
[Federal Register Volume 82, Number 50 (Thursday, March 16, 2017)]
[Notices]
[Pages 14058-14061]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-05210]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-80202; File No. SR-IEX-2017-06]


Self-Regulatory Organizations; Investors Exchange LLC; Notice of 
Filing and Immediate Effectiveness of Proposed Rule Change 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

March 10, 2017.
    Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of 
1934 \2\ and Rule 19b-4 thereunder,\3\ notice is hereby given that, on 
Februrary 28, 2017, the Investors Exchange LLC filed with the 
Securities and Exchange Commission (``Commission'') the proposed rule 
change as described in Items I and II below, which Items have been 
prepared by the self-regulatory organization. The Commission is 
publishing this notice to solicit comments on the proposed rule change 
from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 15 U.S.C. 78a.
    \3\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    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 
Commission a proposed rule change to amend Rule 11.190(g) to 
incrementally optimize and enhance the effectiveness of the quote 
instability calculation in determining whether a crumbling quote 
exists. 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 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 the quote in a 
particular security is crumbling from the national best bid, as 
comprised of Protected Quotations (``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 the quote in a particular security is crumbling from the national 
best offer, as comprised of Protected Quotations (``Protected NBO'' and 
collectively with the Protected NBB the ``Protected NBBO''), 
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 
(not including quotations of the Exchange) 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 two (2) 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

[[Page 14059]]

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.
    (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 [supcaret]-(C0 + C1 * N + C2 
* F + C3 * N-1 + C4 * F-1 + 
C5 * E + C6 * D))

    (a) Quote Stability Coefficients. The Exchange utilizes the values 
below for the quote stability coefficients.

(1) C0 = -1.3493
(2) C1 = -1.1409
(3) C2 = 0.2671
(4) C3 = 0.5141
(5) C4 = -0.1970
(6) C5 = 0.1347
(7) C6 = 0.6862

    (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.
    (5) E = a Boolean indicator that equals 1 if the last two quotation 
updates have been quotations of protected markets moving away from the 
near side of the market on the same side of the market and at the same 
price.
    (6) D = the number of these three (3) venues that moved away from 
the near side of the market on the same side of the market and at the 
same price in the prior one (1) millisecond: XNGS, EDGX, BATS.
    (ii) Quote Instability Threshold. The Exchange utilizes a quote 
instability threshold of 0.6.
    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
    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 November 2016 through mid-
February 2017. The results of the analysis were verified by reviewing 
randomly selected market data from January and mid-February 2017. 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, not including IEX 
protected quotations, in the quote instability calculation. As 
proposed, the Exchange is proposing to include the protection 
quotations of the following exchanges in the quote instability 
calculation: New York Stock Exchange, NYSE Arca, Nasdaq BX, Bats BZX 
Exchange, Bats BYX Exchange, Bats EDGX Exchange, and Bats EDGA 
Exchange. In connection with our analysis of market data, as described 
above, the Exchange considered several different permutations of which 
exchanges to include in the model. The research identified that using 
the Protected Quotations of these specific eight exchanges in the 
aggregate resulted in the greatest predictive power of all permutations 
of exchanges assessed for determining a crumbling quote.
    2. The Exchange proposes to simplify the crumbling quote 
calculation specified in Rule 11.190(g)(1) by eliminating the three (3) 
preconditions related to the stability and ratio of the protected 
national best bid and offer (``NBBO''),\8\ and base the determination 
solely on whether the quote instability factor result from the quote 
stability calculation is greater than the defined quote instability 
threshold. Based on our analysis of market data, as described above, 
the Exchange believes that the simplification would incrementally 
increase the accuracy of the formula in predicting a crumbling quote by 
expanding the scope of the model to additional situations where a 
crumbling quote exists in the absence of the pre-conditions.
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    \8\ Currently IEX Rule 11.190(g)(1) provides that in determining 
whether a crumbling quote exists the following other factors will be 
considered: The Protected NBB and Protected NBO are the same as the 
Protected NBB and Protected NBO one (1) millisecond ago, the 
Protected NBBO spread is less than or equal to the thirty (30) day 
median Protected NBBO spread during the Regular Market Session, and 
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 NBO for 
sell orders.
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    3. The Exchange proposes to revise the quote stability variables 
currently specified in subparagraph (1)(D)(i)(b) of Rule 11.190(g) by 
adding seven (7) new variables (NC, FC, Delta, EPos, ENeg, EPosPrev, 
and ENegPrev) and retiring four (4) variables (N-1, F-1, E, and D).\9\ 
Specifically, based on our analysis of market data, as described above, 
the Exchange identified that considering the maximum change over the 
course of the previous millisecond up to the most recent Protected NBBO 
change was a more accurate indicator of a crumbling quote than simply 
looking at the absolute state of the market one millisecond previously. 
The replacement of N-1, F-1, and D with NC, FC, and Delta, 
respectively, reflects this finding. Additionally, we found that 
looking at the previous two quote changes on a more granular basis 
(specifically, looking at whether each of the last two events 
individually was a

[[Page 14060]]

quote dropping off the near side or joining the near side, rather than 
whether both of the last two events dropped off the near side) was a 
more accurate indicator of a crumbling quote than a simple boolean 
factor indicating whether both of the last two events were quotes 
dropping off the inside. Replacing E with 4 separate factors--EPos, 
ENeg, EPosPrev, and ENegPrev--reflects this finding.
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    \9\ Two (2) of the existing variables (N and F) will be 
retained.
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    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 the changes to the 
quote stability variables as described above. Specifically, as proposed 
the seven (7) existing coefficients will be modified and three (3) new 
coefficients will be added. 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 new quote 
stability variables. Specifically, the threshold size would vary based 
on the spread of the Protected NBBO.\10\ Based on its data analysis, as 
described above, the Exchange concluded that tiering the threshold 
would reduce the rate of false positives. Consequently, the Exchange 
believes that the modifications, as proposed, will increase the 
accuracy of the quote instability calculation.
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    \10\ The spread is defined in proposed paragraph (1)(D)(ii) as 
the Protected Best Offer minus Protected Best Bid.
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    6. Finally, the Exchange proposes conforming numbering changes to 
Rule 11.190(g) to reflect elimination of the three (3) preconditions 
for the crumbling quote calculation specified in Rule 11.190(g)(1) as 
described above.
    The Exchange will announce the implementation date of the proposed 
rule change by Trader Notice at least five business days in advance of 
such implementation date and within 90 days of effectiveness of this 
proposed rule change.
2. Statutory Basis
    IEX believes that the proposed rule change is consistent with 
Section 6(b) \11\ of the Act in general, and furthers the objectives of 
Section 6(b)(5) of the Act,\12\ 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 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. As discussed in the 
Purpose section, each of the proposed changes are based on the 
Exchange's analysis of market data, which supports that, in the 
aggregate and individually, the proposed changes would increase the 
accuracy of the Exchange's quote instability calculation.
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    \11\ 15 U.S.C. 78f.
    \12\ 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.\13\ The proposed rule change is 
designed to merely enhance the accuracy of the quote instability 
calculation specified in Rule 11.190(g); therefore, no new burdens are 
being proposed.
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    \13\ 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

    Because the foregoing proposed rule change does not: (i) 
Significantly affect the protection of investors or the public 
interest; (ii) impose any significant burden on competition; and (iii) 
become operative for 30 days from the date on which it was filed, or 
such shorter time as the Commission may designate, it has become 
effective pursuant to Section 19(b)(3)(A) of the Act \14\ and Rule 19b-
4(f)(6) thereunder.\15\
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    \14\ 15 U.S.C. 78s(b)(3)(A).
    \15\ 17 CFR 240.19b-4(f)(6). As required under Rule 19b-
4(f)(6)(iii), IEX provided the Commission with written notice of its 
intent to file the proposed rule change, along with a brief 
description and the text of the proposed rule change, at least five 
business days prior to the date of filing of the proposed rule 
change, or such shorter time as designated by the Commission.
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    A proposed rule change filed under Rule 19b-4(f)(6) \16\ normally 
does not become operative prior to 30 days after the date of the 
filing. However, pursuant to Rule 19b-4(f)(6)(iii),\17\ 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. The Exchange stated 
that the proposed rule change is designed to optimize the fixed quote 
instability equation contained in the rule without introducing new 
functionality or materially changing the operation of the current 
functionality in a manner not contemplated by the rule. The Exchange 
believes that its proposal will operate to protect Members that enter 
Discretionary Peg orders from unfavorable executions when the market is 
moving against such orders, and noted that waiver of the operative 
delay would allow the Exchange to implement the optimized formula 
without delay. As the Exchange's proposal is intended to further refine 
the ability of the discretionary peg order type to meet its stated 
objectives as reflected in the Exchange's rule, the Commission believes 
that waiver of the operative delay is consistent with the protection of 
investors and the public interest. Therefore, the Commission hereby

[[Page 14061]]

waives the operative delay and designates the proposed rule change 
operative upon filing.\18\
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    \16\ 17 CFR 240.19b-4(f)(6).
    \17\ 17 CFR 240.19b-4(f)(6)(iii).
    \18\ 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 to 
determine whether the proposed rule should be approved or disapproved.

IV. Solicitation of Comments

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

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File SR-IEX-2017-06 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-2017-06. 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 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-2017-06 and should be 
submitted on or before April 6, 2017.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\19\
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    \19\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-05210 Filed 3-15-17; 8:45 am]
 BILLING CODE 8011-01-P


