Self-Regulatory Organizations; Investors Exchange LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Amend Rule 11.190(g) To Modify the Quote Instability Coefficients and Quote Instability Threshold Included in the Quote Instability Calculation Specified in Subparagraph (g)(1) for Purposes of Determining Whether a Crumbling Quote Exists, 14058-14061 [2017-05210]
Download as PDF
14058
Federal Register / Vol. 82, No. 50 / Thursday, March 16, 2017 / Notices
2017–15 and should be submitted on or
before April 6,2017.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.21
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017–05214 Filed 3–15–17; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–80202; File No. SR–IEX–
2017–06]
Self-Regulatory Organizations;
Investors Exchange LLC; Notice of
Filing and Immediate Effectiveness of
Proposed Rule Change To Amend Rule
11.190(g) To Modify the Quote
Instability Coefficients and Quote
Instability Threshold Included in the
Quote Instability Calculation Specified
in Subparagraph (g)(1) for Purposes of
Determining Whether a Crumbling
Quote Exists
notice required by Rule 19b–4(f)(6)(iii)
under the Act.6
The text of the proposed rule change
is available at the Exchange’s Web site
at www.iextrading.com, at the principal
office of the Exchange, and at the
Commission’s Public Reference Room.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
self-regulatory organization included
statements concerning the purpose of
and basis for the proposed rule change
and discussed any comments it received
on the proposed rule change. The text
of these statement may be examined at
the places specified in Item IV below.
The self-regulatory organization has
prepared summaries, set forth in
Sections A, B, and C below, of the most
significant aspects of such statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
March 10, 2017.
1. Purpose
Pursuant to Section 19(b)(1) 1 of the
Securities Exchange Act of 1934 2 and
Rule 19b–4 thereunder,3 notice is
hereby given that, on Februrary 28,
2017, the Investors Exchange LLC filed
with the Securities and Exchange
Commission (‘‘Commission’’) the
proposed rule change as described in
Items I and II below, which Items have
been prepared by the self-regulatory
organization. The Commission is
publishing this notice to solicit
comments on the proposed rule change
from interested persons.
Overview
The purpose of the proposed rule
change is to amend Rule 11.190(g) to
modify the quote instability coefficients
and quote instability threshold included
in the quote instability calculation
specified in subparagraph (g)(1) for
purposes of determining whether a
crumbling quote exists. When the
Exchange determines that the quote in
a particular security is crumbling from
the national best bid, as comprised of
Protected Quotations (‘‘Protected
NBB’’), Discretionary Peg buy orders are
restricted from exercising price
discretion to trade against interest above
the NBB. Similarly, when the Exchange
determines that the quote in a particular
security is crumbling from the national
best offer, as comprised of Protected
Quotations (‘‘Protected NBO’’ and
collectively with the Protected NBB the
‘‘Protected NBBO’’), Discretionary Peg
sell orders are restricted from exercising
price discretion to trade against interest
below the NBO.
mstockstill on DSK3G9T082PROD with NOTICES
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
Pursuant to the provisions of Section
19(b)(1) under the Securities Exchange
Act of 1934 (‘‘Act’’),4 and Rule 19b–4
thereunder,5 Investors Exchange LLC
(‘‘IEX’’ or ‘‘Exchange’’) is filing with the
Commission a proposed rule change to
amend Rule 11.190(g) to incrementally
optimize and enhance the effectiveness
of the quote instability calculation in
determining whether a crumbling quote
exists. The Exchange has designated this
proposal as non-controversial and
provided the Commission with the
21 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 15 U.S.C. 78a.
3 17 CFR 240.19b–4.
4 15 U.S.C. 78s(b)(1).
5 17 CFR 240.19b–4.
1 15
VerDate Sep<11>2014
17:12 Mar 15, 2017
Discretionary Peg Order
The manner in which Discretionary
Peg orders operate is described in Rule
11.190(b)(10). Specifically, a
Discretionary Peg order is a nondisplayed, pegged order that upon entry
into the System, the price of the order
is automatically adjusted by the System
to be equal to the less aggressive of the
6 17
Jkt 241001
PO 00000
CFR 240.19b–4(f)(6)(iii).
Frm 00086
Fmt 4703
Sfmt 4703
Midpoint Price or the order’s limit
price, if any. When unexecuted shares
of such order are posted to the Order
Book, the price of the order is
automatically adjusted by the System to
be equal to and ranked at the less
aggressive of the primary quote or the
order’s limit price and is automatically
adjusted by the System in response to
changes in the NBB (NBO) for buy (sell)
orders up (down) to the order’s limit
price, if any. In order to meet the limit
price of active orders on the Order Book,
a Discretionary Peg order will exercise
the least amount of price discretion
necessary from the Discretionary Peg
order’s resting price to its discretionary
price (defined as the less aggressive of
the Midpoint Price or the Discretionary
Peg order’s limit price, if any), except
during periods of quote instability (i.e.,
when a crumbling quote exists) as
defined in paragraph Rule 11.190(g).
In determining whether a crumbling
quote exists, the Exchange utilizes real
time relative quoting activity of
Protected Quotations (not including
quotations of the Exchange) and a
proprietary mathematical calculation
(the ‘‘quote instability calculation’’) to
assess the probability of an imminent
change to the current Protected NBB to
a lower price or Protected NBO to a
higher price for a particular security
(‘‘quote instability factor’’). When the
quoting activity meets predefined
criteria and the quote instability factor
calculated is greater than the Exchange’s
defined threshold (‘‘quote instability
threshold’’), the System treats the quote
as not stable (‘‘quote instability’’ or a
‘‘crumbling quote’’). During all other
times, the quote is considered stable
(‘‘quote stability’’). The System
independently assesses the stability of
the Protected NBB and Protected NBO
for each security.
When the System determines that a
quote, either the Protected NBB or the
Protected NBO, is unstable, the
determination remains in effect at that
price level for two (2) milliseconds. The
System will only treat one side of the
Protected NBBO as unstable in a
particular security at any given time.7
By not permitting resting Discretionary
Peg orders to execute at a price that is
more aggressive than the near-side
protected NBB or NBO (as applicable)
during periods of quote instability, the
Exchange System is intended to attempt
to protect such orders from unfavorable
executions when the market is moving
against them. Once the market has
moved and the Exchange System deems
the near-side Protected NBB or NBO (as
applicable) to be stable (pursuant to a
7 See,
E:\FR\FM\16MRN1.SGM
Rule 11.190(g).
16MRN1
mstockstill on DSK3G9T082PROD with NOTICES
Federal Register / Vol. 82, No. 50 / Thursday, March 16, 2017 / Notices
pre-determined, objective set of
conditions as described below),
Discretionary Peg orders are permitted
to exercise discretion up to (for buy
orders) or down to (for sell orders) the
midpoint of the NBBO in order to meet
the limit price of active orders on the
order book and thereby potentially
provide price improvement to such
active orders.
Quote stability or instability (also
referred to as a crumbling quote) is an
assessment that the Exchange System
makes on a real-time basis, based on a
pre-determined, objective set of
conditions specified in Rule
11.190(g)(1). Specifically, quote
instability, or the presence of a
crumbling quote, is determined by the
System when the following factors
occur:
(A) The Protected NBB and Protected
NBO are the same as the Protected NBB
and Protected NBO one (1) millisecond
ago; and
(B) the Protected NBBO spread is less
than or equal to the thirty (30) day
median Protected NBBO spread during
the Regular Market Session; and
(C) there are more Protected
Quotations on the far side, i.e. more
Protected Quotations on the Protected
NBO than the Protected NBB for buy
orders, or more Protected Quotations on
the Protected NBB than the Protected
NBO for sell orders; and
(D) the quote instability factor result
from the quote stability calculation is
greater than the defined quote
instability threshold.
(i) Quote Instability Factor. The
Exchange’s proprietary quote stability
calculation used to determine the
current quote instability factor is
defined by the following formula that
utilizes the quote stability coefficients
and quote stability variables defined
below:
1/(1 + e ∧¥(C0 + C1 * N + C2 * F + C3
* N¥1 + C4 * F¥1 + C5 * E + C6 *
D))
(a) Quote Stability Coefficients. The
Exchange utilizes the values below for
the quote stability coefficients.
(1) C0 = ¥1.3493
(2) C1 = ¥1.1409
(3) C2 = 0.2671
(4) C3 = 0.5141
(5) C4 = ¥0.1970
(6) C5 = 0.1347
(7) C6 = 0.6862
(b) Quote Stability Variables. The
Exchange utilizes the quote stability
variables defined below to calculate the
current quote instability factor.
(1) N = the number of Protected
Quotations on the near side of the
market, i.e. Protected NBB for buy
VerDate Sep<11>2014
17:12 Mar 15, 2017
Jkt 241001
orders and Protected NBO for sell
orders.
(2) F = the number of Protected
Quotations on the far side of the market,
i.e. Protected NBO for buy orders and
Protected NBB for sell orders.
(3) N¥1 = the number of Protected
Quotations on the near side of the
market one (1) millisecond ago.
(4) F¥1 = the number of Protected
Quotations on the far side of the market
one (1) millisecond ago.
(5) E = a Boolean indicator that equals
1 if the last two quotation updates have
been quotations of protected markets
moving away from the near side of the
market on the same side of the market
and at the same price.
(6) D = the number of these three (3)
venues that moved away from the near
side of the market on the same side of
the market and at the same price in the
prior one (1) millisecond: XNGS, EDGX,
BATS.
(ii) Quote Instability Threshold. The
Exchange utilizes a quote instability
threshold of 0.6.
Rule 11.190(g)(1)(D)(iii) provides that
the Exchange reserves the right to
modify the quote instability coefficients
or quote instability threshold at any
time, subject to a filing of a proposed
rule change with the SEC. The Exchange
is proposing such changes in this rule
filing.
Changes to Quote Instability
Coefficients and Quote Instability
Threshold
IEX conducted an analysis of the
effectiveness of the existing factors in
predicting whether a crumbling quote
would occur, by reviewing randomly
selected market data from November
2016 through mid-February 2017. The
results of the analysis were verified by
reviewing randomly selected market
data from January and mid-February
2017. Based on this analysis, the
Exchange has determined that further
optimization of the existing factors
would incrementally increase the
accuracy of the formula in predicting
whether a crumbling quote will occur.
The following describes the proposed
changes:
1. Rule 11.190(g) states that the
Exchange utilizes real time relative
quoting activity of Protected Quotations,
not including IEX protected quotations,
in the quote instability calculation. As
proposed, the Exchange is proposing to
include the protection quotations of the
following exchanges in the quote
instability calculation: New York Stock
Exchange, NYSE Arca, Nasdaq BX, Bats
BZX Exchange, Bats BYX Exchange,
Bats EDGX Exchange, and Bats EDGA
Exchange. In connection with our
PO 00000
Frm 00087
Fmt 4703
Sfmt 4703
14059
analysis of market data, as described
above, the Exchange considered several
different permutations of which
exchanges to include in the model. The
research identified that using the
Protected Quotations of these specific
eight exchanges in the aggregate
resulted in the greatest predictive power
of all permutations of exchanges
assessed for determining a crumbling
quote.
2. The Exchange proposes to simplify
the crumbling quote calculation
specified in Rule 11.190(g)(1) by
eliminating the three (3) preconditions
related to the stability and ratio of the
protected national best bid and offer
(‘‘NBBO’’),8 and base the determination
solely on whether the quote instability
factor result from the quote stability
calculation is greater than the defined
quote instability threshold. Based on
our analysis of market data, as described
above, the Exchange believes that the
simplification would incrementally
increase the accuracy of the formula in
predicting a crumbling quote by
expanding the scope of the model to
additional situations where a crumbling
quote exists in the absence of the preconditions.
3. The Exchange proposes to revise
the quote stability variables currently
specified in subparagraph (1)(D)(i)(b) of
Rule 11.190(g) by adding seven (7) new
variables (NC, FC, Delta, EPos, ENeg,
EPosPrev, and ENegPrev) and retiring
four (4) variables (N–1, F–1, E, and D).9
Specifically, based on our analysis of
market data, as described above, the
Exchange identified that considering the
maximum change over the course of the
previous millisecond up to the most
recent Protected NBBO change was a
more accurate indicator of a crumbling
quote than simply looking at the
absolute state of the market one
millisecond previously. The
replacement of N–1, F–1, and D with
NC, FC, and Delta, respectively, reflects
this finding. Additionally, we found
that looking at the previous two quote
changes on a more granular basis
(specifically, looking at whether each of
the last two events individually was a
8 Currently IEX Rule 11.190(g)(1) provides that in
determining whether a crumbling quote exists the
following other factors will be considered: The
Protected NBB and Protected NBO are the same as
the Protected NBB and Protected NBO one (1)
millisecond ago, the Protected NBBO spread is less
than or equal to the thirty (30) day median
Protected NBBO spread during the Regular Market
Session, and there are more Protected Quotations
on the far side, i.e., more Protected Quotations on
the Protected NBO than the Protected NBB for buy
orders or more Protected Quotations on the
Protected NBO for sell orders.
9 Two (2) of the existing variables (N and F) will
be retained.
E:\FR\FM\16MRN1.SGM
16MRN1
14060
Federal Register / Vol. 82, No. 50 / Thursday, March 16, 2017 / Notices
quote dropping off the near side or
joining the near side, rather than
whether both of the last two events
dropped off the near side) was a more
accurate indicator of a crumbling quote
than a simple boolean factor indicating
whether both of the last two events were
quotes dropping off the inside.
Replacing E with 4 separate factors—
EPos, ENeg, EPosPrev, and ENegPrev—
reflects this finding.
4. The Quote Stability Coefficients
specified in subparagraph (1)(D)(i) of
Rule 11.190(g) are proposed to be
modified to take into account the recent
market data analysis, as well as the
changes to the quote stability variables
as described above. Specifically, as
proposed the seven (7) existing
coefficients will be modified and three
(3) new coefficients will be added. The
Exchange believes that the
modifications, as proposed, will
increase the accuracy of the quote
instability calculation.
5. The Exchange proposes to modify
and re-optimize the Quote Instability
Threshold specified in subparagraph
(1)(D)(ii) of Rule 11.190(g) based on the
recent market data analysis and the new
quote stability variables. Specifically,
the threshold size would vary based on
the spread of the Protected NBBO.10
Based on its data analysis, as described
above, the Exchange concluded that
tiering the threshold would reduce the
rate of false positives. Consequently, the
Exchange believes that the
modifications, as proposed, will
increase the accuracy of the quote
instability calculation.
6. Finally, the Exchange proposes
conforming numbering changes to Rule
11.190(g) to reflect elimination of the
three (3) preconditions for the
crumbling quote calculation specified in
Rule 11.190(g)(1) as described above.
The Exchange will announce the
implementation date of the proposed
rule change by Trader Notice at least
five business days in advance of such
implementation date and within 90 days
of effectiveness of this proposed rule
change.
mstockstill on DSK3G9T082PROD with NOTICES
2. Statutory Basis
IEX believes that the proposed rule
change is consistent with Section 6(b) 11
of the Act in general, and furthers the
objectives of Section 6(b)(5) of the Act,12
in particular, in that it is designed to
prevent fraudulent and manipulative
acts and practices, to promote just and
10 The spread is defined in proposed paragraph
(1)(D)(ii) as the Protected Best Offer minus
Protected Best Bid.
11 15 U.S.C. 78f.
12 15 U.S.C. 78f(b)(5).
VerDate Sep<11>2014
17:12 Mar 15, 2017
Jkt 241001
equitable principles of trade, to foster
cooperation and coordination with
persons engaged in facilitating
transactions in securities, to remove
impediments to and perfect the
mechanism of a free and open market
and a national market system and, in
general, to protect investors and the
public interest. Specifically, and as
discussed above, the proposal is
designed to optimize and enhance the
effectiveness of the quote instability
calculation in determining whether a
crumbling quote exists. The Exchange
believes that the proposed changes are
designed to protect investors and the
public interest by enhancing the
accuracy of the Exchange’s quote
instability calculation in determining
whether a crumbling quote exists
thereby preventing Discretionary Peg
orders from trading at prices more
aggressive than the near side of the
market (NBB for buy orders, NBO for
sell orders) to protect such orders from
unfavorable executions when the market
appears to be moving against them. As
discussed in the Purpose section, each
of the proposed changes are based on
the Exchange’s analysis of market data,
which supports that, in the aggregate
and individually, the proposed changes
would increase the accuracy of the
Exchange’s quote instability calculation.
As proposed, the new quote
instability calculation will continue to
be a fixed formula specified
transparently in IEX’s rules. The
Exchange is not proposing to add any
new functionality, but merely to revise
the fixed formula based on market data
analysis designed to increase the
accuracy of the formula in predicting a
crumbling quote, and as contemplated
by the rule.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
IEX does not believe that the
proposed rule change will result in any
burden on competition that is not
necessary or appropriate in furtherance
of the purposes of the Act. The
proposed change will apply equally to
all IEX Members. The Commission has
already considered the Exchange’s
Discretionary Peg order type in
connection with its grant of IEX’s
application for registration as a national
securities exchange under Sections 6
and 19 of the Act.13 The proposed rule
change is designed to merely enhance
the accuracy of the quote instability
calculation specified in Rule 11.190(g);
13 See Securities Exchange Act Release No. 34–
78101 (June 17, 2016), 81 FR 41142 (June 23, 2016)
(File No. 10–222).
PO 00000
Frm 00088
Fmt 4703
Sfmt 4703
therefore, no new burdens are being
proposed.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
Written comments were neither
solicited nor received.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Because the foregoing proposed rule
change does not: (i) Significantly affect
the protection of investors or the public
interest; (ii) impose any significant
burden on competition; and (iii) become
operative for 30 days from the date on
which it was filed, or such shorter time
as the Commission may designate, it has
become effective pursuant to Section
19(b)(3)(A) of the Act 14 and Rule 19b–
4(f)(6) thereunder.15
A proposed rule change filed under
Rule 19b–4(f)(6) 16 normally does not
become operative prior to 30 days after
the date of the filing. However, pursuant
to Rule 19b–4(f)(6)(iii),17 the
Commission may designate a shorter
time if such action is consistent with the
protection of investors and the public
interest. The Exchange has asked the
Commission to waive the 30-day
operative delay. The Exchange stated
that the proposed rule change is
designed to optimize the fixed quote
instability equation contained in the
rule without introducing new
functionality or materially changing the
operation of the current functionality in
a manner not contemplated by the rule.
The Exchange believes that its proposal
will operate to protect Members that
enter Discretionary Peg orders from
unfavorable executions when the market
is moving against such orders, and
noted that waiver of the operative delay
would allow the Exchange to implement
the optimized formula without delay.
As the Exchange’s proposal is intended
to further refine the ability of the
discretionary peg order type to meet its
stated objectives as reflected in the
Exchange’s rule, the Commission
believes that waiver of the operative
delay is consistent with the protection
of investors and the public interest.
Therefore, the Commission hereby
14 15
U.S.C. 78s(b)(3)(A).
CFR 240.19b–4(f)(6). As required under Rule
19b–4(f)(6)(iii), IEX provided the Commission with
written notice of its intent to file the proposed rule
change, along with a brief description and the text
of the proposed rule change, at least five business
days prior to the date of filing of the proposed rule
change, or such shorter time as designated by the
Commission.
16 17 CFR 240.19b–4(f)(6).
17 17 CFR 240.19b–4(f)(6)(iii).
15 17
E:\FR\FM\16MRN1.SGM
16MRN1
Federal Register / Vol. 82, No. 50 / Thursday, March 16, 2017 / Notices
waives the operative delay and
designates the proposed rule change
operative upon filing.18
At any time within 60 days of the
filing of the proposed rule change, the
Commission summarily may
temporarily suspend such rule change if
it appears to the Commission that such
action is necessary or appropriate in the
public interest, for the protection of
investors, or otherwise in furtherance of
the purposes of the Act. If the
Commission takes such action, the
Commission shall institute proceedings
to determine whether the proposed rule
should be approved or disapproved.
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:
mstockstill on DSK3G9T082PROD with NOTICES
Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include File SR–IEX–
2017–06 on the subject line.
Paper Comments
• Send paper comments in triplicate
to Secretary, Securities and Exchange
Commission, 100 F Street NE.,
Washington, DC 20549–1090.
All submissions should refer to File
Number SR–IEX–2017–06. This file
number should be included on the
subject line if email is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
Internet Web site (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for Web site viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE.,
Washington, DC 20549, on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of the
filing also will be available for
inspection and copying at the principal
office of the Exchange. All comments
received will be posted without change;
the Commission does not edit personal
identifying information from
submissions. You should submit only
information that you wish to make
available publicly. All submissions
should refer to File Number SR–IEX–
2017–06 and should be submitted on or
before April 6, 2017.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.19
Eduardo A. Aleman,
Assistant Secretary.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
[FR Doc. 2017–05210 Filed 3–15–17; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–80215; File No. SR–
BatsEDGA–2017–05]
Self-Regulatory Organizations; Bats
EDGA Exchange, Inc.; Notice of Filing
and Immediate Effectiveness of a
Proposed Rule Change to Rule 11.21
To Modify the Date of Appendix B Web
Site Data Publication Pursuant to the
Regulation NMS Plan To Implement a
Tick Size Pilot Program
March 10, 2017.
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
28, 2017, Bats EDGA Exchange, Inc. (the
‘‘Exchange’’ or ‘‘EDGA’’) filed with the
Securities and Exchange Commission
(‘‘Commission’’) the proposed rule
change as described in Items I and II
below, which Items have been prepared
by the Exchange. The Exchange has
designated this proposal as a ‘‘noncontroversial’’ proposed rule change
pursuant to Section 19(b)(3)(A) of the
Act 3 and Rule 19b–4(f)(6)(iii)
thereunder,4 which renders it effective
upon filing with the Commission. The
Commission is publishing this notice to
solicit comments on the proposed rule
change from interested persons.
19 17
18 For
purposes only of waiving the 30-day
operative delay, the Commission has also
considered the proposed rule’s impact on
efficiency, competition, and capital formation. See
15 U.S.C. 78c(f).
VerDate Sep<11>2014
17:12 Mar 15, 2017
Jkt 241001
14061
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 15 U.S.C. 78s(b)(3)(A).
4 17 CFR 240.19b–4(f)(6)(iii).
1 15
PO 00000
Frm 00089
Fmt 4703
Sfmt 4703
The Exchange filed a proposal to
amend Rule 11.21 to modify the date of
Appendix B Web site data publication
pursuant to the Regulation NMS Plan to
Implement a Tick Size Pilot Program
(‘‘Plan’’).
The text of the proposed rule change
is available at the Exchange’s Web site
at www.bats.com, at the principal office
of the Exchange, and at the
Commission’s Public Reference Room.
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 parts of such
statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
Rule 11.21(b) (Compliance with Data
Collection Requirements) 5 implements
the data collection and Web site
publication requirements of the Plan.6
Rule 11.21(b).08 provides, among other
things, that the requirement that the
Exchange or Designated Examining
Authority (‘‘DEA’’) make certain data
publicly available on their Web site
pursuant to Appendix B and C to the
Plan shall commence at the beginning of
the Pilot Period,7 and that the Exchange
or DEA shall make data for the Pre-Pilot
Period publicly available on their Web
5 See Exchange Rule 11.21(b). See also Securities
Exchange Act Release Nos. 77417 (March 22, 2016),
81 FR 17219 (March 28, 2016); and 78799
(September 9, 2016), 81 FR 63549 (September 15,
2016).
6 The Participants filed the Plan to comply with
an order issued by the Commission on June 24,
2014. See Letter from Brendon J. Weiss, Vice
President, Intercontinental Exchange, Inc., to
Secretary, Commission, dated August 25, 2014
(‘‘SRO Tick Size Plan Proposal’’). See Securities
Exchange Act Release No 72460 (June 24, 2014), 79
FR 36840 (June 30, 2014); see also Securities
Exchange Act Release No. 74892 (May 6, 2015), 80
FR 27513 (May 13, 2015).
7 Unless otherwise defined herein, capitalized
terms have the meaning ascribed to them in Rule
11.21.
E:\FR\FM\16MRN1.SGM
16MRN1
Agencies
[Federal Register Volume 82, Number 50 (Thursday, March 16, 2017)]
[Notices]
[Pages 14058-14061]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-05210]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-80202; File No. SR-IEX-2017-06]
Self-Regulatory Organizations; Investors Exchange LLC; Notice of
Filing and Immediate Effectiveness of Proposed Rule Change To Amend
Rule 11.190(g) To Modify the Quote Instability Coefficients and Quote
Instability Threshold Included in the Quote Instability Calculation
Specified in Subparagraph (g)(1) for Purposes of Determining Whether a
Crumbling Quote Exists
March 10, 2017.
Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of
1934 \2\ and Rule 19b-4 thereunder,\3\ notice is hereby given that, on
Februrary 28, 2017, the Investors Exchange LLC filed with the
Securities and Exchange Commission (``Commission'') the proposed rule
change as described in Items I and II below, which Items have been
prepared by the self-regulatory organization. The Commission is
publishing this notice to solicit comments on the proposed rule change
from interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 15 U.S.C. 78a.
\3\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
Pursuant to the provisions of Section 19(b)(1) under the Securities
Exchange Act of 1934 (``Act''),\4\ and Rule 19b-4 thereunder,\5\
Investors Exchange LLC (``IEX'' or ``Exchange'') is filing with the
Commission a proposed rule change to amend Rule 11.190(g) to
incrementally optimize and enhance the effectiveness of the quote
instability calculation in determining whether a crumbling quote
exists. The Exchange has designated this proposal as non-controversial
and provided the Commission with the notice required by Rule 19b-
4(f)(6)(iii) under the Act.\6\
---------------------------------------------------------------------------
\4\ 15 U.S.C. 78s(b)(1).
\5\ 17 CFR 240.19b-4.
\6\ 17 CFR 240.19b-4(f)(6)(iii).
---------------------------------------------------------------------------
The text of the proposed rule change is available at the Exchange's
Web site at www.iextrading.com, at the principal office of the
Exchange, and at the Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the self-regulatory organization
included statements concerning the purpose of and basis for the
proposed rule change and discussed any comments it received on the
proposed rule change. The text of these statement may be examined at
the places specified in Item IV below. The self-regulatory organization
has prepared summaries, set forth in Sections A, B, and C below, of the
most significant aspects of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
Overview
The purpose of the proposed rule change is to amend Rule 11.190(g)
to modify the quote instability coefficients and quote instability
threshold included in the quote instability calculation specified in
subparagraph (g)(1) for purposes of determining whether a crumbling
quote exists. When the Exchange determines that the quote in a
particular security is crumbling from the national best bid, as
comprised of Protected Quotations (``Protected NBB''), Discretionary
Peg buy orders are restricted from exercising price discretion to trade
against interest above the NBB. Similarly, when the Exchange determines
that the quote in a particular security is crumbling from the national
best offer, as comprised of Protected Quotations (``Protected NBO'' and
collectively with the Protected NBB the ``Protected NBBO''),
Discretionary Peg sell orders are restricted from exercising price
discretion to trade against interest below the NBO.
Discretionary Peg Order
The manner in which Discretionary Peg orders operate is described
in Rule 11.190(b)(10). Specifically, a Discretionary Peg order is a
non-displayed, pegged order that upon entry into the System, the price
of the order is automatically adjusted by the System to be equal to the
less aggressive of the Midpoint Price or the order's limit price, if
any. When unexecuted shares of such order are posted to the Order Book,
the price of the order is automatically adjusted by the System to be
equal to and ranked at the less aggressive of the primary quote or the
order's limit price and is automatically adjusted by the System in
response to changes in the NBB (NBO) for buy (sell) orders up (down) to
the order's limit price, if any. In order to meet the limit price of
active orders on the Order Book, a Discretionary Peg order will
exercise the least amount of price discretion necessary from the
Discretionary Peg order's resting price to its discretionary price
(defined as the less aggressive of the Midpoint Price or the
Discretionary Peg order's limit price, if any), except during periods
of quote instability (i.e., when a crumbling quote exists) as defined
in paragraph Rule 11.190(g).
In determining whether a crumbling quote exists, the Exchange
utilizes real time relative quoting activity of Protected Quotations
(not including quotations of the Exchange) and a proprietary
mathematical calculation (the ``quote instability calculation'') to
assess the probability of an imminent change to the current Protected
NBB to a lower price or Protected NBO to a higher price for a
particular security (``quote instability factor''). When the quoting
activity meets predefined criteria and the quote instability factor
calculated is greater than the Exchange's defined threshold (``quote
instability threshold''), the System treats the quote as not stable
(``quote instability'' or a ``crumbling quote''). During all other
times, the quote is considered stable (``quote stability''). The System
independently assesses the stability of the Protected NBB and Protected
NBO for each security.
When the System determines that a quote, either the Protected NBB
or the Protected NBO, is unstable, the determination remains in effect
at that price level for two (2) milliseconds. The System will only
treat one side of the Protected NBBO as unstable in a particular
security at any given time.\7\ By not permitting resting Discretionary
Peg orders to execute at a price that is more aggressive than the near-
side protected NBB or NBO (as applicable) during periods of quote
instability, the Exchange System is intended to attempt to protect such
orders from unfavorable executions when the market is moving against
them. Once the market has moved and the Exchange System deems the near-
side Protected NBB or NBO (as applicable) to be stable (pursuant to a
[[Page 14059]]
pre-determined, objective set of conditions as described below),
Discretionary Peg orders are permitted to exercise discretion up to
(for buy orders) or down to (for sell orders) the midpoint of the NBBO
in order to meet the limit price of active orders on the order book and
thereby potentially provide price improvement to such active orders.
---------------------------------------------------------------------------
\7\ See, Rule 11.190(g).
---------------------------------------------------------------------------
Quote stability or instability (also referred to as a crumbling
quote) is an assessment that the Exchange System makes on a real-time
basis, based on a pre-determined, objective set of conditions specified
in Rule 11.190(g)(1). Specifically, quote instability, or the presence
of a crumbling quote, is determined by the System when the following
factors occur:
(A) The Protected NBB and Protected NBO are the same as the
Protected NBB and Protected NBO one (1) millisecond ago; and
(B) the Protected NBBO spread is less than or equal to the thirty
(30) day median Protected NBBO spread during the Regular Market
Session; and
(C) there are more Protected Quotations on the far side, i.e. more
Protected Quotations on the Protected NBO than the Protected NBB for
buy orders, or more Protected Quotations on the Protected NBB than the
Protected NBO for sell orders; and
(D) the quote instability factor result from the quote stability
calculation is greater than the defined quote instability threshold.
(i) Quote Instability Factor. The Exchange's proprietary quote
stability calculation used to determine the current quote instability
factor is defined by the following formula that utilizes the quote
stability coefficients and quote stability variables defined below:
1/(1 + e [supcaret]-(C0 + C1 * N + C2
* F + C3 * N-1 + C4 * F-1 +
C5 * E + C6 * D))
(a) Quote Stability Coefficients. The Exchange utilizes the values
below for the quote stability coefficients.
(1) C0 = -1.3493
(2) C1 = -1.1409
(3) C2 = 0.2671
(4) C3 = 0.5141
(5) C4 = -0.1970
(6) C5 = 0.1347
(7) C6 = 0.6862
(b) Quote Stability Variables. The Exchange utilizes the quote
stability variables defined below to calculate the current quote
instability factor.
(1) N = the number of Protected Quotations on the near side of the
market, i.e. Protected NBB for buy orders and Protected NBO for sell
orders.
(2) F = the number of Protected Quotations on the far side of the
market, i.e. Protected NBO for buy orders and Protected NBB for sell
orders.
(3) N-1 = the number of Protected Quotations on the near
side of the market one (1) millisecond ago.
(4) F-1 = the number of Protected Quotations on the far
side of the market one (1) millisecond ago.
(5) E = a Boolean indicator that equals 1 if the last two quotation
updates have been quotations of protected markets moving away from the
near side of the market on the same side of the market and at the same
price.
(6) D = the number of these three (3) venues that moved away from
the near side of the market on the same side of the market and at the
same price in the prior one (1) millisecond: XNGS, EDGX, BATS.
(ii) Quote Instability Threshold. The Exchange utilizes a quote
instability threshold of 0.6.
Rule 11.190(g)(1)(D)(iii) provides that the Exchange reserves the
right to modify the quote instability coefficients or quote instability
threshold at any time, subject to a filing of a proposed rule change
with the SEC. The Exchange is proposing such changes in this rule
filing.
Changes to Quote Instability Coefficients and Quote Instability
Threshold
IEX conducted an analysis of the effectiveness of the existing
factors in predicting whether a crumbling quote would occur, by
reviewing randomly selected market data from November 2016 through mid-
February 2017. The results of the analysis were verified by reviewing
randomly selected market data from January and mid-February 2017. Based
on this analysis, the Exchange has determined that further optimization
of the existing factors would incrementally increase the accuracy of
the formula in predicting whether a crumbling quote will occur. The
following describes the proposed changes:
1. Rule 11.190(g) states that the Exchange utilizes real time
relative quoting activity of Protected Quotations, not including IEX
protected quotations, in the quote instability calculation. As
proposed, the Exchange is proposing to include the protection
quotations of the following exchanges in the quote instability
calculation: New York Stock Exchange, NYSE Arca, Nasdaq BX, Bats BZX
Exchange, Bats BYX Exchange, Bats EDGX Exchange, and Bats EDGA
Exchange. In connection with our analysis of market data, as described
above, the Exchange considered several different permutations of which
exchanges to include in the model. The research identified that using
the Protected Quotations of these specific eight exchanges in the
aggregate resulted in the greatest predictive power of all permutations
of exchanges assessed for determining a crumbling quote.
2. The Exchange proposes to simplify the crumbling quote
calculation specified in Rule 11.190(g)(1) by eliminating the three (3)
preconditions related to the stability and ratio of the protected
national best bid and offer (``NBBO''),\8\ and base the determination
solely on whether the quote instability factor result from the quote
stability calculation is greater than the defined quote instability
threshold. Based on our analysis of market data, as described above,
the Exchange believes that the simplification would incrementally
increase the accuracy of the formula in predicting a crumbling quote by
expanding the scope of the model to additional situations where a
crumbling quote exists in the absence of the pre-conditions.
---------------------------------------------------------------------------
\8\ Currently IEX Rule 11.190(g)(1) provides that in determining
whether a crumbling quote exists the following other factors will be
considered: The Protected NBB and Protected NBO are the same as the
Protected NBB and Protected NBO one (1) millisecond ago, the
Protected NBBO spread is less than or equal to the thirty (30) day
median Protected NBBO spread during the Regular Market Session, and
there are more Protected Quotations on the far side, i.e., more
Protected Quotations on the Protected NBO than the Protected NBB for
buy orders or more Protected Quotations on the Protected NBO for
sell orders.
---------------------------------------------------------------------------
3. The Exchange proposes to revise the quote stability variables
currently specified in subparagraph (1)(D)(i)(b) of Rule 11.190(g) by
adding seven (7) new variables (NC, FC, Delta, EPos, ENeg, EPosPrev,
and ENegPrev) and retiring four (4) variables (N-1, F-1, E, and D).\9\
Specifically, based on our analysis of market data, as described above,
the Exchange identified that considering the maximum change over the
course of the previous millisecond up to the most recent Protected NBBO
change was a more accurate indicator of a crumbling quote than simply
looking at the absolute state of the market one millisecond previously.
The replacement of N-1, F-1, and D with NC, FC, and Delta,
respectively, reflects this finding. Additionally, we found that
looking at the previous two quote changes on a more granular basis
(specifically, looking at whether each of the last two events
individually was a
[[Page 14060]]
quote dropping off the near side or joining the near side, rather than
whether both of the last two events dropped off the near side) was a
more accurate indicator of a crumbling quote than a simple boolean
factor indicating whether both of the last two events were quotes
dropping off the inside. Replacing E with 4 separate factors--EPos,
ENeg, EPosPrev, and ENegPrev--reflects this finding.
---------------------------------------------------------------------------
\9\ Two (2) of the existing variables (N and F) will be
retained.
---------------------------------------------------------------------------
4. The Quote Stability Coefficients specified in subparagraph
(1)(D)(i) of Rule 11.190(g) are proposed to be modified to take into
account the recent market data analysis, as well as the changes to the
quote stability variables as described above. Specifically, as proposed
the seven (7) existing coefficients will be modified and three (3) new
coefficients will be added. The Exchange believes that the
modifications, as proposed, will increase the accuracy of the quote
instability calculation.
5. The Exchange proposes to modify and re-optimize the Quote
Instability Threshold specified in subparagraph (1)(D)(ii) of Rule
11.190(g) based on the recent market data analysis and the new quote
stability variables. Specifically, the threshold size would vary based
on the spread of the Protected NBBO.\10\ Based on its data analysis, as
described above, the Exchange concluded that tiering the threshold
would reduce the rate of false positives. Consequently, the Exchange
believes that the modifications, as proposed, will increase the
accuracy of the quote instability calculation.
---------------------------------------------------------------------------
\10\ The spread is defined in proposed paragraph (1)(D)(ii) as
the Protected Best Offer minus Protected Best Bid.
---------------------------------------------------------------------------
6. Finally, the Exchange proposes conforming numbering changes to
Rule 11.190(g) to reflect elimination of the three (3) preconditions
for the crumbling quote calculation specified in Rule 11.190(g)(1) as
described above.
The Exchange will announce the implementation date of the proposed
rule change by Trader Notice at least five business days in advance of
such implementation date and within 90 days of effectiveness of this
proposed rule change.
2. Statutory Basis
IEX believes that the proposed rule change is consistent with
Section 6(b) \11\ of the Act in general, and furthers the objectives of
Section 6(b)(5) of the Act,\12\ in particular, in that it is designed
to prevent fraudulent and manipulative acts and practices, to promote
just and equitable principles of trade, to foster cooperation and
coordination with persons engaged in facilitating transactions in
securities, to remove impediments to and perfect the mechanism of a
free and open market and a national market system and, in general, to
protect investors and the public interest. Specifically, and as
discussed above, the proposal is designed to optimize and enhance the
effectiveness of the quote instability calculation in determining
whether a crumbling quote exists. The Exchange believes that the
proposed changes are designed to protect investors and the public
interest by enhancing the accuracy of the Exchange's quote instability
calculation in determining whether a crumbling quote exists thereby
preventing Discretionary Peg orders from trading at prices more
aggressive than the near side of the market (NBB for buy orders, NBO
for sell orders) to protect such orders from unfavorable executions
when the market appears to be moving against them. As discussed in the
Purpose section, each of the proposed changes are based on the
Exchange's analysis of market data, which supports that, in the
aggregate and individually, the proposed changes would increase the
accuracy of the Exchange's quote instability calculation.
---------------------------------------------------------------------------
\11\ 15 U.S.C. 78f.
\12\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
As proposed, the new quote instability calculation will continue to
be a fixed formula specified transparently in IEX's rules. The Exchange
is not proposing to add any new functionality, but merely to revise the
fixed formula based on market data analysis designed to increase the
accuracy of the formula in predicting a crumbling quote, and as
contemplated by the rule.
B. Self-Regulatory Organization's Statement on Burden on Competition
IEX does not believe that the proposed rule change will result in
any burden on competition that is not necessary or appropriate in
furtherance of the purposes of the Act. The proposed change will apply
equally to all IEX Members. The Commission has already considered the
Exchange's Discretionary Peg order type in connection with its grant of
IEX's application for registration as a national securities exchange
under Sections 6 and 19 of the Act.\13\ The proposed rule change is
designed to merely enhance the accuracy of the quote instability
calculation specified in Rule 11.190(g); therefore, no new burdens are
being proposed.
---------------------------------------------------------------------------
\13\ See Securities Exchange Act Release No. 34-78101 (June 17,
2016), 81 FR 41142 (June 23, 2016) (File No. 10-222).
---------------------------------------------------------------------------
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
Written comments were neither solicited nor received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Because the foregoing proposed rule change does not: (i)
Significantly affect the protection of investors or the public
interest; (ii) impose any significant burden on competition; and (iii)
become operative for 30 days from the date on which it was filed, or
such shorter time as the Commission may designate, it has become
effective pursuant to Section 19(b)(3)(A) of the Act \14\ and Rule 19b-
4(f)(6) thereunder.\15\
---------------------------------------------------------------------------
\14\ 15 U.S.C. 78s(b)(3)(A).
\15\ 17 CFR 240.19b-4(f)(6). As required under Rule 19b-
4(f)(6)(iii), IEX provided the Commission with written notice of its
intent to file the proposed rule change, along with a brief
description and the text of the proposed rule change, at least five
business days prior to the date of filing of the proposed rule
change, or such shorter time as designated by the Commission.
---------------------------------------------------------------------------
A proposed rule change filed under Rule 19b-4(f)(6) \16\ normally
does not become operative prior to 30 days after the date of the
filing. However, pursuant to Rule 19b-4(f)(6)(iii),\17\ the Commission
may designate a shorter time if such action is consistent with the
protection of investors and the public interest. The Exchange has asked
the Commission to waive the 30-day operative delay. The Exchange stated
that the proposed rule change is designed to optimize the fixed quote
instability equation contained in the rule without introducing new
functionality or materially changing the operation of the current
functionality in a manner not contemplated by the rule. The Exchange
believes that its proposal will operate to protect Members that enter
Discretionary Peg orders from unfavorable executions when the market is
moving against such orders, and noted that waiver of the operative
delay would allow the Exchange to implement the optimized formula
without delay. As the Exchange's proposal is intended to further refine
the ability of the discretionary peg order type to meet its stated
objectives as reflected in the Exchange's rule, the Commission believes
that waiver of the operative delay is consistent with the protection of
investors and the public interest. Therefore, the Commission hereby
[[Page 14061]]
waives the operative delay and designates the proposed rule change
operative upon filing.\18\
---------------------------------------------------------------------------
\16\ 17 CFR 240.19b-4(f)(6).
\17\ 17 CFR 240.19b-4(f)(6)(iii).
\18\ For purposes only of waiving the 30-day operative delay,
the Commission has also considered the proposed rule's impact on
efficiency, competition, and capital formation. See 15 U.S.C.
78c(f).
---------------------------------------------------------------------------
At any time within 60 days of the filing of the proposed rule
change, the Commission summarily may temporarily suspend such rule
change if it appears to the Commission that such action is necessary or
appropriate in the public interest, for the protection of investors, or
otherwise in furtherance of the purposes of the Act. If the Commission
takes such action, the Commission shall institute proceedings to
determine whether the proposed rule should be approved or disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's Internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an email to rule-comments@sec.gov. Please include
File SR-IEX-2017-06 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.
All submissions should refer to File Number SR-IEX-2017-06. This file
number should be included on the subject line if email is used. To help
the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's Internet Web site (https://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all
written statements with respect to the proposed rule change that are
filed with the Commission, and all written communications relating to
the proposed rule change between the Commission and any person, other
than those that may be withheld from the public in accordance with the
provisions of 5 U.S.C. 552, will be available for Web site viewing and
printing in the Commission's Public Reference Room, 100 F Street NE.,
Washington, DC 20549, on official business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of the filing also will be available
for inspection and copying at the principal office of the Exchange. All
comments received will be posted without change; the Commission does
not edit personal identifying information from submissions. You should
submit only information that you wish to make available publicly. All
submissions should refer to File Number SR-IEX-2017-06 and should be
submitted on or before April 6, 2017.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\19\
---------------------------------------------------------------------------
\19\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-05210 Filed 3-15-17; 8:45 am]
BILLING CODE 8011-01-P