[Federal Register Volume 83, Number 131 (Monday, July 9, 2018)]
[Notices]
[Pages 31816-31822]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-14546]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-83579; File No. SR-IEX-2018-13]
Self-Regulatory Organizations; Investors Exchange LLC; Notice of
Filing and Immediate Effectiveness of Proposed Rule Change to the IPO
Auction Processes for Trading in an IEX-Listed Security That Is the
Subject of an Initial Public Offering
July 2, 2018.
Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of
1934 (``Act'') \2\ and Rule 19b-4 thereunder,\3\ notice is hereby given
that on June 22, 2018, Investors Exchange LLC (``IEX'' or the
``Exchange'') filed with the Securities and Exchange Commission
(``Commission'') the proposed rule change as described in Items I, II,
and III below, which Items have been prepared by the Exchange. The
Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 15 U.S.C. 78a.
\3\ 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
(a) 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 modify Rules 11.280(h)(8) and 11.350(e), which
collectively govern the IPO Auction processes for trading in an IEX-
listed security that is the subject of an initial public offering
(``IPO'').\6\ The Exchange is also proposing to modify certain
definitions in Rule 11.350(a) regarding IPO Auction market data that is
disseminated in IEX Auction Information.\7\ The Exchange has designated
this rule change as ``non-controversial'' under Section 19(b)(3)(A) of
the Act \8\ and provided the Commission with the notice required by
Rule 19b-4(f)(6) thereunder.\9\
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\4\ 15 U.S.C. 78s(b)(1).
\5\ 17 CFR 240.19b-4.
\6\ Pursuant to section 12(f)(1)(G)(i)-(ii) of the Securities
Exchange Act, a security is the subject of an initial public
offering if the offering of the subject security is registered under
the Securities Act of 1933, the issuer of the security, immediately
prior to filing the registration statement with respect to the
offering, was not subject to the reporting requirements of the Act,
and the initial public offering of such security commences at the
opening of trading on the day on which such security commences
trading on the national securities exchange with which such security
is registered. See 15 U.S.C. 78l(f)(1)(G).
\7\ See Rule 11.350(a)(9).
\8\ 15 U.S.C. 78s(b)(3)(A).
\9\ 17 CFR 240.19b-4.
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The text of the proposed rule change is available at the Exchange's
website 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 may be examined at
the places specified in Item IV below.
[[Page 31817]]
The self-regulatory organization has prepared summaries, set forth in
Sections A, B, and C below, of the most significant aspects of such
statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and the
Statutory Basis for, the Proposed Rule Change
1. Purpose
Overview
On August 4, 2017, the Commission approved a proposed rule change
filed by the Exchange to adopt rules governing auctions in IEX-listed
securities (``IEX Auctions''), including provisions governing the
initial public offering (``IPO'') of IEX-listed securities.\10\ The
Exchange intends to launch a listings program for corporate issuers.
During the process of designing the IPO Auction, the Exchange conducted
a thorough review of the auction rules of the New York Stock Exchange
(``NYSE''), NYSE Arca, Inc. (``NYSE Arca''), Nasdaq Stock Market, LLC
(``Nasdaq''), Cboe BZX Exchange, Inc. (``Cboe BZX''), and the London
Stock Exchange (``LSE''), as well as discussions with a variety of buy-
side and sell-side market participants, including large banks and
broker dealers, electronic market makers, asset managers, and
institutional investors.
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\10\ See Securities Exchange Act Release No. 81316 (August 4,
2017), 82 FR 37474 (August 10, 2017). See also Rule 11.350(e).
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The purpose of this proposed rule change is to modify the IPO
Auction rules and certain IPO Auction market data that is disseminated
in IEX Auction Information to offer issuers, underwriters, and market
participants a more transparent IPO Auction process. The proposed
changes, discussed below in detail, are designed to enhance the price
discovery process by augmenting certain of the Exchange's automated and
manual processes governing IPO Auctions with certain manual IPO Auction
processes utilized by the NYSE.\11\ Specifically, the Exchange is
proposing to increase transparency to market participants regarding the
supply and demand for an IPO security by requiring the lead
underwriter, or broker-dealer serving in the role of financial advisor
for securities being priced pursuant to Rule 11.280(h)(9)
(collectively, the ``underwriter'') to provide an Upper and Lower IPO
Price Band (collectively, the ``IPO Price Band'') to the Exchange for
publication, which may be updated by the underwriter as necessary to
reflect the price range within which the underwriter anticipates the
IPO Auction match will occur. The IPO Price Band will be published by
the Exchange via IEX Auction Information on the Exchange's proprietary
data feeds,\12\ as well as the applicable Securities Information
Processor (``SIP'').\13\ Additionally, the Exchange is proposing to
constrain the Reference Price for the IPO Auction by the latest
published IPO Price Band, which will provide information about
Imbalance Shares \14\ and Paired Shares \15\ at a price that better
reflects where the underwriter believes the IPO Auction match is
anticipated to occur, and thus will invite offsetting interest within
such range.
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\11\ See NYSE Rule 15 (Pre-Opening Indications and Order
Imbalance Information). See also information regarding the NYSE IPO
auction process available at: https://www.nyse.com/publicdocs/nyse/listing/IPO_infographic.pdf.
\12\ See Rules 11.330(a)(1)-(3), and 11.350(a)(9).
\13\ The Exchange is a participant of the quotation and
transaction reporting plan governing Tape B Securities (``CTA
Plan''). Pursuant to the CTA Plan, the CTA SIP, in relevant part,
consolidates quote and trade data from all markets trading IEX-
listed securities. The Exchange intends to leverage the existing
Trading Status message (Category T Type S) offered by the CTA SIP to
disseminate a Trading Range Indication message that reflects the IPO
Price Band.
\14\ See infra note 22.
\15\ Id.
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IEX IPO Auction
For trading in an IEX-listed security that is the subject of an
IPO, or the initial pricing of any other security pursuant to Rule
11.280(h)(9),\16\ the Exchange will conduct an IPO Auction pursuant to
Rules 11.350(e) and 11.280(h)(8). Specifically, Users may submit
Auction Eligible Orders \17\ for execution in the IPO Auction at the
start of the Order Acceptance Period,\18\ which begins at 8:00 a.m.\19\
All Auction Eligible Orders designated for participation in the IPO
Auction will be queued on the IPO Auction Book \20\ until the scheduled
auction match, at which time they will be eligible for execution in the
IPO Auction. Pursuant to Rule 11.350(e)(2)(A), the Exchange will begin
to disseminate IEX Auction Information via electronic means at the
start of the Display Only Period,\21\ which begins thirty (30) minutes
prior to the scheduled IPO Auction match, and will be updated every one
second thereafter.\22\ The Exchange will attempt to conduct an IPO
Auction for all IEX-listed securities at the scheduled auction match
time in accordance with the clearing price determination process set
forth in Rule 11.350(e)(2)(C). Auction Eligible Orders will be ranked
and maintained in accordance with IEX auction priority, pursuant to
Rule 11.350(b).
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\16\ Pursuant to Rule 11.280(h)(9), the process for halting and
initial pricing of a security that is the subject of an IPO shall
also be available for the initial pricing of any other security that
has not been listed on a national securities exchange or traded in
the over-the-counter market pursuant to FINRA Form 211 immediately
prior to the initial pricing, provided that a broker-dealer serving
in the role of financial advisor to the issuer of the securities
being listed is willing to perform the functions under IEX Rule
11.280(h)(8) that are performed by an underwriter with respect to an
IPO.
\17\ See Rule 11.350(a)(2).
\18\ See Rule 11.350(a)(29). The Exchange is proposing to make a
clarifying change in proposed Rule 11.280(h)(8)(A) to explicitly
state that Auction Eligible Orders are accepted during the Order
Acceptance Period for an IPO Auction, rather than simply ``orders''.
\19\ All times are in Eastern Time.
\20\ See Rule 11.350(a)(1)(C). For an IPO Auction, the IPO
Auction Book would include Market-On-Open, Limit-On-Open, and market
orders with a time-in-force of DAY, as well as limit orders with a
time in-force of DAY, GTX, GTT, SYS, FOK, or IOC.
\21\ See Rule 11.350(a)(5).
\22\ See Rule 11.350(a)(9).
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The Exchange will generally attempt to conduct an IPO Auction
beginning at 10:15 a.m. Pursuant to Rule 11.280(g)(7), IEX will declare
a regulatory halt before the start of the Pre-Market Session for a
security that is the subject of an IPO on IEX, and therefore there will
be no Continuous Book for such security. The Order Acceptance Period
for an IPO Auction may be extended at the time of the auction match
pursuant to Rules 11.350(e)(2)(B)(i)-(iv):
Automatically for five (5) minutes when there are
unmatched shares from market orders on the IPO Auction Book;
Automatically for five (5) minutes when the Indicative
Clearing Price \23\ at the time of the IPO Auction match differs by the
greater of five percent (5%) or fifty cents ($0.50) from any of the
previous fifteen (15) Indicative Clearing Price disseminations;
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\23\ See Rule 11.350(a)(9)(E).
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Automatically during the Pre-Launch Period \24\ when the
IPO Auction match price is above (below) the upper (lower) price band
selected by the underwriter pursuant to proposed Rule 11.280(h)(8),
until the clearing price is within such bands; or
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\24\ See Rule 11.280(h)(8).
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Manually upon request from the underwriter at any time
prior to the auction match.
Furthermore, Rule 11.280(h)(8) governs the process for resuming
from a trading halt initiated under Rule 11.280(g)(7) for a security
that is the subject of an IPO. Thus, in addition to the systemic
processes described above that govern the IPO Auction match, there is a
series of procedural steps to complete an IPO Auction, which include
input from and coordination
[[Page 31818]]
with the IPO underwriter. Specifically, pursuant to Rule 11.280(h),
thirty (30) minutes after the start of the Display Only Period, unless
extended by the underwriter, the security will enter a Pre-Launch
Period of indeterminate duration. The Pre-Launch Period will end
immediately after the transition to the Regular Market Session
following the IPO Auction match,\25\ pending:
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\25\ See Rule 11.350(e)(3).
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Notification from the underwriter that the security is
ready to trade and subsequent approval of the Indicative Clearing Price
at the time of such notification;
Selection of a price band, comprised of an upper (lower)
price between $0.00 and $0.50 above (below) the approved Indicative
Clearing Price, which explicitly constrains the IPO Auction match
price; and
Validation that each of the conditions for the extension
of the Order Acceptance Period set forth in Rules 11.350(e)(2)(B)(i)-
(iv) are not satisfied.
Rule 11.350(a)(9) defines the various data fields that are
disseminated in IEX Auction Information for IEX Auctions, including the
data that is disseminated during the Display Only Period for an IPO
Auction. IEX Auction Information contains the current status of price,
size, imbalance information, auction collar information, and other
relevant information related to the IPO Auction. Specifically, IEX
Auction Information for an IPO Auction contains the following data
elements:
Reference Price: The single price at or within the
Reference Price Range at which orders on the IPO Auction Book would
match if the IPO Auction were to occur at that time of dissemination.
The Reference Price is set to the price that maximizes the number of
the shares from orders on the Auction Book to be executed in the
auction. If more than one price maximizes the number of shares that
will execute resulting in an auction price range, the Reference Price
is set to the price at or within such range that is not lower (higher)
than the most aggressive unexecuted buy (sell) order. If more than one
price satisfies the above conditions, the Reference Price is set to the
price closest or equal to either the Volume Based Tie Breaker (if such
range includes prices in the Reference Price Range) or the Reference
Price Range (if such range does not include prices in the Reference
Price Range) at the time of dissemination. In the case of an IPO
Auction, the Reference Price shall be the same as the Auction Book
Clearing Price (because there is no Continuous Book prior to an IPO
Auction).
Paired Shares: The number of shares from orders on the IPO
Auction Book that can be matched with other orders on the IPO Auction
Book at the Reference Price at the time of dissemination.
Imbalance Shares: The number of shares from orders on the
IPO Auction Book that may not be matched with other orders on the IPO
Auction Book at the Reference Price at the time of dissemination.
Imbalance Side: The buy/sell direction of any imbalance at
the time of dissemination.
Indicative Clearing Price: The single price at which
Auction Eligible Orders would match if the IPO Auction were to occur at
the time of dissemination pursuant to the procedures for determining
the clearing price set forth in the applicable auction rule. In the
case of an IPO Auction, the Indicative Clearing Price shall be the same
as the Auction Book Clearing Price (because there is no Continuous Book
prior to an IPO Auction).
Auction Book Clearing Price: The single price at which
orders on the IPO Auction Book would match if the IPO Auction were to
occur at the time of dissemination pursuant to the procedures for
determining the clearing price set forth in the applicable auction
rule. If shares from market orders would remain unexecuted, IEX shall
disseminate an indicator for ``market buy'' or ``market sell.''
Scheduled Auction Time: The projected time of the auction
match.
Extension Number: The total number of automatic Order
Acceptance Period extensions the IPO Auction has received.
The Exchange notes that IEX Auction Information includes
data fields for a Collar Reference Price, Lower Auction Collar, and
Upper Auction Collar, all of which will be set zero (0) for an IPO
Auction, because collars do not apply to the IPO Auction.
Proposed Changes
Each field disseminated in IEX Auction Information is strategically
tailored to the IEX Auction model. Specifically, IEX Auction
Information is designed to provide transparent and reliable information
regarding the price and size of the pending auction match that allows
participants to enter new auction-specific interest or adjust
continuous trading behavior as they iterate towards the clearing
price.\26\ As discussed above, in the case of an IPO Auction, there is
no Continuous Book, and thus IEX Auction Information is designed to
provide transparency regarding the state of the Auction Book. However,
it is IEX's understanding that in an IPO Auction, a large portion of
the Auction Eligible Orders that will be participating are represented
by the underwriter and participating syndicate members, both on a
proprietary and agency basis, that typically have made a firm
commitment to purchase the securities and place them with investors.
This process of allocating shares to interested investors, or ``book
building'', is managed by the lead underwriter in advance of the IPO
Auction process, allowing for the underwriter to assess investor demand
before determining the issue price for the security, and the subsequent
IPO Auction process.
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\26\ See Securities Exchange Act Release No. 80583 (May 3, 2017)
82 FR 21634 (May 9, 2017) (SR-IEX-2017-10).
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At the time of the IPO Auction, as a result of the book building
process, IEX understands that the syndicate typically has explicit
interest from clients and indications of excess demand from investors
that were seeking more shares than they were allocated, as well as
supply from investors that received an allocation and intend to sell in
the IPO Auction. The underwriter is typically responsible for
coordinating with participating syndicate members to account for the
aggregate share supply and investor demand leading up to and during the
IPO Auction process. As a result, the IPO Auction Book, and therefore
IEX Auction Information, conveys only a partial representation of the
supply and demand for an IPO security until a material portion of the
interest represented by the underwriter enters the Auction Book.
Accordingly, between the start of the Display Only Period and the start
of the Pre-Launch Period, the Exchange is proposing to increase
transparency to market participants regarding the supply and demand for
an IPO security by requiring the underwriter to provide the Exchange
with an IPO Price Band for publication, which would reflect the price
range within which the underwriter anticipates the IPO Auction match to
occur. When published, the IPO Price Band would be disseminated via the
SIP and IEX Auction Information.\27\
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\27\ See proposed Rule 11.280(h)(8)(B). See also NYSE Rule
15(a), which provides for a similar function.
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As proposed, in determining the IPO Price Band, the underwriter
would take into account all Auction Eligible Orders for the IPO
Auction, including all orders on the Exchange's Order Book, as well as
the underwriter's own interest, and
[[Page 31819]]
interest otherwise represented by the underwriter.\28\ If the current
published IPO Price Band spread is greater than $1.00, the underwriter
shall make best efforts to provide the Exchange with an updated IPO
Price Band with a spread of $1.00 or less for publication before the
IPO Auction match.\29\ In order to allow market participants a
reasonable opportunity to adjust their Auction Eligible Orders in
response to a published IPO Price Band, a minimum of one minute must
elapse between publication of the last IPO Price Band and the IPO
Auction match.\30\
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\28\ See proposed Rule 11.280(h)(8)(B)(i). See also NYSE Rule
15(b)(2), which includes similar language that is specific to the
NYSE's manual trading floor-based model.
\29\ See proposed Rule 11.280(h)(8)(B)(ii). See also NYSE Rule
15(e)(3), which imposes a substantially similarly requirements on
the DMM to make best efforts to narrow the pre-opening indication
spread to $1.00.
\30\ See proposed Rule 11.280(h)(8)(B)(iii). See also NYSE Rule
15(e)(4), which imposes a series of temporal restriction on the
opening of a security following publication of a pre-opening
indication.
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The Exchange proposes to integrate the IPO Price Band into IEX
Auction Information in several ways that are designed to enhance
transparency and guide the price discovery process within the IPO Price
Band as market participants iterate towards a clearing price. First,
the Exchange proposes to publish the Upper IPO Price Band and Lower IPO
Price Band as the Upper Auction Collar and Lower Auction Collar,
respectively, unless the underwriter has not provided an IPO Price Band
to the Exchange for publication, in which case the Upper and Lower
Auction Collar will be equal to the Volume Based Tie Breaker, which is
equal to the issue price in the case of an IPO Auction.\31\ Similarly,
the Exchange proposes to amend the Collar Reference Price definition to
be equal to the Volume Based Tie Breaker (i.e., the issue price),
unless such price is above (below) the most current Upper (Lower) IPO
Price Band published by the Exchange, in which the case the Collar
Reference Price shall be equal to the Upper (Lower) IPO Price Band. As
proposed, the Collar Reference Price will provide market participants a
signal regarding the issue price relative to the IPO Price Band
provided by the underwriter, which would inform market participants
regarding the state of supply and demand for the IPO security.
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\31\ See Rule 11.350(a)(33), which defines the Volume Based Tie
Breaker for an IPO Auction as being equal to the issue price.
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Furthermore, in the case of an IPO Auction, the Exchange proposes
to change the definition of Reference Price Range to be equal to the
prices between and including the most current IPO Price Band published
by the Exchange, unless the underwriter has not provided the Exchange
with an IPO Price Band for publication, in which case the Reference
Price Range will be equal to the Volume Based Tie Breaker. The
Reference Price Range is used to constrain the Reference Price at which
the Exchange disseminates Paired Shares and Imbalance Shares.
Accordingly, if but for the constraint, the Reference Price would be
above (below) the Upper (Lower) IPO Price Band, the Reference Price
would be equal to the Upper (Lower) IPO Price Band, and thus the
Exchange would disseminate Paired Shares and Imbalance Shares at the
Upper (Lower) IPO Price Band, which would solicit interest willing to
offset the imbalance at prices at or within the IPO Price Band.\32\ For
example, at the start of the Display Only Period, the IPO Price Band
and therefore the Reference Price Range is $12.00 by $13.00, and the
Indicative Clearing Price is $10.00. The Reference Price, which would
be constrained by the Reference Price Range, would be equal to the
Lower IPO Price Band of $12.00, and thus the Exchange would show Paired
Shares and Imbalance Shares at $12.00.\33\ In the case of a buy
imbalance, this would solicit additional offsetting interest to sell at
or higher than the Lower IPO Price Band, and thus guiding the clearing
price at or within the IPO Price Band, which would reflect all Auction
Eligible Orders for the IPO Auction, including all orders on the
Exchange's Order Book, as well as the underwriter's own interest, and
interest represented by the underwriter.
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\32\ The Exchange proposes to make a conforming change to the
definition of Reference Price set forth in proposed Rule
11.350(a)(9)(A), which would constrain the Reference Price by the
Upper and Lower IPO Price Bands, and thus the Reference Price will
no longer necessarily be the same as the Auction Book Clearing Price
and the Indicative Clearing Price.
\33\ The Exchange notes that this example assumes the
underwriter has provided the Exchange with an IPO Price Band for
publication immediately at the start of the Display Only Period.
However, it is possible that the underwriter does not provide the
Exchange with the first IPO Price Band for publication until after
the start of the Display Only Period, in which case, between the
start of the Display Only Period and publication of the first IPO
Price Band, the Reference Price would be equal to the Volume Based
Tie Breaker, which is defined as the issue price for the IPO
security.
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Assuming the same facts above but excluding the proposed changes
regarding the IPO Price Band illustrates the benefits of the proposed
change. For example, at the start of the Display Only Period, the
Auction Book Clearing Price and therefore the Reference Price and
Indicative Clearing Price are all $10.00. However, when accounting for
the underwriter's own interest and interest represented by the
underwriter, shares are maximized between $12.00 and $13.00 (i.e., the
underwriter has or represents more aggressive buy interest that intends
to participate in the IPO Auction between $12.00 and $13.00). However,
IEX Auction Information does not currently provide a mechanism for the
underwriter to broadly disseminate the effect of the underwriter's own
interest and interest represented by the underwriter on the potential
price of the IPO Auction match. Thus, in the case of a buy imbalance,
IEX Auction Information would solicit additional offsetting interest to
sell at or higher than $10.00, thus guiding the price discovery process
based on a partial representation of the interest that intends on
participating in the IPO Auction. Therefore, as described above, the
Exchange is proposing to increase transparency by enabling the
underwriter to broadly disseminate an indication regarding the
potential price of the IPO Auction match that accounts for the
underwriter's own interest and interest represented by the underwriter.
Pursuant to proposed Rule 11.280(h)(8)(C), at least fifteen (15)
minutes after the start of the Display Only Period,\34\ the underwriter
shall advise the Exchange to enter a ``Pre-Launch Period'' of
indeterminate duration.\35\ As proposed, the Exchange is shortening the
minimum Display Only Period from thirty (30) minutes to fifteen (15)
minutes, in order to facilitate the commencement of fair and orderly
trading in securities that are the subject of an IPO, by providing
greater flexibility to begin trading earlier in certain cases, such as
smaller IPOs, where an extended Display Only Period is not necessary
for order entry and the development of price stability. At the same
time, the proposed change will permit a longer Display Only Period in
cases where extensive order entry is still occurring or where price
stability has not yet developed. The Pre-Launch Period and the Display
Only Period shall end, and the security shall be released for trading
by IEX when the following conditions are all met, and the requirements
of Rule 11.350(e)(2) are satisfied:
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\34\ See supra note 21.
\35\ The Exchange is also proposing to make a conforming change
to Rule 11.350(a)(5) to reflect the shorter minimum display only
period.
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All market orders will be executed in the IPO Auction;
[[Page 31820]]
The underwriter has selected a final IPO Price Band that
is at or within the last published IPO Price Band;
The IPO Auction clearing price is at or within the IPO
Price Band selected by the underwriter under the immediately preceding
bullet point; and
IEX receives notice from the underwriter of the IPO that
the security is ready to trade.
Under proposed Rule 11.280(h)(8)(D), the failure to satisfy the
conditions of proposed Rule 11.280(h)(8)(C) would result in a delay of
the release for trading of the IPO, and a continuation of the Pre-
Launch Period, during which the underwriter may provide one or more
updated IPO Price Bands to the Exchange for publication pursuant to
proposed Rule 11.280(h)(8)(B), until all of the conditions of proposed
Rule 11.280(h)(8)(C) have been satisfied.\36\ In addition, because the
IPO Auction is conditioned on the underwriter manually giving the
Exchange notice that the IPO security is ready to trade, the Exchange
is proposing to specify that the Scheduled Auction Time data field in
IEX Auction Information is not specified.\37\
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\36\ The Exchange is proposing to make a conforming change to
the conditions for extending the Order Acceptance Period for an IPO
Auction as set forth in proposed Rule 11.350(e)(2)(B)(iii) and Rule
11.350(e)(2)(C)(iv).
\37\ The Exchange notes that market participants will be able to
assess the timing of the IPO Auction match by monitoring the
Indicative Clearing Price and the current IPO Price Band; as the IPO
Price Band narrows, and the Indicative Clearing Price moves within
the IPO Price Band, the IPO Auction can be considered imminent.
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As described above, the Exchange is proposing to move away from a
predominantly automated IPO Auction mechanism towards a more manual
process that is designed to account for the underwriter's unique and
fundamental role in the IPO process. Accordingly, the Exchange is
proposing to eliminate the automated five (5) minutes extensions of the
Order Acceptance Period for IPO Auctions that are set forth in Rule
11.350(e)(2)(B), described above.\38\ The existing automated extension
processes were originally designed to systematically accommodate
unexpected imbalances and sharp price movements leading into an IPO
Auction match by allowing market participants an additional five (5)
minute period to enter, cancel, and/or adjust Auction Eligible Orders
and iterate towards a new equilibrium price. However, proposed Rule
11.280(h)(8)(D) is designed to enable the underwriter, who plays a
unique and central role in the IPO process, an opportunity to extend
the price discovery process in response to unexpected changes in the
composition of the IPO Auction Book that would impact the price of the
IPO Auction match after the start of the Pre-Launch Period.
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\38\ The Exchange proposes to remove IPO's from the Extension
Number field within IEX Auction Information because, as proposed,
there will no longer be automated extension of the Order Acceptance
Period. See proposed Rule 11.350(a)(9)(K).
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Further, constraining the IPO Auction by the IPO Price Band
provides a mechanism to protect the IPO Auction match from occurring at
a price that is outside of the expected auction price range provided by
the underwriter as communicated to participants via IEX Auction
Information and the SIP. Moreover, proposed Rule 11.280(h)(8)(D) is
also designed to provide enhanced transparency to market participants
regarding unexpected imbalances and sharp price movements leading into
an IPO Auction match by allowing the underwriter to provide one or more
updated IPO Price Bands to the Exchange for publication, pursuant to
proposed Rule 11.280(h)(8)(B), reflecting the new price range within
which the IPO Auction match is anticipated to occur after accounting
for all Auction Eligible Orders for the IPO Auction, including all
orders on the Exchange's Order Book, as well as the underwriter's own
interest and interest represented by the underwriter.\39\ The Exchange
believes such increased transparency would facilitate a more informed
price discovery process as market participants iterate towards a new
equilibrium price after an unexpected change in the composition of the
IPO Auction Book that impacts the clearing price.
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\39\ The Exchange notes that when the underwriter provides an
updated IPO Price Band to the Exchange for publication, the
underwriter would also be subject to proposed Rules
11.280(h)(8)(B)(ii)-(iii), requiring the underwriter to make best
efforts to provide an IPO Price Band with a spread of $1.00 or less
before the IPO Auction match, and allowing a minimum of one minute
to elapse after publication of the updated IPO Price Band and the
IPO Auction match to allow market participants time to account for
the updated IPO Price Band.
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In addition, the Exchange is proposing to eliminate the existing
underwriter price band selection process set forth in Rule
11.280(h)(8)(A)(iii) (described above), in light of the enhanced IPO
Price Band selection process set forth in proposed Rule
11.280(h)(8)(C)(ii), which serves a substantially similar function.
Specifically, during the Pre-Launch Period, proposed Rule
11.280(h)(8)(C)(ii) requires the underwriter to select an IPO Price
Band at or within the last published IPO Price Band (that the
underwriter must make best efforts to narrow to a spread of $1.00 or
less before the IPO Auction match) \40\ that would serve as an explicit
constraint on the IPO Auction match price pursuant to proposed Rule
11.280(h)(8)(C)(iii), which is eligible to occur only after the
Exchange receives notice from the underwriter that the security is
ready to trade pursuant to proposed Rule 11.280(h)(8)(C)(iv).
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\40\ See supra note 29.
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Similarly, as described above, during the Pre-Launch Period,
existing Rule 11.280(h)(8)(A)(iii) requires, as a condition to
execution of the IPO Auction, notification from the underwriter that
the security is ready to trade and subsequent approval of the
Indicative Clearing Price at the time of such notification. Further,
the underwriter must select a price band, comprised of an upper (lower)
price between $0.00 and $0.50 above (below) the approved Indicative
Clearing Price, which explicitly constrains the IPO Auction match
price. Therefore, the Exchange believes the proposed elimination of the
existing underwriter price band selection process does not
substantively alter the IPO Auction functionality in that the enhanced
IPO Price Band selection process set forth in proposed Rule
11.280(h)(8)(C)(ii), which requires the underwriter to select an IPO
Price Band at or within the last published IPO Price Band (that the
underwriter must make best efforts to narrow to a spread of $1.00 or
less before the IPO Auction match), serves a substantially similar
function, while facilitating a more robust price discovery process that
more fully reflects supply and demand to determine the price and timing
of the IPO Auction match.
Consistent with current Rule 11.280(h)(8)(B), pursuant to proposed
Rule 11.280(h)(8)(D), the underwriter, with concurrence of IEX, may
determine at any point during the IPO Auction process up through the
conclusion of the Pre-Launch Period to postpone and reschedule the IPO.
Market participants may continue to enter orders and order
cancellations for participation in the IPO Auction during the Pre-
Launch Period until the auction match.
Lastly, the Exchange is proposing Supplemental Material .01 to Rule
11.280(h)(8) that addresses the jurisdictional issue posed by an
underwriter for a security that is the subject of an IPO on IEX that is
not an approved Member of the Exchange. Specifically, proposed
Supplemental Material .01 states that the underwriter for a security
that is the subject of an IPO on IEX must be a Member of the
[[Page 31821]]
Exchange, or appoint a Member of the Exchange to perform the functions
under Rule 11.280(h)(8) that are performed by the underwriter with
respect to the IPO Auction.\41\ Proposed Supplemental Material .01 is
designed to ensure the enforceability of the Exchange's rules governing
the underwriter's responsibilities during the IPO Auction process as
proposed, which as described above, are designed to promote
transparency and price discovery for securities that are the subject of
an IPO on the Exchange. The Exchange believes that absent the
provisions set forth Supplemental Material .01, an underwriter that is
not a Member of the Exchange would not be legally bound by the
Exchange's rules and therefore could fail to satisfy the obligations of
the underwriter under proposed Rule 11.280(h)(8).
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\41\ The Exchange expects that an underwriter appointing such
Member would share with the Member all information necessary for the
Member to adequately perform the functions required under Rule
11.280(h)(8).
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2. Statutory Basis
IEX believes that the proposed rule changes are consistent with the
provisions of Section 6(b) \42\ of the Act in general, and furthers the
objectives of Section 6(b)(5) of the Act \43\ in particular, in that
they are designed to prevent fraudulent and manipulative acts and
practices, 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.
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\42\ 15 U.S.C. 78f.
\43\ 15 U.S.C. 78f(b)(5).
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The Exchange believes that the proposed changes are consistent with
the protection of investors and the public interest in that they are
designed to increase transparency to market participants regarding the
supply and demand for an IPO security by requiring the underwriter to
provide the Exchange with IPO Price Bands for broad dissemination.
Furthermore, the Exchange believes the proposed changes remove
impediments to and perfect the mechanism of a free and open market and
national market system by enhancing the price discovery process in the
IPO Auction by providing IEX Auction Information that is more
reflective of the aggregate supply and demand for a security, as
described in the Purpose section. Specifically, by constraining the
Reference Price for the IPO Auction by the latest published IPO Price
Band, the Exchange will provide information regarding Imbalance Shares
and Paired Shares at a price that reflects all orders on the Order
Book, as well as the underwriter's own interest and interest
represented by the underwriter.
The Exchange also believes that the proposed rule changes governing
the publication of underwriter's selection of an IPO Price Band are
consistent with the protection of investors and the public interest.
Specifically, the Exchange believes that requiring the underwriter to
consider all interest on the Order Book, as well as the underwriter's
own interest and interest represented by the underwriter, is designed
to ensure that the IPO Price Band provides a more accurate
representation of the aggregate supply and demand for the IPO security.
Moreover, the Exchange believes that it is consistent with the
protection of investors and the public interest to require that the
underwriter make best efforts to provide an IPO Price Band for
publication with a spread of $1.00 or less before the IPO Auction
match, as well as mandating that a minimum of one minute to elapse
between the time of the last IPO Price Band publication and the IPO
Auction match. Specifically, the Exchange believes the narrower spread
and one-minute window will allow market participants a reasonable
opportunity to adjust their Auction Eligible Orders in response to the
last IPO Price Band, which more accurately reflects the aggregate
supply and demand for the IPO security in final moments before the IPO
Auction match.
Furthermore, the Exchange believes the proposed rule change to
shorten the minimum Display Only Period from thirty (30) minutes to
fifteen (15) minutes is consistent with the protection of investors and
the public interest in that it is designed to facilitate the
commencement of orderly trading in securities that are the subject of
an IPO by providing greater flexibility to begin trading earlier in
certain cases, such as smaller IPOs, where an extended Display Only
Period is not necessary to allow for order entry and the development of
price stability, while at the same time avoiding unnecessary temporal
constraints on the price discovery process in cases where extensive
order entry is still occurring or where price stability has not yet
developed.
The Exchange believes it is consistent with the protection of
investors and the public interest to eliminate the automated five (5)
minute extension of the Order Acceptance Period and provide for a
manual extension process that requires the underwriter to provide one
or more updated IPO Price Bands to the Exchange for publication. The
Exchange believes the proposed changes acknowledge the unique and
central role of the underwriter in the IPO Process, and allow for the
underwriter to transparently respond to unexpected changes in the
composition of the IPO Auction Book that would impact the price of the
IPO Auction match after the start of the Pre-Launch Period. Moreover,
the Exchange believes the increased transparency would facilitate a
more informed price discovery process as market participants iterate
towards a new equilibrium price after an unexpected change in the
composition of the IPO Auction Book that impacts the clearing price.
Similarly, the Exchange further believes that constraining the IPO
Auction by the IPO Price Band is consistent with the protection
investors and the public interest in that it provides a mechanism to
protect the IPO Auction match from occurring at a price that is outside
of the expected auction price range that has been communicated to
participants via IEX Auction Information and the SIP, which fosters
price transparency and continuity.
Furthermore, the Exchange believes that eliminating the existing
underwriter price band selection process set forth in Rule
11.280(h)(8)(A)(iii), in light of the proposed IPO Price Band selection
and publication process, is consistent with the protection of investors
and the public interest in that the proposed rules governing the
selection and publication of an IPO Price Band serves a substantially
similar function, while facilitating a more robust price discovery
process that more fully reflects supply and demand to determine the
price and timing of the IPO Auction match.
Lastly, the Exchange believes that proposed Supplemental Material
.01 to Rule 11.280(h)(8) is consistent with the protection of investors
and the public interest, in that the proposed supplemental material is
designed to ensure the enforceability of the Exchange's rules governing
the underwriter's responsibilities during the IPO Auction process as
proposed, which as described above, are designed to promote
transparency and price discovery for securities that are the subject of
an IPO on the Exchange.
B. Self-Regulatory Organization's Statement on Burden on Competition
IEX does not believe that the proposed rule changes will result in
any burden on competition that is not necessary or appropriate in
furtherance of the purposes of the Act. The Exchange notes that the
proposed rule
[[Page 31822]]
changes are similar to certain rules of the NYSE.\44\ Thus, the
Exchange believes there are no new inter-market competitive burdens
imposed as a result of the proposed rule changes, which are designed to
augment certain of the Exchange's automated and manual processes
governing IPO Auctions with certain manual IPO Auction processes
utilized by the NYSE. To the contrary, the Exchange believes the
proposed changes may serve as a catalyst for competition in the market
for IPOs by providing underwriters a familiar tool for managing the IPO
auction process while simultaneously enhancing IPO Auction transparency
for market participants.
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\44\ See supra notes 11, 27-30.
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In addition, the Exchange does not believe that the proposed
changes will have any impact on intra-market competition. Specifically,
as discussed above, the proposed changes are designed to increase
transparency to market participants regarding the supply and demand for
an IPO security by requiring the underwriter to provide the Exchange
with the proposed IPO Price Band for broad publication. Broad
publication of the IPO Price Band and the proposed integration with IEX
Auction Information is designed to enhance price discovery in the IPO
Auction process, to the benefit of all market participants, by
providing information about Imbalance Shares and Paired Shares at a
price that better reflects where the underwriter believes the IPO
Auction match is anticipated to occur, and thus inviting offsetting
interest within such range. Moreover, the Exchange notes that the
proposed IPO Price Band will be disseminated via IEX Auction
Information, which is available free of charge through the Exchange's
existing proprietary data feeds.\45\ Moreover, the proposed IPO Price
Band will be disseminated via the SIP,\46\ which is a widely consumed
data product.\47\ Accordingly, the proposed changes would apply to all
Members on a fair and equal basis, in that all market participants have
an equal opportunity to consume IEX Auction Information and/or SIP
data. Accordingly, the Exchange believes there are no intra-market
competitive burdens imposed as a result of the proposed rule changes.
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\45\ See Rule 11.330.
\46\ See supra note 9 [sic].
\47\ See, e.g., CTA SIP Tape A & B subscriber/household metrics.
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Lastly, the Exchange believes that proposed Supplemental Material
.01 to Rule 11.280(h)(8) does not result in any undue burden on
competition, as any qualified market participant may become a Member of
the Exchange free of charge,\48\ or may alternatively enter into
private arrangements to appoint any approved Exchange Member to perform
the functions under Rule 11.280(h)(8) that are performed by the
underwriter with respect to the IPO Auction.
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\48\ See the IEX Fee Schedule, which currently provides for free
Membership on the Exchange, available at https://iextrading.com/trading/fees/.
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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) \49\ of the Act and Rule 19b-4(f)(6) \50\
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, it has become
effective pursuant to Section 19(b)(3)(A) of the Act and Rule 19b-
4(f)(6) thereunder.
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\49\ 15 U.S.C. 78s(b)(3)(A).
\50\ 17 CFR 240.19b-4(f)(6).
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At any time within 60 days of the filing of the proposed rule
change, the Commission summarily may temporarily suspend such rule
change if it appears to the Commission that such action is 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) \51\ of the Act to determine whether the proposed
rule change should be approved or disapproved.
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\51\ 15 U.S.C. 78s(b)(2)(B).
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IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
File Number SR-IEX-2018-13 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-2018-13. 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 website (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 website viewing and printing in
the Commission's Public Reference Room, 100 F Street NE, Washington, DC
20549 on official business days between the hours of 10:00 a.m. and
3:00 p.m. Copies of such filing also will be available for inspection
and copying at the principal office of the Exchange. All comments
received will be posted without change. Persons submitting comments are
cautioned that we do not redact or edit personal identifying
information from comment submissions. You should submit only
information that you wish to make available publicly. All submissions
should refer to File Number SR-IEX-2018-13, and should be submitted on
or before July 30, 2018.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\52\
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\52\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-14546 Filed 7-6-18; 8:45 am]
BILLING CODE P