Document ID: SEC-2018-0237-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Investors Exchange, LLC
Posted Date: 2018-02-08T05:00Z

[Federal Register Volume 83, Number 27 (Thursday, February 8, 2018)]
[Notices]
[Pages 5655-5658]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-02483]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-82623; File No. SR-IEX-2018-01]

Self-Regulatory Organizations; Investors Exchange LLC; Notice of 
Filing and Immediate Effectiveness of Proposed Rule Change To Modify 
the Default Handling of Market Orders Entered With a Time-in-Force of 
DAY

February 2, 2018.
    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 January 22, 2018, 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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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 Securities 
Exchange Act of 1934 (``Act''),\4\ and Rule 19b-4 thereunder,\5\ 
Investors Exchange LLC (``IEX'' or ``Exchange'') is filing with the 
Securities and Exchange Commission (``Commission'') a proposed rule 
change to modify the default handling of market orders \6\ entered with 
a time-in-force of DAY.\7\ The Exchange has designated this rule change 
as ``non-controversial'' under Section 19(b)(3)(A) of the Act \8\ and 
provided the Commission with the notice required by Rule 19b-4(f)(6) 
thereunder.\9\ The text of the proposed

[[Page 5656]]

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.
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    \4\ 15 U.S.C. 78s(b)(1).
    \5\ 17 CRF 240.19b-4.
    \6\ See Rule 11.190(a)(2).
    \7\ See Rule 11.190(c)(3).
    \8\ 15 U.S.C. 78s(b)(3)(A).
    \9\ 17 CFR 240.19b-4.
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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 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 purpose of this proposed rule change is to modify the default 
handling of market orders entered with a time-in-force of DAY 
(hereinafter referred to as ``market DAY orders'').
    Pursuant to Rule 11.190(a)(2), the Exchange offers Users a market 
order, which is an order type that allows Users to buy or sell a stated 
amount of a security that is to be executed at or better than the NBBO 
at the time the order reaches the Exchange.\10\ Specifically, pursuant 
to Rule 11.190(a)(2), market orders do not trade through Protected 
Quotations,\11\ consistent with Rule 611(a)(1) of Regulation NMS.\12\ 
Moreover, any portion of a market order that is designated as an IEX 
Only order \13\ will be canceled if, upon receipt by the System,\14\ it 
cannot be executed by the Exchange in accordance with the Exchange's 
order execution rules.\15\ Any portion of a market order that is not 
designated as an IEX Only order (i.e., routable orders as described in 
IEX Rule 11.230(b)) that cannot be executed in full in accordance with 
the Exchange's order execution rules when reaching the Exchange will be 
eligible for routing away pursuant to IEX Rule 11.230(a)(2). A routable 
market order will trade at increasingly aggressive prices, fully 
satisfying all Protected Quotations, until the order is fully filled, 
reaches the LULD Price Band,\16\ or reaches the Router Constraint.\17\
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    \10\ A market order is always non displayed, may be a MQTY (as 
defined in Rule 11.190(b)(11)), may be routable or IEX Only, may not 
be designated as an ISO (as defined in Rule 11.190(b)(12)), and may 
not be submitted with a limit price. See Rules 11.190(a)(2)(B)-(D), 
and (F)-(G).
    \11\ See Rule 1.160(bb)
    \12\ See 17 CFR 242.611(a)(1).
    \13\ See Rule 11.190(b)(6).
    \14\ See Rule 1.160(nn).
    \15\ See Rules 11.230 and 11.230(a).
    \16\ See Rule 11.280(e)(5)(A).
    \17\ See Rule 11.190(f)(2).
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    Pursuant to Rule 11.190(a)(2)(A), market orders must have a time-
in-force of IOC, FOK, or, DAY, depending on the User election.\18\ 
Pursuant to Rule 11.190(a)(2)(E)(iii), market DAY orders, by default, 
are rejected, unless the User specifically elects to configure one or 
more of its connectivity ports to accept market DAY orders.\19\ Market 
orders with a time-in-force of IOC and FOK are accepted and eligible to 
trade during the Regular Market Session only.\20\ Market DAY orders are 
eligible to trade or route during the Regular Market Session and 
treated by the System as having a time-in-force of IOC. Furthermore, 
market DAY orders submitted before the open of the Regular Market 
Session are queued by the System until the Opening Auction (or Halt 
Auction, as applicable) \21\ for IEX-listed securities, or until the 
Opening Process for non-IEX listed securities pursuant to IEX Rule 
11.231, except market DAY orders that are designated to route pursuant 
to Rule 11.230(c).
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    \18\ Market orders with a time-in-force of GTT, GTX, and SYS, 
are rejected. See Rules 11.190(a)(2)(E)(iv)-(vi).
    \19\ A User can elect for the Exchange to accept market orders 
with a time-in-force of DAY on the Equities Port Request Form on 
pages 8-9 of its initial IEX Connectivity Agreement and Forms. A 
User may also change an existing connectivity port to accept market 
orders with a time-in-force of DAY by submitting an updated Equities 
Port Request Form to [email protected].
    \20\ See Rule 1.160(gg).
    \21\ See Rule 11.350(c).
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    Furthermore, pursuant to Rule 11.190(f)(1), market orders, 
including market DAY orders entered during continuous trading are 
subject to the IEX Order Collar, which prevents any incoming order or 
order resting on the Order Book, including those marked ISO, from 
executing at a price outside the Order Collar price range (i.e. 
prevents buy orders from trading at prices above the collar and 
prevents sell orders from trading at prices below the collar). The 
order collar price range is calculated using the numerical guidelines 
for clearly erroneous executions.
    The default treatment for market DAY orders was implemented based 
on informal discussions with various market participants who indicated 
that such orders are not typically utilized by market participants 
during continuous trading because of their aggressive trading 
characteristics. As a result, the Exchange determined that the default 
treatment for market DAY orders was appropriate.
    On August 4, 2017, the Commission approved a proposed rule change 
filed by the Exchange to adopt rules governing auctions for IEX-listed 
securities, including Opening and Closing Auction processes that 
establish IEX Official Opening and Closing Prices for each trading day, 
as well as IPO, Halt, and Volatility Auction processes utilized to 
conduct initial public offerings, and resume trading after a regulatory 
trading halt or pause in an IEX-listed security (collectively, ``IEX 
Auctions'').\22\
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    \22\ See Securities Exchange Act Release No. 81316 (August 4, 
2017), 82 FR 37474 (August 10, 2017)(SR-IEX-2017-10). See also Rules 
11.350(a)(12) and (10), respectively.
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    During the iterative process of designing IEX Auctions, informal 
discussions with various market participants indicated that 
notwithstanding the atypical use-case for the entry of market DAY 
orders during continuous trading, such orders are in fact ordinarily 
utilized by investors to interact with the auction processes of certain 
primary listing markets, because market DAY orders retain their 
aggressive pricing characteristics, which increases the likelihood of 
execution and adds depth of liquidity in the auction, while remaining 
constrained to the auction match price, therefore passively benefiting 
from the price discovery process.\23\ Accordingly, as proposed, the 
Exchange will instead allow all connectivity port sessions across all 
Members to accept market DAY orders by default.
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    \23\ See e.g., Cboe BZX Exchange, Inc. (``Bats'') Rules 
11.9(a)(2) and 11.23(a)(8).
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    Accordingly, the Exchange designed the IEX Auction processes to 
account for market DAY orders by queueing such orders on the Auction 
Book \24\ for participation in an upcoming auction when the order type 
is not eligible for trading in the current market session (i.e., during 
the Pre-Market Session for the Opening Auction), or when there is no 
active continuous trading (i.e., during the Order Acceptance Period 
\25\ before an IPO, Halt, or Volatility Auction), and then immediately 
canceling any unfilled portion immediately after the auction. This 
design allows Users to leverage the benefits of interacting with the 
IEX Auction processes using market DAY orders while mitigating the 
potentially

[[Page 5657]]

harmful impact of such orders that could manifest during continuous 
trading. Specifically, pursuant to Rule 11.350(a)(1):
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    \24\ See Rule 11.350(a)(1).
    \25\ See Rules 11.1350(a)(29)(A)-(C).

     The Opening and IPO Auction Books include market orders 
with a time-in-force of DAY entered during the Order Acceptance 
Period, and in the case of the Opening Auction, before the Opening 
Auction Lock-In Time; \26\
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    \26\ See Rule 11.350(a)(22).
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     The Halt Auction Book includes market orders with a 
time-in-force of DAY received during the Order Acceptance Period 
within the Regular Market Session, or queued prior to the Regular 
Market Session for securities that have not traded during the 
Regular Market Session on that trading day (i.e., market orders with 
a time-in-force of DAY entered during the Pre-Market Session for the 
Opening Auction that are participating in a Halt Auction pursuant to 
Rule 11.350(c)(2)(D) or (E)(ii)); and
     The Volatility Auction Book includes market orders with 
a time-in-force of DAY received during the Order Acceptance Period 
within the Regular Market Session.

    However, if a User does not have their connectivity ports properly 
configured to allow market DAY orders, such auction interest would be 
rejected by default. While, as noted above, a User can elect for the 
Exchange to accept market DAY orders by submitting an Equities Port 
Request Form, the process of making system changes to modify, test, and 
deploy the configuration adds additional complexity for Members and the 
Exchange. Therefore, to simplify User interaction with the System and 
allow Users to efficiently leverage the benefits of interacting with 
the IEX Auction processes using market DAY orders, the Exchange is 
proposing to eliminate the default rejection of market DAY orders and 
the corresponding User elected connectivity port settings for the 
acceptance of market DAY orders. As proposed, the Exchange will instead 
allow all connectivity port sessions across all Members to accept 
market DAY orders by default.
    The proposed changes do not amend the behavior of market DAY 
orders, as described above. Moreover, notwithstanding the potentially 
aggressive trading characteristics of market orders generally, the 
Exchange believes that there are sufficient limitations on execution of 
market orders, as described above, to mitigate against such concerns.
    As announced in IEX Trading Alerts #2017-015 and #2017-046, the 
Exchange intends to become a primary listing exchange and support its 
first IEX-listed security in 2018.\27\ In addition, as part of the 
listings initiative, the Exchange is providing a series of industry 
wide weekend tests for the Exchange and its Members to exercise the 
various technology changes required to support IEX Auctions and 
listings functionality.\28\ Accordingly, the Exchange is proposing to 
amend the default acceptance of market DAY orders in advance of the 
industry wide testing period in order to allow Members and other market 
participants time to develop, test, and deploy any necessary changes to 
support the handling of market DAY orders for participation in IEX 
Auctions.
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    \27\ See IEX Trading Alert #2017-015 (Listings Specifications, 
Testing Opportunities, and Timelines), May 31, 2017. See also IEX 
Trading Alert #2017-046 (IEX Listings Timeline Update), originally 
published on Monday, October 30, 2017, and re-published on Tuesday, 
October 31, 2017.
    \28\ See, e.g., IEX Trading Alert #2017-028 (First Listings 
Functionality Industry Test on Saturday, August 26), August 17, 
2017; IEX Trading Alert #2017-037 (Second Listings Functionality 
Industry Test on Saturday, September 9), September 7, 2017; IEX 
Trading Alert #2017-039 (Third Listings Functionality Industry Test 
on Saturday, September 23), September 18, 2017; IEX Trading Alert 
#2017-040 (Rescheduled 4th Listing Functionality Industry Test), 
September 29, 2017; IEX Trading Alert #2017-046 (IEX Listings 
Timeline Update), originally published on Monday, October 30, 2017, 
and re-published on Tuesday, October 31, 2017; and IEX Trading Alert 
#2017-047 (Fourth Listings Functionality Industry Test on Saturday, 
November 4), October 31, 2017.
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2. Statutory Basis
    IEX believes that the proposed rule change is consistent with the 
provisions of Section 6(b) \29\ of the Act in general, and furthers the 
objectives of Section 6(b)(5) of the Act \30\ in particular, in that it 
is designed to prevent fraudulent and manipulative acts and practices, 
to promote just and equitable principles of trade, to remove 
impediments to and perfect the mechanism of a free and open market and 
a national market system, and, in general, to protect investors and the 
public interest.
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    \29\ 15 U.S.C. 78f.
    \30\ 15 U.S.C. 78f(b)(5).
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    The proposed rule change is consistent with the protection of 
investors and the public interest, because it does not alter the 
substantive behavior of market DAY orders, but instead simplifies the 
process of entering market DAY orders for all Members. Specifically, 
the proposed changes are designed to simplify User interaction with the 
System and allow Users to efficiently leverage the benefits of 
interacting with the IEX Auction processes by eliminating the default 
rejection of market DAY orders and the corresponding User elected 
connectivity port settings for the acceptance of market DAY orders. The 
Exchange further believes that since the proposed changes do not amend 
the behavior of market DAY orders, the proposed rule changes are 
consistent with the protection of investors and the public interest 
because the limitations on execution of market orders, as discussed in 
the purpose section, would continue to mitigate against potential 
adverse market impact from such orders during continuous trading.
    Additionally, IEX notes that no other exchange utilizes default 
rejection of orders comparable to market DAY order types.\31\
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    \31\ See, e.g., Bats Rule 11.9(a)(2).
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    Moreover, the Exchange believes that the proposed rule changes are 
consistent with the protection of investors and the public interest 
because the Exchange is proposing to amend the default behavior of 
market DAY orders during the industry wide testing period for Members 
and other market participants to test with IEX as a primary listing 
exchange, and in advance of the first listing transferring to IEX, 
which will allow Members and other market participants time to develop, 
test, and deploy any necessary changes to support the handling of 
market DAY orders for participation in IEX Auctions.\32\
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    \32\ See supra note 28.
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    Furthermore, as discussed in the purpose section, the process of 
making system changes to modify, test, and deploy the port setting 
configurations on a Member-by-Member basis adds additional technical 
complexities for Members and the Exchange. Thus, the Exchange believes 
the proposed rule changes are consistent with the protection of 
investors and the public interest in that the Exchange is proposing to 
simplify the process of entering market DAY orders, thereby reducing 
overall technical complexities within the System that raise risks to 
Exchange operations, Members, and their investor clients.
    Lastly, the Exchange believes that the proposed rule change would 
not result in unfair discrimination, since the proposed changes amend 
the default behavior of market DAY orders across all connectivity 
ports. Thus, all Members will be eligible to enter market DAY orders on 
a fair and equal basis.

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

    IEX does not believe that the proposed rule change will result in 
any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act. The Exchange believes that the 
proposed changes do not impact inter-market competition since it is 
merely designed

[[Page 5658]]

to simplify the entry of market DAY orders for all Members, without 
substantively changing the approved rules governing the behavior of 
such orders. Moreover, as noted above, no competing exchanges impose a 
similar requirement.
    In addition, the Exchange does not believe that the proposed 
changes will have any impact on intra-market competition, because as 
discussed in purpose section, the proposed changes amend the default 
behavior of market DAY orders across all connectivity ports. Thus, all 
Members will be eligible to enter market DAY orders on a fair and equal 
basis.

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) \33\ of the Act and Rule 19b-4(f)(6) \34\ 
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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    \33\ 15 U.S.C. 78s(b)(3)(A).
    \34\ 17 CFR 240.19b-4(f)(6).
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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) \35\ of the Act to determine whether the proposed 
rule change should be approved or disapproved.
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    \35\ 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 [email protected]. Please include 
File Number SR-IEX-2018-01 on the subject line.

Paper Comments

     Send paper comments in triplicate to Brent J. Fields, 
Secretary, Securities and Exchange Commission, 100 F Street NE, 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-IEX-2018-01. This file 
number should be included in the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's internet website (http://www.sec.gov/rules/sro.shtml). 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for website viewing and printing in 
the Commission's Public Reference Section, 100 F Street NE, Washington, 
DC 20549-1090. Copies of the filing will also be available for 
inspection and copying at the IEX's principal office and on its 
internet website at www.iextrading.com. All comments received will be 
posted without change. Persons submitting comments are cautioned that 
we do not redact or edit personal identifying information from comment 
submissions. You should submit only information that you wish to make 
available publicly. All submissions should refer to File Number SR-IEX-
2018-01 and should be submitted on or before March 1, 2018.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\36\
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    \36\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-02483 Filed 2-7-18; 8:45 am]
 BILLING CODE 8011-01-P