Self-Regulatory Organizations; EDGX Exchange, Inc.; Order Approving a Proposed Rule Change Relating to Amendments to Rule 2.11 That Establish the Authority To Cancel Orders and Describe the Operation of an Error Account, 30564-30566 [2012-12442]
Download as PDF
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30564
Federal Register / Vol. 77, No. 100 / Wednesday, May 23, 2012 / Notices
trade, to foster cooperation and
coordination with persons engaged in
regulating, clearing, settling, processing
information with respect to, and
facilitating transactions in securities, to
remove impediments to and perfect the
mechanism of a free and open market
and a national market system, and, in
general, to protect investors and the
public interest; and are not designed to
permit unfair discrimination between
customers, issuers, brokers, or dealers.
In addition, the Commission believes
the proposed rule change is consistent
with Section 11A(a)(1)(C) of the Act 24
in that it seeks to assure economically
efficient execution of securities
transactions.
The Commission recognizes that a
systems, technical, or operational issue
may occur, and believes that EDGA Rule
2.11, in allowing EDGA or DE Route to
cancel orders affected by a systems,
technical, or operational issue, should
provide a reasonably efficient means for
the Exchange to handle such orders, and
appears reasonably designed to permit
EDGA to maintain fair and orderly
markets.25
The Commission also believes that
allowing DE Route to maintain an error
account to resolve error positions
acquired in connection with its role as
an Outbound Router pursuant to the
procedures set forth in the rule, and as
described above, is consistent with the
Act. The Commission notes that the rule
establishes criteria for determining
which positions are error positions that
may be acquired into the error account,
and which will be assigned to
Members.26 DE Route, in connection
with a particular systems, technical, or
operational issue, will be required to
either (i) assign the entire amount of a
resulting error position to Members or
(ii) liquidate such position.27 Also, DE
Route will assign an error position that
results from a particular systems,
technical, or operational issue to
Members only if the entire amount of
such error position can be assigned to
24 15
U.S.C. 78k–1(a)(1)(C).
Commission notes that EDGA states that
the proposed amendments to EDGA Rule 2.11 are
designed to maintain fair and orderly markets,
ensure full trade certainty for market participants,
and avoid disrupting the clearance and settlement
process. See Notice, 77 FR at 20866. The
Commission also notes that EDGA states that a
decision to cancel orders due to a systems,
technical, or operational issue may not cause the
Exchange to declare self-help against a Trading
Center pursuant to Rule 611 of Regulation NMS, in
which case the Exchange would continue to be
subject to the order protection requirements of Rule
611 with respect to that Trading Center. See 17 CFR
242.611(b). See also Notice, 77 FR at 20865, n.12.
26 See EDGA Rule 2.11(a)(7).
27 See id.
mstockstill on DSK4VPTVN1PROD with NOTICES
25 The
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17:00 May 22, 2012
Jkt 226001
all of the affected Members.28 If DE
Route cannot fairly and practically
assign the entire amount of an error
position to all affected Members, DE
Route will liquidate such error
position.29 In this regard, the
Commission believes that the new rule
appears reasonably designed to further
just and equitable principles of trade
and the protection of investors and the
public interest, and to help prevent
unfair discrimination, in that it should
help assure the handling of error
positions will be based on clear and
objective criteria, and that the resolution
of those positions will occur promptly
through a transparent process.
Additionally, the Commission notes
that it has previously expressed concern
about the potential for unfair
competition and conflicts of interest
between an exchange’s self-regulatory
obligations and its commercial interest
when the exchange is affiliated with one
of its members.30 The Commission is
also concerned about the potential for
misuse of confidential and proprietary
information. The Commission believes
that the requirement that DE Route
provide complete time and price
discretion for the liquidation of an error
position to a third-party broker-dealer,
including that DE Route not attempt to
exercise any influence or control over
the timing or methods of such trading,
combined with the requirement that DE
Route establish and implement policies
and procedures that are reasonably
designed to restrict the flow of
confidential and proprietary
information to the third-party routing
broker liquidating such positions,
should help mitigate the Commission’s
concerns. In particular, the Commission
believes that these requirements should
help assure that none of EDGA, DE
Route, or the third-party broker-dealer is
able to misuse confidential or
proprietary information obtained in
connection with the liquidation of error
positions for its own benefit. The
Commission also notes that DE Route
would be required to make and keep
records documenting the rationale for
assignment of error positions to
Members, documenting the factors
considered in determining to acquire
error positions into the error account,
and associated with the liquidation of
error positions through the third-party
broker-dealer.31
28 See
id.
id.
30 See, e.g., Securities Exchange Act Release No.
65455 (September 30, 2011), 76 FR 62119 (October
6, 2011) at 62120, n.16 and accompanying text.
31 See EDGA Rule 2.11(a)(7).
29 See
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Fmt 4703
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Finally, the Commission notes that
the proposed procedures for canceling
orders and handling of error positions
are consistent with procedures the
Commission has approved for another
exchange.32
IV. Conclusion
It is therefore ordered, pursuant to
Section 19(b)(2) of the Act,33 that the
proposed rule change (SR–EDGA–2012–
09) be, and it hereby is, approved.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.34
Kevin M. O’Neill,
Deputy Secretary.
[FR Doc. 2012–12443 Filed 5–22–12; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–67010; File No. SR–EDGX–
2012–08]
Self-Regulatory Organizations; EDGX
Exchange, Inc.; Order Approving a
Proposed Rule Change Relating to
Amendments to Rule 2.11 That
Establish the Authority To Cancel
Orders and Describe the Operation of
an Error Account
May 17, 2012.
I. Introduction
On March 22, 2012, EDGX Exchange,
Inc. (‘‘Exchange’’ or ‘‘EDGX’’) filed with
the Securities and Exchange
Commission (‘‘Commission’’), pursuant
to Section 19(b)(1) of the Securities
Exchange Act of 1934 (‘‘Act’’) 1 and Rule
19b–4 thereunder,2 a proposed rule
change to amend EDGX Rule 2.11 to (1)
add a new subparagraph (a)(6) that
addresses the authority of EDGX and its
routing broker-dealer, Direct Edge ECN
LLC d/b/a DE Route (‘‘DE Route’’) to
cancel orders if and when a systems,
technical, or operational issue occurs,
and (2) amend subparagraph (a)(4) and
add new subparagraph (a)(7) to describe
the operation of an error account for DE
Route. The proposed rule change was
published for comment in the Federal
Register on April 6, 2012.3 The
Commission received no comment
letters regarding the proposed rule
32 See Securities Exchange Act Release No. 66963
(May 10, 2012), 77 FR 28919 (May 16, 2012) (SR–
NYSEArca–2012–22).
33 15 U.S.C. 78s(b)(2).
34 17 CFR 200.30–3(a)(12).
1 15 U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 Securities Exchange Act Release No. 66713
(April 2, 2012), 77 FR 20854 (April 6, 2012) (SR–
EDGX–2012–08) (‘‘Notice’’).
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Federal Register / Vol. 77, No. 100 / Wednesday, May 23, 2012 / Notices
change. This order approves the
proposed rule change.
mstockstill on DSK4VPTVN1PROD with NOTICES
II. Description of the Proposal
DE Route, a broker-dealer that is a
facility and an affiliate of the Exchange,
provides outbound routing services
from the Exchange to other market
centers pursuant to Exchange rules.4 In
its proposal, the Exchange states that a
systems, technical, or operational issue
may occur at EDGX, DE Route, or a
Trading Center 5 that causes EDGX or
DE Route to cancel orders, if the
Exchange or DE Route determines that
such action is necessary to maintain a
fair and orderly market.6 The Exchange
also states that systems, technical, or
operational issues that occur at EDGX,
DE Route, or a Trading Center may
result in DE Route acquiring an error
position that it must resolve.7
New subparagraph (a)(6) to EDGX
Rule 2.11 provides EDGX or DE Route
with general authority to cancel orders
to maintain fair and orderly markets
when a systems, technical, or
operational issue occurs at EDGX, DE
Route, or a Trading Center. EDGX or DE
Route will be required to provide notice
of the cancellation of orders to
Members 8 as soon as practicable.9
New subparagraphs (a)(4) and (a)(7)
provide authority for DE Route to
maintain an error account for the
purpose of addressing, and sets forth the
procedures for resolving, error
4 See Notice, 77 FR at 20855, n.4 and
accompanying text, and text accompanying n.6. See
also EDGX Rule 2.11; and Securities Exchange Act
Release No. 61698 (March 12, 2010) 75 FR 13151
(March 18, 2010) at 13165.
The Exchange also receives equities orders routed
inbound to the Exchange by DE Route from EDGA
Exchange, Inc. under a pilot period ending on June
30, 2013. See Notice, 77 FR at 20855. See also
Securities Exchange Act Release No. 64361 (April
28, 2011), 76 FR 25388 (May 4, 2011) (SR–EDGX–
2011–12); and Securities Exchange Act Release No.
66644 (March 22, 2012), 77 FR 18877 (March 28,
2012) (SR–EDGX–2012–09) (filing to extend the
pilot period through June 30, 2013).
5 EDGX Rule 2.11(a) defines ‘‘Trading Center’’ as
‘‘other securities exchanges, facilities of securities
exchanges, automated trading systems, electronic
communications networks or other brokers or
dealers.’’ See also Notice, 77 FR at 20855, n.5
(stating that ‘‘Trading Centers’’ is as defined in
EDGX Rule 2.11(a) and Rule 600(b)(78) of
Regulation NMS under the Act, 17 CFR
242.600(b)(78)).
6 See Notice, 77 FR at 20855. For examples of
some of the circumstances in which EDGX or DE
Route may decide to cancel orders, see id.
7 See id. For examples of some of the
circumstances that may lead to error positions, see
id.
8 EDGX Rule 1.5(n) defines ‘‘Member’’ to mean
‘‘any registered broker or dealer, or any person
associated with a registered broker or dealer, that
has been admitted to membership in the Exchange’’
and states that ‘‘[a] Member will have the status of
a ‘member’ of the Exchange as that term is defined
in Section 3(a)(3) of the [Exchange] Act.’’
9 See EDGX Rule 2.11(a)(6).
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positions. Specifically, DE Route will
maintain an error account for the
purpose of liquidating an error position
acquired in connection with its role as
an Outbound Router 10 when such
position, in the judgment of DE Route
subject to the factors described in EDGX
Rule 2.11(a)(7) (and as set forth below),
cannot be fairly and practicably
assigned to one or more Members in its
entirety.11
In determining whether an entire
error position can be fairly and
practicably assigned to one or more
Members, DE Route will consider (i)
whether DE Route has accurate and
sufficient information to assign the
entire amount of an error position to all
affected Members; and (ii) whether DE
Route is able to evaluate available
information in order to assign the entire
amount of an error position to all
affected Members by the first business
day following the trade date on which
the error position was established.12 If
DE Route determines that an error
position can be assigned to one or more
Members by the first business day
following the trade date on which the
error position was incurred, DE Route
will (i) assign the entire amount of the
error position to all affected Members,
and (ii) make and keep records to
document the rationale for the
assignment to those Members.13 All
determinations and assignments will be
made in a non-discriminatory manner.14
If, however, DE Route reasonably
concludes, due to the number of
erroneous executions or the number of
members potentially impacted, that it
would not be able to trace each
erroneous execution comprising an error
position back to the affected Members in
a timely manner, then DE Route will
assume the entire amount of the error
position into the error account.15 DE
Route will make and keep records of the
factors considered in determining
whether to acquire an error position into
the error account.16
If DE Route determines to acquire an
error position into the error account, DE
Route will liquidate the error position as
soon as practicable.17 DE Route will be
10 EDGX Rule 2.11(a) defines DE Route, in its
function providing outbound routing of orders from
the Exchange to other Trading Centers, as the
‘‘Outbound Router.’’
11 See EDGX Rule 2.11(a)(7). An error position
can be acquired as a result of a systems, technical,
or operational issue experienced by EDGX, DE
Route, or a Trading Center to which DE Route
directed an outbound order. See id.
12 See id.
13 See id.
14 See id.
15 See Notice, 77 FR at 20856.
16 See EDGX Rule 2.11(a)(7).
17 See id.
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Frm 00069
Fmt 4703
Sfmt 4703
30565
required to provide complete time and
price discretion for the trading to
liquidate the error positions to a thirdparty broker-dealer, and would be
prohibited from attempting to exercise
any influence or control over the timing
or methods of such trading.18 Further,
DE Route will be required to establish
and implement written policies and
procedures that are reasonably designed
to restrict the flow of confidential and
proprietary information between the
third-party broker-dealer, on one hand,
and the Exchange and DE Route, on the
other, associated with the liquidation of
the error positions.19 DE Route will
make and keep records associated with
the liquidation of the error position
through a third-party broker-dealer.20
III. Discussion and Commission’s
Findings
After careful review, the Commission
finds that the proposed rule change is
consistent with the requirements of
Section 6(b) of the Act 21 and the rules
and regulations thereunder applicable to
a national securities exchange.22 In
particular, the Commission finds that
the proposed rule change is consistent
with Section 6(b)(5) of the Act,23 which
requires, among other things, that the
rules of a national securities exchange
be designed to prevent fraudulent and
manipulative acts and practices, to
promote just and equitable principles of
trade, to foster cooperation and
coordination with persons engaged in
regulating, clearing, settling, processing
information with respect to, and
facilitating transactions in securities, to
remove impediments to and perfect the
mechanism of a free and open market
and a national market system, and, in
general, to protect investors and the
public interest; and are not designed to
permit unfair discrimination between
customers, issuers, brokers, or dealers.
In addition, the Commission believes
the proposed rule change is consistent
with Section 11A(a)(1)(C) of the Act 24
in that it seeks to assure economically
efficient execution of securities
transactions.
The Commission recognizes that a
systems, technical, or operational issue
may occur, and believes that EDGX Rule
2.11, in allowing EDGX or DE Route to
cancel orders affected by a systems,
18 See
id.
id.
20 See id.
21 15 U.S.C. 78f(b).
22 In approving this proposed rule change, the
Commission has considered the proposed rule’s
impact on efficiency, competition, and capital
formation. See 15 U.S.C. 78c(f).
23 15 U.S.C. 78f(b)(5).
24 15 U.S.C. 78k–1(a)(1)(C).
19 See
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30566
Federal Register / Vol. 77, No. 100 / Wednesday, May 23, 2012 / Notices
technical, or operational issue, should
provide a reasonably efficient means for
the Exchange to handle such orders, and
appears reasonably designed to permit
EDGX to maintain fair and orderly
markets.25
The Commission also believes that
allowing DE Route to maintain an error
account to resolve error positions
acquired in connection with its role as
an Outbound Router pursuant to the
procedures set forth in the rule, and as
described above, is consistent with the
Act. The Commission notes that the rule
establishes criteria for determining
which positions are error positions that
may be acquired into the error account,
and which will be assigned to
Members.26 DE Route, in connection
with a particular systems, technical, or
operational issue, will be required to
either (i) assign the entire amount of a
resulting error position to Members or
(ii) liquidate such position.27 Also, DE
Route will assign an error position that
results from a particular systems,
technical, or operational issue to
Members only if the entire amount of
such error position can be assigned to
all of the affected Members.28 If DE
Route cannot fairly and practically
assign the entire amount of an error
position to all affected Members, DE
Route will liquidate such error
position.29 In this regard, the
Commission believes that the new rule
appears reasonably designed to further
just and equitable principles of trade
and the protection of investors and the
public interest, and to help prevent
unfair discrimination, in that it should
help assure the handling of error
positions will be based on clear and
objective criteria, and that the resolution
of those positions will occur promptly
through a transparent process.
Additionally, the Commission notes
that it has previously expressed concern
about the potential for unfair
competition and conflicts of interest
between an exchange’s self-regulatory
obligations and its commercial interest
mstockstill on DSK4VPTVN1PROD with NOTICES
25 The
Commission notes that EDGX states that
the proposed amendments to EDGX Rule 2.11 are
designed to maintain fair and orderly markets,
ensure full trade certainty for market participants,
and avoid disrupting the clearance and settlement
process. See Notice, 77 FR at 20857. The
Commission also notes that EDGX states that a
decision to cancel orders due to a systems,
technical, or operational issue may not cause the
Exchange to declare self-help against a Trading
Center pursuant to Rule 611 of Regulation NMS, in
which case the Exchange would continue to be
subject to the order protection requirements of Rule
611 with respect to that Trading Center. See 17 CFR
242.611(b). See also Notice, 77 FR at 20856, n.12.
26 See EDGX Rule 2.11(a)(7).
27 See id.
28 See id.
29 See id.
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17:00 May 22, 2012
Jkt 226001
when the exchange is affiliated with one
of its members.30 The Commission is
also concerned about the potential for
misuse of confidential and proprietary
information. The Commission believes
that the requirement that DE Route
provide complete time and price
discretion for the liquidation of an error
position to a third-party broker-dealer,
including that DE Route not attempt to
exercise any influence or control over
the timing or methods of such trading,
combined with the requirement that DE
Route establish and implement policies
and procedures that are reasonably
designed to restrict the flow of
confidential and proprietary
information to the third-party routing
broker liquidating such positions,
should help mitigate the Commission’s
concerns. In particular, the Commission
believes that these requirements should
help assure that none of EDGX, DE
Route, or the third-party broker-dealer is
able to misuse confidential or
proprietary information obtained in
connection with the liquidation of error
positions for its own benefit. The
Commission also notes that DE Route
would be required to make and keep
records documenting the rationale for
assignment of error positions to
Members, documenting the factors
considered in determining to acquire
error positions into the error account,
and associated with the liquidation of
error positions through the third-party
broker-dealer.31
Finally, the Commission notes that
the proposed procedures for canceling
orders and handling of error positions
are consistent with procedures the
Commission has approved for another
exchange.32
IV. Conclusion
It is therefore ordered, pursuant to
Section 19(b)(2) of the Act,33 that the
proposed rule change (SR–EDGX–2012–
08) be, and it hereby is, approved.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.34
Kevin M. O’Neill,
Deputy Secretary.
[FR Doc. 2012–12442 Filed 5–22–12; 8:45 am]
BILLING CODE 8011–01–P
30 See, e.g., Securities Exchange Act Release No.
65455 (September 30, 2011), 76 FR 62119 (October
6, 2011) at 62120, n.16 and accompanying text.
31 See EDGX Rule 2.11(a)(7).
32 See Securities Exchange Act Release No. 66963
(May 10, 2012), 77 FR 28919 (May 16, 2012) (SR–
NYSEArca–2012–22).
33 15 U.S.C. 78s(b)(2).
34 17 CFR 200.30–3(a)(12).
PO 00000
Frm 00070
Fmt 4703
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SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–67009; File No. SR–BX–
2012–036]
Self-Regulatory Organizations;
NASDAQ OMX BX, Inc.; Notice of Filing
and Immediate Effectiveness of a
Proposed Rule Change To Amend the
Grandfathered Rules, BOX Trading
Rules, BX By-Laws, BX Rules and
Remove the BOXR Operating
Agreement and By-Laws
May 17, 2012.
Pursuant to Section 19(b)(1) under the
Securities Exchange Act of 1934 (the
‘‘Act’’) 1 and Rule 19b–4 thereunder,2
notice is hereby given that on May 14,
2012, NASDAQ OMX BX (‘‘BX’’ or the
‘‘Exchange’’) 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 Exchange has
designated the proposed rule change as
constituting a non-controversial rule
change under Rule 19b–4(f)(6) under the
Act,3 which renders the proposal
effective upon filing with the
Commission. 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
proposal [sic] to amend the
Grandfathered Rules, the Boston
Options Exchange Group LLC (‘‘BOX’’)
Trading Rules, remove the Boston
Options Exchange Regulation LLC
(‘‘BOXR’’) By-Laws and the Amended
and Restated Limited Liability Company
Agreement (‘‘BOXR Operating
Agreement’’), and amend the BX ByLaws and the BX Rules. The text of the
proposed rule change is available from
the principal office of the Exchange, at
the Commission’s Public Reference
Room and also on the Exchange’s
Internet Web site at https://
nasdaqomxbx.cchwallstreet.com/
NASDAQOMXBX/Filings/.
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
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 17 CFR 240.19b–4(f)(6).
2 17
E:\FR\FM\23MYN1.SGM
23MYN1
]]>Agencies
[Federal Register Volume 77, Number 100 (Wednesday, May 23, 2012)]
[Notices]
[Pages 30564-30566]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-12442]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-67010; File No. SR-EDGX-2012-08]
Self-Regulatory Organizations; EDGX Exchange, Inc.; Order
Approving a Proposed Rule Change Relating to Amendments to Rule 2.11
That Establish the Authority To Cancel Orders and Describe the
Operation of an Error Account
May 17, 2012.
I. Introduction
On March 22, 2012, EDGX Exchange, Inc. (``Exchange'' or ``EDGX'')
filed with the Securities and Exchange Commission (``Commission''),
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ a proposed rule change to
amend EDGX Rule 2.11 to (1) add a new subparagraph (a)(6) that
addresses the authority of EDGX and its routing broker-dealer, Direct
Edge ECN LLC d/b/a DE Route (``DE Route'') to cancel orders if and when
a systems, technical, or operational issue occurs, and (2) amend
subparagraph (a)(4) and add new subparagraph (a)(7) to describe the
operation of an error account for DE Route. The proposed rule change
was published for comment in the Federal Register on April 6, 2012.\3\
The Commission received no comment letters regarding the proposed rule
[[Page 30565]]
change. This order approves the proposed rule change.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ Securities Exchange Act Release No. 66713 (April 2, 2012),
77 FR 20854 (April 6, 2012) (SR-EDGX-2012-08) (``Notice'').
---------------------------------------------------------------------------
II. Description of the Proposal
DE Route, a broker-dealer that is a facility and an affiliate of
the Exchange, provides outbound routing services from the Exchange to
other market centers pursuant to Exchange rules.\4\ In its proposal,
the Exchange states that a systems, technical, or operational issue may
occur at EDGX, DE Route, or a Trading Center \5\ that causes EDGX or DE
Route to cancel orders, if the Exchange or DE Route determines that
such action is necessary to maintain a fair and orderly market.\6\ The
Exchange also states that systems, technical, or operational issues
that occur at EDGX, DE Route, or a Trading Center may result in DE
Route acquiring an error position that it must resolve.\7\
---------------------------------------------------------------------------
\4\ See Notice, 77 FR at 20855, n.4 and accompanying text, and
text accompanying n.6. See also EDGX Rule 2.11; and Securities
Exchange Act Release No. 61698 (March 12, 2010) 75 FR 13151 (March
18, 2010) at 13165.
The Exchange also receives equities orders routed inbound to the
Exchange by DE Route from EDGA Exchange, Inc. under a pilot period
ending on June 30, 2013. See Notice, 77 FR at 20855. See also
Securities Exchange Act Release No. 64361 (April 28, 2011), 76 FR
25388 (May 4, 2011) (SR-EDGX-2011-12); and Securities Exchange Act
Release No. 66644 (March 22, 2012), 77 FR 18877 (March 28, 2012)
(SR-EDGX-2012-09) (filing to extend the pilot period through June
30, 2013).
\5\ EDGX Rule 2.11(a) defines ``Trading Center'' as ``other
securities exchanges, facilities of securities exchanges, automated
trading systems, electronic communications networks or other brokers
or dealers.'' See also Notice, 77 FR at 20855, n.5 (stating that
``Trading Centers'' is as defined in EDGX Rule 2.11(a) and Rule
600(b)(78) of Regulation NMS under the Act, 17 CFR 242.600(b)(78)).
\6\ See Notice, 77 FR at 20855. For examples of some of the
circumstances in which EDGX or DE Route may decide to cancel orders,
see id.
\7\ See id. For examples of some of the circumstances that may
lead to error positions, see id.
---------------------------------------------------------------------------
New subparagraph (a)(6) to EDGX Rule 2.11 provides EDGX or DE Route
with general authority to cancel orders to maintain fair and orderly
markets when a systems, technical, or operational issue occurs at EDGX,
DE Route, or a Trading Center. EDGX or DE Route will be required to
provide notice of the cancellation of orders to Members \8\ as soon as
practicable.\9\
---------------------------------------------------------------------------
\8\ EDGX Rule 1.5(n) defines ``Member'' to mean ``any registered
broker or dealer, or any person associated with a registered broker
or dealer, that has been admitted to membership in the Exchange''
and states that ``[a] Member will have the status of a `member' of
the Exchange as that term is defined in Section 3(a)(3) of the
[Exchange] Act.''
\9\ See EDGX Rule 2.11(a)(6).
---------------------------------------------------------------------------
New subparagraphs (a)(4) and (a)(7) provide authority for DE Route
to maintain an error account for the purpose of addressing, and sets
forth the procedures for resolving, error positions. Specifically, DE
Route will maintain an error account for the purpose of liquidating an
error position acquired in connection with its role as an Outbound
Router \10\ when such position, in the judgment of DE Route subject to
the factors described in EDGX Rule 2.11(a)(7) (and as set forth below),
cannot be fairly and practicably assigned to one or more Members in its
entirety.\11\
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\10\ EDGX Rule 2.11(a) defines DE Route, in its function
providing outbound routing of orders from the Exchange to other
Trading Centers, as the ``Outbound Router.''
\11\ See EDGX Rule 2.11(a)(7). An error position can be acquired
as a result of a systems, technical, or operational issue
experienced by EDGX, DE Route, or a Trading Center to which DE Route
directed an outbound order. See id.
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In determining whether an entire error position can be fairly and
practicably assigned to one or more Members, DE Route will consider (i)
whether DE Route has accurate and sufficient information to assign the
entire amount of an error position to all affected Members; and (ii)
whether DE Route is able to evaluate available information in order to
assign the entire amount of an error position to all affected Members
by the first business day following the trade date on which the error
position was established.\12\ If DE Route determines that an error
position can be assigned to one or more Members by the first business
day following the trade date on which the error position was incurred,
DE Route will (i) assign the entire amount of the error position to all
affected Members, and (ii) make and keep records to document the
rationale for the assignment to those Members.\13\ All determinations
and assignments will be made in a non-discriminatory manner.\14\
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\12\ See id.
\13\ See id.
\14\ See id.
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If, however, DE Route reasonably concludes, due to the number of
erroneous executions or the number of members potentially impacted,
that it would not be able to trace each erroneous execution comprising
an error position back to the affected Members in a timely manner, then
DE Route will assume the entire amount of the error position into the
error account.\15\ DE Route will make and keep records of the factors
considered in determining whether to acquire an error position into the
error account.\16\
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\15\ See Notice, 77 FR at 20856.
\16\ See EDGX Rule 2.11(a)(7).
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If DE Route determines to acquire an error position into the error
account, DE Route will liquidate the error position as soon as
practicable.\17\ DE Route will be required to provide complete time and
price discretion for the trading to liquidate the error positions to a
third-party broker-dealer, and would be prohibited from attempting to
exercise any influence or control over the timing or methods of such
trading.\18\ Further, DE Route will be required to establish and
implement written policies and procedures that are reasonably designed
to restrict the flow of confidential and proprietary information
between the third-party broker-dealer, on one hand, and the Exchange
and DE Route, on the other, associated with the liquidation of the
error positions.\19\ DE Route will make and keep records associated
with the liquidation of the error position through a third-party
broker-dealer.\20\
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\17\ See id.
\18\ See id.
\19\ See id.
\20\ See id.
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III. Discussion and Commission's Findings
After careful review, the Commission finds that the proposed rule
change is consistent with the requirements of Section 6(b) of the Act
\21\ and the rules and regulations thereunder applicable to a national
securities exchange.\22\ In particular, the Commission finds that the
proposed rule change is consistent with Section 6(b)(5) of the Act,\23\
which requires, among other things, that the rules of a national
securities exchange be designed to prevent fraudulent and manipulative
acts and practices, to promote just and equitable principles of trade,
to foster cooperation and coordination with persons engaged in
regulating, clearing, settling, processing information with respect to,
and facilitating transactions in securities, to remove impediments to
and perfect the mechanism of a free and open market and a national
market system, and, in general, to protect investors and the public
interest; and are not designed to permit unfair discrimination between
customers, issuers, brokers, or dealers. In addition, the Commission
believes the proposed rule change is consistent with Section
11A(a)(1)(C) of the Act \24\ in that it seeks to assure economically
efficient execution of securities transactions.
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\21\ 15 U.S.C. 78f(b).
\22\ In approving this proposed rule change, the Commission has
considered the proposed rule's impact on efficiency, competition,
and capital formation. See 15 U.S.C. 78c(f).
\23\ 15 U.S.C. 78f(b)(5).
\24\ 15 U.S.C. 78k-1(a)(1)(C).
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The Commission recognizes that a systems, technical, or operational
issue may occur, and believes that EDGX Rule 2.11, in allowing EDGX or
DE Route to cancel orders affected by a systems,
[[Page 30566]]
technical, or operational issue, should provide a reasonably efficient
means for the Exchange to handle such orders, and appears reasonably
designed to permit EDGX to maintain fair and orderly markets.\25\
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\25\ The Commission notes that EDGX states that the proposed
amendments to EDGX Rule 2.11 are designed to maintain fair and
orderly markets, ensure full trade certainty for market
participants, and avoid disrupting the clearance and settlement
process. See Notice, 77 FR at 20857. The Commission also notes that
EDGX states that a decision to cancel orders due to a systems,
technical, or operational issue may not cause the Exchange to
declare self-help against a Trading Center pursuant to Rule 611 of
Regulation NMS, in which case the Exchange would continue to be
subject to the order protection requirements of Rule 611 with
respect to that Trading Center. See 17 CFR 242.611(b). See also
Notice, 77 FR at 20856, n.12.
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The Commission also believes that allowing DE Route to maintain an
error account to resolve error positions acquired in connection with
its role as an Outbound Router pursuant to the procedures set forth in
the rule, and as described above, is consistent with the Act. The
Commission notes that the rule establishes criteria for determining
which positions are error positions that may be acquired into the error
account, and which will be assigned to Members.\26\ DE Route, in
connection with a particular systems, technical, or operational issue,
will be required to either (i) assign the entire amount of a resulting
error position to Members or (ii) liquidate such position.\27\ Also, DE
Route will assign an error position that results from a particular
systems, technical, or operational issue to Members only if the entire
amount of such error position can be assigned to all of the affected
Members.\28\ If DE Route cannot fairly and practically assign the
entire amount of an error position to all affected Members, DE Route
will liquidate such error position.\29\ In this regard, the Commission
believes that the new rule appears reasonably designed to further just
and equitable principles of trade and the protection of investors and
the public interest, and to help prevent unfair discrimination, in that
it should help assure the handling of error positions will be based on
clear and objective criteria, and that the resolution of those
positions will occur promptly through a transparent process.
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\26\ See EDGX Rule 2.11(a)(7).
\27\ See id.
\28\ See id.
\29\ See id.
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Additionally, the Commission notes that it has previously expressed
concern about the potential for unfair competition and conflicts of
interest between an exchange's self-regulatory obligations and its
commercial interest when the exchange is affiliated with one of its
members.\30\ The Commission is also concerned about the potential for
misuse of confidential and proprietary information. The Commission
believes that the requirement that DE Route provide complete time and
price discretion for the liquidation of an error position to a third-
party broker-dealer, including that DE Route not attempt to exercise
any influence or control over the timing or methods of such trading,
combined with the requirement that DE Route establish and implement
policies and procedures that are reasonably designed to restrict the
flow of confidential and proprietary information to the third-party
routing broker liquidating such positions, should help mitigate the
Commission's concerns. In particular, the Commission believes that
these requirements should help assure that none of EDGX, DE Route, or
the third-party broker-dealer is able to misuse confidential or
proprietary information obtained in connection with the liquidation of
error positions for its own benefit. The Commission also notes that DE
Route would be required to make and keep records documenting the
rationale for assignment of error positions to Members, documenting the
factors considered in determining to acquire error positions into the
error account, and associated with the liquidation of error positions
through the third-party broker-dealer.\31\
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\30\ See, e.g., Securities Exchange Act Release No. 65455
(September 30, 2011), 76 FR 62119 (October 6, 2011) at 62120, n.16
and accompanying text.
\31\ See EDGX Rule 2.11(a)(7).
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Finally, the Commission notes that the proposed procedures for
canceling orders and handling of error positions are consistent with
procedures the Commission has approved for another exchange.\32\
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\32\ See Securities Exchange Act Release No. 66963 (May 10,
2012), 77 FR 28919 (May 16, 2012) (SR-NYSEArca-2012-22).
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IV. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\33\ that the proposed rule change (SR-EDGX-2012-08) be, and it
hereby is, approved.
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\33\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\34\
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\34\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-12442 Filed 5-22-12; 8:45 am]
BILLING CODE 8011-01-P
