
[Federal Register Volume 79, Number 186 (Thursday, September 25, 2014)]
[Notices]
[Pages 57603-57624]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-22787]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-73150; File No. SR-CHX-2014-15]


Self-Regulatory Organizations; Chicago Stock Exchange, Inc.; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change To 
Adopt the CHX Routing Services

September 19, 2014.
    Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of 
1934 (``Act''),\2\ and Rule 19b-4 thereunder,\3\ notice is hereby given 
that on September 8, 2014, 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. 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

    CHX proposes to adopt and amend rules to implement the CHX Routing 
Services. 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 Changes

1. Purpose
    The Exchange proposes to adopt and amend rules to implement the 
proposed CHX Routing Services. Specifically, the Exchange proposes to 
permit Routable Orders \4\ to be routed away from the CHX Matching 
System (``Matching System'') for executions at away Trading Centers 
(``routing destination''),\5\ if a Routing Event \6\ is triggered. The 
proposed CHX Routing Services would be provided through CHXBD, LLC 
(``CHXBD''), which is an affiliated broker-dealer that will operate as 
a facility of the Exchange. All orders routed away from, and related 
executions within, the Matching System would be done in a manner 
compliant with Exchange rules and federal securities laws and 
regulations, including Regulation NMS and Regulation SHO. Incidentally, 
the Exchange also proposes to amend the operation of certain order 
modifiers and price sliding functionalities that will be impacted by 
the proposed CHX Routing Services, including the CHX Only and LULD 
Price Sliding functionalities and Do Not Display modifier, and clarify 
how orders are ranked, displayed and executed by the Matching System.
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    \4\ As discussed below, proposed Article 1, Rule 1(oo) defines 
``Routable Order'' as ``any incoming Limit order, as defined under 
Article 1, Rule 2(a)(1), of any size, not marked by any order 
modifiers or related terms listed under Article 1, Rule 2 that 
prohibit the routing of the order to another Trading Center.'' By 
definition, orders resting on the CHX book are never routable.
    \5\ Proposed Article 1, Rule 1(nn) defines ``Trading Center'' as 
it is defined under Rule 600(b)(78) under Regulation NMS.
    \6\ As discussed below, proposed Article 19, Rule 3(a) lists 
three Routing Events, any of which may cause an order to be routed 
away pursuant to the proposed CHX Routing Services.
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    The Exchange believes that the proposed CHX Routing Services and 
related amendments will benefit market participants by providing a 
routing functionality that would increase the likelihood of executions 
resulting from Routable Orders submitted to the Matching System. 
Consequently, the proposed CHX Routing Services and

[[Page 57604]]

related amendments to modifiers and price sliding functionalities will 
reduce the number of order cancellations and improve fill rates on 
orders submitted to the Matching System, which will, in turn, enhance 
and streamline the national market system by promoting executions 
within and without the Matching System.
Background
    Current CHX Article 20 (Operation of the Matching System) provides 
routing rules that were adopted when the Exchange migrated to its all-
electronic trading model in 2006.\7\ However, the Exchange has never 
provided outbound routing of orders from the Matching System. In sum, 
these current routing rules contemplate a routing functionality largely 
based on the current routing of orders from Brokerplex through the 
Order Management System (``OMS''), which is fundamentally different 
from the proposed CHX Routing Services.\8\ The following highlight the 
key differences between the current routing rules and the proposed CHX 
Routing Services:
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    \7\ See Securities Exchange Act Release No. 54550 (September 29, 
2006), 71 FR 59563 (October 10, 2006) (SR-CHX-2006-05).
    \8\ See CHX Article 17, Rule 5(e). Brokerplex is an order 
sending facility of the Exchange distinct and separate from the 
Matching System. At the request of the Participant, orders may be 
routed from Brokerplex through the OMS to the Matching System or to 
any other Trading Center with which the Participant order sender has 
precedent access. The Exchange does not place itself between 
Brokerplex and the away Trading Center.
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    (1) Unlike the proposed CHX Routing Services, the current routing 
rules contemplate a routing functionality requiring Participants to 
enter into numerous agreements, including one with a non-affiliated 
third-party routing broker directly (``third-party routing 
broker'').\9\ In contrast, the proposed CHX Routing Services do not 
involve Participants entering into any agreements with, or submitting 
any orders directly to, the routing brokers associated with the CHX 
Routing Services, including CHXBD. As discussed in detail below, the 
proposed CHX Routing Services involve the routing of corresponding 
orders related to Routable Orders submitted to the Matching System, 
from the Matching System, through CHXBD, to a third-party routing 
broker. This third-party routing broker would then submit the order to 
a routing destination for execution directly, or through another non-
affiliated third-party routing broker.\10\
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    \9\ See Interpretation and Policy .03(b) of CHX Article 20, Rule 
5; see also Interpretation and Policy .03(1) of CHX Article 20, Rule 
8.
    \10\ At initial operation of the proposed CHX Routing Services, 
CHXBD will utilize one third-party routing broker to clear and 
submit trades for execution on behalf of the Exchange. The same 
third-party routing broker will maintain a CHXBD Error Account on 
behalf of CHXBD for the purpose of liquidating Error Positions, 
pursuant to proposed Article 19, Rule 2(a)(7). The same third-party 
routing broker will also liquidate such positions, pursuant to 
proposed Article 19, Rule 2(a)(8)(D). The proposed rules do not 
prohibit the Exchange from utilizing two or more third-party routing 
brokers in connection with the proposed CHX Routing Services.
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    (2) Unlike the proposed CHX Routing Services, the current routing 
rules only contemplate the routing of orders directly away from the 
Matching System where such orders would execute in violation of Rule 
611 of Regulation NMS and/or display in violation of Rule 610(d) of 
Regulation NMS.\11\ In contrast, the proposed CHX Routing Services 
include additional Routing Events that would also result in routing of 
Routable Orders away from the Matching System.
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    \11\ See Interpretation and Policy .03 of CHX Article 20, Rule 
5.
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    (3) Unlike the proposed CHX Routing Services, the current routing 
rules contemplate routing of orders that are rejected from the Matching 
System.\12\ In contrast, the proposed CHX Routing Services only involve 
routing of Routable Orders from the Matching System and Routable Orders 
that have been rejected from the Matching System are not eligible for 
the proposed CHX Routing Services.
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    \12\ See CHX Article 20, Rule 8(h); see also Interpretation and 
Policy .03 of CHX Article 20, Rule 8.
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    Given these fundamental differences between the current routing 
rules and the proposed CHX Routing Services, the Exchange now proposes 
to delete current Interpretation and Policy .03 of Article 20, Rule 5; 
Article 20, Rule 8(h); and Interpretation and Policy .03 of Article 20, 
Rule 8. In lieu of these current rules, the Exchange proposes to adopt 
or amend the following rules.
Proposed Article 19 (Operation of the CHX Routing Services)
    The Exchange proposes to list all rules concerning the ``Operation 
of the CHX Routing Services'' under Article 19, which is currently 
reserved. Thereunder, the Exchange proposes to adopt Rule 1 (CHX 
Routing Services), Rule 2 (Routing Brokers), and Rule 3 (Routing 
Events).
Proposed Article 19, Rule 1 (CHX Routing Services)
    Proposed Rule 1 (CHX Routing Services) provides a general overview 
of the scope of the proposed CHX Routing Services. Specifically, 
proposed Rule 1(a) states as follows:
    (a) Generally. Routable Orders that have been submitted to, and 
accepted by, the Matching System may be routed from the Matching System 
to other Trading Centers pursuant to this Article 19 and in a manner 
that is compliant with other Exchange rules and all securities laws and 
regulations, including, but not limited to, Regulation NMS and 
Regulation SHO; provided that the Exchange's routing-related systems 
and facilities are enabled and operational.
    Pursuant to proposed Article 1, Rule 2(oo),\13\ a ``Routable 
Order'' is an incoming limit order of any size, regardless of the 
attached order display modifier (i.e., fully-displayable if no display 
modifier is attached, Reserve Size or Do Not Display); provided that 
such an order is not attached with at least one order modifier listed 
under Article 1, Rule 2 that explicitly or implicitly precludes 
routing.\14\ Once a Routable Order comes to rest on the CHX book, it is 
no longer considered a Routable Order as the proposed CHX Routing 
Services will never route away resting orders. Moreover, the proposed 
CHX Routing Services involve the routing of Routable Orders from the 
Matching System. Routable Orders that have not been accepted by the 
Matching System (i.e., rejected or never submitted) or have been 
accepted by the Matching System, but cancelled back to the Participant 
order sender, are not eligible for the proposed CHX Routing 
Services.\15\ Thus, the proposed CHX

[[Page 57605]]

Routing Services can be distinguished from the current routing of 
orders directly from Brokerplex, pursuant to current Article 17, Rule 
5(e).\16\
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    \13\ See supra note 4.
    \14\ If any one of the following order modifiers are attached to 
a limit order, the order shall not be eligible for routing: ``BBO 
ISO,'' as defined under paragraph (b)(1)(A); ``CHX Only,'' as 
defined under paragraph (b)(1)(C); ``Post Only,'' as defined under 
paragraph (b)(1)(D); ``Price Penetrating ISO,'' as defined under 
paragraph (b)(1)(E); ``Do Not Route,'' as defined under paragraph 
(b)(3)(A); ``ISO,'' as defined under paragraph (b)(3)(B); ``Sell 
Short,'' as defined under paragraph (b)(3)(D), if the short sale 
price test restriction of Rule 201 under Regulation SHO is in effect 
for the relevant security and the order is not marked ``Short 
Exempt,'' as defined under paragraph (b)(3)(E); ``Fill Or Kill,'' as 
defined under paragraph (d)(2); and ``Immediate Or Cancel,'' as 
defined under paragraph (d)(4). Cross and Market orders are not 
routable as they are always treated by the Matching System as 
Immediate Or Cancel. See CHX Article 1, Rules 2(a)(2) and (3). All 
Routable Orders shall be marked for Regular Way Settlement, as only 
Cross orders can be for Non-Regular Way Settlement. See CHX Article 
1, Rule 2(e)(1).
    \15\ An order ``rejected'' by the Matching System is different 
than order ``cancelled'' by the Matching System. While both an order 
rejection and cancellation would result in the order being sent back 
to the Participant who submitted the order, generally speaking, an 
order is ``rejected'' by the Matching System if the order could not 
be accepted by the Matching System and ``cancelled'' by the Matching 
System only after it had been accepted by the Matching System.
    \16\ See supra note 8.
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    Proposed Rule 1(b) states as follows:
    (b) Limitation of liability. Use of the CHX Routing Services is 
optional and subject to the Exchange's limitation of liability, 
pursuant to Article 3, Rule 19.
    The purpose of this language is to make clear that the Exchange's 
absolute limitation of liability applies to the use of the proposed CHX 
Routing Services. Consequently, the Exchange will not provide any 
compensation to Participants for any alleged losses incurred due to use 
of the proposed CHX Routing Services.
    Proposed Rule 1(c) states as follows:
    (c) Firm orders. Routable Orders submitted to the Matching System 
are firm orders, pursuant to Article 20, Rule 3, and Participants that 
submit Routable Orders agree to be bound by all resulting executions, 
including the execution of routed orders at other Trading Centers. 
Routed orders received by another Trading Center shall be subject to 
the rules and procedures of that Trading Center.
    This language expands the firm order rule of current Article 20, 
Rule 3 (Firm Orders) to include all orders, regardless of whether the 
order is executed within the Matching System or at another Trading 
Center.\17\ It also clarifies that routed orders received by another 
Trading Center are subject to the rules of the away Trading Center, 
which means, inter alia, that CHX rules concerning order handling do 
not apply to routed orders while they are away from the Exchange and 
its facilities.
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    \17\ CHX Article 20, Rule 3 applies specifically to ``executions 
within the Matching System.''
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Proposed Article 19, Rule 2 (Routing Brokers)
    Proposed Rule 2 (Routing Brokers) details rules concerning routing 
brokers connected with the proposed CHX Routing Services. Currently, 
CHXBD is the only broker-dealer affiliated with the Exchange. As such, 
proposed paragraph (a) details operational and governance rules 
concerning CHXBD, which begins as follows:
    (a) CHXBD, LLC as Outbound Router. The Exchange shall provide the 
CHX Routing Services through CHXBD, LLC (``CHXBD''), which is an 
affiliated broker that operates as a facility of the Exchange. CHXBD 
shall utilize one or more non-affiliated third-party brokers-dealers 
(``third-party routing brokers'' and together with CHXBD ``routing 
brokers'') in connection with the CHX Routing Services to route orders 
to away Trading Centers. CHXBD shall only accept routing-related 
instructions from the Exchange to route orders to away Trading Centers 
and shall not accept routing instructions from Participants or other 
non-Participants directly. Thus, the Exchange will determine the logic 
that provides, when, how, and where orders are routed away. Routing 
brokers cannot change the terms of an order or the routing 
instructions, nor do the routing brokers have any discretion about 
where to route an order. The Exchange shall report and allocate 
executions or report cancellations of routed orders at the away Trading 
Centers to the Participants that submitted the Routable Orders and to 
Qualified Clearing Agencies. Neither the Exchange nor CHXBD shall have 
responsibility for the handling of the routed order by the away Trading 
Center.
    At initial operation, CHXBD will operate as an ``introducing 
broker-dealer,'' which means that CHXBD shall not be permitted to hold 
customer funds nor execute or clear trades.\18\ Instead, the clearing 
functions of the proposed CHX Routing Services will be handled by a 
third-party routing broker, which will, pursuant to specific agreements 
entered into between each third-party routing broker and CHXBD (e.g., 
carrying agreement pursuant to FINRA Rule 4311), carry a customer 
account, submit orders, and clear trades.\19\ CHXBD shall not engage in 
any proprietary trading, except that a third-party routing broker shall 
liquidate Error Positions in the CHXBD Error Account, pursuant to 
proposed Article 19, Rule 2(a)(7), as discussed below.\20\
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    \18\ See FINRA Rule 7310(d).
    \19\ See supra note 10.
    \20\ Id.
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    As an introducing broker-dealer, the Exchange submits that CHXBD 
does not have market access obligations, pursuant to Rule 15c3-5 under 
the Act \21\ nor does it have reporting obligations pursuant to Rule 
606 of Regulation NMS. Specifically, since CHXBD does not directly 
submit orders to any exchange or alternative trading system (``ATS'') 
for execution and does not operate an ATS, it does not have ``market 
access'' as defined by Rule 15c3-5(a)(1) under the Act.\22\ Instead, 
market access obligations will be handled ``upstream'' by Participants 
that submit orders to the Matching System and ``downstream'' by third-
party broker dealers that submit orders on behalf of the Exchange to 
routing destinations. Moreover, since CHXBD will not have discretion as 
to where a corresponding routing order is to be routed, the Exchange 
believes that CHXBD has no reporting obligations pursuant to Rule 606 
of Regulation NMS.
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    \21\ 17 CFR 240.15c3-5.
    \22\ 17 CFR 240.15c3-5(a)(1).
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    Mechanically, when the Exchange accepts a Routable Order in the 
Matching System and a Routing Event, as described under proposed 
Article 19, Rule 3, is triggered, the Exchange will provide CHXBD with 
one or more ``corresponding routing orders'' and instructions to route 
the order(s) consistent with the applicable Routing Event. As discussed 
below, the routed portion of the Routable Order will enter a 
``pending'' state in the Exchange's systems until an execution or 
cancellation confirmation is received from the away routing destination 
(``pending routed portion''). CHXBD will then route the corresponding 
routing order(s) and instructions to a third-party routing broker, who 
will then route the order(s) to the ultimate routing destination(s) for 
execution.
    In the normal course, executions will be reported backwards through 
the routing chain, ultimately to the Participant order sender by the 
Exchange.\23\ In the case of cancellations of routed orders at away 
routing destinations (``unexecuted remainders'') such unexecuted 
remainders would be reported backwards through the routing chain to the 
Exchange by CHXBD. Unexecuted remainders will only be cancelled back to 
the Participant order sender if a cancel message is awaiting the 
unexecuted remainder upon its return to the Matching System.
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    \23\ As discussed below, these execution and cancellation 
confirmations will be utilized by the Exchange's routing systems to 
determine how to treat pending routed portions awaiting away 
execution(s).
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    In contrast, clearing submissions for routed orders executed at 
away Trading Centers (``street-side trade'') will be submitted for 
clearance and settlement in the name of the third-party routing broker 
on behalf of the Exchange and the Exchange will, in turn, execute 
corresponding non-tape clearing-only trade(s) with the Participant 
order sender. As such, the sequence of non-tape clearing only trades 
connecting the street-side trade with the Participant order sender will 
never involve CHXBD. Thus, the Exchange, not CHXBD, will arrange for 
any resulting securities positions to be delivered to the Participant 
order sender that submitted the Routable Order to the Matching System. 
Mechanically, upon receipt of an execution confirmation for a routed

[[Page 57606]]

order, the Exchange's systems will (1) automatically pair the execution 
with the pending routed portion of the Participant order sender's 
Routable Order that is resting on the Matching System and (2) report 
that trade to a Qualified Clearing Agency for clearance and settlement 
purposes by submitting a non-tape, clearing only report. In sum, 
positions would be delivered from the ``street'' to the Exchange and 
the Exchange would, in turn, deliver the positions to Participant order 
senders.
    Proposed Rule 2(a) further provides that for so long as CHXBD is 
affiliated with the Exchange and is providing outbound routing from the 
Exchange to away Trading Centers, proposed paragraphs (a)(1) to (a)(7) 
shall apply. Much of the proposed language is virtually identical to 
the rules of other exchanges, such as NYSE, BATS Y-Exchange (``BYX''), 
and Nasdaq.\24\ Proposed paragraphs (a)(1)-(a)(6) state as follows:
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    \24\ See NYSE Rule 17; see also BYX Rule 2.11; see also Nasdaq 
Rule 4758(b).
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    (1) The Exchange will regulate CHXBD as a facility (as defined in 
Section 3(a)(2) of the Act), subject to Section 6 of the Act.\25\ In 
particular, and without limitation, under the Act, the Exchange will be 
responsible for filing with the Commission rule changes and fees 
relating to CHXBD and CHXBD will be subject to the Exchange's non-
discrimination requirements.
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    \25\ See 15 U.S.C. 78c(a)(2); see also 15 U.S.C. 78f.
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    (2) FINRA, a self-regulatory organization unaffiliated with the 
Exchange or any of its affiliates, will carry out oversight and 
enforcement responsibilities as the designated examining authority 
designated by the Commission pursuant to Rule 17d-1 of the Act \26\ 
with the responsibility for examining CHXBD for compliance with 
applicable financial responsibility rules.
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    \26\ 17 CFR 240.17d-1.
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    (3) Participants' use of CHXBD to route orders to away Trading 
Centers will be optional. Participants that do not desire to use CHXBD 
must designate orders entered into the Matching System as ``Do Not 
Route'' or any other order modifier available through the Exchange that 
is ineligible for routing. Any Participant that does not want to use 
CHXBD may use other routers to route orders to away Trading Centers.
    (4) CHXBD will not engage in any business other than (A) its 
outbound router function for the Exchange, (B) its usage of CHXBD Error 
Accounts in compliance with paragraph (b)(7) below, and (C) any other 
activities it may engage in as approved by the Commission.
    (5) The Exchange shall establish and maintain procedures and 
internal controls reasonably designed to adequately restrict the flow 
of confidential and proprietary information between the Exchange and 
its facilities (including CHXBD as its routing facility) and any other 
entity; or, where there is a third-party routing broker, the Exchange, 
the routing facility and any third-party routing broker, and any other 
entity, including any affiliate of the third-party routing broker (and 
if the third-party routing broker or any of its affiliates engages in 
any other business activities other than providing the routing services 
to the Exchange, between the segment of the third-party routing broker 
or affiliate that provides the other business activities and the 
segment of the third-party routing broker that provides the routing 
services).
    (6) The books, records, premises, officers, agents, directors and 
employees of CHXBD as a facility of the Exchange shall be deemed to be 
the books, records, premises, officers, agents, directors and employees 
of the Exchange for the purposes of, and subject to oversight pursuant 
to, the Act. The books and records of CHXBD as a facility of the 
Exchange shall be subject at all times to inspection and copying by the 
Exchange and the Commission. Nothing in these Rules shall preclude 
officers, agents, directors or employees of the Exchange from also 
serving as officers, agents, directors and employees of CHXBD.
    With respect to proposed paragraph (a)(3), by submitting a Routable 
Order to the Matching System, a Participant is electing to utilize the 
proposed CHX Routing Services. If a Participant does not wish for an 
order to be routed, the order submitted to the Matching System must not 
be a Routable Order, which is achieved by attaching any order modifier 
to the order that is ineligible for routing, including, but not limited 
to, Do Not Route.\27\ Thus, the CHX Routing Services is optional in 
that a Participant may elect not to submit a Routable Order to the 
Matching System. Once a Routable Order is submitted to the Matching 
System, however, the CHX Routing Services would be the only option 
through which an order could be routed away directly from the Matching 
System, without an intervening order cancellation.\28\ If a Participant 
wishes to utilize another routing option after submitting a Routable 
Order to the Matching System, the Participant would have to cancel the 
original order.
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    \27\ See supra note 14.
    \28\ See infra note 71.
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    With respect to proposed paragraph (a)(5), prior to becoming 
operational, CHXBD will adopt policies and procedures related to the 
handling of confidential and proprietary information, as required by 
proposed paragraph (a)(5).
    Proposed paragraph (a)(7) details rules concerning Error Position 
and, specifically, how Error Positions would be handled by the Exchange 
and/or CHXBD. Proposed paragraph (a)(7) begins as follows:
    (7) CHXBD shall maintain a CHXBD Error Account for the purpose of 
liquidating unpaired trade positions that are the result of an 
execution or executions that are not clearly erroneous under Article 
20, Rule 10 \29\ and result from a technical or systems issue at CHXBD, 
the Exchange, a routing destination, or non-affiliated third-party 
broker-dealers. (``Error Positions'').\30\
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    \29\ As defined under Article 20, Rule 10, a transaction 
executed on the Exchange is ``clearly erroneous'' where there is an 
obvious error in any term, such as price, number of shares or unit 
of trading, or identification of the security.
    \30\ See supra note 10.
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    The proposed definition of ``Error Positions'' excludes clearly 
erroneous transactions because clearly erroneous trades should be 
cancelled pursuant to the clearly erroneous rules of the executing 
exchange.
    Proposed subparagraph (A) states as follows:
    (A) CHXBD shall not accept any positions in a CHXBD Error Account 
from an account of a Participant or permit any Participant to transfer 
any positions from its account to a CHXBD Error Account; provided, 
however, that CHXBD may accept into its CHXBD Error Account positions 
erroneously allocated to Participants to the extent that the 
alternatives listed under subparagraph (C) below have been exhausted or 
are impracticable.
    Proposed subparagraph (A) provides a narrow exception from the 
general prohibition against CHXBD accepting positions from 
Participants. Specifically, the exception is narrowly tailored to the 
improbable scenario where a systems or technical issue at the Exchange 
would result in a position being erroneously allocated to a Participant 
(e.g., an erroneous pairing of an execution confirmation with a pending 
Routable Order). In such a situation, the erroneously allocated 
position would have been an Error Position, but for the erroneous 
allocation. The proposed exception would only apply to Error Positions 
that could not otherwise be addressed

[[Page 57607]]

pursuant to proposed subparagraph (C), as discussed below. Given that 
the Exchange does not provide Participants with the ability to file 
claims for alleged losses, the Exchange submits that this narrow 
exception is necessary and appropriate.\31\
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    \31\ Compare BYX Rule 11.16. In support of its absolute 
prohibition on accepting error positions from its Members, BATS Y-
Exchange stated the following: To the extent a Member receives 
locked-in positions in connection with a technical or systems issue, 
that Member may seek to rely on BYX Rule 11.16 if it experiences a 
loss. That rule provides Members with the ability to file claims 
against the Exchange for ``losses resulting directly from the 
malfunction of the Exchange's physical equipment, devices, and/or 
programming or the negligent acts or omissions of its employees.'' 
See Exchange Act Release No. 69226 (June 12, 2013), 78 FR 36612 
(June 18, 2013) (SR-BYX-2013-018) (``Notice'').
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    Proposed subparagraph (B) states as follows:
    (B) If a technical or systems issue on the Exchange or CHXBD 
results in the Exchange not having valid clearing instructions for a 
Participant to a trade, the Exchange may assume that Participant's side 
of the trade so that the trade can be automatically processed for 
clearance and settlement on a locked-in basis.
    This proposed language permits the Exchange to take a Participant's 
side to an away execution where a systems or technical issue at the 
Exchange or CHXBD results in the Exchange not having valid clearing 
instructions for the Participant to the trade.\32\ Assuming that the 
execution at the away Trading Center is valid, the Exchange would be 
obligated to settle that execution. The resulting position would then 
be liquidated pursuant to proposed subparagraph (D).\33\
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    \32\ As discussed above, CHXBD will operate as a facility of the 
Exchange. Accordingly, pursuant to proposed CHX Article 19, Rule 
2(a)(1), the Exchange is responsible for filing with the Commission 
rule changes and fees relating to the functions of CHXBD. In 
addition, the Exchange is using the phrase ``the Exchange or CHXBD'' 
in this rule filing to reflect the fact that a decision to take 
action with respect to orders affected by a technical or systems 
issue may be made in the capacity of CHXBD or the Exchange depending 
on the circumstances of the issue. At initial operation, the 
Exchange will use one or more non-affiliate third-party broker-
dealers to provide outbound routing services (i.e., third-party 
routing brokers). Mechanically, orders will be submitted to the 
third-party routing broker through CHXBD, which will act as an 
introducing broker-dealer. The third-party routing broker will then 
route the orders to the routing destination in its name, and any 
executions will be submitted for clearance and settlement in the 
name of the third-party routing broker on behalf of the Exchange, so 
that any resulting positions are delivered to the Exchange upon 
settlement. As described above, the Exchange would then normally 
arrange for any resulting securities positions to be delivered to 
the Participant that submitted the Routable Order to the Exchange. 
If Error Positions (as defined in proposed CHX Article 19, Rule 
2(a)(7)) result in connection with the Exchange's use of a third-
party routing broker for outbound routing, and those positions are 
delivered to the Exchange through the clearance and settlement 
process, the Exchange or CHXBD would be permitted to resolve those 
positions in accordance with proposed CHX Article 19, Rule 2(a)(7). 
If the third-party routing broker received Error Positions in 
connection with its role as a routing broker for the Exchange, and 
the Error Positions were not delivered to the Exchange through the 
clearance and settlement process, then the third-party Routing 
Broker would resolve the Error Positions itself and CHXBD would not 
be permitted to accept the Error Positions, as set forth in proposed 
CHX Article 19, Rule 2(a)(7)(A).
    \33\ See infra Example 6.
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    Proposed subparagraph (C) states as follows:
    (C) In connection with a particular technical or systems issue and 
prior to accepting any resulting Error Positions into the CHXBD Error 
Account, the Exchange or CHXBD shall, if practicable, -1- assign such 
Error Positions to Participants in accordance with subparagraph (C)(i) 
below; -2- cause to have any erroneous executions cancelled on the 
Trading Centers on which they were executed; or -3- allocate Error 
Positions to third-party routing brokers, if the technical or systems 
issue occurred away from the Exchange and CHXBD. Error Positions that 
could not be handled in this manner shall be taken into the CHXBD Error 
Account and liquidated in accordance with subparagraph (D). 
Determinations on how to treat Error Positions shall be made in a 
nondiscriminatory manner.\34\
---------------------------------------------------------------------------

    \34\ Prior to becoming operational, CHXBD will adopt policies 
and procedures designed to ensure that any determinations 
considering how to treat Error Positions will be done in a manner 
nondiscriminatory to our Participants.
---------------------------------------------------------------------------

    (i) The Exchange or CHXBD shall assign all Error Positions 
resulting from a particular technical or systems issue to the 
Participants affected by that technical or systems issue if the 
Exchange or CHXBD:
    (1) Determines that it has accurate and sufficient information 
(including valid clearing information) to assign the positions to all 
of the Participants affected by that technical or systems issue;
    (2) Determines that it has sufficient time pursuant to normal 
clearance and settlement deadlines to evaluate the information 
necessary to assign the positions to all of the Participants affected 
by that technical or systems issue; and
    (3) Has not determined to cancel all orders affected by that 
technical or systems issue in accordance with Article 20, Rule 12.
    Although the CHXBD Error Account may be utilized to liquidate any 
Error Positions, regardless of where the systems or technical issue 
occurred, proposed subparagraph (C) requires three alternatives be 
pursued, if practicable, prior to accepting a Error Position into the 
CHXBD Error Account.\35\
---------------------------------------------------------------------------

    \35\ While the alternatives detailed under proposed subparagraph 
(C) are being considered, Error Positions will not be transferred 
into the CHXBD Error Account. See supra note 10.
---------------------------------------------------------------------------

    With respect to the allocation of unpaired positions pursuant to 
proposed subparagraph (C)(i), a technical or systems issue of limited 
scope or duration may occur at a routing destination and the resulting 
trades may be submitted for clearance and settlement by such routing 
destinations to a Qualified Clearing Agency. If there were a small 
number of trades, there may be sufficient time to match positions with 
Participant orders and avoid using the CHXBD Error Account. There may 
be scenarios, however, where the Exchange or CHXBD determines that it 
is unable to assign all Error Positions resulting from a particular 
technical or systems issue to all of the affected Participants, or 
determines to cancel all affected routed orders, pursuant to proposed 
Article 20, Rule 12. For example, in some cases, the volume of 
questionable executions and positions resulting from a technical or 
systems issues might be such that the research necessary to determine 
which Participants to assign those executions could be expected to 
extend past the normal settlement cycle for such executions. 
Furthermore, if a routing destination experiences a technical or 
systems issue after CHXBD has transmitted IOC orders to it that prevent 
CHXBD from receiving responses to those orders, the Exchange or CHXBD 
may cancel/release all Routable Orders affected by the issue, pursuant 
to proposed Article 20, Rule 12(b), as discussed below. In such a 
situation, the Exchange or CHXBD would not pass on to the Participants 
any executions on the routed orders subsequently received from the 
routing destination. Thus, where Error Positions could not be assigned 
to Participants, the Exchange would seek to either cancel the related 
executions \36\ or have the third-party routing broker accept the 
positions, prior to accepting Error Positions into the CHXBD Error 
Account.
---------------------------------------------------------------------------

    \36\ Cancellations of executions that comprise an Error Position 
would be effected pursuant to the rules of the executing venue.
---------------------------------------------------------------------------

    Pursuant to agreement between CHXBD and third-party routing 
brokers, third-party routing brokers would typically be required to 
accept Error Positions where the positions result from systems or 
technical issues away

[[Page 57608]]

from the Exchange and CHXBD.\37\ If an Error Position gets erroneously 
allocated to the Exchange's customer account, the Exchange would 
require the third-party routing broker to take back the Error Position. 
Thus, ideally, the CHXBD Error Account would only be used (1) to 
liquidate Error Positions resulting from systems or technical issues at 
the Exchange/CHXBD or (2) where a third-party routing broker is unable 
to utilize its own error account to liquidate Error Positions resulting 
from systems or technical issues away from the Exchange and CHXBD. 
However, the Exchange recognizes that some Error Positions resulting 
from systems or technical issues away from the Exchange/CHXBD may not 
be taken by a third-party routing broker or may not be cancelled by the 
executing routing destination and, as such, it is important that CHXBD 
retain the discretion to take any Error Positions into the CHXBD Error 
Account.\38\
---------------------------------------------------------------------------

    \37\ The Exchange believes it is reasonable and appropriate to 
require such Error Positions to be addressed through the error 
account of a third-party routing broker because, among other 
reasons, it is the executing broker associated with these 
transactions.
    \38\ To the extent that CHXBD incurred a loss in covering its 
positions, short or long, and to the extent that the Error Position 
resulted from a systems or technical issue at a third-party routing 
broker or routing destination, it would submit a reimbursement claim 
to the third-party routing broker or routing destination, as 
applicable.
---------------------------------------------------------------------------

    If an Error Position is taken into the CHXBD Error Account, 
proposed subparagraph (D) details how such Error Positions would be 
liquidated, which states as follows:
    (D) If the Exchange or CHXBD is unable to address Error Positions 
in accordance with subparagraph (C) above or if the Exchange or CHXBD 
determines to cancel all orders affected by the technical or systems 
issue in accordance with Article 20, Rule 12, then such Error Positions 
shall be taken into the CHXBD Error Account and CHXBD shall cause to 
have such positions liquidated as soon as practicable. In liquidating 
such Error Positions, the Exchange or CHXBD shall:
    (i) Provide complete time and price discretion for the trading to 
liquidate the Error Positions to a non-affiliated third-party broker-
dealer and shall not attempt to exercise any influence or control over 
the timing or methods of such trading; provided, however, that CHXBD 
may provide a general instruction to the non-affiliated third-party 
broker-dealer that the Error Positions should be liquidated in a timely 
manner using commercially reasonable efforts in accordance with custom 
and practice within the securities industry while minimizing market 
fluctuation to the extent possible; and
    (ii) Establish and enforce policies and procedures that are 
reasonably designed to restrict the flow of confidential and 
proprietary information between the non-affiliated third-party broker-
dealer and CHXBD/the Exchange associated with the liquidation of the 
Error Positions.
    Although proposed subparagraph (D)(i) provides full price/time 
discretion to a third-party broker-dealer, the Exchange submits that it 
should be permitted to provide a general instruction to the third-party 
broker-dealer to effectuate the liquidation of the position in a timely 
manner with minimum market fluctuation, in order to improve the 
likelihood that the liquidation be effected in market conditions 
similar to when the Error Position was obtained, so as to minimize the 
potential for loss to the Exchange.
    Proposed subparagraph (E) states as follows:
    (E) The Exchange and CHXBD shall make and keep records to document 
all determinations to treat positions as Error Positions and all 
determinations for the liquidation of Error Positions through the non-
affiliated third-party broker-dealer, as well as records associated 
with the liquidation of Error Positions through the non-affiliated 
third-party broker-dealer.
    Incidentally, proposed Article 20, Rule 12 (Order Cancellation by 
the Exchange) provides the Exchange and CHXBD with the authority to 
cancel orders, including cancelling and/or releasing orders subject to 
the proposed CHX Routing Services, which states as follows:
    (a) The Exchange or CHXBD may cancel orders as it deems to be 
necessary to maintain fair and orderly markets if a technical or 
systems issue occurs at the Exchange, CHXBD, a non-affiliated third 
party broker in connection with the CHX Routing Services provided under 
Article 19, or another Trading Center to which an order has been 
routed. The Exchange or CHXBD shall provide notice of the cancellation 
to affected Participants as soon as practicable.
    (b) The Exchange may release orders being held on the Exchange 
awaiting another Trading Center execution as it deems necessary to 
maintain fair and orderly markets if a technical or systems issue 
occurs at the Exchange, CHXBD, a non-affiliated third-party broker, or 
another Trading Center to which an order has been routed.
    The proposed rule gives the Exchange authority to cancel orders as 
necessary to maintain fair and orderly markets in all situations, not 
only in connection with the proposed CHX Routing Services.\39\ In the 
context of the proposed CHX Routing Services, proposed paragraph (a) 
permits the Exchange to cancel the unrouted portion of a Routable Order 
posted to the CHX book, whereas proposed paragraph (b) provides the 
Exchange with the authority to release the pending routed portion of a 
Routable Order that is pending on the Exchange's systems (i.e., the 
portion represented by the corresponding order that has been routed 
away). If the Exchange releases a routed order, the Participant order 
sender would be given an ``out'' and any resulting executions would be 
treated as Error Positions.
---------------------------------------------------------------------------

    \39\ Such a situation may not cause the Exchange to declare 
self-help against the routing destination pursuant to Rule 611 of 
Regulation NMS. If the Exchange or CHXBD determines to cancel orders 
routed to a routing destination under proposed Article 20, Rule 
12(a), but does not declare self-help against that routing 
destination, the Exchange would continue to be subject to the trade-
through requirements in Rule 611 with respect to that routing 
destination.
---------------------------------------------------------------------------

    Incidentally, the Exchange also proposes to amend current Article 
20, Rule 8(f) to clarify how cancel messages are currently handled for 
orders resting on the CHX book and how they would be handled in 
connection with routed orders. The amended Article 20, Rule 8(f) 
provides as follows:
    (f) Cancellation of orders. Order cancellation messages submitted 
by Participants shall be handled as follows:
    (1) Orders resting on the CHX book shall be immediately and 
automatically cancelled upon receipt of a cancellation message; 
provided, however, that cross orders (other than opening cross orders) 
cannot be cancelled or changed because they are always handled IOC; 
\40\ and
---------------------------------------------------------------------------

    \40\ The Exchange proposes replace current language describing 
the Immediate Or Cancel order modifier with a reference to the 
modifier itself. See CHX Article 1, Rule 2(d)(4).
---------------------------------------------------------------------------

    (2) Cancel messages for routed orders shall be held by the Exchange 
while the routed order is away and only the unexecuted routed portion 
of a routed order shall be cancelled upon its return to the Matching 
System; provided, however, that the Exchange may release the pending 
routed portion of a Routable Order pursuant to Article 20, Rule 12.
    Notably, the Exchange proposes to replace current language 
describing the Immediate Or Cancel order modifier with a reference to 
the modifier itself.\41\ Also, given that cancel messages from

[[Page 57609]]

Participant order senders for routed orders will not be forwarded on to 
the routing destination because all routed orders shall be marked 
IOC,\42\ routed orders shall only be cancelled at the request of 
Participants to the extent that an unexecuted remainder is returned to 
the Matching System.
---------------------------------------------------------------------------

    \41\ See CHX Article 1, Rule 2(d)(4).
    \42\ Pursuant to proposed Article 19, Rule 3(b), all routed 
orders shall be marked IOC. Thus, routed orders shall not be 
permitted to rest at away routing destinations.
---------------------------------------------------------------------------

    The following Examples 1 and 2 illustrate when and how the Exchange 
would seek to cancel orders in the context of the proposed CHX Routing 
Services: \43\
---------------------------------------------------------------------------

    \43\ The examples are not an exhaustive list of scenarios.
---------------------------------------------------------------------------

    Example 1. If CHXBD, a third-party routing broker, or a routing 
destination experiences a technical or systems issue that results in 
CHXBD not receiving responses to IOC orders that it routed away, the 
Exchange may release the routed portion of the Routable Order pending 
on the Exchange's systems, pursuant to proposed Article 20, Rule 12(b).
    Example 2. If the Exchange experiences a systems issue, the 
Exchange may take steps to cancel all outstanding orders resting on the 
CHX book affected by that issue, including the unrouted portion of 
Routable Orders posted to the CHX book, and notify affected 
Participants of the cancellations. In addition, the Exchange may also 
seek to release any pending routed portions awaiting away 
confirmations.
    The following Examples 3-6 illustrate how certain Error Positions 
may result and be resolved:
    Example 3. An Error Position may result from an order processing 
issue at a routing destination. For instance, if a routing destination 
experienced a systems problem that affects its order processing, it may 
transmit back a message purporting to cancel a routed order, but then 
subsequently submit an execution of that same order to The Depository 
Trust & Clearing Company (``DTCC'') for clearance and settlement.
    In such a situation, the Exchange would not then allocate the 
execution to the Participant because of the earlier cancellation 
message from the routing destination. Instead, CHXBD would first cause 
to have such executions cancelled pursuant to the rules of the 
executing venue or allocate the position to a third-party routing 
broker, if practicable. If the executions could not be cancelled or 
allocated, CHXBD would post those positions into its CHXBD Error 
Account and have the positions liquidated pursuant to proposed Article 
19, Rule 2(a)(7)(D).
    Example 4. Error Positions may result if the Exchange receives an 
execution report from a routing destination but does not receive 
clearing instructions for the execution from the routing destination. 
For instance, assume that a Participant submits a Routable Order to buy 
100 shares of ABC stock, which causes CHXBD to send an order to a 
third-party routing broker, which in turn sends the order to a routing 
destination that is subsequently executed, cleared, and closed out by 
that routing destination, and the execution is ultimately communicated 
back to that Participant. On the next trading day (T+1), if the routing 
destination does not provide clearing instructions for that execution, 
the Exchange would still be responsible for settling that Participant's 
purchase, but would be left with a short position in the CHXBD Error 
Account.\44\
---------------------------------------------------------------------------

    \44\ To the extent that CHXBD incurred a loss in covering its 
positions, short or long, it would submit reimbursement claims to 
either the routing destination and/or third-party routing broker 
related to the routed order execution.
---------------------------------------------------------------------------

    In such a situation, the Exchange would take the opposite side of 
the Participant's purchase, but submit a claim for reimbursement from 
the third-party routing broker or routing destination or cause to have 
the routing destination submit valid clearing instructions to cover the 
Exchange's short position, if practicable.
    Example 5. Error Positions may result from a technical or systems 
issue that causes orders to be executed in the name of the Exchange or 
a third-party routing broker \45\ that are not related to any 
corresponding Routable Orders initially submitted to the Matching 
System. As a result, the Exchange would not be able to assign any 
positions resulting from such an issue to Participants.
---------------------------------------------------------------------------

    \45\ Given that CHXBD is an introducing broker-dealer, routed 
orders will never be executed in the name of CHXBD.
---------------------------------------------------------------------------

    If the technical or systems issue occurred away from the Exchange 
and CHXBD, pursuant to proposed Article 19, Rule 2(a)(7)(C), CHXBD 
would first cause to have such executions cancelled pursuant to the 
rules of the executing market or have the responsible third-party 
routing broker accept the position, if practicable. If the executions 
could not be cancelled or accepted by the responsible third-party 
routing broker or if the technical or systems issue occurred at the 
Exchange or CHXBD, CHXBD would post those positions into its CHXBD 
Error Account and have the positions liquidated pursuant to proposed 
Article 19, Rule 2(a)(7)(D).
    Example 6. Error Positions may result from a technical or systems 
issue at the Exchange through which the Exchange does not receive 
sufficient notice that a Participant that has executed trades on the 
Exchange has lost the ability to clear trades through DTCC, as well as 
where the Exchange received notice of such Participant's loss of 
ability to clear trades through DTCC, but, because of a technical or 
systems issue at the Exchange, the Exchange was unable to react to such 
notice in a timely manner.
    In such a situation, the Exchange would not have valid clearing 
information from its Participant, which would prevent the trade from 
being automatically processed for clearance and settlement on a locked-
in basis. Thus, pursuant to proposed Article 19, Rule 2(a)(7)(B), the 
Exchange would assume that Participant's side of the trades so that the 
counterparties can settle the trade. CHXBD would post those positions 
into the CHXBD Error Account and have the positions liquidated pursuant 
to proposed Article 19, Rule 2(a)(7)(D).
Proposed Article 19, Rule 3 (Routing Events)
    Proposed Rule 3 (Routing Events) outlines when and how a Routable 
Order would be routed away from the Matching System and states as 
follows:
    (a) Routing Events. A Routable Order, or a portion thereof, shall 
be routed pursuant to the CHX Routing Services in compliance with CHX 
rules and all federal securities laws, rules and regulations, including 
Regulation NMS and Regulation SHO, to the extent necessary: \46\
---------------------------------------------------------------------------

    \46\ A routed order may nevertheless execute against hidden 
liquidity priced better than the Protected Quotation.
---------------------------------------------------------------------------

    (1) To permit the display and/or execution of an incoming Routable 
Order on the Exchange in compliance with Rules 610(d) and 611 of 
Regulations NMS;
    (2) To prevent the execution of an incoming Routable Order for an 
Odd Lot if it would trade-through a Protected Quotation of an external 
market; or
    (3) To execute an incoming Routable Order marked Do Not Display or 
a Routable Order of an Odd Lot that could not be displayed (``incoming 
undisplayed Routable Order'') against any Protected Quotation(s) of 
external market(s) priced at or through the limit price of the Routable 
Order if there are no contra-side resting orders on the CHX book 
against which the incoming undisplayed Routable Order could execute.

[[Page 57610]]

    (b) Marking routed orders. Every order routed away pursuant to a 
Routing Event shall be marked IOC.
    (c) Handling unexecuted remainders. If an unexecuted remainder of a 
routed order is returned to the Matching System in one or more parts, 
each shall be handled pursuant to Article 20, Rule 8(b)(7).
    (d) Cancelling routed orders. Cancellation requests of routed 
orders from Participants shall be handled pursuant to Article 20, Rule 
8(f). The Exchange may release pending routed portions of Routable 
Orders pursuant to Article 20, Rule 12(b).
    Proposed paragraph (a)(1) permits the routing of a Routable Order 
to the extent necessary for an order to be displayed and/or executed on 
the Exchange in compliance with Rules 610(d) and Rule 611 of 
Regulations NMS (``Routing Event 1'').
    With respect to Rule 610(d) of Regulation NMS, if the display of an 
incoming Routable Order would impermissibly lock or cross the market in 
violation of Rule 610(d) of Regulation NMS, the portion of the Routable 
Order necessary to satisfy all contra-side Protected Quotations of 
external markets priced at or better than the Routable Order shall be 
routed away to execute against such Protected Quotations. Thus, if the 
Routable Order is smaller than, or the same size as, the aggregate size 
of all contra-side Protected Quotations of external markets priced at 
or better than the Routable Order, the entire Routable Order would be 
routed away. However, if the Routable Order is larger than the 
aggregate size of all contra-side Protected Quotations of external 
markets priced at or better than the Routable Order, only the portion 
of the Routable Order necessary to satisfy such Protected Quotations 
shall be routed away. The following Examples 7 and 8 illustrate how an 
order would be routed to permit a Routable Order to be displayed on the 
Exchange in compliance with Rule 610(d) of Regulation NMS:
    Example 7. Assume that the NBBO for security XYZ is $10.00 x $10.01 
where Exchange A and Exchange B are each displaying for 100 shares at 
the NBO and Exchange C is displaying a Protected Offer for 100 shares 
at $10.02. Assume there are no other Protected Offers of external 
markets in security XYZ. Assume also that the displayed CHX BBO is 
$10.00 x $10.03 and there are no offers priced better than $10.03 
resting on the CHX book. Assume then that an incoming fully-displayable 
Routable Bid for 100 shares of security XYZ priced at $10.02/share is 
received by the Matching System (``Routable Bid 1''). As such, there 
are 300 shares worth of Protected Offers of external markets priced at 
or better than Routable Bid 1.
    In this situation, the display of Routable Bid 1 at $10.02 would 
cross the Protected Offers of Exchange A and B at $10.01 and lock the 
Protected Offer of Exchange C at $10.02, in violation of Rule 610(d) of 
Regulations NMS.
    Thus, Routing Event 1 would be triggered and the 
Exchange's routing systems would create a corresponding buy order 
marked IOC for 100 shares of security XYZ,\47\ and route the 
corresponding buy order to CHXBD, with instructions for the third-party 
routing broker to route the order utilizing its smart-routing 
technology pursuant to the Exchange's routing table.\48\ The entire 
balance of Routable Bid 1 would then be placed in a pending routed 
state. CHXBD would then forward the corresponding buy order with 
instructions to the third-party routing broker and the third-party 
routing broker would then route the corresponding buy order to Exchange 
A and/or Exchange B.\49\
---------------------------------------------------------------------------

    \47\ See supra note 42.
    \48\ Where the routed order is smaller than the aggregate size 
of two or more contra-side Protected Quotations that could be 
satisfied, the Exchange will rely on the third-party routing broker 
to utilize its smart-routing technology to route the order pursuant 
to a routing table provided by the Exchange. Thus, the relevant 
snapshot of the NBBO for Regulation NMS purposes will be taken by 
the third-party routing broker and the third-party routing broker 
would route orders IOC and ISO. However, where the routed order is 
smaller than the size of one Protected Quotation that could be 
satisfied or is the same size as the aggregate size of one or more 
contra-side Protected Quotations that could be satisfied, the 
Exchange will direct the third-party routing broker to route orders 
to specific routing destinations. Thus, the relevant snapshot of the 
NBBO will be taken by the Exchange and the Exchange would mark the 
directed orders IOC and ISO.
    \49\ Given the frequency at which the bids and offers change in 
the national market system, it is possible that a Protected 
Quotation identified by the Exchange as having to be satisfied 
pursuant to Regulation NMS may no longer be displayed when the 
third-party routing-broker receives the corresponding routing order. 
Nevertheless, the third-party routing broker will route the order as 
received from CHXBD utilizing its smart-routing technology and 
pursuant to the Exchange's routing table.
---------------------------------------------------------------------------

    Any unexecuted remainders returned to the Matching System would be 
handled pursuant to proposed Article 20, Rule 8(b)(7), as discussed 
below.
    Example 8. Assume the same as Example 7, except that Routable Bid 1 
is for 500 shares of security XYZ.
    In this situation, similar to Example 7, the display of Routable 
Bid 1 at $10.02 would cross the Protected Offers of Exchange A and B at 
$10.01 and lock the Protected Offer of Exchange C at $10.02, all in 
violation of Rule 610(d) of Regulations NMS.
    As such, Routing Event 1 would be triggered and since 
Routable Bid 1 for 500 shares is larger than the aggregate size of all 
Protected Offers of external markets priced at or better than Routable 
Bid 1 (i.e., 300 shares total), the Exchange's routing systems would 
create three corresponding buy orders marked IOC and ISO with 
instructions to route one buy order for 100 shares priced at $10.01/
share to Exchange A, one buy order for 100 shares priced at $10.01/
share to Exchange B and one buy order for 100 shares priced at $10.02/
share to Exchange C.\50\ The routed portion would then enter a pending 
routed state on the Exchange's system and the remaining 200 shares 
would immediately be displayed on the CHX book at $10.02. This ``ship 
and post'' would permit the unrouted portion to be displayed in 
compliance with Rule 610(d) of Regulations NMS.
---------------------------------------------------------------------------

    \50\ See supra note 48.
---------------------------------------------------------------------------

    Any unexecuted remainders returned to the Matching System would be 
handled pursuant to proposed Article 20, Rule 8(b)(7), as discussed 
below.
    With respect to Rule 611 of Regulation NMS, if the execution of an 
incoming Routable Order against a resting order on the CHX book would 
result in an impermissible trade-through of a Protected Quotation of an 
external market in violation of Rule 611 of Regulation NMS, the portion 
of the Routable Order necessary to prevent an improper trade-through 
shall be routed away to execute against such Protected Quotations of 
external markets. Thus, if the Routable Order is smaller than, or the 
same size as, the aggregate size of all contra-side Protected 
Quotations of external markets priced better than the Routable Order, 
the entire Routable Order would be routed away. However, if the 
Routable Order is larger than the aggregate size of all contra-side 
Protected Quotations of external markets priced better than the 
Routable Order, only the portion of the Routable Order necessary to 
satisfy such Protected Quotations shall be routed away. The following 
Examples 9 and 10 illustrate how an order would be routed to permit a 
Routable Order to execute within the Matching System in compliance with 
Rule 611 of Regulation NMS:
    Example 9. Assume that the NBBO for security XYZ is $10.00 x $10.01 
where Exchange A and Exchange B are each displaying 100 shares at 
$10.01 and Exchange C is displaying a Protected Offer for 100 shares at 
$10.02. Assume there are no other Protected Offers of

[[Page 57611]]

external markets in security XYZ. Assume then that the CHX BBO is 
$10.00 x $10.03, with 100 shares displaying at the $10.03 and there are 
no offers priced better than $10.03 resting on the CHX book. Assume 
then that an incoming fully-displayable Routable Bid for 100 shares of 
security XYZ priced at $10.03/share is received by the Matching System 
(``Routable Bid 1''). As such, there are 300 shares worth of Protected 
Offers of external markets priced better than Routable Bid 1. In this 
situation, the execution of Routable Bid 1 at $10.03 against the CHX 
Best Offer would result in an impermissible trade-through of the 
Protected Offers of Exchanges A, B and C, in violation of Rule 611 of 
Regulations NMS.
    Thus, Routing Event 1 would be triggered and the 
Exchange's routing systems would create a corresponding buy order 
marked IOC for 100 shares of security XYZ,\51\ and route the 
corresponding buy order to CHXBD, with instructions for the third-party 
routing broker to route the order utilizing its smart-routing 
technology pursuant to the Exchange's routing table.\52\ The entire 
balance of Routable Bid 1 would then be placed in a pending routed 
state. CHXBD would then forward the corresponding buy order with 
instructions to the third-party routing broker and the third-party 
routing broker would then route the corresponding buy order to Exchange 
A and/or Exchange B.\53\
---------------------------------------------------------------------------

    \51\ See supra note 42.
    \52\ See supra note 48.
    \53\ See supra note 49.
---------------------------------------------------------------------------

    Any unexecuted remainders returned to the Matching System would be 
handled pursuant to proposed Article 20, Rule 8(b)(7), as discussed 
below.
    Example 10. Assume the same as Example 9, except that Routable Bid 
1 is for 500 shares of security XYZ.
    In this situation, the execution of Routable Bid 1 at $10.03 
against the CHX Best Offer would result in an impermissible trade-
through of the Protected Offers of Exchanges A, B and C, in violation 
of Rule 611 of Regulations NMS.
    As such, Routing Event 1 would be triggered and since 
Routable Bid 1 for 500 shares is larger than the aggregate size of all 
Protected Offers of external markets priced at or better than Routable 
Bid 1 (i.e., 300 shares total), the Exchange's routing systems would 
create three corresponding buy orders marked IOC and ISO with 
instructions to route one buy order for 100 shares priced at $10.01/
share to Exchange A, one buy order for 100 shares priced at $10.01/
share to Exchange B and one buy order for 100 shares priced at $10.02/
share to Exchange C.\54\ The routed portion would then enter a pending 
routed state on the Exchange's system and 100 shares of the unrouted 
portion of Routable Bid 1 would execute against the CHX Best Offer at 
$10.03/share. Since there is no other resting liquidity against which 
the remaining 100 shares of the unrouted portion of Routable Bid 1 
could execute, the Exchange would post and display the unexecuted 
remainder of the unrouted portion at $10.03. This ``ship and execute'' 
would permit the unrouted portion to be executed within the Matching 
System in compliance with Rule 611 of Regulations NMS.
---------------------------------------------------------------------------

    \54\ See supra note 48.
---------------------------------------------------------------------------

    Any unexecuted remainders returned to the Matching System would be 
handled pursuant to proposed Article 20, Rule 8(b)(7), as discussed 
below.
    Proposed paragraph (a)(2) provides that an incoming Routable Order 
for an Odd Lot will be routed away if its execution on the Exchange 
would trade-through a Protected Quotation of an external market 
(``Routing Event 2''). This language is consistent with a 
proposed amendment to current Article 20, Rule 5(b) that will prohibit 
the execution of incoming Odd Lot limit orders if the execution would 
trade-through a Protected Quotation of an external market, as discussed 
below, but would permit resting Odd Lot orders to be executed through 
the NBBO.\55\ The following Example 11 illustrates how Routing Event 
2 would be triggered.
---------------------------------------------------------------------------

    \55\ Current CHX Article 20, Rule 5(b) permits inbound Odd Lot 
orders to execute through Protected Quotations of external markets. 
Also, incoming Odd Lot limit orders are permitted to post to, or 
remain on, the CHX book through the NBBO, provided that it could not 
be displayed pursuant to CHX Article 20, Rule 8(b)(6). Odd Lot 
orders that are displayed pursuant to current CHX Article 20, Rule 
8(b)(6) are treated like Round Lot orders for the purposes of Rule 
610(d) of Regulation NMS.
---------------------------------------------------------------------------

    Example 11. Assume that the NBBO for security XYZ is $10.00 x 
$10.01 and Exchange A is the only Protected Offer at the NBO and is 
displaying 100 shares. Assume also that CHX has a Protected Offer for 
100 shares priced at $10.02/share and there are no other orders resting 
on the CHX book with respect security XYZ. Assume then that an incoming 
fully-displayable Routable Bid for 50 shares of security XYZ priced at 
$10.02/share is received by the Matching System (``Routable Bid 1'').
    In this situation, Routing Event 2 would be triggered and 
the Exchange's routing systems would create a corresponding buy order 
marked IOC for 50 shares of security XYZ priced at $10.01/share and 
route the order away with instructions to direct the order to Exchange 
A.\56\ The entire balance of Routable Bid 1 would then be placed in a 
pending routed state. CHXBD would then forward the corresponding buy 
order with instructions to the third-party routing broker and the 
third-party routing broker would then route the corresponding buy order 
to Exchange A.
---------------------------------------------------------------------------

    \56\ Current Article 20, Rule 5(b) would permit Routable Bid 1 
to execute against the resting offer at $10.02 for 50 shares of XYZ, 
as the execution would be for an Odd Lot.
---------------------------------------------------------------------------

    Any unexecuted remainders returned to the Matching System would be 
handled pursuant to proposed Article 20, Rule 8(b)(7), as discussed 
below.
    Proposed paragraph (a)(3) provides that an incoming Routable Order 
that is either marked Do Not Display or is an undisplayed yet 
displayable Odd Lot will be routed away to execute against any 
Protected Quotation(s) of external market(s) priced at or better than 
the limit price of the incoming undisplayed Routable Order if there is 
no resting liquidity on the CHX book against which the incoming 
undisplayed Routable Order could execute (``Routing Event 
3).\57\ Thus, the difference between Routing Event 1 
and Routing Event 3 is that Routing Event 3 would not 
result in a trade-through of a Protected Quotation of an external 
market because there are no resting contra-side orders on the CHX book 
nor a locked or crossed market in violation of Rule 610(d) of 
Regulation NMS because the incoming Routable Order could not be 
displayed.\58\ The following Examples 12-13 illustrate how Routing 
Event 3 could be triggered:
---------------------------------------------------------------------------

    \57\ An incoming Routable Order marked Reserve Size, as defined 
under Article 1, Rule 2(c)(3), will always be treated as fully-
displayed order for the purposes of the proposed CHX Routing 
Services.
    \58\ Currently, the Exchange permits undisplayed yet displayable 
orders (e.g., Odd Lot limit orders that could not be aggregated with 
other Odd Lots or Mixed Lots, pursuant to CHX Article 20, Rule 
8(d)(6)) and fully-undisplayed orders) (e.g., limit orders marked Do 
Not Display) to rest through the NBBO. However, if a subsequent 
incoming contra-side order would result in a resting order priced 
through the NBBO being executed, the resting order ``shall be 
cancelled to the extent necessary to allow the inbound order to be 
executed or quoted.'' See CHX Article 20, Rule 5(a). As discussed in 
detail below, the Exchange now proposes to expand the applicability 
of the CHX Only modifier, which offers the CHX Only Price Sliding 
Processes, to all limit orders, regardless of the attached order 
display modifier and to require all Do Not Display orders that are 
resting on the CHX book to be handled as CHX Only, even if they were 
not originally marked CHX Only by the order sender.
---------------------------------------------------------------------------

    Example 12. Assume that the NBBO for security XYZ is $10.00 x 
$10.02 and only Exchange A has a Protected Offer at $10.02, which is 
for 100 shares. Assume also that the CHX book is empty with respect 
security XYZ. Assume then that an incoming Routable Bid marked Do Not 
Display for 200

[[Page 57612]]

shares of security XYZ, priced at $10.03 is received by the Matching 
System (``Routable Bid 1'').
    In this situation, since the posting of Routable Bid 1 at $10.03 
would result in a bid resting on the CHX book through the NBO, Routing 
Event 3 would be triggered and the Exchange's routing systems 
would create a corresponding buy order marked IOC for 100 shares priced 
at $10.02/share and route the corresponding buy order to Exchange A. 
The routed portion would then enter a pending routed state on the 
Exchange's systems. Immediately after routing the corresponding buy 
order away, the unrouted 100 shares would be posted to the CHX book 
undisplayed at $10.03.
    Any unexecuted remainders returned to the Matching System would be 
handled pursuant to proposed Article 20, Rule 8(b)(7), as discussed 
below.
    Example 13. Assume the same as Example 12 and that after the 
unrouted 100 shares of Routable Bid 1 posted to the CHX book at $10.03, 
Exchange B displayed a Protected Offer for 100 shares of security XYZ 
at $10.02.
    In this situation, since the Exchange will not route away resting 
orders, Routable Bid 1 would be price slid to the NBO locking price of 
$10.02, as all resting orders marked Do Not Display will be handled as 
CHX Only and subject to price sliding.\59\
---------------------------------------------------------------------------

    \59\ Id.
---------------------------------------------------------------------------

    Incidentally, given that the Exchange proposes to permit certain 
limit orders marked Do Not Display to be routable, the Exchange 
proposes to amend the definition of ``Do Not Route,'' under Article 1, 
Rule 2(b)(3)(A), by replacing the current term ``displayed'' with the 
more inclusive term ``ranked.'' As such, amended Article 1, Rule 
2(b)(3)(A) will provide that ``Do Not Route'' means ``a limit or market 
order modifier that requires an order to only be executed or ranked 
within the Exchange's Matching System and not be routed to another 
market.''
    With respect to how unexecuted remainders of routed orders would be 
treated by the Matching System, amended Article 20, Rule 8(b)(7) states 
as follows:
    (7) Priority of unexecuted remainders of routed orders returned to 
the Matching System. An unexecuted remainder of a routed order returned 
to the Matching System in one or more parts shall be added to the 
existing balance of the related Routable Order already posted to the 
CHX book. If no balance exists at the time a part of an unexecuted 
remainder of a routed order is returned to the Matching System, it 
shall be treated as a new incoming order.\60\
---------------------------------------------------------------------------

    \60\ Current Article 20, Rule 8(b)(7) provides language that the 
Exchange proposes to delete concerning order execution priority for 
price slid orders because the concept of the ``Working Price'' 
enunciated in the rule is actually applicable to execution priority 
for all orders, as discussed in detail below.
---------------------------------------------------------------------------

    As discussed above, when a Routing Event is triggered, a 
corresponding routing order is created by the Exchange's routing system 
that represents the relevant portion of the Routable Order that is to 
be routed away.\61\ Upon routing of the corresponding routed order, the 
routed portion of the Routable Order enters a pending state on the 
Matching System (``pending routed portion''). If the Exchange receives 
an execution confirmation concerning the corresponding routed order, 
the related pending routed portion will be released as executed to the 
extent represented by the execution confirmation. If, however, the 
Exchange receives a cancellation confirmation from the away Trading 
Center, the pending routed portion will be released as unexecuted to 
the extent represented by the cancellation confirmation.\62\ In turn, 
the pending routed portion released as unexecuted will either (1) be 
added to any existing balance of the Routable Order already posted to 
the CHX book or (2) be treated as a new incoming order to the Matching 
System.\63\
---------------------------------------------------------------------------

    \61\ See supra Examples 7-13.
    \62\ The Exchange can also release pending routed portions 
pursuant to proposed Article 20, Rule 12, in connection with a 
systems or technical issue. In such a case, the pending routed 
portion would be released as unexecuted and cancelled back to the 
order sender.
    \63\ It is important to note that a cancel message from the away 
routing destination is not a new incoming order. Once the cancel 
message is received by the Matching System, the released pending 
routed portion may be handled as an incoming order if there is no 
existing balance of the Routable Order already posted to the CHX 
book.
---------------------------------------------------------------------------

    An existing balance can occur if an unrouted portion had posted to 
the CHX book immediately after the routed portion had been routed away 
(i.e., ``ship and post'') and the unrouted portion was resting on the 
CHX book when the pending routed portion was released as unexecuted. An 
existing balance could also occur even if there was no portion of the 
Routable Order initially posted to the CHX book where the routed 
portion returned to the Matching System in two or more parts. In such a 
situation, the first unexecuted remainder to return to the Exchange 
would be treated as an incoming order and any subsequent unexecuted 
remainders would be added to any existing balance of previously 
returned remainders. The portion of a Routable Order released as 
unexecuted that is treated as an incoming order may result in that 
released portion being routed away again, if a proposed Routing Event 
is triggered, executed against the CHX book, or posted to the CHX book 
as a new order. The following Examples 14-16 illustrate how unexecuted 
remainders of routed orders would be handled by the Matching System:
    Example 14. Assume that a Routable Order to buy 500 shares of 
security XYZ at $10.00/share is received by the Matching System that 
will be subject to a ``ship and post'' because Exchange A and Exchange 
B are displaying Protected Offers at the NBO priced at $10.00/share 
(``Protected Offer A'' and ``Protected Offer B''). Assume that pursuant 
to Routing Event 1, the Exchange's routing systems created two 
corresponding buy orders for 200 shares each to be routed to Exchange A 
and Exchange B (``Routed Bid A'' and ``Routed Bid B,'' respectively). 
The routed portion then enters a pending routed state on the Exchange's 
systems. Immediately after Routed Bid A and Routed Bid B are routed 
way, the remaining 100 shares of the unrouted portion of the Routable 
Order are posted to the CHX book. Assume that while the unrouted 
portion remains posted to the CHX book, the Matching System receives an 
execution confirmation for Routed Bid A for 200 shares, an execution 
confirmation for Routed Bid B for 100 shares, and a cancellation 
message for Routed Bid B for 100 shares.
    In this situation, of the 400 shares representing the pending 
routed portion, 200 of those shares would be released as executed and 
reported to clearing. Upon receipt of the second execution, 100 of 
those shares would be released as executed and reported to clearing. 
Upon receipt of the cancellation message, the remaining 100 shares 
would be released as unexecuted and would be posted to the existing 
balance of the Routable Order already posted to the CHX book, which 
would result in 200 shares of the Routable Order being posted to the 
CHX book priced at $10.00/share.
    Example 15. Assume the same as Example 14, except that by the time 
the first execution confirmation returned to the Matching System, the 
unrouted portion of the Routable Order resting on the CHX book was 
fully executed.
    In this situation, upon receipt of the first execution 
confirmation, 200 of those shares would be released as executed and 
reported to clearing. Upon receipt of the second execution, 100 of 
those shares would be released as executed and reported to clearing. 
Upon

[[Page 57613]]

receipt of the cancellation message, the remaining 100 shares would be 
released as unexecuted and would be treated as a new incoming bid to 
purchase 100 shares of security XYZ at $10.00/share.
    If a Protected Offer of an external market priced at $10.00/share 
were displayed prior the final 100 shares of the Routable Order being 
released as unexecuted, Routing Event 1 would be triggered 
again and the Exchange's routing systems would create a corresponding 
buy order for 100 shares of XYZ priced at $10.00/share and the Routable 
Order would be routed to the venue displaying the new Protected Offer. 
If, instead, the Exchange received an offer for security XYZ priced at 
$10.00/share or better on the Matching System prior to the final 100 
shares of the Routable Order being released as unexecuted, the 100 
released shares would execute against the resting offer on the CHX 
book. However, if the CHX book were empty and the NBBO did not prohibit 
the posting of a bid at $10.00/share, the 100 released share would be 
posted to the CHX book and ranked on the CHX book pursuant to Article 
20, Rule 8(b).\64\
---------------------------------------------------------------------------

    \64\ As discussed in detail below, the Exchange proposes to 
amend current CHX Article 20, Rule 8 in order to clarify how the 
Exchange currently ranks orders on the CHX book.
---------------------------------------------------------------------------

    Example 16. Assume the same as Example 14, except that the Matching 
System receives an execution confirmation for Routed Bid A for 100 
shares, a cancellation confirmation for Routed Bid A for 100 shares, 
and a cancellation message for Routed Bid B for 200 shares. Assume also 
that the portion of the Routed Order released as unexecuted pursuant to 
the first cancellation message resulted in 100 shares of the Routed 
Order being posted to the CHX book.
    In this situation, the 200 shares of the pending routed portion 
would be released as unexecuted pursuant to Routed Bid B being returned 
cancelled and would be added to the existing balance of 100 shares 
already posted to the CHX book due to the earlier cancellation message 
received regarding Routed Bid A.
Exception From Article 3, Rule 20 (No Affiliation Between Exchange and 
any Participant)
    Current Article 3, Rule 20 provides, in pertinent part, that the 
Exchange or any entity with which it is affiliated shall not, directly 
or indirectly, acquire or maintain an ownership interest in a 
Participant in the absence of an effective filing under Section 19(b) 
of the Act. The rule further provides that a Participant shall not be 
or become an affiliate of the Exchange or any affiliate of the Exchange 
in the absence of an effective filing under Section 19(b) of the Act. 
The purpose of Article 3, Rule 20 is to prevent or manage potential 
conflicts of interest that could arise from the Exchange or its 
affiliates having an ownership interest in a Participant, particularly 
with respect to the Exchange's obligation under Section 19(g) of the 
Act to enforce its Participants' compliance with the Act, the 
Commission's rules thereunder, and Exchange Rules.
    The Exchange is currently in compliance with Article 3, Rule 20. 
CHX Holdings Inc. wholly owns the Exchange and CHXBD. As such, the 
Exchange is affiliated with CHXBD, which is a registered broker-dealer 
and member of FINRA. However, CHXBD is not yet a Participant of the 
Exchange.
    The Exchange believes that CHXBD should now be permitted to operate 
as an affiliated Participant outbound router on behalf of the Exchange 
and, to this end, the Exchange submits this immediately effective 
filing pursuant to Section 19(b)(3)(A) of the Act, which is consistent 
with the requirements of Article 3, Rule 20. Specifically, the Exchange 
believes that proposed Article 19, Rule 2(a) would eliminate any 
potential conflict of interest that could arise in the context of an 
affiliation between the Exchange and CHXBD, as a Participant, by 
requiring the following:
     The Exchange will regulate CHXBD as a facility of the 
Exchange;
     FINRA, a self-regulatory organization unaffiliated with 
the Exchange or any of its affiliates, is CHXBD's designated examining 
authority;
     CHXBD will not engage in any other business other than (a) 
its outbound router function and (b) any other activities it may engage 
in as approved by the Commission;
     The use of CHXBD for outbound routing by Participants is 
optional;
     The Exchange shall establish and maintain procedures and 
internal controls reasonably designed to adequately restrict the flow 
of confidential and proprietary information between the Exchange and 
its facilities (including CHXBD as its routing facility) and any other 
entity; and
     The books, records, premises, officers, agents, directors 
and employees of CHXBD as a facility of the Exchange shall be deemed to 
be the books, records, premises, officers, agents, directors and 
employees of the Exchange for the purposes of, and subject to oversight 
pursuant to, the Act.
    As a facility of the Exchange, CHXBD will be subject to the 
Exchange's and the Commission's regulatory oversight, and the Exchange 
will be responsible for ensuring that CHXBD's outbound routing function 
is operated consistent with Section 6 of the Act and the Exchange's 
proposed rules. In addition, the Exchange will be required to file with 
the Commission proposed rule changes and fees relating to CHXBD's 
outbound routing function. Any such rules and fees relating to CHXBD's 
outbound routing function will be subject to the Exchange's non-
discrimination requirements. The Exchange also notes that the 
Commission has previously approved an affiliation between an exchange 
and its member outbound routing facility based on rules similar to the 
provisions of proposed Article 19, Rule 2(a) stated above.\65\ Thus, 
the Exchange submits that CHXBD becoming an affiliate Participant of 
the Exchange to be consistent with the Act.
---------------------------------------------------------------------------

    \65\ See BYX Rule 2.11; see also Securities Exchange Act Release 
No. 62716 (August 13, 2010), 75 FR 51295 (August 19, 2010) (In the 
Matter of the Application of BATS Y-Exchange Inc. for Registration 
as a National Securities Exchange Findings, Opinion, and Order of 
the Commission).
---------------------------------------------------------------------------

Amended Article 20, Rule 5 (Prevention of Trade-Throughs)
    In light of the proposed CHX Routing Services, the Exchange 
proposes to amend current Article 20, Rule 5 to clarify how the 
Matching System will treat orders received by the Matching System that 
could not be executed within the Matching System in compliance with 
Rule 611 of Regulation NMS and to prohibit incoming Odd Lot orders from 
executing through the NBBO. Amended Rule 5(a) states as follows:
    (a) An inbound order for at least a round lot is not eligible for 
execution on the Exchange if its execution would be improper under Rule 
611 of Regulation NMS (but not including the exception set out in Rule 
611(b)(8)) (an ``improper trade-through'') and such an order shall be 
handled by the Exchange as follows:
    (1) If the execution of all or part of an inbound Routable Order, 
as defined under Article 1, Rule 1(oo), would cause an improper trade-
through, that Routable Order (or the portion of that order that would 
cause an improper trade-through) shall be routed away, pursuant to 
Article 19, Rule 3(a)(1); or
    (2) If the execution of all or part of an inbound order would cause 
an improper trade-through and the order cannot be routed away, the 
order shall be automatically cancelled; provided, however, that such an 
order marked

[[Page 57614]]

CHX Only may be subject to the CHX Only Price Sliding Processes, 
detailed under Article 1, Rule 2(b)(1)(C) and not automatically 
cancelled.
    Specifically, under amended paragraph (a), the Exchange proposes to 
clarify that ``Rule 611'' refers to Rule 611 of ``Regulation NMS.'' 
Under proposed paragraph (a)(1), the Exchange proposes to add language 
clarifying that inbound orders that are ``Routable Orders,'' as defined 
under proposed Article 1, Rule 1(oo), would be routed away pursuant to 
proposed Article 19, Rule 3(a)(1),\66\ as opposed to current 
Interpretation and Policy .03 of Article 20, Rule 5, if an improper 
trade-through would result.\67\ Also, under proposed paragraph (a)(2), 
the Exchange proposes to clarify that all inbound non-Routable Orders 
that would cause an improper trade-through shall be automatically 
cancelled; provided, however, that if the order is marked CHX Only and 
eligible for price sliding, it shall be price slid and not 
automatically cancelled.\68\
---------------------------------------------------------------------------

    \66\ See supra Examples 9 and 10.
    \67\ As discussed above, the Exchange proposes to delete 
Interpretation and Policy .03 of Rule 5, as the routing 
functionality contemplated under that language is not what the 
Exchange now proposes through the proposed CHX Routing Services. 
With respect to paragraph (a) thereunder, given that the Cross With 
Satisfy modifier is not currently available and only certain Limit 
orders could be routed away pursuant to the proposed CHX Routing 
Services, the Exchange proposes to delete the current paragraph (a). 
When and if the Exchange decides to reactivate the Cross With 
Satisfy modifier, the Exchange will propose new language concerning 
the routing of Cross With Satisfy orders pursuant to Rule 19b-4 
under the Act.
    \68\ See CHX Article 1, Rule 2(b)(1)(C). As discussed below, the 
Exchange proposes to amend the CHX Only modifier to apply to all 
Limit orders, regardless of display modifier. The CHX Only modifier 
is currently only applicable to ``fully-displayable'' Limit orders, 
which exclude orders marked Do Not Display or Reserve Size.
---------------------------------------------------------------------------

    The Exchange also proposes to delete language stating that 
undisplayed orders resting through the NBBO shall be cancelled to the 
extent necessary for an inbound order, against which an execution would 
result in an improper trade-through, to be executed or quoted.\69\ This 
is because the Exchange now proposes to require all resting orders 
marked Do Not Display to be price slid if the execution of such a 
resting order would result in an impermissible trade-through of a 
Protected Quotation of an external market, as discussed below.
---------------------------------------------------------------------------

    \69\ The Exchange also propose [sic] to delete Article 20, Rule 
8(e)(6), which provides similar language.
---------------------------------------------------------------------------

    Amended paragraph (b) states as follows:
    (b) Odd Lot crosses and resting Odd Lot limit orders/remainders 
priced through a contra-side Protected Quotation of an external market 
shall be eligible for execution on the Exchange even if the execution 
would trade-through a Protected Quotation of an external market. 
Inbound Odd Lot limit and market orders shall not be permitted to 
trade-through a contra-side Protected Quotation of an external market 
and shall be treated the same as Round Lots.
    Currently, the Exchange permits incoming and resting Odd Lot orders 
to execute through the NBBO. However, the Exchange now proposes to 
prohibit incoming Odd Lot orders from trading through a contra-side 
Protected Quotation of an external market, while continuing to permit 
resting Odd Lot orders to trade-through a contra-side Protected 
Quotation of an external market.
    As proposed, if an incoming Odd Lot Routable Bid (Offer) were 
matchable against an offer (bid) resting on the CHX book and the 
execution of the incoming bid (offer) would result in a trade-through 
of the NBO (NBB), proposed Routing Event 2 would be triggered 
and the incoming Odd Lot bid (offer) would be routed away. If, however, 
the incoming Odd Lot order is not a Routable Order, the incoming Odd 
Lot order would be price slid if marked CHX Only or cancelled if not 
eligible for price sliding. Thus, the Exchange proposes to treat 
incoming Odd Lot orders the same as Round Lots.
Amended Article 1, Rule 2(c)(2) (Do Not Display)
    The Exchange proposes to amend the definition of the Do Not Display 
modifier under current Article 1, Rule 2(c)(2) to add that all limit 
orders marked Do Not Display resting on the CHX book shall be handled 
as CHX Only, even if such orders were not originally marked CHX Only, 
which cannot be overridden by an order sender. By definition, this 
would include, inter alia, Routable Orders marked Do Not Display that 
immediately posted to the CHX book or where an unexecuted remainder of 
a Routable Order marked Do Not Display posted to the CHX book (i.e., a 
routed order returned to the Matching System as unexecuted). In the 
later situation, the Routable Order marked Do Not Display would only be 
handled as CHX Only after the order was posted to the CHX book, as 
handling such an order CHX Only prior to its posting to the CHX book 
would preclude routing.
    The Exchange also proposes to amend current Article 1, Rule 2(c)(2) 
to delete language that incorrectly states that an order may be marked 
Do Not Display ``in part,'' as a limit order marked Do Not Display can 
only be fully-hidden. Incidentally, the Exchange proposes to expand the 
applicability of the CHX Only modifier to all limit orders, regardless 
of order display modifier, as discussed below.
Amended Article 20, Rule 6(d) (Locked and Crossed Markets)
    In light of the proposed CHX Routing Services, the Exchange 
proposes to amend current Article 20, Rule 6(d) to clarify how the 
Matching System will treat orders received by the Matching System that 
could not be displayed in compliance with Rule 610(d) of Regulation 
NMS. As such, amended Rule 6(d) states as follows:
    (d) Matching System operation. Except as permitted in paragraph (c) 
above, an order is not eligible for display on the Exchange if its 
display would lock or cross a Protected Quotation of an external market 
in violation of Rule 610 of Regulation NMS and such an order shall be 
handled by the Exchange as follows:
    (1) If the display of a Routable Order, as defined under Article 1, 
Rule 1(oo), would impermissibly lock or cross a Protected Quotation of 
an external market, that Routable Order, or a portion thereof, shall be 
routed away, pursuant to Article 19, Rule 3(a)(1); or
    (2) If the display of an order would impermissibly lock or cross a 
Protected Quotation of an external market and the order cannot be 
routed away, that order shall be automatically cancelled; provided, 
however, that such an order marked CHX Only may be subject to the CHX 
Only Price Sliding Processes, detailed under Article 1, Rule 2(b)(1)(C) 
and not automatically cancelled.
    Specifically, under paragraph (d), the Exchange proposes to specify 
that ``Rule 610'' refers to ``Rule 610 of Regulation NMS.'' Thereunder, 
amended paragraph (d)(1) provides that if the display of a Routable 
Order would impermissibly lock or cross a Protected Quotation of an 
external market, that Routable Order, or a portion thereof, shall be 
routed away, pursuant to Article 19, Rule 3(a)(1),\70\ as opposed to 
current Interpretation and Policy .03 of Article 20, Rule 5. In 
addition, amended paragraph (b)(2) provides that if the display of an 
order would impermissibly lock or cross a Protected Quotation of an 
external market and the order cannot be routed away, that order shall 
be automatically cancelled; provided however that such an order marked 
CHX Only may be subject to the CHX Only Price Sliding Processes, 
detailed under Article 1, Rule

[[Page 57615]]

2(b)(1)(C) and not automatically cancelled.
---------------------------------------------------------------------------

    \70\ See supra Examples 7 and 8.
---------------------------------------------------------------------------

Amended Article 20, Rule 8 (Operation of the Matching System)
    The Exchange proposes to amend Article 20, Rule 8 to adopt 
provisions concerning the proposed CHX Routing Services and to clarify 
how orders are currently ranked, displayed and executed by the CHX 
Matching System.
    The Exchange proposes to amend Rule 8(a) to provide that 
Participants may route orders to the Matching System through any 
communications line approved by the Exchange and may only route orders 
away from the Matching System by utilizing the proposed CHX Routing 
Services, pursuant to proposed Article 19.\71\
---------------------------------------------------------------------------

    \71\ As noted above in the discussion concerning proposed CHX 
Article 19, Rule 2(a)(3), the use of CHXBD to route orders is 
optional because Participants are always free to submit orders to 
away markets without utilizing CHX or CHXBD. However, to the extent 
that a Participant wishes to route an order directly away from the 
Matching System, the Participant must use the proposed CHX Routing 
Services, by submitting a Routable Order to the Matching System.
---------------------------------------------------------------------------

    Current Rules 8(b) and (d) describes the ranking, display and 
execution of orders within the Matching System. Although the current 
language is accurate, the Exchange submits that additional granularity 
is appropriate in light of the proposed CHX Routing Services and 
proposed amendment to the CHX Only modifier to expand its applicability 
to Do Not Display and Reserve Size limit orders, as described below. It 
is important to note that the Exchange does not propose to 
substantively modify any functionality described under current 
paragraphs (b) and (d).
    Amended paragraph (b) begins as follows:
    (b) All orders accepted by the Matching System that will post to 
the CHX book shall be ranked at each price point up to its limit price 
by display status then sequence number. Resting limit orders shall be 
ranked as follows:
    Unlike current paragraph (b), which refers to orders ``sent to'' 
the Matching System, amended paragraph (b) refers more accurately to 
orders ``accepted'' by the Matching System, as orders sent to the 
Matching System may be rejected by the Matching System and never 
ranked. In addition, unlike current paragraph (b), which simply refers 
to ranking orders ``according to their price and time of receipt,'' 
amended paragraph (b) provides that orders are ranked at each price 
point up to its limit price by ``display status'' then ``sequence 
number.'' \72\ That is, when an order is to be posted to the CHX book, 
at each price point up to its limit price, the order is sorted into one 
of three pools based on ``display status'' at each price point, and 
within each pool, prioritized based on ``sequence number,'' which 
reflects time priority (e.g., a bid that will be posted to CHX book 
with limit price of $10.00 is ranked at $10.00, $9.99, $9.98, etc . . 
.). This ranking of orders at numerous price points is particularly 
necessary given the Exchange's price sliding functionalities, which 
requires price slid orders to maintain original time priority, even if 
the price slid order is executable at a price less aggressive than its 
limit price (i.e., order always execute at its ``Working Price'').\73\ 
Specifically, the ranking of orders at each price point up to its limit 
price permits such orders to preserve its original time priority within 
the CHX book, notwithstanding the number of price sliding events. This 
ranking scheme also prevents the Matching System from having to re-
establish time priority after each price sliding event, as their 
relative rank is established at the time the order is accepted by the 
Matching System.
---------------------------------------------------------------------------

    \72\ Time priority in the Matching System 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 
slid, 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. ``Display status'' refers to one of three categories, 
described in paragraphs (b)(1)-(3), under which each order received 
by the Matching System is sorted.
    \73\ Proposed Article 1, Rule 1(pp), defines ``Working Price'' 
as ``the most aggressive price at which a resting Limit order, as 
defined under Article 1, Rule 2(a)(1), can execute within the 
Matching System, in compliance with Rule 611 under Regulation NMS. 
An order's Working Price may be any price up to and including its 
limit price.''
---------------------------------------------------------------------------

    Amended paragraph (b)(1) describes display status pool 1 
and states as follows:
    (1) Fully-displayable orders and displayed portions of Reserve Size 
orders. At each price point up to their limit prices, fully-displayable 
limit orders of any size and the displayed portion of Reserve Size 
orders, as defined under Article 1, Rule 2(c)(3), shall be ranked based 
on their sequence numbers by the Exchange's Matching system and shall 
be ranked ahead of undisplayed portions of Reserve Size orders and 
orders marked Do Not Display. Orders sent to an Institutional Broker 
for handling shall not have any priority within the Matching System 
unless and until they are received by the Matching System.
    Amended paragraph (b)(1) is substantively similar to current 
paragraph (b)(1), with amendments to explicitly refer to the ranking of 
orders at each price point up to its limit price and to replace ``times 
of receipt'' with the more accurate ``sequence numbers.'' Also, the 
Exchange proposes to eliminate references to Mixed Lot and Odd Lot 
orders, as Mixed Lot and Odd Lot orders are always ``fully-
displayable,'' but may not actually be displayed, if such orders are 
not at the CHX Best Bid or Offer (``CHX BBO'') and cannot be aggregated 
into Round Lots.\74\ Thus, ``fully-displayable'' orders are limit 
orders of any size not marked Do Not Display or Reserve Size. Along 
with fully-displayable orders, the displayed portions of Reserve Size 
orders are currently part of display status pool 1, which is 
ranked ahead of other display statuses.
---------------------------------------------------------------------------

    \74\ See CHX Article 20, Rule 8(b)(6).
---------------------------------------------------------------------------

    Amended paragraph (b)(2) describes display status pool 2 
and states as follows:
    (2) Undisplayed portion of Reserve Size orders. At each price point 
up to their limit prices, the undisplayed portions of Reserve Size 
orders shall be ranked based on their sequence numbers by the 
Exchange's Matching System, but shall be ranked after any orders as 
described in paragraph (b)(1) above.
    Amended paragraph (b)(2) is substantively similar to current 
paragraph (b)(2), with amendments to explicitly refer to the ranking of 
orders at each price point up to its limit price, to clarify that the 
paragraph applies to the ``undisplayed portion of Reserve Size 
orders,''\75\ to replace ``times of receipt'' with the more accurate 
``sequence numbers,'' and to clarify that undisplayed portions of 
Reserve Size orders are ranked behind orders in display status pool 
1.
---------------------------------------------------------------------------

    \75\ The only ``orders that are not displayed in part'' are 
limit orders marked Reserve Size, where the reserve portion is 
undisplayed. See CHX Article 1, Rule 2(c)(3). As discussed above, 
the Exchange proposes to amend the definition of ``Do Not Display'' 
to correct a misstatement that orders may be Do Not Display ``in 
part.'' Only orders marked Reserve Size may be hidden in part.
---------------------------------------------------------------------------

    Amended paragraph (b)(3) describes the display status pool 
3 and states as follows:
    (3) Orders marked Do Not Display. At each price point up to their 
limit prices, limit orders marked Do Not Display, as defined under 
Article 1, Rule 2(c)(2), shall be ranked based on their sequence 
numbers by the Exchange's Matching System, but shall be ranked after 
all orders as described under subparagraphs (b)(1) and (b)(2) above.

[[Page 57616]]

    Amended paragraph (b)(3) is substantively similar to current 
paragraph (b)(3), with amendments to explicitly refer to the ranking of 
orders at each price point up to its limit price, to clarify that the 
paragraph applies to the ``orders marked Do Not Display,'' \76\ to 
replace ``times of receipt'' with the more accurate ``sequence 
numbers,'' and to clarify that orders marked Do Not Display are ranked 
orders in display statuses 1 and 2.
---------------------------------------------------------------------------

    \76\ The only ``orders that are not displayed at all'' are limit 
orders marked Do Not Display. See CHX Article 1, Rule 2(c)(2). See 
id.
---------------------------------------------------------------------------

    The following Examples 17-19 illustrate how orders are currently 
ranked on the CHX book, as clarified by the proposed amendments:
    Example 17. Assume that the CHX book is empty with respect to 
security XYZ and the NBBO for security XYZ is $10.00 x $10.02. Assume 
then that the Matching System accepts a limit order to buy 100 shares 
of security XYZ at $10.00/share marked Do Not Display and the order is 
assigned a sequence number of ``1'' (``Bid 1'').
    In this situation, Bid 1 would be ranked on the CHX book as follows 
(values in parentheses indicate size): \77\
---------------------------------------------------------------------------

    \77\ Examples 17-22 represent order execution priority at each 
price point up to the order's limit price, which starts on the far 
right from top to bottom, then from right to left.
[GRAPHIC] [TIFF OMITTED] TN25SE14.001

    Pursuant to amended paragraph (b)(3), Bid 1 would be ranked at each 
price point up to its limit price of $10.00 and allocated to display 
status pool 3 for limit orders marked Do Not Display.\78\
---------------------------------------------------------------------------

    \78\ The Working Price of Bid 1 would be $10.00 as the limit 
price of the Bid 1 is at the NBB. See supra note 73.
---------------------------------------------------------------------------

    Example 18. Assume the same as Example 17 and while Bid 1 is 
resting on the CHX book, the Matching System accepts a limit order to 
buy 50 shares of security XYZ at $9.99/share that is ``fully-
displayable'' and the order is assigned a sequence number of ``2'' 
(``Bid 2'').
    In this situation, Bid 2 would be ranked on the CHX book as 
follows:
[GRAPHIC] [TIFF OMITTED] TN25SE14.002

    Pursuant to amended paragraph (b)(1), Bid 2 would be ranked at each 
price point up to its limit price of $9.99 and allocated to display 
status pool 1 for fully-displayable limit orders. However, as 
discussed below, although Bid 2 represents the CHX BO, it cannot be 
displayed because it is for an Odd Lot and cannot be aggregated with 
other Odd Lots or Mixed Lots to be displayed as a Round Lot. This, 
however, has no bearing on its rank on the CHX book.
    Example 19. Assume the same as Example 18 and while Bid 1 and Bid 2 
are resting on the CHX book, the Matching System accepts a limit order 
to buy 500 shares of security XYX at $10.00/share that is marked 
Reserve Size, with a displayable amount of 100 shares, refresh 
threshold of 0, and the order is assigned a sequence number 3.
    In this situation, Bid 3 would be ranked on the CHX book as 
follows:
[GRAPHIC] [TIFF OMITTED] TN25SE14.003

    Pursuant to amended paragraph (b)(1), the 100 shares of Bid 3 that 
represent the displayed portion of Bid 3 will be ranked at each price 
point up to its limit price of $10.00 and allocated to display status 
pool 1 for fully-displayable orders and displayed portions of 
Reserve Size orders. Thus, the displayed portion of Bid 3 will be 
ranked ahead of Bid 1 at every price point up to $10.00. However, given 
that Bid 3 has an inferior sequence number to Bid 2, Bid 3 will be 
ranked behind Bid 2 at each price point up to $9.99. Since Bid 2 has a 
limit price of $9.99, the displayed portion of Bid 3 will be at the top 
of the CHX book at the $10.00.
    Pursuant to amended paragraph (b)(2), the 400 shares of Bid 3 that 
represent the undisplayed portion of the Bid 3 will be ranked at each 
price point up to

[[Page 57617]]

its limit price of $10.00 and allocated to display status pool 
2 for undisplayed portions of Reserve Size orders. Thus, the 
undisplayed portion of Bid 3 will be ranked ahead of Bid 1, but behind 
the displayed portion of Bid 3 and Bid 2 up to $9.99 and behind the 
displayed portion of Bid 3 only at $10.00.
    Amended paragraph (b)(4) clarifies how Reserve Size orders are 
handled for ranking purposes when the displayed portion is refreshed 
and states as follows:
    (4) Refreshed portions of Reserve Size orders. When the displayed 
portion of a Reserve Size order reaches a threshold set by the 
Participant submitting the order (the ``submitting Participant''), the 
displayed portion of the order shall be refreshed to the original 
displayed quantity (or with the remaining number of shares, if less) 
and the undisplayed portion of the order shall be decremented by that 
number of shares. The refreshed displayed portion of the Reserve Size 
order shall receive a new display sequence number based on the time at 
which it was refreshed, whereas any remaining undisplayed portion of 
the Reserve Size order shall retain its original sequence number.
    Correspondingly, the Exchange proposes to amend Article 20, Rule 
2(c)(3), which defines the ``Reserve Size'' modifier to add that the 
refreshed displayed portions of Reserve Size orders shall be ranked in 
the CHX book pursuant to amended Article 20, Rule 8(b)(4).
    Amended paragraph (b)(4) is substantively similar to current 
paragraph (b)(4), with amendments to describe the ranking of the 
Reserve Size orders in terms of ``sequence numbers,'' so as to be 
consistent with the foregoing proposed amendments to paragraph (b). 
That is, amended paragraph (b)(4) clarifies that when the displayed 
portion of a Reserve Size order is refreshed, the refreshed displayed 
portion will receive a new sequence number and lose priority to all 
other orders in the first display status pool, whereas the undisplayed 
portion will retain its original sequence number and retain its 
original priority in display status pool 2. The following 
Example 20 illustrates how the refreshed Reserve Size orders are 
currently treated, as clarified by the proposed amendment:
    Example 20. Assume the same as Example 19. Assume then that Bid 2 
is cancelled by the order sender and soon thereafter, the Matching 
System accepts a limit order to buy 500 shares of security XYX at 
$10.00/share that is marked Reserve Size, with a displayable amount of 
100 shares, with a refresh threshold of 0, and the order is assigned a 
sequence number 4.
    In this situation, Bid 3 would be ranked on the CHX book as 
follows:
[GRAPHIC] [TIFF OMITTED] TN25SE14.004

    Assume then that the Matching System receives an incoming limit 
order to sell 100 shares of security XYZ at $10.00/share that is marked 
IOC.
    In this situation, the incoming offer would execute against the 
full displayed portion of Bid 3 at $10.00/share. Pursuant to amended 
paragraph (b)(4), the displayed portion of Bid 3 would then be 
refreshed to 100 shares and would receive a new sequence number 
reflecting the time of the refresh, while the undisplayed portion of 
Bid 3 would be decremented by 100 shares and would retain its original 
sequence number.
    Thus, Bid 3 would now be ranked on the CHX book as follows:
    [GRAPHIC] [TIFF OMITTED] TN25SE14.005
    
    This chart clearly shows that the refreshed display portion of Bid 
3 loses priority to the displayed portion of Bid 4, but the undisplayed 
portion of Bid 3 maintains priority over the undisplayed portion of Bid 
4.
    Amended paragraph (b)(5) describes the impact of change of size or 
price to an order and states as follows:
    (5) Other changes in order size or price. When a Participant 
reduces the number of shares in an order, the order will continue to be 
ranked at the price and time at which it was originally received. When 
a Participant increases the number of shares in an order, the order 
will be ranked at the original limit price, but shall receive a new 
ranking based on the time at which shares were added to the order. Any 
change in the price of an order shall result in a new ranking for the 
order based on the new limit price and the time at which the price 
change was received. Any change to the display instruction associated 
with an order (including, but not limited to, a change that identifies 
an order as Reserve Size or Do Not Display) must be submitted as a new 
order and shall be ranked based on the time at which the new order was 
received.
    Amended paragraph (b)(5) is virtually identical to current 
paragraph (b)(5), with proposed amendments to replace the term 
``instruction'' with the more accurate ``modifier,'' to capitalize the

[[Page 57618]]

term ``Reserve Size,'' and to replace ``undisplayed orders'' with the 
more accurate term ``Do Not Display.''
    Amended paragraph (b)(6) describes which orders are displayed and 
how certain Odd Lot and Mixed Lot orders are handled for display 
purposes and states follows:
    (6) Displayed CHX Best Bid and Offer. Except as provided in Rule 5 
above, all orders or portions of orders described under paragraph 
(b)(1) above that constitute the best bid(s) or offer(s) in the 
Matching System in each security, the display of which would not 
violate Rule 610 under Regulation NMS (``displayable CHX BBO''), shall 
be immediately and publicly displayed through the processes set out in 
the appropriate reporting plan for each security, provided that the 
displayable CHX BBO is for at least a Round Lot. The displayable CHX 
BBO for a security shall only be displayed in multiples of a Round Lot. 
If the displayable CHX BBO for a security is for an Odd Lot, it shall 
not be displayed, but the bids or offers that constitute the 
undisplayed yet displayable CHX BBO shall maintain their execution 
priority pursuant to paragraph (b)(1) above. If the displayable CHX BBO 
for a security is for a Mixed Lot, it shall be rounded down to the 
nearest integer multiple of a Round Lot for display purposes only and 
the displayable yet undisplayed Odd Lot remainder(s) shall maintain 
their execution priority pursuant to paragraph (b)(1) above.
    Amended paragraph (b)(6) is substantively identical to current 
paragraph (b)(6), but changes the way order aggregation for display 
purposes is described and deletes surplus language already included in 
the foregoing paragraphs. In sum, amended paragraph (b)(6) makes clear 
the distinction between aggregation of orders for display purposes and 
the rank of individual orders on the CHX book. Specifically, it 
clarifies that the CHX BBO can only be displayed in Round Lots or 
multiples of Round Lots and Odd Lot and Mixed Lot orders will be 
displayed to the extent that they can be aggregated together into a 
multiple of a Round Lot. The amended paragraph further clarifies that 
order rank will not be affected by aggregation of orders for display 
purposes as described under amended paragraphs (b)(1)-(5).
    Amended paragraph (b)(7) replaces current language concerning the 
execution priority of price slid orders, with language describing how 
unexecuted remainders of routed orders would be ranked on the CHX book, 
as discussed above.\79\ The Exchange submits that the current language 
is redundant of the proposed amendments to the CHX Only modifier and 
automated matching of orders, both described below, because all orders, 
regardless of whether or not they are subject to any price sliding 
functionality, would be executed at its ``Working Price,'' which the 
Exchange proposes to adopt in the CHX rules as a defined term.\80\
---------------------------------------------------------------------------

    \79\ See supra Examples 14-16.
    \80\ See supra note 73.
---------------------------------------------------------------------------

    Amended paragraph (d)(1) clarifies how orders resting on the CHX 
book are currently executed and states as follows:
    (1) Except for certain orders which shall be executed as described 
in Rule 8(e), below, an incoming order shall be matched against one or 
more resting orders in the Matching System, in the order in which the 
resting orders are ranked on the CHX book, pursuant to Rule 8(b) above, 
at the Working Price of each resting order, as defined under Article 1, 
Rule 1(pp), for the full amount of shares available at that price, or 
for the size of the incoming order, if smaller.
    Amended paragraph (d)(1) is substantively identical to current 
paragraph (d)(1), with amendments to clarify that orders are executed 
according to their rank on the CHX book, pursuant to amended paragraph 
(b), and at the Working Price of each resting order, as defined under 
proposed Article 1, Rule 1(pp).\81\ The Working Price of a resting 
order that is not eligible for price sliding will always be its limit 
price, whereas the Working Price of a resting order that is eligible 
for price sliding will be the most aggressive price at which the order 
can execute, depending on the prevailing NBBO for the subject 
security.\82\ The following Examples 21-23 illustrate how orders 
resting on the CHX book are currently executed:
---------------------------------------------------------------------------

    \81\ Id.
    \82\ Id.
---------------------------------------------------------------------------

    Example 21. Assume the same as Example 20 above, that the NBBO for 
security XYZ is $10.00 x $10.01, and that the Exchange is the only 
market at the NBB displaying 200 shares at $10.00.
    The CHX book as to security XYZ looks like this:
    [GRAPHIC] [TIFF OMITTED] TN25SE14.006
    
    Assume then that after the displayed portion of Bid 3 is refreshed, 
the Matching System receives an incoming limit order to sell 1000 
shares of security XYZ at $10.00/share. In this situation, since the 
size of the incoming offer is equal to the total number of shares 
represented by all resting bids at $10.00, the incoming offer would 
execute against all resting bids on the CHX book at the Working Price 
of the resting orders, which are their limit prices because they have 
not been price slid, in the following order: 4(100), 31 (100), 3(300), 
4(400), 1(100).
    Example 22. Assume the same as Example 21, except that the CHX book 
is empty with respect to security XYZ, and the NBBO for security XYZ is 
$9.99 x $10.00. Assume then that the Matching System accepts two orders 
in quick succession. The first order is a Routable Order to buy 100 
shares of security XYZ at $9.99/share (not eligible for NMS Price 
Sliding) and is assigned a sequence number of ``5'' (``Bid 5''). The 
second order is a limit order to buy 100 shares of security XYZ at 
$10.01/share marked CHX Only (eligible for NMS Price Sliding) \83\ and 
is assigned a sequence number of ``6'' (``Bid 6''). In this situation, 
pursuant to paragraph (b)(1), Bid 5 would be ranked at every

[[Page 57619]]

price point up to its limit price of $9.99 and Bid 6 would be ranked at 
every price point up to its limit price of $10.01. However, since the 
display of Bid 6 at $10.01 would cross the NBO in violation of Rule 
610(d) of Regulation NMS, Bid 6 would be price slid and would only be 
executable at the NBO locking price of $10.00 (i.e., Working Price) and 
displayable at one price increment below the NBO, at $9.99. The 
Matching System would then aggregate Bids 5 and 6 for display purposes, 
pursuant to amended paragraph (b)(6), and display a CHX Protected Bid 
at $9.99 for 200 shares of security XYZ. However, the bids would 
receive order execution priority as follows:
---------------------------------------------------------------------------

    \83\ See CHX Article 1, Rule 2(b)(1)(C).
    [GRAPHIC] [TIFF OMITTED] TN25SE14.007
    
    Thus, Bid 6 would have a Working Price of $10.00/share and Bid 5 
would have a Working Price of $9.99/share, which is its limit price. 
That is, if the Matching System then accepted an incoming offer for 200 
shares of security XYZ priced at $9.99/share, the incoming offer would 
first execute 100 shares against Bid 6 at $10.00/share, then against 
Bid 5 at $9.99/share.
    Example 23. Assume the same as Example 22, except that prior to the 
Matching System receiving an incoming offer for 200 shares of security 
XYZ priced at $9.99/share, the Upper Price Band for security XYZ moved 
to $9.99. As such, order could not be executed at a price more 
aggressive than $9.99 and the bids would receive order execution 
priority as follows:
[GRAPHIC] [TIFF OMITTED] TN25SE14.008

    Thus, both Bid 5 and Bid 6 would have a Working Price of $9.99/
share. Thus, if the Matching System then accepted an incoming offer for 
200 shares of security XYZ priced at $9.99/share, the incoming offer 
would first execute 100 shares against Bid 5 at $9.99/share, then 
against Bid 6 at $9.99/share.
    Amended paragraph (d)(3) reflects changes to the handling of Odd 
Lot orders pursuant to the proposed CHX Routing Services and states as 
follows:
    (3) Odd Lot orders and unexecuted Odd Lot remainders that are 
unable to be immediately displayed according to Rule 8(b)(6) above 
(because they are at a price that is better than the current CHX quote) 
shall be posted to, remain in, or be routed or cancelled from, the 
Exchange's Matching System according to the attached order modifiers. 
Orders remaining in the Matching System will continue to be ranked at 
the price and time at which they were originally received.
    Specifically, pursuant to proposed Article 19, Rule 3(a), amended 
paragraph (d)(3) adds that Odd Lot orders could be posted to, or routed 
away from, the Matching System, in addition to either remaining in, or 
being cancelled from, the Matching System.\84\ Also, amended paragraph 
(d)(3) replaced the phrase ``Participant's instruction,'' with the more 
technically accurate ``order modifiers.'' Moreover, as discussed above, 
the Exchange proposes to delete reference to current Article 20, Rule 
8(h) in current paragraph (d)(3), as the Exchange proposes to delete 
Article 20, Rule 8(h) in its entirety as obsolete.
---------------------------------------------------------------------------

    \84\ Incoming or resting Odd Lots priced at the CHX BBO that 
could not be aggregated with other orders for display purposes will 
be cancelled by the Matching System if it is marked Always Quote, as 
defined under CHX Article 1, Rule 2(c)(1).
---------------------------------------------------------------------------

    The Exchange proposes to amend paragraph (d)(4) to adopt style 
edits and to provide additional detail as to how the Matching System 
currently handles orders that are subject to Rule 201 of Regulation 
SHO. Specifically, in order to clarify the scope of the rule, the 
Exchange proposes to entitle the paragraph ``Rule 201 of Regulation 
SHO.'' The Exchange also proposes to capitalize all references to 
``Trading Center,'' as the Exchange now proposes to define the term in 
the CHX rules; \85\ to replace reference to ``short sale'' orders with 
``Sell Short,'' as short sale orders are, more accurately, limit orders 
marked Sell Short, as defined under Article 1, Rule 2(b)(3)(D); to 
insert a cross-reference to Article 1, Rule 2(b)(3)(E), which defines 
``Short Exempt''; and to replace the current citation to Article 20, 
Rule 8(h) with a citation to proposed Article 19, Rule 3, which details 
the proposed Routing Events. Also, given that current Rule 8(d)(4) 
addresses exceptions to the short sale price test restriction, as 
provided under Rules 201(b)(1)(iii)(A) and (B) of Regulation SHO, the 
Exchange proposes to adopt those citations in the amended rule.\86\
---------------------------------------------------------------------------

    \85\ See supra note 5.
    \86\ Rule 201(b)(1)(iii)(A) of Regulation SHO provides the 
Exchange's policies and procedures must be reasonably designed to 
permit ``the execution of a displayed short sale order of a covered 
security by a trading center if, at the time of initial display of 
the short sale order, the order was at a price above the current 
national best bid.''

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

[[Page 57620]]

    In addition, the Exchange proposes to adopt language that clarifies 
how the Matching System currently applies the Rule 201(b)(1)(iii)(A) 
exception to resting limit orders marked Sell Short and Reserve Size. 
The proposed language provides that the Rule 201(b)(1)(iii)(A) 
exception shall also apply to resting limit orders marked Sell Short 
and Reserve Size, as defined under Article 1, Rule 2(c)(3), and, 
pursuant to the exception, such orders shall be permitted to execute at 
its initially displayed price, up to its full size, including the 
undisplayed portion, during one order-matching event.\87\ The proposed 
language also provides that Reserve Size orders may not be modified or 
refreshed during an order-matching event.\88\
---------------------------------------------------------------------------

    \87\ An ``order-matching event'' refers to the matching of one 
incoming order against one or more marketable contra-side orders 
resting on the CHX book. The simplest example involves one incoming 
order matching against one resting order at one price point. 
However, an order-matching event could also involve one incoming 
order matching against two or more orders, sometimes at multiple 
price points.
    \88\ During an order matching event, an order sender cannot not 
change the size or price of the Reserve Size order.
---------------------------------------------------------------------------

    The purpose of this language is to clarify that the Rule 
201(b)(1)(iii)(A) exception applies to the entire Reserve Size order, 
including the undisplayed portion, so long as (1) the Reserve Size 
order was initially displayed at a price above the then-current NBB and 
(2) any execution(s) against the Reserve Size order at a price below 
one minimum price increment above the NBB is the result of one order-
matching event. Thus, the proposed language continues by providing that 
if a Reserve Size order is refreshed after an order-matching event 
(e.g., the incoming order was smaller than the resting Reserve Size 
order), but the refreshed quote cannot be permissibly displayed at the 
initially displayed price in compliance with Regulation SHO, the entire 
Reserve Size order shall be cancelled or price slid, if the order is 
marked CHX Only, as defined under the amended Article 1, Rule 
2(b)(1)(C).
    Moreover, the Exchange proposes to adopt language that provides 
that if the NBBO for a covered security subject to the short sale price 
test restriction become crossed, a Sell Short order in the covered 
security may be displayed or executed at a price that is less than or 
equal to the current NBB while the market is crossed. This language is 
virtually identical to the response to Question 6.1 of the ``Division 
of Trading and Markets: Responses to Frequency Asked Questions 
Concerning Rule 201 of Regulation SHO'' (``Regulation SHO FAQs'').\89\
---------------------------------------------------------------------------

    \89\ ``Division of Trading and Markets: Responses to Frequency 
Asked Questions Concerning Rule 201 of Regulation SHO.'' U.S. 
Securities and Exchange Commission, 20 Jan. 2011. Web. 16 June 2014. 
<http://www.sec.gov/divisions/marketreg/rule201faq.htm>.
---------------------------------------------------------------------------

Amended Article 1, Rule 2(b)(1)(C) (CHX Only)
    The Exchange proposes to expand the applicability of the current 
CHX Only modifier to limit orders marked Do Not Display or Reserve Size 
and not just ``fully-displayable'' limit orders (i.e., limit orders not 
marked by an order display modifier).\90\ Moreover, in light of the 
foregoing amendments to the Article 20, Rule 8(b) and (d), the Exchange 
proposes to make similar amendments to terminology used in defining the 
CHX Only modifier to be consistent with proposed Article 20, Rule 8(b) 
and (d).
---------------------------------------------------------------------------

    \90\ See Article 1, Rule 2(b)(1)(C).
---------------------------------------------------------------------------

    In 2011, the Exchange introduced the CHX Only order type, amended 
twice in 2013,\91\ which is designed to encourage displayed liquidity 
on the Exchange and to reduce automatic cancellations by the Matching 
System.\92\ The CHX Only modifier is a limit order modifier that 
requires the order to be ranked and executed on the Exchange, without 
routing away to another trading center. Order senders have the option 
to default all limit orders to ``CHX Only'' and therefore be subject to 
the CHX Only Price Sliding Processes. The CHX Only Price Sliding 
Processes is an order handling functionality comprised of NMS Price 
Sliding and Short Sale Price Sliding designed to ensure compliance with 
Rule 610(d) of Regulation NMS and Rule 201 of Regulation SHO. The CHX 
Only Price Sliding Processes are applied to all CHX Only orders that, 
at the time of order entry, would be in violation of Rule 610(d) of 
Regulation NMS and/or Rule 201 of Regulation SHO, if displayed or 
executed at the limit price. However, a CHX Only order that, at the 
time of order entry, could be displayed or executed in compliance with 
Regulation NMS and Rule 201 of Regulation SHO will not be subject to 
the CHX Only Price Sliding Processes and shall be displayed and 
executable without price sliding.
---------------------------------------------------------------------------

    \91\ See Securities Exchange Act Release No. 69319 (April 5, 
2013), 78 FR 21634 (April 11, 2013) (SR-CHX-2013-08); see also 
Securities Exchange Act Release No. 69075 (March 8, 2013), 78 FR 
16311 (March 14, 2013) (SR-CHX-2013-07).
    \92\ Prior to the recent amendment, the CHX Only order type was 
originally adopted in 2011. See Securities Exchange Act Release No. 
64319 (Apr. 21, 2011), 76 FR 23634 (Apr. 27, 2011) (SR-CHX-2011-04).
---------------------------------------------------------------------------

    Mechanically, for those orders subject to the CHX Only Price 
Sliding Processes, the Matching System will price slide orders multiple 
times depending on changes to the NBBO (the repricing of CHX Only sell 
short orders subject to Rule 201 of Regulation SHO is dependent solely 
on declines to the NBB), so long as the order can be displayed and 
executable in an increment consistent with the provisions of Rule 
610(d) of Regulation NMS and Rule 201 of Regulation SHO, until the 
order is executed, cancelled or the original limit price is reached. 
Also, the CHX Only Price Sliding Processes are based on Protected 
Quotations at equities exchanges other than the Exchange (Short Sale 
Price Sliding is based on the NBB) and 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. Like all limit orders ranked on the 
CHX book, CHX Only orders are ranked at every price point up to its 
limit price, as fully-displayable orders, then by sequence number. CHX 
Only orders that are price slid maintain their original sequence 
number, notwithstanding price sliding.
    The Exchange now proposes several amendments to the CHX Only 
modifier to permit the modifier to be attached to limit orders marked 
Do Not Display and Reserve Size and to clarify that Odd Lot orders 
marked CHX Only are also subject to the CHX Only Price Sliding 
Processes.
    Notably, the Exchange proposes to add additional language to 
Article 1, Rule 2(b)(1)(C)(i)(a), which outlines ``Initial NMS Price 
Sliding,'' to provide that in addition to when a CHX Only would lock or 
cross a Protected Quotation of an external market in violation of Rule 
610(d), NMS Price Sliding will also occur if, at the time of entry, a 
CHX Only order is priced at or through a contra-side Protected 
Quotation of an external market and is for an Odd Lot or is priced 
through a contra-side Protected Quotation of an external market and is 
marked Do Not Display. This additional language is necessary because 
Odd Lots could not, by themselves, be Protected Quotations and, thus, 
are not subject to Rule 610(d) of Regulation NMS.\93\ Moreover, since 
CHX Only orders marked Do Not Display could never be displayed at any 
price, a violation of Rule 610(d) of Regulation NMS would never occur.
---------------------------------------------------------------------------

    \93\ See CHX Article 20, Rule 8(b)(6).

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

[[Page 57621]]

    In addition, the Exchange proposes the following global changes 
under subparagraph (C):
    (1) The Exchange proposes to replace all reference to ``ranked'' or 
``re-rank'' with the more accurate term ``executable.'' Pursuant to 
proposed Article 20, Rule 8(b), a limit order is ranked at each price 
point up to its limit price by its display status then sequence number. 
Thus, an order subject to price sliding is not quite ``re-ranked,'' as 
it maintains its original rank in the CHX book behind orders already 
resting on the CHX book.\94\ Thus, the more accurate term is 
``executable,'' as price slid orders are ranked at every price point up 
to its limit price, but only executable at the most aggressive price 
permissible by Rule 611 of Regulation NMS (i.e., its ``Working 
Price'').\95\
---------------------------------------------------------------------------

    \94\ This concept is already codified under current Article 20, 
Rule 2(b)(1)(C)(iv), which provides that CHX Only order subject to 
the Price Sliding Processes will retain their time priority versus 
other orders based upon the time those orders were initially 
received by the Matching System.
    \95\ See supra note 73.
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    (2) The Exchange also proposes to adopt the term ``displayable,'' 
in addition to the current term ``displayed,'' because Odd Lot orders 
that are marked CHX Only would not be displayed at the Permitted 
Display Price if it could not be aggregated with other Odd Lots or 
Mixed Lots for display purposes, pursuant to current Article 20, Rule 
8(b)(6). Thus, price slid Odd Lots would be executable at the locking 
price and displayable at the Permitted Display Price, if the Odd Lot 
could not be aggregated for display purposes pursuant to current 
Article 20, Rule 8(b)(6).
    (3) The Exchange proposes to eliminate language in current 
subparagraphs (C)(i)(b)(1) and (2) and (C)(ii)(b) states that CHX Only 
orders ``shall receive a new timestamp'' at each price sliding event, 
as such language is confusing and unnecessary. As the Exchange 
clarified in SR-CHX-2013-07, the purpose of timestamp ``is to simply 
record the time of the price adjustment, as opposed to establishing or 
retaining time priority.'' \96\ Pursuant to subparagraph (C)(iv), CHX 
Only orders subject to the Price Sliding Processes retain their time 
priority versus other orders based upon the time those orders were 
initially received by the Matching System. Thus, for clarity, the 
Exchange proposes to delete reference to a ``new timestamp.''
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    \96\ See Securities Exchange Act Release No. 69075 (March 8, 
2013), 78 FR 16311 (March 14, 2013) (SR-CHX-2013-07).
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    Moreover, the Exchange proposes the following specific amendments. 
With respect to current subparagraph (C), the Exchange propose to 
capitalize the term ``Trading Center'' in the first paragraph, as the 
Exchange proposes to adopt the term as a defined term under Article 1, 
Rule 1(nn).\97\ Moreover, the Exchange proposes to eliminate the first 
sentence of the fourth paragraph under subparagraph (C), as the 
Exchange proposes to make the CHX Only modifier applicable to all limit 
orders, regardless of the attached order display modifier.
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    \97\ See supra note 5.
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    In addition, given that the Exchange proposes to permit Do Not 
Display orders to be marked CHX Only and require all resting limit 
orders marked Do Not Display to be handled as CHX Only, all resting 
sell short orders marked Do Not Display shall be subject to Short Sale 
Price Sliding. As such, if the short sale price test restriction under 
Rule 201 of Regulation SHO is in effect, resting sell short orders 
marked Do Not Display will not be cancelled if it would execute at a 
price at or below the NBB because such resting orders will always be 
price slid to the Permitted Price (i.e., one minimum price increment 
above the NBB). Thus, the Exchange proposes to delete the last sentence 
of the fourth paragraph under subparagraph (C), as such orders will be 
subject to the Short Sale Price Sliding Processes.
    Incidentally, the Exchange proposes to add a sentence to current 
Article 1, Rule 2(b)(1)(C)(ii)(b), which provides that to reflect 
increases in the NBB, the Matching System will continue to reprice an 
undisplayed CHX Only Sell Short order (i.e., CHX Only Sell Short order 
for an Odd Lot that could not be aggregated into a displayed round lot 
or a CHX Only Sell Short order marked Do Not Display) to the greater of 
the Permitted Price or the Lower Price Band, until the order is 
executed, cancelled or its original limit price is reached.
    With respect to subparagraph (C)(i)(a), aside from the amendments 
discussed above, the Exchange also proposes to add ``if not marked Do 
Not Display,'' prior to the word ``displayed,'' to clarify that orders 
marked Do Not Display would never be displayed at any price. The 
Exchange proposes to make similar amendments to the second paragraph 
under subparagraph (C)(i)(a), which details the interplay between the 
CHX Only Price Sliding Processes and Limit Up-Limit Down Price Sliding 
(``LULD Price Sliding''),\98\ which currently provides that the more 
aggressive of the NBB (NBO) and Lower (Upper) Price Band will dictate 
how an order would be price slid.\99\ Also, with respect to 
subparagraph (C)(i)(b), the Exchange proposes to replace ``re-ranked 
and re-displayed'' with the more general ``price slid,'' because the 
price sliding of orders marked Do Not Display will never result in the 
order being ``re-displayed.''
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    \98\ See CHX Article 20, Rule 2A(b)(2)(A)(i).
    \99\ See the Plan to Address Extraordinary Market Volatility 
Pursuant to Rule 608 of Regulation NMS under the Act (the ``Limit 
Up-Limit Down Plan'' or the ``Plan''), Securities Exchange Act 
Release No. 67091 (May 31, 2012), 77 FR 33498 (June 6, 2012) (the 
``Limit Up-Limit Down Release'').
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    The Exchange proposes to adopt subparagraphs (C)(i)(b)(5) and (6) 
to address ``multiple NMS Price Sliding'' for CHX Only orders marked Do 
Not Display and Reserve Size, respectively. Proposed subparagraph 
(C)(i)(b)(5) provides that in the event that a Protected Offer (Bid) of 
an external market crosses a resting CHX Only bid (offer) marked Do Not 
Display, the resting bid (offer) marked Do Not Display shall be price 
slid to lock the Protected Offer (Bid) of the external market.\100\ The 
following Example 24 illustrates this price sliding for resting CHX 
Only orders marked Do Not Display:
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    \100\ This is in contrast to fully-displayed CHX Only orders, 
which would be permitted to stand its ground at its displayed price 
where a subsequent contra-side Protected Quotation of an external 
market locked or crossed the fully-displayed CHX Only order.
---------------------------------------------------------------------------

    Example 24. Assume that the NBBO for security XYZ is $10.00 x 
$10.01. Assume that the CHX book has one resting bid marked Do Not 
Display and CHX Only for 100 shares of security XYZ priced at $10.01/
share (``CHX Only Bid 1''). Assume then that the NBBO moves to $9.99 x 
$10.00.
    In this situation, pursuant to proposed subparagraph (C)(i)(b)(5), 
CHX Only Bid would be price slid and executable at the NBO locking 
price of $10.00.
    Proposed subparagraph (C)(i)(b)(6) provides that a resting CHX Only 
order marked Reserve Size shall be price slid to a less aggressive 
price if a refreshed display of the order would lock or cross a 
Protected Quotation of an external market and shall receive execution 
priority pursuant to Article 20, Rule 8(b)(4). If a contra-side 
Protected Quotation of an external market locked or crossed the 
displayed portion of a CHX Only Reserve Size order, the CHX Only 
Reserve Size order would be permitted to remain displayed at its 
current displayed price because displayed portions of reserve size 
orders are treated the same as fully-displayed limit orders for the 
purposes of Rule 610(d) of Regulation NMS. The following Examples 25 
and 26 illustrates this price sliding for CHX Only orders marked Do Not 
Display:

[[Page 57622]]

    Example 25. Assume the same as Example 24, except that the resting 
bid is marked Reserve Size and CHX Only and is for 500 shares of 
security XYZ, 100 of which are displayed, priced at $10.00/share (``CHX 
Only Bid 2''). Assume then that the NBBO moves to $9.99 x $10.00.
    In this situation, CHX Only Bid 2 would be permitted to remain 
displayed at $10.00 because it was displayed at a price below the NBO 
at the time it was initially displayed. Furthermore, pursuant to 
Interpretation and Policy .01(d) of Article 20, Rule 5, the Matching 
System would ignore the crossing quotes and execute orders pursuant to 
the first uncrossed set of Protected Quotations.
    Example 26. Assume the same as Example 25 and that prior to the 
NBBO moving to $9.99 x $10.00, the Matching System receives a limit 
order to sell 100 shares of security XYZ at $10.00/share, which is 
immediately executed against the displayed portion of CHX Only Bid 2. 
Assume then that prior to the displayed portion of CHX Only Bid 2 being 
refreshed, the NBBO moves to $9.99 x $10.00. Thus, a refreshed display 
of 100 shares of security XYZ at $10.00/share would lock the markets in 
violation of Rule 610(d) of Regulation NMS.
    In this situation, the remaining 400 shares of CHX Only Bid 2 would 
be price slid and executable at the NBO locking price of $10.00/share, 
but the displayed portion would be displayed at the Permitted Display 
Price of $9.99. Thus, if an incoming offer for 400 shares of security 
XYZ priced at $9.99/share were subsequently received by the Matching 
System, the incoming offer would execute against the full size of CHX 
Only Bid 2 (i.e., the first 100 displayed shares, followed by the 300 
shares that are undisplayed) at $10.00/share.
    Also, the Exchange proposes to amend the last sentence under 
subparagraph (c)(i)(b) to include ``subparagraphs (3) to (6).''
    Pursuant to current Article 20, Rule 8(b)(4), when the displayed 
portion of a Reserve Size order is refreshed, the displayed portion 
receives a new sequence number reflecting the time at which the display 
was refreshed, regardless of whether the Reserve Size order is price 
slid. However, the undisplayed portion of a Reserve Size order will 
always maintain its original sequence number, provided that the size of 
the undisplayed portion is only decremented. As such, the Exchange 
proposes to amend subparagraph (C)(iv) to provide that CHX Only orders 
subject to the Price Sliding Processes will retain their time priority 
versus other orders based upon the time those orders were initially 
received by the Matching System; provided, however, that the displayed 
portion of a Reserve Size CHX Only order that is refreshed shall have 
time priority based on the time the displayed order was refreshed.\101\
---------------------------------------------------------------------------

    \101\ See supra Example 20.
---------------------------------------------------------------------------

    Under subparagraph (C)(ii), aside from the amendments discussed 
above, the Exchange proposes several amendments. Immediately after the 
title of subparagraph (C)(ii) ``Short Sale Price Sliding,'' the 
Exchange proposes to add language clarifying that a limit order marked 
Sell Short, as defined under Article 1, Rule 2(b)(3)(D), must comply 
with the requirements of Article 20, Rule 8(d)(4), which outlines how 
the Matching System handles orders subject to the short sale price test 
restriction under Rule 201 of Regulation SHO. The proposed language 
continues by providing that if the Sell Short order is marked CHX Only, 
the order shall be price slid pursuant to the Short Sale Price Sliding 
rule.
    In addition, the Exchange proposes to replace all reference under 
subparagraph (C)(ii) to ``repriced and displayed'' and ``reprice and 
display'' with the more accurate ``repriced (and displayed, if 
applicable)'' and ``reprice (and re-display, if applicable),'' 
respectively, since limit orders marked Do Not Display and CHX Only 
will never be displayed at any price. The Exchange also proposes to 
capitalize all references to the term ``Sell Short,'' as it is a 
defined term under Article 1, Rule 2(b)(3)(D).
    Under subparagraph (C)(ii)(a), the Exchange proposes to delete 
reference to the Limit Up-Limit Down Lower Price Band within 
subparagraph (C)(ii)(a) and restate that language as a separate 
paragraph, which provides that if the Permitted Price is priced below 
the Lower Price Band, an incoming CHX Only Sell Short order that, at 
the time of entry, is priced below the Lower Price Band, shall be 
repriced (and displayed, if applicable) at the Lower Price Band, 
pursuant to Article 20, Rule 2A(b)(2)(A)(i). The Exchange submits that 
this proposed amendment will improve the logical flow of the rule. 
Similarly, the Exchange proposes to replace ``irrespective of the 
prices at which such orders are priced and displayed'' with the 
simplified ``notwithstanding price sliding.''
    Under subparagraph (C)(ii)(b), the Exchange proposes to add 
language that provides that to reflect increases in the NBB, the 
Matching System will continue to reprice an undisplayed CHX Only Sell 
Short order to the greater of the Permitted Price or the Lower Price 
Band, until the order is executed, cancelled or its original limit 
price is reached, pursuant to Article 20, Rule 2A(b)(2)(A)(ii). This 
language is necessary because undisplayed CHX Only Sell Short orders 
cannot not rely upon the Rule 201(b)(1)(iii)(A) of Regulation SHO 
exception to the short sale price test restriction to be executable at 
a price below one minimum price above the then current NBB.\102\ Given 
that the Exchange proposes to handle all orders marked Do Not Display 
as CHX Only, the Exchange intends to price slide these orders, as 
opposed to cancelling them, as the Exchange does currently.
---------------------------------------------------------------------------

    \102\ See supra note 86.
---------------------------------------------------------------------------

    Under subparagraph (C)(ii)(d)(1), the Exchange proposes to add 
language to cross-reference current Article 20, Rule 8(b)(4), which 
currently codifies Rule 201(b)(1)(iii)(A) of Regulation SHO in CHX 
rules.\103\ The Exchange also proposes to delete language referring to 
CHX Only Sell Short orders that are ``subject to Short Sale Price 
Sliding,'' as all CHX Only Sell Short orders are eligible for this 
exception, even if the order was not initially price slid upon 
acceptance by the Matching System. Finally, the Exchange proposes to 
amend the language referring to the Lower Price Band to simply provide 
that a CHX Only Sell Short order may never execute (or be displayed, if 
applicable) at a price below the Lower Price Band.
---------------------------------------------------------------------------

    \103\ Id.
---------------------------------------------------------------------------

    Aside from the foregoing, the Exchange does not propose to 
otherwise amend the operation of the CHX Only modifier. Thus, the CHX 
Only modifier shall remain compatible or incompatible with other order 
modifiers as described under SR-CHX-2013-07.\104\
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    \104\ See supra note 96.
---------------------------------------------------------------------------

Amended Article 20, Rule 2A(b) (LULD Price Sliding)
    In light of the proposed amendment to the CHX Only modifier, the 
Exchange proposes to amend Article 20, Rule 2A(b)(1), which details the 
operation of Limit Up-Limit Down Price Sliding (``LULD Price 
Sliding''), to amend the definition of ``eligible orders'' for LULD 
Price Sliding to provide that ``all incoming and resting limit orders 
shall be eligible for LULD Price Sliding.'' This amendment would make 
LULD Price Sliding consistent with the amended CHX Only modifier, which 
the Exchange now proposes to make applicable to Do Not Display and 
Reserve Size orders. Aside from this amendment, the Exchange does not

[[Page 57623]]

propose to otherwise amend the operation of LULD Price Sliding as 
described under SR-CHX-2013-08.\105\
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    \105\ See Exchange Act Release No. 69319 (April 5, 2013), 78 FR 
21634 (April 11, 2013) (SR-CHX-2013-08).
---------------------------------------------------------------------------

Operative Date of Proposed Rule Change
    This proposed rule filing shall become effective upon filing, 
pursuant to Section 19(b)(3)(A) of the Act \106\ and Rule 19b-4(f)(6) 
thereunder,\107\ but will be implemented upon two weeks' notice by the 
Exchange to its Participants via Regulatory Notice. The Exchange 
anticipates that the proposed CHX Routing Services and other amendments 
described herein will become operational, at earliest, by the end of 
2014. In addition, prior to the proposed CHX Routing Services becoming 
operational, the Exchange will adopt a fee for use of the proposed CHX 
Routing Services, in a separate Rule 19b-4 filing.
---------------------------------------------------------------------------

    \106\ 15 U.S.C. 78s(b)(3)(A).
    \107\ 17 CFR 240.19b-4(f)(6).
---------------------------------------------------------------------------

2. Statutory Basis
    The Exchange submits that the proposed rule change to adopt the 
proposed CHX Routing Services, modify the Exchange's price sliding 
functionalities, and clarify the operation of the Matching System, is 
consistent with Section 6(b) of the Act in general \108\ and furthers 
the objectives of Section 6(b)(5) in particular,\109\ because 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 transaction in 
securities, to remove impediments to, and perfect the mechanisms of, a 
free and open market and, in general, protect investors and the public 
interest.
---------------------------------------------------------------------------

    \108\ 15 U.S.C. 78f(b).
    \109\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    The proposed CHX Routing Services will increase the likelihood of 
order executions resulting from orders submitted to the Matching 
System, as Routable Orders that could not be executed within the 
Matching System will be routed for execution at an away routing 
destination by the Exchange, provided that a Routing Event is 
triggered. As such, the routing of orders to execute against Protected 
Quotations of external markets will enhance the efficiency of the 
National Market System by permitting Participants to obtain executions 
for orders at protected markets displaying better priced contra-side 
quotes, without having to submit orders in addition to Routable Orders 
already submitted to the Matching System. This will, in turn, result in 
more efficient order sending activity, which is consistent with the 
aforementioned objectives of Section 6(b)(5).
    Also, the proposed expansion of the CHX Only modifier and LULD 
Price Sliding to include limit orders marked Do Not Display and Reserve 
Size and amendment to the Do Not Display modifier to require all 
resting Do Not Display orders to be handled as CHX Only will reduce the 
number of order cancellations within the Matching System by price 
sliding orders that would otherwise be cancelled if they could not be 
displayed or executed in compliance with Regulation NMS. Consequently, 
there will be more liquidity resting on the CHX book, which will 
increase the likelihood of order executions, which is also consistent 
with the aforementioned objectives of Section 6(b)(5).
    In addition, the proposed amendment to the Do Not Display modifier 
to correct a misstatement that such orders may [sic] hidden ``in part'' 
will result in the description of the order modifier to be more 
accurate, which is consistent with the aforementioned objectives of 
Section 6(b)(5).
    Moreover, the proposed amendments to Article 20, Rule 8 to clarify 
how orders are currently ranked, displayed, and automatically executed 
within the Matching System will promote a better understanding of how 
orders are handled within the Matching System. This greater 
transparency will provide better protection to investors and promote 
the public interest, which is consistent with the aforementioned 
objectives of Section 6(b)(5).

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

    The Exchange does not believe that the proposed rule change will 
have an impact on competition that is unnecessary or inappropriate in 
furtherance of the purposes of the Act. To the contrary, the proposed 
CHX Routing Services and proposed amendments to the CHX Only and Do Not 
Display modifier and the LULD Price Sliding Processes should act as a 
positive force for competition by providing a more transparent and 
versatile alternative to similar routing services and price sliding 
functionalities offered by other exchanges. Moreover, the proposed 
clarification of the operation of the Matching System would have no 
impact on competition as it does not introduce any new functionality 
not already offered by the Exchange.

C. Self-Regulatory Organization's Statement on Comments Regarding the 
Proposed Rule Changes 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 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 from the date on which it was filed, or 
such shorter time as the Commission may designate, it has become 
effective pursuant to Section 19(b)(3)(A) of the Act \110\ and 
subparagraph (f)(6) of Rule 19b-4 thereunder.\111\
---------------------------------------------------------------------------

    \110\ 15 U.S.C. 78s(b)(3)(A).
    \111\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6) 
requires the Exchange to give the Commission written notice of the 
Exchange's intent to file the proposed rule change along with a 
brief description and text of 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.
---------------------------------------------------------------------------

    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-CHX-2014-15 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-CHX-2014-15. This file

[[Page 57624]]

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 CHX. 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-2014-15 and should be 
submitted on or before October 16, 2014.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\112\
---------------------------------------------------------------------------

    \112\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-22787 Filed 9-24-14; 8:45 am]
BILLING CODE 8011-01-P


