[Federal Register Volume 78, Number 243 (Wednesday, December 18, 2013)]
[Notices]
[Pages 76693-76696]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-30046]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-71062; File No. SR-EDGX-2013-45]
Self-Regulatory Organizations; EDGX Exchange, Inc.; Notice of
Filing and Immediate Effectiveness of Proposed Rule Change To Amend
EDGX Rule 11.12, Limitations of Liability
December 12, 2013.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given
that on December 6, 2013, EDGX Exchange, Inc. (the ``Exchange'' or
``EDGX'') filed with the Securities and Exchange Commission
(``Commission'') the proposed rule change as described in Items I and
II below, which Items have been prepared by the self-regulatory
organization. The Commission is publishing this notice to solicit
comments on the proposed rule change from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of the
Substance of the Proposed Rule Change
The Exchange proposes to amend paragraph (d)(3) of Rule 11.12 to
provide Members \3\ with additional time within which to submit a
written claim for compensation for ``losses resulting directly from the
malfunction of the Exchange's physical equipment, devices and/or
programming or the negligent acts or omissions of its employees''
(``Exchange Systems Issues'').
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\3\ The term ``Member'' is defined as ``any registered broker or
dealer, or any person associated with a registered broker or dealer,
that has been admitted to membership in the Exchange. A Member will
have the status of a ``member'' of the Exchange as that term is
defined in Section 3(a)(3) of the Act.'' See Exchange Rule 1.5(n).
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In addition, the Exchange proposes to add a new paragraph (e) to
Rule 11.12 to permit the Exchange, subject to certain conditions and
limitations, to compensate Members for certain losses incurred in
connection with orders or portions of orders routed by the Exchange
through its affiliated routing broker-dealer, Direct Edge ECN LLC (d/b/
a/DE Route) (``DE Route''), to Trading Centers \4\ where such losses
are claimed by the Member to have resulted directly from a malfunction
of the physical equipment, devices and/or programming, or the negligent
acts or omissions of the employees, of such Trading Centers (``Trading
Center Systems Issue'').
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\4\ Rule 600(b)(78) of Regulation NMS, 17 CFR 242.600(b)(78),
defines a ``Trading Center'' as ``a national securities exchange or
national securities association that operates an SRO trading
facility, an alternative trading system, an exchange market maker,
an OTC market maker, or any other broker or dealer that executes
orders internally by trading as principal or crossing orders as
agent.'' See also Exchange Rule 2.11(a).
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All of the changes described herein are applicable to Members.\5\
The text of the proposed rule change is available on the Exchange's
Internet Web site at www.directedge.com, at the Exchange's principal
office, and at the Public Reference Room of the Commission.
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\5\ A Member is any registered broker or dealer, or any person
associated with a registered broker or dealer that has been admitted
to membership in the Exchange.
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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 self-regulatory organization
included statements concerning the purpose of, and basis for, the
proposed rule change and discussed any comments it received on the
proposed rule change. The text of these statements may be examined at
the places specified in Item IV below. The self-regulatory organization
has prepared summaries, set forth in sections A, B and C below, of the
most significant aspects of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Exchange proposes to amend Rule 11.12 to: (i) Amend paragraph
(d)(3) to provide Members with additional time within which to submit a
written claim for compensation for Exchange Systems Issues; and (ii)
add a new paragraph (e) permitting the Exchange, subject to certain
conditions and limitations, to compensate Members for certain losses
incurred in connection with orders or portions of orders routed by the
Exchange through DE Route to Trading Centers where such losses are
claimed by the Member to have resulted directly from a Trading Center
Systems Issue.
Extension of Deadline To Submit Claims
Rule 11.12 currently states that, except as provided in subsection
(d) of the Rule, the Exchange and its affiliates shall not be liable
for any losses, damages, or other claims arising out of the Exchange or
its use. Exchange Rule 11.12(d) provides a limited exception to its
general limitation of liability that allows for the payment of
compensation to Members for Exchange Systems Issues, subject to certain
conditions.
[[Page 76694]]
Subsection (d)(1) of Rule 11.12 states that for the aggregate of all
claims made by all market participants related to the use of the
Exchange during a single calendar month, the Exchange's payments under
Rule 11.12 shall not exceed the larger of $500,000, or the amount of
the recovery obtained by the Exchange under any applicable insurance
policy.
Currently, Rule 11.12(d)(3) requires Members to submit claims for
compensation to the Exchange by 12:00 p.m. Eastern Time on the business
day following the day on which the Member's use of the Exchange gave
rise to the claim. The Exchange proposes to extend the deadline to
submit a claim to no later than 4:00 p.m. Eastern Time, or 1:00 p.m. in
the event of an early market close,\6\ on the second business day
following the day on which the Member's use of the Exchange gave rise
to the claim. The Exchange believes that such expansion of time is
reasonable given that Members often do not have all the necessary
information to substantiate all facts bearing on the accuracy and
completeness of a claim within the required current timeframe under
Rule 11.12(d). The expansion of time to submit compensation claims
should, therefore, increase the likelihood that Members will be able to
submit claims to the Exchange in a timely manner.
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\6\ Regular trading hours for days when the markets close early
are typically 9:30 a.m. to 1:00 p.m. Eastern Time on the day after
Thanksgiving and on Christmas Eve, unless Christmas Eve happens to
fall on a weekend. See, e.g., Direct Edge Trading Notice
13-47: Market Holiday Reminder--Thanksgiving. http://www.directedge.com/About/exchangenotices/ViewNewsletterDetail.aspx?NewsletterID=1143.
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Reimbursement for Losses Sustained at Trading Centers
The Exchange also proposes to amend Exchange Rule 11.12 to add a
new paragraph (e) that would authorize the Exchange, subject to express
conditions and limitations, to compensate Members for losses relating
to orders routed by the Exchange through DE Route to Trading Centers
that the Member claims resulted directly from a Trading Center Systems
Issue.
The Exchange believes that the proposed rule change will provide a
remedy, not currently available under Rule 11.12, to Members that
experience losses due to Trading Center Systems Issues after DE Route
routed the Members' orders to a Trading Center that experienced such
issues. The Exchange's authority to compensate Members for losses under
Rule 11.12(d) only covers losses incurred as a result of Exchange
Systems Issues, and does not currently extend to Trading Center Systems
Issues. Even if the Exchange, via DE Route, were to seek and receive
compensation on behalf of a Member from a Trading Center relating to a
Trading Center Systems Issue, it does not currently have the authority
to, in turn, pass such compensation along to the affected Member. The
Exchange, therefore, proposes to add a new paragraph (e) to Rule 11.12
as an accommodation to Members, whereby the Exchange, via DE Route,
would employ reasonable efforts to submit Members' claims for
compensation on such Members' behalf to a Trading Center, and pass
along to such Members the full amount of compensation, if any, obtained
by DE Route from such Trading Center.\7\
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\7\ DE Route is considered a facility of the Exchange, and,
therefore, claims for compensation due to an Exchange Systems Issue
experienced by DE Route must be submitted in accordance with
Exchange Rule 11.12(d).
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Under proposed Rule 11.12(e), the Exchange would undertake to
accept claims for losses submitted by Members, which claims must
contain representations from such Members as to the accuracy of the
information contained therein and that any losses incurred were the
direct result of a Trading Center Systems Issue.\8\ The Exchange would
employ reasonable efforts to submit such claims, via DE Route, to the
Trading Center in question. If and to the extent that DE Route were to
receive compensation from a Trading Center in response to a claim
submitted on behalf of a Member, the full amount of such compensation
would be passed through to the Member.
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\8\ Members receive reports from the Exchange shortly after a
trade is consummated indicating whether their order, or a portion
thereof, was executed at a Trading Center. The report will indicate
the size and price of the execution on the Trading Center.
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Proposed Rule 11.12(e)(1) would require that a Member seeking
compensation for a loss due to a Trading Center Systems Issue must
submit its claim to the Exchange in writing. The proposed rule would
not include a specific deadline by which Members must submit claims for
compensation. The Exchange notes that Trading Centers that are national
securities exchanges impose different deadlines by which their Members
must submit claims for compensation,\9\ and that many Trading Centers
that are not national securities exchanges either do not impose any
deadline or otherwise handle requests for compensation on a case-by-
case basis. It is, therefore, incumbent on, and the sole responsibility
of, the Member to submit claims to the Exchange in a timely manner so
that the Exchange may then forward such claim, via DE Route, in advance
of any deadline required by that Trading Center. Upon receipt of a
Member's claim, the Exchange would only verify that a valid order was
submitted by the Member and accepted and acknowledged by the Exchange,
that the Member's order or a portion of the order was routed by the
Exchange via DE Route to a Trading Center, and that the Member
represented that it incurred a loss as a result of a Trading Center
Systems Issue. The Exchange would then use reasonable efforts to
forward the claim, via DE Route, to such Trading Center.
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\9\ See Nasdaq Stock Market LLC Rule 4626 (requiring claims for
compensation to be submitted by 12:00 p.m. Eastern Time on T+1). See
also NYSE Arca, Inc. Options Rule 14.2, NYSE MKT LLC Rule 905NY,
Chicago Board Options Exchange, Incorporated Rule 6.7, BATS
Exchange, Inc. Rule 11.16, and BATS-Y Exchange, Inc. Rule 11.16
(requiring claims for compensation to be submitted by the open of
regular trading hours on T+1).
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Proposed Rule 11.12(e)(2) would state that the Exchange would pass
along to the Member the full amount of any compensation that the
Exchange, via DE Route, received from a Trading Center as a result of a
claim submitted on behalf of the Member. Any compensation paid to the
Member would be paid solely from the compensation, if any, recovered
from that Trading Center and not from any other source.
Proposed Rule 11.12(e)(3) would account for the circumstance where
more than one Member submitted a claim for loss resulting from the same
Trading Center Systems Issue and the total amount of compensation
received from the Trading Center is insufficient to fully satisfy the
claims of all such Members. In such case, the Exchange would
proportionally allocate the total amount received from the Trading
Center, if any, among all such Members' claims based on the proportion
that each such claim bears to the sum of all such claims. The Exchange
believes that this provision will provide for equitable compensation
among all Members that submit a valid claim related to a Trading Center
Systems Issue by ensuring that Members are compensated on a pro rata
basis.
The payment of claims submitted in response to an Exchange Systems
Issue would be separate and apart from any pass-through of compensation
paid due to a Trading Center Systems Issue. Proposed Rule 11.12(e)(4)
would state that any pass-through of compensation to a Member in
accordance with Rule
[[Page 76695]]
11.12(e) would be unrelated to any other claims for compensation that
are made due to an Exchange Systems Issues under Exchange Rule
11.12(d)(3). Accordingly, proposed Rule 11.12(e)(4) would state that
any compensation paid to Members from reimbursement recovered from a
Trading Center would not count against the Exchange's $500,000 monthly
liability limit set forth in Rule 11.12(d)(1), nor any applicable
insurance maintained by the Exchange.
Notwithstanding the foregoing, the Exchange is not proposing to
undertake or assume any responsibility to: (1) Independently validate
information submitted by a Member in connection with a claim for
compensation for loss arising out of a Trading Center Systems Issue,
other than the ticker, size and side of the affected orders and the
Trading Center to which the affected orders were routed and alleged to
have experienced a Trading Center Systems Issue; (2) ascertain or
comply with any mandatory deadlines within which to submit claims for
compensation to a Trading Center; (3) guarantee that any compensation
will be procured from a Trading Center; (4) negotiate agreements with
any Trading Centers to require compensation under any circumstances; or
(5) take any additional steps with respect to a Trading Center Systems
Issue if such Trading Center denies or fails to respond to any claim
for compensation, in whole or in part. In other words, the Exchange
will, upon receipt of a claim for compensation from a Member for loss
resulting from a Trading Center Systems Issue, reasonably endeavor to
submit such claim, via DE Route, to the applicable Trading Center as
soon as reasonably practicable, and if DE Route in turns receives an
accommodation from such Trading Center, such accommodation will be
passed along to the Member via the Exchange. Neither the Exchange nor
DE Route will be under any obligation to know any Trading Center's
rules, procedures and/or customs, to the extent any exist, for the
submission of claims for compensation, nor to dispute a Trading
Center's denial of a claim, whether in whole or in part, nor to take
any further actions with respect to such claim in the event that the
Trading Center does not respond at all to the claim. Accordingly, with
this proposed rule change, the Exchange is not assuming any additional
liability to Members for losses claimed to have resulted from Trading
Center Systems Issues; rather, it proposes to serve a purely
ministerial role, given the contractual privity that exists between DE
Route and Trading Centers, in the submission of Members' claims for
compensation to such Trading Centers on their behalf. To that end,
proposed Rule 11.12(e)(5) would make clear that under no circumstances
will the Exchanges' inability to procure compensation from a Trading
Center, in whole or in part, for whatever reason, give rise to a claim
for compensation from the Exchange pursuant to paragraph (d) of Rule
11.12 as a ``negligent act or omission of an Exchange employee.''
Proposed Rule 11.12(e)(5) would further state that the Exchange would
not be liable should the Trading Center deny such claim made pursuant
to proposed Rule 11.12(e), in whole or in part, for any reason.
The Exchange believes that the provisions outlined in the above
paragraph are equitable because any claim submitted under the proposed
Rule 11.12(e) would be subject to the rules, procedures, and discretion
of the Trading Center in question. It is the Trading Center, and not
the Exchange or DE Route, that ultimately decides whether to approve or
deny a Member's claim, or even whether to act on such request at all.
For example, the Exchange has no discretion over or responsibility for
the information provided by the Member in its claim, and no discretion
over or responsibility for whether such information is sufficient for
the Trading Center to provide compensation. In addition, any claim
submitted under the proposal would be subject to compensation only to
the extent that the Trading Center provided such compensation to DE
Route. Accordingly, because it is the Trading Center, and not the
Exchange or DE Route, that ultimately decides whether a claim for
compensation would be granted, the Exchange believes the proposal is
fair and just in limiting the Exchange's liability in the event a
Trading Center determines, for any reason, to deny a claim, in whole or
in part, or even not to respond to such claim.
Implementation Date
The Exchange intends to implement the proposed rule changes no
later than January 15, 2014 and will announce its availability via a
trading notice to be posted on the Exchange's Web site.
2. Statutory Basis
The Exchange believes that the proposed rule change is consistent
with Section 6(b) of the Act \10\ and furthers the objectives of
Section 6(b)(5) of the Act,\11\ in that it is designed promote just and
equitable principles of trade, remove impediments to, and perfect the
mechanism of, a free and open market and a national market system, and,
in general, protect investors and the public interest. In addition, the
Exchange believes that the proposed rule change is not designed to
permit unfair discrimination between customers, issuers, brokers or
dealers.
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\10\ 15 U.S.C. 78f(b).
\11\ 15 U.S.C. 78f(b)(5).
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Extension of Deadline To Submit Claims
Extending the deadline by which claims for compensation are
submitted to the Exchange is designed to increase the likelihood that
Members will be able to submit claims in a timely manner. The Exchange
believes that such expansion of time is reasonable given that Members
often do not have all the necessary information to substantiate all
facts bearing on the accuracy and completeness of a claim within the
required current timeframe under Rule 11.12(d). Therefore, the Exchange
believes the proposed rule change is equitable and will promote
fairness in the market place by providing Members increased time to
submit claims that result from an Exchange Systems Issue.
Reimbursement for Losses Sustained at Other Trading Centers
Proposed Rule 11.12(e) would enable the Exchange to pass through to
Members any compensation that the Exchange is able to procure, via DE
Route, from a Trading Center for losses claimed by Members to have
resulted from a Trading Center Systems Issue. The proposal specifies a
standardized method for Members to submit claims for compensation from
a Trading Center, and for the Exchange to pass through to its Members
any such compensation obtained, if and to the extent the Exchange, via
DE Route, is able to obtain such compensation from the Trading Center.
Furthermore, any compensation obtained by the Exchange from a Trading
Center would be passed on to the Member who requested such
reimbursement. If the amount received by the Exchange from the Trading
Center was insufficient to satisfy all claims, it would be allocated
among the claimants proportionally based on the percentage that each
claimant's claim in relation to the sum of all claims received by the
Exchange. In addition, the proposed pro-rata allocation methodology
that the Exchange would employ would provide for equitable compensation
among all Members who submit a claim related to a Trading Center
Systems Issue and deter the risk
[[Page 76696]]
of preferential treatment of certain Members by the Exchange.
Therefore, the Exchange believes that the proposed rule change would
protect investors and the public interest by potentially providing
Members with a remedy not currently available to them to recover for
losses incurred as a result of Trading Center Systems Issues, which
generally arise from factors unrelated to their trading activities.
B. Self-Regulatory Organization's Statement on Burden on Competition
The proposed rule change would not impose any burden on
competition. The proposed rule change is designed to promote fairness
in the marketplace by increasing the time within which a Member is to
submit claims for Exchange System Issues and to be compensated for
losses that result from Trading Center Systems Issues. The Exchange
believes that the proposed rule changes will not burden intermarket
competition because the benefits offered under the proposed rule
changes are not currently offered by any other exchange. The Exchange
believes that the proposed rule changes will not burden intramarket
competition because all Members would be subject to the same deadline
to submit a claim for Exchange Systems Issues and be able to submit
claims for reimbursement for certain losses incurred due to Trading
Center System Issues.
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 for 30
days from the date on which it was filed, or such shorter time as the
Commission may designate if consistent with the protection of investors
and the public interest, the proposed rule change has become effective
pursuant to Section 19(b)(3)(A) of the Act \12\ and Rule 19b-
4(f)(6)(iii) thereunder.\13\
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\12\ 15 U.S.C. 78s(b)(3)(A).
\13\ 17 CFR 240.19b-4(f)(6)(iii). As required under Rule 19b-
4(f)(6)(iii), the Exchange provided the Commission with written
notice of its intent to file the proposed rule change, along with a
brief description and the text of 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.
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A proposed rule change filed under Rule 19b-4(f)(6) of the Act \14\
normally does not become operative prior to 30 days after the date of
the filing. However, pursuant to Rule 19b-4(f)(6)(iii) of the Act,\15\
the Commission may designate a shorter time if such action is
consistent with the protection of investors and the public interest.
The Exchange has requested that the Commission waive the 30-day
operative delay so that the proposal may become operative immediately
upon filing. The Commission believes that waiving the 30-day operative
delay is consistent with the protection of investors and the public
interest. Such waiver would immediately extend the time period by which
Exchange members are able to submit claims seeking compensation for
Exchange systems issues under EDGX Rule 11.12(d) and would immediately
establish a means for members to potentially receive compensation for
losses caused by a systems issue occurring at another Trading Center on
orders routed to such Trading Center by DE Route. For these reasons,
the Commission hereby waives the 30-day operative delay and designates
the proposed rule change to be operative upon filing with the
Commission.\16\
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\14\ 17 CFR 240.19b-4(f)(6).
\15\ 17 CFR 240.19b-4(f)(6)(iii).
\16\ For purposes only of waiving the 30-day operative delay,
the Commission has also considered the proposed rule's impact on
efficiency, competition, and capital formation. See 15 U.S.C.
78c(f).
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At any time within 60 days of the filing of the proposed rule
change, the Commission summarily may temporarily suspend such rule
change if it appears to the Commission that such action is necessary or
appropriate in the public interest, for the protection of investors, or
otherwise in furtherance of the purposes of the Act. If the Commission
takes such action, the Commission shall institute proceedings to
determine whether the proposed rule change should be approved or
disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
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-EDGX-2013-45 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-EDGX-2013-45. 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 such filing also will be available
for inspection and copying at the principal offices 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-EDGX-2013-45,
and should be submitted on or before January 8, 2014.
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. 2013-30046 Filed 12-17-13; 8:45 am]
BILLING CODE 8011-01-P