Document ID: SEC-2020-1682-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Investors Exchange, LLC
Posted Date: 2020-10-21T04:00Z

[Federal Register Volume 85, Number 204 (Wednesday, October 21, 2020)]
[Notices]
[Pages 67074-67078]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-23257]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-90197; File No. SR-IEX-2020-16]

Self-Regulatory Organizations: Investors Exchange LLC; Notice of 
Filing and Immediate Effectiveness of Proposed Rule Change To Add an 
Offset Peg Order Type

October 15, 2020.
    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 October 5, 2020, 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, 
II and III 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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[[Page 67075]]

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\ IEX is filing with the Commission a 
proposed rule change to add a new order type (a ``Offset Peg'' or ``O-
Peg'' order) that pegs to the primary quote,\6\ plus or minus an offset 
amount. The Exchange has designated this rule change as ``non-
controversial'' under Section 19(b)(3)(A) of the Act \7\ and provided 
the Commission with the notice required by Rule 19b-4(f)(6) 
thereunder.\8\
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    \4\ 15 U.S.C. 78s(b)(1).
    \5\ 17 CFR 240.19b-4.
    \6\ The primary quote is the national best bid for a buy order 
or the national best offer for a sell order. See IEX Rule 1.160(u).
    \7\ 15 U.S.C. 78s(b)(3)(A).
    \8\ 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 the 
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 [sic] 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 the 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Exchange proposes to amend IEX Rule 11.190 to add a new Offset 
Peg or O-Peg order type that pegs to the primary quote,\9\ plus or 
minus an offset amount specified by the User.\10\ In addition, the 
Exchange proposes two accommodating amendments to IEX Rule 11.190 to 
describe how O-Peg orders will behave when executed at the Midpoint 
Price \11\ and in locked and crossed markets.
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    \9\ See supra note 6.
    \10\ See IEX Rule 1.160(qq).
    \11\ See IEX Rule 1.160(t),
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    Currently, the Exchange offers three types of pegged orders--
primary peg, midpoint peg and Discretionary Peg \12\--each of which are 
non-displayed orders that upon entry into the System \13\ and while 
resting on the Order Book,\14\ are pegged to a reference price based on 
the national best bid and offer (``NBBO'') and the price of the order 
is automatically adjusted by the System in response to changes in the 
NBBO.
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    \12\ IEX has two other order types that are based on the 
discretionary peg order type: The Retail Liquidity Provider order 
and the Corporate Discretionary Peg order. See IEX Rule 
11.190(b)(14) and (16).
    \13\ See IEX Rule 1.160(nn).
    \14\ See IEX Rule 1.160(p).
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    The Exchange proposes to add a new type of pegged order--an Offset 
Peg order--that is a non-displayed pegged order that upon entry and 
when posting to the Order Book, the price of the order is automatically 
adjusted by the System to be equal to and ranked at the less aggressive 
of the primary quote (i.e., the NBB \15\ for buy orders and NBO \16\ 
for sell orders) plus or minus an offset amount specified by the User 
or the order's limit price, if any. While resting on the Order Book, 
(i) a buy order is automatically adjusted by the System in response to 
changes in the NBB plus or minus the offset amount up to the order's 
limit price, if any; and (ii) a sell order is automatically adjusted by 
the System in response to changes in the NBO plus or minus the offset 
amount down to the order's limit price, if any; and (iii) in locked and 
crossed markets, slide one MPV \17\ less aggressive than the locking 
price or crossing price (i.e., the lowest Protected Offer \18\ for buy 
orders and the highest Protected Bid \19\ for sell orders).\20\ 
Further, an Offset Peg order would not be eligible to trade when the 
market is locked or crossed, either upon order entry or when resting on 
the Order Book.
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    \15\ See IEX Rule 1.160(u).
    \16\ See IEX Rule 1.160(u).
    \17\ See IEX Rule 11.210.
    \18\ See IEX Rule 1.160(bb).
    \19\ See IEX Rule 1.160(bb).
    \20\ As with all pegged orders, each time the price of an Offset 
Peg order is adjusted by the System it receives a new timestamp, as 
described in IEX Rule 11.220.
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    While Offset Peg orders would not be limited to trading more 
aggressively than the primary quote, based on informal feedback from 
Members, IEX understands that Offset Peg orders would be useful to 
market participants seeking to trade between the primary quote and the 
Midpoint Price.
    Accordingly, IEX proposes to amend subparagraph (b)(13) of IEX Rule 
11.190, which is currently reserved, to add the Offset Peg order. As 
proposed, an Offset Peg order:
    (A) Must be a pegged order.
    (B) Must have a TIF of DAY, GTT, GTX, or SYS, as described in IEX 
Rule 11.190(a)(3).
    (C) Is not eligible for routing pursuant to IEX Rule 11.230(b) and 
(c)(2).
    (D) May not be an ISO, as defined in paragraph (12) above.
    (E) May be submitted with a limit price or without a limit price 
(an ``unpriced pegged order'').
    (F) Is eligible to trade only during the Regular Market Session. As 
provided in IEX Rule 11.190(a)(3)(E)(iii), any pegged order marked with 
a TIF of DAY that is submitted to the System before the opening of the 
Regular Market Session will be queued by the System until the start of 
the Regular Market Session; any pegged order that is marked with a TIF 
other than DAY will be rejected when submitted to the System during the 
Pre-Market Session. Any pegged order submitted into the System after 
the closing of the Regular Market Session will be rejected.
    (G) May be a MQTY, as defined in paragraph (11) below.
    (H) Is not eligible to display. Pegged orders are always non-
displayed.
    (I) May be an odd lot, round lot, or mixed lot.
    (J) Is eligible to be invited by the System to Recheck as described 
in IEX Rule 11.230(a)(4)(D).
    (K) Is not eligible to trade when the market is locked or crossed.
    (L) May be submitted with an offset amount that is either 
aggressive or passive compared to the primary quote. If the offset 
amount would result in the price of an Offset Peg order being more 
aggressive than the Midpoint Price, the offset amount will be reduced 
so that the order is priced at the Midpoint Price until such time as 
the full value of the offset amount will not result in the price of the 
Offset Peg order being more aggressive than the Midpoint Price, except 
when the order is an active order.\21\ If the offset amount would 
result in the price of an Offset Peg order being in an increment 
smaller than specified in IEX Rule 11.210, the price of a buy order 
will be rounded down and the price of a sell order will be rounded up 
to the nearest permissible increment. If no offset amount is specified, 
the System will consider the offset amount to be zero.
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    \21\ See IEX Rule 1.160(b).
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    In addition, the Exchange proposes two accommodating amendments to 
other IEX rules. First, IEX Rule 11.190(a)(3) would be amended to 
specify that an Offset Peg may be executed in sub-pennies if necessary 
when the execution is at or constrained to the midpoint and the order 
executes

[[Page 67076]]

at the Midpoint Price. This is consistent with the fact that midpoint 
peg orders and Discretionary Peg orders can execute at a Midpoint Price 
in sub-pennies.\22\ Second, the Exchange proposes amendments to IEX 
Rule 11.190(h) to describe the manner in which Offset Peg orders will 
operate in locked and crossed markets. Specifically, when the market 
becomes locked, Offset Peg orders resting on or posting to the Order 
Book will be priced at the less aggressive of the locking price plus or 
minus an offset amount or the order's limit price, if any.\23\ However, 
an Offset Peg with an offset amount that would otherwise result in the 
order being priced more aggressive than the locking price will be 
priced at the locking price pursuant to the Midpoint Price Constraint. 
When the market becomes crossed, the Exchange considers the Midpoint 
Price to be indeterminable,\24\ and resting Offset Peg orders that 
would otherwise be subject to the Midpoint Price Constraint pursuant to 
IEX Rule 11.190(h)(3)(D) (i.e., because the price of the order would be 
more aggressive than the Midpoint Price) will be priced to be no more 
aggressive than the crossing price, the lowest Protected Offer for buy 
orders and the highest Protected Bid for sell orders. Further, as 
proposed, Offset Peg orders resting on or posting to the Order Book 
while the market is crossed are priced at the least aggressive of (1) 
the crossing price (the lowest Protected Offer for buy orders and the 
highest Protected Bid for sell orders) plus or minus an offset amount, 
(2) the crossing price (the lowest Protected Offer for buy orders and 
the highest Protected Bid for sell orders), or (3) the order's limit 
price, if any.
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    \22\ An execution at a sub-penny Midpoint Price is not 
prohibited by Rule 612 under Regulation NMS so long as the execution 
did not result from an impermissible sub-penny order or quotation. 
See Securities Exchange Act Release No. 51808 (June 9, 2005), 70 FR 
37496, 37556 (June 29, 2005) (File No. S7-10-04) (``NMS Adopting 
Release'').
    \23\ See IEX Rule 11.190(h)(3)(C).
    \24\ See IEX Rule 11.190(h)(3)(D).
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    The methodology for pricing Offset Peg orders during locked and 
crossed markets is designed to price such orders at the least 
aggressive price that is consistent with the terms of the order so as 
to avoid exacerbating the lock or cross.
    In addition, Offset Peg orders will not be eligible to trade when 
the market is locked or crossed, and an Offset Peg order that would 
otherwise be eligible to trade against an active order will surrender 
its precedence on the Order Book for the duration of the System 
processing the current active order, pursuant to IEX Rule 11.220(a)(5).
    The manner in which Offset Peg orders will operate in locked and 
crossed markets (as proposed) is similar to the manner in which other 
pegged order types operate, except that other pegged orders are 
eligible to trade when the market is locked or crossed. Offset Peg 
orders are designed to enable a market participant to capture part of 
the spread between the NBBO; when the NBBO is locked or crossed there 
is uncertainty as to the spread. Consequently, the Exchange believes 
that Offset Peg orders should not trade in such circumstances.
    The Exchange notes that for many years other national securities 
exchanges have offered order types that peg to the NBB and/or NBO plus 
or minus an offset amount.\25\ In this regard, the Exchange notes that 
this proposed rule change is substantially similar to order types 
offered by the Nasdaq Stock Market LLC (``Nasdaq''), NYSE Arca, Inc. 
(``Arca'') and CBOE BZX Exchange, Inc. (``BZX''), each of which offer a 
nondisplayed primary or market pegged order type or attribute that pegs 
to the inside quotation on the same side of the market (i.e., the NBB 
for a buy order and the NBO for a sell order) and may also specify an 
aggressive or passive offset amount.\26\
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    \25\ See, e.g., Securities Exchange Act Release No. 52449 
(September 15, 2005), 70 FR 55647 (September 22, 2005) (File No. SR-
NASD-2005-107).
    \26\ See Nasdaq Rule 4703(d), NYSE Arca Rule 7.31-E(h)(1), and 
Cboe BZX Rule 11.9(c)(8)(A).
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2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6(b) of the Act,\27\ in general, and furthers the 
objectives of Section 6(b)(5),\28\ in particular, in that it is 
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 facilitating transactions in 
securities, and 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. Specifically, the Exchange 
believes that the proposed rule change is consistent with the 
protection of investors and the public interest because it is designed 
to increase competition among execution venues by providing an 
additional pegged order type that market participants can use to trade 
at an offset to the primary quote, as described in the Purpose section 
and thereby enable the Exchange to better compete with order types on 
other national securities exchanges that offer similar features to 
market participants.
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    \27\ 15 U.S.C. 78f(b).
    \28\ 15 U.S.C. 78f(b)(5).
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    Further, IEX believes that the proposal is consistent with the 
protection of investors and the public interest in that the Offset Peg 
order type would provide additional flexibility to market participants 
in their use of pegging orders. As described in the Purpose section, 
IEX already offers several different types of pegging orders that trade 
with reference to the primary quote (Discretionary Peg and primary 
peg), at the Midpoint Price (Midpoint Peg), and in some cases with the 
ability to also exercise price discretion in specified circumstances 
(Discretionary Peg and primary peg). As proposed, the Offset Peg order 
would function in a similar manner but provide flexibility to market 
participants to specify an offset to the primary quote. Such 
functionality could be used for a number of purposes, including to 
mitigate risk by posting an order at a price that is lower or higher 
than the prevailing NBB or NBO. Although broker-dealers could implement 
similar functionality on their own by consuming market data feeds and 
sending limit orders to the Exchange at prices that are offset from the 
NBBO, implementing this functionality through an exchange order type 
ensures that it is widely available to market participants on a fair 
and non-discriminatory basis. At the same time, the offset instruction 
would be offered on a purely voluntary basis, and with flexibility for 
Users to choose the amount of any offset, thereby providing flexibility 
to continue using current pegged order types without a User specified 
offset and to choose different offsets based on a User's specific 
needs. The Exchange does not believe that providing flexibility to 
Users to select the amount of any offset raises any significant or 
novel concerns, since similar offset functionality is already available 
on other national securities exchanges, as discussed in the Purpose 
section.\29\
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    \29\ See supra note 26.
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    Further, IEX believes that it is consistent with the Act to not 
permit an Offset Peg order to trade when the market is locked or 
crossed. While IEX's current pegged order types are eligible to trade 
in such circumstances, they are repriced away from the locking and 
crossing price (except for Midpoint Peg orders in a locked market which 
continue to be priced at the locking Midpoint Price) which is designed 
to

[[Page 67077]]

reduce the incidence of trading when the market is locked or crossed. 
As noted in the Purpose section, Offset Peg orders are designed to 
enable a market participant to capture part of the spread between the 
NBBO; when the NBBO is locked or crossed there is uncertainty as to the 
spread. Consequently, the Exchange believes that Offset Peg orders 
should not trade in such circumstances.\30\ Moreover, similar order 
types on other national securities exchange are explicitly not eligible 
to trade in locked and crossed markets.\31\ Additionally, IEX believes 
that the methodology for pricing Offset Peg orders during locked and 
crossed markets is consistent with the Act because it is designed to 
price such orders at the least aggressive price that is consistent with 
the terms of the order so as to avoid exacerbating the lock or cross.
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    \30\ In contrast, IEX's other pegged order types are designed to 
enable a market participant to capture liquidity pursuant to the 
terms of the order type so the Exchange has chosen not to impose a 
restriction on trading in locked and crossed markets.
    \31\ See, e.g., NYSE Arca Rule 7.31-E(h)(1)(B).
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    In addition, the Exchange believes that it is consistent with the 
Act to round the price of a buy order down and a sell order up to the 
nearest permissible increment if the offset amount would result in the 
price of an Offset Peg order being in an increment smaller than 
specified in IEX Rule 11.210. Rounding assures that IEX is compliant 
with Regulation NMS Rule 612 \32\ and IEX Rule 11.210. Moreover, this 
approach is consistent with the way other national securities exchanges 
handle pegged orders.\33\
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    \32\ See 17 CFR 242.612 and FAQs 8, 1, and 2 in Division of 
Market Regulation: Responses to Frequently Asked Questions 
Concerning Rule 612 (Minimum Pricing Increment) of Regulation NMS, 
available at https://www.sec.gov/divisions/marketreg/subpenny612faq.htm which provides that although exchanges (and 
broker-dealers) may not accept and round orders in NMS stocks 
explicitly priced in sub-penny increments (FAQs 8 and 1), they may 
accept such orders when the order is not ``explicitly'' priced in an 
impermissible sub-penny increment, meaning that a calculation must 
be performed to obtain the price of the order, in which case the 
exchange or broker-dealer may round the price of the stock to 
determine the ``actual explicit price for the order.'' (FAQ 2). IEX 
believes that Offset Peg orders would not be explicitly priced in 
sub-penny increments even if the offset amount specified is in a 
sub-penny increment because the Exchange would need to perform a 
calculation to obtain the price of the order by applying the offset 
amount to the NBB or NBO as applicable. Accordingly, IEX believes 
that rounding as proposed is consistent with Rule 612 under 
Regulation NMS and relevant FAQs, which provides that exchanges (and 
broker-dealers) may not accept and round orders in NMS stocks 
explicitly priced in sub-penny increments (FAQs 8 and 1), except for 
when the order is not ``explicitly'' priced in an impermissible sub-
penny increment, in which case the exchange may round the price of 
the stock to determine the ``actual explicit price for the order.'' 
(FAQ 2).
    \33\ See, e.g., Cboe U.S. Equities FIX Specification (Version 
2.8.18) describing treatment of Tag 211 regarding ``Pegged 
Difference'' available at https://cdn.cboe.com/resources/membership/Cboe_US_Equities_FIX_Specification.pdf.
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    Thus, IEX does not believe that the proposed changes raise any new 
or novel material issues that have not already been considered by the 
Commission in connection with existing order types offered by the IEX 
and other national securities exchanges.

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

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition that is not necessary or appropriate 
in furtherance of the purposes of the Act. To the contrary, the 
proposal is a competitive response to similar order types available on 
other exchanges.
    The Exchange does not believe that the proposed rule change will 
impose any burden on intermarket competition that is not necessary or 
appropriate in furtherance of the purposes of the Act. Competing 
exchanges have and can continue to adopt similar order types, subject 
to the SEC rule change process, as discussed in the Purpose and 
Statutory Basis sections.\34\
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    \34\ See supra notes 26 and 29.
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    The Exchange also does not believe that the proposed rule change 
will impose any burden on intramarket competition that is not necessary 
or appropriate in furtherance of the purposes of the Act. All Members 
would be eligible to use an Offset Peg order type on the same terms.

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 designated this rule filing as non-controversial 
under Section 19(b)(3)(A) \35\ of the Act and Rule 19b-4(f)(6) \36\ 
thereunder. Because the 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) of the Act and Rule 19b-
4(f)(6) thereunder.
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    \35\ 15 U.S.C. 78s(b)(3)(A).
    \36\ 17 CFR 240.19b-4(f)(6).
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    The Exchange believes that the proposed rule change meets the 
criteria of subparagraph (f)(6) of Rule 19b-4 \37\ because it is 
substantially similar to order types previously approved or considered 
by the Commission and as discussed in the Statutory Basis and Burden on 
Competition sections.\38\ Thus, IEX does not believe that the proposed 
changes raise any new or novel material issues that have not already 
been considered by the Commission.
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    \37\ 17 CFR 240.19b-4(f)(6).
    \38\ See supra notes 26, 29, and 34.
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    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 under 
Section 19(b)(2)(B) \39\ of the Act to determine whether the proposed 
rule change should be approved or disapproved.
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    \39\ 15 U.S.C. 78s(b)(2)(B).
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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 rule-comments@sec.gov. Please include 
File Number SR-IEX-2020-16 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-2020-16. 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

[[Page 67078]]

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 
the 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-
2020-16, and should be submitted on or before November 12, 2020.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\40\
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    \40\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-23257 Filed 10-20-20; 8:45 am]
BILLING CODE 8011-01-P