[Federal Register Volume 79, Number 4 (Tuesday, January 7, 2014)]
[Notices]
[Pages 883-885]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-31607]
[[Page 883]]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-71216; File No. SR-CHX-2013-23]
Self-Regulatory Organizations; Chicago Stock Exchange, Inc.;
Notice of Filing and Immediate Effectiveness of a Proposed Rule Change
To Provide That the Match Trade Prevention Modifier Is Not Compatible
With the Fill Or Kill Modifier
December 31, 2013.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 \2\ thereunder, notice is hereby given
that on December 23, 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 Exchange Act Rule
19b-4(f)(6) \3\ which is effective upon filing with the Commission. 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.
\3\ 17 CFR 240.19b-4(f)(6).
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
CHX proposes to amend Article 1, Rule 2(b)(3)(F) to provide that
the Match Trade Prevention order execution modifier is not compatible
with the Fill Or Kill order duration modifier. The text of this
proposed rule change is available on the Exchange's Web site at
(www.chx.com), on the Commission's Web site at (www.sec.gov), 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 Article 1, Rule 2(b)(3)(F) to
provide that the Match Trade Prevention (``MTP'') order execution
modifier is not compatible with the Fill Or Kill (``FOK'') order
duration modifier and that any limit or market order marked MTP and FOK
shall be rejected by the Matching System.\4\ Given that MTP has been
incompatible with FOK since MTP became operative on December 2, 2013,
the Exchange also submits this filing to correct certain statements in
the Form 19b-4 filed by the Exchange under SR-CHX-2013-20, which
inaccurately states that the MTP modifier is fully compatible with all
order modifiers applicable to limit and market orders.\5\ More
accurately, the MTP modifier is fully compatible with all order
modifiers applicable to limit and market orders, except for the FOK
modifier, as discussed in detail below. The Exchange does not propose
to substantively amend the functionality of the MTP modifier.\6\
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\4\ Article 1, Rule 2(d)(2) defines ``Fill Or Kill'' or ``FOK''
as ``a modifier that requires an order to be executed in full and
for limit orders, at or better than its limit price, as soon as the
order is received by the Matching System, but that will be
immediately cancelled if it cannot be executed in full. An order
marked FOK may be executed at one or more different prices against
orders in the Matching System (including any Reserve Size or
undisplayed orders).
An order marked FOK shall be deemed to have been received `Do
Not Route,' as defined under paragraph (b)(3)(A), which cannot be
overridden by an order sender.''
\5\ See Securities Exchange Act Release No. 70948 (November 26,
2013), 78 FR 72731 (December 3, 2013) (SR-CHX-2013-20) (``Notice of
Filing and Immediate Effectiveness of a Proposed Rule Change to
Adopt a Match Trade Prevention Modifier for Limit and Market Order
Submitted to the Exchange'').
\6\ The Exchange notes that it deactivated the FOK modifier as
of December 4, 2013, pursuant to its authority under Article 20,
Rule 4(b), and that the Exchange has never received any orders
marked MTP and FOK.
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Background
On November 20, 2013, the Exchange filed SR-CHX-2013-20 for
immediate effectiveness, which adopted the current MTP order modifier,
as defined under Article 1, Rule 2(b)(3)(F), and became operative on
December 2, 2013.\7\
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\7\ See supra note 5.
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In sum, the MTP functionality is based on the interaction between
MTP Trading Groups \8\ and, if applicable, subgroups within the MTP
Trading Group, which are created through the use of optional MTP
sublevel designations. Assuming that the MTP functionality has been
activated by the Trading Permit Holders that are part of the MTP
Trading Group, an incoming limit or market order marked with an MTP
modifier, which is comprised of a compulsory MTP Action and an optional
MTP sublevel designation, will not be allowed to execute against a
resting opposite side order from the same MTP Trading Group. However,
if the MTP modifier of the incoming limit or market order indicates an
MTP sublevel designation, the order will be considered to have
originated from a subgroup within the MTP Trading Group, designated by
the sublevel value, and will only be prevented from executing against
resting opposite side orders from the same subgroup (i.e., same
optional MTP sublevel designation). Consequently, an incoming order
that originated from a subgroup will not be prevented from executing
against opposite side resting orders from the same MTP Trading Group,
so long as the opposite side order is not part of the same subgroup
(i.e., the resting order is either marked by a different MTP sublevel
designation or is not marked by any MTP sublevel designation).
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\8\ Article 1, Rule 1(mm) defines ``MTP Trading Group'' as ``a
group of one or more Trading Accounts that have been aggregated at
the request of all Participant Trading Permit holders that control
all Trading Accounts within the proposed group for the purpose of
enabling Match Trade Prevention (`MTP') functionality, pursuant to
Article 1, Rule 2(b)(3)(F)(i). A Trading Account may not be assigned
to more than one MTP Trading Group. Any Exchange-approved changes to
the composition of an MTP Trading Group shall be effective no
earlier than the trading day following the request.''
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Once MTP is triggered, one or both orders will be cancelled
pursuant to the MTP Action of the MTP modifier attached to the incoming
order. If the incoming order has an MTP Action of ``N,'' the incoming
order would be cancelled. If the incoming order has an MTP Action of
``O,'' the resting order would be cancelled. If the incoming order has
an MTP Action of ``B,'' both the incoming and resting orders would be
cancelled. Moreover, if the incoming order is marked ``I,'' MTP would
be deactivated and would not prevent a match.
MTP and FOK
On p. 16 and p. 41 of SR-CHX-2013-20,\9\ the Exchange stated that
the ``proposed MTP modifier is fully compatible with all order
execution, display, and duration modifiers, that are applicable to
limit and market
[[Page 884]]
orders.'' \10\ While MTP and FOK are compatible in theory,\11\ MTP and
FOK are incompatible in practice because the Matching System currently
handles an incoming order marked FOK in a manner that may result in the
FOK modifier being ignored if (1) the incoming order must execute
against two or more resting orders and (2) MTP is triggered by the
second or subsequent resting orders.
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\9\ See supra note 5.
\10\ Id.
\11\ In contrast, Post Only and FOK are theoretically and
practically incompatible. See Article 1, Rule 2(b)(1)(D). A limit
order marked Post Only requires the order to be posted to the CHX
Book or cancelled if the order would remove liquidity from the CHX
Book. In contrast, a limit order marked FOK cannot post to the CHX
Book and must remove liquidity from the CHX Book and be executed in
full or be cancelled in its entirety.
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Generally, when the Matching System receives an incoming limit
order marked FOK, the Matching System will take the preliminary step of
determining whether there is sufficient resting order size to
immediately execute the incoming FOK order in full. In doing so, the
Matching System only considers the total size of the resting orders
necessary to immediately execute the incoming FOK order in full and
does not pre-match the incoming FOK order against each of these resting
orders. If there is not enough resting size, the Matching System will
cancel the incoming FOK order. If there is enough resting size, the
Matching System will next attempt to match the incoming FOK order
against each of the resting orders necessary to execute the incoming
FOK order in full and will execute such orders in price/time priority
of the resting orders.\12\ In considering each set of contra-side
orders, the Matching System will consider all order modifiers attached
to the contra-side orders, but will consider the MTP modifier(s) last.
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\12\ See Article 20, Rule 8(b).
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Prior to adopting the MTP modifier, this process of handling
incoming FOK orders was sufficient because there were no other order
modifiers that could prevent a full and immediate execution of the
incoming FOK order after the preliminary resting size test of the FOK
modifier was satisfied. Thus, it was impossible for an incoming FOK
order to be partially-executed. However, an incoming FOK order marked
MTP could now result in a partial execution of an incoming FOK order.
Specifically, if MTP is triggered by the second or subsequent resting
order, there may not be enough resting size remaining to fully satisfy
the incoming FOK order. Thus, an incoming FOK order could be cancelled
with a partial execution, which would violate the FOK modifier. The
following Examples 1 and 2 illustrate this scenario.
Example 1. Assume that the Matching System receives an incoming
limit buy order (``Bid A'') for 1,000 shares of security XYZ priced at
$10.10/share is marked FOK and MTP, with an MTP Action of ``N'' and no
MTP sublevel designation, and originated from MTP Trading Group A1.
Assume that the CHX Book for security XYZ contains no resting bids, but
has two resting offers (``Offers A and B''). Assume that Offer A is a
limit order for 500 shares of XYZ priced at $10.10/share marked MTP
that originated from MTP Trading Group B1. Assume that Offer B is also
a limit order for 500 shares of XYZ priced at $10.10/share marked MTP
that originated from MTP Trading Group B1. Assume further that Offer A
has time priority over Offer B and that Offers A and B are at the
National Best Offer.
Under this Example 1, since Bid A is marked FOK, the Matching
System will take the preliminary step of determining whether Bid A
could be immediately executed in full. Given that Bid A is for 1,000
shares of XYZ priced at $10.10/share and Offers A and B are for a
combined 1000 shares of XYZ priced at $10.10/share, the Matching System
will determine that there is enough resting order size on the CHX Book
to immediately execute Bid A in full. The Matching System will then
attempt to match Bid A against Offer A. Since the non-MTP order
modifiers attached to Bid A and Offer A do not conflict, the Matching
System will next consider the MTP Trading Groups of the order because
the incoming order is marked MTP with an MTP Action of ``N.'' Since Bid
A is from Trading Group A1 and Offer A is from Trading Group B1, MTP
will not be triggered and the MTP Action of ``N'' will not come into
play. As such, the Matching System will permit Bid A to execute against
Offer A, which will result in Bid A being decremented by 500 shares.
The Matching System will then go through the same process with the 500
remaining shares of Bid A and Offer B. Given that Offer B is identical
to Offer A, the Matching System will go through the same process and
permit the remaining 500 shares of Bid A to execute against Offer B.
The result is that Bid A has been immediately executed in full, which
is consistent with the FOK modifier.
Example 2. Assume the same as Example 1, except that Offer B
originated from MTP Trading Group A1, which is the same MTP Trading
Group as Bid A.
Under this Example 2, MTP would prevent the remaining 500 shares of
Bid A from executing against Offer B because both orders originated
from MTP Trading Group A1. Pursuant to the MTP Action of ``N,'' Bid A
would be cancelled as it is the incoming order, while Offer B would
remain posted to the CHX Book. As a result, Bid A would be cancelled
with a partial execution (i.e., 500 shares of Bid A executed against
the full size of Offer A), which is in violation of the FOK modifier.
The result would be the same if Bid A were marked ``O,'' as the ``O''
MTP Action would require Offer B to be cancelled and since there are no
remaining resting orders against which Bid A could execute, Bid A would
be cancelled with a partial execution. Similarly, if Bid A had an MTP
Action of ``B,'' both Bid A and Offer B would be cancelled, which would
also result in Bid A being cancelled with a partial execution.
The Exchange notes that this issue could be resolved by having the
Matching System pre-match an incoming FOK order against the required
resting orders prior to executing any one trade. If the pre-match
revealed that one or more of the resting orders could not execute
against the incoming order due to MTP and that the result would be
insufficient remaining resting size to fully and immediately execute
the incoming FOK order, the pre-match would fail and the incoming FOK
order would be cancelled without any partial executions. However, given
the tremendous amount of resources needed to modify the Matching System
to make this change and in light of the fact that the Exchange
infrequently receives FOK orders, the Exchange proposes to reject all
incoming orders marked MTP and FOK when the FOK modifier is
reactivated.\13\
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\13\ See supra note 6. If the Exchange decides to modify the
operation of the Matching System to permit an order to be marked FOK
and MTP, the Exchange will file a proposed rule change pursuant to
Rule 19b-4 under the Act to effectuate such a change.
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2. Statutory Basis
The Exchange submits that the proposed rule filing is consistent
with Section 6(b) of the Act in general \14\ and furthers the
objectives of Section 6(b)(5) in particular,\15\ because it is designed
to prevent fraudulent and manipulative acts and practices, to promote
just and equitable principles of trade, to foster cooperation and
coordination with persons engaged in facilitating transaction in
securities, to remove impediments to, and perfect the mechanisms of, a
free and open market and, in general, by protecting investors
[[Page 885]]
and the public interest. Specifically, the proposed rule filing
amending Article 1, Rule 2(b)(3)(F) to provide that the MTP modifier is
not compatible with the FOK modifier and that orders marked MTP and FOK
shall be rejected by the Matching System provides accuracy concerning a
functionality already offered by the Exchange, which, in turn, promotes
all of the objectives of Section 6(b)(5).
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\14\ 15 U.S.C. 78f(b).
\15\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed filing will impose
any burden on competition that is not necessary or appropriate in
furtherance of the purposes of the Act because this filing clarifies
the operation of the current MTP modifier and does not propose to
modify its functionality.
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
The Exchange has filed the proposed rule change pursuant to Section
19(b)(3)(A)(iii) of the Act \16\ and Rule 19b-4(f)(6) thereunder.\17\
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, 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 and Rule 19b-
4(f)(6)(iii) thereunder.
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\16\ 15 U.S.C. 78s(b)(3)(A)(iii).
\17\ 17 CFR 240.19b-4(f)(6).
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A proposed rule change filed under Rule 19b-4(f)(6) \18\ normally
does not become operative prior to 30 days after the date of the
filing. However, pursuant to Rule 19b-4(f)(6)(iii),\19\ the Commission
may 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 so that the proposal
may become operative upon filing. The Exchange requested such waiver so
that it may immediately provide accuracy as to the current
functionality of the MTP modifier and address inaccurate statements in
SR-CHX-2013-20. Based on the Exchange's statements, the Commission
believes that waiving the 30-day operative delay is consistent with the
protection of investors and the public interest. Therefore, the
Commission designates the proposed rule change to be operative upon
filing.\20\
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\18\ Id.
\19\ 17 CFR 240.19b-4(f)(6)(iii).
\20\ 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).
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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: (i)
necessary or appropriate in the public interest; (ii) for the
protection of investors; or (iii) otherwise in furtherance of the
purposes of the Act. If the Commission takes such action, the
Commission shall institute proceedings under Section 19(b)(2)(B) \21\
of the Act to determine whether the proposed rule should be approved or
disapproved.
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\21\ 15 U.S.C. 78s(b)(2)(B).
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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-2013-23 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-2013-23. 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-CHX-2013-23,
and should be submitted on or before January 28, 2014.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\22\
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\22\ 17 CFR 200.30-3(a)(12).
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Elizabeth M. Murphy,
Secretary.
[FR Doc. 2013-31607 Filed 1-6-14; 8:45 am]
BILLING CODE 8011-01-P [FEDREG][VOL]*[/VOL][NO]*[/NO][DATE]*[/
DATE][NOTICES]