FR 2021-03213

In a recent filing with the Securities and Exchange Commission (SEC), Cboe C2 Exchange, Inc. has proposed a set of changes to its fee schedule. The document outlines modifications to transaction fees and rebates for trades involving specific financial products, notably AAPL, QQQ, IWM, and SLV. These changes are meant to enhance the competitiveness of C2 Exchange by adjusting its fee structure to better align with or improve upon offerings from competing exchanges. The overarching goal is to stimulate market activity by offering incentives that could attract more transaction volume.

Significant Issues and Concerns

One notable issue with the document is its reliance on complex financial terminology and industry-specific jargon. Terms such as "NBBO Joiners," "NBBO Setters," and fee codes like "PC," "SC," and "SM" might not be familiar to a general audience. This could pose challenges for understanding the full implications of the proposed changes. Additionally, the document's arguments for the fee adjustments are heavily anchored in market competition dynamics, referencing various legal codes such as the Securities Exchange Act, which can obscure clarity for those unfamiliar with such regulatory frameworks.

Impact on the Public

The proposed changes to transaction fees and rebates may indirectly impact the public, primarily investors who trade in the options market. If these adjustments lead to increased market activity on C2 Exchange, they could potentially offer more competitive pricing and better liquidity, which would be beneficial for investors seeking favorable transaction conditions. However, should these changes not align with the needs of market participants, the intended effects might not materialize, which could negatively affect market dynamics.

Impact on Specific Stakeholders

For public customers, the reduced fees for certain transactions might result in cost savings, making C2 Exchange a more attractive option compared to other exchanges. This could lead to increased engagement from retail investors, contributing to more vibrant trading activity. On the other hand, market makers and non-market-making entities might see a mixed impact. While they may benefit from certain rebates, the overall reduction in liquidity-adding incentives could motivate these participants to seek more favorable conditions elsewhere, potentially affecting their trading volumes on the exchange.

Overall, the proposed rule change represents a focused effort by C2 Exchange to recalibrate its fee schedule to remain appealing in a competitive market landscape. However, the effectiveness of these changes will largely depend on the exchange's ability to communicate and implement them such that they genuinely provide an edge over competing venues. As the SEC evaluates these proposals, public stakeholders are encouraged to submit comments and insights, ensuring that the regulatory outcome aligns with broader market interests and investor protection principles.

The document details a proposed rule change by the Cboe C2 Exchange, Inc. regarding transaction fees and rebates for certain types of security transactions. This commentary will focus on the financial allocations and how they relate to the issues identified.

Transaction Fees and Rebates

The proposed changes involve adjusting the transaction fees and rebates associated with trading certain popular stocks and ETF options like AAPL, QQQ, IWM, and SLV. Specifically, public customer orders that remove liquidity from the market currently incur a standard transaction fee of $0.43 per contract under fee code "PC". The proposal suggests changing these orders to fall under fee code "SC," which is a reduced fee of $0.39 per contract.

For C2 Market Maker orders that add liquidity, there's an amendment to shift from fee code "PM," currently offering a rebate of $0.41 per contract, to fee code "SM," which provides a reduced rebate of $0.26 per contract. Similarly, non-Market Maker, non-Customer orders adding liquidity, which are currently under fee code "PN” with a $0.36 rebate per contract, would switch to fee code "SN," reducing the rebate to $0.20 per contract.

These changes reflect the exchange's effort to adapt its fee structure to maintain competitive positioning in the highly competitive options market.

Competitive Market Dynamics

The issues raised in the document highlight the necessity for exchanges like C2 to remain competitive with their fee structures. The adjustments to fees and rebates are framed as responses to competition from other exchanges, which offer various fee schedules. For example, MIAX Pearl charges $0.50 per contract for priority customer IWM and QQQ orders that remove liquidity, showcasing how exchanges benchmark their structures against each other to attract and retain market participants.

The rationale provided by the C2 Exchange emphasizes the dynamic nature of market share distribution, where participants can easily migrate their order flow to venues offering more favorable fees. Therefore, reducing fees and rebates is seen as a strategy to encourage higher trading volumes specific to C2, but the document could benefit from more explicit comparisons or data to illustrate how their fees stand relative to industry norms.

Equity and Discrimination Considerations

The document discusses how the proposed changes aim to be "reasonable, equitable, and not unfairly discriminatory," which is a crucial legal guideline under securities legislation. By lowering the fee for public customer orders and adjusting rebates for market makers, the C2 Exchange attempts to create incentives for retail and professional participants alike. These adjustments are aligned with historical industry practices where exchanges preferentially price fees to encourage general public and customer participation, recognized as beneficial for overall market liquidity and functionality.

A precise understanding of how these fees compare to other exchanges or detailed breakdowns of savings could make this alignment with fairness and non-discrimination more explicit and digestible to the average reader.

Implications for Market Participants

The document also hints at the broader implications of these financial adjustments. For public customers and smaller market participants, slightly reduced fees may open doors to increased trading without significant expense, thus contributing to greater market activity. Yet the document does not provide quantitative forecasts or models to depict these potential impacts, which could have strengthened the argument for the proposed changes.

The C2 Exchange's attempt to balance costs for participants signals its commitment to sustainability in a shifting market landscape, but further clarification and data could help demystify these financial shifts for the less familiar audience.