
[Federal Register Volume 81, Number 125 (Wednesday, June 29, 2016)]
[Notices]
[Pages 42380-42386]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-15324]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-78146; File No. SR-CHX-2016-09]


Self-Regulatory Organizations; Chicago Stock Exchange, Inc.; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change To 
Adopt Rules To Implement the Regulation NMS Plan To Implement a Tick 
Size Pilot Program

June 23, 2016.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 \2\ thereunder, notice is hereby given 
that on June 16, 2016, the Chicago Stock Exchange, Inc. (``CHX'' or the 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I, II, 
and III below, which Items have been prepared by the Exchange. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    CHX proposes to amend the Rules of the Exchange (``CHX Rules'') to 
adopt Article 20, Rule 13(a) to implement the quoting and trading 
provisions of the Regulation NMS Plan to Implement a Tick Size Pilot 
Program (``Plan''). The proposed rule change is substantially similar 
to a proposed rule change approved by the Commission by the Bats BZX 
Exchange, Inc. f/k/a BATS Exchange, Inc. (``BZX'') to adopt BZX Rule 
11.27(a) which also implemented the quoting and trading provisions of 
the Plan.\3\ Therefore, the Exchange has designated this proposal as 
``non-controversial'' and provided the

[[Page 42381]]

Commission with the notice required by Rule 19b-4(f)(6)(iii) under the 
Act.\4\
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    \3\ See Securities Exchange Act Release No. 77291 (March 3, 
2016), 81 FR 12543 (March 9, 2016) (order approving SR-BATS-2015-
108).
    \4\ 17 CFR 240.19b-4(f)(6)(iii).
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    The text of this proposed rule change is available on the 
Exchange's Web site at (www.chx.com) and in the Commission's Public 
Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the CHX included statements 
concerning the purpose of and basis for the proposed rule changes and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The CHX has prepared summaries, set forth in sections A, 
B and C below, of the most significant aspects of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Changes

1. Purpose
    On August 25, 2014, NYSE Group, Inc., on behalf of the Exchange, 
BZX, Bats BYX Exchange, Inc. f/k/a BATS Y-Exchange, Inc., Bats EDGA 
Exchange, Inc. f/k/a EDGA Exchange, Inc., Bats EDGX Exchange, Inc. f/k/
a EDGX Exchange, Inc., Financial Industry Regulatory Authority, Inc. 
(``FINRA''), NASDAQ OMX BX, Inc., NASDAQ OMX PHLX LLC, the Nasdaq Stock 
Market LLC, New York Stock Exchange LLC (``NYSE''), NYSE MKT LLC, and 
NYSE Arca, Inc. (collectively ``Plan Participants''),\5\ filed with the 
Commission, pursuant to Section 11A of the Act \6\ and Rule 608 of 
Regulation NMS thereunder, the Plan to implement a tick size pilot 
program (``Pilot'').\7\ The Plan Participants filed the Plan to comply 
with an order issued by the Commission on June 24, 2014.\8\ The Plan 
\9\ was published for comment in the Federal Register on November 7, 
2014, and approved by the Commission, as modified, on May 6, 2015.\10\
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    \5\ A ``Participant'' is a ``member'' of the Exchange for 
purposes of the Act. See CHX Article 1, Rule 1(s). For clarity, the 
Exchange proposes to utilize the term ``CHX Participant'' when 
referring to members of the Exchange and the term ``Plan 
Participant'' when referring to Participants of the Plan.
    \6\ 15 U.S.C. 78k-1.
    \7\ See Letter from Brendon J. Weiss, Vice President, 
Intercontinental Exchange, Inc., to Secretary, Commission, dated 
August 25, 2014.
    \8\ See Securities Exchange Act Release No. 72460 (June 24, 
2014), 79 FR 36840 (June 30, 2014).
    \9\ Unless otherwise specified, capitalized terms used in this 
rule filing are defined as set forth in the Plan. The Exchange also 
proposes supplementary material as part of this proposed rule change 
to, among other things, provide that the terms used in proposed Rule 
13(a) shall have the same meaning as provided in the Plan, unless 
otherwise specified.
    \10\ See Securities Exchange Act Release No. 74892 (May 6, 
2015), 80 FR 27514 (May 13, 2015) (``Approval Order'').
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    The Plan is designed to allow the Commission, market participants, 
and the public to study and assess the impact of increment conventions 
on the liquidity and trading of the common stocks of small-
capitalization companies. Each Plan Participant is required to comply 
with, and to enforce compliance by its member organizations, as 
applicable, with the provisions of the Plan. As is described more fully 
below, the proposed rules would require CHX Participants to comply with 
the applicable quoting and trading increments for Pilot Securities.\11\
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    \11\ The Exchange proposes to add Interpretation and Policy .03 
to Rule 13(a) to provide that the Rule shall be in effect during a 
pilot period to coincide with the pilot period for the Plan 
(including any extensions to the pilot period for the Plan).
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    The Pilot will include stocks of companies with $3 billion or less 
in market capitalization, an average daily trading volume of one 
million shares or less, and a volume weighted average price of at least 
$2.00 for every trading day. The Pilot will consist of a control group 
of approximately 1400 Pilot Securities and three test groups with 400 
Pilot Securities in each selected by a stratified sampling.\12\ During 
the Pilot, Pilot Securities in the control group will be quoted and 
traded at the currently permissible increments. Pilot Securities in the 
first test group (``Test Group One'') will be quoted in $0.05 minimum 
increments but will continue to trade at any price increment that is 
currently permitted.\13\ Pilot Securities in the second test group 
(``Test Group Two'') will be quoted in $0.05 minimum increments and 
will trade at $0.05 minimum increments subject to a midpoint exception, 
a retail investor order exception, and a negotiated trade 
exception.\14\ Pilot Securities in the third test group (``Test Group 
Three'') will be subject to the same restrictions as Test Group Two and 
also will be subject to the ``Trade-at'' requirement to prevent price 
matching by a market participant that is not displaying at a price of a 
Trading Center's \15\ ``Best Protected Bid'' or ``Best Protected 
Offer,'' unless an enumerated exception applies.\16\ In addition to the 
exceptions provided under Test Group Two, an exception for Block Size 
orders and exceptions that mirror those under Rule 611 of Regulation 
NMS \17\ will apply to the Trade-at requirement.
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    \12\ See Section V of the Plan for identification of Pilot 
Securities, including criteria for selection and grouping.
    \13\ See Section VI(B) of the Plan.
    \14\ See Section VI(C) of the Plan.
    \15\ The Plan incorporates the definition of ``Trading Center'' 
from Rule 600(b)(78) of Regulation NMS. Regulation NMS defines a 
Trading Center as ``a national securities exchange or national 
securities association that operates an SRO trading facility, an 
alternative trading system, an exchange market maker, an OTC market 
maker, or any other broker or dealer that executes orders internally 
by trading as principal or crossing orders as agent.''
    \16\ See Section VI(D) of the Plan.
    \17\ 17 CFR 242.611.
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Compliance With the Quoting and Trading Increments of the Plan
    The Plan requires the Exchange to establish, maintain, and enforce 
written policies and procedures that are reasonably designed to comply 
with applicable quoting and trading requirements specified in the 
Plan.\18\ Accordingly, the Exchange is proposing new paragraph (a) to 
Article 20, Rule 13 (Compliance with Regulation NMS Plan to Implement a 
Tick Size Pilot Program) to require CHX Participants to comply with the 
quoting and trading provisions of the Plan.
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    \18\ The Exchange is also required by the Plan to develop 
appropriate policies and procedures that provide for data collection 
and reporting to the Commission of data described in Appendixes B 
and C of the Plan. CHX Article 20, Rule 13(b) provides rules that 
require compliance by CHX Participants with the collection of data 
provisions of the Plan described in Section VII of the Plan. See 
Exchange Act Release No. 77469 (March 29, 2016), 81 FR 19275 (April 
4, 2016) (SR-CHX-2016-03).
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    Proposed Rule 13(a) (Compliance with Quoting and Trading 
Restrictions) sets forth the requirements for the Exchange and CHX 
Participants in meeting their obligations under the Plan. Rule 13(a)(1) 
will require CHX Participants to establish, maintain and enforce 
written policies and procedures that are reasonably designed to comply 
with the applicable quoting and trading requirements of the Plan. Rule 
13(a)(2) provides that the Matching System \19\ will not display, quote 
or trade in violation of the applicable quoting and trading 
requirements for a Pilot Security specified in the Plan and this Rule, 
unless such quotation or transaction is specifically exempted under the 
Plan.
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    \19\ The Matching System is an automated order execution system, 
which is a part of the Exchange's ``Trading Facilities,'' as defined 
under CHX Article 1, Rule 1(z).
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    Proposed Rule 13(a)(3) clarifies the treatment of Pilot Securities 
that drop below $1.00 during the Pilot Period. In particular, Rule 
13(a)(3) provides that, if the price of a Pilot Security drops below 
$1.00 during regular trading hours on any trading day, such Pilot 
Security will continue to be a Pilot Security subject

[[Page 42382]]

to the Plan. However, if the Closing Price of a Pilot Security on any 
given trading day is below $1.00, such Pilot Security will be moved out 
of its Pilot Test Group into the Control Group, and may then be quoted 
and traded at any price increment that is currently permitted for the 
remainder of the Pilot Period.\20\ Rule 13(a)(3) also provides that, 
notwithstanding anything contained within these rules to the contrary, 
Pilot Securities (whether in the Control Group or any Pilot Test Group) 
will continue to be subject to the data collection requirements of the 
Plan at all times during the Pilot Period and for the six-month period 
following the end of the Pilot Period.
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    \20\ The NYSE, on behalf of the Plan Participants, submitted a 
letter to Commission requesting exemption from certain provisions of 
the Plan related to quoting and trading. See letter from Elizabeth 
K. King, NYSE, to Brent J. Fields, Secretary, Commission, dated 
October 14, 2015 (``October Exemption Request''). FINRA, also on 
behalf of the Plan Participants, submitted a separate letter to 
Commission requesting additional exemptions from certain provisions 
of the Plan related to quoting and trading. See letter from Marcia 
E. Asquith, Senior Vice President and Corporate Secretary, FINRA, to 
Robert W. Errett, Deputy Secretary, Commission, dated February 23, 
2016 (``February Exemption Request''). The Commission, pursuant to 
its authority under Rule 608(e) of Regulation NMS, granted BZX a 
limited exemption from the requirement to comply with certain 
provisions of the Plan as specified in the letter and noted herein. 
See letter from David Shillman, Associate Director, Division of 
Trading and Markets, Commission to Eric Swanson, General Counsel, 
BZX, dated March 3, 2016 (``Exemption Letter''). The Exchange is 
seeking the same exemptions as requested in the October Exemption 
Request and the February Exemption Request.
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    In approving the Plan, the Commission noted that the Plan 
Participants had proposed additional selection criteria to minimize the 
likelihood that securities that trade with a share price of $1.00 or 
less would be included in the Pilot, and stated that, once established, 
the universe of Pilot Securities should stay as consistent as possible 
so that the analysis and data can be accurate throughout the Pilot 
Period.\21\ The Exchange notes that a Pilot Security that drops below 
$1.00 during regular trading hours will remain in its applicable Test 
Group; a Pilot Security will only be moved to the Control Group if its 
Closing Price on any given trading day is below $1.00. The Exchange 
believes that this provision is appropriate because it will help ensure 
that Pilot Securities in Test Groups One, Two and Three continue to 
reflect the Pilot's selection criteria, helping ensure the accuracy of 
the resulting data. The Exchange also believes that this provision is 
appropriate because it responds to comments that the Plan address the 
treatment of securities that trade below $1.00 during the Pilot 
Period.\22\
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    \21\ See Approval Order, supra note 10, 80 FR at 27535.
    \22\ Id.
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    Proposed Rule 13(a)(4) sets forth the applicable limitations for 
securities in Test Group One. Consistent with the language of the Plan, 
Rule 13(a)(4) provides that no CHX Participant may display, rank, or 
accept from any person any displayable or non-displayable bids or 
offers, orders, or indications of interest in any Pilot Security in 
Test Group One in increments other than $0.05. However, orders priced 
to execute at the midpoint of the national best bid and national best 
offer (``NBBO'') or best protected bid and best protected offer 
(``PBBO'') \23\ and orders entered in a Plan Participant-operated 
retail liquidity program may be ranked and accepted in increments of 
less than $0.05. Pilot Securities in Test Group One may continue to 
trade at any price increment that is currently permitted by applicable 
Plan Participant, SEC and Exchange rules.
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    \23\ Regulation NMS defines a protected bid or protected offer 
as a quotation in an NMS stock that (1) is displayed by an automated 
trading center; (2) is disseminated pursuant to an effective 
national market system plan; and (3) is an automated quotation that 
is the best bid or best offer of a national securities exchange, the 
best bid or best offer of The Nasdaq Stock Market, Inc., or the best 
bid or best offer of a national securities association other than 
the best bid or best offer of The Nasdaq Stock Market, Inc. See 17 
CFR 242.600(57). In the Approval Order, the Commission noted that 
the protected quotation standard encompasses the aggregate of the 
most aggressively priced displayed liquidity on all Trading Centers, 
whereas the NBBO standard is limited to the single best order in the 
market. See Approval Order, supra note 10, 80 FR at 27539.
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    Proposed Rule 13(a)(5) sets forth the applicable quoting and 
trading requirements for securities in Test Group Two. This provision 
states that no CHX Participant may display, rank, or accept from any 
person any displayable or non-displayable bids or offers, orders, or 
indications of interest in any Pilot Security in Test Group Two in 
increments other than $0.05. However, orders priced to execute at the 
midpoint of the NBBO or PBBO and orders entered in a Plan Participant-
operated retail liquidity program may be ranked and accepted in 
increments of less than $0.05.
    Proposed Rule 13(a)(5) also sets forth the applicable trading 
restrictions for Test Group Two securities. Absent any of the 
exceptions listed in the Rule, no CHX Participant may execute orders in 
any Pilot Security in Test Group Two in price increments other than 
$0.05. The $0.05 trading increment will apply to all trades, including 
Brokered Cross Trades.
    Consistent with the language of the Plan, the Rule provides that 
Pilot Securities in Test Group Two may trade in increments of less than 
$0.05 under the following circumstances: (1) Trading may occur at the 
midpoint between the NBBO or the PBBO; (2) Retail Investor Orders may 
be provided with price improvement that is at least $0.005 better than 
the PBBO; and (3) Negotiated Trades may trade in increments of less 
than $0.05.
    The Exchange also proposes to add an exception to Rule 13(a)(5) to 
permit CHX Participants to fill a customer order in a Pilot Security in 
Test Group Two at a non-nickel increment to comply with Article 9, Rule 
17 (Prohibition Against Trading Ahead of Customer Orders) under limited 
circumstances. Specifically, the exception would allow the execution of 
a customer order following a proprietary trade by the CHX Participant 
at an increment other than $0.05 in the same security, on the same side 
and at the same price as (or within the prescribed amount of) a 
customer order owed a fill pursuant to Article 9, Rule 17, where the 
triggering proprietary trade was permissible pursuant to an exception 
under the Plan.\24\
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    \24\ The Commission granted BZX an exemption from Rule 608(c) 
related to this provision. See February Exemption Request and 
Exemption Letter, supra note 20. The Exchange is seeking the same 
exemptions as requested in the October Exemption Request and the 
February Exemption Request. Supra note 20.
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    Thus, the Exchange is proposing to add a customer order protection 
exception to Rule 13(a)(5) that would permit CHX Participants to trade 
Pilot Securities in Test Group Two in increments less than $0.05, and 
where the CHX Participant is executing a customer order to comply with 
Article 9, Rule 17 following the execution of a proprietary trade by 
the CHX Participant at an increment other than $0.05 where such 
proprietary trade was permissible pursuant to an exception under the 
Plan. The Exchange believes that this approach best facilitates the 
ability of CHX Participants to continue to protect customer orders 
while retaining the flexibility to engage in proprietary trades that 
comply with an exception to the Plan.
    Proposed Rule 13(a)(6) sets forth the applicable quoting and 
trading restrictions for Pilot Securities in Test Group Three. The rule 
provides that no CHX Participant may display, rank, or accept from any 
person any displayable or non-displayable bids or offers, orders, or 
indications of interest in any Pilot Security in Test Group Three in 
increments other than $0.05. However, orders priced to execute at the 
midpoint of the NBBO or PBBO and orders

[[Page 42383]]

entered in a Plan Participant-operated retail liquidity program may be 
ranked and accepted in increments of less than $0.05. The rule also 
states that, absent any of the applicable exceptions, no CHX 
Participant that operates a Trading Center may execute orders in any 
Pilot Security in Test Group Three in price increments other than 
$0.05. The $0.05 trading increment will apply to all trades, including 
Brokered Cross Trades.\25\
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    \25\ A brokered cross trade is a trade that a broker-dealer that 
is a member of a Plan Participant executes directly by matching 
simultaneous buy and sell orders for a Pilot Security. See Section 
I(G) of the Plan.
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    Proposed Rule 13(a)(6)(C) sets forth the exceptions pursuant to 
which Pilot Securities in Test Group Three may trade in increments of 
less than $0.05. First, trading may occur at the midpoint between the 
NBBO or PBBO. Second, Retail Investor Orders may be provided with price 
improvement that is at least $0.005 better than the PBBO. Third, 
Negotiated Trades may trade in increments of less than $0.05.
    Similar to that proposed under Rule 13(a)(5) described above, the 
Exchange also proposes to add an exception to Rule 13(a)(6) to permit 
CHX Participants to fill a customer order in a Pilot Security in Test 
Group Three at a non-nickel increment to comply with Article 9, Rule 17 
(Prohibition Against Trading Ahead of Customer Orders) under limited 
circumstances. Specifically, the exception would allow the execution of 
a customer order following a proprietary trade by the CHX Participant 
at an increment other than $0.05 in the same security, on the same side 
and at the same price as (or within the prescribed amount of) a 
customer order owed a fill pursuant to Article 9, Rule 17, where the 
triggering proprietary trade was permissible pursuant to an exception 
under the Plan.\26\ Thus, the Exchange is proposing to add a customer 
order protection exception to Rule 13(a)(6) that would permit CHX 
Participants to trade Pilot Securities in Test Group Three in 
increments less than $0.05, and where the CHX Participant is executing 
a customer order to comply with Article 9, Rule 17 following the 
execution of a proprietary trade by the CHX Participant at an increment 
other than $0.05 where such proprietary trade was permissible pursuant 
to an exception under the Plan.
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    \26\ See supra note 24. The Exchange is seeking the same 
exemptions as requested in the October Exemption Request and the 
February Exemption Request. Supra note 20.
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    Proposed Rule 13(a)(6)(D) sets forth the ``Trade-at Prohibition,'' 
which is the prohibition against executions by a CHX Participant that 
operates a Trading Center of a sell order for a Pilot Security in Test 
Group Three at the price of a Protected Bid or the execution of a buy 
order for a Pilot Security in Test Group Three at the price of a 
Protected Offer during regular trading hours, absent any of the 
exceptions set forth in Rule 13(a)(6)(D). Consistent with the Plan, the 
rule reiterates that a CHX Participant that operates a Trading Center 
that is displaying a quotation, via either a processor or an SRO 
quotation feed that is a Protected Bid or Protected Offer is permitted 
to execute orders at that level, but only up to the amount of its 
displayed size. A CHX Participant that operates a Trading Center that 
was not displaying a quotation that is the same price as a Protected 
Quotation, via either a processor or an SRO quotation feed, is 
prohibited from price-matching protected quotations unless an exception 
applies.
    Consistent with the Plan, proposed Rule 13(a)(6)(D) also sets forth 
the exceptions to the Trade-at prohibition, pursuant to which a CHX 
Participant that operates a Trading Center may execute a sell order for 
a Pilot Security in Test Group Three at the price of a Protected Bid or 
execute a buy order for a Pilot Security in Test Group Three at the 
price of a Protected Offer. The first exception to the Trade-at 
Prohibition is the ``display exception,'' which allows a trade to occur 
at the price of the Protected Quotation, up to the Trading Center's 
full displayed size, if the order ``is executed by a trading center 
that is displaying a quotation.'' \27\
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    \27\ See Section VI(D)(1) of the Plan.
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    In Rule 13(a)(6)(D), the Exchange proposes that a CHX Participant 
that utilizes the independent aggregation unit concept may satisfy the 
display exception only if the same independent aggregation unit that 
displays interest via either a processor or an SRO Quotation Feed also 
executes an order in reliance upon this exception. The rule provides 
that ``independent aggregation unit'' has the same meaning as provided 
under Rule 200(f) of SEC Regulation SHO.\28\ This provision also 
recognizes that not all CHX Participants may utilize the independent 
aggregation unit concept as part of their regulatory structure, and 
still permits such CHX Participants to utilize the display exception if 
all the other requirements of that exception are met.
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    \28\ 17 CFR 242.200. Treatment as an independent aggregation 
unit is available if traders in an aggregation unit pursue only the 
particular trading objective(s) or strategy(ies) of that aggregation 
unit and do not coordinate that strategy with any other aggregation 
unit. Therefore, one independent aggregation unit within a Trading 
Center cannot execute trades pursuant to the display exception in 
reliance on quotations displayed by a different independent 
aggregation unit. As an example, an agency desk of a Trading Center 
cannot rely on the quotation of a proprietary desk in a separate 
independent aggregation unit at that same Trading Center.
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    As initially proposed by the Plan Participants, the Plan contained 
an additional condition to the display exception, which would have 
required that, where the quotation is displayed through a national 
securities exchange, the execution at the size of the order must occur 
against the displayed size on that national securities exchange; and 
where the quotation is displayed through the Alternative Display 
Facility or another facility approved by the Commission that does not 
provide execution functionality, the execution at the size of the order 
must occur against the displayed size in accordance with the rules of 
the Alternative Display Facility of such approved facility (``venue 
limitation'').\29\ Some commenters stated that this provision was anti-
competitive, as it would have forced off-exchange Trading Centers to 
route orders to the venue on which the order was displayed.\30\
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    \29\ See Securities Exchange Act Release No. 73511 (November 3, 
2014), 79 FR 66423, 66437 (November 7, 2014).
    \30\ See Approval Order, supra note 10, 80 FR at 27540.
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    In approving the Plan, the Commission modified the Trade-At 
Prohibition to remove the venue limitation.\31\ The Commission noted 
that the venue limitation was not prescribed in its Order mandating the 
filing of the Plan.\32\ The Commission also noted that the venue 
limitation would have unnecessarily restricted the ability of off-
exchange market participants to execute orders in Test Group Three 
Securities, and that removing the venue limitation should mitigate 
concerns about the cost and complexity of the Pilot by reducing the 
need for off-exchange Trading Centers to route to the exchange.\33\ The 
Commission also stated that the venue limitation did not create any 
additional incentives to display liquidity in furtherance of the 
purposes of the Trade-At Prohibition, because the requirement that a 
Trading Center could only trade at a protected quotation up to its 
displayed size should be sufficient to incentivize displayed 
liquidity.\34\
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    \31\ Id.
    \32\ Id.
    \33\ Id.
    \34\ Id.
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    Consistent with Plan and the SEC's determination to remove the 
venue limitation, the Exchange is making clear that the display 
exception applies to

[[Page 42384]]

trades done by a Trading Center otherwise than on an exchange where the 
Trading Center has previously displayed a quotation in either an agency 
or a principal capacity. As part of the display exception, the Exchange 
also proposes that a Trading Center that is displaying a quotation as 
agent or riskless principal may only execute as agent or riskless 
principal, while a Trading Center displaying a quotation as principal 
(excluding riskless principal) may execute either as principal or agent 
or riskless principal. The Exchange believes this is consistent with 
the Plan and the objective of the Trade-at Prohibition, which is to 
promote the display of liquidity and generally to prevent any Trading 
Center that is not quoting from price-matching Protected Quotations. 
Providing that a Trading Center may not execute on a proprietary basis 
in reliance on a quotation representing customer interest (whether 
agency or riskless principal) ensures that the Trading Center cannot 
avoid compliance with the Trade-at Prohibition by trading on a 
proprietary basis in reliance on a quotation that does not represent 
such Trading Center's own interest. Where a Trading Center is 
displaying a quotation at the same price as a Protected Quotation in a 
proprietary capacity, transactions in any capacity at the price and up 
to the size of such Trading Center's displayed quotation would be 
permissible. Transactions executed pursuant to the display exception 
may occur on the venue on which such quotation is displayed or over the 
counter.
    The proposal also excepts Block Size orders \35\ and permits 
Trading Centers to trade at the price of a Protected Quotation, 
provided that the order is of Block Size at the time of origin and is 
not an aggregation of non-block orders, broken into orders smaller than 
Block Size prior to submitting the order to a Trading Center for 
execution; or executed on multiple Trading Centers.\36\ The Plan only 
provides that Block Size orders shall be exempted from the Trade-At 
Prohibition. In requiring that the order be of Block Size at the time 
of origin and not an aggregation of non-block orders, or broken into 
orders smaller than Block Size prior to submitting the order to a 
Trading Center for execution; or executed on multiple Trading Centers, 
the Exchange believes that it is providing clarity as to the 
circumstances under which a Block Size order will be excepted from the 
Trade-At Prohibition.
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    \35\ ``Block Size'' is defined in the Plan as an order (1) of at 
least 5,000 shares or (2) for a quantity of stock having a market 
value of at least $100,000.
    \36\ Once a Block Size order or portion of such Block Size order 
is routed from one Trading Center to another Trading Center in 
compliance with Rule 611 of Regulation NMS, the Block Size order 
would lose the proposed Trade-at exemption, unless the Block Size 
remaining after the first route and execution meets the Block Size 
definition under the Plan.
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    Consistent with the Plan, the proposal also excepts an order that 
is a Retail Investor Order that is executed with at least $0.005 price 
improvement.
    The exceptions set forth in proposed Rule 13(a)(6)(D)(ii)(d) 
through (n) are based on the exceptions found in Rule 611 of Regulation 
NMS.\37\ The subparagraph (d) exception applies when the order is 
executed when the Trading Center displaying the Protected Quotation 
that was traded at was experiencing a failure, material delay, or 
malfunction of its systems or equipment. The subparagraph (e) exception 
applies to an order that is executed as part of a transaction that was 
not a ``regular way'' contract. The subparagraph (f) exception applies 
to an order that is executed as part of a single-priced opening, 
reopening, or closing transaction by the Trading Center. The 
subparagraph (g) exception applies to an order that is executed when a 
Protected Bid was priced higher than a Protected Offer in a Pilot 
Security.
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    \37\ See 17 CFR 242.611.
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    The subparagraph (h) exception applies when the order is identified 
as a Trade-at Intermarket Sweep Order. The subparagraph (i) exception 
applies when the order is executed by a Trading Center that 
simultaneously routed Trade-at Intermarket Sweep Orders to execute 
against the full displayed size of a Protected Quotation with a price 
that is better than or equal to the limit price of the limit order 
identified as a Trade-at Intermarket Sweep Order. Depending on whether 
Rule 611 or the Trade-at requirement applies, an ISO may mean that the 
sender of the ISO has swept better-priced protected quotations, so that 
the recipient of that ISO may trade through the price of the protected 
quotation (Rule 611), or it could mean that the sender of the ISO has 
swept protected quotations at the same price that it wishes to execute 
at (in addition to any better-priced quotations), so the recipient of 
that ISO may trade at the price of the protected quotation (Trade-at). 
Given that the meaning of an ISO may differ under Rule 611 and Trade-
at, the Exchange proposes Rule 13(a)(6)(D)(ii)(h) so that the recipient 
of an ISO in a Test Group Three security would know, upon receipt of 
that ISO, that the Trading Center that sent the ISO had already 
executed against the full size of displayed quotations at that price, 
e.g., the recipient of that ISO could permissibly trade at the price of 
the protected quotation.
    The Exchange proposes to further clarify the use of an ISO in 
connection with the Trade-at requirement by adopting, as part of 
proposed Rule 13(a)(7), a definition of ``Trade-at Intermarket Sweep 
Order.'' As set forth in the Plan and as noted above, the definition of 
a Trade-at ISO does not distinguish ISOs that are compliant with Rule 
611 from ISOs that are compliant with Trade-at. The Exchange therefore 
proposes to define a Trade-at ISO as a limit order for a Pilot Security 
that meets the following requirements: (1) When routed to a Trading 
Center, the limit order is identified as a Trade-at Intermarket Sweep 
Order; (2) simultaneously with the routing of the limit order 
identified as a Trade-at Intermarket Sweep Order, one or more 
additional limit orders, as necessary, are routed to execute against 
the full displayed size of any protected bid, in the case of a limit 
order to sell, or the full displayed size of any protected offer, in 
the case of a limit order to buy, for the Pilot Security with a price 
that is better than or equal to the limit price of the limit order 
identified as a Trade-at Intermarket Sweep Order. These additional 
routed orders also must be marked as Trade-at Intermarket Sweep Orders. 
The Exchange believes that this proposed change will further clarify to 
recipients of ISOs in Group Three securities whether the ISO satisfies 
the requirements of Rule 611 or Trade-at.
    The exception under subparagraph (j) of proposed Rule 
13(a)(6)(D)(ii) applies when the order is executed as part of a 
Negotiated Trade. The subparagraph (k) exception applies when the order 
is executed when the Trading Center displaying the Protected Quotation 
that was traded at had displayed, within one second prior to execution 
of the transaction that constituted the Trade-at, a Best Protected Bid 
or Best Protected Offer, as applicable, for the Pilot Security with a 
price that was inferior to the price of the Trade-at transaction.
    The exception proposed in subparagraph (l) applies to a ``stopped 
order.'' The stopped order exemption in Rule 611 of SEC Regulation NMS 
applies where ``[t]he price of the trade-through transaction was, for a 
stopped buy order, lower than the national best bid in the NMS stock at 
the time of execution or, for a stopped sell order, higher than the 
national best offer in the NMS stock at the time of execution.'' \38\ 
The Trade-at stopped order exception applies where ``the price of the 
Trade-at transaction was, for a stopped buy

[[Page 42385]]

order, equal to the national best bid in the Pilot Security at the time 
of execution or, for a stopped sell order, equal to the national best 
offer in the Pilot Security at the time of execution.'' \39\
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    \38\ See 17 CFR 242.611(b)(9).
    \39\ See Plan, Section VI(D)(12).
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    To illustrate the application of the stopped order exemption as it 
currently operates under Rule 611 of SEC Regulation NMS and as it is 
currently proposed for Trade-at, assume the NBB is $10.00 and another 
protected quote is at $9.95. Under Rule 611 of SEC Regulation NMS, a 
stopped order to buy can be filled at $9.95 and the firm does not have 
to send an ISO to access the protected quote at $10.00 since the price 
of the stopped order must be lower than the NBB. For the stopped order 
to also be executed at $9.95 and satisfy the Trade-at requirements, the 
Trade-at exception would have to be revised to allow an order to 
execute at the price of a protected quote which, in this case, could be 
$9.95.
    Based on the fact that a stopped order would be treated differently 
under the Regulation NMS Rule 611 exception than under the proposed 
Trade-at exception, the Exchange believes that it is appropriate to 
amend the Trade-at stopped order exception to ensure that the 
application of this exception will produce a consistent result under 
both Regulation NMS and the Plan. The Exchange therefore proposes to 
amend the stopped order exception to allow a transaction to satisfy the 
Trade-at requirement if the stopped order price, for a stopped buy 
order, is equal to or less than the NBB, and for a stopped sell order, 
is equal to or greater than the NBO, as long as such order is priced at 
an acceptable increment.
    Proposed subparagraph (l) to Rule 13(a)(6)(D)(ii) would define a 
``stopped order'' as an order that is executed by a Trading Center 
which, at the time of order receipt, the Trading Center had guaranteed 
an execution at no worse than a specified price, where (1) the stopped 
order was for the account of a customer; (2) the customer agreed to the 
specified price on an order-by-order basis; and (3) the price of the 
Trade-at transaction was, for a stopped buy order, equal to or less 
than the National Best Bid in the Pilot Security at the time of 
execution or, for a stopped sell order, equal to or greater than the 
National Best Offer in the Pilot Security at the time of execution as 
long as such order is priced at an acceptable increment.\40\
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    \40\ The Commission granted BZX an exemption from Rule 608(c) 
related to this provision. See Exemption Letter, supra note 20. The 
Exchange is seeking the same exemptions as requested in the October 
Exemption Request and the February Exemption Request. Supra note 20.
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    The subparagraph (m) exception applies where the order is for a 
fractional share of a Pilot Security, provided that such fractional 
share order was not the result of breaking an order for one or more 
whole shares of a Pilot Security into orders for fractional shares or 
was not otherwise effected to evade the requirements of the Trade-at 
Prohibition or any other provisions of the Plan.
    The subparagraph (n) exception applies to bona fide errors 
transactions. Following the adoption of Rule 611 and its exceptions, 
the Commission issued exemptive relief that created exceptions from 
Rule 611 for certain error correction transactions.\41\ The Exchange 
has determined that it is appropriate to incorporate the error 
correction exception to the Trade-at prohibition, as this exception is 
equally applicable in the Trade-at context. Accordingly, the Exchange 
is proposing to exempt certain transactions to correct bona fide errors 
in the execution of customer orders from the Trade-at prohibition, 
subject to the conditions set forth by the SEC's order exempting these 
transactions from Rule 611 of SEC Regulation NMS.\42\
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    \41\ See Securities Exchange Act Release No. 55884 (June 8, 
2007), 72 FR 32926 (June 14, 2007).
    \42\ The Commission granted BZX an exemption from Rule 608(c) 
related to this provision. See February Exemption Request and 
Exemption Letter, supra note 20. The Exchange is seeking the same 
exemptions as requested in the October Exemption Request and the 
February Exemption Request. Supra note 20.
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    As with the corresponding exception under Rule 611 of SEC 
Regulation NMS, the Exchange proposes to define a ``bona fide error'' 
as: (i) The inaccurate conveyance or execution of any term of an order 
including, but not limited to, price, number of shares or other unit of 
trading; identification of the security; identification of the account 
for which securities are purchased or sold; lost or otherwise misplaced 
order tickets; short sales that were instead sold long or vice versa; 
or the execution of an order on the wrong side of a market; (ii) the 
unauthorized or unintended purchase, sale, or allocation of securities, 
or the failure to follow specific client instructions; (iii) the 
incorrect entry of data into relevant systems, including reliance on 
incorrect cash positions, withdrawals, or securities positions 
reflected in an account; or (iv) a delay, outage, or failure of a 
communication system used to transmit market data prices or to 
facilitate the delivery or execution of an order. The bona fide error 
must be evidenced by objective facts and circumstances, the Trading 
Center must maintain documentation of such facts and circumstances, and 
the Trading Center must record the transaction in its error account. To 
avail itself of the exemption, the Trading Center must establish, 
maintain, and enforce written policies and procedures that are 
reasonably designed to address the occurrence of errors and, in the 
event of an error, the use and terms of a transaction to correct the 
error in compliance with this exemption. Finally, the Trading Center 
must regularly surveil to ascertain the effectiveness of its policies 
and procedures to address errors and transactions to correct errors and 
take prompt action to remedy deficiencies in such policies and 
procedures.\43\
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    \43\ See Securities Exchange Act Release No. 55884 (June 8, 
2007), 72 FR 32926 (June 14, 2007).
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    Consistent with the Plan, the final exception to the Trade-At 
Prohibition and its accompanying supplementary material applies to an 
order that is for a fractional share of a Pilot Security. The 
supplementary material provides that such fractional share orders may 
not be the result of breaking an order for one or more whole shares of 
a Pilot Security into orders for fractional shares or that otherwise 
were effected to evade the requirements of the Trade-at Prohibition or 
any other provisions of the Plan. In approving the Plan, the Commission 
noted that this exception was appropriate, as there could be potential 
difficulty in the routing and executing of fractional shares.\44\
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    \44\ See Approval Order, supra note 10, 80 FR at 27541.
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    The proposed rule change will become operative upon the 
commencement of the Pilot Period.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act \45\ in general, and furthers the objectives of Section 
6(b)(5) of the Act \46\ in particular, in that it is designed to 
promote just and equitable principles of trade, to foster cooperation 
and coordination with persons engaged in facilitating transactions in 
securities, to remove impediments to and perfect the mechanism of a 
free and open market and a national market system and, in general, to 
protect investors and the public interest.
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    \45\ 15 U.S.C. 78f(b).
    \46\ 15 U.S.C. 78f(b)(5).
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    The Exchange believes that this proposal is consistent with the Act 
because it implements, interprets, and clarifies the provisions of the 
Plan, and is designed to assist the Exchange and CHX Participants in 
meeting regulatory obligations pursuant to the Plan. In approving the 
Plan, the SEC noted that

[[Page 42386]]

the Pilot was an appropriate, data-driven test that was designed to 
evaluate the impact of a wider tick size on trading, liquidity, and the 
market quality of securities of smaller capitalization companies, and 
was therefore in furtherance of the purposes of the Act. To the extent 
that this proposal implements, interprets, and clarifies the Plan and 
applies specific requirements to CHX Participants, the Exchange 
believes that this proposal is in furtherance of the objectives of the 
Plan, as identified by the SEC, and is therefore consistent with the 
Act.

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

    The Exchange does not believe that the proposed rule change will 
result in any burden on competition that is not necessary or 
appropriate in furtherance of the purposes of the Act. The Exchange 
notes that the proposed rule change implements the provisions of the 
Plan, and is designed to assist the Exchange in meeting its regulatory 
obligations pursuant to the Plan. The Exchange also notes that the 
quoting and trading requirements of the Plan will apply equally to all 
CHX Participants that trade Pilot Securities.

C. Self-Regulatory Organization's Statement on Comments Regarding the 
Proposed Rule Changes Received From Members, Participants or Others

    No written comments were either solicited or received.

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

    The Exchange has designated this rule filing as non-controversial 
under Section 19(b)(3)(A) of the Act \47\ and paragraph (f)(6) of Rule 
19b-4 thereunder.\48\ The Exchange asserts that the proposed rule 
change: (1) Will not significantly affect the protection of investors 
or the public interest, (2) will not impose any significant burden on 
competition, (3) and will not become operative for 30 days from the 
date on which it was filed, or such shorter time as the Commission may 
designate. In addition, the Exchange provided the Commission with 
written notice of its intent to file the proposed rule change, along 
with a brief description and text of the proposed rule change, at least 
five business days prior to the date of filing.\49\
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    \47\ 15 U.S.C. 78s(b)(3)(A).
    \48\ 17 CFR 240.19b-4.
    \49\ 17 CFR 240.19b-4(f)(6)(iii).
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    The Exchange believes that the proposed rule change meets the 
criteria of subparagraph (f)(6) of Rule 19b-4 \50\ because it would not 
significantly affect the protection of investors or the public 
interest; rather, the proposed rule change will benefit investors 
because it implements, interprets, and clarifies the provisions of the 
Plan, and is designed to assist the Exchange and CHX Participants in 
meeting regulatory obligations pursuant to the Plan. To the extent that 
this proposal implements, interprets, and clarifies the Plan and 
applies specific requirements to CHX Participants, the Exchange 
believes that this proposal is in furtherance of the objectives of the 
Plan, as identified by the SEC, and is therefore consistent with the 
Act, the protection of investors and the public interest. In addition, 
the proposed rule change is substantially similar to a proposed rule 
change by BZX that was approved by the Commission.\51\ Therefore, the 
proposed rule change does not present any unique issues not previously 
considered by the Commission. Based on the foregoing, the Exchange has 
designated this rule filing as ``non-controversial'' under Section 
19(b)(3)(A) of the Act \52\ and paragraph (f)(6) of Rule 19b-4 
thereunder.\53\
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    \50\ 17 CFR 240.19b-4(f)(6).
    \51\ See supra note 3.
    \52\ 15 U.S.C. 78s(b)(3)(A).
    \53\ 17 CFR 240.19b-4.
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission may summarily temporarily suspend such rule 
change if it appears to the Commission that such action is: (1) 
Necessary or appropriate in the public interest; (2) for the protection 
of investors; or (3) otherwise in furtherance of the purposes of the 
Act. If the Commission takes such action, the Commission shall 
institute proceedings to determine whether the proposed rule should be 
approved or disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposal is 
consistent with the Act. Comments may be submitted by any of the 
following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File No. SR-CHX-2016-09 on the subject line.

Paper Comments

     Send paper comments in triplicate to [Name of Secretary], 
Secretary, Securities and Exchange Commission, 100 F Street NE., 
Washington, DC 20549.

All submissions should refer to File No. SR-CHX-2016-09. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule changes between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for Web site viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE., 
Washington, DC 20549-1090 on official business days between the hours 
of 10:00 a.m. and 3:00 p.m. Copies of the filing also will be available 
for inspection and copying at the principal office of the CHX. All 
comments received will be posted without change; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File No. SR-CHX-2016-09 and should be 
submitted on or before July 20, 2016.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\54\
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    \54\ 17 CFR 200.30-3(a)(12).
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Brent J. Fields,
Secretary.
[FR Doc. 2016-15324 Filed 6-28-16; 8:45 am]
BILLING CODE 8011-01-P


