[Federal Register Volume 80, Number 219 (Friday, November 13, 2015)]
[Notices]
[Pages 70261-70268]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-28811]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-76390; File No. SR-NSX-2015-05]
Self-Regulatory Organizations; National Stock Exchange, Inc.;
Notice of Filing of Proposed Rule Change Amending Rule 11.1, Hours of
Trading, To Rescind Interpretations and Policies .01, ``Cessation of
Trading Operations on NSX;'' Adopting Rule 11.25 Relating to Use of
Market Data Feeds; Amending NSX Rule 11.13 Relating to the Order
Delivery Mode of Order Interaction; Amending NSX Rule 11.11 To Remove
Certain Order Types and Correct Technical Deficiencies in the Numbering
of Certain Sections of the Rule; and Amending Rule 11.12, Cross Message
and Making Conforming Amendments to NSX Rules 11.11(c) and 16.2
November 9, 2015.
Pursuant to the provisions of Section 19(b)(1) of the Securities
Exchange Act of 1934 (the ``Exchange Act'' or ``Act'') \1\ and Rule
19b-4 thereunder,\2\ notice is hereby given that on November 3, 2015,
National Stock Exchange, Inc. (``NSX[supreg]'' or the ``Exchange'')
filed with the Securities and Exchange Commission (the ``Commission'')
the proposed rule change, as described in Items I and II below, which
Items have been substantially prepared by the Exchange. The Commission
is publishing this notice to solicit comments on the
[[Page 70262]]
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 proposing to amend NSX Rule 11.1, Hours of Trading,
to rescind Interpretations and Policies .01, ``Cessation of Trading
Operations on NSX.'' The Exchange is also proposing to: (i) Adopt new
Rule 11.25, Use of Market Data Feeds; (ii) amend NSX Rule 11.13 and
Interpretations and Policies .01 with respect to the order delivery
mode of order interaction with the Exchange's trading system (``Order
Delivery''); (iii) amend NSX Rule 11.11, Orders and Modifiers, to
remove descriptions of certain order types that the Exchange will not
offer upon a resumption of trading and to correct technical
deficiencies in the numbering of certain subparagraphs of the rule; and
(v) amend Rule 11.12, Cross Message, to delete the rule in its entirety
and make conforming amendments to NSX Rules 11.11(c) and 16.2.
The text of the proposed rule change is available on the Exchange's
Web site at www.nsx.com, at the Exchange's principal office, and at 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 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 those statements may be examined at
the places specified in Item IV below. The Exchange has prepared
summaries, set forth in sections A, B, and C below, of the most
significant parts of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
NSX, a corporation organized under the laws of the State of
Delaware,\3\ is a registered national securities exchange under Section
6 of the Exchange Act \4\ and operates as a self-regulatory
organization governed by the requirements of Section 19 of the Exchange
Act.\5\ The Exchange is filing this rule proposal to rescind
Interpretations and Policies .01 of Rule 11.1 (hereinafter referred to
as ``I&P.01''), ``Cessation of Trading Operations on the Exchange.''
I&P.01 currently states that, as of the close of business on May 30,
2014 (the ``Closing Date''), NSX shall cease trading activity on its
trading system (the ``System''); \6\ that all NSX Rules will remain in
full force and effect through and after the Closing Date; and that the
Exchange shall file a proposed rule change pursuant to Rule 19b-4 of
the Exchange Act prior to any resumption of trading on the Exchange
pursuant to Chapter XI (Trading Rules).\7\ Rescinding I&P.01 will
permit the Exchange to resume trading activity on the System as soon as
practicable after the instant rule amendment is operative, thereby
restoring NSX to its status as an operating, all-electronic national
securities exchange as it had been for many years prior to ceasing
trading operations
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\3\ NSX was founded in 1885 as the Cincinnati Stock Exchange and
changed its name to ``National Stock Exchange'' in 2003. See
Securities Exchange Act Release No. 48774 (November 12, 2003), 68 FR
65332 (November 19, 2003) (SR-CSE-2003-12). In 2006, the Exchange
de-mutualized and changed its corporate organizational structure
from a non-stock, not-for-profit Ohio corporation to a Delaware for-
profit stock corporation. See Securities Exchange Act Release No.
53963 (June 8, 2006), 71 FR 34660 (June 15, 2006) (SR-NSX-2006-03).
\4\ 15 U.S.C. 78f.
\5\ 15 U.S.C. 78s.
\6\ Exchange Rule 1.5S.(4) defined the term ``System'' as ``. .
. the electronic securities communications and trading facility
designated by the Board [of Directors] through which orders . . .
are consolidated for ranking and execution.''
\7\ See Securities Exchange Act Release No. 72107 (May 6, 2014),
79 FR 27017 (May 12, 2014) (SR-NSX-2014-14).
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In connection with the proposed resumption of trading on the
System, the Exchange is proposing several other rule amendments.
Specifically, the Exchange is proposing in new Rule 11.25 to describe
the Exchange's use of certain data feeds for order handling and
execution, order routing and regulatory compliance. The Exchange is
also proposing amendments to: (i) Rule 11.11 to eliminate the Double
Play and Auto-Ex Only Order types; (ii) Rule 11.13 and the
Interpretations and Policies under the rule to eliminate rule text
relating to Order Delivery; and (iii) Rule 11.16, Cross Message, to
rescind the rule text in its entirety. The Exchange is further
proposing non-substantive or conforming amendments to Rules 11.11 and
16.2.
The details of these proposed rule changes are discussed below.
Proposed Resumption of Trading on NSX
At the time that NSX ceased trading operations, the Exchange
operated as a wholly-owned subsidiary of CBOE Stock Exchange, LLC
(``CBSX'').\8\ Thereafter, on February 13, 2015,\9\ the Commission
issued an Order granting its approval of a transaction in which
National Stock Exchange Holdings, Inc. (``NSX Holdings''), a Delaware
corporation, purchased all of the outstanding shares of NSX from the
CBSX (the ``Approval Order''). The Commission noted in the Approval
Order that ``[t]he Exchange is, and will remain, registered as a
national securities exchange under Section 6 of the Act \10\ and a
self-regulatory organization [``SRO''] . . . as defined in [S]ection
3(a)(26) of the Act \11\after the Closing [of the Transaction].'' The
Commission further noted that ``. . . [t]he Exchange states that it
plans to reopen its trading operations as soon as practicable after the
Closing and plans to operate the Exchange using its existing . . .
[S]ystem pursuant to the rules of the Exchange currently in effect . .
. .''\12\
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\8\ See Securities Exchange Act Release No. 66071 (December 29,
2011); 77 FR 521 (January 5, 2012)(SR-CBOE-2011-107 and SR-NSX-2011-
14), Order Granting Accelerated Approval to Proposed Rule Changes in
Connection with the Proposed Acquisition of the National Stock
Exchange, Inc. by the CBOE Stock Exchange, LLC.
\9\ See Securities Exchange Act Release No. 74270 (February 13,
2015), 80 FR 9286 (February 20, 2015) (SR-NSX-2014-017), Order
Granting Approval of Proposed Rule Change in Connection With a
Proposed Transaction in Which National Stock Exchange Holdings, Inc.
Will Acquire Ownership of the Exchange from the CBOE Stock Exchange,
LLC. The Approval Order described in detail, inter alia, the
ownership structure of the Exchange upon its acquisition by NSX
Holdings and the requirement that NSX Holdings give due regard to
the preservation of the independence of the Exchange's self-
regulatory function.
\10\ See 15 U.S.C. 78f.
\11\ See 15 U.S.C. 78s.
\12\ See Order Granting Approval of Proposed Rule Change in
Connection With a Proposed Transaction in Which National Stock
Exchange Holdings, Inc. Will Acquire Ownership of the Exchange from
the CBOE Stock Exchange, LLC, 80 FR at 9287.
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After the Closing of the Transaction up to the date of the instant
rule filing, the Exchange has continued to discharge its applicable SRO
responsibilities in anticipation of resuming trading operations on the
Exchange. Specifically, as outlined below, the Exchange has continued
as a party to the National Market System (``NMS'') Plans \13\ and has
updated its
[[Page 70263]]
rules as appropriate.\14\ The Exchange also filed with the Commission
an amendment to NSX Rule 2.5, Application Procedures for an ETP Holder
or to become an Associated Person of an ETP Holder, adding
Interpretations and Policies .01, Expedited Process for Reinstatement
as an ETP Holder.\15\ The amendment provided an expedited procedure,
available for a period of 90 days from the date the rule amendment
became operative, for ETP Holders in good standing as of the close of
business on May 30, 2014 to reinstate their status as such and to
register Associated Persons.\16\
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\13\ See, e.g., Securities Exchange Act Release No. 74323
(February 19, 2015), 80 FR 10169 (February 25, 2015) (File No. 4-
631), Order Approving the Eighth Amendment to the National Market
System Plan to Address Extraordinary Market Volatility (the ``Limit
Up-Limit Down Plan''); Securities Exchange Act Release No. 75192
(June 17, 2015), 80 FR 36028 (June 23, 2015) (File No. 4-668), Order
Approving Amendment No. 1 to the National Market System Plan
Governing the Process of Selecting a Plan Processor and Developing a
Plan for the Consolidated Audit Trail; Securities Exchange Act
Release No. 75505 (July 22, 2015), 80 FR 45254 (July 29, 2015) (File
No. S7-24-89), Order Approving Amendment No. 35 to the Joint Self-
Regulatory Organization Plan Governing the Collection, Consolidation
and Dissemination of Quotation and Transaction Information for
Nasdaq-Listed Securities Traded on Exchanges on an Unlisted Trading
Privileges Basis; Securities Exchange Act Release No. 75504 (July
22, 2015), 80 FR 45252 (July 29, 2015) (SR-CTA/CQ 2015-01), Order
Approving the Twenty Second Substantive Amendment to the Second
Restatement of the CTA Plan and Sixteenth Substantive Amendment to
the Restated CQ Plan; Securities Exchange Act Release No. 75660
(August 11, 2015), 80 FR 48940 (August 14, 2015), (SR-CTA-2015-02),
Order Approving the Twenty Third Substantive Amendment to the Second
Restatement of the CTA Plan; Securities Exchange Act Release No
75980 (September 25, 2015), 80 FR 58796 (September 30, 2015),Order
Approving Amendment No. 2 to the National Market System Plan
Governing the Process of Selecting a Plan Processor and Developing a
Plan for the Consolidated Audit Trail.
\14\ See Securities Exchange Act Release No. 72434 (June 19,
2014), 79 FR 36110 (June 25, 2014) (SR-NSX-2014-08), Order Granting
Approval of Proposed Rule Changes Relating to Clearly Erroneous
Executions; Securities Exchange Act Release No. 72914 (August 26,
2014), 79 FR 52089 (September 2, 2014) (SR-NSX-2014-16), Notice of
Filing and Immediate Effectiveness of Proposed Rule Change to Amend
Rule 15.5 to Provide Additional Clarity and Precision, Correct
Certain Citations, and Align the Rule with the Rules of Other
Exchanges With Respect to the Original and Continued Listing
Standards for Issuers' Compensation Committees; Securities Exchange
Act Release No. 75355 (July 2, 2015), 80 FR 39460 (July 9, 2015)
(SR-NSX-2015-03), Notice of Filing and Immediate Effectiveness of
Proposed Rule Change to Amend Rule 4.3, Record of Written
Complaints; Securities Exchange Act Release No. 75554 (July 30,
2015), 80 FR 46620 (August 5, 2015) (SR-NSX-2015-04), Notice of
Filing and Immediate Effectiveness of Proposed Rule Change Amending
Exchange Rule 11.21, Short Sales, to Describe the Exchange's
Implementation of Rule 201 of Regulation SHO Under the Securities
Exchange Act of 1934 and Relocate Certain Text from Rule 11.11,
Orders and Modifiers; and Amending Rule 13.2 to Incorporate By
Reference Rules 200,203 and 204 of Regulation SHO.
\15\ The term ``ETP Holder'' refers to registered brokers or
dealers that have been issued an Equity Trading Permit by the
Exchange for effecting approved securities transactions on the
Exchange's trading facilities. See Exchange Rule 1.5E.(1).
\16\ See Securities Exchange Act Release No. 75098 (June 3,
2015), 80 FR 32644 (June 9, 2015) (SR-NSX-2015-02).
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As noted above, the Exchange will operate using the existing System
and pursuant to the rules in effect. The Exchange has maintained the
System's operability and has not made any modification to the System's
functionality, except to the extent necessary to comply with regulatory
requirements.\17\ The functionality relating to order entry and
execution, order routing, clearance and settlement and market data
distribution, as further described below, remains the same. The
Exchange does not currently list any securities and trades equity
securities on an Unlisted Trading Privileges basis.\18\
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\17\ For example, the Exchange has made System changes to comply
with the new timestamp requirements under the July 2015 amendments
to the UTP Plan and the Consolidated Tape and Consolidated Quote
Plans. See footnote 13, above.
\18\ See NSX Rule 15.9.
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The Exchange has implemented and continues to execute a rigorous
testing process, including tests with industry participants, to assure
that all components of the System function effectively, that the
Exchange has full operational capability to re-open its marketplace for
the trading of equity securities, and that the Exchange will operate in
compliance with all applicable rules and regulations. This testing plan
included three weekend tests of NSX's interfaces with the securities
information processors, or ``SIPs'' (i.e., the Consolidated Quote
System or ``CQS;'' the Consolidated Tape System or ``CTS;'' the UTP
Quotation Data Feed, or ``UQDF;'' and the UTP Trade Data Feed, or
``UTDF''). These tests, which were completed on August 29, 2015,
confirmed that NSX will be ready to receive quote and trade data and
relevant national market system plan information from, and transmit its
quote and trade information to, the securities information processors
when it resumes trading operations on the System.
The Exchange also tested for proper functioning of client
communication systems with NSX, client order entry connections, and
depth of book. Moreover, the Exchange tested its matching engines,
market data, trade reporting, quote publication and trade messages, and
clearing systems. The tests were conducted with actual market data and
clearing data. The Exchange has also re-certified its connection with
the Depository Trust & Clearing Corporation (``DTCC'') to assure
complete and accurate trade clearing and settlement functions.
The Exchange has also performed a thorough review of the hardware
and software components of the System and has resumed the production
status of the System on a daily basis. Furthermore, the Exchange made
enhancements to its connectivity and certification processes. The
Exchange has created an automated certification process, providing ETP
Holders and Users with a more efficient process of connecting to the
System. The Exchange has also made enhancements to certain internal
processes and monitoring tools. These enhancements include a message
bus upgrade and security master file upgrade. The Exchange has also
enhanced its System monitoring tools to provide for more effective
monitoring of System health to allow quicker response within operations
support.
Having conducted these tests and made these enhancements and upon
receiving regulatory approval to resume trading on the System, the
Exchange will execute a staged roll-out plan to reach full operational
capacity.\19\ Beginning one week and one day prior to the date trading
will resume on the System, the Exchange will test the System using only
test symbols. On the first day of trading the Exchange will allow for
trading in symbols within a defined alphabetic range (for example,
symbols within the letter range X-Z). After three days of trading in
this range, the Exchange will activate trading in additional symbols
within an alphabetic range (for example, adding symbols within the
letter range A-K). Two days later the Exchange will activate trading in
all remaining symbols and be fully operational. The Exchange will
provide ETP Holders with advance notice of the dates and the symbol
ranges that will comprise the staged roll-out.
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\19\ The Exchange will issue a notice to ETP Holders with the
precise details of the roll-out plan prior to initiating the plan.
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The Exchange will also take affirmative steps to assure that the
date that it intends to resume trading operations is communicated
broadly to market participants and to the investing public.
Specifically, the Exchange has a target date of on or about December 1,
2015 to resume trading operations on the System. The Exchange will
provide timely written notice of the date and other information
concerning its resumption of trading operations directly to the
following parties: (1) ETP Holders; (2) other national securities
exchanges that trade NMS securities; (3) the SIPs; and, (4) the
operating committees for the various NMS plans (e.g., the Consolidated
Tape Association Plan/Consolidated Quote Plan; the Plan Governing the
Collection, Consolidation and Dissemination of Quotation and
Transaction Information for Nasdaq-Listed Securities Traded on
Exchanges on an Unlisted Trading Privileges Basis;
[[Page 70264]]
and the Plan to Address Extraordinary Market Volatility). Furthermore,
the Exchange will provide timely notice to the public as a whole by way
of widely-disseminated press releases issued by the Exchange and
notification through the Exchange's Web site and through communications
with financial and industry press.
As required by Section 6(b)(1) of the Act,\20\ the Exchange has the
capacity to be able to carry out the purposes of the Act and to comply
and to enforce compliance by ETP Holders and persons associated with
ETP Holders, with the provisions of the Act, the rules and regulations
thereunder, and the rules of the Exchange. The Exchange has the
financial, technology and staff resources to effectively surveil its
marketplace and to regulate ETP Holders' trading on NSX upon the
resumption of trading operations on the System. The Exchange will
continue to regularly assess its regulatory resources to assure that
they continue to be sufficient to discharge its SRO responsibilities.
The Exchange notes that, throughout the period from the date that it
ceased trading operations through the date of the instant rule filing,
it has continued to be a party to certain 17d-2 Plans for the
Allocation of Regulatory Responsibilities pursuant to Section 17(d)(1)
of the Exchange Act \21\ and Rules 17d-1 and 17d-2 thereunder,\22\
specifically the 17d-2 Plan relating to the surveillance, investigation
and enforcement of insider trading rules \23\ and the 17d-2 Plan
relating to Regulation NMS Rules.\24\ The Exchange will continue as a
party to these plans going forward.
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\20\ 15 U.S.C. 78(f)(b)(1).
\21\ 15 U.S.C. 78q(d)(1).
\22\ 17 CFR 240.17d-1 and 17 CFR 240.17d-2, respectively.
\23\ See Securities Exchange Act Release No. 65991 (December 16,
2010), 76 FR 79714 (December 22, 2011) (File No. 4-566), Notice of
Filing and Order Approving and Declaring Effective an Amendment to
the Plan for the Allocation of Regulatory Responsibilities . . .
Relating to the Surveillance, Investigation, and Enforcement of
Insider Trading Rules.
\24\ See Securities Exchange Act Release No. 63430 (December 3,
2010), 75 FR 76758 (December 9, 2010) (File No. 4-618), Order
Approving and Declaring Effective a Plan for the Allocation of
Regulatory Responsibilities . . . Relating to Regulation NMS Rules.
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In summary, since ceasing trading operations on the System as of
the close of business on May 30, 2014, the Exchange (i) continued to
maintain the operability of the System; (ii) implemented and
successfully executed a rigorous internal testing program to assure
that the System will function as designed and subject to NSX rules in
effect; (iii) successfully tested connectivity to the securities
information processors and to DTCC; (iv) continued to discharge its SRO
responsibilities through, among other things, remaining a party to NMS
plans and in the multi-party 17d-2 plans for insider trading
surveillance and certain Regulation NMS requirements; and (v) amended
its rules to keep current with industry regulatory initiatives (e.g.,
amendments to the market-wide rules governing clearly erroneous
executions), and is proposing additional rule changes in the instant
rule proposal, described below, that will align with the System's
functionality when trading operations resume. Further, the Exchange has
sufficient financial, technology and staff resources to effectively
regulate ETP Holder activity in the NSX marketplace and meet its
compliance obligations under the Act.
In view of the foregoing, the Exchange is positioned to
successfully reopen its marketplace for the trading of equity
securities and accordingly is proposing to rescind I&P.01 to allow the
NSX to resume trading operations as soon as practicable after the
instant rule proposal becomes operative.
Adoption of NSX Rule 11.25
The Exchange is proposing to adopt NSX Rule 11.25 to describe the
sources of market data used for purposes of order handling and
execution, order routing, and regulatory compliance. Paragraph (a) of
the proposed Rule will specify which data feeds the Exchange utilizes
for the handling, execution, and routing of orders, as well as for
surveillance necessary to monitor compliance with applicable securities
laws and Exchange rules. Proposed paragraph (b) will state that the
Exchange may adjust its calculation of the NBBO based on information
about orders sent to other venues with protected quotations, execution
reports received from those venues, and certain orders received by the
Exchange. With this rule and other functionalities in place, the system
will use market data as follows.
Order Handling and Execution
In order to calculate the national best bid and offer (``NBBO'')
\25\ the Exchange uses only SIP data disseminated through CQ and UQDF
for all exchanges. NSX does not use any exchange's proprietary data
feeds. The Exchange does not include its own quotes in the calculation
of the Exchange's NBBO because the system is designed such that all
incoming orders are separately compared to the Exchange's Protected
Best Bid or Offer (``PBBO'') \26\ and the Exchange-calculated NBBO,
which together create a complete view of the NBBO, prior to order
display, execution, or routing.
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\25\ NSX Rule 1.5P.(2) defines the ``Protected NBBO'' as the
national best bid or offer that is a protected quotation.
\26\ NSX Rule 1.5P.(3) defines the ``Protected BBO'' as the
Protected NBBO or the displayed Top of Book on NSX.
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The Exchange offers three types of ``pegged'' Zero Display Reserve
Orders, which may be ``pegged'' to the buy-side of the PBBO, the sell-
side of the PBBO or the midpoint of the PBBO.\27\ The System calculates
the PBBO using the quotes from the SIPs, excluding quotes disseminated
by the SIPs that originated from the NSX Book.\28\
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\27\ See NSX Rule 11.11(c)(2)(A).
\28\ NSX Rule 1.5N.(1) defines the NSX Book as the System's
electronic file of orders.
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Order Routing
When the Exchange has a marketable order eligible to be routed and
the System identifies that there is no matching price available on the
Exchange, but there is a matching price represented at another trading
center displaying protected quotes, the System will cause the order to
be routed to that trading center. The Exchange uses data received from
the SIPs to update the System's calculation of the NBBO for purposes of
routing decisions.
Regulatory Compliance
Locked or Crossed Markets: The System determines whether the
display of an order would lock or cross the market. At the time an
order is entered into the System, it will establish, based upon its
calculation of the NBBO from SIP feeds, whether the order will lock or
cross the prevailing NBBO for a security. In the event that the order
would produce a locking or crossing condition, the System will cancel
the order or route the order based on the ETP Holder's order handling
instructions.
Pursuant to Regulation NMS, a declaration of self-help can occur
when an exchange displaying protected quotes is slow, as defined in
Regulation NMS, or non-responsive to the Exchange's routed orders. In
this circumstance, according to Rule 611(b) of Regulation NMS,\29\ the
Exchange may declare self-help against that exchange and display a
quotation that may lock or cross the market that the Exchange invoked
self-help against.\30\ The Exchange may also
[[Page 70265]]
declare self-help where another exchange's SIP quotes are slow or non-
responsive resulting in a locked or crossed market. Once the Exchange
declares self-help, the System will ignore the quotes generated from
that exchange in its calculation of the NBBO for execution and routing
determinations in compliance with Regulation NMS. The Exchange will
also disable all routing to that exchange. However, the System will
continue to receive and process that exchange's quotes in order to
immediately include the quote in the NBBO calculation and enable
routing once self-help is revoked.
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\29\ See 17 CFR 242.611.
\30\ See also Question 5.03 in the ``Division of Trading and
Markets, Responses to Frequently Asked Questions Concerning Rule 611
and Rule 610 of Regulation NMS'' (last updated April 4, 2008)
available at http://www.sec.gov/divisions/marketreg/nmsfaq610-11.htm.
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Order Protection Rule: Pursuant to Rule 611 of Regulation NMS,\31\
the Exchange is required to establish, maintain, and enforce written
policies and procedures that are reasonably designed to prevent trade-
throughs of protected quotations in NMS stocks that do not fall within
a valid exception and, if relying on such an exception, that are
reasonably designed to ensure compliance with the terms of the
exception. The System does not permit an execution on the Exchange if
there are better-priced protected quotations displayed in the market
unless the order is an ISO. At the time an order is entered on NSX, the
System uses the SIP data to determine if the NBBO is priced better than
what is on the NSX Book. If the Exchange does not match such order on
the NSX Book,\32\ and based on the ETP Holder's order handling
instructions, the System cancels or routes the order.
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\31\ 17 CFR 242.611.
\32\ NSX Rule 1.5N.(1) defines the term ``NSX Book'' as the
``System's electronic file of orders.''
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Regulation SHO: The Exchange is required to establish, maintain and
enforce written policies and procedures reasonably designed to prevent
the execution of a Short Sale Order in a covered security at a price
that is equal to or below the current National Best Bid (``NBB'') when
a short sale price restriction is in effect pursuant to Rule 201 of
Regulation SHO under the Exchange Act (``Short Sale Circuit
Breaker'').\33\ When a Short Sale Circuit Breaker is in effect, the
Exchange utilizes information received from SIP feeds and what is on
the NSX Book, to prevent the execution of a sell short order in
contravention of Rule 201 of Regulation SHO.\34\
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\33\ 17 CFR 242.201.
\34\ See Id.
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Limit Up-Limit Down: As stated in Rule 11.24(c), the Exchange is a
participant in, and subject to the applicable requirements of, the
Limit Up-Limit Down Plan. The System uses price band data received
through the SIP to comply with the requirements of the Limit Up-Limit
Down Plan. Specifically, as provided in Rule 11.24(e) the System will
not execute or display orders for an NMS stock at prices that are
outside of a specified price band (i.e., below the lower price band or
above the higher price band).
Amendments to NSX Rules 11.13 and 11.11
The Exchange is further proposing to amend NSX Rule 11.13,
Proprietary and Agency Orders; Modes of Order Interaction, to eliminate
text relating to two modes of order interaction available to Users.\35\
The Exchange is also: (i) Proposing a conforming amendment to NSX Rule
11.11(c)(2)(C) to remove text relating to a Zero Display Reserve Order
\36\ entered through the order delivery mode; and (ii) proposing to
amend NSX Rule 11.11, Orders and Modifiers, to eliminate the Auto-Ex
Only Order \37\ and the Double Play Order \38\ and make non-substantive
amendments to correct a numbering defect with respect to certain
subparagraphs of NSX Rule 11.11(c).
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\35\ A ``User'' is any ETP Holder or Sponsored Participant that
is authorized to obtain access to the System pursuant to NSX Rule
11.9. See NSX Rule 1.5U.(1).
\36\ NSX Rule 11.11(c)(2) defines a reserve order as ``[a] limit
order with a portion of the quantity displayed . . . and with a
reserve portion of the quantity . . . that is not displayed.'' Rule
11.11(c)(2)(A) provides a Reserve Order may be entered with a zero
display quantity, in which case the Reserve Order is known as a Zero
Display Reserve Order.
\37\ See NSX Rule 11.11(c)(13).
\38\ See NSX Rule 11.11(c)(10).
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On August 31, 2006, the Commission approved amendments to NSX's
trading rules to provide for a price-time priority market with two
modes of order interaction: (1) Automatic execution (``Auto-Ex Mode'')
and (2) order delivery and automated response (previously referred to
herein as ``Order Delivery'').\39\ Every User is eligible to use the
Auto-Ex Mode, under which the System matches and executes like-priced
orders, including against Order Delivery Orders resting on the NSX
Book. To use Order Delivery a User must demonstrate that it can meet
certain eligibility criteria; specifically, a User must demonstrate
that its system can automatically process the inbound order and respond
immediately. If no response to an inbound order is received within 300
milliseconds, the User's displayed order will be canceled.
Interpretations and Policies .01 of Rule 11.13 provides that, in
determining whether a User's system can automatically process the
inbound order and respond immediately, the Exchange requires that Users
selecting Order Delivery have system response times that generally meet
or exceed industry standards (subject to exceptions for occasional
systems malfunctions that do not, in the Exchange's judgment,
materially impair the User's ability to process and respond to inbound
orders immediately).\40\
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\39\ See Securities Exchange Act Release No. 54391 (August 31,
2006), 71 FR 52836 (September 7, 2006) (SR-NSX-2006-08), Order
Approving a Proposed Rule Change and Amendment No. 1 Thereto and
Notice of Filing and Order Granting Accelerated Approval to
Amendment Nos. 2 and 3 Thereto to Amend Its Trading Rules to Provide
for a Price-Time Priority Market and Other Related Changes.
\40\ The Exchange considered 100 milliseconds to be the industry
standard for response time to an inbound order.
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The Exchange maintained Order Delivery as a mode of interaction
with the System through the cessation of trading as of the close of
business on May 30, 2014. The Exchange has now determined that, upon
resuming trading operations on the System, it will not offer Order
Delivery as a mode of order interaction with the System and the only
mode of order interaction with the System will be Auto-Ex Mode. The
Exchange made this decision as a business judgment based on its
assessment of customer interest and market structure considerations.
The Exchange proposes to amend Rule 11.13 to delete paragraph (b) and
Interpretations and Policies .01 relating to Order Delivery as a mode
of order interaction.
The Exchange is further proposing to amend Rule 11.11(c)(2)(C) to
remove certain text related to a Zero Display Reserve Order entered
through Order Delivery. The relevant rule text currently states that,
if a Zero Display Reserve Order is not designated as a Post Only Order
\41\ and is entered using the Order Delivery and such order is
immediately marketable upon entry into the System, the order will have
its mode of order interaction converted to Automatic Execution as
described in Rule 11.13(b)(1). This rule text is no longer apposite in
view of the Exchange's decision to eliminate Order Delivery upon a
resumption of trading on the System.
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\41\ NSX Rule 11.11(c)(5) defines a Post Only Order as ``[a]
limit order that is to be posted on the Exchange and not routed away
to another trading center.''
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The Exchange is also proposing to amend Rule 11.11 to eliminate the
Auto-Ex Only Order, which was implemented by the Exchange in May
2013.\42\ An
[[Page 70266]]
Auto-Ex Only Order is an ``immediate or cancel'' (``IOC'') Limit or
Market Order \43\ that the System will automatically execute
exclusively against other Auto-Ex Orders at a marketable price. An
Auto-Ex Only Order does not interact with an Order Delivery order or
route away to other Trading Centers. The System cancels any shares
remaining after executing against all marketable Auto-Ex Orders. An
Auto-Ex Only Order cannot be used to comply with Rule 611 of Regulation
NMS pursuant to the Exchange Act because the Auto-Ex Only Order did not
interact with Order Delivery orders that may be protected quotations.
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\42\ See Securities Exchange Act Release No. 69519 (May 6,
2013), 78 FR 27461 (May 10, 2013) (SR-NSX-2013-02), Order Granting
Approval of Proposed Rule Change to Adopt a New Order Type Called
the ``Auto-Ex Only'' Order and Add New Definitions Regarding
Automatic Execution Mode and Automatic Execution Orders.
\43\ NSX Rule 11.11(a), General Order Types, defines a market
order as an order to buy or sell a stated amount of a security that
is to be executed at the best price obtainable when the order
reaches the Exchange (NSX Rule 11.11(a)(1)); a limit order is
defined as an order to buy or sell a stated amount of a security at
a specified price or better (NSX Rule 11.11(a)(2)); NSX Rule
11.11(b), Time-in-Force, defines an IOC order as a limit order that
is to be executed in whole or in part as soon as such order is
received and the portion not so executed is canceled. IOC orders are
not eligible to be routed to an away trading center pursuant to NSX
Rule 11.15, Order Execution.
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The Exchange notes that the Auto-Ex Only order was implemented to
offer Users of the System the option of interacting with marketable
orders on the NSX Book without having to incur delays associated with
Order Delivery. Such delays could result from sending an incoming order
to an Order Delivery participant and receiving a response thereto.
However, since NSX will no longer offer Order Delivery the underlying
rationale for the Auto-Ex Only Order will no longer exist.
The Exchange is also proposing to amend NSX Rule 11.11(c)(10) to
eliminate the Double Play Order type. The Double Play Order was
implemented by the Exchange in November 2012.\44\ A Double Play Order
is a market or limit order for which a User instructs the System to
route to designated away trading centers which are approved by the
Exchange from time to time without first exposing the order to the NSX
Book. A Double Play Order that does not execute in full after routing
away receives a new time stamp upon return to the Exchange and is
ranked and maintained in the NSX Book in accordance with NSX Rule
11.14, Priority of Orders.
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\44\ See Securities Exchange Act Release No. 68317 (November 29,
2012), 77 FR 72423 (December 5, 2012) (SR-NSX-2012-22).
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After assessing the use of the Double Play Order since November
2012, the Exchange has determined that the Double Play Order was
infrequently used and that it is not an efficient use of its resources
to maintain and support the Double Play Order as an active order type.
Finally, the Exchange proposes certain technical, non-substantive
amendments to NSX Rule 11.11 to correct defective numbering. The
Exchange added the Midpoint Seeker Order in March 2013 under NSX Rule
11.11(c)(13).\45\ As a result of an administrative error by the
Exchange, the Auto-Ex Only order was assigned the same subparagraph
number (c)(13) of Rule 11.11 when it was implemented in May 2013. The
Exchange is proposing to renumber the Midpoint Seeker Order as
subparagraph (c)(12), which is currently a ``reserved'' subparagraph.
With the proposed elimination of the Auto-Ex Only Order, subparagraph
(c)(13) will now be ``reserved.''
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\45\ See Securities Exchange Act Release No. 69009 (February 28,
2013), 78 FR 14867 (March 7, 2013) (SR-NSX-2013-07).
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Amendments to Rule 11.12
Currently, NSX Rule 11.12, Cross Message, provides that subject to
the certain restrictions described in the rule, Users are permitted to
enter a cross message instructing the System to match for execution the
identified buy-side of the cross message with the identified sell side
of the cross message at a specified price (a ``Cross Trade'').\46\
Pursuant to NSX Rule 11.12(b), the price of the Cross Trade must, on
the buy side, be at least $0.01 less than the lowest displayed order to
sell on the NSX Book and is at a price equal to or less than the
Protected NBBO offer; on the sell side of the cross, the price must be
at least $0.01 greater than the highest displayed order to buy on the
NSX Book and is at a price equal to or greater than the Protected NBBO
bid.
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\46\ The Commission approved NSX Rule 11.12 in August 2006. See
footnote 39, supra.
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Rule 11.12 provides for three types of Cross Trades: A Midpoint
Cross, at which the Cross Trade is priced at the midpoint of the
Protected NBBO and improves each side of the NSX Top of Book \47\ by at
least the minimum price increment for the subject security; \48\ a
Clean Cross, in which the Cross Trade is for at least 5,000 shares with
an aggregate value of at least $100,000 and is executed at a price that
is equal to or better than each side of the NSX Top of Book and equal
to or better than the Protected NBBO; \49\ and, a Cross/Sweep, in which
the System, upon receipt of a Cross/Sweep message from a user, will
enter a Protected Sweep Order \50\ for the User's account in an amount
necessary to execute against all protected quotations that, if not
swept, would prohibit the Cross Trade from being executed by the
System. Pursuant to NSX Rule 11.12(f)(1), the Cross Trade will be
executed on the System simultaneously with the Protected Sweep Order,
unless the size of such order would exceed the size of the Cross Trade,
in which event both the Protected Sweep Order and the order for the
Cross Trade would be canceled without an execution.
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\47\ The NSX Top of Book is the best-ranked order to buy or sell
in the NSX Book. See NSX Rule 1.5T.(1).
\48\ See NSX Rule 11.12(c).
\49\ See NSX Rule 11.12(d).
\50\ A Protected Sweep Order is a limit order that instructed
the System to ``sweep'' the market with sizes equal to the order
sizes in the NSX Book and the order sizes at away trading centers.
See NSX Rule 11.11(c)(7)(i)(A).
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The Exchange has determined in its business judgment that, upon a
resumption of trading on the System, it will not support the
functionality for Users to enter a Cross into the System. This
determination is based on the Exchange's assessment of its current
market structure requirements and the technology resources needed to
support the functionality. In the event that the Exchange determines to
offer Cross Message functionality in the future, it will file a
proposed rule change pursuant to Rule 19b-4 of the Exchange Act.
In view of the determination to no longer offer Cross Message
functionality, the Exchange is proposing other conforming amendments to
its rules. First, the Exchange proposes to delete subparagraph
(c)(7)(iii) of NSX Rule 11.11, which currently states that ``[a] Sweep
Order entered as part of a Cross/Sweep message pursuant to Rule 11.12
shall be treated identically to a Sweep Order designated `Sweep and
Cancel' except as otherwise provided in Rule 11.12.'' Similarly, the
Exchange proposes to rescind in its entirety the text of NSX Rule 16.2,
Crosses, which currently provides that ``[c]rosses executed in Tape
``A'', ``B'' and ``C'' securities will not be subject to any
transaction fees.'' The elimination of the Cross Message functionality
renders this rule inapposite.
2. Statutory Basis
The Exchange's proposed rule changes are consistent with the
Exchange Act and the rules and regulations thereunder applicable to the
Exchange and, in particular, the requirements of Section 6(b) \51\ of
the Exchange Act. Specifically, the proposed rule change is consistent
with
[[Page 70267]]
the requirement of Section 6(b)(5) \52\ of the Exchange Act that the
rules of an exchange be designed to, among other things, promote just
and equitable principles of trade, foster cooperation and coordination
with persons engaged in regulating, clearing, settling, processing
information with respect to, and facilitating transactions in
securities, to remove impediments to and perfect the mechanism of a
free and open market and a national market system, and, in general, to
protect investors and the public interest.
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\51\ 15 U.S.C. 78f(b).
\52\ 15 U.S.C. 78f(b)(5).
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The Exchange submits that the proposed rescission of I&P.01, which
will operate to permit the re-opening of the System for quoting and
trading equity securities, fulfills the purposes of Section
6(b)(5).\53\ The Exchange's rule proposal will restore the Exchange to
the status of a fully operational national securities exchange, as it
was prior to the close of business on May 30, 2014. Notably, throughout
the period from the date that it ceased trading operations up to the
date of the instant rule filing, the Exchange has continued to maintain
its status as a registered national securities exchange and as an SRO.
It has continued its participation as a party in the national market
system plans.\54\
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\53\ 15 U.S.C. 78f(b)(5).
\54\ See footnote 13, supra.
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Upon the resumption of trading on the System, the Exchange will
operate its marketplace pursuant to rules currently in effect, as
amended by the rule changes proposed in this rule filing. The Exchange
has completed a rigorous testing process, including tests with the SIPs
and market participants, to assure that the System continues to send
and receive quote and trade data and other information necessary to
assure the Exchange's compliance with the national market system plans.
Restoring NSX to its status as an operating Exchange will promote the
protection of investors and the public interest by providing an
additional trading venue, operating pursuant to an approved rule set,
and available to market participants and the investing public for the
trading of equity securities. The Exchange has sufficient financial and
staff resources to continue to discharge its obligations as a national
securities exchange and as an SRO. The Exchange submits that the
proposed amendment will thus further the purposes of Section 6(b)(5) of
the Act \55\ in that it will operate to promote just and equitable
principles of trade and perfect the mechanism of a free and open market
and a national market system by providing investors with the ability to
execute trades in equity securities on a regulated marketplace
operating pursuant to rules approved by the Commission and subject to
regulatory oversight.
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\55\ 15 U.S.C. 78f(b)(5).
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Additionally, the Exchange's proposal to describe the Exchange's
use of data feeds as a part of this filing and through the adoption of
NSX Rule 11.25 is consistent with the Section 6(b)(5) of the Act.\56\
Further, the proposal removes impediments to and perfects the mechanism
of a free and open market and protects investors and the public
interest because it provides additional specificity and transparency.
The Exchange's proposal will enable investors to better assess the
quality of the Exchange's execution and routing services. The proposal
does not change the operation of the Exchange or its use of data feeds;
rather it describes how, and for what purposes, the Exchange uses the
quotes disseminated from data feeds to calculate the NBBO for a
security for purposes of Regulation NMS, Regulation SHO and various
order types that update based on changes to the applicable NBBO. The
additional transparency into the operation of the Exchange as described
in the proposal will remove impediments to and perfect the mechanism of
a free and open market and a national market system, and, in general,
protect investors and the public interest.
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\56\ 15 U.S.C. 78f(b)(5).
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The Exchange's proposed amendments to conform certain of its rules
to the planned operation of the System upon a resumption of trading are
consistent with the Section 6(b)(5) of the Act.\57\ Specifically, the
Exchange is proposing to amend NSX Rules 11.11 and 11.13, and
Interpretations and Policies .01 of Rule 11.13, to remove text relating
to Order Delivery, which will not be available to Users as a mode of
order interaction with the System upon a resumption of trading. The
Exchange is further proposing to amend Rule 11.11 to eliminate the
Auto-Ex Only Order, which relates to the handling of certain orders
when interacting with Order Delivery, and the Double Play Order, which
was an infrequently used order type that the Exchange no longer wishes
to support. The Exchange is also proposing to correct defective
numbering in Rule 11.11, which will promote clarity and ease of
reference in its rules. These proposed amendments are consistent with
Section 6(b)(5) of the Act \58\ in that they will operate to align the
Exchange's rules with the planned operation of the System upon a
resumption of trading, thereby promoting just and equitable principles
of trade and the protection of investors and the public interest.
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\57\ 15 U.S.C. 78f(b)(5).
\58\ Id.
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The Exchange's proposals to amend NSX Rule 11.12 to rescind the
rule text governing Cross Trades on the System, and making conforming
amendments to NSX Rules 11.11(c)(7)(iii), regarding a Cross/Sweep
Order, and 16.2, providing that Cross Trades in Tape A, B, and C
securities are not subject to transaction fees, are consistent with
Section 6(b)(5) of the Exchange Act because they will remove from the
NSX rule book provisions that address a System functionality that will
not be supported operationally upon a resumption of trading on the
System. The amendments are designed to align the Exchange's rules with
the System's planned functionality. The Exchange believes that the
amendments will further promote just and equitable principles of trade
and the protection of investors and the public interest.
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 that is not necessary or appropriate
in furtherance of the purposes of the Exchange Act. The Exchange
believes that reopening the System for the trading of equity securities
will enhance competition in the national market system by providing
investors with the opportunity to trade on a competitive trading venue
that was available to them prior to the close of business May 30, 2014.
The Exchange submits that the proposed rule amendment will thus operate
to enhance rather than burden competition in the equity securities
markets.
The Exchange's proposed rule changes to: (i) Eliminate Order
Delivery-related rule text; (ii) Eliminate the Auto-Ex Only and Double
Play Orders; (iii) eliminate the Cross Trade rule; and (iv) make other
conforming rule amendments and correct defecting numbering of certain
paragraphs of NSX Rule 11.11, have no competitive impact in that they
are designed to assure that the Exchange's rules and its System
functionality align and to promote clarity and transparency in the
Exchange's rules.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
The Exchange has not solicited or received comments on the proposed
rule change from market participants or others.
[[Page 70268]]
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period up to 90 days (i) as the
Commission may designate if it finds such longer period to be
appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
(A) by order approve or disapprove the proposed rule change, or
(B) institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
File Number SR-NSX-2015-05 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-NSX-2015-05. 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-NSX-2015-05 and should be
submitted on or before December 4, 2015.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\59\
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\59\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2015-28811 Filed 11-12-15; 8:45 am]
BILLING CODE 8011-01-P