
[Federal Register Volume 83, Number 243 (Wednesday, December 19, 2018)]
[Notices]
[Pages 65186-65188]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-27403]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-84820; File No. SR-IEX-2018-23]


Self-Regulatory Organizations; Investors Exchange LLC; Notice of 
Filing of Proposed Rule Change To Modify the Resting Price of 
Discretionary Peg Orders December 13, 2018.

    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 November 30, 2018, 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, 
II and III 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\ IEX is 
filing with the Commission a proposed rule change to modify the resting 
price of Discretionary Peg orders to be equal to the less aggressive of 
one (1) MPV \6\ less aggressive than the primary quote (i.e., the NBB 
for buy orders and NBO for sell orders) or the order's limit price, 
rather than the primary quote.
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    \4\ 15 U.S.C. 78s(b)(1).
    \5\ 17 CFR 240.19b-4.
    \6\ See Rule 11.210.
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    The text of the proposed rule change is available at the Exchange's 
website 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 the 
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 statements 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
    The purpose of this proposed rule filing is to modify the resting 
price of Discretionary Peg orders to be equal to the less aggressive of 
one (1) MPV \7\ less aggressive than the primary quote or the order's 
limit price, rather than the primary quote. Currently, the Exchange 
offers three types of pegged orders--primary peg, midpoint peg, and 
Discretionary Peg--each of which are non-displayed orders that upon 
entry into the System and while resting on the Order Book, are 
automatically pegged to a reference price based on the national best 
bid and offer (``NBBO'').
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    \7\ See Rule 11.210.
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    As set forth in Rule 11.190(b)(10), a Discretionary Peg order is a 
pegged order that upon entry into the System, the price of the order is 
automatically adjusted to be equal to the less aggressive of the 
Midpoint Price \8\ or the order's limit price, if any. Furthermore, 
when unexecuted shares of a Discretionary Peg 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 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.
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    \8\ See Rule 11.160(t).
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    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 (i.e., the less aggressive of the Midpoint 
Price or the Discretionary Peg order's limit price, if any), except 
during periods of quote instability as defined in Rule 11.190(g), 
discussed further below. When exercising price discretion, a 
Discretionary Peg order maintains time priority at its resting price 
and is prioritized behind any non-displayed interest at the 
discretionary price for the duration of that book processing action. If 
multiple Discretionary Peg orders are exercising price discretion 
during the same book processing action, they maintain their relative 
time priority at the discretionary price. In the event the NBBO becomes 
locked or crossed, Discretionary Peg orders resting on or posting to 
the Order Book are priced one (1) MPV less aggressive than the locking 
or crossing price.\9\
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    \9\ See Rule 11.190(h)(3)(C)(ii) and (D)(ii).
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    Pursuant to Rule 11.190(g), the Exchange utilizes real time 
relative quoting activity of certain Protected Quotations \10\ 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 
quote instability threshold, the System treats the quote as unstable 
and the crumbling quote indicator (``CQI'') is on at that price level 
for two milliseconds,

[[Page 65187]]

or until the CQI triggers again. During all other times, the quote is 
considered stable, and the CQI is off. The System independently 
assesses the stability of the Protected NBB and Protected NBO for each 
security.
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    \10\ Pursuant to Rule 11.190(g), the Protected Quotations of the 
New York Stock Exchange, Nasdaq Stock Market, NYSE Arca, Nasdaq BX, 
Cboe BZX Exchange, Cboe BYX Exchange, Cboe EDGX Exchange, and Cboe 
EDGA Exchange.
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    When the CQI is on, Discretionary Peg orders do not exercise price 
discretion to meet the limit price of an active (i.e., taking) order. 
However, Discretionary Peg orders are eligible for execution at their 
resting price (i.e., at the NBB (NBO) for buy (sell) orders) when the 
CQI is on. Therefore, when IEX determines the quote to be unstable, 
Discretionary Peg orders are protected from trading more aggressively 
at a price that appears to be unstable, and thus imminently stale, 
between the primary quote and the Midpoint Price. However, 
Discretionary Peg orders remain susceptible to trading at the primary 
quote under such circumstances. For example, based on a recent analysis 
of data for May and June of 2018, the Exchange identified that 90% of 
Discretionary Peg order executions trade within the NBBO when the CQI 
is off, 88% of which execute at the Midpoint Price. However, of the 
remaining 10% of Discretionary Peg order executions that occur at the 
primary quote, 31% occur when the CQI is on.\11\ Said differently, 31% 
of Discretionary Peg executions at the primary quote occur when IEX has 
determined the primary quote to be in transition to a less aggressive 
(more advantageous) price.
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    \11\ The remaining 69% execute at the primary quote when the CQI 
is off because the limit price of the active orders removing the 
Discretionary Peg orders were priced at least as aggressive as the 
primary quote.
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    Therefore, in order to further protect resting Discretionary Peg 
orders from execution at a stale price, the Exchange proposes to modify 
the resting price of Discretionary Peg orders to be equal to the less 
aggressive of one (1) MPV less aggressive than the primary quote or the 
order's limit price, rather than the primary quote.
    As proposed, upon entry into the System, Discretionary Peg orders 
will continue to be priced to the less aggressive of the Midpoint Price 
or the orders limit price (i.e., Discretionary Peg orders will continue 
to remove liquidity up to the Midpoint Price, subject to the order's 
limit price). Similarly, after posting to the Order Book, Discretionary 
Peg orders will continue to exercise the least amount of price 
discretion up (down) to the less aggressive of the Midpoint Price or 
the orders limit price, if any, to meet the limit price of active 
orders on the Order Book when the CQI is off.\12\ Moreover, 
Discretionary Peg orders will continue to be available for execution at 
their resting price (i.e., the less aggressive of one (1) MPV less 
aggressive than the primary quote or the orders limit price) when the 
CQI is on. Furthermore, if the System determines the NBB (NBO) for a 
particular security to be an unstable quote, it will restrict buy 
(sell) Discretionary Peg orders in that security from exercising price 
discretion to trade against interest at or above (below) the NBB (NBO). 
The Exchange is not proposing to modify the handling of Discretionary 
Peg orders resting on or posting to the Order Book in locked and 
crossed markets. Thus, in the event the NBBO becomes locked or crossed, 
Discretionary Peg orders resting on or posting to the Order Book will 
continue to be priced one (1) MPV less aggressive than the locking or 
crossing price.\13\
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    \12\ The Exchange notes that the proposed resting price for 
Discretionary Peg orders will be the same as the resting price of 
Primary Peg orders pursuant to Rule 11.190(b)(8). Thus, as proposed, 
both Discretionary Peg and Primary Peg orders will rest at the less 
aggressive of one (1) MPV less aggressive than the primary quote or 
the order's limit price in relative time priority. Furthermore, when 
the CQI is off, Primary Peg orders are eligible to exercise 
discretion up (down) to the NBB (NBO) for buy (sell) orders up 
(down) to the order's limit price. Thus, as proposed, when 
exercising discretion, Primary Peg and Discretionary Peg orders will 
compete for execution with orders removing liquidity at the primary 
quote based on relative time priority.
    \13\ See supra note 9.
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    Lastly, the Exchange is also proposing to make conforming changes 
to the description of the resting price of Discretionary Peg orders for 
purposes of ranking and priority in the Regular Market Session Opening 
Process for Non-IEX-Listed Securities, and IEX Auctions.\14\
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    \14\ See proposed Rule 11.231(a)(1)(iii) and Rule 
11.350(b)(1)(A)(i)(c), respectively.
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2. Statutory Basis
    IEX believes that the proposed rule change is consistent with the 
provisions of Section 6(b) \15\ of the Act in general, and furthers the 
objectives of Section 6(b)(5) of the Act \16\ in particular, in that it 
is designed to prevent fraudulent and manipulative acts and practices, 
to promote just and equitable principles of trade, 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, the Exchange believes the proposed rule 
change is consistent with the protection of investors and the public 
interest because it is designed to protect resting Discretionary Peg 
orders from adverse selection by limiting execution at the primary 
quote when the Exchange's probabilistic model identifies that the 
primary quote appears to be moving adversely to them, thereby reducing 
the potential to execute at an imminently stale price and enhancing the 
overall execution experience of Discretionary Peg orders.
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    \15\ 15 U.S.C. 78f.
    \16\ 15 U.S.C. 78f(b)(5).
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    In addition, the Exchange believes that such protection is 
consistent with the protection of investors and the public interest 
because it may incentivize the entry of additional resting 
Discretionary Peg orders on the Exchange, thereby increasing the 
overall liquidity profile on the Exchange to the benefit of all market 
participants. Moreover, as noted in the Purpose section, resting 
Discretionary Peg orders generally provide liquidity and opportunities 
for price improvement to market participants removing liquidity on the 
Exchange during periods of quote stability. By incentivizing the entry 
of additional Discretionary Peg orders, the Exchange believes that the 
proposed changes may enhance the overall execution experience for other 
market participants removing liquidity on the Exchange during periods 
of quote stability.
    Further, IEX believes that the proposal is consistent with 
protection of investors and the public interest in that the 
Discretionary Peg order type is designed to assist Members in obtaining 
best execution for their customers (and proprietary orders) by 
providing an opportunity to execute at the NBBO, but limiting 
executions at the NBBO when the NBBO appears to be unstable, thereby 
reducing the potential to execute at an imminently stale price.
    In addition, as noted in the Purpose section, the proposed resting 
price for Discretionary Peg orders will be the same as the resting 
price of Primary Peg orders pursuant to Rule 11.190(b)(8).\17\ Thus, 
IEX does not believe that the proposed changes raise any new or novel 
issues that have not already been considered by the Commission in 
connection with existing order types offered by the Exchange.\18\
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    \17\ As proposed, both Discretionary Peg and Primary Peg orders 
will rest at the less aggressive of one (1) MPV less aggressive than 
the primary quote or the orders limit price in relative time 
priority.
    \18\ See Securities Exchange Act Release No. 80223 (March 13, 
2017), 82 FR 14240 (March 17, 2017) (SR-IEX-2016-18).
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    Finally, the Exchange believes that the conforming change to the 
description of the resting price of Discretionary Peg orders for 
purposes of ranking and priority in the Regular

[[Page 65188]]

Market Session Opening Process for Non-IEX-Listed Securities is 
consistent with the protection of investors and the public interest 
because it will make the Exchange's rules more accurate and complete, 
and descriptive of the System's functionality.

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. With regards to inter-market 
competition, the proposed resting price for Discretionary Peg orders 
will be the same as the resting price of Primary Peg orders pursuant to 
Rule 11.190(b)(8), and thus the Exchange believes that no new inter-
market burdens are being imposed.\19\ Furthermore, the Exchange notes 
that other markets are free to adopt similar rules for comparable order 
types to the extent that the proposed changes pose a competitive threat 
to their business. In this regard, the Exchange notes that NYSE 
American LLC has adopted a rule copying an earlier iteration of the 
Exchange's Discretionary Peg order type and quote stability 
calculation.\20\ Accordingly, the Exchange also believes that the 
proposed rule change will not result in any burden on inter-market 
competition that is not necessary or appropriate in furtherance of the 
purposes of the Act.
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    \19\ Id.
    \20\ See NYSE American Rule 7.31E(h)(3)(D).
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    With regards to intra-market competition, the proposed change will 
modify the resting price of all Discretionary Peg orders and will 
therefore be applied equally to all Members using the Discretionary Peg 
order type. Moreover, the Exchange does not believe that the proposed 
change to the resting price of Discretionary Peg orders will result in 
any burden on Members seeking to cross the spread and execute at the 
far side quote (the NBO (NBB) for buy (sell) orders). To the contrary, 
the proposed change would provide potential benefits to such Members. 
As discussed above, the enhanced benefits and protections offered by 
the Discretionary Peg order, as proposed, is intended in part to 
incentivize additional resting Discretionary Peg orders to be entered 
on the Exchange. Thus, Members seeking to cross the spread may be more 
likely to obtain price improvement for their liquidity removing orders 
to the extent such orders execute against a Discretionary Peg order 
during times when the CQI is off.
    Moreover, as discussed in the Purpose and Statutory Basis sections, 
resting Discretionary Peg orders generally provide liquidity and 
opportunities for price improvement to market participants removing 
liquidity on the Exchange during periods of quote stability. Thus, the 
Exchange further believes that by enhancing the performance of 
Discretionary Peg orders, and thereby incentivizing additional order 
flow, the proposed changes may enhance the overall execution experience 
for other market participants seeking to cross the spread and execute 
at the far side quote during periods of quote stability, which is 
consistent with the protection of investors and the public interest.

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

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the Exchange consents, the Commission shall: (a) By order approve 
or disapprove such proposed rule change, or (b) institute proceedings 
to determine whether the proposed rule change should be 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 Number SR-IEX-2018-23 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-IEX-2018-23. This file 
number should be included in 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 website (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 website viewing and printing in 
the Commission's Public Reference Section, 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 will also be available for inspection 
and copying at the IEX's principal office and on its internet website 
at www.iextrading.com. All comments received will be posted without 
change. Persons submitting comments are cautioned that we do not redact 
or edit personal identifying information from comment submissions. You 
should submit only information that you wish to make available 
publicly. All submissions should refer to File Number SR-IEX-2018-23 
and should be submitted on or before January 9, 2019.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\21\
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    \21\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2018-27403 Filed 12-18-18; 8:45 am]
 BILLING CODE 8011-01-P


