[Federal Register Volume 85, Number 64 (Thursday, April 2, 2020)]
[Notices]
[Pages 18612-18615]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-06856]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-88501; File No. SR-IEX-2019-15]


Self-Regulatory Organizations; Investors Exchange LLC; Order 
Instituting Proceedings To Determine Whether To Approve or Disapprove a 
Proposed Rule Change To Add a New Discretionary Limit Order Type Called 
D-Limit

March 27, 2020.

I. Introduction

    On December 16, 2019, the Investors Exchange LLC (``IEX'' or the 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Exchange Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to adopt a new order type, the 
Discretionary Limit or ``D-Limit.'' The proposed rule change was 
published for comment in the Federal Register on December 30, 2019.\3\ 
On February 12, 2020, the Commission designated a longer period within 
which to approve the proposed rule change, disapprove the proposed rule 
change, or institute proceedings to determine whether to disapprove the 
proposed rule change.\4\ This order institutes proceedings under 
Section 19(b)(2)(B) of the Exchange Act \5\ to determine whether to 
approve or disapprove the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 87814 (December 20, 
2019), 84 FR 71997 (``Notice''). Comments on the proposed rule 
change can be found at https://www.sec.gov/comments/sr-iex-2019-15/sriex201915.htm.
    \4\ See Securities Exchange Act Release No. 88186 (February 19, 
2020), 85 FR 9513.
    \5\ 15 U.S.C. 78s(b)(2)(B).
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II. Description of the Proposed Rule Change

    IEX proposes to establish a new order type, called a Discretionary 
Limit order (``D-Limit''), which the Exchange explains ``is designed to 
protect liquidity providers, institutional

[[Page 18613]]

investors as well as market makers, from potential adverse selection by 
latency arbitrage trading strategies in a fair and nondiscriminatory 
manner. . . .'' \6\
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    \6\ Notice, supra note 3, at 71998. The Exchange uses the term 
``latency arbitrage'' to refer to trading strategies used by market 
participants with sophisticated low-latency technology, who can 
rapidly aggregate market data feeds (including proprietary data 
products obtained directly from the exchanges) to react faster than 
other market participants, as well as the Exchange, when the 
national best bid and offer (``NBBO'') changes. See id. at 71997.
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    In the Notice, the Exchange explains how it has designed its market 
model around ``ways to counter or reduce speed advantages that can harm 
investors by exposing them to execution at stale prices when their 
orders are traded against by traders with more complete and timely 
information about market prices.'' \7\ The primary feature of that 
market model is the IEX ``speed bump,'' which employs physical path 
latency to introduce an equivalent 350 microseconds of latency between 
the network access point (the Point-of-Presence, or ``POP'') and the 
Exchange's system at its primary data center.\8\
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    \7\ See id.
    \8\ See id. The IEX speed bump applies to all incoming and 
outgoing messages except for inbound market data from other trading 
centers and outbound transaction and quote information sent to the 
applicable securities information processor. In addition, updates to 
resting pegged orders on IEX are processed within the IEX trading 
system and do not require separate messages to be transmitted from 
outside the system. The speed bump provides time for IEX to update 
resting pegged orders when the NBBO changes, so that the resting 
pegged orders are accurately pegged to current market prices.
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    Currently, the speed bump works together with non-displayed order 
types on IEX that are ``pegged'' to a given price, including the 
Discretionary Peg (``DPeg'') and the primary peg (``PPeg'') orders.\9\ 
DPeg and PPeg orders can ``exercise discretion'' to trade at prices 
more aggressive than their pegged prices.\10\ Specifically, IEX uses a 
proprietary mathematical calculation, the crumbling quote indicator 
(``CQI''), to determine when these pegged order types are eligible to 
exercise discretion.\11\ As described in the Notice, the CQI is 
designed to predict whether a particular quote is unstable or 
``crumbling,'' meaning that the NBB is likely about to decline or the 
NBO is likely about to increase.\12\ The Exchange utilizes real time 
relative quoting activity of certain 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'').\13\ 
When the quoting activity meets predefined criteria and the quote 
instability factor calculated is greater than the Exchange's defined 
quote instability threshold, IEX treats the quote as ``unstable,'' and 
the CQI is on at that price level for up to two milliseconds (hereafter 
referred to as the ``quote instability determination price level'' or 
the ``CQI Price'').\14\ During all other times, the quote is considered 
stable, and the CQI is off. IEX assesses the stability of the Protected 
NBB and Protected NBO for each security.\15\ When IEX determines, 
pursuant to the CQI methodology, that the current market for a specific 
security is unstable--meaning there is a heightened probability of an 
imminent quote change at the NBB or NBO--IEX's system will prevent DPeg 
and PPeg orders on that side of the market from exercising discretion 
and trading at a price that is more aggressive than their default 
resting prices.\16\
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    \9\ See IEX Rule 11.190(b)(10) and 11.190(b)(8), respectively.
    \10\ See Notice, supra note 3, at 71998.
    \11\ See id.
    \12\ See id.
    \13\ See id.
    \14\ See id.
    \15\ See id.
    \16\ See id.
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    In this proposal, IEX seeks to adopt the D-Limit order type, which 
would work in conjunction with the CQI by adjusting its price when the 
CQI is on.\17\ A D-Limit order could be a displayed or non-displayed 
limit order that, upon entry and when posting to the Order Book, is 
priced to be equal to and ranked at the order's limit price.\18\
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    \17\ IEX proposes to amend IEX Rule 11.190(b)(7), which is 
currently reserved, to add the D-Limit order type.
    \18\ A non-displayed D-Limit order with a limit price more 
aggressive than the Midpoint Price will be subject to the Midpoint 
Price Constraint and be booked and ranked on the Order Book at a 
price equal to the Midpoint Price pursuant to IEX Rule 11.190(h)(2).
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    A D-Limit order would be adjusted to a less-aggressive price during 
periods of quote instability. As proposed, if, upon entry of a D-Limit 
buy (sell) order, the CQI is on and the order has a limit price equal 
to or higher (lower) than the quote instability determination price 
level (i.e., the CQI Price), the price of the D-Limit order will 
automatically be adjusted by IEX to one MPV \19\ lower (higher) than 
the CQI price. Similarly, when unexecuted shares of a D-Limit buy 
(sell) order are posted to the Order Book, if a quote instability 
determination is made and such shares are ranked and displayed (in the 
case of a displayed order) by IEX at a price equal to or higher (lower) 
than the CQI Price, the price of the order will automatically be 
adjusted by IEX to one MPV lower (higher) than the CQI Price.
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    \19\ See IEX Rule 11.210.
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    A D-Limit order whose price is adjusted by IEX will not revert back 
to the price at which it was previously ranked and displayed (in the 
case of a displayed order).\20\ Rather, the order will continue to be 
ranked and displayed (in the case of a displayed order) at the new 
price, unless the order becomes subject to another automatic adjustment 
or if the order is subject to the price sliding provisions of IEX Rule 
11.190(h). When the price of a D-Limit order is adjusted, the order 
will receive a new time priority. If multiple D-Limit orders are 
adjusted at the same time, their relative time priority will be 
maintained. Further, when the price of a D-Limit order is adjusted, the 
member that entered the order will receive an order message from the 
Exchange notifying the member of the price adjustment.
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    \20\ IEX Rule 11.190(h) provides for price sliding in the event 
of a locked or crossed market, to enforce the Midpoint Price 
Constraint, to comply with the display or execution requirements for 
a short sale order not marked short exempt during a Short Sale 
Period, or to comply with the Limit Up-Limit Down Price Constraint. 
As set forth in IEX Rule 11.190(h), an order that has been subject 
to price sliding will be repriced back to its more aggressive limit 
price when the market condition changes such that the condition 
necessitating the price sliding is no longer applicable. This is in 
contrast to the normal operation of a D-Limit order when it adjusts 
due to the CQI being triggered, at which point the D-Limit order's 
adjusted price will not reprice.
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    The Commission has received a number of comment letters on the 
proposed rule change.\21\ Many of those commenters support the 
proposal, and recommend that the Commission approve it. Commenters in 
support opine that the proposal is an innovative response to what some 
categorize as aggressive and ``predatory'' trading behavior by a small 
number of market participants that ``plague'' the displayed markets; 
and they support the D-Limit order as a transparent, widely-accessible, 
and not unfairly discriminatory means to counter those traders through 
an order type that will protect and thus encourage additional long-term 
investors and others to submit more displayed liquidity to exchanges, 
and thereby potentially increase the depth of displayed liquidity and 
narrow quoted spreads.\22\ Several other

[[Page 18614]]

commenters, however, urge the Commission to disapprove the proposed 
rule change, arguing that it constitutes an unnecessary and 
inappropriate burden on competition that is unfairly discriminatory, 
circumvents the federal securities laws, would not be an automated and 
protected quote, may negatively impact investors particularly for 
larger orders, will lead to phantom liquidity/quote fading and 
declining fill rates, and lacks sufficient data to support the 
proposal.\23\
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    \21\ See supra note 3.
    \22\ See, e.g., Letters from Thomas M. Merritt, Deputy General 
Counsel, Virtu Financial, LLC, dated, January 16, 2020; Marius-
Andrei Zoican, Assistant Professor of Finance, University of 
Toronto-Mississauga, dated January 20, 2020; Daniel Aisen, Proof 
Services LLC, dated December 24, 2019; Mehmet Kinak and Jonathan D. 
Siegel, T Rowe Price, dated February 5, 2020; Jeffrey P. Mahoney, 
General Counsel, Council of Institutional Investors, dated February 
11, 2020; and OTPP, CDPQ, and the Office of the New York City 
Comptroller, et al., dated February 24, 2020.
    \23\ See, e.g., Letters from Joan C. Conley, Senior Vice 
President & Corporate Secretary, NASDAQ, dated January 21, 2020; 
Joanna Mallers, Secretary, FIA Principal Traders Group, dated 
January 21, 2020; Adam Nunes, Head of Business Development, Hudson 
River Trading LLC, dated January 21, 2020; and Ellen Greene, 
Managing Director, Equity and Options Market Structure, SIFMA, dated 
February 5, 2020.
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III. Proceedings To Determine Whether To Approve or Disapprove SR-IEX-
2019-15 and Grounds for Disapproval Under Consideration

    The Commission is instituting proceedings pursuant to Section 
19(b)(2)(B) of the Exchange Act \24\ to determine whether the proposed 
rule change should be approved or disapproved. Institution of 
proceedings is appropriate at this time in view of the legal and policy 
issues raised by the proposed rule change and the comments received 
thereon. Institution of Proceedings does not indicate that the 
Commission has reached any conclusions with respect to any of the 
issues involved.
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    \24\ 15 U.S.C. 78s(b)(2)(B).
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    Pursuant to Section 19(b)(2)(B) of the Exchange Act,\25\ the 
Commission is providing notice of the grounds for possible disapproval 
under consideration. The Commission is instituting proceedings to allow 
for additional analysis and input concerning the proposed rule change's 
consistency with the Exchange Act, including Sections 6(b)(5) and 
6(b)(8) thereof,\26\ and the rules and regulations thereunder.
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    \25\ Id.
    \26\ 15 U.S.C. 78f(b)(5) and 15 U.S.C. 78f(b)(8), respectively. 
Section 6(b)(5) of the Exchange Act requires that the rules of a 
national securities exchange be designed, among other things, 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, and not be designed to permit unfair 
discrimination between customers, issuers, brokers, or dealers. 
Section 6(b)(8) of the Exchange Act requires that the rules of a 
national securities exchange not impose any burden on competition 
that is not necessary or appropriate in furtherance of the purposes 
of the Exchange Act.
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    The Commission is instituting proceedings to further consider the 
proposal and the issues raised by the commenters on the proposal as it 
determines whether the proposed D-Limit order type is consistent with 
the Exchange Act and the rules and regulations thereunder. 
Specifically, the Commission is providing notice of the following 
grounds for possible disapproval under consideration:
     Whether the Exchange has demonstrated how its proposal is 
consistent with Section 6(b)(5) of the Exchange Act,\27\ which requires 
the rules of IEX to not be ``designed to permit unfair discrimination 
between customers, issuers, brokers, or dealers.''
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    \27\ 15 U.S.C. 78f(b)(5).
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     Whether the Exchange has demonstrated how its proposal is 
consistent with Section 6(b)(8) of the Exchange Act,\28\ which requires 
that the rules of IEX not impose any burden on competition that is not 
necessary or appropriate in furtherance of the purposes of the Exchange 
Act.
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    \28\ 15 U.S.C. 78f(b)(8).
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    Under the Commission's Rules of Practice, the ``burden to 
demonstrate that a proposed rule change is consistent with the 
[Exchange Act] and the rules and regulations issued thereunder . . . is 
on the [SRO] that proposed the rule change.'' \29\ The description of a 
proposed rule change, its purpose and operation, its effect, and a 
legal analysis of its consistency with applicable requirements must all 
be sufficiently detailed and specific to support an affirmative 
Commission finding,\30\ and any failure of an SRO to provide this 
information may result in the Commission not having a sufficient basis 
to make an affirmative finding that a proposed rule change is 
consistent with the Exchange Act and the applicable rules and 
regulations.\31\ Moreover, ``unquestioning reliance'' on an SRO's 
representations in a proposed rule change would not be sufficient to 
justify Commission approval of a proposed rule change.\32\
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    \29\ Rule 700(b)(3), Commission Rules of Practice, 17 CFR 
201.700(b)(3).
    \30\ See id.
    \31\ See id.
    \32\ See Susquehanna Int'l Group, LLP v. Securities and Exchange 
Commission, 866 F.3d 442, 446-47 (D.C. Cir. 2017) (rejecting the 
Commission's reliance on an SRO's own determinations without 
sufficient evidence of the basis for such determinations).
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    For the reasons discussed above, the Commission believes it is 
appropriate to institute proceedings pursuant to Section 19(b)(2)(B) of 
the Exchange Act to allow for additional consideration of the issues 
raised by the proposal as it determines whether the proposal should be 
approved or disapproved.

IV. Procedure: Request for Written Comments

    The Commission requests that interested persons provide written 
submissions of their views, data, and arguments with respect to the 
issues identified above, as well as any other concerns they may have 
with the proposal. In particular, the Commission invites the written 
views of interested persons concerning whether the proposal is 
consistent with Sections 6(b)(5) and 6(b)(8), or any other provision of 
the Exchange Act, or the rules and regulations thereunder. Although 
there do not appear to be any issues relevant to approval or 
disapproval that would be facilitated by an oral presentation of views, 
data, and arguments, the Commission will consider, pursuant to Rule 
19b-4, any request for an opportunity to make an oral presentation.\33\
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    \33\ Section 19(b)(2) of the Exchange Act, as amended by the 
Securities Act Amendments of 1975, Public Law 94-29 (June 4, 1975), 
grants the Commission flexibility to determine what type of 
proceeding--either oral or notice and opportunity for written 
comments--is appropriate for consideration of a particular proposal 
by a self-regulatory organization. See Securities Act Amendments of 
1975, Senate Comm. on Banking, Housing & Urban Affairs, S. Rep. No. 
75, 94th Cong., 1st Sess. 30 (1975).
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    Interested persons are invited to submit written data, views, and 
arguments regarding whether the proposal should be approved or 
disapproved by April 23, 2020. Any person who wishes to file a rebuttal 
to any other person's submission must file that rebuttal by May 7, 
2020.
    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-2019-15 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 Numbers SR-IEX-2019-15. 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 website (http://www.sec.gov/

[[Page 18615]]

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 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 these filings also will be 
available for inspection and copying at the principal office of the 
Exchange. 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-2019-15 and should be 
submitted on or before April 23, 2020. Rebuttal comments should be 
submitted by May 7, 2020.
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    \34\ 17 CFR 200.30-3(a)(57).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\34\
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-06856 Filed 4-1-20; 8:45 am]
BILLING CODE 8011-01-P


