Document ID: SEC-2019-0327-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Investors Exchange LLC
Posted Date: 2019-03-22T04:00Z

[Federal Register Volume 84, Number 56 (Friday, March 22, 2019)]
[Notices]
[Pages 10871-10874]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-05469]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-85351; File No. SR-IEX-2018-23]

Self-Regulatory Organizations; Investors Exchange LLC; Notice of 
Filing of Amendment No. 1, and Order Granting Accelerated Approval of a 
Proposed Rule Change, as Modified by Amendment No. 1, To Modify the 
Resting Price of Discretionary Peg Orders

March 18, 2019.

I. Introduction

    On November 30, 2018, the Investors Exchange, LLC (``IEX'' or 
``Exchange'') 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 modify the resting price of Discretionary Peg 
orders. The proposed rule change was published for comment in the 
Federal Register on December 19, 2018.\3\ The Commission received two 
comments on the proposed rule change,\4\ and one response letter from 
the Exchange.\5\ On March 13, 2018, the Exchange filed Amendment No. 1 
to the proposed rule change.\6\ The Commission is publishing this 
notice to solicit comments on Amendment No. 1 from interested persons, 
and is approving the proposed rule change, as modified by Amendment No. 
1, on an accelerated basis.
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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. 84820 (December 13, 
2018), 83 FR 65186 (December 19, 2018) (``Notice'').
    \4\ See Letters from Joanna Mallers, Secretary, FIA Principals 
Traders Group to Brent J. Fields, Secretary, Office of the 
Secretary, Commission, dated January 22, 2019 (``FIA PTG Letter I'') 
and March 1, 2019 (``FIA PTG Letter II'').
    \5\ See Letter from John Ramsey, Chief Market Policy Officer, 
IEX Group, Inc. to Brent J. Fields, Secretary, Office of the 
Secretary, Commission, dated February 14, 2019 (``IEX Letter'').
    \6\ In Amendment No. 1, the Exchange specified that, if the 
Commission were to approve its proposed rule change, the Exchange 
would implement it within ninety (90) days of Commission approval 
and would provide market participants with at least 10 days of 
notice via a Trading Alert once a specific implementation date is 
determined. To promote transparency of its proposed amendment, when 
the Exchange filed Amendment No. 1 with the Commission, it also 
submitted Amendment No. 1 as a comment letter to the file, which the 
Commission posted on its website and placed in the public comment 
file for SR-IEX-2018-23 (available at https://www.sec.gov/comments/sr-iex-2018-23/sriex201823-5101841-183253.pdf). The Exchange also 
posted a copy of its Amendment No. 1 on its website.
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II. Description of the Proposed Rule Change

    The Exchange offers a Discretionary Peg order type that is an 
entirely non-displayed, pegged order.\7\ Upon entry, the order is 
priced by the IEX system to be equal to the less aggressive of the 
midpoint of the NBBO or the order's limit price, if any. Currently, any 
unexecuted portion of the order is posted and ranked non-displayed on 
the IEX order book at the near-side primary quote (i.e., the NBB for 
buy orders, the NBO for sell orders). Thereafter, the resting price of 
the order is automatically adjusted by the IEX system in response to 
changes in the NBB (NBO) for buy (sell) orders so that its non-
displayed resting price remains pegged at the near-side primary quote, 
up (down) to the order's limit price, if any.\8\
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    \7\ The Exchange currently offers three types of pegged orders--
primary peg, midpoint peg, and Discretionary Peg--each of which are 
non-displayed orders that are pegged to a reference price based on 
the national best bid and offer (``NBBO''). See IEX Rule 
11.190(a)(3).
    \8\ See IEX Rule 11.190(b)(10).
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    Once posted to the IEX order book, a Discretionary Peg order, in 
response to incoming active orders, will exercise the least amount of 
price discretion necessary from its resting price to its discretionary 
price, and thus may trade more aggressively up to (for buy orders) or 
down to (for sell orders) the midpoint of the NBBO,\9\ but will only do 
so when the IEX system determines the quote in the subject security to 
be ``stable.'' \10\ When IEX determines the quote to be ``unstable'' 
for the subject security and activates the crumbling quote indicator 
(``CQI'') for up to 2 milliseconds, as specified in IEX Rule 11.190(g), 
Discretionary Peg orders do not exercise price discretion to trade at 
prices to the midpoint of the NBBO. However, Discretionary Peg orders 
remain eligible for execution at their resting price (i.e., at the NBB 
(NBO) for buy (sell) orders) when the CQI is on. Therefore, when IEX 
determines the quote to be unstable, Discretionary Peg orders are 
protected

[[Page 10872]]

from trading more aggressively to a reference price that IEX determines 
may become stale imminently.
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    \9\ When ``exercising discretion,'' a Discretionary Peg order is 
prioritized behind any displayed or non-displayed interest resting 
at the discretionary price. See IEX Rule 11.190(b)(10).
    \10\ See IEX Rule 11.190(g).
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    In its proposal, the Exchange now proposes to modify the resting 
price of Discretionary Peg orders to be equal to the less aggressive of 
1 MPV less aggressive than the primary quote (rather than the primary 
quote itself) or the order's limit price. The Exchange notes that the 
proposed resting price for Discretionary Peg orders will be the same as 
the resting price of primary peg orders pursuant to IEX Rule 
11.190(b)(8).\11\
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    \11\ See Notice, supra note 3, at n.12.
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    In its filing, the Exchange stated that one of the purposes for its 
proposed rule change was to ``further protect resting Discretionary Peg 
orders from execution at a stale price'' and noted that Discretionary 
Peg orders currently ``remain susceptible to trading at the primary 
quote'' when the CQI is on.\12\ The Exchange further noted that, in its 
experience, while Discretionary Peg orders do not often execute at the 
primary quote, a considerable portion of such executions at the primary 
quote occur when the CQI is on.\13\
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    \12\ See id. at 65187.
    \13\ See id. (observing that in May-June 2018, ``90% of 
Discretionary Peg order executions trade within the NBBO when the 
CQI is off, 88% of which execute at the Midpoint Price. However, of 
the remaining 10% of Discretionary Peg order executions that occur 
at the primary quote, 31% occur when the CQI is on'').
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    Finally, the Exchange also proposes conforming changes to the 
description of the resting price of Discretionary Peg orders for 
purposes of ranking and priority in the Regular Market Session Opening 
Process for Non-IEX-Listed Securities and IEX Auctions.\14\
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    \14\ See proposed IEX Rule 11.231(a)(1)(iii) and IEX Rule 
11.350(b)(1)(A)(i)(c), respectively.
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III. Comment Letter and Exchange Response

    The Commission received two comments from one commenter that 
opposed the proposal rule change.\15\ The commenter expressed concern 
that IEX's proposal would allow a Discretionary Peg order to ``jump 
over'' other orders to price more aggressively up to the midpoint when 
the CQI signal indicates it is ``safe'' to do so, but IEX will 
``reprice'' the order back below the near-side primary quote ``to avoid 
execution'' (emphasis in original) when the CQI signal indicates a 
potential unstable quote.\16\
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    \15\ See supra note 4.
    \16\ See FIA PTG Letter I, supra note 4, at 2.
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    The commenter stated that, as a result of IEX's proposed rule 
change, ``the Discretionary Peg [o]rder can avoid being executed at all 
whenever the CQI signal is active'' \17\ and noted that current 
Discretionary Peg functionality to price more aggressively when the CQI 
is off ``is partly counterbalanced by the fact that even when the CQI 
signal is active, Discretionary Peg [o]rders will still be executed.'' 
\18\ The commenter argued that the proposal ``would be eliminating this 
counterbalance'' as a Discretionary Peg order would ``never'' execute 
when the CQI ``predicted an imminent price change in the NBBO.'' \19\ 
In turn, the commenter believed that the proposal presents a ``conflict 
between the proposed change and the promotion of price discovery 
through the display of protected quotes.'' \20\
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    \17\ See id.
    \18\ See id.
    \19\ See id.
    \20\ See id. The commenter also urged the Commission to 
establish standards or guidelines for the use of discretionary price 
mechanisms and the ability of matching engines to adjust order 
prices based on predictive signals, and posed several hypothetical 
order types that could introduce additional complexity and potential 
conflicts between order types. See id. at 3.
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    In its second letter, the commenter noted that a Discretionary Peg 
order is ``much more likely to be exercising discretion than not'' as 
they are ``eligible to trade more aggressively throughout the entire 
day with the exception of the 1.24 seconds when IEX has determined the 
market is unstable'' (emphasis in original).\21\ The commenter also 
noted that the merits of the proposal are subjective and ``depend on 
the perspective from which the order is viewed.'' \22\ For example, 
while IEX views the proposal as providing an additional measure of 
protection to Discretionary Peg orders when the CQI is on, ``[f]rom the 
point of view of the seller, the [Discretionary Peg order] appears to 
have faded its interest in response to preferential access to market 
data.'' \23\ The commenter further criticized the Exchange's lack of 
data or analysis on the impact that its proposal might have on the 
provision of displayed liquidity on IEX.\24\
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    \21\ See FIA PTG Letter II, supra note 4, at 2.
    \22\ See id.
    \23\ See id.
    \24\ See id.
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    In its response, the Exchange stated its belief that the commenter 
described aspects of the Discretionary Peg order inaccurately.\25\ In 
particular, the Exchange disagreed that Discretionary Peg orders ``fall 
back'' or reprice passively when the CQI is on, but rather 
characterized them as resting passively when the CQI is active.\26\ 
Thus, the Exchange characterized the proposal as ``rather than 
repricing when the CQI is active, IEX is simply proposing that 
[Discretionary Peg orders] rest more passively'' than they do currently 
(emphasis in original).\27\
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    \25\ See IEX Letter, supra note 4, at 2.
    \26\ See id.
    \27\ See id.
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    The Exchange also argued that the commenter mischaracterized the 
operation of the Discretionary Peg order by suggesting it could ``jump 
over'' resting displayed orders.\28\ The Exchange explained that a 
Discretionary Peg order ``exercise[s] the least amount of price 
discretion necessary from [its] resting price to its discretionary 
price,'' except during periods of quote instability, and ``is 
prioritized behind any displayed or non-displayed interest resting at 
the discretionary price.'' \29\ Thus, the Exchange explained that 
Discretionary Peg orders can only trade at prices more aggressive than 
resting displayed orders (i.e., at the midpoint) only when the active 
incoming order is priced less aggressive than the NBBO (i.e., active 
sell orders priced higher than the NBB or active buy orders priced 
lower than the NBO) (emphasis in original).\30\
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    \28\ See id.
    \29\ See id.
    \30\ See id.
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    Further, the Exchange countered the commenter's assertion that, 
unlike displayed orders, Discretionary Peg orders would never be 
eligible to execute when the CQI is active. The Exchange explained that 
a Discretionary Peg order would remain eligible to trade at its 
proposed resting price when the active order is priced more aggressive 
than the NBBO.\31\
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    \31\ See id. In its second comment letter, FIA PTG acknowledged 
this point but argued that it is unlikely to occur because it 
believes ``it is not common practice to route through the NBBO into 
the depth of book.'' See FIA PTG Letter II, supra note 4, at n.3.
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    Finally, the Exchange stated its belief that its proposed change 
did not present a novel application of discretionary pricing.\32\
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    \32\ See IEX Letter, supra note 4, at 3.
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IV. Discussion and Commission Findings

    After careful review of the proposal and the comments received 
thereon the Commission finds that the proposed rule change is 
consistent with the requirements of the Act \33\ and the rules and 
regulations thereunder applicable to a national securities 
exchange.\34\ In particular, the Commission finds that the proposed 
rule change is consistent

[[Page 10873]]

with Section 6(b)(5) of the Act,\35\ which requires that the rules of 
an 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.
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    \33\ 15 U.S.C. 78f.
    \34\ 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).
    \35\ 15 U.S.C. 78f(b)(5).
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    The Commission believes the proposed rule change is consistent with 
the protection of investors and the public interest because it is 
reasonably designed to protect non-displayed resting Discretionary Peg 
orders from unfavorable executions when IEX's precise rules-based 
mathematical quote instability formula suggests the possibility that 
the market may soon move against them in the next two milliseconds. If 
the market does move, the Discretionary Peg orders are re-ranked at a 
new resting price and permitted to once again exercise discretion to 
meet the limit price of active orders.
    In general, the core design of a Discretionary Peg order, when 
resting, is to provide liquidity at a price as aggressive as the 
midpoint of the NBBO. While such orders currently rest at the near-side 
quote, these orders are non-displayed (i.e., not reflected in the near-
side quote) and thus market participants do not know in advance whether 
or to what extent they may be present on IEX. Further, such orders are 
ranked behind other interest, and they exercise the least amount of 
price discretion necessary in response to an incoming active order. As 
the Exchange continuously updates the NBBO and calculates the midpoint 
thereof, it also applies its CQI functionality in an attempt to predict 
an in-process market move that could result imminently in a new 
midpoint price. In ranking a Discretionary Peg order at its resting 
price during this time, investors may be better able to achieve their 
goals of passively trading up to the most up-to-date midpoint while 
minimizing the adverse selection of their non-displayed interest.
    The proposed change will result in Discretionary Peg orders resting 
at the less aggressive of one MPV less aggressive than the primary 
quote (or the order's limit price), rather than the primary quote 
itself. As these order types are non-displayed, the Commission 
disagrees with the commenter's assertion that, from the perspective of 
a seller, a Discretionary Peg order can appear to have faded its 
interest. As such orders are non-displayed, they cannot so appear.
    Rather, resting a Discretionary Peg order at one MVP less 
aggressive than it currently rests is reasonably designed to further 
protect such orders from execution at potentially stale prices, and 
therefore may help users of such orders avoid subjecting them to 
``latency arbitrage'' by those market participants using very 
sophisticated latency-sensitive technology who can rapidly aggregate 
market data feeds and react fast to changing market conditions.\36\ As 
IEX notes, Discretionary Peg orders will remain subject to execution at 
their new, only slightly less aggressive, resting prices, which, 
because they are only one MPV less aggressive, still will be eligible 
to trade against incoming orders that are aggressively seeking 
liquidity slightly through the best displayed price. At the same time, 
their protection from algorithms that may be seeking to trade at a 
potentially soon-to-be stale price will be enhanced.
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    \36\ See Securities Exchange Act Release No. 78101 (June 17, 
2016), 81 FR 41142, 41157 (June 23, 2016) (In the Matter of the 
Application of: Investors' Exchange, LLC for Registration as a 
National Securities Exchange; Findings, Opinion, and Order of the 
Commission).
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    To the extent this enhancement incentivizes the entry of additional 
Discretionary Peg orders on the Exchange by better protecting them from 
adverse selection, it could increase overall liquidity available on the 
Exchange to the benefit of all market participants and provide 
additional opportunities for price improvement to market participants 
removing liquidity on the Exchange during periods of quote stability.
    The Commission agrees with the commenter that the impact on 
displayed liquidity is an important consideration, and the Commission 
agrees with IEX's response that the design of the Discretionary Peg 
order achieves a reasonable balance in that regard. Specifically, 
because Discretionary Peg orders exercise the least amount of price 
discretion, they may trade at prices more aggressive than resting 
displayed orders only when the active order is priced less aggressive 
then the NBBO (i.e., active sell orders priced higher than the NBB or 
active buy orders priced lower than the NBO). As such, Discretionary 
Peg orders are not ``jumping over'' resting displayed interest on IEX 
because those types of incoming orders are priced such that they are 
not marketable against the displayed orders.
    Finally, the Commission believes that the conforming changes to the 
description of the resting price of Discretionary Peg orders for 
purposes of ranking and priority in the Regular Market Session Opening 
Process for Non-IEX-Listed Securities is consistent with the protection 
of investors and the public interest because as it conforms those 
provisions to the change being made to the resting price of 
Discretionary Peg orders, which change the Commission addresses above.
    Accordingly, the Commission finds that this proposed rule change, 
as modified by Amendment No. 1, is designed 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.

V. Solicitation of Comments on Amendment No. 1

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether Amendment No. 1 
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 Number SR-IEX-2018-23 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-2018-23. This file 
number should be included in 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

[[Page 10874]]

provisions of 5 U.S.C. 552, will be available for website viewing and 
printing in the Commission's Public Reference Section, 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 the filing will also be available 
for inspection and copying at the IEX's principal office and on its 
internet website at www.iextrading.com. 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-
2018-23 and should be submitted on or before April 12, 2019.

VI. Accelerated Approval of Proposed Rule Change, as Modified by 
Amendment No. 1

    The Commission finds good cause to approve the proposed rule 
change, as modified by Amendment No. 1, prior to the 30th day after the 
date of publication of the notice of Amendment No. 1 in the Federal 
Register. As noted above, in Amendment No. 1, the Exchange specified 
that, if the Commission were to approve its proposed rule change, the 
Exchange would implement it within ninety (90) days of Commission 
approval and would provide market participants with at least 10 days of 
notice via a Trading Alert once a specific implementation date is 
determined. Because Amendment No. 1 relates to the implementation of 
the proposed rule change and does not make any substantive changes to 
the proposal, the Commission believes that good cause exists for 
accelerated approval of the proposed rule change, as modified by 
Amendment No. 1. The Commission further notes that the original 
proposal was subject to a 21 day comment period; and three comments 
were received, and considered, on the proposal. Accordingly, the 
Commission finds good cause, pursuant to Section 19(b)(2) of the 
Act,\37\ to approve the proposed rule change prior to the 30th day 
after the date of publication of the notice of Amendment No. 1 in the 
Federal Register.
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    \37\ 15 U.S.C. 78s(b)(2).
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VII. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\38\ that the proposed rule change (SR-IEX-2018-23), as modified by 
Amendment No. 1, hereby is approved on an accelerated basis.
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    \38\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\39\
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    \39\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2019-05469 Filed 3-21-19; 8:45 am]
 BILLING CODE 8011-01-P