Document ID: SEC-2012-0820-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: EDGX Exchange, Inc.
Posted Date: 2012-05-23T04:00Z

[Federal Register Volume 77, Number 100 (Wednesday, May 23, 2012)]
[Notices]
[Pages 30564-30566]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-12442]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-67010; File No. SR-EDGX-2012-08]

Self-Regulatory Organizations; EDGX Exchange, Inc.; Order 
Approving a Proposed Rule Change Relating to Amendments to Rule 2.11 
That Establish the Authority To Cancel Orders and Describe the 
Operation of an Error Account

May 17, 2012.

I. Introduction

    On March 22, 2012, EDGX Exchange, Inc. (``Exchange'' or ``EDGX'') 
filed with the Securities and Exchange Commission (``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 
amend EDGX Rule 2.11 to (1) add a new subparagraph (a)(6) that 
addresses the authority of EDGX and its routing broker-dealer, Direct 
Edge ECN LLC d/b/a DE Route (``DE Route'') to cancel orders if and when 
a systems, technical, or operational issue occurs, and (2) amend 
subparagraph (a)(4) and add new subparagraph (a)(7) to describe the 
operation of an error account for DE Route. The proposed rule change 
was published for comment in the Federal Register on April 6, 2012.\3\ 
The Commission received no comment letters regarding the proposed rule

[[Page 30565]]

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\ Securities Exchange Act Release No. 66713 (April 2, 2012), 
77 FR 20854 (April 6, 2012) (SR-EDGX-2012-08) (``Notice'').
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II. Description of the Proposal

    DE Route, a broker-dealer that is a facility and an affiliate of 
the Exchange, provides outbound routing services from the Exchange to 
other market centers pursuant to Exchange rules.\4\ In its proposal, 
the Exchange states that a systems, technical, or operational issue may 
occur at EDGX, DE Route, or a Trading Center \5\ that causes EDGX or DE 
Route to cancel orders, if the Exchange or DE Route determines that 
such action is necessary to maintain a fair and orderly market.\6\ The 
Exchange also states that systems, technical, or operational issues 
that occur at EDGX, DE Route, or a Trading Center may result in DE 
Route acquiring an error position that it must resolve.\7\
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    \4\ See Notice, 77 FR at 20855, n.4 and accompanying text, and 
text accompanying n.6. See also EDGX Rule 2.11; and Securities 
Exchange Act Release No. 61698 (March 12, 2010) 75 FR 13151 (March 
18, 2010) at 13165.
    The Exchange also receives equities orders routed inbound to the 
Exchange by DE Route from EDGA Exchange, Inc. under a pilot period 
ending on June 30, 2013. See Notice, 77 FR at 20855. See also 
Securities Exchange Act Release No. 64361 (April 28, 2011), 76 FR 
25388 (May 4, 2011) (SR-EDGX-2011-12); and Securities Exchange Act 
Release No. 66644 (March 22, 2012), 77 FR 18877 (March 28, 2012) 
(SR-EDGX-2012-09) (filing to extend the pilot period through June 
30, 2013).
    \5\ EDGX Rule 2.11(a) defines ``Trading Center'' as ``other 
securities exchanges, facilities of securities exchanges, automated 
trading systems, electronic communications networks or other brokers 
or dealers.'' See also Notice, 77 FR at 20855, n.5 (stating that 
``Trading Centers'' is as defined in EDGX Rule 2.11(a) and Rule 
600(b)(78) of Regulation NMS under the Act, 17 CFR 242.600(b)(78)).
    \6\ See Notice, 77 FR at 20855. For examples of some of the 
circumstances in which EDGX or DE Route may decide to cancel orders, 
see id.
    \7\ See id. For examples of some of the circumstances that may 
lead to error positions, see id.
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    New subparagraph (a)(6) to EDGX Rule 2.11 provides EDGX or DE Route 
with general authority to cancel orders to maintain fair and orderly 
markets when a systems, technical, or operational issue occurs at EDGX, 
DE Route, or a Trading Center. EDGX or DE Route will be required to 
provide notice of the cancellation of orders to Members \8\ as soon as 
practicable.\9\
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    \8\ EDGX Rule 1.5(n) defines ``Member'' to mean ``any registered 
broker or dealer, or any person associated with a registered broker 
or dealer, that has been admitted to membership in the Exchange'' 
and states that ``[a] Member will have the status of a `member' of 
the Exchange as that term is defined in Section 3(a)(3) of the 
[Exchange] Act.''
    \9\ See EDGX Rule 2.11(a)(6).
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    New subparagraphs (a)(4) and (a)(7) provide authority for DE Route 
to maintain an error account for the purpose of addressing, and sets 
forth the procedures for resolving, error positions. Specifically, DE 
Route will maintain an error account for the purpose of liquidating an 
error position acquired in connection with its role as an Outbound 
Router \10\ when such position, in the judgment of DE Route subject to 
the factors described in EDGX Rule 2.11(a)(7) (and as set forth below), 
cannot be fairly and practicably assigned to one or more Members in its 
entirety.\11\
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    \10\ EDGX Rule 2.11(a) defines DE Route, in its function 
providing outbound routing of orders from the Exchange to other 
Trading Centers, as the ``Outbound Router.''
    \11\ See EDGX Rule 2.11(a)(7). An error position can be acquired 
as a result of a systems, technical, or operational issue 
experienced by EDGX, DE Route, or a Trading Center to which DE Route 
directed an outbound order. See id.
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    In determining whether an entire error position can be fairly and 
practicably assigned to one or more Members, DE Route will consider (i) 
whether DE Route has accurate and sufficient information to assign the 
entire amount of an error position to all affected Members; and (ii) 
whether DE Route is able to evaluate available information in order to 
assign the entire amount of an error position to all affected Members 
by the first business day following the trade date on which the error 
position was established.\12\ If DE Route determines that an error 
position can be assigned to one or more Members by the first business 
day following the trade date on which the error position was incurred, 
DE Route will (i) assign the entire amount of the error position to all 
affected Members, and (ii) make and keep records to document the 
rationale for the assignment to those Members.\13\ All determinations 
and assignments will be made in a non-discriminatory manner.\14\
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    \12\ See id.
    \13\ See id.
    \14\ See id.
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    If, however, DE Route reasonably concludes, due to the number of 
erroneous executions or the number of members potentially impacted, 
that it would not be able to trace each erroneous execution comprising 
an error position back to the affected Members in a timely manner, then 
DE Route will assume the entire amount of the error position into the 
error account.\15\ DE Route will make and keep records of the factors 
considered in determining whether to acquire an error position into the 
error account.\16\
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    \15\ See Notice, 77 FR at 20856.
    \16\ See EDGX Rule 2.11(a)(7).
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    If DE Route determines to acquire an error position into the error 
account, DE Route will liquidate the error position as soon as 
practicable.\17\ DE Route will be required to provide complete time and 
price discretion for the trading to liquidate the error positions to a 
third-party broker-dealer, and would be prohibited from attempting to 
exercise any influence or control over the timing or methods of such 
trading.\18\ Further, DE Route will be required to establish and 
implement written policies and procedures that are reasonably designed 
to restrict the flow of confidential and proprietary information 
between the third-party broker-dealer, on one hand, and the Exchange 
and DE Route, on the other, associated with the liquidation of the 
error positions.\19\ DE Route will make and keep records associated 
with the liquidation of the error position through a third-party 
broker-dealer.\20\
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    \17\ See id.
    \18\ See id.
    \19\ See id.
    \20\ See id.
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III. Discussion and Commission's Findings

    After careful review, the Commission finds that the proposed rule 
change is consistent with the requirements of Section 6(b) of the Act 
\21\ and the rules and regulations thereunder applicable to a national 
securities exchange.\22\ In particular, the Commission finds that the 
proposed rule change is consistent with Section 6(b)(5) of the Act,\23\ 
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 foster cooperation and coordination with persons engaged in 
regulating, clearing, settling, processing information with respect to, 
and facilitating transactions in securities, 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; and are not designed to permit unfair discrimination between 
customers, issuers, brokers, or dealers. In addition, the Commission 
believes the proposed rule change is consistent with Section 
11A(a)(1)(C) of the Act \24\ in that it seeks to assure economically 
efficient execution of securities transactions.
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    \21\ 15 U.S.C. 78f(b).
    \22\ 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).
    \23\ 15 U.S.C. 78f(b)(5).
    \24\ 15 U.S.C. 78k-1(a)(1)(C).
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    The Commission recognizes that a systems, technical, or operational 
issue may occur, and believes that EDGX Rule 2.11, in allowing EDGX or 
DE Route to cancel orders affected by a systems,

[[Page 30566]]

technical, or operational issue, should provide a reasonably efficient 
means for the Exchange to handle such orders, and appears reasonably 
designed to permit EDGX to maintain fair and orderly markets.\25\
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    \25\ The Commission notes that EDGX states that the proposed 
amendments to EDGX Rule 2.11 are designed to maintain fair and 
orderly markets, ensure full trade certainty for market 
participants, and avoid disrupting the clearance and settlement 
process. See Notice, 77 FR at 20857. The Commission also notes that 
EDGX states that a decision to cancel orders due to a systems, 
technical, or operational issue may not cause the Exchange to 
declare self-help against a Trading Center pursuant to Rule 611 of 
Regulation NMS, in which case the Exchange would continue to be 
subject to the order protection requirements of Rule 611 with 
respect to that Trading Center. See 17 CFR 242.611(b). See also 
Notice, 77 FR at 20856, n.12.
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    The Commission also believes that allowing DE Route to maintain an 
error account to resolve error positions acquired in connection with 
its role as an Outbound Router pursuant to the procedures set forth in 
the rule, and as described above, is consistent with the Act. The 
Commission notes that the rule establishes criteria for determining 
which positions are error positions that may be acquired into the error 
account, and which will be assigned to Members.\26\ DE Route, in 
connection with a particular systems, technical, or operational issue, 
will be required to either (i) assign the entire amount of a resulting 
error position to Members or (ii) liquidate such position.\27\ Also, DE 
Route will assign an error position that results from a particular 
systems, technical, or operational issue to Members only if the entire 
amount of such error position can be assigned to all of the affected 
Members.\28\ If DE Route cannot fairly and practically assign the 
entire amount of an error position to all affected Members, DE Route 
will liquidate such error position.\29\ In this regard, the Commission 
believes that the new rule appears reasonably designed to further just 
and equitable principles of trade and the protection of investors and 
the public interest, and to help prevent unfair discrimination, in that 
it should help assure the handling of error positions will be based on 
clear and objective criteria, and that the resolution of those 
positions will occur promptly through a transparent process.
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    \26\ See EDGX Rule 2.11(a)(7).
    \27\ See id.
    \28\ See id.
    \29\ See id.
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    Additionally, the Commission notes that it has previously expressed 
concern about the potential for unfair competition and conflicts of 
interest between an exchange's self-regulatory obligations and its 
commercial interest when the exchange is affiliated with one of its 
members.\30\ The Commission is also concerned about the potential for 
misuse of confidential and proprietary information. The Commission 
believes that the requirement that DE Route provide complete time and 
price discretion for the liquidation of an error position to a third-
party broker-dealer, including that DE Route not attempt to exercise 
any influence or control over the timing or methods of such trading, 
combined with the requirement that DE Route establish and implement 
policies and procedures that are reasonably designed to restrict the 
flow of confidential and proprietary information to the third-party 
routing broker liquidating such positions, should help mitigate the 
Commission's concerns. In particular, the Commission believes that 
these requirements should help assure that none of EDGX, DE Route, or 
the third-party broker-dealer is able to misuse confidential or 
proprietary information obtained in connection with the liquidation of 
error positions for its own benefit. The Commission also notes that DE 
Route would be required to make and keep records documenting the 
rationale for assignment of error positions to Members, documenting the 
factors considered in determining to acquire error positions into the 
error account, and associated with the liquidation of error positions 
through the third-party broker-dealer.\31\
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    \30\ See, e.g., Securities Exchange Act Release No. 65455 
(September 30, 2011), 76 FR 62119 (October 6, 2011) at 62120, n.16 
and accompanying text.
    \31\ See EDGX Rule 2.11(a)(7).
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    Finally, the Commission notes that the proposed procedures for 
canceling orders and handling of error positions are consistent with 
procedures the Commission has approved for another exchange.\32\
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    \32\ See Securities Exchange Act Release No. 66963 (May 10, 
2012), 77 FR 28919 (May 16, 2012) (SR-NYSEArca-2012-22).
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IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\33\ that the proposed rule change (SR-EDGX-2012-08) be, and it 
hereby is, approved.
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    \33\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\34\
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    \34\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-12442 Filed 5-22-12; 8:45 am]
BILLING CODE 8011-01-P