Document ID: SEC-2016-1074-0001
Agency: sec
Document Type: Rule
Title: Commission Interpretation Regarding Automated Quotations under Regulation NMS
Posted Date: 2016-06-23T04:00Z

[Federal Register Volume 81, Number 121 (Thursday, June 23, 2016)]
[Rules and Regulations]
[Pages 40785-40793]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-14876]

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SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 241

[Release No. 34-78102; File No. S7-03-16]

Commission Interpretation Regarding Automated Quotations Under 
Regulation NMS

AGENCY: Securities and Exchange Commission.

ACTION: Final interpretation.

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SUMMARY: The Securities and Exchange Commission is issuing a final 
interpretation with respect to the definition of automated quotation 
under Rule 600(b)(3) of Regulation NMS.

DATES: Effective June 23, 2016.

FOR FURTHER INFORMATION CONTACT: Richard Holley III, Assistant 
Director, Michael Bradley, Special Counsel, or Michael Ogershok, 
Attorney-Adviser, Office of Market Supervision, at 202-551-5777, 
Division of Trading and Markets, Securities and Exchange Commission, 
100 F Street NE., Washington, DC 20549-7010.

SUPPLEMENTARY INFORMATION:

I. Background

    Rule 611 of Regulation NMS provides intermarket protection against 
trade-throughs for ``automated'' (as opposed to ``manual'') quotations 
of NMS stocks. Under Regulation NMS, an ``automated'' quotation is one 
that, among other things, can be executed ``immediately and 
automatically'' against an incoming immediate-or-cancel order. The 
Regulation NMS Adopting Release issued in 2005 makes clear that this 
formulation was intended to distinguish and exclude from protection 
quotations on manual markets that produced delays measured in seconds 
in responding to an incoming order, because delays of that magnitude 
would impair fair and efficient access to an

[[Page 40786]]

exchange's quotations.\1\ In the Regulation NMS Adopting Release, the 
Commission interpreted the term ``immediate'' to ``preclude[ ] any 
coding of automated systems or other type of intentional device that 
would delay the action taken with respect to a quotation.'' \2\
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    \1\ See Securities Exchange Act Release No. 51808 (June 9, 2005) 
70 FR 37496, 37500 & n.21, 37501 (June 29, 2005) (``Regulation NMS 
Adopting Release''). The Commission notes that the smallest time 
increment suggested by commenters at the time Regulation NMS was 
adopted was 250 milliseconds. See id. at 37518. See also infra note 
15 (discussing the distinction between ``automated quotations'' and 
``manual quotations'' and noting that ``[t]he difference in speed 
between automated and manual markets often is the difference between 
a 1-second response and a 15-second response . . . .'').
    \2\ See Regulation NMS Adopting Release, supra note 1, at 37534.
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    In light of the application of Investors' Exchange LLC (``IEX'') 
\3\ to register as an exchange and technological and market 
developments since the adoption of Regulation NMS, the Commission 
decided to revisit this interpretation. The Commission believes its 
prior interpretation should be updated given technological and market 
developments since the adoption of Regulation NMS, in particular the 
emergence of low latency trading strategies and related technology that 
permit trading decisions to be made in microseconds, neither of which 
were contemplated by the Commission or commenters in 2005.\4\ As 
further addressed below, the Commission now interprets ``immediate'' in 
the context of Regulation NMS as not precluding a de minimis 
intentional delay--i.e., a delay so short as to not frustrate the 
purposes of Rule 611 by impairing fair and efficient access to an 
exchange's quotations.\5\
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    \3\ See Securities Exchange Act Release Nos. 75925 (September 
15, 2015), 80 FR 57261 (September 22, 2015) (File No. 10-222) 
(original notice); and 77406 (March 18, 2016), 81 FR 15765 (March 
24, 2016) (File No. 10-222) (notice of amendments, order instituting 
proceedings, and extension of time).
    \4\ IEX's Form 1 includes an intentional access delay that 
imposes 350 microseconds of one-way latency for non-routable orders. 
IEX's access delay is discussed in the Commission's final order on 
IEX's Form 1. See Securities Exchange Act Release No. 78101 (June 
17, 2016) (File No. 10-222) (order granting IEX's exchange 
registration) (``IEX Form 1 Approval Order'').
    \5\ See Regulation NMS Adopting Release, supra note 1, at 37520 
(noting that ``[f]or a trading center to qualify as entitled to 
display any protected quotations, the public in general must have 
fair and efficient access to a trading center's quotations'').
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A. Regulation NMS: Automated Quotation and Protected Quotation

    In general, Rule 611 under Regulation NMS (the ``Order Protection 
Rule,'' or ``Trade-Through Rule'') protects the best ``automated'' 
quotations of exchanges by obligating other trading centers to honor 
those ``protected'' quotations by not executing trades at inferior 
prices, or ``trading through'' such best automated quotations.\6\ Only 
an exchange that is an ``automated trading center'' \7\ displaying an 
``automated quotation'' \8\ is entitled to this protection.\9\ Trading 
centers must establish, maintain, and enforce written policies and 
procedures that are reasonably designed to prevent trade-throughs of 
protected quotations, unless an exception or exemption applies.\10\
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    \6\ See 17 CFR 242.611. When it adopted Regulation NMS, the 
Commission explained that one purpose of the Order Protection Rule 
was to incentivize greater use of displayed limit orders, which 
contribute to price discovery and market liquidity, by protecting 
them from trade-throughs. See Regulation NMS Adopting Release, supra 
note 1, at 37516-17. In discussing whether to apply order protection 
to non-automated, ``manual'' quotations, the Commission stated that 
``providing protection to manual quotations, even limited to trade-
throughs beyond a certain amount, potentially would lead to undue 
delays in the routing of investor orders, thereby not justifying the 
benefits of price protection.'' Id. at 37518. The Commission also 
noted that ``those who route limit orders will be able to control 
whether their orders are protected by evaluating the extent to which 
various trading centers display automated versus manual 
quotations.'' Id. In addition, the Commission intended that the 
Order Protection Rule would reinforce a broker's duty of best 
execution by prohibiting executions at inferior prices absent an 
exception. See id. at 37516 (``Given the large number of trades that 
fail to obtain the best displayed prices (e.g., approximately 1 in 
40 trades for both Nasdaq and NYSE stocks), the Commission is 
concerned that many of the investors that ultimately received the 
inferior price in these trades may not be aware that their orders 
did not, in fact, obtain the best price. The Order Protection Rule 
will backstop a broker's duty of best execution on an order-by-order 
basis by prohibiting the practice of executing orders at inferior 
prices, absent an applicable exception.'').
    \7\ See 17 CFR 242.600(b)(4). References to ``exchange'' used 
herein apply also to facilities of national securities associations. 
See 17 CFR 242.600(b)(57).
    \8\ See 17 CFR 242.600(b)(3).
    \9\ See 17 CFR 242.600(b)(57) (defining ``protected bid or 
protected offer'') and 242.600(b)(58) (defining ``protected 
quotation''). See also Regulation NMS Adopting Release, supra note 
1, at 37504 (stating that ``[t]o qualify for protection, a quotation 
must be automated'').
    \10\ 17 CFR 242.611(a)(1).
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    There are several provisions in Regulation NMS that impact whether 
the Order Protection Rule applies. First, Rule 600(b)(58) defines a 
``protected quotation'' as a ``protected bid or a protected offer.'' 
\11\ Rule 600(b)(57), in turn, defines a ``protected bid or protected 
offer'' as a quotation in an NMS stock that is: (i) Displayed by an 
``automated trading center,'' (ii) disseminated pursuant to an 
effective national market system plan, and (iii) an ``automated 
quotation'' that is the best bid or best offer of a national securities 
exchange or national securities association.\12\
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    \11\ 17 CFR 242.600(b)(58).
    \12\ 17 CFR 242.600(b)(57).
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    In order for an exchange to operate as an ``automated trading 
center,'' it must, among other things, have ``implemented such systems, 
procedures, and rules as are necessary to render it capable of 
displaying quotations that meet the requirements for an `automated 
quotation' set forth in [Rule 600(b)(3) of Regulation NMS].'' \13\ Rule 
600(b)(3) defines an ``automated quotation'' as one that:
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    \13\ 17 CFR 242.600(b)(4). Rule 600(b)(4) contains additional 
requirements that must be satisfied in order to be an automated 
trading center. Those requirements are not at issue for purposes of 
this interpretation.
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    i. Permits an incoming order to be marked as immediate-or-cancel;
    ii. Immediately and automatically executes an order marked as 
immediate-or-cancel against the displayed quotation up to its full 
size;
    iii. Immediately and automatically cancels any unexecuted portion 
of an order marked as immediate-or-cancel without routing the order 
elsewhere;
    iv. Immediately and automatically transmits a response to the 
sender of an order marked as immediate-or-cancel indicating the action 
taken with respect to such order; and
    v. Immediately and automatically displays information that updates 
the displayed quotation to reflect any change to its material 
terms.\14\
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    \14\ See 17 CFR 242.600(b)(3). See also Regulation NMS Adopting 
Release, supra note 1, at 37504.
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    Any quotation that does not meet the requirements for an automated 
quotation is defined in Rule 600(b)(37) as a ``manual'' quotation.\15\
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    \15\ Regulation NMS Adopting Release, supra note 1, at 37534. 
See also 17 CFR 242.600(b)(37) (defining ``manual quotation''). The 
Commission also provided context as to the distinction between 
``automated quotations'' and ``manual quotations.'' At the time of 
the adoption of Regulation NMS, manual quotations and markets that 
primarily were centered around human interaction in a floor-based 
trading environment, including ``hybrid'' manual-automated trading 
facilities, experienced processing delays for inbound orders that 
were measured in multiple seconds. See Regulation NMS Adopting 
Release, supra note 1, at 37500 n.21 (``One of the primary effects 
of the Order Protection Rule adopted today will be to promote much 
greater speed of execution in the market for exchange-listed stocks. 
The difference in speed between automated and manual markets often 
is the difference between a 1-second response and a 15-second 
response . . . .''). In contrast to floor-based and hybrid markets 
that existed at the time Regulation NMS was adopted, newer automated 
matching systems coming more widely into use removed the human 
element and instead immediately matched buyers and sellers 
electronically. The Commission also explained that the Order 
Protection Rule took a substantially different approach to 
intermarket price protection than the existing trade-through 
protection regime at the time--the Intermarket Trading System 
(``ITS'') Plan. See id. at 37501. As the Commission noted, the ITS 
provisions did not distinguish between manual and automated 
quotations and ``fail[ed] to reflect the disparate speed of response 
between manual and automated quotations'' as they ``were drafted for 
a world of floor-based markets.'' Id. As a result, ``[b]y requiring 
order routers to wait for a response from a manual market, the ITS 
trade-through provisions can cause an order to miss both the best 
price of a manual quotation and slightly inferior prices at 
automated markets that would have been immediately accessible.'' Id. 
In addition, the Commission emphasized that Rule 611 does not 
``supplant or diminish'' a broker-dealer's duty of best execution. 
See id. at 37538.

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[[Page 40787]]

    In adopting Regulation NMS, the Commission recognized that there 
would be unintentional time delays by automated trading centers in 
responding to orders, albeit very short ones.\16\ Although a number of 
commenters on Regulation NMS advocated for a specific time standard, 
ranging from one second down to 250 milliseconds,\17\ to distinguish 
between manual and automated quotations,\18\ the Commission declined to 
set such a standard.\19\ Instead, in interpreting the term ``immediate[ 
]'' when adopting Rules 600 and 611, the Commission stated that ``[t]he 
term `immediate' precludes any coding of automated systems or other 
type of intentional device that would delay the action taken with 
respect to a quotation.'' \20\
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    \16\ See infra note 23 and accompanying text (discussing the 
exception in Rule 611(b)(1) for small unintentional delays).
    \17\ A millisecond is one thousandth of a second.
    \18\ See Regulation NMS Adopting Release, supra note 1, at 
37519.
    \19\ See id. at 37519 (``The definition of automated quotation 
as adopted does not set forth a specific time standard for 
responding to an incoming order.'').
    \20\ Id. at 37534. The Commission also stated that the standard 
for responding to an incoming order ``should be `immediate,' i.e., a 
trading center's systems should provide the fastest response 
possible without any programmed delay.'' Id. at 37519. Further, the 
Commission also stated that, for a quotation ``[t]o qualify as 
`automatic,' no human discretion in determining any action taken 
with respect to an order may be exercised after the time an order is 
received,'' and ``a quotation will not qualify as `automated' if any 
human intervention after the time an order is received is allowed to 
determine the action taken with respect to the quotation.'' Id. at 
37519 and 37534.
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    The only precise time standards approved by the Commission in Rule 
611 and the Regulation NMS Adopting Release arise in the context of two 
exceptions to Rule 611 covering circumstances in which trade-through 
protection would not apply. These exceptions illustrate the time 
dimensions the Commission had in mind in distinguishing quotations that 
should receive trade-through protection from those that should not, and 
notably, both use a one-second standard.\21\ Specifically, Rule 
611(b)(1) provides that trading centers may trade through quotations of 
automated trading centers that experience a ``failure, material delay, 
or malfunction.'' \22\ The Commission accepted that the ``immediate'' 
standard necessarily would accommodate unintentional delays below the 
threshold of a ``material delay,'' which it interpreted in light of 
``current industry conditions'' as one where a market was ``repeatedly 
failing to respond within one second after receipt of an order.'' \23\ 
The Commission similarly established a one-second standard for the 
exception in Rule 611(b)(8), which excepts trade-through protection 
where the trading center that was traded-through had displayed, within 
the prior one second, a price equal or inferior to the price of the 
trade-through transaction.\24\ In discussing the 611(b)(8) exception, 
the Commission stated that it ``generally does not believe that the 
benefits would justify the costs imposed on trading centers of 
attempting to implement an intermarket price priority rule at the level 
of sub-second time increments. Accordingly, Rule 611 has been 
formulated to relieve trading centers of this burden.'' \25\ In 
adopting these exceptions to Rule 611, the Commission contemplated the 
existence of very short unintentional delays of a magnitude up to one 
second that would not affect the protected status of an ``immediate'' 
automated quotation. Since then, the market and the technology have 
evolved.
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    \21\ See 17 CFR 242.611(b)(1) and (8); see also Regulation NMS 
Adopting Release, supra note 1, at 37519 (discussing the one-second 
standard in Rule 611(b)(1)) and id. at 37523 (discussing the one-
second standard in Rule 611(b)(8)). One second is 1,000,000 
microseconds.
    \22\ 17 CFR 242.611(b)(1).
    \23\ See Regulation NMS Adopting Release, supra note 1, at 
37519. In other words, the Commission viewed the phrase ``fastest 
response possible'' as consistent with an unintentional delay of 
less than one second whereby participants could consider an 
automated trading center experiencing a delay beyond that limit to 
no longer be ``immediately'' accessible.
    \24\ See 17 CFR 242.611(b)(8).
    \25\ Regulation NMS Adopting Release, supra note 1, at 37523.
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B. The Commission's Updated Interpretation of Automated Quotation

    The Commission proposed to interpret ``immediate'' when determining 
whether a trading center maintains an ``automated quotation'' for 
purposes of Rule 611 ``to include response time delays at trading 
centers that are de minimis, whether intentional or not.'' \26\ The 
Commission further stated its preliminary belief ``that, in the current 
market, delays of less than a millisecond in quotation response times 
may be at a de minimis level that would not impair a market 
participant's ability to access a quote, consistent with the goals of 
Rule 611 and because such delays are within the geographic and 
technological latencies experienced by market participants today.'' 
\27\ As discussed below, the Commission received a number of comments 
on its proposed interpretation and, after considering those comments, 
has determined to issue a revised interpretation from that which it 
originally proposed, as detailed further below.
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    \26\ Securities Exchange Act Release No. 77407 (March 18, 2016), 
81 FR 15660, 15661 (March 24, 2016) (S7-03-16) (``Notice of Proposed 
Interpretation''). Because IEX's POP/coil delay is designed 
purposefully and intentionally to delay access to its matching 
engine, and consequently delays access to IEX's displayed quotation 
(See Letter from Sophia Lee, IEX, to Brent J. Fields, Secretary, 
Commission, dated November 13, 2015 (``IEX First Form 1 Letter'') at 
4 (comment letter on File No. 10-222)), IEX would not be an 
automated market under the interpretation of ``immediate'' in the 
Regulation NMS Adopting Release as ``[t]he term `immediate' 
precludes any coding of automated systems or other type of 
intentional device that would delay the action taken with respect a 
quotation.'' Regulation NMS Adopting Release, supra note 1, at 
37534.
    \27\ Notice of Proposed Interpretation, supra note 26, at 15665.
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II. Comments Received and Commission Discussion

    The Commission received 24 comments \28\ on its proposed

[[Page 40788]]

interpretation.\29\ Commenters raised a number of issues, including 
whether intentional sub-millisecond delays are in fact de minimis or 
would materially complicate market structure, as well as requests to 
clarify the scope and details of the interpretation.
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    \28\ See Letters (``Interp Letter(s)'') from Rajiv Sethi to 
Brent J. Fields, Secretary, Commission, dated March 21, 2016; 
Stacius Sakato to Brent J. Fields, Secretary, Commission, dated 
March 28, 2016; David Lauer, Healthy Markets Association, to Brent 
J. Fields, Secretary, Commission, dated April 1, 2016; Hazel 
Henderson, Ethical Markets Media, to Brent J. Fields, Secretary, 
Commission, dated April 1, 2016; R.T. Leuchtkafer to Brent J. 
Fields, Secretary, Commission, dated April 8, 2016; Sal Arnuk and 
Joe Saluzzi, Themis Trading, to Brent J. Fields, Secretary, 
Commission, dated April 12, 2016; R. Glenn Hubbard, John L. 
Thornton, and Hal S. Scott, Committee on Capital Markets Regulation, 
to Brent J. Fields, Secretary, Commission, dated April 14, 2016; 
Mary Ann Burns, FIA Principal Traders Group, to Brent J. Fields, 
Secretary, Commission, dated April 14, 2016; William J. Stephenson, 
Franklin Templeton Investments, to Brent J. Fields, Secretary, 
Commission, dated April 14, 2016; John Nagel, Citadel, to Brent J. 
Fields, Secretary, Commission, dated April 14, 2016; Eric Budish to 
Brent J. Fields, Secretary, Commission, dated April 14, 2016; Bryan 
Thompson, British Columbia Investment Management Corporation, to 
Brent J. Fields, Secretary, Commission, dated April 14, 2016; Adam 
Nunes, Hudson River Trading (``HRT''), to Brent J. Fields, 
Secretary, Commission, dated April 14, 2016; William R. Harts, 
Modern Markets Initiative, to Brent J. Fields, Secretary, 
Commission, dated April 14, 2016; Joan C. Conley, Nasdaq, to Brent 
J. Fields, Secretary, Commission, dated April 14, 2016; D. Keith 
Ross, PDQ Enterprises, to Brent J. Fields, Secretary, Commission, 
dated April 15, 2016; David Weisberger, Markit, to Brent J. Fields, 
Secretary, Commission, dated April 18, 2016; Elizabeth K. King, 
NYSE, to Brent J. Fields, Secretary, Commission, dated April 18, 
2016; Kevin J. Weldon to Brent J. Fields, Secretary, Commission, 
dated April 20, 2016; Sophia Lee, IEX, to Brent J. Fields, 
Secretary, Commission, dated April 25, 2016; Abraham Kohen, AK 
Financial Engineering Consultants, to Brent J. Fields, Secretary, 
Commission, dated April 25, 2016; Theodore R. Lazo, SIFMA, to Brent 
J. Fields, Secretary, Commission, dated May 2, 2016; The Honorable 
Randy Hultgren to Mary Jo White, Commission, dated May 2, 2016; Amir 
C. Tayrani, Gibson, Dunn & Crutcher LLP to Brent J. Fields, 
Secretary, Commission, dated May 19, 2016.
    \29\ As discussed and summarized in the Commission's notice of 
its proposed interpretation, the Commission also received comments 
on the issue addressed by this interpretation in response to the 
initial notice of IEX's Form 1. See Notice of Proposed 
Interpretation, supra note 26, at 15660, 15663-64. Those comments 
are also discussed in the Commission's order approving IEX's Form 1 
application for exchange registration, which the Commission is 
separately issuing today. See IEX Form 1 Approval Order, supra note 
4.
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A. De minimis for Purposes of Rule 611

    Several commenters questioned whether de minimis intentional delays 
were permissible and whether delays of less than a millisecond could be 
considered de minimis in the current market. One commenter asserted 
that any intentional delay, even a de minimis one, ``is flatly 
inconsistent with the plain meaning of `immediate[ ],' '' \30\ 
referring to the dictionary definition of that term as `` `[o]ccurring 
without delay' or `instant'.'' \31\ Another commenter asserted that 
``[o]ne millisecond is not de minimis in any context except from the 
perspective of a human trader'' and noted that a millisecond ``is over 
10 times longer than the response time of most exchanges today.'' \32\ 
The commenter believed that sub-millisecond delays would ``impair a 
market participant's ability to access a quote.'' \33\ Another 
commenter argued that a millisecond is ``excessively long when compared 
to computer response times.'' \34\ One commenter believed that a sub-
millisecond standard ``will become obsolete at faster and faster 
rates'' as communications technology evolves.\35\
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    \30\ Gibson Dunn Interp Letter at 3.
    \31\ Gibson Dunn Interp Letter at 2 (citing to Black's Law 
Dictionary and Webster's Third New International Dictionary).
    \32\ HRT Interp Letter at 2. The commenter further noted that 
one millisecond is ``approximately three times the time via fiber 
between the furthest New Jersey data centers and approximately \1/
8\th the time to Chicago via fiber from the New Jersey 
datacenters.'' Id. at 2-3.
    \33\ HRT Interp Letter at 2. This commenter also cited to the 
Commission's MIDAS data from the fourth quarter of 2015, which 
showed that over 13% of displayed orders in large stocks are 
cancelled within one millisecond and over 9% of displayed orders in 
large stocks are executed within one millisecond, and concluded that 
``[g]iven that over 20% of orders are either executed or canceled 
during the first millisecond they were displayed, it seems likely 
that a one millisecond delay would have a material impact on a 
participant's ability to access the quotations.'' See id. The 
commenter qualified its observation by noting that these figures are 
relevant ``[t]o the extent that a market with similar order 
cancellation patterns implemented a one millisecond delay.'' See id. 
The commenter also recommended that an exchange that imposes an 
intentional delay ``allow market participants to bypass the delay 
when attempting to access `protected quotations'.'' Id. at 1-2. See 
also Citadel Interp Letter at 4 (``A time interval in which 
approximately 10% of executions in many of the most widely traded 
stocks typically occur is manifestly not de minimis.''); NYSE Interp 
Letter at 7. The Commission notes that it is not clear whether an 
exchange with an access delay that does not offer features (like co-
location, post-only orders, or maker-taker fees) that typically 
attract latency-sensitive traders, who may be more likely to cancel 
their orders within one millisecond of placing them, would 
experience those cancellation rates. Further, the Commission notes 
that Rule 611 focuses on inter-market order protection, which 
applies only when market participants access protected quotations at 
geographically dispersed trading centers that are already subject to 
varying processing delays, some of which may be a millisecond or 
more. A one millisecond intentional access delay is well within the 
current geographic and technological latencies already experienced 
by market participants when routing orders between trading centers.
    \34\ FIA PTG Interp Letter at 3. The commenter further noted 
that ``[f]or comparison, modern exchange matching engines process 
orders in considerably less than \1/20\ of that time, and geographic 
latencies between the major exchange data centers in New Jersey are 
generally less than \1/4\ of that time.'' Id. See also Nasdaq Interp 
Letter at 6 (noting that the throughput time of Nasdaq's system is 
40 microseconds); Kohen Interp Letter at 1 (noting that the Bombay 
Stock Exchange processes a transaction in 6 microseconds).
    \35\ See Nasdaq Interp Letter at 3. See also HRT Interp Letter 
at 3 (noting that ``a one millisecond time standard . . . is already 
obsolete''); FIA PTG Interp Letter at 6 (``One millisecond is slow 
by today's computer standards, and will be even slower (relatively 
speaking) in the future.''). Some commenters criticized the proposed 
interpretation as lacking empirical support for a sub-millisecond 
threshold or consideration of alternative delays. See Nasdaq Interp 
Letter at 4; Citadel Interp Letter at 3; Budish Interp Letter at 2. 
As discussed above, the Commission notes that the interpretation 
uses a de minimis standard, and not a specific time frame 
demarcating permissible versus impermissible access delays.
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    Other commenters expressed concern that intentional access delays, 
even de minimis ones, could add unnecessary complexity to the markets. 
In particular, the commenters stressed that such delays could cause 
orders to be routed to protected quotes that are no longer available. 
For example, one commenter expressed concern that the proposed 
interpretation could turn the national market system ``into a hall of 
mirrors where it's impossible to know which prices are real and which 
are latent reflections.'' \36\ The commenter opined that intentional 
access delays would ``harm market transparency and degrade the value of 
the NBBO'' and ``lead directly to lower fill rates'' when orders cannot 
be filled because the exchange with an access delay displays a stale 
better-priced quote that no longer exists but has yet to communicate 
that information.\37\ Another commenter argued that the interpretation 
could make market structure ``considerably more complex'' and lead to 
``ghost quotes'' that could ``cloud price discovery and corrode 
execution quality.'' \38\ The commenter further noted that ``an 
artificial delay in an exchange quote anywhere affects the markets 
everywhere'' and expressed concern that the proposed interpretation 
could negatively impact otherwise efficient and accessible markets.\39\ 
One commenter expressed concern that intentional delays might ``open 
the floodgates to a new wave of complex order types'' with delays 
ranging from 1 to 1,000 microseconds.\40\ Other commenters, however, 
opined that intentional access delays would not add complexity to the 
markets and would fit within current latencies experienced by trading 
centers. For example, one commenter asserted that a 350 microsecond 
delay is ``not much more than the normal latency that all trading 
platforms impose,'' and that an exchange could achieve the same delay 
by ``locat[ing] its primary data center 65 or more miles away from the 
other exchange data centers.'' \41\
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    \36\ FIA PTG Interp Letter at 2.
    \37\ FIA PTG Interp Letter at 5. The commenter argued that this 
might result in the appearance of more locked and crossed markets, 
which may interfere with market stability during periods of high 
volatility. See id.
    \38\ PDQ Interp Letter at 1.
    \39\ Id. at 2.
    \40\ Nasdaq Interp Letter at 3-4; Gibson Dunn Interp Letter at 
7.
    \41\ Letter from James J. Angel to Securities and Exchange 
Commission, dated December 5, 2015, at 3 (comment letter on IEX Form 
1, File No. 10-222). See also Letter from Larry Tabb, TABB Group, to 
Brent J. Fields, Secretary, Commission, dated November 23, 2015, at 
1 (comment letter on IEX Form 1, File No. 10-222) (arguing that 
IEX's 350 microsecond delay is not ``particularly problematic, as 
the time gap is minimal, and (even including the speed bump) IEX 
matches orders faster than a number of other markets''); Letter from 
Charles M. Jones to Brent Fields, Secretary, Commission, dated March 
2, 2016, at 2 (comment letter on IEX Form 1, File No. 10-222) 
(noting that ``from an economic point of view the 350-microsecond 
delay [proposed by IEX] per se should not be a particular cause for 
concern, as it is well within the bounds of the existing, 
geographically dispersed National Market System, and does not seem 
likely to contribute substantially to a phantom liquidity 
problem'').
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    In response to a comment that the dictionary definition of the term 
``immediate[ ]'' precludes any delay in accessing quotations, the 
Commission notes that quotations cannot be accessed

[[Page 40789]]

instantaneously.\42\ As the Commission repeatedly acknowledged when 
adopting Regulation NMS, even ``immediately'' accessible protected 
quotations in the context of Rules 600 and 611 are necessarily subject 
to some delay.\43\ Specifically, as noted above, the Regulation NMS 
Adopting Release discussed these delays and, although the Commission 
declined to set a specific time standard, it contemplated the existence 
of very short unintentional delays of a magnitude up to one second in 
the exceptions to Rule 611.
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    \42\ See supra note 31 (citing to the Gibson Dunn Interp 
Letter).
    \43\ For example, the Rule 611(b)(1) exception refers to a 
``material'' delay, which the Commission interpreted as one second 
or more. See Regulation NMS Adopting Release, supra note 1, at 
37519. In addition, the comment letters on Regulation NMS expressed 
a multitude of views on the appropriate standard for assessing the 
accessibility of a protected quotation. See also supra text 
accompanying note 17 (noting that commenters on Regulation NMS who 
advocated for setting a specific time standard for automated 
quotations recommended a range of times from one second down to 250 
milliseconds).
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    The Commission notes that, when it adopted Regulation NMS in 2005, 
processing times were longer than they are now.\44\ Today, low latency 
technology permits trading decisions to be made in microseconds, and 
certain market participants use the fastest gateways and purchase co-
location to compete to access quotations at those speeds.\45\ As 
discussed further below, however, even the fastest market participants 
today must access protected quotations on trading centers where there 
are delays of several milliseconds as a result of geography alone. In 
addition, trading centers today are attempting to address concerns with 
the fastest trading strategies by creating very small delays in 
accessing their quotations.\46\ The Commission does not agree that such 
efforts are incompatible with the Order Protection Rule. In the context 
of Regulation NMS, the term ``immediate'' does not preclude all 
intentional delays regardless of their duration, and such preclusion is 
not necessary to achieve the objectives of Rule 611. As long as any 
intentional delay is de minimis--i.e., does not impair fair and 
efficient access to an exchange's protected quotations--it is 
consistent with both the text and purpose of Rule 611.
---------------------------------------------------------------------------

    \44\ See supra text accompanying note 17 (noting that commenters 
on Regulation NMS who advocated for setting a specific time standard 
for automated quotations recommended a range of times from one 
second down to 250 milliseconds).
    \45\ Exchanges currently have delays within their systems, 
including access gateways of varying speeds as well as within their 
co-location infrastructure. For example, some exchanges 
intentionally employ a ``delay coil'' in their co-location 
facilities or offer different access gateways of varying speeds 
where one is not as ``fast as technologically feasible'' as the 
other. See IEX First Form 1 Letter at 3 (comment letter on File No. 
10-222) (referring to varying connectivity options offered by 
exchanges from the NYSE, Nasdaq, and BATS groups, and citing the CEO 
of Nasdaq referring to the intentional ``delay coil'' that Nasdaq 
uses inside its co-location infrastructure). Compare Gibson Dunn 
Interp Letter at 3 (writing on behalf of Nasdaq) (stating ``the term 
`immediate[]' in Rule 600(b)(3) unambiguously forecloses 
intentional, planned delay'' and referring to ``the Commission's own 
understanding that the term [immediately] requires response times 
that are as fast as technologically feasible'').
    \46\ See, e.g., supra note 45 (discussing intentional delays 
imposed in the exchange co-location context).
---------------------------------------------------------------------------

    In response to commenters that argued that an intentional de 
minimis delay would harm market transparency, degrade the NBBO, or 
cloud price discovery, the Commission notes, as discussed further 
below, that Rule 600(b)(3)(v) requires trading centers to immediately 
update their displayed quotations to reflect material changes. Market 
participants today already necessarily experience very short delays in 
receiving updates to displayed quotations, as a result of geographic 
and technological latencies, similar to those experienced when 
accessing protected quotations. The Commission does not believe the 
introduction of intentional delays of even smaller magnitude will 
impair fair and efficient access to protected quotations.
    In response to commenters' concern that an intentional delay is not 
de minimis or could add complexity to the market, the Commission notes 
that its interpretation does not address whether delays are de minimis 
in all trading contexts, but rather only whether they impair fair and 
efficient access to an exchange's quotations when a market participant 
routes an order to comply with Rule 611.
    Systems processing and transit times, whether at the exchange, the 
market participant sending the order, or its agent, all create 
latencies in accessing protected quotations.\47\ Even the most 
technologically advanced market participants today encounter delays in 
accessing protected quotations of other ``away'' automated trading 
centers that either are transitory (e.g., as a result of message 
queuing) or permanent (e.g., as a result of physical distance). 
Furthermore, as noted above, any market participant co-located with the 
major exchanges' data centers in northern New Jersey necessarily 
encounters delays of 3-4 milliseconds--due to geography alone--in 
accessing the protected quotations of securities traded on the Chicago 
Stock Exchange's matching engine in Chicago.\48\ No commenter asserted 
that the periodic message queuing or minor systems-processing delays 
encountered at exchanges with protected quotations, or the time it 
takes to access the protected quotes of the Chicago Stock Exchange's 
Chicago facility, would, for example, materially undermine market 
quality or price transparency, or the efficiency of order routing or 
trading strategies.\49\
---------------------------------------------------------------------------

    \47\ See supra note 34 (discussing comments on exchange 
processing times).
    \48\ Similarly, they would encounter delays in reaching other 
``away'' exchanges located in other data centers. See, e.g., Letter 
from David Lauer, Healthy Markets Association, to Brent J. Fields, 
Secretary, Commission, dated November 6, 2015, at 4 (comment letter 
on IEX Form 1, File No. 10-222) (noting that ``[t]he NBBO already 
includes quotes with varied degrees of time lag'' and that the 
length of IEX's coiled cable ``is far less than the distance between 
NY and Chicago, and is remarkably similar to the distance between 
Carteret and Mahwah (36 miles)''); Letter from Sophia Lee, IEX, to 
Brent J. Fields, Secretary, Commission, dated November 23, 2016, at 
4 and 7 (comment letter on IEX Form 1, File No. 10-222) (referring 
to data from certain subscribers to IEX's ATS that, according to 
IEX, indicate that those subscribers' average latency when trading 
on IEX is comparable to that when trading on certain other 
exchanges, ``is an order of magnitude less than that of the Chicago 
Stock Exchange,'' and ``is on average less than the round-trip 
latency of the NYSE as well'').
    \49\ From the perspective of a market participant based in New 
Jersey, classifying a New Jersey market with an intentional sub-
millisecond delay as ``manual'' while classifying a Chicago market 
with geographic delay measured in multiple milliseconds as 
``automated'' would be inequitable and would not further the goals 
of Regulation NMS.
---------------------------------------------------------------------------

    The Commission acknowledges that interpreting ``immediate'' to 
include an intentional de minimis access delay, because it would be 
additive, may increase the overall latency in accessing a particular 
protected quotation, albeit by a very small amount. Such delays may be 
a detectable difference for the most latency-sensitive market 
participants and could marginally impact the efficiency of some of 
their quoting and trading strategies, even if such intervals likely are 
immaterial to investors with less advanced trading technology or a 
longer-term investing horizon. But the Commission believes that just as 
the geographic and technological delays experienced today do not impair 
fair and efficient access to an exchange's quotations or otherwise 
frustrate the objectives of Rule 611, the addition of a de minimis 
intentional access delay is consistent with Rule 600(b)(3)'s 
``immedia[cy]'' requirement.\50\
---------------------------------------------------------------------------

    \50\ One commenter argued that there is ``no evidence of a need 
for a de minimis exception or that planned delays will benefit 
investors in any meaningful way.'' Gibson Dunn Interp Letter at 7. 
See also Nasdaq Interp Letter at 5. As discussed above, however, the 
Commission believes that its updated interpretation is warranted in 
light of technological and market developments and is consistent 
with the purposes of Rule 611. See also comments submitted on IEX's 
exchange registration (File No. 10-222), a number of which supported 
the intentional delay proposed by IEX.

---------------------------------------------------------------------------

[[Page 40790]]

    Further, the Commission notes that its interpretation uses a de 
minimis standard specifically so that it may evolve with technological 
and market developments. As it did when it established the 
``immediate'' standard, the Commission believes it remains appropriate 
to avoid ``specifying a specific time standard that may become obsolete 
as systems improve over time.'' \51\ As explained further below, the 
Commission's revised interpretation provides that the term 
``immediate'' precludes any coding of automated systems or other type 
of intentional device that would delay the action taken with respect to 
a quotation unless such delay is de minimis in that it would not impair 
a market participant's ability to fairly and efficiently access a 
quote, consistent with the goals of Rule 611.
---------------------------------------------------------------------------

    \51\ Regulation NMS Adopting Release, supra note 1, at 37519.
---------------------------------------------------------------------------

B. Operation of Access Delays

    Several commenters that expressed general concerns with an 
intentional access delay, even a de minimis one, expressed a particular 
concern with those that would be ``selectively'' applied (e.g., 
intentional delays that are applied to members but not to the exchange 
itself).\52\ In addition, several commenters asserted that the 
Commission's proposed interpretation was overbroad based on their 
belief that it would ``permit all sub-millisecond delays, regardless of 
how those delays operate, the reasoning and incentives behind the 
delays, or the impacts on the markets and investors.'' \53\ These 
commenters instead urged the Commission to ``evaluate each proposed 
delay, regardless of its duration, and specifically determine that it 
is designed and applied in a manner that is consistent with the 
purposes of the Exchange Act.'' \54\ Another commenter urged the 
Commission to ``take into account not just the length of the delay, but 
also its purpose.'' \55\
---------------------------------------------------------------------------

    \52\ See, e.g., FIA PTG Interp Letter at 6; MMI Interp Letter at 
1; Weldon Interp Letter at 1-2.; NYSE Interp Letter at 4; Citadel 
Interp Letter at 8; Markit Interp Letter at 2-3.
    \53\ Healthy Markets Interp Letter at 2. See also Ethical 
Markets Interp Letter at 2-3, Franklin Templeton Interp Letter, 
British Columbia Investment Management Corporation Interp Letter 
(each repeating the recommendation of the Healthy Markets Interp 
Letter); and Themis Interp Letter at 2.
    \54\ Healthy Markets Interp Letter at 3. See also Ethical 
Markets Interp Letter at 2-3, Franklin Templeton Interp Letter, and 
British Columbia Investment Management Corporation Interp Letter 
(each repeating the recommendation of the Healthy Markets Interp 
Letter). The commenters further urged that the interpretation be 
conditioned on: (1) Delays always being less than one millisecond; 
(2) delays being applied equally to all participants and across all 
order types; (3) data sent to the Securities Information Processors 
should not be delayed; and (4) the purpose of each delay is 
expressly stated and intended to benefit long-term investors. See 
Healthy Markets Interp Letter at 4. See also Ethical Markets Interp 
Letter at 2-3, Franklin Templeton Interp Letter, and British 
Columbia Investment Management Corporation Interp Letter (each 
repeating the recommendation of the Healthy Markets Interp Letter). 
Another commenter raised a similar concern, and urged the Commission 
to review each proposed access delay separately and ``ensure that 
any such delays are equally applied to all market participants.'' 
See Committee on Capital Markets Regulation Interp Letter at 2. One 
commenter urged the Commission to consider ``one single measuring 
stick: Will the proposed delay serve long term investors?'' Themis 
Interp Letter at 2.
    \55\ Sethi Interp Letter at 2 (emphasis in original). Another 
commenter suggested an alternative definition of ``immediate'' that 
is not ``elapsed-time dependent'' but instead would consider an 
exchange's response to an incoming order to be ``immediate'' if the 
transition of the displayed quote from point A (before the order is 
received) to B (after the order is received) can be ``fully 
attributed to the execution of [the order] in a determinative way.'' 
Sakato Interp Letter at 1-2. The Commission believes that at this 
time an order-by-order determination of whether a quotation is 
``protected'' could introduce unworkable complexity into order 
routing and could frustrate the incentive provided to market 
participants to post the resting displayed limit orders that 
underpin much of the price discovery in the market.
---------------------------------------------------------------------------

    The Commission notes that this interpretation does not address 
whether any particular access delay is unfairly discriminatory, an 
inappropriate or unnecessary burden on competition, or otherwise 
inconsistent with the Act. Rather, it clarifies that if an intentional 
access delay is de minimis, then it is ``immediate'' for purposes of 
Rules 600(b)(3) and 611. While the Commission's interpretation is 
narrowly focused on the meaning and application of the word 
``immediate[ ]'' in Rule 600(b)(3) in light of technological and market 
developments since the adoption of Regulation NMS in 2005, the 
evaluation of any proposed access delay would involve additional 
considerations.
    Specifically, this interpretation does not obviate the requirement 
of individualized review of proposed access delays, including de 
minimis delays, for consistency with the Exchange Act and Regulation 
NMS. Any exchange seeking to impose an access delay must reflect that 
in its rules, which are required to be filed with the Commission as 
part of the exchange application or as an individual proposed rule 
change. This interpretation does not alter the requirement that any 
exchange access delay must be fully described in a written rule of the 
exchange, which in turn must be filed with the Commission and published 
for notice and comment, nor does it obviate the need for a proposed 
rule change that would impose an access delay otherwise to comply with 
the Act and the regulations thereunder applicable to the exchange.\56\ 
Accordingly, the commenters' concerns and recommended conditions are 
addressed by the existing requirements and process through which 
exchanges publicly propose their rule changes under the Act, and each 
proposed access delay would be scrutinized on an individual basis 
through that process.\57\ Any proposed application of an access delay 
would therefore be subject to notice, comment, and the Commission's 
separate evaluation of the proposed rule change.\58\
---------------------------------------------------------------------------

    \56\ Only registered exchanges and associations can have 
``automated quotations'' that are ``protected quotations.'' See 17 
CFR 242.611(b)(57). Such entities are required by Section 19 of the 
Act to file all rules and proposed changes to their rules with the 
Commission so that the Commission can review and publish them for 
public notice and comment. See 15 U.S.C. 78s(b). Further, no 
proposed rule change can take effect unless approved by the 
Commission or otherwise permitted to become effective under the Act 
and rules thereunder. See id. Similarly, an applicant seeking to 
register as an exchange is required to file all proposed rules with 
the Commission on Form 1, which the Commission publishes for notice 
and comment. Once filed, the Commission evaluates each proposed rule 
change for consistency with the Act and the rules thereunder. An 
access delay would constitute a ``rule'' of an exchange because it 
would be a ``stated policy, practice, or interpretation'' that 
concerns a ``material aspect'' of the operation of an exchange, and 
thus any new or amended delay would require a filing. See 15 U.S.C. 
78c(a)(27) (defining ``rules of an exchange''); 17 CFR 240.19b-
4(a)(6) (defining ``stated policy, practice, or interpretation''); 
17 CFR 240.19b-4 (noting that a stated policy, practice, or 
interpretation is deemed to be a proposed change unless it is fairly 
and reasonably implied by an existing rule or is concerned solely 
with the administration of the exchange). As required by Section 
19(b) of the Act, Rule 19b-4, and Form 19b-4, such exchange would be 
required to, among other things, detail the purpose of the proposed 
delay and analyze how the delay is consistent with the Act, 
including the Section 6 standards governing, among other things, 
unfair discrimination, protection of investors and the public 
interest, inappropriate burdens on competition, and just and 
equitable principles of trade. See Section 19(b), Rule 19b-4 and 
Form 19b-4 (on which exchanges file their proposed rule changes).
    \57\ See Citadel Interp Letter at 6-7 (acknowledging that new 
access delays would need to be filed with the Commission before they 
can be implemented, but expressing concern that it would ``be 
exceedingly difficult for the staff to recognize all of the 
implications and impacts of each delay mechanism'').
    \58\ In the case of IEX, the Commission's separate order 
approving IEX's Form 1 addresses the POP/coil delay's consistency 
with the Act. See also SIFMA Interp Letter at 3 (recommending that 
``any intentional delay should be predictable and universally 
applied to all market participants in a non-discriminatory 
manner'').

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[[Page 40791]]

C. Other Comments

    A few commenters asked the Commission to provide more detail on the 
application of the proposed interpretation.\59\ For example, one 
commenter asked whether it applies to both inbound and outbound delays 
and whether it should be based on the exchange's fastest or slowest 
means of connecting.\60\ Other commenters asked how much variance will 
be permitted and whether unintentional delays also should be covered by 
the interpretation.\61\
---------------------------------------------------------------------------

    \59\ See, e.g., HRT Interp Letter at 3; Nasdaq Interp Letter at 
3.
    \60\ See HRT Interp Letter at 3. See also Citadel Interp Letter 
at 9.
    \61\ See, e.g., Citadel Interp Letter at 9-10. One commenter 
asked whether there would be a process to remove protected quotation 
status from an exchange that has an intentional delay that equals or 
exceeds one millisecond. See id. at 10. If any market participant 
experiences issues in accessing that exchange's quotation, it may 
consider the applicability of the exceptions specified in Rule 
611(b), including the ``material delay'' condition of Rule 
611(b)(1). See 17 CFR 242.611(b)(1). The Commission notes that the 
Rule 611(b)(1) ``self-help'' exception refers to a ``material 
delay,'' and in the Regulation NMS Adopting Release, the Commission 
provided an interpretation of the phrase ``material delay'' as one 
where a market was ``repeatedly failing to respond within one second 
after receipt of an order.'' See Regulation NMS Adopting Release, 
supra note 1, at 37519.
---------------------------------------------------------------------------

    The interpretation of ``immediate'' applies to the term as used in 
Rule 600(b)(3), so that it applies to any intentional delay imposed by 
an exchange through any means provided by the exchange to access its 
quotations. Further, as modified here from the proposed interpretation, 
the interpretation applies only to intentional delays, as unintentional 
delays are addressed by the existing exception contained in Rule 
611(b)(1).\62\ Finally, in response to the commenters asking if both 
inbound and outbound delays should be taken into account when measuring 
the length of an intentional delay, the Commission notes that the 
intentional delay, as it pertains to the Order Protection Rule, is 
measured as a cumulative delay experienced by a non-routable order--in 
other words, the intentional delay applied on an order message sent 
into an exchange system through each of the events specified in the 
definition of ``automated quotation'' in Rule 600(b)(3). Specifically, 
any intentional delay imposed by the exchange in (1) executing an 
immediate-or-cancel order against its displayed quotation up to its 
full size, (2) cancelling any unexecuted portion of such order, or (3) 
transmitting a response to the sender of such order, should be added 
together in assessing compliance with Rule 611.\63\
---------------------------------------------------------------------------

    \62\ See 17 CFR 242.611(b)(1). See also supra note 61 
(discussing the self-help exception). Accordingly, the Commission is 
not including as part of the interpretation the phrase ``whether 
intentional or not'' to focus its interpretation on access delays 
that are intentional. While the Commission acknowledges that the 
one-second (i.e., 1,000,000 microseconds) interpretation included in 
the Regulation NMS Adopting Release for this exception, as well as 
the ``one second'' exception in Rule 600(b)(8), may warrant 
reconsideration in the future, that would be a separate analysis and 
the Commission is not addressing those exceptions in this 
interpretation. See also SIFMA Interp Letter at 4 (requesting that 
the Commission clarify that it is not changing the self-help 
threshold).
    \63\ See 17 CFR 242.600(b)(3)(ii), (iii), and (iv), 
respectively. See also Regulation NMS Adopting Release, supra note 
1, at 37534. In the case of IEX, the POP/coil delay imposes a 350 
microsecond delay inbound to the matching engine for non-routable 
orders (but no additional delay when cancelling the unexecuted 
portion of the order) and a 350 microsecond delay outbound on the 
confirmation back to the order sender, for a cumulative 700 
microsecond delay. In addition, the Commission notes that IEX 
permits incoming orders to be marked as immediate-or-cancel, as is 
required by Rule 600(b)(3). See 17 CFR 242.600(b)(3)(i). One 
commenter argued that a delay in outbound data could cause the data 
reported to ``not accurately reflect the state of a quotation.'' See 
Gibson Dunn Interp Letter at 7. This commenter also asserted that 
intentional delays in communicating reports of transactions would 
decrease their ``informational value.'' See Gibson Dunn Interp 
Letter at 7; Nasdaq Interp Letter at 2. The Commission notes that 
the geographic and technological latencies that market participants 
experience when routing to access a quotation also affect data 
disseminated from the trading center to the market participant. In 
other words, market participants already experience latencies when 
receiving quotation updates and transaction information. At least 
with respect to delays well within those existing latencies, the 
Commission does not believe that a market participant's general 
experience in receiving this information is likely to be altered 
depending on whether the delay is intentional or unintentional.
---------------------------------------------------------------------------

    One commenter recommended that the Commission engage in notice and 
comment rulemaking to effect ``a change of this magnitude,'' which it 
argued contradicts the ``plain meaning of the term `immediate.' '' \64\ 
The commenter argued that an interpretation is only appropriate to 
``provide guidance on how a new service or product not contemplated at 
the time a rule was adopted should be treated under existing rules.'' 
\65\ As discussed above, however, the Commission does not believe the 
dictionary definition of the term ``immediate[ ]'' forecloses de 
minimis intentional delays (i.e., intentional delays so short that they 
do not impair fair and efficient access to an exchange's quotations). 
The Commission is updating its prior interpretation in light of 
technological and market developments since the adoption of Regulation 
NMS in 2005 to accommodate very short intentional delays that do not 
impair fair and efficient access to protected quotations. Although the 
Commission did afford an opportunity for notice and comment by 
publishing a draft interpretation for comment, and did take the 
comments it received into consideration, the Commission was not 
required to undertake notice and comment rulemaking when updating its 
interpretation of its own regulation.
---------------------------------------------------------------------------

    \64\ Citadel Interp Letter at 1. See also Hultgren Interp Letter 
at 1; Gibson Dunn Interp Letter at 1-2.
    \65\ Citadel Interp Letter at 2-3.
---------------------------------------------------------------------------

    Other commenters focused on what they viewed as a potential 
opportunity for manipulative activity that could result from an access 
delay to a market displaying a protected quotation. One commenter 
opined that an access delay would make it easier to manipulate markets 
``by taking advantage of stale and inaccessible quotations displayed 
during the duration of any access delays,'' and that such manipulative 
behavior ``could be particularly powerful in relatively illiquid 
stocks.'' \66\ As an example, the commenter posited that a market 
participant could ``safely manipulate a closing auction by sending 
displayed orders to an exchange with an intentional 999 microsecond 
delay and timing the submission of those orders for display 998 
microseconds or less before the close'' because ``no other market 
participant could reach them in time.'' \67\ Another commenter argued 
that access delays could lead to ``stale prices [that] are guaranteed 
to be displayed for a specific period of time up to 1 millisecond,'' 
which would cause pegged orders on other exchanges to ``be traded 
against at known stale prices'' when such pegged order is pegged to the 
stale price on the exchange with the access delay.\68\ The commenter 
argued that this could lead to ``a potentially new mechanism for 
spoofing . . . with the objective of affecting pegged orders on other 
exchanges.'' \69\
---------------------------------------------------------------------------

    \66\ Id. at 6.
    \67\ Id.
    \68\ NYSE Interp Letter at 8. See also Citadel Interp Letter at 
8 (arguing that ``every time market prices tick up or down, the NBBO 
would be incorrect for at least the duration of any intentional 
delays'' which would lead some pegged orders to track at 
``inaccurate prices'').
    \69\ NYSE Interp Letter at 8. See also HRT Interp Letter at 3 
(citing to a comment from Instinet on IEX's Form 1 that discussed 
the potential for ``spoofing'' by entering an order, waiting for 700 
microseconds, and cancelling the order without the risk of another 
market participant seeing or responding to it, but which could 
provide a false or misleading appearance that could affect the 
trading of other participants); FIA PTG Interp Letter at 7 (also 
citing to the Instinet letter).
---------------------------------------------------------------------------

    The Commission notes that the scenarios discussed by commenters are 
not related to the issue addressed by this interpretation--whether an 
intentional delay that is so short as not

[[Page 40792]]

to frustrate the goals of Rule 611 by interfering with fair and 
efficient access to an exchange's quotations is consistent with Rule 
600(b)(3)'s ``immedia[cy]'' requirement.\70\ If a delay is de minimis, 
then whether it is unintentional or intentional in nature is not 
expected to alter the potential for manipulative activity or make it 
harder to detect and prosecute. One commenter noted that it is 
important ``to contemplate and address the potential for abuse'' \71\ 
when an access delay is proposed and approved. The Commission agrees 
that such scrutiny--both by the exchange proposing an access delay, and 
by the Commission when considering whether to approve a proposed access 
delay rule--would be important. The Commission notes that, pursuant to 
Section 19(b) and Rule 19b-4, the proposing exchange would be required 
to consider and address in its rule change filing the potential for 
abuse of any proposed access delay, which would then be subject to 
notice, comment, and Commission review. Further, even after the rule 
change became effective, the Commission believes it would be incumbent 
on the exchange to remain vigilant in surveilling for abuses and 
violative conduct of its access delay rule, and consider amending its 
access delay if necessary, among other considerations, for the 
protection of investors and the public interest.\72\
---------------------------------------------------------------------------

    \70\ Nevertheless, the Commission believes that the scenarios 
discussed by commenters would, as a practical matter, be difficult 
to implement. For example, in the closing auction scenario, the 
Commission believes it would be practically difficult to 
successfully implement a coordinated single-digit microsecond 
strategy during a broad-based auction because of the precision it 
would require to ensure order arrival at the final microsecond and 
not have it trade with a multitude of other interest in the auction. 
Further, concerns surrounding pegged orders on away markets would 
affect only the most latency sensitive traders and only apply when 
the exchange with the access delay is alone at the NBBO, has 
exhausted all displayed and non-displayed interest at its best 
price, and is in the process of transitioning to a new price. 
However, that possibility is not uniquely introduced by an exchange 
with an access delay, but is currently present in a fragmented 
market with geographically dispersed venues. For example, the same 
problem (only exacerbated with considerably more latency) would be 
present if the Chicago Stock Exchange was alone at the NBBO on a 
symbol it trades from Chicago.
    \71\ HRT Interp Letter at 3.
    \72\ See 15 U.S.C. 78s(g)(1).
---------------------------------------------------------------------------

III. Commission's Interpretation

    In response to technological and market developments since the 
adoption of Regulation NMS,\73\ the Commission believes that it is 
appropriate to provide an updated interpretation of the meaning of the 
term ``immediate'' in Rule 600(b)(3).
---------------------------------------------------------------------------

    \73\ A number of factors affect the speed at which a market 
participant can receive market and quote data, submit orders, obtain 
an execution, and receive information on trades, including hardware, 
software, and physical distance. See, e.g., Securities Exchange Act 
Release No. 61358 (January 14, 2010), 75 FR 3594, 3610-11 (January 
21, 2010) (Concept Release on Equity Market Structure). Recent 
technological advances have reduced the ``latency'' that these 
factors introduce into the order handling process, both in absolute 
and relative terms, and some market participants and liquidity 
providers have invested in low-latency systems that take into 
account the advances in technology. See id. at 3606; see also 
Securities Exchange Act Release No. 76474 (November 18, 2015), 80 FR 
80997, 81000 (December 28, 2015) (Regulation of NMS Stock 
Alternative Trading Systems; Proposed Rule) (stating that ``[t]he 
growth in trading centers and trading activity has been fueled 
primarily by advances in technology for generating, routing, and 
executing orders'' and that ``[t]hese technologies have markedly 
improved the speed, capacity, and sophistication of the trading 
mechanisms and processes that are available to market 
participants'').
---------------------------------------------------------------------------

    Solely in the context of determining whether a trading center 
maintains an ``automated quotation'' for purposes of Rule 611 of 
Regulation NMS, the Commission does not interpret the term 
``immediate'' used in Rule 600(b)(3) by itself to prohibit a trading 
center from implementing an intentional access delay that is de 
minimis--i.e., a delay so short as to not frustrate the purposes of 
Rule 611 by impairing fair and efficient access to an exchange's 
quotations. Accordingly, the Commission's revised interpretation 
provides that the term ``immediate'' precludes any coding of automated 
systems or other type of intentional device that would delay the action 
taken with respect to a quotation unless such delay is de minimis.
    The Commission's updated interpretation recognizes that a de 
minimis access delay, even if it involves an ``intentional device'' 
that delays access to an exchange's quotation, is compatible with the 
exchange having an ``automated quotation'' under Rule 600(b)(3) and 
thus a ``protected quotation'' under Rule 611.\74\ Under this 
interpretation, Rule 600(b)(3)'s ``immedia[cy]'' requirement does not 
necessarily foreclose an automated trading center's use of very small 
intentional delays to address concerns arising from low latency trading 
strategies and other market structure issues. For example, intentional 
access delays that are well within the geographic and technological 
latencies experienced by market participants when routing orders are de 
minimis to the extent they would not impair a market participant's 
ability to access a displayed quotation consistent with the goals of 
Rule 611.
---------------------------------------------------------------------------

    \74\ An exchange that proposed to provide any member or user 
(including the exchange's inbound or outbound routing functionality, 
or the exchange's affiliates) with exclusive privileged faster 
access to its facilities over any other member or user would raise 
concerns under the Act, including under Section 6(b)(5) and 6(b)(8) 
of the Act, and would need to address those concerns in a Form 1 
exchange registration application or a proposed rule change 
submitted pursuant to Section 19 of the Act, as applicable.
---------------------------------------------------------------------------

    The interpretation does not change the existing requirement that, 
prior to being implemented, an intentional delay of any duration must 
be fully disclosed and codified in a written rule of the exchange that 
has become effective pursuant to Section 19 of the Act, where the 
exchange met its burden of articulating how the purpose, operation, and 
application of the delay is consistent with the Act and the rules and 
regulations thereunder applicable to the exchange.\75\
---------------------------------------------------------------------------

    \75\ As discussed above, any exchange that seeks to impose an 
intentional access delay must first file a proposed rule change with 
the Commission, which the Commission would publish for notice and 
comment, and approve only after finding that it is consistent with 
the applicable standards set forth in the Act. For example, a 
proposed access delay that is only imposed on certain market 
participants or certain types of orders would be scrutinized to 
determine whether or not the discriminatory application of that 
delay is unfair. See, e.g., Securities Exchange Act Release No. 
77406, 81 FR 15765 (March 24, 2016) (File No. 10-222) (order 
instituting proceedings on IEX's Form 1) (discussing the potentially 
unfairly discriminatory application of an access delay to advantage 
an affiliated outbound routing broker). If the Commission cannot 
find that a proposed access delay is consistent with the Act, it 
would disapprove the proposal, rendering moot the issue of whether a 
quotation with such a delay is protected. Generally, the Commission 
would be concerned about access delays that were imposed only on 
certain market participants or intentional access delays that were 
relieved based upon payment of certain fees.
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    In the Notice of Proposed Interpretation, the Commission stated its 
preliminary belief ``that, in the current market, delays of less than a 
millisecond in quotation response times may be at a de minimis level 
that would not impair a market participant's ability to access a quote, 
consistent with the goals of Rule 611 and because such delays are 
within the geographic and technological latencies experienced by market 
participants today.'' \76\ As discussed above, the Commission received 
a number of comments on that specific guidance.
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    \76\ Notice of Proposed Interpretation, supra note 26, at 15665.
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    At this time, the Commission is not adopting the proposed guidance 
under this interpretation that delays of less than one millisecond are 
de minimis. The Commission believes that, in light of the evolving 
nature of technology and the markets, and the need to assess the impact 
of intentional access delays on the markets, establishing a bright line 
de minimis threshold is not appropriate at this time. Rather, the 
Commission

[[Page 40793]]

believes that the interpretation is best focused on whether an 
intentional delay is so short as to not frustrate the purposes of Rule 
611 by impairing fair and efficient access to an exchange's quotations. 
As it makes findings as to whether particular access delays are de 
minimis in the context of individual exchange proposals,\77\ the 
Commission recognizes that such findings create common standards that 
must be applied fairly and consistently to all market participants.
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    \77\ See supra note 56 (discussing the proposed rule change 
process under the Exchange Act). See also IEX Form 1 Approval Order, 
supra note 4.
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    The Staff will also conduct a study within two years regarding the 
effects of intentional access delays on market quality, including price 
discovery and report back to the Commission with the results of any 
recommendations. Based on the results of that study or earlier as it 
determines, the Commission will reassess whether further action is 
appropriate.

List of Subjects in 17 CFR Part 241

    Securities.

Text of Amendments

    For the reasons set out in the preamble, the Commission is amending 
Title 17, chapter II, of the Code of Federal Regulations as follows:

PART 241--INTERPRETATIVE RELEASES RELATING TO THE SECURITIES 
EXCHANGE ACT OF 1934 AND GENERAL RULES AND REGULATIONS THEREUNDER

    Part 241 is amended by adding Release No. 34-78102 to the list of 
interpretative releases as follows:

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                                                                                         Federal  Register  vol.
               Subject                   Release No.                  Date                       and page
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                                                  * * * * * * *
Interpretation Regarding Automated           34-78102   June 17, 2016..................  121 FR [Insert FR Page
 Quotations Under Regulation NMS.                                                         Number].
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    By the Commission.

    Dated: June 17, 2016.
Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-14876 Filed 6-22-16; 8:45 am]
 BILLING CODE 8011-01-P