Document ID: SEC-2022-1432-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Investors Exchange, LLC
Posted Date: 2022-11-04T04:00Z

[Federal Register Volume 87, Number 213 (Friday, November 4, 2022)]
[Notices]
[Pages 66764-66767]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-24008]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-96187; File No. SR-IEX-2022-08]

Self-Regulatory Organizations; Investors Exchange LLC; Notice of 
Filing and Immediate Effectiveness of Proposed Rule Change To Amend IEX 
Rule 11.190(e) To Expand the Availability of the Exchange's Existing 
Anti-Internalization Functionality to More Members

October 31, 2022.
    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 October 24, 2022, 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 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\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of the 
Substance of the Proposed Rule Change

    Pursuant to the provisions of Section 19(b)(1) under the Act,\3\ 
and Rule 19b-4 thereunder,\4\ the Exchange is filing with the 
Commission a proposed rule change to amend IEX Rule 11.190(e) to expand 
the availability of the Exchange's existing anti-internalization 
functionality to more Members. The Exchange has designated this rule 
change as ``non-controversial'' under Section 19(b)(3)(A) of the Act 
\5\ and provided the Commission with the notice required by Rule 19b-
4(f)(6) thereunder.\6\
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    \3\ 15 U.S.C. 78s(b)(1).
    \4\ 17 CFR 240.19b-4.
    \5\ 15 U.S.C. 78s(b)(3)(A).
    \6\ 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. 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

1. Purpose
    The Exchange proposes to amend IEX Rule 11.190(e) to expand the 
availability of the Exchange's existing anti-internalization group 
identifier (``AIQ'') functionality to more Members.\7\ Specifically, 
the Exchange is proposing to allow Members to apply AIQ to orders 
submitted by an Affiliate \8\ that is also an IEX Member (a ``Member 
Affiliate''), if so desired.
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    \7\ See IEX Rule 1.160(s) (defining the term ``Member'').
    \8\ An ``Affiliate'' is a person (including an entity) that 
directly, or indirectly through one or more intermediaries, 
controls, or is controlled by, or is under common control with, the 
person specified. See 17 CFR 240.12b-2.
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    IEX offers optional anti-internalization functionality to Users \9\ 
that enables a User to prevent two of its orders from executing against 
each other. Currently, Users can set the anti-internalization 
functionality to apply at the market participant identifier (``MPID'') 
or User level. To utilize IEX's optional anti-internalization 
functionality, a User adds a unique identifier of its choosing 
designating the order as subject to anti-internalization (the ``AIQ 
identifier'').\10\ Orders that have the same AIQ identifier and 
originate from the same MPID or User, as specified by the User,\11\ are 
part of the same ``AIQ group.'' \12\ And any active order that is part 
of the same AIQ group is prevented from executing against a resting 
opposite side order that is part of the same AIQ group.
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    \9\ Pursuant to IEX Rule 1.160(qq), a User means any Member or 
Sponsored Participant who is authorized to obtain access to the 
System pursuant to IEX Rule 11.130. Sponsored Participant is defined 
in IEX Rule 1.160(ll).
    \10\ See IEX Rule 11.190(e)(1)(A).
    \11\ Users may elect to enable anti-internalization 
functionality on an IEX Port Request Form, designating whether such 
functionality should be applied on an MPID or User basis.
    \12\ See IEX Rule 11.190(e)(1)(B).
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    Users seeking to apply AIQ to their orders also include one of five 
modifiers to their orders, which determines the interaction between two 
orders within the same AIQ group that would otherwise execute against 
each other (``AIQ modifier'').\13\ The AIQ modifier on the order with 
the newer timestamp controls the interaction between the two orders in 
an AIQ group.\14\ The five possible interactions for two orders with 
AIQ instructions that would otherwise match are: cancel the older of 
the two orders; cancel the newer of the two orders; cancel both orders; 
cancel the smaller of the two orders; or cancel the smaller of the two 
orders and decrement the size of the smaller order from the larger 
order.\15\
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    \13\ See IEX Rule 11.190(e)(1)(B).
    \14\ See IEX Rule 11.190(e).
    \15\ See IEX Rule 11.190(e)(2).
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Proposal
    IEX understands that some Members would like to apply AIQ to orders 
submitted by their Affiliates who are also Members. For example, if 
Member A is under common control with Member B, the two Members would 
like the option of applying AIQ to orders submitted by the two Member 
Affiliates. Therefore, the Exchange proposes to expand the availability 
of the anti-internalization functionality it offers by allowing AIQ 
groups to be set at the Member Affiliate level in addition to the 
current options of setting AIQ groups at the User or MPID level. This 
proposal is designed to offer AIQ functionality to Member Affiliates 
that have divided their business activities between separate corporate 
entities without disadvantaging them when compared to Members that 
operate those business activities within a single corporate entity. 
This proposal would expand the

[[Page 66765]]

levels at which AIQ groups can be set by a Member, but nothing in this 
proposal would change the manner in which two orders in the same AIQ 
group interact.
    Specifically, IEX proposes to amend IEX Rule 11.190(e)(1)(B) to 
include ``Member Affiliates'' as one of the possible levels for AIQ 
groups (in addition to the current options of MPID or User). And the 
Exchange proposes to add subparagraph (i) to IEX Rule 11.190(e)(1)(B) 
to specify that for purposes of subparagraph (e)(1)(B), the term 
``Member Affiliates'' shall mean Members that are affiliated with each 
other pursuant to Rule 12b-2 under the Act.\16\ If Members choose to 
have AIQ applied across Member Affiliates, the anti-internalization 
functionality would prevent quotes and orders from such Member 
Affiliates from trading against one another.
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    \16\ See supra note 9.
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    Under this proposal if Member A submits an order to buy 100 shares 
of security ABC for $10.00 with a user-supplied AIQ identifier, and 
Member B, an Affiliate of Member A, submits an order to sell 100 shares 
of security ABC for $10.00 with the same User-supplied AIQ identifier 
(meaning the two orders are in the same AIQ group), the two otherwise 
executable orders will not match, but will instead interact based upon 
the User-supplied AIQ modifier on the newer order.
    Members will be responsible for having proper internal 
documentation in their books and records substantiating that two or 
more Members using AIQ are Affiliates of one another. IEX notes that 
this grouping of Member Affiliates is already a common practice for 
exchanges that offer rebates, in order to not penalize two affiliated 
members when calculating rebate tiers.\17\
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    \17\ See, e.g., the Nasdaq Stock Market LLC Equity 7, Section 
127 (``Aggregation of Activity of Affiliated Members''); Nasdaq BX, 
Inc. Equity 7, Section 127 (``Aggregation of Activity of Affiliated 
Members''); New York Stock Exchange LLC Price List, General II 
(``Aggregate Billing of Affiliated Member Organizations'') at 24, 
available at: https://www.nyse.com/publicdocs/nyse/markets/nyse/NYSE_Price_List.pdf.
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    This proposed rule change is designed to provide additional 
flexibility to Members in how they implement self-trade prevention 
provided by the Exchange, and thereby better manage their order flow 
and prevent undesirable executions or the potential for ``wash sales'' 
that may occur as a result of the speed of trading in today's 
marketplace. Based on informal discussions with Members, the Exchange 
believes that the proposed additional types of anti-internalization 
functionality will be useful to Members in implementing their own 
compliance controls. And the additional AIQ functionality may assist 
Members in complying with certain rules and regulations of the Employee 
Retirement Income Security Act (``ERISA'') that preclude and/or limit 
managing broker-dealers of such accounts from trading as principal with 
orders generated for those accounts.
    The Exchange notes that, as with the current anti-internalization 
functionality offered by IEX, use of the proposed new Member Affiliate 
AIQ grouping will not alleviate, or otherwise exempt, Members from 
their best execution obligations. As such, Members and their Affiliates 
using AIQ will continue to be obligated to take appropriate steps to 
ensure that customer orders that do not execute because they were 
subject to anti-internalization ultimately receive the same price, or a 
better price, than they would have received had execution of the orders 
not been inhibited by anti-internalization.\18\ Further, as with 
current rule provisions, Market Makers and other Users may not use AIQ 
functionality to evade the firm quote obligation, as specified in IEX 
Rule 11.151(b), and the AIQ functionality must be used in a manner 
consistent with just and equitable principles of trade.\19\ For these 
reasons, the Exchange believes the proposed new Member Affiliate level 
of AIQ grouping offers Members enhanced order processing functionality 
that may prevent potentially undesirable executions without negatively 
impacting broker-dealer best execution obligations.
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    \18\ See Supplementary Material .01 to IEX Rule 11.190(e).
    \19\ See Supplementary Materials .02 and .03 to IEX Rule 
11.190(e).
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2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6(b) of the Act,\20\ in general, and furthers the 
objectives of Section 6(b)(5),\21\ in particular, in that it is 
designed to prevent fraudulent and manipulative acts and practices, to 
promote just and equitable principles of trade, to foster cooperation 
and coordination with persons engaged in facilitating transactions in 
securities, and to remove impediments to and perfect the mechanism of a 
free and open market and a national market system, and, in general, to 
protect investors and the public interest. Specifically, the Exchange 
believes that the proposed rule change is consistent with the 
protection of investors and the public interest because allowing Member 
Affiliates to be part of the same AIQ group will provide Members with 
additional flexibility with respect to how they implement self-trade 
protections provided by IEX that may better support their trading 
strategies and compliance controls. Members that prefer the current 
anti-internalization groupings offered by the Exchange can continue to 
use them without any modification (i.e., if two Member Affiliates do 
not wish to have orders from the two Members be in the same AIQ group, 
the Members will not have to make any changes to the manner in which 
they submit orders to the Exchange).
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    \20\ 15 U.S.C. 78f(b).
    \21\ 15 U.S.C. 78f(b)(5).
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    As noted in the Purpose section, IEX believes that providing 
Members with more flexibility and control over the interactions of 
their orders will better prevent undesirable executions or the 
potential for ``wash sales'' that may occur as a result of the speed of 
trading in today's marketplace. And the Member Affiliate level AIQ 
grouping may better assist Members in complying with certain ERISA 
rules and regulations that preclude and/or limit managing broker-
dealers of such accounts from trading as principal with orders 
generated for those accounts.
    Additionally, as discussed in the Purpose section, allowing Members 
to apply AIQ to trades submitted by their Affiliates that are also 
Members is intended to avoid disparate treatment of firms that have 
divided their various business activities between separate corporate 
entities as compared to firms that operate those business activities 
within a single corporate entity. Accordingly, the Exchange believes 
that this proposed rule change is fair and equitable, and not 
unreasonably discriminatory.
    Further, the Exchange believes that providing expanded AIQ grouping 
options may streamline certain regulatory functions by reducing false 
positive results that may occur on wash trading surveillance reports 
when two orders in the same AIQ group are executed, notwithstanding 
that the transaction may not constitute a wash trade.
    Finally, as discussed in the Purpose section, the Exchange notes 
that exchanges allowing Members to combine their trading activity with 
Affiliates is already a common practice at several other national 
securities exchanges.\22\ Consequently, the Exchange does not believe 
that the proposed rule change raises any new or

[[Page 66766]]

novel issues not already considered by the Commission.
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    \22\ See supra note 18.
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition that is not necessary or appropriate 
in furtherance of the purposes of the Act. To the contrary, the 
proposal is designed to enhance IEX's competitiveness by providing 
additional flexibility over the level at which orders are grouped, 
thereby incentivizing Members to send orders to IEX and increase the 
liquidity available on the Exchange. Additionally, the proposed rule 
change is designed to assist Members with compliance with the 
securities laws that prohibit wash trading as well as ERISA 
requirements. The Exchange also notes that the proposed new AIQ 
grouping option, like the Exchange's current anti-internalization 
functionality, is completely optional and Members can determine on an 
order-by-order, MPID, User, or Member Affiliate basis whether to apply 
anti-internalization protections to orders submitted to the Exchange.
    The Exchange does not believe that the proposed rule change will 
impose any burden on intermarket competition that is not necessary or 
appropriate in furtherance of the purposes of the Act. Moreover, there 
is no barrier to other national securities exchanges adopting similar 
anti-internalization grouping at the Member Affiliate level.
    The Exchange also does not believe that the proposed rule change 
will impose any burden on intramarket competition that is not necessary 
or appropriate in furtherance of the purposes of the Act. All Members 
will continue to be eligible to use the Exchange's anti-internalization 
functionality. While not every Member engages in a business that might 
involve risks of self-matching against an Affiliate's orders, for the 
Members that do face that risk, the proposed additional anti-
internalization grouping is designed to help such Members with their 
compliance with the securities laws and ERISA. Further, implementation 
of anti-internalization functionality impacts only a Member's orders 
(and the orders of the Member Affiliates), and not the orders of other, 
unaffiliated Members. And, as discussed in the Purpose and Statutory 
Basis sections, allowing Members to apply AIQ to trades submitted by 
their Affiliates that are also Members is intended to avoid disparate 
treatment of firms that have divided their various business activities 
between separate corporate entities as compared to firms that operate 
those business activities within a single corporate entity.

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) \23\ of the Act and Rule 19b-4(f)(6) \24\ 
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. In addition, the Exchange provided the Commission 
with written notice of its intent to file the proposed rule change, 
along with a brief description and text of the proposed rule change, at 
least five business days prior to the date of filing.\25\
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    \23\ 15 U.S.C. 78s(b)(3)(A).
    \24\ 17 CFR 240.19b-4(f)(6).
    \25\ 17 CFR 240.19b-4(f)(6)(iii).
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    The Exchange believes that the proposed rule change meets the 
criteria of subparagraph (f)(6) of Rule 19b-4 \26\ because, as 
discussed above, this rule change does not modify any of its existing 
AIQ functionality, but simply offers an additional level of optional 
AIQ grouping to Members with Affiliates that are also Members. As 
discussed above, several other exchanges currently allow Members to 
group their orders with those of their Affiliates for fee purposes.\27\ 
Thus, IEX does not believe that the proposed changes raise any new or 
novel material issues that have not already been considered by the 
Commission in connection with the existing anti-internalization 
functionality offered by IEX.
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    \26\ 17 CFR 240.19b-4(f)(6).
    \27\ See supra note 18.
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    Accordingly, the Exchange has designated this rule filing as non-
controversial under Section 19(b)(3)(A) of the Act \28\ and paragraph 
(f)(6) of Rule 19b-4 thereunder.\29\ The Exchange will implement the 
proposed rule change within 90 days of filing, subject to the 30-day 
operative delay, and provide at least ten (10) days' notice to Members 
and market participants of the implementation timeline.
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    \28\ 15 U.S.C. 78s(b)(3)(A).
    \29\ 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) \30\ of the Act to determine whether the proposed 
rule change should be approved or disapproved.
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    \30\ 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-2022-08 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-2022-08. 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

[[Page 66767]]

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-
2022-08, and should be submitted on or before November 25, 2022.
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    \31\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\31\
J. Matthew DeLesDernier,
Deputy Secretary.
[FR Doc. 2022-24008 Filed 11-3-22; 8:45 am]
BILLING CODE 8011-01-P