Document ID: SEC-2021-0161-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Investors Exchange, LLC
Posted Date: 2021-02-04T05:00Z

[Federal Register Volume 86, Number 22 (Thursday, February 4, 2021)]
[Notices]
[Pages 8238-8240]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-02266]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-91016; File No. SR-IEX-2020-18]

Self-Regulatory Organizations; Investors Exchange, LLC; Order 
Granting Approval of Proposed Rule Change To Amend IEX Rule 11.510 To 
Reduce the Outbound Latency That Presently Applies to All Messages Sent 
From IEX Back to Users of the Exchange

January 29, 2021.

I. Introduction

    On December 9, 2020, the Investors Exchange LLC (``Exchange'') 
filed with 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 amend IEX Rule (``Rule'') 11.510 to reduce the 
outbound latency that presently applies to all messages sent from IEX 
to users of the Exchange, as well as to make conforming changes to the 
outbound latency that applies to all trading messages sent from the IEX 
order book to the system routing logic with respect to routable orders. 
The proposed rule change was published for comment in the Federal 
Register on December 17, 2020.\3\ 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. 90645 (December 11, 
2020), 85 FR 81982 (December 17, 2020) (``Notice'').
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II. Description of the Proposal

    The Exchange proposed to amend Rule 11.510 to eliminate the 
``coil'' delay that is currently applied to outbound order execution 
messages and IEX proprietary market data sent to IEX users and the IEX 
system routing logic used by IEX's affiliated routing broker-dealer, 
IEX Services LLC (``IEXS'').\4\ Currently, users access IEX through the 
Exchange-provided network interface at the IEX Point-of-Presence, or 
``POP,'' located in Secaucus, New Jersey.\5\ Electronic messages that 
users send inbound to the IEX system, and order execution messages and 
IEX proprietary market data sent outbound to users, traverse the IEX 
coil, which is a box containing approximately 38 miles of compactly 
coiled optical fiber cable, and travel an additional geographic and 
physical distance between the POP and the IEX system located at the 
Exchange's primary data center in Weehawken, New Jersey.\6\ The time 
required for such communications to traverse the coil combined with the 
geographic and physical distance (and related networking) currently 
equates to an equivalent 350 microseconds of latency.\7\ IEXS is a 
member of the Exchange and its associated routing logic currently is 
subject to the same 350 microseconds of latency as other members when 
sending order messages to the IEX order book and when receiving order 
execution messages and IEX proprietary market data.\8\ As a result, 
IEXS has no speed or informational advantage compared to other Exchange 
members and data recipients.\9\
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    \4\ See proposed Rule 11.510; Notice, supra note 3, at 81982. 
The Exchange did not propose any changes to the coil delay that 
applies to inbound order messages, including order cancellations and 
modifications, from users at the POP to the IEX system and from the 
system routing logic to the order book. See proposed Rule 11.510; 
Notice, supra note 3, at 81984. The Exchange does not apply a coil 
delay to its communications with the Securities Information 
Processors (``SIP(s)'') or away trading centers, and those aspects 
of the Exchange likewise are not changing under the proposal. See 
Notice, supra note 3, at 81983.
    \5\ See Notice, supra note 3, at 81983.
    \6\ Id.
    \7\ Id.
    \8\ Id. If a user sends a routable order to the Exchange, after 
traversing the inbound latency (including the coil) from the POP to 
the IEX system, the order is directed to the system routing logic. 
Id. The current 350 microsecond latency on order messages between 
the IEX routing logic and order book is implicated when the routing 
logic has determined to route to the IEX order book all or part of 
the routable order submitted by the user, and is in addition to the 
350 microsecond latency between the POP and the IEX system. Id. As a 
result, currently, users connected at the POP experience a 
cumulative, one-way latency of 700 microseconds on routable order 
messages to and from the IEX system. Id. at 81983-84; see also Rule 
11.230(b), 11.510(c)(1), and proposed Supplementary Material 
(``Supp.'') .03 to Rule 11.510.
    \9\ See Notice, supra note 3, at 81983.
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    IEX's proposed elimination of the coil delay on outbound order 
execution messages and proprietary market data will reduce the latency 
on outbound communications to 37 microseconds, which latency will be 
due to geographic and physical distance and network connectivity.\10\ 
The proposed elimination of the coil delay on outbound order execution 
messages and proprietary market data will affect IEXS in the same 
manner that it effects other Exchange users, thus ensuring that the 
Exchange's affiliated routing broker-dealer is similarly situated and 
not competitively advantaged vis-[agrave]-vis any non-affiliated 
routing broker-dealer.\11\
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    \10\ See proposed Rule 11.510(a); see also Notice, supra note 3, 
at 81984. Specifically, the Exchange proposed to amend Rule 
11.510(a) to state that outbound communications from the IEX system 
to the POP will not traverse the physical distance provided by 
coiled optical fiber and instead will be subject to an equivalent 37 
microseconds of latency due to traversing the geographic 
distribution and network connectivity between the system at the 
primary data center and the network access point of the POP. See 
proposed Rule 11.510(a). Relatedly, the Exchange proposed to amend 
Rule 11.510(b)(2) to state that, for outbound communications 
(including, without limitation, execution report messages found in 
the Exchange's FIX Specification, quote and trade update messages 
found in the Exchange's TOPS and DEEP specifications, and DROP 
messages), the Exchange's connectivity infrastructure is designed to 
provide an equivalent 37 microseconds of latency from the system at 
the primary data center to the Exchange-provided network interface 
at the POP. See proposed Rule 11.510(b)(2).
    \11\ See Notice; supra note 3, at 81986. Specifically, the 
Exchange proposed to amend Rule 11.510(c)(1) to state that all 
outbound communications (including, without limitation, execution 
report messages found in the Exchange's FIX specification) from the 
order book to the system routing logic are subject to 37 
microseconds of latency, which is in addition to the 37 microsecond 
latency on outbound communications from the IEX system to the POP 
described in proposed Rule 11.510(b)(2). See proposed Rule 
11.510(c)(1); see also proposed Supp. .03 (stating that all 
responses from the IEX order book to the system routing logic are 
subject to 37 microseconds of latency and all messages from the 
system routing logic to users are subject to an additional 37 
microseconds of outbound latency). Users connected to IEX at the POP 
therefore would experience a cumulative delay of 74 microseconds on 
outbound messages from the IEX system regarding their routable 
orders. See proposed Rule 11.510(c)(1); see also proposed Supp. .03. 
Users would continue to experience a cumulative latency of 700 
microseconds on inbound routable order messages. See proposed Rule 
11.510(c)(1); proposed Supp. .03; Notice, supra note 3, at 81984. In 
addition, the Exchange proposed to amend Rule 11.510(c)(2)(A) to 
specify that the IEX routing logic may only receive Exchange data 
products subject to 37 microseconds of latency, equivalent to the 
outbound latency applicable to all other data product recipients 
that is described in proposed Rule 11.510(b)(2). See proposed Rule 
11.510(c)(2)(A).
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    The Exchange also proposed to make several non-substantive 
clarifying changes to add further detail to Rule 11.510 to: (i) Define 
the term ``POP''; \12\ (ii) reference the 350 microsecond latency on 
inbound communications from the POP to the IEX system and from the 
system routing logic to the order book separately from the proposed 37 
microsecond latency on outbound communications from the system to the

[[Page 8239]]

POP and from the order book to the system routing logic; \13\ (iii) 
further describe, without alteration, how the Exchange handles incoming 
routable orders, and specify that the 350 microseconds of latency on 
inbound communications from the routing logic to the order book is in 
addition to the inbound latency on communications from the POP to the 
system; \14\ (iv) refine references to ``POP'' throughout the rule such 
that they refer to connectivity at the POP or the connectivity 
infrastructure between the system and the POP, as appropriate; \15\ (v) 
add explanatory cross references to provisions within the rule; \16\ 
and (vi) make non-substantive grammatical revisions.\17\
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    \12\ See proposed Rule 11.510(a).
    \13\ See proposed Rule 11.510(a) and 11.510(c)(1).
    \14\ See proposed Rule 11.510(c)(1).
    \15\ See proposed Rule 11.510.
    \16\ See proposed Rule 11.510(b), 11.510(c)(3)(A), and Supp. 
.02.
    \17\ See proposed Rule 11.510.
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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.\18\ In particular, the Commission finds that the proposed 
rule change is consistent with Section 6(b)(5) of the Act,\19\ 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, and not be designed to permit unfair discrimination 
between customers, issuers, brokers or dealers; and with Section 
6(b)(8) of the Act,\20\ which requires that the rules of a national 
securities exchange not impose any burden on competition that is not 
necessary or appropriate.
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    \18\ 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).
    \19\ 15 U.S.C. 78f(b)(5).
    \20\ 15 U.S.C. 78f(b)(8).
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    IEX's coil delay on outbound order execution messages and 
proprietary market data, which has been in place since IEX became a 
registered national securities exchange in 2016, was designed to help 
IEX members avoid potential information leakage in connection with an 
execution on IEX that could reduce their ability to access liquidity on 
other markets after trading on IEX.\21\ Since 2016, however, various 
technological developments, including the widespread availability of 
improved smart order routing techniques that take into account 
transmission latency in coordinating simultaneous order arrival and 
execution times across multiple trading venues, have greatly reduced 
the potential for information leakage when sweeping the market, thus 
mitigating the utility of IEX's outbound coil delay to IEX users.\22\ 
In addition, SIP latencies have decreased materially since 2016, 
effectively nullifying the purpose of the coil delay on IEX proprietary 
data since market participants currently can receive SIP data faster 
than IEX proprietary data.\23\
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    \21\ See Notice, supra note 3, at 81983-84. By contrast, the 
inbound coil delay, which is not affected by this proposal, is 
designed to enable IEX to more effectively manage and price orders 
resting on its book when the market moves. Id. at 81983.
    \22\ Id. at 81983-86; see also Securities Exchange Act Release 
No. 89686 (August 26, 2020), 85 FR 54438, 54441 (September 1, 2020).
    \23\ See Notice, supra note 3, at 81984 and n.25 (noting that, 
at the time of IEX's exchange launch in September 2016 the average 
latencies for quote messages was 470 microseconds for the CQ Plan 
and 762 microseconds for the UTP Plan, and for trade messages was 
320 microseconds for the CTA Plan and 619.7 microseconds for the UTP 
Plan); see also www.utpplan.com (stating that current median latency 
is approximately 13.0-14.2 microseconds); www.ctaplan.com (stating 
that current median latency is under 17 microseconds for quotes and 
under 18 microseconds for trades); and compare current Rule 
11.150(b)(2) (stating that the POP is currently designed to provide 
350 microseconds of latency on IEX proprietary market data).
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    Against this backdrop, the Exchange asserts that the considerations 
that existed in 2016 for imposing the coil delay on its outbound order 
execution messages and proprietary data have been superseded by 
developments in the market and are now outweighed by the benefits that 
would be provided by the proposal--in particular, enhancement of 
members' ability to manage risk and market exposure through receipt of 
execution messages and IEX market data closer in time to when 
executions or quote changes occur.\24\ The Exchange also states that 
the proposal would enable other exchanges to update their pegged orders 
faster, and enable other exchanges' affiliated routing brokers to more 
quickly incorporate executions on IEX into their routing decisions.\25\
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    \24\ See Notice, supra note 3, at 81984-86.
    \25\ Id. at 81986.
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    Importantly, IEXS (the Exchange's affiliated routing broker) and 
all other IEX members will remain on equal footing in that they will 
experience the same 37 microseconds of latency on their receipt of IEX 
order execution messages and proprietary market data. As a result, IEXS 
will have no informational or time advantage--or resulting competitive 
advantage--over any other IEX member.\26\ Also, due to the equivalent 
reduction in the latency attendant to both outbound execution messages 
and IEX proprietary market data, parties to an execution on IEX will 
not receive information regarding the execution prior to other market 
participants, and thus will have no informational or time advantage--or 
resulting competitive advantage--over members who receive IEX 
proprietary data but are not parties to the execution. For these 
reasons, the Commission believes that the proposal is not designed to 
permit unfair discrimination, consistent with Section 6(b)(5) of the 
Act, and would not impose any inappropriate or unnecessary burden on 
competition, consistent with Section 6(b)(8) of the Act.
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    \26\ IEX will sequence the necessary systems changes to 
implement this proposed rule change in two steps, the first 
occurring for IEX users and the second for IEXS, thus ensuring that 
IEX's system routing logic is not preferenced over other users 
during implementation. Id. at 81985. After step one and before step 
two, while all outbound communications from the order book to the 
routing logic would continue to be subject to an equivalent 350 
microseconds of latency, outgoing messages (i.e., responses) from 
the routing logic to users (with respect to routable orders sent to 
IEX) would be subject to the proposed reduced outbound latency of 37 
microseconds. Id. at 81985 n.29. During this intervening period IEXS 
also would be able to receive IEX proprietary market data subject to 
the same 37 microseconds of latency as other members and data 
recipients. Id.
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    In addition, permitting the Exchange to modernize its 
infrastructure in a way that will better enable its members to manage 
risk and market exposure without inhibiting their ability to capture 
liquidity when routing orders to multiple market venues is consistent 
with the Section 6(b)(5) goals of promoting just and equitable 
principles of trade, removing impediments to and perfecting the 
mechanism of a free and open market and a national market system, and 
protecting investors and the public interest. These goals also will be 
furthered by the proposal to the extent that other exchanges are better 
able to manage their own resting orders and routing processes through 
faster receipt of order messages and proprietary data from IEX. This 
potential effect on other exchanges, coupled with the fact that no 
other exchange currently imposes an artificial delay on outbound order 
execution messages or proprietary market data,\27\ also support the 
conclusion that the proposal will not impose any inappropriate or 
unnecessary burden on competition,

[[Page 8240]]

consistent with Section 6(b)(8) of the Act.
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    \27\ Id. at 81986.
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    Finally, the Commission believes that the Exchange's proposed 
clarifying changes to Rule 11.510 add helpful detail that will further 
enhance investors' understanding of how IEX operates in a manner 
consistent with the Act, thereby helping to 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,\28\ that the proposed rule change (SR-IEX-2020-18) be and hereby 
is approved.
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    \28\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\29\
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    \29\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-02266 Filed 2-3-21; 8:45 am]
BILLING CODE 8011-01-P