[Federal Register Volume 88, Number 61 (Thursday, March 30, 2023)]
[Notices]
[Pages 19173-19178]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-06557]



[[Page 19173]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-97195; File No. SR-FINRA-2022-032]


Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Order Instituting Proceedings To Determine Whether To 
Approve or Disapprove a Proposed Rule Change Relating to Alternative 
Display Facility New Entrant

March 24, 2023.

I. Introduction

    On December 16, 2022, the Financial Industry Regulatory Authority, 
Inc. (``FINRA'') 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 add IntelligentCross ATS 
(``IntelligentCross'') as a new entrant to the Alternative Display 
Facility (``ADF'') (``Proposal''). The proposed rule change was 
published for comment in the Federal Register on December 27, 2022.\3\ 
On February 9, 2023, the Commission extended the time period within 
which to approve, disapprove the proposed rule change, or institute 
proceedings to determine whether to approve or disapprove the proposed 
rule change to March 27, 2023.\4\ The Commission has received eight 
comment letters on the proposed rule change, two of which were received 
after the Extension.\5\ On February 16, 2023, IntelligentCross 
submitted a letter responding to the commenters.\6\ On March 13, 2023, 
FINRA submitted a letter responding to certain commenters.\7\ Under 
Section 19(b)(3)(C) of the Exchange Act,\8\ the Commission is hereby 
instituting proceedings to determine whether to approve or disapprove 
File Number SR-FINRA-2022-032.
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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. 96550 (December 20, 
2022), 87 FR 79401 (``Notice'').
    \4\ See Securities Exchange Act Release No. 96864, 88 FR 9945 
(February 15, 2023) (``Extension'').
    \5\ All comments received by the Commission on the proposed rule 
change are available at: https://www.sec.gov/comments/sr-finra-2022-032/srfinra2022032.htm.
    \6\ See Letter from Ari Burstein, General Counsel, Imperative 
Execution, dated February 16, 2023 (``IntelligentCross Letter'').
    \7\ See Letter from Faisal Sheikh, Assistant General Counsel, 
FINRA, dated March 13, 2023 (``FINRA Letter'').
    \8\ 15 U.S.C. 78s(b)(3)(C).
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II. Description of the Proposed Rule Change

    The ADF is a quotation collection and trade reporting facility that 
provides ADF market participants (i.e., ADF-registered market makers or 
electronic communications networks) \9\ the ability to post quotations, 
display orders and report transactions in NMS stocks \10\ for 
submission to the securities information processors (``SIP'') for 
consolidation and dissemination to vendors and other market 
participants.\11\ The ADF is also designed to deliver real-time data to 
FINRA for regulatory purposes, including enforcement of requirements 
imposed by Regulation NMS.\12\
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    \9\ See FINRA Rule 6220(a)(3).
    \10\ See 17 CFR 242.600.
    \11\ See Notice, supra note 3, at 79401.
    \12\ See 17 CFR 242.600.
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    In particular, Regulation NMS includes an order protection rule 
that provides that a trading center ``shall establish, maintain, and 
enforce written policies and procedures that are reasonably designed to 
prevent trade-throughs on that trading center of protected quotations 
in NMS stocks'' that do not fall within one of the exceptions set forth 
in the rule (``Order Protection Rule'').\13\ For quotations to be 
protected under the rule, they must be, among other things, executable 
``immediately and automatically'' against an incoming immediate-or-
cancel (``IOC'') order.\14\ In 2016, the Commission interpreted 
Regulation NMS's immediacy requirement to allow for ``an intentional 
access delay that is de minimis--i.e., a delay so short as to not 
frustrate the purposes of Rule 611 by impairing fair and efficient 
access to an exchange's quotations.'' \15\ The Commission stated that 
``[i]n the context of Regulation NMS, the term `immediate' does not 
preclude all intentional delays regardless of their duration, and such 
preclusion is not necessary to achieve the objectives of Rule 611. As 
long as any intentional delay is de minimis--i.e., does not impair fair 
and efficient access to an exchange's protected quotations--it is 
consistent with both the text and purpose of Rule 611.'' \16\ 
Commission staff guidance has further stated that ``consistent with the 
Commission's interpretation regarding automated quotation under Rule 
600(b)(3) of Regulation NMS, delays of less than a millisecond are at a 
de minimis level that would not impair fair and efficient access to a 
quotation, consistent with the goals of Rule 611.'' \17\
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    \13\ See 17 CFR 242.611.
    \14\ 17 CFR 242.600(b)(6).
    \15\ Commission Interpretation Regarding Automated Quotations 
Under Regulation NMS, Securities Exchange Act Release No. 78102 
(June 17, 2016), 81 FR 40785, 40792 (June 23, 2016) (``Commission 
Interpretation of Automated Quotations'').
    \16\ See id. at 40789.
    \17\ See Staff Guidance on Automated Quotations under Regulation 
NMS available at https://www.sec.gov/divisions/marketreg/automated-quotations-under-regulation-nms.htm.
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    In addition, Rule 610 of Regulation NMS requires that a trading 
center displaying quotations in an NMS stock through a self-regulatory 
organization (``SRO'') display-only facility (such as the ADF) 
``provide a level and cost of access to such quotations that is 
substantially equivalent to the level and cost of access to quotations 
displayed by SRO trading facilities in that stock.'' \18\ Rule 610 also 
requires that a trading center displaying quotations in an NMS stock 
through an SRO display-only facility not impose unfairly discriminatory 
terms that prevent or inhibit any person from obtaining efficient 
access to such quotations through a member, subscriber, or customer of 
the trading center.\19\ In articulating this standard, the Commission 
noted that the level and cost of access would ``encompass both (1) the 
policies, procedures, and standards that govern access to quotations of 
the trading center, and (2) the connectivity through which market 
participants can obtain access and the cost of such connectivity.'' 
\20\ The nature and cost of connections for market participants seeking 
to access an ADF participant's quotations would need to be 
substantially equivalent to the nature and cost of connections to SRO 
trading facilities.\21\
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    \18\ 17 CFR 242.610(b)(1).
    \19\ 17 CFR 242.610(b)(2).
    \20\ See Securities Exchange Act Release No. 51808 (June 9, 
2005), 70 FR 37496, 37549 (June 29, 2005) (``NMS Adopting 
Release'').
    \21\ See id.
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    In evaluating whether ADF participants are meeting the access 
standards under Rule 610, Regulation NMS also requires FINRA to submit 
a proposed rule change under Section 19(b) of the Exchange Act in order 
to add a new ADF participant.\22\ Accordingly, FINRA is proposing to 
add IntelligentCross as a new ADF Market Participant.\23\ 
IntelligentCross is an NMS stock alternative trading system (``ATS'') 
operating pursuant to an effective Form ATS-N.\24\

[[Page 19174]]

IntelligentCross currently operates three separate limit order books 
with optional display capability distinguished by different fee 
structures--the ASPEN fee/fee limit order book (``ASPEN Fee/Fee''), 
ASPEN maker/taker limit order book, and ASPEN taker/maker limit order 
book (collectively, ``IntelligentCross ASPEN'').\25\ FINRA states that 
the ASPEN Fee/Fee book would be the only order book displaying orders 
on the ADF.\26\
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    \22\ See Notice, supra note 3, at 79401.
    \23\ According to FINRA, there have been no ADF Market 
Participants since the first quarter of 2015. See id.
    \24\ See Form ATS-N Filings and Information page on the 
Commission's website, at https://www.sec.gov/divisions/marketreg/form-ats-n-filings.htm.
    \25\ See Notice, supra note 3, at 79402. FINRA states that all 
three IntelligentCross ASPEN order books act independently of each 
other (i.e., orders resting in one book do not rest on or interact 
with orders resting in another book). See id. In addition to 
IntelligentCross ASPEN, FINRA states that IntelligentCross also 
operates a midpoint book that only accepts non-displayed midpoint 
orders, which is distinct from and does not interact with the 
IntelligentCross ASPEN. See id. at n.17. All activity on 
IntelligentCross is identified and reported under the ``INCR'' 
market participant identifier (``MPID''). See id. at 79402.
    \26\ See id. at 79402. FINRA states that the effective date of 
the Proposal would be the date of the Commission's approval. See id. 
at 79404.
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    IntelligentCross provided FINRA with a summary of its policies and 
procedures regarding access to its quotations in an NMS stock displayed 
on the ADF, and a summary of its proposed fees for such access.\27\ 
Based on IntelligentCross' representations, FINRA believes that 
IntelligentCross' proposed level and cost of access to quotations on 
the ASPEN Fee/Fee book is substantially equivalent to the level and 
cost of access to quotations displayed by an SRO trading facility, both 
in absolute and relative terms.\28\ FINRA also believes that the 
quotations displayed on ASPEN Fee/Fee book would meet the definition of 
an ``automated quotation'' under Regulation NMS.\29\
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    \27\ See id. at 76341.
    \28\ See id. at 79404, n.37.
    \29\ See id. at 79403.
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    In particular, FINRA states that IntelligentCross only permits 
registered broker-dealers to be subscribers to IntelligentCross, and 
subscribers can interact with ASPEN Fee/Fee book using conventional 
order types.\30\ The ASPEN Fee/Fee book will accept incoming 
intermarket sweep orders (``ISOs'') \31\ once it displays orders on the 
ADF.\32\
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    \30\ See id. at 79402. FINRA states that ASPEN Fee/Fee book 
accepts limit orders with optional display instructions, immediate 
or cancel orders, and pegged orders (which are treated as regular 
orders with an automated repricing to the national best bid or offer 
(``NBBO'')). See id. Only limit orders and primary peg orders (with 
or without a limit price) are eligible to be displayed on the ASPEN 
Fee/Fee book, and therefore on the ADF. See id.
    \31\ 17 CFR 242.600(b)(38).
    \32\ See Notice, supra note 3, at 79402. IntelligentCross has 
represented to FINRA that the ASPEN Fee/Fee book will be the only 
IntelligentCross ASPEN order book that will accept ISOs. See id. at 
79402, n.22.
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    FINRA states that the ASPEN Fee/Fee book establishes a matching 
schedule \33\ using an overnight optimization process based on 
historical performance measurements from prior days' matches across all 
three IntelligentCross ASPEN books.\34\ The match event time is 
randomized within the time band throughout the course of the trading 
day and any order that arrives prior to a match event (and that has not 
been cancelled, become unmarketable, or repriced) \35\ is eligible to 
participate in the next match event for that security.\36\
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    \33\ See id. at 79402. FINRA states that the ASPEN Fee/Fee match 
schedules are defined by minimum/maximum time bands for each 
security, and these bands can have a minimum time of 150 
microseconds and a maximum time of 900 microseconds. See id. For 
example, on a particular day, the match event band for XYZ stock may 
have a minimum time of 450 microseconds and a maximum time of 600 
microseconds. See id.
    \34\ See id.
    \35\ See id.
    \36\ See id. at 79402. According to FINRA, IntelligentCross has 
represented that both sides of the trade (buyers and sellers) are on 
equal footing for the next scheduled match event, while maintaining 
full control of their orders, i.e., both sides can cancel or update 
their orders at any time prior to the match. See id. at n.24. In 
addition, the ASPEN Fee/Fee book automatically updates its 
quotations, and all quotation updates, including those due to new or 
cancelled orders, are immediate. See id.
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    IntelligentCross has represented to FINRA that, in the following 
cases, an incoming order on ASPEN Fee/Fee may not execute against a 
resting order at match event time when: (i) an existing resting order 
cancels prior to the next match event; (ii) an incoming order is 
canceled prior to the next match event; (iii) the NBBO moves between 
the time an order is received and the next match event takes place, 
making either the incoming order or the resting order non-marketable; 
or (iv) the NBBO changed before the next match event and pegged orders 
were repriced to the new NBBO, making the incoming order or the resting 
pegged order non-marketable.\37\
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    \37\ See id. at 79402, n.23. IntelligentCross has represented to 
FINRA that non-match events on ASPEN Fee/Fee occur in a minority of 
cases. See id. at 79403. For a more detailed discussion of examples 
regarding situations where an incoming order may not execute against 
a resting order at match event time, see id. at 79403.
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    FINRA states that ASPEN Fee/Fee's matching engine operates near-
continuously and that, when a new order arrives in the ASPEN Fee/Fee 
book, it would participate in the next scheduled match event by 
interacting with existing orders in the order book within a maximum 
time capped at 900 microseconds.\38\
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    \38\ See id. at 79403. FINRA states that the quotations 
displayed on ASPEN Fee/Fee are handled on an automated basis and 
that there is no human discretion in determining any action taken 
with respect to an order after the order is received. See id.
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    FINRA states that for each match event time, ASPEN Fee/Fee 
retrieves the NBBO and processes all the orders that have arrived and 
have not been cancelled in price-time priority.\39\ No subscriber to 
IntelligentCross (or non-subscriber accessing IntelligentCross through 
a subscriber) is given any priority through the matching process and 
the matching process is blind to the identity of the subscriber.\40\ 
All matches are reported immediately to subscribers and the SIPs via a 
FINRA trade reporting facility and disseminated on IntelligentCross' 
market data feed.\41\
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    \39\ See id. FINRA states that IntelligentCross uses a 
combination of SIP and proprietary direct feeds from national 
securities exchanges to determine the NBBO and protected quotes, and 
to price executions. See id. at 79402, n.27.
    \40\ See id.
    \41\ See id. IntelligentCross has represented to FINRA that 
displayed orders from all three IntelligentCross ASPEN order books 
are available in the IQX market data feed. See id. 79402, n.28.
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    FINRA further states that IntelligentCross utilizes a fee/fee 
pricing model for activity on ASPEN Fee/Fee book where both sides are 
charged the same fee \42\ for transactions.\43\ Eligible displayed 
orders are published via a free market data feed (``IQX market data 
feed'').\44\ IntelligentCross does not charge connectivity fees to its 
subscribers.\45\ FINRA states that firms wishing to access liquidity on 
ASPEN Fee/Fee may connect in a variety of ways.\46\ Firms that are 
IntelligentCross subscribers can connect to ASPEN Fee/Fee via a 
Financial Information Exchange (``FIX'') connection.\47\ Such access is 
available to subscribers through an internet protocol address via 
communications that are compliant

[[Page 19175]]

with the FIX application programming interface (``API'') provided by 
IntelligentCross.\48\ IntelligentCross does not accept orders via any 
other forms of communication (e.g., telephone, email, instant 
message).\49\ IntelligentCross allows a subscriber to determine its 
level of connectivity and does not tier or discriminate among 
subscribers.\50\
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    \42\ See id. at 79404. FINRA states that the IntelligentCross' 
fee schedule is published in the IntelligentCross Form ATS-N and 
advance notice is provided to its subscribers prior to a pricing 
change. See id.
    \43\ See id. at 79404. FINRA states that the base rate charged 
by IntelligentCross is $0.0008 per share for each side of a 
transaction on ASPEN Fee/Fee. See id.
    \44\ See id.
    \45\ See id. IntelligentCross has represented to FINRA that it 
is not involved in the installation of cross-connects. See id. 
Further, IntelligentCross does not currently charge connectivity 
fees to access ASPEN Fee/Fee and has offered to pay for certain of 
subscribers' cross-connect fees at NY4. See id. IntelligentCross 
also currently pays for one primary connection and one back-up 
connection, and any direct subscriber is eligible for this payment. 
See id. IntelligentCross' network provider and other similar network 
providers may charge fees relating to connectivity. See id. 
IntelligentCross has represented to FINRA that any such connectivity 
fees would be substantially equivalent to the costs to connect to 
any other trading center, such as an exchange. See id.
    \46\ See id.
    \47\ See id.
    \48\ See id.
    \49\ See id.
    \50\ See id.
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    Additionally, FINRA states that IntelligentCross has established 
and maintains policies and procedures related to periodic system 
capacity reviews and tests to ensure future capacity, as well as 
policies and procedures to identify potential weaknesses and reduce the 
risks of system failures and threats to system integrity.\51\ FINRA 
also states that, for purposes of displaying orders through the ADF, 
IntelligentCross' policies and procedures require continuous monitoring 
of ASPEN Fee/Fee's connections with an SRO display-only facility and, 
in the event that ASPEN Fee/Fee loses connection with the ADF, 
IntelligentCross has contingency plans in place, including removing 
(i.e., ``zeroing out'') all quotes previously published by the system 
to the ADF and notifying its subscribers of such interruption.\52\
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    \51\ See id.
    \52\ See id.
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    Finally, FINRA states that all members in good standing of an SRO 
would be eligible to become a subscriber to ASPEN Fee/Fee, and would be 
subject to eligibility requirements set by IntelligentCross.\53\
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    \53\ See id. at 79405.
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III. Summary of Comments and Responses by IntelligentCross and FINRA

    The Commission received seven comment letters opposing the 
Proposal,\54\ and one comment letter supporting the Proposal.\55\ 
Commenters opposing the Proposal generally state the Proposal lacks 
sufficient detail necessary for the Commission to approve the Proposal 
and point to several areas of concern.\56\ In particular, commenters 
raise concerns about whether the Proposal: (1) complies with the 
requirements of Regulation NMS; (2) should condition Commission's 
approval on additional representations by IntelligentCross; (3) 
provides a sufficient implementation period for the industry to adopt 
changes from the addition of IntelligentCross to the ADF; and (4) 
raises concerns about the ADF's technological infrastructure.\57\
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    \54\ See Letter from Tyler Gellasch, President and CEO, Healthy 
Markets Association, dated January 13, 2023 (``Healthy Markets 
Letter''); Letter from Brett Kitt, Associate Vice President & 
Principal Associate General Counsel, Nasdaq, Inc., dated January 17, 
2023 (``Nasdaq Letter''); Letter from Joanna Mallers, Secretary, FIA 
Principal Traders Group, dated January 17, 2023 (``FIA PTG 
Letter''); Letter from Stephen John Berger, Managing Director, 
Global Head of Government & Regulatory Policy, Citadel Securities, 
dated January 23, 2023 (``Citadel Letter''); Letter from Ellen 
Greene, Managing Director, Equities & Options Market Structure, 
SIFMA, dated February 8, 2023 (``SIFMA Letter''); Letter from Joanna 
Mallers, Secretary, FIA Principal Traders Group, dated March 8, 2023 
(``FIA PTG Letter II''); Letter from Tyler Gellasch, President and 
CEO, Healthy Markets Association, dated March 14, 2023 (``Healthy 
Markets Letter II'').
    \55\ See Letter from Nataliya Bershova, Head of Execution 
Research, Sanford C. Bernstein & Co., LLC, dated January 17, 2023. 
This commenter states that adding IntelligentCross' displayed 
liquidity to the public quote would enable market participants to 
interact with better prices, enhance price discovery, and minimize 
pricing errors. See id.
    \56\ See supra note 54.
    \57\ Some commenters also raise issues that are beyond the scope 
of the Commission's consideration of whether the present Proposal is 
consistent with the Exchange Act. In particular, one commenter 
states that the Commission should reconsider and withdraw the 
Commission Interpretation of Automated Quotations. See Citadel 
Letter at 1-4, 8 (stating, among other things, that the Commission 
Interpretation of Automated Quotations is ``inconsistent with the 
plain text of Regulation NMS and therefore invalid''). Some 
commenters question the appropriateness of the ADF in today's market 
structure, including the need for the ADF given the number of 
exchanges and active non-display ATS' in the marketplace. See Nasdaq 
Letter at 2; Healthy Markets Letter at 8. One commenter recommends 
that the Commission should consider ``whether the ADF is still 
needed or should be eliminated entirely.'' Nasdaq Letter at 1, 3 
(stating that the ADF ``continues to exist in form only, while 
serving no productive function''). Finally, some commenters state 
that approval of the Proposal may undermine the recent Commission 
proposals to modernize equity market structure. See Healthy Markets 
Letter at 16; Nasdaq Letter at 2. One of these commenters also 
questions how recent reforms to Rule 605 of Regulation NMS would 
apply to the Proposal, particularly in relation to the single MPID 
that IntelligentCross uses to identify and report its transaction 
activity. See Healthy Markets Letter at 5, 16.
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1. Compliance With Regulation NMS

    Some commenters raise concern that IntelligentCross' displayed 
quotations do not meet the Commission's definition of ``automated 
quotations'' due to the intentional delay built into IntelligentCross' 
delayed matching process.\58\ In particular, some commenters state that 
the Proposal does not demonstrate how the intentionally delayed 
matching process is de minimis.\59\ Two commenters states that the 
Proposal wrongly assumes that any delay under a millisecond is de 
minimis.\60\ One commenter states that the ``novel features'' of the 
Proposal have not been adequately assessed to provide the Commission 
with sufficient basis to make an affirmative finding that the Proposal 
is consistent with the Exchange Act.\61\ One commenter states that the 
randomized nature of the matching process ``creates significant 
challenges for best execution for brokers'' and prevents ``predictable 
staging of order sending activity by brokers across multiple venues,'' 
resulting in ``significant risk of material information leakage and 
quote fading--leading to materially worse execution quality for 
investors.'' \62\
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    \58\ See Citadel Letter at 1; SIFMA Letter at 3; FIA PTG Letter 
at 1-2; FIA PTG Letter II at 1-2; Nasdaq Letter at 2; Healthy 
Markets Letter at 13.
    \59\ See Citadel Letter at 1; FIA PTG Letter at 1-2; FIA PTG 
Letter II at 1-2; SIFMA Letter at 4.
    \60\ See Citadel Letter at 4; FIA PTG Letter at 2. One of these 
commenters further states that the Proposal lacks basic information 
regarding the intentionally delayed matching process, such as 
whether it is symmetric or asymmetric and how it operates in 
practice. See FIA PTG Letter at 2.
    \61\ See Citadel Letter at 4. This commenter states that the 
``required assessment of whether or not an intentional delay is de 
minimis must consider the impact of the intentional delay on fill 
rates and execution quality and whether it operates to frustrate the 
purposes of Rule 611 by impairing fair and efficient access to 
displayed quotations.'' Id. at 8. The commenter further states that 
based on the data presented in the Proposal, ``nearly 9% of 
executable transactions do not occur'' because of the reasons 
described by the commenter in its letter, which the commenter states 
is ``certainly not de minimis.'' Id. The commenter also states that 
granting ``protected quotation'' status for the first time to a 
matching process that uses discrete match events would treat the 
IntelligentCross displayed quote as equivalent to those on other 
market centers, even though the matching of counterparties and the 
execution of transactions only occurs after the match event is 
conducted. Id. at 7.
    \62\ See Healthy Markets Letter at 14. This commenter also 
states that the delayed randomized match creates challenges 
regarding the operation of ISOs. See id. at 4. See also Healthy 
Markets Letter II at 4; Citadel Letter at 6-7 (stating that market 
participants could have difficulty adopting routing strategies to 
account for IntelligentCross' randomized intentional delay).
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    Some commenters state that the ability for liquidity providers to 
cancel displayed ADF orders through IntelligentCross' functionality at 
any time raises questions about whether its functionality is consistent 
with Regulation NMS and prior Commission guidance.\63\ For example, 
some commenters state that they are concerned that a resting limit 
order could be canceled at any time (even after the incoming order is 
received) prior to the match, including when such incoming orders are 
routed to IntelligentCross consistent with regulatory obligations under 
the Order Protection Rule.\64\ One commenter states that the non-match 
event data stated in the Proposal is a ``material''

[[Page 19176]]

figure that ``likely understates expected cancellation rates'' if 
market participants are required to route order flow to 
IntelligentCross.\65\ Another commenter emphasizes that order posters 
in ASPEN Fee/Fee book have the ability to immediately cancel their 
orders, whereas order transmitters seeking to interact with that 
interest at the NBBO do not have the same ability to cancel their 
orders due to their regulatory obligation to attempt to access the 
protected quote.\66\
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    \63\ See SIFMA Letter at 3-4.
    \64\ See SIFMA Letter at 3-4; Citadel Letter at 4. One of these 
commenters discusses prior SRO proposals considered by the 
Commission that raised similar concerns related to asymmetrical 
``speed bumps'' in which one of the orders and/or messages on one 
side of the market are subject to a delay whereas others are not. 
See SIFMA Letter at 3.
    \65\ See Citadel Letter at 5.
    \66\ See SIFMA Letter at 3. This commenter states that areas to 
explore in addressing its concerns with the Proposal could include 
``instituting a delay regarding the ability to cancel a posted order 
that mirrors the delay for incoming orders seeking to interact with 
that posted order or removing the delay on incoming ISO/IOC orders 
attempting to access the ADF protected quote.'' Id. at 4, n.10.
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    In its response letter, IntelligentCross states that it disagrees 
with the characterizations made by commenters of the IntelligentCross 
matching process.\67\ Specifically, IntelligentCross states that its 
matching process is ``completely symmetric in nature and does not favor 
a particular side of the trade; there is no differential treatment of 
certain market participants.'' \68\ IntelligentCross states that both 
sides of the trade ``can cancel or update their orders at any time 
prior to a match'' and ``must equally wait for the next scheduled match 
event to occur.'' \69\ IntelligentCross also emphasizes that the 
regulatory obligations attendant to ``protected quotations'' under 
Regulation NMS do not provide a guarantee of an execution.\70\ 
Accordingly, IntelligentCross states that a market participant that 
routes an order to any market with the intention of matching against a 
displayed order may not ultimately receive an execution.\71\ Moreover, 
IntelligentCross disagrees with a commenter's statement that non-match 
events on IntelligentCross are ``material'' and states that there is no 
evidence to the effect that non-match rates would increase if market 
participants are required to route order flow to IntelligentCross.\72\
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    \67\ See IntelligentCross Letter at 3.
    \68\ See id. at 4.
    \69\ Id.
    \70\ Id.
    \71\ Id. IntelligentCross also states that, in the case of ISOs, 
commenter ``concerns are misplaced as once the ISO is sent to a 
trading center displaying a protected quotation, a broker's 
obligations under the Rule 611 have been met.'' Id. at 5.
    \72\ Id. at 8. IntelligentCross believes that ``it is just as 
likely that cancellations will decrease'' as ``the IntelligentCross 
order book will be in a matchable state more frequently.'' Id.
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    IntelligentCross also disagrees with commenters that express 
concern regarding the ability for liquidity providers to cancel their 
order in IntelligentCross prior to a match event and believe it to be 
detrimental to the markets and investors.\73\ IntelligentCross points 
to its own user experience on the platform, and data specifying that 
``in January 2023, ASPEN Fee/Fee improved the NBBO over 5.3 million 
times per day (for orders of round-lot size or larger on arrival).'' 
\74\ Additionally, IntelligentCross states that any ``trade-offs'' due 
to the manner of IntelligentCross' matching process ``certainly do not 
frustrate the purpose of Regulation NMS by impairing fair and efficient 
access to IntelligentCross' displayed quotations.'' \75\ Moreover, 
IntelligentCross states that there is no basis for the assumption that 
there is a significant risk of information leakage and quote fading due 
to an IntelligentCross protected quote.\76\
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    \73\ Id. at 5.
    \74\ Id.
    \75\ Id. at 6.
    \76\ See id. For the proposition that its system is designed to 
provide for best execution, IntelligentCross states that in the past 
year, it has grown from 70 basis points of the market on average in 
January 2022 to 110 basis points during January 2023. See id.
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    In addressing commenter concerns regarding any difficulties for 
market participants to adapt to an IntelligentCross protected quote, 
IntelligentCross states it is already widely used by most major broker-
dealer and electronic trading firms, and that any market participants 
should be able to account for the IntelligentCross protected quote 
without significant or material changes to its technology. 
Additionally, IntelligentCross points to the ``technological 
capabilities of order routers today'' and believes that a market 
participant ``should not have difficulties in configuring their routers 
to adopt to the IntelligentCross matching process.'' \77\
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    \77\ Id. at 7.
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    Finally, IntelligentCross states that its matching process is 
consistent with the Commission Interpretation of Automated 
Quotations.\78\ IntelligentCross states that, while the Commission did 
not establish a ``bright line de minimis threshold,'' the ASPEN Fee/Fee 
matching engine ``operates near-continuously and when a new order 
arrives in the ASPEN Fee/Fee book, it will participate in the next 
scheduled match event by interacting with existing orders in the order 
book within a maximum time capped at 900 microseconds.'' \79\
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    \78\ See id. at 9.
    \79\ Id.
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2. Additional Conditions to Approval of the Proposal

    Two commenters raise questions regarding the regulatory process in 
connection with proposed changes to IntelligentCross' operations and 
fees associated with displaying protected quotations on the ADF.\80\ 
One commenter states that there is currently no process for ongoing 
operational changes at non-exchange venues with protected quotes and 
intentional access delays.\81\ This commenter states that without the 
exchange notice and comment process in connection with changes to 
operations, it seeks additional information on the process for managing 
such changes at IntelligentCross and the ADF.\82\
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    \80\ See Healthy Markets Letter at 2; FIA PTG Letter at 2; FIA 
PTG Letter II at 2.
    \81\ See FIA PTG Letter at 2; FIA PTG Letter II at 2-3.
    \82\ See FIA PTG Letter at 2; FIA PTG Letter II at 2-3.
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    One commenter states that if the Commission chooses to permit any 
trading center to disseminate quotations using the ADF, it must 
condition approval with limitations that are consistent with 
limitations imposed upon other trading venues (i.e., exchanges) whose 
quotations have protected quotation status.\83\ In particular, this 
commenter states that approval of the Proposal should be conditioned 
upon IntelligentCross: (1) continuing to not charge for market data or 
connectivity; (2) having fees and rebates (if adopted) that are at or 
below those charged by exchanges; (3) notifying the Commission and 
FINRA of all changes related to the ASPEN Fee/Fee book; and (4) 
describing how any such changes are consistent with the ASPEN Fee/Fee 
book quotations continuing to be included as protected quotations is 
consistent with the Exchange Act and protection of investors.\84\ This 
commenter also states that both the Commission and FINRA should detail 
how they would ``gather, review, analyze, and publish for public 
consideration'' any changes to IntelligentCross' policies and 
procedures related to the Proposal, as well as describe how they would

[[Page 19177]]

intervene to block or disallow any concerning changes in 
IntelligentCross' policies and procedures related to the ADF.\85\ 
Overarching this commenter's concerns with the Proposal are that any 
changes to the ASPEN Fee/Fee rules and operations should be treated the 
same for regulatory purposes as if they were changes made by an 
exchange, including that they are put out for notice and public 
comment, and subject to Commission disapproval.\86\
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    \83\ See Healthy Markets Letter at 2. This commenter states that 
if the Commission approves the Proposal, ``it would be difficult, if 
not impossible, for the Commission to practically constrain 
IntelligentCross' fees and potential limitations for accessing the 
newly protected quotations.'' Id. at 9. See also Healthy Markets 
Letter II.
    \84\ See Healthy Markets Letter at 2. This commenter also states 
that if the Commission approves the Proposal, it should expressly 
condition the approval on IntelligentCross being compliant with 
Regulation SCI like other trading centers with protected quotations. 
See id. at 8, n.29.
    \85\ See id. at 2.
    \86\ See id. at 17.
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    In its response letter, IntelligentCross points to its current 
regulatory responsibilities associated with being a registered broker-
dealer and an ATS, as well as the Regulation NMS obligations attached 
to being an ADF Participant.\87\ IntelligentCross also states that, 
while an ATS is not subject to the same requirements as exchanges, it 
also does not share the same benefits as exchanges.\88\ However, 
IntelligentCross states that it does not object to notifying the 
Commission and FINRA in advance if changes are made to the level and 
cost of access to the ASPEN Fee/Fee book impacting the display of 
IntelligentCross' protected quotations on the ADF, or the operation of 
the ASPEN Fee/Fee book impacting the provision of the protected 
quote.\89\ IntelligentCross also states that it does not object to an 
``appropriately structured process'' to engage the Commission in 
evaluating and commenting on such changes.\90\ But IntelligentCross 
disagrees with the commenter's recommendation to condition 
IntelligentCross' approval on ``continuing to not charge for market 
data or connectivity'' given that it believes such a requirement would 
not be consistent with the limitations imposed on exchanges.\91\
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    \87\ See IntelligentCross Letter at 11.
    \88\ See id.
    \89\ See id. IntelligentCross also states that it would not 
object to describing how such changes are consistent with the ASPEN 
Fee/Fee book quotations continuing to be included as protected 
quotations, consistent with the Exchange Act. See id.
    \90\ See id.
    \91\ See id. at 11-12. IntelligentCross also states that it 
currently does not charge for market data and connectivity. See id. 
at 12.
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3. Implementation Period

    Two commenters suggest that the proposed implementation period for 
the Proposal is too short given the connectivity arrangements that the 
industry would need time to establish.\92\ One commenter suggests an 
implementation period of no less than 120 days following the date of 
Commission approval.\93\ Another commenter suggest a period of no less 
than 90 days following the date of Commission approval.\94\
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    \92\ See FIA PTG Letter at 2; FIA PTG Letter II at 3; SIFMA 
Letter at 4.
    \93\ See FIA PTG Letter at 2; FIA PTG Letter II at 3.
    \94\ See SIFMA Letter at 4-5.
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    In its response letter, IntelligentCross states that it has been 
working with industry participants to ensure that they have all the 
information necessary to prepare for the IntelligentCross protected 
quote.\95\ IntelligentCross also notes that most major broker-dealers 
and electronic trading firms are already connected to, and trading 
with, the IntelligentCross ATS.\96\ Moreover, IntelligentCross believes 
that a reasonable implementation timeframe would be to require that 
industry participants begin treating IntelligentCross' quotes as a 
protected quotation no later than 90 days after the date of the 
Commission's approval order.\97\
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    \95\ See IntelligentCross Letter at 10.
    \96\ See id.
    \97\ See id.
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4. ADF Technological Infrastructure

    One commenter states that the Commission and FINRA should consider 
whether to ``wind down'' the ADF due to concerns regarding the latency 
and technological infrastructure of the ADF.\98\ Specifically, this 
commenter states that the Proposal does not provide any details of the 
ADF's systems capabilities and questions whether the ``intake, 
processing, and dissemination systems [are] up to 2023 speed and 
capacity standards.'' \99\ This commenter also expresses concern 
regarding the speed at which the ADF disseminates quotation data 
compared to the speed at which IntelligentCross' proprietary quotation 
feed is disseminated to market participants.\100\ This commenter states 
that it is unclear the extent to which ``FINRA has attempted to upgrade 
the system'' to address the latency gap.\101\
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    \98\ See Healthy Markets Letter at 14-17.
    \99\ See id. at 14. This commenter asserts that it is ``not 
aware of any public details regarding the details of [the ADF's] 
operations, including systems specifications and latencies.'' Id.
    \100\ See id. at 7.
    \101\ See id. at 8.
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    In its response letter, FINRA states that it has made technological 
updates to the ADF infrastructure that make it ``well-equipped to 
support use of the ADF by multiple market participants for quoting and 
trading purposes.'' \102\ FINRA also asserts that its recent 
technological updates to the ADF have significantly reduced the ADF's 
processing latency times as compared to when the ADF was last 
operational in 2015.\103\ FINRA also represents that it continues to 
conduct capacity requirement testing with IntelligentCross and ``aim[s] 
to address any potential areas identified for further improvement prior 
to IntelligentCross becoming an ADF Participant and sending quotes to 
the ADF (subject to SEC approval).'' \104\ Accordingly, FINRA believes 
that any processing latency for the ADF would generally be in line with 
exchange processing latencies once IntelligentCross begins quoting on 
the ADF.\105\
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    \102\ See FINRA Letter at 3. FINRA states that in 2021 it began 
a multi-year effort to update the technological infrastructure for 
several of its facilities, relevant data vendor feeds, and related 
reference data. See id. The ADF's trade reporting and quoting 
functionality were migrated onto a new platform in November 2021 and 
March 2022, respectively. See id.
    \103\ See id.
    \104\ Id.
    \105\ See id.
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IV. Proceedings To Determine Whether To Approve or Disapprove SR-FINRA-
2022-032 and Grounds for Disapproval Under Consideration

    The Commission hereby institutes proceedings pursuant to Section 
19(b)(2)(B) of the Exchange Act \106\ to determine whether the proposed 
rule change should be approved or disapproved. Institution of 
proceedings is appropriate at this time in view of the legal and policy 
issues raised by the proposal. Institution of proceedings does not 
indicate that the Commission has reached any conclusions with respect 
to any of the issues involved. Rather, the Commission seeks and 
encourages interested persons to provide additional comment on the 
proposed rule change to inform the Commission's analysis of whether to 
approve or disapprove the proposed rule change.
---------------------------------------------------------------------------

    \106\ 15 U.S.C. 78s(b)(2)(B).
---------------------------------------------------------------------------

    Pursuant to Section 19(b)(2)(B) of the Exchange Act,\107\ the 
Commission is providing notice of the grounds for possible disapproval 
under consideration. As described above, FINRA has proposed to add 
IntelligentCross to the ADF. The Commission is instituting proceedings 
to allow for additional analysis of, and input from commenters with 
respect to,

[[Page 19178]]

the consistency of the proposal with the Section 15A(b)(6) of the 
Exchange Act,\108\ which requires, among other things, that FINRA rules 
must be designed to prevent fraudulent and manipulative acts and 
practices, to promote just and equitable principles of trade, and, in 
general, to protect investors and the public interest. The Commission 
believes that there are questions as to whether FINRA has provided 
sufficient information to demonstrate that the proposal to add 
IntelligentCross to the ADF is consistent with the Exchange Act and the 
rules thereunder.
---------------------------------------------------------------------------

    \107\ 15 U.S.C. 78s(b)(2)(B). Section 19(b)(2)(B) of the 
Exchange Act also provides that proceedings to determine whether to 
disapprove a proposed rule change must be concluded within 180 days 
of the date of publication of notice of the filing of the proposed 
rule change. See id. The time for conclusion of the proceedings may 
be extended for up to 60 days if the Commission finds good cause for 
such extension and publishes its reasons for so finding, or if the 
self-regulatory organization consents to the longer period. See id.
    \108\ 15 U.S.C. 78o-3(b)(6).
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    Under the Commission's Rules of Practice, the ``burden to 
demonstrate that a proposed rule change is consistent with the 
[Exchange Act] and the rules and regulations issued thereunder . . . is 
on the [SRO] that proposed the rule change.'' \109\ The description of 
a proposed rule change, its purpose and operation, its effect, and a 
legal analysis of its consistency with applicable requirements must all 
be sufficiently detailed and specific to support an affirmative 
Commission finding,\110\ and any failure of an SRO to provide this 
information may result in the Commission not having a sufficient basis 
to make an affirmative finding that a proposed rule change is 
consistent with the Exchange Act and the applicable rules and 
regulations.\111\ The Commission is instituting proceedings to allow 
for additional consideration and comment on the issues raised herein.
---------------------------------------------------------------------------

    \109\ 17 CFR 201.700(b)(3).
    \110\ See id.
    \111\ See id.
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V. 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 
view of interested persons concerning whether the proposal is 
consistent with Section 15A(b)(6) of the Exchange Act, 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.\112\
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    \112\ 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 April 20, 2023. Any person who wishes to file a rebuttal 
to any other person's submission must file that rebuttal by May 4, 
2023.
    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-FINRA-2022-032 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-FINRA-2022-032. 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 such filing also will be available for inspection 
and copying at the principal office of FINRA. 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-FINRA-2022-032 should be submitted on or 
before April 20, 2023. Rebuttal comments should be submitted by May 4, 
2023.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\113\
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    \113\ 17 CFR 200.30-3(a)(57).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023-06557 Filed 3-29-23; 8:45 am]
BILLING CODE 8011-01-P