Self-Regulatory Organizations; Investors Exchange LLC; Notice of Filing of Proposed Rule Change To Introduce a New Market Maker Peg Order, 32026-32030 [2017-14429]

Download as PDF 32026 Federal Register / Vol. 82, No. 131 / Tuesday, July 11, 2017 / Notices mstockstill on DSK30JT082PROD with NOTICES Arca Equities Rule 8.201(g), which allow the Exchange to ensure that they do not use their positions to violate the requirements of Exchange rules or applicable federal securities laws.23 In support of this proposal, the Exchange has made the following additional representations: (1) The Shares will be listed and traded on the Exchange pursuant to the initial and continued listing criteria in NYSE Arca Equities Rule 8.201.24 (2) The Exchange has appropriate rules to facilitate transactions in the Shares during all trading sessions.25 (3) The Exchange deems the Shares to be equity securities.26 (4) The Exchange also has a general policy prohibiting the distribution of material, non-public information by its employees.27 (5) Trading in the Shares will be subject to the existing trading surveillances administered by the Exchange, as well as cross-market surveillances administered by FINRA on behalf of the Exchange, which are designed to detect violations of Exchange rules and applicable federal securities laws, and that these procedures are adequate to properly monitor Exchange trading of the Shares in all trading sessions and to deter and detect violations of Exchange rules and federal securities laws applicable to trading on the Exchange.28 (6) The Exchange or FINRA, on behalf of the Exchange, or both, will communicate as needed regarding trading in the Shares with other markets and other entities that are members of the ISG, and the Exchange or FINRA, on behalf of the Exchange, or both, may obtain trading information regarding trading in the Shares from such markets and other entities. In addition, the Exchange may obtain information 23 Commentary .04 of NYSE Arca Equities Rule 6.3 requires that an ETP Holder acting as a registered market maker in the Shares, and its affiliates, establish, maintain and enforce written policies and procedures reasonably designed to prevent the misuse of any material nonpublic information with respect to such products, any components of the related products, any physical asset or commodity underlying the product, applicable currencies, underlying indexes, related futures or options on futures, and any related derivative instruments. 24 See id. 25 See id. 26 See id. The Commission notes that, as a result, trading of the Shares will be subject to the Exchange’s existing rules governing the trading of equity securities. 27 See id. at 24184. 28 See id. at 24183. FINRA conducts cross-market surveillances on behalf of the Exchange pursuant to a regulatory services agreement. The Exchange is responsible for FINRA’s performance under this regulatory services agreement. See id. at 24183, n.28. VerDate Sep<11>2014 18:01 Jul 10, 2017 Jkt 241001 regarding trading in the Shares from markets and other entities that are members of ISG or with which the Exchange has in place a comprehensive surveillance sharing agreement.29 (7) Prior to the commencement of trading, the Exchange will inform its ETP Holders in an Information Bulletin of the special characteristics and risks associated with trading the Shares. Specifically, the Information Bulletin will discuss the following: (1) The procedures for purchases and redemptions of Shares in Baskets (including noting that Shares are not individually redeemable); (2) NYSE Arca Equities Rule 9.2(a), which imposes a duty of due diligence on its ETP Holders to learn the essential facts relating to every customer prior to trading the Shares; (3) how information regarding the IIV is disseminated; (4) ETP Holders deliver a prospectus to investors purchasing newly issued Shares prior to or concurrently with the confirmation of a transaction; (5) the possibility that trading spreads and the resulting premium or discount on the Shares may widen as a result of reduced liquidity of gold trading during the Core and Late Trading Sessions after the close of the major world gold markets; and (6) trading information.30 (8) All statements and representations made in this filing regarding (a) the description of the portfolio, (b) limitations on portfolio holdings or reference assets, or (c) the applicability of Exchange listing rules specified in this rule filing shall constitute continued listing requirements for listing the Shares of the Trust on the Exchange.31 (9) The issuer has represented to the Exchange that it will advise the Exchange of any failure by the Trust to comply with the continued listing requirements and, pursuant to its obligations under Section 19(g)(1) of the Act, the Exchange will monitor for compliance with the continued listing requirements. If the Trust is not in compliance with the applicable listing requirements, the Exchange will commence delisting procedures under the NYSE Arca Equities Rule 5.5(m).32 This approval order is based on all of the Exchange’s representations— including those set forth above, in the Notice, and in Amendment No. 1—and the Exchange’s description of the Trust. For the foregoing reasons, the Commission finds that the proposed rule change, as modified by Amendment PO 00000 29 See id. at 24183–84. id. at 24184. 31 See id. at 24184. 32 See id. 30 See Frm 00094 Fmt 4703 Sfmt 4703 No. 1, is consistent with Section 6(b)(5) of the Act 33 and the rules and regulations thereunder applicable to a national securities exchange. IV. Conclusion It is therefore ordered, pursuant to Section 19(b)(2) of the Exchange Act,34 that the proposed rule change (SR– NYSEArca–2017–55), as modified by Amendment No. 1 be, and it hereby is, approved. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.35 Eduardo A. Aleman, Assistant Secretary. [FR Doc. 2017–14428 Filed 7–10–17; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–81078; File No. SR–IEX– 2017–22] Self-Regulatory Organizations; Investors Exchange LLC; Notice of Filing of Proposed Rule Change To Introduce a New Market Maker Peg Order July 5, 2017. Pursuant to Section 19(b)(1) 1 of the Securities Exchange Act of 1934 (the ‘‘Act’’) 2 and Rule 19b–4 thereunder,3 notice is hereby given that, on June 30, 2017, the Investors Exchange LLC (‘‘IEX’’ or the ‘‘Exchange’’) filed with the Securities and Exchange Commission (the ‘‘Commission’’) the proposed rule change as described in Items I, II and III below, which Items have been prepared by the self-regulatory organization. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. 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 the ‘‘Exchange’’) is filing with the Securities and Exchange Commission (‘‘Commission’’) a proposed rule change to introduce a new Market Maker Peg Order, designed 33 15 U.S.C. 78f(b)(5). U.S.C. 78s(b)(2). 35 17 CFR 200.30–3(a)(12). 1 15 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. 34 15 E:\FR\FM\11JYN1.SGM 11JYN1 Federal Register / Vol. 82, No. 131 / Tuesday, July 11, 2017 / Notices to simplify market maker compliance with IEX Rule 11.151 (Market Maker Obligations), and make a conforming change regarding connectivity within the Exchange System. In addition, the Exchange proposes to amend paragraph (d) of Rule 11.340 to describe how Market Maker Peg Orders in a Pilot Security 6 would be priced in order to comply with the Plan to Implement a Tick Size Pilot Program (‘‘Tick Pilot Plan’’).7 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 statements may be examined at the places specified in Item IV below. The self-regulatory organization has prepared summaries, set forth in Sections A, B, and C below, of the most significant aspects of such statements. A. Self-Regulatory Organization’s Statement of the Purpose of, and the Statutory Basis for, the Proposed Rule Change 1. Purpose mstockstill on DSK30JT082PROD with NOTICES Background IEX Rule 11.151 (Market Maker Obligations) requires market makers for each stock in which they are registered to continuously maintain a two-sided quotation within a designated percentage of the National Best Bid (‘‘NBB’’) and National Best Offer (‘‘NBO’’),8 as appropriate. In addition to the market maker quoting and pricing obligations set forth in the Exchange’s rules, market makers must meet their obligations under Rule 15c3–5 under the Act (the ‘‘Market Access Rule’’) 9 and Regulation SHO.10 6 Pilot Security has the meaning specified in the Tick Pilot Plan. 7 See Securities and Exchange Act Release No. 74892 (May 6, 2015), 80 FR 27513 (File No. 4–657) (‘‘Tick Plan Approval Order’’). See also Securities and Exchange Act Release No. 76382 (November 6, 2015) (File No. 4–657), 80 FR 70284 (File No. 4– 657) (November 13, 2015), which extended the pilot period commencement date from May 6, 2015 to October 3, 2016. 8 As defined by Regulation NMS Rule 600(b)(42). 17 CFR 242.600. 9 17 CFR 240.15c3–5. 10 17 CFR 242.200 through 204. VerDate Sep<11>2014 18:01 Jul 10, 2017 Jkt 241001 The Market Access Rule requires a broker-dealer with market access, or that provides a customer or any other person with access to an exchange or alternative trading system through use of its market participant identifier or otherwise, to establish, document, and maintain a system of risk management controls and supervisory procedures reasonably designed to manage the financial, regulatory, and other risks of this business activity. These controls must be reasonably designed to ensure compliance with all regulatory requirements, which are defined as ‘‘all federal securities laws, rules and regulations, and rules of self-regulatory organizations, that are applicable in connection with market access.’’ 11 In addition to the obligations of the Market Access Rule, broker-dealers have independent obligations that arise under Regulation SHO. Regulation SHO obligations generally include properly marking sell orders, obtaining a ‘‘locate’’ for short sale orders, closing out fail to deliver positions, and, where applicable, complying with the short sale price test.12 While there are certain exceptions to some of the requirements of Regulation SHO where a market maker is engaged in bona-fide market making activities,13 the availability of those exceptions is distinct and independent from whether a market supra note 5. supra note 6. 13 See 17 CFR 242.203(b)(1). The Commission adopted a narrow exception to Regulation SHO’s ‘‘locate’’ requirement for market makers engaged in bona fide market making that may need to facilitate customer orders in a fast moving market without being subject to the possible delays associated with complying with such requirement. See Exchange Act Release No. 50103 (July 28, 2004), 69 FR 48008, 48015 (August 6, 2004) (providing guidance as to what does not constitute bona-fide market making for purposes of claiming the exception to Regulation SHO’s ‘‘locate’’ requirement). See also Exchange Act Release No. 58775 (October 14, 2008), 73 FR 61690, 61698–9 (October 17, 2008) (providing guidance regarding what is bona-fide market making for purposes of complying with the market maker exception to Regulation SHO’s ‘‘locate’’ requirement including without limitation whether the market maker incurs any economic or market risk with respect to the securities, continuous quotations that are at or near the market on both sides and that are communicated and represented in a way that makes them widely accessible to investors and other broker-dealers and a pattern of trading that includes both purchases and sales in roughly comparable amounts to provide liquidity to customers or other broker-dealers). Thus, market makers would not be able to rely solely on quotations priced in accordance with the Designated Percentages under proposed Rule 11.190(b)(13) for eligibility for the bona-fide market making exception to the ‘‘locate’’ requirement based on the criteria set forth by the Commission. It should also be noted that a determination of bonafide market making is relevant for the purposes of a broker-dealer’s close-out obligations under Rule 204 of Regulation SHO. See 17 CFR 242.204(a)(3). PO 00000 11 See 12 See Frm 00095 Fmt 4703 Sfmt 4703 32027 maker submits an order that is a Market Maker Peg Order. Proposed Rule The Exchange is proposing to introduce a new Market Maker Peg Order type, designed to simplify market maker compliance with the continuous quoting and pricing obligations, as well as market maker compliance with the requirements of the Market Access Rule and Regulation SHO. The Market Maker Peg Order, as proposed, is substantially similar to equivalent order types offered by other market centers, including Bats BZX Exchange, Inc. (‘‘Bats’’), Nasdaq Stock Market LLC (‘‘Nasdaq’’), and Bats EDGX Exchange, Inc. (‘‘EDGX’’).14 Specifically, the Market Maker Peg Order would be a one-sided limit order and, similar to other peg orders available to market participants, priced in reference to or ‘‘pegged’’ to the NBB or NBO,15 but is distinguishable in that it would always be displayed. The Exchange believes that this orderbased approach would provide an effective compliance tool to facilitate market makers compliance with the requirements of the Market Access Rule and Regulation SHO while also providing quotation adjusting functionality to its market makers. Market makers would have control of order origination, as required by the Market Access Rule, while also allowing market makers to make marking and locate determinations prior to order entry, as required by Regulation SHO. As such, market makers using Market Maker Peg Orders would be fully able to comply with the requirements of the Market Access Rule and Regulation SHO, as they would when placing any order, while also facilitating compliance with their Exchange market making obligations. In this regard, the Market Maker Peg Order does not by itself ensure that the market maker is satisfying the requirements of Regulation SHO, including the satisfaction of the locate requirements of Rule 203(b)(1) or an exception thereto. It is expected that market makers will perform the necessary checks to comply with Regulation SHO, prior to entry of a Market Maker Peg Order. The Market Maker Peg Order would be limited to registered market makers 16 and would have its price automatically set and adjusted by the System, both upon entry and any time thereafter, in order to comply with the Exchange’s rules regarding market maker quoting 14 See e.g., Bats Rule 11.9(c)(16), Nasdaq Rule 4702(b)(7), and EDGX Rule 11.8(e). 15 See Rule 11.190(a)(3). 16 See Rule 11.150. E:\FR\FM\11JYN1.SGM 11JYN1 mstockstill on DSK30JT082PROD with NOTICES 32028 Federal Register / Vol. 82, No. 131 / Tuesday, July 11, 2017 / Notices and pricing obligations.17 Specifically, upon entry or at the beginning of the Regular Market Session, as applicable, the entered bid or offer is automatically priced by the System at the Designated Percentage (as defined in Rule 11.151(a)(6)) away from the then current NBB or NBO, as applicable, or if there is no NBB or NBO, at the Designated Percentage away from the last reported sale from the responsible single plan processor in order to comply with the quotation requirements for market makers set forth in Rule 11.151(a). Market makers may submit Market Maker Peg Orders to the Exchange starting at the beginning of the PreMarket Session, but the order will not be executable or automatically priced until the beginning of the Regular Market Session, and will expire at the end of the Regular Market Session. Upon reaching the Defined Limit (as defined in Rule 11.151(a)(7)), the price of a Market Maker Peg Order bid or offer will be adjusted by the System to the Designated Percentage away from the then current NBB or NBO, or, if there is no NBB or NBO, the order will, by default, be the Designated Percentage away from the last reported sale from the responsible single plan processor. If a Market Maker Peg Order bid or offer moves a specified number of percentage points away from the Designated Percentage towards the then current NBB or NBO, which number of percentage points will be determined and published in a circular distributed to Members from time to time, the price of such bid or offer will be adjusted by the System to the Designated Percentage away from the then current NBB or NBO, as applicable. If there is no NBB or NBO, as applicable, the order will be adjusted by the System to the Designated Percentage away from the last reported sale from the responsible single plan processor. In the event that pricing a Market Maker Peg Order at the Designated Percentage away from the then current National Best Bid and National Best Offer, or, if no National Best Bid or National Best Offer, to the Designated Percentage away from the last reported sale from the responsible single plan processor, would result in the order exceeding its limit price, the order will be cancelled or rejected. The limit price entered on a Market Maker Peg Order is designed to allow a market maker to specify a price at which the initial pricing and any subsequent 17 The Market Maker Peg Order is one-sided, and thus a market maker seeking to use Market Maker Peg Orders to comply with the Exchange’s continuous two-sided quotation requirements would need to submit both a bid and an offer using the order type. VerDate Sep<11>2014 18:01 Jul 10, 2017 Jkt 241001 repricing of the order to the Designated Percentage will be constrained. If, after entry, the Market Maker Peg Order is priced based on the last reported sale from the single plan processor and such Market Maker Peg Order is established as the NBB or NBO, the Market Maker Peg Order will not be subsequently adjusted in accordance with this rule until either there is a new consolidated last sale, or a new NBB or NBO is established by a national securities exchange. Market Maker Peg Orders are not eligible for routing pursuant to Rule 11.230(b) and are always displayed on the Exchange. In addition, a new timestamp is created for the order each time that it is automatically adjusted in accordance with the proposed rule. Market Maker Peg Orders may only be entered by a registered Market Maker, pursuant to IEX Rule 11.150. In addition, the Exchange proposes to amend paragraph (d) of Rule 11.340 to describe changes to System functionality with respect to Market Maker Peg Orders in order to comply with the Tick Pilot Plan. Specifically, the Exchange proposes to add new subparagraph (d)(1)(A) to Rule 11.340 to specify that if, pursuant to proposed Rule 11.190(b)(13), a Market Maker Peg Order in a Pilot Security would be priced at an increment other than $0.05, the System will round such order to buy (sell) up (down) to the nearest permissible increment. This approach, which is substantially similar to Bats Rule 11.27(c)(5), is designed to ensure that Market Maker Peg Orders for Pilot Securities are appropriately priced in $0.05 increments by rounding such order to the nearest permissible increment, that is also compliant with the minimum market maker quoting obligations set forth in IEX Rule 11.151. In addition, if the rounding methodology results in a Market Maker Peg Order being priced to a price below $0.05, the order will be cancelled back to the market maker that entered the order. The Exchange notes that notwithstanding the availability of the proposed Market Maker Peg Order functionality, a market maker remains responsible for entering, monitoring, and resubmitting, as applicable, quotations that meet the requirements of Rule 11.151. As proposed, the Exchange will apply the Designated Percentage and Defined Limit as set forth in Rules 11.151(a)(6) and (7), respectively, subject to the following exception: For all NMS stocks with a price less than $1 per share that are not included in the S&P 500® Index, Russell 1000® Index, and a pilot list of PO 00000 Frm 00096 Fmt 4703 Sfmt 4703 Exchange Traded Products, the Exchange will use the Designated Percentage and Defined Limit applicable to NMS stocks equal to or greater than $1 per share that are not included in the S&P 500® Index, Russell 1000® Index, and a pilot list of Exchange Traded Products. The System will be available for entry, modification, and cancellation of Market Maker Peg Orders under proposed Rule 11.190(b)(13) only via the POP pursuant to Rule 11.510(b), and thus are subject to the Inbound and Outbound POP Latency upon entry, accordingly.18 Furthermore, each time a Market Maker Peg Order is automatically adjusted by the System thereafter in accordance with proposed Rule 11.190(b)(13), all inbound and outbound communications related to the modified order instruction would traverse an additional POP between the Market Maker Peg Order repricing logic, and the Order Book, which is subject to an equivalent 350 microseconds of latency pursuant to proposed Rule 11.510(c)(1).19 This approach is designed so that a market maker using a Market Maker Peg Order to facilitate compliance with the Exchange’s continuous quoting and pricing obligations is in the same position as a market maker updating its own quote, whose orders would need to traverse a POP. As discussed more fully in the Statutory Basis section, the Exchange believes that it is appropriate to treat Market Maker Peg Orders differently in this regard from other pegged orders (which are repriced without traversing a POP) because of substantially distinguishing characteristics. The Exchange also proposes to make a conforming change to Rule 11.510(c) regarding connectivity, to provide that, pursuant to Rule 11.190(b)(13), each time a Market Maker Peg Order is automatically adjusted by the System, all inbound and outbound communications related to the modified order instruction will traverse an additional POP between the Market 18 See 11.510(b)(1) and (2), respectively, which define the Inbound POP Latency as an equivalent 350 microseconds of latency from the Exchangeprovided network interface at the IEX POP to the System at the primary data center; and Outbound POP Latency as an equivalent 350 microseconds of latency from the System at the primary data center to the Exchange-provided network interface at the IEX POP. 19 The Exchange notes that the same ‘‘additional POP’’ that is used to implement an equivalent 350 microseconds of latency to all routable orders sent by the System to the Order Book pursuant to Rule 11.510(c)(1) will be used to implement such delay to all modified order instructions for Market Maker Peg Orders pursuant to proposed Rule 11.190(b)(13). E:\FR\FM\11JYN1.SGM 11JYN1 Federal Register / Vol. 82, No. 131 / Tuesday, July 11, 2017 / Notices mstockstill on DSK30JT082PROD with NOTICES Maker Peg Order repricing logic and the Order Book. The Exchange plans to implement the proposed changes during the third quarter of 2017 pending completion of necessary technology changes and subject to Commission approval. The Exchange will announce the implementation date of the proposed changes by Trader Alert at least 10 business days in advance of such implementation date and within 90 days of approval of this proposed rule change. 2. Statutory Basis IEX believes that the proposed rule change is consistent with Section 6(b) of the Act in general, 20 and further the objectives of Section 6(b)(5) of the Act,21 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. As noted above, the Exchange believes that the proposed rule is designed to simplify market maker compliance with the minimum continuous quoting and pricing obligations, as well as facilitate market maker compliance with the requirements of the Market Access Rule and Regulation SHO. Specifically, the Exchange believes that simplifying compliance with this rule will remove impediments to and perfect the mechanism of a free and open market and a national market system, and protect investors and the public interest, because it will provide a simplified means by which market makers may offer liquidity, even in circumstances where they are not willing to quote at the inside market. As a result, in circumstances where liquidity available at displayed prices closer to the inside than the price of a Market Maker Peg Order is exhausted during an aggressive market wide sweep, the Market Maker Peg Order may nevertheless be available to support executions at prices that are at least within the applicable Designated Percentage or Defined Limit. Moreover, the methodology for repricing Market Maker Peg Orders is consistent with the requirements of the Act because it is designed to ensure that the displayed price of the order is at least within the 20 15 21 15 U.S.C. 78f. U.S.C. 78f(b)(5). VerDate Sep<11>2014 18:01 Jul 10, 2017 Jkt 241001 applicable Designated Percentage or Defined Limit, as applicable.22 The proposed rule change also is designed to support the principles of Section 11A(a)(1) of the Act 23 in that it seeks to assure fair competition among brokers and dealers and among exchange markets. The Exchange believes that offering the Market Maker Peg Order to market makers exclusively is consistent with fair competition among brokers and dealers in that market makers have chosen to subject themselves to the obligations of Rule 11.151, and the benefit conferred on such market participants by this order type is commensurate with the obligations. Furthermore, all Members are eligible to apply for registration as a market maker under Rule 11.150 on a fair and equal basis. The Exchange also believes that it is fair and reasonable for all inbound and outbound communications related to the repricing of a Market Maker Peg Order to traverse a POP that is subject to an equivalent 350 microseconds of latency for several reasons. First, as noted in the Purpose section, this approach is designed so that a market maker using a Market Maker Peg Order to facilitate compliance with the Exchange’s continuous quoting and pricing obligations is in the same position as a market maker updating its own quote, whose orders would need to traverse a POP. Similarly, price adjustments to Market Maker Peg Orders will experience the same latency as any other displayed order entered on the Exchange. IEX believes that it is appropriate to treat Market Maker Peg Orders differently in this regard than other pegged order types (which are repriced within the System without traversing a POP) offered by the Exchange because the fundamental characteristics of a Market Maker Peg Order is substantially different from such other peg orders.24 Specifically, the other peg order types offered are non-displayed and designed to generally execute at or within the NBBO. A primary function of the IEX POP access delay, in conjunction with the Exchange’s consumption of direct 22 The Exchange notes that in certain scenarios the applicable Designated Percentage or Defined Limit price may be outside of the industry wide limit-up, limit-down price bands, and/or the clearly erroneous parameters. Nevertheless, Market Maker Peg Orders may be less likely to execute at a clearly erroneous price or a price that would trigger a limitup, limit-down trading pause than other displayed orders that are not subject to the market maker pricing obligations. 23 15 U.S.C. 78k–1. 24 See IEX Rule 11.190(b)(8), (9) and (10) with respect to Primary Peg, Midpoint Peg, and Discretionary Peg Orders respectively. PO 00000 Frm 00097 Fmt 4703 Sfmt 4703 32029 proprietary market data without any such delay, is to protect resting nondisplayed orders from adverse selection by latency arbitrage whereby market participants with access to fast market data send orders to trade against resting non-displayed interest at soon to be stale prices. Subjecting all inbound and outbound communications related to the repricing of such non-displayed orders to POP latency would frustrate the purpose of the IEX POP since the pegged order would be subject to execution at a stale price before the repricing instruction is received. Moreover, market participants entering non-displayed pegged orders to the Exchange are often large institutional investors that do not have the technical capabilities of market makers or other latency sensitive Members to manage their orders to avoid adverse selection. Such market participants entrust the Exchange, pursuant to its design and System architecture, to accurately price and protect such order from adverse selection. In contrast, and by design, a Market Maker Peg Order is a compliance tool for market makers rather than an order type to facilitate trading at the most current pricing. In this regard, Market Maker Peg Orders are designed to reprice significantly outside the NBBO and are thus are materially less susceptible to adverse selection. Furthermore, such orders are not ‘‘pegged’’ to the NBBO in the same manner as non-displayed pegged orders, in that Market Maker Peg Orders only reprice to remain in compliance with the Exchange’s quoting and pricing obligations rather than to peg at, close to, or better than the NBBO with each NBBO update. Accordingly, the Exchange believes that it is consistent with the public interest and the protection of investors to reprice Market Maker Peg Orders through the POP in the interest of ensuring that market makers will not have any unfair advantage over market makers that updates its own quote, as well as with other market participants using displayed orders. Furthermore, the Exchange believes that it is consistent with the public interest and the protection of investors to apply a new timestamp to a Market Maker Peg Order each time it is repriced so that a Market Maker Peg Order does not achieve execution priority superior to a displayed order entered at that price earlier in time. Accordingly, market makers will not have any unfair advantage over a market makers updating its own quote, or other market participants using displayed orders on the Exchange. E:\FR\FM\11JYN1.SGM 11JYN1 32030 Federal Register / Vol. 82, No. 131 / Tuesday, July 11, 2017 / Notices Additionally, the Exchange believes that its proposed rounding of a buy (sell) Market Maker Peg Order in a Pilot Security that would be priced at an increment other than $0.05 up (down) to the nearest permissible increment, as well as to cancel such orders if the rounding methodology results in a Market Maker Peg Order being priced to a price below $0.05, is consistent with the protection of investors and the public interest in that it enables the Exchange to comply with the Tick Pilot Plan. Further, the Exchange believes it is also consistent with the protection of investors and the public interest to cancel or reject (as applicable) a Market Maker Peg Order that would otherwise be priced at a price exceeding its limit price because such price would not be consistent with the market maker’s instructions. Lastly, the Exchange believes that the proposed conforming rule change to Rule 11.510(c)(1) is consistent with the protection of investors and the public interest in that it is designed to provide clarity to market participants regarding Market Maker Peg Order repricing methodology, and make the Exchange’s rule more clear and explicit. mstockstill on DSK30JT082PROD with NOTICES 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. Specifically, the Exchange believes that the proposal will enhance the Exchange’s competitiveness by providing market makers on IEX with a means to offer liquidity even in circumstances where they are not willing to quote at the inside market. Based on informal discussion with market participants that serve as market maker on other trading centers, the Exchange believes that this functionality will be appealing to potential market makers, and therefore will make it more likely that market participants will choose to become registered market makers on the Exchange. This may, in turn, increase the extent of liquidity available on IEX and increase its ability to compete with other execution venues to attract orders that are seeking liquidity. The Exchange further notes that the Market Maker Peg Order, as proposed, is substantially similar to equivalent order types offered by other market centers, including Bats, Nasdaq, and EDGX, and therefore will not impair market participants or other market centers from competing, but would in fact allow the Exchange to compete with existing functionality VerDate Sep<11>2014 18:01 Jul 10, 2017 Jkt 241001 offered by competing market centers.25 Moreover, there is no barrier to other exchanges adopting the same repricing functionality. With regard to intra-market competition, the Exchange does not believe that the method of repricing Market Maker Peg Orders will result in any burden on intra-market competition that is not necessary or appropriate in furtherance of the purposes of the Act. To the contrary, as described in the Statutory Basis section, the Exchange’s proposed method of repricing is designed in the interest of ensuring that market makers using Market Maker Peg Orders will be in the same position as market makers updating their own quotes, as well as other market participants using displayed orders. 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 Within 45 days of the date of publication of this notice in the Federal Register or within such longer period (i) as the Commission may designate up to 90 days of such date if it finds such longer period to be appropriate and publishes its reasons for so finding or (ii) as to which the Exchange consents, the Commission shall: (a) By order approve or disapprove such proposed rule change, or (b) institute proceedings to determine whether the proposed rule change should be disapproved. IV. Solicitation of Comments Electronic Comments • Use the Commission’s Internet comment form (http://www.sec.gov/ rules/sro.shtml); or • Send an email to rule-comments@ sec.gov. Please include File Number SR– IEX–2017–22 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. PO 00000 supra note 9. Frm 00098 Fmt 4703 For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.26 Eduardo A. Aleman, Assistant Secretary. [FR Doc. 2017–14429 Filed 7–10–17; 8:45 am] 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: 25 See All submissions should refer to File Number SR–IEX–2017–22. This file number should be included on the subject line if email is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission’s Internet Web site (http://www.sec.gov/ rules/sro.shtml). Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule change that are filed with the Commission, and all written communications relating to the proposed rule change between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for Web site viewing and printing in the Commission’s Public Reference Room, 100 F Street NE., Washington, DC 20549, on official business days between the hours of 10:00 a.m. and 3:00 p.m. Copies of the 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– 2017–22, and should be submitted on or before August 1, 2017. BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–81074; File Nos. SR–DTC– 2017–008; SR–FICC–2017–014; SR–NSCC– 2017–008] Self-Regulatory Organizations; The Depository Trust Company; Fixed Income Clearing Corporation; National Securities Clearing Corporation; Notice of Filings of Proposed Rule Changes To Adopt the Clearing Agency Model Risk Management Framework July 5, 2017. Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934, as 26 17 Sfmt 4703 E:\FR\FM\11JYN1.SGM CFR 200.30–3(a)(12). 11JYN1

Agencies

[Federal Register Volume 82, Number 131 (Tuesday, July 11, 2017)]
[Notices]
[Pages 32026-32030]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-14429]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-81078; File No. SR-IEX-2017-22]


Self-Regulatory Organizations; Investors Exchange LLC; Notice of 
Filing of Proposed Rule Change To Introduce a New Market Maker Peg 
Order

July 5, 2017.
    Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of 
1934 (the ``Act'') \2\ and Rule 19b-4 thereunder,\3\ notice is hereby 
given that, on June 30, 2017, the Investors Exchange LLC (``IEX'' or 
the ``Exchange'') filed with the Securities and Exchange Commission 
(the ``Commission'') the proposed rule change as described in Items I, 
II and III below, which Items have been prepared by the self-regulatory 
organization. The Commission is publishing this notice to solicit 
comments on the proposed rule change from interested persons.
---------------------------------------------------------------------------

    \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 the ``Exchange'') is filing with the 
Securities and Exchange Commission (``Commission'') a proposed rule 
change to introduce a new Market Maker Peg Order, designed

[[Page 32027]]

to simplify market maker compliance with IEX Rule 11.151 (Market Maker 
Obligations), and make a conforming change regarding connectivity 
within the Exchange System. In addition, the Exchange proposes to amend 
paragraph (d) of Rule 11.340 to describe how Market Maker Peg Orders in 
a Pilot Security \6\ would be priced in order to comply with the Plan 
to Implement a Tick Size Pilot Program (``Tick Pilot Plan'').\7\
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    \4\ 15 U.S.C. 78s(b)(1).
    \5\ 17 CFR 240.19b-4.
    \6\ Pilot Security has the meaning specified in the Tick Pilot 
Plan.
    \7\ See Securities and Exchange Act Release No. 74892 (May 6, 
2015), 80 FR 27513 (File No. 4-657) (``Tick Plan Approval Order''). 
See also Securities and Exchange Act Release No. 76382 (November 6, 
2015) (File No. 4-657), 80 FR 70284 (File No. 4-657) (November 13, 
2015), which extended the pilot period commencement date from May 6, 
2015 to October 3, 2016.
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    The text of the proposed rule change is available at the Exchange's 
Web site at www.iextrading.com, at the principal office of the 
Exchange, and at the Commission's Public Reference Room.

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

    In its filing with the Commission, the self-regulatory organization 
included statements concerning the purpose of and basis for the 
proposed rule change and discussed any comments it received on the 
proposed rule change. The text of these statements may be examined at 
the places specified in Item IV below. The self-regulatory organization 
has prepared summaries, set forth in Sections A, B, and C below, of the 
most significant aspects of such statements.

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

1. Purpose
Background
    IEX Rule 11.151 (Market Maker Obligations) requires market makers 
for each stock in which they are registered to continuously maintain a 
two-sided quotation within a designated percentage of the National Best 
Bid (``NBB'') and National Best Offer (``NBO''),\8\ as appropriate. In 
addition to the market maker quoting and pricing obligations set forth 
in the Exchange's rules, market makers must meet their obligations 
under Rule 15c3-5 under the Act (the ``Market Access Rule'') \9\ and 
Regulation SHO.\10\
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    \8\ As defined by Regulation NMS Rule 600(b)(42). 17 CFR 
242.600.
    \9\ 17 CFR 240.15c3-5.
    \10\ 17 CFR 242.200 through 204.
---------------------------------------------------------------------------

    The Market Access Rule requires a broker-dealer with market access, 
or that provides a customer or any other person with access to an 
exchange or alternative trading system through use of its market 
participant identifier or otherwise, to establish, document, and 
maintain a system of risk management controls and supervisory 
procedures reasonably designed to manage the financial, regulatory, and 
other risks of this business activity. These controls must be 
reasonably designed to ensure compliance with all regulatory 
requirements, which are defined as ``all federal securities laws, rules 
and regulations, and rules of self-regulatory organizations, that are 
applicable in connection with market access.'' \11\
---------------------------------------------------------------------------

    \11\ See supra note 5.
---------------------------------------------------------------------------

    In addition to the obligations of the Market Access Rule, broker-
dealers have independent obligations that arise under Regulation SHO. 
Regulation SHO obligations generally include properly marking sell 
orders, obtaining a ``locate'' for short sale orders, closing out fail 
to deliver positions, and, where applicable, complying with the short 
sale price test.\12\ While there are certain exceptions to some of the 
requirements of Regulation SHO where a market maker is engaged in bona-
fide market making activities,\13\ the availability of those exceptions 
is distinct and independent from whether a market maker submits an 
order that is a Market Maker Peg Order.
---------------------------------------------------------------------------

    \12\ See supra note 6.
    \13\ See 17 CFR 242.203(b)(1). The Commission adopted a narrow 
exception to Regulation SHO's ``locate'' requirement for market 
makers engaged in bona fide market making that may need to 
facilitate customer orders in a fast moving market without being 
subject to the possible delays associated with complying with such 
requirement. See Exchange Act Release No. 50103 (July 28, 2004), 69 
FR 48008, 48015 (August 6, 2004) (providing guidance as to what does 
not constitute bona-fide market making for purposes of claiming the 
exception to Regulation SHO's ``locate'' requirement). See also 
Exchange Act Release No. 58775 (October 14, 2008), 73 FR 61690, 
61698-9 (October 17, 2008) (providing guidance regarding what is 
bona-fide market making for purposes of complying with the market 
maker exception to Regulation SHO's ``locate'' requirement including 
without limitation whether the market maker incurs any economic or 
market risk with respect to the securities, continuous quotations 
that are at or near the market on both sides and that are 
communicated and represented in a way that makes them widely 
accessible to investors and other broker-dealers and a pattern of 
trading that includes both purchases and sales in roughly comparable 
amounts to provide liquidity to customers or other broker-dealers). 
Thus, market makers would not be able to rely solely on quotations 
priced in accordance with the Designated Percentages under proposed 
Rule 11.190(b)(13) for eligibility for the bona-fide market making 
exception to the ``locate'' requirement based on the criteria set 
forth by the Commission. It should also be noted that a 
determination of bona-fide market making is relevant for the 
purposes of a broker-dealer's close-out obligations under Rule 204 
of Regulation SHO. See 17 CFR 242.204(a)(3).
---------------------------------------------------------------------------

Proposed Rule
    The Exchange is proposing to introduce a new Market Maker Peg Order 
type, designed to simplify market maker compliance with the continuous 
quoting and pricing obligations, as well as market maker compliance 
with the requirements of the Market Access Rule and Regulation SHO. The 
Market Maker Peg Order, as proposed, is substantially similar to 
equivalent order types offered by other market centers, including Bats 
BZX Exchange, Inc. (``Bats''), Nasdaq Stock Market LLC (``Nasdaq''), 
and Bats EDGX Exchange, Inc. (``EDGX'').\14\ Specifically, the Market 
Maker Peg Order would be a one-sided limit order and, similar to other 
peg orders available to market participants, priced in reference to or 
``pegged'' to the NBB or NBO,\15\ but is distinguishable in that it 
would always be displayed.
---------------------------------------------------------------------------

    \14\ See e.g., Bats Rule 11.9(c)(16), Nasdaq Rule 4702(b)(7), 
and EDGX Rule 11.8(e).
    \15\ See Rule 11.190(a)(3).
---------------------------------------------------------------------------

    The Exchange believes that this order-based approach would provide 
an effective compliance tool to facilitate market makers compliance 
with the requirements of the Market Access Rule and Regulation SHO 
while also providing quotation adjusting functionality to its market 
makers. Market makers would have control of order origination, as 
required by the Market Access Rule, while also allowing market makers 
to make marking and locate determinations prior to order entry, as 
required by Regulation SHO. As such, market makers using Market Maker 
Peg Orders would be fully able to comply with the requirements of the 
Market Access Rule and Regulation SHO, as they would when placing any 
order, while also facilitating compliance with their Exchange market 
making obligations. In this regard, the Market Maker Peg Order does not 
by itself ensure that the market maker is satisfying the requirements 
of Regulation SHO, including the satisfaction of the locate 
requirements of Rule 203(b)(1) or an exception thereto. It is expected 
that market makers will perform the necessary checks to comply with 
Regulation SHO, prior to entry of a Market Maker Peg Order.
    The Market Maker Peg Order would be limited to registered market 
makers \16\ and would have its price automatically set and adjusted by 
the System, both upon entry and any time thereafter, in order to comply 
with the Exchange's rules regarding market maker quoting

[[Page 32028]]

and pricing obligations.\17\ Specifically, upon entry or at the 
beginning of the Regular Market Session, as applicable, the entered bid 
or offer is automatically priced by the System at the Designated 
Percentage (as defined in Rule 11.151(a)(6)) away from the then current 
NBB or NBO, as applicable, or if there is no NBB or NBO, at the 
Designated Percentage away from the last reported sale from the 
responsible single plan processor in order to comply with the quotation 
requirements for market makers set forth in Rule 11.151(a). Market 
makers may submit Market Maker Peg Orders to the Exchange starting at 
the beginning of the Pre-Market Session, but the order will not be 
executable or automatically priced until the beginning of the Regular 
Market Session, and will expire at the end of the Regular Market 
Session.
---------------------------------------------------------------------------

    \16\ See Rule 11.150.
    \17\ The Market Maker Peg Order is one-sided, and thus a market 
maker seeking to use Market Maker Peg Orders to comply with the 
Exchange's continuous two-sided quotation requirements would need to 
submit both a bid and an offer using the order type.
---------------------------------------------------------------------------

    Upon reaching the Defined Limit (as defined in Rule 11.151(a)(7)), 
the price of a Market Maker Peg Order bid or offer will be adjusted by 
the System to the Designated Percentage away from the then current NBB 
or NBO, or, if there is no NBB or NBO, the order will, by default, be 
the Designated Percentage away from the last reported sale from the 
responsible single plan processor. If a Market Maker Peg Order bid or 
offer moves a specified number of percentage points away from the 
Designated Percentage towards the then current NBB or NBO, which number 
of percentage points will be determined and published in a circular 
distributed to Members from time to time, the price of such bid or 
offer will be adjusted by the System to the Designated Percentage away 
from the then current NBB or NBO, as applicable. If there is no NBB or 
NBO, as applicable, the order will be adjusted by the System to the 
Designated Percentage away from the last reported sale from the 
responsible single plan processor. In the event that pricing a Market 
Maker Peg Order at the Designated Percentage away from the then current 
National Best Bid and National Best Offer, or, if no National Best Bid 
or National Best Offer, to the Designated Percentage away from the last 
reported sale from the responsible single plan processor, would result 
in the order exceeding its limit price, the order will be cancelled or 
rejected. The limit price entered on a Market Maker Peg Order is 
designed to allow a market maker to specify a price at which the 
initial pricing and any subsequent repricing of the order to the 
Designated Percentage will be constrained.
    If, after entry, the Market Maker Peg Order is priced based on the 
last reported sale from the single plan processor and such Market Maker 
Peg Order is established as the NBB or NBO, the Market Maker Peg Order 
will not be subsequently adjusted in accordance with this rule until 
either there is a new consolidated last sale, or a new NBB or NBO is 
established by a national securities exchange.
    Market Maker Peg Orders are not eligible for routing pursuant to 
Rule 11.230(b) and are always displayed on the Exchange. In addition, a 
new timestamp is created for the order each time that it is 
automatically adjusted in accordance with the proposed rule. Market 
Maker Peg Orders may only be entered by a registered Market Maker, 
pursuant to IEX Rule 11.150.
    In addition, the Exchange proposes to amend paragraph (d) of Rule 
11.340 to describe changes to System functionality with respect to 
Market Maker Peg Orders in order to comply with the Tick Pilot Plan. 
Specifically, the Exchange proposes to add new subparagraph (d)(1)(A) 
to Rule 11.340 to specify that if, pursuant to proposed Rule 
11.190(b)(13), a Market Maker Peg Order in a Pilot Security would be 
priced at an increment other than $0.05, the System will round such 
order to buy (sell) up (down) to the nearest permissible increment. 
This approach, which is substantially similar to Bats Rule 11.27(c)(5), 
is designed to ensure that Market Maker Peg Orders for Pilot Securities 
are appropriately priced in $0.05 increments by rounding such order to 
the nearest permissible increment, that is also compliant with the 
minimum market maker quoting obligations set forth in IEX Rule 11.151. 
In addition, if the rounding methodology results in a Market Maker Peg 
Order being priced to a price below $0.05, the order will be cancelled 
back to the market maker that entered the order.
    The Exchange notes that notwithstanding the availability of the 
proposed Market Maker Peg Order functionality, a market maker remains 
responsible for entering, monitoring, and resubmitting, as applicable, 
quotations that meet the requirements of Rule 11.151.
    As proposed, the Exchange will apply the Designated Percentage and 
Defined Limit as set forth in Rules 11.151(a)(6) and (7), respectively, 
subject to the following exception: For all NMS stocks with a price 
less than $1 per share that are not included in the S&P 500[supreg] 
Index, Russell 1000[supreg] Index, and a pilot list of Exchange Traded 
Products, the Exchange will use the Designated Percentage and Defined 
Limit applicable to NMS stocks equal to or greater than $1 per share 
that are not included in the S&P 500[supreg] Index, Russell 
1000[supreg] Index, and a pilot list of Exchange Traded Products.
    The System will be available for entry, modification, and 
cancellation of Market Maker Peg Orders under proposed Rule 
11.190(b)(13) only via the POP pursuant to Rule 11.510(b), and thus are 
subject to the Inbound and Outbound POP Latency upon entry, 
accordingly.\18\ Furthermore, each time a Market Maker Peg Order is 
automatically adjusted by the System thereafter in accordance with 
proposed Rule 11.190(b)(13), all inbound and outbound communications 
related to the modified order instruction would traverse an additional 
POP between the Market Maker Peg Order repricing logic, and the Order 
Book, which is subject to an equivalent 350 microseconds of latency 
pursuant to proposed Rule 11.510(c)(1).\19\ This approach is designed 
so that a market maker using a Market Maker Peg Order to facilitate 
compliance with the Exchange's continuous quoting and pricing 
obligations is in the same position as a market maker updating its own 
quote, whose orders would need to traverse a POP. As discussed more 
fully in the Statutory Basis section, the Exchange believes that it is 
appropriate to treat Market Maker Peg Orders differently in this regard 
from other pegged orders (which are repriced without traversing a POP) 
because of substantially distinguishing characteristics.
---------------------------------------------------------------------------

    \18\ See 11.510(b)(1) and (2), respectively, which define the 
Inbound POP Latency as an equivalent 350 microseconds of latency 
from the Exchange-provided network interface at the IEX POP to the 
System at the primary data center; and Outbound POP Latency as an 
equivalent 350 microseconds of latency from the System at the 
primary data center to the Exchange-provided network interface at 
the IEX POP.
    \19\ The Exchange notes that the same ``additional POP'' that is 
used to implement an equivalent 350 microseconds of latency to all 
routable orders sent by the System to the Order Book pursuant to 
Rule 11.510(c)(1) will be used to implement such delay to all 
modified order instructions for Market Maker Peg Orders pursuant to 
proposed Rule 11.190(b)(13).
---------------------------------------------------------------------------

    The Exchange also proposes to make a conforming change to Rule 
11.510(c) regarding connectivity, to provide that, pursuant to Rule 
11.190(b)(13), each time a Market Maker Peg Order is automatically 
adjusted by the System, all inbound and outbound communications related 
to the modified order instruction will traverse an additional POP 
between the Market

[[Page 32029]]

Maker Peg Order repricing logic and the Order Book.
    The Exchange plans to implement the proposed changes during the 
third quarter of 2017 pending completion of necessary technology 
changes and subject to Commission approval. The Exchange will announce 
the implementation date of the proposed changes by Trader Alert at 
least 10 business days in advance of such implementation date and 
within 90 days of approval of this proposed rule change.
2. Statutory Basis
    IEX believes that the proposed rule change is consistent with 
Section 6(b) of the Act in general, \20\ and further the objectives of 
Section 6(b)(5) of the Act,\21\ 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. As noted above, the Exchange 
believes that the proposed rule is designed to simplify market maker 
compliance with the minimum continuous quoting and pricing obligations, 
as well as facilitate market maker compliance with the requirements of 
the Market Access Rule and Regulation SHO.
---------------------------------------------------------------------------

    \20\ 15 U.S.C. 78f.
    \21\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    Specifically, the Exchange believes that simplifying compliance 
with this rule will remove impediments to and perfect the mechanism of 
a free and open market and a national market system, and protect 
investors and the public interest, because it will provide a simplified 
means by which market makers may offer liquidity, even in circumstances 
where they are not willing to quote at the inside market. As a result, 
in circumstances where liquidity available at displayed prices closer 
to the inside than the price of a Market Maker Peg Order is exhausted 
during an aggressive market wide sweep, the Market Maker Peg Order may 
nevertheless be available to support executions at prices that are at 
least within the applicable Designated Percentage or Defined Limit. 
Moreover, the methodology for repricing Market Maker Peg Orders is 
consistent with the requirements of the Act because it is designed to 
ensure that the displayed price of the order is at least within the 
applicable Designated Percentage or Defined Limit, as applicable.\22\
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    \22\ The Exchange notes that in certain scenarios the applicable 
Designated Percentage or Defined Limit price may be outside of the 
industry wide limit-up, limit-down price bands, and/or the clearly 
erroneous parameters. Nevertheless, Market Maker Peg Orders may be 
less likely to execute at a clearly erroneous price or a price that 
would trigger a limit-up, limit-down trading pause than other 
displayed orders that are not subject to the market maker pricing 
obligations.
---------------------------------------------------------------------------

    The proposed rule change also is designed to support the principles 
of Section 11A(a)(1) of the Act \23\ in that it seeks to assure fair 
competition among brokers and dealers and among exchange markets. The 
Exchange believes that offering the Market Maker Peg Order to market 
makers exclusively is consistent with fair competition among brokers 
and dealers in that market makers have chosen to subject themselves to 
the obligations of Rule 11.151, and the benefit conferred on such 
market participants by this order type is commensurate with the 
obligations. Furthermore, all Members are eligible to apply for 
registration as a market maker under Rule 11.150 on a fair and equal 
basis.
---------------------------------------------------------------------------

    \23\ 15 U.S.C. 78k-1.
---------------------------------------------------------------------------

    The Exchange also believes that it is fair and reasonable for all 
inbound and outbound communications related to the repricing of a 
Market Maker Peg Order to traverse a POP that is subject to an 
equivalent 350 microseconds of latency for several reasons. First, as 
noted in the Purpose section, this approach is designed so that a 
market maker using a Market Maker Peg Order to facilitate compliance 
with the Exchange's continuous quoting and pricing obligations is in 
the same position as a market maker updating its own quote, whose 
orders would need to traverse a POP. Similarly, price adjustments to 
Market Maker Peg Orders will experience the same latency as any other 
displayed order entered on the Exchange.
    IEX believes that it is appropriate to treat Market Maker Peg 
Orders differently in this regard than other pegged order types (which 
are repriced within the System without traversing a POP) offered by the 
Exchange because the fundamental characteristics of a Market Maker Peg 
Order is substantially different from such other peg orders.\24\ 
Specifically, the other peg order types offered are non-displayed and 
designed to generally execute at or within the NBBO. A primary function 
of the IEX POP access delay, in conjunction with the Exchange's 
consumption of direct proprietary market data without any such delay, 
is to protect resting non-displayed orders from adverse selection by 
latency arbitrage whereby market participants with access to fast 
market data send orders to trade against resting non-displayed interest 
at soon to be stale prices. Subjecting all inbound and outbound 
communications related to the repricing of such non-displayed orders to 
POP latency would frustrate the purpose of the IEX POP since the pegged 
order would be subject to execution at a stale price before the 
repricing instruction is received. Moreover, market participants 
entering non-displayed pegged orders to the Exchange are often large 
institutional investors that do not have the technical capabilities of 
market makers or other latency sensitive Members to manage their orders 
to avoid adverse selection. Such market participants entrust the 
Exchange, pursuant to its design and System architecture, to accurately 
price and protect such order from adverse selection. In contrast, and 
by design, a Market Maker Peg Order is a compliance tool for market 
makers rather than an order type to facilitate trading at the most 
current pricing. In this regard, Market Maker Peg Orders are designed 
to reprice significantly outside the NBBO and are thus are materially 
less susceptible to adverse selection. Furthermore, such orders are not 
``pegged'' to the NBBO in the same manner as non-displayed pegged 
orders, in that Market Maker Peg Orders only reprice to remain in 
compliance with the Exchange's quoting and pricing obligations rather 
than to peg at, close to, or better than the NBBO with each NBBO 
update.
---------------------------------------------------------------------------

    \24\ See IEX Rule 11.190(b)(8), (9) and (10) with respect to 
Primary Peg, Midpoint Peg, and Discretionary Peg Orders 
respectively.
---------------------------------------------------------------------------

    Accordingly, the Exchange believes that it is consistent with the 
public interest and the protection of investors to reprice Market Maker 
Peg Orders through the POP in the interest of ensuring that market 
makers will not have any unfair advantage over market makers that 
updates its own quote, as well as with other market participants using 
displayed orders.
    Furthermore, the Exchange believes that it is consistent with the 
public interest and the protection of investors to apply a new 
timestamp to a Market Maker Peg Order each time it is repriced so that 
a Market Maker Peg Order does not achieve execution priority superior 
to a displayed order entered at that price earlier in time. 
Accordingly, market makers will not have any unfair advantage over a 
market makers updating its own quote, or other market participants 
using displayed orders on the Exchange.

[[Page 32030]]

    Additionally, the Exchange believes that its proposed rounding of a 
buy (sell) Market Maker Peg Order in a Pilot Security that would be 
priced at an increment other than $0.05 up (down) to the nearest 
permissible increment, as well as to cancel such orders if the rounding 
methodology results in a Market Maker Peg Order being priced to a price 
below $0.05, is consistent with the protection of investors and the 
public interest in that it enables the Exchange to comply with the Tick 
Pilot Plan. Further, the Exchange believes it is also consistent with 
the protection of investors and the public interest to cancel or reject 
(as applicable) a Market Maker Peg Order that would otherwise be priced 
at a price exceeding its limit price because such price would not be 
consistent with the market maker's instructions.
    Lastly, the Exchange believes that the proposed conforming rule 
change to Rule 11.510(c)(1) is consistent with the protection of 
investors and the public interest in that it is designed to provide 
clarity to market participants regarding Market Maker Peg Order 
repricing methodology, and make the Exchange's rule more clear and 
explicit.

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. Specifically, the Exchange 
believes that the proposal will enhance the Exchange's competitiveness 
by providing market makers on IEX with a means to offer liquidity even 
in circumstances where they are not willing to quote at the inside 
market. Based on informal discussion with market participants that 
serve as market maker on other trading centers, the Exchange believes 
that this functionality will be appealing to potential market makers, 
and therefore will make it more likely that market participants will 
choose to become registered market makers on the Exchange. This may, in 
turn, increase the extent of liquidity available on IEX and increase 
its ability to compete with other execution venues to attract orders 
that are seeking liquidity. The Exchange further notes that the Market 
Maker Peg Order, as proposed, is substantially similar to equivalent 
order types offered by other market centers, including Bats, Nasdaq, 
and EDGX, and therefore will not impair market participants or other 
market centers from competing, but would in fact allow the Exchange to 
compete with existing functionality offered by competing market 
centers.\25\ Moreover, there is no barrier to other exchanges adopting 
the same repricing functionality.
---------------------------------------------------------------------------

    \25\ See supra note 9.
---------------------------------------------------------------------------

    With regard to intra-market competition, the Exchange does not 
believe that the method of repricing Market Maker Peg Orders will 
result in any burden on intra-market competition that is not necessary 
or appropriate in furtherance of the purposes of the Act. To the 
contrary, as described in the Statutory Basis section, the Exchange's 
proposed method of repricing is designed in the interest of ensuring 
that market makers using Market Maker Peg Orders will be in the same 
position as market makers updating their own quotes, as well as other 
market participants using displayed orders.

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

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

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-IEX-2017-22 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-2017-22. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for Web site viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE., 
Washington, DC 20549, on official business days between the hours of 
10:00 a.m. and 3:00 p.m. Copies of the 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-2017-22, and should be 
submitted on or before August 1, 2017.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\26\
Eduardo A. Aleman,
Assistant Secretary.
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    \26\ 17 CFR 200.30-3(a)(12).
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[FR Doc. 2017-14429 Filed 7-10-17; 8:45 am]
 BILLING CODE 8011-01-P