[Federal Register Volume 88, Number 9 (Friday, January 13, 2023)]
[Notices]
[Pages 2379-2381]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-00555]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-96611; File No. SR-IEX-2022-10]


Self-Regulatory Organizations; Investors Exchange LLC; Order 
Granting Approval of a Proposed Rule Change To Modify IEX Rule 
11.190(b)(7) To Adopt an Optional Cancel or Re-Price Functionality for 
D-Limit Orders

January 9, 2023.

I. Introduction

    On November 4, 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 allow Users \3\ of 
Discretionary Limit orders (``D-Limit orders'') to opt for their D-
Limit orders to either automatically cancel or re-price--under certain 
conditions--after after an initial price adjustment. The proposed rule 
change was published for comment in the Federal Register on November 
25, 2022.\4\ 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 IEX Rule 1.160(qq) (defining ``User''). Users include 
both Members and Sponsored Participants. See IEX Rule 1.160(ll) 
(defining ``Sponsored Participant'').
    \4\ See Securities Exchange Act Release No. 96352 (November 18, 
2022), 87 FR 72523 (``Notice'').
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II. Description of the Proposed Rule Change

    The Exchange seeks to amend IEX Rule 11.190(b)(7) to allow a User 
to attach an optional instruction to a D-Limit order so that the order 
will either re-price or cancel following an initial price adjustment 
during a period of quote instability \5\ under certain circumstances. 
Specifically, the D-Limit order would either reprice or cancel if, 
after the most recent quote instability determination \6\ that resulted 
in the D-Limit order being price adjusted, ten (10) milliseconds have 
passed and the order is resting at a price that is less aggressive than 
the NBB \7\ for buy orders or less aggressive than the NBO \8\ for sell 
orders.
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    \5\ See infra notes 10-14 and accompanying text.
    \6\ Id.
    \7\ See IEX Rule 1.160(u).
    \8\ See IEX Rule 1.160(u).
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Current D-Limit Functionality

    D-Limit orders are limit orders that may be either displayed or 
non-displayed and are initially priced and ranked in the Exchange's 
Order Book at the order's limit price.\9\
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    \9\ See IEX Rule 1.160(p).
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    When a D-Limit order is resting on the Exchange's Order Book, it 
will reprice automatically when the Exchange's Crumbling Quote 
Indicator (``CQI'') is triggered (i.e., during a period of relative 
quote instability).\10\ The CQI that applies to D-Limit orders is 
governed by IEX Rule 11.190(g)(1), under which the Exchange utilizes 
quoting activity of eight away exchanges' Protected Quotations \11\ and 
a mathematical calculation to assess the probability of an imminent 
change to the current Protected NBB \12\ to a lower price or imminent 
change to the current Protected NBO \13\ to a higher price for a

[[Page 2380]]

particular security. When the quoting activity meets predetermined 
criteria, the System 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.\14\
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    \10\ See IEX Rule 11.190(g) (describing crumbling quotes and 
quote instability).
    \11\ 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).
    \12\ See IEX Rule 1.160(cc).
    \13\ See id.
    \14\ After this proposal was filed and published for comment, 
the Commission approved IEX Rule 11.190(g)(2), which provides a new 
alternative calculation for determining when there is quote 
instability and therefore, when the CQI is triggered. See Securities 
Exchange Act Release No. 96416 (December 1, 2022), 87 FR 75099 
(December 7, 2022). However, the alternative calculation under Rule 
11.190(g)(2) may not be applied to D-Limit orders, so D-Limit orders 
only price adjust when there is quote instability pursuant to IEX 
Rule 11.190(g)(1). Thus, these recent changes to Rule 11.190(g) do 
not affect the present proposal.
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    After the CQI is triggered, all D-Limit orders--both resting and 
those being entered at the time of quote instability--are adjusted to a 
less-aggressive price and will subsequently rest on the Exchange's 
Order Book at that new price. Specifically, if the System receives a D-
Limit buy (sell) order during a period of quote instability, and the D-
Limit order has a limit price equal to or higher (lower) than the quote 
instability determination price level (``CQI Price''), the price of the 
order will be automatically adjusted by the System to one (1) minimum 
price variation (``MPV'') \15\ lower (higher) than the CQI Price.\16\ 
Similarly, when unexecuted shares of a D-Limit buy (sell) order are 
posted to the Order Book, if the CQI turns on and such shares are 
ranked (and displayed in the case of a displayed order) by the System 
at a price equal to or higher (lower) than the CQI Price, the price of 
the order will be automatically adjusted to a price one MPV lower 
(higher) than the quote instability price level.\17\
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    \15\ See IEX Rule 11.210.
    \16\ See IEX Rule 11.190(b)(7)(A) and (B).
    \17\ See IEX Rule 11.190(b)(7)(C) and (D).
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    A D-Limit order that has been subject to an automatic price 
adjustment will not revert to the price at which it was previously 
ranked (and, if applicable, displayed). Further, whenever the price of 
a D-Limit order is adjusted, the order will receive a new time 
priority, and the User that entered the order will receive an order 
restatement message from the Exchange.\18\
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    \18\ If multiple D-Limit orders are adjusted at the same time, 
their relative time priority is maintained.
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Proposal

    The Exchange proposes to provide Users with an option to either 
reprice or cancel a price-adjusted D-Limit order under certain 
circumstances by attaching an instruction to their D-Limit orders 
pursuant to new IEX Rule 11.190(b)(7)(E).\19\ If a D-Limit order that 
is entered with this optional instruction is then subject to an 
automatic price adjustment pursuant to IEX Rule 11.190(b)(7) and is 
resting at a price that is less aggressive than the NBBO ten (10) 
milliseconds after the most recent quote instability determination that 
resulted in the order being price adjusted, the order will either be 
canceled (if the User selected the cancel instruction) or re-priced to 
the less aggressive of the order's limit price or the NBB (for a buy 
order) or NBO (for a sell order) (if the User selected the re-price 
instruction).\20\
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    \19\ The Exchange also proposes to reorganize IEX Rule 11.190(b) 
so that the text in current IEX Rule 11.190(b)(7)(E) will become 
Rule 11.190(7)(F). Additionally, the Exchange proposes to add a 
reference to new IEX Rule 11.190(b)(7)(E) into paragraph (F).
    \20\ Additionally, displayed D-Limit orders that re-price to the 
NBB (for a buy order) or the NBO (for a sell order) will be subject 
to IEX's Display-Price Sliding rule (IEX Rule 11.190(b)(h)(1)) and 
will be displayed at the ``most aggressive permissible price'' 
without locking or crossing a Protected Quotation (IEX Rule 
1.160(bb) of an away market, which means they will be priced one MPV 
less aggressive than the locking (IEX Rule 11.190(b)(h)(3)(A)(ii)) 
or crossing (IEX Rule 11.190(b)(h)(3)(B)(ii)) price. Non-displayed 
D-Limit orders that re-price to the NBB (for a buy order) or the NBO 
(or a sell order) will be subject to IEX's Non-Displayed Price 
Sliding rule, which means they will be able to post at the locking 
or crossing price. See IEX Rule 11.190(b)(h)(2). In the Notice, the 
Exchange provides examples to demonstrate how the new cancel or re-
price instruction would operate. See Notice, supra note 4, at 72525.
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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.\21\ In particular, the Commission finds that the 
proposed rule change is consistent with Sections 6(b)(5) \22\ and 
6(b)(8) \23\ 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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    \21\ 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).
    \22\ 15 U.S.C. 78f(b)(5).
    \23\ 15 U.S.C. 78f(b)(8).
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    In its proposal, IEX represents that some Users of D-Limit orders 
have informed IEX that they ``cannot readily configure their trading 
systems to receive, process, and respond to the restatement messages 
IEX transmits to [Users] after each price adjustment.'' \24\ IEX states 
that these Users ``are unable to track whether their D-Limit orders 
have been re-priced, and if so, the price at which they are currently 
resting.'' \25\ As such, ``[w]ithout this information, IEX understands 
that such [Users] are hindered in their ability to timely cancel or 
adjust the prices of their resting D-Limit orders to meet their trading 
objectives.'' \26\ IEX says that to address this issue, some Users have 
requested that IEX provide optional order type functionality to allow a 
D-Limit order that has been subject to an automatic price adjustment to 
be automatically either canceled or re-priced.\27\
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    \24\ Notice, supra note 4, at 72524. IEX also states that these 
Users note that their trading systems are not currently configured 
to ingest the D-Limit restatement messages (and, in some cases, 
other restatement messages), and they would have to devote 
significant resources to build the logic in order to ingest, and 
respond to, the messages for this one order type. See id.
    \25\ Id.
    \26\ Id.
    \27\ See id.
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    IEX asserts that the proposed 10 millisecond delay after which a 
re-priced D-Limit order could either cancel or re-price to a more 
aggressive price, as described above, will not provide any speed 
advantages to Users that elect to use the order type's new optional 
cancel or re-price functionality when compared to Users who cancel or 
re-price a price-adjusted D-Limit themselves.\28\ Specifically, IEX 
notes that all orders are subject to the Exchange's existing latency 
for all orders, which are 37 and 350 microseconds for outbound and 
inbound messages, respectively.\29\ The Exchange explains that this 
aggregate 387 microseconds of latency for a ``round trip'' that would 
be required for a User to respond to a D-Limit price adjustment is more 
than 9 milliseconds less than the proposed 10 millisecond time after 
which the proposed order type's new instruction will result in the 
System canceling or re-pricing a D-Limit

[[Page 2381]]

order that was automatically adjusted.\30\ IEX represents that this 
``timing differential is designed to ensure that orders canceled or re-
priced by IEX have no advantage over orders canceled or repriced by a 
User that processed the restatement message'' because ``the Exchange 
would cancel or re-price orders more slowly than orders canceled or re-
priced by a User.'' \31\
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    \28\ See Notice, supra note 4, at 72524.
    \29\ See id.
    \30\ See id.
    \31\ Id.
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    The Commission previously found that the D-Limit order type is a 
``narrowly tailored tool that balances the ability of long-term 
investors to access displayed liquidity in the ordinary course against 
the current structural advantages enjoyed by short-term latency 
arbitrage trading strategies that rely on superior access to the 
fastest data and connectivity, while also encouraging liquidity 
providers to post more displayed liquidity.'' \32\ The key feature of 
the D-Limit order type is that, when IEX's CQI is triggered, the order 
(if its limit price is equal to or higher (for a buy order; or lower 
for a sell order) than the CQI Price) will automatically adjust to a 
price one MPV lower (higher) than the CQI Price and the price will not 
revert to the prior, more aggressive price.
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    \32\ Securities Exchange Act Release No. 89686 (August 26, 
2020), 85 FR 54438, 54443 (September 1, 2020) (SR-IEX-2019-15) (``D-
Limit Approval Order'').
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    IEX now seeks to offer Users the ability to attach an optional 
instruction on a D-Limit order to either cancel or reprice the order 
if, after 10 milliseconds since the D-Limit was price adjusted, the D-
Limit order is resting at a price that is less aggressive than the NBB 
for buy orders or less aggressive than the NBO for sell orders. 
Accordingly, the optional cancellation or re-pricing feature would 
occur after a D-Limit order is initially adjusted to a less aggressive 
price. It neither affects when nor how a D-Limit order is initially 
price adjusted during a period of quote instability, and therefore, the 
Commission believes that this proposal does not alter the core 
attributes of the D-Limit order type.
    The Commission further believes that the triggering of the proposed 
cancellation or re-pricing functionality is approporiately delayed to 
an extent that would not be expected to confer a special advantage to 
the User over other Users that elect to retain for themselves the 
responsibility for canceling or updating their resting D-Limit orders. 
To the extent some Users do not presently have the ability or capacity 
to build the IEX-specific capability to track and respond when their D-
Limit orders have been price adjusted during periods of quote 
instability, the proposal would allow those Users to utilize D-Limit 
orders and manage those orders like Users that do have such ability. As 
the Exchange notes in its filing, the 10 millisecond delay is 
significantly longer than the aggregate sub-millisecond ``round trip'' 
latency that a User would encounter when manually re-pricing or 
canceling a price-adjusted D-Limit order. The Commission accordingly 
finds that the proposal does not permit unfair discrimination between 
cutomers, issuers, brokers, or dealers in offering the option for Users 
to instruct IEX to cancel or reprice its D-Limit order as described 
above after 10 milliseconds have passed and the order remains priced 
less aggressive than the national best quote. Given the 10 millisecond 
delay, that functionlality should not provide a special advantage to 
Users when compared to Users that have the technology and ability to 
track and directly respond to D-Limit price adjustments more quickly by 
themselves.
    Finally, the Commission finds that 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 system and, 
in general, protects investors and the public interest in that it is 
designed to cancel an adjusted D-Limit order only after 10 milliseconds 
have passed and only where the order remains priced less aggressive 
than the national best quote where it is less likely to receive an 
execution. Alternatively, if the User selects the re-price option, the 
D-Limit order will only re-price to a price more aggressive than that 
at which it was resting and will not reprice to a less aggressive 
price. As such, the new D-Limit functionality will re-price the D-Limit 
order to join the NBB (for a buy order) or NBO (for a sell order), if 
allowable given the order's limit price. In doing so, the proposal will 
increase the liquidity available on IEX to all investors at the 
national best quote.
    For the reasons discussed above, the Commission finds that the 
proposal 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 among other things, 
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 Exchange Act, including the 
requirements of Section 6(b)(5) and Section 6(b)(8) of the Exchange 
Act.

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Exchange Act,\33\ that the proposed rule change (SR-IEX-2022-10), be, 
and it hereby is, approved.
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    \33\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\34\
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    \34\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023-00555 Filed 1-12-23; 8:45 am]
BILLING CODE 8011-01-P


