Document ID: SEC-2012-1002-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: EDGA Exchange, Inc.
Posted Date: 2012-06-26T04:00Z

[Federal Register Volume 77, Number 123 (Tuesday, June 26, 2012)]
[Notices]
[Pages 38113-38116]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-15535]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-67226; File No. SR-EDGA-2012-22]

Self-Regulatory Organizations; EDGA Exchange, Inc.; Notice of 
Filing and Immediate Effectiveness of Proposed Rule Change To Amend 
EDGA Rules To Add the Mid-Point Discretionary Order

June 20, 2012.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that on June 8, 2012, the EDGA Exchange, Inc. (the ``Exchange'' or the 
``EDGA'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I and 
II 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\ 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

    EDGA Exchange, Inc. (``EDGA'' or the ``Exchange'') proposes to 
amend Exchange Rule 11.5(c) to add a new order type, the Mid-Point 
Discretionary Order, to the rule. In addition, the Exchange proposes to 
amend Exchange Rule 11.8(a)(2)(C) to reflect the priority that a Mid-
Point Discretionary Order would have under certain circumstances. The 
text of the proposed rule changes are attached as Exhibit 5 and are 
available on the Exchange's Web site at www.directedge.com, at the 
Exchange's principal office, and at the Public Reference Room of the 
Commission.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the Exchange 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 statements 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 
Statutory Basis for, the Proposed Rule Change

Purpose
1. Proposed Amendment to Rule 11.5(c)
    Exchange Rule 11.5(c) describes the Exchange's current order types. 
In order to provide additional flexibility and increased functionality 
to its System \3\ and its Users,\4\ the Exchange proposes to add a new 
order type, the Mid-Point Discretionary Order (the ``MDO''), to Rule 
11.5(c)(17). MDOs to buy would be displayed at and pegged to the 
national best bid (the ``NBB \5\''), with discretion to execute at 
prices up to and including the mid-point of the National Best Bid

[[Page 38114]]

and Offer (the ``NBBO \6\''). MDOs to sell would be displayed at and 
pegged to the national best offer (the ``NBO \7\''), with discretion to 
execute at prices down to and including the mid-point of the NBBO. The 
displayed prices of MDOs would move in tandem with changes in the NBB 
(for buy orders) or the NBO (for sell orders). Moreover, MDOs would not 
independently establish or maintain an NBB or NBO; rather, the 
displayed prices of MDOs would be derived from the then current NBB or 
NBO.
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    \3\ As defined in Exchange Rule 1.5(cc)
    \4\ As defined in Exchange Rule 1.5(ee).
    \5\ As defined in Exchange Rule 1.5(o) and Rule 600(b)(42) of 
Regulation NMS under the Securities Exchange Act of 1934.
    \6\ Id.
    \7\ Id.
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    Users entering MDOs would have the option to enter limit prices to 
specify the highest or lowest prices at which MDOs to buy or sell, 
respectively, would be eligible to be executed under any circumstances. 
For example, if an MDO to buy was entered with a limit price that was 
less than the prevailing NBBO mid-point, it would not have discretion 
to buy up to the NBBO mid-point, but rather only up to its limit price. 
If a User did not place a limit price on an MDO, then the MDO would 
have discretion to execute to the mid-point of the NBBO, regardless of 
the price of then [sic] current NBBO, unless and until the MDO was 
cancelled or fully executed. Thus, depending on certain factors, 
including the types and characteristics of contra side orders and any 
limit prices placed on the MDO, the MDO could be executed at its 
displayed price, at a price between its displayed price and the mid-
point of the NBBO, at the mid-point of the NBBO, or not be executed at 
all.
    A new time stamp would be created for an MDO each time its 
displayed price was automatically adjusted. There would be no separate 
time stamp for the displayed and non-displayed portions of an MDO if 
the displayed price remained the same but the discretionary range 
changed. Like all discretionary order types, the only time stamp would 
be the one assigned to the displayed portion of the MDO.
    In addition, pursuant to Exchange Rule 11.8(a)(2), as with all 
discretionary order types, as described below, the discretionary 
portion of the order would be given lower time priority than the 
displayed portion and non-displayed size/reserve quantity of reserve 
orders. In addition, MDOs would not be eligible for routing pursuant to 
Exchange Rule 11.9(b)(2).
MDOs Entered Without Limit Prices
    The following examples demonstrate how an MDO that is entered 
without a limit price would operate:

    Example 1 
    Assume the NBBO is 10.00 x 10.03 (so the NBBO mid-point is 
10.015) and an MDO is entered without a limit price to buy 100 
shares.
     The MDO would be displayed at 10.00 with discretion to 
buy up to 10.015.
     A contra side market order or marketable limit order to 
sell 100 shares at 10.00 would execute against the MDO to buy at 
10.00 for 100 shares.
     A contra side limit order to sell 100 shares at 10.01 
would execute against the MDO to buy at 10.01 for 100 shares. As 
discussed below, only certain types of contra side order would be 
able to execute against MDOs at sub-penny prices.
    Example 2 
    Following on from Example 1, if the NBBO changes to 10.01 x 
10.06 (so the NBBO mid-point is now 10.035), the displayed price of 
the MDO would be adjusted to 10.01, with discretion to buy up to 
10.035. If the NBBO changes once again to 10.03 x 10.05 (so the NBBO 
mid-point is now 10.04), the displayed price of the MDO would be 
adjusted to 10.03, with discretion to buy up to 10.04.
    This example illustrates that the displayed prices of MDOs 
entered without limit prices will continue to move in tandem with, 
and be displayed at, changes in the NBB (for buy orders) and the NBO 
(for sell orders).
    Example 3 
    Assume the NBBO is 10.00 x 10.03 (so the NBBO mid-point is 
10.015), and an MDO is entered without a limit price to buy 100 
shares. Assume further that on the EDGA Book there are two other 
displayed orders to buy 100 shares each at 10.00, both with time 
priority over the MDO. Assume further that there is a displayed 
resting order to buy at 9.99 on the EDGA Book, and no other market 
is publishing a bid at 10.00.
     The MDO would be displayed at 10.00 with discretion to 
buy up to 10.015.
     A contra side market order to sell 200 shares would 
execute against the two buy orders with time priority over the MDO 
at 10.00, thereby leaving the MDO order to buy on the EDGA Book.
     The MDO would then re-price to 9.99 because MDOs could 
not independently establish or maintain an NBB or NBO--rather, their 
displayed prices would be derived from the NBB and NBO. Therefore, 
the MDO would be displayed at 9.99 with discretion to trade up to 
10.01 (assuming the NBO remained at 10.03), although the resting buy 
order at 9.99 would have time priority over the MDO.
MDOs Entered With Limit Prices
    The following examples demonstrate how an MDO that is entered with 
a limit price would operate:
    Example 1 
    Assume the NBBO is 10.00 x 10.03 (so the NBBO mid-point is 
10.015) and an MDO is entered to buy 100 shares with a limit price 
of 10.03.
     The MDO would be displayed at 10.00 with discretion to 
buy up to 10.015.
     A contra side market order or marketable limit order to 
sell 100 shares at 10.00 would execute against the MDO to buy at 
10.00 for 100 shares.
     A contra side limit order to sell 100 shares at 10.01 
would execute against the MDO to buy at 10.01 for 100 shares.
     A contra side limit order to sell 100 shares at 10.02 
would not execute against the MDO to buy, because the MDO had 
discretion to buy only up to the mid-point of the NBBO. The limit 
order to sell would thus be displayed at 10.02 and reduce the mid-
point of the NBBO to 10.01.
    Example 2 
    Assume the NBBO is 10.00 x 10.04 (so the NBBO mid-point is 
10.02) and an MDO is entered to buy 100 shares with a limit price of 
10.03.
     The MDO would be displayed at 10.00 with discretion to 
buy up to 10.02.
     A contra side limit order to sell 100 shares at 10.02 
would execute against the MDO to buy at 10.02 for 100 shares.
    Example 3 
    Following on from Example 2, assume the NBBO changes to 10.01 x 
10.06 (so the NBBO mid-point is now 10.035). The displayed price of 
the MDO to buy would be adjusted to 10.01 with discretion to buy up 
to 10.03, and not the NBBO mid-point of 10.035, because the NBBO 
mid-point would be higher than the 10.03 limit price placed on the 
MDO.
     A contra-side limit order to sell 100 shares at 10.03 
would execute against the MDO to buy at 10.03. If the sell order 
were for 10.02, then it would execute against the MDO to buy at 
10.02.
    Example 4 
    Following on from Example 3, assume the NBBO changes once again 
to 10.03 x 10.05 (so the NBBO mid-point is now 10.04). The displayed 
price of the MDO to buy would be adjusted to 10.03, but there would 
be no discretion to trade at a price exceeding 10.03 because of the 
limit price placed on the MDO. And, if the NBBO changed again to 
10.04 x 10.06, the MDO to buy would simply post to the EDGA Book at 
its limit price of 10.03 and be displayed as a limit order (in the 
depth of book view) with no discretion. However, if the NBBO again 
changed to, say, 10.02 x 10.03, then the MDO would again be 
displayed at the NBB with discretion to trade up to the NBBO mid-
point of 10.025 (assuming the MDO was not cancelled or fully 
executed in the meantime).
    Example 5 
    Following on from Example 4, assume the NBBO is still 10.04 x 
10.06, and that on the EDGA Book there is one displayed order to buy 
100 shares at 10.04 and two separate displayed orders to buy 100 
shares each at 10.03 with time priority over the MDO resting at 
10.03. Assume further that there is also a displayed buy order at 
10.02 for 100 shares on the EDGA Book, and no other market is 
publishing a bid at either 10.03 or 10.04.
     A contra side market order to sell 300 shares would 
execute first against the buy order on the book at 10.04, and then 
against the two buy orders on the book with time priority over the 
MDO at 10.03, thereby leaving the MDO to buy on the book.
     The MDO would then re-price to 10.02 because MDOs could 
not independently establish or maintain an NBB or NBO--rather, their 
displayed price(s) would be

[[Page 38115]]

derived from the then current NBB and NBO. Therefore, the MDO would 
be displayed at 10.02 with discretion to trade up to 10.03 (assuming 
the NBO remained at 10.06), although the resting buy order at 10.02 
would have time priority over the MDO.
Sub-Penny Executions
    MDOs would only be able to execute at sub-penny prices in stocks 
priced at $1 or more against contra side orders that were by their 
terms eligible for NBBO mid-point executions regardless [sic] whether 
such mid-point is in a penny or sub-penny increment, namely, (1) other 
MDOs, and (2) Mid-Point Peg Orders (``MPOs'').\8\ Nonetheless, despite 
being eligible to execute in sub-pennies to the extent that they 
executed at the NBBO mid-point, MDOs would not be displayed or ranked 
in sub-penny increments. MDOs would execute against all other order 
types solely in penny increments.
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    \8\ As defined in Exchange Rule 11.5(c)(7).
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    Example 1 
    Assume the NBBO is 10.00 x 10.03 (so the NBBO mid-point is 
10.015) and an MDO is entered to buy 100 shares with a limit price 
of 10.02.
     The MDO would be displayed at 10.00 with discretion to 
buy up to 10.015.
     A contra side MPO to sell 100 shares would execute 
against the MDO to buy at the NBBO mid-point of 10.015.
    Assume the NBBO changes to 10.02 x 10.05 (so the NBBO mid-point 
is now 10.035).
     The MDO would be displayed at 10.02, with no discretion 
above 10.02 given its limit price.
     A contra side MPO to sell 100 shares would not execute 
against the MDO to buy at 10.02, because the NBBO mid-point would 
exceed the limit price on the MDO.
    Example 2 
    Assume the NBBO is 10.00 x 10.03 (so the mid-point is 10.015) 
and an MDO is entered to buy 100 shares with a limit price of 10.03, 
and an MDO is subsequently entered to sell 100 shares with a limit 
price of 10.00.
     The MDO to buy would be displayed at 10.00 with 
discretion to buy up to 10.015. The MDO to sell would then execute 
against the MDO to buy at the NBBO mid-point of 10.015.
    If instead the MDO to sell was entered with a limit price of 
10.02, it would not execute against the MDO to buy since the limit 
price on the MDO to sell was greater than the NBBO mid-point.
2. Proposed Amendment to Rule 11.8(a)(2)(C)
    The Exchange proposes to amend Rule 11.8(a)(2)(C) to reflect the 
priority that MDOs would have when they are executed within their 
discretionary range. When MDOs execute at their displayed price, they 
would have the same priority as that of the displayed size of limit 
orders, in accordance with Rule 11.8(a)(2)(A). However, when they 
execute within their discretionary range, they would have the same 
priority as the discretionary range of Discretionary Orders, as set 
forth in Rule 11.8(a)(2)(C). Therefore, the Exchange is proposing to 
amend Rule 11.8(a)(2)(C) to account for the priority of MDOs when they 
act within their discretionary range.
    Example 
    Assume the NBBO is 10.00 x 10.04 (so the NBBO mid-point is 
10.02) and an MDO is entered to buy 100 shares with a limit price of 
10.02, and a non-displayed order to buy 100 shares at 10.02 is 
subsequently entered.
     The MDO would be displayed at 10.00 with discretion to 
buy up to 10.02.
     A contra side limit order to sell 100 shares at 10.02 
would execute against the non-displayed order, and not the MDO, 
since non-displayed orders would have priority over the 
discretionary range of MDOs in accordance with Rule 11.8(a)(2).
    The Exchange will notify its Members in an information circular 
of the exact implementation date of these rule changes, which will 
be no later than July 31, 2012.
Basis
    The Exchange believes that the proposed rule changes are consistent 
with Section 6(b) of the Act \9\ and further the objectives of Section 
6(b)(5) of the Act,\10\ because they are designed to promote just and 
equitable principles of trade, to remove impediments to and perfect the 
mechanism of a free and open market and a national market system, to 
foster cooperation and coordination with persons engaged in 
facilitating transactions in securities, and, in general, to protect 
investors and the public interest. The proposed rule changes would 
provide Users with a greater selection of order types that may result 
in the efficient execution of such orders and provide additional 
flexibility and increased functionality to the Exchange's System and 
its Users. Specifically, the Exchange believes that Users may receive 
more efficient order executions by permitting them to have greater 
flexibility to be displayed at the NBBO with discretion to execute to 
the mid-point of the NBBO, resulting in the potential benefit of price 
improvement.
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    \9\ 15 U.S.C. 78f(b).
    \10\ 15 U.S.C. 78f(b)(5).
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    The MDO would be similar in nature to several existing order types 
of the Exchange. First, the MDO would be similar to the Pegged Order 
\11\ and the MPO in that like these order types, an MDO's displayed 
price would be pegged to and automatically adjusted in tandem with 
changes in the then current NBB or NBO, a new timestamp would be 
created for the order each time it was automatically adjusted, and it 
would not be eligible for routing pursuant to Rule 11.9(b)(2). In 
addition, like the MPO, the MDO would be eligible to receive sub-penny 
executions at the mid-point of the NBBO. However, unlike the MPO, the 
MDO would provide the added benefit of transparency, since there would 
always be a displayed component to an MDO. In addition, the MDO would 
be similar to a Discretionary Order,\12\ in that it would include a 
displayed order at a specified price (in this case, an objectively 
determined price based on the prevailing NBB or NBO) and an undisplayed 
order at a specified price (in this case, an objectively determined 
price based on the mid-point of the NBBO and subject to any limits the 
User attaches the MDO). The Exchange believes that this proposed order 
type would benefit its Users by offering greater flexibility to display 
liquidity at the NBBO with discretion generally to execute to the NBBO 
mid-point, resulting in additional opportunities for price improvement 
for contra-side orders.
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    \11\ As defined in Exchange Rule 11.5(c)(6).
    \12\ As defined in Exchange Rule 11.5(c)(13).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The proposed rule change does not impose any burden on competition 
that is not necessary or appropriate in furtherance of the purposes of 
the Act.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    The Exchange has not solicited, and does not intend to solicit, 
comments on this proposed rule change. The Exchange has not received 
any unsolicited written comments from members or other interested 
parties.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    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 if consistent with the protection of investors 
and the public interest, the proposed rule change has become effective 
pursuant to Section 19(b)(3)(A) of the Act \13\ and Rule 19b-4(f)(6) 
thereunder.\14\
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    \13\ 15 U.S.C. 78s(b)(3)(A).
    \14\ 17 CFR 240.19b-4(f)(6). As required under Rule 19b-
4(f)(6)(iii), the Exchange provided the Commission with written 
notice of its intent to file the proposed rule change along with a 
brief description and the text of the proposed rule change, at least 
five business days prior to the date of filing of the proposed rule 
change, or such shorter time as designated by the Commission.

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[[Page 38116]]

    A proposed rule change filed pursuant to Rule 19b-4(f)(6) under the 
Act \15\ normally does not become operative for 30 days after the date 
of its filing. However, Rule 19b-4(f)(6) \16\ permits the Commission to 
designate a shorter time if such action is consistent with the 
protection of investors and the public interest. The Exchange has asked 
the Commission to waive the 30-day operative delay so that the proposal 
may become operative immediately upon filing. The Exchange has asked 
the Commission to waive the 30-day operative delay so that the proposal 
may become operative immediately upon filing, noting that similar 
functionality is already offered by other market centers.\17\ The 
Commission believes that waiving the 30-day operative delay is 
consistent with the protection of investors and the public interest. 
Therefore, the Commission designates the proposal operative upon 
filing.\18\
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    \15\ 17 CFR 240.19b-4(f)(6).
    \16\ 17 CFR 240.19b-4(f)(6).
    \17\ See NYSE Arca, Inc. Equities Rule 7.31(cc).
    \18\ For purposes only of waiving the 30-day operative delay, 
the Commission has considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
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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.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-EDGA-2012-22 on the subject line.

Paper Comments

     Send paper comments in triplicate to Elizabeth M. Murphy, 
Secretary, Securities and Exchange Commission, 100 F Street NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-EDGA-2012-22. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (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 Web site viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE., 
Washington, DC 20549, on official business days between the hours of 10 
a.m. and 3 p.m. Copies of the filing also will be available for 
inspection and copying at the principal office of the Exchange. All 
comments received will be posted without change; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File Number SR-EDGA-2012-22 and should be 
submitted on or before July 17, 2012.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\19\
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    \19\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-15535 Filed 6-25-12; 8:45 am]
BILLING CODE 8011-01-P