
[Federal Register Volume 77, Number 129 (Thursday, July 5, 2012)]
[Notices]
[Pages 39785-39787]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-16403]


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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-67291; File No. SR-EDGA-2012-28]


Self-Regulatory Organizations; EDGA Exchange, Inc.; Notice of 
Filing of Proposed Rule Changes To Amend EDGA Rules To Add the Route 
Peg Order

June 28, 2012.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that on June 26, 2012, the EDGA Exchange, Inc. (the ``Exchange'' or 
``EDGA'') filed with the Securities and Exchange Commission (the 
``Commission'') the proposed rule change as described in Items II and 
III below, which items have been prepared by the self-regulatory 
organization. The Commission is publishing this notice to solicit 
comments on the proposed rule changes from interested persons.
---------------------------------------------------------------------------

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

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

    The Exchange proposes to amend Rule 11.5 to provide an additional 
order type, the Route Peg Order. In addition, the Exchange proposes to 
amend Rule 11.8 to describe the priority of the Route Peg Order 
relative to other orders on the EDGA Book.
    The text of the proposed rule changes are attached as Exhibit 5 \3\ 
and are available on the Exchange's Web site at www.directedge.com, at 
the Exchange's principal office, at the Public Reference Room of the 
Commission, and on the Commission's Web site at www.sec.gov.
---------------------------------------------------------------------------

    \3\ The Commission notes that the Exhibit 5 is attached to the 
filing, but is not attached to this Notice.
---------------------------------------------------------------------------

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

    In its filing with the Commission, the Exchange included statements 
concerning the purpose of, and basis for, the proposed rule changes and 
discussed any comments it received on the proposed rule changes. The 
text of these statements 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 Changes

Purpose
    The Exchange proposes to amend Rule 11.5(c) to add a new 
subparagraph (14) that describes a Route Peg Order. A Route Peg Order 
would be a non-displayed limit order eligible for execution at the 
national best bid (the ``NBB'') for Route Peg Orders to buy, and at the 
national best offer (the ``NBO'', and together with the NBB, the 
``NBBO'') for Route Peg Orders to sell, against routable orders \4\ 
that are equal to or less than the size of the Route Peg Order. Thus, 
the Route Peg Order would only be eligible for execution at a price 
that matches the NBB for buy orders, and the NBO for sell orders. The 
Route Peg Order would be a passive, resting order designed exclusively 
to provide liquidity; therefore, it would not be permitted to take 
liquidity.
---------------------------------------------------------------------------

    \4\ Orders that are not designated for routing are not 
executable against Route Peg Orders because Users entering non-
routable orders typically expect to post liquidity on EDGA or seek 
to execute immediately against the EDGA displayed quote or attempt 
to ferret out hidden liquidity at or within the NBBO, e.g., through 
an Immediate-or-Cancel Order type. By contrast, the Route Peg Order 
would be designed for Users to interact with other Users that seek 
to access liquidity at the NBBO, and that employ routable orders to 
access such liquidity at a range of trading venues.
---------------------------------------------------------------------------

    An incoming order that has been designated as eligible for routing 
would be able to interact with Route Peg Orders. Such an order would 
first be matched against orders other than Route Peg Orders in price/
time priority in accordance with Rule 11.8(a)(2)(A)-(C). If any portion 
of the incoming order remained unexecuted, only then would such order 
be eligible to execute against Route Peg Orders.\5\ Thus, the Route Peg 
Order is intended only to provide liquidity in the event that a 
marketable order would otherwise route to another destination.
---------------------------------------------------------------------------

    \5\ The Exchange is proposing to [sic] The Exchange proposes to 
codify this principle in proposed new paragraph (a)(2)(D) of Rule 
11.8.
---------------------------------------------------------------------------

    As mentioned supra, Route Peg Orders would only trade with orders 
that are equal to or smaller in quantity than the original order 
quantity of the Route Peg Order. If a Route Peg Order were partially 
executed, it would be able to execute against orders that were

[[Page 39786]]

larger than the remaining balance of the order, but those orders would 
still need to be equal to or smaller than the original order quantity 
of the Route Peg Order.\6\ The following example illustrates how this 
would work: Assume Member A places a Route Peg Order to buy 500 shares, 
and an incoming order to sell executes against the Route Peg Order at 
the NBB for 300 shares. That would leave Member A with a remaining 
balance of 200 shares to buy. Another incoming order to sell 400 shares 
would be eligible to execute against Member A's balance, for 200 
shares, because the size of its order would be less than the original 
size of Member A's order. If, however, the incoming order were to sell 
600 shares, it would not execute against the Route Peg Order because 
the size of the order would be greater than the original size of Member 
A's order. In that event, such order would be routed externally. It 
should be noted, however, that if there were another Route Peg Order on 
the Book, behind Member A's order in time priority, for, say, 1000 
shares, the order to sell 600 shares would execute against that second 
Route Peg Order.
---------------------------------------------------------------------------

    \6\ If a Route Peg Order were partially executed, the remaining 
portion of the order would continue to be eligible for execution, 
but it would be assigned a new time priority and new timestamp after 
each partial execution, until either the remaining size of the order 
is exhausted or it is cancelled. Assigning a new timestamp after 
each partial execution would allow for a kind of rotating priority 
of execution for Users who place Route Peg Orders. The Exchange is 
proposing to codify this principle in Rule 11.8(a)(5) and proposed 
new subparagraph (a)(7) of Rule 11.8.
---------------------------------------------------------------------------

    The Exchange elected to design the System in this manner, as 
opposed to alternatives such as measuring incoming orders against the 
aggregate size of all Route Peg Orders then on the Book, in order to 
avoid the possibility of a single block-sized order potentially 
clearing all the liquidity on the Book attributable to Route Peg 
Orders.
    Route Peg Orders would be able to be entered, cancelled and 
cancelled/replaced prior to and during Regular Trading Hours.\7\ Route 
Peg Orders would be eligible for execution in a given security during 
Regular Trading Hours, except that, even after the commencement of 
Regular Trading Hours, Route Peg Orders would not be eligible for 
execution (1) in the opening cross, and (2) until such time that 
regular session orders in that security could be posted to the EDGA 
Book.\8\ A Route Peg Order would not execute at a price that is 
inferior to a Protected Quotation,\9\ and would not be permitted to 
execute if the NBBO were locked or crossed. Any and all remaining, 
unexecuted Route Peg Orders would be cancelled at the conclusion of 
Regular Trading Hours.
---------------------------------------------------------------------------

    \7\ As defined in Rule 1.5(y).
    \8\ To illustrate, for stocks listed on the New York Stock 
Exchange LLC (the ``NYSE''), regular session orders can be posted to 
the EDGA Book upon the dissemination by the responsible Securities 
Information Processor (``SIP'') of an opening print in that stock on 
the NYSE. Conversely, for stocks listed on, say, the NASDAQ Stock 
Market LLC, regular session orders can be posted to the EDGA Book 
upon the dissemination of the NBBO by the responsible SIP in that 
stock.
    \9\ As defined in Rule 1.5(v).
---------------------------------------------------------------------------

    The Route Peg Order would provide Members with an additional means 
to post stable trading interest at the NBB and NBO. The purpose of the 
Route Peg Order is to encourage Members to further enhance the depth of 
liquidity at the NBBO on the Exchange. The Exchange believes that if 
the Route Peg Order became widely used, Members seeking to access 
liquidity at the NBBO would be more motivated to direct their orders to 
EDGA because they would have a heightened expectation of the 
availability of liquidity at the NBBO. In addition, a User \10\ whose 
order executed against a Route Peg Order would be able to obtain an 
execution at the NBB or NBO while minimizing the risk that incremental 
latency associated with routing the order to an away destination may 
result in an inferior execution.
---------------------------------------------------------------------------

    \10\ As defined in Rule 1.5(ee).
---------------------------------------------------------------------------

Basis
    The Exchange believes that the proposed rule changes are consistent 
with Section 6(b) of the Act \11\ and further the objectives of Section 
6(b)(5) of the Act,\12\ in that they are 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, and to 
remove impediments to and perfect the mechanisms of a free and open 
market and a national market system, and, in general, to protect 
investors and the public interest. Moreover, the Exchange believes that 
the proposed rule changes are not designed to permit unfair 
discrimination between customers, issuers, brokers, or dealers.
---------------------------------------------------------------------------

    \11\ 15 U.S.C. 78f(b).
    \12\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    The benefits to investors of enhanced depth of liquidity at the 
NBBO in today's market structure cannot be understated. The Route Peg 
Order is designed to incentivize Users to place greater liquidity at 
the NBBO, thereby promoting more favorable and efficient executions for 
the benefit of public customers. It would do so by (1) offering 
liquidity providers a means to use the Exchange to post larger limit 
orders that are only executable at the NBBO and that do not disclose 
their trading interest to other market participants in advance of 
execution; (2) offering market participants seeking to access liquidity 
a greater expectation of market depth at the NBBO than may currently be 
the case; and (3) offering more predictable executions at the NBBO for 
Users by reducing the risk that incremental latency associated with 
routing an order to an away destination may result in an inferior 
execution. Thus, by providing an additional means by which market 
participants can be encouraged to post liquidity at the NBBO on the 
Exchange, which would add depth and support to the NBBO on the Exchange 
and mitigate the negative effects of market fragmentation, the proposed 
rule changes would promote just and equitable principles of trade and 
remove impediments to and perfect the mechanism of a free and open 
market and national market system. Moreover, the proposed rule changes 
would protect investors and the public interest by increasing the 
probability of an execution on the Exchange at the NBBO in the event 
that the order would otherwise be shipped to an external destination 
and potentially miss an execution at the NBBO while in transit.
    The Exchange believes, however, that the benefits to be derived 
from Route Peg Orders would only be realized if Route Peg Orders only 
interact with orders eligible for routing. Routable orders are 
typically characteristic of public customers, both retail and 
institutional (colloquially referred to as well as ``natural'' 
investors), who are concerned with executing at the best price. On the 
other hand, non-routable orders typically expect to post liquidity on 
the Book or seek to execute immediately, such as via an Immediate-or-
Cancel Order, against the Exchange's best displayed bid or offer or to 
ferret out hidden liquidity at or inside the NBBO (colloquially 
referred to as well as ``pinging''). Professional traders, in 
particular, are more apt to submit, and often immediately cancel, 
``pinging'' orders, as reflected in generally higher message-to-trade 
ratios. The Exchange believes this type of order behavior, while it may 
have its own business purposes, would not be suitable to interact with 
Route Peg Orders simply because Users would be reticent to post 
liquidity via Route Peg Orders given the uncertain, and therefore 
difficult to manage, exposure to executions against orders attributable 
to professional traders. Indeed, we believe potential

[[Page 39787]]

liquidity providers would be more apt to provide liquidity in 
alternative trading systems and other non-exchange market centers where 
the customization and segmentation experience may be less transparent 
and objective.
    While non-routable orders would not be permitted to execute against 
Route Peg Orders, the Exchange does not believe that the proposed rule 
changes would be designed to permit unfair discrimination between 
customers, brokers, or dealers. First, the Exchange believes this 
limited exception is constructed narrowly enough, based on rational and 
legitimate grounds, so that the compelling policy objectives, which are 
wholly consistent with the Act, can be realized. Second, the Exchange 
is not proposing to limit the type of User that can place routable 
orders, or that can place Route Peg Orders. So any disadvantage 
resulting from the limitation to executing against routable orders 
would not target particular segments of market participants, per se, 
but rather a particular type of market behavior. Therefore, the 
Exchange believes that not only would the proposed rule changes not be 
designed to permit unfair discrimination between customers, brokers, or 
dealers, the differentiation between routable and non-routable orders 
is an important element for the Route Peg Order to be able to achieve 
the objectives of protecting investors and the public interest and 
promoting just and equitable principles of trade.
    Finally, because the Route Peg Order would be functionally similar 
to the Supplemental Order that is currently offered by the NASDAQ Stock 
Market LLC (``NASDAQ''),\13\ the Route Peg Order would promote 
competition by enhancing EDGA's ability to compete with NASDAQ as well 
as other non-exchange market centers.
---------------------------------------------------------------------------

    \13\ See NASDAQ Rules 4751(f)(14), 4751(g) and 4757(a)(1)(D).
---------------------------------------------------------------------------

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

    The proposed rule change does not impose any burden on competition 
that is not necessary or appropriate in furtherance of the purposes of 
the Act.

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

    The Exchange has not solicited, and does not intend to solicit, 
comments on this proposed rule change. The Exchange has not received 
any unsolicited written comments from members or other interested 
parties.

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

    Within 45 days of the date of publication of this notice or within 
such longer period (i) as the Commission may designate up to 45 days of 
such date if it finds such longer period to be appropriate and 
publishes its reasons for so finding or (ii) as to which the self-
regulatory organization consents, the Commission will:
    (a) By order approve or disapprove such proposed rule changes; or
    (b) Institute proceedings to determine whether the proposed rule 
changes should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File No. SR-EDGA-2012-28 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 No. SR-EDGA-2012-28. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for Web site viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE., 
Washington, DC 20549, on official business days between the hours of 10 
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 available publicly. All 
submissions should refer to File No. SR-EDGA-2012-28 and should be 
submitted on or before July 26, 2012.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\14\
---------------------------------------------------------------------------

    \14\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-16403 Filed 7-3-12; 8:45 am]
BILLING CODE 8011-01-P


