Investors' Exchange LLC; Notice of Filing of Amendment Nos. 2, 3, and 4 to, and Order Instituting Proceedings To Determine Whether To Grant or Deny, and Notice of Designation of Longer Period for Commission Action on Proceedings To Determine Whether To Grant or Deny, an Application for Registration as a National Securities Exchange Under Section 6 of the Securities Exchange Act of 1934, as Modified by Amendment Nos. 1, 2, 3, and 4 Thereto, 15765-15770 [2016-06632]
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Federal Register / Vol. 81, No. 57 / Thursday, March 24, 2016 / Notices
be submitted on or before April 14,
2016.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.21
Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016–06604 Filed 3–23–16; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–77406; File No. 10–222]
Investors’ Exchange LLC; Notice of
Filing of Amendment Nos. 2, 3, and 4
to, and Order Instituting Proceedings
To Determine Whether To Grant or
Deny, and Notice of Designation of
Longer Period for Commission Action
on Proceedings To Determine Whether
To Grant or Deny, an Application for
Registration as a National Securities
Exchange Under Section 6 of the
Securities Exchange Act of 1934, as
Modified by Amendment Nos. 1, 2, 3,
and 4 Thereto
March 18, 2016.
I. Introduction
On August 21, 2015, Investors’
Exchange LLC (‘‘IEX’’ or ‘‘IEX
Exchange’’) submitted to the Securities
and Exchange Commission
(‘‘Commission’’) a Form 1 application
(‘‘Form 1’’), seeking registration as a
national securities exchange pursuant to
Section 6 of the Securities Exchange Act
of 1934 (‘‘Act’’).1 IEX amended its Form
1 four times, including its most recent
amendment on March 7, 2016. The
Commission is required to review the
exchange registration application, as
amended, together with all comments
received, and make a determination
whether to grant the registration.2
On September 9, 2015, IEX submitted
Amendment No. 1 to its Form 1.3 Notice
of the application, as amended, was
published for comment in the Federal
Register on September 22, 2015.4 IEX
submitted several responses to
comments.5 On December 18, 2015, IEX
21 17
CFR 200.30–3(a)(12).
U.S.C. 78f.
2 See 15 U.S.C. 78f and 15 U.S.C. 78s.
3 In Amendment No. 1, IEX submitted updated
portions of its Form 1, including revised exhibits,
a revised version of the proposed IEX Rule Book,
and revised Addenda C–2, C–3, C–4, D–1, D–2, F–
1, F–2, F–3, F–4, F–5, F–6, F–7, F–8, F–9, F–10, F–
11, F–12, and F–13.
4 See Securities Exchange Act Release No. 75925
(September 15, 2015), 80 FR 57261 (‘‘Notice’’).
5 See Letter from Sophia Lee, General Counsel,
IEX, to Brent J. Fields, Secretary, Commission,
dated November 13, 2015 (‘‘IEX First Response’’);
Letter from Sophia Lee, General Counsel, IEX, to
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consented to an extension of time to
March 21, 2016 for Commission
consideration of its Form 1.6 IEX
submitted a second amendment to its
Form 1 on February 29, 2016 that
proposes to make functional changes to
its outbound router, which had been the
subject of extensive public comment as
originally proposed.7 IEX submitted a
third amendment to its Form 1 on
March 4, 2016.8 IEX submitted a fourth
amendment to its Form 1 on March 7,
2016.9
Section 19(a)(1) of the Act 10 requires
the Commission, within ninety days of
the date of publication of notice of an
application for registration as a national
securities exchange, or such longer
period as to which the applicant
consents,11 to, by order, grant such
registration12 or institute proceedings to
determine whether such registration
should be denied.13 This order is
providing public notice of the
significant changes in Amendment Nos.
2, 3, and 4 to IEX’s Form 1 and
soliciting comment on the Form 1 as
amended, while simultaneously
instituting proceedings under Section
19(a)(1)(B) of the Act 14 to determine
Brent J. Fields, Secretary, Commission, dated
November 23, 2015 (‘‘IEX Second Response’’);
Letter from Sophia Lee, General Counsel, IEX, to
Brent J. Fields, Secretary, Commission, dated
February 9, 2016 (‘‘IEX Third Response’’); Letter
from Donald Bollerman, Head of Markets and Sales,
IEX Group, Inc., to File No. 10–222, dated February
16, 2016 (‘‘IEX Fourth Response’’); and Letter from
IEX Group, Inc., to File No. 10–222, dated February
19, 2016 (‘‘IEX Fifth Response’’).
6 See Letter from Sophia Lee, General Counsel,
IEX, to Brent J. Fields, Secretary, Commission,
dated December 18, 2015.
7 In Amendment No. 2, IEX proposed changes to
its Form 1 to, among other things, redesign its
outbound routing functionality to direct routable
orders first to the IEX routing logic instead of
directly to the IEX matching engine. See Letter from
Sophia Lee, General Counsel, IEX, to Brent J. Fields,
Secretary, Commission, dated February 29, 2016, at
1. In this manner, the IEX router would ‘‘interact
with the IEX matching system over a 350
microsecond speed-bump in the same way an
independent third party broker would be subject to
a speed bump.’’ Id.
8 In Amendment No. 3, IEX proposed changes to
its Form 1 to clarify and correct revisions to its
rulebook that it made in Amendment No. 2. See
Letter from Sophia Lee, General Counsel, IEX, to
Brent J. Fields, Secretary, Commission, dated March
4, 2016.
9 In Amendment No. 4, IEX proposed changes to
its Form 1 to update Exhibit E to reflect changes it
proposed in Amendment No. 2. See Letter from
Sophia Lee, General Counsel, IEX, to Brent J. Fields,
Secretary, Commission, dated March 7, 2016.
10 15 U.S.C. 78s(a)(1).
11 See supra note 6 and accompanying text
(noting that IEX provided the Commission with an
extension of time until March 21, 2016).
12 15 U.S.C. 78s(a)(1)(A).
13 15 U.S.C. 78s(a)(1)(B).
14 15 U.S.C. 78s(a)(1)(B).
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whether to grant or deny IEX’s exchange
registration application, as amended.
Section 19(a)(1)(B) of the Act 15
further provides that such proceedings
shall be concluded within one hundred
eighty days of the date of publication of
notice of the filing of the registration
application. Under Section 19(a)(1)(B),
the Commission may, however, extend
the time for conclusion of such
proceedings for up to ninety days if it
finds good cause for such extension and
publishes its reasons for so finding. As
discussed below, the Commission
believes that there is good cause for a
ninety-day extension of these
proceedings, and is therefore
designating June 18, 2016 as the date by
which the Commission shall determine
whether to grant or deny IEX’s Form 1
for registration as a national securities
exchange.
The Commission received over 430
comment letters on IEX’s Form 1, many
focused on IEX’s proposed trading rules
and system.16 Many commenters
supported IEX’s application.17 Other
commenters either opposed IEX’s
application or questioned whether
certain proposed elements of IEX’s
trading system would be consistent with
the requirements of the Act applicable
to a registered national securities
exchange.18
Among the commenters who
supported IEX’s exchange registration,
several argued that IEX would offer a
market solution to address certain
market inefficiencies and conflicts of
interest in a manner that may protect
15 15
U.S.C. 78s(a)(1)(B).
public comment file for IEX’s Form 1 (File
No. 10–222) is available on the Commission’s Web
site at: https://www.sec.gov/comments/10-222/10222.shtml.
17 See, e.g., Verret Letter; Shatto Letters 1, 2, and
3; Simonelis Letter; Leuchtkafer First Letter;
Leuchtkafer Second Letter; Capital Group Letter;
Southeastern Letter; Navari First Letter; Navari
Second Letter; DV Advisors Letter; Cowen Letter;
Themis First Letter; Themis Second Letter;
Oppenheimer Funds Letter; Murphy Letter; Birch
Bay Letter; Healthy Markets Letter; Keblish Letter;
Bowcott Letter; Secrist Letter; Stevens Letter; Oltean
Letter; Park Letter; Crespo Letter; Hovanec Letter;
Meskill Letter; Brian S. Letter; Glennon Letter;
Shaw Letter; Upson Letter; Goldman Sachs Letter;
Robeson Letter; Lynch Letter; Budish Letter; Chen
& Foley Letter; Liquidnet Letter; T. Rowe Price
Letter.
18 See, e.g., BATS First Letter; BATS Second
Letter; NYSE First Letter; NASDAQ First Letter;
NASDAQ Second Letter; Citadel First Letter;
Citadel Second Letter; Citadel Third Letter; Citadel
Fourth Letter; FIA First Letter; Hudson River
Trading First Letter; Hudson River Trading Second
Letter; Anonymous First Letter; Hunsacker Letter;
Modern Markets Initiative Letter; Tabb Letter;
Weldon Letter; Markit First Letter; Markit Second
Letter; Direct Match Letter; Duffy Letter; Scott
Letter.
16 The
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the interests of buy-side investors.19 In
particular, some commenters noted
IEX’s decision not to pursue ‘‘makertaker’’ pricing and instead offer flat
transaction fees.20 Some commenters
praised IEX for offering fewer order
types.21 Several commenters
highlighted IEX’s ‘‘coil’’ delay
(frequently referred to as IEX’s ‘‘speed
bump’’), discussed in detail below, and
asserted that it may help counter latency
arbitrage.22 Some commenters
questioned the motive of certain
19 See, e.g., Capital Group Letter at 1 (noting the
‘‘technologies and practices to discourage predatory
behavior’’ including the ‘‘350 microsecond buffer,’’
the lack of maker-taker pricing, and ‘‘simple order
types’’); Southeastern Letter (submitted on behalf of
a group of undersigned asset managers)
(complimenting IEX’s proposed benefits to
investors in ‘‘reducing structural inefficiencies in
the market, and offering a more balanced and
simplified market design’’); Navari First Letter at 1
(noting certain features that ‘‘have great promise for
the [r]etail [i]nvestor’’); DV Advisors Letter; Cowen
Letter; Themis First Letter (noting that IEX’s
‘‘unconflicted investor-friendly alternative’’ will
‘‘employ technology designed to even playing
fields, rather than exploit information asymmetry,’’
that IEX will be ‘‘a stark alternative to other stock
exchange models that seem to be more focused on
selling speed and data,’’ and that as an alternative
trading system, IEX allowed it and its customers ‘‘to
achieve best execution’’); Oppenheimer Funds
Letter; Murphy Letter (arguing that IEX’s design
should ‘‘help to limit and even eliminate the
electronic front running that is central to the
problems in the market today’’); Keblish Letter;
Secrist Letter; Stevens Letter; Oltean Letter; Meskill
Letter; fi360 Letter; TRS Letter; Lynch Letter;
Jefferies Letter; T. Rowe Price Letter; Liquidnet
Letter.
20 See, e.g., Capital Group Letter; Southeastern
Letter; Navari First Letter; Navari Second Letter;
Themis Letter 1; Oppenheimer Funds Letter;
Healthy Markets Letter; Abel/Noser Letter; Goldman
Sachs Letter; Liquidnet Letter; Franklin Templeton
Investments Letter; TRS Letter. The Commission
notes, however, that fees are not actually part of
IEX’s Form 1. Rather, if IEX were to be approved
as an exchange, it would need to submit separate
filings under Section 19(b) of the Act to establish
fees that it would charge to members and others
using its facilities. Nevertheless, in its Second
Response Letter, IEX noted that, as an exchange, it
would intend to charge a flat transaction fee. See
IEX Second Response at 9.
21 See, e.g., Capital Group Letter; Southeastern
Letter; Shatto First Letter; Navari First Letter;
Oppenheimer Funds Letter; Healthy Markets Letter;
Norges Bank Letter; Burgess Letter; fi360 Letter;
TRS Letter. But see NYSE First Letter at 9 (arguing
that IEX’s proposed menu of order types is not
necessarily ‘‘simple’’ and the potential different
combinations of instructions for limit orders is in
the hundreds).
22 See, e.g., T. Rowe Price Letter at 1–2; Navari
Second Letter; Healthy Markets Letter at 2–4;
Jefferies Letter at 3; Chen & Foley Letter at 2–3;
Leuchtkafer Second Letter at 9; Budish Letter at 4.
See also Burgess Letter; Capital Group Letter;
Franklin Templeton Investments Letter; Michael
Schroeder Letter; Leeson Letter; Lupinski Letter;
Oorjitham Letter; Eric K Letter; Grey Letter; Spear
Letter; Baggins Letter; Nixon Letter; Campbell
Letter; Moses Letter; Huff Letter; Kaye Letter; Jean
Letter; Gloy Letter; Givehchi Letter; Kara Letter;
Hiester Letter; Benites Letter; Eustace Letter;
Ramirez Letter; Luce Letter; Arnold Letter; Tidwell
Letter; Doyle Letter; Long Letter; Kim Letter;
Mannheim Letter; Oppenheimer Funds Letter.
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commenters who opposed the
proposal.23 In addition, one commenter
argued that the coil delay should not be
grounds for denying IEX’s exchange
application, and suggested that IEX be
phased into the national market system
under a pilot program so that the effect
of IEX’s access delay on the wider
market could be better assessed.24
Among the commenters who were
critical of aspects of IEX’s proposal,
most focused on issues surrounding
IEX’s coil delay, IEX’s affiliated
outbound router and what they viewed
as an unfair advantage to bypass the
outbound coil delay, and IEX’s
proposed order types.25 Other
commenters did not express a view on
whether the Commission should grant
or deny IEX’s application.26
II. Description of IEX’s Trading System
IEX, which currently operates a
trading platform as an alternative
trading system (‘‘ATS’’), is seeking to
register as a national securities
exchange. Below is a brief description of
the proposed IEX exchange trading
platform, including the new aspects of
the system concerning the router
functionality where noted.27
Order Execution. Non-marketable
orders submitted to IEX would be
displayed or non-displayed, depending
on the instructions indicated by the IEX
member submitting the order.28 IEX
would direct an order (or any portion
thereof) that it could not execute on IEX
to away markets for execution through
IEX Services LLC (‘‘IEXS’’), IEX’s
23 See, e.g., Verret Letter at 2 (arguing that
‘‘incumbent firms have long sought to utilize
regulatory barriers to entry to minimize
competition, and it would appear a number of firms
are presently using the regulatory comment process
regarding IEX’s application as a venue to replicate
that strategy here’’); Crespo Letter; Brian S. Letter.
24 See Angel Letter at 3–5. The pilot program
suggested by this commenter would be to measure
the effect on the market of protecting IEX’s
quotation notwithstanding the ‘‘speed bump.’’ See
id. at 4–5. According to the commenter, if the pilot
caused material harm, it could be halted, in which
case IEX could still operate as an exchange but
without having its quotes protected under
Regulation NMS. See id. at 5. See also Wolfe Letter
at 3 (agreeing with the pilot approach suggested in
the Angel Letter).
25 See, e.g., NYSE First Letter; NASDAQ First
Letter; BATS First Letter; Citadel First Letter;
Citadel Second Letter; Citadel Third Letter; Hudson
River Trading First Letter; Hudson River Trading
Second Letter; FIA First Letter.
26 See, e.g., Virtu Letter; Healthy Markets Letter;
Tabb Letter; Aesthetic Integration Letter.
27 For more detail on IEX’s proposed trading
system, see IEX’s Form 1 and Exhibits, as amended
(in particular Exhibits B (the proposed rulebook)
and E (a narrative description of the proposed
operation of IEX as an exchange)), which are
available on the Commission’s Web site at https://
www.sec.gov/rules/other/otherarchive/
other2015.shtml.
28 See Proposed IEX Rule 11.220(a)(1).
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wholly owned single-purpose outbound
router, unless the terms of the order
direct IEX not to route such order
away.29
IEX proposed several pegged order
types—primary peg, midpoint peg, and
discretionary peg—all of which would
be non-displayed with prices that are
automatically adjusted by the IEX
system in response to changes in the
national best bid and offer (‘‘NBBO’’)
(subject to a limit price, if any).30 As
noted below, it is these types of dark
pegged orders—and not standard market
or limit orders, or displayed quotes or
orders—that would be affected by the
proposed coil delay.
Access and the Coil Delay. Only
broker-dealer members of IEX and
entities that enter into market access
arrangements with members
(collectively, ‘‘Users’’) would have
access to the IEX system.31 Users would
connect to IEX through a single Pointof-Presence (‘‘POP’’) located in
Secaucus, New Jersey.32 After entering
through the POP, a User’s electronic
message sent to the IEX trading system
would traverse the IEX ‘‘coil,’’ which is
a box of compactly coiled optical fiber
cable equivalent to a prescribed
physical distance of 61,625 meters
(approximately 38 miles).33 After
exiting the coil, the User’s message
would travel an additional physical
distance to the IEX trading system,
located in Weehawken, New Jersey.34
According to IEX, the coil, when
combined with the physical distance
between the POP and the IEX trading
system (hereinafter the ‘‘POP/coil’’),
provides IEX Users sending nonroutable orders to IEX with 350
microseconds 35 of one-way latency
(hereinafter the ‘‘POP/coil delay’’).36
Several commenters expressed
concern that IEX’s previously-published
Form 1 lacked specific detail about how
the POP/coil structure would work,
including what messages and activity
would—and would not—be subject to
the delay.37 IEX responded by
supplementing the record through its
29 See Proposed IEX Rule 11.230(b). See also
Amendment Nos. 2 and 3.
30 See Proposed IEX Rule 11.190(a)–(b).
31 To obtain authorized access to the IEX System,
each User must enter into a User Agreement with
IEX. See Proposed IEX Rule 11.130(a).
32 See IEX Second Response at 2.
33 See IEX First Response at 3.
34 See Exhibit E to IEX’s Form 1 submission, at
12. See also IEX First Response at 3.
35 A microsecond is one millionth of a second.
36 See IEX First Response at 3. See also
Amendment Nos. 2 and 3.
37 See, e.g., NYSE First Letter and Nasdaq First
Letter.
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first two response letters.38 Most
recently, IEX proposed a new approach
to outbound routing, which is discussed
further below.
According to IEX, all incoming
messages (e.g., orders to buy or sell and
any modification to a previously sent
open order) from any User would
traverse the POP/coil to initially reach
IEX. In addition, all outbound messages
from IEX back to a User (e.g.,
confirmations of an execution that
occurred on IEX) would pass through
the same route in reverse.39 IEX’s direct
proprietary market data feed, which is
an optional data feed that IEX would
make available to subscribers, also
would traverse the POP/coil.40
As originally proposed, one type of
inbound message and two types of
outbound messages would not traverse
the POP/coil, specifically:
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1. Inbound market data from other trading
centers to the IEX system would not traverse
the POP/coil;
2. Orders routed outbound from IEX
through IEXS to away trading centers for
execution (as well as reports back to IEX from
those away trading centers) would not
traverse the POP/coil (though execution and
transaction reports sent from IEX back to
Users would traverse the POP/coil and thus
would be delayed) (as discussed below, IEX
recently proposed a materially different
approach to outbound routing that it intends
will eliminate any exclusive advantages
provided to its routing functionality); and
3. Outbound transaction and quote
messages sent from IEX to the applicable
securities information processor (‘‘SIP’’)
would not pass through the POP/coil, but
instead would be sent directly from the IEX
system to the SIP processor.41
Finally, updates to resting pegged orders
on IEX would be processed within the
IEX trading system and would not
require that separate messages be
transmitted from outside the trading
system, which would otherwise traverse
the POP/coil, for each update.42
According to IEX, its POP/coil delay,
including its application to some but
not all of the message traffic into and
out of its trading system, was originally
designed to achieve two main purposes:
(1) To allow IEX time to update the
prices of resting dark pegged orders on
its book (whose permissible execution
prices are not static, but rather are tied
to the NBBO as IEX sees it through the
proprietary data feeds it purchases from
each exchange) in response to changes
in market prices before other market
participants can access IEX’s resting
38 See IEX First Response and IEX Second
Response.
39 See IEX First Response at 3.
40 See id.
41 See id. at 3–4.
42 See id.
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pegged orders at potentially ‘‘stale’’
prices (i.e., pegged order prices that had
not been updated by IEX when the new
incoming order arrived at IEX); 43 and
(2) to delay the trade acknowledgements
IEX sends to Users, as well as to delay
its proprietary outbound data feed that
reflects the occurrence of an execution
on IEX, both of which originally
provided IEX’s affiliated outbound
router with a ‘‘head start’’ as it routes
out to access trading interest posted on
other exchanges before other market
participants learn about a trade on IEX
and can trade with or re-price that away
interest in reaction to the execution that
occurred on IEX.44
Outbound Routing. In the three recent
amendments to its Form 1, IEX, among
other things, proposed a significantly
different approach to outbound
routing.45 Rather than initially directing
the entirety of a User’s order to the IEX
matching engine and then routing away
any excess shares via IEXS directly (and
without having to first pass through the
POP/coil delay as it routes shares
outbound), IEX proposed to eliminate
43 See id. at 4 (explaining that the POP/coil is
designed ‘‘to ensure that no market participants can
take action on IEX in reaction to changes in market
prices before IEX is aware of the same price changes
on behalf of all IEX members’’). See also Hudson
River Trading First Letter at 3 (discussing the
purposes of the POP/coil delay). One commenter
noted that the POP/coil delay ‘‘has no impact’’ on
regular displayed orders, and ‘‘simply slows down
the trade execution process but does not alter the
outcome’’ for non-pegged orders. Id. at 2–3
(‘‘Similar to a 100-meter sprint, if you simply add
350 microseconds to each participant’s time,
neither the order in which they finish nor their time
differentials will change.’’). Rather, the commenter
argued that ‘‘IEX delays all transparent displayed
orders that are critical to price discovery without
altering the outcomes of those orders . . . for the
benefit of hidden, pegged orders that free-ride on
price discovery.’’ See Hudson River Trading Second
Letter at 4.
44 See IEX Second Response at 14 (‘‘. . . the
purpose of requiring outbound execution messages
to go through the POP (350 microseconds) is to
prevent ‘information leakage’ or ‘liquidity fade’
when IEXS routes to other markets’’).
45 The proposed revisions to accommodate the
new routing process are primarily addressed in
proposed IEX Rule 11.510 (Connectivity), as well as
in proposed IEX Rules 2.220 (IEX Services LLC as
Outbound Router), 11.130 (Access), 11.230(b)–(c)
(Order Execution), 11.240 (Trade Execution,
Reporting, and Dissemination of Quotations),
11.330 (Data Products), and 11.410 (Use of Market
Data Feeds and Calculations of Necessary Price
Reference Points). IEX also proposed other changes
in Amendment Nos. 2 and 3, including changes to
proposed Rule 2.160 (Restrictions on Membership)
to reflect the Series 57 exam; proposed new Rule
2.250 (Mandatory Participation in Testing of
Backup Systems); proposed new Rule 9.217
(Expedited Client Suspension Proceeding);
proposed new Rule 10.270 (Disruptive Quoting and
Trading Activity Prohibited); changes to proposed
Rule 11.190(a)(3) (Pegged Orders), (b)(8)–(10)
(concerning pegged orders), and (g) (concerning
quote stability for Discretionary Peg Orders); and
changes to proposed Rule 11.260 (LIMITATION OF
LIABILITY).
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15767
this aspect and instead create a new
structure intended to place its outbound
routing function on parity with
competing broker-dealers. IEX’s latest
amendments, which constitute a
significant change from its initial Form
1, are discussed further below.
III. Proceedings To Determine Whether
To Grant or Deny the Application and
Grounds for Potential Denial Under
Consideration
The Commission is hereby instituting
proceedings pursuant to Section
19(a)(1)(B) of the Act 46 to determine
whether IEX’s Form 1, as amended,
should be granted or denied. Institution
of such proceedings is appropriate at
this time in view of the issues raised by
the application, the significant changes
proposed in IEX’s recent amendments,
and the need for the Commission to
provide the public with an opportunity
to comment and allow the Commission
to consider comments received on the
recently filed features of the IEX market.
Institution of proceedings does not
indicate that the Commission has
reached any conclusions with respect to
any of the issues involved. In fact, the
Commission is providing the public
with an opportunity to comment to
inform its consideration and decision
making regarding the Form 1, as IEX
recently amended it. The Commission
encourages interested persons to
provide specific comment on the Form
1 focused on Amendment Nos. 2, 3, and
4.47
As required by Section 19(a)(1)(B) of
the Act,48 the Commission is hereby
providing notice of the grounds for
potential denial under consideration.
Under Sections 6(b) and 19(a)(1) of the
Act,49 the Commission shall grant an
application for registration as a national
securities exchange if the Commission
finds that the requirements of the Act
and the rules and regulations
thereunder with respect to the applicant
are satisfied; the Commission shall deny
such application for registration if it
does not make such a finding. In
particular, Section 6(b)(5) of the Act 50
provides that an exchange shall not be
registered as a national securities
exchange unless the Commission
determines that the rules of the
46 15
U.S.C. 78s(a)(1)(B).
infra Section IV (Extension of Time for
Proceedings). Separately, the Commission is
evaluating whether to revisit its interpretation of
automated quotation under Regulation NMS in light
of comments received on IEX’s Form 1 concerning
the consistency of the POP/coil delay with
Regulation NMS.
48 15 U.S.C. 78s(a)(1)(B).
49 15 U.S.C. 78f(b) and 15 U.S.C. 78s(a)(1),
respectively.
50 15 U.S.C. 78f(b)(5).
47 See
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exchange are designed, among other
things, not to permit unfair
discrimination between customers,
issuers, brokers, or dealers. In addition,
Section 6(b)(8) of the Act 51 provides
that an exchange shall not be registered
as a national securities exchange unless
the Commission determines that the
rules of the exchange do not impose any
burden on competition that is not
necessary or appropriate in furtherance
of the purposes of Act.
The Commission is particularly
interested in commenters’ views as to
whether the changes set forth in IEX’s
Form 1, as amended, are consistent with
the Act, in light of commenters’
concerns that IEX’s routing functionality
and IEXS would have an advantage over
other routing broker-dealers that would
be unfairly discriminatory and an
inappropriate burden on competition.52
IEX has represented to the Commission
that, under its revised outbound routing
structure, IEX’s routing functionality
would interface with the IEX matching
engine on the same terms as other Users,
including routing broker-dealer
members of IEX.53
51 15
U.S.C. 78f(b)(8).
commenters criticized the fact that
IEXS would have received routing information from
the IEX system outside of, and not subject to, the
POP/coil delay while other IEX members’ receipt of
transaction and quotation information from the IEX
system would have been subject to the POP/coil
delay. See, e.g., BATS First Letter at 4–5; BATS
Second Letter at 3–6; BATS Third Letter at 3; NYSE
First Letter at 3–5; NYSE Second Letter at 3; Citadel
First Letter at 6–7; Citadel Second Letter at 5–6;
Citadel Third Letter at 1–2; FIA First Letter at 4–
5; Tabb Letter at 2–3; Hudson River Trading First
Letter at 3–7; Hudson River Trading Second Letter
at 2–5; Markit First Letter at 1–3; Markit Second
Letter at 3–4 and 6; Hunsacker Letter; Weldon
Letter. In other words, the concern expressed was
that IEXS would have been able to route to away
markets the unexecuted portion of any marketable
order not fully executed at IEX 350 microseconds
before other routing broker-dealers learned that an
execution occurred on IEX. Some commenters
argued that this arrangement would provide an
unfair competitive advantage to IEX and the routing
broker that it owns in that IEXS would have faster
access to information from the IEX trading system
than other members of IEX, including those who
offer routing services that compete with IEXS, and
thus IEXS would have the unique ability over other
routing brokers to most quickly and efficiently route
to away markets. See, e.g., BATS First Letter at 4–
5; BATS Second Letter at 3–6; BATS Third Letter
at 3; NYSE First Letter at 3–5; NYSE Second Letter
at 3; Citadel First Letter at 6–7; Citadel Second
Letter at 5–6; Citadel Third Letter at 1–2; FIA First
Letter at 4–5; Tabb Letter at 2–3; Hudson River
Trading First Letter at 3–7; Hudson River Trading
Second Letter at 4–5; Markit First Letter at 1–3;
Markit Second Letter at 3–4 and 6; Weldon Letter.
Other commenters opined that the advantage
provided to IEXS would effectively force brokers to
use IEXS because other third party routing brokers
would be competitively disadvantaged by their
inability to similarly bypass the POP/coil delay.
See, e.g., Tabb Letter at 2; Citadel Third Letter at
3.
53 See Letter from Sophia Lee, General Counsel,
IEX, to Brent J. Fields, Secretary, Commission,
dated February 29, 2016.
asabaliauskas on DSK3SPTVN1PROD with NOTICES
52 Several
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The proposed new outbound routing
structure, which IEX filed with the
Commission over a period ending in
early March, represents a material
departure from the original design that
IEX proposed in its original Form 1 and
therefore warrants further review and
consideration by the Commission, as
informed by further public comment.54
IEX has proposed a number of changes
to its rulebook to effectuate this new
design. The Commission believes that
the protection of investors and the
public interest are best served by
affording the public the opportunity to
review and comment on this modified
proposal from IEX, particularly in light
of the large number of comments the
Commission received that raised
questions about whether IEX’s proposed
rules were consistent with the
requirements of the Act. By publishing
notice of, and soliciting comment on,
IEX’s Form 1, as most recently amended
by Amendment Nos. 2, 3, and 4, and
simultaneously instituting proceedings,
the Commission seeks public input on
whether IEX’s proposed new outbound
routing structure, as reflected in its new
proposed amended rules, is consistent
with the Act, and accordingly, whether
IEX should be registered as a national
securities exchange.
The Commission previously has
stated that an exchange-affiliated
outbound router, as a ‘‘facility’’ of the
exchange, will be subject to the
exchange’s and the Commission’s
regulatory oversight, and that the
exchange will be responsible for
ensuring that the affiliated outbound
routing function is operated consistent
with Section 6 of the Act and the
exchange’s rules.55 For example, in
approving an exchange with an
affiliated outbound routing broker, the
Commission previously noted that ‘‘[a]
conflict of interest would arise if the
national securities exchange (or an
affiliate) provided advantages to its
broker-dealer that are not available to
other members.’’ 56 The Commission
54 In particular, the recently-filed amendments to
IEX’s Form 1 introduce the concept of a new POP/
coil delay between IEX’s routing logic (which is
located within IEX’s system) and IEX’s book.
55 See, e.g., Securities Exchange Act Release No.
62716 (Aug. 13, 2010), 75 FR 51295 (August 19,
2010) (granting BATS Y Exchange’s request to
register as a national securities exchange).
56 Securities Exchange Act Release No. 44983
(October 25, 2001), 66 FR 55225, 55233 (November
1, 2001) (PCX–00–25) (order approving Archipelago
Exchange (‘‘ArcaEx’’) as the equities trading facility
of PCX Equities, Inc.) (‘‘ArcaEx Order’’). In the 2001
PCX filing, two commenters expressed concerns
regarding ArcaEx’s affiliation with the Wave brokerdealer, which operated as the outbound routing
broker-dealer for ArcaEx. Specifically, these
commenters were concerned that the affiliation
between ArcaEx and Wave would be anti-
PO 00000
Frm 00092
Fmt 4703
Sfmt 4703
further explained that ‘‘advantages, such
as greater access to information,
improved speed of execution, or
enhanced operational capabilities in
dealing with the exchange, might
constitute unfair discrimination under
the Act.’’ 57
As specified in IEX’s initial Form 1,
unexecuted shares of routable orders
sent to IEXS would not have traversed
the POP/coil. As revised by Amendment
Nos. 2, 3, and 4, IEX now proposes a
significantly different structure that it
says is intended to place its router and
routing logic in an identical position to
non-affiliated routing broker-dealers.58
IEX’s recent amendments include new
rules to bifurcate its handling of nonroutable and routable orders.59 For
routable orders, IEX explains that it
would insert an additional POP/coil
delay within the IEX system to delay
routable orders’ access to the IEX book
by an additional 350 microseconds after
they have already passed through the
initial POP/coil delay on their way into
the IEX system (for a total delay of 700
microseconds before any portion of the
routable order reaches the IEX book).60
IEX represents that this new delay is
intended to place IEX in the same
position as a third-party routing broker
in reaching IEX’s book through a POP/
coil delay, such that IEX’s ability to
submit a routable order to its own order
book would be identical to any other
routing broker-dealer’s ability to submit
a routable order to the IEX order book
despite the fact that the orders would
traverse different paths in the system.61
Likewise, IEX notes that messages from
the IEX order book back to IEX’s routing
logic also would be subject to this POP/
coil delay to effect a latency identical to
that experienced by IEX’s non-affiliated
members when receiving messages back
from the IEX order book.62 As such, IEX
competitive and could create a conflict of interest.
See also supra note 55, at 51304 (citing to the BATS
Y order).
57 ArcaEx Order, supra note 56, at 55233.
58 See Letter from Sophia Lee, General Counsel,
IEX, to Brent J. Fields, Secretary, Commission,
dated February 29, 2016, at 1.
59 See id.
60 See id. at 1–2 (‘‘Please note that because of the
speed bump introduced between the IEX Router
and the IEX matching engine, IEX routing members
independently choosing to use the IEX Router will
experience an additional 350 microseconds of
latency as compared to members sending nonroutable orders to the IEX matching engine.’’).
61 See id. at 1 (‘‘In particular, this redesign
eliminates any alleged advantage claimed by the
commenters that the Router has over a third party
broker routing to IEX.’’).
62 See id. at 1–2 (noting that ‘‘the IEX Router
would receive fill information from the IEX
matching engine by way of the speed bump, which
would place the IEX Router’s ability to receive
information from the IEX matching engine on equal
terms to an independent broker router’’).
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asabaliauskas on DSK3SPTVN1PROD with NOTICES
represents that its routing functionality
would have no information advantage
(i.e., no special view of IEX’s book,
including displayed or non-displayed
interest) and IEX represents that the
proposal places its outbound routing
functionality in an identical position to
third-party routing broker-dealers when
sending orders into the IEX matching
engine and when receiving transaction
information from the IEX matching
engine.63
Given this additional POP/coil delay,
Users submitting routable orders to IEX
and Users submitting non-routable
orders to IEX would not be subject to
the same cumulative POP/coil delay.
Non-routable orders would remain
subject to the 350 microsecond delay
into and out of the IEX matching engine
via the initial POP/coil. Routable orders,
however, would be sent to IEX’s system
routing logic first, and, if routed to IEX,
would traverse a new POP/coil delay
(with an additional 350 microsecond
delay) when interacting with the IEX
matching engine.64
The Commission is evaluating
whether IEX’s revised proposal for
handling routable orders sufficiently
addresses concerns that its proposed
rules may not be consistent with the
Act, for example whether they
constitute unfair discrimination, or
impose an unnecessary or inappropriate
burden on competition.
Accordingly, the Commission believes
that it is appropriate at this time to
institute proceedings to determine
whether to grant or deny IEX’s Form 1,
as modified by IEX’s recent
amendments. For the reasons set forth
above, the Commission believes that
questions remain as to whether IEX’s
proposed trading system is consistent
with the requirements of: (1) Section
6(b)(5) of the Act,65 which provides that
an exchange shall not be registered as a
national securities exchange unless the
Commission determines that the rules of
the exchange are designed, among other
things, not to permit unfair
discrimination between customers,
issuers, brokers, or dealers; and (2)
63 See id. at 2 (noting that ‘‘the IEX Router would
receive IEX quote information (the IEX TOPS feed)
over the speed bump, which would place the IEX
Router’s ability to receive IEX quote information on
equal terms to an independent broker router’’).
64 See id. IEX believes that this additional delay
should not be to the detriment of a User submitting
a routable order, and notes that Users may avoid
this additional delay by submitting non-routable
orders. See id. In addition, the trade confirmation
report from the IEX matching engine back to the
User that submitted the routable order would be
subject to a 700 microsecond delay, whereas IEX’s
proprietary data feed would only be subject to a 350
microsecond delay. See id. at 1–2.
65 15 U.S.C. 78f(b)(5).
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Section 6(b)(8) of the Act,66 which
provides that an exchange shall not be
registered as a national securities
exchange unless the Commission
determines that the rules of the
exchange do not impose any burden on
competition that is not necessary or
appropriate in furtherance of the
purposes of Act.67
The Commission invites comment on
all aspects of IEX’s Form 1, as amended,
particularly with regard to the proposed
outbound routing functionality as
presented in its recent amendments. In
particular, do commenters have a view
on whether IEX’s revised proposal
places other routing brokers who are
members of IEX on the same footing as
IEX in a manner that would address the
concerns under the Act and the rules
thereunder? Are there material aspects
of IEX’s proposed revised routing
functionality that are not clearly
presented in IEX’s revised rules 68 and
addressed by IEX’s Form 1, as amended?
Do commenters have a view on whether
the different delays in accessing the IEX
matching engine experienced by
routable orders versus non-routable
orders present any concerns under the
Act?
IV. Extension of Time for Proceedings
As noted above, IEX previously
consented to an extension of time for its
Form 1 to March 21, 2016.69 Most
recently, on February 29, March 4, and
March 7, IEX filed amendments to its
Form 1.70 As discussed above, these
amendments contained, among other
unrelated changes, several new and
amended rules to effect a significantly
different approach to outbound routing.
IEX stated its belief that its new routing
proposal addresses concerns raised by
commenters about its outbound routing
functionality and whether that original
proposal was consistent with the Act.71
For the reasons discussed above, the
66 15
U.S.C. 78f(b)(8).
also raised concerns about
whether IEX’s quotation, in light of the POP/coil
delay, could be categorized as ‘‘automated,’’ and
therefore be ‘‘protected,’’ under Rule 611 of
Regulation NMS given prior Commission guidance
on those definitions when it adopted Regulation
NMS. See, e.g., FIA First Letter; NYSE First Letter;
Citadel First Letter. The Commission is separately
evaluating the definition of automated quotation
under Regulation NMS in light of comments
received on IEX’s Form 1 concerning the
consistency of the POP/coil delay with Regulation
NMS.
68 See supra note 45 (citing to the proposed
amended IEX rules that would accommodate the
new routing process, including proposed IEX Rule
11.510).
69 See supra note 6.
70 See supra notes 7–9.
71 See Letter from Sophia Lee, General Counsel,
IEX, to Brent J. Fields, Secretary, Commission,
dated February 29, 2016, at 2.
67 Commenters
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Fmt 4703
Sfmt 4703
15769
Commission believes it is necessary to
provide a notice and comment period so
that market participants can evaluate
the new proposal and amended rule
text.
IEX filed these amendments to its
Form 1 approximately two weeks prior
to the March 21 deadline. The
Commission does not have sufficient
time before that March 21 deadline to
publish notice of IEX’s amendments in
the Federal Register, afford market
participants a 21-day comment period,
and then evaluate any comments
received before making a final
determination on IEX’s Form 1, as
amended. Therefore, to provide time for
public notice and comment and for
Commission consideration of this
significant new proposal from IEX, the
Commission believes that there is good
cause for a ninety-day extension of these
proceedings. Accordingly, the
Commission hereby designates June 18,
2016 as the date by which the
Commission shall determine whether to
grant or deny IEX’s Form 1, as amended,
for registration as a national securities
exchange.
V. Request for Written Comments
The Commission requests that
interested persons provide written
views and data with respect to IEX’s
Form 1, as amended, and the questions
included above or other relevant issues.
Comments may be submitted by any of
the following methods:
Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include File Number 10–
222 on the subject line.
Paper Comments
• Send paper comments in triplicate
to Brent J. Fields, Secretary, Securities
and Exchange Commission, 100 F Street
NE., Washington, DC 20549–1090.
All submissions should refer to File
Number 10–222. 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 (https://www.sec.gov/
rules/other.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to IEX’s Form 1 filed with
the Commission, and all written
communications relating to the
application between the Commission
and any person, other than those that
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Federal Register / Vol. 81, No. 57 / Thursday, March 24, 2016 / Notices
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. 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 publicly available. All
submissions should refer to File
Number 10–222 and should be
submitted on or before April 14, 2016.
By the Commission.
Brent J. Fields,
Secretary.
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–77404; File No. SR–FINRA–
2016–011]
Self-Regulatory Organizations;
Financial Industry Regulatory
Authority, Inc.; Notice of Filing and
Immediate Effectiveness of a Proposed
Rule Change To Modify the
Dissemination Protocols for TRACEEligible Securities
March 18, 2016.
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 March 9,
2016, Financial Industry Regulatory
Authority, Inc. (‘‘FINRA’’) filed with the
Securities and Exchange Commission
(‘‘SEC’’ or ‘‘Commission’’) the proposed
rule change as described in Items I and
II below, which Items have been
prepared by FINRA. The Commission is
publishing this notice to solicit
comments on the proposed rule change
from interested persons.
asabaliauskas on DSK3SPTVN1PROD with NOTICES
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
FINRA is proposing to modify the
dissemination protocols for TRACEEligible Securities to disseminate a new
alternative trading system (‘‘ATS’’)
contra-party type and ATS indicator.
There are no changes to the text of a
FINRA rule.
The text of the proposed rule change
is available on FINRA’s Web site at
2 17
U.S.C. 78s(b)(1).
CFR 240.19b–4.
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II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission,
FINRA 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. FINRA has prepared
summaries, set forth in sections A, B,
and C below, of the most significant
aspects of such statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and the
Statutory Basis for, the Proposed Rule
Change
[FR Doc. 2016–06632 Filed 3–23–16; 8:45 am]
1 15
https://www.finra.org, at the principal
office of FINRA and at the
Commission’s Public Reference Room.
1. Purpose
On February 2, 2015, FINRA Rule
6720(c) (Alternative Trading Systems)
went into effect to require TRACE
participants that operate an alternative
trading system (‘‘ATS’’) to use a separate
Market Participant Identifier (‘‘MPID’’)
to report all transactions that are
executed within the ATS to TRACE.
Where a member operates multiple
ATSs, a unique, separate MPID must be
used for reporting transactions within
each respective ATS. Where a member
operates a single ATS, but also engages
in transactions otherwise than on the
ATS (e.g., conducts both an ATS
business and a ‘‘voice’’ business), the
member must use the ATS MPID only
for reporting transactions within the
ATS.3
In light of the implementation of the
separate MPID requirement for ATS
reporting, FINRA now can conclusively
identify transactions that occur within
an ATS (as opposed to other areas of a
member’s business). As discussed in the
filing proposing the separate MPID
requirement, FINRA believes that
separate MPIDs will enhance FINRA’s
ability to surveil for compliance with
the requirements of Regulation ATS as
well as other SEC rules, the federal
securities laws, and FINRA rules.4
FINRA also believes that dissemination
of an ATS contra-party type would
provide useful, additional information
3 In all cases, members must have policies and
procedures in place to ensure that trades reported
using the separate ATS MPID obtained in
compliance with Rule 6720(c) are restricted to
trades executed within the ATS. FINRA Rule
6720(c).
4 See Securities Exchange Act Release No. 70676
(October 11, 2013), 78 FR 62862 (October 22, 2013)
(Notice of Filing of File No. SR–FINRA–2013–042).
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Fmt 4703
Sfmt 4703
regarding the market for TRACE-Eligible
Securities and, therefore, improve
transparency for such securities.5
At present, disseminated TRACE
transactions indicate whether the
reporting party or contra-party is a
dealer (‘‘D’’), non-member affiliate of a
member (‘‘A’’) or customer (‘‘C’’).
FINRA is now proposing another new
identifier for purposes of dissemination
to indicate when the reporting party or
contra-party is an ATS. Specifically,
where a reporting party or contra-party
is identified with a unique ATS MPID,
or where an ATS is exempt from TRACE
reporting pursuant to FINRA Rule 6732
and a member that is a party to the
exempt transaction on the ATS enters
the ATS’s unique MPID pursuant to
FINRA Rule 6730(c)(13),6 FINRA will
disseminate the ATS indicator.
The proposal will not necessitate that
members change their TRACE trade
reporting practices. As noted above,
FINRA will use information already
required to be reported to TRACE to
identify transactions involving an ATS
and append the ATS indicator for
dissemination, as appropriate.
Importantly, FINRA will not disclose
any identifying information regarding
the particular ATS involved in the
transaction. All ATSs will be generically
identified by FINRA using the same new
contra-party type and the ATS indicator
also will be generic. However, FINRA
will not identify ATSs for transactions
in ‘‘to be announced’’ or ‘‘TBA’’ 7
transactions in Agency Pass-Through
Mortgage-Backed Securities 8 and SBA5 Rule 6710 generally defines a ‘‘TRACE-Eligible
Security’’ as: (1) A debt security that is U.S. dollardenominated and issued by a U.S. or foreign private
issuer (and, if a ‘‘restricted security’’ as defined in
Securities Act Rule 144(a)(3), sold pursuant to
Securities Act Rule 144A); or (2) a debt security that
is U.S. dollar-denominated and issued or
guaranteed by an ‘‘Agency’’ as defined in Rule
6710(k) or a ‘‘Government-Sponsored Enterprise’’ as
defined in Rule 6710(n).
6 See Securities Exchange Act Release No. 76677
(December 17, 2015), 80 FR 79966 (December 23,
2015) (Notice of Filing and Immediate Effectiveness
of File No. SR–FINRA–2015–055).
7 ‘‘To Be Announced’’ means a transaction in an
Agency Pass-Through Mortgage-Backed Security as
defined in Rule 6710(v) or an SBA-Backed ABS as
defined in Rule 6710(bb) where the parties agree
that the seller will deliver to the buyer a pool or
pools of a specified face amount and meeting
certain other criteria but the specific pool or pools
to be delivered at settlement is not specified at the
Time of Execution, and includes TBA transactions
‘‘for good delivery’’ (‘‘GD’’) and TBA transactions
‘‘not for good delivery’’ (‘‘NGD’’). See Rule 6710(u).
8 ‘‘Agency Pass-Through Mortgage-Backed
Security’’ means a type of Securitized Product
issued in conformity with a program of an Agency
as defined in paragraph (k) or a GovernmentSponsored Enterprise (‘‘GSE’’) as defined in
paragraph (n), for which the timely payment of
principal and interest is guaranteed by the Agency
or GSE, representing ownership interest in a pool
(or pools) of mortgage loans structured to ‘‘pass
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]]>Agencies
[Federal Register Volume 81, Number 57 (Thursday, March 24, 2016)]
[Notices]
[Pages 15765-15770]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-06632]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-77406; File No. 10-222]
Investors' Exchange LLC; Notice of Filing of Amendment Nos. 2, 3,
and 4 to, and Order Instituting Proceedings To Determine Whether To
Grant or Deny, and Notice of Designation of Longer Period for
Commission Action on Proceedings To Determine Whether To Grant or Deny,
an Application for Registration as a National Securities Exchange Under
Section 6 of the Securities Exchange Act of 1934, as Modified by
Amendment Nos. 1, 2, 3, and 4 Thereto
March 18, 2016.
I. Introduction
On August 21, 2015, Investors' Exchange LLC (``IEX'' or ``IEX
Exchange'') submitted to the Securities and Exchange Commission
(``Commission'') a Form 1 application (``Form 1''), seeking
registration as a national securities exchange pursuant to Section 6 of
the Securities Exchange Act of 1934 (``Act'').\1\ IEX amended its Form
1 four times, including its most recent amendment on March 7, 2016. The
Commission is required to review the exchange registration application,
as amended, together with all comments received, and make a
determination whether to grant the registration.\2\
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78f.
\2\ See 15 U.S.C. 78f and 15 U.S.C. 78s.
---------------------------------------------------------------------------
On September 9, 2015, IEX submitted Amendment No. 1 to its Form
1.\3\ Notice of the application, as amended, was published for comment
in the Federal Register on September 22, 2015.\4\ IEX submitted several
responses to comments.\5\ On December 18, 2015, IEX consented to an
extension of time to March 21, 2016 for Commission consideration of its
Form 1.\6\ IEX submitted a second amendment to its Form 1 on February
29, 2016 that proposes to make functional changes to its outbound
router, which had been the subject of extensive public comment as
originally proposed.\7\ IEX submitted a third amendment to its Form 1
on March 4, 2016.\8\ IEX submitted a fourth amendment to its Form 1 on
March 7, 2016.\9\
---------------------------------------------------------------------------
\3\ In Amendment No. 1, IEX submitted updated portions of its
Form 1, including revised exhibits, a revised version of the
proposed IEX Rule Book, and revised Addenda C-2, C-3, C-4, D-1, D-2,
F-1, F-2, F-3, F-4, F-5, F-6, F-7, F-8, F-9, F-10, F-11, F-12, and
F-13.
\4\ See Securities Exchange Act Release No. 75925 (September 15,
2015), 80 FR 57261 (``Notice'').
\5\ See Letter from Sophia Lee, General Counsel, IEX, to Brent
J. Fields, Secretary, Commission, dated November 13, 2015 (``IEX
First Response''); Letter from Sophia Lee, General Counsel, IEX, to
Brent J. Fields, Secretary, Commission, dated November 23, 2015
(``IEX Second Response''); Letter from Sophia Lee, General Counsel,
IEX, to Brent J. Fields, Secretary, Commission, dated February 9,
2016 (``IEX Third Response''); Letter from Donald Bollerman, Head of
Markets and Sales, IEX Group, Inc., to File No. 10-222, dated
February 16, 2016 (``IEX Fourth Response''); and Letter from IEX
Group, Inc., to File No. 10-222, dated February 19, 2016 (``IEX
Fifth Response'').
\6\ See Letter from Sophia Lee, General Counsel, IEX, to Brent
J. Fields, Secretary, Commission, dated December 18, 2015.
\7\ In Amendment No. 2, IEX proposed changes to its Form 1 to,
among other things, redesign its outbound routing functionality to
direct routable orders first to the IEX routing logic instead of
directly to the IEX matching engine. See Letter from Sophia Lee,
General Counsel, IEX, to Brent J. Fields, Secretary, Commission,
dated February 29, 2016, at 1. In this manner, the IEX router would
``interact with the IEX matching system over a 350 microsecond
speed-bump in the same way an independent third party broker would
be subject to a speed bump.'' Id.
\8\ In Amendment No. 3, IEX proposed changes to its Form 1 to
clarify and correct revisions to its rulebook that it made in
Amendment No. 2. See Letter from Sophia Lee, General Counsel, IEX,
to Brent J. Fields, Secretary, Commission, dated March 4, 2016.
\9\ In Amendment No. 4, IEX proposed changes to its Form 1 to
update Exhibit E to reflect changes it proposed in Amendment No. 2.
See Letter from Sophia Lee, General Counsel, IEX, to Brent J.
Fields, Secretary, Commission, dated March 7, 2016.
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Section 19(a)(1) of the Act \10\ requires the Commission, within
ninety days of the date of publication of notice of an application for
registration as a national securities exchange, or such longer period
as to which the applicant consents,\11\ to, by order, grant such
registration\12\ or institute proceedings to determine whether such
registration should be denied.\13\ This order is providing public
notice of the significant changes in Amendment Nos. 2, 3, and 4 to
IEX's Form 1 and soliciting comment on the Form 1 as amended, while
simultaneously instituting proceedings under Section 19(a)(1)(B) of the
Act \14\ to determine whether to grant or deny IEX's exchange
registration application, as amended.
---------------------------------------------------------------------------
\10\ 15 U.S.C. 78s(a)(1).
\11\ See supra note 6 and accompanying text (noting that IEX
provided the Commission with an extension of time until March 21,
2016).
\12\ 15 U.S.C. 78s(a)(1)(A).
\13\ 15 U.S.C. 78s(a)(1)(B).
\14\ 15 U.S.C. 78s(a)(1)(B).
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Section 19(a)(1)(B) of the Act \15\ further provides that such
proceedings shall be concluded within one hundred eighty days of the
date of publication of notice of the filing of the registration
application. Under Section 19(a)(1)(B), the Commission may, however,
extend the time for conclusion of such proceedings for up to ninety
days if it finds good cause for such extension and publishes its
reasons for so finding. As discussed below, the Commission believes
that there is good cause for a ninety-day extension of these
proceedings, and is therefore designating June 18, 2016 as the date by
which the Commission shall determine whether to grant or deny IEX's
Form 1 for registration as a national securities exchange.
---------------------------------------------------------------------------
\15\ 15 U.S.C. 78s(a)(1)(B).
---------------------------------------------------------------------------
The Commission received over 430 comment letters on IEX's Form 1,
many focused on IEX's proposed trading rules and system.\16\ Many
commenters supported IEX's application.\17\ Other commenters either
opposed IEX's application or questioned whether certain proposed
elements of IEX's trading system would be consistent with the
requirements of the Act applicable to a registered national securities
exchange.\18\
---------------------------------------------------------------------------
\16\ The public comment file for IEX's Form 1 (File No. 10-222)
is available on the Commission's Web site at: https://www.sec.gov/comments/10-222/10-222.shtml.
\17\ See, e.g., Verret Letter; Shatto Letters 1, 2, and 3;
Simonelis Letter; Leuchtkafer First Letter; Leuchtkafer Second
Letter; Capital Group Letter; Southeastern Letter; Navari First
Letter; Navari Second Letter; DV Advisors Letter; Cowen Letter;
Themis First Letter; Themis Second Letter; Oppenheimer Funds Letter;
Murphy Letter; Birch Bay Letter; Healthy Markets Letter; Keblish
Letter; Bowcott Letter; Secrist Letter; Stevens Letter; Oltean
Letter; Park Letter; Crespo Letter; Hovanec Letter; Meskill Letter;
Brian S. Letter; Glennon Letter; Shaw Letter; Upson Letter; Goldman
Sachs Letter; Robeson Letter; Lynch Letter; Budish Letter; Chen &
Foley Letter; Liquidnet Letter; T. Rowe Price Letter.
\18\ See, e.g., BATS First Letter; BATS Second Letter; NYSE
First Letter; NASDAQ First Letter; NASDAQ Second Letter; Citadel
First Letter; Citadel Second Letter; Citadel Third Letter; Citadel
Fourth Letter; FIA First Letter; Hudson River Trading First Letter;
Hudson River Trading Second Letter; Anonymous First Letter;
Hunsacker Letter; Modern Markets Initiative Letter; Tabb Letter;
Weldon Letter; Markit First Letter; Markit Second Letter; Direct
Match Letter; Duffy Letter; Scott Letter.
---------------------------------------------------------------------------
Among the commenters who supported IEX's exchange registration,
several argued that IEX would offer a market solution to address
certain market inefficiencies and conflicts of interest in a manner
that may protect
[[Page 15766]]
the interests of buy-side investors.\19\ In particular, some commenters
noted IEX's decision not to pursue ``maker-taker'' pricing and instead
offer flat transaction fees.\20\ Some commenters praised IEX for
offering fewer order types.\21\ Several commenters highlighted IEX's
``coil'' delay (frequently referred to as IEX's ``speed bump''),
discussed in detail below, and asserted that it may help counter
latency arbitrage.\22\ Some commenters questioned the motive of certain
commenters who opposed the proposal.\23\ In addition, one commenter
argued that the coil delay should not be grounds for denying IEX's
exchange application, and suggested that IEX be phased into the
national market system under a pilot program so that the effect of
IEX's access delay on the wider market could be better assessed.\24\
---------------------------------------------------------------------------
\19\ See, e.g., Capital Group Letter at 1 (noting the
``technologies and practices to discourage predatory behavior''
including the ``350 microsecond buffer,'' the lack of maker-taker
pricing, and ``simple order types''); Southeastern Letter (submitted
on behalf of a group of undersigned asset managers) (complimenting
IEX's proposed benefits to investors in ``reducing structural
inefficiencies in the market, and offering a more balanced and
simplified market design''); Navari First Letter at 1 (noting
certain features that ``have great promise for the [r]etail
[i]nvestor''); DV Advisors Letter; Cowen Letter; Themis First Letter
(noting that IEX's ``unconflicted investor-friendly alternative''
will ``employ technology designed to even playing fields, rather
than exploit information asymmetry,'' that IEX will be ``a stark
alternative to other stock exchange models that seem to be more
focused on selling speed and data,'' and that as an alternative
trading system, IEX allowed it and its customers ``to achieve best
execution''); Oppenheimer Funds Letter; Murphy Letter (arguing that
IEX's design should ``help to limit and even eliminate the
electronic front running that is central to the problems in the
market today''); Keblish Letter; Secrist Letter; Stevens Letter;
Oltean Letter; Meskill Letter; fi360 Letter; TRS Letter; Lynch
Letter; Jefferies Letter; T. Rowe Price Letter; Liquidnet Letter.
\20\ See, e.g., Capital Group Letter; Southeastern Letter;
Navari First Letter; Navari Second Letter; Themis Letter 1;
Oppenheimer Funds Letter; Healthy Markets Letter; Abel/Noser Letter;
Goldman Sachs Letter; Liquidnet Letter; Franklin Templeton
Investments Letter; TRS Letter. The Commission notes, however, that
fees are not actually part of IEX's Form 1. Rather, if IEX were to
be approved as an exchange, it would need to submit separate filings
under Section 19(b) of the Act to establish fees that it would
charge to members and others using its facilities. Nevertheless, in
its Second Response Letter, IEX noted that, as an exchange, it would
intend to charge a flat transaction fee. See IEX Second Response at
9.
\21\ See, e.g., Capital Group Letter; Southeastern Letter;
Shatto First Letter; Navari First Letter; Oppenheimer Funds Letter;
Healthy Markets Letter; Norges Bank Letter; Burgess Letter; fi360
Letter; TRS Letter. But see NYSE First Letter at 9 (arguing that
IEX's proposed menu of order types is not necessarily ``simple'' and
the potential different combinations of instructions for limit
orders is in the hundreds).
\22\ See, e.g., T. Rowe Price Letter at 1-2; Navari Second
Letter; Healthy Markets Letter at 2-4; Jefferies Letter at 3; Chen &
Foley Letter at 2-3; Leuchtkafer Second Letter at 9; Budish Letter
at 4. See also Burgess Letter; Capital Group Letter; Franklin
Templeton Investments Letter; Michael Schroeder Letter; Leeson
Letter; Lupinski Letter; Oorjitham Letter; Eric K Letter; Grey
Letter; Spear Letter; Baggins Letter; Nixon Letter; Campbell Letter;
Moses Letter; Huff Letter; Kaye Letter; Jean Letter; Gloy Letter;
Givehchi Letter; Kara Letter; Hiester Letter; Benites Letter;
Eustace Letter; Ramirez Letter; Luce Letter; Arnold Letter; Tidwell
Letter; Doyle Letter; Long Letter; Kim Letter; Mannheim Letter;
Oppenheimer Funds Letter.
\23\ See, e.g., Verret Letter at 2 (arguing that ``incumbent
firms have long sought to utilize regulatory barriers to entry to
minimize competition, and it would appear a number of firms are
presently using the regulatory comment process regarding IEX's
application as a venue to replicate that strategy here''); Crespo
Letter; Brian S. Letter.
\24\ See Angel Letter at 3-5. The pilot program suggested by
this commenter would be to measure the effect on the market of
protecting IEX's quotation notwithstanding the ``speed bump.'' See
id. at 4-5. According to the commenter, if the pilot caused material
harm, it could be halted, in which case IEX could still operate as
an exchange but without having its quotes protected under Regulation
NMS. See id. at 5. See also Wolfe Letter at 3 (agreeing with the
pilot approach suggested in the Angel Letter).
---------------------------------------------------------------------------
Among the commenters who were critical of aspects of IEX's
proposal, most focused on issues surrounding IEX's coil delay, IEX's
affiliated outbound router and what they viewed as an unfair advantage
to bypass the outbound coil delay, and IEX's proposed order types.\25\
Other commenters did not express a view on whether the Commission
should grant or deny IEX's application.\26\
---------------------------------------------------------------------------
\25\ See, e.g., NYSE First Letter; NASDAQ First Letter; BATS
First Letter; Citadel First Letter; Citadel Second Letter; Citadel
Third Letter; Hudson River Trading First Letter; Hudson River
Trading Second Letter; FIA First Letter.
\26\ See, e.g., Virtu Letter; Healthy Markets Letter; Tabb
Letter; Aesthetic Integration Letter.
---------------------------------------------------------------------------
II. Description of IEX's Trading System
IEX, which currently operates a trading platform as an alternative
trading system (``ATS''), is seeking to register as a national
securities exchange. Below is a brief description of the proposed IEX
exchange trading platform, including the new aspects of the system
concerning the router functionality where noted.\27\
---------------------------------------------------------------------------
\27\ For more detail on IEX's proposed trading system, see IEX's
Form 1 and Exhibits, as amended (in particular Exhibits B (the
proposed rulebook) and E (a narrative description of the proposed
operation of IEX as an exchange)), which are available on the
Commission's Web site at https://www.sec.gov/rules/other/otherarchive/other2015.shtml.
---------------------------------------------------------------------------
Order Execution. Non-marketable orders submitted to IEX would be
displayed or non-displayed, depending on the instructions indicated by
the IEX member submitting the order.\28\ IEX would direct an order (or
any portion thereof) that it could not execute on IEX to away markets
for execution through IEX Services LLC (``IEXS''), IEX's wholly owned
single-purpose outbound router, unless the terms of the order direct
IEX not to route such order away.\29\
---------------------------------------------------------------------------
\28\ See Proposed IEX Rule 11.220(a)(1).
\29\ See Proposed IEX Rule 11.230(b). See also Amendment Nos. 2
and 3.
---------------------------------------------------------------------------
IEX proposed several pegged order types--primary peg, midpoint peg,
and discretionary peg--all of which would be non-displayed with prices
that are automatically adjusted by the IEX system in response to
changes in the national best bid and offer (``NBBO'') (subject to a
limit price, if any).\30\ As noted below, it is these types of dark
pegged orders--and not standard market or limit orders, or displayed
quotes or orders--that would be affected by the proposed coil delay.
---------------------------------------------------------------------------
\30\ See Proposed IEX Rule 11.190(a)-(b).
---------------------------------------------------------------------------
Access and the Coil Delay. Only broker-dealer members of IEX and
entities that enter into market access arrangements with members
(collectively, ``Users'') would have access to the IEX system.\31\
Users would connect to IEX through a single Point-of-Presence (``POP'')
located in Secaucus, New Jersey.\32\ After entering through the POP, a
User's electronic message sent to the IEX trading system would traverse
the IEX ``coil,'' which is a box of compactly coiled optical fiber
cable equivalent to a prescribed physical distance of 61,625 meters
(approximately 38 miles).\33\ After exiting the coil, the User's
message would travel an additional physical distance to the IEX trading
system, located in Weehawken, New Jersey.\34\ According to IEX, the
coil, when combined with the physical distance between the POP and the
IEX trading system (hereinafter the ``POP/coil''), provides IEX Users
sending non-routable orders to IEX with 350 microseconds \35\ of one-
way latency (hereinafter the ``POP/coil delay'').\36\
---------------------------------------------------------------------------
\31\ To obtain authorized access to the IEX System, each User
must enter into a User Agreement with IEX. See Proposed IEX Rule
11.130(a).
\32\ See IEX Second Response at 2.
\33\ See IEX First Response at 3.
\34\ See Exhibit E to IEX's Form 1 submission, at 12. See also
IEX First Response at 3.
\35\ A microsecond is one millionth of a second.
\36\ See IEX First Response at 3. See also Amendment Nos. 2 and
3.
---------------------------------------------------------------------------
Several commenters expressed concern that IEX's previously-
published Form 1 lacked specific detail about how the POP/coil
structure would work, including what messages and activity would--and
would not--be subject to the delay.\37\ IEX responded by supplementing
the record through its
[[Page 15767]]
first two response letters.\38\ Most recently, IEX proposed a new
approach to outbound routing, which is discussed further below.
---------------------------------------------------------------------------
\37\ See, e.g., NYSE First Letter and Nasdaq First Letter.
\38\ See IEX First Response and IEX Second Response.
---------------------------------------------------------------------------
According to IEX, all incoming messages (e.g., orders to buy or
sell and any modification to a previously sent open order) from any
User would traverse the POP/coil to initially reach IEX. In addition,
all outbound messages from IEX back to a User (e.g., confirmations of
an execution that occurred on IEX) would pass through the same route in
reverse.\39\ IEX's direct proprietary market data feed, which is an
optional data feed that IEX would make available to subscribers, also
would traverse the POP/coil.\40\
---------------------------------------------------------------------------
\39\ See IEX First Response at 3.
\40\ See id.
---------------------------------------------------------------------------
As originally proposed, one type of inbound message and two types
of outbound messages would not traverse the POP/coil, specifically:
1. Inbound market data from other trading centers to the IEX
system would not traverse the POP/coil;
2. Orders routed outbound from IEX through IEXS to away trading
centers for execution (as well as reports back to IEX from those
away trading centers) would not traverse the POP/coil (though
execution and transaction reports sent from IEX back to Users would
traverse the POP/coil and thus would be delayed) (as discussed
below, IEX recently proposed a materially different approach to
outbound routing that it intends will eliminate any exclusive
advantages provided to its routing functionality); and
3. Outbound transaction and quote messages sent from IEX to the
applicable securities information processor (``SIP'') would not pass
through the POP/coil, but instead would be sent directly from the
IEX system to the SIP processor.\41\
---------------------------------------------------------------------------
\41\ See id. at 3-4.
Finally, updates to resting pegged orders on IEX would be processed
within the IEX trading system and would not require that separate
messages be transmitted from outside the trading system, which would
otherwise traverse the POP/coil, for each update.\42\
---------------------------------------------------------------------------
\42\ See id.
---------------------------------------------------------------------------
According to IEX, its POP/coil delay, including its application to
some but not all of the message traffic into and out of its trading
system, was originally designed to achieve two main purposes: (1) To
allow IEX time to update the prices of resting dark pegged orders on
its book (whose permissible execution prices are not static, but rather
are tied to the NBBO as IEX sees it through the proprietary data feeds
it purchases from each exchange) in response to changes in market
prices before other market participants can access IEX's resting pegged
orders at potentially ``stale'' prices (i.e., pegged order prices that
had not been updated by IEX when the new incoming order arrived at
IEX); \43\ and (2) to delay the trade acknowledgements IEX sends to
Users, as well as to delay its proprietary outbound data feed that
reflects the occurrence of an execution on IEX, both of which
originally provided IEX's affiliated outbound router with a ``head
start'' as it routes out to access trading interest posted on other
exchanges before other market participants learn about a trade on IEX
and can trade with or re-price that away interest in reaction to the
execution that occurred on IEX.\44\
---------------------------------------------------------------------------
\43\ See id. at 4 (explaining that the POP/coil is designed ``to
ensure that no market participants can take action on IEX in
reaction to changes in market prices before IEX is aware of the same
price changes on behalf of all IEX members''). See also Hudson River
Trading First Letter at 3 (discussing the purposes of the POP/coil
delay). One commenter noted that the POP/coil delay ``has no
impact'' on regular displayed orders, and ``simply slows down the
trade execution process but does not alter the outcome'' for non-
pegged orders. Id. at 2-3 (``Similar to a 100-meter sprint, if you
simply add 350 microseconds to each participant's time, neither the
order in which they finish nor their time differentials will
change.''). Rather, the commenter argued that ``IEX delays all
transparent displayed orders that are critical to price discovery
without altering the outcomes of those orders . . . for the benefit
of hidden, pegged orders that free-ride on price discovery.'' See
Hudson River Trading Second Letter at 4.
\44\ See IEX Second Response at 14 (``. . . the purpose of
requiring outbound execution messages to go through the POP (350
microseconds) is to prevent `information leakage' or `liquidity
fade' when IEXS routes to other markets'').
---------------------------------------------------------------------------
Outbound Routing. In the three recent amendments to its Form 1,
IEX, among other things, proposed a significantly different approach to
outbound routing.\45\ Rather than initially directing the entirety of a
User's order to the IEX matching engine and then routing away any
excess shares via IEXS directly (and without having to first pass
through the POP/coil delay as it routes shares outbound), IEX proposed
to eliminate this aspect and instead create a new structure intended to
place its outbound routing function on parity with competing broker-
dealers. IEX's latest amendments, which constitute a significant change
from its initial Form 1, are discussed further below.
---------------------------------------------------------------------------
\45\ The proposed revisions to accommodate the new routing
process are primarily addressed in proposed IEX Rule 11.510
(Connectivity), as well as in proposed IEX Rules 2.220 (IEX Services
LLC as Outbound Router), 11.130 (Access), 11.230(b)-(c) (Order
Execution), 11.240 (Trade Execution, Reporting, and Dissemination of
Quotations), 11.330 (Data Products), and 11.410 (Use of Market Data
Feeds and Calculations of Necessary Price Reference Points). IEX
also proposed other changes in Amendment Nos. 2 and 3, including
changes to proposed Rule 2.160 (Restrictions on Membership) to
reflect the Series 57 exam; proposed new Rule 2.250 (Mandatory
Participation in Testing of Backup Systems); proposed new Rule 9.217
(Expedited Client Suspension Proceeding); proposed new Rule 10.270
(Disruptive Quoting and Trading Activity Prohibited); changes to
proposed Rule 11.190(a)(3) (Pegged Orders), (b)(8)-(10) (concerning
pegged orders), and (g) (concerning quote stability for
Discretionary Peg Orders); and changes to proposed Rule 11.260
(LIMITATION OF LIABILITY).
---------------------------------------------------------------------------
III. Proceedings To Determine Whether To Grant or Deny the Application
and Grounds for Potential Denial Under Consideration
The Commission is hereby instituting proceedings pursuant to
Section 19(a)(1)(B) of the Act \46\ to determine whether IEX's Form 1,
as amended, should be granted or denied. Institution of such
proceedings is appropriate at this time in view of the issues raised by
the application, the significant changes proposed in IEX's recent
amendments, and the need for the Commission to provide the public with
an opportunity to comment and allow the Commission to consider comments
received on the recently filed features of the IEX market. Institution
of proceedings does not indicate that the Commission has reached any
conclusions with respect to any of the issues involved. In fact, the
Commission is providing the public with an opportunity to comment to
inform its consideration and decision making regarding the Form 1, as
IEX recently amended it. The Commission encourages interested persons
to provide specific comment on the Form 1 focused on Amendment Nos. 2,
3, and 4.\47\
---------------------------------------------------------------------------
\46\ 15 U.S.C. 78s(a)(1)(B).
\47\ See infra Section IV (Extension of Time for Proceedings).
Separately, the Commission is evaluating whether to revisit its
interpretation of automated quotation under Regulation NMS in light
of comments received on IEX's Form 1 concerning the consistency of
the POP/coil delay with Regulation NMS.
---------------------------------------------------------------------------
As required by Section 19(a)(1)(B) of the Act,\48\ the Commission
is hereby providing notice of the grounds for potential denial under
consideration. Under Sections 6(b) and 19(a)(1) of the Act,\49\ the
Commission shall grant an application for registration as a national
securities exchange if the Commission finds that the requirements of
the Act and the rules and regulations thereunder with respect to the
applicant are satisfied; the Commission shall deny such application for
registration if it does not make such a finding. In particular, Section
6(b)(5) of the Act \50\ provides that an exchange shall not be
registered as a national securities exchange unless the Commission
determines that the rules of the
[[Page 15768]]
exchange are designed, among other things, not to permit unfair
discrimination between customers, issuers, brokers, or dealers. In
addition, Section 6(b)(8) of the Act \51\ provides that an exchange
shall not be registered as a national securities exchange unless the
Commission determines that the rules of the exchange do not impose any
burden on competition that is not necessary or appropriate in
furtherance of the purposes of Act.
---------------------------------------------------------------------------
\48\ 15 U.S.C. 78s(a)(1)(B).
\49\ 15 U.S.C. 78f(b) and 15 U.S.C. 78s(a)(1), respectively.
\50\ 15 U.S.C. 78f(b)(5).
\51\ 15 U.S.C. 78f(b)(8).
---------------------------------------------------------------------------
The Commission is particularly interested in commenters' views as
to whether the changes set forth in IEX's Form 1, as amended, are
consistent with the Act, in light of commenters' concerns that IEX's
routing functionality and IEXS would have an advantage over other
routing broker-dealers that would be unfairly discriminatory and an
inappropriate burden on competition.\52\ IEX has represented to the
Commission that, under its revised outbound routing structure, IEX's
routing functionality would interface with the IEX matching engine on
the same terms as other Users, including routing broker-dealer members
of IEX.\53\
---------------------------------------------------------------------------
\52\ Several commenters criticized the fact that IEXS would have
received routing information from the IEX system outside of, and not
subject to, the POP/coil delay while other IEX members' receipt of
transaction and quotation information from the IEX system would have
been subject to the POP/coil delay. See, e.g., BATS First Letter at
4-5; BATS Second Letter at 3-6; BATS Third Letter at 3; NYSE First
Letter at 3-5; NYSE Second Letter at 3; Citadel First Letter at 6-7;
Citadel Second Letter at 5-6; Citadel Third Letter at 1-2; FIA First
Letter at 4-5; Tabb Letter at 2-3; Hudson River Trading First Letter
at 3-7; Hudson River Trading Second Letter at 2-5; Markit First
Letter at 1-3; Markit Second Letter at 3-4 and 6; Hunsacker Letter;
Weldon Letter. In other words, the concern expressed was that IEXS
would have been able to route to away markets the unexecuted portion
of any marketable order not fully executed at IEX 350 microseconds
before other routing broker-dealers learned that an execution
occurred on IEX. Some commenters argued that this arrangement would
provide an unfair competitive advantage to IEX and the routing
broker that it owns in that IEXS would have faster access to
information from the IEX trading system than other members of IEX,
including those who offer routing services that compete with IEXS,
and thus IEXS would have the unique ability over other routing
brokers to most quickly and efficiently route to away markets. See,
e.g., BATS First Letter at 4-5; BATS Second Letter at 3-6; BATS
Third Letter at 3; NYSE First Letter at 3-5; NYSE Second Letter at
3; Citadel First Letter at 6-7; Citadel Second Letter at 5-6;
Citadel Third Letter at 1-2; FIA First Letter at 4-5; Tabb Letter at
2-3; Hudson River Trading First Letter at 3-7; Hudson River Trading
Second Letter at 4-5; Markit First Letter at 1-3; Markit Second
Letter at 3-4 and 6; Weldon Letter. Other commenters opined that the
advantage provided to IEXS would effectively force brokers to use
IEXS because other third party routing brokers would be
competitively disadvantaged by their inability to similarly bypass
the POP/coil delay. See, e.g., Tabb Letter at 2; Citadel Third
Letter at 3.
\53\ See Letter from Sophia Lee, General Counsel, IEX, to Brent
J. Fields, Secretary, Commission, dated February 29, 2016.
---------------------------------------------------------------------------
The proposed new outbound routing structure, which IEX filed with
the Commission over a period ending in early March, represents a
material departure from the original design that IEX proposed in its
original Form 1 and therefore warrants further review and consideration
by the Commission, as informed by further public comment.\54\ IEX has
proposed a number of changes to its rulebook to effectuate this new
design. The Commission believes that the protection of investors and
the public interest are best served by affording the public the
opportunity to review and comment on this modified proposal from IEX,
particularly in light of the large number of comments the Commission
received that raised questions about whether IEX's proposed rules were
consistent with the requirements of the Act. By publishing notice of,
and soliciting comment on, IEX's Form 1, as most recently amended by
Amendment Nos. 2, 3, and 4, and simultaneously instituting proceedings,
the Commission seeks public input on whether IEX's proposed new
outbound routing structure, as reflected in its new proposed amended
rules, is consistent with the Act, and accordingly, whether IEX should
be registered as a national securities exchange.
---------------------------------------------------------------------------
\54\ In particular, the recently-filed amendments to IEX's Form
1 introduce the concept of a new POP/coil delay between IEX's
routing logic (which is located within IEX's system) and IEX's book.
---------------------------------------------------------------------------
The Commission previously has stated that an exchange-affiliated
outbound router, as a ``facility'' of the exchange, will be subject to
the exchange's and the Commission's regulatory oversight, and that the
exchange will be responsible for ensuring that the affiliated outbound
routing function is operated consistent with Section 6 of the Act and
the exchange's rules.\55\ For example, in approving an exchange with an
affiliated outbound routing broker, the Commission previously noted
that ``[a] conflict of interest would arise if the national securities
exchange (or an affiliate) provided advantages to its broker-dealer
that are not available to other members.'' \56\ The Commission further
explained that ``advantages, such as greater access to information,
improved speed of execution, or enhanced operational capabilities in
dealing with the exchange, might constitute unfair discrimination under
the Act.'' \57\
---------------------------------------------------------------------------
\55\ See, e.g., Securities Exchange Act Release No. 62716 (Aug.
13, 2010), 75 FR 51295 (August 19, 2010) (granting BATS Y Exchange's
request to register as a national securities exchange).
\56\ Securities Exchange Act Release No. 44983 (October 25,
2001), 66 FR 55225, 55233 (November 1, 2001) (PCX-00-25) (order
approving Archipelago Exchange (``ArcaEx'') as the equities trading
facility of PCX Equities, Inc.) (``ArcaEx Order''). In the 2001 PCX
filing, two commenters expressed concerns regarding ArcaEx's
affiliation with the Wave broker-dealer, which operated as the
outbound routing broker-dealer for ArcaEx. Specifically, these
commenters were concerned that the affiliation between ArcaEx and
Wave would be anti-competitive and could create a conflict of
interest. See also supra note 55, at 51304 (citing to the BATS Y
order).
\57\ ArcaEx Order, supra note 56, at 55233.
---------------------------------------------------------------------------
As specified in IEX's initial Form 1, unexecuted shares of routable
orders sent to IEXS would not have traversed the POP/coil. As revised
by Amendment Nos. 2, 3, and 4, IEX now proposes a significantly
different structure that it says is intended to place its router and
routing logic in an identical position to non-affiliated routing
broker-dealers.\58\
---------------------------------------------------------------------------
\58\ See Letter from Sophia Lee, General Counsel, IEX, to Brent
J. Fields, Secretary, Commission, dated February 29, 2016, at 1.
---------------------------------------------------------------------------
IEX's recent amendments include new rules to bifurcate its handling
of non-routable and routable orders.\59\ For routable orders, IEX
explains that it would insert an additional POP/coil delay within the
IEX system to delay routable orders' access to the IEX book by an
additional 350 microseconds after they have already passed through the
initial POP/coil delay on their way into the IEX system (for a total
delay of 700 microseconds before any portion of the routable order
reaches the IEX book).\60\ IEX represents that this new delay is
intended to place IEX in the same position as a third-party routing
broker in reaching IEX's book through a POP/coil delay, such that IEX's
ability to submit a routable order to its own order book would be
identical to any other routing broker-dealer's ability to submit a
routable order to the IEX order book despite the fact that the orders
would traverse different paths in the system.\61\ Likewise, IEX notes
that messages from the IEX order book back to IEX's routing logic also
would be subject to this POP/coil delay to effect a latency identical
to that experienced by IEX's non-affiliated members when receiving
messages back from the IEX order book.\62\ As such, IEX
[[Page 15769]]
represents that its routing functionality would have no information
advantage (i.e., no special view of IEX's book, including displayed or
non-displayed interest) and IEX represents that the proposal places its
outbound routing functionality in an identical position to third-party
routing broker-dealers when sending orders into the IEX matching engine
and when receiving transaction information from the IEX matching
engine.\63\
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\59\ See id.
\60\ See id. at 1-2 (``Please note that because of the speed
bump introduced between the IEX Router and the IEX matching engine,
IEX routing members independently choosing to use the IEX Router
will experience an additional 350 microseconds of latency as
compared to members sending non-routable orders to the IEX matching
engine.'').
\61\ See id. at 1 (``In particular, this redesign eliminates any
alleged advantage claimed by the commenters that the Router has over
a third party broker routing to IEX.'').
\62\ See id. at 1-2 (noting that ``the IEX Router would receive
fill information from the IEX matching engine by way of the speed
bump, which would place the IEX Router's ability to receive
information from the IEX matching engine on equal terms to an
independent broker router'').
\63\ See id. at 2 (noting that ``the IEX Router would receive
IEX quote information (the IEX TOPS feed) over the speed bump, which
would place the IEX Router's ability to receive IEX quote
information on equal terms to an independent broker router'').
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Given this additional POP/coil delay, Users submitting routable
orders to IEX and Users submitting non-routable orders to IEX would not
be subject to the same cumulative POP/coil delay. Non-routable orders
would remain subject to the 350 microsecond delay into and out of the
IEX matching engine via the initial POP/coil. Routable orders, however,
would be sent to IEX's system routing logic first, and, if routed to
IEX, would traverse a new POP/coil delay (with an additional 350
microsecond delay) when interacting with the IEX matching engine.\64\
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\64\ See id. IEX believes that this additional delay should not
be to the detriment of a User submitting a routable order, and notes
that Users may avoid this additional delay by submitting non-
routable orders. See id. In addition, the trade confirmation report
from the IEX matching engine back to the User that submitted the
routable order would be subject to a 700 microsecond delay, whereas
IEX's proprietary data feed would only be subject to a 350
microsecond delay. See id. at 1-2.
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The Commission is evaluating whether IEX's revised proposal for
handling routable orders sufficiently addresses concerns that its
proposed rules may not be consistent with the Act, for example whether
they constitute unfair discrimination, or impose an unnecessary or
inappropriate burden on competition.
Accordingly, the Commission believes that it is appropriate at this
time to institute proceedings to determine whether to grant or deny
IEX's Form 1, as modified by IEX's recent amendments. For the reasons
set forth above, the Commission believes that questions remain as to
whether IEX's proposed trading system is consistent with the
requirements of: (1) Section 6(b)(5) of the Act,\65\ which provides
that an exchange shall not be registered as a national securities
exchange unless the Commission determines that the rules of the
exchange are designed, among other things, not to permit unfair
discrimination between customers, issuers, brokers, or dealers; and (2)
Section 6(b)(8) of the Act,\66\ which provides that an exchange shall
not be registered as a national securities exchange unless the
Commission determines that the rules of the exchange do not impose any
burden on competition that is not necessary or appropriate in
furtherance of the purposes of Act.\67\
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\65\ 15 U.S.C. 78f(b)(5).
\66\ 15 U.S.C. 78f(b)(8).
\67\ Commenters also raised concerns about whether IEX's
quotation, in light of the POP/coil delay, could be categorized as
``automated,'' and therefore be ``protected,'' under Rule 611 of
Regulation NMS given prior Commission guidance on those definitions
when it adopted Regulation NMS. See, e.g., FIA First Letter; NYSE
First Letter; Citadel First Letter. The Commission is separately
evaluating the definition of automated quotation under Regulation
NMS in light of comments received on IEX's Form 1 concerning the
consistency of the POP/coil delay with Regulation NMS.
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The Commission invites comment on all aspects of IEX's Form 1, as
amended, particularly with regard to the proposed outbound routing
functionality as presented in its recent amendments. In particular, do
commenters have a view on whether IEX's revised proposal places other
routing brokers who are members of IEX on the same footing as IEX in a
manner that would address the concerns under the Act and the rules
thereunder? Are there material aspects of IEX's proposed revised
routing functionality that are not clearly presented in IEX's revised
rules \68\ and addressed by IEX's Form 1, as amended? Do commenters
have a view on whether the different delays in accessing the IEX
matching engine experienced by routable orders versus non-routable
orders present any concerns under the Act?
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\68\ See supra note 45 (citing to the proposed amended IEX rules
that would accommodate the new routing process, including proposed
IEX Rule 11.510).
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IV. Extension of Time for Proceedings
As noted above, IEX previously consented to an extension of time
for its Form 1 to March 21, 2016.\69\ Most recently, on February 29,
March 4, and March 7, IEX filed amendments to its Form 1.\70\ As
discussed above, these amendments contained, among other unrelated
changes, several new and amended rules to effect a significantly
different approach to outbound routing. IEX stated its belief that its
new routing proposal addresses concerns raised by commenters about its
outbound routing functionality and whether that original proposal was
consistent with the Act.\71\ For the reasons discussed above, the
Commission believes it is necessary to provide a notice and comment
period so that market participants can evaluate the new proposal and
amended rule text.
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\69\ See supra note 6.
\70\ See supra notes 7-9.
\71\ See Letter from Sophia Lee, General Counsel, IEX, to Brent
J. Fields, Secretary, Commission, dated February 29, 2016, at 2.
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IEX filed these amendments to its Form 1 approximately two weeks
prior to the March 21 deadline. The Commission does not have sufficient
time before that March 21 deadline to publish notice of IEX's
amendments in the Federal Register, afford market participants a 21-day
comment period, and then evaluate any comments received before making a
final determination on IEX's Form 1, as amended. Therefore, to provide
time for public notice and comment and for Commission consideration of
this significant new proposal from IEX, the Commission believes that
there is good cause for a ninety-day extension of these proceedings.
Accordingly, the Commission hereby designates June 18, 2016 as the date
by which the Commission shall determine whether to grant or deny IEX's
Form 1, as amended, for registration as a national securities exchange.
V. Request for Written Comments
The Commission requests that interested persons provide written
views and data with respect to IEX's Form 1, as amended, and the
questions included above or other relevant issues. Comments may be
submitted by any of the following methods:
Electronic Comments
Use the Commission's Internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an email to rule-comments@sec.gov. Please include
File Number 10-222 on the subject line.
Paper Comments
Send paper comments in triplicate to Brent J. Fields,
Secretary, Securities and Exchange Commission, 100 F Street NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number 10-222. 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 (https://www.sec.gov/rules/other.shtml).
Copies of the submission, all subsequent amendments, all written
statements with respect to IEX's Form 1 filed with the Commission, and
all written communications relating to the application between the
Commission and any person, other than those that
[[Page 15770]]
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. 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
publicly available. All submissions should refer to File Number 10-222
and should be submitted on or before April 14, 2016.
By the Commission.
Brent J. Fields,
Secretary.
[FR Doc. 2016-06632 Filed 3-23-16; 8:45 am]
BILLING CODE 8011-01-P
