[Federal Register Volume 81, Number 239 (Tuesday, December 13, 2016)]
[Notices]
[Pages 90035-90038]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-29807]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-79502; File No. SR-IEX-2016-18]


Self-Regulatory Organizations; Investors Exchange LLC; Notice of 
Filing of Proposed Rule Change to: (i) Amend Rules 11.190(a)(3) and 
11.190(b)(8) To Modify the Operation of the Primary Peg Order Type; 
(ii) Amend Rule 11.190(h)(C)(ii) and (D)(ii) Regarding Price Sliding in 
Locked and Crossed Markets To Simplify the Price Sliding Process for 
Both Primary Peg Orders and Discretionary Peg Orders Resting on or 
Posting to the Order Book; and (iii) Make Minor Housekeeping Changes To 
Conform Certain Terminology

December 7, 2016.
    Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of 
1934 \2\ and Rule 19b-4 thereunder,\3\ notice is hereby given that, on 
November 29, 2016, the Investors Exchange LLC filed with the Securities 
and Exchange Commission the proposed rule change as described in Items 
I, II, and III 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\ 15 U.S.C. 78a.
    \3\ 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

    Pursuant to the provisions of Section 19(b)(1) under the Securities 
Exchange Act of 1934 (``Act''),\4\ and Rule 19b-4 thereunder,\5\ 
Investors Exchange LLC (``IEX'' or ``Exchange'') is filing with the 
Securities and Exchange Commission (``Commission'') proposed rule 
changes to (i) amend Rules 11.190(a)(3) and 11.190(b)(8) to modify the 
operation of the primary peg order type; (ii) amend Rule 
11.190(h)(C)(ii) and (D)(ii) [sic] regarding price sliding in locked 
and crossed markets to simplify the price sliding process for both 
primary peg orders and Discretionary Peg orders resting on or posting 
to the Order Book; and (iii) make minor housekeeping changes to conform 
certain terminology.
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    \4\ 15 U.S.C. 78s(b)(1).
    \5\ 17 CFR 240.19b-4.
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    The text of the proposed rule change is available at the Exchange's 
Web site at www.iextrading.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 self-regulatory organization 
included statements concerning the purpose of and basis for the 
proposed rule change and discussed any comments it received on the 
proposed rule change. The text of these statements may be examined at 
the places specified in Item IV below. The self-regulatory organization 
has prepared summaries, set forth in Sections A, B, and C below, of the 
most significant aspects of such statements.

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

1. Purpose
Background
    The purpose of the proposed rule change is to amend Rules 
11.190(a)(3) and 11.190(b)(8) to modify the operation of the primary 
peg order type offered by the Exchange, and to amend Rule 
11.190(h)(C)(ii) and (D)(ii) [sic] regarding price sliding in locked 
and crossed markets to simplify the price sliding process for both 
primary peg orders and Discretionary Peg orders resting on or posting 
to the Order Book.
    Currently, the Exchange offers three types of pegged orders--
primary peg, midpoint peg and discretionary peg--each of which are non-
displayed orders that upon entry into the System and while resting on 
the Order Book, are pegged to a reference price based on the national 
best bid and offer (``NBBO'') and the price of the order is 
automatically adjusted by the System in response to changes in the 
NBBO. As set forth in Rule 11.190(b)(8), a primary peg order is a 
pegged order that upon entry and when posting to the Order Book, the 
price of the order is automatically adjusted by the System to be equal 
to and ranked at the less aggressive of the primary quote (i.e., the 
national best bid (``NBB'') for buy orders and the national best offer 
(``NBO'') for sell orders) or the order's limit price, if any. While 
resting on the Order Book, the order is automatically adjusted by the 
System in response to the changes in the NBB (NBO) for buy (sell) 
orders up (down) to the order's limit price, if any.
    In the event the NBBO becomes locked or crossed, primary peg 
orders, as well as Discretionary Peg orders, resting on or posting to 
the Order Book are priced to the less aggressive of either the prior 
non-locked or non-crossing near side quote (i.e., the prior unlocked

[[Page 90036]]

or uncrossed NBB (NBO) for buy (sell) orders), or one (1) MPV less 
aggressive than the locking or crossing price.\6\
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    \6\ See, Rule 11.190(h)(C)(ii) and (D)(ii) [sic].
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Overview
    The Exchange proposes to modify the operation of the primary peg 
order type. The order type as revised is a non-displayed order designed 
to enable a Member (or customer thereof) to rest trading interest on 
the Order Book at a price inferior to the primary quote and remain 
available to execute against an incoming order seeking to cross the 
spread and execute at prices equal to or more aggressive (from the 
taker's perspective) than such quote, while avoiding adverse selection 
when the market appears to be moving against the resting primary peg 
order (i.e., moving lower in the case of a buy order or higher in the 
case of a sell order). As described more fully below, the primary peg 
order as proposed combines the offset feature of the Primary Pegged 
Order offered by BATS BZX Exchange, Inc (``BZX'') \7\ with the price 
improvement opportunities and protections offered by the Exchange's 
existing Discretionary Peg order.\8\ Specifically, the primary peg 
order as proposed offers Members an opportunity to rest one (1) MPV 
less aggressive than the primary quote (i.e., one (1) MPV below the NBB 
for buy orders or one (1) MPV above the NBO for sell orders) but remain 
eligible to exercise price discretion up (down) to the NBB (NBO) for 
buy (sell) orders, and is designed to protect such orders from 
unfavorable executions by preventing the exercise of such price 
discretion when the Exchange has determined that the market is moving 
against the order (i.e., a crumbling quote is detected). In addition, 
the Exchange proposes to simplify the price sliding process for both 
primary peg orders and Discretionary Peg orders resting on or posting 
to the Order Book so that such orders will slide to one MPV less 
aggressive than the locking or crossing price (i.e., higher for a sell 
order and lower for a buy order) rather than remaining at the prior 
non-locked or non-crossed price when such price is less aggressive.
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    \7\ See BZX Rule 11.9(c)(8).
    \8\ See, Rule 11.190(b)(10).
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    The Exchange notes that the primary peg order type has received 
modest usage by Members, and at the same time, the Exchange has 
observed that spread crossing interest entered on the Exchange is 
sometimes unable to find sufficient resting interest willing to trade 
at the far-side primary quote. The Exchange believes (based in part on 
informal discussions with liquidity providing Members) that the primary 
peg order type as revised, which is designed to prevent adverse 
selection in unstable market conditions, will incentivize passive 
resting liquidity priced to execute at the primary quote on the 
Exchange, and consequently may result in greater execution 
opportunities at the far side quote for Members entering spread 
crossing orders.
Description of Proposed Rule Change
    As proposed, Rule 11.190(b)(8) provides that (i) a primary peg 
order will, upon entry and when posting to the Order Book, be 
automatically adjusted by the System to be equal to and ranked at the 
less aggressive of one (1) minimum price variant (``MPV'') \9\ less 
aggressive than the primary quote (i.e., one MPV below (above) the NBB 
(NBO) for buy (sell) orders) or the order's limit price, as applicable; 
(ii) exercise price discretion up (down) to the NBB (NBO) for buy 
(sell) orders, except during periods of quote instability as defined in 
Rule 11.190(g); and (iii) in locked and crossed markets, slide one MPV 
less aggressive than the locking price or crossing price (i.e., the 
lowest Protected Offer for buy orders and the highest Protected Bid for 
sell orders).\10\
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    \9\ See, Rule 11.210.
    \10\ The proposed changes to the price sliding process in locked 
and crossed markets would also apply to Discretionary Peg orders.
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    As is the case with Discretionary Peg orders, Rule 11.190(b)(8) 
would provide that a primary peg order would maintain time priority at 
its resting price, and be prioritized behind any non-displayed interest 
resting at the NBB (NBO) for buy (sell) orders (i.e., the ``primary 
quote'') for the duration of the book processing action in which it is 
exercising discretion. If multiple primary peg orders are exercising 
discretion during the same book processing action, they would maintain 
their relative time priority when executing at the primary quote.
    As proposed, the manner in which a primary peg order will exercise 
price discretion is similar to the manner in which a Discretionary Peg 
order exercises price discretion. As set forth in Rule 11.190(b)(10), a 
Discretionary Peg order pegs to the less aggressive of the primary 
quote (i.e., NBB for buy orders and NBO for sell orders) or the order's 
limit price, if any, but, in order to meet the limit price of an active 
order, will exercise price discretion up to the less aggressive of the 
Midpoint Price \11\ or the order's limit price, if any. However, a 
Discretionary Peg order will not exercise such price discretion during 
periods of quote instability as defined in Rule 11.190(g).\12\ 
Similarly, as proposed a primary peg order will exercise discretion in 
order to meet the limit price of an active order up to the NBB (for buy 
orders) or down to the NBO (for sell orders), except during periods of 
quote instability as defined in Rule 11.190(g), or if the order is 
resting at its limit price, if any.
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    \11\ See, Rule 1.160(t).
    \12\ As set forth in Rule 11.190(g), in determining whether a 
crumbling quote exists, the Exchange utilizes real time relative 
quoting activity of Protected Quotations and a proprietary 
mathematical calculation (the ``quote instability calculation'') to 
assess the probability of an imminent change to the current 
Protected NBB to a lower price or Protected NBO to a higher price 
for a particular security (``quote instability factor''). When the 
quoting activity meets predefined criteria and the quote instability 
factor calculated is greater than the Exchange's defined threshold 
(``quote instability threshold''), the System treats the quote as 
not stable (``quote instability'' or a ``crumbling quote''). During 
all other times, the quote is considered stable (``quote 
stability''). The System independently assesses the quote stability 
of the Protected NBB and Protected NBO for each security. When the 
System determines that a quote, either the Protected NBB or the 
Protected NBO, is unstable, the determination remains in effect at 
that price level for ten (10) milliseconds. The System will only 
treat one side of the Protected NBBO as unstable in a particular 
security at any given time. By not permitting resting Discretionary 
Peg orders to execute at a price that is more aggressive than the 
near-side protected NBB or NBO (as applicable) during periods of 
quote instability, the Exchange System is intended to attempt to 
protect such orders from unfavorable executions when the market is 
moving against them. Once the market has moved and the Exchange 
System deems the near-side Protected NBB or NBO (as applicable) to 
be stable (pursuant to a pre-determined, objective set of conditions 
as described below), Discretionary Peg orders are permitted to 
exercise discretion up to (for buy orders) or down to (for sell 
orders) the midpoint of the NBBO in order to meet the limit price of 
active orders on the order book and thereby potentially provide 
price improvement to such active orders. Quote stability or 
instability (also referred to as a crumbling quote) is an assessment 
that the Exchange System makes on a real-time basis, based on a pre-
determined, objective set of conditions specified in Rule 
11.190(g)(1).
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    The Exchange also proposes to amend Rule 11.190(h)(C)(ii) and 
(D)(ii) [sic] regarding price sliding in locked and crossed markets to 
simplify the price sliding process for both primary peg orders and 
Discretionary Peg orders resting on or posting to the Order Book. As 
proposed, such orders will slide to one MPV less aggressive than the 
locking or crossing price (i.e., higher for a sell order and lower for 
a buy order) rather than remaining at the prior non-locked or non-
crossed price when such price is less aggressive. If a primary peg 
order is submitted while the market is crossed, the order would post to 
the Order Book priced one (1) MPV less aggressive than the crossing 
price, the

[[Page 90037]]

lowest Protected Offer for buy orders and the highest Protected Bid for 
sell orders. The Exchange notes that the goal of this provision is to 
ensure that primary peg and Discretionary Peg orders do not rest at 
locking or crossing prices. The Exchange believes that the variability 
of the existing approach is unnecessarily complicated, without any 
material benefit, and requires both the Exchange System and Member 
systems to keep track of the prior non-locked/non-crossed price. 
Therefore, the Exchange believes that simplifying the price sliding 
processing for primary peg and Discretionary Peg orders is appropriate 
in this respect since it would accomplish the goal of sliding such 
orders to a non-locked/non-crossed price.
    The Exchange does not propose to amend the order modifiers and 
parameters currently applicable to primary peg orders as set forth in 
Rule 11.190(b)(8)(A)-(J), and such order modifiers and parameters would 
apply to primary peg orders as revised. Specifically, currently and as 
proposed, a primary peg order: (i) Must be a pegged order; (ii) must 
have a time-in-force (``TIF'') of DAY, GTT, GTX, or SYS; \13\ (iii) is 
not eligible for routing; \14\ (iv) may not be an intermarket sweep 
order; \15\ (v) may be submitted with a limit price, or without a limit 
price; (vi) is eligible to trade only during the Regular Market 
Session; (vii) may be a minimum quantity order; \16\ (viii) is not 
eligible to be displayed by the System; (ix) may be an odd lot, round 
lot, or mixed lot; and (x) is not eligible to be invited by the System 
to Recheck, as described in Rule 11.230(a)(4)(D).
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    \13\ See, Rule 11.190(a)(3). A primary peg order with a TIF of 
GTT, GTX or SYS entered before the opening of the Regular Market 
Session will be rejected. A primary peg order with a TIF of DAY 
entered before the opening of the Regular Market Session will be 
queued in the System until the start of the Regular Market Session.
    \14\ See, Rules 11.230(b) and (c)(2).
    \15\ See, Rule 11.190(b)(12).
    \16\ See, Rule 11.190(b)(11).
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    Finally, the Exchange proposes to make a minor conforming 
housekeeping change to Rule 11.190(h)(D)(ii) [sic] to refer to the 
``crossing price'' rather than ``crossed quote'' to be consistent with 
other references within the rule.
Implementation
    The Exchange plans to implement the proposed changes during the 
first quarter of 2017 pending completion of necessary technology 
changes and subject to Commission approval. The Exchange will announce 
the implementation date of the proposed changes by Trader Alert at 
least 5 business days in advance of such implementation date and within 
90 days of approval of this proposed rule change.
2. Statutory Basis
    IEX believes that the proposed rule change is consistent with 
Section 6(b) \17\ of the Act in general, and furthers the objectives of 
Section 6(b)(5) of the Act,\18\ in particular, in that it is designed 
to prevent fraudulent and manipulative acts and practices, to promote 
just and equitable principles of trade, to foster cooperation and 
coordination with persons engaged in 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.
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    \17\ 15 U.S.C. 78f.
    \18\ 15 U.S.C. 78f(b)(5).
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    Specifically, IEX believes that the proposal is consistent with 
protection of investors and the public interest in that the primary peg 
order type is designed to assist Members in obtaining best execution 
for their customers (and proprietary orders) by providing an 
opportunity to execute at the NBBO, but limiting executions at the NBBO 
when the NBBO is not stable, thereby reducing the potential to execute 
at a stale price. Moreover, as discussed above, the primary peg order, 
as proposed, combines key attributes of the Primary Pegged Order 
offered by BZX, in that both order types offer Members an opportunity 
to rest more passively than the primary quote, and the discretionary 
price improvement attributes of the Exchange's Discretionary Peg order 
type. Thus, IEX does not believe that the primary peg order type raises 
any new or novel issues that have not already been considered by the 
Commission in connection with existing order types of IEX and BZX.\19\ 
In particular, IEX notes that, in connection with its grant of IEX's 
application for registration as a national securities exchange under 
Sections 6 and 19 of the Act, the Commission specifically found IEX's 
order type rules, including those providing for a Discretionary Peg 
order to exercise price discretion only when the quote appears to be 
stable, to be consistent with the Act and, in particular, the Section 
6(b)(5) requirement that the Exchange's rules be designed to promote 
just and equitable principles of trade, remove impediments to and 
perfect the mechanisms of a free and open market and a national market 
system, and protect investors and the public interest.\20\ Accordingly, 
the Exchange believes that providing the same price discretion to 
primary peg orders is similarly consistent with the protection of 
investors and the public interest.
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    \19\ See also NYSE Arca Equities Rule 7.31P(h) [sic] which 
provides for a Discretionary Pegged order type based on IEX's 
Disretionary Peg order type.
    \20\ See Securities Exchange Act Release No. 34-78101 at 47 
(June 17, 2016), 81 FR 41142 (June 23, 2016) (File No. 10-222).
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    The Exchange also believes that the proposed priority rules for 
primary peg orders are designed to protect investors and the public 
interest because the proposed priority rules are identical to those for 
Discretionary Peg orders.\21\ As noted above, the Commission has 
already considered the Exchange's Discretionary Peg order type in 
connection with its grant of IEX's application for registration as a 
national securities exchange under Sections 6 and 19 of the Act, and 
specifically found IEX's order type rules to be consistent with the Act 
and, in particular, the Section 6(b)(5) requirement that the exchange's 
rules be designed to promote just and equitable principles of trade, 
remove impediments to and perfect the mechanisms of a free and open 
market and a national market system, and protect investors and the 
public interest.\22\ Accordingly, the Exchange does not believe that 
applying these priority rules to primary peg orders raises any new or 
novel issues that have not already been considered by the Commission, 
and is thus consistent with the protection of investors and the public 
interest.
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    \21\ See IEX Rule 11.190(b)(10).
    \22\ See supra, note 20.
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    The Exchange also believes that simplifying the operation of price 
sliding primary peg orders in a locked or crossed market is consistent 
with the protection of investors and the public interest by making the 
Exchange's rules more clear and transparent, and removing the 
variability of a primary peg orders booked price in situations where 
the market becomes locked or crossed. Specifically, rather than price 
sliding such orders at the less aggressive of either the prior unlocked 
or uncrossed near side quotation, or one MPV less aggressive than the 
locking or crossing price, the Exchange will simply slide such orders 
one MPV less aggressive than the locking or crossing price, creating a 
simple, transparent process for price sliding such orders.
    Finally, the Exchange believes that the minor conforming 
housekeeping change to Rule 11.190(h)(D)(ii) [sic] to

[[Page 90038]]

refer to ``crossing price'' rather than ``crossed quote'' is consistent 
with the protection of investors and the public interest because it 
will make the applicable rule text more clear by eliminating 
inconsistent verbiage to describe the same concept.

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

    IEX does not believe that the proposed rule change will result in 
any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act. The proposed change will offer 
the primary peg order type equally to all IEX Members. Furthermore, the 
Exchange does not believe that allowing primary peg orders to exercise 
discretion in stable markets, using the formula set forth in IEX Rule 
11.190(g), will result in any burden on competition that is not 
necessary or appropriate in furtherance of the purposes of the Act. The 
Commission has already considered the Exchange's Discretionary Peg 
order type in connection with its grant of IEX's application for 
registration as a national securities exchange under Sections 6 and 19 
of the Act.\23\ The proposed rule change is designed to extend the 
benefits of the quote stability calculation to Members using the 
primary peg order type to prevent unfavorable executions in crumbling 
markets; therefore, no new burdens are being proposed.
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    \23\ See supra, note 20.
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    The Exchange also does not believe that the proposed primary peg 
order type will result in any burden on Members seeking to cross the 
spread and execute at the far side quote (the NBO (NBB) for buy (sell) 
orders), because the benefits and protections offered by the proposed 
primary peg order type, which is designed to prevent adverse selection 
in unstable market conditions, is intended to incentivize passive 
resting liquidity priced to execute at the primary quote on the 
Exchange, and consequently may result in greater execution 
opportunities at the far side quote for Members entering spread 
crossing orders.

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

    Written comments were neither solicited nor received.

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

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the Exchange consents, the Commission shall: (a) By order approve 
or disapprove such proposed rule change, or (b) institute proceedings 
to determine whether the proposed rule change should be disapproved.

IV. Solicitation of Comments

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

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
File SR-IEX-2016-18 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-IEX-2016-18. 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-IEX-2016-18 and should be 
submitted on or before January 3, 2017.
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    \24\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\24\
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2016-29807 Filed 12-12-16; 8:45 am]
 BILLING CODE 8011-01-P