[Federal Register Volume 81, Number 174 (Thursday, September 8, 2016)]
[Notices]
[Pages 62187-62192]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-21644]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-78761; File No. SR-NSX-2016-04]


Self-Regulatory Organizations; National Stock Exchange, Inc.; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change To 
Amend Rule 11.18 To Address the Exchange's Liability for System 
Failures; Amend Rule 2.11 To Provide for an Error Account Maintained by 
the Exchange's Routing Broker; Adopt Rule 11.11(e) To Allow 
Cancellation of Orders When a System Failure Occurs; Amend Rule 1.5 To 
Reposition the Definition of a Trading Center; and Make Other Non-
Substantive and Conforming Changes

September 2, 2016.
    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 August 29, 2016, National Stock Exchange, Inc. (``NSX'' or the 
``Exchange'') 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 Exchange. The Exchange 
has designated this proposal as a ``non-controversial'' proposed rule 
change pursuant to Section 19(b)(3)(A) of the Act \3\ and Rule 19b-
4(f)(6)(iii) \4\ thereunder, which renders it effective upon filing 
with the Commission. 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.
    \3\ 15 U.S.C. 78s(b)(3)(A).
    \4\ 17 CFR 240.19b-4(f)(6)(iii).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange is proposing to: (i) amend NSX Rule 11.18, entitled 
``LIMITATION OF LIABILITY,'' to allow the Exchange to provide 
compensation for losses sustained as a result of an Exchange trading 
system (``System'') \5\ failure (``System Failure'') or through a 
negligent act or omission of an Exchange employee; (ii) adopt new NSX 
Rule 11.11(e), entitled Cancellation of Orders By NSX and NSX 
Securities,\6\ to provide authority to cancel orders as deemed to be 
necessary to maintain fair and orderly markets if a System Failure 
occurs; (iii) amend NSX Rule 2.11, currently entitled NSX Securities, 
LLC, to provide for an error account maintained by NSX Securities, LLC 
(``NSXS''); and (iv) make changes to certain definitional sections and 
adopt other non-substantive and ministerial amendments. The Exchange 
has designated this proposal as ``non-controversial'' and provided the 
Commission with the notice required by Rule 19b-4(f)(6)(iii) under the 
Act.\7\
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    \5\ Rule 1.5S.(4) defines the ``System'' as the ``. . 
.electronic securities communications and trading facility 
designated by the Board through which orders. . .are consolidated 
for ranking and execution.''
    \6\ NSX Securities, LLC is a facility of the Exchange as defined 
in Section 3(a)(2) of the Exchange Act, 15 U.S.C. 78c(a)(2) and, as 
such, is subject to Section 6 of the Exchange Act, 15 U.S.C. 78f. 
The Exchange is responsible for filing with the Commission rule 
changes and fees relating to the outbound router function of NSXS.
    \7\ 17 CFR 240.19b-4(f)(6)(iii).
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    The text of the proposed Rule change is available on the Exchange's 
Web site at http://www.nsx.com, at the principal office of the 
Exchange, and at the Commission's Public Reference Room.

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

    In its filing with the Commission, the Exchange included statements 
concerning the purpose of and statutory 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 Exchange has prepared summaries, set 
forth in sections A, B, and C below, of the most significant parts 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: (i) amend NSX Rule 11.18 to establish a 
procedure to compensate Equity Trading Permit (``ETP'') Holders \8\ for 
System Failures; (ii) adopt Rule 11.11(e), Cancellation of Orders By 
NSX or NSX Securities, to provide that NSX or NSXS may cancel orders as 
deemed necessary to maintain fair and orderly markets if a System 
Failure occurs at NSX, or at a routing broker in connection with the 
routing function provided under NSX Rules 2.11 and 11.15, or at another 
trading center to which an NSX order has been routed; (iii) amend NSX 
Rule 2.11 to describe the operation of an error account maintained by 
NSXS as the Exchange's outbound order routing facility and by other 
routing broker-dealers that may be used to liquidate unmatched 
executions when a System Failure occurs; and (iv) amend NSX Rule 1.5 to 
add the definition of a ``Trading Center'' by repositioning the 
definition from its current placement in NSX Rule 2.11(a) and make 
changes to NSX Rule 11.15(a)(ii)(A) and 11.15(a)(ii)(B) in connection 
therewith. The Exchange is also proposing certain non-substantive, 
ministerial amendments to Rules 1.5, 2.11 and 11.18.
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    \8\ Rule 1.5E.(1) defines ``ETP'' as an Equity Trading Permit 
issued by the Exchange to a registered broker or dealer for 
effecting approved securities transactions on the Exchange's trading 
facilities.
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Proposed Amendments to NSX Rule 11.18--Limitation of Liability
    Currently, Rule 11.18 provides that neither the Exchange nor 
Exchange-related persons, which are defined in current NSX Rule 
11.18(A) as the Exchange's ``agents, employees, contractors, officers, 
directors, committee members or affiliates,'' shall be liable to any 
User,\9\ ETP Holder or persons associated therewith, for any loss, 
damage, claim or expense growing out of, inter alia, the use or 
enjoyment of the System or any facility of the Exchange. The Exchange 
is proposing to amend Rule 11.18 to provide for the payment of claims 
by ETP Holders for losses sustained either as a result of a

[[Page 62188]]

System Failure, which is defined in proposed paragraph (d)(2) of NSX 
Rule 11.18 as ``an actual malfunction in the physical equipment and/or 
programming in the Exchange's system or facilities that results in an 
incorrect execution or no execution of a valid, marketable order that 
was received and acknowledged by Exchange systems,'' or losses 
sustained through the negligent acts or omissions of an Exchange 
employee. The proposal will allow the Exchange to compensate an ETP 
Holder, subject to specific monetary limits, for losses that can be 
established as having resulted from such an occurrence.
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    \9\ A ``User'' is defined in Exchange Rule 1.5U.(1) as ``. . 
.any ETP Holder or Sponsored Participant who is authorized to obtain 
access to the System[.]''
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    The Exchange proposes that, as to any one or more claims made by a 
single ETP Holder under the proposed rule for losses occurring on a 
single trading day, the Exchange shall not be liable in excess of the 
greater of $100,000 or the amount of any recovery obtained by the 
Exchange under any applicable insurance maintained by the Exchange.\10\
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    \10\ Proposed Rule 11.18(d)(3).
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    As to the aggregate of all claims made by all ETP Holders under the 
proposed rule for losses occurring on a single trading day, the 
Exchange shall not be liable in excess of the greater of $250,000 or 
the amount of any recovery obtained by the Exchange under any 
applicable insurance maintained by the Exchange.\11\ For the aggregate 
of all claims made by all ETP Holders under the proposed rule during a 
single calendar month, the Exchange shall not be liable in excess of 
the greater of $500,000 or the amount of any recovery obtained by the 
Exchange under any applicable insurance maintained by the Exchange.\12\
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    \11\ Proposed Rule 11.18(d)(4).
    \12\ Proposed Rule 11.18(d)(5).
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    As proposed in new subparagraph (d)(6) of the rule, in the event 
that all of the claims made under Rule 11.18 cannot be fully satisfied 
because in the aggregate they exceed the applicable maximum limitations 
provided in the rule, then the maximum permitted amount will be 
proportionally allocated among all such claims arising during a single 
trading day or single calendar month based on the proportion that each 
such claim bears to the total amount of all such claims.
    Further, the Exchange is proposing in new subparagraph (d)(7) of 
the rule to require that any claims for reimbursement shall be in 
writing and must be submitted before the close of Regular Trading Hours 
\13\ on the next business day following the day on which the use of the 
System or Exchange facilities, or the purported negligent acts or 
omissions of an Exchange employee, gave rise to the claim. 
Additionally, pursuant to proposed new subparagraph (d)(8), in 
reviewing claims by ETP Holders pursuant to NSX Rule 11.18(d), the 
Exchange will verify that: (i) a valid order was entered by the ETP 
Holder and accepted and acknowledged by the System; (ii) a System 
Failure or a negligent act or omission by an Exchange employee occurred 
during the handling or execution of that order; and (iii) the ETP 
Holder's loss resulted from the System Failure or negligent act or 
omission by an Exchange employee. The Exchange will also assess the 
extent to which the conduct of the ETP Holder may have contributed to 
the loss and may adjust the amount to be paid on the claim accordingly.
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    \13\ Rule 1.5R.(1) defines ``Regular Trading Hours'' as the time 
between 9:30 a.m. and 4:00 p.m. Eastern Time.
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    The Exchange's proposed rule amendments are similar to rules 
adopted by a number of other national securities exchanges that allow 
for limited compensation for losses resulting from system malfunctions 
or negligent acts or omissions of exchange employees.\14\ For example, 
NYSE Arca Equities (``NYSE Arca'') Rule 13.2(b) is substantively the 
same as proposed NSX Rule 11.18(d)(1) in its description of the 
occurrences that give rise to a claim for compensation. The process 
that the Exchange proposes to use in order to verify a claim for 
compensation by an ETP Holder under proposed Rules 11.18(d)(7) and 
(d)(8) is similar to the process described in the rules of Bats BZX 
Exchange, Inc. (``BZX''),\15\ Bats BYX Exchange, Inc. (``BYX''),\16\ 
Bats EDGA Exchange, Inc. (``EDGA''),\17\ and Bats EDGX Exchange, Inc. 
(``EDGX'').\18\ In each of these exchange's rule sets, the exchange 
verifies that: (i) a valid order was entered and accepted and 
acknowledged by the exchange's system; and (ii) a system failure or 
negligent act or omission of an exchange employee occurred during the 
handling or execution of that order. The Exchange's proposed Rule 
11.18(d)(8), however, specifies that the review process of claims will 
include verification that the ETP Holder's loss resulted from a System 
Failure or a negligent act or omission by an Exchange employee, as well 
as the extent to which the ETP Holder's conduct may have contributed to 
the loss; the amount to be paid on the claim may be adjusted by the 
Exchange as a result. In this regard, the proposed rule is similar to 
New York Stock Exchange (``NYSE'') Rule 18(d), which provides, in 
relevant part, that the review of a claim for compensation ``will 
determine whether the amount claimed should be reduced based on the 
actions or inactions of the claiming member organization, including 
whether the member organization made appropriate efforts to mitigate 
its loss.''
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    \14\ See Securities Exchange Act Release No. 56085 (July 17, 
2007), 72 FR 40348 (July 24, 2007) (SR-NYSE-2007-09) (relating to 
amendments to New York Stock Exchange Rule 18); Securities Exchange 
Act Release No. 60794 (October 6, 2009), 74 FR 52522 (October 13, 
2009) (SR-NASDAQ-2009-084) (relating to amendments to NASDAQ Rule 
4626); Securities Exchange Act Release No. 58872 (October 28, 2008), 
73 FR 65901 (November 5, 2008) (SR-BATS-2008-008 (relating to 
amendments to Bats Exchange, Inc. Rule 11.16); see also NYSE Arca 
Equities Rule 13.2.
    \15\ See BZX Rule 11.16(f).
    \16\ See BYX Rule 11.16(f).
    \17\ See EDGA Rule 11.14(f).
    \18\ See EDGX Rule 11.14(f).
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    Additionally, the Exchange provides for the same monetary 
compensation formula under proposed subparagraphs (d)(3)-(5) of Rule 
11.18 as do the BZX,\19\ BYX,\20\ EDGA,\21\ and EDGX \22\ exchanges in 
their respective liability rules. The Exchange proposes to adopt the 
rule amendments proposed in this filing in order to have similar 
authority as other national securities exchanges in those 
circumstances, and thereby promote consistency among exchange rules.
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    \19\ See BZX Rule 11.16(d)(1)-(3).
    \20\ See BYX Rule 11.16(d)(1)-(3).
    \21\ See EDGA Rule 11.14(d)(1)-(3).
    \22\ See EDGX Rule 11.14(d)(1)-(3).
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    The Exchange also proposes ministerial amendments to amend Rule 
11.18(A)-(C) to adjust the lettering from its current all upper case 
format to lower case (i.e., Rule 11.18(a), 11.18(b) and 11.18(c)) and 
to adjust the text in those paragraphs to be consistent with style of 
text used throughout the Exchange's rule book.
Proposed NSX Rule 11.11(e)
    The Exchange is proposing to adopt NSX Rule 11.11(e), entitled 
Cancellation of Orders By NSX or NSX Securities. As proposed, the rule 
will provide that NSX, NSXS, or a third-party routing broker may cancel 
orders as deemed to be necessary to maintain fair and orderly markets 
if and when a systems, technical, or operational issue occurs at NSX, 
NSXS, or at a third-party routing broker in connection with the routing 
function provided under NSX Rules 2.11 and 11.15 \23\ or at another 
Trading Center to which an NSX order has been routed. A routing broker 
may only cancel orders routed to another Trading Center based on NSX's 
standing or specific instructions or as otherwise

[[Page 62189]]

provided in the Exchange's rules.\24\ NSX shall provide notice of the 
cancellation to each affected ETP Holder via telephonic communication 
and/or electronic mail as soon as practicable.
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    \23\ Rule 11.15, Order Execution, describes the process for the 
execution of orders on NSX and for orders routed to other Trading 
Centers.
    \24\ See, e.g., Rule 11.11(d), Cancel/Replace Messages and Rule 
11.15(c), Special Rules for Orders Routed to Other Trading Centers.
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    The Exchange is proposing Rule 11.11(e) to gain the explicit 
authority to cancel orders in the event of a System Failure that, if 
not promptly addressed, could be detrimental to the maintenance of fair 
and orderly markets.\25\ This provision would apply in all situations, 
and not be limited to the routing function. Other national securities 
exchanges have adopted rules that, like proposed Rule 11.11(e), provide 
the authority to cancel orders as deemed necessary for the maintenance 
of fair and orderly markets.\26\ The requirement for NSX to provide 
notice of any such cancellation to the affected ETP Holders as soon as 
practicable will benefit market participants by allowing them to 
determine alternatives in the handling of their orders.
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    \25\ The definition of ``maintenance of fair and orderly 
markets'' includes, but is not limited to, the prevention of 
situations that would create a potential market dislocation or 
result in executions that would operate to cause an economic harm to 
a market participant were the order or orders at issue to be 
executed.
    \26\ Examples of other exchange rules providing authority to 
cancel orders to maintain fair and orderly markets include NYSE Arca 
Rule 7.45(d)(1); BZX Rule 2.11(a)(6); BYX Rule 2.11(a)(6); EDGA Rule 
2.11(a)(6); EDGX Rule 2.11(a)(6); and Chicago Stock Exchange Article 
20, Rule 12(a).
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    In addition, the Exchange is proposing to make ministerial, non-
substantive amendments to Rule 11.11(d) by renumbering current 
subparagraphs (i) through (iv) as subparagraphs (1) through (4). NSX is 
not proposing any changes to the rule text of these subparagraphs. The 
Exchange is making this change to align the subparagraph numbering 
under NSX Rule 11.11(d) with the numbering used in other sections of 
Rule 11.11.
Proposed Amendments to NSX Rule 2.11
    NSXS is the Exchange's outbound order routing facility. From time 
to time, the Exchange, NSXS or one or more unaffiliated third-party 
routing broker-dealers used by the Exchange to access other Trading 
Centers may encounter situations in which it becomes necessary to 
cancel orders and resolve one or more error positions.
    The Exchange proposes to amend Rule 2.11 to provide that NSXS and 
any third-party routing broker-dealer used by the Exchange to route 
orders to other Trading Centers (collectively, the ``Routing Broker'') 
shall maintain an account for the purpose of addressing positions that 
result from a systems, technical or operational issue at the Exchange, 
the Routing Broker, or the destination Trading Center that affects one 
or more orders (``Error Position'').\27\ Specifically, under proposed 
Rule 2.11(a)(5), the Routing Broker would be required to maintain an 
error account for the purpose of liquidating an Error Position acquired 
as a result of a System Failure experienced by the Routing Broker, the 
Exchange or at a Trading Center, in connection with the order routing 
process. The proposed amendments provide that the Routing Broker would 
only assume an Error Position in its error account under documented 
circumstances when the Error Position could not fairly and practicably 
be assigned to one or more ETP Holders or if the Exchange determines to 
cancel all orders affected by the technical or systems issue. Such 
circumstances include if an economic harm would result or it would 
otherwise be to the economic detriment of the ETP Holder or its 
customer.
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    \27\ The Exchange notes that, in connection with providing the 
routing function, a non-affiliated Routing Broker currently may 
utilize its own error account to liquidate Error Positions. It is 
reasonable and appropriate to address routing errors through the 
error account maintained by a non-affiliated Routing Broker because, 
among other reasons, the non-affiliated Routing Broker is, in fact, 
the executing broker associated with these transactions.
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    Proposed subparagraph (a)(5)(i) of Rule 2.11 provides that errors 
to which the rule applies include those caused by any act or omission 
by NSX, a Routing Broker, or at another Trading Center to which an 
order has been routed and that results in an unmatched trade position, 
i.e., an execution of a routed order for which there is no 
corresponding order with which to pair the execution (each a ``routing 
error''). Such routing errors would include, without limitation, 
positions resulting from determinations by NSX or a Routing Broker to 
cancel an order pursuant to proposed NSX Rule 11.11(e).
    As proposed in Rule 2.11(a)(5)(ii), if the Exchange or the Routing 
Broker reasonably determines that there is accurate and sufficient 
information (including valid clearing information) to assign the 
positions to all of the ETP Holders affected by that systems, technical 
or operational issue, sufficient time pursuant to normal clearance and 
settlement deadlines to evaluate the information necessary to assign 
the positions to all of the ETP Holders affected by that systems, 
technical or operational issue, and has not determined to cancel all 
orders affected by that systems, technical or operational issue, the 
Exchange or NSXS [sic] will assign the full amount of the resulting 
Error Position to one or more ETP Holders. The ETP Holder would then be 
responsible for liquidating the position in its own error account. To 
the extent that the Error Position resulted from a System Failure at 
the Exchange or the Routing Broker, the affected ETP Holder would have 
the ability to file a claim for reimbursement pursuant to the proposed 
amendments to NSX Rule 11.18 discussed above.
    As an example of such a situation, if ETP Holder A placed an order 
to buy 100 shares of symbol XYZ, and a System Failure caused the 
Routing Broker to route an order for the wrong number of shares (e.g., 
1,000 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, the Routing Broker would assign to ETP Holder A the full 
amount of the resulting Error Position (in the above examples, with 
respect to the incorrect size, 1,000 shares of XYZ, of which 900 shares 
would be the Error Position or, with respect to the incorrect symbol, 
100 shares of XYY). Under these circumstances, because the Error 
Position would have been caused by an Exchange or Routing Broker System 
Failure, ETP Holder A would be permitted to submit a claim for 
reimbursement to the Exchange, subject to the requirements and 
limitations of proposed NSX Rule 11.18(d), to the extent that ETP 
Holder A incurred a loss after trading out of the Error Position.
    Proposed Rule 2.11(a)(5)(iv) states that, except to facilitate the 
clearing and settlement process where a systems, technical or 
operational issue prevents an ETP Holder from providing valid clearing 
instructions, the Routing Broker shall not accept any positions in such 
error account from an account of an ETP Holder or permit any ETP Holder 
to transfer any positions from the ETP Holder's account to a Routing 
Broker error account. The exception is set forth in Rule 2.11(a)(5)(v) 
and permits the Routing Broker, in the absence of valid clearing 
information attributable to a systems, technical or operational issue, 
to assume that ETP Holder's side of the trade so that the trade can be 
automatically processed for clearing and settlement on a locked-in 
basis pursuant to Rule 11.17(b).
    Proposed Rule 2.11(a)(6) requires the Routing Broker to liquidate 
the Error Positions as soon as practicable. The Routing Broker could 
determine to liquidate the position itself or have a third-party 
broker-dealer liquidate the position on the Routing Broker's behalf. 
Further, proposed subparagraph (a)(6)(i)

[[Page 62190]]

requires that NSX and NSXS provide complete time and price discretion 
for the trading to liquidate the Error Positions to a third-party 
broker-dealer and shall not attempt to exercise any influence or 
control over the timing or methods of such trading. Subparagraph 
(a)(6)(ii) provides that NSX and NSXS shall establish, maintain, and 
enforce written policies and procedures reasonably designed to restrict 
the flow of confidential and proprietary information associated with 
the liquidation of the Error Positions in accordance with NSX Rule 
2.11,\28\ and prevent the use of information associated with other 
orders subject to the routing service when making determinations 
regarding the liquidation of Error Positions. In addition, subparagraph 
(a)(6)(iii) provides that NSX and NSXS shall make and keep records to 
document all determinations to treat positions as Error Positions and 
all determinations for the assignment of Error Positions to ETP Holders 
or the liquidation of Error Positions, as well as records associated 
with the liquidation of Error Positions through a third-party broker 
dealer in accordance with Rule 17a-4 under the Exchange Act.\29\
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    \28\ Proposed Rule 2.11(a)(6)(ii) provides that NSX or NSXS 
shall establish, maintain and enforce written policies and 
procedures reasonably designed to restrict the flow of confidential 
and proprietary information associated with the liquidation of the 
Error Positions in accordance with Rule 2.11, and prevent the use of 
information associated with other orders subject to the routing 
services when making determinations regarding the liquidation of 
Error Positions.
    \29\ See 17 CFR 240.17a-4.
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    The Exchange notes that, in certain circumstances, NSX and its 
Routing Broker may not learn about an Error Position until the 
following business day (``T+1''). Examples of such situations include 
(i) during the clearing process when a routing destination has 
submitted to Depository Trust Clearing Corporation (``DTCC'') a 
transaction for clearance and settlement for which NSX or the Routing 
Broker never received an execution confirmation; or (ii) when another 
Trading Center does not recognize a transaction submitted by a Routing 
Broker to DTCC for clearance and settlement. The affected ETP Holder's 
trade(s) cannot be nullified absent express authority under Exchange 
Rules.\30\ Accordingly, the Exchange believes that the use of an error 
account to liquidate the Error Positions that may occur in these 
circumstances is reasonable and appropriate.
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    \30\ See, e.g., Rule 11.19, Clearly Erroneous Executions.
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    The Exchange's proposed assignment process is designed to ensure 
that an Error Position is assigned to ETP Holders in a non-
discriminatory manner because the Exchange would attempt to assign an 
Error Position to an ETP Holder in every instance. If the Routing 
Broker reasonably concludes that it is unable to trace each erroneous 
execution comprising an Error Position back to one or more ETP Holder's 
orders, then the Routing Broker will assume the entire amount of the 
Error Position in its error account. Moreover, under proposed Rule 
2.11(a)(5)(iii), if the Routing Broker reasonably concludes, due to the 
number of erroneous executions and/or the number of ETP Holders 
potentially affected, that it would not be able to trace each erroneous 
execution comprising an Error Position back to such ETP Holders in a 
timely manner (which will be defined to mean by the end of Regular 
Trading Hours on the first business day following the trade date on 
which the Error Position was established (T+1)), then the Routing 
Broker will assume the entire amount of the Error Position in its error 
account. When an Error Position is acquired in the NSXS error account 
or the error account of an unaffiliated routing broker-dealer, it will 
be liquidated as soon as practicable pursuant to proposed subparagraph 
(a)(6) of NSX Rule 2.11.
    The Exchange also proposes two ministerial amendments to Rule 2.11. 
First, the Exchange proposes to remove the comma in the title of the 
Rule to align with the actual corporate name of NSX Securities. Second, 
the Exchange proposes to amend Rule 2.11(a) to add ``NSXS'' as an 
abbreviated term for NSX Securities LLC.
Definition of Trading Center
    The Exchange proposes to move the definition of ``Trading Center'' 
from NSX Rule 2.11, which pertains to NSXS, to NSX Rule 1.5, which 
contains definitions generally used throughout the Exchange's rules. 
Under NSX Rule 2.11(a), ``Trading Center'' is defined as ``other 
securities exchanges, facilities of securities exchanges, automated 
trading systems, electronic communication networks or other brokers or 
dealers.'' The Exchange does not propose to amend the definition of 
``Trading Center.''
    The Exchange submits that relocating the definition of ``Trading 
Center'' to the Exchange's general definitional rule will enhance the 
clarity and ease of reference of the Exchange's Rules. With this 
change, the Exchange will change NSX Rule 11.15(a)(ii)(A) and (B) to 
remove the clause ``(as defined in NSX Rule 2.11)'' in reference to the 
definition of Trading Center, because the clause is no longer 
applicable.
    Lastly, the Exchange proposes to remove the word ``all'' from the 
first sentence of Rule 1.5, as the inclusion of the word is 
unnecessary.
2. Statutory Basis
    The Exchange submits that the proposed rule change is consistent 
with Section 6 of the Act \31\ and the Rules and regulations thereunder 
and, in particular, the requirements of Section 6(b) of the Act.\32\ 
Specifically, the Exchange submits that the proposal furthers the 
objectives of Section 6(b)(5),\33\ in particular, as it is designed 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, and is not 
designed to permit unfair discrimination between customers, brokers or 
dealers. The Exchange submits that, in general, this proposal is in 
keeping with those principles.
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    \31\ 15 U.S.C. 78f.
    \32\ 15 U.S.C. 78f(b).
    \33\ 15 U.S.C. 78f(b)(5).
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    The proposed amendments to NSX Rule 11.18 are consistent with 
Section 6(b)(5) of the Act in that they promote just and equitable 
principles of trade by providing the Exchange with the authority to 
compensate ETP Holders for losses resulting from System Failures or the 
negligent conduct of an Exchange employee, in amounts up to the 
monetary limitations set forth in subparagraphs (d)(3) through (d)(5) 
of NSX Rule 11.18. Currently, market participants experiencing a loss 
as a result of such an occurrence have no ability under Exchange rules 
to obtain any compensation from the Exchange. The proposed amendments 
would enable the Exchange to provide reasonable and equitable 
compensation to parties who sustained losses as a result of failure on 
the part of the Exchange to properly handle an order. Other exchanges 
have recognized the need to provide such relief and have amended their 
general liability rules to permit limited compensation under defined 
circumstances.\34\
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    \34\ See note 14, supra.
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    The Exchange believes that the rule provisions that establish the 
process for an ETP Holder to obtain compensation under the rule are 
consistent with

[[Page 62191]]

Section 6(b)(5) of the Act in that they provide a clear definition of 
what constitutes a System Failure (i.e., an actual malfunction in the 
physical equipment and/or programming in the Exchange's systems or 
facilities that results in an incorrect execution or no execution of a 
valid, marketable order that was received and acknowledged by Exchange 
systems) and establish a transparent process for ETP Holders to submit 
a claim for compensation pursuant to the rule. Specifically, a claim 
for compensation must be submitted by the close of Regular Trading 
Hours on the next business day following the occurrence that gives rise 
to the claim. This time frame is sufficient for ETP Holders to gather 
information and submit a claim, while also requiring that claims be 
submitted in a timely manner. Thus, the time window for submission of a 
claim is reasonable because it balances the Exchange's interest in 
timely submission with the ETP Holder's interest in having enough time 
to prepare and submit a claim.
    Similarly, the Exchange believes that provisions of proposed Rule 
11.18(d)(8) that establish the criteria for reviewing claims for 
compensation provide for a transparent process in which the Exchange 
will verify that: (i) A valid order was entered by the ETP Holder and 
accepted and acknowledged by the Exchange's system; (ii) an Exchange 
system failure or a negligent act or omission by an Exchange employee 
occurred during the handling or execution of that order; and (iii) that 
the ETP Holder's loss resulted from such system failure or negligent 
act or omission. The Exchange will assess the extent to which the ETP 
Holder's conduct may have contributed to the loss and may adjust the 
amount to be paid on the claim by the Exchange.
    The Exchange believes that these provision are designed to, and 
will operate to, further the objectives of Section 6(b)(5) by promoting 
just and equitable principles of trade, removing impediments to and 
perfecting the mechanism of a free and open market and a national 
market system and, in general, protecting investors and the public 
interest. The amendments contained in NSX Rule 11.18(d) provide clear 
standards for addressing claims and are available to all ETP Holders, 
and are not designed to permit unfair discrimination between customers, 
brokers or dealers, thus meeting the requirement of Section 6(b)(5).
    Proposed Rule 11.11(e) is consistent with Section 6(b)(5) of the 
Act in that it will allow NSX, NSXS, or a third-party routing broker to 
cancel orders when it deems such action to be necessary for the 
maintenance of fair and orderly markets if a System Failure occurs. As 
proposed, the Exchange submits that the ability to take action to 
mitigate potential harm to market participants in cases where the 
handling of an order is affected by a System Failure will operate to 
promote just and equitable principles of trade and protect investors 
and the public interest.
    The proposed amendments to Rule 2.11(a)(5) and (a)(6) governing the 
process for liquidating errors resulting from a technical or systems 
issue affecting the routing function, and the requirements for an error 
account maintained by the Routing Broker, are consistent with Section 
6(b)(5) of the Act in that they are designed to provide a uniform and 
consistent approach to handling such errors, thereby promoting just and 
equitable principles of trade. As noted above and as further described 
in Section 8 of the Exchange's rule filing, the Exchange's proposed 
rule amendments align to a significant degree with the rules of other 
national securities exchanges and, in that regard, the proposed 
amendments operate to remove impediments to and perfect the mechanism 
of a free and open market and a national market system and, in general, 
protect investors and the public interest.
    Finally, the Exchange submits that its proposed ministerial, non-
substantive amendments to certain rules, as discussed above, are 
consistent with Section 6(b)(5) of the Act. The changes are designed to 
promote consistency, transparency and ease of reference in the 
Exchange's Rules, and will thereby operate to promote just and 
equitable principles of trade and the protection of investors and the 
public interest as required by Section 6(b)(5).

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

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition that is not necessary or appropriate 
in furtherance of the purposes of the Exchange Act. Allowing the 
Exchange to have the authority to address System Failures in a timely 
manner, including by canceling an order where deemed necessary to 
maintain fair and orderly markets, and establishing a framework for 
compensating market participants for losses, will not burden 
competition among ETP Holders or among NSX and other exchanges. As 
noted above, other national securities exchanges have adopted similar 
rules and the Exchange is seeking to align its error resolution rules 
and processes with those already widely adopted within the securities 
industry.\35\
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    \35\ See id.
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C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    The Exchange has not solicited or received any comments on the 
proposed rule change from market participants or others.

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 \36\ and Rule 19b-4(f)(6) 
thereunder.\37\
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    \36\ 15 U.S.C. 78s(b)(3)(A).
    \37\ 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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    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. If the Commission 
takes such action, the Commission shall institute proceedings to 
determine whether the proposed rule should be approved or 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-NSX-2016-04 on the subject line.

[[Page 62192]]

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-NSX-2016-04. 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 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-NSX-2016-04 and should be 
submitted on or before September 29, 2016.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\38\
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    \38\ 17 CFR 200.30-3(a)(12).
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Brent J. Fields,
Secretary.
[FR Doc. 2016-21644 Filed 9-7-16; 8:45 am]
 BILLING CODE 8011-01-P