Federal Register, Volume 81 Issue 157 (Monday, August 15, 2016)

[Federal Register Volume 81, Number 157 (Monday, August 15, 2016)]
[Notices]
[Pages 54166-54170]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-19315]

-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-78510; File No. SR-IEX-2016-11]

Self-Regulatory Organizations; Investors Exchange LLC; Notice of
Filing and Immediate Effectiveness of Proposed Rule Change To Amend
Rule 11.190(g) Related to Discretionary Peg Orders

August 9, 2016.
Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of
1934 (the ``Act'') \2\ and Rule 19b-4 thereunder,\3\ notice is hereby
given that, on August 4, 2016, the Investors Exchange LLC (``IEX'' 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 prepared by the self-regulatory
organization. The Commission is publishing this notice to solicit
comments on the proposed rule change from interested persons.
---------------------------------------------------------------------------

\1\ 15 U.S.C. 78s(b)(1).
\2\ 15 U.S.C. 78a.
\3\ 17 CFR 240.19b-4.

---------------------------------------------------------------------------

[[Page 54167]]

I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change

Pursuant to the provisions of Section 19(b)(1) under the Securities
Exchange Act of 1934 (``Act''),\4\ and Rule 19b-4 thereunder,\5\
Investors Exchange LLC (``IEX'' or ``Exchange'') is filing with the
Securities and Exchange Commission (``Commission'') a proposed rule
change to amend Rule 11.190(g) to optimize and enhance the
effectiveness of the quote instability calculation in determining
whether a crumbling quote exists, to: (i) Provide that the quote
instability calculation would not include IEX protected quotations;
(ii) reduce the time period that a crumbling quote condition remains in
effect from ten to two milliseconds; (iii) add two new quote stability
variables, together with their respective coefficients; and (iv) modify
the quote instability coefficients and quote instability threshold
included in the quote instability calculation, pursuant to subparagraph
(1)(D)(iii) thereof. The Exchange has designated this proposal as non-
controversial and provided the Commission with the notice required by
Rule 19b-4(f)(6)(iii) under the Act.\6\
---------------------------------------------------------------------------

\4\ 15 U.S.C. 78s(b)(1).
\5\ 17 CFR 240.19b-4.
\6\ 17 CFR 240.19b-4(f)(6)(iii).
---------------------------------------------------------------------------

The text of the proposed rule change is available at the Exchange's
Web site at www.iextrading.com, at the principal office of the
Exchange, 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 these statement [sic] may be examined
at the places specified in Item IV below. The self-regulatory
organization has prepared summaries, set forth in Sections A, B, and C
below, of the most significant aspects of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change

1. Purpose
Overview
The purpose of the proposed rule change is to amend Rule 11.190(g)
to modify the quote instability coefficients and quote instability
threshold included in the quote instability calculation specified in
subparagraph (g)(1) for purposes of determining whether a crumbling
quote exists. When the Exchange determines that a crumbling quote
exists in a particular security for Protected Quotations from the
national best bid (``Protected NBB''), Discretionary Peg buy orders are
restricted from exercising price discretion to trade against interest
above the NBB. Similarly, when the Exchange determines that a crumbling
quote exists in a particular security for Protected Quotations from the
national best offer (``Protected NBO''), Discretionary Peg sell orders
are restricted from exercising price discretion to trade against
interest below the NBO.
Discretionary Peg Order
The manner in which Discretionary Peg orders operate is described
in Rule 11.190(b)(10). Specifically, a Discretionary Peg order is a
non-displayed, pegged order that upon entry into the System, the price
of the order is automatically adjusted by the System to be equal to the
less aggressive of the Midpoint Price or the order's limit price, if
any. When unexecuted shares of such order are posted to the Order Book,
the price of the order is automatically adjusted by the System to be
equal to and ranked at the less aggressive of the primary quote or the
order's limit price and is automatically adjusted by the System in
response to changes in the NBB (NBO) for buy (sell) orders up (down) to
the order's limit price, if any. In order to meet the limit price of
active orders on the Order Book, a Discretionary Peg order will
exercise the least amount of price discretion necessary from the
Discretionary Peg order's resting price to its discretionary price
(defined as the less aggressive of the Midpoint Price or the
Discretionary Peg order's limit price, if any), except during periods
of quote instability (i.e., when a crumbling quote exists) as defined
in paragraph Rule 11.190(g).
In determining whether a crumbling quote exists, the Exchange
utilizes real time relative quoting activity of Protected Quotations
and a proprietary mathematical calculation (the ``quote instability
calculation'') to assess the probability of an imminent change to the
current Protected NBB to a lower price or Protected NBO to a higher
price for a particular security (``quote instability factor''). When
the quoting activity meets predefined criteria and the quote
instability factor calculated is greater than the Exchange's defined
threshold (``quote instability threshold''), the System treats the
quote as not stable (``quote instability'' or a ``crumbling quote'').
During all other times, the quote is considered stable (``quote
stability''). The System independently assesses the stability of the
Protected NBB and Protected NBO for each security.
When the System determines that a quote, either the Protected NBB
or the Protected NBO, is unstable, the determination remains in effect
at that price level for ten (10) milliseconds. The System will only
treat one side of the Protected NBBO as unstable in a particular
security at any given time.\7\ By not permitting resting Discretionary
Peg orders to execute at a price that is more aggressive than the near-
side protected NBB or NBO (as applicable) during periods of quote
instability, the Exchange System is intended to attempt to protect such
orders from unfavorable executions when the market is moving against
them. Once the market has moved and the Exchange System deems the near-
side Protected NBB or NBO (as applicable) to be stable (pursuant to a
pre-determined, objective set of conditions as described below),
Discretionary Peg orders are permitted to exercise discretion up to
(for buy orders) or down to (for sell orders) the midpoint of the NBBO
in order to meet the limit price of active orders on the order book and
thereby potentially provide price improvement to such active orders.
---------------------------------------------------------------------------

\7\ See, Rule 11.190(g).
---------------------------------------------------------------------------

Quote stability or instability (also referred to as a crumbling
quote) is an assessment that the Exchange System makes on a real-time
basis, based on a pre-determined, objective set of conditions specified
in Rule 11.190(g)(1). Specifically, quote instability, or the presence
of a crumbling quote, is determined by the System when the following
factors occur:
(A) The Protected NBB and Protected NBO are the same as the
Protected NBB and Protected NBO one (1) millisecond ago; and
(B) the Protected NBBO spread is less than or equal to the thirty
(30) day median Protected NBBO spread during the Regular Market
Session; and
(C) there are more Protected Quotations on the far side, i.e., more
Protected Quotations on the Protected NBO than the Protected NBB for
buy orders, or more Protected Quotations on the Protected NBB than the
Protected NBO for sell orders; and
(D) the quote instability factor result from the quote stability
calculation is greater than the defined quote instability threshold.

[[Page 54168]]

(i) Quote Instability Factor. The Exchange's proprietary quote
stability calculation used to determine the current quote instability
factor is defined by the following formula that utilizes the quote
stability coefficients and quote stability variables defined below:

1/ (1 + e [caret] -(C0 + C1 * N +
C2 * F + C3 * N-1 + C4 *
F-1))

(a) Quote Stability Coefficients. The Exchange utilizes the values
below for the quote stability coefficients.
(1) C0 = -2.39515
(2) C1 = -0.76504
(3) C2 = 0.07599
(4) C3 = 0.38374
(5) C4 = 0.14466
(b) Quote Stability Variables. The Exchange utilizes the quote
stability variables defined below to calculate the current quote
instability factor.
1. N = the number of Protected Quotations on the near side of the
market, i.e., Protected NBB for buy orders and Protected NBO for sell
orders.
2. F = the number of Protected Quotations on the far side of the
market, i.e., Protected NBO for buy orders and Protected NBB for sell
orders.
3. N-1 = the number of Protected Quotations on the near
side of the market one (1) millisecond ago.
4. F-1 = the number of Protected Quotations on the far
side of the market one (1) millisecond ago.
(ii) Quote Instability Threshold. The Exchange utilizes a quote
instability threshold of 0.32.
Rule 11.190(g)(1)(D)(iii) provides that the Exchange reserves the
right to modify the quote instability coefficients or quote instability
threshold at any time, subject to a filing of a proposed rule change
with the SEC. The Exchange is proposing such changes in this rule
filing.
Changes to Quote Instability Coefficients and Quote Instability
Threshold
The alternative trading system (``ATS'') operated by the Exchange's
affiliate, IEX Services LLC (``IEX ATS'') offers a Discretionary Peg
order type that is identical to the Exchange's Discretionary Peg order
type, including the factors for determining when a crumbling quote (or
quote instability) is present. IEX conducted an analysis of the
effectiveness of the existing factors in predicting whether a crumbling
quote would occur, by reviewing randomly selected market data from
March through June 2016. The results of the analysis were verified by
reviewing randomly selected market data from July 2016. Based on this
analysis, the Exchange has determined that further optimization of the
existing factors would incrementally increase the accuracy of the
formula in predicting whether a crumbling quote will occur. The
following describes the proposed changes:
1. Rule 11.190(g) states that the Exchange utilizes real time
relative quoting activity of Protected Quotations in the quote
instability calculation. As proposed, the quote instability calculation
would not include IEX protected quotations. The quote instability
calculation has been optimized, subject to further proposed
enhancements, based on actual market data from trading on the IEX ATS
prior to the launch of the Exchange with a protected quotation.
Accordingly, IEX does not have data that includes IEX protected
quotations to consider in optimization of the quote instability
calculation at this time.\8\
---------------------------------------------------------------------------

\8\ IEX may consider further enhancements that include IEX's
protected quotation, subject to IEX submitting a proposed rule
change under Section 19(b) of the Act.
---------------------------------------------------------------------------

2. The Exchange also proposes to reduce the time period that a
crumbling quote condition remains in effect from ten to two
milliseconds. Based on the market data analysis, IEX found that
generally in the instances in which the formula correctly predicted a
crumbling quote, the crumbling quote occurred within two milliseconds.
By reducing the time period that the crumbling quote condition remains
on, IEX believes that it will ameliorate the potential impact of any
false positives, because the condition will remain on for a shorter
period of time.
3. The Exchange proposes to add two new quote stability variables,
``E'' and ``D'', and their coefficients to the quote instability factor
calculation specified in subparagraph (g)(1)(D)(i) of Rule 11.190.
Quote stability variable E is a Boolean indicator that equals 1 if and
only if the last two received quotation updates received by IEX have
been quotations of protected markets moving away from the near side of
the market on the same side of the market (i.e., bids moving lower or
offers moving higher). Based on the market data analysis, the Exchange
believes that inclusion of quote stability variable E will help to make
the quote instability calculation more accurate in predicting a
crumbling quote. Quote stability variable D is a measure of whether the
quotation updates received by IEX from the Nasdaq Stock Market, EDGX
Exchange or BATS BZX Exchange have been quotations moving away from the
near side of the market on the same side of the market (i.e., bids
moving lower or offers moving higher) in the last one (1) millisecond.
The value will be either 0, 1, 2 or 3 depending on how many of such
exchanges (if any) meet the quote stability variable D measure. Based
on the market data analysis, the Exchange believes that when these
three exchanges move away from the near side of the market on the same
side of the market, it is more likely that the quote will crumble, and
that inclusion of quote stability variable D will help to make the
quote instability calculation more accurate in predicting a crumbling
quote.
4. The Quote Stability Coefficients specified in subparagraph
(1)(D)(i) of Rule 11.190(g) are proposed to be modified to take into
account the recent market data analysis, as well as to add new quote
stability variables E and D. The Exchange believes that the
modifications, as proposed, will increase the accuracy of the quote
instability calculation.
5. The Exchange proposes to modify and re-optimize the Quote
Instability Threshold specified in subparagraph (1)(D)(ii) of Rule
11.190(g) based on the recent market data analysis and the two new
quote stability variables. The Exchange believes that the
modifications, as proposed, will increase the accuracy of the quote
instability calculation.
2. Statutory Basis
IEX believes that the proposed rule change is consistent with
Section 6(b) \9\ of the Act in general, and furthers the objectives of
Section 6(b)(5) of the Act,\10\ in particular, in that it is designed
to prevent fraudulent and manipulative acts and practices, to promote
just and equitable principles of trade, to foster cooperation and
coordination with persons engaged in facilitating 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. Specifically, and as
discussed above, the proposal is designed to optimize and enhance the
effectiveness of the quote instability calculation in determining
whether a crumbling quote exists. The Exchange believes that the
proposed changes are designed to protect investors and the public
interest by enhancing the accuracy of the Exchange's quote instability
calculation in determining whether a crumbling quote exists thereby
preventing Discretionary Peg

[[Page 54169]]

orders from trading at prices more aggressive than the near side of the
market (NBB for buy orders, NBO for sell orders) to protect such orders
from unfavorable executions when the market appears to be moving
against them. The Exchange believes that not including IEX protected
quotations in the quote instability calculation is consistent with the
protection of investors and the public interest because the calculation
is optimized based on actual market data, and IEX does not yet have
actual market data that includes IEX protected quotations to consider
in optimization of the quote instability calculation at this time. The
Exchange also believes that it is consistent with the protection of
investors and the public interest to reduce the time period that a
crumbling quote condition remains in effect from ten to two
milliseconds to ameliorate the potential impact of any false positives.
Further, IEX believes that adding the two new quote stability
variables, as well as the proposed additions to and modification of the
quote instability coefficients and quote instability threshold, as
contemplated by 11.190(g)(1)(D)(iii), is consistent with the public
interest and the protection of investors because these changes are
designed to increase the accuracy of the calculation.
---------------------------------------------------------------------------

\9\ 15 U.S.C. 78f.
\10\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

As proposed, the new quote instability calculation will continue to
be a fixed formula specified transparently in IEX's rules. The Exchange
is not proposing to add any new functionality, but merely to revise the
fixed formula based on market data analysis designed to increase the
accuracy of the formula in predicting a crumbling quote, and as
contemplated by the rule.

B. Self-Regulatory Organization's Statement on Burden on Competition

IEX does not believe that the proposed rule change will result in
any burden on competition that is not necessary or appropriate in
furtherance of the purposes of the Act. The proposed change will apply
equally to all IEX Members. The Commission has already considered the
Exchange's Discretionary Peg order type in connection with its grant of
IEX's application for registration as a national securities exchange
under Sections 6 and 19 of the Act.\11\ The proposed rule change is
designed to merely enhance the accuracy of the quote instability
calculation specified in Rule 11.190(g) and ameliorate the impact of
any false positives; therefore, no new burdens are being proposed.
---------------------------------------------------------------------------

\11\ See Securities Exchange Act Release No. 34-78101 (June 17,
2016), 81 FR 41142 (June 23, 2016) (File No. 10-222).
---------------------------------------------------------------------------

C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others

Written comments were neither solicited nor received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action

The Exchange has designated this rule filing as non-controversial
under Section 19(b)(3)(A) \12\ of the Act and Rule 19b-4(f)(6) \13\
thereunder. Because the proposed rule change does not: (i)
Significantly affect the protection of investors or the public
interest; (ii) impose any significant burden on competition; and (iii)
become operative for 30 days from the date on which it was filed, or
such shorter time as the Commission may designate if consistent with
the protection of investors and the public interest, it has become
effective pursuant to Section 19(b)(3)(A) of the Act and Rule 19b-
4(f)(6) thereunder.\14\
---------------------------------------------------------------------------

\12\ 15 U.S.C. 78s(b)(3)(A).
\13\ 17 CFR 240.19b-4(f)(6).
\14\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)
requires a self-regulatory organization to give the Commission
written notice of its intent to file the proposed rule change at
least five business days prior to the date of filing of the proposed
rule change, or such shorter time as designated by the Commission.
The Exchange has satisfied this requirement.
---------------------------------------------------------------------------

A proposed rule change filed under Rule 19b-4(f)(6) \15\ normally
does not become operative prior to 30 days after the date of the
filing. However, pursuant to Rule 19b-4(f)(6)(iii),\16\ the Commission
may designate a shorter time if such action is consistent with the
protection of investors and the public interest. The Exchange has asked
the Commission to waive the 30-day operative delay, and stated that the
proposed rule change will merely revise the fixed formula specified in
Rule 11.190(g) for predicting a crumbling quote, as contemplated by the
rule. The Exchange noted that the proposed rule change is designed to
enhance the accuracy of the quote instability calculation and protect
Members that enter Discretionary Peg orders from unfavorable executions
when the market is moving against such orders. Further, the Exchange
stated that waiver of the operative delay will allow the Exchange to
implement the proposed rule change to coincide with IEX's launch of
exchange operations during a security-by-security phase-in period
beginning on August 19, 2016, thus enabling the Exchange to provide the
contemplated protections to Members entering Discretionary Peg orders
from exchange launch. The Commission notes that the changes proposed by
IEX are intended to optimize the quote instability equation contained
in the discretionary peg order type rule, and are not intended to
materially change the operation of the rule or introduce new
functionality. Rather, the Exchange intends the proposed changes to
increase the ability of the discretionary peg order type to meet its
stated objectives as reflected in the Exchange's rule. Accordingly, the
Commission believes that waiver of the operative delay is consistent
with the protection of investors and the public interest. Therefore,
the Commission hereby waives the operative delay and designates the
proposed rule change operative upon filing.\17\
---------------------------------------------------------------------------

\15\ 17 CFR 240.19b-4(f)(6).
\16\ 17 CFR 240.19b-4(f)(6)(iii).
\17\ For purposes only of waiving the 30-day operative delay,
the Commission has also considered the proposed rule's impact on
efficiency, competition, and capital formation. See 15 U.S.C.
78c(f).
---------------------------------------------------------------------------

At any time within 60 days of the filing of the proposed rule
change, the Commission summarily may temporarily suspend such rule
change if it appears to the Commission that such action is necessary or
appropriate in the public interest, for the protection of investors, or
otherwise in furtherance of the purposes of the Act. If the Commission
takes such action, the Commission shall institute proceedings under
Section 19(b)(2)(B) \18\ of the Act to determine whether the proposed
rule change should be approved or disapproved.
---------------------------------------------------------------------------

\18\ 15 U.S.C. 78s(b)(2)(B).
---------------------------------------------------------------------------

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-IEX-2016-11 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-IEX-2016-11. This file

[[Page 54170]]

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-IEX-2016-11 and should be
submitted on or before September 6, 2016.
---------------------------------------------------------------------------

\19\ 17 CFR 200.30-3(a)(12).

For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\19\
Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-19315 Filed 8-12-16; 8:45 am]
BILLING CODE 8011-01-P