81 FR 40785 - Commission Interpretation Regarding Automated Quotations Under Regulation NMS
SECURITIES AND EXCHANGE COMMISSION Federal Register Volume 81, Issue 121 (June 23, 2016)
Federal Register Volume 81, Issue 121 (June 23, 2016)
| Page Range | 40785-40793 | |
| FR Document | 2016-14876 |
[Federal Register Volume 81, Number 121 (Thursday, June 23, 2016)] [Rules and Regulations] [Pages 40785-40793] From the Federal Register Online [www.thefederalregister.org] [FR Doc No: 2016-14876] ======================================================================= ----------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION 17 CFR Part 241 [Release No. 34-78102; File No. S7-03-16] Commission Interpretation Regarding Automated Quotations Under Regulation NMS AGENCY: Securities and Exchange Commission. ACTION: Final interpretation. ----------------------------------------------------------------------- SUMMARY: The Securities and Exchange Commission is issuing a final interpretation with respect to the definition of automated quotation under Rule 600(b)(3) of Regulation NMS. DATES: Effective June 23, 2016. FOR FURTHER INFORMATION CONTACT: Richard Holley III, Assistant Director, Michael Bradley, Special Counsel, or Michael Ogershok, Attorney-Adviser, Office of Market Supervision, at 202-551-5777, Division of Trading and Markets, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549-7010. SUPPLEMENTARY INFORMATION: I. Background Rule 611 of Regulation NMS provides intermarket protection against trade-throughs for ``automated'' (as opposed to ``manual'') quotations of NMS stocks. Under Regulation NMS, an ``automated'' quotation is one that, among other things, can be executed ``immediately and automatically'' against an incoming immediate-or-cancel order. The Regulation NMS Adopting Release issued in 2005 makes clear that this formulation was intended to distinguish and exclude from protection quotations on manual markets that produced delays measured in seconds in responding to an incoming order, because delays of that magnitude would impair fair and efficient access to an [[Page 40786]] exchange's quotations.\1\ In the Regulation NMS Adopting Release, the Commission interpreted the term ``immediate'' to ``preclude[ ] any coding of automated systems or other type of intentional device that would delay the action taken with respect to a quotation.'' \2\ --------------------------------------------------------------------------- \1\ See Securities Exchange Act Release No. 51808 (June 9, 2005) 70 FR 37496, 37500 & n.21, 37501 (June 29, 2005) (``Regulation NMS Adopting Release''). The Commission notes that the smallest time increment suggested by commenters at the time Regulation NMS was adopted was 250 milliseconds. See id. at 37518. See also infra note 15 (discussing the distinction between ``automated quotations'' and ``manual quotations'' and noting 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 . . . .''). \2\ See Regulation NMS Adopting Release, supra note 1, at 37534. --------------------------------------------------------------------------- In light of the application of Investors' Exchange LLC (``IEX'') \3\ to register as an exchange and technological and market developments since the adoption of Regulation NMS, the Commission decided to revisit this interpretation. The Commission believes its prior interpretation should be updated given technological and market developments since the adoption of Regulation NMS, in particular the emergence of low latency trading strategies and related technology that permit trading decisions to be made in microseconds, neither of which were contemplated by the Commission or commenters in 2005.\4\ As further addressed below, the Commission now interprets ``immediate'' in the context of Regulation NMS as not precluding a de minimis intentional delay--i.e., a delay so short as to not frustrate the purposes of Rule 611 by impairing fair and efficient access to an exchange's quotations.\5\ --------------------------------------------------------------------------- \3\ See Securities Exchange Act Release Nos. 75925 (September 15, 2015), 80 FR 57261 (September 22, 2015) (File No. 10-222) (original notice); and 77406 (March 18, 2016), 81 FR 15765 (March 24, 2016) (File No. 10-222) (notice of amendments, order instituting proceedings, and extension of time). \4\ IEX's Form 1 includes an intentional access delay that imposes 350 microseconds of one-way latency for non-routable orders. IEX's access delay is discussed in the Commission's final order on IEX's Form 1. See Securities Exchange Act Release No. 78101 (June 17, 2016) (File No. 10-222) (order granting IEX's exchange registration) (``IEX Form 1 Approval Order''). \5\ See Regulation NMS Adopting Release, supra note 1, at 37520 (noting that ``[f]or a trading center to qualify as entitled to display any protected quotations, the public in general must have fair and efficient access to a trading center's quotations''). --------------------------------------------------------------------------- A. Regulation NMS: 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 ``protected'' quotations by not executing trades at inferior prices, or ``trading through'' such best automated quotations.\6\ Only an exchange that is an ``automated trading center'' \7\ displaying an ``automated quotation'' \8\ is entitled to this protection.\9\ 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.\10\ --------------------------------------------------------------------------- \6\ See 17 CFR 242.611. When it adopted Regulation NMS, the Commission explained that one purpose of the Order Protection Rule was to incentivize greater use of displayed limit orders, which contribute to price discovery and market liquidity, by protecting them from trade-throughs. See Regulation NMS Adopting Release, supra note 1, at 37516-17. In discussing whether to apply order protection to non-automated, ``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.'' Id. at 37518. 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.'' Id. In addition, the Commission intended that the Order Protection Rule would reinforce a broker's duty of best execution by prohibiting executions at inferior prices absent an exception. See id. at 37516 (``Given the large number of trades that fail to obtain the best displayed prices (e.g., approximately 1 in 40 trades for both Nasdaq and NYSE stocks), the Commission is concerned that many of the investors that ultimately received the inferior price in these trades may not be aware that their orders did not, in fact, obtain the best price. The Order Protection Rule will backstop a broker's duty of best execution on an order-by-order basis by prohibiting the practice of executing orders at inferior prices, absent an applicable exception.''). \7\ See 17 CFR 242.600(b)(4). References to ``exchange'' used herein apply also to facilities of national securities associations. See 17 CFR 242.600(b)(57). \8\ See 17 CFR 242.600(b)(3). \9\ See 17 CFR 242.600(b)(57) (defining ``protected bid or protected offer'') and 242.600(b)(58) (defining ``protected quotation''). See also Regulation NMS Adopting Release, supra note 1, at 37504 (stating that ``[t]o qualify for protection, a quotation must be automated''). \10\ 17 CFR 242.611(a)(1). --------------------------------------------------------------------------- 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.'' \11\ 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 or national securities association.\12\ --------------------------------------------------------------------------- \11\ 17 CFR 242.600(b)(58). \12\ 17 CFR 242.600(b)(57). --------------------------------------------------------------------------- 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].'' \13\ Rule 600(b)(3) defines an ``automated quotation'' as one that: --------------------------------------------------------------------------- \13\ 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 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.\14\ --------------------------------------------------------------------------- \14\ See 17 CFR 242.600(b)(3). See also Regulation NMS Adopting Release, supra note 1, at 37504. --------------------------------------------------------------------------- Any quotation that does not meet the requirements for an automated quotation is defined in Rule 600(b)(37) as a ``manual'' quotation.\15\ --------------------------------------------------------------------------- \15\ Regulation NMS Adopting Release, supra note 1, at 37534. See also 17 CFR 242.600(b)(37) (defining ``manual quotation''). The Commission also provided context as to 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'' manual-automated trading facilities, experienced processing delays for inbound orders that were measured in multiple seconds. See Regulation NMS Adopting Release, supra note 1, 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 . . . .''). In contrast to floor-based and hybrid markets that existed at the time Regulation NMS was adopted, newer automated matching systems coming more widely into use removed the human element and instead immediately matched buyers and sellers electronically. 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. In addition, the Commission emphasized that Rule 611 does not ``supplant or diminish'' a broker-dealer's duty of best execution. See id. at 37538. --------------------------------------------------------------------------- [[Page 40787]] In adopting Regulation NMS, the Commission recognized that there would be unintentional time delays by automated trading centers in responding to orders, albeit very short ones.\16\ Although a number of commenters on Regulation NMS advocated for a specific time standard, ranging from one second down to 250 milliseconds,\17\ to distinguish between manual and automated quotations,\18\ the Commission declined to set such a standard.\19\ Instead, in interpreting the term ``immediate[ ]'' when adopting Rules 600 and 611, 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 respect to a quotation.'' \20\ --------------------------------------------------------------------------- \16\ See infra note 23 and accompanying text (discussing the exception in Rule 611(b)(1) for small unintentional delays). \17\ A millisecond is one thousandth of a second. \18\ See Regulation NMS Adopting Release, supra note 1, at 37519. \19\ See id. at 37519 (``The definition of automated quotation as adopted does not set forth a specific time standard for responding to an incoming order.''). \20\ Id. at 37534. The Commission also stated 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.'' Id. at 37519. Further, 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. --------------------------------------------------------------------------- The only precise time standards approved by the Commission in Rule 611 and the Regulation NMS Adopting Release arise in the context of two exceptions to Rule 611 covering circumstances in which trade-through protection would not apply. These exceptions illustrate the time dimensions the Commission had in mind in distinguishing quotations that should receive trade-through protection from those that should not, and notably, both use a one-second standard.\21\ Specifically, Rule 611(b)(1) provides that trading centers may trade through quotations of automated trading centers that experience a ``failure, material delay, or malfunction.'' \22\ The Commission accepted that the ``immediate'' standard necessarily would accommodate unintentional delays below the threshold of a ``material delay,'' which it interpreted in light of ``current industry conditions'' as one where a market was ``repeatedly failing to respond within one second after receipt of an order.'' \23\ The Commission similarly established a one-second standard for the exception in Rule 611(b)(8), which excepts trade-through protection 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.\24\ 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.'' \25\ In adopting these exceptions to Rule 611, the Commission contemplated the existence of very short unintentional delays of a magnitude up to one second that would not affect the protected status of an ``immediate'' automated quotation. Since then, the market and the technology have evolved. --------------------------------------------------------------------------- \21\ See 17 CFR 242.611(b)(1) and (8); see also Regulation NMS Adopting Release, supra note 1, at 37519 (discussing the one-second standard in Rule 611(b)(1)) and id. at 37523 (discussing the one- second standard in Rule 611(b)(8)). One second is 1,000,000 microseconds. \22\ 17 CFR 242.611(b)(1). \23\ See Regulation NMS Adopting Release, supra note 1, at 37519. In other words, the Commission viewed the phrase ``fastest response possible'' as consistent with an unintentional delay of less than one second whereby participants could consider an automated trading center experiencing a delay beyond that limit to no longer be ``immediately'' accessible. \24\ See 17 CFR 242.611(b)(8). \25\ Regulation NMS Adopting Release, supra note 1, at 37523. --------------------------------------------------------------------------- B. The Commission's Updated Interpretation of Automated Quotation The Commission proposed 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.'' \26\ The Commission further stated its preliminary belief ``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.'' \27\ As discussed below, the Commission received a number of comments on its proposed interpretation and, after considering those comments, has determined to issue a revised interpretation from that which it originally proposed, as detailed further below. --------------------------------------------------------------------------- \26\ Securities Exchange Act Release No. 77407 (March 18, 2016), 81 FR 15660, 15661 (March 24, 2016) (S7-03-16) (``Notice of Proposed Interpretation''). Because IEX's POP/coil delay is designed purposefully and intentionally to delay access to its matching engine, and consequently delays access to IEX's displayed quotation (See Letter from Sophia Lee, IEX, to Brent J. Fields, Secretary, Commission, dated November 13, 2015 (``IEX First Form 1 Letter'') at 4 (comment letter on File No. 10-222)), IEX would not be an automated market under the interpretation of ``immediate'' in the Regulation NMS Adopting Release as ``[t]he term `immediate' precludes any coding of automated systems or other type of intentional device that would delay the action taken with respect a quotation.'' Regulation NMS Adopting Release, supra note 1, at 37534. \27\ Notice of Proposed Interpretation, supra note 26, at 15665. --------------------------------------------------------------------------- II. Comments Received and Commission Discussion The Commission received 24 comments \28\ on its proposed [[Page 40788]] interpretation.\29\ Commenters raised a number of issues, including whether intentional sub-millisecond delays are in fact de minimis or would materially complicate market structure, as well as requests to clarify the scope and details of the interpretation. --------------------------------------------------------------------------- \28\ See Letters (``Interp Letter(s)'') from Rajiv Sethi to Brent J. Fields, Secretary, Commission, dated March 21, 2016; Stacius Sakato to Brent J. Fields, Secretary, Commission, dated March 28, 2016; David Lauer, Healthy Markets Association, to Brent J. Fields, Secretary, Commission, dated April 1, 2016; Hazel Henderson, Ethical Markets Media, to Brent J. Fields, Secretary, Commission, dated April 1, 2016; R.T. Leuchtkafer to Brent J. Fields, Secretary, Commission, dated April 8, 2016; Sal Arnuk and Joe Saluzzi, Themis Trading, to Brent J. Fields, Secretary, Commission, dated April 12, 2016; R. Glenn Hubbard, John L. Thornton, and Hal S. Scott, Committee on Capital Markets Regulation, to Brent J. Fields, Secretary, Commission, dated April 14, 2016; Mary Ann Burns, FIA Principal Traders Group, to Brent J. Fields, Secretary, Commission, dated April 14, 2016; William J. Stephenson, Franklin Templeton Investments, to Brent J. Fields, Secretary, Commission, dated April 14, 2016; John Nagel, Citadel, to Brent J. Fields, Secretary, Commission, dated April 14, 2016; Eric Budish to Brent J. Fields, Secretary, Commission, dated April 14, 2016; Bryan Thompson, British Columbia Investment Management Corporation, to Brent J. Fields, Secretary, Commission, dated April 14, 2016; Adam Nunes, Hudson River Trading (``HRT''), to Brent J. Fields, Secretary, Commission, dated April 14, 2016; William R. Harts, Modern Markets Initiative, to Brent J. Fields, Secretary, Commission, dated April 14, 2016; Joan C. Conley, Nasdaq, to Brent J. Fields, Secretary, Commission, dated April 14, 2016; D. Keith Ross, PDQ Enterprises, to Brent J. Fields, Secretary, Commission, dated April 15, 2016; David Weisberger, Markit, to Brent J. Fields, Secretary, Commission, dated April 18, 2016; Elizabeth K. King, NYSE, to Brent J. Fields, Secretary, Commission, dated April 18, 2016; Kevin J. Weldon to Brent J. Fields, Secretary, Commission, dated April 20, 2016; Sophia Lee, IEX, to Brent J. Fields, Secretary, Commission, dated April 25, 2016; Abraham Kohen, AK Financial Engineering Consultants, to Brent J. Fields, Secretary, Commission, dated April 25, 2016; Theodore R. Lazo, SIFMA, to Brent J. Fields, Secretary, Commission, dated May 2, 2016; The Honorable Randy Hultgren to Mary Jo White, Commission, dated May 2, 2016; Amir C. Tayrani, Gibson, Dunn & Crutcher LLP to Brent J. Fields, Secretary, Commission, dated May 19, 2016. \29\ As discussed and summarized in the Commission's notice of its proposed interpretation, the Commission also received comments on the issue addressed by this interpretation in response to the initial notice of IEX's Form 1. See Notice of Proposed Interpretation, supra note 26, at 15660, 15663-64. Those comments are also discussed in the Commission's order approving IEX's Form 1 application for exchange registration, which the Commission is separately issuing today. See IEX Form 1 Approval Order, supra note 4. --------------------------------------------------------------------------- A. De minimis for Purposes of Rule 611 Several commenters questioned whether de minimis intentional delays were permissible and whether delays of less than a millisecond could be considered de minimis in the current market. One commenter asserted that any intentional delay, even a de minimis one, ``is flatly inconsistent with the plain meaning of `immediate[ ],' '' \30\ referring to the dictionary definition of that term as `` `[o]ccurring without delay' or `instant'.'' \31\ Another commenter asserted that ``[o]ne millisecond is not de minimis in any context except from the perspective of a human trader'' and noted that a millisecond ``is over 10 times longer than the response time of most exchanges today.'' \32\ The commenter believed that sub-millisecond delays would ``impair a market participant's ability to access a quote.'' \33\ Another commenter argued that a millisecond is ``excessively long when compared to computer response times.'' \34\ One commenter believed that a sub- millisecond standard ``will become obsolete at faster and faster rates'' as communications technology evolves.\35\ --------------------------------------------------------------------------- \30\ Gibson Dunn Interp Letter at 3. \31\ Gibson Dunn Interp Letter at 2 (citing to Black's Law Dictionary and Webster's Third New International Dictionary). \32\ HRT Interp Letter at 2. The commenter further noted that one millisecond is ``approximately three times the time via fiber between the furthest New Jersey data centers and approximately \1/ 8\th the time to Chicago via fiber from the New Jersey datacenters.'' Id. at 2-3. \33\ HRT Interp Letter at 2. This commenter also cited to the Commission's MIDAS data from the fourth quarter of 2015, which showed that over 13% of displayed orders in large stocks are cancelled within one millisecond and over 9% of displayed orders in large stocks are executed within one millisecond, and concluded that ``[g]iven that over 20% of orders are either executed or canceled during the first millisecond they were displayed, it seems likely that a one millisecond delay would have a material impact on a participant's ability to access the quotations.'' See id. The commenter qualified its observation by noting that these figures are relevant ``[t]o the extent that a market with similar order cancellation patterns implemented a one millisecond delay.'' See id. The commenter also recommended that an exchange that imposes an intentional delay ``allow market participants to bypass the delay when attempting to access `protected quotations'.'' Id. at 1-2. See also Citadel Interp Letter at 4 (``A time interval in which approximately 10% of executions in many of the most widely traded stocks typically occur is manifestly not de minimis.''); NYSE Interp Letter at 7. The Commission notes that it is not clear whether an exchange with an access delay that does not offer features (like co- location, post-only orders, or maker-taker fees) that typically attract latency-sensitive traders, who may be more likely to cancel their orders within one millisecond of placing them, would experience those cancellation rates. Further, the Commission notes that Rule 611 focuses on inter-market order protection, which applies only when market participants access protected quotations at geographically dispersed trading centers that are already subject to varying processing delays, some of which may be a millisecond or more. A one millisecond intentional access delay is well within the current geographic and technological latencies already experienced by market participants when routing orders between trading centers. \34\ FIA PTG Interp Letter at 3. The commenter further noted that ``[f]or comparison, modern exchange matching engines process orders in considerably less than \1/20\ of that time, and geographic latencies between the major exchange data centers in New Jersey are generally less than \1/4\ of that time.'' Id. See also Nasdaq Interp Letter at 6 (noting that the throughput time of Nasdaq's system is 40 microseconds); Kohen Interp Letter at 1 (noting that the Bombay Stock Exchange processes a transaction in 6 microseconds). \35\ See Nasdaq Interp Letter at 3. See also HRT Interp Letter at 3 (noting that ``a one millisecond time standard . . . is already obsolete''); FIA PTG Interp Letter at 6 (``One millisecond is slow by today's computer standards, and will be even slower (relatively speaking) in the future.''). Some commenters criticized the proposed interpretation as lacking empirical support for a sub-millisecond threshold or consideration of alternative delays. See Nasdaq Interp Letter at 4; Citadel Interp Letter at 3; Budish Interp Letter at 2. As discussed above, the Commission notes that the interpretation uses a de minimis standard, and not a specific time frame demarcating permissible versus impermissible access delays. --------------------------------------------------------------------------- Other commenters expressed concern that intentional access delays, even de minimis ones, could add unnecessary complexity to the markets. In particular, the commenters stressed that such delays could cause orders to be routed to protected quotes that are no longer available. For example, one commenter expressed concern that the proposed interpretation could turn the national market system ``into a hall of mirrors where it's impossible to know which prices are real and which are latent reflections.'' \36\ The commenter opined that intentional access delays would ``harm market transparency and degrade the value of the NBBO'' and ``lead directly to lower fill rates'' when orders cannot be filled because the exchange with an access delay displays a stale better-priced quote that no longer exists but has yet to communicate that information.\37\ Another commenter argued that the interpretation could make market structure ``considerably more complex'' and lead to ``ghost quotes'' that could ``cloud price discovery and corrode execution quality.'' \38\ The commenter further noted that ``an artificial delay in an exchange quote anywhere affects the markets everywhere'' and expressed concern that the proposed interpretation could negatively impact otherwise efficient and accessible markets.\39\ One commenter expressed concern that intentional delays might ``open the floodgates to a new wave of complex order types'' with delays ranging from 1 to 1,000 microseconds.\40\ Other commenters, however, opined that intentional access delays would not add complexity to the markets and would fit within current latencies experienced by trading centers. For example, one commenter asserted that a 350 microsecond delay is ``not much more than the normal latency that all trading platforms impose,'' and that an exchange could achieve the same delay by ``locat[ing] its primary data center 65 or more miles away from the other exchange data centers.'' \41\ --------------------------------------------------------------------------- \36\ FIA PTG Interp Letter at 2. \37\ FIA PTG Interp Letter at 5. The commenter argued that this might result in the appearance of more locked and crossed markets, which may interfere with market stability during periods of high volatility. See id. \38\ PDQ Interp Letter at 1. \39\ Id. at 2. \40\ Nasdaq Interp Letter at 3-4; Gibson Dunn Interp Letter at 7. \41\ Letter from James J. Angel to Securities and Exchange Commission, dated December 5, 2015, at 3 (comment letter on IEX Form 1, File No. 10-222). See also Letter from Larry Tabb, TABB Group, to Brent J. Fields, Secretary, Commission, dated November 23, 2015, at 1 (comment letter on IEX Form 1, File No. 10-222) (arguing that IEX's 350 microsecond delay is not ``particularly problematic, as the time gap is minimal, and (even including the speed bump) IEX matches orders faster than a number of other markets''); Letter from Charles M. Jones to Brent Fields, Secretary, Commission, dated March 2, 2016, at 2 (comment letter on IEX Form 1, File No. 10-222) (noting that ``from an economic point of view the 350-microsecond delay [proposed by IEX] per se should not be a particular cause for concern, as it is well within the bounds of the existing, geographically dispersed National Market System, and does not seem likely to contribute substantially to a phantom liquidity problem''). --------------------------------------------------------------------------- In response to a comment that the dictionary definition of the term ``immediate[ ]'' precludes any delay in accessing quotations, the Commission notes that quotations cannot be accessed [[Page 40789]] instantaneously.\42\ As the Commission repeatedly acknowledged when adopting Regulation NMS, even ``immediately'' accessible protected quotations in the context of Rules 600 and 611 are necessarily subject to some delay.\43\ Specifically, as noted above, the Regulation NMS Adopting Release discussed these delays and, although the Commission declined to set a specific time standard, it contemplated the existence of very short unintentional delays of a magnitude up to one second in the exceptions to Rule 611. --------------------------------------------------------------------------- \42\ See supra note 31 (citing to the Gibson Dunn Interp Letter). \43\ For example, the Rule 611(b)(1) exception refers to a ``material'' delay, which the Commission interpreted as one second or more. See Regulation NMS Adopting Release, supra note 1, at 37519. In addition, the comment letters on Regulation NMS expressed a multitude of views on the appropriate standard for assessing the accessibility of a protected quotation. See also supra text accompanying note 17 (noting that commenters on Regulation NMS who advocated for setting a specific time standard for automated quotations recommended a range of times from one second down to 250 milliseconds). --------------------------------------------------------------------------- The Commission notes that, when it adopted Regulation NMS in 2005, processing times were longer than they are now.\44\ Today, low latency technology permits trading decisions to be made in microseconds, and certain market participants use the fastest gateways and purchase co- location to compete to access quotations at those speeds.\45\ As discussed further below, however, even the fastest market participants today must access protected quotations on trading centers where there are delays of several milliseconds as a result of geography alone. In addition, trading centers today are attempting to address concerns with the fastest trading strategies by creating very small delays in accessing their quotations.\46\ The Commission does not agree that such efforts are incompatible with the Order Protection Rule. In the context of Regulation NMS, the term ``immediate'' does not preclude all intentional delays regardless of their duration, and such preclusion is not necessary to achieve the objectives of Rule 611. As long as any intentional delay is de minimis--i.e., does not impair fair and efficient access to an exchange's protected quotations--it is consistent with both the text and purpose of Rule 611. --------------------------------------------------------------------------- \44\ See supra text accompanying note 17 (noting that commenters on Regulation NMS who advocated for setting a specific time standard for automated quotations recommended a range of times from one second down to 250 milliseconds). \45\ Exchanges currently have delays within their systems, including access gateways of varying speeds as well as within their co-location infrastructure. For example, some exchanges intentionally employ a ``delay coil'' in their co-location facilities or offer different access gateways of varying speeds where one is not as ``fast as technologically feasible'' as the other. See IEX First Form 1 Letter at 3 (comment letter on File No. 10-222) (referring to varying connectivity options offered by exchanges from the NYSE, Nasdaq, and BATS groups, and citing the CEO of Nasdaq referring to the intentional ``delay coil'' that Nasdaq uses inside its co-location infrastructure). Compare Gibson Dunn Interp Letter at 3 (writing on behalf of Nasdaq) (stating ``the term `immediate[]' in Rule 600(b)(3) unambiguously forecloses intentional, planned delay'' and referring to ``the Commission's own understanding that the term [immediately] requires response times that are as fast as technologically feasible''). \46\ See, e.g., supra note 45 (discussing intentional delays imposed in the exchange co-location context). --------------------------------------------------------------------------- In response to commenters that argued that an intentional de minimis delay would harm market transparency, degrade the NBBO, or cloud price discovery, the Commission notes, as discussed further below, that Rule 600(b)(3)(v) requires trading centers to immediately update their displayed quotations to reflect material changes. Market participants today already necessarily experience very short delays in receiving updates to displayed quotations, as a result of geographic and technological latencies, similar to those experienced when accessing protected quotations. The Commission does not believe the introduction of intentional delays of even smaller magnitude will impair fair and efficient access to protected quotations. In response to commenters' concern that an intentional delay is not de minimis or could add complexity to the market, the Commission notes that its interpretation does not address whether delays are de minimis in all trading contexts, but rather only whether they impair fair and efficient access to an exchange's quotations when a market participant routes an order to comply with Rule 611. Systems processing and transit times, whether at the exchange, the market participant sending the order, or its agent, all create latencies in accessing protected quotations.\47\ Even the most technologically advanced market participants today encounter delays in accessing protected quotations of other ``away'' automated trading centers that either are transitory (e.g., as a result of message queuing) or permanent (e.g., as a result of physical distance). Furthermore, as noted above, any market participant co-located with the major exchanges' data centers in northern New Jersey necessarily encounters delays of 3-4 milliseconds--due to geography alone--in accessing the protected quotations of securities traded on the Chicago Stock Exchange's matching engine in Chicago.\48\ No commenter asserted that the periodic message queuing or minor systems-processing delays encountered at exchanges with protected quotations, or the time it takes to access the protected quotes of the Chicago Stock Exchange's Chicago facility, would, for example, materially undermine market quality or price transparency, or the efficiency of order routing or trading strategies.\49\ --------------------------------------------------------------------------- \47\ See supra note 34 (discussing comments on exchange processing times). \48\ Similarly, they would encounter delays in reaching other ``away'' exchanges located in other data centers. See, e.g., Letter from David Lauer, Healthy Markets Association, to Brent J. Fields, Secretary, Commission, dated November 6, 2015, at 4 (comment letter on IEX Form 1, File No. 10-222) (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)''); Letter from Sophia Lee, IEX, to Brent J. Fields, Secretary, Commission, dated November 23, 2016, at 4 and 7 (comment letter on IEX Form 1, File No. 10-222) (referring to 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''). \49\ From the perspective of a market participant based in New Jersey, classifying a New Jersey market with an intentional sub- millisecond delay as ``manual'' while classifying a Chicago market with geographic delay measured in multiple milliseconds as ``automated'' would be inequitable and would not further the goals of Regulation NMS. --------------------------------------------------------------------------- The Commission acknowledges that interpreting ``immediate'' to include an intentional de minimis access delay, because it would be additive, may increase the overall latency in accessing a particular protected quotation, albeit by a very small amount. Such delays may be a detectable difference for the most latency-sensitive market participants and could marginally impact the efficiency of some of their quoting and trading strategies, even if such intervals likely are immaterial to investors with less advanced trading technology or a longer-term investing horizon. But the Commission believes that just as the geographic and technological delays experienced today do not impair fair and efficient access to an exchange's quotations or otherwise frustrate the objectives of Rule 611, the addition of a de minimis intentional access delay is consistent with Rule 600(b)(3)'s ``immedia[cy]'' requirement.\50\ --------------------------------------------------------------------------- \50\ One commenter argued that there is ``no evidence of a need for a de minimis exception or that planned delays will benefit investors in any meaningful way.'' Gibson Dunn Interp Letter at 7. See also Nasdaq Interp Letter at 5. As discussed above, however, the Commission believes that its updated interpretation is warranted in light of technological and market developments and is consistent with the purposes of Rule 611. See also comments submitted on IEX's exchange registration (File No. 10-222), a number of which supported the intentional delay proposed by IEX. --------------------------------------------------------------------------- [[Page 40790]] Further, the Commission notes that its interpretation uses a de minimis standard specifically so that it may evolve with technological and market developments. As it did when it established the ``immediate'' standard, the Commission believes it remains appropriate to avoid ``specifying a specific time standard that may become obsolete as systems improve over time.'' \51\ As explained further below, the Commission's revised interpretation provides that the term ``immediate'' precludes any coding of automated systems or other type of intentional device that would delay the action taken with respect to a quotation unless such delay is de minimis in that it would not impair a market participant's ability to fairly and efficiently access a quote, consistent with the goals of Rule 611. --------------------------------------------------------------------------- \51\ Regulation NMS Adopting Release, supra note 1, at 37519. --------------------------------------------------------------------------- B. Operation of Access Delays Several commenters that expressed general concerns with an intentional access delay, even a de minimis one, expressed a particular concern with those that would be ``selectively'' applied (e.g., intentional delays that are applied to members but not to the exchange itself).\52\ In addition, several commenters asserted that the Commission's proposed interpretation was overbroad based on their belief that it would ``permit all sub-millisecond delays, regardless of how those delays operate, the reasoning and incentives behind the delays, or the impacts on the markets and investors.'' \53\ These commenters instead urged the Commission to ``evaluate each proposed delay, regardless of its duration, and specifically determine that it is designed and applied in a manner that is consistent with the purposes of the Exchange Act.'' \54\ Another commenter urged the Commission to ``take into account not just the length of the delay, but also its purpose.'' \55\ --------------------------------------------------------------------------- \52\ See, e.g., FIA PTG Interp Letter at 6; MMI Interp Letter at 1; Weldon Interp Letter at 1-2.; NYSE Interp Letter at 4; Citadel Interp Letter at 8; Markit Interp Letter at 2-3. \53\ Healthy Markets Interp Letter at 2. See also Ethical Markets Interp Letter at 2-3, Franklin Templeton Interp Letter, British Columbia Investment Management Corporation Interp Letter (each repeating the recommendation of the Healthy Markets Interp Letter); and Themis Interp Letter at 2. \54\ Healthy Markets Interp Letter at 3. See also Ethical Markets Interp Letter at 2-3, Franklin Templeton Interp Letter, and British Columbia Investment Management Corporation Interp Letter (each repeating the recommendation of the Healthy Markets Interp Letter). The commenters further urged that the interpretation be conditioned on: (1) Delays always being less than one millisecond; (2) delays being applied equally to all participants and across all order types; (3) data sent to the Securities Information Processors should not be delayed; and (4) the purpose of each delay is expressly stated and intended to benefit long-term investors. See Healthy Markets Interp Letter at 4. See also Ethical Markets Interp Letter at 2-3, Franklin Templeton Interp Letter, and British Columbia Investment Management Corporation Interp Letter (each repeating the recommendation of the Healthy Markets Interp Letter). Another commenter raised a similar concern, and urged the Commission to review each proposed access delay separately and ``ensure that any such delays are equally applied to all market participants.'' See Committee on Capital Markets Regulation Interp Letter at 2. One commenter urged the Commission to consider ``one single measuring stick: Will the proposed delay serve long term investors?'' Themis Interp Letter at 2. \55\ Sethi Interp Letter at 2 (emphasis in original). Another commenter suggested an alternative definition of ``immediate'' that is not ``elapsed-time dependent'' but instead would consider an exchange's response to an incoming order to be ``immediate'' if the transition of the displayed quote from point A (before the order is received) to B (after the order is received) can be ``fully attributed to the execution of [the order] in a determinative way.'' Sakato Interp Letter at 1-2. The Commission believes that at this time an order-by-order determination of whether a quotation is ``protected'' could introduce unworkable complexity into order routing and could frustrate the incentive provided to market participants to post the resting displayed limit orders that underpin much of the price discovery in the market. --------------------------------------------------------------------------- The Commission notes that this interpretation does not address whether any particular access delay is unfairly discriminatory, an inappropriate or unnecessary burden on competition, or otherwise inconsistent with the Act. Rather, it clarifies that if an intentional access delay is de minimis, then it is ``immediate'' for purposes of Rules 600(b)(3) and 611. While the Commission's interpretation is narrowly focused on the meaning and application of the word ``immediate[ ]'' in Rule 600(b)(3) in light of technological and market developments since the adoption of Regulation NMS in 2005, the evaluation of any proposed access delay would involve additional considerations. Specifically, this interpretation does not obviate the requirement of individualized review of proposed access delays, including de minimis delays, for consistency with the Exchange Act and Regulation NMS. Any exchange seeking to impose an access delay must reflect that in its rules, which are required to be filed with the Commission as part of the exchange application or as an individual proposed rule change. This interpretation does not alter the requirement that any exchange access delay must be fully described in a written rule of the exchange, which in turn must be filed with the Commission and published for notice and comment, nor does it obviate the need for a proposed rule change that would impose an access delay otherwise to comply with the Act and the regulations thereunder applicable to the exchange.\56\ Accordingly, the commenters' concerns and recommended conditions are addressed by the existing requirements and process through which exchanges publicly propose their rule changes under the Act, and each proposed access delay would be scrutinized on an individual basis through that process.\57\ Any proposed application of an access delay would therefore be subject to notice, comment, and the Commission's separate evaluation of the proposed rule change.\58\ --------------------------------------------------------------------------- \56\ Only registered exchanges and associations can have ``automated quotations'' that are ``protected quotations.'' See 17 CFR 242.611(b)(57). Such entities are required by Section 19 of the Act to file all rules and proposed changes to their rules with the Commission so that the Commission can review and publish them for public notice and comment. See 15 U.S.C. 78s(b). Further, no proposed rule change can take effect unless approved by the Commission or otherwise permitted to become effective under the Act and rules thereunder. See id. Similarly, an applicant seeking to register as an exchange is required to file all proposed rules with the Commission on Form 1, which the Commission publishes for notice and comment. Once filed, the Commission evaluates each proposed rule change for consistency with the Act and the rules thereunder. An access delay would constitute a ``rule'' of an exchange because it would be a ``stated policy, practice, or interpretation'' that concerns a ``material aspect'' of the operation of an exchange, and thus any new or amended delay would require a filing. See 15 U.S.C. 78c(a)(27) (defining ``rules of an exchange''); 17 CFR 240.19b- 4(a)(6) (defining ``stated policy, practice, or interpretation''); 17 CFR 240.19b-4 (noting that a stated policy, practice, or interpretation is deemed to be a proposed change unless it is fairly and reasonably implied by an existing rule or is concerned solely with the administration of the exchange). As required by Section 19(b) of the Act, Rule 19b-4, and Form 19b-4, such exchange would be required to, among other things, detail the purpose of the proposed delay and analyze how the delay is consistent with the Act, including the Section 6 standards governing, among other things, unfair discrimination, protection of investors and the public interest, inappropriate burdens on competition, and just and equitable principles of trade. See Section 19(b), Rule 19b-4 and Form 19b-4 (on which exchanges file their proposed rule changes). \57\ See Citadel Interp Letter at 6-7 (acknowledging that new access delays would need to be filed with the Commission before they can be implemented, but expressing concern that it would ``be exceedingly difficult for the staff to recognize all of the implications and impacts of each delay mechanism''). \58\ In the case of IEX, the Commission's separate order approving IEX's Form 1 addresses the POP/coil delay's consistency with the Act. See also SIFMA Interp Letter at 3 (recommending that ``any intentional delay should be predictable and universally applied to all market participants in a non-discriminatory manner''). --------------------------------------------------------------------------- [[Page 40791]] C. Other Comments A few commenters asked the Commission to provide more detail on the application of the proposed interpretation.\59\ For example, one commenter asked whether it applies to both inbound and outbound delays and whether it should be based on the exchange's fastest or slowest means of connecting.\60\ Other commenters asked how much variance will be permitted and whether unintentional delays also should be covered by the interpretation.\61\ --------------------------------------------------------------------------- \59\ See, e.g., HRT Interp Letter at 3; Nasdaq Interp Letter at 3. \60\ See HRT Interp Letter at 3. See also Citadel Interp Letter at 9. \61\ See, e.g., Citadel Interp Letter at 9-10. One commenter asked whether there would be a process to remove protected quotation status from an exchange that has an intentional delay that equals or exceeds one millisecond. See id. at 10. If any market participant experiences issues in accessing that exchange's quotation, it may consider the applicability of the exceptions specified in Rule 611(b), including the ``material delay'' condition of Rule 611(b)(1). See 17 CFR 242.611(b)(1). The Commission notes that the Rule 611(b)(1) ``self-help'' exception refers to a ``material delay,'' and 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.'' See Regulation NMS Adopting Release, supra note 1, at 37519. --------------------------------------------------------------------------- The interpretation of ``immediate'' applies to the term as used in Rule 600(b)(3), so that it applies to any intentional delay imposed by an exchange through any means provided by the exchange to access its quotations. Further, as modified here from the proposed interpretation, the interpretation applies only to intentional delays, as unintentional delays are addressed by the existing exception contained in Rule 611(b)(1).\62\ Finally, in response to the commenters asking if both inbound and outbound delays should be taken into account when measuring the length of an intentional delay, the Commission notes that the intentional delay, as it pertains to the Order Protection Rule, is measured as a cumulative delay experienced by a non-routable order--in other words, the intentional delay applied on an order message sent into an exchange system through each of the events specified in the definition of ``automated quotation'' in Rule 600(b)(3). Specifically, any intentional delay imposed by the exchange in (1) executing an immediate-or-cancel order against its displayed quotation up to its full size, (2) cancelling any unexecuted portion of such order, or (3) transmitting a response to the sender of such order, should be added together in assessing compliance with Rule 611.\63\ --------------------------------------------------------------------------- \62\ See 17 CFR 242.611(b)(1). See also supra note 61 (discussing the self-help exception). Accordingly, the Commission is not including as part of the interpretation the phrase ``whether intentional or not'' to focus its interpretation on access delays that are intentional. While the Commission acknowledges that the one-second (i.e., 1,000,000 microseconds) interpretation included in the Regulation NMS Adopting Release for this exception, as well as the ``one second'' exception in Rule 600(b)(8), may warrant reconsideration in the future, that would be a separate analysis and the Commission is not addressing those exceptions in this interpretation. See also SIFMA Interp Letter at 4 (requesting that the Commission clarify that it is not changing the self-help threshold). \63\ See 17 CFR 242.600(b)(3)(ii), (iii), and (iv), respectively. See also Regulation NMS Adopting Release, supra note 1, at 37534. In the case of IEX, the POP/coil delay imposes a 350 microsecond delay inbound to the matching engine for non-routable orders (but no additional delay when cancelling the unexecuted portion of the order) and a 350 microsecond delay outbound on the confirmation back to the order sender, for a cumulative 700 microsecond delay. In addition, the Commission notes that IEX permits incoming orders to be marked as immediate-or-cancel, as is required by Rule 600(b)(3). See 17 CFR 242.600(b)(3)(i). One commenter argued that a delay in outbound data could cause the data reported to ``not accurately reflect the state of a quotation.'' See Gibson Dunn Interp Letter at 7. This commenter also asserted that intentional delays in communicating reports of transactions would decrease their ``informational value.'' See Gibson Dunn Interp Letter at 7; Nasdaq Interp Letter at 2. The Commission notes that the geographic and technological latencies that market participants experience when routing to access a quotation also affect data disseminated from the trading center to the market participant. In other words, market participants already experience latencies when receiving quotation updates and transaction information. At least with respect to delays well within those existing latencies, the Commission does not believe that a market participant's general experience in receiving this information is likely to be altered depending on whether the delay is intentional or unintentional. --------------------------------------------------------------------------- One commenter recommended that the Commission engage in notice and comment rulemaking to effect ``a change of this magnitude,'' which it argued contradicts the ``plain meaning of the term `immediate.' '' \64\ The commenter argued that an interpretation is only appropriate to ``provide guidance on how a new service or product not contemplated at the time a rule was adopted should be treated under existing rules.'' \65\ As discussed above, however, the Commission does not believe the dictionary definition of the term ``immediate[ ]'' forecloses de minimis intentional delays (i.e., intentional delays so short that they do not impair fair and efficient access to an exchange's quotations). The Commission is updating its prior interpretation in light of technological and market developments since the adoption of Regulation NMS in 2005 to accommodate very short intentional delays that do not impair fair and efficient access to protected quotations. Although the Commission did afford an opportunity for notice and comment by publishing a draft interpretation for comment, and did take the comments it received into consideration, the Commission was not required to undertake notice and comment rulemaking when updating its interpretation of its own regulation. --------------------------------------------------------------------------- \64\ Citadel Interp Letter at 1. See also Hultgren Interp Letter at 1; Gibson Dunn Interp Letter at 1-2. \65\ Citadel Interp Letter at 2-3. --------------------------------------------------------------------------- Other commenters focused on what they viewed as a potential opportunity for manipulative activity that could result from an access delay to a market displaying a protected quotation. One commenter opined that an access delay would make it easier to manipulate markets ``by taking advantage of stale and inaccessible quotations displayed during the duration of any access delays,'' and that such manipulative behavior ``could be particularly powerful in relatively illiquid stocks.'' \66\ As an example, the commenter posited that a market participant could ``safely manipulate a closing auction by sending displayed orders to an exchange with an intentional 999 microsecond delay and timing the submission of those orders for display 998 microseconds or less before the close'' because ``no other market participant could reach them in time.'' \67\ Another commenter argued that access delays could lead to ``stale prices [that] are guaranteed to be displayed for a specific period of time up to 1 millisecond,'' which would cause pegged orders on other exchanges to ``be traded against at known stale prices'' when such pegged order is pegged to the stale price on the exchange with the access delay.\68\ The commenter argued that this could lead to ``a potentially new mechanism for spoofing . . . with the objective of affecting pegged orders on other exchanges.'' \69\ --------------------------------------------------------------------------- \66\ Id. at 6. \67\ Id. \68\ NYSE Interp Letter at 8. See also Citadel Interp Letter at 8 (arguing that ``every time market prices tick up or down, the NBBO would be incorrect for at least the duration of any intentional delays'' which would lead some pegged orders to track at ``inaccurate prices''). \69\ NYSE Interp Letter at 8. See also HRT Interp Letter at 3 (citing to a comment from Instinet on IEX's Form 1 that discussed the potential for ``spoofing'' by entering an order, waiting for 700 microseconds, and cancelling the order without the risk of another market participant seeing or responding to it, but which could provide a false or misleading appearance that could affect the trading of other participants); FIA PTG Interp Letter at 7 (also citing to the Instinet letter). --------------------------------------------------------------------------- The Commission notes that the scenarios discussed by commenters are not related to the issue addressed by this interpretation--whether an intentional delay that is so short as not [[Page 40792]] to frustrate the goals of Rule 611 by interfering with fair and efficient access to an exchange's quotations is consistent with Rule 600(b)(3)'s ``immedia[cy]'' requirement.\70\ If a delay is de minimis, then whether it is unintentional or intentional in nature is not expected to alter the potential for manipulative activity or make it harder to detect and prosecute. One commenter noted that it is important ``to contemplate and address the potential for abuse'' \71\ when an access delay is proposed and approved. The Commission agrees that such scrutiny--both by the exchange proposing an access delay, and by the Commission when considering whether to approve a proposed access delay rule--would be important. The Commission notes that, pursuant to Section 19(b) and Rule 19b-4, the proposing exchange would be required to consider and address in its rule change filing the potential for abuse of any proposed access delay, which would then be subject to notice, comment, and Commission review. Further, even after the rule change became effective, the Commission believes it would be incumbent on the exchange to remain vigilant in surveilling for abuses and violative conduct of its access delay rule, and consider amending its access delay if necessary, among other considerations, for the protection of investors and the public interest.\72\ --------------------------------------------------------------------------- \70\ Nevertheless, the Commission believes that the scenarios discussed by commenters would, as a practical matter, be difficult to implement. For example, in the closing auction scenario, the Commission believes it would be practically difficult to successfully implement a coordinated single-digit microsecond strategy during a broad-based auction because of the precision it would require to ensure order arrival at the final microsecond and not have it trade with a multitude of other interest in the auction. Further, concerns surrounding pegged orders on away markets would affect only the most latency sensitive traders and only apply when the exchange with the access delay is alone at the NBBO, has exhausted all displayed and non-displayed interest at its best price, and is in the process of transitioning to a new price. However, that possibility is not uniquely introduced by an exchange with an access delay, but is currently present in a fragmented market with geographically dispersed venues. For example, the same problem (only exacerbated with considerably more latency) would be present if the Chicago Stock Exchange was alone at the NBBO on a symbol it trades from Chicago. \71\ HRT Interp Letter at 3. \72\ See 15 U.S.C. 78s(g)(1). --------------------------------------------------------------------------- III. Commission's Interpretation In response to technological and market developments since the adoption of Regulation NMS,\73\ the Commission believes that it is appropriate to provide an updated interpretation of the meaning of the term ``immediate'' in Rule 600(b)(3). --------------------------------------------------------------------------- \73\ 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; see also Securities Exchange Act Release No. 76474 (November 18, 2015), 80 FR 80997, 81000 (December 28, 2015) (Regulation of NMS Stock Alternative Trading Systems; Proposed Rule) (stating that ``[t]he growth in trading centers and trading activity has been fueled primarily by advances in technology for generating, routing, and executing orders'' and that ``[t]hese technologies have markedly improved the speed, capacity, and sophistication of the trading mechanisms and processes that are available to market participants''). --------------------------------------------------------------------------- Solely in the context of determining whether a trading center maintains an ``automated quotation'' for purposes of Rule 611 of Regulation NMS, the Commission does not interpret the term ``immediate'' used in Rule 600(b)(3) by itself to prohibit a trading center from implementing an intentional access delay that is de minimis--i.e., a delay so short as to not frustrate the purposes of Rule 611 by impairing fair and efficient access to an exchange's quotations. Accordingly, the Commission's revised interpretation provides that the term ``immediate'' precludes any coding of automated systems or other type of intentional device that would delay the action taken with respect to a quotation unless such delay is de minimis. The Commission's updated interpretation recognizes that a de minimis access delay, even if it involves an ``intentional device'' that delays access to an exchange's quotation, is compatible with the exchange having an ``automated quotation'' under Rule 600(b)(3) and thus a ``protected quotation'' under Rule 611.\74\ Under this interpretation, Rule 600(b)(3)'s ``immedia[cy]'' requirement does not necessarily foreclose an automated trading center's use of very small intentional delays to address concerns arising from low latency trading strategies and other market structure issues. For example, intentional access delays that are well within the geographic and technological latencies experienced by market participants when routing orders are de minimis to the extent they would not impair a market participant's ability to access a displayed quotation consistent with the goals of Rule 611. --------------------------------------------------------------------------- \74\ 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. --------------------------------------------------------------------------- The interpretation does not change the existing requirement that, prior to being implemented, an intentional delay of any duration must be fully disclosed and codified in a written rule of the exchange that has become effective pursuant to Section 19 of the Act, where the exchange met its burden of articulating how the purpose, operation, and application of the delay is consistent with the Act and the rules and regulations thereunder applicable to the exchange.\75\ --------------------------------------------------------------------------- \75\ As discussed above, any exchange that seeks to impose an intentional access delay must first file a proposed rule change with the Commission, which the Commission would publish for notice and comment, and approve only after finding that it is consistent with the applicable standards set forth in the Act. For example, a proposed access delay that is only imposed on certain market participants or certain types of orders would be scrutinized to determine whether or not the discriminatory application of that delay is unfair. See, e.g., Securities Exchange Act Release No. 77406, 81 FR 15765 (March 24, 2016) (File No. 10-222) (order instituting proceedings on IEX's Form 1) (discussing the potentially unfairly discriminatory application of an access delay to advantage an affiliated outbound routing broker). If the Commission cannot find that a proposed access delay is consistent with the Act, it would disapprove the proposal, rendering moot the issue of whether a quotation with such a delay is protected. Generally, the Commission would be concerned about access delays that were imposed only on certain market participants or intentional access delays that were relieved based upon payment of certain fees. --------------------------------------------------------------------------- In the Notice of Proposed Interpretation, the Commission stated its preliminary belief ``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.'' \76\ As discussed above, the Commission received a number of comments on that specific guidance. --------------------------------------------------------------------------- \76\ Notice of Proposed Interpretation, supra note 26, at 15665. --------------------------------------------------------------------------- At this time, the Commission is not adopting the proposed guidance under this interpretation that delays of less than one millisecond are de minimis. The Commission believes that, in light of the evolving nature of technology and the markets, and the need to assess the impact of intentional access delays on the markets, establishing a bright line de minimis threshold is not appropriate at this time. Rather, the Commission [[Page 40793]] believes that the interpretation is best focused on whether an intentional delay is so short as to not frustrate the purposes of Rule 611 by impairing fair and efficient access to an exchange's quotations. As it makes findings as to whether particular access delays are de minimis in the context of individual exchange proposals,\77\ the Commission recognizes that such findings create common standards that must be applied fairly and consistently to all market participants. --------------------------------------------------------------------------- \77\ See supra note 56 (discussing the proposed rule change process under the Exchange Act). See also IEX Form 1 Approval Order, supra note 4. --------------------------------------------------------------------------- The Staff will also conduct a study within two years regarding the effects of intentional access delays on market quality, including price discovery and report back to the Commission with the results of any recommendations. Based on the results of that study or earlier as it determines, the Commission will reassess whether further action is appropriate. List of Subjects in 17 CFR Part 241 Securities. Text of Amendments For the reasons set out in the preamble, the Commission is amending Title 17, chapter II, of the Code of Federal Regulations as follows: PART 241--INTERPRETATIVE RELEASES RELATING TO THE SECURITIES EXCHANGE ACT OF 1934 AND GENERAL RULES AND REGULATIONS THEREUNDER Part 241 is amended by adding Release No. 34-78102 to the list of interpretative releases as follows: ---------------------------------------------------------------------------------------------------------------- Federal Register vol. Subject Release No. Date and page ---------------------------------------------------------------------------------------------------------------- * * * * * * * Interpretation Regarding Automated 34-78102 June 17, 2016.................. 121 FR [Insert FR Page Quotations Under Regulation NMS. Number]. ---------------------------------------------------------------------------------------------------------------- By the Commission. Dated: June 17, 2016. Robert W. Errett, Deputy Secretary. [FR Doc. 2016-14876 Filed 6-22-16; 8:45 am] BILLING CODE 8011-01-P
![Federal Register / Vol. 81, No. 121 / Thursday, June 23, 2016 / Rules and Regulations 40785
and enforced by the responsible opportunity for public comment are not PART 748—[AMENDED]
designated departmental representatives required under the APA or by any other
to the End-User Review Committee. law, the analytical requirements of the ■ 1. The authority citation for part 748
Delaying this action’s effectiveness Regulatory Flexibility Act (5 U.S.C. 601 continues to read as follows:
would likely cause confusion regarding et seq.) are not applicable. As a result, Authority: 50 U.S.C. 4601 et seq.; 50
which items are authorized by the U.S. no final regulatory flexibility analysis is U.S.C. 1701 et seq.; E.O. 13026, 61 FR 58767,
Government and in turn stifle the required and none has been prepared. 3 CFR, 1996 Comp., p. 228; E.O. 13222, 66
purpose of the VEU Program. FR 44025, 3 CFR, 2001 Comp., p. 783; Notice
List of Subjects in 15 CFR Part 748 of August 7, 2015, 80 FR 48233 (August 11,
Accordingly, it is contrary to the public
interest to delay this rule’s effectiveness. Administrative practice and 2015).
No other law requires that a notice of procedure, Exports, Reporting and ■ 2. Amend Supplement No. 7 to part
proposed rulemaking and an recordkeeping requirements. 748 by revising the entry for ‘‘Advanced
opportunity for public comment be Accordingly, part 748 of the EAR (15 Micro Devices China, Inc.’’ in ‘‘China
given for this final rule. Because a CFR parts 730–774) is amended as (People’s Republic of)’’ to read as
notice of proposed rulemaking and an follows: follows:
SUPPLEMENT NO. 7 TO PART 748—AUTHORIZATION VALIDATED END-USER (VEU): LIST OF VALIDATED END-USERS,
RESPECTIVE ITEMS ELIGIBLE FOR EXPORT, RE-EXPORT AND TRANSFER, AND ELIGIBLE DESTINATIONS
Validated Eligible items Federal Register
Country Eligible destination
end-user (by ECCN) citation
Nothing in this Supplement shall be deemed to supersede other provisions in the EAR, including but not limited to § 748.15(c).
China (People’s Re- Advanced Micro 3D002, 3D003, 3E001 (limited to Advanced Micro Devices (Shanghai) 75 FR 25763, 5/10/10.
public of). Devices China, ‘‘technology’’ for items classified Co., Ltd., Buildings 33 (Unit 1), 46, 76 FR 2802, 1/18/11.
Inc. under 3C002 and 3C004 and ‘‘tech- 47, 48 & 49, River Front Harbor, 78 FR 3319, 1/16/13.
nology’’ for use during the Inter- Zhangjiang Hi-Tech Park, No. 1387 81 FR [INSERT PAGE NUMBER],
national Technology Roadmap for Zhang Dong Road, Pudong District, 6/23/16.
Semiconductors (ITRS) process for Shanghai, China 201203.
items classified under ECCNs AMD Technology Development (Bei-
3B001 and 3B002), 3E002 (limited jing) Co., Ltd., North and South
to ‘‘technology’’ for use during the Buildings, RaycomInfotech, Park
ITRS process for items classified Tower C, No. 2 Science Institute
under ECCNs 3B001 and 3B002), South Rd., Zhong Guan Cun,
3E003.e (limited to the ‘‘develop- Haidian District, Beijing, China
ment’’ and ‘‘production’’ of inte- 100190.
grated circuits for commercial appli-
cations), 4D001 and 4E001 (limited
to the ‘‘development’’ of products
under ECCN 4A003).
Nothing in this Supplement shall be deemed to supersede other provisions in the EAR, including but not limited to § 748.15(c).
AMD Products (China) Co. Ltd., North
and South Buildings,
RaycomInfotech Park Tower C, No.
2 Science Institute South Rd.,
Zhong Guan Cun, Haidian District,
Beijing, China 100190.
* * * * * * *
Dated: June 17, 2016. ACTION: Final interpretation. I. Background
Matthew S. Borman,
Deputy Assistant Secretary for Export SUMMARY: The Securities and Exchange Rule 611 of Regulation NMS provides
Administration. Commission is issuing a final intermarket protection against trade-
[FR Doc. 2016–14902 Filed 6–22–16; 8:45 am] interpretation with respect to the throughs for ‘‘automated’’ (as opposed
BILLING CODE 3510–33–P definition of automated quotation under to ‘‘manual’’) quotations of NMS stocks.
Rule 600(b)(3) of Regulation NMS. Under Regulation NMS, an ‘‘automated’’
quotation is one that, among other
DATES: Effective June 23, 2016. things, can be executed ‘‘immediately
SECURITIES AND EXCHANGE
FOR FURTHER INFORMATION CONTACT: and automatically’’ against an incoming
COMMISSION
Richard Holley III, Assistant Director, immediate-or-cancel order. The
17 CFR Part 241 Michael Bradley, Special Counsel, or Regulation NMS Adopting Release
asabaliauskas on DSK3SPTVN1PROD with RULES
Michael Ogershok, Attorney-Adviser, issued in 2005 makes clear that this
[Release No. 34–78102; File No. S7–03–16] formulation was intended to distinguish
Office of Market Supervision, at 202–
551–5777, Division of Trading and and exclude from protection quotations
Commission Interpretation Regarding
Markets, Securities and Exchange on manual markets that produced
Automated Quotations Under
Commission, 100 F Street NE., delays measured in seconds in
Regulation NMS
Washington, DC 20549–7010. responding to an incoming order,
AGENCY:Securities and Exchange because delays of that magnitude would
Commission. SUPPLEMENTARY INFORMATION: impair fair and efficient access to an
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![40786 Federal Register / Vol. 81, No. 121 / Thursday, June 23, 2016 / Rules and Regulations
exchange’s quotations.1 In the obligating other trading centers to honor exchange or national securities
Regulation NMS Adopting Release, the those ‘‘protected’’ quotations by not association.12
Commission interpreted the term executing trades at inferior prices, or In order for an exchange to operate as
‘‘immediate’’ to ‘‘preclude[ ] any coding ‘‘trading through’’ such best automated an ‘‘automated trading center,’’ it must,
of automated systems or other type of quotations.6 Only an exchange that is an among other things, have ‘‘implemented
intentional device that would delay the ‘‘automated trading center’’ 7 displaying such systems, procedures, and rules as
action taken with respect to a an ‘‘automated quotation’’ 8 is entitled to are necessary to render it capable of
quotation.’’ 2 this protection.9 Trading centers must displaying quotations that meet the
In light of the application of Investors’ establish, maintain, and enforce written requirements for an ‘automated
Exchange LLC (‘‘IEX’’) 3 to register as an policies and procedures that are quotation’ set forth in [Rule 600(b)(3) of
exchange and technological and market Regulation NMS].’’ 13 Rule 600(b)(3)
reasonably designed to prevent trade-
developments since the adoption of defines an ‘‘automated quotation’’ as
throughs of protected quotations, unless
Regulation NMS, the Commission one that:
decided to revisit this interpretation. an exception or exemption applies.10
i. Permits an incoming order to be
The Commission believes its prior There are several provisions in marked as immediate-or-cancel;
interpretation should be updated given Regulation NMS that impact whether ii. Immediately and automatically
technological and market developments the Order Protection Rule applies. First, executes an order marked as immediate-
since the adoption of Regulation NMS, Rule 600(b)(58) defines a ‘‘protected or-cancel against the displayed
in particular the emergence of low quotation’’ as a ‘‘protected bid or a quotation up to its full size;
latency trading strategies and related protected offer.’’ 11 Rule 600(b)(57), in iii. Immediately and automatically
technology that permit trading decisions turn, defines a ‘‘protected bid or cancels any unexecuted portion of an
to be made in microseconds, neither of protected offer’’ as a quotation in an order marked as immediate-or-cancel
which were contemplated by the NMS stock that is: (i) Displayed by an without routing the order elsewhere;
Commission or commenters in 2005.4 ‘‘automated trading center,’’ (ii) iv. Immediately and automatically
As further addressed below, the disseminated pursuant to an effective transmits a response to the sender of an
Commission now interprets national market system plan, and (iii) an order marked as immediate-or-cancel
‘‘immediate’’ in the context of ‘‘automated quotation’’ that is the best indicating the action taken with respect
Regulation NMS as not precluding a de bid or best offer of a national securities to such order; and
minimis intentional delay—i.e., a delay v. Immediately and automatically
so short as to not frustrate the purposes 6 See 17 CFR 242.611. When it adopted
displays information that updates the
of Rule 611 by impairing fair and Regulation NMS, the Commission explained that displayed quotation to reflect any
efficient access to an exchange’s one purpose of the Order Protection Rule was to change to its material terms.14
quotations.5 incentivize greater use of displayed limit orders, Any quotation that does not meet the
which contribute to price discovery and market requirements for an automated
A. Regulation NMS: Automated liquidity, by protecting them from trade-throughs.
See Regulation NMS Adopting Release, supra note quotation is defined in Rule 600(b)(37)
Quotation and Protected Quotation
1, at 37516–17. In discussing whether to apply as a ‘‘manual’’ quotation.15
In general, Rule 611 under Regulation order protection to non-automated, ‘‘manual’’
NMS (the ‘‘Order Protection Rule,’’ or quotations, the Commission stated that ‘‘providing 12 17 CFR 242.600(b)(57).
protection to manual quotations, even limited to
‘‘Trade-Through Rule’’) protects the best trade-throughs beyond a certain amount, potentially
13 17 CFR 242.600(b)(4). Rule 600(b)(4) contains
‘‘automated’’ quotations of exchanges by additional requirements that must be satisfied in
would lead to undue delays in the routing of order to be an automated trading center. Those
investor orders, thereby not justifying the benefits requirements are not at issue for purposes of this
1 See Securities Exchange Act Release No. 51808 of price protection.’’ Id. at 37518. The Commission interpretation.
(June 9, 2005) 70 FR 37496, 37500 & n.21, 37501 also noted that ‘‘those who route limit orders will 14 See 17 CFR 242.600(b)(3). See also Regulation
(June 29, 2005) (‘‘Regulation NMS Adopting be able to control whether their orders are protected
NMS Adopting Release, supra note 1, at 37504.
Release’’). The Commission notes that the smallest by evaluating the extent to which various trading 15 Regulation NMS Adopting Release, supra note
time increment suggested by commenters at the centers display automated versus manual
quotations.’’ Id. In addition, the Commission 1, at 37534. See also 17 CFR 242.600(b)(37)
time Regulation NMS was adopted was 250
intended that the Order Protection Rule would (defining ‘‘manual quotation’’). The Commission
milliseconds. See id. at 37518. See also infra note
reinforce a broker’s duty of best execution by also provided context as to the distinction between
15 (discussing the distinction between ‘‘automated
prohibiting executions at inferior prices absent an ‘‘automated quotations’’ and ‘‘manual quotations.’’
quotations’’ and ‘‘manual quotations’’ and noting
exception. See id. at 37516 (‘‘Given the large At the time of the adoption of Regulation NMS,
that ‘‘[t]he difference in speed between automated
number of trades that fail to obtain the best manual quotations and markets that primarily were
and manual markets often is the difference between
displayed prices (e.g., approximately 1 in 40 trades centered around human interaction in a floor-based
a 1-second response and a 15-second response
for both Nasdaq and NYSE stocks), the Commission trading environment, including ‘‘hybrid’’ manual-
. . . .’’).
2 See Regulation NMS Adopting Release, supra is concerned that many of the investors that automated trading facilities, experienced processing
ultimately received the inferior price in these trades delays for inbound orders that were measured in
note 1, at 37534. multiple seconds. See Regulation NMS Adopting
3 See Securities Exchange Act Release Nos. 75925 may not be aware that their orders did not, in fact,
obtain the best price. The Order Protection Rule Release, supra note 1, at 37500 n.21 (‘‘One of the
(September 15, 2015), 80 FR 57261 (September 22, primary effects of the Order Protection Rule
2015) (File No. 10–222) (original notice); and 77406 will backstop a broker’s duty of best execution on
an order-by-order basis by prohibiting the practice adopted today will be to promote much greater
(March 18, 2016), 81 FR 15765 (March 24, 2016) speed of execution in the market for exchange-listed
(File No. 10–222) (notice of amendments, order of executing orders at inferior prices, absent an
applicable exception.’’). stocks. The difference in speed between automated
instituting proceedings, and extension of time). and manual markets often is the difference between
7 See 17 CFR 242.600(b)(4). References to
4 IEX’s Form 1 includes an intentional access
a 1-second response and a 15-second response
delay that imposes 350 microseconds of one-way ‘‘exchange’’ used herein apply also to facilities of
. . . .’’). In contrast to floor-based and hybrid
latency for non-routable orders. IEX’s access delay national securities associations. See 17 CFR
markets that existed at the time Regulation NMS
242.600(b)(57).
asabaliauskas on DSK3SPTVN1PROD with RULES
is discussed in the Commission’s final order on was adopted, newer automated matching systems
8 See 17 CFR 242.600(b)(3).
IEX’s Form 1. See Securities Exchange Act Release coming more widely into use removed the human
9 See 17 CFR 242.600(b)(57) (defining ‘‘protected
No. 78101 (June 17, 2016) (File No. 10–222) (order element and instead immediately matched buyers
granting IEX’s exchange registration) (‘‘IEX Form 1 bid or protected offer’’) and 242.600(b)(58) (defining and sellers electronically. The Commission also
Approval Order’’). ‘‘protected quotation’’). See also Regulation NMS explained that the Order Protection Rule took a
5 See Regulation NMS Adopting Release, supra Adopting Release, supra note 1, at 37504 (stating substantially different approach to intermarket
note 1, at 37520 (noting that ‘‘[f]or a trading center that ‘‘[t]o qualify for protection, a quotation must price protection than the existing trade-through
to qualify as entitled to display any protected be automated’’). protection regime at the time—the Intermarket
10 17 CFR 242.611(a)(1).
quotations, the public in general must have fair and Trading System (‘‘ITS’’) Plan. See id. at 37501. As
efficient access to a trading center’s quotations’’). 11 17 CFR 242.600(b)(58). the Commission noted, the ITS provisions did not
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In adopting Regulation NMS, the Specifically, Rule 611(b)(1) provides stated its preliminary belief ‘‘that, in the
Commission recognized that there that trading centers may trade through current market, delays of less than a
would be unintentional time delays by quotations of automated trading centers millisecond in quotation response times
automated trading centers in responding that experience a ‘‘failure, material may be at a de minimis level that would
to orders, albeit very short ones.16 delay, or malfunction.’’ 22 The not impair a market participant’s ability
Although a number of commenters on Commission accepted that the to access a quote, consistent with the
Regulation NMS advocated for a specific ‘‘immediate’’ standard necessarily goals of Rule 611 and because such
time standard, ranging from one second would accommodate unintentional delays are within the geographic and
down to 250 milliseconds,17 to delays below the threshold of a technological latencies experienced by
distinguish between manual and ‘‘material delay,’’ which it interpreted in market participants today.’’ 27 As
automated quotations,18 the light of ‘‘current industry conditions’’ as discussed below, the Commission
Commission declined to set such a one where a market was ‘‘repeatedly received a number of comments on its
standard.19 Instead, in interpreting the failing to respond within one second proposed interpretation and, after
term ‘‘immediate[ ]’’ when adopting after receipt of an order.’’ 23 The considering those comments, has
Rules 600 and 611, the Commission Commission similarly established a one- determined to issue a revised
stated that ‘‘[t]he term ‘immediate’ second standard for the exception in interpretation from that which it
precludes any coding of automated Rule 611(b)(8), which excepts trade- originally proposed, as detailed further
systems or other type of intentional through protection where the trading below.
device that would delay the action taken center that was traded-through had
displayed, within the prior one second, II. Comments Received and
with respect to a quotation.’’ 20
The only precise time standards a price equal or inferior to the price of Commission Discussion
approved by the Commission in Rule the trade-through transaction.24 In The Commission received 24
611 and the Regulation NMS Adopting discussing the 611(b)(8) exception, the comments 28 on its proposed
Release arise in the context of two Commission stated that it ‘‘generally
exceptions to Rule 611 covering does not believe that the benefits would delays access to IEX’s displayed quotation (See
circumstances in which trade-through justify the costs imposed on trading Letter from Sophia Lee, IEX, to Brent J. Fields,
Secretary, Commission, dated November 13, 2015
protection would not apply. These centers of attempting to implement an (‘‘IEX First Form 1 Letter’’) at 4 (comment letter on
exceptions illustrate the time intermarket price priority rule at the File No. 10–222)), IEX would not be an automated
dimensions the Commission had in level of sub-second time increments. market under the interpretation of ‘‘immediate’’ in
mind in distinguishing quotations that Accordingly, Rule 611 has been the Regulation NMS Adopting Release as ‘‘[t]he
term ‘immediate’ precludes any coding of
should receive trade-through protection formulated to relieve trading centers of automated systems or other type of intentional
from those that should not, and notably, this burden.’’ 25 In adopting these device that would delay the action taken with
both use a one-second standard.21 exceptions to Rule 611, the Commission respect a quotation.’’ Regulation NMS Adopting
contemplated the existence of very short Release, supra note 1, at 37534.
27 Notice of Proposed Interpretation, supra note
distinguish between manual and automated unintentional delays of a magnitude up
quotations and ‘‘fail[ed] to reflect the disparate 26, at 15665.
to one second that would not affect the 28 See Letters (‘‘Interp Letter(s)’’) from Rajiv Sethi
speed of response between manual and automated
quotations’’ as they ‘‘were drafted for a world of
protected status of an ‘‘immediate’’ to Brent J. Fields, Secretary, Commission, dated
floor-based markets.’’ Id. As a result, ‘‘[b]y requiring automated quotation. Since then, the March 21, 2016; Stacius Sakato to Brent J. Fields,
order routers to wait for a response from a manual market and the technology have Secretary, Commission, dated March 28, 2016;
market, the ITS trade-through provisions can cause David Lauer, Healthy Markets Association, to Brent
evolved. J. Fields, Secretary, Commission, dated April 1,
an order to miss both the best price of a manual
quotation and slightly inferior prices at automated B. The Commission’s Updated 2016; Hazel Henderson, Ethical Markets Media, to
markets that would have been immediately Brent J. Fields, Secretary, Commission, dated April
Interpretation of Automated Quotation 1, 2016; R.T. Leuchtkafer to Brent J. Fields,
accessible.’’ Id. In addition, the Commission
emphasized that Rule 611 does not ‘‘supplant or The Commission proposed to Secretary, Commission, dated April 8, 2016; Sal
diminish’’ a broker-dealer’s duty of best execution. Arnuk and Joe Saluzzi, Themis Trading, to Brent J.
interpret ‘‘immediate’’ when Fields, Secretary, Commission, dated April 12,
See id. at 37538.
16 See infra note 23 and accompanying text
determining whether a trading center 2016; R. Glenn Hubbard, John L. Thornton, and Hal
(discussing the exception in Rule 611(b)(1) for small maintains an ‘‘automated quotation’’ for S. Scott, Committee on Capital Markets Regulation,
unintentional delays). purposes of Rule 611 ‘‘to include to Brent J. Fields, Secretary, Commission, dated
April 14, 2016; Mary Ann Burns, FIA Principal
17 A millisecond is one thousandth of a second. response time delays at trading centers Traders Group, to Brent J. Fields, Secretary,
18 See Regulation NMS Adopting Release, supra
that are de minimis, whether intentional Commission, dated April 14, 2016; William J.
note 1, at 37519. or not.’’ 26 The Commission further Stephenson, Franklin Templeton Investments, to
19 See id. at 37519 (‘‘The definition of automated
Brent J. Fields, Secretary, Commission, dated April
quotation as adopted does not set forth a specific 14, 2016; John Nagel, Citadel, to Brent J. Fields,
time standard for responding to an incoming second standard in Rule 611(b)(8)). One second is
1,000,000 microseconds. Secretary, Commission, dated April 14, 2016; Eric
order.’’). Budish to Brent J. Fields, Secretary, Commission,
22 17 CFR 242.611(b)(1).
20 Id. at 37534. The Commission also stated that
23 See Regulation NMS Adopting Release, supra
dated April 14, 2016; Bryan Thompson, British
the standard for responding to an incoming order Columbia Investment Management Corporation, to
‘‘should be ‘immediate,’ i.e., a trading center’s note 1, at 37519. In other words, the Commission Brent J. Fields, Secretary, Commission, dated April
systems should provide the fastest response viewed the phrase ‘‘fastest response possible’’ as 14, 2016; Adam Nunes, Hudson River Trading
possible without any programmed delay.’’ Id. at consistent with an unintentional delay of less than (‘‘HRT’’), to Brent J. Fields, Secretary, Commission,
37519. Further, the Commission also stated that, for one second whereby participants could consider an dated April 14, 2016; William R. Harts, Modern
a quotation ‘‘[t]o qualify as ‘automatic,’ no human automated trading center experiencing a delay Markets Initiative, to Brent J. Fields, Secretary,
discretion in determining any action taken with beyond that limit to no longer be ‘‘immediately’’ Commission, dated April 14, 2016; Joan C. Conley,
asabaliauskas on DSK3SPTVN1PROD with RULES
respect to an order may be exercised after the time accessible. Nasdaq, to Brent J. Fields, Secretary, Commission,
24 See 17 CFR 242.611(b)(8).
an order is received,’’ and ‘‘a quotation will not dated April 14, 2016; D. Keith Ross, PDQ
qualify as ‘automated’ if any human intervention 25 Regulation NMS Adopting Release, supra note
Enterprises, to Brent J. Fields, Secretary,
after the time an order is received is allowed to 1, at 37523. Commission, dated April 15, 2016; David
determine the action taken with respect to the 26 Securities Exchange Act Release No. 77407 Weisberger, Markit, to Brent J. Fields, Secretary,
quotation.’’ Id. at 37519 and 37534. (March 18, 2016), 81 FR 15660, 15661 (March 24, Commission, dated April 18, 2016; Elizabeth K.
21 See 17 CFR 242.611(b)(1) and (8); see also 2016) (S7–03–16) (‘‘Notice of Proposed King, NYSE, to Brent J. Fields, Secretary,
Regulation NMS Adopting Release, supra note 1, at Interpretation’’). Because IEX’s POP/coil delay is Commission, dated April 18, 2016; Kevin J. Weldon
37519 (discussing the one-second standard in Rule designed purposefully and intentionally to delay to Brent J. Fields, Secretary, Commission, dated
611(b)(1)) and id. at 37523 (discussing the one- access to its matching engine, and consequently Continued
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![40788 Federal Register / Vol. 81, No. 121 / Thursday, June 23, 2016 / Rules and Regulations
interpretation.29 Commenters raised a that a millisecond is ‘‘excessively long ‘‘harm market transparency and degrade
number of issues, including whether when compared to computer response the value of the NBBO’’ and ‘‘lead
intentional sub-millisecond delays are times.’’ 34 One commenter believed that directly to lower fill rates’’ when orders
in fact de minimis or would materially a sub-millisecond standard ‘‘will cannot be filled because the exchange
complicate market structure, as well as become obsolete at faster and faster with an access delay displays a stale
requests to clarify the scope and details rates’’ as communications technology better-priced quote that no longer exists
of the interpretation. evolves.35 but has yet to communicate that
A. De minimis for Purposes of Rule 611 Other commenters expressed concern information.37 Another commenter
that intentional access delays, even de argued that the interpretation could
Several commenters questioned minimis ones, could add unnecessary make market structure ‘‘considerably
whether de minimis intentional delays complexity to the markets. In particular, more complex’’ and lead to ‘‘ghost
were permissible and whether delays of the commenters stressed that such quotes’’ that could ‘‘cloud price
less than a millisecond could be delays could cause orders to be routed discovery and corrode execution
considered de minimis in the current to protected quotes that are no longer quality.’’ 38 The commenter further
market. One commenter asserted that available. For example, one commenter noted that ‘‘an artificial delay in an
any intentional delay, even a de expressed concern that the proposed exchange quote anywhere affects the
minimis one, ‘‘is flatly inconsistent with interpretation could turn the national markets everywhere’’ and expressed
the plain meaning of ‘immediate[ ],’ ’’ 30 market system ‘‘into a hall of mirrors concern that the proposed interpretation
referring to the dictionary definition of where it’s impossible to know which could negatively impact otherwise
that term as ‘‘ ‘[o]ccurring without delay’ prices are real and which are latent efficient and accessible markets.39 One
or ‘instant’.’’ 31 Another commenter reflections.’’ 36 The commenter opined commenter expressed concern that
asserted that ‘‘[o]ne millisecond is not that intentional access delays would intentional delays might ‘‘open the
de minimis in any context except from floodgates to a new wave of complex
the perspective of a human trader’’ and are relevant ‘‘[t]o the extent that a market with order types’’ with delays ranging from 1
noted that a millisecond ‘‘is over 10 similar order cancellation patterns implemented a to 1,000 microseconds.40 Other
times longer than the response time of one millisecond delay.’’ See id. The commenter also
commenters, however, opined that
most exchanges today.’’ 32 The recommended that an exchange that imposes an
intentional delay ‘‘allow market participants to intentional access delays would not add
commenter believed that sub- bypass the delay when attempting to access complexity to the markets and would fit
millisecond delays would ‘‘impair a ‘protected quotations’.’’ Id. at 1–2. See also Citadel within current latencies experienced by
market participant’s ability to access a Interp Letter at 4 (‘‘A time interval in which
trading centers. For example, one
quote.’’ 33 Another commenter argued approximately 10% of executions in many of the
most widely traded stocks typically occur is commenter asserted that a 350
manifestly not de minimis.’’); NYSE Interp Letter at microsecond delay is ‘‘not much more
April 20, 2016; Sophia Lee, IEX, to Brent J. Fields, 7. The Commission notes that it is not clear whether
Secretary, Commission, dated April 25, 2016; than the normal latency that all trading
an exchange with an access delay that does not offer
Abraham Kohen, AK Financial Engineering features (like co-location, post-only orders, or platforms impose,’’ and that an
Consultants, to Brent J. Fields, Secretary, maker-taker fees) that typically attract latency- exchange could achieve the same delay
Commission, dated April 25, 2016; Theodore R. sensitive traders, who may be more likely to cancel by ‘‘locat[ing] its primary data center 65
Lazo, SIFMA, to Brent J. Fields, Secretary, their orders within one millisecond of placing
Commission, dated May 2, 2016; The Honorable or more miles away from the other
them, would experience those cancellation rates.
Randy Hultgren to Mary Jo White, Commission, Further, the Commission notes that Rule 611 exchange data centers.’’ 41
dated May 2, 2016; Amir C. Tayrani, Gibson, Dunn focuses on inter-market order protection, which
& Crutcher LLP to Brent J. Fields, Secretary,
In response to a comment that the
applies only when market participants access
Commission, dated May 19, 2016. protected quotations at geographically dispersed
dictionary definition of the term
29 As discussed and summarized in the
trading centers that are already subject to varying ‘‘immediate[ ]’’ precludes any delay in
Commission’s notice of its proposed interpretation, processing delays, some of which may be a accessing quotations, the Commission
the Commission also received comments on the millisecond or more. A one millisecond intentional notes that quotations cannot be accessed
issue addressed by this interpretation in response access delay is well within the current geographic
to the initial notice of IEX’s Form 1. See Notice of and technological latencies already experienced by
Proposed Interpretation, supra note 26, at 15660, market participants when routing orders between 37 FIA PTG Interp Letter at 5. The commenter
15663–64. Those comments are also discussed in trading centers. argued that this might result in the appearance of
the Commission’s order approving IEX’s Form 1 34 FIA PTG Interp Letter at 3. The commenter more locked and crossed markets, which may
application for exchange registration, which the further noted that ‘‘[f]or comparison, modern interfere with market stability during periods of
Commission is separately issuing today. See IEX exchange matching engines process orders in high volatility. See id.
Form 1 Approval Order, supra note 4. considerably less than 1⁄20 of that time, and 38 PDQ Interp Letter at 1.
30 Gibson Dunn Interp Letter at 3.
geographic latencies between the major exchange 39 Id. at 2.
31 Gibson Dunn Interp Letter at 2 (citing to Black’s data centers in New Jersey are generally less than 40 Nasdaq Interp Letter at 3–4; Gibson Dunn
Law Dictionary and Webster’s Third New 1⁄4 of that time.’’ Id. See also Nasdaq Interp Letter
Interp Letter at 7.
International Dictionary). at 6 (noting that the throughput time of Nasdaq’s 41 Letter from James J. Angel to Securities and
32 HRT Interp Letter at 2. The commenter further system is 40 microseconds); Kohen Interp Letter at Exchange Commission, dated December 5, 2015, at
noted that one millisecond is ‘‘approximately three 1 (noting that the Bombay Stock Exchange 3 (comment letter on IEX Form 1, File No. 10–222).
times the time via fiber between the furthest New processes a transaction in 6 microseconds). See also Letter from Larry Tabb, TABB Group, to
Jersey data centers and approximately 1⁄8th the time 35 See Nasdaq Interp Letter at 3. See also HRT
Brent J. Fields, Secretary, Commission, dated
to Chicago via fiber from the New Jersey Interp Letter at 3 (noting that ‘‘a one millisecond November 23, 2015, at 1 (comment letter on IEX
datacenters.’’ Id. at 2–3. time standard . . . is already obsolete’’); FIA PTG Form 1, File No. 10–222) (arguing that IEX’s 350
33 HRT Interp Letter at 2. This commenter also Interp Letter at 6 (‘‘One millisecond is slow by microsecond delay is not ‘‘particularly problematic,
cited to the Commission’s MIDAS data from the today’s computer standards, and will be even as the time gap is minimal, and (even including the
fourth quarter of 2015, which showed that over slower (relatively speaking) in the future.’’). Some speed bump) IEX matches orders faster than a
asabaliauskas on DSK3SPTVN1PROD with RULES
13% of displayed orders in large stocks are commenters criticized the proposed interpretation number of other markets’’); Letter from Charles M.
cancelled within one millisecond and over 9% of as lacking empirical support for a sub-millisecond Jones to Brent Fields, Secretary, Commission, dated
displayed orders in large stocks are executed within threshold or consideration of alternative delays. See March 2, 2016, at 2 (comment letter on IEX Form
one millisecond, and concluded that ‘‘[g]iven that Nasdaq Interp Letter at 4; Citadel Interp Letter at 3; 1, File No. 10–222) (noting that ‘‘from an economic
over 20% of orders are either executed or canceled Budish Interp Letter at 2. As discussed above, the point of view the 350-microsecond delay [proposed
during the first millisecond they were displayed, it Commission notes that the interpretation uses a de by IEX] per se should not be a particular cause for
seems likely that a one millisecond delay would minimis standard, and not a specific time frame concern, as it is well within the bounds of the
have a material impact on a participant’s ability to demarcating permissible versus impermissible existing, geographically dispersed National Market
access the quotations.’’ See id. The commenter access delays. System, and does not seem likely to contribute
qualified its observation by noting that these figures 36 FIA PTG Interp Letter at 2. substantially to a phantom liquidity problem’’).
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![Federal Register / Vol. 81, No. 121 / Thursday, June 23, 2016 / Rules and Regulations 40789
instantaneously.42 As the Commission quotations.46 The Commission does not the protected quotations of securities
repeatedly acknowledged when agree that such efforts are incompatible traded on the Chicago Stock Exchange’s
adopting Regulation NMS, even with the Order Protection Rule. In the matching engine in Chicago.48 No
‘‘immediately’’ accessible protected context of Regulation NMS, the term commenter asserted that the periodic
quotations in the context of Rules 600 ‘‘immediate’’ does not preclude all message queuing or minor systems-
and 611 are necessarily subject to some intentional delays regardless of their processing delays encountered at
delay.43 Specifically, as noted above, the duration, and such preclusion is not exchanges with protected quotations, or
Regulation NMS Adopting Release necessary to achieve the objectives of the time it takes to access the protected
discussed these delays and, although Rule 611. As long as any intentional quotes of the Chicago Stock Exchange’s
the Commission declined to set a delay is de minimis—i.e., does not Chicago facility, would, for example,
specific time standard, it contemplated impair fair and efficient access to an materially undermine market quality or
the existence of very short unintentional exchange’s protected quotations—it is price transparency, or the efficiency of
delays of a magnitude up to one second consistent with both the text and order routing or trading strategies.49
purpose of Rule 611. The Commission acknowledges that
in the exceptions to Rule 611.
In response to commenters that interpreting ‘‘immediate’’ to include an
The Commission notes that, when it argued that an intentional de minimis intentional de minimis access delay,
adopted Regulation NMS in 2005, delay would harm market transparency, because it would be additive, may
processing times were longer than they degrade the NBBO, or cloud price increase the overall latency in accessing
are now.44 Today, low latency discovery, the Commission notes, as a particular protected quotation, albeit
technology permits trading decisions to discussed further below, that Rule by a very small amount. Such delays
be made in microseconds, and certain 600(b)(3)(v) requires trading centers to may be a detectable difference for the
market participants use the fastest immediately update their displayed most latency-sensitive market
gateways and purchase co-location to quotations to reflect material changes. participants and could marginally
compete to access quotations at those Market participants today already impact the efficiency of some of their
speeds.45 As discussed further below, necessarily experience very short delays quoting and trading strategies, even if
however, even the fastest market in receiving updates to displayed such intervals likely are immaterial to
participants today must access protected quotations, as a result of geographic and investors with less advanced trading
quotations on trading centers where technological latencies, similar to those technology or a longer-term investing
there are delays of several milliseconds experienced when accessing protected horizon. But the Commission believes
as a result of geography alone. In quotations. The Commission does not that just as the geographic and
addition, trading centers today are believe the introduction of intentional technological delays experienced today
attempting to address concerns with the delays of even smaller magnitude will do not impair fair and efficient access to
fastest trading strategies by creating very impair fair and efficient access to an exchange’s quotations or otherwise
small delays in accessing their protected quotations. frustrate the objectives of Rule 611, the
In response to commenters’ concern addition of a de minimis intentional
42 See supra note 31 (citing to the Gibson Dunn
that an intentional delay is not de access delay is consistent with Rule
Interp Letter). minimis or could add complexity to the 600(b)(3)’s ‘‘immedia[cy]’’
43 For example, the Rule 611(b)(1) exception
market, the Commission notes that its requirement.50
refers to a ‘‘material’’ delay, which the Commission
interpreted as one second or more. See Regulation interpretation does not address whether 48 Similarly, they would encounter delays in
NMS Adopting Release, supra note 1, at 37519. In delays are de minimis in all trading reaching other ‘‘away’’ exchanges located in other
addition, the comment letters on Regulation NMS contexts, but rather only whether they data centers. See, e.g., Letter from David Lauer,
expressed a multitude of views on the appropriate
standard for assessing the accessibility of a
impair fair and efficient access to an Healthy Markets Association, to Brent J. Fields,
exchange’s quotations when a market Secretary, Commission, dated November 6, 2015, at
protected quotation. See also supra text 4 (comment letter on IEX Form 1, File No. 10–222)
accompanying note 17 (noting that commenters on participant routes an order to comply (noting that ‘‘[t]he NBBO already includes quotes
Regulation NMS who advocated for setting a with Rule 611. with varied degrees of time lag’’ and that the length
specific time standard for automated quotations of IEX’s coiled cable ‘‘is far less than the distance
recommended a range of times from one second
Systems processing and transit times,
between NY and Chicago, and is remarkably similar
down to 250 milliseconds). whether at the exchange, the market to the distance between Carteret and Mahwah (36
44 See supra text accompanying note 17 (noting participant sending the order, or its miles)’’); Letter from Sophia Lee, IEX, to Brent J.
that commenters on Regulation NMS who agent, all create latencies in accessing Fields, Secretary, Commission, dated November 23,
advocated for setting a specific time standard for protected quotations.47 Even the most 2016, at 4 and 7 (comment letter on IEX Form 1,
automated quotations recommended a range of File No. 10–222) (referring to data from certain
times from one second down to 250 milliseconds). technologically advanced market subscribers to IEX’s ATS that, according to IEX,
45 Exchanges currently have delays within their participants today encounter delays in indicate that those subscribers’ average latency
systems, including access gateways of varying accessing protected quotations of other when trading on IEX is comparable to that when
speeds as well as within their co-location ‘‘away’’ automated trading centers that trading on certain other exchanges, ‘‘is an order of
infrastructure. For example, some exchanges magnitude less than that of the Chicago Stock
intentionally employ a ‘‘delay coil’’ in their co-
either are transitory (e.g., as a result of Exchange,’’ and ‘‘is on average less than the round-
location facilities or offer different access gateways message queuing) or permanent (e.g., as trip latency of the NYSE as well’’).
of varying speeds where one is not as ‘‘fast as a result of physical distance). 49 From the perspective of a market participant
technologically feasible’’ as the other. See IEX First Furthermore, as noted above, any based in New Jersey, classifying a New Jersey
Form 1 Letter at 3 (comment letter on File No. 10– market with an intentional sub-millisecond delay as
222) (referring to varying connectivity options
market participant co-located with the ‘‘manual’’ while classifying a Chicago market with
offered by exchanges from the NYSE, Nasdaq, and major exchanges’ data centers in geographic delay measured in multiple
asabaliauskas on DSK3SPTVN1PROD with RULES
BATS groups, and citing the CEO of Nasdaq northern New Jersey necessarily milliseconds as ‘‘automated’’ would be inequitable
referring to the intentional ‘‘delay coil’’ that Nasdaq encounters delays of 3–4 milliseconds— and would not further the goals of Regulation NMS.
uses inside its co-location infrastructure). Compare 50 One commenter argued that there is ‘‘no
Gibson Dunn Interp Letter at 3 (writing on behalf
due to geography alone—in accessing evidence of a need for a de minimis exception or
of Nasdaq) (stating ‘‘the term ‘immediate[]’ in Rule that planned delays will benefit investors in any
46 See, e.g., supra note 45 (discussing intentional
600(b)(3) unambiguously forecloses intentional, meaningful way.’’ Gibson Dunn Interp Letter at 7.
planned delay’’ and referring to ‘‘the Commission’s delays imposed in the exchange co-location See also Nasdaq Interp Letter at 5. As discussed
own understanding that the term [immediately] context). above, however, the Commission believes that its
requires response times that are as fast as 47 See supra note 34 (discussing comments on updated interpretation is warranted in light of
technologically feasible’’). exchange processing times). Continued
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Further, the Commission notes that its urged the Commission to ‘‘take into turn must be filed with the Commission
interpretation uses a de minimis account not just the length of the delay, and published for notice and comment,
standard specifically so that it may but also its purpose.’’ 55 nor does it obviate the need for a
evolve with technological and market The Commission notes that this proposed rule change that would
developments. As it did when it interpretation does not address whether impose an access delay otherwise to
established the ‘‘immediate’’ standard, any particular access delay is unfairly comply with the Act and the regulations
the Commission believes it remains discriminatory, an inappropriate or thereunder applicable to the
appropriate to avoid ‘‘specifying a unnecessary burden on competition, or exchange.56 Accordingly, the
specific time standard that may become otherwise inconsistent with the Act.
commenters’ concerns and
obsolete as systems improve over Rather, it clarifies that if an intentional
recommended conditions are addressed
time.’’ 51 As explained further below, access delay is de minimis, then it is
‘‘immediate’’ for purposes of Rules by the existing requirements and
the Commission’s revised interpretation process through which exchanges
provides that the term ‘‘immediate’’ 600(b)(3) and 611. While the
Commission’s interpretation is narrowly publicly propose their rule changes
precludes any coding of automated
focused on the meaning and application under the Act, and each proposed
systems or other type of intentional
device that would delay the action taken of the word ‘‘immediate[ ]’’ in Rule access delay would be scrutinized on an
with respect to a quotation unless such 600(b)(3) in light of technological and individual basis through that process.57
delay is de minimis in that it would not market developments since the adoption Any proposed application of an access
impair a market participant’s ability to of Regulation NMS in 2005, the delay would therefore be subject to
fairly and efficiently access a quote, evaluation of any proposed access delay notice, comment, and the Commission’s
consistent with the goals of Rule 611. would involve additional separate evaluation of the proposed rule
considerations. change.58
B. Operation of Access Delays Specifically, this interpretation does
Several commenters that expressed not obviate the requirement of 56 Only registered exchanges and associations can
individualized review of proposed have ‘‘automated quotations’’ that are ‘‘protected
general concerns with an intentional quotations.’’ See 17 CFR 242.611(b)(57). Such
access delay, even a de minimis one, access delays, including de minimis entities are required by Section 19 of the Act to file
expressed a particular concern with delays, for consistency with the all rules and proposed changes to their rules with
those that would be ‘‘selectively’’ Exchange Act and Regulation NMS. Any the Commission so that the Commission can review
applied (e.g., intentional delays that are exchange seeking to impose an access and publish them for public notice and comment.
delay must reflect that in its rules, See 15 U.S.C. 78s(b). Further, no proposed rule
applied to members but not to the change can take effect unless approved by the
exchange itself).52 In addition, several which are required to be filed with the Commission or otherwise permitted to become
commenters asserted that the Commission as part of the exchange effective under the Act and rules thereunder. See
Commission’s proposed interpretation application or as an individual id. Similarly, an applicant seeking to register as an
proposed rule change. This exchange is required to file all proposed rules with
was overbroad based on their belief that the Commission on Form 1, which the Commission
it would ‘‘permit all sub-millisecond interpretation does not alter the publishes for notice and comment. Once filed, the
delays, regardless of how those delays requirement that any exchange access Commission evaluates each proposed rule change
operate, the reasoning and incentives delay must be fully described in a for consistency with the Act and the rules
behind the delays, or the impacts on the written rule of the exchange, which in thereunder. An access delay would constitute a
‘‘rule’’ of an exchange because it would be a ‘‘stated
markets and investors.’’ 53 These policy, practice, or interpretation’’ that concerns a
delays being applied equally to all participants and
commenters instead urged the across all order types; (3) data sent to the Securities
‘‘material aspect’’ of the operation of an exchange,
Commission to ‘‘evaluate each proposed and thus any new or amended delay would require
Information Processors should not be delayed; and
a filing. See 15 U.S.C. 78c(a)(27) (defining ‘‘rules of
delay, regardless of its duration, and (4) the purpose of each delay is expressly stated and
an exchange’’); 17 CFR 240.19b–4(a)(6) (defining
specifically determine that it is designed intended to benefit long-term investors. See Healthy
Markets Interp Letter at 4. See also Ethical Markets ‘‘stated policy, practice, or interpretation’’); 17 CFR
and applied in a manner that is Interp Letter at 2–3, Franklin Templeton Interp 240.19b–4 (noting that a stated policy, practice, or
consistent with the purposes of the Letter, and British Columbia Investment interpretation is deemed to be a proposed change
unless it is fairly and reasonably implied by an
Exchange Act.’’ 54 Another commenter Management Corporation Interp Letter (each
existing rule or is concerned solely with the
repeating the recommendation of the Healthy
Markets Interp Letter). Another commenter raised a administration of the exchange). As required by
technological and market developments and is similar concern, and urged the Commission to Section 19(b) of the Act, Rule 19b–4, and Form
consistent with the purposes of Rule 611. See also review each proposed access delay separately and 19b–4, such exchange would be required to, among
comments submitted on IEX’s exchange registration ‘‘ensure that any such delays are equally applied to other things, detail the purpose of the proposed
(File No. 10–222), a number of which supported the all market participants.’’ See Committee on Capital delay and analyze how the delay is consistent with
intentional delay proposed by IEX. Markets Regulation Interp Letter at 2. One the Act, including the Section 6 standards
51 Regulation NMS Adopting Release, supra note
commenter urged the Commission to consider ‘‘one governing, among other things, unfair
1, at 37519. single measuring stick: Will the proposed delay discrimination, protection of investors and the
52 See, e.g., FIA PTG Interp Letter at 6; MMI
serve long term investors?’’ Themis Interp Letter at public interest, inappropriate burdens on
Interp Letter at 1; Weldon Interp Letter at 1–2.; 2. competition, and just and equitable principles of
NYSE Interp Letter at 4; Citadel Interp Letter at 8; 55 Sethi Interp Letter at 2 (emphasis in original). trade. See Section 19(b), Rule 19b–4 and Form 19b–
Markit Interp Letter at 2–3. Another commenter suggested an alternative 4 (on which exchanges file their proposed rule
53 Healthy Markets Interp Letter at 2. See also
definition of ‘‘immediate’’ that is not ‘‘elapsed-time changes).
Ethical Markets Interp Letter at 2–3, Franklin dependent’’ but instead would consider an 57 See Citadel Interp Letter at 6–7 (acknowledging
Templeton Interp Letter, British Columbia exchange’s response to an incoming order to be that new access delays would need to be filed with
Investment Management Corporation Interp Letter ‘‘immediate’’ if the transition of the displayed quote the Commission before they can be implemented,
(each repeating the recommendation of the Healthy from point A (before the order is received) to B but expressing concern that it would ‘‘be
asabaliauskas on DSK3SPTVN1PROD with RULES
Markets Interp Letter); and Themis Interp Letter at (after the order is received) can be ‘‘fully attributed exceedingly difficult for the staff to recognize all of
2. to the execution of [the order] in a determinative the implications and impacts of each delay
54 Healthy Markets Interp Letter at 3. See also way.’’ Sakato Interp Letter at 1–2. The Commission mechanism’’).
Ethical Markets Interp Letter at 2–3, Franklin believes that at this time an order-by-order 58 In the case of IEX, the Commission’s separate
Templeton Interp Letter, and British Columbia determination of whether a quotation is ‘‘protected’’ order approving IEX’s Form 1 addresses the POP/
Investment Management Corporation Interp Letter could introduce unworkable complexity into order coil delay’s consistency with the Act. See also
(each repeating the recommendation of the Healthy routing and could frustrate the incentive provided SIFMA Interp Letter at 3 (recommending that ‘‘any
Markets Interp Letter). The commenters further to market participants to post the resting displayed intentional delay should be predictable and
urged that the interpretation be conditioned on: (1) limit orders that underpin much of the price universally applied to all market participants in a
Delays always being less than one millisecond; (2) discovery in the market. non-discriminatory manner’’).
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C. Other Comments applied on an order message sent into efficient access to protected quotations.
A few commenters asked the an exchange system through each of the Although the Commission did afford an
Commission to provide more detail on events specified in the definition of opportunity for notice and comment by
the application of the proposed ‘‘automated quotation’’ in Rule publishing a draft interpretation for
interpretation.59 For example, one 600(b)(3). Specifically, any intentional comment, and did take the comments it
delay imposed by the exchange in (1) received into consideration, the
commenter asked whether it applies to
executing an immediate-or-cancel order Commission was not required to
both inbound and outbound delays and
against its displayed quotation up to its undertake notice and comment
whether it should be based on the
full size, (2) cancelling any unexecuted rulemaking when updating its
exchange’s fastest or slowest means of
portion of such order, or (3) transmitting interpretation of its own regulation.
connecting.60 Other commenters asked Other commenters focused on what
a response to the sender of such order,
how much variance will be permitted they viewed as a potential opportunity
should be added together in assessing
and whether unintentional delays also for manipulative activity that could
compliance with Rule 611.63
should be covered by the One commenter recommended that result from an access delay to a market
interpretation.61 the Commission engage in notice and displaying a protected quotation. One
The interpretation of ‘‘immediate’’ comment rulemaking to effect ‘‘a change commenter opined that an access delay
applies to the term as used in Rule of this magnitude,’’ which it argued would make it easier to manipulate
600(b)(3), so that it applies to any contradicts the ‘‘plain meaning of the markets ‘‘by taking advantage of stale
intentional delay imposed by an term ‘immediate.’ ’’ 64 The commenter and inaccessible quotations displayed
exchange through any means provided argued that an interpretation is only during the duration of any access
by the exchange to access its quotations. appropriate to ‘‘provide guidance on delays,’’ and that such manipulative
Further, as modified here from the how a new service or product not behavior ‘‘could be particularly
proposed interpretation, the contemplated at the time a rule was powerful in relatively illiquid
interpretation applies only to adopted should be treated under stocks.’’ 66 As an example, the
intentional delays, as unintentional existing rules.’’ 65 As discussed above, commenter posited that a market
delays are addressed by the existing however, the Commission does not participant could ‘‘safely manipulate a
exception contained in Rule 611(b)(1).62 believe the dictionary definition of the closing auction by sending displayed
Finally, in response to the commenters term ‘‘immediate[ ]’’ forecloses de orders to an exchange with an
asking if both inbound and outbound minimis intentional delays (i.e., intentional 999 microsecond delay and
delays should be taken into account intentional delays so short that they do timing the submission of those orders
when measuring the length of an not impair fair and efficient access to an for display 998 microseconds or less
intentional delay, the Commission notes exchange’s quotations). The before the close’’ because ‘‘no other
that the intentional delay, as it pertains Commission is updating its prior market participant could reach them in
to the Order Protection Rule, is interpretation in light of technological time.’’ 67 Another commenter argued
measured as a cumulative delay and market developments since the that access delays could lead to ‘‘stale
experienced by a non-routable order—in adoption of Regulation NMS in 2005 to prices [that] are guaranteed to be
other words, the intentional delay accommodate very short intentional displayed for a specific period of time
delays that do not impair fair and up to 1 millisecond,’’ which would
59 See, e.g., HRT Interp Letter at 3; Nasdaq Interp
cause pegged orders on other exchanges
Letter at 3.
60 See HRT Interp Letter at 3. See also Citadel
63 See 17 CFR 242.600(b)(3)(ii), (iii), and (iv), to ‘‘be traded against at known stale
respectively. See also Regulation NMS Adopting prices’’ when such pegged order is
Interp Letter at 9. Release, supra note 1, at 37534. In the case of IEX,
61 See, e.g., Citadel Interp Letter at 9–10. One
the POP/coil delay imposes a 350 microsecond
pegged to the stale price on the
commenter asked whether there would be a process delay inbound to the matching engine for non- exchange with the access delay.68 The
to remove protected quotation status from an routable orders (but no additional delay when commenter argued that this could lead
exchange that has an intentional delay that equals cancelling the unexecuted portion of the order) and
or exceeds one millisecond. See id. at 10. If any
to ‘‘a potentially new mechanism for
a 350 microsecond delay outbound on the
market participant experiences issues in accessing confirmation back to the order sender, for a spoofing . . . with the objective of
that exchange’s quotation, it may consider the cumulative 700 microsecond delay. In addition, the affecting pegged orders on other
applicability of the exceptions specified in Rule Commission notes that IEX permits incoming orders exchanges.’’ 69
611(b), including the ‘‘material delay’’ condition of to be marked as immediate-or-cancel, as is required The Commission notes that the
Rule 611(b)(1). See 17 CFR 242.611(b)(1). The by Rule 600(b)(3). See 17 CFR 242.600(b)(3)(i). One
Commission notes that the Rule 611(b)(1) ‘‘self- commenter argued that a delay in outbound data
scenarios discussed by commenters are
help’’ exception refers to a ‘‘material delay,’’ and in could cause the data reported to ‘‘not accurately not related to the issue addressed by
the Regulation NMS Adopting Release, the reflect the state of a quotation.’’ See Gibson Dunn this interpretation—whether an
Commission provided an interpretation of the Interp Letter at 7. This commenter also asserted that intentional delay that is so short as not
phrase ‘‘material delay’’ as one where a market was intentional delays in communicating reports of
‘‘repeatedly failing to respond within one second transactions would decrease their ‘‘informational
66 Id. at 6.
after receipt of an order.’’ See Regulation NMS value.’’ See Gibson Dunn Interp Letter at 7; Nasdaq
67 Id.
Adopting Release, supra note 1, at 37519. Interp Letter at 2. The Commission notes that the
62 See 17 CFR 242.611(b)(1). See also supra note geographic and technological latencies that market 68 NYSE Interp Letter at 8. See also Citadel Interp
61 (discussing the self-help exception). participants experience when routing to access a Letter at 8 (arguing that ‘‘every time market prices
Accordingly, the Commission is not including as quotation also affect data disseminated from the tick up or down, the NBBO would be incorrect for
part of the interpretation the phrase ‘‘whether trading center to the market participant. In other at least the duration of any intentional delays’’
intentional or not’’ to focus its interpretation on words, market participants already experience which would lead some pegged orders to track at
access delays that are intentional. While the latencies when receiving quotation updates and ‘‘inaccurate prices’’).
asabaliauskas on DSK3SPTVN1PROD with RULES
Commission acknowledges that the one-second (i.e., transaction information. At least with respect to 69 NYSE Interp Letter at 8. See also HRT Interp
1,000,000 microseconds) interpretation included in delays well within those existing latencies, the Letter at 3 (citing to a comment from Instinet on
the Regulation NMS Adopting Release for this Commission does not believe that a market IEX’s Form 1 that discussed the potential for
exception, as well as the ‘‘one second’’ exception participant’s general experience in receiving this ‘‘spoofing’’ by entering an order, waiting for 700
in Rule 600(b)(8), may warrant reconsideration in information is likely to be altered depending on microseconds, and cancelling the order without the
the future, that would be a separate analysis and the whether the delay is intentional or unintentional. risk of another market participant seeing or
64 Citadel Interp Letter at 1. See also Hultgren
Commission is not addressing those exceptions in responding to it, but which could provide a false
this interpretation. See also SIFMA Interp Letter at Interp Letter at 1; Gibson Dunn Interp Letter at 1– or misleading appearance that could affect the
4 (requesting that the Commission clarify that it is 2. trading of other participants); FIA PTG Interp Letter
not changing the self-help threshold). 65 Citadel Interp Letter at 2–3. at 7 (also citing to the Instinet letter).
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to frustrate the goals of Rule 611 by believes that it is appropriate to provide experienced by market participants
interfering with fair and efficient access an updated interpretation of the when routing orders are de minimis to
to an exchange’s quotations is consistent meaning of the term ‘‘immediate’’ in the extent they would not impair a
with Rule 600(b)(3)’s ‘‘immedia[cy]’’ Rule 600(b)(3). market participant’s ability to access a
requirement.70 If a delay is de minimis, Solely in the context of determining displayed quotation consistent with the
then whether it is unintentional or whether a trading center maintains an goals of Rule 611.
intentional in nature is not expected to ‘‘automated quotation’’ for purposes of The interpretation does not change
alter the potential for manipulative Rule 611 of Regulation NMS, the the existing requirement that, prior to
activity or make it harder to detect and Commission does not interpret the term being implemented, an intentional delay
prosecute. One commenter noted that it ‘‘immediate’’ used in Rule 600(b)(3) by of any duration must be fully disclosed
is important ‘‘to contemplate and itself to prohibit a trading center from and codified in a written rule of the
address the potential for abuse’’ 71 when implementing an intentional access exchange that has become effective
an access delay is proposed and delay that is de minimis—i.e., a delay so pursuant to Section 19 of the Act, where
approved. The Commission agrees that short as to not frustrate the purposes of the exchange met its burden of
such scrutiny—both by the exchange Rule 611 by impairing fair and efficient articulating how the purpose, operation,
proposing an access delay, and by the access to an exchange’s quotations. and application of the delay is
Commission when considering whether Accordingly, the Commission’s revised consistent with the Act and the rules
to approve a proposed access delay interpretation provides that the term and regulations thereunder applicable to
rule—would be important. The ‘‘immediate’’ precludes any coding of the exchange.75
Commission notes that, pursuant to automated systems or other type of In the Notice of Proposed
Section 19(b) and Rule 19b–4, the intentional device that would delay the Interpretation, the Commission stated
proposing exchange would be required action taken with respect to a quotation its preliminary belief ‘‘that, in the
to consider and address in its rule unless such delay is de minimis. current market, delays of less than a
change filing the potential for abuse of The Commission’s updated millisecond in quotation response times
any proposed access delay, which interpretation recognizes that a de may be at a de minimis level that would
would then be subject to notice, minimis access delay, even if it involves not impair a market participant’s ability
comment, and Commission review. an ‘‘intentional device’’ that delays to access a quote, consistent with the
Further, even after the rule change access to an exchange’s quotation, is goals of Rule 611 and because such
became effective, the Commission compatible with the exchange having an delays are within the geographic and
believes it would be incumbent on the ‘‘automated quotation’’ under Rule technological latencies experienced by
exchange to remain vigilant in 600(b)(3) and thus a ‘‘protected market participants today.’’ 76 As
surveilling for abuses and violative quotation’’ under Rule 611.74 Under this discussed above, the Commission
conduct of its access delay rule, and interpretation, Rule 600(b)(3)’s received a number of comments on that
consider amending its access delay if ‘‘immedia[cy]’’ requirement does not specific guidance.
necessary, among other considerations, necessarily foreclose an automated At this time, the Commission is not
for the protection of investors and the trading center’s use of very small adopting the proposed guidance under
public interest.72 intentional delays to address concerns this interpretation that delays of less
arising from low latency trading than one millisecond are de minimis.
III. Commission’s Interpretation strategies and other market structure The Commission believes that, in light
In response to technological and issues. For example, intentional access of the evolving nature of technology and
market developments since the adoption delays that are well within the the markets, and the need to assess the
of Regulation NMS,73 the Commission geographic and technological latencies impact of intentional access delays on
the markets, establishing a bright line de
70 Nevertheless, the Commission believes that the Exchange Act Release No. 61358 (January 14, 2010), minimis threshold is not appropriate at
scenarios discussed by commenters would, as a 75 FR 3594, 3610–11 (January 21, 2010) (Concept
practical matter, be difficult to implement. For Release on Equity Market Structure). Recent
this time. Rather, the Commission
example, in the closing auction scenario, the technological advances have reduced the ‘‘latency’’
Commission believes it would be practically 75 As discussed above, any exchange that seeks to
that these factors introduce into the order handling
difficult to successfully implement a coordinated process, both in absolute and relative terms, and impose an intentional access delay must first file a
single-digit microsecond strategy during a broad- some market participants and liquidity providers proposed rule change with the Commission, which
based auction because of the precision it would have invested in low-latency systems that take into the Commission would publish for notice and
require to ensure order arrival at the final account the advances in technology. See id. at 3606; comment, and approve only after finding that it is
microsecond and not have it trade with a multitude see also Securities Exchange Act Release No. 76474 consistent with the applicable standards set forth in
of other interest in the auction. Further, concerns (November 18, 2015), 80 FR 80997, 81000 the Act. For example, a proposed access delay that
surrounding pegged orders on away markets would (December 28, 2015) (Regulation of NMS Stock is only imposed on certain market participants or
affect only the most latency sensitive traders and Alternative Trading Systems; Proposed Rule) certain types of orders would be scrutinized to
only apply when the exchange with the access (stating that ‘‘[t]he growth in trading centers and determine whether or not the discriminatory
delay is alone at the NBBO, has exhausted all trading activity has been fueled primarily by application of that delay is unfair. See, e.g.,
displayed and non-displayed interest at its best advances in technology for generating, routing, and Securities Exchange Act Release No. 77406, 81 FR
price, and is in the process of transitioning to a new executing orders’’ and that ‘‘[t]hese technologies 15765 (March 24, 2016) (File No. 10–222) (order
price. However, that possibility is not uniquely have markedly improved the speed, capacity, and instituting proceedings on IEX’s Form 1)
introduced by an exchange with an access delay, sophistication of the trading mechanisms and (discussing the potentially unfairly discriminatory
but is currently present in a fragmented market with processes that are available to market application of an access delay to advantage an
geographically dispersed venues. For example, the participants’’). affiliated outbound routing broker). If the
same problem (only exacerbated with considerably 74 An exchange that proposed to provide any Commission cannot find that a proposed access
asabaliauskas on DSK3SPTVN1PROD with RULES
more latency) would be present if the Chicago Stock member or user (including the exchange’s inbound delay is consistent with the Act, it would
Exchange was alone at the NBBO on a symbol it or outbound routing functionality, or the exchange’s disapprove the proposal, rendering moot the issue
trades from Chicago. affiliates) with exclusive privileged faster access to of whether a quotation with such a delay is
71 HRT Interp Letter at 3.
its facilities over any other member or user would protected. Generally, the Commission would be
72 See 15 U.S.C. 78s(g)(1).
raise concerns under the Act, including under concerned about access delays that were imposed
73 A number of factors affect the speed at which Section 6(b)(5) and 6(b)(8) of the Act, and would only on certain market participants or intentional
a market participant can receive market and quote need to address those concerns in a Form 1 access delays that were relieved based upon
data, submit orders, obtain an execution, and exchange registration application or a proposed rule payment of certain fees.
receive information on trades, including hardware, change submitted pursuant to Section 19 of the Act, 76 Notice of Proposed Interpretation, supra note
software, and physical distance. See, e.g., Securities as applicable. 26, at 15665.
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believes that the interpretation is best intentional access delays on market Title 17, chapter II, of the Code of
focused on whether an intentional delay quality, including price discovery and Federal Regulations as follows:
is so short as to not frustrate the report back to the Commission with the
purposes of Rule 611 by impairing fair results of any recommendations. Based PART 241—INTERPRETATIVE
and efficient access to an exchange’s on the results of that study or earlier as RELEASES RELATING TO THE
quotations. As it makes findings as to it determines, the Commission will SECURITIES EXCHANGE ACT OF 1934
whether particular access delays are de reassess whether further action is AND GENERAL RULES AND
minimis in the context of individual appropriate. REGULATIONS THEREUNDER
exchange proposals,77 the Commission
recognizes that such findings create List of Subjects in 17 CFR Part 241
Part 241 is amended by adding
common standards that must be applied Securities. Release No. 34–78102 to the list of
fairly and consistently to all market interpretative releases as follows:
Text of Amendments
participants.
The Staff will also conduct a study For the reasons set out in the
within two years regarding the effects of preamble, the Commission is amending
Federal
Subject Release No. Date Register
vol. and page
* * * * * * *
Interpretation Regarding Automated Quotations Under Regulation 34–78102 June 17, 2016 ...... 121 FR [Insert FR Page Number].
NMS.
By the Commission. ACTION: Final rule. FOR FURTHER INFORMATION CONTACT:
Dated: June 17, 2016. Brian Bak (Technical Information),
Robert W. Errett, SUMMARY: The Federal Energy Office of Energy Policy and Innovation,
Regulatory Commission (Commission) is Federal Energy Regulatory Commission,
Deputy Secretary.
eliminating the exemptions for wind
[FR Doc. 2016–14876 Filed 6–22–16; 8:45 am] 888 First Street NE., Washington, DC
generators from the requirement to
BILLING CODE 8011–01–P 20426, (202) 502–6574, brian.bak@
provide reactive power by revising the
pro forma Large Generator ferc.gov.
Interconnection Agreement (LGIA), Gretchen Kershaw (Legal
DEPARTMENT OF ENERGY Appendix G to the pro forma LGIA, and Information), Office of the General
the pro forma Small Generator Counsel, Federal Energy Regulatory
Federal Energy Regulatory
Interconnection Agreement (SGIA). As a Commission, 888 First Street NE.,
Commission
result, all newly interconnecting non- Washington, DC 20426, (202) 502–8213,
synchronous generators will be required gretchen.kershaw@ferc.gov.
18 CFR Part 35
to provide reactive power at the high-
[Docket No. RM16–1–000; Order No. 827] SUPPLEMENTARY INFORMATION:
side of the generator substation as a
condition of interconnection as set forth Table of Contents
Reactive Power Requirements for Non- in their LGIA or SGIA as of the effective
Synchronous Generation date of this Final Rule.
AGENCY:Federal Energy Regulatory DATES: This Final Rule will become
Commission, DOE. effective September 21, 2016.
Paragraph
I. Background ............................................................................................................................................................................................ 6
II. Need for Reform ................................................................................................................................................................................... 11
III. Discussion ........................................................................................................................................................................................... 13
A. Reactive Power Requirement for Non-Synchronous Generators ............................................................................................... 16
1. NOPR Proposal ....................................................................................................................................................................... 16
2. Comments ............................................................................................................................................................................... 17
3. Commission Determination ................................................................................................................................................... 21
B. Power Factor Range, Point of Measurement, and Dynamic Reactive Power Capability Requirements .................................. 26
1. NOPR Proposal ....................................................................................................................................................................... 26
2. Comments ............................................................................................................................................................................... 27
3. Commission Determination ................................................................................................................................................... 34
C. Real Power Output Level ............................................................................................................................................................. 41
1. NOPR Proposal ....................................................................................................................................................................... 41
asabaliauskas on DSK3SPTVN1PROD with RULES
2. Comments ............................................................................................................................................................................... 42
3. Commission Determination ................................................................................................................................................... 47
D. Compensation ............................................................................................................................................................................... 50
1. NOPR Proposal ....................................................................................................................................................................... 50
2. Comments ............................................................................................................................................................................... 51
77 See supra note 56 (discussing the proposed rule
change process under the Exchange Act). See also
IEX Form 1 Approval Order, supra note 4.
VerDate Sep<11>2014 16:58 Jun 22, 2016 Jkt 238001 PO 00000 Frm 00015 Fmt 4700 Sfmt 4700 E:\FR\FM\23JNR1.SGM 23JNR1](https://thefederalregister.org/doc/81_FR_40906/page/9.svg)
Document Created: 2018-02-08 07:41:23
Document Modified: 2018-02-08 07:41:23
| 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 | Rules and Regulations | |
| Action | Final interpretation. | |
| Dates | Effective June 23, 2016. | |
| Contact | Richard Holley III, Assistant Director, Michael Bradley, Special Counsel, or Michael Ogershok, Attorney-Adviser, Office of Market Supervision, at 202-551-5777, Division of Trading and Markets, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549-7010. | |
| FR Citation | 81 FR 40785 |
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