Self-Regulatory Organizations; Investors Exchange LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Adopt Rules To Implement the Quoting and Trading Provisions of the Tick Size Pilot Program and To Describe Related Changes to IEX System Functionality, 70216-70222 [2016-24421]
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Federal Register / Vol. 81, No. 196 / Tuesday, October 11, 2016 / Notices
post all comments on the Commission’s
Internet Web site (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for Web site viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE.,
Washington, DC 20549 on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of such
filing also will be available for
inspection and copying at the principal
office of the Exchange. All comments
received will be posted without change;
the Commission does not edit personal
identifying information from
submissions. You should submit only
information that you wish to make
available publicly. All submissions
should refer to File Number SR–BOX–
2016–47, and should be submitted on or
before November 1, 2016.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.11
Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016–24423 Filed 10–7–16; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–79036; File No. SR–IEX–
2016–16]
Self-Regulatory Organizations;
Investors Exchange LLC; Notice of
Filing and Immediate Effectiveness of
Proposed Rule Change To Adopt Rules
To Implement the Quoting and Trading
Provisions of the Tick Size Pilot
Program and To Describe Related
Changes to IEX System Functionality
asabaliauskas on DSK3SPTVN1PROD with NOTICES
October 4, 2016.
Pursuant to Section 19(b)(1) 1 of the
Securities Exchange Act of 1934 (the
‘‘Act’’) 2 and Rule 19b–4 thereunder,3
notice is hereby given that, on October
3, 2016, the Investors Exchange LLC
(‘‘IEX’’ or the ‘‘Exchange’’) filed with the
Securities and Exchange Commission
(the ‘‘Commission’’) the proposed rule
11 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 15 U.S.C. 78a.
3 17 CFR 240.19b–4.
1 15
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change as described in Items I and II
below, which Items have been prepared
by the self-regulatory organization. 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
IEX is filing with the Commission a
proposed rule change to adopt rules
under IEX Rule 11.340 to implement the
quoting and trading provisions of the
Regulation NMS Plan to Implement a
Tick Size Pilot Program submitted to the
Commission pursuant to Rule 608 of
Regulation NMS 4 under the Act (the
‘‘Plan’’),5 and to describe changes to IEX
system functionality necessary to
implement the Plan. The proposed rule
change is substantially similar to
proposed rule changes published by the
Commission for the NASDAQ Stock
Market LLC (‘‘Nasdaq’’) to adopt
NASDAQ Rule 4770, which also
implemented the quoting and trading
provisions of the Plan.6 Accordingly,
the Exchange has designated this
proposal as a ‘‘non-controversial’’
proposed rule change pursuant to
Section 19(b)(3)(A) of the Act 7 and
provided the Commission with the
notice required by Rule 19b–4(f)(6)(iii)
under the Act.8
The text of the proposed rule change
is available at the Exchange’s Web site
at www.iextrading.com, at the principal
office of the Exchange, and at the
Commission’s Public Reference Room.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
self-regulatory organization included
statements concerning the purpose of
and basis for the proposed rule change
and discussed any comments it received
on the proposed rule change. The text
of these statement may be examined at
the places specified in Item IV below.
The self-regulatory organization has
prepared summaries, set forth in
Sections A, B, and C below, of the most
significant aspects of such statements.
4 17
CFR 242.608.
Securities and Exchange Act Release No.
74892 (May 6, 2015), 80 FR 27513 (File No. 4–657)
(‘‘Tick Plan Approval Order’’). See also Securities
and Exchange Act Release No. 76382 (November 6,
2015) (File No. 4–657), 80 FR 70284 (File No. 4–
657) (November 13, 2015), which extended the pilot
period commencement date from May 6, 2015 to
October 3, 2016.
6 See Securities and Exchange Act Release No.
78251 (July 7, 2016); 81 FR 45315 (July 13, 2016.
7 15 U.S.C. 78s(b)(3)(a).
8 17 CFR 240.19b–4(f)(6)(iii).
5 See
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A. Self-Regulatory Organization’s
Statement of the Purpose of, and the
Statutory Basis for, the Proposed Rule
Change
1. Purpose
The Exchange proposes to establish
rules to require its members to comply
with the requirements of the Plan,
which is designed to study and assess
the impact of increment conventions on
the liquidity and trading of the common
stocks of small capitalization
companies. The Exchange proposes
changes to its rules for a two-year pilot
period that coincides with the Pilot
Period for the Plan, which is currently
scheduled as a two-year pilot to begin
on October 3, 2016.
Background
On August 25, 2014, NYSE Group,
Inc., on behalf of BATS Exchange, Inc.,
BATS Y-Exchange, Inc., Chicago Stock
Exchange, Inc., EDGA Exchange, Inc.,
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
‘‘Participants’’), filed with the
Commission, pursuant to Section 11A of
the Act 9 and Rule 608 of Regulation
NMS thereunder, the Plan to Implement
a Tick Size Pilot Program (‘‘Pilot’’).10
The Participants filed the Plan to
comply with an order issued by the
Commission on June 24, 2014 (the ‘‘June
2014 Order’’).11 The Plan 12 was
published for comment in the Federal
Register on November 7, 2014,13 and
approved by the Commission, as
modified, on May 6, 2015.14 An
amendment to the Plan adding IEX as a
Participant became effective on August
5, 2016.15
The Plan is designed to allow the
Commission, market participants, and
the public to study and assess the
impact of increment conventions on the
9 15
U.S.C. 78k–1
Letter from Brendon J. Weiss, Vice
President, Intercontinental Exchange, Inc., to
Secretary, Commission, dated August 25, 2014.
11 See Securities Exchange Act Release No. 72460
(June 24, 2014), 79 FR 36840 (June 30, 2014).
12 Unless otherwise specified, capitalized terms
used in this rule filing are based on the defined
terms of the Plan.
13 See Securities Exchange Act Release No. 72460
(June 24, 2014), 79 FR 36840 (June 30, 2014).
14 See Tick Plan Approval Order, supra note 5.
See also Securities Exchange Act Release No. 77277
(March 3, 2016), 81 FR 12162 (March 8, 2016) (File
No. 4–657), which amended the Plan to add
National Stock Exchange, Inc. as a Participant.
15 See Securities Exchange Act Release No. 78703
(August 26, 2016; 81 FR 60397 (September 1, 2016)
(File No. 4–631).
10 See
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liquidity and trading of the common
stocks of small-capitalization
companies. The Commission plans to
use the Tick Size Pilot Program to assess
whether wider tick sizes enhance the
market quality of Pilot Securities for the
benefit of issuers and investors. Each
Participant is required to comply, and to
enforce compliance by its member
organizations, as applicable, with the
provisions of the Plan.
Proposed paragraph (d) of Rule 11.340
describes the changes to System
functionality necessary to implement
the Plan. The Exchange believes that all
of the proposed changes are designed to
directly comply with the Plan and to
assist the Exchange in meeting its
regulatory obligations thereunder.
The Plan 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 Plan will consist of a control
group of approximately 1,400 Pilot
Securities and three test groups with
400 Pilot Securities in each selected by
a stratified sampling.16 During the pilot,
Pilot Securities in the control group will
be quoted at the current tick size
increment of $0.01 per share and will
trade at the currently permitted
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.17
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 exception, and a negotiated
trade exception.18 Pilot Securities in the
third test group (‘‘Test Group Three’’)
will be subject to the same terms as Test
Group Two and also will be subject to
the ‘‘Trade-at’’ requirement to prevent
price matching by a person not
displaying at a price of a Trading
Center’s ‘‘Best Protected Bid’’ or ‘‘Best
Protected Offer,’’ unless an enumerated
exception applies.19 In addition to the
exceptions provided under Test Group
Two, an exception for Block Size orders
and exceptions that closely resemble
those under Rule 611 of Regulation
16 See Section V of the Plan for identification of
Pilot Securities, including criteria for selection and
grouping.
17 See Section VI(B) of the Plan. Pilot Securities
in Test Group One will be subject to a midpoint
exception and a retail investor exception.
18 See Section VI(C) of the Plan.
19 See Section VI(D) of the Plan.
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NMS 20 will apply to the Trade-at
requirement.
The Plan also contains requirements
for the collection and transmission of
data to the Commission and the public.
A variety of data generated during the
Plan will be released publicly on an
aggregated basis to assist in analyzing
the impact of wider tick sizes on smaller
capitalization stocks.21 The Exchange
adopted paragraph (b) of Rule 11.340 to
require Members to comply with the
data collection provisions under
Appendix B and C of the Plan.22
Member Compliance; Proposed Rules
11.340(a) and (c)
The Plan requires the Exchange to
establish, maintain, and enforce written
policies and procedures that are
reasonably designed to comply with the
applicable quoting and trading
requirements specified in the Plan.23
Accordingly, the Exchange is proposing
new Rule 11.340(a) to require its
Members to comply with the quoting
and trading provisions of the Plan. The
proposed Rules are also designed to
ensure the Exchange’s compliance with
the Plan.
Proposed paragraph (a)(1) of Rule
11.340 would establish the following
defined terms:
• ‘‘Plan’’ means the Tick Size Pilot
Plan submitted to the Commission
pursuant to Rule 608(a)(3) of Regulation
NMS under the Act.
• ‘‘Pilot Test Groups’’ means the three
test groups established under the Plan,
consisting of 400 Pilot Securities each,
which satisfy the respective criteria
established by the Plan for each such
test group.
• Trade-at Intermarket Sweep Order’’
(‘‘TA ISO’’) would mean a limit order
for a Pilot Security that meets the
following requirements:
(i) When routed to a Trading Center,
the limit order is identified as a TA ISO;
and
(ii) Simultaneously with the routing
of the limit order identified as a TA ISO,
one or more additional limit orders, as
necessary, are routed to execute against
the full 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
20 17
CFR 242.611.
Section VII of the Plan.
22 See Securities Exchange Act Release No. 78481
(August 4, 2016); 81 FR 52933 (August 10, 2016).
23 The Exchange was 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. See Securities Exchange Act Release
No. 77456 (March 28, 2016), 81 FR 18925 (April 1,
2016) (SR–NASDAQ–2016–43).
21 See
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than or equal to the limit price of the
limit order identified as a TA ISO
Sweep Order. These additional routed
orders also must be marked as TA ISOs
or Intermarket Sweep Order (‘‘ISO).
• Paragraph (a)(1)(E) would provide
that all capitalized terms not otherwise
defined in this rule shall have the
meanings set forth in the Plan,
Regulation NMS under the Act, or
Exchange rules, as applicable.
Proposed Paragraph (a)(2) would state
that the Exchange is a Participant in,
and subject to the applicable
requirements of, the Plan; proposed
Paragraph (a)(3) would require members
to establish, maintain and enforce
written policies and procedures that are
reasonably designed to comply with the
applicable requirements of the Plan,
which would allow the Exchange to
enforce compliance by its members with
the provisions of the Plan, as required
pursuant to Section II(B) of the Plan.
In addition, Paragraph (a)(4) would
provide that Exchange systems would
not display, quote or trade in violation
of the applicable quoting and trading
requirements for a Pilot Security
specified in the Plan and this proposed
rule, unless such quotation or
transaction is specifically exempted
under the Plan. Although not required
or prohibited by the Plan, the Exchange
proposes to apply the quoting and
trading requirements during the PreMarket Hours and Post-Market Hours
trading sessions,24 in addition to the
Regular Market Hours trading session.25
The Exchange believes that applying the
same processes and requirements in
Test Group Pilot Securities will simplify
processing of orders by the Exchange,
avoiding market participant confusion
that may be caused by applying only
some of the Plan requirements and not
others during the different market
sessions.
The Exchange also proposes to add
Rule 11.340(a)(5) to provide for the
treatment of Pilot Securities that drop
below a $1.00 value during the Pilot
Period.26 The Exchange proposes that if
24 As used in this proposal, the term ‘‘Market
Hours’’ means the period of time beginning at 9:30
a.m. ET and ending at 4:00 p.m. ET (or such earlier
time as may be designated by IEX on a day when
IEX closes early). The term ‘‘Pre- Market Hours’’
means the period of time beginning at 8:00 a.m. ET
and ending immediately prior to the
commencement of Market Hours. The term ‘‘PostMarket Hours’’ means the period of time beginning
immediately after the end of Market Hours and
ending at 5:00 p.m. ET. See Rule 1.160(z), (aa) and
(gg).
25 Regular Trading Hours is defined by the Plan
as having the same meaning as Rule 600(b)(64) of
Regulation NMS. See Section I (cc) of the Plan.
26 NYSE, on behalf of the Participants, submitted
a letter to Commission requesting exemption from
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the price of a Pilot Security drops below
$1.00 during regular trading on any
given business day, such Pilot Security
would continue to be subject to the Plan
and the requirements described below
that necessitate members to comply
with the specific quoting and trading
obligations for each respective Pilot Test
Group under the Plan, and would
continue to trade in accordance with the
proposed rules below as if the price of
the Pilot Security had not dropped
below $1.00. However, if the Closing
Price of a Pilot Security on any given
business day is below $1.00, such Pilot
Security would be moved out of its
respective Pilot Test Group into the
control group (which consists of Pilot
Securities not placed into a Pilot Test
Group), and may then be quoted and
traded at any price increment that is
currently permitted by Exchange rules
for the remainder of the Pilot Period.
Notwithstanding anything contained
herein to the contrary, the Exchange
proposes that, at all times during the
Pilot Period, Pilot Securities (whether in
the control group or any Pilot Test
Group) would continue to be subject to
the data collection rules, which are
enumerated in Rule 11.340(b).
The Exchange proposes Rules
11.340(c)(1)–(3), which would require
members to comply with the specific
quoting and trading obligations for each
Pilot Test Group under the Plan. With
regard to Pilot Securities in Test Group
One, proposed Rule 11.340(c)(1) would
provide that no member may display,
rank, or accept from any person any
displayable or non-displayable bids or
offers, orders, or indications of interest
in increments other than $0.05.
However, orders priced to trade at the
midpoint of the National Best Bid and
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 (the ‘‘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 (the ‘‘February Exemption
Request,’’ and together with the October Exemption
Request, the ‘‘Exemption Request Letters’’). The
Commission, pursuant to its authority under Rule
608(e) of Regulation NMS, granted New York Stock
Exchange LLC a limited exemption from the
requirement to comply with certain provisions of
the Plan as specified in the Exemption Request
Letters and noted herein. See letter from David
Shillman, Associate Director, Division of Trading
and Markets, Commission to Sherry Sandler,
Associate General Counsel, New York Stock
Exchange LLC, dated April 25, 2016 (the
‘‘Exemption Letter’’). The Exchange is seeking the
same exemptions as requested in the Exemption
Request Letters, including without limitation, an
exemption relating to proposed Rule 11.340(a)(5).
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National Best Offer (‘‘NBBO’’) or Best
Protected Bid and Best Protected Offer
(‘‘PBBO’’) and orders entered in a
Participant-operated retail liquidity
program 27 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 Rule
11.210.28
With regard to Pilot Securities in Test
Group Two, proposed Rule
11.340(c)(2)(A) would provide that such
Pilot Securities would be subject to all
of the same quoting requirements as
described above for Pilot Securities in
Test Group One, along with the
applicable quoting exceptions. In
addition, proposed Rule 11.340(c)(2)(B)
would provide that, absent one of the
listed exceptions in proposed
11.340(c)(2)(C) enumerated below, no
member may execute orders in any Pilot
Security in Test Group Two in price
increments other than $0.05. The $0.05
trading increment would apply to all
trades, including Brokered Cross Trades.
Paragraph (2)(C) would set forth
further requirements for Pilot Securities
in Test Group Two. Specifically,
members trading Pilot Securities in Test
Group Two would be allowed to trade
in increments less than $0.05 under the
following circumstances:
(i) Trading may occur at the midpoint
between the NBBO or PBBO;
(ii) Retail Investor Orders may be
provided with price improvement that
is at least $0.005 better than the PBBO.
(iii) Negotiated Trades may trade in
increments less than $0.05; and
(iv) Execution of a customer order to
comply with Rule 10.160 29 following
the execution of a proprietary trade by
the Member at an increment other than
$0.05, where such proprietary trade was
permissible pursuant to an exception
under the Plan.30
27 The Exchange notes that it does not operate a
retail liquidity program, but has included references
to retail liquidity programs operated by other
Participants in its rules for the sake of consistency
with the Plan.
28 Rule 11.210 specifies the minimum price
variant, or increment, applicable to securities
traded on the Exchange.
29 Rule 10.160 is the Exchange’s Prohibition
Against Trading Ahead of Customer Orders rule,
which is substantially identical to FINRA Rule
5320.
30 The Exchange proposes to add this exemption
to permit members to fill a customer order in a Pilot
Security at a non-nickel increment to comply with
Rule 10.160 under limited circumstances.
Specifically, the exception would allow the
execution of a customer order following a
proprietary trade by the member 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 Rule 10.160, where the triggering
proprietary trade was permissible pursuant to an
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Paragraph (3)(A)–(3)(C) would set
forth the requirements for Pilot
Securities in Test Group Three.
Members quoting or trading such Pilot
Securities would be subject to all of the
same quoting and trading requirements
as described above for Pilot Securities in
Test Group Two, including the quoting
and trading exceptions applicable to
Pilot Securities in Test Group Two. In
addition, proposed Paragraph (3)(D)
would provide for an additional
prohibition on Pilot Securities in Test
Group Three referred to as the ‘‘Tradeat Prohibition.’’ 31 Paragraph (3)(D)(ii)
would provide that, absent one of the
listed exceptions in proposed Rule
11.340(c)(3)(D)(iii) enumerated below,
no member 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.
Proposed Rule 11.340(c)(3)(D)(iii)
would allow members to 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 if any of the following
circumstances exist:
a. The order is executed as agent or
riskless principal by an independent
trading unit, as defined under Rule
200(f) of Regulation SHO,32 of a Trading
Center within a Member that has a
displayed quotation as agent or riskless
principal, via either a processor or an
SRO Quotation Feed, at a price equal to
exception under the Plan. The Commission granted
NYSE an exemption from Rule 608(c) related to this
provision. See Exemption Letter, supra note 26. The
Exchange is seeking the same exemptions as
requested in the Exemption Request Letters. The
Exchange believes such an exception best facilitates
the ability of members to continue to protect
customer orders while retaining the flexibility to
engage in proprietary trades that comply with an
exception to the Plan.
31 Proposed 11.340(c)(3)(D)(i) would define the
‘‘Trade-at Prohibition’’ to mean the prohibition
against executions by a Trading Center of a sell
order for a Pilot Security at the price of a Protected
Bid or the execution of a buy order for a Pilot
Security at the price of a Protected Offer during
regular trading hours.
32 The Exchange is proposing that, for proposed
Rules 11.340 (c)(3)(D)(iii)a. and b., a Trading Center
operated by a broker-dealer would mean an
independent trading unit, as defined under Rule
200(f) of Regulation SHO, within such brokerdealer. See 17 CFR 242.200.
Independent trading unit aggregation is available
if traders in an aggregation unit pursue only the
particular trading objective(s) or strategy(s) of that
aggregation unit and do not coordinate that strategy
with any other aggregation unit. Therefore, a
Trading Center cannot rely on quotations displayed
by that broker dealer from a different independent
trading unit. As an example, an agency desk of a
broker-dealer cannot rely on the quotation of a
proprietary desk in a separate independent trading
unit at that same broker-dealer.
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the traded-at Protected Quotation, that
was displayed before the order was
received,33 but only up to the full
displayed size of that independent
trading unit’s previously displayed
quote; 34
b. The order is executed by an
independent trading unit, as defined
under Rule 200(f) of Regulation SHO, of
a Trading Center within a Member that
has a displayed quotation for the
account of that Trading Center on a
principal (excluding riskless
principal) 35 basis, via either a processor
or an SRO Quotation Feed, at a price
equal to the traded-at Protected
Quotation, that was displayed before the
order was received, but only up to the
full displayed size of that independent
unit’s previously displayed quote; 36
c. The order is of Block Size 37 at the
time of origin and may not be:
A. an aggregation of non-block orders;
or
B. broken into orders smaller than
Block Size prior to submitting the order
to a Trading Center for execution;
d. The order is a Retail Investor Order
executed with at least $0.005 price
improvement;
33 The Exchange is proposing to adopt this
limitation to ensure that a Trading Center does not
display a quotation after the time of order receipt
solely for the purpose of trading at the price of a
protected quotation without routing to that
protected quotation.
34 This proposed exception to Trade-at would
allow a Trading Center to execute an order at the
Protected Quotation in the same capacity in which
it has displayed a quotation at a price equal to the
Protected Quotation and up to the displayed size of
such displayed quotation.
35 As described above, proposed Rule
11.340(c)(3)(D)(iii)a. would establish the
circumstances in which a Trading Center displaying
an order as riskless principal would be permitted
to Trade-at the Protected Quotation. Accordingly,
the Exchange proposes that proposed Rule
11.340(c)(3)(D)(iii)b. would exclude such
circumstances.
36 The display exceptions to Trade-at set forth in
proposed Rules 11.340 (c)(3)(D)(iii)a. and b. would
not permit a broker-dealer to trade on the basis of
interest it is not responsible for displaying. In
particular, a broker-dealer that matches orders in
the over-the-counter market shall be deemed to
have ‘‘executed’’ such orders as a Trading Center for
purposes of proposed Rule 11.340. Accordingly, if
a broker-dealer is not displaying a quotation at a
price equal to the Protected Quotation, it could not
submit matched trades to an alternative trading
center (‘‘ATS’’) that was displaying on an agency
basis the quotation of another ATS subscriber.
However, a broker-dealer that is displaying, as
principal, via either a processor or an SRO
Quotation Feed, a buy order at the protected bid,
could internalize a customer sell order up to its
displayed size. The display exceptions would not
permit a non-displayed Trading Center to submit
matched trades to an ATS that was displaying on
an agency basis the quotation of another ATS
subscriber and confirmed that a broker-dealer
would not be permitted to trade on the basis of
interest that it is not responsible for displaying.
37 ‘‘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.
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e. 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;
f. The order is executed as part of a
transaction that was not a ‘‘regular way’’
contract;
g. The order is executed as part of a
single-priced opening, reopening, or
closing transaction on the Exchange;
h. The order is executed when a
Protected Bid was priced higher than a
Protected Offer in the Pilot Security in
Test Group Three;
i. The order is identified as a TA ISO;
j. The order is executed by a Trading
Center that simultaneously routed TA
ISO or ISOs to execute against the full
displayed size of the Protected
Quotation that was traded at: 38
k. The order is executed as part of a
Negotiated Trade;
l. 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 in Test
Group Three with a price that was
inferior to the price of the Trade-at
transaction;
m. The order 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 (a ‘‘stopped
order’’), where:
A. The stopped order was for the
account of a customer;
B. The customer agrees to the
specified price on an order-by-order
basis; and
C. 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 in Test
Group Three at the time of execution or,
for a stopped sell order, equal to or
greater than the National Best Offer in
the Pilot Security in Test Group Three
at the time of execution, as long as such
order is priced at an acceptable
increment; 39
38 In connection with the definition of a Tradeat ISO proposed in Rule 11.340 (a)(1)(D), this
exception refers to the Trading Center that routed
the ISO.
39 The stopped order exemption in Rule 611 of
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’’ (see 17 CFR
242.611(b)(9)). The Trade-at stopped order
exception applies where ‘‘the price of the Trade-at
PO 00000
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Sfmt 4703
70219
n. The order is for a fractional share
of a Pilot Security in Test Group Three,
provided that such fractional share
order was not the result of breaking an
order for one or more whole shares of
a Pilot Security in Test Group Three
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; or
o. The order is to correct a bona fide
error, which is recorded by the Trading
Center in its error account.40 A bona
fide error is defined as:
transaction was, for a stopped buy 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’’ (see Plan, Section VI(D)(12)).
To illustrate the application of the stopped order
exemption as it currently operates under Rule 611
of Regulation NMS and as it is currently proposed
for Trade-at, assume the National Best Bid is $10.00
and another protected quote is at $9.95. Under Rule
611 of 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 National Best Bid. 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 Rule 611 of Regulation
NMS exception than under the Trade-at exception
in the Plan, the Exchange believes that it is
appropriate to amend the Trade-at stopped order
exception in the Plan to ensure that the application
of this exception would produce a consistent result
under both Regulation NMS and the Plan.
Therefore, the Exchange proposes in this proposed
Rule 11.340(c)(3)(D)(iii)m. 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 National Best Bid, and for a stopped sell
order, is equal to or greater than the National Best
Offer, as long as such order is priced at an
acceptable increment. The Commission granted
NYSE an exemption from Rule 608(c) related to this
provision. See Exemption Letter, supra note 26. The
Exchange is seeking the same exemptions as
requested in the Exemption Request Letters.
40 The exceptions to the Trade-at requirement set
forth in the Plan and in the Exchange’s proposed
Rule 11.340(c)(3)(D)(iii) are, in part, based on the
exceptions to the trade-through requirement set
forth in Rule 611 of Regulation NMS, including
exceptions for an order that is executed as part of
a transaction that was not a ‘‘regular way’’ contract,
and an order that is executed as part of a singlepriced opening, reopening, or closing transaction by
the Trading Center (see 17 CFR 242.611(b)(2) and
(b)(3)). Following the adoption of Rule 611 of
Regulation NMS and its exceptions, the
Commission issued exemptive relief that created
exceptions from Rule 611 of Regulation NMS for
certain error correction transactions. See Securities
Exchange Act Release No. 55884 (June 8, 2007), 72
FR 32926 (June 14, 2007); Securities Exchange Act
Release No. 55883 (June 8, 2007), 72 FR 32927 (June
14, 2007). The Exchange has determined that it is
appropriate to incorporate this additional 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
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Federal Register / Vol. 81, No. 196 / Tuesday, October 11, 2016 / Notices
The Exchange is proposing to adopt
new Rule 11.340(d)(1) to make it clear
that it will not accept an order in a Test
Group Pilot Security that is not entered
in the Pilot’s minimum increment of
$0.05, applied to all orders that require
a price and do not otherwise qualify for
an exemption to the $0.05 minimum
price increment required by the Plan.
The provision will also clarify that IEX
will use the $0.05 minimum price
increment when the System reprices an
order, including when it rounds a
derived price up or down.
Exchange Handling of Orders During
the Pilot Period for the Plan
Proposed paragraph (d) of Rule 11.340
would set forth the Exchange’s specific
procedures for handling, executing,
repricing and displaying certain orders
and modifiers applicable to Pilot
Securities. Unless otherwise indicated,
paragraph (d) of Rule 11.340 would
apply to orders in all three Test Group
Pilot Securities, but not to Pilot
Securities included in the Control
Group.
asabaliauskas on DSK3SPTVN1PROD with NOTICES
A. 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:
B. The unauthorized or unintended
purchase, sale, or allocation of
securities, or the failure to follow
specific client instructions;
C. The incorrect entry of data into
relevant systems, including reliance on
incorrect cash positions, withdrawals,
or securities positions reflected in an
account; or
D. 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.
Finally, Proposed Rule 11.340
(c)(3)(D)(iv) would prevent members
from breaking an order into smaller
orders or otherwise effecting or
executing an order to evade the
requirements of the Trade-at Prohibition
or any other provisions of the Plan.
In order to facilitate compliance with
the Plan, paragraph (d)(3) of Rule 11.340
would provide that Order Price Collars
and Restraints, as specified in Rule
11.190(f), that are not in the permissible
trading price increment for the security
will be rounded down (in the case of an
order to buy) or up (in the case of an
order to sell) to the nearest price in the
permissible trading price increment for
that security. The Exchange believes
that rounding, as described, will
facilitate its compliance with the
requirements of the Plan.
Trade-at Prohibition, subject to the conditions set
forth by the SEC’s order exempting these
transactions from Rule 611 of Regulation NMS. The
Commission granted New York Stock Exchange LLC
an exemption from Rule 608(c) related to this
provision. See Exemption Letter, supra note 26. The
Exchange is seeking the same exemptions as
requested in the Exemption Request Letters.
As with the corresponding exception under Rule
611 of Regulation NMS, the bona fide error would
have to be evidenced by objective facts and
circumstances, the Trading Center would have to
maintain documentation of such facts and
circumstances and record the transaction in its error
account. To avail itself of the exemption, the
Trading Center would have to establish, maintain,
and enforce written policies and procedures
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 would have to 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. See
Securities Exchange Act Release No. 55884 (June 8,
2007), 72 FR 32926 (June 14, 2007).
Retail Liquidity Programs
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Trade-at Intermarket Sweep Orders
The Exchange proposes to adopt
paragraph (d)(2) to Rule 11.340 to
specify that it will accept TA ISOs in all
securities, and that TA ISOs must be
designated as IOC, may not be
Minimum Quantity Orders and do not
route. If a TA ISO is entered in a
security that is not in Test Group Three,
it will be treated as an ISO in
accordance with Rule 11.190(b)(12). The
Exchange believes that accepting TA
ISOs in all securities will reduce
complexity for Members.
Order Price Collars and Restraints
As proposed, paragraph (d)(4)
specifies that the Exchange does not
operate a retail liquidity program, but
that if IEX receives an order from a
Member that is identified as a Retail
Investor Order or a retail liquidity
providing order, IEX will accept such
order if it is in a permissible increment,
but will disregard identification as a
Retail Investor Order or a retail liquidity
providing order.
Test Group Three Securities
As proposed, subparagraph (d)(5) of
Rule 11.340 describes how the Exchange
will handle certain types of orders in
Pilot Securities in Test Group Three to
avoid possible execution on the
Exchange of a non-displayed order at
the price of a Protected Quote in a Test
Group Three Pilot Security unless the
PO 00000
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Fmt 4703
Sfmt 4703
incoming order otherwise qualifies for
an exception to the Trade-at prohibition.
Currently, pursuant to Rule
11.230(a)(4), an incoming or active order
to sell (buy) may trade with nondisplayed orders to buy (sell) at the
price of protected bids (offers) without
routing to such protected bids (offers).
Subparagraph (d)(5)(A) provides that an
incoming or active order to sell (buy)
will trade with displayed orders to buy
(sell) and route, if consistent with the
terms of the order, to protected bids
(offers) before trading with nondisplayed orders at the same price. After
trading or routing, or both, any
remaining balance of an incoming order
will trade with any non-displayed
orders at the same price, so long as the
incoming order has satisfied all same
price Protected Quotations or an
exception applies. This provision thus
enables the Exchange to comply with
the Trade-at restriction of the Plan by
providing for satisfaction of Protected
Quotations before executing nondisplayed orders at the same price.
Similarly, subparagraph (d)(5)(B) of
Rule 11.340 specifies that an ISO to buy
(sell) will not trade with non-displayed
interest to sell (buy) that is the same
price as the protected offer (bid) unless
the limit price of such ISO is higher
(lower) than the price of the protected
offer (bid), or another exception applies.
This would be permitted under the
Trade-at Prohibition because to enter an
ISO to buy (sell) at a price higher
(lower) than the protected offer
(protected bid), the entering firm would
have been required to simultaneously
route limit orders to execute against the
full size of the protected offer (protected
bid).
Rule 11.340(5)(C) specifies how the
Exchange will handle certain nondisplayed orders to assure that such
orders would not trade at the price of a
Protected Quotation. A non-displayed
order is an order that is not displayed
on the Exchange, and may be a market
order, limit order or pegged order.
Pegged orders must be non-displayed.
Reserve Orders are orders with a
displayed and non-displayed portion.
Currently, a non-displayed order is
eligible to trade with a resting order on
the Order Book on entry or to post to the
Order Book and trade with an incoming
order, depending on market conditions
and the terms of each such order.41 Nondisplayed orders (except for
Discretionary Peg Orders and Primary
Peg Orders), including the nondisplayed portion of a Reserve Order,
may post and rest on the Order Book at
a price that locks contra-side liquidity at
41 See
E:\FR\FM\11OCN1.SGM
Rule 11.230 generally.
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Federal Register / Vol. 81, No. 196 / Tuesday, October 11, 2016 / Notices
the Midpoint Price, and may execute
against an incoming order at such price
if the resting order’s conditions are met.
For example, if the NBBO is locked at
$10.10 and a midpoint peg buy order is
resting at $10.10 it will trade with an
incoming sell order at $10.10.
Accordingly, to prevent nondisplayed resting buy (sell) orders from
executing at the price of a Protected
Offer (Bid), subparagraph (d)(5)(C)
provides that, if after being posted to the
Order Book, the NBBO or PBBO changes
so that such a non-displayed order will
no longer be executable at its posted
price due to the requirements of
Regulation NMS or the Plan, as
applicable, the non-displayed order will
be repriced consistent with
subparagraph (d)(5)(C) and IEX Rule
11.190(h).
The provisions of subparagraphs
(d)(5)(C)(i) and (ii) describe the manner
in which nondisplayed orders will
function when the order’s booked price
is locked or crossed by the PBBO. These
provisions change the manner in which
nondisplayed limit and midpoint peg
orders function. For Discretionary Peg
orders and primary peg orders, the
provision modifies existing
functionality whereby such orders are
subject to repricing with reference to the
NBBO so that in Test Group Three, such
orders will reprice with reference to the
PBBO as well.
Specifically, subparagraph (d)(5)(C)(i)
provides that a non-displayed resting
buy (sell) order (including the nondisplayed portion of a reserve order)
will not execute at the price of a
Protected Bid (Offer) on an away trading
center unless the incoming order
qualifies for an exception to the Tradeat Prohibition.
Subparagraph (d)(5)(c)(ii) provides
that a non-displayable order (including
the non-displayed portion of a reserve
order) that, at the time of entry, could
not be executed at its full limit price,
adjusted by applicable peg instructions,
if any, market conditions and all
applicable rules and regulations, will be
repriced and ranked by the System on
the Order Book non-displayed pursuant
to the Midpoint Price Constraint at the
current Midpoint Price (‘‘Permitted
Non-Displayed Group 3 Book Price’’). In
situations where the resulting price for
a buy (sell) order is equal to the lowest
Protected Offer (highest Protected Bid),
the Permitted Non-Displayed Group 3
Book Price will be equal to one (1) MPV
below (above) the lowest Protected Offer
(highest Protected Bid). Non-displayed
orders (including non-displayed
portions of reserve orders) resting on the
Order Book whose booked price
becomes locked or crossed by the PBBO
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20:12 Oct 07, 2016
Jkt 241001
will be re-priced by the System at a
Permitted Non-Displayed Group 3 Book
Price. To reflect increases (declines) in
the lowest Protected Offer (highest
Protected Bid), the System will continue
to re-price a resting non-displayed buy
(sell) order to be equal to the higher
(lower) of the order’s limit price or a
Permitted Non-Displayed Group 3 Book
Price.
Block Size Orders
Finally, the Exchange proposes to
specify how it will implement the Block
Size exception to the Trade-at
prohibition. Specifically, pursuant to
subparagraph (d)(5)(D) of Rule 11.340,
the Exchange will utilize the Block Size
exception under the following
circumstances: If a non-routable order is
of at least Block Size and the resulting
execution upon entry against the Order
Book is for at least Block Size, or a
routable order of at least Block Size is
sent to the Order Book and the resulting
execution upon entry is for at least
Block Size.
2. Statutory Basis
IEX believes that the proposed rule
change is consistent with the provisions
of Section 6 of the Act,42 in general and
furthers the objectives of Sections
6(b)(5) of the Act 43 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 the proposed rule change is
consistent with the Act because it is
designed to ensure that the Exchange
and its members would be in
compliance with a Plan approved by the
Commission pursuant to an order issued
by the Commission in reliance on
Section 11A of the Act,44 and also
because it allows the Exchange to make
changes to its handling of orders and
modifiers necessary to implement the
requirements of the Plan on its System.
Such approved Plan gives the Exchange
authority 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. The
Exchange believes that the proposed
rule change is consistent with the
authority granted to it by the Plan to
42 15
U.S.C. 78f(b).
U.S.C. 78f(b)(5).
44 15 U.S.C. 78k–1.
Frm 00137
Fmt 4703
establish specifications and procedures
for the implementation and operation of
the Plan that are consistent with the
provisions of the Plan. Likewise, the
Exchange believes that the proposed
rule change provides interpretations of
the Plan that are consistent with the
Act, in general, and furthers the
objectives of the Act, in particular.
Furthermore, the Exchange is a
Participant under the Plan and subject,
itself, to the provisions of the Plan. The
proposed rule change ensures that the
Exchange’s systems would not display
or execute trading interests outside the
requirements specified in such Plan.
The proposal would also help allow
market participants to continue to trade
NMS Stocks within quoting and trading
requirements that are in compliance
with the Plan, with certainty on how
certain orders and trading interests
would be treated. This, in turn, will
help encourage market participants to
continue to provide liquidity in the
marketplace.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
IEX 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
proposed changes are being made to
establish, maintain, and enforce written
policies and procedures that are
reasonably designed to comply with the
trading and quoting requirements
specified in the Plan, of which other
equities exchanges are also Participants.
Other competing national securities
exchanges are subject to the same
trading and quoting requirements
specified in the Plan, and must take the
same steps that the Exchange has to
conform its existing rules to the
requirements of the Plan. Therefore, the
proposed changes would not impose
any burden on competition, while
providing certainty of treatment and
execution of trading interests on the
Exchange to market participants in NMS
Stocks that are acting in compliance
with the requirements specified in the
Plan.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
Written comments were neither
solicited nor received.
43 15
PO 00000
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Federal Register / Vol. 81, No. 196 / Tuesday, October 11, 2016 / Notices
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Because the foregoing proposed rule
change does not: (i) Significantly affect
the protection of investors or the public
interest; (ii) impose any significant
burden on competition; and (iii) become
operative for 30 days from the date on
which it was filed, or such shorter time
as the Commission may designate, it has
become effective pursuant to Section
19(b)(3)(A) of the Act 45 and Rule 19b–
4(f)(6) thereunder.46
At any time within 60 days of the
filing of the proposed rule change, the
Commission summarily may
temporarily suspend such rule change if
it appears to the Commission that such
action is necessary or appropriate in the
public interest, for the protection of
investors, or 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.
The Exchange has requested that the
SEC waive the 30-day operative period.
The Commission believes that waiving
the 30-day operative delay is consistent
with the protection of investors and the
public interest because it will allow the
Exchange to implement the proposed
rules immediately thereby preventing
delays in the implementation of the
Plan. The Commission notes that the
Plan is scheduled to start on October 3,
2016. Therefore, the Commission hereby
waives the 30-day operative delay and
designates the proposed rule change to
be operative upon filing with the
Commission.47
IV. Solicitation of Comments
Paper Comments
• Send paper comments in triplicate
to Secretary, Securities and Exchange
Commission, 100 F Street NE.,
Washington, DC 20549–1090.
All submissions should refer to File
Number SR–IEX–2016–16. This file
number should be included on the
subject line if email is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
Internet Web site (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for Web site viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE.,
Washington, DC 20549, on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of the
filing also will be available for
inspection and copying at the principal
office of the Exchange. All comments
received will be posted without change;
the Commission does not edit personal
identifying information from
submissions. You should submit only
information that you wish to make
available publicly. All submissions
should refer to File Number SR–IEX–
2016–16, and should be submitted on or
before November 1, 2016.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.48
Robert W. Errett,
Deputy Secretary.
Electronic Comments
asabaliauskas on DSK3SPTVN1PROD with NOTICES
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
[FR Doc. 2016–24421 Filed 10–7–16; 8:45 am]
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rulecomments@sec.gov. Please include File
Number SR– IEX–2016–16 on the
subject line.
BILLING CODE 8011–01–P
45 15
U.S.C. 78s(b)(3)(A).
CFR 240.19b–4(f)(6).
47 For purposes only of waiving the operative
delay for this proposal, the Commission has
considered the proposed rule’s impact on
efficiency, competition, and capital formation. See
15 U.S.C. 78c(f).
46 17
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Jkt 241001
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–79040; File No. SR–BOX–
2016–49]
Self-Regulatory Organizations; BOX
Options Exchange LLC; Notice of
Filing and Immediate Effectiveness of
a Proposed Rule Change To Amend
the Fee Schedule on the BOX Market
LLC (‘‘BOX’’) Options Facility
October 4, 2016.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (the
‘‘Act’’),1 and Rule 19b–4 thereunder,2
notice is hereby given that on
September 30, 2016, BOX Options
Exchange LLC (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 Exchange filed the proposed rule
change pursuant to Section
19(b)(3)(A)(ii) of the Act,3 and Rule
19b–4(f)(2) thereunder,4 which renders
the proposal effective upon filing with
the Commission. The Commission is
publishing this notice to solicit
comments on the proposed rule change
from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of the Substance
of the Proposed Rule Change
The Exchange is filing with the
Securities and Exchange Commission
(‘‘Commission’’) a proposed rule change
to amend the Fee Schedule to amend
the Fee Schedule [sic] on the BOX
Market LLC (‘‘BOX’’) options facility.
While changes to the fee schedule
pursuant to this proposal will be
effective upon filing, the changes will
become operative on October 1, 2016.
The text of the proposed rule change is
available from the principal office of the
Exchange, at the Commission’s Public
Reference Room and also on the
Exchange’s Internet Web site at https://
boxexchange.com.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
Exchange included statements
concerning the purpose of and basis for
the proposed rule change and discussed
any comments it received on the
proposed rule change. The text of these
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 15 U.S.C. 78s(b)(3)(A)(ii).
4 17 CFR 240.19b–4(f)(2).
2 17
48 17
PO 00000
CFR 200.30–3(a)(12).
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E:\FR\FM\11OCN1.SGM
11OCN1
]]>Agencies
[Federal Register Volume 81, Number 196 (Tuesday, October 11, 2016)]
[Notices]
[Pages 70216-70222]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-24421]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-79036; File No. SR-IEX-2016-16]
Self-Regulatory Organizations; Investors Exchange LLC; Notice of
Filing and Immediate Effectiveness of Proposed Rule Change To Adopt
Rules To Implement the Quoting and Trading Provisions of the Tick Size
Pilot Program and To Describe Related Changes to IEX System
Functionality
October 4, 2016.
Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of
1934 (the ``Act'') \2\ and Rule 19b-4 thereunder,\3\ notice is hereby
given that, on October 3, 2016, the Investors Exchange LLC (``IEX'' or
the ``Exchange'') filed with the Securities and Exchange Commission
(the ``Commission'') the proposed rule change as described in Items I
and II below, which Items have been prepared by the self-regulatory
organization. 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\ 15 U.S.C. 78a.
\3\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
IEX is filing with the Commission a proposed rule change to adopt
rules under IEX Rule 11.340 to implement the quoting and trading
provisions of the Regulation NMS Plan to Implement a Tick Size Pilot
Program submitted to the Commission pursuant to Rule 608 of Regulation
NMS \4\ under the Act (the ``Plan''),\5\ and to describe changes to IEX
system functionality necessary to implement the Plan. The proposed rule
change is substantially similar to proposed rule changes published by
the Commission for the NASDAQ Stock Market LLC (``Nasdaq'') to adopt
NASDAQ Rule 4770, which also implemented the quoting and trading
provisions of the Plan.\6\ Accordingly, the Exchange has designated
this proposal as a ``non-controversial'' proposed rule change pursuant
to Section 19(b)(3)(A) of the Act \7\ and provided the Commission with
the notice required by Rule 19b-4(f)(6)(iii) under the Act.\8\
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\4\ 17 CFR 242.608.
\5\ See Securities and Exchange Act Release No. 74892 (May 6,
2015), 80 FR 27513 (File No. 4-657) (``Tick Plan Approval Order'').
See also Securities and Exchange Act Release No. 76382 (November 6,
2015) (File No. 4-657), 80 FR 70284 (File No. 4-657) (November 13,
2015), which extended the pilot period commencement date from May 6,
2015 to October 3, 2016.
\6\ See Securities and Exchange Act Release No. 78251 (July 7,
2016); 81 FR 45315 (July 13, 2016.
\7\ 15 U.S.C. 78s(b)(3)(a).
\8\ 17 CFR 240.19b-4(f)(6)(iii).
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The text of the proposed rule change is available at the Exchange's
Web site at www.iextrading.com, at the principal office of the
Exchange, and at the Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the self-regulatory organization
included statements concerning the purpose of and basis for the
proposed rule change and discussed any comments it received on the
proposed rule change. The text of these statement may be examined at
the places specified in Item IV below. The self-regulatory organization
has prepared summaries, set forth in Sections A, B, and C below, of the
most significant aspects of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and the
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Exchange proposes to establish rules to require its members to
comply with the requirements of the Plan, which is designed to study
and assess the impact of increment conventions on the liquidity and
trading of the common stocks of small capitalization companies. The
Exchange proposes changes to its rules for a two-year pilot period that
coincides with the Pilot Period for the Plan, which is currently
scheduled as a two-year pilot to begin on October 3, 2016.
Background
On August 25, 2014, NYSE Group, Inc., on behalf of BATS Exchange,
Inc., BATS Y-Exchange, Inc., Chicago Stock Exchange, Inc., EDGA
Exchange, Inc., 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 ``Participants''),
filed with the Commission, pursuant to Section 11A of the Act \9\ and
Rule 608 of Regulation NMS thereunder, the Plan to Implement a Tick
Size Pilot Program (``Pilot'').\10\ The Participants filed the Plan to
comply with an order issued by the Commission on June 24, 2014 (the
``June 2014 Order'').\11\ The Plan \12\ was published for comment in
the Federal Register on November 7, 2014,\13\ and approved by the
Commission, as modified, on May 6, 2015.\14\ An amendment to the Plan
adding IEX as a Participant became effective on August 5, 2016.\15\
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\9\ 15 U.S.C. 78k-1
\10\ See Letter from Brendon J. Weiss, Vice President,
Intercontinental Exchange, Inc., to Secretary, Commission, dated
August 25, 2014.
\11\ See Securities Exchange Act Release No. 72460 (June 24,
2014), 79 FR 36840 (June 30, 2014).
\12\ Unless otherwise specified, capitalized terms used in this
rule filing are based on the defined terms of the Plan.
\13\ See Securities Exchange Act Release No. 72460 (June 24,
2014), 79 FR 36840 (June 30, 2014).
\14\ See Tick Plan Approval Order, supra note 5. See also
Securities Exchange Act Release No. 77277 (March 3, 2016), 81 FR
12162 (March 8, 2016) (File No. 4-657), which amended the Plan to
add National Stock Exchange, Inc. as a Participant.
\15\ See Securities Exchange Act Release No. 78703 (August 26,
2016; 81 FR 60397 (September 1, 2016) (File No. 4-631).
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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
[[Page 70217]]
liquidity and trading of the common stocks of small-capitalization
companies. The Commission plans to use the Tick Size Pilot Program to
assess whether wider tick sizes enhance the market quality of Pilot
Securities for the benefit of issuers and investors. Each Participant
is required to comply, and to enforce compliance by its member
organizations, as applicable, with the provisions of the Plan.
Proposed paragraph (d) of Rule 11.340 describes the changes to
System functionality necessary to implement the Plan. The Exchange
believes that all of the proposed changes are designed to directly
comply with the Plan and to assist the Exchange in meeting its
regulatory obligations thereunder.
The Plan 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 Plan will consist of a control group
of approximately 1,400 Pilot Securities and three test groups with 400
Pilot Securities in each selected by a stratified sampling.\16\ During
the pilot, Pilot Securities in the control group will be quoted at the
current tick size increment of $0.01 per share and will trade at the
currently permitted 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.\17\ 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 exception, and a negotiated trade exception.\18\ Pilot
Securities in the third test group (``Test Group Three'') will be
subject to the same terms as Test Group Two and also will be subject to
the ``Trade-at'' requirement to prevent price matching by a person not
displaying at a price of a Trading Center's ``Best Protected Bid'' or
``Best Protected Offer,'' unless an enumerated exception applies.\19\
In addition to the exceptions provided under Test Group Two, an
exception for Block Size orders and exceptions that closely resemble
those under Rule 611 of Regulation NMS \20\ will apply to the Trade-at
requirement.
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\16\ See Section V of the Plan for identification of Pilot
Securities, including criteria for selection and grouping.
\17\ See Section VI(B) of the Plan. Pilot Securities in Test
Group One will be subject to a midpoint exception and a retail
investor exception.
\18\ See Section VI(C) of the Plan.
\19\ See Section VI(D) of the Plan.
\20\ 17 CFR 242.611.
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The Plan also contains requirements for the collection and
transmission of data to the Commission and the public. A variety of
data generated during the Plan will be released publicly on an
aggregated basis to assist in analyzing the impact of wider tick sizes
on smaller capitalization stocks.\21\ The Exchange adopted paragraph
(b) of Rule 11.340 to require Members to comply with the data
collection provisions under Appendix B and C of the Plan.\22\
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\21\ See Section VII of the Plan.
\22\ See Securities Exchange Act Release No. 78481 (August 4,
2016); 81 FR 52933 (August 10, 2016).
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Member Compliance; Proposed Rules 11.340(a) and (c)
The Plan requires the Exchange to establish, maintain, and enforce
written policies and procedures that are reasonably designed to comply
with the applicable quoting and trading requirements specified in the
Plan.\23\ Accordingly, the Exchange is proposing new Rule 11.340(a) to
require its Members to comply with the quoting and trading provisions
of the Plan. The proposed Rules are also designed to ensure the
Exchange's compliance with the Plan.
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\23\ The Exchange was 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. See Securities Exchange Act Release No. 77456
(March 28, 2016), 81 FR 18925 (April 1, 2016) (SR-NASDAQ-2016-43).
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Proposed paragraph (a)(1) of Rule 11.340 would establish the
following defined terms:
``Plan'' means the Tick Size Pilot Plan submitted to the
Commission pursuant to Rule 608(a)(3) of Regulation NMS under the Act.
``Pilot Test Groups'' means the three test groups
established under the Plan, consisting of 400 Pilot Securities each,
which satisfy the respective criteria established by the Plan for each
such test group.
Trade-at Intermarket Sweep Order'' (``TA ISO'') would mean
a limit order for a Pilot Security that meets the following
requirements:
(i) When routed to a Trading Center, the limit order is identified
as a TA ISO; and
(ii) Simultaneously with the routing of the limit order identified
as a TA ISO, one or more additional limit orders, as necessary, are
routed to execute against the full 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 TA ISO Sweep Order. These additional
routed orders also must be marked as TA ISOs or Intermarket Sweep Order
(``ISO).
Paragraph (a)(1)(E) would provide that all capitalized
terms not otherwise defined in this rule shall have the meanings set
forth in the Plan, Regulation NMS under the Act, or Exchange rules, as
applicable.
Proposed Paragraph (a)(2) would state that the Exchange is a
Participant in, and subject to the applicable requirements of, the
Plan; proposed Paragraph (a)(3) would require members to establish,
maintain and enforce written policies and procedures that are
reasonably designed to comply with the applicable requirements of the
Plan, which would allow the Exchange to enforce compliance by its
members with the provisions of the Plan, as required pursuant to
Section II(B) of the Plan.
In addition, Paragraph (a)(4) would provide that Exchange systems
would not display, quote or trade in violation of the applicable
quoting and trading requirements for a Pilot Security specified in the
Plan and this proposed rule, unless such quotation or transaction is
specifically exempted under the Plan. Although not required or
prohibited by the Plan, the Exchange proposes to apply the quoting and
trading requirements during the Pre-Market Hours and Post-Market Hours
trading sessions,\24\ in addition to the Regular Market Hours trading
session.\25\ The Exchange believes that applying the same processes and
requirements in Test Group Pilot Securities will simplify processing of
orders by the Exchange, avoiding market participant confusion that may
be caused by applying only some of the Plan requirements and not others
during the different market sessions.
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\24\ As used in this proposal, the term ``Market Hours'' means
the period of time beginning at 9:30 a.m. ET and ending at 4:00 p.m.
ET (or such earlier time as may be designated by IEX on a day when
IEX closes early). The term ``Pre- Market Hours'' means the period
of time beginning at 8:00 a.m. ET and ending immediately prior to
the commencement of Market Hours. The term ``Post- Market Hours''
means the period of time beginning immediately after the end of
Market Hours and ending at 5:00 p.m. ET. See Rule 1.160(z), (aa) and
(gg).
\25\ Regular Trading Hours is defined by the Plan as having the
same meaning as Rule 600(b)(64) of Regulation NMS. See Section I
(cc) of the Plan.
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The Exchange also proposes to add Rule 11.340(a)(5) to provide for
the treatment of Pilot Securities that drop below a $1.00 value during
the Pilot Period.\26\ The Exchange proposes that if
[[Page 70218]]
the price of a Pilot Security drops below $1.00 during regular trading
on any given business day, such Pilot Security would continue to be
subject to the Plan and the requirements described below that
necessitate members to comply with the specific quoting and trading
obligations for each respective Pilot Test Group under the Plan, and
would continue to trade in accordance with the proposed rules below as
if the price of the Pilot Security had not dropped below $1.00.
However, if the Closing Price of a Pilot Security on any given business
day is below $1.00, such Pilot Security would be moved out of its
respective Pilot Test Group into the control group (which consists of
Pilot Securities not placed into a Pilot Test Group), and may then be
quoted and traded at any price increment that is currently permitted by
Exchange rules for the remainder of the Pilot Period. Notwithstanding
anything contained herein to the contrary, the Exchange proposes that,
at all times during the Pilot Period, Pilot Securities (whether in the
control group or any Pilot Test Group) would continue to be subject to
the data collection rules, which are enumerated in Rule 11.340(b).
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\26\ NYSE, on behalf of the 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 (the ``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 (the
``February Exemption Request,'' and together with the October
Exemption Request, the ``Exemption Request Letters''). The
Commission, pursuant to its authority under Rule 608(e) of
Regulation NMS, granted New York Stock Exchange LLC a limited
exemption from the requirement to comply with certain provisions of
the Plan as specified in the Exemption Request Letters and noted
herein. See letter from David Shillman, Associate Director, Division
of Trading and Markets, Commission to Sherry Sandler, Associate
General Counsel, New York Stock Exchange LLC, dated April 25, 2016
(the ``Exemption Letter''). The Exchange is seeking the same
exemptions as requested in the Exemption Request Letters, including
without limitation, an exemption relating to proposed Rule
11.340(a)(5).
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The Exchange proposes Rules 11.340(c)(1)-(3), which would require
members to comply with the specific quoting and trading obligations for
each Pilot Test Group under the Plan. With regard to Pilot Securities
in Test Group One, proposed Rule 11.340(c)(1) would provide that no
member may display, rank, or accept from any person any displayable or
non-displayable bids or offers, orders, or indications of interest in
increments other than $0.05. However, orders priced to trade at the
midpoint of the National Best Bid and National Best Offer (``NBBO'') or
Best Protected Bid and Best Protected Offer (``PBBO'') and orders
entered in a Participant-operated retail liquidity program \27\ 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 Rule 11.210.\28\
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\27\ The Exchange notes that it does not operate a retail
liquidity program, but has included references to retail liquidity
programs operated by other Participants in its rules for the sake of
consistency with the Plan.
\28\ Rule 11.210 specifies the minimum price variant, or
increment, applicable to securities traded on the Exchange.
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With regard to Pilot Securities in Test Group Two, proposed Rule
11.340(c)(2)(A) would provide that such Pilot Securities would be
subject to all of the same quoting requirements as described above for
Pilot Securities in Test Group One, along with the applicable quoting
exceptions. In addition, proposed Rule 11.340(c)(2)(B) would provide
that, absent one of the listed exceptions in proposed 11.340(c)(2)(C)
enumerated below, no member may execute orders in any Pilot Security in
Test Group Two in price increments other than $0.05. The $0.05 trading
increment would apply to all trades, including Brokered Cross Trades.
Paragraph (2)(C) would set forth further requirements for Pilot
Securities in Test Group Two. Specifically, members trading Pilot
Securities in Test Group Two would be allowed to trade in increments
less than $0.05 under the following circumstances:
(i) Trading may occur at the midpoint between the NBBO or PBBO;
(ii) Retail Investor Orders may be provided with price improvement
that is at least $0.005 better than the PBBO.
(iii) Negotiated Trades may trade in increments less than $0.05;
and
(iv) Execution of a customer order to comply with Rule 10.160 \29\
following the execution of a proprietary trade by the Member at an
increment other than $0.05, where such proprietary trade was
permissible pursuant to an exception under the Plan.\30\
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\29\ Rule 10.160 is the Exchange's Prohibition Against Trading
Ahead of Customer Orders rule, which is substantially identical to
FINRA Rule 5320.
\30\ The Exchange proposes to add this exemption to permit
members to fill a customer order in a Pilot Security at a non-nickel
increment to comply with Rule 10.160 under limited circumstances.
Specifically, the exception would allow the execution of a customer
order following a proprietary trade by the member 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 Rule 10.160, where the triggering
proprietary trade was permissible pursuant to an exception under the
Plan. The Commission granted NYSE an exemption from Rule 608(c)
related to this provision. See Exemption Letter, supra note 26. The
Exchange is seeking the same exemptions as requested in the
Exemption Request Letters. The Exchange believes such an exception
best facilitates the ability of members to continue to protect
customer orders while retaining the flexibility to engage in
proprietary trades that comply with an exception to the Plan.
---------------------------------------------------------------------------
Paragraph (3)(A)-(3)(C) would set forth the requirements for Pilot
Securities in Test Group Three. Members quoting or trading such Pilot
Securities would be subject to all of the same quoting and trading
requirements as described above for Pilot Securities in Test Group Two,
including the quoting and trading exceptions applicable to Pilot
Securities in Test Group Two. In addition, proposed Paragraph (3)(D)
would provide for an additional prohibition on Pilot Securities in Test
Group Three referred to as the ``Trade-at Prohibition.'' \31\ Paragraph
(3)(D)(ii) would provide that, absent one of the listed exceptions in
proposed Rule 11.340(c)(3)(D)(iii) enumerated below, no member 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.
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\31\ Proposed 11.340(c)(3)(D)(i) would define the ``Trade-at
Prohibition'' to mean the prohibition against executions by a
Trading Center of a sell order for a Pilot Security at the price of
a Protected Bid or the execution of a buy order for a Pilot Security
at the price of a Protected Offer during regular trading hours.
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Proposed Rule 11.340(c)(3)(D)(iii) would allow members to 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 if any of the following
circumstances exist:
a. The order is executed as agent or riskless principal by an
independent trading unit, as defined under Rule 200(f) of Regulation
SHO,\32\ of a Trading Center within a Member that has a displayed
quotation as agent or riskless principal, via either a processor or an
SRO Quotation Feed, at a price equal to
[[Page 70219]]
the traded-at Protected Quotation, that was displayed before the order
was received,\33\ but only up to the full displayed size of that
independent trading unit's previously displayed quote; \34\
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\32\ The Exchange is proposing that, for proposed Rules 11.340
(c)(3)(D)(iii)a. and b., a Trading Center operated by a broker-
dealer would mean an independent trading unit, as defined under Rule
200(f) of Regulation SHO, within such broker-dealer. See 17 CFR
242.200.
Independent trading unit aggregation is available if traders in
an aggregation unit pursue only the particular trading objective(s)
or strategy(s) of that aggregation unit and do not coordinate that
strategy with any other aggregation unit. Therefore, a Trading
Center cannot rely on quotations displayed by that broker dealer
from a different independent trading unit. As an example, an agency
desk of a broker-dealer cannot rely on the quotation of a
proprietary desk in a separate independent trading unit at that same
broker-dealer.
\33\ The Exchange is proposing to adopt this limitation to
ensure that a Trading Center does not display a quotation after the
time of order receipt solely for the purpose of trading at the price
of a protected quotation without routing to that protected
quotation.
\34\ This proposed exception to Trade-at would allow a Trading
Center to execute an order at the Protected Quotation in the same
capacity in which it has displayed a quotation at a price equal to
the Protected Quotation and up to the displayed size of such
displayed quotation.
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b. The order is executed by an independent trading unit, as defined
under Rule 200(f) of Regulation SHO, of a Trading Center within a
Member that has a displayed quotation for the account of that Trading
Center on a principal (excluding riskless principal) \35\ basis, via
either a processor or an SRO Quotation Feed, at a price equal to the
traded-at Protected Quotation, that was displayed before the order was
received, but only up to the full displayed size of that independent
unit's previously displayed quote; \36\
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\35\ As described above, proposed Rule 11.340(c)(3)(D)(iii)a.
would establish the circumstances in which a Trading Center
displaying an order as riskless principal would be permitted to
Trade-at the Protected Quotation. Accordingly, the Exchange proposes
that proposed Rule 11.340(c)(3)(D)(iii)b. would exclude such
circumstances.
\36\ The display exceptions to Trade-at set forth in proposed
Rules 11.340 (c)(3)(D)(iii)a. and b. would not permit a broker-
dealer to trade on the basis of interest it is not responsible for
displaying. In particular, a broker-dealer that matches orders in
the over-the-counter market shall be deemed to have ``executed''
such orders as a Trading Center for purposes of proposed Rule
11.340. Accordingly, if a broker-dealer is not displaying a
quotation at a price equal to the Protected Quotation, it could not
submit matched trades to an alternative trading center (``ATS'')
that was displaying on an agency basis the quotation of another ATS
subscriber. However, a broker-dealer that is displaying, as
principal, via either a processor or an SRO Quotation Feed, a buy
order at the protected bid, could internalize a customer sell order
up to its displayed size. The display exceptions would not permit a
non-displayed Trading Center to submit matched trades to an ATS that
was displaying on an agency basis the quotation of another ATS
subscriber and confirmed that a broker-dealer would not be permitted
to trade on the basis of interest that it is not responsible for
displaying.
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c. The order is of Block Size \37\ at the time of origin and may
not be:
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\37\ ``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.
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A. an aggregation of non-block orders; or
B. broken into orders smaller than Block Size prior to submitting
the order to a Trading Center for execution;
d. The order is a Retail Investor Order executed with at least
$0.005 price improvement;
e. 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;
f. The order is executed as part of a transaction that was not a
``regular way'' contract;
g. The order is executed as part of a single-priced opening,
reopening, or closing transaction on the Exchange;
h. The order is executed when a Protected Bid was priced higher
than a Protected Offer in the Pilot Security in Test Group Three;
i. The order is identified as a TA ISO;
j. The order is executed by a Trading Center that simultaneously
routed TA ISO or ISOs to execute against the full displayed size of the
Protected Quotation that was traded at: \38\
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\38\ In connection with the definition of a Trade-at ISO
proposed in Rule 11.340 (a)(1)(D), this exception refers to the
Trading Center that routed the ISO.
---------------------------------------------------------------------------
k. The order is executed as part of a Negotiated Trade;
l. 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 in Test Group Three with a price that was inferior to
the price of the Trade-at transaction;
m. The order 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 (a ``stopped order''), where:
A. The stopped order was for the account of a customer;
B. The customer agrees to the specified price on an order-by-order
basis; and
C. 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 in Test Group Three at the time of execution or, for a stopped
sell order, equal to or greater than the National Best Offer in the
Pilot Security in Test Group Three at the time of execution, as long as
such order is priced at an acceptable increment; \39\
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\39\ The stopped order exemption in Rule 611 of 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'' (see 17 CFR 242.611(b)(9)). The Trade-at stopped order
exception applies where ``the price of the Trade-at transaction was,
for a stopped buy 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'' (see Plan, Section VI(D)(12)).
To illustrate the application of the stopped order exemption as
it currently operates under Rule 611 of Regulation NMS and as it is
currently proposed for Trade-at, assume the National Best Bid is
$10.00 and another protected quote is at $9.95. Under Rule 611 of
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 National Best Bid. 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 Rule 611 of Regulation NMS exception than
under the Trade-at exception in the Plan, the Exchange believes that
it is appropriate to amend the Trade-at stopped order exception in
the Plan to ensure that the application of this exception would
produce a consistent result under both Regulation NMS and the Plan.
Therefore, the Exchange proposes in this proposed Rule
11.340(c)(3)(D)(iii)m. 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 National Best Bid, and for a stopped
sell order, is equal to or greater than the National Best Offer, as
long as such order is priced at an acceptable increment. The
Commission granted NYSE an exemption from Rule 608(c) related to
this provision. See Exemption Letter, supra note 26. The Exchange is
seeking the same exemptions as requested in the Exemption Request
Letters.
---------------------------------------------------------------------------
n. The order is for a fractional share of a Pilot Security in Test
Group Three, provided that such fractional share order was not the
result of breaking an order for one or more whole shares of a Pilot
Security in Test Group Three 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; or
o. The order is to correct a bona fide error, which is recorded by
the Trading Center in its error account.\40\ A bona fide error is
defined as:
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\40\ The exceptions to the Trade-at requirement set forth in the
Plan and in the Exchange's proposed Rule 11.340(c)(3)(D)(iii) are,
in part, based on the exceptions to the trade-through requirement
set forth in Rule 611 of Regulation NMS, including exceptions for an
order that is executed as part of a transaction that was not a
``regular way'' contract, and an order that is executed as part of a
single- priced opening, reopening, or closing transaction by the
Trading Center (see 17 CFR 242.611(b)(2) and (b)(3)). Following the
adoption of Rule 611 of Regulation NMS and its exceptions, the
Commission issued exemptive relief that created exceptions from Rule
611 of Regulation NMS for certain error correction transactions. See
Securities Exchange Act Release No. 55884 (June 8, 2007), 72 FR
32926 (June 14, 2007); Securities Exchange Act Release No. 55883
(June 8, 2007), 72 FR 32927 (June 14, 2007). The Exchange has
determined that it is appropriate to incorporate this additional
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 Regulation NMS. The Commission granted New York
Stock Exchange LLC an exemption from Rule 608(c) related to this
provision. See Exemption Letter, supra note 26. The Exchange is
seeking the same exemptions as requested in the Exemption Request
Letters.
As with the corresponding exception under Rule 611 of Regulation
NMS, the bona fide error would have to be evidenced by objective
facts and circumstances, the Trading Center would have to maintain
documentation of such facts and circumstances and record the
transaction in its error account. To avail itself of the exemption,
the Trading Center would have to establish, maintain, and enforce
written policies and procedures 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 would have to 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. See Securities Exchange Act Release No. 55884 (June 8,
2007), 72 FR 32926 (June 14, 2007).
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[[Page 70220]]
A. 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:
B. The unauthorized or unintended purchase, sale, or allocation of
securities, or the failure to follow specific client instructions;
C. The incorrect entry of data into relevant systems, including
reliance on incorrect cash positions, withdrawals, or securities
positions reflected in an account; or
D. 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.
Finally, Proposed Rule 11.340 (c)(3)(D)(iv) would prevent members
from breaking an order into smaller orders or otherwise effecting or
executing an order to evade the requirements of the Trade-at
Prohibition or any other provisions of the Plan.
Exchange Handling of Orders During the Pilot Period for the Plan
Proposed paragraph (d) of Rule 11.340 would set forth the
Exchange's specific procedures for handling, executing, repricing and
displaying certain orders and modifiers applicable to Pilot Securities.
Unless otherwise indicated, paragraph (d) of Rule 11.340 would apply to
orders in all three Test Group Pilot Securities, but not to Pilot
Securities included in the Control Group.
The Exchange is proposing to adopt new Rule 11.340(d)(1) to make it
clear that it will not accept an order in a Test Group Pilot Security
that is not entered in the Pilot's minimum increment of $0.05, applied
to all orders that require a price and do not otherwise qualify for an
exemption to the $0.05 minimum price increment required by the Plan.
The provision will also clarify that IEX will use the $0.05 minimum
price increment when the System reprices an order, including when it
rounds a derived price up or down.
Trade-at Intermarket Sweep Orders
The Exchange proposes to adopt paragraph (d)(2) to Rule 11.340 to
specify that it will accept TA ISOs in all securities, and that TA ISOs
must be designated as IOC, may not be Minimum Quantity Orders and do
not route. If a TA ISO is entered in a security that is not in Test
Group Three, it will be treated as an ISO in accordance with Rule
11.190(b)(12). The Exchange believes that accepting TA ISOs in all
securities will reduce complexity for Members.
Order Price Collars and Restraints
In order to facilitate compliance with the Plan, paragraph (d)(3)
of Rule 11.340 would provide that Order Price Collars and Restraints,
as specified in Rule 11.190(f), that are not in the permissible trading
price increment for the security will be rounded down (in the case of
an order to buy) or up (in the case of an order to sell) to the nearest
price in the permissible trading price increment for that security. The
Exchange believes that rounding, as described, will facilitate its
compliance with the requirements of the Plan.
Retail Liquidity Programs
As proposed, paragraph (d)(4) specifies that the Exchange does not
operate a retail liquidity program, but that if IEX receives an order
from a Member that is identified as a Retail Investor Order or a retail
liquidity providing order, IEX will accept such order if it is in a
permissible increment, but will disregard identification as a Retail
Investor Order or a retail liquidity providing order.
Test Group Three Securities
As proposed, subparagraph (d)(5) of Rule 11.340 describes how the
Exchange will handle certain types of orders in Pilot Securities in
Test Group Three to avoid possible execution on the Exchange of a non-
displayed order at the price of a Protected Quote in a Test Group Three
Pilot Security unless the incoming order otherwise qualifies for an
exception to the Trade-at prohibition.
Currently, pursuant to Rule 11.230(a)(4), an incoming or active
order to sell (buy) may trade with non-displayed orders to buy (sell)
at the price of protected bids (offers) without routing to such
protected bids (offers). Subparagraph (d)(5)(A) provides that an
incoming or active order to sell (buy) will trade with displayed orders
to buy (sell) and route, if consistent with the terms of the order, to
protected bids (offers) before trading with non-displayed orders at the
same price. After trading or routing, or both, any remaining balance of
an incoming order will trade with any non-displayed orders at the same
price, so long as the incoming order has satisfied all same price
Protected Quotations or an exception applies. This provision thus
enables the Exchange to comply with the Trade-at restriction of the
Plan by providing for satisfaction of Protected Quotations before
executing non-displayed orders at the same price.
Similarly, subparagraph (d)(5)(B) of Rule 11.340 specifies that an
ISO to buy (sell) will not trade with non-displayed interest to sell
(buy) that is the same price as the protected offer (bid) unless the
limit price of such ISO is higher (lower) than the price of the
protected offer (bid), or another exception applies. This would be
permitted under the Trade-at Prohibition because to enter an ISO to buy
(sell) at a price higher (lower) than the protected offer (protected
bid), the entering firm would have been required to simultaneously
route limit orders to execute against the full size of the protected
offer (protected bid).
Rule 11.340(5)(C) specifies how the Exchange will handle certain
non-displayed orders to assure that such orders would not trade at the
price of a Protected Quotation. A non-displayed order is an order that
is not displayed on the Exchange, and may be a market order, limit
order or pegged order. Pegged orders must be non-displayed. Reserve
Orders are orders with a displayed and non-displayed portion.
Currently, a non-displayed order is eligible to trade with a
resting order on the Order Book on entry or to post to the Order Book
and trade with an incoming order, depending on market conditions and
the terms of each such order.\41\ Non-displayed orders (except for
Discretionary Peg Orders and Primary Peg Orders), including the non-
displayed portion of a Reserve Order, may post and rest on the Order
Book at a price that locks contra-side liquidity at
[[Page 70221]]
the Midpoint Price, and may execute against an incoming order at such
price if the resting order's conditions are met. For example, if the
NBBO is locked at $10.10 and a midpoint peg buy order is resting at
$10.10 it will trade with an incoming sell order at $10.10.
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\41\ See Rule 11.230 generally.
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Accordingly, to prevent non-displayed resting buy (sell) orders
from executing at the price of a Protected Offer (Bid), subparagraph
(d)(5)(C) provides that, if after being posted to the Order Book, the
NBBO or PBBO changes so that such a non-displayed order will no longer
be executable at its posted price due to the requirements of Regulation
NMS or the Plan, as applicable, the non-displayed order will be
repriced consistent with subparagraph (d)(5)(C) and IEX Rule 11.190(h).
The provisions of subparagraphs (d)(5)(C)(i) and (ii) describe the
manner in which nondisplayed orders will function when the order's
booked price is locked or crossed by the PBBO. These provisions change
the manner in which nondisplayed limit and midpoint peg orders
function. For Discretionary Peg orders and primary peg orders, the
provision modifies existing functionality whereby such orders are
subject to repricing with reference to the NBBO so that in Test Group
Three, such orders will reprice with reference to the PBBO as well.
Specifically, subparagraph (d)(5)(C)(i) provides that a non-
displayed resting buy (sell) order (including the non-displayed portion
of a reserve order) will not execute at the price of a Protected Bid
(Offer) on an away trading center unless the incoming order qualifies
for an exception to the Trade-at Prohibition.
Subparagraph (d)(5)(c)(ii) provides that a non-displayable order
(including the non-displayed portion of a reserve order) that, at the
time of entry, could not be executed at its full limit price, adjusted
by applicable peg instructions, if any, market conditions and all
applicable rules and regulations, will be repriced and ranked by the
System on the Order Book non-displayed pursuant to the Midpoint Price
Constraint at the current Midpoint Price (``Permitted Non-Displayed
Group 3 Book Price''). In situations where the resulting price for a
buy (sell) order is equal to the lowest Protected Offer (highest
Protected Bid), the Permitted Non-Displayed Group 3 Book Price will be
equal to one (1) MPV below (above) the lowest Protected Offer (highest
Protected Bid). Non-displayed orders (including non-displayed portions
of reserve orders) resting on the Order Book whose booked price becomes
locked or crossed by the PBBO will be re-priced by the System at a
Permitted Non-Displayed Group 3 Book Price. To reflect increases
(declines) in the lowest Protected Offer (highest Protected Bid), the
System will continue to re-price a resting non-displayed buy (sell)
order to be equal to the higher (lower) of the order's limit price or a
Permitted Non-Displayed Group 3 Book Price.
Block Size Orders
Finally, the Exchange proposes to specify how it will implement the
Block Size exception to the Trade-at prohibition. Specifically,
pursuant to subparagraph (d)(5)(D) of Rule 11.340, the Exchange will
utilize the Block Size exception under the following circumstances: If
a non-routable order is of at least Block Size and the resulting
execution upon entry against the Order Book is for at least Block Size,
or a routable order of at least Block Size is sent to the Order Book
and the resulting execution upon entry is for at least Block Size.
2. Statutory Basis
IEX believes that the proposed rule change is consistent with the
provisions of Section 6 of the Act,\42\ in general and furthers the
objectives of Sections 6(b)(5) of the Act \43\ 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 the proposed rule change is consistent with
the Act because it is designed to ensure that the Exchange and its
members would be in compliance with a Plan approved by the Commission
pursuant to an order issued by the Commission in reliance on Section
11A of the Act,\44\ and also because it allows the Exchange to make
changes to its handling of orders and modifiers necessary to implement
the requirements of the Plan on its System. Such approved Plan gives
the Exchange authority 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. The
Exchange believes that the proposed rule change is consistent with the
authority granted to it by the Plan to establish specifications and
procedures for the implementation and operation of the Plan that are
consistent with the provisions of the Plan. Likewise, the Exchange
believes that the proposed rule change provides interpretations of the
Plan that are consistent with the Act, in general, and furthers the
objectives of the Act, in particular.
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\42\ 15 U.S.C. 78f(b).
\43\ 15 U.S.C. 78f(b)(5).
\44\ 15 U.S.C. 78k-1.
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Furthermore, the Exchange is a Participant under the Plan and
subject, itself, to the provisions of the Plan. The proposed rule
change ensures that the Exchange's systems would not display or execute
trading interests outside the requirements specified in such Plan. The
proposal would also help allow market participants to continue to trade
NMS Stocks within quoting and trading requirements that are in
compliance with the Plan, with certainty on how certain orders and
trading interests would be treated. This, in turn, will help encourage
market participants to continue to provide liquidity in the
marketplace.
B. Self-Regulatory Organization's Statement on Burden on Competition
IEX 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 proposed changes are being made to establish,
maintain, and enforce written policies and procedures that are
reasonably designed to comply with the trading and quoting requirements
specified in the Plan, of which other equities exchanges are also
Participants. Other competing national securities exchanges are subject
to the same trading and quoting requirements specified in the Plan, and
must take the same steps that the Exchange has to conform its existing
rules to the requirements of the Plan. Therefore, the proposed changes
would not impose any burden on competition, while providing certainty
of treatment and execution of trading interests on the Exchange to
market participants in NMS Stocks that are acting in compliance with
the requirements specified in the Plan.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
Written comments were neither solicited nor received.
[[Page 70222]]
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Because the foregoing proposed rule change does not: (i)
Significantly affect the protection of investors or the public
interest; (ii) impose any significant burden on competition; and (iii)
become operative for 30 days from the date on which it was filed, or
such shorter time as the Commission may designate, it has become
effective pursuant to Section 19(b)(3)(A) of the Act \45\ and Rule 19b-
4(f)(6) thereunder.\46\
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\45\ 15 U.S.C. 78s(b)(3)(A).
\46\ 17 CFR 240.19b-4(f)(6).
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At any time within 60 days of the filing of the proposed rule
change, the Commission summarily may temporarily suspend such rule
change if it appears to the Commission that such action is necessary or
appropriate in the public interest, for the protection of investors, or
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.
The Exchange has requested that the SEC waive the 30-day operative
period. The Commission believes that waiving the 30-day operative delay
is consistent with the protection of investors and the public interest
because it will allow the Exchange to implement the proposed rules
immediately thereby preventing delays in the implementation of the
Plan. The Commission notes that the Plan is scheduled to start on
October 3, 2016. Therefore, the Commission hereby waives the 30-day
operative delay and designates the proposed rule change to be operative
upon filing with the Commission.\47\
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\47\ For purposes only of waiving the operative delay for this
proposal, the Commission has considered the proposed rule's impact
on efficiency, competition, and capital formation. See 15 U.S.C.
78c(f).
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IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's Internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an email to rule-comments@sec.gov. Please include
File Number SR- IEX-2016-16 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.
All submissions should refer to File Number SR-IEX-2016-16. This file
number should be included on the subject line if email is used. To help
the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's Internet Web site (https://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all
written statements with respect to the proposed rule change that are
filed with the Commission, and all written communications relating to
the proposed rule change between the Commission and any person, other
than those that may be withheld from the public in accordance with the
provisions of 5 U.S.C. 552, will be available for Web site viewing and
printing in the Commission's Public Reference Room, 100 F Street NE.,
Washington, DC 20549, on official business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of the filing also will be available
for inspection and copying at the principal office of the Exchange. All
comments received will be posted without change; the Commission does
not edit personal identifying information from submissions. You should
submit only information that you wish to make available publicly. All
submissions should refer to File Number SR-IEX-2016-16, and should be
submitted on or before November 1, 2016.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\48\
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\48\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-24421 Filed 10-7-16; 8:45 am]
BILLING CODE 8011-01-P
