[Federal Register Volume 87, Number 234 (Wednesday, December 7, 2022)]
[Notices]
[Pages 75099-75102]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-26533]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-96416; File No. SR-IEX-2022-06]


Self-Regulatory Organizations; Investors Exchange LLC; Order 
Granting Approval of a Proposed Rule Change To Amend Rule 11.190(g) To 
Provide an Alternative Calculation for Non-Displayed Pegged Order Types 
for Determining Whether a Quote Instability Condition Exists

December 1, 2022.

I. Introduction

    On September 27, 2022, 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 provide an alternative 
calculation for non-displayed pegged order types to determine whether a 
quote instability condition exists for purposes of determining when the 
Exchange's proprietary Crumbling Quote Indicator (``CQI'') is to be 
triggered. The proposed rule change was published for comment in the 
Federal Register on October 17, 2022.\3\ The Commission received no 
comments on the proposed rule change. This order approves 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. 96014 (October 11, 
2022), 87 FR 62903 (``Notice'').
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II. Description of the Proposed Rule Change

Current CQI Operation

    Pursuant to IEX Rule 11.190(g), the Exchange utilizes quoting 
activity of eight away exchanges' Protected Quotations \4\ and a 
mathematical

[[Page 75100]]

calculation to assess the probability of an imminent change to the 
current Protected NBB \5\ to a lower price or imminent change to the 
current Protected NBO \6\ to a higher price for a particular security. 
When the quoting activity meets predetermined criteria, the System \7\ 
treats the quote as not stable (``quote instability'' or a ``crumbling 
quote'') and the CQI is then ``on'' at that price level for two 
milliseconds. 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. IEX 
characterizes these order types and the CQI functionality as being 
designed to ``counter the costs of `adverse selection' that 
participants supplying liquidity incur when their orders are executed 
at worse prices as a result of certain speed-based trading 
strategies.'' \8\
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    \4\ See IEX Rule 1.160(bb) (defining ``Protected Quotation'' as 
an automated quotation that is calculated by IEX to be the best bid 
or best offer of an exchange). Current IEX Rule 11.190(g) uses the 
following eight exchanges' Protected Quotations: New York Stock 
Exchange LLC, the Nasdaq Stock Market LLC, NYSE Arca, Inc., Nasdaq 
BX, Inc., Cboe BYX Exchange, Inc., Cboe Bats BZX Exchange, Inc., 
Cboe EDGA Exchange, Inc., and Cboe EDGX Exchange, Inc. 
(collectively, ``Signal Exchanges'').
    \5\ See IEX Rule 1.160(cc).
    \6\ See IEX Rule 1.160(cc).
    \7\ See IEX Rule 1.160(nn).
    \8\ Notice, supra note 3, at 62904.
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    This proposal applies to the CQI formula that informs the exercise 
of ``discretion'' by Discretionary Peg (``D-Peg'') \9\ orders, Primary 
Peg (``P-Peg'') \10\ orders, and Corporate Discretionary Peg (``C-
Peg'') orders.\11\ Each of those resting peg order types, all of which 
are non-displayed, passively rest at prices slightly less aggressive 
than the near-side quote. When the quote is stable, those peg orders 
exercise price discretion by ``jumping'' to a more aggressive price to 
interact with an active incoming liquidity taking order when the quote 
is stable. However, when the CQI comes on, those orders do not exercise 
price discretion and instead continue to rest passively. Specifically, 
D-Peg, P-Peg, and C-Peg orders rest at a pegged price that is the less 
aggressive of one minimum price variant (``MPV'') \12\ less aggressive 
than the primary quote (i.e., one MPV below (above) the NBB \13\ (NBO 
\14\) for buy (sell) orders) or the order's limit price, if any.\15\ In 
addition, when the CQI is on at the NBB (in the case of a buy order) or 
NBO (in the case of a sell order), P-Peg orders are restricted by the 
System from exercising price discretion to trade at the quote 
instability determination price level (the ``CQI Price''), and D-Peg 
and C-Peg orders are restricted by the System from exercising price 
discretion to trade at the CQI Price or at more aggressive prices than 
the CQI Price.
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    \9\ See IEX Rule 11.190(b)(10).
    \10\ See IEX Rule 11.190(b)(8).
    \11\ See IEX Rule 11.190(b)(16). Note that C-Peg orders can only 
be buy orders, so any discussion of D-Peg sell orders does not apply 
to C-Peg orders. This proposal does not apply to Discretionary Limit 
(``D-Limit'') orders, which can be displayed. See IEX Rule 
11.190(b)(10).
    \12\ See IEX Rule 11.210.
    \13\ See IEX Rule 1.160(u).
    \14\ See IEX Rule 1.160(u).
    \15\ C-Peg orders are also constrained by the consolidated last 
sale price of the security, and therefore cannot trade, book, or 
exercise discretion at a price that is more aggressive than the 
consolidated last sale price. See IEX Rule 11.190(b)(16).
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Proposed Alternative CQI Calculation

    As proposed, Users \16\ of D-Peg, P-Peg and C-Peg orders will be 
able to designate whether the order's price will be adjusted using the 
existing quote instability calculation (hereinafter referred to as the 
``Current CQI Calculation'') or the new proposed alternative quote 
instability calculation (hereinafter referred to as the ``Alternative 
CQI Calculation''). According to the Exchange, the Alternative CQI 
Calculation is ``designed to incrementally increase the coverage of the 
quote instability calculation in predicting whether a particular quote 
is unstable by adjusting the logic underlying the quote instability 
calculation and introducing enhanced functionality designed to increase 
the number of crumbling quotes identified, while maintaining the quote 
instability calculation's accuracy in predicting the direction and 
timing of the next price change in the NBB or NBO, as applicable.'' 
\17\
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    \16\ See IEX Rule 1.160(qq).
    \17\ Notice, supra note 3, at 62904.
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    The Alternative CQI Calculation applies four separate rule 
categories of Protected Quotation changes, each encompassing one or 
more sub-rules (``quote instability rules''), to determine whether the 
System should trigger the CQI. When a quote instability rule is 
``active,'' as described below, the CQI will trigger when the rule is 
``true'' thus indicating a potential crumbling quote. These quote 
instability rules are grouped into the following four categories:
    1. Disappearing Bids/Offers: Four separate rules look at when the 
Signal Exchanges \18\ fall off the best prices.
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    \18\ See infra note 20 and accompanying text.
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    2. Quote Size: Two separate rules look at size imbalances between 
buys and sells at the best price on the Signal Exchanges.
    3. Locked or Crossed Markets: This single rule looks for locked and 
crossed conditions at a Signal Exchange.
    4. Quotation Price: Two separate rules evaluate changes in the best 
prices on the Signal Exchanges.\19\
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    \19\ See Notice, supra note 3, at 62905-07 for the Exchange's 
detailed discussion of the proposed quote instability rules.
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    Overall, there are several notable differences between the 
Alternative CQI Calculation and the Current CQI Calculation. First, the 
Alternative CQI Calculation expands the number of exchange protected 
quotes (i.e., Signal Exchanges) that are evaluated by the System from 
eight exchanges to eleven.\20\ In addition, the Alternative CQI 
Calculation can activate crumbling quote protection for one or both 
sides of the market (e.g., it can determine a crumbling quote to exist 
on the bid side and, while that crumbling quote protection is active, 
separately and concurrently determine a crumbling quote to exist on the 
offer side), whereas the Current CQI Calculation only activates the CQI 
for one side of the market at a time.\21\ Further, under the Current 
CQI Calculation, the Exchange only analyzes the relevant prices at the 
Signal Exchanges, whereas the Alternative CQI Calculation will also 
take into account quotation sizes at the eleven away exchanges under 
the Quote Size rules.
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    \20\ The additional Signal Exchanges are MIAX PEARL, LLC, MEMX 
LLC, and Nasdaq Phlx LLC.
    \21\ More specifically, the current rule text reads as follows: 
``Only one determination may be in effect at any given time for a 
particular security. A new determination may be made after at least 
200 microseconds has elapsed since a preceding determination, or a 
price change on either side of the Protected NBBO occurs, whichever 
is first.'' The new rule text for the Alternative CQI Calculation 
reads: ``Quote Instability Determinations are made separately for 
the Protected NBB and Protected NBO, so it is possible for zero, one 
or both of the Protected NBB and Protected NBO to be subject to a 
quote instability determination concurrently.'' Additionally, the 
revised rule text states that ``[a] determination that the Protected 
NBB for a particular security is unstable does not impact the 
System's ability to determine that the Protected NBO for that same 
security is also unstable, and vice versa.''
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    In addition, the Alternative CQI Calculation increases the minimum 
time period between CQI determinations (i.e., when a new CQI can 
trigger during the two millisecond ``on'' period). Currently, the 
System will keep the CQI in effect for two milliseconds, unless, after 
200 microseconds, a new determination is made by the System that the 
quote continues to crumble, in which case the CQI will extend for 
another two milliseconds from that point. Under the Alternative CQI 
Calculation, the CQI will also remain in effect for two milliseconds, 
but a determination to extend the CQI cannot be made until at least 250 
microseconds have passed. The Exchange states that

[[Page 75101]]

CQI triggers in extremely rapid succession are unnecessary to 
continuously restrict discretion across successive NBBO changes, and 
that increasing what it refers to as the CQI ``cooldown period'' from 
200 microsecond to 250 microseconds before the System can make another 
quote instability determination will reduce the technical processing 
burden on the System.\22\
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    \22\ See Notice supra note 3, at 62907.
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    In general, the Exchange explains that the current quote 
instability calculation ``utilizes a logistic regression model with 
multiple coefficients and variables that must exceed a pre-defined 
threshold in order for the System to treat the quote as unstable.'' The 
Exchange characterizes the new Alternative CQI Calculation as a 
``rules-based model'' that ``incorporates and expands on the existing 
approach.'' \23\
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    \23\ See id. at 62905.
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    The Alternative CQI Calculation also uses the concept of an 
activation value (``Activation Value'') for each of the new quote 
instability rules. As explained in more detail in the Notice, the 
Activation Values and corresponding thresholds are ``intended to 
optimize the overall accuracy of the quote instability determinations 
by providing a mechanism to turn off a particular rule when market 
conditions are such that it is relatively less accurate in predicting a 
crumbling quote.'' \24\
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    \24\ See id. at 62907.
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    Specifically, the Activation Value is a function generally of the 
number of times the quote moves to a less aggressive price within the 
two milliseconds ``on'' timeframe following the time the rule was 
``True'' (i.e., to assess whether the rule correctly predicted a 
crumbling quote) and the total number of times the rule was True. 
Whenever the Activation Value for a given quote instability rule 
exceeds a fixed predetermined activation threshold specific to that 
rule (the ``Activation Threshold''), the rule is active (i.e., it is 
eligible to trigger a quote instability determination when True).
    Finally, the proposal sets forth several conforming changes 
throughout IEX Rule 11.190(b) to establish that Users may utilize one 
of the two crumbling quote calculations for P-Peg, D-Peg, and C-Peg 
orders. The Exchange also proposes to amend IEX Rule 11.190(b)(7), 
which sets forth the Exchange's D-Limit order type, to make clear that 
a User may only use the Current CQI Calculation when entering a D-Limit 
order.\25\
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    \25\ Unlike the non-displayed P-Peg, D-Peg, and C-Peg order 
types, D-Limit orders can be displayed or non-displayed.
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III. Discussion and Commission Findings

    After careful review, the Commission finds that the Exchange's 
proposal is consistent with the requirements of the Exchange Act and 
the rules and regulations thereunder applicable to a national 
securities exchange.\26\ In particular, the Commission finds that the 
proposed rule change is consistent with Sections 6(b)(5) \27\ and 
6(b)(8) \28\ of the Exchange Act. 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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    \26\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
    \27\ 15 U.S.C. 78f(b)(5).
    \28\ 15 U.S.C. 78f(b)(8).
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    In its filing, the Exchange explains that adding three more Signal 
Exchanges and also using quotation size data in addition to quotation 
price data is designed to increase the predictive power and accuracy of 
the quote instability calculation.\29\ Adding additional reference 
exchanges and considering quoted size in addition to quoted price 
appear reasonably designed to contribute to the functioning of the 
crumbling quote indicator consistent with its original design and 
purpose.
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    \29\ See Notice, supra note 3, at 62908.
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    Further, the Exchange states that the use of Activation Thresholds 
for the Alternative CQI Calculation is designed to optimize the 
frequency and accuracy of the quote instability calculation by enabling 
IEX to utilize a broader array of rules that may be predictive of a 
crumbling quote in certain market conditions but not others.\30\ 
Specifically, IEX states that the proposed activation values and 
thresholds are designed to ``enable broader coverage while controlling 
for overall accuracy of the quote instability determinations by 
providing a mechanism to turn off a particular rule when market 
conditions are such that it is relatively less accurate in predicting a 
crumbling quote'' where certain rules with a higher potential to be 
less accurate have a higher activation threshold before they become 
active.\31\ The Exchange states that it expects the Current and 
Alternative CQI Calculations to continue to be ``on'' for only a small 
portion of the trading day.\32\ The Exchange further explains that it 
designed the Alternative CQI Calculation in response to feedback from 
Users of P-Peg, D-Peg, and C-Peg orders, some of which expressed a 
desire for additional coverage.\33\ If allowed to use the Alternative 
CQI Calculation, IEX expects that some Users may begin to enter more 
and larger sized pegged orders on the Exchange.\34\
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    \30\ See id. at 62907.
    \31\ See id. at 62909.
    \32\ See id.
    \33\ See id. at 62908.
    \34\ See id. at 62909.
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    While the Exchange acknowledges that the Alternative CQI 
Calculation may trigger more frequently than the current version, it 
has developed a reasonable method, through the Activation Values and 
Activation Thresholds, to cause the new rules to be used in those 
market conditions in which the Exchange expects them to be more 
accurate in predicting a crumbling quote. To the extent Users see their 
execution quality for non-displayed orders improve when they use the 
Alternative CQI Calculation, they may be incentivized to post more non-
displayed pegged orders on the Exchange, which in turn will benefit 
liquidity seeking investors especially during most of the day when the 
quote is stable and those pegged orders are offering aggressive price 
improvement to those investors.
    Based on the foregoing, the Commission believes that the proposal, 
including the Alternative CQI Calculation, is appropriately and 
narrowly tailored to provide a reasonable mechanism for Users of non-
displayed peg orders on the Exchange to protect their orders from 
adverse selection during limited periods of time in specific market 
conditions. Further, the proposed Alternative CQI Calculation is 
transparent and fully-disclosed in the rules of the Exchange. While the 
Exchange uses the phrase ``price discretion'' to describe the operation 
of the crumbling quote functionality, the Exchange itself retains no 
discretion to deviate from the confines of the rule, as the rule 
contains the entirety of the parameters under which the Alternative CQI 
Calculation

[[Page 75102]]

will operate. The Exchange's proposal does not otherwise amend any 
functionality of the affected peg order types.
    In addition, because the Alternative CQI Calculation will activate 
without further action from the User, all Users will benefit equally 
regardless of their technological capabilities and ability to take 
action within a short prescribed period. To the extent the Alternative 
CQI Calculation is successful in incentivizing more firms to post non-
displayed peg orders on the Exchange, it will contribute to liquidity 
that all market participants can access and increase opportunities for 
investors to receive improved prices on their liquidity taking orders. 
Accordingly, the proposal promotes just and equitable principles of 
trade, removes impediments to and perfects the mechanism of a free and 
open market and a national market, and, in general, protects investors 
and the public interest.
    Finally, the Alternative CQI Calculation cannot be used to trigger 
the repricing of any displayed orders, specifically, the D-Limit Order 
type. As such, market participants seeking to execute against displayed 
liquidity on IEX, including protected quotes, will not be adversely 
affected by the addition of the Alternative CQI Calculation to the 
Exchange's rules because use of the Alternative CQI Calculation is 
limited to the P-Peg, D-Peg, and C-Peg order types.
    For the reasons discussed above, the Commission finds that the 
proposal will not impair access to quotations and is narrowly tailored 
to not impose any burden on competition that is not necessary or 
appropriate in furtherance of the purposes of the Exchange Act, and is 
reasonably designed to remove impediments to and perfect the mechanism 
of a free and open market and a national market system and, in general, 
protect investors and the public interest. Accordingly, the Commission 
finds the proposed rule change to be consistent with the Act, including 
the requirements of Section 6(b)(5) and Section 6(b)(8) of the Act.

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Exchange Act,\35\ that the proposed rule change (SR-IEX-2022-06), be, 
and it hereby is, approved.
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    \35\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\36\
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    \36\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2022-26533 Filed 12-6-22; 8:45 am]
BILLING CODE 8011-01-P


