Document ID: SEC-2012-1618-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: EDGA Exchange, Inc.
Posted Date: 2012-10-03T04:00Z

[Federal Register Volume 77, Number 192 (Wednesday, October 3, 2012)]
[Notices]
[Pages 60500-60502]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-24291]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-67941; File No. SR-EDGA-2012-43]

Self-Regulatory Organizations; EDGA Exchange, Inc.; Notice of 
Filing and Immediate Effectiveness of Proposed Rule Change Relating to 
Amendment to Rule 2.11

September 27, 2012.
    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 September 25, 2012, EDGA Exchange, Inc. (the ``Exchange'' 
or ``EDGA'') 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

    EDGA Exchange, Inc. (the ``Exchange'' or ``EDGA'') proposes to 
amend Rule 2.11(a)(7) to describe the circumstances under which the 
Exchange's routing broker-dealer, Direct Edge ECN LLC d/b/a DE Route 
(``DE Route''),\4\ would be authorized to liquidate an error position 
resulting from one or more erroneous executions on the Exchange 
attributable to a systems, technical or operational issue (referred to 
herein as a ``Systems Issue'') experienced by the Exchange. The text of 
the proposed rule change is available on the Exchange's Web site at 
www.directedge.com, at the Exchange's principal office and at the 
Public Reference Room of the Commission.
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    \4\ DE Route is a facility of the Exchange. Accordingly, under 
Exchange Rule 2.11(a)(1), the Exchange is responsible for filing 
with the Securities and Exchange Commission (the ``Commission'') 
rule changes and fees relating to DE Route's outbound router 
function, and its authorized functions are limited to those 
enumerated in Rule 2.11(a)(4).
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II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the Exchange included statements 
concerning the purpose of, and basis for, the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The self-regulatory organization has prepared summaries, 
set forth in Sections A, B and C below, of the most significant aspects 
of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
Background
    DE Route is the approved Outbound Router \5\ of EDGA, subject to 
the conditions contained in Rule 2.11. EDGA relies on DE Route to 
provide outbound routing services from EDGA to external market centers 
(each, a ``Trading Center'' \6\). The Exchange has also been approved 
to receive inbound routes of equities orders by DE Route from EDGX 
Exchange, Inc. for a pilot period ending on June 30, 2013.\7\
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    \5\ As defined in EDGA Rule 2.11(a). See also Securities 
Exchange Act Release No. 61698 (March 12, 2010), 75 FR 13151 (March 
18, 2010) (order approving the registration of EDGA as a national 
securities exchange).
    \6\ As defined in EDGA Rule 2.11(a) and Rule 600(b)(78) of 
Regulation NMS under the Securities Exchange Act of 1934 (the 
``Act''), 17 CFR 242.600(b)(78).
    \7\ See Securities Exchange Act Release No. 66643 (March 22, 
2012), 77 FR 18876 (March 28, 2012) (SR-EDGA-2012-10) (extending the 
pilot period of the Inbound Router as described in EDGA Rule 2.12(b) 
through June 30, 2013). See also Securities Exchange Act Release No. 
64362 (April 28, 2011), 76 FR 25386 (May 4, 2011) (SR-EDGA-2011-13) 
(extending the pilot period through June 30, 2012).
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    In addition to the foregoing, DE Route, as well as the Exchange, is 
authorized under Rule 2.11(a)(6) to cancel orders when a Systems Issue 
occurs, and is authorized under Rule 2.11(a)(7), in connection with its 
role as an Outbound Router of EDGA, to maintain an error account for 
the purpose of liquidating an error position acquired as a result of a 
Systems Issue experienced either by DE Route, the Exchange or a Trading 
Center to which DE Route directed an outbound order.\8\ In this regard, 
DE Route may only assume such a position in the error account under 
documented circumstances when such position could not fairly and 
practicably be assigned to one or more Members in its entirety.\9\
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    \8\ See Securities Exchange Act Release No. 67011 (May 17, 
2012), 77 FR 30562 (May 23, 2012) (SR-EDGA-2012-09) (order approving 
amendments to Rule 2.11 that establish the Exchange's and DE Route's 
authority to cancel orders and describe the operation of an error 
account).
    \9\ See EDGA Rule 2.11(a)(7). See also, supra note 8 for a 
description of the requirements applicable to DE Route relating, 
among other things, to: (i) Determining whether an error position 
can be fairly and practicably assigned to one or more Members in its 
entirety; and (ii) the manner in which an error position acquired in 
the error account shall be liquidated.

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[[Page 60501]]

Proposed Amendment to Exchange Rule 2.11(a)(7)
    The Exchange is now proposing to amend Rule 2.11(a)(7) to describe 
the circumstances under which DE Route would be authorized to use the 
error account to liquidate an error position resulting from an 
erroneous execution on the Exchange that was attributable to a Systems 
Issue, and not just an error position acquired in connection with its 
role as Outbound Router. In this regard, the proposed rule change would 
specify that an error position would not include any position that 
resulted from an order submitted by a Member to EDGA that was executed 
on EDGA and automatically processed for clearance and settlement on a 
locked-in basis. DE Route would not be permitted to: (i) Accept a 
position in the error account from a Member's account; or (ii) permit 
any Member to transfer any position from the Member's account to the 
error account. In other words, DE Route would not be permitted to 
accept from a Member a position that was delivered to the Member 
through the clearance and settlement process, even if such position may 
have been related to a Systems Issue on EDGA. If a Member received a 
locked-in position in connection with a Systems Issue and experienced a 
loss in unwinding such position, that Member would be able to seek 
reimbursement from the Exchange in accordance with, and subject to the 
limitations of, Exchange Rule 11.12(d), which provides Members with the 
ability to file claims against the Exchange ``for losses resulting 
directly from the malfunction of the Exchange's physical equipment, 
devices and/or programming or the negligent acts or omissions of its 
employees.'' If, however, a Systems Issue resulted in the Exchange not 
having valid clearing instructions for a Member to a trade, DE Route 
would be permitted to assume that Member's side of the trade so that 
the trade could be automatically processed for clearance and settlement 
on a locked-in basis.
    In the addition to the foregoing, the Exchange proposes to amend 
Rule 2.11(a)(7) to clarify that either the Exchange or DE Route, or 
both, are authorized to make a determination as to whether an error 
position can be fairly and practicably assigned to one or more Members, 
or alternatively, to make a determination as to whether an error 
position shall be acquired in DE Route's error account to be 
liquidated, in either case in accordance with the provisions of Rule 
2.11(a)(7).
Circumstances That Could Lead to an Error Position
    An error position may result from a Systems Issue at the Exchange 
that does not involve routing of orders through DE Route. For example, 
a situation may arise in which a posted quote/order validly cancelled 
by the System \10\ erroneously matched that quote/order with an order 
that was seeking to access it. In such a situation, DE Route would have 
to assume that side of the trade opposite the order seeking to access 
the cancelled quote/order. DE Route would post the position in its 
error account and resolve the position in the manner described in Rule 
2.11(a)(7).
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    \10\ As defined in EDGA Rule 1.5(cc).
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    An error position may also result from a Systems Issue whereby the 
Exchange does not receive sufficient notice that a Member that has 
executed trades on the Exchange has lost the ability to clear trades 
through The Depository Trust Clearing Corporation. In such a situation, 
the Exchange would not have valid clearing information, which would 
prevent the trade from being automatically processed for clearance and 
settlement on a locked-in basis. Accordingly, DE Route would assume 
that Member's side of the trade so that the counterparty could the 
settle the trade. DE Route would post such an error position into its 
error account and resolve the position in the manner described in Rule 
2.11(a)(7).
    The Exchange notes that this discussion of potential scenarios that 
could lead to an error position is for illustrative purposes only and 
is not intended to be an exhaustive list of all scenarios.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6(b) of the Act \11\ and furthers the objectives of 
Section 6(b)(5) of the Act,\12\ 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 mechanisms of a free and open 
market and a national market system, and, in general, to protect 
investors and the public interest. Moreover, the Exchange believes that 
the proposed rule change is not designed to permit unfair 
discrimination between customers, issuers, brokers or dealers.
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    \11\ 15 U.S.C. 78f(b).
    \12\ 15 U.S.C. 78f(b)(5).
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    Similar to the Exchange's previous proposal to authorize DE Route 
to maintain an error account for the purpose of addressing and 
resolving an error position acquired in connection with its role as an 
Outbound Router,\13\ the Exchange continues to believe that allowing DE 
Route to assume an error position in the error account, and to 
liquidate such position in accordance with the conditions set forth in 
Rule 2.11(a)(7), is the least disruptive means to resolve an error 
position, except where it is fair and practicable for DE Route to 
assign the entire amount of such error position to one or more Members 
of the Exchange; ensures full trade certainty for market participants; 
and avoids disrupting the clearance and settlement process. The 
proposed amendment to Rule 2.11(a)(7) would extend these principles to 
circumstances where an error position resulted from one or more 
erroneous executions on the Exchange due to a Systems Issue experienced 
by the Exchange, and not solely under circumstances where DE Route was 
acting as the Exchange's Outbound Router. Thus, regardless whether the 
error position resulted from an execution on the Exchange or at a 
Trading Center,\14\ Rule 2.11(a)(7) would continue to provide a 
consistent methodology for handling such error position in a manner 
that did not discriminate among Members, and would continue to require 
DE Route to establish controls reasonably designed to restrict the flow 
of any confidential information associated with the liquidation of an 
error position.
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    \13\ See supra note 8, at 11 [sic].
    \14\ As defined in EDGA Rule 2.11(a).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The proposed rule change does not impose any burden on competition 
that is not necessary or appropriate in furtherance of the purposes of 
the Act.

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

    The Exchange has not solicited, and does not intend to solicit, 
comments on this proposed rule change. The Exchange has not received 
any unsolicited written comments from members or other interested 
parties.

[[Page 60502]]

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 after the date of the filing, or such 
shorter time as the Commission may designate, it has become effective 
pursuant to Section 19(b)(3)(A) of the Act \15\ and Rule 19b-4(f)(6) 
\16\ thereunder.
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    \15\ 15 U.S.C. 78s(b)(3)(A).
    \16\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6) 
requires a self-regulatory organization to give the Commission 
written notice of its intent to file the proposed rule change at 
least five business days prior to the date of filing of the proposed 
rule change, or such shorter time as designated by the Commission. 
The Exchange has satisfied this requirement.
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    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.

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-EDGA-2012-43 on the subject line.

Paper Comments

     Send paper comments in triplicate to Elizabeth M. Murphy, 
Secretary, Securities and Exchange Commission, 100 F Street NE., 
Washington, DC 20549-1090.
    All submissions should refer to File Number SR-EDGA-2012-43. 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 
a.m. and 3 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-EDGA-2012-43 and should be 
submitted on or before October 24, 2012.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\17\
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    \17\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-24291 Filed 10-2-12; 8:45 am]
BILLING CODE 8011-01-P