Document ID: SEC-2016-1807-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Investors Exchange LLC
Posted Date: 2016-10-11T04:00Z

[Federal Register Volume 81, Number 196 (Tuesday, October 11, 2016)]
[Notices]
[Pages 70216-70222]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-24421]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-79036; File No. SR-IEX-2016-16]

Self-Regulatory Organizations; Investors Exchange LLC; Notice of 
Filing and Immediate Effectiveness of Proposed Rule Change To Adopt 
Rules To Implement the Quoting and Trading Provisions of the Tick Size 
Pilot Program and To Describe Related Changes to IEX System 
Functionality

October 4, 2016.
    Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of 
1934 (the ``Act'') \2\ and Rule 19b-4 thereunder,\3\ notice is hereby 
given that, on October 3, 2016, 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.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 15 U.S.C. 78a.
    \3\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    IEX is filing with the Commission a proposed rule change to adopt 
rules under IEX Rule 11.340 to implement the quoting and trading 
provisions of the Regulation NMS Plan to Implement a Tick Size Pilot 
Program submitted to the Commission pursuant to Rule 608 of Regulation 
NMS \4\ under the Act (the ``Plan''),\5\ and to describe changes to IEX 
system functionality necessary to implement the Plan. The proposed rule 
change is substantially similar to proposed rule changes published by 
the Commission for the NASDAQ Stock Market LLC (``Nasdaq'') to adopt 
NASDAQ Rule 4770, which also implemented the quoting and trading 
provisions of the Plan.\6\ Accordingly, the Exchange has designated 
this proposal as a ``non-controversial'' proposed rule change pursuant 
to Section 19(b)(3)(A) of the Act \7\ and provided the Commission with 
the notice required by Rule 19b-4(f)(6)(iii) under the Act.\8\
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    \4\ 17 CFR 242.608.
    \5\ See Securities and Exchange Act Release No. 74892 (May 6, 
2015), 80 FR 27513 (File No. 4-657) (``Tick Plan Approval Order''). 
See also Securities and Exchange Act Release No. 76382 (November 6, 
2015) (File No. 4-657), 80 FR 70284 (File No. 4-657) (November 13, 
2015), which extended the pilot period commencement date from May 6, 
2015 to October 3, 2016.
    \6\ See Securities and Exchange Act Release No. 78251 (July 7, 
2016); 81 FR 45315 (July 13, 2016.
    \7\ 15 U.S.C. 78s(b)(3)(a).
    \8\ 17 CFR 240.19b-4(f)(6)(iii).
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    The text of the proposed rule change is available at the Exchange's 
Web site 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 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 the 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Exchange proposes to establish rules to require its members to 
comply with the requirements of the Plan, which is designed to study 
and assess the impact of increment conventions on the liquidity and 
trading of the common stocks of small capitalization companies. The 
Exchange proposes changes to its rules for a two-year pilot period that 
coincides with the Pilot Period for the Plan, which is currently 
scheduled as a two-year pilot to begin on October 3, 2016.

Background

    On August 25, 2014, NYSE Group, Inc., on behalf of BATS Exchange, 
Inc., BATS Y-Exchange, Inc., Chicago Stock Exchange, Inc., EDGA 
Exchange, Inc., EDGX Exchange, Inc., Financial Industry Regulatory 
Authority, Inc. (``FINRA''), NASDAQ OMX BX, Inc., NASDAQ OMX PHLX LLC, 
the Nasdaq Stock Market LLC, New York Stock Exchange LLC (``NYSE''), 
NYSE MKT LLC, and NYSE Arca, Inc. (collectively ``Participants''), 
filed with the Commission, pursuant to Section 11A of the Act \9\ and 
Rule 608 of Regulation NMS thereunder, the Plan to Implement a Tick 
Size Pilot Program (``Pilot'').\10\ The Participants filed the Plan to 
comply with an order issued by the Commission on June 24, 2014 (the 
``June 2014 Order'').\11\ The Plan \12\ was published for comment in 
the Federal Register on November 7, 2014,\13\ and approved by the 
Commission, as modified, on May 6, 2015.\14\ An amendment to the Plan 
adding IEX as a Participant became effective on August 5, 2016.\15\
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    \9\ 15 U.S.C. 78k-1
    \10\ See Letter from Brendon J. Weiss, Vice President, 
Intercontinental Exchange, Inc., to Secretary, Commission, dated 
August 25, 2014.
    \11\ See Securities Exchange Act Release No. 72460 (June 24, 
2014), 79 FR 36840 (June 30, 2014).
    \12\ Unless otherwise specified, capitalized terms used in this 
rule filing are based on the defined terms of the Plan.
    \13\ See Securities Exchange Act Release No. 72460 (June 24, 
2014), 79 FR 36840 (June 30, 2014).
    \14\ See Tick Plan Approval Order, supra note 5. See also 
Securities Exchange Act Release No. 77277 (March 3, 2016), 81 FR 
12162 (March 8, 2016) (File No. 4-657), which amended the Plan to 
add National Stock Exchange, Inc. as a Participant.
    \15\ See Securities Exchange Act Release No. 78703 (August 26, 
2016; 81 FR 60397 (September 1, 2016) (File No. 4-631).
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    The Plan is designed to allow the Commission, market participants, 
and the public to study and assess the impact of increment conventions 
on the

[[Page 70217]]

liquidity and trading of the common stocks of small-capitalization 
companies. The Commission plans to use the Tick Size Pilot Program to 
assess whether wider tick sizes enhance the market quality of Pilot 
Securities for the benefit of issuers and investors. Each Participant 
is required to comply, and to enforce compliance by its member 
organizations, as applicable, with the provisions of the Plan.
    Proposed paragraph (d) of Rule 11.340 describes the changes to 
System functionality necessary to implement the Plan. The Exchange 
believes that all of the proposed changes are designed to directly 
comply with the Plan and to assist the Exchange in meeting its 
regulatory obligations thereunder.
    The Plan will include stocks of companies with $3 billion or less 
in market capitalization, an average daily trading volume of one 
million shares or less, and a volume weighted average price of at least 
$2.00 for every trading day. The Plan will consist of a control group 
of approximately 1,400 Pilot Securities and three test groups with 400 
Pilot Securities in each selected by a stratified sampling.\16\ During 
the pilot, Pilot Securities in the control group will be quoted at the 
current tick size increment of $0.01 per share and will trade at the 
currently permitted increments. Pilot Securities in the first test 
group (``Test Group One'') will be quoted in $0.05 minimum increments 
but will continue to trade at any price increment that is currently 
permitted.\17\ Pilot Securities in the second test group (``Test Group 
Two'') will be quoted in $0.05 minimum increments and will trade at 
$0.05 minimum increments subject to a midpoint exception, a retail 
investor exception, and a negotiated trade exception.\18\ Pilot 
Securities in the third test group (``Test Group Three'') will be 
subject to the same terms as Test Group Two and also will be subject to 
the ``Trade-at'' requirement to prevent price matching by a person not 
displaying at a price of a Trading Center's ``Best Protected Bid'' or 
``Best Protected Offer,'' unless an enumerated exception applies.\19\ 
In addition to the exceptions provided under Test Group Two, an 
exception for Block Size orders and exceptions that closely resemble 
those under Rule 611 of Regulation NMS \20\ will apply to the Trade-at 
requirement.
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    \16\ See Section V of the Plan for identification of Pilot 
Securities, including criteria for selection and grouping.
    \17\ See Section VI(B) of the Plan. Pilot Securities in Test 
Group One will be subject to a midpoint exception and a retail 
investor exception.
    \18\ See Section VI(C) of the Plan.
    \19\ See Section VI(D) of the Plan.
    \20\ 17 CFR 242.611.
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    The Plan also contains requirements for the collection and 
transmission of data to the Commission and the public. A variety of 
data generated during the Plan will be released publicly on an 
aggregated basis to assist in analyzing the impact of wider tick sizes 
on smaller capitalization stocks.\21\ The Exchange adopted paragraph 
(b) of Rule 11.340 to require Members to comply with the data 
collection provisions under Appendix B and C of the Plan.\22\
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    \21\ See Section VII of the Plan.
    \22\ See Securities Exchange Act Release No. 78481 (August 4, 
2016); 81 FR 52933 (August 10, 2016).
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Member Compliance; Proposed Rules 11.340(a) and (c)

    The Plan requires the Exchange to establish, maintain, and enforce 
written policies and procedures that are reasonably designed to comply 
with the applicable quoting and trading requirements specified in the 
Plan.\23\ Accordingly, the Exchange is proposing new Rule 11.340(a) to 
require its Members to comply with the quoting and trading provisions 
of the Plan. The proposed Rules are also designed to ensure the 
Exchange's compliance with the Plan.
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    \23\ The Exchange was also required by the Plan to develop 
appropriate policies and procedures that provide for data collection 
and reporting to the Commission of data described in Appendixes B 
and C of the Plan. See Securities Exchange Act Release No. 77456 
(March 28, 2016), 81 FR 18925 (April 1, 2016) (SR-NASDAQ-2016-43).
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    Proposed paragraph (a)(1) of Rule 11.340 would establish the 
following defined terms:
     ``Plan'' means the Tick Size Pilot Plan submitted to the 
Commission pursuant to Rule 608(a)(3) of Regulation NMS under the Act.
     ``Pilot Test Groups'' means the three test groups 
established under the Plan, consisting of 400 Pilot Securities each, 
which satisfy the respective criteria established by the Plan for each 
such test group.
     Trade-at Intermarket Sweep Order'' (``TA ISO'') would mean 
a limit order for a Pilot Security that meets the following 
requirements:
    (i) When routed to a Trading Center, the limit order is identified 
as a TA ISO; and
    (ii) Simultaneously with the routing of the limit order identified 
as a TA ISO, one or more additional limit orders, as necessary, are 
routed to execute against the full size of any protected bid, in the 
case of a limit order to sell, or the full displayed size of any 
protected offer, in the case of a limit order to buy, for the Pilot 
Security with a price that is better than or equal to the limit price 
of the limit order identified as a TA ISO Sweep Order. These additional 
routed orders also must be marked as TA ISOs or Intermarket Sweep Order 
(``ISO).
     Paragraph (a)(1)(E) would provide that all capitalized 
terms not otherwise defined in this rule shall have the meanings set 
forth in the Plan, Regulation NMS under the Act, or Exchange rules, as 
applicable.
    Proposed Paragraph (a)(2) would state that the Exchange is a 
Participant in, and subject to the applicable requirements of, the 
Plan; proposed Paragraph (a)(3) would require members to establish, 
maintain and enforce written policies and procedures that are 
reasonably designed to comply with the applicable requirements of the 
Plan, which would allow the Exchange to enforce compliance by its 
members with the provisions of the Plan, as required pursuant to 
Section II(B) of the Plan.
    In addition, Paragraph (a)(4) would provide that Exchange systems 
would not display, quote or trade in violation of the applicable 
quoting and trading requirements for a Pilot Security specified in the 
Plan and this proposed rule, unless such quotation or transaction is 
specifically exempted under the Plan. Although not required or 
prohibited by the Plan, the Exchange proposes to apply the quoting and 
trading requirements during the Pre-Market Hours and Post-Market Hours 
trading sessions,\24\ in addition to the Regular Market Hours trading 
session.\25\ The Exchange believes that applying the same processes and 
requirements in Test Group Pilot Securities will simplify processing of 
orders by the Exchange, avoiding market participant confusion that may 
be caused by applying only some of the Plan requirements and not others 
during the different market sessions.
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    \24\ As used in this proposal, the term ``Market Hours'' means 
the period of time beginning at 9:30 a.m. ET and ending at 4:00 p.m. 
ET (or such earlier time as may be designated by IEX on a day when 
IEX closes early). The term ``Pre- Market Hours'' means the period 
of time beginning at 8:00 a.m. ET and ending immediately prior to 
the commencement of Market Hours. The term ``Post- Market Hours'' 
means the period of time beginning immediately after the end of 
Market Hours and ending at 5:00 p.m. ET. See Rule 1.160(z), (aa) and 
(gg).
    \25\ Regular Trading Hours is defined by the Plan as having the 
same meaning as Rule 600(b)(64) of Regulation NMS. See Section I 
(cc) of the Plan.
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    The Exchange also proposes to add Rule 11.340(a)(5) to provide for 
the treatment of Pilot Securities that drop below a $1.00 value during 
the Pilot Period.\26\ The Exchange proposes that if

[[Page 70218]]

the price of a Pilot Security drops below $1.00 during regular trading 
on any given business day, such Pilot Security would continue to be 
subject to the Plan and the requirements described below that 
necessitate members to comply with the specific quoting and trading 
obligations for each respective Pilot Test Group under the Plan, and 
would continue to trade in accordance with the proposed rules below as 
if the price of the Pilot Security had not dropped below $1.00. 
However, if the Closing Price of a Pilot Security on any given business 
day is below $1.00, such Pilot Security would be moved out of its 
respective Pilot Test Group into the control group (which consists of 
Pilot Securities not placed into a Pilot Test Group), and may then be 
quoted and traded at any price increment that is currently permitted by 
Exchange rules for the remainder of the Pilot Period. Notwithstanding 
anything contained herein to the contrary, the Exchange proposes that, 
at all times during the Pilot Period, Pilot Securities (whether in the 
control group or any Pilot Test Group) would continue to be subject to 
the data collection rules, which are enumerated in Rule 11.340(b).
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    \26\ NYSE, on behalf of the Participants, submitted a letter to 
Commission requesting exemption from certain provisions of the Plan 
related to quoting and trading. See letter from Elizabeth K. King, 
NYSE, to Brent J. Fields, Secretary, Commission, dated October 14, 
2015 (the ``October Exemption Request''). FINRA, also on behalf of 
the Plan Participants, submitted a separate letter to Commission 
requesting additional exemptions from certain provisions of the Plan 
related to quoting and trading. See letter from Marcia E. Asquith, 
Senior Vice President and Corporate Secretary, FINRA, to Robert W. 
Errett, Deputy Secretary, Commission, dated February 23, 2016 (the 
``February Exemption Request,'' and together with the October 
Exemption Request, the ``Exemption Request Letters''). The 
Commission, pursuant to its authority under Rule 608(e) of 
Regulation NMS, granted New York Stock Exchange LLC a limited 
exemption from the requirement to comply with certain provisions of 
the Plan as specified in the Exemption Request Letters and noted 
herein. See letter from David Shillman, Associate Director, Division 
of Trading and Markets, Commission to Sherry Sandler, Associate 
General Counsel, New York Stock Exchange LLC, dated April 25, 2016 
(the ``Exemption Letter''). The Exchange is seeking the same 
exemptions as requested in the Exemption Request Letters, including 
without limitation, an exemption relating to proposed Rule 
11.340(a)(5).
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    The Exchange proposes Rules 11.340(c)(1)-(3), which would require 
members to comply with the specific quoting and trading obligations for 
each Pilot Test Group under the Plan. With regard to Pilot Securities 
in Test Group One, proposed Rule 11.340(c)(1) would provide that no 
member may display, rank, or accept from any person any displayable or 
non-displayable bids or offers, orders, or indications of interest in 
increments other than $0.05. However, orders priced to trade at the 
midpoint of the National Best Bid and National Best Offer (``NBBO'') or 
Best Protected Bid and Best Protected Offer (``PBBO'') and orders 
entered in a Participant-operated retail liquidity program \27\ may be 
ranked and accepted in increments of less than $0.05. Pilot Securities 
in Test Group One may continue to trade at any price increment that is 
currently permitted by Rule 11.210.\28\
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    \27\ The Exchange notes that it does not operate a retail 
liquidity program, but has included references to retail liquidity 
programs operated by other Participants in its rules for the sake of 
consistency with the Plan.
    \28\ Rule 11.210 specifies the minimum price variant, or 
increment, applicable to securities traded on the Exchange.
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    With regard to Pilot Securities in Test Group Two, proposed Rule 
11.340(c)(2)(A) would provide that such Pilot Securities would be 
subject to all of the same quoting requirements as described above for 
Pilot Securities in Test Group One, along with the applicable quoting 
exceptions. In addition, proposed Rule 11.340(c)(2)(B) would provide 
that, absent one of the listed exceptions in proposed 11.340(c)(2)(C) 
enumerated below, no member may execute orders in any Pilot Security in 
Test Group Two in price increments other than $0.05. The $0.05 trading 
increment would apply to all trades, including Brokered Cross Trades.
    Paragraph (2)(C) would set forth further requirements for Pilot 
Securities in Test Group Two. Specifically, members trading Pilot 
Securities in Test Group Two would be allowed to trade in increments 
less than $0.05 under the following circumstances:
    (i) Trading may occur at the midpoint between the NBBO or PBBO;
    (ii) Retail Investor Orders may be provided with price improvement 
that is at least $0.005 better than the PBBO.
    (iii) Negotiated Trades may trade in increments less than $0.05; 
and
    (iv) Execution of a customer order to comply with Rule 10.160 \29\ 
following the execution of a proprietary trade by the Member at an 
increment other than $0.05, where such proprietary trade was 
permissible pursuant to an exception under the Plan.\30\
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    \29\ Rule 10.160 is the Exchange's Prohibition Against Trading 
Ahead of Customer Orders rule, which is substantially identical to 
FINRA Rule 5320.
    \30\ The Exchange proposes to add this exemption to permit 
members to fill a customer order in a Pilot Security at a non-nickel 
increment to comply with Rule 10.160 under limited circumstances. 
Specifically, the exception would allow the execution of a customer 
order following a proprietary trade by the member at an increment 
other than $0.05 in the same security, on the same side and at the 
same price as (or within the prescribed amount of) a customer order 
owed a fill pursuant to Rule 10.160, where the triggering 
proprietary trade was permissible pursuant to an exception under the 
Plan. The Commission granted NYSE an exemption from Rule 608(c) 
related to this provision. See Exemption Letter, supra note 26. The 
Exchange is seeking the same exemptions as requested in the 
Exemption Request Letters. The Exchange believes such an exception 
best facilitates the ability of members to continue to protect 
customer orders while retaining the flexibility to engage in 
proprietary trades that comply with an exception to the Plan.
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    Paragraph (3)(A)-(3)(C) would set forth the requirements for Pilot 
Securities in Test Group Three. Members quoting or trading such Pilot 
Securities would be subject to all of the same quoting and trading 
requirements as described above for Pilot Securities in Test Group Two, 
including the quoting and trading exceptions applicable to Pilot 
Securities in Test Group Two. In addition, proposed Paragraph (3)(D) 
would provide for an additional prohibition on Pilot Securities in Test 
Group Three referred to as the ``Trade-at Prohibition.'' \31\ Paragraph 
(3)(D)(ii) would provide that, absent one of the listed exceptions in 
proposed Rule 11.340(c)(3)(D)(iii) enumerated below, no member may 
execute a sell order for a Pilot Security in Test Group Three at the 
price of a Protected Bid or execute a buy order for a Pilot Security in 
Test Group Three at the price of a Protected Offer.
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    \31\ Proposed 11.340(c)(3)(D)(i) would define the ``Trade-at 
Prohibition'' to mean the prohibition against executions by a 
Trading Center of a sell order for a Pilot Security at the price of 
a Protected Bid or the execution of a buy order for a Pilot Security 
at the price of a Protected Offer during regular trading hours.
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    Proposed Rule 11.340(c)(3)(D)(iii) would allow members to execute a 
sell order for a Pilot Security in Test Group Three at the price of a 
Protected Bid or execute a buy order for a Pilot Security in Test Group 
Three at the price of a Protected Offer if any of the following 
circumstances exist:
    a. The order is executed as agent or riskless principal by an 
independent trading unit, as defined under Rule 200(f) of Regulation 
SHO,\32\ of a Trading Center within a Member that has a displayed 
quotation as agent or riskless principal, via either a processor or an 
SRO Quotation Feed, at a price equal to

[[Page 70219]]

the traded-at Protected Quotation, that was displayed before the order 
was received,\33\ but only up to the full displayed size of that 
independent trading unit's previously displayed quote; \34\
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    \32\ The Exchange is proposing that, for proposed Rules 11.340 
(c)(3)(D)(iii)a. and b., a Trading Center operated by a broker-
dealer would mean an independent trading unit, as defined under Rule 
200(f) of Regulation SHO, within such broker-dealer. See 17 CFR 
242.200.
     Independent trading unit aggregation is available if traders in 
an aggregation unit pursue only the particular trading objective(s) 
or strategy(s) of that aggregation unit and do not coordinate that 
strategy with any other aggregation unit. Therefore, a Trading 
Center cannot rely on quotations displayed by that broker dealer 
from a different independent trading unit. As an example, an agency 
desk of a broker-dealer cannot rely on the quotation of a 
proprietary desk in a separate independent trading unit at that same 
broker-dealer.
    \33\ The Exchange is proposing to adopt this limitation to 
ensure that a Trading Center does not display a quotation after the 
time of order receipt solely for the purpose of trading at the price 
of a protected quotation without routing to that protected 
quotation.
    \34\ This proposed exception to Trade-at would allow a Trading 
Center to execute an order at the Protected Quotation in the same 
capacity in which it has displayed a quotation at a price equal to 
the Protected Quotation and up to the displayed size of such 
displayed quotation.
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    b. The order is executed by an independent trading unit, as defined 
under Rule 200(f) of Regulation SHO, of a Trading Center within a 
Member that has a displayed quotation for the account of that Trading 
Center on a principal (excluding riskless principal) \35\ basis, via 
either a processor or an SRO Quotation Feed, at a price equal to the 
traded-at Protected Quotation, that was displayed before the order was 
received, but only up to the full displayed size of that independent 
unit's previously displayed quote; \36\
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    \35\ As described above, proposed Rule 11.340(c)(3)(D)(iii)a. 
would establish the circumstances in which a Trading Center 
displaying an order as riskless principal would be permitted to 
Trade-at the Protected Quotation. Accordingly, the Exchange proposes 
that proposed Rule 11.340(c)(3)(D)(iii)b. would exclude such 
circumstances.
    \36\ The display exceptions to Trade-at set forth in proposed 
Rules 11.340 (c)(3)(D)(iii)a. and b. would not permit a broker-
dealer to trade on the basis of interest it is not responsible for 
displaying. In particular, a broker-dealer that matches orders in 
the over-the-counter market shall be deemed to have ``executed'' 
such orders as a Trading Center for purposes of proposed Rule 
11.340. Accordingly, if a broker-dealer is not displaying a 
quotation at a price equal to the Protected Quotation, it could not 
submit matched trades to an alternative trading center (``ATS'') 
that was displaying on an agency basis the quotation of another ATS 
subscriber. However, a broker-dealer that is displaying, as 
principal, via either a processor or an SRO Quotation Feed, a buy 
order at the protected bid, could internalize a customer sell order 
up to its displayed size. The display exceptions would not permit a 
non-displayed Trading Center to submit matched trades to an ATS that 
was displaying on an agency basis the quotation of another ATS 
subscriber and confirmed that a broker-dealer would not be permitted 
to trade on the basis of interest that it is not responsible for 
displaying.
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    c. The order is of Block Size \37\ at the time of origin and may 
not be:
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    \37\ ``Block Size'' is defined in the Plan as an order (1) of at 
least 5,000 shares or (2) for a quantity of stock having a market 
value of at least $100,000.
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    A. an aggregation of non-block orders; or
    B. broken into orders smaller than Block Size prior to submitting 
the order to a Trading Center for execution;
    d. The order is a Retail Investor Order executed with at least 
$0.005 price improvement;
    e. The order is executed when the Trading Center displaying the 
Protected Quotation that was traded at was experiencing a failure, 
material delay, or malfunction of its systems or equipment;
    f. The order is executed as part of a transaction that was not a 
``regular way'' contract;
    g. The order is executed as part of a single-priced opening, 
reopening, or closing transaction on the Exchange;
    h. The order is executed when a Protected Bid was priced higher 
than a Protected Offer in the Pilot Security in Test Group Three;
    i. The order is identified as a TA ISO;
    j. The order is executed by a Trading Center that simultaneously 
routed TA ISO or ISOs to execute against the full displayed size of the 
Protected Quotation that was traded at: \38\
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    \38\ In connection with the definition of a Trade-at ISO 
proposed in Rule 11.340 (a)(1)(D), this exception refers to the 
Trading Center that routed the ISO.
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    k. The order is executed as part of a Negotiated Trade;
    l. The order is executed when the Trading Center displaying the 
Protected Quotation that was traded at had displayed, within one second 
prior to execution of the transaction that constituted the Trade-at, a 
Best Protected Bid or Best Protected Offer, as applicable, for the 
Pilot Security in Test Group Three with a price that was inferior to 
the price of the Trade-at transaction;
    m. The order is executed by a Trading Center which, at the time of 
order receipt, the Trading Center had guaranteed an execution at no 
worse than a specified price (a ``stopped order''), where:
    A. The stopped order was for the account of a customer;
    B. The customer agrees to the specified price on an order-by-order 
basis; and
    C. The price of the Trade-at transaction was, for a stopped buy 
order, equal to or less than the National Best Bid in the Pilot 
Security in Test Group Three at the time of execution or, for a stopped 
sell order, equal to or greater than the National Best Offer in the 
Pilot Security in Test Group Three at the time of execution, as long as 
such order is priced at an acceptable increment; \39\
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    \39\ The stopped order exemption in Rule 611 of Regulation NMS 
applies where ``[t]he price of the trade-through transaction was, 
for a stopped buy order, lower than the national best bid in the NMS 
stock at the time of execution or, for a stopped sell order, higher 
than the national best offer in the NMS stock at the time of 
execution'' (see 17 CFR 242.611(b)(9)). The Trade-at stopped order 
exception applies where ``the price of the Trade-at transaction was, 
for a stopped buy order, equal to the national best bid in the Pilot 
Security at the time of execution or, for a stopped sell order, 
equal to the national best offer in the Pilot Security at the time 
of execution'' (see Plan, Section VI(D)(12)).
    To illustrate the application of the stopped order exemption as 
it currently operates under Rule 611 of Regulation NMS and as it is 
currently proposed for Trade-at, assume the National Best Bid is 
$10.00 and another protected quote is at $9.95. Under Rule 611 of 
Regulation NMS, a stopped order to buy can be filled at $9.95 and 
the firm does not have to send an ISO to access the protected quote 
at $10.00 since the price of the stopped order must be lower than 
the National Best Bid. For the stopped order to also be executed at 
$9.95 and satisfy the Trade-at requirements, the Trade-at exception 
would have to be revised to allow an order to execute at the price 
of a protected quote which, in this case, could be $9.95.
    Based on the fact that a stopped order would be treated 
differently under the Rule 611 of Regulation NMS exception than 
under the Trade-at exception in the Plan, the Exchange believes that 
it is appropriate to amend the Trade-at stopped order exception in 
the Plan to ensure that the application of this exception would 
produce a consistent result under both Regulation NMS and the Plan. 
Therefore, the Exchange proposes in this proposed Rule 
11.340(c)(3)(D)(iii)m. to allow a transaction to satisfy the Trade-
at requirement if the stopped order price, for a stopped buy order, 
is equal to or less than the National Best Bid, and for a stopped 
sell order, is equal to or greater than the National Best Offer, as 
long as such order is priced at an acceptable increment. The 
Commission granted NYSE an exemption from Rule 608(c) related to 
this provision. See Exemption Letter, supra note 26. The Exchange is 
seeking the same exemptions as requested in the Exemption Request 
Letters.
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    n. The order is for a fractional share of a Pilot Security in Test 
Group Three, provided that such fractional share order was not the 
result of breaking an order for one or more whole shares of a Pilot 
Security in Test Group Three into orders for fractional shares or was 
not otherwise effected to evade the requirements of the Trade-at 
Prohibition or any other provisions of the Plan; or
    o. The order is to correct a bona fide error, which is recorded by 
the Trading Center in its error account.\40\ A bona fide error is 
defined as:
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    \40\ The exceptions to the Trade-at requirement set forth in the 
Plan and in the Exchange's proposed Rule 11.340(c)(3)(D)(iii) are, 
in part, based on the exceptions to the trade-through requirement 
set forth in Rule 611 of Regulation NMS, including exceptions for an 
order that is executed as part of a transaction that was not a 
``regular way'' contract, and an order that is executed as part of a 
single- priced opening, reopening, or closing transaction by the 
Trading Center (see 17 CFR 242.611(b)(2) and (b)(3)). Following the 
adoption of Rule 611 of Regulation NMS and its exceptions, the 
Commission issued exemptive relief that created exceptions from Rule 
611 of Regulation NMS for certain error correction transactions. See 
Securities Exchange Act Release No. 55884 (June 8, 2007), 72 FR 
32926 (June 14, 2007); Securities Exchange Act Release No. 55883 
(June 8, 2007), 72 FR 32927 (June 14, 2007). The Exchange has 
determined that it is appropriate to incorporate this additional 
exception to the Trade-at Prohibition, as this exception is equally 
applicable in the Trade-at context.
    Accordingly, the Exchange is proposing to exempt certain 
transactions to correct bona fide errors in the execution of 
customer orders from the Trade-at Prohibition, subject to the 
conditions set forth by the SEC's order exempting these transactions 
from Rule 611 of Regulation NMS. The Commission granted New York 
Stock Exchange LLC an exemption from Rule 608(c) related to this 
provision. See Exemption Letter, supra note 26. The Exchange is 
seeking the same exemptions as requested in the Exemption Request 
Letters.
    As with the corresponding exception under Rule 611 of Regulation 
NMS, the bona fide error would have to be evidenced by objective 
facts and circumstances, the Trading Center would have to maintain 
documentation of such facts and circumstances and record the 
transaction in its error account. To avail itself of the exemption, 
the Trading Center would have to establish, maintain, and enforce 
written policies and procedures reasonably designed to address the 
occurrence of errors and, in the event of an error, the use and 
terms of a transaction to correct the error in compliance with this 
exemption. Finally, the Trading Center would have to regularly 
surveil to ascertain the effectiveness of its policies and 
procedures to address errors and transactions to correct errors and 
take prompt action to remedy deficiencies in such policies and 
procedures. See Securities Exchange Act Release No. 55884 (June 8, 
2007), 72 FR 32926 (June 14, 2007).

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[[Page 70220]]

    A. The inaccurate conveyance or execution of any term of an order 
including, but not limited to, price, number of shares or other unit of 
trading; identification of the security; identification of the account 
for which securities are purchased or sold; lost or otherwise misplaced 
order tickets; short sales that were instead sold long or vice versa; 
or the execution of an order on the wrong side of a market:
    B. The unauthorized or unintended purchase, sale, or allocation of 
securities, or the failure to follow specific client instructions;
    C. The incorrect entry of data into relevant systems, including 
reliance on incorrect cash positions, withdrawals, or securities 
positions reflected in an account; or
    D. A delay, outage, or failure of a communication system used to 
transmit market data prices or to facilitate the delivery or execution 
of an order.
    Finally, Proposed Rule 11.340 (c)(3)(D)(iv) would prevent members 
from breaking an order into smaller orders or otherwise effecting or 
executing an order to evade the requirements of the Trade-at 
Prohibition or any other provisions of the Plan.

Exchange Handling of Orders During the Pilot Period for the Plan

    Proposed paragraph (d) of Rule 11.340 would set forth the 
Exchange's specific procedures for handling, executing, repricing and 
displaying certain orders and modifiers applicable to Pilot Securities. 
Unless otherwise indicated, paragraph (d) of Rule 11.340 would apply to 
orders in all three Test Group Pilot Securities, but not to Pilot 
Securities included in the Control Group.
    The Exchange is proposing to adopt new Rule 11.340(d)(1) to make it 
clear that it will not accept an order in a Test Group Pilot Security 
that is not entered in the Pilot's minimum increment of $0.05, applied 
to all orders that require a price and do not otherwise qualify for an 
exemption to the $0.05 minimum price increment required by the Plan. 
The provision will also clarify that IEX will use the $0.05 minimum 
price increment when the System reprices an order, including when it 
rounds a derived price up or down.

Trade-at Intermarket Sweep Orders

    The Exchange proposes to adopt paragraph (d)(2) to Rule 11.340 to 
specify that it will accept TA ISOs in all securities, and that TA ISOs 
must be designated as IOC, may not be Minimum Quantity Orders and do 
not route. If a TA ISO is entered in a security that is not in Test 
Group Three, it will be treated as an ISO in accordance with Rule 
11.190(b)(12). The Exchange believes that accepting TA ISOs in all 
securities will reduce complexity for Members.

Order Price Collars and Restraints

    In order to facilitate compliance with the Plan, paragraph (d)(3) 
of Rule 11.340 would provide that Order Price Collars and Restraints, 
as specified in Rule 11.190(f), that are not in the permissible trading 
price increment for the security will be rounded down (in the case of 
an order to buy) or up (in the case of an order to sell) to the nearest 
price in the permissible trading price increment for that security. The 
Exchange believes that rounding, as described, will facilitate its 
compliance with the requirements of the Plan.

Retail Liquidity Programs

    As proposed, paragraph (d)(4) specifies that the Exchange does not 
operate a retail liquidity program, but that if IEX receives an order 
from a Member that is identified as a Retail Investor Order or a retail 
liquidity providing order, IEX will accept such order if it is in a 
permissible increment, but will disregard identification as a Retail 
Investor Order or a retail liquidity providing order.

Test Group Three Securities

    As proposed, subparagraph (d)(5) of Rule 11.340 describes how the 
Exchange will handle certain types of orders in Pilot Securities in 
Test Group Three to avoid possible execution on the Exchange of a non-
displayed order at the price of a Protected Quote in a Test Group Three 
Pilot Security unless the incoming order otherwise qualifies for an 
exception to the Trade-at prohibition.
    Currently, pursuant to Rule 11.230(a)(4), an incoming or active 
order to sell (buy) may trade with non-displayed orders to buy (sell) 
at the price of protected bids (offers) without routing to such 
protected bids (offers). Subparagraph (d)(5)(A) provides that an 
incoming or active order to sell (buy) will trade with displayed orders 
to buy (sell) and route, if consistent with the terms of the order, to 
protected bids (offers) before trading with non-displayed orders at the 
same price. After trading or routing, or both, any remaining balance of 
an incoming order will trade with any non-displayed orders at the same 
price, so long as the incoming order has satisfied all same price 
Protected Quotations or an exception applies. This provision thus 
enables the Exchange to comply with the Trade-at restriction of the 
Plan by providing for satisfaction of Protected Quotations before 
executing non-displayed orders at the same price.
    Similarly, subparagraph (d)(5)(B) of Rule 11.340 specifies that an 
ISO to buy (sell) will not trade with non-displayed interest to sell 
(buy) that is the same price as the protected offer (bid) unless the 
limit price of such ISO is higher (lower) than the price of the 
protected offer (bid), or another exception applies. This would be 
permitted under the Trade-at Prohibition because to enter an ISO to buy 
(sell) at a price higher (lower) than the protected offer (protected 
bid), the entering firm would have been required to simultaneously 
route limit orders to execute against the full size of the protected 
offer (protected bid).
    Rule 11.340(5)(C) specifies how the Exchange will handle certain 
non-displayed orders to assure that such orders would not trade at the 
price of a Protected Quotation. A non-displayed order is an order that 
is not displayed on the Exchange, and may be a market order, limit 
order or pegged order. Pegged orders must be non-displayed. Reserve 
Orders are orders with a displayed and non-displayed portion.
    Currently, a non-displayed order is eligible to trade with a 
resting order on the Order Book on entry or to post to the Order Book 
and trade with an incoming order, depending on market conditions and 
the terms of each such order.\41\ Non-displayed orders (except for 
Discretionary Peg Orders and Primary Peg Orders), including the non-
displayed portion of a Reserve Order, may post and rest on the Order 
Book at a price that locks contra-side liquidity at

[[Page 70221]]

the Midpoint Price, and may execute against an incoming order at such 
price if the resting order's conditions are met. For example, if the 
NBBO is locked at $10.10 and a midpoint peg buy order is resting at 
$10.10 it will trade with an incoming sell order at $10.10.
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    \41\ See Rule 11.230 generally.
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    Accordingly, to prevent non-displayed resting buy (sell) orders 
from executing at the price of a Protected Offer (Bid), subparagraph 
(d)(5)(C) provides that, if after being posted to the Order Book, the 
NBBO or PBBO changes so that such a non-displayed order will no longer 
be executable at its posted price due to the requirements of Regulation 
NMS or the Plan, as applicable, the non-displayed order will be 
repriced consistent with subparagraph (d)(5)(C) and IEX Rule 11.190(h).
    The provisions of subparagraphs (d)(5)(C)(i) and (ii) describe the 
manner in which nondisplayed orders will function when the order's 
booked price is locked or crossed by the PBBO. These provisions change 
the manner in which nondisplayed limit and midpoint peg orders 
function. For Discretionary Peg orders and primary peg orders, the 
provision modifies existing functionality whereby such orders are 
subject to repricing with reference to the NBBO so that in Test Group 
Three, such orders will reprice with reference to the PBBO as well.
    Specifically, subparagraph (d)(5)(C)(i) provides that a non-
displayed resting buy (sell) order (including the non-displayed portion 
of a reserve order) will not execute at the price of a Protected Bid 
(Offer) on an away trading center unless the incoming order qualifies 
for an exception to the Trade-at Prohibition.
    Subparagraph (d)(5)(c)(ii) provides that a non-displayable order 
(including the non-displayed portion of a reserve order) that, at the 
time of entry, could not be executed at its full limit price, adjusted 
by applicable peg instructions, if any, market conditions and all 
applicable rules and regulations, will be repriced and ranked by the 
System on the Order Book non-displayed pursuant to the Midpoint Price 
Constraint at the current Midpoint Price (``Permitted Non-Displayed 
Group 3 Book Price''). In situations where the resulting price for a 
buy (sell) order is equal to the lowest Protected Offer (highest 
Protected Bid), the Permitted Non-Displayed Group 3 Book Price will be 
equal to one (1) MPV below (above) the lowest Protected Offer (highest 
Protected Bid). Non-displayed orders (including non-displayed portions 
of reserve orders) resting on the Order Book whose booked price becomes 
locked or crossed by the PBBO will be re-priced by the System at a 
Permitted Non-Displayed Group 3 Book Price. To reflect increases 
(declines) in the lowest Protected Offer (highest Protected Bid), the 
System will continue to re-price a resting non-displayed buy (sell) 
order to be equal to the higher (lower) of the order's limit price or a 
Permitted Non-Displayed Group 3 Book Price.

Block Size Orders

    Finally, the Exchange proposes to specify how it will implement the 
Block Size exception to the Trade-at prohibition. Specifically, 
pursuant to subparagraph (d)(5)(D) of Rule 11.340, the Exchange will 
utilize the Block Size exception under the following circumstances: If 
a non-routable order is of at least Block Size and the resulting 
execution upon entry against the Order Book is for at least Block Size, 
or a routable order of at least Block Size is sent to the Order Book 
and the resulting execution upon entry is for at least Block Size.
2. Statutory Basis
    IEX believes that the proposed rule change is consistent with the 
provisions of Section 6 of the Act,\42\ in general and furthers the 
objectives of Sections 6(b)(5) of the Act \43\ in particular, in that 
it is designed to promote just and equitable principles of trade, to 
foster cooperation and coordination with persons engaged in 
facilitating transactions in securities, to remove impediments 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. 
The Exchange believes that the proposed rule change is consistent with 
the Act because it is designed to ensure that the Exchange and its 
members would be in compliance with a Plan approved by the Commission 
pursuant to an order issued by the Commission in reliance on Section 
11A of the Act,\44\ and also because it allows the Exchange to make 
changes to its handling of orders and modifiers necessary to implement 
the requirements of the Plan on its System. Such approved Plan gives 
the Exchange authority to establish, maintain, and enforce written 
policies and procedures that are reasonably designed to comply with 
applicable quoting and trading requirements specified in the Plan. The 
Exchange believes that the proposed rule change is consistent with the 
authority granted to it by the Plan to establish specifications and 
procedures for the implementation and operation of the Plan that are 
consistent with the provisions of the Plan. Likewise, the Exchange 
believes that the proposed rule change provides interpretations of the 
Plan that are consistent with the Act, in general, and furthers the 
objectives of the Act, in particular.
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    \42\ 15 U.S.C. 78f(b).
    \43\ 15 U.S.C. 78f(b)(5).
    \44\ 15 U.S.C. 78k-1.
---------------------------------------------------------------------------

    Furthermore, the Exchange is a Participant under the Plan and 
subject, itself, to the provisions of the Plan. The proposed rule 
change ensures that the Exchange's systems would not display or execute 
trading interests outside the requirements specified in such Plan. The 
proposal would also help allow market participants to continue to trade 
NMS Stocks within quoting and trading requirements that are in 
compliance with the Plan, with certainty on how certain orders and 
trading interests would be treated. This, in turn, will help encourage 
market participants to continue to provide liquidity in the 
marketplace.

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. The Exchange notes that the 
proposed rule change implements the provisions of the Plan, and is 
designed to assist the Exchange in meeting its regulatory obligations 
pursuant to the Plan. The proposed changes are being made to establish, 
maintain, and enforce written policies and procedures that are 
reasonably designed to comply with the trading and quoting requirements 
specified in the Plan, of which other equities exchanges are also 
Participants. Other competing national securities exchanges are subject 
to the same trading and quoting requirements specified in the Plan, and 
must take the same steps that the Exchange has to conform its existing 
rules to the requirements of the Plan. Therefore, the proposed changes 
would not impose any burden on competition, while providing certainty 
of treatment and execution of trading interests on the Exchange to 
market participants in NMS Stocks that are acting in compliance with 
the requirements specified in the Plan.

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.

[[Page 70222]]

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) of the Act \45\ and Rule 19b-
4(f)(6) thereunder.\46\
---------------------------------------------------------------------------

    \45\ 15 U.S.C. 78s(b)(3)(A).
    \46\ 17 CFR 240.19b-4(f)(6).
---------------------------------------------------------------------------

    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 shall institute proceedings to 
determine whether the proposed rule should be approved or disapproved.
    The Exchange has requested that the SEC waive the 30-day operative 
period. The Commission believes that waiving the 30-day operative delay 
is consistent with the protection of investors and the public interest 
because it will allow the Exchange to implement the proposed rules 
immediately thereby preventing delays in the implementation of the 
Plan. The Commission notes that the Plan is scheduled to start on 
October 3, 2016. Therefore, the Commission hereby waives the 30-day 
operative delay and designates the proposed rule change to be operative 
upon filing with the Commission.\47\
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    \47\ For purposes only of waiving the operative delay for this 
proposal, the Commission has considered the proposed rule's impact 
on efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
---------------------------------------------------------------------------

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 (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR- IEX-2016-16 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-2016-16. 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/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for Web site viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE., 
Washington, DC 20549, on official business days between the hours of 
10:00 a.m. and 3:00 p.m. Copies of 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; 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 SR-IEX-2016-16, and should be 
submitted on or before November 1, 2016.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\48\
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    \48\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-24421 Filed 10-7-16; 8:45 am]
 BILLING CODE 8011-01-P