[Federal Register Volume 83, Number 118 (Tuesday, June 19, 2018)]
[Notices]
[Pages 28477-28479]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-13084]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-83425; File No. SR-CHX-2018-001]


Self-Regulatory Organizations; Chicago Stock Exchange, Inc.; 
Order Instituting Proceedings To Determine Whether To Approve or 
Disapprove a Proposed Rule Change To Adopt the Route QCT Cross Routing 
Option

June 13, 2018.

I. Introduction

    On March 6, 2018, 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 Route QCT Cross 
routing option. The proposed rule change was published for comment in 
the Federal Register on March 20, 2018.\3\ On May 1, 2018, pursuant to 
Section 19(b)(2) of the Exchange Act,\4\ 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 to disapprove the proposed rule change.\5\ The 
Commission received no comment letters on the proposed rule change. 
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. 82870 (March 14, 
2018), 83 FR 12214 (``Notice'').
    \4\ 15 U.S.C. 78s(b)(2).
    \5\ See Securities Exchange Act Release No. 83143, 83 FR 20123 
(May 7, 2018). The Commission designated June 18, 2018, as the date 
by which the Commission shall approve or disapprove, or institute 
proceedings to determine whether to disapprove, the proposed rule 
change.
    \6\ 15 U.S.C. 78s(b)(2)(B).
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II. Description of the Proposed Rule Change

    Currently, under the Exchange's rules, Routable Orders \7\ 
submitted to the CHX matching system (``Matching System'') \8\ for 
execution are routed away from the Matching System automatically if a 
Routing Event \9\ is triggered. The Exchange's current rules provide 
that all Routable Orders \10\ are limit orders. Market \11\ and cross 
orders \12\ are never routable. The Exchange does not currently permit 
orders to be directly routed to an away Trading Center \13\ without 
first being submitted to the Matching System.
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    \7\ See CHX Article 1, Rule 1(oo).
    \8\ The Matching System is part of the Exchange's ``Trading 
Facilities,'' as defined under CHX Article 1, Rule 1(z).
    \9\ See CHX Article 19, Rule 3(a)(1)-(5).
    \10\ See CHX Article 1, Rule 1(oo) defining ``Routable Order.''
    \11\ See CHX Article 1, Rule 2(a)(3) defining ``market order.''
    \12\ See CHX Article 1, Rule 2(a)(2) defining ``cross order.''
    \13\ See CHX Article 1, Rule 1(nn) defining ``Trading Center.''
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    Because Qualifed Contingent Trade (``QCT'') Crosses \14\ are exempt 
from the trade-through prohibition of Rule 611 of Regulation NMS,\15\ 
the Matching System permits QCT Crosses to trade-through protected 
quotes of away markets. Under the Exchange's current rules, QCT Crosses 
are handled IOC \16\ and can never rest on the CHX book. Moreover, a 
QCT Cross submitted to the Matching System will be cancelled back to 
the order sender as ``blocked'' if a precedent limit order priced at or 
better than the QCT Cross is resting on the CHX book,\17\ except that a 
QCT Cross priced at the top of the CHX book (i.e., the best-ranked 
order on the CHX book pursuant to Article 20, Rule 8(b)) that qualifies 
for Cross With Size \18\ handling will be permitted to execute.
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    \14\ QCT Crosses are cross orders that are component orders to 
Qualified Contingent Trades that are submitted by an Institutional 
Broker. See CHX Article 1, Rule 2(b)(2)(E) defining ``Qualified 
Contingent Trade.'' See also CHX Article 1, Rule 2(a)(2) defining 
``cross order.''
    \15\ See Securities Exchange Act Release No. 57620 (April 4, 
2008), 73 FR 19271 (April 4, 2008).
    \16\ See CHX Article 1, Rule 2(a)(2)
    \17\ See CHX Article 1, Rule 2(a)(2). See also CHX Article 20, 
Rule 8(e)(1).
    \18\ See CHX Article 1, Rule 2(g)(1).
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    The Exchange has proposed to adopt the Route QCT Cross routing 
option, which will permit only Institutional Brokers (``IBs'') \19\ to 
directly route a QCT Cross to a non-affiliated third-party broker-
dealer designated by the IB (``designated executing broker'') for 
execution. Route QCT Cross orders will be handled like current Routable 
Orders,\20\ except that the Route QCT Cross order will never be 
submitted to the Matching System for execution. Specifically, upon 
receipt of a Route QCT Cross order, the Exchange will cause the order 
to be routed IOC \21\ from the Exchange, through CHXBD, LLC 
(``CHXBD''), the Exchange's affiliated routing broker, to the 
designated executing broker identified by the IB.\22\ The Exchange 
states that the relationship between a designated executing broker and 
CHXBD will be governed by applicable CHX Rules \23\ and customary 
interbroker agreements, such as fully-disclosed clearing and customer 
agreements. The Exchange represents that at all times, the use of Route 
QCT Cross will be optional.\24\ The Exchange also states that Route QCT 
Cross is similar to the routing options available on the Nasdaq Stock 
Market \25\ and Cboe BYX and Cboe BZX exchanges.\26\
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    \19\ The Exchange states that it has proposed to limit use of 
Route QCT Cross to IBs to be consistent with the fact that only IBs 
are currently permitted to submit QCT Crosses to the Matching 
System. See CHX Article 1, Rule 2(b)(2)(E).
    \20\ See CHX Article 1, Rule 1(oo).
    \21\ See CHX Article 1, Rule 2(a)(2).
    \22\ The Exchange states that IBs will be permitted to identify 
only one designated executing broker to which all Route QCT Cross 
orders submitted by the IB will be routed, subject to additional 
requirements, as described below.
    \23\ See e.g., CHX Article 19, Rule 2(a).
    \24\ See Notice, supra note 3 at 12215.
    \25\ See id. The Exchange states that like Route QCT Cross, the 
``Directed Order'' routing option offered by the Nasdaq Stock Market 
(``Nasdaq'') permits an order sender to route an order to another 
market center while bypassing the Nasdaq's order book, which may 
result in the routed order executing at a price through Nasdaq's top 
of book. See id.
    \26\ The Exchange states that like Route QCT Cross, the ``DRT'' 
routing option offered by the Cboe BYX and Cboe BZX exchanges 
permits an order to be routed to one or more away alternative 
trading systems. See id.
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    Specifically, the Exchange has proposed to adopt proposed Article 
19, Rule 4 (Routing Options) to provide that routing options may be 
combined with all available order types, modifiers and related terms, 
except for order types, modifiers, and related terms that are 
inconsistent with the terms of a routing option, and that the Exchange 
may activate or deactivate any routing option at its discretion and, if 
practicable, after notice to Participants.\27\ Article 19, Rule 4(a)(1) 
provides that Route QCT Cross is

[[Page 28478]]

a routing option,\28\ which may only be utilized by IBs, that instructs 
the Exchange to route a cross order marked QCT directly to a non-
affiliated third-party broker-dealer designated by the IB without 
submitting the order into the Matching System for execution. In 
addition, each IB is permitted to identify only one designated 
executing broker to which all Route QCT Cross orders submitted by the 
IB would be routed. Furthermore, the Exchange represents that prior to 
the Exchange accepting any Route QCT Cross orders directed to a 
specific designated executing broker, the Exchange would confirm that 
the designated executing broker has established connectivity to the 
Exchange's routing systems.\29\ In addition, the IB would be 
responsible for all away execution fees resulting from the execution of 
Route QCT Cross orders, including any guaranteed payments to its 
designated executing broker.\30\ Moreover, Route QCT Cross orders would 
be routed IOC and a Route QCT Cross order that could not be executed by 
a designated executing broker, for any reason, would be cancelled back 
to the original order sender.\31\
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    \27\ See CHX Article 1, Rule 1(s).
    \28\ In addition, since the cross orders are not currently 
Routable Orders, the Exchange has proposed to amend Article 1, Rule 
1(oo) by adopting paragraph (oo)(2), which would expand the 
definition of Routable Orders to include any order marked by a 
routing option listed under proposed Article 19, Rule 4 (i.e., Route 
QCT Cross).
    \29\ See Notice, supra note 3 at 12215.
    \30\ See id.
    \31\ See id. at 12215-16.
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    As Route QCT Cross orders would be routed away from the Exchange 
without being submitted to the Matching System for execution, the 
Exchange proposes to amend Article 19, Rules 1(a) and (c), and Rule 
2(a) to replace the term ``Matching System'' with ``Exchange.'' 
Moreover, since Route QCT Cross orders are a subset of cross orders 
that will not be handled IOC upon receipt by the Exchange, and all 
cross orders currently received by the Exchange are deemed to have been 
received IOC, the Exchange proposes to amend the definition of ``cross 
orders'' under Article 1, Rule 2(a)(2) to provide that all cross orders 
submitted to the Matching System for execution shall be deemed to have 
been received IOC.
    The Exchange has also proposed to amend Article 19, Rule 3(a) to 
provide that a Routable Order that is submitted to the Matching System 
would be routed away from the Matching System pursuant to the CHX 
Routing Services if a Routing Event is triggered.\32\
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    \32\ To clarify this distinction, the Exchange has proposed to 
amend the title to Article 19, Rule 3 from ``Routing Events'' to 
``Mandatory Routing Events.'' Also, the Exchange has proposed to 
eliminate the word ``incoming'' from proposed Rule 1(oo)(1), which 
it states is redundant in light of the proposed clarifying 
amendments to Article 19, Rule 3.
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    In addition, the Exchange proposes non-substantive amendments to 
Article 19, Rules 3(a)(1)-(5) to clarify the current operation of the 
Routing Events.\33\
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    \33\ See Notice, supra note 3.
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II. Proceedings To Determine Whether To Approve or Disapprove SR-CHX-
2018-001 and Grounds for Disapproval Under Consideration

    The Commission is instituting proceedings pursuant to Section 
19(b)(2)(B) of the Exchange Act \34\ 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 described below, the 
Commission seeks and encourages interested persons to provide comments 
on the proposed rule change.
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    \34\ 15 U.S.C. 78s(b)(2)(B).
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    Pursuant to Section 19(b)(2)(B) of the Exchange Act,\35\ the 
Commission is providing notice of the grounds for disapproval under 
consideration. As discussed above, the Exchange has proposed to offer a 
new Route QCT Cross routing option, which would be available only to 
IBs. Route QCT Crosses would not check the CHX order book. In addition, 
Route QCT Crosses would only route to a single designated broker, as 
designated by each IB, for execution.
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    \35\ Id.
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    The Commission is instituting proceedings to allow for additional 
analysis of the proposed rule change's consistency with Sections 
6(b)(5) \36\ and 6(b)(8) \37\ of the Exchange Act. Section 6(b)(5) of 
the Exchange Act requires that the rules of a national securities 
exchange be designed, among other things, to promote just and equitable 
principles of trade, to remove impediments to and perfect the mechanism 
of a free and open market and a national market system and, in general, 
to protect investors and the public interest, and not be designed to 
permit unfair discrimination between customers, issuers, brokers, or 
dealers. Section 6(b)(8) of the Exchange Act requires that the rules of 
a national securities exchange not impose any burden on competition 
that is not necessary or appropriate in furtherance of the purposes of 
the Exchange Act.
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    \36\ 15 U.S.C. 78f(b)(5).
    \37\ 15 U.S.C. 78f(b)(8).
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III. 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) and 6(b)(8), or any other provision of 
the Exchange Act, or the rules and regulations thereunder. Although 
there do not appear to be any issues relevant to approval or 
disapproval that would be facilitated by an oral presentation of views, 
data, and arguments, the Commission will consider, pursuant to Rule 
19b-4, any request for an opportunity to make an oral presentation.\38\
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    \38\ 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 July 10, 2018. Any person who wishes to file a rebuttal 
to any other person's submission must file that rebuttal by July 24, 
2018.
    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-2018-001 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-2018-001. 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

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internet website (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 website 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. Persons submitting comments are 
cautioned that we do not redact or edit personal identifying 
information from comment submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to File Number SR-CHX-2018-001 and should be submitted on 
or before July 10, 2018. Rebuttal comments should be submitted by July 
24, 2018.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\39\
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    \39\ 17 CFR 200.30-3(a)(57).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-13084 Filed 6-18-18; 8:45 am]
BILLING CODE 8011-01-P