Self-Regulatory Organizations; Chicago Stock Exchange, Inc.; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Adopt Rules To Implement the Regulation NMS Plan To Implement a Tick Size Pilot Program, 42380-42386 [2016-15324]
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Federal Register / Vol. 81, No. 125 / Wednesday, June 29, 2016 / Notices
NATIONAL SCIENCE FOUNDATION
FOR FURTHER INFORMATION CONTACT:
National Science Board; Sunshine Act
Meetings; Notice
David A. Trissell, General Counsel, at
202–789–6820.
SUPPLEMENTARY INFORMATION:
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to NSF regulations (45 CFR part 614),
the National Science Foundation Act, as
amended (42 U.S.C. 1862n–5), and the
Government in the Sunshine Act (5
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notice in regard to the scheduling of a
meeting for the transaction of National
Science Board business. The original
notice appeared at 81 FR 41354, on June
24, 2016.
CORRECTED DATE AND TIME: Wednesday,
June 29, 2016 at 2:00–3:00 p.m. EDT.
SUBJECT MATTER: NSB Chair’s opening
remarks; NSF remarks; discussion and
Board action regarding the project
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Chris Blair,
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[FR Doc. 2016–15540 Filed 6–27–16; 4:15 pm]
BILLING CODE 7555–01–P
POSTAL REGULATORY COMMISSION
[Docket No. CP2016–227]
New Postal Product
Postal Regulatory Commission.
ACTION: Notice.
AGENCY:
The Commission is noticing a
recent Postal Service filing for the
Commission’s consideration concerning
a negotiated service agreement. This
notice informs the public of the filing,
invites public comment, and takes other
administrative steps.
DATES: Comments are due: June 30,
2016.
ADDRESSES: Submit comments
electronically via the Commission’s
Filing Online system at https://
www.prc.gov. Those who cannot submit
comments electronically should contact
the person identified in the FOR FURTHER
INFORMATION CONTACT section by
telephone for advice on filing
alternatives.
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SUMMARY:
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Table of Contents
I. Introduction
II. Docketed Proceeding(s)
I. Introduction
The Commission gives notice that the
Postal Service filed request(s) for the
Commission to consider matters related
to negotiated service agreement(s). The
request(s) may propose the addition or
removal of a negotiated service
agreement from the market dominant or
the competitive product list, or the
modification of an existing product
currently appearing on the market
dominant or the competitive product
list.
Section II identifies the docket
number(s) associated with each Postal
Service request, the title of each Postal
Service request, the request’s acceptance
date, and the authority cited by the
Postal Service for each request. For each
request, the Commission appoints an
officer of the Commission to represent
the interests of the general public in the
proceeding, pursuant to 39 U.S.C. 505
(Public Representative). Section II also
establishes comment deadline(s)
pertaining to each request.
The public portions of the Postal
Service’s request(s) can be accessed via
the Commission’s Web site (https://
www.prc.gov). Non-public portions of
the Postal Service’s request(s), if any,
can be accessed through compliance
with the requirements of 39 CFR
3007.40.
The Commission invites comments on
whether the Postal Service’s request(s)
in the captioned docket(s) are consistent
with the policies of title 39. For
request(s) that the Postal Service states
concern market dominant product(s),
applicable statutory and regulatory
requirements include 39 U.S.C. 3622, 39
U.S.C. 3642, 39 CFR part 3010, and 39
CFR part 3020, subpart B. For request(s)
that the Postal Service states concern
competitive product(s), applicable
statutory and regulatory requirements
include 39 U.S.C. 3632, 39 U.S.C. 3633,
39 U.S.C. 3642, 39 CFR part 3015, and
39 CFR part 3020, subpart B. Comment
deadline(s) for each request appear in
section II.
II. Docketed Proceeding(s)
1. Docket No(s).: CP2016–227; Filing
Title: Notice of the United States Postal
Service of Filing a Functionally
Equivalent Global Plus 1C Negotiated
Service Agreement and Application for
Non-Public Treatment of Materials Filed
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Under Seal; Filing Acceptance Date:
June 22, 2016; Filing Authority: 39
U.S.C. 3642 and 39 CFR 3020.30 et seq.;
Public Representative: Curtis E. Kidd;
Comments Due: June 30, 2016.
This notice will be published in the
Federal Register.
Stacy L. Ruble,
Secretary.
[FR Doc. 2016–15334 Filed 6–28–16; 8:45 am]
BILLING CODE 7710–FW–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–78146; File No. SR–CHX–
2016–09]
Self-Regulatory Organizations;
Chicago Stock Exchange, Inc.; Notice
of Filing and Immediate Effectiveness
of Proposed Rule Change To Adopt
Rules To Implement the Regulation
NMS Plan To Implement a Tick Size
Pilot Program
June 23, 2016.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’),1 and Rule 19b–4 2 thereunder,
notice is hereby given that on June 16,
2016, the Chicago Stock Exchange, Inc.
(‘‘CHX’’ or the ‘‘Exchange’’) filed with
the Securities and Exchange
Commission (‘‘Commission’’) the
proposed rule change as described in
Items I, II, and III below, which Items
have been prepared by the Exchange.
The Commission is publishing this
notice to solicit comments on the
proposed rule change from interested
persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
CHX proposes to amend the Rules of
the Exchange (‘‘CHX Rules’’) to adopt
Article 20, Rule 13(a) to implement the
quoting and trading provisions of the
Regulation NMS Plan to Implement a
Tick Size Pilot Program (‘‘Plan’’). The
proposed rule change is substantially
similar to a proposed rule change
approved by the Commission by the
Bats BZX Exchange, Inc. f/k/a BATS
Exchange, Inc. (‘‘BZX’’) to adopt BZX
Rule 11.27(a) which also implemented
the quoting and trading provisions of
the Plan.3 Therefore, the Exchange has
designated this proposal as ‘‘noncontroversial’’ and provided the
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 See Securities Exchange Act Release No. 77291
(March 3, 2016), 81 FR 12543 (March 9, 2016)
(order approving SR–BATS–2015–108).
2 17
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Federal Register / Vol. 81, No. 125 / Wednesday, June 29, 2016 / Notices
Commission with the notice required by
Rule 19b–4(f)(6)(iii) under the Act.4
The text of this proposed rule change
is available on the Exchange’s Web site
at (www.chx.com) and in the
Commission’s Public Reference Room.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
CHX included statements concerning
the purpose of and basis for the
proposed rule changes and discussed
any comments it received on the
proposed rule change. The text of these
statements may be examined at the
places specified in Item IV below. The
CHX has prepared summaries, set forth
in sections A, B and C below, of the
most significant aspects of such
statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Changes
1. Purpose
On August 25, 2014, NYSE Group,
Inc., on behalf of the Exchange, BZX,
Bats BYX Exchange, Inc. f/k/a BATS Y–
Exchange, Inc., Bats EDGA Exchange,
Inc. f/k/a EDGA Exchange, Inc., Bats
EDGX Exchange, Inc. f/k/a EDGX
Exchange, Inc., Financial Industry
Regulatory Authority, Inc. (‘‘FINRA’’),
NASDAQ OMX BX, Inc., NASDAQ
OMX PHLX LLC, the Nasdaq Stock
Market LLC, New York Stock Exchange
LLC (‘‘NYSE’’), NYSE MKT LLC, and
NYSE Arca, Inc. (collectively ‘‘Plan
Participants’’),5 filed with the
Commission, pursuant to Section 11A of
the Act 6 and Rule 608 of Regulation
NMS thereunder, the Plan to implement
a tick size pilot program (‘‘Pilot’’).7 The
Plan Participants filed the Plan to
comply with an order issued by the
Commission on June 24, 2014.8 The
Plan 9 was published for comment in the
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4 17
CFR 240.19b–4(f)(6)(iii).
5 A ‘‘Participant’’ is a ‘‘member’’ of the Exchange
for purposes of the Act. See CHX Article 1, Rule
1(s). For clarity, the Exchange proposes to utilize
the term ‘‘CHX Participant’’ when referring to
members of the Exchange and the term ‘‘Plan
Participant’’ when referring to Participants of the
Plan.
6 15 U.S.C. 78k–1.
7 See Letter from Brendon J. Weiss, Vice
President, Intercontinental Exchange, Inc., to
Secretary, Commission, dated August 25, 2014.
8 See Securities Exchange Act Release No. 72460
(June 24, 2014), 79 FR 36840 (June 30, 2014).
9 Unless otherwise specified, capitalized terms
used in this rule filing are defined as set forth in
the Plan. The Exchange also proposes
supplementary material as part of this proposed
rule change to, among other things, provide that the
terms used in proposed Rule 13(a) shall have the
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17:18 Jun 28, 2016
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Federal Register on November 7, 2014,
and approved by the Commission, as
modified, on May 6, 2015.10
The Plan is designed to allow the
Commission, market participants, and
the public to study and assess the
impact of increment conventions on the
liquidity and trading of the common
stocks of small-capitalization
companies. Each Plan Participant is
required to comply with, and to enforce
compliance by its member
organizations, as applicable, with the
provisions of the Plan. As is described
more fully below, the proposed rules
would require CHX Participants to
comply with the applicable quoting and
trading increments for Pilot Securities.11
The Pilot will include stocks of
companies with $3 billion or less in
market capitalization, an average daily
trading volume of one million shares or
less, and a volume weighted average
price of at least $2.00 for every trading
day. The Pilot will consist of a control
group of approximately 1400 Pilot
Securities and three test groups with
400 Pilot Securities in each selected by
a stratified sampling.12 During the Pilot,
Pilot Securities in the control group will
be quoted and traded at the currently
permissible increments. Pilot Securities
in the first test group (‘‘Test Group
One’’) will be quoted in $0.05 minimum
increments but will continue to trade at
any price increment that is currently
permitted.13 Pilot Securities in the
second test group (‘‘Test Group Two’’)
will be quoted in $0.05 minimum
increments and will trade at $0.05
minimum increments subject to a
midpoint exception, a retail investor
order exception, and a negotiated trade
exception.14 Pilot Securities in the third
test group (‘‘Test Group Three’’) will be
subject to the same restrictions as Test
Group Two and also will be subject to
the ‘‘Trade-at’’ requirement to prevent
price matching by a market participant
that is not displaying at a price of a
Trading Center’s 15 ‘‘Best Protected Bid’’
same meaning as provided in the Plan, unless
otherwise specified.
10 See Securities Exchange Act Release No. 74892
(May 6, 2015), 80 FR 27514 (May 13, 2015)
(‘‘Approval Order’’).
11 The Exchange proposes to add Interpretation
and Policy .03 to Rule 13(a) to provide that the Rule
shall be in effect during a pilot period to coincide
with the pilot period for the Plan (including any
extensions to the pilot period for the Plan).
12 See Section V of the Plan for identification of
Pilot Securities, including criteria for selection and
grouping.
13 See Section VI(B) of the Plan.
14 See Section VI(C) of the Plan.
15 The Plan incorporates the definition of
‘‘Trading Center’’ from Rule 600(b)(78) of
Regulation NMS. Regulation NMS defines a Trading
Center as ‘‘a national securities exchange or
national securities association that operates an SRO
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42381
or ‘‘Best Protected Offer,’’ unless an
enumerated exception applies.16 In
addition to the exceptions provided
under Test Group Two, an exception for
Block Size orders and exceptions that
mirror those under Rule 611 of
Regulation NMS 17 will apply to the
Trade-at requirement.
Compliance With the Quoting and
Trading Increments of the Plan
The Plan requires the Exchange to
establish, maintain, and enforce written
policies and procedures that are
reasonably designed to comply with
applicable quoting and trading
requirements specified in the Plan.18
Accordingly, the Exchange is proposing
new paragraph (a) to Article 20, Rule 13
(Compliance with Regulation NMS Plan
to Implement a Tick Size Pilot Program)
to require CHX Participants to comply
with the quoting and trading provisions
of the Plan.
Proposed Rule 13(a) (Compliance
with Quoting and Trading Restrictions)
sets forth the requirements for the
Exchange and CHX Participants in
meeting their obligations under the
Plan. Rule 13(a)(1) will require CHX
Participants to establish, maintain and
enforce written policies and procedures
that are reasonably designed to comply
with the applicable quoting and trading
requirements of the Plan. Rule 13(a)(2)
provides that the Matching System 19
will not display, quote or trade in
violation of the applicable quoting and
trading requirements for a Pilot Security
specified in the Plan and this Rule,
unless such quotation or transaction is
specifically exempted under the Plan.
Proposed Rule 13(a)(3) clarifies the
treatment of Pilot Securities that drop
below $1.00 during the Pilot Period. In
particular, Rule 13(a)(3) provides that, if
the price of a Pilot Security drops below
$1.00 during regular trading hours on
any trading day, such Pilot Security will
continue to be a Pilot Security subject
trading facility, an alternative trading system, an
exchange market maker, an OTC market maker, or
any other broker or dealer that executes orders
internally by trading as principal or crossing orders
as agent.’’
16 See Section VI(D) of the Plan.
17 17 CFR 242.611.
18 The Exchange is also required by the Plan to
develop appropriate policies and procedures that
provide for data collection and reporting to the
Commission of data described in Appendixes B and
C of the Plan. CHX Article 20, Rule 13(b) provides
rules that require compliance by CHX Participants
with the collection of data provisions of the Plan
described in Section VII of the Plan. See Exchange
Act Release No. 77469 (March 29, 2016), 81 FR
19275 (April 4, 2016) (SR–CHX–2016–03).
19 The Matching System is an automated order
execution system, which is a part of the Exchange’s
‘‘Trading Facilities,’’ as defined under CHX Article
1, Rule 1(z).
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to the Plan. However, if the Closing
Price of a Pilot Security on any given
trading day is below $1.00, such Pilot
Security will be moved out of its Pilot
Test Group into the Control Group, and
may then be quoted and traded at any
price increment that is currently
permitted for the remainder of the Pilot
Period.20 Rule 13(a)(3) also provides
that, notwithstanding anything
contained within these rules to the
contrary, Pilot Securities (whether in
the Control Group or any Pilot Test
Group) will continue to be subject to the
data collection requirements of the Plan
at all times during the Pilot Period and
for the six-month period following the
end of the Pilot Period.
In approving the Plan, the
Commission noted that the Plan
Participants had proposed additional
selection criteria to minimize the
likelihood that securities that trade with
a share price of $1.00 or less would be
included in the Pilot, and stated that,
once established, the universe of Pilot
Securities should stay as consistent as
possible so that the analysis and data
can be accurate throughout the Pilot
Period.21 The Exchange notes that a
Pilot Security that drops below $1.00
during regular trading hours will remain
in its applicable Test Group; a Pilot
Security will only be moved to the
Control Group if its Closing Price on any
given trading day is below $1.00. The
Exchange believes that this provision is
appropriate because it will help ensure
that Pilot Securities in Test Groups One,
Two and Three continue to reflect the
Pilot’s selection criteria, helping ensure
the accuracy of the resulting data. The
Exchange also believes that this
provision is appropriate because it
responds to comments that the Plan
20 The NYSE, on behalf of the Plan Participants,
submitted a letter to Commission requesting
exemption from certain provisions of the Plan
related to quoting and trading. See letter from
Elizabeth K. King, NYSE, to Brent J. Fields,
Secretary, Commission, dated October 14, 2015
(‘‘October Exemption Request’’). FINRA, also on
behalf of the Plan Participants, submitted a separate
letter to Commission requesting additional
exemptions from certain provisions of the Plan
related to quoting and trading. See letter from
Marcia E. Asquith, Senior Vice President and
Corporate Secretary, FINRA, to Robert W. Errett,
Deputy Secretary, Commission, dated February 23,
2016 (‘‘February Exemption Request’’). The
Commission, pursuant to its authority under Rule
608(e) of Regulation NMS, granted BZX a limited
exemption from the requirement to comply with
certain provisions of the Plan as specified in the
letter and noted herein. See letter from David
Shillman, Associate Director, Division of Trading
and Markets, Commission to Eric Swanson, General
Counsel, BZX, dated March 3, 2016 (‘‘Exemption
Letter’’). The Exchange is seeking the same
exemptions as requested in the October Exemption
Request and the February Exemption Request.
21 See Approval Order, supra note 10, 80 FR at
27535.
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address the treatment of securities that
trade below $1.00 during the Pilot
Period.22
Proposed Rule 13(a)(4) sets forth the
applicable limitations for securities in
Test Group One. Consistent with the
language of the Plan, Rule 13(a)(4)
provides that no CHX Participant may
display, rank, or accept from any person
any displayable or non-displayable bids
or offers, orders, or indications of
interest in any Pilot Security in Test
Group One in increments other than
$0.05. However, orders priced to
execute at the midpoint of the national
best bid and national best offer
(‘‘NBBO’’) or best protected bid and best
protected offer (‘‘PBBO’’) 23 and orders
entered in a Plan Participant-operated
retail liquidity program may be ranked
and accepted in increments of less than
$0.05. Pilot Securities in Test Group
One may continue to trade at any price
increment that is currently permitted by
applicable Plan Participant, SEC and
Exchange rules.
Proposed Rule 13(a)(5) sets forth the
applicable quoting and trading
requirements for securities in Test
Group Two. This provision states that
no CHX Participant may display, rank,
or accept from any person any
displayable or non-displayable bids or
offers, orders, or indications of interest
in any Pilot Security in Test Group Two
in increments other than $0.05.
However, orders priced to execute at the
midpoint of the NBBO or PBBO and
orders entered in a Plan Participantoperated retail liquidity program may be
ranked and accepted in increments of
less than $0.05.
Proposed Rule 13(a)(5) also sets forth
the applicable trading restrictions for
Test Group Two securities. Absent any
of the exceptions listed in the Rule, no
CHX Participant may execute orders in
any Pilot Security in Test Group Two in
price increments other than $0.05. The
$0.05 trading increment will apply to all
trades, including Brokered Cross Trades.
Consistent with the language of the
Plan, the Rule provides that Pilot
22 Id.
23 Regulation NMS defines a protected bid or
protected offer as a quotation in an NMS stock that
(1) is displayed by an automated trading center; (2)
is disseminated pursuant to an effective national
market system plan; and (3) is an automated
quotation that is the best bid or best offer of a
national securities exchange, the best bid or best
offer of The Nasdaq Stock Market, Inc., or the best
bid or best offer of a national securities association
other than the best bid or best offer of The Nasdaq
Stock Market, Inc. See 17 CFR 242.600(57). In the
Approval Order, the Commission noted that the
protected quotation standard encompasses the
aggregate of the most aggressively priced displayed
liquidity on all Trading Centers, whereas the NBBO
standard is limited to the single best order in the
market. See Approval Order, supra note 10, 80 FR
at 27539.
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Securities in Test Group Two may trade
in increments of less than $0.05 under
the following circumstances: (1) Trading
may occur at the midpoint between the
NBBO or the PBBO; (2) Retail Investor
Orders may be provided with price
improvement that is at least $0.005
better than the PBBO; and (3) Negotiated
Trades may trade in increments of less
than $0.05.
The Exchange also proposes to add an
exception to Rule 13(a)(5) to permit
CHX Participants to fill a customer
order in a Pilot Security in Test Group
Two at a non-nickel increment to
comply with Article 9, Rule 17
(Prohibition Against Trading Ahead of
Customer Orders) under limited
circumstances. Specifically, the
exception would allow the execution of
a customer order following a proprietary
trade by the CHX Participant at an
increment other than $0.05 in the same
security, on the same side and at the
same price as (or within the prescribed
amount of) a customer order owed a fill
pursuant to Article 9, Rule 17, where
the triggering proprietary trade was
permissible pursuant to an exception
under the Plan.24
Thus, the Exchange is proposing to
add a customer order protection
exception to Rule 13(a)(5) that would
permit CHX Participants to trade Pilot
Securities in Test Group Two in
increments less than $0.05, and where
the CHX Participant is executing a
customer order to comply with Article
9, Rule 17 following the execution of a
proprietary trade by the CHX Participant
at an increment other than $0.05 where
such proprietary trade was permissible
pursuant to an exception under the
Plan. The Exchange believes that this
approach best facilitates the ability of
CHX Participants to continue to protect
customer orders while retaining the
flexibility to engage in proprietary
trades that comply with an exception to
the Plan.
Proposed Rule 13(a)(6) sets forth the
applicable quoting and trading
restrictions for Pilot Securities in Test
Group Three. The rule provides that no
CHX Participant may display, rank, or
accept from any person any displayable
or non-displayable bids or offers, orders,
or indications of interest in any Pilot
Security in Test Group Three in
increments other than $0.05. However,
orders priced to execute at the midpoint
of the NBBO or PBBO and orders
24 The Commission granted BZX an exemption
from Rule 608(c) related to this provision. See
February Exemption Request and Exemption Letter,
supra note 20. The Exchange is seeking the same
exemptions as requested in the October Exemption
Request and the February Exemption Request.
Supra note 20.
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entered in a Plan Participant-operated
retail liquidity program may be ranked
and accepted in increments of less than
$0.05. The rule also states that, absent
any of the applicable exceptions, no
CHX Participant that operates a Trading
Center may execute orders in any Pilot
Security in Test Group Three in price
increments other than $0.05. The $0.05
trading increment will apply to all
trades, including Brokered Cross
Trades.25
Proposed Rule 13(a)(6)(C) sets forth
the exceptions pursuant to which Pilot
Securities in Test Group Three may
trade in increments of less than $0.05.
First, trading may occur at the midpoint
between the NBBO or PBBO. Second,
Retail Investor Orders may be provided
with price improvement that is at least
$0.005 better than the PBBO. Third,
Negotiated Trades may trade in
increments of less than $0.05.
Similar to that proposed under Rule
13(a)(5) described above, the Exchange
also proposes to add an exception to
Rule 13(a)(6) to permit CHX Participants
to fill a customer order in a Pilot
Security in Test Group Three at a nonnickel increment to comply with Article
9, Rule 17 (Prohibition Against Trading
Ahead of Customer Orders) under
limited circumstances. Specifically, the
exception would allow the execution of
a customer order following a proprietary
trade by the CHX Participant at an
increment other than $0.05 in the same
security, on the same side and at the
same price as (or within the prescribed
amount of) a customer order owed a fill
pursuant to Article 9, Rule 17, where
the triggering proprietary trade was
permissible pursuant to an exception
under the Plan.26 Thus, the Exchange is
proposing to add a customer order
protection exception to Rule 13(a)(6)
that would permit CHX Participants to
trade Pilot Securities in Test Group
Three in increments less than $0.05, and
where the CHX Participant is executing
a customer order to comply with Article
9, Rule 17 following the execution of a
proprietary trade by the CHX Participant
at an increment other than $0.05 where
such proprietary trade was permissible
pursuant to an exception under the
Plan.
Proposed Rule 13(a)(6)(D) sets forth
the ‘‘Trade-at Prohibition,’’ which is the
prohibition against executions by a CHX
25 A brokered cross trade is a trade that a brokerdealer that is a member of a Plan Participant
executes directly by matching simultaneous buy
and sell orders for a Pilot Security. See Section I(G)
of the Plan.
26 See supra note 24. The Exchange is seeking the
same exemptions as requested in the October
Exemption Request and the February Exemption
Request. Supra note 20.
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17:18 Jun 28, 2016
Jkt 238001
Participant that operates a Trading
Center of a sell order for a Pilot Security
in Test Group Three at the price of a
Protected Bid or the execution of a buy
order for a Pilot Security in Test Group
Three at the price of a Protected Offer
during regular trading hours, absent any
of the exceptions set forth in Rule
13(a)(6)(D). Consistent with the Plan,
the rule reiterates that a CHX Participant
that operates a Trading Center that is
displaying a quotation, via either a
processor or an SRO quotation feed that
is a Protected Bid or Protected Offer is
permitted to execute orders at that level,
but only up to the amount of its
displayed size. A CHX Participant that
operates a Trading Center that was not
displaying a quotation that is the same
price as a Protected Quotation, via
either a processor or an SRO quotation
feed, is prohibited from price-matching
protected quotations unless an
exception applies.
Consistent with the Plan, proposed
Rule 13(a)(6)(D) also sets forth the
exceptions to the Trade-at prohibition,
pursuant to which a CHX Participant
that operates a Trading Center may
execute a sell order for a Pilot Security
in Test Group Three at the price of a
Protected Bid or execute a buy order for
a Pilot Security in Test Group Three at
the price of a Protected Offer. The first
exception to the Trade-at Prohibition is
the ‘‘display exception,’’ which allows a
trade to occur at the price of the
Protected Quotation, up to the Trading
Center’s full displayed size, if the order
‘‘is executed by a trading center that is
displaying a quotation.’’ 27
In Rule 13(a)(6)(D), the Exchange
proposes that a CHX Participant that
utilizes the independent aggregation
unit concept may satisfy the display
exception only if the same independent
aggregation unit that displays interest
via either a processor or an SRO
Quotation Feed also executes an order
in reliance upon this exception. The
rule provides that ‘‘independent
aggregation unit’’ has the same meaning
as provided under Rule 200(f) of SEC
Regulation SHO.28 This provision also
recognizes that not all CHX Participants
27 See
Section VI(D)(1) of the Plan.
CFR 242.200. Treatment as an independent
aggregation unit is available if traders in an
aggregation unit pursue only the particular trading
objective(s) or strategy(ies) of that aggregation unit
and do not coordinate that strategy with any other
aggregation unit. Therefore, one independent
aggregation unit within a Trading Center cannot
execute trades pursuant to the display exception in
reliance on quotations displayed by a different
independent aggregation unit. As an example, an
agency desk of a Trading Center cannot rely on the
quotation of a proprietary desk in a separate
independent aggregation unit at that same Trading
Center.
28 17
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Fmt 4703
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42383
may utilize the independent aggregation
unit concept as part of their regulatory
structure, and still permits such CHX
Participants to utilize the display
exception if all the other requirements
of that exception are met.
As initially proposed by the Plan
Participants, the Plan contained an
additional condition to the display
exception, which would have required
that, where the quotation is displayed
through a national securities exchange,
the execution at the size of the order
must occur against the displayed size on
that national securities exchange; and
where the quotation is displayed
through the Alternative Display Facility
or another facility approved by the
Commission that does not provide
execution functionality, the execution at
the size of the order must occur against
the displayed size in accordance with
the rules of the Alternative Display
Facility of such approved facility
(‘‘venue limitation’’).29 Some
commenters stated that this provision
was anti-competitive, as it would have
forced off-exchange Trading Centers to
route orders to the venue on which the
order was displayed.30
In approving the Plan, the
Commission modified the Trade-At
Prohibition to remove the venue
limitation.31 The Commission noted
that the venue limitation was not
prescribed in its Order mandating the
filing of the Plan.32 The Commission
also noted that the venue limitation
would have unnecessarily restricted the
ability of off-exchange market
participants to execute orders in Test
Group Three Securities, and that
removing the venue limitation should
mitigate concerns about the cost and
complexity of the Pilot by reducing the
need for off-exchange Trading Centers to
route to the exchange.33 The
Commission also stated that the venue
limitation did not create any additional
incentives to display liquidity in
furtherance of the purposes of the
Trade-At Prohibition, because the
requirement that a Trading Center could
only trade at a protected quotation up to
its displayed size should be sufficient to
incentivize displayed liquidity.34
Consistent with Plan and the SEC’s
determination to remove the venue
limitation, the Exchange is making clear
that the display exception applies to
29 See Securities Exchange Act Release No. 73511
(November 3, 2014), 79 FR 66423, 66437 (November
7, 2014).
30 See Approval Order, supra note 10, 80 FR at
27540.
31 Id.
32 Id.
33 Id.
34 Id.
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trades done by a Trading Center
otherwise than on an exchange where
the Trading Center has previously
displayed a quotation in either an
agency or a principal capacity. As part
of the display exception, the Exchange
also proposes that a Trading Center that
is displaying a quotation as agent or
riskless principal may only execute as
agent or riskless principal, while a
Trading Center displaying a quotation as
principal (excluding riskless principal)
may execute either as principal or agent
or riskless principal. The Exchange
believes this is consistent with the Plan
and the objective of the Trade-at
Prohibition, which is to promote the
display of liquidity and generally to
prevent any Trading Center that is not
quoting from price-matching Protected
Quotations. Providing that a Trading
Center may not execute on a proprietary
basis in reliance on a quotation
representing customer interest (whether
agency or riskless principal) ensures
that the Trading Center cannot avoid
compliance with the Trade-at
Prohibition by trading on a proprietary
basis in reliance on a quotation that
does not represent such Trading
Center’s own interest. Where a Trading
Center is displaying a quotation at the
same price as a Protected Quotation in
a proprietary capacity, transactions in
any capacity at the price and up to the
size of such Trading Center’s displayed
quotation would be permissible.
Transactions executed pursuant to the
display exception may occur on the
venue on which such quotation is
displayed or over the counter.
The proposal also excepts Block Size
orders 35 and permits Trading Centers to
trade at the price of a Protected
Quotation, provided that the order is of
Block Size at the time of origin and is
not an aggregation of non-block orders,
broken into orders smaller than Block
Size prior to submitting the order to a
Trading Center for execution; or
executed on multiple Trading Centers.36
The Plan only provides that Block Size
orders shall be exempted from the
Trade-At Prohibition. In requiring that
the order be of Block Size at the time of
origin and not an aggregation of nonblock orders, or broken into orders
smaller than Block Size prior to
submitting the order to a Trading Center
35 ‘‘Block Size’’ is defined in the Plan as an order
(1) of at least 5,000 shares or (2) for a quantity of
stock having a market value of at least $100,000.
36 Once a Block Size order or portion of such
Block Size order is routed from one Trading Center
to another Trading Center in compliance with Rule
611 of Regulation NMS, the Block Size order would
lose the proposed Trade-at exemption, unless the
Block Size remaining after the first route and
execution meets the Block Size definition under the
Plan.
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for execution; or executed on multiple
Trading Centers, the Exchange believes
that it is providing clarity as to the
circumstances under which a Block Size
order will be excepted from the TradeAt Prohibition.
Consistent with the Plan, the proposal
also excepts an order that is a Retail
Investor Order that is executed with at
least $0.005 price improvement.
The exceptions set forth in proposed
Rule 13(a)(6)(D)(ii)(d) through (n) are
based on the exceptions found in Rule
611 of Regulation NMS.37 The
subparagraph (d) exception applies
when the order is executed when the
Trading Center displaying the Protected
Quotation that was traded at was
experiencing a failure, material delay, or
malfunction of its systems or
equipment. The subparagraph (e)
exception applies to an order that is
executed as part of a transaction that
was not a ‘‘regular way’’ contract. The
subparagraph (f) exception applies to an
order that is executed as part of a singlepriced opening, reopening, or closing
transaction by the Trading Center. The
subparagraph (g) exception applies to an
order that is executed when a Protected
Bid was priced higher than a Protected
Offer in a Pilot Security.
The subparagraph (h) exception
applies when the order is identified as
a Trade-at Intermarket Sweep Order.
The subparagraph (i) exception applies
when the order is executed by a Trading
Center that simultaneously routed
Trade-at Intermarket Sweep Orders to
execute against the full displayed size of
a Protected Quotation with a price that
is better than or equal to the limit price
of the limit order identified as a Tradeat Intermarket Sweep Order. Depending
on whether Rule 611 or the Trade-at
requirement applies, an ISO may mean
that the sender of the ISO has swept
better-priced protected quotations, so
that the recipient of that ISO may trade
through the price of the protected
quotation (Rule 611), or it could mean
that the sender of the ISO has swept
protected quotations at the same price
that it wishes to execute at (in addition
to any better-priced quotations), so the
recipient of that ISO may trade at the
price of the protected quotation (Tradeat). Given that the meaning of an ISO
may differ under Rule 611 and Trade-at,
the Exchange proposes Rule
13(a)(6)(D)(ii)(h) so that the recipient of
an ISO in a Test Group Three security
would know, upon receipt of that ISO,
that the Trading Center that sent the ISO
had already executed against the full
size of displayed quotations at that
price, e.g., the recipient of that ISO
37 See
PO 00000
17 CFR 242.611.
Frm 00077
Fmt 4703
could permissibly trade at the price of
the protected quotation.
The Exchange proposes to further
clarify the use of an ISO in connection
with the Trade-at requirement by
adopting, as part of proposed Rule
13(a)(7), a definition of ‘‘Trade-at
Intermarket Sweep Order.’’ As set forth
in the Plan and as noted above, the
definition of a Trade-at ISO does not
distinguish ISOs that are compliant with
Rule 611 from ISOs that are compliant
with Trade-at. The Exchange therefore
proposes to define a Trade-at ISO as a
limit order for a Pilot Security that
meets the following requirements: (1)
When routed to a Trading Center, the
limit order is identified as a Trade-at
Intermarket Sweep Order; (2)
simultaneously with the routing of the
limit order identified as a Trade-at
Intermarket Sweep Order, one or more
additional limit orders, as necessary, are
routed to execute against the full
displayed size of any protected bid, in
the case of a limit order to sell, or the
full displayed size of any protected
offer, in the case of a limit order to buy,
for the Pilot Security with a price that
is better than or equal to the limit price
of the limit order identified as a Tradeat Intermarket Sweep Order. These
additional routed orders also must be
marked as Trade-at Intermarket Sweep
Orders. The Exchange believes that this
proposed change will further clarify to
recipients of ISOs in Group Three
securities whether the ISO satisfies the
requirements of Rule 611 or Trade-at.
The exception under subparagraph (j)
of proposed Rule 13(a)(6)(D)(ii) applies
when the order is executed as part of a
Negotiated Trade. The subparagraph (k)
exception applies when the order is
executed when the Trading Center
displaying the Protected Quotation that
was traded at had displayed, within one
second prior to execution of the
transaction that constituted the Tradeat, a Best Protected Bid or Best Protected
Offer, as applicable, for the Pilot
Security with a price that was inferior
to the price of the Trade-at transaction.
The exception proposed in
subparagraph (l) applies to a ‘‘stopped
order.’’ The stopped order exemption in
Rule 611 of SEC Regulation NMS
applies where ‘‘[t]he price of the tradethrough transaction was, for a stopped
buy order, lower than the national best
bid in the NMS stock at the time of
execution or, for a stopped sell order,
higher than the national best offer in the
NMS stock at the time of execution.’’ 38
The Trade-at stopped order exception
applies where ‘‘the price of the Tradeat transaction was, for a stopped buy
38 See
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order, equal to the national best bid in
the Pilot Security at the time of
execution or, for a stopped sell order,
equal to the national best offer in the
Pilot Security at the time of
execution.’’ 39
To illustrate the application of the
stopped order exemption as it currently
operates under Rule 611 of SEC
Regulation NMS and as it is currently
proposed for Trade-at, assume the NBB
is $10.00 and another protected quote is
at $9.95. Under Rule 611 of SEC
Regulation NMS, a stopped order to buy
can be filled at $9.95 and the firm does
not have to send an ISO to access the
protected quote at $10.00 since the price
of the stopped order must be lower than
the NBB. For the stopped order to also
be executed at $9.95 and satisfy the
Trade-at requirements, the Trade-at
exception would have to be revised to
allow an order to execute at the price of
a protected quote which, in this case,
could be $9.95.
Based on the fact that a stopped order
would be treated differently under the
Regulation NMS Rule 611 exception
than under the proposed Trade-at
exception, the Exchange believes that it
is appropriate to amend the Trade-at
stopped order exception to ensure that
the application of this exception will
produce a consistent result under both
Regulation NMS and the Plan. The
Exchange therefore proposes to amend
the stopped order exception to allow a
transaction to satisfy the Trade-at
requirement if the stopped order price,
for a stopped buy order, is equal to or
less than the NBB, and for a stopped sell
order, is equal to or greater than the
NBO, as long as such order is priced at
an acceptable increment.
Proposed subparagraph (l) to Rule
13(a)(6)(D)(ii) would define a ‘‘stopped
order’’ as an order that is executed by
a Trading Center which, at the time of
order receipt, the Trading Center had
guaranteed an execution at no worse
than a specified price, where (1) the
stopped order was for the account of a
customer; (2) the customer agreed to the
specified price on an order-by-order
basis; and (3) the price of the Trade-at
transaction was, for a stopped buy
order, equal to or less than the National
Best Bid in the Pilot Security at the time
of execution or, for a stopped sell order,
equal to or greater than the National
Best Offer in the Pilot Security at the
time of execution as long as such order
is priced at an acceptable increment.40
39 See
Plan, Section VI(D)(12).
40 The Commission granted BZX an exemption
from Rule 608(c) related to this provision. See
Exemption Letter, supra note 20. The Exchange is
seeking the same exemptions as requested in the
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The subparagraph (m) exception
applies where the order is for a
fractional share of a Pilot Security,
provided that such fractional share
order was not the result of breaking an
order for one or more whole shares of
a Pilot Security into orders for fractional
shares or was not otherwise effected to
evade the requirements of the Trade-at
Prohibition or any other provisions of
the Plan.
The subparagraph (n) exception
applies to bona fide errors transactions.
Following the adoption of Rule 611 and
its exceptions, the Commission issued
exemptive relief that created exceptions
from Rule 611 for certain error
correction transactions.41 The Exchange
has determined that it is appropriate to
incorporate the error correction
exception to the Trade-at prohibition, as
this exception is equally applicable in
the Trade-at context. Accordingly, the
Exchange is proposing to exempt certain
transactions to correct bona fide errors
in the execution of customer orders
from the Trade-at prohibition, subject to
the conditions set forth by the SEC’s
order exempting these transactions from
Rule 611 of SEC Regulation NMS.42
As with the corresponding exception
under Rule 611 of SEC Regulation NMS,
the Exchange proposes to define a ‘‘bona
fide error’’ as: (i) The inaccurate
conveyance or execution of any term of
an order including, but not limited to,
price, number of shares or other unit of
trading; identification of the security;
identification of the account for which
securities are purchased or sold; lost or
otherwise misplaced order tickets; short
sales that were instead sold long or vice
versa; or the execution of an order on
the wrong side of a market; (ii) the
unauthorized or unintended purchase,
sale, or allocation of securities, or the
failure to follow specific client
instructions; (iii) the incorrect entry of
data into relevant systems, including
reliance on incorrect cash positions,
withdrawals, or securities positions
reflected in an account; or (iv) a delay,
outage, or failure of a communication
system used to transmit market data
prices or to facilitate the delivery or
execution of an order. The bona fide
error must be evidenced by objective
facts and circumstances, the Trading
Center must maintain documentation of
October Exemption Request and the February
Exemption Request. Supra note 20.
41 See Securities Exchange Act Release No. 55884
(June 8, 2007), 72 FR 32926 (June 14, 2007).
42 The Commission granted BZX an exemption
from Rule 608(c) related to this provision. See
February Exemption Request and Exemption Letter,
supra note 20. The Exchange is seeking the same
exemptions as requested in the October Exemption
Request and the February Exemption Request.
Supra note 20.
PO 00000
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42385
such facts and circumstances, and the
Trading Center must record the
transaction in its error account. To avail
itself of the exemption, the Trading
Center must establish, maintain, and
enforce written policies and procedures
that are reasonably designed to address
the occurrence of errors and, in the
event of an error, the use and terms of
a transaction to correct the error in
compliance with this exemption.
Finally, the Trading Center must
regularly surveil to ascertain the
effectiveness of its policies and
procedures to address errors and
transactions to correct errors and take
prompt action to remedy deficiencies in
such policies and procedures.43
Consistent with the Plan, the final
exception to the Trade-At Prohibition
and its accompanying supplementary
material applies to an order that is for
a fractional share of a Pilot Security.
The supplementary material provides
that such fractional share orders may
not be the result of breaking an order for
one or more whole shares of a Pilot
Security into orders for fractional shares
or that otherwise were effected to evade
the requirements of the Trade-at
Prohibition or any other provisions of
the Plan. In approving the Plan, the
Commission noted that this exception
was appropriate, as there could be
potential difficulty in the routing and
executing of fractional shares.44
The proposed rule change will
become operative upon the
commencement of the Pilot Period.
2. Statutory Basis
The Exchange believes that its
proposal is consistent with Section 6(b)
of the Act 45 in general, and furthers the
objectives of Section 6(b)(5) of the Act 46
in particular, in that it is designed to
promote just and equitable principles of
trade, to foster cooperation and
coordination with persons engaged in
facilitating transactions in securities, to
remove impediments to and perfect the
mechanism of a free and open market
and a national market system and, in
general, to protect investors and the
public interest.
The Exchange believes that this
proposal is consistent with the Act
because it implements, interprets, and
clarifies the provisions of the Plan, and
is designed to assist the Exchange and
CHX Participants in meeting regulatory
obligations pursuant to the Plan. In
approving the Plan, the SEC noted that
43 See Securities Exchange Act Release No. 55884
(June 8, 2007), 72 FR 32926 (June 14, 2007).
44 See Approval Order, supra note 10, 80 FR at
27541.
45 15 U.S.C. 78f(b).
46 15 U.S.C. 78f(b)(5).
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the Pilot was an appropriate, datadriven test that was designed to evaluate
the impact of a wider tick size on
trading, liquidity, and the market
quality of securities of smaller
capitalization companies, and was
therefore in furtherance of the purposes
of the Act. To the extent that this
proposal implements, interprets, and
clarifies the Plan and applies specific
requirements to CHX Participants, the
Exchange believes that this proposal is
in furtherance of the objectives of the
Plan, as identified by the SEC, and is
therefore consistent with the Act.
B. Self-Regulatory Organization’s
Statement of Burden on Competition
The Exchange does not believe that
the proposed rule change will result in
any burden on competition that is not
necessary or appropriate in furtherance
of the purposes of the Act. The
Exchange notes that the proposed rule
change implements the provisions of the
Plan, and is designed to assist the
Exchange in meeting its regulatory
obligations pursuant to the Plan. The
Exchange also notes that the quoting
and trading requirements of the Plan
will apply equally to all CHX
Participants that trade Pilot Securities.
mstockstill on DSK3G9T082PROD with NOTICES
C. Self-Regulatory Organization’s
Statement on Comments Regarding the
Proposed Rule Changes Received From
Members, Participants or Others
No written comments were either
solicited or received.
III. Date of Effectiveness of the
Proposed Rule Changes and Timing for
Commission Action
The Exchange has designated this rule
filing as non-controversial under
Section 19(b)(3)(A) of the Act 47 and
paragraph (f)(6) of Rule 19b–4
thereunder.48 The Exchange asserts that
the proposed rule change: (1) Will not
significantly affect the protection of
investors or the public interest, (2) will
not impose any significant burden on
competition, (3) and will not become
operative for 30 days from the date on
which it was filed, or such shorter time
as the Commission may designate. In
addition, the Exchange provided the
Commission with written notice of its
intent to file the proposed rule change,
along with a brief description and text
of the proposed rule change, at least five
business days prior to the date of
filing.49
The Exchange believes that the
proposed rule change meets the criteria
of subparagraph (f)(6) of Rule 19b–4 50
because it would not significantly affect
the protection of investors or the public
interest; rather, the proposed rule
change will benefit investors because it
implements, interprets, and clarifies the
provisions of the Plan, and is designed
to assist the Exchange and CHX
Participants in meeting regulatory
obligations pursuant to the Plan. To the
extent that this proposal implements,
interprets, and clarifies the Plan and
applies specific requirements to CHX
Participants, the Exchange believes that
this proposal is in furtherance of the
objectives of the Plan, as identified by
the SEC, and is therefore consistent with
the Act, the protection of investors and
the public interest. In addition, the
proposed rule change is substantially
similar to a proposed rule change by
BZX that was approved by the
Commission.51 Therefore, the proposed
rule change does not present any unique
issues not previously considered by the
Commission. Based on the foregoing,
the Exchange has designated this rule
filing as ‘‘non-controversial’’ under
Section 19(b)(3)(A) of the Act 52 and
paragraph (f)(6) of Rule 19b–4
thereunder.53
At any time within 60 days of the
filing of the proposed rule change, the
Commission may summarily
temporarily suspend such rule change if
it appears to the Commission that such
action is: (1) Necessary or appropriate in
the public interest; (2) for the protection
of investors; or (3) otherwise in
furtherance of the purposes of the Act.
If the Commission takes such action, the
Commission shall institute proceedings
to determine whether the proposed rule
should be approved or disapproved.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views and
arguments concerning the foregoing,
including whether the proposal is
consistent with the Act. Comments may
be submitted by any of the following
methods:
Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include File No. SR–
CHX–2016–09 on the subject line.
Paper Comments
• Send paper comments in triplicate
to [Name of Secretary], Secretary,
50 17
CFR 240.19b–4(f)(6).
supra note 3.
52 15 U.S.C. 78s(b)(3)(A).
53 17 CFR 240.19b–4.
47 15
U.S.C. 78s(b)(3)(A).
CFR 240.19b–4.
49 17 CFR 240.19b–4(f)(6)(iii).
51 See
48 17
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PO 00000
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Sfmt 4703
Securities and Exchange Commission,
100 F Street NE., Washington, DC
20549.
All submissions should refer to File No.
SR–CHX–2016–09. This file number
should be included on the subject line
if email is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
Internet Web site (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule changes between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for Web site viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE.,
Washington, DC 20549–1090 on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of the
filing also will be available for
inspection and copying at the principal
office of the CHX. All comments
received will be posted without change;
the Commission does not edit personal
identifying information from
submissions. You should submit only
information that you wish to make
available publicly. All submissions
should refer to File No. SR–CHX–2016–
09 and should be submitted on or before
July 20, 2016.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.54
Brent J. Fields,
Secretary.
[FR Doc. 2016–15324 Filed 6–28–16; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–78143; File No. SR–CFE–
2016–002]
Self-Regulatory Organizations; CBOE
Futures Exchange, LLC; Notice of
Proposed Rule Change To Make
Clarifying Updates to Prohibited
Disruptive Trading Practices
June 23, 2016.
Pursuant to Section 19(b)(7) of the
Securities Exchange Act of 1934
54 17
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CFR 200.30–3(a)(12).
29JNN1
]]>Agencies
[Federal Register Volume 81, Number 125 (Wednesday, June 29, 2016)]
[Notices]
[Pages 42380-42386]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-15324]
=======================================================================
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-78146; File No. SR-CHX-2016-09]
Self-Regulatory Organizations; Chicago Stock Exchange, Inc.;
Notice of Filing and Immediate Effectiveness of Proposed Rule Change To
Adopt Rules To Implement the Regulation NMS Plan To Implement a Tick
Size Pilot Program
June 23, 2016.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 \2\ thereunder, notice is hereby given
that on June 16, 2016, the Chicago Stock Exchange, Inc. (``CHX'' or the
``Exchange'') filed with the Securities and Exchange Commission
(``Commission'') the proposed rule change as described in Items I, II,
and III below, which Items have been prepared by the Exchange. The
Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
CHX proposes to amend the Rules of the Exchange (``CHX Rules'') to
adopt Article 20, Rule 13(a) to implement the quoting and trading
provisions of the Regulation NMS Plan to Implement a Tick Size Pilot
Program (``Plan''). The proposed rule change is substantially similar
to a proposed rule change approved by the Commission by the Bats BZX
Exchange, Inc. f/k/a BATS Exchange, Inc. (``BZX'') to adopt BZX Rule
11.27(a) which also implemented the quoting and trading provisions of
the Plan.\3\ Therefore, the Exchange has designated this proposal as
``non-controversial'' and provided the
[[Page 42381]]
Commission with the notice required by Rule 19b-4(f)(6)(iii) under the
Act.\4\
---------------------------------------------------------------------------
\3\ See Securities Exchange Act Release No. 77291 (March 3,
2016), 81 FR 12543 (March 9, 2016) (order approving SR-BATS-2015-
108).
\4\ 17 CFR 240.19b-4(f)(6)(iii).
---------------------------------------------------------------------------
The text of this proposed rule change is available on the
Exchange's Web site at (www.chx.com) and in the Commission's Public
Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the CHX included statements
concerning the purpose of and basis for the proposed rule changes and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The CHX has prepared summaries, set forth in sections A,
B and C below, of the most significant aspects of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Changes
1. Purpose
On August 25, 2014, NYSE Group, Inc., on behalf of the Exchange,
BZX, Bats BYX Exchange, Inc. f/k/a BATS Y-Exchange, Inc., Bats EDGA
Exchange, Inc. f/k/a EDGA Exchange, Inc., Bats EDGX Exchange, Inc. f/k/
a EDGX Exchange, Inc., Financial Industry Regulatory Authority, Inc.
(``FINRA''), NASDAQ OMX BX, Inc., NASDAQ OMX PHLX LLC, the Nasdaq Stock
Market LLC, New York Stock Exchange LLC (``NYSE''), NYSE MKT LLC, and
NYSE Arca, Inc. (collectively ``Plan Participants''),\5\ filed with the
Commission, pursuant to Section 11A of the Act \6\ and Rule 608 of
Regulation NMS thereunder, the Plan to implement a tick size pilot
program (``Pilot'').\7\ The Plan Participants filed the Plan to comply
with an order issued by the Commission on June 24, 2014.\8\ The Plan
\9\ was published for comment in the Federal Register on November 7,
2014, and approved by the Commission, as modified, on May 6, 2015.\10\
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\5\ A ``Participant'' is a ``member'' of the Exchange for
purposes of the Act. See CHX Article 1, Rule 1(s). For clarity, the
Exchange proposes to utilize the term ``CHX Participant'' when
referring to members of the Exchange and the term ``Plan
Participant'' when referring to Participants of the Plan.
\6\ 15 U.S.C. 78k-1.
\7\ See Letter from Brendon J. Weiss, Vice President,
Intercontinental Exchange, Inc., to Secretary, Commission, dated
August 25, 2014.
\8\ See Securities Exchange Act Release No. 72460 (June 24,
2014), 79 FR 36840 (June 30, 2014).
\9\ Unless otherwise specified, capitalized terms used in this
rule filing are defined as set forth in the Plan. The Exchange also
proposes supplementary material as part of this proposed rule change
to, among other things, provide that the terms used in proposed Rule
13(a) shall have the same meaning as provided in the Plan, unless
otherwise specified.
\10\ See Securities Exchange Act Release No. 74892 (May 6,
2015), 80 FR 27514 (May 13, 2015) (``Approval Order'').
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The Plan is designed to allow the Commission, market participants,
and the public to study and assess the impact of increment conventions
on the liquidity and trading of the common stocks of small-
capitalization companies. Each Plan Participant is required to comply
with, and to enforce compliance by its member organizations, as
applicable, with the provisions of the Plan. As is described more fully
below, the proposed rules would require CHX Participants to comply with
the applicable quoting and trading increments for Pilot Securities.\11\
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\11\ The Exchange proposes to add Interpretation and Policy .03
to Rule 13(a) to provide that the Rule shall be in effect during a
pilot period to coincide with the pilot period for the Plan
(including any extensions to the pilot period for the Plan).
---------------------------------------------------------------------------
The Pilot will include stocks of companies with $3 billion or less
in market capitalization, an average daily trading volume of one
million shares or less, and a volume weighted average price of at least
$2.00 for every trading day. The Pilot will consist of a control group
of approximately 1400 Pilot Securities and three test groups with 400
Pilot Securities in each selected by a stratified sampling.\12\ During
the Pilot, Pilot Securities in the control group will be quoted and
traded at the currently permissible increments. Pilot Securities in the
first test group (``Test Group One'') will be quoted in $0.05 minimum
increments but will continue to trade at any price increment that is
currently permitted.\13\ Pilot Securities in the second test group
(``Test Group Two'') will be quoted in $0.05 minimum increments and
will trade at $0.05 minimum increments subject to a midpoint exception,
a retail investor order exception, and a negotiated trade
exception.\14\ Pilot Securities in the third test group (``Test Group
Three'') will be subject to the same restrictions as Test Group Two and
also will be subject to the ``Trade-at'' requirement to prevent price
matching by a market participant that is not displaying at a price of a
Trading Center's \15\ ``Best Protected Bid'' or ``Best Protected
Offer,'' unless an enumerated exception applies.\16\ In addition to the
exceptions provided under Test Group Two, an exception for Block Size
orders and exceptions that mirror those under Rule 611 of Regulation
NMS \17\ will apply to the Trade-at requirement.
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\12\ See Section V of the Plan for identification of Pilot
Securities, including criteria for selection and grouping.
\13\ See Section VI(B) of the Plan.
\14\ See Section VI(C) of the Plan.
\15\ The Plan incorporates the definition of ``Trading Center''
from Rule 600(b)(78) of Regulation NMS. Regulation NMS defines a
Trading Center as ``a national securities exchange or national
securities association that operates an SRO trading facility, an
alternative trading system, an exchange market maker, an OTC market
maker, or any other broker or dealer that executes orders internally
by trading as principal or crossing orders as agent.''
\16\ See Section VI(D) of the Plan.
\17\ 17 CFR 242.611.
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Compliance With the Quoting and Trading Increments of the Plan
The Plan requires the Exchange to establish, maintain, and enforce
written policies and procedures that are reasonably designed to comply
with applicable quoting and trading requirements specified in the
Plan.\18\ Accordingly, the Exchange is proposing new paragraph (a) to
Article 20, Rule 13 (Compliance with Regulation NMS Plan to Implement a
Tick Size Pilot Program) to require CHX Participants to comply with the
quoting and trading provisions of the Plan.
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\18\ The Exchange is also required by the Plan to develop
appropriate policies and procedures that provide for data collection
and reporting to the Commission of data described in Appendixes B
and C of the Plan. CHX Article 20, Rule 13(b) provides rules that
require compliance by CHX Participants with the collection of data
provisions of the Plan described in Section VII of the Plan. See
Exchange Act Release No. 77469 (March 29, 2016), 81 FR 19275 (April
4, 2016) (SR-CHX-2016-03).
---------------------------------------------------------------------------
Proposed Rule 13(a) (Compliance with Quoting and Trading
Restrictions) sets forth the requirements for the Exchange and CHX
Participants in meeting their obligations under the Plan. Rule 13(a)(1)
will require CHX Participants to establish, maintain and enforce
written policies and procedures that are reasonably designed to comply
with the applicable quoting and trading requirements of the Plan. Rule
13(a)(2) provides that the Matching System \19\ will not display, quote
or trade in violation of the applicable quoting and trading
requirements for a Pilot Security specified in the Plan and this Rule,
unless such quotation or transaction is specifically exempted under the
Plan.
---------------------------------------------------------------------------
\19\ The Matching System is an automated order execution system,
which is a part of the Exchange's ``Trading Facilities,'' as defined
under CHX Article 1, Rule 1(z).
---------------------------------------------------------------------------
Proposed Rule 13(a)(3) clarifies the treatment of Pilot Securities
that drop below $1.00 during the Pilot Period. In particular, Rule
13(a)(3) provides that, if the price of a Pilot Security drops below
$1.00 during regular trading hours on any trading day, such Pilot
Security will continue to be a Pilot Security subject
[[Page 42382]]
to the Plan. However, if the Closing Price of a Pilot Security on any
given trading day is below $1.00, such Pilot Security will be moved out
of its Pilot Test Group into the Control Group, and may then be quoted
and traded at any price increment that is currently permitted for the
remainder of the Pilot Period.\20\ Rule 13(a)(3) also provides that,
notwithstanding anything contained within these rules to the contrary,
Pilot Securities (whether in the Control Group or any Pilot Test Group)
will continue to be subject to the data collection requirements of the
Plan at all times during the Pilot Period and for the six-month period
following the end of the Pilot Period.
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\20\ The NYSE, on behalf of the Plan Participants, submitted a
letter to Commission requesting exemption from certain provisions of
the Plan related to quoting and trading. See letter from Elizabeth
K. King, NYSE, to Brent J. Fields, Secretary, Commission, dated
October 14, 2015 (``October Exemption Request''). FINRA, also on
behalf of the Plan Participants, submitted a separate letter to
Commission requesting additional exemptions from certain provisions
of the Plan related to quoting and trading. See letter from Marcia
E. Asquith, Senior Vice President and Corporate Secretary, FINRA, to
Robert W. Errett, Deputy Secretary, Commission, dated February 23,
2016 (``February Exemption Request''). The Commission, pursuant to
its authority under Rule 608(e) of Regulation NMS, granted BZX a
limited exemption from the requirement to comply with certain
provisions of the Plan as specified in the letter and noted herein.
See letter from David Shillman, Associate Director, Division of
Trading and Markets, Commission to Eric Swanson, General Counsel,
BZX, dated March 3, 2016 (``Exemption Letter''). The Exchange is
seeking the same exemptions as requested in the October Exemption
Request and the February Exemption Request.
---------------------------------------------------------------------------
In approving the Plan, the Commission noted that the Plan
Participants had proposed additional selection criteria to minimize the
likelihood that securities that trade with a share price of $1.00 or
less would be included in the Pilot, and stated that, once established,
the universe of Pilot Securities should stay as consistent as possible
so that the analysis and data can be accurate throughout the Pilot
Period.\21\ The Exchange notes that a Pilot Security that drops below
$1.00 during regular trading hours will remain in its applicable Test
Group; a Pilot Security will only be moved to the Control Group if its
Closing Price on any given trading day is below $1.00. The Exchange
believes that this provision is appropriate because it will help ensure
that Pilot Securities in Test Groups One, Two and Three continue to
reflect the Pilot's selection criteria, helping ensure the accuracy of
the resulting data. The Exchange also believes that this provision is
appropriate because it responds to comments that the Plan address the
treatment of securities that trade below $1.00 during the Pilot
Period.\22\
---------------------------------------------------------------------------
\21\ See Approval Order, supra note 10, 80 FR at 27535.
\22\ Id.
---------------------------------------------------------------------------
Proposed Rule 13(a)(4) sets forth the applicable limitations for
securities in Test Group One. Consistent with the language of the Plan,
Rule 13(a)(4) provides that no CHX Participant may display, rank, or
accept from any person any displayable or non-displayable bids or
offers, orders, or indications of interest in any Pilot Security in
Test Group One in increments other than $0.05. However, orders priced
to execute at the midpoint of the national best bid and national best
offer (``NBBO'') or best protected bid and best protected offer
(``PBBO'') \23\ and orders entered in a Plan Participant-operated
retail liquidity program may be ranked and accepted in increments of
less than $0.05. Pilot Securities in Test Group One may continue to
trade at any price increment that is currently permitted by applicable
Plan Participant, SEC and Exchange rules.
---------------------------------------------------------------------------
\23\ Regulation NMS defines a protected bid or protected offer
as a quotation in an NMS stock that (1) is displayed by an automated
trading center; (2) is disseminated pursuant to an effective
national market system plan; and (3) is an automated quotation that
is the best bid or best offer of a national securities exchange, the
best bid or best offer of The Nasdaq Stock Market, Inc., or the best
bid or best offer of a national securities association other than
the best bid or best offer of The Nasdaq Stock Market, Inc. See 17
CFR 242.600(57). In the Approval Order, the Commission noted that
the protected quotation standard encompasses the aggregate of the
most aggressively priced displayed liquidity on all Trading Centers,
whereas the NBBO standard is limited to the single best order in the
market. See Approval Order, supra note 10, 80 FR at 27539.
---------------------------------------------------------------------------
Proposed Rule 13(a)(5) sets forth the applicable quoting and
trading requirements for securities in Test Group Two. This provision
states that no CHX Participant may display, rank, or accept from any
person any displayable or non-displayable bids or offers, orders, or
indications of interest in any Pilot Security in Test Group Two in
increments other than $0.05. However, orders priced to execute at the
midpoint of the NBBO or PBBO and orders entered in a Plan Participant-
operated retail liquidity program may be ranked and accepted in
increments of less than $0.05.
Proposed Rule 13(a)(5) also sets forth the applicable trading
restrictions for Test Group Two securities. Absent any of the
exceptions listed in the Rule, no CHX Participant may execute orders in
any Pilot Security in Test Group Two in price increments other than
$0.05. The $0.05 trading increment will apply to all trades, including
Brokered Cross Trades.
Consistent with the language of the Plan, the Rule provides that
Pilot Securities in Test Group Two may trade in increments of less than
$0.05 under the following circumstances: (1) Trading may occur at the
midpoint between the NBBO or the PBBO; (2) Retail Investor Orders may
be provided with price improvement that is at least $0.005 better than
the PBBO; and (3) Negotiated Trades may trade in increments of less
than $0.05.
The Exchange also proposes to add an exception to Rule 13(a)(5) to
permit CHX Participants to fill a customer order in a Pilot Security in
Test Group Two at a non-nickel increment to comply with Article 9, Rule
17 (Prohibition Against Trading Ahead of Customer Orders) under limited
circumstances. Specifically, the exception would allow the execution of
a customer order following a proprietary trade by the CHX Participant
at an increment other than $0.05 in the same security, on the same side
and at the same price as (or within the prescribed amount of) a
customer order owed a fill pursuant to Article 9, Rule 17, where the
triggering proprietary trade was permissible pursuant to an exception
under the Plan.\24\
---------------------------------------------------------------------------
\24\ The Commission granted BZX an exemption from Rule 608(c)
related to this provision. See February Exemption Request and
Exemption Letter, supra note 20. The Exchange is seeking the same
exemptions as requested in the October Exemption Request and the
February Exemption Request. Supra note 20.
---------------------------------------------------------------------------
Thus, the Exchange is proposing to add a customer order protection
exception to Rule 13(a)(5) that would permit CHX Participants to trade
Pilot Securities in Test Group Two in increments less than $0.05, and
where the CHX Participant is executing a customer order to comply with
Article 9, Rule 17 following the execution of a proprietary trade by
the CHX Participant at an increment other than $0.05 where such
proprietary trade was permissible pursuant to an exception under the
Plan. The Exchange believes that this approach best facilitates the
ability of CHX Participants to continue to protect customer orders
while retaining the flexibility to engage in proprietary trades that
comply with an exception to the Plan.
Proposed Rule 13(a)(6) sets forth the applicable quoting and
trading restrictions for Pilot Securities in Test Group Three. The rule
provides that no CHX Participant may display, rank, or accept from any
person any displayable or non-displayable bids or offers, orders, or
indications of interest in any Pilot Security in Test Group Three in
increments other than $0.05. However, orders priced to execute at the
midpoint of the NBBO or PBBO and orders
[[Page 42383]]
entered in a Plan Participant-operated retail liquidity program may be
ranked and accepted in increments of less than $0.05. The rule also
states that, absent any of the applicable exceptions, no CHX
Participant that operates a Trading Center may execute orders in any
Pilot Security in Test Group Three in price increments other than
$0.05. The $0.05 trading increment will apply to all trades, including
Brokered Cross Trades.\25\
---------------------------------------------------------------------------
\25\ A brokered cross trade is a trade that a broker-dealer that
is a member of a Plan Participant executes directly by matching
simultaneous buy and sell orders for a Pilot Security. See Section
I(G) of the Plan.
---------------------------------------------------------------------------
Proposed Rule 13(a)(6)(C) sets forth the exceptions pursuant to
which Pilot Securities in Test Group Three may trade in increments of
less than $0.05. First, trading may occur at the midpoint between the
NBBO or PBBO. Second, Retail Investor Orders may be provided with price
improvement that is at least $0.005 better than the PBBO. Third,
Negotiated Trades may trade in increments of less than $0.05.
Similar to that proposed under Rule 13(a)(5) described above, the
Exchange also proposes to add an exception to Rule 13(a)(6) to permit
CHX Participants to fill a customer order in a Pilot Security in Test
Group Three at a non-nickel increment to comply with Article 9, Rule 17
(Prohibition Against Trading Ahead of Customer Orders) under limited
circumstances. Specifically, the exception would allow the execution of
a customer order following a proprietary trade by the CHX Participant
at an increment other than $0.05 in the same security, on the same side
and at the same price as (or within the prescribed amount of) a
customer order owed a fill pursuant to Article 9, Rule 17, where the
triggering proprietary trade was permissible pursuant to an exception
under the Plan.\26\ Thus, the Exchange is proposing to add a customer
order protection exception to Rule 13(a)(6) that would permit CHX
Participants to trade Pilot Securities in Test Group Three in
increments less than $0.05, and where the CHX Participant is executing
a customer order to comply with Article 9, Rule 17 following the
execution of a proprietary trade by the CHX Participant at an increment
other than $0.05 where such proprietary trade was permissible pursuant
to an exception under the Plan.
---------------------------------------------------------------------------
\26\ See supra note 24. The Exchange is seeking the same
exemptions as requested in the October Exemption Request and the
February Exemption Request. Supra note 20.
---------------------------------------------------------------------------
Proposed Rule 13(a)(6)(D) sets forth the ``Trade-at Prohibition,''
which is the prohibition against executions by a CHX Participant that
operates a Trading Center of a sell order for a Pilot Security in Test
Group Three at the price of a Protected Bid or the execution of a buy
order for a Pilot Security in Test Group Three at the price of a
Protected Offer during regular trading hours, absent any of the
exceptions set forth in Rule 13(a)(6)(D). Consistent with the Plan, the
rule reiterates that a CHX Participant that operates a Trading Center
that is displaying a quotation, via either a processor or an SRO
quotation feed that is a Protected Bid or Protected Offer is permitted
to execute orders at that level, but only up to the amount of its
displayed size. A CHX Participant that operates a Trading Center that
was not displaying a quotation that is the same price as a Protected
Quotation, via either a processor or an SRO quotation feed, is
prohibited from price-matching protected quotations unless an exception
applies.
Consistent with the Plan, proposed Rule 13(a)(6)(D) also sets forth
the exceptions to the Trade-at prohibition, pursuant to which a CHX
Participant that operates a Trading Center may execute a sell order for
a Pilot Security in Test Group Three at the price of a Protected Bid or
execute a buy order for a Pilot Security in Test Group Three at the
price of a Protected Offer. The first exception to the Trade-at
Prohibition is the ``display exception,'' which allows a trade to occur
at the price of the Protected Quotation, up to the Trading Center's
full displayed size, if the order ``is executed by a trading center
that is displaying a quotation.'' \27\
---------------------------------------------------------------------------
\27\ See Section VI(D)(1) of the Plan.
---------------------------------------------------------------------------
In Rule 13(a)(6)(D), the Exchange proposes that a CHX Participant
that utilizes the independent aggregation unit concept may satisfy the
display exception only if the same independent aggregation unit that
displays interest via either a processor or an SRO Quotation Feed also
executes an order in reliance upon this exception. The rule provides
that ``independent aggregation unit'' has the same meaning as provided
under Rule 200(f) of SEC Regulation SHO.\28\ This provision also
recognizes that not all CHX Participants may utilize the independent
aggregation unit concept as part of their regulatory structure, and
still permits such CHX Participants to utilize the display exception if
all the other requirements of that exception are met.
---------------------------------------------------------------------------
\28\ 17 CFR 242.200. Treatment as an independent aggregation
unit is available if traders in an aggregation unit pursue only the
particular trading objective(s) or strategy(ies) of that aggregation
unit and do not coordinate that strategy with any other aggregation
unit. Therefore, one independent aggregation unit within a Trading
Center cannot execute trades pursuant to the display exception in
reliance on quotations displayed by a different independent
aggregation unit. As an example, an agency desk of a Trading Center
cannot rely on the quotation of a proprietary desk in a separate
independent aggregation unit at that same Trading Center.
---------------------------------------------------------------------------
As initially proposed by the Plan Participants, the Plan contained
an additional condition to the display exception, which would have
required that, where the quotation is displayed through a national
securities exchange, the execution at the size of the order must occur
against the displayed size on that national securities exchange; and
where the quotation is displayed through the Alternative Display
Facility or another facility approved by the Commission that does not
provide execution functionality, the execution at the size of the order
must occur against the displayed size in accordance with the rules of
the Alternative Display Facility of such approved facility (``venue
limitation'').\29\ Some commenters stated that this provision was anti-
competitive, as it would have forced off-exchange Trading Centers to
route orders to the venue on which the order was displayed.\30\
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\29\ See Securities Exchange Act Release No. 73511 (November 3,
2014), 79 FR 66423, 66437 (November 7, 2014).
\30\ See Approval Order, supra note 10, 80 FR at 27540.
---------------------------------------------------------------------------
In approving the Plan, the Commission modified the Trade-At
Prohibition to remove the venue limitation.\31\ The Commission noted
that the venue limitation was not prescribed in its Order mandating the
filing of the Plan.\32\ The Commission also noted that the venue
limitation would have unnecessarily restricted the ability of off-
exchange market participants to execute orders in Test Group Three
Securities, and that removing the venue limitation should mitigate
concerns about the cost and complexity of the Pilot by reducing the
need for off-exchange Trading Centers to route to the exchange.\33\ The
Commission also stated that the venue limitation did not create any
additional incentives to display liquidity in furtherance of the
purposes of the Trade-At Prohibition, because the requirement that a
Trading Center could only trade at a protected quotation up to its
displayed size should be sufficient to incentivize displayed
liquidity.\34\
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\31\ Id.
\32\ Id.
\33\ Id.
\34\ Id.
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Consistent with Plan and the SEC's determination to remove the
venue limitation, the Exchange is making clear that the display
exception applies to
[[Page 42384]]
trades done by a Trading Center otherwise than on an exchange where the
Trading Center has previously displayed a quotation in either an agency
or a principal capacity. As part of the display exception, the Exchange
also proposes that a Trading Center that is displaying a quotation as
agent or riskless principal may only execute as agent or riskless
principal, while a Trading Center displaying a quotation as principal
(excluding riskless principal) may execute either as principal or agent
or riskless principal. The Exchange believes this is consistent with
the Plan and the objective of the Trade-at Prohibition, which is to
promote the display of liquidity and generally to prevent any Trading
Center that is not quoting from price-matching Protected Quotations.
Providing that a Trading Center may not execute on a proprietary basis
in reliance on a quotation representing customer interest (whether
agency or riskless principal) ensures that the Trading Center cannot
avoid compliance with the Trade-at Prohibition by trading on a
proprietary basis in reliance on a quotation that does not represent
such Trading Center's own interest. Where a Trading Center is
displaying a quotation at the same price as a Protected Quotation in a
proprietary capacity, transactions in any capacity at the price and up
to the size of such Trading Center's displayed quotation would be
permissible. Transactions executed pursuant to the display exception
may occur on the venue on which such quotation is displayed or over the
counter.
The proposal also excepts Block Size orders \35\ and permits
Trading Centers to trade at the price of a Protected Quotation,
provided that the order is of Block Size at the time of origin and is
not an aggregation of non-block orders, broken into orders smaller than
Block Size prior to submitting the order to a Trading Center for
execution; or executed on multiple Trading Centers.\36\ The Plan only
provides that Block Size orders shall be exempted from the Trade-At
Prohibition. In requiring that the order be of Block Size at the time
of origin and not an aggregation of non-block orders, or broken into
orders smaller than Block Size prior to submitting the order to a
Trading Center for execution; or executed on multiple Trading Centers,
the Exchange believes that it is providing clarity as to the
circumstances under which a Block Size order will be excepted from the
Trade-At Prohibition.
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\35\ ``Block Size'' is defined in the Plan as an order (1) of at
least 5,000 shares or (2) for a quantity of stock having a market
value of at least $100,000.
\36\ Once a Block Size order or portion of such Block Size order
is routed from one Trading Center to another Trading Center in
compliance with Rule 611 of Regulation NMS, the Block Size order
would lose the proposed Trade-at exemption, unless the Block Size
remaining after the first route and execution meets the Block Size
definition under the Plan.
---------------------------------------------------------------------------
Consistent with the Plan, the proposal also excepts an order that
is a Retail Investor Order that is executed with at least $0.005 price
improvement.
The exceptions set forth in proposed Rule 13(a)(6)(D)(ii)(d)
through (n) are based on the exceptions found in Rule 611 of Regulation
NMS.\37\ The subparagraph (d) exception applies when the order is
executed when the Trading Center displaying the Protected Quotation
that was traded at was experiencing a failure, material delay, or
malfunction of its systems or equipment. The subparagraph (e) exception
applies to an order that is executed as part of a transaction that was
not a ``regular way'' contract. The subparagraph (f) exception applies
to an order that is executed as part of a single-priced opening,
reopening, or closing transaction by the Trading Center. The
subparagraph (g) exception applies to an order that is executed when a
Protected Bid was priced higher than a Protected Offer in a Pilot
Security.
---------------------------------------------------------------------------
\37\ See 17 CFR 242.611.
---------------------------------------------------------------------------
The subparagraph (h) exception applies when the order is identified
as a Trade-at Intermarket Sweep Order. The subparagraph (i) exception
applies when the order is executed by a Trading Center that
simultaneously routed Trade-at Intermarket Sweep Orders to execute
against the full displayed size of a Protected Quotation with a price
that is better than or equal to the limit price of the limit order
identified as a Trade-at Intermarket Sweep Order. Depending on whether
Rule 611 or the Trade-at requirement applies, an ISO may mean that the
sender of the ISO has swept better-priced protected quotations, so that
the recipient of that ISO may trade through the price of the protected
quotation (Rule 611), or it could mean that the sender of the ISO has
swept protected quotations at the same price that it wishes to execute
at (in addition to any better-priced quotations), so the recipient of
that ISO may trade at the price of the protected quotation (Trade-at).
Given that the meaning of an ISO may differ under Rule 611 and Trade-
at, the Exchange proposes Rule 13(a)(6)(D)(ii)(h) so that the recipient
of an ISO in a Test Group Three security would know, upon receipt of
that ISO, that the Trading Center that sent the ISO had already
executed against the full size of displayed quotations at that price,
e.g., the recipient of that ISO could permissibly trade at the price of
the protected quotation.
The Exchange proposes to further clarify the use of an ISO in
connection with the Trade-at requirement by adopting, as part of
proposed Rule 13(a)(7), a definition of ``Trade-at Intermarket Sweep
Order.'' As set forth in the Plan and as noted above, the definition of
a Trade-at ISO does not distinguish ISOs that are compliant with Rule
611 from ISOs that are compliant with Trade-at. The Exchange therefore
proposes to define a Trade-at ISO as a limit order for a Pilot Security
that meets the following requirements: (1) When routed to a Trading
Center, the limit order is identified as a Trade-at Intermarket Sweep
Order; (2) simultaneously with the routing of the limit order
identified as a Trade-at Intermarket Sweep Order, one or more
additional limit orders, as necessary, are routed to execute against
the full displayed size of any protected bid, in the case of a limit
order to sell, or the full displayed size of any protected offer, in
the case of a limit order to buy, for the Pilot Security with a price
that is better than or equal to the limit price of the limit order
identified as a Trade-at Intermarket Sweep Order. These additional
routed orders also must be marked as Trade-at Intermarket Sweep Orders.
The Exchange believes that this proposed change will further clarify to
recipients of ISOs in Group Three securities whether the ISO satisfies
the requirements of Rule 611 or Trade-at.
The exception under subparagraph (j) of proposed Rule
13(a)(6)(D)(ii) applies when the order is executed as part of a
Negotiated Trade. The subparagraph (k) exception applies when the order
is executed when the Trading Center displaying the Protected Quotation
that was traded at had displayed, within one second prior to execution
of the transaction that constituted the Trade-at, a Best Protected Bid
or Best Protected Offer, as applicable, for the Pilot Security with a
price that was inferior to the price of the Trade-at transaction.
The exception proposed in subparagraph (l) applies to a ``stopped
order.'' The stopped order exemption in Rule 611 of SEC Regulation NMS
applies where ``[t]he price of the trade-through transaction was, for a
stopped buy order, lower than the national best bid in the NMS stock at
the time of execution or, for a stopped sell order, higher than the
national best offer in the NMS stock at the time of execution.'' \38\
The Trade-at stopped order exception applies where ``the price of the
Trade-at transaction was, for a stopped buy
[[Page 42385]]
order, equal to the national best bid in the Pilot Security at the time
of execution or, for a stopped sell order, equal to the national best
offer in the Pilot Security at the time of execution.'' \39\
---------------------------------------------------------------------------
\38\ See 17 CFR 242.611(b)(9).
\39\ See Plan, Section VI(D)(12).
---------------------------------------------------------------------------
To illustrate the application of the stopped order exemption as it
currently operates under Rule 611 of SEC Regulation NMS and as it is
currently proposed for Trade-at, assume the NBB is $10.00 and another
protected quote is at $9.95. Under Rule 611 of SEC Regulation NMS, a
stopped order to buy can be filled at $9.95 and the firm does not have
to send an ISO to access the protected quote at $10.00 since the price
of the stopped order must be lower than the NBB. For the stopped order
to also be executed at $9.95 and satisfy the Trade-at requirements, the
Trade-at exception would have to be revised to allow an order to
execute at the price of a protected quote which, in this case, could be
$9.95.
Based on the fact that a stopped order would be treated differently
under the Regulation NMS Rule 611 exception than under the proposed
Trade-at exception, the Exchange believes that it is appropriate to
amend the Trade-at stopped order exception to ensure that the
application of this exception will produce a consistent result under
both Regulation NMS and the Plan. The Exchange therefore proposes to
amend the stopped order exception to allow a transaction to satisfy the
Trade-at requirement if the stopped order price, for a stopped buy
order, is equal to or less than the NBB, and for a stopped sell order,
is equal to or greater than the NBO, as long as such order is priced at
an acceptable increment.
Proposed subparagraph (l) to Rule 13(a)(6)(D)(ii) would define a
``stopped order'' as an order that is executed by a Trading Center
which, at the time of order receipt, the Trading Center had guaranteed
an execution at no worse than a specified price, where (1) the stopped
order was for the account of a customer; (2) the customer agreed to the
specified price on an order-by-order basis; and (3) the price of the
Trade-at transaction was, for a stopped buy order, equal to or less
than the National Best Bid in the Pilot Security at the time of
execution or, for a stopped sell order, equal to or greater than the
National Best Offer in the Pilot Security at the time of execution as
long as such order is priced at an acceptable increment.\40\
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\40\ The Commission granted BZX an exemption from Rule 608(c)
related to this provision. See Exemption Letter, supra note 20. The
Exchange is seeking the same exemptions as requested in the October
Exemption Request and the February Exemption Request. Supra note 20.
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The subparagraph (m) exception applies where the order is for a
fractional share of a Pilot Security, provided that such fractional
share order was not the result of breaking an order for one or more
whole shares of a Pilot Security into orders for fractional shares or
was not otherwise effected to evade the requirements of the Trade-at
Prohibition or any other provisions of the Plan.
The subparagraph (n) exception applies to bona fide errors
transactions. Following the adoption of Rule 611 and its exceptions,
the Commission issued exemptive relief that created exceptions from
Rule 611 for certain error correction transactions.\41\ The Exchange
has determined that it is appropriate to incorporate the error
correction exception to the Trade-at prohibition, as this exception is
equally applicable in the Trade-at context. Accordingly, the Exchange
is proposing to exempt certain transactions to correct bona fide errors
in the execution of customer orders from the Trade-at prohibition,
subject to the conditions set forth by the SEC's order exempting these
transactions from Rule 611 of SEC Regulation NMS.\42\
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\41\ See Securities Exchange Act Release No. 55884 (June 8,
2007), 72 FR 32926 (June 14, 2007).
\42\ The Commission granted BZX an exemption from Rule 608(c)
related to this provision. See February Exemption Request and
Exemption Letter, supra note 20. The Exchange is seeking the same
exemptions as requested in the October Exemption Request and the
February Exemption Request. Supra note 20.
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As with the corresponding exception under Rule 611 of SEC
Regulation NMS, the Exchange proposes to define a ``bona fide error''
as: (i) The inaccurate conveyance or execution of any term of an order
including, but not limited to, price, number of shares or other unit of
trading; identification of the security; identification of the account
for which securities are purchased or sold; lost or otherwise misplaced
order tickets; short sales that were instead sold long or vice versa;
or the execution of an order on the wrong side of a market; (ii) the
unauthorized or unintended purchase, sale, or allocation of securities,
or the failure to follow specific client instructions; (iii) the
incorrect entry of data into relevant systems, including reliance on
incorrect cash positions, withdrawals, or securities positions
reflected in an account; or (iv) a delay, outage, or failure of a
communication system used to transmit market data prices or to
facilitate the delivery or execution of an order. The bona fide error
must be evidenced by objective facts and circumstances, the Trading
Center must maintain documentation of such facts and circumstances, and
the Trading Center must record the transaction in its error account. To
avail itself of the exemption, the Trading Center must establish,
maintain, and enforce written policies and procedures that are
reasonably designed to address the occurrence of errors and, in the
event of an error, the use and terms of a transaction to correct the
error in compliance with this exemption. Finally, the Trading Center
must regularly surveil to ascertain the effectiveness of its policies
and procedures to address errors and transactions to correct errors and
take prompt action to remedy deficiencies in such policies and
procedures.\43\
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\43\ See Securities Exchange Act Release No. 55884 (June 8,
2007), 72 FR 32926 (June 14, 2007).
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Consistent with the Plan, the final exception to the Trade-At
Prohibition and its accompanying supplementary material applies to an
order that is for a fractional share of a Pilot Security. The
supplementary material provides that such fractional share orders may
not be the result of breaking an order for one or more whole shares of
a Pilot Security into orders for fractional shares or that otherwise
were effected to evade the requirements of the Trade-at Prohibition or
any other provisions of the Plan. In approving the Plan, the Commission
noted that this exception was appropriate, as there could be potential
difficulty in the routing and executing of fractional shares.\44\
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\44\ See Approval Order, supra note 10, 80 FR at 27541.
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The proposed rule change will become operative upon the
commencement of the Pilot Period.
2. Statutory Basis
The Exchange believes that its proposal is consistent with Section
6(b) of the Act \45\ in general, and furthers the objectives of Section
6(b)(5) of the Act \46\ in particular, in that it is designed to
promote just and equitable principles of trade, to foster cooperation
and coordination with persons engaged in facilitating transactions in
securities, to remove impediments to and perfect the mechanism of a
free and open market and a national market system and, in general, to
protect investors and the public interest.
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\45\ 15 U.S.C. 78f(b).
\46\ 15 U.S.C. 78f(b)(5).
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The Exchange believes that this proposal is consistent with the Act
because it implements, interprets, and clarifies the provisions of the
Plan, and is designed to assist the Exchange and CHX Participants in
meeting regulatory obligations pursuant to the Plan. In approving the
Plan, the SEC noted that
[[Page 42386]]
the Pilot was an appropriate, data-driven test that was designed to
evaluate the impact of a wider tick size on trading, liquidity, and the
market quality of securities of smaller capitalization companies, and
was therefore in furtherance of the purposes of the Act. To the extent
that this proposal implements, interprets, and clarifies the Plan and
applies specific requirements to CHX Participants, the Exchange
believes that this proposal is in furtherance of the objectives of the
Plan, as identified by the SEC, and is therefore consistent with the
Act.
B. Self-Regulatory Organization's Statement of Burden on Competition
The Exchange does not believe that the proposed rule change will
result in any burden on competition that is not necessary or
appropriate in furtherance of the purposes of the Act. The Exchange
notes that the proposed rule change implements the provisions of the
Plan, and is designed to assist the Exchange in meeting its regulatory
obligations pursuant to the Plan. The Exchange also notes that the
quoting and trading requirements of the Plan will apply equally to all
CHX Participants that trade Pilot Securities.
C. Self-Regulatory Organization's Statement on Comments Regarding the
Proposed Rule Changes Received From Members, Participants or Others
No written comments were either solicited or received.
III. Date of Effectiveness of the Proposed Rule Changes and Timing for
Commission Action
The Exchange has designated this rule filing as non-controversial
under Section 19(b)(3)(A) of the Act \47\ and paragraph (f)(6) of Rule
19b-4 thereunder.\48\ The Exchange asserts that the proposed rule
change: (1) Will not significantly affect the protection of investors
or the public interest, (2) will not impose any significant burden on
competition, (3) and will not become operative for 30 days from the
date on which it was filed, or such shorter time as the Commission may
designate. In addition, the Exchange provided the Commission with
written notice of its intent to file the proposed rule change, along
with a brief description and text of the proposed rule change, at least
five business days prior to the date of filing.\49\
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\47\ 15 U.S.C. 78s(b)(3)(A).
\48\ 17 CFR 240.19b-4.
\49\ 17 CFR 240.19b-4(f)(6)(iii).
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The Exchange believes that the proposed rule change meets the
criteria of subparagraph (f)(6) of Rule 19b-4 \50\ because it would not
significantly affect the protection of investors or the public
interest; rather, the proposed rule change will benefit investors
because it implements, interprets, and clarifies the provisions of the
Plan, and is designed to assist the Exchange and CHX Participants in
meeting regulatory obligations pursuant to the Plan. To the extent that
this proposal implements, interprets, and clarifies the Plan and
applies specific requirements to CHX Participants, the Exchange
believes that this proposal is in furtherance of the objectives of the
Plan, as identified by the SEC, and is therefore consistent with the
Act, the protection of investors and the public interest. In addition,
the proposed rule change is substantially similar to a proposed rule
change by BZX that was approved by the Commission.\51\ Therefore, the
proposed rule change does not present any unique issues not previously
considered by the Commission. Based on the foregoing, the Exchange has
designated this rule filing as ``non-controversial'' under Section
19(b)(3)(A) of the Act \52\ and paragraph (f)(6) of Rule 19b-4
thereunder.\53\
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\50\ 17 CFR 240.19b-4(f)(6).
\51\ See supra note 3.
\52\ 15 U.S.C. 78s(b)(3)(A).
\53\ 17 CFR 240.19b-4.
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At any time within 60 days of the filing of the proposed rule
change, the Commission may summarily temporarily suspend such rule
change if it appears to the Commission that such action is: (1)
Necessary or appropriate in the public interest; (2) for the protection
of investors; or (3) otherwise in furtherance of the purposes of the
Act. If the Commission takes such action, the Commission shall
institute proceedings to determine whether the proposed rule should be
approved or disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the foregoing, including whether the proposal is
consistent with the Act. Comments may be submitted by any of the
following methods:
Electronic Comments
Use the Commission's Internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an email to rule-comments@sec.gov. Please include
File No. SR-CHX-2016-09 on the subject line.
Paper Comments
Send paper comments in triplicate to [Name of Secretary],
Secretary, Securities and Exchange Commission, 100 F Street NE.,
Washington, DC 20549.
All submissions should refer to File No. SR-CHX-2016-09. This file
number should be included on the subject line if email is used. To help
the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's Internet Web site (https://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all
written statements with respect to the proposed rule change that are
filed with the Commission, and all written communications relating to
the proposed rule changes between the Commission and any person, other
than those that may be withheld from the public in accordance with the
provisions of 5 U.S.C. 552, will be available for Web site viewing and
printing in the Commission's Public Reference Room, 100 F Street NE.,
Washington, DC 20549-1090 on official business days between the hours
of 10:00 a.m. and 3:00 p.m. Copies of the filing also will be available
for inspection and copying at the principal office of the CHX. All
comments received will be posted without change; the Commission does
not edit personal identifying information from submissions. You should
submit only information that you wish to make available publicly. All
submissions should refer to File No. SR-CHX-2016-09 and should be
submitted on or before July 20, 2016.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\54\
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\54\ 17 CFR 200.30-3(a)(12).
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Brent J. Fields,
Secretary.
[FR Doc. 2016-15324 Filed 6-28-16; 8:45 am]
BILLING CODE 8011-01-P
