Commission Interpretation Regarding Automated Quotations Under Regulation NMS, 40785-40793 [2016-14876]
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AMD Products (China) Co. Ltd., North
and
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*
*
*
Dated: June 17, 2016.
Matthew S. Borman,
Deputy Assistant Secretary for Export
Administration.
ACTION:
DATES:
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SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–78102; File No. S7–03–16]
Commission Interpretation Regarding
Automated Quotations Under
Regulation NMS
16:58 Jun 22, 2016
Jkt 238001
Effective June 23, 2016.
Richard Holley III, Assistant Director,
Michael Bradley, Special Counsel, or
Michael Ogershok, Attorney-Adviser,
Office of Market Supervision, at 202–
551–5777, Division of Trading and
Markets, Securities and Exchange
Commission, 100 F Street NE.,
Washington, DC 20549–7010.
SUPPLEMENTARY INFORMATION:
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I. Background
FOR FURTHER INFORMATION CONTACT:
17 CFR Part 241
VerDate Sep<11>2014
Final interpretation.
The Securities and Exchange
Commission is issuing a final
interpretation with respect to the
definition of automated quotation under
Rule 600(b)(3) of Regulation NMS.
BILLING CODE 3510–33–P
Securities and Exchange
Commission.
*
SUMMARY:
[FR Doc. 2016–14902 Filed 6–22–16; 8:45 am]
AGENCY:
*
Rule 611 of Regulation NMS provides
intermarket protection against tradethroughs for ‘‘automated’’ (as opposed
to ‘‘manual’’) quotations of NMS stocks.
Under Regulation NMS, an ‘‘automated’’
quotation is one that, among other
things, can be executed ‘‘immediately
and automatically’’ against an incoming
immediate-or-cancel order. The
Regulation NMS Adopting Release
issued in 2005 makes clear that this
formulation was intended to distinguish
and exclude from protection quotations
on manual markets that produced
delays measured in seconds in
responding to an incoming order,
because delays of that magnitude would
impair fair and efficient access to an
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Federal Register / Vol. 81, No. 121 / Thursday, June 23, 2016 / Rules and Regulations
exchange’s quotations.1 In the
Regulation NMS Adopting Release, the
Commission interpreted the term
‘‘immediate’’ to ‘‘preclude[ ] any coding
of automated systems or other type of
intentional device that would delay the
action taken with respect to a
quotation.’’ 2
In light of the application of Investors’
Exchange LLC (‘‘IEX’’) 3 to register as an
exchange and technological and market
developments since the adoption of
Regulation NMS, the Commission
decided to revisit this interpretation.
The Commission believes its prior
interpretation should be updated given
technological and market developments
since the adoption of Regulation NMS,
in particular the emergence of low
latency trading strategies and related
technology that permit trading decisions
to be made in microseconds, neither of
which were contemplated by the
Commission or commenters in 2005.4
As further addressed below, the
Commission now interprets
‘‘immediate’’ in the context of
Regulation NMS as not precluding a de
minimis intentional delay—i.e., a delay
so short as to not frustrate the purposes
of Rule 611 by impairing fair and
efficient access to an exchange’s
quotations.5
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A. Regulation NMS: Automated
Quotation and Protected Quotation
In general, Rule 611 under Regulation
NMS (the ‘‘Order Protection Rule,’’ or
‘‘Trade-Through Rule’’) protects the best
‘‘automated’’ quotations of exchanges by
1 See Securities Exchange Act Release No. 51808
(June 9, 2005) 70 FR 37496, 37500 & n.21, 37501
(June 29, 2005) (‘‘Regulation NMS Adopting
Release’’). The Commission notes that the smallest
time increment suggested by commenters at the
time Regulation NMS was adopted was 250
milliseconds. See id. at 37518. See also infra note
15 (discussing the distinction between ‘‘automated
quotations’’ and ‘‘manual quotations’’ and noting
that ‘‘[t]he difference in speed between automated
and manual markets often is the difference between
a 1-second response and a 15-second response
. . . .’’).
2 See Regulation NMS Adopting Release, supra
note 1, at 37534.
3 See Securities Exchange Act Release Nos. 75925
(September 15, 2015), 80 FR 57261 (September 22,
2015) (File No. 10–222) (original notice); and 77406
(March 18, 2016), 81 FR 15765 (March 24, 2016)
(File No. 10–222) (notice of amendments, order
instituting proceedings, and extension of time).
4 IEX’s Form 1 includes an intentional access
delay that imposes 350 microseconds of one-way
latency for non-routable orders. IEX’s access delay
is discussed in the Commission’s final order on
IEX’s Form 1. See Securities Exchange Act Release
No. 78101 (June 17, 2016) (File No. 10–222) (order
granting IEX’s exchange registration) (‘‘IEX Form 1
Approval Order’’).
5 See Regulation NMS Adopting Release, supra
note 1, at 37520 (noting that ‘‘[f]or a trading center
to qualify as entitled to display any protected
quotations, the public in general must have fair and
efficient access to a trading center’s quotations’’).
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obligating other trading centers to honor
those ‘‘protected’’ quotations by not
executing trades at inferior prices, or
‘‘trading through’’ such best automated
quotations.6 Only an exchange that is an
‘‘automated trading center’’ 7 displaying
an ‘‘automated quotation’’ 8 is entitled to
this protection.9 Trading centers must
establish, maintain, and enforce written
policies and procedures that are
reasonably designed to prevent tradethroughs of protected quotations, unless
an exception or exemption applies.10
There are several provisions in
Regulation NMS that impact whether
the Order Protection Rule applies. First,
Rule 600(b)(58) defines a ‘‘protected
quotation’’ as a ‘‘protected bid or a
protected offer.’’ 11 Rule 600(b)(57), in
turn, defines a ‘‘protected bid or
protected offer’’ as a quotation in an
NMS stock that is: (i) Displayed by an
‘‘automated trading center,’’ (ii)
disseminated pursuant to an effective
national market system plan, and (iii) an
‘‘automated quotation’’ that is the best
bid or best offer of a national securities
6 See 17 CFR 242.611. When it adopted
Regulation NMS, the Commission explained that
one purpose of the Order Protection Rule was to
incentivize greater use of displayed limit orders,
which contribute to price discovery and market
liquidity, by protecting them from trade-throughs.
See Regulation NMS Adopting Release, supra note
1, at 37516–17. In discussing whether to apply
order protection to non-automated, ‘‘manual’’
quotations, the Commission stated that ‘‘providing
protection to manual quotations, even limited to
trade-throughs beyond a certain amount, potentially
would lead to undue delays in the routing of
investor orders, thereby not justifying the benefits
of price protection.’’ Id. at 37518. The Commission
also noted that ‘‘those who route limit orders will
be able to control whether their orders are protected
by evaluating the extent to which various trading
centers display automated versus manual
quotations.’’ Id. In addition, the Commission
intended that the Order Protection Rule would
reinforce a broker’s duty of best execution by
prohibiting executions at inferior prices absent an
exception. See id. at 37516 (‘‘Given the large
number of trades that fail to obtain the best
displayed prices (e.g., approximately 1 in 40 trades
for both Nasdaq and NYSE stocks), the Commission
is concerned that many of the investors that
ultimately received the inferior price in these trades
may not be aware that their orders did not, in fact,
obtain the best price. The Order Protection Rule
will backstop a broker’s duty of best execution on
an order-by-order basis by prohibiting the practice
of executing orders at inferior prices, absent an
applicable exception.’’).
7 See 17 CFR 242.600(b)(4). References to
‘‘exchange’’ used herein apply also to facilities of
national securities associations. See 17 CFR
242.600(b)(57).
8 See 17 CFR 242.600(b)(3).
9 See 17 CFR 242.600(b)(57) (defining ‘‘protected
bid or protected offer’’) and 242.600(b)(58) (defining
‘‘protected quotation’’). See also Regulation NMS
Adopting Release, supra note 1, at 37504 (stating
that ‘‘[t]o qualify for protection, a quotation must
be automated’’).
10 17 CFR 242.611(a)(1).
11 17 CFR 242.600(b)(58).
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exchange or national securities
association.12
In order for an exchange to operate as
an ‘‘automated trading center,’’ it must,
among other things, have ‘‘implemented
such systems, procedures, and rules as
are necessary to render it capable of
displaying quotations that meet the
requirements for an ‘automated
quotation’ set forth in [Rule 600(b)(3) of
Regulation NMS].’’ 13 Rule 600(b)(3)
defines an ‘‘automated quotation’’ as
one that:
i. Permits an incoming order to be
marked as immediate-or-cancel;
ii. Immediately and automatically
executes an order marked as immediateor-cancel against the displayed
quotation up to its full size;
iii. Immediately and automatically
cancels any unexecuted portion of an
order marked as immediate-or-cancel
without routing the order elsewhere;
iv. Immediately and automatically
transmits a response to the sender of an
order marked as immediate-or-cancel
indicating the action taken with respect
to such order; and
v. Immediately and automatically
displays information that updates the
displayed quotation to reflect any
change to its material terms.14
Any quotation that does not meet the
requirements for an automated
quotation is defined in Rule 600(b)(37)
as a ‘‘manual’’ quotation.15
12 17
CFR 242.600(b)(57).
CFR 242.600(b)(4). Rule 600(b)(4) contains
additional requirements that must be satisfied in
order to be an automated trading center. Those
requirements are not at issue for purposes of this
interpretation.
14 See 17 CFR 242.600(b)(3). See also Regulation
NMS Adopting Release, supra note 1, at 37504.
15 Regulation NMS Adopting Release, supra note
1, at 37534. See also 17 CFR 242.600(b)(37)
(defining ‘‘manual quotation’’). The Commission
also provided context as to the distinction between
‘‘automated quotations’’ and ‘‘manual quotations.’’
At the time of the adoption of Regulation NMS,
manual quotations and markets that primarily were
centered around human interaction in a floor-based
trading environment, including ‘‘hybrid’’ manualautomated trading facilities, experienced processing
delays for inbound orders that were measured in
multiple seconds. See Regulation NMS Adopting
Release, supra note 1, at 37500 n.21 (‘‘One of the
primary effects of the Order Protection Rule
adopted today will be to promote much greater
speed of execution in the market for exchange-listed
stocks. The difference in speed between automated
and manual markets often is the difference between
a 1-second response and a 15-second response
. . . .’’). In contrast to floor-based and hybrid
markets that existed at the time Regulation NMS
was adopted, newer automated matching systems
coming more widely into use removed the human
element and instead immediately matched buyers
and sellers electronically. The Commission also
explained that the Order Protection Rule took a
substantially different approach to intermarket
price protection than the existing trade-through
protection regime at the time—the Intermarket
Trading System (‘‘ITS’’) Plan. See id. at 37501. As
the Commission noted, the ITS provisions did not
13 17
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In adopting Regulation NMS, the
Commission recognized that there
would be unintentional time delays by
automated trading centers in responding
to orders, albeit very short ones.16
Although a number of commenters on
Regulation NMS advocated for a specific
time standard, ranging from one second
down to 250 milliseconds,17 to
distinguish between manual and
automated quotations,18 the
Commission declined to set such a
standard.19 Instead, in interpreting the
term ‘‘immediate[ ]’’ when adopting
Rules 600 and 611, the Commission
stated that ‘‘[t]he term ‘immediate’
precludes any coding of automated
systems or other type of intentional
device that would delay the action taken
with respect to a quotation.’’ 20
The only precise time standards
approved by the Commission in Rule
611 and the Regulation NMS Adopting
Release arise in the context of two
exceptions to Rule 611 covering
circumstances in which trade-through
protection would not apply. These
exceptions illustrate the time
dimensions the Commission had in
mind in distinguishing quotations that
should receive trade-through protection
from those that should not, and notably,
both use a one-second standard.21
distinguish between manual and automated
quotations and ‘‘fail[ed] to reflect the disparate
speed of response between manual and automated
quotations’’ as they ‘‘were drafted for a world of
floor-based markets.’’ Id. As a result, ‘‘[b]y requiring
order routers to wait for a response from a manual
market, the ITS trade-through provisions can cause
an order to miss both the best price of a manual
quotation and slightly inferior prices at automated
markets that would have been immediately
accessible.’’ Id. In addition, the Commission
emphasized that Rule 611 does not ‘‘supplant or
diminish’’ a broker-dealer’s duty of best execution.
See id. at 37538.
16 See infra note 23 and accompanying text
(discussing the exception in Rule 611(b)(1) for small
unintentional delays).
17 A millisecond is one thousandth of a second.
18 See Regulation NMS Adopting Release, supra
note 1, at 37519.
19 See id. at 37519 (‘‘The definition of automated
quotation as adopted does not set forth a specific
time standard for responding to an incoming
order.’’).
20 Id. at 37534. The Commission also stated that
the standard for responding to an incoming order
‘‘should be ‘immediate,’ i.e., a trading center’s
systems should provide the fastest response
possible without any programmed delay.’’ Id. at
37519. Further, the Commission also stated that, for
a quotation ‘‘[t]o qualify as ‘automatic,’ no human
discretion in determining any action taken with
respect to an order may be exercised after the time
an order is received,’’ and ‘‘a quotation will not
qualify as ‘automated’ if any human intervention
after the time an order is received is allowed to
determine the action taken with respect to the
quotation.’’ Id. at 37519 and 37534.
21 See 17 CFR 242.611(b)(1) and (8); see also
Regulation NMS Adopting Release, supra note 1, at
37519 (discussing the one-second standard in Rule
611(b)(1)) and id. at 37523 (discussing the one-
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Specifically, Rule 611(b)(1) provides
that trading centers may trade through
quotations of automated trading centers
that experience a ‘‘failure, material
delay, or malfunction.’’ 22 The
Commission accepted that the
‘‘immediate’’ standard necessarily
would accommodate unintentional
delays below the threshold of a
‘‘material delay,’’ which it interpreted in
light of ‘‘current industry conditions’’ as
one where a market was ‘‘repeatedly
failing to respond within one second
after receipt of an order.’’ 23 The
Commission similarly established a onesecond standard for the exception in
Rule 611(b)(8), which excepts tradethrough protection where the trading
center that was traded-through had
displayed, within the prior one second,
a price equal or inferior to the price of
the trade-through transaction.24 In
discussing the 611(b)(8) exception, the
Commission stated that it ‘‘generally
does not believe that the benefits would
justify the costs imposed on trading
centers of attempting to implement an
intermarket price priority rule at the
level of sub-second time increments.
Accordingly, Rule 611 has been
formulated to relieve trading centers of
this burden.’’ 25 In adopting these
exceptions to Rule 611, the Commission
contemplated the existence of very short
unintentional delays of a magnitude up
to one second that would not affect the
protected status of an ‘‘immediate’’
automated quotation. Since then, the
market and the technology have
evolved.
B. The Commission’s Updated
Interpretation of Automated Quotation
The Commission proposed to
interpret ‘‘immediate’’ when
determining whether a trading center
maintains an ‘‘automated quotation’’ for
purposes of Rule 611 ‘‘to include
response time delays at trading centers
that are de minimis, whether intentional
or not.’’ 26 The Commission further
second standard in Rule 611(b)(8)). One second is
1,000,000 microseconds.
22 17 CFR 242.611(b)(1).
23 See Regulation NMS Adopting Release, supra
note 1, at 37519. In other words, the Commission
viewed the phrase ‘‘fastest response possible’’ as
consistent with an unintentional delay of less than
one second whereby participants could consider an
automated trading center experiencing a delay
beyond that limit to no longer be ‘‘immediately’’
accessible.
24 See 17 CFR 242.611(b)(8).
25 Regulation NMS Adopting Release, supra note
1, at 37523.
26 Securities Exchange Act Release No. 77407
(March 18, 2016), 81 FR 15660, 15661 (March 24,
2016) (S7–03–16) (‘‘Notice of Proposed
Interpretation’’). Because IEX’s POP/coil delay is
designed purposefully and intentionally to delay
access to its matching engine, and consequently
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stated its preliminary belief ‘‘that, in the
current market, delays of less than a
millisecond in quotation response times
may be at a de minimis level that would
not impair a market participant’s ability
to access a quote, consistent with the
goals of Rule 611 and because such
delays are within the geographic and
technological latencies experienced by
market participants today.’’ 27 As
discussed below, the Commission
received a number of comments on its
proposed interpretation and, after
considering those comments, has
determined to issue a revised
interpretation from that which it
originally proposed, as detailed further
below.
II. Comments Received and
Commission Discussion
The Commission received 24
comments 28 on its proposed
delays access to IEX’s displayed quotation (See
Letter from Sophia Lee, IEX, to Brent J. Fields,
Secretary, Commission, dated November 13, 2015
(‘‘IEX First Form 1 Letter’’) at 4 (comment letter on
File No. 10–222)), IEX would not be an automated
market under the interpretation of ‘‘immediate’’ in
the Regulation NMS Adopting Release as ‘‘[t]he
term ‘immediate’ precludes any coding of
automated systems or other type of intentional
device that would delay the action taken with
respect a quotation.’’ Regulation NMS Adopting
Release, supra note 1, at 37534.
27 Notice of Proposed Interpretation, supra note
26, at 15665.
28 See Letters (‘‘Interp Letter(s)’’) from Rajiv Sethi
to Brent J. Fields, Secretary, Commission, dated
March 21, 2016; Stacius Sakato to Brent J. Fields,
Secretary, Commission, dated March 28, 2016;
David Lauer, Healthy Markets Association, to Brent
J. Fields, Secretary, Commission, dated April 1,
2016; Hazel Henderson, Ethical Markets Media, to
Brent J. Fields, Secretary, Commission, dated April
1, 2016; R.T. Leuchtkafer to Brent J. Fields,
Secretary, Commission, dated April 8, 2016; Sal
Arnuk and Joe Saluzzi, Themis Trading, to Brent J.
Fields, Secretary, Commission, dated April 12,
2016; R. Glenn Hubbard, John L. Thornton, and Hal
S. Scott, Committee on Capital Markets Regulation,
to Brent J. Fields, Secretary, Commission, dated
April 14, 2016; Mary Ann Burns, FIA Principal
Traders Group, to Brent J. Fields, Secretary,
Commission, dated April 14, 2016; William J.
Stephenson, Franklin Templeton Investments, to
Brent J. Fields, Secretary, Commission, dated April
14, 2016; John Nagel, Citadel, to Brent J. Fields,
Secretary, Commission, dated April 14, 2016; Eric
Budish to Brent J. Fields, Secretary, Commission,
dated April 14, 2016; Bryan Thompson, British
Columbia Investment Management Corporation, to
Brent J. Fields, Secretary, Commission, dated April
14, 2016; Adam Nunes, Hudson River Trading
(‘‘HRT’’), to Brent J. Fields, Secretary, Commission,
dated April 14, 2016; William R. Harts, Modern
Markets Initiative, to Brent J. Fields, Secretary,
Commission, dated April 14, 2016; Joan C. Conley,
Nasdaq, to Brent J. Fields, Secretary, Commission,
dated April 14, 2016; D. Keith Ross, PDQ
Enterprises, to Brent J. Fields, Secretary,
Commission, dated April 15, 2016; David
Weisberger, Markit, to Brent J. Fields, Secretary,
Commission, dated April 18, 2016; Elizabeth K.
King, NYSE, to Brent J. Fields, Secretary,
Commission, dated April 18, 2016; Kevin J. Weldon
to Brent J. Fields, Secretary, Commission, dated
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Federal Register / Vol. 81, No. 121 / Thursday, June 23, 2016 / Rules and Regulations
interpretation.29 Commenters raised a
number of issues, including whether
intentional sub-millisecond delays are
in fact de minimis or would materially
complicate market structure, as well as
requests to clarify the scope and details
of the interpretation.
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A. De minimis for Purposes of Rule 611
Several commenters questioned
whether de minimis intentional delays
were permissible and whether delays of
less than a millisecond could be
considered de minimis in the current
market. One commenter asserted that
any intentional delay, even a de
minimis one, ‘‘is flatly inconsistent with
the plain meaning of ‘immediate[ ],’ ’’ 30
referring to the dictionary definition of
that term as ‘‘ ‘[o]ccurring without delay’
or ‘instant’.’’ 31 Another commenter
asserted that ‘‘[o]ne millisecond is not
de minimis in any context except from
the perspective of a human trader’’ and
noted that a millisecond ‘‘is over 10
times longer than the response time of
most exchanges today.’’ 32 The
commenter believed that submillisecond delays would ‘‘impair a
market participant’s ability to access a
quote.’’ 33 Another commenter argued
April 20, 2016; Sophia Lee, IEX, to Brent J. Fields,
Secretary, Commission, dated April 25, 2016;
Abraham Kohen, AK Financial Engineering
Consultants, to Brent J. Fields, Secretary,
Commission, dated April 25, 2016; Theodore R.
Lazo, SIFMA, to Brent J. Fields, Secretary,
Commission, dated May 2, 2016; The Honorable
Randy Hultgren to Mary Jo White, Commission,
dated May 2, 2016; Amir C. Tayrani, Gibson, Dunn
& Crutcher LLP to Brent J. Fields, Secretary,
Commission, dated May 19, 2016.
29 As discussed and summarized in the
Commission’s notice of its proposed interpretation,
the Commission also received comments on the
issue addressed by this interpretation in response
to the initial notice of IEX’s Form 1. See Notice of
Proposed Interpretation, supra note 26, at 15660,
15663–64. Those comments are also discussed in
the Commission’s order approving IEX’s Form 1
application for exchange registration, which the
Commission is separately issuing today. See IEX
Form 1 Approval Order, supra note 4.
30 Gibson Dunn Interp Letter at 3.
31 Gibson Dunn Interp Letter at 2 (citing to Black’s
Law Dictionary and Webster’s Third New
International Dictionary).
32 HRT Interp Letter at 2. The commenter further
noted that one millisecond is ‘‘approximately three
times the time via fiber between the furthest New
Jersey data centers and approximately 1⁄8th the time
to Chicago via fiber from the New Jersey
datacenters.’’ Id. at 2–3.
33 HRT Interp Letter at 2. This commenter also
cited to the Commission’s MIDAS data from the
fourth quarter of 2015, which showed that over
13% of displayed orders in large stocks are
cancelled within one millisecond and over 9% of
displayed orders in large stocks are executed within
one millisecond, and concluded that ‘‘[g]iven that
over 20% of orders are either executed or canceled
during the first millisecond they were displayed, it
seems likely that a one millisecond delay would
have a material impact on a participant’s ability to
access the quotations.’’ See id. The commenter
qualified its observation by noting that these figures
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that a millisecond is ‘‘excessively long
when compared to computer response
times.’’ 34 One commenter believed that
a sub-millisecond standard ‘‘will
become obsolete at faster and faster
rates’’ as communications technology
evolves.35
Other commenters expressed concern
that intentional access delays, even de
minimis ones, could add unnecessary
complexity to the markets. In particular,
the commenters stressed that such
delays could cause orders to be routed
to protected quotes that are no longer
available. For example, one commenter
expressed concern that the proposed
interpretation could turn the national
market system ‘‘into a hall of mirrors
where it’s impossible to know which
prices are real and which are latent
reflections.’’ 36 The commenter opined
that intentional access delays would
are relevant ‘‘[t]o the extent that a market with
similar order cancellation patterns implemented a
one millisecond delay.’’ See id. The commenter also
recommended that an exchange that imposes an
intentional delay ‘‘allow market participants to
bypass the delay when attempting to access
‘protected quotations’.’’ Id. at 1–2. See also Citadel
Interp Letter at 4 (‘‘A time interval in which
approximately 10% of executions in many of the
most widely traded stocks typically occur is
manifestly not de minimis.’’); NYSE Interp Letter at
7. The Commission notes that it is not clear whether
an exchange with an access delay that does not offer
features (like co-location, post-only orders, or
maker-taker fees) that typically attract latencysensitive traders, who may be more likely to cancel
their orders within one millisecond of placing
them, would experience those cancellation rates.
Further, the Commission notes that Rule 611
focuses on inter-market order protection, which
applies only when market participants access
protected quotations at geographically dispersed
trading centers that are already subject to varying
processing delays, some of which may be a
millisecond or more. A one millisecond intentional
access delay is well within the current geographic
and technological latencies already experienced by
market participants when routing orders between
trading centers.
34 FIA PTG Interp Letter at 3. The commenter
further noted that ‘‘[f]or comparison, modern
exchange matching engines process orders in
considerably less than 1⁄20 of that time, and
geographic latencies between the major exchange
data centers in New Jersey are generally less than
1⁄4 of that time.’’ Id. See also Nasdaq Interp Letter
at 6 (noting that the throughput time of Nasdaq’s
system is 40 microseconds); Kohen Interp Letter at
1 (noting that the Bombay Stock Exchange
processes a transaction in 6 microseconds).
35 See Nasdaq Interp Letter at 3. See also HRT
Interp Letter at 3 (noting that ‘‘a one millisecond
time standard . . . is already obsolete’’); FIA PTG
Interp Letter at 6 (‘‘One millisecond is slow by
today’s computer standards, and will be even
slower (relatively speaking) in the future.’’). Some
commenters criticized the proposed interpretation
as lacking empirical support for a sub-millisecond
threshold or consideration of alternative delays. See
Nasdaq Interp Letter at 4; Citadel Interp Letter at 3;
Budish Interp Letter at 2. As discussed above, the
Commission notes that the interpretation uses a de
minimis standard, and not a specific time frame
demarcating permissible versus impermissible
access delays.
36 FIA PTG Interp Letter at 2.
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‘‘harm market transparency and degrade
the value of the NBBO’’ and ‘‘lead
directly to lower fill rates’’ when orders
cannot be filled because the exchange
with an access delay displays a stale
better-priced quote that no longer exists
but has yet to communicate that
information.37 Another commenter
argued that the interpretation could
make market structure ‘‘considerably
more complex’’ and lead to ‘‘ghost
quotes’’ that could ‘‘cloud price
discovery and corrode execution
quality.’’ 38 The commenter further
noted that ‘‘an artificial delay in an
exchange quote anywhere affects the
markets everywhere’’ and expressed
concern that the proposed interpretation
could negatively impact otherwise
efficient and accessible markets.39 One
commenter expressed concern that
intentional delays might ‘‘open the
floodgates to a new wave of complex
order types’’ with delays ranging from 1
to 1,000 microseconds.40 Other
commenters, however, opined that
intentional access delays would not add
complexity to the markets and would fit
within current latencies experienced by
trading centers. For example, one
commenter asserted that a 350
microsecond delay is ‘‘not much more
than the normal latency that all trading
platforms impose,’’ and that an
exchange could achieve the same delay
by ‘‘locat[ing] its primary data center 65
or more miles away from the other
exchange data centers.’’ 41
In response to a comment that the
dictionary definition of the term
‘‘immediate[ ]’’ precludes any delay in
accessing quotations, the Commission
notes that quotations cannot be accessed
37 FIA PTG Interp Letter at 5. The commenter
argued that this might result in the appearance of
more locked and crossed markets, which may
interfere with market stability during periods of
high volatility. See id.
38 PDQ Interp Letter at 1.
39 Id. at 2.
40 Nasdaq Interp Letter at 3–4; Gibson Dunn
Interp Letter at 7.
41 Letter from James J. Angel to Securities and
Exchange Commission, dated December 5, 2015, at
3 (comment letter on IEX Form 1, File No. 10–222).
See also Letter from Larry Tabb, TABB Group, to
Brent J. Fields, Secretary, Commission, dated
November 23, 2015, at 1 (comment letter on IEX
Form 1, File No. 10–222) (arguing that IEX’s 350
microsecond delay is not ‘‘particularly problematic,
as the time gap is minimal, and (even including the
speed bump) IEX matches orders faster than a
number of other markets’’); Letter from Charles M.
Jones to Brent Fields, Secretary, Commission, dated
March 2, 2016, at 2 (comment letter on IEX Form
1, File No. 10–222) (noting that ‘‘from an economic
point of view the 350-microsecond delay [proposed
by IEX] per se should not be a particular cause for
concern, as it is well within the bounds of the
existing, geographically dispersed National Market
System, and does not seem likely to contribute
substantially to a phantom liquidity problem’’).
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instantaneously.42 As the Commission
repeatedly acknowledged when
adopting Regulation NMS, even
‘‘immediately’’ accessible protected
quotations in the context of Rules 600
and 611 are necessarily subject to some
delay.43 Specifically, as noted above, the
Regulation NMS Adopting Release
discussed these delays and, although
the Commission declined to set a
specific time standard, it contemplated
the existence of very short unintentional
delays of a magnitude up to one second
in the exceptions to Rule 611.
The Commission notes that, when it
adopted Regulation NMS in 2005,
processing times were longer than they
are now.44 Today, low latency
technology permits trading decisions to
be made in microseconds, and certain
market participants use the fastest
gateways and purchase co-location to
compete to access quotations at those
speeds.45 As discussed further below,
however, even the fastest market
participants today must access protected
quotations on trading centers where
there are delays of several milliseconds
as a result of geography alone. In
addition, trading centers today are
attempting to address concerns with the
fastest trading strategies by creating very
small delays in accessing their
42 See supra note 31 (citing to the Gibson Dunn
Interp Letter).
43 For example, the Rule 611(b)(1) exception
refers to a ‘‘material’’ delay, which the Commission
interpreted as one second or more. See Regulation
NMS Adopting Release, supra note 1, at 37519. In
addition, the comment letters on Regulation NMS
expressed a multitude of views on the appropriate
standard for assessing the accessibility of a
protected quotation. See also supra text
accompanying note 17 (noting that commenters on
Regulation NMS who advocated for setting a
specific time standard for automated quotations
recommended a range of times from one second
down to 250 milliseconds).
44 See supra text accompanying note 17 (noting
that commenters on Regulation NMS who
advocated for setting a specific time standard for
automated quotations recommended a range of
times from one second down to 250 milliseconds).
45 Exchanges currently have delays within their
systems, including access gateways of varying
speeds as well as within their co-location
infrastructure. For example, some exchanges
intentionally employ a ‘‘delay coil’’ in their colocation facilities or offer different access gateways
of varying speeds where one is not as ‘‘fast as
technologically feasible’’ as the other. See IEX First
Form 1 Letter at 3 (comment letter on File No. 10–
222) (referring to varying connectivity options
offered by exchanges from the NYSE, Nasdaq, and
BATS groups, and citing the CEO of Nasdaq
referring to the intentional ‘‘delay coil’’ that Nasdaq
uses inside its co-location infrastructure). Compare
Gibson Dunn Interp Letter at 3 (writing on behalf
of Nasdaq) (stating ‘‘the term ‘immediate[]’ in Rule
600(b)(3) unambiguously forecloses intentional,
planned delay’’ and referring to ‘‘the Commission’s
own understanding that the term [immediately]
requires response times that are as fast as
technologically feasible’’).
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quotations.46 The Commission does not
agree that such efforts are incompatible
with the Order Protection Rule. In the
context of Regulation NMS, the term
‘‘immediate’’ does not preclude all
intentional delays regardless of their
duration, and such preclusion is not
necessary to achieve the objectives of
Rule 611. As long as any intentional
delay is de minimis—i.e., does not
impair fair and efficient access to an
exchange’s protected quotations—it is
consistent with both the text and
purpose of Rule 611.
In response to commenters that
argued that an intentional de minimis
delay would harm market transparency,
degrade the NBBO, or cloud price
discovery, the Commission notes, as
discussed further below, that Rule
600(b)(3)(v) requires trading centers to
immediately update their displayed
quotations to reflect material changes.
Market participants today already
necessarily experience very short delays
in receiving updates to displayed
quotations, as a result of geographic and
technological latencies, similar to those
experienced when accessing protected
quotations. The Commission does not
believe the introduction of intentional
delays of even smaller magnitude will
impair fair and efficient access to
protected quotations.
In response to commenters’ concern
that an intentional delay is not de
minimis or could add complexity to the
market, the Commission notes that its
interpretation does not address whether
delays are de minimis in all trading
contexts, but rather only whether they
impair fair and efficient access to an
exchange’s quotations when a market
participant routes an order to comply
with Rule 611.
Systems processing and transit times,
whether at the exchange, the market
participant sending the order, or its
agent, all create latencies in accessing
protected quotations.47 Even the most
technologically advanced market
participants today encounter delays in
accessing protected quotations of other
‘‘away’’ automated trading centers that
either are transitory (e.g., as a result of
message queuing) or permanent (e.g., as
a result of physical distance).
Furthermore, as noted above, any
market participant co-located with the
major exchanges’ data centers in
northern New Jersey necessarily
encounters delays of 3–4 milliseconds—
due to geography alone—in accessing
46 See, e.g., supra note 45 (discussing intentional
delays imposed in the exchange co-location
context).
47 See supra note 34 (discussing comments on
exchange processing times).
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40789
the protected quotations of securities
traded on the Chicago Stock Exchange’s
matching engine in Chicago.48 No
commenter asserted that the periodic
message queuing or minor systemsprocessing delays encountered at
exchanges with protected quotations, or
the time it takes to access the protected
quotes of the Chicago Stock Exchange’s
Chicago facility, would, for example,
materially undermine market quality or
price transparency, or the efficiency of
order routing or trading strategies.49
The Commission acknowledges that
interpreting ‘‘immediate’’ to include an
intentional de minimis access delay,
because it would be additive, may
increase the overall latency in accessing
a particular protected quotation, albeit
by a very small amount. Such delays
may be a detectable difference for the
most latency-sensitive market
participants and could marginally
impact the efficiency of some of their
quoting and trading strategies, even if
such intervals likely are immaterial to
investors with less advanced trading
technology or a longer-term investing
horizon. But the Commission believes
that just as the geographic and
technological delays experienced today
do not impair fair and efficient access to
an exchange’s quotations or otherwise
frustrate the objectives of Rule 611, the
addition of a de minimis intentional
access delay is consistent with Rule
600(b)(3)’s ‘‘immedia[cy]’’
requirement.50
48 Similarly, they would encounter delays in
reaching other ‘‘away’’ exchanges located in other
data centers. See, e.g., Letter from David Lauer,
Healthy Markets Association, to Brent J. Fields,
Secretary, Commission, dated November 6, 2015, at
4 (comment letter on IEX Form 1, File No. 10–222)
(noting that ‘‘[t]he NBBO already includes quotes
with varied degrees of time lag’’ and that the length
of IEX’s coiled cable ‘‘is far less than the distance
between NY and Chicago, and is remarkably similar
to the distance between Carteret and Mahwah (36
miles)’’); Letter from Sophia Lee, IEX, to Brent J.
Fields, Secretary, Commission, dated November 23,
2016, at 4 and 7 (comment letter on IEX Form 1,
File No. 10–222) (referring to data from certain
subscribers to IEX’s ATS that, according to IEX,
indicate that those subscribers’ average latency
when trading on IEX is comparable to that when
trading on certain other exchanges, ‘‘is an order of
magnitude less than that of the Chicago Stock
Exchange,’’ and ‘‘is on average less than the roundtrip latency of the NYSE as well’’).
49 From the perspective of a market participant
based in New Jersey, classifying a New Jersey
market with an intentional sub-millisecond delay as
‘‘manual’’ while classifying a Chicago market with
geographic delay measured in multiple
milliseconds as ‘‘automated’’ would be inequitable
and would not further the goals of Regulation NMS.
50 One commenter argued that there is ‘‘no
evidence of a need for a de minimis exception or
that planned delays will benefit investors in any
meaningful way.’’ Gibson Dunn Interp Letter at 7.
See also Nasdaq Interp Letter at 5. As discussed
above, however, the Commission believes that its
updated interpretation is warranted in light of
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Further, the Commission notes that its
interpretation uses a de minimis
standard specifically so that it may
evolve with technological and market
developments. As it did when it
established the ‘‘immediate’’ standard,
the Commission believes it remains
appropriate to avoid ‘‘specifying a
specific time standard that may become
obsolete as systems improve over
time.’’ 51 As explained further below,
the Commission’s revised interpretation
provides that the term ‘‘immediate’’
precludes any coding of automated
systems or other type of intentional
device that would delay the action taken
with respect to a quotation unless such
delay is de minimis in that it would not
impair a market participant’s ability to
fairly and efficiently access a quote,
consistent with the goals of Rule 611.
B. Operation of Access Delays
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Several commenters that expressed
general concerns with an intentional
access delay, even a de minimis one,
expressed a particular concern with
those that would be ‘‘selectively’’
applied (e.g., intentional delays that are
applied to members but not to the
exchange itself).52 In addition, several
commenters asserted that the
Commission’s proposed interpretation
was overbroad based on their belief that
it would ‘‘permit all sub-millisecond
delays, regardless of how those delays
operate, the reasoning and incentives
behind the delays, or the impacts on the
markets and investors.’’ 53 These
commenters instead urged the
Commission to ‘‘evaluate each proposed
delay, regardless of its duration, and
specifically determine that it is designed
and applied in a manner that is
consistent with the purposes of the
Exchange Act.’’ 54 Another commenter
technological and market developments and is
consistent with the purposes of Rule 611. See also
comments submitted on IEX’s exchange registration
(File No. 10–222), a number of which supported the
intentional delay proposed by IEX.
51 Regulation NMS Adopting Release, supra note
1, at 37519.
52 See, e.g., FIA PTG Interp Letter at 6; MMI
Interp Letter at 1; Weldon Interp Letter at 1–2.;
NYSE Interp Letter at 4; Citadel Interp Letter at 8;
Markit Interp Letter at 2–3.
53 Healthy Markets Interp Letter at 2. See also
Ethical Markets Interp Letter at 2–3, Franklin
Templeton Interp Letter, British Columbia
Investment Management Corporation Interp Letter
(each repeating the recommendation of the Healthy
Markets Interp Letter); and Themis Interp Letter at
2.
54 Healthy Markets Interp Letter at 3. See also
Ethical Markets Interp Letter at 2–3, Franklin
Templeton Interp Letter, and British Columbia
Investment Management Corporation Interp Letter
(each repeating the recommendation of the Healthy
Markets Interp Letter). The commenters further
urged that the interpretation be conditioned on: (1)
Delays always being less than one millisecond; (2)
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urged the Commission to ‘‘take into
account not just the length of the delay,
but also its purpose.’’ 55
The Commission notes that this
interpretation does not address whether
any particular access delay is unfairly
discriminatory, an inappropriate or
unnecessary burden on competition, or
otherwise inconsistent with the Act.
Rather, it clarifies that if an intentional
access delay is de minimis, then it is
‘‘immediate’’ for purposes of Rules
600(b)(3) and 611. While the
Commission’s interpretation is narrowly
focused on the meaning and application
of the word ‘‘immediate[ ]’’ in Rule
600(b)(3) in light of technological and
market developments since the adoption
of Regulation NMS in 2005, the
evaluation of any proposed access delay
would involve additional
considerations.
Specifically, this interpretation does
not obviate the requirement of
individualized review of proposed
access delays, including de minimis
delays, for consistency with the
Exchange Act and Regulation NMS. Any
exchange seeking to impose an access
delay must reflect that in its rules,
which are required to be filed with the
Commission as part of the exchange
application or as an individual
proposed rule change. This
interpretation does not alter the
requirement that any exchange access
delay must be fully described in a
written rule of the exchange, which in
delays being applied equally to all participants and
across all order types; (3) data sent to the Securities
Information Processors should not be delayed; and
(4) the purpose of each delay is expressly stated and
intended to benefit long-term investors. See Healthy
Markets Interp Letter at 4. See also Ethical Markets
Interp Letter at 2–3, Franklin Templeton Interp
Letter, and British Columbia Investment
Management Corporation Interp Letter (each
repeating the recommendation of the Healthy
Markets Interp Letter). Another commenter raised a
similar concern, and urged the Commission to
review each proposed access delay separately and
‘‘ensure that any such delays are equally applied to
all market participants.’’ See Committee on Capital
Markets Regulation Interp Letter at 2. One
commenter urged the Commission to consider ‘‘one
single measuring stick: Will the proposed delay
serve long term investors?’’ Themis Interp Letter at
2.
55 Sethi Interp Letter at 2 (emphasis in original).
Another commenter suggested an alternative
definition of ‘‘immediate’’ that is not ‘‘elapsed-time
dependent’’ but instead would consider an
exchange’s response to an incoming order to be
‘‘immediate’’ if the transition of the displayed quote
from point A (before the order is received) to B
(after the order is received) can be ‘‘fully attributed
to the execution of [the order] in a determinative
way.’’ Sakato Interp Letter at 1–2. The Commission
believes that at this time an order-by-order
determination of whether a quotation is ‘‘protected’’
could introduce unworkable complexity into order
routing and could frustrate the incentive provided
to market participants to post the resting displayed
limit orders that underpin much of the price
discovery in the market.
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turn must be filed with the Commission
and published for notice and comment,
nor does it obviate the need for a
proposed rule change that would
impose an access delay otherwise to
comply with the Act and the regulations
thereunder applicable to the
exchange.56 Accordingly, the
commenters’ concerns and
recommended conditions are addressed
by the existing requirements and
process through which exchanges
publicly propose their rule changes
under the Act, and each proposed
access delay would be scrutinized on an
individual basis through that process.57
Any proposed application of an access
delay would therefore be subject to
notice, comment, and the Commission’s
separate evaluation of the proposed rule
change.58
56 Only registered exchanges and associations can
have ‘‘automated quotations’’ that are ‘‘protected
quotations.’’ See 17 CFR 242.611(b)(57). Such
entities are required by Section 19 of the Act to file
all rules and proposed changes to their rules with
the Commission so that the Commission can review
and publish them for public notice and comment.
See 15 U.S.C. 78s(b). Further, no proposed rule
change can take effect unless approved by the
Commission or otherwise permitted to become
effective under the Act and rules thereunder. See
id. Similarly, an applicant seeking to register as an
exchange is required to file all proposed rules with
the Commission on Form 1, which the Commission
publishes for notice and comment. Once filed, the
Commission evaluates each proposed rule change
for consistency with the Act and the rules
thereunder. An access delay would constitute a
‘‘rule’’ of an exchange because it would be a ‘‘stated
policy, practice, or interpretation’’ that concerns a
‘‘material aspect’’ of the operation of an exchange,
and thus any new or amended delay would require
a filing. See 15 U.S.C. 78c(a)(27) (defining ‘‘rules of
an exchange’’); 17 CFR 240.19b–4(a)(6) (defining
‘‘stated policy, practice, or interpretation’’); 17 CFR
240.19b–4 (noting that a stated policy, practice, or
interpretation is deemed to be a proposed change
unless it is fairly and reasonably implied by an
existing rule or is concerned solely with the
administration of the exchange). As required by
Section 19(b) of the Act, Rule 19b–4, and Form
19b–4, such exchange would be required to, among
other things, detail the purpose of the proposed
delay and analyze how the delay is consistent with
the Act, including the Section 6 standards
governing, among other things, unfair
discrimination, protection of investors and the
public interest, inappropriate burdens on
competition, and just and equitable principles of
trade. See Section 19(b), Rule 19b–4 and Form 19b–
4 (on which exchanges file their proposed rule
changes).
57 See Citadel Interp Letter at 6–7 (acknowledging
that new access delays would need to be filed with
the Commission before they can be implemented,
but expressing concern that it would ‘‘be
exceedingly difficult for the staff to recognize all of
the implications and impacts of each delay
mechanism’’).
58 In the case of IEX, the Commission’s separate
order approving IEX’s Form 1 addresses the POP/
coil delay’s consistency with the Act. See also
SIFMA Interp Letter at 3 (recommending that ‘‘any
intentional delay should be predictable and
universally applied to all market participants in a
non-discriminatory manner’’).
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C. Other Comments
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A few commenters asked the
Commission to provide more detail on
the application of the proposed
interpretation.59 For example, one
commenter asked whether it applies to
both inbound and outbound delays and
whether it should be based on the
exchange’s fastest or slowest means of
connecting.60 Other commenters asked
how much variance will be permitted
and whether unintentional delays also
should be covered by the
interpretation.61
The interpretation of ‘‘immediate’’
applies to the term as used in Rule
600(b)(3), so that it applies to any
intentional delay imposed by an
exchange through any means provided
by the exchange to access its quotations.
Further, as modified here from the
proposed interpretation, the
interpretation applies only to
intentional delays, as unintentional
delays are addressed by the existing
exception contained in Rule 611(b)(1).62
Finally, in response to the commenters
asking if both inbound and outbound
delays should be taken into account
when measuring the length of an
intentional delay, the Commission notes
that the intentional delay, as it pertains
to the Order Protection Rule, is
measured as a cumulative delay
experienced by a non-routable order—in
other words, the intentional delay
59 See, e.g., HRT Interp Letter at 3; Nasdaq Interp
Letter at 3.
60 See HRT Interp Letter at 3. See also Citadel
Interp Letter at 9.
61 See, e.g., Citadel Interp Letter at 9–10. One
commenter asked whether there would be a process
to remove protected quotation status from an
exchange that has an intentional delay that equals
or exceeds one millisecond. See id. at 10. If any
market participant experiences issues in accessing
that exchange’s quotation, it may consider the
applicability of the exceptions specified in Rule
611(b), including the ‘‘material delay’’ condition of
Rule 611(b)(1). See 17 CFR 242.611(b)(1). The
Commission notes that the Rule 611(b)(1) ‘‘selfhelp’’ exception refers to a ‘‘material delay,’’ and in
the Regulation NMS Adopting Release, the
Commission provided an interpretation of the
phrase ‘‘material delay’’ as one where a market was
‘‘repeatedly failing to respond within one second
after receipt of an order.’’ See Regulation NMS
Adopting Release, supra note 1, at 37519.
62 See 17 CFR 242.611(b)(1). See also supra note
61 (discussing the self-help exception).
Accordingly, the Commission is not including as
part of the interpretation the phrase ‘‘whether
intentional or not’’ to focus its interpretation on
access delays that are intentional. While the
Commission acknowledges that the one-second (i.e.,
1,000,000 microseconds) interpretation included in
the Regulation NMS Adopting Release for this
exception, as well as the ‘‘one second’’ exception
in Rule 600(b)(8), may warrant reconsideration in
the future, that would be a separate analysis and the
Commission is not addressing those exceptions in
this interpretation. See also SIFMA Interp Letter at
4 (requesting that the Commission clarify that it is
not changing the self-help threshold).
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applied on an order message sent into
an exchange system through each of the
events specified in the definition of
‘‘automated quotation’’ in Rule
600(b)(3). Specifically, any intentional
delay imposed by the exchange in (1)
executing an immediate-or-cancel order
against its displayed quotation up to its
full size, (2) cancelling any unexecuted
portion of such order, or (3) transmitting
a response to the sender of such order,
should be added together in assessing
compliance with Rule 611.63
One commenter recommended that
the Commission engage in notice and
comment rulemaking to effect ‘‘a change
of this magnitude,’’ which it argued
contradicts the ‘‘plain meaning of the
term ‘immediate.’ ’’ 64 The commenter
argued that an interpretation is only
appropriate to ‘‘provide guidance on
how a new service or product not
contemplated at the time a rule was
adopted should be treated under
existing rules.’’ 65 As discussed above,
however, the Commission does not
believe the dictionary definition of the
term ‘‘immediate[ ]’’ forecloses de
minimis intentional delays (i.e.,
intentional delays so short that they do
not impair fair and efficient access to an
exchange’s quotations). The
Commission is updating its prior
interpretation in light of technological
and market developments since the
adoption of Regulation NMS in 2005 to
accommodate very short intentional
delays that do not impair fair and
63 See 17 CFR 242.600(b)(3)(ii), (iii), and (iv),
respectively. See also Regulation NMS Adopting
Release, supra note 1, at 37534. In the case of IEX,
the POP/coil delay imposes a 350 microsecond
delay inbound to the matching engine for nonroutable orders (but no additional delay when
cancelling the unexecuted portion of the order) and
a 350 microsecond delay outbound on the
confirmation back to the order sender, for a
cumulative 700 microsecond delay. In addition, the
Commission notes that IEX permits incoming orders
to be marked as immediate-or-cancel, as is required
by Rule 600(b)(3). See 17 CFR 242.600(b)(3)(i). One
commenter argued that a delay in outbound data
could cause the data reported to ‘‘not accurately
reflect the state of a quotation.’’ See Gibson Dunn
Interp Letter at 7. This commenter also asserted that
intentional delays in communicating reports of
transactions would decrease their ‘‘informational
value.’’ See Gibson Dunn Interp Letter at 7; Nasdaq
Interp Letter at 2. The Commission notes that the
geographic and technological latencies that market
participants experience when routing to access a
quotation also affect data disseminated from the
trading center to the market participant. In other
words, market participants already experience
latencies when receiving quotation updates and
transaction information. At least with respect to
delays well within those existing latencies, the
Commission does not believe that a market
participant’s general experience in receiving this
information is likely to be altered depending on
whether the delay is intentional or unintentional.
64 Citadel Interp Letter at 1. See also Hultgren
Interp Letter at 1; Gibson Dunn Interp Letter at 1–
2.
65 Citadel Interp Letter at 2–3.
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40791
efficient access to protected quotations.
Although the Commission did afford an
opportunity for notice and comment by
publishing a draft interpretation for
comment, and did take the comments it
received into consideration, the
Commission was not required to
undertake notice and comment
rulemaking when updating its
interpretation of its own regulation.
Other commenters focused on what
they viewed as a potential opportunity
for manipulative activity that could
result from an access delay to a market
displaying a protected quotation. One
commenter opined that an access delay
would make it easier to manipulate
markets ‘‘by taking advantage of stale
and inaccessible quotations displayed
during the duration of any access
delays,’’ and that such manipulative
behavior ‘‘could be particularly
powerful in relatively illiquid
stocks.’’ 66 As an example, the
commenter posited that a market
participant could ‘‘safely manipulate a
closing auction by sending displayed
orders to an exchange with an
intentional 999 microsecond delay and
timing the submission of those orders
for display 998 microseconds or less
before the close’’ because ‘‘no other
market participant could reach them in
time.’’ 67 Another commenter argued
that access delays could lead to ‘‘stale
prices [that] are guaranteed to be
displayed for a specific period of time
up to 1 millisecond,’’ which would
cause pegged orders on other exchanges
to ‘‘be traded against at known stale
prices’’ when such pegged order is
pegged to the stale price on the
exchange with the access delay.68 The
commenter argued that this could lead
to ‘‘a potentially new mechanism for
spoofing . . . with the objective of
affecting pegged orders on other
exchanges.’’ 69
The Commission notes that the
scenarios discussed by commenters are
not related to the issue addressed by
this interpretation—whether an
intentional delay that is so short as not
66 Id.
at 6.
67 Id.
68 NYSE Interp Letter at 8. See also Citadel Interp
Letter at 8 (arguing that ‘‘every time market prices
tick up or down, the NBBO would be incorrect for
at least the duration of any intentional delays’’
which would lead some pegged orders to track at
‘‘inaccurate prices’’).
69 NYSE Interp Letter at 8. See also HRT Interp
Letter at 3 (citing to a comment from Instinet on
IEX’s Form 1 that discussed the potential for
‘‘spoofing’’ by entering an order, waiting for 700
microseconds, and cancelling the order without the
risk of another market participant seeing or
responding to it, but which could provide a false
or misleading appearance that could affect the
trading of other participants); FIA PTG Interp Letter
at 7 (also citing to the Instinet letter).
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to frustrate the goals of Rule 611 by
interfering with fair and efficient access
to an exchange’s quotations is consistent
with Rule 600(b)(3)’s ‘‘immedia[cy]’’
requirement.70 If a delay is de minimis,
then whether it is unintentional or
intentional in nature is not expected to
alter the potential for manipulative
activity or make it harder to detect and
prosecute. One commenter noted that it
is important ‘‘to contemplate and
address the potential for abuse’’ 71 when
an access delay is proposed and
approved. The Commission agrees that
such scrutiny—both by the exchange
proposing an access delay, and by the
Commission when considering whether
to approve a proposed access delay
rule—would be important. The
Commission notes that, pursuant to
Section 19(b) and Rule 19b–4, the
proposing exchange would be required
to consider and address in its rule
change filing the potential for abuse of
any proposed access delay, which
would then be subject to notice,
comment, and Commission review.
Further, even after the rule change
became effective, the Commission
believes it would be incumbent on the
exchange to remain vigilant in
surveilling for abuses and violative
conduct of its access delay rule, and
consider amending its access delay if
necessary, among other considerations,
for the protection of investors and the
public interest.72
asabaliauskas on DSK3SPTVN1PROD with RULES
III. Commission’s Interpretation
In response to technological and
market developments since the adoption
of Regulation NMS,73 the Commission
believes that it is appropriate to provide
an updated interpretation of the
meaning of the term ‘‘immediate’’ in
Rule 600(b)(3).
Solely in the context of determining
whether a trading center maintains an
‘‘automated quotation’’ for purposes of
Rule 611 of Regulation NMS, the
Commission does not interpret the term
‘‘immediate’’ used in Rule 600(b)(3) by
itself to prohibit a trading center from
implementing an intentional access
delay that is de minimis—i.e., a delay so
short as to not frustrate the purposes of
Rule 611 by impairing fair and efficient
access to an exchange’s quotations.
Accordingly, the Commission’s revised
interpretation provides that the term
‘‘immediate’’ precludes any coding of
automated systems or other type of
intentional device that would delay the
action taken with respect to a quotation
unless such delay is de minimis.
The Commission’s updated
interpretation recognizes that a de
minimis access delay, even if it involves
an ‘‘intentional device’’ that delays
access to an exchange’s quotation, is
compatible with the exchange having an
‘‘automated quotation’’ under Rule
600(b)(3) and thus a ‘‘protected
quotation’’ under Rule 611.74 Under this
interpretation, Rule 600(b)(3)’s
‘‘immedia[cy]’’ requirement does not
necessarily foreclose an automated
trading center’s use of very small
intentional delays to address concerns
arising from low latency trading
strategies and other market structure
issues. For example, intentional access
delays that are well within the
geographic and technological latencies
70 Nevertheless, the Commission believes that the
scenarios discussed by commenters would, as a
practical matter, be difficult to implement. For
example, in the closing auction scenario, the
Commission believes it would be practically
difficult to successfully implement a coordinated
single-digit microsecond strategy during a broadbased auction because of the precision it would
require to ensure order arrival at the final
microsecond and not have it trade with a multitude
of other interest in the auction. Further, concerns
surrounding pegged orders on away markets would
affect only the most latency sensitive traders and
only apply when the exchange with the access
delay is alone at the NBBO, has exhausted all
displayed and non-displayed interest at its best
price, and is in the process of transitioning to a new
price. However, that possibility is not uniquely
introduced by an exchange with an access delay,
but is currently present in a fragmented market with
geographically dispersed venues. For example, the
same problem (only exacerbated with considerably
more latency) would be present if the Chicago Stock
Exchange was alone at the NBBO on a symbol it
trades from Chicago.
71 HRT Interp Letter at 3.
72 See 15 U.S.C. 78s(g)(1).
73 A number of factors affect the speed at which
a market participant can receive market and quote
data, submit orders, obtain an execution, and
receive information on trades, including hardware,
software, and physical distance. See, e.g., Securities
Exchange Act Release No. 61358 (January 14, 2010),
75 FR 3594, 3610–11 (January 21, 2010) (Concept
Release on Equity Market Structure). Recent
technological advances have reduced the ‘‘latency’’
that these factors introduce into the order handling
process, both in absolute and relative terms, and
some market participants and liquidity providers
have invested in low-latency systems that take into
account the advances in technology. See id. at 3606;
see also Securities Exchange Act Release No. 76474
(November 18, 2015), 80 FR 80997, 81000
(December 28, 2015) (Regulation of NMS Stock
Alternative Trading Systems; Proposed Rule)
(stating that ‘‘[t]he growth in trading centers and
trading activity has been fueled primarily by
advances in technology for generating, routing, and
executing orders’’ and that ‘‘[t]hese technologies
have markedly improved the speed, capacity, and
sophistication of the trading mechanisms and
processes that are available to market
participants’’).
74 An exchange that proposed to provide any
member or user (including the exchange’s inbound
or outbound routing functionality, or the exchange’s
affiliates) with exclusive privileged faster access to
its facilities over any other member or user would
raise concerns under the Act, including under
Section 6(b)(5) and 6(b)(8) of the Act, and would
need to address those concerns in a Form 1
exchange registration application or a proposed rule
change submitted pursuant to Section 19 of the Act,
as applicable.
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experienced by market participants
when routing orders are de minimis to
the extent they would not impair a
market participant’s ability to access a
displayed quotation consistent with the
goals of Rule 611.
The interpretation does not change
the existing requirement that, prior to
being implemented, an intentional delay
of any duration must be fully disclosed
and codified in a written rule of the
exchange that has become effective
pursuant to Section 19 of the Act, where
the exchange met its burden of
articulating how the purpose, operation,
and application of the delay is
consistent with the Act and the rules
and regulations thereunder applicable to
the exchange.75
In the Notice of Proposed
Interpretation, the Commission stated
its preliminary belief ‘‘that, in the
current market, delays of less than a
millisecond in quotation response times
may be at a de minimis level that would
not impair a market participant’s ability
to access a quote, consistent with the
goals of Rule 611 and because such
delays are within the geographic and
technological latencies experienced by
market participants today.’’ 76 As
discussed above, the Commission
received a number of comments on that
specific guidance.
At this time, the Commission is not
adopting the proposed guidance under
this interpretation that delays of less
than one millisecond are de minimis.
The Commission believes that, in light
of the evolving nature of technology and
the markets, and the need to assess the
impact of intentional access delays on
the markets, establishing a bright line de
minimis threshold is not appropriate at
this time. Rather, the Commission
75 As discussed above, any exchange that seeks to
impose an intentional access delay must first file a
proposed rule change with the Commission, which
the Commission would publish for notice and
comment, and approve only after finding that it is
consistent with the applicable standards set forth in
the Act. For example, a proposed access delay that
is only imposed on certain market participants or
certain types of orders would be scrutinized to
determine whether or not the discriminatory
application of that delay is unfair. See, e.g.,
Securities Exchange Act Release No. 77406, 81 FR
15765 (March 24, 2016) (File No. 10–222) (order
instituting proceedings on IEX’s Form 1)
(discussing the potentially unfairly discriminatory
application of an access delay to advantage an
affiliated outbound routing broker). If the
Commission cannot find that a proposed access
delay is consistent with the Act, it would
disapprove the proposal, rendering moot the issue
of whether a quotation with such a delay is
protected. Generally, the Commission would be
concerned about access delays that were imposed
only on certain market participants or intentional
access delays that were relieved based upon
payment of certain fees.
76 Notice of Proposed Interpretation, supra note
26, at 15665.
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believes that the interpretation is best
focused on whether an intentional delay
is so short as to not frustrate the
purposes of Rule 611 by impairing fair
and efficient access to an exchange’s
quotations. As it makes findings as to
whether particular access delays are de
minimis in the context of individual
exchange proposals,77 the Commission
recognizes that such findings create
common standards that must be applied
fairly and consistently to all market
participants.
The Staff will also conduct a study
within two years regarding the effects of
intentional access delays on market
quality, including price discovery and
report back to the Commission with the
results of any recommendations. Based
on the results of that study or earlier as
it determines, the Commission will
reassess whether further action is
appropriate.
List of Subjects in 17 CFR Part 241
Title 17, chapter II, of the Code of
Federal Regulations as follows:
PART 241—INTERPRETATIVE
RELEASES RELATING TO THE
SECURITIES EXCHANGE ACT OF 1934
AND GENERAL RULES AND
REGULATIONS THEREUNDER
Part 241 is amended by adding
Release No. 34–78102 to the list of
interpretative releases as follows:
Securities.
Text of Amendments
For the reasons set out in the
preamble, the Commission is amending
Release No.
Subject
*
*
*
Interpretation Regarding Automated Quotations Under Regulation
NMS.
By the Commission.
Dated: June 17, 2016.
Robert W. Errett,
Deputy Secretary.
ACTION:
Date
Federal
Register
vol. and page
34–78102
*
June 17, 2016 ......
*
*
121 FR [Insert FR Page Number].
*
Final rule.
FOR FURTHER INFORMATION CONTACT:
The Federal Energy
Regulatory Commission (Commission) is
eliminating the exemptions for wind
generators from the requirement to
provide reactive power by revising the
pro forma Large Generator
Interconnection Agreement (LGIA),
Appendix G to the pro forma LGIA, and
the pro forma Small Generator
Interconnection Agreement (SGIA). As a
result, all newly interconnecting nonsynchronous generators will be required
to provide reactive power at the highside of the generator substation as a
condition of interconnection as set forth
in their LGIA or SGIA as of the effective
date of this Final Rule.
DATES: This Final Rule will become
effective September 21, 2016.
SUMMARY:
[FR Doc. 2016–14876 Filed 6–22–16; 8:45 am]
BILLING CODE 8011–01–P
DEPARTMENT OF ENERGY
Federal Energy Regulatory
Commission
18 CFR Part 35
[Docket No. RM16–1–000; Order No. 827]
Reactive Power Requirements for NonSynchronous Generation
Federal Energy Regulatory
Commission, DOE.
AGENCY:
Brian Bak (Technical Information),
Office of Energy Policy and Innovation,
Federal Energy Regulatory Commission,
888 First Street NE., Washington, DC
20426, (202) 502–6574, brian.bak@
ferc.gov.
Gretchen Kershaw (Legal
Information), Office of the General
Counsel, Federal Energy Regulatory
Commission, 888 First Street NE.,
Washington, DC 20426, (202) 502–8213,
gretchen.kershaw@ferc.gov.
SUPPLEMENTARY INFORMATION:
Table of Contents
asabaliauskas on DSK3SPTVN1PROD with RULES
Paragraph
I. Background ............................................................................................................................................................................................
II. Need for Reform ...................................................................................................................................................................................
III. Discussion ...........................................................................................................................................................................................
A. Reactive Power Requirement for Non-Synchronous Generators ...............................................................................................
1. NOPR Proposal .......................................................................................................................................................................
2. Comments ...............................................................................................................................................................................
3. Commission Determination ...................................................................................................................................................
B. Power Factor Range, Point of Measurement, and Dynamic Reactive Power Capability Requirements ..................................
1. NOPR Proposal .......................................................................................................................................................................
2. Comments ...............................................................................................................................................................................
3. Commission Determination ...................................................................................................................................................
C. Real Power Output Level .............................................................................................................................................................
1. NOPR Proposal .......................................................................................................................................................................
2. Comments ...............................................................................................................................................................................
3. Commission Determination ...................................................................................................................................................
D. Compensation ...............................................................................................................................................................................
1. NOPR Proposal .......................................................................................................................................................................
2. Comments ...............................................................................................................................................................................
77 See supra note 56 (discussing the proposed rule
change process under the Exchange Act). See also
IEX Form 1 Approval Order, supra note 4.
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]]>Agencies
[Federal Register Volume 81, Number 121 (Thursday, June 23, 2016)]
[Rules and Regulations]
[Pages 40785-40793]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-14876]
=======================================================================
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
17 CFR Part 241
[Release No. 34-78102; File No. S7-03-16]
Commission Interpretation Regarding Automated Quotations Under
Regulation NMS
AGENCY: Securities and Exchange Commission.
ACTION: Final interpretation.
-----------------------------------------------------------------------
SUMMARY: The Securities and Exchange Commission is issuing a final
interpretation with respect to the definition of automated quotation
under Rule 600(b)(3) of Regulation NMS.
DATES: Effective June 23, 2016.
FOR FURTHER INFORMATION CONTACT: Richard Holley III, Assistant
Director, Michael Bradley, Special Counsel, or Michael Ogershok,
Attorney-Adviser, Office of Market Supervision, at 202-551-5777,
Division of Trading and Markets, Securities and Exchange Commission,
100 F Street NE., Washington, DC 20549-7010.
SUPPLEMENTARY INFORMATION:
I. Background
Rule 611 of Regulation NMS provides intermarket protection against
trade-throughs for ``automated'' (as opposed to ``manual'') quotations
of NMS stocks. Under Regulation NMS, an ``automated'' quotation is one
that, among other things, can be executed ``immediately and
automatically'' against an incoming immediate-or-cancel order. The
Regulation NMS Adopting Release issued in 2005 makes clear that this
formulation was intended to distinguish and exclude from protection
quotations on manual markets that produced delays measured in seconds
in responding to an incoming order, because delays of that magnitude
would impair fair and efficient access to an
[[Page 40786]]
exchange's quotations.\1\ In the Regulation NMS Adopting Release, the
Commission interpreted the term ``immediate'' to ``preclude[ ] any
coding of automated systems or other type of intentional device that
would delay the action taken with respect to a quotation.'' \2\
---------------------------------------------------------------------------
\1\ See Securities Exchange Act Release No. 51808 (June 9, 2005)
70 FR 37496, 37500 & n.21, 37501 (June 29, 2005) (``Regulation NMS
Adopting Release''). The Commission notes that the smallest time
increment suggested by commenters at the time Regulation NMS was
adopted was 250 milliseconds. See id. at 37518. See also infra note
15 (discussing the distinction between ``automated quotations'' and
``manual quotations'' and noting that ``[t]he difference in speed
between automated and manual markets often is the difference between
a 1-second response and a 15-second response . . . .'').
\2\ See Regulation NMS Adopting Release, supra note 1, at 37534.
---------------------------------------------------------------------------
In light of the application of Investors' Exchange LLC (``IEX'')
\3\ to register as an exchange and technological and market
developments since the adoption of Regulation NMS, the Commission
decided to revisit this interpretation. The Commission believes its
prior interpretation should be updated given technological and market
developments since the adoption of Regulation NMS, in particular the
emergence of low latency trading strategies and related technology that
permit trading decisions to be made in microseconds, neither of which
were contemplated by the Commission or commenters in 2005.\4\ As
further addressed below, the Commission now interprets ``immediate'' in
the context of Regulation NMS as not precluding a de minimis
intentional delay--i.e., a delay so short as to not frustrate the
purposes of Rule 611 by impairing fair and efficient access to an
exchange's quotations.\5\
---------------------------------------------------------------------------
\3\ See Securities Exchange Act Release Nos. 75925 (September
15, 2015), 80 FR 57261 (September 22, 2015) (File No. 10-222)
(original notice); and 77406 (March 18, 2016), 81 FR 15765 (March
24, 2016) (File No. 10-222) (notice of amendments, order instituting
proceedings, and extension of time).
\4\ IEX's Form 1 includes an intentional access delay that
imposes 350 microseconds of one-way latency for non-routable orders.
IEX's access delay is discussed in the Commission's final order on
IEX's Form 1. See Securities Exchange Act Release No. 78101 (June
17, 2016) (File No. 10-222) (order granting IEX's exchange
registration) (``IEX Form 1 Approval Order'').
\5\ See Regulation NMS Adopting Release, supra note 1, at 37520
(noting that ``[f]or a trading center to qualify as entitled to
display any protected quotations, the public in general must have
fair and efficient access to a trading center's quotations'').
---------------------------------------------------------------------------
A. Regulation NMS: Automated Quotation and Protected Quotation
In general, Rule 611 under Regulation NMS (the ``Order Protection
Rule,'' or ``Trade-Through Rule'') protects the best ``automated''
quotations of exchanges by obligating other trading centers to honor
those ``protected'' quotations by not executing trades at inferior
prices, or ``trading through'' such best automated quotations.\6\ Only
an exchange that is an ``automated trading center'' \7\ displaying an
``automated quotation'' \8\ is entitled to this protection.\9\ Trading
centers must establish, maintain, and enforce written policies and
procedures that are reasonably designed to prevent trade-throughs of
protected quotations, unless an exception or exemption applies.\10\
---------------------------------------------------------------------------
\6\ See 17 CFR 242.611. When it adopted Regulation NMS, the
Commission explained that one purpose of the Order Protection Rule
was to incentivize greater use of displayed limit orders, which
contribute to price discovery and market liquidity, by protecting
them from trade-throughs. See Regulation NMS Adopting Release, supra
note 1, at 37516-17. In discussing whether to apply order protection
to non-automated, ``manual'' quotations, the Commission stated that
``providing protection to manual quotations, even limited to trade-
throughs beyond a certain amount, potentially would lead to undue
delays in the routing of investor orders, thereby not justifying the
benefits of price protection.'' Id. at 37518. The Commission also
noted that ``those who route limit orders will be able to control
whether their orders are protected by evaluating the extent to which
various trading centers display automated versus manual
quotations.'' Id. In addition, the Commission intended that the
Order Protection Rule would reinforce a broker's duty of best
execution by prohibiting executions at inferior prices absent an
exception. See id. at 37516 (``Given the large number of trades that
fail to obtain the best displayed prices (e.g., approximately 1 in
40 trades for both Nasdaq and NYSE stocks), the Commission is
concerned that many of the investors that ultimately received the
inferior price in these trades may not be aware that their orders
did not, in fact, obtain the best price. The Order Protection Rule
will backstop a broker's duty of best execution on an order-by-order
basis by prohibiting the practice of executing orders at inferior
prices, absent an applicable exception.'').
\7\ See 17 CFR 242.600(b)(4). References to ``exchange'' used
herein apply also to facilities of national securities associations.
See 17 CFR 242.600(b)(57).
\8\ See 17 CFR 242.600(b)(3).
\9\ See 17 CFR 242.600(b)(57) (defining ``protected bid or
protected offer'') and 242.600(b)(58) (defining ``protected
quotation''). See also Regulation NMS Adopting Release, supra note
1, at 37504 (stating that ``[t]o qualify for protection, a quotation
must be automated'').
\10\ 17 CFR 242.611(a)(1).
---------------------------------------------------------------------------
There are several provisions in Regulation NMS that impact whether
the Order Protection Rule applies. First, Rule 600(b)(58) defines a
``protected quotation'' as a ``protected bid or a protected offer.''
\11\ Rule 600(b)(57), in turn, defines a ``protected bid or protected
offer'' as a quotation in an NMS stock that is: (i) Displayed by an
``automated trading center,'' (ii) disseminated pursuant to an
effective national market system plan, and (iii) an ``automated
quotation'' that is the best bid or best offer of a national securities
exchange or national securities association.\12\
---------------------------------------------------------------------------
\11\ 17 CFR 242.600(b)(58).
\12\ 17 CFR 242.600(b)(57).
---------------------------------------------------------------------------
In order for an exchange to operate as an ``automated trading
center,'' it must, among other things, have ``implemented such systems,
procedures, and rules as are necessary to render it capable of
displaying quotations that meet the requirements for an `automated
quotation' set forth in [Rule 600(b)(3) of Regulation NMS].'' \13\ Rule
600(b)(3) defines an ``automated quotation'' as one that:
---------------------------------------------------------------------------
\13\ 17 CFR 242.600(b)(4). Rule 600(b)(4) contains additional
requirements that must be satisfied in order to be an automated
trading center. Those requirements are not at issue for purposes of
this interpretation.
---------------------------------------------------------------------------
i. Permits an incoming order to be marked as immediate-or-cancel;
ii. Immediately and automatically executes an order marked as
immediate-or-cancel against the displayed quotation up to its full
size;
iii. Immediately and automatically cancels any unexecuted portion
of an order marked as immediate-or-cancel without routing the order
elsewhere;
iv. Immediately and automatically transmits a response to the
sender of an order marked as immediate-or-cancel indicating the action
taken with respect to such order; and
v. Immediately and automatically displays information that updates
the displayed quotation to reflect any change to its material
terms.\14\
---------------------------------------------------------------------------
\14\ See 17 CFR 242.600(b)(3). See also Regulation NMS Adopting
Release, supra note 1, at 37504.
---------------------------------------------------------------------------
Any quotation that does not meet the requirements for an automated
quotation is defined in Rule 600(b)(37) as a ``manual'' quotation.\15\
---------------------------------------------------------------------------
\15\ Regulation NMS Adopting Release, supra note 1, at 37534.
See also 17 CFR 242.600(b)(37) (defining ``manual quotation''). The
Commission also provided context as to the distinction between
``automated quotations'' and ``manual quotations.'' At the time of
the adoption of Regulation NMS, manual quotations and markets that
primarily were centered around human interaction in a floor-based
trading environment, including ``hybrid'' manual-automated trading
facilities, experienced processing delays for inbound orders that
were measured in multiple seconds. See Regulation NMS Adopting
Release, supra note 1, at 37500 n.21 (``One of the primary effects
of the Order Protection Rule adopted today will be to promote much
greater speed of execution in the market for exchange-listed stocks.
The difference in speed between automated and manual markets often
is the difference between a 1-second response and a 15-second
response . . . .''). In contrast to floor-based and hybrid markets
that existed at the time Regulation NMS was adopted, newer automated
matching systems coming more widely into use removed the human
element and instead immediately matched buyers and sellers
electronically. The Commission also explained that the Order
Protection Rule took a substantially different approach to
intermarket price protection than the existing trade-through
protection regime at the time--the Intermarket Trading System
(``ITS'') Plan. See id. at 37501. As the Commission noted, the ITS
provisions did not distinguish between manual and automated
quotations and ``fail[ed] to reflect the disparate speed of response
between manual and automated quotations'' as they ``were drafted for
a world of floor-based markets.'' Id. As a result, ``[b]y requiring
order routers to wait for a response from a manual market, the ITS
trade-through provisions can cause an order to miss both the best
price of a manual quotation and slightly inferior prices at
automated markets that would have been immediately accessible.'' Id.
In addition, the Commission emphasized that Rule 611 does not
``supplant or diminish'' a broker-dealer's duty of best execution.
See id. at 37538.
---------------------------------------------------------------------------
[[Page 40787]]
In adopting Regulation NMS, the Commission recognized that there
would be unintentional time delays by automated trading centers in
responding to orders, albeit very short ones.\16\ Although a number of
commenters on Regulation NMS advocated for a specific time standard,
ranging from one second down to 250 milliseconds,\17\ to distinguish
between manual and automated quotations,\18\ the Commission declined to
set such a standard.\19\ Instead, in interpreting the term ``immediate[
]'' when adopting Rules 600 and 611, the Commission stated that ``[t]he
term `immediate' precludes any coding of automated systems or other
type of intentional device that would delay the action taken with
respect to a quotation.'' \20\
---------------------------------------------------------------------------
\16\ See infra note 23 and accompanying text (discussing the
exception in Rule 611(b)(1) for small unintentional delays).
\17\ A millisecond is one thousandth of a second.
\18\ See Regulation NMS Adopting Release, supra note 1, at
37519.
\19\ See id. at 37519 (``The definition of automated quotation
as adopted does not set forth a specific time standard for
responding to an incoming order.'').
\20\ Id. at 37534. The Commission also stated that the standard
for responding to an incoming order ``should be `immediate,' i.e., a
trading center's systems should provide the fastest response
possible without any programmed delay.'' Id. at 37519. Further, the
Commission also stated that, for a quotation ``[t]o qualify as
`automatic,' no human discretion in determining any action taken
with respect to an order may be exercised after the time an order is
received,'' and ``a quotation will not qualify as `automated' if any
human intervention after the time an order is received is allowed to
determine the action taken with respect to the quotation.'' Id. at
37519 and 37534.
---------------------------------------------------------------------------
The only precise time standards approved by the Commission in Rule
611 and the Regulation NMS Adopting Release arise in the context of two
exceptions to Rule 611 covering circumstances in which trade-through
protection would not apply. These exceptions illustrate the time
dimensions the Commission had in mind in distinguishing quotations that
should receive trade-through protection from those that should not, and
notably, both use a one-second standard.\21\ Specifically, Rule
611(b)(1) provides that trading centers may trade through quotations of
automated trading centers that experience a ``failure, material delay,
or malfunction.'' \22\ The Commission accepted that the ``immediate''
standard necessarily would accommodate unintentional delays below the
threshold of a ``material delay,'' which it interpreted in light of
``current industry conditions'' as one where a market was ``repeatedly
failing to respond within one second after receipt of an order.'' \23\
The Commission similarly established a one-second standard for the
exception in Rule 611(b)(8), which excepts trade-through protection
where the trading center that was traded-through had displayed, within
the prior one second, a price equal or inferior to the price of the
trade-through transaction.\24\ In discussing the 611(b)(8) exception,
the Commission stated that it ``generally does not believe that the
benefits would justify the costs imposed on trading centers of
attempting to implement an intermarket price priority rule at the level
of sub-second time increments. Accordingly, Rule 611 has been
formulated to relieve trading centers of this burden.'' \25\ In
adopting these exceptions to Rule 611, the Commission contemplated the
existence of very short unintentional delays of a magnitude up to one
second that would not affect the protected status of an ``immediate''
automated quotation. Since then, the market and the technology have
evolved.
---------------------------------------------------------------------------
\21\ See 17 CFR 242.611(b)(1) and (8); see also Regulation NMS
Adopting Release, supra note 1, at 37519 (discussing the one-second
standard in Rule 611(b)(1)) and id. at 37523 (discussing the one-
second standard in Rule 611(b)(8)). One second is 1,000,000
microseconds.
\22\ 17 CFR 242.611(b)(1).
\23\ See Regulation NMS Adopting Release, supra note 1, at
37519. In other words, the Commission viewed the phrase ``fastest
response possible'' as consistent with an unintentional delay of
less than one second whereby participants could consider an
automated trading center experiencing a delay beyond that limit to
no longer be ``immediately'' accessible.
\24\ See 17 CFR 242.611(b)(8).
\25\ Regulation NMS Adopting Release, supra note 1, at 37523.
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B. The Commission's Updated Interpretation of Automated Quotation
The Commission proposed to interpret ``immediate'' when determining
whether a trading center maintains an ``automated quotation'' for
purposes of Rule 611 ``to include response time delays at trading
centers that are de minimis, whether intentional or not.'' \26\ The
Commission further stated its preliminary belief ``that, in the current
market, delays of less than a millisecond in quotation response times
may be at a de minimis level that would not impair a market
participant's ability to access a quote, consistent with the goals of
Rule 611 and because such delays are within the geographic and
technological latencies experienced by market participants today.''
\27\ As discussed below, the Commission received a number of comments
on its proposed interpretation and, after considering those comments,
has determined to issue a revised interpretation from that which it
originally proposed, as detailed further below.
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\26\ Securities Exchange Act Release No. 77407 (March 18, 2016),
81 FR 15660, 15661 (March 24, 2016) (S7-03-16) (``Notice of Proposed
Interpretation''). Because IEX's POP/coil delay is designed
purposefully and intentionally to delay access to its matching
engine, and consequently delays access to IEX's displayed quotation
(See Letter from Sophia Lee, IEX, to Brent J. Fields, Secretary,
Commission, dated November 13, 2015 (``IEX First Form 1 Letter'') at
4 (comment letter on File No. 10-222)), IEX would not be an
automated market under the interpretation of ``immediate'' in the
Regulation NMS Adopting Release as ``[t]he term `immediate'
precludes any coding of automated systems or other type of
intentional device that would delay the action taken with respect a
quotation.'' Regulation NMS Adopting Release, supra note 1, at
37534.
\27\ Notice of Proposed Interpretation, supra note 26, at 15665.
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II. Comments Received and Commission Discussion
The Commission received 24 comments \28\ on its proposed
[[Page 40788]]
interpretation.\29\ Commenters raised a number of issues, including
whether intentional sub-millisecond delays are in fact de minimis or
would materially complicate market structure, as well as requests to
clarify the scope and details of the interpretation.
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\28\ See Letters (``Interp Letter(s)'') from Rajiv Sethi to
Brent J. Fields, Secretary, Commission, dated March 21, 2016;
Stacius Sakato to Brent J. Fields, Secretary, Commission, dated
March 28, 2016; David Lauer, Healthy Markets Association, to Brent
J. Fields, Secretary, Commission, dated April 1, 2016; Hazel
Henderson, Ethical Markets Media, to Brent J. Fields, Secretary,
Commission, dated April 1, 2016; R.T. Leuchtkafer to Brent J.
Fields, Secretary, Commission, dated April 8, 2016; Sal Arnuk and
Joe Saluzzi, Themis Trading, to Brent J. Fields, Secretary,
Commission, dated April 12, 2016; R. Glenn Hubbard, John L.
Thornton, and Hal S. Scott, Committee on Capital Markets Regulation,
to Brent J. Fields, Secretary, Commission, dated April 14, 2016;
Mary Ann Burns, FIA Principal Traders Group, to Brent J. Fields,
Secretary, Commission, dated April 14, 2016; William J. Stephenson,
Franklin Templeton Investments, to Brent J. Fields, Secretary,
Commission, dated April 14, 2016; John Nagel, Citadel, to Brent J.
Fields, Secretary, Commission, dated April 14, 2016; Eric Budish to
Brent J. Fields, Secretary, Commission, dated April 14, 2016; Bryan
Thompson, British Columbia Investment Management Corporation, to
Brent J. Fields, Secretary, Commission, dated April 14, 2016; Adam
Nunes, Hudson River Trading (``HRT''), to Brent J. Fields,
Secretary, Commission, dated April 14, 2016; William R. Harts,
Modern Markets Initiative, to Brent J. Fields, Secretary,
Commission, dated April 14, 2016; Joan C. Conley, Nasdaq, to Brent
J. Fields, Secretary, Commission, dated April 14, 2016; D. Keith
Ross, PDQ Enterprises, to Brent J. Fields, Secretary, Commission,
dated April 15, 2016; David Weisberger, Markit, to Brent J. Fields,
Secretary, Commission, dated April 18, 2016; Elizabeth K. King,
NYSE, to Brent J. Fields, Secretary, Commission, dated April 18,
2016; Kevin J. Weldon to Brent J. Fields, Secretary, Commission,
dated April 20, 2016; Sophia Lee, IEX, to Brent J. Fields,
Secretary, Commission, dated April 25, 2016; Abraham Kohen, AK
Financial Engineering Consultants, to Brent J. Fields, Secretary,
Commission, dated April 25, 2016; Theodore R. Lazo, SIFMA, to Brent
J. Fields, Secretary, Commission, dated May 2, 2016; The Honorable
Randy Hultgren to Mary Jo White, Commission, dated May 2, 2016; Amir
C. Tayrani, Gibson, Dunn & Crutcher LLP to Brent J. Fields,
Secretary, Commission, dated May 19, 2016.
\29\ As discussed and summarized in the Commission's notice of
its proposed interpretation, the Commission also received comments
on the issue addressed by this interpretation in response to the
initial notice of IEX's Form 1. See Notice of Proposed
Interpretation, supra note 26, at 15660, 15663-64. Those comments
are also discussed in the Commission's order approving IEX's Form 1
application for exchange registration, which the Commission is
separately issuing today. See IEX Form 1 Approval Order, supra note
4.
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A. De minimis for Purposes of Rule 611
Several commenters questioned whether de minimis intentional delays
were permissible and whether delays of less than a millisecond could be
considered de minimis in the current market. One commenter asserted
that any intentional delay, even a de minimis one, ``is flatly
inconsistent with the plain meaning of `immediate[ ],' '' \30\
referring to the dictionary definition of that term as `` `[o]ccurring
without delay' or `instant'.'' \31\ Another commenter asserted that
``[o]ne millisecond is not de minimis in any context except from the
perspective of a human trader'' and noted that a millisecond ``is over
10 times longer than the response time of most exchanges today.'' \32\
The commenter believed that sub-millisecond delays would ``impair a
market participant's ability to access a quote.'' \33\ Another
commenter argued that a millisecond is ``excessively long when compared
to computer response times.'' \34\ One commenter believed that a sub-
millisecond standard ``will become obsolete at faster and faster
rates'' as communications technology evolves.\35\
---------------------------------------------------------------------------
\30\ Gibson Dunn Interp Letter at 3.
\31\ Gibson Dunn Interp Letter at 2 (citing to Black's Law
Dictionary and Webster's Third New International Dictionary).
\32\ HRT Interp Letter at 2. The commenter further noted that
one millisecond is ``approximately three times the time via fiber
between the furthest New Jersey data centers and approximately \1/
8\th the time to Chicago via fiber from the New Jersey
datacenters.'' Id. at 2-3.
\33\ HRT Interp Letter at 2. This commenter also cited to the
Commission's MIDAS data from the fourth quarter of 2015, which
showed that over 13% of displayed orders in large stocks are
cancelled within one millisecond and over 9% of displayed orders in
large stocks are executed within one millisecond, and concluded that
``[g]iven that over 20% of orders are either executed or canceled
during the first millisecond they were displayed, it seems likely
that a one millisecond delay would have a material impact on a
participant's ability to access the quotations.'' See id. The
commenter qualified its observation by noting that these figures are
relevant ``[t]o the extent that a market with similar order
cancellation patterns implemented a one millisecond delay.'' See id.
The commenter also recommended that an exchange that imposes an
intentional delay ``allow market participants to bypass the delay
when attempting to access `protected quotations'.'' Id. at 1-2. See
also Citadel Interp Letter at 4 (``A time interval in which
approximately 10% of executions in many of the most widely traded
stocks typically occur is manifestly not de minimis.''); NYSE Interp
Letter at 7. The Commission notes that it is not clear whether an
exchange with an access delay that does not offer features (like co-
location, post-only orders, or maker-taker fees) that typically
attract latency-sensitive traders, who may be more likely to cancel
their orders within one millisecond of placing them, would
experience those cancellation rates. Further, the Commission notes
that Rule 611 focuses on inter-market order protection, which
applies only when market participants access protected quotations at
geographically dispersed trading centers that are already subject to
varying processing delays, some of which may be a millisecond or
more. A one millisecond intentional access delay is well within the
current geographic and technological latencies already experienced
by market participants when routing orders between trading centers.
\34\ FIA PTG Interp Letter at 3. The commenter further noted
that ``[f]or comparison, modern exchange matching engines process
orders in considerably less than \1/20\ of that time, and geographic
latencies between the major exchange data centers in New Jersey are
generally less than \1/4\ of that time.'' Id. See also Nasdaq Interp
Letter at 6 (noting that the throughput time of Nasdaq's system is
40 microseconds); Kohen Interp Letter at 1 (noting that the Bombay
Stock Exchange processes a transaction in 6 microseconds).
\35\ See Nasdaq Interp Letter at 3. See also HRT Interp Letter
at 3 (noting that ``a one millisecond time standard . . . is already
obsolete''); FIA PTG Interp Letter at 6 (``One millisecond is slow
by today's computer standards, and will be even slower (relatively
speaking) in the future.''). Some commenters criticized the proposed
interpretation as lacking empirical support for a sub-millisecond
threshold or consideration of alternative delays. See Nasdaq Interp
Letter at 4; Citadel Interp Letter at 3; Budish Interp Letter at 2.
As discussed above, the Commission notes that the interpretation
uses a de minimis standard, and not a specific time frame
demarcating permissible versus impermissible access delays.
---------------------------------------------------------------------------
Other commenters expressed concern that intentional access delays,
even de minimis ones, could add unnecessary complexity to the markets.
In particular, the commenters stressed that such delays could cause
orders to be routed to protected quotes that are no longer available.
For example, one commenter expressed concern that the proposed
interpretation could turn the national market system ``into a hall of
mirrors where it's impossible to know which prices are real and which
are latent reflections.'' \36\ The commenter opined that intentional
access delays would ``harm market transparency and degrade the value of
the NBBO'' and ``lead directly to lower fill rates'' when orders cannot
be filled because the exchange with an access delay displays a stale
better-priced quote that no longer exists but has yet to communicate
that information.\37\ Another commenter argued that the interpretation
could make market structure ``considerably more complex'' and lead to
``ghost quotes'' that could ``cloud price discovery and corrode
execution quality.'' \38\ The commenter further noted that ``an
artificial delay in an exchange quote anywhere affects the markets
everywhere'' and expressed concern that the proposed interpretation
could negatively impact otherwise efficient and accessible markets.\39\
One commenter expressed concern that intentional delays might ``open
the floodgates to a new wave of complex order types'' with delays
ranging from 1 to 1,000 microseconds.\40\ Other commenters, however,
opined that intentional access delays would not add complexity to the
markets and would fit within current latencies experienced by trading
centers. For example, one commenter asserted that a 350 microsecond
delay is ``not much more than the normal latency that all trading
platforms impose,'' and that an exchange could achieve the same delay
by ``locat[ing] its primary data center 65 or more miles away from the
other exchange data centers.'' \41\
---------------------------------------------------------------------------
\36\ FIA PTG Interp Letter at 2.
\37\ FIA PTG Interp Letter at 5. The commenter argued that this
might result in the appearance of more locked and crossed markets,
which may interfere with market stability during periods of high
volatility. See id.
\38\ PDQ Interp Letter at 1.
\39\ Id. at 2.
\40\ Nasdaq Interp Letter at 3-4; Gibson Dunn Interp Letter at
7.
\41\ Letter from James J. Angel to Securities and Exchange
Commission, dated December 5, 2015, at 3 (comment letter on IEX Form
1, File No. 10-222). See also Letter from Larry Tabb, TABB Group, to
Brent J. Fields, Secretary, Commission, dated November 23, 2015, at
1 (comment letter on IEX Form 1, File No. 10-222) (arguing that
IEX's 350 microsecond delay is not ``particularly problematic, as
the time gap is minimal, and (even including the speed bump) IEX
matches orders faster than a number of other markets''); Letter from
Charles M. Jones to Brent Fields, Secretary, Commission, dated March
2, 2016, at 2 (comment letter on IEX Form 1, File No. 10-222)
(noting that ``from an economic point of view the 350-microsecond
delay [proposed by IEX] per se should not be a particular cause for
concern, as it is well within the bounds of the existing,
geographically dispersed National Market System, and does not seem
likely to contribute substantially to a phantom liquidity
problem'').
---------------------------------------------------------------------------
In response to a comment that the dictionary definition of the term
``immediate[ ]'' precludes any delay in accessing quotations, the
Commission notes that quotations cannot be accessed
[[Page 40789]]
instantaneously.\42\ As the Commission repeatedly acknowledged when
adopting Regulation NMS, even ``immediately'' accessible protected
quotations in the context of Rules 600 and 611 are necessarily subject
to some delay.\43\ Specifically, as noted above, the Regulation NMS
Adopting Release discussed these delays and, although the Commission
declined to set a specific time standard, it contemplated the existence
of very short unintentional delays of a magnitude up to one second in
the exceptions to Rule 611.
---------------------------------------------------------------------------
\42\ See supra note 31 (citing to the Gibson Dunn Interp
Letter).
\43\ For example, the Rule 611(b)(1) exception refers to a
``material'' delay, which the Commission interpreted as one second
or more. See Regulation NMS Adopting Release, supra note 1, at
37519. In addition, the comment letters on Regulation NMS expressed
a multitude of views on the appropriate standard for assessing the
accessibility of a protected quotation. See also supra text
accompanying note 17 (noting that commenters on Regulation NMS who
advocated for setting a specific time standard for automated
quotations recommended a range of times from one second down to 250
milliseconds).
---------------------------------------------------------------------------
The Commission notes that, when it adopted Regulation NMS in 2005,
processing times were longer than they are now.\44\ Today, low latency
technology permits trading decisions to be made in microseconds, and
certain market participants use the fastest gateways and purchase co-
location to compete to access quotations at those speeds.\45\ As
discussed further below, however, even the fastest market participants
today must access protected quotations on trading centers where there
are delays of several milliseconds as a result of geography alone. In
addition, trading centers today are attempting to address concerns with
the fastest trading strategies by creating very small delays in
accessing their quotations.\46\ The Commission does not agree that such
efforts are incompatible with the Order Protection Rule. In the context
of Regulation NMS, the term ``immediate'' does not preclude all
intentional delays regardless of their duration, and such preclusion is
not necessary to achieve the objectives of Rule 611. As long as any
intentional delay is de minimis--i.e., does not impair fair and
efficient access to an exchange's protected quotations--it is
consistent with both the text and purpose of Rule 611.
---------------------------------------------------------------------------
\44\ See supra text accompanying note 17 (noting that commenters
on Regulation NMS who advocated for setting a specific time standard
for automated quotations recommended a range of times from one
second down to 250 milliseconds).
\45\ Exchanges currently have delays within their systems,
including access gateways of varying speeds as well as within their
co-location infrastructure. For example, some exchanges
intentionally employ a ``delay coil'' in their co-location
facilities or offer different access gateways of varying speeds
where one is not as ``fast as technologically feasible'' as the
other. See IEX First Form 1 Letter at 3 (comment letter on File No.
10-222) (referring to varying connectivity options offered by
exchanges from the NYSE, Nasdaq, and BATS groups, and citing the CEO
of Nasdaq referring to the intentional ``delay coil'' that Nasdaq
uses inside its co-location infrastructure). Compare Gibson Dunn
Interp Letter at 3 (writing on behalf of Nasdaq) (stating ``the term
`immediate[]' in Rule 600(b)(3) unambiguously forecloses
intentional, planned delay'' and referring to ``the Commission's own
understanding that the term [immediately] requires response times
that are as fast as technologically feasible'').
\46\ See, e.g., supra note 45 (discussing intentional delays
imposed in the exchange co-location context).
---------------------------------------------------------------------------
In response to commenters that argued that an intentional de
minimis delay would harm market transparency, degrade the NBBO, or
cloud price discovery, the Commission notes, as discussed further
below, that Rule 600(b)(3)(v) requires trading centers to immediately
update their displayed quotations to reflect material changes. Market
participants today already necessarily experience very short delays in
receiving updates to displayed quotations, as a result of geographic
and technological latencies, similar to those experienced when
accessing protected quotations. The Commission does not believe the
introduction of intentional delays of even smaller magnitude will
impair fair and efficient access to protected quotations.
In response to commenters' concern that an intentional delay is not
de minimis or could add complexity to the market, the Commission notes
that its interpretation does not address whether delays are de minimis
in all trading contexts, but rather only whether they impair fair and
efficient access to an exchange's quotations when a market participant
routes an order to comply with Rule 611.
Systems processing and transit times, whether at the exchange, the
market participant sending the order, or its agent, all create
latencies in accessing protected quotations.\47\ Even the most
technologically advanced market participants today encounter delays in
accessing protected quotations of other ``away'' automated trading
centers that either are transitory (e.g., as a result of message
queuing) or permanent (e.g., as a result of physical distance).
Furthermore, as noted above, any market participant co-located with the
major exchanges' data centers in northern New Jersey necessarily
encounters delays of 3-4 milliseconds--due to geography alone--in
accessing the protected quotations of securities traded on the Chicago
Stock Exchange's matching engine in Chicago.\48\ No commenter asserted
that the periodic message queuing or minor systems-processing delays
encountered at exchanges with protected quotations, or the time it
takes to access the protected quotes of the Chicago Stock Exchange's
Chicago facility, would, for example, materially undermine market
quality or price transparency, or the efficiency of order routing or
trading strategies.\49\
---------------------------------------------------------------------------
\47\ See supra note 34 (discussing comments on exchange
processing times).
\48\ Similarly, they would encounter delays in reaching other
``away'' exchanges located in other data centers. See, e.g., Letter
from David Lauer, Healthy Markets Association, to Brent J. Fields,
Secretary, Commission, dated November 6, 2015, at 4 (comment letter
on IEX Form 1, File No. 10-222) (noting that ``[t]he NBBO already
includes quotes with varied degrees of time lag'' and that the
length of IEX's coiled cable ``is far less than the distance between
NY and Chicago, and is remarkably similar to the distance between
Carteret and Mahwah (36 miles)''); Letter from Sophia Lee, IEX, to
Brent J. Fields, Secretary, Commission, dated November 23, 2016, at
4 and 7 (comment letter on IEX Form 1, File No. 10-222) (referring
to data from certain subscribers to IEX's ATS that, according to
IEX, indicate that those subscribers' average latency when trading
on IEX is comparable to that when trading on certain other
exchanges, ``is an order of magnitude less than that of the Chicago
Stock Exchange,'' and ``is on average less than the round-trip
latency of the NYSE as well'').
\49\ From the perspective of a market participant based in New
Jersey, classifying a New Jersey market with an intentional sub-
millisecond delay as ``manual'' while classifying a Chicago market
with geographic delay measured in multiple milliseconds as
``automated'' would be inequitable and would not further the goals
of Regulation NMS.
---------------------------------------------------------------------------
The Commission acknowledges that interpreting ``immediate'' to
include an intentional de minimis access delay, because it would be
additive, may increase the overall latency in accessing a particular
protected quotation, albeit by a very small amount. Such delays may be
a detectable difference for the most latency-sensitive market
participants and could marginally impact the efficiency of some of
their quoting and trading strategies, even if such intervals likely are
immaterial to investors with less advanced trading technology or a
longer-term investing horizon. But the Commission believes that just as
the geographic and technological delays experienced today do not impair
fair and efficient access to an exchange's quotations or otherwise
frustrate the objectives of Rule 611, the addition of a de minimis
intentional access delay is consistent with Rule 600(b)(3)'s
``immedia[cy]'' requirement.\50\
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\50\ One commenter argued that there is ``no evidence of a need
for a de minimis exception or that planned delays will benefit
investors in any meaningful way.'' Gibson Dunn Interp Letter at 7.
See also Nasdaq Interp Letter at 5. As discussed above, however, the
Commission believes that its updated interpretation is warranted in
light of technological and market developments and is consistent
with the purposes of Rule 611. See also comments submitted on IEX's
exchange registration (File No. 10-222), a number of which supported
the intentional delay proposed by IEX.
---------------------------------------------------------------------------
[[Page 40790]]
Further, the Commission notes that its interpretation uses a de
minimis standard specifically so that it may evolve with technological
and market developments. As it did when it established the
``immediate'' standard, the Commission believes it remains appropriate
to avoid ``specifying a specific time standard that may become obsolete
as systems improve over time.'' \51\ As explained further below, the
Commission's revised interpretation provides that the term
``immediate'' precludes any coding of automated systems or other type
of intentional device that would delay the action taken with respect to
a quotation unless such delay is de minimis in that it would not impair
a market participant's ability to fairly and efficiently access a
quote, consistent with the goals of Rule 611.
---------------------------------------------------------------------------
\51\ Regulation NMS Adopting Release, supra note 1, at 37519.
---------------------------------------------------------------------------
B. Operation of Access Delays
Several commenters that expressed general concerns with an
intentional access delay, even a de minimis one, expressed a particular
concern with those that would be ``selectively'' applied (e.g.,
intentional delays that are applied to members but not to the exchange
itself).\52\ In addition, several commenters asserted that the
Commission's proposed interpretation was overbroad based on their
belief that it would ``permit all sub-millisecond delays, regardless of
how those delays operate, the reasoning and incentives behind the
delays, or the impacts on the markets and investors.'' \53\ These
commenters instead urged the Commission to ``evaluate each proposed
delay, regardless of its duration, and specifically determine that it
is designed and applied in a manner that is consistent with the
purposes of the Exchange Act.'' \54\ Another commenter urged the
Commission to ``take into account not just the length of the delay, but
also its purpose.'' \55\
---------------------------------------------------------------------------
\52\ See, e.g., FIA PTG Interp Letter at 6; MMI Interp Letter at
1; Weldon Interp Letter at 1-2.; NYSE Interp Letter at 4; Citadel
Interp Letter at 8; Markit Interp Letter at 2-3.
\53\ Healthy Markets Interp Letter at 2. See also Ethical
Markets Interp Letter at 2-3, Franklin Templeton Interp Letter,
British Columbia Investment Management Corporation Interp Letter
(each repeating the recommendation of the Healthy Markets Interp
Letter); and Themis Interp Letter at 2.
\54\ Healthy Markets Interp Letter at 3. See also Ethical
Markets Interp Letter at 2-3, Franklin Templeton Interp Letter, and
British Columbia Investment Management Corporation Interp Letter
(each repeating the recommendation of the Healthy Markets Interp
Letter). The commenters further urged that the interpretation be
conditioned on: (1) Delays always being less than one millisecond;
(2) delays being applied equally to all participants and across all
order types; (3) data sent to the Securities Information Processors
should not be delayed; and (4) the purpose of each delay is
expressly stated and intended to benefit long-term investors. See
Healthy Markets Interp Letter at 4. See also Ethical Markets Interp
Letter at 2-3, Franklin Templeton Interp Letter, and British
Columbia Investment Management Corporation Interp Letter (each
repeating the recommendation of the Healthy Markets Interp Letter).
Another commenter raised a similar concern, and urged the Commission
to review each proposed access delay separately and ``ensure that
any such delays are equally applied to all market participants.''
See Committee on Capital Markets Regulation Interp Letter at 2. One
commenter urged the Commission to consider ``one single measuring
stick: Will the proposed delay serve long term investors?'' Themis
Interp Letter at 2.
\55\ Sethi Interp Letter at 2 (emphasis in original). Another
commenter suggested an alternative definition of ``immediate'' that
is not ``elapsed-time dependent'' but instead would consider an
exchange's response to an incoming order to be ``immediate'' if the
transition of the displayed quote from point A (before the order is
received) to B (after the order is received) can be ``fully
attributed to the execution of [the order] in a determinative way.''
Sakato Interp Letter at 1-2. The Commission believes that at this
time an order-by-order determination of whether a quotation is
``protected'' could introduce unworkable complexity into order
routing and could frustrate the incentive provided to market
participants to post the resting displayed limit orders that
underpin much of the price discovery in the market.
---------------------------------------------------------------------------
The Commission notes that this interpretation does not address
whether any particular access delay is unfairly discriminatory, an
inappropriate or unnecessary burden on competition, or otherwise
inconsistent with the Act. Rather, it clarifies that if an intentional
access delay is de minimis, then it is ``immediate'' for purposes of
Rules 600(b)(3) and 611. While the Commission's interpretation is
narrowly focused on the meaning and application of the word
``immediate[ ]'' in Rule 600(b)(3) in light of technological and market
developments since the adoption of Regulation NMS in 2005, the
evaluation of any proposed access delay would involve additional
considerations.
Specifically, this interpretation does not obviate the requirement
of individualized review of proposed access delays, including de
minimis delays, for consistency with the Exchange Act and Regulation
NMS. Any exchange seeking to impose an access delay must reflect that
in its rules, which are required to be filed with the Commission as
part of the exchange application or as an individual proposed rule
change. This interpretation does not alter the requirement that any
exchange access delay must be fully described in a written rule of the
exchange, which in turn must be filed with the Commission and published
for notice and comment, nor does it obviate the need for a proposed
rule change that would impose an access delay otherwise to comply with
the Act and the regulations thereunder applicable to the exchange.\56\
Accordingly, the commenters' concerns and recommended conditions are
addressed by the existing requirements and process through which
exchanges publicly propose their rule changes under the Act, and each
proposed access delay would be scrutinized on an individual basis
through that process.\57\ Any proposed application of an access delay
would therefore be subject to notice, comment, and the Commission's
separate evaluation of the proposed rule change.\58\
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\56\ Only registered exchanges and associations can have
``automated quotations'' that are ``protected quotations.'' See 17
CFR 242.611(b)(57). Such entities are required by Section 19 of the
Act to file all rules and proposed changes to their rules with the
Commission so that the Commission can review and publish them for
public notice and comment. See 15 U.S.C. 78s(b). Further, no
proposed rule change can take effect unless approved by the
Commission or otherwise permitted to become effective under the Act
and rules thereunder. See id. Similarly, an applicant seeking to
register as an exchange is required to file all proposed rules with
the Commission on Form 1, which the Commission publishes for notice
and comment. Once filed, the Commission evaluates each proposed rule
change for consistency with the Act and the rules thereunder. An
access delay would constitute a ``rule'' of an exchange because it
would be a ``stated policy, practice, or interpretation'' that
concerns a ``material aspect'' of the operation of an exchange, and
thus any new or amended delay would require a filing. See 15 U.S.C.
78c(a)(27) (defining ``rules of an exchange''); 17 CFR 240.19b-
4(a)(6) (defining ``stated policy, practice, or interpretation'');
17 CFR 240.19b-4 (noting that a stated policy, practice, or
interpretation is deemed to be a proposed change unless it is fairly
and reasonably implied by an existing rule or is concerned solely
with the administration of the exchange). As required by Section
19(b) of the Act, Rule 19b-4, and Form 19b-4, such exchange would be
required to, among other things, detail the purpose of the proposed
delay and analyze how the delay is consistent with the Act,
including the Section 6 standards governing, among other things,
unfair discrimination, protection of investors and the public
interest, inappropriate burdens on competition, and just and
equitable principles of trade. See Section 19(b), Rule 19b-4 and
Form 19b-4 (on which exchanges file their proposed rule changes).
\57\ See Citadel Interp Letter at 6-7 (acknowledging that new
access delays would need to be filed with the Commission before they
can be implemented, but expressing concern that it would ``be
exceedingly difficult for the staff to recognize all of the
implications and impacts of each delay mechanism'').
\58\ In the case of IEX, the Commission's separate order
approving IEX's Form 1 addresses the POP/coil delay's consistency
with the Act. See also SIFMA Interp Letter at 3 (recommending that
``any intentional delay should be predictable and universally
applied to all market participants in a non-discriminatory
manner'').
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[[Page 40791]]
C. Other Comments
A few commenters asked the Commission to provide more detail on the
application of the proposed interpretation.\59\ For example, one
commenter asked whether it applies to both inbound and outbound delays
and whether it should be based on the exchange's fastest or slowest
means of connecting.\60\ Other commenters asked how much variance will
be permitted and whether unintentional delays also should be covered by
the interpretation.\61\
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\59\ See, e.g., HRT Interp Letter at 3; Nasdaq Interp Letter at
3.
\60\ See HRT Interp Letter at 3. See also Citadel Interp Letter
at 9.
\61\ See, e.g., Citadel Interp Letter at 9-10. One commenter
asked whether there would be a process to remove protected quotation
status from an exchange that has an intentional delay that equals or
exceeds one millisecond. See id. at 10. If any market participant
experiences issues in accessing that exchange's quotation, it may
consider the applicability of the exceptions specified in Rule
611(b), including the ``material delay'' condition of Rule
611(b)(1). See 17 CFR 242.611(b)(1). The Commission notes that the
Rule 611(b)(1) ``self-help'' exception refers to a ``material
delay,'' and in the Regulation NMS Adopting Release, the Commission
provided an interpretation of the phrase ``material delay'' as one
where a market was ``repeatedly failing to respond within one second
after receipt of an order.'' See Regulation NMS Adopting Release,
supra note 1, at 37519.
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The interpretation of ``immediate'' applies to the term as used in
Rule 600(b)(3), so that it applies to any intentional delay imposed by
an exchange through any means provided by the exchange to access its
quotations. Further, as modified here from the proposed interpretation,
the interpretation applies only to intentional delays, as unintentional
delays are addressed by the existing exception contained in Rule
611(b)(1).\62\ Finally, in response to the commenters asking if both
inbound and outbound delays should be taken into account when measuring
the length of an intentional delay, the Commission notes that the
intentional delay, as it pertains to the Order Protection Rule, is
measured as a cumulative delay experienced by a non-routable order--in
other words, the intentional delay applied on an order message sent
into an exchange system through each of the events specified in the
definition of ``automated quotation'' in Rule 600(b)(3). Specifically,
any intentional delay imposed by the exchange in (1) executing an
immediate-or-cancel order against its displayed quotation up to its
full size, (2) cancelling any unexecuted portion of such order, or (3)
transmitting a response to the sender of such order, should be added
together in assessing compliance with Rule 611.\63\
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\62\ See 17 CFR 242.611(b)(1). See also supra note 61
(discussing the self-help exception). Accordingly, the Commission is
not including as part of the interpretation the phrase ``whether
intentional or not'' to focus its interpretation on access delays
that are intentional. While the Commission acknowledges that the
one-second (i.e., 1,000,000 microseconds) interpretation included in
the Regulation NMS Adopting Release for this exception, as well as
the ``one second'' exception in Rule 600(b)(8), may warrant
reconsideration in the future, that would be a separate analysis and
the Commission is not addressing those exceptions in this
interpretation. See also SIFMA Interp Letter at 4 (requesting that
the Commission clarify that it is not changing the self-help
threshold).
\63\ See 17 CFR 242.600(b)(3)(ii), (iii), and (iv),
respectively. See also Regulation NMS Adopting Release, supra note
1, at 37534. In the case of IEX, the POP/coil delay imposes a 350
microsecond delay inbound to the matching engine for non-routable
orders (but no additional delay when cancelling the unexecuted
portion of the order) and a 350 microsecond delay outbound on the
confirmation back to the order sender, for a cumulative 700
microsecond delay. In addition, the Commission notes that IEX
permits incoming orders to be marked as immediate-or-cancel, as is
required by Rule 600(b)(3). See 17 CFR 242.600(b)(3)(i). One
commenter argued that a delay in outbound data could cause the data
reported to ``not accurately reflect the state of a quotation.'' See
Gibson Dunn Interp Letter at 7. This commenter also asserted that
intentional delays in communicating reports of transactions would
decrease their ``informational value.'' See Gibson Dunn Interp
Letter at 7; Nasdaq Interp Letter at 2. The Commission notes that
the geographic and technological latencies that market participants
experience when routing to access a quotation also affect data
disseminated from the trading center to the market participant. In
other words, market participants already experience latencies when
receiving quotation updates and transaction information. At least
with respect to delays well within those existing latencies, the
Commission does not believe that a market participant's general
experience in receiving this information is likely to be altered
depending on whether the delay is intentional or unintentional.
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One commenter recommended that the Commission engage in notice and
comment rulemaking to effect ``a change of this magnitude,'' which it
argued contradicts the ``plain meaning of the term `immediate.' '' \64\
The commenter argued that an interpretation is only appropriate to
``provide guidance on how a new service or product not contemplated at
the time a rule was adopted should be treated under existing rules.''
\65\ As discussed above, however, the Commission does not believe the
dictionary definition of the term ``immediate[ ]'' forecloses de
minimis intentional delays (i.e., intentional delays so short that they
do not impair fair and efficient access to an exchange's quotations).
The Commission is updating its prior interpretation in light of
technological and market developments since the adoption of Regulation
NMS in 2005 to accommodate very short intentional delays that do not
impair fair and efficient access to protected quotations. Although the
Commission did afford an opportunity for notice and comment by
publishing a draft interpretation for comment, and did take the
comments it received into consideration, the Commission was not
required to undertake notice and comment rulemaking when updating its
interpretation of its own regulation.
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\64\ Citadel Interp Letter at 1. See also Hultgren Interp Letter
at 1; Gibson Dunn Interp Letter at 1-2.
\65\ Citadel Interp Letter at 2-3.
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Other commenters focused on what they viewed as a potential
opportunity for manipulative activity that could result from an access
delay to a market displaying a protected quotation. One commenter
opined that an access delay would make it easier to manipulate markets
``by taking advantage of stale and inaccessible quotations displayed
during the duration of any access delays,'' and that such manipulative
behavior ``could be particularly powerful in relatively illiquid
stocks.'' \66\ As an example, the commenter posited that a market
participant could ``safely manipulate a closing auction by sending
displayed orders to an exchange with an intentional 999 microsecond
delay and timing the submission of those orders for display 998
microseconds or less before the close'' because ``no other market
participant could reach them in time.'' \67\ Another commenter argued
that access delays could lead to ``stale prices [that] are guaranteed
to be displayed for a specific period of time up to 1 millisecond,''
which would cause pegged orders on other exchanges to ``be traded
against at known stale prices'' when such pegged order is pegged to the
stale price on the exchange with the access delay.\68\ The commenter
argued that this could lead to ``a potentially new mechanism for
spoofing . . . with the objective of affecting pegged orders on other
exchanges.'' \69\
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\66\ Id. at 6.
\67\ Id.
\68\ NYSE Interp Letter at 8. See also Citadel Interp Letter at
8 (arguing that ``every time market prices tick up or down, the NBBO
would be incorrect for at least the duration of any intentional
delays'' which would lead some pegged orders to track at
``inaccurate prices'').
\69\ NYSE Interp Letter at 8. See also HRT Interp Letter at 3
(citing to a comment from Instinet on IEX's Form 1 that discussed
the potential for ``spoofing'' by entering an order, waiting for 700
microseconds, and cancelling the order without the risk of another
market participant seeing or responding to it, but which could
provide a false or misleading appearance that could affect the
trading of other participants); FIA PTG Interp Letter at 7 (also
citing to the Instinet letter).
---------------------------------------------------------------------------
The Commission notes that the scenarios discussed by commenters are
not related to the issue addressed by this interpretation--whether an
intentional delay that is so short as not
[[Page 40792]]
to frustrate the goals of Rule 611 by interfering with fair and
efficient access to an exchange's quotations is consistent with Rule
600(b)(3)'s ``immedia[cy]'' requirement.\70\ If a delay is de minimis,
then whether it is unintentional or intentional in nature is not
expected to alter the potential for manipulative activity or make it
harder to detect and prosecute. One commenter noted that it is
important ``to contemplate and address the potential for abuse'' \71\
when an access delay is proposed and approved. The Commission agrees
that such scrutiny--both by the exchange proposing an access delay, and
by the Commission when considering whether to approve a proposed access
delay rule--would be important. The Commission notes that, pursuant to
Section 19(b) and Rule 19b-4, the proposing exchange would be required
to consider and address in its rule change filing the potential for
abuse of any proposed access delay, which would then be subject to
notice, comment, and Commission review. Further, even after the rule
change became effective, the Commission believes it would be incumbent
on the exchange to remain vigilant in surveilling for abuses and
violative conduct of its access delay rule, and consider amending its
access delay if necessary, among other considerations, for the
protection of investors and the public interest.\72\
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\70\ Nevertheless, the Commission believes that the scenarios
discussed by commenters would, as a practical matter, be difficult
to implement. For example, in the closing auction scenario, the
Commission believes it would be practically difficult to
successfully implement a coordinated single-digit microsecond
strategy during a broad-based auction because of the precision it
would require to ensure order arrival at the final microsecond and
not have it trade with a multitude of other interest in the auction.
Further, concerns surrounding pegged orders on away markets would
affect only the most latency sensitive traders and only apply when
the exchange with the access delay is alone at the NBBO, has
exhausted all displayed and non-displayed interest at its best
price, and is in the process of transitioning to a new price.
However, that possibility is not uniquely introduced by an exchange
with an access delay, but is currently present in a fragmented
market with geographically dispersed venues. For example, the same
problem (only exacerbated with considerably more latency) would be
present if the Chicago Stock Exchange was alone at the NBBO on a
symbol it trades from Chicago.
\71\ HRT Interp Letter at 3.
\72\ See 15 U.S.C. 78s(g)(1).
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III. Commission's Interpretation
In response to technological and market developments since the
adoption of Regulation NMS,\73\ the Commission believes that it is
appropriate to provide an updated interpretation of the meaning of the
term ``immediate'' in Rule 600(b)(3).
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\73\ A number of factors affect the speed at which a market
participant can receive market and quote data, submit orders, obtain
an execution, and receive information on trades, including hardware,
software, and physical distance. See, e.g., Securities Exchange Act
Release No. 61358 (January 14, 2010), 75 FR 3594, 3610-11 (January
21, 2010) (Concept Release on Equity Market Structure). Recent
technological advances have reduced the ``latency'' that these
factors introduce into the order handling process, both in absolute
and relative terms, and some market participants and liquidity
providers have invested in low-latency systems that take into
account the advances in technology. See id. at 3606; see also
Securities Exchange Act Release No. 76474 (November 18, 2015), 80 FR
80997, 81000 (December 28, 2015) (Regulation of NMS Stock
Alternative Trading Systems; Proposed Rule) (stating that ``[t]he
growth in trading centers and trading activity has been fueled
primarily by advances in technology for generating, routing, and
executing orders'' and that ``[t]hese technologies have markedly
improved the speed, capacity, and sophistication of the trading
mechanisms and processes that are available to market
participants'').
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Solely in the context of determining whether a trading center
maintains an ``automated quotation'' for purposes of Rule 611 of
Regulation NMS, the Commission does not interpret the term
``immediate'' used in Rule 600(b)(3) by itself to prohibit a trading
center from implementing an intentional access delay that is de
minimis--i.e., a delay so short as to not frustrate the purposes of
Rule 611 by impairing fair and efficient access to an exchange's
quotations. Accordingly, the Commission's revised interpretation
provides that the term ``immediate'' precludes any coding of automated
systems or other type of intentional device that would delay the action
taken with respect to a quotation unless such delay is de minimis.
The Commission's updated interpretation recognizes that a de
minimis access delay, even if it involves an ``intentional device''
that delays access to an exchange's quotation, is compatible with the
exchange having an ``automated quotation'' under Rule 600(b)(3) and
thus a ``protected quotation'' under Rule 611.\74\ Under this
interpretation, Rule 600(b)(3)'s ``immedia[cy]'' requirement does not
necessarily foreclose an automated trading center's use of very small
intentional delays to address concerns arising from low latency trading
strategies and other market structure issues. For example, intentional
access delays that are well within the geographic and technological
latencies experienced by market participants when routing orders are de
minimis to the extent they would not impair a market participant's
ability to access a displayed quotation consistent with the goals of
Rule 611.
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\74\ An exchange that proposed to provide any member or user
(including the exchange's inbound or outbound routing functionality,
or the exchange's affiliates) with exclusive privileged faster
access to its facilities over any other member or user would raise
concerns under the Act, including under Section 6(b)(5) and 6(b)(8)
of the Act, and would need to address those concerns in a Form 1
exchange registration application or a proposed rule change
submitted pursuant to Section 19 of the Act, as applicable.
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The interpretation does not change the existing requirement that,
prior to being implemented, an intentional delay of any duration must
be fully disclosed and codified in a written rule of the exchange that
has become effective pursuant to Section 19 of the Act, where the
exchange met its burden of articulating how the purpose, operation, and
application of the delay is consistent with the Act and the rules and
regulations thereunder applicable to the exchange.\75\
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\75\ As discussed above, any exchange that seeks to impose an
intentional access delay must first file a proposed rule change with
the Commission, which the Commission would publish for notice and
comment, and approve only after finding that it is consistent with
the applicable standards set forth in the Act. For example, a
proposed access delay that is only imposed on certain market
participants or certain types of orders would be scrutinized to
determine whether or not the discriminatory application of that
delay is unfair. See, e.g., Securities Exchange Act Release No.
77406, 81 FR 15765 (March 24, 2016) (File No. 10-222) (order
instituting proceedings on IEX's Form 1) (discussing the potentially
unfairly discriminatory application of an access delay to advantage
an affiliated outbound routing broker). If the Commission cannot
find that a proposed access delay is consistent with the Act, it
would disapprove the proposal, rendering moot the issue of whether a
quotation with such a delay is protected. Generally, the Commission
would be concerned about access delays that were imposed only on
certain market participants or intentional access delays that were
relieved based upon payment of certain fees.
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In the Notice of Proposed Interpretation, the Commission stated its
preliminary belief ``that, in the current market, delays of less than a
millisecond in quotation response times may be at a de minimis level
that would not impair a market participant's ability to access a quote,
consistent with the goals of Rule 611 and because such delays are
within the geographic and technological latencies experienced by market
participants today.'' \76\ As discussed above, the Commission received
a number of comments on that specific guidance.
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\76\ Notice of Proposed Interpretation, supra note 26, at 15665.
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At this time, the Commission is not adopting the proposed guidance
under this interpretation that delays of less than one millisecond are
de minimis. The Commission believes that, in light of the evolving
nature of technology and the markets, and the need to assess the impact
of intentional access delays on the markets, establishing a bright line
de minimis threshold is not appropriate at this time. Rather, the
Commission
[[Page 40793]]
believes that the interpretation is best focused on whether an
intentional delay is so short as to not frustrate the purposes of Rule
611 by impairing fair and efficient access to an exchange's quotations.
As it makes findings as to whether particular access delays are de
minimis in the context of individual exchange proposals,\77\ the
Commission recognizes that such findings create common standards that
must be applied fairly and consistently to all market participants.
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\77\ See supra note 56 (discussing the proposed rule change
process under the Exchange Act). See also IEX Form 1 Approval Order,
supra note 4.
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The Staff will also conduct a study within two years regarding the
effects of intentional access delays on market quality, including price
discovery and report back to the Commission with the results of any
recommendations. Based on the results of that study or earlier as it
determines, the Commission will reassess whether further action is
appropriate.
List of Subjects in 17 CFR Part 241
Securities.
Text of Amendments
For the reasons set out in the preamble, the Commission is amending
Title 17, chapter II, of the Code of Federal Regulations as follows:
PART 241--INTERPRETATIVE RELEASES RELATING TO THE SECURITIES
EXCHANGE ACT OF 1934 AND GENERAL RULES AND REGULATIONS THEREUNDER
Part 241 is amended by adding Release No. 34-78102 to the list of
interpretative releases as follows:
----------------------------------------------------------------------------------------------------------------
Federal Register vol.
Subject Release No. Date and page
----------------------------------------------------------------------------------------------------------------
* * * * * * *
Interpretation Regarding Automated 34-78102 June 17, 2016.................. 121 FR [Insert FR Page
Quotations Under Regulation NMS. Number].
----------------------------------------------------------------------------------------------------------------
By the Commission.
Dated: June 17, 2016.
Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-14876 Filed 6-22-16; 8:45 am]
BILLING CODE 8011-01-P
