
[Federal Register Volume 81, Number 57 (Thursday, March 24, 2016)]
[Notices]
[Pages 15765-15770]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-06632]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-77406; File No. 10-222]


Investors' Exchange LLC; Notice of Filing of Amendment Nos. 2, 3, 
and 4 to, and Order Instituting Proceedings To Determine Whether To 
Grant or Deny, and Notice of Designation of Longer Period for 
Commission Action on Proceedings To Determine Whether To Grant or Deny, 
an Application for Registration as a National Securities Exchange Under 
Section 6 of the Securities Exchange Act of 1934, as Modified by 
Amendment Nos. 1, 2, 3, and 4 Thereto

March 18, 2016.

I. Introduction

    On August 21, 2015, Investors' Exchange LLC (``IEX'' or ``IEX 
Exchange'') submitted to the Securities and Exchange Commission 
(``Commission'') a Form 1 application (``Form 1''), seeking 
registration as a national securities exchange pursuant to Section 6 of 
the Securities Exchange Act of 1934 (``Act'').\1\ IEX amended its Form 
1 four times, including its most recent amendment on March 7, 2016. The 
Commission is required to review the exchange registration application, 
as amended, together with all comments received, and make a 
determination whether to grant the registration.\2\
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    \1\ 15 U.S.C. 78f.
    \2\ See 15 U.S.C. 78f and 15 U.S.C. 78s.
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    On September 9, 2015, IEX submitted Amendment No. 1 to its Form 
1.\3\ Notice of the application, as amended, was published for comment 
in the Federal Register on September 22, 2015.\4\ IEX submitted several 
responses to comments.\5\ On December 18, 2015, IEX consented to an 
extension of time to March 21, 2016 for Commission consideration of its 
Form 1.\6\ IEX submitted a second amendment to its Form 1 on February 
29, 2016 that proposes to make functional changes to its outbound 
router, which had been the subject of extensive public comment as 
originally proposed.\7\ IEX submitted a third amendment to its Form 1 
on March 4, 2016.\8\ IEX submitted a fourth amendment to its Form 1 on 
March 7, 2016.\9\
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    \3\ In Amendment No. 1, IEX submitted updated portions of its 
Form 1, including revised exhibits, a revised version of the 
proposed IEX Rule Book, and revised Addenda C-2, C-3, C-4, D-1, D-2, 
F-1, F-2, F-3, F-4, F-5, F-6, F-7, F-8, F-9, F-10, F-11, F-12, and 
F-13.
    \4\ See Securities Exchange Act Release No. 75925 (September 15, 
2015), 80 FR 57261 (``Notice'').
    \5\ See Letter from Sophia Lee, General Counsel, IEX, to Brent 
J. Fields, Secretary, Commission, dated November 13, 2015 (``IEX 
First Response''); Letter from Sophia Lee, General Counsel, IEX, to 
Brent J. Fields, Secretary, Commission, dated November 23, 2015 
(``IEX Second Response''); Letter from Sophia Lee, General Counsel, 
IEX, to Brent J. Fields, Secretary, Commission, dated February 9, 
2016 (``IEX Third Response''); Letter from Donald Bollerman, Head of 
Markets and Sales, IEX Group, Inc., to File No. 10-222, dated 
February 16, 2016 (``IEX Fourth Response''); and Letter from IEX 
Group, Inc., to File No. 10-222, dated February 19, 2016 (``IEX 
Fifth Response'').
    \6\ See Letter from Sophia Lee, General Counsel, IEX, to Brent 
J. Fields, Secretary, Commission, dated December 18, 2015.
    \7\ In Amendment No. 2, IEX proposed changes to its Form 1 to, 
among other things, redesign its outbound routing functionality to 
direct routable orders first to the IEX routing logic instead of 
directly to the IEX matching engine. See Letter from Sophia Lee, 
General Counsel, IEX, to Brent J. Fields, Secretary, Commission, 
dated February 29, 2016, at 1. In this manner, the IEX router would 
``interact with the IEX matching system over a 350 microsecond 
speed-bump in the same way an independent third party broker would 
be subject to a speed bump.'' Id.
    \8\ In Amendment No. 3, IEX proposed changes to its Form 1 to 
clarify and correct revisions to its rulebook that it made in 
Amendment No. 2. See Letter from Sophia Lee, General Counsel, IEX, 
to Brent J. Fields, Secretary, Commission, dated March 4, 2016.
    \9\ In Amendment No. 4, IEX proposed changes to its Form 1 to 
update Exhibit E to reflect changes it proposed in Amendment No. 2. 
See Letter from Sophia Lee, General Counsel, IEX, to Brent J. 
Fields, Secretary, Commission, dated March 7, 2016.
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    Section 19(a)(1) of the Act \10\ requires the Commission, within 
ninety days of the date of publication of notice of an application for 
registration as a national securities exchange, or such longer period 
as to which the applicant consents,\11\ to, by order, grant such 
registration\12\ or institute proceedings to determine whether such 
registration should be denied.\13\ This order is providing public 
notice of the significant changes in Amendment Nos. 2, 3, and 4 to 
IEX's Form 1 and soliciting comment on the Form 1 as amended, while 
simultaneously instituting proceedings under Section 19(a)(1)(B) of the 
Act \14\ to determine whether to grant or deny IEX's exchange 
registration application, as amended.
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    \10\ 15 U.S.C. 78s(a)(1).
    \11\ See supra note 6 and accompanying text (noting that IEX 
provided the Commission with an extension of time until March 21, 
2016).
    \12\ 15 U.S.C. 78s(a)(1)(A).
    \13\ 15 U.S.C. 78s(a)(1)(B).
    \14\ 15 U.S.C. 78s(a)(1)(B).
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    Section 19(a)(1)(B) of the Act \15\ further provides that such 
proceedings shall be concluded within one hundred eighty days of the 
date of publication of notice of the filing of the registration 
application. Under Section 19(a)(1)(B), the Commission may, however, 
extend the time for conclusion of such proceedings for up to ninety 
days if it finds good cause for such extension and publishes its 
reasons for so finding. As discussed below, the Commission believes 
that there is good cause for a ninety-day extension of these 
proceedings, and is therefore designating June 18, 2016 as the date by 
which the Commission shall determine whether to grant or deny IEX's 
Form 1 for registration as a national securities exchange.
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    \15\ 15 U.S.C. 78s(a)(1)(B).
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    The Commission received over 430 comment letters on IEX's Form 1, 
many focused on IEX's proposed trading rules and system.\16\ Many 
commenters supported IEX's application.\17\ Other commenters either 
opposed IEX's application or questioned whether certain proposed 
elements of IEX's trading system would be consistent with the 
requirements of the Act applicable to a registered national securities 
exchange.\18\
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    \16\ The public comment file for IEX's Form 1 (File No. 10-222) 
is available on the Commission's Web site at: http://www.sec.gov/comments/10-222/10-222.shtml.
    \17\ See, e.g., Verret Letter; Shatto Letters 1, 2, and 3; 
Simonelis Letter; Leuchtkafer First Letter; Leuchtkafer Second 
Letter; Capital Group Letter; Southeastern Letter; Navari First 
Letter; Navari Second Letter; DV Advisors Letter; Cowen Letter; 
Themis First Letter; Themis Second Letter; Oppenheimer Funds Letter; 
Murphy Letter; Birch Bay Letter; Healthy Markets Letter; Keblish 
Letter; Bowcott Letter; Secrist Letter; Stevens Letter; Oltean 
Letter; Park Letter; Crespo Letter; Hovanec Letter; Meskill Letter; 
Brian S. Letter; Glennon Letter; Shaw Letter; Upson Letter; Goldman 
Sachs Letter; Robeson Letter; Lynch Letter; Budish Letter; Chen & 
Foley Letter; Liquidnet Letter; T. Rowe Price Letter.
    \18\ See, e.g., BATS First Letter; BATS Second Letter; NYSE 
First Letter; NASDAQ First Letter; NASDAQ Second Letter; Citadel 
First Letter; Citadel Second Letter; Citadel Third Letter; Citadel 
Fourth Letter; FIA First Letter; Hudson River Trading First Letter; 
Hudson River Trading Second Letter; Anonymous First Letter; 
Hunsacker Letter; Modern Markets Initiative Letter; Tabb Letter; 
Weldon Letter; Markit First Letter; Markit Second Letter; Direct 
Match Letter; Duffy Letter; Scott Letter.
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    Among the commenters who supported IEX's exchange registration, 
several argued that IEX would offer a market solution to address 
certain market inefficiencies and conflicts of interest in a manner 
that may protect

[[Page 15766]]

the interests of buy-side investors.\19\ In particular, some commenters 
noted IEX's decision not to pursue ``maker-taker'' pricing and instead 
offer flat transaction fees.\20\ Some commenters praised IEX for 
offering fewer order types.\21\ Several commenters highlighted IEX's 
``coil'' delay (frequently referred to as IEX's ``speed bump''), 
discussed in detail below, and asserted that it may help counter 
latency arbitrage.\22\ Some commenters questioned the motive of certain 
commenters who opposed the proposal.\23\ In addition, one commenter 
argued that the coil delay should not be grounds for denying IEX's 
exchange application, and suggested that IEX be phased into the 
national market system under a pilot program so that the effect of 
IEX's access delay on the wider market could be better assessed.\24\
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    \19\ See, e.g., Capital Group Letter at 1 (noting the 
``technologies and practices to discourage predatory behavior'' 
including the ``350 microsecond buffer,'' the lack of maker-taker 
pricing, and ``simple order types''); Southeastern Letter (submitted 
on behalf of a group of undersigned asset managers) (complimenting 
IEX's proposed benefits to investors in ``reducing structural 
inefficiencies in the market, and offering a more balanced and 
simplified market design''); Navari First Letter at 1 (noting 
certain features that ``have great promise for the [r]etail 
[i]nvestor''); DV Advisors Letter; Cowen Letter; Themis First Letter 
(noting that IEX's ``unconflicted investor-friendly alternative'' 
will ``employ technology designed to even playing fields, rather 
than exploit information asymmetry,'' that IEX will be ``a stark 
alternative to other stock exchange models that seem to be more 
focused on selling speed and data,'' and that as an alternative 
trading system, IEX allowed it and its customers ``to achieve best 
execution''); Oppenheimer Funds Letter; Murphy Letter (arguing that 
IEX's design should ``help to limit and even eliminate the 
electronic front running that is central to the problems in the 
market today''); Keblish Letter; Secrist Letter; Stevens Letter; 
Oltean Letter; Meskill Letter; fi360 Letter; TRS Letter; Lynch 
Letter; Jefferies Letter; T. Rowe Price Letter; Liquidnet Letter.
    \20\ See, e.g., Capital Group Letter; Southeastern Letter; 
Navari First Letter; Navari Second Letter; Themis Letter 1; 
Oppenheimer Funds Letter; Healthy Markets Letter; Abel/Noser Letter; 
Goldman Sachs Letter; Liquidnet Letter; Franklin Templeton 
Investments Letter; TRS Letter. The Commission notes, however, that 
fees are not actually part of IEX's Form 1. Rather, if IEX were to 
be approved as an exchange, it would need to submit separate filings 
under Section 19(b) of the Act to establish fees that it would 
charge to members and others using its facilities. Nevertheless, in 
its Second Response Letter, IEX noted that, as an exchange, it would 
intend to charge a flat transaction fee. See IEX Second Response at 
9.
    \21\ See, e.g., Capital Group Letter; Southeastern Letter; 
Shatto First Letter; Navari First Letter; Oppenheimer Funds Letter; 
Healthy Markets Letter; Norges Bank Letter; Burgess Letter; fi360 
Letter; TRS Letter. But see NYSE First Letter at 9 (arguing that 
IEX's proposed menu of order types is not necessarily ``simple'' and 
the potential different combinations of instructions for limit 
orders is in the hundreds).
    \22\ See, e.g., T. Rowe Price Letter at 1-2; Navari Second 
Letter; Healthy Markets Letter at 2-4; Jefferies Letter at 3; Chen & 
Foley Letter at 2-3; Leuchtkafer Second Letter at 9; Budish Letter 
at 4. See also Burgess Letter; Capital Group Letter; Franklin 
Templeton Investments Letter; Michael Schroeder Letter; Leeson 
Letter; Lupinski Letter; Oorjitham Letter; Eric K Letter; Grey 
Letter; Spear Letter; Baggins Letter; Nixon Letter; Campbell Letter; 
Moses Letter; Huff Letter; Kaye Letter; Jean Letter; Gloy Letter; 
Givehchi Letter; Kara Letter; Hiester Letter; Benites Letter; 
Eustace Letter; Ramirez Letter; Luce Letter; Arnold Letter; Tidwell 
Letter; Doyle Letter; Long Letter; Kim Letter; Mannheim Letter; 
Oppenheimer Funds Letter.
    \23\ See, e.g., Verret Letter at 2 (arguing that ``incumbent 
firms have long sought to utilize regulatory barriers to entry to 
minimize competition, and it would appear a number of firms are 
presently using the regulatory comment process regarding IEX's 
application as a venue to replicate that strategy here''); Crespo 
Letter; Brian S. Letter.
    \24\ See Angel Letter at 3-5. The pilot program suggested by 
this commenter would be to measure the effect on the market of 
protecting IEX's quotation notwithstanding the ``speed bump.'' See 
id. at 4-5. According to the commenter, if the pilot caused material 
harm, it could be halted, in which case IEX could still operate as 
an exchange but without having its quotes protected under Regulation 
NMS. See id. at 5. See also Wolfe Letter at 3 (agreeing with the 
pilot approach suggested in the Angel Letter).
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    Among the commenters who were critical of aspects of IEX's 
proposal, most focused on issues surrounding IEX's coil delay, IEX's 
affiliated outbound router and what they viewed as an unfair advantage 
to bypass the outbound coil delay, and IEX's proposed order types.\25\ 
Other commenters did not express a view on whether the Commission 
should grant or deny IEX's application.\26\
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    \25\ See, e.g., NYSE First Letter; NASDAQ First Letter; BATS 
First Letter; Citadel First Letter; Citadel Second Letter; Citadel 
Third Letter; Hudson River Trading First Letter; Hudson River 
Trading Second Letter; FIA First Letter.
    \26\ See, e.g., Virtu Letter; Healthy Markets Letter; Tabb 
Letter; Aesthetic Integration Letter.
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II. Description of IEX's Trading System

    IEX, which currently operates a trading platform as an alternative 
trading system (``ATS''), is seeking to register as a national 
securities exchange. Below is a brief description of the proposed IEX 
exchange trading platform, including the new aspects of the system 
concerning the router functionality where noted.\27\
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    \27\ For more detail on IEX's proposed trading system, see IEX's 
Form 1 and Exhibits, as amended (in particular Exhibits B (the 
proposed rulebook) and E (a narrative description of the proposed 
operation of IEX as an exchange)), which are available on the 
Commission's Web site at http://www.sec.gov/rules/other/otherarchive/other2015.shtml.
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    Order Execution. Non-marketable orders submitted to IEX would be 
displayed or non-displayed, depending on the instructions indicated by 
the IEX member submitting the order.\28\ IEX would direct an order (or 
any portion thereof) that it could not execute on IEX to away markets 
for execution through IEX Services LLC (``IEXS''), IEX's wholly owned 
single-purpose outbound router, unless the terms of the order direct 
IEX not to route such order away.\29\
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    \28\ See Proposed IEX Rule 11.220(a)(1).
    \29\ See Proposed IEX Rule 11.230(b). See also Amendment Nos. 2 
and 3.
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    IEX proposed several pegged order types--primary peg, midpoint peg, 
and discretionary peg--all of which would be non-displayed with prices 
that are automatically adjusted by the IEX system in response to 
changes in the national best bid and offer (``NBBO'') (subject to a 
limit price, if any).\30\ As noted below, it is these types of dark 
pegged orders--and not standard market or limit orders, or displayed 
quotes or orders--that would be affected by the proposed coil delay.
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    \30\ See Proposed IEX Rule 11.190(a)-(b).
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    Access and the Coil Delay. Only broker-dealer members of IEX and 
entities that enter into market access arrangements with members 
(collectively, ``Users'') would have access to the IEX system.\31\ 
Users would connect to IEX through a single Point-of-Presence (``POP'') 
located in Secaucus, New Jersey.\32\ After entering through the POP, a 
User's electronic message sent to the IEX trading system would traverse 
the IEX ``coil,'' which is a box of compactly coiled optical fiber 
cable equivalent to a prescribed physical distance of 61,625 meters 
(approximately 38 miles).\33\ After exiting the coil, the User's 
message would travel an additional physical distance to the IEX trading 
system, located in Weehawken, New Jersey.\34\ According to IEX, the 
coil, when combined with the physical distance between the POP and the 
IEX trading system (hereinafter the ``POP/coil''), provides IEX Users 
sending non-routable orders to IEX with 350 microseconds \35\ of one-
way latency (hereinafter the ``POP/coil delay'').\36\
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    \31\ To obtain authorized access to the IEX System, each User 
must enter into a User Agreement with IEX. See Proposed IEX Rule 
11.130(a).
    \32\ See IEX Second Response at 2.
    \33\ See IEX First Response at 3.
    \34\ See Exhibit E to IEX's Form 1 submission, at 12. See also 
IEX First Response at 3.
    \35\ A microsecond is one millionth of a second.
    \36\ See IEX First Response at 3. See also Amendment Nos. 2 and 
3.
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    Several commenters expressed concern that IEX's previously-
published Form 1 lacked specific detail about how the POP/coil 
structure would work, including what messages and activity would--and 
would not--be subject to the delay.\37\ IEX responded by supplementing 
the record through its

[[Page 15767]]

first two response letters.\38\ Most recently, IEX proposed a new 
approach to outbound routing, which is discussed further below.
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    \37\ See, e.g., NYSE First Letter and Nasdaq First Letter.
    \38\ See IEX First Response and IEX Second Response.
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    According to IEX, all incoming messages (e.g., orders to buy or 
sell and any modification to a previously sent open order) from any 
User would traverse the POP/coil to initially reach IEX. In addition, 
all outbound messages from IEX back to a User (e.g., confirmations of 
an execution that occurred on IEX) would pass through the same route in 
reverse.\39\ IEX's direct proprietary market data feed, which is an 
optional data feed that IEX would make available to subscribers, also 
would traverse the POP/coil.\40\
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    \39\ See IEX First Response at 3.
    \40\ See id.
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    As originally proposed, one type of inbound message and two types 
of outbound messages would not traverse the POP/coil, specifically:

    1. Inbound market data from other trading centers to the IEX 
system would not traverse the POP/coil;
    2. Orders routed outbound from IEX through IEXS to away trading 
centers for execution (as well as reports back to IEX from those 
away trading centers) would not traverse the POP/coil (though 
execution and transaction reports sent from IEX back to Users would 
traverse the POP/coil and thus would be delayed) (as discussed 
below, IEX recently proposed a materially different approach to 
outbound routing that it intends will eliminate any exclusive 
advantages provided to its routing functionality); and
    3. Outbound transaction and quote messages sent from IEX to the 
applicable securities information processor (``SIP'') would not pass 
through the POP/coil, but instead would be sent directly from the 
IEX system to the SIP processor.\41\
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    \41\ See id. at 3-4.

Finally, updates to resting pegged orders on IEX would be processed 
within the IEX trading system and would not require that separate 
messages be transmitted from outside the trading system, which would 
otherwise traverse the POP/coil, for each update.\42\
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    \42\ See id.
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    According to IEX, its POP/coil delay, including its application to 
some but not all of the message traffic into and out of its trading 
system, was originally designed to achieve two main purposes: (1) To 
allow IEX time to update the prices of resting dark pegged orders on 
its book (whose permissible execution prices are not static, but rather 
are tied to the NBBO as IEX sees it through the proprietary data feeds 
it purchases from each exchange) in response to changes in market 
prices before other market participants can access IEX's resting pegged 
orders at potentially ``stale'' prices (i.e., pegged order prices that 
had not been updated by IEX when the new incoming order arrived at 
IEX); \43\ and (2) to delay the trade acknowledgements IEX sends to 
Users, as well as to delay its proprietary outbound data feed that 
reflects the occurrence of an execution on IEX, both of which 
originally provided IEX's affiliated outbound router with a ``head 
start'' as it routes out to access trading interest posted on other 
exchanges before other market participants learn about a trade on IEX 
and can trade with or re-price that away interest in reaction to the 
execution that occurred on IEX.\44\
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    \43\ See id. at 4 (explaining that the POP/coil is designed ``to 
ensure that no market participants can take action on IEX in 
reaction to changes in market prices before IEX is aware of the same 
price changes on behalf of all IEX members''). See also Hudson River 
Trading First Letter at 3 (discussing the purposes of the POP/coil 
delay). One commenter noted that the POP/coil delay ``has no 
impact'' on regular displayed orders, and ``simply slows down the 
trade execution process but does not alter the outcome'' for non-
pegged orders. Id. at 2-3 (``Similar to a 100-meter sprint, if you 
simply add 350 microseconds to each participant's time, neither the 
order in which they finish nor their time differentials will 
change.''). Rather, the commenter argued that ``IEX delays all 
transparent displayed orders that are critical to price discovery 
without altering the outcomes of those orders . . . for the benefit 
of hidden, pegged orders that free-ride on price discovery.'' See 
Hudson River Trading Second Letter at 4.
    \44\ See IEX Second Response at 14 (``. . . the purpose of 
requiring outbound execution messages to go through the POP (350 
microseconds) is to prevent `information leakage' or `liquidity 
fade' when IEXS routes to other markets'').
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    Outbound Routing. In the three recent amendments to its Form 1, 
IEX, among other things, proposed a significantly different approach to 
outbound routing.\45\ Rather than initially directing the entirety of a 
User's order to the IEX matching engine and then routing away any 
excess shares via IEXS directly (and without having to first pass 
through the POP/coil delay as it routes shares outbound), IEX proposed 
to eliminate this aspect and instead create a new structure intended to 
place its outbound routing function on parity with competing broker-
dealers. IEX's latest amendments, which constitute a significant change 
from its initial Form 1, are discussed further below.
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    \45\ The proposed revisions to accommodate the new routing 
process are primarily addressed in proposed IEX Rule 11.510 
(Connectivity), as well as in proposed IEX Rules 2.220 (IEX Services 
LLC as Outbound Router), 11.130 (Access), 11.230(b)-(c) (Order 
Execution), 11.240 (Trade Execution, Reporting, and Dissemination of 
Quotations), 11.330 (Data Products), and 11.410 (Use of Market Data 
Feeds and Calculations of Necessary Price Reference Points). IEX 
also proposed other changes in Amendment Nos. 2 and 3, including 
changes to proposed Rule 2.160 (Restrictions on Membership) to 
reflect the Series 57 exam; proposed new Rule 2.250 (Mandatory 
Participation in Testing of Backup Systems); proposed new Rule 9.217 
(Expedited Client Suspension Proceeding); proposed new Rule 10.270 
(Disruptive Quoting and Trading Activity Prohibited); changes to 
proposed Rule 11.190(a)(3) (Pegged Orders), (b)(8)-(10) (concerning 
pegged orders), and (g) (concerning quote stability for 
Discretionary Peg Orders); and changes to proposed Rule 11.260 
(LIMITATION OF LIABILITY).
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III. Proceedings To Determine Whether To Grant or Deny the Application 
and Grounds for Potential Denial Under Consideration

    The Commission is hereby instituting proceedings pursuant to 
Section 19(a)(1)(B) of the Act \46\ to determine whether IEX's Form 1, 
as amended, should be granted or denied. Institution of such 
proceedings is appropriate at this time in view of the issues raised by 
the application, the significant changes proposed in IEX's recent 
amendments, and the need for the Commission to provide the public with 
an opportunity to comment and allow the Commission to consider comments 
received on the recently filed features of the IEX market. Institution 
of proceedings does not indicate that the Commission has reached any 
conclusions with respect to any of the issues involved. In fact, the 
Commission is providing the public with an opportunity to comment to 
inform its consideration and decision making regarding the Form 1, as 
IEX recently amended it. The Commission encourages interested persons 
to provide specific comment on the Form 1 focused on Amendment Nos. 2, 
3, and 4.\47\
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    \46\ 15 U.S.C. 78s(a)(1)(B).
    \47\ See infra Section IV (Extension of Time for Proceedings). 
Separately, the Commission is evaluating whether to revisit its 
interpretation of automated quotation under Regulation NMS in light 
of comments received on IEX's Form 1 concerning the consistency of 
the POP/coil delay with Regulation NMS.
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    As required by Section 19(a)(1)(B) of the Act,\48\ the Commission 
is hereby providing notice of the grounds for potential denial under 
consideration. Under Sections 6(b) and 19(a)(1) of the Act,\49\ the 
Commission shall grant an application for registration as a national 
securities exchange if the Commission finds that the requirements of 
the Act and the rules and regulations thereunder with respect to the 
applicant are satisfied; the Commission shall deny such application for 
registration if it does not make such a finding. In particular, Section 
6(b)(5) of the Act \50\ provides that an exchange shall not be 
registered as a national securities exchange unless the Commission 
determines that the rules of the

[[Page 15768]]

exchange are designed, among other things, not to permit unfair 
discrimination between customers, issuers, brokers, or dealers. In 
addition, Section 6(b)(8) of the Act \51\ provides that an exchange 
shall not be registered as a national securities exchange unless the 
Commission determines that the rules of the exchange do not impose any 
burden on competition that is not necessary or appropriate in 
furtherance of the purposes of Act.
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    \48\ 15 U.S.C. 78s(a)(1)(B).
    \49\ 15 U.S.C. 78f(b) and 15 U.S.C. 78s(a)(1), respectively.
    \50\ 15 U.S.C. 78f(b)(5).
    \51\ 15 U.S.C. 78f(b)(8).
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    The Commission is particularly interested in commenters' views as 
to whether the changes set forth in IEX's Form 1, as amended, are 
consistent with the Act, in light of commenters' concerns that IEX's 
routing functionality and IEXS would have an advantage over other 
routing broker-dealers that would be unfairly discriminatory and an 
inappropriate burden on competition.\52\ IEX has represented to the 
Commission that, under its revised outbound routing structure, IEX's 
routing functionality would interface with the IEX matching engine on 
the same terms as other Users, including routing broker-dealer members 
of IEX.\53\
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    \52\ Several commenters criticized the fact that IEXS would have 
received routing information from the IEX system outside of, and not 
subject to, the POP/coil delay while other IEX members' receipt of 
transaction and quotation information from the IEX system would have 
been subject to the POP/coil delay. See, e.g., BATS First Letter at 
4-5; BATS Second Letter at 3-6; BATS Third Letter at 3; NYSE First 
Letter at 3-5; NYSE Second Letter at 3; Citadel First Letter at 6-7; 
Citadel Second Letter at 5-6; Citadel Third Letter at 1-2; FIA First 
Letter at 4-5; Tabb Letter at 2-3; Hudson River Trading First Letter 
at 3-7; Hudson River Trading Second Letter at 2-5; Markit First 
Letter at 1-3; Markit Second Letter at 3-4 and 6; Hunsacker Letter; 
Weldon Letter. In other words, the concern expressed was that IEXS 
would have been able to route to away markets the unexecuted portion 
of any marketable order not fully executed at IEX 350 microseconds 
before other routing broker-dealers learned that an execution 
occurred on IEX. Some commenters argued that this arrangement would 
provide an unfair competitive advantage to IEX and the routing 
broker that it owns in that IEXS would have faster access to 
information from the IEX trading system than other members of IEX, 
including those who offer routing services that compete with IEXS, 
and thus IEXS would have the unique ability over other routing 
brokers to most quickly and efficiently route to away markets. See, 
e.g., BATS First Letter at 4-5; BATS Second Letter at 3-6; BATS 
Third Letter at 3; NYSE First Letter at 3-5; NYSE Second Letter at 
3; Citadel First Letter at 6-7; Citadel Second Letter at 5-6; 
Citadel Third Letter at 1-2; FIA First Letter at 4-5; Tabb Letter at 
2-3; Hudson River Trading First Letter at 3-7; Hudson River Trading 
Second Letter at 4-5; Markit First Letter at 1-3; Markit Second 
Letter at 3-4 and 6; Weldon Letter. Other commenters opined that the 
advantage provided to IEXS would effectively force brokers to use 
IEXS because other third party routing brokers would be 
competitively disadvantaged by their inability to similarly bypass 
the POP/coil delay. See, e.g., Tabb Letter at 2; Citadel Third 
Letter at 3.
    \53\ See Letter from Sophia Lee, General Counsel, IEX, to Brent 
J. Fields, Secretary, Commission, dated February 29, 2016.
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    The proposed new outbound routing structure, which IEX filed with 
the Commission over a period ending in early March, represents a 
material departure from the original design that IEX proposed in its 
original Form 1 and therefore warrants further review and consideration 
by the Commission, as informed by further public comment.\54\ IEX has 
proposed a number of changes to its rulebook to effectuate this new 
design. The Commission believes that the protection of investors and 
the public interest are best served by affording the public the 
opportunity to review and comment on this modified proposal from IEX, 
particularly in light of the large number of comments the Commission 
received that raised questions about whether IEX's proposed rules were 
consistent with the requirements of the Act. By publishing notice of, 
and soliciting comment on, IEX's Form 1, as most recently amended by 
Amendment Nos. 2, 3, and 4, and simultaneously instituting proceedings, 
the Commission seeks public input on whether IEX's proposed new 
outbound routing structure, as reflected in its new proposed amended 
rules, is consistent with the Act, and accordingly, whether IEX should 
be registered as a national securities exchange.
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    \54\ In particular, the recently-filed amendments to IEX's Form 
1 introduce the concept of a new POP/coil delay between IEX's 
routing logic (which is located within IEX's system) and IEX's book.
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    The Commission previously has stated that an exchange-affiliated 
outbound router, as a ``facility'' of the exchange, will be subject to 
the exchange's and the Commission's regulatory oversight, and that the 
exchange will be responsible for ensuring that the affiliated outbound 
routing function is operated consistent with Section 6 of the Act and 
the exchange's rules.\55\ For example, in approving an exchange with an 
affiliated outbound routing broker, the Commission previously noted 
that ``[a] conflict of interest would arise if the national securities 
exchange (or an affiliate) provided advantages to its broker-dealer 
that are not available to other members.'' \56\ The Commission further 
explained that ``advantages, such as greater access to information, 
improved speed of execution, or enhanced operational capabilities in 
dealing with the exchange, might constitute unfair discrimination under 
the Act.'' \57\
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    \55\ See, e.g., Securities Exchange Act Release No. 62716 (Aug. 
13, 2010), 75 FR 51295 (August 19, 2010) (granting BATS Y Exchange's 
request to register as a national securities exchange).
    \56\ Securities Exchange Act Release No. 44983 (October 25, 
2001), 66 FR 55225, 55233 (November 1, 2001) (PCX-00-25) (order 
approving Archipelago Exchange (``ArcaEx'') as the equities trading 
facility of PCX Equities, Inc.) (``ArcaEx Order''). In the 2001 PCX 
filing, two commenters expressed concerns regarding ArcaEx's 
affiliation with the Wave broker-dealer, which operated as the 
outbound routing broker-dealer for ArcaEx. Specifically, these 
commenters were concerned that the affiliation between ArcaEx and 
Wave would be anti-competitive and could create a conflict of 
interest. See also supra note 55, at 51304 (citing to the BATS Y 
order).
    \57\ ArcaEx Order, supra note 56, at 55233.
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    As specified in IEX's initial Form 1, unexecuted shares of routable 
orders sent to IEXS would not have traversed the POP/coil. As revised 
by Amendment Nos. 2, 3, and 4, IEX now proposes a significantly 
different structure that it says is intended to place its router and 
routing logic in an identical position to non-affiliated routing 
broker-dealers.\58\
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    \58\ See Letter from Sophia Lee, General Counsel, IEX, to Brent 
J. Fields, Secretary, Commission, dated February 29, 2016, at 1.
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    IEX's recent amendments include new rules to bifurcate its handling 
of non-routable and routable orders.\59\ For routable orders, IEX 
explains that it would insert an additional POP/coil delay within the 
IEX system to delay routable orders' access to the IEX book by an 
additional 350 microseconds after they have already passed through the 
initial POP/coil delay on their way into the IEX system (for a total 
delay of 700 microseconds before any portion of the routable order 
reaches the IEX book).\60\ IEX represents that this new delay is 
intended to place IEX in the same position as a third-party routing 
broker in reaching IEX's book through a POP/coil delay, such that IEX's 
ability to submit a routable order to its own order book would be 
identical to any other routing broker-dealer's ability to submit a 
routable order to the IEX order book despite the fact that the orders 
would traverse different paths in the system.\61\ Likewise, IEX notes 
that messages from the IEX order book back to IEX's routing logic also 
would be subject to this POP/coil delay to effect a latency identical 
to that experienced by IEX's non-affiliated members when receiving 
messages back from the IEX order book.\62\ As such, IEX

[[Page 15769]]

represents that its routing functionality would have no information 
advantage (i.e., no special view of IEX's book, including displayed or 
non-displayed interest) and IEX represents that the proposal places its 
outbound routing functionality in an identical position to third-party 
routing broker-dealers when sending orders into the IEX matching engine 
and when receiving transaction information from the IEX matching 
engine.\63\
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    \59\ See id.
    \60\ See id. at 1-2 (``Please note that because of the speed 
bump introduced between the IEX Router and the IEX matching engine, 
IEX routing members independently choosing to use the IEX Router 
will experience an additional 350 microseconds of latency as 
compared to members sending non-routable orders to the IEX matching 
engine.'').
    \61\ See id. at 1 (``In particular, this redesign eliminates any 
alleged advantage claimed by the commenters that the Router has over 
a third party broker routing to IEX.'').
    \62\ See id. at 1-2 (noting that ``the IEX Router would receive 
fill information from the IEX matching engine by way of the speed 
bump, which would place the IEX Router's ability to receive 
information from the IEX matching engine on equal terms to an 
independent broker router'').
    \63\ See id. at 2 (noting that ``the IEX Router would receive 
IEX quote information (the IEX TOPS feed) over the speed bump, which 
would place the IEX Router's ability to receive IEX quote 
information on equal terms to an independent broker router'').
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    Given this additional POP/coil delay, Users submitting routable 
orders to IEX and Users submitting non-routable orders to IEX would not 
be subject to the same cumulative POP/coil delay. Non-routable orders 
would remain subject to the 350 microsecond delay into and out of the 
IEX matching engine via the initial POP/coil. Routable orders, however, 
would be sent to IEX's system routing logic first, and, if routed to 
IEX, would traverse a new POP/coil delay (with an additional 350 
microsecond delay) when interacting with the IEX matching engine.\64\
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    \64\ See id. IEX believes that this additional delay should not 
be to the detriment of a User submitting a routable order, and notes 
that Users may avoid this additional delay by submitting non-
routable orders. See id. In addition, the trade confirmation report 
from the IEX matching engine back to the User that submitted the 
routable order would be subject to a 700 microsecond delay, whereas 
IEX's proprietary data feed would only be subject to a 350 
microsecond delay. See id. at 1-2.
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    The Commission is evaluating whether IEX's revised proposal for 
handling routable orders sufficiently addresses concerns that its 
proposed rules may not be consistent with the Act, for example whether 
they constitute unfair discrimination, or impose an unnecessary or 
inappropriate burden on competition.
    Accordingly, the Commission believes that it is appropriate at this 
time to institute proceedings to determine whether to grant or deny 
IEX's Form 1, as modified by IEX's recent amendments. For the reasons 
set forth above, the Commission believes that questions remain as to 
whether IEX's proposed trading system is consistent with the 
requirements of: (1) Section 6(b)(5) of the Act,\65\ which provides 
that an exchange shall not be registered as a national securities 
exchange unless the Commission determines that the rules of the 
exchange are designed, among other things, not to permit unfair 
discrimination between customers, issuers, brokers, or dealers; and (2) 
Section 6(b)(8) of the Act,\66\ which provides that an exchange shall 
not be registered as a national securities exchange unless the 
Commission determines that the rules of the exchange do not impose any 
burden on competition that is not necessary or appropriate in 
furtherance of the purposes of Act.\67\
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    \65\ 15 U.S.C. 78f(b)(5).
    \66\ 15 U.S.C. 78f(b)(8).
    \67\ Commenters also raised concerns about whether IEX's 
quotation, in light of the POP/coil delay, could be categorized as 
``automated,'' and therefore be ``protected,'' under Rule 611 of 
Regulation NMS given prior Commission guidance on those definitions 
when it adopted Regulation NMS. See, e.g., FIA First Letter; NYSE 
First Letter; Citadel First Letter. The Commission is separately 
evaluating the definition of automated quotation under Regulation 
NMS in light of comments received on IEX's Form 1 concerning the 
consistency of the POP/coil delay with Regulation NMS.
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    The Commission invites comment on all aspects of IEX's Form 1, as 
amended, particularly with regard to the proposed outbound routing 
functionality as presented in its recent amendments. In particular, do 
commenters have a view on whether IEX's revised proposal places other 
routing brokers who are members of IEX on the same footing as IEX in a 
manner that would address the concerns under the Act and the rules 
thereunder? Are there material aspects of IEX's proposed revised 
routing functionality that are not clearly presented in IEX's revised 
rules \68\ and addressed by IEX's Form 1, as amended? Do commenters 
have a view on whether the different delays in accessing the IEX 
matching engine experienced by routable orders versus non-routable 
orders present any concerns under the Act?
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    \68\ See supra note 45 (citing to the proposed amended IEX rules 
that would accommodate the new routing process, including proposed 
IEX Rule 11.510).
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IV. Extension of Time for Proceedings

    As noted above, IEX previously consented to an extension of time 
for its Form 1 to March 21, 2016.\69\ Most recently, on February 29, 
March 4, and March 7, IEX filed amendments to its Form 1.\70\ As 
discussed above, these amendments contained, among other unrelated 
changes, several new and amended rules to effect a significantly 
different approach to outbound routing. IEX stated its belief that its 
new routing proposal addresses concerns raised by commenters about its 
outbound routing functionality and whether that original proposal was 
consistent with the Act.\71\ For the reasons discussed above, the 
Commission believes it is necessary to provide a notice and comment 
period so that market participants can evaluate the new proposal and 
amended rule text.
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    \69\ See supra note 6.
    \70\ See supra notes 7-9.
    \71\ See Letter from Sophia Lee, General Counsel, IEX, to Brent 
J. Fields, Secretary, Commission, dated February 29, 2016, at 2.
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    IEX filed these amendments to its Form 1 approximately two weeks 
prior to the March 21 deadline. The Commission does not have sufficient 
time before that March 21 deadline to publish notice of IEX's 
amendments in the Federal Register, afford market participants a 21-day 
comment period, and then evaluate any comments received before making a 
final determination on IEX's Form 1, as amended. Therefore, to provide 
time for public notice and comment and for Commission consideration of 
this significant new proposal from IEX, the Commission believes that 
there is good cause for a ninety-day extension of these proceedings. 
Accordingly, the Commission hereby designates June 18, 2016 as the date 
by which the Commission shall determine whether to grant or deny IEX's 
Form 1, as amended, for registration as a national securities exchange.

V. Request for Written Comments

    The Commission requests that interested persons provide written 
views and data with respect to IEX's Form 1, as amended, and the 
questions included above or other relevant issues. 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 10-222 on the subject line.

Paper Comments

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

All submissions should refer to File Number 10-222. This file number 
should be included on the subject line if email is used. To help the 
Commission process and review your comments more efficiently, please 
use only one method. The Commission will post all comments on the 
Commission's Internet Web site (http://www.sec.gov/rules/other.shtml). 
Copies of the submission, all subsequent amendments, all written 
statements with respect to IEX's Form 1 filed with the Commission, and 
all written communications relating to the application between the 
Commission and any person, other than those that

[[Page 15770]]

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. All comments received will be posted without change; the 
Commission does not edit personal identifying information from 
submissions. You should submit only information that you wish to make 
publicly available. All submissions should refer to File Number 10-222 
and should be submitted on or before April 14, 2016.

    By the Commission.
Brent J. Fields,
Secretary.
[FR Doc. 2016-06632 Filed 3-23-16; 8:45 am]
 BILLING CODE 8011-01-P


