
[Federal Register Volume 81, Number 57 (Thursday, March 24, 2016)]
[Proposed Rules]
[Pages 15660-15665]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-06633]


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SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 241

[Release No. 34-77407; File No. S7-03-16]


Notice of Proposed Commission Interpretation Regarding Automated 
Quotations Under Regulation NMS

AGENCY: Securities and Exchange Commission.

ACTION: Proposed interpretation; request for comment.

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SUMMARY: The Securities and Exchange Commission is publishing for 
comment a proposed interpretation with respect to the definition of 
automated quotation under Rule 600(b)(3) of Regulation NMS.

DATES: Comments should be received on or before April 14, 2016.

ADDRESSES: 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 S7-03-16 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 S7-03-16. 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). 
Comments are also 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.

FOR FURTHER INFORMATION CONTACT: Richard Holley III, Assistant 
Director, at (202) 551-5614, Michael Bradley, Special Counsel, at (202) 
551-5594, or Michael Ogershok, Attorney-Advisor, at 202-551-5541, all 
in the Office of Market Supervision, Division of Trading and Markets, 
Securities and Exchange Commission, 100 F Street NE., Washington, DC 
20549-7010.

SUPPLEMENTARY INFORMATION:

I. Background

A. IEX's Form 1

    On August 21, 2015, Investors' Exchange LLC (``IEX'') submitted to 
the Commission a Form 1 application seeking registration as a national 
securities exchange under Section 6 of the Securities Exchange Act of 
1934 (``Act'').\1\ On September 9, 2015, IEX submitted Amendment No. 1 
to its Form 1 application.\2\ Notice of IEX's filing of its Form 1 
application, as amended, was published for comment in the Federal 
Register on September 22, 2015.\3\ Recently, IEX submitted three 
additional amendments to its Form 1 application.\4\ Simultaneously with 
the

[[Page 15661]]

issuance of this proposed interpretation, the Commission issued a 
release to notice Amendment Nos. 2, 3, and 4 to IEX's Form 1 
application, instituted proceedings to consider whether to grant or 
deny IEX's application, and designated a longer period for Commission 
action to accommodate those proceedings.\5\
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    \1\ 15 U.S.C. 78f.
    \2\ In Amendment No. 1, IEX submitted updated portions of its 
Form 1 application, 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. IEX's Form 1 application, as amended, including all of the 
Exhibits referenced above, is available online at www.sec.gov/rules/other.shtml as well as at the Commission's Public Reference Room.
    \3\ See Securities Exchange Act Release No. 75925 (September 15, 
2015), 80 FR 57261. On December 18, 2015, IEX consented to an 
extension of time to March 21, 2016 for Commission consideration of 
its Form 1 application. See Letter from Sophia Lee, General Counsel, 
IEX, to Brent J. Fields, Secretary, Commission, dated December 18, 
2015.
    \4\ In Amendment No. 2, filed on February 29, 2016, IEX proposed 
changes to its Form 1 application to, among other things, redesign 
its outbound routing functionality to direct routable orders first 
to the IEX router 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.'' 
See id. In Amendment No. 3, filed on March 4, 2016, IEX proposed 
changes to its Form 1 application 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. In Amendment No. 4, filed on March 
7, 2016, IEX proposed changes to its Form 1 application 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.
    \5\ See Securities Exchange Act Release No. 77406 (March 18, 
2016) (File No. 10-222).
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    The Commission has received extensive comments on IEX's Form 1 
application,\6\ and IEX has submitted several letters in response to 
concerns raised by commenters.\7\ Among other things, a number of 
commenters on IEX's Form 1 application asserted that a unique feature 
of IEX's design--specifically, its Point-of-Presence (``POP'') and 
``coil'' access delay--would preclude IEX's best-priced quotation from 
being a ``protected quotation'' under Regulation NMS if the Commission 
grants IEX's exchange registration.\8\ IEX contests this assertion, as 
do certain other commenters.\9\
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    \6\ The public comment file for IEX's Form 1 application (File 
No. 10-222) is available on the Commission's Web site at: http://www.sec.gov/comments/10-222/10-222.shtml.
    \7\ See Letters from Sophia Lee, General Counsel, IEX, to Brent 
J. Fields, Secretary, Commission, dated November 13, 2015 (``IEX 
First Response''); November 23, 2015 (``IEX Second Response''); and 
February 9, 2016 (``IEX Third Response''). See also 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'').
    \8\ See, e.g., FIA First Letter; NYSE First Letter; Citadel 
First Letter.
    \9\ See IEX First Response and IEX Second Response. See also, 
e.g., Verret Letter; Leuchtkafer Second Letter.
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    As discussed more fully below and as highlighted by a number of 
commenters on IEX's Form 1 application,\10\ the Commission 
preliminarily believes that IEX's proposed POP/coil structure raises 
questions about prior Commission statements with respect to the 
definition of an ``automated quotation'' under Regulation NMS. In light 
of market and technological developments since the adoption of 
Regulation NMS in 2005, the Commission is proposing and requesting 
comment on an updated interpretation to permit more flexibility for 
trading centers with respect to automated quotations to allow them to 
develop innovative business models that do not undermine the goals of 
Rule 611 of Regulation NMS. Specifically, the Commission is proposing 
to interpret ``immediate'' when determining whether a trading center 
maintains an ``automated quotation'' for purposes of Rule 611 to 
include response time delays at trading centers that are de minimis, 
whether intentional or not.
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    \10\ See infra text accompanying notes 49-57 (discussing 
comments on IEX's Form 1).
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B. Regulation NMS Concept of an Automated Quotation and Protected 
Quotation

    In general, Rule 611 under Regulation NMS (the ``Order Protection 
Rule,'' or ``Trade-Through Rule'') protects the best automated 
quotations of exchanges by obligating other trading centers to honor 
those quotes by not executing trades at inferior prices or ``trading 
through'' such best automated quotations.\11\ Only an exchange that is 
an ``automated trading center'' \12\ displaying an ``automated 
quotation'' \13\ is entitled to this protection.\14\ Trading centers 
must establish, maintain, and enforce written policies and procedures 
that are reasonably designed to prevent trade-throughs of protected 
quotations, unless an exception or exemption applies.\15\
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    \11\ See 17 CFR 242.611.
    \12\ See 17 CFR 242.600(b)(4).
    \13\ See 17 CFR 242.600(b)(3).
    \14\ See 17 CFR 242.600(b)(57) (defining ``protected bid or 
protected offer''), 242.600(b)(58) (defining ``protected 
quotation''); see also Securities Exchange Act Release No. 51808 
(June 9, 2005) 70 FR 37496, 37504 (June 29, 2005) (``Regulation NMS 
Adopting Release'') (stating that ``[t]o qualify for protection, a 
quotation must be automated'').
    \15\ 17 CFR 242.611(a)(1).
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    When it adopted Regulation NMS, the Commission explained that the 
purpose of the Order Protection Rule was to incentivize greater use of 
displayed limit orders, which contribute to price discovery and market 
liquidity.\16\ In discussing whether to apply order protection to 
manual quotations, the Commission stated that ``providing protection to 
manual quotations, even limited to trade-throughs beyond a certain 
amount, potentially would lead to undue delays in the routing of 
investor orders, thereby not justifying the benefits of price 
protection.'' \17\ The Commission also noted that ``those who route 
limit orders will be able to control whether their orders are protected 
by evaluating the extent to which various trading centers display 
automated versus manual quotations.'' \18\
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    \16\ See Regulation NMS Adopting Release, supra note 14, at 
37516 and 37517.
    \17\ Id. at 37518.
    \18\ Id.
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    There are several provisions in Regulation NMS that impact whether 
the Order Protection Rule applies. First, Rule 600(b)(58) defines a 
``protected quotation'' as a ``protected bid or a protected offer.'' 
\19\ Rule 600(b)(57), in turn, defines a ``protected bid or protected 
offer'' as a quotation in an NMS stock that is: (i) Displayed by an 
``automated trading center,'' (ii) disseminated pursuant to an 
effective national market system plan, and (iii) an ``automated 
quotation'' that is the best bid or best offer of a national securities 
exchange.\20\
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    \19\ 17 CFR 242.600(b)(58).
    \20\ 17 CFR 242.600(b)(57).
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    In order for an exchange to operate as an ``automated trading 
center,'' it must, among other things, have ``implemented such systems, 
procedures, and rules as are necessary to render it capable of 
displaying quotations that meet the requirements for an `automated 
quotation' set forth in [Rule 600(b)(3) of Regulation NMS].'' \21\ Rule 
600(b)(3) defines an ``automated quotation'' as one that:
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    \21\ 17 CFR 242.600(b)(4). Rule 600(b)(4) contains additional 
requirements that must be satisfied in order to be an automated 
trading center. Those requirements are not at issue for purposes of 
this proposed interpretation.

    i. Permits an incoming order to be marked as immediate-or-
cancel;
    ii. Immediately and automatically executes an order marked as 
immediate-or-cancel against the displayed quotation up to its full 
size;
    iii. Immediately and automatically cancels any unexecuted 
portion of an order marked as immediate-or-cancel without routing 
the order elsewhere;
    iv. Immediately and automatically transmits a response to the 
sender of an order marked as immediate-or-cancel indicating the 
action taken with respect to such order; and
    v. Immediately and automatically displays information that 
updates the displayed quotation to reflect any change to its 
material terms.\22\
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    \22\ See 17 CFR 242.600(b)(3). See also Regulation NMS Adopting 
Release, supra note 14, at 37504.

Any quotation that does not meet the requirements for an automated 
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quotation is defined in Rule 600(b)(37) as a ``manual'' quotation.\23\

    \23\ Regulation NMS Adopting Release, supra note 14, at 37534. 
See also 17 CFR 242.600(b)(37) (defining ``manual quotation'').
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    In the Regulation NMS Adopting Release, the Commission elaborated 
on the meaning of the terms ``immediate'' and ``automatic'' as those 
terms are used in the Rule 600(b)(3) definition of an automated 
quotation. Specifically, with respect to the meaning of the term 
``immediate,'' the Commission stated that ``[t]he term `immediate' 
precludes any coding of automated systems or other type of intentional 
device that would delay the action taken with

[[Page 15662]]

respect to a quotation,'' \24\ and that the standard for responding to 
an incoming order ``should be `immediate,' i.e., a trading center's 
systems should provide the fastest response possible without any 
programmed delay.'' \25\
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    \24\ Regulation NMS Adopting Release, supra note 14, at 37534. 
The Commission also stated that, for a quotation ``[t]o qualify as 
`automatic,' no human discretion in determining any action taken 
with respect to an order may be exercised after the time an order is 
received,'' and ``a quotation will not qualify as `automated' if any 
human intervention after the time an order is received is allowed to 
determine the action taken with respect to the quotation.'' Id. at 
37519 and 37534.
    \25\ Id. at 37519. In the case of IEX, its access delay involves 
hardware (i.e., coiled cable) and geographic dispersion, not 
software programming. See infra text accompanying notes 40-45. 
Nevertheless, it is an intentional delay. See id.
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    The Commission provided context in the Regulation NMS Adopting 
Release as to the intent behind the Order Protection Rule and the 
distinction between ``automated quotations'' and ``manual quotations.'' 
At the time of the adoption of Regulation NMS, manual quotations and 
markets that primarily were centered around human interaction in a 
floor-based trading environment, including ``hybrid'' trading 
facilities that offer automatic execution of orders seeking to interact 
with displayed quotations while also maintaining a physical trading 
floor, experienced processing delays for inbound orders that were 
measured in multiple seconds.\26\ In contrast to floor-based and hybrid 
markets, at the time Regulation NMS was adopted, newer automated 
matching systems removed the human element and instead immediately 
matched buyers and sellers electronically. The Commission sought to 
achieve the goals of the Order Protection Rule and maintain the 
efficiencies of the markets by protecting only automated quotations 
that were ``immediately'' accessible, and allowing trade-throughs of 
those that were not.\27\
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    \26\ See Regulation NMS Adopting Release, supra note 14, at 
37500 n.21 (``One of the primary effects of the Order Protection 
Rule adopted today will be to promote much greater speed of 
execution in the market for exchange-listed stocks. The difference 
in speed between automated and manual markets often is the 
difference between a 1-second response and a 15-second response. . . 
.'').
    \27\ See id. at 37501. More broadly, the Commission stated that 
the definition of ``automated trading center'' in Rule 600(b)(4) 
``offers flexibility for a hybrid market to display both automated 
and manual quotations, but only when such a market meets basic 
standards that promote fair and efficient access by the public to 
the market's automated quotations.'' Id. at 37520. This definition 
was an outgrowth of two floor-based exchanges' intention to operate 
``hybrid'' trading facilities that would offer automatic execution 
against their displayed quotations, while at the same time 
maintaining a traditional trading floor. See id. at 37518. The 
Commission also explained that the Order Protection Rule took a 
substantially different approach to intermarket price protection 
than the existing trade-through protection regime at the time--the 
Intermarket Trading System (``ITS'') Plan. See id. at 37501. As the 
Commission noted, the ITS provisions did not distinguish between 
manual and automated quotations and ``fail[ed] to reflect the 
disparate speed of response between manual and automated 
quotations'' as they ``were drafted for a world of floor-based 
markets.'' Id. As a result, ``[b]y requiring order routers to wait 
for a response from a manual market, the ITS trade-through 
provisions can cause an order to miss both the best price of a 
manual quotation and slightly inferior prices at automated markets 
that would have been immediately accessible.'' Id. See also supra 
note 26 (citing to footnote 21 of the Regulation NMS Adopting 
Release).
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    In Rules 600 and 611, the Commission did not set a maximum response 
time for a quotation to be an ``automated quotation.'' \28\ While a 
number of commenters on Regulation NMS advocated for a specific time 
standard, ranging from one second down to 250 milliseconds,\29\ for 
distinguishing between manual and automated quotations,\30\ the 
Commission declined to set such a standard, noting that ``[t]he 
definition of automated quotation as adopted does not set forth a 
specific time standard for responding to an incoming order.'' \31\ 
Rather, the Commission specifically sought to avoid ``specifying a 
specific time standard that may become obsolete as systems improve over 
time,'' and agreed with commenters that ``the standard should be 
`immediate' i.e., a trading center's systems should provide the fastest 
response possible without any programmed delay.'' \32\
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    \28\ See also id. at 37519 (``The definition of automated 
quotation as adopted does not set forth a specific time standard for 
responding to an incoming order.'').
    \29\ A millisecond is one thousandth of a second.
    \30\ See id. at 37518.
    \31\ Id. at 37519.
    \32\ Id.
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    However, the Commission believed that ``immediate'' should not be 
construed in a way to frustrate the purposes of Rule 611 and crafted 
several exceptions to Rule 611, two of which use a one second 
standard.\33\ Specifically, Rule 600(b)(1) addresses the applicability 
of the trade-through requirements with respect to quotations of 
automated trading centers that experience a ``failure, material delay, 
or malfunction,'' by allowing other trading centers to trade-through 
such quotations.\34\ In the Regulation NMS Adopting Release, the 
Commission provided an interpretation of the phrase ``material delay'' 
as one where a market was ``repeatedly failing to respond within one 
second after receipt of an order.'' \35\ The Commission similarly 
established a one-second standard for the exception in Rule 611(b)(8), 
which excepts trade-throughs where the trading center that was traded-
through had displayed, within the prior one second, a price equal or 
inferior to the price of the trade-through transaction.\36\ In 
discussing the 611(b)(8) exception, the Commission stated that it 
``generally does not believe that the benefits would justify the costs 
imposed on trading centers of attempting to implement an intermarket 
price priority rule at the level of sub-second time increments. 
Accordingly, Rule 611 has been formulated to relieve trading centers of 
this burden.'' \37\
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    \33\ See 17 CFR 242.611(b)(1) and (8).
    \34\ See 17 CFR 242.611(b)(1).
    \35\ See Regulation NMS Adopting Release, supra note 14, at 
37519.
    \36\ See 17 CFR 242.611(b)(8).
    \37\ See Regulation NMS Adopting Release, supra note 14, at 
37523.
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C. IEX's Access Delay

    IEX, which currently operates a trading platform as an alternative 
trading system, is seeking to register as a national securities 
exchange. If its registration is granted, IEX would operate an 
electronic order book for NMS stocks.\38\ IEX's POP and coil 
infrastructure is how IEX users (``Users'') would connect to IEX.\39\
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    \38\ For more detail on IEX's proposed trading system, see IEX's 
full Form 1 application and Exhibits, as amended, which are 
available on the Commission's Web site at http://www.sec.gov/rules/other/otherarchive/other2015.shtml.
    \39\ To obtain authorized access to the IEX System, each User 
must enter into a User Agreement with the Exchange. See IEX Rule 
11.130(a). The term ``Users,'' for purposes of this notice, does not 
include IEX Services LLC, IEX's affiliated outbound routing broker-
dealer.
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    IEX has represented that access to IEX by all Users would be 
obtained through a POP located in Secaucus, New Jersey.\40\ According 
to IEX, 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).\41\ After exiting the coil, the User's message would travel an 
additional physical distance to the IEX system, located in Weehawken, 
New Jersey.\42\ IEX has represented that routable orders would 
thereafter be directed to the IEX routing logic, and non-routable 
orders would be directed to the IEX matching engine.\43\ According to 
IEX, the coil, when combined with the physical distance between the POP 
and the IEX system, would provide IEX Users sending non-

[[Page 15663]]

routable orders to IEX with 350 microseconds \44\ of one-way 
latency.\45\ For purposes of this notice, IEX's process for handling 
non-routable orders is hereinafter referred to as the ``POP/coil 
delay.''
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    \40\ See IEX Second Response at 2.
    \41\ See IEX First Response at 3.
    \42\ See Exhibit E to IEX's Form 1 submission, at 12. See also 
IEX First Response at 3.
    \43\ See Amendment Nos. 2 and 3 to IEX's Form 1 application.
    \44\ A microsecond is one millionth of a second.
    \45\ See IEX First Response at 3. See also Amendment Nos. 2 and 
3. Users sending routable orders would experience 700 microseconds 
of one-way latency. See Letter from Sophia Lee, General Counsel, 
IEX, to Brent J. Fields, Secretary, Commission, dated February 29, 
2016, at 2.
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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 proposed POP/coil delay.\46\ 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.\47\ IEX's direct proprietary market data feed, which is an 
optional data feed that IEX would make available to subscribers, also 
would traverse the coil before exiting at the POP.\48\ As a result, a 
non-routable immediate-or-cancel (``IOC'') order, which is a type of 
order that IEX would permit Users to send to the IEX system, would 
traverse the proposed POP/coil (and its attendant 350 microsecond 
delay) before arriving at the IEX system and potentially executing 
against a displayed quotation on IEX. Likewise, the response from the 
IEX system to the User indicating the action taken by the IEX system 
with respect to such IOC order also would traverse the POP/coil and 
experience a 350 microsecond delay.\49\
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    \46\ See IEX First Response at 3-4.
    \47\ See id.
    \48\ See id.
    \49\ See id. at 3. Outbound transaction and quote messages 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. See id. at 3-4.
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D. Comments on IEX's Proposed Access Delay

    Several commenters on IEX's Form 1 application questioned whether 
IEX's operation of the proposed POP/coil would be consistent with the 
Order Protection Rule.\50\ Their main assertion is that the 350 
microsecond latency caused by the POP/coil calls into question whether 
IEX's quotations meet the definition of ``automated quotation,'' and 
therefore would be a ``protected quotation,'' under Regulation NMS and 
Rule 611 in particular.\51\ These commenters generally cited to 
language, discussed above, from the Regulation NMS Adopting Release 
where the Commission elaborated on what it means for a quotation to be 
an ``automated quotation,'' including statements that the term 
``immediate,'' as it relates to the definition of an automated 
quotation, means that ``a trading center's systems should provide the 
fastest response possible without any programmed delay'' \52\ and 
``precludes any coding of automated systems or other type of 
intentional device that would delay the action taken with respect to a 
quotation'' (emphasis added).\53\ Based on this language, these 
commenters contended that IEX's quotation is not consistent with the 
definition of automated quotation, or at least questioned whether it 
can be so considered.\54\
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    \50\ See, e.g., NYSE First Letter at 5; BATS First Letter at 3; 
FIA First Letter at 2; Nasdaq First Letter at 2; Citadel First 
Letter at 3.
    \51\ See, e.g., BATS First Letter at 2-4; FIA First Letter at 2; 
NYSE First Letter at 5-7; Nasdaq First Letter at 2; Citadel First 
Letter at 2-4.
    \52\ See, e.g., Nasdaq First Letter at 2; NYSE First Letter at 
6. See also Regulation NMS Adopting Release, supra note 14, at 
37519.
    \53\ See, e.g., BATS First Letter at 3; FIA First Letter at 2; 
Citadel First Letter at 3; Citadel Second Letter at 3; see also 
Regulation NMS Adopting Release, supra note 14, at 37534.
    \54\ See BATS First Letter at 3; FIA First Letter at 2; NYSE 
First Letter at 6-7; Nasdaq First Letter at 2-3; Citadel First 
Letter at 3-4; Citadel Second Letter at 3-4; Hudson River Trading 
Second Letter at 3-4.
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    Several commenters urged the Commission not to decide this question 
in the context of IEX's Form 1 application.\55\ One commenter urged the 
Commission, should it disagree with the contention that IEX's quotation 
cannot be protected, to explain its reasoning in a rulemaking 
proceeding or exemptive order that is subject to public vetting.\56\ 
Another commenter urged the Commission ``to articulate clear standards 
regarding the precise amount of time an intentional device can delay 
access to the quotation of a registered exchange and still be 
considered an automated quotation.'' \57\ This commenter supported an 
interpretation of the definition of an automated quotation that would 
include the delay resulting from IEX's POP/coil, but further urged the 
Commission to articulate clear regulatory standards that would be 
applicable to all trading venues and market participants.\58\
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    \55\ See, e.g., Citadel Second Letter at 4; Nasdaq Second Letter 
at 1-4; Direct Match Letter at 2-4; Scott Letter.
    \56\ See, e.g., Citadel Second Letter at 4.
    \57\ BATS First Letter at 3; see also BATS First Letter at 4, 6. 
A second commenter writing in support of IEX's POP/coil similarly 
urged the Commission to articulate the extent of permissible 
intentional, geographical, or technological delays for registered 
exchanges. See T. Rowe Price Letter at 2. A third commenter urged 
the Commission to not approve IEX's POP/coil without also 
establishing a maximum permissible delay for registered exchanges. 
See Jon D. Letter.
    \58\ See BATS Second Letter at 2.
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    Other commenters offered support for IEX's proposed access delay, 
and challenged the assertion that IEX's quotation would not meet the 
definition of ``automated quotation'' under Regulation NMS.\59\ 
According to one commenter, the Commission's ``larger plan'' in 
requiring protected quotes to be ``immediately and automatically'' 
accessible under Regulation NMS was ``to encourage automated markets 
and prevent exchanges from favoring their own manual markets, so the 
SEC protected an exchange's lit, automated quotes and banned any 
programmed tricks or devices an exchange might use to give human 
traders a chance to intervene or any kind of an edge over automated 
quotes.'' \60\ In addition, this commenter further asserted, ``[t]hat 
`immediately' simply prohibits discrimination favoring manual markets 
is all the more obvious in the [Regulation NMS] Adopting Release's 
discussion of self-help'' where, according to the commenter, ``[t]he 
SEC had every opportunity to define `immediately' in absolute terms and 
declined to do it,'' and instead ``only went as far as suggesting one 
second was a reasonable upper bound for declaring self-help and left it 
up to the marketplace to reward fast markets or punish slow markets.'' 
\61\
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    \59\ One commenter argued that such an assertion ``rests on an 
overly formalistic reading of Regulation NMS that fails to account 
for the rise of high speed trading in the last decade.'' See Verret 
Letter at 4. Another commenter similarly criticized that assertion 
as dependent ``on a self-serving read of Reg NMS, leaving out its 
history, its original meaning, and its subsequent interpretation.'' 
See Leuchtkafer Second Letter at 1.
    \60\ Leuchtkafer Second Letter at 1-2 (emphasis in original). 
This commenter pointed out that ``[t]he standard by which to measure 
automated and protected quotes was ITS, or, more precisely, human 
intervention, because it was human intervention the SEC wanted to 
firewall'' and asserted that ```[i]mmediately and automatically' 
means without human intervention and with no chance of human 
intervention'' and ``does not mean as fast as an exchange, or any 
exchange, can go.'' Id. at 2.
    \61\ Id. at 2. Another commenter asserted that IEX's POP/coil 
structure is ``entirely consistent with the overall policy 
objectives of Regulation NMS.'' Franklin Templeton Letter at 2. One 
commenter argued that IEX's proposed POP/coil delay does not 
constitute an ``intentional device'' under Rule 600 of Regulation 
NMS because IEX's dissemination of quote information to the SIP 
would not be subject to the delay, and thus IEX's POP/coil would not 
increase the uncertainty of the NBBO relative to current latencies. 
See Upson Letter at 2. One commenter noted that ``the flip side of 
faster access is slower access if you don't pay'' and with co-
location ``[t]he problem is that you have to pay to get into their 
data centers in the first place, and if you don't it sure looks like 
you are intentionally delayed compared to those who can and do 
pay.'' See Leuchtkafer First Letter at 1. That commenter noted that 
``if the IEX critics are right, by their own reasoning the exchanges 
will have to dismantle their co-location facilities and stop 
offering tiered high-speed network facilities. They are selling 
faster access to their markets, and if you don't pay, aren't you 
slower than you could be, aren't you intentionally delayed?'' Id. at 
2.

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[[Page 15664]]

    Several commenters noted that there is latency associated with the 
transmission of orders to protected quotations at existing market 
venues--and in some cases, those latencies are greater than that 
associated with transmitting orders to IEX even factoring in the 
proposed POP/coil delay.\62\ One commenter argued that the 350 
microsecond proposed POP/coil delay ``would be so de minimis as to have 
no appreciable impact on market behavior'' and is ``not much more than 
the normal latency that all trading platforms impose.'' \63\ Another 
commenter did not find the proposed POP/coil delay ``particularly 
problematic, as the time gap is minimal, and (even including the speed 
bump) IEX matches orders faster than a number of other markets.'' \64\ 
One commenter noted that the POP/coil 350 microsecond delay ``is orders 
of magnitude shorter than the variable lags between the SIP and the 
proprietary feeds,'' and asserted that the proposed POP/coil delay is 
consistent with existing practices already approved by the 
Commission.\65\
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    \62\ See, e.g., BATS First Letter at 4; BATS Second Letter at 2-
3; Healthy Markets Letter at 4; Angel Letter at 2; Kim Letter; 
Mannheim Letter; Wilcox Letter.
    \63\ Angel Letter at 3.
    \64\ Tabb Letter at 1.
    \65\ Healthy Markets Letter at 3.
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    IEX asserted that the language of the Order Protection Rule and the 
Regulation NMS Adopting Release, when considered in light of the 
context in which the Order Protection Rule was adopted, do not compel 
the conclusion that IEX's quotes should be considered ``manual 
quotations'' instead of ``automated quotations.'' \66\ In addition, IEX 
noted that not all exchange matching systems are located in the same 
vicinity and asserted that ``there is no reason to think that the 
Commission by referring to `intentional device' meant somehow to set 
geographic standards with regard to exchange matching system 
connections generally, or to prescribe the exact length of cable that 
is or is not allowable.'' \67\
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    \66\ See IEX First Response at 6-7; see also IEX Third Response 
at 1-3. IEX noted that the Regulation NMS Adopting Release does not 
define a maximum allowable latency in order for quotations to 
qualify as automated quotations, and stated that ``[t]he POP does 
not enable any human intervention to determine the action taken with 
respect to a quote or the order itself'' and that ``the POP clearly 
does not involve a `coding of automated systems'. . . .'' IEX First 
Response at 6-7. IEX suggested that the POP is consistent with the 
purpose of Regulation NMS because ``the POP helps to promote access 
to quotations by limiting the chance that a party displaying a quote 
on an exchange will use a signal from an execution on IEX to cancel 
its quote on that other market within microseconds.'' See IEX Second 
Response at 4 (emphasis in original).
    \67\ IEX First Response at 7; see also IEX Second Response at 4.
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    According to IEX, its POP/coil structure ``represents a form of 
prescribed physical distance to which all users are subject when 
submitting orders to IEX's trading system'' and ``[i]n this sense, it 
is no different from means that all exchanges impose to set the terms 
by which users can connect to their systems.'' \68\ IEX stated that 
``the amount of latency imposed by the POP is less than or not 
materially different than that currently involved in reaching various 
exchanges based on geographic factors,'' and refers, by way of example, 
to the geographic distance that an order from the Chicago Stock 
Exchange's Secaucus, New Jersey data center must physically traverse 
before reaching the Chicago Stock Exchange's trading system in 
Chicago.\69\ IEX also provided data from certain subscribers to IEX's 
ATS that, according to IEX, indicate that those subscribers' average 
latency when trading on IEX is comparable to that when trading on 
certain other exchanges, ``is an order of magnitude less than that of 
the Chicago Stock Exchange,'' and ``is on average less than the round-
trip latency of the NYSE as well.'' \70\
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    \68\ IEX First Response at 5.
    \69\ See id. at 6; see also IEX Third Response at 2. One 
commenter made the same observation, noting that ``[t]he NBBO 
already includes quotes with varied degrees of time lag'' and that 
the length of IEX's coiled cable ``is far less than the distance 
between NY and Chicago, and is remarkably similar to the distance 
between Carteret and Mahwah (36 miles).'' See Healthy Markets Letter 
at 4. See also IEX Second Response at 11 (noting that the distance 
between Nasdaq's Carteret facility and NYSE's Mahwah facility is 
42.8 miles (compared to the IEX coil's approximately 38 mile 
equivalent)). Other commenters similarly understood that the POP/
coil latency is comparable to or shorter than natural and geographic 
latencies in today's market. See Angel Letter at 2; BATS First 
Letter at 4; BATS Second Letter at 2-3; Kim Letter; Mannheim Letter; 
T. Rowe Price Letter at 2-3; Wilcox Letter. Two commenters 
specifically suggested that such a delay would be inconsequential or 
de minimis. See Angel Letter at 2; Abel/Noser Letter at 2.
    \70\ IEX Second Response at 4 and 7. IEX compared its POP to the 
coiling of cable that existing exchanges utilize in their respective 
data centers for purposes of co-location access. See IEX First 
Response at 3-6; IEX Third Response at 2. IEX further contended that 
``the POP should no more be considered prohibited than existing 
access arrangements could be considered as designed to intentionally 
delay access to quotes by anyone who declines to pay for the 
privilege of the fastest access.'' IEX First Response at 7. 
According to IEX, ``the POP clearly is not a `programmed delay' any 
more than the coiled cables connecting to every other exchange's 
matching systems could be considered as such.'' IEX Second Response 
at 4. IEX claimed that its 350 microsecond latency on inbound orders 
is actually less than the latency differential between the non-co-
located access and the highest level of co-location offered by the 
Nasdaq Stock Market. See id. at 5-6.
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II. Commission's Proposed Interpretation

    As discussed above, at the time Regulation NMS was adopted, the 
concept of an ``automated quotation'' was intended to address manual 
and hybrid automated-manual trading systems in relation to the trade-
through requirements of Rule 611. Under Regulation NMS, a trading 
center must provide an ``immediate'' response for its quotation to be 
an ``automated quotation.'' \71\ Although the Commission did not set a 
maximum response time in Rule 600 or Rule 611 for a quotation to be an 
automated quotation, in the Regulation NMS Adopting Release the 
Commission stated that an immediate response meant ``the fastest 
response possible without any programmed delay.'' \72\ When Regulation 
NMS was adopted, however, the Commission was focused on the response 
time delays generated by manual interaction, and crafted exceptions to 
Rule 611 based on response times of one second.\73\ Delays in the realm 
of sub-milliseconds, as presented by the IEX Form 1 application, were 
not contemplated by the Commission because they generally were not 
relevant or material for the slower trading technologies used by market 
participants at the time.\74\
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    \71\ See 17 CFR 242.600(b)(3) (defining ``automated 
quotation'').
    \72\ Regulation NMS Adopting Release, supra note 14, at 37519.
    \73\ See supra note 26 (citing to footnote 21 of the Regulation 
NMS adopting release where the Commission noted that ``[t]he 
difference in speed between automated and manual markets often is 
the difference between a 1-second response and a 15-second 
response--a disparity that clearly can be important to many 
investors'').
    \74\ The Commission notes that the smallest time increment 
suggested by commenters at the time Regulation NMS was adopted--250 
milliseconds--is magnitudes slower than the latency introduced by 
IEX's proposed POP/coil delay. See Regulation NMS Adopting Release, 
supra note 14, at 37518.
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    As the speed of trading technology has increased since the adoption 
of Regulation NMS,\75\ some trading centers have begun to explore ways 
to reduce the relevance of speed differentials of

[[Page 15665]]

very small increments.\76\ Proposals like IEX's POP/coil that 
intentionally delay access to an exchange's quotation, albeit by a sub-
millisecond amount, raise questions about the prior interpretation with 
respect to the definition of an automated quotation under Regulation 
NMS. Accordingly, the Commission is proposing and soliciting comment on 
an updated interpretation from that provided in the Regulation NMS 
Adopting Release.\77\
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    \75\ A number of factors affect the speed at which a market 
participant can receive market and quote data, submit orders, obtain 
an execution, and receive information on trades, including hardware, 
software, and physical distance. See, e.g., Securities Exchange Act 
Release No. 61358 (January 14, 2010), 75 FR 3594, 3610-11 (January 
21, 2010) (Concept Release on Equity Market Structure). Recent 
technological advances have reduced the ``latency'' that these 
factors introduce into the order handling process, both in absolute 
and relative terms, and some market participants and liquidity 
providers have invested in low-latency systems that take into 
account the advances in technology. See id. at 3606.
    \76\ See, e.g., Securities Exchange Act Release No. 67639 
(August 10, 2012), 77 FR 49034 (August 15, 2012) (SR-NASDAQ-2012-
071) (order approving proposed rule change to provide for 
simultaneous routing).
    \77\ In particular, the POP/coil, because it delays inbound and 
outbound messages to and from IEX Users, raises a question as to 
whether IEX will, among other things, ``immediately'' execute IOC 
orders under Rule 600(b)(3)(ii), ''immediately'' transmit a response 
to an IOC order sender under Rule 600(b)(3)(iv), and ``immediately'' 
display information that updates IEX's displayed quotation under 
Rule 600(b)(3)(v). See 17 CFR 242.600(b)(3); see also Regulation NMS 
Adopting Release, supra note 14, at 37504.
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    Specifically, the Commission preliminarily believes that, in the 
current market, delays of less than a millisecond in quotation response 
times may be at a de minimis level that would not impair a market 
participant's ability to access a quote, consistent with the goals of 
Rule 611 and because such delays are within the geographic and 
technological latencies experienced by market participants today. For 
example, IEX's proposed POP/coil would introduce a 350 microsecond 
delay for a non-routable IOC order before it could access the IEX 
matching engine. The additional delay introduced by the coil itself, 
which is approximately 38 miles long, is effectively equivalent to the 
communications latency between venues that are 38 miles apart.\78\ The 
Commission understands that today the distances between exchange data 
centers, or between the order entry systems of market participants and 
exchange data centers, may exceed, sometimes by many multiples, a 
distance of 38 miles. The Commission does not believe that these 
naturally-occurring response time latencies resulting from geography 
are inconsistent with the purposes of Rule 611.\79\ At the same time, 
permitting the quotations of trading centers with very small response 
time delays, such as those proposed by IEX, to be treated as automated 
quotations, and thereby benefit from trade-through protection under 
Rule 611, could encourage innovative ways to address market structure 
issues.
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    \78\ See supra note 69 (citing to the Healthy Markets Letter, 
which observed that the length of IEX's coiled cable ``is far less 
than the distance between NY and Chicago, and is remarkably similar 
to the distance between Carteret and Mahwah (36 miles)''). See also 
IEX Second Response at 11 (noting that the distance between Nasdaq's 
Carteret facility and NYSE's Mahwah facility is 42.8 miles).
    \79\ See supra note 69 (citing to commenters who believe that 
IEX's POP/coil latency is comparable to or shorter than natural and 
geographic latencies in today's market). One market maker and 
liquidity provider on the IEX ATS notes that it ``engages in 
precisely the same market making strategies on IEX as [it does] on 
automated trading systems run by other broker-dealers . . . as well 
as on registered stock exchanges'' and that ``IEX's `speed bump' has 
had no impact on [its] market making and liquidity provisioning on 
the platform.'' Virtu Letter at 1-2.
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    Accordingly, the Commission today is proposing to interpret 
``immediate'' when determining whether a trading center maintains an 
``automated quotation'' for purposes of Rule 611 of Regulation NMS to 
include response time delays at trading centers that are de minimis, 
whether intentional or not.\80\
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    \80\ An exchange that proposed to provide any member or user 
(including the exchange's inbound or outbound routing functionality, 
or the exchange's affiliates) with exclusive privileged faster 
access to its facilities over any other member or user would raise 
concerns under the Act, including under Section 6(b)(5) and 6(b)(8) 
of the Act, and would need to address those concerns in a Form 1 
exchange registration application or a proposed rule change 
submitted pursuant to Section 19 of the Act, as applicable.
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III. Solicitation of Comment

    The Commission requests comment all aspects of this proposed 
interpretation, including:
    1. Would delays of less than a millisecond in quotation response 
times impair a market participant's ability to access a quote or impair 
efficient compliance with Rule 611?
    2. In the current market, should the Commission interpret 
``immediate'' as including a de minimis delay of less than one 
millisecond? Should the Commission consider other lengths? If so, what 
should they be?
    3. Should the Commission be concerned about market manipulation? If 
so, specifically, what should the Commission focus on?
    4. Should the Commission consider an alternative interpretation? If 
so, what should it be?

    By the Commission.

    Dated: March 18, 2016.
Brent J. Fields,
Secretary.
[FR Doc. 2016-06633 Filed 3-23-16; 8:45 am]
 BILLING CODE 8011-01-P


