Self-Regulatory Organizations; Investors Exchange LLC; Order Granting Approval of a Proposed Rule Change To Amend Rule 11.190(g) To Provide an Alternative Calculation for Non-Displayed Pegged Order Types for Determining Whether a Quote Instability Condition Exists, 75099-75102 [2022-26533]
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Federal Register / Vol. 87, No. 234 / Wednesday, December 7, 2022 / Notices
2. Statutory Basis
The Exchange believes that the
proposed rule change is consistent with
the objectives of Section 6 of the
Exchange Act of 1934 (the ‘‘Act’’),7 in
general, and furthers the objectives of
Section 6(b)(4),8 in particular, as it is
designed to provide for the equitable
allocation of reasonable dues, fees and
other charges among its Members,
issuers and other persons using its
facilities.
The Exchange believes the proposal to
modify fee code X to explicitly provide
that it is applicable to routed orders that
add and remove liquidity on the
destination exchange is not designed to
permit unfair discrimination between
customers, issuers, brokers, or dealers.
Specifically, the proposal is intended
only to make a clarifying change to the
Fee Schedule and involves no
substantive change.
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. The
Exchange believes its proposal to clarify
that fee code X is applicable to liquidity
adding and removing orders will have
no impact on competition as it involves
no substantive change, but merely is a
clarifying change to the existing Fee
Schedule.
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C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
The Exchange neither solicited nor
received comments on the proposed
rule change.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
The foregoing rule change has become
effective pursuant to Section 19(b)(3)(A)
of the Act 9 and paragraph (f) of Rule
19b–4 10 thereunder. 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 necessary or appropriate in the
public interest, for the protection of
investors, or otherwise in furtherance of
the purposes of the Act. If the
Commission takes such action, the
Commission will institute proceedings
7 15
U.S.C. 78f.
U.S.C. 78f(b)(4).
9 15 U.S.C. 78s(b)(3)(A).
10 17 CFR 240.19b–4(f).
8 15
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to determine whether the proposed rule
change 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.
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–
CboeEDGA–2022–020 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–CboeEDGA–2022–020. 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–CboeEDGA–2022–020 and
should be submitted on or before
December 28, 2022.
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75099
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.11
Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2022–26538 Filed 12–6–22; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–96416; File No. SR–IEX–
2022–06]
Self-Regulatory Organizations;
Investors Exchange LLC; Order
Granting Approval of a Proposed Rule
Change To Amend Rule 11.190(g) To
Provide an Alternative Calculation for
Non-Displayed Pegged Order Types for
Determining Whether a Quote
Instability Condition Exists
December 1, 2022.
I. Introduction
On September 27, 2022, the Investors
Exchange LLC (‘‘IEX’’ or the
‘‘Exchange’’) filed with the Securities
and Exchange Commission
(‘‘Commission’’), pursuant to Section
19(b)(1) of the Securities Exchange Act
of 1934 (‘‘Exchange Act’’) 1 and Rule
19b-4 thereunder,2 a proposed rule
change to provide an alternative
calculation for non-displayed pegged
order types to determine whether a
quote instability condition exists for
purposes of determining when the
Exchange’s proprietary Crumbling
Quote Indicator (‘‘CQI’’) is to be
triggered. The proposed rule change was
published for comment in the Federal
Register on October 17, 2022.3 The
Commission received no comments on
the proposed rule change. This order
approves the proposed rule change.
II. Description of the Proposed Rule
Change
Current CQI Operation
Pursuant to IEX Rule 11.190(g), the
Exchange utilizes quoting activity of
eight away exchanges’ Protected
Quotations 4 and a mathematical
11 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 See Securities Exchange Act Release No. 96014
(October 11, 2022), 87 FR 62903 (‘‘Notice’’).
4 See IEX Rule 1.160(bb) (defining ‘‘Protected
Quotation’’ as an automated quotation that is
calculated by IEX to be the best bid or best offer
of an exchange). Current IEX Rule 11.190(g) uses
the following eight exchanges’ Protected
Quotations: New York Stock Exchange LLC, the
Nasdaq Stock Market LLC, NYSE Arca, Inc., Nasdaq
BX, Inc., Cboe BYX Exchange, Inc., Cboe Bats BZX
Exchange, Inc., Cboe EDGA Exchange, Inc., and
1 15
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calculation to assess the probability of
an imminent change to the current
Protected NBB 5 to a lower price or
imminent change to the current
Protected NBO 6 to a higher price for a
particular security. When the quoting
activity meets predetermined criteria,
the System 7 treats the quote as not
stable (‘‘quote instability’’ or a
‘‘crumbling quote’’) and the CQI is then
‘‘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. IEX characterizes these order
types and the CQI functionality as being
designed to ‘‘counter the costs of
‘adverse selection’ that participants
supplying liquidity incur when their
orders are executed at worse prices as a
result of certain speed-based trading
strategies.’’ 8
This proposal applies to the CQI
formula that informs the exercise of
‘‘discretion’’ by Discretionary Peg (‘‘DPeg’’) 9 orders, Primary Peg (‘‘P-Peg’’) 10
orders, and Corporate Discretionary Peg
(‘‘C-Peg’’) orders.11 Each of those resting
peg order types, all of which are nondisplayed, passively rest at prices
slightly less aggressive than the nearside quote. When the quote is stable,
those peg orders exercise price
discretion by ‘‘jumping’’ to a more
aggressive price to interact with an
active incoming liquidity taking order
when the quote is stable. However,
when the CQI comes on, those orders do
not exercise price discretion and instead
continue to rest passively. Specifically,
D-Peg, P-Peg, and C-Peg orders rest at a
pegged price that is the less aggressive
of one minimum price variant
(‘‘MPV’’) 12 less aggressive than the
primary quote (i.e., one MPV below
(above) the NBB 13 (NBO 14) for buy
(sell) orders) or the order’s limit price,
if any.15 In addition, when the CQI is on
Cboe EDGX Exchange, Inc. (collectively, ‘‘Signal
Exchanges’’).
5 See IEX Rule 1.160(cc).
6 See IEX Rule 1.160(cc).
7 See IEX Rule 1.160(nn).
8 Notice, supra note 3, at 62904.
9 See IEX Rule 11.190(b)(10).
10 See IEX Rule 11.190(b)(8).
11 See IEX Rule 11.190(b)(16). Note that C-Peg
orders can only be buy orders, so any discussion
of D-Peg sell orders does not apply to C-Peg orders.
This proposal does not apply to Discretionary Limit
(‘‘D-Limit’’) orders, which can be displayed. See
IEX Rule 11.190(b)(10).
12 See IEX Rule 11.210.
13 See IEX Rule 1.160(u).
14 See IEX Rule 1.160(u).
15 C-Peg orders are also constrained by the
consolidated last sale price of the security, and
therefore cannot trade, book, or exercise discretion
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at the NBB (in the case of a buy order)
or NBO (in the case of a sell order), PPeg orders are restricted by the System
from exercising price discretion to trade
at the quote instability determination
price level (the ‘‘CQI Price’’), and D-Peg
and C-Peg orders are restricted by the
System from exercising price discretion
to trade at the CQI Price or at more
aggressive prices than the CQI Price.
Proposed Alternative CQI Calculation
As proposed, Users 16 of D-Peg, P-Peg
and C-Peg orders will be able to
designate whether the order’s price will
be adjusted using the existing quote
instability calculation (hereinafter
referred to as the ‘‘Current CQI
Calculation’’) or the new proposed
alternative quote instability calculation
(hereinafter referred to as the
‘‘Alternative CQI Calculation’’).
According to the Exchange, the
Alternative CQI Calculation is
‘‘designed to incrementally increase the
coverage of the quote instability
calculation in predicting whether a
particular quote is unstable by adjusting
the logic underlying the quote
instability calculation and introducing
enhanced functionality designed to
increase the number of crumbling
quotes identified, while maintaining the
quote instability calculation’s accuracy
in predicting the direction and timing of
the next price change in the NBB or
NBO, as applicable.’’ 17
The Alternative CQI Calculation
applies four separate rule categories of
Protected Quotation changes, each
encompassing one or more sub-rules
(‘‘quote instability rules’’), to determine
whether the System should trigger the
CQI. When a quote instability rule is
‘‘active,’’ as described below, the CQI
will trigger when the rule is ‘‘true’’ thus
indicating a potential crumbling quote.
These quote instability rules are
grouped into the following four
categories:
1. Disappearing Bids/Offers: Four
separate rules look at when the Signal
Exchanges 18 fall off the best prices.
2. Quote Size: Two separate rules look
at size imbalances between buys and
sells at the best price on the Signal
Exchanges.
3. Locked or Crossed Markets: This
single rule looks for locked and crossed
conditions at a Signal Exchange.
at a price that is more aggressive than the
consolidated last sale price. See IEX Rule
11.190(b)(16).
16 See IEX Rule 1.160(qq).
17 Notice, supra note 3, at 62904.
18 See infra note 20 and accompanying text.
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4. Quotation Price: Two separate rules
evaluate changes in the best prices on
the Signal Exchanges.19
Overall, there are several notable
differences between the Alternative CQI
Calculation and the Current CQI
Calculation. First, the Alternative CQI
Calculation expands the number of
exchange protected quotes (i.e., Signal
Exchanges) that are evaluated by the
System from eight exchanges to
eleven.20 In addition, the Alternative
CQI Calculation can activate crumbling
quote protection for one or both sides of
the market (e.g., it can determine a
crumbling quote to exist on the bid side
and, while that crumbling quote
protection is active, separately and
concurrently determine a crumbling
quote to exist on the offer side), whereas
the Current CQI Calculation only
activates the CQI for one side of the
market at a time.21 Further, under the
Current CQI Calculation, the Exchange
only analyzes the relevant prices at the
Signal Exchanges, whereas the
Alternative CQI Calculation will also
take into account quotation sizes at the
eleven away exchanges under the Quote
Size rules.
In addition, the Alternative CQI
Calculation increases the minimum time
period between CQI determinations (i.e.,
when a new CQI can trigger during the
two millisecond ‘‘on’’ period).
Currently, the System will keep the CQI
in effect for two milliseconds, unless,
after 200 microseconds, a new
determination is made by the System
that the quote continues to crumble, in
which case the CQI will extend for
another two milliseconds from that
point. Under the Alternative CQI
Calculation, the CQI will also remain in
effect for two milliseconds, but a
determination to extend the CQI cannot
be made until at least 250 microseconds
have passed. The Exchange states that
19 See Notice, supra note 3, at 62905–07 for the
Exchange’s detailed discussion of the proposed
quote instability rules.
20 The additional Signal Exchanges are MIAX
PEARL, LLC, MEMX LLC, and Nasdaq Phlx LLC.
21 More specifically, the current rule text reads as
follows: ‘‘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.’’ The
new rule text for the Alternative CQI Calculation
reads: ‘‘Quote Instability Determinations are made
separately for the Protected NBB and Protected
NBO, so it is possible for zero, one or both of the
Protected NBB and Protected NBO to be subject to
a quote instability determination concurrently.’’
Additionally, the revised rule text states that ‘‘[a]
determination that the Protected NBB for a
particular security is unstable does not impact the
System’s ability to determine that the Protected
NBO for that same security is also unstable, and
vice versa.’’
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Federal Register / Vol. 87, No. 234 / Wednesday, December 7, 2022 / Notices
CQI triggers in extremely rapid
succession are unnecessary to
continuously restrict discretion across
successive NBBO changes, and that
increasing what it refers to as the CQI
‘‘cooldown period’’ from 200
microsecond to 250 microseconds
before the System can make another
quote instability determination will
reduce the technical processing burden
on the System.22
In general, the Exchange explains that
the current quote instability calculation
‘‘utilizes a logistic regression model
with multiple coefficients and variables
that must exceed a pre-defined
threshold in order for the System to
treat the quote as unstable.’’ The
Exchange characterizes the new
Alternative CQI Calculation as a ‘‘rulesbased model’’ that ‘‘incorporates and
expands on the existing approach.’’ 23
The Alternative CQI Calculation also
uses the concept of an activation value
(‘‘Activation Value’’) for each of the new
quote instability rules. As explained in
more detail in the Notice, the Activation
Values and corresponding thresholds
are ‘‘intended to optimize the overall
accuracy of the quote instability
determinations by providing a
mechanism to turn off a particular rule
when market conditions are such that it
is relatively less accurate in predicting
a crumbling quote.’’ 24
Specifically, the Activation Value is a
function generally of the number of
times the quote moves to a less
aggressive price within the two
milliseconds ‘‘on’’ timeframe following
the time the rule was ‘‘True’’ (i.e., to
assess whether the rule correctly
predicted a crumbling quote) and the
total number of times the rule was True.
Whenever the Activation Value for a
given quote instability rule exceeds a
fixed predetermined activation
threshold specific to that rule (the
‘‘Activation Threshold’’), the rule is
active (i.e., it is eligible to trigger a quote
instability determination when True).
Finally, the proposal sets forth several
conforming changes throughout IEX
Rule 11.190(b) to establish that Users
may utilize one of the two crumbling
quote calculations for P-Peg, D-Peg, and
C-Peg orders. The Exchange also
proposes to amend IEX Rule
11.190(b)(7), which sets forth the
Exchange’s D-Limit order type, to make
clear that a User may only use the
Current CQI Calculation when entering
a D-Limit order.25
22 See
Notice supra note 3, at 62907.
id. at 62905.
24 See id. at 62907.
25 Unlike the non-displayed P-Peg, D-Peg, and CPeg order types, D-Limit orders can be displayed or
non-displayed.
23 See
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III. Discussion and Commission
Findings
After careful review, the Commission
finds that the Exchange’s proposal is
consistent with the requirements of the
Exchange Act and the rules and
regulations thereunder applicable to a
national securities exchange.26 In
particular, the Commission finds that
the proposed rule change is consistent
with Sections 6(b)(5) 27 and 6(b)(8) 28 of
the Exchange Act. Section 6(b)(5) of the
Exchange Act requires that the rules of
a national securities exchange be
designed, among other things, to
promote just and equitable principles of
trade, to remove impediments to and
perfect the mechanism of a free and
open market and a national market
system and, in general, to protect
investors and the public interest, and
not be designed to permit unfair
discrimination between customers,
issuers, brokers, or dealers. Section
6(b)(8) of the Exchange Act requires that
the rules of a national securities
exchange not impose any burden on
competition that is not necessary or
appropriate in furtherance of the
purposes of the Exchange Act.
In its filing, the Exchange explains
that adding three more Signal
Exchanges and also using quotation size
data in addition to quotation price data
is designed to increase the predictive
power and accuracy of the quote
instability calculation.29 Adding
additional reference exchanges and
considering quoted size in addition to
quoted price appear reasonably
designed to contribute to the
functioning of the crumbling quote
indicator consistent with its original
design and purpose.
Further, the Exchange states that the
use of Activation Thresholds for the
Alternative CQI Calculation is designed
to optimize the frequency and accuracy
of the quote instability calculation by
enabling IEX to utilize a broader array
of rules that may be predictive of a
crumbling quote in certain market
conditions but not others.30
Specifically, IEX states that the
proposed activation values and
thresholds are designed to ‘‘enable
broader coverage while controlling for
overall accuracy of the quote instability
determinations by providing a
mechanism to turn off a particular rule
26 In approving this proposed rule change, the
Commission has considered the proposed rule’s
impact on efficiency, competition, and capital
formation. See 15 U.S.C. 78c(f).
27 15 U.S.C. 78f(b)(5).
28 15 U.S.C. 78f(b)(8).
29 See Notice, supra note 3, at 62908.
30 See id. at 62907.
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75101
when market conditions are such that it
is relatively less accurate in predicting
a crumbling quote’’ where certain rules
with a higher potential to be less
accurate have a higher activation
threshold before they become active.31
The Exchange states that it expects the
Current and Alternative CQI
Calculations to continue to be ‘‘on’’ for
only a small portion of the trading
day.32 The Exchange further explains
that it designed the Alternative CQI
Calculation in response to feedback
from Users of P-Peg, D-Peg, and C-Peg
orders, some of which expressed a
desire for additional coverage.33 If
allowed to use the Alternative CQI
Calculation, IEX expects that some
Users may begin to enter more and
larger sized pegged orders on the
Exchange.34
While the Exchange acknowledges
that the Alternative CQI Calculation
may trigger more frequently than the
current version, it has developed a
reasonable method, through the
Activation Values and Activation
Thresholds, to cause the new rules to be
used in those market conditions in
which the Exchange expects them to be
more accurate in predicting a crumbling
quote. To the extent Users see their
execution quality for non-displayed
orders improve when they use the
Alternative CQI Calculation, they may
be incentivized to post more nondisplayed pegged orders on the
Exchange, which in turn will benefit
liquidity seeking investors especially
during most of the day when the quote
is stable and those pegged orders are
offering aggressive price improvement
to those investors.
Based on the foregoing, the
Commission believes that the proposal,
including the Alternative CQI
Calculation, is appropriately and
narrowly tailored to provide a
reasonable mechanism for Users of nondisplayed peg orders on the Exchange to
protect their orders from adverse
selection during limited periods of time
in specific market conditions. Further,
the proposed Alternative CQI
Calculation is transparent and fullydisclosed in the rules of the Exchange.
While the Exchange uses the phrase
‘‘price discretion’’ to describe the
operation of the crumbling quote
functionality, the Exchange itself retains
no discretion to deviate from the
confines of the rule, as the rule contains
the entirety of the parameters under
which the Alternative CQI Calculation
31 See
id. at 62909.
id.
33 See id. at 62908.
34 See id. at 62909.
32 See
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Federal Register / Vol. 87, No. 234 / Wednesday, December 7, 2022 / Notices
will operate. The Exchange’s proposal
does not otherwise amend any
functionality of the affected peg order
types.
In addition, because the Alternative
CQI Calculation will activate without
further action from the User, all Users
will benefit equally regardless of their
technological capabilities and ability to
take action within a short prescribed
period. To the extent the Alternative
CQI Calculation is successful in
incentivizing more firms to post nondisplayed peg orders on the Exchange,
it will contribute to liquidity that all
market participants can access and
increase opportunities for investors to
receive improved prices on their
liquidity taking orders. Accordingly, the
proposal promotes just and equitable
principles of trade, removes
impediments to and perfects the
mechanism of a free and open market
and a national market, and, in general,
protects investors and the public
interest.
Finally, the Alternative CQI
Calculation cannot be used to trigger the
repricing of any displayed orders,
specifically, the D-Limit Order type. As
such, market participants seeking to
execute against displayed liquidity on
IEX, including protected quotes, will
not be adversely affected by the addition
of the Alternative CQI Calculation to the
Exchange’s rules because use of the
Alternative CQI Calculation is limited to
the P-Peg, D-Peg, and C-Peg order types.
For the reasons discussed above, the
Commission finds that the proposal will
not impair access to quotations and is
narrowly tailored to not impose any
burden on competition that is not
necessary or appropriate in furtherance
of the purposes of the Exchange Act,
and is reasonably designed to remove
impediments to and perfect the
mechanism of a free and open market
and a national market system and, in
general, protect investors and the public
interest. Accordingly, the Commission
finds the proposed rule change to be
consistent with the Act, including the
requirements of Section 6(b)(5) and
Section 6(b)(8) of the Act.
ddrumheller on DSK6VXHR33PROD with NOTICES
IV. Conclusion
It is therefore ordered, pursuant to
Section 19(b)(2) of the Exchange Act,35
that the proposed rule change (SR–IEX–
2022–06), be, and it hereby is, approved.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.36
Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2022–26533 Filed 12–6–22; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–96422; File No. SR–BX–
2022–024]
Self-Regulatory Organizations; Nasdaq
BX, Inc.; Notice of Filing and
Immediate Effectiveness of Proposed
Rule Change To Amend the Definition
of Short Term Option Series
December 1, 2022.
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 November
22, 2022, Nasdaq BX, Inc. (‘‘BX’’ or
‘‘Exchange’’) filed with the Securities
and Exchange Commission
(‘‘Commission’’) the proposed rule
change as described in Items I and II
below, which Items have been prepared
by the Exchange. The Commission is
publishing this notice to solicit
comments on the proposed rule change
from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange proposes to amend
certain rule text within General 2,
Organization and Administration;
Equity 2. Market Participants; Options
1, General Provisions; Options 4A,
Options Index Rules; and Options 10,
Doing Business with the Public.
The text of the proposed rule change
is available on the Exchange’s website at
https://listingcenter.nasdaq.com/
rulebook/bx/rules, at the principal office
of the Exchange, and at the
Commission’s Public Reference Room.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
Exchange included statements
concerning the purpose of and basis for
the proposed rule change and discussed
any comments it received on the
proposed rule change. The text of these
statements may be examined at the
places specified in Item IV below. The
36 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
1 15
35 15
U.S.C. 78s(b)(2).
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Exchange 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
The Exchange proposes to amend the
description of the term ‘‘Short Term
Option Series’’ within Options 1,
Section 1, Definitions, to conform the
term to Nasdaq ISE, LLC’s (‘‘ISE’’) term
of Short Term Option Series which was
recently amended.3 The Exchange also
proposes to amend certain rule text
within Options 4A, Section 12, Terms of
Index Options Contracts, related to the
Short Term Option Series Program.
Finally, the Exchange propose certain
other non-substantive amendments.
Each change is described below.
Short Term Option Series
Options 1, Section 1(a)(58) describes
the term ‘‘Short Term Option Series’’ as
follows:
The term ‘‘Short Term Option Series’’
means a series in an option class that is
approved for listing and trading on the
Exchange in which the series is opened for
trading on any Monday, Tuesday,
Wednesday, Thursday or Friday that is a
business day and that expires on the
Monday, Wednesday or Friday of the next
business week, or, in the case of a series that
is listed on a Friday and expires on a
Monday, is listed one business week and one
business day prior to that expiration. If a
Tuesday, Wednesday, Thursday or Friday is
not a business day, the series may be opened
(or shall expire) on the first business day
immediately prior to that Tuesday,
Wednesday, Thursday or Friday,
respectively. For a series listed pursuant to
this Rule for Monday expiration, if a Monday
is not a business day, the series shall expire
on the first business day immediately
following that Monday.
ISE’s Options 4 rules were recently
amended to expand the Short Term
Option Series Program to permit the
listing and trading of options series with
Tuesday and Thursday expirations for
options on SPY and QQQ listed
pursuant to the Short Term Option
Series Program.4 In conjunction with
3 See Securities Exchange Act Release No. 96281
(November 9, 2022), 87 FR 68769 (November 16,
2022) (SR–ISE–2022–18) (Order Granting Approval
of a Proposed Rule Change to Amend the Short
Term Option Series Program). BX’s Options 4 Rules
are incorporated by reference to ISE’s Options 4
Rules and therefore the approval of ISE’s Options
4 rules permit the listing and trading of options
series with Tuesday and Thursday expirations for
options on SPY and QQQ on BX.
4 See note 3 above. BX’s Options 4 Rules are
incorporated by reference to ISE’s Options 4 Rules.
E:\FR\FM\07DEN1.SGM
07DEN1
]]>Agencies
[Federal Register Volume 87, Number 234 (Wednesday, December 7, 2022)]
[Notices]
[Pages 75099-75102]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-26533]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-96416; File No. SR-IEX-2022-06]
Self-Regulatory Organizations; Investors Exchange LLC; Order
Granting Approval of a Proposed Rule Change To Amend Rule 11.190(g) To
Provide an Alternative Calculation for Non-Displayed Pegged Order Types
for Determining Whether a Quote Instability Condition Exists
December 1, 2022.
I. Introduction
On September 27, 2022, the Investors Exchange LLC (``IEX'' or the
``Exchange'') filed with the Securities and Exchange Commission
(``Commission''), pursuant to Section 19(b)(1) of the Securities
Exchange Act of 1934 (``Exchange Act'') \1\ and Rule 19b-4
thereunder,\2\ a proposed rule change to provide an alternative
calculation for non-displayed pegged order types to determine whether a
quote instability condition exists for purposes of determining when the
Exchange's proprietary Crumbling Quote Indicator (``CQI'') is to be
triggered. The proposed rule change was published for comment in the
Federal Register on October 17, 2022.\3\ The Commission received no
comments on the proposed rule change. This order approves the proposed
rule change.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 96014 (October 11,
2022), 87 FR 62903 (``Notice'').
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II. Description of the Proposed Rule Change
Current CQI Operation
Pursuant to IEX Rule 11.190(g), the Exchange utilizes quoting
activity of eight away exchanges' Protected Quotations \4\ and a
mathematical
[[Page 75100]]
calculation to assess the probability of an imminent change to the
current Protected NBB \5\ to a lower price or imminent change to the
current Protected NBO \6\ to a higher price for a particular security.
When the quoting activity meets predetermined criteria, the System \7\
treats the quote as not stable (``quote instability'' or a ``crumbling
quote'') and the CQI is then ``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. IEX
characterizes these order types and the CQI functionality as being
designed to ``counter the costs of `adverse selection' that
participants supplying liquidity incur when their orders are executed
at worse prices as a result of certain speed-based trading
strategies.'' \8\
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\4\ See IEX Rule 1.160(bb) (defining ``Protected Quotation'' as
an automated quotation that is calculated by IEX to be the best bid
or best offer of an exchange). Current IEX Rule 11.190(g) uses the
following eight exchanges' Protected Quotations: New York Stock
Exchange LLC, the Nasdaq Stock Market LLC, NYSE Arca, Inc., Nasdaq
BX, Inc., Cboe BYX Exchange, Inc., Cboe Bats BZX Exchange, Inc.,
Cboe EDGA Exchange, Inc., and Cboe EDGX Exchange, Inc.
(collectively, ``Signal Exchanges'').
\5\ See IEX Rule 1.160(cc).
\6\ See IEX Rule 1.160(cc).
\7\ See IEX Rule 1.160(nn).
\8\ Notice, supra note 3, at 62904.
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This proposal applies to the CQI formula that informs the exercise
of ``discretion'' by Discretionary Peg (``D-Peg'') \9\ orders, Primary
Peg (``P-Peg'') \10\ orders, and Corporate Discretionary Peg (``C-
Peg'') orders.\11\ Each of those resting peg order types, all of which
are non-displayed, passively rest at prices slightly less aggressive
than the near-side quote. When the quote is stable, those peg orders
exercise price discretion by ``jumping'' to a more aggressive price to
interact with an active incoming liquidity taking order when the quote
is stable. However, when the CQI comes on, those orders do not exercise
price discretion and instead continue to rest passively. Specifically,
D-Peg, P-Peg, and C-Peg orders rest at a pegged price that is the less
aggressive of one minimum price variant (``MPV'') \12\ less aggressive
than the primary quote (i.e., one MPV below (above) the NBB \13\ (NBO
\14\) for buy (sell) orders) or the order's limit price, if any.\15\ In
addition, when the CQI is on at the NBB (in the case of a buy order) or
NBO (in the case of a sell order), P-Peg orders are restricted by the
System from exercising price discretion to trade at the quote
instability determination price level (the ``CQI Price''), and D-Peg
and C-Peg orders are restricted by the System from exercising price
discretion to trade at the CQI Price or at more aggressive prices than
the CQI Price.
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\9\ See IEX Rule 11.190(b)(10).
\10\ See IEX Rule 11.190(b)(8).
\11\ See IEX Rule 11.190(b)(16). Note that C-Peg orders can only
be buy orders, so any discussion of D-Peg sell orders does not apply
to C-Peg orders. This proposal does not apply to Discretionary Limit
(``D-Limit'') orders, which can be displayed. See IEX Rule
11.190(b)(10).
\12\ See IEX Rule 11.210.
\13\ See IEX Rule 1.160(u).
\14\ See IEX Rule 1.160(u).
\15\ C-Peg orders are also constrained by the consolidated last
sale price of the security, and therefore cannot trade, book, or
exercise discretion at a price that is more aggressive than the
consolidated last sale price. See IEX Rule 11.190(b)(16).
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Proposed Alternative CQI Calculation
As proposed, Users \16\ of D-Peg, P-Peg and C-Peg orders will be
able to designate whether the order's price will be adjusted using the
existing quote instability calculation (hereinafter referred to as the
``Current CQI Calculation'') or the new proposed alternative quote
instability calculation (hereinafter referred to as the ``Alternative
CQI Calculation''). According to the Exchange, the Alternative CQI
Calculation is ``designed to incrementally increase the coverage of the
quote instability calculation in predicting whether a particular quote
is unstable by adjusting the logic underlying the quote instability
calculation and introducing enhanced functionality designed to increase
the number of crumbling quotes identified, while maintaining the quote
instability calculation's accuracy in predicting the direction and
timing of the next price change in the NBB or NBO, as applicable.''
\17\
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\16\ See IEX Rule 1.160(qq).
\17\ Notice, supra note 3, at 62904.
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The Alternative CQI Calculation applies four separate rule
categories of Protected Quotation changes, each encompassing one or
more sub-rules (``quote instability rules''), to determine whether the
System should trigger the CQI. When a quote instability rule is
``active,'' as described below, the CQI will trigger when the rule is
``true'' thus indicating a potential crumbling quote. These quote
instability rules are grouped into the following four categories:
1. Disappearing Bids/Offers: Four separate rules look at when the
Signal Exchanges \18\ fall off the best prices.
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\18\ See infra note 20 and accompanying text.
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2. Quote Size: Two separate rules look at size imbalances between
buys and sells at the best price on the Signal Exchanges.
3. Locked or Crossed Markets: This single rule looks for locked and
crossed conditions at a Signal Exchange.
4. Quotation Price: Two separate rules evaluate changes in the best
prices on the Signal Exchanges.\19\
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\19\ See Notice, supra note 3, at 62905-07 for the Exchange's
detailed discussion of the proposed quote instability rules.
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Overall, there are several notable differences between the
Alternative CQI Calculation and the Current CQI Calculation. First, the
Alternative CQI Calculation expands the number of exchange protected
quotes (i.e., Signal Exchanges) that are evaluated by the System from
eight exchanges to eleven.\20\ In addition, the Alternative CQI
Calculation can activate crumbling quote protection for one or both
sides of the market (e.g., it can determine a crumbling quote to exist
on the bid side and, while that crumbling quote protection is active,
separately and concurrently determine a crumbling quote to exist on the
offer side), whereas the Current CQI Calculation only activates the CQI
for one side of the market at a time.\21\ Further, under the Current
CQI Calculation, the Exchange only analyzes the relevant prices at the
Signal Exchanges, whereas the Alternative CQI Calculation will also
take into account quotation sizes at the eleven away exchanges under
the Quote Size rules.
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\20\ The additional Signal Exchanges are MIAX PEARL, LLC, MEMX
LLC, and Nasdaq Phlx LLC.
\21\ More specifically, the current rule text reads as follows:
``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.'' The new rule text for the Alternative CQI Calculation
reads: ``Quote Instability Determinations are made separately for
the Protected NBB and Protected NBO, so it is possible for zero, one
or both of the Protected NBB and Protected NBO to be subject to a
quote instability determination concurrently.'' Additionally, the
revised rule text states that ``[a] determination that the Protected
NBB for a particular security is unstable does not impact the
System's ability to determine that the Protected NBO for that same
security is also unstable, and vice versa.''
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In addition, the Alternative CQI Calculation increases the minimum
time period between CQI determinations (i.e., when a new CQI can
trigger during the two millisecond ``on'' period). Currently, the
System will keep the CQI in effect for two milliseconds, unless, after
200 microseconds, a new determination is made by the System that the
quote continues to crumble, in which case the CQI will extend for
another two milliseconds from that point. Under the Alternative CQI
Calculation, the CQI will also remain in effect for two milliseconds,
but a determination to extend the CQI cannot be made until at least 250
microseconds have passed. The Exchange states that
[[Page 75101]]
CQI triggers in extremely rapid succession are unnecessary to
continuously restrict discretion across successive NBBO changes, and
that increasing what it refers to as the CQI ``cooldown period'' from
200 microsecond to 250 microseconds before the System can make another
quote instability determination will reduce the technical processing
burden on the System.\22\
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\22\ See Notice supra note 3, at 62907.
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In general, the Exchange explains that the current quote
instability calculation ``utilizes a logistic regression model with
multiple coefficients and variables that must exceed a pre-defined
threshold in order for the System to treat the quote as unstable.'' The
Exchange characterizes the new Alternative CQI Calculation as a
``rules-based model'' that ``incorporates and expands on the existing
approach.'' \23\
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\23\ See id. at 62905.
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The Alternative CQI Calculation also uses the concept of an
activation value (``Activation Value'') for each of the new quote
instability rules. As explained in more detail in the Notice, the
Activation Values and corresponding thresholds are ``intended to
optimize the overall accuracy of the quote instability determinations
by providing a mechanism to turn off a particular rule when market
conditions are such that it is relatively less accurate in predicting a
crumbling quote.'' \24\
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\24\ See id. at 62907.
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Specifically, the Activation Value is a function generally of the
number of times the quote moves to a less aggressive price within the
two milliseconds ``on'' timeframe following the time the rule was
``True'' (i.e., to assess whether the rule correctly predicted a
crumbling quote) and the total number of times the rule was True.
Whenever the Activation Value for a given quote instability rule
exceeds a fixed predetermined activation threshold specific to that
rule (the ``Activation Threshold''), the rule is active (i.e., it is
eligible to trigger a quote instability determination when True).
Finally, the proposal sets forth several conforming changes
throughout IEX Rule 11.190(b) to establish that Users may utilize one
of the two crumbling quote calculations for P-Peg, D-Peg, and C-Peg
orders. The Exchange also proposes to amend IEX Rule 11.190(b)(7),
which sets forth the Exchange's D-Limit order type, to make clear that
a User may only use the Current CQI Calculation when entering a D-Limit
order.\25\
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\25\ Unlike the non-displayed P-Peg, D-Peg, and C-Peg order
types, D-Limit orders can be displayed or non-displayed.
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III. Discussion and Commission Findings
After careful review, the Commission finds that the Exchange's
proposal is consistent with the requirements of the Exchange Act and
the rules and regulations thereunder applicable to a national
securities exchange.\26\ In particular, the Commission finds that the
proposed rule change is consistent with Sections 6(b)(5) \27\ and
6(b)(8) \28\ of the Exchange Act. Section 6(b)(5) of the Exchange Act
requires that the rules of a national securities exchange be designed,
among other things, to promote just and equitable principles of trade,
to remove impediments to and perfect the mechanism of a free and open
market and a national market system and, in general, to protect
investors and the public interest, and not be designed to permit unfair
discrimination between customers, issuers, brokers, or dealers. Section
6(b)(8) of the Exchange Act requires that the rules of a national
securities exchange not impose any burden on competition that is not
necessary or appropriate in furtherance of the purposes of the Exchange
Act.
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\26\ In approving this proposed rule change, the Commission has
considered the proposed rule's impact on efficiency, competition,
and capital formation. See 15 U.S.C. 78c(f).
\27\ 15 U.S.C. 78f(b)(5).
\28\ 15 U.S.C. 78f(b)(8).
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In its filing, the Exchange explains that adding three more Signal
Exchanges and also using quotation size data in addition to quotation
price data is designed to increase the predictive power and accuracy of
the quote instability calculation.\29\ Adding additional reference
exchanges and considering quoted size in addition to quoted price
appear reasonably designed to contribute to the functioning of the
crumbling quote indicator consistent with its original design and
purpose.
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\29\ See Notice, supra note 3, at 62908.
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Further, the Exchange states that the use of Activation Thresholds
for the Alternative CQI Calculation is designed to optimize the
frequency and accuracy of the quote instability calculation by enabling
IEX to utilize a broader array of rules that may be predictive of a
crumbling quote in certain market conditions but not others.\30\
Specifically, IEX states that the proposed activation values and
thresholds are designed to ``enable broader coverage while controlling
for overall accuracy of the quote instability determinations by
providing a mechanism to turn off a particular rule when market
conditions are such that it is relatively less accurate in predicting a
crumbling quote'' where certain rules with a higher potential to be
less accurate have a higher activation threshold before they become
active.\31\ The Exchange states that it expects the Current and
Alternative CQI Calculations to continue to be ``on'' for only a small
portion of the trading day.\32\ The Exchange further explains that it
designed the Alternative CQI Calculation in response to feedback from
Users of P-Peg, D-Peg, and C-Peg orders, some of which expressed a
desire for additional coverage.\33\ If allowed to use the Alternative
CQI Calculation, IEX expects that some Users may begin to enter more
and larger sized pegged orders on the Exchange.\34\
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\30\ See id. at 62907.
\31\ See id. at 62909.
\32\ See id.
\33\ See id. at 62908.
\34\ See id. at 62909.
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While the Exchange acknowledges that the Alternative CQI
Calculation may trigger more frequently than the current version, it
has developed a reasonable method, through the Activation Values and
Activation Thresholds, to cause the new rules to be used in those
market conditions in which the Exchange expects them to be more
accurate in predicting a crumbling quote. To the extent Users see their
execution quality for non-displayed orders improve when they use the
Alternative CQI Calculation, they may be incentivized to post more non-
displayed pegged orders on the Exchange, which in turn will benefit
liquidity seeking investors especially during most of the day when the
quote is stable and those pegged orders are offering aggressive price
improvement to those investors.
Based on the foregoing, the Commission believes that the proposal,
including the Alternative CQI Calculation, is appropriately and
narrowly tailored to provide a reasonable mechanism for Users of non-
displayed peg orders on the Exchange to protect their orders from
adverse selection during limited periods of time in specific market
conditions. Further, the proposed Alternative CQI Calculation is
transparent and fully-disclosed in the rules of the Exchange. While the
Exchange uses the phrase ``price discretion'' to describe the operation
of the crumbling quote functionality, the Exchange itself retains no
discretion to deviate from the confines of the rule, as the rule
contains the entirety of the parameters under which the Alternative CQI
Calculation
[[Page 75102]]
will operate. The Exchange's proposal does not otherwise amend any
functionality of the affected peg order types.
In addition, because the Alternative CQI Calculation will activate
without further action from the User, all Users will benefit equally
regardless of their technological capabilities and ability to take
action within a short prescribed period. To the extent the Alternative
CQI Calculation is successful in incentivizing more firms to post non-
displayed peg orders on the Exchange, it will contribute to liquidity
that all market participants can access and increase opportunities for
investors to receive improved prices on their liquidity taking orders.
Accordingly, the proposal promotes just and equitable principles of
trade, removes impediments to and perfects the mechanism of a free and
open market and a national market, and, in general, protects investors
and the public interest.
Finally, the Alternative CQI Calculation cannot be used to trigger
the repricing of any displayed orders, specifically, the D-Limit Order
type. As such, market participants seeking to execute against displayed
liquidity on IEX, including protected quotes, will not be adversely
affected by the addition of the Alternative CQI Calculation to the
Exchange's rules because use of the Alternative CQI Calculation is
limited to the P-Peg, D-Peg, and C-Peg order types.
For the reasons discussed above, the Commission finds that the
proposal will not impair access to quotations and is narrowly tailored
to not impose any burden on competition that is not necessary or
appropriate in furtherance of the purposes of the Exchange Act, and is
reasonably designed to remove impediments to and perfect the mechanism
of a free and open market and a national market system and, in general,
protect investors and the public interest. Accordingly, the Commission
finds the proposed rule change to be consistent with the Act, including
the requirements of Section 6(b)(5) and Section 6(b)(8) of the Act.
IV. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Exchange Act,\35\ that the proposed rule change (SR-IEX-2022-06), be,
and it hereby is, approved.
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\35\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\36\
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\36\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2022-26533 Filed 12-6-22; 8:45 am]
BILLING CODE 8011-01-P
