[Federal Register Volume 83, Number 247 (Thursday, December 27, 2018)]
[Notices]
[Pages 66808-66811]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-27986]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-84852; File No. SR-CHX-2018-09]
Self-Regulatory Organizations; Chicago Stock Exchange, Inc.;
Notice of Filing and Immediate Effectiveness of Proposed Rule Change To
Decommission the Exchange's Outbound Routing Service and the Sub-Second
Non-Displayed Auction Process
December 19, 2018.
Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of
1934 (``Act'') \2\ and Rule 19b-4 thereunder,\3\ notice is hereby given
that, on December 12, 2018, the Chicago Stock Exchange, Inc. (``CHX''
or ``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 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
The Exchange proposes to amend the rules of the Exchange
(``Rules'') to decommission the Exchange's outbound routing service and
the Sub-second Non-displayed Auction Process (``SNAP''). The proposed
rule change is available on the Exchange's website at www.nyse.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 those 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 the
Statutory Basis for, the Proposed Rule Change
1. Purpose
2. Background
The Exchange proposes to amend the Rules to decommission the
Exchange's outbound routing service \4\ and SNAP.\5\ Since initial
launch of the outbound routing service in May 2015 and SNAP in June
2016, neither product has been frequently or actively utilized by
Participants.\6\ Accordingly, to streamline the Exchange's product
offerings and to reallocate Exchange resources to other initiatives and
obligations, the Exchange proposes to decommission the outbound routing
service and SNAP as of December 31, 2018 (``Operative Date'').
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\4\ See generally CHX Article 19.
\5\ See CHX Article 18, Rules 1 and 1A. The Exchange will submit
a separate Rule 19b-4 filing to eliminate fees and credits
associated with the outbound routing service and SNAP.
\6\ See CHX Article 1, Rule 1(s). From January 1, 2018 through
November 30, 2018, the Exchange routed away a total of 634 orders
and executed 178,682 away shares pursuant to the outbound routing
service. Moreover, a total of 60 SNAP auctions that resulted in
order executions were initiated since June 2016, 16 of which
occurred in 2018.
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On the Operative Date, the Exchange's outbound routing broker-
dealer, CHXBD, LLC (``CHXBD''), will cease business operations and all
inbound orders received by the Exchange will be handled Do Not
Route.\7\ Specifically, to the extent an inbound order would trade-
through a protected quotation of an away market in violation of Rule
611 of Regulation NMS \8\ or impermissibly lock or cross a protected
quotation of an away market in violation of Rule 610(d) of Regulation
NMS,\9\ the order will either be cancelled back to the order sender or
price slid to a permissible price if it is marked CHX Only.\10\
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\7\ See CHX Article 1, Rule 2(b)(3)(A).
\8\ 17 CFR 242.611.
\9\ 17 CFR 242.610(d).
\10\ See CHX Article 1, Rule 2(b)(1)(C); see also amended CHX
Article 20, Rules 5 and 6.
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With respect to SNAP, pursuant to Article 20, Rule 4(b), the
Exchange deactivated the Start SNAP,\11\ Cancel On SNAP,\12\ and SNAP
Auction Only Order (``SNAP AOO'') \13\ order modifiers as of August 16,
2018. As SNAP Cycles \14\ can only be initiated upon receipt of a valid
Start SNAP order or pursuant to the Exchange's pro forma review of the
SNAP AOO queue,\15\ the Exchange does not currently conduct any SNAP
auctions. Therefore, elimination of the SNAP-related Rules will have no
impact on the current operation of the Matching System.\16\
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\11\ See CHX Article 1, Rule 2(h)(1).
\12\ See CHX Article 1, Rule 2(h)(2).
\13\ See CHX Article 1, Rule 2(h)(3).
\14\ See CHX Article 1, Rule 1(b).
\15\ See CHX Article 18, Rules 1A(a) and (b).
\16\ The Matching System is a ``Trading Facility'' of the
Exchange as defined under CHX Article 1, Rule 1(z).
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3. Proposed Rule Change
To effect the decommissioning of the outbound routing service and
SNAP, the Exchange proposes to amend the Rules as follows:
a. Amendments to Article 1
Current Article 1, Rule 1(oo) defines the term ``Routable Order,''
which are the only orders that may be routed away pursuant to the
outbound routing service. The Exchange proposes to amend Article 1,
Rule 1(oo) to eliminate ``Routable Order'' as a defined term and to
insert the term ``Reserved'' in its place.
Current Article 1, Rule 1(rr) defines the term ``SNAP Price,''
which is the single price at which an order will be executed during a
SNAP Cycle, and current Article 1, Rule 1(ss) defines ``SNAP Eligible
Orders,'' which are specific orders that are eligible for participation
in a SNAP Cycle. The Exchange proposes to amend these Rules to
eliminate SNAP Price and SNAP Eligible Orders as defined terms and to
insert the term ``Reserved'' in their place.
Current Article 1, Rule 2(a) provides that the general order types
described thereunder shall be accepted by the Matching System, subject
to the requirements of Article 20, Rule 4. Because the decommissioning
of the outbound routing service would result in all orders being non-
routable, the
[[Page 66809]]
Exchange proposes to amend Rule 2(a) to provide that all orders
received by the Matching System would be deemed to have been received
``Do Not Route,'' as defined under Article 1, Rule 2(b)(3)(A), which
cannot be overridden by the order sender. Because all orders received
by the Exchange would be handled ``Do Not Route,'' the Exchange
proposes to delete repetitive text under Article 1, Rules 2(b)(1)(C),
2(b)(1)(D), 2(b)(3)(B), 2(d)(2), and 2(d)(4).
Current Article 1, Rule 2(h) defines the three order modifiers
specific to SNAP: Start SNAP, under paragraph (h)(1); Cancel On SNAP,
under paragraph (h)(2); and SNAP AOO, under paragraph (h)(3). The
Exchange proposes to eliminate Start SNAP, Cancel On SNAP, and SNAP AOO
as defined terms and delete Rule 2(h) in its entirety. Elimination of
these order modifiers would have no impact on trading during the Open
Trading State,\17\ as they are only valid in the context of SNAP
Cycles.
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\17\ See CHX Article 1, Rule 1(qq) defining ``Open Trading
State.''
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b. Amendments to Article 18
Current Article 18 (Auctions) includes Rule 1, which describes the
SNAP Cycle, and Rule 1A, which describes how a SNAP Cycle is initiated
and the process by which a SNAP Cycle is initiated by the Exchange. In
light of the proposed decommissioning of SNAP, the Exchange proposes to
delete Rules 1 and 1A in their entirety. Because the Exchange does not
currently offer any other auction products, the Exchange proposes to
replace the term ``Auctions'' in the heading to Article 18 with the
term ``Reserved.''
c. Amendments to Article 19
Current Article 19 (Operation of the CHX Routing Services)
describes the CHX Routing Services, which includes both outbound and
inbound order routing. Specifically, Rule 1 (CHX Routing Services)
provides a summary of the outbound routing function, as well as
limitation of liability and firm order provisions. Rule 2 (Routing
Broker) describes the functions and obligations of CHXBD as outbound
router under paragraph (a) and Archipelago Securities LLC (``Arca
Securities'') as inbound router to the Exchange from NYSE Arca, Inc.
(``NYSE Arca''), NYSE American, LLC (``NYSE American''), New York Stock
Exchange, LLC (``NYSE''), and NYSE National, Inc. (``NYSE National,''
and with the Exchange, NYSE Arca, NYSE American, NYSE, and NYSE
National, the ``NYSE Group Exchanges'') under paragraph (b). Rule 3
(Routing Events) describes the circumstances under which Routable
Orders are routed away from the Exchange.
Given that the Exchange is proposing to decommission outbound
routing only and thereby maintain the inbound routing function, the
Exchange proposes to delete Rules 1(a), 1(c), and 3, and all language
under Rule 2(a) (replacing the deleted text with the term
``Reserved''), but to maintain Rules 1(b) (as amended Rule 1) and 2(b).
Specifically, current Rule 2(b) describes the inbound routing function
and current Rule 1(b) (amended Rule 1) provides that use of the CHX
Routing Services (i.e., the inbound routing function) is optional and
subject to the Exchange's limitation of liability under Article 3, Rule
19.
With respect to the proposed deletion of current Article 19, Rule
2(a)(7) related to the CHXBD Error Account, the Exchange notes that
since the outbound routing service will be decommissioned, the Exchange
will not be at risk of having to liquidate unpaired trade positions, as
such positions would only result from issues related to routed orders.
However, even if unpaired trade positions were to result from
executions within the Matching System, the Exchange would be permitted
to nullify such transactions pursuant to Article 20, Rules 10(f) and
(g), and would rely on the limitation on liability provisions under
Article 3, Rule 19. Therefore, the CHXBD Error Account will not be
required to address unpaired trade positions.
The Exchange notes that current Rules 3(c) and 3(d) refer to
Article 20, Rules 8(b)(7), 8(f), and 12(b), all of which the Exchange
proposes to delete, as described below.
d. Amendments to Article 20
Current Article 20, Rule 5 (Prevention of Trade-Throughs) describes
the handling of inbound orders whose immediate execution would be
improper under Rule 611 of Regulation NMS \18\ for Routable Orders
under Rule 5(a)(1) and non-Routable Orders under Rule 5(a)(2). The
Exchange proposes to delete language under current Rule 5(a)(1) and
insert the term ``Reserved.'' Also, since all inbound orders received
by the Matching System would be deemed received as Do Not Route,
pursuant to amended Article 1, Rule 2(a), the Exchange proposes to
amend current Rule 5(a)(2) to delete as repetitive the phrase ``and the
order cannot be routed away.'' Therefore, amended Rule 5(a)(2) would
provide that if execution of all or part of an inbound order would
cause an improper trade-through, the order shall be automatically
cancelled; provided, however, that such an order marked CHX Only may be
subject to the CHX Only Price Sliding Processes, detailed under Article
1, Rule 2(b)(1)(C) and not automatically cancelled.
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\18\ 17 CFR 242.611.
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Current Article 20, Rule 6 (Locked and Crossed Markets) describes
the handling of inbound orders whose immediate display would be
improper under Rule 610(d) of Regulation NMS \19\ for Routable Orders
under Rule 6(d)(1) and non-Routable Orders under Rule 6(d)(2). The
Exchange proposes to delete language under current Rule 6(d)(1) and
insert the term ``Reserved.'' Also, since all inbound orders received
by the Matching System will be deemed received as Do Not Route,
pursuant to amended Article 1, Rule 2(a), the Exchange proposes to
amend current Rule 6(d)(2) to delete as repetitive the phrase ``and the
order cannot be routed away.'' Therefore, amended Rule 6(d)(2) provides
that if the display of an order would impermissibly lock or cross a
protected quotation of an external market, that order shall be
automatically cancelled; provided, however, that such an order marked
CHX Only may be subject to the CHX Only Price Sliding Processes,
detailed under Article 1, Rule 2(b)(1)(C) and not automatically
cancelled.
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\19\ 17 CFR 242.610(d).
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Current Article 20, Rule 8(a) generally provides that Participants
may route orders to the Matching System through any communications line
approved by the Exchange but may only route orders away from the
Matching System by utilizing the CHX Routing Services, pursuant to
Article 19. The Exchange proposes to amend Rule 8(a) to delete language
related to routing orders away from the Matching System.
Current Article 20, Rule 8(b)(7) describes how the unexecuted
remainder of routed orders returned to the Matching System are ranked
on the CHX book. In light of the proposed decommissioning of the
outbound routing service, the Matching System will not receive any
unexecuted remainders of orders routed away from the Matching System,
and therefore, the Exchange proposes to delete Rule 8(b)(7) in its
entirety.
Current Article 20, Rule 8(d)(3) describes how Odd Lot \20\ orders
and unexecuted Odd Lot remainders of routed orders are handled by the
Matching System. The Exchange proposes to amend Rule 8(d)(3) to
eliminate language relating to routing
[[Page 66810]]
away orders. Accordingly, amended Rule 8(d)(3) provides that an Odd Lot
order or unexecuted Odd Lot remainders shall be posted to, remain in,
or be cancelled from the Matching System according to the attached
order modifiers.
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\20\ See CHX Article 1, Rule 2(f)(2).
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Current Article 20, Rule 8(d)(4) (Rule 201 of Regulation SHO \21\)
describes how orders subject to the short sale price test restriction
will be handled during the Open Trading State and transition to the
Open Trading State from a SNAP Cycle, under subparagraph (A), and
during a SNAP Cycle, under subparagraph (B). The Exchange proposes to
delete reference to the stage five Transition to the Open Trading State
under subparagraph (A) and to delete subparagraph (B) in its entirety
as it describes the handling of orders subject to the short sale price
test restriction during a SNAP Cycle. Moreover, the Exchange proposes
to amend subparagraph (A)(iv) to omit reference to the routing away of
Sell Short orders. Accordingly, amended subparagraph (A)(iv) will
provide that a Sell Short order, other than a CHX Only order, will be
cancelled back to the order sender if, based on Rule 201 of Regulation
SHO,\22\ such order is not executable or cannot be posted to the
Matching System.
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\21\ 17 CFR 242.201.
\22\ 17 CFR 242.201.
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Current Article 20, Rule 8(e) describes the execution of certain
orders, order types, and auctions. The Exchange proposes to amend Rule
8(e) to delete reference to ``auctions'' in the header and to delete
the language under current Rule 8(e)(2) related to the execution of
orders during a SNAP Cycle, inserting the term ``Reserved'' in its
place.
Current Article 20, Rule 8(f) describes how orders cancellation
messages submitted by Participants are handled and Rule 8(f)(2), in
particular, describes how cancel messages received by the Exchange for
routed orders are handled. The Exchange proposes to delete Rule 8(f)(2)
in its entirety.
Current Article 20, Rule 12 (Order Cancellation/Release by the
Exchange) describes the circumstances under which the Exchange may
cancel or release orders. Specifically, Rule 12(a) permits the Exchange
or CHXBD to cancel orders it deems necessary to maintain fair and
orderly markets if a technical or systems issue occurs at the Exchange,
CHXBD, a non-affiliated third-party broker, or another trading center
to which an order was routed. Rule 12(a) also requires the Exchange or
CHXBD to provide notice of the cancellation to affected Participants as
soon as practicable. In addition, Rule 12(b) permits the Exchange to
release orders being held on the Exchange awaiting another trading
center execution as it deems necessary to maintain fair and orderly
markets if a technical or systems issue occurs at the Exchange, CHXBD,
a non-affiliated third-party broker, or another Trading Center to which
an order has been routed. Given that the proposed decommissioning of
the outbound routing service will not require the Exchange to cancel or
release orders that have been routed away from the Exchange, the
Exchange proposes to amend the header to Rule 12 to read ``Order
Cancellation by the Exchange,'' amend Rule 12(a) to limit its scope to
technical or systems issues that occur at the Exchange only, and to
delete Rule 12(b) in its entirety.
2. Statutory Basis
The Exchange believes that the proposed rule change is consistent
with Section 6(b)(5) of the Exchange Act,\23\ 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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\23\ 15 U.S.C. 78f(b)(5).
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Specifically, the Exchange believes that the proposal to amend the
Rules to decommission the Exchange's outbound routing service and SNAP
will permit the Exchange to reallocate resources currently used to
maintain the infrequently utilized \24\ outbound routing service and
SNAP to the development of other business initiatives and to further
support the Exchange's regulatory obligations. In addition, the
Exchange notes that the decommissioning of the outbound routing service
will result in all inbound orders received by the Exchange being
handled Do Not Route and therefore subject to the Exchange's current
order processing procedures and rules for non-routable orders, which
will ensure that the Matching System continues to be reasonably
designed to comply with the requirements of Rule 201 of Regulation SHO
\25\ and Rules 610(d) \26\ and 611 \27\ of Regulation NMS. Also, the
Exchange is not required by rule or regulation to provide outbound
routing services and Participants will continue to be able to route
orders to away markets either directly or through another routing
service. Therefore, the Exchange believes that the proposed rule change
will remove impediments to and perfect the mechanism of a free and open
market and a national market system in furtherance of Section 6(b)(5)
of the Exchange Act.\28\
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\24\ See supra note 6.
\25\ 17 CFR 242.201.
\26\ 17 CFR 242.610(d).
\27\ 17 CFR 242.611.
\28\ 15 U.S.C. 78f(b)(5).
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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. Specifically, the
proposed rule change will result in the decommissioning of certain
Exchange products that have not been frequently or actively utilized by
Participants. Therefore, the Exchange submits that the proposal does
not raise any competitive issues.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
No written comments were solicited or received with respect to the
proposed rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
The Exchange has filed the proposed rule change pursuant to Section
19(b)(3)(A)(iii) of the Act \29\ and Rule 19b-4(f)(6) thereunder.\30\
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 prior to
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 and Rule 19b-
4(f)(6)(iii) thereunder.
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\29\ 15 U.S.C. 78s(b)(3)(A)(iii).
\30\ 17 CFR 240.19b-4(f)(6).
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A proposed rule change filed under Rule 19b-4(f)(6) \31\ normally
does not become operative prior to 30 days after the date of the
filing. However, pursuant to Rule 19b4(f)(6)(iii),\32\ the Commission
may designate a shorter time if such action is consistent with the
protection
[[Page 66811]]
of investors and the public interest. The Exchange has asked the
Commission to waive the 30-day operative delay so that the proposal may
become operative on December 31, 2018 to coincide with the termination
of its clearing agreement with a third-party routing broker-dealer at
the completion of calendar year 2018. According to CHX, waiver of the
operative delay would provide cost savings that would permit the
Exchange to allocate those resources to developing new business
initiatives or further supporting its regulatory obligations. The
Exchange also notes that the neither outbound router nor SNAP are
utilized frequently.\33\ The Commission believes that a partial waiver
of the 30-day operative delay is consistent with the protection of
investors and the public interest and hereby designates the proposal
operative on December 31, 2018.\34\
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\31\ 17 CFR 240.19b-4(f)(6).
\32\ 17 CFR 240.19b-4(f)(6)(iii).
\33\ See supra note 6.
\34\ For purposes only of waiving the 30-day operative delay,
the Commission has also considered the proposed rule's impact on
efficiency, competition, and capital formation. See 15 U.S.C.
78c(f).
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At any time within 60 days of the filing of such 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 under
Section 19(b)(2)(B) \35\ of the Act to determine whether the proposed
rule change should be approved or disapproved.
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\35\ 15 U.S.C. 78s(b)(2)(B).
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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-CHX-2018-09 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-CHX-2018-09. 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 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 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. 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-2018-09 and should be submitted on
or before January 17, 2019.\36\
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.
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\36\ 17 CFR 200.30-3(a)(12).
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Brent J. Fields,
Secretary.
[FR Doc. 2018-27986 Filed 12-26-18; 8:45 am]
BILLING CODE 8011-01-P