Self-Regulatory Organizations; Investors Exchange LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Amend Rule 11.190(g) To Incrementally Optimize and Enhance the Effectiveness of the Quote Instability Calculation in Determining Whether a Crumbling Quote Exists, 17467-17472 [2018-08155]
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Federal Register / Vol. 83, No. 76 / Thursday, April 19, 2018 / Notices
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Sessions when an updated Benchmark
Index value and Intraday Indicative
Value will not be calculated or publicly
disseminated; (e) the requirement that
members deliver a prospectus to
investors purchasing newly issued
Shares prior to or concurrently with the
confirmation of a transaction; and (f)
trading information.41
(8) The Fund may hold up to an
aggregate amount of 15% of its net
assets in illiquid securities (calculated
at the time of investment).42
(9) Each single call option in the
Benchmark Index will be traded on
national securities exchanges.43
(10) The equity securities in which
the Fund will invest, and the option that
the Fund will write, will be limited to
U.S. exchange-traded securities and call
options, respectively, and such
securities will trade in markets that are
members of the ISG or which are parties
to a comprehensive surveillance sharing
agreement with the Exchange.44
(11) The Fund will invest at least 80%
of its total assets in all of the equity
securities in the Russell 2000 Index and
a single written one-month out-of-themoney covered call option on the
Russell 2000 Index, and the market
value of the option strategy may be up
to 20% of the Fund’s overall net asset
value.45
(12) The Fund will utilize options in
accordance with Rule 4.5 of the CEA.46
(13) The Fund will transact only with
swap dealers that have in place an ISDA
agreement with the Fund.47
(14) The Fund’s short positions and
its investments in swaps, futures
contracts, forward contracts and options
based on the Benchmark Index and
Russell 2000 Index and ETFs designed
to track the Benchmark Index or Russell
2000 Index will be backed by
investments in cash, high-quality shortterm debt securities and money-market
instruments in an amount equal to the
Fund’s maximum liability under the
applicable position or contract, or will
otherwise be offset in accordance with
Section 18 of the 1940 Act.48
(15) The Fund will attempt to limit
counterparty risk in non-cleared swaps,
forwards, and OTC option contracts by
entering into such contracts only with
counterparties the Adviser believes are
creditworthy and by limiting the Fund’s
exposure to each counterparty. The
id. at 8725.
id. at 8722.
43 See id. at 8721.
44 See id.
45 See id. at 8720.
46 See id. at 8721.
47 See id. at 8721 n.10.
48 See id. at 8721.
Adviser will monitor the
creditworthiness of each counterparty
and the Fund’s exposure to each
counterparty on an ongoing basis.49
(16) To limit the potential risk
associated with such transactions, the
Fund will segregate or ‘‘earmark’’ assets
determined to be liquid by the Adviser
in accordance with procedures
established by the Trust’s Board of
Trustees and in accordance with the
1940 Act (or, as permitted by applicable
regulation, enter into certain offsetting
positions) to cover its obligations arising
from such transactions. In addition, the
Fund will include appropriate risk
disclosure in its offering documents,
including leveraging risk.50
(17) The Fund will not make
investments in securities to seek to
achieve a multiple or inverse multiple
of an index and they will not be used
to enhance leverage.51
(18) The Fund will not invest in assets
that are not described in the proposed
rule change.52
(19) A minimum of 100,000 Shares
will be outstanding at the
commencement of trading on the
Exchange.53
The Exchange further represents that
all statements and representations made
in this filing regarding the description of
the portfolio, limitations on portfolio
holdings or reference assets,
dissemination and availability of the
reference asset and intraday indicative
values, and the applicability of
Exchange listing rules shall constitute
continued listing requirements for
listing the Shares on the Exchange. The
issuer has represented to the Exchange
that it will advise the Exchange of any
failure by the Fund to comply with the
continued listing requirements, and,
pursuant to its obligations under
Section 19(g)(1) of the Act, the Exchange
will monitor for compliance with the
continued listing requirements. If the
Fund is not in compliance with the
applicable listing requirements, the
Exchange will commence delisting
procedures under the Nasdaq 5800
Series.54
This approval order is based on all of
the Exchange’s representations,
including those set forth above and in
the Notice. For the foregoing reasons,
the Commission finds that the proposed
rule change is consistent with Section
6(b)(5) of the Act 55 and the rules and
41 See
42 See
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17:49 Apr 18, 2018
id. at 8722.
id. at 8722 n.14.
51 See id.
52 See id. at 8722.
53 See id. at 8724.
54 See id. at 8725.
55 15 U.S.C. 78f(b)(5).
regulations thereunder applicable to a
national securities exchange.
IV. Conclusion
It is therefore ordered, pursuant to
Section 19(b)(2) of the Act,56 that the
proposed rule change (SR–NASDAQ–
2018–012) be, and it hereby is,
approved.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.57
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018–08153 Filed 4–18–18; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–83048; File No. SR–IEX–
2018–07]
Self-Regulatory Organizations;
Investors Exchange LLC; Notice of
Filing and Immediate Effectiveness of
Proposed Rule Change To Amend Rule
11.190(g) To Incrementally Optimize
and Enhance the Effectiveness of the
Quote Instability Calculation in
Determining Whether a Crumbling
Quote Exists
April 13, 2018.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (the
‘‘Act’’),1 and Rule 19b–4 thereunder,2
notice is hereby given that on April 3,
2018, the Investors Exchange LLC
(‘‘IEX’’ or the ‘‘Exchange’’) filed with the
Securities and Exchange Commission
(the ‘‘Commission’’) the proposed rule
change as described in Items I and II,
below, which Items have been prepared
by the self-regulatory organization. The
Commission is publishing this notice to
solicit comments on the proposed rule
change from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
Pursuant to the provisions of Section
19(b)(1) under the Act,3 and Rule 19b–
4 thereunder,4 IEX is filing with the
Commission a proposed rule change to
amend Rule 11.190(g) to incrementally
optimize and enhance the effectiveness
of the quote instability calculation in
determining whether a crumbling quote
exists. The Exchange has designated this
proposal as non-controversial and
49 See
50 See
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56 15
U.S.C. 78s(b)(2).
CFR 200.30–3(a)(12).
1 15 U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 15 U.S.C. 78s(b)(1).
4 17 CFR 240.19b–4.
57 17
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provided the Commission with the
notice required by Rule 19b–4(f)(6)(iii)
under the Act.5
The text of the proposed rule change
is available at the Exchange’s website at
www.iextrading.com, at the principal
office of the Exchange, and at the
Commission’s Public Reference Room.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
self-regulatory organization included
statements concerning the purpose of
and basis for the proposed rule change
and discussed any comments it received
on the proposed rule change. The text
of these statement [sic] may be
examined at the places specified in Item
IV below. The self-regulatory
organization has prepared summaries,
set forth in Sections A, B, and C below,
of the most significant aspects of such
statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
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Overview
The purpose of the proposed rule
change is to amend Rule 11.190(g) to
incrementally optimize and enhance the
effectiveness of the quote instability
calculation in determining whether a
crumbling quote exists. The Exchange
utilizes real time relative quoting
activity of certain Protected Quotations 6
and a proprietary mathematical
calculation (the ‘‘quote instability
calculation’’) to assess the probability of
an imminent change to the current
Protected NBB to a lower price or
Protected NBO to a higher price for a
particular security (‘‘quote instability
factor’’). When the quoting activity
meets predefined criteria and the quote
instability factor calculated is greater
than the Exchange’s defined quote
instability threshold, the System treats
the quote as unstable and the crumbling
quote indicator (‘‘CQI’’) is on at that
price level for two milliseconds. During
all other times, the quote is considered
stable, and the CQI is off. The System
independently assesses the stability of
the Protected NBB and Protected NBO
for each security.
5 17
CFR 240.19b–4(f)(6)(iii).
to Rule 11.190(g), the Protected
Quotations of the New York Stock Exchange,
Nasdaq Stock Market, NYSE Arca, Nasdaq BX, Bats
BZX Exchange, Bats BYX Exchange, Bats EDGX
Exchange, and Bats EDGA Exchange.
6 Pursuant
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When CQI is on, Discretionary Peg
orders 7 and primary peg orders 8 do not
exercise price discretion to meet the
limit price of an active (i.e., taking)
order. Specifically, as set forth in Rule
11.190(b)(10), a Discretionary Peg order
pegs to the less aggressive of the
primary quote (i.e., NBB for buy orders
and NBO for sell orders) or the order’s
limit price, if any, but, will exercise
price discretion in order to meet the
limit price of an active order up to the
less aggressive of the Midpoint Price or
the order’s limit price, if any. However,
a Discretionary Peg order will not
exercise such price discretion when the
CQI is on. Similarly, as set forth in Rule
11.190(b)(8), a primary peg order pegs to
a price that is the less aggressive of one
(1) minimum price variant (‘‘MPV’’) less
aggressive than the primary quote (i.e.,
one MPV below (above) the NBB (NBO)
for buy (sell) orders) or the order’s limit
price, if any, but will exercise price
discretion in order to meet the limit
price of an active order up to the NBB
(for buy orders) or down to the NBO (for
sell orders), except when the CQI is on
or if the order is resting at its limit price,
if any.
In addition, when the CQI is on buy
(sell) orders that take liquidity at prices
at or below (above) the NBO (NBB) are
subject to the Crumbling Quote Remove
Fee (‘‘CQRF’’) for executions that exceed
the CQRF Threshold.
Discretionary Peg Order
The manner in which Discretionary
Peg orders operate is described in Rule
11.190(b)(10). Specifically, a
Discretionary Peg order is a nondisplayed, pegged order that upon entry
into the System, the price of the order
is automatically adjusted by the System
to be equal to the less aggressive of the
Midpoint Price or the order’s limit
price, if any. When unexecuted shares
of such order are posted to the Order
Book, the price of the order is
automatically adjusted by the System to
be equal to and ranked at the less
aggressive of the primary quote or the
order’s limit price and is automatically
adjusted by the System in response to
changes in the NBB (NBO) for buy (sell)
orders up (down) to the order’s limit
price, if any. In order to meet the limit
price of active orders on the Order Book,
a Discretionary Peg order will exercise
the least amount of price discretion
necessary from the Discretionary Peg
order’s resting price to its discretionary
price (defined as the less aggressive of
the Midpoint Price or the Discretionary
Peg order’s limit price, if any), except
7 See
8 See
PO 00000
Rule 11.190(b)(10).
Rule 11.190(b)(8).
Frm 00110
Fmt 4703
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during periods of quote instability (i.e.,
when a crumbling quote exists) as
defined in paragraph Rule 11.190(g).
Primary Peg Orders
The manner in which primary peg
orders operate is described in Rules
11.190(a)(3) and 11.190(b)(8).
Specifically, a primary peg order is a
non-displayed, pegged order that upon
entry and when posting to the Order
Book the price of the order is
automatically adjusted by the System to
be equal to and ranked at the less
aggressive of one (1) MPV less
aggressive than the primary quote (i.e.,
the NBB for buy orders and the NBO for
sell orders) or the order’s limit price, if
any. While resting on the Order Book,
the order is automatically adjusted by
the System in response to changes in the
NBB (NBO) for buy (sell) orders up
(down) to the order’s limit price, if any.
In order to meet the limit price of active
orders on the Order Book a primary peg
order will exercise price discretion to its
discretionary [sic] (defined as the
primary quote), except during periods of
quote instability as defined in paragraph
11.190(g).
CQRF
The CQRF is designed to incentivize
resting liquidity, including displayed
liquidity, on IEX, and is applicable to
orders that remove resting liquidity
when the CQI is on if such orders
constitute at least 5% of the Member’s
volume executed on IEX and at least
1,000,000 shares, on a monthly basis,
measured on a per market participant
identifier (‘‘MPID’’) basis. Thus, orders
that exceed the 5% and 1,000,000 share
thresholds are assessed a fee of $0.0030
per each incremental share executed (or
0.3% of the total dollar value of the
transaction for securities priced below
$1.00) that exceeds the threshold.
Crumbling Quote Calculation
In determining whether a crumbling
quote exists, the Exchange utilizes real
time relative quoting activity of certain
Protected Quotations and a proprietary
mathematical calculation (the ‘‘quote
instability calculation’’) to assess the
probability of an imminent change to
the current Protected NBB to a lower
price or Protected NBO to a higher price
for a particular security (‘‘quote
instability factor’’). When the quoting
activity meets predefined criteria and
the quote instability factor calculated is
greater than the Exchange’s defined
threshold (‘‘quote instability
threshold’’), the System treats the quote
as not stable (‘‘quote instability’’ or a
‘‘crumbling quote’’). During all other
times, the quote is considered stable
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(‘‘quote stability’’). The System
independently assesses the stability of
the Protected NBB and Protected NBO
for each security.
When the System determines that a
quote, either the Protected NBB or the
Protected NBO, is unstable, the
determination remains in effect at that
price level for two (2) milliseconds. The
System will only treat one side of the
Protected NBBO as unstable in a
particular security at any given time.9
By not permitting resting Discretionary
Peg orders and primary peg orders to
exercise price discretion during periods
of quote instability, the Exchange is
designed to protect such orders from
unfavorable executions when its
probabilistic model identifies that the
market appears to be moving adversely
to them. Similarly, the CQRF is
designed to protect liquidity providing
orders by disincentivizing trading
strategies that target resting liquidity
during periods of quote instability
seeking to trade at prices that are about
to become stale.
Quote stability or instability (also
referred to as a crumbling quote) is an
assessment that the Exchange System
makes on a real-time basis, based on a
pre-determined, objective set of
conditions specified in Rule
11.190(g)(1). Specifically, quote
instability, or the presence of a
crumbling quote, is determined by the
System when:
(A) the quote instability factor result
from the quote stability calculation is
greater than the defined quote
instability threshold.
(i) Quote Instability Factor. The
Exchange’s proprietary quote stability
calculation used to determine the
current quote instability factor is
defined by the following formula that
utilizes the quote stability coefficients
and quote stability variables defined
below:
1/(1 + e ∧ ¥(C0 + C1 * N + C2 * F + C3
* NC + C4 * FC + C5 * EPos + C6
* ENeg + C7 * EPosPrev + C8 *
ENegPrev + C9 * Delta))
(a) Quote Stability Coefficients. The
Exchange utilizes the values below for
the quote stability coefficients.
(1) C0 = ¥1.2867
(2) C1 = ¥0.7030
(3) C2 = 0.0143
(4) C3 = ¥0.2170
(5) C4 = 0.1526
(6) C5 = ¥0.4771
(7) C6 = 0.8703
(8) C7 = 0.1830
(9) C8 = 0.5122
(10) C9 = 0.4645
(b) Quote Stability Variables. The Exchange
9 See,
Rule 11.190(g).
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utilizes the quote stability variables
defined below to calculate the current
quote instability factor.
(1) N = the number of Protected Quotations
on the near side of the market, i.e.
Protected NBB for buy orders and
Protected NBO for sell orders.
(2) F = the number of Protected Quotations
on the far side of the market, i.e.
Protected NBO for buy orders and
Protected NBB for sell orders.
(3) NC = the number of Protected Quotations
on the near side of the market minus the
maximum number of Protected
Quotations on the near side at any point
since one (1) millisecond ago or the most
recent PBBO change, whichever
happened more recently.
(4) FC = the number of Protected Quotations
on the far side of the market minus the
minimum number of Protected
Quotations on the far side at any point
since one (1) millisecond ago or the most
recent PBBO change, whichever
happened more recently.
(5) EPos = a Boolean indicator that equals 1
if the most recent quotation update was
a quotation of a protected market joining
the near side of the market at the same
price.
(6) ENeg = a Boolean indicator that equals 1
if the most recent quotation update was
a quotation of a protected market moving
away from the near side of market that
was previously at the same price.
(7) EPosPrev = a Boolean indicator that
equals 1 if the second most recent
quotation update was a quotation of a
protected market joining the near side of
the market at the same price AND the
second most recent quotation update
occurred since one (1) millisecond ago or
the most recent PBBO change, whichever
happened more recently.
(8) ENegPrev = a Boolean indicator that
equals 1 if the second most recent
quotation update was a quotation of a
protected market moving away from the
near side of market that was previously
at the same price AND the second most
recent quotation update occurred since
one (1) millisecond ago or the most
recent PBBO change, whichever
happened more recently.
(9) Delta = the number of these three (3)
venues that moved away from the near
side of the market on the same side of
the market and were at the same price at
any point since one (1) millisecond ago
or the most recent PBBO change,
whichever happened more recently:
XNGS, EDGX, BATS.
(ii) Quote Instability Threshold. The
Exchange utilizes a quote instability
threshold of 0.39 for securities whose
current spread is less than or equal to
$0.01; 0.45 for securities for which the
current spread (i.e., the Protected Best
Offer minus Protected Best Bid) is
greater than $0.01 and less than or equal
to $0.02; 0.51 for securities for which
the current spread is greater than $0.02
and less than or equal to $0.03; and 0.39
for securities for which the current
spread is greater than $0.03.
PO 00000
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17469
Rule 11.190(g)(1)(D)(iii) provides that
the Exchange reserves the right to
modify the quote instability coefficients
or quote instability threshold at any
time, subject to a filing of a proposed
rule change with the SEC. The Exchange
is proposing such changes in this rule
filing.
Changes To Quote Instability
Coefficients and Quote Instability
Threshold
IEX conducted an analysis of the
effectiveness of the existing factors in
predicting whether a crumbling quote
would occur, by reviewing market data
from randomly selected days in the
period from October 2016 through
October 2017. These results were then
validated by testing different randomly
selected dates from the same time
period. Based on this analysis, the
Exchange has determined that further
optimization of the methodology and
existing factors would incrementally
increase the accuracy of the formula in
predicting whether a crumbling quote
will occur. The following describes the
proposed changes:
1. Rule 11.190(g)(1) provides in part
that when the System determines that a
quote, either the Protected NBB or the
Protected NBO is unstable, the
determination remains in effect at that
price level for two (2) milliseconds. The
Exchange proposes to revise the time
limitation on how long each
determination remains in effect, and
reorganize certain existing rule text for
clarity. As proposed, when the System
determines that either the Protected
NBB or the Protected NBO in a
particular security is unstable, the
determination remains in effect at that
price level for two (2) milliseconds,
unless a new determination is made
before the end of the two (2) millisecond
period. Only one determination may be
in effect at any given time for a
particular security. A new
determination may be made after at least
200 microseconds has elapsed since a
preceding determination, or a price
change on either side of the Protected
NBBO occurs, whichever is first. If a
new determination is made, the original
determination is no longer in effect. A
new determination can be at either the
Protected NBB or the Protected NBO
and at the same or different price level
as the original determination.10 Based
10 The Exchange also proposes a nonsubstantive
change to the text of subparagraph (g)(1) of Rule
11.190 to remove the sentence stating that ‘‘[t]he
System will only treat one side of the Protected
NBBO as unstable in a particular security at any
give time.’’ which is redundant of proposed new
text that provides that ‘‘[o]nly one determination
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upon our analysis of market data, as
described above, the Exchange believes
that changes to the time limitation
would provide for a more dynamic
methodology for quote instability
determinations thereby incrementally
increasing the accuracy of the formula
in predicting a crumbling quote by
expanding the scope of the model to
additional situations where a crumbling
quote exists at a different price point, or
again at the same price point within two
(2) milliseconds. For example, suppose
that the NBBO is currently $10.03 by
$10.04 in a particular security, and the
System determines that the NBB is
unstable. This determination goes into
effect, with an expiration time set two
(2) milliseconds in the future. Now
suppose that one (1) millisecond later,
the NBB falls to $10.02 and the System
determines that this new NBB is
unstable. As proposed once the System
makes a new determination that the
NBB of $10.02 is unstable, even though
the prior determination at $10.03 has
not expired, the new determination will
overwrite the old determination, and its
expiration time will be set to two (2)
milliseconds in the future from the time
of this determination.
2. The Exchange proposes to revise
five of the quote stability variables
currently specified in subparagraph
(1)(A)(i)(b) of Rule 11.190(g).
Specifically, the Exchange proposes to
revise variables NC, EPosPrev, ENegPrev
and Delta to be calculated over a time
window looking back from the time of
calculation to one (1) millisecond ago or
the most recent PBBO change on the
near side (rather than on either side),
whichever happened more recently.
Based on our analysis of market data, as
described above, the Exchange
identified that for each variable,
considering the maximum change over
the time window defined in this manner
is a more accurate indicator of a
crumbling quote than the current
approach. Similarly, the Exchange
proposes to revise variable FC to be
calculated over a time window looking
back from the time of calculation to one
(1) millisecond ago or the most recent
PBBO change on the far side (rather
than on either side), whichever
happened more recently. Based on our
analysis of market data, as described
above, the Exchange identified that for
this variable, considering the maximum
change over the time window described
in this manner is a more accurate
indicator of a crumbling quote than the
current approach.
may be in effect at any given time for a particular
security.’’. [sic]
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3. The Quote Stability Coefficients
specified in subparagraph (1)(A)(i)(a) of
Rule 11.190(g) are proposed to be
modified to take into account the recent
market data analysis, as well as the
changes to the quote stability variables
as described above. The Exchange
believes that the modifications, as
proposed, will increase the accuracy of
the quote instability calculation.
4. The Exchange proposes to modify
and re-optimize the Quote Instability
Threshold specified in subparagraph
(1)(A)(ii) of Rule 11.190(g) based on the
recent market data analysis and the
changes to the quote stability variables.
Specifically, the threshold size would
continue to vary based on the spread of
the Protected NBBO,11 but the values
would be revised. Based on its data
analysis, as described above, the
Exchange believes that the revised
values, as proposed, will increase the
accuracy of the quote instability
calculation.
5. Finally, the Exchange proposes to
conform terminology within Rule
11.190(g) by replacing the use of the
term ‘‘quote stability’’ in two
instances—within subparagraph (1)(A)
and subparagraph (1)(A)(i) of
11.190(g)—with ‘‘quote instability’’ for
clarity and consistency. The Exchange
notes that in context, both instances
mean ‘‘quote instability’’ so no
substantive change is proposed in this
respect.
The Exchange will announce the
implementation date of the proposed
rule change by Trading Alert at least
five business days in advance of such
implementation date and within 90 days
of effectiveness of this proposed rule
change.
2. Statutory Basis
IEX believes that the proposed rule
change is consistent with Section 6(b) 12
of the Act in general, and furthers the
objectives of Section 6(b)(5) of the Act,13
in particular, in that it is designed to
prevent fraudulent and manipulative
acts and practices, to promote just and
equitable principles of trade, to foster
cooperation and coordination with
persons engaged in facilitating
transactions in securities, to remove
impediments to and perfect the
mechanism of a free and open market
and a national market system and, in
general, to protect investors and the
public interest. Specifically, and as
discussed above, the proposal is
11 The spread is defined in proposed paragraph
(1)(D)(ii) as the Protected Best Offer minus
Protected Best Bid.
12 15 U.S.C. 78f.
13 15 U.S.C. 78f(b)(5).
PO 00000
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Sfmt 4703
designed to optimize and enhance the
effectiveness of the quote instability
calculation in determining whether a
crumbling quote exists. As discussed in
the Purpose section, each of the
proposed changes are based on the
Exchange’s analysis of market data,
which supports that the proposed
changes would increase the accuracy of
the Exchange’s quote instability
calculation.
The Exchange believes that the
proposed changes are designed to
protect investors and the public interest
by incrementally enhancing the
accuracy of the Exchange’s quote
instability calculation in determining
whether a crumbling quote exists,
thereby increasing the Exchange’s
protection of Discretionary Peg orders,
primary peg orders and other liquidity
providing orders. Specifically, the
Exchange believes that the proposed
rule change will enhance the extent to
which Discretionary Peg orders and
primary peg orders will be protected
from unfavorable executions by
increasing the instances in which such
orders will be prevented from exercising
price discretion during periods of quote
instability when the Exchange’s
probabilistic model identifies that the
market appears to be moving adversely
to them. Similarly, the Exchange
believes that the proposed rule change
will incrementally enhance the extent to
which liquidity providing orders will be
protected from liquidity taking orders
targeting them at prices that are likely
to move adversely from the perspective
of the liquidity providing order.
The Exchange also believes that
application of the proposed rule change
to the CQRF is equitable and not
unfairly discriminatory, because it will
continue to be narrowly tailored to
disincentivize all Members from
deploying trading strategies designed to
chase short-term price momentum
during periods when the CQI is on and
thus potentially adversely impact
liquidity providing orders. Further,
although the incremental enhancements
to the accuracy of the crumbling quote
formula may result in a corresponding
increase in executions that remove
resting liquidity when the CQI is on, the
Exchange believes that Members are
able to adjust their trading on IEX to
reduce or eliminate the imposition of
fees pursuant to the CQRF. Moreover,
based on its review of market data
during February 2018, the Exchange
estimates that while approximately 10%
more trades would be impacted by the
proposed rule change, only one
additional Member would potentially be
subject to the CQRF. However, a review
of this Member’s trading activity since
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Federal Register / Vol. 83, No. 76 / Thursday, April 19, 2018 / Notices
the January 2018 implementation of the
CQRF indicates that the Member has
been able to adjust its trading on IEX to
reduce and then eliminate its liability
for the CQRF. Thus, the Exchange
believes that application of the rule
change with respect to the CQRF is
equitable and not unfairly
discriminatory.
The Exchange further believes that the
conforming changes to terminology are
consistent with the Act because they are
designed to provide enhanced clarity
within Rule 11.190(g) and thereby avoid
any potential confusion on the part of
market participants.
Finally, the Exchange notes that, as
proposed, the new quote instability
calculation will continue to be a fixed
formula specified transparently in IEX’s
rules. The Exchange is not proposing to
add any new functionality, but merely
to revise the fixed formula based on
market data analysis designed to
increase the accuracy of the formula in
predicting a crumbling quote, and as
contemplated by the rule.
daltland on DSKBBV9HB2PROD with NOTICES
B. Self-Regulatory Organization’s
Statement on Burden on Competition
IEX does not believe that the
proposed rule change will result in any
burden on competition that is not
necessary or appropriate in furtherance
of the purposes of the Act. With regard
to intra-market competition, the
proposed change will apply equally to
all IEX Members. The Commission has
already considered the Exchange’s
Discretionary Peg order type in
connection with its grant of IEX’s
application for registration as a national
securities exchange under Sections 6
and 19 of the Act 14 and approved the
Exchange’s primary peg order type.15
The Commission has also considered
the CQRF,16 and the Exchange does not
believe that the incremental increase in
the number of executions that remove
resting liquidity when the CQI is on as
a result of the proposed enhancements
to the accuracy of the quote instability
calculation specified in Rule 11.190(g)
will create a burden on competition
with respect to application to the CQRF.
As discussed in the Statutory Basis
section, the proposed rule change will
apply equally to all Members, and the
Exchange believes that Members who
may be subject to potential increased
fees will be able to adjust their trading
14 See
Securities Exchange Act Release 78101
(June 17, 2016), 81 FR 41142 (June 23, 2016) (File
No. 10–222).
15 See Securities Exchange Act Release No. 80223
(March 13, 2017), 82 FR 14240 (March 17, 2017).
16 See Securities Exchange Act Release No. 81484
(August 25, 2017), 82 FR 41446 (August 31, 2017).
VerDate Sep<11>2014
17:49 Apr 18, 2018
Jkt 244001
on IEX to reduce or eliminate any
additional fees pursuant to the CQRF.
The Exchange also believes that the
proposed rule change will not result in
any burden on inter-market competition
that is not necessary or appropriate in
furtherance of the purposes of the Act.
In this regard, the Exchange notes that
NYSE American LLC has adopted a rule
copying an earlier iteration of the
Exchange’s Discretionary Peg Order and
quote stability calculation.17
As discussed in the Purpose and
Statutory Basis sections, the proposed
rule change is designed to merely
enhance the accuracy of the quote
instability calculation; therefore, no new
burdens are being proposed.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
Written comments were neither
solicited nor received.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Because the foregoing proposed rule
change does not: (i) Significantly affect
the protection of investors or the public
interest; (ii) impose any significant
burden on competition; and (iii) become
operative for 30 days from the date on
which it was filed, or such shorter time
as the Commission may designate, it has
become effective pursuant to Section
19(b)(3)(A)(iii) of the Act 18 and
subparagraph (f)(6) of Rule 19b–4
thereunder.19
A proposed rule change filed under
Rule 19b–4(f)(6) normally does not
become operative for 30 days after the
date of the filing. However, Rule 19b–
4(f)(6)(iii) 20 permits the Commission to
designate a shorter time if such action
is consistent with the protection of
investors and the public interest. In its
filing, IEX requests that the Commission
waive the 30-day operative delay. IEX
represented that the proposed rule
change would optimize the
methodology by which the Exchange
determines whether a crumbling quote
exists. Specifically, IEX stated that its
proposed changes to the quote stability
variables, the quote stability
coefficients, and the quote instability
17 See
NYSE American Rule 7.31E(h)(3)(D).
U.S.C. 78s(b)(3)(A)(iii).
19 17 CFR 240.19b–4(f)(6). In addition, Rule 19b–
4(f)(6) requires a self-regulatory organization to give
the Commission written notice of its intent to file
the proposed rule change at least five business days
prior to the date of filing of the proposed rule
change, or such shorter time as designated by the
Commission. The Exchange has satisfied this
requirement.
20 17 CFR 240.19b–4(f)(6)(iii).
17471
threshold were based on a recent market
data analysis and would increase the
accuracy of the quote instability
calculation. IEX similarly believed that
its proposed changes to the current time
limitation would provide a more
dynamic and expansive methodology
that would increase the accuracy of
quote instability determinations.21 IEX
further indicated that the proposed
changes to the quote instability
calculation would enhance the
Exchange’s ability to protect
Discretionary Peg orders, primary peg
orders, and other liquidity providing
orders from unfavorable executions,
because such changes would better
prevent such orders from exercising
price discretion during periods when
the market appears to be moving
adversely to them.
The Commission believes that a
partial waiver of the 30-day operative
delay is consistent with the protection
of investors and the public interest as it
will allow IEX to optimize the
functionality of its quote instability
calculation in order to allow the
crumbling quote functionality to better
meet its intended purpose to protect
certain liquidity-providing orders. At
the same time, a partial operative delay
will afford the public time to review and
comment upon the proposed changes
before they become operative.
Accordingly, the Commission waives
the 30-day operative delay and
designates that the proposed rule
change will become operative on April
24, 2018.22
At any time within 60 days of the
filing of the proposed rule change, the
Commission summarily may
temporarily suspend such rule change if
it appears to the Commission that such
action is: (i) Necessary or appropriate in
the public interest; (ii) for the protection
of investors; or (iii) otherwise in
furtherance of the purposes of the Act.
If the Commission takes such action, the
Commission shall institute proceedings
to determine whether the proposed rule
should be approved or 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.
18 15
PO 00000
Frm 00113
Fmt 4703
Sfmt 4703
21 The Exchange also proposed several nonsubstantive changes to Rule 11.190(g) that were
designed to increase the clarity and consistency of
the rule.
22 For purposes only of waiving the 30-day
operative delay, the Commission has also
considered the proposed rule’s impact on
efficiency, competition, and capital formation. See
15 U.S.C. 78c(f).
E:\FR\FM\19APN1.SGM
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Federal Register / Vol. 83, No. 76 / Thursday, April 19, 2018 / Notices
Comments may be submitted by any of
the following methods:
DEPARTMENT OF TRANSPORTATION
Electronic Comments
Pipeline and Hazardous Materials
Safety Administration
• Use the Commission’s internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include File Number SR–
IEX–2018–07 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.
daltland on DSKBBV9HB2PROD with NOTICES
All submissions should refer to File
Number SR–IEX–2018–07. 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 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–IEX–2018–07, and should
be submitted on or before May 10, 2018.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.23
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018–08155 Filed 4–18–18; 8:45 am]
BILLING CODE 8011–01–P
23 17
CFR 200.30–3(a)(12) and (59).
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17:49 Apr 18, 2018
Jkt 244001
[Docket No. PHMSA–2016–0128]
Pipeline Safety: Meeting of the
Voluntary Information-Sharing System
Working Group
Pipeline and Hazardous
Materials Safety Administration
(PHMSA), DOT.
ACTION: Notice.
AGENCY:
This notice announces a
public meeting of the Voluntary
Information-sharing System (VIS)
Working Group. The VIS Working
Group will convene to discuss and
identify recommendations to establish a
voluntary information-sharing system.
DATES: The public meeting will be held
on June 20, 2018, from 8:30 a.m. to 5:00
p.m. ET. Members of the public who
wish to attend in person should register
no later than June 15, 2018. Individuals
requiring accommodations, such as sign
language interpretation or other
ancillary aids, may notify PHMSA by
June 15, 2018. For additional
information, see the ADDRESSES section.
ADDRESSES: The meeting will be held at
a location yet to be determined in the
Washington, DC Metropolitan area. The
meeting location, agenda and any
additional information will be
published on the following VIS Working
Group and registration page at: https://
primis.phmsa.dot.gov/meetings/
MtgHome.mtg?mtg=134.
The meetings will not be webcast;
however, presentations will be available
on the meeting website and posted on
the E-Gov website, https://
www.regulations.gov/, under docket
number PHMSA–2016–0128 within 30
days following the meeting.
Public Participation: This meeting
will be open to the public. Members of
the public who attend in person will
also be provided an opportunity to make
a statement during the meetings.
Written Comments: Persons who wish
to submit written comments on the
meetings may submit them to the docket
in the following ways:
E-Gov Website: https://
www.regulations.gov. This site allows
the public to enter comments on any
Federal Register notice issued by any
agency.
Fax: 1–202–493–2251.
Mail: Docket Management Facility;
U.S. Department of Transportation
(DOT), 1200 New Jersey Avenue SE,
West Building, Room W12–140,
Washington, DC 20590–0001.
SUMMARY:
PO 00000
Frm 00114
Fmt 4703
Sfmt 4703
Hand Delivery: Room W12–140 on the
ground level of the DOT West Building,
1200 New Jersey Avenue SE,
Washington, DC, between 9:00 a.m. and
5:00 p.m., Monday through Friday,
except on Federal holidays.
Instructions: Identify the docket
number PHMSA–2016–0128 at the
beginning of your comments. Note that
all comments received will be posted
without change to https://
www.regulations.gov, including any
personal information provided.
Anyone can search the electronic
form of all comments received into any
of our dockets by the name of the
individual submitting the comment (or
signing the comment, if submitted on
behalf of an association, business, labor
union, etc.). Therefore, consider
reviewing DOT’s complete Privacy Act
Statement in the Federal Register
published on April 11, 2000, (65 FR
19477), or view the Privacy Notice at
https://www.regulations.gov before
submitting comments.
Docket: For docket access or to read
background documents or comments, go
to https://www.regulations.gov at any
time or to Room W12–140 on the
ground level of the DOT West Building,
1200 New Jersey Avenue SE,
Washington, DC, between 9:00 a.m. and
5:00 p.m., Monday through Friday,
except Federal holidays.
If you wish to receive confirmation of
receipt of your written comments,
please include a self-addressed,
stamped postcard with the following
statement: ‘‘Comments on PHMSA–
2016–0128.’’ The docket clerk will date
stamp the postcard prior to returning it
to you via the U.S. mail.
Privacy Act Statement
DOT may solicit comments from the
public regarding certain general notices.
DOT posts these comments, without
edit, including any personal information
the commenter provides, to
www.regulations.gov, as described in
the system of records notice (DOT/ALL–
14 FDMS), which can be reviewed at
www.dot.gov/privacy.
Services for Individuals with
Disabilities: The public meeting will be
physically accessible to people with
disabilities. Individuals requiring
accommodations, such as sign language
interpretation or other ancillary aids, are
asked to notify Cheryl Whetsel at
cheryl.whetsel@dot.gov.
FOR FURTHER INFORMATION CONTACT: For
information about the meeting, contact
Cheryl Whetsel by phone at 202–366–
4431 or by email at cheryl.whetsel@
dot.gov.
SUPPLEMENTARY INFORMATION:
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]]>Agencies
[Federal Register Volume 83, Number 76 (Thursday, April 19, 2018)]
[Notices]
[Pages 17467-17472]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-08155]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-83048; File No. SR-IEX-2018-07]
Self-Regulatory Organizations; Investors Exchange LLC; Notice of
Filing and Immediate Effectiveness of Proposed Rule Change To Amend
Rule 11.190(g) To Incrementally Optimize and Enhance the Effectiveness
of the Quote Instability Calculation in Determining Whether a Crumbling
Quote Exists
April 13, 2018.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given
that on April 3, 2018, the Investors Exchange LLC (``IEX'' or the
``Exchange'') filed with the Securities and Exchange Commission (the
``Commission'') the proposed rule change as described in Items I and
II, 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
Pursuant to the provisions of Section 19(b)(1) under the Act,\3\
and Rule 19b-4 thereunder,\4\ IEX is filing with the Commission a
proposed rule change to amend Rule 11.190(g) to incrementally optimize
and enhance the effectiveness of the quote instability calculation in
determining whether a crumbling quote exists. The Exchange has
designated this proposal as non-controversial and
[[Page 17468]]
provided the Commission with the notice required by Rule 19b-
4(f)(6)(iii) under the Act.\5\
---------------------------------------------------------------------------
\3\ 15 U.S.C. 78s(b)(1).
\4\ 17 CFR 240.19b-4.
\5\ 17 CFR 240.19b-4(f)(6)(iii).
---------------------------------------------------------------------------
The text of the proposed rule change is available at the Exchange's
website at www.iextrading.com, at the principal office of the Exchange,
and at the Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the self-regulatory organization
included statements concerning the purpose of and basis for the
proposed rule change and discussed any comments it received on the
proposed rule change. The text of these statement [sic] may be examined
at the places specified in Item IV below. The self-regulatory
organization has prepared summaries, set forth in Sections A, B, and C
below, of the most significant aspects of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
Overview
The purpose of the proposed rule change is to amend Rule 11.190(g)
to incrementally optimize and enhance the effectiveness of the quote
instability calculation in determining whether a crumbling quote
exists. The Exchange utilizes real time relative quoting activity of
certain Protected Quotations \6\ and a proprietary mathematical
calculation (the ``quote instability calculation'') to assess the
probability of an imminent change to the current Protected NBB to a
lower price or Protected NBO to a higher price for a particular
security (``quote instability factor''). When the quoting activity
meets predefined criteria and the quote instability factor calculated
is greater than the Exchange's defined quote instability threshold, the
System treats the quote as unstable and the crumbling quote indicator
(``CQI'') is on at that price level for two milliseconds. During all
other times, the quote is considered stable, and the CQI is off. The
System independently assesses the stability of the Protected NBB and
Protected NBO for each security.
---------------------------------------------------------------------------
\6\ Pursuant to Rule 11.190(g), the Protected Quotations of the
New York Stock Exchange, Nasdaq Stock Market, NYSE Arca, Nasdaq BX,
Bats BZX Exchange, Bats BYX Exchange, Bats EDGX Exchange, and Bats
EDGA Exchange.
---------------------------------------------------------------------------
When CQI is on, Discretionary Peg orders \7\ and primary peg orders
\8\ do not exercise price discretion to meet the limit price of an
active (i.e., taking) order. Specifically, as set forth in Rule
11.190(b)(10), a Discretionary Peg order pegs to the less aggressive of
the primary quote (i.e., NBB for buy orders and NBO for sell orders) or
the order's limit price, if any, but, will exercise price discretion in
order to meet the limit price of an active order up to the less
aggressive of the Midpoint Price or the order's limit price, if any.
However, a Discretionary Peg order will not exercise such price
discretion when the CQI is on. Similarly, as set forth in Rule
11.190(b)(8), a primary peg order pegs to a price that is the less
aggressive of one (1) minimum price variant (``MPV'') less aggressive
than the primary quote (i.e., one MPV below (above) the NBB (NBO) for
buy (sell) orders) or the order's limit price, if any, but will
exercise price discretion in order to meet the limit price of an active
order up to the NBB (for buy orders) or down to the NBO (for sell
orders), except when the CQI is on or if the order is resting at its
limit price, if any.
---------------------------------------------------------------------------
\7\ See Rule 11.190(b)(10).
\8\ See Rule 11.190(b)(8).
---------------------------------------------------------------------------
In addition, when the CQI is on buy (sell) orders that take
liquidity at prices at or below (above) the NBO (NBB) are subject to
the Crumbling Quote Remove Fee (``CQRF'') for executions that exceed
the CQRF Threshold.
Discretionary Peg Order
The manner in which Discretionary Peg orders operate is described
in Rule 11.190(b)(10). Specifically, a Discretionary Peg order is a
non-displayed, pegged order that upon entry into the System, the price
of the order is automatically adjusted by the System to be equal to the
less aggressive of the Midpoint Price or the order's limit price, if
any. When unexecuted shares of such order are posted to the Order Book,
the price of the order is automatically adjusted by the System to be
equal to and ranked at the less aggressive of the primary quote or the
order's limit price and is automatically adjusted by the System in
response to changes in the NBB (NBO) for buy (sell) orders up (down) to
the order's limit price, if any. In order to meet the limit price of
active orders on the Order Book, a Discretionary Peg order will
exercise the least amount of price discretion necessary from the
Discretionary Peg order's resting price to its discretionary price
(defined as the less aggressive of the Midpoint Price or the
Discretionary Peg order's limit price, if any), except during periods
of quote instability (i.e., when a crumbling quote exists) as defined
in paragraph Rule 11.190(g).
Primary Peg Orders
The manner in which primary peg orders operate is described in
Rules 11.190(a)(3) and 11.190(b)(8). Specifically, a primary peg order
is a non-displayed, pegged order that upon entry and when posting to
the Order Book the price of the order is automatically adjusted by the
System to be equal to and ranked at the less aggressive of one (1) MPV
less aggressive than the primary quote (i.e., the NBB for buy orders
and the NBO for sell orders) or the order's limit price, if any. While
resting on the Order Book, the order is automatically adjusted by the
System in response to changes in the NBB (NBO) for buy (sell) orders up
(down) to the order's limit price, if any. In order to meet the limit
price of active orders on the Order Book a primary peg order will
exercise price discretion to its discretionary [sic] (defined as the
primary quote), except during periods of quote instability as defined
in paragraph 11.190(g).
CQRF
The CQRF is designed to incentivize resting liquidity, including
displayed liquidity, on IEX, and is applicable to orders that remove
resting liquidity when the CQI is on if such orders constitute at least
5% of the Member's volume executed on IEX and at least 1,000,000
shares, on a monthly basis, measured on a per market participant
identifier (``MPID'') basis. Thus, orders that exceed the 5% and
1,000,000 share thresholds are assessed a fee of $0.0030 per each
incremental share executed (or 0.3% of the total dollar value of the
transaction for securities priced below $1.00) that exceeds the
threshold.
Crumbling Quote Calculation
In determining whether a crumbling quote exists, the Exchange
utilizes real time relative quoting activity of certain Protected
Quotations and a proprietary mathematical calculation (the ``quote
instability calculation'') to assess the probability of an imminent
change to the current Protected NBB to a lower price or Protected NBO
to a higher price for a particular security (``quote instability
factor''). When the quoting activity meets predefined criteria and the
quote instability factor calculated is greater than the Exchange's
defined threshold (``quote instability threshold''), the System treats
the quote as not stable (``quote instability'' or a ``crumbling
quote''). During all other times, the quote is considered stable
[[Page 17469]]
(``quote stability''). The System independently assesses the stability
of the Protected NBB and Protected NBO for each security.
When the System determines that a quote, either the Protected NBB
or the Protected NBO, is unstable, the determination remains in effect
at that price level for two (2) milliseconds. The System will only
treat one side of the Protected NBBO as unstable in a particular
security at any given time.\9\ By not permitting resting Discretionary
Peg orders and primary peg orders to exercise price discretion during
periods of quote instability, the Exchange is designed to protect such
orders from unfavorable executions when its probabilistic model
identifies that the market appears to be moving adversely to them.
Similarly, the CQRF is designed to protect liquidity providing orders
by disincentivizing trading strategies that target resting liquidity
during periods of quote instability seeking to trade at prices that are
about to become stale.
---------------------------------------------------------------------------
\9\ See, Rule 11.190(g).
---------------------------------------------------------------------------
Quote stability or instability (also referred to as a crumbling
quote) is an assessment that the Exchange System makes on a real-time
basis, based on a pre-determined, objective set of conditions specified
in Rule 11.190(g)(1). Specifically, quote instability, or the presence
of a crumbling quote, is determined by the System when:
(A) the quote instability factor result from the quote stability
calculation is greater than the defined quote instability threshold.
(i) Quote Instability Factor. The Exchange's proprietary quote
stability calculation used to determine the current quote instability
factor is defined by the following formula that utilizes the quote
stability coefficients and quote stability variables defined below:
1/(1 + e [supcaret] -(C0 + C1 * N + C2
* F + C3 * NC + C4 * FC + C5 * EPos +
C6 * ENeg + C7 * EPosPrev + C8 *
ENegPrev + C9 * Delta))
(a) Quote Stability Coefficients. The Exchange utilizes the values
below for the quote stability coefficients.
(1) C0 = -1.2867
(2) C1 = -0.7030
(3) C2 = 0.0143
(4) C3 = -0.2170
(5) C4 = 0.1526
(6) C5 = -0.4771
(7) C6 = 0.8703
(8) C7 = 0.1830
(9) C8 = 0.5122
(10) C9 = 0.4645
(b) Quote Stability Variables. The Exchange utilizes the quote
stability variables defined below to calculate the current quote
instability factor.
(1) N = the number of Protected Quotations on the near side of the
market, i.e. Protected NBB for buy orders and Protected NBO for sell
orders.
(2) F = the number of Protected Quotations on the far side of the
market, i.e. Protected NBO for buy orders and Protected NBB for sell
orders.
(3) NC = the number of Protected Quotations on the near side of the
market minus the maximum number of Protected Quotations on the near
side at any point since one (1) millisecond ago or the most recent
PBBO change, whichever happened more recently.
(4) FC = the number of Protected Quotations on the far side of the
market minus the minimum number of Protected Quotations on the far
side at any point since one (1) millisecond ago or the most recent
PBBO change, whichever happened more recently.
(5) EPos = a Boolean indicator that equals 1 if the most recent
quotation update was a quotation of a protected market joining the
near side of the market at the same price.
(6) ENeg = a Boolean indicator that equals 1 if the most recent
quotation update was a quotation of a protected market moving away
from the near side of market that was previously at the same price.
(7) EPosPrev = a Boolean indicator that equals 1 if the second most
recent quotation update was a quotation of a protected market
joining the near side of the market at the same price AND the second
most recent quotation update occurred since one (1) millisecond ago
or the most recent PBBO change, whichever happened more recently.
(8) ENegPrev = a Boolean indicator that equals 1 if the second most
recent quotation update was a quotation of a protected market moving
away from the near side of market that was previously at the same
price AND the second most recent quotation update occurred since one
(1) millisecond ago or the most recent PBBO change, whichever
happened more recently.
(9) Delta = the number of these three (3) venues that moved away
from the near side of the market on the same side of the market and
were at the same price at any point since one (1) millisecond ago or
the most recent PBBO change, whichever happened more recently: XNGS,
EDGX, BATS.
(ii) Quote Instability Threshold. The Exchange utilizes a quote
instability threshold of 0.39 for securities whose current spread is
less than or equal to $0.01; 0.45 for securities for which the current
spread (i.e., the Protected Best Offer minus Protected Best Bid) is
greater than $0.01 and less than or equal to $0.02; 0.51 for securities
for which the current spread is greater than $0.02 and less than or
equal to $0.03; and 0.39 for securities for which the current spread is
greater than $0.03.
Rule 11.190(g)(1)(D)(iii) provides that the Exchange reserves the
right to modify the quote instability coefficients or quote instability
threshold at any time, subject to a filing of a proposed rule change
with the SEC. The Exchange is proposing such changes in this rule
filing.
Changes To Quote Instability Coefficients and Quote Instability
Threshold
IEX conducted an analysis of the effectiveness of the existing
factors in predicting whether a crumbling quote would occur, by
reviewing market data from randomly selected days in the period from
October 2016 through October 2017. These results were then validated by
testing different randomly selected dates from the same time period.
Based on this analysis, the Exchange has determined that further
optimization of the methodology and existing factors would
incrementally increase the accuracy of the formula in predicting
whether a crumbling quote will occur. The following describes the
proposed changes:
1. Rule 11.190(g)(1) provides in part that when the System
determines that a quote, either the Protected NBB or the Protected NBO
is unstable, the determination remains in effect at that price level
for two (2) milliseconds. The Exchange proposes to revise the time
limitation on how long each determination remains in effect, and
reorganize certain existing rule text for clarity. As proposed, when
the System determines that either the Protected NBB or the Protected
NBO in a particular security is unstable, the determination remains in
effect at that price level for two (2) milliseconds, unless a new
determination is made before the end of the two (2) millisecond period.
Only one determination may be in effect at any given time for a
particular security. A new determination may be made after at least 200
microseconds has elapsed since a preceding determination, or a price
change on either side of the Protected NBBO occurs, whichever is first.
If a new determination is made, the original determination is no longer
in effect. A new determination can be at either the Protected NBB or
the Protected NBO and at the same or different price level as the
original determination.\10\ Based
[[Page 17470]]
upon our analysis of market data, as described above, the Exchange
believes that changes to the time limitation would provide for a more
dynamic methodology for quote instability determinations thereby
incrementally increasing the accuracy of the formula in predicting a
crumbling quote by expanding the scope of the model to additional
situations where a crumbling quote exists at a different price point,
or again at the same price point within two (2) milliseconds. For
example, suppose that the NBBO is currently $10.03 by $10.04 in a
particular security, and the System determines that the NBB is
unstable. This determination goes into effect, with an expiration time
set two (2) milliseconds in the future. Now suppose that one (1)
millisecond later, the NBB falls to $10.02 and the System determines
that this new NBB is unstable. As proposed once the System makes a new
determination that the NBB of $10.02 is unstable, even though the prior
determination at $10.03 has not expired, the new determination will
overwrite the old determination, and its expiration time will be set to
two (2) milliseconds in the future from the time of this determination.
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\10\ The Exchange also proposes a nonsubstantive change to the
text of subparagraph (g)(1) of Rule 11.190 to remove the sentence
stating that ``[t]he System will only treat one side of the
Protected NBBO as unstable in a particular security at any give
time.'' which is redundant of proposed new text that provides that
``[o]nly one determination may be in effect at any given time for a
particular security.''. [sic]
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2. The Exchange proposes to revise five of the quote stability
variables currently specified in subparagraph (1)(A)(i)(b) of Rule
11.190(g). Specifically, the Exchange proposes to revise variables NC,
EPosPrev, ENegPrev and Delta to be calculated over a time window
looking back from the time of calculation to one (1) millisecond ago or
the most recent PBBO change on the near side (rather than on either
side), whichever happened more recently. Based on our analysis of
market data, as described above, the Exchange identified that for each
variable, considering the maximum change over the time window defined
in this manner is a more accurate indicator of a crumbling quote than
the current approach. Similarly, the Exchange proposes to revise
variable FC to be calculated over a time window looking back from the
time of calculation to one (1) millisecond ago or the most recent PBBO
change on the far side (rather than on either side), whichever happened
more recently. Based on our analysis of market data, as described
above, the Exchange identified that for this variable, considering the
maximum change over the time window described in this manner is a more
accurate indicator of a crumbling quote than the current approach.
3. The Quote Stability Coefficients specified in subparagraph
(1)(A)(i)(a) of Rule 11.190(g) are proposed to be modified to take into
account the recent market data analysis, as well as the changes to the
quote stability variables as described above. The Exchange believes
that the modifications, as proposed, will increase the accuracy of the
quote instability calculation.
4. The Exchange proposes to modify and re-optimize the Quote
Instability Threshold specified in subparagraph (1)(A)(ii) of Rule
11.190(g) based on the recent market data analysis and the changes to
the quote stability variables. Specifically, the threshold size would
continue to vary based on the spread of the Protected NBBO,\11\ but the
values would be revised. Based on its data analysis, as described
above, the Exchange believes that the revised values, as proposed, will
increase the accuracy of the quote instability calculation.
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\11\ The spread is defined in proposed paragraph (1)(D)(ii) as
the Protected Best Offer minus Protected Best Bid.
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5. Finally, the Exchange proposes to conform terminology within
Rule 11.190(g) by replacing the use of the term ``quote stability'' in
two instances--within subparagraph (1)(A) and subparagraph (1)(A)(i) of
11.190(g)--with ``quote instability'' for clarity and consistency. The
Exchange notes that in context, both instances mean ``quote
instability'' so no substantive change is proposed in this respect.
The Exchange will announce the implementation date of the proposed
rule change by Trading Alert at least five business days in advance of
such implementation date and within 90 days of effectiveness of this
proposed rule change.
2. Statutory Basis
IEX believes that the proposed rule change is consistent with
Section 6(b) \12\ of the Act in general, and furthers the objectives of
Section 6(b)(5) of the Act,\13\ in particular, in that it is designed
to prevent fraudulent and manipulative acts and practices, to promote
just and equitable principles of trade, to foster cooperation and
coordination with persons engaged in facilitating transactions in
securities, to remove impediments to and perfect the mechanism of a
free and open market and a national market system and, in general, to
protect investors and the public interest. Specifically, and as
discussed above, the proposal is designed to optimize and enhance the
effectiveness of the quote instability calculation in determining
whether a crumbling quote exists. As discussed in the Purpose section,
each of the proposed changes are based on the Exchange's analysis of
market data, which supports that the proposed changes would increase
the accuracy of the Exchange's quote instability calculation.
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\12\ 15 U.S.C. 78f.
\13\ 15 U.S.C. 78f(b)(5).
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The Exchange believes that the proposed changes are designed to
protect investors and the public interest by incrementally enhancing
the accuracy of the Exchange's quote instability calculation in
determining whether a crumbling quote exists, thereby increasing the
Exchange's protection of Discretionary Peg orders, primary peg orders
and other liquidity providing orders. Specifically, the Exchange
believes that the proposed rule change will enhance the extent to which
Discretionary Peg orders and primary peg orders will be protected from
unfavorable executions by increasing the instances in which such orders
will be prevented from exercising price discretion during periods of
quote instability when the Exchange's probabilistic model identifies
that the market appears to be moving adversely to them. Similarly, the
Exchange believes that the proposed rule change will incrementally
enhance the extent to which liquidity providing orders will be
protected from liquidity taking orders targeting them at prices that
are likely to move adversely from the perspective of the liquidity
providing order.
The Exchange also believes that application of the proposed rule
change to the CQRF is equitable and not unfairly discriminatory,
because it will continue to be narrowly tailored to disincentivize all
Members from deploying trading strategies designed to chase short-term
price momentum during periods when the CQI is on and thus potentially
adversely impact liquidity providing orders. Further, although the
incremental enhancements to the accuracy of the crumbling quote formula
may result in a corresponding increase in executions that remove
resting liquidity when the CQI is on, the Exchange believes that
Members are able to adjust their trading on IEX to reduce or eliminate
the imposition of fees pursuant to the CQRF. Moreover, based on its
review of market data during February 2018, the Exchange estimates that
while approximately 10% more trades would be impacted by the proposed
rule change, only one additional Member would potentially be subject to
the CQRF. However, a review of this Member's trading activity since
[[Page 17471]]
the January 2018 implementation of the CQRF indicates that the Member
has been able to adjust its trading on IEX to reduce and then eliminate
its liability for the CQRF. Thus, the Exchange believes that
application of the rule change with respect to the CQRF is equitable
and not unfairly discriminatory.
The Exchange further believes that the conforming changes to
terminology are consistent with the Act because they are designed to
provide enhanced clarity within Rule 11.190(g) and thereby avoid any
potential confusion on the part of market participants.
Finally, the Exchange notes that, as proposed, the new quote
instability calculation will continue to be a fixed formula specified
transparently in IEX's rules. The Exchange is not proposing to add any
new functionality, but merely to revise the fixed formula based on
market data analysis designed to increase the accuracy of the formula
in predicting a crumbling quote, and as contemplated by the rule.
B. Self-Regulatory Organization's Statement on Burden on Competition
IEX does not believe that the proposed rule change will result in
any burden on competition that is not necessary or appropriate in
furtherance of the purposes of the Act. With regard to intra-market
competition, the proposed change will apply equally to all IEX Members.
The Commission has already considered the Exchange's Discretionary Peg
order type in connection with its grant of IEX's application for
registration as a national securities exchange under Sections 6 and 19
of the Act \14\ and approved the Exchange's primary peg order type.\15\
The Commission has also considered the CQRF,\16\ and the Exchange does
not believe that the incremental increase in the number of executions
that remove resting liquidity when the CQI is on as a result of the
proposed enhancements to the accuracy of the quote instability
calculation specified in Rule 11.190(g) will create a burden on
competition with respect to application to the CQRF. As discussed in
the Statutory Basis section, the proposed rule change will apply
equally to all Members, and the Exchange believes that Members who may
be subject to potential increased fees will be able to adjust their
trading on IEX to reduce or eliminate any additional fees pursuant to
the CQRF.
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\14\ See Securities Exchange Act Release 78101 (June 17, 2016),
81 FR 41142 (June 23, 2016) (File No. 10-222).
\15\ See Securities Exchange Act Release No. 80223 (March 13,
2017), 82 FR 14240 (March 17, 2017).
\16\ See Securities Exchange Act Release No. 81484 (August 25,
2017), 82 FR 41446 (August 31, 2017).
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The Exchange also believes that the proposed rule change will not
result in any burden on inter-market competition that is not necessary
or appropriate in furtherance of the purposes of the Act. In this
regard, the Exchange notes that NYSE American LLC has adopted a rule
copying an earlier iteration of the Exchange's Discretionary Peg Order
and quote stability calculation.\17\
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\17\ See NYSE American Rule 7.31E(h)(3)(D).
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As discussed in the Purpose and Statutory Basis sections, the
proposed rule change is designed to merely enhance the accuracy of the
quote instability calculation; therefore, no new burdens are being
proposed.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
Written comments were neither solicited nor received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Because the foregoing proposed rule change does not: (i)
Significantly affect the protection of investors or the public
interest; (ii) impose any significant burden on competition; and (iii)
become operative for 30 days from the date on which it was filed, or
such shorter time as the Commission may designate, it has become
effective pursuant to Section 19(b)(3)(A)(iii) of the Act \18\ and
subparagraph (f)(6) of Rule 19b-4 thereunder.\19\
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\18\ 15 U.S.C. 78s(b)(3)(A)(iii).
\19\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)
requires a self-regulatory organization to give the Commission
written notice of its intent to file the proposed rule change at
least five business days prior to the date of filing of the proposed
rule change, or such shorter time as designated by the Commission.
The Exchange has satisfied this requirement.
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A proposed rule change filed under Rule 19b-4(f)(6) normally does
not become operative for 30 days after the date of the filing. However,
Rule 19b-4(f)(6)(iii) \20\ permits the Commission to designate a
shorter time if such action is consistent with the protection of
investors and the public interest. In its filing, IEX requests that the
Commission waive the 30-day operative delay. IEX represented that the
proposed rule change would optimize the methodology by which the
Exchange determines whether a crumbling quote exists. Specifically, IEX
stated that its proposed changes to the quote stability variables, the
quote stability coefficients, and the quote instability threshold were
based on a recent market data analysis and would increase the accuracy
of the quote instability calculation. IEX similarly believed that its
proposed changes to the current time limitation would provide a more
dynamic and expansive methodology that would increase the accuracy of
quote instability determinations.\21\ IEX further indicated that the
proposed changes to the quote instability calculation would enhance the
Exchange's ability to protect Discretionary Peg orders, primary peg
orders, and other liquidity providing orders from unfavorable
executions, because such changes would better prevent such orders from
exercising price discretion during periods when the market appears to
be moving adversely to them.
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\20\ 17 CFR 240.19b-4(f)(6)(iii).
\21\ The Exchange also proposed several non-substantive changes
to Rule 11.190(g) that were designed to increase the clarity and
consistency of the rule.
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The Commission believes that a partial waiver of the 30-day
operative delay is consistent with the protection of investors and the
public interest as it will allow IEX to optimize the functionality of
its quote instability calculation in order to allow the crumbling quote
functionality to better meet its intended purpose to protect certain
liquidity-providing orders. At the same time, a partial operative delay
will afford the public time to review and comment upon the proposed
changes before they become operative. Accordingly, the Commission
waives the 30-day operative delay and designates that the proposed rule
change will become operative on April 24, 2018.\22\
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\22\ For purposes only of waiving the 30-day operative delay,
the Commission has also considered the proposed rule's impact on
efficiency, competition, and capital formation. See 15 U.S.C.
78c(f).
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At any time within 60 days of the filing of the proposed rule
change, the Commission summarily may temporarily suspend such rule
change if it appears to the Commission that such action is: (i)
Necessary or appropriate in the public interest; (ii) for the
protection of investors; or (iii) otherwise in furtherance of the
purposes of the Act. If the Commission takes such action, the
Commission shall institute proceedings to determine whether the
proposed rule should be approved or 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.
[[Page 17472]]
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-IEX-2018-07 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
All submissions should refer to File Number SR-IEX-2018-07. 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 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-IEX-2018-07, and should be submitted on
or before May 10, 2018.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\23\
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\23\ 17 CFR 200.30-3(a)(12) and (59).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-08155 Filed 4-18-18; 8:45 am]
BILLING CODE 8011-01-P
