Document ID: SEC-2022-1356-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Investors Exchange, LLC
Posted Date: 2022-10-17T04:00Z

[Federal Register Volume 87, Number 199 (Monday, October 17, 2022)]
[Notices]
[Pages 62903-62910]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-22447]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-96014; File No. SR-IEX-2022-06]

Self-Regulatory Organizations; Investors Exchange LLC; Notice of 
Filing of Proposed Rule Change To Amend Rule 11.190(g) To Provide an 
Alternative Calculation for Pegged Order Types for Determining Whether 
a Quote Instability Condition Exists

October 11, 2022.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on September 27, 2022, the Investors Exchange LLC (``IEX'' or the 
``Exchange'') filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission'') the proposed rule change as described in 
Items I and II 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 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\ IEX is filing with the Commission a 
proposed rule change to amend Rule 11.190(g) to provide an alternative 
calculation for pegged order types for determining whether a quote 
instability condition exists.
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    \3\ 15 U.S.C. 78s(b)(1).
    \4\ 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 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

1. Purpose
    The purpose of the proposed rule change is to amend Rule 11.190(g) 
to provide an alternative quote calculation for pegged order types for 
determining whether a quote instability condition exists.
Background
    Currently, as specified in Rule 11.190(g), the Exchange utilizes 
quoting activity of eight away exchanges' Protected Quotations \5\ and 
a proprietary mathematical calculation to assess the probability of an 
imminent change to the current Protected NBB \6\ to a lower price or 
imminent change to the current Protected NBO \7\ to a higher price for 
a particular security. When the quoting activity meets predetermined 
criteria, the System \8\ treats the quote as not stable (``quote 
instability'' or a ``crumbling quote'') and the crumbling quote 
indicator (``CQI'') is ``on'' at that price level for two milliseconds. 
During all other times, the quote is considered stable (``quote 
stability''), and the CQI is considered to be ``off''. The System 
independently assesses the stability of the Protected NBB and Protected 
NBO for each security.
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    \5\ Each exchange's Protected Quotation is its best displayed 
bid or offer. See Rule 1.160(bb). Current Rule 11.190(g) uses the 
following eight exchanges' Protected Quotations: New York Stock 
Exchange LLC (``XNYS''), the Nasdaq Stock Market LLC (``XNGS''), 
NYSE Arca, Inc. (``ARCX''), Nasdaq BX, Inc. (``XBOS''), Cboe BYX 
Exchange, Inc. (``BATY''), Cboe Bats BZX Exchange, Inc. (``BATS''), 
Cboe EDGA Exchange, Inc. (``EDGA''), and Cboe EDGX Exchange, Inc. 
(``EDGX'').
    \6\ See Rule 1.160(cc).
    \7\ See Rule 1.160(cc).
    \8\ See Rule 1.160(nn).
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    When the CQI is on, Discretionary Peg (``D-Peg'') \9\ orders, 
primary peg (``P-Peg'') \10\ orders, and Corporate Discretionary Peg 
(``C-Peg'') \11\ orders do not exercise price discretion to meet the 
limit price of an active (i.e., taking) order. Specifically, D-Peg, P-
Peg, and C-Peg orders peg to a price that is the less aggressive of one 
(1) minimum price variant (``MPV'') \12\ less aggressive than the 
primary quote (i.e., one MPV below (above) the NBB \13\ (NBO \14\) for 
buy (sell) orders) or the order's limit price, if any.\15\ When the CQI 
is on at the NBB (in the case of a buy order) or NBO (in the case of a 
sell order), P-Peg orders are restricted by the System from exercising 
price discretion to trade at the quote instability determination price 
level (the ``CQI Price''), and D-Peg and C-Peg orders are restricted by 
the System from exercising price discretion to trade at the CQI Price 
or at more aggressive prices than the CQI Price.
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    \9\ See Rule 11.190(b)(10).
    \10\ See Rule 11.190(b)(8).
    \11\ See Rule 11.190(b)(16). Note that C-Peg orders can only be 
buy orders, so any discussion of D-Peg sell orders does not apply to 
C-Peg orders.
    \12\ See Rule 11.210.
    \13\ See Rule 1.160(u).
    \14\ See Rule 1.160(u).
    \15\ C-Peg orders are also constrained by the consolidated last 
sale price of the security, and therefore cannot trade, book, or 
exercise discretion at a price that is more aggressive than the 
consolidated last sale price. See Rule 11.190(b)(16).
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    The manner in which D-Peg orders operate is described in Rule 
11.190(b)(10). Specifically, a D-Peg order is a non-displayed, pegged 
order whose price, upon entry into the System, is automatically 
adjusted by the System to be equal to the less aggressive of the 
Midpoint Price \16\ or the order's limit price, if any. When unexecuted 
shares of such an order are posted to the Order Book,\17\ the price of 
the order is automatically adjusted by the System to be equal to and 
ranked at the less aggressive of one (1) MPV less

[[Page 62904]]

aggressive than the primary quote or the order's limit price and is 
automatically adjusted by the System in response to changes in the NBB 
(NBO) for buy (sell) orders up (down) to the order's limit price, if 
any. In order to meet the limit price of active orders on the Order 
Book, a D-Peg order will exercise the least amount of price discretion 
necessary from the D-Peg order's resting price to its discretionary 
price (defined as the less aggressive of the Midpoint Price or the D-
Peg order's limit price, if any), except during periods of quote 
instability as defined in Rule 11.190(g).
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    \16\ See Rule 1.160(t).
    \17\ See Rule 1.160(p).
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    The manner in which P-Peg orders operate is described in Rule 
11.190(b)(8). Specifically, a P-Peg order is a non-displayed, pegged 
order whose price, upon entry and when posting to the Order Book, is 
automatically adjusted by the System to be equal to and ranked at the 
less aggressive of one (1) MPV less aggressive than the primary quote 
(i.e., the NBB for buy orders and the NBO for sell orders) or the 
order's limit price, if any. When unexecuted shares of such an order 
are posted to the Order Book, the order is automatically adjusted by 
the System in response to changes in the NBB (NBO) for buy (sell) 
orders up (down) to the order's limit price, if any. In order to meet 
the limit price of active orders on the Order Book, a P-Peg order will 
exercise price discretion to its discretionary price (defined as the 
primary quote), except during periods of quote instability as defined 
in Rule 11.190(g).
    The manner in which C-Peg orders operate is described in Rule 
11.190(b)(16). Specifically, a C-Peg order is a non-displayed, pegged 
buy order whose price, upon entry into the System, is automatically 
adjusted by the System to be equal to the less aggressive of the 
Midpoint Price, the consolidated last sale price, or the order's limit 
price, if any. When unexecuted shares of such an order are posted to 
the Order Book, the price of the order is automatically adjusted by the 
System to be equal to and ranked at the less aggressive of one (1) MPV 
less aggressive than the primary quote or the order's limit price and 
is automatically adjusted by the System in response to changes in the 
NBB and the consolidated last sale price up to the order's limit price, 
if any. In order to meet the limit price of active orders on the Order 
Book, a C-Peg order will exercise the least amount of price discretion 
necessary from the C-Peg order's resting price to its discretionary 
price (defined as the less aggressive of the Midpoint Price, the 
consolidated last sale price, or the C-Peg order's limit price, if 
any), except during periods of quote instability as defined in Rule 
11.190(g).
    IEX has consistently sought to innovate by offering order types 
that counter the costs of ``adverse selection'' that participants 
supplying liquidity incur when their orders are executed at worse 
prices as a result of certain speed-based trading strategies. 
Restricting resting D-Peg, P-Peg, and C-Peg orders from exercising 
price discretion during periods of quote instability, as described in 
Rule 11.190, is designed to protect such orders from unfavorable 
executions at prices that the Exchange's probabilistic model predicts 
are about to become ``stale.''
    As proposed, Users \18\ of D-Peg, P-Peg and C-Peg orders will be 
able to designate whether the order's price will be adjusted using the 
existing quote instability calculation or a new alternative quote 
instability calculation. The alternative calculation is designed to 
incrementally increase the coverage of the quote instability 
calculation in predicting whether a particular quote is unstable by 
adjusting the logic underlying the quote instability calculation and 
introducing enhanced functionality designed to increase the number of 
crumbling quotes identified, while maintaining the quote instability 
calculation's accuracy in predicting the direction and timing of the 
next price change in the NBB or NBO, as applicable.
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    \18\ See IEX Rule 1.160(qq).
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Current Crumbling Quote Calculation
    In determining whether a crumbling quote exists, the Exchange 
utilizes real time relative quoting activity of eight exchanges' 
Protected Quotations \19\ and a proprietary mathematical calculation 
(the ``quote instability calculation'') to assess the probability of an 
imminent change to the current Protected NBB to a lower price or 
Protected NBO to a higher price for a particular security (``quote 
instability factor''). When the quoting activity meets predefined 
criteria and the quote instability factor calculated is greater than 
the Exchange's defined threshold (``quote instability threshold''), the 
System treats the quote as not stable (``quote instability'' or a 
``crumbling quote''), which turns the CQI on. During all other times, 
the quote is considered stable (``quote stability'') and the CQI is 
off. The System independently assesses the stability of the Protected 
NBB and Protected NBO for each security.
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    \19\ See supra note 2. [sic]
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    Quote instability (i.e., a crumbling quote) is an assessment that 
the Exchange System makes on a real-time basis, based on a pre-
determined, objective set of conditions specified in Rule 11.190(g)(1) 
during the Regular Market Session.\20\ Specifically, the presence of a 
crumbling quote is determined by the System when the quote instability 
factor result from the quote stability calculation is greater than the 
defined quote instability threshold. As set forth in Rule 
11.190(g)(1)(i), this calculation applies ten fixed coefficients to 
nine quote stability variables. The quote stability variables are 
measures of the status of Protected Quotations of the eight exchanges, 
including the number of such Protected Quotations on the near and far 
side of the market and the relationship and recent changes thereto. The 
quote instability calculation inputs these variables into a formula 
comprised of the ten fixed coefficients to determine the quote 
instability factor and whether it is greater than the defined quote 
instability threshold. The quote stability variables, fixed 
coefficients and formula were developed by the Exchange based on 
extensive research, analysis and validation to identify when there is a 
heightened probability of an imminent quote change to the NBB or NBO. 
The Exchange has made incremental changes to optimize and enhance the 
effectiveness of the quote instability calculation in determining 
whether a crumbling quote exists three times since Exchange launch.\21\
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    \20\ See IEX Rule 1.160(gg). Quote instability assessments are 
only made by the Exchange System during the Regular Market Session 
because the order types that utilize the assessment (i.e., D-Peg, P-
Peg and C-Peg orders) are only eligible to trade during the Regular 
Market Session.
    \21\ See Securities Exchange Act Release 34-78510 (August 9, 
2016), 81 FR 54166 (August 15, 2016) (SR-IEX-2016-11); Securities 
Exchange Act Release No. 80202 (March 10, 2017), 82 FR 14058 (March 
16, 2017) (SR-IEX-2017-06); and Securities Exchange Act Release No. 
83048 (April 13, 2018), 83 FR 17467 (April 19, 2018) (SR-IEX-2018-
07).
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    When the CQI is on, it remains in effect at that price level (the 
``CQI Price'') for two milliseconds, unless a new determination is made 
before the CQI turns off. Only one determination may be in effect at 
any given time for a particular security (i.e., the System will only 
treat one side of the Protected NBBO as unstable in a particular 
security at any given time and the CQI can only be on at one price 
level).\22\ A new determination may be made after at least 200 
microseconds have elapsed since the preceding determination, or a price 
change on either side of the best displayed bid or offer of the eight 
exchanges used for the current quote instability calculation occurs, 
whichever is first. If a new

[[Page 62905]]

determination is made, the original determination is no longer in 
effect. A new determination can be on either side of the best displayed 
bid or offer of the eight exchanges used for the current quote 
instability calculation and at the same or different price level as the 
original determination.
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    \22\ See Rule 11.190(g)(1).
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    Rule 11.190(g)(1)(A)(iii) provides that the Exchange reserves the 
right to modify the quote instability coefficients or quote instability 
threshold at any time, subject to a filing of a proposed rule change 
with the SEC. In this rule filing, the Exchange is proposing to make 
such changes by adding an alternative quote instability calculation 
approach.
Proposed Alternative Quote Instability Calculation
    IEX periodically reviews the performance of the quote instability 
calculation in predicting imminent quote changes, and potential 
alternative approaches. Based on that review, IEX identified an 
alternative approach that is designed to achieve two related 
objectives. First, we sought to increase the ``coverage'' of the CQI, 
meaning the percentage of all ``adverse'' NBBO changes per symbol 
(lower for bids, higher for offers) that were predicted by the CQI 
(meaning the CQI was ``on'' at the time of the adverse NBBO change). 
Second, we sought to preserve the ``accuracy rate'' of the CQI, meaning 
the percentage of time that the CQI accurately predicted the direction 
of the next price change. IEX reviewed market data from March 2022 to 
consider these factors.\23\ The analysis indicated that the current CQI 
calculation predicted 43% of such adverse NBBO changes on a volume 
weighted basis, while the alternative CQI calculation would have 
predicted 62% of such adverse NBBO changes. As to the accuracy rate, 
the analysis indicated that the CQI had an accuracy rate of 78%, and 
the alternative CQI calculation would have had an accuracy rate of 79%.
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    \23\ Data regarding the proposed alternative approach is based 
on comprehensive back testing. Specifically, IEX adjusts TAQ (i.e., 
NYSE Trade and Quote) data by fixed latency offsets per-venue to 
simulate market data seen by the IEX system. This simulated data is 
used to compute CQI models and evaluate their performance. Using 
this process to simulate the current CQI model confirms that 
performance estimates are similar to the actual IEX production 
system, and applying this process to the proposed model produces the 
back testing performance estimates described herein.
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    Based on informal feedback from Members, IEX understands that 
different firms may prefer different levels of coverage, i.e., how 
frequently a pegged order refrains from exercising price discretion to 
meet the price of an incoming order in response to crumbling quote 
predictions. Accordingly, IEX proposes to add the alternative quote 
instability calculation approach for determining whether a crumbling 
quote exists as an option for Users of pegged orders.
    As described in more detail below, the alternative approach would: 
expand the sources and types of market data used, utilize a more plain 
English rules-based approach, modify the minimum time period between 
quote instability determinations, and include a real-time accuracy 
assessment of each rule with the effect of deactivating a rule that is 
not meeting specified metrics. In addition, pegged orders would be 
restricted from exercising price discretion when the CQI is on, 
regardless of whether the current NBB or NBO (as applicable) is the 
same as the CQI Price.
    The following describes the proposed alternative approach:
Expanded Sources and Types of Market Data
    The Exchange is proposing to use the Protected Quotations of the 
current eight exchanges \24\ in the quote instability calculation, and 
to add the Protected Quotations of three additional exchanges: MIAX 
PEARL, LLC (``EPRL''), MEMX LLC (``MEMX''), and Nasdaq PHLX LLC 
(``XPHL'') (collectively the ``Signal Exchanges''). Additionally, as 
detailed below, the Exchange is proposing to use quotation size data 
\25\ from the Signal Exchanges, as well as quotation price data, which 
is also used in the current approach. In connection with the Exchange's 
analysis of market data,\26\ the Exchange considered several different 
permutations of which exchanges to include in the model. The analysis 
identified that using Protected Quotations from the 11 Signal Exchanges 
in the aggregate, as well as adding quotation size data, enhanced the 
predictive power of the alternative approach for determining a 
crumbling quote.
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    \24\ Current Rule 11.190(g) uses the following eight exchanges' 
Protected Quotations: XNYS; XNGS; ARCX; XBOS; BATY; BATS; EDGA; and 
EDGX.
    \25\ All references to quotation size are measured in round lot 
multiples.
    \26\ IEX conducted an analysis to develop a model for predicting 
crumbling quotes by reviewing market data from randomly selected 
days in 2018, 2019, and 2020. This model was validated by testing 
across randomly selected days from the same time period, as well as 
2021.
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Use of a Rules-Based System
    As proposed, the alternative model utilizes a quote instability 
calculation in which nine separate rules--each with specific conditions 
based on either the price, size, or price and size of the Signal 
Exchanges' Protected Quotations--can trigger a quote instability 
determination for either the NBB or the NBO of a particular 
security.\27\ The current quote instability calculation utilizes a 
logistic regression model with multiple coefficients and variables that 
must exceed a pre-defined threshold in order for the System to treat 
the quote as unstable. Based upon the analysis noted above, the 
Exchange believes that the proposed alternative rules-based model 
(which incorporates and expands on the existing approach) will 
incrementally increase the coverage of the Exchange's probabilistic 
model for determining whether a crumbling quote will occur at the same 
level of precision. In other words, the alternative model is expected 
to increase the number of quote instability determinations while 
maintaining the same degree of accuracy in predicting the timing and 
direction of price changes in the NBB and NBO. The proposed quote 
instability rules include four categories of Protected Quotation 
changes (each comprised of one or more rules) that IEX has determined 
are predictive of whether the NBB or NBO is about to move to a less 
aggressive price, as follows:
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    \27\ The nine rules are designed to work together in determining 
whether a quote instability determination is triggered, so if a User 
selects the alternative model all nine rules would be applicable. 
Users cannot elect that only some of the rules would apply.
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     Disappearing bids (or offers)--This category includes four 
rules that focus on whether one or more of the Signal Exchanges is no 
longer disseminating a bid or offer at the Signal Best Bid \28\ or 
Signal Best Offer \29\ as applicable; \30\
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    \28\ ``Signal Best Bid'' means the highest Protected Bid of the 
Signal Exchanges. See proposed IEX Rule 11.190(g)(2)(B)(i).
    \29\ ``Signal Best Offer'' means the lowest Protected Offer of 
the Signal Exchanges. See proposed IEX Rule 11.190(g)(2)(B)(v).
    \30\ The proposed disappearing bid/offers rules are closely 
related to the current approach to the quote instability 
calculation, in that both approaches share the Delta quote 
instability variable, which is heavily weighted in the current quote 
instability calculation. In the current calculation, Delta is 
additively incorporated into the logistic formula (after scaling by 
its relevant coefficient) whereas in the proposed disappearing bid/
offer rules, specific Delta values are explicitly required for the 
relevant rule to be True. See IEX Rule 11.190(g)(1)(A)(i)(b)(9) and 
proposed IEX Rule 11.190(g)(2)(B)(x) and (xi), each of which reflect 
a count of the number of three specified exchanges that have moved 
away from the best near side Protected NBBO of the Signal exchanges, 
as specified. IEX expects that the overall behavior of the proposed 
disappearing bid/offer rules will be similar to the behavior of the 
current approach.
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     Recent changes in quote size--This category includes two 
rules that focus

[[Page 62906]]

on whether there is an imbalance in the size of bids and offers at the 
Signal Best Bid or Signal Best Offer;
     Locked or crossed market--This category includes one rule 
that focuses on situations where the Signal Best Bid and Signal Best 
Offer are locked or crossed; and
     Quotation Changes--This category includes two rules that 
focus on changes to the Signal Best Bid or Signal Best Offer.
    On a security-by-security basis, if the specified conditions of any 
of the quote instability rules are met, then the rule is deemed to be 
True for that security. As described in more detail below, each rule 
must be active before it can trigger a quote instability determination. 
When one or more quote instability rules is deemed to be True and any 
of such rules are active, the System will treat the quote as unstable. 
The following describes the proposed rules:
     Rule DB1 (DO1) is True if two or 
more exchanges among BATS, EDGX, and XNGS have fallen off the Signal 
Best Bid (Offer) (i.e., the exchange was at the Signal Best Bid (Offer) 
but is no longer at the Signal Best Bid (Offer) ) within the past 
millisecond or within the time period since the start of the current 
Signal Best Bid (Offer) if shorter.\31\
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    \31\ Note that rule DB2 (DO2/DB4/DO4) being True logically 
implies that rule DB1 (DO1/DB3/DO3) is True. These rules are not 
redundant however, since a rule must be both True AND Active to 
generate a quote instability determination. It is possible for Rule 
DB2 (DO2/DB4/DO4) to be Active while Rule DB1 (DO1/DB3/DO3) is not 
Active, so these logical subset rules can add a distinct 
contribution to output behavior.
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     Rule DB2 (DO2) is True if two or 
more exchanges among BATS, EDGX, and XNGS have fallen off the Signal 
Best Bid (Offer) (i.e., the exchange was at the Signal Best Bid (Offer) 
but is no longer at the Signal Best Bid (Offer)) within the past 
millisecond or within the time period since the start of the current 
Signal Best Bid (Offer) if shorter AND the total notional value of 
protected displayed interest at the Signal Best Bid (Offer) is less 
than $60,000.
     Rule DB3 (DO3) is True if two or 
more exchanges among BATS, EDGX, and XNGS have fallen off the Signal 
Best Bid (Offer) (i.e., the exchange was at the Signal Best Bid (Offer) 
but is no longer at the Signal Best Bid (Offer)) within the past 
millisecond or within the time period since the start of the current 
Signal Best Bid (Offer) if shorter AND there is only one Signal 
Exchange at the Signal Best Bid (Offer).
     Rule DB4 (DO4) is True if two or 
more exchanges among BATS, EDGX, and XNGS have fallen off the Signal 
Best Bid (Offer) (i.e., the exchange was at the Signal Best Bid (Offer) 
but is no longer at the Signal Best Bid (Offer)) within the past 
millisecond or within the time period since the start of the current 
Signal Best Bid (Offer) if shorter AND the total notional value of 
protected displayed interest at the Signal Best Bid (Offer) is less 
than $60,000 AND there is only one Signal Exchange at the Signal Best 
Bid (Offer).
     Rule SB1 (SO1) is True if there is 
one Signal Exchange at the Signal Best Bid (Offer) AND the Bid (Offer) 
Pressure \32\ is greater than or equal to Offer (Bid) Pressure AND the 
aggregate total shares displayed at the Signal Best Offer (Bid) is 
greater than the aggregate total shares displayed at the Signal Best 
Bid (Offer) AND Bid (Offer) Pressure is greater than two.
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    \32\ See proposed IEX Rules 11.190(g)(2)(B)(xii) and (xiii).
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     Rule SB2 (SO2) is True if there is 
one Signal Exchange at the Signal Best Bid (Offer) AND Bid (Offer) 
Pressure is greater than or equal to Offer (Bid) Pressure AND the 
aggregate total shares displayed at the Signal Best Offer (Bid) is 
greater than the aggregate total shares displayed at the Signal Best 
Bid (Offer) AND Bid (Offer) Pressure is greater than one AND the spread 
is less than the average of the spread over the past twenty Updates 
\33\ to either the Protected Bid or Offer of any Signal Exchange.
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    \33\ ``Update'' means any change to either the price or size of 
any Signal Exchange's Protected Bid or Offer, or a change to the 
quote condition (e.g., when the quote becomes slow or non-firm, or 
the security is halted).
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     Rule LB1 (LO1) is True if either of 
the following conditions are met: (A) the Signal Best Bid is greater 
than or equal to the Signal Best Offer AND the Signal Best Offer (Bid) 
is less than (greater than) the Signal Best Offer (Bid) as of the last 
Update; OR the Signal Best Bid is greater than or equal to the Signal 
Best Offer AND the aggregate total shares displayed at the Signal Best 
Offer (Bid) is greater than the aggregate total shares displayed at the 
Signal Best Offer (Bid) as of the last Update AND the aggregate total 
shares displayed at the Signal Best Offer (Bid) is greater than the 
aggregate total shares displayed at the Signal Best Bid (Offer).
     Rule FB1 (FO1) is True if the Signal 
Best Bid (Offer) is greater (less) than the Signal Best Bid (Offer) as 
of the last Update.
     Rule FB2 (FO2) is True if the Signal 
Best Bid (Offer) is less (greater) than the Signal Best Bid (Offer) as 
of the last Update.
Time and Direction Constraints on the CQI
    The Exchange proposes three distinct changes for the alternative 
model to the time and direction constraints on the CQI in the current 
model. These changes are designed to provide a more dynamic methodology 
for quote instability determinations, thereby incrementally increasing 
the coverage of the formula in predicting a crumbling quote by 
expanding the scope of the model to additional situations where the 
Exchange's probabilistic model predicts that the NBB or NBO is in the 
process of moving to a less aggressive price and is about to become 
stale.
    First, the quote instability calculation could turn on concurrently 
on both sides of the market (i.e., the NBB and NBO) and always remains 
on for the full two millisecond period each time it turns on. In the 
current model, the quote instability calculation independently assesses 
the stability of the Protected NBB and Protected NBO for each security, 
but it can only turn on for one side of the market for each security at 
a time. Thus, if the quote instability calculation determines that the 
Protected NBB is unstable, the CQI turns on for the NBB. If thereafter 
the quote instability calculation determines that the Protected NBO for 
that same security is also unstable while the CQI is still on for the 
NBB, the System will turn off the CQI for NBB and turn it on for the 
NBO. As proposed, the CQI could be on concurrently on the buy and sell 
side of the market and will be able to remain on for the full two 
millisecond period after turning on because a subsequent determination 
on the opposite side of the market will not turn off a prior 
determination. While both sides of the market do not frequently crumble 
concurrently, IEX nonetheless believes that when they do, providing 
corresponding protection to orders on both sides of the market is 
appropriate.
    Second, pursuant to the alternative model, when the CQI turns on it 
would not be constrained to a specific price level. Currently the CQI 
is on at a specific CQI Price, the particular price in effect at the 
time it turned on, and if the NBB or NBO (as applicable) changes during 
the time it is on, the CQI does not constrain D-Peg, P-Peg, and C-Peg 
orders from exercising discretion since the CQI Price is no longer set 
by reference to the current NBB or NBO (as applicable).\34\ As 
proposed, pursuant to the alternative approach, the CQI will continue 
to turn on at a specific price,

[[Page 62907]]

but it will restrict D-Peg, P-Peg, and C-Peg orders from exercising 
discretion past their resting price when the CQI is on for the same 
side of the market as such orders regardless of whether the price at 
which it turned on is currently equal to the NBB or NBO (as 
applicable). The Exchange also proposes conforming changes to Rules 
11.190(b)(8)(K)(i) and (ii), (b)(10)(K)(i) and (ii), and (b)(16)(K) to 
reflect this change to D-Peg, P-Peg, and C-Peg orders' behavior if the 
User selects the alternative quote instability calculation. Based on 
IEX's analysis of market data, as described above, the Exchange has 
determined that continuing to restrict D-Peg, P-Peg, and C-Peg orders 
from exercising discretion when the CQI is on, even if the CQI Price 
has changed, will protect such orders from potential adverse selection 
at the new price level.
---------------------------------------------------------------------------

    \34\ See IEX Rules 11.190(b)(8)(K)(i) and (ii), (b)(10)(K)(i) 
and (ii), (b)(16)(K).
---------------------------------------------------------------------------

    Third, pursuant to the alternative model, IEX proposes to change 
the amount of time the System waits after the CQI turns on before it 
can make a new quote instability determination on the same side of the 
market from 200 microseconds to 250 microseconds (irrespective of any 
change in the Signal Best Bid or Offer). Because pegged orders will be 
constrained from exercising price discretion when the CQI is on, 
regardless of whether the current NBB or NBO (as applicable) is the 
same as the CQI price, CQI triggers in extremely rapid succession are 
unnecessary to continuously restrict discretion across successive NBBO 
changes. Moreover, increasing the 200 microsecond ``cooldown'' period 
to 250 microseconds before the System can make another quote 
instability determination is designed to reduce the technical 
processing burden on the System.
Activation Values/Activation Thresholds
    As proposed, in applying the alternative approach, consistent with 
using a rules-based model instead of a logistic regression model for 
the quote instability calculation, the Exchange would maintain an 
activation value (``Activation Value'') for each quote instability 
rule. Each rule's Activation Value is computed (on a security-by-
security basis for the Bid and Offer side) in real time as a function 
of the number of times the quote moves to a less aggressive price 
within the two milliseconds (or the start time of the current Signal 
Best Bid or Signal Best Offer, as applicable, if shorter) following the 
time the rule was True and the total number of times the rule was True. 
Whenever the Activation Value for a given rule exceeds a fixed 
predetermined activation threshold specific to that rule (``Activation 
Threshold''), the rule is active (i.e., it is eligible to trigger a 
quote instability determination when True).
    The Activation Value and Activation Threshold computations are 
intended to optimize the overall accuracy of the quote instability 
determinations by providing a mechanism to turn off a particular rule 
when market conditions are such that it is relatively less accurate in 
predicting a crumbling quote. IEX believes that utilizing Activation 
Thresholds is a useful innovation because it enables the use of rules 
that can be highly predictive in certain market conditions but not in 
others. The Activation Thresholds are tailored for each rule based on 
the rule's expected general accuracy in predicting a crumbling quote, 
based on IEX's market data analysis, so that a rule that has a higher 
potential to be less accurate has a higher activation threshold burden 
to meet. The Activation Thresholds are designed to increase the 
coverage for the alternative quote instability calculation by enabling 
more frequent triggers than the current approach but with accuracy 
controls safeguards.
    As proposed, the Activation Threshold for the DB, DO, SB and SO 
rules is 0.30; the Activation Threshold for Rules LB and LO is 0, and 
the Activation Threshold for the FB and FO rules is 0.50.\35\ The 
Exchange would utilize an initial activation value of 0.50 for all 
rules at the start of the Regular Market Session, which is then 
modified during the course of the Regular Market Session to reflect 
each rule's predictive performance. Specifically, each time a rule is 
True \36\ its existing Activation Value is multiplied by a Decay Factor 
of 0.94. In addition, each time the Signal Best Bid or Signal Best 
Offer moves to less aggressive price within two milliseconds of a rule 
being True at that price level, 0.06 will be added to that rule's 
existing Activation Threshold (i.e., (1-decay factor) + previous 
Activation Value as specified in IEX Rule 11.190(g)(2)(D)(ii).
---------------------------------------------------------------------------

    \35\ Note that the FB/FO rules will not have activation values 
strictly above their activation thresholds of 0.5 upon the first 
time they are satisfied (they are initialized daily at 0.5 and 
multiplied by the decay factor of 0.94 when they are satisfied), 
therefore the first time each day that either or both of these rules 
is True will not trigger a quote instability determination.
    \36\ Excluding instances where the rule was already True at the 
same unchanged price level in the prior two milliseconds.
---------------------------------------------------------------------------

    When a rule is active, the System continues to evaluate if its 
Activation Value exceeds its Activation Threshold. If the rule's 
Activation Value subsequently does not exceed its Activation Threshold, 
the rule will not trigger the System to treat the relevant quote as 
unstable even if the rule is True. The System continues to track the 
Activation Value for rules that are inactive, and if the Activation 
Value subsequently exceeds the rule's Activation Threshold, the System 
will reactivate the rule.
    Based on IEX's market data analysis, the Exchange believes that the 
use of Activation Thresholds, as proposed, would provide a dynamic 
performance evaluation methodology that will optimize the frequency and 
accuracy of the quote instability calculation, by enabling IEX to 
utilize a broader array of rules that may be predictive of a crumbling 
quote in certain market conditions but not others. Moreover, as 
proposed all aspects of the activation calculations are fully 
transparent in IEX rules thus enabling Members, market participants and 
others to perform the same calculations to determine whether a 
particular security is subject to a quote instability determination.
Specific Rule Changes
    IEX proposes to make the following changes to Rule 11.190(g) to 
specify that there are two alternative proprietary mathematical 
calculations (Option 1 and Option 2) to assess the probability of an 
imminent change to the current Protected NBB to a lower price or a 
Protected NBO to a higher price for a particular security:
     Add new language to the introductory section of Rule 
11.190(g) after the phrase ``Quote Stability'' at the beginning of the 
Rule specifying that the Exchange utilizes two User Selected 
alternative proprietary mathematical calculations to assess the 
probability of an imminent change to the current Protected NBB to a 
lower price or a Protected NBO to a higher price for a particular 
security.
     Add language immediately following the new language 
described in the preceding bullet and prior to the existing text 
stating that ``[f]or Option 1, as set forth in subparagraph (1) of Rule 
11.190(g),''.
     Add a new paragraph after the current first paragraph 
providing introductory language describing Option 2 and specifying that 
Option 2 is set forth in subparagraph (2) of Rule 11.190(g).
     Add ``Option 1'' prior to ``Crumbling Quote'' in the 
heading to subparagraph (1) of Rule 11.190(g).
     Relocate and revise subparagraph (1)(A)(iii) of Rule 
11.190(g) with new subparagraph (3) of Rule 11.190(g) which makes 
clarifying changes to the terminology in current subsection

[[Page 62908]]

(1)(A)(iii) of Rule 11.190(g), which specifies that the Exchange 
reserves the right to modify the quote instability coefficients or 
quote instability threshold at any time, subject to a filing of a 
proposed rule change with the SEC. IEX proposes to revise the rule 
provision to reference ``the proprietary mathematical calculations used 
to assess the probability of an imminent change to the current 
Protected NBB to a lower price or a Protected NBO to a higher price for 
a particular security'' rather than existing references to ``the quote 
instability coefficients or quote instability threshold.'' Current 
language that provides that such changes are ``subject to a filing of a 
proposed rule change with the SEC'' would be retained. In addition, IEX 
proposes to renumber this subsection to be subsection (3) of Rule 
11.190(g).
     Add new subparagraph (2) (including subparagraphs) of Rule 
11.190(g) to describe the alternative quote instability model and refer 
to such model as ``Option 2 Crumbling Quote''.
    The Exchange also proposes to make conforming changes to Rules 
11.190(b)(8)(K)(i) and (ii) (``P-Peg''), (b)(10)(K)(i) and (ii) (``D-
Peg''), and (b)(16)(K) (``C-Peg'') to reflect differences in whether 
the System will restrict applicable orders from exercising price 
discretion when the CQI is on. Specifically, if the User selected the 
existing quote instability model (Option 1), D-Peg, P-Peg, and C-Peg 
orders will be restricted from exercising discretion while the CQI is 
on for the same side of the market if the current NBB/NBO (as 
applicable) is the same as the NBB/NBO that the quote instability 
determination was based on. If the User selected the alternative quote 
instability model (Option 2), D-Peg, P-Peg, and C-Peg orders will be 
restricted from exercising discretion while the CQI is on for the same 
side of the market, even if the current NBB/NBO (as applicable) is 
different than the NBB/NBO upon which the quote instability 
determination was based. In addition, the Exchange proposes to make a 
conforming change to Rule 11.190(b)(7) to reflect that only Option 1 
will be applicable to Discretionary Limit orders.
Implementation
    The Exchange will announce the implementation date of the proposed 
rule change by Trading Alert at least ten business days in advance of 
such implementation date and within 90 days of effectiveness of this 
proposed rule change.
2. Statutory Basis
    IEX believes that the proposed rule change is consistent with 
section 6(b) \37\ of the Act in general, and furthers the objectives of 
section 6(b)(5) of the Act,\38\ in particular, in that it is 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 and, in general, to protect investors and the 
public interest. Specifically, and as discussed in the Purpose section, 
the proposal is designed to provide an alternative quote instability 
approach for pegged orders that is designed to make more frequent 
predictions while maintaining a similar true positive ratio as the 
existing approach. Based on informal feedback from Members, IEX 
understands that different firms prefer different levels of coverage 
with respect to the CQI and its impact on pegged orders exercising 
price discretion to meet the price of an incoming order. The 
alternative quote instability approach is responsive to that feedback 
and would provide additional coverage to Users of D-Peg, P-Peg and C-
Peg orders, i.e., as discussed in the Purpose section, it would result 
in more frequent predictions and thereby increase the circumstances in 
which the order would not exercise discretion.
---------------------------------------------------------------------------

    \37\ 15 U.S.C. 78f.
    \38\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    The Exchange believes it is consistent with the protection of 
investors and the public interest to provide an alternative quote 
instability calculation model that is designed to protect pegged orders 
from potential unfavorable executions during periods of quote 
instability when the Exchange's probabilistic model identifies that the 
market appears to be moving adversely to them. IEX believes that the 
alternative approach, in the aggregate and with respect to the specific 
changes proposed, is rigorously sound, supported by market data 
analysis, and consistent with the Act as described below.
    The Exchange believes that it is consistent with the Act to expand 
the sources and types of market data used by the quote instability 
calculation. As described in the Purpose section, based on market data 
analysis and testing, the Exchange believes that using the market data 
of three additional exchanges, and using quotation size data (in 
addition to quotation price data) of all eleven Signal Exchanges, will 
result in robust predictive power and accuracy of the quote instability 
calculation.
    The Exchange also believes that it is consistent with the Act to 
utilize a rules-based model to determine whether a crumbling quote will 
occur. As discussed in the Purpose section, based on market data 
analysis, the Exchange believes that the nine proposed quote 
instability rules--each with specific conditions based on either the 
price, size, or price and size of the Signal Exchange's Protected 
Quotations--will result in robust predictive power and accuracy of the 
Exchange's alternative probabilistic model for determining whether a 
crumbling quote will occur by expanding the scope of the model to 
additional situations where the Exchange's probabilistic model predicts 
that the NBB or NBO is about to become stale. IEX believes that this 
proposed change will potentially enhance the protection available to 
market participants using pegged order types that elect to use the 
alternative model. Moreover, IEX believes that the alternative quote 
instability calculation, as a plain English rules-based system, will be 
more readily understood by market participants, thereby increasing the 
transparency of IEX's rules and removing impediments to a free and open 
market.
    The Exchange further believes that it is consistent with the Act to 
restrict D-Peg, P-Peg, and C-Peg orders from exercising price 
discretion when the alternative quote instability calculation model is 
on for the same side of the market as the order regardless of the 
triggering price. As discussed in the Purpose section, based on market 
data analysis, the Exchange believes that continuing to restrict D-Peg, 
P-Peg, and C-Peg orders from exercising discretion when the CQI is on 
even if the CQI Price has changed will protect such orders from 
potential adverse selection at new price levels resulting from 
consecutive closely timed price moves as the market ``settles'' at a 
new price level.
    Additionally, the Exchange believes that it is consistent with the 
Act to change the time and direction constraints on the alternative 
quote instability calculation model. As discussed in the Purpose 
section, these differences--keeping the CQI on for a full two 
millisecond period every time it turns on and allowing the CQI to turn 
on concurrently on both sides of the market (i.e., the NBB and NBO)--
are designed to incrementally increase the coverage of the alternative 
quote instability calculation model in predicting a crumbling quote by 
increasing the duration of time in which the CQI is on. Based on market 
data analysis, the Exchange believes these changes to the CQI's time 
and direction constraints will increase the coverage of quote 
instability determinations.

[[Page 62909]]

    The Exchange additionally believes that it is consistent with the 
protection of investors and the public interest to extend by 50 
microseconds the ``cooldown'' period before the System can make another 
quote instability determination (extending it from 200 microseconds to 
250 microseconds). As discussed in the Purpose section, based on market 
data analysis, because pegged orders will be constrained from 
exercising price discretion when the CQI is on regardless of whether 
the current NBB or NBO (as applicable) is the same as the CQI price, 
CQI triggers in extremely rapid succession are unnecessary to 
continuously restrict discretion across successive NBBO changes. 
Moreover, increasing the ``cooldown'' period before the System can make 
another quote instability determination is designed to reduce the 
technical processing burden on the System thereby supporting the 
resiliency of the Exchange and removing impediments to and perfecting 
the mechanism of a free and open market and a national market system.
    The Exchange also believes that using activation thresholds instead 
of a quote stability threshold is consistent with the Act because the 
activation thresholds are designed to enable broader coverage while 
controlling for overall accuracy of the quote instability 
determinations by providing a mechanism to turn off a particular rule 
when market conditions are such that it is relatively less accurate in 
predicting a crumbling quote. Based upon market data analysis, IEX 
believes that utilizing activation thresholds is a useful innovation 
because it enables the use of rules that can be highly predictive in 
certain market conditions but not in others. The activation thresholds 
are tailored for each rule based on the rule's general accuracy in 
predicting a crumbling quote so that a rule that has a higher potential 
to be less accurate has a higher activation threshold burden to meet.
    The Exchange believes that it is consistent with the protection of 
investors and the public interest to offer an alternative User selected 
quote instability calculation model for pegged orders. As discussed in 
the Purpose section and above, IEX understands that different market 
participants seek differing levels of coverage with respect to the CQI 
and its impact on when a pegged order exercises price discretion to 
meet the price of an incoming order. The proposed rule change is 
designed to provide a market-based approach to such differing 
objectives in a manner that is transparent to market participants. 
Moreover, IEX's market data analysis evidences that both quote 
instability calculations will be ``on'' for a small portion of the 
trading day while providing robust protection to pegged orders.
    The Exchange believes that the proposed rule change may result in 
more and larger sized pegged orders being entered on IEX as a result of 
the ability to select the quote instability calculation alternative 
which, as discussed above, is designed to provide greater coverage with 
respect to the CQI and its impact on pegged orders exercising price 
discretion to meet the price of an incoming order. To the extent more 
orders are entered, the increased liquidity would benefit all IEX 
members and their customers.
    Regardless of whether a User selects to use the current or proposed 
alternative quote instability calculation, when multiple pegged orders 
exercise discretion at the same time, their relative priority is 
retained.\39\ Thus, the Exchange notes that the proposed rule change 
does not raise any new or novel issues in this regard.
---------------------------------------------------------------------------

    \39\ See IEX Rule 11.190(b)(8), (10) and (16).
---------------------------------------------------------------------------

    Furthermore, the Exchange notes that all Members are eligible to 
use D-Peg, P-Peg, and C-Peg orders, and therefore all Members are 
eligible to benefit from these order types' protections against adverse 
selection, and will also benefit if use of the alternative quote 
instability calculation bring more liquidity to the Exchange. Thus, the 
Exchange believes that application of the rule change is equitable and 
not unfairly discriminatory.
    Further, the Exchange believes that the proposed changes (as 
described in the Purpose section) to relocate and revise subparagraph 
(1)(A)(iii) of Rule 11.190(g) with new subparagraph (3) of Rule 
11.190(g) and to make clarifying changes to the terminology in current 
subsection (1)(A)(iii) of Rule 11.190(g), which specifies that the 
Exchange reserves the right to modify the quote instability 
coefficients or quote instability threshold at any time, subject to a 
filing of a proposed rule change with the SEC are consistent with the 
Act. The proposed changes merely update terms and descriptive language 
to describe both alternative quote instability calculations, and 
without changing the operative language that any future changes would 
continue to be subject to a filing of a proposed rule change with the 
SEC.
    The Exchange also believes that the proposed conforming rule 
changes, as described in the Purpose section are consistent with the 
Act because the changes would promote clarity in IEX's rules.
    Finally, the Exchange notes that, as proposed, both quote 
instability calculations will continue to be fixed formulas specified 
transparently in IEX's rules. The Exchange is not proposing to add any 
new functionality, but merely to provide an alternative quote 
instability calculation for pegged orders based on market data analysis 
designed to increase its accuracy in predicting a crumbling quote, and 
as contemplated by the rule.

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

    IEX does not believe that the proposed rule change will result in 
any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act. To the contrary, as discussed 
in the Statutory Basis section, the proposal is designed to enhance 
IEX's competitiveness by incentivizing the entry of increased 
liquidity.
    With regard to intra-market competition, the proposed changes to 
the quote instability calculation will apply equally to all Members on 
a fair, impartial and nondiscriminatory basis without imposing any new 
burdens on the Members. The Commission has already considered the 
Exchange's D-Peg order type in connection with its grant of IEX's 
application for registration as a national securities exchange under 
sections 6 and 19 of the Act \40\ and approved the Exchange's P-Peg 
\41\ order type. The Commission has also allowed the Exchange's C-Peg 
\42\ order type to become effective. As discussed in the Purpose and 
Statutory Basis sections, the proposed rule change is designed to 
merely provide an optional alternative quote instability calculation; 
therefore, no new burdens are being proposed.
---------------------------------------------------------------------------

    \40\ See Securities Exchange Act Release 78101 (June 17, 2016), 
81 FR 41142 (June 23, 2016) (File No. 10-222).
    \41\ See Securities Exchange Act Release No. 80223 (March 13, 
2017), 82 FR 14240 (March 17, 2017) (SR-IEX-2016-18).
    \42\ See Securities Exchange Act Release No. 87019 (September 
19, 2019), 84 FR 50485 (September 25, 2019) (SR-IEX-2019-10).
---------------------------------------------------------------------------

    With regard to inter-market competition, other exchanges are free 
to adopt similar quote instability calculations. In this regard, the 
Exchange notes that that NYSE American LLC has adopted a rule copying 
an earlier iteration of the Exchange's Discretionary Peg Order type and 
quote instability calculation.\43\
---------------------------------------------------------------------------

    \43\ See NYSE American LLC Rule 7.31E(h)(3)(D).

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[[Page 62910]]

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

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period up to 90 days of such 
date (i) as the Commission may designate if it finds such longer period 
to be appropriate and publishes its reasons for so finding or (ii) as 
to which the Exchange consents, the Commission shall: (a) by order 
approve or disapprove such proposed rule change, or (b) institute 
proceedings to determine whether the proposed rule change should be 
disapproved.

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-2022-06 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-2022-06. 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 the filing also will be available for inspection 
and copying at the principal offices 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-2022-06, and should be submitted on 
or before November 7, 2022.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\44\
---------------------------------------------------------------------------

    \44\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

J. Matthew DeLesDernier,
Deputy Secretary.
[FR Doc. 2022-22447 Filed 10-14-22; 8:45 am]
BILLING CODE 8011-01-P