Document ID: SEC-2023-0176-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Investors Exchange, LLC
Posted Date: 2023-02-15T05:00Z

[Federal Register Volume 88, Number 31 (Wednesday, February 15, 2023)]
[Notices]
[Pages 9925-9928]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-03164]

-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-96865; File No. SR-IEX-2023-01]

Self-Regulatory Organizations; Investors Exchange LLC; Notice of 
Filing and Immediate Effectiveness of Proposed Rule Change To Amend IEX 
Rule 11.190(e) To Offer Users an Additional Option for How To Apply the 
Exchange's Existing Anti-Internalization Functionality to Their Orders

February 9, 2023.
    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 February 2, 2023, 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, 
II and III 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.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 15 U.S.C. 78a.
    \3\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    Pursuant to the provisions of Section 19(b)(1) under the Act,\4\ 
and Rule 19b-4 thereunder,\5\ IEX is filing with the Commission a 
proposed rule change to amend IEX Rule 11.190(e) to offer Users an 
additional option for how to apply the Exchange's existing anti-
internalization functionality to their orders and to make conforming 
and clarifying changes to the rule. The Exchange has designated this 
rule change as ``non-controversial'' under Section 19(b)(3)(A) of the 
Act \6\ and provided the Commission with the notice required by Rule 
19b-4(f)(6) thereunder.\7\
---------------------------------------------------------------------------

    \4\ 15 U.S.C. 78s(b)(1).
    \5\ 17 CFR 240.19b-4.
    \6\ 15 U.S.C. 78s(b)(3)(A).
    \7\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

    The text of the proposed rule change is available at the Exchange's 
website at www.iextrading.com, at the principal office of the Exchange, 
and at the Commission's Public Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and the 
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 amend IEX Rule 11.190(e) to offer Users 
\8\ an additional option for how to apply the Exchange's existing anti-
internalization group identifier (``AIQ'') functionality to their 
orders. Specifically, the Exchange proposes to amend IEX Rule 
11.190(e)(2)(E) to allow Users to modify the way a newer order 
designated with the ``Decrement Larger--Original Order Quantity'' \9\ 
AIQ functionality interacts with older orders also subject to anti-
internalization. The Exchange also proposes to make conforming and 
clarifying changes to IEX Rule 11.190(e)(2).
---------------------------------------------------------------------------

    \8\ Pursuant to IEX Rule 1.160(qq), a User means any Member or 
Sponsored Participant who is authorized to obtain access to the 
System pursuant to IEX Rule 11.130. Member is defined in IEX Rule 
1.160(s), and Sponsored Participant is defined in IEX Rule 
1.160(ll).
    \9\ See IEX Rule 11.190(e)(2)(E).

---------------------------------------------------------------------------

[[Page 9926]]

    IEX offers optional anti-internalization functionality that enables 
a User to prevent two of its orders from executing against each other. 
To utilize IEX's optional anti-internalization functionality, a User 
adds a unique identifier of its choosing to an order, thereby 
designating the order as subject to anti-internalization (the ``AIQ 
identifier'').\10\ Orders that have the same AIQ identifier and 
originate from the same MPID, User, or Member Affiliate,\11\ as 
specified by the User,\12\ are part of the same ``AIQ group.'' \13\ And 
any active order that is part of the same AIQ group is prevented from 
executing against a resting opposite side order that is part of the 
same AIQ group.
---------------------------------------------------------------------------

    \10\ See IEX Rule 11.190(e)(1)(A).
    \11\ See IEX Rule 11.190(e)(1)(B)(i).
    \12\ Users may elect to enable anti-internalization 
functionality on an IEX Port Request Form, designating whether such 
functionality should be applied on an MPID, User, or Member 
Affiliate basis.
    \13\ See IEX Rule 11.190(e)(1)(B).
---------------------------------------------------------------------------

    Users seeking to apply AIQ to their orders also include one of five 
modifiers to their orders, which determines the interaction between two 
orders within the same AIQ group that would otherwise execute against 
each other (``AIQ modifier'').\14\ The AIQ modifier on the order with 
the newer timestamp controls the interaction between the two orders in 
an AIQ group.\15\ The five AIQ modifiers are: (1) cancel the older of 
the two orders (``CO''); (2) cancel the newer of the two orders 
(``CN''); (3) cancel both orders (``CB''); (4) cancel the smaller of 
the two orders (``CS''); or cancel the smaller of the two orders and 
decrement the size of the smaller order from the larger order 
(``DLO'').
---------------------------------------------------------------------------

    \14\ See IEX Rule 11.190(e)(1)(C).
    \15\ See IEX Rule 11.190(e).
---------------------------------------------------------------------------

    In particular, IEX Rule 11.190(e)(2)(E) provides for the following 
functionality if the newer order is marked with the DLO AIQ modifier:

    1. If both the newer and older orders are the same size, both 
orders are cancelled back to the User by the System \16\; or
---------------------------------------------------------------------------

    \16\ See IEX Rule 1.160(nn).
---------------------------------------------------------------------------

    2. If the newer order is larger than the older order, the size 
of the newer order is decremented by the size of the older order and 
the older order is cancelled back to the User by the System; or
    3. If the newer order is smaller than the older order and the 
older order is also marked with the DLO AIQ modifier, the size of 
the older order is decremented by the size of the newer order and 
the newer order is cancelled back to the User by the System; or
    4. If the newer order is smaller than the older order and the 
older order is marked with an AIQ modifier other than the DLO AIQ 
modifier, both orders are cancelled back to the User by the System.
Proposal
    Based upon informal feedback from Members, IEX is proposing to 
allow Users to override the default functionality of the DLO AIQ 
modifier that IEX applies when the newer order is smaller than the 
older order and the older order is not designated with the DLO AIQ 
modifier, which is described in the fourth list item, above. IEX is not 
proposing to modify any of the DLO AIQ functionality described in the 
first through third of the above list.
    As proposed, if the newer order is smaller than the older order, 
the older order is marked with an AIQ modifier other than the DLO AIQ 
modifier, the older order is not routable,\17\ and the User instructed 
the Exchange to disregard the older order's AIQ modifier; then the 
System would decrement the size of the larger older order by the size 
of the smaller newer order (without changing the older order's AIQ 
modifier) and cancel the smaller newer order instead of canceling both 
orders.
---------------------------------------------------------------------------

    \17\ IEX rejects routable orders designated with a DLO AIQ 
modifier, see IEX Rule 11.190(e)(8), due to technical limitations 
that prevent the IEX router from identifying that the size of a 
routable order has been decremented pursuant to IEX Rule 11.190(e). 
For the same reason, IEX is proposing to not allow decrementing of 
an older routable order even if the User has instructed the Exchange 
to disregard the older order's AIQ modifier.
---------------------------------------------------------------------------

    Thus, IEX proposes to modify IEX Rule 11.190(e)(2)(E) to specify 
the interactions between two orders in the same AIQ group when the 
newer order is marked with the DLO AIQ modifier. Specifically, IEX 
proposes to delete the first, third and fourth sentences of IEX Rule 
11.190(e)(2)(E), and amend the rule to read as follows:

    Decrement Larger--Original Order Quantity (``DLO''). If the 
newer order is marked with the DLO AIQ modifier, the following 
describes the manner in which such orders will interact:
    (i) If both orders are equivalent in size, then both orders will 
be cancelled back to the originating User.
    (ii) If the newer order is larger than the older order, then the 
size of the larger order will be decremented by the size of the 
smaller order, and the smaller order will be cancelled back to the 
originating User.
    (iii) If the newer order is smaller than the older order, and:
    a. the older order is also marked with the DLO AIQ modifier, 
then the size of the older order will be decremented by the size of 
the newer order, and the newer order will be canceled back to the 
originating User.
    b. the older order is marked or designated with any AIQ modifier 
other than DLO, and the User did not provide a standing instruction 
for the Exchange to disregard the AIQ modifier of the older order if 
the newer order is marked with the DLO AIQ modifier, then both 
orders will be canceled back to the originating User.
    c. the older order is marked or designated with any AIQ modifier 
other than DLO, the User provided a standing instruction for the 
Exchange to disregard the AIQ modifier of the older order if the 
newer order is marked with the DLO AIQ modifier, and:
    i. the older order is not routable, then the size of the older 
order will be decremented by the size of the newer order, and the 
newer order will be cancelled back to the originating User.
    ii. the older order is routable, then both orders will be 
cancelled back to the originating User.\18\
---------------------------------------------------------------------------

    \18\ See proposed IEX Rule 11.190(e)(2)(E).

    With the exception of proposed IEX Rule 11.190(e)(2)(E)(iii), which 
specifies how a User may override the default DLO AIQ functionality 
(unless the older order is routable), the proposed changes set forth 
above to the text of IEX Rule 11.190(e)(2)(E) simply clarify the 
existing functionality of the DLO AIQ modifier.
    Additionally, IEX proposes to make conforming and clarifying 
changes to IEX Rule 11.190(e)(2)(A)-(D). Specifically, IEX proposes to 
remove the first sentence of each of these subparagraphs, because they 
restate language found in IEX Rule 11.190(e) about how an active order 
subject to AIQ will not execute against resting opposite side orders 
within the same AIQ group. IEX also proposes to add clarifying language 
to subparagraphs (A)-(D) of IEX Rule 11.190(e)(2) clarifying that the 
interaction between two orders in the same AIQ group is determined by 
the newer order's AIQ modifier. Finally, IEX proposes to add language 
clarifying that if the criteria in that subparagraph are met, then the 
two orders will interact in the specified manner.
    The proposed rule change is designed to provide additional 
flexibility to Users in how they implement self-trade prevention 
provided by the Exchange, and thereby better manage their order flow 
and prevent undesirable executions or the potential for ``wash sales'' 
that may occur as a result of the speed of trading in today's 
marketplace. Based on informal discussions with Users, the Exchange 
believes that the proposed additional anti-internalization 
functionality will be useful to Users in implementing their own 
compliance controls. And the additional AIQ functionality may assist 
Members in complying with certain rules and regulations of the Employee 
Retirement Income Security Act (``ERISA'') that preclude and/or limit 
managing broker-dealers of such accounts from trading as

[[Page 9927]]

principal with orders generated for those accounts.
    The Exchange notes that, as with the current anti-internalization 
functionality offered by IEX, use of the proposed new DLO AIQ 
functionality will not relieve, or otherwise modify the duty of best 
execution owed to orders received from customers.\19\ As such, market 
participants using the AIQ modifiers will continue to be obligated to 
take appropriate steps to ensure that customer orders that do not 
execute because they were subject to anti-internalization ultimately 
receive the same price, or a better price, than they would have 
received had execution of the orders not been inhibited by anti-
internalization.\20\ Further, as with current rule provisions, Market 
Makers \21\ and other Users may not use AIQ functionality to evade the 
firm quote obligation, as specified in IEX Rule 11.151(b), and the AIQ 
functionality must be used in a manner consistent with just and 
equitable principles of trade.\22\ For these reasons, the Exchange 
believes the proposed new optional DLO AIQ functionality offers Users 
enhanced order processing functionality that may prevent potentially 
undesirable executions without modifying broker-dealer best execution 
obligations.
---------------------------------------------------------------------------

    \19\ See Supplementary Material .01 to IEX Rule 11.190(e).
    \20\ Id.
    \21\ See IEX Rule 14.002(a)(20).
    \22\ See Supplementary Material .02 and .03 to IEX Rule 
11.190(e).
---------------------------------------------------------------------------

    IEX notes that this proposed rule change is functionally identical 
to one of the anti-internalization options offered by the Cboe BZX 
Exchange, Inc (``BZX''), with the exception that the BZX rule allows a 
User to decrement an older order that is routable.\23\
---------------------------------------------------------------------------

    \23\ See BZX Rule 11.9(f)(3).
---------------------------------------------------------------------------

2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6(b) of the Act,\24\ in general, and furthers the 
objectives of Section 6(b)(5),\25\ in particular, in that it is 
designed to prevent fraudulent and manipulative acts and practices, to 
promote just and equitable principles of trade, to foster cooperation 
and coordination with persons engaged in facilitating transactions in 
securities, and to remove impediments to and perfect the mechanism of a 
free and open market and a national market system, and, in general, to 
protect investors and the public interest. Specifically, the Exchange 
believes that the proposed rule change is consistent with the 
protection of investors and the public interest because allowing Users 
to apply DLO AIQ functionality to their orders irrespective of if the 
newer order is larger than the older order or if the older order has 
the same AIQ functionality (which is not a requirement for any other 
AIQ modifier), will provide Users with additional flexibility with 
respect to how they implement self-trade protections provided by IEX 
that may better support their trading strategies and compliance 
controls. Users that prefer the current DLO AIQ functionality can 
continue to use it without any modification (i.e., this change will 
only apply if the User specifically instructs the Exchange to override 
the current DLO AIQ functionality).
---------------------------------------------------------------------------

    \24\ 15 U.S.C. 78f(b).
    \25\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    Additionally, IEX believes that, as discussed in the Purpose 
section, allowing Users the option of having an order designated with a 
DLO AIQ modifier decrement the larger of the two orders with which it 
would otherwise execute may encourage Users to use the Exchange's 
optional AIQ functionality. As noted in the Purpose section, IEX 
believes that providing Users with more flexibility and control over 
the interactions of their orders better prevents undesirable executions 
or the potential for ``wash sales'' that may occur as a result of the 
speed of trading in today's marketplace. And the ability to override 
the default DLO AIQ modifier functionality may better assist Members in 
complying with certain ERISA rules and regulations that preclude and/or 
limit managing broker-dealers of such accounts from trading as 
principal with orders generated for those accounts.
    And the Exchange believes that the proposed non-substantive 
conforming and clarifying changes to IEX Rule 11.190(e)(2) are 
consistent with the protection of investors and the public interest 
because they will have no impact on the Exchanges anti-internalization 
functionality, but rather simply provide consistency and clarity in 
IEX's description of the AIQ modifiers, thereby reducing the potential 
for confusion of any market participants.
    Finally, as discussed in the Purpose section, the Exchange notes 
that this proposed rule change is functionally identical to the 
functionality at BZX with the exception of IEX not allowing a routable 
order to be decremented.\26\ Consequently, the Exchange does not 
believe that the proposed rule change raises any new or novel issues 
not already considered by the Commission.
---------------------------------------------------------------------------

    \26\ See supra note 23.
---------------------------------------------------------------------------

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition that is not necessary or appropriate 
in furtherance of the purposes of the Act. To the contrary, the 
proposal is designed to enhance IEX's competitiveness by providing 
additional flexibility to Users applying the Exchange's optional anti-
internalization functionality, thereby incentivizing Users to send 
orders to IEX and increase the liquidity available on the Exchange. 
Additionally, the proposed rule change is designed to assist Users with 
compliance with the securities laws that prohibit wash trading as well 
as ERISA requirements. The Exchange also notes that the proposed new 
DLO AIQ modifier functionality, like the Exchange's current anti-
internalization functionality, is completely optional and Users can 
determine on an order-by-order basis whether to apply anti-
internalization protections to orders submitted to the Exchange.
    The Exchange does not believe that the proposed rule change will 
impose any burden on intermarket competition that is not necessary or 
appropriate in furtherance of the purposes of the Act. In this regard, 
IEX notes that there is no barrier to other national securities 
exchanges adopting a similar modification to their equivalent AIQ 
modifiers.
    The Exchange also does not believe that the proposed rule change 
will impose any burden on intramarket competition that is not necessary 
or appropriate in furtherance of the purposes of the Act. As proposed, 
all Users will continue to be eligible to use the Exchange's anti-
internalization functionality.
    Further, the proposed conforming and clarifying changes to IEX Rule 
11.190(e)(2) are not designed to address any competitive issue, but 
rather to provide additional clarity in IEX's rulebook.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    Written comments were neither solicited nor received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    The Exchange has designated this rule filing as non-controversial 
under

[[Page 9928]]

Section 19(b)(3)(A) \27\ of the Act and Rule 19b-4(f)(6) \28\ 
thereunder. Because the 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 and Rule 19b-
4(f)(6) thereunder.
---------------------------------------------------------------------------

    \27\ 15 U.S.C. 78s(b)(3)(A).
    \28\ 17 CFR 240.19b-4(f)(6).
---------------------------------------------------------------------------

    The Exchange believes that the proposed rule change meets the 
criteria of subparagraph (f)(6) of Rule 19b-4 \29\ because it merely 
provides additional flexibility for the use of AIQ functionality which, 
as discussed above, is substantially identical to an existing rule of 
another exchange with the exception of BZX allowing the decrementing of 
a routable order.\30\ Thus, IEX does not believe that the proposed 
change raises any new or novel material issues that have not already 
been considered by the Commission in connection with existing anti-
internalization functionality offered by IEX and other national 
securities exchanges.
---------------------------------------------------------------------------

    \29\ 17 CFR 240.19b-4(f)(6).
    \30\ See supra note 23.
---------------------------------------------------------------------------

    Accordingly, the Exchange has designated this rule filing as non-
controversial under Section 19(b)(3)(A) of the Act \31\ and paragraph 
(f)(6) of Rule 19b-4 thereunder.\32\
---------------------------------------------------------------------------

    \31\ 15 U.S.C. 78s(b)(3)(A).
    \32\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

    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 under 
Section 19(b)(2)(B) \33\ of the Act to determine whether the proposed 
rule change should be approved or disapproved.
---------------------------------------------------------------------------

    \33\ 15 U.S.C. 78s(b)(2)(B).
---------------------------------------------------------------------------

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 [email protected]. Please include 
File Number SR-IEX-2023-01 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-2023-01. This file 
number should be included in 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 (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 website viewing and printing in 
the Commission's Public Reference Section, 100 F Street NE, Washington, 
DC 20549, on official business days between the hours of 10:00 a.m. and 
3:00 p.m. Copies of the filing also will be available for inspection 
and copying at the principal office of the Exchange. All comments 
received will be posted without change. Persons submitting comments are 
cautioned that we do not redact or edit personal identifying 
information from comment submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to File Number SR-IEX-2023-01 and should be submitted on 
or before March 8, 2023.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\34\
---------------------------------------------------------------------------

    \34\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023-03164 Filed 2-14-23; 8:45 am]
BILLING CODE 8011-01-P