[Federal Register Volume 79, Number 123 (Thursday, June 26, 2014)]
[Notices]
[Pages 36354-36357]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-14971]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-72445; File No. SR-EDGX-2014-05]


Self-Regulatory Organizations; EDGX Exchange, Inc.; Order 
Instituting Proceedings To Determine Whether To Approve or Disapprove a 
Proposed Rule Change To Adopt a New Order Type Called the Mid-Point 
Discretionary Order

June 20, 2014.

I. Introduction

    On March 7, 2014, EDGX Exchange, Inc. (``Exchange'' or ``EDGX'') 
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 
amend its rules to add a new order type called the Mid-Point 
Discretionary Order (``MDO'') and to reflect the priority of MDOs. The 
proposed rule change was published for comment in the Federal Register 
on March 25, 2014.\3\ On May 2, 2014, the Commission extended the time 
period in which to either approve or disapprove the proposed rule 
change to June 23, 2014.\4\ The Commission received no comment letters 
on the proposed rule change. This order institutes proceedings under 
Section 19(b)(2)(B) of the Act \5\ to determine whether to approve or 
disapprove 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. 71747 (March 19, 
2014), 79 FR 16401 (March 25, 2014) (``Notice'').
    \4\ See Securities Exchange Act Release No. 72086 (May 2, 2014), 
79 FR 26473 (May 8, 2014).
    \5\ 15 U.S.C. 78s(b)(2)(B).
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II. Description of the Proposal

A. Proposed Mid-Point Discretionary Order

    The Exchange proposes to add a new order type--called the Mid-Point 
Discretionary Order or MDO. An MDO would be a limit order to buy that 
is displayed and pegged to the National Best Bid (``NBB''), with 
discretion to execute at prices up to and including

[[Page 36355]]

the mid-point of the NBBO,\6\ and a limit order to sell that is 
displayed and pegged to the National Best Offer (``NBO''), with 
discretion to execute at prices down to and including the mid-point of 
the NBBO.\7\ The displayed price of an MDO would be re-priced to track 
changes in the NBBO.\8\ An MDO's sole time stamp would be the one 
assigned to the order at its displayed price, and it would only change 
when the displayed price is adjusted to track changes in the NBB or NBO 
to which it is pegged. Therefore, if the discretionary range of an MDO 
changes due to a change in the mid-point of the NBBO (i.e., if the NBO 
changes for an MDO to buy or if the NBB changes for an MDO to sell), an 
MDO's time stamp would not change.
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    \6\ EDGX Rule 1.5(o) defines ``NBBO'' as ``the national best bid 
or offer.'' See also Rule 600(b)(42) of Regulation NMS under the 
Act.
    \7\ See proposed EDGX Rule 11.5(c)(14). The Exchange represents 
that the proposed MDO is based on and would operate similarly to the 
Mid-Point Discretionary Order on EDGA Exchange, Inc. (``EDGA''). See 
Notice, supra note 3, at 16402. However, the Exchange identifies and 
explains four differences, which it attributes to the different fee 
structures used by EDGA and EDGX. Id. at 16403-05. The differences 
are that an MDO on EDGX, unlike an MDO on EDGA: (1) Would not be 
eligible to execute immediately upon entry at its displayed price; 
(2) would not be eligible to execute against resting Discretionary 
Orders, including contra-side MDOs; (3) would only be eligible to 
execute at the mid-point of the NBBO against Mid-Point Match Orders 
and incoming liquidity-removing orders when their limit prices are 
equal to the mid-point of the NBBO; and (4) would be immediately 
canceled in the event a trading halt is declared by the listing 
market. Id.; see also infra notes 9, 13-18 and accompanying text.
    \8\ See proposed EDGX Rule 11.5(c)(14).
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    An MDO would not independently establish or maintain the NBB or 
NBO; rather, the displayed price of the MDO would be derived from the 
NBB or NBO. Accordingly, an MDO would be cancelled if no NBBO exists. 
An MDO would also be cancelled if a trading halt is declared by the 
listing market.\9\ An MDO would be able to join the Exchange BBO when 
the Exchange BBO equals the NBBO and the EDGX Book is locked or crossed 
by another market.\10\ However, if an MDO displayed on the Exchange 
would create a locked or crossed market, the System would automatically 
adjust the price of the order \11\ to one minimum price variation below 
the current NBO (for an MDO to buy) or to one minimum price variation 
above the current NBB (for an MDO to sell) with no discretion to 
execute to the mid-point of the NBBO.\12\
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    \9\ Id. In the Notice, the Exchange explains rationale for this 
behavior. See supra, note 3, at 16404-05; note 7.
    \10\ See proposed EDGX Rule 11.5(c)(14). EDGX Rule 1.5(d) 
defines ``EDGX Book'' as the ``System's electronic file of orders.''
    \11\ EDGX Rule 1.5(cc) defines ``System'' as ``the electronic 
communications and trading facility designated by the Board through 
which securities orders of Users are consolidated for ranking, 
execution and, when applicable, routing away.''
    \12\ See proposed EDGX Rule 11.5(c)(14).
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    Upon entry into the System, an MDO would not be eligible to execute 
immediately at its displayed price; however, it would be eligible to 
execute at the mid-point of the NBBO.\13\ An MDO would be eligible to 
execute at its displayed price only after it has been posted to the 
EDGX Book.\14\
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    \13\ Id.
    \14\ In the Notice, the Exchange explains the rationale for this 
behavior and it identifies order types on other exchanges that it 
believes operate in the same manner. See supra note 3, at 16403-04; 
note 7.
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    An MDO would not be eligible to execute against resting 
Discretionary Orders,\15\ including contra-side MDOs.\16\ An MDO would 
only be eligible to execute at the mid-point of the NBBO against Mid-
Point Match Orders \17\ and incoming liquidity-removing orders when 
their limit price is equal to the mid-point of the NBBO.\18\ An MDO in 
a stock priced at $1.00 or more would only be executed in sub-penny 
increments when executed at the mid-point of the NBBO against contra-
side Mid-Point Match Orders.\19\ In addition, an MDO would not be 
eligible for routing pursuant to EDGX Rule 11.9(b)(2).\20\
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    \15\ See EDGX Rule 11.5(c)(13).
    \16\ See proposed EDGX Rule 11.5(c)(14). In the Notice, the 
Exchange explains the rationale for this behavior. See supra, note 
3, at 16404; note 7.
    \17\ See EDGX Rule 11.5(c)(7).
    \18\ See proposed EDGX Rule 11.5(c)(14). In the Notice, the 
Exchange explains the rationale for this behavior. See supra, note 
3, at 16404; note 7.
    \19\ See proposed EDGX Rule 11.5(c)(14). An MDO would execute 
against all other order types solely in whole penny increments, 
would not be eligible to execute against a contra-side MDO at the 
mid-point of the NBBO, and would not be displayed or ranked in sub-
penny increments.
    \20\ Id.
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    An MDO could include a limit price, by which its displayed price 
and discretion to the mid-point of the NBBO would be bound.\21\ 
Specifically, an MDO to buy or sell with a limit price that is less 
than the prevailing NBB or greater than the prevailing NBO, 
respectively, is posted to the EDGX Book at its limit price.\22\ 
Further, for example, if an MDO to buy is entered with a limit price 
that is less than the prevailing mid-point of the NBBO, it would have 
discretion to buy only up to its limit price, not the mid-point of the 
NBBO. Conversely, if an MDO to buy is entered with a limit price that 
is greater than the prevailing NBO, it would have discretion to buy up 
to the mid-point of the NBBO and not to its limit price.\23\
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    \21\ Id.
    \22\ Id.
    \23\ The Exchange notes that an MDO's discretion to trade to and 
including the mid-point of the NBBO may be limited where the only 
available contra-side liquidity at the mid-point is represented by 
MDOs or Non-Displayed Orders resting on the EDGX Book. See Notice, 
supra note 3, at 16402.
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    The Exchange also proposes to address how an MDO would comply with 
the National Market System Plan, also known as Limit Up/Limit Down 
(``LULD''), established pursuant to Rule 608 of the Act, to address 
extraordinary market volatility (``LULD Plan'').\24\ Specifically, an 
MDO to buy would be re-priced to the Upper Price Band and not the 
Protected Bid where the price of the Upper Price Band moves below an 
existing Protected Bid, and an MDO to sell would be re-priced to the 
Lower Price Band and not the Protected Offer where the price of the 
Lower Price Band moves above an existing Protected Offer.\25\ An MDO 
would only execute at its displayed price and not within its 
discretionary ranges when: (i) The price of the Upper Price Band equals 
or moves below an existing Protected Bid; or (ii) the price of the 
Lower Price Band equals or moves above an existing Protected Offer.\26\ 
When those conditions no longer exist, an MDO would resume trading 
against other orders in its discretionary range and being displayed at 
and pegged to the NBBO.\27\
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    \24\ See Appendix A to Securities Exchange Act Release No. 67091 
(May 31, 2012), 77 FR 33498 (June 6, 2012).
    \25\ See proposed EDGX Rule 11.5(c)(14); EDGX Rule 11.9(a)(3). 
EDGX Rule 1.5(gg) states that ``[t]he terms . . . Upper Price Band 
and Lower Price Band . . . shall have the definitions and meanings 
ascribed to them under the [LULD] Plan.'' EDGX Rule 1.5(v) defines 
``Protected Bid'' and ``Protected Offer'' as ``a bid or offer in a 
stock that is (i) displayed by an automated trading center; (ii) 
disseminated pursuant to an effective national market system plan; 
and (iii) an automated quotation that is the best bid or best offer 
of a national securities exchange or association.''
    \26\ See proposed EDGX Rule 11.5(c)(14).
    \27\ Id.
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C. Proposed Amendments to EDGX Rule 11.8(a)--Priority

    The Exchange proposes to amend EDGX Rule 11.8(a) to reflect the 
priority an MDO would have when it is executed within its discretionary 
range. Specifically, current EDGX Rule 11.8(a)(2) states that the EDGX 
System shall execute equally priced trading interest in time priority 
in the following order: (i) Displayed size of limit orders; (ii) Mid-
Point Match Orders; (iii) non-displayed limit orders and the reserve 
quantity of Reserve Orders; \28\ (iv) discretionary range of 
Discretionary Orders as set forth in current Rule

[[Page 36356]]

11.5(c)(13); and (v) Route Peg Orders as set forth in current Rule 
11.5(c)(17). The Exchange proposes that, when an MDO executes at its 
displayed price, the MDO would have the same priority as that of the 
displayed size of a limit order, in accordance with EDGX Rule 
11.8(a)(2)(A). The Exchange also proposes that, when an MDO executes 
within its discretionary range, the MDO would have the same priority as 
the discretionary range of a Discretionary Order, as set forth in Rule 
11.8(a)(2)(D).\29\
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    \28\ See EDGX Rule 11.5(c)(1).
    \29\ The Exchange provides an example to illustrate the 
application of the priority rules to an MDO. See Notice, supra note 
3, at 16407.
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    In addition, the Exchange proposes to address the priority of 
orders when an MDO is posted to the EDGX Book. Where orders to buy (or 
sell) are made at the same price, EDGX Rule 11.8(a)(2) requires that 
the order clearly established as the first entered into the System at 
that price shall have precedence up to the number of shares of stock 
specified in the order.\30\ As described above, an MDO would not be 
eligible to execute immediately upon entry into the System at its 
displayed price.\31\ Instead, an MDO would be eligible to execute at 
its displayed price only after it has been posted to the EDGX Book 
(i.e., at the displayed price, it functions as a ``post-only'' order 
type). Therefore, the Exchange proposes to add subparagraph (9) to EDGX 
Rule 11.8(a) to provide that, in accordance with proposed Rule 
11.5(c)(14), where an MDO does not execute against certain marketable 
contra-side interest resting on the EDGX Book, it would, 
notwithstanding EDGX Rule 11.8(a)(2) described above, be posted 
directly to the EDGX Book and would be eligible to execute against 
later-arriving marketable contra-side orders.
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    \30\ The Commission notes that the EDGX System executes equally-
priced trading interest within the System in time priority within 
order type categories in the following order: (1) Displayed size of 
limit orders; (2) Mid-Point Match Orders; (3) Non-displayed limit 
orders and the reserve quantity of Reserve Orders; (4) Discretionary 
range of Discretionary Orders as set forth in Rule 11.5(c)(13); and 
(5) Route Peg Orders as set forth in Rule 11.5(c)(17).
    \31\ See supra notes 13 thru 14and accompanying text. An MDO 
also would not be eligible to execute against resting Discretionary 
Orders, including contra-side MDOs. See supra notes 15 and 16 and 
accompanying text.
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    For example, assume that the NBBO is $10.00 x $10.01, and that User 
A \32\ has submitted a Discretionary Order (a non-``post-only'' order 
type) to buy at $10.00 with discretion to $10.01 that rests on the EDGX 
Book. If User B submits an MDO to sell with a limit price of $10.01, 
User B's MDO would not be able to execute against User A's resting 
Discretionary Order to buy, despite otherwise being marketable against 
User A. User B's MDO to sell instead would be posted to the EDGX Book 
and displayed at $10.01 with discretion to execute down to the mid-
point of the NBBO, $10.005. If User C submits an order identical to 
User A's Discretionary Order, User C's Discretionary Order to buy would 
execute against User B's MDO Order to sell at $10.01, and User A's 
Discretionary Order to buy would remain on the EDGX Book, despite User 
A being first in time priority. The Exchange believes that precluding 
MDOs from executing against resting Discretionary Orders would promote 
just and equitable principles of trade by permitting the Exchange to 
offer a low-cost pricing structure while also offering an order type 
that provides Users the opportunity to achieve price improvement to and 
including the mid-point of the NBBO.\33\ The Exchange also argues that, 
once a User's order is posted to the book (User A in the example 
above), such User expects to receive a rebate, and, thus, would be 
willing to forgo an execution against a later-arriving MDO at the 
displayed price.\34\ The Exchange further argues that, if a User is 
willing to pay a fee for broader execution opportunities at the mid-
point of the NBBO, that User could utilize a Mid-Point Match Order, 
rather than an MDO.\35\ The Exchange further states that amending its 
general priority structure to accommodate scenarios similar to the one 
noted above is appropriate because the Exchange believes that Users 
could then post aggressively-priced liquidity (by submitting an MDO) 
because they will have certainty as to the fee or rebate they would pay 
or receive from the Exchange if their orders are executed.\36\
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    \32\ EDGX Rule 1.5(ee) defines ``User'' as ``any Member or 
Sponsored Participant who is authorized to obtain access to the 
System pursuant to Rule 11.3.''
    \33\ See Notice, supra note 3, at 16408. Specifically, the 
Exchange stated that, if the Exchange were to allow MDOs on EDGX to 
execute against each other, the provider of liquidity would receive 
a rebate while the taker of liquidity would be charged no fee. Id. 
On the other hand, the Exchange states that an MDO on EDGA may 
execute against resting Discretionary Orders, including contra-side 
MDOs, because both orders would pay a fee. Id.; see also EDGA Fee 
Schedule available at http://www.directedge.com/Trading/EDGAFeeSchedule.aspx.
    \34\ See Notice, supra note 3, at 16408. The Exchange 
acknowledges that a later-arriving, identical Discretionary Order 
would act as a liquidity remover and pay a fee to execute against 
the MDO. Id. at 16403.
    \35\ Id.
    \36\ Id. at 16408.
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III. Proceedings To Determine Whether To Approve or Disapprove SR-EDGX-
2014-05 and Grounds for Disapproval Under Consideration

    The Commission is instituting proceedings pursuant to Section 
19(b)(2)(B) of the Act \37\ to determine whether the proposed rule 
change should be approved or disapproved.\38\ Institution of such 
proceedings is appropriate at this time in view of the legal and policy 
issues that are raised by the proposal and are discussed below. 
Institution of proceedings does not indicate that the Commission has 
reached any conclusions with respect to any of the issues involved. 
Rather, as described in greater detail below, the Commission seeks and 
encourages interested persons to comment on the proposal and provide 
the Commission with additional comment to inform the Commission's 
analysis whether to approve or disapprove the proposed rule change.
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    \37\ 15 U.S.C. 78s(b)(2)(B).
    \38\ Section 19(b)(2)(B) of the Act provides that proceedings to 
determine whether to disapprove a proposed rule change must be 
concluded within 180 days of the date of publication of notice of 
the filing of the proposed rule change. The time for conclusion of 
the proceedings may be extended for up to an additional 60 days if 
the Commission finds good cause for such extension and publishes its 
reasons for so finding or if the self-regulatory organization 
consents to the extension.
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    Pursuant to Section 19(b)(2)(B) of the Act, the Commission is 
providing notice of the grounds for disapproval under consideration. 
The sections of the Act applicable to the proposed rule change that 
provide the grounds for approval or disapproval under consideration are 
Section 6(b)(5).\39\ Section 6(b)(5) of the Act \40\ requires that the 
rules of an exchange be designed, among other things, to prevent 
fraudulent and manipulative acts and practices, 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; and are not 
designed to permit unfair discrimination between customers, issuers, 
brokers, or dealers.
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    \39\ 15 U.S.C. 78f(b)(5).
    \40\ 15 U.S.C. 78f(b)(5).
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    The interaction (or non-interaction) of the MDO with other orders 
on the EDGX Book raises important issues that warrant further public 
comment and Commission consideration. Specifically, in certain 
circumstances, as described above, an incoming MDO, which functions as 
a post-only order type, would not interact with a resting non-post-only 
order, but would interact with

[[Page 36357]]

an identical later-arriving non-post-only order. The Commission 
believes the proposed rule change raises questions regarding: (1) 
Whether it is unfairly discriminatory, or inconsistent with the 
protection of investors and the public interest, for the later-arriving 
order to have execution priority in these circumstances; and (2) 
whether it is inconsistent with a free and open market and the national 
market system, or the protection of investors and the public interest, 
for an exchange to create complex order interaction scenarios in order 
to maintain a simplified fee schedule.

IV. Procedure: Request for Written Comments

    The Commission requests that interested persons provide written 
submissions of their views, data and arguments with respect to the 
concerns identified above, as well as any others they may have with the 
proposal. In particular, the Commission invites the written views of 
interested persons concerning whether the proposed rule change is 
inconsistent with Section6(b)(5), or any other provision, of the Act, 
or the rules and regulations thereunder. Although there do not appear 
to be any issues relevant to approval or disapproval that would be 
facilitated by an oral presentation of views, data, and arguments, the 
Commission will consider, pursuant to Rule 19b-4, any request for an 
opportunity to make an oral presentation.\41\
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    \41\ Section 19(b)(2) of the Act, as amended by the Securities 
Act Amendments of 1975, Public Law 94-29 (June 4, 1975), grants the 
Commission flexibility to determine what type of proceeding--either 
oral or notice and opportunity for written comments--is appropriate 
for consideration of a particular proposal by a self-regulatory 
organization. See Securities Act Amendments of 1975, Senate Comm. on 
Banking, Housing & Urban Affairs, S. Rep. No. 75, 94th Cong., 1st 
Sess. 30 (1975).
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    Interested persons are invited to submit written data, views and 
arguments regarding whether the proposed rule change should be approved 
or disapproved by July 17, 2014. Any person who wishes to file a 
rebuttal to any other person's submission must file that rebuttal by 
July 31, 2014.
    The Commission asks that commenters address the sufficiency and 
merit of the Exchange's statements in support of the proposal, in 
addition to any other comments they may wish to submit about the 
proposed rule change. In particular, the Commission seeks comment on 
the following:
    1. As proposed, an incoming MDO would not execute against certain 
resting orders willing to pay a take fee, but could instead execute 
against later-arriving orders identical to the resting orders.\42\ 
Would this result add unnecessary complexity to the Exchange's priority 
rules and the equity markets generally? Would it create opportunities 
for Users to effect ``queue-jumping'' or other strategies that might be 
unfair or detrimental to the markets? Please explain.
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    \42\ See supra notes 15-16, 32-36 and accompanying text.
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    2. The Exchange asserts that, once a User's order is posted to the 
EDGX Book, the User expects to receive a rebate, even if it was willing 
to pay a take fee when the order was initially submitted.\43\ Does this 
accurately represent User expectations? Please explain. Would such a 
User be willing to pay a fee to execute against an incoming MDO if the 
net execution price, taking into account the rebate forgone and the fee 
paid, is within the range of prices the User would have been willing to 
accept upon order entry?
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    \43\ See supra note 34 and accompanying text.
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    3. The Exchange indicates that one reason an incoming MDO would not 
execute against a resting, contra-side Discretionary Order or MDO is 
because, in this circumstance, the provider of liquidity would receive 
a rebate while the taker of liquidity would be charged no fee.\44\ Is 
it appropriate for an Exchange to address scenarios such as this--in 
which it would lose money--by adding complexity to the way orders 
interact (including overriding time priority), rather than adjusting 
its fee schedule?
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    \44\ See supra notes 15-16 and accompanying text.
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    4. What type of market participants would avail themselves of the 
MDO, and how and why would the order type improve market quality or 
otherwise promote fair and orderly markets, or the protection of 
investors and the public interest?
    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-2014-05 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-EDGX-2014-05. 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 
10:00 a.m. and 3:00 p.m. Copies of such filing also will be available 
for inspection and copying at the principal office of the Exchange. All 
comments received will be posted without change; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make publicly available. All 
submissions should refer to File Number SR-EDGX-2014-05 and should be 
submitted on or before July 17, 2014. If comments are received, any 
rebuttal comments should be submitted by July 31, 2014.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\45\
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    \45\ 17 CFR 200.30-3(a)(57).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-14971 Filed 6-25-14; 8:45 am]
BILLING CODE 8011-01-P