[Federal Register Volume 79, Number 249 (Tuesday, December 30, 2014)]
[Notices]
[Pages 78507-78509]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-30437]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-73911; File No. 10-214]


Automated Matching Systems Exchange, LLC; Notice of Filing of 
Amendment No. 1 to an Application for Limited Volume Exemption From 
Registration as a National Securities Exchange Under Section 5 of the 
Securities Exchange Act of 1934

December 22, 2014.
    On July 7, 2014, Automated Matching Systems Exchange, LLC 
(``AMSE'') submitted to the Securities and Exchange Commission (``SEC'' 
or ``Commission'') an application seeking a limited volume exemption 
under Section 5 of the Securities Exchange Act (``Exchange Act'') from 
registration as a national securities exchange under Section 6 of the 
Exchange Act.\1\ Notice of AMSE's exemption application was published 
for comment in the Federal Register on July 29, 2014.\2\ On October 23, 
2014, the Commission issued an order instituting proceedings to 
determine whether to grant or deny AMSE's exemption application.\3\ On 
November 10, 2014, AMSE submitted Amendment No. 1 to its exemption 
application. The Commission is publishing this notice in order to 
solicit views of interested persons on AMSE's exemption application as 
amended by Amendment No. 1.
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    \1\ The Commission notes that AMSE's application only seeks a 
limited volume exemption under Section 5 of the Exchange Act from 
registration as a national securities exchange under Section 6 of 
the Exchange Act. AMSE's application does not seek to register as a 
national securities exchange.
    \2\ See Securities Exchange Act Release No. 72661 (July 23, 
2014), 79 FR 44070 (``Notice'').
    \3\ See Securities Exchange Act Release No. 73419 (October 23, 
2014), 79 FR 64421 (October 29, 2014) (``Order Instituting 
Proceedings'').
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I. Description of AMSE's System

    AMSE proposes to conduct business in reliance upon an exemption 
from registration as a national securities exchange pursuant to Section 
5 of the Exchange Act.\4\ In general, AMSE seeks to operate as an 
exchange for alternative trading systems.\5\ AMSE proposes to operate 
solely on an ``off-order-book'' trading basis. AMSE does not intend to 
have a physical exchange trading floor, centralized order book, or 
specialists or market makers with affirmative and negative market 
making obligations. Each member of AMSE would maintain its own 
automated matching system or electronic order book. Each member of AMSE 
would adopt its own rules governing the execution and priority of 
orders on its system. Trades would occur when an order to buy and an 
order to sell match on a member's electronic order book. Each member 
would report its transactions to AMSE at such intervals as required by 
AMSE.
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    \4\ 15 U.S.C. 78e.
    \5\ For more detail on AMSE's proposed system, see AMSE's full 
amended exemption application and exhibits, which are published with 
this notice on the Commission's Web site at http://www.sec.gov/rules/other.shtml.
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II. Amendment No. 1 to AMSE's Exemption Application

    On November 10, 2014, AMSE submitted Amendment No. 1 to its 
exemption application. AMSE has represented that the only substantive 
change to its exemption application made by Amendment No. 1 is the 
addition of the following paragraph to Exhibit E: \6\
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    \6\ See email from Michael Stegawski, Chief Regulatory Officer, 
AMSE, to SEC staff, dated November 14, 2014.

    The Exchange will bring together orders for multiple buyers and 
sellers and such will be done by the use of consolidated quotation 
systems which effect transactions for multiple buyers and sellers. 
The consolidated quotation systems will display, or otherwise 
represent, trading interests entered on the AMSE system to its 
system users. AMSE may use a centralized order router which would 
match trading interests on the electronic order book of one member 
with the trading interests on the electronic order book of a second 
member.

III. Additional Grounds for Denial Under Consideration

    In the Order Instituting Proceedings, the Commission provided 
notice of the grounds for denial under consideration.\7\ Specifically, 
the Commission noted that it was concerned that AMSE's exemption 
application does not meet a key threshold requirement for being granted 
an exemption from exchange registration--namely, that the applicant 
actually be an ``exchange'' as defined under Section 3(a)(1) of the 
Exchange Act and Rule 3b-16 thereunder.\8\ The Commission continues to 
have this concern.
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    \7\ See Order Instituting Proceedings, supra note 3, at 64422.
    \8\ See Regulation ATS Adopting Release, 63 FR at 70898-70901 
(discussing the Commission's revised interpretation of the 
``exchange'' definition). Among other things, the Commission stated 
that ``the first essential element of an exchange is the bringing 
together of orders of multiple buyers and sellers.'' Id. at 70900.
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    The Commission is providing notice of additional grounds for denial 
under consideration. Specifically, the Commission is concerned that it 
would not be necessary or appropriate in the public interest or for the 
protection of investors to grant a limited volume exemption under 
Section 5 of the Exchange Act because it appears from the exemption 
application that the operation of the proposed exchange would be 
inconsistent with the Exchange Act.

[[Page 78508]]

    AMSE's exemption application states that AMSE would operate as a 
self-regulatory organization that would exercise self-regulatory 
authority over its members.\9\ A ``self-regulatory organization'' is 
defined under Section 3(a)(26) of the Exchange Act as ``any national 
securities exchange, registered securities association, or registered 
clearing agency. . . .'' \10\ Section 5 of the Exchange Act provides 
that an exchange must be either (1) registered as a national securities 
exchange under Section 6 of the Exchange Act or (2) exempted from such 
registration on the basis of limited volume of transactions effected on 
the exchange.\11\ An exchange can only become a ``national securities 
exchange,'' and thus a self-regulatory organization, by registering 
under Section 6 of the Exchange Act.\12\ An exchange that is exempt 
under Section 5 of the Exchange Act on the basis of limited volume of 
transactions, however, is relieved from registering as a national 
securities exchange under Section 6 of the Exchange Act and therefore 
is not a self-regulatory organization.\13\ If the Commission were to 
grant AMSE's exemption application, however, AMSE would not be a 
registered national securities exchange and, therefore, would not 
become a self-regulatory organization as defined under Section 3(a)(26) 
of the Exchange Act.\14\ Accordingly, it appears that any attempts by 
AMSE to hold itself out as a self-regulatory organization while 
simultaneously seeking an exemption under Section 5 would be contrary 
to the Exchange Act.
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    \9\ See, e.g., AMSE Operating Agreement Article III, Section 
1(e) (``In light of the unique nature of the Company, its 
operations, its status as a SRO. . . .'' (emphasis added)); Article 
XI, Section 2 (``All meetings of the Board (and any committees of 
the Board) pertaining to the self-regulatory function of the Company 
(including disciplinary matters). . . .'' (emphasis added)); and 
Article XI, Section 3 (``to the extent necessary or appropriate to 
discharge properly the self-regulatory responsibilities of the 
Company.'' (emphasis added)).
    \10\ 15 U.S.C. 78c(a)(26).
    \11\ 15 U.S.C. 78e.
    \12\ 15 U.S.C. 78f(a).
    \13\ In an order granting a limited volume exemption from 
registration as a national securities exchange under Section 5 of 
the Exchange Act to Wunsch Auction Systems Inc., the Commission 
stated ``[b]y virtue of this exemption from registration, the Wunsch 
System falls outside the definition of a national securities 
exchange because the term ``national securities exchange'' implies a 
registered entity (see, e.g., sections 3(a)(26) of the [Exchange] 
Act (defining the term ``self-regulatory organization'') and section 
6(a) of the [Exchange] Act.'' See Securities Exchange Act Release 
No. 28899 (February 20, 1991), 56 FR 8377, 8382 (February 28, 1991) 
(File No. 10-100).
    \14\ The Commission notes that, even if AMSE's exemption 
application were to be approved, the broker-dealer members of AMSE 
would not be able to satisfy their requirement to be members of a 
self-regulatory organization by their membership with AMSE; rather 
such broker-dealers would be required to be members of a registered 
securities association or a national securities exchange if such 
broker-dealers effect transactions solely on that exchange, pursuant 
to Section 15(b)(1)(B) of the Exchange Act. See 15 U.S.C. 
78o(b)(1)(B).
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    The Commission notes that it has not reached any conclusions with 
respect to AMSE's exemption application. Rather, the Commission seeks 
and encourages interested persons to provide additional comment on the 
exemption application as amended by Amendment No. 1.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning AMSE's exemption application as amended by 
Amendment No. 1, including whether AMSE's exemption application as 
amended by Amendment No. 1 is consistent with the Exchange Act.
    1. While the Commission requests comment on all aspects of AMSE's 
exemption application as amended by Amendment No. 1, the Commission 
specifically requests comment on whether statements made in Amendment 
No. 1 are consistent with other statements in the exemption 
application, including those made in Exhibit E thereto. For example:
    <bullet> In Amendment No. 1, in Exhibit E, AMSE states that ``[t]he 
Exchange will bring together orders for multiple buyers and sellers and 
such will be done by the use of consolidated quotation systems which 
effect transactions for multiple buyers and sellers. The consolidated 
quotation systems will display, or otherwise represent, trading 
interests entered on the AMSE system to its system users. AMSE may use 
a centralized order router which would match trading interests on the 
electronic order book of one member with the trading interests on the 
electronic order book of a second member.'' \15\
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    \15\ See supra note 5.
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    <bullet> But Exhibit E to AMSE's exemption application also states 
``[t]he Exchange has designed its System to allow its Exchange Members 
to individually determine the best method for display of quotations and 
entry of orders through the Exchange. Thus, Exchange Members may 
develop their own customized electronic order books and routing 
systems, but shall report their transactions to the Exchange at such 
intervals as required by the Exchange.'' In addition, Exhibit E states 
``[t]rades shall occur when an order to buy and an order to sell match 
on the Exchange Member's electronic order book. Each Exchange Member 
shall adopt rules to govern the execution and priority of orders.''
    2. The Commission specifically requests comment on whether the 
following are sufficiently clear from AMSE's exemption application, as 
amended by Amendment No. 1:
    <bullet> How would AMSE's consolidated quotation systems, which 
according to AMSE ``will display, or otherwise represent, trading 
interests entered on the AMSE system to its system users,'' effect 
transactions?
    <bullet> If AMSE's consolidated quotation systems do effect 
transactions, how is that consistent with the statement in Exhibit E 
that ``[t]rades shall occur when an order to buy and an order to sell 
match on the Exchange Member's electronic order book?''
    <bullet> If AMSE's consolidated quotation systems do effect 
transactions, what are the established non-discretionary methods (e.g., 
execution priority rules) by which orders from members interact with 
each other through AMSE's consolidated quotation systems?
    <bullet> Amendment No. 1 states that ``AMSE may use a centralized 
order router'' (emphasis added). Under what circumstances would AMSE 
use or not use the centralized order router? How would the centralized 
order router function? What methods (discretionary or non-
discretionary) would determine how the centralized order router ``would 
match trading interests on the electronic order book of one member with 
the trading interests on the electronic order book of a second 
member?''
    <bullet> What does it mean for AMSE's centralized order router to 
``match trading interest?'' Does ``match trading interest'' mean 
bringing together orders using established non-discretionary methods in 
the consolidated quotation system, or does it mean routing an order 
from one member's order book to another member's order book for a 
transaction to occur on the member's order book? If the former, what 
are the established non-discretionary methods by which orders from 
members interact with each other through the centralized router (e.g., 
execution priority rules)?
    <bullet> What other functions, if any, does the centralized order 
router do other than provide the technology and systems to route 
trading interest from one member's order book to another member's order 
book? In particular, does the centralized order router decide when to 
send trading interest from one member's electronic order book to 
another member's electronic order book, or does the AMSE member have to 
take action to route the trading interest? If the centralized order 
router decides when to route trading interest from one

[[Page 78509]]

member's book to another member's book, under what rules or protocols 
does it make such decisions?
    <bullet> Would an AMSE member be required to use AMSE's 
consolidated quotations systems or would the AMSE member be allowed to 
display trading interest submitted to its order book through other 
means, including its own data feed?
    <bullet> Are members required to use AMSE's centralized order 
router? Are members required to route trading interest to other members 
if an execution could occur, or is routing between members 
discretionary? For example, assume Member 1's order book has no sell 
interest in XYZ stock. If Member 1 receives buy interest in XYZ stock 
that could execute against sell interest in XYZ stock on Member 2's 
order book, would Member 1 be required to route such buy interest to 
Member 2 or could Member 1 post such buy interest to its order book?
    3. The Commission specifically requests comment on whether 
statements made in AMSE's exemption application pertaining to its 
intent to operate as an SRO are consistent with statements in the 
application pertaining to its exemption request. As noted above, AMSE's 
application states that it intends to operate as an SRO. But, AMSE's 
application also states that it is seeking an exemption from 
registering as a national securities exchange. If AMSE were granted an 
exemption from registering as a national securities exchange, AMSE 
would not be a registered national securities exchange and hence would 
not be an SRO. The Commission seeks comment on the inconsistencies 
between these statements in AMSE's application.
    Comments may be submitted by any of the following methods:

Electronic Comments

    <bullet> Use the Commission's Internet comment form (http://www.sec.gov/rules/other.shtml); or
    <bullet> Send an email to <a href="/cdn-cgi/l/email-protection#1c6e697079317f7371717972686f5c6f797f327b736a"><span class="__cf_email__" data-cfemail="1260677e773f717d7f7f777c6661526177713c757d64">[email protected]</span></a>. Please include 
File Number 10-214 on the subject line.

Paper Comments

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

All submissions should refer to File Number 10-214. This file number 
should be included on the subject line if email is used. To help the 
Commission process and review your comments more efficiently, please 
use only one method. The Commission will post all comments on the 
Commission's Internet Web site (http://www.sec.gov/rules/other.shtml). 
Copies of the submission, all subsequent amendments, all written 
statements with respect to AMSE's exemption application filed with the 
Commission, and all written communications relating to the application 
between the Commission and any person, other than those that may be 
withheld from the public in accordance with the provisions of 5 U.S.C. 
552, will be available for Web site viewing and printing in the 
Commission's Public Reference Room, 100 F Street NE., Washington, DC 
20549, on official business days between the hours of 10:00 a.m. and 
3:00 p.m. All comments received will be posted without change; the 
Commission does not edit personal identifying information from 
submissions. You should submit only information that you wish to make 
available publicly. All submissions should refer to File Number 10-214 
and should be submitted on or before January 20, 2015.
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    \16\ 17 CFR 200.30-3(a)(71)(ii).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\16\
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-30437 Filed 12-29-14; 8:45 am]
BILLING CODE 8011-01-P


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