[Federal Register Volume 89, Number 80 (Wednesday, April 24, 2024)]
[Notices]
[Pages 31236-31242]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-08683]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-99990; File No. SR-IEX-2024-07]


Self-Regulatory Organizations; Investors Exchange LLC; Notice of 
Filing and Immediate Effectiveness of Proposed Rule Change To Amend the 
Activation Value in IEX Rule 11.190(g)(2)

April 18, 2024.
    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 April 12, 2024, the Investors Exchange LLC (``IEX'' or the 
``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

    Pursuant to the provisions of Section 19(b)(1) under the Act,\4\ 
and Rule 19b-4 thereunder,\5\ the Exchange is filing with the 
Commission a proposed rule change to amend IEX Rule 11.190(g)(2) to 
incrementally optimize the effectiveness of the proprietary 
mathematical calculation used to make quote instability determinations 
for certain orders, and to correct two cross-reference errors and one 
typographical error. The Exchange has designated this proposal as non-
controversial and provided the Commission with the notice required by 
Rule 19b-4(f)(6)(iii) under the Act.\6\
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    \4\ 15 U.S.C. 78s(b)(1).
    \5\ 17 CFR 240.19b-4.
    \6\ 17 CFR 240.19b-4(f)(6)(iii).
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    The text of the proposed rule change is available at the Exchange's 
website at www.iextrading.com, at the principal office of the Exchange, 
and at the Commission's Public Reference Room.

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

    In its filing with the Commission, the self-regulatory organization 
included statements concerning the purpose of and basis for the 
proposed rule change and discussed any comments it received on the 
proposed rule change. The text of these statements may be examined at 
the places specified in Item IV below. The self-regulatory organization 
has prepared summaries, set forth in Sections A, B, and C below, of the 
most significant aspects of such statements.

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

1. Purpose
    The purpose of the proposed rule change is to amend IEX Rule 
11.190(g)(2) to incrementally optimize the proprietary mathematical 
calculation used to make quote instability determinations for certain 
orders (i.e., to assess the probability of a ``crumbling quote''--an 
imminent change to the current Protected NBB \7\ to a lower price or 
the current Protected NBO \8\ to a higher price for a particular 
security). This calculation is referred to as the ``crumbling quote 
indicator'' or ``CQI''. This proposed rule change would only modify the 
functionality of CQI 2,\9\ which is the CQI version used to make quote 
instability determinations for all Discretionary Limit (``D-Limit'') 
\10\ orders, and for Discretionary Peg (``D-Peg''),\11\ primary peg 
(``P-Peg''),\12\ and Corporate Discretionary Peg (``C-Peg'') \13\ 
orders for which the User \14\ selected CQI 2 (collectively ``CQI 2 
enhanced pegged orders'').\15\
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    \7\ See IEX Rule 1.160(cc).
    \8\ See IEX Rule 1.160(cc).
    \9\ IEX supports two versions of the CQI--Option 1 Crumbling 
Quote (which is based on the CQI in effect when IEX began operating 
as a national securities exchange in 2016) (``CQI 1'') and Option 2 
Crumbling Quote (``CQI 2''). See IEX Rule 11.190(g)(1) and (g)(2), 
respectively. CQI 1 is not affected by this proposed rule change.
    \10\ See IEX Rule 11.190(b)(7).
    \11\ See Rule 11.190(b)(10).
    \12\ See Rule 11.190(b)(8).
    \13\ See Rule 11.190(b)(16).
    \14\ See IEX Rule 1.160(qq).
    \15\ Users may select which CQI version to apply to D-Peg, P-
Peg, and C-Peg orders (pegged orders eligible to exercise price 
discretion to their discretionary price except during periods of 
quote instability). See IEX Rules 11.190(b)(8)(K), 11.190(b)(10)(K), 
and 11.190(b)(16)(K).
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    The Exchange also proposes to correct two cross-reference errors 
and one typographical error in the rule text defining the CQI 2.
Background
    When CQI 2 generates a quote instability determination (i.e., it is 
``on'' pursuant to IEX Rule 11.190(g)(2)), CQI 2 enhanced pegged orders 
resting on the Order Book \16\ do not exercise price discretion to meet 
the limit price of an active (i.e., taking) order, and remain pegged to 
a price that is the less aggressive of one (1) minimum price variant 
(``MPV'') \17\ less aggressive than the primary quote (i.e., one MPV 
below (above) the NBB \18\ (NBO \19\) for buy (sell) orders) or the 
order's limit price, if any.\20\
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    \16\ See IEX Rule 1.160(p).
    \17\ See IEX Rule 11.210.
    \18\ See IEX Rule 1.160(u).
    \19\ See IEX Rule 1.160(u).
    \20\ C-Peg orders are also constrained by the consolidated last 
sale price of the security, and therefore cannot trade, book, or 
exercise discretion at a price that is more aggressive than the 
consolidated last sale price. See IEX Rule 11.190(b)(16).
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    Relatedly, D-Limit orders priced at or more aggressively than the 
quote instability determination price level (``CQI Price'') are re-
priced when CQI 2 is on.\21\ Specifically, if the System \22\ receives 
a D-Limit buy (sell) order when CQI 2 is on, and the D-Limit order has 
a limit price equal to or higher (lower) than the CQI Price, the price 
of the order will be automatically adjusted by the System to a price 
one (1) MPV lower (higher) than the CQI Price (the ``effective limit 
price''). Similarly, when unexecuted shares of a D-Limit buy (sell) 
order are posted to the Order Book, if a quote instability 
determination is made and such shares are ranked and displayed (in the 
case of a displayed order) by the System at a price equal to or higher 
(lower) than the CQI Price, the price of the order will be 
automatically adjusted by the System to a price one MPV lower (higher) 
than the CQI Price.\23\
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    \21\ See IEX Rules 11.190(b)(7)(A) and (B).
    \22\ See IEX Rule 1.160(nn).
    \23\ See IEX Rule 11.190(b)(7)(C) and (D).
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    Once the price of a D-Limit order that has been posted to the Order 
Book is automatically adjusted by the System to its effective limit 
price, the order will continue to be ranked and displayed (in the case 
of a displayed order) at the adjusted price,\24\ unless subject to 
another automatic adjustment; if the order is subject to the price 
sliding provisions of IEX Rule 11.190(h); or if the User elects, 
pursuant to IEX Rule 11.190(b)(7)(E)(i), that the order will be re-
priced if resting at a price that is less aggressive than the NBB (for 
a buy order) or NBO (for a sell order) ten (10) milliseconds after the 
most recent quote

[[Page 31237]]

instability determination. Otherwise, a D-Limit order operates in the 
same manner as either a displayed or non-displayed limit order, as 
applicable.\25\
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    \24\ See IEX Rule 11.190(b)(7)(F).
    \25\ See IEX Rule 11.190(b)(7).
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Overview of CQI 2
    The Exchange has made incremental changes to optimize and enhance 
the effectiveness of CQI 1 in determining whether a crumbling quote 
exists three times since Exchange launch \26\ and in 2022, introduced 
CQI 2.\27\ CQI 2 is designed to incrementally increase the coverage 
\28\ of the quote instability determinations in predicting whether a 
particular quote is unstable by adjusting the logic underlying the 
quote instability calculation and introducing enhanced functionality 
designed to increase the number of crumbling quotes identified, while 
maintaining CQI 1's accuracy rate \29\ in predicting the direction and 
timing of the next price change in the NBB or NBO, as applicable.
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    \26\ See Securities Exchange Act Release 34-78510 (August 9, 
2016), 81 FR 54166 (August 15, 2016) (SR-IEX-2016-11); Securities 
Exchange Act Release No. 80202 (March 10, 2017), 82 FR 14058 (March 
16, 2017) (SR-IEX-2017-06); Securities Exchange Act Release No. 
83048 (April 13, 2018), 83 FR 17467 (April 19, 2018) (SR-IEX-2018-
07).
    \27\ See Securities Exchange Act Release No. 96014 (October 11, 
2022), 87 FR 62903 (October 17, 2022) (``CQI 2 Proposal''); 
Securities Exchange Act Release No. 96416 (December 1, 2022), 87 FR 
75099 (December 7, 2022) (``CQI 2 Approval Order'') (SR-IEX-2022-
06).
    \28\ ``Coverage'' means the percentage of all ``adverse'' NBBO 
changes per symbol (lower for bids, higher for offers) that were 
predicted by CQI 2 (meaning CQI 2 was ``on'' at the time of the 
adverse NBBO change).
    \29\ ``Accuracy rate'' means the percentage of time that CQI 2 
accurately predicted the direction of the next price change.
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    IEX introduced CQI 2 into its System on March 31, 2023 (i.e., it 
began generating quote instability determinations for informational and 
planning purposes), and CQI 2 became optionally available for D-Peg, P-
Peg, and C-Peg orders on May 16, 2023 \30\ and for all D-Limit orders 
on November 10, 2023.\31\
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    \30\ See IEX Trading Alert # 2023-010, available at https://iextrading.com/alerts/#/217; see also CQI 2 Approval Order, supra 
note 27.
    \31\ See IEX Trading Alert # 2023-023, available at https://iextrading.com/alerts/#/231; see also Securities Exchange Act 
Release No. 98625 (September 28, 2023), 88 FR 68709 (October 4, 
2023) (SR-IEX-2023-10).
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    CQI 2 utilizes real time relative quoting activity of certain 
Protected Quotations \32\ and a ``quote instability calculation'' in 
which nine separate ``quote instability rules'' \33\--each with 
specific conditions based on either the price, size, or price and size 
of the Signal Exchanges to assess the probability of a crumbling quote. 
Each of these rules can trigger a quote instability determination for 
either the NBB (for buy orders) the NBO (for sell orders), or both, of 
a particular security, meaning the System treats the quote as unstable 
and CQI 2 is on at that price level for two milliseconds.\34\ During 
all other times, the quote is considered stable, and CQI 2 is off. The 
System independently assesses the stability of the Protected NBB and 
Protected NBO for each security.
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    \32\ Specifically, IEX utilizes real time relative quoting 
activity of Protected Quotations from the ``Signal Exchanges'', 
which are the following eleven exchanges: Cboe BZX Exchange 
(``BATS''), Cboe BYX Exchange (``BATY''), Cboe EDGA Exchange 
(``EDGA''), Cboe EDGX Exchange (``EDGX''), MIAX Pearl (``EPRL''), 
MEMX LLC (``MEMX''), the Nasdaq Stock Market (``XNGS''), Nasdaq BX 
(``XBOS''), Nasdaq PHLX (``XPHL''), the New York Stock Exchange 
(``XNYS''), and NYSE Arca (``ARCX''). See IEX Rule 11.190(g).
    \33\ See IEX Rule 11.190(g)(2)(C).
    \34\ The nine rules are designed to work together in determining 
whether a quote instability determination is triggered, so if a User 
selects the alternative model all nine rules would be applicable. 
Users cannot elect that only some of the rules would apply.
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    CQI 2 includes four categories of rules designed to predict whether 
the Protected NBB or Protected NBO is unstable, as follows:
     Disappearing bids (or offers)--This category includes four 
rules that focus on whether one or more of the Signal Exchanges is no 
longer disseminating a bid or offer at the Signal Best Bid \35\ or 
Signal Best Offer \36\ as applicable; \37\
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    \35\ ``Signal Best Bid'' means the highest Protected Bid of the 
Signal Exchanges. See IEX Rule 11.190(g)(2)(B)(i).
    \36\ ``Signal Best Offer'' means the lowest Protected Offer of 
the Signal Exchanges. See IEX Rule 11.190(g)(2)(B)(v).
    \37\ See IEX Rule 11.190(g)(2)(C)(i).
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     Recent changes in quote size--This category includes two 
rules that focus on whether there is an imbalance in the size of bids 
and offers at the Signal Best Bid or Signal Best Offer; \38\
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    \38\ See IEX Rule 11.190(g)(2)(C)(ii).
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     Locked or crossed market--This category includes one rule 
that focuses on situations where the Signal Best Bid and Signal Best 
Offer are locked or crossed; \39\ and
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    \39\ See IEX Rule 11.190(g)(2)(C)(iii).
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     Quotation Changes--This category includes two rules that 
focus on changes to the Signal Best Bid or Signal Best Offer.\40\
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    \40\ See IEX Rule 11.190(g)(2)(C)(iv).
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    On a security-by-security basis, if the specified conditions of any 
of the quote instability rules are met, then the rule is deemed to be 
``True'' for that security. Each rule also must be active before it can 
trigger a quote instability determination. When one or more quote 
instability rules is deemed to be True and any of such rules are 
active, the System will treat the quote as unstable.
    For CQI 2, the Exchange maintains an activation value (``Activation 
Value'') for each quote instability rule, which is used to determine if 
each rule is active. Each rule's Activation Value is computed (on a 
security-by-security basis for both the Bid side and the Offer side) in 
real time as a function of the number of times the quote moves to a 
less aggressive price within the two milliseconds following the time 
the rule was True and the total number of times the rule was True. 
Whenever the Activation Value for a given rule exceeds a fixed 
predetermined activation threshold specific to that rule (``Activation 
Threshold''),\41\ the rule is active (i.e., it is eligible to trigger a 
quote instability determination when True). If a rule's Activation 
Value is below its Activation Threshold, it will not trigger a quote 
instability determination when True.
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    \41\ The Activation Thresholds for the quote instability rules 
range from 0 to .50.
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    The Activation Value and Activation Threshold computations are 
designed to optimize the overall accuracy of the quote instability 
determinations by providing a mechanism to turn off a particular rule 
when market conditions are such that it is relatively less accurate in 
predicting a crumbling quote. IEX believes that utilizing Activation 
Thresholds is a useful innovation because it enables the use of rules 
that can be highly predictive in certain market conditions but not in 
others. The Activation Thresholds are tailored for each rule based on 
the rule's expected general accuracy in predicting a crumbling quote, 
based on IEX's market data analysis, so that a rule that has a higher 
potential to be less accurate has a higher activation threshold burden 
to meet. The Activation Thresholds are designed to enable increased 
coverage for CQI 2 by enabling more frequent triggers with accuracy 
control safeguards.
    The Exchange utilizes an initial activation value of 0.50 for all 
rules at the start of the Regular Market Session,\42\ which is then 
modified during the course of the Regular Market Session to reflect 
each rule's predictive performance. Specifically, each time a rule is 
True \43\ its existing Activation Value is multiplied by a Decay Factor 
of 0.94. In addition, each time the Protected NBB or Protected NBO 
moves to a less aggressive price within two milliseconds of a rule 
being True at that

[[Page 31238]]

price level, 0.06 will be added to that rule's existing Activation 
Value (i.e., (1 - decay factor) + previous Activation Value) as 
specified in IEX Rule 11.190(g)(2)(D)(ii).
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    \42\ See IEX Rule 1.160(gg).
    \43\ Excluding instances where the rule was already True at the 
same unchanged price level in the prior two milliseconds.
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    Whenever a rule is True, the System evaluates if its Activation 
Value exceeds its Activation Threshold, regardless of whether the rule 
is active. If a rule is True and its Activation Value exceeds its 
Activation Threshold, the rule is active and will trigger the System to 
treat the relevant quote as unstable. If a rule is True but its 
Activation Value does not exceed its Activation Threshold, the rule is 
inactive, and it will not trigger the System to treat the relevant 
quote as unstable. If one or more rules are True, and if any one of 
such rules has an Activation Value that exceeds the rule's Activation 
Threshold, the System will treat the relevant quote as unstable. The 
System continues to update the Activation Value for rules that are 
inactive, and if the Activation Value subsequently exceeds the rule's 
Activation Threshold, the System will reactivate the rule.
    IEX believes that these Activation Thresholds provide a dynamic 
performance evaluation methodology that is designed to optimize the 
frequency and accuracy of the quote instability calculation, by 
enabling IEX to utilize a broader array of rules that may be predictive 
of a crumbling quote in certain market conditions but not others.
    IEX Rule 11.190(g)(3) provides that IEX reserves the right to 
modify the quote instability calculations as appropriate, subject to a 
filing of a proposed rule change with the SEC. Pursuant to this 
provision, IEX identified a modification to CQI 2 that it believes will 
enhance its effectiveness, as described below.
Proposal
    IEX conducted an analysis of the efficacy of CQI 2 in predicting 
whether a crumbling quote would occur, by reviewing randomly selected 
market data from the second half of 2023 and the first quarter of 2024. 
These results were then validated by testing different randomly 
selected dates from the same time period. Based upon this analysis, IEX 
proposes to make an incremental change to the CQI 2 Activation Value 
calculation process, which is designed to enhance CQI 2's accuracy by 
better reflecting market conditions. Specifically, the Exchange is 
proposing to extend the amount of time the System waits after a quote 
instability rule is True to assess if the quote moved to a less 
aggressive price. Currently, the System waits two milliseconds 
following the time a quote instability rule was True to assess whether 
the quote instability rule accurately predicted that the next price 
change would be to a less aggressive price. IEX proposes to modify IEX 
Rule 11.190(g)(2)(D)(ii), so that the System would wait up to one 
second after a quote instability rule is True to assess if the next 
price change is to a less aggressive price (hereafter the ``CQI 2 
Update''). If the next price change occurs within one second after a 
quote instability rule is True and is to a less aggressive price, the 
System would add .06 to that rule's previous Activation Value. However, 
if one second passes from the time that a quote instability rule's 
conditions are met with no price change, or if the next price change 
was to a more aggressive price, then the System will not update that 
quote instability rule's Activation Value.
    In deciding to propose increasing the interval for the Activation 
Value calculation process to assess if the next price change was to a 
less aggressive price (from two milliseconds to one second), the 
Exchange considered that a predicted price change may take more than 
two milliseconds to occur for several reasons. For example, large 
reserve orders might take more than two milliseconds to fully exhaust 
the reserve volume allowing a price change to occur. Additionally, 
periods of relatively higher market volume (or bursts of market data) 
can impact the time it takes for price changes to materialize because 
of increased time for markets to process incoming orders and 
executions. During periods of market volatility, trading functions such 
as order processing, order matching, and the publishing of market data 
may be delayed due to higher message rates (which are correlated with 
the Exchange making quote instability determinations). Significantly, 
during these time periods of increased market activity and volatility, 
latency arbitrage strategies have an opportunity to be more prevalent 
because there are more opportunities to react to market volatility to 
take advantage of resting orders.
    In light of the foregoing, IEX believes a modest increase of the 
time used in the Activation Value calculation process is a narrowly 
tailored approach to enhance the efficacy of CQI 2 in predicting an 
imminent quote change to a price adverse to a resting order.
    IEX's market data analysis \44\ evidences that the proposed CQI 2 
Update would result in an incremental enhancement to the efficacy of 
CQI 2 as set forth in the chart below:
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    \44\ As noted above, IEX analyzed the efficacy of CQI 2 and 
developed the proposed incremental enhancement in this rule filing 
using market data from the second half of 2023 and the first quarter 
of 2024. However, for Charts 1, 2, and 3, IEX used all the trading 
days in January and February 2024, which, according to IEX's market 
data analysis, were representative of regular trading activity 
throughout the calendar year.

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[[Page 31239]]

[GRAPHIC] [TIFF OMITTED] TN24AP24.157

    Thus, IEX believes that the CQI 2 Update will incrementally enhance 
the existing protection provided by D-Limit orders by providing greater 
coverage (i.e., identifying more potentially crumbling quotes) with 
increased accuracy. IEX estimated the impact of the CQI 2 Update 
(compared to the existing CQI 2) on standard limit order executions by 
simulating the markouts \45\ had the orders been subject to the 
protection of the current CQI 2 or the CQI 2 Update. Assessment of 
these executions is designed to simulate differences in adverse 
selection protection from the current CQI 2 and the CQI 2 Update. As 
shown in the chart below, both the current CQI 2 and the CQI 2 Update 
result in improved markouts over executions without CQI protection, but 
the CQI 2 Update would have provided incrementally enhanced protection 
compared to the current CQI 2 (as measured by markouts) because it is 
better at identifying situations when adverse selection is most likely:
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    \45\ Markouts measure the direction and degree to which the 
market moved after an execution, and are often measured as the 
difference between the execution price and the midpoint of the NBBO 
at various time intervals after a trade. Markouts are typically used 
as a way to measure the ``quality'' of a trade. In particular, 
short-term markouts of several milliseconds after the time of 
execution, are often used to assess whether an order was subject to 
``adverse selection'' that can occur when a liquidity providing 
order is executed at a price that was about to become stale as a 
result of certain speed-based trading strategies.
[GRAPHIC] [TIFF OMITTED] TN24AP24.158

    Similarly, IEX believes that the CQI 2 Update will incrementally 
enhance the existing protection CQI 2 offers pegged orders by providing 
greater coverage (i.e., identifying more potentially crumbling quotes) 
with increased accuracy. IEX estimated the impact of the CQI 2 Update 
(compared to the existing CQI 2) on traditional midpoint order 
executions by simulating the markouts had the orders been subject to 
the protection of the current CQI 2 or

[[Page 31240]]

the CQI 2 Update. Assessment of these executions is designed to 
simulate differences in adverse selection protection from CQI 2 and CQI 
2 Update. As shown in the chart below, both CQI 2 and the CQI 2 Update 
result in improved markouts over executions without CQI protection, but 
CQI 2 Update would have provided incrementally enhanced protection 
compared to CQI 2 (as measured by markouts) because it is better at 
identifying situations when adverse selection is most likely:
[GRAPHIC] [TIFF OMITTED] TN24AP24.159

    IEX believes that this proposed minor change in methodology for the 
calculation of Activation Values would increase CQI 2's efficacy by 
better reflecting the market activity in a particular security, as 
described above. Specifically, IEX believes that it is appropriate to 
provide slightly more time to determine if the next price change is 
adverse (i.e., consistent with the quote instability determination 
prediction), and thus consistent with the quote instability 
determination that the quote in question was about to become stale and 
thus subject to potential latency arbitrage, in calculating whether the 
rule's Activation Value should be increased. IEX believes that one 
second is an appropriate time period to wait based on an analysis of 
the effectiveness of various potential time frames (including the 
current two milliseconds) in predicting whether a crumbling quote would 
occur, by reviewing randomly selected market data from the second half 
of 2023 and the first quarter of 2024.
    Accordingly, based on this analysis, the Exchange believes that 
extending the time period used to calculate Activation Value changes to 
one second is a narrowly tailored approach that would incrementally 
increase the effectiveness of CQI 2 in predicting whether a crumbling 
quote will occur.
Cross-Reference and Typographical Error Fixes
    IEX also proposes to correct two internal cross-reference errors in 
IEX Rule 11.190(g)(2). Specifically, IEX proposes to modify the cross 
reference in IEX Rule 11.190(g)(2)(B) to refer to IEX Rule 
11.190(g)(2)(C), instead of IEX Rule 11.190(g)(1)(C), and to modify the 
cross reference in IEX Rule 11.190(g)(2)(D)(i) to refer to IEX Rule 
11.190(g)(2)(A), instead of IEX Rule 11.190(g)(1)(A). While these two 
cross-references cite to the rule provisions for CQI 1 instead of CQI 
2, IEX notes that the context of the rule text mitigates any possible 
confusion since each is within the rule provisions describing CQI 2. 
Moreover, the third paragraph of IEX Rule 11.190(g), which provides a 
summary description of CQI 2, accurately describes the functionality 
that is described in the two rule provisions containing cross-reference 
errors.
    Finally, IEX proposes to make a typographical correction to IEX 
Rule 11.190(g)(2)(B)(vii) by adding a missing period to the end of the 
text.
Implementation
    The Exchange will announce the implementation date of the proposed 
rule change by Trading Alert at least ten business days in advance of 
such implementation date and within 90 days of effectiveness of this 
proposed rule change.
2. Statutory Basis
    IEX believes that the proposed rule change is consistent with 
Section 6(b) \46\ of the Act in general, and furthers the objectives of 
Section 6(b)(5) of the Act,\47\ in particular, in that it is designed 
to prevent fraudulent and manipulative acts and practices, to promote 
just and equitable principles of trade, to foster cooperation and 
coordination with persons engaged in facilitating transactions in 
securities, to remove impediments to and perfect the mechanism of a 
free and open market and a national market system and, in general, to 
protect investors and the public interest. As discussed in the Purpose 
section, the proposed minor change is based on the Exchange's analysis 
of market data, which supports that the proposed change would 
incrementally optimize the effectiveness

[[Page 31241]]

of CQI 2 by better reflecting market conditions that could delay a 
predicted quote change being realized until more than two milliseconds 
(but less than one second) has passed. Further, as noted in Chart 1 in 
the Purpose section, the proposed CQI 2 Update would increase CQI 2's 
volume-weighted coverage by 6.4% (from 63.3% to 69.7%) while increasing 
its volume-weighted accuracy by 2% (from 78% to 80%). Thus, the 
Exchange believes that it is consistent with the Act to expand the 
amount of time used to calculate Activation Value updates because it is 
designed to provide additional protection to D-Limit orders and CQI-
enhanced pegged orders from adverse selection associated with latency 
arbitrage during periods of quote instability, thus protecting 
investors and the public interest. Moreover, IEX's market data 
analysis, as described in the Purpose section and demonstrated in Chart 
1, evidences that, as with CQI 2, the CQI 2 Update would be ``on'' for 
only a small portion of the trading day while providing robust 
protection in a narrowly tailored manner that balances the ability of 
long-term investors to access displayed liquidity in the ordinary 
course against the current structural advantages enjoyed by short-term 
latency arbitrage trading strategies that rely on superior access to 
the fastest data and connectivity.
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    \46\ 15 U.S.C. 78f.
    \47\ 15 U.S.C. 78f(b)(5).
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    Additionally, the Exchange believes that the proposed rule change 
may result in more and larger sized displayed and non-displayed D-Limit 
orders and CQI 2 enhanced pegged orders being entered on IEX as a 
result of the improved coverage and continued accuracy of CQI 2. To the 
extent more orders are entered, the increased liquidity would benefit 
all IEX members and their customers. And to the extent that more 
displayed D-Limit orders are entered, price discovery and price 
formation will be enhanced on IEX and in the market generally to the 
benefit of all IEX Members and market participants. Furthermore, the 
Exchange notes that all Members and their customers are eligible to use 
D-Limit orders and CQI 2 enhanced pegged orders, and therefore all 
Members and their customers are eligible to benefit from the proposed 
enhanced protections against adverse selection in the CQI 2 Update. 
Thus, the Exchange believes that application of the rule change is 
equitable and not unfairly discriminatory.
    Additionally, the Exchange notes that the existing CQI 2 is a 
narrowly tailored fixed formula specified transparently in IEX rules, 
that was previously approved by the SEC.\48\ The Exchange is not 
proposing to add any new functionality, but merely to enhance an SEC 
approved quote instability calculation as described in the Purpose 
Section. And as proposed, CQI 2 will continue to be a fixed formula 
specified transparently in IEX's rules. Thus, IEX does not believe that 
the proposal raises any new or novel issues that have not already been 
considered by the Commission, in that the CQI 2 functionality was 
previously approved by the Commission.\49\
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    \48\ See supra note 27.
    \49\ See supra note 27.
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    Also, IEX Rule 11.190(g)(3) specifically contemplates that the 
Exchange will periodically modify the quote instability calculations as 
appropriate, and the proposed rule change is consistent with this 
provision.
    Furthermore, the Exchange believes that the proposed corrections of 
the two internal cross-reference errors in IEX Rule 11.190(g)(2)(B) and 
IEX Rule 11.190(g)(2)(D)(i) would remove impediments to and perfect the 
mechanism of a free and open market and a national market system 
because the proposed changes are designed to update internal rule 
references. As noted in the Purpose section, the overall context of CQI 
2's rule text mitigates any possible confusion attributable to the 
erroneous cross-references. Nevertheless, the Exchange believes that 
Users would benefit from the increased clarity of correct cross-
reference citations, thereby reducing potential confusion and ensuring 
that persons subject to the Exchange's jurisdiction, regulators, and 
the investing public can more easily navigate and understand the 
Exchange's rules.
    Additionally, IEX believes that the proposed addition of a period 
at the end of IEX Rule 11.190(g)(2)(B)(vii) is consistent with Section 
6(b)(5) of the Act because it will eliminate any confusion regarding 
IEX rules by correcting an inadvertent typographical error without 
changing the substance of such rule.

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

    IEX does not believe that the proposed rule change will result in 
any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act. To the contrary, as discussed 
in the Statutory Basis section, the proposal is designed to enhance 
competition by incentivizing additional liquidity.
    With regard to intra-market competition, the proposed change to CQI 
2 would apply equally to all Members on a fair, impartial and 
nondiscriminatory basis without imposing any new burdens on the Members 
because D-Limit is an optional order type, and CQI 2 is one of two 
choices of CQI that Members may apply to their eligible pegged orders. 
The Commission has already approved CQI 2.\50\ As discussed in the 
Purpose and Statutory Basis sections, the proposed rule change is 
designed to provide a narrowly tailored enhancement to an SEC approved 
quote instability calculation; therefore, no new burdens are being 
proposed.
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    \50\ See supra note 27.
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    With regard to inter-market competition, other exchanges are free 
to adopt similar quote instability calculations subject to the SEC rule 
filing process. In this regard, the Exchange notes that NYSE American 
LLC until recently had a ``discretionary pegged order type'', see 
former NYSE American LLC Rule 7.31E(h)(3)(D), which copied an earlier 
iteration of the Exchange's quote instability calculation.\51\
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    \51\ See Securities Exchange Act Release 34-99827 (March 21, 
2024), 89 FR 21302 (March 27, 2024) (SR-NYSEAMER-2024-21) (modifying 
NYSE American's discretionary pegged order type to remove its quote 
instability calculation).
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C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    Written comments were neither solicited nor received.

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

    Because the foregoing 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 for 30 days from the date on which it was 
filed, or such shorter time as the Commission may designate, it has 
become effective pursuant to Section 19(b)(3)(A) of the Act and Rule 
19b-4(f)(6) thereunder.\52\
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    \52\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6) 
requires a self-regulatory organization to give the Commission 
written notice of its intent to file the proposed rule change at 
least five business days prior to the date of filing of the proposed 
rule change, or such shorter time as designated by the Commission. 
The Exchange has satisfied this requirement.
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such

[[Page 31242]]

action is necessary or appropriate in the public interest, for the 
protection of investors, or otherwise in furtherance of the purposes of 
the Act.

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 (https://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
file number SR-IEX-2024-07 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.

All submissions should refer to file number SR-IEX-2024-07. 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 (https://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 
a.m. and 3 p.m. Copies of the filing also will be available for 
inspection and copying at the principal office of the Exchange. Do not 
include personal identifiable information in submissions; you should 
submit only information that you wish to make available publicly. We 
may redact in part or withhold entirely from publication submitted 
material that is obscene or subject to copyright protection. All 
submissions should refer to file number SR-IEX-2024-07 and should be 
submitted on or before May 15, 2024.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\53\
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    \53\ 17 CFR 200.30-3(a)(12).
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Vanessa A. Countryman,
Secretary.
[FR Doc. 2024-08683 Filed 4-23-24; 8:45 am]
BILLING CODE 8011-01-P