[Federal Register Volume 77, Number 129 (Thursday, July 5, 2012)]
[Notices]
[Pages 39768-39771]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-16402]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-67290; File No. SR-EDGX-2012-25]
Self-Regulatory Organizations; EDGX Exchange, Inc.; Notice of
Filing of Proposed Rule Changes To Amend EDGX Rules To Add the Route
Peg Order
June 28, 2012.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given
that on June 26, 2012, the EDGX Exchange, Inc. (the
[[Page 39769]]
``Exchange'' or ``EDGX'') filed with the Securities and Exchange
Commission (the ``Commission'') the proposed rule change as described
in Items II and III below, which items have been prepared by the self-
regulatory organization. The Commission is publishing this notice to
solicit comments on the proposed rule changes from interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Changes
The Exchange proposes to amend Rule 11.5 to provide an additional
order type, the Route Peg Order. In addition, the Exchange proposes to
amend Rule 11.8 to describe the priority of the Route Peg Order
relative to other orders on the EDGX Book.
The text of the proposed rule changes are attached as Exhibit 5 \3\
and are available on the Exchange's Web site at www.directedge.com, at
the Exchange's principal office, at the Public Reference Room of the
Commission, and on the Commission's Web site at www.sec.gov.
---------------------------------------------------------------------------
\3\ The Commission notes that the Exhibit 5 is attached to the
filing, but is not attached to this Notice.
---------------------------------------------------------------------------
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Changes
In its filing with the Commission, the Exchange included statements
concerning the purpose of, and basis for, the proposed rule changes and
discussed any comments it received on the proposed rule changes. 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
Statutory Basis for, the Proposed Rule Changes
Purpose
The Exchange proposes to amend Rule 11.5(c) to add a new
subparagraph (17) that describes a Route Peg Order. A Route Peg Order
would be a non-displayed limit order eligible for execution at the
national best bid (the ``NBB'') for Route Peg Orders to buy, and at the
national best offer (the ``NBO'', and together with the NBB, the
``NBBO'') for Route Peg Orders to sell, against routable orders \4\
that are equal to or less than the size of the Route Peg Order. Thus,
the Route Peg Order would only be eligible for execution at a price
that matches the NBB for buy orders, and the NBO for sell orders. The
Route Peg Order would be a passive, resting order designed exclusively
to provide liquidity; therefore, it would not be permitted to take
liquidity.
---------------------------------------------------------------------------
\4\ Orders that are not designated for routing are not
executable against Route Peg Orders because Users entering non-
routable orders typically expect to post liquidity on EDGX or seek
to execute immediately against the EDGX displayed quote or attempt
to ferret out hidden liquidity at or within the NBBO, e.g., through
an Immediate-or-Cancel Order type. By contrast, the Route Peg Order
would be designed for Users to interact with other Users that seek
to access liquidity at the NBBO, and that employ routable orders to
access such liquidity at a range of trading venues.
---------------------------------------------------------------------------
An incoming order that has been designated as eligible for routing
would be able to interact with Route Peg Orders. Such an order would
first be matched against orders other than Route Peg Orders in price/
time priority in accordance with Rule 11.8(a)(2)(A)-(D). If any portion
of the incoming order remained unexecuted, only then would such order
be eligible to execute against Route Peg Orders.\5\ Thus, the Route Peg
Order is intended only to provide liquidity in the event that a
marketable order would otherwise route to another destination.
---------------------------------------------------------------------------
\5\ The Exchange proposes to codify this principle in proposed
new paragraph (a)(2)(E) of Rule 11.8.
---------------------------------------------------------------------------
As mentioned supra, Route Peg Orders would only trade with orders
that are equal to or smaller in quantity than the original order
quantity of the Route Peg Order. If a Route Peg Order were partially
executed, it would be able to execute against orders that were larger
than the remaining balance of the order, but those orders would still
need to be equal to or smaller than the original order quantity of the
Route Peg Order.\6\
---------------------------------------------------------------------------
\6\ If a Route Peg Order were partially executed, the remaining
portion of the order would continue to be eligible for execution,
but it would be assigned a new time priority and new timestamp after
each partial execution, until either the remaining size of the order
is exhausted or it is cancelled. Assigning a new timestamp after
each partial execution would allow for a kind of rotating priority
of execution for Users who place Route Peg Orders. The Exchange is
proposing to codify this principle in Rule 11.8(a)(5) and proposed
new subparagraph (a)(7) of Rule 11.8.
---------------------------------------------------------------------------
The following example illustrates how this would work: Assume
Member A places a Route Peg Order to buy 500 shares, and an incoming
order to sell executes against the Route Peg Order at the NBB for 300
shares. That would leave Member A with a remaining balance of 200
shares to buy. Another incoming order to sell 400 shares would be
eligible to execute against Member A's balance, for 200 shares, because
the size of its order would be less than the original size of Member
A's order. If, however, the incoming order were to sell 600 shares, it
would not execute against the Route Peg Order because the size of the
order would be greater than the original size of Member A's order. In
that event, such order would be routed externally. It should be noted,
however, that if there were another Route Peg Order on the Book, behind
Member A's order in time priority, for, say, 1,000 shares, the order to
sell 600 shares would execute against that second Route Peg Order.
The Exchange elected to design the System in this manner, as
opposed to alternatives such as measuring incoming orders against the
aggregate size of all Route Peg Orders then on the Book, in order to
avoid the possibility of a single block-sized order potentially
clearing all the liquidity on the Book attributable to Route Peg
Orders.
Route Peg Orders would be able to be entered, cancelled and
cancelled/replaced prior to and during Regular Trading Hours.\7\ Route
Peg Orders would be eligible for execution in a given security during
Regular Trading Hours, except that, even after the commencement of
Regular Trading Hours, Route Peg Orders would not be eligible for
execution (1) in the opening cross, and (2) until such time that
regular session orders in that security could be posted to the EDGX
Book.\8\ A Route Peg Order would not execute at a price that is
inferior to a Protected Quotation,\9\ and would not be permitted to
execute if the NBBO were locked or crossed. Any and all remaining,
unexecuted Route Peg Orders would be cancelled at the conclusion of
Regular Trading Hours.
---------------------------------------------------------------------------
\7\ As defined in Rule 1.5(y).
\8\ To illustrate, for stocks listed on the New York Stock
Exchange LLC (the ``NYSE''), regular session orders can be posted to
the EDGX Book upon the dissemination by the responsible Securities
Information Processor (``SIP'') of an opening print in that stock on
the NYSE. Conversely, for stocks listed on, say, the NASDAQ Stock
Market LLC, regular session orders can be posted to the EDGX Book
upon the dissemination of the NBBO by the responsible SIP in that
stock.
\9\ As defined in Rule 1.5(v).
---------------------------------------------------------------------------
The Route Peg Order would provide Members with an additional means
to post stable trading interest at the NBB and NBO. The purpose of the
Route Peg Order is to encourage Members to further enhance the depth of
liquidity at the NBBO on the Exchange. The Exchange believes that if
the Route Peg Order became widely used, Members seeking to access
liquidity at the NBBO would be more motivated to direct their orders to
EDGX because they would have a heightened expectation of the
availability of liquidity at the NBBO. In addition, a User \10\ whose
order
[[Page 39770]]
executed against a Route Peg Order would be able to obtain an execution
at the NBB or NBO while minimizing the risk that incremental latency
associated with routing the order to an away destination may result in
an inferior execution.
---------------------------------------------------------------------------
\10\ As defined in Rule 1.5(ee).
---------------------------------------------------------------------------
Basis
The Exchange believes that the proposed rule changes are consistent
with Section 6(b) of the Act \11\ and further the objectives of Section
6(b)(5) of the Act,\12\ in that they are 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, and to
remove impediments to and perfect the mechanisms of a free and open
market and a national market system, and, in general, to protect
investors and the public interest. Moreover, the Exchange believes that
the proposed rule changes are not designed to permit unfair
discrimination between customers, issuers, brokers, or dealers.
---------------------------------------------------------------------------
\11\ 15 U.S.C. 78f(b).
\12\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
The benefits to investors of enhanced depth of liquidity at the
NBBO in today's market structure cannot be understated. The Route Peg
Order is designed to incentivize Users to place greater liquidity at
the NBBO, thereby promoting more favorable and efficient executions for
the benefit of public customers. It would do so by (1) Offering
liquidity providers a means to use the Exchange to post larger limit
orders that are only executable at the NBBO and that do not disclose
their trading interest to other market participants in advance of
execution; (2) offering market participants seeking to access liquidity
a greater expectation of market depth at the NBBO than may currently be
the case; and (3) offering more predictable executions at the NBBO for
Users by reducing the risk that incremental latency associated with
routing an order to an away destination may result in an inferior
execution. Thus, by providing an additional means by which market
participants can be encouraged to post liquidity at the NBBO on the
Exchange, which would add depth and support to the NBBO on the Exchange
and mitigate the negative effects of market fragmentation, the proposed
rule changes would promote just and equitable principles of trade and
remove impediments to and perfect the mechanism of a free and open
market and national market system. Moreover, the proposed rule changes
would protect investors and the public interest by increasing the
probability of an execution on the Exchange at the NBBO in the event
that the order would otherwise be shipped to an external destination
and potentially miss an execution at the NBBO while in transit.
The Exchange believes, however, that the benefits to be derived
from Route Peg Orders would only be realized if Route Peg Orders only
interact with orders eligible for routing. Routable orders are
typically characteristic of public customers, both retail and
institutional (colloquially referred to as well as ``natural''
investors), who are concerned with executing at the best price. On the
other hand, non-routable orders typically expect to post liquidity on
the Book or seek to execute immediately, such as via an Immediate-or-
Cancel Order, against the Exchange's best displayed bid or offer or to
ferret out hidden liquidity at or inside the NBBO (colloquially
referred to as well as ``pinging''). Professional traders, in
particular, are more apt to submit, and often immediately cancel,
``pinging'' orders, as reflected in generally higher message-to-trade
ratios. The Exchange believes this type of order behavior, while it may
have its own business purposes, would not be suitable to interact with
Route Peg Orders simply because Users would be reticent to post
liquidity via Route Peg Orders given the uncertain, and therefore
difficult to manage, exposure to executions against orders attributable
to professional traders. Indeed, we believe potential liquidity
providers would be more apt to provide liquidity in alternative trading
systems and other non-exchange market centers where the customization
and segmentation experience may be less transparent and objective.
While non-routable orders would not be permitted to execute against
Route Peg Orders, the Exchange does not believe that the proposed rule
changes would be designed to permit unfair discrimination between
customers, brokers, or dealers. First, the Exchange believes this
limited exception is constructed narrowly enough, based on rational and
legitimate grounds, so that the compelling policy objectives, which are
wholly consistent with the Act, can be realized. Second, the Exchange
is not proposing to limit the type of User that can place routable
orders, or that can place Route Peg Orders. So any disadvantage
resulting from the limitation to executing against routable orders
would not target particular segments of market participants, per se,
but rather a particular type of market behavior. Therefore, the
Exchange believes that not only would the proposed rule changes not be
designed to permit unfair discrimination between customers, brokers, or
dealers, the differentiation between routable and non-routable orders
is an important element for the Route Peg Order to be able to achieve
the objectives of protecting investors and the public interest and
promoting just and equitable principles of trade.
Finally, because the Route Peg Order would be functionally similar
to the Supplemental Order that is currently offered by the NASDAQ Stock
Market LLC (``NASDAQ''),\13\ the Route Peg Order would promote
competition by enhancing EDGX's ability to compete with NASDAQ as well
as other non-exchange market centers.
---------------------------------------------------------------------------
\13\ See NASDAQ Rules 4751(f)(14), 4751(g) and 4757(a)(1)(D).
---------------------------------------------------------------------------
B. Self-Regulatory Organization's Statement on Burden on Competition
The proposed rule change does not impose any burden on competition
that is not necessary or appropriate in furtherance of the purposes of
the Act.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Changes Received From Members, Participants, or Others
The Exchange has not solicited, and does not intend to solicit,
comments on this proposed rule change. The Exchange has not received
any unsolicited written comments from members or other interested
parties.
III. Date of Effectiveness of the Proposed Rule Changes and Timing for
Commission Action
Within 45 days of the date of publication of this notice or within
such longer period (i) as the Commission may designate up to 45 days of
such date if it finds such longer period to be appropriate and
publishes its reasons for so finding or (ii) as to which the self-
regulatory organization consents, the Commission will:
(a) By order approve or disapprove such proposed rule changes; or
(b) Institute proceedings to determine whether the proposed rule
changes should be disapproved.
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:
[[Page 39771]]
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 No. SR-EDGX-2012-25 on the subject line.
Paper Comments
Send paper comments in triplicate to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, 100 F Street NE.,
Washington, DC 20549-1090.
All submissions should refer to File No. SR-EDGX-2012-25. This file
number should be included on the subject line if email is used. To help
the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all
written statements with respect to the proposed rule change that are
filed with the Commission, and all written communications relating to
the proposed rule change between the Commission and any person, other
than those that may be withheld from the public in accordance with the
provisions of 5 U.S.C. 552, will be available for Web site viewing and
printing in the Commission's Public Reference Room, 100 F Street NE.,
Washington, DC 20549, on official business days between the hours of 10
a.m. and 3 p.m. Copies of such filing also will be available for
inspection and copying at the principal office of the Exchange. All
comments received will be posted without change; the Commission does
not edit personal identifying information from submissions. You should
submit only information that you wish to make available publicly. All
submissions should refer to File No. SR-EDGX-2012-25 and should be
submitted on or before July 26, 2012.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\14\
---------------------------------------------------------------------------
\14\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-16402 Filed 7-3-12; 8:45 am]
BILLING CODE 8011-01-P