Document ID: SEC-2016-2285-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Chicago Stock Exchange, Inc.
Posted Date: 2016-12-27T05:00Z

[Federal Register Volume 81, Number 248 (Tuesday, December 27, 2016)]
[Notices]
[Pages 95238-95241]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-31100]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-79608; File No. SR-CHX-2016-16]

Self-Regulatory Organizations; Chicago Stock Exchange, Inc.; 
Order Instituting Proceedings To Determine Whether To Approve or 
Disapprove a Proposed Rule Change To Adopt the CHX Liquidity Taking 
Access Delay

December 20, 2016.

I. Introduction

    On September 6, 2016, the Chicago Stock Exchange, Inc. (``CHX'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Exchange Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to adopt the CHX Liquidity Taking 
Access Delay (``LTAD''). The proposed rule change was published for 
comment in the Federal Register on September 22, 2016.\3\ On November 
1, 2016, pursuant to Section 19(b)(2) of the Exchange Act,\4\ the 
Commission designated a longer period within which to approve the 
proposed rule change, disapprove the proposed rule change, or institute 
proceedings to determine whether to disapprove the proposed rule 
change.\5\ The Commission received 20 comments on the proposed rule 
change, including a response to certain comment letters by the 
Exchange.\6\ This order institutes proceedings under Section 
19(b)(2)(B) of the Exchange Act \7\ to determine whether to approve or 
disapprove the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 78860 (September 16, 
2016), 81 FR 65442 (``Notice'').
    \4\ 15 U.S.C. 78s(b)(2).
    \5\ See Securities Exchange Act Release No. 79216, 81 FR 78228 
(November 7, 2016). The Commission designated December 21, 2016, as 
the date by which the Commission shall either approve or disapprove, 
or institute proceedings to determine whether to disapprove, the 
proposed rule change.
    \6\ See letters from: (1) Douglas A. Cifu, Chief Executive 
Officer, Virtu Financial, dated September 21, 2016 (``Virtu 
Letter''); (2) R.T. Leuchtkafer, dated September 29, 2016 
(``Leuchtkafer Letter 1''); (3) Adam Nunes, Head of Business 
Development, Hudson River Trading LLC, dated October 6, 2016 
(``Hudson River Trading Letter''); (4) Beste Bidd, Trader, dated 
October 9, 2016 (``Beste Bidd Letter''); (5) Joanna Mallers, 
Secretary, FIA Principal Traders Group, dated October 13, 2016 
(``FIA PTG Letter''); (6) John L. Thornton, Co-Chair, Hal S. Scott, 
Director, and R. Glenn Hubbard, Co-Chair, Committee on Capital 
Markets Regulation, dated October 13, 2016 (``Committee on Capital 
Markets Letter''); (7) Adam C. Cooper, Senior Managing Director and 
Chief Legal Officer, Citadel Securities, dated October 13, 2016 
(``Citadel Letter''); (8) Tyler Gellasch, Executive Director, 
Healthy Markets Association, dated October 13, 2016 (``HMA 
Letter''); (9) Eric Budish, Professor of Economics, University of 
Chicago Booth School of Business, dated October 13, 2016 (``Budish 
Letter''); (10) Elizabeth K. King, General Counsel and Corporate 
Secretary, New York Stock Exchange, dated October 14, 2016 (``NYSE 
Letter''); (11) James J. Angel, Associate Professor, McDonough 
School of Business, Georgetown University, dated October 16, 2016 
(``Angel Letter''); (12) Eric Swanson, EVP, General Counsel and 
Secretary, Bats Global Markets, Inc., dated October 25, 2016 (``Bats 
Letter''); (13) Eric Pritchett, Chief Executive Officer, Potamus 
Trading LLC, dated October 26, 2016 (``Potamus Letter''); (14) James 
Ongena, Executive Vice President and General Counsel, CHX, dated 
October 28, 2016 (``CHX Response''); (15) Steve Crutchfield, Head of 
Market Structure, CTC Trading Group, L.L.C., dated November 1, 2016 
(``CTC Letter''); (16) Boris Ilyevsky, Brokerage Director, 
Interactive Brokers LLC, dated November 7, 2016 (``IB Letter''); 
(17) Alex Jacobson, dated November 9, 2016 (``Jacobson Letter''); 
(18) Brian Donnelly, Founder and Chief Executive Officer, Volant 
Trading, dated November 28, 2016 (``Volant Letter''); (19) R.T. 
Leuchtkafer, dated December 14, 2016 (``Leuchtkafer Letter 2''); and 
(20) Theodore R. Lazo, Managing Director and Associate General 
Counsel, Securities Industry and Financial Markets Association, 
dated December 16, 2016 (``SIFMA Letter''). All of the comment 
letters are available at: https://www.sec.gov/comments/sr-chx-2016-16/chx201616.shtml.
    \7\ 15 U.S.C. 78s(b)(2)(B).
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II. Summary of the Proposal

A. Description

    The LTAD would require all new incoming orders \8\ received during 
the Open Trading State \9\ that could immediately execute against one 
or more resting orders on the CHX book, as well as certain related 
cancel messages, to be intentionally delayed for 350 microseconds 
before such delayed messages would be processed \10\ by the Matching 
System.\11\ All other messages, including liquidity providing orders 
(i.e., orders that would not immediately execute against resting 
orders) and cancel messages for resting orders, would be immediately 
processed without delay.
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    \8\ ``New incoming orders'' are orders received by the Matching 
System for the first time. The LTAD would not apply to other 
situations where existing orders or portions thereof are treated as 
incoming orders, such as (1) resting orders that are price slid into 
a new price point pursuant to the CHX Only Price Sliding or Limit 
Up-Limit Down Price Sliding Processes and (2) unexecuted remainders 
of routed orders released into the Matching System. See Notice, 
supra note 3, 81 FR at 65443, n.5.
    \9\ ``Open Trading State'' means the period of time during the 
regular trading session when orders are eligible for automatic 
execution. See CHX Article 1, Rule 1(qq).
    \10\ ``Processed'' means executing instructions contained in a 
message, including, but not limited to, permitting an order to 
execute within the Matching System pursuant to the terms of the 
order or cancelling an existing order. See Notice, supra note 3, 81 
FR at 65443, n.7.
    \11\ ``Matching System'' means the automated order execution 
system, which is part of CHX's ``Trading Facilities'' as defined 
under CHX Article 1, Rule 1(z). See id. at 65443, n.8.
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    Each delayable message would be diverted into the LTAD queue and 
would remain delayed until it is released for processing. A delayed 
message would become releasable 350 microseconds after initial receipt 
by the Exchange (``Fixed LTAD Period''), and would be processed only 
after the Matching System has evaluated and processed, if applicable, 
all messages in the security received by the Exchange during the Fixed 
LTAD Period for the delayed message.\12\ A message may be delayed for 
longer than the Fixed LTAD Period depending on the then-current 
messaging volume in the security, according to the Exchange.\13\
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    \12\ See id. at 65444.
    \13\ See id. at 65444, text accompanying n.35.
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B. Purpose of the LTAD

    The Exchange states that it designed and proposed the LTAD to 
respond to declines in CHX volume and size at the national best bid or 
offer (``NBBO'') in the SPDR S&P 500 trust exchange-traded fund 
(``SPY'') between January 2016 and July 2016, which it attributes to 
latency arbitrage activity in SPY.\14\ CHX defines ``latency 
arbitrage'' as the practice of exploiting disparities in the price of a 
security or related securities that are being traded in different 
markets by taking advantage of the time it takes to access and respond 
to market information.\15\
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    \14\ See id. at 65443.
    \15\ See id. at 65443, n.3.
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    The Exchange asserts that much of the CHX liquidity in SPY and 
other S&P 500-correlated securities is provided as part of an arbitrage 
strategy between CHX and the futures markets, whereby liquidity 
providers utilize, among other things, proprietary algorithms to price 
and size resting orders on CHX to track index market data from a 
derivatives market (e.g., E-Mini S&P traded on the Chicago Mercantile 
Exchange's Globex trading platform).\16\ According to the Exchange, 
prior to the beginning of the SPY latency arbitrage activity, which CHX 
first observed in January of 2016, CHX volume and liquidity in SPY

[[Page 95239]]

constituted a material portion of overall volume and liquidity in SPY 
market-wide. Specifically, CHX states that: (1) Its market share in SPY 
as a percentage of total volume decreased from 5.73% in January 2016 to 
0.57% in July 2016, while certain control securities (``Control 
Securities'') did not experience similar declines; \17\ and (2) the 
time-weighted average CHX size at the NBBO in SPY relative to the total 
NMS size at the NBBO in SPY decreased from 44.36% in January 2016 to 
3.39% of the total NMS size at the NBBO in SPY in July 2016, while the 
Control Securities did not experience similar declines.\18\
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    \16\ See id. at 65443, n.10.
    \17\ CHX states that it designated DIA, IWM, and QQQ as Control 
Securities because they share the following similarities to SPY: (1) 
Highly correlated in price movements with a well-known equity market 
index; (2) ETFs; (3) traded in CHX's Chicago data center; (4) 
actively traded in the NMS; and (5) highly correlated with a futures 
contract traded electronically on the Globex trading platform. See 
id. at 65448, n.59 and accompanying text.
    \18\ See id. at 65443, n.11.
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    The Exchange asserts that the LTAD would enhance displayed 
liquidity and price discovery in NMS securities without adversely 
affecting the ability of virtually all market participants, other than 
latency arbitrageurs, to access liquidity at CHX.\19\ In support of 
this conclusion, CHX offers an analysis of cancel activity in SPY at 
CHX for the period starting in May 2016 through July 2016, and asserts 
that, if the LTAD had been implemented during that time period, out of 
a total of 18,316 at least partially-executed orders in SPY, only 20 
liquidity taking orders not attributed to latency arbitrage activity 
would have not been executed.\20\
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    \19\ See id. at 65456.
    \20\ See id. at 65444, n.19.
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III. Summary of Comments

    Commenters both supportive of and opposing the proposed rule change 
have opined on a number of aspects of the proposed rule change and 
whether the proposal is consistent with the requirements of the 
Exchange Act and the rules thereunder.
    Some commenters question whether latency arbitrage as asserted by 
CHX is to blame for the decline in CHX's market share and whether the 
LTAD would solve the purported problem.\21\ Other commenters assert 
that the proposed rule change is overbroad because the proposed LTAD is 
a systemic solution to a problem--namely a decline in CHX's market 
share in one security--that CHX has not demonstrated to be market-
wide.\22\ One commenter states that based on CHX's assertion that 
latency arbitrage is a market-wide issue caused by a structural bias, 
the Commission should not address the issue in isolation, but should 
instead consider a market-wide solution.\23\
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    \21\ See Hudson River Trading Letter, supra note 6, at 2; HMA 
Letter, supra note 6, at 5.
    \22\ See Citadel Letter, supra note 6, at 11; HMA Letter, supra 
note 6, at 4.
    \23\ See SIFMA Letter, supra note 6, at 5.
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    One commenter asserts that the LTAD might enable latency arbitrage 
among correlated instruments by applying its speed bump to some but not 
all related securities.\24\ Another commenter states that applying the 
LTAD on a security-by-security basis would add unnecessary market 
complexity and give CHX unreasonable flexibility while requiring market 
participants to develop symbol specific routing strategies to meet 
their obligations under Rule 611 of Regulation NMS.\25\
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    \24\ See Leuchtkafer Letter 1, supra note 6, at 2; Leuchtkafer 
Letter 2, supra note 6, at 5.
    \25\ See SIFMA Letter, supra note 6, at 4.
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    One commenter asserts that what CHX describes as latency arbitrage 
could be another firm or firms engaging in a similar arbitrage strategy 
between CHX and the futures markets that are faster and/or more skilled 
than CHX's liquidity providers.\26\ CHX responds by insisting that 
utilization of algorithms by liquidity providers to price and size 
resting orders on CHX to track index market data from a derivatives 
market is different than latency arbitrage and provides additional data 
that it asserts supports that conclusion.\27\ Another commenter 
questions whether CHX could address what it perceives as latency 
arbitrage by improving its technology to reduce the time to cancel for 
liquidity providers.\28\
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    \26\ See Hudson River Trading Letter, supra note 6, at 2.
    \27\ See CHX Response, supra note 6, at 6. Specifically, CHX 
submits the following additional data regarding SPY for the period 
of May through July 2016: (1) Latency arbitrage resulted in no 
liquidity in SPY at CHX as all orders that CHX attributes to latency 
arbitrage were Immediate Or Cancel orders; and (2) while 77% of the 
trades that CHX attributes to latency arbitrage were followed by 
late cancel messages for the provide order soon after the execution, 
only 2.7% of the trades the CHX does not attribute to latency 
arbitrage were followed by late cancel messages from the liquidity 
provider.
    \28\ See SIFMA Letter, supra note 6, at 4-5.
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    A number of commenters assert that the proposed LTAD would increase 
displayed liquidity.\29\ One commenter, however, asserts that, while 
the LTAD would enhance displayed liquidity, the increased liquidity 
would be more conditional and less accessible.\30\ Another commenter 
argues that the Investors Exchange LLC (``IEX'') delay, which the 
Commission approved, also makes protected quotes less accessible.\31\
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    \29\ See, e.g., Virtu Letter, supra note 6, at 2 (the LTAD would 
improve price discovery in NMS securities on lit, protected 
exchanges); Potamus Letter, supra note 6, at 1; Beste Bidd Letter, 
supra note 6 (the proposal would enhance liquidity in the public 
markets by helping market-makers and long-term investors meet on-
exchange); Jacobson Letter, supra note 6, at 2; Volant Letter, supra 
note 6, at 1; Angel Letter, supra note 6, at 2 (the proposal would 
incentivize market makers to post more liquidity, which would lead 
to deeper quotes and tighter bid-ask spreads); Budish Letter, supra 
note 6, at 2. Another commenter states that the LTAD has the 
potential to enhance liquidity. See Bats Letter, supra note 6, at 2.
    \30\ See Hudson River Trading Letter, supra note 6, at 3. 
Similarly, another commenter states that the proposal has the 
potential to distort the market view of available liquidity if such 
liquidity proves to be ephemeral. See Bats Letter, supra note 6, at 
2.
    \31\ See Volant Letter, supra note 6, at 2.
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    Commenters also opined on the competitive effect of the LTAD. Some 
commenters assert that the LTAD would unduly burden competition among 
CHX's members and among national securities exchanges.\32\ 
Alternatively, other commenters assert that approval of the proposal 
would introduce greater competition among the national securities 
exchanges, and that the Commission should regard the LTAD as an 
innovation that could allow CHX to better compete with other 
exchanges.\33\ Additionally, another commenter asserts that the LTAD 
would lower the cost of entry for new liquidity providers because they 
would not have to invest in technology to be faster than the fastest 
latency arbitrageur.\34\
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    \32\ See Hudson River Trading Letter, supra note 6, at 3; FIA 
PTG Letter supra note 6, at 4-5; Citadel Letter, supra note 6, at 
10-11.
    \33\ See Angel Letter, supra note 6, at 2; CTC Trading Letter, 
supra note 6, at 4-5; Potamus Letter, supra note 6, at 2.
    \34\ See Volant Letter, supra note 6, at 3.
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    Commenters disagree about whether the LTAD would be unfairly 
discriminatory. A number of commenters state that the LTAD would be 
unfairly discriminatory because it would delay only liquidity taking 
orders.\35\ Another commenter states that the LTAD is unfairly 
discriminatory because it would provide CHX liquidity providers with a 
``last look'' whereby they could back away from their displayed 
quotations, and may result so that liquidity takers would be unable to 
reliably access quotations provided by

[[Page 95240]]

CHX liquidity providers.\36\ One commenter asserts that the LTAD would 
unfairly discriminate in favor of market makers who have the resources 
to respond to price changes on the futures market ahead of all other 
market participants.\37\
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    \35\ See, e.g., Citadel Letter, supra note 6, at 6-8; Hudson 
River Trading Letter, supra note 6, at 2-3; FIA PTG Letter, supra 
note 6, at 3. See also SIFMA Letter, supra note 6, at 3 (asserting 
that any intentional delay should be universally applied to all 
market participants in a non-discriminatory manner). Another 
commenter asserts that intentionally delaying the orders of only 
some market participants could distort markets and may not be 
beneficial for long-term investors, and that any intentional delays 
should be equally applied to all market participants. See Committee 
on Capital Markets Letter, supra note 6, at 2.
    \36\ See Citadel Letter, supra note 6, at 6.
    \37\ See Leuchtkafer Letter 1, supra note 6, at 1; Leuchtkafer 
Letter 2, supra note 6, at 3.
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    Supporters of the proposed rule change assert that, because all 
liquidity taking orders would be treated the same, the LTAD would not 
be unfairly discriminatory.\38\ The Exchange asserts that the LTAD is 
narrowly tailored to address latency arbitrage by giving liquidity 
providers a tiny head start to cancel stale quotes in the race to react 
to symmetric public information, and that it could not effectively 
address latency arbitrage without distinguishing between liquidity 
taking and liquidity providing orders.\39\ One commenter states that 
the LTAD could benefit any market participant who posts an order to the 
extent they would otherwise be traded against by another participant 
with identical information but a slightly faster data feed.\40\ The 
commenter argues that the LTAD's discrimination is necessary to 
disincentivize a technological arms race that is contrary to investor 
protection and the public interest.\41\ Both the commenter and the 
Exchange assert that the proposed discrimination is fair because it 
would make the market structure fairer by leveling the playing field, 
which currently is tilted against liquidity providers.\42\
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    \38\ See Angel Letter, supra note 6, at 2; CHX Response, supra 
note 6, at 2.
    \39\ See CHX Response, supra note 6, at 2, 8. See also Budish 
Letter, supra note 6, at 2.
    \40\ See CTC Trading Letter, supra note 6, at 5.
    \41\ See id. at 2.
    \42\ See id. at 3; CHX Response, supra note 6, at 2. See also IB 
Letter, supra note 6, at 2.
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    One commenter asserts that the LTAD would damage the efficiency of 
the market by undermining the ability of exchange-traded fund (``ETF'') 
market makers' ability to engage in arbitrage transactions.\43\ In 
response, the Exchange states that no evidence has been offered to 
support the conclusion that the LTAD would negatively impact ETF 
trading, and that the LTAD would not have a material impact on 
liquidity taking orders that are not submitted as part of a latency 
arbitrage strategy.\44\
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    \43\ See Citadel Letter, supra note 6, at 12-13. See also Beste 
Bidd Letter, supra note 6 (stating that ETPs could be severely 
affected during periods of elevated volatility if market makers are 
forced to hedge on unreliable markets).
    \44\ See CHX Response, supra note 6, at 9.
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    Commenters disagree about whether the LTAD would be consistent with 
Rule 602 of Regulation NMS (``Quote Rule''). Two commenters assert that 
adoption of the LTAD may be inconsistent with the Quote Rule.\45\ Two 
other commenters state that the LTAD could violate the Quote Rule 
because it is designed to allow liquidity providers to back away from 
their quotes.\46\
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    \45\ See NYSE Letter, supra note 6, at 3 (stating that CHX would 
not be enforcing its members' obligations under the Quote Rule); 
Bats Letter, supra note 6, at 1 (stating that, absent new 
interpretative guidance, the proposal likely violates the Quote 
Rule).
    \46\ See FIA PTG Letter, supra note 6, at 4; Citadel Letter, 
supra note 6, at 5-6.
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    Another commenter and the Exchange, however, argue that the LTAD 
would not violate the Quote Rule. They argue that, under the rule, the 
duty of a broker or dealer to stand behind its quote would not vest 
because the LTAD would prevent the liquidity provider from receiving 
(i.e., being presented with) a marketable contra-side order.\47\
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    \47\ See CTC Trading Letter, supra note 6, at 5-6; CHX Response, 
supra note 6, at 11-12.
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    Commenters also disagree about whether adoption of the LTAD would 
be consistent with CHX's protected quotation status under Regulation 
NMS.\48\ One commenter asserts that allowing some market participants 
to have an advantage over others frustrates the purposes of Rule 611 of 
Regulation NMS by impairing fair and efficient access to an exchange's 
quotations.\49\ Another commenter argues that exchanges with asymmetric 
access delays should not be considered to have ``protected quotations'' 
under Rule 611 of Regulation NMS.\50\ Other commenters assert that the 
LTAD would impair a market participant's ability to fairly and 
efficiently access a quote, and therefore it is inconsistent with the 
goals of Rule 611.\51\
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    \48\ 17 CFR 242.611.
    \49\ See FIA PTG Letter, supra note 6, at 3.
    \50\ See Beste Bidd Letter, supra note 6. See also SIFMA Letter, 
supra note 6, at 3 (questioning the implications of market 
participants' obligation under Rule 611 of Regulation NMS to access 
protected CHX quotes when the CHX liquidity providers' quotes may 
not be accessible as a result of the LTAD).
    \51\ See Hudson River Trading Letter, supra note 6, at 4; 
Citadel Letter, supra note 6, at 12-13; NYSE Letter, supra note 6, 
at 4. See also SIFMA Letter, supra note 6, at 4 (questioning the 
effect of an access delay coupled with existing geographic or 
technological latencies on the fair and efficient access to an 
exchange's protected quotations).
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    In response, the Exchange argues that the LTAD is consistent with 
Rule 611 of Regulation NMS because the Commission does not interpret 
``immediate'' to prohibit implementation of a de minimis intentional 
access delay, and the delay imposed by the LTAD would not impair fair 
and efficient access to the Exchange's quotations because: (1) The LTAD 
would apply to all liquidity taking orders submitted by any CHX 
participant and would only delay such orders by 350 microseconds, the 
same length as the IEX speed bump; (2) the 350-microsecond delay is so 
short that it would only neutralize a structural bias that permits 
latency arbitrageurs to profit from symmetric public information; (3) 
it would not provide an incremental advantage to a liquidity provider 
other than to neutralize the structural bias to latency arbitrageurs; 
and (4) the LTAD is narrowly-tailored to address latency arbitrage 
strategies at CHX.\52\
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    \52\ See CHX Response, supra note 6, at 14.
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    Certain commenters assert that the LTAD would result in unfair 
allocation of SIP market data revenue by generating an increase in 
quoting, but not necessarily trading, on the Exchange.\53\ The Exchange 
responds that the LTAD would not encourage non-bona fide quote activity 
for the purpose of earning rebates because quotes cancelled within the 
350-microsecond LTAD would not be eligible for market data revenue 
rebates, and cancellation of such quotes could result in the CHX 
participant being assessed an order cancellation fee.\54\
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    \53\ See Hudson River Trading Letter, supra note 6, at 5; FIA 
PTG Letter, supra note 6, at 3; SIFMA Letter, supra note 6, at 4. 
Another commenter argues that in conjunction with CHX's market data 
revenue sharing program, the LTAD would harm overall market 
transparency, quality, and efficiency. See Citadel Letter, supra 
note 6, at 3-4.
    \54\ See CHX Response, supra note 6, at 10-11.
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    One commenter asserts that the LTAD may encourage spoofing by 
decreasing the risk of executions.\55\ Another commenter states that 
the LTAD would facilitate market manipulation by allowing liquidity 
providers a means for setting the NBBO with a quotation that they do 
not intend to honor.\56\ In response, the Exchange states that the LTAD 
would be too short to introduce any incremental risk of manipulative 
practices, and that the Exchange has in place surveillances to detect, 
and rules to deter, these practices.\57\
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    \55\ See FIA PTG Letter, supra note 6, at 3-4.
    \56\ See Citadel Letter, supra note 6, at 4.
    \57\ See CHX Response, supra note 6, at 10.
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    Two commenters assert that the LTAD would confer special benefits 
on market participants without imposing any new obligation or 
responsibility to contribute to market quality.\58\ One commenter 
suggests that the LTAD could be more narrowly tailored to apply only to 
orders that would take liquidity from

[[Page 95241]]

market makers that meet heightened quoting obligations.\59\
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    \58\ See Citadel Letter, supra note 6, at 8; Leuchtkafer Letter 
2, supra note 6, at 4.
    \59\ See CTC Letter, supra note 6, at 6.
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    Finally, a commenter asserts that due to the implementation of the 
LTAD through software, rather than hardware, the indeterminacy of the 
delay may result in the LTAD producing delays inconsistent with the 
Commission's ``speed bump guidelines.'' \60\ In response, the Exchange 
states that system messaging delays and variable message queuing are 
irrelevant, stating that they exist today in every market that utilizes 
a continuous limit order book to rank and match orders and are a 
function of finite network and processing resources.\61\ The commenter 
responds in turn that implementing the LTAD through software could 
create opportunities for delays and queuing, and that the Exchange 
should outline how it plans to surveil for and remediate any 
implementation issues.\62\
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    \60\ See Leuchtkafer Letter 1, supra note 6, at 1.
    \61\ See CHX Response, supra note 6, at 15.
    \62\ See Leuchtkafer Letter 2, supra note 6, at 2.
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IV. Proceedings To Determine Whether To Approve or Disapprove SR-CHX-
2016-16 and Grounds for Disapproval Under Consideration

    The Commission is instituting proceedings pursuant to Section 
19(b)(2)(B) of the Exchange Act \63\ to determine whether the proposed 
rule change should be approved or disapproved. Institution of such 
proceedings is appropriate at this time in view of the legal and policy 
issues raised by the proposed rule change. Institution of proceedings 
does not indicate that the Commission has reached any conclusions with 
respect to any of the issues involved. Rather, as stated below, the 
Commission seeks and encourages interested persons to provide comments 
on the proposed rule change.
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    \63\ 15 U.S.C. 78s(b)(2)(B).
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    Pursuant to Section 19(b)(2)(B) of the Exchange Act,\64\ the 
Commission is providing notice of the grounds for disapproval under 
consideration. The Commission is instituting proceedings to allow for 
additional analysis of the proposed rule change's consistency with 
Section 6(b)(5) of the Exchange Act, which requires, among other 
things, that the rules of a national securities exchange not be 
designed to permit unfair discrimination between customers, issuers, 
brokers, or dealers \65\ and Section 6(b)(8) of the Exchange Act, which 
requires that the rules of a national securities exchange not impose 
any burden on competition not necessary or appropriate in furtherance 
of the purposes of the Exchange Act.
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    \64\ Id.
    \65\ 15 U.S.C. 78f(b)(5).
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IV. Procedure: Request for Written Comments

    The Commission requests that interested persons provide written 
submissions of their views, data, and arguments with respect to the 
issues identified above, as well as any other concerns they may have 
with the proposal. In particular, the Commission invites the written 
views of interested persons concerning whether the proposal is 
consistent with Sections 6(b)(5), 6(b)(8), or any other provision of 
the Exchange Act, or the rules and regulations thereunder. Although 
there do not appear to be any issues relevant to approval or 
disapproval that would be facilitated by an oral presentation of views, 
data, and arguments, the Commission will consider, pursuant to Rule 
19b-4, any request for an opportunity to make an oral presentation.\66\
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    \66\ Section 19(b)(2) of the Exchange Act, as amended by the 
Securities Act Amendments of 1975, Public Law 94-29 (June 4, 1975), 
grants the Commission flexibility to determine what type of 
proceeding--either oral or notice and opportunity for written 
comments--is appropriate for consideration of a particular proposal 
by a self-regulatory organization. See Securities Act Amendments of 
1975, Senate Comm. on Banking, Housing & Urban Affairs, S. Rep. No. 
75, 94th Cong., 1st Sess. 30 (1975).
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    Interested persons are invited to submit written data, views, and 
arguments regarding whether the proposal should be approved or 
disapproved by January 17, 2017. Any person who wishes to file a 
rebuttal to any other person's submission must file that rebuttal by 
January 31, 2017. The Commission asks that commenters address the 
sufficiency of the Exchange's statements in support of the proposal, in 
addition to any other comments they may wish to submit about the 
proposed rule change.
    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-CHX-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 Numbers SR-CHX-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 these filings 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-CHX-2016-16 and should be 
submitted on or before January 17, 2017]. Rebuttal comments should be 
submitted by January 31, 2017.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\67\
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    \67\ 17 CFR 200.30-3(a)(57).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2016-31100 Filed 12-23-16; 8:45 am]
 BILLING CODE 8011-01-P