82 FR 11252 - Self-Regulatory Organizations; Chicago Stock Exchange, Inc.; Notice of Filing of Proposed Rule Change To Adopt the CHX Liquidity Enhancing Access Delay

SECURITIES AND EXCHANGE COMMISSION

Federal Register Volume 82, Issue 33 (February 21, 2017)

Page Range		11252-11272
FR Document		2017-03296

Federal Register, Volume 82 Issue 33 (Tuesday, February 21, 2017)

[Federal Register Volume 82, Number 33 (Tuesday, February 21, 2017)]
[Notices]
[Pages 11252-11272]
From the Federal Register Online [www.thefederalregister.org]
[FR Doc No: 2017-03296]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-80041; File No. SR-CHX-2017-04]

Self-Regulatory Organizations; Chicago Stock Exchange, Inc.;
Notice of Filing of Proposed Rule Change To Adopt the CHX Liquidity
Enhancing Access Delay

February 14, 2017.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on February 10, 2017, the Chicago Stock Exchange, Inc. (``CHX'' or
``Exchange'') filed with the Securities and Exchange Commission (the
``Commission'') the proposed rule change as described in Items I, II
and III below, which Items have been prepared by the self-regulatory
organization. The Commission is publishing this notice to solicit
comments 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

CHX proposes to amend the Rules of the Exchange (``CHX Rules'') to
adopt the CHX Liquidity Enhancing Access Delay. The text of this
proposed rule change is available on the Exchange's Web site at http://www.chx.com/regulatory-operations/rule-filings/, 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 self-regulatory organization
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 those 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 the
Statutory Basis for, the Proposed Rule Change

1. Purpose
(1) Overview
The Exchange proposes to amend the CHX Rules to adopt the CHX
Liquidity Enhancing Access Delay (``LEAD''). In sum, LEAD will require
all new incoming orders, cancel and cancel/replace messages to be
subject to a 350-microsecond intentional access delay; provided,
however, that (1) new incoming orders \3\ submitted by LEAD Market
Makers (``LEAD MM''), a new class of CHX Market Maker \4\ with
heightened quoting and trading obligations, that would be immediately
ranked on the CHX book without executing against any resting orders on
the CHX book and (2) certain cancel messages related to resting orders
that were submitted by LEAD MMs will not be delayed. LEAD will be
applied to all securities traded on the Exchange throughout the trading
day.\5\ LEAD is designed to enhance displayed liquidity and price
discovery by minimizing the effectiveness of latency arbitrage
strategies that diminish displayed liquidity and impair price
discovery, as described in detail below.
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\3\ ``New incoming orders'' are orders received by the Matching
System for the first time. As discussed below, LEAD will not apply
to other situations where existing orders or portions thereof are
treated as incoming orders, such as (1) resting orders that are
price slid into a new price point pursuant to the CHX Only Price
Sliding or Limit Up-Limit Down Price Sliding Processes and (2)
unexecuted remainders of routed orders released into the Matching
System. See CHX Article 1, Rule 2(b)(1)(C); see also CHX Article 20,
Rule 2A(b); see also CHX Article 20, Rule 8(b)(7). Incidentally, the
Exchange is proposing to amend CHX Article 20, Rule 8(a)(7) to
delete the word ``new'' from the last sentence, so that the rule
provides, in pertinent part, that if no balance exists at the time a
part of an unexecuted remainder of a routed order is returned to the
Matching System, it shall be treated an incoming order.
\4\ See CHX Article 1, Rule 1(tt) defining ``Market Maker''; see
also generally CHX Article 16 (Market Makers).
\5\ Each trading day is divided into four trading sessions:
Early session, regular trading session, late trading session and
late crossing session. See CHX Article 20, Rule 1(b). The Exchange
only accepts cross orders during the late crossing session and thus
does not accept or rank any single-sided orders during the late
crossing session. See CHX Article 1, Rule 2(a)(2) defining ``cross
order.''
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(2) Latency Arbitrage
As used herein, ``latency arbitrage'' means the practice of
exploiting

[[Page 11253]]

disparities in the price of a security or related securities that are
being traded in different markets by taking advantage of the time it
takes to access and respond to symmetric public information.\6\ At CHX,
latency arbitrage is effected by low-latency market participants that
leverage microsecond speed advantages to take resting liquidity at
stale prices from the CHX limit order book.
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\6\ See Letter to Brent J. Fields, Secretary, SEC, from Eric
Budish, Professor of Economic and David G. Booth Faculty Fellow, the
University of Chicago Booth School of Business (October 13, 2016)
(``Budish LTAD Letter'') at 2. Given its emphasis on speed, latency
arbitrage has resulted in a well-documented and escalating
technology race among certain market participants seeking to obtain
ever smaller speed advantages. See Eric Budish, Peter Cramton and
John Shim, ``The High-Frequency Trading Arms Race: Frequent Batch
Auctions as a Market Design Response,'' Quarterly Journal of
Economics, Vol. 130(4), November 2015 (``Budish Paper''); see also,
Elaine Wah and Michael Wellman, ``Latency Arbitrage, Market
Fragmentation, and Efficiency: A Two-Market Model,'' 4th ACM
Conference on Electronic Commerce, June 2013.
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In 2016, the Exchange experienced a material decline in CHX volume
and liquidity in the SPDR S&P 500 trust exchange-traded fund
(``SPY''),\7\ which the Exchange has attributed to latency arbitrage
activity in SPY first observed at CHX in January 2016 (``SPY latency
arbitrage activity'').\8\ Specifically, during the period of January
through July 2016, the Exchange observed unusual messaging patterns in
SPY whereby an execution of a large inbound Immediate Or Cancel order
(``IOC'') against a contra-side order resting on the CHX book was
frequently followed by a late cancel message for the executed resting
order soon after the execution (``Too Late to Cancel'' or ``TLTC'').\9\
Based on these observations, Participant corroboration of the
observations and market data analysis,\10\ the Exchange found that SPY
latency arbitrage activity caused CHX liquidity providers to
dramatically reduce displayed liquidity in SPY (and at times withdraw
from the market altogether), which materially decreased liquidity in
SPY market wide, especially in light of CHX's significant contributions
to overall volume and liquidity in SPY prior to the declines.\11\
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\7\ Most of the CHX liquidity in SPY and other S&P 500-
correlated securities is provided as part of an arbitrage strategy
between CHX and the futures markets, whereby liquidity providers
utilize, among other things, proprietary algorithms to price and
size resting orders on CHX to track index market data from a
derivatives market (e.g., E-Mini S&P traded on the Chicago
Mercantile Exchange's Globex trading platform).
\8\ A detailed analysis (``CHX ETF Analysis'') of the impact of
latency arbitrage on displayed liquidity in SPY at CHX, for the
period of August 2015 through July 2016 (``Analysis Period''), may
be found under Appendix A. The market data utilized by the CHX ETF
Analysis, as well as defined terms and notes, may be found under
Appendix B. Additional analysis regarding the potential impact of
LEAD on liquidity takers may be found under Appendix C. As discussed
in detail under Appendix A below, prior to the beginning of the SPY
latency arbitrage activity in January 2016, CHX volume and liquidity
in SPY constituted a material portion of overall volume and
liquidity in SPY marketwide. For example, the CHX Market Share in
SPY as a percentage of Total Volume decreased from 5.73% in January
2016 to 0.57% in July 2016, while the Control Securities did not
experience similar declines. See infra Appendix A; see also infra
Appendix B Calculation Set 1a. Also, the Time-weighted Average CHX
Size At The NBBO in SPY relative to the total NMS Size At The NBBO
in SPY decreased from 44.36% in January 2016 to 3.39% of the total
NMS Size At The NBBO in SPY in July 2016, while the Control
Securities did not experience similar declines. See also infra
Appendix A; see also infra Appendix B Calculations Sets 3a and 4a.
\9\ The Exchange did not begin maintaining TLTC data until May
2016. See infra Appendix C.
\10\ See supra note 8.
\11\ See id.
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As demonstrated by the SPY latency arbitrage activity, latency
arbitrage imposes a tax on liquidity provision \12\ that dissuades
market participants from providing displayed liquidity, which is
incompatible with a primary goal of Regulation NMS to enhance displayed
liquidity to the benefit of investors and the public interest.\13\
Latency arbitrageurs exploit the fact that updating the continuous
limit order book (utilized by every national securities exchange)
necessarily requires the processing of order-related messages serially
by time of receipt. Thus, when reacting to the same symmetric
information, a liquidity provider with a quote displayed on an exchange
must be faster than a latency arbitrageur to avoid its stale quote from
being executed.\14\ This structural bias facilitates the ability of the
latency arbitrageur to extract profits from symmetric information.\15\
The Exchange submits that this bias is contrary to a fundamental
principal of trading, that the parties agree upon the terms of the
trade, and permitting latency arbitrage to continue to diminish
displayed liquidity is wholly inconsistent with the objectives of
Regulation NMS.\16\
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\12\ See Eric Budish, Comment letter regarding ``Investors'
Exchange LLC Form 1 Application (Release No. 34-75925; File No. 10-
222)'' (February 5, 2016).
\13\ The Commission has stated that ``increased displayed
liquidity [is] a principal goal of the Order Protection Rule.''
Exchange Act Release No. 51808 (June 9, 2005), 70 FR 37496, 37514
(June 29, 2005) (``Regulation NMS Adopting Release''). The
Commission has also stated that ``[t]o the extent that competition
among orders is lessened, the quality of price discovery for all
sizes of orders can be compromised. Impaired price discovery could
cause market prices to deviate from fundamental values, reduce
market depth and liquidity, and create excessive short-term
volatility that is harmful to long-term investors and listed
companies. More broadly, when market prices do not reflect
fundamental values, resources will be misallocated within the
economy and economic efficiency--as well as market efficiency--will
be impaired.'' Id. at 37499.
\14\ See Budish LTAD Letter, supra note 6, at 2.
\15\ See id.
\16\ See Regulation NMS Adopting Release, supra note 13, at
37514.
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(3) LEAD
LEAD is designed to offset the structural bias that unfairly favors
latency arbitrageurs by giving liquidity providers who have committed
to heightened quoting and trading requirements (i.e., LEAD MMs) a small
head start to the cancellation of stale quotes in the race to react to
symmetric public information.\17\ Based on its analysis of CHX market
data,\18\ the Exchange does not believe that LEAD will have a material
impact on the ability of liquidity takers not engaged in latency
arbitrage, such as retail investors, to access displayed liquidity at
CHX.\19\ To the extent a sophisticated market participant seeks to take
displayed liquidity pursuant to better or different information (as
opposed to the same information exploited by latency arbitrageurs),
LEAD is too short to have an incrementally negative impact on such non-
latency arbitrage strategies.
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\17\ See Budish LTAD Letter, supra note 6, at 2. In discussing
possible alternatives to a frequent batch auction model for trading
securities, the Budish Paper provides that ``the asymmetric delay
eliminates sniping and stops the arms race.'' See Budish Paper,
supra note 6, at 1612.
\18\ Based on the Exchange's analysis of cancel activity in SPY
at CHX for the period starting in May 2016 through July 2016, the
Exchange believes that if LEAD had been implemented during that time
period, out of a total of 18,316 partially-executed orders in SPY,
20 liquidity taking orders not attributed to latency arbitrage
activity would have not been executed, a de minimis number in the
light of the enhanced liquidity and price discovery afforded by
LEAD. See infra Appendix C.
\19\ The Exchange notes that while LEAD is designed to
neutralize microsecond speed advantages exploited by latency
arbitrageurs, LEAD MMs would still be required to obtain speed
capabilities fast enough to take advantage of LEAD.
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The LEAD MM is a new class of CHX Market Maker that will be subject
to the proposed Minimum Performance Standards, as described in detail
below, which will not be applied to non-LEAD MMs. The purpose of the
Minimum Performance Standards is to ensure that LEAD MMs will be
required to meet heightened quoting and trading requirements in return
for undelayed access to the CHX book for the purposes of submitting
liquidity providing orders and cancelling its resting orders. Also,
LEAD MMs will be required to establish at least one LEAD MM Trading
Account, as described below, through which all LEAD market making
activities must originate.
Specifically, LEAD will require the following messages in all
securities

[[Page 11254]]

received by the Exchange throughout a trading day to be subject to a
350-microsecond intentional delay, the same length as the Investors
Exchange LLC (``IEX'') POP/coil delay (``IEX Delay'') recently approved
by the Commission,\20\ before such delayed messages would be processed
\21\ by the Matching System: \22\
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\20\ See Securities Exchange Act Release No. 78101 (June 17,
2016), 81 FR 41141 (June 23, 2016) (``IEX Approval Order''). The IEX
Delay will delay all inbound order-related messages from IEX Users,
outbound message confirmations to IEX Users and outbound market data
disseminated through IEX's proprietary data feed. See id. at 41154.
By not delaying inbound market data, IEX would be able to reprice
its resting pegged orders to track changes to the NBBO before
latency arbitrageurs could execute against such pegged orders at
potentially stale prices, which facilitates the ability of IEX to
comply with its rules regarding the repricing of pegged orders. See
id. at 41155.
\21\ For clarity, ``processed'' means executing instructions
contained in a message, including, but not limited to, permitting an
order to execute within the Matching System pursuant to the terms of
the order or cancelling an existing order, whereas ``evaluate''
means the Matching System determining whether a message should be
diverted into LEAD, as described below.
\22\ The Matching System is an automated order execution system,
which is a part of the Exchange's ``Trading Facilities,'' as defined
under CHX Article 1, Rule 1(z).
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All new incoming messages that did not originate from a
Valid LEAD MM Trading Account, as described below, will be
intentionally delayed; provided, however, that the portion of any new
incoming Routable Order \23\ that is to be routed away will never be
delayed, regardless of who submitted the Routable Order.
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\23\ See CHX Article 1, Rule 1(oo) defining ``Routable Order.''
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New incoming orders, as well as the replace portion of
cancel/replace messages, that originate from a Valid LEAD MM Trading
Account that would immediately execute against existing resting orders
on the CHX book will be intentionally delayed.
Cancel and cancel/replace messages for orders that
originate from a Valid LEAD MM Trading Account that have been delayed,
but not yet processed by the Matching System, will be intentionally
delayed.
As such, the following messages would not be intentionally delayed
pursuant to LEAD:
New incoming orders that originate from a Valid LEAD MM
Trading Account that would immediately be ranked on the CHX book
without executing against existing resting orders on the CHX book will
not be intentionally delayed.
A cancel message for a resting order that originates from
a Valid LEAD MM Trading Account will not be intentionally delayed.
A cancel/replace message related to a resting order that
originates from a Valid LEAD MM Trading Account will not be
intentionally delayed; provided, however, that if any part of the
replace portion would immediately execute against an existing resting
order on the CHX book, the replace portion will be intentionally
delayed.
The portion of a Routable Order that is to be routed away
will not be intentionally delayed, regardless of who submitted the
Routable Order.
Also, LEAD will not delay any outbound messages or market data.
The Exchange notes that adopting a symmetric delay and order types
that would permit the Exchange to reprice resting orders based on
undelayed market data, such as the IEX Delay and pegged order types,
would not address latency arbitrage at CHX with respect to limit orders
because the liquidity provision strategies utilized by CHX liquidity
providers, which provide valuable liquidity to the market overall,\24\
require cancellations or adjustments to resting limit orders pursuant
to proprietary algorithms held by the CHX liquidity providers that
could not be adequately replicated by CHX.\25\ Also, as the Commission
noted in the IEX Approval Order, a symmetric delay that delays all
inbound messages would be ineffective in protecting resting limit
orders from latency arbitrage.\26\ However, the Exchange notes that
both LEAD and the IEX Delay provide processing advantages to certain
types of liquidity providers over all other order senders so as to
minimize the effectiveness of latency arbitrage and are thus similar in
this respect.\27\
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\24\ See supra note 8; see also infra Appendices A and B.
\25\ See supra note 7.
\26\ See IEX Approval Order, supra note 20, at 41157.
\27\ See infra Section 3(b).
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Moreover, the Exchange submits that LEAD is consistent with the
objectives of the Exchange Act and the rules and regulations
thereunder. As described in detail below,\28\ LEAD is, among other
things, (1) a de minimis intentional access delay in that it is so
short as to not frustrate the purposes of Rule 611 of Regulation NMS
\29\ by impairing fair and efficient access to an exchange's
quotations; \30\ (2) consistent with Rule 602(b) of Regulation NMS;
\31\ and (3) furthers the objectives of the objectives of Section
6(b)(5) of the Act in that it would protect investors and the public
interest and does not unfairly discriminate among Participants.\32\
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\28\ See id.
\29\ 17 CFR 242.611.
\30\ See Securities Exchange Act Release No. 78102 (June 17,
2016), 81 FR 40785 (June 23, 2016) (``Final Interpretation'').
\31\ See 17 CFR 242.602(b).
\32\ 15 U.S.C. 78f(b)(5).
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Amended Article 16, Rule 4 (Obligation of Market Makers)
Proposed Article 16, Rule 4(f) provides rules regarding the
proposed LEAD MM Program. Specifically, proposed paragraph (f)(1)
provides defined terms for the purposes of paragraph (f). Thereunder,
proposed paragraph (f)(1)(A) provides that ``LEAD'' means the Liquidity
Enhancing Access Delay, as described under proposed Article 20, Rule
8(h); proposed paragraph (f)(1)(B) provides that ``LEAD MM'' means a
Market Maker assigned to a particular security that has committed to
maintaining Minimum Performance Standards, described under proposed
paragraph (f)(2), in the security; proposed paragraph (f)(1)(C)
provides that ``LEAD MM Security'' means a security assigned to a LEAD
MM; and proposed paragraph (f)(1)(D) provides that ``Qualified
Executions'' means all executed shares at CHX, during all trading
sessions,\33\ resulting from single-sided orders, excluding any
executed shares resulting from auctions.
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\33\ See supra note 5.
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Proposed paragraph (f)(2) provides that ``Minimum Performance
Standards'' means the Quotation Requirements and Obligations described
under current paragraph (d),\34\ which provides the current quoting and
pricing obligations for Market Makers, with the following
modifications.\35\
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\34\ The current Quotation Requirements and Obligations include,
among other things, a continuous two-sided quote obligation and
pricing obligations that require a continuous bid no further away
from the National Best Bid (``NBB'') and a continuous offer no
further away from the National Best Offer (``NBO'') than the
Designated Percentage or Defined Limit, as applicable. See CHX
Article 16, Rule 4(d).
\35\ Trading days on which the Exchange does not open for
trading, for whatever reason, will be excluded from the Exchange's
calculations regarding compliance with the proposed Minimum
Performance Standards.
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Proposed paragraph (f)(2)(A) provides that the Designated
Percentages described under current Article 16, Rule 4(d)(2)(B) shall
be halved.\36\ Thus, new incoming orders submitted by LEAD MMs will be
required to be priced closer to the NBBO or the last reported sale in
the security, as applicable, than those of current Market Makers.
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\36\ For example, the 8% Designated Percentage for securities
subject to the Article 20, Rule 2A(c)(1)(A) pursuant to current CHX
Article 16, Rule 4(d)(2)(A) and (B) would be 4% for LEAD MMs.
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In addition, LEAD MMs will be required to meet the following

[[Page 11255]]

additional requirements. Proposed paragraph (f)(2)(B) provides that
LEAD MMs shall maintain a Monthly Average NBBO Quoting Percentage, as
defined thereunder, in each of its LEAD MM Securities, of at least 10%
over the course of a calendar month. For each such security, the
Exchange will determine: (i) The ``Daily NBB Quoting Percentage'' by
determining the percentage of time the LEAD MM has at least one Round
Lot \37\ of displayed interest in an Exchange bid at the NBB during the
Open Trading State \38\ of each trading day for a calendar month; (ii)
the ``Daily NBO Quoting Percentage'' by determining the percentage of
time the LEAD MM has at least one Round Lot of displayed interest in an
Exchange offer at the NBO during the Open Trading State of each trading
day for a calendar month; (iii) the ``Average Daily NBBO Quoting
Percentage'' for each trading day by summing the ``Daily NBB Quoting
Percentage'' and the ``Daily NBO Quoting Percentage'' then dividing
such sum by two; and (iv) the ``Monthly Average NBBO Quoting
Percentage'' for each security by summing the security's ``Average
Daily NBBO Quoting Percentages'' for each trading day in a calendar
month then dividing the resulting sum by the total number of trading
days in such calendar month.^{39 40}
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\37\ See CHX Article 1, Rule 2(f)(3) defining ``Round Lot.''
\38\ See CHX Article 1, Rule 1(qq) defining ``Open Trading
State.''
\39\ For example, a LEAD MM with a Monthly Average NBBO Quoting
Percentage of 11% would meet the requirements of proposed paragraph
(f)(2)(B), even if on a particular day during the calendar month,
the LEAD MM's Average Daily Quoting Percentage was 9%.
\40\ See supra note 35.
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Proposed paragraph (f)(2)(C) provides that a LEAD MM's Qualified
Executions in each of its LEAD MM Securities must comprise on an
equally-weighted daily average at least 2% of all Qualified Executions
in the same security over the course of a calendar month.\41\ The
Exchange believes that the 2% requirement is sufficiently high to
require a material contribution to overall volume in the security,
while not rendering the requirement impractical in the event the
security is assigned numerous LEAD MMs.
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\41\ For example, a LEAD MM whose Qualified Executions in an
assigned security comprised on average 3% of all Qualified
Executions in the assigned security over the course of a calendar
month would meet the requirements of proposed paragraph (f)(2)(C),
even if on a particular day during the calendar month, the LEAD MM's
Qualified Executions in the same assigned security comprised 1% of
all Qualified Executions in the assigned security on that day.
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Proposed paragraph (f)(2)(D) provides that at least 80% of the LEAD
MM's Qualified Executions in each of its LEAD MM Securities must result
from its resting orders that originated from the corresponding LEAD MM
Trading Account over the course of a calendar month.\42\
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\42\ Unlike the standards provided under proposed paragraphs
(f)(2)(A)-(C), this standard would be measured based on aggregate
activity over the course of a calendar month.
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The Exchange submits that the proposed Minimum Performance
Standards are commensurate with the benefit afforded to LEAD MMs. Given
that the only benefit afforded to LEAD MMs is the ability to cancel and
cancel/replace its resting orders without delay, the Exchange believes
that it would be inappropriate to adopt even higher quoting and trading
requirements, such as those for Designated Marker Makers (``DMMs'') on
the New York Stock Exchange (``NYSE''), who, in return for such higher
quoting and trading requirements, receive certain financial and
execution parity benefits not proposed herein.\43\
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\43\ See generally NYSE Rules 103B and 104.
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Proposed paragraph (f)(3) provides rules regarding the process by
which Market Makers would be assigned securities as a LEAD MM.
Specifically, proposed paragraph (f)(3)(A) provides that only a Market
Maker may apply to be assigned one or more securities as a LEAD MM.
Market Makers must receive written approval from the Exchange to be
assigned securities as a LEAD MM. LEAD MMs shall be selected by the
Exchange based on factors including, but not limited to, experience
with making markets in securities, adequacy of capital, willingness to
promote the Exchange as a marketplace, issuer preference, operational
capacity, support personnel and history of adherence to Exchange rules
and securities laws. Current Article 16, Rules 2(c)-(e) regarding
withdrawal from assigned securities shall also apply to LEAD MMs and
LEAD MM Securities.\44\
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\44\ The Exchange will expand its current procedures for
voluntary and involuntary withdrawals regarding Marker Maker
securities to apply to LEAD MM Securities.
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Proposed paragraph (f)(3)(B) outlines requirements regarding LEAD
MM Trading Accounts and provides that before beginning LEAD market
making activities in a security, a LEAD MM shall complete the
following, subject to Exchange approval. Thereunder, proposed
subparagraph (B)(i) provides that the LEAD MM must establish at least
one separately designated LEAD MM Trading Account through which all and
only LEAD market making activities in LEAD MM Securities shall
originate.
Subparagraph (B)(ii) provides that the LEAD MM must register each
of its LEAD MM Securities to precisely one LEAD MM Trading Account
(``Valid LEAD MM Trading Account''); provided, however, that a LEAD MM
Trading Account may be registered with one or more LEAD MM Securities.
All messages related to a single LEAD MM Security must originate from
the Valid LEAD MM Trading Account on a given day and in the event a
LEAD MM wishes to change the Valid LEAD MM Trading Account for a given
LEAD MM Security, the LEAD MM shall so notify the Exchange in writing
by no later than 9 a.m. on the trading day immediately preceding the
effective date of the change; provided, however, that the Exchange may,
at its discretion, delay or deny the change. In addition, no change of
a Valid LEAD MM Trading Account for a given LEAD MM Security may be
effected intraday.
Proposed paragraph (f)(3)(B) facilitates the ability of the
Exchange to monitor compliance with the proposed Minimum Performance
Standards by requiring a LEAD MM to submit all LEAD market making
activities in a particular security through a Valid LEAD MM Trading
Account. Moreover, in the event a LEAD MM would like to change the
Valid LEAD MM Trading Account for a given LEAD MM Security, the
proposed rule outlines the precise procedures to effect the change,
which promotes clarity regarding the process.
Proposed paragraph (f)(3)(C) provides that the Exchange may, at its
discretion, approve more than one LEAD MM to be assigned to any LEAD MM
Security and limit the number of LEAD MMs assigned to any security.
Proposed paragraph (f)(3)(D) provides that the Exchange will review
each LEAD MM's quoting and trading activity on a monthly basis to
determine whether the LEAD MM has met the Minimum Performance
Standards. Also, a LEAD MM's failure to meet the Minimum Performance
Standards on any given month will result in the Exchange (i) suspending
or terminating a LEAD MM's registration as a Market Maker pursuant to
current Article 16, Rule 1(d) or (ii) suspending or terminating
assignment to a LEAD MM Security pursuant to proposed subparagraph (A)
above. In addition, nothing in proposed subparagraph (D) will limit any
other power of the Exchange to discipline a LEAD MM pursuant to CHX
Rules.

[[Page 11256]]

Amended Article 20, Rule 8 (Operation of the CHX Matching System)
Proposed Article 20, Rule 8(h) provides rules regarding the
operation of LEAD. Specifically, proposed paragraph (h) begins by
stating that after initial receipt \45\ of a new incoming message, the
Matching System will evaluate \46\ the message to determine whether it
is a Delayable Message, as defined under proposed paragraph (h)(1)
below. For the purposes of such an evaluation only, the Matching System
shall not consider Match Trade Prevention (``MTP''), as described under
current Article 1, Rule 2(b)(3)(F).\47\ If not delayable, the Matching
System will immediately process the message without delay.
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\45\ As used herein, ``initial receipt'' means the time at which
the Exchange receives a message and assigns the message a unique
sequence number, which the Exchange utilizes to determine, among
other things, message processing order and ranking on the CHX book.
See CHX Article 20, Rule 8(b).
\46\ See supra note 21.
\47\ The purpose of ignoring MTP in LEAD evaluation is to
provide a previously delayed order that would not have triggered MTP
an opportunity to execute against the resting order before the newer
incoming order would cancel the resting order after release from
LEAD. The Exchange is also proposing unrelated modifications to MTP
to contemplate LEAD, as discussed below.
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Proposed paragraph (h)(1) provides that ``Delayable Message'' means
all new incoming order, cancel and cancel/replace messages, except as
follows:

(A) Any new incoming order or unrouted balance, as described
under proposed subparagraph (D) below, that originates from a Valid
LEAD MM Trading Account, as described under proposed Article 16,
Rule 4(f)(3)(B)(ii), that would, by its terms, immediately be ranked
on CHX book without executing against any existing resting orders on
the CHX book shall not be a Delayable Message.
(B) A cancel message related to a resting order that originates
from a Valid LEAD MM Trading Account shall not be a Delayable
Message.
(C) A cancel/replace message related to a resting order that
originates from a Valid LEAD MM Trading Account shall not be a
Delayable Message; provided, however, that if any part of the
replace portion would immediately execute against existing resting
orders on the CHX book, the replace portion shall be a Delayable
Message.
(D) The portion of a new incoming Routable Order that is to be
routed away, pursuant to current Article 19, Rule 3(a), shall not be
diverted into the LEAD; provided, however, that the entire unrouted
balance of the Routable Order shall be diverted into the LEAD,
subject to proposed subparagraph (A).

Mechanically, upon initial receipt of a new incoming message, the
Matching System would assign the message a unique sequence number, as
it does currently, which, in addition to establishing processing and
execution priority, will serve as the starting point for the Fixed LEAD
Period, as described below. The Matching System would then initially
evaluate the message to determine whether it is a Delayable
Message.\48\ For example, a new incoming limit order marked Post Only
\49\ that originated from a Valid LEAD MM Trading Account that would
not be immediately ranked on the CHX book due to one or more matchable
contra-side orders resting on the CHX book would be a Delayable Message
because the Post Only order would not, by its terms, immediately be
ranked on the CHX book without executing against any resting orders on
the CHX book. In such a case, the Post Only order would be diverted
into the LEAD queue before being processed by the Matching System,
which would result in the Post Only order being posted or cancelled
depending on the state of the CHX book upon its release.\50\ If,
however, the Exchange were to receive a new Post Only order that
originated from a Valid LEAD MM Trading Account that would post to the
CHX book due to no existing orders resting on the CHX book at that
time, the Post Only order would not be a Delayable Message and it would
immediately be ranked on the CHX book without delay.\51\ Similarly, a
new incoming order marked CHX Only \52\ that originated from a Valid
LEAD MM Trading Account that would trade-through a protected quotation
of an external market would not be a Delayable Message as it would be
price slid to a permissible price.\53\ Also, a new incoming order that
originated from a Valid LEAD MM Trading Account that would immediately
be ranked on the CHX book without executing against any resting orders
because MTP would cancel the resting contra-side orders against which
the order would have executed, would be a Delayable Message, as MTP is
ignored for the purposes of the LEAD evaluation only.\54\
---------------------------------------------------------------------------

\48\ The Exchange notes that the Matching System processes
messages for a given security serially. Thus, the length of time it
takes for a message to be evaluated and/or processed by the Matching
System after initial receipt is herein called ``variable message
queuing delay,'' as the actual length of the delay depends on the
number of precedent messages that have yet to be evaluated and/or
processed by the Matching System and are residing in the ``Inbound
Queue.'' The length of time it takes for a message to be evaluated
and/or processed by the Matching System is herein called ``system
processing delay.''
\49\ See CHX Article 1, Rule 2(b)(1)(D) defining ``Post Only.''
\50\ See infra Example 2.
\51\ See id.
\52\ See CHX Article 1, Rule 2(b)(1)(C) defining ``CHX Only.''
\53\ See CHX Article 20, Rule 5(a)(2).
\54\ See supra note 47.
---------------------------------------------------------------------------

Proposed paragraph (h) continues by providing that if a message is
delayable, the message will be diverted into the LEAD queue and will
remain delayed until it is released for processing. A delayed message
shall become releasable 350 microseconds after initial receipt by the
Exchange (``Fixed LEAD Period''),\55\ but shall only be processed after
the Matching System has evaluated and processed, if applicable,\56\ all
messages in the security received by the Exchange during the Fixed LEAD
Period for the delayed message. A message may be delayed for longer
than the Fixed LEAD Period depending on the then-current messaging
volume at CHX.\57\ The Matching System will utilize a new market
snapshot to process a released order.\58\ A delayed message shall
retain its original sequence number and may only be delayed once. LEAD
shall apply to all securities traded on the Exchange throughout the
trading day.\59\ LEAD shall not apply to messages received during an
auction.\60\
---------------------------------------------------------------------------

\55\ In the event that then-current messaging volume results in
a Delayable Message being evaluated after 350 microseconds from
initial receipt, the Delayable Message shall be diverted into LEAD
and be immediately releasable. This will ensure that messages
received during the Fixed LEAD Period for a delayed message are
evaluated and processed, if applicable, before the Delayable Message
is released.
\56\ For example, an order that would not take liquidity from
the CHX book would not be delayed and would be immediately
processed, whereas an order that would take liquidity from the CHX
book would be delayed and would not be immediately processed.
\57\ In the event a releasable message is awaiting other
messages received during its Fixed LEAD Period to be evaluated and
processed, if applicable, the releasable message would be subject to
an additional unintentional variable delay that is a function of the
then-current messaging volume at CHX. See supra note 21; see also
supra note 45; see also infra Examples 1-3.
\58\ The purpose of a new market snapshot is to ensure that the
released order is processed in a manner consistent with federal
securities rules and regulations, such as Regulation NMS and
Regulation SHO.
\59\ See supra note 5.
\60\ For example, if the Exchange receives an order after
initiation of a Sub-second Non-displayed Auction Process (``SNAP'')
in the security, the order will not be diverted into the LEAD queue
and, rather, be handled pursuant to current CHX Article 18, Rule 1.
---------------------------------------------------------------------------

The Exchange also proposes to make corresponding amendments to
current Article 20, Rule 8(d) and (f) to contemplate LEAD.
Specifically, the Exchange proposes to add the clause ``subject to
paragraph (h) below'' at the end of current paragraph (d)(1) so that
amended paragraph (d)(1) provides as follows:

[[Page 11257]]

Except for certain orders which shall be executed as described
in Rule 8(e), below, an incoming order shall be matched against one
or more resting orders in the Matching System, in the order in which
the resting orders are ranked on the CHX book, pursuant to Rule 8(b)
above, at the Working Price of each resting order, as defined under
Article 1, Rule 1(pp), for the full amount of shares available at
that price, or for the size of the incoming order, if smaller;
subject to paragraph (h) below.

The Exchange also proposes to amend paragraph (f)(1) to provide that
orders resting on the CHX book shall be immediately and automatically
cancelled upon receipt of a cancellation message, subject to paragraph
(h) below, as certain cancel messages will be diverted into the LEAD as
described above.
Examples 1-2 below illustrate the operation of LEAD.
Amended Routing Protocol
In light of the possible bifurcation of a Routable Order into an
immediately routed portion and a delayed unrouted portion \61\ and the
fact that the Exchange does not currently utilize any Router Feedback
to augment protected quotations,\62\ LEAD could result in a single
order being routed twice to satisfy the same protected quotation. In
order to eliminate this inefficiency, the Exchange proposes to amend
its current order routing protocol to adopt a single type of Router
Feedback utilized by the Bats BYX Exchange,\63\ Immediate Feedback, but
only on an order-by-order basis. Use of Immediate Feedback would permit
the Exchange to augment away quotes on an order-by-order basis to avoid
double routing of the same order to satisfy the same protected
quotation(s).
---------------------------------------------------------------------------

\61\ See proposed CHX Article 20, Rule 8(h)(1)(D).
\62\ The Exchange does not currently ignore or modify SIP quote
data for away markets under any circumstances where the SIP data
feed shows an uncrossed market. See Exchange Act Release No. 74357
(February 24, 2015), 80 FR 11252 (March 2, 2015) (SR-CHX-2015-01);
see also Securities Exchange Act Release No. 72711 (July 29, 2014),
79 FR 45570 (August 5, 2014) (SR-CHX-2014-10).
\63\ ``Router Feedback'' refers to the use of routed orders
(``Feedback Orders'') to augment protected quotations for the
purposes of calculating the National Best Bid and Offer. See
Securities Exchange Act Release No. 74075 (January 15, 2015), 80 FR
3693 (January 23, 2015) (SR-BYX-2015-03).The three types of Router
Feedback are Immediate Feedback, Execution Feedback and Cancellation
Feedback. See id. at 3695.
---------------------------------------------------------------------------

Specifically, Immediate Feedback would permit the Exchange to
decrease the number of shares available at an away market by an amount
equal to the size of the immediately routed portion of the Routable
Order. In the extremely unlikely event that the Exchange receives an
execution report from an away market indicating that the routed portion
of a Routable Order had partially-executed prior to the unrouted
balance being released from the LEAD queue, the Exchange would first
add the cancelled remainder to the unrouted balance in the LEAD queue
and then continue to utilize Immediate Feedback to augment the relevant
away quotes when processing the unrouted balance upon release from the
LEAD queue, unless the feedback had expired.
Immediate Feedback would expire as soon as: (i) One second passes
or (ii) the Exchange receives new quote information from the away
market. Given that Immediate Feedback will only be applied on an order-
by-order basis, Immediate Feedback would also expire upon full
execution, cancellation or ranking of the Routable Order on the CHX
book. Also, in light of the relatively short Fixed LEAD Period, it is
unlikely that Router Feedback would expire prior to the unrouted
balance being released from the LEAD queue and processed by the
Matching System.
Examples 2-3 illustrate the operation of the amended routing
protocol in the context of LEAD.
Amended Article 1, Rule 2(b)(3)(F) (Match Trade Prevention)
Current Article 1, Rule 2(b)(3)(F) describes the MTP modifier,
which prevents matches between orders that originate from the same MTP
Trading Group or MTP sublevel thereunder.\64\ Also, an order sender
must designate one of the following MTP Actions for each order, with
the MTP Action noted on the incoming order controlling the MTP
interaction:
---------------------------------------------------------------------------

\64\ See Securities Exchange Act Release No. 71216 (December 31,
2013), 79 FR 883 (January 7, 2014) (SR-CHX-2013-23); see also
Securities Exchange Act Release No. 70948 (November 26, 2013), 78 FR
72731 (December 3, 2013) (SR-CHX-2013-20).

MTP Cancel Incoming (``N''): An incoming limit or market order
marked ``N'' will not execute against opposite side resting interest
originating from the same MTP Trading Group or MTP sublevel, if
applicable. Only the incoming order will be cancelled pursuant to
MTP.
MTP Cancel Resting (``O''): An incoming limit or market order
marked ``O'' will not execute against opposite side resting interest
originating from the same MTP Trading Group or MTP sublevel, if
applicable. Only the resting order will be cancelled pursuant to
MTP.
MTP Cancel Both (``B''): An incoming limit or market order
marked ``B'' will not execute against opposite side resting interest
originating from the same MTP Trading Group or MTP sublevel, if
applicable. The entire size of both orders will be cancelled
pursuant to MTP.

Given that LEAD may result in newer orders (i.e., orders with lower
sequence numbers) becoming resting orders prior to older orders being
released from LEAD,\65\ the Exchange proposes to amend current Article
1, Rule 2(b)(3)(F)(iii)(a) and (b), which describe MTP Actions ``N''
and ``O'' respectively, to provide that the newer of the contra-side
orders, as opposed to the incoming order if it is the older order,
would be cancelled if the incoming order is marked ``N,'' and the older
of the contra-side orders, as opposed to the resting order if it is the
newer order, would be cancelled if the incoming order is marked ``O.''
Moreover, given that a price slid order that triggers MTP is not always
the newer order \66\ and because the Exchange wishes to maintain the
current handling of MTP when it is triggered by a price slid order, the
Exchange proposes to add clauses to the end of current subparagraphs
(a) and (b) that preserve that current handling. Thus, amended
subparagraphs (a) and (b) provide as follows:
---------------------------------------------------------------------------

\65\ Currently, a new incoming order that triggers MTP is always
newer than the resting contra-side order. However, LEAD may result
in the newer of the contra-side orders being the resting order and
the older order being the incoming order. See infra Example 4.
\66\ See Example 4 under SR-CHX-2013-20.

(a) MTP Cancel New (``N''): An incoming limit or market order
marked ``N'' will not execute against opposite side resting interest
originating from the same MTP Trading Group or MTP sublevel, if
applicable. Only the newer order will be cancelled pursuant to MTP;
provided that the incoming order will be cancelled, even if it is
not the newer order, in the event MTP is triggered by the incoming
order being price slid pursuant to the CHX Only Price Sliding
Processes.
(b) MTP Cancel Old (``O''): An incoming limit or market order
marked ``O'' will not execute against opposite side resting interest
originating from the same MTP Trading Group or MTP sublevel, if
applicable. Only the older order will be cancelled pursuant to MTP;
provided that the resting order will be cancelled, even if it is not
the older order, in the event MTP is triggered by the incoming order
being price slid pursuant to the CHX Only Price Sliding Processes.

Example 4 below illustrates the operation of the amended MTP in the
context of LEAD.
(4) Examples
The following Examples are illustrative of LEAD and related
amendments to existing functionality, but do not exhaustively depict
every possible scenario that may arise under LEAD. Moreover, the
Examples do not necessarily depict the actual technical processes of
prioritizing messages and executing orders.

[[Page 11258]]

Example 1: LEAD. Assume that LEAD is operational, all messages
are for security XYZ and all orders are routable, unless marked
otherwise. Assume also that the system processing delay \67\ is 50
microseconds \68\ and the CHX book is as follows:
---------------------------------------------------------------------------

\67\ See supra note 48.
\68\ The Exchange does not represent that actual system
processing delay is at or near 50 microseconds or that unintentional
delays do not exist elsewhere in the Matching System processes. The
figure is being utilized for demonstrative purposes only.

------------------------------------------------------------------------
Fig 1(a): CHX book
-------------------------------------------------------------------------
Buy Sell
------------------------------------------------------------------------
Empty.................................. Order A: 1000 @10.01 (LMM).\69\
------------------------------------------------------------------------

Assume then that the Exchange receives the following messages:
---------------------------------------------------------------------------

\69\ ``LMM'' refers to messages that originated from a Valid
Lead MM Trading Account. Absence of ``LMM'' means that the message
did not originate from a Valid LEAD MM Trading Account.

------------------------------------------------------------------------
Fig 1(b): Inbound queue
-------------------------------------------------------------------------
Initial receipt Message
------------------------------------------------------------------------
10:00:00.000000........................ Order B: Buy 1000 @10.01.
10:00:00.000265........................ Cancel Order A (LMM).
10:00:00.000305........................ Order C: Sell 1000 @10.02.
10:00:00.000310........................ Order D: Buy 1000 @10.01 (LMM).
10:00:00.000325........................ Cancel Order B.
10:00:00.000355........................ Order E: Sell 1000 @10.01.
------------------------------------------------------------------------

Under this Example 1:
Order B would be evaluated and diverted into LEAD as it
originated from a non-Valid LEAD MM Trading Account and is thus a
Delayable Message. Due to the system processing delay, Order B would
be diverted into LEAD at 10:00:00.000050 and releasable at
10:00:00.000350. The result is that the LEAD queue would be as
follows:

------------------------------------------------------------------------
Fig 1(c): LEAD queue
-------------------------------------------------------------------------
Releasable time Message
------------------------------------------------------------------------
10:00:00.000350........................ Order B: Buy 1000 @10.01.
------------------------------------------------------------------------

Cancel Order A would be evaluated and processed at
10:00:00.000265 without being diverted into LEAD as it is a cancel
message for a resting order that originated from a Valid LEAD MM
Trading Account and is thus not a Delayable Message. Due to the
system processing delay, Order A would be cancelled at
10:00:00.000315 and the CHX book would become empty.
Order C would then be evaluated at 10:00:00.000315, due
to the variable message queuing delay,\70\ and be diverted into LEAD
because it originated from a non-Valid LEAD MM Trading Account and
is thus a Delayable Message. Due to the system processing delay,
Order C would be diverted into LEAD at 10:00:00.000365 and
releasable at 10:00:00.000665.
---------------------------------------------------------------------------

\70\ See supra note 48.

------------------------------------------------------------------------
Fig 1(d): LEAD queue
-------------------------------------------------------------------------
Releasable time Message
------------------------------------------------------------------------
10:00:00.000350........................ Order B: Buy 1000 @10.01.
10:00:00.000665........................ Order C: Sell 1000 @10.02.
------------------------------------------------------------------------

While Order C was being evaluated by the Matching
System, Order B became releasable from the LEAD queue at
10:00:00.000350. However, given that the Matching System processes
messages serially,\71\ the Matching System would not consider
releasing Order B until after Order C had been placed into the LEAD
queue at 10:00:00.000365, at which point it would be handled as
follows:
---------------------------------------------------------------------------

\71\ See id.
---------------------------------------------------------------------------

[cir] At 10:00:00.000365, the Matching System would compare the
releasable time of Order B to the initial receipt time of the
message at the top of the Inbound Queue: Order D. Since Order D was
received during the Fixed LEAD Period for Order B, Order D would be
evaluated before releasing Order B and processed without being
diverted into LEAD as it originated from a Valid LEAD MM Trading
Account and would be immediately ranked on the CHX book without
executing against resting orders on the CHX book and is thus not a
Delayable Message. Due to the system processing delay, Order D would
be ranked on the CHX book at 10:00:00.000415. The result is that the
CHX book would be as follows:

------------------------------------------------------------------------
Fig 1(e): CHX book
-------------------------------------------------------------------------
Buy Sell
------------------------------------------------------------------------
Order D: 1000 @10.01 (LMM)............. Empty.
------------------------------------------------------------------------

[cir] At 10:00:00.000415, the Matching System would then compare
the releasable time of Order B to the initial receipt time of the
next message at the top of the Inbound Queue: Cancel Order B. Since
Cancel Order B was received when Order B was in the LEAD queue,
Cancel Order B would be diverted into LEAD as it originated from a
non-Valid LMM Trading Account and is thus a Delayable Message.
However, due to the system processing delay, Cancel Order B would be
diverted into LEAD at 10:00:00.000465 and releasable at
10:00:00.000675. The result is that the LEAD queue would be as
follows:

------------------------------------------------------------------------
Fig 1(f): LEAD queue
-------------------------------------------------------------------------
Releasable time Message
------------------------------------------------------------------------
10:00:00.000350........................ Order B: Buy 1000 @10.01.
10:00:00.000665........................ Order C: Sell 1000 @10.02.
10:00:00.000675........................ Cancel Order B.
------------------------------------------------------------------------

[cir] At 10:00:00.000465, the Matching System would then compare
the releasable time of Order B to the initial receipt time of the
next message at the top of the Inbound Queue: Order E. Given that
Order E was received after the Fixed LEAD Period for Order B had
expired, the Matching System would release Order B before evaluating
Order E. Due to the system processing delay, Order B would be ranked
on the CHX book at 10:00:00.000515. Also, given that Order B was
initially received before Order D, Order B would receive execution
priority over Order D, pursuant to Article 20, Rule 8(b)(1). The
result is that the CHX book and LEAD queue would be as follows:

------------------------------------------------------------------------
Fig 1(g): CHX book
-------------------------------------------------------------------------
Buy Sell
------------------------------------------------------------------------
Order B: 1000 @10.01................... Empty.
Order D: 1000 @10.01 (LMM).............
------------------------------------------------------------------------

------------------------------------------------------------------------
Fig 1(h): LEAD queue
-------------------------------------------------------------------------
Releasable time Message
------------------------------------------------------------------------
10:00:00.000665........................ Order C: Sell 1000 @10.02.
10:00:00.000675........................ Cancel Order B.
------------------------------------------------------------------------

Order E would then be evaluated at 10:00:00.000515, due
to the variable message queuing delay, and then diverted into the
LEAD as it originated from a non-Valid LEAD MM Trading Account and
is thus a Delayable Message. Due to the system-processing delay,
Order E would be diverted at 10:00:00.000565 and releasable at
10:00:00.000705. The result is that the LEAD queue would be as
follows:

------------------------------------------------------------------------
Fig 1(i): LEAD queue
-------------------------------------------------------------------------
Releasable time Message
------------------------------------------------------------------------
10:00:00.000665........................ Order C: Sell 1000 @10.02.
10:00:00.000675........................ Cancel Order B.
10:00:00.000705........................ Order E: Sell 1000 @10.01.
------------------------------------------------------------------------

Order C would then be released from LEAD at
10:00:00.000665. Due to the system processing delay, Order C would
be ranked on the CHX book at 10:00:00.000715. The result is that the
CHX book and LEAD queue are as follows:

------------------------------------------------------------------------
Fig 1(j): CHX book
-------------------------------------------------------------------------
Buy Sell
------------------------------------------------------------------------
Order B: 1000 @10.01................... Order C: 1000 @10.02.
Order D: 1000 @10.01 (LMM).............
------------------------------------------------------------------------

------------------------------------------------------------------------
Fig 1(k): LEAD queue
-------------------------------------------------------------------------
Releasable time Message
------------------------------------------------------------------------
10:00:00.000675........................ Cancel Order B.
10:00:00.000705........................ Order E: Sell 1000 @10.01.
------------------------------------------------------------------------

Cancel Order B would then be released from LEAD at
10:00:00.000715, as the Matching System was processing Order C when
Cancel Order B became releasable at 10:00:00.000675. Due to the
system processing delay Order B would be cancelled at
10:00:00.000765. The result is that the CHX book and the LEAD queue
would be as follows:

------------------------------------------------------------------------
Fig 1(l): CHX book
-------------------------------------------------------------------------
Buy Sell
------------------------------------------------------------------------
Order D: 1000 @10.01 (LMM)............. Order C: 1000 @10.02.
------------------------------------------------------------------------

------------------------------------------------------------------------
Fig 1(m): LEAD queue
-------------------------------------------------------------------------
Releasable time Message
------------------------------------------------------------------------
10:00:00.000705........................ Order E: Sell 1000 @10.01.
------------------------------------------------------------------------

[[Page 11259]]

Order E would then be released from LEAD at
10:00:00.000765, as the Matching System was processing Order C (then
Cancel Order B) when Order E became releasable at 10:00:00.000705.
Order E would then be processed and fully execute against Order D at
10.01/share at 10:00:00.000775, due to the system processing delay.
The result is that the Inbound Queue and the LEAD queue would be
empty and the CHX book would be as follows:

Empty.................................. Order C: 1000 @10.02.
------------------------------------------------------------------------

Example 2: Post Only and Routing--Immediate Feedback. Assume the
same as Example 1. Assume also that after Order E was processed, the
NBBO became 10.01 x 10.02 with only one market (``Away Market
A1'') displaying 100 shares at the NBB (``Protected Bid
A1'') and no other protected bids and CHX is alone at the
NBO displaying 1000 shares at 10.02. Assume then that the Matching
System receives the following new messages in security XYZ:

------------------------------------------------------------------------
Fig 2(a): Inbound queue
-------------------------------------------------------------------------
Initial receipt Message
------------------------------------------------------------------------
10:00:00.000900........................ Cancel Order C.
10:00:00.001000........................ Order F: Post Only Buy 100
@10.02.
10:00:00.001010........................ Order G: Post Only Buy 100
@10.01 (LMM).
10:00:00.001020........................ Order H: Sell 500 @9.99 (LMM).
10:00:00.001030........................ Order I: Sell 500 @9.99.
10:00:00.001600........................ Order J: Buy 600 @9.99.
10:00:00.001610........................ Order K: Sell 200 @9.99 (LMM).
10:00:00.001750........................ Cancel Order I.
10:00:00.001760........................ Cancel Order H (LMM).
------------------------------------------------------------------------

Under this Example 2:
Cancel Order C would be evaluated at 10:00:00.000900
and diverted into the LEAD as it originated from a non-Valid LEAD MM
Trading Account and is thus a Delayable Message. Due to the system
processing delay, Cancel Order C would be diverted at
10:00:00.000950 and releasable at 10:00:00.001250. The result is
that the CHX Book and LEAD queue would be as follows:

------------------------------------------------------------------------
Fig 2(b): CHX book
-------------------------------------------------------------------------
Buy Sell
------------------------------------------------------------------------
Empty.................................. Order C: 1000 @10.02.
------------------------------------------------------------------------

------------------------------------------------------------------------
Fig 2(c): LEAD queue
-------------------------------------------------------------------------
Releasable time Message
------------------------------------------------------------------------
10:00:00.001250........................ Cancel Order C.
------------------------------------------------------------------------

Order F would then be evaluated at 10:00:00.001000 and
diverted into the LEAD as it originated from a non-Valid LEAD MM
Trading Account and is thus a Delayable Message. Due to the system
processing delay, Order F would be diverted at 10:00:00.001050 and
releasable at 10:00:001350. The result is that the LEAD queue would
be as follows:

------------------------------------------------------------------------
Fig 2(d): LEAD queue
-------------------------------------------------------------------------
Releasable time Message
------------------------------------------------------------------------
10:00:00.001250........................ Cancel Order C.
10:00:00.001350........................ Order F.
------------------------------------------------------------------------

Order G would then be evaluated at 10:00:00.001050, due
to variable message queuing delay, and would be immediately
processed without being diverted into LEAD as it originated from a
Valid LEAD MM Trading Account and would be immediately ranked on the
CHX book without executing against resting orders and is thus not a
Delayable Message. Due to the system processing delay, Order G would
be ranked on the CHX book at 10:00:00.1100. The result is that the
CHX book is as follows:

------------------------------------------------------------------------
Fig 2(e): CHX book
-------------------------------------------------------------------------
Buy Sell
------------------------------------------------------------------------
Order G: 100 @10.01 (LMM).............. Order C: 1000 @10.02.
------------------------------------------------------------------------

Order H would then be evaluated at 10:00:00.001100, due
to variable message queuing delay. Pursuant to the Exchange's
routing protocol, the Exchange would immediately route 100 shares of
Order H priced at 10.01/share to satisfy Protected Bid
A1, and divert the unrouted 400 shares of Order H into
the LEAD queue as it is priced such that it would immediately
execute against Order G and is thus a Delayable Message. Due to the
system processing delay, Order H would be diverted at
10:00:00.001150, and releasable at 10:00:00.001370. The result is
that the LEAD queue would be as follows:

------------------------------------------------------------------------
Fig 2(f): LEAD queue
-------------------------------------------------------------------------
Releasable time Message
------------------------------------------------------------------------
10:00:00.001250........................ Cancel Order C.
10:00:00.001350........................ Order F.
10:00:00.001370........................ Order H--Unrouted Balance
(LMM).
------------------------------------------------------------------------

Order I would then be evaluated at 10:00:00.001150, due
to variable message queuing delay. Given that the proposed Router
Feedback is only applied on an order-by-order basis, Order I would
be handled similarly to Order H. Thus, the Exchange would
immediately route 100 shares of Order I priced at 10.01/share to
satisfy Protected Bid A1, and divert the unrouted 400
shares of Order I into the LEAD queue as it originated from a non-
Valid LEAD MM Trading Account and is thus a Delayable Message. Due
to the system processing delay, Order I would be diverted at
10:00:00.001200 and releasable at 10:00:00.001380. The result is
that the LEAD queue would be as follows:

------------------------------------------------------------------------
Fig 2(g): LEAD queue
-------------------------------------------------------------------------
Releasable time Message
------------------------------------------------------------------------
10:00:00.001250........................ Cancel Order C.
10:00:00.001350........................ Order F.
10:00:00.001370........................ Order H--Unrouted Balance
(LMM).
10:00:00.001380........................ Order I--Unrouted Balance.
------------------------------------------------------------------------

At 10:00:00.001250, Cancel Order C would be released
from the LEAD queue. Due to the system processing delay, Order C
would be cancelled at 10:00:00.01300. The result is that the CHX
book and LEAD queue would be as follows:

------------------------------------------------------------------------
Fig 2(h): CHX book
-------------------------------------------------------------------------
Buy Sell
------------------------------------------------------------------------
Order G: 100 @10.01.................... Empty.
------------------------------------------------------------------------

------------------------------------------------------------------------
Fig 2(i): LEAD queue
-------------------------------------------------------------------------
Releasable time Message
------------------------------------------------------------------------
10:00:00.001350........................ Order F.
10:00:00.001370........................ Order H--Unrouted Balance
(LMM).
10:00:00.001380........................ Order I--Unrouted Balance.
------------------------------------------------------------------------

At 10:00:00.01350, Order F would be released from the
LEAD queue. Due to the system processing delay, Order F would be
ranked on the CHX book at 10:00:00.001400. The result is that the
CHX book and the LEAD queue would be as follows:

------------------------------------------------------------------------
Fig 2(j): CHX book
-------------------------------------------------------------------------
Buy Sell
------------------------------------------------------------------------
Order F: 100 @10.02.................... Empty.
Order G: 100 @10.01....................
------------------------------------------------------------------------

------------------------------------------------------------------------
Fig 2(k): LEAD queue
-------------------------------------------------------------------------
Releasable time Message
------------------------------------------------------------------------
10:00:00.001370........................ Order H--Unrouted Balance
(LMM).
10:00:00.001380........................ Order I--Unrouted Balance.
------------------------------------------------------------------------

Due to system processing delays, Order H and Order I
would be released after their respective releasable times as
follows:
[cir] The unrouted balance of Order H would be released from the
LEAD queue at 10:00:00.001400. Order H would then execute against
all 100 shares of Order F at 10.02/share, as well as all 100 shares
of Order G at 10.01/share, and the remaining 200 shares of Order H
would be ranked on the CHX book at 9.99. Due to the system
processing delay, the unexecuted balance would be ranked to the CHX
book at 10:00:00.001450.
[cir] The unrouted balance of Order I would then be released
from the LEAD queue at 10:00:00.001450. All 400 shares of Order I
would then be ranked on the CHX book at 9.99. Due to the system
processing delay, Order I would be ranked on the CHX book at
10:00:00.001500. The result is that the LEAD queue would be empty
and the CHX book would be as follows:

------------------------------------------------------------------------
Fig 2(l): CHX book
-------------------------------------------------------------------------
Buy Sell
------------------------------------------------------------------------
Empty.................................. Order H: 200 @9.99 (LMM).
Order I: 400 @9.99.
------------------------------------------------------------------------

Order J would be evaluated at 10:00:00.001600 and
diverted into LEAD as it originated from a non-Valid LEAD MM Trading
Account and is thus a Delayable

[[Page 11260]]

Message. Due to the system processing delay, Order J would be
diverted at 10:00:00.001650 and releasable at 10:00:00.001950. The
result is that the LEAD queue would be as follows:

------------------------------------------------------------------------
Fig 2(m): LEAD queue
-------------------------------------------------------------------------
Releasable time Message
------------------------------------------------------------------------
10:00:00.001950........................ Order J.
------------------------------------------------------------------------

Order K would be evaluated at 10:00:00.001650, due to
the variable messaging delay. Order K would be immediately ranked on
the CHX book as it originated from a Valid LEAD MM Trading Account
and would not immediately execute against any resting orders. Due to
the system processing delay, Order K would be ranked on the CHX book
at 10:00:00.001700. The result is that the CHX book would be as
follows:

------------------------------------------------------------------------
Fig 2(n): CHX book
-------------------------------------------------------------------------
Buy Sell
------------------------------------------------------------------------
Empty.................................. Order H: 200 @9.99 (LMM).
Order I: 400 @9.99.
Order K: 200 @9.99 (LMM).
------------------------------------------------------------------------

Cancel Order I would be evaluated at 10:00:00.001750
and diverted into the LEAD as it is originated from a non-Valid LEAD
MM Trading Account and is thus a Delayable Message. Due to the
system processing delay, Cancel Order I would be diverted at
10:00:00.001800 and releasable at 10:00:00.002100. The result is
that the LEAD queue would be as follows:

------------------------------------------------------------------------
Fig 2(o): LEAD queue
-------------------------------------------------------------------------
Releasable time Message
------------------------------------------------------------------------
10:00:00.001950........................ Order J.
10:00:00.002100........................ Cancel Order I.
------------------------------------------------------------------------

Cancel Order H would be evaluated and processed at
10:00:00.001800, due to variable messaging delay, without being
diverted into LEAD as it is a cancel message for a resting order
that originated from a Valid LEAD MM Trading Account and is thus not
a Delayable Message. Due to the system processing delay, Order H
would be cancelled at 10:00:00.001850. The result is that the CHX
Book would be as follows:

------------------------------------------------------------------------
Fig 2(p): CHX book
-------------------------------------------------------------------------
Buy Sell
------------------------------------------------------------------------
Empty.................................. Order I: 400 @9.99.
Order K: 200 @9.99 (LMM).
------------------------------------------------------------------------

At 10:00:00.001950, Order J would be released from the
LEAD queue and would immediately execute against all 400 shares of
Order I at 9.99/share and all 200 shares of Order K at 9.99/share.
The result is that the CHX book is empty and the LEAD queue is as
follows:

------------------------------------------------------------------------
Fig 2(q): LEAD queue
-------------------------------------------------------------------------
Releasable time Message
------------------------------------------------------------------------
10:00:00.002100........................ Cancel Order I.
------------------------------------------------------------------------

At 10:00:00.002100, Cancel Order I would be released
from the LEAD queue. Since Order I had already been executed in
full, Cancel Order I will have no effect.
Example 3: Routing--Expired Feedback. Assume the same as Example
2, except that immediately prior to the unrouted balance of Order H
being released, the Exchange received an updated quote from Away
Market A1 displaying 1,000 shares at the $10.01.
Under this Example 3, the Immediate Feedback derived from the
immediately routed portion of Order H would expire and, upon release
of the unrouted delayed portion of Order H, the Matching System
would route the entire unrouted portion to satisfy the updated
Protected Bid displayed by Away Market A1.
Similarly, the Immediate Feedback derived from the immediately
routed portion of Order I would also expire and, upon release of the
unrouted delayed portion of Order I, the Matching System would route
the entire unrouted portion to satisfy the updated Protected Bid
displayed by Away Market A1.
Example 4: MTP. Assume the same as Example 2, except that Order
J and Order K originated from the same MTP Trading Group and Order J
has an MTP Action of ``N.''
Under this Example 4, pursuant to the current MTP rules, MTP
would be triggered and the Order J would be cancelled, as the
current ``N'' MTP Action requires the incoming order to be
cancelled. However, pursuant to the proposed amended MTP rules,
Order K would be cancelled, as the amended ``N'' MTP action requires
the newer order to be cancelled, absent a price sliding event.
(5) Operative Date
In the event the proposed rule change is approved by the SEC, the
proposed rule change shall be operative pursuant to notice by the
Exchange to its Participants. Prior to the operative date, the Exchange
will ensure that policies and procedures are in place to allow Exchange
operations personnel to effectively monitor the operation of LEAD and
compliance by LEAD MMs with the proposed Minimum Performance Standards.
Appendix A: CHX ETF Analysis
The purpose of the CHX ETF Analysis is to demonstrate that latency
arbitrage activity \72\ in SPY at CHX (``SPY latency arbitrage
activity'') has (1) reduced volume and displayed liquidity in SPY at
CHX and (2) impaired liquidity provision in SPY marketwide. For the
purpose of this CHX ETF Analysis, the following terms shall have the
following meanings: \73\
---------------------------------------------------------------------------

\72\ See supra note 6; see also supra Section 3(a)(2).
\73\ Other capitalized terms utilized in the CHX ETF Analysis
shall have the meanings set forth under Appendix B.
---------------------------------------------------------------------------

After Period refers to February 2016 through July 2016.
Analysis Period refers to August 2015 through July 2016.
Before Period refers to August 2015 through December 2015.
Control Average refers to the arithmetic average of a
given metric for Control Securities.
Control Securities refers to DIA, IWM, and QQQ.\74\
---------------------------------------------------------------------------

\74\ Each of the Control Securities were selected for the
following similarities to SPY in that each is: (1) Highly correlated
in price movements with a well-known equity market index; (2) ETFs;
(3) traded in CHX's Chicago data center; (4) actively traded in the
NMS; and (5) highly correlated with a futures contract traded
electronically on the Globex trading platform.
---------------------------------------------------------------------------

Entry Event refers to a trading day in January 2016 on
which latency arbitrage activity in SPY at CHX was first observed.
Entry Month refers to January 2016, the month in which
latency arbitrage activity in SPY at CHX was first observed.
Subject Securities refers to SPY and the Control
Securities.
Entry of SPY Latency Arbitrage Activity
During the After Period, the Exchange observed unusual messaging
patterns in SPY whereby executions of large inbound IOC \75\ orders
against resting orders in SPY were frequently followed by the receipt
of late cancel messages for the executed resting orders very soon after
the execution. This observation was corroborated by feedback from
liquidity providing Participants that indicated that, unlike prior to
the Entry Event, they were no longer able to reliably cancel or cancel/
adjust resting orders on the CHX book in SPY in response to market
changes after the Entry Event. The Exchange believes that each instance
of the unusual messaging pattern is the end result of a race triggered
by an away market event (e.g., change in market data from a futures
market) whereby the liquidity taker is able to take a resting order at
a stale price before the liquidity provider could adjust the resting
order to accurately reflect the market. As such, the SPY latency
arbitrage activity has had the following impact on volume and liquidity
in SPY at CHX and away exchanges:
---------------------------------------------------------------------------

\75\ See CHX Article 1, Rule 2(d)(4).
---------------------------------------------------------------------------

Analysis 1: SPY Latency Arbitrage Activity Reduced CHX Market Share in
SPY Relative to Total Volume in SPY and Disproportionately To Control
Securities
As shown under Figure 1, CHX Market Share in SPY as a percentage of
Total Volume dropped by 90.1% from 5.73% in the Entry Month to 0.57% in

[[Page 11261]]

July 2016, while CHX Market Share in the Control Average dropped by
45.20% from 5.54% in the Entry Month to 3.03% in July 2016.\76\ As
shown under Figure 2, changes in the average Total Volume during the
Analysis Period for the Subject Securities were highly correlated.
Thus, Figure 1 and Figure 2 show that despite the high correlation
between SPY and each of the Control Securities during the Analysis
Period, the CHX Market Share in SPY decreased disproportionately to
Total Volume, which the Exchange submits is attributed to the SPY
latency arbitrage activity.
---------------------------------------------------------------------------

\76\ See infra Appendix B Calculation Set 1a.
[GRAPHIC] [TIFF OMITTED] TN21FE17.000

[[Page 11262]]

Analysis 2: SPY Latency Arbitrage Activity Resulted in Less
Aggressively Priced and Smaller Orders in SPY at CHX
---------------------------------------------------------------------------

\77\ See infra Appendix B Calculation Sets 1a and 1b.
\78\ The correlation coefficients ([rho]) over the twelve-month
period were: [rho](SPY, DIA) = 0.9118, [rho](SPY, IWM) = 0.8996,
[rho](SPY, QQQ) = 0.9392, [rho](SPY, Average) = 0.9493.
\79\ See infra Appendix B Calculation Sets 2a and 2b.
---------------------------------------------------------------------------

While the Exchange did not observe any discernable change on the
NBBO spread in SPY during the After Period, the Exchange did observe a
negative impact on the frequency at which CHX was at the NBBO in SPY
and the frequency at which CHX displayed the largest quote at the NBBO
in SPY during the After Period, while Control Securities experienced
either smaller declines or no declines at all.\80\
---------------------------------------------------------------------------

\80\ See infra Appendix B Calculation Sets 6 and 7.
---------------------------------------------------------------------------

Specifically, the % of Time CHX Was At The NBB decreased from 23.8%
in the Entry Month to 8.2% in July 2016; \81\ the % of Time CHX Was At
The NBO decreased from 23.3% in the Entry Month to 5.8% in July 2016;
\82\ and the % of Time CHX Was At The NBB and that CHX Was At The NBO
decreased from 3.3% in the Entry Month to 0% in July 2016.\83\
---------------------------------------------------------------------------

\81\ See infra Appendix B Calculation Set 6a.
\82\ See infra Appendix B Calculation Set 6b.
\83\ See infra Appendix B Calculation Set 6c.
---------------------------------------------------------------------------

Moreover, the % of Time CHX Was At The NBB And Was The Largest Bid
At That Price decreased from 20% in the Entry Month to 2.3% in July
2016; \84\ the % of Time CHX Was At The NBO And Was The Largest Offer
At That Price decreased from 20.7% in the Entry Month to 1.1% in July
2016; \85\ and the % of Time CHX Was At The NBB And Was The Largest Bid
At That Price and that CHX Was At The NBO And Was The Largest Offer At
That Price decreased from 1.9% to 0%.\86\
---------------------------------------------------------------------------

\84\ See infra Appendix B Calculation Set 7a.
\85\ See infra Appendix B Calculation Set 7b.
\86\ See infra Appendix B Calculation Set 7c.
---------------------------------------------------------------------------

These calculation sets clearly show that SPY latency arbitrage
activity resulted in less aggressively priced CHX displayed liquidity
in SPY and smaller CHX displayed size at the NBBO, during the After
Period. SPY latency arbitrage activity also negatively impacted the
percentage of the time that CHX was at the NBBO and the percentage of
the time CHX displayed the largest quote at the NBBO.
Analysis 3: Latency Arbitrage Activity at CHX Reduced CHX Size At The
NBBO in SPY Relative to the Control Securities and NMS Size At The NBBO
As shown under Figure 3, during the Before Period, the Time-
weighted Average CHX Size at The NBBO for SPY tended to follow changes
to the Control Average, whereas from the Entry Month through July 2016,
the Time-weighted Average CHX Size At The NBBO for SPY decreased by
82.16% and the Time-weighted Average CHX Size At The NBBO for the
Control Average increased by 64.38%.\87\ As shown under Figure 4,
during the Before Period, the monthly changes in the Time-weighted
Average CHX Size At The NBBO tended to follow similar changes to the
Time-weighted Average NMS Size At The NBBO. However, during the After
Period, the monthly changes in the Time-weighted Average CHX Size At
The NBBO in SPY did not follow changes to the Time-weighted Average NMS
Size At The NBBO in SPY. Moreover, during the After Period, CHX went
from having a Two-Sided Market in SPY 100% of regular trading hours in
the Entry Month to 74% of regular trading hours in July 2016.\88\
---------------------------------------------------------------------------

\87\ See infra Appendix B Calculation Sets 3a and 3b.
\88\ See infra Appendix B Calculation Set 5.
---------------------------------------------------------------------------

Thus, Figure 3 and Figure 4 show that SPY latency arbitrage
activity negatively impacted liquidity in SPY marketwide. Moreover, the
data shows that the change in the risk/reward of providing liquidity in
SPY at CHX which resulted from the introduction of the SPY latency
arbitrage activity resulted in a significant reduction of liquidity in
SPY provided by CHX, even during a period when significant incremental
liquidity was being added in the Control Securities.

[[Page 11263]]

[GRAPHIC] [TIFF OMITTED] TN21FE17.001

[[Page 11264]]

Analysis 4: SPY Latency Arbitrage Activity Reduced Displayed Liquidity
in SPY Marketwide
---------------------------------------------------------------------------

\89\ See infra Appendix B Calculation Sets 3a and 3b.
\90\ See infra Appendix B Calculation Sets 3b and 4b.
---------------------------------------------------------------------------

Although the Time-weighted Average NMS Size At The NBBO in SPY
increased by 22.83% during the After Period, the increase in SPY did
not follow much greater increases in the Time-weighted Average NBBO
Size in the Control Group, which increased by 128.82% during the After
Period.\91\ Moreover, during the After Period, the Time-weighted
Average CHX Size At The NBBO for SPY decreased by 90.61% \92\ and, as a
% of total NMS Size At The NBBO in SPY, from 44.36% to 3.39%.\93\ These
calculations suggest that the SPY latency arbitrage activity materially
impacted displayed liquidity in SPY marketwide. The dramatic decrease
in displayed liquidity in SPY at CHX during the After Period explains
why the increase in Time-weighted Average NBBO Size in SPY lagged
behind the increase in Time-weighted Average NBBO Size in the Control
Securities. Had CHX Size At The NBBO remained at least constant during
the After Period, NBBO Size in SPY would have been at least 32.7%
higher in July 2016, as shown below: \94\
---------------------------------------------------------------------------

\91\ See infra Appendix B Calculation Set 4a.
\92\ See infra Appendix B Calculation Set 3a.
\93\ See infra Appendix B Calculations Sets 3a and 4a.
\94\ See infra Appendix B Calculation Set 4a.

----------------------------------------------------------------------------------------------------------------
NMS Size at NBBO Change attribution
-------------------------------------------------------------------------------
Jan-16 Jul-16 Change CHX Others
----------------------------------------------------------------------------------------------------------------
SPY............................. 9,513 11,686 2,172 -3,824 5,996
DIA............................. 2,569 4,711 2,142 1,227 915
IWM............................. 5,222 10,026 4,804 536 4,268
QQQ............................. 14,100 35,354 21,253 3,900 17,353
Control Average................. 7,297 16,697 9,400 1,888 7,512
----------------------------------------------------------------------------------------------------------------

Conclusion
Based on its observations of unusual messaging patterns in SPY,
feedback from Participants and the analysis summarized above, the
Exchange believes that the unusual messaging activity in SPY that was
first observed in the Entry Month is attributed to SPY latency
arbitrage activity. The market data shows that in response to the SPY
latency arbitrage activity, CHX liquidity providers displayed smaller
orders in SPY at less aggressive prices during the After Period
relative to the Before Period and Entry Month. Moreover, in light of
CHX's significant contribution to overall volume and liquidity in SPY
during the Before Period and the Entry Month, diminished displayed
liquidity at CHX has materially impaired displayed liquidity in SPY
market wide.
Appendix B: Calculation Sets
The calculations sets below were prepared with microsecond-level
trade and quote record. Trade records include the date, microsecond-
level timestamp, exchange, security symbol, price, and quantity of all
trades reported to the consolidated tape. Quote records include the
date, microsecond-level timestamp, exchange, security symbol, bid
price, bid quantity, ask price, and ask quantity of all quotes reported
to the consolidated tape. Only protected quotations are reported to the
consolidated tape.
The Analysis Period for the calculations begins on August 1, 2015
and ends on July 31, 2016. Symbols SPY and three other Control
Securities (i.e., DIA, IWM, and QQQ) were considered. Only trades and
quotes that occurred on the national securities exchanges during the
regular trading hours \95\ were considered. Certain types of non-
standard trades were excluded.\96\ Quotes with negative prices or
quantities were excluded. Unless otherwise indicated, lengths of time
when the market was locked or crossed were not considered.
---------------------------------------------------------------------------

\95\ See 17 CFR 242.600(b)(64).
\96\ Non-standard trades include derivatively priced trades,
qualified contingent trades, opening trades, closing trades, and
after hours trades.
---------------------------------------------------------------------------

In the calculations below:

Total Volume refers to the number of shares of the
indicated symbol traded on the national securities exchanges on a
given day, excluding certain types of non-standard trades. CHX
Volume refers to the number of shares of the indicated symbol traded
on CHX on a given day, excluding certain types of non-standard
trades.
CHX Market Share was calculated as CHX Volume divided
by Total Volume on a given day, CHX Market Share = CHX Volume /
Total Volume.
CHX Had A Two-Sided Market refers to an indicator
variable defined as true at any microsecond when there was at least
one bid and at least one offer among all outstanding orders on CHX,
and false otherwise. CHX Had A One-Sided Market refers to an
indicator variable defined as true at any microsecond when there was
at least one bid but no offers among all outstanding orders on CHX
or when there was at least one offer but no bids among all
outstanding orders on CHX, and false otherwise. CHX Had No Market
refers to an indicator variable defined as true at any microsecond
when there were no outstanding orders on CHX, and false otherwise.
A bid was At The NBB at any microsecond when its price
was equal to the National Best Bid. An offer was At The NBO at any
microsecond when its price was equal to the National Best Offer.
At any microsecond, the NMS Size At The National Best
Bid (``NMS Size At The NBB'') refers to the quantity of shares in
prevailing bids on the national securities exchanges priced at the
National Best Bid and the NMS Size At The National Best Offer (``NMS
Size At The NBO'') refers to the quantity of shares in prevailing
offers on the national securities exchanges priced at the National
Best Offer. NMS Size At The NBBO was calculated as the average of
the National Best Bid Size and the National Best Offer Size at each
microsecond, NMS Size At The NBBO = (NMS Size At The NBB + NMS Size
At The NBO) / 2.
CHX Was At The NBB refers to an indicator variable
defined as true at any microsecond when the CHX Best Bid was at the
National Best Bid, and false otherwise. CHX Was At The NBO refers to
an indicator variable defined as true at any microsecond when the
CHX Best Offer was at the National Best Offer, and false otherwise.
At any microsecond, the CHX Size At The NBB (``CHX Size
At The NBB'') refers to the CHX Best Bid Size if CHX was at the NBB
and zero if CHX was not at the NBB. At any microsecond, the CHX Size
At The NBO (``CHX Size At The NBO'') refers to the CHX Best Offer
Size if CHX was at the NBO and zero if CHX was not at the NBO. CHX
Size At The NBBO was calculated as the average of the CHX Size At
The NBB and CHX Size At The NBO at each microsecond, CHX Size At The
NBBO = (CHX Size At The NBB + CHX Size At The NBO) / 2.
CHX Was At The NBB And Was The Largest Bid At That
Price refers to an indicator variable defined as true at any

[[Page 11265]]

microsecond when CHX was at the National Best Bid and the CHX Best
Bid Size was greater than or equal to the largest quantity of shares
in prevailing bids on any one national securities exchange other
than CHX, and false otherwise. CHX Was At The NBO And Was The
Largest Offer At That Price refers to an indicator variable defined
as true at any microsecond when CHX was at the National Best Offer
and the CHX Best Offer Size was greater than or equal to the largest
quantity of shares in prevailing offers on any one national
securities exchange other than CHX, and false otherwise.
For the calculations in the table below:
Monthly average values are shown. Monthly
average values were calculated as the average of daily values for
each day in a month. Daily values were calculated as time-weighted
averages or as percentages of time in the trading day, as indicated
in the table. Time-weighted average values were calculated as daily
average of the specified quantity, market share, or spread value
weighted by time (in microseconds). % of time values were calculated
as the length of time (in microseconds) for which the specified
indicator variable was true divided by the length of time in that
trading day, excluding lengths of time during which the market was
locked or crossed or otherwise could not be calculated (e.g., at the
start of the trading day).

--------------------------------------------------------------------------------------------------------------------------------------------------------
Symbol
---------------------------------------------------------------------
SPY DIA IWM QQQ Control
[No.] Calculation Month -------------------------------------------------------- Average
-------------
[1] [2] [3] [4] ([2]:[4])
--------------------------------------------------------------------------------------------------------------------------------------------------------
[1a] CHX market share (% of total volume)..... Aug 2015.......................... 4.32% 3.07% 5.51% 3.40% 3.99%
Sep 2015.......................... 6.07% 2.61% 3.82% 3.46% 3.30%
Oct 2015.......................... 4.08% 5.95% 2.58% 4.42% 4.32%
Nov 2015.......................... 4.49% 8.58% 3.14% 5.13% 5.62%
Dec 2015.......................... 4.85% 4.89% 2.53% 4.49% 3.97%
Jan 2016.......................... 5.73% 9.13% 3.14% 4.35% 5.54%
Feb 2016.......................... 4.78% 9.13% 3.32% 4.41% 5.62%
Mar 2016.......................... 2.80% 7.54% 2.38% 3.57% 4.50%
Apr 2016.......................... 2.28% 4.41% 2.01% 2.69% 3.04%
May 2016.......................... 1.10% 3.53% 2.21% 1.93% 2.55%
Jun 2016.......................... 0.90% 5.17% 1.74% 3.00% 3.30%
Jul 2016.......................... 0.57% 6.11% 1.22% 1.77% 3.03%
[1b] CHX market share (% of total volume) Aug 2015.......................... 75 34 176 78 72
index: January 2016 = 100.
Sep 2015.......................... 106 29 122 80 60
Oct 2015.......................... 71 65 82 102 78
Nov 2015.......................... 78 94 100 118 101
Dec 2015.......................... 85 54 81 103 72
Jan 2016.......................... 100 100 100 100 100
Feb 2016.......................... 83 100 106 102 102
Mar 2016.......................... 49 83 76 82 81
Apr 2016.......................... 40 48 64 62 55
May 2016.......................... 19 39 70 44 46
Jun 2016.......................... 16 57 55 69 60
Jul 2016.......................... 10 67 39 41 55
[2a] Average total volume..................... Aug 2015.......................... 130,150,083 6,153,725 26,846,599 33,963,873 23,568,046
Sep 2015.......................... 94,627,144 6,552,649 21,381,524 28,452,481 19,947,099
Oct 2015.......................... 75,881,581 4,461,519 22,420,310 22,701,556 14,268,977
Nov 2015.......................... 63,307,314 3,673,677 16,624,141 17,531,483 10,308,999
Dec 2015.......................... 87,011,822 4,969,853 23,287,782 24,474,150 16,211,695
Jan 2016.......................... 127,469,871 8,301,912 35,204,822 39,029,308 21,425,674
Feb 2016.......................... 97,911,733 6,121,299 27,668,000 35,547,824 18,060,375
Mar 2016.......................... 63,333,000 2,521,807 20,709,893 17,600,599 9,724,974
Apr 2016.......................... 53,023,531 2,337,084 15,556,074 14,984,599 8,991,216
May 2016.......................... 51,578,634 2,016,095 17,899,288 14,856,962 9,822,504
Jun 2016.......................... 78,385,026 2,740,421 20,938,721 16,963,513 10,240,678
Jul 2016.......................... 49,783,615 2,130,330 14,122,275 11,973,239 5,657,111
[2b] Average total volume index: Jan 2016 = Aug 2015.......................... 102 74 76 87 110
100.
Sep 2015.......................... 74 79 61 73 93
Oct 2015.......................... 60 54 64 58 67
Nov 2015.......................... 50 44 47 45 48
Dec 2015.......................... 68 60 66 63 76
Jan 2016.......................... 100 100 100 100 100
Feb 2016.......................... 77 74 79 91 84
Mar 2016.......................... 50 30 59 45 45
Apr 2016.......................... 42 28 44 38 42
May 2016.......................... 40 24 51 38 46
Jun 2016.......................... 61 33 59 43 48
Jul 2016.......................... 39 26 40 31 26
[3a] Time-weighted average CHX size at the Aug 2015.......................... 7,740.13 753.47 2,294.04 3,666.82 2,238.11
NBBO.
Sep 2015.......................... 6,217.48 682.18 2,157.29 4,177.88 2,339.12
Oct 2015.......................... 7,816.38 1,308.53 2,052.68 6,130.87 3,164.03
Nov 2015.......................... 8,983.84 2,439.37 2,158.33 7,182.16 3,926.62
Dec 2015.......................... 5,776.73 1,152.21 1,517.59 4,347.08 2,338.96
Jan 2016.......................... 4,220.05 1,830.97 1,726.35 4,341.83 2,633.05
Feb 2016.......................... 2,642.32 1,829.95 2,004.50 4,523.73 2,786.06

[[Page 11266]]

Mar 2016.......................... 1,611.90 2,347.82 2,077.08 5,987.78 3,470.89
Apr 2016.......................... 1,415.95 1,481.35 2,314.10 6,196.84 3,330.76
May 2016.......................... 485.23 1,469.69 2,374.66 7,423.33 3,755.89
Jun 2016.......................... 565.73 1,772.03 2,188.41 7,994.73 3,985.06
Jul 2016.......................... 396.37 3,057.61 2,262.70 8,241.77 4,520.69
[3b] Time-weighted average CHX size at the Aug 2015.......................... 183 41 133 84 85
NBBO index: Jan 2016 = 100.
Sep 2015.......................... 147 37 125 96 89
Oct 2015.......................... 185 71 119 141 120
Nov 2015.......................... 213 133 125 165 149
Dec 2015.......................... 137 63 88 100 89
Jan 2016.......................... 100 100 100 100 100
Feb 2016.......................... 63 100 116 104 106
Mar 2016.......................... 38 128 120 138 132
Apr 2016.......................... 34 81 134 143 126
May 2016.......................... 11 80 138 171 143
Jun 2016.......................... 13 97 127 184 151
Jul 2016.......................... 9 167 131 190 172
[4a] Time-weighted average NMS size at the Aug 2015.......................... 19,257.66 2,609.35 6,511.42 18,471.79 9,197.52
NBBO.
Sep 2015.......................... 11,919.38 1,679.93 6,540.46 14,223.92 7,481.44
Oct 2015.......................... 18,309.27 2,468.56 6,972.46 19,848.75 9,763.26
Nov 2015.......................... 19,257.58 3,930.75 6,963.92 23,442.48 11,445.72
Dec 2015.......................... 13,230.66 2,204.20 5,812.28 17,106.74 8,374.40
Jan 2016.......................... 9,513.33 2,569.26 5,221.94 14,100.46 7,297.22
Feb 2016.......................... 7,417.60 2,489.46 6,340.40 13,869.32 7,566.40
Mar 2016.......................... 8,638.39 3,703.26 8,521.28 20,316.43 10,846.99
Apr 2016.......................... 9,876.59 3,070.53 9,422.71 23,246.57 11,913.27
May 2016.......................... 9,398.26 3,144.93 10,295.88 28,354.88 13,931.90
Jun 2016.......................... 9,313.10 3,107.54 9,597.43 28,288.57 13,664.51
Jul 2016.......................... 11,685.53 4,711.37 10,026.35 35,353.64 16,697.12
[4b] Time-weighted average NMS size at the Aug 2015.......................... 202 102 125 131 126
NBBO index: Jan 2016 = 100.
Sep 2015.......................... 125 65 125 101 103
Oct 2015.......................... 192 96 134 141 134
Nov 2015.......................... 202 153 133 166 157
Dec 2015.......................... 139 86 111 121 115
Jan 2016.......................... 100 100 100 100 100
Feb 2016.......................... 78 97 121 98 104
Mar 2016.......................... 91 144 163 144 149
Apr 2016.......................... 104 120 180 165 163
May 2016.......................... 99 122 197 201 191
Jun 2016.......................... 98 121 184 201 187
Jul 2016.......................... 123 183 192 251 229
[5a] % of time CHX had a two-sided market..... Aug 2015.......................... 99.8% 99.6% 99.7% 99.6% 99.7%
Sep 2015.......................... 99.9% 99.9% 99.9% 99.9% 99.9%
Oct 2015.......................... 100.0% 99.9% 99.9% 100.0% 99.9%
Nov 2015.......................... 99.9% 99.9% 99.5% 99.8% 99.7%
Dec 2015.......................... 98.6% 98.3% 98.6% 98.6% 98.5%
Jan 2016.......................... 100.0% 99.9% 99.9% 100.0% 99.9%
Feb 2016.......................... 99.9% 100.0% 100.0% 100.0% 100.0%
Mar 2016.......................... 99.8% 100.0% 100.0% 100.0% 100.0%
Apr 2016.......................... 99.3% 99.9% 100.0% 99.8% 99.9%
May 2016.......................... 85.2% 99.9% 100.0% 100.0% 100.0%
Jun 2016.......................... 73.2% 99.9% 100.0% 100.0% 100.0%
Jul 2016.......................... 74.0% 99.9% 100.0% 100.0% 100.0%
[5b] % of time CHX had a one-sided market..... Aug 2015.......................... 0.1% 0.1% 0.0% 0.2% 0.1%
Sep 2015.......................... 0.0% 0.0% 0.0% 0.0% 0.0%
Oct 2015.......................... 0.0% 0.0% 0.0% 0.0% 0.0%
Nov 2015.......................... 0.0% 0.0% 0.0% 0.2% 0.1%
Dec 2015.......................... 0.0% 0.3% 0.0% 0.0% 0.1%
Jan 2016.......................... 0.0% 0.1% 0.0% 0.0% 0.0%
Feb 2016.......................... 0.0% 0.0% 0.0% 0.0% 0.0%
Mar 2016.......................... 0.2% 0.0% 0.0% 0.0% 0.0%
Apr 2016.......................... 0.2% 0.0% 0.0% 0.0% 0.0%
May 2016.......................... 3.0% 0.0% 0.0% 0.0% 0.0%
Jun 2016.......................... 6.1% 0.0% 0.0% 0.0% 0.0%
Jul 2016.......................... 1.8% 0.0% 0.0% 0.0% 0.0%
[5c] % of time CHX had no market.............. Aug 2015.......................... 0.1% 0.3% 0.3% 0.1% 0.2%
Sep 2015.......................... 0.0% 0.1% 0.1% 0.0% 0.1%

[[Page 11267]]

Oct 2015.......................... 0.0% 0.1% 0.1% 0.0% 0.1%
Nov 2015.......................... 0.1% 0.1% 0.4% 0.0% 0.2%
Dec 2015.......................... 1.4% 1.4% 1.4% 1.4% 1.4%
Jan 2016.......................... 0.0% 0.0% 0.0% 0.0% 0.0%
Feb 2016.......................... 0.1% 0.0% 0.0% 0.0% 0.0%
Mar 2016.......................... 0.0% 0.0% 0.0% 0.0% 0.0%
Apr 2016.......................... 0.5% 0.1% 0.0% 0.2% 0.1%
May 2016.......................... 11.8% 0.1% 0.0% 0.0% 0.0%
Jun 2016.......................... 20.7% 0.1% 0.0% 0.0% 0.0%
Jul 2016.......................... 24.2% 0.0% 0.0% 0.0% 0.0%
[6a] % of time CHX was at the NBB............. Aug 2015.......................... 16.5% 32.7% 46.9% 58.0% 45.9%
Sep 2015.......................... 24.0% 36.4% 44.7% 67.6% 49.6%
Oct 2015.......................... 30.8% 45.8% 44.3% 74.9% 55.0%
Nov 2015.......................... 24.5% 50.3% 54.0% 79.6% 61.3%
Dec 2015.......................... 29.2% 34.1% 38.3% 71.3% 47.9%
Jan 2016.......................... 23.8% 46.0% 40.2% 70.4% 52.2%
Feb 2016.......................... 15.5% 53.9% 33.7% 65.5% 51.0%
Mar 2016.......................... 18.5% 58.4% 35.6% 66.8% 53.6%
Apr 2016.......................... 18.7% 46.8% 35.9% 60.5% 47.7%
May 2016.......................... 7.0% 44.8% 53.5% 68.5% 55.6%
Jun 2016.......................... 5.4% 47.1% 44.2% 72.8% 54.7%
Jul 2016.......................... 8.2% 45.9% 40.8% 74.1% 53.6%
[6b] % of time CHX was at the NBO............. Aug 2015.......................... 27.9% 39.8% 57.0% 65.6% 54.1%
Sep 2015.......................... 29.7% 36.0% 41.8% 66.7% 48.2%
Oct 2015.......................... 20.9% 41.4% 42.7% 74.0% 52.7%
Nov 2015.......................... 28.7% 39.3% 52.9% 78.2% 56.8%
Dec 2015.......................... 27.1% 35.5% 42.4% 70.0% 49.3%
Jan 2016.......................... 23.3% 52.3% 48.8% 70.4% 57.2%
Feb 2016.......................... 23.2% 55.5% 46.3% 69.1% 57.0%
Mar 2016.......................... 19.0% 58.5% 44.4% 70.0% 57.7%
Apr 2016.......................... 14.0% 44.0% 36.4% 65.8% 48.7%
May 2016.......................... 12.4% 40.4% 49.3% 64.2% 51.3%
Jun 2016.......................... 11.0% 47.3% 48.4% 74.6% 56.8%
Jul 2016.......................... 5.8% 46.0% 34.0% 69.4% 49.8%
[6c] % of time CHX was at the NBB and that CHX Aug 2015.......................... 1.0% 8.2% 19.7% 32.5% 20.2%
was at the NBO.
Sep 2015.......................... 2.0% 10.0% 9.2% 37.1% 18.8%
Oct 2015.......................... 3.0% 14.4% 10.2% 49.8% 24.8%
Nov 2015.......................... 6.0% 14.2% 17.9% 58.1% 30.1%
Dec 2015.......................... 4.4% 9.3% 12.5% 44.8% 22.2%
Jan 2016.......................... 3.3% 19.2% 7.8% 41.8% 22.9%
Feb 2016.......................... 1.0% 24.5% 4.8% 35.4% 21.5%
Mar 2016.......................... 0.5% 29.6% 4.6% 38.0% 24.1%
Apr 2016.......................... 0.2% 15.7% 2.2% 29.9% 15.9%
May 2016.......................... 0.0% 13.5% 17.5% 34.6% 21.9%
Jun 2016.......................... 0.0% 17.0% 12.2% 48.5% 25.9%
Jul 2016.......................... 0.0% 12.6% 4.0% 44.1% 20.3%
[7a] % of time CHX was at the NBB and was the Aug 2015.......................... 13.6% 26.2% 37.1% 26.6% 29.9%
largest bid at that price.
Sep 2015.......................... 21.5% 34.0% 40.0% 47.6% 40.6%
Oct 2015.......................... 24.9% 43.8% 36.2% 57.4% 45.8%
Nov 2015.......................... 18.8% 47.9% 39.4% 55.9% 47.7%
Dec 2015.......................... 25.1% 31.7% 27.7% 39.1% 32.8%
Jan 2016.......................... 20.0% 43.6% 32.0% 48.1% 41.2%
Feb 2016.......................... 11.2% 52.7% 28.5% 45.5% 42.2%
Mar 2016.......................... 11.9% 55.7% 28.3% 44.8% 42.9%
Apr 2016.......................... 13.0% 42.2% 31.6% 43.6% 39.1%
May 2016.......................... 1.7% 39.8% 37.9% 50.2% 42.6%
Jun 2016.......................... 2.0% 43.7% 32.2% 48.3% 41.4%
Jul 2016.......................... 2.3% 43.2% 31.7% 48.0% 41.0%
[7b] % of time CHX was at the NBO and was the Aug 2015.......................... 24.3% 34.4% 51.2% 39.8% 41.8%
largest offer at that price.
Sep 2015.......................... 27.0% 33.8% 37.8% 46.7% 39.4%
Oct 2015.......................... 16.0% 38.1% 31.3% 44.0% 37.8%
Nov 2015.......................... 22.6% 36.8% 35.1% 53.4% 41.8%
Dec 2015.......................... 23.2% 32.7% 30.6% 36.8% 33.4%
Jan 2016.......................... 20.7% 51.1% 41.3% 50.7% 47.7%
Feb 2016.......................... 18.5% 54.7% 40.8% 49.4% 48.3%
Mar 2016.......................... 12.9% 55.2% 35.3% 51.2% 47.2%
Apr 2016.......................... 8.1% 38.6% 30.8% 45.9% 38.4%

[[Page 11268]]

May 2016.......................... 3.8% 36.7% 29.8% 45.2% 37.2%
Jun 2016.......................... 4.6% 44.6% 31.4% 51.8% 42.6%
Jul 2016.......................... 1.1% 42.5% 27.0% 31.0% 33.5%
[7c] % of time CHX was at the NBB and was the Aug 2015.......................... 0.2% 5.3% 12.8% 7.1% 8.4%
largest bid at that price and that CHX was at
the NBO and was the largest offer at that
price.
Sep 2015.......................... 1.1% 8.5% 7.3% 16.7% 10.9%
Oct 2015.......................... 0.9% 12.3% 5.3% 17.7% 11.8%
Nov 2015.......................... 2.3% 12.6% 7.0% 23.0% 14.2%
Dec 2015.......................... 2.9% 8.1% 6.4% 13.7% 9.4%
Jan 2016.......................... 1.9% 17.3% 4.3% 18.5% 13.4%
Feb 2016.......................... 0.3% 23.3% 2.8% 13.9% 13.3%
Mar 2016.......................... 0.1% 26.0% 2.6% 14.0% 14.2%
Apr 2016.......................... 0.0% 10.9% 1.5% 14.0% 8.8%
May 2016.......................... 0.0% 10.4% 8.0% 15.6% 11.3%
Jun 2016.......................... 0.0% 14.3% 4.8% 18.6% 12.5%
Jul 2016.......................... 0.0% 10.7% 2.8% 10.8% 8.1%
--------------------------------------------------------------------------------------------------------------------------------------------------------

Appendix C: Impact of LEAD on Liquidity Takers
The purpose of this analysis is to show that implementation of LEAD
would not materially impact the ability of a random market participant
not engaged in a latency arbitrage strategy, such as retail investors,
to take displayed liquidity at CHX. This analysis assumes that LEAD
would not materially change order sending behavior of Participants.
For the period of May 2016 through July 2016,\97\ the Exchange
observed the following with regards to SPY:

\97\ For the months prior to May 2016 during the Analysis
Period, the Exchange did not maintain TLTC data. A limitation of
this data is that CHX Market Share and displayed liquidity in SPY
and, by extension, order sending activity had all diminished
considerably by May 2016. See supra Appendix B Calculation Set 1.
---------------------------------------------------------------------------

There were a total of 18,316 orders at least partially
executed.
During the same period, the Exchange received 1,278
cancel messages to cancel resting orders after the resting order had
been fully executed (``too-late-to-cancel'' or ``TLTC'').
Of the 1,278 TLTCs, 412 TLTCs (32.24%) were received
sooner than or exactly 350 microseconds after the execution
(``TLTC<=350''), whereas 866 (67.76%) were received later
than 350 microseconds after the execution (``TLTC>350'').
Of the 412 TLTC<=350, 392 (95.15%)
executions were attributed to SPY latency arbitrage activity while
the remaining 20 (4.85%) executions were not.
Of the 866 TLTC>350, 780 (90.07%) executions
were attributed to SPY latency arbitrage activity while the
remaining 86 (9.93%) executions were not.

Thus, if LEAD had been in effect for the period of May 2016 through
July 2016, LEAD (1) would have prevented up to 412 orders, virtually
all of which the Exchange believes were submitted as part of SPY
latency arbitrage activity, from being executed during the 350
microsecond Fixed LEAD Period and (2) would have had a negative impact
on only 20 liquidity taking orders not attributed to SPY latency
arbitrage activity. These 20 orders comprised 0.11% of the 18,316
orders executed during the period. That is, during the measurement
period of 63 trading days, LEAD would have had an adverse effect on
approximately one order every three trading days. Thus, LEAD can make a
significant contribution to leveling the playing field between LEAD MMs
and latency arbitrageurs with minimal adverse effect on other liquidity
taking orders.
2. Statutory Basis
The Exchange believes that the proposed rule change is consistent
with Section 6(b) of the Act in general,\98\ and furthers the
objectives of Section 6(b)(5) in particular,\99\ 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 and perfect the
mechanisms of a free and open market, and, in general, to protect
investors and the public interest; and is not designed to permit unfair
discrimination between customers, issuers, brokers, or dealers.
---------------------------------------------------------------------------

\98\ 15 U.S.C. 78f(b).
\99\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

Specifically, the Exchange believes that the proposed rule change
would remove impediments and perfect the mechanisms of a free and open
market and, in general, protect investors and the public interest by
enhancing displayed liquidity and price discovery by minimizing the
effectiveness of latency arbitrage strategies that negatively impact
market quality. As shown under the CHX ETF Analysis,\100\ latency
arbitrage lessens competition among orders by dissuading liquidity
providers from displaying large and aggressively priced orders, which
in turn impairs market efficiency.\101\ The Commission has recognized
the crucial role that displayed limit orders play in the price
discovery process.\102\ Thus, the Exchange believes that optimizing
liquidity provision on the Exchange will enhance price discovery and,
thereby, enhance market efficiency. To this end, LEAD is designed to
promote displayed liquidity on the Exchange by giving LEAD MMs a small
head start to the cancellation of stale quotes in the race to react to
symmetric public information. LEAD is designed to achieve these goals
without having a materially negative impact on the ability of liquidity
takers not engaged in latency arbitrage, such as retail investors, to
access displayed liquidity at CHX, as such liquidity will most always
remain on the CHX book after a liquidity taking order has been released
from LEAD.\103\ Thus, the Exchange believes that LEAD will encourage
LEAD MMs to post large aggressively priced orders on the CHX book,
which

[[Page 11269]]

will enhance liquidity and optimize price discovery in furtherance of
the objectives of Section 6(b)(5) of the Act \104\ and in a manner
consistent with Regulation NMS, as described below.
---------------------------------------------------------------------------

\100\ See supra Appendix A
\101\ See Regulation NMS Adopting Release, supra note 13, at
37499.
\102\ See Regulation NMS Adopting Release, supra note 13, at
37526.
\103\ See also supra note 18; see also supra Appendix C.
\104\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

In addition, the Exchange believes that the proposed LEAD MM
designation would protect investors and the public interest by
requiring LEAD MMs to meet the proposed Minimum Performance Standards
in return for being afforded the benefits of LEAD. Moreover, the
Exchange submits that the proposal to leverage existing Market Maker
rules regarding the procedures for deregistering Market Makers and
involuntary withdrawals from assigned securities will provide the
Exchange with sufficient authority to compel and enforce compliance by
LEAD MMs with the proposed Minimum Performance Standards.
The Exchange also believes that the proposed rules regarding
assignment of LEAD MM Securities would protect investors and the public
interest by implementing a comprehensive process whereby the Exchange
will be able to select LEAD MMs that have demonstrated the ability and
capacity to enhance displayed liquidity on the Exchange and to comply
with federal rules and regulations, as well as CHX Rules. When
considering these procedures with the proposed Minimum Performance
Standards and enforcement mechanism, the Exchange believes that the
effectiveness of LEAD in enhancing displayed liquidity and price
discovery will be optimized.
Moreover, for similar reasons, the Exchange submits that the
proposed rules for LEAD are not designed to permit unfair
discrimination. Specifically, the Exchange believes that any
discrimination between LEAD MMs and non-LEAD MMs is permissible under
the Act because (1) LEAD is designed to enhance displayed liquidity and
price discovery by rectifying a current structural bias against
displayed liquidity,\105\ without having a materially negative impact
on the ability of liquidity takers not engaged in latency arbitrage,
such as retail investors, to access displayed liquidity at CHX,\106\
and (2) the proposed Minimum Performance Standards, which will not
apply to non-LEAD MMs, will help ensure that those goals are achieved,
as well as to provide a safeguard against LEAD MMs utilizing LEAD to
engage in manipulative activities or otherwise non-bona fide liquidity
provision strategies.
---------------------------------------------------------------------------

\105\ See supra Section 3(a)(2).
\106\ See also supra note 18; see also supra Appendix C.
---------------------------------------------------------------------------

Regardless of whether a delay is symmetric (e.g., IEX Delay) or
asymmetric (e.g., LEAD), any intentional delay designed to address
latency arbitrage must necessarily discriminate among members. That is,
correcting asymmetry in the market requires asymmetry in the remedy.
For example, while the IEX Delay delays all incoming messages, the IEX
Delay is asymmetric in that it provides processing advantages to non-
displayed pegged orders resting on the IEX book, which are not provided
to other orders. LEAD would similarly address latency arbitrage by
providing a processing advantage to LEAD MMs, which will not be
provided to non-LEAD MMs.
The Exchange also believes that the LEAD is narrowly-tailored to
address latency arbitrage as applied to limit orders. In finding that
the rules pertaining to the IEX Delay did not permit unfair
discrimination, and would not impose any unnecessary or inappropriate
burden on competition, the Commission recognized that displayed limit
orders or non-pegged non-displayed limit orders, the types of liquidity
LEAD is designed to protect, would not benefit from the symmetric IEX
Delay \107\ because the purpose of such limit orders is to post or
execute consistent with their fixed limit price, as opposed to being
repriced by an exchange based on changes to the NBBO.\108\ Given that
limit orders are also vulnerable to latency arbitrage and could only be
effectively adjusted by the liquidity providers, if such orders are
provided as part of a broader liquidity provision strategy that
utilizes proprietary algorithms to price and size such limit orders, it
logically flows that the best way to protect such liquidity is through
an asymmetric delay, such as LEAD, that empowers LEAD MMs to better
execute their liquidity provision strategies, which result in valuable
displayed liquidity being provided to the market.\109\ Thus, given the
ineffectiveness of symmetric delays in protecting limit orders from
latency arbitrage and the immaterial impact that LEAD would have on the
ability of random liquidity takers not engaged in latency arbitrage to
access liquidity at CHX,\110\ the Exchange believes that LEAD is
narrowly-tailored to address latency arbitrage as applied to limit
orders.
---------------------------------------------------------------------------

\107\ See IEX Approval Order, supra note 20, at 41157.
\108\ See id.
\109\ See supra notes 7 and 8.
\110\ See also supra note 18; see also supra Appendix C.
---------------------------------------------------------------------------

The Exchange further submits that LEAD would not confer any unfair
advantage to LEAD MMs or introduce incremental risk of manipulative
activity. While LEAD is long enough to neutralize microsecond speed
advantages exploited by latency arbitrageurs, it is too short to
provide any actionable incremental advantage to LEAD MMs in reacting to
information not already it their possession. LEAD is also too short to
introduce any incremental risk of manipulative practices, which is
supported by the fact that the Commission has recognized that a 350-
microsecond delay would not materially increase the likelihood of
certain manipulative practices such as ``spoofing'' or ``marking-the-
close'' due to the practical difficulties of executing such strategies
within such a short time frame.^{111 112} Notwithstanding, the
Exchange has elected to adopt the proposed Minimum Performance
Standards to provide additional assurance to the Commission that CHX
displayed liquidity will remain valuable and reliable by tying the
processing advantage afforded to LEAD MMs to heightened market quality
requirements, which will not be applied to non-LEAD MMs. Thus, for all
of the reasons described above, any discrimination between LEAD MMs and
non-LEAD MMs is justified and consistent with the requirements of the
Section 6(b)(5) of the Act.\113\
---------------------------------------------------------------------------

\111\ Final Interpretation, supra note 30, at n. 70.
\112\ The Exchange notes that it currently maintains
surveillance protocols designed to detect such manipulative
practices.
\113\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

The Exchange notes that the Commission has previously approved
functionality that permissibly discriminates among members for the
purpose enhancing displayed liquidity. Specifically, the Commission has
previously approved the following mechanisms:

Maker/taker fee. Many national securities exchanges,
including CHX, utilize the ``maker/taker'' fee model, which
discriminates between liquidity providers and takers for the purpose
of incentivizing market participants to provide liquidity to or take
liquidity from the exchange.\114\
---------------------------------------------------------------------------

\114\ See, e.g., Bats BYX Fee Schedule; see also Section E.1 of
the CHX Fee Schedule.
---------------------------------------------------------------------------

Bulk-quoting interface. Nasdaq offers a bulk-quoting
interface to allow its options market makers to more efficiently
submit and update quotes as ``aiding market makers in their market
making activities will help to

[[Page 11270]]

enhance market liquidity for investors.'' \115\ BATS Options offers
a similar functionality, but permits all BATS Options users to
utilize its bulk-quoting interface.\116\ In each case, the exchange
gives liquidity providers a processing advantage to facilitate the
adjusting of stale quotes to the disadvantage of liquidity takers.
Consequently, as bulk-quoting interfaces permit liquidity providers
to adjust numerous quotes through a single message, this would
minimize the possibility of stale quotes being executed before the
liquidity provider has an opportunity to adjust the stale quote.
That is, bulk-quoting interfaces, among other things, minimize the
effectiveness of latency arbitrage strategies.
---------------------------------------------------------------------------

\115\ See Securities Exchange Act Release No. 65024 (August 3,
2011), 76 FR 48925 (August 9, 2011) (SR-NASDAQ-2011-102).
\116\ See Securities Exchange Act Release No. 65307 (September
9, 2011), 76 FR 57092 (September 15, 2011) (SR-BATS-2011-034)
(expanding the availability of the bulk-quoting interface to all
users of BATS Options); Securities Exchange Act Release No. 65133
(August 15, 2011), 76 FR 52032 (August 19, 2011) (SR-BATS-2011-029)
(adopting the bulk-quoting interface).
---------------------------------------------------------------------------

Market Makers generally. Many national securities
exchange offer a market maker program that provides certain
financial or operational benefits (e.g., Nasdaq's bulk-quoting
interface and NYSE DMM parity \117\) in return for meeting
heightened market quality requirements.
---------------------------------------------------------------------------

\117\ See NYSE Rules 103B and 104.

The Exchange also believes that the proposed amendments to the MTP
order modifier would remove impediments and perfect the mechanisms of a
free and open market and, in general, protect investors and the public
interest, in that they are designed to avoid certain unintended
consequences of LEAD on the MTP functionality. Specifically, since an
order would be assigned a sequence number prior to being evaluated
pursuant to LEAD,\118\ LEAD may result in a newer undelayed order being
ranked on the CHX book before an older delayed order, which would not
otherwise occur today. Under this scenario and assuming that the
contra-side orders trigger MTP and the incoming order is marked ``N,''
the current MTP rules would require the incoming older order to be
cancelled, whereas the amended MTP handling would require the resting
newer order to be cancelled subject to the exception for CHX Only
orders described under amended Article 1, Rule 2(b)(3)(F)(iii)(a) and
(b). Thus, the Exchange believes that the amended MTP functionality
better contemplates LEAD and preserves expected results.
---------------------------------------------------------------------------

\118\ See supra note 45.
---------------------------------------------------------------------------

The Exchange also believes that the proposed rule change is
consistent with Regulation NMS. Specifically, the Exchange believes
that LEAD is consistent with Rule 600(b)(3),\119\ Rule 602(b)(2)
(``Firm Quote Rule''),\120\ Rule 611 \121\ and Rule 610(d).\122\
---------------------------------------------------------------------------

\119\ See 17 CFR 242.600(b)(3).
\120\ See 17 CFR 242.602(b)(2).
\121\ See 17 CFR 242.611.
\122\ See 17 CFR 242.610(d).
---------------------------------------------------------------------------

The Exchange believes that the proposed rule change is consistent
with the ``immedia[cy]'' requirement of Rule 600(b)(3) as LEAD is a de
minimis intentional access delay and thereby compatible with the
Exchange having an ``automated quotation'' under Rule 600(b)(3) and
thus a ``protected quotation'' under Rule 611.\123\ Specifically, Rule
600(b)(3) requires that a trading center displaying an automated
quotation permit, among other things, an incoming IOC order to
immediately and automatically execute against the automated quotation
up to its full size; and immediately and automatically cancel any
unexecuted portion of the IOC order without routing the order
elsewhere.\124\ In the context of determining whether a trading center
maintains an ``automated quotation'' for purposes of Rule 611, 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 the Order Protection Rule by impairing
fair and efficient access to an exchange's quotations).\125\
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.\126\
---------------------------------------------------------------------------

\123\ See Final Interpretation, supra note 30, at 40792.
\124\ See 17 CFR 242.600(b)(3).
\125\ See Final Interpretation, supra note 30, at 40792. Thus,
the Exchange's quotations would continue to be ``immediately''
accessible and protected pursuant to Rule 611. See 17 CFR
242.600(b)(3) defining ``automated quotation''; see also 17 CFR
242.600(b)(58) defining ``protected quotation.''
\126\ See Final Interpretation, supra note 30, at 40792.
---------------------------------------------------------------------------

The Exchange believes that LEAD is so short as to not frustrate the
purposes of the Rule 611 \127\ by impairing fair and efficient access
to the Exchange's quotations. Specifically, all Participants seeking to
take liquidity from the CHX book will have fair and efficient access to
CHX quotations. Also, the 350-microsecond delay is so short that it
does not provide an incremental advantage to a LEAD MM other than
neutralizing a structural bias that permits latency arbitrageurs to
profit off of symmetric public information. To the extent a market
participant has a better algorithm or better information, LEAD is too
short to have a negative impact on such non-latency arbitrage
strategies, much less permit a LEAD MM to decide on a quotation-by-
quotation basis whether to cancel or modify a quote. In addition, LEAD
is narrowly-tailored to minimize the effectiveness of latency arbitrage
strategies at CHX, as described above.
---------------------------------------------------------------------------

\127\ See 17 CFR 242.611.
---------------------------------------------------------------------------

The Exchange also believes that LEAD is consistent with Rule
602(b)(2).\128\ Specifically, a plain reading of Rule 602(b) indicates
that the delay of a liquidity taking order pursuant to LEAD would not
result in the order being ``presented'' to the LEAD MM.\129\ This is
consistent with the Commission's guidance regarding the applicability
of the Firm Quote Rule in the context of obsolete Intermarket Trading
System (``ITS'') commitments.\130\ Specifically, the Commission stated
that ``the Firm Quote Rule requires that every exchange specialist or
OTC market maker execute any order to buy or sell a security it
receives at a price at least as favorable as its published bid or offer
in any amount up to its published size, subject to two exceptions.''
\131\ The Commission further stated ``that the Firm Quote Rule applies
to ITS commitments; where a specialist or market maker fails to honor
its quote by refusing to execute an ITS commitment received at its
published bid or offer, and neither of the exceptions contained in the
Firm Quote Rule apply, the specialist or market maker is in violation
of the Firm Quote Rule.'' \132\ As such, the Commission's guidance
clearly suggests that a Rule 602(b) violation occurs when a liquidity
provider receives (i.e., is presented) a marketable contra-side order
and refuses to honor its quote.\133\ When also

[[Page 11271]]

considering that the Exchange will never notify Participants or the
public of the Exchange's receipt of a liquidity taking order subject to
LEAD and CHX Rules indicate that a liquidity provider's Rule 602(b)
obligation vests only after execution of its order within the Matching
System,\134\ the Exchange submits that LEAD is consistent with the Firm
Quote Rule.
---------------------------------------------------------------------------

\128\ ``Subject to the provisions of paragraph (b)(3) of this
section, each responsible broker or dealer shall be obligated to
execute any order to buy or sell a subject security, other than an
odd-lot order, presented to it by another broker or dealer, or any
other person belonging to a category of persons with whom such
responsible broker or dealer customarily deals, at a price at least
as favorable to such buyer or seller as the responsible broker's or
dealer's published bid or published offer (exclusive of any
commission, commission equivalent or differential customarily
charged by such responsible broker or dealer in connection with
execution of any such order) in any amount up to its published
quotation size.'' 17 CFR 242.602(b)(2) (emphasis added).
\129\ See 17 CFR 242.602(b).
\130\ See Exchange Act Release No. 40260, 63 FR 40748, 40754
(July 30, 1998).
\131\ Id (emphasis added).
\132\ Id (emphasis added).
\133\ See 17 CFR 242.602(b). A Section 21(a) report from 1996
regarding, among other things, misconduct by certain market makers
with respect to its published quotes is illustrative of the type of
activity that the Firm Quote Rule is designed to address. See Report
Pursuant to Section 21(a) of the Securities Exchange Act of 1934
Regarding the NASD, the Nasdaq Market, and Nasdaq Market Makers,
Exchange Act Release No. 37542 (August 8, 1996). Page 32 of the
report provides, in pertinent part, as follows: Certain market
makers at times did not honor their quotation for those with whom
they preferred not to trade and ``backed away'' from their quotes as
reprisal for, among other reasons, perceived prior back way by other
market makers. Certain market makers also variously refused to trade
with order entry firms, certain other market makers, and
participants they ``dislike,'' such as options market makers. Market
makers at times backed away from their trading obligations to avoid
unwanted orders placed when they coordinated their quotations with
other market makers.
\134\ CHX Article 20, Rule 3(a) provides as follows: Each order
submitted by each Participant is a firm order and each Participant
must, upon execution of the order within the Matching System,
purchase or sell, as the case may be, at the price, size and
conditions identified by the participant at the time it submitted
the order. No Participant may submit an order marked for display as
a ``manual'' quotation.
---------------------------------------------------------------------------

The Exchange further believes that LEAD is consistent with the
requirements of Rule 611.\135\ As described above, a portion of a
Routable Order may be immediately routed away to execute against away
protected quotations, with the unrouted remainder being delayed before
being permitted to execute against an order resting on the CHX book at
a price inferior to the away protected quotations. \136\ Given that
LEAD is de minimis in the context of Rule 600(b)(3),\137\ it logically
flows that LEAD would also be considered de minimis for the purposes of
the ``simultaneously routed'' Intermarket Sweep Order (``ISO'')
requirement under Rule 611(b)(6).\138\ Thus, the Exchange submits that
a delay caused by LEAD between the routing of one or more ISOs to
satisfy better priced protected quotation(s) and the delayed execution
of a related order at price inferior to such protected quotation(s) is
consistent with the requirements of Rule 611(b)(6).\139\
---------------------------------------------------------------------------

\135\ 17 CFR 242.611.
\136\ See supra Example 3.
\137\ See 17 CFR 242.600(b)(3).
\138\ See 17 CFR 242.611(b)(6).
\139\ See id.
---------------------------------------------------------------------------

Similarly, a portion of a Routable Order may be immediately routed
away to execute against away protected quotations with the unrouted
remainder being delayed before be ranked on the CHX book at a price
that crosses such away protected quotations. This could result if the
resting order on the CHX book that resulted in the unrouted remainder
being delayed was cancelled before the unrouted remainder were released
from LEAD. Under this scenario, given that LEAD is de minimis in the
context of Rule 600(b)(3),\140\ it logically flows that the de minimis
delay caused by LEAD between the routing of one or more ISOs to satisfy
away protected quotations and the display of the related order at a
price that crosses such away protected quotations is permissible and
consistent with the requirements of Rule 610(d).\141\
---------------------------------------------------------------------------

\140\ See 17 CFR 242.600(b)(3).
\141\ See ``Division of Trading and Markets: Responses to
Frequency Asked Questions Concerning Rule 611 and Rule 610 of
Regulation NMS.'' U.S. Securities and Exchange Commission, 4 April
2008. Web. 20 June 2016 http://www.sec.gov/divisions/marketreg/nmsfaq610-11.htm (``Question 5.02''); see also CHX Article 20, Rule
6(c)(3); see also 17 CFR 242.610(d).
---------------------------------------------------------------------------

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

The Exchange does not believe that the proposed rule change will
impose any burden on competition that is not necessary or appropriate
in furtherance of the purposes of the Act. To the contrary, the
Exchange believes that any burden on competition is necessary and
appropriate in furtherance of the purposes of Section 6(b)(5) of the
Act because LEAD is functionality that seeks to enhance liquidity and
optimize price discovery by deemphasizing speed as a key to trading
success in order to further serve the interests of investors and
thereby removes impediments and perfects the mechanisms of a free and
open market.
The Exchange further notes that market participants will continue
to be able to obtain CHX book data via the Securities Information
Processors or through the Exchange's proprietary book feed, the CHX
Book Feed,\142\ without delay as the Exchange does not propose to delay
any outbound messages or market data. As such, the Exchange submits
that any burden on competition, while necessary and appropriate in
furtherance of the purposes of that Act, has been minimized.
---------------------------------------------------------------------------

\142\ See CHX Article 4, Rule 1.
---------------------------------------------------------------------------

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

No written comments were solicited or received with respect to the
proposed rule change.

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

Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period (i) as the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
A. By order approve or disapprove the proposed rule change, or
B. Institute proceedings to determine whether the proposed rule
change should be disapproved.

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-CHX-2017-04 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-CHX-2017-04. This file
number should be included on the subject line if email is used. To help
the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's Internet Web site (http://www.sec.gov/rules/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
10:00 a.m. and 3:00 p.m. Copies of the

[[Page 11272]]

filing also will 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-CHX-2017-04 and should be submitted on or before March
14, 2017.

For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\143\
---------------------------------------------------------------------------

\143\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-03296 Filed 2-17-17; 8:45 am]
BILLING CODE 8011-01-P

11252 Federal Register / Vol. 82, No. 33 / Tuesday, February 21, 2017 / Notices

sections 6(c) and 17(b) of the Act from consistent with the protection of the places specified in Item IV below.
the prohibition on certain affiliated investors and the purposes fairly The Exchange has prepared summaries,
transactions in section 17(a) of the Act intended by the policy and provisions of set forth in sections A, B and C below,
to the extent necessary to permit the the Act. of the most significant parts of such
Underlying Funds to sell their shares to, For the Commission, by the Division of statements.
and redeem their shares from, the Funds Investment Management, pursuant to A. Self-Regulatory Organization’s
of Funds.4 Applicants state that such delegated authority.
Statement of the Purpose of, and the
transactions will be consistent with the Eduardo A. Aleman, Statutory Basis for, the Proposed Rule
policies of each Fund of Funds and each Assistant Secretary. Change
Underlying Fund and with the general [FR Doc. 2017–03297 Filed 2–17–17; 8:45 am]
purposes of the Act and will be based 1. Purpose
BILLING CODE 8011–01–P
on the net asset values of the (1) Overview
Underlying Funds.
2. Applicants agree that any order The Exchange proposes to amend the
SECURITIES AND EXCHANGE CHX Rules to adopt the CHX Liquidity
granting the requested relief will be COMMISSION
subject to the terms and conditions Enhancing Access Delay (‘‘LEAD’’). In
stated in the application. Such terms [Release No. 34–80041; File No. SR–CHX– sum, LEAD will require all new
and conditions are designed to, among 2017–04] incoming orders, cancel and cancel/
other things, help prevent any potential replace messages to be subject to a 350-
Self-Regulatory Organizations; microsecond intentional access delay;
(i) undue influence over an Underlying
Chicago Stock Exchange, Inc.; Notice provided, however, that (1) new
Fund that is not in the same ‘‘group of
of Filing of Proposed Rule Change To incoming orders 3 submitted by LEAD
investment companies’’ as the Fund of
Adopt the CHX Liquidity Enhancing Market Makers (‘‘LEAD MM’’), a new
Funds through control or voting power,
Access Delay class of CHX Market Maker 4 with
or in connection with certain services,
transactions, and underwritings, (ii) February 14, 2017. heightened quoting and trading
excessive layering of fees, and (iii) Pursuant to Section 19(b)(1) of the obligations, that would be immediately
overly complex fund structures, which Securities Exchange Act of 1934 ranked on the CHX book without
are the concerns underlying the limits (‘‘Act’’) 1 and Rule 19b–4 thereunder,2 executing against any resting orders on
in sections 12(d)(1)(A), (B), and (C) of notice is hereby given that on February the CHX book and (2) certain cancel
the Act. 10, 2017, the Chicago Stock Exchange, messages related to resting orders that
3. Section 12(d)(1)(J) of the Act Inc. (‘‘CHX’’ or ‘‘Exchange’’) filed with were submitted by LEAD MMs will not
provides that the Commission may the Securities and Exchange be delayed. LEAD will be applied to all
exempt any person, security, or Commission (the ‘‘Commission’’) the securities traded on the Exchange
transaction, or any class or classes of proposed rule change as described in throughout the trading day.5 LEAD is
persons, securities, or transactions, from Items I, II and III below, which Items designed to enhance displayed liquidity
any provision of section 12(d)(1) if the have been prepared by the self- and price discovery by minimizing the
exemption is consistent with the public regulatory organization. The effectiveness of latency arbitrage
interest and the protection of investors. Commission is publishing this notice to strategies that diminish displayed
Section 17(b) of the Act authorizes the solicit comments on the proposed rule liquidity and impair price discovery, as
Commission to grant an order change from interested persons. described in detail below.
permitting a transaction otherwise (2) Latency Arbitrage
prohibited by section 17(a) if it finds I. Self-Regulatory Organization’s
that (a) the terms of the proposed Statement of the Terms of Substance of As used herein, ‘‘latency arbitrage’’
transaction are fair and reasonable and the Proposed Rule Change means the practice of exploiting
do not involve overreaching on the part CHX proposes to amend the Rules of 3 ‘‘New incoming orders’’ are orders received by
of any person concerned; (b) the the Exchange (‘‘CHX Rules’’) to adopt the Matching System for the first time. As discussed
proposed transaction is consistent with the CHX Liquidity Enhancing Access below, LEAD will not apply to other situations
the policies of each registered Delay. The text of this proposed rule where existing orders or portions thereof are treated
investment company involved; and (c) change is available on the Exchange’s as incoming orders, such as (1) resting orders that
are price slid into a new price point pursuant to the
the proposed transaction is consistent Web site at http://www.chx.com/ CHX Only Price Sliding or Limit Up-Limit Down
with the general purposes of the Act. regulatory-operations/rule-filings/, at Price Sliding Processes and (2) unexecuted
Section 6(c) of the Act permits the the principal office of the Exchange, and remainders of routed orders released into the
Commission to exempt any persons or Matching System. See CHX Article 1, Rule
at the Commission’s Public Reference 2(b)(1)(C); see also CHX Article 20, Rule 2A(b); see
transactions from any provision of the Room. also CHX Article 20, Rule 8(b)(7). Incidentally, the
Act if such exemption is necessary or Exchange is proposing to amend CHX Article 20,
appropriate in the public interest and II. Self-Regulatory Organization’s Rule 8(a)(7) to delete the word ‘‘new’’ from the last
Statement of the Purpose of, and sentence, so that the rule provides, in pertinent
4 A Fund of Funds generally would purchase and Statutory Basis for, the Proposed Rule part, that if no balance exists at the time a part of
sell shares of an Underlying Fund that operates as Change an unexecuted remainder of a routed order is
an ETF through secondary market transactions returned to the Matching System, it shall be treated
rather than through principal transactions with the In its filing with the Commission, the an incoming order.
4 See CHX Article 1, Rule 1(tt) defining ‘‘Market
Underlying Fund. Applicants nevertheless request self-regulatory organization included
Maker’’; see also generally CHX Article 16 (Market
sradovich on DSK3GMQ082PROD with NOTICES

relief from section 17(a) to permit a Fund of Funds statements concerning the purpose of,
to purchase or redeem shares from the ETF. A Fund Makers).
of Funds will purchase and sell shares of an
and basis for, the proposed rule change 5 Each trading day is divided into four trading

Underlying Fund that is a closed-end fund through and discussed any comments it received sessions: Early session, regular trading session, late
secondary market transactions at market prices on the proposed rule change. The text trading session and late crossing session. See CHX
rather than through principal transactions with the of those statements may be examined at Article 20, Rule 1(b). The Exchange only accepts
closed-end fund. Accordingly, applicants are not cross orders during the late crossing session and
requesting section 17(a) relief with respect to thus does not accept or rank any single-sided orders
1 15 U.S.C. 78s(b)(1).
transactions in shares of closed-end funds during the late crossing session. See CHX Article 1,
(including business development companies). 2 17 CFR 240.19b–4. Rule 2(a)(2) defining ‘‘cross order.’’

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11256 Federal Register / Vol. 82, No. 33 / Tuesday, February 21, 2017 / Notices

Amended Article 20, Rule 8 (Operation currently, which, in addition to Message, as MTP is ignored for the
of the CHX Matching System) establishing processing and execution purposes of the LEAD evaluation only.54
Proposed Article 20, Rule 8(h) priority, will serve as the starting point Proposed paragraph (h) continues by
provides rules regarding the operation for the Fixed LEAD Period, as described providing that if a message is delayable,
of LEAD. Specifically, proposed below. The Matching System would the message will be diverted into the
paragraph (h) begins by stating that after then initially evaluate the message to LEAD queue and will remain delayed
initial receipt 45 of a new incoming determine whether it is a Delayable until it is released for processing. A
message, the Matching System will Message.48 For example, a new delayed message shall become
evaluate 46 the message to determine incoming limit order marked Post releasable 350 microseconds after initial
whether it is a Delayable Message, as Only 49 that originated from a Valid receipt by the Exchange (‘‘Fixed LEAD
defined under proposed paragraph LEAD MM Trading Account that would Period’’),55 but shall only be processed
(h)(1) below. For the purposes of such not be immediately ranked on the CHX after the Matching System has evaluated
an evaluation only, the Matching book due to one or more matchable and processed, if applicable,56 all
System shall not consider Match Trade contra-side orders resting on the CHX messages in the security received by the
Prevention (‘‘MTP’’), as described under book would be a Delayable Message Exchange during the Fixed LEAD Period
current Article 1, Rule 2(b)(3)(F).47 If not because the Post Only order would not, for the delayed message. A message may
delayable, the Matching System will by its terms, immediately be ranked on be delayed for longer than the Fixed
immediately process the message the CHX book without executing against LEAD Period depending on the then-
without delay. any resting orders on the CHX book. In current messaging volume at CHX.57
Proposed paragraph (h)(1) provides such a case, the Post Only order would The Matching System will utilize a new
that ‘‘Delayable Message’’ means all new be diverted into the LEAD queue before market snapshot to process a released
incoming order, cancel and cancel/ being processed by the Matching order.58 A delayed message shall retain
replace messages, except as follows: System, which would result in the Post its original sequence number and may
(A) Any new incoming order or unrouted Only order being posted or cancelled only be delayed once. LEAD shall apply
balance, as described under proposed depending on the state of the CHX book to all securities traded on the Exchange
subparagraph (D) below, that originates from upon its release.50 If, however, the throughout the trading day.59 LEAD
a Valid LEAD MM Trading Account, as Exchange were to receive a new Post shall not apply to messages received
described under proposed Article 16, Rule Only order that originated from a Valid during an auction.60
4(f)(3)(B)(ii), that would, by its terms, LEAD MM Trading Account that would
immediately be ranked on CHX book without The Exchange also proposes to make
post to the CHX book due to no existing corresponding amendments to current
executing against any existing resting orders
on the CHX book shall not be a Delayable orders resting on the CHX book at that Article 20, Rule 8(d) and (f) to
Message. time, the Post Only order would not be contemplate LEAD. Specifically, the
(B) A cancel message related to a resting a Delayable Message and it would Exchange proposes to add the clause
order that originates from a Valid LEAD MM immediately be ranked on the CHX book ‘‘subject to paragraph (h) below’’ at the
Trading Account shall not be a Delayable without delay.51 Similarly, a new end of current paragraph (d)(1) so that
Message. incoming order marked CHX Only 52 amended paragraph (d)(1) provides as
(C) A cancel/replace message related to a that originated from a Valid LEAD MM
resting order that originates from a Valid
follows:
Trading Account that would trade-
LEAD MM Trading Account shall not be a
Delayable Message; provided, however, that through a protected quotation of an 54 See supra note 47.
if any part of the replace portion would external market would not be a 55 In the event that then-current messaging
immediately execute against existing resting Delayable Message as it would be price volume results in a Delayable Message being
orders on the CHX book, the replace portion slid to a permissible price.53 Also, a new evaluated after 350 microseconds from initial
receipt, the Delayable Message shall be diverted
shall be a Delayable Message. incoming order that originated from a into LEAD and be immediately releasable. This will
(D) The portion of a new incoming Valid LEAD MM Trading Account that ensure that messages received during the Fixed
Routable Order that is to be routed away, would immediately be ranked on the LEAD Period for a delayed message are evaluated
pursuant to current Article 19, Rule 3(a), CHX book without executing against and processed, if applicable, before the Delayable
shall not be diverted into the LEAD; Message is released.
provided, however, that the entire unrouted
any resting orders because MTP would 56 For example, an order that would not take

balance of the Routable Order shall be cancel the resting contra-side orders liquidity from the CHX book would not be delayed
diverted into the LEAD, subject to proposed against which the order would have and would be immediately processed, whereas an
subparagraph (A). executed, would be a Delayable order that would take liquidity from the CHX book
would be delayed and would not be immediately
Mechanically, upon initial receipt of processed.
48 The Exchange notes that the Matching System 57 In the event a releasable message is awaiting
a new incoming message, the Matching processes messages for a given security serially. other messages received during its Fixed LEAD
System would assign the message a Thus, the length of time it takes for a message to Period to be evaluated and processed, if applicable,
unique sequence number, as it does be evaluated and/or processed by the Matching the releasable message would be subject to an
System after initial receipt is herein called ‘‘variable additional unintentional variable delay that is a
45 As used herein, ‘‘initial receipt’’ means the message queuing delay,’’ as the actual length of the function of the then-current messaging volume at
time at which the Exchange receives a message and delay depends on the number of precedent CHX. See supra note 21; see also supra note 45; see
assigns the message a unique sequence number, messages that have yet to be evaluated and/or also infra Examples 1–3.
which the Exchange utilizes to determine, among processed by the Matching System and are residing 58 The purpose of a new market snapshot is to

other things, message processing order and ranking in the ‘‘Inbound Queue.’’ The length of time it takes ensure that the released order is processed in a
on the CHX book. See CHX Article 20, Rule 8(b). for a message to be evaluated and/or processed by manner consistent with federal securities rules and
sradovich on DSK3GMQ082PROD with NOTICES

46 See supra note 21. the Matching System is herein called ‘‘system regulations, such as Regulation NMS and
47 The purpose of ignoring MTP in LEAD
processing delay.’’ Regulation SHO.
49 See CHX Article 1, Rule 2(b)(1)(D) defining
59 See supra note 5.
evaluation is to provide a previously delayed order
‘‘Post Only.’’
that would not have triggered MTP an opportunity 50 See infra Example 2.
60 For example, if the Exchange receives an order

to execute against the resting order before the newer after initiation of a Sub-second Non-displayed
51 See id.
incoming order would cancel the resting order after Auction Process (‘‘SNAP’’) in the security, the order
52 See CHX Article 1, Rule 2(b)(1)(C) defining
release from LEAD. The Exchange is also proposing will not be diverted into the LEAD queue and,
unrelated modifications to MTP to contemplate ‘‘CHX Only.’’ rather, be handled pursuant to current CHX Article
LEAD, as discussed below. 53 See CHX Article 20, Rule 5(a)(2). 18, Rule 1.

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11258 Federal Register / Vol. 82, No. 33 / Tuesday, February 21, 2017 / Notices

Example 1: LEAD. Assume that LEAD is • While Order C was being evaluated by Fig 1(g): CHX book
operational, all messages are for security XYZ the Matching System, Order B became
and all orders are routable, unless marked releasable from the LEAD queue at Buy Sell
otherwise. Assume also that the system 10:00:00.000350. However, given that the
processing delay 67 is 50 microseconds 68 and Order B: 1000 Empty.
Matching System processes messages @10.01.
the CHX book is as follows: serially,71 the Matching System would not Order D: 1000
Fig 1(a): CHX book
consider releasing Order B until after Order @10.01 (LMM).
C had been placed into the LEAD queue at
Buy Sell 10:00:00.000365, at which point it would be Fig 1(h): LEAD queue
handled as follows:
Empty ......................... Order A: 1000 @10.01
Æ At 10:00:00.000365, the Matching Releasable time Message
(LMM).69
System would compare the releasable time of
Order B to the initial receipt time of the 10:00:00.000665 ........ Order C: Sell 1000 @10.02.
Assume then that the Exchange receives 10:00:00.000675 ........ Cancel Order B.
the following messages: message at the top of the Inbound Queue:
Order D. Since Order D was received during
• Order E would then be evaluated at
Fig 1(b): Inbound queue the Fixed LEAD Period for Order B, Order D
10:00:00.000515, due to the variable message
would be evaluated before releasing Order B
Initial receipt Message queuing delay, and then diverted into the
and processed without being diverted into
LEAD as it originated from a non-Valid LEAD
10:00:00.000000 ........ Order B: Buy 1000 @10.01. LEAD as it originated from a Valid LEAD MM
MM Trading Account and is thus a Delayable
10:00:00.000265 ........ Cancel Order A (LMM). Trading Account and would be immediately
Message. Due to the system-processing delay,
10:00:00.000305 ........ Order C: Sell 1000 @10.02. ranked on the CHX book without executing
10:00:00.000310 ........ Order D: Buy 1000 @10.01 Order E would be diverted at
against resting orders on the CHX book and
(LMM). 10:00:00.000565 and releasable at
is thus not a Delayable Message. Due to the
10:00:00.000325 ........ Cancel Order B. 10:00:00.000705. The result is that the LEAD
10:00:00.000355 ........ Order E: Sell 1000 @10.01. system processing delay, Order D would be
queue would be as follows:
ranked on the CHX book at 10:00:00.000415.
Under this Example 1: The result is that the CHX book would be as Fig 1(i): LEAD queue
• Order B would be evaluated and diverted follows:
into LEAD as it originated from a non-Valid Releasable time Message
LEAD MM Trading Account and is thus a Fig 1(e): CHX book
10:00:00.000665 ........ Order C: Sell 1000 @10.02.
Delayable Message. Due to the system Buy Sell 10:00:00.000675 ........ Cancel Order B.
processing delay, Order B would be diverted 10:00:00.000705 ........ Order E: Sell 1000 @10.01.
into LEAD at 10:00:00.000050 and releasable Order D: 1000 Empty.
at 10:00:00.000350. The result is that the @10.01 (LMM).
• Order C would then be released from
LEAD queue would be as follows:
LEAD at 10:00:00.000665. Due to the system
Æ At 10:00:00.000415, the Matching
Fig 1(c): LEAD queue processing delay, Order C would be ranked
System would then compare the releasable
on the CHX book at 10:00:00.000715. The
Releasable time Message time of Order B to the initial receipt time of
result is that the CHX book and LEAD queue
the next message at the top of the Inbound
10:00:00.000350 ........ Order B: Buy 1000 @10.01.
are as follows:
Queue: Cancel Order B. Since Cancel Order
B was received when Order B was in the Fig 1(j): CHX book
• Cancel Order A would be evaluated and LEAD queue, Cancel Order B would be
processed at 10:00:00.000265 without being diverted into LEAD as it originated from a Buy Sell
diverted into LEAD as it is a cancel message non-Valid LMM Trading Account and is thus
for a resting order that originated from a a Delayable Message. However, due to the
Order B: 1000 Order C: 1000 @10.02.
Valid LEAD MM Trading Account and is @10.01.
system processing delay, Cancel Order B Order D: 1000
thus not a Delayable Message. Due to the
would be diverted into LEAD at @10.01 (LMM).
system processing delay, Order A would be
cancelled at 10:00:00.000315 and the CHX 10:00:00.000465 and releasable at
book would become empty. 10:00:00.000675. The result is that the LEAD
Fig 1(k): LEAD queue
• Order C would then be evaluated at queue would be as follows:
10:00:00.000315, due to the variable message Releasable time Message
queuing delay,70 and be diverted into LEAD Fig 1(f): LEAD queue
because it originated from a non-Valid LEAD 10:00:00.000675 ........ Cancel Order B.
Releasable time Message 10:00:00.000705 ........ Order E: Sell 1000 @10.01.
MM Trading Account and is thus a Delayable
Message. Due to the system processing delay, 10:00:00.000350 ........ Order B: Buy 1000 @10.01.
Order C would be diverted into LEAD at 10:00:00.000665 ........ Order C: Sell 1000 @10.02. • Cancel Order B would then be released
10:00:00.000365 and releasable at 10:00:00.000675 ........ Cancel Order B. from LEAD at 10:00:00.000715, as the
10:00:00.000665. Matching System was processing Order C
Æ At 10:00:00.000465, the Matching when Cancel Order B became releasable at
Fig 1(d): LEAD queue System would then compare the releasable 10:00:00.000675. Due to the system
time of Order B to the initial receipt time of processing delay Order B would be cancelled
Releasable time Message
the next message at the top of the Inbound at 10:00:00.000765. The result is that the
10:00:00.000350 ........ Order B: Buy 1000 @10.01. Queue: Order E. Given that Order E was CHX book and the LEAD queue would be as
10:00:00.000665 ........ Order C: Sell 1000 @10.02. received after the Fixed LEAD Period for follows:
Order B had expired, the Matching System
would release Order B before evaluating Fig 1(l): CHX book
67 See supra note 48. Order E. Due to the system processing delay, Buy Sell
68 The Exchange does not represent that actual
Order B would be ranked on the CHX book
sradovich on DSK3GMQ082PROD with NOTICES

system processing delay is at or near 50
microseconds or that unintentional delays do not
at 10:00:00.000515. Also, given that Order B Order D: 1000 Order C: 1000 @10.02.
exist elsewhere in the Matching System processes. was initially received before Order D, Order @10.01 (LMM).
The figure is being utilized for demonstrative B would receive execution priority over
purposes only. Order D, pursuant to Article 20, Rule 8(b)(1). Fig 1(m): LEAD queue
69 ‘‘LMM’’ refers to messages that originated from
The result is that the CHX book and LEAD
a Valid Lead MM Trading Account. Absence of queue would be as follows: Releasable time Message
‘‘LMM’’ means that the message did not originate
from a Valid LEAD MM Trading Account. 10:00:00.000705 ........ Order E: Sell 1000 @10.01.
70 See supra note 48. 71 See id.

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$11262 Federal Register / Vol. 82, No. 33 / Tuesday, February 21, 2017 / Notices Analysis 2: SPY Latency Arbitrage Moreover, the % of Time CHX Was At Average CHX Size At The NBBO for Activity Resulted in Less Aggressively The NBB And Was The Largest Bid At SPY decreased by 82.16% and the Time- Priced and Smaller Orders in SPY at That Price decreased from 20% in the weighted Average CHX Size At The CHX Entry Month to 2.3% in July 2016; 84 the NBBO for the Control Average increased % of Time CHX Was At The NBO And by 64.38%.87 As shown under Figure 4, While the Exchange did not observe Was The Largest Offer At That Price during the Before Period, the monthly any discernable change on the NBBO decreased from 20.7% in the Entry changes in the Time-weighted Average spread in SPY during the After Period, Month to 1.1% in July 2016; 85 and the CHX Size At The NBBO tended to the Exchange did observe a negative % of Time CHX Was At The NBB And follow similar changes to the Time- impact on the frequency at which CHX Was The Largest Bid At That Price and weighted Average NMS Size At The was at the NBBO in SPY and the that CHX Was At The NBO And Was NBBO. However, during the After frequency at which CHX displayed the The Largest Offer At That Price Period, the monthly changes in the largest quote at the NBBO in SPY during decreased from 1.9% to 0%.86 Time-weighted Average CHX Size At the After Period, while Control These calculation sets clearly show The NBBO in SPY did not follow Securities experienced either smaller that SPY latency arbitrage activity changes to the Time-weighted Average declines or no declines at all.80 resulted in less aggressively priced CHX NMS Size At The NBBO in SPY. Specifically, the % of Time CHX Was displayed liquidity in SPY and smaller Moreover, during the After Period, CHX At The NBB decreased from 23.8% in CHX displayed size at the NBBO, during went from having a Two-Sided Market the Entry Month to 8.2% in July 2016; 81 the After Period. SPY latency arbitrage in SPY 100% of regular trading hours in the % of Time CHX Was At The NBO activity also negatively impacted the the Entry Month to 74% of regular decreased from 23.3% in the Entry percentage of the time that CHX was at trading hours in July 2016.88 Month to 5.8% in July 2016; 82 and the the NBBO and the percentage of the Thus, Figure 3 and Figure 4 show that % of Time CHX Was At The NBB and time CHX displayed the largest quote at SPY latency arbitrage activity negatively that CHX Was At The NBO decreased the NBBO. impacted liquidity in SPY marketwide. from 3.3% in the Entry Month to 0% in Analysis 3: Latency Arbitrage Activity at Moreover, the data shows that the July 2016.83 CHX Reduced CHX Size At The NBBO change in the risk/reward of providing in SPY Relative to the Control Securities liquidity in SPY at CHX which resulted 77 See infra Appendix B Calculation Sets 1a and and NMS Size At The NBBO from the introduction of the SPY latency 1b. 78 The correlation coefficients (r) over the twelve- As shown under Figure 3, during the arbitrage activity resulted in a month period were: r(SPY, DIA) = 0.9118, r(SPY, Before Period, the Time-weighted significant reduction of liquidity in SPY IWM) = 0.8996, r(SPY, QQQ) = 0.9392, r(SPY, Average CHX Size at The NBBO for SPY provided by CHX, even during a period Average) = 0.9493. when significant incremental liquidity 79 See infra Appendix B Calculation Sets 2a and tended to follow changes to the Control 2b. Average, whereas from the Entry Month was being added in the Control 80 See infra Appendix B Calculation Sets 6 and through July 2016, the Time-weighted Securities. 7. 81 See infra Appendix B Calculation Set 6a. 84 See infra Appendix B Calculation Set 7a. 87 See infra Appendix B Calculation Sets 3a and 82 See infra Appendix B Calculation Set 6b. 85 See infra Appendix B Calculation Set 7b. 3b. 83 See infra Appendix B Calculation Set 6c. 86 See infra Appendix B Calculation Set 7c. 88 See infra Appendix B Calculation Set 5. sradovich on DSK3GMQ082PROD with NOTICES VerDate Sep<11>2014 17:15 Feb 17, 2017 Jkt 241001 PO 00000 Frm 00092 Fmt 4703 Sfmt 4703 E:\FR\FM\21FEN1.SGM 21FEN1$

11266 Federal Register / Vol. 82, No. 33 / Tuesday, February 21, 2017 / Notices

Symbol

Control
[No.] Calculation Month SPY DIA IWM QQQ Average

[1] [2] [3] [4] ([2]:[4])

Mar 2016 ...... 1,611.90 2,347.82 2,077.08 5,987.78 3,470.89
Apr 2016 ...... 1,415.95 1,481.35 2,314.10 6,196.84 3,330.76
May 2016 ..... 485.23 1,469.69 2,374.66 7,423.33 3,755.89
Jun 2016 ...... 565.73 1,772.03 2,188.41 7,994.73 3,985.06
Jul 2016 ....... 396.37 3,057.61 2,262.70 8,241.77 4,520.69
[3b] Time-weighted average CHX size at the Aug 2015 ..... 183 41 133 84 85
NBBO index: Jan 2016 = 100.
Sep 2015 ..... 147 37 125 96 89
Oct 2015 ...... 185 71 119 141 120
Nov 2015 ..... 213 133 125 165 149
Dec 2015 ..... 137 63 88 100 89
Jan 2016 ...... 100 100 100 100 100
Feb 2016 ...... 63 100 116 104 106
Mar 2016 ...... 38 128 120 138 132
Apr 2016 ...... 34 81 134 143 126
May 2016 ..... 11 80 138 171 143
Jun 2016 ...... 13 97 127 184 151
Jul 2016 ....... 9 167 131 190 172
[4a] Time-weighted average NMS size at the Aug 2015 ..... 19,257.66 2,609.35 6,511.42 18,471.79 9,197.52
NBBO.
Sep 2015 ..... 11,919.38 1,679.93 6,540.46 14,223.92 7,481.44
Oct 2015 ...... 18,309.27 2,468.56 6,972.46 19,848.75 9,763.26
Nov 2015 ..... 19,257.58 3,930.75 6,963.92 23,442.48 11,445.72
Dec 2015 ..... 13,230.66 2,204.20 5,812.28 17,106.74 8,374.40
Jan 2016 ...... 9,513.33 2,569.26 5,221.94 14,100.46 7,297.22
Feb 2016 ...... 7,417.60 2,489.46 6,340.40 13,869.32 7,566.40
Mar 2016 ...... 8,638.39 3,703.26 8,521.28 20,316.43 10,846.99
Apr 2016 ...... 9,876.59 3,070.53 9,422.71 23,246.57 11,913.27
May 2016 ..... 9,398.26 3,144.93 10,295.88 28,354.88 13,931.90
Jun 2016 ...... 9,313.10 3,107.54 9,597.43 28,288.57 13,664.51
Jul 2016 ....... 11,685.53 4,711.37 10,026.35 35,353.64 16,697.12
[4b] Time-weighted average NMS size at the Aug 2015 ..... 202 102 125 131 126
NBBO index: Jan 2016 = 100.
Sep 2015 ..... 125 65 125 101 103
Oct 2015 ...... 192 96 134 141 134
Nov 2015 ..... 202 153 133 166 157
Dec 2015 ..... 139 86 111 121 115
Jan 2016 ...... 100 100 100 100 100
Feb 2016 ...... 78 97 121 98 104
Mar 2016 ...... 91 144 163 144 149
Apr 2016 ...... 104 120 180 165 163
May 2016 ..... 99 122 197 201 191
Jun 2016 ...... 98 121 184 201 187
Jul 2016 ....... 123 183 192 251 229
[5a] % of time CHX had a two-sided market .... Aug 2015 ..... 99.8% 99.6% 99.7% 99.6% 99.7%
Sep 2015 ..... 99.9% 99.9% 99.9% 99.9% 99.9%
Oct 2015 ...... 100.0% 99.9% 99.9% 100.0% 99.9%
Nov 2015 ..... 99.9% 99.9% 99.5% 99.8% 99.7%
Dec 2015 ..... 98.6% 98.3% 98.6% 98.6% 98.5%
Jan 2016 ...... 100.0% 99.9% 99.9% 100.0% 99.9%
Feb 2016 ...... 99.9% 100.0% 100.0% 100.0% 100.0%
Mar 2016 ...... 99.8% 100.0% 100.0% 100.0% 100.0%
Apr 2016 ...... 99.3% 99.9% 100.0% 99.8% 99.9%
May 2016 ..... 85.2% 99.9% 100.0% 100.0% 100.0%
Jun 2016 ...... 73.2% 99.9% 100.0% 100.0% 100.0%
Jul 2016 ....... 74.0% 99.9% 100.0% 100.0% 100.0%
[5b] % of time CHX had a one-sided market ... Aug 2015 ..... 0.1% 0.1% 0.0% 0.2% 0.1%
Sep 2015 ..... 0.0% 0.0% 0.0% 0.0% 0.0%
Oct 2015 ...... 0.0% 0.0% 0.0% 0.0% 0.0%
Nov 2015 ..... 0.0% 0.0% 0.0% 0.2% 0.1%
Dec 2015 ..... 0.0% 0.3% 0.0% 0.0% 0.1%
Jan 2016 ...... 0.0% 0.1% 0.0% 0.0% 0.0%
sradovich on DSK3GMQ082PROD with NOTICES

Feb 2016 ...... 0.0% 0.0% 0.0% 0.0% 0.0%
Mar 2016 ...... 0.2% 0.0% 0.0% 0.0% 0.0%
Apr 2016 ...... 0.2% 0.0% 0.0% 0.0% 0.0%
May 2016 ..... 3.0% 0.0% 0.0% 0.0% 0.0%
Jun 2016 ...... 6.1% 0.0% 0.0% 0.0% 0.0%
Jul 2016 ....... 1.8% 0.0% 0.0% 0.0% 0.0%
[5c] % of time CHX had no market ................... Aug 2015 ..... 0.1% 0.3% 0.3% 0.1% 0.2%
Sep 2015 ..... 0.0% 0.1% 0.1% 0.0% 0.1%

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Federal Register / Vol. 82, No. 33 / Tuesday, February 21, 2017 / Notices 11267

Symbol

Control
[No.] Calculation Month SPY DIA IWM QQQ Average

[1] [2] [3] [4] ([2]:[4])

Oct 2015 ...... 0.0% 0.1% 0.1% 0.0% 0.1%
Nov 2015 ..... 0.1% 0.1% 0.4% 0.0% 0.2%
Dec 2015 ..... 1.4% 1.4% 1.4% 1.4% 1.4%
Jan 2016 ...... 0.0% 0.0% 0.0% 0.0% 0.0%
Feb 2016 ...... 0.1% 0.0% 0.0% 0.0% 0.0%
Mar 2016 ...... 0.0% 0.0% 0.0% 0.0% 0.0%
Apr 2016 ...... 0.5% 0.1% 0.0% 0.2% 0.1%
May 2016 ..... 11.8% 0.1% 0.0% 0.0% 0.0%
Jun 2016 ...... 20.7% 0.1% 0.0% 0.0% 0.0%
Jul 2016 ....... 24.2% 0.0% 0.0% 0.0% 0.0%
[6a] % of time CHX was at the NBB ................ Aug 2015 ..... 16.5% 32.7% 46.9% 58.0% 45.9%
Sep 2015 ..... 24.0% 36.4% 44.7% 67.6% 49.6%
Oct 2015 ...... 30.8% 45.8% 44.3% 74.9% 55.0%
Nov 2015 ..... 24.5% 50.3% 54.0% 79.6% 61.3%
Dec 2015 ..... 29.2% 34.1% 38.3% 71.3% 47.9%
Jan 2016 ...... 23.8% 46.0% 40.2% 70.4% 52.2%
Feb 2016 ...... 15.5% 53.9% 33.7% 65.5% 51.0%
Mar 2016 ...... 18.5% 58.4% 35.6% 66.8% 53.6%
Apr 2016 ...... 18.7% 46.8% 35.9% 60.5% 47.7%
May 2016 ..... 7.0% 44.8% 53.5% 68.5% 55.6%
Jun 2016 ...... 5.4% 47.1% 44.2% 72.8% 54.7%
Jul 2016 ....... 8.2% 45.9% 40.8% 74.1% 53.6%
[6b] % of time CHX was at the NBO ................ Aug 2015 ..... 27.9% 39.8% 57.0% 65.6% 54.1%
Sep 2015 ..... 29.7% 36.0% 41.8% 66.7% 48.2%
Oct 2015 ...... 20.9% 41.4% 42.7% 74.0% 52.7%
Nov 2015 ..... 28.7% 39.3% 52.9% 78.2% 56.8%
Dec 2015 ..... 27.1% 35.5% 42.4% 70.0% 49.3%
Jan 2016 ...... 23.3% 52.3% 48.8% 70.4% 57.2%
Feb 2016 ...... 23.2% 55.5% 46.3% 69.1% 57.0%
Mar 2016 ...... 19.0% 58.5% 44.4% 70.0% 57.7%
Apr 2016 ...... 14.0% 44.0% 36.4% 65.8% 48.7%
May 2016 ..... 12.4% 40.4% 49.3% 64.2% 51.3%
Jun 2016 ...... 11.0% 47.3% 48.4% 74.6% 56.8%
Jul 2016 ....... 5.8% 46.0% 34.0% 69.4% 49.8%
[6c] % of time CHX was at the NBB and that Aug 2015 ..... 1.0% 8.2% 19.7% 32.5% 20.2%
CHX was at the NBO.
Sep 2015 ..... 2.0% 10.0% 9.2% 37.1% 18.8%
Oct 2015 ...... 3.0% 14.4% 10.2% 49.8% 24.8%
Nov 2015 ..... 6.0% 14.2% 17.9% 58.1% 30.1%
Dec 2015 ..... 4.4% 9.3% 12.5% 44.8% 22.2%
Jan 2016 ...... 3.3% 19.2% 7.8% 41.8% 22.9%
Feb 2016 ...... 1.0% 24.5% 4.8% 35.4% 21.5%
Mar 2016 ...... 0.5% 29.6% 4.6% 38.0% 24.1%
Apr 2016 ...... 0.2% 15.7% 2.2% 29.9% 15.9%
May 2016 ..... 0.0% 13.5% 17.5% 34.6% 21.9%
Jun 2016 ...... 0.0% 17.0% 12.2% 48.5% 25.9%
Jul 2016 ....... 0.0% 12.6% 4.0% 44.1% 20.3%
[7a] % of time CHX was at the NBB and was Aug 2015 ..... 13.6% 26.2% 37.1% 26.6% 29.9%
the largest bid at that price.
Sep 2015 ..... 21.5% 34.0% 40.0% 47.6% 40.6%
Oct 2015 ...... 24.9% 43.8% 36.2% 57.4% 45.8%
Nov 2015 ..... 18.8% 47.9% 39.4% 55.9% 47.7%
Dec 2015 ..... 25.1% 31.7% 27.7% 39.1% 32.8%
Jan 2016 ...... 20.0% 43.6% 32.0% 48.1% 41.2%
Feb 2016 ...... 11.2% 52.7% 28.5% 45.5% 42.2%
Mar 2016 ...... 11.9% 55.7% 28.3% 44.8% 42.9%
Apr 2016 ...... 13.0% 42.2% 31.6% 43.6% 39.1%
May 2016 ..... 1.7% 39.8% 37.9% 50.2% 42.6%
Jun 2016 ...... 2.0% 43.7% 32.2% 48.3% 41.4%
Jul 2016 ....... 2.3% 43.2% 31.7% 48.0% 41.0%
[7b] % of time CHX was at the NBO and was Aug 2015 ..... 24.3% 34.4% 51.2% 39.8% 41.8%
the largest offer at that price.
sradovich on DSK3GMQ082PROD with NOTICES

Sep 2015 ..... 27.0% 33.8% 37.8% 46.7% 39.4%
Oct 2015 ...... 16.0% 38.1% 31.3% 44.0% 37.8%
Nov 2015 ..... 22.6% 36.8% 35.1% 53.4% 41.8%
Dec 2015 ..... 23.2% 32.7% 30.6% 36.8% 33.4%
Jan 2016 ...... 20.7% 51.1% 41.3% 50.7% 47.7%
Feb 2016 ...... 18.5% 54.7% 40.8% 49.4% 48.3%
Mar 2016 ...... 12.9% 55.2% 35.3% 51.2% 47.2%
Apr 2016 ...... 8.1% 38.6% 30.8% 45.9% 38.4%

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11270 Federal Register / Vol. 82, No. 33 / Tuesday, February 21, 2017 / Notices

enhance market liquidity for investors.’’ 115 602(b)(2) (‘‘Firm Quote Rule’’),120 Rule extent a market participant has a better
BATS Options offers a similar functionality, 611 121 and Rule 610(d).122 algorithm or better information, LEAD is
but permits all BATS Options users to utilize The Exchange believes that the too short to have a negative impact on
its bulk-quoting interface.116 In each case, the proposed rule change is consistent with such non-latency arbitrage strategies,
exchange gives liquidity providers a
processing advantage to facilitate the
the ‘‘immedia[cy]’’ requirement of Rule much less permit a LEAD MM to decide
adjusting of stale quotes to the disadvantage 600(b)(3) as LEAD is a de minimis on a quotation-by-quotation basis
of liquidity takers. Consequently, as bulk- intentional access delay and thereby whether to cancel or modify a quote. In
quoting interfaces permit liquidity providers compatible with the Exchange having an addition, LEAD is narrowly-tailored to
to adjust numerous quotes through a single ‘‘automated quotation’’ under Rule minimize the effectiveness of latency
message, this would minimize the possibility 600(b)(3) and thus a ‘‘protected arbitrage strategies at CHX, as described
of stale quotes being executed before the quotation’’ under Rule 611.123 above.
liquidity provider has an opportunity to Specifically, Rule 600(b)(3) requires that The Exchange also believes that LEAD
adjust the stale quote. That is, bulk-quoting
interfaces, among other things, minimize the
a trading center displaying an is consistent with Rule 602(b)(2).128
effectiveness of latency arbitrage strategies. automated quotation permit, among Specifically, a plain reading of Rule
• Market Makers generally. Many national other things, an incoming IOC order to 602(b) indicates that the delay of a
securities exchange offer a market maker immediately and automatically execute liquidity taking order pursuant to LEAD
program that provides certain financial or against the automated quotation up to would not result in the order being
operational benefits (e.g., Nasdaq’s bulk- its full size; and immediately and ‘‘presented’’ to the LEAD MM.129 This is
quoting interface and NYSE DMM parity 117) automatically cancel any unexecuted consistent with the Commission’s
in return for meeting heightened market portion of the IOC order without routing guidance regarding the applicability of
quality requirements.
the order elsewhere.124 In the context of the Firm Quote Rule in the context of
The Exchange also believes that the determining whether a trading center obsolete Intermarket Trading System
proposed amendments to the MTP order maintains an ‘‘automated quotation’’ for (‘‘ITS’’) commitments.130 Specifically,
modifier would remove impediments purposes of Rule 611, the Commission the Commission stated that ‘‘the Firm
and perfect the mechanisms of a free does not interpret the term ‘‘immediate’’ Quote Rule requires that every exchange
and open market and, in general, protect used in Rule 600(b)(3) by itself to specialist or OTC market maker execute
investors and the public interest, in that prohibit a trading center from any order to buy or sell a security it
they are designed to avoid certain implementing an intentional access receives at a price at least as favorable
unintended consequences of LEAD on delay that is de minimis (i.e., a delay so as its published bid or offer in any
the MTP functionality. Specifically, short as to not frustrate the purposes of amount up to its published size, subject
since an order would be assigned a the Order Protection Rule by impairing to two exceptions.’’ 131 The Commission
sequence number prior to being fair and efficient access to an exchange’s further stated ‘‘that the Firm Quote Rule
evaluated pursuant to LEAD,118 LEAD quotations).125 Accordingly, the applies to ITS commitments; where a
may result in a newer undelayed order Commission’s revised interpretation specialist or market maker fails to honor
being ranked on the CHX book before an provides that the term ‘‘immediate’’ its quote by refusing to execute an ITS
older delayed order, which would not precludes any coding of automated commitment received at its published
otherwise occur today. Under this systems or other type of intentional bid or offer, and neither of the
scenario and assuming that the contra- device that would delay the action taken exceptions contained in the Firm Quote
side orders trigger MTP and the with respect to a quotation unless such Rule apply, the specialist or market
incoming order is marked ‘‘N,’’ the delay is de minimis.126 maker is in violation of the Firm Quote
current MTP rules would require the The Exchange believes that LEAD is Rule.’’ 132 As such, the Commission’s
incoming older order to be cancelled, so short as to not frustrate the purposes guidance clearly suggests that a Rule
whereas the amended MTP handling of the Rule 611 127 by impairing fair and 602(b) violation occurs when a liquidity
would require the resting newer order to efficient access to the Exchange’s provider receives (i.e., is presented) a
be cancelled subject to the exception for quotations. Specifically, all Participants marketable contra-side order and refuses
CHX Only orders described under seeking to take liquidity from the CHX to honor its quote.133 When also
amended Article 1, Rule 2(b)(3)(F)(iii)(a) book will have fair and efficient access
and (b). Thus, the Exchange believes to CHX quotations. Also, the 350- 128 ‘‘Subject to the provisions of paragraph (b)(3)

that the amended MTP functionality microsecond delay is so short that it of this section, each responsible broker or dealer
better contemplates LEAD and preserves does not provide an incremental shall be obligated to execute any order to buy or sell
a subject security, other than an odd-lot order,
expected results. advantage to a LEAD MM other than presented to it by another broker or dealer, or any
The Exchange also believes that the neutralizing a structural bias that other person belonging to a category of persons with
proposed rule change is consistent with permits latency arbitrageurs to profit off whom such responsible broker or dealer
Regulation NMS. Specifically, the of symmetric public information. To the customarily deals, at a price at least as favorable to
such buyer or seller as the responsible broker’s or
Exchange believes that LEAD is dealer’s published bid or published offer (exclusive
consistent with Rule 600(b)(3),119 Rule 120 See 17 CFR 242.602(b)(2). of any commission, commission equivalent or
121 See 17 CFR 242.611. differential customarily charged by such
115 See Securities Exchange Act Release No. 122 See 17 CFR 242.610(d). responsible broker or dealer in connection with
65024 (August 3, 2011), 76 FR 48925 (August 9, 123 See Final Interpretation, supra note 30, at execution of any such order) in any amount up to
2011) (SR–NASDAQ–2011–102). 40792. its published quotation size.’’ 17 CFR 242.602(b)(2)
116 See Securities Exchange Act Release No. 124 See 17 CFR 242.600(b)(3). (emphasis added).
129 See 17 CFR 242.602(b).
65307 (September 9, 2011), 76 FR 57092 (September 125 See Final Interpretation, supra note 30, at
sradovich on DSK3GMQ082PROD with NOTICES

15, 2011) (SR–BATS–2011–034) (expanding the 40792. Thus, the Exchange’s quotations would 130 See Exchange Act Release No. 40260, 63 FR

availability of the bulk-quoting interface to all users continue to be ‘‘immediately’’ accessible and 40748, 40754 (July 30, 1998).
of BATS Options); Securities Exchange Act Release protected pursuant to Rule 611. See 17 CFR 131 Id (emphasis added).
No. 65133 (August 15, 2011), 76 FR 52032 (August 242.600(b)(3) defining ‘‘automated quotation’’; see 132 Id (emphasis added).
19, 2011) (SR–BATS–2011–029) (adopting the bulk- also 17 CFR 242.600(b)(58) defining ‘‘protected 133 See 17 CFR 242.602(b). A Section 21(a) report
quoting interface). quotation.’’ from 1996 regarding, among other things,
117 See NYSE Rules 103B and 104. 126 See Final Interpretation, supra note 30, at
misconduct by certain market makers with respect
118 See supra note 45. 40792. to its published quotes is illustrative of the type of
119 See 17 CFR 242.600(b)(3). 127 See 17 CFR 242.611. activity that the Firm Quote Rule is designed to

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11272 Federal Register / Vol. 82, No. 33 / Tuesday, February 21, 2017 / Notices

filing also will be available for filings/pearl, at MIAX’s principal office, ‘‘CMTAed’’ and then subsequently
inspection and copying at the principal and at the Commission’s Public ‘‘gives-up’’ or ‘‘CMTAs’’ the transaction
office of the Exchange. All comments Reference Room. to another non-member via a CMTA
received will be posted without change; reversal) is a Member. Further, the
II. Self-Regulatory Organization’s
the Commission does not edit personal Exchange will not assess the ORF on
Statement of the Purpose of, and
identifying information from linkage trades, whether executed at the
submissions. You should submit only Statutory Basis for, the Proposed Rule
Exchange or an away exchange. A
information that you wish to make Change
customer order routed to another
available publicly. All submissions In its filing with the Commission, the exchange results in two customer trades,
should refer to File Number SR–CHX– Exchange included statements one from the originating exchange and
2017–04 and should be submitted on or concerning the purpose of and basis for one from the recipient exchange.
before March 14, 2017. the proposed rule change and discussed Charging ORF on both trades could
For the Commission, by the Division of any comments it received on the result in double-billing of ORF for a
Trading and Markets, pursuant to delegated proposed rule change. The text of these single customer order, thus the
authority.143 statements may be examined at the Exchange chooses not to charge ORF on
Eduardo A. Aleman, places specified in Item IV below. The the trade from the originating exchange
Assistant Secretary. Exchange has prepared summaries, set in a linkage scenario. This assessment
[FR Doc. 2017–03296 Filed 2–17–17; 8:45 am]
forth in sections A, B, and C below, of practice will be identical to the
BILLING CODE 8011–01–P
the most significant aspects of such assessment practice currently utilized
statements. by the Exchange’s affiliate, Miami
A. Self-Regulatory Organization’s International Securities Exchange, LLC
SECURITIES AND EXCHANGE Statement of the Purpose of, and the (‘‘MIAX Options’’).
COMMISSION Statutory Basis for, the Proposed Rule As a practical matter, when a
Change transaction that is subject to the ORF is
[Release No. 34–80035; File No. SR–
PEARL–2017–09] not executed on the Exchange, the
1. Purpose Exchange lacks the information
Self-Regulatory Organizations; MIAX The purpose of the proposed rule necessary to identify the executing
PEARL, LLC; Notice of Filing and change is to establish an ORF in the member for that transaction. There are
Immediate Effectiveness of a Proposed amount of $0.0010 per contract side. countless executing market participants,
Rule Change To Amend the MIAX The per-contract ORF will be assessed and each day such participants can and
PEARL Fee Schedule To Establish an by MIAX PEARL to each MIAX PEARL often do drop their connection to one
Options Regulatory Fee (‘‘ORF’’) Member for all options transactions market center and establish themselves
executed, cleared, or ultimately cleared as participants on another. For these
February 14, 2017. reasons, it is not possible for the
by the Member which are cleared by
Pursuant to Section 19(b)(1) of the OCC in the ‘‘customer’’ range, regardless Exchange to identify, and thus assess
Securities Exchange Act of 1934 (the of the exchange on which the fees such as an ORF on, executing
‘‘Act’’),1 and Rule 19b–4 thereunder,2 transaction occurs. The ORF will be participants on away markets on a given
notice is hereby given that on February collected indirectly from Members trading day.
3, 2017, MIAX PEARL, LLC (‘‘MIAX through their clearing firms by OCC on Clearing members, however, are
PEARL’’ or ‘‘Exchange’’) filed with the behalf of MIAX PEARL. distinguished from executing
Securities and Exchange Commission In the case where a non-Member participants because they remain
(the ‘‘Commission’’) the proposed rule executes a transaction and a Member identified to the Exchange regardless of
change as described in Items I, II, and clears the transaction, the ORF will be the identity of the initiating executing
III below, which Items have been assessed to the Member who clears the participant, their location, and the
prepared by the Exchange. The transaction. In the case where a Member market center on which they execute
Commission is publishing this notice to executes a transaction and another transactions. Therefore, the Exchange
solicit comments on the proposed rule Member clears the transaction, the ORF believes it is more efficient for the
change from interested persons. will be assessed to the Member who operation of the Exchange and for the
I. Self-Regulatory Organization’s clears the transaction. Further, the ORF marketplace as a whole to collect the
Statement of the Terms of Substance of will be assessed on transactions that are ORF from clearing members.
the Proposed Rule Change not executed by a Member, but are As discussed below, the Exchange
The Exchange is filing a proposal rule ultimately cleared by a Member. The believes it is appropriate to charge the
change to amend the MIAX PEARL Fee Exchange notes that, in the limited ORF only to transactions that clear as
Schedule (the ‘‘Fee Schedule’’) by circumstance in which a Member customer at the OCC. The Exchange
establishing an Options Regulatory Fee executes or clears a transaction and then believes that its broad regulatory
(‘‘ORF’’). ‘‘gives-up’’ or ‘‘CMTAs’’ the trade to a responsibilities with respect to a
While changes to the Fee Schedule non-member of MIAX PEARL (which Member’s activities supports applying
pursuant to this proposal are effective non-member becomes the ultimate the ORF to transactions cleared but not
upon filing, the Exchange has clearing firm for the transaction), MIAX executed by a Member. The Exchange’s
designated these changes to be operative PEARL will collect the ORF from such regulatory responsibilities are the same
non-member involving [sic] that regardless of whether a Member
sradovich on DSK3GMQ082PROD with NOTICES

February 6, 2017.
The text of the proposed rule change transaction. However, for the avoidance executes a transaction or clears a
is available on the Exchange’s Web site of doubt, the Exchange will not assess transaction executed on its behalf. The
at http://www.miaxoptions.com/rule- the ORF when the transaction is not Exchange regularly reviews all such
executed on the Exchange and neither activities, including performing
143 17CFR 200.30–3(a)(12). the executing clearing firm nor the surveillance for position limit
1 15 U.S.C. 78s(b)(1). ultimate clearing firm (e.g., such as violations, manipulation, front-running,
2 17 CFR 240.19b–4. when the Member is ‘‘given-up’’ or contrary exercise advice violations and

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Document Created: 2018-02-01 15:04:42
Document Modified: 2018-02-01 15:04:42

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		82 FR 11252