
[Federal Register Volume 76, Number 37 (Thursday, February 24, 2011)]
[Notices]
[Pages 10416-10418]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-4158]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-63929; File No. SR-EDGA-2010-18]


 Self-Regulatory Organizations; EDGA Exchange, Inc.; Order 
Instituting Proceedings To Determine Whether To Disapprove a Proposed 
Rule Change as Modified by Amendment No. 2 to Amend EDGA Rules 11.9 and 
11.5 Regarding Step-up Orders

February 18, 2011.

I. Introduction

    On November 8, 2010, EDGA Exchange, Inc. (the ``Exchange'' or 
``EDGA'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change to amend EDGA Rule 11.9 regarding the description 
of the Step-up order type \3\ and add Exchange Rule 11.5(c)(7) to allow 
Mid-Point Match orders \4\ entered in response to Step-up orders to be 
processed pursuant to Exchange Rule 11.9. The proposed rule change was 
published for comment in the Federal Register on November 24, 2010.\5\ 
On November 23, 2010, the Exchange submitted Amendment No. 1 to the 
proposed rule change. On December 14, 2010, the Exchange submitted 
Amendment No. 2 to the proposed rule change, which was published for 
comment in the Federal Register on December 23, 2010.\6\ The Commission 
received one comment letter on the proposal,\7\ and received the 
Exchange's response to the comment letter.\8\ This order institutes 
proceedings pursuant to Section 19(b)(2)(B) of the Act to determine 
whether to disapprove the proposed rule change, as modified by 
Amendment No. 2. Institution of disapproval proceedings, however, does 
not indicate that the Commission has reached any conclusions with 
respect to any of the issues involved.\9\
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Exchange Rule 11.5(c)(11) defines a ``Step-up'' order as a 
``market or limit order with the instruction that the System display 
the order to Users at or within the NBBO price pursuant to Rule 
11.9(b)(1)(C).''
    \4\ The Exchange proposes to define a ``Mid-Point Match'' order 
as an ``order entered in response to a Step-up Order * * * with an 
instruction to execute it at the midpoint of the NBBO.''
    \5\ See Securities Exchange Act Release No. 63335 (November 18, 
2010), 75 FR 71783.
    \6\ Amendment No. 2 replaced in its entirety the original filing 
and Amendment No. 1. See Securities Exchange Act Release No. 63572 
(December 17, 2010), 75 FR 80873.
    \7\ See Letter dated December 15, 2010, from Janet L. 
McGuinness, Senior Vice President--Legal and Corporate Secretary, 
Legal & Government Affairs, NYSE Euronext to Elizabeth M. Murphy, 
Secretary, Commission (``NYSE Euronext Letter''). The NYSE Euronext 
Letter opposes the proposed rule change and, in so doing, expresses 
support for the Commission's recent proposal that would eliminate 
the exception for ``flash orders'' from Rule 602 of Regulation NMS. 
See Securities Exchange Act Release No. 60684 (September 18, 2009), 
74 FR 48632 (September 23, 2009) (the ``Flash Order Proposed 
Rulemaking'').
    \8\ See Letter dated January 18, 2011, from Eric Hess, General 
Counsel, DirectEdge Holdings, LLC (``Direct Edge''), to Elizabeth M. 
Murphy, Secretary, Commission.
    \9\ As noted above, the Commission has issued a proposed 
rulemaking that, if adopted, could impact the permissibility of the 
Step-up orders of the Exchange that are the subject of the proposed 
rule change. See Flash Order Proposed Rulemaking, supra note 7. The 
Commission emphasizes that this institution of proceedings to 
determine whether to disapprove the proposed rule change in no way 
prejudges or otherwise determines what action, if any, the 
Commission may take with respect to the Flash Order Proposed 
Rulemaking.
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II. Description of the Proposal

    Exchange Rule 11.5(c)(11) defines a ``Step-up'' order as a ``market 
or limit order with the instruction that the System display the order 
to Users at or within the NBBO price pursuant to Rule 11.9(b)(1)(C).'' 
Exchange Rule 11.9(b)(1)(C), in turn, states that Step-up orders shall 
be displayed to Users (hereinafter referred to as ``Members''),\10\

[[Page 10417]]

in a manner that is separately identifiable from other Exchange orders, 
at or within the NBBO price for a period of time not to exceed five 
hundred milliseconds, as determined by the Exchange (the ``Step-up 
Display Period''). Step-up orders are intended to permit a Member to 
initiate a price auction of such orders by displaying order 
solicitation information to other Members simultaneously, provided such 
other Members have elected to receive such order information. Under the 
current rules, the first responsive Member order would execute against 
the Step-up order.
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    \10\ Exchange Rule 1.5(cc) defines a User as ``any Member or 
Sponsored Participant who is authorized to obtain access to the 
System pursuant to Rule 11.3.'' Exchange Rule 11.9(b)(1) provides 
that (prior to display of an order to a User), an incoming order 
shall first attempt to be matched for execution against orders in 
the EDGA Book.
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    The Exchange proposes to specify the Step-up Display Period as 10 
milliseconds, and eliminate the discretion afforded to the Exchange in 
its existing Rule to vary the length of the Step-up Display Period. In 
addition, the Exchange proposes to amend Exchange Rule 11.9(b)(1)(C) to 
provide that, at the conclusion of the Step-up Display Period, the 
Step-up order shall execute against responsive Member orders priced at 
or within the NBBO on a price/time priority basis consistent with 
Exchange Rule 11.8(a)(1) and (2). The Exchange further proposes that, 
commencing on the six month anniversary of a Commission approval order, 
the orders eligible for executing against Step-up orders shall be 
expanded to include Member orders priced better but not outside the 
NBBO at the end of the Step-up Display Period that may have entered the 
Exchange book outside the Step-up process (such orders, ``Eligible Book 
Orders'').\11\
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    \11\ Responses are accumulated for the Step-up Display Period by 
the Exchange, rather than processed at arrival time. Eligible Book 
Orders will continue to be eligible for execution against the EDGA 
Book during the Step-up Display Period, as they do currently.
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    The Exchange also proposes to add Exchange Rule 11.5(c)(7) to allow 
Mid-Point Match orders that are entered in response to Step-up orders 
to participate in the price auction. The Exchange will not accept 
orders priced in subpennies during Step-up auctions. The Exchange 
believes a midpoint response will provide an additional mechanism for a 
Member that is willing to offer price improvement, but is unwilling to 
cross the spread between the NBBO, to do so. By providing this option, 
the Exchange believes that a greater proportion of Step-up orders will 
receive price improvement.
    The Step-up order process will not generate an execution if the 
market is crossed for the security that is the subject of a Step-up 
order. If the market is crossed, or if there are no responsive Member 
orders at or within the NBBO, at the end of the Step-up Display Period, 
the Step-up process shall terminate and the Step-up order shall be 
cancelled or routed in accordance with the Member's instructions.
    The Exchange finally proposes to make conforming changes to the 
numbering of current rules as a result of the insertion of the Mid-
Point Match order type in Rule 11.5(c)(7), as described above. 
Similarly, the references to the newly numbered rules are also proposed 
to be amended in Rule 11.5(c) and Rule 11.8(a)(2)(C).

III. Summary of Comments

    In its comment letter on the original filing, NYSE Euronext opposes 
the proposed rule change on several grounds. NYSE Euronext argues that 
the Step-up auction mechanism will increase the number of orders whose 
execution is artificially delayed, including both Step-up orders and 
those responding to them, and thus increase the number of orders 
missing execution opportunities in other markets. NYSE Euronext also 
believes that, by proposing to ultimately make Eligible Book Orders 
eligible for execution against Step-up orders, the proposed rule change 
would eliminate an Exchange member's choice as to whether its orders 
will interact with Step-up orders. Finally, NYSE Euronext expresses 
concern that allowing Mid-Point Match orders to be submitted in 
response to a Step-up order ``further expands the use of [the 
Exchange's] flash mechanism.'' \12\
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    \12\ NYSE Euronext Letter, supra note 7, at p. 3. As noted 
above, NYSE Euronext also expresses support for the Flash Order 
Proposed Rulemaking. This order addresses only those portions of the 
NYSE Euronext Letter that specifically address the Exchange's 
proposed rule change.
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    Direct Edge, on behalf of the Exchange, responds that it is not 
offering an expansion of the flash order type, but rather an auction 
process that has significant similarities to those used by the NYSE, 
and notes that the duration of its auction will be the shortest in the 
securities markets.\13\ Direct Edge further argues that the Step-up 
auction process creates meaningful price improvement opportunities for 
investors while helping brokers to satisfy their best execution 
obligations. Direct Edge also believes that expanding participation in 
the auction to both Eligible Book Orders and Mid-Point Match orders 
will both increase price competition and expand member choice.\14\
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    \13\ Direct Edge Letter, supra note 8, at p. 2.
    \14\ See id. at p. 3-4.
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IV. Proceedings To Determine Whether To Disapprove SR-EDGA-2010-18 and 
Grounds for Disapproval Under Consideration

    The Commission is instituting proceedings pursuant to Section 
19(b)(2) of the Act \15\ to determine whether the Exchange's proposed 
rule change should be disapproved. Pursuant to Section 19(b)(2)(B) of 
the Act,\16\ the Commission is providing notice of the grounds for 
disapproval under consideration. Under the proposal, the Exchange would 
create a 10 millisecond auction for responding to Step-up orders and 
would expand the order types able to interact with Step-up orders 
during the Step-up auction process. The Act and the rules thereunder 
require, among other things, that the rules of an exchange be designed 
to promote just and equitable principles of trade, to not permit unfair 
discrimination among broker-dealers and customers and, in general, to 
protect investors and the public interest.\17\ The Commission is 
concerned that the Exchange's proposal may be inconsistent with these 
standards. Specifically, the Commission is concerned about the extent 
to which a 10 millisecond auction would provide a meaningful 
opportunity for price improvement, or would materially increase the 
risk that a Step-up order will miss an execution. The Commission notes 
that the Exchange has not provided any data with respect to the impact 
of its proposed 10 millisecond auction on these issues. The Commission 
is also concerned about the potential implications of the Step-up 
auction process, because Eligible Book Orders would not be able to 
participate in the Step-up auction for six-months from the date of a 
Commission approval order.
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    \15\ 15 U.S.C. 78s(b)(2).
    \16\ 15 U.S.C. 78s(b)(2)(B). Section 19(b)(2)(B) of the Act also 
provides that proceedings to determine whether to disapprove a 
proposed rule change must be concluded within 180 days of the date 
of publication of notice of the filing of the proposed rule change. 
Id. The time for conclusion of the proceedings may be extended for 
up to 60 days if the Commission finds good cause for such extension 
and publishes its reasons for so finding. Id.
    \17\ See 15 U.S.C. 78f(b)(5).
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    In view of the issues raised by the proposal, the Commission has 
determined to institute disapproval proceedings at this time to 
determine whether the Commission should disapprove the proposed rule 
change. Institution of disapproval proceedings does not indicate, 
however, that the Commission has reached any conclusions with respect 
to the issues involved. The sections of the Act and

[[Page 10418]]

the rules thereunder that are applicable to the proposed rule change 
include:
     Section 6(b)(5) of the Act, which requires, among other 
things, that the rules of a national securities exchange be designed to 
promote just and equitable principles of trade, to remove impediments 
to and perfect the mechanism of a free and open market and a national 
market system and, in general, to protect investors and the public 
interest, and not be designed to permit unfair discrimination between 
customers, issuers, brokers, or dealers; \18\ and
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    \18\ 15 U.S.C. 78f(b)(5).
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     Section 11A(a) of the Act, in which Congress found that it 
is in the public interest and appropriate for the protection of 
investors and the maintenance of fair and orderly markets to assure 
``economically efficient execution of securities transactions,'' ``fair 
competition among brokers and dealers and among exchange markets,'' 
``the availability to brokers, dealers, and investors of information 
with respect to quotations for and transactions in securities,'' and 
``the practicability of brokers executing investors' orders in the best 
market.'' \19\
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    \19\ 15 U.S.C. 78k-1(a)(1)(C)(i)-(iv).
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V. Procedure: Request for Written Comments

    The Commission requests written views, data, and arguments with 
respect to the concerns identified above as well as any other relevant 
concerns. Such comments should be submitted by April 11, 2011. Rebuttal 
comments should be submitted by April 25, 2011. Although there do not 
appear to be any issues relevant to disapproval which would be 
facilitated by an oral presentation of views, data, and arguments, the 
Commission will consider, pursuant to Rule 19b-4, any request for an 
opportunity to make an oral presentation.\20\
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    \20\ 15 U.S.C. 78s(b)(2). Section 19(b)(2) of the Act grants the 
Commission flexibility to determine what type of proceeding--either 
oral or notice and opportunity for written comments--is appropriate 
for consideration of a particular proposal by a self-regulatory 
organization. See Securities Acts Amendments of 1975, Report of the 
Senate Committee on Banking, Housing and Urban Affairs to Accompany 
S. 249, S. Rep. No. 75, 94th Cong., 1st Sess. 30 (1975).
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    The Commission asks that commenters address the merit of the 
Exchange's statements in support of the proposal, in addition to any 
other comments they may wish to submit about the proposed rule change. 
Interested persons are invited to submit written data, views, and 
arguments concerning the proposed rule change, 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/other.shtml); or
     Send an e-mail to rule-comments@sec.gov. Please include 
File Number SR-EDGA-2010-18 on the subject line.

Paper Comments

     Send paper comments in triplicate to Elizabeth M. Murphy, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-EDGA-2010-18. The file 
number should be included on the subject line if e-mail 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/other.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 
a.m. and 3 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; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make publicly available. All 
submissions should refer to File Number SR-EDGA-2010-18 and should be 
submitted on or before April 11, 2011. Rebuttal comments should be 
submitted by April 25, 2011.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\21\
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    \21\ 17 CFR 200.30-3(a)(57).
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Cathy H. Ahn,
Deputy Secretary.
[FR Doc. 2011-4158 Filed 2-23-11; 8:45 am]
BILLING CODE 8011-01-P


