[Federal Register Volume 78, Number 128 (Wednesday, July 3, 2013)]
[Notices]
[Pages 40225-40227]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-15914]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-69870; File No. SR-EDGX-2013-17]


Self-Regulatory Organizations; EDGX Exchange, Inc.; Order 
Approving a Proposed Rule Change Relating to the EDGX Exchange, Inc.'s 
Routing Broker Dealer, as Described in EDGX Rule 2.12(b)

 June 27, 2013.

I. Introduction

    On May 16, 2013, EDGX Exchange, Inc. (``EDGX'' or ``Exchange'') 
filed with the Securities and Exchange Commission (``Commission''), 
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ a proposed rule change to 
make permanent the existing pilot program that permits the Exchange's 
inbound router, as described in Rule 2.12(b), to receive inbound routes 
of equities orders through Direct Edge ECN LLC d/b/a DE Route (``DE 
Route''), the Exchange's routing broker dealer, from EDGA Exchange, 
Inc. (``EDGA''). The proposed rule change was published for comment in 
the Federal Register on May 28, 2013.\3\ The Commission received no 
comment letters regarding the proposed rule change. This order approves 
the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 69614 (May 21, 
2013), 78 FR 31994 (``Notice'').
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II. Background

    DE Route is a registered broker-dealer that is a member of the 
Exchange and is permitted to provide members of EDGA optional routing 
services to other trading centers.\4\ DE Route is owned by Direct Edge 
Holdings LLC (``DE Holdings''). DE Holdings also owns two registered 
securities exchanges--the Exchange and EDGA.\5\ Thus, DE Route is an 
affiliate of the Exchange and EDGA.\6\
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    \4\ DE operates as a facility of EDGA that provides outbound 
routing from EDGA to other trading centers, subject to certain 
conditions. See Securities Exchange Act Release No. 61698 (March 12, 
2010), 75 FR 13151 (March 18, 2010) (File No. 10-194 and 10-196) 
(order granting the exchange registration of EDGA and EDGX.) 
(``Exchange Registration Approval Order'').
    \5\ See id.
    \6\ See Exchange Registration Approval Order, 75 FR at 13165 
n.219 and accompanying text.
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    On May 12, 2010, the Commission approved the Exchange's application 
for registration as a national securities

[[Page 40226]]

exchange.\7\ As part of the approval, the Exchange was approved to 
receive inbound routes of orders that DE Route routes in its capacity 
as a facility of EDGA on a pilot basis for 12 months.\8\ The pilot was 
originally set to expire on July 1, 2011, but was subsequently extended 
and is currently set to expire on June 30, 2013.\9\ The Exchange now 
seeks permanent approval of this inbound routing pilot.\10\
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    \7\ See Exchange Registration Approval Order, 75 FR 13151.
    \8\ See id.
    \9\ See Securities Exchange Act Release Nos. 64361 (April 28, 
2011), 76 FR 25388 (May 4, 2011) (SR-EDGX-2011-12); and 66644 (March 
22, 2012), 77 FR 18877 (March 28, 2012) (SR-EDGX-2012-09).
    \10\ See Notice, 78 FR 31996.
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III. Discussion and Commission Findings

    After careful review, the Commission finds that the proposed rule 
change is consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to a national securities 
exchange.\11\ Specifically, the Commission finds that the proposed rule 
change is consistent with Section 6(b)(1) of the Act,\12\ which 
requires, among other things, that a national securities exchange be so 
organized and have the capacity to carry out the purposes of the Act, 
and to comply and enforce compliance by its members and persons 
associated with its members, with the provisions of the Act, the rules 
and regulation thereunder, and the rules of the Exchange. Further, the 
Commission finds that the proposed rule change is consistent with 
Section 6(b)(5) of the Act,\13\ which requires, among other things, 
that the rules of a national securities exchange be 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, and 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. Section 6(b)(5) also 
requires that the rules of an exchange not be designed to permit unfair 
discrimination among customers, issuers, brokers, or dealers.
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    \11\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition and 
capital formation. 15 U.S.C. 78c(f).
    \12\ 15 U.S.C. 78f(b)(1).
    \13\ 15 U.S.C. 78f(b)(5).
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    Recognizing that the Commission has previously expressed concern 
regarding the potential for conflicts of interest in instances where a 
member firm is affiliated with an exchange to which it is routing 
orders, the Exchange previously implemented limitations and conditions 
to DE Route's affiliation with the Exchange to permit the Exchange to 
accept inbound orders that DE Route routes in its capacity as a 
facility of EDGA, on a pilot basis.\14\ The Exchange now seeks to make 
this pilot permanent, subject to the same limitation and conditions. 
Specifically, the Exchange committed to the following limitations and 
conditions: \15\
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    \14\ See Exchange Registration Approval Order, 75 FR at 13165-
13166.
    \15\ See Notice, 78 FR at 31995.
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     The Exchange shall enter into a plan pursuant to Rule 17d-
2 under the Exchange Act with a non-affiliated self-regulatory 
organization (``SRO'') to relieve the Exchange of regulatory 
responsibilities for DE Route with respect to rules that are common 
rules between the Exchange and the non-affiliated SRO, and enter into a 
regulatory contract (``Regulatory Contract'') with a non-affiliated SRO 
to perform regulatory responsibilities for DE Route for unique Exchange 
rules.
     The Regulatory Contract shall require the Exchange to 
provide the non-affiliated SRO with information, in an easily 
accessible manner, regarding all exception reports, alerts, complaints, 
trading errors, cancellations, investigations, and enforcement matters 
(collectively ``Exceptions'') in which DE Route is identified as a 
participant that has potentially violated Exchange or Commission Rules, 
and shall require that the non-affiliated SRO provide a report, at 
least quarterly, to the Exchange quantifying all Exceptions in which DE 
Route is identified as a participant that has potentially violated 
Exchange or Commission Rules.
     The Exchange, on behalf of DE Holdings, shall establish 
and maintain procedures and internal controls reasonably designed to 
ensure that DE Route does not develop or implement changes to its 
system on the basis of non-public information regarding planned changes 
to Exchange systems, obtained as a result of its affiliation with the 
Exchange, until such information is available generally to similarly 
situated members of the Exchange in connection with the provision of 
inbound order routing to the Exchange.\16\
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    \16\ The Commission notes that this condition is set forth in 
EDGX Rule 2.12(a)(3).
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    The Exchange states that is has complied with the above-listed 
conditions during the pilot.\17\ The Exchange believes that by meeting 
such conditions it has set up mechanisms that protect the independence 
of the Exchange's regulatory responsibility with respect to DE Route, 
and has demonstrated that DE Route cannot use any information that it 
may have because of its affiliation with the Exchange to its 
advantage.\18\
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    \17\ See Notice, 78 FR at 31995.
    \18\ See id.
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    In the past, the Commission has expressed concern that the 
affiliation of an exchange with one of its members raises potential 
conflicts of interest, and the potential for unfair competitive 
advantage.\19\ Although the Commission continues to be concerned about 
potential unfair competition and conflicts of interest between an 
exchange's self-regulatory obligations and its commercial interest when 
the exchange is affiliated with one of its members, for the reasons 
discussed below, the Commission believes that it is consistent with the 
Act to permit DE Route, in its capacity as a facility of EDGA, to 
provide inbound routing to the Exchange on a permanent basis instead of 
a pilot basis, subject to the other conditions described above.\20\
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    \19\ See, e.g., Securities Exchange Act Release Nos. 54170 (July 
18, 2006), 71 FR 42149 (July 25, 2006) (SR-NASDAQ-2006-006) (order 
approving Nasdaq's proposal to adopt Nasdaq Rule 2140, restricting 
affiliations between Nasdaq and its members); 53382 (February 27, 
2006), 71 FR 11251 (March 6, 2006) (SR-NYSE-2005-77) (order 
approving the combination of the New York Stock Exchange, Inc. and 
Archipelago Holdings, Inc.); 58673 (September 29, 2008), 73 FR 57707 
(October 8, 2008) (SR-Amex-2008-62) (order approving the combination 
of NYSE Euronext and the American Stock Exchange LLC); 59135 
(December 22, 2008), 73 FR 79954 (December 30, 2008) (SR-ISE-2009-
85) (order approving the purchase by ISE Holdings of an ownership 
interest in DirectEdge Holdings LLC); and 59281 (January 22, 2009), 
74 FR 5014 (January 28, 2009) (SR-NYSE-2008-120) (order approving a 
joint venture between NYSE and BIDS Holdings L.P.); 58375 (August 
18, 2008), 73 FR 49498 (August 21, 2008) (File No. 10-182) (order 
granting the exchange registration of BATS Exchange, Inc.); 61698 
(March 12, 2010), 75 FR 13151 (March 18, 2010) (File Nos. 10-194 and 
10-196) (order granting the exchange registration of EDGX Exchange, 
Inc. and EDGA Exchange, Inc.); and 62716 (August 13, 2010), 75 FR 
51295 (August 19, 2010) (File No. 10-198) (order granting the 
exchange registration of BATS-Y Exchange, Inc.).
    \20\ The Commission notes that these limitations and conditions 
are consistent with those previously approved by the Commission for 
other exchanges. See, e.g., Securities Exchange Act Release Nos. 
64090 (March 17, 2011), 76 FR 16462 (March 23, 2011) (SR-BX-2011-
007); 66808 (April 13, 2012), 77 FR 23294 (April 18, 2012) (SR-BATS-
2012-013); 66807 (April 13, 2012), 77 FR 23300 (April 18, 2012) (SR-
BYX-2012-006); 67256 (June 26, 2012) 77 FR 39277 (July 2, 2012) (SR-
BX-2012-030); 69233 (March 25, 2013), 78 FR 19352 (March 29, 2013) 
(SR-NASDAQ-2013-028); 69232 (March 25, 2013), 78 FR 19342 (March 29, 
2013) (SR-BX-2013-013); and 69229 (March 25, 2013), 78 FR 19337 
(March 29, 2013) (SR-Phlx-2013-15).
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    The Exchange has proposed ongoing conditions applicable to DE 
Route's inbound routing activities in its capacity

[[Page 40227]]

as a facility of EDGA, which are enumerated above. The Commission 
believes that these conditions mitigate its concerns about potential 
conflicts of interest and unfair competitive advantage. In particular, 
the Commission believes that a non-affiliated SRO's oversight of DE 
Route,\21\ combined with a non-affiliated SRO's monitoring of DE 
Route's compliance with the Exchange's rules and quarterly reporting to 
the Exchange, will help to protect the independence of the Exchange's 
regulatory responsibilities with respect to DE Route. The Commission 
also believes that the Exchange's Rule 2.12(a)(3) is designed to ensure 
that DE Route cannot use any information advantage it may have because 
of its affiliation with the Exchange.
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    \21\ This oversight will be accomplished through a 17d-2 
Agreement. See Approval Order, 75 FR at 13165; and Notice, 78 FR at 
31995.
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IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\22\ that the proposed rule change (SR-EDGX-2013-17) be, and hereby 
is, approved.
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    \22\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\23\
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    \23\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-15914 Filed 7-2-13; 8:45 am]
BILLING CODE 8011-01-P