
[Federal Register Volume 77, Number 195 (Tuesday, October 9, 2012)]
[Notices]
[Pages 61449-61452]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-24731]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-67959; File No. SR-EDGX-2012-44]


Self-Regulatory Organizations; EDGX Exchange, Inc.; Notice of 
Filing and Immediate Effectiveness of Proposed Rule Change Relating to 
EDGX Rule 11.5 To Add a New Order Type

October 2, 2012.
    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 September 25, 2012, EDGX Exchange, Inc. (the ``Exchange'' 
or ``EDGX'') 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.
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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

    The Exchange proposes to amend Rule 11.5(c) to add a new order 
type, the NBBO Offset Peg Order, to the rule. The text of the proposed 
rule change is available on the Exchange's Web site at 
www.directedge.com, at the Exchange's principal office and at the 
Public Reference Room of the Commission.

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 Exchange 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 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 Change

1. Purpose
    The Exchange proposes to add a new order type to Exchange Rule 
11.5(c), the NBBO Offset Peg Order. While the

[[Page 61450]]

NBBO Offset Peg Order would be available for all Users,\4\ the Exchange 
believes it would be particularly useful for, and therefore used 
predominately, if not exclusively, by Members \5\ acting as Market 
Makers \6\ in accordance with applicable Exchange Rules.\7\
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    \4\ As defined in Exchange Rule 1.5(ee).
    \5\ As defined in Exchange Rule 1.5(n).
    \6\ As defined in Exchange Rule 1.5(l).
    \7\ See Exchange Rules 11.18 (Registration of Market Makers), 
11.19 (Obligations of Market Maker Authorized Traders), 11.20 
(Registration of Market Makers in a Security) and 11.21 (Obligations 
of Market Makers).
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    The NBBO Offset Peg Order would enable Users to submit buy and sell 
orders to the Exchange that are pegged to a designated percentage away 
from the National Best Bid (the ``NBB'') and National Best Offer (the 
``NBO'', and together with the NBB, the ``NBBO''), respectively, while 
providing them full control over order origination and order marking. 
This retention of control, in turn, would enable Market Makers to 
comply independently with the requirements of Regulation SHO \8\ under 
the Securities Exchange Act of 1934 (the ``Act'') and Rule 15c3-5 \9\ 
under the Act (the ``Market Access Rule''), as described in more detail 
below.\10\
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    \8\ 17 CFR 242.200 through 242.204.
    \9\ 17 CFR 242.15c3-5.
    \10\ The Exchange notes that the NBBO Offset Peg Order 
represents new functionality for the Exchange, which has not 
previously offered and does not currently offer any automated quote 
management (``AQ'') functionality, in contrast to other exchanges, 
such as The NASDAQ Stock Market LLC (``NASDAQ'') and BATS Exchange, 
Inc. (``BATS''), whose respective Market Maker Peg Orders replaced 
their previous AQ functionality.
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Background
    The Market Access Rule requires that any broker-dealer with market 
access, or that provides a customer or any other person with market 
access, must establish, document and maintain a system of risk 
management controls and supervisory procedures reasonably designed to 
manage the financial, regulatory and other risks of this business 
activity. These controls include financial risk management controls 
reasonably designed to prevent the entry of orders that exceed 
appropriate pre-set credit or capital thresholds in the aggregate for 
each customer and the broker-dealer itself, and to prevent the entry of 
erroneous orders. In addition, the Market Access Rule requires certain 
regulatory risk management controls that, among other things, prevent 
the entry of orders unless compliance with applicable regulatory 
requirements has been satisfied on a pre-order entry basis, and 
restrict access to trading systems and technology that provide market 
access to persons and accounts that have been pre-approved and 
authorized by the broker-dealer. These regulatory risk management 
controls also include measures designed to prevent the entry of orders 
for a broker-dealer, customer or other person if such person is 
restricted from trading those securities, and to assure that 
appropriate surveillance personnel receive immediate, post-trade 
execution reports that result from market access.\11\
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    \11\ See supra note 9.
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    In addition to the Market Access Rule, broker-dealers have 
independent obligations that arise under Regulation SHO. Regulation SHO 
obligations generally include properly marking orders to sell as 
``long'', ``short'' or ``short exempt'', obtaining a ``locate'' for 
short sale orders, closing out fail to deliver positions and, where 
applicable, complying with the short sale price test.\12\ While 
Regulation SHO provides certain exceptions when a market maker is 
engaged in bona fide market making activity,\13\ the availability of 
those exceptions would be distinct and independent from whether a 
Market Maker submitted an NBBO Offset Peg Order.
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    \12\ 17 CFR 242.200 through 242.204.
    \13\ See 17 CFR 242.203(b)(1). The Commission adopted a narrow 
exception to Regulation SHO's ``locate'' requirement for market 
makers that may need to facilitate customer orders in a fast moving 
market without possible delays associated with complying with such 
requirement. Only market makers engaged in bona fide market making 
in the security at the time they effect the short sale are excepted 
from the ``locate'' requirement. See also Securities Exchange Act 
Release No. 50103 (July 28, 2004), 69 FR 48008, 48015 (August 6, 
2004) (providing guidance as to what does not constitute bona fide 
market making for purposes of claiming the exception to Regulation 
SHO's ``locate'' requirement). See also Securities Exchange Act 
Release No. 58775 (October 14, 2008), 73 FR 61690, 61698-9 (October 
17, 2008) (providing guidance regarding what is bona fide market 
making for purposes of complying with the market maker exception to 
Regulation SHO's ``locate'' requirement including without limitation 
whether the market maker incurs any economic or market risk with 
respect to the securities, continuous quotations that are at or near 
the market on both sides and that are communicated and represented 
in a way that makes them widely accessible to investors and other 
broker-dealers and a pattern of trading that includes both purchases 
and sales in roughly comparable amounts to provide liquidity to 
customers or other broker-dealers). Thus, Market Makers would not be 
able to rely solely on quotations priced in accordance with the 
Designated Percentages under proposed Rule 11.5(c)(15) for 
eligibility for the bona fide market making exception to the 
``locate'' requirement based on the criteria set forth by the 
Commission. It should also be noted that a determination of bona 
fide market making is relevant for purposes of a broker-dealer's 
close-out obligations under Rule 204 of Regulation SHO. See also 17 
CFR 242.204(a)(3).
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NBBO Offset Peg Order
    In an effort to simplify Members' compliance with the requirements 
of the Market Access Rule and Regulation SHO, the Exchange is proposing 
to adopt a new order type, the NBBO Offset Peg Order, and add it to 
Rule 11.5(c) as new subparagraph (15). An NBBO Offset Peg Order would 
be a one-sided limit order \14\ and, similar to other pegged orders 
available to Users, it would be tied or ``pegged'' to a certain 
price.\15\ An NBBO Offset Peg Order would not be eligible for routing 
pursuant to Rule 11.9(b)(2) and would always be displayed on the 
Exchange. It is expected that Members would perform the necessary 
checks to comply with applicable regulatory requirements, including the 
Market Access Rule and Regulation SHO, as discussed above, prior to the 
entry of an NBBO Offset Peg Order.
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    \14\ The NBBO Offset Peg Order would be a one-sided order. 
Therefore, a Member acting as a Market Maker seeking to use the NBBO 
Offset Peg Order to comply with the Exchange's Market Maker 
quotation requirements would need to submit and maintain 
continuously both a bid and an offer using the order type.
    \15\ Rule 11.5(c)(6) defines ``Pegged Order''.
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    As noted above, while use of the NBBO Offset Peg Order would not be 
limited to Market Makers, the Exchange believes that Market Makers 
would likely be the predominant, if not exclusive, users of the order 
type. Thus, the NBBO Offset Peg Order is designed such that its price 
would be automatically set and adjusted, both upon entry and at any 
time thereafter, in order to comply with the Exchange's Market Maker 
quotation requirements.\16\ Users may submit NBBO Offset Peg Orders to 
the Exchange starting at the beginning of the Pre-Opening Session,\17\ 
but the order is not executable or automatically priced until the 
beginning of Regular Trading Hours \18\ and expires at the end of 
Regular Trading Hours.
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    \16\ Exchange Rule 11.21 describes the obligations of Members 
registered with the Exchange as Market Makers. Among other things, 
Market Makers are required to maintain continuous, two-sided 
quotations consistent with the requirements of paragraph (d) of Rule 
11.21, which generally states that such quotations must be priced 
within a designated percentage of the NBB for buy quotations, and 
the NBO for sell quotations.
    \17\ Rule 1.5(s) defines ``Pre-Opening Session''.
    \18\ Rule 1.5(y) defines ``Regular Trading Hours''.
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    Specifically, upon entry and at any time the price of the order 
reached the ``Defined Limit'',\19\ or moved a specified

[[Page 61451]]

number of percentage points away from the ``Designated Percentage'' 
\20\ toward the then current NBB (for NBBO Offset Peg Orders to buy) or 
NBO (for NBBO Offset Peg Orders to sell), the price of the NBBO Offset 
Peg Order would be automatically adjusted by the System to the 
Designated Percentage away from the then current NBB or NBO, as the 
case may be. In the event that there was no NBB or NBO, the price of 
the NBBO Offset Peg Order would be automatically adjusted by the System 
to the Designated Percentage away from the last reported sale from the 
responsible single plan processor, unless the User instructed the 
Exchange upon entry to cancel or reject the order under such 
circumstances. In the absence of an NBB or NBO and last reported sale, 
the order would be cancelled or rejected. Adjustment to the Designated 
Percentage would be designed to avoid an execution against an NBBO 
Offset Peg Order that would initiate an individual stock trading pause.
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    \19\ The ``Defined Limit'' is defined in Rule 11.21(d)(2)(F) to 
mean 9.5% for securities included in the S&P 500[supreg] Index and 
the Russell 1000[supreg] Index, as well as a pilot list of Exchange 
Traded Products for securities subject to an individual stock pause 
trigger under the applicable rules of a listing market (the 
``Original Circuit Breaker Securities''). For times during Regular 
Trading Hours when stock pause triggers are not in effect under the 
rules of a security's listing market, the Defined Limit is 21.5% for 
Original Circuit Breaker Securities. For all NMS securities that are 
not Original Circuit Breaker Securities (``Non-Original Circuit 
Breaker Securities'') with a price equal to or greater than $1, the 
Defined Limit is 29.5%, and 31.5% for those with a price less than 
$1. See Rule 11.21(d)(2)(G).
    \20\ The ``Designated Percentage'' is defined in Rule 
11.21(d)(2)(D) to mean 8% with respect to Original Circuit Breaker 
Securities. For times during Regular Trading Hours when stock pause 
triggers are not in effect under the rules of a security's listing 
market, the Designated Percentage is 20% for Original Circuit 
Breaker Securities. For Non-Original Circuit Breaker Securities with 
a price equal to or greater than $1, the Designated Percentage is 
28%, and 30% for those with a price less than $1. See Rule 
11.21(d)(2)(E).
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    In the event that pricing an NBBO Offset Peg Order at the 
Designated Percentage away from the then current NBB or NBO, or, if no 
NBB or NBO, to the Designated Percentage away from the last reported 
sale from the responsible single plan processor, would result in the 
order exceeding its limit price, the order would be cancelled or 
rejected.
    In the event of an execution against an NBBO Offset Peg Order that 
reduced the size of the order below one round lot, a Member acting as a 
Market Maker would need to enter a new order, after performing the 
regulatory checks discussed above, to satisfy its obligations under 
Rule 11.21. A new timestamp would be created each time an NBBO Offset 
Peg Order was automatically adjusted.
    Users utilizing the NBBO Offset Peg Order would have control over 
order origination, as required by the Market Access Rule, while also 
enabling them to satisfy their order marking and locate obligations 
prior to order entry, as required by Regulation SHO. Thus, Members 
would be in a position to comply with the Market Access Rule and 
Regulation SHO just as they would when placing any other order on the 
Exchange, while also enabling Members acting as Market Makers using 
coupled buy and sell NBBO Offset Peg Orders to satisfy their Exchange 
Market Making obligations.\21\
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    \21\ In this regard, the NBBO Offset Peg Order would not ensure 
that the Member was satisfying the requirements of Regulation SHO, 
including the satisfaction of the locate requirement of Rule 
203(b)(1) or an exception thereto.
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    The Exchange intends to implement the proposed rule change on or 
about November 19, 2012, and will notify its Members and other market 
participants in an information circular to be posted on the Exchange's 
Web site.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6(b) of the Act \22\ and furthers the objectives of 
Section 6(b)(5) of the Act,\23\ 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, 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 proposed rule change 
is not designed to permit unfair discrimination between customers, 
issuers, brokers, or dealers. The proposed rule change also is designed 
to support the principles of Section 11A(a)(1) \24\ of the Act in that 
it seeks to assure fair competition among brokers and dealers and among 
exchange markets. The Exchange believes that the proposed rule meets 
these requirements in that it promotes transparency and uniformity 
across markets concerning minimum Market Maker quotation requirements 
and Member obligations generally to comply with the requirements of the 
Market Access Rule and Regulation SHO.
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    \22\ 15 U.S.C. 78f(b).
    \23\ 15 U.S.C. 78f(b)(5).
    \24\ 15 U.S.C. 78k-1(a)(1).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange 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, as amended.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change 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 its Members or other interested 
parties.

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

    Because the foregoing 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 after the date of the filing, or such 
shorter time as the Commission may designate, it has become effective 
pursuant to Section 19(b)(3)(A) of the Act \25\ and Rule 19b-4(f)(6) 
\26\ thereunder.
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    \25\ 15 U.S.C. 78s(b)(3)(A).
    \26\ 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.
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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 to 
determine whether the proposed rule should be approved or 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 Number SR-EDGX-2012-44 on the subject line.

Paper Comments

     Send paper comments in triplicate to Elizabeth M. Murphy, 
Secretary,

[[Page 61452]]

Securities and Exchange Commission, 100 F Street NE., Washington, DC 
20549-1090.
    All submissions should refer to File Number SR-EDGX-2012-44. This 
file number should be included on the subject line if email is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for Web site viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE., 
Washington, DC 20549, on official business days between the hours of 
10:00 a.m. and 3:00 p.m. Copies of the filing also will be available 
for inspection and copying at the principal office of the Exchange. All 
comments received will be posted without change; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File Number SR-EDGX-2012-44 and should be 
submitted on or before October 30, 2012.
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    \27\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\27\
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-24731 Filed 10-5-12; 8:45 am]
BILLING CODE 8011-01-P


