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
<![CDATA[
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 (https://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 (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for Web site viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE.,
Washington, DC 20549, on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of the
filing also will be available for
inspection and copying at the principal
office of the Exchange. All comments
received will be posted without change;
the Commission does not edit personal
identifying information from
submissions. You should submit only
information that you wish to make
available publicly. All submissions
should refer to File Number SR–IEX–
2017–22, 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]
-----------------------------------------------------------------------
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\
---------------------------------------------------------------------------
\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.
---------------------------------------------------------------------------
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\
---------------------------------------------------------------------------
\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\
---------------------------------------------------------------------------
\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 (https://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 (https://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all
written statements with respect to the proposed rule change that are
filed with the Commission, and all written communications relating to
the proposed rule change between the Commission and any person, other
than those that may be withheld from the public in accordance with the
provisions of 5 U.S.C. 552, will be available for Web site viewing and
printing in the Commission's Public Reference Room, 100 F Street NE.,
Washington, DC 20549, on official business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of the filing also will be available
for inspection and copying at the principal office of the Exchange. All
comments received will be posted without change; the Commission does
not edit personal identifying information from submissions. You should
submit only information that you wish to make available publicly. All
submissions should refer to File Number SR-IEX-2017-22, 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.
---------------------------------------------------------------------------
\26\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------
[FR Doc. 2017-14429 Filed 7-10-17; 8:45 am]
BILLING CODE 8011-01-P
