Self-Regulatory Organizations; NASDAQ BX, Inc.; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Provide a Process for an Expedited Suspension Proceeding and Adopt a Rule To Prohibit Disruptive Quoting and Trading Activity, 35106-35111 [2016-12776]

Download as PDF 35106 Federal Register / Vol. 81, No. 105 / Wednesday, June 1, 2016 / Notices disapprove, the proposed rule change (File No. SR–NYSEArca–2016–49). For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.7 Brent J. Fields, Secretary. [FR Doc. 2016–12774 Filed 5–31–16; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–77914; File No. SR–BX– 2016–028] Self-Regulatory Organizations; NASDAQ BX, Inc.; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Provide a Process for an Expedited Suspension Proceeding and Adopt a Rule To Prohibit Disruptive Quoting and Trading Activity May 25, 2016. Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (the ‘‘Act’’),1 and Rule 19b–4 thereunder,2 notice is hereby given that on May 19, 2016, NASDAQ BX, Inc. (‘‘BX’’ or ‘‘Exchange’’) filed with the Securities and Exchange Commission (‘‘Commission’’) the proposed rule change as described in Items I, II and III below, which Items have been prepared by the Exchange. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. sradovich on DSK3TPTVN1PROD with NOTICES I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change The Exchange proposes to adopt a new rule to adopt a new equity rule to clearly prohibit disruptive quoting and trading activity on the Exchange, as further described below. Further the Exchange proposes to amend Exchange Rules to permit the Exchange to take prompt action to suspend Members or their clients that violate such rule. The text of the proposed rule change is available on the Exchange’s Web site at https:// nasdaqomxbx.cchwallstreet.com/, at the principal office of the Exchange, and at the Commission’s Public Reference Room. 7 17 CFR 200.30–3(a)(31). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. II. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, the Exchange included statements concerning the purpose of and basis for 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. The Exchange 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 1. Purpose The Exchange is filing this proposal to adopt a new rule to clearly prohibit disruptive quoting and trading activity on the Exchange for the equities market and to amend Exchange Rules to permit the Exchange to take prompt action to suspend Members or their clients that violate such rule. Background As a national securities exchange registered pursuant to Section 6 of the Act, the Exchange is required to be organized and to have the capacity to enforce compliance by its members and persons associated with its members, with the Act, the rules and regulations thereunder, and the Exchange’s Rules. Further, the Exchange’s Rules are required to be ‘‘designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade . . . and, in general, to protect investors and the public interest.’’ 3 In fulfilling these requirements, the Exchange has developed a comprehensive regulatory program that includes automated surveillance of trading activity that is both operated directly by Exchange staff and by staff of the Financial Industry Regulatory Authority (‘‘FINRA’’) pursuant to a Regulatory Services Agreement (‘‘RSA’’). When disruptive and potentially manipulative or improper quoting and trading activity is identified, the Exchange or FINRA (acting as an agent of the Exchange) conducts an investigation into the activity, requesting additional information from the Member or Members involved. To the extent violations of the Act, the rules and regulations thereunder, or Exchange 1 15 VerDate Sep<11>2014 21:59 May 31, 2016 3 15 Jkt 238001 PO 00000 U.S.C. 78f(b)(1). Frm 00138 Fmt 4703 Sfmt 4703 Rules have been identified and confirmed, the Exchange or FINRA as its agent will commence the enforcement process, which might result in, among other things, a censure, a requirement to take certain remedial actions, one or more restrictions on future business activities, a monetary fine, or even a temporary or permanent ban from the securities industry. The process described above, from the identification of disruptive and potentially manipulative or improper quoting and trading activity to a final resolution of the matter, can often take several years. The Exchange believes that this time period is generally necessary and appropriate to afford the subject Member adequate due process, particularly in complex cases. However, as described below, the Exchange believes that there are certain obvious and uncomplicated cases of disruptive and manipulative behavior or cases where the potential harm to investors is so large that the Exchange should have the authority to initiate an expedited suspension proceeding in order to stop the behavior from continuing on the Exchange. In recent years, several cases have been brought and resolved by the Exchange and other SROs that involved allegations of wide-spread market manipulation, much of which was ultimately being conducted by foreign persons and entities using relatively rudimentary technology to access the markets and over which the Exchange and other SROs had no direct jurisdiction. In each case, the conduct involved a pattern of disruptive quoting and trading activity indicative of manipulative layering 4 or spoofing.5 The Exchange and other SROs were able to identify the disruptive quoting and trading activity in real-time or near realtime; nonetheless, in accordance with Exchange Rules and the Act, the Members responsible for such conduct or responsible for their customers’ conduct were allowed to continue the disruptive quoting and trading activity on the Exchange and other exchanges during the entirety of the subsequent 4 ‘‘Layering’’ is a form of market manipulation in which multiple, non-bona fide limit orders are entered on one side of the market at various price levels in order to create the appearance of a change in the levels of supply and demand, thereby artificially moving the price of the security. An order is then executed on the opposite side of the market at the artificially created price, and the nonbona fide orders are cancelled. 5 ‘‘Spoofing’’ is a form of market manipulation that involves the market manipulator placing nonbona fide orders that are intended to trigger some type of market movement and/or response from other market participants, from which the market manipulator might benefit by trading bona fide orders. E:\FR\FM\01JNN1.SGM 01JNN1 sradovich on DSK3TPTVN1PROD with NOTICES Federal Register / Vol. 81, No. 105 / Wednesday, June 1, 2016 / Notices lengthy investigation and enforcement process. The Exchange believes that it should have the authority to initiate an expedited suspension proceeding in order to stop the behavior from continuing on the Exchange if a Member is engaging in or facilitating disruptive quoting and trading activity and the Member has received sufficient notice with an opportunity to respond, but such activity has not ceased. The following two examples are instructive on the Exchange’s rationale for the proposed rule change. In July 2012, Biremis Corp. (formerly Swift Trade Securities USA, Inc.) (the ‘‘Firm’’) and its CEO were barred from the industry for, among other things, supervisory violations related to a failure by the Firm to detect and prevent disruptive and allegedly manipulative trading activities, including layering, short sale violations, and anti-money laundering violations.6 The Firm’s sole business was to provide trade execution services via a proprietary day trading platform and order management system to day traders located in foreign jurisdictions. Thus, the disruptive and allegedly manipulative trading activity introduced by the Firm to U.S. markets originated directly or indirectly from foreign clients of the Firm. The pattern of disruptive and allegedly manipulative quoting and trading activity was widespread across multiple exchanges, and the Exchange, FINRA, and other SROs identified clear patterns of the behavior in 2007 and 2008. Although the Firm and its principals were on notice of the disruptive and allegedly manipulative quoting and trading activity that was occurring, the Firm took little to no action to attempt to supervise or prevent such quoting and trading activity until at least 2009. Even when it put some controls in place, they were deficient and the pattern of disruptive and allegedly manipulative trading activity continued to occur. As noted above, the final resolution of the enforcement action to bar the Firm and its CEO from the industry was not concluded until 2012, four years after the disruptive and allegedly manipulative trading activity was first identified. In September of 2012, Hold Brothers On-Line Investment Services, Inc. (the ‘‘Firm’’) settled a regulatory action in connection with the Firm’s provision of a trading platform, trade software and trade execution, support and clearing 6 See Biremis Corp. and Peter Beck, FINRA Letter of Acceptance, Waiver and Consent No. 2010021162202, July 30, 2012. VerDate Sep<11>2014 21:59 May 31, 2016 Jkt 238001 services for day traders.7 Many traders using the Firm’s services were located in foreign jurisdictions. The Firm ultimately settled the action with FINRA and several exchanges, including the Exchange, for a total monetary fine of $3.4 million. In a separate action, the Firm settled with the Commission for a monetary fine of $2.5 million.8 Among the alleged violations in the case were disruptive and allegedly manipulative quoting and trading activity, including spoofing, layering, wash trading, and pre-arranged trading. Through its conduct and insufficient procedures and controls, the Firm also allegedly committed anti-money laundering violations by failing to detect and report manipulative and suspicious trading activity. The Firm was alleged to have not only provided foreign traders with access to the U.S. markets to engage in such activities, but that its principals also owned and funded foreign subsidiaries that engaged in the disruptive and allegedly manipulative quoting and trading activity. Although the pattern of disruptive and allegedly manipulative quoting and trading activity was identified in 2009, as noted above, the enforcement action was not concluded until 2012. Thus, although disruptive and allegedly manipulative quoting and trading was promptly detected, it continued for several years. The Exchange also notes the current criminal proceedings that have commenced against Navinder Singh Sarao. Mr. Sarao’s allegedly manipulative trading activity, which included forms of layering and spoofing in the futures markets, has been linked as a contributing factor to the ‘‘Flash Crash’’ of 2010, and yet continued through 2015. The Exchange believes that the activities described in the cases above provide justification for the proposed rule change, which is described below. Rule 9400—Expedited Client Suspension Proceeding The Exchange proposes to adopt new Rule 9400, which is currently reserved, to set forth procedures for issuing suspension orders, immediately prohibiting a Member from conducting continued disruptive quoting and trading activity on the Exchange. Importantly, these procedures would also provide the Exchange the authority to order a Member to cease and desist from providing access to the Exchange 7 See Hold Brothers On-Line Investment Services, LLC, FINRA Letter of Acceptance, Waiver and Consent No. 20100237710001, September 25, 2012. 8 In the Matter of Hold Brothers On-Line Investment Services, LLC, Exchange Act Release No. 67924, September 25, 2012. PO 00000 Frm 00139 Fmt 4703 Sfmt 4703 35107 to a client of the Member that is conducting disruptive quoting and trading activity in violation of proposed Rule 2170. Under proposed paragraph (a) of Rule 9400, with the prior written authorization of the Chief Regulatory Officer (‘‘CRO’’) or such other senior officers as the CRO may designate, the Office of General Counsel or Regulatory Department of the Exchange (such departments generally referred to as the ‘‘Exchange’’ for purposes of proposed Rule 9400) may initiate an expedited suspension proceeding with respect to alleged violations of Rule 2170, which is proposed as part of this filing and described in detail below. Proposed paragraph (a) would also set forth the requirements for notice and service of such notice pursuant to the Rule, including the required method of service and the content of notice. Proposed paragraph (b) of Rule 9400 would govern the appointment of a Hearing Panel as well as potential disqualification or recusal of Hearing Officers. The proposed provision is consistent with existing Exchange Rule 9231(b). The Exchange’s Rules provide for a Hearing Officer to be recused in the event he or she has a conflict of interest or bias or other circumstances exist where his or her fairness might reasonably be questioned in accordance with Rules 9233(a). In addition to recusal initiated by such a Hearing Officer, a party to the proceeding will be permitted to file a motion to disqualify a Hearing Officer. However, due to the compressed schedule pursuant to which the process would operate under Rule 9400, the proposed rule would require such motion to be filed no later than 5 days after the announcement of the Hearing Panel and the Exchange’s brief in opposition to such motion would be required to be filed no later than 5 days after service thereof. Pursuant to existing Rule 9233(c), a motion for disqualification of a Hearing Officer shall be decided by the Chief Hearing Officer based on a prompt investigation. The applicable Hearing Officer shall remove himself or herself and request the Chief Executive Officer to reassign the hearing to another Hearing Officer such that the Hearing Panel still meets the compositional requirements described in Rule 9231(b). If the Chief Hearing Officer determines that the Respondent’s grounds for disqualification are insufficient, it shall deny the Respondent’s motion for disqualification by setting forth the reasons for the denial in writing and the Hearing Panel will proceed with the hearing. Under paragraph (c) of the proposed Rule, the hearing would be held not E:\FR\FM\01JNN1.SGM 01JNN1 sradovich on DSK3TPTVN1PROD with NOTICES 35108 Federal Register / Vol. 81, No. 105 / Wednesday, June 1, 2016 / Notices later than 15 days after service of the notice initiating the suspension proceeding, unless otherwise extended by the Chairman of the Hearing Panel with the consent of the Parties for good cause shown. In the event of a recusal or disqualification of a Hearing Officer, the hearing shall be held not later than five days after a replacement Hearing Officer is appointed. Proposed paragraph (c) would also govern how the hearing is conducted, including the authority of Hearing Officers, witnesses, additional information that may be required by the Hearing Panel, the requirement that a transcript of the proceeding be created and details related to such transcript, and details regarding the creation and maintenance of the record of the proceeding. Proposed paragraph (c) would also state that if a Respondent fails to appear at a hearing for which it has notice, the allegations in the notice and accompanying declaration may be deemed admitted, and the Hearing Panel may issue a suspension order without further proceedings. Finally, as proposed, if the Exchange fails to appear at a hearing for which it has notice, the Hearing Panel may order that the suspension proceeding be dismissed. Under paragraph (d) of the proposed Rule, the Hearing Panel would be required to issue a written decision stating whether a suspension order would be imposed. The Hearing Panel would be required to issue the decision not later than 10 days after receipt of the hearing transcript, unless otherwise extended by the Chairman of the Hearing Panel with the consent of the Parties for good cause shown. The Rule would state that a suspension order shall be imposed if the Hearing Panel finds by a preponderance of the evidence that the alleged violation specified in the notice has occurred and that the violative conduct or continuation thereof is likely to result in significant market disruption or other significant harm to investors. Proposed paragraph (d) would also describe the content, scope and form of a suspension order. As proposed, a suspension order shall be limited to ordering a Respondent to cease and desist from violating proposed Rule 2170 and/or to ordering a Respondent to cease and desist from providing access to the Exchange to a client of Respondent that is causing violations of Rule 2170. Under the proposed rule, a suspension order shall also set forth the alleged violation and the significant market disruption or other significant harm to investors that is likely to result without the issuance of an order. The order shall describe in reasonable detail VerDate Sep<11>2014 21:59 May 31, 2016 Jkt 238001 the act or acts the Respondent is to take or refrain from taking, and suspend such Respondent unless and until such action is taken or refrained from. Finally, the order shall include the date and hour of its issuance. As proposed, a suspension order would remain effective and enforceable unless modified, set aside, limited, or revoked pursuant to proposed paragraph (e), as described below. Finally, paragraph (d) would require service of the Hearing Panel’s decision and any suspension order consistent with other portions of the proposed rule related to service. Proposed paragraph (e) of Rule 9400 would state that at any time after the Hearing Officers served the Respondent with a suspension order, a Party could apply to the Hearing Panel to have the order modified, set aside, limited, or revoked. If any part of a suspension order is modified, set aside, limited, or revoked, proposed paragraph (e) of Rule 9400 provides the Hearing Panel discretion to leave the cease and desist part of the order in place. For example, if a suspension order suspends Respondent unless and until Respondent ceases and desists providing access to the Exchange to a client of Respondent, and after the order is entered the Respondent complies, the Hearing Panel is permitted to modify the order to lift the suspension portion of the order while keeping in place the cease and desist portion of the order. With its broad modification powers, the Hearing Panel also maintains the discretion to impose conditions upon the removal of a suspension—for example, the Hearing Panel could modify an order to lift the suspension portion of the order in the event a Respondent complies with the cease and desist portion of the order but additionally order that the suspension will be re-imposed if Respondent violates the cease and desist provisions [sic] modified order in the future. The Hearing Panel generally would be required to respond to the request in writing within 10 days after receipt of the request. An application to modify, set aside, limit or revoke a suspension order would not stay the effectiveness of the suspension order. Finally, proposed paragraph (f) would provide that sanctions issued under the proposed Rule 9400 would constitute final and immediately effective disciplinary sanctions imposed by the Exchange, and that the right to have any action under the Rule reviewed by the Commission would be governed by Section 19 of the Act. The filing of an application for review would not stay the effectiveness of a suspension order PO 00000 Frm 00140 Fmt 4703 Sfmt 4703 unless the Commission otherwise ordered. Rule 2170—Disruptive Quoting and Trading Activity Prohibited The The Exchange currently has authority to prohibit and take action against manipulative trading activity, including disruptive quoting and trading activity, pursuant to its general market manipulation rules, including Rules 2110, 2111 and 2120. The Exchange proposes to adopt new Rule 2170, which would more specifically define and prohibit disruptive quoting and trading activity on the Exchange. As noted above, the Exchange also proposes to apply the proposed suspension rules to proposed Rule 2170. Proposed Rule 2170 would prohibit Members from engaging in or facilitating disruptive quoting and trading activity on the Exchange, as described in proposed Rule 2170(i) and (ii), including acting in concert with other persons to effect such activity. The Exchange believes that it is necessary to extend the prohibition to situations when persons are acting in concert to avoid a potential loophole where disruptive quoting and trading activity is simply split between several brokers or customers. The Exchange believes, that with respect to persons acting in concert perpetrating an abusive scheme, it is important that the Exchange have authority to act against the parties perpetrating the abusive scheme, whether it is one person or multiple persons. To provide proper context for the situations in which the Exchange proposes to utilize its proposed authority, the Exchange believes it is necessary to describe the types of disruptive quoting and trading activity that would cause the Exchange to use its authority. Accordingly, the Exchange proposes to adopt Rule 2170(i) and (ii) providing additional details regarding disruptive quoting and trading activity. Proposed Rule 2170(i)(a) describes disruptive quoting and trading activity containing many of the elements indicative of layering. It would describe disruptive quoting and trading activity as a frequent pattern in which the following facts are [sic] present: (i) A party enters multiple limit orders on one side of the market at various price levels (the ‘‘Displayed Orders’’); and (ii) following the entry of the Displayed Orders, the level of supply and demand for the security changes; and (iii) the party enters one or more orders on the opposite side of the market of the Displayed Orders (the ‘‘Contra-Side Orders’’) that are subsequently executed; and (iv) following the E:\FR\FM\01JNN1.SGM 01JNN1 sradovich on DSK3TPTVN1PROD with NOTICES Federal Register / Vol. 81, No. 105 / Wednesday, June 1, 2016 / Notices execution of the Contra-Side Orders, the party cancels the Displayed Orders. Proposed Rule 2170(i)(b) describes disruptive quoting and trading activity containing many of the elements indicative of spoofing and would describe disruptive quoting and trading activity as a frequent pattern in which the following facts are present: (i) A party narrows the spread for a security by placing an order inside the national best bid or offer; and (ii) the party then submits an order on the opposite side of the market that executes against another market participant that joined the new inside market established by the order described in proposed (b)(i) that narrowed the spread. The Exchange believes that the proposed descriptions of disruptive quoting and trading activity articulated in the rule are consistent with the activities that have been identified and described in the client access cases described above. The Exchange further believes that the proposed descriptions will provide Members with clear descriptions of disruptive quoting and trading activity that will help them to avoid engaging in such activities or allowing their clients to engage in such activities. The Exchange proposes to make clear in proposed Rule 2170(ii), unless otherwise indicated, the descriptions of disruptive quoting and trading activity do not require the facts to occur in a specific order in order for the rule to apply. For instance, with respect to the pattern defined in proposed Rule 2170(i)(a) it is of no consequence whether a party first enters Displayed Orders and then Contra-side Orders or vice-versa. However, as proposed, it is required for supply and demand to change following the entry of the Displayed Orders. The Exchange also proposes to make clear that disruptive quoting and trading activity includes a pattern or practice in which some portion of the disruptive quoting and trading activity is conducted on the Exchange and the other portions of the disruptive quoting and trading activity are conducted on one or more other exchanges. The Exchange believes that this authority is necessary to address market participants who would otherwise seek to avoid the prohibitions of the proposed Rule by spreading their activity amongst various execution venues. In sum, proposed Rule 2170 coupled with proposed Rule 9400 would provide the Exchange with authority to promptly act to prevent disruptive quoting and trading activity from continuing on the Exchange. Below is an example of how the proposed rule would operate. VerDate Sep<11>2014 21:59 May 31, 2016 Jkt 238001 Assume that through its surveillance program, Exchange staff identifies a pattern of potentially disruptive quoting and trading activity. After an initial investigation the Exchange would then contact the Member responsible for the orders that caused the activity to request an explanation of the activity as well as any additional relevant information, including the source of the activity. If the Exchange were to continue to see the same pattern from the same Member and the source of the activity is the same or has been previously identified as a frequent source of disruptive quoting and trading activity then the Exchange could initiate an expedited suspension proceeding by serving notice on the Member that would include details regarding the alleged violations as well as the proposed sanction. In such a case the proposed sanction would likely be to order the Member to cease and desist providing access to the Exchange to the client that is responsible for the disruptive quoting and trading activity and to suspend such Member unless and until such action is taken. The Member would have the opportunity to be heard in front of a Hearing Panel at a hearing to be conducted within 15 days of the notice. If the Hearing Panel determined that the violation alleged in the notice did not occur or that the conduct or its continuation would not have the potential to result in significant market disruption or other significant harm to investors, then the Hearing Panel would dismiss the suspension order proceeding. If the Hearing Panel determined that the violation alleged in the notice did occur and that the conduct or its continuation is likely to result in significant market disruption or other significant harm to investors, then the Hearing Panel would issue the order including the proposed sanction, ordering the Member to cease providing access to the client at issue and suspending such Member unless and until such action is taken. If such Member wished for the suspension to be lifted because the client ultimately responsible for the activity no longer would be provided access to the Exchange, then such Member could apply to the Hearing Panel to have the order modified, set aside, limited or revoked. The Exchange notes that the issuance of a suspension order would not alter the Exchange’s ability to further investigate the matter and/or later sanction the Member pursuant to the Exchange’s standard disciplinary process for supervisory violations or PO 00000 Frm 00141 Fmt 4703 Sfmt 4703 35109 other violations of Exchange rules or the Act. The Exchange reiterates that it already has broad authority to take action against a Member in the event that such Member is engaging in or facilitating disruptive or manipulative trading activity on the Exchange. For the reasons described above, and in light of recent cases like the client access cases described above, as well as other cases currently under investigation, the Exchange believes that it is equally important for the Exchange to have the authority to promptly initiate expedited suspension proceedings against any Member who has demonstrated a clear pattern or practice of disruptive quoting and trading activity, as described above, and to take action including ordering such Member to terminate access to the Exchange to one or more of such Member’s clients if such clients are responsible for the activity. The Exchange recognizes that its proposed authority to issue a suspension order is a powerful measure that should be used very cautiously. Consequently, the proposed rules have been designed to ensure that the proceedings are used to address only the most clear and serious types of disruptive quoting and trading activity and that the interests of Respondents are protected. For example, to ensure that proceedings are used appropriately and that the decision to initiate a proceeding is made only at the highest staff levels, the proposed rules require the CRO or another senior officer of the Exchange to issue written authorization before the Exchange can institute an expedited suspension proceeding. In addition, the rule by its terms is limited to violations of Rules 2170, when necessary to protect investors, other Members and the Exchange. The Exchange will initiate disciplinary action for violations of Rule 2170, pursuant to Rule 9400. Further, the Exchange believes that the proposed expedited suspension provisions described above that provide the opportunity to respond as well as a Hearing Panel determination prior to taking action will ensure that the Exchange would not utilize its authority in the absence of a clear pattern or practice of disruptive quoting and trading activity. Notwithstanding the adoption of the proposed rules along with existing disciplinary rules in the 9000 series, the Exchange also notes that that it may impose temporary restrictions upon the automated entry or updating of orders or quotes/orders as the Exchange may determine to be necessary to protect the integrity of the Exchange’s systems E:\FR\FM\01JNN1.SGM 01JNN1 35110 Federal Register / Vol. 81, No. 105 / Wednesday, June 1, 2016 / Notices pursuant to Rule 4611(c).9 Also, pursuant to Rule 9555(a)(2) 10 if a member, associated person, or other person cannot continue to have access to services offered by the Exchange or a member thereof with safety to investors, creditors, members, or the Exchange, the Exchange’s Regulation Department staff may provide written notice to such member or person limiting or prohibiting access to services offered by the Exchange or a member thereof. This ability to impose a temporary restriction upon Members assists the Exchange in maintaining the integrity of the market and protecting investors and the public interest. 2. Statutory Basis sradovich on DSK3TPTVN1PROD with NOTICES The Exchange believes that its proposal is consistent with Section 6(b) of the Act 11 in general, and furthers the objectives of Section 6(b)(5) of the Act 12 in particular, in that it is designed to promote just and equitable principles of trade, to remove impediments to and perfect the mechanism of a free and open market and a national market system, and, in general to protect investors and the public interest. Pursuant to the proposal, the Exchange will have a mechanism to promptly initiate expedited suspension proceedings in the event the Exchange believes that it has sufficient proof that a violation of Rule 2170 has occurred and is ongoing. Further, the Exchange believes that the proposal is consistent with Sections 6(b)(1) and 6(b)(6) of the Act,13 which require that the rules of an exchange enforce compliance with, and provide appropriate discipline for, violations of the Commission and Exchange rules. The Exchange also believes that the proposal is consistent with the public interest, the protection of investors, or otherwise in furtherance of the purposes of the Act because the proposal helps to strengthen the Exchange’s ability to carry out its oversight and enforcement responsibilities as a self-regulatory organization in cases where awaiting the conclusion of a full disciplinary proceeding is unsuitable in view of the potential harm to other Members and their customers. Also, the Exchange notes that if this type of conduct is 9 For example, such temporary restrictions may be necessary to address a system problem at a particular BX Market Maker, BX ECN or Order Entry Firm or at the Exchange, or an unexpected period of extremely high message traffic. 10 See Rule 9555, entitled ‘‘Failure to Meet the Eligibility or Qualification Standards or Prerequisites for Access to Services.’’ 11 15 U.S.C. 78f(b). 12 15 U.S.C. 78f(b)(5). 13 15 U.S.C. 78f(b)(1) and 78f(b)(6). VerDate Sep<11>2014 21:59 May 31, 2016 Jkt 238001 allowed to continue on the Exchange, the Exchange’s reputation could be harmed because it may appear to the public that the Exchange is not acting to address the behavior. The proposed expedited process would enable the Exchange to address the behavior with greater speed. As explained above, the Exchange notes that it has defined the prohibited disruptive quoting and trading activity by modifying the traditional definitions of layering and spoofing 14 to eliminate an express intent element that would not be proven on an expedited basis and would instead require a thorough investigation into the activity. As noted throughout this filing, the Exchange believes it is necessary for the protection of investors to make such modifications in order to adopt an expedited process rather than allowing disruptive quoting and trading activity to occur for several years. Through this proposal, the Exchange does not intend to modify the definitions of spoofing and layering that have generally been used by the Exchange and other regulators in connection with actions like those cited above. The Exchange believes that the pattern of disruptive and allegedly manipulative quoting and trading activity was widespread across multiple exchanges, and the Exchange, FINRA, and other SROs identified clear patterns of the behavior in 2007 and 2008 in the equities markets.15 The Exchange believes that this proposal will provide the Exchange with the necessary means to enforce against such behavior in an expedited manner while providing Members with the necessary due process. The Exchange believes that its proposal is consistent with the Act because it provides the Exchange with the ability to remove impediments to and perfect the mechanism of a free and open market and a national market system, and, in general to protect investors and the public interest from such ongoing behavior. The Exchange further believes that the proposal is consistent with Section 6(b)(7) of the Act,16 which requires that the rules of an exchange ‘‘provide a fair procedure for the disciplining of members and persons associated with members . . . and the prohibition or limitation by the exchange of any person with respect to access to services offered by the exchange or a member thereof.’’ Finally, the Exchange also believes the proposal is consistent with supra, notes 4 and 5. Section 3 herein, the Purpose section, for examples of conduct referred to herein. 16 15 U.S.C. 78f(b)(7). Sections 6(d)(1) and 6(d)(2) of the Act,17which require that the rules of an exchange with respect to a disciplinary proceeding or proceeding that would limit or prohibit access to or membership in the exchange require the exchange to: provide adequate and specific notice of the charges brought against a member or person associated with a member, provide an opportunity to defend against such charges, keep a record, and provide details regarding the findings and applicable sanctions in the event a determination to impose a disciplinary sanction is made. The Exchange believes that each of these requirements is addressed by the notice and due process provisions included within proposed Rule 9400. Importantly, as noted above, the Exchange will use the authority proposed in this filing only in clear and egregious cases when necessary to protect investors, other Members and the Exchange, and even in such cases, the Respondent will be afforded due process in connection with the suspension proceedings. B. Self-Regulatory Organization’s Statement on Burden on Competition The Exchange does not believe that the proposed rule change will impose any burden on competition not necessary or appropriate in furtherance of the purposes of the Act. To the contrary, the Exchange believes that each self-regulatory organization should be empowered to regulate trading occurring on their [sic] market consistent with the Act and without regard to competitive issues. The Exchange is requesting authority to take appropriate action if necessary for the protection of investors, other Members and the Exchange. The Exchange also believes that it is important for all exchanges to be able to take similar action to enforce its [sic] rules against manipulative conduct thereby leaving no exchange prey to such conduct. The Exchange does not believe that the proposed rule change imposes an undue burden on competition, rather this process will provide the Exchange with the necessary means to enforce against violations of manipulative quoting and trading activity in an expedited manner, while providing Members with the necessary due process. 14 See 15 See PO 00000 Frm 00142 Fmt 4703 Sfmt 4703 17 U.S.C. E:\FR\FM\01JNN1.SGM 78f(d)(1). 01JNN1 Federal Register / Vol. 81, No. 105 / Wednesday, June 1, 2016 / Notices C. Self-Regulatory Organization’s Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others No written comments were either solicited or received. III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action Because the foregoing proposed rule change does not: (i) significantly affect the protection of investors or the public interest; (ii) impose any significant burden on competition; and (iii) become operative for 30 days from the date on which it was filed, or such shorter time as the Commission may designate, it has become effective pursuant to Section 19(b)(3)(A)(iii) of the Act 18 and subparagraph (f)(6) of Rule 19b–4 thereunder.19 At any time within 60 days of the filing of the proposed rule change, the Commission summarily may temporarily suspend such rule change if it appears to the Commission that such action is: (i) necessary or appropriate in the public interest; (ii) for the protection of investors; or (iii) otherwise in furtherance of the purposes of the Act. If the Commission takes such action, the Commission shall institute proceedings to determine whether the proposed rule should be approved or disapproved. IV. Solicitation of Comments Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposal is consistent with the Act. 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 No. SR–BX– 2016–028 on the subject line. sradovich on DSK3TPTVN1PROD with NOTICES Paper Comments • Send paper comments in triplicate to Secretary, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549–1090. All submissions should refer to File No. SR–BX–2016–028. This file number 18 15 U.S.C. 78s(b)(3)(a)(iii). 19 17 CFR 240.19b–4(f)(6). In addition, Rule 19b– 4(f)(6) requires a self-regulatory organization to give the Commission written notice of its intent to file the proposed rule change at least five business days prior to the date of filing of the proposed rule change, or such shorter time as designated by the Commission. The Exchange has satisfied this requirement. VerDate Sep<11>2014 21:59 May 31, 2016 Jkt 238001 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/sro.shtml). Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule change that are filed with the Commission, and all written communications relating to the proposed rule change between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for Web site viewing and printing in the Commission’s Public Reference Room, 100 F Street NE., Washington, DC 20549, on official business days between the hours of 10:00 a.m. and 3:00 p.m. Copies of the filing also will be available for inspection and copying at the principal office of the Exchange. All comments received will be posted without change; the Commission does not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File No. SR–BX–2016– 028, and should be submitted on or before June 22, 2016. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.20 Brent J. Fields, Secretary. [FR Doc. 2016–12776 Filed 5–31–16; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–77903; File No. SR–MSRB– 2016–07] Self-Regulatory Organizations; Municipal Securities Rulemaking Board; Notice of Filing of a Proposed Rule Change Consisting of Proposed Amendments to MSRB Rule G–12, on Uniform Practice, Regarding Close-Out Procedures for Municipal Securities May 25, 2016. Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (the ‘‘Exchange Act’’ or ‘‘Act’’) 1 and Rule 19b–4 thereunder,2 notice is hereby given that on May 11, 2016, the 20 17 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 1 15 PO 00000 Frm 00143 Fmt 4703 Sfmt 4703 35111 Municipal Securities Rulemaking Board (the ‘‘MSRB’’ or ‘‘Board’’) filed with the Securities and Exchange Commission (the ‘‘SEC’’ or ‘‘Commission’’) the proposed rule change as described in Items I, II, and III below, which Items have been prepared by the MSRB. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change The MSRB filed with the Commission a proposed rule change consisting of proposed amendments to Rule G–12, on uniform practice, regarding close-out procedures for municipal securities (‘‘proposed rule change’’). The text of the proposed rule change is available on the MSRB’s Web site at www.msrb.org/Rules-andInterpretations/SEC-Filings/2016Filings.aspx, at the MSRB’s principal office, and at the Commission’s Public Reference Room. II. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, the MSRB 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. The MSRB has prepared summaries, set forth in Sections A, B, and C below, of the most significant aspects of such statements. A. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change 1. Purpose Background Rule G–12(h) 3 and the MSRB’s Manual on Close-Out Procedures 4 provide optional procedures that can be used by brokers, dealers, or municipal securities dealers (‘‘dealers’’) to close out open inter-dealer fail transactions. The rule currently allows the purchasing dealer to issue a notice of close-out to the selling dealer on any business day from five to 90 business days after the scheduled settlement date.5 Rule G–12(h) currently does not 3 See MSRB Rule G–12. Manual on Close-Out Procedures. 5 The purchasing dealer may initiate a close-out within 15 business days after a reclamation made under Rule G–12(g)(iii)(C) or G–12(g)(iii)(D), even 4 See Continued E:\FR\FM\01JNN1.SGM 01JNN1

Agencies

[Federal Register Volume 81, Number 105 (Wednesday, June 1, 2016)]
[Notices]
[Pages 35106-35111]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-12776]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-77914; File No. SR-BX-2016-028]


Self-Regulatory Organizations; NASDAQ BX, Inc.; Notice of Filing 
and Immediate Effectiveness of Proposed Rule Change To Provide a 
Process for an Expedited Suspension Proceeding and Adopt a Rule To 
Prohibit Disruptive Quoting and Trading Activity

May 25, 2016.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that on May 19, 2016, NASDAQ BX, Inc. (``BX'' or ``Exchange'') filed 
with the Securities and Exchange Commission (``Commission'') the 
proposed rule change as described in Items I, II and III below, which 
Items have been prepared by the Exchange. The Commission is publishing 
this notice to solicit comments on the proposed rule change from 
interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to adopt a new rule to adopt a new equity 
rule to clearly prohibit disruptive quoting and trading activity on the 
Exchange, as further described below. Further the Exchange proposes to 
amend Exchange Rules to permit the Exchange to take prompt action to 
suspend Members or their clients that violate such rule.
    The text of the proposed rule change is available on the Exchange's 
Web site at https://nasdaqomxbx.cchwallstreet.com/, at the principal 
office of the Exchange, and at the Commission's Public Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the Exchange 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. The Exchange 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

1. Purpose
    The Exchange is filing this proposal to adopt a new rule to clearly 
prohibit disruptive quoting and trading activity on the Exchange for 
the equities market and to amend Exchange Rules to permit the Exchange 
to take prompt action to suspend Members or their clients that violate 
such rule.
Background
    As a national securities exchange registered pursuant to Section 6 
of the Act, the Exchange is required to be organized and to have the 
capacity to enforce compliance by its members and persons associated 
with its members, with the Act, the rules and regulations thereunder, 
and the Exchange's Rules. Further, the Exchange's Rules are required to 
be ``designed to prevent fraudulent and manipulative acts and 
practices, to promote just and equitable principles of trade . . . and, 
in general, to protect investors and the public interest.'' \3\ In 
fulfilling these requirements, the Exchange has developed a 
comprehensive regulatory program that includes automated surveillance 
of trading activity that is both operated directly by Exchange staff 
and by staff of the Financial Industry Regulatory Authority (``FINRA'') 
pursuant to a Regulatory Services Agreement (``RSA''). When disruptive 
and potentially manipulative or improper quoting and trading activity 
is identified, the Exchange or FINRA (acting as an agent of the 
Exchange) conducts an investigation into the activity, requesting 
additional information from the Member or Members involved. To the 
extent violations of the Act, the rules and regulations thereunder, or 
Exchange Rules have been identified and confirmed, the Exchange or 
FINRA as its agent will commence the enforcement process, which might 
result in, among other things, a censure, a requirement to take certain 
remedial actions, one or more restrictions on future business 
activities, a monetary fine, or even a temporary or permanent ban from 
the securities industry.
---------------------------------------------------------------------------

    \3\ 15 U.S.C. 78f(b)(1).
---------------------------------------------------------------------------

    The process described above, from the identification of disruptive 
and potentially manipulative or improper quoting and trading activity 
to a final resolution of the matter, can often take several years. The 
Exchange believes that this time period is generally necessary and 
appropriate to afford the subject Member adequate due process, 
particularly in complex cases. However, as described below, the 
Exchange believes that there are certain obvious and uncomplicated 
cases of disruptive and manipulative behavior or cases where the 
potential harm to investors is so large that the Exchange should have 
the authority to initiate an expedited suspension proceeding in order 
to stop the behavior from continuing on the Exchange.
    In recent years, several cases have been brought and resolved by 
the Exchange and other SROs that involved allegations of wide-spread 
market manipulation, much of which was ultimately being conducted by 
foreign persons and entities using relatively rudimentary technology to 
access the markets and over which the Exchange and other SROs had no 
direct jurisdiction. In each case, the conduct involved a pattern of 
disruptive quoting and trading activity indicative of manipulative 
layering \4\ or spoofing.\5\ The Exchange and other SROs were able to 
identify the disruptive quoting and trading activity in real-time or 
near real-time; nonetheless, in accordance with Exchange Rules and the 
Act, the Members responsible for such conduct or responsible for their 
customers' conduct were allowed to continue the disruptive quoting and 
trading activity on the Exchange and other exchanges during the 
entirety of the subsequent

[[Page 35107]]

lengthy investigation and enforcement process. The Exchange believes 
that it should have the authority to initiate an expedited suspension 
proceeding in order to stop the behavior from continuing on the 
Exchange if a Member is engaging in or facilitating disruptive quoting 
and trading activity and the Member has received sufficient notice with 
an opportunity to respond, but such activity has not ceased.
---------------------------------------------------------------------------

    \4\ ``Layering'' is a form of market manipulation in which 
multiple, non-bona fide limit orders are entered on one side of the 
market at various price levels in order to create the appearance of 
a change in the levels of supply and demand, thereby artificially 
moving the price of the security. An order is then executed on the 
opposite side of the market at the artificially created price, and 
the non-bona fide orders are cancelled.
    \5\ ``Spoofing'' is a form of market manipulation that involves 
the market manipulator placing non-bona fide orders that are 
intended to trigger some type of market movement and/or response 
from other market participants, from which the market manipulator 
might benefit by trading bona fide orders.
---------------------------------------------------------------------------

    The following two examples are instructive on the Exchange's 
rationale for the proposed rule change.
    In July 2012, Biremis Corp. (formerly Swift Trade Securities USA, 
Inc.) (the ``Firm'') and its CEO were barred from the industry for, 
among other things, supervisory violations related to a failure by the 
Firm to detect and prevent disruptive and allegedly manipulative 
trading activities, including layering, short sale violations, and 
anti-money laundering violations.\6\ The Firm's sole business was to 
provide trade execution services via a proprietary day trading platform 
and order management system to day traders located in foreign 
jurisdictions. Thus, the disruptive and allegedly manipulative trading 
activity introduced by the Firm to U.S. markets originated directly or 
indirectly from foreign clients of the Firm. The pattern of disruptive 
and allegedly manipulative quoting and trading activity was widespread 
across multiple exchanges, and the Exchange, FINRA, and other SROs 
identified clear patterns of the behavior in 2007 and 2008. Although 
the Firm and its principals were on notice of the disruptive and 
allegedly manipulative quoting and trading activity that was occurring, 
the Firm took little to no action to attempt to supervise or prevent 
such quoting and trading activity until at least 2009. Even when it put 
some controls in place, they were deficient and the pattern of 
disruptive and allegedly manipulative trading activity continued to 
occur. As noted above, the final resolution of the enforcement action 
to bar the Firm and its CEO from the industry was not concluded until 
2012, four years after the disruptive and allegedly manipulative 
trading activity was first identified.
---------------------------------------------------------------------------

    \6\ See Biremis Corp. and Peter Beck, FINRA Letter of 
Acceptance, Waiver and Consent No. 2010021162202, July 30, 2012.
---------------------------------------------------------------------------

    In September of 2012, Hold Brothers On-Line Investment Services, 
Inc. (the ``Firm'') settled a regulatory action in connection with the 
Firm's provision of a trading platform, trade software and trade 
execution, support and clearing services for day traders.\7\ Many 
traders using the Firm's services were located in foreign 
jurisdictions. The Firm ultimately settled the action with FINRA and 
several exchanges, including the Exchange, for a total monetary fine of 
$3.4 million. In a separate action, the Firm settled with the 
Commission for a monetary fine of $2.5 million.\8\ Among the alleged 
violations in the case were disruptive and allegedly manipulative 
quoting and trading activity, including spoofing, layering, wash 
trading, and pre-arranged trading. Through its conduct and insufficient 
procedures and controls, the Firm also allegedly committed anti-money 
laundering violations by failing to detect and report manipulative and 
suspicious trading activity. The Firm was alleged to have not only 
provided foreign traders with access to the U.S. markets to engage in 
such activities, but that its principals also owned and funded foreign 
subsidiaries that engaged in the disruptive and allegedly manipulative 
quoting and trading activity. Although the pattern of disruptive and 
allegedly manipulative quoting and trading activity was identified in 
2009, as noted above, the enforcement action was not concluded until 
2012. Thus, although disruptive and allegedly manipulative quoting and 
trading was promptly detected, it continued for several years.
---------------------------------------------------------------------------

    \7\ See Hold Brothers On-Line Investment Services, LLC, FINRA 
Letter of Acceptance, Waiver and Consent No. 20100237710001, 
September 25, 2012.
    \8\ In the Matter of Hold Brothers On-Line Investment Services, 
LLC, Exchange Act Release No. 67924, September 25, 2012.
---------------------------------------------------------------------------

    The Exchange also notes the current criminal proceedings that have 
commenced against Navinder Singh Sarao. Mr. Sarao's allegedly 
manipulative trading activity, which included forms of layering and 
spoofing in the futures markets, has been linked as a contributing 
factor to the ``Flash Crash'' of 2010, and yet continued through 2015.
    The Exchange believes that the activities described in the cases 
above provide justification for the proposed rule change, which is 
described below.
Rule 9400--Expedited Client Suspension Proceeding
    The Exchange proposes to adopt new Rule 9400, which is currently 
reserved, to set forth procedures for issuing suspension orders, 
immediately prohibiting a Member from conducting continued disruptive 
quoting and trading activity on the Exchange. Importantly, these 
procedures would also provide the Exchange the authority to order a 
Member to cease and desist from providing access to the Exchange to a 
client of the Member that is conducting disruptive quoting and trading 
activity in violation of proposed Rule 2170. Under proposed paragraph 
(a) of Rule 9400, with the prior written authorization of the Chief 
Regulatory Officer (``CRO'') or such other senior officers as the CRO 
may designate, the Office of General Counsel or Regulatory Department 
of the Exchange (such departments generally referred to as the 
``Exchange'' for purposes of proposed Rule 9400) may initiate an 
expedited suspension proceeding with respect to alleged violations of 
Rule 2170, which is proposed as part of this filing and described in 
detail below. Proposed paragraph (a) would also set forth the 
requirements for notice and service of such notice pursuant to the 
Rule, including the required method of service and the content of 
notice.
    Proposed paragraph (b) of Rule 9400 would govern the appointment of 
a Hearing Panel as well as potential disqualification or recusal of 
Hearing Officers. The proposed provision is consistent with existing 
Exchange Rule 9231(b). The Exchange's Rules provide for a Hearing 
Officer to be recused in the event he or she has a conflict of interest 
or bias or other circumstances exist where his or her fairness might 
reasonably be questioned in accordance with Rules 9233(a). In addition 
to recusal initiated by such a Hearing Officer, a party to the 
proceeding will be permitted to file a motion to disqualify a Hearing 
Officer. However, due to the compressed schedule pursuant to which the 
process would operate under Rule 9400, the proposed rule would require 
such motion to be filed no later than 5 days after the announcement of 
the Hearing Panel and the Exchange's brief in opposition to such motion 
would be required to be filed no later than 5 days after service 
thereof. Pursuant to existing Rule 9233(c), a motion for 
disqualification of a Hearing Officer shall be decided by the Chief 
Hearing Officer based on a prompt investigation. The applicable Hearing 
Officer shall remove himself or herself and request the Chief Executive 
Officer to reassign the hearing to another Hearing Officer such that 
the Hearing Panel still meets the compositional requirements described 
in Rule 9231(b). If the Chief Hearing Officer determines that the 
Respondent's grounds for disqualification are insufficient, it shall 
deny the Respondent's motion for disqualification by setting forth the 
reasons for the denial in writing and the Hearing Panel will proceed 
with the hearing.
    Under paragraph (c) of the proposed Rule, the hearing would be held 
not

[[Page 35108]]

later than 15 days after service of the notice initiating the 
suspension proceeding, unless otherwise extended by the Chairman of the 
Hearing Panel with the consent of the Parties for good cause shown. In 
the event of a recusal or disqualification of a Hearing Officer, the 
hearing shall be held not later than five days after a replacement 
Hearing Officer is appointed. Proposed paragraph (c) would also govern 
how the hearing is conducted, including the authority of Hearing 
Officers, witnesses, additional information that may be required by the 
Hearing Panel, the requirement that a transcript of the proceeding be 
created and details related to such transcript, and details regarding 
the creation and maintenance of the record of the proceeding. Proposed 
paragraph (c) would also state that if a Respondent fails to appear at 
a hearing for which it has notice, the allegations in the notice and 
accompanying declaration may be deemed admitted, and the Hearing Panel 
may issue a suspension order without further proceedings. Finally, as 
proposed, if the Exchange fails to appear at a hearing for which it has 
notice, the Hearing Panel may order that the suspension proceeding be 
dismissed.
    Under paragraph (d) of the proposed Rule, the Hearing Panel would 
be required to issue a written decision stating whether a suspension 
order would be imposed. The Hearing Panel would be required to issue 
the decision not later than 10 days after receipt of the hearing 
transcript, unless otherwise extended by the Chairman of the Hearing 
Panel with the consent of the Parties for good cause shown. The Rule 
would state that a suspension order shall be imposed if the Hearing 
Panel finds by a preponderance of the evidence that the alleged 
violation specified in the notice has occurred and that the violative 
conduct or continuation thereof is likely to result in significant 
market disruption or other significant harm to investors.
    Proposed paragraph (d) would also describe the content, scope and 
form of a suspension order. As proposed, a suspension order shall be 
limited to ordering a Respondent to cease and desist from violating 
proposed Rule 2170 and/or to ordering a Respondent to cease and desist 
from providing access to the Exchange to a client of Respondent that is 
causing violations of Rule 2170. Under the proposed rule, a suspension 
order shall also set forth the alleged violation and the significant 
market disruption or other significant harm to investors that is likely 
to result without the issuance of an order. The order shall describe in 
reasonable detail the act or acts the Respondent is to take or refrain 
from taking, and suspend such Respondent unless and until such action 
is taken or refrained from. Finally, the order shall include the date 
and hour of its issuance. As proposed, a suspension order would remain 
effective and enforceable unless modified, set aside, limited, or 
revoked pursuant to proposed paragraph (e), as described below. 
Finally, paragraph (d) would require service of the Hearing Panel's 
decision and any suspension order consistent with other portions of the 
proposed rule related to service.
    Proposed paragraph (e) of Rule 9400 would state that at any time 
after the Hearing Officers served the Respondent with a suspension 
order, a Party could apply to the Hearing Panel to have the order 
modified, set aside, limited, or revoked. If any part of a suspension 
order is modified, set aside, limited, or revoked, proposed paragraph 
(e) of Rule 9400 provides the Hearing Panel discretion to leave the 
cease and desist part of the order in place. For example, if a 
suspension order suspends Respondent unless and until Respondent ceases 
and desists providing access to the Exchange to a client of Respondent, 
and after the order is entered the Respondent complies, the Hearing 
Panel is permitted to modify the order to lift the suspension portion 
of the order while keeping in place the cease and desist portion of the 
order. With its broad modification powers, the Hearing Panel also 
maintains the discretion to impose conditions upon the removal of a 
suspension--for example, the Hearing Panel could modify an order to 
lift the suspension portion of the order in the event a Respondent 
complies with the cease and desist portion of the order but 
additionally order that the suspension will be re-imposed if Respondent 
violates the cease and desist provisions [sic] modified order in the 
future. The Hearing Panel generally would be required to respond to the 
request in writing within 10 days after receipt of the request. An 
application to modify, set aside, limit or revoke a suspension order 
would not stay the effectiveness of the suspension order.
    Finally, proposed paragraph (f) would provide that sanctions issued 
under the proposed Rule 9400 would constitute final and immediately 
effective disciplinary sanctions imposed by the Exchange, and that the 
right to have any action under the Rule reviewed by the Commission 
would be governed by Section 19 of the Act. The filing of an 
application for review would not stay the effectiveness of a suspension 
order unless the Commission otherwise ordered.
Rule 2170--Disruptive Quoting and Trading Activity Prohibited
    The The Exchange currently has authority to prohibit and take 
action against manipulative trading activity, including disruptive 
quoting and trading activity, pursuant to its general market 
manipulation rules, including Rules 2110, 2111 and 2120. The Exchange 
proposes to adopt new Rule 2170, which would more specifically define 
and prohibit disruptive quoting and trading activity on the Exchange. 
As noted above, the Exchange also proposes to apply the proposed 
suspension rules to proposed Rule 2170.
    Proposed Rule 2170 would prohibit Members from engaging in or 
facilitating disruptive quoting and trading activity on the Exchange, 
as described in proposed Rule 2170(i) and (ii), including acting in 
concert with other persons to effect such activity. The Exchange 
believes that it is necessary to extend the prohibition to situations 
when persons are acting in concert to avoid a potential loophole where 
disruptive quoting and trading activity is simply split between several 
brokers or customers. The Exchange believes, that with respect to 
persons acting in concert perpetrating an abusive scheme, it is 
important that the Exchange have authority to act against the parties 
perpetrating the abusive scheme, whether it is one person or multiple 
persons.
    To provide proper context for the situations in which the Exchange 
proposes to utilize its proposed authority, the Exchange believes it is 
necessary to describe the types of disruptive quoting and trading 
activity that would cause the Exchange to use its authority. 
Accordingly, the Exchange proposes to adopt Rule 2170(i) and (ii) 
providing additional details regarding disruptive quoting and trading 
activity. Proposed Rule 2170(i)(a) describes disruptive quoting and 
trading activity containing many of the elements indicative of 
layering. It would describe disruptive quoting and trading activity as 
a frequent pattern in which the following facts are [sic] present: (i) 
A party enters multiple limit orders on one side of the market at 
various price levels (the ``Displayed Orders''); and (ii) following the 
entry of the Displayed Orders, the level of supply and demand for the 
security changes; and (iii) the party enters one or more orders on the 
opposite side of the market of the Displayed Orders (the ``Contra-Side 
Orders'') that are subsequently executed; and (iv) following the

[[Page 35109]]

execution of the Contra-Side Orders, the party cancels the Displayed 
Orders. Proposed Rule 2170(i)(b) describes disruptive quoting and 
trading activity containing many of the elements indicative of spoofing 
and would describe disruptive quoting and trading activity as a 
frequent pattern in which the following facts are present: (i) A party 
narrows the spread for a security by placing an order inside the 
national best bid or offer; and (ii) the party then submits an order on 
the opposite side of the market that executes against another market 
participant that joined the new inside market established by the order 
described in proposed (b)(i) that narrowed the spread. The Exchange 
believes that the proposed descriptions of disruptive quoting and 
trading activity articulated in the rule are consistent with the 
activities that have been identified and described in the client access 
cases described above. The Exchange further believes that the proposed 
descriptions will provide Members with clear descriptions of disruptive 
quoting and trading activity that will help them to avoid engaging in 
such activities or allowing their clients to engage in such activities.
    The Exchange proposes to make clear in proposed Rule 2170(ii), 
unless otherwise indicated, the descriptions of disruptive quoting and 
trading activity do not require the facts to occur in a specific order 
in order for the rule to apply. For instance, with respect to the 
pattern defined in proposed Rule 2170(i)(a) it is of no consequence 
whether a party first enters Displayed Orders and then Contra-side 
Orders or vice-versa. However, as proposed, it is required for supply 
and demand to change following the entry of the Displayed Orders. The 
Exchange also proposes to make clear that disruptive quoting and 
trading activity includes a pattern or practice in which some portion 
of the disruptive quoting and trading activity is conducted on the 
Exchange and the other portions of the disruptive quoting and trading 
activity are conducted on one or more other exchanges. The Exchange 
believes that this authority is necessary to address market 
participants who would otherwise seek to avoid the prohibitions of the 
proposed Rule by spreading their activity amongst various execution 
venues. In sum, proposed Rule 2170 coupled with proposed Rule 9400 
would provide the Exchange with authority to promptly act to prevent 
disruptive quoting and trading activity from continuing on the 
Exchange.
    Below is an example of how the proposed rule would operate.
    Assume that through its surveillance program, Exchange staff 
identifies a pattern of potentially disruptive quoting and trading 
activity. After an initial investigation the Exchange would then 
contact the Member responsible for the orders that caused the activity 
to request an explanation of the activity as well as any additional 
relevant information, including the source of the activity. If the 
Exchange were to continue to see the same pattern from the same Member 
and the source of the activity is the same or has been previously 
identified as a frequent source of disruptive quoting and trading 
activity then the Exchange could initiate an expedited suspension 
proceeding by serving notice on the Member that would include details 
regarding the alleged violations as well as the proposed sanction. In 
such a case the proposed sanction would likely be to order the Member 
to cease and desist providing access to the Exchange to the client that 
is responsible for the disruptive quoting and trading activity and to 
suspend such Member unless and until such action is taken.
    The Member would have the opportunity to be heard in front of a 
Hearing Panel at a hearing to be conducted within 15 days of the 
notice. If the Hearing Panel determined that the violation alleged in 
the notice did not occur or that the conduct or its continuation would 
not have the potential to result in significant market disruption or 
other significant harm to investors, then the Hearing Panel would 
dismiss the suspension order proceeding.
    If the Hearing Panel determined that the violation alleged in the 
notice did occur and that the conduct or its continuation is likely to 
result in significant market disruption or other significant harm to 
investors, then the Hearing Panel would issue the order including the 
proposed sanction, ordering the Member to cease providing access to the 
client at issue and suspending such Member unless and until such action 
is taken. If such Member wished for the suspension to be lifted because 
the client ultimately responsible for the activity no longer would be 
provided access to the Exchange, then such Member could apply to the 
Hearing Panel to have the order modified, set aside, limited or 
revoked. The Exchange notes that the issuance of a suspension order 
would not alter the Exchange's ability to further investigate the 
matter and/or later sanction the Member pursuant to the Exchange's 
standard disciplinary process for supervisory violations or other 
violations of Exchange rules or the Act.
    The Exchange reiterates that it already has broad authority to take 
action against a Member in the event that such Member is engaging in or 
facilitating disruptive or manipulative trading activity on the 
Exchange. For the reasons described above, and in light of recent cases 
like the client access cases described above, as well as other cases 
currently under investigation, the Exchange believes that it is equally 
important for the Exchange to have the authority to promptly initiate 
expedited suspension proceedings against any Member who has 
demonstrated a clear pattern or practice of disruptive quoting and 
trading activity, as described above, and to take action including 
ordering such Member to terminate access to the Exchange to one or more 
of such Member's clients if such clients are responsible for the 
activity.
    The Exchange recognizes that its proposed authority to issue a 
suspension order is a powerful measure that should be used very 
cautiously. Consequently, the proposed rules have been designed to 
ensure that the proceedings are used to address only the most clear and 
serious types of disruptive quoting and trading activity and that the 
interests of Respondents are protected. For example, to ensure that 
proceedings are used appropriately and that the decision to initiate a 
proceeding is made only at the highest staff levels, the proposed rules 
require the CRO or another senior officer of the Exchange to issue 
written authorization before the Exchange can institute an expedited 
suspension proceeding. In addition, the rule by its terms is limited to 
violations of Rules 2170, when necessary to protect investors, other 
Members and the Exchange. The Exchange will initiate disciplinary 
action for violations of Rule 2170, pursuant to Rule 9400. Further, the 
Exchange believes that the proposed expedited suspension provisions 
described above that provide the opportunity to respond as well as a 
Hearing Panel determination prior to taking action will ensure that the 
Exchange would not utilize its authority in the absence of a clear 
pattern or practice of disruptive quoting and trading activity.
    Notwithstanding the adoption of the proposed rules along with 
existing disciplinary rules in the 9000 series, the Exchange also notes 
that that it may impose temporary restrictions upon the automated entry 
or updating of orders or quotes/orders as the Exchange may determine to 
be necessary to protect the integrity of the Exchange's systems

[[Page 35110]]

pursuant to Rule 4611(c).\9\ Also, pursuant to Rule 9555(a)(2) \10\ if 
a member, associated person, or other person cannot continue to have 
access to services offered by the Exchange or a member thereof with 
safety to investors, creditors, members, or the Exchange, the 
Exchange's Regulation Department staff may provide written notice to 
such member or person limiting or prohibiting access to services 
offered by the Exchange or a member thereof. This ability to impose a 
temporary restriction upon Members assists the Exchange in maintaining 
the integrity of the market and protecting investors and the public 
interest.
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    \9\ For example, such temporary restrictions may be necessary to 
address a system problem at a particular BX Market Maker, BX ECN or 
Order Entry Firm or at the Exchange, or an unexpected period of 
extremely high message traffic.
    \10\ See Rule 9555, entitled ``Failure to Meet the Eligibility 
or Qualification Standards or Prerequisites for Access to 
Services.''
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2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act \11\ in general, and furthers the objectives of Section 
6(b)(5) of the Act \12\ in particular, in that it is designed to 
promote just and equitable principles of trade, to remove impediments 
to and perfect the mechanism of a free and open market and a national 
market system, and, in general to protect investors and the public 
interest. Pursuant to the proposal, the Exchange will have a mechanism 
to promptly initiate expedited suspension proceedings in the event the 
Exchange believes that it has sufficient proof that a violation of Rule 
2170 has occurred and is ongoing.
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    \11\ 15 U.S.C. 78f(b).
    \12\ 15 U.S.C. 78f(b)(5).
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    Further, the Exchange believes that the proposal is consistent with 
Sections 6(b)(1) and 6(b)(6) of the Act,\13\ which require that the 
rules of an exchange enforce compliance with, and provide appropriate 
discipline for, violations of the Commission and Exchange rules. The 
Exchange also believes that the proposal is consistent with the public 
interest, the protection of investors, or otherwise in furtherance of 
the purposes of the Act because the proposal helps to strengthen the 
Exchange's ability to carry out its oversight and enforcement 
responsibilities as a self-regulatory organization in cases where 
awaiting the conclusion of a full disciplinary proceeding is unsuitable 
in view of the potential harm to other Members and their customers. 
Also, the Exchange notes that if this type of conduct is allowed to 
continue on the Exchange, the Exchange's reputation could be harmed 
because it may appear to the public that the Exchange is not acting to 
address the behavior. The proposed expedited process would enable the 
Exchange to address the behavior with greater speed.
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    \13\ 15 U.S.C. 78f(b)(1) and 78f(b)(6).
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    As explained above, the Exchange notes that it has defined the 
prohibited disruptive quoting and trading activity by modifying the 
traditional definitions of layering and spoofing \14\ to eliminate an 
express intent element that would not be proven on an expedited basis 
and would instead require a thorough investigation into the activity. 
As noted throughout this filing, the Exchange believes it is necessary 
for the protection of investors to make such modifications in order to 
adopt an expedited process rather than allowing disruptive quoting and 
trading activity to occur for several years.
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    \14\ See supra, notes 4 and 5.
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    Through this proposal, the Exchange does not intend to modify the 
definitions of spoofing and layering that have generally been used by 
the Exchange and other regulators in connection with actions like those 
cited above. The Exchange believes that the pattern of disruptive and 
allegedly manipulative quoting and trading activity was widespread 
across multiple exchanges, and the Exchange, FINRA, and other SROs 
identified clear patterns of the behavior in 2007 and 2008 in the 
equities markets.\15\ The Exchange believes that this proposal will 
provide the Exchange with the necessary means to enforce against such 
behavior in an expedited manner while providing Members with the 
necessary due process. The Exchange believes that its proposal is 
consistent with the Act because it provides the Exchange with the 
ability to remove impediments to and perfect the mechanism of a free 
and open market and a national market system, and, in general to 
protect investors and the public interest from such ongoing behavior.
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    \15\ See Section 3 herein, the Purpose section, for examples of 
conduct referred to herein.
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    The Exchange further believes that the proposal is consistent with 
Section 6(b)(7) of the Act,\16\ which requires that the rules of an 
exchange ``provide a fair procedure for the disciplining of members and 
persons associated with members . . . and the prohibition or limitation 
by the exchange of any person with respect to access to services 
offered by the exchange or a member thereof.'' Finally, the Exchange 
also believes the proposal is consistent with Sections 6(d)(1) and 
6(d)(2) of the Act,\17\which require that the rules of an exchange with 
respect to a disciplinary proceeding or proceeding that would limit or 
prohibit access to or membership in the exchange require the exchange 
to: provide adequate and specific notice of the charges brought against 
a member or person associated with a member, provide an opportunity to 
defend against such charges, keep a record, and provide details 
regarding the findings and applicable sanctions in the event a 
determination to impose a disciplinary sanction is made. The Exchange 
believes that each of these requirements is addressed by the notice and 
due process provisions included within proposed Rule 9400. Importantly, 
as noted above, the Exchange will use the authority proposed in this 
filing only in clear and egregious cases when necessary to protect 
investors, other Members and the Exchange, and even in such cases, the 
Respondent will be afforded due process in connection with the 
suspension proceedings.
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    \16\ 15 U.S.C. 78f(b)(7).
    \17\ U.S.C. 78f(d)(1).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition not necessary or appropriate in 
furtherance of the purposes of the Act. To the contrary, the Exchange 
believes that each self-regulatory organization should be empowered to 
regulate trading occurring on their [sic] market consistent with the 
Act and without regard to competitive issues. The Exchange is 
requesting authority to take appropriate action if necessary for the 
protection of investors, other Members and the Exchange. The Exchange 
also believes that it is important for all exchanges to be able to take 
similar action to enforce its [sic] rules against manipulative conduct 
thereby leaving no exchange prey to such conduct.
    The Exchange does not believe that the proposed rule change imposes 
an undue burden on competition, rather this process will provide the 
Exchange with the necessary means to enforce against violations of 
manipulative quoting and trading activity in an expedited manner, while 
providing Members with the necessary due process.

[[Page 35111]]

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

    No written comments were either solicited or received.

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

    Because the foregoing proposed rule change does not: (i) 
significantly affect the protection of investors or the public 
interest; (ii) impose any significant burden on competition; and (iii) 
become operative for 30 days from the date on which it was filed, or 
such shorter time as the Commission may designate, it has become 
effective pursuant to Section 19(b)(3)(A)(iii) of the Act \18\ and 
subparagraph (f)(6) of Rule 19b-4 thereunder.\19\
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    \18\ 15 U.S.C. 78s(b)(3)(a)(iii).
    \19\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6) 
requires a self-regulatory organization to give the Commission 
written notice of its intent to file the proposed rule change at 
least five business days prior to the date of filing of the proposed 
rule change, or such shorter time as designated by the Commission. 
The Exchange has satisfied this requirement.
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is: (i) 
necessary or appropriate in the public interest; (ii) for the 
protection of investors; or (iii) otherwise in furtherance of the 
purposes of the Act. If the Commission takes such action, the 
Commission shall institute proceedings to determine whether the 
proposed rule should be approved or disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposal is 
consistent with the Act. 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 No. SR-BX-2016-028 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.

All submissions should refer to File No. SR-BX-2016-028. 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/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for Web site viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE., 
Washington, DC 20549, on official business days between the hours of 
10:00 a.m. and 3:00 p.m. Copies of the filing also will be available 
for inspection and copying at the principal office of the Exchange. All 
comments received will be posted without change; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File No. SR-BX-2016-028, and should be 
submitted on or before June 22, 2016.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\20\
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    \20\ 17 CFR 200.30-3(a)(12).
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Brent J. Fields,
Secretary.
[FR Doc. 2016-12776 Filed 5-31-16; 8:45 am]
BILLING CODE 8011-01-P
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