Federal Register, Volume 77 Issue 123 (Tuesday, June 26, 2012)

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

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SECURITIES AND EXCHANGE COMMISSION

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

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

June 20, 2012.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given
that on June 8, 2012, the EDGA Exchange, Inc. (the ``Exchange'' or the
``EDGA'') filed with the Securities and Exchange Commission
(``Commission'') the proposed rule change as described in Items I and
II below, which Items have been prepared by the self-regulatory
organization. The Commission is publishing this notice to solicit
comments on the proposed rule change from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change

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

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

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

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

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

[[Page 38114]]

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

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

[[Page 38115]]

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

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

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

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

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

Because the proposed rule change does not (i) significantly affect
the protection of investors or the public interest; (ii) impose any
significant burden on competition; and (iii) become operative for 30
days from the date on which it was filed, or such shorter time as the
Commission may designate if consistent with the protection of investors
and the public interest, the proposed rule change has become effective
pursuant to Section 19(b)(3)(A) of the Act \13\ and Rule 19b-4(f)(6)
thereunder.\14\
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\13\ 15 U.S.C. 78s(b)(3)(A).
\14\ 17 CFR 240.19b-4(f)(6). As required under Rule 19b-
4(f)(6)(iii), the Exchange provided the Commission with written
notice of its intent to file the proposed rule change along with a
brief description and the text of the proposed rule change, at least
five business days prior to the date of filing of the proposed rule
change, or such shorter time as designated by the Commission.

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[[Page 38116]]

A proposed rule change filed pursuant to Rule 19b-4(f)(6) under the
Act \15\ normally does not become operative for 30 days after the date
of its filing. However, Rule 19b-4(f)(6) \16\ permits the Commission to
designate a shorter time if such action is consistent with the
protection of investors and the public interest. The Exchange has asked
the Commission to waive the 30-day operative delay so that the proposal
may become operative immediately upon filing. The Exchange has asked
the Commission to waive the 30-day operative delay so that the proposal
may become operative immediately upon filing, noting that similar
functionality is already offered by other market centers.\17\ The
Commission believes that waiving the 30-day operative delay is
consistent with the protection of investors and the public interest.
Therefore, the Commission designates the proposal operative upon
filing.\18\
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\15\ 17 CFR 240.19b-4(f)(6).
\16\ 17 CFR 240.19b-4(f)(6).
\17\ See NYSE Arca, Inc. Equities Rule 7.31(cc).
\18\ For purposes only of waiving the 30-day operative delay,
the Commission has considered the proposed rule's impact on
efficiency, competition, and capital formation. See 15 U.S.C.
78c(f).
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At any time within 60 days of the filing of the proposed rule
change, the Commission summarily may temporarily suspend such rule
change if it appears to the Commission that such action is necessary or
appropriate in the public interest, for the protection of investors, or
otherwise in furtherance of the purposes of the Act.

IV. Solicitation of Comments

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

Electronic Comments

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

Paper Comments

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

All submissions should refer to File Number SR-EDGA-2012-22. This file
number should be included on the subject line if email is used. To help
the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all
written statements with respect to the proposed rule change that are
filed with the Commission, and all written communications relating to
the proposed rule change between the Commission and any person, other
than those that may be withheld from the public in accordance with the
provisions of 5 U.S.C. 552, will be available for Web site viewing and
printing in the Commission's Public Reference Room, 100 F Street NE.,
Washington, DC 20549, on official business days between the hours of 10
a.m. and 3 p.m. Copies of the filing also will be available for
inspection and copying at the principal office of the Exchange. All
comments received will be posted without change; the Commission does
not edit personal identifying information from submissions. You should
submit only information that you wish to make available publicly. All
submissions should refer to File Number SR-EDGA-2012-22 and should be
submitted on or before July 17, 2012.

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