[Federal Register Volume 80, Number 197 (Tuesday, October 13, 2015)]
[Notices]
[Pages 61540-61545]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-25886]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-76087; File No. SR-CHX-2015-03]
Self-Regulatory Organizations; Chicago Stock Exchange, Inc.;
Order Granting Accelerated Approval of a Proposed Rule Change, as
Modified by Amendment No. 1 Thereto, To Adopt and Implement CHX SNAP
\SM\, an Intra-day and On-Demand Auction Service
October 6, 2015.
I. Introduction
On June 23, 2015, the Chicago Stock Exchange, Inc. (``CHX'' 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 implement CHX SNAP \SM\, an intra-day and on-
demand auction service initiated at the request of market participants
seeking to trade securities in bulk. The proposed rule change was
published for comment in the Federal Register on July 8, 2015.\3\ On
August 6, 2015, pursuant to section 19(b)(2) of the Act,\4\ the
Commission designated a longer period within which to approve the
proposed rule change, disapprove the proposed rule change, or institute
proceedings to determine whether to disapprove the proposed rule
change.\5\ On August 24, 2015, the Exchange filed Amendment No. 1 to
the proposed rule change.\6\ Amendment No. 1 was published for comment
in the Federal Register on September 9, 2015.\7\ The Commission did not
receive any comment letters regarding 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. 75346 (July 1,
2015), 80 FR 39172.
\4\ 15 U.S.C. 78s(b)(2).
\5\ See Securities Exchange Act Release No. 75630, 80 FR 48375
(August 12, 2015). The Commission designated October 6, 2015, as the
date by which it should approve, disapprove, or institute
proceedings to determine whether to disapprove the proposed rule
change.
\6\ Amendment No. 1 is publicly available on the Commission's
Web site at: https://www.sec.gov/comments/sr-chx-2015-;03/chx201503-
1.pdf.
\7\ See Securities Exchange Act Release No. 75816 (September 2,
2015), 80 FR 54331 (``Notice'').
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This order approves the proposed rule change, as modified by
Amendment No. 1, on an accelerated basis.
II. Summary of the Proposal, as Modified by Amendment No. 1
The Exchange proposes to adopt and implement a new auction, titled
the Sub-second Non-displayed Auction Process (``SNAP''), that is
designed to facilitate the bulk trading \8\ of a security within the
Exchange's matching system (the ``Matching System''). As proposed, SNAP
is a fully-hidden, on-demand auction for a security \9\ that may be
initiated only by the Exchange's Participants and may occur only during
the Exchange's regular trading session.\10\ Members may initiate
multiple SNAPs for a security throughout the course of the regular
trading session.
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\8\ As explained further below, under the proposal, an order
must meet a minimum size requirement to be eligible to initiate a
SNAP. See infra, note 39 and accompanying text.
\9\ Under the proposal, the SNAP functionality will be available
for all securities traded within the Matching System. The Exchange
represents that it will announce any future changes to the
securities eligible for the SNAP functionality via an Information
Memorandum and that any such change would be effective no sooner
than the trading day after it issues the Information Memorandum. See
Notice, supra note 7, 80 FR at 54332, n.15.
\10\ The Exchange's regular trading session begins at 8:30 a.m.
Central Standard Time and concludes at 3:00 p.m. Central Standard
Time on the days that the Exchange is open for the transaction of
business. See CHX Article 20, Rules 1(b) and (c).
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During the stages of a SNAP (the ``SNAP Cycle''), the Exchange
temporarily suspends automated trading on the Exchange for the security
subject to the SNAP. At the conclusion of the SNAP Cycle, the Exchange
transitions back to automated trading on the Exchange for the subject
security.\11\ The SNAP Cycle has the following five stages, which are
set forth in proposed CHX Article 18, Rule 1: \12\ (1) Initiating the
SNAP; (2) SNAP Order Acceptance Period; (3) Pricing and Satisfaction
Period; (4) Order Matching Period; and (5) Transition to Open Trading
State.\13\
[[Page 61541]]
Under the proposal, if a halt or pause is in effect for a subject
security that requires the Exchange to suspend trading in that security
(``material halt or pause'') at the time a SNAP Cycle would otherwise
be initiated, the SNAP Cycle would not be initiated; the proposed rule
text also sets forth required actions should a material halt or pause
be declared for the subject security during a SNAP Cycle.\14\
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\11\ The Exchange represents that the SNAP Cycle on CHX is
designed to occur simultaneously with automated trading in the
subject security elsewhere in the national market system. See
Notice, supra note 7, 80 FR at 54332.
\12\ In the filing, the Exchange provides examples demonstrating
the procedures and functionalities of each stage of the SNAP Cycle.
See Notice, supra note 7, 80 FR at 54342-46.
\13\ The Exchange proposes to define ``Open Trading State''
under proposed CHX Article 1, Rule 1(qq) as the period of time
during the regular trading session when orders are eligible for
automatic execution. See Notice, supra note 7, 80 FR at 54332.
\14\ See Notice, supra note 7, 80 FR at 54341-42.
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The Exchange also proposes amendments to the following CHX Rules in
order to facilitate the SNAP Cycle:
(1) Article 1, Rule 1 (Definitions); \15\
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\15\ The Exchange proposes to: (1) Amend the definition of
``Routable Order'' under current paragraph (oo), see infra, note 66;
and (2) add new definitions for ``Open Trading State,'' see supra
note 13, ``SNAP Price,'' see infra, note 61 and accompanying text,
and ``SNAP Eligible Order,'' see infra, note 46.
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(2) Article 2, Rule 2 (Order Types, Modifiers, and Related Terms;
\16\
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\16\ The Exchange proposes to: (1) Amend the current definition
of ``cross order'' under current paragraph (a)(2), see Notice, supra
note 7, 80 FR at 54337; and (2) add new limit order modifiers
related SNAP, see infra notes 24-26 and accompanying text.
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(3) Article 4, Rule 1 (CHX Book Feed); \17\
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\17\ The Exchange proposes to amend current paragraph (a) to add
a cross reference to new Article 18, Rule 1(b) to clarify that the
operation of the CHX Book Feed is subject to the rules governing the
SNAP Cycle. See Notice, supra note 7, 80 FR at 54336.
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(4) Article 16, Rule 8 (CHX Market Maker Responsibilities); \18\
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\18\ The Exchange proposes to amend paragraph (a) to (1) replace
the term ``member'' with the term ``Participant'' and (2) state that
the quoting obligations of CHX Market Makers do not apply for a
security while that security is subject to a SNAP Cycle. See Notice,
supra note 7, 80 FR at 54346.
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(5) Article 19, Rule 3 (Order Routing Events); \19\
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\19\ The Exchange proposes to add text to current paragraph (a)
setting forth two new routing events for orders participating in a
SNAP Cycle. See infra, note 66.
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(6) Article 20, Rules 1 (Trading Sessions) and 2A (Limit Up-Limit
Down (``LULD'') Plan and Trading Pauses in Individual Securities Due to
Extraordinary Market Volatility); \20\
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\20\ The Exchange proposes to amend paragraph .02 of Article 20,
Rule 1 and Article 20, Rule 2A(c)(3) to add cross references to
proposed Article 18 so that those rules would provide that the
actions described thereunder with respect to trading a halts are
subject to the provisions of proposed Article 18, Rule 1(c), which
addresses trading halts or pauses during a SNAP Cycle. See Notice,
supra note 7, 80 FR at 54342. The Exchange also proposes to specify
that the provisions of paragraph .02 of Article 20, Rule 1 apply
only to a trading halt or pause that ``requires the Exchange to
suspend trading in the issue, other than a LULD Trading Pause.'' See
id.
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(7) Article 20, Rule 8(b) (Ranking and Display of Orders); \21\
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\21\ The Exchange proposes to amend paragraph (b) to set forth
how orders are queued and ranked for execution during Open Trading
State and during a SNAP Cycle. See infra notes 50, 52, and 69.
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(8) Article 20, Rule 8(d)(4) (Rule 201 of Regulation SHO); \22\ and
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\22\ The Exchange proposes to amend paragraph (d)(4) to address
how the Exchange handles orders marked Sell Short in a covered
security subject to the short sale price test restriction during
both Open Trading State and during a SNAP Cycle for that security.
Specifically, the Exchange proposes to (1) create new subparagraph
(A) to govern trading in Open Trading State, which would contain the
rule text under current paragraph (d)(4) and (2) create new subgraph
(B) to govern trading during a SNAP Cycle, which would state, among
other things, that SNAP Eligible Orders marked Sell Short shall not
be permitted to execute at prices at or below the National Best Bid
ascertained from the market snapshot taken pursuant during the SNAP
Cycle to determine the SNAP Price pursuant to proposed Article 18,
Rule 1(b)(2)(E). See Notice, supra note 7, 80 FR at 54338-39.
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(9) Article 20 Rule 8(e) (Execution of Certain Orders and Order
Types).\23\
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\23\ The Exchange proposes to: (1) Specify that, during a SNAP
Cycle, participating SNAP Eligible Orders shall be executed within
the Matching System at the SNAP Price, pursuant to proposed Article
18, Rule 1(b)(4)(A), see infra, notes 71 and 72 and accompanying
text; and (2) re-title the rule's header, see Notice, supra note 7,
80 FR at 54340.
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In particular, the Exchange proposes to add the following new limit
order modifiers related to SNAP:
(1) Start SNAP; \24\
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\24\ See Notice, supra note 7, 80 FR at 54333-34.
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(2) Cancel on SNAP; \25\ and
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\25\ See Notice, supra note 7, 80 FR at 54334.
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(3) SNAP Auction Only (SNAP AOO), which is subcategorized as SNAP
AOO--Day, SNAP AOO--One and Done, or SNAP AOO--Pegged.\26\
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\26\ See Notice, supra note 7, 80 FR at 54334-35.
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A limit order marked Start SNAP will either: (1) Initiate a SNAP
Cycle in a specified security if it meets certain requirements; \27\ or
(2) if it is received by the Matching System during the stage two Order
Acceptance Period and it meets the requirements for a SNAP AOO--One and
Done Order, be treated as a SNAP AOO--One and Done Order.\28\ A limit
order marked Start SNAP that does not meet either of those sets of
requirements will be cancelled.\29\ A limit order marked Cancel on SNAP
will be cancelled upon initiation of a SNAP Cycle or cancelled upon
receipt if received during a SNAP Cycle.\30\
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\27\ See infra, notes 38-42 and accompanying text.
\28\ See Notice, supra note 7, 80 FR at 54334.
\29\ See Notice, supra note 7, 80 FR at 54333.
\30\ See Notice, supra note 7, 80 FR at 54334.
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SNAP AOOs will be accepted only from the beginning of the CHX early
session 31 to five minutes prior the end of the regular
trading session and only be executable during a SNAP Cycle (i.e., SNAP
AOOs orders would not be active during Open Trading State).\32\ Upon
receipt by the Exchange, all valid SNAP AOOs will either be queued in
the SNAP AOO Queue \33\ or immediately ranked on the SNAP CHX book.\34\
Furthermore, all SNAP AOOs must meet the following minimum size
requirement: (1) At least 250 shares and have a minimum aggregate
notional value of $25,000 based on its corresponding SNAP AOO Reference
Price \35\ or (b) at least 2,000 shares with no minimum aggregate
notional value requirement; provided, however, that a certain issue is
subject to a special minimum size requirement.\36\
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\31\ The Exchange's early trading session begins at 6:00 a.m.
Central Standard Time and concludes at 8:30 a.m. Central Standard
Time on the days that the Exchange is open for the transaction of
business. See CHX Article 20, Rules 1(b) and (c).
\32\ See Notice, supra note 7, 80 FR at 54334.
\33\ See infra, note 48 and accompanying text.
\34\ See infra, note 52 and 53 and accompanying text.
\35\ The SNAP AOO Reference Price for the security would be the
last sale in the subject security that was not permitted to trade-
through the National Best Bid and Offer (``NBBO'') at the time the
last sale was executed. If a SNAP AOO Reference Price cannot be
determined, the SNAP AOO shall be cancelled. See Notice, supra note
7, 80 FR at 54334.
\36\ A SNAP AOO for Berkshire Hathaway, Inc. must be for at
least 10 shares.
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Stage 1: Initiating the SNAP
The first stage of a SNAP Cycle is titled Initiating the SNAP.\37\
To initiate a SNAP Cycle, a Participant must submit to the Matching
System a limit order marked Start SNAP. Pursuant to proposed CHX
Article 1, Rule 2(h)(1), a limit order marked Start SNAP must meet the
following requirements to initiate a SNAP Cycle: \38\
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\37\ See Notice, supra note 7, 80 FR at 54336.
\38\ See Notice, supra note 7, 80 FR at 54333.
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(1) Size: The Start SNAP order must be (a) at least 2,500 shares
and have a minimum aggregate notional value of $250,000 or (b) at least
20,000 shares with no minimum aggregate notional value requirement.\39\
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\39\ A limit order for Berkshire Hathaway, Inc. marked Start
SNAP must be for at least 100 shares.
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(2) Price: The limit price of the Start SNAP order must be priced
at or through the National Best Offer (``NBO'') for buy orders or
National Best Bid (``NBB'') for sell orders at the time the order was
received by the Matching System.\40\
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\40\ If the NBBO is crossed or a two-sided NBBO does not exist
at the time the limit order marked Start SNAP is received by the
Matching System, the limit order marked Start SNAP would not
initiate a SNAP Cycle. See id. Furthermore, a limit order marked
Start SNAP and Sell Short, as defined under CHX Article 1, Rule
2(b)(3)(E), for a covered security subject to short sale price test
restriction, shall not initiate a SNAP Cycle and shall be cancelled.
See Notice, supra note 7, 80 FR at 54339.
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[[Page 61542]]
(3) Timing: The Start SNAP order must have been received during the
regular trading session.\41\
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\41\ Furthermore, a limit order marked Start SNAP would not
initiate a SNAP cycle if it is received: (1) Within five minutes of
the first two-sided quote in the subject security having been
received by the Exchange from the primary market disseminated after
either the beginning of the regular trading session or a trading
halt or pause that required the Exchange to suspend trading in the
subject security; (2) within five minutes of the end of the regular
trading session; (3) during a SNAP Cycle or (4) within one minute
after the completion of the previous SNAP Cycle. See Notice, supra
note 7, 80 FR at 54333.
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(4) Routing Availability: A limit order marked Start SNAP will not
initiate a SNAP Cycle if the CHX Routing Services \42\ are not
available at the time the order is received by the Matching System.
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\42\ See generally CHX Article 19.
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Upon acceptance of a valid limit order market Start SNAP, the
Matching System would begin the SNAP Cycle in the subject security by
taking the following actions: (1) Immediately suspending automatic
execution of orders in the subject security; (2) removing the
Exchange's Protected Quotation(s) in the subject security, if any; (3)
notifying the market that a SNAP Cycle in the subject security has
begun; (4) disseminating messages through the CHX Book Feed indicating
that precedent orders on the CHX book in the subject security are no
longer automatically executable; and (5) suspending dissemination of
any other order information concerning the subject security through the
CHX Book Feed.
Stage 2: The SNAP Order Acceptance Period
Upon initiation of the SNAP Cycle, the SNAP Order Acceptance Period
begins.\43\ The SNAP Order Acceptance Period will last between 475 to
525 milliseconds, with the CHX Matching System randomizing the actual
length. The Exchange states that randomizing the exact length of the
SNAP Order Acceptance Period is designed to minimize speed advantages
by precluding market participants from pinpointing exactly when the
SNAP Order Acceptance Period ends.\44\
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\43\ See Notice, supra note 7, 80 FR at 54336-38.
\44\ See Notice, supra note 7, 80 FR at 54336.
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During the SNAP Order Acceptance Period, the CHX Matching System
will establish the SNAP CHX book \45\ by ranking SNAP Eligible
Orders.\46\ Prior to being ranked on the SNAP CHX book, the following
order modifiers will be deactivated for the subject security only: (1)
CHX Only; (2) Post Only; (3) Do Not Route; (4) Match Trade Prevention;
(5) Always Quote; and (6) Reserve Size.\47\
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\45\ The Exchange represents that it operates only one book for
each security and therefore, automated execution of orders in a
subject security will never occur simultaneously with a SNAP Cycle
in the same security. See Notice, supra note 7, 80 FR at 54332.
Because of what the Exchange characterizes as the fundamental
differences between automated execution of orders and auctions, the
Exchange distinguishes between the CHX book during the Open Trading
State and the CHX book during a SNAP Cycle (``SNAP CHX book''). See
id.
\46\ Under proposed CHX Article 1, Rule 1(ss), a ``SNAP Eligible
Order'' is a limit order not marked by, or handled as, any one of
the following modifiers: (1) Cancel On SNAP; (2) Fill Or Kill; (3)
Immediate Or Cancel or (4) Start SNAP, except where the limit order
marked Start SNAP is handled as SNAP AOO--One And Done, pursuant to
proposed Article 1, Rule 2(h)(1)(C). See Notice, supra note 7, 80 FR
at 54333.
\47\ See Notice, supra note 7, 80 FR at 54337. The Exchange
states that deactivating each of these modifiers is necessary so
that SNAP Eligible Orders subject to a SNAP Cycle are handled in a
manner that do not violate the terms of the specified order
modifiers, as the SNAP Cycle requires all participating orders to be
routable, undisplayed in whole and executable, without restriction.
See id.
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First, pursuant to proposed CHX Article 18, Rule 1(b)(2)(A), the
CHX Matching System will rank or cancel ``precedent orders,'' which
are: (1) SNAP Eligible Orders in the subject security resting on the
CHX Book and SNAP AOO Queue \48\ prior to the initiation of the SNAP
Cycle; (2) the limit order marked Start SNAP that initiated the SNAP
Cycle; and (3) Non-SNAP Eligible Orders in the subject security resting
on the CHX book prior to the initiation of the SNAP Cycle. Precedent
SNAP Eligible Orders, precedent SNAP AOOs not marked SNAP AOO--
Pegged,\49\ and the precedent limit order marked Start SNAP that
initiated the SNAP Cycle would be ranked on the SNAP CHX book, pursuant
to proposed CHX Article 20, Rule 8(b)(3).\50\ Precedent SNAP AOO--
Pegged orders would remain on the SNAP AOO Queue and be ranked on the
SNAP CHX book during the Pricing and Satisfaction Period later in the
SNAP Cycle,\51\ and precedent Non-SNAP Eligible Orders would be
cancelled.
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\48\ Under proposed CHX Article 20, Rule 8(b)(2)(A), valid SNAP
AOOs in the subject security that are received during the Open
Trading State in the security will not be ranked on the CHX Book
upon receipt; they will be queued in the SNAP AOO Queue in the order
in which they were originally received. See Notice, supra note 7, 80
FR at 54335.
\49\ Under proposed CHX Article 1, Rule 2(h)(3)(C), a SNAP AOO--
Pegged Order is a limit order modifier available only for orders
marked SNAP AOO--Day or SNAP AOO--One And Done, which requires that
the order be priced at the less aggressive of an optional limit
price or mandatory offset price from the NBBO ascertained from the
market snapshot taken pursuant at the conclusion of the Order
Acceptance Period. An order sender that submits a limit order marked
SNAP AOO--Pegged must specify one of the following pricing options:
(1) Midpoint--priced at the midpoint of the NBBO or the locking
price if the NBBO is locked; if the NBBO is crossed, this order will
not participate in the instant SNAP Cycle, even if there is an
optional limit price indicated; (2) Market--a buy (sell) order
priced at the NBO (NBB), or at a specified offset below or above the
NBO (NBB); or (3) Primary--a buy (sell) order priced at the NBB
(NBO), or at a specified offset below or above the NBB (NBO). See
Notice, supra note 7, 80 FR at 54335.
\50\ Proposed CHX Article 20, Rule 8(b)(3) ranks precedent
orders with the same prices in the following priority: (1) Precedent
fully-displayable orders and displayed portions of Reserve Size SNAP
Eligible Orders; (2) precedent undisplayed portion of Reserve Size
SNAP Eligible orders; (3) precedent SNAP Eligible orders marked Do
Not Display; (4) limit order marked Start SNAP that started the SNAP
Cycle; and (5) precedent SNAP AOOs. See Notice, supra note 7, 80 FR
at 54335.
\51\ See infra, note 59.
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Second, the CHX Matching System would rank incoming SNAP Eligible
Orders received during the SNAP Order Acceptance Period on the CHX SNAP
Book. Incoming SNAP Eligible Orders would be immediately ranked on the
SNAP CHX book pursuant to proposed Article 20, Rule 8(b)(3)(E),\52\
provided, however, that SNAP AOOs marked SNAP AOO--Pegged shall be
placed in the SNAP AOO Queue upon receipt and would only be ranked on
the SNAP CHX book during the Pricing and Satisfaction Period later in
the SNAP Cycle.\53\ Incoming non-SNAP Eligible Orders received during
the SNAP Cycle, would be cancelled upon receipt, except that cross
orders shall be queued.\54\
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\52\ Proposed CHX Article 20, Rule 8(b)(3)(E) states that SNAP
Eligible Orders received during the SNAP Order Acceptance Period and
SNAP AOOs would be ranked based on their sequence numbers and after
precedent fully-displayable orders and displayed portions of Reserve
Size SNAP Eligible Orders, precedent undisplayed portion of Reserve
Size SNAP Eligible orders, precedent SNAP Eligible orders marked Do
Not Display, and limit order marked Start SNAP that initiated the
SNAP Cycle, respectively. See Notice, supra note 7, 80 FR at 54335.
\53\ See proposed CHX Article 18, Rule 1(b)(3)(A).
\54\ Under the Exchange's current rules, cross orders are always
handled Immediate Or Cancel, pursuant. See CHX Article 1, Rule
2(a)(2). To facilitate SNAP, the Exchange proposes to amend the
definition of cross orders to provide that cross orders received
during a SNAP Cycle shall be queued for later processing and not
immediately cancelled. The Exchange represents that this special
handling of cross orders is necessary because, for example, the
Exchange receives a significant number of cross orders marked
Qualified Contingent Trade (``QCT''), the execution of which is
required, among other things, to be contingent upon the execution of
all other components at or near the same time. See Notice, supra
note 7, 80 FR at 54337. Thus, the Exchange states that it is
preferable to momentarily delay processing of QCTs to give such
orders the opportunity to clear the CHX book, whereas the Exchange
believes that an immediate cancellation could result in the QCT
being out-of hedge with the other component trades. See id. The
Exchange also argues that, in light of the manual nature of QCT
order packaging process, the approximate one second delay in
processing a QCT on the FIFO Queue is immaterial with respect to the
execution ``at or near the same time'' requirement for QCTs. See id.
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[[Page 61543]]
During the SNAP Cycle, the following incoming messages would be
queued in the proposed First In/First Out (``FIFO'') Queue for later
processing: (1) Cancel and cancel/replace messages for resting or
queued orders; (2) cancel messages from away markets for routed orders
received after the SNAP Order Acceptance Period; (3) SNAP Eligible
Orders received after the SNAP Order Acceptance Period; and (4) cross
orders. The Exchange asserts that the FIFO Queue is necessary because
the immediate processing of most messages would be suspended during the
SNAP Cycle.\55\ The Exchange further argues that the momentary delay of
processing of the messages in the FIFO Queue is reasonable because the
delay would be no longer than the approximate one second that it would
take for the SNAP Cycle to be completed and market liquidity in the
subject security would be enhanced by preserving such orders and
reducing unnecessary order cancellations.\56\
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\55\ See Notice, supra note 7, 80 FR at 54337.
\56\ See id.
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Upon the conclusion of the Order Acceptance Period, the Matching
System will take a snapshot of the Protected Quotation(s) of external
market(s) in the subject security and determine whether or not the CHX
Routing Services are available. If the snapshot of the Protected
Quotation(s) of external market(s) in the subject security shows that a
two-sided NBBO exists and the CHX Routing Services are available, the
SNAP Cycle will continue to stage three, the Pricing and Satisfaction
Period; if the market snapshot shows that a two-sided NBBO does not
exist or the CHX Routing Services are unavailable, the SNAP Cycle will
abort without any executions, and the Matching System will take another
snapshot of the Protected Quotation(s) of external market(s) in the
subject security and immediately transition to stage five, Transition
to the Open Trading State.
Stage 3: The Pricing and Satisfaction Period
Using the market snapshot taken at the conclusion of the Order
Acceptance Period, the Matching System will initiate the Pricing and
Satisfaction Period.\57\ First, the Matching System will price all SNAP
AOOs marked SNAPP AOO--Pegged \58\ that remain on the SNAP AOO Queue,
and then rank those orders on the SNAP CHX book pursuant to proposed
CHX Article 20, Rule 8(b)(3)(E).\59\ The SNAP CHX book is complete once
these remaining orders from the SNAP AOO Queue are processed.\60\
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\57\ See Notice, supra note 7, 80 FR at 54338-40.
\58\ See supra note 49.
\59\ See supra note 52.
\60\ See Notice, supra note 7, 80 FR at 54338.
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After SNAP AOOs marked SNAP AOO--Pegged are priced, the Matching
System will determine the SNAP Price. Under proposed Article 1, Rule
1(rr), the SNAP Price is the single price at which the greatest number
of shares may be executed during a SNAP Cycle without trading-through
any more aggressively priced orders on either side of the market, in
compliance with all CHX Rules and relevant securities laws and
regulations, including Regulation NMS and Rule 201 of Regulation SHO,
and any applicable exemptive relief therefrom.\61\ Where two or more
price points are identified when the Matching System is determining the
SNAP Price, the SNAP Price will be the price closest to the last
reported sale in the security from the same trading day that was not
permitted to trade-through the NBBO at the time the last sale was
executed (``eligible same day last sale''); where two or more price
points are equally close to the eligible same day last sale price, the
SNAP Price will be the eligible same day last sale price.\62\ If an
eligible same day last sale cannot be ascertained, the SNAP Price will
be the price closest to the NBBO midpoint.\63\ Where two or more price
points are equally close to the NBBO midpoint, the SNAP Price will be
the NBBO midpoint.\64\
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\61\ See Notice, supra note 7, 80 FR at 54332-33.
\62\ See Notice, supra note 7, 80 FR at 54333.
\63\ See id.
\64\ See id.
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If the SNAP Price cannot be determined, the Matching System will
take a snapshot of the Protected Quotation(s) of external market(s) in
the subject security and the SNAP Cycle will transition to stage five,
Transition to the Open Trading State.\65\ If the SNAP Price can be
determined and one or more orders must be routed away, pursuant to
proposed CHX Article 19, Rule 3(a)(4) and/or (5),\66\ the Satisfaction
Period of stage three will begin. If no order routing is necessary, the
SNAP Cycle will continue to stage four, the Order Matching Period.
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\65\ In the filing, the Exchange provides examples of when the
Matching System would be unable to determine a SNAP Price. See
Notice, supra note 7, 80 FR at 54338.
\66\ Proposed CHX Article 19, Rule 3(a)(4) provides that a
Routable Order, as defined under CHX Article 1, Rule 1(oo), or a
portion thereof, shall be routed pursuant to the CHX Routing
Services in compliance with CHX rules and all federal securities
laws, rules and regulations, including Regulation NMS and Regulation
SHO, to the extent necessary to permit orders to be executed within
the Matching System at the SNAP Price in compliance with Regulation
NMS. See Notice, supra note 7, 80 FR at 54340. Orders routed away
pursuant to paragraph (a)(4) shall be priced (1) at the SNAP Price
or, (2) if the SNAP Price is priced at an increment smaller than the
relevant minimum price increment, at the minimum price increment
less aggressive than the SNAP Price. See id. Proposed CHX Article
19, Rule 3(a)(5) provides that a Routable Order, as defined under
CHX Article 1, Rule 1(oo), or a portion thereof, shall be routed
pursuant to the CHX Routing Services in compliance with CHX rules
and all federal securities laws, rules and regulations to the extent
necessary to execute SNAP Eligible Orders at the SNAP Price against
Protected Quotations of external markets priced at the SNAP Price
that could not be matched within the Matching System, during a SNAP
Cycle. See id. The Exchange also proposes to amend the definition of
Routable Order under CHX Article 1, Rule 1(oo) to specify that
during a SNAP Cycle, participating SNAP Eligible Orders are always
Routable Orders. See Notice, supra note 7, 80 FR at 54340 n.73.
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During the Satisfaction Period, the Exchange's routing systems will
route away the necessary SNAP Eligible Orders, or portions thereof,
based on the execution priority rules set forth in proposed CHX Article
18, Rule 1(b)(4)(A).\67\ The Matching System will then delay proceeding
to stage four, the Order Matching Period, for 200 milliseconds or until
all confirmations for routed orders have been received from away
market(s), whichever occurs first. According to the Exchange, the
purpose of this delay is to give away markets sufficient time to
respond to the SNAP routed orders so that any unexecuted SNAP routed
orders would be included in the SNAP execution in the Matching System
in that SNAP Cycle.\68\ The unexecuted remainders of
[[Page 61544]]
orders routed away and returned to the Matching System prior to the
expiration of the Satisfaction Period during which the orders were
routed away will maintain their respective original execution priority
within the SNAP CHX book. Any unexecuted remainders returned to the
Matching System after the expiration of the Satisfaction Period during
which the orders were routed away will be handled pursuant to CHX
Article 20, Rule 8(b)(7).\69\
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\67\ See infra, notes 70-72 and accompanying text for an
explanation of the execution priority rules set forth in proposed
CHX Article 18, Rule 1(b)(4)(A).
\68\ See Notice, supra note 7, 80 FR at 54339. In connection
with this up-to-200 millisecond delay, the Exchange also requested
exemptive relief from the ``current'' national best bid requirement
explicitly required by Rule 201 of Regulation SHO, see 17 CFR
242.201, to determine whether a short sale order in a covered
security under Regulation SHO (i.e., any NMS Stock as defined in 17
CFR 242.600(b)(47)) can be executed in a SNAP Cycle. See Letter from
Albert J. Kim, VP and Associate General Counsel, CHX, to Josephine
J. Tao, Assistant Director, Division of Trading and Markets,
Commission, dated October 6, 2015. The Exchange explained that the
200 millisecond delay may result in SNAP Eligible Orders executing
at or below the current national best bid while Rule 201 is in
effect, see id., which would violate Rule 201(b), see 17 CFR 201(b)
(requiring, among other things, that a trading center establish,
maintain, and enforce written policies and procedures reasonably
designed to 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). The Commission
granted the Exchange an exemption from Rule 201 to permit the
Exchange to use a reference price other than the current national
best bid under Rule 201 in determining permissible execution prices
in SNAP Cycles where there is a SNAP execution delay between the
stage 2 market snapshot and SNAP executions, subject to certain
conditions. See Letter from Josephine J. Tao, Assistant Director,
Division of Trading and Markets, Commission, to Albert J. Kim, VP
and Associate General Counsel, CHX, dated October 6, 2015.
\69\ Pursuant to proposed CHX Article 20, Rule 8(b)(7), an
unexecuted remainder of a routed order returned to the Matching
System in one or more parts will be added to the existing balance of
the related Routable Order already posted to the CHX book, the SNAP
CHX book, or the SNAP AOO Queue, as applicable. See Notice, supra
note 7, 80 FR at 54339-40. If no balance exists at the time a part
of an unexecuted remainder of a routed order is returned to the
Matching System, the order will be treated as a new incoming order,
subject to Satisfaction Period provisions set forth in proposed CHX
Article 18, Rule 1(b)(3)(C). See id. As noted above, the unexecuted
remainders of orders routed away and then returned to the Matching
System prior to the expiration of the Satisfaction Period during
which the orders were routed away will maintain their respective
original execution priority within the SNAP CHX book and will not be
treated as new incoming orders. See Notice, supra note 7, 80 FR at
54340.
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Stage 4: The Order Matching Period
Upon conclusion of the stage three Pricing and Satisfaction Period,
orders remaining on the SNAP CHX book if any, will be matched at the
SNAP Price in accordance with the execution priority provisions set
forth in proposed CHX Article 18, Rule 1(b)(4), and after those orders
are matched, the Matching System will take another snapshot of the
Protected Quotation(s) of external market(s) in the subject
security.\70\ Under proposed paragraph (b)(4), SNAP Eligible Orders
with a Working Price \71\ at or more aggressive than the SNAP Price
will be executed in Working Price priority and if more than one such
order shares the same Working Price, then as described under Article
20, Rule 8(b)(3), for that price point.\72\ Accordingly, orders will be
executed according to their rank at the SNAP Price, except that orders
with a more aggressive Working Price will be executed first.\73\ The
Exchange will utilize the market snapshot taken during the Order
Matching Period for regulatory compliance purposes in transitioning the
Open Trading State during stage five.\74\
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\70\ See Notice, supra note 7, 80 FR at 54340-41.
\71\ Under CHX Article 1, Rule 1(pp), Working Price is defined
as the most aggressive price at which a resting limit order, as
defined under CHX Article 1, Rule 2(a)(1), can execute within the
Matching System, in compliance with CHX Rules and relevant
securities laws and regulations, including Rule 611 of Regulation
NMS and Rule 201 of Regulation SHO.
\72\ See supra notes 50 and 52.
\73\ See Notice, supra note 7, 80 FR at 54340.
\74\ See Notice, supra note 7, 80 FR at 54341-42.
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Stage 5: The Transition to Open Trading State
During stage five, the Transition to Open Trading State, the
Matching System will use the relevant market snapshot to transition
trading in the subject security to the Open Trading State.\75\
Specifically, orders resting on the SNAP CHX book will be either: (1)
Transitioned onto the CHX book and ranked pursuant to the Exchange's
ranking rules for orders during the Open Trading State; \76\ (2) routed
away; (3) placed in the SNAP AOO Queue, if the order is a SNAP AOO that
may participate in a subsequent SNAP Cycle; or (4) otherwise cancelled.
Additionally, order modifiers attached to the SNAP Eligible Orders
being transitioned to the CHX book that were deactivated during the
SNAP Cycle will be reactivated prior to transition to the CHX book.
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\75\ See id.
\76\ See proposed CHX Article 20, Rule 8(b)(1).
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Once these processes have finished, all messages queued on the FIFO
Queue during the SNAP Cycle will be processed as incoming messages in
the order in which they were received. As the final step of the SNAP
Cycle, the Exchange will: (1) notify the market that the SNAP Cycle has
concluded; (2) publish Protected Quotation(s) in the subject security,
if any; and (3) begin the dissemination of relevant order information
concerning orders resting on the CHX book.
III. Discussion and Commission Findings
After careful review and consideration, the Commission finds that
the proposed rule change, as modified by Amendment No. 1, is consistent
with the requirements of the Act and the rules and regulations
thereunder that are applicable to a national securities exchange.\77\
In particular, the Commission finds that the proposed rule change is
consistent with section 6(b)(5) of the Act,\78\ which requires, among
other things, that the rules of a national securities exchange be
designed to promote just and equitable principles of trade; 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, and that the rules of a national securities exchange
not be designed to permit unfair discrimination between customers,
issuers, brokers or dealers.
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\77\ In approving this proposed rule change, as amended, the
Commission notes that it has considered the proposed rule's impact
on efficiency, competition, and capital formation. See 15 U.S.C.
78c(f).
\78\ 15 U.S.C. 78f(b)(5).
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The Commission believes that the proposal is reasonably designed to
facilitate the auction trading of securities on CHX in a fair and
orderly manner, and could improve market quality for market
participants seeking to execute bulk trading interests and for other
market participants submitting orders in response to that interest. The
Commission believes that the SNAP may promote liquidity while
minimizing potential information leakage that could disadvantage market
participants whose orders are participating in the SNAP Cycle. At the
initiation of the SNAP Cycle, the Exchange will broadcast to the market
that an aggressively priced trading interest \79\ in a particular
security of a substantial size \80\ is guaranteed to exist at CHX
without disclosing details of the order. That signal will allow market
participants to respond to what must be a large Start SNAP order priced
at or better than the NBBO at the time the Start SNAP order was
received by the Matching System.\81\ The SNAP CHX book will be fully
hidden, and market data dissemination would be suspended during a SNAP
Cycle (except for the SNAP execution reports to the relevant SIP and
order senders). The Commission notes that the Exchange has represented
that orders will be executed in the SNAP at the SNAP Price in a manner
consistent with all CHX Rules and relevant securities laws and
regulations, including Regulation NMS and Rule 201 of Regulation SHO,
and any applicable exemptive relief therefrom.\82\
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\79\ The limit price of the Start SNAP order must be priced at
or through the NBO for buy orders or NBB for sell orders at the time
the order was received by the Matching System. See supra note 40 and
accompanying text.
\80\ Generally, a Start SNAP order must be (a) at least 2,500
shares and have a minimum aggregate notional value of $250,000 or
(b) at least 20,000 shares with no minimum aggregate notional value
requirement. See supra note 39 and accompanying text.
\81\ See supra notes 79 and 80 and accompanying text.
\82\ See supra note 61- 66 and accompanying text. The Commission
notes that the Exchange has obtained exemptive relief from certain
requirements of the short sale price test restriction of Rule 201 of
Regulation SHO in connection with certain SNAP processes. See supra
note 68.
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[[Page 61545]]
The Exchange has included functionalities in SNAP that the Exchange
states are designed to deemphasize speed as a key for trading success.
A SNAP Cycle will never be scheduled ahead of time, and the length of
the SNAP Order Acceptance Period would be randomized.\83\ The SNAP also
deemphasizes speed advantages because Participants may submit SNAP AOOs
to rest on the SNAP AOO Queue prior to a SNAP Cycle, and those AOOs
would maintain priority over SNAP Eligible Orders submitted during the
SNAP Cycle.\84\ The Commission believes that the proposal, which is
intended to deemphasize speed advantages during the SNAP Cycle, is
reasonably designed to help promote just and equitable principles of
trade and remove impediments and perfect the mechanisms of a free and
open market. The Commission believes that the SNAP may encourage
competition among trading venues, which may inure to the benefit of
investors.
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\83\ See Notice, supra note 7, 80 FR at 54347.
\84\ See id.
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For the above reasons, the Commission finds that the proposed rule
change, as modified by Amendment No. 1, is consistent with the
requirements of the Act.
IV. Accelerated Approval of Proposed Rule Change, as Modified by
Amendment No. 1
The Commission finds good cause to approve the proposed rule
change, as modified by Amendment No. 1, prior to the 30th day after the
date of publication of notice of Amendment No. 1 in the Federal
Register.\85\ In Amendment No. 1, the Exchange proposes to amend the
minimum size requirements for the following: (1) Limit orders marked
Start SNAP for securities that do not have a special minimum size
requirement; and (2) SNAP AOOs for securities that do not have a
special minimum size requirement. With respect to Start SNAP orders,
the Exchange proposes to replace the previously proposed tier-based
minimum size requirements with a requirement that a Start SNAP order be
for at least: (1) 2,500 shares and have a minimum aggregate notional
value of $250,000; or (2) 20,000 shares with no minimum aggregate
notional value requirement. With respect to SNAP AOOs, the Exchange
also proposes to replace the previously proposed tier-based minimum
size requirements with a requirement that a SNAP AOO be for at least:
(1) 250 shares and have a minimum aggregate notional value of $25,000
based on its corresponding SNAP AOO Reference Price; or (2) at least
2,000 shares with no minimum aggregate notional value requirement.
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\85\ As mentioned above, Amendment No. 1 was published for
comment in the Federal Register on September 9, 2015. Accordingly,
the 30th day after publication of the Notice is October 9, 2015.
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The Exchange states that it received feedback from certain
Participants indicating that the original tier-based minimum size
requirements were counter-intuitive and would unnecessarily complicate
the programming of those Participants' respective systems to
automatically initiate and participate in SNAP Cycles, and that the
proposed simplification of the minimum size requirements is designed to
address those concerns.\86\ The Commission finds that Amendment No. 1
is consistent with the protection of investors and the public interest,
and notes that the Commission solicited comments regarding Amendment
No. 1 and no comments have been received.\87\
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\86\ See Amendment No. 1 at pgs. 3-4.
\87\ See Notice, supra note 7.
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Accordingly, the Commission finds good cause, pursuant to section
19(b)(2) of the Act,\88\ to approve the proposed rule change, as
modified by Amendment No. 1, on an accelerated basis.
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\88\ 15 U.S.C. 78s(b)(2).
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VI. Conclusion
It is therefore ordered that, pursuant to section 19(b)(2) of the
Act,\89\ the proposed rule change, as modified by Amendment No. 1, (SR-
CHX-2015-03) be, and hereby is, approved on an accelerated basis.
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\89\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\90\
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\90\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2015-25886 Filed 10-9-15; 8:45 am]
BILLING CODE 8011-01-P