[Federal Register Volume 78, Number 128 (Wednesday, July 3, 2013)]
[Notices]
[Pages 40253-40255]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-15915]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-69871; File No. SR-EDGA-2013-13]
Self-Regulatory Organizations; EDGA Exchange, Inc.; Order
Approving a Proposed Rule Change Relating to the EDGA Exchange, Inc.'s
Routing Broker Dealer, as Described in EDGA Rule 2.12(b)
June 27, 2013.
I. Introduction
On May 16, 2013, EDGA Exchange, Inc. (``EDGA'' or ``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
make permanent the existing pilot program that permits the Exchange's
inbound router, as described in Rule 2.12(b), to receive inbound routes
of equities orders through Direct Edge ECN LLC d/b/a DE Route (``DE
Route''), the Exchange's routing broker dealer, from EDGX Exchange,
Inc. (``EDGX'') . The proposed rule change was published for comment in
the Federal Register on May 28, 2013.\3\ The Commission received no
comment letters regarding the proposed rule change. 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. 69613 (May 21,
2013), 78 FR 31996 (``Notice'').
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II. Background
DE Route is a registered broker-dealer that is a member of the
Exchange and is permitted to provide members of EDGX optional routing
services to other
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trading centers.\4\ DE Route is owned by Direct Edge Holdings LLC (``DE
Holdings''). DE Holdings also owns two registered securities
exchanges--the Exchange and EDGX.\5\ Thus, DE Route is an affiliate of
the Exchange and EDGX.\6\
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\4\ DE operates as a facility of EDGX that provides outbound
routing from EDGX to other trading centers, subject to certain
conditions. See Securities Exchange Act Release No. 61698 (March 12,
2010), 75 FR 13151 (March 18, 2010) (File No. 10-194 and 10-196)
(order granting the exchange registration of EDGA and EDGX.)
(``Exchange Registration Approval Order'').
\5\ See id.
\6\ See Exchange Registration Approval Order, 75 FR at 13165
n.219 and accompanying text.
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On May 12, 2010, the Commission approved the Exchange's application
for registration as a national securities exchange.\7\ As part of the
approval, the Exchange was approved to receive inbound routes of orders
that DE Route routes in its capacity as a facility of EDGX on a pilot
basis for 12 months.\8\ The pilot was originally set to expire on July
1, 2011, but was subsequently extended and is currently set to expire
on June 30, 2013.\9\ The Exchange now seeks permanent approval of this
inbound routing pilot.\10\
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\7\ See Exchange Registration Approval Order, 75 FR 13151.
\8\ See id.
\9\ See Securities Exchange Act Release Nos. 64362 (April 28,
2011), 76 FR 25386 (May 4, 2011) (SR-EDGA-2011-13); and 66643 (March
22, 2012), 77 FR 18876 (March 28, 2012) (SR-EDGA-2012-10).
\10\ See Notice, 78 FR 31996.
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III. Discussion and Commission 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.\11\ Specifically, the Commission finds that the proposed rule
change is consistent with Section 6(b)(1) of the Act,\12\ which
requires, among other things, that a national securities exchange be so
organized and have the capacity to carry out the purposes of the Act,
and to comply and enforce compliance by its members and persons
associated with its members, with the provisions of the Act, the rules
and regulation thereunder, and the rules of the Exchange. Further, the
Commission finds that the proposed rule change is consistent with
Section 6(b)(5) of the Act,\13\ which requires, among other things,
that the rules of a national securities exchange be 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 regulating, clearing, settling, and processing
information with respect to, and facilitating transactions in
securities; to remove impediments to and perfect the mechanism of a
free and open market and a national market system; and, in general, to
protect investors and the public interest. Section 6(b)(5) also
requires that the rules of an exchange not be designed to permit unfair
discrimination among customers, issuers, brokers, or dealers.
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\11\ In approving this proposed rule change, the Commission has
considered the proposed rule's impact on efficiency, competition and
capital formation. 15 U.S.C. 78c(f).
\12\ 15 U.S.C. 78f(b)(1).
\13\ 15 U.S.C. 78f(b)(5).
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Recognizing that the Commission has previously expressed concern
regarding the potential for conflicts of interest in instances where a
member firm is affiliated with an exchange to which it is routing
orders, the Exchange previously implemented limitations and conditions
to DE Route's affiliation with the Exchange to permit the Exchange to
accept inbound orders that DE Route routes in its capacity as a
facility of EDGX, on a pilot basis.\14\ The Exchange now seeks to make
this pilot permanent, subject to the same limitation and conditions.
Specifically, the Exchange committed to the following limitations and
conditions: \15\
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\14\ See Exchange Registration Approval Order, 75 FR at 13165-
13166.
\15\ See Notice, 78 FR at 31996-31997.
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The Exchange shall enter into a plan pursuant to Rule 17d-
2 under the Exchange Act with a non-affiliated self-regulatory
organization (``SRO'') to relieve the Exchange of regulatory
responsibilities for DE Route with respect to rules that are common
rules between the Exchange and the non-affiliated SRO, and enter into a
regulatory contract (``Regulatory Contract'') with a non-affiliated SRO
to perform regulatory responsibilities for DE Route for unique Exchange
rules.
The Regulatory Contract shall require the Exchange to
provide the non-affiliated SRO with information, in an easily
accessible manner, regarding all exception reports, alerts, complaints,
trading errors, cancellations, investigations, and enforcement matters
(collectively ``Exceptions'') in which DE Route is identified as a
participant that has potentially violated Exchange or Commission Rules,
and shall require that the non-affiliated SRO provide a report, at
least quarterly, to the Exchange quantifying all Exceptions in which DE
Route is identified as a participant that has potentially violated
Exchange or Commission Rules.
The Exchange, on behalf of DE Holdings, shall establish
and maintain procedures and internal controls reasonably designed to
ensure that DE Route does not develop or implement changes to its
system on the basis of non-public information regarding planned changes
to Exchange systems, obtained as a result of its affiliation with the
Exchange, until such information is available generally to similarly
situated members of the Exchange in connection with the provision of
inbound order routing to the Exchange.\16\
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\16\ The Commission notes that this condition is set forth in
EDGA Rule 2.12(a)(3).
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The Exchange states that is has complied with the above-listed
conditions during the pilot.\17\ The Exchange believes that by meeting
such conditions it has set up mechanisms that protect the independence
of the Exchange's regulatory responsibility with respect to DE Route,
and has demonstrated that DE Route cannot use any information that it
may have because of its affiliation with the Exchange to its
advantage.\18\
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\17\ See Notice, 78 FR at 31997.
\18\ See id.
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In the past, the Commission has expressed concern that the
affiliation of an exchange with one of its members raises potential
conflicts of interest, and the potential for unfair competitive
advantage.\19\ Although the Commission continues to be concerned about
potential unfair competition and conflicts of interest between an
exchange's self-regulatory obligations and its commercial interest when
the exchange is affiliated with one of its members, for the reasons
discussed below, the Commission believes that it is consistent with the
Act to permit DE
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Route, in its capacity as a facility of EDGX, to provide inbound
routing to the Exchange on a permanent basis instead of a pilot basis,
subject to the other conditions described above.\20\
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\19\ See, e.g., Securities Exchange Act Release Nos. 54170 (July
18, 2006), 71 FR 42149 (July 25, 2006) (SR-NASDAQ-2006-006) (order
approving Nasdaq's proposal to adopt Nasdaq Rule 2140, restricting
affiliations between Nasdaq and its members); 53382 (February 27,
2006), 71 FR 11251 (March 6, 2006) (SR-NYSE-2005-77) (order
approving the combination of the New York Stock Exchange, Inc. and
Archipelago Holdings, Inc.); 58673 (September 29, 2008), 73 FR 57707
(October 8, 2008) (SR-Amex-2008-62) (order approving the combination
of NYSE Euronext and the American Stock Exchange LLC); 59135
(December 22, 2008), 73 FR 79954 (December 30, 2008) (SR-ISE-2009-
85) (order approving the purchase by ISE Holdings of an ownership
interest in DirectEdge Holdings LLC); and 59281 (January 22, 2009),
74 FR 5014 (January 28, 2009) (SR-NYSE-2008-120) (order approving a
joint venture between NYSE and BIDS Holdings L.P.); 58375 (August
18, 2008), 73 FR 49498 (August 21, 2008) (File No. 10-182) (order
granting the exchange registration of BATS Exchange, Inc.); 61698
(March 12, 2010), 75 FR 13151 (March 18, 2010) (File Nos. 10-194 and
10-196) (order granting the exchange registration of EDGX Exchange,
Inc. and EDGA Exchange, Inc.); and 62716 (August 13, 2010), 75 FR
51295 (August 19, 2010) (File No. 10-198) (order granting the
exchange registration of BATS-Y Exchange, Inc.).
\20\ The Commission notes that these limitations and conditions
are consistent with those previously approved by the Commission for
other exchanges. See, e.g., Securities Exchange Act Release Nos.
64090 (March 17, 2011), 76 FR 16462 (March 23, 2011) (SR-BX-2011-
007); 66808 (April 13, 2012), 77 FR 23294 (April 18, 2012) (SR-BATS-
2012-013); 66807 (April 13, 2012), 77 FR 23300 (April 18, 2012) (SR-
BYX-2012-006); 67256 (June 26, 2012) 77 FR 39277 (July 2, 2012) (SR-
BX-2012-030); 69233 (March 25, 2013), 78 FR 19352 (March 29, 2013)
(SR-NASDAQ-2013-028); 69232 (March 25, 2013), 78 FR 19342 (March 29,
2013) (SR-BX-2013-013); and 69229 (March 25, 2013), 78 FR 19337
(March 29, 2013) (SR-Phlx-2013-15).
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The Exchange has proposed ongoing conditions applicable to DE
Route's inbound routing activities in its capacity as a facility of
EDGX, which are enumerated above. The Commission believes that these
conditions mitigate its concerns about potential conflicts of interest
and unfair competitive advantage. In particular, the Commission
believes that a non-affiliated SRO's oversight of DE Route,\21\
combined with a non-affiliated SRO's monitoring of DE Route's
compliance with the Exchange's rules and quarterly reporting to the
Exchange, will help to protect the independence of the Exchange's
regulatory responsibilities with respect to DE Route. The Commission
also believes that the Exchange's Rule 2.12(a)(3) is designed to ensure
that DE Route cannot use any information advantage it may have because
of its affiliation with the Exchange.
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\21\ This oversight will be accomplished through a 17d-2
Agreement. See Approval Order, 75 FR at 13165; and Notice, 78 FR at
31996.
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IV. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\22\ that the proposed rule change (SR-EDGA-2013-13) be, and hereby
is, approved.
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\22\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\23\
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\23\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-15915 Filed 7-2-13; 8:45 am]
BILLING CODE 8011-01-P