Self-Regulatory Organizations; Chicago Stock Exchange, Inc.; Notice of Filing of Amendments No. 1 and No. 2 and Order Granting Accelerated Approval of a Proposed Rule Change, as Modified by Amendments No. 1 and No. 2, To Adopt the CHX Liquidity Enhancing Access Delay on a Pilot Basis, 49433-49447 [2017-23122]

Download as PDF Federal Register / Vol. 82, No. 205 / Wednesday, October 25, 2017 / Notices For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.19 Eduardo A. Aleman, Assistant Secretary. [FR Doc. 2017–23119 Filed 10–24–17; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–81913; File No. SR–CHX– 2017–04] Self-Regulatory Organizations; Chicago Stock Exchange, Inc.; Notice of Filing of Amendments No. 1 and No. 2 and Order Granting Accelerated Approval of a Proposed Rule Change, as Modified by Amendments No. 1 and No. 2, To Adopt the CHX Liquidity Enhancing Access Delay on a Pilot Basis October 19, 2017. sradovich on DSK3GMQ082PROD with NOTICES I. Introduction On February 10, 2017, the Chicago Stock Exchange, Inc. (‘‘CHX’’ or ‘‘Exchange’’) filed with the Securities and Exchange Commission (‘‘Commission’’), pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Exchange Act’’) 1 and Rule 19b–4 thereunder,2 a proposed rule change to adopt the CHX Liquidity Enhancing Access Delay (‘‘LEAD’’), which would require all new incoming orders, cancel, and cancel/replace messages to be subject to a 350microsecond intentional access delay except for: (1) Orders that would provide liquidity submitted by a LEAD Market Maker (‘‘LEAD MM’’ or ‘‘LMM’’), a new class of CHX market maker with heightened quoting and trading obligations (referred to collectively as the ‘‘minimum performance standards’’); and (2) cancel messages originating from a LEAD MM’s trading account. The proposed rule change was published for comment in the Federal Register on February 21, 2017.3 On April 3, 2017, the Commission designated a longer period within which to approve the proposed rule change, disapprove the proposed rule change, or institute proceedings to determine whether the proposed rule change should be disapproved.4 The Commission received eleven comment 19 17 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 3 See Securities Exchange Act Release No. 80041 (February 14, 2017), 82 FR 11252 (‘‘Notice’’). 4 See Securities Exchange Act Release No. 80364, 82 FR 17065 (April 7, 2017). 1 15 VerDate Sep<11>2014 22:06 Oct 24, 2017 Jkt 244001 letters on the proposed rule change, including a response from the Exchange.5 On May 22, 2017, the Commission instituted proceedings under Section 19(b)(2)(B) of the Exchange Act 6 to determine whether to approve or disapprove the proposed rule change.7 Thereafter, the Commission received seven more comment letters, including a response from the Exchange.8 On August 17, 2017, pursuant to Section 19(b)(2) of the Exchange Act,9 the Commission designated a longer period for Commission action on proceedings to determine whether to disapprove the proposed rule change.10 On September 19, 2017, the Exchange filed Amendment No. 1 to the proposed rule change. In Amendment No. 1, the Exchange proposed to implement the proposed rule change as a 24-month pilot program, during which time the Exchange would collect and publicly disclose (following the sixth month of the pilot program) the following data: (1) Quote quality statistics, designed to 5 See letters from: Ryan Hitch, Head of Equities Trading, XR Securities LLC, dated February 24, 2017 (‘‘XR Securities Letter’’); Douglas A. Cifu, Chief Executive Officer, Virtu Financial LLC, dated February 27, 2017 (‘‘Virtu Letter’’); Joanna Mallers, Secretary, FIA Principal Traders Group, dated March 13, 2017 (‘‘FIA PTG Letter’’); Adam Nunes, Head of Business Development, Hudson River Trading LLC, dated March 13, 2017 (‘‘Hudson River Trading Letter’’); R.T. Leuchtkafer, dated March 14, 2017 (‘‘Leuchtkafer Letter’’); Stephen John Berger, Managing Director, Government & Regulatory Policy, Citadel Securities, dated March 14, 2017 (‘‘Citadel Letter’’); Tyler Gellasch, Executive Director, Healthy Markets Association, March 17, 2017 (‘‘Healthy Markets Letter’’); Elizabeth K. King, General Counsel and Corporate Secretary, New York Stock Exchange, dated March 20, 2017 (‘‘NYSE Letter’’); James G. Ongena, Executive Vice President and General Counsel, CHX, dated March 24, 2017 (‘‘CHX Letter’’); Steve Crutchfield, Head of Market Structure, CTC Trading Group, LLC, dated April 4, 2017 (‘‘CTC Trading Letter’’); and Theodore R. Lazo, Managing Director and Associate General Counsel, Securities Industry and Financial Markets Association, dated May 17, 2017 (‘‘SIFMA Letter’’). All comments on the proposed rule change are available at https://www.sec.gov/comments/sr-chx2017-04/chx201704.htm. 6 15 U.S.C. 78s(b)(2)(B). 7 See Securities Exchange Act Release No. 80740, 82 FR 24412 (May 26, 2017) (‘‘OIP’’). In the OIP, the Commission specifically requested comment on thirteen questions. See id. at 24416. 8 See letters from: R.T. Leuchtkafer, dated June 15, 2017 (‘‘Leuchtkafer Letter 2’’); Stephen Berger, Managing Director, Government and Regulatory Policy, Citadel Securities, dated June 16, 2017 (‘‘Citadel Letter 2’’); Joanna Mallers, Secretary, FIA Principal Traders Group, dated June 16, 2017 (‘‘FIA PTG Letter 2’’); James G. Ongena, Executive Vice President, General Counsel, CHX, dated June 30, 2017 (‘‘CHX Letter 2’’); R.T. Leuchtkafer, dated July 7, 2017 (‘‘Leuchtkafer Letter 3’’); R.T. Leuchtkafer, dated July 10, 2017 (‘‘Leuchtkafer Letter 4’’); and R.T. Leuchtkafer, dated October 7, 2017 (‘‘Leuchtkafer Letter 5’’). 9 15 U.S.C. 78s(b)(2). 10 See Securities Exchange Act Release No. 81415, 82 FR 40051 (August 23, 2017). PO 00000 Frm 00123 Fmt 4703 Sfmt 4703 49433 provide comparative data regarding the effect of LEAD on market quality, for each security per trading day and for each period of exceptional volatility (‘‘PEV’’) range (‘‘PEV Range’’), for the six months immediately preceding the implementation of the pilot program and for the duration of the pilot program; (2) matched trade difference statistics, designed to compare the reliability of CHX quotes with and without the LEAD, for each security assigned to a LEAD MM (‘‘LEAD MM Security’’) per trading day and per PEV Range, for the duration of the pilot program; (3) volume statistics, designed to measure the impact of LEAD on execution volume in LEAD MM Securities for the duration of the pilot program; (4) variable processing delay statistics, designed to provide comparative data regarding the variable delay 11 between the initial receipt of an order and the time that the order is eligible to be matched by CHX’s matching system for the duration of the pilot program; and (5) effective spread statistics, designed to measure the impact of the LEAD on CHX and national market system (‘‘NMS’’) effective spreads for the duration of the pilot program.12 On October 18, 2017, the Exchange filed Amendment No. 2 to the proposed rule change.13 This order approves the proposed rule change, as 11 The variable delay does not include the 350microsecond intentional access delay. The variable delay will depend on factors including, but not limited to, messaging volume and system processing. See Amendment No. 1, infra note 12, at 28. 12 In Amendment No. 1, the Exchange also supplemented its rationale for the proposed rule change, provided additional discussion related to the market quality enhancements that it believes would be realized from the proposal, corrected certain errors in the examples set forth in the proposal, and corrected a misstatement by the Exchange in one of its comment letters. Amendment No. 1 is available at https:// www.sec.gov/comments/sr-chx-2017-04/chx2017042583844-161106.pdf. 13 In Amendment No. 2, the Exchange: (1) Amended the proposal so that the LEAD would apply only during the regular trading session; (2) revised the definition of ‘‘Qualified Executions’’ to measure executions during the regular trading session only; (3) modified its description of its review for compliance with the minimum performance standards to provide that the Exchange would review LEAD MM quoting and trading activity on a monthly basis, and that trading days on which a LEAD MM was prohibited by CHX rules from submitting orders from its trading account would be excluded from such review; (4) modified its description of the data that will be published on its Web site; (5) modified its description of the PEV data that will be collected; and (6) clarified its description of one of the order origin categories into which the variable processing delay statistics will be divided and amended and added delay ranges for which data will be collected. Amendment No. 2 is available at https://www.sec.gov/comments/srchx-2017-04/chx201704-2643435-161294.pdf. E:\FR\FM\25OCN1.SGM 25OCN1 49434 Federal Register / Vol. 82, No. 205 / Wednesday, October 25, 2017 / Notices modified by Amendments No. 1 and No. 2, on an accelerated basis. sradovich on DSK3GMQ082PROD with NOTICES II. Summary of the Proposal The Exchange proposes to adopt, on a pilot basis, the LEAD,14 which would subject all new incoming orders,15 cancel, and cancel/replace messages to a 350-microsecond intentional access delay, except for: (1) Orders that would provide liquidity submitted by a LEAD MM; and (2) cancel messages originating from a LEAD MM’s trading account. New incoming orders, cancel, and cancel/replace messages would be subject to a 350 microsecond delay after initial receipt by the Exchange (‘‘Fixed LEAD Period’’), and would only be processed after the Exchange’s matching system 16 has evaluated and processed, if applicable, all messages received by the Exchange during the Fixed LEAD Period. A delayed message would retain its original sequence number and would be delayed only once. The LEAD would be applied to all securities traded on the Exchange during the regular trading session.17 The Exchange states that the LEAD is designed to address a lack of resting liquidity in NMS securities on CHX by providing LEAD MMs with a risk management tool that would incentivize LEAD MMs to display larger orders at aggressive prices.18 To the extent the LEAD would incentivize LEAD MMs to improve the price and size of the prevailing National Best Bid and Offer (‘‘NBBO’’), the Exchange asserts that LEAD could reduce transaction costs for retail investors, as wholesale brokerdealers price the majority of the retail orders they handle using the prevailing NBBO, and for institutional investors, as the execution costs for their orders would be reduced if the average NBBO spreads are narrowed.19 14 For more details regarding the proposal, please refer to the Notice, Amendment No. 1, and Amendment No. 2, supra notes 3, 12, and 13 respectively. 15 New incoming orders are orders received by the matching system for the first time. The LEAD would not apply to other situations where existing orders or portions thereof are treated as incoming orders, such as: (1) Resting orders that are price slid into a new price point pursuant to the CHX only price sliding or limit up-limit down price sliding processes; and (2) unexecuted remainders of routed orders released into the matching system. See Notice, supra note 3, 82 FR at 11252, n.3. 16 The matching system is an automated order execution system. 17 See Amendment No. 2, supra note 13, at 11. 18 See Amendment No. 1, supra note 12, at 8. 19 See CHX Letter 2, supra note 8, at 10. Originally, CHX framed the LEAD as a countermeasure to ‘‘latency arbitrage,’’ defined by the Exchange as the practice of exploiting disparities in the price of a security or related securities that are being traded in different markets by taking advantage of the time it takes to access VerDate Sep<11>2014 22:06 Oct 24, 2017 Jkt 244001 A LEAD MM would be required to meet the proposed minimum performance standards in return for undelayed access to submit liquidity providing orders and to cancel its resting orders. The proposed minimum performance standards require, in addition to the obligations for market makers required by the Exchange’s current rules,20 that: (1) A LEAD MM disseminate throughout the Exchange’s regular trading session (except during auctions) a continuous two-sided quote, with bids and offers being closer to the National Best Bid (‘‘NBB’’) and National Best Offer (‘‘NBO’’), respectively, than the quotes that market makers are required to post under CHX’s existing rules; (2) a LEAD MM maintain an average monthly NBBO quoting percentage 21 in each of its LEAD MM Securities of at least 10% over the course of a calendar month; (3) a LEAD MM must execute at least 2% of the transactions during the regular trading session, resulting from single-sided orders (excluding auction executions), in each of its LEAD MM Securities on an equally-weighted daily average over the course of a calendar month; and (4) at least 80% of the LEAD MM’s executions during the regular trading session, resulting from single-sided orders (excluding auction executions), in each of its LEAD MM Securities result from its resting orders that originated from its corresponding LEAD MM trading account over the course of a calendar month.22 and respond to public information. See Notice, supra note 3, 82 FR at 11252–53. CHX attributes latency arbitrage to a degradation of the quality of its market it observed between January and July 2016. See id. at 11253. 20 See CHX Article 16, Rule 4(d). 21 Proposed CHX Article 16, Rule 4(f)(2) provides that the Exchange will determine: (1) The ‘‘Daily NBB Quoting Percentage’’ by determining the percentage of time the LEAD MM has at least one round lot of displayed interest in an Exchange bid at the NBB during the open trading state of each trading day for a calendar month; (2) the ‘‘Daily NBO Quoting Percentage’’ by determining the percentage of time the LEAD MM has at least one round lot of displayed interest in an Exchange offer at the NBO during the open trading state of each trading day for a calendar month; (3) the ‘‘Average Daily NBBO Quoting Percentage’’ for each trading day by summing the ‘‘Daily NBB Quoting Percentage’’ and the ‘‘Daily NBO Quoting Percentage’’ then dividing such sum by two; and (4) the ‘‘Monthly Average NBBO Quoting Percentage’’ for each security by summing the security’s ‘‘Average Daily NBBO Quoting Percentages’’ for each trading day in a calendar month then dividing the resulting sum by the total number of trading days in such calendar month. 22 Prior to commencing LEAD market making activities in a security, a LEAD MM must, among other things, establish at least one separately designated LEAD MM trading account through which all and only LEAD market making activities in LEAD MM Securities must originate. See proposed CHX Article 16, Rule 4(f)(3)(B)(i). PO 00000 Frm 00124 Fmt 4703 Sfmt 4703 CHX also proposes to establish a procedure to designate LEAD MMs in a security. Only a market maker could apply to be a LEAD MM in one or more securities, and market makers must receive written approval from the Exchange to be assigned securities as a LEAD MM.23 LEAD MMs would be selected by the Exchange based on factors including, but not limited to, experience with making markets in securities, adequacy of capital, willingness to promote the Exchange as a marketplace, issuer preference, operational capacity, support personnel, and history of adherence to Exchange rules and securities laws.24 Current Article 16, Rules 2(c)–(e) govern market maker withdrawal from assigned securities, and would apply to LEAD MMs and LEAD MM Securities. The Exchange could approve, at its discretion, more than one LEAD MM to be assigned to any LEAD MM Security and limit the number of LEAD MMs assigned to any security.25 Pursuant to proposed CHX Article 16, Rule 4(f)(3)(D), the Exchange would review each LEAD MM’s quoting and trading activity on a monthly basis to determine whether the LEAD MM has met the minimum performance standards for each of its LEAD MM Securities.26 A LEAD MM’s failure to meet the minimum performance standards during any given month would result in the Exchange: (1) Suspending or terminating a LEAD MM’s registration as a market maker; or (2) suspending or terminating assignment to a LEAD MM Security.27 These proposed provisions would not limit any other power of the Exchange to discipline a LEAD MM pursuant to other CHX rules. CHX Article 20, Rule 8(h) and proposed CHX Article 16, Rule 4(f) (collectively, the ‘‘LEAD Rules’’) would be introduced as a pilot program that would end 24 months following the implementation of the LEAD.28 In connection with the pilot program, the Exchange would collect the following data (collectively, the ‘‘Pilot Data’’): (1) Quote quality statistics for each security 23 See proposed CHX Article 16, Rule 4(f)(3)(A). id. 25 See proposed CHX Article 16, Rule 4(f)(3)(C). 26 See proposed CHX Article 16, Rule 4(f)(3)(D). The trading days that a LEAD MM is prohibited by CHX rules from submitting orders will be excluded from such review. See Amendment No. 2, supra note 13, at 12. 27 See proposed CHX Article 16, Rule 4(f)(3)(D). 28 To adopt the LEAD on a permanent basis, the Exchange would have to file another proposed rule change, and the Commission would have to approve it. 24 See E:\FR\FM\25OCN1.SGM 25OCN1 Federal Register / Vol. 82, No. 205 / Wednesday, October 25, 2017 / Notices per trading day and per PEV Range,29 for the six months immediately preceding the pilot program date of implementation, and for the duration of the pilot program; (2) matched trade difference statistics, which are designed to provide comparative data regarding how Qualified Orders 30 received by CHX would have been handled if LEAD had not been in effect, for each LEAD MM Security per trading day and per PEV Range, for the duration of the pilot program; (3) volume statistics for each LEAD MM Security per trading day for the duration of the pilot program; (4) comparative data regarding the variable delay between the initial receipt of an order and the time at which the order is eligible to be matched by CHX’s matching system for each LEAD MM Security per trading day for the duration of the pilot program; and (5) statistics designed to measure the impact of LEAD on CHX and NMS effective spreads, for each LEAD MM Security per trading day and per PEV Range, for the duration of the pilot program. The Pilot Data is described in more detail below: 1. Daily Quote Quality Statistics The daily quote quality statistics are designed to show several aspects of CHX and overall market quote quality Field name 1 ....................... 1A ..................... Symbol. Primary Matching Location .............................. 2 ....................... 2A ..................... TradeDate. PEVRange ........................................................ 3 ....................... 4A ..................... NLMMs ............................................................. TimeRegSessScheduled .................................. 4B ..................... TimeRegSessActual ......................................... 5 ....................... TimeCHXBidPresent ........................................ 5L ..................... TimeCHXBidPresentLMM ................................ 6 ....................... TimeCHXBidMissing ........................................ 7 ....................... TimeCHXBidOnNBB ........................................ 7L ..................... TimeCHXBidOnNBBLMM ................................ 8 ....................... TimeCHXBidNamed ......................................... 8L ..................... TimeCHXBidNamed ......................................... 9 ....................... TimeCHXBidAlone ........................................... 9L ..................... TimeCHXBidAloneLMM ................................... 10 ..................... TimeCHXAskPresent ....................................... 10L ................... TimeCHXAskPresentLMM ............................... 11 ..................... TimeCHXAskMissing ........................................ 12 ..................... TimeCHXAskOnNBO ....................................... 12L ................... sradovich on DSK3GMQ082PROD with NOTICES Field No. TimeCHXAskOnNBOLMM ............................... 29 A PEV means a one second interval during which a percentage change in the NBBO midpoint for the security equaled or exceeded two standard deviations (‘‘s’’) from the mean. Each trading day, the Exchange would calculate a reference mean and standard deviation from consecutive one second time intervals during the regular trading session. VerDate Sep<11>2014 22:06 Oct 24, 2017 Jkt 244001 49435 both pre- and post-implementation of the pilot program. First, the statistics will show the width and the displayed size for both the NBBO and CHX’s BBO during different periods of market volatility. Second, the statistics will display the contribution to the NBBO and CHX’s BBO by the LEAD MM for those different periods of volatility. Finally, the statistics will show the contribution of CHX’s BBO to the overall NBBO. Quote quality statistics are designed to provide comparative data regarding the effect of LEAD on market quality, and would include at a minimum the following data fields (as applicable): Description C = Chicago (CH2). N = New Jersey (NY4). Blank = All regular session data, 2 = PEV data greater than or equal to 2s and less than 3s, 3 = PEV data greater than or equal to 3s and less than 4s, 4 = PEV data greater than or equal to 4s and less than 5s, 5 = PEV data greater than or equal to 5s. The number of LMMs assigned to this Symbol on this Trade Date. The total scheduled time of the regular trading session for this Symbol for this TradeDate. The total actual time of the regular trading session for this Symbol for this TradeDate. Time during regulatory trading halts is not included in this total. The total time during the regular trading session that CHX has a protected bid. The total time during the regular trading session that CHX has a protected bid and one or more LMMs are included in the CHX protected bid price. The total time during the regular trading session that CHX does not have a protected bid. The total time during the regular trading session that CHX has a protected bid equal to the NBB price. The total time during the regular trading session that CHX has a protected bid equal to the NBB price and one or more LMMs are included in the NBB price. The total time during the regular trading session that CHX has a protected bid equal to the NBB price and CHX is shown as the NBB. The total time during the regular trading session that CHX has a protected bid equal to the NBB price and CHX is shown as the NBB and one or more LMMs are included in the NBB price. The total time during the regular trading session that CHX has a protected bid that is the only bid at the NBB price. The total time during the regular trading session that CHX has a protected bid that is the only protected bid at the NBB price and one or more LMMs are included in the NBB price. The total time during the regular trading session that CHX has a protected offer. The total time during the regular trading session that CHX has a protected offer and one or more LMMs are included in the CHX protected offer. The total time during the regular trading session that CHX does not have a protected offer. The total time during the regular trading session that CHX has a protected offer equal to the NBO price. The total time during the regular trading session that CHX has a protected offer equal to the NBO price and one or more LMMs are included in the NBO price. Each daily reference mean and standard deviation would be applied to measure PEV on the following trading day. Each PEV would be categorized into one of five PEV Ranges, which are as follows: 2 = PEV greater than or equal to 2s and less than 3s; 3 = PEV greater than or equal to 3s and less than 4s; 4 = PEV greater than or equal to 4s and less PO 00000 Frm 00125 Fmt 4703 Sfmt 4703 than 5s; and 5 = PEV greater than or equal to 5s. See Amendment No. 2, supra note 13, at 8. 30 Generally, ‘‘Qualified Orders’’ are new singlesided orders received by the Exchange during the regular trading session that were delayed. E:\FR\FM\25OCN1.SGM 25OCN1 49436 Federal Register / Vol. 82, No. 205 / Wednesday, October 25, 2017 / Notices Field name Description 13 ..................... TimeCHXAskNamed ........................................ 13L ................... TimeCHXAskNamedLMM ................................ 14 ..................... TimeCHXAskAlone ........................................... 14L ................... TimeCHXAskAloneLMM ................................... 15 ..................... TimeCHXNoQuote ........................................... 16 ..................... TimeCHXTwoSided .......................................... 17 ..................... TimeNBBOUncrossed ...................................... 18 ..................... Time-weightedCHXBid Differential ................... 19 ..................... Time-weightedCHXBid SizeOnNBB ................. 19L ................... Time-weightedCHXBid SizeOnNBBLMM ......... 20 ..................... Time-weightedCHXBid SizeWhenNamed ........ 20L ................... Time-weightedCHXBid SizeWhenNamed ........ 21 ..................... Time-weightedCHXBid SizeWhenAlone .......... 21L ................... Time-weightedCHXBid SizeWhenAloneLMM .. 22 ..................... 23 ..................... Time-weightedCHXPctOfBid SizeWhenOnNBB. Time-weightedCHXAsk Differential .................. 24 ..................... Time-weightedCHXAsk SizeOnNBO ............... 24L ................... Time-weightedCHXAsk SizeOnNBOLMM ....... 25 ..................... Time-weightedCHXAsk SizeWhenNamed ....... 25L ................... Time-weightedCHXAsk SizeWhenNamedLMM 26 ..................... Time-weightedCHXAsk SizeWhenAlone ......... 26L ................... Time-weightedCHXAsk SizeWhenAloneLMM 27 ..................... 28 ..................... Time-weightedCHXPctOfAsk SizeWhenOnNBO. Time-weightedCHX BBOSpread ...................... 29 ..................... sradovich on DSK3GMQ082PROD with NOTICES Field No. Time-WeightedNBBOSpread ........................... The total time during the regular trading session that CHX has a protected offer equal to the NBO price and CHX is shown as the NBO. The total time during the regular trading session that CHX has a protected offer equal to the NBO price and CHX is shown as the NBO and one or more LMMs are included in the NBO price. The total time during the regular trading session that CHX has a protected offer that is the only protected offer at the NBO price. The total time during the regular trading session that CHX has a protected offer that is the only protected offer at the NBO price and one or more LMMs are included in the NBO price. The total time during the regular trading session that CHX has neither a protected bid nor a protected offer. The total time during the regular trading session that CHX has both a protected bid and a protected offer. The total time during the regular trading session that the NBBO is not crossed. The time-weighted average difference between the CHX protected bid price and the NBB price when a CHX protected bid is present during the regular trading session. The time-weighted average CHX protected bid size when the CHX protected bid price equals the NBB price during the regular trading session. The time-weighted average LMM percentage of the CHX protected bid size when the CHX protected bid price equals the NBB price during the regular trading session. The time-weighted average CHX protected bid size when the CHX protected bid price equals the NBB price during the regular trading session. The time-weighted average LMM percentage of CHX protected bid size when the CHX protected bid price equals the NBB price during the regular trading session. The time-weighted average LMM percentage of CHX protected bid size when the CHX protected bid is the only protected bid at the NBB price during the regular trading session. The time-weighted average CHX protected bid size when the CHX protected bid is the only protected bid at the NBB price during the regular trading session. The time-weighted average percentage of all protected quotations at the NBB price when the CHX protected bid price equals the NBB price. The time-weighted average difference between the CHX protected offer price and the NBO price when a CHX protected offer is present during the regular trading session. The time-weighted average CHX protected offer size when the CHX protected offer price equals the NBO price during the regular trading session. The time-weighted average LMM percentage of CHX protected offer size when the CHX protected offer price equals the NBO price during the regular trading session. The time-weighted average CHX protected offer size when the CHX protected offer price equals the NBO price during the regular trading session. The time-weighted average LMM percentage of CHX protected offer size when the CHX protected offer price equals the NBO price during the regular trading session. The time-weighted average CHX protected offer size when the CHX protected offer is the only protected offer at the NBO price during the regular trading session. The time-weighted average LMM percentage of CHX protected offer size when the CHX protected offer is the only protected offer at the NBO price during the regular trading session. The time-weighted average percentage of all protected quotation size at the NBO price when CHX protected offer price equals the NBO price. The time-weighted average difference between the CHX protected bid price and the CHX protected offer price when CHX is displaying a two-sided protected quotation. The time-weighted average difference between the NBB price and the NBO price when a two-sided NBBO exists. 2. Matched Trade Difference Statistics The matched trade difference statistics are designed to show how many shares were executed with the LEAD MM proposal implemented and also, hypothetically, how many shares VerDate Sep<11>2014 22:06 Oct 24, 2017 Jkt 244001 would have been executed had the LEAD MM proposal not been implemented, which would be accomplished by assuming non-LEAD MM orders were executed immediately. In addition, these metrics are aggregated by specific PEV Range so that one can PO 00000 Frm 00126 Fmt 4703 Sfmt 4703 analyze how these executions vary during different periods of volatility. Each Qualified Order would be categorized into one of the following four groups: (1) Group 1: Orders with at least a partial execution upon initial processing by CHX’s matching system E:\FR\FM\25OCN1.SGM 25OCN1 Federal Register / Vol. 82, No. 205 / Wednesday, October 25, 2017 / Notices that would have had the same number of shares executed with or without LEAD; (2) Group 2: Orders with at least a partial execution upon initial processing by the matching system that had fewer executed shares with LEAD than it would have had without LEAD; (3) Group 3: Orders with at least a partial execution upon initial processing by the matching system that had more executed shares with LEAD than it would have had without LEAD; and (4) Field No. Field name 1 ....................... 1A ..................... Symbol. Primary Matching Location .............................. 2 ....................... 2A ..................... TradeDate. PEVRange ........................................................ 3 ....................... 3A ..................... 4 ....................... InboundTradingAccount ................................... NLMMs ............................................................. CapacityCode ................................................... 4A ..................... ExchangeCode ................................................. 5 ....................... ISOCode ........................................................... 6 ....................... TimeInForceCode ............................................. 7 ....................... 8 ....................... 9 32 .................... GROUP1_NO ................................................... GROUP1_NTS ................................................. GROUP1_NSE = GROUP1_NSEW ................. 10 11 12 13 14 15 16 17 18 19 GROUP2_NO ................................................... GROUP2_NTS ................................................. GROUP2_NSE ................................................. GROUP2_NSEW .............................................. GROUP3_NO ................................................... GROUP3_NTS ................................................. GROUP3_NSE ................................................. GROUP3_NSEW .............................................. GROUP4_NO ................................................... GROUP4_NTS ................................................. GROUP4_NSE ................................................. GROUP4_NSEW .............................................. LMMProvideOrderExecutedAheadOfDelayed NonLMMProvideOrder. ..................... ..................... ..................... ..................... ..................... ..................... ..................... ..................... ..................... ..................... sradovich on DSK3GMQ082PROD with NOTICES 20 ..................... 21 ..................... 3. Volume Statistics The volume statistics are designed to show how the adoption of the LEAD by market makers changes over time as 31 See proposed CHX Article 20, Rule 8(h)(5)(A). VerDate Sep<11>2014 22:06 Oct 24, 2017 Jkt 244001 49437 Group 4: Orders with no executed shares upon initial processing by the matching system with LEAD.31 Match trade difference statistics would include, at a minimum, the following data fields, as applicable: Description C = Chicago (CH2). N = New Jersey (NY4). Blank = All regular session data. 2 = PEV data greater than or equal to 2s and less than 3s. 3 = PEV data greater than or equal to 3s and less than 4s. 4= PEV data greater than or equal to 4s and less than 5s. 5 = PEV data greater than or equal to 5s. The Trading Account of the inbound order. The number of LMMs assigned to this Symbol on this Trade Date. This field would include the following codes: Code Meaning A Agency. L LEAD Market Maker. M Market Maker (not LEAD). P Principal. R Riskless Principal. Code Meaning N Not from an exchange. Y From an exchange. Code Meaning N Not an ISO order. Y An ISO order. Code Meaning 0 DAY or equivalent. 3 IOC. 4 FOK. 9 Other (includes auction). The number of orders (‘‘NO’’) in Group 1. The total number of shares on all orders (‘‘NTS’’) in Group 1. The total number of shares immediately executed upon initial processing by the Matching System on all orders (‘‘NSE’’) in Group 1, which would always be equal to the total number of shares that would have been immediately executed upon initial processing by the Matching System had LEAD not been in effect (‘‘NSEW’’). NO in Group 2. NTS in Group 2. NSE in Group 2. NSEW on all orders in Group 2. NO in Group 3. NTS in Group 3. NSE in Group 3. NSEW on all orders in Group 3. NO in Group 4. NTS in Group 4. This value would always be zero and not included. NSEW on all orders in Group 4. Frequency at which an LMM provider order ranked on the CHX book executes ahead of a precedent non-LMM order (with the same side and price as the LMM order) that would have been immediately ranked on the CHX book if it had originated from a LEAD MM Trading Account, but was delayed. well as how much volume these new market makers execute over time. Generally, this data will concisely indicate CHX’s ability to attract new market makers to the LEAD MM program. For each LEAD MM Security, the Exchange would collect the following: (1) Daily number of LEAD MMs assigned; (2) total single-sided volume on CHX; (3) total market wide 32 NSE and NSEW exclude executions that resulted or would have resulted after initial processing by the matching system, such as when the orders are executed after being ranked on the CHX book. See Amendment No. 1, supra note 12, at 27. PO 00000 Frm 00127 Fmt 4703 Sfmt 4703 E:\FR\FM\25OCN1.SGM 25OCN1 49438 Federal Register / Vol. 82, No. 205 / Wednesday, October 25, 2017 / Notices single-sided volume; 33 (4) total singlesided volume on CHX attributed to LEAD MMs as providers; and (5) the primary matching location for the security. 4. Variable Processing Delay Statistics The variable processing delay statistics are designed to indicate how variable delays are distributed between orders from LEAD MMs and other market participants. All exchanges experience delays to some degree during periods of high order volume. These statistics will highlight discrepancies in delays experienced by orders from LEAD MMs and other market participants. These statistics would be divided into three order origin categories: (1) Orders from CHX participants that are not LEAD MMs; (2) liquidity taking orders from LEAD MMs; and (3) undelayed liquidity providing orders from LEAD MMs. For each order origin category, the Exchange would collect the following: (1) The number of orders with a variable delay less than 50 microseconds, and the average delay time; (2) the number of orders with a variable delay equal to or greater than 50 microseconds but less than 150 microseconds, and the average delay time; (3) the number of orders with a variable delay equal to or greater than 150 microseconds but less than 250 microseconds, and the average delay time; (4) the number of orders with a variable delay equal to or greater than Field No. Field name 1 ....................... 1A ..................... Symbol. Primary Matching Location ................................ 2 ....................... 2A ..................... Date. PEVRange .......................................................... 3 ....................... 4 ....................... NLMMs ............................................................... TradeSizeBracket ............................................... 5 ....................... CHXNTrades ...................................................... 6 ....................... CHXNShares ...................................................... 7 ....................... SW_CHX_EffectiveSpread ................................. 8 ....................... SW_CHX_EffectiveSpreadIndex ........................ 9 ....................... 10 ..................... NMSNTrades ...................................................... NMSNShares ..................................................... 11 ..................... SW_NMS_EffectiveSpread ................................. 12 ..................... SW_NMS_EffectiveSpreadIndex ........................ sradovich on DSK3GMQ082PROD with NOTICES 6. Timeline To Produce Pilot Data By no later than the end of the second month of the pilot program, the Exchange would provide the Commission with the Pilot Data for the first month of the pilot program.36 By the end of each month thereafter, the Exchange would provide the Commission with the Pilot Data from the previous month.37 By no later than the end of the sixth month of the pilot 33 In calculating total market wide volume, the Exchange will exclude volume attributed to certain non-standard trades. See Amendment No. 1, supra note 12, at 27. 34 See Amendment No. 2, supra note 13, at 10. VerDate Sep<11>2014 22:06 Oct 24, 2017 Jkt 244001 250 microseconds but less than 350 microseconds, and the average delay time; and (5) the number of orders with a variable delay equal to or greater than 350 microseconds, and the average delay time.34 5. Effective Spread Statistics The effective spread statistics are designed to track both the CHX and overall market effective spreads per security for different PEV Ranges prior to and after the implementation of the pilot program. This data should highlight changes in market quality that occur during the pilot program. The effective spread statistics would include, at least, the following data fields, as applicable: Description C = Chicago (CH2). N = New Jersey (NY4). Blank = All regular session data. 2 = PEV data greater than or equal to 2s and less than 3s. 3 = PEV data greater than or equal to 3s and less than 4s. 4 = PEV data greater than or equal to 4s and less than 5s. 5 = PEV data greater than or equal to 5s. Number of LMMs assigned to symbol. 1 = 1–499. 2 = 500–1999. 3 = 2000–4999. 4 = 5000–9999. 5 = 10,000 or more. For Eligible Trades 35 reported by CHX in TradeSizeBracket, the number of Eligible Trades reported. For Eligible Trades reported by CHX in TradeSizeBracket, number of shares attributed to Eligible Trades reported. For Eligible Trades reported by CHX in TradeSizeBracket: Share-Weighted (2 * |Trade Price—SIP NBBO Midpoint|). For qualified trades reported by CHX in TradeSizeBracket: CHX Effective Spread divided by the SIP NBBO at Participant Trade Report Time. For Eligible Trades reported by SIP, the number of trades reported. For Eligible Trades reported by SIP in TradeSizeBracket, the number of shares reported. For Eligible Trades reported by SIP in TradeSizeBracket: Share-Weighted (2 * |Trade Price—SIP NBBO Midpoint|). For Eligible Trades reported by SIP in TradeSizeBracket: NMS Effective Spread divided by the SIP NBBO at Participant Trade Report Time. program, the Exchange would publish on its Web site an anonymized version of the Pilot Data and, by the end of each month thereafter, the Exchange would publish on its Web site an anonymized version of the Pilot Data, for each prior month of the pilot program.38 On the first day of the pilot program, the Exchange would publish on the CHX Web site each LEAD MM Security and the number of LEAD MMs assigned to 35 Generally, ‘‘Eligible Trades’’ are executions attributed to single-sided orders received during the regular trading session when a two-sided and uncrossed NBBO disseminated by the relevant Securities Information Processor (‘‘SIP NBBO’’) was present. See proposed CHX Article 20, Rule 8(h)(8). PO 00000 Frm 00128 Fmt 4703 Sfmt 4703 each security, which would be updated daily during the duration of the pilot program.39 By no later than the end of the eighteenth month of the pilot program, the Exchange would provide the Commission with an analysis of the Pilot Data, which would be made publicly available.40 36 See proposed CHX Article 20, Rule 8(h)(3)(B). id. 38 See proposed CHX Article 20, Rule 8(h)(3)(C). 39 See id. 40 See proposed CHX Article 20, Rule 8(h)(3)(A). 37 See E:\FR\FM\25OCN1.SGM 25OCN1 Federal Register / Vol. 82, No. 205 / Wednesday, October 25, 2017 / Notices sradovich on DSK3GMQ082PROD with NOTICES III. Discussion and Commission Findings The Commission has carefully reviewed the proposal and finds that approval of the proposed rule change, as modified by Amendments No. 1 and No. 2, is consistent with the requirements of the Exchange Act and the rules and regulations thereunder applicable to a national securities exchange.41 In particular, as discussed below, the Commission finds that the proposal is consistent with: (1) Section 6(b)(5) of the Exchange Act,42 which requires that the rules of a national securities exchange, among other things, be designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, to remove impediments to and perfect the mechanism of a free and open market and a national market system, and, in general, to protect investors and the public interest; and not be designed to permit unfair discrimination between customers, issuers, brokers, or dealers; (2) Section 6(b)(8) of the Exchange Act,43 which requires that the rules of a national securities exchange not impose any burden on competition not necessary or appropriate in furtherance of the purposes of the Exchange Act; and (3) Section 11A of the Exchange Act, which articulates Congress’ finding that, among other things, it is in the public interest and appropriate for the protection of investors and the maintenance of fair and orderly markets to assure: Economically efficient execution of securities transactions; fair competition among brokers and dealers, among exchange markets, and between exchange markets; the availability to brokers, dealers, and investors of information with respect to quotations for and transactions in securities; the practicability of brokers executing investors’ orders in the best market; and an opportunity, consistent with the economically efficient execution of securities transactions and the practicability of brokers executing investors’ orders in the best market, for investors’ orders to be executed without the participation of a dealer.44 The Commission received sixteen comment letters from ten commenters on the proposal and two response letters from the Exchange.45 Two commenters 41 In approving the proposed rule change, as modified by Amendments No. 1 and No. 2, the Commission has considered its impact on efficiency, competition, and capital formation. 15 U.S.C. 78c(f). See infra Section III.A. 42 15 U.S.C. 78f(b)(5). 43 15 U.S.C. 78f(b)(8). 44 15 U.S.C. 78k–1(a)(1)(C). 45 See supra notes 5 and 8. VerDate Sep<11>2014 22:06 Oct 24, 2017 Jkt 244001 express support for the proposal,46 and eight commenters express opposition to, or concern regarding, the proposal.47 A. Section 6 of the Exchange Act Section 6(b)(5) of the Exchange Act requires that the rules of a national securities exchange must be, among other things, not designed to permit unfair discrimination between customers, issuers, brokers, or dealers.48 Certain commenters argue that the proposed rule change would provide an unfair advantage to LEAD MMs over other CHX participants.49 In particular, commenters argue that by not subjecting LEAD MMs’ liquidity providing orders and related cancels to the LEAD, the proposal would unfairly discriminate in favor of the LEAD MMs.50 Two commenters state that the LEAD would unfairly discriminate against market participants that are primarily liquidity takers, such as retail investors or institutions.51 A commenter argues that the discriminatory nature of the LEAD would harm market participants when they seek to access liquidity provided by a LEAD MM as the LEAD MM may alter its price while incoming orders are being delayed.52 Another commenter expresses concern that the LEAD would frustrate strategies that involve taking prices across multiple venues by giving extra time to LEAD MMs to pull their quotes in the middle of a multi-venue order.53 46 See Virtu Letter, supra note 5; and CTC Trading Group Letter, supra note 5. 47 See XR Securities Letter, supra note 5; FIA PTG Letter, supra note 5; Hudson River Trading Letter, supra note 5; Leuchtkafer Letter, supra note 5; Citadel Letter, supra note 5; Healthy Markets Letter, supra note 5; NYSE Letter, supra note 5; and SIFMA Letter, supra note 5. 48 15 U.S.C. 78f(b)(5). 49 See FIA PTG Letter, supra note 5, at 3; XR Securities Letter, supra note 5, at 1; SIFMA Letter, supra note 5, at 2; Leuchtkafer Letter, supra note 5, at 4 (asserting that the LEAD would only benefit market participants who become LEAD MMs and subscribe to the Chicago Mercantile Exchange’s (‘‘CME’’) data feeds); Hudson River Trading Letter, supra note 5, at 2; and Citadel Letter, supra note 5, at 3. 50 See FIA PTG Letter, supra note 5, at 2–3; Leuchtkafer Letter, supra note 5, at 4–5; Citadel Letter, supra note 5, at 3–4; Hudson River Trading Letter, supra note 5, at 5–6. See also XR Securities Letter, supra note 5, at 2 (stating that the LEAD would give LEAD MMs an ‘‘unfair advantage’’); Healthy Markets Letter, supra note 5, at 4 (stating that the proposal would ‘‘venture into unchartered discriminatory waters, and offers little explanation or justification’’); and SIFMA Letter, supra note 5, at 5 (asserting that any intentional delay should be universally applied to all market participants in a non-discriminatory manner). 51 See Citadel Letter, supra note 5, at 5–6; Leuchtkafer Letter, supra note 5, at 4. 52 See Hudson River Trading Letter, supra note 5, at 2. 53 See FIA PTG Letter, supra note 5, at 3. PO 00000 Frm 00129 Fmt 4703 Sfmt 4703 49439 In addition, certain commenters express concern regarding the discriminatory effects of the LEAD on non-LEAD MM liquidity providers.54 For example, one commenter asserts that the LEAD would benefit LEAD MMs by making it easier to quote better prices in larger size but would in turn make it more difficult for non-LEAD MM liquidity providers to quote better prices at larger size.55 Similarly, another commenter argues that the LEAD will prevent non-LEAD MM liquidity providers, who the commenter characterize as being not being informationally advantaged by the speed bump, from providing the best possible market they otherwise could.56 Two commenters believe that the proposal will incentivize LEAD MMs to enhance displayed liquidity by entering larger orders at better prices.57 Another commenter states that it believes that this will benefit institutional investors.58 One commenter states that it believes that the proposal would benefit the public interest and protect investors by encouraging superior displayed liquidity from qualified market makers.59 In addition, these commenters believe that the proposed minimum performance standards are appropriate given the benefits that LEAD MMs would be afforded.60 One of those commenters states its belief that market maker incentives should be consistent with the risk inherent with truly affirmative quoting and trading obligations, and asserts that the minimum performance standards meet such standard.61 That commenter believes that the proposal would appropriately link heightened quoting and trading requirements with the ability to adequately manage the heightened risks of such requirements.62 Another commenter agrees with CHX that the minimum performance standards are substantial and proportionate to the advantages that LEAD MMs will receive.63 The commenter states that historically, other national securities exchanges have balanced market maker benefits with 54 See Hudson River Trading Letter, supra note 5, at 1–2; XR Securities Letter, supra note 5, at 3; Citadel Letter, supra note 5, at 3; Leuchtkafer Letter 2, supra note 5, at 8. 55 See Hudson River Trading Letter, supra note 5, at 1–2. 56 See XR Securities Letter, supra note 5, at 3. 57 See Virtu Letter, supra note 5, at 2; and CTC Trading Letter, supra note 5, at 3. 58 See Virtu Letter, supra note 5, at 2. 59 See CTC Trading Letter, supra note 5, at 5. 60 See Virtu Letter, supra note 5, at 2; and CTC Trading Letter, supra note 5, at 4. 61 See Virtu Letter, supra note 5, at 2. 62 See id. 63 See CTC Trading Letter, supra note 5, at 4. E:\FR\FM\25OCN1.SGM 25OCN1 49440 Federal Register / Vol. 82, No. 205 / Wednesday, October 25, 2017 / Notices responsibilities, and asserts that requiring market makers to comply with substantial quoting requirements and benefits that are proportionate to their obligations, which it believes the LEAD would provide for, is consistent with the Exchange Act.64 In addition, that commenter states its views that the LEAD would reduce unfair discrimination by providing an appropriate trade-off between the benefits and responsibilities of LEAD MMs.65 Other commenters express concern that the minimum performance standards may not be adequate to justify the benefits that LEAD MMs would receive under the proposal.66 In addition, one commenter suggests that LEAD MMs should have specific responsibilities around the open, close, and in volatile markets.67 The Exchange argues that the proposed rule change is not designed to permit unfair discrimination. While the Exchange acknowledges that the LEAD is discriminatory by design,68 the Exchange asserts that the proposed discrimination is fair because the advantage afforded to LEAD MMs is conditioned upon LEAD MMs satisfying the proposed minimum performance standards,69 which, according to the Exchange, are substantial and proportionate to the benefits that the LEAD would confer on LEAD MMs.70 The Exchange notes that it has little to no resting liquidity in the vast majority of NMS securities traded at CHX, which has resulted in immaterial trading volume in all but a handful of securities.71 The Exchange states that the LEAD Rules would address this lack of resting liquidity in NMS securities on 64 See id. id. at 3. 66 See Leuchtkafer Letter, supra note 5, at 4–5; NYSE Letter, supra note 5, at 4–5 (stating that the benefit is ‘‘disproportionate’’ to the proposed standards); Citadel Letter, supra note 5, at 2 (asserting that the minimum performance standards appear to be ‘‘largely immaterial in substance’’ and the benefits of the LEAD would be ‘‘entirely disproportionate’’ to these obligations). Two commenters suggest that CHX should provide data regarding the materiality of the minimum performance standards, how they will improve market quality, and whether CHX market makers already satisfy these criteria. See Citadel Letter, supra note 5, at 3; and Healthy Markets Letter, supra note 5, at 4. Two other commenters express concern that the proposal would be unfairly discriminatory because only firms selected by CHX as LEAD MMs would be given the speed advantage. See XR Securities Letter, supra note 5, at 1; and FIA PTG Letter, supra note 5, at 2. In addition, one commenter raises concern that LEAD MMs would be named based on subjective criteria. See Citadel Letter, supra note 5, at 4. 67 See Leuchtkafer Letter, supra note 5, at 5. 68 See, e.g., CHX Letter, supra note 5, at 10–11. 69 See Notice, supra note 3, 82 FR at 11269. 70 See CHX Letter, supra note 5, at 6. 71 See Amendment No. 1, supra note 12, at 8. sradovich on DSK3GMQ082PROD with NOTICES 65 See VerDate Sep<11>2014 22:06 Oct 24, 2017 Jkt 244001 CHX by providing LEAD MMs with a risk management tool that would incentivize them to display larger orders at aggressive prices.72 To the extent the LEAD would incentivize LEAD MMs to improve the price and size of the prevailing NBBO, the Exchange argues that LEAD could reduce transaction costs for retail investors, as wholesale broker-dealers price the majority of the retail orders they handle off the prevailing NBBO, and for institutional investors, as the execution costs for their orders would be reduced if the average NBBO spreads are narrowed.73 The Exchange, therefore, contends that the LEAD would result in meaningful enhancements to market quality in securities that are actively traded at CHX and new aggressive markets in securities that are currently not actively traded at CHX.74 Further, the Exchange states that the minimum performance standards are appropriate given the requirements imposed upon and benefits incurred by market makers on other exchanges.75 Specifically, the Exchange compares the proposed obligations of its LEAD MMs to those of the New York Stock Exchange, LLC (‘‘NYSE’’) Designated Market Makers (‘‘DMMs’’), which receive execution parity rights in return for minimum performance standards that CHX states are similar to CHX’s proposed minimum performance standards.76 The Exchange asserts that, while DMM parity merely encourages DMMs to join the NBBO, the LEAD would incentivize LEAD MMs to improve the price and size of the NBBO by: Minimizing the risk that LEAD MMs’ quotes would be ‘‘picked off’’ by latency arbitrageurs; and providing, through CHX’s existing market data revenue rebates program, rebates for quotes that remain on the CHX book for at least one second.77 In response to the comments requesting data showing that the minimum performance standards are appropriate,78 the Exchange presents data 79 that it believes demonstrates that the minimum performance standards would be substantial relative to historical CHX data. The Exchange states that the data shows that the majority of CHX participants would not have passed the proposed minimum performance standards in January 2016 72 See id. CHX Letter 2, supra note 8, at 9–10. 74 See Amendment No. 1, supra note 12, at 8. 75 See CHX Letter, supra note 5, at 6. 76 See CHX Letter 2, supra note 8, at 6–7. 77 See id. 78 See supra note 66. 79 See CHX Letter 2, supra note 8, at 7–9. 73 See PO 00000 Frm 00130 Fmt 4703 Sfmt 4703 or February 2017 for the securities that trade on CHX,80 and that the most active SPDR S&P 500 trust exchange-traded fund (‘‘SPY’’) liquidity providers in January 2016 would not have met the standards as of February 2017.81 In addition, CHX believes that the LEAD MM selection criteria, which would allow CHX to consider various factors in assessing the ability of an applicant to meaningfully contribute to market quality as a LEAD MM,82 are designed to forecast how well an applicant would perform as a LEAD MM.83 CHX notes that the criteria are virtually identical to the criteria under Bats BZX’s rules for its lead market maker program.84 With regard to a commenter’s concern that the LEAD would frustrate strategies that involve taking prices across multiple venues, the Exchange asserts that a market participant who currently utilizes sophisticated order routing logic to successfully execute multi-venue orders could modify its logic to account for the 350-microsecond intentional delay at CHX and thereby eliminate any incremental information leakage.85 In addition, the Exchange believes that 350 microseconds is long enough to minimize the effectiveness of latency arbitrage strategies, yet short enough as to not provide liquidity providers with an unfair advantage, and asserts that the 350 microsecond delay is appropriate both for New York and Chicago data centers.86 For the reasons discussed below, the Commission believes that the proposal to implement the LEAD and the minimum performance standards is not designed to permit unfair discrimination under Section 6(b)(5) of the Exchange Act. Liquidity providers that display limit orders are the primary source of public price discovery.87 The Commission emphasizes the importance of displayed limit orders as they typically set quoted spreads, supply liquidity, and in general establish the public ‘‘market’’ for a stock.88 To establish the public market for a stock, 80 See id. id. at 9. 82 The factors the Exchange may consider in selecting a LEAD MM include, but are not limited to, experience with making markets in securities, adequacy of capital, willingness to promote the Exchange as a marketplace, issuer preference, operational capacity, support personnel, and history of adherence to Exchange rules and securities laws. See proposed CHX Article 16, Rule 4(f)(3)(A). 83 See CHX Letter, supra note 5, at 11–12. 84 See id. 85 See id. at 11. 86 See CHX Letter 2, supra note 8, at 13–14. 87 Securities Exchange Act Release No. 51808 (June 9, 2005), 70 FR 37496, 37526 (June 29, 2005) (‘‘Regulation NMS Adopting Release’’). 88 See id. 81 See E:\FR\FM\25OCN1.SGM 25OCN1 Federal Register / Vol. 82, No. 205 / Wednesday, October 25, 2017 / Notices sradovich on DSK3GMQ082PROD with NOTICES displayed limit orders make the first move by being displayed rather than executed and therefore provide a ‘‘free option’’ for other market participants to trade a stock by submitting marketable orders and taking the liquidity supplied by the displayd limit orders.89 The Commission notes that the quality of execution for marketable orders, which, in turn, trade with displayed liquidity, depends to a great extent on the quality of markets established by displayed limit orders (i.e., the narrowness of quoted spreads and the available liquidity at various price levels).90 Accordingly, the quality of execution for marketable orders is directly affected by the willingness of liquidity providers to take the execution risk associated with providing displayed liquidity. To the extent liquidity providers can be incentivized to display better prices or larger size, the market quality for liquidity taking orders should improve. National securities exchanges have historically discriminated among their members by, among other things, providing various advantages to members that register as market makers and thereby commit to certain undertakings designed to enhance market quality.91 CHX’s proposal discriminates in favor of LEAD MMs, by not subjecting LEAD MM liquidity providing orders and related cancels to the LEAD, to provide LEAD MMs with a risk management tool that should incentivize LEAD MMs to post larger size and more aggressively-priced quotes on CHX. The proposal also imposes heightened quoting and new transaction obligations on the LEAD MMs to obtain this benefit.92 LEAD MMs therefore have committed to provide a specific level of liquidity on the Exchange on an ongoing basis, unlike other liquidity providers or other CHX participants. These obligations will require LEAD MMs to take on greater risk, and they in turn will be provided a tool—the LEAD—to help them more effectively manage that risk. In this way, the difference in benefits is designed to reflect the different obligations of the parties. The Commission therefore believes that these minimum performance standards, particularly the quoting and transaction thresholds, are meaningful obligations that are 89 See id. at 37526–37527. id. at 37526. 91 See, e.g., NYSE Rule 104 (Dealings and Responsibilities of DMMs). 92 Presently, liquidity providers on CHX are not obligated to quote or transact at levels consistent with the minimum performance standards as each LEAD MM would be under the proposal. 90 See VerDate Sep<11>2014 22:06 Oct 24, 2017 Jkt 244001 proportionate to and balanced with the advantages conferred upon LEAD MMs. The Commission also notes that: (1) The minimum performance standards are quantitive standards that the Exchange can objectively measure to determine whether LEAD MMs are in compliance, which will allow the Exchange to apply them consistently to ensure that similarly situated parties are treated equally; and (2) the LEAD MM selection process is substantially similar to the market maker selection processes previously approved by the Commission and implemented on other national securities exchanges.93 With respect to one commenter’s concern that the LEAD would frustrate strategies that involve taking prices across multiple venues,94 the Commission believes that a market participant could modify its routing strategies to address the 350microsecond LEAD and eliminate any added risk of information leakage. The Commission notes that, in its second comment letter,95 the commenter did not refute CHX’s rebuttal.96 For these reasons, the Commission finds that the proposed rule change, as modified by Amendments No. 1 and No. 2, is consistent with the requirement of Section 6(b)(5) of the Exchange Act that the rules of a national securities exchange be not designed to permit unfair discrimination between customers, issuers, brokers, or dealers. Section 6(b)(8) of the Exchange Act requires that the rules of a national securities exchange not impose any burden on competition not necessary or appropriate in furtherance of the purposes of the Exchange Act. One commenter asserts that the LEAD would unduly burden competition between liquidty providers and firms that access displayed prices on CHX.97 This commenter states its view that benefits provided to market makers create a disparity that harms competition among market participants and leads to greater intermediation as the benefits are available only to certain intermediaries.98 This commenter believes that the LEAD may make it easier for LEAD MMs to quote better prices in larger size, but would make it 93 Compare proposed CHX Article 16, Rule 4(f)(2) with Bats BZX Rule 11.8(e)(2); NYSE Arca Rule 7.22–E; CBOE Rule 8.83. 94 See supra note 53 and accompanying text. 95 See FIA PTG Letter 2, supra note 8. 96 See supra note 85 and accompanying text. 97 See Hudson River Trading Letter, supra note 5, at 8. 98 See id. at 1. As discussed above, the Commission believes that the discriminatory aspect of the LEAD is fair for the reasons discussed above. See supra Section III.A. PO 00000 Frm 00131 Fmt 4703 Sfmt 4703 49441 more difficult for non-LEAD MMs to do so.99 Another commenter expresses concern that the LEAD would alter the competitive balance in the market by benefitting only LEAD MMs, as LEAD MMs would effectively be given extra time to determine whether to remain firm or cancel/modify a displayed quotation in order to avoid unfavorable executions.100 The Exchange believes that the LEAD would result in increased competition with liquidity providers of other markets, which furthers a primary goal of Regulation NMS, as such liquidity providers would have to provide enhanced liquidity or risk losing market share to LEAD MMs.101 The Exchange also responds that the LEAD would not create a new competitive balance as much as it would correct a competitive imbalance that serves to discourage displayed liquidity and is in itself an undue burden on competition.102 The Commission finds that the LEAD Rules are consistent with Section 6(b)(8) of the Exchange Act because they do not impose any burden on competition not necessary or appropriate in furtherance of the purposes of the Exchange Act. The Commission believes that, while the proposal will provide a benefit to LEAD MMs by not subjecting their liquidity providing orders and related cancels to the LEAD, such benefit is appropriate in exchange for their commitment to provide meaningful liquidity on the Exchange as required by the minimum performance standards. By providing a mechanism for LEAD MMs to update their displayed quotations without delay, the LEAD is designed to incentivize LEAD MMs to improve the price and size of their quotes on CHX thereby improving market quality to the ultimate benefit of liquidity takers. The Commission notes that improvements to CHX’s quotations would benefit non-CHX market participants to the extent such quotations result in tightening the NBBO spread, as a number of execution venues price transactions off the NBBO. For these reasons, the Commission believes that the balance between the benefit to LEAD MMs afforded by the LEAD and their obligations under the minimum performance standards appropriately furthers the purposes of the Exchange Act. One commenter believes that, to assess the proposed rule change’s impact on competition, the Exchange 99 See Hudson River Trading Letter, supra note 5, at 1. 100 See Citadel Letter, supra note 5, at 4. CHX Letter 2, supra note 8, at 15. 102 See id. at 17. 101 See E:\FR\FM\25OCN1.SGM 25OCN1 49442 Federal Register / Vol. 82, No. 205 / Wednesday, October 25, 2017 / Notices should also collect and disclose order book queue metrics.103 That commenter also asserts that to assess the ‘‘anticompetitive effect’’ of shifting latency arbitrage costs to non-LEAD MM participants, CHX should collect and disclose: (1) The number of times a nonLEAD MM’s resting order was executed within 350 microseconds of any LEAD MM’s order cancellation at the same price or better, and (2) the number of times any LEAD MM’s order was cancelled while any marketable contra sat in the LEAD queue.104 While the Exchange will not be collecting the statistitics that the commenter suggests, the Exchange will be collecting other data that are designed to allow the Exchange and the Commission to assess the impact of the proposal on competition. Specifically, the Exchange will collect and publish matched trade difference statistics. These metrics will measure the volume executed hypothetically without LEAD and the volume executed in reality with LEAD, and will be grouped by different PEV Range values such that analysis can be conducted to determine how much, if at all, this cost increases during periods of excessive volatility. This data will allow the Exchange and the Commission to examine the effect on competition that the commenter suggests by determining the difference between the hypothetical and actual executed volume, and focusing specifically on periods of higher volatility. This difference, combined with type of market participant who provided liquidity, should shed light on how competition has been affected. Also, analysis of this data will allow the Commission to assess and weigh the degree to which latency arbitrage costs are being borne by non-LEAD liquidity providers and if those costs outweigh any of the displayed benefits. With respect to the commenter’s suggestion that the Exchange also provide order book queue statistics,105 it is not sufficiently clear what benefit such statistics would provide.106 The Commission’s views of the proposal’s consistency with Sections 6(b)(5) and 6(b)(8) of the Exchange Act are informed by its views that the proposal is appropriately designed to sradovich on DSK3GMQ082PROD with NOTICES 103 See Leuchtkafer Letter 5, supra note 8, at 1. id. at 2. 105 See supra note 103 and accompanying text. 106 Under CHX’s execution rules, a non-LEAD MM order that was received by the Exchange before a LEAD MM order would have time priority over the LEAD MM order once it is ranked in the Exchange’s order book notwithstanding the delay imposed by the LEAD to reach the Exchange’s order book. See CHX Article 20, Rule 8(b). See also Amendment No. 1, supra note 12, at 7–8. 104 See VerDate Sep<11>2014 22:06 Oct 24, 2017 Jkt 244001 enhance market quality by striking a balance between the new obligations for LEAD MMs and the accompanying benefits. Several commenters discuss the potential impact of the proposal on displayed liquidity and price discovery as well as market quality in general.107 Two commenters assert that the LEAD would enable liquidity providers to improve displayed liquidity.108 One commenter states that LEAD MMs will be more inclined to post larger orders at better prices in assigned securities on CHX with confidence that their orders will not be ‘‘picked off’’ by speed arbitrageurs. The commenter believes this will improve displayed liquidity available to institutional investors, and all investors, without limiting the ability of retail and institutional investors to access liquidity.109 Another commenter states its views that the LEAD will reduce adverse selection risk and incentivize market makers to provide more liquidity, leading to deeper quotes and tighter bid-ask spreads,110 which would reduce the costs of investors.111 Six other commenters express concern that the LEAD could deteriorate the accessibility of quotes and overall market quality.112 Two commenters 107 See Virtu Letter, supra note 5, at 2; CTC Trading Letter, supra note 5, at 3; Healthy Markets Letter, supra note 5, at 4–5; XR Securities Letter, supra note 5, at 2; FIA PTG Letter, supra note 5, at 4; SIFMA Letter, supra note 5, at 6; Citadel Letter, supra note 5, at 3; and Hudson River Trading Letter supra note 5, at 6. 108 See Virtu Letter, supra note 5, at 2; and CTC Trading Letter, supra note 5, at 3. 109 See Virtu Letter, supra note 5, at 2. 110 See CTC Trading Letter, supra note 5, at 3. 111 See id. at 6. 112 See Healthy Markets Letter, supra note 5, at 4–5; XR Securities Letter, supra note 5, at 2; FIA PTG Letter, supra note 5, at 4; SIFMA Letter, supra note 5, at 6; Citadel Letter, supra note 5, at 3; and Hudson River Trading Letter supra note 5, at 6. In addition, as CHX is the only exchange to share quote revenue with its members, three commenters assert that the LEAD would result in unfair allocation of consolidated market data revenue by generating an increase in quoting, but not necessarily trading, on the Exchange. See Hudson River Trading Letter, supra note 5, at 7; Citadel Letter, supra note 5, at 6; and SIFMA Letter, supra note 5, at 7. The Securities Information Processors (‘‘SIPs’’) collect fees from subscribers for trade and quote tape data received from trading centers and reporting facilities (collectively ‘‘SIP Participants’’) and, after deducting the cost of operating each tape, the SIPs allocate profits among the SIP Participants (including CHX) on a quarterly basis. CHX shares with its members a portion of the revenue it receives that is attributed to members’ quote activity. See Securities Exchange Act Release No. 70546 (September 27, 2013), 78 FR 61413 (October 3, 2013) (SR–CHX–2013–18). The Exchange responds that the LEAD would not encourage nonbona fide quote activity for the purpose of earning rebates because quotes cancelled within the 350microsecond LEAD would not be eligible for market data revenue rebates, and cancellation of such quotes could result in the CHX participant being assessed an order cancellation fee. See CHX Letter, supra note 5, at 10. PO 00000 Frm 00132 Fmt 4703 Sfmt 4703 predict that, while overall spreads and liquidity may improve, the increased liquidity would be more conditional and less accessible.113 In addition, one commenter predicts that spreads made by ‘‘real’’ liquidity providers—as distinguished from ‘‘fleeting’’ quotes submitted by LEAD MMs—would widen.114 Several commenters express concern about the potential transaction costs that the LEAD could impose on investors.115 In addition, one commenter believes that the LEAD could result in institutional migration to dark venues, which could reduce market quality over time.116 The commenter also asserts that the LEAD could result in volatility during stressed trading conditions.117 In the OIP, the Commission asked about how the proposal would affect price volatility on the Exchange.118 In response, the Exchange states that, although LEAD MM quotes would likely widen during stressed trading conditions, LEAD MMs would be subject to the minimum performance standards, which may have a mitigating effect on price volatility.119 The Exchange asserts that the proposal would provide LEAD MMs with a risk management tool that would encourage LEAD MMs to display larger orders at aggressive prices, which should provide meaningful 113 See Hudson River Trading Letter, supra note 5, at 6; and Citadel Letter, supra note 5, at 3. Another commenter similarly predicted that the LEAD would result in complex trickle-down impacts on the NBBO including CHX quotes that would not be accessible. See FIA PTG Letter, supra note 5 at 3. 114 See XR Securities Letter, supra note 5, at 2. See also FIA PTG Letter, supra note 5, at 4 (expressing concern that non-LEAD MMs would be forced to widen their bid/ask spreads across the marketplace). 115 See FIA PTG Letter, supra note 5, at 4 (stating that LEAD MMs may be forced to widen their bid/ ask spreads, which would be costly to investors); Leuchtkafer Letter 2, supra note 8, at 8 (asserting that the LEAD would result to increased transaction costs for retail and institutional investors, who would be exposed to adverse selection); XR Securities Letter, supra note 5, at 1 (asserting that the LEAD is likely to result in higher trading costs for the investing public); Hudson River Trading Letter, supra note 5, at 6 (asserting that providing LEAD MMs the ability to back away from quoted prices and sizes would increase the cost of finding liquidity); SIFMA Letter, supra note 5, at 8 (stating that the proposal could result in increased market complexity and costs); and Citadel Letter 2, supra note 5, at 3 (asserting that the LEAD would expose liquidity providers (other than LEAD MMs) to adverse selection, which would raise costs for providing liquidity). 116 See Leuchtkafer Letter 2, supra note 8, at 9. 117 See id. at 7–8. 118 See OIP, supra note 7, 82 FR at 24416. 119 See CHX Letter 2, supra note 8, at 9. The Exchange also asserts that current circuit breakers, include Limit Up-Limit Down, provide an adequate market-wide remedy for extraordinary market volatility. See id. E:\FR\FM\25OCN1.SGM 25OCN1 Federal Register / Vol. 82, No. 205 / Wednesday, October 25, 2017 / Notices enhancements to market quality.120 The Exchange explains that, currently, it has less than one-percent market share in NMS securities and little to no resting liquidity in the vast majority of NMS securities.121 The Exchange believes that the proposal would enhance market quality across all securities traded on CHX.122 In particular, CHX believes that the LEAD Rules would significantly enhance market quality for securities that are actively traded on CHX and attract robust markets in securities that are currently not actively traded at CHX.123 In addition, the Exchange asserts that the LEAD would reduce the cost of LEAD MMs providing liquidity, which the Exchange believes would result in more efficient price discovery for retail and institutional investors.124 The Exchange also asserts that there is no evidence that the proposal would result in CHX quotes being less accessible to retail or institutional buyers and sellers,125 and, in fact, the heightened quoting and trading obligations for LEAD MMs would ensure that CHX quotes remain reliable and accessible.126 The Exchange also states its view that: (1) A market participant that places an order to take liquidity posted on any national 120 See Amendment No. 1, supra note 12, at 8. id. 122 See id. 123 See id. 124 See CHX Letter, supra note 5, at 4. With respect to retail customers, the Exchange states that wholesalers base execution price on the NBBO and that a slight narrowing of the average NBBO, which the Exchange predicts will occur because of the LEAD, will favorably affect the pricing that wholesalers provide for retail orders, at the expense of the wholesalers’ bottom line. See CHX Letter 2, supra note 8, at 10. The Exchange predicts that, because wholesalers prefer to trade at or inside the NBBO, when the NBBO is narrowed, wholesalers would either have to choose among matching the better price, improving the better price, or routing the customer order to the better price, and the Exchange asserts that any of these outcomes will benefit retail customers. See id. at 15. The Exchange states that institutional order flow is not directed to wholesalers, and some institutional orders are executed during opening and closing auctions. See id. at 10. The LEAD would not impact the cost of those transactions, according to the Exchange. But the Exchange also states that: (1) Most institutional orders are broken down into much smaller ‘‘child orders,’’ which are executed in the marketplace using a variety of algorithms; (2) in general, execution costs for such child orders would be reduced when average NBBO spreads are narrowed; and therefore (3) to the extent that the LEAD increases competition among orders and narrows the average NBBO spread, institutional order flow would also experience lower execution costs. See id. With respect to an institutional investor’s experience taking liquidity, CHX states that institutional investors would have the same experience as any other liquidity taker and that the LEAD would not have a materially negative effect on liquidity takers not engaged in latency arbitrage strategies. See id. at 11. 125 See CHX Letter, supra note 5, at 4–5. 126 See Amendment No. 1, supra note 12, at 12. sradovich on DSK3GMQ082PROD with NOTICES 121 See VerDate Sep<11>2014 22:06 Oct 24, 2017 Jkt 244001 securities exchange today may find that the liquidity is not be present by the time the order reaches the exchange’s limit order book; (2) this has nothing to do with the presence of intentional delays; and therefore (3) the LEAD would not render CHX quotes any more ‘‘fleeting’’ than they are today.127 As discussed above, the Commission believes that the LEAD Rules are reasonably designed to incentivize LEAD MMs to post larger size and more aggressively-priced quotes on CHX, which in turn could lead to broader enhancements to market quality by improving the NBBO and increasing quote competition. The extremely short access delay will allow LEAD MMs to adjust their quotations in response to changing market conditions and thereby reduce their exposure to losses from professional traders with micro-second speed advantages. As a result, LEAD MMs should be more inclined to post larger displayed orders at better prices on CHX with greater confidence that they will have an opportunity to update their quotes and therefore avoid an execution at a stale price or size. The reduction in risk in these limited conditions should allow LEAD MMs to provide more liquidity and narrower spreads throughout much of the trading day. The Commission recognizes that commenters also were concerned that a 350 microsecond delay could reduce access to CHX quotations and thereby detract from market quality in a variety of contexts. The Commission believes, however, that the LEAD is reasonably designed to impact access only to CHX quotations by market participants racing to respond to symmetric information about market conditions, while the potential benefits generated by LEAD MMs posting larger sized and more aggressive quotations should inure throughout most of the trading day. Accordingly, the Commission believes that the LEAD Rules are reasonably designed to improvet market quality, particularly for investors who are unlikely to have speed advantages over professional traders. However, because the Exchange proposes to implement the LEAD Rules on a pilot basis, the Exchange and the Commission will be able to assess the 127 See CHX Letter 2, supra note 8, at 12. In the OIP, the Commission raised several questions about the impact that the LEAD would have on market quality. In particular, the Commission raised questions about volatility during stressed trading conditions, whether the proposed rule change would increase displayed liquidity on the Exchange, and whether liquidity provided by LEAD MMs would be ‘‘fleeting’’ and how significant such ‘‘fleeting’’ liquidity would be. See OIP, supra note 7, 82 FR at 24416. PO 00000 Frm 00133 Fmt 4703 Sfmt 4703 49443 actual impact of the proposal.128 During the pilot period, CHX will collect and analyze the Pilot Data, which will measure the impact, if any, of the LEAD Rules on market quality, including quote accessibility and quoted and effective spreads, and should allow CHX to quantify any effects on the market. Among other things, the Exchange will collect and publicly disseminate data designed to measure the impact of the LEAD, including whether it: (1) Increases the amount and competitiveness of liquidity displayed on CHX; and (2) impacts the accessibility of liquidity posted on CHX.129 Specifically, the Exchange will collect, distribute, and analyze data measuring quote and execution quality both on CHX and more broadly, separated by levels of volatility. This data should allow the Exchange and Commissoin to assess not only changes in overall market quality but also changes during the most volatile periods on both the Exchange and the overall market. The Exchange also will collect matched trade difference statistics, which will indicate the number of shares that would have been executed, hypothetically, without the LEAD and the number of shares executed with the LEAD. This data will be aggregated by different levels of volatility. The Commission believes that analyzing the matched trade difference statistics will be insightful in determining if, and to what degree, the LEAD changed the accessibility of CHX quotes during different periods of volatility. Accordingly, the Pilot Data is intended to help CHX and the Commission assess whether the proposal is having the intended impact on improving market quality. The Exchange will also collect and provide to the Commission and the public data regarding variable delays experienced by both LEAD MMs and non-LEAD MMs.130 One commenter asserts that a fixed delay implemented with software could result in variable delays that could be excessive and/or unevenly distributed between market participants, with non-LEAD MMs bearing the bulk of the variable delays.131 The commenter suggests a variety of different approaches to 128 See proposed CHX Article 20, Rule 8(h)(2). proposed CHX Article 20, Rules 8(h)(4), 8(h)(5), and 8(h)(6). 130 See proposed CHX Article 20, Rule 8(h)(7) (requiring CHX to collect variable processing delay statistics). 131 See Leuchtkafer Letter, supra note 5, at 2–4; Leuchtkafer Letter 2, supra note 8, at 6; and Leuchtkafer Letter 4, supra note 8, at 1. 129 See E:\FR\FM\25OCN1.SGM 25OCN1 49444 Federal Register / Vol. 82, No. 205 / Wednesday, October 25, 2017 / Notices sradovich on DSK3GMQ082PROD with NOTICES measure these variable delays.132 Although CHX asserts that variable delays occur on other markets without intentional access delays,133 the Exchange will be collecting variable delay statistics to measure this type of delay. The Commission believes that these statistics will provide the necessary information on whether different types of market participants experience differing variable processing delays. Analysis of this data will allow the Exchange to implement any necessary changes to correct for a discrepancy. The Commission emphasizes that CHX would have to file another proposed rule change to continue LEAD after the pilot period. The Commission would consider, among other things, the Pilot Data and analyses of that data if, in the future, the Exchange proposed to make permanent the LEAD Rules. Some commenters assert that the LEAD would impinge upon price discovery across the national market system.134 Some commenters cite studies showing that an asymmetric delay on TSX Alpha, a Canadian exchange, degraded overall market quality, harmed institutional order routers, and increased effective spreads.135 In response, the Exchange asserts that the TSX Alpha delay is materially different from LEAD because 132 See Leuchtkafer Letter 5, supra note 8, at 1(asserting that, for every message and for the length of the pilot program, CHX should timestamp every transaction on receipt, on LEAD queue entry and exit (if applicable), and on matching engine processing start to finish). That commenter believes that every message should also be clearly labeled if it was received immediately before, during, or immediately after a PEV and the PEV Range value itself. See Leuchtkafer Letter 5, supra note 8, at 1. 133 See CHX Letter, supra note 5, at 9. 134 See XR Securities Letter, supra note 5, at 3; FIA PTG Letter, supra note 5 at 3–4; and Hudson River Trading Letter supra note 5, at 5. 135 See Hudson River Trading Letter, supra note 5, at 2. See also Healthy Markets Letter, supra note 5, at 5; and SIFMA Letter, supra note 5, at 6. These commenters cite a recent study regarding TSX Alpha: See Chen, Haoming, Foley, Sean, Goldstein, Michael, and Ruf, Thomas, ‘‘The Value of a Millisecond: Harnessing Information in Fast, Fragmented Markets,’’ available at https:// papers.ssrn.com/sol3/papers.cfm?abstract_ id=2860359. One commenter notes that, while quoted depth increased on TSX Alpha, the exchange did not demonstrate tighter spreads, and the accessibility of quotes significantly degraded. See Hudson River Trading Letter, supra note 5, at 2. In addition, a commenter asserts that the only counterbalance to the negative impact on market quality caused by an asymmetric delay (such as that exhibited due to TSX Alpha) would be coupling it with ‘‘robust and rigorous’’ affirmative obligations for those benefitting from the delay. See Healthy Markets Letter, supra note 5, at 5. The commenter urges the Commission to proceed cautiously, using data-driven analyses, and not within the context of the instant proposal. See id. As discussed, the Commission will review the Pilot Data and analyses of that data. VerDate Sep<11>2014 22:06 Oct 24, 2017 Jkt 244001 it is randomized and, unlike CHX, TSX Alpha utilizes a taker-maker model.136 The Exchange also observes that TSX Alpha does not require its liquidity providers to meet heightened requirements designed to enhance market quality.137 The Commission notes that the LEAD proposal differs from TSX Alpha. The delay on TSX Alpha is a longer, randomized delay of 1–3 milliseconds that occurs in a different market with a different pricing structure and regulatory environment. A randomized delay on an exchange will not allow a smart order router to send child orders to different exchanges such that the orders arrive simultaneously, preventing the sweeping of volume displayed on the NBBO without information leakage. To adjust for the potential of information leakage, a smart order router could be adjusted to avoid the TSX Alpha exchange when sweeping NBBO volume. The possible increase of informed volume on exchanges other than TSX Alpha, could have been a factor in the degradation of market quality on those exchanges. Also, given TSX Alpha’s taker-maker pricing structure, market makers on this exchange could attract order flow by only matching the now degraded NBBO. Therefore, given this combination of factors, the effects of TSX Alpha may not be relevant in assessing the potential results of the LEAD on market quality. The Exchange will collect, analyze, and publicly disclose data that should show how the LEAD affects market quality, including the statistics disclosing width, displayed size, and effective spreads during different periods of market volatility. Section 6(b)(5) of the Exchange Act requires that the rules of a national securities exchange be designed to prevent fraudulent and manipulative activity. A number of commenters question whether the length and means of implementing the delay is consistent with the requirement in Section 6(b)(5) of the Exchange Act that the rules of the exchange be designed to prevent fraudulent and manipulative acts and practices.138 One commenter states that CHX does not support its conclusion 139 that the Fixed LEAD Period would be too short to introduce any incremental risk of manipulative activity.140 Another commenter asks CHX to state how long a delay would have to be to permit 136 See CHX Letter, supra note 5, at 8. id. at 8–9. Healthy Markets Letter, supra note 5, at 5; Leuchtkafer Letter 2, supra note 5, at 6; and FIA PTG Letter, supra note 5, at 2–3. 139 See infra note 143 and accompanying text. 140 See FIA PTG Letter, supra note 5, at 2–3. 137 See 138 See PO 00000 Frm 00134 Fmt 4703 Sfmt 4703 manipulative practices and what it will do to ensure that its software does not result in delays that would permit such practices.141 The Exchange asserts that the LEAD would not introduce incremental risk of manipulative activity.142 The Exchange believes that the Fixed LEAD Period is too short to provide any actionable advantage to a LEAD MM reacting to information already in its possession or to introduce incremental risk of manipulative activity.143 The Commission finds that the proposed rule change, as modified by Amendments No. 1 and No. 2, is consistent with the requirement of Section 6(b)(5) of the Exchange Act that the rules of a national securities exchange be designed to prevent fraudulent and manipulative activity. The Commission previously stated that it does not expect that any de minimis delay will alter the potential for manipulative activity or make it harder to detect and prosecute.144 The Fixed LEAD Period will be a de minimis delay (as discussed below),145 and the Commission continues to believe that such a delay will neither increase the potential for manipulative activity nor make it more difficult to detect and prosecute.146 In addition, the Pilot Data will allow the Exchange and the Commission to assess in a timely fashion whether the LEAD presents any increased risks of manipulation.147 141 See Leuchtkafer Letter, supra note 5, at 4. Notice, supra note 3, 82 FR at 11269. 143 See CHX Letter, supra note 5, at 11. 144 See Regulation NMS Interpretation, infra note 162, at 40792. 145 See infra Section III.B. 146 One commenter asserts that LEAD MMs would make trading decisions with more information than any of their potential counterparties. See XR Securities Letter, supra note 5, at 1. Another commenter asserts that CHX should require LEAD MMs to establish information barriers to prevent such firms from using their advantage on CHX in their other proprietary trading. See Leuchtkafer Letter, supra note 5, at 5. The Commission believes that the operation of the LEAD Rules would not provide LEAD MMs with any unique information and therefore, the Commission believes that it is unnecessary to require LEAD MMs to adopt information barriers. 147 CHX will start providing the Pilot Data to the Commission by no later than the end of the second month of the pilot program. The Commission believes this timeline is appropriate because it will allow the Exchange sufficient time to properly collect and organize the Pilot Data while still making such data available to the Commission close in time to the start of the pilot program. A commenter asserts that the LEAD could result in delays that are longer than 350 microseconds, and that with the variable delay, the total delay could be long enough to increase risk of manipulative practices. See Leuchtkafer Letter, supra note 5, at 3–4; and Leuchtkafer Letter 2, supra note 5, at 5– 6. The Commission believes that the variable processing delay statistics should allow the Exchange to monitor for persistent delays and 142 See E:\FR\FM\25OCN1.SGM 25OCN1 Federal Register / Vol. 82, No. 205 / Wednesday, October 25, 2017 / Notices Regulation NMS.154 These commenters argue that, if CHX implemented the LEAD, CHX’s displayed quotations would not be immediately accessible and would be inconsistent with the B. Section 11A of the Exchange Act definition of ‘‘automated quotation’’ Section 11A(a)(1) of the Exchange Act under Rule 600(b)(3) and, therefore, the LEAD would prevent CHX’s displayed articulates Congress’ finding that, quotations from being considered among other things, it is in the public ‘‘protected’’ under Regulation NMS.155 interest and appropriate for the More specifically, some commenters protection of investors and the maintenance of fair and orderly markets assert that by providing LEAD MMs with a structural advantage, the LEAD to assure: Economically efficient execution of securities transactions; fair would frustrate the purposes the Order competition among brokers and dealers, Protection Rule by impairing fair and efficient access to an exchange’s among exchange markets, and between quotations.156 One commenter exchange markets; the availability to distinguishes the LEAD from the delay brokers, dealers, and investors of on the Investors Exchange, LLC (‘‘IEX’’), information with respect to quotations noting that IEX’s delay only affected for and transactions in securities; the access to non-displayed orders.157 practicability of brokers executing Another commenter expresses concern investors’ orders in the best market; and that, unlike other examples of permitted an opportunity, consistent with the discrimination, the LEAD would affect economically efficient execution of the regulatory mechanics of trading securities transactions and the because, in some cases, traders would practicability of brokers executing be required to route orders to the investors’ orders in the best market, for investors’ orders to be executed without Exchange pursuant to the Order Protection Rule.158 Similarly, one the participation of a dealer.148 commenter expresses concern that the As discussed below, certain regulatory requirement to interact with commenters questioned whether the proposed rule change is consistent with a LEAD MM’s protected quote could prevent investors from achieving Rule 611 of Regulation NMS (‘‘Order optimal executions because the LEAD Protection Rule’’) 149 and Rule 602 of MMs would have the benefit of making 150 both Regulation NMS (‘‘Quote Rule’’), their trading decisions with more of which were adopted pursuant to information than any of their potential Section 11A of the Exchange Act. counterparties.159 The Order Protection Rule, among In response, the Exchange asserts that other things, requires trading centers to the LEAD is consistent with the Order establish, maintain, and enforce written Protection Rule.160 CHX notes that Rule policies and procedures reasonably 600(b)(3) of Regulation NMS requires designed to prevent the execution of that a trading center displaying an trades at prices inferior to protected automated quotation permit, among quotations displayed by other trading other things, an incoming immediate-or151 To be protected, a quotation centers. cancel order to immediately and must, among other things, be immediately and automatically 154 See Hudson River Trading Letter, supra note accessible and be the best bid or best 5, at 3; Citadel Letter, supra note 5, at 6–7; NYSE Letter, supra note 5, at 3–4; and XR Securities offer of a national securities Letter, supra note 5, at 1. See also SIFMA Letter, exchange.152 Certain commenters argue supra note 5, at 3 (suggesting that the Commission that the proposal, which would allow should ‘‘carefully consider the implications’’ of LEAD MMs to post and reprice market participants routing orders to CHX to access a protected quote when the accessibility of such displayed orders without delay, could quote is ‘‘questionable’’). hinder the ability of investors to access 155 See Hudson River Trading Letter, supra note such displayed quotations on CHX.153 5, at 3; Citadel Letter, supra note 5, at 6–7; NYSE Several commenters assert that the Letter, supra note 5, at 3–4; and XR Securities Letter, supra note 5, at 1. LEAD would be inconsistent with 156 See FIA PTG Letter, supra note 5, at 2; Hudson CHX’s protected quotation status under sradovich on DSK3GMQ082PROD with NOTICES Collection of the Pilot Data will also assist the Exchange in discharging its ongoing responsibility to surveil for manipulative activity. implement any necessary changes to remove such delays. 148 15 U.S.C. 78k–1(a)(1)(C). 149 17 CFR 242.611. 150 17 CFR 242.602. 151 See Regulation NMS Adopting Release, supra note 87, 70 FR at 37501. 152 See id. at 37496. 153 See Citadel Letter, supra note 5, at 5–6; Hudson River Trading Letter, supra note 5, at 6. VerDate Sep<11>2014 22:06 Oct 24, 2017 Jkt 244001 River Trading Letter, supra note 5, at 7; Citadel Letter, supra note 5, at 6; NYSE Letter, supra note 5, at 4; XR Securities Letter, supra note 5, at 1; and SIFMA Letter, supra note 5, at 6 (questioning the effect of an access delay coupled with existing geographic or technological latencies on the fair and efficient access to an exchange’s protected quotations). 157 See XR Securities Letter, supra note 5, at 3. 158 See FIA PTG Letter, supra note 5, at 4. 159 See XR Securities Letter, supra note 5, at 3. 160 See CHX Letter, supra note 5, at 13. PO 00000 Frm 00135 Fmt 4703 Sfmt 4703 49445 automatically execute against the automated quotation up to its full size; and immediately and automatically cancel any unexecuted portion of the immediate-or-cancel order without routing the order elsewhere.161 CHX highlights that the Commission recently issued a final interpretation with respect to the definition of automated quotation under Rule 600(b)(3) of Regulation NMS, which, CHX notes, did not interpret the term ‘‘immediate’’ used in Rule 600(b)(3) by itself to prohibit a trading center from implementing an intentional access delay that is de minimis (i.e., a delay so short as to not frustrate the purposes of the Order Protection Rule by impairing fair and efficient access to an exchange’s quotations).162 CHX concludes that the Commission’s revised interpretation provides that the term ‘‘immediate’’ precludes any coding of automated systems or other type of intentional device that would delay the action taken with respect to a quotation unless such delay is de minimis.163 CHX believes that the LEAD would be a de minimis delay so short as not to frustrate the purposes of the Order Protection Rule by impairing fair and efficient access to the Exchange’s quotations.164 The Order Protection Rule provides intermarket protection against tradethroughs for ‘‘automated’’ (as opposed to ‘‘manual’’) quotations of NMS stocks. Under Regulation NMS, an ‘‘automated’’ quotation is one that, among other things, can be executed ‘‘immediately and automatically’’ against an incoming immediate-or-cancel order. This formulation was intended to distinguish and exclude from protection quotations manual markets that produced delays measured in seconds in responding to an incoming order, because delays of that magnitude would impair fair and efficient access to an exchange’s quotations.165 As CHX notes, the Commission, in connection with its approval of IEX’s exchange application, interpreted ‘‘immediate’’ in the context of Regulation NMS as not precluding a de minimis intentional delay—i.e., a delay so short as to not frustrate the purposes of the Order Protection Rule by impairing fair and efficient access to an 161 See id. See also 17 CFR 242.600(b)(3). CHX Letter, supra note 5, at 13. See also Commission Interpretation Regarding Automated Quotations Under Regulation NMS, Securities Exchange Act Release No. 78102 (June 17, 2016), 81 FR 40785 (June 23, 2016) (‘‘Regulation NMS Interpretation’’). 163 See CHX Letter, supra note 5, at 14. 164 See id. 165 See Regulation NMS Interpretation, supra note 162, 81 FR at 40785–86. 162 See E:\FR\FM\25OCN1.SGM 25OCN1 49446 Federal Register / Vol. 82, No. 205 / Wednesday, October 25, 2017 / Notices exchange’s quotations.166 Specifically, while acknowledging that even a de minimis access delay may increase the overall latency in accessing a particular protected quotation, the Commission reasoned that, just as the geographic and technological delays do not impair fair and efficient access to an exchange’s quotations or otherwise frustrate the objectives of Rule 611, the addition of a de minimis intentional access delay is consistent with the immediacy requirement of Rule 600(b)(3).167 In its related interpretative guidance, the Commission’s staff found that ‘‘delays of less than a millisecond are at a de minimis level that would not impair fair and efficient access to a quotation, consistent with the goals of Rule 611.’’ 168 The Commission believes that the LEAD is consistent with the Order Protection Rule. The Commission notes that its recent interpretation with respect to the definition of automated quotation under Rule 600(b)(3) of Regulation NMS, and the corresponding staff guidance, does not distinguish between intentional delays designed to benefit non-displayed liquidity, as was the case with the IEX delay, or displayed liquidity, as is the case with the LEAD. The Commission’s staff found that ‘‘delays of less than a millisecond are at a de minimis level that would not impair fair and efficient access to a quotation, consistent with the goals of Rule 611.’’ 169 Accordingly, because the 350 microsecond delay imposed by the LEAD is less than a millisecond, it is de minimis. The Commission’s interpretation recognized ‘‘that a de minimis access delay, even if it involves an ‘intentional device’ that delays access to an exchange’s quotation, is compatible with the exchange having an ‘automated quotation’ under Rule 600(b)(3) and thus a ‘protected quotation’ under Rule 166 See id. at 40792. id. at 40789, text accompanying n.50. 168 See Staff Guidance on Automated Quotations under Regulation NMS, Securities and Exchange Commission, June 17, 2016, available at https:// www.sec.gov/divisions/marketreg/automatedquotations-under-regulation-nms.htm (‘‘Regulation NMS Staff Guidance’’). One commenter questions whether 350 microseconds is an appropriate duration for the delay. See Healthy Markets Letter, supra note 5, at 5 (stating that CHX, unlike IEX, failed to explain why it is proposing a delay of 350 microseconds). See also Leuchtkafer Letter, supra note 5, at 2 (stating that the length of the LEAD is based on IEX and the speed arms race, which it describes as ‘‘a relative and constantly changing issue,’’ and questioning whether CHX will change the length of the LEAD if IEX changes its delay or if LEAD MMs speed up or other firms slow down or exit the market). As discussed below, the Fixed LEAD period will be a de minimis delay. 169 See Regulation NMS Staff Guidance, supra note 168. sradovich on DSK3GMQ082PROD with NOTICES 167 See VerDate Sep<11>2014 22:06 Oct 24, 2017 Jkt 244001 611.’’ 170 Accordingly, the LEAD will not change CHX’s protected quotation status. Under the firm quote provisions of the Quote Rule, a responsible broker-dealer must execute any order to buy or sell a subject security (other than an odd-lot order) presented to it by another brokerdealer at a price at least as favorable to such buyer or seller as the responsible broker-dealer’s published bid or published offer in any amount up to its published quotation size unless an exception applies.171 One commenter states its view that the LEAD would be consistent with the Quote Rule because the Exchange is not proposing to notify a LEAD MM that an inbound order that has been delayed may imminently execute, and therefore, should a LEAD MM revise its quote prior to the end of the delay, the inbound order would not have been presented to the LEAD MM.172 Some commenters assert that the LEAD may be inconsistent with the firm quote provisions of the Quote Rule or the intent behind the Quote Rule because, in their view, it would allow liquidity providers to ‘‘back away’’ from their quotes.173 These commenters are concerned that the LEAD would allow LEAD MMs to update their quotes to potentially inferior prices while orders to execute against their quotes are being held in the LEAD queue.174 The Exchange responds that the LEAD would not result in violations of the Quote Rule because orders delayed pursuant to the LEAD would not have been ‘‘presented’’ to LEAD MMs and therefore the duty of a broker or dealer to stand behind its quote would not have yet vested when the LEAD applies.175 The Commission notes that the firm quote provisions of the Quote Rule require each responsible broker or dealer to execute an order presented to it at a price at least as favorable as its published bid or published offer in any amount up to its published quotation size.176 There may be circumstances in which a LEAD MM posts a quote on 170 See Regulation NMS Interpretation, supra note 162, at 40792. 171 17 CFR 242.602(b)(2). 172 See CTC Trading Letter, supra note 5, at 6. 173 See FIA PTG Letter, supra note 5, at 5; Citadel Letter, supra note 5, at 5; NYSE Letter, supra note 5, at 2–3; and Hudson River Trading Letter, supra note 5, at 6 (asserting that ‘‘at best, [the LEAD] is designed to circumvent’’ the Quote Rule). 174 See FIA PTG Letter, supra note 5, at 5; Hudson River Trading Letter, supra note 5, at 6; Citadel Letter, supra note 5, at 5; NYSE Letter, supra note 5, at 2–3. 175 See CHX Letter, supra note 5, at 13. One commenter agrees with CHX’s interpretation of the Quote Rule. See CTC Trading Letter, supra note 5, at 6. 176 17 CFR 242.602(b)(2). PO 00000 Frm 00136 Fmt 4703 Sfmt 4703 CHX, a contra-side order is submitted and delayed by the LEAD, and the LEAD MM without any knowledge of the contra-side order modifies or cancels its quote prior to release of the contra-side order from the LEAD queue. In this case, the Commission believes that Quote Rule compliance issues would not be raised because the contraside order was not yet presented to the LEAD MM. Accordingly, the Commission believes that the LEAD is not inconsistent with the Quote Rule. IV. Solicitation of Comments on Amendments No. 1 and No. 2 Interested persons are invited to submit written data, views, and arguments concerning Amendments No. 1 and No. 2. 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– CHX–2017–04 on the subject line. Paper Comments • Send paper comments in triplicate to Secretary, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549–1090. All submissions should refer to File Number SR–CHX–2017–04. This file number should be included on the subject line if email is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission’s Internet Web site (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 this filing will also be available for inspection and copying at the principal office of the Exchange. All comments received will be posted without change. Persons submitting comments are cautioned that we do not redact or edit E:\FR\FM\25OCN1.SGM 25OCN1 Federal Register / Vol. 82, No. 205 / Wednesday, October 25, 2017 / Notices personal identifying information from comment submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR–CHX–2017–04 and should be submitted on or before November 15, 2017. V. Accelerated Approval of Proposed Rule Change, as Modified by Amendments No. 1 and No. 2 The Commission finds good cause to approve the proposed rule change, as modified by Amendments No. 1 and No. 2, prior to the 30th day after the date of publication of notice of Amendments No. 1 and No. 2 in the Federal Register. Neither Amendment No. 1 nor Amendment No. 2 expands the structure of the proposed rule change as it was previously published for notice and comment.177 Rather, the Exchange circumscribed its proposal to implement the LEAD during the regular trading session on a pilot basis to provide an opportunity to study the impact of the LEAD Rules on the markets and to address comments by further explaining the purpose and the intended impact of the proposal. Accordingly, the Commission finds good cause, pursuant to Section 19(b)(2) of the Exchange Act,178 to approve the proposed rule change, as modified by Amendments No. 1 and No. 2, on an accelerated basis. VI. Conclusion sradovich on DSK3GMQ082PROD with NOTICES For the foregoing reasons, the Commission finds that the proposed rule change, as modified by Amendments No. 1 and No. 2, is consistent with the Exchange Act and the rules and regulations thereunder applicable to a national securities exchange. It is therefore ordered, pursuant to Section 19(b)(2) of the Exchange Act 179 that the proposed rule change (SR– CHX–2017–04), as modified by Amendments No. 1 and No. 2, be, and hereby is, approved on an accelerated basis, subject to a pilot period set to expire twenty- four months after implementation of the pilot program. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.180 Eduardo A. Aleman, Assistant Secretary. [FR Doc. 2017–23122 Filed 10–24–17; 8:45 am] BILLING CODE 8011–01–P supra notes 12 and 13. U.S.C. 78s(b)(2). 179 15 U.S.C. 78s(b)(2). 180 17 CFR 200.30–3(a)(12). SECURITIES AND EXCHANGE COMMISSION [Release No. 34–81907; File No. SR–MRX– 2017–21] Self-Regulatory Organizations; Nasdaq MRX, LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Amend the Exchange’s Schedule of Fees October 19, 2017. Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’),1 and Rule 19b–4 thereunder,2 notice is hereby given that on October 5, 2017, Nasdaq MRX, LLC (‘‘MRX’’ or ‘‘Exchange’’) filed with the Securities and Exchange Commission (‘‘SEC’’ or ‘‘Commission’’) the proposed rule change as described in Items I and II below, which Items have been prepared by the Exchange. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change The Exchange proposes to amend its Schedule of Fees to add new fees for colocation services, direct circuit connections to the Exchange, connections to third party services, point of presence (‘‘POP’’) connectivity, and connectivity to the Exchange’s Test Facility (the ‘‘Test Facility’’). The text of the proposed rule change is available on the Exchange’s Web site at www.ise.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 Exchange included statements concerning the purpose of and basis for the proposed rule change and discussed any comments it received on the proposed rule change. The text of these statements may be examined at the places specified in Item IV below. The Exchange has prepared summaries, set forth in sections A, B, and C below, of the most significant aspects of such statements. 177 See 178 15 VerDate Sep<11>2014 22:06 Oct 24, 2017 1 15 2 17 Jkt 244001 PO 00000 U.S.C. 78s(b)(1). CFR 240.19b–4. Frm 00137 Fmt 4703 Sfmt 4703 49447 A. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change 1. Purpose The Exchange proposes to amend its Fee Schedule to eliminate certain fees associated with legacy options for connecting to ISE and to replace them with fees associated with new options for connecting to the Exchange that are similar to those that MRX’s sister exchanges presently offer. The Exchange is engaged in an initiative to migrate the Exchange’s trading system to the Nasdaq INET architecture. As part of that initiative, the Exchange proposes to offer customers various new options to connect to the Exchange and to assess fees for such connectivity. The connectivity options that the Exchange proposes to offer—colocation, direct circuit connectivity, connectivity to third party services, POP connectivity, and connectivity to the Exchange’s Test Facility—and the fees that the Exchange proposes to assess for such connectivity are similar to those that the Exchange’s affiliated Nasdaq, Inc. markets— including The NASDAQ Stock Market, LLC (‘‘Nasdaq’’), Nasdaq BX, Inc. (‘‘BX’’), and Nasdaq Phlx LLC (‘‘Phlx’’)—presently offer and assess to their customers under their respective rules. They are also the same as the connectivity options and fees that Nasdaq GEMX, LLC (‘‘GEMX’’) and Nasdaq ISE, LLC (‘‘ISE’’) propose to offer and assess under their respective rules in tandem with this filing. This proposal, in other words, seeks to harmonize the Exchange’s connectivity offerings and fees with those of its sister exchanges. The first new connectivity option that the Exchange proposes to offer its customers is co-location. Co-location is a suite of hardware, power, telecommunication, and other ancillary products and services that allow market participants and vendors to place their trading and communications equipment in close physical proximity to the quoting and execution facilities of the Exchange and other Nasdaq, Inc. markets. The Exchange provides colocation services and imposes fees through Nasdaq Technology Services LLC and pursuant to agreements with the owner/operator of its data center where both the Exchange’s quoting and trading facilities and co-located customer equipment are housed. Users of colocation services include private extranet providers, data vendors, as well as Exchange members and non- E:\FR\FM\25OCN1.SGM 25OCN1

Agencies

SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 82, Number 205 (Wednesday, October 25, 2017)]
[Notices]
[Pages 49433-49447]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-23122]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-81913; File No. SR-CHX-2017-04]


Self-Regulatory Organizations; Chicago Stock Exchange, Inc.; 
Notice of Filing of Amendments No. 1 and No. 2 and Order Granting 
Accelerated Approval of a Proposed Rule Change, as Modified by 
Amendments No. 1 and No. 2, To Adopt the CHX Liquidity Enhancing Access 
Delay on a Pilot Basis

October 19, 2017.

I. Introduction

    On February 10, 2017, the Chicago Stock Exchange, Inc. (``CHX'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Exchange Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to adopt the CHX Liquidity 
Enhancing Access Delay (``LEAD''), which would require all new incoming 
orders, cancel, and cancel/replace messages to be subject to a 350-
microsecond intentional access delay except for: (1) Orders that would 
provide liquidity submitted by a LEAD Market Maker (``LEAD MM'' or 
``LMM''), a new class of CHX market maker with heightened quoting and 
trading obligations (referred to collectively as the ``minimum 
performance standards''); and (2) cancel messages originating from a 
LEAD MM's trading account. The proposed rule change was published for 
comment in the Federal Register on February 21, 2017.\3\ On April 3, 
2017, the Commission designated a longer period within which to approve 
the proposed rule change, disapprove the proposed rule change, or 
institute proceedings to determine whether the proposed rule change 
should be disapproved.\4\ The Commission received eleven comment 
letters on the proposed rule change, including a response from the 
Exchange.\5\ On May 22, 2017, the Commission instituted proceedings 
under Section 19(b)(2)(B) of the Exchange Act \6\ to determine whether 
to approve or disapprove the proposed rule change.\7\ Thereafter, the 
Commission received seven more comment letters, including a response 
from the Exchange.\8\ On August 17, 2017, pursuant to Section 19(b)(2) 
of the Exchange Act,\9\ the Commission designated a longer period for 
Commission action on proceedings to determine whether to disapprove the 
proposed rule change.\10\
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 80041 (February 14, 
2017), 82 FR 11252 (``Notice'').
    \4\ See Securities Exchange Act Release No. 80364, 82 FR 17065 
(April 7, 2017).
    \5\ See letters from: Ryan Hitch, Head of Equities Trading, XR 
Securities LLC, dated February 24, 2017 (``XR Securities Letter''); 
Douglas A. Cifu, Chief Executive Officer, Virtu Financial LLC, dated 
February 27, 2017 (``Virtu Letter''); Joanna Mallers, Secretary, FIA 
Principal Traders Group, dated March 13, 2017 (``FIA PTG Letter''); 
Adam Nunes, Head of Business Development, Hudson River Trading LLC, 
dated March 13, 2017 (``Hudson River Trading Letter''); R.T. 
Leuchtkafer, dated March 14, 2017 (``Leuchtkafer Letter''); Stephen 
John Berger, Managing Director, Government & Regulatory Policy, 
Citadel Securities, dated March 14, 2017 (``Citadel Letter''); Tyler 
Gellasch, Executive Director, Healthy Markets Association, March 17, 
2017 (``Healthy Markets Letter''); Elizabeth K. King, General 
Counsel and Corporate Secretary, New York Stock Exchange, dated 
March 20, 2017 (``NYSE Letter''); James G. Ongena, Executive Vice 
President and General Counsel, CHX, dated March 24, 2017 (``CHX 
Letter''); Steve Crutchfield, Head of Market Structure, CTC Trading 
Group, LLC, dated April 4, 2017 (``CTC Trading Letter''); and 
Theodore R. Lazo, Managing Director and Associate General Counsel, 
Securities Industry and Financial Markets Association, dated May 17, 
2017 (``SIFMA Letter''). All comments on the proposed rule change 
are available at https://www.sec.gov/comments/sr-chx-2017-04/chx201704.htm.
    \6\ 15 U.S.C. 78s(b)(2)(B).
    \7\ See Securities Exchange Act Release No. 80740, 82 FR 24412 
(May 26, 2017) (``OIP''). In the OIP, the Commission specifically 
requested comment on thirteen questions. See id. at 24416.
    \8\ See letters from: R.T. Leuchtkafer, dated June 15, 2017 
(``Leuchtkafer Letter 2''); Stephen Berger, Managing Director, 
Government and Regulatory Policy, Citadel Securities, dated June 16, 
2017 (``Citadel Letter 2''); Joanna Mallers, Secretary, FIA 
Principal Traders Group, dated June 16, 2017 (``FIA PTG Letter 2''); 
James G. Ongena, Executive Vice President, General Counsel, CHX, 
dated June 30, 2017 (``CHX Letter 2''); R.T. Leuchtkafer, dated July 
7, 2017 (``Leuchtkafer Letter 3''); R.T. Leuchtkafer, dated July 10, 
2017 (``Leuchtkafer Letter 4''); and R.T. Leuchtkafer, dated October 
7, 2017 (``Leuchtkafer Letter 5'').
    \9\ 15 U.S.C. 78s(b)(2).
    \10\ See Securities Exchange Act Release No. 81415, 82 FR 40051 
(August 23, 2017).
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    On September 19, 2017, the Exchange filed Amendment No. 1 to the 
proposed rule change. In Amendment No. 1, the Exchange proposed to 
implement the proposed rule change as a 24-month pilot program, during 
which time the Exchange would collect and publicly disclose (following 
the sixth month of the pilot program) the following data: (1) Quote 
quality statistics, designed to provide comparative data regarding the 
effect of LEAD on market quality, for each security per trading day and 
for each period of exceptional volatility (``PEV'') range (``PEV 
Range''), for the six months immediately preceding the implementation 
of the pilot program and for the duration of the pilot program; (2) 
matched trade difference statistics, designed to compare the 
reliability of CHX quotes with and without the LEAD, for each security 
assigned to a LEAD MM (``LEAD MM Security'') per trading day and per 
PEV Range, for the duration of the pilot program; (3) volume 
statistics, designed to measure the impact of LEAD on execution volume 
in LEAD MM Securities for the duration of the pilot program; (4) 
variable processing delay statistics, designed to provide comparative 
data regarding the variable delay \11\ between the initial receipt of 
an order and the time that the order is eligible to be matched by CHX's 
matching system for the duration of the pilot program; and (5) 
effective spread statistics, designed to measure the impact of the LEAD 
on CHX and national market system (``NMS'') effective spreads for the 
duration of the pilot program.\12\ On October 18, 2017, the Exchange 
filed Amendment No. 2 to the proposed rule change.\13\ This order 
approves the proposed rule change, as

[[Page 49434]]

modified by Amendments No. 1 and No. 2, on an accelerated basis.
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    \11\ The variable delay does not include the 350-microsecond 
intentional access delay. The variable delay will depend on factors 
including, but not limited to, messaging volume and system 
processing. See Amendment No. 1, infra note 12, at 28.
    \12\ In Amendment No. 1, the Exchange also supplemented its 
rationale for the proposed rule change, provided additional 
discussion related to the market quality enhancements that it 
believes would be realized from the proposal, corrected certain 
errors in the examples set forth in the proposal, and corrected a 
misstatement by the Exchange in one of its comment letters. 
Amendment No. 1 is available at https://www.sec.gov/comments/sr-chx-2017-04/chx201704-2583844-161106.pdf.
    \13\ In Amendment No. 2, the Exchange: (1) Amended the proposal 
so that the LEAD would apply only during the regular trading 
session; (2) revised the definition of ``Qualified Executions'' to 
measure executions during the regular trading session only; (3) 
modified its description of its review for compliance with the 
minimum performance standards to provide that the Exchange would 
review LEAD MM quoting and trading activity on a monthly basis, and 
that trading days on which a LEAD MM was prohibited by CHX rules 
from submitting orders from its trading account would be excluded 
from such review; (4) modified its description of the data that will 
be published on its Web site; (5) modified its description of the 
PEV data that will be collected; and (6) clarified its description 
of one of the order origin categories into which the variable 
processing delay statistics will be divided and amended and added 
delay ranges for which data will be collected. Amendment No. 2 is 
available at https://www.sec.gov/comments/sr-chx-2017-04/chx201704-2643435-161294.pdf.
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II. Summary of the Proposal

    The Exchange proposes to adopt, on a pilot basis, the LEAD,\14\ 
which would subject all new incoming orders,\15\ cancel, and cancel/
replace messages to a 350-microsecond intentional access delay, except 
for: (1) Orders that would provide liquidity submitted by a LEAD MM; 
and (2) cancel messages originating from a LEAD MM's trading account. 
New incoming orders, cancel, and cancel/replace messages would be 
subject to a 350 microsecond delay after initial receipt by the 
Exchange (``Fixed LEAD Period''), and would only be processed after the 
Exchange's matching system \16\ has evaluated and processed, if 
applicable, all messages received by the Exchange during the Fixed LEAD 
Period. A delayed message would retain its original sequence number and 
would be delayed only once. The LEAD would be applied to all securities 
traded on the Exchange during the regular trading session.\17\
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    \14\ For more details regarding the proposal, please refer to 
the Notice, Amendment No. 1, and Amendment No. 2, supra notes 3, 12, 
and 13 respectively.
    \15\ New incoming orders are orders received by the matching 
system for the first time. The LEAD would not apply to other 
situations where existing orders or portions thereof are treated as 
incoming orders, such as: (1) Resting orders that are price slid 
into a new price point pursuant to the CHX only price sliding or 
limit up-limit down price sliding processes; and (2) unexecuted 
remainders of routed orders released into the matching system. See 
Notice, supra note 3, 82 FR at 11252, n.3.
    \16\ The matching system is an automated order execution system.
    \17\ See Amendment No. 2, supra note 13, at 11.
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    The Exchange states that the LEAD is designed to address a lack of 
resting liquidity in NMS securities on CHX by providing LEAD MMs with a 
risk management tool that would incentivize LEAD MMs to display larger 
orders at aggressive prices.\18\ To the extent the LEAD would 
incentivize LEAD MMs to improve the price and size of the prevailing 
National Best Bid and Offer (``NBBO''), the Exchange asserts that LEAD 
could reduce transaction costs for retail investors, as wholesale 
broker-dealers price the majority of the retail orders they handle 
using the prevailing NBBO, and for institutional investors, as the 
execution costs for their orders would be reduced if the average NBBO 
spreads are narrowed.\19\
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    \18\ See Amendment No. 1, supra note 12, at 8.
    \19\ See CHX Letter 2, supra note 8, at 10. Originally, CHX 
framed the LEAD as a countermeasure to ``latency arbitrage,'' 
defined by the Exchange as the practice of exploiting disparities in 
the price of a security or related securities that are being traded 
in different markets by taking advantage of the time it takes to 
access and respond to public information. See Notice, supra note 3, 
82 FR at 11252-53. CHX attributes latency arbitrage to a degradation 
of the quality of its market it observed between January and July 
2016. See id. at 11253.
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    A LEAD MM would be required to meet the proposed minimum 
performance standards in return for undelayed access to submit 
liquidity providing orders and to cancel its resting orders. The 
proposed minimum performance standards require, in addition to the 
obligations for market makers required by the Exchange's current 
rules,\20\ that: (1) A LEAD MM disseminate throughout the Exchange's 
regular trading session (except during auctions) a continuous two-sided 
quote, with bids and offers being closer to the National Best Bid 
(``NBB'') and National Best Offer (``NBO''), respectively, than the 
quotes that market makers are required to post under CHX's existing 
rules; (2) a LEAD MM maintain an average monthly NBBO quoting 
percentage \21\ in each of its LEAD MM Securities of at least 10% over 
the course of a calendar month; (3) a LEAD MM must execute at least 2% 
of the transactions during the regular trading session, resulting from 
single-sided orders (excluding auction executions), in each of its LEAD 
MM Securities on an equally-weighted daily average over the course of a 
calendar month; and (4) at least 80% of the LEAD MM's executions during 
the regular trading session, resulting from single-sided orders 
(excluding auction executions), in each of its LEAD MM Securities 
result from its resting orders that originated from its corresponding 
LEAD MM trading account over the course of a calendar month.\22\
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    \20\ See CHX Article 16, Rule 4(d).
    \21\ Proposed CHX Article 16, Rule 4(f)(2) provides that the 
Exchange will determine: (1) The ``Daily NBB Quoting Percentage'' by 
determining the percentage of time the LEAD MM has at least one 
round lot of displayed interest in an Exchange bid at the NBB during 
the open trading state of each trading day for a calendar month; (2) 
the ``Daily NBO Quoting Percentage'' by determining the percentage 
of time the LEAD MM has at least one round lot of displayed interest 
in an Exchange offer at the NBO during the open trading state of 
each trading day for a calendar month; (3) the ``Average Daily NBBO 
Quoting Percentage'' for each trading day by summing the ``Daily NBB 
Quoting Percentage'' and the ``Daily NBO Quoting Percentage'' then 
dividing such sum by two; and (4) the ``Monthly Average NBBO Quoting 
Percentage'' for each security by summing the security's ``Average 
Daily NBBO Quoting Percentages'' for each trading day in a calendar 
month then dividing the resulting sum by the total number of trading 
days in such calendar month.
    \22\ Prior to commencing LEAD market making activities in a 
security, a LEAD MM must, among other things, establish at least one 
separately designated LEAD MM trading account through which all and 
only LEAD market making activities in LEAD MM Securities must 
originate. See proposed CHX Article 16, Rule 4(f)(3)(B)(i).
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    CHX also proposes to establish a procedure to designate LEAD MMs in 
a security. Only a market maker could apply to be a LEAD MM in one or 
more securities, and market makers must receive written approval from 
the Exchange to be assigned securities as a LEAD MM.\23\ LEAD MMs would 
be selected by the Exchange based on factors including, but not limited 
to, experience with making markets in securities, adequacy of capital, 
willingness to promote the Exchange as a marketplace, issuer 
preference, operational capacity, support personnel, and history of 
adherence to Exchange rules and securities laws.\24\ Current Article 
16, Rules 2(c)-(e) govern market maker withdrawal from assigned 
securities, and would apply to LEAD MMs and LEAD MM Securities. The 
Exchange could approve, at its discretion, more than one LEAD MM to be 
assigned to any LEAD MM Security and limit the number of LEAD MMs 
assigned to any security.\25\
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    \23\ See proposed CHX Article 16, Rule 4(f)(3)(A).
    \24\ See id.
    \25\ See proposed CHX Article 16, Rule 4(f)(3)(C).
---------------------------------------------------------------------------

    Pursuant to proposed CHX Article 16, Rule 4(f)(3)(D), the Exchange 
would review each LEAD MM's quoting and trading activity on a monthly 
basis to determine whether the LEAD MM has met the minimum performance 
standards for each of its LEAD MM Securities.\26\ A LEAD MM's failure 
to meet the minimum performance standards during any given month would 
result in the Exchange: (1) Suspending or terminating a LEAD MM's 
registration as a market maker; or (2) suspending or terminating 
assignment to a LEAD MM Security.\27\ These proposed provisions would 
not limit any other power of the Exchange to discipline a LEAD MM 
pursuant to other CHX rules.
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    \26\ See proposed CHX Article 16, Rule 4(f)(3)(D). The trading 
days that a LEAD MM is prohibited by CHX rules from submitting 
orders will be excluded from such review. See Amendment No. 2, supra 
note 13, at 12.
    \27\ See proposed CHX Article 16, Rule 4(f)(3)(D).
---------------------------------------------------------------------------

    CHX Article 20, Rule 8(h) and proposed CHX Article 16, Rule 4(f) 
(collectively, the ``LEAD Rules'') would be introduced as a pilot 
program that would end 24 months following the implementation of the 
LEAD.\28\ In connection with the pilot program, the Exchange would 
collect the following data (collectively, the ``Pilot Data''): (1) 
Quote quality statistics for each security

[[Page 49435]]

per trading day and per PEV Range,\29\ for the six months immediately 
preceding the pilot program date of implementation, and for the 
duration of the pilot program; (2) matched trade difference statistics, 
which are designed to provide comparative data regarding how Qualified 
Orders \30\ received by CHX would have been handled if LEAD had not 
been in effect, for each LEAD MM Security per trading day and per PEV 
Range, for the duration of the pilot program; (3) volume statistics for 
each LEAD MM Security per trading day for the duration of the pilot 
program; (4) comparative data regarding the variable delay between the 
initial receipt of an order and the time at which the order is eligible 
to be matched by CHX's matching system for each LEAD MM Security per 
trading day for the duration of the pilot program; and (5) statistics 
designed to measure the impact of LEAD on CHX and NMS effective 
spreads, for each LEAD MM Security per trading day and per PEV Range, 
for the duration of the pilot program. The Pilot Data is described in 
more detail below:
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    \28\ To adopt the LEAD on a permanent basis, the Exchange would 
have to file another proposed rule change, and the Commission would 
have to approve it.
    \29\ A PEV means a one second interval during which a percentage 
change in the NBBO midpoint for the security equaled or exceeded two 
standard deviations (``[sigma]'') from the mean. Each trading day, 
the Exchange would calculate a reference mean and standard deviation 
from consecutive one second time intervals during the regular 
trading session. Each daily reference mean and standard deviation 
would be applied to measure PEV on the following trading day. Each 
PEV would be categorized into one of five PEV Ranges, which are as 
follows: 2 = PEV greater than or equal to 2[sigma] and less than 
3[sigma]; 3 = PEV greater than or equal to 3[sigma] and less than 
4[sigma]; 4 = PEV greater than or equal to 4[sigma] and less than 
5[sigma]; and 5 = PEV greater than or equal to 5[sigma]. See 
Amendment No. 2, supra note 13, at 8.
    \30\ Generally, ``Qualified Orders'' are new single-sided orders 
received by the Exchange during the regular trading session that 
were delayed.
---------------------------------------------------------------------------

1. Daily Quote Quality Statistics
    The daily quote quality statistics are designed to show several 
aspects of CHX and overall market quote quality both pre- and post-
implementation of the pilot program. First, the statistics will show 
the width and the displayed size for both the NBBO and CHX's BBO during 
different periods of market volatility. Second, the statistics will 
display the contribution to the NBBO and CHX's BBO by the LEAD MM for 
those different periods of volatility. Finally, the statistics will 
show the contribution of CHX's BBO to the overall NBBO. Quote quality 
statistics are designed to provide comparative data regarding the 
effect of LEAD on market quality, and would include at a minimum the 
following data fields (as applicable):

------------------------------------------------------------------------
          Field No.              Field name           Description
------------------------------------------------------------------------
1...........................  Symbol.........
1A..........................  Primary          C = Chicago (CH2).
                               Matching        N = New Jersey (NY4).
                               Location.
2...........................  TradeDate......
2A..........................  PEVRange.......  Blank = All regular
                                                session data,
                                               2 = PEV data greater than
                                                or equal to 2[sigma] and
                                                less than 3[sigma],
                                               3 = PEV data greater than
                                                or equal to 3[sigma] and
                                                less than 4[sigma],
                                               4 = PEV data greater than
                                                or equal to 4[sigma] and
                                                less than 5[sigma],
                                               5 = PEV data greater than
                                                or equal to 5[sigma].
3...........................  NLMMs..........  The number of LMMs
                                                assigned to this Symbol
                                                on this Trade Date.
4A..........................  TimeRegSessSche  The total scheduled time
                               duled.           of the regular trading
                                                session for this Symbol
                                                for this TradeDate.
4B..........................  TimeRegSessActu  The total actual time of
                               al.              the regular trading
                                                session for this Symbol
                                                for this TradeDate. Time
                                                during regulatory
                                                trading halts is not
                                                included in this total.
5...........................  TimeCHXBidPrese  The total time during the
                               nt.              regular trading session
                                                that CHX has a protected
                                                bid.
5L..........................  TimeCHXBidPrese  The total time during the
                               ntLMM.           regular trading session
                                                that CHX has a protected
                                                bid and one or more LMMs
                                                are included in the CHX
                                                protected bid price.
6...........................  TimeCHXBidMissi  The total time during the
                               ng.              regular trading session
                                                that CHX does not have a
                                                protected bid.
7...........................  TimeCHXBidOnNBB  The total time during the
                                                regular trading session
                                                that CHX has a protected
                                                bid equal to the NBB
                                                price.
7L..........................  TimeCHXBidOnNBB  The total time during the
                               LMM.             regular trading session
                                                that CHX has a protected
                                                bid equal to the NBB
                                                price and one or more
                                                LMMs are included in the
                                                NBB price.
8...........................  TimeCHXBidNamed  The total time during the
                                                regular trading session
                                                that CHX has a protected
                                                bid equal to the NBB
                                                price and CHX is shown
                                                as the NBB.
8L..........................  TimeCHXBidNamed  The total time during the
                                                regular trading session
                                                that CHX has a protected
                                                bid equal to the NBB
                                                price and CHX is shown
                                                as the NBB and one or
                                                more LMMs are included
                                                in the NBB price.
9...........................  TimeCHXBidAlone  The total time during the
                                                regular trading session
                                                that CHX has a protected
                                                bid that is the only bid
                                                at the NBB price.
9L..........................  TimeCHXBidAlone  The total time during the
                               LMM.             regular trading session
                                                that CHX has a protected
                                                bid that is the only
                                                protected bid at the NBB
                                                price and one or more
                                                LMMs are included in the
                                                NBB price.
10..........................  TimeCHXAskPrese  The total time during the
                               nt.              regular trading session
                                                that CHX has a protected
                                                offer.
10L.........................  TimeCHXAskPrese  The total time during the
                               ntLMM.           regular trading session
                                                that CHX has a protected
                                                offer and one or more
                                                LMMs are included in the
                                                CHX protected offer.
11..........................  TimeCHXAskMissi  The total time during the
                               ng.              regular trading session
                                                that CHX does not have a
                                                protected offer.
12..........................  TimeCHXAskOnNBO  The total time during the
                                                regular trading session
                                                that CHX has a protected
                                                offer equal to the NBO
                                                price.
12L.........................  TimeCHXAskOnNBO  The total time during the
                               LMM.             regular trading session
                                                that CHX has a protected
                                                offer equal to the NBO
                                                price and one or more
                                                LMMs are included in the
                                                NBO price.

[[Page 49436]]

 
13..........................  TimeCHXAskNamed  The total time during the
                                                regular trading session
                                                that CHX has a protected
                                                offer equal to the NBO
                                                price and CHX is shown
                                                as the NBO.
13L.........................  TimeCHXAskNamed  The total time during the
                               LMM.             regular trading session
                                                that CHX has a protected
                                                offer equal to the NBO
                                                price and CHX is shown
                                                as the NBO and one or
                                                more LMMs are included
                                                in the NBO price.
14..........................  TimeCHXAskAlone  The total time during the
                                                regular trading session
                                                that CHX has a protected
                                                offer that is the only
                                                protected offer at the
                                                NBO price.
14L.........................  TimeCHXAskAlone  The total time during the
                               LMM.             regular trading session
                                                that CHX has a protected
                                                offer that is the only
                                                protected offer at the
                                                NBO price and one or
                                                more LMMs are included
                                                in the NBO price.
15..........................  TimeCHXNoQuote.  The total time during the
                                                regular trading session
                                                that CHX has neither a
                                                protected bid nor a
                                                protected offer.
16..........................  TimeCHXTwoSided  The total time during the
                                                regular trading session
                                                that CHX has both a
                                                protected bid and a
                                                protected offer.
17..........................  TimeNBBOUncross  The total time during the
                               ed.              regular trading session
                                                that the NBBO is not
                                                crossed.
18..........................  Time-            The time-weighted average
                               weightedCHXBid   difference between the
                               Differential.    CHX protected bid price
                                                and the NBB price when a
                                                CHX protected bid is
                                                present during the
                                                regular trading session.
19..........................  Time-            The time-weighted average
                               weightedCHXBid   CHX protected bid size
                               SizeOnNBB.       when the CHX protected
                                                bid price equals the NBB
                                                price during the regular
                                                trading session.
19L.........................  Time-            The time-weighted average
                               weightedCHXBid   LMM percentage of the
                               SizeOnNBBLMM.    CHX protected bid size
                                                when the CHX protected
                                                bid price equals the NBB
                                                price during the regular
                                                trading session.
20..........................  Time-            The time-weighted average
                               weightedCHXBid   CHX protected bid size
                               SizeWhenNamed.   when the CHX protected
                                                bid price equals the NBB
                                                price during the regular
                                                trading session.
20L.........................  Time-            The time-weighted average
                               weightedCHXBid   LMM percentage of CHX
                               SizeWhenNamed.   protected bid size when
                                                the CHX protected bid
                                                price equals the NBB
                                                price during the regular
                                                trading session.
21..........................  Time-            The time-weighted average
                               weightedCHXBid   LMM percentage of CHX
                               SizeWhenAlone.   protected bid size when
                                                the CHX protected bid is
                                                the only protected bid
                                                at the NBB price during
                                                the regular trading
                                                session.
21L.........................  Time-            The time-weighted average
                               weightedCHXBid   CHX protected bid size
                               SizeWhenAloneL   when the CHX protected
                               MM.              bid is the only
                                                protected bid at the NBB
                                                price during the regular
                                                trading session.
22..........................  Time-            The time-weighted average
                               weightedCHXPct   percentage of all
                               OfBid            protected quotations at
                               SizeWhenOnNBB.   the NBB price when the
                                                CHX protected bid price
                                                equals the NBB price.
23..........................  Time-            The time-weighted average
                               weightedCHXAsk   difference between the
                               Differential.    CHX protected offer
                                                price and the NBO price
                                                when a CHX protected
                                                offer is present during
                                                the regular trading
                                                session.
24..........................  Time-            The time-weighted average
                               weightedCHXAsk   CHX protected offer size
                               SizeOnNBO.       when the CHX protected
                                                offer price equals the
                                                NBO price during the
                                                regular trading session.
24L.........................  Time-            The time-weighted average
                               weightedCHXAsk   LMM percentage of CHX
                               SizeOnNBOLMM.    protected offer size
                                                when the CHX protected
                                                offer price equals the
                                                NBO price during the
                                                regular trading session.
25..........................  Time-            The time-weighted average
                               weightedCHXAsk   CHX protected offer size
                               SizeWhenNamed.   when the CHX protected
                                                offer price equals the
                                                NBO price during the
                                                regular trading session.
25L.........................  Time-            The time-weighted average
                               weightedCHXAsk   LMM percentage of CHX
                               SizeWhenNamedL   protected offer size
                               MM.              when the CHX protected
                                                offer price equals the
                                                NBO price during the
                                                regular trading session.
26..........................  Time-            The time-weighted average
                               weightedCHXAsk   CHX protected offer size
                               SizeWhenAlone.   when the CHX protected
                                                offer is the only
                                                protected offer at the
                                                NBO price during the
                                                regular trading session.
26L.........................  Time-            The time-weighted average
                               weightedCHXAsk   LMM percentage of CHX
                               SizeWhenAloneL   protected offer size
                               MM.              when the CHX protected
                                                offer is the only
                                                protected offer at the
                                                NBO price during the
                                                regular trading session.
27..........................  Time-            The time-weighted average
                               weightedCHXPct   percentage of all
                               OfAsk            protected quotation size
                               SizeWhenOnNBO.   at the NBO price when
                                                CHX protected offer
                                                price equals the NBO
                                                price.
28..........................  Time-            The time-weighted average
                               weightedCHX      difference between the
                               BBOSpread.       CHX protected bid price
                                                and the CHX protected
                                                offer price when CHX is
                                                displaying a two-sided
                                                protected quotation.
29..........................  Time-            The time-weighted average
                               WeightedNBBOSp   difference between the
                               read.            NBB price and the NBO
                                                price when a two-sided
                                                NBBO exists.
------------------------------------------------------------------------

2. Matched Trade Difference Statistics
    The matched trade difference statistics are designed to show how 
many shares were executed with the LEAD MM proposal implemented and 
also, hypothetically, how many shares would have been executed had the 
LEAD MM proposal not been implemented, which would be accomplished by 
assuming non-LEAD MM orders were executed immediately. In addition, 
these metrics are aggregated by specific PEV Range so that one can 
analyze how these executions vary during different periods of 
volatility. Each Qualified Order would be categorized into one of the 
following four groups: (1) Group 1: Orders with at least a partial 
execution upon initial processing by CHX's matching system

[[Page 49437]]

that would have had the same number of shares executed with or without 
LEAD; (2) Group 2: Orders with at least a partial execution upon 
initial processing by the matching system that had fewer executed 
shares with LEAD than it would have had without LEAD; (3) Group 3: 
Orders with at least a partial execution upon initial processing by the 
matching system that had more executed shares with LEAD than it would 
have had without LEAD; and (4) Group 4: Orders with no executed shares 
upon initial processing by the matching system with LEAD.\31\
---------------------------------------------------------------------------

    \31\ See proposed CHX Article 20, Rule 8(h)(5)(A).
---------------------------------------------------------------------------

    Match trade difference statistics would include, at a minimum, the 
following data fields, as applicable:

------------------------------------------------------------------------
          Field No.              Field name           Description
------------------------------------------------------------------------
1...........................  Symbol.........
1A..........................  Primary          C = Chicago (CH2).
                               Matching        N = New Jersey (NY4).
                               Location.
2...........................  TradeDate......
2A..........................  PEVRange.......  Blank = All regular
                                                session data.
                                               2 = PEV data greater than
                                                or equal to 2[sigma] and
                                                less than 3[sigma].
                                               3 = PEV data greater than
                                                or equal to 3[sigma] and
                                                less than 4[sigma].
                                               4= PEV data greater than
                                                or equal to 4[sigma] and
                                                less than 5[sigma].
                                               5 = PEV data greater than
                                                or equal to 5[sigma].
3...........................  InboundTradingA  The Trading Account of
                               ccount.          the inbound order.
3A..........................  NLMMs..........  The number of LMMs
                                                assigned to this Symbol
                                                on this Trade Date.
4...........................  CapacityCode...  This field would include
                                                the following codes:
                                               Code Meaning
                                               A Agency.
                                               L LEAD Market Maker.
                                               M Market Maker (not
                                                LEAD).
                                               P Principal.
                                               R Riskless Principal.
4A..........................  ExchangeCode...  Code Meaning
                                               N Not from an exchange.
                                               Y From an exchange.
5...........................  ISOCode........  Code Meaning
                                               N Not an ISO order.
                                               Y An ISO order.
6...........................  TimeInForceCode  Code Meaning
                                               0 DAY or equivalent.
                                               3 IOC.
                                               4 FOK.
                                               9 Other (includes
                                                auction).
7...........................  GROUP1_NO......  The number of orders
                                                (``NO'') in Group 1.
8...........................  GROUP1_NTS.....  The total number of
                                                shares on all orders
                                                (``NTS'') in Group 1.
9 \32\......................  GROUP1_NSE =     The total number of
                               GROUP1_NSEW.     shares immediately
                                                executed upon initial
                                                processing by the
                                                Matching System on all
                                                orders (``NSE'') in
                                                Group 1, which would
                                                always be equal to the
                                                total number of shares
                                                that would have been
                                                immediately executed
                                                upon initial processing
                                                by the Matching System
                                                had LEAD not been in
                                                effect (``NSEW'').
10..........................  GROUP2_NO......  NO in Group 2.
11..........................  GROUP2_NTS.....  NTS in Group 2.
12..........................  GROUP2_NSE.....  NSE in Group 2.
13..........................  GROUP2_NSEW....  NSEW on all orders in
                                                Group 2.
14..........................  GROUP3_NO......  NO in Group 3.
15..........................  GROUP3_NTS.....  NTS in Group 3.
16..........................  GROUP3_NSE.....  NSE in Group 3.
17..........................  GROUP3_NSEW....  NSEW on all orders in
                                                Group 3.
18..........................  GROUP4_NO......  NO in Group 4.
19..........................  GROUP4_NTS.....  NTS in Group 4.
                              GROUP4_NSE.....  This value would always
                                                be zero and not
                                                included.
20..........................  GROUP4_NSEW....  NSEW on all orders in
                                                Group 4.
21..........................  LMMProvideOrder  Frequency at which an LMM
                               ExecutedAheadO   provider order ranked on
                               fDelayedNonLMM   the CHX book executes
                               ProvideOrder.    ahead of a precedent non-
                                                LMM order (with the same
                                                side and price as the
                                                LMM order) that would
                                                have been immediately
                                                ranked on the CHX book
                                                if it had originated
                                                from a LEAD MM Trading
                                                Account, but was
                                                delayed.
------------------------------------------------------------------------

     
---------------------------------------------------------------------------

    \32\ NSE and NSEW exclude executions that resulted or would have 
resulted after initial processing by the matching system, such as 
when the orders are executed after being ranked on the CHX book. See 
Amendment No. 1, supra note 12, at 27.
---------------------------------------------------------------------------

3. Volume Statistics
    The volume statistics are designed to show how the adoption of the 
LEAD by market makers changes over time as well as how much volume 
these new market makers execute over time. Generally, this data will 
concisely indicate CHX's ability to attract new market makers to the 
LEAD MM program. For each LEAD MM Security, the Exchange would collect 
the following: (1) Daily number of LEAD MMs assigned; (2) total single-
sided volume on CHX; (3) total market wide

[[Page 49438]]

single-sided volume; \33\ (4) total single-sided volume on CHX 
attributed to LEAD MMs as providers; and (5) the primary matching 
location for the security.
---------------------------------------------------------------------------

    \33\ In calculating total market wide volume, the Exchange will 
exclude volume attributed to certain non-standard trades. See 
Amendment No. 1, supra note 12, at 27.
---------------------------------------------------------------------------

4. Variable Processing Delay Statistics
    The variable processing delay statistics are designed to indicate 
how variable delays are distributed between orders from LEAD MMs and 
other market participants. All exchanges experience delays to some 
degree during periods of high order volume. These statistics will 
highlight discrepancies in delays experienced by orders from LEAD MMs 
and other market participants. These statistics would be divided into 
three order origin categories: (1) Orders from CHX participants that 
are not LEAD MMs; (2) liquidity taking orders from LEAD MMs; and (3) 
undelayed liquidity providing orders from LEAD MMs. For each order 
origin category, the Exchange would collect the following: (1) The 
number of orders with a variable delay less than 50 microseconds, and 
the average delay time; (2) the number of orders with a variable delay 
equal to or greater than 50 microseconds but less than 150 
microseconds, and the average delay time; (3) the number of orders with 
a variable delay equal to or greater than 150 microseconds but less 
than 250 microseconds, and the average delay time; (4) the number of 
orders with a variable delay equal to or greater than 250 microseconds 
but less than 350 microseconds, and the average delay time; and (5) the 
number of orders with a variable delay equal to or greater than 350 
microseconds, and the average delay time.\34\
---------------------------------------------------------------------------

    \34\ See Amendment No. 2, supra note 13, at 10.
    \35\ Generally, ``Eligible Trades'' are executions attributed to 
single-sided orders received during the regular trading session when 
a two-sided and uncrossed NBBO disseminated by the relevant 
Securities Information Processor (``SIP NBBO'') was present. See 
proposed CHX Article 20, Rule 8(h)(8).
---------------------------------------------------------------------------

5. Effective Spread Statistics
    The effective spread statistics are designed to track both the CHX 
and overall market effective spreads per security for different PEV 
Ranges prior to and after the implementation of the pilot program. This 
data should highlight changes in market quality that occur during the 
pilot program. The effective spread statistics would include, at least, 
the following data fields, as applicable:

------------------------------------------------------------------------
          Field No.               Field name           Description
------------------------------------------------------------------------
1............................  Symbol.........
1A...........................  Primary          C = Chicago (CH2).
                                Matching        N = New Jersey (NY4).
                                Location.
2............................  Date...........
2A...........................  PEVRange.......  Blank = All regular
                                                 session data.
                                                2 = PEV data greater
                                                 than or equal to
                                                 2[sigma] and less than
                                                 3[sigma].
                                                3 = PEV data greater
                                                 than or equal to
                                                 3[sigma] and less than
                                                 4[sigma].
                                                4 = PEV data greater
                                                 than or equal to
                                                 4[sigma] and less than
                                                 5[sigma].
                                                5 = PEV data greater
                                                 than or equal to
                                                 5[sigma].
3............................  NLMMs..........  Number of LMMs assigned
                                                 to symbol.
4............................  TradeSizeBracke     1 = 1-499.
                                t.              2 = 500-1999.
                                                3 = 2000-4999.
                                                4 = 5000-9999.
                                                5 = 10,000 or more.
5............................  CHXNTrades.....  For Eligible Trades \35\
                                                 reported by CHX in
                                                 TradeSizeBracket, the
                                                 number of Eligible
                                                 Trades reported.
6............................  CHXNShares.....  For Eligible Trades
                                                 reported by CHX in
                                                 TradeSizeBracket,
                                                 number of shares
                                                 attributed to Eligible
                                                 Trades reported.
7............................  SW_CHX_Effectiv  For Eligible Trades
                                eSpread.         reported by CHX in
                                                 TradeSizeBracket: Share-
                                                 Weighted (2 *
                                                 [verbar]Trade Price--
                                                 SIP NBBO
                                                 Midpoint[verbar]).
8............................  SW_CHX_Effectiv  For qualified trades
                                eSpreadIndex.    reported by CHX in
                                                 TradeSizeBracket: CHX
                                                 Effective Spread
                                                 divided by the SIP NBBO
                                                 at Participant Trade
                                                 Report Time.
9............................  NMSNTrades.....  For Eligible Trades
                                                 reported by SIP, the
                                                 number of trades
                                                 reported.
10...........................  NMSNShares.....  For Eligible Trades
                                                 reported by SIP in
                                                 TradeSizeBracket, the
                                                 number of shares
                                                 reported.
11...........................  SW_NMS_Effectiv  For Eligible Trades
                                eSpread.         reported by SIP in
                                                 TradeSizeBracket: Share-
                                                 Weighted (2 *
                                                 [verbar]Trade Price--
                                                 SIP NBBO
                                                 Midpoint[verbar]).
12...........................  SW_NMS_Effectiv  For Eligible Trades
                                eSpreadIndex.    reported by SIP in
                                                 TradeSizeBracket: NMS
                                                 Effective Spread
                                                 divided by the SIP NBBO
                                                 at Participant Trade
                                                 Report Time.
------------------------------------------------------------------------

6. Timeline To Produce Pilot Data
    By no later than the end of the second month of the pilot program, 
the Exchange would provide the Commission with the Pilot Data for the 
first month of the pilot program.\36\ By the end of each month 
thereafter, the Exchange would provide the Commission with the Pilot 
Data from the previous month.\37\ By no later than the end of the sixth 
month of the pilot program, the Exchange would publish on its Web site 
an anonymized version of the Pilot Data and, by the end of each month 
thereafter, the Exchange would publish on its Web site an anonymized 
version of the Pilot Data, for each prior month of the pilot 
program.\38\ On the first day of the pilot program, the Exchange would 
publish on the CHX Web site each LEAD MM Security and the number of 
LEAD MMs assigned to each security, which would be updated daily during 
the duration of the pilot program.\39\ By no later than the end of the 
eighteenth month of the pilot program, the Exchange would provide the 
Commission with an analysis of the Pilot Data, which would be made 
publicly available.\40\
---------------------------------------------------------------------------

    \36\ See proposed CHX Article 20, Rule 8(h)(3)(B).
    \37\ See id.
    \38\ See proposed CHX Article 20, Rule 8(h)(3)(C).
    \39\ See id.
    \40\ See proposed CHX Article 20, Rule 8(h)(3)(A).

---------------------------------------------------------------------------

[[Page 49439]]

III. Discussion and Commission Findings

    The Commission has carefully reviewed the proposal and finds that 
approval of the proposed rule change, as modified by Amendments No. 1 
and No. 2, is consistent with the requirements of the Exchange Act and 
the rules and regulations thereunder applicable to a national 
securities exchange.\41\ In particular, as discussed below, the 
Commission finds that the proposal is consistent with: (1) Section 
6(b)(5) of the Exchange Act,\42\ which requires that the rules of a 
national securities exchange, among other things, be designed to 
prevent fraudulent and manipulative acts and practices, to promote just 
and equitable principles of trade, to remove impediments to and perfect 
the mechanism of a free and open market and a national market system, 
and, in general, to protect investors and the public interest; and not 
be designed to permit unfair discrimination between customers, issuers, 
brokers, or dealers; (2) Section 6(b)(8) of the Exchange Act,\43\ which 
requires that the rules of a national securities exchange not impose 
any burden on competition not necessary or appropriate in furtherance 
of the purposes of the Exchange Act; and (3) Section 11A of the 
Exchange Act, which articulates Congress' finding that, among other 
things, it is in the public interest and appropriate for the protection 
of investors and the maintenance of fair and orderly markets to assure: 
Economically efficient execution of securities transactions; fair 
competition among brokers and dealers, among exchange markets, and 
between exchange markets; the availability to brokers, dealers, and 
investors of information with respect to quotations for and 
transactions in securities; the practicability of brokers executing 
investors' orders in the best market; and an opportunity, consistent 
with the economically efficient execution of securities transactions 
and the practicability of brokers executing investors' orders in the 
best market, for investors' orders to be executed without the 
participation of a dealer.\44\
---------------------------------------------------------------------------

    \41\ In approving the proposed rule change, as modified by 
Amendments No. 1 and No. 2, the Commission has considered its impact 
on efficiency, competition, and capital formation. 15 U.S.C. 78c(f). 
See infra Section III.A.
    \42\ 15 U.S.C. 78f(b)(5).
    \43\ 15 U.S.C. 78f(b)(8).
    \44\ 15 U.S.C. 78k-1(a)(1)(C).
---------------------------------------------------------------------------

    The Commission received sixteen comment letters from ten commenters 
on the proposal and two response letters from the Exchange.\45\ Two 
commenters express support for the proposal,\46\ and eight commenters 
express opposition to, or concern regarding, the proposal.\47\
---------------------------------------------------------------------------

    \45\ See supra notes 5 and 8.
    \46\ See Virtu Letter, supra note 5; and CTC Trading Group 
Letter, supra note 5.
    \47\ See XR Securities Letter, supra note 5; FIA PTG Letter, 
supra note 5; Hudson River Trading Letter, supra note 5; Leuchtkafer 
Letter, supra note 5; Citadel Letter, supra note 5; Healthy Markets 
Letter, supra note 5; NYSE Letter, supra note 5; and SIFMA Letter, 
supra note 5.
---------------------------------------------------------------------------

A. Section 6 of the Exchange Act

    Section 6(b)(5) of the Exchange Act requires that the rules of a 
national securities exchange must be, among other things, not designed 
to permit unfair discrimination between customers, issuers, brokers, or 
dealers.\48\ Certain commenters argue that the proposed rule change 
would provide an unfair advantage to LEAD MMs over other CHX 
participants.\49\ In particular, commenters argue that by not 
subjecting LEAD MMs' liquidity providing orders and related cancels to 
the LEAD, the proposal would unfairly discriminate in favor of the LEAD 
MMs.\50\ Two commenters state that the LEAD would unfairly discriminate 
against market participants that are primarily liquidity takers, such 
as retail investors or institutions.\51\ A commenter argues that the 
discriminatory nature of the LEAD would harm market participants when 
they seek to access liquidity provided by a LEAD MM as the LEAD MM may 
alter its price while incoming orders are being delayed.\52\ Another 
commenter expresses concern that the LEAD would frustrate strategies 
that involve taking prices across multiple venues by giving extra time 
to LEAD MMs to pull their quotes in the middle of a multi-venue 
order.\53\
---------------------------------------------------------------------------

    \48\ 15 U.S.C. 78f(b)(5).
    \49\ See FIA PTG Letter, supra note 5, at 3; XR Securities 
Letter, supra note 5, at 1; SIFMA Letter, supra note 5, at 2; 
Leuchtkafer Letter, supra note 5, at 4 (asserting that the LEAD 
would only benefit market participants who become LEAD MMs and 
subscribe to the Chicago Mercantile Exchange's (``CME'') data 
feeds); Hudson River Trading Letter, supra note 5, at 2; and Citadel 
Letter, supra note 5, at 3.
    \50\ See FIA PTG Letter, supra note 5, at 2-3; Leuchtkafer 
Letter, supra note 5, at 4-5; Citadel Letter, supra note 5, at 3-4; 
Hudson River Trading Letter, supra note 5, at 5-6. See also XR 
Securities Letter, supra note 5, at 2 (stating that the LEAD would 
give LEAD MMs an ``unfair advantage''); Healthy Markets Letter, 
supra note 5, at 4 (stating that the proposal would ``venture into 
unchartered discriminatory waters, and offers little explanation or 
justification''); and SIFMA Letter, supra note 5, at 5 (asserting 
that any intentional delay should be universally applied to all 
market participants in a non-discriminatory manner).
    \51\ See Citadel Letter, supra note 5, at 5-6; Leuchtkafer 
Letter, supra note 5, at 4.
    \52\ See Hudson River Trading Letter, supra note 5, at 2.
    \53\ See FIA PTG Letter, supra note 5, at 3.
---------------------------------------------------------------------------

    In addition, certain commenters express concern regarding the 
discriminatory effects of the LEAD on non-LEAD MM liquidity 
providers.\54\ For example, one commenter asserts that the LEAD would 
benefit LEAD MMs by making it easier to quote better prices in larger 
size but would in turn make it more difficult for non-LEAD MM liquidity 
providers to quote better prices at larger size.\55\ Similarly, another 
commenter argues that the LEAD will prevent non-LEAD MM liquidity 
providers, who the commenter characterize as being not being 
informationally advantaged by the speed bump, from providing the best 
possible market they otherwise could.\56\
---------------------------------------------------------------------------

    \54\ See Hudson River Trading Letter, supra note 5, at 1-2; XR 
Securities Letter, supra note 5, at 3; Citadel Letter, supra note 5, 
at 3; Leuchtkafer Letter 2, supra note 5, at 8.
    \55\ See Hudson River Trading Letter, supra note 5, at 1-2.
    \56\ See XR Securities Letter, supra note 5, at 3.
---------------------------------------------------------------------------

    Two commenters believe that the proposal will incentivize LEAD MMs 
to enhance displayed liquidity by entering larger orders at better 
prices.\57\ Another commenter states that it believes that this will 
benefit institutional investors.\58\ One commenter states that it 
believes that the proposal would benefit the public interest and 
protect investors by encouraging superior displayed liquidity from 
qualified market makers.\59\ In addition, these commenters believe that 
the proposed minimum performance standards are appropriate given the 
benefits that LEAD MMs would be afforded.\60\ One of those commenters 
states its belief that market maker incentives should be consistent 
with the risk inherent with truly affirmative quoting and trading 
obligations, and asserts that the minimum performance standards meet 
such standard.\61\ That commenter believes that the proposal would 
appropriately link heightened quoting and trading requirements with the 
ability to adequately manage the heightened risks of such 
requirements.\62\ Another commenter agrees with CHX that the minimum 
performance standards are substantial and proportionate to the 
advantages that LEAD MMs will receive.\63\ The commenter states that 
historically, other national securities exchanges have balanced market 
maker benefits with

[[Page 49440]]

responsibilities, and asserts that requiring market makers to comply 
with substantial quoting requirements and benefits that are 
proportionate to their obligations, which it believes the LEAD would 
provide for, is consistent with the Exchange Act.\64\ In addition, that 
commenter states its views that the LEAD would reduce unfair 
discrimination by providing an appropriate trade-off between the 
benefits and responsibilities of LEAD MMs.\65\ Other commenters express 
concern that the minimum performance standards may not be adequate to 
justify the benefits that LEAD MMs would receive under the 
proposal.\66\ In addition, one commenter suggests that LEAD MMs should 
have specific responsibilities around the open, close, and in volatile 
markets.\67\
---------------------------------------------------------------------------

    \57\ See Virtu Letter, supra note 5, at 2; and CTC Trading 
Letter, supra note 5, at 3.
    \58\ See Virtu Letter, supra note 5, at 2.
    \59\ See CTC Trading Letter, supra note 5, at 5.
    \60\ See Virtu Letter, supra note 5, at 2; and CTC Trading 
Letter, supra note 5, at 4.
    \61\ See Virtu Letter, supra note 5, at 2.
    \62\ See id.
    \63\ See CTC Trading Letter, supra note 5, at 4.
    \64\ See id.
    \65\ See id. at 3.
    \66\ See Leuchtkafer Letter, supra note 5, at 4-5; NYSE Letter, 
supra note 5, at 4-5 (stating that the benefit is 
``disproportionate'' to the proposed standards); Citadel Letter, 
supra note 5, at 2 (asserting that the minimum performance standards 
appear to be ``largely immaterial in substance'' and the benefits of 
the LEAD would be ``entirely disproportionate'' to these 
obligations). Two commenters suggest that CHX should provide data 
regarding the materiality of the minimum performance standards, how 
they will improve market quality, and whether CHX market makers 
already satisfy these criteria. See Citadel Letter, supra note 5, at 
3; and Healthy Markets Letter, supra note 5, at 4. Two other 
commenters express concern that the proposal would be unfairly 
discriminatory because only firms selected by CHX as LEAD MMs would 
be given the speed advantage. See XR Securities Letter, supra note 
5, at 1; and FIA PTG Letter, supra note 5, at 2. In addition, one 
commenter raises concern that LEAD MMs would be named based on 
subjective criteria. See Citadel Letter, supra note 5, at 4.
    \67\ See Leuchtkafer Letter, supra note 5, at 5.
---------------------------------------------------------------------------

    The Exchange argues that the proposed rule change is not designed 
to permit unfair discrimination. While the Exchange acknowledges that 
the LEAD is discriminatory by design,\68\ the Exchange asserts that the 
proposed discrimination is fair because the advantage afforded to LEAD 
MMs is conditioned upon LEAD MMs satisfying the proposed minimum 
performance standards,\69\ which, according to the Exchange, are 
substantial and proportionate to the benefits that the LEAD would 
confer on LEAD MMs.\70\ The Exchange notes that it has little to no 
resting liquidity in the vast majority of NMS securities traded at CHX, 
which has resulted in immaterial trading volume in all but a handful of 
securities.\71\ The Exchange states that the LEAD Rules would address 
this lack of resting liquidity in NMS securities on CHX by providing 
LEAD MMs with a risk management tool that would incentivize them to 
display larger orders at aggressive prices.\72\ To the extent the LEAD 
would incentivize LEAD MMs to improve the price and size of the 
prevailing NBBO, the Exchange argues that LEAD could reduce transaction 
costs for retail investors, as wholesale broker-dealers price the 
majority of the retail orders they handle off the prevailing NBBO, and 
for institutional investors, as the execution costs for their orders 
would be reduced if the average NBBO spreads are narrowed.\73\ The 
Exchange, therefore, contends that the LEAD would result in meaningful 
enhancements to market quality in securities that are actively traded 
at CHX and new aggressive markets in securities that are currently not 
actively traded at CHX.\74\
---------------------------------------------------------------------------

    \68\ See, e.g., CHX Letter, supra note 5, at 10-11.
    \69\ See Notice, supra note 3, 82 FR at 11269.
    \70\ See CHX Letter, supra note 5, at 6.
    \71\ See Amendment No. 1, supra note 12, at 8.
    \72\ See id.
    \73\ See CHX Letter 2, supra note 8, at 9-10.
    \74\ See Amendment No. 1, supra note 12, at 8.
---------------------------------------------------------------------------

    Further, the Exchange states that the minimum performance standards 
are appropriate given the requirements imposed upon and benefits 
incurred by market makers on other exchanges.\75\ Specifically, the 
Exchange compares the proposed obligations of its LEAD MMs to those of 
the New York Stock Exchange, LLC (``NYSE'') Designated Market Makers 
(``DMMs''), which receive execution parity rights in return for minimum 
performance standards that CHX states are similar to CHX's proposed 
minimum performance standards.\76\ The Exchange asserts that, while DMM 
parity merely encourages DMMs to join the NBBO, the LEAD would 
incentivize LEAD MMs to improve the price and size of the NBBO by: 
Minimizing the risk that LEAD MMs' quotes would be ``picked off'' by 
latency arbitrageurs; and providing, through CHX's existing market data 
revenue rebates program, rebates for quotes that remain on the CHX book 
for at least one second.\77\
---------------------------------------------------------------------------

    \75\ See CHX Letter, supra note 5, at 6.
    \76\ See CHX Letter 2, supra note 8, at 6-7.
    \77\ See id.
---------------------------------------------------------------------------

    In response to the comments requesting data showing that the 
minimum performance standards are appropriate,\78\ the Exchange 
presents data \79\ that it believes demonstrates that the minimum 
performance standards would be substantial relative to historical CHX 
data. The Exchange states that the data shows that the majority of CHX 
participants would not have passed the proposed minimum performance 
standards in January 2016 or February 2017 for the securities that 
trade on CHX,\80\ and that the most active SPDR S&P 500 trust exchange-
traded fund (``SPY'') liquidity providers in January 2016 would not 
have met the standards as of February 2017.\81\ In addition, CHX 
believes that the LEAD MM selection criteria, which would allow CHX to 
consider various factors in assessing the ability of an applicant to 
meaningfully contribute to market quality as a LEAD MM,\82\ are 
designed to forecast how well an applicant would perform as a LEAD 
MM.\83\ CHX notes that the criteria are virtually identical to the 
criteria under Bats BZX's rules for its lead market maker program.\84\
---------------------------------------------------------------------------

    \78\ See supra note 66.
    \79\ See CHX Letter 2, supra note 8, at 7-9.
    \80\ See id.
    \81\ See id. at 9.
    \82\ The factors the Exchange may consider in selecting a LEAD 
MM include, but are not limited to, experience with making markets 
in securities, adequacy of capital, willingness to promote the 
Exchange as a marketplace, issuer preference, operational capacity, 
support personnel, and history of adherence to Exchange rules and 
securities laws. See proposed CHX Article 16, Rule 4(f)(3)(A).
    \83\ See CHX Letter, supra note 5, at 11-12.
    \84\ See id.
---------------------------------------------------------------------------

    With regard to a commenter's concern that the LEAD would frustrate 
strategies that involve taking prices across multiple venues, the 
Exchange asserts that a market participant who currently utilizes 
sophisticated order routing logic to successfully execute multi-venue 
orders could modify its logic to account for the 350-microsecond 
intentional delay at CHX and thereby eliminate any incremental 
information leakage.\85\ In addition, the Exchange believes that 350 
microseconds is long enough to minimize the effectiveness of latency 
arbitrage strategies, yet short enough as to not provide liquidity 
providers with an unfair advantage, and asserts that the 350 
microsecond delay is appropriate both for New York and Chicago data 
centers.\86\
---------------------------------------------------------------------------

    \85\ See id. at 11.
    \86\ See CHX Letter 2, supra note 8, at 13-14.
---------------------------------------------------------------------------

    For the reasons discussed below, the Commission believes that the 
proposal to implement the LEAD and the minimum performance standards is 
not designed to permit unfair discrimination under Section 6(b)(5) of 
the Exchange Act. Liquidity providers that display limit orders are the 
primary source of public price discovery.\87\ The Commission emphasizes 
the importance of displayed limit orders as they typically set quoted 
spreads, supply liquidity, and in general establish the public 
``market'' for a stock.\88\ To establish the public market for a stock,

[[Page 49441]]

displayed limit orders make the first move by being displayed rather 
than executed and therefore provide a ``free option'' for other market 
participants to trade a stock by submitting marketable orders and 
taking the liquidity supplied by the displayd limit orders.\89\ The 
Commission notes that the quality of execution for marketable orders, 
which, in turn, trade with displayed liquidity, depends to a great 
extent on the quality of markets established by displayed limit orders 
(i.e., the narrowness of quoted spreads and the available liquidity at 
various price levels).\90\ Accordingly, the quality of execution for 
marketable orders is directly affected by the willingness of liquidity 
providers to take the execution risk associated with providing 
displayed liquidity. To the extent liquidity providers can be 
incentivized to display better prices or larger size, the market 
quality for liquidity taking orders should improve.
---------------------------------------------------------------------------

    \87\ Securities Exchange Act Release No. 51808 (June 9, 2005), 
70 FR 37496, 37526 (June 29, 2005) (``Regulation NMS Adopting 
Release'').
    \88\ See id.
    \89\ See id. at 37526-37527.
    \90\ See id. at 37526.
---------------------------------------------------------------------------

    National securities exchanges have historically discriminated among 
their members by, among other things, providing various advantages to 
members that register as market makers and thereby commit to certain 
undertakings designed to enhance market quality.\91\ CHX's proposal 
discriminates in favor of LEAD MMs, by not subjecting LEAD MM liquidity 
providing orders and related cancels to the LEAD, to provide LEAD MMs 
with a risk management tool that should incentivize LEAD MMs to post 
larger size and more aggressively-priced quotes on CHX. The proposal 
also imposes heightened quoting and new transaction obligations on the 
LEAD MMs to obtain this benefit.\92\ LEAD MMs therefore have committed 
to provide a specific level of liquidity on the Exchange on an ongoing 
basis, unlike other liquidity providers or other CHX participants. 
These obligations will require LEAD MMs to take on greater risk, and 
they in turn will be provided a tool--the LEAD--to help them more 
effectively manage that risk. In this way, the difference in benefits 
is designed to reflect the different obligations of the parties. The 
Commission therefore believes that these minimum performance standards, 
particularly the quoting and transaction thresholds, are meaningful 
obligations that are proportionate to and balanced with the advantages 
conferred upon LEAD MMs.
---------------------------------------------------------------------------

    \91\ See, e.g., NYSE Rule 104 (Dealings and Responsibilities of 
DMMs).
    \92\ Presently, liquidity providers on CHX are not obligated to 
quote or transact at levels consistent with the minimum performance 
standards as each LEAD MM would be under the proposal.
---------------------------------------------------------------------------

    The Commission also notes that: (1) The minimum performance 
standards are quantitive standards that the Exchange can objectively 
measure to determine whether LEAD MMs are in compliance, which will 
allow the Exchange to apply them consistently to ensure that similarly 
situated parties are treated equally; and (2) the LEAD MM selection 
process is substantially similar to the market maker selection 
processes previously approved by the Commission and implemented on 
other national securities exchanges.\93\
---------------------------------------------------------------------------

    \93\ Compare proposed CHX Article 16, Rule 4(f)(2) with Bats BZX 
Rule 11.8(e)(2); NYSE Arca Rule 7.22-E; CBOE Rule 8.83.
---------------------------------------------------------------------------

    With respect to one commenter's concern that the LEAD would 
frustrate strategies that involve taking prices across multiple 
venues,\94\ the Commission believes that a market participant could 
modify its routing strategies to address the 350-microsecond LEAD and 
eliminate any added risk of information leakage. The Commission notes 
that, in its second comment letter,\95\ the commenter did not refute 
CHX's rebuttal.\96\
---------------------------------------------------------------------------

    \94\ See supra note 53 and accompanying text.
    \95\ See FIA PTG Letter 2, supra note 8.
    \96\ See supra note 85 and accompanying text.
---------------------------------------------------------------------------

    For these reasons, the Commission finds that the proposed rule 
change, as modified by Amendments No. 1 and No. 2, is consistent with 
the requirement of Section 6(b)(5) of the Exchange Act that the rules 
of a national securities exchange be not designed to permit unfair 
discrimination between customers, issuers, brokers, or dealers.
    Section 6(b)(8) of the Exchange Act requires that the rules of a 
national securities exchange not impose any burden on competition not 
necessary or appropriate in furtherance of the purposes of the Exchange 
Act. One commenter asserts that the LEAD would unduly burden 
competition between liquidty providers and firms that access displayed 
prices on CHX.\97\ This commenter states its view that benefits 
provided to market makers create a disparity that harms competition 
among market participants and leads to greater intermediation as the 
benefits are available only to certain intermediaries.\98\ This 
commenter believes that the LEAD may make it easier for LEAD MMs to 
quote better prices in larger size, but would make it more difficult 
for non-LEAD MMs to do so.\99\ Another commenter expresses concern that 
the LEAD would alter the competitive balance in the market by 
benefitting only LEAD MMs, as LEAD MMs would effectively be given extra 
time to determine whether to remain firm or cancel/modify a displayed 
quotation in order to avoid unfavorable executions.\100\
---------------------------------------------------------------------------

    \97\ See Hudson River Trading Letter, supra note 5, at 8.
    \98\ See id. at 1. As discussed above, the Commission believes 
that the discriminatory aspect of the LEAD is fair for the reasons 
discussed above. See supra Section III.A.
    \99\ See Hudson River Trading Letter, supra note 5, at 1.
    \100\ See Citadel Letter, supra note 5, at 4.
---------------------------------------------------------------------------

    The Exchange believes that the LEAD would result in increased 
competition with liquidity providers of other markets, which furthers a 
primary goal of Regulation NMS, as such liquidity providers would have 
to provide enhanced liquidity or risk losing market share to LEAD 
MMs.\101\ The Exchange also responds that the LEAD would not create a 
new competitive balance as much as it would correct a competitive 
imbalance that serves to discourage displayed liquidity and is in 
itself an undue burden on competition.\102\
---------------------------------------------------------------------------

    \101\ See CHX Letter 2, supra note 8, at 15.
    \102\ See id. at 17.
---------------------------------------------------------------------------

    The Commission finds that the LEAD Rules are consistent with 
Section 6(b)(8) of the Exchange Act because they do not impose any 
burden on competition not necessary or appropriate in furtherance of 
the purposes of the Exchange Act. The Commission believes that, while 
the proposal will provide a benefit to LEAD MMs by not subjecting their 
liquidity providing orders and related cancels to the LEAD, such 
benefit is appropriate in exchange for their commitment to provide 
meaningful liquidity on the Exchange as required by the minimum 
performance standards. By providing a mechanism for LEAD MMs to update 
their displayed quotations without delay, the LEAD is designed to 
incentivize LEAD MMs to improve the price and size of their quotes on 
CHX thereby improving market quality to the ultimate benefit of 
liquidity takers. The Commission notes that improvements to CHX's 
quotations would benefit non-CHX market participants to the extent such 
quotations result in tightening the NBBO spread, as a number of 
execution venues price transactions off the NBBO. For these reasons, 
the Commission believes that the balance between the benefit to LEAD 
MMs afforded by the LEAD and their obligations under the minimum 
performance standards appropriately furthers the purposes of the 
Exchange Act.
    One commenter believes that, to assess the proposed rule change's 
impact on competition, the Exchange

[[Page 49442]]

should also collect and disclose order book queue metrics.\103\ That 
commenter also asserts that to assess the ``anti-competitive effect'' 
of shifting latency arbitrage costs to non-LEAD MM participants, CHX 
should collect and disclose: (1) The number of times a non-LEAD MM's 
resting order was executed within 350 microseconds of any LEAD MM's 
order cancellation at the same price or better, and (2) the number of 
times any LEAD MM's order was cancelled while any marketable contra sat 
in the LEAD queue.\104\ While the Exchange will not be collecting the 
statistitics that the commenter suggests, the Exchange will be 
collecting other data that are designed to allow the Exchange and the 
Commission to assess the impact of the proposal on competition. 
Specifically, the Exchange will collect and publish matched trade 
difference statistics. These metrics will measure the volume executed 
hypothetically without LEAD and the volume executed in reality with 
LEAD, and will be grouped by different PEV Range values such that 
analysis can be conducted to determine how much, if at all, this cost 
increases during periods of excessive volatility. This data will allow 
the Exchange and the Commission to examine the effect on competition 
that the commenter suggests by determining the difference between the 
hypothetical and actual executed volume, and focusing specifically on 
periods of higher volatility. This difference, combined with type of 
market participant who provided liquidity, should shed light on how 
competition has been affected. Also, analysis of this data will allow 
the Commission to assess and weigh the degree to which latency 
arbitrage costs are being borne by non-LEAD liquidity providers and if 
those costs outweigh any of the displayed benefits. With respect to the 
commenter's suggestion that the Exchange also provide order book queue 
statistics,\105\ it is not sufficiently clear what benefit such 
statistics would provide.\106\
---------------------------------------------------------------------------

    \103\ See Leuchtkafer Letter 5, supra note 8, at 1.
    \104\ See id. at 2.
    \105\ See supra note 103 and accompanying text.
    \106\ Under CHX's execution rules, a non-LEAD MM order that was 
received by the Exchange before a LEAD MM order would have time 
priority over the LEAD MM order once it is ranked in the Exchange's 
order book notwithstanding the delay imposed by the LEAD to reach 
the Exchange's order book. See CHX Article 20, Rule 8(b). See also 
Amendment No. 1, supra note 12, at 7-8.
---------------------------------------------------------------------------

    The Commission's views of the proposal's consistency with Sections 
6(b)(5) and 6(b)(8) of the Exchange Act are informed by its views that 
the proposal is appropriately designed to enhance market quality by 
striking a balance between the new obligations for LEAD MMs and the 
accompanying benefits. Several commenters discuss the potential impact 
of the proposal on displayed liquidity and price discovery as well as 
market quality in general.\107\ Two commenters assert that the LEAD 
would enable liquidity providers to improve displayed liquidity.\108\ 
One commenter states that LEAD MMs will be more inclined to post larger 
orders at better prices in assigned securities on CHX with confidence 
that their orders will not be ``picked off'' by speed arbitrageurs. The 
commenter believes this will improve displayed liquidity available to 
institutional investors, and all investors, without limiting the 
ability of retail and institutional investors to access liquidity.\109\ 
Another commenter states its views that the LEAD will reduce adverse 
selection risk and incentivize market makers to provide more liquidity, 
leading to deeper quotes and tighter bid-ask spreads,\110\ which would 
reduce the costs of investors.\111\
---------------------------------------------------------------------------

    \107\ See Virtu Letter, supra note 5, at 2; CTC Trading Letter, 
supra note 5, at 3; Healthy Markets Letter, supra note 5, at 4-5; XR 
Securities Letter, supra note 5, at 2; FIA PTG Letter, supra note 5, 
at 4; SIFMA Letter, supra note 5, at 6; Citadel Letter, supra note 
5, at 3; and Hudson River Trading Letter supra note 5, at 6.
    \108\ See Virtu Letter, supra note 5, at 2; and CTC Trading 
Letter, supra note 5, at 3.
    \109\ See Virtu Letter, supra note 5, at 2.
    \110\ See CTC Trading Letter, supra note 5, at 3.
    \111\ See id. at 6.
---------------------------------------------------------------------------

    Six other commenters express concern that the LEAD could 
deteriorate the accessibility of quotes and overall market 
quality.\112\ Two commenters predict that, while overall spreads and 
liquidity may improve, the increased liquidity would be more 
conditional and less accessible.\113\ In addition, one commenter 
predicts that spreads made by ``real'' liquidity providers--as 
distinguished from ``fleeting'' quotes submitted by LEAD MMs--would 
widen.\114\ Several commenters express concern about the potential 
transaction costs that the LEAD could impose on investors.\115\
---------------------------------------------------------------------------

    \112\ See Healthy Markets Letter, supra note 5, at 4-5; XR 
Securities Letter, supra note 5, at 2; FIA PTG Letter, supra note 5, 
at 4; SIFMA Letter, supra note 5, at 6; Citadel Letter, supra note 
5, at 3; and Hudson River Trading Letter supra note 5, at 6. In 
addition, as CHX is the only exchange to share quote revenue with 
its members, three commenters assert that the LEAD would result in 
unfair allocation of consolidated market data revenue by generating 
an increase in quoting, but not necessarily trading, on the 
Exchange. See Hudson River Trading Letter, supra note 5, at 7; 
Citadel Letter, supra note 5, at 6; and SIFMA Letter, supra note 5, 
at 7. The Securities Information Processors (``SIPs'') collect fees 
from subscribers for trade and quote tape data received from trading 
centers and reporting facilities (collectively ``SIP Participants'') 
and, after deducting the cost of operating each tape, the SIPs 
allocate profits among the SIP Participants (including CHX) on a 
quarterly basis. CHX shares with its members a portion of the 
revenue it receives that is attributed to members' quote activity. 
See Securities Exchange Act Release No. 70546 (September 27, 2013), 
78 FR 61413 (October 3, 2013) (SR-CHX-2013-18). The Exchange 
responds that the LEAD would not encourage non-bona fide quote 
activity for the purpose of earning rebates because quotes cancelled 
within the 350-microsecond LEAD would not be eligible for market 
data revenue rebates, and cancellation of such quotes could result 
in the CHX participant being assessed an order cancellation fee. See 
CHX Letter, supra note 5, at 10.
    \113\ See Hudson River Trading Letter, supra note 5, at 6; and 
Citadel Letter, supra note 5, at 3. Another commenter similarly 
predicted that the LEAD would result in complex trickle-down impacts 
on the NBBO including CHX quotes that would not be accessible. See 
FIA PTG Letter, supra note 5 at 3.
    \114\ See XR Securities Letter, supra note 5, at 2. See also FIA 
PTG Letter, supra note 5, at 4 (expressing concern that non-LEAD MMs 
would be forced to widen their bid/ask spreads across the 
marketplace).
    \115\ See FIA PTG Letter, supra note 5, at 4 (stating that LEAD 
MMs may be forced to widen their bid/ask spreads, which would be 
costly to investors); Leuchtkafer Letter 2, supra note 8, at 8 
(asserting that the LEAD would result to increased transaction costs 
for retail and institutional investors, who would be exposed to 
adverse selection); XR Securities Letter, supra note 5, at 1 
(asserting that the LEAD is likely to result in higher trading costs 
for the investing public); Hudson River Trading Letter, supra note 
5, at 6 (asserting that providing LEAD MMs the ability to back away 
from quoted prices and sizes would increase the cost of finding 
liquidity); SIFMA Letter, supra note 5, at 8 (stating that the 
proposal could result in increased market complexity and costs); and 
Citadel Letter 2, supra note 5, at 3 (asserting that the LEAD would 
expose liquidity providers (other than LEAD MMs) to adverse 
selection, which would raise costs for providing liquidity).
---------------------------------------------------------------------------

    In addition, one commenter believes that the LEAD could result in 
institutional migration to dark venues, which could reduce market 
quality over time.\116\ The commenter also asserts that the LEAD could 
result in volatility during stressed trading conditions.\117\ In the 
OIP, the Commission asked about how the proposal would affect price 
volatility on the Exchange.\118\ In response, the Exchange states that, 
although LEAD MM quotes would likely widen during stressed trading 
conditions, LEAD MMs would be subject to the minimum performance 
standards, which may have a mitigating effect on price volatility.\119\
---------------------------------------------------------------------------

    \116\ See Leuchtkafer Letter 2, supra note 8, at 9.
    \117\ See id. at 7-8.
    \118\ See OIP, supra note 7, 82 FR at 24416.
    \119\ See CHX Letter 2, supra note 8, at 9. The Exchange also 
asserts that current circuit breakers, include Limit Up-Limit Down, 
provide an adequate market-wide remedy for extraordinary market 
volatility. See id.
---------------------------------------------------------------------------

    The Exchange asserts that the proposal would provide LEAD MMs with 
a risk management tool that would encourage LEAD MMs to display larger 
orders at aggressive prices, which should provide meaningful

[[Page 49443]]

enhancements to market quality.\120\ The Exchange explains that, 
currently, it has less than one-percent market share in NMS securities 
and little to no resting liquidity in the vast majority of NMS 
securities.\121\ The Exchange believes that the proposal would enhance 
market quality across all securities traded on CHX.\122\ In particular, 
CHX believes that the LEAD Rules would significantly enhance market 
quality for securities that are actively traded on CHX and attract 
robust markets in securities that are currently not actively traded at 
CHX.\123\ In addition, the Exchange asserts that the LEAD would reduce 
the cost of LEAD MMs providing liquidity, which the Exchange believes 
would result in more efficient price discovery for retail and 
institutional investors.\124\
---------------------------------------------------------------------------

    \120\ See Amendment No. 1, supra note 12, at 8.
    \121\ See id.
    \122\ See id.
    \123\ See id.
    \124\ See CHX Letter, supra note 5, at 4. With respect to retail 
customers, the Exchange states that wholesalers base execution price 
on the NBBO and that a slight narrowing of the average NBBO, which 
the Exchange predicts will occur because of the LEAD, will favorably 
affect the pricing that wholesalers provide for retail orders, at 
the expense of the wholesalers' bottom line. See CHX Letter 2, supra 
note 8, at 10. The Exchange predicts that, because wholesalers 
prefer to trade at or inside the NBBO, when the NBBO is narrowed, 
wholesalers would either have to choose among matching the better 
price, improving the better price, or routing the customer order to 
the better price, and the Exchange asserts that any of these 
outcomes will benefit retail customers. See id. at 15. The Exchange 
states that institutional order flow is not directed to wholesalers, 
and some institutional orders are executed during opening and 
closing auctions. See id. at 10. The LEAD would not impact the cost 
of those transactions, according to the Exchange. But the Exchange 
also states that: (1) Most institutional orders are broken down into 
much smaller ``child orders,'' which are executed in the marketplace 
using a variety of algorithms; (2) in general, execution costs for 
such child orders would be reduced when average NBBO spreads are 
narrowed; and therefore (3) to the extent that the LEAD increases 
competition among orders and narrows the average NBBO spread, 
institutional order flow would also experience lower execution 
costs. See id. With respect to an institutional investor's 
experience taking liquidity, CHX states that institutional investors 
would have the same experience as any other liquidity taker and that 
the LEAD would not have a materially negative effect on liquidity 
takers not engaged in latency arbitrage strategies. See id. at 11.
---------------------------------------------------------------------------

    The Exchange also asserts that there is no evidence that the 
proposal would result in CHX quotes being less accessible to retail or 
institutional buyers and sellers,\125\ and, in fact, the heightened 
quoting and trading obligations for LEAD MMs would ensure that CHX 
quotes remain reliable and accessible.\126\ The Exchange also states 
its view that: (1) A market participant that places an order to take 
liquidity posted on any national securities exchange today may find 
that the liquidity is not be present by the time the order reaches the 
exchange's limit order book; (2) this has nothing to do with the 
presence of intentional delays; and therefore (3) the LEAD would not 
render CHX quotes any more ``fleeting'' than they are today.\127\
---------------------------------------------------------------------------

    \125\ See CHX Letter, supra note 5, at 4-5.
    \126\ See Amendment No. 1, supra note 12, at 12.
    \127\ See CHX Letter 2, supra note 8, at 12. In the OIP, the 
Commission raised several questions about the impact that the LEAD 
would have on market quality. In particular, the Commission raised 
questions about volatility during stressed trading conditions, 
whether the proposed rule change would increase displayed liquidity 
on the Exchange, and whether liquidity provided by LEAD MMs would be 
``fleeting'' and how significant such ``fleeting'' liquidity would 
be. See OIP, supra note 7, 82 FR at 24416.
---------------------------------------------------------------------------

    As discussed above, the Commission believes that the LEAD Rules are 
reasonably designed to incentivize LEAD MMs to post larger size and 
more aggressively-priced quotes on CHX, which in turn could lead to 
broader enhancements to market quality by improving the NBBO and 
increasing quote competition. The extremely short access delay will 
allow LEAD MMs to adjust their quotations in response to changing 
market conditions and thereby reduce their exposure to losses from 
professional traders with micro-second speed advantages. As a result, 
LEAD MMs should be more inclined to post larger displayed orders at 
better prices on CHX with greater confidence that they will have an 
opportunity to update their quotes and therefore avoid an execution at 
a stale price or size. The reduction in risk in these limited 
conditions should allow LEAD MMs to provide more liquidity and narrower 
spreads throughout much of the trading day.
    The Commission recognizes that commenters also were concerned that 
a 350 microsecond delay could reduce access to CHX quotations and 
thereby detract from market quality in a variety of contexts. The 
Commission believes, however, that the LEAD is reasonably designed to 
impact access only to CHX quotations by market participants racing to 
respond to symmetric information about market conditions, while the 
potential benefits generated by LEAD MMs posting larger sized and more 
aggressive quotations should inure throughout most of the trading day. 
Accordingly, the Commission believes that the LEAD Rules are reasonably 
designed to improvet market quality, particularly for investors who are 
unlikely to have speed advantages over professional traders.
    However, because the Exchange proposes to implement the LEAD Rules 
on a pilot basis, the Exchange and the Commission will be able to 
assess the actual impact of the proposal.\128\ During the pilot period, 
CHX will collect and analyze the Pilot Data, which will measure the 
impact, if any, of the LEAD Rules on market quality, including quote 
accessibility and quoted and effective spreads, and should allow CHX to 
quantify any effects on the market. Among other things, the Exchange 
will collect and publicly disseminate data designed to measure the 
impact of the LEAD, including whether it: (1) Increases the amount and 
competitiveness of liquidity displayed on CHX; and (2) impacts the 
accessibility of liquidity posted on CHX.\129\ Specifically, the 
Exchange will collect, distribute, and analyze data measuring quote and 
execution quality both on CHX and more broadly, separated by levels of 
volatility. This data should allow the Exchange and Commissoin to 
assess not only changes in overall market quality but also changes 
during the most volatile periods on both the Exchange and the overall 
market. The Exchange also will collect matched trade difference 
statistics, which will indicate the number of shares that would have 
been executed, hypothetically, without the LEAD and the number of 
shares executed with the LEAD. This data will be aggregated by 
different levels of volatility. The Commission believes that analyzing 
the matched trade difference statistics will be insightful in 
determining if, and to what degree, the LEAD changed the accessibility 
of CHX quotes during different periods of volatility. Accordingly, the 
Pilot Data is intended to help CHX and the Commission assess whether 
the proposal is having the intended impact on improving market quality.
---------------------------------------------------------------------------

    \128\ See proposed CHX Article 20, Rule 8(h)(2).
    \129\ See proposed CHX Article 20, Rules 8(h)(4), 8(h)(5), and 
8(h)(6).
---------------------------------------------------------------------------

    The Exchange will also collect and provide to the Commission and 
the public data regarding variable delays experienced by both LEAD MMs 
and non-LEAD MMs.\130\ One commenter asserts that a fixed delay 
implemented with software could result in variable delays that could be 
excessive and/or unevenly distributed between market participants, with 
non-LEAD MMs bearing the bulk of the variable delays.\131\ The 
commenter suggests a variety of different approaches to

[[Page 49444]]

measure these variable delays.\132\ Although CHX asserts that variable 
delays occur on other markets without intentional access delays,\133\ 
the Exchange will be collecting variable delay statistics to measure 
this type of delay. The Commission believes that these statistics will 
provide the necessary information on whether different types of market 
participants experience differing variable processing delays. Analysis 
of this data will allow the Exchange to implement any necessary changes 
to correct for a discrepancy. The Commission emphasizes that CHX would 
have to file another proposed rule change to continue LEAD after the 
pilot period. The Commission would consider, among other things, the 
Pilot Data and analyses of that data if, in the future, the Exchange 
proposed to make permanent the LEAD Rules.
---------------------------------------------------------------------------

    \130\ See proposed CHX Article 20, Rule 8(h)(7) (requiring CHX 
to collect variable processing delay statistics).
    \131\ See Leuchtkafer Letter, supra note 5, at 2-4; Leuchtkafer 
Letter 2, supra note 8, at 6; and Leuchtkafer Letter 4, supra note 
8, at 1.
    \132\ See Leuchtkafer Letter 5, supra note 8, at 1(asserting 
that, for every message and for the length of the pilot program, CHX 
should timestamp every transaction on receipt, on LEAD queue entry 
and exit (if applicable), and on matching engine processing start to 
finish). That commenter believes that every message should also be 
clearly labeled if it was received immediately before, during, or 
immediately after a PEV and the PEV Range value itself. See 
Leuchtkafer Letter 5, supra note 8, at 1.
    \133\ See CHX Letter, supra note 5, at 9.
---------------------------------------------------------------------------

    Some commenters assert that the LEAD would impinge upon price 
discovery across the national market system.\134\ Some commenters cite 
studies showing that an asymmetric delay on TSX Alpha, a Canadian 
exchange, degraded overall market quality, harmed institutional order 
routers, and increased effective spreads.\135\ In response, the 
Exchange asserts that the TSX Alpha delay is materially different from 
LEAD because it is randomized and, unlike CHX, TSX Alpha utilizes a 
taker-maker model.\136\ The Exchange also observes that TSX Alpha does 
not require its liquidity providers to meet heightened requirements 
designed to enhance market quality.\137\
---------------------------------------------------------------------------

    \134\ See XR Securities Letter, supra note 5, at 3; FIA PTG 
Letter, supra note 5 at 3-4; and Hudson River Trading Letter supra 
note 5, at 5.
    \135\ See Hudson River Trading Letter, supra note 5, at 2. See 
also Healthy Markets Letter, supra note 5, at 5; and SIFMA Letter, 
supra note 5, at 6. These commenters cite a recent study regarding 
TSX Alpha: See Chen, Haoming, Foley, Sean, Goldstein, Michael, and 
Ruf, Thomas, ``The Value of a Millisecond: Harnessing Information in 
Fast, Fragmented Markets,'' available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2860359. One commenter notes that, while 
quoted depth increased on TSX Alpha, the exchange did not 
demonstrate tighter spreads, and the accessibility of quotes 
significantly degraded. See Hudson River Trading Letter, supra note 
5, at 2. In addition, a commenter asserts that the only 
counterbalance to the negative impact on market quality caused by an 
asymmetric delay (such as that exhibited due to TSX Alpha) would be 
coupling it with ``robust and rigorous'' affirmative obligations for 
those benefitting from the delay. See Healthy Markets Letter, supra 
note 5, at 5. The commenter urges the Commission to proceed 
cautiously, using data-driven analyses, and not within the context 
of the instant proposal. See id. As discussed, the Commission will 
review the Pilot Data and analyses of that data.
    \136\ See CHX Letter, supra note 5, at 8.
    \137\ See id. at 8-9.
---------------------------------------------------------------------------

    The Commission notes that the LEAD proposal differs from TSX Alpha. 
The delay on TSX Alpha is a longer, randomized delay of 1-3 
milliseconds that occurs in a different market with a different pricing 
structure and regulatory environment. A randomized delay on an exchange 
will not allow a smart order router to send child orders to different 
exchanges such that the orders arrive simultaneously, preventing the 
sweeping of volume displayed on the NBBO without information leakage. 
To adjust for the potential of information leakage, a smart order 
router could be adjusted to avoid the TSX Alpha exchange when sweeping 
NBBO volume. The possible increase of informed volume on exchanges 
other than TSX Alpha, could have been a factor in the degradation of 
market quality on those exchanges. Also, given TSX Alpha's taker-maker 
pricing structure, market makers on this exchange could attract order 
flow by only matching the now degraded NBBO. Therefore, given this 
combination of factors, the effects of TSX Alpha may not be relevant in 
assessing the potential results of the LEAD on market quality. The 
Exchange will collect, analyze, and publicly disclose data that should 
show how the LEAD affects market quality, including the statistics 
disclosing width, displayed size, and effective spreads during 
different periods of market volatility.
    Section 6(b)(5) of the Exchange Act requires that the rules of a 
national securities exchange be designed to prevent fraudulent and 
manipulative activity. A number of commenters question whether the 
length and means of implementing the delay is consistent with the 
requirement in Section 6(b)(5) of the Exchange Act that the rules of 
the exchange be designed to prevent fraudulent and manipulative acts 
and practices.\138\ One commenter states that CHX does not support its 
conclusion \139\ that the Fixed LEAD Period would be too short to 
introduce any incremental risk of manipulative activity.\140\ Another 
commenter asks CHX to state how long a delay would have to be to permit 
manipulative practices and what it will do to ensure that its software 
does not result in delays that would permit such practices.\141\
---------------------------------------------------------------------------

    \138\ See Healthy Markets Letter, supra note 5, at 5; 
Leuchtkafer Letter 2, supra note 5, at 6; and FIA PTG Letter, supra 
note 5, at 2-3.
    \139\ See infra note 143 and accompanying text.
    \140\ See FIA PTG Letter, supra note 5, at 2-3.
    \141\ See Leuchtkafer Letter, supra note 5, at 4.
---------------------------------------------------------------------------

    The Exchange asserts that the LEAD would not introduce incremental 
risk of manipulative activity.\142\ The Exchange believes that the 
Fixed LEAD Period is too short to provide any actionable advantage to a 
LEAD MM reacting to information already in its possession or to 
introduce incremental risk of manipulative activity.\143\
---------------------------------------------------------------------------

    \142\ See Notice, supra note 3, 82 FR at 11269.
    \143\ See CHX Letter, supra note 5, at 11.
---------------------------------------------------------------------------

    The Commission finds that the proposed rule change, as modified by 
Amendments No. 1 and No. 2, is consistent with the requirement of 
Section 6(b)(5) of the Exchange Act that the rules of a national 
securities exchange be designed to prevent fraudulent and manipulative 
activity. The Commission previously stated that it does not expect that 
any de minimis delay will alter the potential for manipulative activity 
or make it harder to detect and prosecute.\144\ The Fixed LEAD Period 
will be a de minimis delay (as discussed below),\145\ and the 
Commission continues to believe that such a delay will neither increase 
the potential for manipulative activity nor make it more difficult to 
detect and prosecute.\146\ In addition, the Pilot Data will allow the 
Exchange and the Commission to assess in a timely fashion whether the 
LEAD presents any increased risks of manipulation.\147\

[[Page 49445]]

Collection of the Pilot Data will also assist the Exchange in 
discharging its ongoing responsibility to surveil for manipulative 
activity.
---------------------------------------------------------------------------

    \144\ See Regulation NMS Interpretation, infra note 162, at 
40792.
    \145\ See infra Section III.B.
    \146\ One commenter asserts that LEAD MMs would make trading 
decisions with more information than any of their potential 
counterparties. See XR Securities Letter, supra note 5, at 1. 
Another commenter asserts that CHX should require LEAD MMs to 
establish information barriers to prevent such firms from using 
their advantage on CHX in their other proprietary trading. See 
Leuchtkafer Letter, supra note 5, at 5. The Commission believes that 
the operation of the LEAD Rules would not provide LEAD MMs with any 
unique information and therefore, the Commission believes that it is 
unnecessary to require LEAD MMs to adopt information barriers.
    \147\ CHX will start providing the Pilot Data to the Commission 
by no later than the end of the second month of the pilot program. 
The Commission believes this timeline is appropriate because it will 
allow the Exchange sufficient time to properly collect and organize 
the Pilot Data while still making such data available to the 
Commission close in time to the start of the pilot program. A 
commenter asserts that the LEAD could result in delays that are 
longer than 350 microseconds, and that with the variable delay, the 
total delay could be long enough to increase risk of manipulative 
practices. See Leuchtkafer Letter, supra note 5, at 3-4; and 
Leuchtkafer Letter 2, supra note 5, at 5-6. The Commission believes 
that the variable processing delay statistics should allow the 
Exchange to monitor for persistent delays and implement any 
necessary changes to remove such delays.
---------------------------------------------------------------------------

B. Section 11A of the Exchange Act

    Section 11A(a)(1) of the Exchange Act articulates Congress' finding 
that, among other things, it is in the public interest and appropriate 
for the protection of investors and the maintenance of fair and orderly 
markets to assure: Economically efficient execution of securities 
transactions; fair competition among brokers and dealers, among 
exchange markets, and between exchange markets; the availability to 
brokers, dealers, and investors of information with respect to 
quotations for and transactions in securities; the practicability of 
brokers executing investors' orders in the best market; and an 
opportunity, consistent with the economically efficient execution of 
securities transactions and the practicability of brokers executing 
investors' orders in the best market, for investors' orders to be 
executed without the participation of a dealer.\148\
---------------------------------------------------------------------------

    \148\ 15 U.S.C. 78k-1(a)(1)(C).
---------------------------------------------------------------------------

    As discussed below, certain commenters questioned whether the 
proposed rule change is consistent with Rule 611 of Regulation NMS 
(``Order Protection Rule'') \149\ and Rule 602 of Regulation NMS 
(``Quote Rule''),\150\ both of which were adopted pursuant to Section 
11A of the Exchange Act.
---------------------------------------------------------------------------

    \149\ 17 CFR 242.611.
    \150\ 17 CFR 242.602.
---------------------------------------------------------------------------

    The Order Protection Rule, among other things, requires trading 
centers to establish, maintain, and enforce written policies and 
procedures reasonably designed to prevent the execution of trades at 
prices inferior to protected quotations displayed by other trading 
centers.\151\ To be protected, a quotation must, among other things, be 
immediately and automatically accessible and be the best bid or best 
offer of a national securities exchange.\152\ Certain commenters argue 
that the proposal, which would allow LEAD MMs to post and reprice 
displayed orders without delay, could hinder the ability of investors 
to access such displayed quotations on CHX.\153\ Several commenters 
assert that the LEAD would be inconsistent with CHX's protected 
quotation status under Regulation NMS.\154\ These commenters argue 
that, if CHX implemented the LEAD, CHX's displayed quotations would not 
be immediately accessible and would be inconsistent with the definition 
of ``automated quotation'' under Rule 600(b)(3) and, therefore, the 
LEAD would prevent CHX's displayed quotations from being considered 
``protected'' under Regulation NMS.\155\ More specifically, some 
commenters assert that by providing LEAD MMs with a structural 
advantage, the LEAD would frustrate the purposes the Order Protection 
Rule by impairing fair and efficient access to an exchange's 
quotations.\156\ One commenter distinguishes the LEAD from the delay on 
the Investors Exchange, LLC (``IEX''), noting that IEX's delay only 
affected access to non-displayed orders.\157\ Another commenter 
expresses concern that, unlike other examples of permitted 
discrimination, the LEAD would affect the regulatory mechanics of 
trading because, in some cases, traders would be required to route 
orders to the Exchange pursuant to the Order Protection Rule.\158\ 
Similarly, one commenter expresses concern that the regulatory 
requirement to interact with a LEAD MM's protected quote could prevent 
investors from achieving optimal executions because the LEAD MMs would 
have the benefit of making their trading decisions with more 
information than any of their potential counterparties.\159\
---------------------------------------------------------------------------

    \151\ See Regulation NMS Adopting Release, supra note 87, 70 FR 
at 37501.
    \152\ See id. at 37496.
    \153\ See Citadel Letter, supra note 5, at 5-6; Hudson River 
Trading Letter, supra note 5, at 6.
    \154\ See Hudson River Trading Letter, supra note 5, at 3; 
Citadel Letter, supra note 5, at 6-7; NYSE Letter, supra note 5, at 
3-4; and XR Securities Letter, supra note 5, at 1. See also SIFMA 
Letter, supra note 5, at 3 (suggesting that the Commission should 
``carefully consider the implications'' of market participants 
routing orders to CHX to access a protected quote when the 
accessibility of such quote is ``questionable'').
    \155\ See Hudson River Trading Letter, supra note 5, at 3; 
Citadel Letter, supra note 5, at 6-7; NYSE Letter, supra note 5, at 
3-4; and XR Securities Letter, supra note 5, at 1.
    \156\ See FIA PTG Letter, supra note 5, at 2; Hudson River 
Trading Letter, supra note 5, at 7; Citadel Letter, supra note 5, at 
6; NYSE Letter, supra note 5, at 4; XR Securities Letter, supra note 
5, at 1; and SIFMA Letter, supra note 5, at 6 (questioning the 
effect of an access delay coupled with existing geographic or 
technological latencies on the fair and efficient access to an 
exchange's protected quotations).
    \157\ See XR Securities Letter, supra note 5, at 3.
    \158\ See FIA PTG Letter, supra note 5, at 4.
    \159\ See XR Securities Letter, supra note 5, at 3.
---------------------------------------------------------------------------

    In response, the Exchange asserts that the LEAD is consistent with 
the Order Protection Rule.\160\ CHX notes that Rule 600(b)(3) of 
Regulation NMS requires that a trading center displaying an automated 
quotation permit, among other things, an incoming immediate-or-cancel 
order to immediately and automatically execute against the automated 
quotation up to its full size; and immediately and automatically cancel 
any unexecuted portion of the immediate-or-cancel order without routing 
the order elsewhere.\161\ CHX highlights that the Commission recently 
issued a final interpretation with respect to the definition of 
automated quotation under Rule 600(b)(3) of Regulation NMS, which, CHX 
notes, did not interpret the term ``immediate'' used in Rule 600(b)(3) 
by itself to prohibit a trading center from implementing an intentional 
access delay that is de minimis (i.e., a delay so short as to not 
frustrate the purposes of the Order Protection Rule by impairing fair 
and efficient access to an exchange's quotations).\162\ CHX concludes 
that the Commission's revised interpretation provides that the term 
``immediate'' precludes any coding of automated systems or other type 
of intentional device that would delay the action taken with respect to 
a quotation unless such delay is de minimis.\163\ CHX believes that the 
LEAD would be a de minimis delay so short as not to frustrate the 
purposes of the Order Protection Rule by impairing fair and efficient 
access to the Exchange's quotations.\164\
---------------------------------------------------------------------------

    \160\ See CHX Letter, supra note 5, at 13.
    \161\ See id. See also 17 CFR 242.600(b)(3).
    \162\ See CHX Letter, supra note 5, at 13. See also Commission 
Interpretation Regarding Automated Quotations Under Regulation NMS, 
Securities Exchange Act Release No. 78102 (June 17, 2016), 81 FR 
40785 (June 23, 2016) (``Regulation NMS Interpretation'').
    \163\ See CHX Letter, supra note 5, at 14.
    \164\ See id.
---------------------------------------------------------------------------

    The Order Protection Rule provides intermarket protection against 
trade-throughs for ``automated'' (as opposed to ``manual'') quotations 
of NMS stocks. Under Regulation NMS, an ``automated'' quotation is one 
that, among other things, can be executed ``immediately and 
automatically'' against an incoming immediate-or-cancel order. This 
formulation was intended to distinguish and exclude from protection 
quotations manual markets that produced delays measured in seconds in 
responding to an incoming order, because delays of that magnitude would 
impair fair and efficient access to an exchange's quotations.\165\
---------------------------------------------------------------------------

    \165\ See Regulation NMS Interpretation, supra note 162, 81 FR 
at 40785-86.
---------------------------------------------------------------------------

    As CHX notes, the Commission, in connection with its approval of 
IEX's exchange application, interpreted ``immediate'' in the context of 
Regulation NMS as not precluding a de minimis intentional delay--i.e., 
a delay so short as to not frustrate the purposes of the Order 
Protection Rule by impairing fair and efficient access to an

[[Page 49446]]

exchange's quotations.\166\ Specifically, while acknowledging that even 
a de minimis access delay may increase the overall latency in accessing 
a particular protected quotation, the Commission reasoned that, just as 
the geographic and technological delays do not impair fair and 
efficient access to an exchange's quotations or otherwise frustrate the 
objectives of Rule 611, the addition of a de minimis intentional access 
delay is consistent with the immediacy requirement of Rule 
600(b)(3).\167\ In its related interpretative guidance, the 
Commission's staff found that ``delays of less than a millisecond are 
at a de minimis level that would not impair fair and efficient access 
to a quotation, consistent with the goals of Rule 611.'' \168\
---------------------------------------------------------------------------

    \166\ See id. at 40792.
    \167\ See id. at 40789, text accompanying n.50.
    \168\ See Staff Guidance on Automated Quotations under 
Regulation NMS, Securities and Exchange Commission, June 17, 2016, 
available at https://www.sec.gov/divisions/marketreg/automated-quotations-under-regulation-nms.htm (``Regulation NMS Staff 
Guidance''). One commenter questions whether 350 microseconds is an 
appropriate duration for the delay. See Healthy Markets Letter, 
supra note 5, at 5 (stating that CHX, unlike IEX, failed to explain 
why it is proposing a delay of 350 microseconds). See also 
Leuchtkafer Letter, supra note 5, at 2 (stating that the length of 
the LEAD is based on IEX and the speed arms race, which it describes 
as ``a relative and constantly changing issue,'' and questioning 
whether CHX will change the length of the LEAD if IEX changes its 
delay or if LEAD MMs speed up or other firms slow down or exit the 
market). As discussed below, the Fixed LEAD period will be a de 
minimis delay.
---------------------------------------------------------------------------

    The Commission believes that the LEAD is consistent with the Order 
Protection Rule. The Commission notes that its recent interpretation 
with respect to the definition of automated quotation under Rule 
600(b)(3) of Regulation NMS, and the corresponding staff guidance, does 
not distinguish between intentional delays designed to benefit non-
displayed liquidity, as was the case with the IEX delay, or displayed 
liquidity, as is the case with the LEAD. The Commission's staff found 
that ``delays of less than a millisecond are at a de minimis level that 
would not impair fair and efficient access to a quotation, consistent 
with the goals of Rule 611.'' \169\ Accordingly, because the 350 
microsecond delay imposed by the LEAD is less than a millisecond, it is 
de minimis. The Commission's interpretation recognized ``that a de 
minimis access delay, even if it involves an `intentional device' that 
delays access to an exchange's quotation, is compatible with the 
exchange having an `automated quotation' under Rule 600(b)(3) and thus 
a `protected quotation' under Rule 611.'' \170\ Accordingly, the LEAD 
will not change CHX's protected quotation status.
---------------------------------------------------------------------------

    \169\ See Regulation NMS Staff Guidance, supra note 168.
    \170\ See Regulation NMS Interpretation, supra note 162, at 
40792.
---------------------------------------------------------------------------

    Under the firm quote provisions of the Quote Rule, a responsible 
broker-dealer must execute any order to buy or sell a subject security 
(other than an odd-lot order) presented to it by another broker-dealer 
at a price at least as favorable to such buyer or seller as the 
responsible broker-dealer's published bid or published offer in any 
amount up to its published quotation size unless an exception 
applies.\171\ One commenter states its view that the LEAD would be 
consistent with the Quote Rule because the Exchange is not proposing to 
notify a LEAD MM that an inbound order that has been delayed may 
imminently execute, and therefore, should a LEAD MM revise its quote 
prior to the end of the delay, the inbound order would not have been 
presented to the LEAD MM.\172\ Some commenters assert that the LEAD may 
be inconsistent with the firm quote provisions of the Quote Rule or the 
intent behind the Quote Rule because, in their view, it would allow 
liquidity providers to ``back away'' from their quotes.\173\ These 
commenters are concerned that the LEAD would allow LEAD MMs to update 
their quotes to potentially inferior prices while orders to execute 
against their quotes are being held in the LEAD queue.\174\ The 
Exchange responds that the LEAD would not result in violations of the 
Quote Rule because orders delayed pursuant to the LEAD would not have 
been ``presented'' to LEAD MMs and therefore the duty of a broker or 
dealer to stand behind its quote would not have yet vested when the 
LEAD applies.\175\
---------------------------------------------------------------------------

    \171\ 17 CFR 242.602(b)(2).
    \172\ See CTC Trading Letter, supra note 5, at 6.
    \173\ See FIA PTG Letter, supra note 5, at 5; Citadel Letter, 
supra note 5, at 5; NYSE Letter, supra note 5, at 2-3; and Hudson 
River Trading Letter, supra note 5, at 6 (asserting that ``at best, 
[the LEAD] is designed to circumvent'' the Quote Rule).
    \174\ See FIA PTG Letter, supra note 5, at 5; Hudson River 
Trading Letter, supra note 5, at 6; Citadel Letter, supra note 5, at 
5; NYSE Letter, supra note 5, at 2-3.
    \175\ See CHX Letter, supra note 5, at 13. One commenter agrees 
with CHX's interpretation of the Quote Rule. See CTC Trading Letter, 
supra note 5, at 6.
---------------------------------------------------------------------------

    The Commission notes that the firm quote provisions of the Quote 
Rule require each responsible broker or dealer to execute an order 
presented to it at a price at least as favorable as its published bid 
or published offer in any amount up to its published quotation 
size.\176\ There may be circumstances in which a LEAD MM posts a quote 
on CHX, a contra-side order is submitted and delayed by the LEAD, and 
the LEAD MM without any knowledge of the contra-side order modifies or 
cancels its quote prior to release of the contra-side order from the 
LEAD queue. In this case, the Commission believes that Quote Rule 
compliance issues would not be raised because the contra-side order was 
not yet presented to the LEAD MM. Accordingly, the Commission believes 
that the LEAD is not inconsistent with the Quote Rule.
---------------------------------------------------------------------------

    \176\ 17 CFR 242.602(b)(2).
---------------------------------------------------------------------------

IV. Solicitation of Comments on Amendments No. 1 and No. 2

    Interested persons are invited to submit written data, views, and 
arguments concerning Amendments No. 1 and No. 2. 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 [email protected]. Please include 
File Number SR-CHX-2017-04 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.

All submissions should refer to File Number SR-CHX-2017-04. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (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 this filing will also be available 
for inspection and copying at the principal office of the Exchange. All 
comments received will be posted without change. Persons submitting 
comments are cautioned that we do not redact or edit

[[Page 49447]]

personal identifying information from comment submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File Number SR-CHX-2017-04 and should be 
submitted on or before November 15, 2017.

V. Accelerated Approval of Proposed Rule Change, as Modified by 
Amendments No. 1 and No. 2

    The Commission finds good cause to approve the proposed rule 
change, as modified by Amendments No. 1 and No. 2, prior to the 30th 
day after the date of publication of notice of Amendments No. 1 and No. 
2 in the Federal Register. Neither Amendment No. 1 nor Amendment No. 2 
expands the structure of the proposed rule change as it was previously 
published for notice and comment.\177\ Rather, the Exchange 
circumscribed its proposal to implement the LEAD during the regular 
trading session on a pilot basis to provide an opportunity to study the 
impact of the LEAD Rules on the markets and to address comments by 
further explaining the purpose and the intended impact of the proposal. 
Accordingly, the Commission finds good cause, pursuant to Section 
19(b)(2) of the Exchange Act,\178\ to approve the proposed rule change, 
as modified by Amendments No. 1 and No. 2, on an accelerated basis.
---------------------------------------------------------------------------

    \177\ See supra notes 12 and 13.
    \178\ 15 U.S.C. 78s(b)(2).
---------------------------------------------------------------------------

VI. Conclusion

    For the foregoing reasons, the Commission finds that the proposed 
rule change, as modified by Amendments No. 1 and No. 2, is consistent 
with the Exchange Act and the rules and regulations thereunder 
applicable to a national securities exchange.
    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Exchange Act \179\ that the proposed rule change (SR-CHX-2017-04), as 
modified by Amendments No. 1 and No. 2, be, and hereby is, approved on 
an accelerated basis, subject to a pilot period set to expire twenty- 
four months after implementation of the pilot program.
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    \179\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\180\
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    \180\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-23122 Filed 10-24-17; 8:45 am]
BILLING CODE 8011-01-P

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