[Federal Register Volume 82, Number 101 (Friday, May 26, 2017)]
[Notices]
[Pages 24412-24417]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-10807]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-80740; File No. SR-CHX-2017-04]


Self-Regulatory Organizations; Chicago Stock Exchange, Inc.; 
Order Instituting Proceedings To Determine Whether To Approve or 
Disapprove a Proposed Rule Change To Adopt the CHX Liquidity Enhancing 
Access Delay

May 22, 2017.

I. Introduction

    On February 10, 2017, the Chicago Stock Exchange, Inc. (``CHX'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Exchange Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to adopt the CHX Liquidity 
Enhancing Access Delay (``LEAD''). The proposed rule change was 
published for comment in the Federal Register on February 21, 2017.\3\ 
On April 3, 2017, the Commission designated a longer period within 
which to approve the proposed rule change, disapprove the proposed rule 
change, or institute proceedings to determine whether the proposed rule 
change should be disapproved.\4\ The Commission received eleven comment 
letters on the proposed rule change, including a response from the 
Exchange.\5\ This order institutes proceedings under Section 
19(b)(2)(B) of the Exchange Act \6\ 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. 80041 (February 14, 
2017), 82 FR 11252 (``Notice'').
    \4\ See Securities Exchange Act Release No. 80364, 82 FR 11252 
(April 7, 2017).
    \5\ See letters from: (1) Ryan Hitch, Head of Equities Trading, 
XR Securities LLC, dated February 24, 2017 (``XR Securities 
Letter''); (2) Douglas A. Cifu, Chief Executive Officer, Virtu 
Financial LLC, dated February 27, 2017 (``Virtu Letter''); (3) 
Joanna Mallers, Secretary, FIA Principal Traders Group, dated March 
13, 2017 (``FIA PTG Letter''); (4) Adam Nunes, Head of Business 
Development, Hudson River Trading LLC, dated March 13, 2017 
(``Hudson River Trading Letter''); (5) R.T. Leuchtkafer, dated March 
14, 2017 (``Leuchtkafter Letter''); (6) Stephen John Berger, 
Managing Director, Government & Regulatory Policy, Citadel 
Securities, dated March 14, 2017 (``Citadel Letter''); (7) Tyler 
Gellasch, Executive Director, Healthy Markets Association, March 17, 
2017 (``Healthy Markets Letter''); (8) Elizabeth K. King, General 
Counsel and Corporate Secretary, New York Stock Exchange, dated 
March 20, 2017 (``NYSE Letter''); (9) James G. Ongena, Executive 
Vice President and General Counsel, CHX, dated March 24, 2017 (``CHX 
Letter''); (10) Steve Crutchfield, Head of Market Structure, CTC 
Trading Group, LLC, dated April 4, 2017 (``CTC Trading Letter''); 
and (11) Theodore R. Lazo, Managing Director and Associate General 
Counsel, Securities Industry and Financial Markets Association, 
dated May 17, 2017 (``SIFMA Letter''). All comments on the proposed 
rule change are available at: https://www.sec.gov/comments/sr-chx-2017-04/chx201704.htm.
    \6\ 15 U.S.C. 78s(b)(2)(B).
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II. Summary of the Proposal

    The Exchange proposes to adopt the LEAD, which would subject all 
new incoming orders,\7\ cancel and cancel/replace messages to a 350-
microsecond intentional access delay, provided that certain types of 
messages would not be subject to the delay: (1) New incoming orders 
submitted by LEAD Market Makers (``LEAD MM''), a new class of CHX 
Market Maker \8\ with heightened quoting and trading obligations 
(referred to collectively as the ``minimum performance standards''), 
which would be immediately ranked on the CHX book without executing 
against any resting orders on the CHX book; (2) certain cancel messages 
related to resting orders that were submitted by LEAD MMs; (3) cancel/
replace messages related to resting orders that were submitted by LEAD 
MMs (except that any part of the replace portion of the order that 
would immediately execute against a resting order would be 
intentionally delayed); and (4) the portion of a routable order that is 
to be routed away, regardless of who submitted the routable order. A 
message will be subject to a 350

[[Page 24413]]

microsecond delay after initial receipt by the Exchange (``Fixed LEAD 
Period''), but will only be processed after the Exchange's matching 
system\9\ has evaluated and processed, if applicable, all messages in 
the security received by the Exchange during the Fixed LEAD Period. A 
delayed message will retain its original sequence number and may be 
delayed only once. The LEAD would be applied to all securities traded 
on the Exchange throughout the trading day.
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    \7\ New incoming orders are orders received by the Matching 
System for the first time. The LEAD would not apply to other 
situations where existing orders or portions thereof are treated as 
incoming orders, such as: (1) Resting orders that are price slid 
into a new price point pursuant to the CHX only price sliding or 
limit up-limit down price sliding processes; and (2) unexecuted 
remainders of routed orders released into the matching system.
    \8\ See CHX Article 1, Rule 1(tt) (defining ``Market Maker''); 
see also generally CHX Article 16 (Market Makers).
    \9\ The matching system is an automated order execution system, 
which is a part of the Exchange's ``Trading Facilities,'' as defined 
under CHX Article 1, Rule 1(z).
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    The Exchange states that the LEAD is designed to enhance displayed 
liquidity and price discovery by minimizing the effectiveness of 
``latency arbitrage'' strategies,\10\ which the Exchange says diminish 
displayed liquidity and impair price discovery. According to the 
Exchange, latency arbitrage is and has been effected at CHX by low-
latency market participants that leverage microsecond speed advantages 
to take resting liquidity at stale prices from the CHX limit order 
book. Specifically, in 2016, the Exchange experienced a decline in 
volume in the SPDR S&P 500 trust exchange-traded fund (``SPY''), which 
the Exchange attributes to latency arbitrage activity in SPY first 
observed at CHX in January 2016. Between January and July 2016, the 
Exchange found that SPY latency arbitrage activity caused CHX liquidity 
providers to dramatically reduce displayed trading interest in SPY (and 
at times withdraw from the market altogether).
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    \10\ The Exchange defines ``latency arbitrage'' as the practice 
of exploiting disparities in the price of a security or related 
securities that are being traded in different markets by taking 
advantage of the time it takes to access and respond to symmetric 
public information.
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    The Exchange believes that the LEAD would not materially impact the 
ability of liquidity takers not engaged in latency arbitrage, such as 
retail investors, to access displayed liquidity at CHX.\11\ The 
Exchange also contends that, to the extent a sophisticated market 
participant seeks to take displayed liquidity pursuant to better or 
different information (as opposed to the same information exploited by 
latency arbitrageurs), the LEAD would be too short to have an 
incrementally negative impact on such non-latency arbitrage 
strategies.\12\
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    \11\ See Notice, supra note 3, 82 FR at 11268.
    \12\ See id. at 11253.
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    A LEAD MM would be required to meet the proposed minimum 
performance standards in return for undelayed access to submit 
liquidity providing orders and to cancel its resting orders. The 
proposed minimum performance standards require:

     a LEAD MM to satisfy the Quotation Requirements and 
Obligations prescribed under current CHX Article 16, Rule 4(d),\13\ 
except that the Designated Percentages described under current Article 
16, Rule 4(d)(2)(B) shall be halved; \14\
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    \13\ Currently, CHX Market Makers must disseminate throughout 
the ``Open Trading State'' a continuous two-sided quote with bids 
and offers being no further away from the National Best Bid 
(``NBB'') and National Best Offer (``NBO''), respectively, than the 
Designated Percentage or Defined Limit, as applicable. See CHX 
Article 16, Rule 4(d).
    \14\ See proposed CHX Article 16, Rule 4(f)(2)(A). For example, 
the 8% Designated Percentage for securities subject to the Article 
20, Rule 2A(c)(1)(A) pursuant to current CHX Article 16, Rule 
4(d)(2)(A) and (B) would be 4% for LEAD MMs.
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     a LEAD MM to maintain a ``Monthly Average NBBO Quoting 
Percentage,'' as defined in proposed CHX Article 16, Rule 
4(f)(2)(B)(iv), in each of the securities assigned to the LEAD MM 
(``LEAD MM Securities''), of at least 10% over the course of a calendar 
month; \15\
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    \15\ See proposed CHX Rule Article 16, Rule 4(f)(2)(B). For each 
such security, the Exchange will determine: (1) The ``Daily NBB 
Quoting Percentage'' by determining the percentage of time the LEAD 
MM has at least one Round Lot (as defined in CHX Article 1, Rule 
2(f)(3)) of displayed interest in an Exchange bid at the NBB during 
the Open Trading State (as defined in CHX Article 1, Rule 1(qq)) of 
each trading day for a calendar month; (2) the ``Daily NBO Quoting 
Percentage'' by determining the percentage of time the LEAD MM has 
at least one Round Lot of displayed interest in an Exchange offer at 
the NBO during the Open Trading State of each trading day for a 
calendar month; (3) the ``Average Daily NBBO Quoting Percentage'' 
for each trading day by summing the ``Daily NBB Quoting Percentage'' 
and the ``Daily NBO Quoting Percentage'' then dividing such sum by 
two; and (4) the ``Monthly Average NBBO Quoting Percentage'' for 
each security by summing the security's ``Average Daily NBBO Quoting 
Percentages'' for each trading day in a calendar month then dividing 
the resulting sum by the total number of trading days in such 
calendar month.
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     a LEAD MM's Qualified Executions; \16\ in each of its LEAD 
MM Securities must comprise on an equally-weighted daily average at 
least 2% of all Qualified Executions in the same security over the 
course of a calendar month; \17\ and
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    \16\ ``Qualified Executions'' are all executed shares at CHX, 
during all trading sessions resulting from single-sided orders, 
excluding any executed shares resulting from auctions. See proposed 
CHX Article 16, Rule 4(f)(1)(D).
    \17\ See proposed CHX Article 16, Rule 4(f)(2)(C).
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     that at least 80% of the LEAD MM's Qualified Executions in 
each of its LEAD MM Securities must result from its resting orders that 
originated from the corresponding LEAD MM trading account \18\ over the 
course of a calendar month.\19\
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    \18\ Prior to commencing LEAD market making activities in a 
security, a LEAD MM must, among other things, establish at least one 
separately designated LEAD MM trading account through which all and 
only LEAD market making activities in LEAD MM Securities must 
originate. See proposed CHX Article 16, Rule 4(f)(3)(B)(i).
    \19\ See proposed CHX Article 16, Rule 4(f)(2)(D). Unlike the 
standards provided under proposed paragraphs (f)(2)(A)-(C), this 
standard would be measured based on aggregate activity over the 
course of a calendar month. Trading days on which the Exchange does 
not open for trading would be excluded from the Exchange's 
calculations regarding compliance with the proposed minimum 
performance standards.
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    The proposed rule change also establishes the procedure for CHX to 
designate LEAD MMs in a security. Only a Market Maker could apply to be 
a LEAD MM in one or more securities,\20\ and Market Makers must receive 
written approval from the Exchange to be assigned securities as a LEAD 
MM. LEAD MMs would be selected by the Exchange based on factors 
including, but not limited to, experience with making markets in 
securities, adequacy of capital, willingness to promote the Exchange as 
a marketplace, issuer preference, operational capacity, support 
personnel and history of adherence to Exchange rules and securities 
laws. Current Article 16, Rules 2(c)-(e) govern Market Maker withdrawal 
from assigned securities, and would apply to LEAD MMs and LEAD MM 
Securities. The Exchange could approve at its discretion more than one 
LEAD MM to be assigned to any LEAD MM Security and limit the number of 
LEAD MMs assigned to any security.\21\
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    \20\ See proposed CHX Article 16, Rule 4(f)(3)(A).
    \21\ See proposed CHX Article 16, Rule 4(f)(3)(C).
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    Proposed CHX Article 16, Rule 4(f)(3)(D) outlines requirements 
regarding LEAD MM trading accounts and, according to the Exchange, 
facilitates the ability of the Exchange to monitor compliance with the 
proposed minimum performance standards. The Exchange would review each 
LEAD MM's quoting and trading activity on a monthly basis to determine 
whether the LEAD MM has met the minimum performance standards.\22\ A 
LEAD MM's failure to meet the minimum performance standards on any 
given month would result in the Exchange: (1) Suspending or terminating 
a LEAD MM's registration as a Market Maker pursuant to current Article 
16, Rule 1(d); or (2) suspending or terminating assignment to a LEAD MM 
Security pursuant to proposed CHX Article 16,

[[Page 24414]]

Rule 4(f)(3)(A).\23\ These proposed provisions would not limit any 
other power of the Exchange to discipline a LEAD MM pursuant to other 
CHX rules.\24\
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    \22\ See proposed CHX Article 16, Rule 4(f)(3)(D).
    \23\ See id.
    \24\ See id.
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III. Summary of the Comments

    The Commission has received eleven comments on the proposed rule 
change, including a response letter from the Exchange.\25\ Two 
commenters expressed support for the proposal,\26\ and eight commenters 
expressed opposition to the proposal.\27\
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    \25\ See supra note 5.
    \26\ See Virtu Letter, supra note 5; and CTC Trading Group 
Letter, supra note 5.
    \27\ See XR Securities Letter, supra note 5; FIA PTG Letter, 
supra note 5; Hudson River Trading Letter, supra note 5; Leuchtkafer 
Letter, supra note 5; Citadel Letter, supra note 5; Healthy Markets 
Letter, supra note 5; NYSE Letter, supra note 5; and SIFMA Letter, 
supra note 5.
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    Some commenters questioned whether, as asserted by CHX, latency 
arbitrage is to blame for the decline in CHX's market share, and 
whether the LEAD would solve the purported problem.\28\ One commenter 
questioned CHX's assertion that there is structural bias against 
displayed liquidity, and the need for an asymmetrical remedy.\29\ 
Another commenter opined that the proposed rule change is overbroad 
because the proposed LEAD is a systemic solution to a problem--namely a 
decline in CHX's market share in one security--that CHX has not 
demonstrated to be market-wide.\30\ In addition, a commenter questioned 
whether CHX could address what it perceives as latency arbitrage by 
improving its technology to reduce the time to cancel for liquidity 
providers.\31\ Another commenter suggested other ways to confront 
latency arbitrage, including that the Exchange could move its servers 
closer to the Chicago Mercantile Exchange's (``CME'') servers or to New 
Jersey, apply a delay to messages coming from CME's data centers, 
implement a random delay for everyone, or prohibit latency arbitrage by 
rule.\32\
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    \28\ See FIA PTG Letter, supra note 5, at 2; and Hudson River 
Trading Letter, supra note 5, at 2, 5.
    \29\ See FIA PTG Letter, supra note 5, at 2.
    \30\ See Citadel Letter, supra note 5, at 7.
    \31\ See SIFMA Letter, supra note 5, at 7-8.
    \32\ See Leuchtkafer Letter, supra note 5, at 6-7.
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    Several commenters discussed the potential impact of the proposal 
on displayed liquidity and price discovery. Two commenters asserted 
that the LEAD would enable liquidity providers to improve displayed 
liquidity.\33\ Six commenters, however, expressed concern that the LEAD 
could deteriorate the accessibility of quotes and overall market 
quality.\34\ For example, one commenter predicted that, while overall 
spreads and liquidity may improve, the increased liquidity would be 
more conditional and less accessible.\35\ In addition, a commenter 
predicted that spreads made by ``real'' liquidity providers--as 
distinguished from ``fleeting'' quotes submitted by LEAD MMs--would 
widen.\36\ In response, the Exchange asserted that the proposal would 
promote tighter spreads and larger size, and that there is no evidence 
that it would result in CHX quotes being less accessible to ``natural'' 
buyers and sellers.\37\
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    \33\ See Virtu Letter, supra note 5, at 2 (stating that the 
proposal would improve displayed liquidity available to 
institutional investors without limiting the ability of ``natural'' 
buyers and sellers to access liquidity); and CTC Trading Letter, 
supra note 5, at 3 (asserting that the LEAD would result in tighter 
bid-ask spreads).
    \34\ See Healthy Markets Letter, supra note 5, at 4-5; XR 
Securities Letter, supra note 5, at 2; FIA PTG Letter, supra note 5, 
at 4; SIFMA Letter, supra note 5, at 6; Citadel Letter, supra note 
5, at 3; and Hudson River Trading Letter supra note 5, at 6.
    \35\ See Hudson River Trading Letter, supra note 5, at 6. 
Another commenter similarly predicted that the LEAD would result in 
complex trickle-down impacts on the NBBO including CHX quotes that 
would not be accessible. See FIA PTG Letter, supra note 5, at 3.
    \36\ See XR Securities Letter, supra note 5, at 2. See also FIA 
PTG Letter, supra note 5, at 4 (expressing concern that non-LEAD MMS 
would be forced to widen their bid/ask spreads across the 
marketplace).
    \37\ See CHX Letter, supra note 5, at 4-5.
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    In addition, some commenters stated that the LEAD would impinge 
upon price discovery across the national market system.\38\ Some 
commenters noted that an asymmetric delay on TSX Alpha, a Canadian 
exchange, degraded overall market quality, harmed institutional order 
routers, and increased effective spreads.\39\ One commenter noted that 
while quoted depth increased on TSX Alpha, the exchange did not 
demonstrate tighter spreads, and the accessibility of quotes 
significantly degraded.\40\ In addition, a commenter asserted that the 
only counterbalance to the negative impact on market quality caused by 
an asymmetric delay (such as that exhibited due to TSX Alpha) would be 
coupling it with ``robust and rigorous'' affirmative obligations for 
those benefitting from the delay.\41\ In response, the Exchange 
asserted that the TSX Alpha delay is materially different from LEAD 
because it is randomized and, unlike CHX, TSX Alpha utilizes an 
inverted maker-taker model.\42\ The Exchange also observed that TSX 
Alpha does not require its liquidity providers to meet heightened 
requirements designed to enhance market quality.\43\
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    \38\ See XR Securities Letter, supra note 5, at 3; FIA PTG 
Letter, supra note 5, at 3-4, and Hudson River Trading Letter supra 
note 5, at 5.
    \39\ See Hudson River Trading Letter, supra note 5, at 2. See 
also Healthy Markets Letter, supra note 5, at 5; and SIFMA Letter, 
supra note 5, at 6. These commenters cite a recent study regarding 
TSX Alpha: See Chen, Haoming, Foley, Sean, Goldstein, Michael, and 
Ruf, Thomas, ``The Value of a Millisecond: Harnessing Information in 
Fast, Fragmented Markets'' https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2860359.
    \40\ See Hudson River Trading Letter, supra note 5, at 2.
    \41\ See Healthy Markets Letter, supra note 5, at 5.
    \42\ See CHX Letter, supra note 5, at 8.
    \43\ See id. at 8-9.
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    One commenter asserted that the indeterminacy of the proposed delay 
may result in the LEAD producing delays that are not de minimis.\44\ In 
response, the Exchange stated that processing delays and message 
queuing currently exists in every market.\45\ The Exchange also 
asserted that these delays would not provide LEAD MMs with more than a 
350 microsecond window to adjust or cancel their resting orders at 
CHX.\46\
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    \44\ See Leuchtkafer Letter, supra note 5, at 2. See also 
Healthy Markets Letter, supra note 5, at 5 (urging the Commission to 
consider concerns about the delay being implemented by software as 
opposed to hardware, what happens in periods of high volume, and how 
CHX would ensure that the delay does not vary under different 
circumstances).
    \45\ See CHX Letter, supra note 5, at 9. See also CTC Letter, 
supra note 5, at 5.
    \46\ See CHX Letter, supra note 5, at 9.
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    Several commenters stated that the LEAD would unfairly discriminate 
in favor of the LEAD MMs.\47\ Specifically, commenters asserted that 
the LEAD would harm market participants seeking to access liquidity 
provided by LEAD MMs as the LEAD MMs may alter their prices while 
incoming orders are being delayed.\48\ In addition, a commenter stated 
that the LEAD would give LEAD MMs an unfair advantage.\49\ One 
commenter asserted that the LEAD could make it more difficult for non-
LEAD MMs to quote better prices at larger size.\50\ Two commenters 
stated that the LEAD would unfairly discriminate against market 
participants that are primarily liquidity takers, such

[[Page 24415]]

as retail investors or institutions.\51\ Another commenter expressed 
concern that, unlike other examples of ``permissible'' discrimination, 
the LEAD would affect the regulatory mechanics of trading because, in 
some cases, traders would be required to route orders to the Exchange 
pursuant to Rule 611 of Regulation NMS.\52\ In addition, one commenter 
asserted that the delay would only benefit market participants who 
become LEAD MMs and subscribe to the CME's data feeds.\53\ In response, 
CHX stated that the LEAD would discriminate on fair terms because it is 
designed to correct the current asymmetry that CHX says currently 
exists in the market.\54\ In addition, CHX asserted that the LEAD would 
reduce the cost of providing liquidity to the LEAD MMs, which CHX 
asserted would result in efficient price discovery for retail and 
institutional investors.\55\
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    \47\ See FIA PTG Letter, supra note 5, at 2-3; Leuchtkafer 
Letter, supra note 5, at 4; Citadel Letter, supra note 5, at 4; 
Hudson River Trading Letter, supra note 5, at 5-6. See also XR 
Securities Letter, supra note 5, at 2 (stating that the LEAD would 
give LEAD MMs an ``unfair advantage''); and Healthy Markets Letter, 
supra note 5, at 4 (stating that the proposal would ``venture into 
unchartered discriminatory waters, and offers little explanation or 
justification''). See also SIFMA Letter, supra note 5, at 5 
(asserting that any intentional delay should be universally applied 
to all market participants in a non-discriminatory manner).
    \48\ See Hudson River Trading Letter, supra note 5, at 2.
    \49\ See XR Securities Letter, supra note 5, at 2.
    \50\ See Hudson River Trading Letter, supra note 5, at 1-2.
    \51\ See Citadel Letter, supra note 5, at 5-6; Leuchtkafer 
Letter, supra note 5, at 4.
    \52\ See FIA PTG Letter, supra note 5, at 4.
    \53\ See Leuchtkafer Letter, supra note 5, at 4.
    \54\ See CHX Letter, supra note 5, at 10-11.
    \55\ See id. at 4.
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    Other commenters expressed concern that the proposal would be 
unfairly discriminatory because only firms selected by CHX as LEAD MMs 
would be given the speed advantage,\56\ and LEAD MMs would be named 
based on subjective criteria.\57\ CHX responded that the LEAD MM 
factors are designed to forecast how well that applicant would perform 
as a LEAD MM if approved.\58\ CHX further noted that the criteria are 
``virtually identical'' to the criteria under Bats BZX's rules for its 
lead market maker program.\59\
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    \56\ See XR Securities Letter, supra note 5, at 1; and FIA PTG 
Letter, supra note 5, at 2.
    \57\ See Citadel Letter, supra note 5, at 4.
    \58\ See CHX Letter, supra note 5, at 11-12.
    \59\ See id.
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    Several commenters commented on the proposed minimum performance 
standards. Two commenters expressed support for the proposed minimum 
performance standards.\60\ One of these commenters asserted that the 
proposal would effectively couple heightened quoting and trading 
requirements with the ability to adequately manage the heightened risks 
of such requirements.\61\ Other commenters expressed concern that the 
minimum performance standards may not be adequate to justify the 
benefits that LEAD MMs would receive under the proposal.\62\ Two 
commenters suggested that CHX should provide data regarding the 
materiality of the minimum performance standards, how they will improve 
market quality, and whether CHX market makers already satisfy these 
criteria.\63\ In response, the Exchange asserted that the proposed 
minimum performance standards are ``substantial and proportionate to 
the benefits conferred upon LEAD MMs,'' and that they would minimize 
the risk of incremental quote fading and other non-bona fide liquidity 
provision strategies.\64\ Further, the Exchange stated that the minimum 
performance standards are appropriate in light of the requirements 
imposed upon and benefits incurred by market makers on other 
exchanges.\65\
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    \60\ See Virtu Letter, supra note 5, at 2; and CTC Trading 
Letter, supra note 5, at 4.
    \61\ See Virtu Letter, supra note 5, at 2.
    \62\ See Leuchtkafter Letter, supra note 5, at 5; NYSE Letter, 
supra note 5, at 4-5 (stating that the benefit is 
``disproportionate'' to the proposed standards); Citadel Letter, 
supra note 5, at 7 (asserting that the minimum performance standards 
appear to be ``largely immaterial in substance'' and the benefits of 
the LEAD would be ``entirely disproportionate'' to these 
obligations).
    \63\ See Citadel Letter, supra note 5, at 3; and Healthy Markets 
Letter, supra note 5, at 4.
    \64\ See CHX Letter, supra note 5, at 6. Another commenter 
agreed with CHX that the proposed quoting requirements are 
``substantial and proportionate.'' See CTC Trading Letter, supra 
note 5, at 4.
    \65\ See CHX Letter, supra note 5, at 6.
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    Some commenters suggested that the LEAD could increase the risk of 
manipulative activity. One commenter argued that the LEAD would enable 
intra-exchange latency arbitrage because CHX would impose neither 
negative obligations on its LEAD MMs nor information barriers to 
segregate LEAD market making from other proprietary trading.\66\ 
Another commenter expressed concern that the LEAD would frustrate 
strategies that involve taking prices across multiple venues by giving 
extra time to LEAD MMs to pull their quotes in the middle of a multi-
venue order.\67\ The Exchange responded that sophisticated order 
routing strategies would minimize incremental leakage, and that the 
LEAD is much shorter than the time that it would take for information 
regarding a CHX routed order that is executed away to be consumed and 
processed by the LEAD MM.\68\
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    \66\ See Leuchtkafer Letter, supra note 5, at 6.
    \67\ See FIA PTG Letter, supra note 5, at 3.
    \68\ See CHX Letter, supra note 5, at 8.
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    One commenter asserted that the LEAD would unduly burden 
competition among CHX members and among national securities 
exchanges.\69\ Another commenter stated that the LEAD would alter the 
competitive balance in the market by benefitting only LEAD MMs.\70\
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    \69\ See Hudson River Trading Letter, supra note 5, at 8.
    \70\ See Citadel Letter, supra note 5, at 8.
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    In addition, some commenters asserted that the LEAD may be 
inconsistent with the ``firm quote'' provisions of Rule 602 of 
Regulation NMS (``Quote Rule'') because commenters asserted that it 
would allow liquidity providers to back away from their quotes.\71\ The 
Exchange responded that the LEAD would not violate the Quote Rule 
because the duty of a broker or dealer to stand behind its quote would 
not vest because the LEAD would prevent the liquidity provider from 
receiving (i.e., being presented with) a marketable contra-side 
order.\72\
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    \71\ See FIA PTG Letter, supra note 5, at 5; Hudson River 
Trading Letter, supra note 5, at 6; Citadel Letter, supra note 5, at 
5; NYSE Letter, supra note 5, at 2.
    \72\ See CHX Letter, supra note 5, at 12.
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    Several commenters asserted that the adoption of the LEAD could be 
inconsistent with CHX's protected quotation status under Regulation 
NMS.\73\ In particular, some commenters asserted that by providing LEAD 
MMs with a structural advantage, the LEAD would frustrate the purposes 
of Rule 611 by impairing fair and efficient access to an exchange's 
quotations.\74\ In response, the Exchange stated that it believes that 
LEAD would be a de minimis delay so short as not to: (1) Frustrate the 
purposes of the Rule 611 by impairing fair and efficient access to the 
Exchange's quotations; and (2) neither provide an incremental advantage 
other than neutralizing structural bias nor permit a LEAD MM to back 
away from a quote on a quotation-by-quotation basis.\75\
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    \73\ See Hudson River Trading Letter, supra note 5, at 7; 
Citadel Letter, supra note 5, at 6; NYSE Letter, supra note 5, at 4; 
XR Securities Letter, supra note 5, at 1. See also SIFMA Letter, 
supra note 5, at 7 (suggesting that the Commission should 
``carefully consider the implications'' of market participants 
routing orders to CHX to access a protected quote when the 
accessibility of such quote is ``questionable'').
    \74\ See FIA PTG Letter, supra note 5, at 2; Hudson River 
Trading Letter, supra note 5, at 7; Citadel Letter, supra note 5, at 
6; NYSE Letter, supra note 5, at 4; XR Securities, supra note 5, at 
1; and SIFMA Letter, supra note 5, at 6 (questioning the effect of 
an access delay coupled with existing geographic or technological 
latencies on the fair and efficient access to an exchange's 
protected quotations).
    \75\ See CHX Letter, supra note 5, at 14.
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    Certain commenters also asserted that the LEAD would result in 
unfair allocation of consolidated market data revenue by generating an 
increase in quoting, but not necessarily trading, on the Exchange.\76\ 
The Exchange responded that the LEAD would not encourage non-bona fide 
quote activity for the purpose of earning rebates because quotes 
cancelled within the 350-microsecond LEAD would not be eligible for 
market data revenue rebates,

[[Page 24416]]

and cancellation of such quotes could result in the CHX participant 
being assessed an order cancellation fee.\77\
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    \76\ See Hudson River Trading Letter, supra note 5, at 7; 
Citadel Letter, supra note 5, at 6; and SIFMA Letter, supra note 5, 
at 7.
    \77\ See CHX Letter, supra note 5, at 10.
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IV. Proceedings To Determine Whether To Approve or Disapprove SR-CHX-
2017-04 and Grounds for Disapproval Under Consideration

    The Commission is instituting proceedings pursuant to Section 
19(b)(2)(B) of the Exchange Act \78\ to determine whether the proposed 
rule change should be approved or disapproved. Institution of such 
proceedings is appropriate at this time in view of the legal and policy 
issues raised by the proposed rule change. Institution of proceedings 
does not indicate that the Commission has reached any conclusions with 
respect to any of the issues involved. Rather, as stated below, the 
Commission seeks and encourages interested persons to provide comments 
on the proposed rule change.
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    \78\ 15 U.S.C. 78s(b)(2)(B).
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    Pursuant to Section 19(b)(2)(B) of the Exchange Act,\79\ the 
Commission is providing notice of the grounds for disapproval under 
consideration. The Commission is instituting proceedings to allow for 
additional analysis of the proposed rule change's consistency with: (1) 
Section 6(b)(5) of the Exchange Act, which requires, among other 
things, that the rules of a national securities exchange not be 
designed to permit unfair discrimination between customers, issuers, 
brokers, or dealers; \80\ (2) Section 6(b)(8) of the Exchange Act, 
which requires that the rules of a national securities exchange not 
impose any burden on competition not necessary or appropriate in 
furtherance of the purposes of the Exchange Act; \81\ and (3) Section 
11A of the Exchange Act.\82\
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    \79\ Id.
    \80\ 15 U.S.C. 78f(b)(5).
    \81\ 15 U.S.C. 78f(b)(8).
    \82\ 15 U.S.C. 78k-1.
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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 
issues identified above, as well as any other concerns they may have 
with the proposal. In particular, the Commission invites the written 
views of interested persons concerning whether the proposal is 
consistent with Sections 6(b)(5), 6(b)(8), and 11A of the Exchange Act, 
any other provision of the Exchange Act, or any other rule or 
regulation under the Exchange Act. 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.\83\
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    \83\ Section 19(b)(2) of the Exchange 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 proposal should be approved or 
disapproved by June 16, 2017. Any person who wishes to file a rebuttal 
to any other person's submission must file that rebuttal by June 30, 
2017. The Commission asks that commenters address the sufficiency 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. Would the proposed minimum performance standards for LEAD MMs 
enhance market quality? Why or why not? What metrics would help 
determine any enhancement to market quality? How should enhancements to 
market quality be measured with the delay in effect?
    2. How would the proposal affect price volatility during stressed 
trading conditions?
    3. How would the proposal affect transaction costs for retail and 
institutional investors?
    4. How would the proposal affect an institutional investor's 
experience providing liquidity and removing liquidity on CHX?
    5. Would the proposal provide an unfair advantage to LEAD MMs 
providing liquidity vis-[agrave]-vis other liquidity providers and in 
particular when the price of a security moves?
    6. Do commenters agree with the Exchange's assertion that the 
proposed rule change would increase displayed liquidity on the 
Exchange?
    7. Do the obligations for LEAD MMs to comply with the proposed 
minimum performance standards justify the LEAD MMs' speed advantage?
    8. According to several commenters, liquidity provided by LEAD MMs 
would be ``fleeting'' because they could update their quotations while 
incoming orders are delayed. Do commenters agree? If so, what are 
commenters' views on how significant ``fleeting'' liquidity would be in 
comparison to the overall liquidity provided on the Exchange?
    9. How would the proposal affect the national market system if 
exchanges with a larger percentage of overall trading volume were to 
adopt a similar proposal? In particular, how would the proposal affect 
market quality?
    10. One of the stated goals of the proposal is to minimize the 
effectiveness of latency arbitrage strategies. What metrics would help 
determine if latency arbitrage is currently a problem on CHX? Is 350 
microsecond necessary to minimize the effectiveness of latency 
arbitrage strategies? Should the delay be shorter or longer to 
accomplish this goal? Is the 350 microsecond delay appropriate for 
trading at both CHX's Chicago data center and its East Coast data 
center? Why or why not?
    11. Does the proposal's protection against latency arbitrage 
strategies for LEAD MMs warrant the benefits of the delay?
    12. Is the delay short enough that it would not harm liquidity 
takers or providers other than those engaging in latency arbitrage?
    13. What are commenters' views on how the proposal would affect 
liquidity providers on CHX other than LEAD Market Makers as well as 
liquidity providers on other markets?
    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-CHX-2017-04 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 Numbers SR-CHX-2017-04. 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

[[Page 24417]]

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 these filings 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-CHX-2017-04 and should be 
submitted on or before June 16, 2017. Rebuttal comments should be 
submitted by June 30, 2017.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\84\
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    \84\ 17 CFR 200.30-3(a)(57).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-10807 Filed 5-25-17; 8:45 am]
BILLING CODE 8011-01-P