[Federal Register Volume 77, Number 169 (Thursday, August 30, 2012)]
[Notices]
[Pages 52773-52774]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-21389]
[[Page 52773]]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-67727; File No. SR-EDGX-2012-25]
Self-Regulatory Organizations; EDGX Exchange, Inc.; Order
Approving a Proposed Rule Change To Amend EDGX Rules To Add the Route
Peg Order
August 24, 2012.
I. Introduction
On June 26, 2012, EDGX Exchange, Inc. (``Exchange'') filed with the
Securities and Exchange Commission (``Commission''), pursuant to
Section 19(b)(1) of the Securities Exchange Act of 1934 (``Act'') \1\
and Rule 19b-4 thereunder,\2\ a proposed rule change to amend Exchange
Rule 11.5 to provide an additional order type, the Route Peg Order. In
addition, the Exchange proposed to amend Exchange Rule 11.8 to describe
the priority of the Route Peg Order relative to other orders on the
EDGX Book. The proposed rule change was published for comment in the
Federal Register on July 5, 2012.\3\ The Commission received no comment
letters on the proposed rule change. On August 16, 2012, the Commission
extended to October 3, 2012, the time period in which to approve the
proposed rule change, disapprove the proposed rule change, or institute
proceedings to determine whether to disapprove the proposed rule
change.\4\ This order approves the proposed rule change.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 67290 (June 28,
2012), 77 FR 39768 (``Notice'').
\4\ See Securities Exchange Act Release No. 67676 (August 16,
2012), 77 FR 50740 (August 22, 2012).
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II. Description of the Proposed Rule Change
The Exchange proposed to add a new order type, the Route Peg
Order.\5\ 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'') \6\ for
Route Peg Orders to sell, against routeable orders that are equal to or
less than the size of the Route Peg Order. The Route Peg Order would be
a passive, resting order that could only provide liquidity. The Route
Peg Order would not be permitted to take liquidity. Incoming orders
that are designated as eligible for routing would be able to interact
with Route Peg Orders. The incoming order would first be matched
according to the price/time priority rules established by Exchange 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.\7\ The Route Peg Order is intended to provide
liquidity in the event that a marketable order would otherwise route to
another destination. In addition, a Route Peg Order would only trade
with orders that are equal to or smaller in quantity than the original
order quantity of the Route Peg Order.\8\ If a Route Peg Order were
partially executed, it would be assigned a new time priority and new
timestamp after each partial execution until either the remaining size
is exhausted or the Route Peg Order is cancelled by the Member.\9\
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\5\ The Exchange proposed to amend Exchange Rule 11.5(c) to add
a new subparagraph (17) describing the Route Peg Order. See Notice,
supra note 3 at 39769.
\6\ Together, the NBO and NBB are referred to as the ``NBBO.''
\7\ The Exchange proposed to codify the priority of the Route
Peg Order in proposed new paragraph (a)(2)(E) of Exchange Rule 11.8.
See Notice, supra note 3 at 39769 n. 5.
\8\ 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 Route Peg Order, but those orders would still need to
be equal to or smaller than the original order quantity of the Route
Peg Order. The Exchange stated that it elected to design the system
in this manner to avoid the possibility of a single block-sized
order potentially clearing all of the liquidity posted on the
Exchange attributable to Route Peg Orders. Id. at 39769.
\9\ The Exchange proposed to codify this principle in new
subparagraph (a)(7) of Exchange Rule 11.8. The Exchange also
proposes to add an exception for the Route Peg Order in Exchange
Rule 11.8(a)(5), which otherwise would require that a partially
executed order retain priority at the same limit price. The Exchange
asserted that assigning a new timestamp after each partial execution
would allow for a rotating priority of execution for Users (as
defined in Exchange Rule 1.5(ee)) who place Route Peg Orders. Id. at
39769 n. 6.
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Route Peg Orders would be able to be entered, cancelled and
cancelled/replaced prior to and during Regular Trading Hours.\10\ 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.\11\ A Route Peg Order would not execute at a price that is
inferior to a Protected Quotation,\12\ 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.
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\10\ As defined in Exchange Rule 1.5(y).
\11\ For example, 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 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.
\12\ As defined in Exchange Rule 1.5(v).
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III. Discussion and Commission's Findings
After careful review, the Commission finds that the proposed rule
change is consistent with the requirements of the Act and the rules and
regulations thereunder applicable to a national securities
exchange.\13\ In particular, the Commission finds that the proposed
rule change is consistent with Section 6(b)(5) of the Act,\14\ which
requires, among other things, that the rules of a national securities
exchange be designed to promote just and equitable principles of trade,
to remove impediments to and perfect the mechanism of a free and open
market and a national market system and, in general, to protect
investors and the public interest, and not be designed to permit unfair
discrimination between customers, issuers, brokers, or dealers.
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\13\ In approving this proposed rule change, the Commission
notes that it has considered the proposed rule's impact on
efficiency, competition, and capital formation. See 15 U.S.C.
78c(f).
\14\ 15 U.S.C. 78f(b)(5).
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The Exchange notes that the Route Peg Order is designed to
incentivize Users \15\ to place greater liquidity at the NBBO, thereby
promoting more favorable executions for the benefit of public
customers. According to the Exchange, the Route Peg Order would result
in more favourable and efficient executions 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.
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\15\ As defined in Exchange Rule 1.5(ee).
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Further, the Exchange believes that these benefits of the Route Peg
Order would be realized only if they interact with orders that are
eligible for routing, as they are characteristic of public customers
who desire to execute at the best price. In contrast, notes the
Exchange, professional traders typically
[[Page 52774]]
expect to post to the book, execute immediately against the Exchange's
best bid or offer, or ferret out hidden liquidity at or inside the NBBO
and use non-routable orders to achieve these ends. The Exchange
believes that Users would be reluctant to post liquidity through the
Route Peg Order if such orders could interact with professional
traders. Finally, the Exchange highlights that any User can place a
routable order that is eligible for execution against a Route Peg
Order.
Based on the Exchange's statements, the Commission believes that
the proposed rule change is consistent with Section 6(b)(5) of the Act.
IV. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\16\ that the proposed rule change (SR-EDGX-2012-25) be, and it
hereby is, approved.
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\16\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\17\
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\17\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-21389 Filed 8-29-12; 8:45 am]
BILLING CODE 8011-01-P