Self-Regulatory Organizations; NYSE MKT LLC; Order Approving Proposed Rule Change Amending Rules 7.29E and 1.1E To Provide for a Delay Mechanism, 23381-23385 [2017-10304]

Download as PDF Federal Register / Vol. 82, No. 97 / Monday, May 22, 2017 / Notices For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.62 Eduardo A. Aleman, Assistant Secretary. [FR Doc. 2017–10297 Filed 5–19–17; 8:45 am] BILLING CODE 8011–01–P II. Description of the Proposed Rule Change SECURITIES AND EXCHANGE COMMISSION [Release No. 34–80700; File No. SR– NYSEMKT–2017–05] Self-Regulatory Organizations; NYSE MKT LLC; Order Approving Proposed Rule Change Amending Rules 7.29E and 1.1E To Provide for a Delay Mechanism May 16, 2017. I. Introduction On January 27, 2017, NYSE MKT LLC (the ‘‘Exchange’’) filed with the Securities and Exchange Commission (‘‘Commission’’) pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’) 1 and Rule 19b–4 thereunder,2 a proposed rule change to amend Rules 7.29E and 1.1E to provide for an intentional access delay to certain inbound and outbound order messages on the Exchange. The proposed rule change was published for comment in the Federal Register on February 15, 2017.3 On March 17, 2017, pursuant to Section 19(b)(2) of the Act,4 the Commission designated a longer period within which to approve the proposed rule change, disapprove the proposed rule change, or institute proceedings to determine whether to approve or disapprove the proposed rule change.5 The Commission has received six comment letters on the proposal from five commenters.6 On March 31, 2017, 62 17 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 3 See Securities Exchange Act Release No. 79998 (Feb. 9, 2017), 82 FR 10828 (Feb. 15, 2017) (‘‘Notice’’). 4 15 U.S.C. 78s(b)(2). 5 See Securities Exchange Act Release No. 80268 (Mar. 17, 2017), 82 FR 14932 (Mar. 23, 2017). The Commission designated May 16, 2017 as the date by which the Commission shall approve or disapprove, or institute proceedings to determine whether to approve or disapprove, the proposed rule change. 6 See Letters to Brent J. Fields, Secretary, Commission, from John Ramsay, Chief Market Policy Officer, Investors Exchange LLC (Mar. 10, 2017) (‘‘IEX Letter I’’); Tyler Gellasch, Executive Director, Healthy Markets Association (Mar. 10, 2017) (‘‘HMA Letter’’); Joanna Mallers, Secretary, FIA Principal Traders Group (Mar. 24, 2017) (‘‘FIA PTG Letter’’); John Ramsay, Chief Market Policy Officer, Investors Exchange LLC (Apr. 21, 2017) (‘‘IEX Letter II’’); Joanne Moffic-Silver, Executive Vice President, General Counsel, and Corporate mstockstill on DSK30JT082PROD with NOTICES 1 15 VerDate Sep<11>2014 23:17 May 19, 2017 Jkt 241001 the Exchange submitted a comment response letter.7 On April 28, 2017, the Exchange submitted a second comment response letter.8 On May 11, 2017, the Exchange submitted a third comment response letter.9 This order approves the proposed rule change. The Exchange proposes to amend Rules 7.29E and 1.1E to provide for an intentional delay to specified message and order processing (the ‘‘Delay Mechanism’’). The Exchange has separately proposed rules to transition its cash equities trading to the Pillar trading platform and to transition its cash equities market from a Floor-based market with a parity allocation model to a fully automated price-time-priority allocation model that trades all NMS Stocks.10 The Exchange now proposes to include an intentional access delay on Pillar that would add 350 microseconds of latency to inbound and outbound order messages, as described in greater detail below.11 The Exchange states that its proposed Delay Mechanism is based in part on the operation of the intentional 350-microsecond delay mechanism of Investors Exchange LLC Secretary, Bats Global Markets, Inc. (Apr. 24, 2017) (‘‘Bats Letter’’); and Stephen John Berger, Managing Director, Government & Regulatory Policy, Citadel Securities (Apr. 28, 2017) (‘‘Citadel Letter’’). 7 See Letter to Brent J. Fields, Secretary, Commission, from Elizabeth K. King, General Counsel and Corporate Secretary, New York Stock Exchange (Mar. 31, 2017) (‘‘NYSE MKT Response Letter I’’). 8 See Letter to Brent J. Fields, Secretary, Commission, from Elizabeth K. King, General Counsel and Corporate Secretary, New York Stock Exchange (Apr. 28, 2017) (‘‘NYSE MKT Response Letter II’’). 9 See Letter to Brent J. Fields, Secretary, Commission, from Elizabeth K. King, General Counsel and Corporate Secretary, New York Stock Exchange (May 11, 2017) (‘‘NYSE MKT Response Letter III’’). 10 See Securities Exchange Act Release Nos. 79242 (Nov. 4, 2016), 81 FR 79081 (Nov. 10, 2016) (SR–NYSEMKT–2016–97); 79400 (November 25, 2016), 81 FR 86750 (Dec. 1, 2016) (SR–NYSEMKT– 2016–103); 79993 (Feb. 9, 2017); 82 FR 10814 (Feb. 15, 2017) (SR–NYSEMKT–2017–01); and 79982 (Feb. 7, 2017); 82 FR 10508 (Feb. 13, 2017) (SR– NYSEMKT–2017–04). According to the Exchange, if the Commission approves these proposed rule changes, it will transition to Pillar on a date announced by Trader Update. 11 The Exchange notes that, when it implements the Delay Mechanism, it will no longer offer Add Liquidity Only (‘‘ALO’’) Order or Day Intermarket Sweep Order (‘‘ISO’’) functionality and all Pegged Orders will not be displayed. The Exchange represents that, before implementing the Delay Mechanism, it will file a separate proposed rule change to eliminate ALO and Day ISO Orders and related functionality and to provide that Primary Pegged Orders will not be displayed. See Notice, supra note 3, 82 FR at 10829 n.6. PO 00000 Frm 00212 Fmt 4703 Sfmt 4703 23381 (‘‘IEX’’) 12 and that the proposed rule change is ‘‘designed to create a competitive trading model to IEX.’’ 13 Unlike IEX, the Exchange proposes to use a software solution to create the delay. The delay added by the Exchange would be in addition to any natural latency inherent in accessing the Exchange and Away Markets.14 In addition, the Exchange would further provide that it would periodically monitor the latency and adjust the latency as necessary to achieve consistency with the 350 microsecond target.15 If the Exchange determines to increase or decrease the delay period, it would be required to submit a rule filing pursuant to Section 19 of the Act.16 The Exchange proposes to apply the Delay Mechanism to the following: • All inbound communications from an ETP Holder.17 The Exchange’s proposal to apply the Delay Mechanism to all inbound communications from an ETP Holder would cover all incoming orders, as well as any requests to cancel or modify a resting order. • All outbound communications to an ETP Holder.18 The Exchange’s proposal to apply the Delay Mechanism to all outbound communications to an ETP Holder would cover Exchange messages to an ETP Holder that an order has been accepted, rejected, cancelled, modified, or executed. Together with the application of the proposed Delay Mechanism to all inbound communications to the Exchange, there would be 700 microseconds of roundtrip latency for an ETP Holder to receive a report of an execution or partial execution on the Exchange. • All outbound communications the Exchange routes to an Away Market,19 and all inbound communications from an Away Market about a routed order.20 If the Exchange determines to route an order, either because it would trade through a protected quotation or has an instruction to be routed to a primary 12 IEX uses a hardware solution to add the equivalent of 350 microseconds of latency between the network access point of the ‘‘POP’’ and IEX’s matching engine at its primary data center through geographic distance and coiled optical fiber. See IEX Rule 11.510. 13 See Notice, supra note 3, 82 FR at 10831. 14 The term ‘‘Away Market’’ is any exchange, alternate trading system (‘‘ATS’’) or other brokerdealer (1) with which the Exchange maintains an electronic linkage and (2) that provides instantaneous responses to orders routed from the Exchange and that the Exchange will designate from time to time those ATS’s or other broker-dealers that qualify as Away Markets. See Rule 1.1E(ff). 15 See Proposed Rule 1.1E(y). 16 See id. 17 See Proposed Rule 7.29E(b)(1)(A). 18 See Proposed Rule 7.29E(b)(1)(B). 19 See Proposed Rule 7.29E(b)(1)(C). 20 See Proposed Rule 7.29E(b)(1)(D). E:\FR\FM\22MYN1.SGM 22MYN1 23382 Federal Register / Vol. 82, No. 97 / Monday, May 22, 2017 / Notices mstockstill on DSK30JT082PROD with NOTICES listing market, the Exchange would apply the Delay Mechanism before routing such order. This proposed rule text would therefore provide that an order that the Exchange routes to an Away Market would have 700 microseconds of added delay before it is routed: First, a 350 microsecond delay before the order is received by the Exchange’s matching engines; and second, an additional 350 microsecond delay when the order is routed.21 Any inbound communications to the Exchange from the Away Market about such routed order, whether a rejection or execution report, would also be subject to the Delay Mechanism. In addition, any such report forwarded to the ETP Holder that entered the order would then be subject to an additional Delay Mechanism. Accordingly, the Exchange would add a total of 1,400 microseconds of round-trip delay to an order that the Exchange routes to an Away Market. • All outbound communications (e.g., bids, offers, and trades) to the Exchange’s proprietary data feeds.22 The Exchange proposes to apply add 350 microseconds of delay to all outbound messages to its proprietary data feeds. Finally, the Exchange proposes also to apply the Delay Mechanism when the Exchange is operating out of its secondary data center. The Exchange proposes not to apply the Delay Mechanism to the following: • All inbound communications from data feeds.23 The Delay Mechanism would not apply to communications to the Exchange from data feeds received directly from Away Markets and data feeds disseminated by a plan processor. • Order processing and order execution on the Exchange’s Book.24 All actions taken within the Exchange’s Book, including calculating the BBO, NBBO, or PBBO,25 assigning working prices and working times to orders,26 21 After the Exchange applies the Delay Mechanism to a routable order, the routed order would be subject to any natural latency inherent in accessing such Away Market. 22 See Proposed Rule 7.29E(b)(1)(E). 23 See Proposed Rule 7.29E(b)(2)(A). 24 See Proposed Rule 7.29E(b)(2)(B). 25 The term ‘‘BBO’’ is the best bid or offer that is a protected quotation on the Exchange. See Rule 1.1E(h). The terms ‘‘NBBO’’ and ‘‘PBBO’’ are the national best bid or offer and the protected best bid and offer, respectively. See Rule 1.1E(dd). 26 The Exchange proposed to define the term ‘‘working price’’ as the price at which an order is eligible to trade at any given time, which may be different from the limit price or display price of the order, and to define the term ‘‘working time’’ as the effective time sequence assigned to an order for purposes of determining its priority ranking. See Securities Exchange Act Release No. 79993 (Feb. 9, 2017), 82 FR 10814 (Feb. 15, 2017) (SR–NYSEMKT– 2017–01). VerDate Sep<11>2014 23:17 May 19, 2017 Jkt 241001 and ranking and executing orders, would not be subject to the Delay Mechanism. For example, the Exchange would not apply the Delay Mechanism to update the working price of Pegged Orders, which would not be displayed on the Exchange, based on an updated PBBO. • All outbound communications (e.g., bids, offers, and trades) to the plan processors under Rules 601 and 602 of Regulation NMS.27 The Exchange proposes not to apply the Delay Mechanism to outbound communications with the SIP to disseminate quotation and last sale information. III. Summary of Comments and NYSE MKT’s Responses As noted above, the Commission has received six letters from five commenters on the proposal, as well as three response letters from the Exchange.28 Three commenters express opposition to the proposal in its current form.29 One commenter generally opposes the proposal, but acknowledged that it would be difficult for the Commission to disapprove the proposal in light of the Commission’s interpretation relating to exchange access delays.30 Another commenter expresses concerns with exchange access delays more generally, but also notes that it does not see any legal grounds for disapproval of the Exchange’s proposal in light of the Commission’s interpretation and approval of IEX’s access delay.31 As discussed in more detail below, commenters generally: (i) Request additional information regarding the proposal (including the Exchange’s rationale for proposing a delay, the objective of the delay, and how the delay will protect investors); (ii) raise questions regarding the differences between the Exchange’s proposal and the IEX access delay; and (iii) urge the Commission to complete a holistic review of equity market structure or the impact of access delays in particular and to provide more comprehensive guidance with respect to access delays, rather than considering new delays on an ad hoc basis through the SRO rule filing process. First, the three commenters that oppose the proposal in its current form 27 See Proposed Rule 7.29E(b)(2)(C). supra notes 6–9. 29 See IEX Letter I; IEX Letter II; HMA Letter; Citadel Letter. 30 See FIA PTG Letter at 2. See also Securities Exchange Act Release No. 78102 (June 17, 2016), 81 FR 40785 (June 23, 2016) (File No. S7–03–16) (‘‘Interpretation’’); infra note 82. 31 See Bats Letter at 1. 28 See PO 00000 Frm 00213 Fmt 4703 Sfmt 4703 request additional information from the Exchange to better understand its proposal and the Exchange’s underlying rationale.32 These commenters note the opposition of the New York Stock Exchange (‘‘NYSE’’), an affiliate of the Exchange, to IEX’s application for registration as a national securities exchange and, in particular, to IEX’s proposal to utilize an intentional delay on its market.33 These commenters request that the Exchange provide more detail regarding the reasoning behind its decision to adopt an intentional delay, including the objectives of the delay and how it will accomplish those objectives, how it is intended to benefit investors and promote fair and orderly markets, and whether the Exchange’s views about the impact of such a delay differ from those raised in NYSE’s comments on IEX’s application.34 One commenter argues that the Exchange should not be permitted to rely simply on its similarity to the IEX access delay, and must instead provide a more thorough explanation as to why it proposes to implement an access delay.35 Two commenters request that the Exchange provide an explanation as to how it determined to set the latency of the Delay Mechanism at 350 microseconds.36 Second, commenters raise questions related to the specifics of the Exchange’s proposal, in particular how it differs from IEX’s access delay. Two commenters ask about the impact of the delay being implemented through a software process rather than a hardware mechanism, and they ask whether this could lead to any variability in the delay and how the Exchange would monitor any such variation from the 350 microsecond target.37 One commenter asks the Exchange to clarify how the additional delay it proposes for routable orders would impact the ability to access quotations on other exchanges that may be modified before the routed order subject to the delay is received by the away exchange.38 This commenter also asks whether the intentional delay on the Exchange would unfairly harm 32 See IEX Letter I at 2–3; HMA Letter at 4; Citadel Letter at 2–3. 33 See IEX Letter I at 2; HMA Letter at 4; Citadel Letter at 1. 34 See IEX Letter I at 2; HMA Letter at 4; Citadel Letter at 2–3. 35 See IEX Letter II at 2–3. This commenter explains that, in connection with its exchange application, it provided the Commission with a detailed explanation of the IEX POP, including its intent in implementing the IEX POP and how its features were determined relevant to its unique circumstances. See id. at 3. 36 See IEX Letter I at 2; HMA Letter at 4. 37 See IEX Letter I at 3; HMA Letter at 5. 38 See IEX Letter I at 3. E:\FR\FM\22MYN1.SGM 22MYN1 Federal Register / Vol. 82, No. 97 / Monday, May 22, 2017 / Notices investors on another of the Exchange’s affiliated markets.39 This commenter further asks the Exchange to clarify if all communications with electronic designated market makers (‘‘DMMs’’) would be subject to the Delay Mechanism and what impact this may have on the DMMs.40 This commenter expresses concern that an NYSE DMM that is also an Exchange DMM may be subject to informational advantages or conflicts if trading on both exchanges, only one of which would be subject to an access delay.41 Finally, two commenters assert that, rather than considering new artificial delays on an ad hoc basis through the SRO rule-filing process, the Commission should complete a holistic review of equity market structure and provide more comprehensive guidance with respect to access delays.42 Another commenter similarly suggests that the Commission complete the comprehensive review of the market impact of exchange access delays contemplated as part of its interpretation of Rule 611 under Regulation NMS before approving any new exchange proposals seeking to implement such delays.43 With respect to the Exchange’s specific proposal, two commenters express concern that intentional delays in protected quotations increase market complexity; increase pricing uncertainty; 44 and, according to one commenter, may amplify the risk of market disruptions during periods of high volatility.45 Finally, one commenter argues that the Delay Mechanism would encourage the use of non-displayed orders, which the commenter states would decrease market transparency and potentially harm price discovery.46 In response to comments, the Exchange states that it is proposing the Delay Mechanism ‘‘in order to provide broker-dealers and issuers with a competitive model’’ to the IEX access delay.47 The Exchange argues that its proposal is consistent with the Act in that it is designed to protect investors and the public interest in a manner that is not unfairly discriminatory and does not impose an unnecessary or inappropriate burden on competition.48 In particular, the Exchange states that the Delay Mechanism would allow nondisplayed orders to dynamically update in accordance with their order instructions.49 In light of this purpose, the Exchange believes that the proposed length of 350 microseconds for its Delay Mechanism would provide Exchange systems with the appropriate amount of time to update prices based on market data it receives from other markets.50 The Exchange further states that the 350 microsecond delay is not ‘‘too short so as to frustrate the purpose of the Delay Mechanism’’ nor ‘‘overly long so as to be unfairly discriminatory to orders subject to the Delay Mechanism.’’ 51 In addition, the proposed delay would be applied equally to all Exchange members and could not be bypassed by payment of a fee or otherwise. Specifically, the delay on outbound market data would be applied uniformly to all Exchange data recipients except for outbound communications with the SIP to disseminate quotation and last sale information, and the delay on inbound order messages would be applied uniformly to all users.52 The Exchange further notes that its Delay Mechanism operates in a manner that is identical to the IEX access delay, except for its treatment of routable orders, which the Exchange believes is consistent with the model approved by the Commission for IEX.53 The Exchange does not believe this difference would cause its proposal to be unfairly discriminatory or to impose an unfair burden on competition, and states that this difference is simply a 47 See NYSE MKT Response Letter I at 4. NYSE MKT Response Letter II at 2. id. 50 See NYSE Response Letter III at 1. Specifically, the Exchange notes that it processes market data updates and re-prices non-displayed orders in less than 100 microseconds, and that the theoretical minimum transmission time for information generated in other exchanges’ primary systems located in Carteret, New Jersey to reach the Exchange’s primary systems (located in Mahwah, New Jersey) is approximately 185 microseconds. See id. at n.1. Accounting for the Exchange’s processing time and the time it takes the Exchange to receive market data updates from nearby exchanges, the Exchange believes that its proposed 350 microsecond Delay Mechanism is appropriately designed to achieve the stated purpose of allowing the Exchange to dynamically update the prices of undisplayed resting pegged orders. See id. at 1–2. 51 See id. at 1–2. 52 See NYSE MKT Response Letter II at 2. 53 See NYSE MKT Response Letter I at 2. 48 See 39 See id. at 2. id. at 3. 41 See id. 42 See FIA PTG Letter at 2; Bats Letter at 1–2. These commenters acknowledge, however, that despite their concerns with exchange access delays, the precedent set by IEX’s exchange approval, including the Commission’s related interpretation, may make it difficult for the Commission to disapprove the Exchange’s proposal. See FIA PTG Letter at 2; Bats Letter at 1. One of these commenters suggests that the Commission limit the approval of any exchange access delays to proposals that closely track IEX’s delay mechanism, such as the current proposal. See FIA PTG Letter at 2. 43 See Citadel Letter at 2. See also Interpretation, supra note 30, 81 FR at 40793. 44 See FIA PTG Letter at 2; Citadel Letter at 3. 45 See FIA PTG Letter at 2. 46 See Citadel Letter at 3–4. mstockstill on DSK30JT082PROD with NOTICES 40 See VerDate Sep<11>2014 23:17 May 19, 2017 Jkt 241001 49 See PO 00000 Frm 00214 Fmt 4703 Sfmt 4703 23383 result of its system architecture.54 The Exchange further states that its proposed Delay Mechanism does not raise any issues that have not already been considered in connection with IEX’s exchange application.55 The Exchange also notes that the Commission’s interpretation of Rule 611 under Regulation NMS found a de minimis delay on exchange response times to be consistent with Rule 611.56 The Exchange does not believe that its proposal to implement the Delay Mechanism through a software mechanism should be relevant to evaluating the proposal, noting that the Commission has not examined existing exchange access delays with respect to the manner in which the delay is implemented.57 The Exchange further states that both hardware and software mechanisms may be subject to variability and the Exchange would be required, in accordance with its proposed rules, to monitor the latency of the Delay Mechanism and make any reasonable adjustments to ensure consistency with the 350 microsecond target.58 With respect to Exchange DMMs, the Exchange notes that it would only have electronic DMMs on its new trading platform and that these participants would be subject to its access delay just as any other market participant on the Exchange.59 The Exchange further states that it does not believe that any conflicts would arise if an NYSE DMM were also an Exchange electronic DMM, because the NYSE DMM would not be able to trade its assigned securities on the Exchange while on the NYSE trading floor.60 IV. Discussion and Commission Findings After careful review, the Commission finds that the proposed rule change is consistent with the requirements of Section 6 of the Act 61 and the rules and regulations thereunder applicable to a national securities exchange.62 In particular, the Commission finds that the proposed rule change is consistent 54 See id. NYSE MKT Response Letter I at 1; NYSE MKT Response Letter II at 1–2. 56 See NYSE MKT Response Letter I at 1–2; NYSE MKT Response Letter II at 2. See also Interpretation, supra note 30; infra note 82. 57 See NYSE MKT Response Letter I at 2. 58 See id. at 3. 59 See id. 60 See id. 61 15 U.S.C. 78f. 62 In approving this proposed rule change, the Commission has considered the proposed rule’s impact on efficiency, competition, and capital formation. See 15 U.S.C. 78c(f). 55 See E:\FR\FM\22MYN1.SGM 22MYN1 23384 Federal Register / Vol. 82, No. 97 / Monday, May 22, 2017 / Notices mstockstill on DSK30JT082PROD with NOTICES with Section 6(b)(5) of the Act,63 which requires, among other things, that the rules of a national securities exchange be 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 regulating, clearing, settling, processing information with respect to, and 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 and that the rules not be designed to permit unfair discrimination between customers, issuers, brokers, or dealers. As summarized above, commenters have requested that the Exchange provide more explanation of its proposal, including the reasoning behind its decision to propose an access delay, as well as whether its views on access delays generally differ from those raised in NYSE’s comments on IEX’s exchange application. In particular, one commenter argues that ‘‘NYSE has said nothing about what it is trying to achieve, or how its design is tailored to its own situation.’’ 64 The Commission believes that the Exchange has provided a sufficient description of the operation and purpose of its proposal in its initial filing and its responses to comments.65 As described above, the Exchange’s proposed Delay Mechanism would add 350 microseconds of one-way latency to inbound and outbound communications—including order messages between the Exchange and its members or other markets—as well as data messages from the Exchange’s proprietary feeds. The proposal would therefore impose a cumulative inbound and outbound intentional delay of 700 microseconds on non-routable orders. The Delay Mechanism would apply to all messages except for outbound communications from the Exchange to the SIP; inbound communications from external market data feeds; and actions taken by the Exchange within the Exchange’s book, including calculating the BBO, NBBO, or PBBO, assigning working prices and working times to 63 15 U.S.C. 78f(b)(5). Letter II at 3. 65 The Commission does not believe that the comments submitted by NYSE, the Exchange’s affiliate, on a separate matter previously before the Commission are relevant to the Commission’s consideration of the current proposal, nor is the Exchange bound by its affiliate’s prior arguments in relation to that matter. 64 IEX VerDate Sep<11>2014 23:17 May 19, 2017 Jkt 241001 orders, and ranking and executing orders.66 The Exchange states that the purpose of its proposal is to ‘‘allow undisplayed orders to meet their order instruction to be dynamically updated to prices based on changes to the PBBO before a new, incoming order generated in response to the same PBBO change can access the resting order.’’ 67 In light of this purpose, the Exchange believes that the proposed length of 350 microseconds for its Delay Mechanism would achieve this purpose by providing Exchange systems with the appropriate amount of time to update prices based on market data it receives from other markets.68 Specifically, the Exchange notes that it processes market data updates and reprices non-displayed orders in less than 100 microseconds, and that the theoretical minimum transmission time for information generated in other exchanges’ primary systems located in Carteret, New Jersey to reach the Exchange’s primary systems (located in Mahwah, New Jersey) is approximately 185 microseconds.69 Accounting for the Exchange’s processing time and the time it takes the Exchange to receive market data updates from nearby exchanges, the Exchange believes that its proposed 350 microsecond Delay Mechanism is therefore appropriately designed to achieve the stated purpose of allowing the Exchange to dynamically update the prices of undisplayed resting pegged orders and that the 350 microsecond delay is not ‘‘too short so as to frustrate the purpose of the Delay Mechanism’’ nor ‘‘overly long so as to be unfairly discriminatory to orders subject to the Delay Mechanism.’’ 70 The Exchange further asserts that its proposed Delay Mechanism ‘‘provide[s] a competitive trading model to IEX,’’ 71 so that brokerdealers and issuers seeking a trading venue that offers an intentional delay mechanism will have an additional option.72 The Commission believes the Exchange has sufficiently demonstrated that the proposed rule change is consistent with the Act, and the Commission does not find any legal basis to distinguish the Exchange’s proposed Delay Mechanism from the IEX access delay. In particular, the Commission believes that the Exchange has sufficiently demonstrated that its proposal would not be unfairly 66 See Proposed Rule 7.29E(b)(2). 67 See NYSE Response Letter III at 1. See also NYSE Response Letter II at 2. 68 See NYSE Response Letter III at 1. 69 See id. at n.1. 70 See id. at 1–2. 71 See supra note 13 and accompanying text. 72 See Notice, supra note 3, 82 FR at 10831. PO 00000 Frm 00215 Fmt 4703 Sfmt 4703 discriminatory. The Commission notes that the Act does not foreclose reasonable and not unfairly discriminatory innovations, including those that are designed to protect investors who seek to reliably place passive, non-displayed pegged orders on an exchange.73 According to the Exchange, its proposal is tailored to achieve the purposes of its proposed access delay and, as stated above, would provide additional choice for market participants desiring to trade or list on an exchange that offers a delay mechanism.74 The Commission further notes that, as described above, the Exchange’s Delay Mechanism would apply to all members equally, and may not be bypassed, for a fee or otherwise. Though the proposal would not subject order processing and order execution on the Exchange’s Book to the Delay Mechanism, this aspect of the proposal is intended to allow undisplayed orders to function as intended by providing the Exchange with the time it needs to dynamically update prices of those orders based on the protected NBBO, which purpose and process the Exchange believes is not unfairly discriminatory and does not impose an unnecessary or inappropriate burden on competition.75 The Commission has previously found that a similar advantage provided to pegged orders by means of an exchange access delay was not unfairly discriminatory and did not impose an unnecessary or inappropriate burden on competition.76 As the Commission noted in that case, the delay was designed to ensure that pegged orders operate as designed by accurately tracking the NBBO and to ensure that users of pegged orders can better achieve their goals when their pegged orders operate efficiently.77 For the current proposal, the Exchange has explained how its proposed Delay Mechanism is tailored to achieve its stated purpose of allowing the Exchange to dynamically update the prices of undisplayed pegged orders to meet their order instructions in response to market-data updates. As noted above, the Exchange has explained its choice of 350 microseconds based on its system processing time combined with its 73 See Securities Exchange Act Release No. 78101 (June 17, 2016), 81 FR 41142, 41157 (June 23, 2016) (File No. 10–222) (‘‘IEX Exchange Approval’’). 74 See Notice, supra note 3, 82 FR at 10831. 75 See NYSE Response Letter II at 2. See also Notice, supra note 3, 82 FR at 10830. 76 See IEX Exchange Approval, supra note 73, 81 FR at 41157. 77 See id. E:\FR\FM\22MYN1.SGM 22MYN1 Federal Register / Vol. 82, No. 97 / Monday, May 22, 2017 / Notices mstockstill on DSK30JT082PROD with NOTICES determination of the theoretical minimum transmission time of information to the Exchange from other exchanges, and has affirmed that the delay is not ‘‘too short’’ so as to not allow the Exchange to achieve the purpose of the Delay Mechanism, nor is it ‘‘overly long’’ so as to be an unnecessary burden on market participants. Accordingly, the Commission finds that the Exchange’s proposed Delay Mechanism is designed to protect investors and the public interest in a manner that is not unfairly discriminatory and that does not impose an unnecessary or inappropriate burden on competition and is therefore consistent with Sections 6(b)(5) and 6(b)(8) of the Act.78 Further, as described above, all members of the Exchange would be equally subject to the Delay Mechanism, and no member would be permitted to avoid the delay by payment of a fee or through any other means. In addition, the Commission believes the Exchange’s proposal to subject all outbound routable orders to the Delay Mechanism is designed to ensure that the Exchange’s ability to provide outbound routing services under the proposal will be on substantively comparable terms to a third-party routing broker that is a member of the Exchange. In particular, both the Exchange routing logic and a third-party routing broker-dealer would experience 350 microseconds of oneway latency in receiving order information about routable orders from the Exchange’s matching engine. Although the Exchange’s proposal is not identical in all respects to the routing structure at another exchange with an access delay,79 the Commission believes that the Exchange’s proposal would not provide it with any structural or informational advantages in its provision of routing services as compared to a third-party broker-dealer member performing a similar function for itself or others. Therefore, the Commission believes that the Exchange’s proposal as applicable to routable orders would not be unfairly discriminatory and would not impose an inappropriate burden on competition and is therefore consistent with Sections 6(b)(5) and 6(b)(8) of the Act. The Commission acknowledges that, as commenters have noted, the 78 While some commenters expressed concern that intentional delays in protected quotations may increase market complexity and requested that the Commission impose a moratorium on new proposals to implement such delays, the Commission notes that it carefully considers each exchange proposal for consistency with the Act. 79 See IEX Rule 11.510. See also IEX Exchange Approval, supra note 73, 81 FR at 41157–60. VerDate Sep<11>2014 23:17 May 19, 2017 Jkt 241001 Exchange’s proposal would differ from the access delay on another exchange in that it would be software-based, as opposed to being implemented through a physical hardware mechanism. However, the Commission does not believe that a software-based delay is inherently inferior to a hardware-based delay or that this specific distinction is material to its analysis of the proposal, and the Commission notes that the Exchange would be required, as with any hardware-based delay, to comply with its rules requiring the Exchange to periodically monitor the actual latency and make adjustments as reasonably necessary to achieve consistency with the 350 microsecond target set forth in the proposed rule.80 Finally, the Commission does not believe that implementation of the Exchange’s Delay Mechanism would preclude the Exchange from maintaining an automated quotation. Similar to an existing access delay on another market,81 the duration of the proposed Delay Mechanism is well within the geographic and technological latencies experienced today, and the Commission believes that it would not impair a market participant’s ability to access a displayed quotation consistent with the goals of Rule 611.82 Accordingly, the proposed intentional one-way 350 microsecond delay is de minimis, and thus, following approval of the instant proposal, the Exchange can maintain a protected quotation when it operates the Delay Mechanism in the manner described above. 80 See Proposed Rule 1.1E(y). IEX Exchange Approval, supra note 73. 82 See Interpretation, supra note 30, 81 FR at 40792 (noting that, in response to technological and market developments since the adoption of Regulation NMS, the Commission has provided an updated interpretation of the meaning of the term ‘‘immediate’’ in Rule 600(b)(3) of Regulation NMS, when determining whether a trading center maintains an ‘‘automated quotation’’ for purposes of Rule 611 of Regulation NMS, to preclude 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, or as the Commission noted, so short as to not frustrate the purposes of Rule 611 by impairing fair and efficient access to an exchange’s quotations). The Commission further stated that such a de minimis access delay would satisfy Rules 600 and 611 under the updated interpretation even if it involved the use of an ‘‘intentional device’’ to delay access to an exchange’s quotation. See id. For purposes of determining whether an exchange access delay is de minimis, the Commission did not set out a specific threshold; however, Commission staff has determined that, today, any delay of less than one millisecond is a de minimis amount of delay in accessing an exchange’s facilities for purposes of the interpretation. See Commission Staff Guidance on Automated Quotations under Regulation NMS (June 17, 2016), https:// www.sec.gov/divisions/marketreg/automatedquotations-under-regulation-nms.htm. 81 See PO 00000 Frm 00216 Fmt 4703 Sfmt 4703 23385 V. Conclusion It is therefore ordered, pursuant to Section 19(b)(2) of the Act,83 that the proposed rule change (SR–NYSEMKT– 2017–05) be, and hereby is, approved. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.84 Eduardo A. Aleman, Assistant Secretary. [FR Doc. 2017–10304 Filed 5–19–17; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–80685; File No. SR–FINRA– 2017–012] Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Notice of Filing of a Proposed Rule Change To Amend FINRA Rule 7730 To Reduce the Delay Period for the Historic TRACE Data Sets Relating to Corporate and Agency Debt Securities May 16, 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 May 12, 2017, Financial Industry Regulatory Authority, Inc. (‘‘FINRA’’) filed with the Securities and Exchange Commission (‘‘SEC’’ or ‘‘Commission’’) the proposed rule change as described in Items I, II, and III below, which Items have been prepared by FINRA. 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 FINRA is proposing to amend Rule 7730 to reduce the delay period for the Historic TRACE Data Sets relating to corporate and agency debt securities from 18 months to six months. The text of the proposed rule change is available on FINRA’s Web site at http://www.finra.org, at the principal office of FINRA and at the Commission’s Public Reference Room. 83 15 U.S.C. 78s(b)(2). CFR 200.30–3(a)(12). 1 15 U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 84 17 E:\FR\FM\22MYN1.SGM 22MYN1

Agencies

[Federal Register Volume 82, Number 97 (Monday, May 22, 2017)]
[Notices]
[Pages 23381-23385]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-10304]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-80700; File No. SR-NYSEMKT-2017-05]


Self-Regulatory Organizations; NYSE MKT LLC; Order Approving 
Proposed Rule Change Amending Rules 7.29E and 1.1E To Provide for a 
Delay Mechanism

May 16, 2017.

I. Introduction

    On January 27, 2017, NYSE MKT LLC (the ``Exchange'') filed with the 
Securities and Exchange Commission (``Commission'') pursuant to Section 
19(b)(1) of the Securities Exchange Act of 1934 (``Act'') \1\ and Rule 
19b-4 thereunder,\2\ a proposed rule change to amend Rules 7.29E and 
1.1E to provide for an intentional access delay to certain inbound and 
outbound order messages on the Exchange. The proposed rule change was 
published for comment in the Federal Register on February 15, 2017.\3\ 
On March 17, 2017, pursuant to Section 19(b)(2) of the Act,\4\ the 
Commission designated a longer period within which to approve the 
proposed rule change, disapprove the proposed rule change, or institute 
proceedings to determine whether to approve or disapprove the proposed 
rule change.\5\ The Commission has received six comment letters on the 
proposal from five commenters.\6\ On March 31, 2017, the Exchange 
submitted a comment response letter.\7\ On April 28, 2017, the Exchange 
submitted a second comment response letter.\8\ On May 11, 2017, the 
Exchange submitted a third comment response letter.\9\ This order 
approves the proposed rule change.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 79998 (Feb. 9, 
2017), 82 FR 10828 (Feb. 15, 2017) (``Notice'').
    \4\ 15 U.S.C. 78s(b)(2).
    \5\ See Securities Exchange Act Release No. 80268 (Mar. 17, 
2017), 82 FR 14932 (Mar. 23, 2017). The Commission designated May 
16, 2017 as the date by which the Commission shall approve or 
disapprove, or institute proceedings to determine whether to approve 
or disapprove, the proposed rule change.
    \6\ See Letters to Brent J. Fields, Secretary, Commission, from 
John Ramsay, Chief Market Policy Officer, Investors Exchange LLC 
(Mar. 10, 2017) (``IEX Letter I''); Tyler Gellasch, Executive 
Director, Healthy Markets Association (Mar. 10, 2017) (``HMA 
Letter''); Joanna Mallers, Secretary, FIA Principal Traders Group 
(Mar. 24, 2017) (``FIA PTG Letter''); John Ramsay, Chief Market 
Policy Officer, Investors Exchange LLC (Apr. 21, 2017) (``IEX Letter 
II''); Joanne Moffic-Silver, Executive Vice President, General 
Counsel, and Corporate Secretary, Bats Global Markets, Inc. (Apr. 
24, 2017) (``Bats Letter''); and Stephen John Berger, Managing 
Director, Government & Regulatory Policy, Citadel Securities (Apr. 
28, 2017) (``Citadel Letter'').
    \7\ See Letter to Brent J. Fields, Secretary, Commission, from 
Elizabeth K. King, General Counsel and Corporate Secretary, New York 
Stock Exchange (Mar. 31, 2017) (``NYSE MKT Response Letter I'').
    \8\ See Letter to Brent J. Fields, Secretary, Commission, from 
Elizabeth K. King, General Counsel and Corporate Secretary, New York 
Stock Exchange (Apr. 28, 2017) (``NYSE MKT Response Letter II'').
    \9\ See Letter to Brent J. Fields, Secretary, Commission, from 
Elizabeth K. King, General Counsel and Corporate Secretary, New York 
Stock Exchange (May 11, 2017) (``NYSE MKT Response Letter III'').
---------------------------------------------------------------------------

II. Description of the Proposed Rule Change

    The Exchange proposes to amend Rules 7.29E and 1.1E to provide for 
an intentional delay to specified message and order processing (the 
``Delay Mechanism''). The Exchange has separately proposed rules to 
transition its cash equities trading to the Pillar trading platform and 
to transition its cash equities market from a Floor-based market with a 
parity allocation model to a fully automated price-time-priority 
allocation model that trades all NMS Stocks.\10\
---------------------------------------------------------------------------

    \10\ See Securities Exchange Act Release Nos. 79242 (Nov. 4, 
2016), 81 FR 79081 (Nov. 10, 2016) (SR-NYSEMKT-2016-97); 79400 
(November 25, 2016), 81 FR 86750 (Dec. 1, 2016) (SR-NYSEMKT-2016-
103); 79993 (Feb. 9, 2017); 82 FR 10814 (Feb. 15, 2017) (SR-NYSEMKT-
2017-01); and 79982 (Feb. 7, 2017); 82 FR 10508 (Feb. 13, 2017) (SR-
NYSEMKT-2017-04). According to the Exchange, if the Commission 
approves these proposed rule changes, it will transition to Pillar 
on a date announced by Trader Update.
---------------------------------------------------------------------------

    The Exchange now proposes to include an intentional access delay on 
Pillar that would add 350 microseconds of latency to inbound and 
outbound order messages, as described in greater detail below.\11\ The 
Exchange states that its proposed Delay Mechanism is based in part on 
the operation of the intentional 350-microsecond delay mechanism of 
Investors Exchange LLC (``IEX'') \12\ and that the proposed rule change 
is ``designed to create a competitive trading model to IEX.'' \13\
---------------------------------------------------------------------------

    \11\ The Exchange notes that, when it implements the Delay 
Mechanism, it will no longer offer Add Liquidity Only (``ALO'') 
Order or Day Intermarket Sweep Order (``ISO'') functionality and all 
Pegged Orders will not be displayed. The Exchange represents that, 
before implementing the Delay Mechanism, it will file a separate 
proposed rule change to eliminate ALO and Day ISO Orders and related 
functionality and to provide that Primary Pegged Orders will not be 
displayed. See Notice, supra note 3, 82 FR at 10829 n.6.
    \12\ IEX uses a hardware solution to add the equivalent of 350 
microseconds of latency between the network access point of the 
``POP'' and IEX's matching engine at its primary data center through 
geographic distance and coiled optical fiber. See IEX Rule 11.510.
    \13\ See Notice, supra note 3, 82 FR at 10831.
---------------------------------------------------------------------------

    Unlike IEX, the Exchange proposes to use a software solution to 
create the delay. The delay added by the Exchange would be in addition 
to any natural latency inherent in accessing the Exchange and Away 
Markets.\14\ In addition, the Exchange would further provide that it 
would periodically monitor the latency and adjust the latency as 
necessary to achieve consistency with the 350 microsecond target.\15\ 
If the Exchange determines to increase or decrease the delay period, it 
would be required to submit a rule filing pursuant to Section 19 of the 
Act.\16\
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    \14\ The term ``Away Market'' is any exchange, alternate trading 
system (``ATS'') or other broker-dealer (1) with which the Exchange 
maintains an electronic linkage and (2) that provides instantaneous 
responses to orders routed from the Exchange and that the Exchange 
will designate from time to time those ATS's or other broker-dealers 
that qualify as Away Markets. See Rule 1.1E(ff).
    \15\ See Proposed Rule 1.1E(y).
    \16\ See id.
---------------------------------------------------------------------------

    The Exchange proposes to apply the Delay Mechanism to the 
following:
     All inbound communications from an ETP Holder.\17\ The 
Exchange's proposal to apply the Delay Mechanism to all inbound 
communications from an ETP Holder would cover all incoming orders, as 
well as any requests to cancel or modify a resting order.
---------------------------------------------------------------------------

    \17\ See Proposed Rule 7.29E(b)(1)(A).
---------------------------------------------------------------------------

     All outbound communications to an ETP Holder.\18\ The 
Exchange's proposal to apply the Delay Mechanism to all outbound 
communications to an ETP Holder would cover Exchange messages to an ETP 
Holder that an order has been accepted, rejected, cancelled, modified, 
or executed. Together with the application of the proposed Delay 
Mechanism to all inbound communications to the Exchange, there would be 
700 microseconds of round-trip latency for an ETP Holder to receive a 
report of an execution or partial execution on the Exchange.
---------------------------------------------------------------------------

    \18\ See Proposed Rule 7.29E(b)(1)(B).
---------------------------------------------------------------------------

     All outbound communications the Exchange routes to an Away 
Market,\19\ and all inbound communications from an Away Market about a 
routed order.\20\ If the Exchange determines to route an order, either 
because it would trade through a protected quotation or has an 
instruction to be routed to a primary

[[Page 23382]]

listing market, the Exchange would apply the Delay Mechanism before 
routing such order. This proposed rule text would therefore provide 
that an order that the Exchange routes to an Away Market would have 700 
microseconds of added delay before it is routed: First, a 350 
microsecond delay before the order is received by the Exchange's 
matching engines; and second, an additional 350 microsecond delay when 
the order is routed.\21\ Any inbound communications to the Exchange 
from the Away Market about such routed order, whether a rejection or 
execution report, would also be subject to the Delay Mechanism. In 
addition, any such report forwarded to the ETP Holder that entered the 
order would then be subject to an additional Delay Mechanism. 
Accordingly, the Exchange would add a total of 1,400 microseconds of 
round-trip delay to an order that the Exchange routes to an Away 
Market.
---------------------------------------------------------------------------

    \19\ See Proposed Rule 7.29E(b)(1)(C).
    \20\ See Proposed Rule 7.29E(b)(1)(D).
    \21\ After the Exchange applies the Delay Mechanism to a 
routable order, the routed order would be subject to any natural 
latency inherent in accessing such Away Market.
---------------------------------------------------------------------------

     All outbound communications (e.g., bids, offers, and 
trades) to the Exchange's proprietary data feeds.\22\ The Exchange 
proposes to apply add 350 microseconds of delay to all outbound 
messages to its proprietary data feeds.
---------------------------------------------------------------------------

    \22\ See Proposed Rule 7.29E(b)(1)(E).
---------------------------------------------------------------------------

    Finally, the Exchange proposes also to apply the Delay Mechanism 
when the Exchange is operating out of its secondary data center.
    The Exchange proposes not to apply the Delay Mechanism to the 
following:
     All inbound communications from data feeds.\23\ The Delay 
Mechanism would not apply to communications to the Exchange from data 
feeds received directly from Away Markets and data feeds disseminated 
by a plan processor.
---------------------------------------------------------------------------

    \23\ See Proposed Rule 7.29E(b)(2)(A).
---------------------------------------------------------------------------

     Order processing and order execution on the Exchange's 
Book.\24\ All actions taken within the Exchange's Book, including 
calculating the BBO, NBBO, or PBBO,\25\ assigning working prices and 
working times to orders,\26\ and ranking and executing orders, would 
not be subject to the Delay Mechanism. For example, the Exchange would 
not apply the Delay Mechanism to update the working price of Pegged 
Orders, which would not be displayed on the Exchange, based on an 
updated PBBO.
---------------------------------------------------------------------------

    \24\ See Proposed Rule 7.29E(b)(2)(B).
    \25\ The term ``BBO'' is the best bid or offer that is a 
protected quotation on the Exchange. See Rule 1.1E(h). The terms 
``NBBO'' and ``PBBO'' are the national best bid or offer and the 
protected best bid and offer, respectively. See Rule 1.1E(dd).
    \26\ The Exchange proposed to define the term ``working price'' 
as the price at which an order is eligible to trade at any given 
time, which may be different from the limit price or display price 
of the order, and to define the term ``working time'' as the 
effective time sequence assigned to an order for purposes of 
determining its priority ranking. See Securities Exchange Act 
Release No. 79993 (Feb. 9, 2017), 82 FR 10814 (Feb. 15, 2017) (SR-
NYSEMKT-2017-01).
---------------------------------------------------------------------------

     All outbound communications (e.g., bids, offers, and 
trades) to the plan processors under Rules 601 and 602 of Regulation 
NMS.\27\ The Exchange proposes not to apply the Delay Mechanism to 
outbound communications with the SIP to disseminate quotation and last 
sale information.
---------------------------------------------------------------------------

    \27\ See Proposed Rule 7.29E(b)(2)(C).
---------------------------------------------------------------------------

III. Summary of Comments and NYSE MKT's Responses

    As noted above, the Commission has received six letters from five 
commenters on the proposal, as well as three response letters from the 
Exchange.\28\ Three commenters express opposition to the proposal in 
its current form.\29\ One commenter generally opposes the proposal, but 
acknowledged that it would be difficult for the Commission to 
disapprove the proposal in light of the Commission's interpretation 
relating to exchange access delays.\30\ Another commenter expresses 
concerns with exchange access delays more generally, but also notes 
that it does not see any legal grounds for disapproval of the 
Exchange's proposal in light of the Commission's interpretation and 
approval of IEX's access delay.\31\ As discussed in more detail below, 
commenters generally: (i) Request additional information regarding the 
proposal (including the Exchange's rationale for proposing a delay, the 
objective of the delay, and how the delay will protect investors); (ii) 
raise questions regarding the differences between the Exchange's 
proposal and the IEX access delay; and (iii) urge the Commission to 
complete a holistic review of equity market structure or the impact of 
access delays in particular and to provide more comprehensive guidance 
with respect to access delays, rather than considering new delays on an 
ad hoc basis through the SRO rule filing process.
---------------------------------------------------------------------------

    \28\ See supra notes 6-9.
    \29\ See IEX Letter I; IEX Letter II; HMA Letter; Citadel 
Letter.
    \30\ See FIA PTG Letter at 2. See also Securities Exchange Act 
Release No. 78102 (June 17, 2016), 81 FR 40785 (June 23, 2016) (File 
No. S7-03-16) (``Interpretation''); infra note 82.
    \31\ See Bats Letter at 1.
---------------------------------------------------------------------------

    First, the three commenters that oppose the proposal in its current 
form request additional information from the Exchange to better 
understand its proposal and the Exchange's underlying rationale.\32\ 
These commenters note the opposition of the New York Stock Exchange 
(``NYSE''), an affiliate of the Exchange, to IEX's application for 
registration as a national securities exchange and, in particular, to 
IEX's proposal to utilize an intentional delay on its market.\33\ These 
commenters request that the Exchange provide more detail regarding the 
reasoning behind its decision to adopt an intentional delay, including 
the objectives of the delay and how it will accomplish those 
objectives, how it is intended to benefit investors and promote fair 
and orderly markets, and whether the Exchange's views about the impact 
of such a delay differ from those raised in NYSE's comments on IEX's 
application.\34\ One commenter argues that the Exchange should not be 
permitted to rely simply on its similarity to the IEX access delay, and 
must instead provide a more thorough explanation as to why it proposes 
to implement an access delay.\35\ Two commenters request that the 
Exchange provide an explanation as to how it determined to set the 
latency of the Delay Mechanism at 350 microseconds.\36\
---------------------------------------------------------------------------

    \32\ See IEX Letter I at 2-3; HMA Letter at 4; Citadel Letter at 
2-3.
    \33\ See IEX Letter I at 2; HMA Letter at 4; Citadel Letter at 
1.
    \34\ See IEX Letter I at 2; HMA Letter at 4; Citadel Letter at 
2-3.
    \35\ See IEX Letter II at 2-3. This commenter explains that, in 
connection with its exchange application, it provided the Commission 
with a detailed explanation of the IEX POP, including its intent in 
implementing the IEX POP and how its features were determined 
relevant to its unique circumstances. See id. at 3.
    \36\ See IEX Letter I at 2; HMA Letter at 4.
---------------------------------------------------------------------------

    Second, commenters raise questions related to the specifics of the 
Exchange's proposal, in particular how it differs from IEX's access 
delay. Two commenters ask about the impact of the delay being 
implemented through a software process rather than a hardware 
mechanism, and they ask whether this could lead to any variability in 
the delay and how the Exchange would monitor any such variation from 
the 350 microsecond target.\37\ One commenter asks the Exchange to 
clarify how the additional delay it proposes for routable orders would 
impact the ability to access quotations on other exchanges that may be 
modified before the routed order subject to the delay is received by 
the away exchange.\38\ This commenter also asks whether the intentional 
delay on the Exchange would unfairly harm

[[Page 23383]]

investors on another of the Exchange's affiliated markets.\39\ This 
commenter further asks the Exchange to clarify if all communications 
with electronic designated market makers (``DMMs'') would be subject to 
the Delay Mechanism and what impact this may have on the DMMs.\40\ This 
commenter expresses concern that an NYSE DMM that is also an Exchange 
DMM may be subject to informational advantages or conflicts if trading 
on both exchanges, only one of which would be subject to an access 
delay.\41\
---------------------------------------------------------------------------

    \37\ See IEX Letter I at 3; HMA Letter at 5.
    \38\ See IEX Letter I at 3.
    \39\ See id. at 2.
    \40\ See id. at 3.
    \41\ See id.
---------------------------------------------------------------------------

    Finally, two commenters assert that, rather than considering new 
artificial delays on an ad hoc basis through the SRO rule-filing 
process, the Commission should complete a holistic review of equity 
market structure and provide more comprehensive guidance with respect 
to access delays.\42\ Another commenter similarly suggests that the 
Commission complete the comprehensive review of the market impact of 
exchange access delays contemplated as part of its interpretation of 
Rule 611 under Regulation NMS before approving any new exchange 
proposals seeking to implement such delays.\43\ With respect to the 
Exchange's specific proposal, two commenters express concern that 
intentional delays in protected quotations increase market complexity; 
increase pricing uncertainty; \44\ and, according to one commenter, may 
amplify the risk of market disruptions during periods of high 
volatility.\45\ Finally, one commenter argues that the Delay Mechanism 
would encourage the use of non-displayed orders, which the commenter 
states would decrease market transparency and potentially harm price 
discovery.\46\
---------------------------------------------------------------------------

    \42\ See FIA PTG Letter at 2; Bats Letter at 1-2. These 
commenters acknowledge, however, that despite their concerns with 
exchange access delays, the precedent set by IEX's exchange 
approval, including the Commission's related interpretation, may 
make it difficult for the Commission to disapprove the Exchange's 
proposal. See FIA PTG Letter at 2; Bats Letter at 1. One of these 
commenters suggests that the Commission limit the approval of any 
exchange access delays to proposals that closely track IEX's delay 
mechanism, such as the current proposal. See FIA PTG Letter at 2.
    \43\ See Citadel Letter at 2. See also Interpretation, supra 
note 30, 81 FR at 40793.
    \44\ See FIA PTG Letter at 2; Citadel Letter at 3.
    \45\ See FIA PTG Letter at 2.
    \46\ See Citadel Letter at 3-4.
---------------------------------------------------------------------------

    In response to comments, the Exchange states that it is proposing 
the Delay Mechanism ``in order to provide broker-dealers and issuers 
with a competitive model'' to the IEX access delay.\47\ The Exchange 
argues that its proposal is consistent with the Act in that it is 
designed to protect investors and the public interest in a manner that 
is not unfairly discriminatory and does not impose an unnecessary or 
inappropriate burden on competition.\48\ In particular, the Exchange 
states that the Delay Mechanism would allow non-displayed orders to 
dynamically update in accordance with their order instructions.\49\
---------------------------------------------------------------------------

    \47\ See NYSE MKT Response Letter I at 4.
    \48\ See NYSE MKT Response Letter II at 2.
    \49\ See id.
---------------------------------------------------------------------------

    In light of this purpose, the Exchange believes that the proposed 
length of 350 microseconds for its Delay Mechanism would provide 
Exchange systems with the appropriate amount of time to update prices 
based on market data it receives from other markets.\50\ The Exchange 
further states that the 350 microsecond delay is not ``too short so as 
to frustrate the purpose of the Delay Mechanism'' nor ``overly long so 
as to be unfairly discriminatory to orders subject to the Delay 
Mechanism.'' \51\ In addition, the proposed delay would be applied 
equally to all Exchange members and could not be bypassed by payment of 
a fee or otherwise. Specifically, the delay on outbound market data 
would be applied uniformly to all Exchange data recipients except for 
outbound communications with the SIP to disseminate quotation and last 
sale information, and the delay on inbound order messages would be 
applied uniformly to all users.\52\
---------------------------------------------------------------------------

    \50\ See NYSE Response Letter III at 1. Specifically, the 
Exchange notes that it processes market data updates and re-prices 
non-displayed orders in less than 100 microseconds, and that the 
theoretical minimum transmission time for information generated in 
other exchanges' primary systems located in Carteret, New Jersey to 
reach the Exchange's primary systems (located in Mahwah, New Jersey) 
is approximately 185 microseconds. See id. at n.1. Accounting for 
the Exchange's processing time and the time it takes the Exchange to 
receive market data updates from nearby exchanges, the Exchange 
believes that its proposed 350 microsecond Delay Mechanism is 
appropriately designed to achieve the stated purpose of allowing the 
Exchange to dynamically update the prices of undisplayed resting 
pegged orders. See id. at 1-2.
    \51\ See id. at 1-2.
    \52\ See NYSE MKT Response Letter II at 2.
---------------------------------------------------------------------------

    The Exchange further notes that its Delay Mechanism operates in a 
manner that is identical to the IEX access delay, except for its 
treatment of routable orders, which the Exchange believes is consistent 
with the model approved by the Commission for IEX.\53\ The Exchange 
does not believe this difference would cause its proposal to be 
unfairly discriminatory or to impose an unfair burden on competition, 
and states that this difference is simply a result of its system 
architecture.\54\ The Exchange further states that its proposed Delay 
Mechanism does not raise any issues that have not already been 
considered in connection with IEX's exchange application.\55\ The 
Exchange also notes that the Commission's interpretation of Rule 611 
under Regulation NMS found a de minimis delay on exchange response 
times to be consistent with Rule 611.\56\
---------------------------------------------------------------------------

    \53\ See NYSE MKT Response Letter I at 2.
    \54\ See id.
    \55\ See NYSE MKT Response Letter I at 1; NYSE MKT Response 
Letter II at 1-2.
    \56\ See NYSE MKT Response Letter I at 1-2; NYSE MKT Response 
Letter II at 2. See also Interpretation, supra note 30; infra note 
82.
---------------------------------------------------------------------------

    The Exchange does not believe that its proposal to implement the 
Delay Mechanism through a software mechanism should be relevant to 
evaluating the proposal, noting that the Commission has not examined 
existing exchange access delays with respect to the manner in which the 
delay is implemented.\57\ The Exchange further states that both 
hardware and software mechanisms may be subject to variability and the 
Exchange would be required, in accordance with its proposed rules, to 
monitor the latency of the Delay Mechanism and make any reasonable 
adjustments to ensure consistency with the 350 microsecond target.\58\
---------------------------------------------------------------------------

    \57\ See NYSE MKT Response Letter I at 2.
    \58\ See id. at 3.
---------------------------------------------------------------------------

    With respect to Exchange DMMs, the Exchange notes that it would 
only have electronic DMMs on its new trading platform and that these 
participants would be subject to its access delay just as any other 
market participant on the Exchange.\59\ The Exchange further states 
that it does not believe that any conflicts would arise if an NYSE DMM 
were also an Exchange electronic DMM, because the NYSE DMM would not be 
able to trade its assigned securities on the Exchange while on the NYSE 
trading floor.\60\
---------------------------------------------------------------------------

    \59\ See id.
    \60\ See id.
---------------------------------------------------------------------------

IV. Discussion and Commission Findings

    After careful review, the Commission finds that the proposed rule 
change is consistent with the requirements of Section 6 of the Act \61\ 
and the rules and regulations thereunder applicable to a national 
securities exchange.\62\ In particular, the Commission finds that the 
proposed rule change is consistent

[[Page 23384]]

with Section 6(b)(5) of the Act,\63\ which requires, among other 
things, that the rules of a national securities exchange be 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 regulating, clearing, settling, 
processing information with respect to, and 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 and that the rules not be 
designed to permit unfair discrimination between customers, issuers, 
brokers, or dealers.
---------------------------------------------------------------------------

    \61\ 15 U.S.C. 78f.
    \62\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
    \63\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    As summarized above, commenters have requested that the Exchange 
provide more explanation of its proposal, including the reasoning 
behind its decision to propose an access delay, as well as whether its 
views on access delays generally differ from those raised in NYSE's 
comments on IEX's exchange application. In particular, one commenter 
argues that ``NYSE has said nothing about what it is trying to achieve, 
or how its design is tailored to its own situation.'' \64\
---------------------------------------------------------------------------

    \64\ IEX Letter II at 3.
---------------------------------------------------------------------------

    The Commission believes that the Exchange has provided a sufficient 
description of the operation and purpose of its proposal in its initial 
filing and its responses to comments.\65\ As described above, the 
Exchange's proposed Delay Mechanism would add 350 microseconds of one-
way latency to inbound and outbound communications--including order 
messages between the Exchange and its members or other markets--as well 
as data messages from the Exchange's proprietary feeds. The proposal 
would therefore impose a cumulative inbound and outbound intentional 
delay of 700 microseconds on non-routable orders. The Delay Mechanism 
would apply to all messages except for outbound communications from the 
Exchange to the SIP; inbound communications from external market data 
feeds; and actions taken by the Exchange within the Exchange's book, 
including calculating the BBO, NBBO, or PBBO, assigning working prices 
and working times to orders, and ranking and executing orders.\66\
---------------------------------------------------------------------------

    \65\ The Commission does not believe that the comments submitted 
by NYSE, the Exchange's affiliate, on a separate matter previously 
before the Commission are relevant to the Commission's consideration 
of the current proposal, nor is the Exchange bound by its 
affiliate's prior arguments in relation to that matter.
    \66\ See Proposed Rule 7.29E(b)(2).
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    The Exchange states that the purpose of its proposal is to ``allow 
undisplayed orders to meet their order instruction to be dynamically 
updated to prices based on changes to the PBBO before a new, incoming 
order generated in response to the same PBBO change can access the 
resting order.'' \67\ In light of this purpose, the Exchange believes 
that the proposed length of 350 microseconds for its Delay Mechanism 
would achieve this purpose by providing Exchange systems with the 
appropriate amount of time to update prices based on market data it 
receives from other markets.\68\ Specifically, the Exchange notes that 
it processes market data updates and re-prices non-displayed orders in 
less than 100 microseconds, and that the theoretical minimum 
transmission time for information generated in other exchanges' primary 
systems located in Carteret, New Jersey to reach the Exchange's primary 
systems (located in Mahwah, New Jersey) is approximately 185 
microseconds.\69\ Accounting for the Exchange's processing time and the 
time it takes the Exchange to receive market data updates from nearby 
exchanges, the Exchange believes that its proposed 350 microsecond 
Delay Mechanism is therefore appropriately designed to achieve the 
stated purpose of allowing the Exchange to dynamically update the 
prices of undisplayed resting pegged orders and that the 350 
microsecond delay is not ``too short so as to frustrate the purpose of 
the Delay Mechanism'' nor ``overly long so as to be unfairly 
discriminatory to orders subject to the Delay Mechanism.'' \70\ The 
Exchange further asserts that its proposed Delay Mechanism ``provide[s] 
a competitive trading model to IEX,'' \71\ so that broker-dealers and 
issuers seeking a trading venue that offers an intentional delay 
mechanism will have an additional option.\72\
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    \67\ See NYSE Response Letter III at 1. See also NYSE Response 
Letter II at 2.
    \68\ See NYSE Response Letter III at 1.
    \69\ See id. at n.1.
    \70\ See id. at 1-2.
    \71\ See supra note 13 and accompanying text.
    \72\ See Notice, supra note 3, 82 FR at 10831.
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    The Commission believes the Exchange has sufficiently demonstrated 
that the proposed rule change is consistent with the Act, and the 
Commission does not find any legal basis to distinguish the Exchange's 
proposed Delay Mechanism from the IEX access delay. In particular, the 
Commission believes that the Exchange has sufficiently demonstrated 
that its proposal would not be unfairly discriminatory. The Commission 
notes that the Act does not foreclose reasonable and not unfairly 
discriminatory innovations, including those that are designed to 
protect investors who seek to reliably place passive, non-displayed 
pegged orders on an exchange.\73\
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    \73\ See Securities Exchange Act Release No. 78101 (June 17, 
2016), 81 FR 41142, 41157 (June 23, 2016) (File No. 10-222) (``IEX 
Exchange Approval'').
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    According to the Exchange, its proposal is tailored to achieve the 
purposes of its proposed access delay and, as stated above, would 
provide additional choice for market participants desiring to trade or 
list on an exchange that offers a delay mechanism.\74\ The Commission 
further notes that, as described above, the Exchange's Delay Mechanism 
would apply to all members equally, and may not be bypassed, for a fee 
or otherwise. Though the proposal would not subject order processing 
and order execution on the Exchange's Book to the Delay Mechanism, this 
aspect of the proposal is intended to allow undisplayed orders to 
function as intended by providing the Exchange with the time it needs 
to dynamically update prices of those orders based on the protected 
NBBO, which purpose and process the Exchange believes is not unfairly 
discriminatory and does not impose an unnecessary or inappropriate 
burden on competition.\75\
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    \74\ See Notice, supra note 3, 82 FR at 10831.
    \75\ See NYSE Response Letter II at 2. See also Notice, supra 
note 3, 82 FR at 10830.
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    The Commission has previously found that a similar advantage 
provided to pegged orders by means of an exchange access delay was not 
unfairly discriminatory and did not impose an unnecessary or 
inappropriate burden on competition.\76\ As the Commission noted in 
that case, the delay was designed to ensure that pegged orders operate 
as designed by accurately tracking the NBBO and to ensure that users of 
pegged orders can better achieve their goals when their pegged orders 
operate efficiently.\77\
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    \76\ See IEX Exchange Approval, supra note 73, 81 FR at 41157.
    \77\ See id.
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    For the current proposal, the Exchange has explained how its 
proposed Delay Mechanism is tailored to achieve its stated purpose of 
allowing the Exchange to dynamically update the prices of undisplayed 
pegged orders to meet their order instructions in response to market-
data updates. As noted above, the Exchange has explained its choice of 
350 microseconds based on its system processing time combined with its

[[Page 23385]]

determination of the theoretical minimum transmission time of 
information to the Exchange from other exchanges, and has affirmed that 
the delay is not ``too short'' so as to not allow the Exchange to 
achieve the purpose of the Delay Mechanism, nor is it ``overly long'' 
so as to be an unnecessary burden on market participants. Accordingly, 
the Commission finds that the Exchange's proposed Delay Mechanism is 
designed to protect investors and the public interest in a manner that 
is not unfairly discriminatory and that does not impose an unnecessary 
or inappropriate burden on competition and is therefore consistent with 
Sections 6(b)(5) and 6(b)(8) of the Act.\78\
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    \78\ While some commenters expressed concern that intentional 
delays in protected quotations may increase market complexity and 
requested that the Commission impose a moratorium on new proposals 
to implement such delays, the Commission notes that it carefully 
considers each exchange proposal for consistency with the Act.
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    Further, as described above, all members of the Exchange would be 
equally subject to the Delay Mechanism, and no member would be 
permitted to avoid the delay by payment of a fee or through any other 
means. In addition, the Commission believes the Exchange's proposal to 
subject all outbound routable orders to the Delay Mechanism is designed 
to ensure that the Exchange's ability to provide outbound routing 
services under the proposal will be on substantively comparable terms 
to a third-party routing broker that is a member of the Exchange. In 
particular, both the Exchange routing logic and a third-party routing 
broker-dealer would experience 350 microseconds of one-way latency in 
receiving order information about routable orders from the Exchange's 
matching engine. Although the Exchange's proposal is not identical in 
all respects to the routing structure at another exchange with an 
access delay,\79\ the Commission believes that the Exchange's proposal 
would not provide it with any structural or informational advantages in 
its provision of routing services as compared to a third-party broker-
dealer member performing a similar function for itself or others. 
Therefore, the Commission believes that the Exchange's proposal as 
applicable to routable orders would not be unfairly discriminatory and 
would not impose an inappropriate burden on competition and is 
therefore consistent with Sections 6(b)(5) and 6(b)(8) of the Act.
---------------------------------------------------------------------------

    \79\ See IEX Rule 11.510. See also IEX Exchange Approval, supra 
note 73, 81 FR at 41157-60.
---------------------------------------------------------------------------

    The Commission acknowledges that, as commenters have noted, the 
Exchange's proposal would differ from the access delay on another 
exchange in that it would be software-based, as opposed to being 
implemented through a physical hardware mechanism. However, the 
Commission does not believe that a software-based delay is inherently 
inferior to a hardware-based delay or that this specific distinction is 
material to its analysis of the proposal, and the Commission notes that 
the Exchange would be required, as with any hardware-based delay, to 
comply with its rules requiring the Exchange to periodically monitor 
the actual latency and make adjustments as reasonably necessary to 
achieve consistency with the 350 microsecond target set forth in the 
proposed rule.\80\
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    \80\ See Proposed Rule 1.1E(y).
---------------------------------------------------------------------------

    Finally, the Commission does not believe that implementation of the 
Exchange's Delay Mechanism would preclude the Exchange from maintaining 
an automated quotation. Similar to an existing access delay on another 
market,\81\ the duration of the proposed Delay Mechanism is well within 
the geographic and technological latencies experienced today, and the 
Commission believes that it would not impair a market participant's 
ability to access a displayed quotation consistent with the goals of 
Rule 611.\82\ Accordingly, the proposed intentional one-way 350 
microsecond delay is de minimis, and thus, following approval of the 
instant proposal, the Exchange can maintain a protected quotation when 
it operates the Delay Mechanism in the manner described above.
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    \81\ See IEX Exchange Approval, supra note 73.
    \82\ See Interpretation, supra note 30, 81 FR at 40792 (noting 
that, in response to technological and market developments since the 
adoption of Regulation NMS, the Commission has provided an updated 
interpretation of the meaning of the term ``immediate'' in Rule 
600(b)(3) of Regulation NMS, when determining whether a trading 
center maintains an ``automated quotation'' for purposes of Rule 611 
of Regulation NMS, to preclude 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, or as 
the Commission noted, so short as to not frustrate the purposes of 
Rule 611 by impairing fair and efficient access to an exchange's 
quotations). The Commission further stated that such a de minimis 
access delay would satisfy Rules 600 and 611 under the updated 
interpretation even if it involved the use of an ``intentional 
device'' to delay access to an exchange's quotation. See id. For 
purposes of determining whether an exchange access delay is de 
minimis, the Commission did not set out a specific threshold; 
however, Commission staff has determined that, today, any delay of 
less than one millisecond is a de minimis amount of delay in 
accessing an exchange's facilities for purposes of the 
interpretation. See Commission Staff Guidance on Automated 
Quotations under Regulation NMS (June 17, 2016), https://www.sec.gov/divisions/marketreg/automated-quotations-under-regulation-nms.htm.
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V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\83\ that the proposed rule change (SR-NYSEMKT-2017-05) be, and 
hereby is, approved.
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    \83\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\84\
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    \84\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-10304 Filed 5-19-17; 8:45 am]
 BILLING CODE 8011-01-P