[Federal Register Volume 78, Number 50 (Thursday, March 14, 2013)]
[Notices]
[Pages 16311-16320]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-05878]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-69075; File No. SR-CHX-2013-07]
Self-Regulatory Organizations; Chicago Stock Exchange, Inc.;
Notice of Filing and Immediate Effectiveness of a Proposed Rule Change
Amending Article 1, Rule 2 (Order Types and Conditions); Article 20,
Rule 4 (Eligible Orders); and Article 20, Rule 6 (Locked and Crossed
Markets) To Modify the Operation of the CHX Only Order Type and Post
Only Order Modifier
March 8, 2013.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on March 1, 2013, the Chicago Stock Exchange, Inc. (``CHX'' 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. CHX has filed this proposal pursuant to Rule 19b-4(f)(6)
under the Act,\3\ which renders the proposal effective upon filing with
the Commission. The Commission is publishing this notice to solicit
comments on the proposed rule change from interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ 17 CFR 240.19b-4(f)(6).
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
CHX proposes to amend its rules to modify the operation of the CHX
Only order type and Post Only order modifier. The text of this proposed
rule change is available on the Exchange's Web site at www.chx.com and
in the Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the CHX included statements
concerning the purpose of and basis for the proposed rule changes 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 CHX 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 Change
1. Purpose
The Exchange proposes to amend its rules that collectively govern
the CHX Only order type and the Repricing Processes and the Post Only
order modifier, as detailed below.\4\ Through this proposed rule
change, the Exchange seeks to promote greater market liquidity and
competition, while maintaining compliance with relevant provisions of
the Act,\5\ Regulation NMS \6\ and Rule 201 of Regulation SHO.\7\
---------------------------------------------------------------------------
\4\ CHX Article 1, Rule 2 (Order Types and Conditions); CHX
Article 20, Rule 4 (Eligible Orders); CHX Article 20, Rule 8
(Operation of the Matching System).
\5\ 15 U.S.C. 78a et seq.
\6\ 17 CFR 242.610(d).
\7\ 17 CFR 242.201.
---------------------------------------------------------------------------
Background
In 2011, the Exchange introduced the CHX Only order type, which was
designed to encourage displayed liquidity on the Exchange and reduce
automatic cancellations by the Matching System.\8\ The CHX Only order
is a limit order that is to be ranked and executed on the Exchange,
without routing away to another trading center.\9\ Order senders have
the option to default all limit orders to ``CHX Only'' and therefore be
subject to repricing. Notably, the CHX Only order type features an
order handling functionality comprised of Regulation NMS repricing
(``NMS repricing'') and Short Sale repricing (Short Sale repricing
together with NMS repricing, the ``Repricing Processes''), to ensure
compliance with Regulation NMS \10\ and Rule 201 of Regulation SHO.\11\
The Repricing Processes are applied to all CHX Only orders that, at the
time of order entry, would be in violation of Regulation NMS \12\ and/
or Rule 201 of Regulation SHO,\13\ if displayed or executed at the
limit price. However, a CHX Only order that, at the time of order
entry, can be displayed or executed in compliance with Regulation NMS
\14\ and Rule 201 of Regulation SHO \15\ will not be subject to the
Repricing Processes and shall be displayed and will be executable
without repricing.
---------------------------------------------------------------------------
\8\ Securities Exchange Act Release No. 64319 (Apr. 21, 2011),
76 FR 23634 (Apr. 27, 2011) (SR-CHX-2011-04); CHX Article 1, Rule 2
(Order Types and Conditions); CHX Article 20, Rule 4 (Eligible
Orders).
\9\ The Exchange currently offers one order subtype (i.e. CHX
Only) and two order modifiers (``Do Not Route,'' under CHX Article
1, Rule 2(k) and ``Post Only,'' under CHX Article 20, Rule 4(b)(18))
that require order execution on the Exchange only. Of the three,
only orders marked CHX Only are eligible for the current Repricing
processes. An order that is not marked CHX Only shall not be
eligible for the current Repricing processes.
\10\ 17 CFR 242.610(d).
\11\ 17 CFR 242.201.
\12\ 17 CFR 242.610(d).
\13\ 17 CFR 242.201.
\14\ 17 CFR 242.610(d).
\15\ 17 CFR 242.201.
---------------------------------------------------------------------------
The Repricing Processes currently result in the repricing of an
order to, or ranking and/or display of an order at, a price other than
an order's limit price in order to comply with Regulation NMS \16\ and
Rule 201 of Regulation SHO.\17\ Specifically, NMS repricing currently
reprices and displays an order upon entry and in certain cases again
reprices and re-displays an order at a more aggressive price one time
if and when permissible, but does not continually reprice an order
based on changes in the National Best Bid (``NBB'') or National Best
Offer (``NBO'', and together with the NBB, the ``NBBO''). Also, Short
Sale repricing currently reprices an order once upon order entry and
does not again reprice such an order after it has
[[Page 16312]]
been displayed, notwithstanding movements to the NBB.
---------------------------------------------------------------------------
\16\ 17 CFR 242.610(d).
\17\ 17 CFR 242.201.
---------------------------------------------------------------------------
The Exchange now proposes to modify these processes so as to create
an order handling functionality that will reprice, re-rank and/or re-
display certain CHX Only orders multiple times depending on changes to
the NBBO (the repricing of CHX Only sell short orders subject to Rule
201 of Regulation SHO \18\ is dependent solely on declines to the NBB),
so long as the order can be ranked and displayed in an increment
consistent with the provisions of Regulation NMS \19\ and Rule 201 of
Regulation SHO,\20\ until the order is executed, cancelled or the
original limit price is reached. As such, the Exchange proposes to call
this functionality the ``CHX Only Price Sliding Processes,'' which will
be comprised of ``NMS Price Sliding'' and ``Short Sale Price Sliding.''
The Exchange also proposes to adopt language to make clear that the
proposed CHX Only Price Sliding Processes are based on Protected
Quotations \21\ at equities exchanges other than the Exchange (Short
Sale Price Sliding is based on the NBB) and that all CHX Only limit
orders subject to the CHX Only Price Sliding Processes shall maintain
their original limit price and shall retain their time priority with
respect to other orders based upon the time those orders were initially
received by the Matching System.
---------------------------------------------------------------------------
\18\ Id.
\19\ 17 CFR 242.610(d).
\20\ 17 CFR 242.201.
\21\ Pursuant to Article 20, Rule 6(a)(1), the Exchange defines
``Protected Quotation'' as that term is defined under Rule 600(b) of
Regulation NMS (17 CFR 242.600(b)), which states ``protected
quotation means a protected bid or a protected offer.'' In turn,
Rule 600(b)(57) of Regulation NMS (17 CFR 242.600(b)(57)) states,
``protected bid or offer means a quotation in an NMS stock that: (i)
Is displayed by an automated trading center; (ii) is disseminated
pursuant to an effective national market system plan; and (iii) is
an automated quotation that is the best bid or best offer of a
national securities exchange, the best bid or best offer of The
Nasdaq Stock Market, Inc., or the best bid or best offer of a
national securities association other than the best bid or best
offer of the Nasdaq Stock Market, Inc.''
---------------------------------------------------------------------------
With respect to the Post Only order modifier, the Exchange proposes
to amend the definition of ``Post Only'' (A) to clarify that a Post
Only order that would remove liquidity from the CHX book shall be
immediately cancelled and (B) to allow a CHX Only Post Only order to be
eligible for the CHX Only Price Sliding Processes.\22\
---------------------------------------------------------------------------
\22\ CHX Article 20, Rule 4(b)(18).
---------------------------------------------------------------------------
The Proposed CHX Only Price Sliding Processes
Initially, the Exchange proposes to replace all reference to
``repricing'' under the rule language of CHX Only orders, with the more
accurate term ``Price Sliding.'' Also, the Exchange proposes to add a
description of the CHX Only Price Sliding Processes by inserting a new
paragraph that states that the CHX Only Price Sliding Processes
utilized by the Matching System include both NMS Price Sliding and
Short Sale Price Sliding and that all CHX Only orders may be subject to
either NMS Price Sliding or Short Sale Price Sliding. It is important
to note that the proposed CHX Only Price Sliding Processes are only
applicable to CHX Only orders. Non- CHX Only orders that, at the time
of entry, would be in violation of Regulation NMS \23\ or Rule 201 of
Regulation SHO,\24\ including ``Do Not Route'' orders, will be
cancelled by the Matching System and rejected back to the order sender.
To this end, the Exchange also proposes to amend Article 20, Rule 6(d)
(Locked and Crossed Markets) to clarify that an order that would lock
or cross a Protected Quotation of an external market may, among other
possibilities, be subject to the CHX Only Price Sliding Processes, if
it is a ``CHX Only'' order.
---------------------------------------------------------------------------
\23\ 17 CFR 242.610(d).
\24\ 17 CFR 242.201.
---------------------------------------------------------------------------
Moreover, the Exchange proposes to adopt language to clarify that
CHX Only orders that are undisplayed in whole or in part (i.e. CHX Only
orders marked ``Do Not Display'' and ``Reserve Size,'' respectively)
are not eligible for the CHX Only Price Sliding Processes and that such
orders that, at the time of entry, are in violation of Regulation NMS
\25\ and Rule 201 of Regulation SHO \26\ shall be cancelled and
rejected back to the order sender. Also, the Exchange proposes to
clarify that when a short sale price test restriction under Rule 201 of
Regulation SHO is in effect, an undisplayed sell short order that is
priced above the NBB at the time of initial order entry, but due to a
change in the NBB, is now priced at or below the NBB, shall be
cancelled.
---------------------------------------------------------------------------
\25\ 17 CFR 242.610(d).
\26\ 17 CFR 242.201.
---------------------------------------------------------------------------
Proposed NMS Price Sliding
With respect to the current NMS repricing, if a CHX Only order
that, at the time of entry, would cross a Protected Quotation displayed
by another trading center, the Exchange will reprice the order and rank
the order in the CHX book at the locking price and display the order at
one minimum price variation below the NBO for bids or above the NBB for
offers. Similarly, in the event a CHX Only order that, at the time of
entry, would lock or cross a Protected Quotation displayed by another
trading center, the Exchange will display the order at one minimum
price variation below the NBO for bids or above the NBB for offers. If
a CHX Only order subject to NMS repricing is matched after the initial
repricing, the order will execute, without further repricing, so long
as Regulation NMS \27\ and Rule 201 of Regulation SHO \28\ are not
violated. If the CHX Only order subject to NMS repricing is not
subsequently executed or cancelled and the NBBO changes such that the
display of the original locking price of the CHX Only order subject to
NMS repricing would not lock or cross a Protected Quotation, the order
will receive a new timestamp and will be re-displayed at the original
locking price. After this repricing, the CHX Only order subject to NMS
Repricing will not be repriced, notwithstanding further changes to the
NBBO.
---------------------------------------------------------------------------
\27\ 17 CFR 242.610(d).
\28\ 17 CFR 242.201.
---------------------------------------------------------------------------
As an example of how the current NMS repricing functions, assume
that the NBBO for security XYZ is $30.25 by $30.26 and the best priced
bid in the CHX Matching System is $30.22. A CHX Only order to sell 100
shares of XYZ at $30.24 is submitted to the Matching System. Since the
display of the sell order at $30.24 would result in an impermissibly
crossed market, the CHX Only sell order would be ranked at the locking
price of $30.25 within the CHX book and displayed at $30.26, which is
one minimum price increment above the NBB, in order to avoid locking
the markets. If a buy limit order priced at $30.25 or higher were to be
subsequently submitted to the Matching System, it could be executed
against the resting CHX Only sell order at its ranked price of $30.25.
If the NBB were to decrease to $30.24 without the CHX Only sell order
being executed or cancelled, the CHX Only sell order would be re-
displayed at the original locking price of $30.25. If the NBB were to
decrease again to $30.23, the CHX Only sell order would remain ranked
and displayed at $30.25.
With respect to the proposed NMS Price Sliding, the Exchange
proposes to adopt language to make clear the distinction between
``Initial NMS Price Sliding'' (i.e. price sliding upon order entry) and
``Multiple NMS Price Sliding'' (i.e. price sliding orders that have
already been adjusted). Under the proposed ``Initial NMS Price
Sliding'' paragraph, the Exchange proposes to adopt language to clarify
that NMS Price Sliding would apply if a CHX Only order, at the time of
entry, would lock
[[Page 16313]]
or cross a Protected Quotation of an external market in violation of
Rule 610(d) of Regulation NMS.\29\ Aside from this clarification, the
Exchange proposes to adopt the functionality of the current NMS
repricing in the proposed NMS Price Sliding, whereby CHX Only orders
that lock or cross a Protected Quotation of an external market will be
initially ranked at the locking price and will be displayed by the
Matching System at one minimum price variation below the current NBO
for bids and one minimum price variation above the current NBB for
offers. In doing so, the Exchange further proposes to refer to these
displayable prices as the ``Permitted Display Price.'' Finally, the
Exchange proposes to adopt language to state that CHX Only orders
subject to NMS Price Sliding will retain their original limit prices
irrespective of the prices at which such orders are ranked and
displayed. Accordingly, the Exchange proposes to refer to the rank and
display of a CHX Only order rather than using the term ``reprice.''
Although the proposed ``Initial NMS Price Sliding'' will function
similarly to the current NMS repricing of CHX Only orders upon order
entry, the functionality of the current and proposed processes diverge
after initial order entry.
---------------------------------------------------------------------------
\29\ 17 CFR 242.610(d).
---------------------------------------------------------------------------
Under the proposed ``Multiple NMS Price Sliding'' paragraph, the
Exchange proposes to adopt language to state that following the initial
ranking and display of a CHX Only order subject to NMS Price Sliding,
the order will be continuously re-ranked and re-displayed until the
order is executed, cancelled or its original limit price is reached. In
addition, the Exchange also proposes to adopt language that states that
such an order will only be re-ranked and re-displayed to the extent it
achieves a more aggressive price, based upon changes to the prevailing
NBBO; provided, however, that an order may be re-ranked to a less
aggressive price where a Protected Quotation of an external market
locks or crosses the displayed price of a resting price slid order.
To this end, the Exchange proposes to adopt language that details
how the Matching System will ``Re-rank'' and ``Re-display'' a CHX Only
order subject to NMS Price Sliding. Under the proposed ``Re-rank''
paragraph, the Exchange proposes to adopt language that states that in
the event the NBBO changes such that a CHX Only order subject to NMS
Price Sliding could be re-ranked at a higher trading increment for buy
orders or lower trading increment for sell orders, without crossing a
Protected Quotation of an external market, the order will receive a new
timestamp and will be re-ranked at the current locking price. Under the
proposed ``Re-display'' paragraph, the Exchange proposes to adopt
language that states that in the event the NBBO changes such that a CHX
Only order subject to NMS Price Sliding could be re-displayed at a
higher trading increment for buy orders or lower trading increment for
sell orders, the order will receive a new timestamp and will be re-
displayed at the current Permitted Display Price.
As an example of how the proposed NMS Price Sliding would function,
assume again that the NBBO for security XYZ is $30.25 by $30.26 and the
best priced bid in the CHX Matching System is priced at $30.22. A CHX
only order to sell 100 shares of XYZ at $30.24 is submitted to the
Matching System. Since the order is not immediately executable within
our system and a display offer of $30.24 would be impermissible,
pursuant to both the current NMS repricing and proposed NMS Price
Sliding processes, the CHX Only sell order would be ranked at the
locking price of $30.25 within the CHX book. Moreover, the Matching
System would publicly display the sell order at $30.26, which is one
minimum price increment above the NBB, i.e. the Permitted Display
Price, in order to avoid locking the market. If a buy limit order
priced at $30.25 or higher were to be subsequently submitted to the
Matching System, it could be executed against the resting CHX Only sell
order at its ranked price of $30.25. Up to this point, the current NMS
repricing and proposed NMS Price Sliding is in lockstep. However, the
processes diverge once the NBB decreases.
If the NBB were to decrease to $30.24 without the CHX Only order
being executed or cancelled, under the current NMS repricing, the CHX
Only sell order would be re-displayed at the original locking price of
$30.25 and would not be subject to further repricing. In contrast,
under the proposed NMS Price Sliding, the CHX Only sell order would be
re-ranked in the CHX book at the new locking price of $30.24 and re-
displayed at the Permitted Display Price of $30.25. Under this
scenario, a buy limit order priced at $30.24 or higher could execute
against the resting CHX Only sell order at its re-ranked and original
limit price.
If the NBB then reverted back to $30.25, without the order being
executed or cancelled, under either the current NMS repricing or
proposed NMS Price Sliding processes, the Exchange would continue to
display the CHX Only sell order at $30.25 expecting the trading center
that posted the new bid at $30.25 to contemporaneously send CHX a
satisfying buy order pursuant to Rule 611 of Regulation NMS.\30\ With
respect to the ranked price, as discussed in detail below, the sell
order may be re-ranked to the display price if the Matching System
receives a marketable buy order. If the NBB were to instead further
decrease to $30.23 without the CHX Only order being executed or
cancelled, under the proposed NMS Price Sliding, the CHX Only sell
order would maintain its ranked price at $30.24 because NMS Price
Sliding would never result in an order being ranked or displayed beyond
its original limit price. As such, the CHX Only sell order would be re-
displayed at its original limit price of $30.24.
---------------------------------------------------------------------------
\30\ 17 CFR 242.611(a).
---------------------------------------------------------------------------
As illustrated above, following the initial ranking and display of
an order subject to NMS Price Sliding, an order is typically only re-
ranked to the extent it achieves a more aggressive price. However, the
Exchange proposes to re-rank a resting price slid order at the same
price as the displayed price (i.e. a less aggressive price) in the
event (1) such order's displayed price is locked by a Protected
Quotation of an external market and (2) the Matching System receives a
marketable contra-side order.\31\ This will avoid the potential of a
trade-through of a Protected Quotation displayed by an external market
at such ranked price.
---------------------------------------------------------------------------
\31\ The Exchange notes that as a general matter Regulation NMS
should prevent external markets from displaying Protected Quotations
that lock or cross Protected Quotations displayed by the Exchange.
However, in a dynamic market, such an event can and does happen for
a variety of reasons. For example, if the Exchange updates its
contra-side Protected Quotation, it is possible that such quotations
lock or cross each other. Neither the Exchange nor the other market
would know in this circumstance that such quotations would lock or
cross each other when publishing their quotation updates. As another
example, in the event another market receives an Intermarket Sweep
Order, such market may permissibly display such order without regard
to other Protected Quotations, including quotations displayed by the
Exchange that lock or cross such order.
---------------------------------------------------------------------------
As an example of the behavior described above, assume the Exchange
has a posted and displayed bid to buy 100 shares of a security priced
at $10.10 per share and a posted and displayed offer to sell 100 shares
at $10.13 per share. Assume the NBBO is $10.10 by $10.12. If the
Exchange receives a fully-displayable CHX Only bid to buy 100 shares at
$10.12 per share, the Exchange will rank the bid at $10.12 and display
the bid at $10.11 because displaying the bid at $10.12 would lock an
external market's Protected Offer to sell for
[[Page 16314]]
$10.12. If an external market then updated its Protected Offer to
$10.11, thus locking the Exchange's displayed bid (i.e. the order
subject to price sliding that is ranked at $10.12 and displayed at
$10.11), the Exchange proposes to maintain the ranked price of the
resting price slid bid at $10.12 and continue to display the order at
$10.11, until a marketable contra-side order is received.
If the Exchange then received an inbound marketable offer priced at
the $10.11 (i.e. the displayed price of the resting bid), the Exchange
proposes to modify the ranked price of the resting price slid bid to
the same price as the displayed price. Thus, the resting price slid bid
could only execute against the incoming marketable offer at the
displayed price of $10.11. Similarly, if the inbound marketable offer
was priced at $10.12, the resting bid would be ranked at the displayed
price of $10.11 and the inbound offer would be ranked and displayed at
$10.12. By re-ranking the bid in this example to the displayed price at
$10.11, the Exchange will not allow an order to trade-through the NBO
when the Exchange receives a marketable contra-side offer during the
locked market condition. If, however, the NBO moved back to $10.12,
without the resting bid being executed or cancelled, the resting bid
would be re-ranked at $10.12 and be continued to be displayed at
$10.11.
The Exchange also proposes to make clear that this re-ranking will
not result in a change in priority for the order at its displayed
price. For instance, in the example above, assume the bid described had
been posted and displayed at $10.11 and ranked at $10.12 (``Order A''),
and then a later arriving bid is received by the Exchange at $10.11
(``Order B'') and posted as well, with priority behind Order A. If the
Exchange then re-ranks Orders A because it has been locked by another
market center's Protected Quotation, the Exchange does not believe it
would be fair to cause such order to lose priority when it was
originally first in priority amongst displayed orders on the Exchange.
A more detailed example of order execution priority may be found below.
Moreover, the Exchange proposes to adopt language that states that
when an external market crosses the Exchange's Protected Quotation and
the Exchange's Protected Quotation is a resting displayed order subject
to the proposed NMS Price Sliding, the Exchange proposes to rank and
display the resting order based on the first uncrossed NBBO (``pro
forma NBBO'') calculated pursuant to paragraph .01(d) of Article 20,
Rule 5.\32\ This pro forma NBBO is calculated by a CHX-specific
protocol that ignores Protected Quotations that cross any Protected
Quotation(s) until an uncrossed NBBO is identified. If the first
uncrossed NBBO is locked and the Exchange receives a marketable contra-
side order, then the resting price slid order with a ranked price that
crosses the contra-side Protected Quotation would be ranked at the
displayed price. If, however, the first uncrossed NBBO is not locked,
then the resting price slid order would be subject to the normal rules
of NMS Price Sliding and maintain its current ranked and displayed
price or be price slid to a more aggressive price. Thus, the order
displayed by the Exchange will still be ranked and permitted to execute
at a price that crosses the ignored market's Protected Quotation, which
is consistent with Rule 611(b)(4) of Regulation NMS.\33\
---------------------------------------------------------------------------
\32\ Paragraph .01(d) of Article 20, Rule 5 states:
``.01 Trade-through policies and procedures. In determining
whether a trade on the Exchange would create an improper trade-
through, the Exchange will adhere to the applicable provisions of
Reg NMS, as well as to the following policies and procedures:
d. Crossed market exception. Trades shall continue to be
executed in the Matching System when the NBBO is crossed; provided
however, that the Matching System shall only execute orders in that
security up to (but not beyond) the first uncrossed NBBO. If a trade
is executed in the Matching System while the NBBO is crossed, the
Matching System will automatically attach an appropriate modifier to
the trade before it is publicly reported.''
\33\ 17 CFR 242.611(b)(4).
---------------------------------------------------------------------------
As an example of the behavior described above, assume the Exchange
has a posted and displayed bid to buy 100 shares of a security priced
at $10.10 per share and a posted and displayed offer to sell 100 shares
at $10.13 per share. Assume the NBBO is $10.10 by $10.12. If the
Exchange receives a CHX Only bid to buy 100 shares at $10.12 per share,
the Exchange will rank the order to buy at $10.12 and display the order
at $10.11 because displaying the bid at $10.12 would lock an external
market's Protected Offer to sell for $10.12. If an external market then
updated its Protected Offer to $10.10, thus crossing the Exchange's
displayed bid, the Exchange would ignore Protected Quotations that
crossed the Exchange's displayed bid until the first uncrossed NBBO was
identified. If the first uncrossed NBO was at $10.12, then the resting
bid would remain ranked at $10.12 and displayed at $10.11. If, however,
the first uncrossed NBO locked the resting bid and the Matching System
received a marketable offer at either the ranked or displayed price,
then the resting bid would be ranked at the displayed price of $10.11.
A more detailed example of order execution priority may be found below.
Proposed Short Sale Price Sliding
With respect to the current Short Sale repricing, if a CHX Only
sell short order that, at the time of entry, could not be executed or
displayed in compliance with Rule 201 of Regulation SHO,\34\ the
Exchange will reprice and display the CHX Only sell short order at one
minimum price variation above the current NBB.\35\ Thereafter, a CHX
Only sell short order subject to Short Sale repricing will not be
readjusted downward even if it could be displayed at a lower price
without violating Rule 201 of Regulation SHO.\36\
---------------------------------------------------------------------------
\34\ 17 CFR 242.201.
\35\ When the short sale price test restriction under Rule 201
of Regulation SHO (17 CFR 242.201(b)(1)(i)) is in effect, non-CHX
Only sell short orders submitted with a limit price at or below the
current NBB at the time received by the Matching System and which
are not marked a sell short exempt shall be cancelled and rejected
back to the order sender. See CHX Article 20, Rule 8(d)(4).
\36\ 17 CFR 242.201.
---------------------------------------------------------------------------
As an example of how the current Short Sale repricing functions,
assume again that the NBBO for security XYZ is $30.25 by $30.26.
Further, assume that the short sale price test restriction under Rule
201 of Regulation SHO is in effect for security XYZ. A CHX Only sell
short order to sell 100 shares of XYZ at $30.24 is submitted to the
Matching System. Since this CHX Only sell short order is priced below
the current NBB, this order would be repriced and displayed at $30.26,
one minimum price increment above the current NBB, pursuant to the
provisions of Rule 612 of Regulation NMS.\37\ If the NBB subsequently
declined to $30.24, the CHX Only sell short order would not be repriced
downward.\38\ If the NBB instead increased to $30.26, the Exchange
would continue to display the sell short order at $30.26 in reliance on
the provision of Rule 201 of Regulation SHO \39\ that permits the
execution of a displayed short sale order if, at the time of the
initial display, the order was priced above the then-current NBB.
---------------------------------------------------------------------------
\37\ 17 CFR 242.612.
\38\ In contrast, if the short sale price test restriction under
Rule 201 of Regulation SHO were not in effect for security XYZ, this
CHX Only sell short order would have been ranked and displayed
pursuant to NMS Repricing (i.e. ranked at $30.25 and displayed at
$30.26).
\39\ 17 CFR 242.201(b)(1)(iii)(A).
---------------------------------------------------------------------------
With respect to the proposed Short Sale Price Sliding, similar to
the organizational structure of the proposed NMS Price Sliding, the
Exchange proposes to adopt language to make a clear distinction between
``Initial Short Sale Price Sliding'' (i.e. price sliding
[[Page 16315]]
upon order entry) and ``Multiple Short Sale Price Sliding'' (i.e. price
sliding orders that have already been adjusted). Under the proposed
``Initial Short Sale Price Sliding'' paragraph, the Exchange proposes
to maintain the substance of the current Short Sale repricing by
including language that states that a CHX Only sell short order that,
at the time of entry, could not be executed or displayed in compliance
with Rule 201 of Regulation SHO \40\ will be repriced and displayed by
the Matching System at one minimum price variation above the current
NBB. The Exchange proposes to refer to this minimum price variation
above the current NBB as the ``Permitted Price.'' Moreover, the
Exchange proposes to adopt language to state that CHX Only orders
subject to Short Sale Price Sliding will retain their original limit
prices irrespective of the prices at which such orders are repriced and
displayed. Although the proposed ``Initial Short Sale Price Sliding''
will function similarly to the current Short Sale repricing of CHX Only
sell short orders upon order entry, the functionality of the current
and proposed processes diverge after initial order entry.
---------------------------------------------------------------------------
\40\ 17 CFR 242.201.
---------------------------------------------------------------------------
Under the proposed ``Multiple Short Sale Price Sliding'' paragraph,
the Exchange proposes to adopt language to state that to reflect
declines in the NBB, the Matching System will continue to reprice a CHX
Only sell short order subject to short sale price test restriction
under Rule 201 of Regulation SHO at the Permitted Price, until the
order is executed or the original limit price is reached. The Exchange
further proposes to include language that clarifies that when a short
sale price test restriction under Rule 201 of Regulation SHO is in
effect, Short Sale Price Sliding will take priority over NMS Price
Sliding, with respect to CHX Only sell short orders subject to Short
Sale Price Sliding. In addition, the Exchange proposes to include
language consistent under Rule 201(b)(1)(iii)(A) of Regulation SHO \41\
that explicitly states that when a short sale price test restriction
under Rule 201 of Regulation SHO is in effect, the Matching System may
execute a CHX Only sell short order subject to Short Sale Price Sliding
at a price below the Permitted Price if, at the time of initial display
of the short sale order, the order was at a price above the then-
current NBB. In addition, the Exchange proposes to include language
that CHX Only orders marked ``short exempt'' shall not be subject to
Short Sale Price Sliding.
---------------------------------------------------------------------------
\41\ 17 CFR 242.201(b)(1)(iii)(A).
---------------------------------------------------------------------------
As an example of how the proposed Short Sale Price Sliding
functions, assume again that the NBBO for security XYZ is $30.25 by
$30.26 and the best priced bid in the CHX Matching System is priced at
$30.22. Further, assume that the short sale price test restriction
under Rule 201 of Regulation SHO is in effect for security XYZ. A CHX
only sell short order to sell 100 shares of XYZ at $30.24 is submitted
to the Matching System. Since this CHX Only sell short order is priced
below the current NBB and involves a security subject to the short sale
price test restriction under Rule 201 of Regulation SHO, Short Sale
Price Sliding will take priority over NMS Price Sliding. As such, under
both the current Short Sale repricing and the proposed Short Sale Price
Sliding, this order would be repriced and displayed at the Permitted
Price of $30.26.
If the NBB subsequently declined to $30.24, under the current Short
Sale repricing, the CHX Only sell short order would not be repriced. In
contrast, under the proposed Short Sale Price Sliding, the CHX Only
sell short order would be repriced and displayed at the new Permitted
Price of $30.25. As such, an inbound buy limit order of $30.25 or
higher (as opposed to merely $30.26 or higher under the current Short
Sale repricing) could execute against the repriced CHX Only sell short
order at $30.25. If the NBB then reverted back to $30.25, the Exchange
would continue to display the CHX Only sell short order at $30.25 in
reliance on the proposed rule that states that when a short sale price
test restriction under Rule 201 of Regulation SHO is in effect, the
Matching System may execute a CHX Only sell short order subject to
Short Sale Price Sliding at a price below the Permitted Price if, at
the time of initial display of the short sale order, the order was at a
price above the then-current NBB.\42\
---------------------------------------------------------------------------
\42\ 17 CFR 242.201(b)(1)(iii)(A).
---------------------------------------------------------------------------
Proposed Lock-Only Price Sliding
Furthermore, the Exchange proposes to create a new paragraph that
reincorporates the current lock-only repricing instruction. The
proposed ``Lock-Only Price Sliding'' would permit order senders to
enter an instruction for the Matching System to only apply the CHX Only
Price Sliding Processes if the CHX Only order locks the NBBO at the
time of the order entry and not if it crosses the NBBO. For order
senders who utilize this instruction, a CHX Only order that crosses the
NBBO will be immediately cancelled. In the context of Short Sale Price
Sliding, an order that is priced below the NBB would be cancelled and
an order priced at the NBB would be price slid.
Proposed Order Execution Priority of Price Slid Orders
The Exchange proposes to adopt language that establishes that CHX
Only orders subject to the CHX Only Price Sliding Processes will retain
their time priority versus other orders based upon the time those
orders were initially received by the Matching System. That is, all CHX
Only orders subject to either NMS Price Sliding or Short Sale Price
Sliding will retain their order execution priority based upon the time
those orders were initially received, but will also be subject to
proposed CHX Article 20, Rule 8(b)(7), which states, in sum, that an
order subject to the CHX Only Price Sliding Processes shall receive
order execution priority based first on its ranked price, then original
time of receipt by the Matching System.
This is an important point of clarification because although the
current Repricing Processes and the proposed CHX Only Price Sliding
Processes require and will require an order to be re-timestamped each
time the order price is adjusted, so as to follow changes to the
prevailing NBBO, the purpose of this re-timestamp is to simply record
the time of the price adjustment, as opposed to establishing or
retaining time priority. Instead, time priority is established by a
unique sequence number (e.g. 1, 2, 3, etc. * * *) that the Matching
System assigns to each incoming order at the original time of order
entry. These sequence numbers ensure that orders retain their relative
time priority to each other, even as they are priced adjusted, and
these sequence numbers will not be changed nor will an order receive a
new sequence number, so long as it is resting in the CHX book. The
reason why a sequence number is utilized for establishing order time
priority is because it allows CHX to assure proper time priority upon
initial receipt by the Matching System and at subsequent price
adjustments, irrespective of the granularity of the timestamp used.
Consequently, sequence numbers allow and will allow each order to
maintain its relative priority over other orders based on the time of
original order entry, notwithstanding any price adjustments.
Example 1. As an example of how time priority of CHX Only orders
subject to the CHX Only Price Sliding Processes would function and how
that is reconciled with general order execution priority, assume that
the NBBO for
[[Page 16316]]
security XYZ is $30.25 by $30.26, the best bid in the CHX book is
$30.21 and there are no resting offers in the CHX book. Further, assume
that the short sale price test restriction under Rule 201 of Regulation
SHO is in effect for security XYZ. Also assume that four CHX Only sell
orders for 100 shares of XYZ are then entered in immediate succession
and that all orders are fully displayable. The orders are received by
the Matching System in the following sequence:
1: A-Original Limit Price: $30.24
2: B-Original Limit Price: $30.26
3 (short): C-Original Limit Price: $30.23
4: D-Original Limit Price: $30.23
Each Arabic numeral represents an order's sequence number. Under
this scenario, Orders A, C and D are all subject to the CHX Only Price
Sliding Processes because all three orders would violate Regulation NMS
\43\ and/or Rule 201 of Regulation SHO,\44\ if displayed. Specifically,
Orders A and D are subject to NMS Price Sliding and Order C is subject
to Short Sale Price Sliding. Order B is not subject to the CHX Only
Price Sliding Processes because its limit price of $30.26 would not
impermissibly lock or cross the NBB.
---------------------------------------------------------------------------
\43\ 17 CFR 242.610(d).
\44\ 17 CFR 242.201.
---------------------------------------------------------------------------
Example 2. After the initial CHX Only Price Sliding Processes have
been applied, the orders are prioritized for execution in the CHX book
as follows:
(i): 1............................. A--Original Limit Rank: $30.25......... Display: $30.26.
Price: $30.24.
(ii): 4............................ D--Original Limit Rank: $30.25......... Display: $30.26.
Price: $30.23.
(iii): 2........................... B--Original Limit Rank: $30.26......... Display: $30.26.
Price: $30.26.
(iv): 3 (short).................... C--Original Limit Rank: $30.26......... Display: $30.26.
Price: $30.23.
The Roman numerals represent the order execution priority. Based on CHX
Article 20, Rule 8(b), Orders A and D both receive order execution
priority over Orders B and C because they both have the same superior
ranked price at $30.25. In addition, Order A receives execution
priority over Order D, where Order A retains its time priority over
Order D from the original time of entry (i.e. Order A has a superior
sequence number to Order D). Similarly, since Orders B and C have the
same ranked price at $30.26, Order B receives execution priority over
Order C, where Order B has a superior sequence number to Order C.
Example 3. Assume now that the NBB for XYZ decreases to $30.23 and
none of the orders have been executed or cancelled. The proposed CHX
Only Price Sliding Processes will re-prioritize the orders as follows:
(i): 4............................. D--Original Limit Rank: $30.23......... Display: $30.24.
Price: $30.23.
(ii): 1............................ A--Original Limit Rank: $30.24......... Display: $30.24.
Price: $30.24.
(iii): 3 (short)................... C--Original Limit Rank: $30.24......... Display: $30.24.
Price: $30.23.
(iv): 2............................ B--Original Limit Rank: $30.26......... Display: $30.26.
Price: $30.26.
Order D has jumped Order A because Order D has the most aggressively
ranked price at $30.23 and, as such, Order D now receives order
execution priority over Order A. Order A, however, has maintained its
order execution priority over Order C because although Order C has been
price slid so that they are now both ranked at the same price of
$30.24, Order A has a superior sequence number to Order C. Order B has
fallen to last on the order execution priority list because of its
inferior ranked price at $30.26.
Example 4. Assume now that the NBB for XYZ decreases to $30.22 and
none of the orders have been executed or cancelled. Further assume that
a new CHX Only sell order of 100 shares of XYZ at $30.22 is entered
(``Order E''). The proposed CHX Only Price Sliding Processes will re-
prioritize the orders as follows:
(i): 5............................. E--Original Limit Rank: $30.22......... Display: $30.23.
Price: $30.22.
(ii): 3 (short).................... C--Original Limit Rank: $30.23......... Display: $30.23.
Price: $30.23.
(iii): 4........................... D--Original Limit Rank: $30.23......... Display: $30.23.
Price: $30.23.
(iv): 1............................ A--Original Limit Rank: $30.24......... Display: $30.24.
Price: $30.24.
(v): 2............................. B--Original Limit Rank: $30.26......... Display: $30.26.
Price: $30.26.
Order E receives a sequence number inferior to the other four orders
because it is the most recent sell order in security XYX to have been
received by the Matching System. Also, Order E is subject to NMS Price
Sliding as it would lock the NBB. However, Order E jumps to the top of
the order execution priority list based on its superior ranked price at
$30.22. Order C has now jumped Order D because Order C has been price
slid so that they are now both ranked at the same price of $30.23 and
Order C has a superior sequence number to Order D. Order A has dropped
to fourth on the order execution priority list because its original
limit price has been reached and a CHX Only order subject to the CHX
Only Price Sliding Processes will never be price slid beyond its
original limit price. Order B was never subject to the CHX Only Price
Sliding Processes and remains last in the order execution priority list
due to its inferior ranked price at $30.26.
Example 5. Assume now that the NBB for XYZ goes back to $30.23,
thereby locking the displayed prices of Orders E, C and D. Pursuant to
the proposed NMS Price Sliding, Order E would not yet be re-ranked to
the displayed price. If the Matching System, however, received an
incoming marketable bid priced at either $30.22 or $30.23, the proposed
CHX Only Price Sliding Processes would re-prioritize the orders as
follows:
(i): 3 (short)..................... C--Original Limit Rank: $30.23......... Display: $30.23.
Price: $30.23.
(ii): 4............................ D--Original Limit Rank: $30.23......... Display: $30.23.
Price: $30.23.
(iii): 5........................... E--Original Limit Rank: $30.23......... Display: $30.23.
Price: $30.22.
(iv): 1............................ A--Original Limit Rank: $30.24......... Display: $30.24.
Price: $30.24.
(v): 2............................. B--Original Limit Rank: $30.26......... Display: $30.26.
Price: $30.26.
[[Page 16317]]
At this point, Order E would be re-ranked at its displayed price of
$30.23. If the incoming bid were priced at $30.22, the bid would be
ranked and displayed at $30.22. If the incoming bid were instead priced
at $30.23, the bid would execute against Orders C and D before Order E
because Order E has an inferior sequence number to Orders C and D.
Furthermore, Order C would be allowed to execute at the NBB locking
price in reliance on the proposed rule that states that when a short
sale price test restriction under Rule 201 of Regulation SHO is in
effect, the Matching System may execute a CHX Only sell short order
subject to Short Sale Price Sliding at a price below the Permitted
Price if, at the time of initial display of the short sale order, the
order was at a price above the then-current NBB.\45\
---------------------------------------------------------------------------
\45\ 17 CFR 242.201(b)(1)(iii)(A).
---------------------------------------------------------------------------
Example 6. Assume now that another market center posts a Protected
Bid of $30.24, without any of the orders being executed. Pursuant to
paragraph .01(d) of Article 20, Rule 5 and Rule 611(b)(4) of Regulation
NMS, the Exchange would ignore the crossing Protected Quotation and
proceed to ascertain the first uncrossed NBBO. If the first uncrossed
NBBO resulted in a locked market, the orders would be prioritized and/
or price slid as described in Example 5. If the first uncrossed NBBO
did not result in a locked market, the orders would be subject to the
normal rules of proposed CHX Only Price Sliding Processes, as shown in
Examples 1-4.
Consequently, a CHX Only order subject to the CHX Only Price
Sliding Processes will execute similarly to its simple limit order
counterpart, except that a CHX Only order subject to the CHX Only Price
Sliding Processes will execute at its ranked price or better, as
opposed to its limit price or better for limit orders that are not CHX
Only. Notwithstanding this difference, CHX Only orders and limit orders
are subject to the same CHX rules and processes for order execution as
any other non-CHX Only order, in that they may execute against a
compatible contra-side order, subject to the conditions and modifiers
of the respective orders and the operation of the Matching System,
pursuant to CHX Article 20, Rule 8.
CHX Only Orders and Order Modifiers
Correspondingly, many of the modifiers applicable to other non-CHX
Only limit orders may be applied to CHX Only orders (e.g. ``Time in
Force'' \46\ and ``Cancel on Halt'' \47\), to the extent that the
modifiers do not conflict with the CHX Only order subtype (i.e. CHX
Only orders must be displayed, must be ranked and executed on the
Exchange and must be subject to the CHX Only Price Sliding Processes).
For example, the ``Post Only'' modifier, with some proposed amendments
detailed below, is compatible with CHX Only orders. Whereas, certain
modifiers, such as ``Immediate or Cancel'' (``IOC'') \48\ and
``Intermarket Sweep Order'' (``ISO'') \49\ are inherently incompatible
with CHX Only orders.
---------------------------------------------------------------------------
\46\ CHX Article 1, Rule 2(ii) defines ``Time in Force'' as ``an
order that is to be executed, in whole or in part, within a
specified time period, with any unexecuted balance of the order to
be immediately cancelled at the end of the specified time period. No
time in force order shall be in force longer than the trading day on
which it is received.''
\47\ CHX Article 1, Rule 2(c) defines ``Cancel on Halt'' as ``an
order that should be automatically cancelled by the Matching System
if a trading halt or suspension is declared in that security.''
\48\ CHX Article 1, Rule 2(m) defines ``IOC'' as ``an order that
is to be executed, either in whole or in part, at or better than its
limit price as soon as the order is received by the Matching System,
with any unexecuted balance of the order to be immediately
cancelled. IOC orders shall be executed in the Matching System at or
better than the Exchange's BBO (including any reserve size or other
undisplayed orders at or better than that price).''
\49\ CHX Article 20, Rule 4(b)(15) defines ``ISO,'' in pertinent
part, as ``an order marked as required by SEC Rule 600(b)(30) that
is to be executed against any orders at the Exchange's BBO
(including any reserve size or other undisplayed orders at that
price) as soon as the order is received by the Matching System, with
any unexecuted balance of the order to be immediately cancelled. The
Matching System, in executing the ISO, shall not take any of the
actions described in Rule 5 to prevent an improper trade-through.''
In turn, Rule 600(b)(30) of Regulation NMS (17 CFR 242.600(b)(30))
defines ``Intermarket Sweep Order'' as ``a limit order for an NMS
stock that meets the following requirements: (i) When routed to a
trading center, the limit order is identified as an intermarket
sweep order; and (ii) simultaneously with the routing of the limit
order identified as an intermarket sweep order, one or more
additional limit orders, as necessary, are routed to execute against
the full displayed size of any protected bid, in the case of a limit
order to sell, or the full displayed size of any protected offer, in
the case of a limit order to buy, for the NMS stock with a price
that is superior to the limit price of the limit order identified as
an intermarket sweep order. These additional routed orders also must
be marked as intermarket sweep orders.
---------------------------------------------------------------------------
The current definition of Post Only does not permit a CHX Only Post
Only order to be eligible for the CHX Only Price Sliding Processes.
Post Only is currently defined as an order that is to be posted on the
Exchange and not routed away to another trading center. Moreover, a
Post Only order will be immediately cancelled if (1) it is marketable
against a contra-side order in the Matching System when entered or (2)
it is at a price that would lock or cross a Manual or Protected
Quotation.\50\ Specifically, the current definition conflicts with the
proposed CHX Only Price Sliding Processes, which requires a CHX Only
Post Only order that would lock or cross a Protected Quotation of an
external market to be price slid and not immediately cancelled.
---------------------------------------------------------------------------
\50\ See Article 20, Rule 4(b)(18).
---------------------------------------------------------------------------
Therefore, the Exchange proposes to amend the definition of Post
Only to allow Post Only orders marked CHX Only to be eligible for the
CHX Only Price Sliding Processes. Specifically, the Exchange proposes
to amend the definition of Post Only to provide that a Post Only order
will be immediately cancelled (A) if the Post Only order would remove
liquidity from the CHX book \51\ or (B) if, at the time of order entry,
the Post Only order would lock or cross a protected quotation of an
external market; provided, however, that if the Post Only order is
marked ``CHX Only'' and is eligible for the CHX Only Price Sliding
Processes, pursuant to proposed Article 1, Rule 2(y), the Post Only
order that would lock or cross a protected quotation \52\ of an
external market shall be subject to the CHX Only Price Sliding
Processes and shall not be immediately cancelled. The following
examples illustrate how a CHX Only Post Only order would behave under
different market conditions.
---------------------------------------------------------------------------
\51\ In adopting the new language for proposed subparagraph (A),
the Exchange does not propose to substantively modify the specific
functionality for the immediate cancellation of Post Only orders
that are marketable against contra-side orders when entered. Rather,
the new language is intended to clarify the meaning of the current
language. That is, currently, a Post Only order will be immediately
cancelled if it would take liquidity from the CHX book.
\52\ The Exchange proposes to omit reference to ``Manual''
quotations, so that the proposed definition accurately reflects Rule
610(d) of Regulation NMS and is consistent with proposed Article 1,
Rule 2(y).
---------------------------------------------------------------------------
Example 1. Assume that the NBBO for security XYZ is $10.10 x $10.12
and the short sale price test restriction of Rule 201 of Regulation SHO
is not in effect. Assume further that the CHX BBO for security XYZ is
also $10.10 x $10.12. Now assume that a fully-displayable CHX Only Post
Only offer for security XYZ priced at $10.10 (``Offer A'') is received
by the Matching System. Since Offer A would remove liquidity from the
CHX book (i.e. resting bid at $10.10), Offer A would be immediately
cancelled. This would be the result under either the current or
proposed Post Only definition.
Example 2. Assume the same as Example 1 and that the NBBO for
security XYZ remains at $10.10 x $10.12, but the CHX BBO moves away to
$10.09 x $10.14. Also assume that
[[Page 16318]]
there are no hidden (i.e. ``Do Not Display'' orders or ranked price of
price slid orders) bids priced at $10.10 on the CHX book. Further
assume that a fully-displayable CHX Only Post Only offer for security
XYZ priced at $10.10 (``Offer B'') is received by the Matching System.
The current definition of Post Only suggests that Offer B should be
immediately cancelled because although it is not marketable against any
resting bids in the CHX book, the display of Offer B would lock a
protected quotation of an external market, whereas the CHX Only
designation would require application of the current NMS repricing and
rank Offer B at the locking price of $10.10 and display the offer at
$10.11. The proposed definition of Post Only resolves this conflict by
requiring Offer B to be price slid and not be immediately cancelled
because it is marked CHX Only.
Example 3. Assume the same as Example 2 and that Offer B is resting
in the CHX book, ranked at $10.10 and displayed at $10.11. Thus, the
NBBO for security XYZ moves to $10.10 x $10.11 and the CHX BBO moves to
$10.09 x $10.11. Further assume that a fully-displayable CHX Only Post
Only bid for security XYZ priced at $10.11 (``Bid A'') is received by
the Matching System. Under both the current and proposed definition of
Post Only, Bid A would be immediately cancelled because it would take
liquidity from the CHX book, namely Offer B at its ranked price of
$10.10.
As a general rule, an order that is resting at a certain price
point, whether it be displayed or undisplayed, is always ``providing''
liquidity to the CHX book. Conversely, if an incoming contra-side order
is submitted that could execute against a resting order or if a contra-
side resting order is price slid into the resting order, regardless of
when the price slid order was originally submitted, the incoming or
price slid contra-side order is always ``removing'' liquidity from the
CHX book. Since Post Only orders may never remove liquidity from the
CHX book, pursuant to the current and proposed definition of Post Only,
an incoming Post Only order that is marketable against a resting
contra-side order or a resting price slid Post Only order that is price
slid into the resting order, shall always be cancelled.
Example 4. Assume that the NBBO for security XYZ is $10.10 x $10.12
and the CHX BBO is $10.10 x $10.14. Now assume that the Matching System
receives a CHX Only Post Only bid priced at $10.13 (``Bid B'').
Pursuant to NMS Price Sliding, Bid B will be ranked at $10.12 and
displayed at $10.11. The NBBO is now $10.11 x $10.12 and the CHX BBO is
$10.11 x $10.14. Assume further that while Bid B is resting on the CHX
book, an undisplayed simple limit offer at $10.13 (``Offer C'') is
received by the Matching System. Thus, the undisplayed CHX BBO is
$10.12 (i.e. the ranked price of Bid B) x $10.13 (i.e. the limit price
of Offer C). Then assume that the NBBO moves away to match the CHX BBO
at $10.11 x $10.14.
Although the proposed NMS Price Sliding Processes would price slide
Bid B to its original limit price (i.e. re-ranked and re-displayed at
$10.13), since Offer C is already resting at $10.13, Bid B would be
cancelled because the current and proposed definition of Post Only
would require that Bid B be immediately cancelled if it would remove
liquidity from the CHX book. Thus, this result would not change if
Offer C were a fully-displayable Post Only order, as opposed to an
undisplayed order.
Example 5. Assume the same as Example 4, except that Offer C is a
fully-displayable Post Only offer, as opposed to an undisplayed offer.
Thus, the NBBO is at $10.11 x $10.12 and the CHX BBO is now at $10.11 x
$10.13. Then assume that the NBBO moves away to $10.11 x $10.13 and Bid
B will be price slid to a ranked price of $10.13 and a displayed price
of $10.12. Just like Example 4, Bid B will be cancelled because a Post
Only order that is price slid into a price point that would remove
liquidity shall always be cancelled.
These examples illustrate two important aspects of the operation of
the Matching System. First, the Matching System will never price slide
an order to avoid an execution. That is, all Post Only orders (e.g. CHX
Only Post Only) that would remove liquidity from the CHX book will be
immediately cancelled. Also, the Matching System will never lock the
CHX book. That is, a Post Only offer (bid) shall not be allowed to post
opposite the ranked price of a price slid bid (offer) or a resting
undisplayed limit bid (offer). In either situation, the incoming Post
Only offer (bid) will be immediately cancelled.
The Exchange acknowledges that the immediate cancellation of Post
Only orders that would otherwise remove liquidity from the CHX book may
result in the Post Only order sender discovering hidden liquidity on
the CHX book. However, the Exchange submits that although an order
sender may discover that hidden orders exist, there is no way that the
Post Only order sender could learn how many shares are available at
that price point, without submitting orders that would execute against
the hidden interest. Moreover, if there is no resting liquidity to
remove from the CHX book, the Post Only order will be posted and may be
executed immediately thereafter. Also, with respect to hidden interest
that is the result of price sliding (i.e. the undisplayed ranked price
of a price slid order), it is important to note that the order sender
that submitted the price slid order had intended to display the order
at a price at least as aggressive as the ranked price and, thus, the
fact that a Post Only order sender may discover the hidden interest
does not disadvantage the order sender that submitted the price slid
order.
With respect to IOC, a CHX Only order marked IOC would only be
executed if it were immediately executable in the Matching System. If,
however, such an order, upon entry, were in violation of Regulation NMS
\53\ and/or Rule 201 of Regulation SHO,\54\ the CHX Only designation
would mandate application of the CHX Only Price Sliding Processes,
whereas the IOC designation would mandate immediate cancellation of the
order. Given this incompatibility, the Matching System will simply
ignore the CHX Only designation and treat the order as a simple limit
IOC.\55\
---------------------------------------------------------------------------
\53\ 17 CFR 242.610(d).
\54\ 17 CFR 242.201.
\55\ The CHX Matching System treats an order with incompatible
elements differently depending on the order subtype and modifier
combination. An incompatibility may result in an order being
rejected as a whole or a conflicting element being ignored.
---------------------------------------------------------------------------
In addition, CHX Only is also incompatible with ISO. Generally,
ISOs require an order sender to take affirmative steps to ensure that
the market is satisfied prior to executing or posting its order,
whereas CHX Only orders that violate Regulation NMS employ NMS Price
Sliding to comport the order price with respect to the prevailing
market, as detailed above. Specifically, an ISO, by its own terms,
obviates the need for NMS Price Sliding, where in submitting an order
marked ISO, the order sender is required to satisfy the protected
quotations of external markets priced superior to the limit order
submitted to the Exchange.\56\ This in turn allows the order to execute
at the Exchange's BBO. The Matching System would, however, apply NMS
Price Sliding and rank the order at the NBB and display the order at
the Permitted Price one increment above the NBB. If Short Sale Price
Sliding were applicable, the same sell order would be repriced and
displayed to the Permitted Price above the NBB. As such, the
[[Page 16319]]
fundamental difference between an ISO and CHX Only order is that an ISO
can execute at the Exchange's BBO, whereas the same order marked CHX
Only could not.
---------------------------------------------------------------------------
\56\ See supra note 49.
---------------------------------------------------------------------------
Since a CHX Only with an ISO modifier is incompatible, the CHX
Matching System will treat the CHX Only ISO as a ``Price-Penetrating
ISO.'' \57\ That is, the ISO modifier trumps the CHX Only designation.
The reasoning behind this treatment is that an order sender who marks
an order ISO is representing that it is sending simultaneous orders to
other market centers to satisfy the quotations of other markets as
required by Rule 600(b)(3) of Regulation NMS. Since the order sender is
taking additional steps to satisfy the statutory requirements of an
ISO, the Matching System will ignore the CHX Only designation.
---------------------------------------------------------------------------
\57\ CHX Article 1, Rule 2(aa) (b)(15) defines ``Price-
Penetrating ISO'' as ``an order marked as required by SEC Rule
600(b)(30) that is to be executed at or better than its limit price
as soon as the order is received by the Matching System, with any
unexecuted balance of the order to be immediately cancelled. Orders
marked as price-penetrating ISO shall be executed against any
eligible orders in the Matching System (including any reserve size
or other undisplayed orders, through multiple price points). The
Matching System, in executing these orders, shall not take any of
the actions described in Rule 5 to prevent an improper trade-
through.'' See also CHX Article 20, Rule 4(b)(15).
---------------------------------------------------------------------------
These examples clearly show that the proposed CHX Only Price
Sliding Processes can promote market liquidity by allowing the CHX Only
order type to be ranked and displayed at the most aggressive prices,
while maintaining compliance with Regulation NMS \58\ and Rule 201 of
Regulation SHO.\59\ As a result, these proposed rule changes will make
the CHX Only order type more attractive to our Participants by
increasing fill or execution rates despite fast-paced changes to the
NBBO and by increasing the probability of price improvement above
displayed bids and offers for inbound orders.
---------------------------------------------------------------------------
\58\ Id.
\59\ 17 CFR 242.201.
---------------------------------------------------------------------------
2. Statutory Basis
The Exchange submits that the proposed rule changes to adopt
continuous CHX Only Price Sliding Processes for CHX Only orders and to
allow orders marked Post Only to be subject to price sliding is
consistent with Section 6(b) of the Act in general \60\ and furthers
the objectives of Section 6(b)(5) in particular,\61\ by promoting just
and equitable principles of trade, fostering cooperation and
coordination with persons engaged in facilitating transaction in
securities, removing impediments, perfecting the mechanisms of a free
and open market and, in general, by protecting investors and the public
interest. Specifically, by ensuring that all orders marked CHX Only,
including Post Only orders, can be price adjusted continuously to
reflect the best permissible price without locking or crossing the
NBBO, displayed liquidity on the Exchange will be encouraged by
improving the chances of order execution and reducing automatic
cancellations by the Exchange's Matching System. Consequently, the
proposed changes to the CHX Only order type and the Post Only order
modifier will benefit Exchange customers by reducing message traffic,
improving fill rates and promoting competition among market centers
offering similar products and services, which is consistent with the
aforementioned objectives of Section 6(b)(5).
---------------------------------------------------------------------------
\60\ 15 U.S.C. 78f(b).
\61\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
In addition, notwithstanding the amendments, the proposed CHX Only
Price Sliding Processes and the Post Only order modifier will continue
to comport with Rule 610 of Regulation NMS \62\ and Rule 201 of
Regulation SHO.\63\ Specifically, since the proposed CHX Only Price
Sliding Processes will ensure that orders are only displayed at
permissible prices and that CHX Only Post Only orders are now eligible
for price sliding, the proposed rules will be consistent with the
mandate of Rule 610(d) of Regulation NMS that requires exchanges to
establish, maintain, and enforce rules that require members to
reasonably avoid ``[d]isplaying quotations that lock or cross any
protected quotation in an NMS stock.''\64\ Moreover, the automated
nature of the CHX Only Price Sliding Processes of the CHX Only order
type is ``reasonably designed to assure the reconciliation of locked or
crossed quotations in any NMS stock.'' \65\ Also, since the proposed
CHX Only Price Sliding Processes will assist Participants by ensuring
that orders, including Post Only orders, are displayed at permissible
prices, the proposed rule is reasonably designed to ``prohibit its
members from engaging in a pattern or practice of displaying quotations
that lock or cross any quotation in a NMS stock, or of displaying
manual quotations that lock or cross an quotation in any NMS stock
disseminated pursuant to an effective national market system plan,
other than displaying quotations that lock or cross any protected or
other quotation as permitted by an exception contained in its rules
established pursuant to paragraph (d)(1) of this section.'' \66\
Similarly, the proposed rules will continue to comport with the
requirements under Rule 201 of Regulation SHO \67\ by ensuring that CHX
Only sell short orders, as well as CHX Only Post Only sell short
orders, are displayed above the NBB at the time the sell short order is
entered, when the short sale price test restriction under Rule 201 of
Regulation SHO is in effect for a covered security. That is, the
repricing of short sale orders to follow decreases in the NBB will not
adversely impact the ability of the proposed rules to reasonably
``prevent the execution or display of a short sale order of a covered
security at a price that is less than or equal to the current national
best bid if the price of that covered security decreases by 10% or more
from the covered security's closing price as determined by the listing
market for the covered security as of the end of regular trading hours
on the prior day.'' \68\
---------------------------------------------------------------------------
\62\ 17 CFR 242.610(d).
\63\ 17 CFR 242.201.
\64\ 17 CFR 242.610(d).
\65\ Id.
\66\ Id.
\67\ 17 CFR 242.201(b)(1)(i).
\68\ Id.
---------------------------------------------------------------------------
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does believe that the proposed rule change will have
an impact on competition. However, the Exchange does not believe that
the proposed rule change will impose a burden on competition that is
unnecessary or inappropriate in furtherance of the purposes of the Act.
To the contrary, the amended CHX Only order type and the proposed CHX
Only Price Sliding Processes should act as a positive force for
competition by providing an alternative to other similar order types
and functionality, such as the BATS ``Display-Price Sliding.'' \69\
---------------------------------------------------------------------------
\69\ See BYX Rule 11.9(g).
---------------------------------------------------------------------------
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
No written comments were either solicited or received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Because the proposed rule change does not: (i) Significantly affect
the protection of investors or the public interest; (ii) impose any
significant burden on competition; and (iii) become operative prior to
30 days from the date on which it was filed, or such shorter time as
the Commission may designate,
[[Page 16320]]
the proposed rule change has become effective pursuant to Section
19(b)(3)(A) of the Act \70\ and Rule 19b-4(f)(6) thereunder.\71\
---------------------------------------------------------------------------
\70\ 15 U.S.C. 78s(b)(3)(A).
\71\ 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.
---------------------------------------------------------------------------
A proposed rule change filed pursuant to Rule 19b-4(f)(6) under the
Act \72\ normally does not become operative for 30 days after the date
of its filing. However, Rule 19b-4(f)(6) \73\ permits the Commission to
designate a shorter time if such action is consistent with the
protection of investors and the public interest. The Exchange has asked
the Commission to waive the 30-day operative delay and allow the
proposed rule change to be operative as of March 22, 2013, noting that
doing so would allow the Exchange to quickly offer Exchange
participants the proposed CHX Only order type and price sliding
functionality while ensuring that the Exchange's matching system has
been properly tested to ensure a smooth transition to the modified CHX
Only order type and Post Only order modifier. The Commission believes
that waiving the 30-day operative delay is consistent with the
protection of investors and the public interest.\74\ This waiver will
allow the Exchange to modify this order type without delay such that is
similar to an order type offered by other another exchange.\75\
Therefore, the Commission hereby waives the 30-day operative delay and
designates the proposal operative as of March 22, 2013.
---------------------------------------------------------------------------
\72\ 17 CFR 240.19b-4(f)(6).
\73\ 17 CFR 240.19b-4(f)(6).
\74\ For purposes only of waiving the 30-day operative delay,
the Commission has considered the proposed rule's impact on
efficiency, competition, and capital formation. See 15 U.S.C.
78c(f).
\75\ The CHX-Only order, as modified, is based upon BATS Y-
Exchange Rule 11.9(g)(1)(C). See also Exchange Act Release No. 67657
(August 14, 2012), 77 FR 50199 (August 20, 2012) (SR-BATS-2010-035).
The differences between the proposed rule and the BATS rule are
discussed in the Exchange's proposed rule change.
---------------------------------------------------------------------------
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 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 (http://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
File Number SR-CHX-2013-07 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 Number SR-CHX-2013-07. 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 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
10:00 a.m. and 3:00 p.m. Copies of the filing also will be available
for inspection and copying at the principal office of the Exchange. All
comments received will be posted without change; 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 Number SR-CHX-2013-07 and
should be submitted on or before April 4, 2013.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\76\
---------------------------------------------------------------------------
\76\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-05878 Filed 3-13-13; 8:45 am]
BILLING CODE 8011-01-P