
[Federal Register Volume 81, Number 157 (Monday, August 15, 2016)]
[Notices]
[Pages 54166-54170]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-19315]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-78510; File No. SR-IEX-2016-11]


Self-Regulatory Organizations; Investors Exchange LLC; Notice of 
Filing and Immediate Effectiveness of Proposed Rule Change To Amend 
Rule 11.190(g) Related to Discretionary Peg Orders

August 9, 2016.
    Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of 
1934 (the ``Act'') \2\ and Rule 19b-4 thereunder,\3\ notice is hereby 
given that, on August 4, 2016, the Investors Exchange LLC (``IEX'' or 
the ``Exchange'') filed with the Securities and Exchange Commission 
(the ``Commission'') the proposed rule change as described in Items I 
and II below, which Items have been prepared by the self-regulatory 
organization. The Commission is publishing this notice to solicit 
comments on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 15 U.S.C. 78a.
    \3\ 17 CFR 240.19b-4.

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[[Page 54167]]

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    Pursuant to the provisions of Section 19(b)(1) under the Securities 
Exchange Act of 1934 (``Act''),\4\ and Rule 19b-4 thereunder,\5\ 
Investors Exchange LLC (``IEX'' or ``Exchange'') is filing with the 
Securities and Exchange Commission (``Commission'') a proposed rule 
change to amend Rule 11.190(g) to optimize and enhance the 
effectiveness of the quote instability calculation in determining 
whether a crumbling quote exists, to: (i) Provide that the quote 
instability calculation would not include IEX protected quotations; 
(ii) reduce the time period that a crumbling quote condition remains in 
effect from ten to two milliseconds; (iii) add two new quote stability 
variables, together with their respective coefficients; and (iv) modify 
the quote instability coefficients and quote instability threshold 
included in the quote instability calculation, pursuant to subparagraph 
(1)(D)(iii) thereof. The Exchange has designated this proposal as non-
controversial and provided the Commission with the notice required by 
Rule 19b-4(f)(6)(iii) under the Act.\6\
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    \4\ 15 U.S.C. 78s(b)(1).
    \5\ 17 CFR 240.19b-4.
    \6\ 17 CFR 240.19b-4(f)(6)(iii).
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    The text of the proposed rule change is available at the Exchange's 
Web site at www.iextrading.com, at the principal office of the 
Exchange, and at 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 self-regulatory organization 
included statements concerning the purpose of and basis for the 
proposed rule change and discussed any comments it received on the 
proposed rule change. The text of these statement [sic] may be examined 
at the places specified in Item IV below. The self-regulatory 
organization has prepared summaries, set forth in Sections A, B, and C 
below, of the most significant aspects of such statements.

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

1. Purpose
Overview
    The purpose of the proposed rule change is to amend Rule 11.190(g) 
to modify the quote instability coefficients and quote instability 
threshold included in the quote instability calculation specified in 
subparagraph (g)(1) for purposes of determining whether a crumbling 
quote exists. When the Exchange determines that a crumbling quote 
exists in a particular security for Protected Quotations from the 
national best bid (``Protected NBB''), Discretionary Peg buy orders are 
restricted from exercising price discretion to trade against interest 
above the NBB. Similarly, when the Exchange determines that a crumbling 
quote exists in a particular security for Protected Quotations from the 
national best offer (``Protected NBO''), Discretionary Peg sell orders 
are restricted from exercising price discretion to trade against 
interest below the NBO.
Discretionary Peg Order
    The manner in which Discretionary Peg orders operate is described 
in Rule 11.190(b)(10). Specifically, a Discretionary Peg order is a 
non-displayed, pegged order that upon entry into the System, the price 
of the order is automatically adjusted by the System to be equal to the 
less aggressive of the Midpoint Price or the order's limit price, if 
any. When unexecuted shares of such order are posted to the Order Book, 
the price of the order is automatically adjusted by the System to be 
equal to and ranked at the less aggressive of the primary quote or the 
order's limit price and is automatically adjusted by the System in 
response to changes in the NBB (NBO) for buy (sell) orders up (down) to 
the order's limit price, if any. In order to meet the limit price of 
active orders on the Order Book, a Discretionary Peg order will 
exercise the least amount of price discretion necessary from the 
Discretionary Peg order's resting price to its discretionary price 
(defined as the less aggressive of the Midpoint Price or the 
Discretionary Peg order's limit price, if any), except during periods 
of quote instability (i.e., when a crumbling quote exists) as defined 
in paragraph Rule 11.190(g).
    In determining whether a crumbling quote exists, the Exchange 
utilizes real time relative quoting activity of Protected Quotations 
and a proprietary mathematical calculation (the ``quote instability 
calculation'') to assess the probability of an imminent change to the 
current Protected NBB to a lower price or Protected NBO to a higher 
price for a particular security (``quote instability factor''). When 
the quoting activity meets predefined criteria and the quote 
instability factor calculated is greater than the Exchange's defined 
threshold (``quote instability threshold''), the System treats the 
quote as not stable (``quote instability'' or a ``crumbling quote''). 
During all other times, the quote is considered stable (``quote 
stability''). The System independently assesses the stability of the 
Protected NBB and Protected NBO for each security.
    When the System determines that a quote, either the Protected NBB 
or the Protected NBO, is unstable, the determination remains in effect 
at that price level for ten (10) milliseconds. The System will only 
treat one side of the Protected NBBO as unstable in a particular 
security at any given time.\7\ By not permitting resting Discretionary 
Peg orders to execute at a price that is more aggressive than the near-
side protected NBB or NBO (as applicable) during periods of quote 
instability, the Exchange System is intended to attempt to protect such 
orders from unfavorable executions when the market is moving against 
them. Once the market has moved and the Exchange System deems the near-
side Protected NBB or NBO (as applicable) to be stable (pursuant to a 
pre-determined, objective set of conditions as described below), 
Discretionary Peg orders are permitted to exercise discretion up to 
(for buy orders) or down to (for sell orders) the midpoint of the NBBO 
in order to meet the limit price of active orders on the order book and 
thereby potentially provide price improvement to such active orders.
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    \7\ See, Rule 11.190(g).
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    Quote stability or instability (also referred to as a crumbling 
quote) is an assessment that the Exchange System makes on a real-time 
basis, based on a pre-determined, objective set of conditions specified 
in Rule 11.190(g)(1). Specifically, quote instability, or the presence 
of a crumbling quote, is determined by the System when the following 
factors occur:
    (A) The Protected NBB and Protected NBO are the same as the 
Protected NBB and Protected NBO one (1) millisecond ago; and
    (B) the Protected NBBO spread is less than or equal to the thirty 
(30) day median Protected NBBO spread during the Regular Market 
Session; and
    (C) there are more Protected Quotations on the far side, i.e., more 
Protected Quotations on the Protected NBO than the Protected NBB for 
buy orders, or more Protected Quotations on the Protected NBB than the 
Protected NBO for sell orders; and
    (D) the quote instability factor result from the quote stability 
calculation is greater than the defined quote instability threshold.

[[Page 54168]]

    (i) Quote Instability Factor. The Exchange's proprietary quote 
stability calculation used to determine the current quote instability 
factor is defined by the following formula that utilizes the quote 
stability coefficients and quote stability variables defined below:

    1/ (1 + e [caret] -(C0 + C1 * N + 
C2 * F + C3 * N-1 + C4 * 
F-1))

    (a) Quote Stability Coefficients. The Exchange utilizes the values 
below for the quote stability coefficients.
    (1) C0 = -2.39515
    (2) C1 = -0.76504
    (3) C2 = 0.07599
    (4) C3 = 0.38374
    (5) C4 = 0.14466
    (b) Quote Stability Variables. The Exchange utilizes the quote 
stability variables defined below to calculate the current quote 
instability factor.
    1. N = the number of Protected Quotations on the near side of the 
market, i.e., Protected NBB for buy orders and Protected NBO for sell 
orders.
    2. F = the number of Protected Quotations on the far side of the 
market, i.e., Protected NBO for buy orders and Protected NBB for sell 
orders.
    3. N-1 = the number of Protected Quotations on the near 
side of the market one (1) millisecond ago.
    4. F-1 = the number of Protected Quotations on the far 
side of the market one (1) millisecond ago.
    (ii) Quote Instability Threshold. The Exchange utilizes a quote 
instability threshold of 0.32.
    Rule 11.190(g)(1)(D)(iii) provides that the Exchange reserves the 
right to modify the quote instability coefficients or quote instability 
threshold at any time, subject to a filing of a proposed rule change 
with the SEC. The Exchange is proposing such changes in this rule 
filing.
Changes to Quote Instability Coefficients and Quote Instability 
Threshold
    The alternative trading system (``ATS'') operated by the Exchange's 
affiliate, IEX Services LLC (``IEX ATS'') offers a Discretionary Peg 
order type that is identical to the Exchange's Discretionary Peg order 
type, including the factors for determining when a crumbling quote (or 
quote instability) is present. IEX conducted an analysis of the 
effectiveness of the existing factors in predicting whether a crumbling 
quote would occur, by reviewing randomly selected market data from 
March through June 2016. The results of the analysis were verified by 
reviewing randomly selected market data from July 2016. Based on this 
analysis, the Exchange has determined that further optimization of the 
existing factors would incrementally increase the accuracy of the 
formula in predicting whether a crumbling quote will occur. The 
following describes the proposed changes:
    1. Rule 11.190(g) states that the Exchange utilizes real time 
relative quoting activity of Protected Quotations in the quote 
instability calculation. As proposed, the quote instability calculation 
would not include IEX protected quotations. The quote instability 
calculation has been optimized, subject to further proposed 
enhancements, based on actual market data from trading on the IEX ATS 
prior to the launch of the Exchange with a protected quotation. 
Accordingly, IEX does not have data that includes IEX protected 
quotations to consider in optimization of the quote instability 
calculation at this time.\8\
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    \8\ IEX may consider further enhancements that include IEX's 
protected quotation, subject to IEX submitting a proposed rule 
change under Section 19(b) of the Act.
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    2. The Exchange also proposes to reduce the time period that a 
crumbling quote condition remains in effect from ten to two 
milliseconds. Based on the market data analysis, IEX found that 
generally in the instances in which the formula correctly predicted a 
crumbling quote, the crumbling quote occurred within two milliseconds. 
By reducing the time period that the crumbling quote condition remains 
on, IEX believes that it will ameliorate the potential impact of any 
false positives, because the condition will remain on for a shorter 
period of time.
    3. The Exchange proposes to add two new quote stability variables, 
``E'' and ``D'', and their coefficients to the quote instability factor 
calculation specified in subparagraph (g)(1)(D)(i) of Rule 11.190. 
Quote stability variable E is a Boolean indicator that equals 1 if and 
only if the last two received quotation updates received by IEX have 
been quotations of protected markets moving away from the near side of 
the market on the same side of the market (i.e., bids moving lower or 
offers moving higher). Based on the market data analysis, the Exchange 
believes that inclusion of quote stability variable E will help to make 
the quote instability calculation more accurate in predicting a 
crumbling quote. Quote stability variable D is a measure of whether the 
quotation updates received by IEX from the Nasdaq Stock Market, EDGX 
Exchange or BATS BZX Exchange have been quotations moving away from the 
near side of the market on the same side of the market (i.e., bids 
moving lower or offers moving higher) in the last one (1) millisecond. 
The value will be either 0, 1, 2 or 3 depending on how many of such 
exchanges (if any) meet the quote stability variable D measure. Based 
on the market data analysis, the Exchange believes that when these 
three exchanges move away from the near side of the market on the same 
side of the market, it is more likely that the quote will crumble, and 
that inclusion of quote stability variable D will help to make the 
quote instability calculation more accurate in predicting a crumbling 
quote.
    4. The Quote Stability Coefficients specified in subparagraph 
(1)(D)(i) of Rule 11.190(g) are proposed to be modified to take into 
account the recent market data analysis, as well as to add new quote 
stability variables E and D. The Exchange believes that the 
modifications, as proposed, will increase the accuracy of the quote 
instability calculation.
    5. The Exchange proposes to modify and re-optimize the Quote 
Instability Threshold specified in subparagraph (1)(D)(ii) of Rule 
11.190(g) based on the recent market data analysis and the two new 
quote stability variables. The Exchange believes that the 
modifications, as proposed, will increase the accuracy of the quote 
instability calculation.
2. Statutory Basis
    IEX believes that the proposed rule change is consistent with 
Section 6(b) \9\ of the Act in general, and furthers the objectives of 
Section 6(b)(5) of the Act,\10\ in particular, in that it is designed 
to prevent fraudulent and manipulative acts and practices, to promote 
just and equitable principles of trade, to foster cooperation and 
coordination with persons engaged in facilitating 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. Specifically, and as 
discussed above, the proposal is designed to optimize and enhance the 
effectiveness of the quote instability calculation in determining 
whether a crumbling quote exists. The Exchange believes that the 
proposed changes are designed to protect investors and the public 
interest by enhancing the accuracy of the Exchange's quote instability 
calculation in determining whether a crumbling quote exists thereby 
preventing Discretionary Peg

[[Page 54169]]

orders from trading at prices more aggressive than the near side of the 
market (NBB for buy orders, NBO for sell orders) to protect such orders 
from unfavorable executions when the market appears to be moving 
against them. The Exchange believes that not including IEX protected 
quotations in the quote instability calculation is consistent with the 
protection of investors and the public interest because the calculation 
is optimized based on actual market data, and IEX does not yet have 
actual market data that includes IEX protected quotations to consider 
in optimization of the quote instability calculation at this time. The 
Exchange also believes that it is consistent with the protection of 
investors and the public interest to reduce the time period that a 
crumbling quote condition remains in effect from ten to two 
milliseconds to ameliorate the potential impact of any false positives. 
Further, IEX believes that adding the two new quote stability 
variables, as well as the proposed additions to and modification of the 
quote instability coefficients and quote instability threshold, as 
contemplated by 11.190(g)(1)(D)(iii), is consistent with the public 
interest and the protection of investors because these changes are 
designed to increase the accuracy of the calculation.
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    \9\ 15 U.S.C. 78f.
    \10\ 15 U.S.C. 78f(b)(5).
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    As proposed, the new quote instability calculation will continue to 
be a fixed formula specified transparently in IEX's rules. The Exchange 
is not proposing to add any new functionality, but merely to revise the 
fixed formula based on market data analysis designed to increase the 
accuracy of the formula in predicting a crumbling quote, and as 
contemplated by the rule.

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

    IEX 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 proposed change will apply 
equally to all IEX Members. The Commission has already considered the 
Exchange's Discretionary Peg order type in connection with its grant of 
IEX's application for registration as a national securities exchange 
under Sections 6 and 19 of the Act.\11\ The proposed rule change is 
designed to merely enhance the accuracy of the quote instability 
calculation specified in Rule 11.190(g) and ameliorate the impact of 
any false positives; therefore, no new burdens are being proposed.
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    \11\ See Securities Exchange Act Release No. 34-78101 (June 17, 
2016), 81 FR 41142 (June 23, 2016) (File No. 10-222).
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C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    Written comments were neither solicited nor received.

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

    The Exchange has designated this rule filing as non-controversial 
under Section 19(b)(3)(A) \12\ of the Act and Rule 19b-4(f)(6) \13\ 
thereunder. Because the proposed rule change does not: (i) 
Significantly affect the protection of investors or the public 
interest; (ii) impose any significant burden on competition; and (iii) 
become operative for 30 days from the date on which it was filed, or 
such shorter time as the Commission may designate if consistent with 
the protection of investors and the public interest, it has become 
effective pursuant to Section 19(b)(3)(A) of the Act and Rule 19b-
4(f)(6) thereunder.\14\
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    \12\ 15 U.S.C. 78s(b)(3)(A).
    \13\ 17 CFR 240.19b-4(f)(6).
    \14\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6) 
requires a self-regulatory organization to give the Commission 
written notice of its intent to file the proposed rule change at 
least five business days prior to the date of filing of the proposed 
rule change, or such shorter time as designated by the Commission. 
The Exchange has satisfied this requirement.
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    A proposed rule change filed under Rule 19b-4(f)(6) \15\ normally 
does not become operative prior to 30 days after the date of the 
filing. However, pursuant to Rule 19b-4(f)(6)(iii),\16\ the Commission 
may designate a shorter time if such action is consistent with the 
protection of investors and the public interest. The Exchange has asked 
the Commission to waive the 30-day operative delay, and stated that the 
proposed rule change will merely revise the fixed formula specified in 
Rule 11.190(g) for predicting a crumbling quote, as contemplated by the 
rule. The Exchange noted that the proposed rule change is designed to 
enhance the accuracy of the quote instability calculation and protect 
Members that enter Discretionary Peg orders from unfavorable executions 
when the market is moving against such orders. Further, the Exchange 
stated that waiver of the operative delay will allow the Exchange to 
implement the proposed rule change to coincide with IEX's launch of 
exchange operations during a security-by-security phase-in period 
beginning on August 19, 2016, thus enabling the Exchange to provide the 
contemplated protections to Members entering Discretionary Peg orders 
from exchange launch. The Commission notes that the changes proposed by 
IEX are intended to optimize the quote instability equation contained 
in the discretionary peg order type rule, and are not intended to 
materially change the operation of the rule or introduce new 
functionality. Rather, the Exchange intends the proposed changes to 
increase the ability of the discretionary peg order type to meet its 
stated objectives as reflected in the Exchange's rule. Accordingly, the 
Commission believes that waiver of the operative delay is consistent 
with the protection of investors and the public interest. Therefore, 
the Commission hereby waives the operative delay and designates the 
proposed rule change operative upon filing.\17\
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    \15\ 17 CFR 240.19b-4(f)(6).
    \16\ 17 CFR 240.19b-4(f)(6)(iii).
    \17\ For purposes only of waiving the 30-day operative delay, 
the Commission has also considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act. If the Commission 
takes such action, the Commission shall institute proceedings under 
Section 19(b)(2)(B) \18\ of the Act to determine whether the proposed 
rule change should be approved or disapproved.
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    \18\ 15 U.S.C. 78s(b)(2)(B).
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IV. Solicitation of Comments

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

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-IEX-2016-11 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-IEX-2016-11. This file

[[Page 54170]]

number should be included on the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for Web site viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE., 
Washington, DC 20549, on official business days between the hours of 
10:00 a.m. and 3:00 p.m. Copies of the filing also will be available 
for inspection and copying at the principal office of the Exchange. All 
comments received will be posted without change; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File Number SR-IEX-2016-11 and should be 
submitted on or before September 6, 2016.
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    \19\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\19\
Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-19315 Filed 8-12-16; 8:45 am]
 BILLING CODE 8011-01-P


