81 FR 69123 - Self-Regulatory Organizations; National Stock Exchange, Inc.; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Amend Exchange Rules 11.11 and 11.26 To Describe Changes to System Functionality Necessary To Implement the Regulation NMS Plan To Implement a Tick Size Pilot Program

SECURITIES AND EXCHANGE COMMISSION

Federal Register Volume 81, Issue 193 (October 5, 2016)

Page Range		69123-69126
FR Document		2016-24009
Federal Register, Volume 81 Issue 193 (Wednesday, October 5, 2016)
[Federal Register Volume 81, Number 193 (Wednesday, October 5, 2016)]
[Notices]
[Pages 69123-69126]
From the Federal Register Online  [www.thefederalregister.org]
[FR Doc No: 2016-24009]



[[Page 69123]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-78987; File No. SR-NSX-2016-13]


Self-Regulatory Organizations; National Stock Exchange, Inc.; 
Notice of Filing and Immediate Effectiveness of a Proposed Rule Change 
To Amend Exchange Rules 11.11 and 11.26 To Describe Changes to System 
Functionality Necessary To Implement the Regulation NMS Plan To 
Implement a Tick Size Pilot Program

September 29, 2016.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that on September 26, 2016, National Stock Exchange, Inc. (``NSX'' or 
the ``Exchange'') filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission'') the proposed rule change, as described in 
Items I and II, which Items have been prepared by the Exchange. The 
Commission is publishing this notice to solicit comment on the proposed 
rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange is proposing to: (1) Amend Exchange Rule 11.11(c), 
Other Types of Orders and Order Modifiers, to specify that certain 
order types will not be supported upon the effective date of the 
Regulation NMS Plan to Implement a Tick Size Pilot (the ``Plan'') \3\ 
and (2) amend Exchange Rule 11.26 to specify that the Exchange will not 
to support the Block Size Order Exemption to the Trade-at rule for Test 
Group Three securities. The Exchange is proposing this rule change 
after carefully considering the scope of the changes to the Exchange's 
trading system (``System'') \4\ to support the functionality 
requirements for Test Group Three securities and the potential for 
introducing additional systemic risk.
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    \3\ See Securities Exchange Act Release No. 72460 (June 24, 
2014), 79 FR 36840 (June 30, 2014).
    \4\ Under Exchange Rule 1.5S.(4) [sic], the term ``System'' is 
defined as the electronic securities communications and trading 
facility designated by the Board of Directors of the Exchange 
through which the orders of Users are consolidated for ranking and 
execution.
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    The Exchange has designated this proposal as a ``non-
controversial'' proposed rule change pursuant to Section 19(b)(3)(A) of 
the Act \5\ and provided the Commission with the notice required by 
Rule 19b-4(f)(6)(iii) under the Act.\6\
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    \5\ 15 U.S.C. 78s(b)(3)(A).
    \6\ 17 CFR 240.19b-4(f)(6)(iii).
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    The text of the proposed rule change is available on the Exchange's 
Web site at http://www.nsx.com, at the principal office of the 
Exchange, and at the Commission's public reference room.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the Exchange included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The Exchange has prepared summaries, set forth in 
sections A, B, and C below, of the most significant parts of such 
statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    On August 25, 2014, NYSE Group, Inc., on behalf of BZX, Chicago 
Stock Exchange, Inc., Bats EDGA Exchange, Inc., Bats EDGX Exchange, 
Inc., Financial Industry Regulatory Authority, Inc. (``FINRA''), NASDAQ 
OMX BX, Inc., NASDAQ OMX PHLX LLC, the Nasdaq Stock Market LLC, New 
York Stock Exchange LLC (``NYSE''), NYSE MKT LLC, and NYSE Arca, Inc. 
(collectively ``Participants''), filed with the Commission, pursuant to 
Section 11A of the Act \7\ and Rule 608 of Regulation NMS 
thereunder,\8\ the Plan to Implement a Tick Size Pilot Program 
(``Pilot'').\9\ The Participants filed the Plan to comply with an order 
issued by the Commission on June 24, 2014.\10\ The Plan \11\ was 
published for comment in the Federal Register on November 7, 2014 and 
was thereafter approved by the Commission, as modified, on May 6, 
2015.\12\ On November 6, 2015, the Commission granted the Participants 
an exemption from implementing the Plan until October 3, 2016.\13\ On 
March 3, 2016, the Commission noticed an amendment to the Plan adding 
NSX as a Participant.\14\
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    \7\ 15 U.S.C. 78k-1.
    \8\ 17 CFR 242.608.
    \9\ See Letter from Brendon J. Weiss, Vice President, 
Intercontinental Exchange, Inc., to Secretary, Commission, dated 
August 25, 2014.
    \10\ See note 3, supra.
    \11\ Unless otherwise specified, capitalized terms used in this 
rule filing are based on the defined terms of the Plan.
    \12\ See Securities Exchange Act Release No. 74892 (May 6, 
2015), 80 FR 27513 (May 13, 2015) (File No. 4-657) (``Approval 
Order'').
    \13\ See Securities Exchange Act Release No. 76382 (November 6, 
2015), 80 FR 70284 (November 13, 2015) (File No. 4-657) (Order 
Granting Exemption From Compliance With the National Market System 
Plan To Implement a Tick Size Pilot Program).
    \14\ See Securities Exchange Act Release No. 77277 (March 3, 
2016), 81 FR 12162 (March 8, 2016).
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    The Plan is designed to allow the Commission, market participants, 
and the public to study and assess the impact of increment conventions 
on the liquidity and trading of the common stocks of small-
capitalization companies. Each Participant is required to comply, and 
to enforce compliance by its member organizations, as applicable, with 
the provisions of the Plan. As is described more fully below, the 
proposed rules would require ETP Holders \15\ to comply with the 
applicable data collection requirements of the Plan.\16\
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    \15\ An ``ETP Holder'' is a registrant of NSX to which NSX has 
issued an ETP. An ``ETP'' is defined as ``. . . an Equity Trading 
Permit issued by the Exchange for effecting approved securities 
transactions on the Exchange's trading facilities. . . .'' See 
Exchange Rule 1.5.E(1).
    \16\ Rule 11.26, Interpretations and Policies .11, which is 
being renumbered to .12, provides that the Rule shall be in effect 
during a pilot period to coincide with the pilot period for the Plan 
(including any extensions to the pilot period for the Plan).
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    The Pilot will include stocks of companies with $3 billion or less 
in market capitalization, an average daily trading volume of one 
million shares or less, and a volume weighted average price of at least 
$2.00 for every trading day. The Pilot will consist of a control group 
of approximately 1,400 Pilot Securities and three test groups with 400 
Pilot Securities in each (selected by a stratified random sampling 
process).\17\ During the pilot, Pilot Securities in the control group 
will be quoted at the current tick size increment of $0.01 per share 
and will trade at the currently permitted increments. Pilot Securities 
in the first test group (``Test Group One'') will be quoted in $0.05 
minimum increments but will continue to trade at any price increment 
that is currently permitted.\18\ Pilot Securities in the second test 
group (``Test Group Two'') will be quoted in $0.05 minimum increments 
and will trade at $0.05 minimum increments subject to a midpoint 
exception, a retail investor order exception, and a negotiated trade

[[Page 69124]]

exception.\19\ Pilot Securities in the third test group (``Test Group 
Three'') will be subject to the same quoting and trading increments as 
Test Group Two and also will be subject to the ``Trade-at'' requirement 
to prevent price matching by a market participant that is not 
displaying at a Trading Center's ``Best Protected Bid'' or ``Best 
Protected Offer,'' unless an enumerated exception applies.\20\ In 
addition to the exceptions provided under Test Group Two, an exception 
for Block Size orders and exceptions that mirror those under Rule 611 
of Regulation NMS \21\ will apply to the Trade-at requirement.
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    \17\ See Section V of the Plan for identification of Pilot 
Securities, including criteria for selection and grouping.
    \18\ See Section VI(B) of the Plan.
    \19\ See Section VI(C) of the Plan.
    \20\ See Section VI(D) of the Plan.
    \21\ 17 CFR 242.611.
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    In approving the Plan, the Commission noted that the Trading Center 
data reporting requirements would facilitate an analysis of the effects 
of the Pilot on liquidity (e.g., transaction costs by order size), 
execution quality (e.g., speed of order executions), market maker 
activity, competition between trading venues (e.g., routing frequency 
of market orders), transparency (e.g., choice between displayed and 
hidden orders), and market dynamics (e.g., rates and speed of order 
cancellations).\22\
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    \22\ See Approval Order, 80 FR at 27543.
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Proposed Amendments to Rule 11.11, Order Types and Modifiers
    The Exchange proposes to amend NSX Rule 11.11(c) to specify that, 
upon the Plan's effective date, certain order types will not be 
supported for trading across all symbols and will be rejected upon 
entry into the System. The Exchange is making this proposal to avoid 
creating unnecessary System complexity and introducing unnecessary 
systemic risk to the System, as well as to avoid expending resources 
unnecessarily in order to support order types that are of limited 
current usage. Pursuant to Rule 1001(a) of Regulation Systems 
Compliance and Integrity (``Regulation SCI''),\23\ the Exchange is 
required to ``. . . establish, maintain and enforce written policies 
and procedures reasonably designed to ensure that its SCI systems, and 
for the purposes of security standards, indirect SCI systems, have 
levels of capacity, integrity, resiliency and security adequate to 
maintain [its] operational capability and promote the maintenance of 
fair and orderly markets.'' The Exchange is proposing the instant rule 
change in order to assure that it will maintain the operational 
capability of the System and assure that the System will be ready to 
operate under Plan requirements as of its effective date, October 3, 
2016.
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    \23\ 17 CFR 242.1001(a).
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    The Exchange has determined to reject all incoming Sweep Orders and 
Destination Specific Orders in all symbols. The Exchange is proposing 
this approach, instead of one in which it would only reject any such 
orders entered in the Plan securities, in order to avoid data anomalies 
that could result if the Exchange were to reject only Sweep Orders and 
Destination Specific Orders in the Pilot securities, but continue to 
allow them in non-Pilot symbols.
Sweep Orders
    The Exchange proposes to amend Rule 11.11(c)(7) to state that upon 
the effective date of the Plan, described in Rule 11.26,\24\ the 
Exchange will reject all Sweep Orders entered into the System. A Sweep 
Order is a limit order that instructs the System to ``sweep'' the 
market. Sweep Orders may be designated as ``Protected Sweep,'' ``Full 
Sweep,'' or ``Destination Sweep.'' An order designated as a Protected 
Sweep Order is converted into one or more limit orders with sizes equal 
to the order sizes in the NSX Book and the order sizes of protected 
quotations at away trading centers to be executed in accordance with 
Exchange Rule 11.15(b).\25\ An order designated as a Full Sweep Order 
is converted into one or more limit orders with sizes equal to the 
sizes of the best available quotations (including manual quotations) in 
the NSX Book and at away trading centers in accordance with Exchange 
Rule 11.15(b). An order designated as a Destination Sweep Order is 
routed to an away trading center specified by the User, after the order 
is exposed to the NSX Book.
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    \24\ NSX Rule 11.26 governs the Exchange's data collection and 
quoting and trading requirements under the Plan.
    \25\ Exchange Rule 11.15(b) pertains to order handling and 
execution of Sweep Orders.
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    The System changes and testing necessary for handling a Sweep Order 
to comply with the Trade-at requirements for Test Group Three 
securities under the Plan are complex and will create unnecessary risk 
to the System relative to ETP Holders' current usage of the order type. 
The Exchange would be required to dedicate significant resources to 
changing the System to ensure that Sweep Orders are handled in 
compliance with the Trade-at prohibition of Test Group Three, even 
though the Exchange has received only one Sweep Order since it resumed 
trading operations in December 2015.\26\ The Exchange believes that 
this extremely limited usage of Sweep Orders does not justify creating 
additional System complexity and introducing the inherent risk to the 
System in creating such complexity by supporting these order types. The 
Exchange has determined that the scope of programming and testing to 
assure that Sweep Orders would execute and route consistent with the 
requirements of the Plan does not justify the level of potential risk 
involved, especially in view of the October 3, 2016 Plan implementation 
date. As a result of these factors, the Exchange proposes to reject all 
Sweep Orders entered into the System for all securities traded on the 
Exchange.
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    \26\ See Exchange Act Release No. 76640 (December 14, 2015), 80 
FR 79122 (December 18, 2015), Order Approving a Proposed Rule Change 
to Modify and Eliminate Certain Rules and to Enable Trading Activity 
to Resume on the Exchange. Trading operations resumed on December 
22, 2015 and since that time, the Exchange has received one Sweep 
Order.
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Destination Specific Orders
    The Exchange proposes to amend Rule 11.26(c)(7) [sic] to specify 
that upon the effective date of the Plan, described in NSX Rule 11.26, 
the Exchange will reject all Destination Specific Orders entered into 
the System. A Destination Specific Order is a market or limit order 
that instructs the System to route the order to a specified away 
trading center, after exposing the order to the NSX Book. Users can 
access markets offering bids and offers other than protected quotations 
(i.e., manual quotations) by entering a Destination Specific Order. The 
System changes necessary for handling of a Destination Specific Order 
to comply with the Trade-at provision of the Plan become increasingly 
complex and introduce unnecessary risk relative to ETP Holders' usage 
of the order type. For example, in a Test Group Three security, which 
is subject to the Trade-at Prohibition, the Exchange would not be able 
to follow the customer's instruction to route the order to a specific 
destination if another trading center was displaying a protected 
quotation at the Trade-at price, and the order would have to be 
canceled. The Exchange would be required to dedicate significant 
resources to programming the System to ensure that Destination Specific 
Orders are handled in compliance with the Trade-at prohibition of Test 
Group Three, even though the Exchange has not received a single 
Destination Specific Order since resuming trading operations in

[[Page 69125]]

December 2015. The Exchange believes that current non-usage of 
Destination Specific Orders does not justify using extensive resources 
to create additional System complexity by supporting the Destination 
Specific Order type for Pilot securities. As a result of these factors, 
the Exchange proposes to not accept all Destination Specific Orders 
entered into the System.
Block Size Order Exemption
    The Exchange is further proposing to renumber Exchange Rule 11.26, 
Interpretations and Policies .11 to Interpretations and Policies .12 
and to adopt new Interpretations and Policies .11 to specify that the 
Exchange will not to support the Block Size Order Exemption to the 
Trade-at rule for Test Group Three securities. Pursuant to the Plan, 
the Exchange adopted Rule 11.26(c)(3)(d)(iii)c. [sic] to provide for 
the Block Size Order Exemption, which allows an ETP Holder to execute a 
block size order (i.e., an order of 5,000 shares or for a quantity of 
stock having a market value of at least $100,000) against undisplayed 
liquidity in Test Group Three securities at the Trade-at price. The 
Exemption was included in the Plan to allow customers to completely 
fill their large orders at a single venue, thereby avoiding the time 
and cost associated with filling a block size order through many 
smaller orders routed to other execution venues. The Exchange has 
determined that, because of the programming required to implement the 
exemption, it will not support the exemption and will handle a block 
size order in a Test Group Three security as the Exchange would handle 
any other order not subject to exemption. Thus, block size orders in 
Test Group Three securities entered on NSX will be subject to the 
Trade-at prohibition, unless the order qualifies for one of the other 
exemptions under the rule.
    The Exchange will not support the Block Size Order Exemption 
because block size orders are generally not applicable to the order 
types that the Exchange supports and, as such, the Exchange has rarely 
received block size orders. The Exchange has determined that the System 
changes necessary to exempt a block size order from complying with the 
Trade-at provision of the Plan are complex and will introduce 
unnecessary risk relative to ETP Holders' usage of block size orders on 
the Exchange.
    The Exchange does not believe that market participants will be 
harmed in any way as a result of this determination because they can 
enter block-size orders in Test Group 3 securities on another exchanges 
for execution. The Exchange will provide notice to all of its ETP 
Holders that it will not support the Block Size Order Exemption for 
Test Group Three securities. Further, since the Exchange receives 
rarely receives block-size orders at present, there is minimal risk 
that the data it produces under the Plan will be affected by the 
absence of information relating to the Block Size Order Exemption.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act \27\ in general, and furthers the objectives of Section 
6(b)(5) of the Act \28\ in particular, in that it is designed to 
promote just and equitable principles of trade, to foster cooperation 
and coordination with persons engaged in facilitating transactions in 
securities, to remove impediments to and perfect the mechanism of a 
free and open market and a national market system and, in general, to 
protect investors and the public interest. The Plan requires the 
Exchange to establish, maintain, and enforce written policies and 
procedures that are reasonably designed to comply with applicable 
quoting and trading requirements specified in the Plan. The proposed 
rule change is designed to comply with the Plan, reduce complexity, and 
enhance System resiliency while not adversely affecting the data 
collected under the Plan. Therefore, the Exchange believes that the 
proposed rule changes are reasonably designed to comply with applicable 
quoting and trading requirements specified in the Plan and, as 
discussed further below, other applicable regulations.
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    \27\ 15 U.S.C. 78f(b).
    \28\ 15 U.S.C. 78f(b)(5).
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    The Exchange believes that this proposal is consistent with the Act 
because it is designed to assist the Exchange in meeting its regulatory 
obligations pursuant to the Plan by allowing the Exchange to dedicate 
its resources to adjusting System functionalities that are consistently 
used by the Exchange and are impacted under the Plan. In approving the 
Plan, the Commission noted that the Pilot was an appropriate, data-
driven test that was designed to evaluate the impact of a wider tick 
size on trading, liquidity, and the market quality of securities of 
smaller capitalization companies, and was therefore in furtherance of 
the purposes of the Act. The Exchange believes that this proposal is in 
furtherance of the objectives of the Plan, as identified by the 
Commission, and is therefore consistent with the Act because the 
proposal allows the Exchange to further dedicate its resources to 
System changes that are in furtherance of compliance with the Plan.
    The Exchange also believes that its proposed amendments are 
consistent with the Act because they are intended to eliminate 
unnecessary System complexity and risk based on the de minimis current 
usage of such order types and sizes in Pilot Securities under the 
Plan's minimum trading and quoting increments or the Trade-at 
Prohibition. The Commission adopted Regulation SCI in November 2014 to 
strengthen the technology infrastructure of the U.S. securities 
markets.\29\ Regulation SCI is designed to reduce the occurrence of 
system issues, improve resiliency when system problems do occur, and 
enhance the Commission's oversight and enforcement of securities market 
technology infrastructure.
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    \29\ See Securities Exchange Act Release No. 73639 (November 19, 
2014), 79 FR 72251 (December 5, 2014) (``Regulation SCI Approval 
Order'').
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    Regulation SCI requires the Exchange to establish written policies 
and procedures reasonably designed to ensure that their systems have 
levels of capacity, integrity, resiliency, availability, and security 
adequate to maintain their operational capability and promote the 
maintenance of fair and orderly markets, and that they operate in a 
manner that complies with the Exchange Act. Each of these proposed 
changes are intended to reduce complexity and risk in the System to 
ensure the Exchange's technology remains resilient. In determining the 
scope of the proposed changes, the Exchange carefully weighed the 
impact on the Pilot, System complexity, and the usage of such order 
types and block size orders in Pilot Securities.\30\ The potential 
complexity results from code changes for a majority of the Exchange's 
order types, which requires the implementation and testing of a 
separate branch of code for each Test Group. Development work for the 
Tick Pilot results in the creation of four additional branches of code 
that are to be developed and tested (e.g., Control Group and three Test 
Groups). Given these complexities, the Exchange determined that the 
changes proposed herein are necessary to ensure continued System 
resiliency in accordance with the requirements of Regulation SCI. 
Therefore, the Exchange believes the proposed rule change

[[Page 69126]]

promotes just and equitable principles of trade, removes impediments to 
and perfects the mechanism of a free and open market and a national 
market system and, in general, to protect investors and the public 
interest.
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    \30\ But for the Plan, the Exchange notes that it would not have 
proposed to amend the operation of Sweep Orders and Destination 
Specific Orders, as well as not support the Block Size Order 
Exemption, as described herein.
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    In addition, each of these proposed changes would have no impact on 
the data reported pursuant to the Plan. As evidenced above, Sweep 
Orders and Destination Specific Orders, and block size orders have 
rarely been used since the Exchange resumed trading operations. The 
limited usage and execution scenarios do not justify the additional 
system complexity which would be created by modifying the System to 
support such order types and support the Block Size Order Exemption in 
order to comply with the Plan. Therefore, the Exchange believes each 
proposed change is a reasonable means to assure the System's integrity, 
resiliency, and availability are such that they will continue to 
promote the maintenance of fair and orderly markets. Due to the 
additional complexity and limited usage, the Exchange believes it is 
not unfairly discriminatory to apply the changes proposed herein as 
such changes are necessary to reduce complexity and ensure continued 
System resiliency in accordance with the requirements of Regulation 
SCI. Moreover, since the Exchange is proposing to reject all Sweep 
Orders and Destination Specific Orders, and not just those in Pilot 
securities or on a test group-specific basis, there is no potential 
that the data compiled and submitted by the Exchange pursuant to the 
Plan will be affected by disparate standards applied to Plan 
securities.

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
result in any burden on competition that is not necessary or 
appropriate in furtherance of the purposes of the Act. The Exchange 
notes that the proposed rule change is designed to assist the Exchange 
in meeting its regulatory obligations pursuant to the Plan, reduce 
System complexity, and enhance resiliency. The Exchange also notes that 
the proposed rule change will apply equally to all such ETP Holders, as 
will the data collection requirements for Market Makers.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    The Exchange has neither solicited nor received comments on the 
proposed rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    The foregoing rule change has become effective pursuant to Section 
19(b)(3)(A) \31\ of the Act and Rule 19b-4(f)(6) \32\ thereunder 
because the proposal does not: (i) Significantly affect the protection 
of investors or the public interest; (ii) impose any significant burden 
on competition; and (iii) by its terms, become operative for 30 days 
from the date on which it was filed, or such shorter time as the 
Commission may designate if consistent with the protection of investors 
and the public interest.
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    \31\ 15 U.S.C. 78s(b)(3)(A).
    \32\ 17 CFR 240.19b-4(f)(6).
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    A proposed rule change filed under Rule 19b-4(f)(6) \33\ normally 
does not become operative prior to 30 days after the date of the 
filing. However, pursuant to Rule 19b-4(f)(6)(iii),\34\ the Commission 
may designate a shorter time if such action is consistent with the 
protection of investors and the public interest. The Exchange has asked 
the Commission to waive the 30-day operative delay so that so that the 
proposed rule change can become operative on September 26, 2016.
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    \33\ 17 CFR 240.19b-4(f)(6).
    \34\ 17 CFR 240.19b-4(f)(6)(iii).
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    The Commission believes that waiving the 30-day operative delay is 
consistent with the protection of investors and the public interest 
because it will allow the Exchange to implement the proposed rules 
immediately thereby preventing delays in the implementation of the 
Plan. The Commission notes that the Plan is scheduled to start on 
October 3, 2016. Therefore, the Commission hereby waives the 30-day 
operative delay and designates the proposed rule change to be operative 
upon filing with the Commission.\35\
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    \35\ For purposes only of waiving the operative delay for this 
proposal, the Commission has considered the proposed rule's impact 
on efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
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IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
File Number SR-NSX-2016-13 on the subject line.

Paper Comments

     Send paper comments in triplicate to Brent J. Fields, 
Secretary, Securities and Exchange Commission, 100 F Street NE., 
Washington, DC 20549-1090.

All submissions should refer to File No. SR-NSX-2016-13. This file 
number should be included in the subject line if email is used. To help 
the Commission process and review comments more efficiently, please use 
only one method. The Commission will post all comments on the 
Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for Web site viewing and printing in 
the Commission's Public Reference Room, 100 F Street NE., Washington, 
DC 20549, on official business days between the hours of 10 a.m. and 3 
p.m. eastern time. Copies of such filings will also be available for 
inspection and copying at the principal office of the Exchange. All 
comments received will be posted without change; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to file number SR-NSX-2016-13 and should be 
submitted on or before October 26, 2016.

    For the Commission by the Division of Trading and Markets, 
pursuant to the delegated authority.\36\
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    \36\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-24009 Filed 10-4-16; 8:45 am]
BILLING CODE 8011-01-P
69124 Federal Register / Vol. 81, No. 193 / Wednesday, October 5, 2016 / Notices

exception.19 Pilot Securities in the third will be ready to operate under Plan trading operations in December 2015.26
test group (‘‘Test Group Three’’) will be requirements as of its effective date, The Exchange believes that this
subject to the same quoting and trading October 3, 2016. extremely limited usage of Sweep
increments as Test Group Two and also The Exchange has determined to Orders does not justify creating
will be subject to the ‘‘Trade-at’’ reject all incoming Sweep Orders and additional System complexity and
requirement to prevent price matching Destination Specific Orders in all introducing the inherent risk to the
by a market participant that is not symbols. The Exchange is proposing System in creating such complexity by
displaying at a Trading Center’s ‘‘Best this approach, instead of one in which supporting these order types. The
Protected Bid’’ or ‘‘Best Protected it would only reject any such orders Exchange has determined that the scope
Offer,’’ unless an enumerated exception entered in the Plan securities, in order of programming and testing to assure
applies.20 In addition to the exceptions to avoid data anomalies that could that Sweep Orders would execute and
provided under Test Group Two, an result if the Exchange were to reject route consistent with the requirements
exception for Block Size orders and only Sweep Orders and Destination of the Plan does not justify the level of
exceptions that mirror those under Rule Specific Orders in the Pilot securities, potential risk involved, especially in
611 of Regulation NMS 21 will apply to but continue to allow them in non-Pilot view of the October 3, 2016 Plan
the Trade-at requirement. symbols. implementation date. As a result of
In approving the Plan, the these factors, the Exchange proposes to
Commission noted that the Trading Sweep Orders reject all Sweep Orders entered into the
Center data reporting requirements System for all securities traded on the
would facilitate an analysis of the The Exchange proposes to amend Exchange.
effects of the Pilot on liquidity (e.g., Rule 11.11(c)(7) to state that upon the
effective date of the Plan, described in Destination Specific Orders
transaction costs by order size),
execution quality (e.g., speed of order Rule 11.26,24 the Exchange will reject The Exchange proposes to amend
executions), market maker activity, all Sweep Orders entered into the Rule 11.26(c)(7) [sic] to specify that
competition between trading venues System. A Sweep Order is a limit order upon the effective date of the Plan,
(e.g., routing frequency of market that instructs the System to ‘‘sweep’’ the described in NSX Rule 11.26, the
orders), transparency (e.g., choice market. Sweep Orders may be Exchange will reject all Destination
between displayed and hidden orders), designated as ‘‘Protected Sweep,’’ ‘‘Full Specific Orders entered into the System.
and market dynamics (e.g., rates and Sweep,’’ or ‘‘Destination Sweep.’’ An A Destination Specific Order is a market
speed of order cancellations).22 order designated as a Protected Sweep or limit order that instructs the System
Order is converted into one or more to route the order to a specified away
Proposed Amendments to Rule 11.11, limit orders with sizes equal to the order trading center, after exposing the order
Order Types and Modifiers sizes in the NSX Book and the order to the NSX Book. Users can access
The Exchange proposes to amend sizes of protected quotations at away markets offering bids and offers other
NSX Rule 11.11(c) to specify that, upon trading centers to be executed in than protected quotations (i.e., manual
the Plan’s effective date, certain order accordance with Exchange Rule quotations) by entering a Destination
types will not be supported for trading 11.15(b).25 An order designated as a Full Specific Order. The System changes
across all symbols and will be rejected Sweep Order is converted into one or necessary for handling of a Destination
upon entry into the System. The more limit orders with sizes equal to the Specific Order to comply with the
Exchange is making this proposal to sizes of the best available quotations Trade-at provision of the Plan become
avoid creating unnecessary System (including manual quotations) in the increasingly complex and introduce
complexity and introducing NSX Book and at away trading centers unnecessary risk relative to ETP
unnecessary systemic risk to the in accordance with Exchange Rule Holders’ usage of the order type. For
System, as well as to avoid expending 11.15(b). An order designated as a example, in a Test Group Three
resources unnecessarily in order to Destination Sweep Order is routed to an security, which is subject to the Trade-
support order types that are of limited away trading center specified by the at Prohibition, the Exchange would not
current usage. Pursuant to Rule 1001(a) User, after the order is exposed to the be able to follow the customer’s
of Regulation Systems Compliance and NSX Book. instruction to route the order to a
Integrity (‘‘Regulation SCI’’),23 the The System changes and testing specific destination if another trading
Exchange is required to ‘‘. . . establish, necessary for handling a Sweep Order to center was displaying a protected
maintain and enforce written policies comply with the Trade-at requirements quotation at the Trade-at price, and the
and procedures reasonably designed to for Test Group Three securities under order would have to be canceled. The
ensure that its SCI systems, and for the the Plan are complex and will create Exchange would be required to dedicate
purposes of security standards, indirect unnecessary risk to the System relative significant resources to programming
SCI systems, have levels of capacity, to ETP Holders’ current usage of the the System to ensure that Destination
integrity, resiliency and security order type. The Exchange would be Specific Orders are handled in
adequate to maintain [its] operational required to dedicate significant compliance with the Trade-at
capability and promote the maintenance resources to changing the System to prohibition of Test Group Three, even
of fair and orderly markets.’’ The ensure that Sweep Orders are handled though the Exchange has not received a
Exchange is proposing the instant rule in compliance with the Trade-at single Destination Specific Order since
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change in order to assure that it will prohibition of Test Group Three, even resuming trading operations in
maintain the operational capability of though the Exchange has received only
the System and assure that the System one Sweep Order since it resumed 26 See Exchange Act Release No. 76640

(December 14, 2015), 80 FR 79122 (December 18,
19 See 2015), Order Approving a Proposed Rule Change to
Section VI(C) of the Plan. 24 NSX Rule 11.26 governs the Exchange’s data
20 See
Modify and Eliminate Certain Rules and to Enable
Section VI(D) of the Plan. collection and quoting and trading requirements Trading Activity to Resume on the Exchange.
21 17 CFR 242.611.
under the Plan. Trading operations resumed on December 22, 2015
22 See Approval Order, 80 FR at 27543. 25 Exchange Rule 11.15(b) pertains to order and since that time, the Exchange has received one
23 17 CFR 242.1001(a). handling and execution of Sweep Orders. Sweep Order.

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December 2015. The Exchange believes exchanges for execution. The Exchange because the proposal allows the
that current non-usage of Destination will provide notice to all of its ETP Exchange to further dedicate its
Specific Orders does not justify using Holders that it will not support the resources to System changes that are in
extensive resources to create additional Block Size Order Exemption for Test furtherance of compliance with the
System complexity by supporting the Group Three securities. Further, since Plan.
Destination Specific Order type for Pilot the Exchange receives rarely receives The Exchange also believes that its
securities. As a result of these factors, block-size orders at present, there is proposed amendments are consistent
the Exchange proposes to not accept all minimal risk that the data it produces with the Act because they are intended
Destination Specific Orders entered into under the Plan will be affected by the to eliminate unnecessary System
the System. absence of information relating to the complexity and risk based on the de
Block Size Order Exemption. minimis current usage of such order
Block Size Order Exemption types and sizes in Pilot Securities under
The Exchange is further proposing to 2. Statutory Basis the Plan’s minimum trading and quoting
renumber Exchange Rule 11.26, The Exchange believes that its increments or the Trade-at Prohibition.
Interpretations and Policies .11 to proposal is consistent with Section 6(b) The Commission adopted Regulation
Interpretations and Policies .12 and to of the Act 27 in general, and furthers the SCI in November 2014 to strengthen the
adopt new Interpretations and Policies objectives of Section 6(b)(5) of the Act 28 technology infrastructure of the U.S.
.11 to specify that the Exchange will not in particular, in that it is designed to securities markets.29 Regulation SCI is
to support the Block Size Order promote just and equitable principles of designed to reduce the occurrence of
Exemption to the Trade-at rule for Test trade, to foster cooperation and system issues, improve resiliency when
Group Three securities. Pursuant to the coordination with persons engaged in system problems do occur, and enhance
Plan, the Exchange adopted Rule facilitating transactions in securities, to the Commission’s oversight and
11.26(c)(3)(d)(iii)c. [sic] to provide for remove impediments to and perfect the enforcement of securities market
the Block Size Order Exemption, which mechanism of a free and open market technology infrastructure.
allows an ETP Holder to execute a block and a national market system and, in Regulation SCI requires the Exchange
size order (i.e., an order of 5,000 shares general, to protect investors and the to establish written policies and
or for a quantity of stock having a public interest. The Plan requires the procedures reasonably designed to
market value of at least $100,000) Exchange to establish, maintain, and ensure that their systems have levels of
against undisplayed liquidity in Test enforce written policies and procedures capacity, integrity, resiliency,
Group Three securities at the Trade-at that are reasonably designed to comply availability, and security adequate to
price. The Exemption was included in with applicable quoting and trading maintain their operational capability
the Plan to allow customers to requirements specified in the Plan. The and promote the maintenance of fair
completely fill their large orders at a proposed rule change is designed to and orderly markets, and that they
single venue, thereby avoiding the time comply with the Plan, reduce operate in a manner that complies with
and cost associated with filling a block complexity, and enhance System the Exchange Act. Each of these
size order through many smaller orders resiliency while not adversely affecting proposed changes are intended to
routed to other execution venues. The the data collected under the Plan. reduce complexity and risk in the
Exchange has determined that, because Therefore, the Exchange believes that System to ensure the Exchange’s
of the programming required to the proposed rule changes are technology remains resilient. In
implement the exemption, it will not reasonably designed to comply with determining the scope of the proposed
support the exemption and will handle applicable quoting and trading changes, the Exchange carefully
a block size order in a Test Group Three requirements specified in the Plan and, weighed the impact on the Pilot, System
security as the Exchange would handle as discussed further below, other complexity, and the usage of such order
any other order not subject to applicable regulations. types and block size orders in Pilot
exemption. Thus, block size orders in The Exchange believes that this Securities.30 The potential complexity
Test Group Three securities entered on proposal is consistent with the Act results from code changes for a majority
NSX will be subject to the Trade-at because it is designed to assist the of the Exchange’s order types, which
prohibition, unless the order qualifies Exchange in meeting its regulatory requires the implementation and testing
for one of the other exemptions under obligations pursuant to the Plan by of a separate branch of code for each
the rule. allowing the Exchange to dedicate its Test Group. Development work for the
The Exchange will not support the resources to adjusting System Tick Pilot results in the creation of four
Block Size Order Exemption because functionalities that are consistently used additional branches of code that are to
block size orders are generally not by the Exchange and are impacted be developed and tested (e.g., Control
applicable to the order types that the under the Plan. In approving the Plan, Group and three Test Groups). Given
Exchange supports and, as such, the the Commission noted that the Pilot was these complexities, the Exchange
Exchange has rarely received block size an appropriate, data-driven test that was determined that the changes proposed
orders. The Exchange has determined designed to evaluate the impact of a herein are necessary to ensure
that the System changes necessary to wider tick size on trading, liquidity, and continued System resiliency in
exempt a block size order from the market quality of securities of accordance with the requirements of
complying with the Trade-at provision smaller capitalization companies, and Regulation SCI. Therefore, the Exchange
of the Plan are complex and will
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was therefore in furtherance of the believes the proposed rule change
introduce unnecessary risk relative to purposes of the Act. The Exchange
ETP Holders’ usage of block size orders believes that this proposal is in 29 See Securities Exchange Act Release No. 73639

on the Exchange. furtherance of the objectives of the Plan, (November 19, 2014), 79 FR 72251 (December 5,
The Exchange does not believe that as identified by the Commission, and is 2014) (‘‘Regulation SCI Approval Order’’).
30 But for the Plan, the Exchange notes that it
market participants will be harmed in therefore consistent with the Act would not have proposed to amend the operation
any way as a result of this determination of Sweep Orders and Destination Specific Orders,
because they can enter block-size orders 27 15 U.S.C. 78f(b). as well as not support the Block Size Order
in Test Group 3 securities on another 28 15 U.S.C. 78f(b)(5). Exemption, as described herein.

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69126 Federal Register / Vol. 81, No. 193 / Wednesday, October 5, 2016 / Notices

promotes just and equitable principles C. Self-Regulatory Organization’s change is consistent with the Act.
of trade, removes impediments to and Statement on Comments on the Comments may be submitted by any of
perfects the mechanism of a free and Proposed Rule Change Received From the following methods:
open market and a national market Members, Participants, or Others
Electronic Comments
system and, in general, to protect The Exchange has neither solicited
investors and the public interest. nor received comments on the proposed • Use the Commission’s Internet
In addition, each of these proposed rule change. comment form (http://www.sec.gov/
changes would have no impact on the rules/sro.shtml); or
III. Date of Effectiveness of the
data reported pursuant to the Plan. As Proposed Rule Change and Timing for • Send an email to rule-comments@
evidenced above, Sweep Orders and Commission Action sec.gov. Please include File Number SR–
Destination Specific Orders, and block NSX–2016–13 on the subject line.
The foregoing rule change has become
size orders have rarely been used since effective pursuant to Section Paper Comments
the Exchange resumed trading 19(b)(3)(A) 31 of the Act and Rule 19b–
operations. The limited usage and 4(f)(6) 32 thereunder because the • Send paper comments in triplicate
execution scenarios do not justify the proposal does not: (i) Significantly affect to Brent J. Fields, Secretary, Securities
additional system complexity which the protection of investors or the public and Exchange Commission, 100 F Street
would be created by modifying the interest; (ii) impose any significant NE., Washington, DC 20549–1090.
System to support such order types and burden on competition; and (iii) by its
support the Block Size Order Exemption All submissions should refer to File No.
terms, become operative for 30 days
SR–NSX–2016–13. This file number
in order to comply with the Plan. from the date on which it was filed, or
should be included in the subject line
Therefore, the Exchange believes each such shorter time as the Commission
may designate if consistent with the if email is used. To help the
proposed change is a reasonable means
protection of investors and the public Commission process and review
to assure the System’s integrity, comments more efficiently, please use
resiliency, and availability are such that interest.
A proposed rule change filed under only one method. The Commission will
they will continue to promote the post all comments on the Commission’s
maintenance of fair and orderly markets. Rule 19b–4(f)(6) 33 normally does not
become operative prior to 30 days after Internet Web site (http://www.sec.gov/
Due to the additional complexity and rules/sro.shtml). Copies of the
limited usage, the Exchange believes it the date of the filing. However, pursuant
to Rule 19b–4(f)(6)(iii),34 the submission, all subsequent
is not unfairly discriminatory to apply amendments, all written statements
Commission may designate a shorter
the changes proposed herein as such with respect to the proposed rule
time if such action is consistent with the
changes are necessary to reduce protection of investors and the public change that are filed with the
complexity and ensure continued interest. The Exchange has asked the Commission, and all written
System resiliency in accordance with Commission to waive the 30-day communications relating to the
the requirements of Regulation SCI. operative delay so that so that the proposed rule change between the
Moreover, since the Exchange is proposed rule change can become Commission and any person, other than
proposing to reject all Sweep Orders operative on September 26, 2016. those that may be withheld from the
and Destination Specific Orders, and The Commission believes that public in accordance with the
not just those in Pilot securities or on a waiving the 30-day operative delay is provisions of 5 U.S.C. 552, will be
test group-specific basis, there is no consistent with the protection of available for Web site viewing and
potential that the data compiled and investors and the public interest printing in the Commission’s Public
submitted by the Exchange pursuant to because it will allow the Exchange to Reference Room, 100 F Street NE.,
the Plan will be affected by disparate implement the proposed rules Washington, DC 20549, on official
standards applied to Plan securities. immediately thereby preventing delays business days between the hours of 10
in the implementation of the Plan. The a.m. and 3 p.m. eastern time. Copies of
B. Self-Regulatory Organization’s Commission notes that the Plan is such filings will also be available for
Statement on Burden on Competition scheduled to start on October 3, 2016. inspection and copying at the principal
Therefore, the Commission hereby office of the Exchange. All comments
The Exchange does not believe that waives the 30-day operative delay and received will be posted without change;
the proposed rule change will result in designates the proposed rule change to the Commission does not edit personal
any burden on competition that is not be operative upon filing with the identifying information from
necessary or appropriate in furtherance Commission.35 submissions. You should submit only
of the purposes of the Act. The information that you wish to make
Exchange notes that the proposed rule IV. Solicitation of Comments available publicly. All submissions
change is designed to assist the Interested persons are invited to should refer to file number SR–NSX–
Exchange in meeting its regulatory submit written data, views, and 2016–13 and should be submitted on or
obligations pursuant to the Plan, reduce arguments concerning the foregoing, before October 26, 2016.
System complexity, and enhance including whether the proposed rule For the Commission by the Division of
asabaliauskas on DSK3SPTVN1PROD with NOTICES

resiliency. The Exchange also notes that Trading and Markets, pursuant to the
31 15 U.S.C. 78s(b)(3)(A).
the proposed rule change will apply delegated authority.36
32 17 CFR 240.19b–4(f)(6).
equally to all such ETP Holders, as will 33 17 CFR 240.19b–4(f)(6). Robert W. Errett,
the data collection requirements for 34 17 CFR 240.19b–4(f)(6)(iii). Deputy Secretary.
Market Makers. 35 For purposes only of waiving the operative [FR Doc. 2016–24009 Filed 10–4–16; 8:45 am]
delay for this proposal, the Commission has
BILLING CODE 8011–01–P
considered the proposed rule’s impact on
efficiency, competition, and capital formation. See
36 17 CFR 200.30–3(a)(12).
15 U.S.C. 78c(f).

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Document Created: 2016-10-05 03:29:27
Document Modified: 2016-10-05 03:29:27
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		Notices
FR Citation		81 FR 69123