Self-Regulatory Organizations; Chicago Stock Exchange, Inc.; Notice of Filing of Proposed Rule Change To Adopt the CHX Liquidity Enhancing Access Delay, 11252-11272 [2017-03296]

Download as PDF 11252 Federal Register / Vol. 82, No. 33 / Tuesday, February 21, 2017 / Notices sradovich on DSK3GMQ082PROD with NOTICES sections 6(c) and 17(b) of the Act from the prohibition on certain affiliated transactions in section 17(a) of the Act to the extent necessary to permit the Underlying Funds to sell their shares to, and redeem their shares from, the Funds of Funds.4 Applicants state that such transactions will be consistent with the policies of each Fund of Funds and each Underlying Fund and with the general purposes of the Act and will be based on the net asset values of the Underlying Funds. 2. Applicants agree that any order granting the requested relief will be subject to the terms and conditions stated in the application. Such terms and conditions are designed to, among other things, help prevent any potential (i) undue influence over an Underlying Fund that is not in the same ‘‘group of investment companies’’ as the Fund of Funds through control or voting power, or in connection with certain services, transactions, and underwritings, (ii) excessive layering of fees, and (iii) overly complex fund structures, which are the concerns underlying the limits in sections 12(d)(1)(A), (B), and (C) of the Act. 3. Section 12(d)(1)(J) of the Act provides that the Commission may exempt any person, security, or transaction, or any class or classes of persons, securities, or transactions, from any provision of section 12(d)(1) if the exemption is consistent with the public interest and the protection of investors. Section 17(b) of the Act authorizes the Commission to grant an order permitting a transaction otherwise prohibited by section 17(a) if it finds that (a) the terms of the proposed transaction are fair and reasonable and do not involve overreaching on the part of any person concerned; (b) the proposed transaction is consistent with the policies of each registered investment company involved; and (c) the proposed transaction is consistent with the general purposes of the Act. Section 6(c) of the Act permits the Commission to exempt any persons or transactions from any provision of the Act if such exemption is necessary or appropriate in the public interest and 4 A Fund of Funds generally would purchase and sell shares of an Underlying Fund that operates as an ETF through secondary market transactions rather than through principal transactions with the Underlying Fund. Applicants nevertheless request relief from section 17(a) to permit a Fund of Funds to purchase or redeem shares from the ETF. A Fund of Funds will purchase and sell shares of an Underlying Fund that is a closed-end fund through secondary market transactions at market prices rather than through principal transactions with the closed-end fund. Accordingly, applicants are not requesting section 17(a) relief with respect to transactions in shares of closed-end funds (including business development companies). VerDate Sep<11>2014 17:15 Feb 17, 2017 Jkt 241001 consistent with the protection of investors and the purposes fairly intended by the policy and provisions of the Act. For the Commission, by the Division of Investment Management, pursuant to delegated authority. Eduardo A. Aleman, Assistant Secretary. [FR Doc. 2017–03297 Filed 2–17–17; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–80041; File No. SR–CHX– 2017–04] Self-Regulatory Organizations; Chicago Stock Exchange, Inc.; Notice of Filing of Proposed Rule Change To Adopt the CHX Liquidity Enhancing Access Delay February 14, 2017. Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’) 1 and Rule 19b–4 thereunder,2 notice is hereby given that on February 10, 2017, the Chicago Stock Exchange, Inc. (‘‘CHX’’ or ‘‘Exchange’’) filed with the Securities and Exchange Commission (the ‘‘Commission’’) the proposed rule change as described in Items I, II and III below, which Items have been prepared by the selfregulatory 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 CHX proposes to amend the Rules of the Exchange (‘‘CHX Rules’’) to adopt the CHX Liquidity Enhancing Access Delay. The text of this proposed rule change is available on the Exchange’s Web site at http://www.chx.com/ regulatory-operations/rule-filings/, 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 those statements may be examined at 1 15 2 17 PO 00000 U.S.C. 78s(b)(1). CFR 240.19b–4. Frm 00082 Fmt 4703 Sfmt 4703 the places specified in Item IV below. The Exchange has prepared summaries, set forth in sections A, B and C below, of the most significant parts of such statements. A. Self-Regulatory Organization’s Statement of the Purpose of, and the Statutory Basis for, the Proposed Rule Change 1. Purpose (1) Overview The Exchange proposes to amend the CHX Rules to adopt the CHX Liquidity Enhancing Access Delay (‘‘LEAD’’). In sum, LEAD will require all new incoming orders, cancel and cancel/ replace messages to be subject to a 350microsecond intentional access delay; provided, however, that (1) new incoming orders 3 submitted by LEAD Market Makers (‘‘LEAD MM’’), a new class of CHX Market Maker 4 with heightened quoting and trading obligations, that would be immediately ranked on the CHX book without executing against any resting orders on the CHX book and (2) certain cancel messages related to resting orders that were submitted by LEAD MMs will not be delayed. LEAD will be applied to all securities traded on the Exchange throughout the trading day.5 LEAD is designed to enhance displayed liquidity and price discovery by minimizing the effectiveness of latency arbitrage strategies that diminish displayed liquidity and impair price discovery, as described in detail below. (2) Latency Arbitrage As used herein, ‘‘latency arbitrage’’ means the practice of exploiting 3 ‘‘New incoming orders’’ are orders received by the Matching System for the first time. As discussed below, LEAD will not apply to other situations where existing orders or portions thereof are treated as incoming orders, such as (1) resting orders that are price slid into a new price point pursuant to the CHX Only Price Sliding or Limit Up-Limit Down Price Sliding Processes and (2) unexecuted remainders of routed orders released into the Matching System. See CHX Article 1, Rule 2(b)(1)(C); see also CHX Article 20, Rule 2A(b); see also CHX Article 20, Rule 8(b)(7). Incidentally, the Exchange is proposing to amend CHX Article 20, Rule 8(a)(7) to delete the word ‘‘new’’ from the last sentence, so that the rule provides, in pertinent part, that if no balance exists at the time a part of an unexecuted remainder of a routed order is returned to the Matching System, it shall be treated an incoming order. 4 See CHX Article 1, Rule 1(tt) defining ‘‘Market Maker’’; see also generally CHX Article 16 (Market Makers). 5 Each trading day is divided into four trading sessions: Early session, regular trading session, late trading session and late crossing session. See CHX Article 20, Rule 1(b). The Exchange only accepts cross orders during the late crossing session and thus does not accept or rank any single-sided orders during the late crossing session. See CHX Article 1, Rule 2(a)(2) defining ‘‘cross order.’’ E:\FR\FM\21FEN1.SGM 21FEN1 Federal Register / Vol. 82, No. 33 / Tuesday, February 21, 2017 / Notices sradovich on DSK3GMQ082PROD with NOTICES disparities in the price of a security or related securities that are being traded in different markets by taking advantage of the time it takes to access and respond to symmetric public information.6 At CHX, latency arbitrage is effected by low-latency market participants that leverage microsecond speed advantages to take resting liquidity at stale prices from the CHX limit order book. In 2016, the Exchange experienced a material decline in CHX volume and liquidity in the SPDR S&P 500 trust exchange-traded fund (‘‘SPY’’),7 which the Exchange has attributed to latency arbitrage activity in SPY first observed at CHX in January 2016 (‘‘SPY latency arbitrage activity’’).8 Specifically, during the period of January through July 2016, the Exchange observed unusual messaging patterns in SPY whereby an execution of a large inbound Immediate 6 See Letter to Brent J. Fields, Secretary, SEC, from Eric Budish, Professor of Economic and David G. Booth Faculty Fellow, the University of Chicago Booth School of Business (October 13, 2016) (‘‘Budish LTAD Letter’’) at 2. Given its emphasis on speed, latency arbitrage has resulted in a welldocumented and escalating technology race among certain market participants seeking to obtain ever smaller speed advantages. See Eric Budish, Peter Cramton and John Shim, ‘‘The High-Frequency Trading Arms Race: Frequent Batch Auctions as a Market Design Response,’’ Quarterly Journal of Economics, Vol. 130(4), November 2015 (‘‘Budish Paper’’); see also, Elaine Wah and Michael Wellman, ‘‘Latency Arbitrage, Market Fragmentation, and Efficiency: A Two-Market Model,’’ 4th ACM Conference on Electronic Commerce, June 2013. 7 Most of the CHX liquidity in SPY and other S&P 500-correlated securities is provided as part of an arbitrage strategy between CHX and the futures markets, whereby liquidity providers utilize, among other things, proprietary algorithms to price and size resting orders on CHX to track index market data from a derivatives market (e.g., E-Mini S&P traded on the Chicago Mercantile Exchange’s Globex trading platform). 8 A detailed analysis (‘‘CHX ETF Analysis’’) of the impact of latency arbitrage on displayed liquidity in SPY at CHX, for the period of August 2015 through July 2016 (‘‘Analysis Period’’), may be found under Appendix A. The market data utilized by the CHX ETF Analysis, as well as defined terms and notes, may be found under Appendix B. Additional analysis regarding the potential impact of LEAD on liquidity takers may be found under Appendix C. As discussed in detail under Appendix A below, prior to the beginning of the SPY latency arbitrage activity in January 2016, CHX volume and liquidity in SPY constituted a material portion of overall volume and liquidity in SPY marketwide. For example, the CHX Market Share in SPY as a percentage of Total Volume decreased from 5.73% in January 2016 to 0.57% in July 2016, while the Control Securities did not experience similar declines. See infra Appendix A; see also infra Appendix B Calculation Set 1a. Also, the Time-weighted Average CHX Size At The NBBO in SPY relative to the total NMS Size At The NBBO in SPY decreased from 44.36% in January 2016 to 3.39% of the total NMS Size At The NBBO in SPY in July 2016, while the Control Securities did not experience similar declines. See also infra Appendix A; see also infra Appendix B Calculations Sets 3a and 4a. VerDate Sep<11>2014 17:15 Feb 17, 2017 Jkt 241001 Or Cancel order (‘‘IOC’’) against a contra-side order resting on the CHX book was frequently followed by a late cancel message for the executed resting order soon after the execution (‘‘Too Late to Cancel’’ or ‘‘TLTC’’).9 Based on these observations, Participant corroboration of the observations and market data analysis,10 the Exchange found that SPY latency arbitrage activity caused CHX liquidity providers to dramatically reduce displayed liquidity in SPY (and at times withdraw from the market altogether), which materially decreased liquidity in SPY market wide, especially in light of CHX’s significant contributions to overall volume and liquidity in SPY prior to the declines.11 As demonstrated by the SPY latency arbitrage activity, latency arbitrage imposes a tax on liquidity provision 12 that dissuades market participants from providing displayed liquidity, which is incompatible with a primary goal of Regulation NMS to enhance displayed liquidity to the benefit of investors and the public interest.13 Latency arbitrageurs exploit the fact that updating the continuous limit order book (utilized by every national securities exchange) necessarily requires the processing of order-related messages serially by time of receipt. Thus, when reacting to the same symmetric information, a liquidity provider with a quote displayed on an exchange must be faster than a latency arbitrageur to avoid its stale quote from being executed.14 This structural bias facilitates the ability of the latency arbitrageur to extract profits from symmetric information.15 The Exchange submits that this bias is contrary to a fundamental principal of trading, that the parties agree upon the terms of the trade, and permitting 9 The Exchange did not begin maintaining TLTC data until May 2016. See infra Appendix C. 10 See supra note 8. 11 See id. 12 See Eric Budish, Comment letter regarding ‘‘Investors’ Exchange LLC Form 1 Application (Release No. 34–75925; File No. 10–222)’’ (February 5, 2016). 13 The Commission has stated that ‘‘increased displayed liquidity [is] a principal goal of the Order Protection Rule.’’ Exchange Act Release No. 51808 (June 9, 2005), 70 FR 37496, 37514 (June 29, 2005) (‘‘Regulation NMS Adopting Release’’). The Commission has also stated that ‘‘[t]o the extent that competition among orders is lessened, the quality of price discovery for all sizes of orders can be compromised. Impaired price discovery could cause market prices to deviate from fundamental values, reduce market depth and liquidity, and create excessive short-term volatility that is harmful to long-term investors and listed companies. More broadly, when market prices do not reflect fundamental values, resources will be misallocated within the economy and economic efficiency—as well as market efficiency—will be impaired.’’ Id. at 37499. 14 See Budish LTAD Letter, supra note 6, at 2. 15 See id. PO 00000 Frm 00083 Fmt 4703 Sfmt 4703 11253 latency arbitrage to continue to diminish displayed liquidity is wholly inconsistent with the objectives of Regulation NMS.16 (3) LEAD LEAD is designed to offset the structural bias that unfairly favors latency arbitrageurs by giving liquidity providers who have committed to heightened quoting and trading requirements (i.e., LEAD MMs) a small head start to the cancellation of stale quotes in the race to react to symmetric public information.17 Based on its analysis of CHX market data,18 the Exchange does not believe that LEAD will have a material impact on the ability of liquidity takers not engaged in latency arbitrage, such as retail investors, to access displayed liquidity at CHX.19 To the extent a sophisticated market participant seeks to take displayed liquidity pursuant to better or different information (as opposed to the same information exploited by latency arbitrageurs), LEAD is too short to have an incrementally negative impact on such non-latency arbitrage strategies. The LEAD MM is a new class of CHX Market Maker that will be subject to the proposed Minimum Performance Standards, as described in detail below, which will not be applied to non-LEAD MMs. The purpose of the Minimum Performance Standards is to ensure that LEAD MMs will be required to meet heightened quoting and trading requirements in return for undelayed access to the CHX book for the purposes of submitting liquidity providing orders and cancelling its resting orders. Also, LEAD MMs will be required to establish at least one LEAD MM Trading Account, as described below, through which all LEAD market making activities must originate. Specifically, LEAD will require the following messages in all securities 16 See Regulation NMS Adopting Release, supra note 13, at 37514. 17 See Budish LTAD Letter, supra note 6, at 2. In discussing possible alternatives to a frequent batch auction model for trading securities, the Budish Paper provides that ‘‘the asymmetric delay eliminates sniping and stops the arms race.’’ See Budish Paper, supra note 6, at 1612. 18 Based on the Exchange’s analysis of cancel activity in SPY at CHX for the period starting in May 2016 through July 2016, the Exchange believes that if LEAD had been implemented during that time period, out of a total of 18,316 partiallyexecuted orders in SPY, 20 liquidity taking orders not attributed to latency arbitrage activity would have not been executed, a de minimis number in the light of the enhanced liquidity and price discovery afforded by LEAD. See infra Appendix C. 19 The Exchange notes that while LEAD is designed to neutralize microsecond speed advantages exploited by latency arbitrageurs, LEAD MMs would still be required to obtain speed capabilities fast enough to take advantage of LEAD. E:\FR\FM\21FEN1.SGM 21FEN1 11254 Federal Register / Vol. 82, No. 33 / Tuesday, February 21, 2017 / Notices sradovich on DSK3GMQ082PROD with NOTICES received by the Exchange throughout a trading day to be subject to a 350microsecond intentional delay, the same length as the Investors Exchange LLC (‘‘IEX’’) POP/coil delay (‘‘IEX Delay’’) recently approved by the Commission,20 before such delayed messages would be processed 21 by the Matching System: 22 • All new incoming messages that did not originate from a Valid LEAD MM Trading Account, as described below, will be intentionally delayed; provided, however, that the portion of any new incoming Routable Order 23 that is to be routed away will never be delayed, regardless of who submitted the Routable Order. • New incoming orders, as well as the replace portion of cancel/replace messages, that originate from a Valid LEAD MM Trading Account that would immediately execute against existing resting orders on the CHX book will be intentionally delayed. • Cancel and cancel/replace messages for orders that originate from a Valid LEAD MM Trading Account that have been delayed, but not yet processed by the Matching System, will be intentionally delayed. As such, the following messages would not be intentionally delayed pursuant to LEAD: • New incoming orders that originate from a Valid LEAD MM Trading Account that would immediately be ranked on the CHX book without executing against existing resting orders on the CHX book will not be intentionally delayed. • A cancel message for a resting order that originates from a Valid LEAD MM Trading Account will not be intentionally delayed. 20 See Securities Exchange Act Release No. 78101 (June 17, 2016), 81 FR 41141 (June 23, 2016) (‘‘IEX Approval Order’’). The IEX Delay will delay all inbound order-related messages from IEX Users, outbound message confirmations to IEX Users and outbound market data disseminated through IEX’s proprietary data feed. See id. at 41154. By not delaying inbound market data, IEX would be able to reprice its resting pegged orders to track changes to the NBBO before latency arbitrageurs could execute against such pegged orders at potentially stale prices, which facilitates the ability of IEX to comply with its rules regarding the repricing of pegged orders. See id. at 41155. 21 For clarity, ‘‘processed’’ means executing instructions contained in a message, including, but not limited to, permitting an order to execute within the Matching System pursuant to the terms of the order or cancelling an existing order, whereas ‘‘evaluate’’ means the Matching System determining whether a message should be diverted into LEAD, as described below. 22 The Matching System is an automated order execution system, which is a part of the Exchange’s ‘‘Trading Facilities,’’ as defined under CHX Article 1, Rule 1(z). 23 See CHX Article 1, Rule 1(oo) defining ‘‘Routable Order.’’ VerDate Sep<11>2014 17:15 Feb 17, 2017 Jkt 241001 • A cancel/replace message related to a resting order that originates from a Valid LEAD MM Trading Account will not be intentionally delayed; provided, however, that if any part of the replace portion would immediately execute against an existing resting order on the CHX book, the replace portion will be intentionally delayed. • The portion of a Routable Order that is to be routed away will not be intentionally delayed, regardless of who submitted the Routable Order. Also, LEAD will not delay any outbound messages or market data. The Exchange notes that adopting a symmetric delay and order types that would permit the Exchange to reprice resting orders based on undelayed market data, such as the IEX Delay and pegged order types, would not address latency arbitrage at CHX with respect to limit orders because the liquidity provision strategies utilized by CHX liquidity providers, which provide valuable liquidity to the market overall,24 require cancellations or adjustments to resting limit orders pursuant to proprietary algorithms held by the CHX liquidity providers that could not be adequately replicated by CHX.25 Also, as the Commission noted in the IEX Approval Order, a symmetric delay that delays all inbound messages would be ineffective in protecting resting limit orders from latency arbitrage.26 However, the Exchange notes that both LEAD and the IEX Delay provide processing advantages to certain types of liquidity providers over all other order senders so as to minimize the effectiveness of latency arbitrage and are thus similar in this respect.27 Moreover, the Exchange submits that LEAD is consistent with the objectives of the Exchange Act and the rules and regulations thereunder. As described in detail below,28 LEAD is, among other things, (1) a de minimis intentional access delay in that it is so short as to not frustrate the purposes of Rule 611 of Regulation NMS 29 by impairing fair and efficient access to an exchange’s quotations; 30 (2) consistent with Rule 602(b) of Regulation NMS; 31 and (3) furthers the objectives of the objectives of Section 6(b)(5) of the Act in that it 24 See supra note 8; see also infra Appendices A and B. 25 See supra note 7. 26 See IEX Approval Order, supra note 20, at 41157. 27 See infra Section 3(b). 28 See id. 29 17 CFR 242.611. 30 See Securities Exchange Act Release No. 78102 (June 17, 2016), 81 FR 40785 (June 23, 2016) (‘‘Final Interpretation’’). 31 See 17 CFR 242.602(b). PO 00000 Frm 00084 Fmt 4703 Sfmt 4703 would protect investors and the public interest and does not unfairly discriminate among Participants.32 Amended Article 16, Rule 4 (Obligation of Market Makers) Proposed Article 16, Rule 4(f) provides rules regarding the proposed LEAD MM Program. Specifically, proposed paragraph (f)(1) provides defined terms for the purposes of paragraph (f). Thereunder, proposed paragraph (f)(1)(A) provides that ‘‘LEAD’’ means the Liquidity Enhancing Access Delay, as described under proposed Article 20, Rule 8(h); proposed paragraph (f)(1)(B) provides that ‘‘LEAD MM’’ means a Market Maker assigned to a particular security that has committed to maintaining Minimum Performance Standards, described under proposed paragraph (f)(2), in the security; proposed paragraph (f)(1)(C) provides that ‘‘LEAD MM Security’’ means a security assigned to a LEAD MM; and proposed paragraph (f)(1)(D) provides that ‘‘Qualified Executions’’ means all executed shares at CHX, during all trading sessions,33 resulting from singlesided orders, excluding any executed shares resulting from auctions. Proposed paragraph (f)(2) provides that ‘‘Minimum Performance Standards’’ means the Quotation Requirements and Obligations described under current paragraph (d),34 which provides the current quoting and pricing obligations for Market Makers, with the following modifications.35 Proposed paragraph (f)(2)(A) provides that the Designated Percentages described under current Article 16, Rule 4(d)(2)(B) shall be halved.36 Thus, new incoming orders submitted by LEAD MMs will be required to be priced closer to the NBBO or the last reported sale in the security, as applicable, than those of current Market Makers. In addition, LEAD MMs will be required to meet the following 32 15 U.S.C. 78f(b)(5). supra note 5. 34 The current Quotation Requirements and Obligations include, among other things, a continuous two-sided quote obligation and pricing obligations that require a continuous bid no further away from the National Best Bid (‘‘NBB’’) and a continuous offer no further away from the National Best Offer (‘‘NBO’’) than the Designated Percentage or Defined Limit, as applicable. See CHX Article 16, Rule 4(d). 35 Trading days on which the Exchange does not open for trading, for whatever reason, will be excluded from the Exchange’s calculations regarding compliance with the proposed Minimum Performance Standards. 36 For example, the 8% Designated Percentage for securities subject to the Article 20, Rule 2A(c)(1)(A) pursuant to current CHX Article 16, Rule 4(d)(2)(A) and (B) would be 4% for LEAD MMs. 33 See E:\FR\FM\21FEN1.SGM 21FEN1 Federal Register / Vol. 82, No. 33 / Tuesday, February 21, 2017 / Notices sradovich on DSK3GMQ082PROD with NOTICES additional requirements. Proposed paragraph (f)(2)(B) provides that LEAD MMs shall maintain a Monthly Average NBBO Quoting Percentage, as defined thereunder, in each of its LEAD MM Securities, of at least 10% over the course of a calendar month. For each such security, the Exchange will determine: (i) The ‘‘Daily NBB Quoting Percentage’’ by determining the percentage of time the LEAD MM has at least one Round Lot 37 of displayed interest in an Exchange bid at the NBB during the Open Trading State 38 of each trading day for a calendar month; (ii) the ‘‘Daily NBO Quoting Percentage’’ by determining the percentage of time the LEAD MM has at least one Round Lot of displayed interest in an Exchange offer at the NBO during the Open Trading State of each trading day for a calendar month; (iii) the ‘‘Average Daily NBBO Quoting Percentage’’ for each trading day by summing the ‘‘Daily NBB Quoting Percentage’’ and the ‘‘Daily NBO Quoting Percentage’’ then dividing such sum by two; and (iv) the ‘‘Monthly Average NBBO Quoting Percentage’’ for each security by summing the security’s ‘‘Average Daily NBBO Quoting Percentages’’ for each trading day in a calendar month then dividing the resulting sum by the total number of trading days in such calendar month.39 40 Proposed paragraph (f)(2)(C) provides that a LEAD MM’s Qualified Executions in each of its LEAD MM Securities must comprise on an equally-weighted daily average at least 2% of all Qualified Executions in the same security over the course of a calendar month.41 The Exchange believes that the 2% requirement is sufficiently high to require a material contribution to overall volume in the security, while not rendering the requirement impractical in the event the security is assigned numerous LEAD MMs. 37 See CHX Article 1, Rule 2(f)(3) defining ‘‘Round Lot.’’ 38 See CHX Article 1, Rule 1(qq) defining ‘‘Open Trading State.’’ 39 For example, a LEAD MM with a Monthly Average NBBO Quoting Percentage of 11% would meet the requirements of proposed paragraph (f)(2)(B), even if on a particular day during the calendar month, the LEAD MM’s Average Daily Quoting Percentage was 9%. 40 See supra note 35. 41 For example, a LEAD MM whose Qualified Executions in an assigned security comprised on average 3% of all Qualified Executions in the assigned security over the course of a calendar month would meet the requirements of proposed paragraph (f)(2)(C), even if on a particular day during the calendar month, the LEAD MM’s Qualified Executions in the same assigned security comprised 1% of all Qualified Executions in the assigned security on that day. VerDate Sep<11>2014 17:15 Feb 17, 2017 Jkt 241001 Proposed paragraph (f)(2)(D) provides that at least 80% of the LEAD MM’s Qualified Executions in each of its LEAD MM Securities must result from its resting orders that originated from the corresponding LEAD MM Trading Account over the course of a calendar month.42 The Exchange submits that the proposed Minimum Performance Standards are commensurate with the benefit afforded to LEAD MMs. Given that the only benefit afforded to LEAD MMs is the ability to cancel and cancel/ replace its resting orders without delay, the Exchange believes that it would be inappropriate to adopt even higher quoting and trading requirements, such as those for Designated Marker Makers (‘‘DMMs’’) on the New York Stock Exchange (‘‘NYSE’’), who, in return for such higher quoting and trading requirements, receive certain financial and execution parity benefits not proposed herein.43 Proposed paragraph (f)(3) provides rules regarding the process by which Market Makers would be assigned securities as a LEAD MM. Specifically, proposed paragraph (f)(3)(A) provides that only a Market Maker may apply to be assigned one or more securities as a LEAD MM. Market Makers must receive written approval from the Exchange to be assigned securities as a LEAD MM. LEAD MMs shall be selected by the Exchange based on factors including, but not limited to, experience with making markets in securities, adequacy of capital, willingness to promote the Exchange as a marketplace, issuer preference, operational capacity, support personnel and history of adherence to Exchange rules and securities laws. Current Article 16, Rules 2(c)–(e) regarding withdrawal from assigned securities shall also apply to LEAD MMs and LEAD MM Securities.44 Proposed paragraph (f)(3)(B) outlines requirements regarding LEAD MM Trading Accounts and provides that before beginning LEAD market making activities in a security, a LEAD MM shall complete the following, subject to Exchange approval. Thereunder, proposed subparagraph (B)(i) provides that the LEAD MM must establish at least one separately designated LEAD MM Trading Account through which all 42 Unlike the standards provided under proposed paragraphs (f)(2)(A)–(C), this standard would be measured based on aggregate activity over the course of a calendar month. 43 See generally NYSE Rules 103B and 104. 44 The Exchange will expand its current procedures for voluntary and involuntary withdrawals regarding Marker Maker securities to apply to LEAD MM Securities. PO 00000 Frm 00085 Fmt 4703 Sfmt 4703 11255 and only LEAD market making activities in LEAD MM Securities shall originate. Subparagraph (B)(ii) provides that the LEAD MM must register each of its LEAD MM Securities to precisely one LEAD MM Trading Account (‘‘Valid LEAD MM Trading Account’’); provided, however, that a LEAD MM Trading Account may be registered with one or more LEAD MM Securities. All messages related to a single LEAD MM Security must originate from the Valid LEAD MM Trading Account on a given day and in the event a LEAD MM wishes to change the Valid LEAD MM Trading Account for a given LEAD MM Security, the LEAD MM shall so notify the Exchange in writing by no later than 9 a.m. on the trading day immediately preceding the effective date of the change; provided, however, that the Exchange may, at its discretion, delay or deny the change. In addition, no change of a Valid LEAD MM Trading Account for a given LEAD MM Security may be effected intraday. Proposed paragraph (f)(3)(B) facilitates the ability of the Exchange to monitor compliance with the proposed Minimum Performance Standards by requiring a LEAD MM to submit all LEAD market making activities in a particular security through a Valid LEAD MM Trading Account. Moreover, in the event a LEAD MM would like to change the Valid LEAD MM Trading Account for a given LEAD MM Security, the proposed rule outlines the precise procedures to effect the change, which promotes clarity regarding the process. Proposed paragraph (f)(3)(C) provides that the Exchange may, at its discretion, approve more than one LEAD MM to be assigned to any LEAD MM Security and limit the number of LEAD MMs assigned to any security. Proposed paragraph (f)(3)(D) provides that the Exchange will review each LEAD MM’s quoting and trading activity on a monthly basis to determine whether the LEAD MM has met the Minimum Performance Standards. Also, a LEAD MM’s failure to meet the Minimum Performance Standards on any given month will result in the Exchange (i) suspending or terminating a LEAD MM’s registration as a Market Maker pursuant to current Article 16, Rule 1(d) or (ii) suspending or terminating assignment to a LEAD MM Security pursuant to proposed subparagraph (A) above. In addition, nothing in proposed subparagraph (D) will limit any other power of the Exchange to discipline a LEAD MM pursuant to CHX Rules. E:\FR\FM\21FEN1.SGM 21FEN1 11256 Federal Register / Vol. 82, No. 33 / Tuesday, February 21, 2017 / Notices Amended Article 20, Rule 8 (Operation of the CHX Matching System) Proposed Article 20, Rule 8(h) provides rules regarding the operation of LEAD. Specifically, proposed paragraph (h) begins by stating that after initial receipt 45 of a new incoming message, the Matching System will evaluate 46 the message to determine whether it is a Delayable Message, as defined under proposed paragraph (h)(1) below. For the purposes of such an evaluation only, the Matching System shall not consider Match Trade Prevention (‘‘MTP’’), as described under current Article 1, Rule 2(b)(3)(F).47 If not delayable, the Matching System will immediately process the message without delay. Proposed paragraph (h)(1) provides that ‘‘Delayable Message’’ means all new incoming order, cancel and cancel/ replace messages, except as follows: (A) Any new incoming order or unrouted balance, as described under proposed subparagraph (D) below, that originates from a Valid LEAD MM Trading Account, as described under proposed Article 16, Rule 4(f)(3)(B)(ii), that would, by its terms, immediately be ranked on CHX book without executing against any existing resting orders on the CHX book shall not be a Delayable Message. (B) A cancel message related to a resting order that originates from a Valid LEAD MM Trading Account shall not be a Delayable Message. (C) A cancel/replace message related to a resting order that originates from a Valid LEAD MM Trading Account shall not be a Delayable Message; provided, however, that if any part of the replace portion would immediately execute against existing resting orders on the CHX book, the replace portion shall be a Delayable Message. (D) The portion of a new incoming Routable Order that is to be routed away, pursuant to current Article 19, Rule 3(a), shall not be diverted into the LEAD; provided, however, that the entire unrouted balance of the Routable Order shall be diverted into the LEAD, subject to proposed subparagraph (A). sradovich on DSK3GMQ082PROD with NOTICES Mechanically, upon initial receipt of a new incoming message, the Matching System would assign the message a unique sequence number, as it does 45 As used herein, ‘‘initial receipt’’ means the time at which the Exchange receives a message and assigns the message a unique sequence number, which the Exchange utilizes to determine, among other things, message processing order and ranking on the CHX book. See CHX Article 20, Rule 8(b). 46 See supra note 21. 47 The purpose of ignoring MTP in LEAD evaluation is to provide a previously delayed order that would not have triggered MTP an opportunity to execute against the resting order before the newer incoming order would cancel the resting order after release from LEAD. The Exchange is also proposing unrelated modifications to MTP to contemplate LEAD, as discussed below. VerDate Sep<11>2014 17:15 Feb 17, 2017 Jkt 241001 currently, which, in addition to establishing processing and execution priority, will serve as the starting point for the Fixed LEAD Period, as described below. The Matching System would then initially evaluate the message to determine whether it is a Delayable Message.48 For example, a new incoming limit order marked Post Only 49 that originated from a Valid LEAD MM Trading Account that would not be immediately ranked on the CHX book due to one or more matchable contra-side orders resting on the CHX book would be a Delayable Message because the Post Only order would not, by its terms, immediately be ranked on the CHX book without executing against any resting orders on the CHX book. In such a case, the Post Only order would be diverted into the LEAD queue before being processed by the Matching System, which would result in the Post Only order being posted or cancelled depending on the state of the CHX book upon its release.50 If, however, the Exchange were to receive a new Post Only order that originated from a Valid LEAD MM Trading Account that would post to the CHX book due to no existing orders resting on the CHX book at that time, the Post Only order would not be a Delayable Message and it would immediately be ranked on the CHX book without delay.51 Similarly, a new incoming order marked CHX Only 52 that originated from a Valid LEAD MM Trading Account that would tradethrough a protected quotation of an external market would not be a Delayable Message as it would be price slid to a permissible price.53 Also, a new incoming order that originated from a Valid LEAD MM Trading Account that would immediately be ranked on the CHX book without executing against any resting orders because MTP would cancel the resting contra-side orders against which the order would have executed, would be a Delayable 48 The Exchange notes that the Matching System processes messages for a given security serially. Thus, the length of time it takes for a message to be evaluated and/or processed by the Matching System after initial receipt is herein called ‘‘variable message queuing delay,’’ as the actual length of the delay depends on the number of precedent messages that have yet to be evaluated and/or processed by the Matching System and are residing in the ‘‘Inbound Queue.’’ The length of time it takes for a message to be evaluated and/or processed by the Matching System is herein called ‘‘system processing delay.’’ 49 See CHX Article 1, Rule 2(b)(1)(D) defining ‘‘Post Only.’’ 50 See infra Example 2. 51 See id. 52 See CHX Article 1, Rule 2(b)(1)(C) defining ‘‘CHX Only.’’ 53 See CHX Article 20, Rule 5(a)(2). PO 00000 Frm 00086 Fmt 4703 Sfmt 4703 Message, as MTP is ignored for the purposes of the LEAD evaluation only.54 Proposed paragraph (h) continues by providing that if a message is delayable, the message will be diverted into the LEAD queue and will remain delayed until it is released for processing. A delayed message shall become releasable 350 microseconds after initial receipt by the Exchange (‘‘Fixed LEAD Period’’),55 but shall only be processed after the Matching System has evaluated and processed, if applicable,56 all messages in the security received by the Exchange during the Fixed LEAD Period for the delayed message. A message may be delayed for longer than the Fixed LEAD Period depending on the thencurrent messaging volume at CHX.57 The Matching System will utilize a new market snapshot to process a released order.58 A delayed message shall retain its original sequence number and may only be delayed once. LEAD shall apply to all securities traded on the Exchange throughout the trading day.59 LEAD shall not apply to messages received during an auction.60 The Exchange also proposes to make corresponding amendments to current Article 20, Rule 8(d) and (f) to contemplate LEAD. Specifically, the Exchange proposes to add the clause ‘‘subject to paragraph (h) below’’ at the end of current paragraph (d)(1) so that amended paragraph (d)(1) provides as follows: 54 See supra note 47. the event that then-current messaging volume results in a Delayable Message being evaluated after 350 microseconds from initial receipt, the Delayable Message shall be diverted into LEAD and be immediately releasable. This will ensure that messages received during the Fixed LEAD Period for a delayed message are evaluated and processed, if applicable, before the Delayable Message is released. 56 For example, an order that would not take liquidity from the CHX book would not be delayed and would be immediately processed, whereas an order that would take liquidity from the CHX book would be delayed and would not be immediately processed. 57 In the event a releasable message is awaiting other messages received during its Fixed LEAD Period to be evaluated and processed, if applicable, the releasable message would be subject to an additional unintentional variable delay that is a function of the then-current messaging volume at CHX. See supra note 21; see also supra note 45; see also infra Examples 1–3. 58 The purpose of a new market snapshot is to ensure that the released order is processed in a manner consistent with federal securities rules and regulations, such as Regulation NMS and Regulation SHO. 59 See supra note 5. 60 For example, if the Exchange receives an order after initiation of a Sub-second Non-displayed Auction Process (‘‘SNAP’’) in the security, the order will not be diverted into the LEAD queue and, rather, be handled pursuant to current CHX Article 18, Rule 1. 55 In E:\FR\FM\21FEN1.SGM 21FEN1 Federal Register / Vol. 82, No. 33 / Tuesday, February 21, 2017 / Notices Except for certain orders which shall be executed as described in Rule 8(e), below, an incoming order shall be matched against one or more resting orders in the Matching System, in the order in which the resting orders are ranked on the CHX book, pursuant to Rule 8(b) above, at the Working Price of each resting order, as defined under Article 1, Rule 1(pp), for the full amount of shares available at that price, or for the size of the incoming order, if smaller; subject to paragraph (h) below. The Exchange also proposes to amend paragraph (f)(1) to provide that orders resting on the CHX book shall be immediately and automatically cancelled upon receipt of a cancellation message, subject to paragraph (h) below, as certain cancel messages will be diverted into the LEAD as described above. Examples 1–2 below illustrate the operation of LEAD. Amended Routing Protocol In light of the possible bifurcation of a Routable Order into an immediately routed portion and a delayed unrouted portion 61 and the fact that the Exchange does not currently utilize any Router Feedback to augment protected quotations,62 LEAD could result in a single order being routed twice to satisfy the same protected quotation. In order to eliminate this inefficiency, the Exchange proposes to amend its current order routing protocol to adopt a single type of Router Feedback utilized by the Bats BYX Exchange,63 Immediate Feedback, but only on an order-by-order basis. Use of Immediate Feedback would permit the Exchange to augment away quotes on an order-by-order basis to avoid double routing of the same order to satisfy the same protected quotation(s). Specifically, Immediate Feedback would permit the Exchange to decrease the number of shares available at an away market by an amount equal to the size of the immediately routed portion of the Routable Order. In the extremely unlikely event that the Exchange receives an execution report from an 61 See proposed CHX Article 20, Rule 8(h)(1)(D). Exchange does not currently ignore or modify SIP quote data for away markets under any circumstances where the SIP data feed shows an uncrossed market. See Exchange Act Release No. 74357 (February 24, 2015), 80 FR 11252 (March 2, 2015) (SR–CHX–2015–01); see also Securities Exchange Act Release No. 72711 (July 29, 2014), 79 FR 45570 (August 5, 2014) (SR–CHX–2014–10). 63 ‘‘Router Feedback’’ refers to the use of routed orders (‘‘Feedback Orders’’) to augment protected quotations for the purposes of calculating the National Best Bid and Offer. See Securities Exchange Act Release No. 74075 (January 15, 2015), 80 FR 3693 (January 23, 2015) (SR–BYX–2015– 03).The three types of Router Feedback are Immediate Feedback, Execution Feedback and Cancellation Feedback. See id. at 3695. sradovich on DSK3GMQ082PROD with NOTICES 62 The VerDate Sep<11>2014 17:15 Feb 17, 2017 Jkt 241001 away market indicating that the routed portion of a Routable Order had partially-executed prior to the unrouted balance being released from the LEAD queue, the Exchange would first add the cancelled remainder to the unrouted balance in the LEAD queue and then continue to utilize Immediate Feedback to augment the relevant away quotes when processing the unrouted balance upon release from the LEAD queue, unless the feedback had expired. Immediate Feedback would expire as soon as: (i) One second passes or (ii) the Exchange receives new quote information from the away market. Given that Immediate Feedback will only be applied on an order-by-order basis, Immediate Feedback would also expire upon full execution, cancellation or ranking of the Routable Order on the CHX book. Also, in light of the relatively short Fixed LEAD Period, it is unlikely that Router Feedback would expire prior to the unrouted balance being released from the LEAD queue and processed by the Matching System. Examples 2–3 illustrate the operation of the amended routing protocol in the context of LEAD. Amended Article 1, Rule 2(b)(3)(F) (Match Trade Prevention) Current Article 1, Rule 2(b)(3)(F) describes the MTP modifier, which prevents matches between orders that originate from the same MTP Trading Group or MTP sublevel thereunder.64 Also, an order sender must designate one of the following MTP Actions for each order, with the MTP Action noted on the incoming order controlling the MTP interaction: MTP Cancel Incoming (‘‘N’’): An incoming limit or market order marked ‘‘N’’ will not execute against opposite side resting interest originating from the same MTP Trading Group or MTP sublevel, if applicable. Only the incoming order will be cancelled pursuant to MTP. MTP Cancel Resting (‘‘O’’): An incoming limit or market order marked ‘‘O’’ will not execute against opposite side resting interest originating from the same MTP Trading Group or MTP sublevel, if applicable. Only the resting order will be cancelled pursuant to MTP. MTP Cancel Both (‘‘B’’): An incoming limit or market order marked ‘‘B’’ will not execute against opposite side resting interest originating from the same MTP Trading Group or MTP sublevel, if applicable. The entire size of both orders will be cancelled pursuant to MTP. 64 See Securities Exchange Act Release No. 71216 (December 31, 2013), 79 FR 883 (January 7, 2014) (SR–CHX–2013–23); see also Securities Exchange Act Release No. 70948 (November 26, 2013), 78 FR 72731 (December 3, 2013) (SR–CHX–2013–20). PO 00000 Frm 00087 Fmt 4703 Sfmt 4703 11257 Given that LEAD may result in newer orders (i.e., orders with lower sequence numbers) becoming resting orders prior to older orders being released from LEAD,65 the Exchange proposes to amend current Article 1, Rule 2(b)(3)(F)(iii)(a) and (b), which describe MTP Actions ‘‘N’’ and ‘‘O’’ respectively, to provide that the newer of the contraside orders, as opposed to the incoming order if it is the older order, would be cancelled if the incoming order is marked ‘‘N,’’ and the older of the contraside orders, as opposed to the resting order if it is the newer order, would be cancelled if the incoming order is marked ‘‘O.’’ Moreover, given that a price slid order that triggers MTP is not always the newer order 66 and because the Exchange wishes to maintain the current handling of MTP when it is triggered by a price slid order, the Exchange proposes to add clauses to the end of current subparagraphs (a) and (b) that preserve that current handling. Thus, amended subparagraphs (a) and (b) provide as follows: (a) MTP Cancel New (‘‘N’’): An incoming limit or market order marked ‘‘N’’ will not execute against opposite side resting interest originating from the same MTP Trading Group or MTP sublevel, if applicable. Only the newer order will be cancelled pursuant to MTP; provided that the incoming order will be cancelled, even if it is not the newer order, in the event MTP is triggered by the incoming order being price slid pursuant to the CHX Only Price Sliding Processes. (b) MTP Cancel Old (‘‘O’’): An incoming limit or market order marked ‘‘O’’ will not execute against opposite side resting interest originating from the same MTP Trading Group or MTP sublevel, if applicable. Only the older order will be cancelled pursuant to MTP; provided that the resting order will be cancelled, even if it is not the older order, in the event MTP is triggered by the incoming order being price slid pursuant to the CHX Only Price Sliding Processes. Example 4 below illustrates the operation of the amended MTP in the context of LEAD. (4) Examples The following Examples are illustrative of LEAD and related amendments to existing functionality, but do not exhaustively depict every possible scenario that may arise under LEAD. Moreover, the Examples do not necessarily depict the actual technical processes of prioritizing messages and executing orders. 65 Currently, a new incoming order that triggers MTP is always newer than the resting contra-side order. However, LEAD may result in the newer of the contra-side orders being the resting order and the older order being the incoming order. See infra Example 4. 66 See Example 4 under SR–CHX–2013–20. E:\FR\FM\21FEN1.SGM 21FEN1 11258 Federal Register / Vol. 82, No. 33 / Tuesday, February 21, 2017 / Notices Example 1: LEAD. Assume that LEAD is operational, all messages are for security XYZ and all orders are routable, unless marked otherwise. Assume also that the system processing delay 67 is 50 microseconds 68 and the CHX book is as follows: Fig 1(a): CHX book Buy Sell Empty ......................... Order A: 1000 @10.01 (LMM).69 Assume then that the Exchange receives the following messages: Fig 1(b): Inbound queue Initial receipt 10:00:00.000000 10:00:00.000265 10:00:00.000305 10:00:00.000310 Message ........ ........ ........ ........ 10:00:00.000325 ........ 10:00:00.000355 ........ Order B: Buy 1000 @10.01. Cancel Order A (LMM). Order C: Sell 1000 @10.02. Order D: Buy 1000 @10.01 (LMM). Cancel Order B. Order E: Sell 1000 @10.01. Under this Example 1: • Order B would be evaluated and diverted into LEAD as it originated from a non-Valid LEAD MM Trading Account and is thus a Delayable Message. Due to the system processing delay, Order B would be diverted into LEAD at 10:00:00.000050 and releasable at 10:00:00.000350. The result is that the LEAD queue would be as follows: Fig 1(c): LEAD queue Releasable time Message 10:00:00.000350 ........ Order B: Buy 1000 @10.01. • Cancel Order A would be evaluated and processed at 10:00:00.000265 without being diverted into LEAD as it is a cancel message for a resting order that originated from a Valid LEAD MM Trading Account and is thus not a Delayable Message. Due to the system processing delay, Order A would be cancelled at 10:00:00.000315 and the CHX book would become empty. • Order C would then be evaluated at 10:00:00.000315, due to the variable message queuing delay,70 and be diverted into LEAD because it originated from a non-Valid LEAD MM Trading Account and is thus a Delayable Message. Due to the system processing delay, Order C would be diverted into LEAD at 10:00:00.000365 and releasable at 10:00:00.000665. Fig 1(d): LEAD queue Releasable time Message 10:00:00.000350 ........ 10:00:00.000665 ........ Order B: Buy 1000 @10.01. Order C: Sell 1000 @10.02. sradovich on DSK3GMQ082PROD with NOTICES 67 See supra note 48. 68 The Exchange does not represent that actual system processing delay is at or near 50 microseconds or that unintentional delays do not exist elsewhere in the Matching System processes. The figure is being utilized for demonstrative purposes only. 69 ‘‘LMM’’ refers to messages that originated from a Valid Lead MM Trading Account. Absence of ‘‘LMM’’ means that the message did not originate from a Valid LEAD MM Trading Account. 70 See supra note 48. VerDate Sep<11>2014 18:35 Feb 17, 2017 Jkt 241001 • While Order C was being evaluated by the Matching System, Order B became releasable from the LEAD queue at 10:00:00.000350. However, given that the Matching System processes messages serially,71 the Matching System would not consider releasing Order B until after Order C had been placed into the LEAD queue at 10:00:00.000365, at which point it would be handled as follows: Æ At 10:00:00.000365, the Matching System would compare the releasable time of Order B to the initial receipt time of the message at the top of the Inbound Queue: Order D. Since Order D was received during the Fixed LEAD Period for Order B, Order D would be evaluated before releasing Order B and processed without being diverted into LEAD as it originated from a Valid LEAD MM Trading Account and would be immediately ranked on the CHX book without executing against resting orders on the CHX book and is thus not a Delayable Message. Due to the system processing delay, Order D would be ranked on the CHX book at 10:00:00.000415. The result is that the CHX book would be as follows: Fig 1(g): CHX book Buy Sell Order B: 1000 @10.01. Order D: 1000 @10.01 (LMM). Empty. Fig 1(h): LEAD queue Releasable time Message 10:00:00.000665 ........ 10:00:00.000675 ........ Order C: Sell 1000 @10.02. Cancel Order B. • Order E would then be evaluated at 10:00:00.000515, due to the variable message queuing delay, and then diverted into the LEAD as it originated from a non-Valid LEAD MM Trading Account and is thus a Delayable Message. Due to the system-processing delay, Order E would be diverted at 10:00:00.000565 and releasable at 10:00:00.000705. The result is that the LEAD queue would be as follows: Fig 1(i): LEAD queue Releasable time Message 10:00:00.000665 ........ 10:00:00.000675 ........ 10:00:00.000705 ........ Order C: Sell 1000 @10.02. Cancel Order B. Order E: Sell 1000 @10.01. Fig 1(e): CHX book Buy Sell Order D: 1000 @10.01 (LMM). Empty. Æ At 10:00:00.000415, the Matching System would then compare the releasable time of Order B to the initial receipt time of the next message at the top of the Inbound Queue: Cancel Order B. Since Cancel Order B was received when Order B was in the LEAD queue, Cancel Order B would be diverted into LEAD as it originated from a non-Valid LMM Trading Account and is thus a Delayable Message. However, due to the system processing delay, Cancel Order B would be diverted into LEAD at 10:00:00.000465 and releasable at 10:00:00.000675. The result is that the LEAD queue would be as follows: • Order C would then be released from LEAD at 10:00:00.000665. Due to the system processing delay, Order C would be ranked on the CHX book at 10:00:00.000715. The result is that the CHX book and LEAD queue are as follows: Fig 1(j): CHX book Buy Sell Order B: 1000 @10.01. Order D: 1000 @10.01 (LMM). Order C: 1000 @10.02. Fig 1(k): LEAD queue Releasable time Message 10:00:00.000675 ........ 10:00:00.000705 ........ Cancel Order B. Order E: Sell 1000 @10.01. Fig 1(f): LEAD queue Releasable time Message 10:00:00.000350 ........ 10:00:00.000665 ........ 10:00:00.000675 ........ Order B: Buy 1000 @10.01. Order C: Sell 1000 @10.02. Cancel Order B. Æ At 10:00:00.000465, the Matching System would then compare the releasable time of Order B to the initial receipt time of the next message at the top of the Inbound Queue: Order E. Given that Order E was received after the Fixed LEAD Period for Order B had expired, the Matching System would release Order B before evaluating Order E. Due to the system processing delay, Order B would be ranked on the CHX book at 10:00:00.000515. Also, given that Order B was initially received before Order D, Order B would receive execution priority over Order D, pursuant to Article 20, Rule 8(b)(1). The result is that the CHX book and LEAD queue would be as follows: • Cancel Order B would then be released from LEAD at 10:00:00.000715, as the Matching System was processing Order C when Cancel Order B became releasable at 10:00:00.000675. Due to the system processing delay Order B would be cancelled at 10:00:00.000765. The result is that the CHX book and the LEAD queue would be as follows: Fig 1(l): CHX book Buy Sell Order D: 1000 @10.01 (LMM). Order C: 1000 @10.02. Fig 1(m): LEAD queue PO 00000 Message 10:00:00.000705 ........ 71 See Releasable time Order E: Sell 1000 @10.01. id. Frm 00088 Fmt 4703 Sfmt 4703 E:\FR\FM\21FEN1.SGM 21FEN1 11259 Federal Register / Vol. 82, No. 33 / Tuesday, February 21, 2017 / Notices • Order E would then be released from LEAD at 10:00:00.000765, as the Matching System was processing Order C (then Cancel Order B) when Order E became releasable at 10:00:00.000705. Order E would then be processed and fully execute against Order D at 10.01/share at 10:00:00.000775, due to the system processing delay. The result is that the Inbound Queue and the LEAD queue would be empty and the CHX book would be as follows: Empty ........................ Order C: 1000 @10.02. Example 2: Post Only and Routing— Immediate Feedback. Assume the same as Example 1. Assume also that after Order E was processed, the NBBO became 10.01 x 10.02 with only one market (‘‘Away Market A1’’) displaying 100 shares at the NBB (‘‘Protected Bid A1’’) and no other protected bids and CHX is alone at the NBO displaying 1000 shares at 10.02. Assume then that the Matching System receives the following new messages in security XYZ: Fig 2(a): Inbound queue Initial receipt Message 10:00:00.000900 ........ 10:00:00.001000 ........ Cancel Order C. Order F: Post Only Buy 100 @10.02. Order G: Post Only Buy 100 @10.01 (LMM). Order H: Sell 500 @9.99 (LMM). Order I: Sell 500 @9.99. Order J: Buy 600 @9.99. Order K: Sell 200 @9.99 (LMM). Cancel Order I. Cancel Order H (LMM). 10:00:00.001010 ........ 10:00:00.001020 ........ 10:00:00.001030 ........ 10:00:00.001600 ........ 10:00:00.001610 ........ 10:00:00.001750 ........ 10:00:00.001760 ........ Under this Example 2: • Cancel Order C would be evaluated at 10:00:00.000900 and diverted into the LEAD as it originated from a non-Valid LEAD MM Trading Account and is thus a Delayable Message. Due to the system processing delay, Cancel Order C would be diverted at 10:00:00.000950 and releasable at 10:00:00.001250. The result is that the CHX Book and LEAD queue would be as follows: Fig 2(b): CHX book Buy Sell Empty ......................... Order C: 1000 @10.02. Fig 2(c): LEAD queue Releasable time 10:00:00.001250 ........ Message Fig 2(d): LEAD queue Releasable time 10:00:00.001250 ........ 10:00:00.001350 ........ Message Cancel Order C. Order F. • Order G would then be evaluated at 10:00:00.001050, due to variable message queuing delay, and would be immediately processed without being diverted into LEAD as it originated from a Valid LEAD MM Trading Account and would be immediately ranked on the CHX book without executing against resting orders and is thus not a Delayable Message. Due to the system processing delay, Order G would be ranked on the CHX book at 10:00:00.1100. The result is that the CHX book is as follows: Fig 2(e): CHX book Buy Sell Order G: 100 @10.01 (LMM). Order C: 1000 @10.02. • Order H would then be evaluated at 10:00:00.001100, due to variable message queuing delay. Pursuant to the Exchange’s routing protocol, the Exchange would immediately route 100 shares of Order H priced at 10.01/share to satisfy Protected Bid A1, and divert the unrouted 400 shares of Order H into the LEAD queue as it is priced such that it would immediately execute against Order G and is thus a Delayable Message. Due to the system processing delay, Order H would be diverted at 10:00:00.001150, and releasable at 10:00:00.001370. The result is that the LEAD queue would be as follows: to the system processing delay, Order C would be cancelled at 10:00:00.01300. The result is that the CHX book and LEAD queue would be as follows: Fig 2(h): CHX book Buy Sell Order G: 100 @10.01 Fig 2(i): LEAD queue Releasable time Message 10:00:00.001350 ........ 10:00:00.001370 ........ Order F. Order H—Unrouted Balance (LMM). Order I—Unrouted Balance. 10:00:00.001380 ........ • At 10:00:00.01350, Order F would be released from the LEAD queue. Due to the system processing delay, Order F would be ranked on the CHX book at 10:00:00.001400. The result is that the CHX book and the LEAD queue would be as follows: Fig 2(j): CHX book Buy Sell Order F: 100 @10.02 Order G: 100 @10.01. Fig 2(k): LEAD queue Releasable time Message 10:00:00.001370 ........ Order H—Unrouted Balance (LMM). Order I—Unrouted Balance. 10:00:00.001380 ........ Releasable time Message 10:00:00.001250 ........ 10:00:00.001350 ........ 10:00:00.001370 ........ Cancel Order C. Order F. Order H—Unrouted Balance (LMM). • Order I would then be evaluated at 10:00:00.001150, due to variable message queuing delay. Given that the proposed Router Feedback is only applied on an orderby-order basis, Order I would be handled similarly to Order H. Thus, the Exchange would immediately route 100 shares of Order I priced at 10.01/share to satisfy Protected Bid A1, and divert the unrouted 400 shares of Order I into the LEAD queue as it originated from a non-Valid LEAD MM Trading Account and is thus a Delayable Message. Due to the system processing delay, Order I would be diverted at 10:00:00.001200 and releasable at 10:00:00.001380. The result is that the LEAD queue would be as follows: • Due to system processing delays, Order H and Order I would be released after their respective releasable times as follows: Æ The unrouted balance of Order H would be released from the LEAD queue at 10:00:00.001400. Order H would then execute against all 100 shares of Order F at 10.02/share, as well as all 100 shares of Order G at 10.01/share, and the remaining 200 shares of Order H would be ranked on the CHX book at 9.99. Due to the system processing delay, the unexecuted balance would be ranked to the CHX book at 10:00:00.001450. Æ The unrouted balance of Order I would then be released from the LEAD queue at 10:00:00.001450. All 400 shares of Order I would then be ranked on the CHX book at 9.99. Due to the system processing delay, Order I would be ranked on the CHX book at 10:00:00.001500. The result is that the LEAD queue would be empty and the CHX book would be as follows: sradovich on DSK3GMQ082PROD with NOTICES Fig 2(g): LEAD queue VerDate Sep<11>2014 17:15 Feb 17, 2017 Jkt 241001 Empty. Fig 2(f): LEAD queue Cancel Order C. • Order F would then be evaluated at 10:00:00.001000 and diverted into the LEAD as it originated from a non-Valid LEAD MM Trading Account and is thus a Delayable Message. Due to the system processing delay, Order F would be diverted at 10:00:00.001050 and releasable at 10:00:001350. The result is that the LEAD queue would be as follows: Empty. Fig 2(l): CHX book Releasable time Message 10:00:00.001250 ........ 10:00:00.001350 ........ 10:00:00.001370 ........ Cancel Order C. Order F. Order H—Unrouted Balance (LMM). Order I—Unrouted Balance. 10:00:00.001380 ........ • At 10:00:00.001250, Cancel Order C would be released from the LEAD queue. Due PO 00000 Frm 00089 Fmt 4703 Sfmt 4703 Buy Sell Empty ......................... Order H: 200 @9.99 (LMM). Order I: 400 @9.99. • Order J would be evaluated at 10:00:00.001600 and diverted into LEAD as it originated from a non-Valid LEAD MM Trading Account and is thus a Delayable E:\FR\FM\21FEN1.SGM 21FEN1 11260 Federal Register / Vol. 82, No. 33 / Tuesday, February 21, 2017 / Notices Message. Due to the system processing delay, Order J would be diverted at 10:00:00.001650 and releasable at 10:00:00.001950. The result is that the LEAD queue would be as follows: Fig 2(m): LEAD queue Releasable time 10:00:00.001950 ........ Message Order J. • Order K would be evaluated at 10:00:00.001650, due to the variable messaging delay. Order K would be immediately ranked on the CHX book as it originated from a Valid LEAD MM Trading Account and would not immediately execute against any resting orders. Due to the system processing delay, Order K would be ranked on the CHX book at 10:00:00.001700. The result is that the CHX book would be as follows: Fig 2(n): CHX book Buy Sell Empty ......................... Order H: 200 @9.99 (LMM). Order I: 400 @9.99. Order K: 200 @9.99 (LMM). • Cancel Order I would be evaluated at 10:00:00.001750 and diverted into the LEAD as it is originated from a non-Valid LEAD MM Trading Account and is thus a Delayable Message. Due to the system processing delay, Cancel Order I would be diverted at 10:00:00.001800 and releasable at 10:00:00.002100. The result is that the LEAD queue would be as follows: Fig 2(o): LEAD queue Releasable time 10:00:00.001950 ........ 10:00:00.002100 ........ (5) Operative Date Message Order J. Cancel Order I. • Cancel Order H would be evaluated and processed at 10:00:00.001800, due to variable messaging delay, without being diverted into LEAD as it is a cancel message for a resting order that originated from a Valid LEAD MM Trading Account and is thus not a Delayable Message. Due to the system processing delay, Order H would be cancelled at 10:00:00.001850. The result is that the CHX Book would be as follows: In the event the proposed rule change is approved by the SEC, the proposed rule change shall be operative pursuant to notice by the Exchange to its Participants. Prior to the operative date, the Exchange will ensure that policies and procedures are in place to allow Exchange operations personnel to effectively monitor the operation of LEAD and compliance by LEAD MMs with the proposed Minimum Performance Standards. Appendix A: CHX ETF Analysis Fig 2(p): CHX book Buy Sell Empty ......................... sradovich on DSK3GMQ082PROD with NOTICES • At 10:00:00.002100, Cancel Order I would be released from the LEAD queue. Since Order I had already been executed in full, Cancel Order I will have no effect. Example 3: Routing—Expired Feedback. Assume the same as Example 2, except that immediately prior to the unrouted balance of Order H being released, the Exchange received an updated quote from Away Market A1 displaying 1,000 shares at the $10.01. Under this Example 3, the Immediate Feedback derived from the immediately routed portion of Order H would expire and, upon release of the unrouted delayed portion of Order H, the Matching System would route the entire unrouted portion to satisfy the updated Protected Bid displayed by Away Market A1. Similarly, the Immediate Feedback derived from the immediately routed portion of Order I would also expire and, upon release of the unrouted delayed portion of Order I, the Matching System would route the entire unrouted portion to satisfy the updated Protected Bid displayed by Away Market A1. Example 4: MTP. Assume the same as Example 2, except that Order J and Order K originated from the same MTP Trading Group and Order J has an MTP Action of ‘‘N.’’ Under this Example 4, pursuant to the current MTP rules, MTP would be triggered and the Order J would be cancelled, as the current ‘‘N’’ MTP Action requires the incoming order to be cancelled. However, pursuant to the proposed amended MTP rules, Order K would be cancelled, as the amended ‘‘N’’ MTP action requires the newer order to be cancelled, absent a price sliding event. Order I: 400 @9.99. Order K: 200 @9.99 (LMM). • At 10:00:00.001950, Order J would be released from the LEAD queue and would immediately execute against all 400 shares of Order I at 9.99/share and all 200 shares of Order K at 9.99/share. The result is that the CHX book is empty and the LEAD queue is as follows: The purpose of the CHX ETF Analysis is to demonstrate that latency arbitrage activity 72 in SPY at CHX (‘‘SPY latency arbitrage activity’’) has (1) reduced volume and displayed liquidity in SPY at CHX and (2) impaired liquidity provision in SPY marketwide. For the purpose of this CHX ETF Analysis, the following terms shall have the following meanings: 73 • After Period refers to February 2016 through July 2016. Fig 2(q): LEAD queue Releasable time 10:00:00.002100 ........ VerDate Sep<11>2014 Message Cancel Order I. 17:15 Feb 17, 2017 Jkt 241001 72 See supra note 6; see also supra Section 3(a)(2). capitalized terms utilized in the CHX ETF Analysis shall have the meanings set forth under Appendix B. 73 Other PO 00000 Frm 00090 Fmt 4703 Sfmt 4703 • Analysis Period refers to August 2015 through July 2016. • Before Period refers to August 2015 through December 2015. • Control Average refers to the arithmetic average of a given metric for Control Securities. • Control Securities refers to DIA, IWM, and QQQ.74 • Entry Event refers to a trading day in January 2016 on which latency arbitrage activity in SPY at CHX was first observed. • Entry Month refers to January 2016, the month in which latency arbitrage activity in SPY at CHX was first observed. • Subject Securities refers to SPY and the Control Securities. Entry of SPY Latency Arbitrage Activity During the After Period, the Exchange observed unusual messaging patterns in SPY whereby executions of large inbound IOC 75 orders against resting orders in SPY were frequently followed by the receipt of late cancel messages for the executed resting orders very soon after the execution. This observation was corroborated by feedback from liquidity providing Participants that indicated that, unlike prior to the Entry Event, they were no longer able to reliably cancel or cancel/adjust resting orders on the CHX book in SPY in response to market changes after the Entry Event. The Exchange believes that each instance of the unusual messaging pattern is the end result of a race triggered by an away market event (e.g., change in market data from a futures market) whereby the liquidity taker is able to take a resting order at a stale price before the liquidity provider could adjust the resting order to accurately reflect the market. As such, the SPY latency arbitrage activity has had the following impact on volume and liquidity in SPY at CHX and away exchanges: Analysis 1: SPY Latency Arbitrage Activity Reduced CHX Market Share in SPY Relative to Total Volume in SPY and Disproportionately To Control Securities As shown under Figure 1, CHX Market Share in SPY as a percentage of Total Volume dropped by 90.1% from 5.73% in the Entry Month to 0.57% in 74 Each of the Control Securities were selected for the following similarities to SPY in that each is: (1) Highly correlated in price movements with a wellknown equity market index; (2) ETFs; (3) traded in CHX’s Chicago data center; (4) actively traded in the NMS; and (5) highly correlated with a futures contract traded electronically on the Globex trading platform. 75 See CHX Article 1, Rule 2(d)(4). E:\FR\FM\21FEN1.SGM 21FEN1 Federal Register / Vol. 82, No. 33 / Tuesday, February 21, 2017 / Notices July 2016, while CHX Market Share in the Control Average dropped by 45.20% from 5.54% in the Entry Month to 3.03% in July 2016.76 As shown under Figure 2, changes in the average Total Volume during the Analysis Period for the Subject Securities were highly correlated. Thus, Figure 1 and Figure 2 show that despite the high correlation between SPY and each of the Control Securities during the Analysis Period, the CHX Market Share in SPY decreased '' -sPY - 11261 disproportionately to Total Volume, which the Exchange submits is attributed to the SPY latency arbitrage activity. '' -control Figure 1. This figure illustrates the decrease in CHX Market Share as a percentage of Total Volume in the Subject Securities (Index: January 2016=100). 77 '' '' -control Figure 2. This figure illustrates the correlation in the Total Volume between SPY and the Control Average (Index: January 2016 = 100) during the Analysis Period?8 79 76 See infra Appendix B Calculation Set 1a. VerDate Sep<11>2014 17:15 Feb 17, 2017 Jkt 241001 PO 00000 Frm 00091 Fmt 4703 Sfmt 4725 E:\FR\FM\21FEN1.SGM 21FEN1 EN21FE17.000</GPH> sradovich on DSK3GMQ082PROD with NOTICES -sPY - 11262 Federal Register / Vol. 82, No. 33 / Tuesday, February 21, 2017 / Notices Analysis 2: SPY Latency Arbitrage Activity Resulted in Less Aggressively Priced and Smaller Orders in SPY at CHX While the Exchange did not observe any discernable change on the NBBO spread in SPY during the After Period, the Exchange did observe a negative impact on the frequency at which CHX was at the NBBO in SPY and the frequency at which CHX displayed the largest quote at the NBBO in SPY during the After Period, while Control Securities experienced either smaller declines or no declines at all.80 Specifically, the % of Time CHX Was At The NBB decreased from 23.8% in the Entry Month to 8.2% in July 2016; 81 the % of Time CHX Was At The NBO decreased from 23.3% in the Entry Month to 5.8% in July 2016; 82 and the % of Time CHX Was At The NBB and that CHX Was At The NBO decreased from 3.3% in the Entry Month to 0% in July 2016.83 77 See infra Appendix B Calculation Sets 1a and 1b. sradovich on DSK3GMQ082PROD with NOTICES 78 The correlation coefficients (r) over the twelvemonth period were: r(SPY, DIA) = 0.9118, r(SPY, IWM) = 0.8996, r(SPY, QQQ) = 0.9392, r(SPY, Average) = 0.9493. 79 See infra Appendix B Calculation Sets 2a and 2b. 80 See infra Appendix B Calculation Sets 6 and 7. 81 See infra Appendix B Calculation Set 6a. 82 See infra Appendix B Calculation Set 6b. 83 See infra Appendix B Calculation Set 6c. VerDate Sep<11>2014 17:15 Feb 17, 2017 Jkt 241001 Moreover, the % of Time CHX Was At The NBB And Was The Largest Bid At That Price decreased from 20% in the Entry Month to 2.3% in July 2016; 84 the % of Time CHX Was At The NBO And Was The Largest Offer At That Price decreased from 20.7% in the Entry Month to 1.1% in July 2016; 85 and the % of Time CHX Was At The NBB And Was The Largest Bid At That Price and that CHX Was At The NBO And Was The Largest Offer At That Price decreased from 1.9% to 0%.86 These calculation sets clearly show that SPY latency arbitrage activity resulted in less aggressively priced CHX displayed liquidity in SPY and smaller CHX displayed size at the NBBO, during the After Period. SPY latency arbitrage activity also negatively impacted the percentage of the time that CHX was at the NBBO and the percentage of the time CHX displayed the largest quote at the NBBO. Analysis 3: Latency Arbitrage Activity at CHX Reduced CHX Size At The NBBO in SPY Relative to the Control Securities and NMS Size At The NBBO As shown under Figure 3, during the Before Period, the Time-weighted Average CHX Size at The NBBO for SPY tended to follow changes to the Control Average, whereas from the Entry Month through July 2016, the Time-weighted 84 See infra Appendix B Calculation Set 7a. infra Appendix B Calculation Set 7b. 86 See infra Appendix B Calculation Set 7c. 85 See PO 00000 Frm 00092 Fmt 4703 Sfmt 4703 Average CHX Size At The NBBO for SPY decreased by 82.16% and the Timeweighted Average CHX Size At The NBBO for the Control Average increased by 64.38%.87 As shown under Figure 4, during the Before Period, the monthly changes in the Time-weighted Average CHX Size At The NBBO tended to follow similar changes to the Timeweighted Average NMS Size At The NBBO. However, during the After Period, the monthly changes in the Time-weighted Average CHX Size At The NBBO in SPY did not follow changes to the Time-weighted Average NMS Size At The NBBO in SPY. Moreover, during the After Period, CHX went from having a Two-Sided Market in SPY 100% of regular trading hours in the Entry Month to 74% of regular trading hours in July 2016.88 Thus, Figure 3 and Figure 4 show that SPY latency arbitrage activity negatively impacted liquidity in SPY marketwide. Moreover, the data shows that the change in the risk/reward of providing liquidity in SPY at CHX which resulted from the introduction of the SPY latency arbitrage activity resulted in a significant reduction of liquidity in SPY provided by CHX, even during a period when significant incremental liquidity was being added in the Control Securities. 87 See infra Appendix B Calculation Sets 3a and 3b. 88 See E:\FR\FM\21FEN1.SGM infra Appendix B Calculation Set 5. 21FEN1 Federal Register / Vol. 82, No. 33 / Tuesday, February 21, 2017 / Notices - .., , ,, , 11263 \ -sPY - -control Figure 3. This figure illustrates the Time-weighted Average CHX Size At The NBBO in the Subject Securities (Indexed: January 2016 = 100) during the Analysis Period. 89 ,, ,--- -NMS Figure 4. This figure illustrates the Time-weighted Average CHX Size At The NBBO in SPY versus Time-weighted Average NMS Size At The NBBO in SPY (Indexed: January 2016 = 100) during the Analysis Period. 90 VerDate Sep<11>2014 17:15 Feb 17, 2017 Jkt 241001 PO 00000 Frm 00093 Fmt 4703 Sfmt 4725 E:\FR\FM\21FEN1.SGM 21FEN1 EN21FE17.001</GPH> sradovich on DSK3GMQ082PROD with NOTICES -cHX- 11264 Federal Register / Vol. 82, No. 33 / Tuesday, February 21, 2017 / Notices Analysis 4: SPY Latency Arbitrage Activity Reduced Displayed Liquidity in SPY Marketwide Although the Time-weighted Average NMS Size At The NBBO in SPY increased by 22.83% during the After Period, the increase in SPY did not follow much greater increases in the Time-weighted Average NBBO Size in the Control Group, which increased by 128.82% during the After Period.91 Moreover, during the After Period, the Time-weighted Average CHX Size At The NBBO for SPY decreased by 90.61% 92 and, as a % of total NMS Size At The NBBO in SPY, from 44.36% to 3.39%.93 These calculations suggest that the SPY latency arbitrage activity materially impacted displayed liquidity in SPY marketwide. The dramatic decrease in displayed liquidity in SPY at CHX during the After Period explains why the increase in Time-weighted Average NBBO Size in SPY lagged behind the increase in Time-weighted Average NBBO Size in the Control Securities. Had CHX Size At The NBBO remained at least constant during the After Period, NBBO Size in SPY would have been at least 32.7% higher in July 2016, as shown below: 94 NMS Size at NBBO Jan-16 SPY ...................................................................................... DIA ....................................................................................... IWM ...................................................................................... QQQ ..................................................................................... Control Average ................................................................... sradovich on DSK3GMQ082PROD with NOTICES Conclusion Based on its observations of unusual messaging patterns in SPY, feedback from Participants and the analysis summarized above, the Exchange believes that the unusual messaging activity in SPY that was first observed in the Entry Month is attributed to SPY latency arbitrage activity. The market data shows that in response to the SPY latency arbitrage activity, CHX liquidity providers displayed smaller orders in SPY at less aggressive prices during the After Period relative to the Before Period and Entry Month. Moreover, in light of CHX’s significant contribution to overall volume and liquidity in SPY during the Before Period and the Entry Month, diminished displayed liquidity at CHX has materially impaired displayed liquidity in SPY market wide. Appendix B: Calculation Sets The calculations sets below were prepared with microsecond-level trade and quote record. Trade records include the date, microsecond-level timestamp, exchange, security symbol, price, and quantity of all trades reported to the consolidated tape. Quote records include the date, microsecond-level timestamp, exchange, security symbol, bid price, bid quantity, ask price, and ask quantity of all quotes reported to the consolidated tape. Only protected quotations are reported to the consolidated tape. The Analysis Period for the calculations begins on August 1, 2015 89 See infra Appendix B Calculation Sets 3a and 3b. 90 See infra Appendix B Calculation Sets 3b and 4b. 91 See infra Appendix B Calculation Set 4a. VerDate Sep<11>2014 17:15 Feb 17, 2017 Jkt 241001 Jul-16 9,513 2,569 5,222 14,100 7,297 11,686 4,711 10,026 35,354 16,697 and ends on July 31, 2016. Symbols SPY and three other Control Securities (i.e., DIA, IWM, and QQQ) were considered. Only trades and quotes that occurred on the national securities exchanges during the regular trading hours 95 were considered. Certain types of nonstandard trades were excluded.96 Quotes with negative prices or quantities were excluded. Unless otherwise indicated, lengths of time when the market was locked or crossed were not considered. In the calculations below: • Total Volume refers to the number of shares of the indicated symbol traded on the national securities exchanges on a given day, excluding certain types of non-standard trades. CHX Volume refers to the number of shares of the indicated symbol traded on CHX on a given day, excluding certain types of non-standard trades. • CHX Market Share was calculated as CHX Volume divided by Total Volume on a given day, CHX Market Share = CHX Volume ÷ Total Volume. • CHX Had A Two-Sided Market refers to an indicator variable defined as true at any microsecond when there was at least one bid and at least one offer among all outstanding orders on CHX, and false otherwise. CHX Had A One-Sided Market refers to an indicator variable defined as true at any microsecond when there was at least one bid but no offers among all outstanding orders on CHX or when there was at least one offer but no bids among all outstanding orders on CHX, and false otherwise. CHX Had No Market refers to an indicator variable defined as true at any microsecond when there were no outstanding orders on CHX, and false otherwise. 92 See 93 See infra Appendix B Calculation Set 3a. infra Appendix B Calculations Sets 3a and 4a. 94 See PO 00000 infra Appendix B Calculation Set 4a. Frm 00094 Fmt 4703 Sfmt 4703 Change attribution Change 2,172 2,142 4,804 21,253 9,400 CHX ¥3,824 1,227 536 3,900 1,888 Others 5,996 915 4,268 17,353 7,512 • A bid was At The NBB at any microsecond when its price was equal to the National Best Bid. An offer was At The NBO at any microsecond when its price was equal to the National Best Offer. • At any microsecond, the NMS Size At The National Best Bid (‘‘NMS Size At The NBB’’) refers to the quantity of shares in prevailing bids on the national securities exchanges priced at the National Best Bid and the NMS Size At The National Best Offer (‘‘NMS Size At The NBO’’) refers to the quantity of shares in prevailing offers on the national securities exchanges priced at the National Best Offer. NMS Size At The NBBO was calculated as the average of the National Best Bid Size and the National Best Offer Size at each microsecond, NMS Size At The NBBO = (NMS Size At The NBB + NMS Size At The NBO) ÷ 2. • CHX Was At The NBB refers to an indicator variable defined as true at any microsecond when the CHX Best Bid was at the National Best Bid, and false otherwise. CHX Was At The NBO refers to an indicator variable defined as true at any microsecond when the CHX Best Offer was at the National Best Offer, and false otherwise. • At any microsecond, the CHX Size At The NBB (‘‘CHX Size At The NBB’’) refers to the CHX Best Bid Size if CHX was at the NBB and zero if CHX was not at the NBB. At any microsecond, the CHX Size At The NBO (‘‘CHX Size At The NBO’’) refers to the CHX Best Offer Size if CHX was at the NBO and zero if CHX was not at the NBO. CHX Size At The NBBO was calculated as the average of the CHX Size At The NBB and CHX Size At The NBO at each microsecond, CHX Size At The NBBO = (CHX Size At The NBB + CHX Size At The NBO) ÷ 2. • CHX Was At The NBB And Was The Largest Bid At That Price refers to an indicator variable defined as true at any 95 See 17 CFR 242.600(b)(64). trades include derivatively priced trades, qualified contingent trades, opening trades, closing trades, and after hours trades. 96 Non-standard E:\FR\FM\21FEN1.SGM 21FEN1 11265 Federal Register / Vol. 82, No. 33 / Tuesday, February 21, 2017 / Notices microsecond when CHX was at the National Best Bid and the CHX Best Bid Size was greater than or equal to the largest quantity of shares in prevailing bids on any one national securities exchange other than CHX, and false otherwise. CHX Was At The NBO And Was The Largest Offer At That Price refers to an indicator variable defined as true at any microsecond when CHX was at the National Best Offer and the CHX Best Offer Size was greater than or equal to the largest quantity of shares in prevailing offers on any one national securities exchange other than CHX, and false otherwise. For the calculations in the table below: • Monthly average values are shown. Monthly average values were calculated as the average of daily values for each day in a month. Daily values were calculated as time-weighted averages or as percentages of time in the trading day, as indicated in the table. Time-weighted average values were calculated as daily average of the specified quantity, market share, or spread value weighted by time (in microseconds). % of time values were calculated as the length of time (in microseconds) for which the specified indicator variable was true divided by the length of time in that trading day, excluding lengths of time during which the market was locked or crossed or otherwise could not be calculated (e.g., at the start of the trading day). Symbol [1a] Month CHX market share (% of total volume) ..... DIA IWM QQQ Control Average [2] [3] [4] ([2]:[4]) [2a] Average total volume ................................. [2b] Average total volume index: Jan 2016 = 100. [3a] Time-weighted average CHX size at the NBBO. VerDate Sep<11>2014 17:15 Feb 17, 2017 Jkt 241001 Aug 2015 ..... Sep 2015 ..... Oct 2015 ...... Nov 2015 ..... Dec 2015 ..... Jan 2016 ...... Feb 2016 ...... Mar 2016 ...... Apr 2016 ...... May 2016 ..... Jun 2016 ...... Jul 2016 ....... Aug 2015 ..... 4.32% 6.07% 4.08% 4.49% 4.85% 5.73% 4.78% 2.80% 2.28% 1.10% 0.90% 0.57% 75 3.07% 2.61% 5.95% 8.58% 4.89% 9.13% 9.13% 7.54% 4.41% 3.53% 5.17% 6.11% 34 5.51% 3.82% 2.58% 3.14% 2.53% 3.14% 3.32% 2.38% 2.01% 2.21% 1.74% 1.22% 176 3.40% 3.46% 4.42% 5.13% 4.49% 4.35% 4.41% 3.57% 2.69% 1.93% 3.00% 1.77% 78 3.99% 3.30% 4.32% 5.62% 3.97% 5.54% 5.62% 4.50% 3.04% 2.55% 3.30% 3.03% 72 Sep 2015 ..... Oct 2015 ...... Nov 2015 ..... Dec 2015 ..... Jan 2016 ...... Feb 2016 ...... Mar 2016 ...... Apr 2016 ...... May 2016 ..... Jun 2016 ...... Jul 2016 ....... Aug 2015 ..... Sep 2015 ..... Oct 2015 ...... Nov 2015 ..... Dec 2015 ..... Jan 2016 ...... Feb 2016 ...... Mar 2016 ...... Apr 2016 ...... May 2016 ..... Jun 2016 ...... Jul 2016 ....... Aug 2015 ..... 106 71 78 85 100 83 49 40 19 16 10 130,150,083 94,627,144 75,881,581 63,307,314 87,011,822 127,469,871 97,911,733 63,333,000 53,023,531 51,578,634 78,385,026 49,783,615 102 29 65 94 54 100 100 83 48 39 57 67 6,153,725 6,552,649 4,461,519 3,673,677 4,969,853 8,301,912 6,121,299 2,521,807 2,337,084 2,016,095 2,740,421 2,130,330 74 122 82 100 81 100 106 76 64 70 55 39 26,846,599 21,381,524 22,420,310 16,624,141 23,287,782 35,204,822 27,668,000 20,709,893 15,556,074 17,899,288 20,938,721 14,122,275 76 80 102 118 103 100 102 82 62 44 69 41 33,963,873 28,452,481 22,701,556 17,531,483 24,474,150 39,029,308 35,547,824 17,600,599 14,984,599 14,856,962 16,963,513 11,973,239 87 60 78 101 72 100 102 81 55 46 60 55 23,568,046 19,947,099 14,268,977 10,308,999 16,211,695 21,425,674 18,060,375 9,724,974 8,991,216 9,822,504 10,240,678 5,657,111 110 Sep 2015 ..... Oct 2015 ...... Nov 2015 ..... Dec 2015 ..... Jan 2016 ...... Feb 2016 ...... Mar 2016 ...... Apr 2016 ...... May 2016 ..... Jun 2016 ...... Jul 2016 ....... Aug 2015 ..... 74 60 50 68 100 77 50 42 40 61 39 7,740.13 79 54 44 60 100 74 30 28 24 33 26 753.47 61 64 47 66 100 79 59 44 51 59 40 2,294.04 73 58 45 63 100 91 45 38 38 43 31 3,666.82 93 67 48 76 100 84 45 42 46 48 26 2,238.11 Sep 2015 Oct 2015 Nov 2015 Dec 2015 Jan 2016 Feb 2016 [1b] CHX market share (% of total volume) index: January 2016 = 100. sradovich on DSK3GMQ082PROD with NOTICES SPY [1] [No.] Calculation 6,217.48 7,816.38 8,983.84 5,776.73 4,220.05 2,642.32 682.18 1,308.53 2,439.37 1,152.21 1,830.97 1,829.95 2,157.29 2,052.68 2,158.33 1,517.59 1,726.35 2,004.50 4,177.88 6,130.87 7,182.16 4,347.08 4,341.83 4,523.73 2,339.12 3,164.03 3,926.62 2,338.96 2,633.05 2,786.06 PO 00000 ..... ...... ..... ..... ...... ...... Frm 00095 Fmt 4703 Sfmt 4703 E:\FR\FM\21FEN1.SGM 21FEN1 11266 Federal Register / Vol. 82, No. 33 / Tuesday, February 21, 2017 / Notices Symbol SPY DIA IWM QQQ Control Average [1] [2] [3] [4] ([2]:[4]) Mar 2016 ...... Apr 2016 ...... May 2016 ..... Jun 2016 ...... Jul 2016 ....... Aug 2015 ..... 1,611.90 1,415.95 485.23 565.73 396.37 183 2,347.82 1,481.35 1,469.69 1,772.03 3,057.61 41 2,077.08 2,314.10 2,374.66 2,188.41 2,262.70 133 5,987.78 6,196.84 7,423.33 7,994.73 8,241.77 84 3,470.89 3,330.76 3,755.89 3,985.06 4,520.69 85 Sep 2015 ..... Oct 2015 ...... Nov 2015 ..... Dec 2015 ..... Jan 2016 ...... Feb 2016 ...... Mar 2016 ...... Apr 2016 ...... May 2016 ..... Jun 2016 ...... Jul 2016 ....... Aug 2015 ..... 147 185 213 137 100 63 38 34 11 13 9 19,257.66 37 71 133 63 100 100 128 81 80 97 167 2,609.35 125 119 125 88 100 116 120 134 138 127 131 6,511.42 96 141 165 100 100 104 138 143 171 184 190 18,471.79 89 120 149 89 100 106 132 126 143 151 172 9,197.52 Sep 2015 ..... Oct 2015 ...... Nov 2015 ..... Dec 2015 ..... Jan 2016 ...... Feb 2016 ...... Mar 2016 ...... Apr 2016 ...... May 2016 ..... Jun 2016 ...... Jul 2016 ....... Aug 2015 ..... 11,919.38 18,309.27 19,257.58 13,230.66 9,513.33 7,417.60 8,638.39 9,876.59 9,398.26 9,313.10 11,685.53 202 1,679.93 2,468.56 3,930.75 2,204.20 2,569.26 2,489.46 3,703.26 3,070.53 3,144.93 3,107.54 4,711.37 102 6,540.46 6,972.46 6,963.92 5,812.28 5,221.94 6,340.40 8,521.28 9,422.71 10,295.88 9,597.43 10,026.35 125 14,223.92 19,848.75 23,442.48 17,106.74 14,100.46 13,869.32 20,316.43 23,246.57 28,354.88 28,288.57 35,353.64 131 7,481.44 9,763.26 11,445.72 8,374.40 7,297.22 7,566.40 10,846.99 11,913.27 13,931.90 13,664.51 16,697.12 126 Sep 2015 ..... Oct 2015 ...... Nov 2015 ..... Dec 2015 ..... Jan 2016 ...... Feb 2016 ...... Mar 2016 ...... Apr 2016 ...... May 2016 ..... Jun 2016 ...... Jul 2016 ....... Aug 2015 ..... Sep 2015 ..... Oct 2015 ...... Nov 2015 ..... Dec 2015 ..... Jan 2016 ...... Feb 2016 ...... Mar 2016 ...... Apr 2016 ...... May 2016 ..... Jun 2016 ...... Jul 2016 ....... Aug 2015 ..... Sep 2015 ..... Oct 2015 ...... Nov 2015 ..... Dec 2015 ..... Jan 2016 ...... Feb 2016 ...... Mar 2016 ...... Apr 2016 ...... May 2016 ..... Jun 2016 ...... Jul 2016 ....... Aug 2015 ..... Sep 2015 ..... 125 192 202 139 100 78 91 104 99 98 123 99.8% 99.9% 100.0% 99.9% 98.6% 100.0% 99.9% 99.8% 99.3% 85.2% 73.2% 74.0% 0.1% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.2% 0.2% 3.0% 6.1% 1.8% 0.1% 0.0% 65 96 153 86 100 97 144 120 122 121 183 99.6% 99.9% 99.9% 99.9% 98.3% 99.9% 100.0% 100.0% 99.9% 99.9% 99.9% 99.9% 0.1% 0.0% 0.0% 0.0% 0.3% 0.1% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.3% 0.1% 125 134 133 111 100 121 163 180 197 184 192 99.7% 99.9% 99.9% 99.5% 98.6% 99.9% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.3% 0.1% 101 141 166 121 100 98 144 165 201 201 251 99.6% 99.9% 100.0% 99.8% 98.6% 100.0% 100.0% 100.0% 99.8% 100.0% 100.0% 100.0% 0.2% 0.0% 0.0% 0.2% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.1% 0.0% 103 134 157 115 100 104 149 163 191 187 229 99.7% 99.9% 99.9% 99.7% 98.5% 99.9% 100.0% 100.0% 99.9% 100.0% 100.0% 100.0% 0.1% 0.0% 0.0% 0.1% 0.1% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.2% 0.1% [No.] Calculation Month [3b] Time-weighted average CHX size at the NBBO index: Jan 2016 = 100. [4a] Time-weighted average NMS size at the NBBO. [4b] Time-weighted average NMS size at the NBBO index: Jan 2016 = 100. % of time CHX had a two-sided market .... [5b] sradovich on DSK3GMQ082PROD with NOTICES [5a] % of time CHX had a one-sided market ... [5c] % of time CHX had no market ................... VerDate Sep<11>2014 17:15 Feb 17, 2017 Jkt 241001 PO 00000 Frm 00096 Fmt 4703 Sfmt 4703 E:\FR\FM\21FEN1.SGM 21FEN1 11267 Federal Register / Vol. 82, No. 33 / Tuesday, February 21, 2017 / Notices Symbol Month DIA IWM QQQ Control Average [2] [3] [4] ([2]:[4]) % of time CHX was at the NBB ................ [6b] % of time CHX was at the NBO ................ [6c] % of time CHX was at the NBB and that CHX was at the NBO. [7a] % of time CHX was at the NBB and was the largest bid at that price. [7b] % of time CHX was at the NBO and was the largest offer at that price. VerDate Sep<11>2014 17:15 Feb 17, 2017 Jkt 241001 Oct 2015 ...... Nov 2015 ..... Dec 2015 ..... Jan 2016 ...... Feb 2016 ...... Mar 2016 ...... Apr 2016 ...... May 2016 ..... Jun 2016 ...... Jul 2016 ....... Aug 2015 ..... Sep 2015 ..... Oct 2015 ...... Nov 2015 ..... Dec 2015 ..... Jan 2016 ...... Feb 2016 ...... Mar 2016 ...... Apr 2016 ...... May 2016 ..... Jun 2016 ...... Jul 2016 ....... Aug 2015 ..... Sep 2015 ..... Oct 2015 ...... Nov 2015 ..... Dec 2015 ..... Jan 2016 ...... Feb 2016 ...... Mar 2016 ...... Apr 2016 ...... May 2016 ..... Jun 2016 ...... Jul 2016 ....... Aug 2015 ..... 0.0% 0.1% 1.4% 0.0% 0.1% 0.0% 0.5% 11.8% 20.7% 24.2% 16.5% 24.0% 30.8% 24.5% 29.2% 23.8% 15.5% 18.5% 18.7% 7.0% 5.4% 8.2% 27.9% 29.7% 20.9% 28.7% 27.1% 23.3% 23.2% 19.0% 14.0% 12.4% 11.0% 5.8% 1.0% 0.1% 0.1% 1.4% 0.0% 0.0% 0.0% 0.1% 0.1% 0.1% 0.0% 32.7% 36.4% 45.8% 50.3% 34.1% 46.0% 53.9% 58.4% 46.8% 44.8% 47.1% 45.9% 39.8% 36.0% 41.4% 39.3% 35.5% 52.3% 55.5% 58.5% 44.0% 40.4% 47.3% 46.0% 8.2% 0.1% 0.4% 1.4% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 46.9% 44.7% 44.3% 54.0% 38.3% 40.2% 33.7% 35.6% 35.9% 53.5% 44.2% 40.8% 57.0% 41.8% 42.7% 52.9% 42.4% 48.8% 46.3% 44.4% 36.4% 49.3% 48.4% 34.0% 19.7% 0.0% 0.0% 1.4% 0.0% 0.0% 0.0% 0.2% 0.0% 0.0% 0.0% 58.0% 67.6% 74.9% 79.6% 71.3% 70.4% 65.5% 66.8% 60.5% 68.5% 72.8% 74.1% 65.6% 66.7% 74.0% 78.2% 70.0% 70.4% 69.1% 70.0% 65.8% 64.2% 74.6% 69.4% 32.5% 0.1% 0.2% 1.4% 0.0% 0.0% 0.0% 0.1% 0.0% 0.0% 0.0% 45.9% 49.6% 55.0% 61.3% 47.9% 52.2% 51.0% 53.6% 47.7% 55.6% 54.7% 53.6% 54.1% 48.2% 52.7% 56.8% 49.3% 57.2% 57.0% 57.7% 48.7% 51.3% 56.8% 49.8% 20.2% Sep 2015 ..... Oct 2015 ...... Nov 2015 ..... Dec 2015 ..... Jan 2016 ...... Feb 2016 ...... Mar 2016 ...... Apr 2016 ...... May 2016 ..... Jun 2016 ...... Jul 2016 ....... Aug 2015 ..... 2.0% 3.0% 6.0% 4.4% 3.3% 1.0% 0.5% 0.2% 0.0% 0.0% 0.0% 13.6% 10.0% 14.4% 14.2% 9.3% 19.2% 24.5% 29.6% 15.7% 13.5% 17.0% 12.6% 26.2% 9.2% 10.2% 17.9% 12.5% 7.8% 4.8% 4.6% 2.2% 17.5% 12.2% 4.0% 37.1% 37.1% 49.8% 58.1% 44.8% 41.8% 35.4% 38.0% 29.9% 34.6% 48.5% 44.1% 26.6% 18.8% 24.8% 30.1% 22.2% 22.9% 21.5% 24.1% 15.9% 21.9% 25.9% 20.3% 29.9% Sep 2015 ..... Oct 2015 ...... Nov 2015 ..... Dec 2015 ..... Jan 2016 ...... Feb 2016 ...... Mar 2016 ...... Apr 2016 ...... May 2016 ..... Jun 2016 ...... Jul 2016 ....... Aug 2015 ..... 21.5% 24.9% 18.8% 25.1% 20.0% 11.2% 11.9% 13.0% 1.7% 2.0% 2.3% 24.3% 34.0% 43.8% 47.9% 31.7% 43.6% 52.7% 55.7% 42.2% 39.8% 43.7% 43.2% 34.4% 40.0% 36.2% 39.4% 27.7% 32.0% 28.5% 28.3% 31.6% 37.9% 32.2% 31.7% 51.2% 47.6% 57.4% 55.9% 39.1% 48.1% 45.5% 44.8% 43.6% 50.2% 48.3% 48.0% 39.8% 40.6% 45.8% 47.7% 32.8% 41.2% 42.2% 42.9% 39.1% 42.6% 41.4% 41.0% 41.8% Sep 2015 Oct 2015 Nov 2015 Dec 2015 Jan 2016 Feb 2016 Mar 2016 Apr 2016 [6a] sradovich on DSK3GMQ082PROD with NOTICES SPY [1] [No.] Calculation 27.0% 16.0% 22.6% 23.2% 20.7% 18.5% 12.9% 8.1% 33.8% 38.1% 36.8% 32.7% 51.1% 54.7% 55.2% 38.6% 37.8% 31.3% 35.1% 30.6% 41.3% 40.8% 35.3% 30.8% 46.7% 44.0% 53.4% 36.8% 50.7% 49.4% 51.2% 45.9% 39.4% 37.8% 41.8% 33.4% 47.7% 48.3% 47.2% 38.4% Sfmt 4703 E:\FR\FM\21FEN1.SGM PO 00000 ..... ...... ..... ..... ...... ...... ...... ...... Frm 00097 Fmt 4703 21FEN1 11268 Federal Register / Vol. 82, No. 33 / Tuesday, February 21, 2017 / Notices Symbol SPY Month DIA IWM QQQ Control Average [1] [No.] Calculation [2] [3] [4] ([2]:[4]) Appendix C: Impact of LEAD on Liquidity Takers The purpose of this analysis is to show that implementation of LEAD would not materially impact the ability of a random market participant not engaged in a latency arbitrage strategy, such as retail investors, to take displayed liquidity at CHX. This analysis assumes that LEAD would not materially change order sending behavior of Participants. For the period of May 2016 through July 2016,97 the Exchange observed the following with regards to SPY: sradovich on DSK3GMQ082PROD with NOTICES • There were a total of 18,316 orders at least partially executed. • During the same period, the Exchange received 1,278 cancel messages to cancel resting orders after the resting order had been fully executed (‘‘too-late-to-cancel’’ or ‘‘TLTC’’). • Of the 1,278 TLTCs, 412 TLTCs (32.24%) were received sooner than or exactly 350 microseconds after the execution (‘‘TLTC≤350’’), whereas 866 (67.76%) were received later than 350 microseconds after the execution (‘‘TLTC>350’’). • Of the 412 TLTC≤350, 392 (95.15%) executions were attributed to SPY latency arbitrage activity while the remaining 20 (4.85%) executions were not. • Of the 866 TLTC>350, 780 (90.07%) executions were attributed to SPY latency arbitrage activity while the remaining 86 (9.93%) executions were not. Thus, if LEAD had been in effect for the period of May 2016 through July 2016, LEAD (1) would have prevented up to 97 For the months prior to May 2016 during the Analysis Period, the Exchange did not maintain TLTC data. A limitation of this data is that CHX Market Share and displayed liquidity in SPY and, by extension, order sending activity had all diminished considerably by May 2016. See supra Appendix B Calculation Set 1. VerDate Sep<11>2014 17:15 Feb 17, 2017 Jkt 241001 3.8% 4.6% 1.1% 0.2% 36.7% 44.6% 42.5% 5.3% 29.8% 31.4% 27.0% 12.8% 45.2% 51.8% 31.0% 7.1% 37.2% 42.6% 33.5% 8.4% Sep 2015 ..... Oct 2015 ...... Nov 2015 ..... Dec 2015 ..... Jan 2016 ...... Feb 2016 ...... Mar 2016 ...... Apr 2016 ...... May 2016 ..... Jun 2016 ...... Jul 2016 ....... [7c] % of time CHX was at the NBB and was the largest bid at that price and that CHX was at the NBO and was the largest offer at that price. May 2016 ..... Jun 2016 ...... Jul 2016 ....... Aug 2015 ..... 1.1% 0.9% 2.3% 2.9% 1.9% 0.3% 0.1% 0.0% 0.0% 0.0% 0.0% 8.5% 12.3% 12.6% 8.1% 17.3% 23.3% 26.0% 10.9% 10.4% 14.3% 10.7% 7.3% 5.3% 7.0% 6.4% 4.3% 2.8% 2.6% 1.5% 8.0% 4.8% 2.8% 16.7% 17.7% 23.0% 13.7% 18.5% 13.9% 14.0% 14.0% 15.6% 18.6% 10.8% 10.9% 11.8% 14.2% 9.4% 13.4% 13.3% 14.2% 8.8% 11.3% 12.5% 8.1% 412 orders, virtually all of which the Exchange believes were submitted as part of SPY latency arbitrage activity, from being executed during the 350 microsecond Fixed LEAD Period and (2) would have had a negative impact on only 20 liquidity taking orders not attributed to SPY latency arbitrage activity. These 20 orders comprised 0.11% of the 18,316 orders executed during the period. That is, during the measurement period of 63 trading days, LEAD would have had an adverse effect on approximately one order every three trading days. Thus, LEAD can make a significant contribution to leveling the playing field between LEAD MMs and latency arbitrageurs with minimal adverse effect on other liquidity taking orders. 2. Statutory Basis The Exchange believes that the proposed rule change is consistent with Section 6(b) of the Act in general,98 and furthers the objectives of Section 6(b)(5) in particular,99 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 and perfect the mechanisms of a free and open market, and, in general, to protect investors and the public interest; and is not designed to permit unfair discrimination between customers, issuers, brokers, or dealers. Specifically, the Exchange believes that the proposed rule change would remove impediments and perfect the mechanisms of a free and open market 98 15 99 15 PO 00000 U.S.C. 78f(b). U.S.C. 78f(b)(5). Frm 00098 Fmt 4703 Sfmt 4703 and, in general, protect investors and the public interest by enhancing displayed liquidity and price discovery by minimizing the effectiveness of latency arbitrage strategies that negatively impact market quality. As shown under the CHX ETF Analysis,100 latency arbitrage lessens competition among orders by dissuading liquidity providers from displaying large and aggressively priced orders, which in turn impairs market efficiency.101 The Commission has recognized the crucial role that displayed limit orders play in the price discovery process.102 Thus, the Exchange believes that optimizing liquidity provision on the Exchange will enhance price discovery and, thereby, enhance market efficiency. To this end, LEAD is designed to promote displayed liquidity on the Exchange by giving LEAD MMs a small head start to the cancellation of stale quotes in the race to react to symmetric public information. LEAD is designed to achieve these goals without having a materially negative impact on the ability of liquidity takers not engaged in latency arbitrage, such as retail investors, to access displayed liquidity at CHX, as such liquidity will most always remain on the CHX book after a liquidity taking order has been released from LEAD.103 Thus, the Exchange believes that LEAD will encourage LEAD MMs to post large aggressively priced orders on the CHX book, which 100 See supra Appendix A Regulation NMS Adopting Release, supra note 13, at 37499. 102 See Regulation NMS Adopting Release, supra note 13, at 37526. 103 See also supra note 18; see also supra Appendix C. 101 See E:\FR\FM\21FEN1.SGM 21FEN1 sradovich on DSK3GMQ082PROD with NOTICES Federal Register / Vol. 82, No. 33 / Tuesday, February 21, 2017 / Notices will enhance liquidity and optimize price discovery in furtherance of the objectives of Section 6(b)(5) of the Act 104 and in a manner consistent with Regulation NMS, as described below. In addition, the Exchange believes that the proposed LEAD MM designation would protect investors and the public interest by requiring LEAD MMs to meet the proposed Minimum Performance Standards in return for being afforded the benefits of LEAD. Moreover, the Exchange submits that the proposal to leverage existing Market Maker rules regarding the procedures for deregistering Market Makers and involuntary withdrawals from assigned securities will provide the Exchange with sufficient authority to compel and enforce compliance by LEAD MMs with the proposed Minimum Performance Standards. The Exchange also believes that the proposed rules regarding assignment of LEAD MM Securities would protect investors and the public interest by implementing a comprehensive process whereby the Exchange will be able to select LEAD MMs that have demonstrated the ability and capacity to enhance displayed liquidity on the Exchange and to comply with federal rules and regulations, as well as CHX Rules. When considering these procedures with the proposed Minimum Performance Standards and enforcement mechanism, the Exchange believes that the effectiveness of LEAD in enhancing displayed liquidity and price discovery will be optimized. Moreover, for similar reasons, the Exchange submits that the proposed rules for LEAD are not designed to permit unfair discrimination. Specifically, the Exchange believes that any discrimination between LEAD MMs and non-LEAD MMs is permissible under the Act because (1) LEAD is designed to enhance displayed liquidity and price discovery by rectifying a current structural bias against displayed liquidity,105 without having a materially negative impact on the ability of liquidity takers not engaged in latency arbitrage, such as retail investors, to access displayed liquidity at CHX,106 and (2) the proposed Minimum Performance Standards, which will not apply to non-LEAD MMs, will help ensure that those goals are achieved, as well as to provide a safeguard against LEAD MMs utilizing LEAD to engage in manipulative activities or otherwise 104 15 U.S.C. 78f(b)(5). 105 See supra Section 3(a)(2). 106 See also supra note 18; see also supra Appendix C. VerDate Sep<11>2014 17:15 Feb 17, 2017 Jkt 241001 non-bona fide liquidity provision strategies. Regardless of whether a delay is symmetric (e.g., IEX Delay) or asymmetric (e.g., LEAD), any intentional delay designed to address latency arbitrage must necessarily discriminate among members. That is, correcting asymmetry in the market requires asymmetry in the remedy. For example, while the IEX Delay delays all incoming messages, the IEX Delay is asymmetric in that it provides processing advantages to non-displayed pegged orders resting on the IEX book, which are not provided to other orders. LEAD would similarly address latency arbitrage by providing a processing advantage to LEAD MMs, which will not be provided to non-LEAD MMs. The Exchange also believes that the LEAD is narrowly-tailored to address latency arbitrage as applied to limit orders. In finding that the rules pertaining to the IEX Delay did not permit unfair discrimination, and would not impose any unnecessary or inappropriate burden on competition, the Commission recognized that displayed limit orders or non-pegged non-displayed limit orders, the types of liquidity LEAD is designed to protect, would not benefit from the symmetric IEX Delay 107 because the purpose of such limit orders is to post or execute consistent with their fixed limit price, as opposed to being repriced by an exchange based on changes to the NBBO.108 Given that limit orders are also vulnerable to latency arbitrage and could only be effectively adjusted by the liquidity providers, if such orders are provided as part of a broader liquidity provision strategy that utilizes proprietary algorithms to price and size such limit orders, it logically flows that the best way to protect such liquidity is through an asymmetric delay, such as LEAD, that empowers LEAD MMs to better execute their liquidity provision strategies, which result in valuable displayed liquidity being provided to the market.109 Thus, given the ineffectiveness of symmetric delays in protecting limit orders from latency arbitrage and the immaterial impact that LEAD would have on the ability of random liquidity takers not engaged in latency arbitrage to access liquidity at CHX,110 the Exchange believes that LEAD is narrowly-tailored to address latency arbitrage as applied to limit orders. The Exchange further submits that LEAD would not confer any unfair advantage to LEAD MMs or introduce incremental risk of manipulative activity. While LEAD is long enough to neutralize microsecond speed advantages exploited by latency arbitrageurs, it is too short to provide any actionable incremental advantage to LEAD MMs in reacting to information not already it their possession. LEAD is also too short to introduce any incremental risk of manipulative practices, which is supported by the fact that the Commission has recognized that a 350-microsecond delay would not materially increase the likelihood of certain manipulative practices such as ‘‘spoofing’’ or ‘‘marking-the-close’’ due to the practical difficulties of executing such strategies within such a short time frame.111 112 Notwithstanding, the Exchange has elected to adopt the proposed Minimum Performance Standards to provide additional assurance to the Commission that CHX displayed liquidity will remain valuable and reliable by tying the processing advantage afforded to LEAD MMs to heightened market quality requirements, which will not be applied to non-LEAD MMs. Thus, for all of the reasons described above, any discrimination between LEAD MMs and non-LEAD MMs is justified and consistent with the requirements of the Section 6(b)(5) of the Act.113 The Exchange notes that the Commission has previously approved functionality that permissibly discriminates among members for the purpose enhancing displayed liquidity. Specifically, the Commission has previously approved the following mechanisms: • Maker/taker fee. Many national securities exchanges, including CHX, utilize the ‘‘maker/taker’’ fee model, which discriminates between liquidity providers and takers for the purpose of incentivizing market participants to provide liquidity to or take liquidity from the exchange.114 • Bulk-quoting interface. Nasdaq offers a bulk-quoting interface to allow its options market makers to more efficiently submit and update quotes as ‘‘aiding market makers in their market making activities will help to 111 Final 107 See IEX Approval Order, supra note 20, at 41157. 108 See id. 109 See supra notes 7 and 8. 110 See also supra note 18; see also supra Appendix C. PO 00000 Frm 00099 Fmt 4703 Sfmt 4703 11269 Interpretation, supra note 30, at n. 70. Exchange notes that it currently maintains surveillance protocols designed to detect such manipulative practices. 113 15 U.S.C. 78f(b)(5). 114 See, e.g., Bats BYX Fee Schedule; see also Section E.1 of the CHX Fee Schedule. 112 The E:\FR\FM\21FEN1.SGM 21FEN1 11270 Federal Register / Vol. 82, No. 33 / Tuesday, February 21, 2017 / Notices enhance market liquidity for investors.’’ 115 BATS Options offers a similar functionality, but permits all BATS Options users to utilize its bulk-quoting interface.116 In each case, the exchange gives liquidity providers a processing advantage to facilitate the adjusting of stale quotes to the disadvantage of liquidity takers. Consequently, as bulkquoting interfaces permit liquidity providers to adjust numerous quotes through a single message, this would minimize the possibility of stale quotes being executed before the liquidity provider has an opportunity to adjust the stale quote. That is, bulk-quoting interfaces, among other things, minimize the effectiveness of latency arbitrage strategies. • Market Makers generally. Many national securities exchange offer a market maker program that provides certain financial or operational benefits (e.g., Nasdaq’s bulkquoting interface and NYSE DMM parity 117) in return for meeting heightened market quality requirements. The Exchange also believes that the proposed amendments to the MTP order modifier would remove impediments and perfect the mechanisms of a free and open market and, in general, protect investors and the public interest, in that they are designed to avoid certain unintended consequences of LEAD on the MTP functionality. Specifically, since an order would be assigned a sequence number prior to being evaluated pursuant to LEAD,118 LEAD may result in a newer undelayed order being ranked on the CHX book before an older delayed order, which would not otherwise occur today. Under this scenario and assuming that the contraside orders trigger MTP and the incoming order is marked ‘‘N,’’ the current MTP rules would require the incoming older order to be cancelled, whereas the amended MTP handling would require the resting newer order to be cancelled subject to the exception for CHX Only orders described under amended Article 1, Rule 2(b)(3)(F)(iii)(a) and (b). Thus, the Exchange believes that the amended MTP functionality better contemplates LEAD and preserves expected results. The Exchange also believes that the proposed rule change is consistent with Regulation NMS. Specifically, the Exchange believes that LEAD is consistent with Rule 600(b)(3),119 Rule 602(b)(2) (‘‘Firm Quote Rule’’),120 Rule 611 121 and Rule 610(d).122 The Exchange believes that the proposed rule change is consistent with the ‘‘immedia[cy]’’ requirement of Rule 600(b)(3) as LEAD is a de minimis intentional access delay and thereby compatible with the Exchange having an ‘‘automated quotation’’ under Rule 600(b)(3) and thus a ‘‘protected quotation’’ under Rule 611.123 Specifically, Rule 600(b)(3) requires that a trading center displaying an automated quotation permit, among other things, an incoming IOC order to immediately and automatically execute against the automated quotation up to its full size; and immediately and automatically cancel any unexecuted portion of the IOC order without routing the order elsewhere.124 In the context of determining whether a trading center maintains an ‘‘automated quotation’’ for purposes of Rule 611, the Commission does not interpret the term ‘‘immediate’’ used in Rule 600(b)(3) by itself to prohibit a trading center from implementing an intentional access delay that is de minimis (i.e., a delay so short as to not frustrate the purposes of the Order Protection Rule by impairing fair and efficient access to an exchange’s quotations).125 Accordingly, the Commission’s revised interpretation provides that the term ‘‘immediate’’ precludes any coding of automated systems or other type of intentional device that would delay the action taken with respect to a quotation unless such delay is de minimis.126 The Exchange believes that LEAD is so short as to not frustrate the purposes of the Rule 611 127 by impairing fair and efficient access to the Exchange’s quotations. Specifically, all Participants seeking to take liquidity from the CHX book will have fair and efficient access to CHX quotations. Also, the 350microsecond delay is so short that it does not provide an incremental advantage to a LEAD MM other than neutralizing a structural bias that permits latency arbitrageurs to profit off of symmetric public information. To the 120 See 17 CFR 242.602(b)(2). 17 CFR 242.611. 122 See 17 CFR 242.610(d). 123 See Final Interpretation, supra note 30, at 40792. 124 See 17 CFR 242.600(b)(3). 125 See Final Interpretation, supra note 30, at 40792. Thus, the Exchange’s quotations would continue to be ‘‘immediately’’ accessible and protected pursuant to Rule 611. See 17 CFR 242.600(b)(3) defining ‘‘automated quotation’’; see also 17 CFR 242.600(b)(58) defining ‘‘protected quotation.’’ 126 See Final Interpretation, supra note 30, at 40792. 127 See 17 CFR 242.611. sradovich on DSK3GMQ082PROD with NOTICES 121 See 115 See Securities Exchange Act Release No. 65024 (August 3, 2011), 76 FR 48925 (August 9, 2011) (SR–NASDAQ–2011–102). 116 See Securities Exchange Act Release No. 65307 (September 9, 2011), 76 FR 57092 (September 15, 2011) (SR–BATS–2011–034) (expanding the availability of the bulk-quoting interface to all users of BATS Options); Securities Exchange Act Release No. 65133 (August 15, 2011), 76 FR 52032 (August 19, 2011) (SR–BATS–2011–029) (adopting the bulkquoting interface). 117 See NYSE Rules 103B and 104. 118 See supra note 45. 119 See 17 CFR 242.600(b)(3). VerDate Sep<11>2014 17:15 Feb 17, 2017 Jkt 241001 PO 00000 Frm 00100 Fmt 4703 Sfmt 4703 extent a market participant has a better algorithm or better information, LEAD is too short to have a negative impact on such non-latency arbitrage strategies, much less permit a LEAD MM to decide on a quotation-by-quotation basis whether to cancel or modify a quote. In addition, LEAD is narrowly-tailored to minimize the effectiveness of latency arbitrage strategies at CHX, as described above. The Exchange also believes that LEAD is consistent with Rule 602(b)(2).128 Specifically, a plain reading of Rule 602(b) indicates that the delay of a liquidity taking order pursuant to LEAD would not result in the order being ‘‘presented’’ to the LEAD MM.129 This is consistent with the Commission’s guidance regarding the applicability of the Firm Quote Rule in the context of obsolete Intermarket Trading System (‘‘ITS’’) commitments.130 Specifically, the Commission stated that ‘‘the Firm Quote Rule requires that every exchange specialist or OTC market maker execute any order to buy or sell a security it receives at a price at least as favorable as its published bid or offer in any amount up to its published size, subject to two exceptions.’’ 131 The Commission further stated ‘‘that the Firm Quote Rule applies to ITS commitments; where a specialist or market maker fails to honor its quote by refusing to execute an ITS commitment received at its published bid or offer, and neither of the exceptions contained in the Firm Quote Rule apply, the specialist or market maker is in violation of the Firm Quote Rule.’’ 132 As such, the Commission’s guidance clearly suggests that a Rule 602(b) violation occurs when a liquidity provider receives (i.e., is presented) a marketable contra-side order and refuses to honor its quote.133 When also 128 ‘‘Subject to the provisions of paragraph (b)(3) of this section, each responsible broker or dealer shall be obligated to execute any order to buy or sell a subject security, other than an odd-lot order, presented to it by another broker or dealer, or any other person belonging to a category of persons with whom such responsible broker or dealer customarily deals, at a price at least as favorable to such buyer or seller as the responsible broker’s or dealer’s published bid or published offer (exclusive of any commission, commission equivalent or differential customarily charged by such responsible broker or dealer in connection with execution of any such order) in any amount up to its published quotation size.’’ 17 CFR 242.602(b)(2) (emphasis added). 129 See 17 CFR 242.602(b). 130 See Exchange Act Release No. 40260, 63 FR 40748, 40754 (July 30, 1998). 131 Id (emphasis added). 132 Id (emphasis added). 133 See 17 CFR 242.602(b). A Section 21(a) report from 1996 regarding, among other things, misconduct by certain market makers with respect to its published quotes is illustrative of the type of activity that the Firm Quote Rule is designed to E:\FR\FM\21FEN1.SGM 21FEN1 Federal Register / Vol. 82, No. 33 / Tuesday, February 21, 2017 / Notices sradovich on DSK3GMQ082PROD with NOTICES considering that the Exchange will never notify Participants or the public of the Exchange’s receipt of a liquidity taking order subject to LEAD and CHX Rules indicate that a liquidity provider’s Rule 602(b) obligation vests only after execution of its order within the Matching System,134 the Exchange submits that LEAD is consistent with the Firm Quote Rule. The Exchange further believes that LEAD is consistent with the requirements of Rule 611.135 As described above, a portion of a Routable Order may be immediately routed away to execute against away protected quotations, with the unrouted remainder being delayed before being permitted to execute against an order resting on the CHX book at a price inferior to the away protected quotations. 136 Given that LEAD is de minimis in the context of Rule 600(b)(3),137 it logically flows that LEAD would also be considered de minimis for the purposes of the ‘‘simultaneously routed’’ Intermarket Sweep Order (‘‘ISO’’) requirement under Rule 611(b)(6).138 Thus, the Exchange submits that a delay caused by LEAD between the routing of one or more ISOs to satisfy better priced protected quotation(s) and the delayed execution of a related order at price inferior to such protected quotation(s) is consistent with the requirements of Rule 611(b)(6).139 Similarly, a portion of a Routable Order may be immediately routed away to execute against away protected quotations with the unrouted remainder being delayed before be ranked on the address. See Report Pursuant to Section 21(a) of the Securities Exchange Act of 1934 Regarding the NASD, the Nasdaq Market, and Nasdaq Market Makers, Exchange Act Release No. 37542 (August 8, 1996). Page 32 of the report provides, in pertinent part, as follows: Certain market makers at times did not honor their quotation for those with whom they preferred not to trade and ‘‘backed away’’ from their quotes as reprisal for, among other reasons, perceived prior back way by other market makers. Certain market makers also variously refused to trade with order entry firms, certain other market makers, and participants they ‘‘dislike,’’ such as options market makers. Market makers at times backed away from their trading obligations to avoid unwanted orders placed when they coordinated their quotations with other market makers. 134 CHX Article 20, Rule 3(a) provides as follows: Each order submitted by each Participant is a firm order and each Participant must, upon execution of the order within the Matching System, purchase or sell, as the case may be, at the price, size and conditions identified by the participant at the time it submitted the order. No Participant may submit an order marked for display as a ‘‘manual’’ quotation. 135 17 CFR 242.611. 136 See supra Example 3. 137 See 17 CFR 242.600(b)(3). 138 See 17 CFR 242.611(b)(6). 139 See id. VerDate Sep<11>2014 17:15 Feb 17, 2017 Jkt 241001 CHX book at a price that crosses such away protected quotations. This could result if the resting order on the CHX book that resulted in the unrouted remainder being delayed was cancelled before the unrouted remainder were released from LEAD. Under this scenario, given that LEAD is de minimis in the context of Rule 600(b)(3),140 it logically flows that the de minimis delay caused by LEAD between the routing of one or more ISOs to satisfy away protected quotations and the display of the related order at a price that crosses such away protected quotations is permissible and consistent with the requirements of Rule 610(d).141 B. Self-Regulatory Organization’s Statement on Burden on Competition The Exchange does not believe that the proposed rule change will impose any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Act. To the contrary, the Exchange believes that any burden on competition is necessary and appropriate in furtherance of the purposes of Section 6(b)(5) of the Act because LEAD is functionality that seeks to enhance liquidity and optimize price discovery by deemphasizing speed as a key to trading success in order to further serve the interests of investors and thereby removes impediments and perfects the mechanisms of a free and open market. The Exchange further notes that market participants will continue to be able to obtain CHX book data via the Securities Information Processors or through the Exchange’s proprietary book feed, the CHX Book Feed,142 without delay as the Exchange does not propose to delay any outbound messages or market data. As such, the Exchange submits that any burden on competition, while necessary and appropriate in furtherance of the purposes of that Act, has been minimized. C. Self-Regulatory Organization’s Statement on Comments on the Proposed Rule Change Received From Members, Participants or Others No written comments were solicited or received with respect to the proposed rule change. 140 See 17 CFR 242.600(b)(3). ‘‘Division of Trading and Markets: Responses to Frequency Asked Questions Concerning Rule 611 and Rule 610 of Regulation NMS.’’ U.S. Securities and Exchange Commission, 4 April 2008. Web. 20 June 2016 http:// www.sec.gov/divisions/marketreg/nmsfaq61011.htm (‘‘Question 5.02’’); see also CHX Article 20, Rule 6(c)(3); see also 17 CFR 242.610(d). 142 See CHX Article 4, Rule 1. 141 See PO 00000 Frm 00101 Fmt 4703 Sfmt 4703 11271 III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action Within 45 days of the date of publication of this notice in the Federal Register or within such longer period (i) as the Commission may designate up to 90 days of such date if it finds such longer period to be appropriate and publishes its reasons for so finding or (ii) as to which the self-regulatory organization consents, the Commission will: A. By order approve or disapprove the proposed rule change, or B. Institute proceedings to determine whether the proposed rule change should be disapproved. 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 (http://www.sec.gov/ rules/sro.shtml); or • Send an email to rule-comments@ sec.gov. Please include File Number SR– CHX–2017–04 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–CHX–2017–04. 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 (http://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 E:\FR\FM\21FEN1.SGM 21FEN1 11272 Federal Register / Vol. 82, No. 33 / Tuesday, February 21, 2017 / Notices 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–CHX– 2017–04 and should be submitted on or before March 14, 2017. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.143 Eduardo A. Aleman, Assistant Secretary. [FR Doc. 2017–03296 Filed 2–17–17; 8:45 am] BILLING CODE 8011–01–P [Release No. 34–80035; File No. SR– PEARL–2017–09] February 14, 2017. sradovich on DSK3GMQ082PROD with NOTICES 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 February 3, 2017, MIAX PEARL, LLC (‘‘MIAX PEARL’’ or ‘‘Exchange’’) filed with the Securities and Exchange Commission (the ‘‘Commission’’) the proposed rule change as described in Items I, II, and III below, which Items have been prepared by the Exchange. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change The Exchange is filing a proposal rule change to amend the MIAX PEARL Fee Schedule (the ‘‘Fee Schedule’’) by establishing an Options Regulatory Fee (‘‘ORF’’). While changes to the Fee Schedule pursuant to this proposal are effective upon filing, the Exchange has designated these changes to be operative February 6, 2017. The text of the proposed rule change is available on the Exchange’s Web site at http://www.miaxoptions.com/ruleCFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. VerDate Sep<11>2014 17:15 Feb 17, 2017 Jkt 241001 In its filing with the Commission, the Exchange included statements concerning the purpose of and basis for the proposed rule change and discussed any comments it received on the proposed rule change. The text of these statements may be examined at the places specified in Item IV below. The Exchange has prepared summaries, set forth in sections A, B, and C below, of the most significant aspects of such statements. 1. Purpose Self-Regulatory Organizations; MIAX PEARL, LLC; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Amend the MIAX PEARL Fee Schedule To Establish an Options Regulatory Fee (‘‘ORF’’) 1 15 II. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change A. Self-Regulatory Organization’s Statement of the Purpose of, and the Statutory Basis for, the Proposed Rule Change SECURITIES AND EXCHANGE COMMISSION 143 17 filings/pearl, at MIAX’s principal office, and at the Commission’s Public Reference Room. The purpose of the proposed rule change is to establish an ORF in the amount of $0.0010 per contract side. The per-contract ORF will be assessed by MIAX PEARL to each MIAX PEARL Member for all options transactions executed, cleared, or ultimately cleared by the Member which are cleared by OCC in the ‘‘customer’’ range, regardless of the exchange on which the transaction occurs. The ORF will be collected indirectly from Members through their clearing firms by OCC on behalf of MIAX PEARL. In the case where a non-Member executes a transaction and a Member clears the transaction, the ORF will be assessed to the Member who clears the transaction. In the case where a Member executes a transaction and another Member clears the transaction, the ORF will be assessed to the Member who clears the transaction. Further, the ORF will be assessed on transactions that are not executed by a Member, but are ultimately cleared by a Member. The Exchange notes that, in the limited circumstance in which a Member executes or clears a transaction and then ‘‘gives-up’’ or ‘‘CMTAs’’ the trade to a non-member of MIAX PEARL (which non-member becomes the ultimate clearing firm for the transaction), MIAX PEARL will collect the ORF from such non-member involving [sic] that transaction. However, for the avoidance of doubt, the Exchange will not assess the ORF when the transaction is not executed on the Exchange and neither the executing clearing firm nor the ultimate clearing firm (e.g., such as when the Member is ‘‘given-up’’ or PO 00000 Frm 00102 Fmt 4703 Sfmt 4703 ‘‘CMTAed’’ and then subsequently ‘‘gives-up’’ or ‘‘CMTAs’’ the transaction to another non-member via a CMTA reversal) is a Member. Further, the Exchange will not assess the ORF on linkage trades, whether executed at the Exchange or an away exchange. A customer order routed to another exchange results in two customer trades, one from the originating exchange and one from the recipient exchange. Charging ORF on both trades could result in double-billing of ORF for a single customer order, thus the Exchange chooses not to charge ORF on the trade from the originating exchange in a linkage scenario. This assessment practice will be identical to the assessment practice currently utilized by the Exchange’s affiliate, Miami International Securities Exchange, LLC (‘‘MIAX Options’’). As a practical matter, when a transaction that is subject to the ORF is not executed on the Exchange, the Exchange lacks the information necessary to identify the executing member for that transaction. There are countless executing market participants, and each day such participants can and often do drop their connection to one market center and establish themselves as participants on another. For these reasons, it is not possible for the Exchange to identify, and thus assess fees such as an ORF on, executing participants on away markets on a given trading day. Clearing members, however, are distinguished from executing participants because they remain identified to the Exchange regardless of the identity of the initiating executing participant, their location, and the market center on which they execute transactions. Therefore, the Exchange believes it is more efficient for the operation of the Exchange and for the marketplace as a whole to collect the ORF from clearing members. As discussed below, the Exchange believes it is appropriate to charge the ORF only to transactions that clear as customer at the OCC. The Exchange believes that its broad regulatory responsibilities with respect to a Member’s activities supports applying the ORF to transactions cleared but not executed by a Member. The Exchange’s regulatory responsibilities are the same regardless of whether a Member executes a transaction or clears a transaction executed on its behalf. The Exchange regularly reviews all such activities, including performing surveillance for position limit violations, manipulation, front-running, contrary exercise advice violations and E:\FR\FM\21FEN1.SGM 21FEN1

Agencies

[Federal Register Volume 82, Number 33 (Tuesday, February 21, 2017)]
[Notices]
[Pages 11252-11272]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-03296]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-80041; File No. SR-CHX-2017-04]


Self-Regulatory Organizations; Chicago Stock Exchange, Inc.; 
Notice of Filing of Proposed Rule Change To Adopt the CHX Liquidity 
Enhancing Access Delay

February 14, 2017.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on February 10, 2017, the Chicago Stock Exchange, Inc. (``CHX'' or 
``Exchange'') filed with the Securities and Exchange Commission (the 
``Commission'') the proposed rule change as described in Items I, II 
and III 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.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 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

    CHX proposes to amend the Rules of the Exchange (``CHX Rules'') to 
adopt the CHX Liquidity Enhancing Access Delay. The text of this 
proposed rule change is available on the Exchange's Web site at http://www.chx.com/regulatory-operations/rule-filings/, 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 those statements may be examined at 
the places specified in Item IV below. The Exchange has prepared 
summaries, set forth in sections A, B and C below, of the most 
significant parts of such statements.

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

1. Purpose
(1) Overview
    The Exchange proposes to amend the CHX Rules to adopt the CHX 
Liquidity Enhancing Access Delay (``LEAD''). In sum, LEAD will require 
all new incoming orders, cancel and cancel/replace messages to be 
subject to a 350-microsecond intentional access delay; provided, 
however, that (1) new incoming orders \3\ submitted by LEAD Market 
Makers (``LEAD MM''), a new class of CHX Market Maker \4\ with 
heightened quoting and trading obligations, that would be immediately 
ranked on the CHX book without executing against any resting orders on 
the CHX book and (2) certain cancel messages related to resting orders 
that were submitted by LEAD MMs will not be delayed. LEAD will be 
applied to all securities traded on the Exchange throughout the trading 
day.\5\ LEAD is designed to enhance displayed liquidity and price 
discovery by minimizing the effectiveness of latency arbitrage 
strategies that diminish displayed liquidity and impair price 
discovery, as described in detail below.
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    \3\ ``New incoming orders'' are orders received by the Matching 
System for the first time. As discussed below, LEAD will not apply 
to other situations where existing orders or portions thereof are 
treated as incoming orders, such as (1) resting orders that are 
price slid into a new price point pursuant to the CHX Only Price 
Sliding or Limit Up-Limit Down Price Sliding Processes and (2) 
unexecuted remainders of routed orders released into the Matching 
System. See CHX Article 1, Rule 2(b)(1)(C); see also CHX Article 20, 
Rule 2A(b); see also CHX Article 20, Rule 8(b)(7). Incidentally, the 
Exchange is proposing to amend CHX Article 20, Rule 8(a)(7) to 
delete the word ``new'' from the last sentence, so that the rule 
provides, in pertinent part, that if no balance exists at the time a 
part of an unexecuted remainder of a routed order is returned to the 
Matching System, it shall be treated an incoming order.
    \4\ See CHX Article 1, Rule 1(tt) defining ``Market Maker''; see 
also generally CHX Article 16 (Market Makers).
    \5\ Each trading day is divided into four trading sessions: 
Early session, regular trading session, late trading session and 
late crossing session. See CHX Article 20, Rule 1(b). The Exchange 
only accepts cross orders during the late crossing session and thus 
does not accept or rank any single-sided orders during the late 
crossing session. See CHX Article 1, Rule 2(a)(2) defining ``cross 
order.''
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(2) Latency Arbitrage
    As used herein, ``latency arbitrage'' means the practice of 
exploiting

[[Page 11253]]

disparities in the price of a security or related securities that are 
being traded in different markets by taking advantage of the time it 
takes to access and respond to symmetric public information.\6\ At CHX, 
latency arbitrage is effected by low-latency market participants that 
leverage microsecond speed advantages to take resting liquidity at 
stale prices from the CHX limit order book.
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    \6\ See Letter to Brent J. Fields, Secretary, SEC, from Eric 
Budish, Professor of Economic and David G. Booth Faculty Fellow, the 
University of Chicago Booth School of Business (October 13, 2016) 
(``Budish LTAD Letter'') at 2. Given its emphasis on speed, latency 
arbitrage has resulted in a well-documented and escalating 
technology race among certain market participants seeking to obtain 
ever smaller speed advantages. See Eric Budish, Peter Cramton and 
John Shim, ``The High-Frequency Trading Arms Race: Frequent Batch 
Auctions as a Market Design Response,'' Quarterly Journal of 
Economics, Vol. 130(4), November 2015 (``Budish Paper''); see also, 
Elaine Wah and Michael Wellman, ``Latency Arbitrage, Market 
Fragmentation, and Efficiency: A Two-Market Model,'' 4th ACM 
Conference on Electronic Commerce, June 2013.
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    In 2016, the Exchange experienced a material decline in CHX volume 
and liquidity in the SPDR S&P 500 trust exchange-traded fund 
(``SPY''),\7\ which the Exchange has attributed to latency arbitrage 
activity in SPY first observed at CHX in January 2016 (``SPY latency 
arbitrage activity'').\8\ Specifically, during the period of January 
through July 2016, the Exchange observed unusual messaging patterns in 
SPY whereby an execution of a large inbound Immediate Or Cancel order 
(``IOC'') against a contra-side order resting on the CHX book was 
frequently followed by a late cancel message for the executed resting 
order soon after the execution (``Too Late to Cancel'' or ``TLTC'').\9\ 
Based on these observations, Participant corroboration of the 
observations and market data analysis,\10\ the Exchange found that SPY 
latency arbitrage activity caused CHX liquidity providers to 
dramatically reduce displayed liquidity in SPY (and at times withdraw 
from the market altogether), which materially decreased liquidity in 
SPY market wide, especially in light of CHX's significant contributions 
to overall volume and liquidity in SPY prior to the declines.\11\
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    \7\ Most of the CHX liquidity in SPY and other S&P 500-
correlated securities is provided as part of an arbitrage strategy 
between CHX and the futures markets, whereby liquidity providers 
utilize, among other things, proprietary algorithms to price and 
size resting orders on CHX to track index market data from a 
derivatives market (e.g., E-Mini S&P traded on the Chicago 
Mercantile Exchange's Globex trading platform).
    \8\ A detailed analysis (``CHX ETF Analysis'') of the impact of 
latency arbitrage on displayed liquidity in SPY at CHX, for the 
period of August 2015 through July 2016 (``Analysis Period''), may 
be found under Appendix A. The market data utilized by the CHX ETF 
Analysis, as well as defined terms and notes, may be found under 
Appendix B. Additional analysis regarding the potential impact of 
LEAD on liquidity takers may be found under Appendix C. As discussed 
in detail under Appendix A below, prior to the beginning of the SPY 
latency arbitrage activity in January 2016, CHX volume and liquidity 
in SPY constituted a material portion of overall volume and 
liquidity in SPY marketwide. For example, the CHX Market Share in 
SPY as a percentage of Total Volume decreased from 5.73% in January 
2016 to 0.57% in July 2016, while the Control Securities did not 
experience similar declines. See infra Appendix A; see also infra 
Appendix B Calculation Set 1a. Also, the Time-weighted Average CHX 
Size At The NBBO in SPY relative to the total NMS Size At The NBBO 
in SPY decreased from 44.36% in January 2016 to 3.39% of the total 
NMS Size At The NBBO in SPY in July 2016, while the Control 
Securities did not experience similar declines. See also infra 
Appendix A; see also infra Appendix B Calculations Sets 3a and 4a.
    \9\ The Exchange did not begin maintaining TLTC data until May 
2016. See infra Appendix C.
    \10\ See supra note 8.
    \11\ See id.
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    As demonstrated by the SPY latency arbitrage activity, latency 
arbitrage imposes a tax on liquidity provision \12\ that dissuades 
market participants from providing displayed liquidity, which is 
incompatible with a primary goal of Regulation NMS to enhance displayed 
liquidity to the benefit of investors and the public interest.\13\ 
Latency arbitrageurs exploit the fact that updating the continuous 
limit order book (utilized by every national securities exchange) 
necessarily requires the processing of order-related messages serially 
by time of receipt. Thus, when reacting to the same symmetric 
information, a liquidity provider with a quote displayed on an exchange 
must be faster than a latency arbitrageur to avoid its stale quote from 
being executed.\14\ This structural bias facilitates the ability of the 
latency arbitrageur to extract profits from symmetric information.\15\ 
The Exchange submits that this bias is contrary to a fundamental 
principal of trading, that the parties agree upon the terms of the 
trade, and permitting latency arbitrage to continue to diminish 
displayed liquidity is wholly inconsistent with the objectives of 
Regulation NMS.\16\
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    \12\ See Eric Budish, Comment letter regarding ``Investors' 
Exchange LLC Form 1 Application (Release No. 34-75925; File No. 10-
222)'' (February 5, 2016).
    \13\ The Commission has stated that ``increased displayed 
liquidity [is] a principal goal of the Order Protection Rule.'' 
Exchange Act Release No. 51808 (June 9, 2005), 70 FR 37496, 37514 
(June 29, 2005) (``Regulation NMS Adopting Release''). The 
Commission has also stated that ``[t]o the extent that competition 
among orders is lessened, the quality of price discovery for all 
sizes of orders can be compromised. Impaired price discovery could 
cause market prices to deviate from fundamental values, reduce 
market depth and liquidity, and create excessive short-term 
volatility that is harmful to long-term investors and listed 
companies. More broadly, when market prices do not reflect 
fundamental values, resources will be misallocated within the 
economy and economic efficiency--as well as market efficiency--will 
be impaired.'' Id. at 37499.
    \14\ See Budish LTAD Letter, supra note 6, at 2.
    \15\ See id.
    \16\ See Regulation NMS Adopting Release, supra note 13, at 
37514.
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(3) LEAD
    LEAD is designed to offset the structural bias that unfairly favors 
latency arbitrageurs by giving liquidity providers who have committed 
to heightened quoting and trading requirements (i.e., LEAD MMs) a small 
head start to the cancellation of stale quotes in the race to react to 
symmetric public information.\17\ Based on its analysis of CHX market 
data,\18\ the Exchange does not believe that LEAD will have a material 
impact on the ability of liquidity takers not engaged in latency 
arbitrage, such as retail investors, to access displayed liquidity at 
CHX.\19\ To the extent a sophisticated market participant seeks to take 
displayed liquidity pursuant to better or different information (as 
opposed to the same information exploited by latency arbitrageurs), 
LEAD is too short to have an incrementally negative impact on such non-
latency arbitrage strategies.
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    \17\ See Budish LTAD Letter, supra note 6, at 2. In discussing 
possible alternatives to a frequent batch auction model for trading 
securities, the Budish Paper provides that ``the asymmetric delay 
eliminates sniping and stops the arms race.'' See Budish Paper, 
supra note 6, at 1612.
    \18\ Based on the Exchange's analysis of cancel activity in SPY 
at CHX for the period starting in May 2016 through July 2016, the 
Exchange believes that if LEAD had been implemented during that time 
period, out of a total of 18,316 partially-executed orders in SPY, 
20 liquidity taking orders not attributed to latency arbitrage 
activity would have not been executed, a de minimis number in the 
light of the enhanced liquidity and price discovery afforded by 
LEAD. See infra Appendix C.
    \19\ The Exchange notes that while LEAD is designed to 
neutralize microsecond speed advantages exploited by latency 
arbitrageurs, LEAD MMs would still be required to obtain speed 
capabilities fast enough to take advantage of LEAD.
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    The LEAD MM is a new class of CHX Market Maker that will be subject 
to the proposed Minimum Performance Standards, as described in detail 
below, which will not be applied to non-LEAD MMs. The purpose of the 
Minimum Performance Standards is to ensure that LEAD MMs will be 
required to meet heightened quoting and trading requirements in return 
for undelayed access to the CHX book for the purposes of submitting 
liquidity providing orders and cancelling its resting orders. Also, 
LEAD MMs will be required to establish at least one LEAD MM Trading 
Account, as described below, through which all LEAD market making 
activities must originate.
    Specifically, LEAD will require the following messages in all 
securities

[[Page 11254]]

received by the Exchange throughout a trading day to be subject to a 
350-microsecond intentional delay, the same length as the Investors 
Exchange LLC (``IEX'') POP/coil delay (``IEX Delay'') recently approved 
by the Commission,\20\ before such delayed messages would be processed 
\21\ by the Matching System: \22\
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    \20\ See Securities Exchange Act Release No. 78101 (June 17, 
2016), 81 FR 41141 (June 23, 2016) (``IEX Approval Order''). The IEX 
Delay will delay all inbound order-related messages from IEX Users, 
outbound message confirmations to IEX Users and outbound market data 
disseminated through IEX's proprietary data feed. See id. at 41154. 
By not delaying inbound market data, IEX would be able to reprice 
its resting pegged orders to track changes to the NBBO before 
latency arbitrageurs could execute against such pegged orders at 
potentially stale prices, which facilitates the ability of IEX to 
comply with its rules regarding the repricing of pegged orders. See 
id. at 41155.
    \21\ For clarity, ``processed'' means executing instructions 
contained in a message, including, but not limited to, permitting an 
order to execute within the Matching System pursuant to the terms of 
the order or cancelling an existing order, whereas ``evaluate'' 
means the Matching System determining whether a message should be 
diverted into LEAD, as described below.
    \22\ The Matching System is an automated order execution system, 
which is a part of the Exchange's ``Trading Facilities,'' as defined 
under CHX Article 1, Rule 1(z).
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     All new incoming messages that did not originate from a 
Valid LEAD MM Trading Account, as described below, will be 
intentionally delayed; provided, however, that the portion of any new 
incoming Routable Order \23\ that is to be routed away will never be 
delayed, regardless of who submitted the Routable Order.
---------------------------------------------------------------------------

    \23\ See CHX Article 1, Rule 1(oo) defining ``Routable Order.''
---------------------------------------------------------------------------

     New incoming orders, as well as the replace portion of 
cancel/replace messages, that originate from a Valid LEAD MM Trading 
Account that would immediately execute against existing resting orders 
on the CHX book will be intentionally delayed.
     Cancel and cancel/replace messages for orders that 
originate from a Valid LEAD MM Trading Account that have been delayed, 
but not yet processed by the Matching System, will be intentionally 
delayed.
    As such, the following messages would not be intentionally delayed 
pursuant to LEAD:
     New incoming orders that originate from a Valid LEAD MM 
Trading Account that would immediately be ranked on the CHX book 
without executing against existing resting orders on the CHX book will 
not be intentionally delayed.
     A cancel message for a resting order that originates from 
a Valid LEAD MM Trading Account will not be intentionally delayed.
     A cancel/replace message related to a resting order that 
originates from a Valid LEAD MM Trading Account will not be 
intentionally delayed; provided, however, that if any part of the 
replace portion would immediately execute against an existing resting 
order on the CHX book, the replace portion will be intentionally 
delayed.
     The portion of a Routable Order that is to be routed away 
will not be intentionally delayed, regardless of who submitted the 
Routable Order.
    Also, LEAD will not delay any outbound messages or market data.
    The Exchange notes that adopting a symmetric delay and order types 
that would permit the Exchange to reprice resting orders based on 
undelayed market data, such as the IEX Delay and pegged order types, 
would not address latency arbitrage at CHX with respect to limit orders 
because the liquidity provision strategies utilized by CHX liquidity 
providers, which provide valuable liquidity to the market overall,\24\ 
require cancellations or adjustments to resting limit orders pursuant 
to proprietary algorithms held by the CHX liquidity providers that 
could not be adequately replicated by CHX.\25\ Also, as the Commission 
noted in the IEX Approval Order, a symmetric delay that delays all 
inbound messages would be ineffective in protecting resting limit 
orders from latency arbitrage.\26\ However, the Exchange notes that 
both LEAD and the IEX Delay provide processing advantages to certain 
types of liquidity providers over all other order senders so as to 
minimize the effectiveness of latency arbitrage and are thus similar in 
this respect.\27\
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    \24\ See supra note 8; see also infra Appendices A and B.
    \25\ See supra note 7.
    \26\ See IEX Approval Order, supra note 20, at 41157.
    \27\ See infra Section 3(b).
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    Moreover, the Exchange submits that LEAD is consistent with the 
objectives of the Exchange Act and the rules and regulations 
thereunder. As described in detail below,\28\ LEAD is, among other 
things, (1) a de minimis intentional access delay in that it is so 
short as to not frustrate the purposes of Rule 611 of Regulation NMS 
\29\ by impairing fair and efficient access to an exchange's 
quotations; \30\ (2) consistent with Rule 602(b) of Regulation NMS; 
\31\ and (3) furthers the objectives of the objectives of Section 
6(b)(5) of the Act in that it would protect investors and the public 
interest and does not unfairly discriminate among Participants.\32\
---------------------------------------------------------------------------

    \28\ See id.
    \29\ 17 CFR 242.611.
    \30\ See Securities Exchange Act Release No. 78102 (June 17, 
2016), 81 FR 40785 (June 23, 2016) (``Final Interpretation'').
    \31\ See 17 CFR 242.602(b).
    \32\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

Amended Article 16, Rule 4 (Obligation of Market Makers)
    Proposed Article 16, Rule 4(f) provides rules regarding the 
proposed LEAD MM Program. Specifically, proposed paragraph (f)(1) 
provides defined terms for the purposes of paragraph (f). Thereunder, 
proposed paragraph (f)(1)(A) provides that ``LEAD'' means the Liquidity 
Enhancing Access Delay, as described under proposed Article 20, Rule 
8(h); proposed paragraph (f)(1)(B) provides that ``LEAD MM'' means a 
Market Maker assigned to a particular security that has committed to 
maintaining Minimum Performance Standards, described under proposed 
paragraph (f)(2), in the security; proposed paragraph (f)(1)(C) 
provides that ``LEAD MM Security'' means a security assigned to a LEAD 
MM; and proposed paragraph (f)(1)(D) provides that ``Qualified 
Executions'' means all executed shares at CHX, during all trading 
sessions,\33\ resulting from single-sided orders, excluding any 
executed shares resulting from auctions.
---------------------------------------------------------------------------

    \33\ See supra note 5.
---------------------------------------------------------------------------

    Proposed paragraph (f)(2) provides that ``Minimum Performance 
Standards'' means the Quotation Requirements and Obligations described 
under current paragraph (d),\34\ which provides the current quoting and 
pricing obligations for Market Makers, with the following 
modifications.\35\
---------------------------------------------------------------------------

    \34\ The current Quotation Requirements and Obligations include, 
among other things, a continuous two-sided quote obligation and 
pricing obligations that require a continuous bid no further away 
from the National Best Bid (``NBB'') and a continuous offer no 
further away from the National Best Offer (``NBO'') than the 
Designated Percentage or Defined Limit, as applicable. See CHX 
Article 16, Rule 4(d).
    \35\ Trading days on which the Exchange does not open for 
trading, for whatever reason, will be excluded from the Exchange's 
calculations regarding compliance with the proposed Minimum 
Performance Standards.
---------------------------------------------------------------------------

    Proposed paragraph (f)(2)(A) provides that the Designated 
Percentages described under current Article 16, Rule 4(d)(2)(B) shall 
be halved.\36\ Thus, new incoming orders submitted by LEAD MMs will be 
required to be priced closer to the NBBO or the last reported sale in 
the security, as applicable, than those of current Market Makers.
---------------------------------------------------------------------------

    \36\ For example, the 8% Designated Percentage for securities 
subject to the Article 20, Rule 2A(c)(1)(A) pursuant to current CHX 
Article 16, Rule 4(d)(2)(A) and (B) would be 4% for LEAD MMs.
---------------------------------------------------------------------------

    In addition, LEAD MMs will be required to meet the following

[[Page 11255]]

additional requirements. Proposed paragraph (f)(2)(B) provides that 
LEAD MMs shall maintain a Monthly Average NBBO Quoting Percentage, as 
defined thereunder, in each of its LEAD MM Securities, of at least 10% 
over the course of a calendar month. For each such security, the 
Exchange will determine: (i) The ``Daily NBB Quoting Percentage'' by 
determining the percentage of time the LEAD MM has at least one Round 
Lot \37\ of displayed interest in an Exchange bid at the NBB during the 
Open Trading State \38\ of each trading day for a calendar month; (ii) 
the ``Daily NBO Quoting Percentage'' by determining the percentage of 
time the LEAD MM has at least one Round Lot of displayed interest in an 
Exchange offer at the NBO during the Open Trading State of each trading 
day for a calendar month; (iii) the ``Average Daily NBBO Quoting 
Percentage'' for each trading day by summing the ``Daily NBB Quoting 
Percentage'' and the ``Daily NBO Quoting Percentage'' then dividing 
such sum by two; and (iv) the ``Monthly Average NBBO Quoting 
Percentage'' for each security by summing the security's ``Average 
Daily NBBO Quoting Percentages'' for each trading day in a calendar 
month then dividing the resulting sum by the total number of trading 
days in such calendar month.39 40
---------------------------------------------------------------------------

    \37\ See CHX Article 1, Rule 2(f)(3) defining ``Round Lot.''
    \38\ See CHX Article 1, Rule 1(qq) defining ``Open Trading 
State.''
    \39\ For example, a LEAD MM with a Monthly Average NBBO Quoting 
Percentage of 11% would meet the requirements of proposed paragraph 
(f)(2)(B), even if on a particular day during the calendar month, 
the LEAD MM's Average Daily Quoting Percentage was 9%.
    \40\ See supra note 35.
---------------------------------------------------------------------------

    Proposed paragraph (f)(2)(C) provides that a LEAD MM's Qualified 
Executions in each of its LEAD MM Securities must comprise on an 
equally-weighted daily average at least 2% of all Qualified Executions 
in the same security over the course of a calendar month.\41\ The 
Exchange believes that the 2% requirement is sufficiently high to 
require a material contribution to overall volume in the security, 
while not rendering the requirement impractical in the event the 
security is assigned numerous LEAD MMs.
---------------------------------------------------------------------------

    \41\ For example, a LEAD MM whose Qualified Executions in an 
assigned security comprised on average 3% of all Qualified 
Executions in the assigned security over the course of a calendar 
month would meet the requirements of proposed paragraph (f)(2)(C), 
even if on a particular day during the calendar month, the LEAD MM's 
Qualified Executions in the same assigned security comprised 1% of 
all Qualified Executions in the assigned security on that day.
---------------------------------------------------------------------------

    Proposed paragraph (f)(2)(D) provides that at least 80% of the LEAD 
MM's Qualified Executions in each of its LEAD MM Securities must result 
from its resting orders that originated from the corresponding LEAD MM 
Trading Account over the course of a calendar month.\42\
---------------------------------------------------------------------------

    \42\ Unlike the standards provided under proposed paragraphs 
(f)(2)(A)-(C), this standard would be measured based on aggregate 
activity over the course of a calendar month.
---------------------------------------------------------------------------

    The Exchange submits that the proposed Minimum Performance 
Standards are commensurate with the benefit afforded to LEAD MMs. Given 
that the only benefit afforded to LEAD MMs is the ability to cancel and 
cancel/replace its resting orders without delay, the Exchange believes 
that it would be inappropriate to adopt even higher quoting and trading 
requirements, such as those for Designated Marker Makers (``DMMs'') on 
the New York Stock Exchange (``NYSE''), who, in return for such higher 
quoting and trading requirements, receive certain financial and 
execution parity benefits not proposed herein.\43\
---------------------------------------------------------------------------

    \43\ See generally NYSE Rules 103B and 104.
---------------------------------------------------------------------------

    Proposed paragraph (f)(3) provides rules regarding the process by 
which Market Makers would be assigned securities as a LEAD MM. 
Specifically, proposed paragraph (f)(3)(A) provides that only a Market 
Maker may apply to be assigned one or more securities as a LEAD MM. 
Market Makers must receive written approval from the Exchange to be 
assigned securities as a LEAD MM. LEAD MMs shall be selected by the 
Exchange based on factors including, but not limited to, experience 
with making markets in securities, adequacy of capital, willingness to 
promote the Exchange as a marketplace, issuer preference, operational 
capacity, support personnel and history of adherence to Exchange rules 
and securities laws. Current Article 16, Rules 2(c)-(e) regarding 
withdrawal from assigned securities shall also apply to LEAD MMs and 
LEAD MM Securities.\44\
---------------------------------------------------------------------------

    \44\ The Exchange will expand its current procedures for 
voluntary and involuntary withdrawals regarding Marker Maker 
securities to apply to LEAD MM Securities.
---------------------------------------------------------------------------

    Proposed paragraph (f)(3)(B) outlines requirements regarding LEAD 
MM Trading Accounts and provides that before beginning LEAD market 
making activities in a security, a LEAD MM shall complete the 
following, subject to Exchange approval. Thereunder, proposed 
subparagraph (B)(i) provides that the LEAD MM must establish at least 
one separately designated LEAD MM Trading Account through which all and 
only LEAD market making activities in LEAD MM Securities shall 
originate.
    Subparagraph (B)(ii) provides that the LEAD MM must register each 
of its LEAD MM Securities to precisely one LEAD MM Trading Account 
(``Valid LEAD MM Trading Account''); provided, however, that a LEAD MM 
Trading Account may be registered with one or more LEAD MM Securities. 
All messages related to a single LEAD MM Security must originate from 
the Valid LEAD MM Trading Account on a given day and in the event a 
LEAD MM wishes to change the Valid LEAD MM Trading Account for a given 
LEAD MM Security, the LEAD MM shall so notify the Exchange in writing 
by no later than 9 a.m. on the trading day immediately preceding the 
effective date of the change; provided, however, that the Exchange may, 
at its discretion, delay or deny the change. In addition, no change of 
a Valid LEAD MM Trading Account for a given LEAD MM Security may be 
effected intraday.
    Proposed paragraph (f)(3)(B) facilitates the ability of the 
Exchange to monitor compliance with the proposed Minimum Performance 
Standards by requiring a LEAD MM to submit all LEAD market making 
activities in a particular security through a Valid LEAD MM Trading 
Account. Moreover, in the event a LEAD MM would like to change the 
Valid LEAD MM Trading Account for a given LEAD MM Security, the 
proposed rule outlines the precise procedures to effect the change, 
which promotes clarity regarding the process.
    Proposed paragraph (f)(3)(C) provides that the Exchange may, at its 
discretion, approve more than one LEAD MM to be assigned to any LEAD MM 
Security and limit the number of LEAD MMs assigned to any security.
    Proposed paragraph (f)(3)(D) provides that the Exchange will review 
each LEAD MM's quoting and trading activity on a monthly basis to 
determine whether the LEAD MM has met the Minimum Performance 
Standards. Also, a LEAD MM's failure to meet the Minimum Performance 
Standards on any given month will result in the Exchange (i) suspending 
or terminating a LEAD MM's registration as a Market Maker pursuant to 
current Article 16, Rule 1(d) or (ii) suspending or terminating 
assignment to a LEAD MM Security pursuant to proposed subparagraph (A) 
above. In addition, nothing in proposed subparagraph (D) will limit any 
other power of the Exchange to discipline a LEAD MM pursuant to CHX 
Rules.

[[Page 11256]]

Amended Article 20, Rule 8 (Operation of the CHX Matching System)
    Proposed Article 20, Rule 8(h) provides rules regarding the 
operation of LEAD. Specifically, proposed paragraph (h) begins by 
stating that after initial receipt \45\ of a new incoming message, the 
Matching System will evaluate \46\ the message to determine whether it 
is a Delayable Message, as defined under proposed paragraph (h)(1) 
below. For the purposes of such an evaluation only, the Matching System 
shall not consider Match Trade Prevention (``MTP''), as described under 
current Article 1, Rule 2(b)(3)(F).\47\ If not delayable, the Matching 
System will immediately process the message without delay.
---------------------------------------------------------------------------

    \45\ As used herein, ``initial receipt'' means the time at which 
the Exchange receives a message and assigns the message a unique 
sequence number, which the Exchange utilizes to determine, among 
other things, message processing order and ranking on the CHX book. 
See CHX Article 20, Rule 8(b).
    \46\ See supra note 21.
    \47\ The purpose of ignoring MTP in LEAD evaluation is to 
provide a previously delayed order that would not have triggered MTP 
an opportunity to execute against the resting order before the newer 
incoming order would cancel the resting order after release from 
LEAD. The Exchange is also proposing unrelated modifications to MTP 
to contemplate LEAD, as discussed below.
---------------------------------------------------------------------------

    Proposed paragraph (h)(1) provides that ``Delayable Message'' means 
all new incoming order, cancel and cancel/replace messages, except as 
follows:

    (A) Any new incoming order or unrouted balance, as described 
under proposed subparagraph (D) below, that originates from a Valid 
LEAD MM Trading Account, as described under proposed Article 16, 
Rule 4(f)(3)(B)(ii), that would, by its terms, immediately be ranked 
on CHX book without executing against any existing resting orders on 
the CHX book shall not be a Delayable Message.
    (B) A cancel message related to a resting order that originates 
from a Valid LEAD MM Trading Account shall not be a Delayable 
Message.
    (C) A cancel/replace message related to a resting order that 
originates from a Valid LEAD MM Trading Account shall not be a 
Delayable Message; provided, however, that if any part of the 
replace portion would immediately execute against existing resting 
orders on the CHX book, the replace portion shall be a Delayable 
Message.
    (D) The portion of a new incoming Routable Order that is to be 
routed away, pursuant to current Article 19, Rule 3(a), shall not be 
diverted into the LEAD; provided, however, that the entire unrouted 
balance of the Routable Order shall be diverted into the LEAD, 
subject to proposed subparagraph (A).

    Mechanically, upon initial receipt of a new incoming message, the 
Matching System would assign the message a unique sequence number, as 
it does currently, which, in addition to establishing processing and 
execution priority, will serve as the starting point for the Fixed LEAD 
Period, as described below. The Matching System would then initially 
evaluate the message to determine whether it is a Delayable 
Message.\48\ For example, a new incoming limit order marked Post Only 
\49\ that originated from a Valid LEAD MM Trading Account that would 
not be immediately ranked on the CHX book due to one or more matchable 
contra-side orders resting on the CHX book would be a Delayable Message 
because the Post Only order would not, by its terms, immediately be 
ranked on the CHX book without executing against any resting orders on 
the CHX book. In such a case, the Post Only order would be diverted 
into the LEAD queue before being processed by the Matching System, 
which would result in the Post Only order being posted or cancelled 
depending on the state of the CHX book upon its release.\50\ If, 
however, the Exchange were to receive a new Post Only order that 
originated from a Valid LEAD MM Trading Account that would post to the 
CHX book due to no existing orders resting on the CHX book at that 
time, the Post Only order would not be a Delayable Message and it would 
immediately be ranked on the CHX book without delay.\51\ Similarly, a 
new incoming order marked CHX Only \52\ that originated from a Valid 
LEAD MM Trading Account that would trade-through a protected quotation 
of an external market would not be a Delayable Message as it would be 
price slid to a permissible price.\53\ Also, a new incoming order that 
originated from a Valid LEAD MM Trading Account that would immediately 
be ranked on the CHX book without executing against any resting orders 
because MTP would cancel the resting contra-side orders against which 
the order would have executed, would be a Delayable Message, as MTP is 
ignored for the purposes of the LEAD evaluation only.\54\
---------------------------------------------------------------------------

    \48\ The Exchange notes that the Matching System processes 
messages for a given security serially. Thus, the length of time it 
takes for a message to be evaluated and/or processed by the Matching 
System after initial receipt is herein called ``variable message 
queuing delay,'' as the actual length of the delay depends on the 
number of precedent messages that have yet to be evaluated and/or 
processed by the Matching System and are residing in the ``Inbound 
Queue.'' The length of time it takes for a message to be evaluated 
and/or processed by the Matching System is herein called ``system 
processing delay.''
    \49\ See CHX Article 1, Rule 2(b)(1)(D) defining ``Post Only.''
    \50\ See infra Example 2.
    \51\ See id.
    \52\ See CHX Article 1, Rule 2(b)(1)(C) defining ``CHX Only.''
    \53\ See CHX Article 20, Rule 5(a)(2).
    \54\ See supra note 47.
---------------------------------------------------------------------------

    Proposed paragraph (h) continues by providing that if a message is 
delayable, the message will be diverted into the LEAD queue and will 
remain delayed until it is released for processing. A delayed message 
shall become releasable 350 microseconds after initial receipt by the 
Exchange (``Fixed LEAD Period''),\55\ but shall only be processed after 
the Matching System has evaluated and processed, if applicable,\56\ all 
messages in the security received by the Exchange during the Fixed LEAD 
Period for the delayed message. A message may be delayed for longer 
than the Fixed LEAD Period depending on the then-current messaging 
volume at CHX.\57\ The Matching System will utilize a new market 
snapshot to process a released order.\58\ A delayed message shall 
retain its original sequence number and may only be delayed once. LEAD 
shall apply to all securities traded on the Exchange throughout the 
trading day.\59\ LEAD shall not apply to messages received during an 
auction.\60\
---------------------------------------------------------------------------

    \55\ In the event that then-current messaging volume results in 
a Delayable Message being evaluated after 350 microseconds from 
initial receipt, the Delayable Message shall be diverted into LEAD 
and be immediately releasable. This will ensure that messages 
received during the Fixed LEAD Period for a delayed message are 
evaluated and processed, if applicable, before the Delayable Message 
is released.
    \56\ For example, an order that would not take liquidity from 
the CHX book would not be delayed and would be immediately 
processed, whereas an order that would take liquidity from the CHX 
book would be delayed and would not be immediately processed.
    \57\ In the event a releasable message is awaiting other 
messages received during its Fixed LEAD Period to be evaluated and 
processed, if applicable, the releasable message would be subject to 
an additional unintentional variable delay that is a function of the 
then-current messaging volume at CHX. See supra note 21; see also 
supra note 45; see also infra Examples 1-3.
    \58\ The purpose of a new market snapshot is to ensure that the 
released order is processed in a manner consistent with federal 
securities rules and regulations, such as Regulation NMS and 
Regulation SHO.
    \59\ See supra note 5.
    \60\ For example, if the Exchange receives an order after 
initiation of a Sub-second Non-displayed Auction Process (``SNAP'') 
in the security, the order will not be diverted into the LEAD queue 
and, rather, be handled pursuant to current CHX Article 18, Rule 1.
---------------------------------------------------------------------------

    The Exchange also proposes to make corresponding amendments to 
current Article 20, Rule 8(d) and (f) to contemplate LEAD. 
Specifically, the Exchange proposes to add the clause ``subject to 
paragraph (h) below'' at the end of current paragraph (d)(1) so that 
amended paragraph (d)(1) provides as follows:


[[Page 11257]]


    Except for certain orders which shall be executed as described 
in Rule 8(e), below, an incoming order shall be matched against one 
or more resting orders in the Matching System, in the order in which 
the resting orders are ranked on the CHX book, pursuant to Rule 8(b) 
above, at the Working Price of each resting order, as defined under 
Article 1, Rule 1(pp), for the full amount of shares available at 
that price, or for the size of the incoming order, if smaller; 
subject to paragraph (h) below.

The Exchange also proposes to amend paragraph (f)(1) to provide that 
orders resting on the CHX book shall be immediately and automatically 
cancelled upon receipt of a cancellation message, subject to paragraph 
(h) below, as certain cancel messages will be diverted into the LEAD as 
described above.
    Examples 1-2 below illustrate the operation of LEAD.
Amended Routing Protocol
    In light of the possible bifurcation of a Routable Order into an 
immediately routed portion and a delayed unrouted portion \61\ and the 
fact that the Exchange does not currently utilize any Router Feedback 
to augment protected quotations,\62\ LEAD could result in a single 
order being routed twice to satisfy the same protected quotation. In 
order to eliminate this inefficiency, the Exchange proposes to amend 
its current order routing protocol to adopt a single type of Router 
Feedback utilized by the Bats BYX Exchange,\63\ Immediate Feedback, but 
only on an order-by-order basis. Use of Immediate Feedback would permit 
the Exchange to augment away quotes on an order-by-order basis to avoid 
double routing of the same order to satisfy the same protected 
quotation(s).
---------------------------------------------------------------------------

    \61\ See proposed CHX Article 20, Rule 8(h)(1)(D).
    \62\ The Exchange does not currently ignore or modify SIP quote 
data for away markets under any circumstances where the SIP data 
feed shows an uncrossed market. See Exchange Act Release No. 74357 
(February 24, 2015), 80 FR 11252 (March 2, 2015) (SR-CHX-2015-01); 
see also Securities Exchange Act Release No. 72711 (July 29, 2014), 
79 FR 45570 (August 5, 2014) (SR-CHX-2014-10).
    \63\ ``Router Feedback'' refers to the use of routed orders 
(``Feedback Orders'') to augment protected quotations for the 
purposes of calculating the National Best Bid and Offer. See 
Securities Exchange Act Release No. 74075 (January 15, 2015), 80 FR 
3693 (January 23, 2015) (SR-BYX-2015-03).The three types of Router 
Feedback are Immediate Feedback, Execution Feedback and Cancellation 
Feedback. See id. at 3695.
---------------------------------------------------------------------------

    Specifically, Immediate Feedback would permit the Exchange to 
decrease the number of shares available at an away market by an amount 
equal to the size of the immediately routed portion of the Routable 
Order. In the extremely unlikely event that the Exchange receives an 
execution report from an away market indicating that the routed portion 
of a Routable Order had partially-executed prior to the unrouted 
balance being released from the LEAD queue, the Exchange would first 
add the cancelled remainder to the unrouted balance in the LEAD queue 
and then continue to utilize Immediate Feedback to augment the relevant 
away quotes when processing the unrouted balance upon release from the 
LEAD queue, unless the feedback had expired.
    Immediate Feedback would expire as soon as: (i) One second passes 
or (ii) the Exchange receives new quote information from the away 
market. Given that Immediate Feedback will only be applied on an order-
by-order basis, Immediate Feedback would also expire upon full 
execution, cancellation or ranking of the Routable Order on the CHX 
book. Also, in light of the relatively short Fixed LEAD Period, it is 
unlikely that Router Feedback would expire prior to the unrouted 
balance being released from the LEAD queue and processed by the 
Matching System.
    Examples 2-3 illustrate the operation of the amended routing 
protocol in the context of LEAD.
Amended Article 1, Rule 2(b)(3)(F) (Match Trade Prevention)
    Current Article 1, Rule 2(b)(3)(F) describes the MTP modifier, 
which prevents matches between orders that originate from the same MTP 
Trading Group or MTP sublevel thereunder.\64\ Also, an order sender 
must designate one of the following MTP Actions for each order, with 
the MTP Action noted on the incoming order controlling the MTP 
interaction:
---------------------------------------------------------------------------

    \64\ See Securities Exchange Act Release No. 71216 (December 31, 
2013), 79 FR 883 (January 7, 2014) (SR-CHX-2013-23); see also 
Securities Exchange Act Release No. 70948 (November 26, 2013), 78 FR 
72731 (December 3, 2013) (SR-CHX-2013-20).

    MTP Cancel Incoming (``N''): An incoming limit or market order 
marked ``N'' will not execute against opposite side resting interest 
originating from the same MTP Trading Group or MTP sublevel, if 
applicable. Only the incoming order will be cancelled pursuant to 
MTP.
    MTP Cancel Resting (``O''): An incoming limit or market order 
marked ``O'' will not execute against opposite side resting interest 
originating from the same MTP Trading Group or MTP sublevel, if 
applicable. Only the resting order will be cancelled pursuant to 
MTP.
    MTP Cancel Both (``B''): An incoming limit or market order 
marked ``B'' will not execute against opposite side resting interest 
originating from the same MTP Trading Group or MTP sublevel, if 
applicable. The entire size of both orders will be cancelled 
pursuant to MTP.

    Given that LEAD may result in newer orders (i.e., orders with lower 
sequence numbers) becoming resting orders prior to older orders being 
released from LEAD,\65\ the Exchange proposes to amend current Article 
1, Rule 2(b)(3)(F)(iii)(a) and (b), which describe MTP Actions ``N'' 
and ``O'' respectively, to provide that the newer of the contra-side 
orders, as opposed to the incoming order if it is the older order, 
would be cancelled if the incoming order is marked ``N,'' and the older 
of the contra-side orders, as opposed to the resting order if it is the 
newer order, would be cancelled if the incoming order is marked ``O.'' 
Moreover, given that a price slid order that triggers MTP is not always 
the newer order \66\ and because the Exchange wishes to maintain the 
current handling of MTP when it is triggered by a price slid order, the 
Exchange proposes to add clauses to the end of current subparagraphs 
(a) and (b) that preserve that current handling. Thus, amended 
subparagraphs (a) and (b) provide as follows:
---------------------------------------------------------------------------

    \65\ Currently, a new incoming order that triggers MTP is always 
newer than the resting contra-side order. However, LEAD may result 
in the newer of the contra-side orders being the resting order and 
the older order being the incoming order. See infra Example 4.
    \66\ See Example 4 under SR-CHX-2013-20.

    (a) MTP Cancel New (``N''): An incoming limit or market order 
marked ``N'' will not execute against opposite side resting interest 
originating from the same MTP Trading Group or MTP sublevel, if 
applicable. Only the newer order will be cancelled pursuant to MTP; 
provided that the incoming order will be cancelled, even if it is 
not the newer order, in the event MTP is triggered by the incoming 
order being price slid pursuant to the CHX Only Price Sliding 
Processes.
    (b) MTP Cancel Old (``O''): An incoming limit or market order 
marked ``O'' will not execute against opposite side resting interest 
originating from the same MTP Trading Group or MTP sublevel, if 
applicable. Only the older order will be cancelled pursuant to MTP; 
provided that the resting order will be cancelled, even if it is not 
the older order, in the event MTP is triggered by the incoming order 
being price slid pursuant to the CHX Only Price Sliding Processes.

    Example 4 below illustrates the operation of the amended MTP in the 
context of LEAD.
(4) Examples
    The following Examples are illustrative of LEAD and related 
amendments to existing functionality, but do not exhaustively depict 
every possible scenario that may arise under LEAD. Moreover, the 
Examples do not necessarily depict the actual technical processes of 
prioritizing messages and executing orders.


[[Page 11258]]


    Example 1: LEAD. Assume that LEAD is operational, all messages 
are for security XYZ and all orders are routable, unless marked 
otherwise. Assume also that the system processing delay \67\ is 50 
microseconds \68\ and the CHX book is as follows:
---------------------------------------------------------------------------

    \67\ See supra note 48.
    \68\ The Exchange does not represent that actual system 
processing delay is at or near 50 microseconds or that unintentional 
delays do not exist elsewhere in the Matching System processes. The 
figure is being utilized for demonstrative purposes only.

------------------------------------------------------------------------
                           Fig 1(a): CHX book
-------------------------------------------------------------------------
                  Buy                                  Sell
------------------------------------------------------------------------
Empty..................................  Order A: 1000 @10.01 (LMM).\69\
------------------------------------------------------------------------

    Assume then that the Exchange receives the following messages:
---------------------------------------------------------------------------

    \69\ ``LMM'' refers to messages that originated from a Valid 
Lead MM Trading Account. Absence of ``LMM'' means that the message 
did not originate from a Valid LEAD MM Trading Account.

------------------------------------------------------------------------
                         Fig 1(b): Inbound queue
-------------------------------------------------------------------------
            Initial receipt                          Message
------------------------------------------------------------------------
10:00:00.000000........................  Order B: Buy 1000 @10.01.
10:00:00.000265........................  Cancel Order A (LMM).
10:00:00.000305........................  Order C: Sell 1000 @10.02.
10:00:00.000310........................  Order D: Buy 1000 @10.01 (LMM).
10:00:00.000325........................  Cancel Order B.
10:00:00.000355........................  Order E: Sell 1000 @10.01.
------------------------------------------------------------------------

    Under this Example 1:
     Order B would be evaluated and diverted into LEAD as it 
originated from a non-Valid LEAD MM Trading Account and is thus a 
Delayable Message. Due to the system processing delay, Order B would 
be diverted into LEAD at 10:00:00.000050 and releasable at 
10:00:00.000350. The result is that the LEAD queue would be as 
follows:

------------------------------------------------------------------------
                          Fig 1(c): LEAD queue
-------------------------------------------------------------------------
            Releasable time                          Message
------------------------------------------------------------------------
10:00:00.000350........................  Order B: Buy 1000 @10.01.
------------------------------------------------------------------------

     Cancel Order A would be evaluated and processed at 
10:00:00.000265 without being diverted into LEAD as it is a cancel 
message for a resting order that originated from a Valid LEAD MM 
Trading Account and is thus not a Delayable Message. Due to the 
system processing delay, Order A would be cancelled at 
10:00:00.000315 and the CHX book would become empty.
     Order C would then be evaluated at 10:00:00.000315, due 
to the variable message queuing delay,\70\ and be diverted into LEAD 
because it originated from a non-Valid LEAD MM Trading Account and 
is thus a Delayable Message. Due to the system processing delay, 
Order C would be diverted into LEAD at 10:00:00.000365 and 
releasable at 10:00:00.000665.
---------------------------------------------------------------------------

    \70\ See supra note 48.

------------------------------------------------------------------------
                          Fig 1(d): LEAD queue
-------------------------------------------------------------------------
            Releasable time                          Message
------------------------------------------------------------------------
10:00:00.000350........................  Order B: Buy 1000 @10.01.
10:00:00.000665........................  Order C: Sell 1000 @10.02.
------------------------------------------------------------------------

     While Order C was being evaluated by the Matching 
System, Order B became releasable from the LEAD queue at 
10:00:00.000350. However, given that the Matching System processes 
messages serially,\71\ the Matching System would not consider 
releasing Order B until after Order C had been placed into the LEAD 
queue at 10:00:00.000365, at which point it would be handled as 
follows:
---------------------------------------------------------------------------

    \71\ See id.
---------------------------------------------------------------------------

    [cir] At 10:00:00.000365, the Matching System would compare the 
releasable time of Order B to the initial receipt time of the 
message at the top of the Inbound Queue: Order D. Since Order D was 
received during the Fixed LEAD Period for Order B, Order D would be 
evaluated before releasing Order B and processed without being 
diverted into LEAD as it originated from a Valid LEAD MM Trading 
Account and would be immediately ranked on the CHX book without 
executing against resting orders on the CHX book and is thus not a 
Delayable Message. Due to the system processing delay, Order D would 
be ranked on the CHX book at 10:00:00.000415. The result is that the 
CHX book would be as follows:

------------------------------------------------------------------------
                           Fig 1(e): CHX book
-------------------------------------------------------------------------
                  Buy                                  Sell
------------------------------------------------------------------------
Order D: 1000 @10.01 (LMM).............  Empty.
------------------------------------------------------------------------

    [cir] At 10:00:00.000415, the Matching System would then compare 
the releasable time of Order B to the initial receipt time of the 
next message at the top of the Inbound Queue: Cancel Order B. Since 
Cancel Order B was received when Order B was in the LEAD queue, 
Cancel Order B would be diverted into LEAD as it originated from a 
non-Valid LMM Trading Account and is thus a Delayable Message. 
However, due to the system processing delay, Cancel Order B would be 
diverted into LEAD at 10:00:00.000465 and releasable at 
10:00:00.000675. The result is that the LEAD queue would be as 
follows:

------------------------------------------------------------------------
                          Fig 1(f): LEAD queue
-------------------------------------------------------------------------
            Releasable time                          Message
------------------------------------------------------------------------
10:00:00.000350........................  Order B: Buy 1000 @10.01.
10:00:00.000665........................  Order C: Sell 1000 @10.02.
10:00:00.000675........................  Cancel Order B.
------------------------------------------------------------------------

    [cir] At 10:00:00.000465, the Matching System would then compare 
the releasable time of Order B to the initial receipt time of the 
next message at the top of the Inbound Queue: Order E. Given that 
Order E was received after the Fixed LEAD Period for Order B had 
expired, the Matching System would release Order B before evaluating 
Order E. Due to the system processing delay, Order B would be ranked 
on the CHX book at 10:00:00.000515. Also, given that Order B was 
initially received before Order D, Order B would receive execution 
priority over Order D, pursuant to Article 20, Rule 8(b)(1). The 
result is that the CHX book and LEAD queue would be as follows:

------------------------------------------------------------------------
                           Fig 1(g): CHX book
-------------------------------------------------------------------------
                  Buy                                  Sell
------------------------------------------------------------------------
Order B: 1000 @10.01...................  Empty.
Order D: 1000 @10.01 (LMM).............
------------------------------------------------------------------------


------------------------------------------------------------------------
                          Fig 1(h): LEAD queue
-------------------------------------------------------------------------
            Releasable time                          Message
------------------------------------------------------------------------
10:00:00.000665........................  Order C: Sell 1000 @10.02.
10:00:00.000675........................  Cancel Order B.
------------------------------------------------------------------------

     Order E would then be evaluated at 10:00:00.000515, due 
to the variable message queuing delay, and then diverted into the 
LEAD as it originated from a non-Valid LEAD MM Trading Account and 
is thus a Delayable Message. Due to the system-processing delay, 
Order E would be diverted at 10:00:00.000565 and releasable at 
10:00:00.000705. The result is that the LEAD queue would be as 
follows:

------------------------------------------------------------------------
                          Fig 1(i): LEAD queue
-------------------------------------------------------------------------
            Releasable time                          Message
------------------------------------------------------------------------
10:00:00.000665........................  Order C: Sell 1000 @10.02.
10:00:00.000675........................  Cancel Order B.
10:00:00.000705........................  Order E: Sell 1000 @10.01.
------------------------------------------------------------------------

     Order C would then be released from LEAD at 
10:00:00.000665. Due to the system processing delay, Order C would 
be ranked on the CHX book at 10:00:00.000715. The result is that the 
CHX book and LEAD queue are as follows:

------------------------------------------------------------------------
                           Fig 1(j): CHX book
-------------------------------------------------------------------------
                  Buy                                  Sell
------------------------------------------------------------------------
Order B: 1000 @10.01...................  Order C: 1000 @10.02.
Order D: 1000 @10.01 (LMM).............
------------------------------------------------------------------------


------------------------------------------------------------------------
                          Fig 1(k): LEAD queue
-------------------------------------------------------------------------
            Releasable time                          Message
------------------------------------------------------------------------
10:00:00.000675........................  Cancel Order B.
10:00:00.000705........................  Order E: Sell 1000 @10.01.
------------------------------------------------------------------------

     Cancel Order B would then be released from LEAD at 
10:00:00.000715, as the Matching System was processing Order C when 
Cancel Order B became releasable at 10:00:00.000675. Due to the 
system processing delay Order B would be cancelled at 
10:00:00.000765. The result is that the CHX book and the LEAD queue 
would be as follows:

------------------------------------------------------------------------
                           Fig 1(l): CHX book
-------------------------------------------------------------------------
                  Buy                                  Sell
------------------------------------------------------------------------
Order D: 1000 @10.01 (LMM).............  Order C: 1000 @10.02.
------------------------------------------------------------------------


------------------------------------------------------------------------
                          Fig 1(m): LEAD queue
-------------------------------------------------------------------------
            Releasable time                          Message
------------------------------------------------------------------------
10:00:00.000705........................  Order E: Sell 1000 @10.01.
------------------------------------------------------------------------


[[Page 11259]]

     Order E would then be released from LEAD at 
10:00:00.000765, as the Matching System was processing Order C (then 
Cancel Order B) when Order E became releasable at 10:00:00.000705. 
Order E would then be processed and fully execute against Order D at 
10.01/share at 10:00:00.000775, due to the system processing delay. 
The result is that the Inbound Queue and the LEAD queue would be 
empty and the CHX book would be as follows:

Empty..................................  Order C: 1000 @10.02.
------------------------------------------------------------------------

    Example 2: Post Only and Routing--Immediate Feedback. Assume the 
same as Example 1. Assume also that after Order E was processed, the 
NBBO became 10.01 x 10.02 with only one market (``Away Market 
A1'') displaying 100 shares at the NBB (``Protected Bid 
A1'') and no other protected bids and CHX is alone at the 
NBO displaying 1000 shares at 10.02. Assume then that the Matching 
System receives the following new messages in security XYZ:

------------------------------------------------------------------------
                         Fig 2(a): Inbound queue
-------------------------------------------------------------------------
            Initial receipt                          Message
------------------------------------------------------------------------
10:00:00.000900........................  Cancel Order C.
10:00:00.001000........................  Order F: Post Only Buy 100
                                          @10.02.
10:00:00.001010........................  Order G: Post Only Buy 100
                                          @10.01 (LMM).
10:00:00.001020........................  Order H: Sell 500 @9.99 (LMM).
10:00:00.001030........................  Order I: Sell 500 @9.99.
10:00:00.001600........................  Order J: Buy 600 @9.99.
10:00:00.001610........................  Order K: Sell 200 @9.99 (LMM).
10:00:00.001750........................  Cancel Order I.
10:00:00.001760........................  Cancel Order H (LMM).
------------------------------------------------------------------------

    Under this Example 2:
     Cancel Order C would be evaluated at 10:00:00.000900 
and diverted into the LEAD as it originated from a non-Valid LEAD MM 
Trading Account and is thus a Delayable Message. Due to the system 
processing delay, Cancel Order C would be diverted at 
10:00:00.000950 and releasable at 10:00:00.001250. The result is 
that the CHX Book and LEAD queue would be as follows:

------------------------------------------------------------------------
                           Fig 2(b): CHX book
-------------------------------------------------------------------------
                  Buy                                  Sell
------------------------------------------------------------------------
Empty..................................  Order C: 1000 @10.02.
------------------------------------------------------------------------


------------------------------------------------------------------------
                          Fig 2(c): LEAD queue
-------------------------------------------------------------------------
            Releasable time                          Message
------------------------------------------------------------------------
10:00:00.001250........................  Cancel Order C.
------------------------------------------------------------------------

     Order F would then be evaluated at 10:00:00.001000 and 
diverted into the LEAD as it originated from a non-Valid LEAD MM 
Trading Account and is thus a Delayable Message. Due to the system 
processing delay, Order F would be diverted at 10:00:00.001050 and 
releasable at 10:00:001350. The result is that the LEAD queue would 
be as follows:

------------------------------------------------------------------------
                          Fig 2(d): LEAD queue
-------------------------------------------------------------------------
            Releasable time                          Message
------------------------------------------------------------------------
10:00:00.001250........................  Cancel Order C.
10:00:00.001350........................  Order F.
------------------------------------------------------------------------

     Order G would then be evaluated at 10:00:00.001050, due 
to variable message queuing delay, and would be immediately 
processed without being diverted into LEAD as it originated from a 
Valid LEAD MM Trading Account and would be immediately ranked on the 
CHX book without executing against resting orders and is thus not a 
Delayable Message. Due to the system processing delay, Order G would 
be ranked on the CHX book at 10:00:00.1100. The result is that the 
CHX book is as follows:

------------------------------------------------------------------------
                           Fig 2(e): CHX book
-------------------------------------------------------------------------
                  Buy                                  Sell
------------------------------------------------------------------------
Order G: 100 @10.01 (LMM)..............  Order C: 1000 @10.02.
------------------------------------------------------------------------

     Order H would then be evaluated at 10:00:00.001100, due 
to variable message queuing delay. Pursuant to the Exchange's 
routing protocol, the Exchange would immediately route 100 shares of 
Order H priced at 10.01/share to satisfy Protected Bid 
A1, and divert the unrouted 400 shares of Order H into 
the LEAD queue as it is priced such that it would immediately 
execute against Order G and is thus a Delayable Message. Due to the 
system processing delay, Order H would be diverted at 
10:00:00.001150, and releasable at 10:00:00.001370. The result is 
that the LEAD queue would be as follows:

------------------------------------------------------------------------
                          Fig 2(f): LEAD queue
-------------------------------------------------------------------------
            Releasable time                          Message
------------------------------------------------------------------------
10:00:00.001250........................  Cancel Order C.
10:00:00.001350........................  Order F.
10:00:00.001370........................  Order H--Unrouted Balance
                                          (LMM).
------------------------------------------------------------------------

     Order I would then be evaluated at 10:00:00.001150, due 
to variable message queuing delay. Given that the proposed Router 
Feedback is only applied on an order-by-order basis, Order I would 
be handled similarly to Order H. Thus, the Exchange would 
immediately route 100 shares of Order I priced at 10.01/share to 
satisfy Protected Bid A1, and divert the unrouted 400 
shares of Order I into the LEAD queue as it originated from a non-
Valid LEAD MM Trading Account and is thus a Delayable Message. Due 
to the system processing delay, Order I would be diverted at 
10:00:00.001200 and releasable at 10:00:00.001380. The result is 
that the LEAD queue would be as follows:

------------------------------------------------------------------------
                          Fig 2(g): LEAD queue
-------------------------------------------------------------------------
            Releasable time                          Message
------------------------------------------------------------------------
10:00:00.001250........................  Cancel Order C.
10:00:00.001350........................  Order F.
10:00:00.001370........................  Order H--Unrouted Balance
                                          (LMM).
10:00:00.001380........................  Order I--Unrouted Balance.
------------------------------------------------------------------------

     At 10:00:00.001250, Cancel Order C would be released 
from the LEAD queue. Due to the system processing delay, Order C 
would be cancelled at 10:00:00.01300. The result is that the CHX 
book and LEAD queue would be as follows:

------------------------------------------------------------------------
                           Fig 2(h): CHX book
-------------------------------------------------------------------------
                  Buy                                  Sell
------------------------------------------------------------------------
Order G: 100 @10.01....................  Empty.
------------------------------------------------------------------------



------------------------------------------------------------------------
                          Fig 2(i): LEAD queue
-------------------------------------------------------------------------
            Releasable time                          Message
------------------------------------------------------------------------
10:00:00.001350........................  Order F.
10:00:00.001370........................  Order H--Unrouted Balance
                                          (LMM).
10:00:00.001380........................  Order I--Unrouted Balance.
------------------------------------------------------------------------

     At 10:00:00.01350, Order F would be released from the 
LEAD queue. Due to the system processing delay, Order F would be 
ranked on the CHX book at 10:00:00.001400. The result is that the 
CHX book and the LEAD queue would be as follows:

------------------------------------------------------------------------
                           Fig 2(j): CHX book
-------------------------------------------------------------------------
                  Buy                                  Sell
------------------------------------------------------------------------
Order F: 100 @10.02....................  Empty.
Order G: 100 @10.01....................
------------------------------------------------------------------------



------------------------------------------------------------------------
                          Fig 2(k): LEAD queue
-------------------------------------------------------------------------
            Releasable time                          Message
------------------------------------------------------------------------
10:00:00.001370........................  Order H--Unrouted Balance
                                          (LMM).
10:00:00.001380........................  Order I--Unrouted Balance.
------------------------------------------------------------------------

     Due to system processing delays, Order H and Order I 
would be released after their respective releasable times as 
follows:
    [cir] The unrouted balance of Order H would be released from the 
LEAD queue at 10:00:00.001400. Order H would then execute against 
all 100 shares of Order F at 10.02/share, as well as all 100 shares 
of Order G at 10.01/share, and the remaining 200 shares of Order H 
would be ranked on the CHX book at 9.99. Due to the system 
processing delay, the unexecuted balance would be ranked to the CHX 
book at 10:00:00.001450.
    [cir] The unrouted balance of Order I would then be released 
from the LEAD queue at 10:00:00.001450. All 400 shares of Order I 
would then be ranked on the CHX book at 9.99. Due to the system 
processing delay, Order I would be ranked on the CHX book at 
10:00:00.001500. The result is that the LEAD queue would be empty 
and the CHX book would be as follows:

------------------------------------------------------------------------
                           Fig 2(l): CHX book
-------------------------------------------------------------------------
                  Buy                                  Sell
------------------------------------------------------------------------
Empty..................................  Order H: 200 @9.99 (LMM).
                                         Order I: 400 @9.99.
------------------------------------------------------------------------

     Order J would be evaluated at 10:00:00.001600 and 
diverted into LEAD as it originated from a non-Valid LEAD MM Trading 
Account and is thus a Delayable

[[Page 11260]]

Message. Due to the system processing delay, Order J would be 
diverted at 10:00:00.001650 and releasable at 10:00:00.001950. The 
result is that the LEAD queue would be as follows:

------------------------------------------------------------------------
                          Fig 2(m): LEAD queue
-------------------------------------------------------------------------
            Releasable time                          Message
------------------------------------------------------------------------
10:00:00.001950........................  Order J.
------------------------------------------------------------------------

     Order K would be evaluated at 10:00:00.001650, due to 
the variable messaging delay. Order K would be immediately ranked on 
the CHX book as it originated from a Valid LEAD MM Trading Account 
and would not immediately execute against any resting orders. Due to 
the system processing delay, Order K would be ranked on the CHX book 
at 10:00:00.001700. The result is that the CHX book would be as 
follows:

------------------------------------------------------------------------
                           Fig 2(n): CHX book
-------------------------------------------------------------------------
                  Buy                                  Sell
------------------------------------------------------------------------
Empty..................................  Order H: 200 @9.99 (LMM).
                                         Order I: 400 @9.99.
                                         Order K: 200 @9.99 (LMM).
------------------------------------------------------------------------

     Cancel Order I would be evaluated at 10:00:00.001750 
and diverted into the LEAD as it is originated from a non-Valid LEAD 
MM Trading Account and is thus a Delayable Message. Due to the 
system processing delay, Cancel Order I would be diverted at 
10:00:00.001800 and releasable at 10:00:00.002100. The result is 
that the LEAD queue would be as follows:

------------------------------------------------------------------------
                          Fig 2(o): LEAD queue
-------------------------------------------------------------------------
            Releasable time                          Message
------------------------------------------------------------------------
10:00:00.001950........................  Order J.
10:00:00.002100........................  Cancel Order I.
------------------------------------------------------------------------

     Cancel Order H would be evaluated and processed at 
10:00:00.001800, due to variable messaging delay, without being 
diverted into LEAD as it is a cancel message for a resting order 
that originated from a Valid LEAD MM Trading Account and is thus not 
a Delayable Message. Due to the system processing delay, Order H 
would be cancelled at 10:00:00.001850. The result is that the CHX 
Book would be as follows:

------------------------------------------------------------------------
                           Fig 2(p): CHX book
-------------------------------------------------------------------------
                  Buy                                  Sell
------------------------------------------------------------------------
Empty..................................  Order I: 400 @9.99.
                                         Order K: 200 @9.99 (LMM).
------------------------------------------------------------------------

     At 10:00:00.001950, Order J would be released from the 
LEAD queue and would immediately execute against all 400 shares of 
Order I at 9.99/share and all 200 shares of Order K at 9.99/share. 
The result is that the CHX book is empty and the LEAD queue is as 
follows:

------------------------------------------------------------------------
                          Fig 2(q): LEAD queue
-------------------------------------------------------------------------
            Releasable time                          Message
------------------------------------------------------------------------
10:00:00.002100........................  Cancel Order I.
------------------------------------------------------------------------

     At 10:00:00.002100, Cancel Order I would be released 
from the LEAD queue. Since Order I had already been executed in 
full, Cancel Order I will have no effect.
    Example 3: Routing--Expired Feedback. Assume the same as Example 
2, except that immediately prior to the unrouted balance of Order H 
being released, the Exchange received an updated quote from Away 
Market A1 displaying 1,000 shares at the $10.01.
    Under this Example 3, the Immediate Feedback derived from the 
immediately routed portion of Order H would expire and, upon release 
of the unrouted delayed portion of Order H, the Matching System 
would route the entire unrouted portion to satisfy the updated 
Protected Bid displayed by Away Market A1.
    Similarly, the Immediate Feedback derived from the immediately 
routed portion of Order I would also expire and, upon release of the 
unrouted delayed portion of Order I, the Matching System would route 
the entire unrouted portion to satisfy the updated Protected Bid 
displayed by Away Market A1.
    Example 4: MTP. Assume the same as Example 2, except that Order 
J and Order K originated from the same MTP Trading Group and Order J 
has an MTP Action of ``N.''
    Under this Example 4, pursuant to the current MTP rules, MTP 
would be triggered and the Order J would be cancelled, as the 
current ``N'' MTP Action requires the incoming order to be 
cancelled. However, pursuant to the proposed amended MTP rules, 
Order K would be cancelled, as the amended ``N'' MTP action requires 
the newer order to be cancelled, absent a price sliding event.
(5) Operative Date
    In the event the proposed rule change is approved by the SEC, the 
proposed rule change shall be operative pursuant to notice by the 
Exchange to its Participants. Prior to the operative date, the Exchange 
will ensure that policies and procedures are in place to allow Exchange 
operations personnel to effectively monitor the operation of LEAD and 
compliance by LEAD MMs with the proposed Minimum Performance Standards.
Appendix A: CHX ETF Analysis
    The purpose of the CHX ETF Analysis is to demonstrate that latency 
arbitrage activity \72\ in SPY at CHX (``SPY latency arbitrage 
activity'') has (1) reduced volume and displayed liquidity in SPY at 
CHX and (2) impaired liquidity provision in SPY marketwide. For the 
purpose of this CHX ETF Analysis, the following terms shall have the 
following meanings: \73\
---------------------------------------------------------------------------

    \72\ See supra note 6; see also supra Section 3(a)(2).
    \73\ Other capitalized terms utilized in the CHX ETF Analysis 
shall have the meanings set forth under Appendix B.
---------------------------------------------------------------------------

     After Period refers to February 2016 through July 2016.
     Analysis Period refers to August 2015 through July 2016.
     Before Period refers to August 2015 through December 2015.
     Control Average refers to the arithmetic average of a 
given metric for Control Securities.
     Control Securities refers to DIA, IWM, and QQQ.\74\
---------------------------------------------------------------------------

    \74\ Each of the Control Securities were selected for the 
following similarities to SPY in that each is: (1) Highly correlated 
in price movements with a well-known equity market index; (2) ETFs; 
(3) traded in CHX's Chicago data center; (4) actively traded in the 
NMS; and (5) highly correlated with a futures contract traded 
electronically on the Globex trading platform.
---------------------------------------------------------------------------

     Entry Event refers to a trading day in January 2016 on 
which latency arbitrage activity in SPY at CHX was first observed.
     Entry Month refers to January 2016, the month in which 
latency arbitrage activity in SPY at CHX was first observed.
     Subject Securities refers to SPY and the Control 
Securities.
Entry of SPY Latency Arbitrage Activity
    During the After Period, the Exchange observed unusual messaging 
patterns in SPY whereby executions of large inbound IOC \75\ orders 
against resting orders in SPY were frequently followed by the receipt 
of late cancel messages for the executed resting orders very soon after 
the execution. This observation was corroborated by feedback from 
liquidity providing Participants that indicated that, unlike prior to 
the Entry Event, they were no longer able to reliably cancel or cancel/
adjust resting orders on the CHX book in SPY in response to market 
changes after the Entry Event. The Exchange believes that each instance 
of the unusual messaging pattern is the end result of a race triggered 
by an away market event (e.g., change in market data from a futures 
market) whereby the liquidity taker is able to take a resting order at 
a stale price before the liquidity provider could adjust the resting 
order to accurately reflect the market. As such, the SPY latency 
arbitrage activity has had the following impact on volume and liquidity 
in SPY at CHX and away exchanges:
---------------------------------------------------------------------------

    \75\ See CHX Article 1, Rule 2(d)(4).
---------------------------------------------------------------------------

Analysis 1: SPY Latency Arbitrage Activity Reduced CHX Market Share in 
SPY Relative to Total Volume in SPY and Disproportionately To Control 
Securities
    As shown under Figure 1, CHX Market Share in SPY as a percentage of 
Total Volume dropped by 90.1% from 5.73% in the Entry Month to 0.57% in

[[Page 11261]]

July 2016, while CHX Market Share in the Control Average dropped by 
45.20% from 5.54% in the Entry Month to 3.03% in July 2016.\76\ As 
shown under Figure 2, changes in the average Total Volume during the 
Analysis Period for the Subject Securities were highly correlated. 
Thus, Figure 1 and Figure 2 show that despite the high correlation 
between SPY and each of the Control Securities during the Analysis 
Period, the CHX Market Share in SPY decreased disproportionately to 
Total Volume, which the Exchange submits is attributed to the SPY 
latency arbitrage activity.
---------------------------------------------------------------------------

    \76\ See infra Appendix B Calculation Set 1a.
    [GRAPHIC] [TIFF OMITTED] TN21FE17.000
    

[[Page 11262]]


Analysis 2: SPY Latency Arbitrage Activity Resulted in Less 
Aggressively Priced and Smaller Orders in SPY at CHX
---------------------------------------------------------------------------

    \77\ See infra Appendix B Calculation Sets 1a and 1b.
    \78\ The correlation coefficients ([rho]) over the twelve-month 
period were: [rho](SPY, DIA) = 0.9118, [rho](SPY, IWM) = 0.8996, 
[rho](SPY, QQQ) = 0.9392, [rho](SPY, Average) = 0.9493.
    \79\ See infra Appendix B Calculation Sets 2a and 2b.
---------------------------------------------------------------------------

    While the Exchange did not observe any discernable change on the 
NBBO spread in SPY during the After Period, the Exchange did observe a 
negative impact on the frequency at which CHX was at the NBBO in SPY 
and the frequency at which CHX displayed the largest quote at the NBBO 
in SPY during the After Period, while Control Securities experienced 
either smaller declines or no declines at all.\80\
---------------------------------------------------------------------------

    \80\ See infra Appendix B Calculation Sets 6 and 7.
---------------------------------------------------------------------------

    Specifically, the % of Time CHX Was At The NBB decreased from 23.8% 
in the Entry Month to 8.2% in July 2016; \81\ the % of Time CHX Was At 
The NBO decreased from 23.3% in the Entry Month to 5.8% in July 2016; 
\82\ and the % of Time CHX Was At The NBB and that CHX Was At The NBO 
decreased from 3.3% in the Entry Month to 0% in July 2016.\83\
---------------------------------------------------------------------------

    \81\ See infra Appendix B Calculation Set 6a.
    \82\ See infra Appendix B Calculation Set 6b.
    \83\ See infra Appendix B Calculation Set 6c.
---------------------------------------------------------------------------

    Moreover, the % of Time CHX Was At The NBB And Was The Largest Bid 
At That Price decreased from 20% in the Entry Month to 2.3% in July 
2016; \84\ the % of Time CHX Was At The NBO And Was The Largest Offer 
At That Price decreased from 20.7% in the Entry Month to 1.1% in July 
2016; \85\ and the % of Time CHX Was At The NBB And Was The Largest Bid 
At That Price and that CHX Was At The NBO And Was The Largest Offer At 
That Price decreased from 1.9% to 0%.\86\
---------------------------------------------------------------------------

    \84\ See infra Appendix B Calculation Set 7a.
    \85\ See infra Appendix B Calculation Set 7b.
    \86\ See infra Appendix B Calculation Set 7c.
---------------------------------------------------------------------------

    These calculation sets clearly show that SPY latency arbitrage 
activity resulted in less aggressively priced CHX displayed liquidity 
in SPY and smaller CHX displayed size at the NBBO, during the After 
Period. SPY latency arbitrage activity also negatively impacted the 
percentage of the time that CHX was at the NBBO and the percentage of 
the time CHX displayed the largest quote at the NBBO.
Analysis 3: Latency Arbitrage Activity at CHX Reduced CHX Size At The 
NBBO in SPY Relative to the Control Securities and NMS Size At The NBBO
    As shown under Figure 3, during the Before Period, the Time-
weighted Average CHX Size at The NBBO for SPY tended to follow changes 
to the Control Average, whereas from the Entry Month through July 2016, 
the Time-weighted Average CHX Size At The NBBO for SPY decreased by 
82.16% and the Time-weighted Average CHX Size At The NBBO for the 
Control Average increased by 64.38%.\87\ As shown under Figure 4, 
during the Before Period, the monthly changes in the Time-weighted 
Average CHX Size At The NBBO tended to follow similar changes to the 
Time-weighted Average NMS Size At The NBBO. However, during the After 
Period, the monthly changes in the Time-weighted Average CHX Size At 
The NBBO in SPY did not follow changes to the Time-weighted Average NMS 
Size At The NBBO in SPY. Moreover, during the After Period, CHX went 
from having a Two-Sided Market in SPY 100% of regular trading hours in 
the Entry Month to 74% of regular trading hours in July 2016.\88\
---------------------------------------------------------------------------

    \87\ See infra Appendix B Calculation Sets 3a and 3b.
    \88\ See infra Appendix B Calculation Set 5.
---------------------------------------------------------------------------

    Thus, Figure 3 and Figure 4 show that SPY latency arbitrage 
activity negatively impacted liquidity in SPY marketwide. Moreover, the 
data shows that the change in the risk/reward of providing liquidity in 
SPY at CHX which resulted from the introduction of the SPY latency 
arbitrage activity resulted in a significant reduction of liquidity in 
SPY provided by CHX, even during a period when significant incremental 
liquidity was being added in the Control Securities.

[[Page 11263]]

[GRAPHIC] [TIFF OMITTED] TN21FE17.001


[[Page 11264]]


Analysis 4: SPY Latency Arbitrage Activity Reduced Displayed Liquidity 
in SPY Marketwide
---------------------------------------------------------------------------

    \89\ See infra Appendix B Calculation Sets 3a and 3b.
    \90\ See infra Appendix B Calculation Sets 3b and 4b.
---------------------------------------------------------------------------

    Although the Time-weighted Average NMS Size At The NBBO in SPY 
increased by 22.83% during the After Period, the increase in SPY did 
not follow much greater increases in the Time-weighted Average NBBO 
Size in the Control Group, which increased by 128.82% during the After 
Period.\91\ Moreover, during the After Period, the Time-weighted 
Average CHX Size At The NBBO for SPY decreased by 90.61% \92\ and, as a 
% of total NMS Size At The NBBO in SPY, from 44.36% to 3.39%.\93\ These 
calculations suggest that the SPY latency arbitrage activity materially 
impacted displayed liquidity in SPY marketwide. The dramatic decrease 
in displayed liquidity in SPY at CHX during the After Period explains 
why the increase in Time-weighted Average NBBO Size in SPY lagged 
behind the increase in Time-weighted Average NBBO Size in the Control 
Securities. Had CHX Size At The NBBO remained at least constant during 
the After Period, NBBO Size in SPY would have been at least 32.7% 
higher in July 2016, as shown below: \94\
---------------------------------------------------------------------------

    \91\ See infra Appendix B Calculation Set 4a.
    \92\ See infra Appendix B Calculation Set 3a.
    \93\ See infra Appendix B Calculations Sets 3a and 4a.
    \94\ See infra Appendix B Calculation Set 4a.

 
----------------------------------------------------------------------------------------------------------------
                                                 NMS Size at NBBO                       Change attribution
                                 -------------------------------------------------------------------------------
                                      Jan-16          Jul-16          Change            CHX           Others
----------------------------------------------------------------------------------------------------------------
SPY.............................           9,513          11,686           2,172          -3,824           5,996
DIA.............................           2,569           4,711           2,142           1,227             915
IWM.............................           5,222          10,026           4,804             536           4,268
QQQ.............................          14,100          35,354          21,253           3,900          17,353
Control Average.................           7,297          16,697           9,400           1,888           7,512
----------------------------------------------------------------------------------------------------------------

Conclusion
    Based on its observations of unusual messaging patterns in SPY, 
feedback from Participants and the analysis summarized above, the 
Exchange believes that the unusual messaging activity in SPY that was 
first observed in the Entry Month is attributed to SPY latency 
arbitrage activity. The market data shows that in response to the SPY 
latency arbitrage activity, CHX liquidity providers displayed smaller 
orders in SPY at less aggressive prices during the After Period 
relative to the Before Period and Entry Month. Moreover, in light of 
CHX's significant contribution to overall volume and liquidity in SPY 
during the Before Period and the Entry Month, diminished displayed 
liquidity at CHX has materially impaired displayed liquidity in SPY 
market wide.
Appendix B: Calculation Sets
    The calculations sets below were prepared with microsecond-level 
trade and quote record. Trade records include the date, microsecond-
level timestamp, exchange, security symbol, price, and quantity of all 
trades reported to the consolidated tape. Quote records include the 
date, microsecond-level timestamp, exchange, security symbol, bid 
price, bid quantity, ask price, and ask quantity of all quotes reported 
to the consolidated tape. Only protected quotations are reported to the 
consolidated tape.
    The Analysis Period for the calculations begins on August 1, 2015 
and ends on July 31, 2016. Symbols SPY and three other Control 
Securities (i.e., DIA, IWM, and QQQ) were considered. Only trades and 
quotes that occurred on the national securities exchanges during the 
regular trading hours \95\ were considered. Certain types of non-
standard trades were excluded.\96\ Quotes with negative prices or 
quantities were excluded. Unless otherwise indicated, lengths of time 
when the market was locked or crossed were not considered.
---------------------------------------------------------------------------

    \95\ See 17 CFR 242.600(b)(64).
    \96\ Non-standard trades include derivatively priced trades, 
qualified contingent trades, opening trades, closing trades, and 
after hours trades.
---------------------------------------------------------------------------

    In the calculations below:

     Total Volume refers to the number of shares of the 
indicated symbol traded on the national securities exchanges on a 
given day, excluding certain types of non-standard trades. CHX 
Volume refers to the number of shares of the indicated symbol traded 
on CHX on a given day, excluding certain types of non-standard 
trades.
     CHX Market Share was calculated as CHX Volume divided 
by Total Volume on a given day, CHX Market Share = CHX Volume / 
Total Volume.
     CHX Had A Two-Sided Market refers to an indicator 
variable defined as true at any microsecond when there was at least 
one bid and at least one offer among all outstanding orders on CHX, 
and false otherwise. CHX Had A One-Sided Market refers to an 
indicator variable defined as true at any microsecond when there was 
at least one bid but no offers among all outstanding orders on CHX 
or when there was at least one offer but no bids among all 
outstanding orders on CHX, and false otherwise. CHX Had No Market 
refers to an indicator variable defined as true at any microsecond 
when there were no outstanding orders on CHX, and false otherwise.
     A bid was At The NBB at any microsecond when its price 
was equal to the National Best Bid. An offer was At The NBO at any 
microsecond when its price was equal to the National Best Offer.
     At any microsecond, the NMS Size At The National Best 
Bid (``NMS Size At The NBB'') refers to the quantity of shares in 
prevailing bids on the national securities exchanges priced at the 
National Best Bid and the NMS Size At The National Best Offer (``NMS 
Size At The NBO'') refers to the quantity of shares in prevailing 
offers on the national securities exchanges priced at the National 
Best Offer. NMS Size At The NBBO was calculated as the average of 
the National Best Bid Size and the National Best Offer Size at each 
microsecond, NMS Size At The NBBO = (NMS Size At The NBB + NMS Size 
At The NBO) / 2.
     CHX Was At The NBB refers to an indicator variable 
defined as true at any microsecond when the CHX Best Bid was at the 
National Best Bid, and false otherwise. CHX Was At The NBO refers to 
an indicator variable defined as true at any microsecond when the 
CHX Best Offer was at the National Best Offer, and false otherwise.
     At any microsecond, the CHX Size At The NBB (``CHX Size 
At The NBB'') refers to the CHX Best Bid Size if CHX was at the NBB 
and zero if CHX was not at the NBB. At any microsecond, the CHX Size 
At The NBO (``CHX Size At The NBO'') refers to the CHX Best Offer 
Size if CHX was at the NBO and zero if CHX was not at the NBO. CHX 
Size At The NBBO was calculated as the average of the CHX Size At 
The NBB and CHX Size At The NBO at each microsecond, CHX Size At The 
NBBO = (CHX Size At The NBB + CHX Size At The NBO) / 2.
     CHX Was At The NBB And Was The Largest Bid At That 
Price refers to an indicator variable defined as true at any

[[Page 11265]]

microsecond when CHX was at the National Best Bid and the CHX Best 
Bid Size was greater than or equal to the largest quantity of shares 
in prevailing bids on any one national securities exchange other 
than CHX, and false otherwise. CHX Was At The NBO And Was The 
Largest Offer At That Price refers to an indicator variable defined 
as true at any microsecond when CHX was at the National Best Offer 
and the CHX Best Offer Size was greater than or equal to the largest 
quantity of shares in prevailing offers on any one national 
securities exchange other than CHX, and false otherwise.
    For the calculations in the table below:
     Monthly average values are shown. Monthly 
average values were calculated as the average of daily values for 
each day in a month. Daily values were calculated as time-weighted 
averages or as percentages of time in the trading day, as indicated 
in the table. Time-weighted average values were calculated as daily 
average of the specified quantity, market share, or spread value 
weighted by time (in microseconds). % of time values were calculated 
as the length of time (in microseconds) for which the specified 
indicator variable was true divided by the length of time in that 
trading day, excluding lengths of time during which the market was 
locked or crossed or otherwise could not be calculated (e.g., at the 
start of the trading day).

--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                   Symbol
                                                                                   ---------------------------------------------------------------------
                                                                                         SPY           DIA           IWM           QQQ         Control
               [No.] Calculation                               Month               --------------------------------------------------------    Average
                                                                                                                                           -------------
                                                                                         [1]           [2]           [3]           [4]        ([2]:[4])
--------------------------------------------------------------------------------------------------------------------------------------------------------
[1a] CHX market share (% of total volume).....  Aug 2015..........................         4.32%         3.07%         5.51%         3.40%         3.99%
                                                Sep 2015..........................         6.07%         2.61%         3.82%         3.46%         3.30%
                                                Oct 2015..........................         4.08%         5.95%         2.58%         4.42%         4.32%
                                                Nov 2015..........................         4.49%         8.58%         3.14%         5.13%         5.62%
                                                Dec 2015..........................         4.85%         4.89%         2.53%         4.49%         3.97%
                                                Jan 2016..........................         5.73%         9.13%         3.14%         4.35%         5.54%
                                                Feb 2016..........................         4.78%         9.13%         3.32%         4.41%         5.62%
                                                Mar 2016..........................         2.80%         7.54%         2.38%         3.57%         4.50%
                                                Apr 2016..........................         2.28%         4.41%         2.01%         2.69%         3.04%
                                                May 2016..........................         1.10%         3.53%         2.21%         1.93%         2.55%
                                                Jun 2016..........................         0.90%         5.17%         1.74%         3.00%         3.30%
                                                Jul 2016..........................         0.57%         6.11%         1.22%         1.77%         3.03%
[1b] CHX market share (% of total volume)       Aug 2015..........................            75            34           176            78            72
 index: January 2016 = 100.
                                                Sep 2015..........................           106            29           122            80            60
                                                Oct 2015..........................            71            65            82           102            78
                                                Nov 2015..........................            78            94           100           118           101
                                                Dec 2015..........................            85            54            81           103            72
                                                Jan 2016..........................           100           100           100           100           100
                                                Feb 2016..........................            83           100           106           102           102
                                                Mar 2016..........................            49            83            76            82            81
                                                Apr 2016..........................            40            48            64            62            55
                                                May 2016..........................            19            39            70            44            46
                                                Jun 2016..........................            16            57            55            69            60
                                                Jul 2016..........................            10            67            39            41            55
[2a] Average total volume.....................  Aug 2015..........................   130,150,083     6,153,725    26,846,599    33,963,873    23,568,046
                                                Sep 2015..........................    94,627,144     6,552,649    21,381,524    28,452,481    19,947,099
                                                Oct 2015..........................    75,881,581     4,461,519    22,420,310    22,701,556    14,268,977
                                                Nov 2015..........................    63,307,314     3,673,677    16,624,141    17,531,483    10,308,999
                                                Dec 2015..........................    87,011,822     4,969,853    23,287,782    24,474,150    16,211,695
                                                Jan 2016..........................   127,469,871     8,301,912    35,204,822    39,029,308    21,425,674
                                                Feb 2016..........................    97,911,733     6,121,299    27,668,000    35,547,824    18,060,375
                                                Mar 2016..........................    63,333,000     2,521,807    20,709,893    17,600,599     9,724,974
                                                Apr 2016..........................    53,023,531     2,337,084    15,556,074    14,984,599     8,991,216
                                                May 2016..........................    51,578,634     2,016,095    17,899,288    14,856,962     9,822,504
                                                Jun 2016..........................    78,385,026     2,740,421    20,938,721    16,963,513    10,240,678
                                                Jul 2016..........................    49,783,615     2,130,330    14,122,275    11,973,239     5,657,111
[2b] Average total volume index: Jan 2016 =     Aug 2015..........................           102            74            76            87           110
 100.
                                                Sep 2015..........................            74            79            61            73            93
                                                Oct 2015..........................            60            54            64            58            67
                                                Nov 2015..........................            50            44            47            45            48
                                                Dec 2015..........................            68            60            66            63            76
                                                Jan 2016..........................           100           100           100           100           100
                                                Feb 2016..........................            77            74            79            91            84
                                                Mar 2016..........................            50            30            59            45            45
                                                Apr 2016..........................            42            28            44            38            42
                                                May 2016..........................            40            24            51            38            46
                                                Jun 2016..........................            61            33            59            43            48
                                                Jul 2016..........................            39            26            40            31            26
[3a] Time-weighted average CHX size at the      Aug 2015..........................      7,740.13        753.47      2,294.04      3,666.82      2,238.11
 NBBO.
                                                Sep 2015..........................      6,217.48        682.18      2,157.29      4,177.88      2,339.12
                                                Oct 2015..........................      7,816.38      1,308.53      2,052.68      6,130.87      3,164.03
                                                Nov 2015..........................      8,983.84      2,439.37      2,158.33      7,182.16      3,926.62
                                                Dec 2015..........................      5,776.73      1,152.21      1,517.59      4,347.08      2,338.96
                                                Jan 2016..........................      4,220.05      1,830.97      1,726.35      4,341.83      2,633.05
                                                Feb 2016..........................      2,642.32      1,829.95      2,004.50      4,523.73      2,786.06

[[Page 11266]]

 
                                                Mar 2016..........................      1,611.90      2,347.82      2,077.08      5,987.78      3,470.89
                                                Apr 2016..........................      1,415.95      1,481.35      2,314.10      6,196.84      3,330.76
                                                May 2016..........................        485.23      1,469.69      2,374.66      7,423.33      3,755.89
                                                Jun 2016..........................        565.73      1,772.03      2,188.41      7,994.73      3,985.06
                                                Jul 2016..........................        396.37      3,057.61      2,262.70      8,241.77      4,520.69
[3b] Time-weighted average CHX size at the      Aug 2015..........................           183            41           133            84            85
 NBBO index: Jan 2016 = 100.
                                                Sep 2015..........................           147            37           125            96            89
                                                Oct 2015..........................           185            71           119           141           120
                                                Nov 2015..........................           213           133           125           165           149
                                                Dec 2015..........................           137            63            88           100            89
                                                Jan 2016..........................           100           100           100           100           100
                                                Feb 2016..........................            63           100           116           104           106
                                                Mar 2016..........................            38           128           120           138           132
                                                Apr 2016..........................            34            81           134           143           126
                                                May 2016..........................            11            80           138           171           143
                                                Jun 2016..........................            13            97           127           184           151
                                                Jul 2016..........................             9           167           131           190           172
[4a] Time-weighted average NMS size at the      Aug 2015..........................     19,257.66      2,609.35      6,511.42     18,471.79      9,197.52
 NBBO.
                                                Sep 2015..........................     11,919.38      1,679.93      6,540.46     14,223.92      7,481.44
                                                Oct 2015..........................     18,309.27      2,468.56      6,972.46     19,848.75      9,763.26
                                                Nov 2015..........................     19,257.58      3,930.75      6,963.92     23,442.48     11,445.72
                                                Dec 2015..........................     13,230.66      2,204.20      5,812.28     17,106.74      8,374.40
                                                Jan 2016..........................      9,513.33      2,569.26      5,221.94     14,100.46      7,297.22
                                                Feb 2016..........................      7,417.60      2,489.46      6,340.40     13,869.32      7,566.40
                                                Mar 2016..........................      8,638.39      3,703.26      8,521.28     20,316.43     10,846.99
                                                Apr 2016..........................      9,876.59      3,070.53      9,422.71     23,246.57     11,913.27
                                                May 2016..........................      9,398.26      3,144.93     10,295.88     28,354.88     13,931.90
                                                Jun 2016..........................      9,313.10      3,107.54      9,597.43     28,288.57     13,664.51
                                                Jul 2016..........................     11,685.53      4,711.37     10,026.35     35,353.64     16,697.12
[4b] Time-weighted average NMS size at the      Aug 2015..........................           202           102           125           131           126
 NBBO index: Jan 2016 = 100.
                                                Sep 2015..........................           125            65           125           101           103
                                                Oct 2015..........................           192            96           134           141           134
                                                Nov 2015..........................           202           153           133           166           157
                                                Dec 2015..........................           139            86           111           121           115
                                                Jan 2016..........................           100           100           100           100           100
                                                Feb 2016..........................            78            97           121            98           104
                                                Mar 2016..........................            91           144           163           144           149
                                                Apr 2016..........................           104           120           180           165           163
                                                May 2016..........................            99           122           197           201           191
                                                Jun 2016..........................            98           121           184           201           187
                                                Jul 2016..........................           123           183           192           251           229
[5a] % of time CHX had a two-sided market.....  Aug 2015..........................         99.8%         99.6%         99.7%         99.6%         99.7%
                                                Sep 2015..........................         99.9%         99.9%         99.9%         99.9%         99.9%
                                                Oct 2015..........................        100.0%         99.9%         99.9%        100.0%         99.9%
                                                Nov 2015..........................         99.9%         99.9%         99.5%         99.8%         99.7%
                                                Dec 2015..........................         98.6%         98.3%         98.6%         98.6%         98.5%
                                                Jan 2016..........................        100.0%         99.9%         99.9%        100.0%         99.9%
                                                Feb 2016..........................         99.9%        100.0%        100.0%        100.0%        100.0%
                                                Mar 2016..........................         99.8%        100.0%        100.0%        100.0%        100.0%
                                                Apr 2016..........................         99.3%         99.9%        100.0%         99.8%         99.9%
                                                May 2016..........................         85.2%         99.9%        100.0%        100.0%        100.0%
                                                Jun 2016..........................         73.2%         99.9%        100.0%        100.0%        100.0%
                                                Jul 2016..........................         74.0%         99.9%        100.0%        100.0%        100.0%
[5b] % of time CHX had a one-sided market.....  Aug 2015..........................          0.1%          0.1%          0.0%          0.2%          0.1%
                                                Sep 2015..........................          0.0%          0.0%          0.0%          0.0%          0.0%
                                                Oct 2015..........................          0.0%          0.0%          0.0%          0.0%          0.0%
                                                Nov 2015..........................          0.0%          0.0%          0.0%          0.2%          0.1%
                                                Dec 2015..........................          0.0%          0.3%          0.0%          0.0%          0.1%
                                                Jan 2016..........................          0.0%          0.1%          0.0%          0.0%          0.0%
                                                Feb 2016..........................          0.0%          0.0%          0.0%          0.0%          0.0%
                                                Mar 2016..........................          0.2%          0.0%          0.0%          0.0%          0.0%
                                                Apr 2016..........................          0.2%          0.0%          0.0%          0.0%          0.0%
                                                May 2016..........................          3.0%          0.0%          0.0%          0.0%          0.0%
                                                Jun 2016..........................          6.1%          0.0%          0.0%          0.0%          0.0%
                                                Jul 2016..........................          1.8%          0.0%          0.0%          0.0%          0.0%
[5c] % of time CHX had no market..............  Aug 2015..........................          0.1%          0.3%          0.3%          0.1%          0.2%
                                                Sep 2015..........................          0.0%          0.1%          0.1%          0.0%          0.1%

[[Page 11267]]

 
                                                Oct 2015..........................          0.0%          0.1%          0.1%          0.0%          0.1%
                                                Nov 2015..........................          0.1%          0.1%          0.4%          0.0%          0.2%
                                                Dec 2015..........................          1.4%          1.4%          1.4%          1.4%          1.4%
                                                Jan 2016..........................          0.0%          0.0%          0.0%          0.0%          0.0%
                                                Feb 2016..........................          0.1%          0.0%          0.0%          0.0%          0.0%
                                                Mar 2016..........................          0.0%          0.0%          0.0%          0.0%          0.0%
                                                Apr 2016..........................          0.5%          0.1%          0.0%          0.2%          0.1%
                                                May 2016..........................         11.8%          0.1%          0.0%          0.0%          0.0%
                                                Jun 2016..........................         20.7%          0.1%          0.0%          0.0%          0.0%
                                                Jul 2016..........................         24.2%          0.0%          0.0%          0.0%          0.0%
[6a] % of time CHX was at the NBB.............  Aug 2015..........................         16.5%         32.7%         46.9%         58.0%         45.9%
                                                Sep 2015..........................         24.0%         36.4%         44.7%         67.6%         49.6%
                                                Oct 2015..........................         30.8%         45.8%         44.3%         74.9%         55.0%
                                                Nov 2015..........................         24.5%         50.3%         54.0%         79.6%         61.3%
                                                Dec 2015..........................         29.2%         34.1%         38.3%         71.3%         47.9%
                                                Jan 2016..........................         23.8%         46.0%         40.2%         70.4%         52.2%
                                                Feb 2016..........................         15.5%         53.9%         33.7%         65.5%         51.0%
                                                Mar 2016..........................         18.5%         58.4%         35.6%         66.8%         53.6%
                                                Apr 2016..........................         18.7%         46.8%         35.9%         60.5%         47.7%
                                                May 2016..........................          7.0%         44.8%         53.5%         68.5%         55.6%
                                                Jun 2016..........................          5.4%         47.1%         44.2%         72.8%         54.7%
                                                Jul 2016..........................          8.2%         45.9%         40.8%         74.1%         53.6%
[6b] % of time CHX was at the NBO.............  Aug 2015..........................         27.9%         39.8%         57.0%         65.6%         54.1%
                                                Sep 2015..........................         29.7%         36.0%         41.8%         66.7%         48.2%
                                                Oct 2015..........................         20.9%         41.4%         42.7%         74.0%         52.7%
                                                Nov 2015..........................         28.7%         39.3%         52.9%         78.2%         56.8%
                                                Dec 2015..........................         27.1%         35.5%         42.4%         70.0%         49.3%
                                                Jan 2016..........................         23.3%         52.3%         48.8%         70.4%         57.2%
                                                Feb 2016..........................         23.2%         55.5%         46.3%         69.1%         57.0%
                                                Mar 2016..........................         19.0%         58.5%         44.4%         70.0%         57.7%
                                                Apr 2016..........................         14.0%         44.0%         36.4%         65.8%         48.7%
                                                May 2016..........................         12.4%         40.4%         49.3%         64.2%         51.3%
                                                Jun 2016..........................         11.0%         47.3%         48.4%         74.6%         56.8%
                                                Jul 2016..........................          5.8%         46.0%         34.0%         69.4%         49.8%
[6c] % of time CHX was at the NBB and that CHX  Aug 2015..........................          1.0%          8.2%         19.7%         32.5%         20.2%
 was at the NBO.
                                                Sep 2015..........................          2.0%         10.0%          9.2%         37.1%         18.8%
                                                Oct 2015..........................          3.0%         14.4%         10.2%         49.8%         24.8%
                                                Nov 2015..........................          6.0%         14.2%         17.9%         58.1%         30.1%
                                                Dec 2015..........................          4.4%          9.3%         12.5%         44.8%         22.2%
                                                Jan 2016..........................          3.3%         19.2%          7.8%         41.8%         22.9%
                                                Feb 2016..........................          1.0%         24.5%          4.8%         35.4%         21.5%
                                                Mar 2016..........................          0.5%         29.6%          4.6%         38.0%         24.1%
                                                Apr 2016..........................          0.2%         15.7%          2.2%         29.9%         15.9%
                                                May 2016..........................          0.0%         13.5%         17.5%         34.6%         21.9%
                                                Jun 2016..........................          0.0%         17.0%         12.2%         48.5%         25.9%
                                                Jul 2016..........................          0.0%         12.6%          4.0%         44.1%         20.3%
[7a] % of time CHX was at the NBB and was the   Aug 2015..........................         13.6%         26.2%         37.1%         26.6%         29.9%
 largest bid at that price.
                                                Sep 2015..........................         21.5%         34.0%         40.0%         47.6%         40.6%
                                                Oct 2015..........................         24.9%         43.8%         36.2%         57.4%         45.8%
                                                Nov 2015..........................         18.8%         47.9%         39.4%         55.9%         47.7%
                                                Dec 2015..........................         25.1%         31.7%         27.7%         39.1%         32.8%
                                                Jan 2016..........................         20.0%         43.6%         32.0%         48.1%         41.2%
                                                Feb 2016..........................         11.2%         52.7%         28.5%         45.5%         42.2%
                                                Mar 2016..........................         11.9%         55.7%         28.3%         44.8%         42.9%
                                                Apr 2016..........................         13.0%         42.2%         31.6%         43.6%         39.1%
                                                May 2016..........................          1.7%         39.8%         37.9%         50.2%         42.6%
                                                Jun 2016..........................          2.0%         43.7%         32.2%         48.3%         41.4%
                                                Jul 2016..........................          2.3%         43.2%         31.7%         48.0%         41.0%
[7b] % of time CHX was at the NBO and was the   Aug 2015..........................         24.3%         34.4%         51.2%         39.8%         41.8%
 largest offer at that price.
                                                Sep 2015..........................         27.0%         33.8%         37.8%         46.7%         39.4%
                                                Oct 2015..........................         16.0%         38.1%         31.3%         44.0%         37.8%
                                                Nov 2015..........................         22.6%         36.8%         35.1%         53.4%         41.8%
                                                Dec 2015..........................         23.2%         32.7%         30.6%         36.8%         33.4%
                                                Jan 2016..........................         20.7%         51.1%         41.3%         50.7%         47.7%
                                                Feb 2016..........................         18.5%         54.7%         40.8%         49.4%         48.3%
                                                Mar 2016..........................         12.9%         55.2%         35.3%         51.2%         47.2%
                                                Apr 2016..........................          8.1%         38.6%         30.8%         45.9%         38.4%

[[Page 11268]]

 
                                                May 2016..........................          3.8%         36.7%         29.8%         45.2%         37.2%
                                                Jun 2016..........................          4.6%         44.6%         31.4%         51.8%         42.6%
                                                Jul 2016..........................          1.1%         42.5%         27.0%         31.0%         33.5%
[7c] % of time CHX was at the NBB and was the   Aug 2015..........................          0.2%          5.3%         12.8%          7.1%          8.4%
 largest bid at that price and that CHX was at
 the NBO and was the largest offer at that
 price.
                                                Sep 2015..........................          1.1%          8.5%          7.3%         16.7%         10.9%
                                                Oct 2015..........................          0.9%         12.3%          5.3%         17.7%         11.8%
                                                Nov 2015..........................          2.3%         12.6%          7.0%         23.0%         14.2%
                                                Dec 2015..........................          2.9%          8.1%          6.4%         13.7%          9.4%
                                                Jan 2016..........................          1.9%         17.3%          4.3%         18.5%         13.4%
                                                Feb 2016..........................          0.3%         23.3%          2.8%         13.9%         13.3%
                                                Mar 2016..........................          0.1%         26.0%          2.6%         14.0%         14.2%
                                                Apr 2016..........................          0.0%         10.9%          1.5%         14.0%          8.8%
                                                May 2016..........................          0.0%         10.4%          8.0%         15.6%         11.3%
                                                Jun 2016..........................          0.0%         14.3%          4.8%         18.6%         12.5%
                                                Jul 2016..........................          0.0%         10.7%          2.8%         10.8%          8.1%
--------------------------------------------------------------------------------------------------------------------------------------------------------

Appendix C: Impact of LEAD on Liquidity Takers
    The purpose of this analysis is to show that implementation of LEAD 
would not materially impact the ability of a random market participant 
not engaged in a latency arbitrage strategy, such as retail investors, 
to take displayed liquidity at CHX. This analysis assumes that LEAD 
would not materially change order sending behavior of Participants.
    For the period of May 2016 through July 2016,\97\ the Exchange 
observed the following with regards to SPY:

    \97\ For the months prior to May 2016 during the Analysis 
Period, the Exchange did not maintain TLTC data. A limitation of 
this data is that CHX Market Share and displayed liquidity in SPY 
and, by extension, order sending activity had all diminished 
considerably by May 2016. See supra Appendix B Calculation Set 1.
---------------------------------------------------------------------------

     There were a total of 18,316 orders at least partially 
executed.
     During the same period, the Exchange received 1,278 
cancel messages to cancel resting orders after the resting order had 
been fully executed (``too-late-to-cancel'' or ``TLTC'').
     Of the 1,278 TLTCs, 412 TLTCs (32.24%) were received 
sooner than or exactly 350 microseconds after the execution 
(``TLTC<=350''), whereas 866 (67.76%) were received later 
than 350 microseconds after the execution (``TLTC>350'').
     Of the 412 TLTC<=350, 392 (95.15%) 
executions were attributed to SPY latency arbitrage activity while 
the remaining 20 (4.85%) executions were not.
     Of the 866 TLTC>350, 780 (90.07%) executions 
were attributed to SPY latency arbitrage activity while the 
remaining 86 (9.93%) executions were not.

Thus, if LEAD had been in effect for the period of May 2016 through 
July 2016, LEAD (1) would have prevented up to 412 orders, virtually 
all of which the Exchange believes were submitted as part of SPY 
latency arbitrage activity, from being executed during the 350 
microsecond Fixed LEAD Period and (2) would have had a negative impact 
on only 20 liquidity taking orders not attributed to SPY latency 
arbitrage activity. These 20 orders comprised 0.11% of the 18,316 
orders executed during the period. That is, during the measurement 
period of 63 trading days, LEAD would have had an adverse effect on 
approximately one order every three trading days. Thus, LEAD can make a 
significant contribution to leveling the playing field between LEAD MMs 
and latency arbitrageurs with minimal adverse effect on other liquidity 
taking orders.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6(b) of the Act in general,\98\ and furthers the 
objectives of Section 6(b)(5) in particular,\99\ 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 and perfect the 
mechanisms of a free and open market, and, in general, to protect 
investors and the public interest; and is not designed to permit unfair 
discrimination between customers, issuers, brokers, or dealers.
---------------------------------------------------------------------------

    \98\ 15 U.S.C. 78f(b).
    \99\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    Specifically, the Exchange believes that the proposed rule change 
would remove impediments and perfect the mechanisms of a free and open 
market and, in general, protect investors and the public interest by 
enhancing displayed liquidity and price discovery by minimizing the 
effectiveness of latency arbitrage strategies that negatively impact 
market quality. As shown under the CHX ETF Analysis,\100\ latency 
arbitrage lessens competition among orders by dissuading liquidity 
providers from displaying large and aggressively priced orders, which 
in turn impairs market efficiency.\101\ The Commission has recognized 
the crucial role that displayed limit orders play in the price 
discovery process.\102\ Thus, the Exchange believes that optimizing 
liquidity provision on the Exchange will enhance price discovery and, 
thereby, enhance market efficiency. To this end, LEAD is designed to 
promote displayed liquidity on the Exchange by giving LEAD MMs a small 
head start to the cancellation of stale quotes in the race to react to 
symmetric public information. LEAD is designed to achieve these goals 
without having a materially negative impact on the ability of liquidity 
takers not engaged in latency arbitrage, such as retail investors, to 
access displayed liquidity at CHX, as such liquidity will most always 
remain on the CHX book after a liquidity taking order has been released 
from LEAD.\103\ Thus, the Exchange believes that LEAD will encourage 
LEAD MMs to post large aggressively priced orders on the CHX book, 
which

[[Page 11269]]

will enhance liquidity and optimize price discovery in furtherance of 
the objectives of Section 6(b)(5) of the Act \104\ and in a manner 
consistent with Regulation NMS, as described below.
---------------------------------------------------------------------------

    \100\ See supra Appendix A
    \101\ See Regulation NMS Adopting Release, supra note 13, at 
37499.
    \102\ See Regulation NMS Adopting Release, supra note 13, at 
37526.
    \103\ See also supra note 18; see also supra Appendix C.
    \104\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    In addition, the Exchange believes that the proposed LEAD MM 
designation would protect investors and the public interest by 
requiring LEAD MMs to meet the proposed Minimum Performance Standards 
in return for being afforded the benefits of LEAD. Moreover, the 
Exchange submits that the proposal to leverage existing Market Maker 
rules regarding the procedures for deregistering Market Makers and 
involuntary withdrawals from assigned securities will provide the 
Exchange with sufficient authority to compel and enforce compliance by 
LEAD MMs with the proposed Minimum Performance Standards.
    The Exchange also believes that the proposed rules regarding 
assignment of LEAD MM Securities would protect investors and the public 
interest by implementing a comprehensive process whereby the Exchange 
will be able to select LEAD MMs that have demonstrated the ability and 
capacity to enhance displayed liquidity on the Exchange and to comply 
with federal rules and regulations, as well as CHX Rules. When 
considering these procedures with the proposed Minimum Performance 
Standards and enforcement mechanism, the Exchange believes that the 
effectiveness of LEAD in enhancing displayed liquidity and price 
discovery will be optimized.
    Moreover, for similar reasons, the Exchange submits that the 
proposed rules for LEAD are not designed to permit unfair 
discrimination. Specifically, the Exchange believes that any 
discrimination between LEAD MMs and non-LEAD MMs is permissible under 
the Act because (1) LEAD is designed to enhance displayed liquidity and 
price discovery by rectifying a current structural bias against 
displayed liquidity,\105\ without having a materially negative impact 
on the ability of liquidity takers not engaged in latency arbitrage, 
such as retail investors, to access displayed liquidity at CHX,\106\ 
and (2) the proposed Minimum Performance Standards, which will not 
apply to non-LEAD MMs, will help ensure that those goals are achieved, 
as well as to provide a safeguard against LEAD MMs utilizing LEAD to 
engage in manipulative activities or otherwise non-bona fide liquidity 
provision strategies.
---------------------------------------------------------------------------

    \105\ See supra Section 3(a)(2).
    \106\ See also supra note 18; see also supra Appendix C.
---------------------------------------------------------------------------

    Regardless of whether a delay is symmetric (e.g., IEX Delay) or 
asymmetric (e.g., LEAD), any intentional delay designed to address 
latency arbitrage must necessarily discriminate among members. That is, 
correcting asymmetry in the market requires asymmetry in the remedy. 
For example, while the IEX Delay delays all incoming messages, the IEX 
Delay is asymmetric in that it provides processing advantages to non-
displayed pegged orders resting on the IEX book, which are not provided 
to other orders. LEAD would similarly address latency arbitrage by 
providing a processing advantage to LEAD MMs, which will not be 
provided to non-LEAD MMs.
    The Exchange also believes that the LEAD is narrowly-tailored to 
address latency arbitrage as applied to limit orders. In finding that 
the rules pertaining to the IEX Delay did not permit unfair 
discrimination, and would not impose any unnecessary or inappropriate 
burden on competition, the Commission recognized that displayed limit 
orders or non-pegged non-displayed limit orders, the types of liquidity 
LEAD is designed to protect, would not benefit from the symmetric IEX 
Delay \107\ because the purpose of such limit orders is to post or 
execute consistent with their fixed limit price, as opposed to being 
repriced by an exchange based on changes to the NBBO.\108\ Given that 
limit orders are also vulnerable to latency arbitrage and could only be 
effectively adjusted by the liquidity providers, if such orders are 
provided as part of a broader liquidity provision strategy that 
utilizes proprietary algorithms to price and size such limit orders, it 
logically flows that the best way to protect such liquidity is through 
an asymmetric delay, such as LEAD, that empowers LEAD MMs to better 
execute their liquidity provision strategies, which result in valuable 
displayed liquidity being provided to the market.\109\ Thus, given the 
ineffectiveness of symmetric delays in protecting limit orders from 
latency arbitrage and the immaterial impact that LEAD would have on the 
ability of random liquidity takers not engaged in latency arbitrage to 
access liquidity at CHX,\110\ the Exchange believes that LEAD is 
narrowly-tailored to address latency arbitrage as applied to limit 
orders.
---------------------------------------------------------------------------

    \107\ See IEX Approval Order, supra note 20, at 41157.
    \108\ See id.
    \109\ See supra notes 7 and 8.
    \110\ See also supra note 18; see also supra Appendix C.
---------------------------------------------------------------------------

    The Exchange further submits that LEAD would not confer any unfair 
advantage to LEAD MMs or introduce incremental risk of manipulative 
activity. While LEAD is long enough to neutralize microsecond speed 
advantages exploited by latency arbitrageurs, it is too short to 
provide any actionable incremental advantage to LEAD MMs in reacting to 
information not already it their possession. LEAD is also too short to 
introduce any incremental risk of manipulative practices, which is 
supported by the fact that the Commission has recognized that a 350-
microsecond delay would not materially increase the likelihood of 
certain manipulative practices such as ``spoofing'' or ``marking-the-
close'' due to the practical difficulties of executing such strategies 
within such a short time frame.111 112 Notwithstanding, the 
Exchange has elected to adopt the proposed Minimum Performance 
Standards to provide additional assurance to the Commission that CHX 
displayed liquidity will remain valuable and reliable by tying the 
processing advantage afforded to LEAD MMs to heightened market quality 
requirements, which will not be applied to non-LEAD MMs. Thus, for all 
of the reasons described above, any discrimination between LEAD MMs and 
non-LEAD MMs is justified and consistent with the requirements of the 
Section 6(b)(5) of the Act.\113\
---------------------------------------------------------------------------

    \111\ Final Interpretation, supra note 30, at n. 70.
    \112\ The Exchange notes that it currently maintains 
surveillance protocols designed to detect such manipulative 
practices.
    \113\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    The Exchange notes that the Commission has previously approved 
functionality that permissibly discriminates among members for the 
purpose enhancing displayed liquidity. Specifically, the Commission has 
previously approved the following mechanisms:

     Maker/taker fee. Many national securities exchanges, 
including CHX, utilize the ``maker/taker'' fee model, which 
discriminates between liquidity providers and takers for the purpose 
of incentivizing market participants to provide liquidity to or take 
liquidity from the exchange.\114\
---------------------------------------------------------------------------

    \114\ See, e.g., Bats BYX Fee Schedule; see also Section E.1 of 
the CHX Fee Schedule.
---------------------------------------------------------------------------

     Bulk-quoting interface. Nasdaq offers a bulk-quoting 
interface to allow its options market makers to more efficiently 
submit and update quotes as ``aiding market makers in their market 
making activities will help to

[[Page 11270]]

enhance market liquidity for investors.'' \115\ BATS Options offers 
a similar functionality, but permits all BATS Options users to 
utilize its bulk-quoting interface.\116\ In each case, the exchange 
gives liquidity providers a processing advantage to facilitate the 
adjusting of stale quotes to the disadvantage of liquidity takers. 
Consequently, as bulk-quoting interfaces permit liquidity providers 
to adjust numerous quotes through a single message, this would 
minimize the possibility of stale quotes being executed before the 
liquidity provider has an opportunity to adjust the stale quote. 
That is, bulk-quoting interfaces, among other things, minimize the 
effectiveness of latency arbitrage strategies.
---------------------------------------------------------------------------

    \115\ See Securities Exchange Act Release No. 65024 (August 3, 
2011), 76 FR 48925 (August 9, 2011) (SR-NASDAQ-2011-102).
    \116\ See Securities Exchange Act Release No. 65307 (September 
9, 2011), 76 FR 57092 (September 15, 2011) (SR-BATS-2011-034) 
(expanding the availability of the bulk-quoting interface to all 
users of BATS Options); Securities Exchange Act Release No. 65133 
(August 15, 2011), 76 FR 52032 (August 19, 2011) (SR-BATS-2011-029) 
(adopting the bulk-quoting interface).
---------------------------------------------------------------------------

     Market Makers generally. Many national securities 
exchange offer a market maker program that provides certain 
financial or operational benefits (e.g., Nasdaq's bulk-quoting 
interface and NYSE DMM parity \117\) in return for meeting 
heightened market quality requirements.
---------------------------------------------------------------------------

    \117\ See NYSE Rules 103B and 104.

    The Exchange also believes that the proposed amendments to the MTP 
order modifier would remove impediments and perfect the mechanisms of a 
free and open market and, in general, protect investors and the public 
interest, in that they are designed to avoid certain unintended 
consequences of LEAD on the MTP functionality. Specifically, since an 
order would be assigned a sequence number prior to being evaluated 
pursuant to LEAD,\118\ LEAD may result in a newer undelayed order being 
ranked on the CHX book before an older delayed order, which would not 
otherwise occur today. Under this scenario and assuming that the 
contra-side orders trigger MTP and the incoming order is marked ``N,'' 
the current MTP rules would require the incoming older order to be 
cancelled, whereas the amended MTP handling would require the resting 
newer order to be cancelled subject to the exception for CHX Only 
orders described under amended Article 1, Rule 2(b)(3)(F)(iii)(a) and 
(b). Thus, the Exchange believes that the amended MTP functionality 
better contemplates LEAD and preserves expected results.
---------------------------------------------------------------------------

    \118\ See supra note 45.
---------------------------------------------------------------------------

    The Exchange also believes that the proposed rule change is 
consistent with Regulation NMS. Specifically, the Exchange believes 
that LEAD is consistent with Rule 600(b)(3),\119\ Rule 602(b)(2) 
(``Firm Quote Rule''),\120\ Rule 611 \121\ and Rule 610(d).\122\
---------------------------------------------------------------------------

    \119\ See 17 CFR 242.600(b)(3).
    \120\ See 17 CFR 242.602(b)(2).
    \121\ See 17 CFR 242.611.
    \122\ See 17 CFR 242.610(d).
---------------------------------------------------------------------------

    The Exchange believes that the proposed rule change is consistent 
with the ``immedia[cy]'' requirement of Rule 600(b)(3) as LEAD is a de 
minimis intentional access delay and thereby compatible with the 
Exchange having an ``automated quotation'' under Rule 600(b)(3) and 
thus a ``protected quotation'' under Rule 611.\123\ Specifically, Rule 
600(b)(3) requires that a trading center displaying an automated 
quotation permit, among other things, an incoming IOC order to 
immediately and automatically execute against the automated quotation 
up to its full size; and immediately and automatically cancel any 
unexecuted portion of the IOC order without routing the order 
elsewhere.\124\ In the context of determining whether a trading center 
maintains an ``automated quotation'' for purposes of Rule 611, the 
Commission does not interpret the term ``immediate'' used in Rule 
600(b)(3) by itself to prohibit a trading center from implementing an 
intentional access delay that is de minimis (i.e., a delay so short as 
to not frustrate the purposes of the Order Protection Rule by impairing 
fair and efficient access to an exchange's quotations).\125\ 
Accordingly, the Commission's revised interpretation provides that the 
term ``immediate'' precludes any coding of automated systems or other 
type of intentional device that would delay the action taken with 
respect to a quotation unless such delay is de minimis.\126\
---------------------------------------------------------------------------

    \123\ See Final Interpretation, supra note 30, at 40792.
    \124\ See 17 CFR 242.600(b)(3).
    \125\ See Final Interpretation, supra note 30, at 40792. Thus, 
the Exchange's quotations would continue to be ``immediately'' 
accessible and protected pursuant to Rule 611. See 17 CFR 
242.600(b)(3) defining ``automated quotation''; see also 17 CFR 
242.600(b)(58) defining ``protected quotation.''
    \126\ See Final Interpretation, supra note 30, at 40792.
---------------------------------------------------------------------------

    The Exchange believes that LEAD is so short as to not frustrate the 
purposes of the Rule 611 \127\ by impairing fair and efficient access 
to the Exchange's quotations. Specifically, all Participants seeking to 
take liquidity from the CHX book will have fair and efficient access to 
CHX quotations. Also, the 350-microsecond delay is so short that it 
does not provide an incremental advantage to a LEAD MM other than 
neutralizing a structural bias that permits latency arbitrageurs to 
profit off of symmetric public information. To the extent a market 
participant has a better algorithm or better information, LEAD is too 
short to have a negative impact on such non-latency arbitrage 
strategies, much less permit a LEAD MM to decide on a quotation-by-
quotation basis whether to cancel or modify a quote. In addition, LEAD 
is narrowly-tailored to minimize the effectiveness of latency arbitrage 
strategies at CHX, as described above.
---------------------------------------------------------------------------

    \127\ See 17 CFR 242.611.
---------------------------------------------------------------------------

    The Exchange also believes that LEAD is consistent with Rule 
602(b)(2).\128\ Specifically, a plain reading of Rule 602(b) indicates 
that the delay of a liquidity taking order pursuant to LEAD would not 
result in the order being ``presented'' to the LEAD MM.\129\ This is 
consistent with the Commission's guidance regarding the applicability 
of the Firm Quote Rule in the context of obsolete Intermarket Trading 
System (``ITS'') commitments.\130\ Specifically, the Commission stated 
that ``the Firm Quote Rule requires that every exchange specialist or 
OTC market maker execute any order to buy or sell a security it 
receives at a price at least as favorable as its published bid or offer 
in any amount up to its published size, subject to two exceptions.'' 
\131\ The Commission further stated ``that the Firm Quote Rule applies 
to ITS commitments; where a specialist or market maker fails to honor 
its quote by refusing to execute an ITS commitment received at its 
published bid or offer, and neither of the exceptions contained in the 
Firm Quote Rule apply, the specialist or market maker is in violation 
of the Firm Quote Rule.'' \132\ As such, the Commission's guidance 
clearly suggests that a Rule 602(b) violation occurs when a liquidity 
provider receives (i.e., is presented) a marketable contra-side order 
and refuses to honor its quote.\133\ When also

[[Page 11271]]

considering that the Exchange will never notify Participants or the 
public of the Exchange's receipt of a liquidity taking order subject to 
LEAD and CHX Rules indicate that a liquidity provider's Rule 602(b) 
obligation vests only after execution of its order within the Matching 
System,\134\ the Exchange submits that LEAD is consistent with the Firm 
Quote Rule.
---------------------------------------------------------------------------

    \128\ ``Subject to the provisions of paragraph (b)(3) of this 
section, each responsible broker or dealer shall be obligated to 
execute any order to buy or sell a subject security, other than an 
odd-lot order, presented to it by another broker or dealer, or any 
other person belonging to a category of persons with whom such 
responsible broker or dealer customarily deals, at a price at least 
as favorable to such buyer or seller as the responsible broker's or 
dealer's published bid or published offer (exclusive of any 
commission, commission equivalent or differential customarily 
charged by such responsible broker or dealer in connection with 
execution of any such order) in any amount up to its published 
quotation size.'' 17 CFR 242.602(b)(2) (emphasis added).
    \129\ See 17 CFR 242.602(b).
    \130\ See Exchange Act Release No. 40260, 63 FR 40748, 40754 
(July 30, 1998).
    \131\ Id (emphasis added).
    \132\ Id (emphasis added).
    \133\ See 17 CFR 242.602(b). A Section 21(a) report from 1996 
regarding, among other things, misconduct by certain market makers 
with respect to its published quotes is illustrative of the type of 
activity that the Firm Quote Rule is designed to address. See Report 
Pursuant to Section 21(a) of the Securities Exchange Act of 1934 
Regarding the NASD, the Nasdaq Market, and Nasdaq Market Makers, 
Exchange Act Release No. 37542 (August 8, 1996). Page 32 of the 
report provides, in pertinent part, as follows: Certain market 
makers at times did not honor their quotation for those with whom 
they preferred not to trade and ``backed away'' from their quotes as 
reprisal for, among other reasons, perceived prior back way by other 
market makers. Certain market makers also variously refused to trade 
with order entry firms, certain other market makers, and 
participants they ``dislike,'' such as options market makers. Market 
makers at times backed away from their trading obligations to avoid 
unwanted orders placed when they coordinated their quotations with 
other market makers.
    \134\ CHX Article 20, Rule 3(a) provides as follows: Each order 
submitted by each Participant is a firm order and each Participant 
must, upon execution of the order within the Matching System, 
purchase or sell, as the case may be, at the price, size and 
conditions identified by the participant at the time it submitted 
the order. No Participant may submit an order marked for display as 
a ``manual'' quotation.
---------------------------------------------------------------------------

    The Exchange further believes that LEAD is consistent with the 
requirements of Rule 611.\135\ As described above, a portion of a 
Routable Order may be immediately routed away to execute against away 
protected quotations, with the unrouted remainder being delayed before 
being permitted to execute against an order resting on the CHX book at 
a price inferior to the away protected quotations. \136\ Given that 
LEAD is de minimis in the context of Rule 600(b)(3),\137\ it logically 
flows that LEAD would also be considered de minimis for the purposes of 
the ``simultaneously routed'' Intermarket Sweep Order (``ISO'') 
requirement under Rule 611(b)(6).\138\ Thus, the Exchange submits that 
a delay caused by LEAD between the routing of one or more ISOs to 
satisfy better priced protected quotation(s) and the delayed execution 
of a related order at price inferior to such protected quotation(s) is 
consistent with the requirements of Rule 611(b)(6).\139\
---------------------------------------------------------------------------

    \135\ 17 CFR 242.611.
    \136\ See supra Example 3.
    \137\ See 17 CFR 242.600(b)(3).
    \138\ See 17 CFR 242.611(b)(6).
    \139\ See id.
---------------------------------------------------------------------------

    Similarly, a portion of a Routable Order may be immediately routed 
away to execute against away protected quotations with the unrouted 
remainder being delayed before be ranked on the CHX book at a price 
that crosses such away protected quotations. This could result if the 
resting order on the CHX book that resulted in the unrouted remainder 
being delayed was cancelled before the unrouted remainder were released 
from LEAD. Under this scenario, given that LEAD is de minimis in the 
context of Rule 600(b)(3),\140\ it logically flows that the de minimis 
delay caused by LEAD between the routing of one or more ISOs to satisfy 
away protected quotations and the display of the related order at a 
price that crosses such away protected quotations is permissible and 
consistent with the requirements of Rule 610(d).\141\
---------------------------------------------------------------------------

    \140\ See 17 CFR 242.600(b)(3).
    \141\ See ``Division of Trading and Markets: Responses to 
Frequency Asked Questions Concerning Rule 611 and Rule 610 of 
Regulation NMS.'' U.S. Securities and Exchange Commission, 4 April 
2008. Web. 20 June 2016 http://www.sec.gov/divisions/marketreg/nmsfaq610-11.htm (``Question 5.02''); see also CHX Article 20, Rule 
6(c)(3); see also 17 CFR 242.610(d).
---------------------------------------------------------------------------

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition that is not necessary or appropriate 
in furtherance of the purposes of the Act. To the contrary, the 
Exchange believes that any burden on competition is necessary and 
appropriate in furtherance of the purposes of Section 6(b)(5) of the 
Act because LEAD is functionality that seeks to enhance liquidity and 
optimize price discovery by deemphasizing speed as a key to trading 
success in order to further serve the interests of investors and 
thereby removes impediments and perfects the mechanisms of a free and 
open market.
    The Exchange further notes that market participants will continue 
to be able to obtain CHX book data via the Securities Information 
Processors or through the Exchange's proprietary book feed, the CHX 
Book Feed,\142\ without delay as the Exchange does not propose to delay 
any outbound messages or market data. As such, the Exchange submits 
that any burden on competition, while necessary and appropriate in 
furtherance of the purposes of that Act, has been minimized.
---------------------------------------------------------------------------

    \142\ See CHX Article 4, Rule 1.
---------------------------------------------------------------------------

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

    No written comments were solicited or received with respect to the 
proposed rule change.

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

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    A. By order approve or disapprove the proposed rule change, or
    B. Institute proceedings to determine whether the proposed rule 
change should be disapproved.

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 (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-CHX-2017-04 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-CHX-2017-04. 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 (http://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

[[Page 11272]]

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-CHX-2017-04 and should be submitted on or before March 
14, 2017.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\143\
---------------------------------------------------------------------------

    \143\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-03296 Filed 2-17-17; 8:45 am]
 BILLING CODE 8011-01-P