Document ID: SEC-2014-2106-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: EDGX Exchange, Inc.
Posted Date: 2014-12-15T05:00Z

[Federal Register Volume 79, Number 240 (Monday, December 15, 2014)]
[Notices]
[Pages 74147-74150]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-29243]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-73796; File No. SR-EDGX-2014-33]

Self-Regulatory Organizations; EDGX Exchange, Inc.; Notice of 
Filing and Immediate Effectiveness of a Proposed Rule Change to Rules 
1.5 and 11.3 of EDGX Exchange, Inc.

December 9, 2014.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that on November 28, 2014, EDGX Exchange, Inc. (the ``Exchange'' or 
``EDGX'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I and 
II below, which Items have been prepared by the Exchange. The Exchange 
has designated this proposal as a ``non-controversial'' proposed rule 
change pursuant to Section 19(b)(3)(A) of the Act \3\ and Rule 19b-
4(f)(6)(iii) thereunder,\4\ which renders it effective upon filing with 
the Commission. 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\ 17 CFR 240.19b-4.
    \3\ 15 U.S.C. 78s(b)(3)(A).
    \4\ 17 CFR 240.19b-4(f)(6)(iii).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange filed a proposal to amend Rules 1.5(z), the definition 
of Sponsored Participant,\5\ and 11.3, titled Access, to harmonize its 
sponsored access rules and definitions with those set forth under BATS 
Exchange, Inc. (``BATS'') Rules 1.5(x) and 11.3 as well as BATS Y-
Exchange, Inc. (``BYX'') Rules 1.5(x) and 11.3.\6\
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    \5\ As defined below.
    \6\ See BATS Rules 1.5(x) and 11.3; BYX Rules 1.5(x) and 11.3.
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    The text of the proposed rule change is available at the Exchange's 
Web site at http://www.directedge.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 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

[[Page 74148]]

statements may be examined at the places specified in Item IV below. 
The Exchange has prepared summaries, set forth in Sections A, B, and C 
below, of the most significant parts of such statements.

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

1. Purpose
    The Exchange proposes to amend Rules 1.5(z) and 11.3 to harmonize 
its sponsored access rules with those set forth under BATS Rules 1.5(x) 
and 11.3 and BYX Rules 1.5(x) and 11.3.\7\ Earlier this year, the 
Exchange and its affiliate EDGA Exchange, Inc. (``EDGA'') received 
approval to effect a merger (the ``Merger'') of the Exchange's parent 
company, Direct Edge Holdings LLC, with BATS Global Markets, Inc., the 
parent of BATS and BYX (together with BATS, BYX, EDGA and EDGX, the 
``BGM Affiliated Exchanges'').\8\ In the context of the Merger, the BGM 
Affiliated Exchanges are working to align certain rules, retaining only 
intended differences between the BGM Affiliated Exchanges. As part of 
this effort, the proposal set forth below harmonizes Exchange Rules 
1.5(z) and 11.3 with BATS and BYX Rules 1.5(x) and 11.3 by aligning the 
rules around sponsored access for all sponsored participants and 
sponsoring members of the BGM Affiliated Exchanges.\9\
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    \7\ See supra note 5.
    \8\ See Securities Exchange Act Release No. 71449 (January 30, 
2014), 79 FR 6961 (February 5, 2014) (SR-EDGX-2013-43; SR-EDGA-2013-
34).
    \9\ The Exchange understands that EDGA is to file a proposed 
rule change with the Commission to adopt similar requirements.
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    Rule 11.3 currently provides that the System \10\ shall be 
available for entry and execution of orders by Users with authorized 
access. In order to obtain authorized access to the System, each Member 
must enter into an agreement with the Exchange in such form as the 
Exchange may provide. A Sponsored Participant \11\ may obtain 
authorized access to the System only if such access is authorized in 
advance by one or more Sponsoring Members \12\ as follows: (i) 
Sponsored Participants must enter into and maintain sponsored or direct 
access arrangements with one or more Sponsoring Members establishing 
proper relationship(s) and account(s) through which the Sponsored 
Participant may trade on the System; (ii) Sponsoring Member shall 
maintain a list of Sponsored Participants who Sponsoring Member has 
authorized to obtain access to the System pursuant to this Rule, shall 
update the list of Sponsored Participants as necessary, and provide the 
list of Sponsored Participants to the Exchange upon request; and (iii) 
Sponsoring Members shall comply with Rule 15c3-5 under the Exchange Act 
(the ``Market Access Rule'') \13\ with regard to market access 
arrangements with Sponsored Participants.
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    \10\ System is defined in EDGX Rule 1.5(cc).
    \11\ Sponsored Participant is defined in EDGX Rule 1.5(z).
    \12\ Sponsoring Members is defined in EDGX Rule 1.5(aa).
    \13\ 17 CFR 240.15c3-5.
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    The Exchange is proposing to delete Rules 11.3(b)(2) and (3), which 
are described in items (ii) and (iii) above. The Exchange is proposing 
to delete 11.3(b)(2) in order to add more thorough requirements for a 
Member to provide sponsored access to a Sponsored Participant, as 
described below. The Exchange is proposing to delete Rule 11.3(b)(3) in 
order to align the Exchange's rules with those of BATS and BYX. The 
Exchange notes that, while Rule 11.3(b)(3) requires a Sponsoring Member 
to comply with the Market Access Rule, such obligation applies to all 
brokers or dealers with market access \14\ and thus exists whether or 
not the Exchange has a rule requiring compliance. As such, deleting 
current Rule 11.3(b)(3) does not alter a Member's or a Sponsored 
Participant's obligation to comply with the Market Access Rule.
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    \14\ 17 CFR 240.15c3-5(b).
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    The Exchange is also proposing to amend Rule 11.3(b)(1) in order to 
replace ``sponsored or direct access arrangements'' with ``customer 
agreements.'' In coordination with this change, the Exchange is also 
proposing to add the following sentence to the end of Rule 11.3(b)(1): 
``Such customer agreement(s) must incorporate the sponsorship 
provisions set forth in paragraph (2) below.''
    The Exchange is also proposing to add a new Rule 11.3(b)(2), which 
contains the requirements for the customer agreements referenced in 
proposed Rule 11.3(b)(1). As proposed, in order for a Sponsored 
Participant to obtain and maintain authorized access to the System, a 
Sponsored Participant and its Sponsoring Member must agree in writing 
to the following sponsorship provisions: (i) The Sponsored Participant 
and its Sponsoring Member must have entered into and maintained a User 
Agreement with the Exchange; (ii) the Sponsoring Member must 
acknowledge and agree that all orders entered by the Sponsored 
Participant and any person acting on behalf of or in the name of such 
Sponsored Participant and any executions occurring as a result of such 
orders are binding in all respects on the Sponsoring Member, and the 
Sponsoring Member is responsible for any and all actions taken by such 
Sponsored Participant and any person acting on behalf of or in the name 
of such Sponsored Participant; (iii) the Sponsoring Member shall comply 
with the Exchange's Certificate of Incorporation, By-Laws, Rules and 
procedures, and the Sponsored Participant shall comply with the 
Exchange's Certificate of Incorporation, By-Laws, Rules and procedures, 
as if such Sponsored Participant were a Member; (iv) the Sponsored 
Participant shall maintain, keep current and provide to the Sponsoring 
Member, and to the Exchange upon request, a list of Authorized Traders 
who may obtain access to the System on behalf of the Sponsored 
Participant. Sponsored Participant shall be subject to the obligations 
of Rule 11.4 with respect to such Authorized Traders; \15\ (v) the 
Sponsored Participant shall familiarize its Authorized Traders with all 
of the Sponsored Participant's obligations under this Rule and will 
assure that they receive appropriate training prior to any use or 
access to the System; (vi) the Sponsored Participant may not permit 
anyone other than Authorized Traders to use or obtain access to the 
System; (vii) the Sponsored Participant shall take reasonable security 
precautions to prevent unauthorized use or access to the System, 
including unauthorized entry of information into the System, or the 
information and data made available therein. The Sponsored Participant 
understands and agrees that the Sponsored Participant is responsible 
for any and all orders, trades and other messages and instructions 
entered, transmitted or received under identifiers, passwords and 
security codes of Authorized Traders, and for the trading and other 
consequences thereof; (viii) the Sponsored Participant acknowledges its 
responsibility to establish adequate procedures and controls that 
permit it to effectively monitor its employees', agents' and customers' 
use and access to the System for compliance with the terms of this 
agreement; and (ix) the Sponsored Participant shall pay when due all 
amounts, if any, payable to Sponsoring Member, the Exchange or any 
other third parties that arise from the Sponsored Participant's access 
to and use of the System. Such amounts

[[Page 74149]]

include, but are not limited to applicable exchange and regulatory 
fees.
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    \15\ See EDGX Rule 11.4.
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    The Exchange is also proposing to replace Rule 11.3(b)(3) to state 
that the Sponsoring Member must provide the Exchange with a written 
statement in form and substance acceptable to the Exchange identifying 
each Sponsored Participant by name and acknowledging its responsibility 
for the orders, executions and actions of such Sponsored Participant. 
Such written statement in form and substance acceptable to the Exchange 
will be available as the ``Sponsored Application and Agreements'' form 
on the Exchange's Web site.\16\
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    \16\ The Exchange's Web site is accessible at 
www.directedge.com.
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    Finally, the Exchange is proposing to amend Rule 1.5(z) to align 
the definition of Sponsored Participant with the definition on BATS and 
BYX \17\ and to align the definition with the relationship between a 
Sponsoring Member, Sponsored Participant, and the Exchange, as proposed 
above. Specifically, the Exchange is proposing that the term Sponsored 
Participant mean a person which has entered into a sponsorship 
arrangement with a Sponsoring Member pursuant to Rule 11.3.
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    \17\ See supra note 5.
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    The Exchange notes that this proposal would in effect restore 
Exchange Rules 1.5(z) and 11.3 to their state prior to filing SR-EDGX-
2012-24 (the ``Filing'').\18\ In the Filing, the Exchange described the 
rationale for the proposed changes as being rendered superfluous and 
unnecessary by the adoption of Market Access Rule. Such changes, in 
contrast to the rules on BATS and BYX, however, created a situation in 
which the Exchange still had Sponsored Participants that were entering 
orders through Sponsoring Members, but the Exchange had no direct 
relationship with Sponsored Participants. In certain circumstances, 
this arrangement led to employees of the Exchange being unable to 
discuss certain order and/or trade details with Sponsored Participants. 
Based on these experiences, the Exchange no longer views the proposed 
rule text as superfluous, but, rather, such proposed rule text outlines 
a reasonable set of standards for a sponsored access relationship 
between the Exchange, the Sponsoring Member, and the Sponsored 
Participant. The Exchange believes that the proposed changes will 
enhance its rules and, as discussed above, harmonize the Exchange's 
rules with those of BATS and BYX. The Exchange does note that the 
proposal is not intended to supersede or supplement the Market Access 
Rule in any way, but rather to establish a more thorough set of rules 
under which the Exchange, Sponsored Participants, and Sponsoring 
Members will interact. As such, the Exchange also notes that compliance 
with the proposed rules has no bearing on whether any particular 
Member, Sponsoring Member, or Sponsored Participant is in compliance 
with the Market Access Rule.
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    \18\ See Securities Exchange Act Release No. 67711 (August 22, 
2012), 77 FR 52096 (August 28, 2012) (SR-EDGX-2012-24).
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Implementation Date
    The Exchange intends to implement the proposed rule change on or 
about January 12, 2015. The Exchange will announce the implementation 
of the proposed rule change via a trading notice to be posted on the 
Exchange's Web site.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6(b) of the Act \19\ and furthers the objectives of 
Section 6(b)(5) of the Act,\20\ in that it is designed promote just and 
equitable principles of trade, remove impediments to, and perfect the 
mechanism of, a free and open market and a national market system, and, 
in general, protect investors and the public interest. The proposal 
would effectively allow a Sponsoring Member(s) to provide a Sponsored 
Participant(s) with access to the Exchange and the ability to interact 
directly with Exchange employees. More specifically, the Exchange 
believes that the proposal is designed to promote just and equitable 
principles of trade, remove impediments to, and perfect the mechanism 
of, a free and open market and a national market system, and, in 
general protect investors and the public interest because it would 
allow the Exchange to directly recognize the trading activity of 
Sponsored Participants and to communicate directly with Sponsored 
Participants regarding any potential issues that may arise.
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    \19\ 15 U.S.C. 78f(b).
    \20\ 15 U.S.C. 78f(b)(5).
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    The Exchange believes that the proposed rule change is not designed 
to permit unfair discrimination between customers, issuers, brokers or 
dealers. The proposed rule change is identical to the existing rules of 
BATS and BYX.\21\ The proposed rule change is intended to align the 
Exchange's requirements for Sponsoring Members to provide sponsored 
access to Sponsored Participants with that of BATS, BYX, and EDGA \22\ 
in order to provide consistent rules across the BGM Affiliated 
Exchanges. Consistent rules, in turn, will simplify the regulatory 
requirements for Members of the Exchange that are also participants on 
the other BGM Affiliated Exchanges. The proposed rule change would 
provide greater harmonization between the rules of the BGM Affiliated 
Exchanges of similar purpose, resulting in greater uniformity and less 
burdensome and more efficient regulatory compliance. As such, the 
proposed rule change would foster cooperation and coordination with 
persons engaged in facilitating transactions in securities and would 
remove impediments to and perfect the mechanism of a free and open 
market and a national market system.
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    \21\ See supra note 5.
    \22\ See supra note 9.
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(B) Self-Regulatory Organization's Statement on Burden on Competition

    The proposed rule change would not impose any burden on 
competition. The Exchange believes that the proposed rule changes will 
not burden intramarket competition because all Sponsoring Members and 
Sponsored Participants would be subject to the same requirements for 
sponsored access. The proposed rule change is not designed to address 
any competitive issues but rather is designed to provide greater 
harmonization among the Exchange, EDGA, BATS and BYX rules of similar 
purpose, resulting in less burdensome and more efficient regulatory 
compliance for common members of the BGM Affiliated Exchanges.

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

    The Exchange has neither solicited nor received written comments on 
the proposed rule change.

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 Section 19(b)(3)(A) of the Act \23\ and paragraph (f)(6) of Rule 
19b-4 thereunder.\24\
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    \23\ 15 U.S.C. 78s(b)(3)(A).
    \24\ 17 CFR 240.19b-4.
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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

[[Page 74150]]

action is: (1) Necessary or appropriate in the public interest; (2) for 
the protection of investors; or (3) 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 proposal 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 No. SR-EDGX-2014-33 on the subject line.

Paper Comments

     Send paper comments in triplicate to Brent J. Fields, 
Secretary, Securities and Exchange Commission, 100 F Street NE., 
Washington, DC 20549-1090.
    All submissions should refer to File No. SR-EDGX-2014-33. 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 such filing will also 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 No. SR-EDGX-2014-33 and should be 
submitted on or before January 5, 2015.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\25\
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    \25\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-29243 Filed 12-12-14; 8:45 am]
BILLING CODE 8011-01-P