81 FR 15660 - Notice of Proposed Commission Interpretation Regarding Automated Quotations Under Regulation NMS

SECURITIES AND EXCHANGE COMMISSION

Federal Register Volume 81, Issue 57 (March 24, 2016)

Page Range		15660-15665
FR Document		2016-06633
The Securities and Exchange Commission is publishing for comment a proposed interpretation with respect to the definition of automated quotation under Rule 600(b)(3) of Regulation NMS.
Federal Register, Volume 81 Issue 57 (Thursday, March 24, 2016)
[Federal Register Volume 81, Number 57 (Thursday, March 24, 2016)]
[Proposed Rules]
[Pages 15660-15665]
From the Federal Register Online  [www.thefederalregister.org]
[FR Doc No: 2016-06633]


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SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 241

[Release No. 34-77407; File No. S7-03-16]


Notice of Proposed Commission Interpretation Regarding Automated 
Quotations Under Regulation NMS

AGENCY: Securities and Exchange Commission.

ACTION: Proposed interpretation; request for comment.

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SUMMARY: The Securities and Exchange Commission is publishing for 
comment a proposed interpretation with respect to the definition of 
automated quotation under Rule 600(b)(3) of Regulation NMS.

DATES: Comments should be received on or before April 14, 2016.

ADDRESSES: 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 [email protected]. Please include 
File Number S7-03-16 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 S7-03-16. 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/other.shtml). 
Comments are also 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. 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 
publicly available.

FOR FURTHER INFORMATION CONTACT: Richard Holley III, Assistant 
Director, at (202) 551-5614, Michael Bradley, Special Counsel, at (202) 
551-5594, or Michael Ogershok, Attorney-Advisor, at 202-551-5541, all 
in the Office of Market Supervision, Division of Trading and Markets, 
Securities and Exchange Commission, 100 F Street NE., Washington, DC 
20549-7010.

SUPPLEMENTARY INFORMATION:

I. Background

A. IEX's Form 1

    On August 21, 2015, Investors' Exchange LLC (``IEX'') submitted to 
the Commission a Form 1 application seeking registration as a national 
securities exchange under Section 6 of the Securities Exchange Act of 
1934 (``Act'').\1\ On September 9, 2015, IEX submitted Amendment No. 1 
to its Form 1 application.\2\ Notice of IEX's filing of its Form 1 
application, as amended, was published for comment in the Federal 
Register on September 22, 2015.\3\ Recently, IEX submitted three 
additional amendments to its Form 1 application.\4\ Simultaneously with 
the

[[Page 15661]]

issuance of this proposed interpretation, the Commission issued a 
release to notice Amendment Nos. 2, 3, and 4 to IEX's Form 1 
application, instituted proceedings to consider whether to grant or 
deny IEX's application, and designated a longer period for Commission 
action to accommodate those proceedings.\5\
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    \1\ 15 U.S.C. 78f.
    \2\ In Amendment No. 1, IEX submitted updated portions of its 
Form 1 application, including revised exhibits, a revised version of 
the proposed IEX Rule Book, and revised Addenda C-2, C-3, C-4, D-1, 
D-2, F-1, F-2, F-3, F-4, F-5, F-6, F-7, F-8, F-9, F-10, F-11, F-12, 
and F-13. IEX's Form 1 application, as amended, including all of the 
Exhibits referenced above, is available online at www.sec.gov/rules/other.shtml as well as at the Commission's Public Reference Room.
    \3\ See Securities Exchange Act Release No. 75925 (September 15, 
2015), 80 FR 57261. On December 18, 2015, IEX consented to an 
extension of time to March 21, 2016 for Commission consideration of 
its Form 1 application. See Letter from Sophia Lee, General Counsel, 
IEX, to Brent J. Fields, Secretary, Commission, dated December 18, 
2015.
    \4\ In Amendment No. 2, filed on February 29, 2016, IEX proposed 
changes to its Form 1 application to, among other things, redesign 
its outbound routing functionality to direct routable orders first 
to the IEX router instead of directly to the IEX matching engine. 
See Letter from Sophia Lee, General Counsel, IEX, to Brent J. 
Fields, Secretary, Commission, dated February 29, 2016, at 1. In 
this manner, the IEX router would ``interact with the IEX matching 
system over a 350 microsecond speed-bump in the same way an 
independent third party broker would be subject to a speed bump.'' 
See id. In Amendment No. 3, filed on March 4, 2016, IEX proposed 
changes to its Form 1 application to clarify and correct revisions 
to its rulebook that it made in Amendment No. 2. See Letter from 
Sophia Lee, General Counsel, IEX, to Brent J. Fields, Secretary, 
Commission, dated March 4, 2016. In Amendment No. 4, filed on March 
7, 2016, IEX proposed changes to its Form 1 application to update 
Exhibit E to reflect changes it proposed in Amendment No. 2. See 
Letter from Sophia Lee, General Counsel, IEX, to Brent J. Fields, 
Secretary, Commission, dated March 7, 2016.
    \5\ See Securities Exchange Act Release No. 77406 (March 18, 
2016) (File No. 10-222).
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    The Commission has received extensive comments on IEX's Form 1 
application,\6\ and IEX has submitted several letters in response to 
concerns raised by commenters.\7\ Among other things, a number of 
commenters on IEX's Form 1 application asserted that a unique feature 
of IEX's design--specifically, its Point-of-Presence (``POP'') and 
``coil'' access delay--would preclude IEX's best-priced quotation from 
being a ``protected quotation'' under Regulation NMS if the Commission 
grants IEX's exchange registration.\8\ IEX contests this assertion, as 
do certain other commenters.\9\
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    \6\ The public comment file for IEX's Form 1 application (File 
No. 10-222) is available on the Commission's Web site at: http://www.sec.gov/comments/10-222/10-222.shtml.
    \7\ See Letters from Sophia Lee, General Counsel, IEX, to Brent 
J. Fields, Secretary, Commission, dated November 13, 2015 (``IEX 
First Response''); November 23, 2015 (``IEX Second Response''); and 
February 9, 2016 (``IEX Third Response''). See also Letter from 
Donald Bollerman, Head of Markets and Sales, IEX Group, Inc., to 
File No. 10-222, dated February 16, 2016 (``IEX Fourth Response'') 
and Letter from IEX Group, Inc., to File No. 10-222, dated February 
19, 2016 (``IEX Fifth Response'').
    \8\ See, e.g., FIA First Letter; NYSE First Letter; Citadel 
First Letter.
    \9\ See IEX First Response and IEX Second Response. See also, 
e.g., Verret Letter; Leuchtkafer Second Letter.
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    As discussed more fully below and as highlighted by a number of 
commenters on IEX's Form 1 application,\10\ the Commission 
preliminarily believes that IEX's proposed POP/coil structure raises 
questions about prior Commission statements with respect to the 
definition of an ``automated quotation'' under Regulation NMS. In light 
of market and technological developments since the adoption of 
Regulation NMS in 2005, the Commission is proposing and requesting 
comment on an updated interpretation to permit more flexibility for 
trading centers with respect to automated quotations to allow them to 
develop innovative business models that do not undermine the goals of 
Rule 611 of Regulation NMS. Specifically, the Commission is proposing 
to interpret ``immediate'' when determining whether a trading center 
maintains an ``automated quotation'' for purposes of Rule 611 to 
include response time delays at trading centers that are de minimis, 
whether intentional or not.
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    \10\ See infra text accompanying notes 49-57 (discussing 
comments on IEX's Form 1).
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B. Regulation NMS Concept of an Automated Quotation and Protected 
Quotation

    In general, Rule 611 under Regulation NMS (the ``Order Protection 
Rule,'' or ``Trade-Through Rule'') protects the best automated 
quotations of exchanges by obligating other trading centers to honor 
those quotes by not executing trades at inferior prices or ``trading 
through'' such best automated quotations.\11\ Only an exchange that is 
an ``automated trading center'' \12\ displaying an ``automated 
quotation'' \13\ is entitled to this protection.\14\ Trading centers 
must establish, maintain, and enforce written policies and procedures 
that are reasonably designed to prevent trade-throughs of protected 
quotations, unless an exception or exemption applies.\15\
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    \11\ See 17 CFR 242.611.
    \12\ See 17 CFR 242.600(b)(4).
    \13\ See 17 CFR 242.600(b)(3).
    \14\ See 17 CFR 242.600(b)(57) (defining ``protected bid or 
protected offer''), 242.600(b)(58) (defining ``protected 
quotation''); see also Securities Exchange Act Release No. 51808 
(June 9, 2005) 70 FR 37496, 37504 (June 29, 2005) (``Regulation NMS 
Adopting Release'') (stating that ``[t]o qualify for protection, a 
quotation must be automated'').
    \15\ 17 CFR 242.611(a)(1).
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    When it adopted Regulation NMS, the Commission explained that the 
purpose of the Order Protection Rule was to incentivize greater use of 
displayed limit orders, which contribute to price discovery and market 
liquidity.\16\ In discussing whether to apply order protection to 
manual quotations, the Commission stated that ``providing protection to 
manual quotations, even limited to trade-throughs beyond a certain 
amount, potentially would lead to undue delays in the routing of 
investor orders, thereby not justifying the benefits of price 
protection.'' \17\ The Commission also noted that ``those who route 
limit orders will be able to control whether their orders are protected 
by evaluating the extent to which various trading centers display 
automated versus manual quotations.'' \18\
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    \16\ See Regulation NMS Adopting Release, supra note 14, at 
37516 and 37517.
    \17\ Id. at 37518.
    \18\ Id.
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    There are several provisions in Regulation NMS that impact whether 
the Order Protection Rule applies. First, Rule 600(b)(58) defines a 
``protected quotation'' as a ``protected bid or a protected offer.'' 
\19\ Rule 600(b)(57), in turn, defines a ``protected bid or protected 
offer'' as a quotation in an NMS stock that is: (i) Displayed by an 
``automated trading center,'' (ii) disseminated pursuant to an 
effective national market system plan, and (iii) an ``automated 
quotation'' that is the best bid or best offer of a national securities 
exchange.\20\
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    \19\ 17 CFR 242.600(b)(58).
    \20\ 17 CFR 242.600(b)(57).
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    In order for an exchange to operate as an ``automated trading 
center,'' it must, among other things, have ``implemented such systems, 
procedures, and rules as are necessary to render it capable of 
displaying quotations that meet the requirements for an `automated 
quotation' set forth in [Rule 600(b)(3) of Regulation NMS].'' \21\ Rule 
600(b)(3) defines an ``automated quotation'' as one that:
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    \21\ 17 CFR 242.600(b)(4). Rule 600(b)(4) contains additional 
requirements that must be satisfied in order to be an automated 
trading center. Those requirements are not at issue for purposes of 
this proposed interpretation.

    i. Permits an incoming order to be marked as immediate-or-
cancel;
    ii. Immediately and automatically executes an order marked as 
immediate-or-cancel against the displayed quotation up to its full 
size;
    iii. Immediately and automatically cancels any unexecuted 
portion of an order marked as immediate-or-cancel without routing 
the order elsewhere;
    iv. Immediately and automatically transmits a response to the 
sender of an order marked as immediate-or-cancel indicating the 
action taken with respect to such order; and
    v. Immediately and automatically displays information that 
updates the displayed quotation to reflect any change to its 
material terms.\22\
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    \22\ See 17 CFR 242.600(b)(3). See also Regulation NMS Adopting 
Release, supra note 14, at 37504.

Any quotation that does not meet the requirements for an automated 
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quotation is defined in Rule 600(b)(37) as a ``manual'' quotation.\23\

    \23\ Regulation NMS Adopting Release, supra note 14, at 37534. 
See also 17 CFR 242.600(b)(37) (defining ``manual quotation'').
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    In the Regulation NMS Adopting Release, the Commission elaborated 
on the meaning of the terms ``immediate'' and ``automatic'' as those 
terms are used in the Rule 600(b)(3) definition of an automated 
quotation. Specifically, with respect to the meaning of the term 
``immediate,'' the Commission stated that ``[t]he term `immediate' 
precludes any coding of automated systems or other type of intentional 
device that would delay the action taken with

[[Page 15662]]

respect to a quotation,'' \24\ and that the standard for responding to 
an incoming order ``should be `immediate,' i.e., a trading center's 
systems should provide the fastest response possible without any 
programmed delay.'' \25\
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    \24\ Regulation NMS Adopting Release, supra note 14, at 37534. 
The Commission also stated that, for a quotation ``[t]o qualify as 
`automatic,' no human discretion in determining any action taken 
with respect to an order may be exercised after the time an order is 
received,'' and ``a quotation will not qualify as `automated' if any 
human intervention after the time an order is received is allowed to 
determine the action taken with respect to the quotation.'' Id. at 
37519 and 37534.
    \25\ Id. at 37519. In the case of IEX, its access delay involves 
hardware (i.e., coiled cable) and geographic dispersion, not 
software programming. See infra text accompanying notes 40-45. 
Nevertheless, it is an intentional delay. See id.
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    The Commission provided context in the Regulation NMS Adopting 
Release as to the intent behind the Order Protection Rule and the 
distinction between ``automated quotations'' and ``manual quotations.'' 
At the time of the adoption of Regulation NMS, manual quotations and 
markets that primarily were centered around human interaction in a 
floor-based trading environment, including ``hybrid'' trading 
facilities that offer automatic execution of orders seeking to interact 
with displayed quotations while also maintaining a physical trading 
floor, experienced processing delays for inbound orders that were 
measured in multiple seconds.\26\ In contrast to floor-based and hybrid 
markets, at the time Regulation NMS was adopted, newer automated 
matching systems removed the human element and instead immediately 
matched buyers and sellers electronically. The Commission sought to 
achieve the goals of the Order Protection Rule and maintain the 
efficiencies of the markets by protecting only automated quotations 
that were ``immediately'' accessible, and allowing trade-throughs of 
those that were not.\27\
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    \26\ See Regulation NMS Adopting Release, supra note 14, at 
37500 n.21 (``One of the primary effects of the Order Protection 
Rule adopted today will be to promote much greater speed of 
execution in the market for exchange-listed stocks. The difference 
in speed between automated and manual markets often is the 
difference between a 1-second response and a 15-second response. . . 
.'').
    \27\ See id. at 37501. More broadly, the Commission stated that 
the definition of ``automated trading center'' in Rule 600(b)(4) 
``offers flexibility for a hybrid market to display both automated 
and manual quotations, but only when such a market meets basic 
standards that promote fair and efficient access by the public to 
the market's automated quotations.'' Id. at 37520. This definition 
was an outgrowth of two floor-based exchanges' intention to operate 
``hybrid'' trading facilities that would offer automatic execution 
against their displayed quotations, while at the same time 
maintaining a traditional trading floor. See id. at 37518. The 
Commission also explained that the Order Protection Rule took a 
substantially different approach to intermarket price protection 
than the existing trade-through protection regime at the time--the 
Intermarket Trading System (``ITS'') Plan. See id. at 37501. As the 
Commission noted, the ITS provisions did not distinguish between 
manual and automated quotations and ``fail[ed] to reflect the 
disparate speed of response between manual and automated 
quotations'' as they ``were drafted for a world of floor-based 
markets.'' Id. As a result, ``[b]y requiring order routers to wait 
for a response from a manual market, the ITS trade-through 
provisions can cause an order to miss both the best price of a 
manual quotation and slightly inferior prices at automated markets 
that would have been immediately accessible.'' Id. See also supra 
note 26 (citing to footnote 21 of the Regulation NMS Adopting 
Release).
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    In Rules 600 and 611, the Commission did not set a maximum response 
time for a quotation to be an ``automated quotation.'' \28\ While a 
number of commenters on Regulation NMS advocated for a specific time 
standard, ranging from one second down to 250 milliseconds,\29\ for 
distinguishing between manual and automated quotations,\30\ the 
Commission declined to set such a standard, noting that ``[t]he 
definition of automated quotation as adopted does not set forth a 
specific time standard for responding to an incoming order.'' \31\ 
Rather, the Commission specifically sought to avoid ``specifying a 
specific time standard that may become obsolete as systems improve over 
time,'' and agreed with commenters that ``the standard should be 
`immediate' i.e., a trading center's systems should provide the fastest 
response possible without any programmed delay.'' \32\
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    \28\ See also id. at 37519 (``The definition of automated 
quotation as adopted does not set forth a specific time standard for 
responding to an incoming order.'').
    \29\ A millisecond is one thousandth of a second.
    \30\ See id. at 37518.
    \31\ Id. at 37519.
    \32\ Id.
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    However, the Commission believed that ``immediate'' should not be 
construed in a way to frustrate the purposes of Rule 611 and crafted 
several exceptions to Rule 611, two of which use a one second 
standard.\33\ Specifically, Rule 600(b)(1) addresses the applicability 
of the trade-through requirements with respect to quotations of 
automated trading centers that experience a ``failure, material delay, 
or malfunction,'' by allowing other trading centers to trade-through 
such quotations.\34\ In the Regulation NMS Adopting Release, the 
Commission provided an interpretation of the phrase ``material delay'' 
as one where a market was ``repeatedly failing to respond within one 
second after receipt of an order.'' \35\ The Commission similarly 
established a one-second standard for the exception in Rule 611(b)(8), 
which excepts trade-throughs where the trading center that was traded-
through had displayed, within the prior one second, a price equal or 
inferior to the price of the trade-through transaction.\36\ In 
discussing the 611(b)(8) exception, the Commission stated that it 
``generally does not believe that the benefits would justify the costs 
imposed on trading centers of attempting to implement an intermarket 
price priority rule at the level of sub-second time increments. 
Accordingly, Rule 611 has been formulated to relieve trading centers of 
this burden.'' \37\
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    \33\ See 17 CFR 242.611(b)(1) and (8).
    \34\ See 17 CFR 242.611(b)(1).
    \35\ See Regulation NMS Adopting Release, supra note 14, at 
37519.
    \36\ See 17 CFR 242.611(b)(8).
    \37\ See Regulation NMS Adopting Release, supra note 14, at 
37523.
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C. IEX's Access Delay

    IEX, which currently operates a trading platform as an alternative 
trading system, is seeking to register as a national securities 
exchange. If its registration is granted, IEX would operate an 
electronic order book for NMS stocks.\38\ IEX's POP and coil 
infrastructure is how IEX users (``Users'') would connect to IEX.\39\
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    \38\ For more detail on IEX's proposed trading system, see IEX's 
full Form 1 application and Exhibits, as amended, which are 
available on the Commission's Web site at http://www.sec.gov/rules/other/otherarchive/other2015.shtml.
    \39\ To obtain authorized access to the IEX System, each User 
must enter into a User Agreement with the Exchange. See IEX Rule 
11.130(a). The term ``Users,'' for purposes of this notice, does not 
include IEX Services LLC, IEX's affiliated outbound routing broker-
dealer.
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    IEX has represented that access to IEX by all Users would be 
obtained through a POP located in Secaucus, New Jersey.\40\ According 
to IEX, after entering through the POP, a User's electronic message 
sent to the IEX trading system would traverse the IEX ``coil,'' which 
is a box of compactly coiled optical fiber cable equivalent to a 
prescribed physical distance of 61,625 meters (approximately 38 
miles).\41\ After exiting the coil, the User's message would travel an 
additional physical distance to the IEX system, located in Weehawken, 
New Jersey.\42\ IEX has represented that routable orders would 
thereafter be directed to the IEX routing logic, and non-routable 
orders would be directed to the IEX matching engine.\43\ According to 
IEX, the coil, when combined with the physical distance between the POP 
and the IEX system, would provide IEX Users sending non-

[[Page 15663]]

routable orders to IEX with 350 microseconds \44\ of one-way 
latency.\45\ For purposes of this notice, IEX's process for handling 
non-routable orders is hereinafter referred to as the ``POP/coil 
delay.''
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    \40\ See IEX Second Response at 2.
    \41\ See IEX First Response at 3.
    \42\ See Exhibit E to IEX's Form 1 submission, at 12. See also 
IEX First Response at 3.
    \43\ See Amendment Nos. 2 and 3 to IEX's Form 1 application.
    \44\ A microsecond is one millionth of a second.
    \45\ See IEX First Response at 3. See also Amendment Nos. 2 and 
3. Users sending routable orders would experience 700 microseconds 
of one-way latency. See Letter from Sophia Lee, General Counsel, 
IEX, to Brent J. Fields, Secretary, Commission, dated February 29, 
2016, at 2.
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    According to IEX, all incoming messages (e.g., orders to buy or 
sell and any modification to a previously sent open order) from any 
User would traverse the proposed POP/coil delay.\46\ In addition, all 
outbound messages from IEX back to a User (e.g., confirmations of an 
execution that occurred on IEX) would pass through the same route in 
reverse.\47\ IEX's direct proprietary market data feed, which is an 
optional data feed that IEX would make available to subscribers, also 
would traverse the coil before exiting at the POP.\48\ As a result, a 
non-routable immediate-or-cancel (``IOC'') order, which is a type of 
order that IEX would permit Users to send to the IEX system, would 
traverse the proposed POP/coil (and its attendant 350 microsecond 
delay) before arriving at the IEX system and potentially executing 
against a displayed quotation on IEX. Likewise, the response from the 
IEX system to the User indicating the action taken by the IEX system 
with respect to such IOC order also would traverse the POP/coil and 
experience a 350 microsecond delay.\49\
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    \46\ See IEX First Response at 3-4.
    \47\ See id.
    \48\ See id.
    \49\ See id. at 3. Outbound transaction and quote messages from 
IEX to the applicable securities information processor (``SIP'') 
would not pass through the POP/coil, but instead would be sent 
directly from the IEX system to the SIP processor. See id. at 3-4.
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D. Comments on IEX's Proposed Access Delay

    Several commenters on IEX's Form 1 application questioned whether 
IEX's operation of the proposed POP/coil would be consistent with the 
Order Protection Rule.\50\ Their main assertion is that the 350 
microsecond latency caused by the POP/coil calls into question whether 
IEX's quotations meet the definition of ``automated quotation,'' and 
therefore would be a ``protected quotation,'' under Regulation NMS and 
Rule 611 in particular.\51\ These commenters generally cited to 
language, discussed above, from the Regulation NMS Adopting Release 
where the Commission elaborated on what it means for a quotation to be 
an ``automated quotation,'' including statements that the term 
``immediate,'' as it relates to the definition of an automated 
quotation, means that ``a trading center's systems should provide the 
fastest response possible without any programmed delay'' \52\ and 
``precludes any coding of automated systems or other type of 
intentional device that would delay the action taken with respect to a 
quotation'' (emphasis added).\53\ Based on this language, these 
commenters contended that IEX's quotation is not consistent with the 
definition of automated quotation, or at least questioned whether it 
can be so considered.\54\
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    \50\ See, e.g., NYSE First Letter at 5; BATS First Letter at 3; 
FIA First Letter at 2; Nasdaq First Letter at 2; Citadel First 
Letter at 3.
    \51\ See, e.g., BATS First Letter at 2-4; FIA First Letter at 2; 
NYSE First Letter at 5-7; Nasdaq First Letter at 2; Citadel First 
Letter at 2-4.
    \52\ See, e.g., Nasdaq First Letter at 2; NYSE First Letter at 
6. See also Regulation NMS Adopting Release, supra note 14, at 
37519.
    \53\ See, e.g., BATS First Letter at 3; FIA First Letter at 2; 
Citadel First Letter at 3; Citadel Second Letter at 3; see also 
Regulation NMS Adopting Release, supra note 14, at 37534.
    \54\ See BATS First Letter at 3; FIA First Letter at 2; NYSE 
First Letter at 6-7; Nasdaq First Letter at 2-3; Citadel First 
Letter at 3-4; Citadel Second Letter at 3-4; Hudson River Trading 
Second Letter at 3-4.
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    Several commenters urged the Commission not to decide this question 
in the context of IEX's Form 1 application.\55\ One commenter urged the 
Commission, should it disagree with the contention that IEX's quotation 
cannot be protected, to explain its reasoning in a rulemaking 
proceeding or exemptive order that is subject to public vetting.\56\ 
Another commenter urged the Commission ``to articulate clear standards 
regarding the precise amount of time an intentional device can delay 
access to the quotation of a registered exchange and still be 
considered an automated quotation.'' \57\ This commenter supported an 
interpretation of the definition of an automated quotation that would 
include the delay resulting from IEX's POP/coil, but further urged the 
Commission to articulate clear regulatory standards that would be 
applicable to all trading venues and market participants.\58\
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    \55\ See, e.g., Citadel Second Letter at 4; Nasdaq Second Letter 
at 1-4; Direct Match Letter at 2-4; Scott Letter.
    \56\ See, e.g., Citadel Second Letter at 4.
    \57\ BATS First Letter at 3; see also BATS First Letter at 4, 6. 
A second commenter writing in support of IEX's POP/coil similarly 
urged the Commission to articulate the extent of permissible 
intentional, geographical, or technological delays for registered 
exchanges. See T. Rowe Price Letter at 2. A third commenter urged 
the Commission to not approve IEX's POP/coil without also 
establishing a maximum permissible delay for registered exchanges. 
See Jon D. Letter.
    \58\ See BATS Second Letter at 2.
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    Other commenters offered support for IEX's proposed access delay, 
and challenged the assertion that IEX's quotation would not meet the 
definition of ``automated quotation'' under Regulation NMS.\59\ 
According to one commenter, the Commission's ``larger plan'' in 
requiring protected quotes to be ``immediately and automatically'' 
accessible under Regulation NMS was ``to encourage automated markets 
and prevent exchanges from favoring their own manual markets, so the 
SEC protected an exchange's lit, automated quotes and banned any 
programmed tricks or devices an exchange might use to give human 
traders a chance to intervene or any kind of an edge over automated 
quotes.'' \60\ In addition, this commenter further asserted, ``[t]hat 
`immediately' simply prohibits discrimination favoring manual markets 
is all the more obvious in the [Regulation NMS] Adopting Release's 
discussion of self-help'' where, according to the commenter, ``[t]he 
SEC had every opportunity to define `immediately' in absolute terms and 
declined to do it,'' and instead ``only went as far as suggesting one 
second was a reasonable upper bound for declaring self-help and left it 
up to the marketplace to reward fast markets or punish slow markets.'' 
\61\
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    \59\ One commenter argued that such an assertion ``rests on an 
overly formalistic reading of Regulation NMS that fails to account 
for the rise of high speed trading in the last decade.'' See Verret 
Letter at 4. Another commenter similarly criticized that assertion 
as dependent ``on a self-serving read of Reg NMS, leaving out its 
history, its original meaning, and its subsequent interpretation.'' 
See Leuchtkafer Second Letter at 1.
    \60\ Leuchtkafer Second Letter at 1-2 (emphasis in original). 
This commenter pointed out that ``[t]he standard by which to measure 
automated and protected quotes was ITS, or, more precisely, human 
intervention, because it was human intervention the SEC wanted to 
firewall'' and asserted that ```[i]mmediately and automatically' 
means without human intervention and with no chance of human 
intervention'' and ``does not mean as fast as an exchange, or any 
exchange, can go.'' Id. at 2.
    \61\ Id. at 2. Another commenter asserted that IEX's POP/coil 
structure is ``entirely consistent with the overall policy 
objectives of Regulation NMS.'' Franklin Templeton Letter at 2. One 
commenter argued that IEX's proposed POP/coil delay does not 
constitute an ``intentional device'' under Rule 600 of Regulation 
NMS because IEX's dissemination of quote information to the SIP 
would not be subject to the delay, and thus IEX's POP/coil would not 
increase the uncertainty of the NBBO relative to current latencies. 
See Upson Letter at 2. One commenter noted that ``the flip side of 
faster access is slower access if you don't pay'' and with co-
location ``[t]he problem is that you have to pay to get into their 
data centers in the first place, and if you don't it sure looks like 
you are intentionally delayed compared to those who can and do 
pay.'' See Leuchtkafer First Letter at 1. That commenter noted that 
``if the IEX critics are right, by their own reasoning the exchanges 
will have to dismantle their co-location facilities and stop 
offering tiered high-speed network facilities. They are selling 
faster access to their markets, and if you don't pay, aren't you 
slower than you could be, aren't you intentionally delayed?'' Id. at 
2.

---------------------------------------------------------------------------

[[Page 15664]]

    Several commenters noted that there is latency associated with the 
transmission of orders to protected quotations at existing market 
venues--and in some cases, those latencies are greater than that 
associated with transmitting orders to IEX even factoring in the 
proposed POP/coil delay.\62\ One commenter argued that the 350 
microsecond proposed POP/coil delay ``would be so de minimis as to have 
no appreciable impact on market behavior'' and is ``not much more than 
the normal latency that all trading platforms impose.'' \63\ Another 
commenter did not find the proposed POP/coil delay ``particularly 
problematic, as the time gap is minimal, and (even including the speed 
bump) IEX matches orders faster than a number of other markets.'' \64\ 
One commenter noted that the POP/coil 350 microsecond delay ``is orders 
of magnitude shorter than the variable lags between the SIP and the 
proprietary feeds,'' and asserted that the proposed POP/coil delay is 
consistent with existing practices already approved by the 
Commission.\65\
---------------------------------------------------------------------------

    \62\ See, e.g., BATS First Letter at 4; BATS Second Letter at 2-
3; Healthy Markets Letter at 4; Angel Letter at 2; Kim Letter; 
Mannheim Letter; Wilcox Letter.
    \63\ Angel Letter at 3.
    \64\ Tabb Letter at 1.
    \65\ Healthy Markets Letter at 3.
---------------------------------------------------------------------------

    IEX asserted that the language of the Order Protection Rule and the 
Regulation NMS Adopting Release, when considered in light of the 
context in which the Order Protection Rule was adopted, do not compel 
the conclusion that IEX's quotes should be considered ``manual 
quotations'' instead of ``automated quotations.'' \66\ In addition, IEX 
noted that not all exchange matching systems are located in the same 
vicinity and asserted that ``there is no reason to think that the 
Commission by referring to `intentional device' meant somehow to set 
geographic standards with regard to exchange matching system 
connections generally, or to prescribe the exact length of cable that 
is or is not allowable.'' \67\
---------------------------------------------------------------------------

    \66\ See IEX First Response at 6-7; see also IEX Third Response 
at 1-3. IEX noted that the Regulation NMS Adopting Release does not 
define a maximum allowable latency in order for quotations to 
qualify as automated quotations, and stated that ``[t]he POP does 
not enable any human intervention to determine the action taken with 
respect to a quote or the order itself'' and that ``the POP clearly 
does not involve a `coding of automated systems'. . . .'' IEX First 
Response at 6-7. IEX suggested that the POP is consistent with the 
purpose of Regulation NMS because ``the POP helps to promote access 
to quotations by limiting the chance that a party displaying a quote 
on an exchange will use a signal from an execution on IEX to cancel 
its quote on that other market within microseconds.'' See IEX Second 
Response at 4 (emphasis in original).
    \67\ IEX First Response at 7; see also IEX Second Response at 4.
---------------------------------------------------------------------------

    According to IEX, its POP/coil structure ``represents a form of 
prescribed physical distance to which all users are subject when 
submitting orders to IEX's trading system'' and ``[i]n this sense, it 
is no different from means that all exchanges impose to set the terms 
by which users can connect to their systems.'' \68\ IEX stated that 
``the amount of latency imposed by the POP is less than or not 
materially different than that currently involved in reaching various 
exchanges based on geographic factors,'' and refers, by way of example, 
to the geographic distance that an order from the Chicago Stock 
Exchange's Secaucus, New Jersey data center must physically traverse 
before reaching the Chicago Stock Exchange's trading system in 
Chicago.\69\ IEX also provided data from certain subscribers to IEX's 
ATS that, according to IEX, indicate that those subscribers' average 
latency when trading on IEX is comparable to that when trading on 
certain other exchanges, ``is an order of magnitude less than that of 
the Chicago Stock Exchange,'' and ``is on average less than the round-
trip latency of the NYSE as well.'' \70\
---------------------------------------------------------------------------

    \68\ IEX First Response at 5.
    \69\ See id. at 6; see also IEX Third Response at 2. One 
commenter made the same observation, noting that ``[t]he NBBO 
already includes quotes with varied degrees of time lag'' and that 
the length of IEX's coiled cable ``is far less than the distance 
between NY and Chicago, and is remarkably similar to the distance 
between Carteret and Mahwah (36 miles).'' See Healthy Markets Letter 
at 4. See also IEX Second Response at 11 (noting that the distance 
between Nasdaq's Carteret facility and NYSE's Mahwah facility is 
42.8 miles (compared to the IEX coil's approximately 38 mile 
equivalent)). Other commenters similarly understood that the POP/
coil latency is comparable to or shorter than natural and geographic 
latencies in today's market. See Angel Letter at 2; BATS First 
Letter at 4; BATS Second Letter at 2-3; Kim Letter; Mannheim Letter; 
T. Rowe Price Letter at 2-3; Wilcox Letter. Two commenters 
specifically suggested that such a delay would be inconsequential or 
de minimis. See Angel Letter at 2; Abel/Noser Letter at 2.
    \70\ IEX Second Response at 4 and 7. IEX compared its POP to the 
coiling of cable that existing exchanges utilize in their respective 
data centers for purposes of co-location access. See IEX First 
Response at 3-6; IEX Third Response at 2. IEX further contended that 
``the POP should no more be considered prohibited than existing 
access arrangements could be considered as designed to intentionally 
delay access to quotes by anyone who declines to pay for the 
privilege of the fastest access.'' IEX First Response at 7. 
According to IEX, ``the POP clearly is not a `programmed delay' any 
more than the coiled cables connecting to every other exchange's 
matching systems could be considered as such.'' IEX Second Response 
at 4. IEX claimed that its 350 microsecond latency on inbound orders 
is actually less than the latency differential between the non-co-
located access and the highest level of co-location offered by the 
Nasdaq Stock Market. See id. at 5-6.
---------------------------------------------------------------------------

II. Commission's Proposed Interpretation

    As discussed above, at the time Regulation NMS was adopted, the 
concept of an ``automated quotation'' was intended to address manual 
and hybrid automated-manual trading systems in relation to the trade-
through requirements of Rule 611. Under Regulation NMS, a trading 
center must provide an ``immediate'' response for its quotation to be 
an ``automated quotation.'' \71\ Although the Commission did not set a 
maximum response time in Rule 600 or Rule 611 for a quotation to be an 
automated quotation, in the Regulation NMS Adopting Release the 
Commission stated that an immediate response meant ``the fastest 
response possible without any programmed delay.'' \72\ When Regulation 
NMS was adopted, however, the Commission was focused on the response 
time delays generated by manual interaction, and crafted exceptions to 
Rule 611 based on response times of one second.\73\ Delays in the realm 
of sub-milliseconds, as presented by the IEX Form 1 application, were 
not contemplated by the Commission because they generally were not 
relevant or material for the slower trading technologies used by market 
participants at the time.\74\
---------------------------------------------------------------------------

    \71\ See 17 CFR 242.600(b)(3) (defining ``automated 
quotation'').
    \72\ Regulation NMS Adopting Release, supra note 14, at 37519.
    \73\ See supra note 26 (citing to footnote 21 of the Regulation 
NMS adopting release where the Commission noted that ``[t]he 
difference in speed between automated and manual markets often is 
the difference between a 1-second response and a 15-second 
response--a disparity that clearly can be important to many 
investors'').
    \74\ The Commission notes that the smallest time increment 
suggested by commenters at the time Regulation NMS was adopted--250 
milliseconds--is magnitudes slower than the latency introduced by 
IEX's proposed POP/coil delay. See Regulation NMS Adopting Release, 
supra note 14, at 37518.
---------------------------------------------------------------------------

    As the speed of trading technology has increased since the adoption 
of Regulation NMS,\75\ some trading centers have begun to explore ways 
to reduce the relevance of speed differentials of

[[Page 15665]]

very small increments.\76\ Proposals like IEX's POP/coil that 
intentionally delay access to an exchange's quotation, albeit by a sub-
millisecond amount, raise questions about the prior interpretation with 
respect to the definition of an automated quotation under Regulation 
NMS. Accordingly, the Commission is proposing and soliciting comment on 
an updated interpretation from that provided in the Regulation NMS 
Adopting Release.\77\
---------------------------------------------------------------------------

    \75\ A number of factors affect the speed at which a market 
participant can receive market and quote data, submit orders, obtain 
an execution, and receive information on trades, including hardware, 
software, and physical distance. See, e.g., Securities Exchange Act 
Release No. 61358 (January 14, 2010), 75 FR 3594, 3610-11 (January 
21, 2010) (Concept Release on Equity Market Structure). Recent 
technological advances have reduced the ``latency'' that these 
factors introduce into the order handling process, both in absolute 
and relative terms, and some market participants and liquidity 
providers have invested in low-latency systems that take into 
account the advances in technology. See id. at 3606.
    \76\ See, e.g., Securities Exchange Act Release No. 67639 
(August 10, 2012), 77 FR 49034 (August 15, 2012) (SR-NASDAQ-2012-
071) (order approving proposed rule change to provide for 
simultaneous routing).
    \77\ In particular, the POP/coil, because it delays inbound and 
outbound messages to and from IEX Users, raises a question as to 
whether IEX will, among other things, ``immediately'' execute IOC 
orders under Rule 600(b)(3)(ii), ''immediately'' transmit a response 
to an IOC order sender under Rule 600(b)(3)(iv), and ``immediately'' 
display information that updates IEX's displayed quotation under 
Rule 600(b)(3)(v). See 17 CFR 242.600(b)(3); see also Regulation NMS 
Adopting Release, supra note 14, at 37504.
---------------------------------------------------------------------------

    Specifically, the Commission preliminarily believes that, in the 
current market, delays of less than a millisecond in quotation response 
times may be at a de minimis level that would not impair a market 
participant's ability to access a quote, consistent with the goals of 
Rule 611 and because such delays are within the geographic and 
technological latencies experienced by market participants today. For 
example, IEX's proposed POP/coil would introduce a 350 microsecond 
delay for a non-routable IOC order before it could access the IEX 
matching engine. The additional delay introduced by the coil itself, 
which is approximately 38 miles long, is effectively equivalent to the 
communications latency between venues that are 38 miles apart.\78\ The 
Commission understands that today the distances between exchange data 
centers, or between the order entry systems of market participants and 
exchange data centers, may exceed, sometimes by many multiples, a 
distance of 38 miles. The Commission does not believe that these 
naturally-occurring response time latencies resulting from geography 
are inconsistent with the purposes of Rule 611.\79\ At the same time, 
permitting the quotations of trading centers with very small response 
time delays, such as those proposed by IEX, to be treated as automated 
quotations, and thereby benefit from trade-through protection under 
Rule 611, could encourage innovative ways to address market structure 
issues.
---------------------------------------------------------------------------

    \78\ See supra note 69 (citing to the Healthy Markets Letter, 
which observed that the length of IEX's coiled cable ``is far less 
than the distance between NY and Chicago, and is remarkably similar 
to the distance between Carteret and Mahwah (36 miles)''). See also 
IEX Second Response at 11 (noting that the distance between Nasdaq's 
Carteret facility and NYSE's Mahwah facility is 42.8 miles).
    \79\ See supra note 69 (citing to commenters who believe that 
IEX's POP/coil latency is comparable to or shorter than natural and 
geographic latencies in today's market). One market maker and 
liquidity provider on the IEX ATS notes that it ``engages in 
precisely the same market making strategies on IEX as [it does] on 
automated trading systems run by other broker-dealers . . . as well 
as on registered stock exchanges'' and that ``IEX's `speed bump' has 
had no impact on [its] market making and liquidity provisioning on 
the platform.'' Virtu Letter at 1-2.
---------------------------------------------------------------------------

    Accordingly, the Commission today is proposing to interpret 
``immediate'' when determining whether a trading center maintains an 
``automated quotation'' for purposes of Rule 611 of Regulation NMS to 
include response time delays at trading centers that are de minimis, 
whether intentional or not.\80\
---------------------------------------------------------------------------

    \80\ An exchange that proposed to provide any member or user 
(including the exchange's inbound or outbound routing functionality, 
or the exchange's affiliates) with exclusive privileged faster 
access to its facilities over any other member or user would raise 
concerns under the Act, including under Section 6(b)(5) and 6(b)(8) 
of the Act, and would need to address those concerns in a Form 1 
exchange registration application or a proposed rule change 
submitted pursuant to Section 19 of the Act, as applicable.
---------------------------------------------------------------------------

III. Solicitation of Comment

    The Commission requests comment all aspects of this proposed 
interpretation, including:
    1. Would delays of less than a millisecond in quotation response 
times impair a market participant's ability to access a quote or impair 
efficient compliance with Rule 611?
    2. In the current market, should the Commission interpret 
``immediate'' as including a de minimis delay of less than one 
millisecond? Should the Commission consider other lengths? If so, what 
should they be?
    3. Should the Commission be concerned about market manipulation? If 
so, specifically, what should the Commission focus on?
    4. Should the Commission consider an alternative interpretation? If 
so, what should it be?

    By the Commission.

    Dated: March 18, 2016.
Brent J. Fields,
Secretary.
[FR Doc. 2016-06633 Filed 3-23-16; 8:45 am]
 BILLING CODE 8011-01-P
15660 Federal Register / Vol. 81, No. 57 / Thursday, March 24, 2016 / Proposed Rules

sample tested will be reported as test kit to the General Conference printing in the Commission’s Public
positive or negative, and the official Committee at the next scheduled Reference Room, 100 F Street NE.,
NPIP procedure used to classify the General Conference Committee meeting. Washington, DC 20549, on official
sample must be submitted in addition to If the Technical Committee recommends business days between the hours of
the assay response value. A completed removal, the final decision to remove 10:00 a.m. and 3:00 p.m. All comments
worksheet for diagnostic test evaluation the test will be granted in accordance received will be posted without change;
is required to be submitted with the raw with the procedures described in the Commission does not edit personal
data and may be obtained by contacting §§ 147.46, 147.47, and 147.48. identifying information from
the NPIP Senior Coordinator. Raw data Done in Washington, DC, this 18th day of submissions. You should submit only
and the completed worksheet for March 2016. information that you wish to make
diagnostic test evaluation must be Kevin Shea,
publicly available.
submitted to the NPIP Senior FOR FURTHER INFORMATION CONTACT:
Administrator, Animal and Plant Health
Coordinator 4 months prior to the next Inspection Service. Richard Holley III, Assistant Director, at
scheduled General Conference (202) 551–5614, Michael Bradley,
[FR Doc. 2016–06664 Filed 3–23–16; 8:45 am]
Committee meeting, which is when Special Counsel, at (202) 551–5594, or
BILLING CODE 3410–34–P
approval will be sought. Michael Ogershok, Attorney-Advisor, at
(5) The findings of the cooperating 202–551–5541, all in the Office of
laboratories will be evaluated by the Market Supervision, Division of Trading
NPIP Technical Committee, and the SECURITIES AND EXCHANGE and Markets, Securities and Exchange
Technical Committee will make a COMMISSION Commission, 100 F Street NE.,
majority recommendation whether to Washington, DC 20549–7010.
approve the test kit to the General 17 CFR Part 241
SUPPLEMENTARY INFORMATION:
Conference Committee at the next [Release No. 34–77407; File No. S7–03–16]
scheduled General Conference I. Background
Committee meeting. If the Technical Notice of Proposed Commission A. IEX’s Form 1
Committee recommends approval, the Interpretation Regarding Automated
final approval will be granted in Quotations Under Regulation NMS On August 21, 2015, Investors’
accordance with the procedures Exchange LLC (‘‘IEX’’) submitted to the
AGENCY: Securities and Exchange Commission a Form 1 application
described in §§ 147.46, 147.47, and
Commission. seeking registration as a national
147.48.
(6) Diagnostic test kits that are not ACTION: Proposed interpretation; request securities exchange under Section 6 of
licensed by the Service (e.g., for comment. the Securities Exchange Act of 1934
bacteriological culturing kits) and that (‘‘Act’’).1 On September 9, 2015, IEX
SUMMARY: The Securities and Exchange submitted Amendment No. 1 to its Form
have been approved for use in the NPIP Commission is publishing for comment
in accordance with this section are 1 application.2 Notice of IEX’s filing of
a proposed interpretation with respect its Form 1 application, as amended, was
listed in the NPIP Program Standards.
to the definition of automated quotation published for comment in the Federal
(b) Approved tests modification and
under Rule 600(b)(3) of Regulation Register on September 22, 2015.3
removal. (1) The specific data required
for modifications of previously NMS. Recently, IEX submitted three
approved tests will be taken on a case- DATES: Comments should be received on additional amendments to its Form 1
by-case basis by the technical or before April 14, 2016. application.4 Simultaneously with the
committee. ADDRESSES: Comments may be
(2) If the Technical Committee submitted by any of the following 1 15 U.S.C. 78f.
determines that only additional field methods: 2 In Amendment No. 1, IEX submitted updated
data is needed at the time of submission portions of its Form 1 application, including
for a modification of a previously Electronic Comments revised exhibits, a revised version of the proposed
IEX Rule Book, and revised Addenda C–2, C–3, C–
approved test, allow for a conditional • Use the Commission’s Internet 4, D–1, D–2, F–1, F–2, F–3, F–4, F–5, F–6, F–7, F–
approval for 60 days for data collection comment form (http://www.sec.gov/ 8, F–9, F–10, F–11, F–12, and F–13. IEX’s Form 1
side-by-side with a current test. The rules/sro.shtml); or application, as amended, including all of the
Exhibits referenced above, is available online at
submitting party must provide complete • Send an email to rule-comments@ www.sec.gov/rules/other.shtml as well as at the
protocol and study design, including sec.gov. Please include File Number S7– Commission’s Public Reference Room.
criteria for pass/fail to the Technical 03–16 on the subject line. 3 See Securities Exchange Act Release No. 75925

Committee. The Technical Committee (September 15, 2015), 80 FR 57261. On December
Paper Comments 18, 2015, IEX consented to an extension of time to
must review the data prior to final
approval. This would only apply to the • Send paper comments in triplicate March 21, 2016 for Commission consideration of its
Form 1 application. See Letter from Sophia Lee,
specific situation where a modified test to Brent J. Fields, Secretary, Securities General Counsel, IEX, to Brent J. Fields, Secretary,
needs additional field data with poultry and Exchange Commission, 100 F Street Commission, dated December 18, 2015.
to be approved. NE., Washington, DC 20549–1090. 4 In Amendment No. 2, filed on February 29,

2016, IEX proposed changes to its Form 1
(3) Approved diagnostic tests may be All submissions should refer to File application to, among other things, redesign its
removed from the Plan by submission of Number S7–03–16. This file number
asabaliauskas on DSK3SPTVN1PROD with PROPOSALS

outbound routing functionality to direct routable
a proposed change from a participant, should be included on the subject line orders first to the IEX router instead of directly to
Official State Agency, the Department, if email is used. To help the the IEX matching engine. See Letter from Sophia
Lee, General Counsel, IEX, to Brent J. Fields,
or other interested person or industry Commission process and review your Secretary, Commission, dated February 29, 2016, at
organization. The data in support of comments more efficiently, please use 1. In this manner, the IEX router would ‘‘interact
removing an approved test will be only one method. The Commission will with the IEX matching system over a 350
compiled and evaluated by the NPIP post all comments on the Commission’s microsecond speed-bump in the same way an
independent third party broker would be subject to
Technical Committee, and the Technical Internet Web site (http://www.sec.gov/ a speed bump.’’ See id. In Amendment No. 3, filed
Committee will make a majority rules/other.shtml). Comments are also on March 4, 2016, IEX proposed changes to its Form
recommendation whether to remove the available for Web site viewing and 1 application to clarify and correct revisions to its

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issuance of this proposed interpretation, develop innovative business models Rule 600(b)(58) defines a ‘‘protected
the Commission issued a release to that do not undermine the goals of Rule quotation’’ as a ‘‘protected bid or a
notice Amendment Nos. 2, 3, and 4 to 611 of Regulation NMS. Specifically, the protected offer.’’ 19 Rule 600(b)(57), in
IEX’s Form 1 application, instituted Commission is proposing to interpret turn, defines a ‘‘protected bid or
proceedings to consider whether to ‘‘immediate’’ when determining protected offer’’ as a quotation in an
grant or deny IEX’s application, and whether a trading center maintains an NMS stock that is: (i) Displayed by an
designated a longer period for ‘‘automated quotation’’ for purposes of ‘‘automated trading center,’’ (ii)
Commission action to accommodate Rule 611 to include response time disseminated pursuant to an effective
those proceedings.5 delays at trading centers that are de national market system plan, and (iii) an
The Commission has received minimis, whether intentional or not. ‘‘automated quotation’’ that is the best
extensive comments on IEX’s Form 1 bid or best offer of a national securities
B. Regulation NMS Concept of an
application,6 and IEX has submitted exchange.20
Automated Quotation and Protected
several letters in response to concerns Quotation In order for an exchange to operate as
raised by commenters.7 Among other an ‘‘automated trading center,’’ it must,
things, a number of commenters on In general, Rule 611 under Regulation among other things, have ‘‘implemented
IEX’s Form 1 application asserted that a NMS (the ‘‘Order Protection Rule,’’ or such systems, procedures, and rules as
unique feature of IEX’s design— ‘‘Trade-Through Rule’’) protects the best are necessary to render it capable of
specifically, its Point-of-Presence automated quotations of exchanges by displaying quotations that meet the
(‘‘POP’’) and ‘‘coil’’ access delay— obligating other trading centers to honor requirements for an ‘automated
would preclude IEX’s best-priced those quotes by not executing trades at quotation’ set forth in [Rule 600(b)(3) of
quotation from being a ‘‘protected inferior prices or ‘‘trading through’’ Regulation NMS].’’ 21 Rule 600(b)(3)
quotation’’ under Regulation NMS if the such best automated quotations.11 Only defines an ‘‘automated quotation’’ as
Commission grants IEX’s exchange an exchange that is an ‘‘automated one that:
registration.8 IEX contests this assertion, trading center’’ 12 displaying an
‘‘automated quotation’’ 13 is entitled to i. Permits an incoming order to be marked
as do certain other commenters.9 as immediate-or-cancel;
As discussed more fully below and as this protection.14 Trading centers must
ii. Immediately and automatically executes
highlighted by a number of commenters establish, maintain, and enforce written an order marked as immediate-or-cancel
on IEX’s Form 1 application,10 the policies and procedures that are against the displayed quotation up to its full
Commission preliminarily believes that reasonably designed to prevent trade- size;
IEX’s proposed POP/coil structure raises throughs of protected quotations, unless iii. Immediately and automatically cancels
questions about prior Commission an exception or exemption applies.15 any unexecuted portion of an order marked
statements with respect to the definition When it adopted Regulation NMS, the as immediate-or-cancel without routing the
of an ‘‘automated quotation’’ under Commission explained that the purpose order elsewhere;
of the Order Protection Rule was to iv. Immediately and automatically
Regulation NMS. In light of market and transmits a response to the sender of an order
technological developments since the incentivize greater use of displayed
limit orders, which contribute to price marked as immediate-or-cancel indicating
adoption of Regulation NMS in 2005, the action taken with respect to such order;
the Commission is proposing and discovery and market liquidity.16 In
and
requesting comment on an updated discussing whether to apply order v. Immediately and automatically displays
interpretation to permit more flexibility protection to manual quotations, the information that updates the displayed
for trading centers with respect to Commission stated that ‘‘providing quotation to reflect any change to its material
automated quotations to allow them to protection to manual quotations, even terms.22
limited to trade-throughs beyond a
Any quotation that does not meet the
certain amount, potentially would lead
rulebook that it made in Amendment No. 2. See requirements for an automated
Letter from Sophia Lee, General Counsel, IEX, to to undue delays in the routing of
quotation is defined in Rule 600(b)(37)
Brent J. Fields, Secretary, Commission, dated March investor orders, thereby not justifying
4, 2016. In Amendment No. 4, filed on March 7, as a ‘‘manual’’ quotation.23
the benefits of price protection.’’ 17 The
2016, IEX proposed changes to its Form 1 In the Regulation NMS Adopting
Commission also noted that ‘‘those who
application to update Exhibit E to reflect changes Release, the Commission elaborated on
it proposed in Amendment No. 2. See Letter from route limit orders will be able to control
the meaning of the terms ‘‘immediate’’
Sophia Lee, General Counsel, IEX, to Brent J. Fields, whether their orders are protected by
Secretary, Commission, dated March 7, 2016. and ‘‘automatic’’ as those terms are used
evaluating the extent to which various
5 See Securities Exchange Act Release No. 77406 in the Rule 600(b)(3) definition of an
trading centers display automated
(March 18, 2016) (File No. 10–222). automated quotation. Specifically, with
versus manual quotations.’’ 18
6 The public comment file for IEX’s Form 1
respect to the meaning of the term
application (File No. 10–222) is available on the There are several provisions in
‘‘immediate,’’ the Commission stated
Commission’s Web site at: http://www.sec.gov/ Regulation NMS that impact whether
comments/10-222/10-222.shtml. that ‘‘[t]he term ‘immediate’ precludes
the Order Protection Rule applies. First,
7 See Letters from Sophia Lee, General Counsel, any coding of automated systems or
IEX, to Brent J. Fields, Secretary, Commission, 11 See 17 CFR 242.611.
other type of intentional device that
dated November 13, 2015 (‘‘IEX First Response’’); 12 See would delay the action taken with
November 23, 2015 (‘‘IEX Second Response’’); and 17 CFR 242.600(b)(4).
13 See 17 CFR 242.600(b)(3).
February 9, 2016 (‘‘IEX Third Response’’). See also 19 17
Letter from Donald Bollerman, Head of Markets and 14 See 17 CFR 242.600(b)(57) (defining ‘‘protected CFR 242.600(b)(58).
asabaliauskas on DSK3SPTVN1PROD with PROPOSALS

20 17 CFR 242.600(b)(57).
Sales, IEX Group, Inc., to File No. 10–222, dated bid or protected offer’’), 242.600(b)(58) (defining
February 16, 2016 (‘‘IEX Fourth Response’’) and ‘‘protected quotation’’); see also Securities 21 17 CFR 242.600(b)(4). Rule 600(b)(4) contains

Letter from IEX Group, Inc., to File No. 10–222, Exchange Act Release No. 51808 (June 9, 2005) 70 additional requirements that must be satisfied in
dated February 19, 2016 (‘‘IEX Fifth Response’’). FR 37496, 37504 (June 29, 2005) (‘‘Regulation NMS order to be an automated trading center. Those
8 See, e.g., FIA First Letter; NYSE First Letter; Adopting Release’’) (stating that ‘‘[t]o qualify for requirements are not at issue for purposes of this
Citadel First Letter. protection, a quotation must be automated’’). proposed interpretation.
9 See IEX First Response and IEX Second 15 17 CFR 242.611(a)(1). 22 See 17 CFR 242.600(b)(3). See also Regulation

Response. See also, e.g., Verret Letter; Leuchtkafer 16 See Regulation NMS Adopting Release, supra NMS Adopting Release, supra note 14, at 37504.
Second Letter. note 14, at 37516 and 37517. 23 Regulation NMS Adopting Release, supra note
10 See infra text accompanying notes 49–57 17 Id. at 37518.
14, at 37534. See also 17 CFR 242.600(b)(37)
(discussing comments on IEX’s Form 1). 18 Id. (defining ‘‘manual quotation’’).

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respect to a quotation,’’ 24 and that the In Rules 600 and 611, the Commission established a one-second standard for
standard for responding to an incoming did not set a maximum response time the exception in Rule 611(b)(8), which
order ‘‘should be ‘immediate,’ i.e., a for a quotation to be an ‘‘automated excepts trade-throughs where the
trading center’s systems should provide quotation.’’ 28 While a number of trading center that was traded-through
the fastest response possible without commenters on Regulation NMS had displayed, within the prior one
any programmed delay.’’ 25 advocated for a specific time standard, second, a price equal or inferior to the
The Commission provided context in ranging from one second down to 250 price of the trade-through transaction.36
the Regulation NMS Adopting Release milliseconds,29 for distinguishing In discussing the 611(b)(8) exception,
as to the intent behind the Order between manual and automated the Commission stated that it ‘‘generally
Protection Rule and the distinction quotations,30 the Commission declined does not believe that the benefits would
between ‘‘automated quotations’’ and to set such a standard, noting that ‘‘[t]he justify the costs imposed on trading
‘‘manual quotations.’’ At the time of the definition of automated quotation as centers of attempting to implement an
adoption of Regulation NMS, manual adopted does not set forth a specific intermarket price priority rule at the
quotations and markets that primarily time standard for responding to an level of sub-second time increments.
were centered around human incoming order.’’ 31 Rather, the Accordingly, Rule 611 has been
interaction in a floor-based trading Commission specifically sought to avoid formulated to relieve trading centers of
environment, including ‘‘hybrid’’ ‘‘specifying a specific time standard that this burden.’’ 37
trading facilities that offer automatic may become obsolete as systems
execution of orders seeking to interact C. IEX’s Access Delay
improve over time,’’ and agreed with
with displayed quotations while also commenters that ‘‘the standard should IEX, which currently operates a
maintaining a physical trading floor, be ‘immediate’ i.e., a trading center’s trading platform as an alternative
experienced processing delays for systems should provide the fastest trading system, is seeking to register as
inbound orders that were measured in response possible without any a national securities exchange. If its
multiple seconds.26 In contrast to floor- programmed delay.’’ 32 registration is granted, IEX would
based and hybrid markets, at the time However, the Commission believed operate an electronic order book for
Regulation NMS was adopted, newer that ‘‘immediate’’ should not be NMS stocks.38 IEX’s POP and coil
automated matching systems removed construed in a way to frustrate the infrastructure is how IEX users
the human element and instead purposes of Rule 611 and crafted several (‘‘Users’’) would connect to IEX.39
immediately matched buyers and sellers exceptions to Rule 611, two of which IEX has represented that access to IEX
electronically. The Commission sought use a one second standard.33 by all Users would be obtained through
to achieve the goals of the Order Specifically, Rule 600(b)(1) addresses a POP located in Secaucus, New
Protection Rule and maintain the the applicability of the trade-through Jersey.40 According to IEX, after entering
efficiencies of the markets by protecting requirements with respect to quotations through the POP, a User’s electronic
only automated quotations that were of automated trading centers that message sent to the IEX trading system
‘‘immediately’’ accessible, and allowing experience a ‘‘failure, material delay, or would traverse the IEX ‘‘coil,’’ which is
trade-throughs of those that were not.27 malfunction,’’ by allowing other trading a box of compactly coiled optical fiber
centers to trade-through such cable equivalent to a prescribed
24 Regulation NMS Adopting Release, supra note physical distance of 61,625 meters
quotations.34 In the Regulation NMS
14, at 37534. The Commission also stated that, for (approximately 38 miles).41 After
a quotation ‘‘[t]o qualify as ‘automatic,’ no human Adopting Release, the Commission
exiting the coil, the User’s message
discretion in determining any action taken with provided an interpretation of the phrase
respect to an order may be exercised after the time would travel an additional physical
‘‘material delay’’ as one where a market
an order is received,’’ and ‘‘a quotation will not distance to the IEX system, located in
was ‘‘repeatedly failing to respond
qualify as ‘automated’ if any human intervention Weehawken, New Jersey.42 IEX has
after the time an order is received is allowed to within one second after receipt of an
represented that routable orders would
determine the action taken with respect to the order.’’ 35 The Commission similarly
quotation.’’ Id. at 37519 and 37534. thereafter be directed to the IEX routing
25 Id. at 37519. In the case of IEX, its access delay
existing trade-through protection regime at the
logic, and non-routable orders would be
involves hardware (i.e., coiled cable) and time—the Intermarket Trading System (‘‘ITS’’) Plan. directed to the IEX matching engine.43
geographic dispersion, not software programming. See id. at 37501. As the Commission noted, the ITS According to IEX, the coil, when
See infra text accompanying notes 40–45. provisions did not distinguish between manual and
Nevertheless, it is an intentional delay. See id.
combined with the physical distance
automated quotations and ‘‘fail[ed] to reflect the
26 See Regulation NMS Adopting Release, supra
disparate speed of response between manual and
between the POP and the IEX system,
note 14, at 37500 n.21 (‘‘One of the primary effects automated quotations’’ as they ‘‘were drafted for a would provide IEX Users sending non-
of the Order Protection Rule adopted today will be world of floor-based markets.’’ Id. As a result, ‘‘[b]y
to promote much greater speed of execution in the requiring order routers to wait for a response from 36 See 17 CFR 242.611(b)(8).
market for exchange-listed stocks. The difference in a manual market, the ITS trade-through provisions 37 See Regulation NMS Adopting Release, supra
speed between automated and manual markets can cause an order to miss both the best price of note 14, at 37523.
often is the difference between a 1-second response a manual quotation and slightly inferior prices at 38 For more detail on IEX’s proposed trading
and a 15-second response. . . .’’). automated markets that would have been
27 See id. at 37501. More broadly, the Commission
system, see IEX’s full Form 1 application and
immediately accessible.’’ Id. See also supra note 26 Exhibits, as amended, which are available on the
stated that the definition of ‘‘automated trading (citing to footnote 21 of the Regulation NMS Commission’s Web site at http://www.sec.gov/rules/
center’’ in Rule 600(b)(4) ‘‘offers flexibility for a Adopting Release). other/otherarchive/other2015.shtml.
hybrid market to display both automated and 28 See also id. at 37519 (‘‘The definition of
39 To obtain authorized access to the IEX System,
asabaliauskas on DSK3SPTVN1PROD with PROPOSALS

manual quotations, but only when such a market automated quotation as adopted does not set forth each User must enter into a User Agreement with
meets basic standards that promote fair and a specific time standard for responding to an the Exchange. See IEX Rule 11.130(a). The term
efficient access by the public to the market’s incoming order.’’). ‘‘Users,’’ for purposes of this notice, does not
automated quotations.’’ Id. at 37520. This definition 29 A millisecond is one thousandth of a second.
include IEX Services LLC, IEX’s affiliated outbound
was an outgrowth of two floor-based exchanges’ 30 See id. at 37518.
routing broker-dealer.
intention to operate ‘‘hybrid’’ trading facilities that 31 Id. at 37519. 40 See IEX Second Response at 2.
would offer automatic execution against their 32 Id. 41 See IEX First Response at 3.
displayed quotations, while at the same time
33 See 17 CFR 242.611(b)(1) and (8). 42 See Exhibit E to IEX’s Form 1 submission, at
maintaining a traditional trading floor. See id. at
34 See 17 CFR 242.611(b)(1). 12. See also IEX First Response at 3.
37518. The Commission also explained that the
Order Protection Rule took a substantially different 35 See Regulation NMS Adopting Release, supra 43 See Amendment Nos. 2 and 3 to IEX’s Form 1

approach to intermarket price protection than the note 14, at 37519. application.

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15664 Federal Register / Vol. 81, No. 57 / Thursday, March 24, 2016 / Proposed Rules

Several commenters noted that there by referring to ‘intentional device’ II. Commission’s Proposed
is latency associated with the meant somehow to set geographic Interpretation
transmission of orders to protected standards with regard to exchange As discussed above, at the time
quotations at existing market venues— matching system connections generally, Regulation NMS was adopted, the
and in some cases, those latencies are or to prescribe the exact length of cable concept of an ‘‘automated quotation’’
greater than that associated with that is or is not allowable.’’ 67 was intended to address manual and
transmitting orders to IEX even factoring According to IEX, its POP/coil hybrid automated-manual trading
in the proposed POP/coil delay.62 One structure ‘‘represents a form of systems in relation to the trade-through
commenter argued that the 350 prescribed physical distance to which requirements of Rule 611. Under
microsecond proposed POP/coil delay all users are subject when submitting Regulation NMS, a trading center must
‘‘would be so de minimis as to have no orders to IEX’s trading system’’ and provide an ‘‘immediate’’ response for its
appreciable impact on market behavior’’ ‘‘[i]n this sense, it is no different from quotation to be an ‘‘automated
and is ‘‘not much more than the normal means that all exchanges impose to set quotation.’’ 71 Although the Commission
latency that all trading platforms the terms by which users can connect to did not set a maximum response time in
impose.’’ 63 Another commenter did not their systems.’’ 68 IEX stated that ‘‘the Rule 600 or Rule 611 for a quotation to
find the proposed POP/coil delay amount of latency imposed by the POP be an automated quotation, in the
‘‘particularly problematic, as the time is less than or not materially different Regulation NMS Adopting Release the
gap is minimal, and (even including the than that currently involved in reaching Commission stated that an immediate
speed bump) IEX matches orders faster various exchanges based on geographic response meant ‘‘the fastest response
than a number of other markets.’’ 64 One factors,’’ and refers, by way of example, possible without any programmed
commenter noted that the POP/coil 350 to the geographic distance that an order delay.’’ 72 When Regulation NMS was
microsecond delay ‘‘is orders of from the Chicago Stock Exchange’s adopted, however, the Commission was
magnitude shorter than the variable lags Secaucus, New Jersey data center must focused on the response time delays
between the SIP and the proprietary physically traverse before reaching the generated by manual interaction, and
feeds,’’ and asserted that the proposed Chicago Stock Exchange’s trading crafted exceptions to Rule 611 based on
POP/coil delay is consistent with system in Chicago.69 IEX also provided response times of one second.73 Delays
existing practices already approved by data from certain subscribers to IEX’s in the realm of sub-milliseconds, as
the Commission.65 ATS that, according to IEX, indicate that presented by the IEX Form 1
IEX asserted that the language of the those subscribers’ average latency when application, were not contemplated by
Order Protection Rule and the trading on IEX is comparable to that the Commission because they generally
Regulation NMS Adopting Release, when trading on certain other were not relevant or material for the
when considered in light of the context exchanges, ‘‘is an order of magnitude slower trading technologies used by
in which the Order Protection Rule was less than that of the Chicago Stock market participants at the time.74
adopted, do not compel the conclusion Exchange,’’ and ‘‘is on average less than As the speed of trading technology
that IEX’s quotes should be considered the round-trip latency of the NYSE as has increased since the adoption of
‘‘manual quotations’’ instead of well.’’ 70 Regulation NMS,75 some trading centers
‘‘automated quotations.’’ 66 In addition, have begun to explore ways to reduce
IEX noted that not all exchange 67 IEX First Response at 7; see also IEX Second
the relevance of speed differentials of
matching systems are located in the Response at 4.
68 IEX First Response at 5.
same vicinity and asserted that ‘‘there is 69 See id. at 6; see also IEX Third Response at 2. claimed that its 350 microsecond latency on
no reason to think that the Commission One commenter made the same observation, noting inbound orders is actually less than the latency
that ‘‘[t]he NBBO already includes quotes with differential between the non-co-located access and
See Leuchtkafer First Letter at 1. That commenter varied degrees of time lag’’ and that the length of the highest level of co-location offered by the
noted that ‘‘if the IEX critics are right, by their own IEX’s coiled cable ‘‘is far less than the distance Nasdaq Stock Market. See id. at 5–6.
71 See 17 CFR 242.600(b)(3) (defining ‘‘automated
reasoning the exchanges will have to dismantle between NY and Chicago, and is remarkably similar
their co-location facilities and stop offering tiered to the distance between Carteret and Mahwah (36 quotation’’).
high-speed network facilities. They are selling faster 72 Regulation NMS Adopting Release, supra note
miles).’’ See Healthy Markets Letter at 4. See also
access to their markets, and if you don’t pay, aren’t IEX Second Response at 11 (noting that the distance 14, at 37519.
you slower than you could be, aren’t you between Nasdaq’s Carteret facility and NYSE’s 73 See supra note 26 (citing to footnote 21 of the
intentionally delayed?’’ Id. at 2. Mahwah facility is 42.8 miles (compared to the IEX Regulation NMS adopting release where the
62 See, e.g., BATS First Letter at 4; BATS Second
coil’s approximately 38 mile equivalent)). Other Commission noted that ‘‘[t]he difference in speed
Letter at 2–3; Healthy Markets Letter at 4; Angel commenters similarly understood that the POP/coil between automated and manual markets often is the
Letter at 2; Kim Letter; Mannheim Letter; Wilcox latency is comparable to or shorter than natural and difference between a 1-second response and a 15-
Letter. geographic latencies in today’s market. See Angel second response—a disparity that clearly can be
63 Angel Letter at 3. Letter at 2; BATS First Letter at 4; BATS Second important to many investors’’).
64 Tabb Letter at 1. Letter at 2–3; Kim Letter; Mannheim Letter; T. Rowe 74 The Commission notes that the smallest time

65 Healthy Markets Letter at 3. Price Letter at 2–3; Wilcox Letter. Two commenters increment suggested by commenters at the time
66 See IEX First Response at 6–7; see also IEX specifically suggested that such a delay would be Regulation NMS was adopted—250 milliseconds—
Third Response at 1–3. IEX noted that the inconsequential or de minimis. See Angel Letter at is magnitudes slower than the latency introduced
Regulation NMS Adopting Release does not define 2; Abel/Noser Letter at 2. by IEX’s proposed POP/coil delay. See Regulation
a maximum allowable latency in order for 70 IEX Second Response at 4 and 7. IEX compared NMS Adopting Release, supra note 14, at 37518.
quotations to qualify as automated quotations, and its POP to the coiling of cable that existing 75 A number of factors affect the speed at which

stated that ‘‘[t]he POP does not enable any human exchanges utilize in their respective data centers for a market participant can receive market and quote
asabaliauskas on DSK3SPTVN1PROD with PROPOSALS

intervention to determine the action taken with purposes of co-location access. See IEX First data, submit orders, obtain an execution, and
respect to a quote or the order itself’’ and that ‘‘the Response at 3–6; IEX Third Response at 2. IEX receive information on trades, including hardware,
POP clearly does not involve a ‘coding of automated further contended that ‘‘the POP should no more be software, and physical distance. See, e.g., Securities
systems’. . . .’’ IEX First Response at 6–7. IEX considered prohibited than existing access Exchange Act Release No. 61358 (January 14, 2010),
suggested that the POP is consistent with the arrangements could be considered as designed to 75 FR 3594, 3610–11 (January 21, 2010) (Concept
purpose of Regulation NMS because ‘‘the POP helps intentionally delay access to quotes by anyone who Release on Equity Market Structure). Recent
to promote access to quotations by limiting the declines to pay for the privilege of the fastest technological advances have reduced the ‘‘latency’’
chance that a party displaying a quote on an access.’’ IEX First Response at 7. According to IEX, that these factors introduce into the order handling
exchange will use a signal from an execution on IEX ‘‘the POP clearly is not a ‘programmed delay’ any process, both in absolute and relative terms, and
to cancel its quote on that other market within more than the coiled cables connecting to every some market participants and liquidity providers
microseconds.’’ See IEX Second Response at 4 other exchange’s matching systems could be have invested in low-latency systems that take into
(emphasis in original). considered as such.’’ IEX Second Response at 4. IEX account the advances in technology. See id. at 3606.

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Federal Register / Vol. 81, No. 57 / Thursday, March 24, 2016 / Proposed Rules 15665

very small increments.76 Proposals like quotations of trading centers with very DEPARTMENT OF EDUCATION
IEX’s POP/coil that intentionally delay small response time delays, such as
access to an exchange’s quotation, albeit those proposed by IEX, to be treated as 34 CFR Parts 270, 271, and 272
by a sub-millisecond amount, raise automated quotations, and thereby RIN 1810–AB26
questions about the prior interpretation benefit from trade-through protection
with respect to the definition of an [Docket ID ED–2016–OESE–0006]
under Rule 611, could encourage
automated quotation under Regulation innovative ways to address market
NMS. Accordingly, the Commission is Equity Assistance Centers (Formerly
structure issues. Desegregation Assistance Centers)
proposing and soliciting comment on an
updated interpretation from that Accordingly, the Commission today is
AGENCY: Office of Elementary and
provided in the Regulation NMS proposing to interpret ‘‘immediate’’
Secondary Education, Department of
Adopting Release.77 when determining whether a trading Education.
Specifically, the Commission center maintains an ‘‘automated
ACTION: Notice of proposed rulemaking.
preliminarily believes that, in the quotation’’ for purposes of Rule 611 of
current market, delays of less than a Regulation NMS to include response SUMMARY: The Secretary proposes to
millisecond in quotation response times time delays at trading centers that are de revise the regulations that govern the
may be at a de minimis level that would minimis, whether intentional or not.80 Equity Assistance Centers (EAC)
not impair a market participant’s ability program, authorized under Title IV of
to access a quote, consistent with the III. Solicitation of Comment the Civil Rights Act of 1964, and to
goals of Rule 611 and because such The Commission requests comment remove the regulations that govern the
delays are within the geographic and State Educational Agency Desegregation
all aspects of this proposed
technological latencies experienced by (SEA) program, authorized under Title
market participants today. For example, interpretation, including:
IV of the Civil Rights Act of 1964. Once
IEX’s proposed POP/coil would 1. Would delays of less than a final and effective, these amended EAC
introduce a 350 microsecond delay for millisecond in quotation response times regulations would govern the
a non-routable IOC order before it could impair a market participant’s ability to application process for new EAC grant
access the IEX matching engine. The access a quote or impair efficient awards. The proposed regulations
additional delay introduced by the coil compliance with Rule 611? would update the definitions applicable
itself, which is approximately 38 miles 2. In the current market, should the to this program; remove the existing
long, is effectively equivalent to the selection criteria; and provide the
Commission interpret ‘‘immediate’’ as
communications latency between Secretary with flexibility to determine
including a de minimis delay of less
venues that are 38 miles apart.78 The the number and composition of
Commission understands that today the than one millisecond? Should the
Commission consider other lengths? If geographic regions for the program.
distances between exchange data Additionally, the proposed regulations
centers, or between the order entry so, what should they be?
would remove the regulations for the
systems of market participants and 3. Should the Commission be SEA program, which is no longer
exchange data centers, may exceed, concerned about market manipulation? funded.
sometimes by many multiples, a If so, specifically, what should the
distance of 38 miles. The Commission DATES: We must receive your comments
Commission focus on?
does not believe that these naturally- on or before April 25, 2016.
4. Should the Commission consider ADDRESSES: Submit your comments
occurring response time latencies
an alternative interpretation? If so, what through the Federal eRulemaking Portal
resulting from geography are
should it be? or via postal mail, commercial delivery,
inconsistent with the purposes of Rule
611.79 At the same time, permitting the By the Commission. or hand delivery. We will not accept
Dated: March 18, 2016. comments submitted by fax or by email
76 See, e.g., Securities Exchange Act Release No. or those submitted after the comment
Brent J. Fields,
67639 (August 10, 2012), 77 FR 49034 (August 15, period. To ensure that we do not receive
2012) (SR–NASDAQ–2012–071) (order approving Secretary. duplicate copies, please submit your
proposed rule change to provide for simultaneous [FR Doc. 2016–06633 Filed 3–23–16; 8:45 am]
routing). comments only once. In addition, please
77 In particular, the POP/coil, because it delays BILLING CODE 8011–01–P include the Docket ID at the top of your
inbound and outbound messages to and from IEX comments.
Users, raises a question as to whether IEX will, • Federal eRulemaking Portal: Go to
among other things, ‘‘immediately’’ execute IOC www.regulations.gov to submit your
orders under Rule 600(b)(3)(ii), ’’immediately’’
transmit a response to an IOC order sender under comments electronically. Information
precisely the same market making strategies on IEX on using Regulations.gov, including
Rule 600(b)(3)(iv), and ‘‘immediately’’ display
as [it does] on automated trading systems run by
information that updates IEX’s displayed quotation instructions for accessing agency
under Rule 600(b)(3)(v). See 17 CFR 242.600(b)(3); other broker-dealers . . . as well as on registered
stock exchanges’’ and that ‘‘IEX’s ‘speed bump’ has documents, submitting comments, and
see also Regulation NMS Adopting Release, supra
note 14, at 37504. had no impact on [its] market making and liquidity viewing the docket, is available on the
78 See supra note 69 (citing to the Healthy provisioning on the platform.’’ Virtu Letter at 1–2. site under ‘‘Are you new to the site?’’
• Postal Mail, Commercial Delivery,
asabaliauskas on DSK3SPTVN1PROD with PROPOSALS

Markets Letter, which observed that the length of 80 An exchange that proposed to provide any
IEX’s coiled cable ‘‘is far less than the distance member or user (including the exchange’s inbound or Hand Delivery: If you mail or deliver
between NY and Chicago, and is remarkably similar
to the distance between Carteret and Mahwah (36
or outbound routing functionality, or the exchange’s your comments about these proposed
affiliates) with exclusive privileged faster access to regulations, address them to: Britt Jung,
miles)’’). See also IEX Second Response at 11
its facilities over any other member or user would U.S. Department of Education, 400
(noting that the distance between Nasdaq’s Carteret
facility and NYSE’s Mahwah facility is 42.8 miles). raise concerns under the Act, including under
Section 6(b)(5) and 6(b)(8) of the Act, and would
Maryland Avenue SW., Room 3E231,
79 See supra note 69 (citing to commenters who
need to address those concerns in a Form 1 Washington, DC 20202–6135.
believe that IEX’s POP/coil latency is comparable to
or shorter than natural and geographic latencies in exchange registration application or a proposed rule Telephone: (202) 205–4513.
today’s market). One market maker and liquidity change submitted pursuant to Section 19 of the Act, Privacy Note: The Department’s
provider on the IEX ATS notes that it ‘‘engages in as applicable. policy is to make all comments received

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Document Created: 2016-03-24 00:57:16
Document Modified: 2016-03-24 00:57:16
Category		Regulatory Information
Collection		Federal Register
sudoc Class		AE 2.7: GS 4.107: AE 2.106:
Publisher		Office of the Federal Register, National Archives and Records Administration
Section		Proposed Rules
Action		Proposed interpretation; request for comment.
Dates		Comments should be received on or before April 14, 2016.
Contact		Richard Holley III, Assistant Director, at (202) 551-5614, Michael Bradley, Special Counsel, at (202) 551-5594, or Michael Ogershok, Attorney-Advisor, at 202-551-5541, all in the Office of Market Supervision, Division of Trading and Markets, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549-7010.
FR Citation		81 FR 15660