[Federal Register Volume 79, Number 62 (Tuesday, April 1, 2014)]
[Notices]
[Pages 18367-18371]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-07194]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-71811; File No. SR-EDGA-2014-007]
Self-Regulatory Organizations; EDGA Exchange, Inc.; Notice of
Filing and Immediate Effectiveness of Proposed Rule Change To Amend
Rule 12.6 to Conform to FINRA Rule 5320, BATS Rule 12.6 and BATS-Y Rule
12.6 Relating to Trading Ahead of Customer Orders
March 26, 2014.
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 March 21, 2014, EDGA Exchange, Inc. (the ``Exchange'' or
``EDGA'') 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
[[Page 18368]]
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 Substance
of the Proposed Rule Change
The Exchange is filing with the Commission a proposal to amend Rule
12.6, Customer Priority, to make it substantially similar to Financial
Industry Regulatory Authority, Inc. (``FINRA'') Rule 5320, BATS
Exchange, Inc. (``BATS'') Rule 12.6 and BATS-Y Exchange, Inc. (``BYX'')
Rule 12.6. 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.
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 the
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Exchange proposes to amend Rule 12.6, which limits trading
ahead of customer orders by Members,\3\ to make the rule substantially
similar to FINRA Rule 5320,\4\ BATS Rule 12.6 and BYX Rule 12.6.\5\
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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).
\4\ See Securities Exchange Act Release No. 63895 (February 11,
2011), 76 FR 9386 (February 17, 2011) (SR-FINRA-2009-090).
\5\ See Securities Exchange Act Release No. 70952 (November 27,
2013), 78 FR 72949 (December 4, 2013) (SR-BATS-2013-056) (order
approving proposal to amend BATS Rule 12.6); see also Securities
Exchange Act Release No. 70951 (November 27, 2013), 78 FR 72944
(December 4, 2013) (SR-BYX-2013-036) (order approving proposal to
amend Rule 12.6).
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On January 31, 2014, Direct Edge Holdings LLC (``DE Holdings''),
the former parent company of the Exchange, completed its business
combination with BATS Global Markets, Inc., the parent company of BATS
and BYX.\6\ As part of its effort to reduce regulatory duplication and
relieve firms that are members of the Exchange, BATS, and BYX of
conflicting or unnecessary regulatory burdens, the Exchange is now
engaged in the process of reviewing and amending certain Exchange,
BATS, and BYX Rules.
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\6\ See Securities Exchange Act Release No. 71449 (January 30,
2014), 79 FR 6961 (February 5, 2014) (SR-EDGA-2013-34). Upon
completion of the Combination, DE Holdings and BATS Global Markets,
Inc. each became intermediate holding companies, held under a single
new holding company. The new holding company, formerly named ``BATS
Global Markets Holdings, Inc.,'' changed its name to ``BATS Global
Markets, Inc.''
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In addition, pursuant to Rule 17d-2 under the Act,\7\ the Exchange
and FINRA entered into an agreement to allocate regulatory
responsibility for common rules (the ``17d-2 Agreement''). The 17d-2
Agreement covers common members of the Exchange and FINRA and allocates
to FINRA regulatory responsibility, with respect to common members, for
the following: (i) Examination of common members of the Exchange and
FINRA for compliance with federal securities laws, rules and
regulations and rules of the Exchange that the Exchange has certified
as identical or substantially similar to FINRA rules; (ii)
investigation of common members of EDGA and FINRA for violations of
federal securities laws, rules or regulations, or Exchange rules that
the Exchange has certified as identical or substantially identical to a
FINRA rule; and (iii) enforcement of compliance by common members with
the federal securities laws, rules and regulations, and the rules of
the Exchange that the Exchange has certified as identical or
substantially similar to FINRA rules.\8\ The 17d-2 Agreement included a
certification by the Exchange that states that the requirements
contained in certain Exchange rules are identical to, or substantially
similar to, certain FINRA rules that have been identified as
comparable.
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\7\ 17 CFR 240.17d-2.
\8\ See Securities Exchange Act Release No. 61698 (March 12,
2010), 75 FR 13151 (March 18, 2010) (approving File No. 10-196).
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To conform to comparable FINRA rules for purposes of the 17d-2
Agreement, as well as BATS and BYX rules for purposes of its
harmonization efforts due to its business combination, the Exchange
proposes to amend Rule 12.6, Customer Priority, to align with FINRA
Rule 5320, BATS Rule 12.6, and BYX Rule 12.6.
As with FINRA Rule 5320, BATS Rule 12.6 and BYX Rule 12.6, amended
Rule 12.6 would prohibit Members from trading ahead of customer orders,
subject to specified exceptions. The amended rule would include
exceptions for large orders and institutional accounts, proprietary
transactions effected by a trading unit of a Member with no knowledge
of customer orders held by another trading unit of the Member, riskless
principal transactions, intermarket sweep orders (``ISOs''), and odd
lot and bona fide error transactions, discussed in detail below.
Amended Rule 12.6 would also provide the same guidance as FINRA Rule
5320, BATS Rule 12.6 and BYX Rule 12.6, on minimum price improvement
standards, order handling procedures, and trading outside normal market
hours.
Background
Current Rule 12.6, the customer order protection rule, generally
prohibits Members from trading on a proprietary basis ahead of, or
along with, customer orders that are executable at the same price as
the proprietary order. The rule contains several exceptions that make
it permissible for a Member to enter a proprietary order while
representing a customer order that could be executed at the same price,
including permitting transactions for the purposes of facilitating the
execution, on a riskless principal basis, of one or more customer
orders.
Proposal To Adopt Text of FINRA Rule 5320, BATS Rule 12.6 and BYX Rule
12.6
To harmonize its rules with FINRA, BATS, and BYX, the Exchange
proposes to delete the current text of Rule 12.6 and its supplementary
material and adopt the text and supplementary material of FINRA Rule
5320, with certain technical changes, as Rule 12.6. The proposed text
of proposed Rule 12.6 would be identical to the text of BATS Rule 12.6
and BYX Rule 12.6. FINRA Rule 5320, BATS Rule 12.6, and BYX Rule 12.6
generally provide that a member that accepts and holds an order in an
equity security from its own customer, or a customer of another broker-
dealer, without immediately executing the order is prohibited from
trading that security on the same side of the market for its own
account at a price that would satisfy the customer order, unless it
immediately thereafter executes the customer order up to the size and
at the same or better price at which it traded for its own account.
Exceptions
Amended Rule 12.6 would include exceptions to the prohibition
against trading ahead of customer orders. That
[[Page 18369]]
is, a Member that meets the conditions of an exception would be
permitted to trade a security on the same side of the market for its
own account at a price that would satisfy a customer order in certain
circumstances. The exceptions are set out below.
Large Orders and Institutional Accounts
One exception would permit a Member to negotiate terms and
conditions with respect to the acceptance of certain large-sized orders
(orders of 10,000 shares or more unless such orders are less than
$100,000 in value) or orders from institutional accounts. The term
``institutional account'' will be defined in accordance with FINRA Rule
4512(c) and Interpretation and Policy .01 under both BATS and BYX Rules
12.6. That is, an institutional account will be defined as the account
of: (1) A bank, savings and loan association, insurance company or
registered investment company; (2) an investment adviser registered
either with the SEC under Section 203 of the Investment Advisers Act or
with a state securities commission (or any agency or office performing
like functions); or (3) any other person (whether a natural person,
corporation, partnership, trust or otherwise) with total assets of at
least $50 million. This exception would require the Member to provide
clear and comprehensive written disclosure to each customer at account
opening and annually thereafter that: (a) States that the Member may
trade proprietarily at prices that would satisfy the customer order,
and (b) provides the customer with a meaningful opportunity to opt in
to the Rule 12.6 protections with respect to all or any portion of its
order. If a customer does not opt in to the protections with respect to
all or any portion of its order, the Member may reasonably conclude
that such customer has consented to the Member trading a security on
the same side of the market for its own account at a price that would
satisfy the customer's order.\9\
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\9\ A customer would retain the right to withdraw consent at any
time. Therefore, a Member's reasonable conclusion that a customer
has consented to the Member trading along with such customer's order
is subject to further instruction and modification from the
customer.
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In lieu of providing written disclosure to customers at account
opening and annually thereafter, the proposed rule would permit Members
to provide clear and comprehensive oral disclosure to, and obtain
consent from, a customer on an order-by-order basis. The Member would
be required to document who provided such consent and that such consent
evidences the customer's understanding of the terms and conditions of
the order. If a customer opted in to the Rule 12.6 protections, a
Member could still obtain consent on an order-by-order basis to trade
ahead of or along with an order from that customer, provided that the
Member documented who provided such consent and that such consent
evidenced the customer's understanding of the terms and conditions of
the order.
No-Knowledge Exception
The Exchange is also proposing to include in Interpretation and
Policy .02 a ``no-knowledge'' exception to its customer order
protection rule. The proposed exception would allow one trading unit of
a Member to trade in a proprietary capacity and at prices that would
satisfy customer orders held by another, separate trading unit of the
Member. The No-Knowledge Exception would be applicable with respect to
NMS stocks, as defined in Rule 600 of Regulation NMS under the Act.
To avail itself of the No-Knowledge Exception, a Member would be
required to meet certain conditions. First, it would have to implement
and utilize an effective system of internal controls (such as
appropriate information barriers) that operate to prevent the
proprietary trading unit from obtaining knowledge of the customer
orders held by a separate trading unit. As proposed, Interpretation and
Policy .02 will make clear that appropriate information barriers must,
at a minimum, comply with the Exchange's existing requirements
regarding the prevention of the misuse of material, non-public
information, which are set forth in Exchange Rule 5.5. Second, the
Member would have to provide, at account opening and annually
thereafter, a written description of how it handles customer orders and
the circumstances under which it may trade proprietarily, including in
a market-making capacity, at prices that would satisfy the customer
order. A Member must maintain records indicating which orders rely on
the no-knowledge exception and produce these records to the Exchange
upon request. The onus will be on the Member to produce sufficient
documentation justifying reliance on the No-Knowledge exception for any
given trade. To ensure clarity and transparency regarding this
exception and others, the Exchange will be issuing a regulatory notice
informing Members of these proposed rule changes. The Exchange will
include in the regulatory notice the effective date for the rule as
amended, which shall be at least 30 days after the effectiveness of the
amendments to Rule 12.6 in order to allow Members to make any necessary
changes to their internal policies or processes.
Riskless Principal Exception
Amended Rule 12.6 would not apply to a proprietary trade made by
the Member to facilitate the execution, on a riskless principal basis,
of another order from a customer (whether its own customer or the
customer of another broker-dealer). To take advantage of this
exception, the Member would have to: (a) Submit a report,
contemporaneously with the execution of the facilitated order,
identifying the trade as riskless principal to the Exchange, and (b)
have written policies and procedures to ensure that riskless principal
transactions relied upon for this exception comply with applicable
Exchange rules. At a minimum, these policies and procedures would have
to require: (1) Receipt of the customer order before execution of the
offsetting principal transaction, and (2) execution of the offsetting
principal transaction at the same price as the customer order,
exclusive of any markup or markdown, commission equivalent, or other
fee and allocation to a riskless principal or customer account in a
consistent manner and within 60 seconds of execution.
Members would have to have supervisory systems in place that
produce records that enable the Member and the Exchange to reconstruct
accurately, readily, and in a time-sequenced manner all orders on which
the Member relies in claiming this exception.
ISO Exception
The proposed rule change would also exempt a Member from the
obligation to execute a customer order in a manner consistent with Rule
12.6 with regard to trading for its own account when the Member routed
an ISO in compliance with Rule 600(b)(30)(ii) of Regulation NMS if the
customer order is received after the Member routed the ISO. If a Member
routes an ISO to facilitate a customer order, and that customer has
consented to not receiving the better prices obtained by the ISO, the
Member would also be exempt with respect to any trading for its own
account that is the result of the ISO as it pertains to the consenting
customer's order.
Odd Lot and Bona Fide Error Exception
The Exchange proposes to except a Member's proprietary trade that:
(1) To offset a customer order that is an amount less than a normal
unit of trading (i.e., an order less than one round lot, which is
typically 100 shares), or (2) corrects a bona fide error.
[[Page 18370]]
With respect to bona fide errors, the Member would be required to
demonstrate and document the basis upon which a transaction meets the
bona fide error exception. For purposes of this proposed Rule, the
Exchange will adopt the definition of ``bona fide error'' found in
Regulation NMS's exemption for error correction transactions.\10\ Thus,
a bona fide error is:
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\10\ Securities Exchange Act Release No. 55884 (June 8, 2007),
72 FR 32926, 32927 (June 14, 2007) (Order Exempting Certain Error
Correction Transactions from Rule 611 of Regulation NMS under the
Securities Exchange Act of 1934).
(i) The inaccurate conveyance or execution of any term of an
order including, but not limited to, price, number of shares or
other unit of trading; identification of the security;
identification of the account for which securities are purchased or
sold; lost or otherwise misplaced order tickets; short sales that
were instead sold long or vice versa; or the execution of an order
on the wrong side of a market; (ii) the unauthorized or unintended
purchase sale or allocation of securities or the failure to follow
specific client instructions; (iii) the incorrect entry of data into
relevant systems, including reliance on incorrect cash positions,
withdrawals, or securities positions reflected in an account; or
(iv) a delay, outage, or failure of a communication system used to
transmit market data prices or to facilitate the delivery or
execution of an order. \11\
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\11\ Id.
Minimum Price Improvement Standards
The proposed rule change establishes the minimum amount of price
improvement necessary for a Member to execute an order on a proprietary
basis when holding an unexecuted limit order in that same security
without being required to execute the held limit order.
In addition, if the minimum price improvement standards set forth
in proposed Interpretation and Policy .06, paragraphs (a) through (g)
would trigger the protection of a pending customer limit order, any
better-priced customer limit order(s) must also be protected under this
Rule, even if those better-priced limit orders would not be directly
triggered under these minimum price improvement standards.
Order Handling Procedures
The proposed rule change provides that a Member must make every
effort to execute a marketable customer order that it receives fully
and promptly. A Member holding a marketable customer order that has not
been immediately executed would have to make every effort to cross such
order with any other order received by the Member on the other side of
the market, up to the size of such order at a price that is no less
than the best bid and no greater than the best offer at the time that
the subsequent order is received by the Member and that is consistent
with the terms of the orders. If a Member were holding multiple orders
on both sides of the market that have not been executed, the Member
would have to make every effort to cross or otherwise execute such
orders in a manner reasonable and consistent with the objectives of the
proposed Rule and with the terms of the orders. A Member could satisfy
the crossing requirement by contemporaneously buying from the seller
and selling to the buyer at the same price.
Trading Outside Normal Market Hours
Under the proposed amendments to Rule 12.6, a Member generally
could limit the life of a customer order to the period of normal market
hours of 9:30 a.m. to 4:00 p.m. Eastern Time. However, if the customer
and Member agreed to the processing of the customer's order outside
normal market hours, the protections of amended Rule 12.6 would apply
to that customer's order at all times the customer order is executable
by the Member.
Statutory Basis
The Exchange believes that its proposal is consistent with Section
6(b) of the Act \12\ in general, and furthers the objectives of Section
6(b)(5) of the Act \13\ in particular, in that it is designed to
promote just and equitable principles of trade, to foster cooperation
and coordination with persons engaged in 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. The Exchange believes that
amending the rule to conform to FINRA Rule 5320, BATS Rule 12.6 and BYX
Rule 12.6 will contribute to investor protection by defining important
parameters by which Members must abide when trading proprietarily while
holding customer limit and market orders, and foster cooperation by
harmonizing requirements across self-regulatory organizations. The
Exchange also believes that including this rule will reinforce the
importance of and ensure that Members are aware of these requirements.
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\12\ 15 U.S.C. 78f(b).
\13\ 15 U.S.C. 78f(b)(5).
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Members who are also members of FINRA, BATS, or BYX are subject to
different regulatory standards when seeking to comply with applicable
rules regarding customer protection. The Exchange believes that the
proposed rule change will provide greater harmonization between similar
Exchange and FINRA, BATS, and BYX rules, resulting in greater
uniformity and, less burdensome and more efficient regulatory
compliance for common members. As such, the proposed rule change would
foster cooperation and coordination with persons engaged in
facilitating transactions in securities and would remove impediments to
and perfect the mechanism of a free and open market and a national
market system.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition not necessary or appropriate in
furtherance of the purposes of the Act. To the contrary, the Exchange
believes that the proposal enhances cooperation among markets and other
trading venues to promote fair and orderly markets and to protect the
interests of the public and of investors. Specifically, by aligning the
Exchange's customer protection rules with those of FINRA, BATS, BYX and
other exchanges,\14\ the proposed rule change will reduce the
complexity of the customer order protection rules for those Members
that are also subject to the customer order protection rules of FINRA
and other exchanges. As a result, the proposed rule will help assure
the protection of customer orders without imposing undue regulatory
costs on industry participants. In addition, the proposed rule change
is not designed to address any competitive issues but rather is
designed to provide greater harmonization among similar Exchange and
FINRA rules, resulting in less burdensome and more efficient regulatory
compliance for common members and facilitating FINRA's performance of
its regulatory functions under the 17d-2 Agreement.
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\14\ See, e.g., Securities Exchange Act Release No. 64418 (May
6, 2011), 76 FR 27735 (May 12, 2011) (SR-CHX-2011-08) (notice of
filing and immediate effectiveness of proposed rule change of
Chicago Stock Exchange, Inc. to adopt customer order protection
language consistent with FINRA Rule 5320); Securities Exchange Act
Release No. 65165 (August 18, 2011), 76 FR 53009 (August 24, 2011)
(SR-NYSEAmex-2011-59) (notice of filing and immediate effectiveness
of proposed rule change of NYSE Amex LLC (now known as NYSE MKT LLC)
to adopt customer order protection language that is substantially
the same as FINRA Rule 5320); and Securities Exchange Act Release
No. 65166 (August 18, 2011), 76 FR 53012 (August 24, 2011) (SR-
NYSEArca-2011-57) (notice of filing and immediate effectiveness of
proposed rule change of NYSE Arca, Inc. to adopt customer order
protection language that is substantially the same as FINRA Rule
5320).
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[[Page 18371]]
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
The Exchange has neither solicited nor received written comments on
the proposed rule change.
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) of the Act \15\ and Rule 19b-4(f)(6) thereunder.\16\
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 \17\ and Rule 19b-
4(f)(6) thereunder.\18\
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\15\ 15 U.S.C. 78s(b)(3)(A).
\16\ 17 CFR 240.19b-4(f)(6).
\17\ 15 U.S.C. 78s(b)(3)(A).
\18\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)
requires the Exchange to give the Commission written notice of the
Exchange's intent to file the proposed rule change, along with a
brief description and 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. The
Exchange has satisfied this requirement.
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At any time within 60 days of the filing of such 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-EDGA-2014-007 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.
All submissions should refer to File Number SR-EDGA-2014-007. 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-EDGA-2014-007 and should be
submitted on or before April 22, 2014.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\19\
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\19\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-07194 Filed 3-31-14; 8:45 am]
BILLING CODE 8011-01-P