
[Federal Register Volume 78, Number 50 (Thursday, March 14, 2013)]
[Notices]
[Pages 16311-16320]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-05878]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-69075; File No. SR-CHX-2013-07]


Self-Regulatory Organizations; Chicago Stock Exchange, Inc.; 
Notice of Filing and Immediate Effectiveness of a Proposed Rule Change 
Amending Article 1, Rule 2 (Order Types and Conditions); Article 20, 
Rule 4 (Eligible Orders); and Article 20, Rule 6 (Locked and Crossed 
Markets) To Modify the Operation of the CHX Only Order Type and Post 
Only Order Modifier

March 8, 2013.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on March 1, 2013, the Chicago Stock Exchange, Inc. (``CHX'' or the 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I and 
II below, which Items have been prepared by the self-regulatory 
organization. CHX has filed this proposal pursuant to Rule 19b-4(f)(6) 
under the Act,\3\ which renders the proposal effective upon filing with 
the Commission. 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\ 17 CFR 240.19b-4.
    \3\ 17 CFR 240.19b-4(f)(6).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    CHX proposes to amend its rules to modify the operation of the CHX 
Only order type and Post Only order modifier. The text of this proposed 
rule change is available on the Exchange's Web site at www.chx.com and 
in 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 CHX included statements 
concerning the purpose of and basis for the proposed rule changes 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 CHX 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 amend its rules that collectively govern 
the CHX Only order type and the Repricing Processes and the Post Only 
order modifier, as detailed below.\4\ Through this proposed rule 
change, the Exchange seeks to promote greater market liquidity and 
competition, while maintaining compliance with relevant provisions of 
the Act,\5\ Regulation NMS \6\ and Rule 201 of Regulation SHO.\7\
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    \4\ CHX Article 1, Rule 2 (Order Types and Conditions); CHX 
Article 20, Rule 4 (Eligible Orders); CHX Article 20, Rule 8 
(Operation of the Matching System).
    \5\ 15 U.S.C. 78a et seq.
    \6\ 17 CFR 242.610(d).
    \7\ 17 CFR 242.201.
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Background
    In 2011, the Exchange introduced the CHX Only order type, which was 
designed to encourage displayed liquidity on the Exchange and reduce 
automatic cancellations by the Matching System.\8\ The CHX Only order 
is a limit order that is to be ranked and executed on the Exchange, 
without routing away to another trading center.\9\ Order senders have 
the option to default all limit orders to ``CHX Only'' and therefore be 
subject to repricing. Notably, the CHX Only order type features an 
order handling functionality comprised of Regulation NMS repricing 
(``NMS repricing'') and Short Sale repricing (Short Sale repricing 
together with NMS repricing, the ``Repricing Processes''), to ensure 
compliance with Regulation NMS \10\ and Rule 201 of Regulation SHO.\11\ 
The Repricing Processes are applied to all CHX Only orders that, at the 
time of order entry, would be in violation of Regulation NMS \12\ and/
or Rule 201 of Regulation SHO,\13\ if displayed or executed at the 
limit price. However, a CHX Only order that, at the time of order 
entry, can be displayed or executed in compliance with Regulation NMS 
\14\ and Rule 201 of Regulation SHO \15\ will not be subject to the 
Repricing Processes and shall be displayed and will be executable 
without repricing.
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    \8\ Securities Exchange Act Release No. 64319 (Apr. 21, 2011), 
76 FR 23634 (Apr. 27, 2011) (SR-CHX-2011-04); CHX Article 1, Rule 2 
(Order Types and Conditions); CHX Article 20, Rule 4 (Eligible 
Orders).
    \9\ The Exchange currently offers one order subtype (i.e. CHX 
Only) and two order modifiers (``Do Not Route,'' under CHX Article 
1, Rule 2(k) and ``Post Only,'' under CHX Article 20, Rule 4(b)(18)) 
that require order execution on the Exchange only. Of the three, 
only orders marked CHX Only are eligible for the current Repricing 
processes. An order that is not marked CHX Only shall not be 
eligible for the current Repricing processes.
    \10\ 17 CFR 242.610(d).
    \11\ 17 CFR 242.201.
    \12\ 17 CFR 242.610(d).
    \13\ 17 CFR 242.201.
    \14\ 17 CFR 242.610(d).
    \15\ 17 CFR 242.201.
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    The Repricing Processes currently result in the repricing of an 
order to, or ranking and/or display of an order at, a price other than 
an order's limit price in order to comply with Regulation NMS \16\ and 
Rule 201 of Regulation SHO.\17\ Specifically, NMS repricing currently 
reprices and displays an order upon entry and in certain cases again 
reprices and re-displays an order at a more aggressive price one time 
if and when permissible, but does not continually reprice an order 
based on changes in the National Best Bid (``NBB'') or National Best 
Offer (``NBO'', and together with the NBB, the ``NBBO''). Also, Short 
Sale repricing currently reprices an order once upon order entry and 
does not again reprice such an order after it has

[[Page 16312]]

been displayed, notwithstanding movements to the NBB.
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    \16\ 17 CFR 242.610(d).
    \17\ 17 CFR 242.201.
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    The Exchange now proposes to modify these processes so as to create 
an order handling functionality that will reprice, re-rank and/or re-
display certain CHX Only orders multiple times depending on changes to 
the NBBO (the repricing of CHX Only sell short orders subject to Rule 
201 of Regulation SHO \18\ is dependent solely on declines to the NBB), 
so long as the order can be ranked and displayed in an increment 
consistent with the provisions of Regulation NMS \19\ and Rule 201 of 
Regulation SHO,\20\ until the order is executed, cancelled or the 
original limit price is reached. As such, the Exchange proposes to call 
this functionality the ``CHX Only Price Sliding Processes,'' which will 
be comprised of ``NMS Price Sliding'' and ``Short Sale Price Sliding.'' 
The Exchange also proposes to adopt language to make clear that the 
proposed CHX Only Price Sliding Processes are based on Protected 
Quotations \21\ at equities exchanges other than the Exchange (Short 
Sale Price Sliding is based on the NBB) and that all CHX Only limit 
orders subject to the CHX Only Price Sliding Processes shall maintain 
their original limit price and shall retain their time priority with 
respect to other orders based upon the time those orders were initially 
received by the Matching System.
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    \18\ Id.
    \19\ 17 CFR 242.610(d).
    \20\ 17 CFR 242.201.
    \21\ Pursuant to Article 20, Rule 6(a)(1), the Exchange defines 
``Protected Quotation'' as that term is defined under Rule 600(b) of 
Regulation NMS (17 CFR 242.600(b)), which states ``protected 
quotation means a protected bid or a protected offer.'' In turn, 
Rule 600(b)(57) of Regulation NMS (17 CFR 242.600(b)(57)) states, 
``protected bid or offer means a quotation in an NMS stock that: (i) 
Is displayed by an automated trading center; (ii) is disseminated 
pursuant to an effective national market system plan; and (iii) is 
an automated quotation that is the best bid or best offer of a 
national securities exchange, the best bid or best offer of The 
Nasdaq Stock Market, Inc., or the best bid or best offer of a 
national securities association other than the best bid or best 
offer of the Nasdaq Stock Market, Inc.''
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    With respect to the Post Only order modifier, the Exchange proposes 
to amend the definition of ``Post Only'' (A) to clarify that a Post 
Only order that would remove liquidity from the CHX book shall be 
immediately cancelled and (B) to allow a CHX Only Post Only order to be 
eligible for the CHX Only Price Sliding Processes.\22\
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    \22\ CHX Article 20, Rule 4(b)(18).
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The Proposed CHX Only Price Sliding Processes
    Initially, the Exchange proposes to replace all reference to 
``repricing'' under the rule language of CHX Only orders, with the more 
accurate term ``Price Sliding.'' Also, the Exchange proposes to add a 
description of the CHX Only Price Sliding Processes by inserting a new 
paragraph that states that the CHX Only Price Sliding Processes 
utilized by the Matching System include both NMS Price Sliding and 
Short Sale Price Sliding and that all CHX Only orders may be subject to 
either NMS Price Sliding or Short Sale Price Sliding. It is important 
to note that the proposed CHX Only Price Sliding Processes are only 
applicable to CHX Only orders. Non- CHX Only orders that, at the time 
of entry, would be in violation of Regulation NMS \23\ or Rule 201 of 
Regulation SHO,\24\ including ``Do Not Route'' orders, will be 
cancelled by the Matching System and rejected back to the order sender. 
To this end, the Exchange also proposes to amend Article 20, Rule 6(d) 
(Locked and Crossed Markets) to clarify that an order that would lock 
or cross a Protected Quotation of an external market may, among other 
possibilities, be subject to the CHX Only Price Sliding Processes, if 
it is a ``CHX Only'' order.
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    \23\ 17 CFR 242.610(d).
    \24\ 17 CFR 242.201.
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    Moreover, the Exchange proposes to adopt language to clarify that 
CHX Only orders that are undisplayed in whole or in part (i.e. CHX Only 
orders marked ``Do Not Display'' and ``Reserve Size,'' respectively) 
are not eligible for the CHX Only Price Sliding Processes and that such 
orders that, at the time of entry, are in violation of Regulation NMS 
\25\ and Rule 201 of Regulation SHO \26\ shall be cancelled and 
rejected back to the order sender. Also, the Exchange proposes to 
clarify that when a short sale price test restriction under Rule 201 of 
Regulation SHO is in effect, an undisplayed sell short order that is 
priced above the NBB at the time of initial order entry, but due to a 
change in the NBB, is now priced at or below the NBB, shall be 
cancelled.
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    \25\ 17 CFR 242.610(d).
    \26\ 17 CFR 242.201.
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Proposed NMS Price Sliding
    With respect to the current NMS repricing, if a CHX Only order 
that, at the time of entry, would cross a Protected Quotation displayed 
by another trading center, the Exchange will reprice the order and rank 
the order in the CHX book at the locking price and display the order at 
one minimum price variation below the NBO for bids or above the NBB for 
offers. Similarly, in the event a CHX Only order that, at the time of 
entry, would lock or cross a Protected Quotation displayed by another 
trading center, the Exchange will display the order at one minimum 
price variation below the NBO for bids or above the NBB for offers. If 
a CHX Only order subject to NMS repricing is matched after the initial 
repricing, the order will execute, without further repricing, so long 
as Regulation NMS \27\ and Rule 201 of Regulation SHO \28\ are not 
violated. If the CHX Only order subject to NMS repricing is not 
subsequently executed or cancelled and the NBBO changes such that the 
display of the original locking price of the CHX Only order subject to 
NMS repricing would not lock or cross a Protected Quotation, the order 
will receive a new timestamp and will be re-displayed at the original 
locking price. After this repricing, the CHX Only order subject to NMS 
Repricing will not be repriced, notwithstanding further changes to the 
NBBO.
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    \27\ 17 CFR 242.610(d).
    \28\ 17 CFR 242.201.
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    As an example of how the current NMS repricing functions, assume 
that the NBBO for security XYZ is $30.25 by $30.26 and the best priced 
bid in the CHX Matching System is $30.22. A CHX Only order to sell 100 
shares of XYZ at $30.24 is submitted to the Matching System. Since the 
display of the sell order at $30.24 would result in an impermissibly 
crossed market, the CHX Only sell order would be ranked at the locking 
price of $30.25 within the CHX book and displayed at $30.26, which is 
one minimum price increment above the NBB, in order to avoid locking 
the markets. If a buy limit order priced at $30.25 or higher were to be 
subsequently submitted to the Matching System, it could be executed 
against the resting CHX Only sell order at its ranked price of $30.25. 
If the NBB were to decrease to $30.24 without the CHX Only sell order 
being executed or cancelled, the CHX Only sell order would be re-
displayed at the original locking price of $30.25. If the NBB were to 
decrease again to $30.23, the CHX Only sell order would remain ranked 
and displayed at $30.25.
    With respect to the proposed NMS Price Sliding, the Exchange 
proposes to adopt language to make clear the distinction between 
``Initial NMS Price Sliding'' (i.e. price sliding upon order entry) and 
``Multiple NMS Price Sliding'' (i.e. price sliding orders that have 
already been adjusted). Under the proposed ``Initial NMS Price 
Sliding'' paragraph, the Exchange proposes to adopt language to clarify 
that NMS Price Sliding would apply if a CHX Only order, at the time of 
entry, would lock

[[Page 16313]]

or cross a Protected Quotation of an external market in violation of 
Rule 610(d) of Regulation NMS.\29\ Aside from this clarification, the 
Exchange proposes to adopt the functionality of the current NMS 
repricing in the proposed NMS Price Sliding, whereby CHX Only orders 
that lock or cross a Protected Quotation of an external market will be 
initially ranked at the locking price and will be displayed by the 
Matching System at one minimum price variation below the current NBO 
for bids and one minimum price variation above the current NBB for 
offers. In doing so, the Exchange further proposes to refer to these 
displayable prices as the ``Permitted Display Price.'' Finally, the 
Exchange proposes to adopt language to state that CHX Only orders 
subject to NMS Price Sliding will retain their original limit prices 
irrespective of the prices at which such orders are ranked and 
displayed. Accordingly, the Exchange proposes to refer to the rank and 
display of a CHX Only order rather than using the term ``reprice.'' 
Although the proposed ``Initial NMS Price Sliding'' will function 
similarly to the current NMS repricing of CHX Only orders upon order 
entry, the functionality of the current and proposed processes diverge 
after initial order entry.
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    \29\ 17 CFR 242.610(d).
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    Under the proposed ``Multiple NMS Price Sliding'' paragraph, the 
Exchange proposes to adopt language to state that following the initial 
ranking and display of a CHX Only order subject to NMS Price Sliding, 
the order will be continuously re-ranked and re-displayed until the 
order is executed, cancelled or its original limit price is reached. In 
addition, the Exchange also proposes to adopt language that states that 
such an order will only be re-ranked and re-displayed to the extent it 
achieves a more aggressive price, based upon changes to the prevailing 
NBBO; provided, however, that an order may be re-ranked to a less 
aggressive price where a Protected Quotation of an external market 
locks or crosses the displayed price of a resting price slid order.
    To this end, the Exchange proposes to adopt language that details 
how the Matching System will ``Re-rank'' and ``Re-display'' a CHX Only 
order subject to NMS Price Sliding. Under the proposed ``Re-rank'' 
paragraph, the Exchange proposes to adopt language that states that in 
the event the NBBO changes such that a CHX Only order subject to NMS 
Price Sliding could be re-ranked at a higher trading increment for buy 
orders or lower trading increment for sell orders, without crossing a 
Protected Quotation of an external market, the order will receive a new 
timestamp and will be re-ranked at the current locking price. Under the 
proposed ``Re-display'' paragraph, the Exchange proposes to adopt 
language that states that in the event the NBBO changes such that a CHX 
Only order subject to NMS Price Sliding could be re-displayed at a 
higher trading increment for buy orders or lower trading increment for 
sell orders, the order will receive a new timestamp and will be re-
displayed at the current Permitted Display Price.
    As an example of how the proposed NMS Price Sliding would function, 
assume again that the NBBO for security XYZ is $30.25 by $30.26 and the 
best priced bid in the CHX Matching System is priced at $30.22. A CHX 
only order to sell 100 shares of XYZ at $30.24 is submitted to the 
Matching System. Since the order is not immediately executable within 
our system and a display offer of $30.24 would be impermissible, 
pursuant to both the current NMS repricing and proposed NMS Price 
Sliding processes, the CHX Only sell order would be ranked at the 
locking price of $30.25 within the CHX book. Moreover, the Matching 
System would publicly display the sell order at $30.26, which is one 
minimum price increment above the NBB, i.e. the Permitted Display 
Price, in order to avoid locking the market. If a buy limit order 
priced at $30.25 or higher were to be subsequently submitted to the 
Matching System, it could be executed against the resting CHX Only sell 
order at its ranked price of $30.25. Up to this point, the current NMS 
repricing and proposed NMS Price Sliding is in lockstep. However, the 
processes diverge once the NBB decreases.
    If the NBB were to decrease to $30.24 without the CHX Only order 
being executed or cancelled, under the current NMS repricing, the CHX 
Only sell order would be re-displayed at the original locking price of 
$30.25 and would not be subject to further repricing. In contrast, 
under the proposed NMS Price Sliding, the CHX Only sell order would be 
re-ranked in the CHX book at the new locking price of $30.24 and re-
displayed at the Permitted Display Price of $30.25. Under this 
scenario, a buy limit order priced at $30.24 or higher could execute 
against the resting CHX Only sell order at its re-ranked and original 
limit price.
    If the NBB then reverted back to $30.25, without the order being 
executed or cancelled, under either the current NMS repricing or 
proposed NMS Price Sliding processes, the Exchange would continue to 
display the CHX Only sell order at $30.25 expecting the trading center 
that posted the new bid at $30.25 to contemporaneously send CHX a 
satisfying buy order pursuant to Rule 611 of Regulation NMS.\30\ With 
respect to the ranked price, as discussed in detail below, the sell 
order may be re-ranked to the display price if the Matching System 
receives a marketable buy order. If the NBB were to instead further 
decrease to $30.23 without the CHX Only order being executed or 
cancelled, under the proposed NMS Price Sliding, the CHX Only sell 
order would maintain its ranked price at $30.24 because NMS Price 
Sliding would never result in an order being ranked or displayed beyond 
its original limit price. As such, the CHX Only sell order would be re-
displayed at its original limit price of $30.24.
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    \30\ 17 CFR 242.611(a).
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    As illustrated above, following the initial ranking and display of 
an order subject to NMS Price Sliding, an order is typically only re-
ranked to the extent it achieves a more aggressive price. However, the 
Exchange proposes to re-rank a resting price slid order at the same 
price as the displayed price (i.e. a less aggressive price) in the 
event (1) such order's displayed price is locked by a Protected 
Quotation of an external market and (2) the Matching System receives a 
marketable contra-side order.\31\ This will avoid the potential of a 
trade-through of a Protected Quotation displayed by an external market 
at such ranked price.
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    \31\ The Exchange notes that as a general matter Regulation NMS 
should prevent external markets from displaying Protected Quotations 
that lock or cross Protected Quotations displayed by the Exchange. 
However, in a dynamic market, such an event can and does happen for 
a variety of reasons. For example, if the Exchange updates its 
contra-side Protected Quotation, it is possible that such quotations 
lock or cross each other. Neither the Exchange nor the other market 
would know in this circumstance that such quotations would lock or 
cross each other when publishing their quotation updates. As another 
example, in the event another market receives an Intermarket Sweep 
Order, such market may permissibly display such order without regard 
to other Protected Quotations, including quotations displayed by the 
Exchange that lock or cross such order.
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    As an example of the behavior described above, assume the Exchange 
has a posted and displayed bid to buy 100 shares of a security priced 
at $10.10 per share and a posted and displayed offer to sell 100 shares 
at $10.13 per share. Assume the NBBO is $10.10 by $10.12. If the 
Exchange receives a fully-displayable CHX Only bid to buy 100 shares at 
$10.12 per share, the Exchange will rank the bid at $10.12 and display 
the bid at $10.11 because displaying the bid at $10.12 would lock an 
external market's Protected Offer to sell for

[[Page 16314]]

$10.12. If an external market then updated its Protected Offer to 
$10.11, thus locking the Exchange's displayed bid (i.e. the order 
subject to price sliding that is ranked at $10.12 and displayed at 
$10.11), the Exchange proposes to maintain the ranked price of the 
resting price slid bid at $10.12 and continue to display the order at 
$10.11, until a marketable contra-side order is received.
    If the Exchange then received an inbound marketable offer priced at 
the $10.11 (i.e. the displayed price of the resting bid), the Exchange 
proposes to modify the ranked price of the resting price slid bid to 
the same price as the displayed price. Thus, the resting price slid bid 
could only execute against the incoming marketable offer at the 
displayed price of $10.11. Similarly, if the inbound marketable offer 
was priced at $10.12, the resting bid would be ranked at the displayed 
price of $10.11 and the inbound offer would be ranked and displayed at 
$10.12. By re-ranking the bid in this example to the displayed price at 
$10.11, the Exchange will not allow an order to trade-through the NBO 
when the Exchange receives a marketable contra-side offer during the 
locked market condition. If, however, the NBO moved back to $10.12, 
without the resting bid being executed or cancelled, the resting bid 
would be re-ranked at $10.12 and be continued to be displayed at 
$10.11.
    The Exchange also proposes to make clear that this re-ranking will 
not result in a change in priority for the order at its displayed 
price. For instance, in the example above, assume the bid described had 
been posted and displayed at $10.11 and ranked at $10.12 (``Order A''), 
and then a later arriving bid is received by the Exchange at $10.11 
(``Order B'') and posted as well, with priority behind Order A. If the 
Exchange then re-ranks Orders A because it has been locked by another 
market center's Protected Quotation, the Exchange does not believe it 
would be fair to cause such order to lose priority when it was 
originally first in priority amongst displayed orders on the Exchange. 
A more detailed example of order execution priority may be found below.
    Moreover, the Exchange proposes to adopt language that states that 
when an external market crosses the Exchange's Protected Quotation and 
the Exchange's Protected Quotation is a resting displayed order subject 
to the proposed NMS Price Sliding, the Exchange proposes to rank and 
display the resting order based on the first uncrossed NBBO (``pro 
forma NBBO'') calculated pursuant to paragraph .01(d) of Article 20, 
Rule 5.\32\ This pro forma NBBO is calculated by a CHX-specific 
protocol that ignores Protected Quotations that cross any Protected 
Quotation(s) until an uncrossed NBBO is identified. If the first 
uncrossed NBBO is locked and the Exchange receives a marketable contra-
side order, then the resting price slid order with a ranked price that 
crosses the contra-side Protected Quotation would be ranked at the 
displayed price. If, however, the first uncrossed NBBO is not locked, 
then the resting price slid order would be subject to the normal rules 
of NMS Price Sliding and maintain its current ranked and displayed 
price or be price slid to a more aggressive price. Thus, the order 
displayed by the Exchange will still be ranked and permitted to execute 
at a price that crosses the ignored market's Protected Quotation, which 
is consistent with Rule 611(b)(4) of Regulation NMS.\33\
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    \32\ Paragraph .01(d) of Article 20, Rule 5 states:
    ``.01 Trade-through policies and procedures. In determining 
whether a trade on the Exchange would create an improper trade-
through, the Exchange will adhere to the applicable provisions of 
Reg NMS, as well as to the following policies and procedures:
    d. Crossed market exception. Trades shall continue to be 
executed in the Matching System when the NBBO is crossed; provided 
however, that the Matching System shall only execute orders in that 
security up to (but not beyond) the first uncrossed NBBO. If a trade 
is executed in the Matching System while the NBBO is crossed, the 
Matching System will automatically attach an appropriate modifier to 
the trade before it is publicly reported.''
    \33\ 17 CFR 242.611(b)(4).
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    As an example of the behavior described above, assume the Exchange 
has a posted and displayed bid to buy 100 shares of a security priced 
at $10.10 per share and a posted and displayed offer to sell 100 shares 
at $10.13 per share. Assume the NBBO is $10.10 by $10.12. If the 
Exchange receives a CHX Only bid to buy 100 shares at $10.12 per share, 
the Exchange will rank the order to buy at $10.12 and display the order 
at $10.11 because displaying the bid at $10.12 would lock an external 
market's Protected Offer to sell for $10.12. If an external market then 
updated its Protected Offer to $10.10, thus crossing the Exchange's 
displayed bid, the Exchange would ignore Protected Quotations that 
crossed the Exchange's displayed bid until the first uncrossed NBBO was 
identified. If the first uncrossed NBO was at $10.12, then the resting 
bid would remain ranked at $10.12 and displayed at $10.11. If, however, 
the first uncrossed NBO locked the resting bid and the Matching System 
received a marketable offer at either the ranked or displayed price, 
then the resting bid would be ranked at the displayed price of $10.11. 
A more detailed example of order execution priority may be found below.
Proposed Short Sale Price Sliding
    With respect to the current Short Sale repricing, if a CHX Only 
sell short order that, at the time of entry, could not be executed or 
displayed in compliance with Rule 201 of Regulation SHO,\34\ the 
Exchange will reprice and display the CHX Only sell short order at one 
minimum price variation above the current NBB.\35\ Thereafter, a CHX 
Only sell short order subject to Short Sale repricing will not be 
readjusted downward even if it could be displayed at a lower price 
without violating Rule 201 of Regulation SHO.\36\
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    \34\ 17 CFR 242.201.
    \35\ When the short sale price test restriction under Rule 201 
of Regulation SHO (17 CFR 242.201(b)(1)(i)) is in effect, non-CHX 
Only sell short orders submitted with a limit price at or below the 
current NBB at the time received by the Matching System and which 
are not marked a sell short exempt shall be cancelled and rejected 
back to the order sender. See CHX Article 20, Rule 8(d)(4).
    \36\ 17 CFR 242.201.
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    As an example of how the current Short Sale repricing functions, 
assume again that the NBBO for security XYZ is $30.25 by $30.26. 
Further, assume that the short sale price test restriction under Rule 
201 of Regulation SHO is in effect for security XYZ. A CHX Only sell 
short order to sell 100 shares of XYZ at $30.24 is submitted to the 
Matching System. Since this CHX Only sell short order is priced below 
the current NBB, this order would be repriced and displayed at $30.26, 
one minimum price increment above the current NBB, pursuant to the 
provisions of Rule 612 of Regulation NMS.\37\ If the NBB subsequently 
declined to $30.24, the CHX Only sell short order would not be repriced 
downward.\38\ If the NBB instead increased to $30.26, the Exchange 
would continue to display the sell short order at $30.26 in reliance on 
the provision of Rule 201 of Regulation SHO \39\ that permits the 
execution of a displayed short sale order if, at the time of the 
initial display, the order was priced above the then-current NBB.
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    \37\ 17 CFR 242.612.
    \38\ In contrast, if the short sale price test restriction under 
Rule 201 of Regulation SHO were not in effect for security XYZ, this 
CHX Only sell short order would have been ranked and displayed 
pursuant to NMS Repricing (i.e. ranked at $30.25 and displayed at 
$30.26).
    \39\ 17 CFR 242.201(b)(1)(iii)(A).
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    With respect to the proposed Short Sale Price Sliding, similar to 
the organizational structure of the proposed NMS Price Sliding, the 
Exchange proposes to adopt language to make a clear distinction between 
``Initial Short Sale Price Sliding'' (i.e. price sliding

[[Page 16315]]

upon order entry) and ``Multiple Short Sale Price Sliding'' (i.e. price 
sliding orders that have already been adjusted). Under the proposed 
``Initial Short Sale Price Sliding'' paragraph, the Exchange proposes 
to maintain the substance of the current Short Sale repricing by 
including language that states that a CHX Only sell short order that, 
at the time of entry, could not be executed or displayed in compliance 
with Rule 201 of Regulation SHO \40\ will be repriced and displayed by 
the Matching System at one minimum price variation above the current 
NBB. The Exchange proposes to refer to this minimum price variation 
above the current NBB as the ``Permitted Price.'' Moreover, the 
Exchange proposes to adopt language to state that CHX Only orders 
subject to Short Sale Price Sliding will retain their original limit 
prices irrespective of the prices at which such orders are repriced and 
displayed. Although the proposed ``Initial Short Sale Price Sliding'' 
will function similarly to the current Short Sale repricing of CHX Only 
sell short orders upon order entry, the functionality of the current 
and proposed processes diverge after initial order entry.
---------------------------------------------------------------------------

    \40\ 17 CFR 242.201.
---------------------------------------------------------------------------

    Under the proposed ``Multiple Short Sale Price Sliding'' paragraph, 
the Exchange proposes to adopt language to state that to reflect 
declines in the NBB, the Matching System will continue to reprice a CHX 
Only sell short order subject to short sale price test restriction 
under Rule 201 of Regulation SHO at the Permitted Price, until the 
order is executed or the original limit price is reached. The Exchange 
further proposes to include language that clarifies that when a short 
sale price test restriction under Rule 201 of Regulation SHO is in 
effect, Short Sale Price Sliding will take priority over NMS Price 
Sliding, with respect to CHX Only sell short orders subject to Short 
Sale Price Sliding. In addition, the Exchange proposes to include 
language consistent under Rule 201(b)(1)(iii)(A) of Regulation SHO \41\ 
that explicitly states that when a short sale price test restriction 
under Rule 201 of Regulation SHO is in effect, the Matching System may 
execute a CHX Only sell short order subject to Short Sale Price Sliding 
at a price below the Permitted Price if, at the time of initial display 
of the short sale order, the order was at a price above the then-
current NBB. In addition, the Exchange proposes to include language 
that CHX Only orders marked ``short exempt'' shall not be subject to 
Short Sale Price Sliding.
---------------------------------------------------------------------------

    \41\ 17 CFR 242.201(b)(1)(iii)(A).
---------------------------------------------------------------------------

    As an example of how the proposed Short Sale Price Sliding 
functions, assume again that the NBBO for security XYZ is $30.25 by 
$30.26 and the best priced bid in the CHX Matching System is priced at 
$30.22. Further, assume that the short sale price test restriction 
under Rule 201 of Regulation SHO is in effect for security XYZ. A CHX 
only sell short order to sell 100 shares of XYZ at $30.24 is submitted 
to the Matching System. Since this CHX Only sell short order is priced 
below the current NBB and involves a security subject to the short sale 
price test restriction under Rule 201 of Regulation SHO, Short Sale 
Price Sliding will take priority over NMS Price Sliding. As such, under 
both the current Short Sale repricing and the proposed Short Sale Price 
Sliding, this order would be repriced and displayed at the Permitted 
Price of $30.26.
    If the NBB subsequently declined to $30.24, under the current Short 
Sale repricing, the CHX Only sell short order would not be repriced. In 
contrast, under the proposed Short Sale Price Sliding, the CHX Only 
sell short order would be repriced and displayed at the new Permitted 
Price of $30.25. As such, an inbound buy limit order of $30.25 or 
higher (as opposed to merely $30.26 or higher under the current Short 
Sale repricing) could execute against the repriced CHX Only sell short 
order at $30.25. If the NBB then reverted back to $30.25, the Exchange 
would continue to display the CHX Only sell short order at $30.25 in 
reliance on the proposed rule that states that when a short sale price 
test restriction under Rule 201 of Regulation SHO is in effect, the 
Matching System may execute a CHX Only sell short order subject to 
Short Sale Price Sliding at a price below the Permitted Price if, at 
the time of initial display of the short sale order, the order was at a 
price above the then-current NBB.\42\
---------------------------------------------------------------------------

    \42\ 17 CFR 242.201(b)(1)(iii)(A).
---------------------------------------------------------------------------

Proposed Lock-Only Price Sliding
    Furthermore, the Exchange proposes to create a new paragraph that 
reincorporates the current lock-only repricing instruction. The 
proposed ``Lock-Only Price Sliding'' would permit order senders to 
enter an instruction for the Matching System to only apply the CHX Only 
Price Sliding Processes if the CHX Only order locks the NBBO at the 
time of the order entry and not if it crosses the NBBO. For order 
senders who utilize this instruction, a CHX Only order that crosses the 
NBBO will be immediately cancelled. In the context of Short Sale Price 
Sliding, an order that is priced below the NBB would be cancelled and 
an order priced at the NBB would be price slid.
Proposed Order Execution Priority of Price Slid Orders
    The Exchange proposes to adopt language that establishes that CHX 
Only orders subject to the CHX Only Price Sliding Processes will retain 
their time priority versus other orders based upon the time those 
orders were initially received by the Matching System. That is, all CHX 
Only orders subject to either NMS Price Sliding or Short Sale Price 
Sliding will retain their order execution priority based upon the time 
those orders were initially received, but will also be subject to 
proposed CHX Article 20, Rule 8(b)(7), which states, in sum, that an 
order subject to the CHX Only Price Sliding Processes shall receive 
order execution priority based first on its ranked price, then original 
time of receipt by the Matching System.
    This is an important point of clarification because although the 
current Repricing Processes and the proposed CHX Only Price Sliding 
Processes require and will require an order to be re-timestamped each 
time the order price is adjusted, so as to follow changes to the 
prevailing NBBO, the purpose of this re-timestamp is to simply record 
the time of the price adjustment, as opposed to establishing or 
retaining time priority. Instead, time priority is established by a 
unique sequence number (e.g. 1, 2, 3, etc. * * *) that the Matching 
System assigns to each incoming order at the original time of order 
entry. These sequence numbers ensure that orders retain their relative 
time priority to each other, even as they are priced adjusted, and 
these sequence numbers will not be changed nor will an order receive a 
new sequence number, so long as it is resting in the CHX book. The 
reason why a sequence number is utilized for establishing order time 
priority is because it allows CHX to assure proper time priority upon 
initial receipt by the Matching System and at subsequent price 
adjustments, irrespective of the granularity of the timestamp used. 
Consequently, sequence numbers allow and will allow each order to 
maintain its relative priority over other orders based on the time of 
original order entry, notwithstanding any price adjustments.
    Example 1. As an example of how time priority of CHX Only orders 
subject to the CHX Only Price Sliding Processes would function and how 
that is reconciled with general order execution priority, assume that 
the NBBO for

[[Page 16316]]

security XYZ is $30.25 by $30.26, the best bid in the CHX book is 
$30.21 and there are no resting offers in the CHX book. Further, assume 
that the short sale price test restriction under Rule 201 of Regulation 
SHO is in effect for security XYZ. Also assume that four CHX Only sell 
orders for 100 shares of XYZ are then entered in immediate succession 
and that all orders are fully displayable. The orders are received by 
the Matching System in the following sequence:

1: A-Original Limit Price: $30.24
2: B-Original Limit Price: $30.26
3 (short): C-Original Limit Price: $30.23
4: D-Original Limit Price: $30.23

    Each Arabic numeral represents an order's sequence number. Under 
this scenario, Orders A, C and D are all subject to the CHX Only Price 
Sliding Processes because all three orders would violate Regulation NMS 
\43\ and/or Rule 201 of Regulation SHO,\44\ if displayed. Specifically, 
Orders A and D are subject to NMS Price Sliding and Order C is subject 
to Short Sale Price Sliding. Order B is not subject to the CHX Only 
Price Sliding Processes because its limit price of $30.26 would not 
impermissibly lock or cross the NBB.
---------------------------------------------------------------------------

    \43\ 17 CFR 242.610(d).
    \44\ 17 CFR 242.201.
---------------------------------------------------------------------------

    Example 2. After the initial CHX Only Price Sliding Processes have 
been applied, the orders are prioritized for execution in the CHX book 
as follows:

(i): 1.............................  A--Original Limit       Rank: $30.25.........  Display: $30.26.
                                      Price: $30.24.
(ii): 4............................  D--Original Limit       Rank: $30.25.........  Display: $30.26.
                                      Price: $30.23.
(iii): 2...........................  B--Original Limit       Rank: $30.26.........  Display: $30.26.
                                      Price: $30.26.
(iv): 3 (short)....................  C--Original Limit       Rank: $30.26.........  Display: $30.26.
                                      Price: $30.23.
 

The Roman numerals represent the order execution priority. Based on CHX 
Article 20, Rule 8(b), Orders A and D both receive order execution 
priority over Orders B and C because they both have the same superior 
ranked price at $30.25. In addition, Order A receives execution 
priority over Order D, where Order A retains its time priority over 
Order D from the original time of entry (i.e. Order A has a superior 
sequence number to Order D). Similarly, since Orders B and C have the 
same ranked price at $30.26, Order B receives execution priority over 
Order C, where Order B has a superior sequence number to Order C.
    Example 3. Assume now that the NBB for XYZ decreases to $30.23 and 
none of the orders have been executed or cancelled. The proposed CHX 
Only Price Sliding Processes will re-prioritize the orders as follows:

(i): 4.............................  D--Original Limit       Rank: $30.23.........  Display: $30.24.
                                      Price: $30.23.
(ii): 1............................  A--Original Limit       Rank: $30.24.........  Display: $30.24.
                                      Price: $30.24.
(iii): 3 (short)...................  C--Original Limit       Rank: $30.24.........  Display: $30.24.
                                      Price: $30.23.
(iv): 2............................  B--Original Limit       Rank: $30.26.........  Display: $30.26.
                                      Price: $30.26.
 

Order D has jumped Order A because Order D has the most aggressively 
ranked price at $30.23 and, as such, Order D now receives order 
execution priority over Order A. Order A, however, has maintained its 
order execution priority over Order C because although Order C has been 
price slid so that they are now both ranked at the same price of 
$30.24, Order A has a superior sequence number to Order C. Order B has 
fallen to last on the order execution priority list because of its 
inferior ranked price at $30.26.
    Example 4. Assume now that the NBB for XYZ decreases to $30.22 and 
none of the orders have been executed or cancelled. Further assume that 
a new CHX Only sell order of 100 shares of XYZ at $30.22 is entered 
(``Order E''). The proposed CHX Only Price Sliding Processes will re-
prioritize the orders as follows:

(i): 5.............................  E--Original Limit       Rank: $30.22.........  Display: $30.23.
                                      Price: $30.22.
(ii): 3 (short)....................  C--Original Limit       Rank: $30.23.........  Display: $30.23.
                                      Price: $30.23.
(iii): 4...........................  D--Original Limit       Rank: $30.23.........  Display: $30.23.
                                      Price: $30.23.
(iv): 1............................  A--Original Limit       Rank: $30.24.........  Display: $30.24.
                                      Price: $30.24.
(v): 2.............................  B--Original Limit       Rank: $30.26.........  Display: $30.26.
                                      Price: $30.26.
 

Order E receives a sequence number inferior to the other four orders 
because it is the most recent sell order in security XYX to have been 
received by the Matching System. Also, Order E is subject to NMS Price 
Sliding as it would lock the NBB. However, Order E jumps to the top of 
the order execution priority list based on its superior ranked price at 
$30.22. Order C has now jumped Order D because Order C has been price 
slid so that they are now both ranked at the same price of $30.23 and 
Order C has a superior sequence number to Order D. Order A has dropped 
to fourth on the order execution priority list because its original 
limit price has been reached and a CHX Only order subject to the CHX 
Only Price Sliding Processes will never be price slid beyond its 
original limit price. Order B was never subject to the CHX Only Price 
Sliding Processes and remains last in the order execution priority list 
due to its inferior ranked price at $30.26.
    Example 5. Assume now that the NBB for XYZ goes back to $30.23, 
thereby locking the displayed prices of Orders E, C and D. Pursuant to 
the proposed NMS Price Sliding, Order E would not yet be re-ranked to 
the displayed price. If the Matching System, however, received an 
incoming marketable bid priced at either $30.22 or $30.23, the proposed 
CHX Only Price Sliding Processes would re-prioritize the orders as 
follows:

(i): 3 (short).....................  C--Original Limit       Rank: $30.23.........  Display: $30.23.
                                      Price: $30.23.
(ii): 4............................  D--Original Limit       Rank: $30.23.........  Display: $30.23.
                                      Price: $30.23.
(iii): 5...........................  E--Original Limit       Rank: $30.23.........  Display: $30.23.
                                      Price: $30.22.
(iv): 1............................  A--Original Limit       Rank: $30.24.........  Display: $30.24.
                                      Price: $30.24.
(v): 2.............................  B--Original Limit       Rank: $30.26.........  Display: $30.26.
                                      Price: $30.26.
 


[[Page 16317]]

At this point, Order E would be re-ranked at its displayed price of 
$30.23. If the incoming bid were priced at $30.22, the bid would be 
ranked and displayed at $30.22. If the incoming bid were instead priced 
at $30.23, the bid would execute against Orders C and D before Order E 
because Order E has an inferior sequence number to Orders C and D. 
Furthermore, Order C would be allowed to execute at the NBB locking 
price in reliance on the proposed rule that states that when a short 
sale price test restriction under Rule 201 of Regulation SHO is in 
effect, the Matching System may execute a CHX Only sell short order 
subject to Short Sale Price Sliding at a price below the Permitted 
Price if, at the time of initial display of the short sale order, the 
order was at a price above the then-current NBB.\45\
---------------------------------------------------------------------------

    \45\ 17 CFR 242.201(b)(1)(iii)(A).
---------------------------------------------------------------------------

    Example 6. Assume now that another market center posts a Protected 
Bid of $30.24, without any of the orders being executed. Pursuant to 
paragraph .01(d) of Article 20, Rule 5 and Rule 611(b)(4) of Regulation 
NMS, the Exchange would ignore the crossing Protected Quotation and 
proceed to ascertain the first uncrossed NBBO. If the first uncrossed 
NBBO resulted in a locked market, the orders would be prioritized and/
or price slid as described in Example 5. If the first uncrossed NBBO 
did not result in a locked market, the orders would be subject to the 
normal rules of proposed CHX Only Price Sliding Processes, as shown in 
Examples 1-4.
    Consequently, a CHX Only order subject to the CHX Only Price 
Sliding Processes will execute similarly to its simple limit order 
counterpart, except that a CHX Only order subject to the CHX Only Price 
Sliding Processes will execute at its ranked price or better, as 
opposed to its limit price or better for limit orders that are not CHX 
Only. Notwithstanding this difference, CHX Only orders and limit orders 
are subject to the same CHX rules and processes for order execution as 
any other non-CHX Only order, in that they may execute against a 
compatible contra-side order, subject to the conditions and modifiers 
of the respective orders and the operation of the Matching System, 
pursuant to CHX Article 20, Rule 8.
CHX Only Orders and Order Modifiers
    Correspondingly, many of the modifiers applicable to other non-CHX 
Only limit orders may be applied to CHX Only orders (e.g. ``Time in 
Force'' \46\ and ``Cancel on Halt'' \47\), to the extent that the 
modifiers do not conflict with the CHX Only order subtype (i.e. CHX 
Only orders must be displayed, must be ranked and executed on the 
Exchange and must be subject to the CHX Only Price Sliding Processes). 
For example, the ``Post Only'' modifier, with some proposed amendments 
detailed below, is compatible with CHX Only orders. Whereas, certain 
modifiers, such as ``Immediate or Cancel'' (``IOC'') \48\ and 
``Intermarket Sweep Order'' (``ISO'') \49\ are inherently incompatible 
with CHX Only orders.
---------------------------------------------------------------------------

    \46\ CHX Article 1, Rule 2(ii) defines ``Time in Force'' as ``an 
order that is to be executed, in whole or in part, within a 
specified time period, with any unexecuted balance of the order to 
be immediately cancelled at the end of the specified time period. No 
time in force order shall be in force longer than the trading day on 
which it is received.''
    \47\ CHX Article 1, Rule 2(c) defines ``Cancel on Halt'' as ``an 
order that should be automatically cancelled by the Matching System 
if a trading halt or suspension is declared in that security.''
    \48\ CHX Article 1, Rule 2(m) defines ``IOC'' as ``an order that 
is to be executed, either in whole or in part, at or better than its 
limit price as soon as the order is received by the Matching System, 
with any unexecuted balance of the order to be immediately 
cancelled. IOC orders shall be executed in the Matching System at or 
better than the Exchange's BBO (including any reserve size or other 
undisplayed orders at or better than that price).''
    \49\ CHX Article 20, Rule 4(b)(15) defines ``ISO,'' in pertinent 
part, as ``an order marked as required by SEC Rule 600(b)(30) that 
is to be executed against any orders at the Exchange's BBO 
(including any reserve size or other undisplayed orders at that 
price) as soon as the order is received by the Matching System, with 
any unexecuted balance of the order to be immediately cancelled. The 
Matching System, in executing the ISO, shall not take any of the 
actions described in Rule 5 to prevent an improper trade-through.'' 
In turn, Rule 600(b)(30) of Regulation NMS (17 CFR 242.600(b)(30)) 
defines ``Intermarket Sweep Order'' as ``a limit order for an NMS 
stock that meets the following requirements: (i) When routed to a 
trading center, the limit order is identified as an intermarket 
sweep order; and (ii) simultaneously with the routing of the limit 
order identified as an intermarket sweep order, one or more 
additional limit orders, as necessary, are routed to execute against 
the full displayed size of any protected bid, in the case of a limit 
order to sell, or the full displayed size of any protected offer, in 
the case of a limit order to buy, for the NMS stock with a price 
that is superior to the limit price of the limit order identified as 
an intermarket sweep order. These additional routed orders also must 
be marked as intermarket sweep orders.
---------------------------------------------------------------------------

    The current definition of Post Only does not permit a CHX Only Post 
Only order to be eligible for the CHX Only Price Sliding Processes. 
Post Only is currently defined as an order that is to be posted on the 
Exchange and not routed away to another trading center. Moreover, a 
Post Only order will be immediately cancelled if (1) it is marketable 
against a contra-side order in the Matching System when entered or (2) 
it is at a price that would lock or cross a Manual or Protected 
Quotation.\50\ Specifically, the current definition conflicts with the 
proposed CHX Only Price Sliding Processes, which requires a CHX Only 
Post Only order that would lock or cross a Protected Quotation of an 
external market to be price slid and not immediately cancelled.
---------------------------------------------------------------------------

    \50\ See Article 20, Rule 4(b)(18).
---------------------------------------------------------------------------

    Therefore, the Exchange proposes to amend the definition of Post 
Only to allow Post Only orders marked CHX Only to be eligible for the 
CHX Only Price Sliding Processes. Specifically, the Exchange proposes 
to amend the definition of Post Only to provide that a Post Only order 
will be immediately cancelled (A) if the Post Only order would remove 
liquidity from the CHX book \51\ or (B) if, at the time of order entry, 
the Post Only order would lock or cross a protected quotation of an 
external market; provided, however, that if the Post Only order is 
marked ``CHX Only'' and is eligible for the CHX Only Price Sliding 
Processes, pursuant to proposed Article 1, Rule 2(y), the Post Only 
order that would lock or cross a protected quotation \52\ of an 
external market shall be subject to the CHX Only Price Sliding 
Processes and shall not be immediately cancelled. The following 
examples illustrate how a CHX Only Post Only order would behave under 
different market conditions.
---------------------------------------------------------------------------

    \51\ In adopting the new language for proposed subparagraph (A), 
the Exchange does not propose to substantively modify the specific 
functionality for the immediate cancellation of Post Only orders 
that are marketable against contra-side orders when entered. Rather, 
the new language is intended to clarify the meaning of the current 
language. That is, currently, a Post Only order will be immediately 
cancelled if it would take liquidity from the CHX book.
    \52\ The Exchange proposes to omit reference to ``Manual'' 
quotations, so that the proposed definition accurately reflects Rule 
610(d) of Regulation NMS and is consistent with proposed Article 1, 
Rule 2(y).
---------------------------------------------------------------------------

    Example 1. Assume that the NBBO for security XYZ is $10.10 x $10.12 
and the short sale price test restriction of Rule 201 of Regulation SHO 
is not in effect. Assume further that the CHX BBO for security XYZ is 
also $10.10 x $10.12. Now assume that a fully-displayable CHX Only Post 
Only offer for security XYZ priced at $10.10 (``Offer A'') is received 
by the Matching System. Since Offer A would remove liquidity from the 
CHX book (i.e. resting bid at $10.10), Offer A would be immediately 
cancelled. This would be the result under either the current or 
proposed Post Only definition.
    Example 2. Assume the same as Example 1 and that the NBBO for 
security XYZ remains at $10.10 x $10.12, but the CHX BBO moves away to 
$10.09 x $10.14. Also assume that

[[Page 16318]]

there are no hidden (i.e. ``Do Not Display'' orders or ranked price of 
price slid orders) bids priced at $10.10 on the CHX book. Further 
assume that a fully-displayable CHX Only Post Only offer for security 
XYZ priced at $10.10 (``Offer B'') is received by the Matching System. 
The current definition of Post Only suggests that Offer B should be 
immediately cancelled because although it is not marketable against any 
resting bids in the CHX book, the display of Offer B would lock a 
protected quotation of an external market, whereas the CHX Only 
designation would require application of the current NMS repricing and 
rank Offer B at the locking price of $10.10 and display the offer at 
$10.11. The proposed definition of Post Only resolves this conflict by 
requiring Offer B to be price slid and not be immediately cancelled 
because it is marked CHX Only.
    Example 3. Assume the same as Example 2 and that Offer B is resting 
in the CHX book, ranked at $10.10 and displayed at $10.11. Thus, the 
NBBO for security XYZ moves to $10.10 x $10.11 and the CHX BBO moves to 
$10.09 x $10.11. Further assume that a fully-displayable CHX Only Post 
Only bid for security XYZ priced at $10.11 (``Bid A'') is received by 
the Matching System. Under both the current and proposed definition of 
Post Only, Bid A would be immediately cancelled because it would take 
liquidity from the CHX book, namely Offer B at its ranked price of 
$10.10.
    As a general rule, an order that is resting at a certain price 
point, whether it be displayed or undisplayed, is always ``providing'' 
liquidity to the CHX book. Conversely, if an incoming contra-side order 
is submitted that could execute against a resting order or if a contra-
side resting order is price slid into the resting order, regardless of 
when the price slid order was originally submitted, the incoming or 
price slid contra-side order is always ``removing'' liquidity from the 
CHX book. Since Post Only orders may never remove liquidity from the 
CHX book, pursuant to the current and proposed definition of Post Only, 
an incoming Post Only order that is marketable against a resting 
contra-side order or a resting price slid Post Only order that is price 
slid into the resting order, shall always be cancelled.
    Example 4. Assume that the NBBO for security XYZ is $10.10 x $10.12 
and the CHX BBO is $10.10 x $10.14. Now assume that the Matching System 
receives a CHX Only Post Only bid priced at $10.13 (``Bid B''). 
Pursuant to NMS Price Sliding, Bid B will be ranked at $10.12 and 
displayed at $10.11. The NBBO is now $10.11 x $10.12 and the CHX BBO is 
$10.11 x $10.14. Assume further that while Bid B is resting on the CHX 
book, an undisplayed simple limit offer at $10.13 (``Offer C'') is 
received by the Matching System. Thus, the undisplayed CHX BBO is 
$10.12 (i.e. the ranked price of Bid B) x $10.13 (i.e. the limit price 
of Offer C). Then assume that the NBBO moves away to match the CHX BBO 
at $10.11 x $10.14.
    Although the proposed NMS Price Sliding Processes would price slide 
Bid B to its original limit price (i.e. re-ranked and re-displayed at 
$10.13), since Offer C is already resting at $10.13, Bid B would be 
cancelled because the current and proposed definition of Post Only 
would require that Bid B be immediately cancelled if it would remove 
liquidity from the CHX book. Thus, this result would not change if 
Offer C were a fully-displayable Post Only order, as opposed to an 
undisplayed order.
    Example 5. Assume the same as Example 4, except that Offer C is a 
fully-displayable Post Only offer, as opposed to an undisplayed offer. 
Thus, the NBBO is at $10.11 x $10.12 and the CHX BBO is now at $10.11 x 
$10.13. Then assume that the NBBO moves away to $10.11 x $10.13 and Bid 
B will be price slid to a ranked price of $10.13 and a displayed price 
of $10.12. Just like Example 4, Bid B will be cancelled because a Post 
Only order that is price slid into a price point that would remove 
liquidity shall always be cancelled.
    These examples illustrate two important aspects of the operation of 
the Matching System. First, the Matching System will never price slide 
an order to avoid an execution. That is, all Post Only orders (e.g. CHX 
Only Post Only) that would remove liquidity from the CHX book will be 
immediately cancelled. Also, the Matching System will never lock the 
CHX book. That is, a Post Only offer (bid) shall not be allowed to post 
opposite the ranked price of a price slid bid (offer) or a resting 
undisplayed limit bid (offer). In either situation, the incoming Post 
Only offer (bid) will be immediately cancelled.
    The Exchange acknowledges that the immediate cancellation of Post 
Only orders that would otherwise remove liquidity from the CHX book may 
result in the Post Only order sender discovering hidden liquidity on 
the CHX book. However, the Exchange submits that although an order 
sender may discover that hidden orders exist, there is no way that the 
Post Only order sender could learn how many shares are available at 
that price point, without submitting orders that would execute against 
the hidden interest. Moreover, if there is no resting liquidity to 
remove from the CHX book, the Post Only order will be posted and may be 
executed immediately thereafter. Also, with respect to hidden interest 
that is the result of price sliding (i.e. the undisplayed ranked price 
of a price slid order), it is important to note that the order sender 
that submitted the price slid order had intended to display the order 
at a price at least as aggressive as the ranked price and, thus, the 
fact that a Post Only order sender may discover the hidden interest 
does not disadvantage the order sender that submitted the price slid 
order.
    With respect to IOC, a CHX Only order marked IOC would only be 
executed if it were immediately executable in the Matching System. If, 
however, such an order, upon entry, were in violation of Regulation NMS 
\53\ and/or Rule 201 of Regulation SHO,\54\ the CHX Only designation 
would mandate application of the CHX Only Price Sliding Processes, 
whereas the IOC designation would mandate immediate cancellation of the 
order. Given this incompatibility, the Matching System will simply 
ignore the CHX Only designation and treat the order as a simple limit 
IOC.\55\
---------------------------------------------------------------------------

    \53\ 17 CFR 242.610(d).
    \54\ 17 CFR 242.201.
    \55\ The CHX Matching System treats an order with incompatible 
elements differently depending on the order subtype and modifier 
combination. An incompatibility may result in an order being 
rejected as a whole or a conflicting element being ignored.
---------------------------------------------------------------------------

    In addition, CHX Only is also incompatible with ISO. Generally, 
ISOs require an order sender to take affirmative steps to ensure that 
the market is satisfied prior to executing or posting its order, 
whereas CHX Only orders that violate Regulation NMS employ NMS Price 
Sliding to comport the order price with respect to the prevailing 
market, as detailed above. Specifically, an ISO, by its own terms, 
obviates the need for NMS Price Sliding, where in submitting an order 
marked ISO, the order sender is required to satisfy the protected 
quotations of external markets priced superior to the limit order 
submitted to the Exchange.\56\ This in turn allows the order to execute 
at the Exchange's BBO. The Matching System would, however, apply NMS 
Price Sliding and rank the order at the NBB and display the order at 
the Permitted Price one increment above the NBB. If Short Sale Price 
Sliding were applicable, the same sell order would be repriced and 
displayed to the Permitted Price above the NBB. As such, the

[[Page 16319]]

fundamental difference between an ISO and CHX Only order is that an ISO 
can execute at the Exchange's BBO, whereas the same order marked CHX 
Only could not.
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    \56\ See supra note 49.
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    Since a CHX Only with an ISO modifier is incompatible, the CHX 
Matching System will treat the CHX Only ISO as a ``Price-Penetrating 
ISO.'' \57\ That is, the ISO modifier trumps the CHX Only designation. 
The reasoning behind this treatment is that an order sender who marks 
an order ISO is representing that it is sending simultaneous orders to 
other market centers to satisfy the quotations of other markets as 
required by Rule 600(b)(3) of Regulation NMS. Since the order sender is 
taking additional steps to satisfy the statutory requirements of an 
ISO, the Matching System will ignore the CHX Only designation.
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    \57\ CHX Article 1, Rule 2(aa) (b)(15) defines ``Price-
Penetrating ISO'' as ``an order marked as required by SEC Rule 
600(b)(30) that is to be executed at or better than its limit price 
as soon as the order is received by the Matching System, with any 
unexecuted balance of the order to be immediately cancelled. Orders 
marked as price-penetrating ISO shall be executed against any 
eligible orders in the Matching System (including any reserve size 
or other undisplayed orders, through multiple price points). The 
Matching System, in executing these orders, shall not take any of 
the actions described in Rule 5 to prevent an improper trade-
through.'' See also CHX Article 20, Rule 4(b)(15).
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    These examples clearly show that the proposed CHX Only Price 
Sliding Processes can promote market liquidity by allowing the CHX Only 
order type to be ranked and displayed at the most aggressive prices, 
while maintaining compliance with Regulation NMS \58\ and Rule 201 of 
Regulation SHO.\59\ As a result, these proposed rule changes will make 
the CHX Only order type more attractive to our Participants by 
increasing fill or execution rates despite fast-paced changes to the 
NBBO and by increasing the probability of price improvement above 
displayed bids and offers for inbound orders.
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    \58\ Id.
    \59\ 17 CFR 242.201.
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2. Statutory Basis
    The Exchange submits that the proposed rule changes to adopt 
continuous CHX Only Price Sliding Processes for CHX Only orders and to 
allow orders marked Post Only to be subject to price sliding is 
consistent with Section 6(b) of the Act in general \60\ and furthers 
the objectives of Section 6(b)(5) in particular,\61\ by promoting just 
and equitable principles of trade, fostering cooperation and 
coordination with persons engaged in facilitating transaction in 
securities, removing impediments, perfecting the mechanisms of a free 
and open market and, in general, by protecting investors and the public 
interest. Specifically, by ensuring that all orders marked CHX Only, 
including Post Only orders, can be price adjusted continuously to 
reflect the best permissible price without locking or crossing the 
NBBO, displayed liquidity on the Exchange will be encouraged by 
improving the chances of order execution and reducing automatic 
cancellations by the Exchange's Matching System. Consequently, the 
proposed changes to the CHX Only order type and the Post Only order 
modifier will benefit Exchange customers by reducing message traffic, 
improving fill rates and promoting competition among market centers 
offering similar products and services, which is consistent with the 
aforementioned objectives of Section 6(b)(5).
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    \60\ 15 U.S.C. 78f(b).
    \61\ 15 U.S.C. 78f(b)(5).
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    In addition, notwithstanding the amendments, the proposed CHX Only 
Price Sliding Processes and the Post Only order modifier will continue 
to comport with Rule 610 of Regulation NMS \62\ and Rule 201 of 
Regulation SHO.\63\ Specifically, since the proposed CHX Only Price 
Sliding Processes will ensure that orders are only displayed at 
permissible prices and that CHX Only Post Only orders are now eligible 
for price sliding, the proposed rules will be consistent with the 
mandate of Rule 610(d) of Regulation NMS that requires exchanges to 
establish, maintain, and enforce rules that require members to 
reasonably avoid ``[d]isplaying quotations that lock or cross any 
protected quotation in an NMS stock.''\64\ Moreover, the automated 
nature of the CHX Only Price Sliding Processes of the CHX Only order 
type is ``reasonably designed to assure the reconciliation of locked or 
crossed quotations in any NMS stock.'' \65\ Also, since the proposed 
CHX Only Price Sliding Processes will assist Participants by ensuring 
that orders, including Post Only orders, are displayed at permissible 
prices, the proposed rule is reasonably designed to ``prohibit its 
members from engaging in a pattern or practice of displaying quotations 
that lock or cross any quotation in a NMS stock, or of displaying 
manual quotations that lock or cross an quotation in any NMS stock 
disseminated pursuant to an effective national market system plan, 
other than displaying quotations that lock or cross any protected or 
other quotation as permitted by an exception contained in its rules 
established pursuant to paragraph (d)(1) of this section.'' \66\ 
Similarly, the proposed rules will continue to comport with the 
requirements under Rule 201 of Regulation SHO \67\ by ensuring that CHX 
Only sell short orders, as well as CHX Only Post Only sell short 
orders, are displayed above the NBB at the time the sell short order is 
entered, when the short sale price test restriction under Rule 201 of 
Regulation SHO is in effect for a covered security. That is, the 
repricing of short sale orders to follow decreases in the NBB will not 
adversely impact the ability of the proposed rules to reasonably 
``prevent the execution or display of a short sale order of a covered 
security at a price that is less than or equal to the current national 
best bid if the price of that covered security decreases by 10% or more 
from the covered security's closing price as determined by the listing 
market for the covered security as of the end of regular trading hours 
on the prior day.'' \68\
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    \62\ 17 CFR 242.610(d).
    \63\ 17 CFR 242.201.
    \64\ 17 CFR 242.610(d).
    \65\ Id.
    \66\ Id.
    \67\ 17 CFR 242.201(b)(1)(i).
    \68\ Id.
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does believe that the proposed rule change will have 
an impact on competition. However, the Exchange does not believe that 
the proposed rule change will impose a burden on competition that is 
unnecessary or inappropriate in furtherance of the purposes of the Act. 
To the contrary, the amended CHX Only order type and the proposed CHX 
Only Price Sliding Processes should act as a positive force for 
competition by providing an alternative to other similar order types 
and functionality, such as the BATS ``Display-Price Sliding.'' \69\
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    \69\ See BYX Rule 11.9(g).
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C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    No written comments were either solicited or received.

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

    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 prior to 
30 days from the date on which it was filed, or such shorter time as 
the Commission may designate,

[[Page 16320]]

the proposed rule change has become effective pursuant to Section 
19(b)(3)(A) of the Act \70\ and Rule 19b-4(f)(6) thereunder.\71\
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    \70\ 15 U.S.C. 78s(b)(3)(A).
    \71\ 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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    A proposed rule change filed pursuant to Rule 19b-4(f)(6) under the 
Act \72\ normally does not become operative for 30 days after the date 
of its filing. However, Rule 19b-4(f)(6) \73\ permits the Commission to 
designate a shorter time if such action is consistent with the 
protection of investors and the public interest. The Exchange has asked 
the Commission to waive the 30-day operative delay and allow the 
proposed rule change to be operative as of March 22, 2013, noting that 
doing so would allow the Exchange to quickly offer Exchange 
participants the proposed CHX Only order type and price sliding 
functionality while ensuring that the Exchange's matching system has 
been properly tested to ensure a smooth transition to the modified CHX 
Only order type and Post Only order modifier. The Commission believes 
that waiving the 30-day operative delay is consistent with the 
protection of investors and the public interest.\74\ This waiver will 
allow the Exchange to modify this order type without delay such that is 
similar to an order type offered by other another exchange.\75\ 
Therefore, the Commission hereby waives the 30-day operative delay and 
designates the proposal operative as of March 22, 2013.
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    \72\ 17 CFR 240.19b-4(f)(6).
    \73\ 17 CFR 240.19b-4(f)(6).
    \74\ For purposes only of waiving the 30-day operative delay, 
the Commission has considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
    \75\ The CHX-Only order, as modified, is based upon BATS Y-
Exchange Rule 11.9(g)(1)(C). See also Exchange Act Release No. 67657 
(August 14, 2012), 77 FR 50199 (August 20, 2012) (SR-BATS-2010-035). 
The differences between the proposed rule and the BATS rule are 
discussed in the Exchange's proposed rule change.
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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.

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-CHX-2013-07 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-CHX-2013-07. 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-CHX-2013-07 and 
should be submitted on or before April 4, 2013.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\76\
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    \76\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-05878 Filed 3-13-13; 8:45 am]
BILLING CODE 8011-01-P


