Document ID: SEC-2022-1310-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Investors Exchange, LLC
Posted Date: 2022-09-30T04:00Z

[Federal Register Volume 87, Number 189 (Friday, September 30, 2022)]
[Notices]
[Pages 59478-59484]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-21194]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-95909; File No. SR-IEX-2022-07]

Self-Regulatory Organizations; Investors Exchange LLC; Notice of 
Filing and Immediate Effectiveness of Proposed Rule Change To Amend IEX 
Rule 11.270 (Cleary Erroneous Executions)

September 26, 2022.
    Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of 
1934 (the ``Act'') \2\ and Rule 19b-4 thereunder,\3\ notice is hereby 
given that, on September 21, 2022, the Investors Exchange LLC (``IEX'' 
or the ``Exchange'') filed with the Securities and Exchange Commission 
(the ``Commission'') the proposed rule change as described in Items I 
and II below, which Items have been prepared by the self-regulatory 
organization. The Commission is publishing this notice to solicit 
comments on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 15 U.S.C. 78a.
    \3\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    Pursuant to the provisions of Section 19(b)(1) under the Act,\4\ 
and Rule 19b-4 thereunder,\5\ the Exchange is filing with the 
Commission a proposed rule change to amend IEX Rule 11.270 (Clearly 
Erroneous Executions). IEX has designated this rule change as ``non-
controversial'' under Section 19(b)(3)(A) of the Act \6\ and provided 
the Commission with the notice required by Rule 19b-4(f)(6) 
thereunder.\7\
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    \4\ 15 U.S.C. 78s(b)(1).
    \5\ 17 CFR 240.19b-4.
    \6\ 15 U.S.C. 78s(b)(3)(A).
    \7\ 17 CFR 240.19b-4.
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    The text of the proposed rule change is available at the Exchange's 
website at www.iextrading.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 self-regulatory organization 
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 statement may be examined at 
the places specified in Item IV below. The self-regulatory organization 
has prepared summaries, set forth in Sections A, B, and C below, of the 
most significant aspects of such statements.

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

1. Purpose
    The purpose of the proposed rule change is to amend IEX Rule 11.270 
(Clearly Erroneous Executions). On September 1, 2022, the Commission 
approved the proposal of Cboe BZX Exchange, Inc. (``BZX''), to adopt on 
a permanent basis its pilot program for Clearly Erroneous Executions in 
BZX Rule 11.17.\8\ Based on the BZX approval, the Exchange proposes 
substantially identical amendments to IEX Rule 11.270 to: (1) limit the 
circumstances where clearly erroneous review would continue to be 
available during Regular Market Hours,\9\ when the National Market 
System Plan to Address Extraordinary Market Volatility (the ``LULD 
Plan'') \10\ already provides similar protections for trades occurring 
at prices that may be deemed erroneous. The Exchange believes that 
these changes are appropriate as the LULD Plan has been approved by the 
Commission on a permanent basis,\11\ and in light of amendments to the 
LULD Plan, including changes to the applicable Price Bands \12\ around 
the open and close of trading. Further, the proposed rule change is 
based on and substantively identical to the recently-approved changes 
to BZX Rule 11.17. The only differences between this proposed rule 
change and the BZX rule change are: (i) IEX's Clearly Erroneous 
Execution rule is not a pilot program,\13\ and therefore does not need 
to be made permanent; (ii) IEX and BZX use different terms to define 
trading sessions (i.e., the Exchange uses the terms Regular Market 
Hours, Pre-Market

[[Page 59479]]

Session,\14\ and Post-Market Session \15\ whereas BZX uses the terms 
Early Trading Session, Pre-Opening Session, Regular Trading Hours and 
After Hours Trading Session); and (iii) BZX's clearly erroneous rule 
proposal included the deletion of different procedures for conducting a 
clearly erroneous review in initial public offering securities traded 
pursuant to unlisted trading privileges, while IEX's Clearly Erroneous 
Execution rule never contained this now-deleted paragraph.
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    \8\ See Securities Exchange Act Release No. 95658 (September 1, 
2022) (SRCboeBZX-2022-037) (``BZX approval'').
    \9\ The term ``Regular Market Hours'' or ``Regular Market 
Session'' means the time between 9:30 a.m. and 4:00 p.m. Eastern 
Time. See IEX Rule 1.160(gg).
    \10\ See Securities Exchange Act Release No. 67091 (May 31, 
2012), 77 FR 33498 (June 6, 2012).
    \11\ See Securities Exchange Act Release No. 85623 (April 11, 
2019), 84 FR 16086 (April 17, 2019). (File No. 4-631) (``Amendment 
Eighteen'').
    \12\ ``Price Bands'' refers to the term provided in Section V of 
the LULD Plan.
    \13\ IEX's Clearly Erroneous Execution rule has been effective, 
and not a pilot, since IEX's approval for registration as a national 
securities exchange in 2016. See Securities Exchange Act Release No. 
78101 (June 17, 2016), 81 FR 41142 (June 23, 2016) (File No. 10-
222).
    \14\ The term ``Pre-Market Hours'' or ``Pre-Market Session'' 
shall mean the time between 8:00 a.m. and 9:30 a.m. Eastern Time. 
See IEX Rule 1.160(z).
    \15\ The term ``Post-Market Hours'' or ``Post-Market Session'' 
shall mean the time between 4:00 p.m. and 5:00 p.m. Eastern Time. 
See IEX Rule 1.160(aa).
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Current Clearly Erroneous Execution Rule
    IEX Rule 11.270 currently provides for uniform treatment of clearly 
erroneous execution reviews in multi-stock events involving twenty or 
more securities; and (ii) reduces the ability of the Exchange to 
deviate from objective standards set forth in the rule.\16\ The rule 
further provides that: (i) a series of transactions in a particular 
security on one or more trading days may be viewed as one event if all 
such transactions were effected based on the same fundamentally 
incorrect or grossly misinterpreted issuance information resulting in a 
severe valuation error for all such transactions; and (ii) in the event 
of any disruption or malfunction in the operation of the electronic 
communications and trading facilities of the Exchange, another SRO, or 
responsible single plan processor in connection with the transmittal or 
receipt of a trading halt, an Officer of the Exchange or senior level 
employee designee, acting on his or her own motion, shall nullify any 
transaction that occurs after a trading halt has been declared by the 
primary listing market for a security, and before such a trading halt 
has officially ended according to the primary listing market.\17\
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    \16\ See IEX Rule 11.270.
    \17\ See IEX Rule 11.270.
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    When it originally approved the clearly erroneous pilot of BZX and 
other exchanges, the Commission explained that the changes were ``being 
implemented on a pilot basis so that the Commission and the Exchanges 
can monitor the effects of the pilot on the markets and investors, and 
consider appropriate adjustments, as necessary.'' \18\ The clearly 
erroneous pilot was implemented following a severe disruption in the 
U.S. equities markets on May 6, 2010 (``Flash Crash'') to ``provide 
greater transparency and certainty to the process of breaking trades.'' 
\19\ IEX's Clearly Erroneous Execution rule limits the discretion of 
the Exchange, other national securities exchanges, and Financial 
Industry Regulatory Authority (``FINRA'') to deviate from the objective 
standards in their respective rules when dealing with potentially 
erroneous transactions.
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    \18\ See e.g., Securities Exchange Act Release No. 62886 
(September 10, 2010), 75 FR 56613 (September 16, 2010) (SR-BATS-
2010-016).
    \19\ Id.
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Amendments to the Clearly Erroneous Execution Rules
    When the Participants to the LULD Plan filed to introduce the Limit 
Up-Limit Down (``LULD'') mechanism, itself a response to the Flash 
Crash, a handful of commenters noted the potential discordance between 
the clearly erroneous rules and the Price Bands used to limit the price 
at which trades would be permitted to be executed pursuant to the LULD 
Plan. For example, two commenters requested that the clearly erroneous 
rules be amended so the presumption would be that trades executed 
within the Price Bands would not be subject to review.\20\ While the 
Participants acknowledged that the potential to prevent clearly 
erroneous executions would be a ``key benefit'' of the LULD Plan, the 
Participants decided not to amend the clearly erroneous rules at that 
time.\21\ In the years since, industry feedback has continued to 
reflect a desire to eliminate the discordance between the LULD 
mechanism and the clearly erroneous rules so that market participants 
would have more certainty that trades executed with the Price Bands 
would stand. For example, the Equity Market Structure Advisory 
Committee (``EMSAC'') Market Quality Subcommittee included in its April 
19, 2016, status report a preliminary recommendation that clearly 
erroneous rules be amended to conform to the Price Bands--i.e., ``any 
trade that takes place within the band would stand and not be broken 
and trades outside the LU/LD bands would be eligible for the 
consideration of the Clearly Erroneous rules.'' \22\
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    \20\ See Securities Exchange Act Release No. 67091 (May 31, 
2012), 77 FR 33498 (June 6, 2012) (File No. 4-631) (n. 33505). An 
amendment to the LULD Plan adding IEX as a Participant was filed 
with the Commission on August 11, 2016, and became effective upon 
filing pursuant to Rule 608(b)(3)(iii) of the Act. See Securities 
Exchange Act Release No. 78703 (August 26, 2016), 81 FR 60397 
(September 1, 2016) (File No. 4-631).
    \21\ Id.
    \22\ See EMSAC Market Quality Subcommittee, Recommendations for 
Rulemaking on Issues of Market Quality (November 29, 2016), 
available at https://www.sec.gov/spotlight/emsac/emsac-recommendations-rulemakingmarket-quality.pdf.
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    The Exchange believes that it is important for there to be some 
mechanism to ensure that investors' orders are either not executed at 
clearly erroneous prices or are subsequently busted as needed to 
maintain a fair and orderly market. At the same time, the Exchange 
believes that the LULD Plan, as amended, would provide sufficient 
protection for trades executed during Regular Market Hours. Indeed, the 
LULD mechanism could be considered to offer superior protection as it 
prevents potentially erroneous trades from being executed in the first 
instance. After gaining experience with the LULD Plan, the Exchange now 
believes that it is appropriate to largely eliminate clearly erroneous 
review during Regular Market Hours when Price Bands are in effect. 
Thus, as proposed, trades executed within the Price Bands would stand, 
barring one of a handful of identified scenarios where such review may 
still be necessary for the protection of investors. The Exchange 
believes that this change would be beneficial for the U.S. equities 
markets as it would ensure that trades executed within the Price Bands 
are subject to clearly erroneous review in only rare circumstances, 
resulting in greater certainty for Members and investors.
    The current LULD mechanism for addressing extraordinary market 
volatility is available solely during Regular Market Hours. Thus, 
trades during the Exchange's Pre-Market Session or Post-Market Session 
would not benefit from this protection and could ultimately be executed 
at prices that may be considered erroneous. For this reason, the 
Exchange proposes that transactions executed during the Pre-Market 
Session or Post-Market Session would continue to be reviewable as 
clearly erroneous. Continued availability of the clearly erroneous rule 
during pre- and post-market trading sessions would therefore ensure 
that investors have appropriate recourse when erroneous trades are 
executed outside of the hours where similar protection can be provided 
by the LULD Plan. Further, the proposal is designed to eliminate the 
potential discordance between clearly erroneous review and LULD Price 
Bands, which does not exist outside of Regular Trading Hours because 
the LULD Plan is not in effect. Thus, the Exchange believes that it is 
appropriate to continue to allow transactions to be eligible for 
clearly erroneous review if executed outside of Regular Market Hours.
    On the other hand, there would be much more limited potential to 
request that a transaction be reviewed as

[[Page 59480]]

potentially erroneous during Regular Market Hours. With the 
introduction of the LULD mechanism in 2013, clearly erroneous trades 
are largely prevented by the requirement that trades be executed within 
the Price Bands. In addition, in 2019, Amendment Eighteen to the LULD 
Plan eliminated double-wide Price Bands: (1) at the Open, and (2) at 
the Close for Tier 2 NMS Stocks 2 with a Reference Price above 
$3.00.\23\ Due to these changes, the Exchange believes that the Price 
Bands would provide sufficient protection to investor orders such that 
clearly erroneous review would no longer be necessary during Regular 
Market Hours. As the Participants to the LULD Plan explained in 
Amendment Eighteen: ``Broadly, the Limit Up-Limit Down mechanism 
prevents trades from happening at prices where one party to the trade 
would be considered `aggrieved,' and thus could be viewed as an 
appropriate mechanism to supplant clearly erroneous rules.'' While the 
Participants also expressed concern that the Price Bands might be too 
wide to afford meaningful protection around the open and close of 
trading, amendments to the LULD Plan adopted in Amendment Eighteen 
narrowed Price Bands at these times in a manner that the Exchange 
believes is sufficient to ensure that investors' orders would be 
appropriately protected in the absence of clearly erroneous review. The 
Exchange therefore believes that it is appropriate to rely on the LULD 
mechanism as the primary means of preventing clearly erroneous trades 
during Regular Market Hours.
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    \23\ See Amendment Eighteen, supra, note 11.
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    At the same time, the Exchange is cognizant that there may be 
limited circumstances where clearly erroneous review may continue to be 
appropriate, even during Regular Market Hours. Thus, the Exchange 
proposes to amend its clearly erroneous rules to enumerate the specific 
circumstances where such review would remain available during the 
course of Regular Market Hours, as follows. All transactions that fall 
outside of these specific enumerated exceptions would be ineligible for 
clearly erroneous review.
    First, pursuant to proposed paragraph (c)(1)(A), a transaction 
executed during Regular Market Hours would continue to be eligible for 
clearly erroneous review if the transaction is not subject to the LULD 
Plan. In such case, the Numerical Guidelines set forth in paragraph 
(c)(2) of Rule 11.270 will be applicable to such NMS Stock. While the 
majority of securities traded on the Exchange would be subject to the 
LULD Plan, certain equity securities, such as rights and warrants, are 
explicitly excluded from the provisions of the LULD Plan and would 
therefore be eligible for clearly erroneous review instead.\24\ 
Similarly, there are instances, such as the opening auction on the 
primary listing market,\25\ where transactions are not ordinarily 
subject to the LULD Plan, or circumstances where a transaction that 
ordinarily would have been subject to the LULD Plan is not--due, for 
example, to some issue with processing the Price Bands. These 
transactions would continue to be eligible for clearly erroneous 
review, effectively ensuring that such review remains available as a 
backstop when the LULD Plan would not prevent executions from occurring 
at erroneous prices in the first instance.
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    \24\ See Appendix A of the LULD Plan.
    \25\ The initial Reference Price used to calculate Price Bands 
is typically set by the Opening Price on the primary listing market. 
See Section V(B) of the LULD Plan.
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    Second, investors would also continue to be able to request review 
of transactions that resulted from certain systems issues pursuant to 
proposed paragraph (c)(1)(B). This limited exception would help to 
ensure that trades that should not have been executed would continue to 
be subject to clearly erroneous review. Specifically, as proposed, 
transactions executed during Regular Market Hours would be eligible for 
clearly erroneous review pursuant to proposed paragraph (c)(1)(B) if 
the transaction is the result of an Exchange technology or systems 
issue that results in the transaction occurring outside of the 
applicable LULD Price Bands pursuant to Rule 11.270(g). A transaction 
subject to review pursuant to this paragraph shall be found to be 
clearly erroneous if the price of the transaction to buy (sell) that is 
the subject of the complaint is greater than (less than) the Reference 
Price, described in paragraph (d) of this Rule, by an amount that 
equals or exceeds the applicable Percentage Parameter defined in 
Appendix A to the LULD Plan (``Percentage Parameters'').
    Third, the Exchange proposes to narrowly allow for the review of 
transactions during Regular Market Hours when the Reference Price, 
described in proposed paragraph (d), is determined to be erroneous by 
an Officer of the Exchange. Specifically, a transaction executed during 
Regular Market Hours would be eligible for clearly erroneous review 
pursuant to proposed paragraph (c)(1)(C) if the transaction involved, 
in the case of (1) a corporate action or new issue or (2) a security 
that enters a Trading Pause pursuant to the LULD Plan and resumes 
trading without an auction,\26\ a Reference Price that is determined to 
be erroneous by an Officer of the Exchange because it clearly deviated 
from the theoretical value of the security. In such circumstances, the 
Exchange may use a different Reference Price pursuant to proposed 
paragraph (d)(2) of this Rule. A transaction subject to review pursuant 
to this paragraph shall be found to be clearly erroneous if the price 
of the transaction to buy (sell) that is the subject of the complaint 
is greater than (less than) the new Reference Price, described in 
paragraph (d)(2) below, by an amount that equals or exceeds the 
applicable Numerical Guidelines or Percentage Parameters, as applicable 
depending on whether the security is subject to the LULD Plan. 
Specifically, the Percentage Parameters would apply to all transactions 
except those in an NMS Stock that is not subject to the LULD Plan, as 
described in paragraph (c)(1)(A).
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    \26\ The Exchange notes that the ``resumption of trading without 
an auction'' provision of the proposed rule text applies only to 
securities that enter a Trading Pause pursuant to LULD and does not 
apply to a corporate action or new issue.
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    In the context of a corporate action or a new issue, there may be 
instances where the security's Reference Price is later determined by 
the Exchange to be erroneous (e.g., because of a bad first trade for a 
new issue), and subsequent LULD Price Bands are calculated from that 
incorrect Reference Price. In determining whether the Reference Price 
is erroneous in such instances, the Exchange would generally look to 
see if such Reference Price clearly deviated from the theoretical value 
of the security. In such cases, the Exchange would consider a number of 
factors to determine a new Reference Price that is based on the 
theoretical value of the security, including but not limited to, the 
offering price of the new issue, the ratio of the stock split applied 
to the prior day's closing price, the theoretical price derived from 
the numerical terms of the corporate action transaction such as the 
exchange ratio and spin-off terms, and the prior day's closing price on 
the OTC market for an OTC up-listing.\27\ In the foregoing instances, 
the theoretical value of the security would be used as the new 
Reference Price when applying the Percentage Parameters under the LULD 
Plan (or Numerical Guidelines if the transaction is in an NMS Stock 
that

[[Page 59481]]

is not subject to the LULD Plan) to determine whether executions would 
be cancelled as clearly erroneous.
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    \27\ Using transaction data reported to the FINRA OTC Reporting 
Facility, FINRA disseminates via the Trade Data Dissemination 
Service a final closing report for OTC equity securities for each 
business day that includes, among other things, each security's 
closing last sale price.
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    The following illustrate the proposed application of the rule in 
the context of a corporate action or new issue:
Example 1
1. ABCD is subject to a corporate action, 1 for 10 reverse split, and 
the previous day close was $5, but the new theoretical price based on 
the terms of the corporate action is $50.
2. The security opens at $5, with LULD bands at $4.50 x $5.50
3. The bands will be calculated correctly but the security is trading 
at an erroneous price based on the valuation of the remaining 
outstanding shares
4. The theoretical price of $50 would be used as the new Reference 
Price when applying LULD bands to determine if executions would be 
cancelled as clearly erroneous
Example 2
1. ABCD is subject to a corporate action, the company is doing a spin 
off where a new issue will be listed, BCDE. ABCD trades at $50, and the 
spinoff company is worth \1/5\ of ABCD
2. BCDE opens at $50 in the belief it is the same company as ABCD
3. The theoretical values of the two companies are ABCD $40 and BCDE 
$10
4. BCDE would be deemed to have had an incorrect Reference Price and 
the theoretical value of $10 would be used as the new Reference Price 
when applying the LULD Bands to determine if executions would be 
cancelled as clearly erroneous
Example 3
1. ABCD is an uplift from the OTC market, the prior days close on the 
OTC market was $20
2. ABCD opens trading on the new listing exchange at $0.20 due to an 
erroneous order entry
3. The new Reference Price to determine clearly erroneous executions 
would be $20, the theoretical value of the stock from where it was last 
traded

    In the context of the rare situation in which a security that 
enters a LULD Trading Pause and resumes trading without an auction 
(i.e., reopens with quotations), the LULD Plan requires that the new 
Reference Price in this instance be established by using the mid-point 
of the best bid and offer (``BBO'') on the primary listing exchange at 
the reopening time.\28\ This can result in a Reference Price and 
subsequent LULD Price Band calculation that is significantly away from 
the security's last traded or more relevant price, especially in less 
liquid names. In such rare instances, the Exchange is proposing to use 
a different Reference Price that is based on the prior LULD Band that 
triggered the Trading Pause, rather than the midpoint of the BBO.
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    \28\ See LULD Plan, Section I(U) and V(C)(1).
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    The following example illustrates the proposed application of the 
rule in the context of a security that reopens without an auction:
Example 4
1. ABCD stock is trading at $20, with LULD Bands at $18 x $22
2. An incoming buy order causes the stock to enter a Limit State 
Trading Pause and then a Trading Pause at $22
3. During the Trading Pause, the buy order causing the Trading Pause is 
cancelled
4. At the end of the 5-minute halt, there is no crossed interest for an 
auction to occur, thus trading would resume on a quote
5. Upon resumption, a quote that was available prior to the Trading 
Pause (e.g., a quote was resting on the book prior to the Trading 
Pause), is widely set at $10 x $90
6. The Reference Price upon resumption is $50 (mid-point of BBO)
7. The SIP will use this Reference Price and publish LULD Bands of $45 
x $55 (i.e., far away from BBO prior to the halt)
8. The bands will be calculated correctly, but the $50 Reference Price 
is subsequently determined to be incorrect as the price clearly 
deviated from where it previously traded prior to the Trading Pause
9. The new Reference Price would be $22 (i.e., the last effective Price 
Band that was in a limit state before the Trading Pause), and the LULD 
Bands would be applied to determine if the executions should be 
cancelled as clearly erroneous

    In all of the foregoing situations, investors would be left with no 
remedy to request clearly erroneous review without the proposed 
carveouts in paragraph (c)(1)(C) because the trades occurred within the 
LULD Price Bands (albeit LULD Price Bands that were calculated from an 
erroneous Reference Price). The Exchange believes that removing the 
current ability for the Exchange to review in these narrow 
circumstances would lessen investor protections.
Numerical Guidelines
    Today, paragraph (c)(1) defines the Numerical Guidelines that are 
used to determine if a transaction is deemed clearly erroneous during 
Regular Market Hours, or during the Pre-Market Session and Post-Market 
Session. With respect to Regular Trading Hours, trades are generally 
deemed clearly erroneous if the execution price differs from the 
Reference Price (i.e., last sale) by 10% if the Reference Price is 
greater than $0.00 up to and including $25.00; 5% if the Reference 
Price is greater than $25.00 up to and including $50.00; and 3% if the 
Reference Price is greater than $50.00. Wider parameters are also used 
for reviews for Multi-Stock Events, as described in paragraph (c)(2). 
With respect to transactions in Leveraged ETF/ETN securities executed 
during Regular Market Hours, Pre-Market Session and Post-Market 
Session, trades are deemed clearly erroneous if the execution price 
exceeds the Regular Market Hours Numerical Guidelines multiplied by the 
leverage multiplier.
    Given the changes described in this proposed rule change, the 
Exchange proposes to amend the way that the Numerical Guidelines are 
calculated during Regular Trading Hours in the handful of instances 
where clearly erroneous review would continue to be available. 
Specifically, the Exchange would base these Numerical Guidelines, as 
applied to the circumstances described in paragraph (c)(1)(A), on the 
Percentage Parameters used to calculate Price Bands, as set forth in 
Appendix A to the LULD Plan. Without this change, a transaction that 
would otherwise stand if Price Bands were properly applied to the 
transaction may end up being subject to review and deemed clearly 
erroneous solely due to the fact that the Price Bands were not 
available due to a systems or other issue. The Exchange believes that 
it makes more sense to instead base the Price Bands on the same 
parameters as would otherwise determine whether the trade would have 
been allowed to execute within the Price Bands. The Exchange also 
proposes to modify the Numerical Guidelines applicable to leveraged 
ETF/ETN securities during Regular Trading Hours. As noted above, the 
Numerical Guidelines will only be applicable to transactions eligible 
for review pursuant paragraph (c)(1)(A) (i.e., to NMS Stocks that are 
not subject to the LULD Plan). As leveraged ETF/ETN securities are 
subject to LULD and thus the Percentage Parameters will be applicable 
during Regular Market Hours, the Exchange proposes to eliminate the 
Numerical Guidelines for leveraged ETF/ETN

[[Page 59482]]

securities traded during Regular Market Hours. However, as no Price 
Bands are available outside of Regular Market Hours, the Exchange 
proposes to keep the existing Numerical Guidelines in place for 
transactions in leveraged ETF/ETN securities that occur during the Pre-
Market Session and Post-Market Session. The Exchange also proposes to 
move existing paragraphs (c)(2), (c)(3), and (d) to proposed paragraph 
(c)(2)(B), (c)(2)(C), and (c)(2)(D), respectively, as Multi-Stock 
Events, Additional Factors, and Outlier Transactions will only be 
subject to review if those NMS Stocks are not subject to the LULD Plan 
or occur during the Pre-Market Session and Post-Market Session. 
Proposed paragraph (c)(2)(B) is substantially similar to existing 
paragraph (c)(2) except for a change in rule reference to paragraph 
(c)(1) has been updated to paragraph (c)(1)(A). Further, given the 
proposal to move existing paragraph (c)(2) to paragraph (c)(2)(B), the 
Exchange also proposes to amend applicable rule references throughout 
paragraph (c)(2)(A). Finally, the Exchange proposes to update 
applicable rule references in paragraph (c)(2)(D) based on the above-
described structural changes to Rule 11.270.
Reference Price
    As proposed, the Reference Price used would continue to be based on 
last sale and would be memorialized in proposed paragraph (d). 
Continuing to use the last sale as the Reference Price is necessary for 
operational efficiency as it may not be possible to perform a timely 
clearly erroneous review if doing so required computing the arithmetic 
mean price of eligible reported transactions over the past five 
minutes, as contemplated by the LULD Plan. While this means that there 
would still be some differences between the Price Bands and the clearly 
erroneous parameters, the Exchange believes that this difference is 
reasonable in light of the need to ensure timely review if clearly 
erroneous rules are invoked. The Exchange also proposes to allow for an 
alternate Reference Price to be used as prescribed in proposed 
paragraphs (d)(1), (2), and (3). Specifically, the Reference Price may 
be a value other than the consolidated last sale immediately prior to 
the execution(s) under review (1) in the case of Multi-Stock Events 
involving twenty or more securities, as described in paragraph 
(c)(2)(B) above, (2) in the case of an erroneous Reference Price, as 
described in paragraph (c)(1)(C) above,\29\ or (3) in other 
circumstances, such as, for example, relevant news impacting a security 
or securities, periods of extreme market volatility, sustained 
illiquidity, or widespread system issues, where use of a different 
Reference Price is necessary for the maintenance of a fair and orderly 
market and the protection of investors and the public interest, 
provided that such circumstances occurred during Pre-Market Session or 
Post-Market Session or the execution(s) are eligible for review 
pursuant to paragraph (c)(1)(A).
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    \29\ As discussed above, in the case of (c)(1)(C)(1), the 
Exchange would consider a number of factors to determine a new 
Reference Price that is based on the theoretical value of the 
security, including but not limited to, the offering price of the 
new issue, the ratio of the stock split applied to the prior day's 
closing price, the theoretical price derived from the numerical 
terms of the corporate action transaction such as the exchange ratio 
and spin-off terms, and the prior day's closing price on the OTC 
market for an OTC up-listing. In the case of (c)(1)(C)(2), the 
Reference Price will be the last effective Price Band that was in a 
limit state before the Trading Pause.
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Appeals
    As described more fully below, the Exchange proposes to eliminate 
paragraph (f), System Disruption or Malfunction. Accordingly, the 
Exchange proposes to remove from paragraph (e)(2), Appeals, each 
reference to paragraph (f), and include language referencing proposed 
paragraph (g), Transactions Occurring Outside of the LULD Bands.
System Disruption or Malfunction
    To conform with the structural changes described above, the 
Exchange now proposes to remove paragraph 11.270(f), System Disruption 
or Malfunction, and proposes new paragraph (c)(1)(B). Specifically, as 
described in paragraph (c)(1)(B), transactions occurring during Regular 
Market Hours that are executed outside of the LULD Price Bands due to 
an Exchange technology or system issue, may be subject to clearly 
erroneous review pursuant to proposed paragraph 11.270(g). Proposed 
paragraph 11.270(c)(1)(B) further provides that a transaction subject 
to review pursuant to this paragraph shall be found to be clearly 
erroneous if the price of the transaction to buy (sell) that is the 
subject of the complaint is greater than (less than) the Reference 
Price, described in paragraph (d), by an amount that equals or exceeds 
the applicable Percentage Parameter defined in Appendix A to the LULD 
Plan.
    The Exchange also proposes to renumber paragraph (g) to paragraph 
(f) based on the proposal to eliminate existing paragraph (f).
Securities Subject to Limit Up-Limit Down Plan
    The Exchange proposes to renumber paragraph (h) to paragraph (g) 
based on the proposal to eliminate existing paragraph (f), and to 
rename the paragraph to provide for transactions occurring outside of 
LULD Price Bands. Given that proposed paragraph (c)(1) defines the LULD 
Plan, the Exchange also proposes to eliminate redundant language from 
proposed paragraph (h). Finally, the Exchange also proposes to update 
references to the LULD Plan and Price Bands so that they are uniform 
throughout the Rule and to update rule references throughout the 
paragraph to conform to the structural changes to the Rule described 
above.
Multi-Day Event and Trading Halts
    The Exchange proposes to renumber paragraphs (i) and (j) to 
paragraphs (h) and (i), respectively, based on the proposal to 
eliminate existing paragraph (f). Additionally, the Exchange proposes 
to modify the text of both paragraphs to reference the Percentage 
Parameters as well as the Numerical Guidelines. Specifically, the 
existing text of proposed paragraphs (h) and (i) provides that any 
action taken in connection with this paragraph will be taken without 
regard to the Numerical Guidelines set forth in this Rule. The Exchange 
proposes to amend the rule text to provide that any action taken in 
connection with this paragraph will be taken without regard to the 
Percentage Parameters or Numerical Guidelines set forth in this Rule, 
with the Percentage Parameters being applicable to an NMS Stock subject 
to the LULD Plan and the Numerical Guidelines being applicable to an 
NMS Stock not subject to the LULD Plan.
2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
the requirements of Section 6(b) of the Act,\30\ in general, and 
Section 6(b)(5) of the Act,\31\ in particular, in that it is designed 
to remove impediments to and perfect the mechanism of a free and open 
market and a national market system, to promote just and equitable 
principles of trade, and, in general, to protect investors and the 
public interest and not to permit unfair discrimination between 
customers, issuers, brokers, or dealers.
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    \30\ 15 U.S.C. 78f(b).
    \31\ 15 U.S.C. 78f(b)(5).
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    As explained in the Purpose section, the SROs that are part of the 
clearly erroneous execution pilot believe that the pilot has 
successfully ensured that

[[Page 59483]]

such reviews are conducted based on objective and consistent standards 
across SROs and has therefore afforded greater certainty to Members and 
investors. IEX agrees with such beliefs with respect to IEX Rule 
11.270. IEX understands that the SROs that are part of the clearly 
erroneous execution pilot will file largely identical proposals to make 
their respective clearly erroneous pilots permanent. The Exchange 
therefore believes that the proposed rule change would promote 
transparency and uniformity across markets concerning review of 
transactions as clearly erroneous and would also help assure consistent 
results in handling erroneous trades across the U.S. equities markets, 
thus furthering fair and orderly markets, the protection of investors, 
and the public interest.
    Similarly, the Exchange believes that it is consistent with just 
and equitable principles of trade to limit the availability of clearly 
erroneous review during Regular Market Hours. The LULD Plan was 
approved by the Commission to operate on a permanent rather than pilot 
basis. As a number of market participants have noted, the LULD Plan 
provides protections that ensure that investors' orders are not 
executed at prices that may be considered clearly erroneous. Further, 
amendments to the LULD Plan approved in Amendment Eighteen serve to 
ensure that the Price Bands established by the LULD Plan are 
``appropriately tailored to prevent trades that are so far from current 
market prices that they would be viewed as having been executed in 
error.'' \32\ Thus, the Exchange believes that clearly erroneous review 
should only be necessary in very limited circumstances during Regular 
Market Hours. Specifically, such review would only be necessary in 
instances where a transaction was not subject to the LULD Plan, or was 
the result of some form of systems issue, as detailed in the purpose 
section of this proposed rule change. Additionally, in narrow 
circumstances where the transaction was subject to the LULD Plan, a 
clearly erroneous review would be available in the case of (1) a 
corporate action or new issue or (2) a security that enters a Trading 
Pause pursuant to LULD and resumes trading without an auction, where 
the Reference Price is determined to be erroneous by an Officer of the 
Exchange because it clearly deviated from the theoretical value of the 
security. Thus, eliminating clearly erroneous review in all other 
instances will serve to increase certainty for Members and investors 
that trades executed during Regular Market Hours would typically stand 
and would not be subject to review.
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    \32\ See Amendment Eighteen, supra note 11.
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    Given the fact that clearly erroneous review would largely be 
limited to transactions that were not subject to the LULD Plan, the 
Exchange also believes that it is necessary to change the parameters 
used to determine whether a trade is clearly erroneous. Specifically, 
due to the different parameters currently used for clearly erroneous 
review and for determining Price Bands, it is possible that a trade 
that would have been permitted to execute within the Price Bands would 
later be deemed clearly erroneous, if, for example, a systems issue 
prevented the dissemination of the Price Bands. The Exchange believes 
that this result is contrary to the principle that trades within the 
Price Bands should stand, and has the potential to cause investor 
confusion if trades that are properly executed within the applicable 
parameters described in the LULD Plan are later deemed erroneous. By 
using consistent parameters for clearly erroneous reviews conducted 
during Regular Market Hours and the calculation of the Price Bands, the 
Exchange believes that this change would also serve to promote greater 
certainty with regards to when trades may be deemed erroneous.
    Finally, the proposed rule changes make organizational updates to 
the Exchange's Clearly Erroneous Execution Rule as well as minor 
updates and corrections to the Rule to improve readability and clarity.

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change would 
impose any burden on competition that is not necessary or appropriate 
in furtherance of the purposes of the Act. The proposal would ensure 
the continued, uninterrupted operation of harmonized clearly erroneous 
execution rules across the U.S. equities markets while also amending 
those rules to provide greater certainty to Members and investors that 
trades will stand if executed during Regular Market Hours where the 
LULD Plan provides adequate protection against trading at erroneous 
prices. The Exchange understands that the SROs that are part of the 
clearly erroneous execution pilot will also file similar proposals, the 
substance of which are identical to this proposal. Thus, the proposed 
rule change will help to ensure consistency across SROs without 
implicating any competitive issues.

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

    Written comments were neither solicited nor received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    The Exchange has filed the proposed rule change pursuant to Section 
19(b)(3)(A)(iii) of the Act \33\ and Rule 19b-4(f)(6) thereunder.\34\ 
Because the foregoing proposed rule change does not: (i) significantly 
affect the protection of investors or the public interest; (ii) impose 
any significant burden on competition; and (iii) become operative for 
30 days from the date on which it was filed, or such shorter time as 
the Commission may designate, it has become effective pursuant to 
Section 19(b)(3)(A)(iii) of the Act \35\ and subparagraph (f)(6) of 
Rule 19b-4 thereunder.\36\
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    \33\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \34\ 17 CFR 240.19b-4(f)(6).
    \35\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \36\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)(iii) 
requires a self-regulatory organization to give the Commission 
written notice of its intent to file the proposed rule change, along 
with a brief description and text of the proposed rule change, at 
least five business days prior to the date of filing of the proposed 
rule change, or such shorter time as designated by the Commission. 
The Exchange has satisfied this requirement.
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    A proposed rule change filed under Rule 19b-4(f)(6) \37\ normally 
does not become operative prior to 30 days after the date of the 
filing. However, Rule 19b-4(f)(6)(iii) \38\ permits the Commission to 
designate a shorter time if such action is consistent with the 
protection of investors and the public interest. The Exchange has asked 
the Commission to waive the 30-day operative delay so that the proposed 
rule change may become operative on October 1, 2022. The Commission 
believes that waiving the 30-day operative delay is consistent with the 
protection of investors and the public interest, as it will allow the 
Exchange to coordinate its implementation of the revised clearly 
erroneous execution rules with the other national securities exchanges 
and FINRA, and will help ensure consistency across the SROs.\39\ For 
this reason, the Commission hereby waives the 30-day operative delay 
and designates the proposed rule change as operative upon filing.\40\
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    \37\ 17 CFR 240.19b-4(f)(6).
    \38\ 17 CFR 240.19b-4(f)(6)(iii).
    \39\ See SR-CboeBZX-2022-37 (July 8, 2022).
    \40\ For purposes only of waiving the 30-day operative delay, 
the Commission has also considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).

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[[Page 59484]]

    At any time within 60 days of the filing of the proposed rule 
change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act. If the Commission 
takes such action, the Commission shall institute proceedings to 
determine whether the proposed rule should be approved or disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
File Number SR-IEX-2022-07 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 Number SR-IEX-2022-07. 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 website (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 website 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 also will be available for inspection 
and copying at the principal office of the Exchange. All comments 
received will be posted without change. Persons submitting comments are 
cautioned that we do not redact or edit personal identifying 
information from comment submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to File Number SR-IEX-2022-07 and should be submitted on 
or before October 21, 2022.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\41\
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    \41\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Deputy Secretary.
[FR Doc. 2022-21194 Filed 9-29-22; 8:45 am]
BILLING CODE 8011-01-P