Document ID: SEC-2018-1065-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Investors Exchange, LLC
Posted Date: 2018-07-09T04:00Z

[Federal Register Volume 83, Number 131 (Monday, July 9, 2018)]
[Notices]
[Pages 31816-31822]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-14546]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-83579; File No. SR-IEX-2018-13]

Self-Regulatory Organizations; Investors Exchange LLC; Notice of 
Filing and Immediate Effectiveness of Proposed Rule Change to the IPO 
Auction Processes for Trading in an IEX-Listed Security That Is the 
Subject of an Initial Public Offering

July 2, 2018.
    Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of 
1934 (``Act'') \2\ and Rule 19b-4 thereunder,\3\ notice is hereby given 
that on June 22, 2018, Investors Exchange LLC (``IEX'' or the 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I, II, 
and III below, which Items have been prepared by the Exchange. 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

    (a) 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 Rules 11.280(h)(8) and 11.350(e), which 
collectively govern the IPO Auction processes for trading in an IEX-
listed security that is the subject of an initial public offering 
(``IPO'').\6\ The Exchange is also proposing to modify certain 
definitions in Rule 11.350(a) regarding IPO Auction market data that is 
disseminated in IEX Auction Information.\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\
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    \4\ 15 U.S.C. 78s(b)(1).
    \5\ 17 CFR 240.19b-4.
    \6\ Pursuant to section 12(f)(1)(G)(i)-(ii) of the Securities 
Exchange Act, a security is the subject of an initial public 
offering if the offering of the subject security is registered under 
the Securities Act of 1933, the issuer of the security, immediately 
prior to filing the registration statement with respect to the 
offering, was not subject to the reporting requirements of the Act, 
and the initial public offering of such security commences at the 
opening of trading on the day on which such security commences 
trading on the national securities exchange with which such security 
is registered. See 15 U.S.C. 78l(f)(1)(G).
    \7\ See Rule 11.350(a)(9).
    \8\ 15 U.S.C. 78s(b)(3)(A).
    \9\ 17 CFR 240.19b-4.
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    The text of the proposed rule change is available at the Exchange's 
website at www.iextrading.com, at the principal office of the Exchange, 
and at the Commission's Public Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
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.

[[Page 31817]]

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
Overview
    On August 4, 2017, the Commission approved a proposed rule change 
filed by the Exchange to adopt rules governing auctions in IEX-listed 
securities (``IEX Auctions''), including provisions governing the 
initial public offering (``IPO'') of IEX-listed securities.\10\ The 
Exchange intends to launch a listings program for corporate issuers. 
During the process of designing the IPO Auction, the Exchange conducted 
a thorough review of the auction rules of the New York Stock Exchange 
(``NYSE''), NYSE Arca, Inc. (``NYSE Arca''), Nasdaq Stock Market, LLC 
(``Nasdaq''), Cboe BZX Exchange, Inc. (``Cboe BZX''), and the London 
Stock Exchange (``LSE''), as well as discussions with a variety of buy-
side and sell-side market participants, including large banks and 
broker dealers, electronic market makers, asset managers, and 
institutional investors.
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    \10\ See Securities Exchange Act Release No. 81316 (August 4, 
2017), 82 FR 37474 (August 10, 2017). See also Rule 11.350(e).
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    The purpose of this proposed rule change is to modify the IPO 
Auction rules and certain IPO Auction market data that is disseminated 
in IEX Auction Information to offer issuers, underwriters, and market 
participants a more transparent IPO Auction process. The proposed 
changes, discussed below in detail, are designed to enhance the price 
discovery process by augmenting certain of the Exchange's automated and 
manual processes governing IPO Auctions with certain manual IPO Auction 
processes utilized by the NYSE.\11\ Specifically, the Exchange is 
proposing to increase transparency to market participants regarding the 
supply and demand for an IPO security by requiring the lead 
underwriter, or broker-dealer serving in the role of financial advisor 
for securities being priced pursuant to Rule 11.280(h)(9) 
(collectively, the ``underwriter'') to provide an Upper and Lower IPO 
Price Band (collectively, the ``IPO Price Band'') to the Exchange for 
publication, which may be updated by the underwriter as necessary to 
reflect the price range within which the underwriter anticipates the 
IPO Auction match will occur. The IPO Price Band will be published by 
the Exchange via IEX Auction Information on the Exchange's proprietary 
data feeds,\12\ as well as the applicable Securities Information 
Processor (``SIP'').\13\ Additionally, the Exchange is proposing to 
constrain the Reference Price for the IPO Auction by the latest 
published IPO Price Band, which will provide information about 
Imbalance Shares \14\ and Paired Shares \15\ at a price that better 
reflects where the underwriter believes the IPO Auction match is 
anticipated to occur, and thus will invite offsetting interest within 
such range.
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    \11\ See NYSE Rule 15 (Pre-Opening Indications and Order 
Imbalance Information). See also information regarding the NYSE IPO 
auction process available at: https://www.nyse.com/publicdocs/nyse/listing/IPO_infographic.pdf.
    \12\ See Rules 11.330(a)(1)-(3), and 11.350(a)(9).
    \13\ The Exchange is a participant of the quotation and 
transaction reporting plan governing Tape B Securities (``CTA 
Plan''). Pursuant to the CTA Plan, the CTA SIP, in relevant part, 
consolidates quote and trade data from all markets trading IEX-
listed securities. The Exchange intends to leverage the existing 
Trading Status message (Category T Type S) offered by the CTA SIP to 
disseminate a Trading Range Indication message that reflects the IPO 
Price Band.
    \14\ See infra note 22.
    \15\ Id.
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IEX IPO Auction
    For trading in an IEX-listed security that is the subject of an 
IPO, or the initial pricing of any other security pursuant to Rule 
11.280(h)(9),\16\ the Exchange will conduct an IPO Auction pursuant to 
Rules 11.350(e) and 11.280(h)(8). Specifically, Users may submit 
Auction Eligible Orders \17\ for execution in the IPO Auction at the 
start of the Order Acceptance Period,\18\ which begins at 8:00 a.m.\19\ 
All Auction Eligible Orders designated for participation in the IPO 
Auction will be queued on the IPO Auction Book \20\ until the scheduled 
auction match, at which time they will be eligible for execution in the 
IPO Auction. Pursuant to Rule 11.350(e)(2)(A), the Exchange will begin 
to disseminate IEX Auction Information via electronic means at the 
start of the Display Only Period,\21\ which begins thirty (30) minutes 
prior to the scheduled IPO Auction match, and will be updated every one 
second thereafter.\22\ The Exchange will attempt to conduct an IPO 
Auction for all IEX-listed securities at the scheduled auction match 
time in accordance with the clearing price determination process set 
forth in Rule 11.350(e)(2)(C). Auction Eligible Orders will be ranked 
and maintained in accordance with IEX auction priority, pursuant to 
Rule 11.350(b).
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    \16\ Pursuant to Rule 11.280(h)(9), the process for halting and 
initial pricing of a security that is the subject of an IPO shall 
also be available for the initial pricing of any other security that 
has not been listed on a national securities exchange or traded in 
the over-the-counter market pursuant to FINRA Form 211 immediately 
prior to the initial pricing, provided that a broker-dealer serving 
in the role of financial advisor to the issuer of the securities 
being listed is willing to perform the functions under IEX Rule 
11.280(h)(8) that are performed by an underwriter with respect to an 
IPO.
    \17\ See Rule 11.350(a)(2).
    \18\ See Rule 11.350(a)(29). The Exchange is proposing to make a 
clarifying change in proposed Rule 11.280(h)(8)(A) to explicitly 
state that Auction Eligible Orders are accepted during the Order 
Acceptance Period for an IPO Auction, rather than simply ``orders''.
    \19\ All times are in Eastern Time.
    \20\ See Rule 11.350(a)(1)(C). For an IPO Auction, the IPO 
Auction Book would include Market-On-Open, Limit-On-Open, and market 
orders with a time-in-force of DAY, as well as limit orders with a 
time in-force of DAY, GTX, GTT, SYS, FOK, or IOC.
    \21\ See Rule 11.350(a)(5).
    \22\ See Rule 11.350(a)(9).
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    The Exchange will generally attempt to conduct an IPO Auction 
beginning at 10:15 a.m. Pursuant to Rule 11.280(g)(7), IEX will declare 
a regulatory halt before the start of the Pre-Market Session for a 
security that is the subject of an IPO on IEX, and therefore there will 
be no Continuous Book for such security. The Order Acceptance Period 
for an IPO Auction may be extended at the time of the auction match 
pursuant to Rules 11.350(e)(2)(B)(i)-(iv):
     Automatically for five (5) minutes when there are 
unmatched shares from market orders on the IPO Auction Book;
     Automatically for five (5) minutes when the Indicative 
Clearing Price \23\ at the time of the IPO Auction match differs by the 
greater of five percent (5%) or fifty cents ($0.50) from any of the 
previous fifteen (15) Indicative Clearing Price disseminations;
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    \23\ See Rule 11.350(a)(9)(E).
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     Automatically during the Pre-Launch Period \24\ when the 
IPO Auction match price is above (below) the upper (lower) price band 
selected by the underwriter pursuant to proposed Rule 11.280(h)(8), 
until the clearing price is within such bands; or
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    \24\ See Rule 11.280(h)(8).
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     Manually upon request from the underwriter at any time 
prior to the auction match.
    Furthermore, Rule 11.280(h)(8) governs the process for resuming 
from a trading halt initiated under Rule 11.280(g)(7) for a security 
that is the subject of an IPO. Thus, in addition to the systemic 
processes described above that govern the IPO Auction match, there is a 
series of procedural steps to complete an IPO Auction, which include 
input from and coordination

[[Page 31818]]

with the IPO underwriter. Specifically, pursuant to Rule 11.280(h), 
thirty (30) minutes after the start of the Display Only Period, unless 
extended by the underwriter, the security will enter a Pre-Launch 
Period of indeterminate duration. The Pre-Launch Period will end 
immediately after the transition to the Regular Market Session 
following the IPO Auction match,\25\ pending:
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    \25\ See Rule 11.350(e)(3).
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     Notification from the underwriter that the security is 
ready to trade and subsequent approval of the Indicative Clearing Price 
at the time of such notification;
     Selection of a price band, comprised of an upper (lower) 
price between $0.00 and $0.50 above (below) the approved Indicative 
Clearing Price, which explicitly constrains the IPO Auction match 
price; and
     Validation that each of the conditions for the extension 
of the Order Acceptance Period set forth in Rules 11.350(e)(2)(B)(i)-
(iv) are not satisfied.
    Rule 11.350(a)(9) defines the various data fields that are 
disseminated in IEX Auction Information for IEX Auctions, including the 
data that is disseminated during the Display Only Period for an IPO 
Auction. IEX Auction Information contains the current status of price, 
size, imbalance information, auction collar information, and other 
relevant information related to the IPO Auction. Specifically, IEX 
Auction Information for an IPO Auction contains the following data 
elements:
     Reference Price: The single price at or within the 
Reference Price Range at which orders on the IPO Auction Book would 
match if the IPO Auction were to occur at that time of dissemination. 
The Reference Price is set to the price that maximizes the number of 
the shares from orders on the Auction Book to be executed in the 
auction. If more than one price maximizes the number of shares that 
will execute resulting in an auction price range, the Reference Price 
is set to the price at or within such range that is not lower (higher) 
than the most aggressive unexecuted buy (sell) order. If more than one 
price satisfies the above conditions, the Reference Price is set to the 
price closest or equal to either the Volume Based Tie Breaker (if such 
range includes prices in the Reference Price Range) or the Reference 
Price Range (if such range does not include prices in the Reference 
Price Range) at the time of dissemination. In the case of an IPO 
Auction, the Reference Price shall be the same as the Auction Book 
Clearing Price (because there is no Continuous Book prior to an IPO 
Auction).
     Paired Shares: The number of shares from orders on the IPO 
Auction Book that can be matched with other orders on the IPO Auction 
Book at the Reference Price at the time of dissemination.
     Imbalance Shares: The number of shares from orders on the 
IPO Auction Book that may not be matched with other orders on the IPO 
Auction Book at the Reference Price at the time of dissemination.
     Imbalance Side: The buy/sell direction of any imbalance at 
the time of dissemination.
     Indicative Clearing Price: The single price at which 
Auction Eligible Orders would match if the IPO Auction were to occur at 
the time of dissemination pursuant to the procedures for determining 
the clearing price set forth in the applicable auction rule. In the 
case of an IPO Auction, the Indicative Clearing Price shall be the same 
as the Auction Book Clearing Price (because there is no Continuous Book 
prior to an IPO Auction).
     Auction Book Clearing Price: The single price at which 
orders on the IPO Auction Book would match if the IPO Auction were to 
occur at the time of dissemination pursuant to the procedures for 
determining the clearing price set forth in the applicable auction 
rule. If shares from market orders would remain unexecuted, IEX shall 
disseminate an indicator for ``market buy'' or ``market sell.''
     Scheduled Auction Time: The projected time of the auction 
match.
     Extension Number: The total number of automatic Order 
Acceptance Period extensions the IPO Auction has received.
     The Exchange notes that IEX Auction Information includes 
data fields for a Collar Reference Price, Lower Auction Collar, and 
Upper Auction Collar, all of which will be set zero (0) for an IPO 
Auction, because collars do not apply to the IPO Auction.
Proposed Changes
    Each field disseminated in IEX Auction Information is strategically 
tailored to the IEX Auction model. Specifically, IEX Auction 
Information is designed to provide transparent and reliable information 
regarding the price and size of the pending auction match that allows 
participants to enter new auction-specific interest or adjust 
continuous trading behavior as they iterate towards the clearing 
price.\26\ As discussed above, in the case of an IPO Auction, there is 
no Continuous Book, and thus IEX Auction Information is designed to 
provide transparency regarding the state of the Auction Book. However, 
it is IEX's understanding that in an IPO Auction, a large portion of 
the Auction Eligible Orders that will be participating are represented 
by the underwriter and participating syndicate members, both on a 
proprietary and agency basis, that typically have made a firm 
commitment to purchase the securities and place them with investors. 
This process of allocating shares to interested investors, or ``book 
building'', is managed by the lead underwriter in advance of the IPO 
Auction process, allowing for the underwriter to assess investor demand 
before determining the issue price for the security, and the subsequent 
IPO Auction process.
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    \26\ See Securities Exchange Act Release No. 80583 (May 3, 2017) 
82 FR 21634 (May 9, 2017) (SR-IEX-2017-10).
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    At the time of the IPO Auction, as a result of the book building 
process, IEX understands that the syndicate typically has explicit 
interest from clients and indications of excess demand from investors 
that were seeking more shares than they were allocated, as well as 
supply from investors that received an allocation and intend to sell in 
the IPO Auction. The underwriter is typically responsible for 
coordinating with participating syndicate members to account for the 
aggregate share supply and investor demand leading up to and during the 
IPO Auction process. As a result, the IPO Auction Book, and therefore 
IEX Auction Information, conveys only a partial representation of the 
supply and demand for an IPO security until a material portion of the 
interest represented by the underwriter enters the Auction Book. 
Accordingly, between the start of the Display Only Period and the start 
of the Pre-Launch Period, the Exchange is proposing to increase 
transparency to market participants regarding the supply and demand for 
an IPO security by requiring the underwriter to provide the Exchange 
with an IPO Price Band for publication, which would reflect the price 
range within which the underwriter anticipates the IPO Auction match to 
occur. When published, the IPO Price Band would be disseminated via the 
SIP and IEX Auction Information.\27\
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    \27\ See proposed Rule 11.280(h)(8)(B). See also NYSE Rule 
15(a), which provides for a similar function.
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    As proposed, in determining the IPO Price Band, the underwriter 
would take into account all Auction Eligible Orders for the IPO 
Auction, including all orders on the Exchange's Order Book, as well as 
the underwriter's own interest, and

[[Page 31819]]

interest otherwise represented by the underwriter.\28\ If the current 
published IPO Price Band spread is greater than $1.00, the underwriter 
shall make best efforts to provide the Exchange with an updated IPO 
Price Band with a spread of $1.00 or less for publication before the 
IPO Auction match.\29\ In order to allow market participants a 
reasonable opportunity to adjust their Auction Eligible Orders in 
response to a published IPO Price Band, a minimum of one minute must 
elapse between publication of the last IPO Price Band and the IPO 
Auction match.\30\
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    \28\ See proposed Rule 11.280(h)(8)(B)(i). See also NYSE Rule 
15(b)(2), which includes similar language that is specific to the 
NYSE's manual trading floor-based model.
    \29\ See proposed Rule 11.280(h)(8)(B)(ii). See also NYSE Rule 
15(e)(3), which imposes a substantially similarly requirements on 
the DMM to make best efforts to narrow the pre-opening indication 
spread to $1.00.
    \30\ See proposed Rule 11.280(h)(8)(B)(iii). See also NYSE Rule 
15(e)(4), which imposes a series of temporal restriction on the 
opening of a security following publication of a pre-opening 
indication.
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    The Exchange proposes to integrate the IPO Price Band into IEX 
Auction Information in several ways that are designed to enhance 
transparency and guide the price discovery process within the IPO Price 
Band as market participants iterate towards a clearing price. First, 
the Exchange proposes to publish the Upper IPO Price Band and Lower IPO 
Price Band as the Upper Auction Collar and Lower Auction Collar, 
respectively, unless the underwriter has not provided an IPO Price Band 
to the Exchange for publication, in which case the Upper and Lower 
Auction Collar will be equal to the Volume Based Tie Breaker, which is 
equal to the issue price in the case of an IPO Auction.\31\ Similarly, 
the Exchange proposes to amend the Collar Reference Price definition to 
be equal to the Volume Based Tie Breaker (i.e., the issue price), 
unless such price is above (below) the most current Upper (Lower) IPO 
Price Band published by the Exchange, in which the case the Collar 
Reference Price shall be equal to the Upper (Lower) IPO Price Band. As 
proposed, the Collar Reference Price will provide market participants a 
signal regarding the issue price relative to the IPO Price Band 
provided by the underwriter, which would inform market participants 
regarding the state of supply and demand for the IPO security.
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    \31\ See Rule 11.350(a)(33), which defines the Volume Based Tie 
Breaker for an IPO Auction as being equal to the issue price.
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    Furthermore, in the case of an IPO Auction, the Exchange proposes 
to change the definition of Reference Price Range to be equal to the 
prices between and including the most current IPO Price Band published 
by the Exchange, unless the underwriter has not provided the Exchange 
with an IPO Price Band for publication, in which case the Reference 
Price Range will be equal to the Volume Based Tie Breaker. The 
Reference Price Range is used to constrain the Reference Price at which 
the Exchange disseminates Paired Shares and Imbalance Shares. 
Accordingly, if but for the constraint, the Reference Price would be 
above (below) the Upper (Lower) IPO Price Band, the Reference Price 
would be equal to the Upper (Lower) IPO Price Band, and thus the 
Exchange would disseminate Paired Shares and Imbalance Shares at the 
Upper (Lower) IPO Price Band, which would solicit interest willing to 
offset the imbalance at prices at or within the IPO Price Band.\32\ For 
example, at the start of the Display Only Period, the IPO Price Band 
and therefore the Reference Price Range is $12.00 by $13.00, and the 
Indicative Clearing Price is $10.00. The Reference Price, which would 
be constrained by the Reference Price Range, would be equal to the 
Lower IPO Price Band of $12.00, and thus the Exchange would show Paired 
Shares and Imbalance Shares at $12.00.\33\ In the case of a buy 
imbalance, this would solicit additional offsetting interest to sell at 
or higher than the Lower IPO Price Band, and thus guiding the clearing 
price at or within the IPO Price Band, which would reflect all Auction 
Eligible Orders for the IPO Auction, including all orders on the 
Exchange's Order Book, as well as the underwriter's own interest, and 
interest represented by the underwriter.
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    \32\ The Exchange proposes to make a conforming change to the 
definition of Reference Price set forth in proposed Rule 
11.350(a)(9)(A), which would constrain the Reference Price by the 
Upper and Lower IPO Price Bands, and thus the Reference Price will 
no longer necessarily be the same as the Auction Book Clearing Price 
and the Indicative Clearing Price.
    \33\ The Exchange notes that this example assumes the 
underwriter has provided the Exchange with an IPO Price Band for 
publication immediately at the start of the Display Only Period. 
However, it is possible that the underwriter does not provide the 
Exchange with the first IPO Price Band for publication until after 
the start of the Display Only Period, in which case, between the 
start of the Display Only Period and publication of the first IPO 
Price Band, the Reference Price would be equal to the Volume Based 
Tie Breaker, which is defined as the issue price for the IPO 
security.
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    Assuming the same facts above but excluding the proposed changes 
regarding the IPO Price Band illustrates the benefits of the proposed 
change. For example, at the start of the Display Only Period, the 
Auction Book Clearing Price and therefore the Reference Price and 
Indicative Clearing Price are all $10.00. However, when accounting for 
the underwriter's own interest and interest represented by the 
underwriter, shares are maximized between $12.00 and $13.00 (i.e., the 
underwriter has or represents more aggressive buy interest that intends 
to participate in the IPO Auction between $12.00 and $13.00). However, 
IEX Auction Information does not currently provide a mechanism for the 
underwriter to broadly disseminate the effect of the underwriter's own 
interest and interest represented by the underwriter on the potential 
price of the IPO Auction match. Thus, in the case of a buy imbalance, 
IEX Auction Information would solicit additional offsetting interest to 
sell at or higher than $10.00, thus guiding the price discovery process 
based on a partial representation of the interest that intends on 
participating in the IPO Auction. Therefore, as described above, the 
Exchange is proposing to increase transparency by enabling the 
underwriter to broadly disseminate an indication regarding the 
potential price of the IPO Auction match that accounts for the 
underwriter's own interest and interest represented by the underwriter.
    Pursuant to proposed Rule 11.280(h)(8)(C), at least fifteen (15) 
minutes after the start of the Display Only Period,\34\ the underwriter 
shall advise the Exchange to enter a ``Pre-Launch Period'' of 
indeterminate duration.\35\ As proposed, the Exchange is shortening the 
minimum Display Only Period from thirty (30) minutes to fifteen (15) 
minutes, in order to facilitate the commencement of fair and orderly 
trading in securities that are the subject of an IPO, by providing 
greater flexibility to begin trading earlier in certain cases, such as 
smaller IPOs, where an extended Display Only Period is not necessary 
for order entry and the development of price stability. At the same 
time, the proposed change will permit a longer Display Only Period in 
cases where extensive order entry is still occurring or where price 
stability has not yet developed. The Pre-Launch Period and the Display 
Only Period shall end, and the security shall be released for trading 
by IEX when the following conditions are all met, and the requirements 
of Rule 11.350(e)(2) are satisfied:
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    \34\ See supra note 21.
    \35\ The Exchange is also proposing to make a conforming change 
to Rule 11.350(a)(5) to reflect the shorter minimum display only 
period.
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     All market orders will be executed in the IPO Auction;

[[Page 31820]]

     The underwriter has selected a final IPO Price Band that 
is at or within the last published IPO Price Band;
     The IPO Auction clearing price is at or within the IPO 
Price Band selected by the underwriter under the immediately preceding 
bullet point; and
     IEX receives notice from the underwriter of the IPO that 
the security is ready to trade.
    Under proposed Rule 11.280(h)(8)(D), the failure to satisfy the 
conditions of proposed Rule 11.280(h)(8)(C) would result in a delay of 
the release for trading of the IPO, and a continuation of the Pre-
Launch Period, during which the underwriter may provide one or more 
updated IPO Price Bands to the Exchange for publication pursuant to 
proposed Rule 11.280(h)(8)(B), until all of the conditions of proposed 
Rule 11.280(h)(8)(C) have been satisfied.\36\ In addition, because the 
IPO Auction is conditioned on the underwriter manually giving the 
Exchange notice that the IPO security is ready to trade, the Exchange 
is proposing to specify that the Scheduled Auction Time data field in 
IEX Auction Information is not specified.\37\
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    \36\ The Exchange is proposing to make a conforming change to 
the conditions for extending the Order Acceptance Period for an IPO 
Auction as set forth in proposed Rule 11.350(e)(2)(B)(iii) and Rule 
11.350(e)(2)(C)(iv).
    \37\ The Exchange notes that market participants will be able to 
assess the timing of the IPO Auction match by monitoring the 
Indicative Clearing Price and the current IPO Price Band; as the IPO 
Price Band narrows, and the Indicative Clearing Price moves within 
the IPO Price Band, the IPO Auction can be considered imminent.
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    As described above, the Exchange is proposing to move away from a 
predominantly automated IPO Auction mechanism towards a more manual 
process that is designed to account for the underwriter's unique and 
fundamental role in the IPO process. Accordingly, the Exchange is 
proposing to eliminate the automated five (5) minutes extensions of the 
Order Acceptance Period for IPO Auctions that are set forth in Rule 
11.350(e)(2)(B), described above.\38\ The existing automated extension 
processes were originally designed to systematically accommodate 
unexpected imbalances and sharp price movements leading into an IPO 
Auction match by allowing market participants an additional five (5) 
minute period to enter, cancel, and/or adjust Auction Eligible Orders 
and iterate towards a new equilibrium price. However, proposed Rule 
11.280(h)(8)(D) is designed to enable the underwriter, who plays a 
unique and central role in the IPO process, an opportunity to extend 
the price discovery process in response to unexpected changes in the 
composition of the IPO Auction Book that would impact the price of the 
IPO Auction match after the start of the Pre-Launch Period.
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    \38\ The Exchange proposes to remove IPO's from the Extension 
Number field within IEX Auction Information because, as proposed, 
there will no longer be automated extension of the Order Acceptance 
Period. See proposed Rule 11.350(a)(9)(K).
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    Further, constraining the IPO Auction by the IPO Price Band 
provides a mechanism to protect the IPO Auction match from occurring at 
a price that is outside of the expected auction price range provided by 
the underwriter as communicated to participants via IEX Auction 
Information and the SIP. Moreover, proposed Rule 11.280(h)(8)(D) is 
also designed to provide enhanced transparency to market participants 
regarding unexpected imbalances and sharp price movements leading into 
an IPO Auction match by allowing the underwriter to provide one or more 
updated IPO Price Bands to the Exchange for publication, pursuant to 
proposed Rule 11.280(h)(8)(B), reflecting the new price range within 
which the IPO Auction match is anticipated to occur after accounting 
for all Auction Eligible Orders for the IPO Auction, including all 
orders on the Exchange's Order Book, as well as the underwriter's own 
interest and interest represented by the underwriter.\39\ The Exchange 
believes such increased transparency would facilitate a more informed 
price discovery process as market participants iterate towards a new 
equilibrium price after an unexpected change in the composition of the 
IPO Auction Book that impacts the clearing price.
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    \39\ The Exchange notes that when the underwriter provides an 
updated IPO Price Band to the Exchange for publication, the 
underwriter would also be subject to proposed Rules 
11.280(h)(8)(B)(ii)-(iii), requiring the underwriter to make best 
efforts to provide an IPO Price Band with a spread of $1.00 or less 
before the IPO Auction match, and allowing a minimum of one minute 
to elapse after publication of the updated IPO Price Band and the 
IPO Auction match to allow market participants time to account for 
the updated IPO Price Band.
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    In addition, the Exchange is proposing to eliminate the existing 
underwriter price band selection process set forth in Rule 
11.280(h)(8)(A)(iii) (described above), in light of the enhanced IPO 
Price Band selection process set forth in proposed Rule 
11.280(h)(8)(C)(ii), which serves a substantially similar function. 
Specifically, during the Pre-Launch Period, proposed Rule 
11.280(h)(8)(C)(ii) requires the underwriter to select an IPO Price 
Band at or within the last published IPO Price Band (that the 
underwriter must make best efforts to narrow to a spread of $1.00 or 
less before the IPO Auction match) \40\ that would serve as an explicit 
constraint on the IPO Auction match price pursuant to proposed Rule 
11.280(h)(8)(C)(iii), which is eligible to occur only after the 
Exchange receives notice from the underwriter that the security is 
ready to trade pursuant to proposed Rule 11.280(h)(8)(C)(iv).
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    \40\ See supra note 29.
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    Similarly, as described above, during the Pre-Launch Period, 
existing Rule 11.280(h)(8)(A)(iii) requires, as a condition to 
execution of the IPO Auction, notification from the underwriter that 
the security is ready to trade and subsequent approval of the 
Indicative Clearing Price at the time of such notification. Further, 
the underwriter must select a price band, comprised of an upper (lower) 
price between $0.00 and $0.50 above (below) the approved Indicative 
Clearing Price, which explicitly constrains the IPO Auction match 
price. Therefore, the Exchange believes the proposed elimination of the 
existing underwriter price band selection process does not 
substantively alter the IPO Auction functionality in that the enhanced 
IPO Price Band selection process set forth in proposed Rule 
11.280(h)(8)(C)(ii), which requires the underwriter to select an IPO 
Price Band at or within the last published IPO Price Band (that the 
underwriter must make best efforts to narrow to a spread of $1.00 or 
less before the IPO Auction match), serves a substantially similar 
function, while facilitating a more robust price discovery process that 
more fully reflects supply and demand to determine the price and timing 
of the IPO Auction match.
    Consistent with current Rule 11.280(h)(8)(B), pursuant to proposed 
Rule 11.280(h)(8)(D), the underwriter, with concurrence of IEX, may 
determine at any point during the IPO Auction process up through the 
conclusion of the Pre-Launch Period to postpone and reschedule the IPO. 
Market participants may continue to enter orders and order 
cancellations for participation in the IPO Auction during the Pre-
Launch Period until the auction match.
    Lastly, the Exchange is proposing Supplemental Material .01 to Rule 
11.280(h)(8) that addresses the jurisdictional issue posed by an 
underwriter for a security that is the subject of an IPO on IEX that is 
not an approved Member of the Exchange. Specifically, proposed 
Supplemental Material .01 states that the underwriter for a security 
that is the subject of an IPO on IEX must be a Member of the

[[Page 31821]]

Exchange, or appoint a Member of the Exchange to perform the functions 
under Rule 11.280(h)(8) that are performed by the underwriter with 
respect to the IPO Auction.\41\ Proposed Supplemental Material .01 is 
designed to ensure the enforceability of the Exchange's rules governing 
the underwriter's responsibilities during the IPO Auction process as 
proposed, which as described above, are designed to promote 
transparency and price discovery for securities that are the subject of 
an IPO on the Exchange. The Exchange believes that absent the 
provisions set forth Supplemental Material .01, an underwriter that is 
not a Member of the Exchange would not be legally bound by the 
Exchange's rules and therefore could fail to satisfy the obligations of 
the underwriter under proposed Rule 11.280(h)(8).
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    \41\ The Exchange expects that an underwriter appointing such 
Member would share with the Member all information necessary for the 
Member to adequately perform the functions required under Rule 
11.280(h)(8).
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2. Statutory Basis
    IEX believes that the proposed rule changes are consistent with the 
provisions of Section 6(b) \42\ of the Act in general, and furthers the 
objectives of Section 6(b)(5) of the Act \43\ in particular, in that 
they are 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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    \42\ 15 U.S.C. 78f.
    \43\ 15 U.S.C. 78f(b)(5).
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    The Exchange believes that the proposed changes are consistent with 
the protection of investors and the public interest in that they are 
designed to increase transparency to market participants regarding the 
supply and demand for an IPO security by requiring the underwriter to 
provide the Exchange with IPO Price Bands for broad dissemination. 
Furthermore, the Exchange believes the proposed changes remove 
impediments to and perfect the mechanism of a free and open market and 
national market system by enhancing the price discovery process in the 
IPO Auction by providing IEX Auction Information that is more 
reflective of the aggregate supply and demand for a security, as 
described in the Purpose section. Specifically, by constraining the 
Reference Price for the IPO Auction by the latest published IPO Price 
Band, the Exchange will provide information regarding Imbalance Shares 
and Paired Shares at a price that reflects all orders on the Order 
Book, as well as the underwriter's own interest and interest 
represented by the underwriter.
    The Exchange also believes that the proposed rule changes governing 
the publication of underwriter's selection of an IPO Price Band are 
consistent with the protection of investors and the public interest. 
Specifically, the Exchange believes that requiring the underwriter to 
consider all interest on the Order Book, as well as the underwriter's 
own interest and interest represented by the underwriter, is designed 
to ensure that the IPO Price Band provides a more accurate 
representation of the aggregate supply and demand for the IPO security. 
Moreover, the Exchange believes that it is consistent with the 
protection of investors and the public interest to require that the 
underwriter make best efforts to provide an IPO Price Band for 
publication with a spread of $1.00 or less before the IPO Auction 
match, as well as mandating that a minimum of one minute to elapse 
between the time of the last IPO Price Band publication and the IPO 
Auction match. Specifically, the Exchange believes the narrower spread 
and one-minute window will allow market participants a reasonable 
opportunity to adjust their Auction Eligible Orders in response to the 
last IPO Price Band, which more accurately reflects the aggregate 
supply and demand for the IPO security in final moments before the IPO 
Auction match.
    Furthermore, the Exchange believes the proposed rule change to 
shorten the minimum Display Only Period from thirty (30) minutes to 
fifteen (15) minutes is consistent with the protection of investors and 
the public interest in that it is designed to facilitate the 
commencement of orderly trading in securities that are the subject of 
an IPO by providing greater flexibility to begin trading earlier in 
certain cases, such as smaller IPOs, where an extended Display Only 
Period is not necessary to allow for order entry and the development of 
price stability, while at the same time avoiding unnecessary temporal 
constraints on the price discovery process in cases where extensive 
order entry is still occurring or where price stability has not yet 
developed.
    The Exchange believes it is consistent with the protection of 
investors and the public interest to eliminate the automated five (5) 
minute extension of the Order Acceptance Period and provide for a 
manual extension process that requires the underwriter to provide one 
or more updated IPO Price Bands to the Exchange for publication. The 
Exchange believes the proposed changes acknowledge the unique and 
central role of the underwriter in the IPO Process, and allow for the 
underwriter to transparently respond to unexpected changes in the 
composition of the IPO Auction Book that would impact the price of the 
IPO Auction match after the start of the Pre-Launch Period. Moreover, 
the Exchange believes the increased transparency would facilitate a 
more informed price discovery process as market participants iterate 
towards a new equilibrium price after an unexpected change in the 
composition of the IPO Auction Book that impacts the clearing price. 
Similarly, the Exchange further believes that constraining the IPO 
Auction by the IPO Price Band is consistent with the protection 
investors and the public interest in that it provides a mechanism to 
protect the IPO Auction match from occurring at a price that is outside 
of the expected auction price range that has been communicated to 
participants via IEX Auction Information and the SIP, which fosters 
price transparency and continuity.
    Furthermore, the Exchange believes that eliminating the existing 
underwriter price band selection process set forth in Rule 
11.280(h)(8)(A)(iii), in light of the proposed IPO Price Band selection 
and publication process, is consistent with the protection of investors 
and the public interest in that the proposed rules governing the 
selection and publication of an IPO Price Band serves a substantially 
similar function, while facilitating a more robust price discovery 
process that more fully reflects supply and demand to determine the 
price and timing of the IPO Auction match.
    Lastly, the Exchange believes that proposed Supplemental Material 
.01 to Rule 11.280(h)(8) is consistent with the protection of investors 
and the public interest, in that the proposed supplemental material is 
designed to ensure the enforceability of the Exchange's rules governing 
the underwriter's responsibilities during the IPO Auction process as 
proposed, which as described above, are designed to promote 
transparency and price discovery for securities that are the subject of 
an IPO on the Exchange.

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

    IEX does not believe that the proposed rule changes will result in 
any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act. The Exchange notes that the 
proposed rule

[[Page 31822]]

changes are similar to certain rules of the NYSE.\44\ Thus, the 
Exchange believes there are no new inter-market competitive burdens 
imposed as a result of the proposed rule changes, which are designed to 
augment certain of the Exchange's automated and manual processes 
governing IPO Auctions with certain manual IPO Auction processes 
utilized by the NYSE. To the contrary, the Exchange believes the 
proposed changes may serve as a catalyst for competition in the market 
for IPOs by providing underwriters a familiar tool for managing the IPO 
auction process while simultaneously enhancing IPO Auction transparency 
for market participants.
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    \44\ See supra notes 11, 27-30.
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    In addition, the Exchange does not believe that the proposed 
changes will have any impact on intra-market competition. Specifically, 
as discussed above, the proposed changes are designed to increase 
transparency to market participants regarding the supply and demand for 
an IPO security by requiring the underwriter to provide the Exchange 
with the proposed IPO Price Band for broad publication. Broad 
publication of the IPO Price Band and the proposed integration with IEX 
Auction Information is designed to enhance price discovery in the IPO 
Auction process, to the benefit of all market participants, by 
providing information about Imbalance Shares and Paired Shares at a 
price that better reflects where the underwriter believes the IPO 
Auction match is anticipated to occur, and thus inviting offsetting 
interest within such range. Moreover, the Exchange notes that the 
proposed IPO Price Band will be disseminated via IEX Auction 
Information, which is available free of charge through the Exchange's 
existing proprietary data feeds.\45\ Moreover, the proposed IPO Price 
Band will be disseminated via the SIP,\46\ which is a widely consumed 
data product.\47\ Accordingly, the proposed changes would apply to all 
Members on a fair and equal basis, in that all market participants have 
an equal opportunity to consume IEX Auction Information and/or SIP 
data. Accordingly, the Exchange believes there are no intra-market 
competitive burdens imposed as a result of the proposed rule changes.
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    \45\ See Rule 11.330.
    \46\ See supra note 9 [sic].
    \47\ See, e.g., CTA SIP Tape A & B subscriber/household metrics.
---------------------------------------------------------------------------

    Lastly, the Exchange believes that proposed Supplemental Material 
.01 to Rule 11.280(h)(8) does not result in any undue burden on 
competition, as any qualified market participant may become a Member of 
the Exchange free of charge,\48\ or may alternatively enter into 
private arrangements to appoint any approved Exchange Member to perform 
the functions under Rule 11.280(h)(8) that are performed by the 
underwriter with respect to the IPO Auction.
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    \48\ See the IEX Fee Schedule, which currently provides for free 
Membership on the Exchange, available at https://iextrading.com/trading/fees/.
---------------------------------------------------------------------------

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) \49\ of the Act and Rule 19b-4(f)(6) \50\ 
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.
---------------------------------------------------------------------------

    \49\ 15 U.S.C. 78s(b)(3)(A).
    \50\ 17 CFR 240.19b-4(f)(6).
---------------------------------------------------------------------------

    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) \51\ of the Act to determine whether the proposed 
rule change should be approved or disapproved.
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    \51\ 15 U.S.C. 78s(b)(2)(B).
---------------------------------------------------------------------------

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-2018-13 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-IEX-2018-13. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's internet website (http://www.sec.gov/rules/sro.shtml). 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for website viewing and printing in 
the Commission's Public Reference Room, 100 F Street NE, Washington, DC 
20549 on official business days between the hours of 10:00 a.m. and 
3:00 p.m. Copies of such filing also will be available for inspection 
and copying at the principal office of the Exchange. All comments 
received will be posted without change. Persons submitting comments are 
cautioned that we do not redact or edit personal identifying 
information from comment submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to File Number SR-IEX-2018-13, and should be submitted on 
or before July 30, 2018.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\52\
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    \52\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-14546 Filed 7-6-18; 8:45 am]
 BILLING CODE P