Self-Regulatory Organizations; Chicago Stock Exchange, Inc.; Notice of Filing of Proposed Rule Change To Adopt the Route QCT Cross Routing Option, 12214-12218 [2018-05560]
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Federal Register / Vol. 83, No. 54 / Tuesday, March 20, 2018 / Notices
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–82870; File No. SR–CHX–
2018–001]
Self-Regulatory Organizations;
Chicago Stock Exchange, Inc.; Notice
of Filing of Proposed Rule Change To
Adopt the Route QCT Cross Routing
Option
March 14, 2018.
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 March 6,
2018, the Chicago Stock Exchange, Inc.
(‘‘CHX’’ or ‘‘Exchange’’) filed with the
Securities and Exchange Commission
(the ‘‘Commission’’) the proposed rule
change as described in Items I, II and III
below, which Items have been prepared
by the self-regulatory organization. The
Commission is publishing this notice to
solicit comments on the proposed rule
change from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
CHX proposes to amend the Rules of
the Exchange (‘‘CHX Rules’’) to adopt
the Route QCT Cross routing option.
The text of this proposed rule change is
available on the Exchange’s website at
https://www.chx.com/regulatoryoperations/rule-filings/, 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
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In its filing with the Commission, the
self-regulatory organization included
statements concerning the purpose of,
and basis for, the proposed rule change
and discussed any comments it received
on the proposed rule change. The text
of those statements may be examined at
the places specified in Item IV below.
The Exchange has prepared summaries,
set forth in sections A, B and C below,
of the most significant parts of such
statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and the
Statutory Basis for, the Proposed Rule
Change
1. Purpose
The Exchange proposes to effect the
following amendments to the CHX
1 15
2 17
U.S.C. 78s(b)(1).
CFR 240.19b-4.
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Rules to adopt the Route QCT 3 Cross
routing option:
• Adopt Article 19, Rule 4(a)(1)
describing the proposed ‘‘Route QCT
Cross’’ routing option.
• Amend the definition of ‘‘Routable
Order’’ under Article 1, Rule 1(oo), the
definition of ‘‘cross order’’ under Article
1, Rule 2(a)(2) and make various
amendments to Article 19 (CHX Routing
Services) to permit the routing of cross
orders marked Route QCT Cross.
• Other non-substantive clarifying
amendments.
(1) Background
Currently, Routable Orders submitted
to the CHX matching system (‘‘Matching
System’’) 4 for execution are routed
away from the Matching System
automatically if a Routing Event 5 is
triggered. All Routable Orders 6 are limit
orders only, and thus market 7 and cross
orders 8 are never routable. Moreover,
the Exchange does not permit orders to
be directly routed to an away Trading
Center 9 without initially being
submitted to the Matching System.
A large percentage of the Exchange’s
average daily volume (‘‘ADV’’) is
attributed to cross orders that are
component orders to Qualified
Contingent Trades (‘‘QCT Crosses’’).
Mechanically, the Matching System
handles QCT Crosses like simple crosses
(i.e., cross orders without any modifiers
attached), except that the Matching
System permits QCT Crosses to tradethrough protected quotes of away
markets as QCT Crosses are exempt
from the trade-through prohibition of
Rule 611 of Regulation NMS.10
Therefore, like simple crosses, all QCT
Crosses are handled IOC 11 and can
never rest on the CHX book. Moreover,
like simple crosses, a QCT Cross
submitted to the Matching System will
be cancelled back to the order sender as
‘‘blocked’’ if a precedent limit order
priced at or better than the QCT Cross
3 See Securities Exchange Act Release No. 57620
(April 4, 2008), 73 FR 19271 (April 4, 2008)
(‘‘Modified QCT Exemptive Order’’); see also CHX
Article 1, Rule 2(a)(2) defining ‘‘cross order’’; see
also CHX Article 1, Rule 2(b)(2)(E) defining
‘‘Qualified Contingent Trade.’’
4 The Matching System is part of the Exchange’s
‘‘Trading Facilities,’’ as defined under CHX Article
1, Rule 1(z).
5 See CHX Article 19, Rule 3(a)(1)–(5).
6 See CHX Article 1, Rule 1(oo) defining
‘‘Routable Order.’’
7 See CHX Article 1, Rule 2(a)(3) defining ‘‘market
order.’’
8 See CHX Article 1, Rule 2(a)(2) defining ‘‘cross
order.’’
9 See CHX Article 1, Rule 1(nn) defining ‘‘Trading
Center.’’
10 See supra note 3.
11 See CHX Article 1, Rule 2(a)(2)
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is resting on the CHX book,12 except
that a QCT Cross priced at the top of the
CHX book (i.e., the best-ranked order on
the CHX book pursuant to Article 20,
Rule 8(b)) that qualifies for Cross With
Size 13 handling will be permitted to
execute. However, unlike simple
crosses, which may be submitted by any
Participant,14 QCT Crosses may only be
submitted by Institutional Brokers
(‘‘IBs’’).15
In the event a QCT Cross is blocked
and cancelled, the IB will usually cause
the order to be executed over-thecounter (‘‘OTC’’). The OTC trade would
then be reported to a Trade Reporting
Facility (‘‘TRF’’) and cleared either
through the Exchange’s optional away
trade clearing service,16 which may only
be used by IBs, or another clearing
service. The Exchange assesses a fee for
use of the optional away trade clearing
service,17 which is identical to the fee
for a QCT Cross executed within the
Matching System.18
In recent years, the percentage of the
Exchange’s average daily volume
(‘‘ADV’’) attributed to cross orders has
decreased, which has been offset by an
increase in single-sided matching
activity.19 This has primarily been
driven by enhanced resting liquidity on
the CHX book. Consequently, as the
number of orders resting on the CHX
book have increased, and the price of
such orders have become more
aggressive, blocked crosses have become
more frequent.20
Considering this trend, the Exchange
is now proposing to adopt the Route
QCT Cross routing option, which will
permit IBs 21 to directly route a QCT
Cross to a non-affiliated third-party
12 See CHX Article 1, Rule 2(a)(2); see also CHX
Article 20, Rule 8(e)(1).
13 See CHX Article 1, Rule 2(g)(1).
14 See CHX Article 1, Rule 1(s) defining
‘‘Participant.’’
15 See CHX Article 1, Rule 2(b)(2)(E); see also
CHX Article 1, Rule 1(n) defining ‘‘Institutional
Broker.’’
16 See CHX Article 21, Rule 6.
17 See Section E.7 of the CHX Fee Schedule.
18 See Section E.3 of the CHX Fee Schedule.
19 In 2014, the percentage of total CHX executed
volume attributed to single-sided orders (‘‘CHX
Single-sided Volume’’) was 11.03%. In 2015 and
2016, this percentage increased to 17.39% and
19.69%, respectively. In 2017, as of December 1,
2017, CHX Single-sided Volume decreased to
12.05%, due primarily to the withdrawal of certain
top CHX liquidity providers in late 2016.
20 In 2014, 6.03% of all cross orders submitted to
the Matching System were cancelled back to the
order sender. In 2015, 2016 and 2017 (as of
December 1, 2017), this percentage increased to
9.72%, 11.47% and 12.81%, respectively.
21 The Exchange is proposing to limit use of Route
QCT Cross to IBs to be consistent with the fact that
only IBs are currently permitted to submit QCT
Crosses to the Matching System. See CHX Article
1, Rule 2(b)(2)(E).
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broker-dealer designated by the IB
(‘‘designated executing broker’’) for
execution. The purpose of Route QCT
Cross is to provide IBs with a routing
option that will simplify and streamline
the OTC execution process for QCTs,22
which will enhance the value of IB
registration with the Exchange. As such,
the Exchange believes that the proposal
will facilitate the ability of IBs to
execute QCT Crosses in compliance
with the requirements of the Modified
QCT Exemptive Order 23 and CHX
Rules,24 which fosters cooperation and
coordination with persons engaged in
facilitating transactions in securities in
furtherance of Section 6(b)(5) of the
Act.25
(2) Operation of Route QCT Cross
In sum, a Route QCT Cross order
submitted by an IB will be handled like
a current Routable Order,26 except that
the Route QCT Cross order will never be
submitted to the Matching System for
execution. Specifically, upon receipt of
a Route QCT Cross order, the Exchange
will cause the order to be routed IOC
from the Exchange, through CHXBD,
LLC (‘‘CHXBD’’), the Exchange’s
affiliated routing broker, to the
designated executing broker identified
by the IB.27 The relationship between a
designated executing broker and
CHXBD will be governed by applicable
CHX Rules 28 and customary interbroker
agreements, such as fully-disclosed
clearing and customer agreements. At
all times, the use of Route QCT Cross
will be optional.
While the Matching System, CHX
Routing Services and CHXBD are each
regulated as a ‘‘facility’’ of the
Exchange,29 as defined under Section
3(a)(2) of the Act,30 the Exchange
submits that a designated executing
broker would not be facility of the
22 CHX
23 See
Article 19, Rule 1.
supra note 3.
24 Id.
25 15
U.S.C. 78f(b)(5).
CHX Article 1, Rule 1(oo).
27 In the event the proposed rule change is
approved and becomes operative, IBs will be
permitted to identify only one designated executing
broker to which all Route QCT Cross orders
submitted by the IB will be routed, subject to
additional requirements, as described below.
28 See e.g., CHX Article 19, Rule 2(a).
29 See CHX Article 1, Rule 1(z); see also CHX
Article 19, Rule 2(a)(1).
30 15 U.S.C. 78c(a)(2). ‘‘The term ‘‘facility’’ when
used with respect to an exchange includes its
premises, tangible or intangible property whether
on the premises or not, any right to the use of such
premises or property or any service thereof for the
purpose of effecting or reporting a transaction on an
exchange (including, among other things, any
system of communication to or from the exchange,
by ticker or otherwise, maintained by or with the
consent of the exchange), and any right of the
exchange to the use of any property or service.’’ Id.
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26 See
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Exchange for the reasons described
below. Therefore, the execution of Route
QCT Cross orders by the designated
executing broker would not be subject to
the Exchange’s book and execution
priority rules.31
Specifically, a designated executing
broker would not be owned by, or
affiliated or associated with, the
Exchange or CHXBD, and thus a
designated executing broker would not
be a premise or property of the
Exchange. In addition, while the
Exchange would provide the routing
infrastructure to permit IBs to execute
QCTs OTC, the Exchange does not have
a ‘‘right’’ to ‘‘use’’ 32 the property or
services of the designated executing
broker (nor does the designated
executing broker have a right to use the
property or services of the Exchange) for
the following reasons:
• An IB has sole discretion as to the
designated executing broker to which its
Route QCT Cross order will be routed.
• Use of the Route QCT Cross routing
option is optional. The Exchange will
have no discretion on when and if the
Route QCT Cross will be used.
• Route QCT Cross orders are not
eligible for execution within the
Matching System and could be used
without regard to the state of the CHX
book. Therefore, the designated
executing broker cannot be considered a
mere extension of the Matching System.
The Exchange notes that Route QCT
Cross is similar to the following routing
options of other national securities
exchanges:
• Directed Order. Like Route QCT
Cross, the ‘‘Directed Order’’ routing
option offered by the Nasdaq Stock
Market (‘‘Nasdaq’’) permits an order
sender to route an order to another
market center while bypassing the
Nasdaq’s order book,33 which may
result in the routed order executing at
a price through Nasdaq’s top of book.
• DRT. Like Route QCT Cross, the
‘‘DRT’’ routing option offered by the
Cboe BYX and Cboe BZX exchanges
permit an order to be routed to one or
more away alternative trading
systems.34
31 See
CHX Article 20, Rules 8(b) and (d).
U.S.C. 78c(a)(2).
33 ‘‘‘Directed Order’ is an Order designed to use
a routing strategy under which the Order is directed
to an automated trading center (as defined in
Regulation NMS) other than Nasdaq, as directed by
the entering party, without checking the Nasdaq
Book.’’ See Nasdaq Equities Rule 4758(a)(1)(A)(ix).
34 DRT is a ‘‘a routing option in which the
entering firm instructs the System to route to
alternative trading systems included in the System
routing.’’ See Cboe BYX Rule 11.13(b)(3)(D); see
also Cboe BZX Rule 11.13(b)(3)(D). Both Cboe BYX
and BZX have ‘‘the right to maintain a different
System routing table for different routing options
32 15
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12215
(3) Proposed Article 19, Rule 4 (Routing
Options) and Related Amendments
Adoption of the Route QCT Cross
routing option requires amendments to
the CHX Rules to describe its
functionality and to permit cross orders
to be routed through the CHX Routing
Services. As such, the Exchange
proposes the following amendments to
the CHX Rules.
The Exchange proposes to adopt
Article 19, Rule 4 (Routing Options).
Proposed paragraph (a) provides that
routing options may be combined with
all available order types, modifiers and
related terms, except for order types,
modifiers, and related terms that are
inconsistent with the terms of a routing
option. Paragraph (a) also provides that
the Exchange may activate or deactivate
any routing option at its discretion and,
if practicable, after notice to
Participants.
Thereunder, proposed paragraph
(a)(1) provides that Route QCT Cross is
a routing option, which may only be
utilized by Institutional Brokers, that
instructs the Exchange to route a cross
order marked QCT directly to a nonaffiliated third-party broker-dealer
designated by the Institutional Broker
without submitting the order into the
Matching System for execution. Also,
each Institutional Broker is permitted to
identify only one designated executing
broker to which all Route QCT Cross
orders submitted by the Institutional
Broker shall be routed. Furthermore,
prior to the Exchange accepting any
Route QCT Cross orders directed to a
specific designated executing broker,
the Exchange shall confirm that the
designated executing broker has
established connectivity to the
Exchange’s routing systems. In addition,
the Institutional Broker shall be
responsible for all away execution fees
resulting from the execution of Route
QCT Cross orders, including any
guaranteed payments to its designated
executing broker.35 Moreover, Route
and to modify the System routing table at any time
without notice.’’ See Cboe BYX Rule 11.13(b)(3); see
also Cboe BZX Rule 11.13(b).
35 For example, the Exchange anticipates that a
typical designated executing broker would require
a per execution fee and a guaranteed monthly
minimum that would be offset by any executions
fees collected during the month. These fees would
be assessed to CHXBD, which would in turn pass
on the fees to the relevant IBs. In the event a
guaranteed payment is due for a given month (i.e.,
the guaranteed monthly minimum was not met), the
Exchange would divide the balance equally among
the IBs that had identified the broker as the
designated executing broker at any point during
that month. For example, if there were two IBs that
each designated Broker A as its designated
executing broker at any point during the month of
November 2018 and a guaranteed payment of
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QCT Cross orders shall be routed IOC
and that a Route QCT Cross order that
could not be executed by a designated
executing broker, for any reason,36 shall
be cancelled back to the original order
sender.
As Route QCT Cross orders will be
routed away from the Exchange without
being submitted to the Matching System
for execution, the Exchange proposes to
amend Article 19, Rules 1(a) and (c) to
replace the term ‘‘Matching System’’
with ‘‘Exchange.’’ Thus, amended Rule
1(a) would provide, in pertinent part,
that Routable Orders that have been
submitted to, and accepted by, the
Exchange may be routed from the
Exchange to other Trading Centers
pursuant to this Article 19. Amended
Rule 1(c) would provide, in pertinent
part, that Routable Orders submitted to
the Exchange are firm orders, pursuant
to Article 20, Rule 3.
Similarly, the Exchange proposes to
amend Article 1, Rule 2(a) to replace the
term ‘‘Matching System’’ with
‘‘Exchange,’’ as a Route QCT Cross order
is a routable cross order marked QCT
that is not eligible to be submitted to the
Matching System for execution. Thus,
amended Rule 2(a) would provide in
pertinent part that the order types
described under Article 20, Rule 2(a)
‘‘shall be accepted by the Exchange,
subject to the requirements of Article
20, Rule 4.’’
Moreover, since Route QCT Cross
orders are a subset of cross orders that
will not be handled IOC upon receipt by
the Exchange, and all cross orders
currently received by the Exchange are
deemed to have been received IOC, the
Exchange proposes to amend the
definition of ‘‘cross orders’’ under
Article 1, Rule 2(a)(2) to provide that all
cross orders submitted to the Matching
System for execution shall be deemed to
have been received IOC.
Since the cross orders are not
currently Routable Orders, the Exchange
proposes to amend Article 1, Rule 1(oo)
by adopting paragraph (oo)(2), which
expands the definition of Routable
Orders to include any order marked by
a routing option listed under proposed
$2,000 became due to Broker A for November 2018,
each IB would be assessed a fee of $1,000 for
November 2018.
36 The Exchange notes that a Route QCT Cross
order will most likely be executed upon receipt by
a designated executing broker. In the unlikely event
a Route QCT Cross order is cancelled by a
designated executing broker, such an event would
most likely be related to systems issues at a
designated executing broker or a regulatory
prohibition (e.g., declaration of a market wide
trading halt in the security during the time the
Route QCT Cross order was in flight to a designated
executing broker). A Route QCT Cross order would
not be cancelled for reasons related to the state of
a designated executing broker’s order book.
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Article 19, Rule 4 (i.e., Route QCT
Cross). Also, the Exchange proposes to
eliminate the word ‘‘incoming’’ from
proposed Rule 1(oo)(1), as it is
redundant in light of the proposed
clarifying amendments to Article 19,
Rule 3 described below. Thus, amended
Article 1, Rule 1(oo) would provide that
‘‘Routable Order’’ means: (1) Any limit
order, as defined under Article 1, Rule
2(a)(1), of any size, not marked by any
order modifiers or related terms listed
under Article 1, Rule 2 that prohibit the
routing of the order to another Trading
Center; provided, however, that during
a SNAP Cycle,37 participating SNAP
Eligible Orders are always Routable
Orders; or (2) any order marked by a
routing option listed under proposed
Article 19, Rule 4.
(4) Amended Article 19, Rule 3
(Mandatory Routing Events)
Current Article 19, Rule 3 (Routing
Events) describes mandatory routing for
Routable Orders submitted to the
Matching System, whereas proposed
Article 19, Rule 4 would list routing
options, such as Route QCT Cross,
which must be affirmatively selected by
the order sender. To clarify this
distinction, the Exchange proposes to
amend the title to Article 19, Rule 3
from ‘‘Routing Events’’ to ‘‘Mandatory
Routing Events’’ and to amend Article
19, Rule 3(a) to provide that a Routable
Order that is submitted to the Matching
System shall be routed away from the
Matching System pursuant to the CHX
Routing Services if a Routing Event is
triggered.
Moreover, the Exchange proposes
additional non-substantive amendments
to Article 19, Rules 3(a)(1)–(5) to clarify
the current operation of the current
Routing Events.38 Amended paragraph
(a)(1) provides that an incoming limit
Routable Order shall be routed away to
permit its display and/or execution on
the Exchange in compliance with Rules
610(d) and 611 of Regulation NMS and,
for the duration of the Pilot Period to
coincide with the Pilot Period for the
Regulation NMS Plan to Implement a
Tick Size Pilot (‘‘Plan’’),39 the Trade-at
Prohibition described under the Plan.
37 See
CHX Article 18, Rule 1.
a comprehensive description of the Routing
Events described under Article 19, Rules 3(a)(1)–(3),
see Exchange Act No. 73150 (September 19, 2014),
79 FR 57603 (September 25, 2014) (SR–CHX–2014–
15). For a comprehensive description of the Routing
Events described under Article 19, Rules 3(a)(4) and
(5), see Exchange Act Release No. 75346 (July 1,
2015), 80 FR 39172 (July 8, 2015) (SR–CHX–2015–
03).
39 See CHX Article 20, Rule 13; see also Securities
Exchange Act Release No. 72460 (June 24, 2014), 79
FR 36840 (June 30, 2014); see also Securities
Exchange Act Release No. 74892 (May 6, 2015), 80
FR 27513 (May 13, 2015).
38 For
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Amended paragraph (a)(2) provides
that an incoming limit Routable Order
for an Odd Lot shall be routed away to
prevent its execution within the
Matching System if it would tradethrough a Protected Quotation of an
external market.
Amended paragraph (a)(3) provides
that (3) an incoming limit Routable
Order marked Do Not Display or an
incoming limit Routable Order for an
Odd Lot that could not be displayed
(‘‘incoming undisplayed limit Routable
Order’’) shall be routed away to execute
against any Protected Quotation(s) of
external market(s) priced at or better
than the limit price of the incoming
undisplayed limit Routable Order if
there are no contra-side resting orders
on the CHX book against which the
incoming undisplayed limit Routable
Order could execute.
Amended paragraph (a)(4) provides
that Routable Order(s) shall be routed
away to permit orders to be executed
within the Matching System at the
SNAP Price, as defined under Article 1,
Rule 1(rr), in compliance with
Regulation NMS. Also, orders routed
away pursuant to this paragraph (a)(4)
shall be priced -1- at the SNAP Price or,
-2- if the SNAP Price is priced at an
increment smaller than the relevant
minimum price increment, at the
minimum price increment less
aggressive than the SNAP Price.
Amended paragraph (a)(5) provides
that (5) Routable Order(s) that could not
be matched within the Matching System
during a SNAP Cycle, as described
under Article 18, Rule 1(b), shall be
routed away at the SNAP Price to
execute against Protected Quotations of
external markets priced at the SNAP
Price.
(5) Operative Date
In the event the proposed rule change
is approved, the proposed rule change
shall become operative pursuant to
notice to Participants.
2. Statutory Basis
The Exchange believes that the
proposed rule change is consistent with
Section 6(b) of the Act in general,40 and
furthers the objectives of Section
6(b)(1) 41 in particular, in that it would
further enable the Exchange to be so
organized as to have the capacity to be
able to carry out the purposes of the Act
and to comply, and to enforce
compliance by its Participants and
persons associated with its Participants,
with the provisions of the Act, the rules
40 15
41 15
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U.S.C. 78f(b).
U.S.C. 78f(b)(1).
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and regulations thereunder, and the
rules of the Exchange.
Specifically, the Exchange believes
that the non-substantive amendments to
Article 19, Rule 3 will clarify the
operation of the mandatory Routing
Events described thereunder, as
distinguished from the optional Route
QCT Cross routing option described
under proposed Article 19, Rule 4(a)(1).
Similarly, the various amendments to
provide that the Route QCT Cross
routing option will result in Routable
Orders being routed away from the
‘‘Exchange’’ generally and to
specifically provide when orders would
be routed away from the Matching
System will clarify how the different
types of Routable Orders will be routed
away. In addition, the proposal to
permit the Exchange to activate or
deactivate the routing options under
proposed Article 19, Rule 4 at its
discretion and, if practicable, after
notice to Participants, would be
consistent with the Exchange’s current
authority to activate and deactivate
certain order types, modifiers and terms
pursuant to Article 20, Rule 4(b). Since
the proposed Route QCT Cross routing
option is an order type (albeit one that
cannot be utilized within the Matching
System), the Exchange believes that
harmonizing these provisions under
proposed Article 19, Rule 4 and current
Article 20, Rule 4(b) would clarify the
Exchange’s discretionary authority with
respect to order types, modifiers and
related terms.
Accordingly, the Exchange believes
that the amendments will better enable
the Exchange to enforce compliance by
Participants and its associated persons
with CHX Rules in furtherance of the
objectives of Section 6(b)(1) of the Act.
The Exchange also believes that the
proposed rule change furthers the
objectives of Section 6(b)(5) of the Act 42
in that it is designed to promote just and
equitable principles of trade, to foster
cooperation and coordination with
persons engaged in facilitating
transactions in securities, to remove
impediments and perfect the
mechanisms of a free and open market,
and, in general, to protect investors and
the public interest; and is not designed
to permit unfair discrimination between
customers, issuers, brokers, or dealers.
Specifically, the Exchange believes
that the proposed Route QCT Cross
routing option will foster cooperation
and coordination with persons engaged
in facilitating transactions in securities
by providing Participants with an
additional execution option for QCT
Crosses, which will enhance their
42 15
U.S.C. 78f(b)(5).
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ability to coordinate the execution of
QCT Crosses in a timely manner with
other market participants that are
handling related component orders, as
required by the Modified QCT
Exemptive Order and CHX Rules.43
Moreover, given that that investors
typically utilize QCTs to execute
exceptionally large trades and to
manage the substantial risk inherent to
large positions, the Exchange submits
that the proposed Route QCT Cross
routing option will also protect
investors and the public interest by
facilitating the execution (and hedging)
of such important transactions.
In addition, since current CHX Rules
only permit IBs to submit QCT Crosses
to the Matching System,44 restricting
use of the Route QCT Cross option to
IBs only would be consistent with
current CHX Rules and thus not unfairly
discriminatory. Moreover, the proposal
is not designed to be unfairly
discriminatory as each IB will be (1)
permitted to select the designated
executing broker of its choice, subject to
certain requirements applicable to all
prospective designated executing
brokers (e.g., the designated executing
broker is a non-affiliated third-party
broker-dealer and must establish
connectivity to the Exchange’s routing
systems) and (2) responsible for all
execution fees and guaranteed payments
due to its designated executing broker,
the latter of which may be divided
equally among IBs that select the same
designated executing broker during a
relevant fee measurement period.45
Accordingly, the Exchange believes
that all proposed amendments to
implement the Route QCT Cross routing
option, including amendments to
Article 1, Rule 1(oo) and Article 1, Rule
2(a)(2) to permit cross orders to become
Routable Orders, are consistent with
Section 6(b)(5) of the Act.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
The Exchange does not believe that
the proposed rule change will impose
any burden on competition that is not
necessary or appropriate in furtherance
of the purposes of the Act. To the
contrary, the Exchange believes that the
proposal will enhance competition
among the exchanges by improving QCT
Cross execution options for Institutional
Brokers. Moreover, the Exchange notes
that other national securities exchanges
offer order routing options that permit
an order sender to bypass the
supra note 3.
44 See supra note 21.
45 See supra note 35.
Frm 00071
Fmt 4703
exchange’s own limit order book 46 or
allows the exchange to route an order to
alternative trading systems designated
by the exchange.47 As such, the
proposed rule change is a competitive
proposal that will enhance competition
among the national securities exchanges
to the benefit of market participants.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants or Others
No written comments were solicited
or received with respect to the proposed
rule change.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of
publication of this notice in the Federal
Register or within such longer period (i)
as the Commission may designate up to
90 days of such date if it finds such
longer period to be appropriate and
publishes its reasons for so finding or
(ii) as to which the self-regulatory
organization consents, the Commission
will:
A. By order approve or disapprove the
proposed rule change, or
B. institute proceedings to determine
whether the proposed rule change
should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
Electronic Comments
• Use the Commission’s internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include File Number SR–
CHX–2018–001 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–2018–001. 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
46 See Nasdaq Equities Rule 4758(a)(1)(A)(ix),
supra note 33.
47 See e.g., Cboe BYX Rule 11.13(b)(3) and
11.13(b)(3)(D), supra note 34.
43 See
PO 00000
12217
Sfmt 4703
E:\FR\FM\20MRN1.SGM
20MRN1
12218
Federal Register / Vol. 83, No. 54 / Tuesday, March 20, 2018 / Notices
post all comments on the Commission’s
internet website (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 website viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE,
Washington, DC 20549, on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of the
filing also will be available for
inspection and copying at the principal
office of the Exchange. All comments
received will be posted without change.
Persons submitting comments are
cautioned that we do not redact or edit
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–2018–001 and should
be submitted on or before April 10,
2018.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.48
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018–05560 Filed 3–19–18; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–82872; File No. SR–
CboeBZX–2017–011]
Self-Regulatory Organizations;
CboeBZX Exchange, Inc.; Order
Granting Approval of a Proposed Rule
Change To List and Trade the Common
Shares of Beneficial Interest of the
PowerShares Income Builder Portfolio,
a Series of PowerShares ExchangeTraded Fund Trust II
daltland on DSKBBV9HB2PROD with NOTICES
March 14, 2018.
I. Introduction
On December 1, 2017, CboeBZX
Exchange, Inc. (‘‘Exchange’’ or ‘‘BZX’’)
filed with the Securities and Exchange
Commission (‘‘Commission’’), pursuant
to Section 19(b)(1) of the Securities
Exchange Act of 1934 (‘‘Act’’) 1 and Rule
48 17
1 15
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
VerDate Sep<11>2014
19:08 Mar 19, 2018
Jkt 244001
19b–4 thereunder,2 a proposed rule
change to list and trade the common
shares of beneficial interest of the
PowerShares Income Builder Portfolio
(‘‘Fund’’), a series of PowerShares
Exchange-Traded Fund Trust II
(‘‘Trust’’), under BZX Rule 14.11(c)(3).
The proposed rule change was
published for comment in the Federal
Register on December 20, 2017.3 On
January 22, 2018, pursuant to Section
19(b)(2) of the Act,4 the Commission
designated a longer period within which
to approve the proposed rule change,
disapprove the proposed rule change, or
institute proceedings to determine
whether to disapprove the proposed
rule change.5 On March 6, 2018, the
Exchange filed Amendment No. 1 to the
proposed rule change.6 The Commission
has received no comments on the
proposal. The Commission is approving
the proposed rule change, as modified
by Amendment No. 1.
II. Exchange’s Description of the
Proposal 7
The Exchange proposes to list and
trade the Shares under BZX Rule
14.11(c)(5), which governs the listing
and trading of Index Fund Shares based
on equity and fixed income securities.
2 17
CFR 240.19b–4.
Securities Exchange Act Release No. 82328
(Dec. 14, 2017), 82 FR 60443 (Dec. 20, 2017).
4 15 U.S.C. 78s(b)(2).
5 See Securities Exchange Act Release No. 82559
(Jan. 22, 2018), 83 FR 3820 (Jan. 26, 2018).
6 In Amendment No. 1, which amended and
replaced the proposed rule change in its entirety,
the Exchange: (1) Corrected certain references to its
rules; (2) supplemented information regarding
requirements applicable to investment advisers,
including information with respect to firewalls and
procedures designed to prevent the use and
dissemination of material, nonpublic information
regarding the Fund’s portfolio; (3) corrected the
definition and usage of certain defined terms; (4)
clarified that the Fund will not be a leveraged or
inverse-leveraged fund and will not use derivative
instruments to enhance leverage; (5) conformed its
representations regarding the calculation and
dissemination of the Underlying Index (as defined
herein) and information relating to trading halts in
accordance with applicable BZX rules; (6)
supplemented information regarding pricing
availability with respect to holdings in nonexchange-listed securities of other investment
companies; and (7) made other technical, nonsubstantive, and conforming changes. Because
Amendment No. 1 does not materially alter the
substance of the proposed rule change or raise
unique or novel regulatory issues, it is not subject
to notice and comment. Amendment No. 1 is
available at: https://www.sec.gov/comments/srcboebzx-2017-011/cboebzx2017011-3206088162013.pdf.
7 A more detailed description of the Trust, the
Fund, and the Shares, as well as information
regarding the methodology of the Underlying Index
(as defined herein), the Fund’s portfolio holdings,
and the Fund’s investment restrictions are included
in Amendment No. 1 to the proposed rule change
and Registration Statement (as defined herein). See
Amendment No. 1, supra note 6; Registration
Statement, infra note 8 and accompanying text.
3 See
PO 00000
Frm 00072
Fmt 4703
Sfmt 4703
The Fund will be a passively managed,
index-based exchange-traded fund
(‘‘ETF’’), and it is a series of the Trust.
The Trust is registered with the
Commission as an open-end
management investment company and
has filed a post-effective amendment to
its registration statement on Form N–1A
(‘‘Registration Statement’’) with the
Commission.8 Invesco PowerShares
Capital Management LLC will be the
investment adviser (‘‘Adviser’’), and
Invesco Advisers, Inc. will be the
investment sub-adviser (‘‘SubAdviser’’), to the Fund. The Adviser and
the Sub-Adviser are affiliated with a
broker-dealer and have implemented,
and will maintain, a fire wall with
respect to the broker-dealer affiliate
regarding access to information
concerning the composition of, or
changes to, the Fund’s portfolio.
The Fund’s investment objective is to
seek to track the investment results
(before fees and expenses) of the
Goldman Sachs Bond Buyers Equity
Basket Index (‘‘Underlying Index’’). The
Underlying Index is designed to
measure the performance of a
hypothetical portfolio of common equity
stocks with an overlay of fullycollateralized written put options on
those stocks. Solactive AG (‘‘Calculation
Agent’’) maintains, calculates, and
publishes the value of the Underlying
Index on each business day. The
Calculation Agent is not registered as an
investment adviser or broker-dealer and
is not affiliated with any broker-dealers.
The Calculation Agent also has
implemented and will maintain
procedures designed to prevent the use
and dissemination of material,
nonpublic information regarding the
Underlying Index as required under
BZX Rule 14.11(c)(5)(A)(iii).
The Exchange states that it has
submitted the proposed rule change
because the Underlying Index for the
Fund does not meet all of the listing
requirements of BZX Rule 14.11(c)(5),
which applies to Index Fund Shares
based on an index that consists of both
equity securities and fixed income
securities. BZX Rule 14.11(c)(5) requires
that the equity and fixed income
component securities separately meet
the criteria set forth in BZX Rules
14.11(c)(3) and (4), applicable to equity
and fixed income securities indexes,
8 See Registration Statement on Form N–1A for
the Trust, filed on July 31, 2017 (File Nos. 333–
138490 and 811–21977). According to the
Exchange, the Commission has issued an order
granting certain exemptive relief (‘‘Exemptive
Order’’) with respect to the Trust under the
Investment Company Act of 1940 (‘‘1940 Act’’). See
Investment Company Act Release No. 27841 (May
25, 2007) (File No. 812–13335).
E:\FR\FM\20MRN1.SGM
20MRN1
]]>Agencies
[Federal Register Volume 83, Number 54 (Tuesday, March 20, 2018)]
[Notices]
[Pages 12214-12218]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-05560]
[[Page 12214]]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-82870; File No. SR-CHX-2018-001]
Self-Regulatory Organizations; Chicago Stock Exchange, Inc.;
Notice of Filing of Proposed Rule Change To Adopt the Route QCT Cross
Routing Option
March 14, 2018.
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 March 6, 2018, the Chicago Stock Exchange, Inc. (``CHX'' or
``Exchange'') filed with the Securities and Exchange Commission (the
``Commission'') the proposed rule change as described in Items I, II
and III below, which Items have been prepared by the self-regulatory
organization. The Commission is publishing this notice to solicit
comments on the proposed rule change from interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
CHX proposes to amend the Rules of the Exchange (``CHX Rules'') to
adopt the Route QCT Cross routing option. The text of this proposed
rule change is available on the Exchange's website at https://www.chx.com/regulatory-operations/rule-filings/, at the principal
office of the Exchange, and at the Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the self-regulatory organization
included statements concerning the purpose of, and basis for, the
proposed rule change and discussed any comments it received on the
proposed rule change. The text of those statements may be examined at
the places specified in Item IV below. The Exchange has prepared
summaries, set forth in sections A, B and C below, of the most
significant parts of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and the
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Exchange proposes to effect the following amendments to the CHX
Rules to adopt the Route QCT \3\ Cross routing option:
---------------------------------------------------------------------------
\3\ See Securities Exchange Act Release No. 57620 (April 4,
2008), 73 FR 19271 (April 4, 2008) (``Modified QCT Exemptive
Order''); see also CHX Article 1, Rule 2(a)(2) defining ``cross
order''; see also CHX Article 1, Rule 2(b)(2)(E) defining
``Qualified Contingent Trade.''
---------------------------------------------------------------------------
Adopt Article 19, Rule 4(a)(1) describing the proposed
``Route QCT Cross'' routing option.
Amend the definition of ``Routable Order'' under Article
1, Rule 1(oo), the definition of ``cross order'' under Article 1, Rule
2(a)(2) and make various amendments to Article 19 (CHX Routing
Services) to permit the routing of cross orders marked Route QCT Cross.
Other non-substantive clarifying amendments.
(1) Background
Currently, Routable Orders submitted to the CHX matching system
(``Matching System'') \4\ for execution are routed away from the
Matching System automatically if a Routing Event \5\ is triggered. All
Routable Orders \6\ are limit orders only, and thus market \7\ and
cross orders \8\ are never routable. Moreover, the Exchange does not
permit orders to be directly routed to an away Trading Center \9\
without initially being submitted to the Matching System.
---------------------------------------------------------------------------
\4\ The Matching System is part of the Exchange's ``Trading
Facilities,'' as defined under CHX Article 1, Rule 1(z).
\5\ See CHX Article 19, Rule 3(a)(1)-(5).
\6\ See CHX Article 1, Rule 1(oo) defining ``Routable Order.''
\7\ See CHX Article 1, Rule 2(a)(3) defining ``market order.''
\8\ See CHX Article 1, Rule 2(a)(2) defining ``cross order.''
\9\ See CHX Article 1, Rule 1(nn) defining ``Trading Center.''
---------------------------------------------------------------------------
A large percentage of the Exchange's average daily volume (``ADV'')
is attributed to cross orders that are component orders to Qualified
Contingent Trades (``QCT Crosses''). Mechanically, the Matching System
handles QCT Crosses like simple crosses (i.e., cross orders without any
modifiers attached), except that the Matching System permits QCT
Crosses to trade-through protected quotes of away markets as QCT
Crosses are exempt from the trade-through prohibition of Rule 611 of
Regulation NMS.\10\ Therefore, like simple crosses, all QCT Crosses are
handled IOC \11\ and can never rest on the CHX book. Moreover, like
simple crosses, a QCT Cross submitted to the Matching System will be
cancelled back to the order sender as ``blocked'' if a precedent limit
order priced at or better than the QCT Cross is resting on the CHX
book,\12\ except that a QCT Cross priced at the top of the CHX book
(i.e., the best-ranked order on the CHX book pursuant to Article 20,
Rule 8(b)) that qualifies for Cross With Size \13\ handling will be
permitted to execute. However, unlike simple crosses, which may be
submitted by any Participant,\14\ QCT Crosses may only be submitted by
Institutional Brokers (``IBs'').\15\
---------------------------------------------------------------------------
\10\ See supra note 3.
\11\ See CHX Article 1, Rule 2(a)(2)
\12\ See CHX Article 1, Rule 2(a)(2); see also CHX Article 20,
Rule 8(e)(1).
\13\ See CHX Article 1, Rule 2(g)(1).
\14\ See CHX Article 1, Rule 1(s) defining ``Participant.''
\15\ See CHX Article 1, Rule 2(b)(2)(E); see also CHX Article 1,
Rule 1(n) defining ``Institutional Broker.''
---------------------------------------------------------------------------
In the event a QCT Cross is blocked and cancelled, the IB will
usually cause the order to be executed over-the-counter (``OTC''). The
OTC trade would then be reported to a Trade Reporting Facility
(``TRF'') and cleared either through the Exchange's optional away trade
clearing service,\16\ which may only be used by IBs, or another
clearing service. The Exchange assesses a fee for use of the optional
away trade clearing service,\17\ which is identical to the fee for a
QCT Cross executed within the Matching System.\18\
---------------------------------------------------------------------------
\16\ See CHX Article 21, Rule 6.
\17\ See Section E.7 of the CHX Fee Schedule.
\18\ See Section E.3 of the CHX Fee Schedule.
---------------------------------------------------------------------------
In recent years, the percentage of the Exchange's average daily
volume (``ADV'') attributed to cross orders has decreased, which has
been offset by an increase in single-sided matching activity.\19\ This
has primarily been driven by enhanced resting liquidity on the CHX
book. Consequently, as the number of orders resting on the CHX book
have increased, and the price of such orders have become more
aggressive, blocked crosses have become more frequent.\20\
---------------------------------------------------------------------------
\19\ In 2014, the percentage of total CHX executed volume
attributed to single-sided orders (``CHX Single-sided Volume'') was
11.03%. In 2015 and 2016, this percentage increased to 17.39% and
19.69%, respectively. In 2017, as of December 1, 2017, CHX Single-
sided Volume decreased to 12.05%, due primarily to the withdrawal of
certain top CHX liquidity providers in late 2016.
\20\ In 2014, 6.03% of all cross orders submitted to the
Matching System were cancelled back to the order sender. In 2015,
2016 and 2017 (as of December 1, 2017), this percentage increased to
9.72%, 11.47% and 12.81%, respectively.
---------------------------------------------------------------------------
Considering this trend, the Exchange is now proposing to adopt the
Route QCT Cross routing option, which will permit IBs \21\ to directly
route a QCT Cross to a non-affiliated third-party
[[Page 12215]]
broker-dealer designated by the IB (``designated executing broker'')
for execution. The purpose of Route QCT Cross is to provide IBs with a
routing option that will simplify and streamline the OTC execution
process for QCTs,\22\ which will enhance the value of IB registration
with the Exchange. As such, the Exchange believes that the proposal
will facilitate the ability of IBs to execute QCT Crosses in compliance
with the requirements of the Modified QCT Exemptive Order \23\ and CHX
Rules,\24\ which fosters cooperation and coordination with persons
engaged in facilitating transactions in securities in furtherance of
Section 6(b)(5) of the Act.\25\
---------------------------------------------------------------------------
\21\ The Exchange is proposing to limit use of Route QCT Cross
to IBs to be consistent with the fact that only IBs are currently
permitted to submit QCT Crosses to the Matching System. See CHX
Article 1, Rule 2(b)(2)(E).
\22\ CHX Article 19, Rule 1.
\23\ See supra note 3.
\24\ Id.
\25\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
(2) Operation of Route QCT Cross
In sum, a Route QCT Cross order submitted by an IB will be handled
like a current Routable Order,\26\ except that the Route QCT Cross
order will never be submitted to the Matching System for execution.
Specifically, upon receipt of a Route QCT Cross order, the Exchange
will cause the order to be routed IOC from the Exchange, through CHXBD,
LLC (``CHXBD''), the Exchange's affiliated routing broker, to the
designated executing broker identified by the IB.\27\ The relationship
between a designated executing broker and CHXBD will be governed by
applicable CHX Rules \28\ and customary interbroker agreements, such as
fully-disclosed clearing and customer agreements. At all times, the use
of Route QCT Cross will be optional.
---------------------------------------------------------------------------
\26\ See CHX Article 1, Rule 1(oo).
\27\ In the event the proposed rule change is approved and
becomes operative, IBs will be permitted to identify only one
designated executing broker to which all Route QCT Cross orders
submitted by the IB will be routed, subject to additional
requirements, as described below.
\28\ See e.g., CHX Article 19, Rule 2(a).
---------------------------------------------------------------------------
While the Matching System, CHX Routing Services and CHXBD are each
regulated as a ``facility'' of the Exchange,\29\ as defined under
Section 3(a)(2) of the Act,\30\ the Exchange submits that a designated
executing broker would not be facility of the Exchange for the reasons
described below. Therefore, the execution of Route QCT Cross orders by
the designated executing broker would not be subject to the Exchange's
book and execution priority rules.\31\
---------------------------------------------------------------------------
\29\ See CHX Article 1, Rule 1(z); see also CHX Article 19, Rule
2(a)(1).
\30\ 15 U.S.C. 78c(a)(2). ``The term ``facility'' when used with
respect to an exchange includes its premises, tangible or intangible
property whether on the premises or not, any right to the use of
such premises or property or any service thereof for the purpose of
effecting or reporting a transaction on an exchange (including,
among other things, any system of communication to or from the
exchange, by ticker or otherwise, maintained by or with the consent
of the exchange), and any right of the exchange to the use of any
property or service.'' Id.
\31\ See CHX Article 20, Rules 8(b) and (d).
---------------------------------------------------------------------------
Specifically, a designated executing broker would not be owned by,
or affiliated or associated with, the Exchange or CHXBD, and thus a
designated executing broker would not be a premise or property of the
Exchange. In addition, while the Exchange would provide the routing
infrastructure to permit IBs to execute QCTs OTC, the Exchange does not
have a ``right'' to ``use'' \32\ the property or services of the
designated executing broker (nor does the designated executing broker
have a right to use the property or services of the Exchange) for the
following reasons:
---------------------------------------------------------------------------
\32\ 15 U.S.C. 78c(a)(2).
---------------------------------------------------------------------------
An IB has sole discretion as to the designated executing
broker to which its Route QCT Cross order will be routed.
Use of the Route QCT Cross routing option is optional. The
Exchange will have no discretion on when and if the Route QCT Cross
will be used.
Route QCT Cross orders are not eligible for execution
within the Matching System and could be used without regard to the
state of the CHX book. Therefore, the designated executing broker
cannot be considered a mere extension of the Matching System.
The Exchange notes that Route QCT Cross is similar to the following
routing options of other national securities exchanges:
Directed Order. Like Route QCT Cross, the ``Directed
Order'' routing option offered by the Nasdaq Stock Market (``Nasdaq'')
permits an order sender to route an order to another market center
while bypassing the Nasdaq's order book,\33\ which may result in the
routed order executing at a price through Nasdaq's top of book.
---------------------------------------------------------------------------
\33\ ```Directed Order' is an Order designed to use a routing
strategy under which the Order is directed to an automated trading
center (as defined in Regulation NMS) other than Nasdaq, as directed
by the entering party, without checking the Nasdaq Book.'' See
Nasdaq Equities Rule 4758(a)(1)(A)(ix).
---------------------------------------------------------------------------
DRT. Like Route QCT Cross, the ``DRT'' routing option
offered by the Cboe BYX and Cboe BZX exchanges permit an order to be
routed to one or more away alternative trading systems.\34\
---------------------------------------------------------------------------
\34\ DRT is a ``a routing option in which the entering firm
instructs the System to route to alternative trading systems
included in the System routing.'' See Cboe BYX Rule 11.13(b)(3)(D);
see also Cboe BZX Rule 11.13(b)(3)(D). Both Cboe BYX and BZX have
``the right to maintain a different System routing table for
different routing options and to modify the System routing table at
any time without notice.'' See Cboe BYX Rule 11.13(b)(3); see also
Cboe BZX Rule 11.13(b).
---------------------------------------------------------------------------
(3) Proposed Article 19, Rule 4 (Routing Options) and Related
Amendments
Adoption of the Route QCT Cross routing option requires amendments
to the CHX Rules to describe its functionality and to permit cross
orders to be routed through the CHX Routing Services. As such, the
Exchange proposes the following amendments to the CHX Rules.
The Exchange proposes to adopt Article 19, Rule 4 (Routing
Options). Proposed paragraph (a) provides that routing options may be
combined with all available order types, modifiers and related terms,
except for order types, modifiers, and related terms that are
inconsistent with the terms of a routing option. Paragraph (a) also
provides that the Exchange may activate or deactivate any routing
option at its discretion and, if practicable, after notice to
Participants.
Thereunder, proposed paragraph (a)(1) provides that Route QCT Cross
is a routing option, which may only be utilized by Institutional
Brokers, that instructs the Exchange to route a cross order marked QCT
directly to a non-affiliated third-party broker-dealer designated by
the Institutional Broker without submitting the order into the Matching
System for execution. Also, each Institutional Broker is permitted to
identify only one designated executing broker to which all Route QCT
Cross orders submitted by the Institutional Broker shall be routed.
Furthermore, prior to the Exchange accepting any Route QCT Cross orders
directed to a specific designated executing broker, the Exchange shall
confirm that the designated executing broker has established
connectivity to the Exchange's routing systems. In addition, the
Institutional Broker shall be responsible for all away execution fees
resulting from the execution of Route QCT Cross orders, including any
guaranteed payments to its designated executing broker.\35\ Moreover,
Route
[[Page 12216]]
QCT Cross orders shall be routed IOC and that a Route QCT Cross order
that could not be executed by a designated executing broker, for any
reason,\36\ shall be cancelled back to the original order sender.
---------------------------------------------------------------------------
\35\ For example, the Exchange anticipates that a typical
designated executing broker would require a per execution fee and a
guaranteed monthly minimum that would be offset by any executions
fees collected during the month. These fees would be assessed to
CHXBD, which would in turn pass on the fees to the relevant IBs. In
the event a guaranteed payment is due for a given month (i.e., the
guaranteed monthly minimum was not met), the Exchange would divide
the balance equally among the IBs that had identified the broker as
the designated executing broker at any point during that month. For
example, if there were two IBs that each designated Broker A as its
designated executing broker at any point during the month of
November 2018 and a guaranteed payment of $2,000 became due to
Broker A for November 2018, each IB would be assessed a fee of
$1,000 for November 2018.
\36\ The Exchange notes that a Route QCT Cross order will most
likely be executed upon receipt by a designated executing broker. In
the unlikely event a Route QCT Cross order is cancelled by a
designated executing broker, such an event would most likely be
related to systems issues at a designated executing broker or a
regulatory prohibition (e.g., declaration of a market wide trading
halt in the security during the time the Route QCT Cross order was
in flight to a designated executing broker). A Route QCT Cross order
would not be cancelled for reasons related to the state of a
designated executing broker's order book.
---------------------------------------------------------------------------
As Route QCT Cross orders will be routed away from the Exchange
without being submitted to the Matching System for execution, the
Exchange proposes to amend Article 19, Rules 1(a) and (c) to replace
the term ``Matching System'' with ``Exchange.'' Thus, amended Rule 1(a)
would provide, in pertinent part, that Routable Orders that have been
submitted to, and accepted by, the Exchange may be routed from the
Exchange to other Trading Centers pursuant to this Article 19. Amended
Rule 1(c) would provide, in pertinent part, that Routable Orders
submitted to the Exchange are firm orders, pursuant to Article 20, Rule
3.
Similarly, the Exchange proposes to amend Article 1, Rule 2(a) to
replace the term ``Matching System'' with ``Exchange,'' as a Route QCT
Cross order is a routable cross order marked QCT that is not eligible
to be submitted to the Matching System for execution. Thus, amended
Rule 2(a) would provide in pertinent part that the order types
described under Article 20, Rule 2(a) ``shall be accepted by the
Exchange, subject to the requirements of Article 20, Rule 4.''
Moreover, since Route QCT Cross orders are a subset of cross orders
that will not be handled IOC upon receipt by the Exchange, and all
cross orders currently received by the Exchange are deemed to have been
received IOC, the Exchange proposes to amend the definition of ``cross
orders'' under Article 1, Rule 2(a)(2) to provide that all cross orders
submitted to the Matching System for execution shall be deemed to have
been received IOC.
Since the cross orders are not currently Routable Orders, the
Exchange proposes to amend Article 1, Rule 1(oo) by adopting paragraph
(oo)(2), which expands the definition of Routable Orders to include any
order marked by a routing option listed under proposed Article 19, Rule
4 (i.e., Route QCT Cross). Also, the Exchange proposes to eliminate the
word ``incoming'' from proposed Rule 1(oo)(1), as it is redundant in
light of the proposed clarifying amendments to Article 19, Rule 3
described below. Thus, amended Article 1, Rule 1(oo) would provide that
``Routable Order'' means: (1) Any limit order, as defined under Article
1, Rule 2(a)(1), of any size, not marked by any order modifiers or
related terms listed under Article 1, Rule 2 that prohibit the routing
of the order to another Trading Center; provided, however, that during
a SNAP Cycle,\37\ participating SNAP Eligible Orders are always
Routable Orders; or (2) any order marked by a routing option listed
under proposed Article 19, Rule 4.
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\37\ See CHX Article 18, Rule 1.
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(4) Amended Article 19, Rule 3 (Mandatory Routing Events)
Current Article 19, Rule 3 (Routing Events) describes mandatory
routing for Routable Orders submitted to the Matching System, whereas
proposed Article 19, Rule 4 would list routing options, such as Route
QCT Cross, which must be affirmatively selected by the order sender. To
clarify this distinction, the Exchange proposes to amend the title to
Article 19, Rule 3 from ``Routing Events'' to ``Mandatory Routing
Events'' and to amend Article 19, Rule 3(a) to provide that a Routable
Order that is submitted to the Matching System shall be routed away
from the Matching System pursuant to the CHX Routing Services if a
Routing Event is triggered.
Moreover, the Exchange proposes additional non-substantive
amendments to Article 19, Rules 3(a)(1)-(5) to clarify the current
operation of the current Routing Events.\38\ Amended paragraph (a)(1)
provides that an incoming limit Routable Order shall be routed away to
permit its display and/or execution on the Exchange in compliance with
Rules 610(d) and 611 of Regulation NMS and, for the duration of the
Pilot Period to coincide with the Pilot Period for the Regulation NMS
Plan to Implement a Tick Size Pilot (``Plan''),\39\ the Trade-at
Prohibition described under the Plan.
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\38\ For a comprehensive description of the Routing Events
described under Article 19, Rules 3(a)(1)-(3), see Exchange Act No.
73150 (September 19, 2014), 79 FR 57603 (September 25, 2014) (SR-
CHX-2014-15). For a comprehensive description of the Routing Events
described under Article 19, Rules 3(a)(4) and (5), see Exchange Act
Release No. 75346 (July 1, 2015), 80 FR 39172 (July 8, 2015) (SR-
CHX-2015-03).
\39\ See CHX Article 20, Rule 13; see also Securities Exchange
Act Release No. 72460 (June 24, 2014), 79 FR 36840 (June 30, 2014);
see also Securities Exchange Act Release No. 74892 (May 6, 2015), 80
FR 27513 (May 13, 2015).
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Amended paragraph (a)(2) provides that an incoming limit Routable
Order for an Odd Lot shall be routed away to prevent its execution
within the Matching System if it would trade-through a Protected
Quotation of an external market.
Amended paragraph (a)(3) provides that (3) an incoming limit
Routable Order marked Do Not Display or an incoming limit Routable
Order for an Odd Lot that could not be displayed (``incoming
undisplayed limit Routable Order'') shall be routed away to execute
against any Protected Quotation(s) of external market(s) priced at or
better than the limit price of the incoming undisplayed limit Routable
Order if there are no contra-side resting orders on the CHX book
against which the incoming undisplayed limit Routable Order could
execute.
Amended paragraph (a)(4) provides that Routable Order(s) shall be
routed away to permit orders to be executed within the Matching System
at the SNAP Price, as defined under Article 1, Rule 1(rr), in
compliance with Regulation NMS. Also, orders routed away pursuant to
this paragraph (a)(4) shall be priced -1- at the SNAP Price or, -2- if
the SNAP Price is priced at an increment smaller than the relevant
minimum price increment, at the minimum price increment less aggressive
than the SNAP Price.
Amended paragraph (a)(5) provides that (5) Routable Order(s) that
could not be matched within the Matching System during a SNAP Cycle, as
described under Article 18, Rule 1(b), shall be routed away at the SNAP
Price to execute against Protected Quotations of external markets
priced at the SNAP Price.
(5) Operative Date
In the event the proposed rule change is approved, the proposed
rule change shall become operative pursuant to notice to Participants.
2. Statutory Basis
The Exchange believes that the proposed rule change is consistent
with Section 6(b) of the Act in general,\40\ and furthers the
objectives of Section 6(b)(1) \41\ in particular, in that it would
further enable the Exchange to be so organized as to have the capacity
to be able to carry out the purposes of the Act and to comply, and to
enforce compliance by its Participants and persons associated with its
Participants, with the provisions of the Act, the rules
[[Page 12217]]
and regulations thereunder, and the rules of the Exchange.
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\40\ 15 U.S.C. 78f(b).
\41\ 15 U.S.C. 78f(b)(1).
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Specifically, the Exchange believes that the non-substantive
amendments to Article 19, Rule 3 will clarify the operation of the
mandatory Routing Events described thereunder, as distinguished from
the optional Route QCT Cross routing option described under proposed
Article 19, Rule 4(a)(1). Similarly, the various amendments to provide
that the Route QCT Cross routing option will result in Routable Orders
being routed away from the ``Exchange'' generally and to specifically
provide when orders would be routed away from the Matching System will
clarify how the different types of Routable Orders will be routed away.
In addition, the proposal to permit the Exchange to activate or
deactivate the routing options under proposed Article 19, Rule 4 at its
discretion and, if practicable, after notice to Participants, would be
consistent with the Exchange's current authority to activate and
deactivate certain order types, modifiers and terms pursuant to Article
20, Rule 4(b). Since the proposed Route QCT Cross routing option is an
order type (albeit one that cannot be utilized within the Matching
System), the Exchange believes that harmonizing these provisions under
proposed Article 19, Rule 4 and current Article 20, Rule 4(b) would
clarify the Exchange's discretionary authority with respect to order
types, modifiers and related terms.
Accordingly, the Exchange believes that the amendments will better
enable the Exchange to enforce compliance by Participants and its
associated persons with CHX Rules in furtherance of the objectives of
Section 6(b)(1) of the Act.
The Exchange also believes that the proposed rule change furthers
the objectives of Section 6(b)(5) of the Act \42\ in that it is
designed to promote just and equitable principles of trade, to foster
cooperation and coordination with persons engaged in facilitating
transactions in securities, to remove impediments and perfect the
mechanisms of a free and open market, and, in general, to protect
investors and the public interest; and is not designed to permit unfair
discrimination between customers, issuers, brokers, or dealers.
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\42\ 15 U.S.C. 78f(b)(5).
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Specifically, the Exchange believes that the proposed Route QCT
Cross routing option will foster cooperation and coordination with
persons engaged in facilitating transactions in securities by providing
Participants with an additional execution option for QCT Crosses, which
will enhance their ability to coordinate the execution of QCT Crosses
in a timely manner with other market participants that are handling
related component orders, as required by the Modified QCT Exemptive
Order and CHX Rules.\43\ Moreover, given that that investors typically
utilize QCTs to execute exceptionally large trades and to manage the
substantial risk inherent to large positions, the Exchange submits that
the proposed Route QCT Cross routing option will also protect investors
and the public interest by facilitating the execution (and hedging) of
such important transactions.
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\43\ See supra note 3.
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In addition, since current CHX Rules only permit IBs to submit QCT
Crosses to the Matching System,\44\ restricting use of the Route QCT
Cross option to IBs only would be consistent with current CHX Rules and
thus not unfairly discriminatory. Moreover, the proposal is not
designed to be unfairly discriminatory as each IB will be (1) permitted
to select the designated executing broker of its choice, subject to
certain requirements applicable to all prospective designated executing
brokers (e.g., the designated executing broker is a non-affiliated
third-party broker-dealer and must establish connectivity to the
Exchange's routing systems) and (2) responsible for all execution fees
and guaranteed payments due to its designated executing broker, the
latter of which may be divided equally among IBs that select the same
designated executing broker during a relevant fee measurement
period.\45\
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\44\ See supra note 21.
\45\ See supra note 35.
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Accordingly, the Exchange believes that all proposed amendments to
implement the Route QCT Cross routing option, including amendments to
Article 1, Rule 1(oo) and Article 1, Rule 2(a)(2) to permit cross
orders to become Routable Orders, are consistent with Section 6(b)(5)
of the Act.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition that is not necessary or appropriate
in furtherance of the purposes of the Act. To the contrary, the
Exchange believes that the proposal will enhance competition among the
exchanges by improving QCT Cross execution options for Institutional
Brokers. Moreover, the Exchange notes that other national securities
exchanges offer order routing options that permit an order sender to
bypass the exchange's own limit order book \46\ or allows the exchange
to route an order to alternative trading systems designated by the
exchange.\47\ As such, the proposed rule change is a competitive
proposal that will enhance competition among the national securities
exchanges to the benefit of market participants.
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\46\ See Nasdaq Equities Rule 4758(a)(1)(A)(ix), supra note 33.
\47\ See e.g., Cboe BYX Rule 11.13(b)(3) and 11.13(b)(3)(D),
supra note 34.
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C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants or Others
No written comments were solicited or received with respect to the
proposed rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period (i) as the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
A. By order approve or disapprove the proposed rule change, or
B. institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
File Number SR-CHX-2018-001 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-2018-001. 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
[[Page 12218]]
post all comments on the Commission's internet website (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 website viewing and printing in the Commission's Public
Reference Room, 100 F Street NE, Washington, DC 20549, on official
business days between the hours of 10:00 a.m. and 3:00 p.m. Copies of
the filing also will be available for inspection and copying at the
principal office of the Exchange. All comments received will be posted
without change. Persons submitting comments are cautioned that we do
not redact or edit 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-
2018-001 and should be submitted on or before April 10, 2018.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\48\
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\48\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-05560 Filed 3-19-18; 8:45 am]
BILLING CODE 8011-01-P
