[Federal Register Volume 77, Number 67 (Friday, April 6, 2012)]
[Notices]
[Pages 20854-20858]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-8271]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-66713; File No. SR-EDGX-2012-08]


Self-Regulatory Organizations; EDGX Exchange, Inc.; Notice of 
Filing of Proposed Rule Change Relating to Amendments to Rule 2.11 That 
Establish the Authority To Cancel Orders and Describe the Operation of 
an Error Account

April 2, 2012.
    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 March 22, 2012, EDGX Exchange, Inc. (``Exchange'' or ``EDGX'') 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\ 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

    The Exchange proposes to amend Rule 2.11 to (1) add a new 
subparagraph (a)(6) that addresses the authority of the Exchange and 
its routing broker-dealer, Direct Edge ECN LLC d/b/a DE Route (``DE 
Route'') to cancel orders if and when a systems, technical or 
operational issue (herein, each individually referred to as a ``Systems 
Issue,'' and collectively referred to as ``Systems Issues'') occurs, 
and (2) amend subparagraph (a)(4) and add new subparagraph (a)(7) to 
describe the operation of an error account for DE Route. The text of 
the proposed rule change is available on the Exchange's Web site, at 
the Exchange's principal office and in the Public Reference Room of the 
Commission.

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

    In its filing with the Commission, the Exchange included statements 
concerning the purpose of, and basis for, the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The self-regulatory organization has prepared summaries, 
set forth in Sections A, B and C below, of the most significant aspects 
of such statements.

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

1. Purpose
    The Exchange proposes to amend Rule 2.11 by adding subparagraph 
(a)(6) to address the authority of the Exchange and DE Route to cancel 
orders when a Systems Issue occurs, and by amending subparagraph (a)(4) 
and adding subparagraph (a)(7) to describe the

[[Page 20855]]

conditions under which DE Route may maintain and use an error 
account.\3\
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    \3\ DE Route is a facility of the Exchange. Accordingly, under 
Exchange Rule 2.11(a)(1), the Exchange is responsible for filing 
with the Commission rule changes and fees relating to DE Route's 
outbound router function. In addition, EDGX is using the phrase 
``the Exchange or DE Route'' in this rule filing to reflect the fact 
that a decision to cancel orders affected by Systems Issue may be 
made by the Exchange or DE Route depending on where those orders are 
located at the time of that decision.
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    DE Route is the approved outbound router of EDGX,\4\ subject to the 
conditions listed in Rule 2.11. EDGX relies on DE Route to provide 
outbound routing services from EDGX to external market centers (each, a 
``Trading Center'' \5\). The Exchange has also been approved to receive 
inbound routes of equities orders by DE Route from EDGA Exchange, Inc. 
for a pilot period ending on June 30, 2012.\6\ When DE Route routes 
orders to a Trading Center, it does so by sending a corresponding order 
in its own name to the Trading Center. From time to time, the Exchange 
and DE Route encounter situations in which it becomes necessary to 
cancel orders and resolve an error position.\7\
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    \4\ See Securities Exchange Act Release No. 61698 (March 12, 
2010), 75 FR 13151 (March 18, 2010).
    \5\ As defined in EDGX Rule 2.11(a) and Rule 600(b)(78) of 
Regulation NMS under the Securities Exchange Act of 1934 (the 
``Act''), 17 CFR 242.600(b)(78).
    \6\ See Release No. 61698 at n. 4. See also Securities Exchange 
Act Release No. 64361 (April 28, 2011), 76 FR 25388 (May 4, 2011) 
(SR-EDGX-2011-12); see also SR-EDGX-2012-09 (March 16, 2012) 
(pending filing to extend the pilot period through June 30, 2013).
    \7\ The examples described in this filing are not intended to be 
exclusive. Proposed subparagraph (a)(6) of EDGX Rule 2.11 would 
provide general authority for the Exchange or DE Route to cancel 
orders in order to maintain fair and orderly markets when Systems 
Issues are occurring, and proposed subparagraph (a)(7) of Rule 2.11 
would set forth the manner in which an error position may be handled 
by DE Route. The proposed rule changes are not limited to addressing 
order cancellation or an error position resulting only from the 
specific examples described in this filing.
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Circumstances That Could Lead to Cancelled Orders
    A Systems Issue may arise at DE Route, a Trading Center or the 
Exchange that may cause the Exchange or DE Route to take steps to 
cancel orders if the Exchange or DE Route determines that such action 
is necessary to maintain a fair and orderly market. The examples set 
forth below describe some of the circumstances in which the Exchange or 
DE Route may decide to cancel orders.

    Example 1. If DE Route or a Trading Center experiences a Systems 
Issue that results in DE Route not receiving responses to immediate 
or cancel (``IOC'') orders that it sent to the Trading Center, and 
that issue is not resolved in a timely manner, DE Route may need to 
cancel the routed orders affected by the issue.\8\ For instance, if 
DE Route experiences a connectivity issue affecting the manner in 
which it sends or receives order messages to or from Trading 
Centers, it may be unable to receive timely execution or 
cancellation reports from the Trading Centers, and DE Route may 
consequently seek to cancel the affected routed orders. Once a 
decision is made to cancel those routed orders, any cancellation 
that a Member submitted to the Exchange on its initial order during 
such a situation would be honored.\9\
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    \8\ In a normal situation (i.e., one in which a Systems Issue 
does not exist), DE Route should receive an immediate response to an 
IOC order from a Trading Center, and would pass the resulting fill 
or cancellation on to the Member. After submitting an order that is 
routed to a Trading Center, if a Member sends an instruction to 
cancel that order, the cancellation is held by the Exchange until a 
response is received from the Trading Center. For instance, if the 
Trading Center executes that order, the execution would be passed on 
to the Member and the cancellation instruction would be disregarded.
    \9\ If a Member did not submit a cancellation to the Exchange, 
however, that initial order would remain ``live'' and thus be 
eligible for execution or posting on the Exchange, and neither the 
Exchange nor DE Route would treat any execution of that initial 
order or any subsequent routed order related to that initial order 
as an error position.
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    Example 2.  If the Exchange experiences a Systems Issue, the 
Exchange may take steps to cancel all outstanding orders affected by 
that issue and notify affected Members of the cancellations. In 
those cases, the Exchange would seek to cancel, via DE Route, any 
routed orders related to the Members' initial orders.
Circumstances That Could Lead to an Error Position
    An error position can arise out of Systems Issues experienced by DE 
Route, the Exchange or a Trading Center. Connectivity and order 
processing related issues are the most common types of Systems Issues 
that DE Route would expect could result in an error position. 
Connectivity issues, for example, would entail problems with the manner 
in which DE Route sends or receives order, execution and cancellation 
messages to or from other Trading Centers. Connectivity issues could 
arise either from DE Route's systems or from the Trading Center's 
systems. For example, if DE Route's connection to a Trading Center is 
interrupted after delivering an order, DE Route may be unable to 
receive a timely execution report from the Trading Center, and as a 
consequence may cancel the Member's order. But DE Route may later 
discover after the connection was restored that the order was actually 
executed by the Trading Center, resulting in an error position. 
Similarly, if the Trading Center attempted to cancel all open orders 
that it had previously accepted due to a Systems Issue, but either 
transmitted cancellations on orders that had previously been executed, 
or subsequently submitted executions of the orders to The Depository 
Trust Clearing Corporation (``DTCC'') for clearance and settlement, an 
error position would result.
    An error position might also result if DE Route failed to process 
order messages correctly. For example, if DE Route's connection to the 
Exchange is temporarily interrupted and DE Route were to erroneously 
re-route orders that had previously been executed after the connection 
was restored, DE Route will have received executions of orders where 
there were effectively no corresponding orders on the Exchange. In this 
case, the executions would not necessarily be nullified since DE Route 
is a regular member of other Trading Centers and is therefore subject 
to those venues' policies for honoring trades.\10\
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    \10\ See, e.g., Nasdaq Rule 4627 (stating that all members must 
honor trades); BATS Rule 11.15(b); and NSX Rule 11.17(b) (both 
stating that transactions are locked-in and automatically processed 
for clearance and settlement).
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    A Systems Issue experienced by the Exchange could also result in an 
error position relating to a routed order. For example, if an order 
were routed from the Exchange to a Trading Center by DE Route, and then 
due to a Systems Issue the Exchange would not accept the resulting 
execution of the order (but rather transmitted a cancellation to the 
Member instead), an error position would result. Another example might 
be where a Systems Issue experienced by the Exchange automatically 
changed the number of shares associated with all orders from one or 
more Members, or all orders in one or more symbols (in either case 
resulting in overfills), or changed the symbol on one or more orders 
(resulting in executions in the wrong stocks), where such orders were 
routed by DE Route to a Trading Center for execution.\11\
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    \11\ This discussion of potential scenarios that could lead to 
an error position is not intended to be an exhaustive list of all 
scenarios, but rather is just illustrative. The Exchange cannot 
anticipate every scenario, but does acknowledge that the types of 
error positions that might warrant use by DE Route of an error 
account would be limited to those arising from Systems Issues, as 
defined herein, which resulted in erroneous executions occurring on 
one or more Trading Centers.
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Assignment Methodology
    Regardless of how an error position arose, DE Route would not 
typically learn about an error position until the next business day 
following the trade date, usually (but not exclusively) during the 
clearing process when a Trading Center has submitted to DTCC a 
transaction for clearance and

[[Page 20856]]

settlement of which DE Route had not received an execution 
confirmation. Nonetheless, if DE Route reasonably determines that it 
has accurate and sufficient information, and a sufficient amount of 
time, it will assign the full amount of the resulting error position to 
one or more Members. For example, if Member A placed an order to buy 
100 shares of symbol XYZ, and a Systems Issue caused DE Route to route 
an order for the wrong number of shares (e.g., 1000 shares), or route 
an order for the correct number of shares but in the wrong symbol 
(e.g., symbol XYY instead of XYZ), then, in either situation, DE Route 
would assign to Member A the full amount of the resulting error 
position (in the above examples, 1000 shares of XYZ, of which 900 
shares would be the error position, or 100 shares of XYY, 
respectively). Under these circumstances, because the error position 
would have been caused by an Exchange or DE Route's Systems Issue, 
Member A would be permitted to submit a claim for reimbursement 
pursuant to EDGX Rule 11.12 to the extent that Member A incurred a loss 
after trading out of the error position.
    The foregoing assignment methodology is designed to ensure that an 
error position is assigned to Members in a non-discriminatory manner. 
Thus, if DE Route reasonably concludes that it is unable to trace each 
erroneous execution comprising an error position back to one or more 
Members' orders, then DE Route will assume the entire amount of the 
error position in the error account. Moreover, if DE Route reasonably 
concludes, due to the number of erroneous executions and/or the number 
of Members potentially impacted, that it would not be able to trace 
each erroneous execution comprising an error position back to such 
Members in a timely manner (which will be defined to mean by the first 
business day following the trade date on which the error position was 
established, or ``T+1''), then DE Route will assume the entire amount 
of the error position in the error account. When an error position is 
acquired into DE Route's error account, it will then be liquidated as 
soon as practicable pursuant to proposed paragraph (a)(7) of Rule 2.11.
Proposed Changes to Exchange Rule 2.11
    The Exchange proposes to amend EDGX Rule 2.11 to amend subparagraph 
(a)(4) and add new subparagraphs (a)(6) and (a)(7) to address the 
cancellation of orders due to Systems Issues and the use of an error 
account by DE Route, respectively.
    Specifically, under proposed subparagraph (a)(6), the Exchange or 
DE Route would be expressly authorized to cancel orders as may be 
necessary to maintain fair and orderly markets if a Systems Issue 
occurred at the Exchange, DE Route or a Trading Center.\12\ The 
Exchange or DE Route would be required to provide notice of the 
cancellation to affected Members as soon as practicable.
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    \12\ Such a situation may not cause the Exchange to declare 
self-help against the Trading Center pursuant to Rule 611 of 
Regulation NMS under the Act. If the Exchange or DE Route determines 
to cancel orders routed to a Trading Center under proposed 
subparagraph (a)(6), but does not declare self-help against that 
Trading Center, the Exchange would continue to be subject to the 
order protection requirements of Rule 611 with respect to that 
Trading Center.
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    Under amended subparagraph (a)(4) and new subparagraph (a)(7), DE 
Route would be authorized, when providing routing services to the 
Exchange, to maintain an error account for the purpose of liquidating 
an error position acquired as a result of Systems Issues experienced 
either by DE Route itself, the Exchange or at a Trading Center, as 
described above. The rule amendments provide that DE Route would only 
assume an error position in the error account under documented 
circumstances when the error position could not fairly and practicably 
be assigned to one or more Members.
    With proposed new subparagraph (a)(7) of Rule 2.11, the Exchange is 
proposing that DE Route would consider the following factors in 
determining whether the entire amount of an error position can be 
fairly and practicably assigned to one or more Members: (i) Whether DE 
Route has accurate and sufficient information to trace each erroneous 
execution comprising an error position back to one or more Members' 
orders; and (ii) whether DE Route is able to review available 
information in order to assign the entire amount of an error position 
to all affected Members by the first business day following the trade 
date on which the error position was created (considering, among other 
factors, the size of the error position and the total number of Members 
potentially impacted). If as a result of the foregoing, DE Route 
reasonably concludes that the entire amount of an error position can be 
assigned to one or more Members in a timely and non-discriminatory 
manner, the entire amount of the error position will accordingly be 
assigned to such Members.\13\ An example of this might be where a 
Systems Issue of limited scope or duration occurred at a Trading 
Center, and the resulting trades submitted for clearance and settlement 
by such Trading Center to DTCC, coupled with the number of Member 
orders transmitted during that same time period or possessing similar, 
traceable characteristics, are adequately manageable so as to allow a 
sufficient amount of time to match the error position with Members' 
orders in a non-discriminatory fashion.
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    \13\ See examples listed under the section entitled ``Assignment 
Methodology,'' supra.
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    There may be scenarios, however, in which the entire amount of a 
particular error position resulting from a Systems Issue cannot be 
assigned to Members, or cannot be assigned to Members in a non-
discriminatory manner. For example, in the event that there is 
insufficient and/or inaccurate information, or the routed order that 
led to an erroneous execution could not be attributed to a Member's 
order, then DE Route would not be able to trace erroneous executions 
back to a Member's order. Also, if the information available would 
enable tracing of some, but not all, of the erroneous executions 
comprising an error position to Members, then the Exchange believes 
that assigning only a portion of an error position to Members might 
unfairly discriminate against those Members. In these circumstances, 
therefore, DE Route may reasonably conclude, pursuant to the factors 
set forth in proposed Rule 2.11(a)(7), that it cannot assign the entire 
amount of an error position to one or more Members, or cannot assign it 
in a non-discriminatory manner, and must instead acquire the entire 
amount of the error position into the error account.
    There may also be scenarios in which the entire amount of a 
particular error position resulting from a Systems Issue cannot 
practicably be assigned to Members in a timely manner. For example, the 
number of erroneous executions comprising an error position, and/or the 
number of Members potentially impacted, could be such that the research 
necessary to trace all of the erroneous executions comprising the error 
position back to particular Members' orders could reasonably be 
expected to extend beyond T+1. The Exchange believes that assigning an 
error position to a Member beyond T+1 significantly increases the 
potential for disruptions in the normal clearance and settlement 
process,\14\ and also could result in adverse regulatory consequences 
for affected Members (e.g., their compliance with Rule 15c3-

[[Page 20857]]

1 under the Act). In these circumstances, therefore, DE Route may 
reasonably conclude, pursuant to the factors set forth in proposed Rule 
2.11(a)(7), that it is not practicable to assign the entire amount of 
an error position to one or more Members by T+1, and must instead 
acquire the entire amount of the error position into the error account.
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    \14\ Specifically, the Exchange believes that the likelihood of 
erroneous executions failing to settle within the normal clearance 
and settlement cycle would increase the closer in time to the 
settlement date that the error position was assigned to a Member.
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    DE Route would be required to document the factors considered in 
determining to assume an error position in the error account. 
Similarly, if DE Route determined that an error position could be 
assigned to a particular Member in a timely fashion, then DE Route 
would be required to document the rationale for the assignment to that 
Member. The assignment of any error position to any one or more Members 
would be required to be done in a non-discriminatory fashion; this 
includes, for example, that the entire amount of an error position must 
be assigned to all Members to which such position could reasonably be 
attributed. If time would not permit a full analysis of all Members to 
which a position could be attributed, then DE Route would not assign 
any portion of the error position to Members, but would rather have to 
assume the error position in its error account. Documentation 
reflecting assignment of an error position to one or more Members shall 
reflect such methodology.
    Proposed subparagraph (a)(7) would further describe the manner in 
which DE Route would liquidate an error position from the error 
account. When, as and if DE Route determined to book an error position 
to its error account, DE Route would be required to liquidate such 
error position as soon as practicable in a manner that would 
effectively confer investment discretion over the error position to a 
third-party broker-dealer. Specifically, DE Route would be required to: 
(i) Provide complete time and price discretion to the third-party 
broker-dealer in the liquidation of the error position, including that 
it would not be permitted to exercise any influence or control over the 
timing or methods of trading; and (ii) establish and implement written 
policies and procedures in accordance with paragraph (a)(7) that are 
reasonably designed to restrict the flow of any confidential and 
proprietary information associated with the liquidation of an error 
position between the Exchange and DE Route, on one hand, and the third-
party broker-dealer, on the other.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with the objectives of Section 6 of the Act,\15\ in general, and 
furthers the objectives of Section 6(b)(5),\16\ in particular, as 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 regulating, clearing, 
settling, processing information with respect to and facilitating 
transactions in securities, 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, and is not 
designed to permit unfair discrimination between customers, brokers or 
dealers. The Exchange believes that this proposal is in keeping with 
those principles since the Exchange's and DE Route's ability to cancel 
orders as a result of a Systems Issue and to maintain an error account 
facilitates the smooth and efficient operations of the market. 
Specifically, the Exchange believes that allowing the Exchange or DE 
Route to cancel orders as a result of a Systems Issue would allow the 
Exchange to maintain fair and orderly markets. Moreover, the Exchange 
believes that allowing DE Route to assume a bona fide error position in 
an error account, and to liquidate the error position subject to the 
conditions set forth in the proposed amendments to Rule 2.11, would be 
the least disruptive means to correct the error position, except where 
it is practicable for DE Route to assign an error position to one or 
more Members of the Exchange. The proposed amendments are designed to 
ensure full trade certainty for market participants and avoid 
disrupting the clearance and settlement process. The proposed 
amendments are also designed to provide a consistent methodology for 
handling an error position in a manner that does not discriminate among 
Members. Finally, the proposed amendments are also consistent with 
Section 6 insofar as they would require DE Route to establish controls 
that are reasonably designed to restrict the flow of any confidential 
information associated with the liquidation of an error position 
between the Exchange and DE Route, on one hand, and the third-party 
broker-dealer, on the other.
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    \15\ 15 U.S.C. 78f.
    \16\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

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

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

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

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

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    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-EDGX-2012-08 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-EDGX-2012-08. 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

[[Page 20858]]

Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the 
submission, all subsequent amendments, all written statements with 
respect to the proposed rule change that are filed with the Commission, 
and all written communications relating to the proposed rule change 
between the Commission and any person, other than those that may be 
withheld from the public in accordance with the provisions of 5 U.S.C. 
552, will be available for Web site viewing and printing in the 
Commission's Public Reference Room, 100 F Street NE., Washington, DC 
20549, on official business days between the hours of 10 a.m. and 3 
p.m. Copies of the filing also will be available for inspection and 
copying at the principal office of the Exchange. All comments received 
will be posted without change; the Commission does not edit personal 
identifying information from submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to File Number SR-EDGX-2012-08 and should be submitted on 
or before April 27, 2012.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\17\
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    \17\ 17 CFR 200.30-3(a)(12).
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Elizabeth M. Murphy,
Secretary.
[FR Doc. 2012-8271 Filed 4-5-12; 8:45 am]
BILLING CODE 8011-01-P