Self-Regulatory Organizations; Chicago Stock Exchange, Inc.; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Adopt a Match Trade Prevention Modifier for Limit and Market Orders Submitted to the Exchange, 72731-72737 [2013-28848]

Download as PDF Federal Register / Vol. 78, No. 232 / Tuesday, December 3, 2013 / Notices 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– OCC–2013–21 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. emcdonald on DSK67QTVN1PROD with NOTICES All submissions should refer to File Number SR–OCC–2013–21. 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 of submission. The Commission will post all comments on the Commission’s Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the 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 Section, 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 such filing also will be available for inspection and copying at the principal office of OCC and on OCC’s Web site at http://www.theocc.com/components/ docs/legal/rules_and_bylaws/sr_occ_13_ 21.pdf. 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–OCC–2013–21 and should be submitted on or before December 24, 2013. For the Commission, by the Division of Trading and Markets, pursuant to delegated Authority.14 Kevin M. O’Neill, Deputy Secretary. [FR Doc. 2013–28847 Filed 12–2–13; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION most significant aspects of such statements. [Release No. 34–70948; File No. SR–CHX– 2013–20] A. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change Self-Regulatory Organizations; Chicago Stock Exchange, Inc.; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Adopt a Match Trade Prevention Modifier for Limit and Market Orders Submitted to the Exchange November 26, 2013. Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’) 1, and Rule 19b–4 2 thereunder, notice is hereby given that on November 20, 2013, the Chicago Stock Exchange, Inc. (‘‘CHX’’ or the ‘‘Exchange’’) filed with the Securities and Exchange Commission (‘‘Commission’’) the proposed rule change as described in Items I and II below, which Items have been prepared by the Exchange. CHX has filed this proposal pursuant to Exchange Act Rule 19b–4(f)(6) 3 which is 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 CHX proposes to amend Article 1, Rule 1 (Definitions) and Rule 2 (Order Types, Modifiers, and Related Terms) to adopt a Match Trade Prevention order execution modifier for limit and market orders submitted to the CHX Matching System (‘‘Matching System’’). The text of this proposed rule change is available on the Exchange’s Web site at www.chx.com, at the principal office of the Exchange, on the Commission’s Web site at www.sec.gov and in the Commission’s Public Reference Room. 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 CHX included statements concerning the purpose of and basis for the proposed rule changes 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 CHX has prepared summaries, set forth in sections A, B and C below, of the 1 15 U.S.C. 78s(b)(1). CFR 240.19b–4. 3 17 CFR 240.19b–4(f)(6). 2 17 14 17 CFR 200.30–3(a)(12). VerDate Mar<15>2010 17:36 Dec 02, 2013 Jkt 232001 72731 PO 00000 Frm 00106 Fmt 4703 1. Purpose The Exchange does not currently offer Match Trade Prevention (‘‘MTP’’) functionality. The Exchange now proposes to adopt Article 1, Rule 2(b)(3)(F) to offer MTP functionality for limit 4 and market 5 orders that are submitted to the Matching System.6 In sum, through the use of a proposed MTP order execution modifier, Participants may prevent the execution of marketable contra-side orders that originated from the same group of one or more trading accounts (i.e., MTP Trading Group), but will not prevent an execution if such contra-side orders originated from different subgroups within the same MTP Trading Group. Thus, given that the proposed MTP functionality is based on the interaction between MTP Trading Groups, the Exchange further proposes to adopt Article 1, Rule 1(ll) to define ‘‘Trading Account’’ and Rule 1(mm) to define ‘‘MTP Trading Group.’’ Trading Accounts and MTP Trading Groups Before discussing the details of the operation of the proposed MTP functionality, it is important to first outline the interplay between Trading Accounts and MTP Trading Groups. Currently, an order submitted to the Matching System originates from a Trading Account, which is identified by a unique account symbol, under a Trading Permit.7 A Participant may hold 4 Article 1, Rule 2(a)(1) defines ‘‘limit order,’’ in pertinent part, as ‘‘an order to buy or sell a specific amount of a security at a specified price or better if obtainable once the order has been submitted to the market.’’ 5 Article 1, Rule 2(a)(3) defines ‘‘market order,’’ in pertinent part, as ‘‘an order to buy or sell a specific amount of a security at the best price available once the order is presented in the market.’’ 6 The proposed MTP functionality will only be applicable to single-sided orders. The purpose of MTP is obviated if both sides of an order are already identified, as in the case of a cross order. Article 1, Rule 2(a)(2) defines ‘‘cross order,’’ in pertinent part, as ‘‘an order to buy and sell the same security at a specific price better than the best bid and offer displayed in the Matching System and which would not constitute a trade-through under Regulation NMS (including all applicable exceptions and exemptions).’’ As such, MTP modifiers may only be applied to limit and market orders. 7 CHX Article 1, Rule 1(aa) defines ‘‘Trading Permit’’ as ‘‘a permit issued by the Exchange, granting the holder a revocable license to execute approved securities transactions through the Continued Sfmt 4703 E:\FR\FM\03DEN1.SGM 03DEN1 72732 Federal Register / Vol. 78, No. 232 / Tuesday, December 3, 2013 / Notices emcdonald on DSK67QTVN1PROD with NOTICES no more than one Trading Permit.8 In practice, but not currently stated in CHX rules, a Participant Trading Permit holder may maintain one or more trading accounts under its Trading Permit. Thus, given that the proposed MTP functionality assumes that all orders sent to the Matching System originate from MTP Trading Groups, it is necessary to define the terms ‘‘Trading Account’’ 9 and ‘‘MTP Trading Group.’’ Proposed Article 1, Rule 1(ll) defines ‘‘Trading Account’’ as an account under a Trading Permit,10 identified by a unique CHX account symbol, from which orders are sent to the Exchange’s Trading Facilities. Also, a Trading Permit holder may establish more than one Trading Account per Trading Permit. Proposed Article 1, Rule 1(mm) provides that an ‘‘MTP Trading Group’’ means a group of one or more Trading Accounts that have been aggregated at the request of all Participant Trading Permit holders that control all Trading Accounts within the proposed group for the purpose of enabling Match Trade Prevention functionality, pursuant to proposed Article 1, Rule 2(b)(3)(F)(i). It also states that a Trading Account may not be assigned to more than one MTP Trading Group. Lastly, it provides that any Exchange-approved changes to the composition of an MTP Trading Group shall be effective no earlier than the trading day following the request. Although the Exchange anticipates that the vast majority of MTP Trading Groups will be composed of Trading Accounts from the same Participant Trading Permit holder, the proposed definition of MTP Trading Groups allows an MTP Trading Group to be comprised of Trading Accounts from different Participant Trading Permit holders. This is meant to address a scenario where a customer order sender has ‘‘sponsored access’’ to the Exchange through two different Participant Trading Permit holders (i.e., one customer order sender submitting orders to the Exchange through two Trading Permits).11 Also, if a Participant Trading Exchange’s Trading Facilities, or to have those transactions executed on its behalf.’’ In turn, CHX Article 1, Rule 1(z) defines ‘‘Trading Facilities’’ as ‘‘all of the Exchange’s facilities for the trading of equity securities, including any and all electronic or automated order routing, execution and reporting systems provided by the Exchange.’’ 8 CHX Article 3, Rule 2(e). 9 ‘‘Trading Accounts’’ are not currently defined in the CHX rulebook. 10 See supra note 7. 11 This scenario might occur, for example, where a sponsored access order sender is in the process of transitioning its trading activity from one Trading Account controlled by one Participant Trading VerDate Mar<15>2010 17:36 Dec 02, 2013 Jkt 232001 Permit holder wishes to aggregate a Trading Account, which has been assigned to its own MTP Trading Group, with other Trading Accounts, in order to form a new MTP Trading Group, the single Trading Account must only be designated to the new aggregated MTP Trading Group and will no longer be associated with its original MTP Trading Group. Enabling or Disabling MTP As suggested by the proposed definition of ‘‘MTP Trading Group,’’ the Exchange proposes to require Participants Trading Permit holders to request that the Exchange enable the proposed MTP functionality for specified MTP Trading Groups. This will give the Exchange an opportunity to admonish Participants of the key aspects of the proposed MTP functionality, described in detail below, and will also facilitate the Exchange’s monitoring of the use of MTP. This will further provide an opportunity for the Participant(s) to determine which Trading Accounts will be part of MTP Trading Groups and which Trading Accounts will not be subject to the MTP functionality. Therefore, orders that originate from an MTP Trading Group will always be subject to the proposed MTP functionality. Thus, proposed Article 1, Rule 2(b)(3)(F)(i) provides that the MTP modifier shall only be available for an order that originated from a Trading Account, as defined under proposed Article 1, Rule 1(ll), that has been assigned to an MTP Trading Group, as defined under Article 1, Rule 1(mm).12 It further states that an order that originated from a Trading Account that is not part of an MTP Trading Group shall not be subject to MTP and any attached MTP modifiers shall be ignored. It further provides that any Exchange-approved changes to the applicability of MTP to a Trading Account shall be effective on the trading Permit holder to the Trading Account of another Participant Trading Permit holder. In such a case, the sponsored access order sender may wish to use the proposed MTP functionality to prevent executions of orders from the two Trading Accounts during the transition period. 12 Prior to implementing the proposed MTP functionality, the Exchange will create a form document that will outline key aspects of the proposed MTP functionality, including the fact that the use of MTP modifiers may result in the cancellation of a customer order by an order submitted by or on behalf of another customer. This form document will be given to Participants requesting that the MTP functionality be enabled for designated Trading Accounts. Among other things, the form document will require such Participants to designate Trading Accounts to MTP Trading Groups and to acknowledge receipt of the form document prior to the MTP functionality being enabled. PO 00000 Frm 00107 Fmt 4703 Sfmt 4703 day following the date of the request to enable or disable MTP. Triggering MTP Proposed Article 1, Rule 2(b)(3)(F)(ii) provides that an MTP modifier is comprised of a compulsory MTP Action, listed under proposed subparagraph (iii), and an optional MTP sublevel designation and that the MTP modifier on the incoming order shall control the interaction between the contra-side orders. With respect to the actual functionality, it further states that an incoming limit or market order designated with an MTP modifier without an MTP sublevel designation will be prevented from executing against a resting opposite side order from the same MTP Trading Group, as defined under proposed Article 1, Rule 1(mm).13 If, however, the incoming order is marked by an MTP modifier with an MTP sublevel designation,14 the order will only be prevented from executing against a resting opposite side order from the same MTP Trading Group if the resting order is marked by the same MTP sublevel designation. Moreover, MTP shall only be applicable to marketable contra-side orders that are both principal orders or are both agency orders. The proposed MTP functionality is based on the interaction between MTP Trading Groups and if applicable, subgroups within the MTP Trading Group, which are created through the use of optional MTP sublevel designations. As discussed above, an incoming order marked with an MTP modifier will not be allowed to execute against a resting opposite side order from the same MTP Trading Group.15 13 Initially, it is important to note the distinction between an incoming order and a resting order. An incoming order is usually an order that has been submitted to the Matching System that has not yet interacted with the CHX book. If and when an incoming order posts to the CHX book, the order becomes a resting order. However, a resting order can become an incoming order if it is being price slid into a new price point, pursuant to a price sliding functionality offered by the Exchange (e.g., CHX Only Price Sliding Processes under Article 1, Rule 2(b)(1)(C)). A discussion of the interplay between the CHX Only Price Sliding Processes and the proposed MTP functionality may be found below. As such, it is inaccurate to characterize the newer order as always being the incoming order and the older order as always being the resting order. The actual distinction between incoming and resting orders is based on the liquidity removing/ providing fee structure utilized by the Exchange. See CHX Fee Schedule, Section E. Therefore, an order that removes liquidity from the CHX book will always be the incoming order and an order that provides liquidity to the CHX book will always be the resting order. 14 The Exchange proposes to permit sixty-two (62) distinct MTP sublevel designations (i.e., a-z; A–Z; 0–9). 15 The proposed MTP functionality does not require resting orders subject to the proposed MTP E:\FR\FM\03DEN1.SGM 03DEN1 Federal Register / Vol. 78, No. 232 / Tuesday, December 3, 2013 / Notices emcdonald on DSK67QTVN1PROD with NOTICES However, if the MTP modifier of the incoming order indicates an MTP sublevel designation, the order will be considered to have originated from a subgroup within the MTP Trading Group, designated by the sublevel value,16 and will only be prevented from executing against resting opposite side orders from the same subgroup (i.e., same optional MTP sublevel designation). Consequently, an incoming order that originated from a subgroup will not be prevented from executing against opposite side resting orders from the same MTP Trading Group, so long as the opposite side order is not part of the same subgroup (i.e., the resting order is either marked by a different MTP sublevel designation or is not marked by any MTP sublevel designation).17 In sum, where the incoming order is marked by an MTP modifier and originates from an MTP Trading Group, the proposed MTP functionality will prevent an order execution under the following circumstances: (1) Both the incoming and resting orders originated from the same MTP Trading Group and neither order is part of a subgroup (see Example 1); (2) Both the incoming and resting orders originated from the same subgroup within an MTP Trading Group (see Examples 2 and 3); or (3) Both the incoming and resting orders are from the same MTP Trading Group, where the incoming order is not part of a subgroup and the resting order is part of any subgroup (see Example 4). In contrast, the proposed MTP functionality will not prevent an order execution under the following circumstances: (1) The incoming order is not marked by an MTP modifier or is marked MTP Inactive; (2) Both the incoming and resting orders originated from different MTP Trading Groups; or functionality to be marked by an MTP modifier. Since all orders subject to the MTP functionality will originate from an MTP Trading Group, the specific MTP Trading Group designations of resting orders will be known, regardless of whether or not the order has an MTP modifier attached. 16 See supra note 14. 17 Although an incoming order may not be prevented from executing against opposite side resting orders by MTP, the incoming order may nevertheless be prevented from executing against resting opposite side orders due to other order modifiers that may be attached to contra-side orders. For example, an incoming Post Only order marked by an MTP modifier would be cancelled if the order would remove liquidity from the CHX book, prior to the Matching System considering the MTP modifier. See Article 1, Rule 2(b)(1)(D). A detailed discussion of the interplay between the proposed MTP functionality and other existing order modifiers may be found below. VerDate Mar<15>2010 17:36 Dec 02, 2013 Jkt 232001 (3) Both the incoming and resting orders originated from the same MTP Trading Group, where the incoming order is part of any subgroup and the resting order is not part of a subgroup (see Example 5). Example 1. Assume that the CHX book has one resting offer for 100 shares of security XYZ priced at $10.01/share and no resting bids for security XYZ. Assume that the resting offer originated from Trading Account ZAAA, under the Trading Permit held by Participant Z, which is part of MTP Trading Group Z1. Assume that the resting offer is marked with an MTP modifier,18 is not marked by an MTP sublevel designation and is a Day 19 limit order. Assume further that an incoming bid for 100 shares of security XYZ priced at $10.02/ share is received by the Matching System. Assume that the incoming bid originated from Trading Account ZBBB, under a Trading Permit held by Participant Z, which is also part of MTP Trading Group Z1. Assume that the incoming bid is designated with an MTP modifier, is not marked with an MTP sublevel designation and is a Day limit order. Under this example, MTP would prevent the incoming bid from executing against the resting offer because both orders originated from the same MTP Trading Group Z1, regardless of the fact that the orders originated from different Trading Accounts. As discussed above, only MTP Trading Groups and subgroups are relevant to the proposed MTP functionality. Example 2. Assume the same as Example 1, except that the resting offer and incoming bid are both marked by the same optional MTP sublevel designation of ‘‘1.’’ Under this example, since both orders are part of the same subgroup Z1–1, MTP would prevent the incoming bid from executing against the resting offer. Example 3. Assume the same as Example 1, except that the resting offer is marked by the MTP sublevel designation of ‘‘1’’ and the incoming bid is marked by another MTP sublevel designation of ‘‘2.’’ Under this example, since the resting offer and incoming bid are part of different MTP Trading Subgroups (i.e., resting offer is part of subgroup Z1–1 and incoming bid part of subgroup Z1–2), MTP would not prevent the incoming bid from executing against the resting offer. Example 4. Assume the same as Example 1 and the incoming bid is not marked by an MTP sublevel designation. Assume, however, that the resting offer is marked by an MTP sublevel designation of ‘‘1.’’ Since the MTP modifier on the incoming bid controls, the 18 For the purposes of determining whether or not the proposed MTP functionality is triggered, the type of MTP Action specified in the MTP code is irrelevant. So long as the MTP code contains one of the MTP Actions listed under proposed subparagraph (iii), the incoming order is considered to be ‘‘designated with an MTP modifier,’’ as required by proposed rule. 19 Article 1, Rule 2(d)(1) defines ‘‘Day’’ as ‘‘a modifier that requires an order to be in effect only for the day on which it is submitted to the Exchange.’’ PO 00000 Frm 00108 Fmt 4703 Sfmt 4703 72733 fact that the incoming bid is not part of subgroup means that the Matching System will not consider the subgroup of the resting offer.20 Thus, similar to Example 1, MTP would prevent the incoming bid from executing against the resting offer because both orders originated from the same MTP Trading Group Z1. Example 5. Assume the same as Example 1 and the resting offer is not marked by an MTP sublevel designation. Assume, however, that the incoming bid is marked by an MTP sublevel designation of ‘‘1’’ and is, thus, part of subgroup Z1–1. Under this example, the Matching System will consider the subgroup of the resting offer since the incoming bid is part of subgroup Z1–1. Moreover, since the resting offer is not part of a subgroup, the Matching System will treat the resting offer as being part of a different subgroup. Thus, MTP will not prevent the execution of the incoming bid against the resting offer, because the Matching System will treat the orders as being part of different subgroups.21 Finally, the Exchange proposes to limit the application of MTP to marketable contra-side orders that are both principal orders or are both agency orders (i.e., principal-principal or agency-agency). The main purpose of this limitation is to prevent an agency top-of-book resting order from being cancelled by an incoming principal order from the same MTP Trading Group and vice versa. The Exchange anticipates that the vast majority of Participant Trading Permit holders that may utilize the proposed MTP functionality will be proprietary traders and, as such, all orders that originate from its MTP Trading Group(s) would be principal orders. However, since some of our Participant Trading Permit holders maintain proprietary and agency accounts, this limitation would prevent customer orders from being cancelled by proprietary orders. As such, the Exchange proposes to only permit marketable principal-principal and agency-agency orders from being eligible for the proposed MTP functionality.22 20 The Exchange notes that it is purposely treating the absence of an MTP sublevel designation on the incoming order and presence of an MTP sublevel designation on the resting order one way (i.e., prevent execution) and the absence of an MTP sublevel designation on the resting order and presence of an MTP sublevel designation on the incoming bid another way (i.e., not preventing execution). The two seemingly similar scenarios are treated differently due to the need to implement an MTP scheme that will produce consistent and predictable result, especially where the contra-side orders have different MTP Actions. 21 Id. 22 In addition to marketable principal-principal orders, the proposed MTP functionality may be E:\FR\FM\03DEN1.SGM Continued 03DEN1 72734 Federal Register / Vol. 78, No. 232 / Tuesday, December 3, 2013 / Notices MTP Order Cancellations emcdonald on DSK67QTVN1PROD with NOTICES Once MTP is triggered, the next step is to determine which order(s) would be cancelled, if any. To this end, proposed subparagraph (iii) provides that the following MTP Actions may be applied to any incoming limit or market orders at the MTP Trading Group level as a default or at the individual order level ad hoc: (a) MTP Cancel Incoming (‘‘N’’): An incoming limit or market order marked ‘‘N’’ will not execute against opposite side resting interest originating from the same MTP Trading Group or MTP sublevel, if applicable. Only the incoming order will be cancelled pursuant to MTP. (b) MTP Cancel Resting (‘‘O’’): An incoming limit or market order marked ‘‘O’’ will not execute against opposite side resting interest originating from the same MTP Trading Group or MTP sublevel, if applicable. Only the resting order will be cancelled pursuant to MTP. (c) MTP Cancel Both (‘‘B’’): An incoming limit or market order marked ‘‘B’’ will not execute against opposite side resting interest originating from the same MTP Trading Group or MTP sublevel, if applicable. The entire size of both orders will be cancelled pursuant to MTP. Moreover, proposed subparagraph (iv) details the MTP Inactivate override function, which provides that an incoming limit or market order marked ‘‘I’’ will inactivate the default MTP action for the incoming order and will not prevent the order from executing against any resting opposite side orders.23 Also, ‘‘I’’ may only be applied at the individual order level ad hoc. Finally, an incoming order marked ‘‘I’’ may be marked by an optional MTP sublevel designation.24 utilized where the marketable contra-side orders are both agency orders from the same customer. For instance, an MTP Trading Group may contain one agency account, through which only one customer is submitting orders to the Matching System as a sponsored access order sender. In such a case, the sponsored access order sender could use the proposed MTP functionality to prevent selfexecution of its orders. 23 Where contra-side orders are not prevented from executing due to the incoming order being marked ‘‘I,’’ the orders may execute in spite of MTP being triggered. In contrast, where contra-side orders are not prevented from executing due to the contra-side orders not being part of the same MTP Trading Group or trading subgroup, the orders may execute because MTP has not been triggered. 24 The purpose of allowing an incoming order marked ‘‘I’’ to rest with an active sublevel designation is to permit an order sender to deactivate the MTP functionality for an incoming order, but to keep the MTP subgroup functionality alive once the order became a resting order. VerDate Mar<15>2010 17:36 Dec 02, 2013 Jkt 232001 The following Examples 1–4 illustrate how each one of the three MTP Actions and the MTP Inactivate would function. Example 1. Assume that an order to buy 100 shares of security XYZ priced at $10.02/ share is received by the Matching System and becomes a resting order on the CHX book. Subsequently, an order to sell 100 shares of security XYZ priced at $10.02/share is received by the Matching System from the same MTP Trading Group and is marked ‘‘N.’’ Further assume that neither contra-side order is marked by an MTP sublevel designation and that both contra-side orders are Day limit orders. Under this ‘‘N’’ Example 1, the full size of the incoming offer would be cancelled and the resting bid would remain on the CHX book. If the incoming bid were for 200 shares or 50 shares, the result would remain the same because the ‘‘N’’ MTP Action would require that the full size of the incoming bid be cancelled. Example 2. Assume that an order to buy 100 shares of security XYZ priced at $10.02/ share is received by the Matching System and becomes a resting order on the CHX book. Subsequently, an order to sell 100 shares of security XYZ priced at $10.02/share is received by the Matching System from the same MTP Trading Group and is marked ‘‘O.’’ Further assume that neither contra-side order is marked by an optional MTP sublevel designation and that both contra-side orders are Day limit orders. Under this Example 2, the full size of the resting offer would be cancelled and the incoming bid would not be cancelled pursuant to MTP.25 If the incoming bid were for 200 shares or 50 shares, the result would remain the same because the ‘‘O’’ MTP Action would require that the full size of the resting offer to be cancelled. Example 3. Assume that an order to buy 100 shares of security XYZ priced at $10.02/ share is received by the Matching System and becomes a resting order on the CHX book. Subsequently, an order to sell 100 shares of security XYZ priced at $10.02/share is received by the Matching System from the same MTP Trading Group and is marked ‘‘B.’’ Further assume that neither contra-side order is marked by an optional MTP sublevel designation and that both contra-side orders are Day limit orders.26 Under this Example 3, the full sizes of both the incoming offer and resting bid would be cancelled. If the incoming bid were for 200 shares or 50 shares, the result would remain the same because the ‘‘B’’ MTP Action would require that the full size of both orders be cancelled. Example 4. Assume that an order to buy 100 shares of security XYZ priced at $10.02/ 25 In this situation, the incoming offer would execute against resting opposite side order, if available, or post the CHX book. As discussed below, since the MTP modifier is not considered by the Matching System until all other modifiers are first considered, an incoming offer marked with an MTP modifier and MTP Action of ‘‘O’’ will execute against other resting opposite side orders, if available, or post the CHX book. 26 Id. PO 00000 Frm 00109 Fmt 4703 Sfmt 4703 share is received by the Matching System and becomes a resting order on the CHX book. Subsequently, an order to sell 100 shares of security XYZ priced at $10.02/share is received by the Matching System from the same MTP Trading Group and is marked ‘‘I.’’ Further assume that neither contra-side order is marked by an MTP sublevel designation and that both contra-side orders are Day limit orders.27 Also assume that the MTP Trading Group from which the contra-side orders originated has a default MTP Action of ‘‘N.’’ Under this Example 4, the incoming offer would execute against the resting bid because the ‘‘I’’ modifier inactivated the default MTP Action of the MTP Trading Group, namely ‘‘N.’’ In contrast, if the incoming offer were not marked by the ‘‘I’’ modifier, MTP would have prevented the execution of the orders and cancelled the incoming offer. Also, since the MTP modifier on the incoming order always controls the MTP interaction, the fact that the resting order has a MTP modifier with a ‘‘N’’ MTP Action is irrelevant. MTP and Other Order Modifiers The proposed MTP modifier is fully compatible with all order execution,28 display,29 and duration modifiers,30 that are applicable to limit and market orders.31 This is because the proposed MTP modifier is the only order modifier that requires the Matching System to consider the MTP Trading Group and subgroup of an order. Thus, there are no other modifiers that would directly conflict with the proposed MTP modifier. If an incoming order marked by an MTP modifier and at least one other modifier is executable against a resting opposite side order, the Matching System will verify the permissibility of the match first against the non-MTP modifiers before considering the MTP Trading Group or subgroup of the contra-side orders as required by the MTP modifier. That is, the MTP modifier will always be considered last. Thus, if such an incoming order is to be cancelled for reasons other than the MTP designation, the incoming order would be cancelled before the Matching System would have the opportunity to consider the MTP Trading Groups or subgroups of the contra-side orders. This priority scheme ensures that the 27 Id. 28 See Article 1, Rule 2(b)(1) and (3). Article 1, Rule 2(c). 30 See Article 1, Rule 2(d). 31 This rule filing will only address the interplay between the MTP modifier and other order modifiers. However, the Exchange notes that certain order modifiers are not compatible with other modifiers. Such incompatibilities are noted in Article 1, Rule 2 and in recent Rule 19b-4 rule filings that have dealt with order types and modifiers. See Securities Exchange Act Release No. 69538 (May 8, 2013), 78 FR 28671 (May 15, 2013) (SR–CHX–2013–10); see also Securities Exchange Act Release No. 69075 (March 8, 2013), 78 FR 16311 (March 14, 2013) (SR–CHX–2013–07). 29 See E:\FR\FM\03DEN1.SGM 03DEN1 Federal Register / Vol. 78, No. 232 / Tuesday, December 3, 2013 / Notices proposed MTP modifier can only be triggered once all of the other order modifiers attached to an order have been considered. The following examples illustrate how this order modifier priority scheme would work when the proposed MTP modifier is paired with the ‘‘Immediate Or Cancel’’ (‘‘IOC’’),32 ‘‘Post Only,’’ 33 or ‘‘CHX Only’’ 34 order modifiers. emcdonald on DSK67QTVN1PROD with NOTICES Example 1. Assume that the Matching System receives an incoming limit buy order (‘‘Bid A’’) for 1,000 shares of security XYZ priced at $10.10/share that originated from MTP Trading Group D1 and is marked IOC and MTP, with an MTP Action of ‘‘O’’ and no MTP sublevel designation. Assume that the CHX book for security XYZ contains no resting bids, but does have two resting offers (‘‘Offers A and B’’). Assume that Offer A originated from MTP Trading Group C1 and is for 200 shares priced at $10.09/share. Assume that Offer B originated from MTP Trading Group D1 and is for 200 shares priced at $10.10/share. Assume also that the Offer A is the only Protected Quotation of any market at the National Best Offer (‘‘NBO’’) for security XYZ. Under this Example 1, since Bid A is immediately executable against Offer A at 32 Article 1, Rule 2(d)(4) defines ‘‘Immediate Or Cancel,’’ in pertinent part, as ‘‘a modifier that requires an order to be executed, either in whole or in part and for limit orders, at or better than its limit price, as soon as the order is received by the Matching System, with any unexecuted balance of the order to be immediately cancelled. 33 Article 1, Rule 2(b)(2)(D) defines ‘‘Post Only’’ as follows (emphasis added): ‘‘‘Post Only’: a limit order modifier that requires an order to be posted on the Exchange and not routed away to another trading center. A limit order marked Post Only shall be deemed to have been received ‘‘Do Not Route,’’ as defined under paragraph (b)(3)(A), which cannot be overridden by the order sender. A Post Only order will be immediately cancelled under the following circumstances: (i) The Post Only order would remove liquidity from the CHX book; or (ii) At the time of order entry, the Post Only order would lock or cross a Protected Quotation of an external market; provided, however, that if the Post Only order is marked ‘‘CHX Only’’ and is eligible for the CHX Only Price Sliding Processes, pursuant to Article 1, Rule 2(b)(1)(C), the Post Only order that would lock or cross a Protected Quotation of an external market shall be subject to the CHX Only Price Sliding Processes or Limit Up-Limit Down Price Sliding, pursuant to Article 20, Rule 2A(b), whichever is applicable, and shall not be immediately cancelled.’’ 34 ‘‘CHX Only’’ is a limit order modifier that requires an order (1) to be ranked and executed on the Exchange without routing away and (2) to be eligible for the CHX Only Price Sliding Processes. The CHX Only Price Sliding Processes will reprice, re-rank and/or re-display certain CHX Only orders multiple times depending on changes to the National Best Bid and Offer (‘‘NBBO’’) (the repricing of CHX Only sell short orders subject to Rule 201 of Regulation SHO is dependent solely on declines to the National Best Bid (‘‘NBB’’)), so long as the order can be ranked and displayed in an increment consistent with the provisions of Regulation NMS and Rule 201 of Regulation SHO, until the order is executed, cancelled or the original limit price is reached. See Article 1, Rule 2(b)(1)(C). VerDate Mar<15>2010 17:36 Dec 02, 2013 Jkt 232001 $10.09, the IOC designation would not cancel Bid A. The Matching System would then consider the MTP Trading Groups of Bid A and Offer A because Bid A is marked ‘‘MTP.’’ Since Bid A and Offer A are from different MTP Trading Groups, MTP would not prevent an execution and Bid A would execute against Offer A at the full size of Offer A priced at $10.09/share. In turn, Bid A would be decremented by 200 shares and would have 800 unexecuted shares remaining. The Matching System will then go through the same process with respect to Offer B. Since Offer B is at the limit price of Bid A, the IOC designation would not cancel Bid A. However, since Bid A and Offer B both originated from the same MTP Trading Group D1, the MTP functionality would prevent an execution and the MTP Action of ‘‘O’’ would require Offer B to be cancelled because it is the resting order. Consequently, the Matching System will go through the attached order modifiers once again to determine what to do with the unexecuted balance of Bid A. Since the CHX book no longer has any resting opposite side orders for security XYZ, the IOC designation would require the unexecuted balance of Bid A to be cancelled. If Bid A instead had an MTP Action of ‘‘N,’’ the triggering of the MTP Action would have resulted in the unexecuted balance of Bid A (i.e., 800 shares) being cancelled and Offer B remaining on the CHX book. Example 2. Assume that the Matching System receives an incoming limit buy order (‘‘Bid A’’) for 1,000 shares of security XYZ priced at $10.10/share that originated from MTP Trading Group D1 and is marked Day, Post Only, and MTP, with an MTP Action of ‘‘B’’ and no MTP sublevel designation. Assume that the CHX book for security XYZ contains no resting bids, but does have one resting offer (‘‘Offer A’’) originated from MTP Trading Group D1 and is for 200 shares priced at $10.09/share. Assume also that the Offer A is the only Protected Quotation of any market at the NBO for security XYZ. Under this Example 2, the Matching System would first determine the permissibility of the match against the Post Only modifier. Since Post Only orders cannot ‘‘remove liquidity from the CHX book,’’ Bid A would be cancelled because Bid A is an incoming order that would remove liquidity from the CHX book. Thus, Bid A would be cancelled before the Matching System would be able to consider the MTP Trading Groups of the contra-side orders. Example 3. Assume that the Matching System receives a fully-displayable incoming limit buy order (‘‘Bid A’’) for 1,000 shares of security XYZ priced at $10.10/share that originated from MTP Trading Group D1 and is marked Day, CHX Only, and MTP, with an MTP Action of ‘‘O’’ and no MTP sublevel designation. Assume that the CHX book for security XYZ is empty. Assume also that the National Best Bid and Offer (‘‘NBBO’’) for security XYZ is $10.07 × $10.09 and the short sale price test restriction of Regulation SHO is not in effect. Since the CHX book is empty with respect to security XYZ and the display of Bid A at $10.10 would cross the NBO at $10.09, the CHX Only Price Sliding Processes, PO 00000 Frm 00110 Fmt 4703 Sfmt 4703 72735 specifically NMS Price Sliding,35 would price slide Bid A to be ranked at $10.09 (i.e., the NBB locking price) and displayed at $10.08 (i.e., one price increment below the NBO). The new NBBO for security XYZ would be $10.08 × $10.09, with Bid A being the NBB. Once Bid A is price slid and posted to the CHX book, Bid A becomes a resting order. If a subsequent incoming offer were to execute against Bid A, Bid A would receive the liquidity providing credit and the opposite side offer would pay the liquidity removing fee. Moreover, since there is no resting opposite side order to match against Bid A, the Matching System would not consider the MTP modifier and thus, MTP would not prevent an execution. Example 4. Assume the same as Example 3 and the CHX book contains only Bid A and no other bids or offers. Assume that after Bid A was price slid, the Matching System receives an incoming limit sell order (‘‘Offer A’’) for 2,000 shares of security XYZ priced at $10.10/share that originated from MTP Trading Group D1 that is marked ‘‘Do Not Display,’’ 36 but is not marked by an MTP modifier. Thus, the CHX book as to security XYZ is now $10.08 × $10.10. Assume further that after Offer A posts to the CHX book, the NBO (which is not on CHX) moves away to $10.10 and thus, the NBBO for security XYZ changes from $10.08 x $10.09 to $10.08 × $10.10. Pursuant to NMS Price Sliding, since the NBO moved away to $10.10, resting Bid A would be permitted to be ranked at its original limit price of $10.10 and displayed at $10.09. Since Offer A is resting undisplayed at $10.10, Bid A would be price slid into a price point that is already occupied by Offer A. Thus, Bid A would become an incoming order and, if executable against Offer A, would take liquidity from the CHX book. The Matching System would then verify the permissibility of the order execution against the order modifiers of the contra-side orders. Offer A has no order modifiers that would prevent an execution. On the opposite side, the CHX Only designation of Bid A would not prevent an execution. However, since Bid A is marked ‘‘MTP’’ and both contra-side orders originated from MTP Trading Group D1, MTP would be triggered. Moreover, since Bid A has an MTP Action of ‘‘O,’’ the resting order would be cancelled. Thus, Offer A would be cancelled and Bid A would be ranked at $10.10 and displayed at $10.09. Consequently, the new NBBO for security XYZ would be $10.09 × $10.10, where Bid A becomes the NBB. Example 5. Assume the same as Example 4, except that Bid A was also marked Post Only. Thus, Bid A was marked Day, CHX Only, Post Only, and MTP, with an MTP Action of ‘‘O’’ and no MTP sublevel designation. Since a Post Only order will be immediately cancelled if the order is price slid into a price point already occupied by 35 See Article 1, Rule 2(b)(1)(C)(i). 1, Rule 2(c)(2) provides that ‘‘Do Not Display’’ is ‘‘a modifier, for orders of at least 1,000 shares when entered, that requires the order not be displayed in whole or in part.’’ 36 Article E:\FR\FM\03DEN1.SGM 03DEN1 72736 Federal Register / Vol. 78, No. 232 / Tuesday, December 3, 2013 / Notices an opposite side order, unlike Example 4, Bid A would be cancelled pursuant to the Post Only modifier before the Matching System would consider the MTP modifier. Thus, under this Example 5, price slid Bid A would be cancelled and Offer A would remain on the CHX book undisplayed. 2. Statutory Basis The Exchange submits that the proposed rule changes to adopt an MTP functionality is consistent with Section 6(b) of the Act in general 37 and furthers the objectives of Section 6(b)(5) in particular,38 because it is 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 facilitating transaction in securities, to remove impediments to, and perfect the mechanisms of, a free and open market and, in general, by protecting investors and the public interest. Specifically, the proposed MTP functionality will allow order senders to better manage order flow and prevent undesirable executions against themselves. Additionally, the proposed MTP modifier will streamline certain regulatory functions of the Exchange by reducing false positive results that may occur on Exchange-generated wash trading surveillance reports when orders are executed under the same account symbol. Consequently, the proposed adoption of the MTP functionality will benefit Exchange customers by improving fill rates and promoting competition among market centers offering similar products and services, which is consistent with the aforementioned objectives of Section 6(b)(5). emcdonald on DSK67QTVN1PROD with NOTICES B. Self-Regulatory Organization’s Statement on Burden on Competition The Exchange does believe that the proposed rule change will have an impact on competition. However, the Exchange does not believe that the proposed rule change will impose a burden on competition that is unnecessary or inappropriate in furtherance of the purposes of the Act. To the contrary, the proposed MTP functionality should act as a positive force for competition by providing an alternative to similar functionality offered by other Exchanges, such as the ‘‘Match Trade Prevention Modifiers’’ offered by BATS. C. Self-Regulatory Organization’s Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others No written comments were either solicited or received. III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action The Exchange has filed the proposed rule change pursuant to Section 19(b)(3)(A)(iii) of the Act 39 and Rule 19b–4(f)(6) thereunder.40 Because the proposed rule change does not: (i) significantly affect the protection of investors or the public interest; (ii) impose any significant burden on competition; and (iii) become operative prior to 30 days from the date on which it was filed, or such shorter time as the Commission may designate, if consistent with the protection of investors and the public interest, the proposed rule change has become effective pursuant to Section 19(b)(3)(A) of the Act and Rule 19b–4(f)(6)(iii) thereunder. A proposed rule change filed under Rule 19b–4(f)(6) 41 normally does not become operative prior to 30 days after the date of the filing. However, pursuant to Rule 19b4(f)(6)(iii),42 the Commission may designate a shorter time if such action is consistent with the protection of investors and the public interest. The Exchange has asked the Commission to waive the 30-day operative delay so that the proposal may become operative as of December 2, 2013. The Exchange requested such waiver so that it may offer Participants the proposed MTP functionality earlier. The Exchange stated that its proposal does not propose any new policies or provisions that are unique or unproven, as all changes proposed are changes to the Exchange’s rules based on the rules of another selfregulatory organization, BATS YExchange (‘‘BYX’’), or modified versions of the corresponding BYX rules, as described in further detail in the filing. According to the Exchange, the proposed MTP functionality and the BATS–Y ‘‘Match Trade Prevention Modifiers’’ are both designed to streamline certain regulatory functions of the Exchange by reducing false positive results that may occur on Exchange-generated wash trading surveillance reports when orders are executed under the same account symbol. Thus, the Exchange believes that it is in the interest of protecting 39 15 U.S.C. 78s(b)(3)(A)(iii). CFR 240.19b–4(f)(6). 41 17 CFR 240.19b–4(f)(6).. 42 17 CFR 240.19b–4(f)(6)(iii). 40 17 37 15 38 15 U.S.C. 78f(b). U.S.C. 78f(b)(5). VerDate Mar<15>2010 17:36 Dec 02, 2013 Jkt 232001 PO 00000 Frm 00111 Fmt 4703 Sfmt 4703 investors to provide the new functionality at the earliest time possible. Based on the Exchange’s statements, the Commission believes that waiving the operative delay as of December 2, 2013 is consistent with the protection of investors and the public interest. Therefore, the Commission designates the proposed rule change to be operative as of December 2, 2013.43 At any time within 60 days of the filing of the proposed rule change, the Commission summarily may temporarily suspend such rule change if it appears to the Commission that such action is: (i) necessary or appropriate in the public interest; (ii) for the protection of investors; or (iii) otherwise in furtherance of the purposes of the Act. If the Commission takes such action, the Commission shall institute proceedings under Section 19(b)(2)(B) 44 of the Act to determine whether the proposed rule should be approved or disapproved. 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– CHX–2013–20 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–CHX–2013–20. 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 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 43 For purposes only of waiving the 30-day operative delay, the Commission has considered the proposed rule’s impact on efficiency, competition, and capital formation. See 15 U.S.C. 78c(f). 44 15 U.S.C. 78s(b)(2)(B). E:\FR\FM\03DEN1.SGM 03DEN1 Federal Register / Vol. 78, No. 232 / Tuesday, December 3, 2013 / Notices 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 such filing also will be available for inspection and copying at the principal offices 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–CHX– 2013–20, and should be submitted on or before December 24, 2013. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.45 Kevin M. O’Neill, Deputy Secretary. [FR Doc. 2013–28848 Filed 12–2–13; 8:45 am] BILLING CODE 8011–01–P I. Clearing Agency’s Statement of the Terms of Substance of the Proposed Rule Change The proposed rule change consist of amendments to the Rules & Procedures (‘‘Rules’’) of NSCC to provide NSCC Members with a risk management tool that would allow those Members to monitor trading activity and would deliver to them notifications when preset trading limits are reached, as more fully described below. II. Clearing Agency’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, NSCC 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. NSCC has prepared summaries, set forth in sections A, B, and C below, of the most significant aspects of such statements. (A) Clearing Agency’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change 1. Purpose SECURITIES AND EXCHANGE COMMISSION [Release No. 34–70946; File No. SR–NSCC– 2013–12] Self-Regulatory Organizations; National Securities Clearing Corporation; Notice of Filing of Proposed Rule Change To Provide Its Members With a Risk Management Tool That Would Enable Members To Monitor Trading Activity and Receive Notifications When Pre-Set Trading Limits are Reached emcdonald on DSK67QTVN1PROD with NOTICES November 26, 2013. Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’) 1 and Rule 19b–4 thereunder,2 notice is hereby given that on November 15, 2013, National Securities Clearing Corporation (‘‘NSCC’’) filed with the Securities and Exchange Commission (‘‘Commission’’) a proposed rule change as described in Item I, II and III below, which Items have been prepared primarily by NSCC. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. 45 17 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 1 15 VerDate Mar<15>2010 17:36 Dec 02, 2013 Jkt 232001 Introduction In connection with recent industrywide efforts to develop tools and strategies to mitigate and address the risks associated with the increasingly complex, interconnected, and automated market technology,3 NSCC has developed a risk management tool, called ‘‘DTCC Limit Monitoring,’’ that would provide its Members with posttrade surveillance.4 The proposed DTCC Limit Monitoring would provide NSCC’s Members with a tool to monitor the intraday clearing activity of their own trading desks and the intraday clearing activity for their correspondents and clients. The tool would send out alerts to those Members when pre-set trading limits with respect to this clearing activity is being approached and is reached, allowing them to monitor exposure of this trading activity, and providing them with notice when there is an unusual or unexpected spike in trading activity that could indicate a trading error, or that a 3 While other market participants may be developing additional risk management tools in connection with these recent industry-wide efforts, the proposed DTCC Limit Monitoring would be separate from and would operate completely independently from any such tools. 4 For the purposes of this proposed rule change, ‘‘post-trade’’ refers to the period in a transaction life cycle after it has been submitted to NSCC for clearing and settlement. PO 00000 Frm 00112 Fmt 4703 Sfmt 4703 72737 customer is trading outside the limits set by its clearing firm. DTCC Limit Monitoring Proposal Overview Pursuant to this filing, NSCC proposes to amend its Rules to create DTCC Limit Monitoring, a risk management tool that would enable Members to monitor both their own intraday trading activity and the intraday trading activity of their correspondents and/or clients. DTCC Limit Monitoring would be available to all NSCC Members. The effectiveness of DTCC Limit Monitoring in addressing risk depends on its use by NSCC Members, particularly those Members that clear for other firms, and depends on their inclusion of the tool within their broader risk management strategies. As such, NSCC is proposing to require that the following NSCC Members register for DTCC Limit Monitoring: (1) any NSCC full service Member that clears for others; (2) any NSCC full service Member that submits transactions to NSCC’s trade capture system either as a Qualified Special Representative (‘‘QSR’’) or Special Representative, pursuant to Procedure IV (Special Representative Service); and (3) any NSCC full service Member that has established a 9A/9B relationship in order to allow another NSCC Member (either a QSR or Special Representative) to submit locked in [sic] trade data on its behalf. NSCC Members would incur minimal, if any, cost to implement DTCC Limit Monitoring. The tool would provide NSCC Members with an additional method to monitor the posttrade activity of their own trading desks and the activity of their correspondents and/or clients. DTCC Limit Monitoring would provide NSCC Members with: (i) posttrade data relating to unsettled equity and fixed income securities trades for a given day that have been compared or recorded through NSCC’s trade capture mechanisms on that day (‘‘LM Trade Date Data’’), and (ii) other information based upon data the participating Member may itself provide at start of or throughout the day (‘‘LM Memberprovided Data’’), as provided in the Rules governing DTCC Limit Monitoring (LM Trade Date Data and LM Memberprovided Data shall collectively be referred to as ‘‘LM Transaction Data’’). Members registered for DTCC Limit Monitoring would be permitted to input or load trade information from prior days to the system on their own to supplement their view of overall risk exposure, and to monitor their trading exposure. E:\FR\FM\03DEN1.SGM 03DEN1

Agencies

[Federal Register Volume 78, Number 232 (Tuesday, December 3, 2013)]
[Notices]
[Pages 72731-72737]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-28848]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-70948; File No. SR-CHX-2013-20]


Self-Regulatory Organizations; Chicago Stock Exchange, Inc.; 
Notice of Filing and Immediate Effectiveness of a Proposed Rule Change 
To Adopt a Match Trade Prevention Modifier for Limit and Market Orders 
Submitted to the Exchange

November 26, 2013.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\, and Rule 19b-4 \2\ thereunder, notice is hereby given 
that on November 20, 2013, the Chicago Stock Exchange, Inc. (``CHX'' or 
the ``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I and 
II below, which Items have been prepared by the Exchange. CHX has filed 
this proposal pursuant to Exchange Act Rule 19b-4(f)(6) \3\ which is 
effective upon filing with the Commission. 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.
    \3\ 17 CFR 240.19b-4(f)(6).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    CHX proposes to amend Article 1, Rule 1 (Definitions) and Rule 2 
(Order Types, Modifiers, and Related Terms) to adopt a Match Trade 
Prevention order execution modifier for limit and market orders 
submitted to the CHX Matching System (``Matching System''). The text of 
this proposed rule change is available on the Exchange's Web site at 
www.chx.com, at the principal office of the Exchange, on the 
Commission's Web site at www.sec.gov and in the Commission's Public 
Reference Room.

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 CHX included statements 
concerning the purpose of and basis for the proposed rule changes 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 CHX 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 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Exchange does not currently offer Match Trade Prevention 
(``MTP'') functionality. The Exchange now proposes to adopt Article 1, 
Rule 2(b)(3)(F) to offer MTP functionality for limit \4\ and market \5\ 
orders that are submitted to the Matching System.\6\ In sum, through 
the use of a proposed MTP order execution modifier, Participants may 
prevent the execution of marketable contra-side orders that originated 
from the same group of one or more trading accounts (i.e., MTP Trading 
Group), but will not prevent an execution if such contra-side orders 
originated from different subgroups within the same MTP Trading Group. 
Thus, given that the proposed MTP functionality is based on the 
interaction between MTP Trading Groups, the Exchange further proposes 
to adopt Article 1, Rule 1(ll) to define ``Trading Account'' and Rule 
1(mm) to define ``MTP Trading Group.''
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    \4\ Article 1, Rule 2(a)(1) defines ``limit order,'' in 
pertinent part, as ``an order to buy or sell a specific amount of a 
security at a specified price or better if obtainable once the order 
has been submitted to the market.''
    \5\ Article 1, Rule 2(a)(3) defines ``market order,'' in 
pertinent part, as ``an order to buy or sell a specific amount of a 
security at the best price available once the order is presented in 
the market.''
    \6\ The proposed MTP functionality will only be applicable to 
single-sided orders. The purpose of MTP is obviated if both sides of 
an order are already identified, as in the case of a cross order. 
Article 1, Rule 2(a)(2) defines ``cross order,'' in pertinent part, 
as ``an order to buy and sell the same security at a specific price 
better than the best bid and offer displayed in the Matching System 
and which would not constitute a trade-through under Regulation NMS 
(including all applicable exceptions and exemptions).'' As such, MTP 
modifiers may only be applied to limit and market orders.
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Trading Accounts and MTP Trading Groups
    Before discussing the details of the operation of the proposed MTP 
functionality, it is important to first outline the interplay between 
Trading Accounts and MTP Trading Groups. Currently, an order submitted 
to the Matching System originates from a Trading Account, which is 
identified by a unique account symbol, under a Trading Permit.\7\ A 
Participant may hold

[[Page 72732]]

no more than one Trading Permit.\8\ In practice, but not currently 
stated in CHX rules, a Participant Trading Permit holder may maintain 
one or more trading accounts under its Trading Permit. Thus, given that 
the proposed MTP functionality assumes that all orders sent to the 
Matching System originate from MTP Trading Groups, it is necessary to 
define the terms ``Trading Account'' \9\ and ``MTP Trading Group.''
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    \7\ CHX Article 1, Rule 1(aa) defines ``Trading Permit'' as ``a 
permit issued by the Exchange, granting the holder a revocable 
license to execute approved securities transactions through the 
Exchange's Trading Facilities, or to have those transactions 
executed on its behalf.'' In turn, CHX Article 1, Rule 1(z) defines 
``Trading Facilities'' as ``all of the Exchange's facilities for the 
trading of equity securities, including any and all electronic or 
automated order routing, execution and reporting systems provided by 
the Exchange.''
    \8\ CHX Article 3, Rule 2(e).
    \9\ ``Trading Accounts'' are not currently defined in the CHX 
rulebook.
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    Proposed Article 1, Rule 1(ll) defines ``Trading Account'' as an 
account under a Trading Permit,\10\ identified by a unique CHX account 
symbol, from which orders are sent to the Exchange's Trading 
Facilities. Also, a Trading Permit holder may establish more than one 
Trading Account per Trading Permit.
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    \10\ See supra note 7.
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    Proposed Article 1, Rule 1(mm) provides that an ``MTP Trading 
Group'' means a group of one or more Trading Accounts that have been 
aggregated at the request of all Participant Trading Permit holders 
that control all Trading Accounts within the proposed group for the 
purpose of enabling Match Trade Prevention functionality, pursuant to 
proposed Article 1, Rule 2(b)(3)(F)(i). It also states that a Trading 
Account may not be assigned to more than one MTP Trading Group. Lastly, 
it provides that any Exchange-approved changes to the composition of an 
MTP Trading Group shall be effective no earlier than the trading day 
following the request.
    Although the Exchange anticipates that the vast majority of MTP 
Trading Groups will be composed of Trading Accounts from the same 
Participant Trading Permit holder, the proposed definition of MTP 
Trading Groups allows an MTP Trading Group to be comprised of Trading 
Accounts from different Participant Trading Permit holders. This is 
meant to address a scenario where a customer order sender has 
``sponsored access'' to the Exchange through two different Participant 
Trading Permit holders (i.e., one customer order sender submitting 
orders to the Exchange through two Trading Permits).\11\ Also, if a 
Participant Trading Permit holder wishes to aggregate a Trading 
Account, which has been assigned to its own MTP Trading Group, with 
other Trading Accounts, in order to form a new MTP Trading Group, the 
single Trading Account must only be designated to the new aggregated 
MTP Trading Group and will no longer be associated with its original 
MTP Trading Group.
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    \11\ This scenario might occur, for example, where a sponsored 
access order sender is in the process of transitioning its trading 
activity from one Trading Account controlled by one Participant 
Trading Permit holder to the Trading Account of another Participant 
Trading Permit holder. In such a case, the sponsored access order 
sender may wish to use the proposed MTP functionality to prevent 
executions of orders from the two Trading Accounts during the 
transition period.
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Enabling or Disabling MTP
    As suggested by the proposed definition of ``MTP Trading Group,'' 
the Exchange proposes to require Participants Trading Permit holders to 
request that the Exchange enable the proposed MTP functionality for 
specified MTP Trading Groups. This will give the Exchange an 
opportunity to admonish Participants of the key aspects of the proposed 
MTP functionality, described in detail below, and will also facilitate 
the Exchange's monitoring of the use of MTP. This will further provide 
an opportunity for the Participant(s) to determine which Trading 
Accounts will be part of MTP Trading Groups and which Trading Accounts 
will not be subject to the MTP functionality. Therefore, orders that 
originate from an MTP Trading Group will always be subject to the 
proposed MTP functionality.
    Thus, proposed Article 1, Rule 2(b)(3)(F)(i) provides that the MTP 
modifier shall only be available for an order that originated from a 
Trading Account, as defined under proposed Article 1, Rule 1(ll), that 
has been assigned to an MTP Trading Group, as defined under Article 1, 
Rule 1(mm).\12\ It further states that an order that originated from a 
Trading Account that is not part of an MTP Trading Group shall not be 
subject to MTP and any attached MTP modifiers shall be ignored. It 
further provides that any Exchange-approved changes to the 
applicability of MTP to a Trading Account shall be effective on the 
trading day following the date of the request to enable or disable MTP.
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    \12\ Prior to implementing the proposed MTP functionality, the 
Exchange will create a form document that will outline key aspects 
of the proposed MTP functionality, including the fact that the use 
of MTP modifiers may result in the cancellation of a customer order 
by an order submitted by or on behalf of another customer. This form 
document will be given to Participants requesting that the MTP 
functionality be enabled for designated Trading Accounts. Among 
other things, the form document will require such Participants to 
designate Trading Accounts to MTP Trading Groups and to acknowledge 
receipt of the form document prior to the MTP functionality being 
enabled.
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Triggering MTP
    Proposed Article 1, Rule 2(b)(3)(F)(ii) provides that an MTP 
modifier is comprised of a compulsory MTP Action, listed under proposed 
subparagraph (iii), and an optional MTP sublevel designation and that 
the MTP modifier on the incoming order shall control the interaction 
between the contra-side orders. With respect to the actual 
functionality, it further states that an incoming limit or market order 
designated with an MTP modifier without an MTP sublevel designation 
will be prevented from executing against a resting opposite side order 
from the same MTP Trading Group, as defined under proposed Article 1, 
Rule 1(mm).\13\ If, however, the incoming order is marked by an MTP 
modifier with an MTP sublevel designation,\14\ the order will only be 
prevented from executing against a resting opposite side order from the 
same MTP Trading Group if the resting order is marked by the same MTP 
sublevel designation. Moreover, MTP shall only be applicable to 
marketable contra-side orders that are both principal orders or are 
both agency orders.
---------------------------------------------------------------------------

    \13\ Initially, it is important to note the distinction between 
an incoming order and a resting order. An incoming order is usually 
an order that has been submitted to the Matching System that has not 
yet interacted with the CHX book. If and when an incoming order 
posts to the CHX book, the order becomes a resting order. However, a 
resting order can become an incoming order if it is being price slid 
into a new price point, pursuant to a price sliding functionality 
offered by the Exchange (e.g., CHX Only Price Sliding Processes 
under Article 1, Rule 2(b)(1)(C)). A discussion of the interplay 
between the CHX Only Price Sliding Processes and the proposed MTP 
functionality may be found below. As such, it is inaccurate to 
characterize the newer order as always being the incoming order and 
the older order as always being the resting order. The actual 
distinction between incoming and resting orders is based on the 
liquidity removing/providing fee structure utilized by the Exchange. 
See CHX Fee Schedule, Section E. Therefore, an order that removes 
liquidity from the CHX book will always be the incoming order and an 
order that provides liquidity to the CHX book will always be the 
resting order.
    \14\ The Exchange proposes to permit sixty-two (62) distinct MTP 
sublevel designations (i.e., a-z; A-Z; 0-9).
---------------------------------------------------------------------------

    The proposed MTP functionality is based on the interaction between 
MTP Trading Groups and if applicable, subgroups within the MTP Trading 
Group, which are created through the use of optional MTP sublevel 
designations. As discussed above, an incoming order marked with an MTP 
modifier will not be allowed to execute against a resting opposite side 
order from the same MTP Trading Group.\15\

[[Page 72733]]

However, if the MTP modifier of the incoming order indicates an MTP 
sublevel designation, the order will be considered to have originated 
from a subgroup within the MTP Trading Group, designated by the 
sublevel value,\16\ and will only be prevented from executing against 
resting opposite side orders from the same subgroup (i.e., same 
optional MTP sublevel designation). Consequently, an incoming order 
that originated from a subgroup will not be prevented from executing 
against opposite side resting orders from the same MTP Trading Group, 
so long as the opposite side order is not part of the same subgroup 
(i.e., the resting order is either marked by a different MTP sublevel 
designation or is not marked by any MTP sublevel designation).\17\
---------------------------------------------------------------------------

    \15\ The proposed MTP functionality does not require resting 
orders subject to the proposed MTP functionality to be marked by an 
MTP modifier. Since all orders subject to the MTP functionality will 
originate from an MTP Trading Group, the specific MTP Trading Group 
designations of resting orders will be known, regardless of whether 
or not the order has an MTP modifier attached.
    \16\ See supra note 14.
    \17\ Although an incoming order may not be prevented from 
executing against opposite side resting orders by MTP, the incoming 
order may nevertheless be prevented from executing against resting 
opposite side orders due to other order modifiers that may be 
attached to contra-side orders. For example, an incoming Post Only 
order marked by an MTP modifier would be cancelled if the order 
would remove liquidity from the CHX book, prior to the Matching 
System considering the MTP modifier. See Article 1, Rule 2(b)(1)(D). 
A detailed discussion of the interplay between the proposed MTP 
functionality and other existing order modifiers may be found below.
---------------------------------------------------------------------------

    In sum, where the incoming order is marked by an MTP modifier and 
originates from an MTP Trading Group, the proposed MTP functionality 
will prevent an order execution under the following circumstances:
    (1) Both the incoming and resting orders originated from the same 
MTP Trading Group and neither order is part of a subgroup (see Example 
1);
    (2) Both the incoming and resting orders originated from the same 
subgroup within an MTP Trading Group (see Examples 2 and 3); or
    (3) Both the incoming and resting orders are from the same MTP 
Trading Group, where the incoming order is not part of a subgroup and 
the resting order is part of any subgroup (see Example 4).
    In contrast, the proposed MTP functionality will not prevent an 
order execution under the following circumstances:
    (1) The incoming order is not marked by an MTP modifier or is 
marked MTP Inactive;
    (2) Both the incoming and resting orders originated from different 
MTP Trading Groups; or
    (3) Both the incoming and resting orders originated from the same 
MTP Trading Group, where the incoming order is part of any subgroup and 
the resting order is not part of a subgroup (see Example 5).

    Example 1. Assume that the CHX book has one resting offer for 
100 shares of security XYZ priced at $10.01/share and no resting 
bids for security XYZ. Assume that the resting offer originated from 
Trading Account ZAAA, under the Trading Permit held by Participant 
Z, which is part of MTP Trading Group Z1. Assume that the resting 
offer is marked with an MTP modifier,\18\ is not marked by an MTP 
sublevel designation and is a Day \19\ limit order.
---------------------------------------------------------------------------

    \18\ For the purposes of determining whether or not the proposed 
MTP functionality is triggered, the type of MTP Action specified in 
the MTP code is irrelevant. So long as the MTP code contains one of 
the MTP Actions listed under proposed subparagraph (iii), the 
incoming order is considered to be ``designated with an MTP 
modifier,'' as required by proposed rule.
    \19\ Article 1, Rule 2(d)(1) defines ``Day'' as ``a modifier 
that requires an order to be in effect only for the day on which it 
is submitted to the Exchange.''
---------------------------------------------------------------------------

    Assume further that an incoming bid for 100 shares of security 
XYZ priced at $10.02/share is received by the Matching System. 
Assume that the incoming bid originated from Trading Account ZBBB, 
under a Trading Permit held by Participant Z, which is also part of 
MTP Trading Group Z1. Assume that the incoming bid is designated 
with an MTP modifier, is not marked with an MTP sublevel designation 
and is a Day limit order.
    Under this example, MTP would prevent the incoming bid from 
executing against the resting offer because both orders originated 
from the same MTP Trading Group Z1, regardless of the fact that the 
orders originated from different Trading Accounts. As discussed 
above, only MTP Trading Groups and subgroups are relevant to the 
proposed MTP functionality.
    Example 2. Assume the same as Example 1, except that the resting 
offer and incoming bid are both marked by the same optional MTP 
sublevel designation of ``1.''
    Under this example, since both orders are part of the same 
subgroup Z1-1, MTP would prevent the incoming bid from executing 
against the resting offer.
    Example 3. Assume the same as Example 1, except that the resting 
offer is marked by the MTP sublevel designation of ``1'' and the 
incoming bid is marked by another MTP sublevel designation of ``2.''
    Under this example, since the resting offer and incoming bid are 
part of different MTP Trading Subgroups (i.e., resting offer is part 
of subgroup Z1-1 and incoming bid part of subgroup Z1-2), MTP would 
not prevent the incoming bid from executing against the resting 
offer.
    Example 4. Assume the same as Example 1 and the incoming bid is 
not marked by an MTP sublevel designation. Assume, however, that the 
resting offer is marked by an MTP sublevel designation of ``1.'' 
Since the MTP modifier on the incoming bid controls, the fact that 
the incoming bid is not part of subgroup means that the Matching 
System will not consider the subgroup of the resting offer.\20\
---------------------------------------------------------------------------

    \20\ The Exchange notes that it is purposely treating the 
absence of an MTP sublevel designation on the incoming order and 
presence of an MTP sublevel designation on the resting order one way 
(i.e., prevent execution) and the absence of an MTP sublevel 
designation on the resting order and presence of an MTP sublevel 
designation on the incoming bid another way (i.e., not preventing 
execution). The two seemingly similar scenarios are treated 
differently due to the need to implement an MTP scheme that will 
produce consistent and predictable result, especially where the 
contra-side orders have different MTP Actions.
---------------------------------------------------------------------------

    Thus, similar to Example 1, MTP would prevent the incoming bid 
from executing against the resting offer because both orders 
originated from the same MTP Trading Group Z1.
    Example 5. Assume the same as Example 1 and the resting offer is 
not marked by an MTP sublevel designation. Assume, however, that the 
incoming bid is marked by an MTP sublevel designation of ``1'' and 
is, thus, part of subgroup Z1-1.
    Under this example, the Matching System will consider the subgroup 
of the resting offer since the incoming bid is part of subgroup Z1-1. 
Moreover, since the resting offer is not part of a subgroup, the 
Matching System will treat the resting offer as being part of a 
different subgroup. Thus, MTP will not prevent the execution of the 
incoming bid against the resting offer, because the Matching System 
will treat the orders as being part of different subgroups.\21\
---------------------------------------------------------------------------

    \21\ Id.
---------------------------------------------------------------------------

    Finally, the Exchange proposes to limit the application of MTP to 
marketable contra-side orders that are both principal orders or are 
both agency orders (i.e., principal-principal or agency-agency). The 
main purpose of this limitation is to prevent an agency top-of-book 
resting order from being cancelled by an incoming principal order from 
the same MTP Trading Group and vice versa. The Exchange anticipates 
that the vast majority of Participant Trading Permit holders that may 
utilize the proposed MTP functionality will be proprietary traders and, 
as such, all orders that originate from its MTP Trading Group(s) would 
be principal orders. However, since some of our Participant Trading 
Permit holders maintain proprietary and agency accounts, this 
limitation would prevent customer orders from being cancelled by 
proprietary orders. As such, the Exchange proposes to only permit 
marketable principal-principal and agency-agency orders from being 
eligible for the proposed MTP functionality.\22\
---------------------------------------------------------------------------

    \22\ In addition to marketable principal-principal orders, the 
proposed MTP functionality may be utilized where the marketable 
contra-side orders are both agency orders from the same customer. 
For instance, an MTP Trading Group may contain one agency account, 
through which only one customer is submitting orders to the Matching 
System as a sponsored access order sender. In such a case, the 
sponsored access order sender could use the proposed MTP 
functionality to prevent self-execution of its orders.

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[[Page 72734]]

MTP Order Cancellations
    Once MTP is triggered, the next step is to determine which order(s) 
would be cancelled, if any. To this end, proposed subparagraph (iii) 
provides that the following MTP Actions may be applied to any incoming 
limit or market orders at the MTP Trading Group level as a default or 
at the individual order level ad hoc:
    (a) MTP Cancel Incoming (``N''): An incoming limit or market order 
marked ``N'' will not execute against opposite side resting interest 
originating from the same MTP Trading Group or MTP sublevel, if 
applicable. Only the incoming order will be cancelled pursuant to MTP.
    (b) MTP Cancel Resting (``O''): An incoming limit or market order 
marked ``O'' will not execute against opposite side resting interest 
originating from the same MTP Trading Group or MTP sublevel, if 
applicable. Only the resting order will be cancelled pursuant to MTP.
    (c) MTP Cancel Both (``B''): An incoming limit or market order 
marked ``B'' will not execute against opposite side resting interest 
originating from the same MTP Trading Group or MTP sublevel, if 
applicable. The entire size of both orders will be cancelled pursuant 
to MTP.
    Moreover, proposed subparagraph (iv) details the MTP Inactivate 
override function, which provides that an incoming limit or market 
order marked ``I'' will inactivate the default MTP action for the 
incoming order and will not prevent the order from executing against 
any resting opposite side orders.\23\ Also, ``I'' may only be applied 
at the individual order level ad hoc. Finally, an incoming order marked 
``I'' may be marked by an optional MTP sublevel designation.\24\
---------------------------------------------------------------------------

    \23\ Where contra-side orders are not prevented from executing 
due to the incoming order being marked ``I,'' the orders may execute 
in spite of MTP being triggered. In contrast, where contra-side 
orders are not prevented from executing due to the contra-side 
orders not being part of the same MTP Trading Group or trading 
subgroup, the orders may execute because MTP has not been triggered.
    \24\ The purpose of allowing an incoming order marked ``I'' to 
rest with an active sublevel designation is to permit an order 
sender to deactivate the MTP functionality for an incoming order, 
but to keep the MTP subgroup functionality alive once the order 
became a resting order.
---------------------------------------------------------------------------

    The following Examples 1-4 illustrate how each one of the three MTP 
Actions and the MTP Inactivate would function.
    Example 1. Assume that an order to buy 100 shares of security 
XYZ priced at $10.02/share is received by the Matching System and 
becomes a resting order on the CHX book. Subsequently, an order to 
sell 100 shares of security XYZ priced at $10.02/share is received 
by the Matching System from the same MTP Trading Group and is marked 
``N.'' Further assume that neither contra-side order is marked by an 
MTP sublevel designation and that both contra-side orders are Day 
limit orders.
    Under this ``N'' Example 1, the full size of the incoming offer 
would be cancelled and the resting bid would remain on the CHX book. 
If the incoming bid were for 200 shares or 50 shares, the result 
would remain the same because the ``N'' MTP Action would require 
that the full size of the incoming bid be cancelled.
    Example 2. Assume that an order to buy 100 shares of security 
XYZ priced at $10.02/share is received by the Matching System and 
becomes a resting order on the CHX book. Subsequently, an order to 
sell 100 shares of security XYZ priced at $10.02/share is received 
by the Matching System from the same MTP Trading Group and is marked 
``O.'' Further assume that neither contra-side order is marked by an 
optional MTP sublevel designation and that both contra-side orders 
are Day limit orders.
    Under this Example 2, the full size of the resting offer would be 
cancelled and the incoming bid would not be cancelled pursuant to 
MTP.\25\ If the incoming bid were for 200 shares or 50 shares, the 
result would remain the same because the ``O'' MTP Action would require 
that the full size of the resting offer to be cancelled.
---------------------------------------------------------------------------

    \25\ In this situation, the incoming offer would execute against 
resting opposite side order, if available, or post the CHX book. As 
discussed below, since the MTP modifier is not considered by the 
Matching System until all other modifiers are first considered, an 
incoming offer marked with an MTP modifier and MTP Action of ``O'' 
will execute against other resting opposite side orders, if 
available, or post the CHX book.
---------------------------------------------------------------------------

    Example 3. Assume that an order to buy 100 shares of security 
XYZ priced at $10.02/share is received by the Matching System and 
becomes a resting order on the CHX book. Subsequently, an order to 
sell 100 shares of security XYZ priced at $10.02/share is received 
by the Matching System from the same MTP Trading Group and is marked 
``B.'' Further assume that neither contra-side order is marked by an 
optional MTP sublevel designation and that both contra-side orders 
are Day limit orders.\26\
---------------------------------------------------------------------------

    \26\ Id.
---------------------------------------------------------------------------

    Under this Example 3, the full sizes of both the incoming offer 
and resting bid would be cancelled. If the incoming bid were for 200 
shares or 50 shares, the result would remain the same because the 
``B'' MTP Action would require that the full size of both orders be 
cancelled.
    Example 4. Assume that an order to buy 100 shares of security 
XYZ priced at $10.02/share is received by the Matching System and 
becomes a resting order on the CHX book. Subsequently, an order to 
sell 100 shares of security XYZ priced at $10.02/share is received 
by the Matching System from the same MTP Trading Group and is marked 
``I.'' Further assume that neither contra-side order is marked by an 
MTP sublevel designation and that both contra-side orders are Day 
limit orders.\27\ Also assume that the MTP Trading Group from which 
the contra-side orders originated has a default MTP Action of ``N.''
---------------------------------------------------------------------------

    \27\ Id.
---------------------------------------------------------------------------

    Under this Example 4, the incoming offer would execute against 
the resting bid because the ``I'' modifier inactivated the default 
MTP Action of the MTP Trading Group, namely ``N.'' In contrast, if 
the incoming offer were not marked by the ``I'' modifier, MTP would 
have prevented the execution of the orders and cancelled the 
incoming offer. Also, since the MTP modifier on the incoming order 
always controls the MTP interaction, the fact that the resting order 
has a MTP modifier with a ``N'' MTP Action is irrelevant.
MTP and Other Order Modifiers
    The proposed MTP modifier is fully compatible with all order 
execution,\28\ display,\29\ and duration modifiers,\30\ that are 
applicable to limit and market orders.\31\ This is because the proposed 
MTP modifier is the only order modifier that requires the Matching 
System to consider the MTP Trading Group and subgroup of an order. 
Thus, there are no other modifiers that would directly conflict with 
the proposed MTP modifier.
---------------------------------------------------------------------------

    \28\ See Article 1, Rule 2(b)(1) and (3).
    \29\ See Article 1, Rule 2(c).
    \30\ See Article 1, Rule 2(d).
    \31\ This rule filing will only address the interplay between 
the MTP modifier and other order modifiers. However, the Exchange 
notes that certain order modifiers are not compatible with other 
modifiers. Such incompatibilities are noted in Article 1, Rule 2 and 
in recent Rule 19b-4 rule filings that have dealt with order types 
and modifiers. See Securities Exchange Act Release No. 69538 (May 8, 
2013), 78 FR 28671 (May 15, 2013) (SR-CHX-2013-10); see also 
Securities Exchange Act Release No. 69075 (March 8, 2013), 78 FR 
16311 (March 14, 2013) (SR-CHX-2013-07).
---------------------------------------------------------------------------

    If an incoming order marked by an MTP modifier and at least one 
other modifier is executable against a resting opposite side order, the 
Matching System will verify the permissibility of the match first 
against the non-MTP modifiers before considering the MTP Trading Group 
or subgroup of the contra-side orders as required by the MTP modifier. 
That is, the MTP modifier will always be considered last. Thus, if such 
an incoming order is to be cancelled for reasons other than the MTP 
designation, the incoming order would be cancelled before the Matching 
System would have the opportunity to consider the MTP Trading Groups or 
subgroups of the contra-side orders. This priority scheme ensures that 
the

[[Page 72735]]

proposed MTP modifier can only be triggered once all of the other order 
modifiers attached to an order have been considered. The following 
examples illustrate how this order modifier priority scheme would work 
when the proposed MTP modifier is paired with the ``Immediate Or 
Cancel'' (``IOC''),\32\ ``Post Only,'' \33\ or ``CHX Only'' \34\ order 
modifiers.
---------------------------------------------------------------------------

    \32\ Article 1, Rule 2(d)(4) defines ``Immediate Or Cancel,'' in 
pertinent part, as ``a modifier that requires an order to be 
executed, either in whole or in part and for limit orders, at or 
better than its limit price, as soon as the order is received by the 
Matching System, with any unexecuted balance of the order to be 
immediately cancelled.
    \33\ Article 1, Rule 2(b)(2)(D) defines ``Post Only'' as follows 
(emphasis added):
    ```Post Only': a limit order modifier that requires an order to 
be posted on the Exchange and not routed away to another trading 
center.
    A limit order marked Post Only shall be deemed to have been 
received ``Do Not Route,'' as defined under paragraph (b)(3)(A), 
which cannot be overridden by the order sender.
    A Post Only order will be immediately cancelled under the 
following circumstances:
    (i) The Post Only order would remove liquidity from the CHX 
book; or
    (ii) At the time of order entry, the Post Only order would lock 
or cross a Protected Quotation of an external market; provided, 
however, that if the Post Only order is marked ``CHX Only'' and is 
eligible for the CHX Only Price Sliding Processes, pursuant to 
Article 1, Rule 2(b)(1)(C), the Post Only order that would lock or 
cross a Protected Quotation of an external market shall be subject 
to the CHX Only Price Sliding Processes or Limit Up-Limit Down Price 
Sliding, pursuant to Article 20, Rule 2A(b), whichever is 
applicable, and shall not be immediately cancelled.''
    \34\ ``CHX Only'' is a limit order modifier that requires an 
order (1) to be ranked and executed on the Exchange without routing 
away and (2) to be eligible for the CHX Only Price Sliding 
Processes. The CHX Only Price Sliding Processes will reprice, re-
rank and/or re-display certain CHX Only orders multiple times 
depending on changes to the National Best Bid and Offer (``NBBO'') 
(the repricing of CHX Only sell short orders subject to Rule 201 of 
Regulation SHO is dependent solely on declines to the National Best 
Bid (``NBB'')), so long as the order can be ranked and displayed in 
an increment consistent with the provisions of Regulation NMS and 
Rule 201 of Regulation SHO, until the order is executed, cancelled 
or the original limit price is reached. See Article 1, Rule 
2(b)(1)(C).
---------------------------------------------------------------------------

    Example 1. Assume that the Matching System receives an incoming 
limit buy order (``Bid A'') for 1,000 shares of security XYZ priced 
at $10.10/share that originated from MTP Trading Group D1 and is 
marked IOC and MTP, with an MTP Action of ``O'' and no MTP sublevel 
designation. Assume that the CHX book for security XYZ contains no 
resting bids, but does have two resting offers (``Offers A and B''). 
Assume that Offer A originated from MTP Trading Group C1 and is for 
200 shares priced at $10.09/share. Assume that Offer B originated 
from MTP Trading Group D1 and is for 200 shares priced at $10.10/
share. Assume also that the Offer A is the only Protected Quotation 
of any market at the National Best Offer (``NBO'') for security XYZ.
    Under this Example 1, since Bid A is immediately executable 
against Offer A at $10.09, the IOC designation would not cancel Bid 
A. The Matching System would then consider the MTP Trading Groups of 
Bid A and Offer A because Bid A is marked ``MTP.'' Since Bid A and 
Offer A are from different MTP Trading Groups, MTP would not prevent 
an execution and Bid A would execute against Offer A at the full 
size of Offer A priced at $10.09/share. In turn, Bid A would be 
decremented by 200 shares and would have 800 unexecuted shares 
remaining.
    The Matching System will then go through the same process with 
respect to Offer B. Since Offer B is at the limit price of Bid A, 
the IOC designation would not cancel Bid A. However, since Bid A and 
Offer B both originated from the same MTP Trading Group D1, the MTP 
functionality would prevent an execution and the MTP Action of ``O'' 
would require Offer B to be cancelled because it is the resting 
order. Consequently, the Matching System will go through the 
attached order modifiers once again to determine what to do with the 
unexecuted balance of Bid A. Since the CHX book no longer has any 
resting opposite side orders for security XYZ, the IOC designation 
would require the unexecuted balance of Bid A to be cancelled.
    If Bid A instead had an MTP Action of ``N,'' the triggering of 
the MTP Action would have resulted in the unexecuted balance of Bid 
A (i.e., 800 shares) being cancelled and Offer B remaining on the 
CHX book.
    Example 2. Assume that the Matching System receives an incoming 
limit buy order (``Bid A'') for 1,000 shares of security XYZ priced 
at $10.10/share that originated from MTP Trading Group D1 and is 
marked Day, Post Only, and MTP, with an MTP Action of ``B'' and no 
MTP sublevel designation. Assume that the CHX book for security XYZ 
contains no resting bids, but does have one resting offer (``Offer 
A'') originated from MTP Trading Group D1 and is for 200 shares 
priced at $10.09/share. Assume also that the Offer A is the only 
Protected Quotation of any market at the NBO for security XYZ.
    Under this Example 2, the Matching System would first determine 
the permissibility of the match against the Post Only modifier. 
Since Post Only orders cannot ``remove liquidity from the CHX 
book,'' Bid A would be cancelled because Bid A is an incoming order 
that would remove liquidity from the CHX book. Thus, Bid A would be 
cancelled before the Matching System would be able to consider the 
MTP Trading Groups of the contra-side orders.
    Example 3. Assume that the Matching System receives a fully-
displayable incoming limit buy order (``Bid A'') for 1,000 shares of 
security XYZ priced at $10.10/share that originated from MTP Trading 
Group D1 and is marked Day, CHX Only, and MTP, with an MTP Action of 
``O'' and no MTP sublevel designation. Assume that the CHX book for 
security XYZ is empty. Assume also that the National Best Bid and 
Offer (``NBBO'') for security XYZ is $10.07 x $10.09 and the short 
sale price test restriction of Regulation SHO is not in effect.
    Since the CHX book is empty with respect to security XYZ and the 
display of Bid A at $10.10 would cross the NBO at $10.09, the CHX 
Only Price Sliding Processes, specifically NMS Price Sliding,\35\ 
would price slide Bid A to be ranked at $10.09 (i.e., the NBB 
locking price) and displayed at $10.08 (i.e., one price increment 
below the NBO). The new NBBO for security XYZ would be $10.08 x 
$10.09, with Bid A being the NBB. Once Bid A is price slid and 
posted to the CHX book, Bid A becomes a resting order.
---------------------------------------------------------------------------

    \35\ See Article 1, Rule 2(b)(1)(C)(i).
---------------------------------------------------------------------------

    If a subsequent incoming offer were to execute against Bid A, 
Bid A would receive the liquidity providing credit and the opposite 
side offer would pay the liquidity removing fee. Moreover, since 
there is no resting opposite side order to match against Bid A, the 
Matching System would not consider the MTP modifier and thus, MTP 
would not prevent an execution.
    Example 4. Assume the same as Example 3 and the CHX book 
contains only Bid A and no other bids or offers. Assume that after 
Bid A was price slid, the Matching System receives an incoming limit 
sell order (``Offer A'') for 2,000 shares of security XYZ priced at 
$10.10/share that originated from MTP Trading Group D1 that is 
marked ``Do Not Display,'' \36\ but is not marked by an MTP 
modifier. Thus, the CHX book as to security XYZ is now $10.08 x 
$10.10. Assume further that after Offer A posts to the CHX book, the 
NBO (which is not on CHX) moves away to $10.10 and thus, the NBBO 
for security XYZ changes from $10.08 x $10.09 to $10.08 x $10.10.
---------------------------------------------------------------------------

    \36\ Article 1, Rule 2(c)(2) provides that ``Do Not Display'' is 
``a modifier, for orders of at least 1,000 shares when entered, that 
requires the order not be displayed in whole or in part.''
---------------------------------------------------------------------------

    Pursuant to NMS Price Sliding, since the NBO moved away to 
$10.10, resting Bid A would be permitted to be ranked at its 
original limit price of $10.10 and displayed at $10.09. Since Offer 
A is resting undisplayed at $10.10, Bid A would be price slid into a 
price point that is already occupied by Offer A. Thus, Bid A would 
become an incoming order and, if executable against Offer A, would 
take liquidity from the CHX book. The Matching System would then 
verify the permissibility of the order execution against the order 
modifiers of the contra-side orders. Offer A has no order modifiers 
that would prevent an execution. On the opposite side, the CHX Only 
designation of Bid A would not prevent an execution. However, since 
Bid A is marked ``MTP'' and both contra-side orders originated from 
MTP Trading Group D1, MTP would be triggered. Moreover, since Bid A 
has an MTP Action of ``O,'' the resting order would be cancelled. 
Thus, Offer A would be cancelled and Bid A would be ranked at $10.10 
and displayed at $10.09. Consequently, the new NBBO for security XYZ 
would be $10.09 x $10.10, where Bid A becomes the NBB.
    Example 5. Assume the same as Example 4, except that Bid A was 
also marked Post Only. Thus, Bid A was marked Day, CHX Only, Post 
Only, and MTP, with an MTP Action of ``O'' and no MTP sublevel 
designation. Since a Post Only order will be immediately cancelled 
if the order is price slid into a price point already occupied by

[[Page 72736]]

an opposite side order, unlike Example 4, Bid A would be cancelled 
pursuant to the Post Only modifier before the Matching System would 
consider the MTP modifier. Thus, under this Example 5, price slid 
Bid A would be cancelled and Offer A would remain on the CHX book 
undisplayed.
2. Statutory Basis
    The Exchange submits that the proposed rule changes to adopt an MTP 
functionality is consistent with Section 6(b) of the Act in general 
\37\ and furthers the objectives of Section 6(b)(5) in particular,\38\ 
because it is 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 facilitating 
transaction in securities, to remove impediments to, and perfect the 
mechanisms of, a free and open market and, in general, by protecting 
investors and the public interest. Specifically, the proposed MTP 
functionality will allow order senders to better manage order flow and 
prevent undesirable executions against themselves. Additionally, the 
proposed MTP modifier will streamline certain regulatory functions of 
the Exchange by reducing false positive results that may occur on 
Exchange-generated wash trading surveillance reports when orders are 
executed under the same account symbol. Consequently, the proposed 
adoption of the MTP functionality will benefit Exchange customers by 
improving fill rates and promoting competition among market centers 
offering similar products and services, which is consistent with the 
aforementioned objectives of Section 6(b)(5).
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    \37\ 15 U.S.C. 78f(b).
    \38\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does believe that the proposed rule change will have 
an impact on competition. However, the Exchange does not believe that 
the proposed rule change will impose a burden on competition that is 
unnecessary or inappropriate in furtherance of the purposes of the Act. 
To the contrary, the proposed MTP functionality should act as a 
positive force for competition by providing an alternative to similar 
functionality offered by other Exchanges, such as the ``Match Trade 
Prevention Modifiers'' offered by BATS.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    No written comments were either solicited or received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    The Exchange has filed the proposed rule change pursuant to Section 
19(b)(3)(A)(iii) of the Act \39\ and Rule 19b-4(f)(6) thereunder.\40\ 
Because the proposed rule change does not: (i) significantly affect the 
protection of investors or the public interest; (ii) impose any 
significant burden on competition; and (iii) become operative prior to 
30 days from the date on which it was filed, or such shorter time as 
the Commission may designate, if consistent with the protection of 
investors and the public interest, the proposed rule change has become 
effective pursuant to Section 19(b)(3)(A) of the Act and Rule 19b-
4(f)(6)(iii) thereunder.
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    \39\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \40\ 17 CFR 240.19b-4(f)(6).
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    A proposed rule change filed under Rule 19b-4(f)(6) \41\ normally 
does not become operative prior to 30 days after the date of the 
filing. However, pursuant to Rule 19b4(f)(6)(iii),\42\ the Commission 
may designate a shorter time if such action is consistent with the 
protection of investors and the public interest. The Exchange has asked 
the Commission to waive the 30-day operative delay so that the proposal 
may become operative as of December 2, 2013. The Exchange requested 
such waiver so that it may offer Participants the proposed MTP 
functionality earlier. The Exchange stated that its proposal does not 
propose any new policies or provisions that are unique or unproven, as 
all changes proposed are changes to the Exchange's rules based on the 
rules of another self-regulatory organization, BATS Y-Exchange 
(``BYX''), or modified versions of the corresponding BYX rules, as 
described in further detail in the filing. According to the Exchange, 
the proposed MTP functionality and the BATS-Y ``Match Trade Prevention 
Modifiers'' are both designed to streamline certain regulatory 
functions of the Exchange by reducing false positive results that may 
occur on Exchange-generated wash trading surveillance reports when 
orders are executed under the same account symbol. Thus, the Exchange 
believes that it is in the interest of protecting investors to provide 
the new functionality at the earliest time possible. Based on the 
Exchange's statements, the Commission believes that waiving the 
operative delay as of December 2, 2013 is consistent with the 
protection of investors and the public interest. Therefore, the 
Commission designates the proposed rule change to be operative as of 
December 2, 2013.\43\
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    \41\ 17 CFR 240.19b-4(f)(6)..
    \42\ 17 CFR 240.19b-4(f)(6)(iii).
    \43\ For purposes only of waiving the 30-day operative delay, 
the Commission has considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is: (i) 
necessary or appropriate in the public interest; (ii) for the 
protection of investors; or (iii) otherwise in furtherance of the 
purposes of the Act. If the Commission takes such action, the 
Commission shall institute proceedings under Section 19(b)(2)(B) \44\ 
of the Act to determine whether the proposed rule should be approved or 
disapproved.
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    \44\ 15 U.S.C. 78s(b)(2)(B).
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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-CHX-2013-20 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-CHX-2013-20. 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 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

[[Page 72737]]

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 such filing also will be available 
for inspection and copying at the principal offices 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-CHX-2013-20, 
and should be submitted on or before December 24, 2013.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\45\
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    \45\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-28848 Filed 12-2-13; 8:45 am]
BILLING CODE 8011-01-P