Document ID: SEC-2017-0448-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Investors Exchange, LLC
Posted Date: 2017-03-17T04:00Z

[Federal Register Volume 82, Number 51 (Friday, March 17, 2017)]
[Notices]
[Pages 14240-14243]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-05338]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-80223; File No. SR-IEX-2016-18]

Self-Regulatory Organizations; Investors Exchange, LLC; Order 
Granting Approval to a Proposed Rule Change To: (i) Amend Rules 
11.190(a)(3) and 11.190(b)(8) To Modify the Operation of the Primary 
Peg Order Type; (ii) Amend Rule 11.190(h)(3)(C)(ii) and (D)(ii) 
Regarding Price Sliding in Locked and Crossed Markets To Simplify the 
Price Sliding Process for Both Primary Peg Orders and Discretionary Peg 
Orders Resting on or Posting to the Order Book; and (iii) Make Minor 
Technical Changes To Conform Certain Terminology

March 13, 2017.

I. Introduction

    On November 29, 2016, the Investors Exchange LLC (``Exchange'') 
filed with

[[Page 14241]]

the Securities and Exchange Commission (``SEC'' or ``Commission''), 
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ a proposed rule change to: 
(i) Amend IEX Rules 11.190(a)(3) and 11.190(b)(8) to modify the 
operation of the primary peg order type; (ii) amend IEX Rule 
11.190(h)(3)(C)(ii) and (D)(ii) regarding price sliding in locked and 
crossed markets to modify the price sliding process for both primary 
peg orders and discretionary peg orders resting on or posting to the 
IEX order book; and (iii) make minor technical changes to conform 
certain terminology. The proposed rule change was published for comment 
in the Federal Register on December 13, 2016.\3\ On January 26, 2017, 
pursuant to Section 19(b)(2) of the 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 approve or disapprove the proposed rule change.\5\ 
The Commission received no comment letters on the proposed rule change. 
This order approves 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. 79502 (December 7, 
2016), 81 FR 90035 (December 13, 2016) (``Notice'').
    \4\ 15 U.S.C. 78s(b)(2).
    \5\ See Securities Exchange Act Release No. 79883, 82 FR 9083 
(February 2, 2017). The Commission designated March 13, 2017 as the 
date by which the Commission shall approve or disapprove, or 
institute proceedings to determine whether to approve or disapprove, 
the proposed rule change.
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II. Description of the Proposal

Primary Peg Order Type Functionality

    The Exchange has proposed to amend Rules 11.190(a)(3) and 
11.190(b)(8) to modify the operation of the primary peg order type 
offered by the Exchange. Currently, a primary peg order is a non-
displayed order that the Exchange system automatically adjusts (upon 
entry and when posting to the Exchange order book) to be equal to and 
ranked at the less aggressive of the near-side primary quote (i.e., the 
national best bid (``NBB'') for buy orders and the national best offer 
(``NBO'') for sell orders) or the order's limit price, if any.\6\ While 
resting on the Exchange's order book, the order is automatically 
adjusted by the system in response to changes in the NBB (NBO) for buy 
(sell) orders up (down) to the order's limit price, if any.\7\
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    \6\ See Rules 11.190(a)(3) and (b)(8); see also Notice, supra 
note 3, at 90035.
    \7\ See id.
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    Under the proposal, the operation of the primary peg order type 
would be amended such that the Exchange system would automatically 
adjust a primary peg order, upon entry and when the order is posting to 
the Exchange order book, to be equal to and ranked at the less 
aggressive of one (1) minimum price variant (``MPV'') less aggressive 
than the primary quote (i.e., one MPV below (above) the NBB (NBO) for 
buy (sell) orders) or the order's limit price, as applicable.\8\ The 
primary peg order would continue to be a non-displayed order type, and 
the Exchange's system would continue to automatically adjust a primary 
peg order in response to changes in the NBB (NBO) for buy (sell) orders 
up (down) to the order's limit price, if any.\9\
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    \8\ See proposed Rules 11.190(a)(3) and (b)(8); see also Notice, 
supra note 3, at 90036. In its proposal, the Exchange noted that the 
BATS BZX exchange's primary pegged order type has an offset feature 
that allows primary pegged orders on that exchange to rest more 
passively than the primary quote. See Notice, supra note 3, at 
90036-37.
    \9\ See proposed Rules 11.190(a)(3) and 11.190(b)(8). The 
Exchange has not proposed to amend the order modifiers and 
parameters currently applicable to primary peg orders as set forth 
in Rule 11.190(b)(8)(A)-(J), and such order modifiers and parameters 
would continue apply to the amended primary peg order type. See 
Notice, supra note 3, at 90037 and n.13.
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    In addition, under the proposal, in order to meet the limit price 
of active orders on the Exchange order book, a primary peg order would 
be able to exercise price discretion from its resting price to a 
discretionary price (defined as the primary quote), except during 
periods of quote instability as defined in Rule 11.190(g) \10\ or where 
the primary peg order is resting at its limit price.\11\ Specifically, 
as set forth in proposed Rule 11.190(b)(8)(K), if the Exchange system 
were to determine the NBB for a particular security to be an unstable 
quote in accordance with Rule 11.190(g), it would restrict buy primary 
peg orders in that security from exercising price discretion to trade 
against interest at the NBB (and thus they would be executable only at 
their resting price one MPV less aggressive than the NBB, subject to 
any limit price); likewise, if the Exchange system were to determine 
the NBO for a particular security to be an unstable quote in accordance 
with Rule 11.190(g), it would restrict sell primary peg orders in that 
security from exercising price discretion to trade against interest at 
the NBO (and thus they would be executable only at their resting price 
one MPV less aggressive than the NBO, subject to any limit price).\12\
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    \10\ As set forth in Rule 11.190(g), the Exchange utilizes real 
time relative quoting activity of protected quotations and a 
proprietary mathematical calculation (the ``quote instability 
calculation'') to assess the probability of an imminent change to 
the current protected NBB to a lower price or protected NBO to a 
higher price for a particular security (``quote instability 
factor''). See Rule 11.190(g); see also Notice, supra note 3, at 
90036 n.12. When the quoting activity meets predefined criteria and 
the quote instability factor calculated is greater than the 
Exchange's defined threshold (``quote instability threshold''), the 
system treats the quote as not stable (``quote instability'' or a 
``crumbling quote''). See id. During all other times, the quote is 
considered stable (``quote stability''). The system independently 
assesses the quote stability of the protected NBB and protected NBO 
for each security. See id. When the system determines that a quote, 
either the protected NBB or the protected NBO, is unstable, the 
determination remains in effect at that price level for ten (10) 
milliseconds. See id. The system will only treat one side of the 
protected NBBO as unstable in a particular security at any given 
time. See id.
    \11\ See proposed Rules 11.190(a)(3) and (b)(8). In its 
proposal, the Exchange represented that the manner in which a 
primary peg order would exercise discretion is similar to the manner 
in which the Exchange's discretionary peg order exercises 
discretion. See Notice, supra note 3, at 90036.
    \12\ See proposed Rule 11.190(b)(8)(K).
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    Further, as proposed, when exercising price discretion, a primary 
peg order would maintain its time priority position among non-displayed 
orders (and behind any displayed orders) at its resting price and would 
be prioritized behind any non-displayed (and displayed) interest 
resting at the discretionary price for the duration of that book 
processing action.\13\ If multiple primary peg orders were to exercise 
price discretion during the same book processing action, they would 
maintain their relative time priority at the discretionary price.\14\
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    \13\ See proposed Rule 11.190(b)(8); see also Notice, supra note 
3, at 90036. Displayed orders have precedence over non-displayed 
orders at a given price level in the IEX order book. See Rule 
11.220(a)(1)(B).
    \14\ See proposed Rule 11.190(b)(8); see also Notice, supra note 
3, at 90036. In its proposal, the Exchange represented that the 
proposed priority rules for the primary peg order are identical to 
those for the Exchange's discretionary peg order. See Notice, supra 
note 3, at 90037.
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    According to the Exchange, the primary peg order type, as proposed, 
is designed to offer Exchange members an opportunity to rest orders one 
MPV less aggressive than the primary quote but remain eligible to 
exercise price discretion up (down) to the NBB (NBO) for buy (sell) 
orders, and to protect such orders from unfavorable executions by 
preventing the exercise of such price discretion when the Exchange has 
determined that the market is moving against the order (i.e., a 
crumbling quote is detected).\15\
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    \15\ See Notice, supra note 3, at 90036.
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Price Sliding in Locked or Crossed Markets

    The Exchange also has proposed to amend Rule 11.190(h)(3)(C)(ii) 
and

[[Page 14242]]

(D)(ii) regarding the price sliding process for both primary peg and 
discretionary peg orders in locked and crossed markets. Currently, in 
the event the NBBO becomes locked or crossed, primary peg and 
discretionary peg orders resting on or posting to the order book are 
priced to the less aggressive of either: (i) The prior non-locked or 
non-crossing near side quote (i.e., the prior unlocked or uncrossed NBB 
(NBO) for buy (sell) orders), or (ii) one MPV less aggressive than the 
locking or crossing price.\16\ Under the proposal, the first 
alternative under the current rule would be eliminated such that in 
locked or crossed markets, primary peg and discretionary peg orders 
would slide to one MPV less aggressive than the locking or crossing 
price rather than remaining at the prior non-locked or non-crossed 
price when such price is less aggressive.\17\
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    \16\ See Rule 11.190(h)(3)(C)(ii) and (D)(ii); see also Notice, 
supra note 3, at 90035-36.
    \17\ See proposed Rule 11.190(h)(3)(C)(ii) and (D)(ii); see also 
Notice, supra note 3, at 90036.
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    Specifically, proposed Rule 11.190(h)(3)(C)(ii) would provide that 
in the event the market becomes locked, primary peg orders and 
discretionary peg orders resting on or posting to the order book would 
be priced one MPV less aggressive than the locking price.\18\ Proposed 
Rule 11.190(h)(3)(D)(ii) would provide that in the event that the 
market becomes crossed, primary peg orders and discretionary peg orders 
resting on or posting to the order book would be priced one MPV less 
aggressive than the crossing price, i.e., the lowest protected offer 
for buy orders and the highest protected bid for sell orders, before 
posting.\19\ In addition, proposed Rule 11.190(h)(3)(D)(ii) would 
specify that if a primary peg order is submitted to the Exchange while 
the market is crossed, the order would post to the order book priced 
one MPV less aggressive than the crossing price.\20\ In its proposal, 
the Exchange noted that its goal with respect to its rules for price 
sliding primary peg and discretionary peg orders in locked or crossed 
markets is to ensure that such orders do not rest at locking or 
crossing prices.\21\
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    \18\ See proposed Rule 11.190(h)(3)(C)(ii).
    \19\ See proposed Rule 11.190(h)(3)(D)(ii).
    \20\ See id.; see also Notice, supra note 3, at 90036-37.
    \21\ See Notice, supra note 3, at 90037.
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Technical Change

    Lastly, the Exchange has proposed to make a technical change to 
Rule 11.190(h)(3)(D)(ii) to refer to the ``crossing price'' rather than 
the ``crossed quote'' in order to be consistent with other references 
within the rule.\22\
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    \22\ See proposed Rule 11.190(h)(3)(D)(ii); see also Notice, 
supra note 3, at 90037.
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III. Discussion and Commission Findings

    After careful review, the Commission finds that the proposed rule 
change is consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to a national securities 
exchange.\23\ In particular, the Commission finds that the proposed 
rule change is consistent with Section 6(b)(5) of the Act,\24\ which 
requires, among other things, that the rules of a national securities 
exchange be designed to prevent fraudulent and manipulative acts and 
practices, to promote just and equitable principles of trade, 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.
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    \23\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
    \24\ 15 U.S.C. 78f(b)(5).
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    The Exchange has described the proposed amendments to its primary 
peg order type as combining an offset feature offered by another 
exchange that allows primary pegged orders on that exchange to rest 
more passively than the primary quote, with the discretionary feature 
of the Exchange's discretionary peg order type.\25\ As noted above, 
according to the Exchange, its amended primary peg order type would be 
designed to enable a member (or customer thereof) to rest non-displayed 
trading interest on the Exchange order book at a price inferior to the 
primary quote and remain available to execute against an incoming order 
seeking to cross the spread and execute at prices equal to or more 
aggressive (from the taker's perspective) than such quote, while 
minimizing adverse selection to the poster (if its resting order were 
to ``jump'' to the primary quote) when the market appears to be moving 
against the resting primary peg order (i.e., moving lower in the case 
of a buy order or higher in the case of a sell order).\26\ The Exchange 
believes that adding to its primary peg order type both an offset 
feature and the discretionary functionality that currently is applied 
to the discretionary peg order type would incentivize members and their 
customers to post more passive resting liquidity on the Exchange that 
is priced to execute at the primary quote during periods of quote 
stability, and consequently may result in greater execution 
opportunities at the far side quote for members entering spread-
crossing orders.\27\
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    \25\ See Notice, supra note 3, at 90036-37.
    \26\ See id.
    \27\ See Notice, supra note 3, at 90036.
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    The Commission does not believe that the Exchange's proposed 
amendments to its primary peg order type raise any novel issues that 
the Commission has not previously considered, and notes in this regard 
that the Commission received no comments on the Exchange's proposed 
rule change. The Commission's approval of IEX's Form 1 application 
included, among other things, approval of IEX's discretionary peg order 
type, which utilizes the same discretionary feature (though a different 
discretionary price) that the Exchange proposes to apply to its primary 
peg order type.\28\ As with the Exchange's discretionary peg order 
type, the amended primary peg order type would be eligible to exercise 
price ``discretion'' to move itself to a price that is more aggressive 
than its resting/ranked price (subject to the constraints of a limit 
price, if any), except during periods of ``quote instability'' as 
defined in Rule 11.190(g).\29\ Rule 11.190(g) sets forth the formula 
that the Exchange utilizes for determining quote stability for purposes 
of exercising discretion to move a resting order to a more aggressive 
price, and is the same formula that the Exchange already utilizes for 
the quote stability determinations relative to it discretionary peg 
order type.\30\ In the IEX Form 1 Approval, the Commission stated that 
Rule 11.190(g) delineates the specific conditions under which IEX 
discretionary peg orders are eligible to exercise discretion by setting 
forth the mathematical formula that IEX uses to determine quote 
stability.\31\ The Commission believes that, as with the Exchange's 
discretionary peg order, the Exchange has set forth in its rule the 
totality of the discretionary feature of

[[Page 14243]]

the proposed primary peg order type, and that it is hardcoded 
conditionality based on pre-determined, objective factors.\32\ In 
addition, as the Commission observed in the IEX Form 1 Approval, other 
exchanges offer both discretion and pegging functionalities, including 
the combination of both of those functionalities in a single order 
type, and thus an order type that offers both discretion and pegging 
features is not novel.\33\
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    \28\ See Securities Exchange Act Release No. 78101 (June 17, 
2016), 81 FR 41142, 41152-53 (June 23, 2016) (File No. 10-222; In 
the Matter of the Application of: Investors' Exchange, LLC for 
Registration as a National Securities Exchange; Findings, Opinion, 
and Order of the Commission) (``IEX Form 1 Approval''); see also 
Rule 11.190(b)(10).
    \29\ See proposed Rule 11.190(b)(8); Rule 11.190(b)(10). See 
also Notice, supra note 3, at 90036. In addition, as the Exchange 
has noted, the priority scheme that would be applied to the proposed 
primary peg order when it exercises discretion is identical to that 
applied to the Exchange's discretionary peg order when it exercises 
discretion. See proposed Rule 11.190(b)(8); Rule 11.190(b)(10). See 
also Notice, supra note 3, at 90037.
    \30\ Compare proposed Rule 11.190(b)(8) and Rule 11.190(b)(10).
    \31\ See IEX Form 1 Approval, supra note 30, at 41153.
    \32\ See proposed Rule 11.190(b)(8) and Rule 11.190(g); see also 
IEX Form 1 Approval, supra note 28, at 41153.
    \33\ See IEX Form 1 Approval, supra note 28, at 41153; see also, 
e.g., Nasdaq Rule 4703(g); NYSE Arca Equities Rule 7.31P(h)(3). In 
addition, as the Exchange has noted, primary pegged orders on other 
exchanges may be pegged to prices less aggressive than the near-side 
primary quote. See Notice, supra note 3, at 90036-37; see also, 
e.g., BZX Rule 11.9(c)(8)(A).
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    Importantly, the Commission notes that the Exchange's amended 
primary peg order type would remain a non-displayed order type, like 
all of the Exchange's pegged order types, including the discretionary 
peg order type.\34\ Thus, the proposed amended primary peg order type, 
with its added discretionary and crumbling quote determination 
functionalities, should not impact the Exchange's dissemination of a 
protected quotation, which must be displayed,\35\ or market 
participants' ability to execute against the Exchange's protection 
quotation, and does not appear otherwise designed to impede the 
mechanism of a free and open market. Accordingly, the Commission 
believes that the proposed amendments to the Exchange's primary peg 
order type are consistent with the Act and, in particular, the Section 
6(b)(5) requirement that a national securities exchange's rules be 
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 protect investors and the public 
interest.\36\
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    \34\ See Rules 11.190(a)(3) and (b)(8)(H). The Commission also 
notes that primary pegged orders on other exchanges may be non-
displayed. See, e.g., BZX Rule 11.9(c)(8)(A).
    \35\ See 17 CFR 242.600(b)(57) and (58).
    \36\ The Commission notes that the Exchange would be required to 
submit a proposed rule change pursuant to Section 19(b) of the Act 
prior to implementing any changes to the proposed primary peg order 
type.
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    The Commission also believes that the proposed amendments to the 
Exchange's price sliding process for primary peg orders and 
discretionary peg orders in locked or crossed markets are consistent 
with the Act. The Exchange has stated that its existing approach to 
price sliding for such orders in locked or crossed markets is 
unnecessarily complicated, without any material benefit, and that the 
proposed amendments to the approach would remove the variability of a 
primary peg order's booked price in locked or crossed market 
situations, and make the Exchange's rules more clear and 
transparent.\37\ The Commission believes these changes should help 
lessen the complexity in the Exchange's price sliding rules, which may 
reduce the potential for investor confusion as to how primary peg and 
discretionary peg orders would price slide in locked or crossed 
markets, and thereby help protect investors and the public interest 
consistent with Section 6(b)(5) of the Act. In addition, the proposed 
amendments appear to be consistent with the requirements of Rule 610(d) 
of Regulation NMS which, among other things, requires that the rules of 
a national securities exchange be reasonably designed to assure the 
reconciliation of locked or crossed quotations in an NMS stock.\38\
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    \37\ See Notice, 81 FR at 90037.
    \38\ See 17 CFR 242.610(d).
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    Lastly, the Commission believes that the Exchange's proposed 
technical change to conform certain terminology in its proposed rules 
is intended to enhance the clarity of its rules, which should reduce 
the potential for investor confusion, and thereby help protect 
investors and the public interest consistent with Section 6(b)(5) of 
the Act.

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\39\ that the proposed rule change (SR-IEX-2016-18) be and hereby 
is approved.
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    \39\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\40\
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    \40\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-05338 Filed 3-16-17; 8:45 am]
 BILLING CODE 8011-01-P