82 FR 14058 - Self-Regulatory Organizations; Investors Exchange LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Amend Rule 11.190(g) To Modify the Quote Instability Coefficients and Quote Instability Threshold Included in the Quote Instability Calculation Specified in Subparagraph (g)(1) for Purposes of Determining Whether a Crumbling Quote Exists

SECURITIES AND EXCHANGE COMMISSION

Federal Register Volume 82, Issue 50 (March 16, 2017)

Page Range		14058-14061
FR Document		2017-05210

Federal Register, Volume 82 Issue 50 (Thursday, March 16, 2017)

[Federal Register Volume 82, Number 50 (Thursday, March 16, 2017)]
[Notices]
[Pages 14058-14061]
From the Federal Register Online [www.thefederalregister.org]
[FR Doc No: 2017-05210]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-80202; File No. SR-IEX-2017-06]

Self-Regulatory Organizations; Investors Exchange LLC; Notice of
Filing and Immediate Effectiveness of Proposed Rule Change To Amend
Rule 11.190(g) To Modify the Quote Instability Coefficients and Quote
Instability Threshold Included in the Quote Instability Calculation
Specified in Subparagraph (g)(1) for Purposes of Determining Whether a
Crumbling Quote Exists

March 10, 2017.
Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of
1934 \2\ and Rule 19b-4 thereunder,\3\ notice is hereby given that, on
Februrary 28, 2017, the Investors Exchange LLC filed with the
Securities and Exchange Commission (``Commission'') the proposed rule
change as described in Items I and II 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\ 15 U.S.C. 78a.
\3\ 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

Pursuant to the provisions of Section 19(b)(1) under the Securities
Exchange Act of 1934 (``Act''),\4\ and Rule 19b-4 thereunder,\5\
Investors Exchange LLC (``IEX'' or ``Exchange'') is filing with the
Commission a proposed rule change to amend Rule 11.190(g) to
incrementally optimize and enhance the effectiveness of the quote
instability calculation in determining whether a crumbling quote
exists. The Exchange has designated this proposal as non-controversial
and provided the Commission with the notice required by Rule 19b-
4(f)(6)(iii) under the Act.\6\
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\4\ 15 U.S.C. 78s(b)(1).
\5\ 17 CFR 240.19b-4.
\6\ 17 CFR 240.19b-4(f)(6)(iii).
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The text of the proposed rule change is available at the Exchange's
Web site at www.iextrading.com, at the principal office of the
Exchange, and at the Commission's Public Reference Room.

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

In its filing with the Commission, the 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 these statement may be examined at
the places specified in Item IV below. The self-regulatory organization
has prepared summaries, set forth in Sections A, B, and C below, of the
most significant aspects of such statements.

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

1. Purpose
Overview
The purpose of the proposed rule change is to amend Rule 11.190(g)
to modify the quote instability coefficients and quote instability
threshold included in the quote instability calculation specified in
subparagraph (g)(1) for purposes of determining whether a crumbling
quote exists. When the Exchange determines that the quote in a
particular security is crumbling from the national best bid, as
comprised of Protected Quotations (``Protected NBB''), Discretionary
Peg buy orders are restricted from exercising price discretion to trade
against interest above the NBB. Similarly, when the Exchange determines
that the quote in a particular security is crumbling from the national
best offer, as comprised of Protected Quotations (``Protected NBO'' and
collectively with the Protected NBB the ``Protected NBBO''),
Discretionary Peg sell orders are restricted from exercising price
discretion to trade against interest below the NBO.
Discretionary Peg Order
The manner in which Discretionary Peg orders operate is described
in Rule 11.190(b)(10). Specifically, a Discretionary Peg order is a
non-displayed, pegged order that upon entry into the System, the price
of the order is automatically adjusted by the System to be equal to the
less aggressive of the Midpoint Price or the order's limit price, if
any. When unexecuted shares of such order are posted to the Order Book,
the price of the order is automatically adjusted by the System to be
equal to and ranked at the less aggressive of the primary quote or the
order's limit price and is automatically adjusted by the System in
response to changes in the NBB (NBO) for buy (sell) orders up (down) to
the order's limit price, if any. In order to meet the limit price of
active orders on the Order Book, a Discretionary Peg order will
exercise the least amount of price discretion necessary from the
Discretionary Peg order's resting price to its discretionary price
(defined as the less aggressive of the Midpoint Price or the
Discretionary Peg order's limit price, if any), except during periods
of quote instability (i.e., when a crumbling quote exists) as defined
in paragraph Rule 11.190(g).
In determining whether a crumbling quote exists, the Exchange
utilizes real time relative quoting activity of Protected Quotations
(not including quotations of the Exchange) and a proprietary
mathematical calculation (the ``quote instability calculation'') to
assess the probability of an imminent change to the current Protected
NBB to a lower price or Protected NBO to a higher price for a
particular security (``quote instability factor''). When the quoting
activity meets predefined criteria and the quote instability factor
calculated is greater than the Exchange's defined threshold (``quote
instability threshold''), the System treats the quote as not stable
(``quote instability'' or a ``crumbling quote''). During all other
times, the quote is considered stable (``quote stability''). The System
independently assesses the stability of the Protected NBB and Protected
NBO for each security.
When the System determines that a quote, either the Protected NBB
or the Protected NBO, is unstable, the determination remains in effect
at that price level for two (2) milliseconds. The System will only
treat one side of the Protected NBBO as unstable in a particular
security at any given time.\7\ By not permitting resting Discretionary
Peg orders to execute at a price that is more aggressive than the near-
side protected NBB or NBO (as applicable) during periods of quote
instability, the Exchange System is intended to attempt to protect such
orders from unfavorable executions when the market is moving against
them. Once the market has moved and the Exchange System deems the near-
side Protected NBB or NBO (as applicable) to be stable (pursuant to a

[[Page 14059]]

pre-determined, objective set of conditions as described below),
Discretionary Peg orders are permitted to exercise discretion up to
(for buy orders) or down to (for sell orders) the midpoint of the NBBO
in order to meet the limit price of active orders on the order book and
thereby potentially provide price improvement to such active orders.
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\7\ See, Rule 11.190(g).
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Quote stability or instability (also referred to as a crumbling
quote) is an assessment that the Exchange System makes on a real-time
basis, based on a pre-determined, objective set of conditions specified
in Rule 11.190(g)(1). Specifically, quote instability, or the presence
of a crumbling quote, is determined by the System when the following
factors occur:
(A) The Protected NBB and Protected NBO are the same as the
Protected NBB and Protected NBO one (1) millisecond ago; and
(B) the Protected NBBO spread is less than or equal to the thirty
(30) day median Protected NBBO spread during the Regular Market
Session; and
(C) there are more Protected Quotations on the far side, i.e. more
Protected Quotations on the Protected NBO than the Protected NBB for
buy orders, or more Protected Quotations on the Protected NBB than the
Protected NBO for sell orders; and
(D) the quote instability factor result from the quote stability
calculation is greater than the defined quote instability threshold.
(i) Quote Instability Factor. The Exchange's proprietary quote
stability calculation used to determine the current quote instability
factor is defined by the following formula that utilizes the quote
stability coefficients and quote stability variables defined below:

1/(1 + e [supcaret]-(C0 + C1 * N + C2
* F + C3 * N-1 + C4 * F-1 +
C5 * E + C6 * D))

(a) Quote Stability Coefficients. The Exchange utilizes the values
below for the quote stability coefficients.

(1) C0 = -1.3493
(2) C1 = -1.1409
(3) C2 = 0.2671
(4) C3 = 0.5141
(5) C4 = -0.1970
(6) C5 = 0.1347
(7) C6 = 0.6862

(b) Quote Stability Variables. The Exchange utilizes the quote
stability variables defined below to calculate the current quote
instability factor.
(1) N = the number of Protected Quotations on the near side of the
market, i.e. Protected NBB for buy orders and Protected NBO for sell
orders.
(2) F = the number of Protected Quotations on the far side of the
market, i.e. Protected NBO for buy orders and Protected NBB for sell
orders.
(3) N-1 = the number of Protected Quotations on the near
side of the market one (1) millisecond ago.
(4) F-1 = the number of Protected Quotations on the far
side of the market one (1) millisecond ago.
(5) E = a Boolean indicator that equals 1 if the last two quotation
updates have been quotations of protected markets moving away from the
near side of the market on the same side of the market and at the same
price.
(6) D = the number of these three (3) venues that moved away from
the near side of the market on the same side of the market and at the
same price in the prior one (1) millisecond: XNGS, EDGX, BATS.
(ii) Quote Instability Threshold. The Exchange utilizes a quote
instability threshold of 0.6.
Rule 11.190(g)(1)(D)(iii) provides that the Exchange reserves the
right to modify the quote instability coefficients or quote instability
threshold at any time, subject to a filing of a proposed rule change
with the SEC. The Exchange is proposing such changes in this rule
filing.
Changes to Quote Instability Coefficients and Quote Instability
Threshold
IEX conducted an analysis of the effectiveness of the existing
factors in predicting whether a crumbling quote would occur, by
reviewing randomly selected market data from November 2016 through mid-
February 2017. The results of the analysis were verified by reviewing
randomly selected market data from January and mid-February 2017. Based
on this analysis, the Exchange has determined that further optimization
of the existing factors would incrementally increase the accuracy of
the formula in predicting whether a crumbling quote will occur. The
following describes the proposed changes:
1. Rule 11.190(g) states that the Exchange utilizes real time
relative quoting activity of Protected Quotations, not including IEX
protected quotations, in the quote instability calculation. As
proposed, the Exchange is proposing to include the protection
quotations of the following exchanges in the quote instability
calculation: New York Stock Exchange, NYSE Arca, Nasdaq BX, Bats BZX
Exchange, Bats BYX Exchange, Bats EDGX Exchange, and Bats EDGA
Exchange. In connection with our analysis of market data, as described
above, the Exchange considered several different permutations of which
exchanges to include in the model. The research identified that using
the Protected Quotations of these specific eight exchanges in the
aggregate resulted in the greatest predictive power of all permutations
of exchanges assessed for determining a crumbling quote.
2. The Exchange proposes to simplify the crumbling quote
calculation specified in Rule 11.190(g)(1) by eliminating the three (3)
preconditions related to the stability and ratio of the protected
national best bid and offer (``NBBO''),\8\ and base the determination
solely on whether the quote instability factor result from the quote
stability calculation is greater than the defined quote instability
threshold. Based on our analysis of market data, as described above,
the Exchange believes that the simplification would incrementally
increase the accuracy of the formula in predicting a crumbling quote by
expanding the scope of the model to additional situations where a
crumbling quote exists in the absence of the pre-conditions.
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\8\ Currently IEX Rule 11.190(g)(1) provides that in determining
whether a crumbling quote exists the following other factors will be
considered: The Protected NBB and Protected NBO are the same as the
Protected NBB and Protected NBO one (1) millisecond ago, the
Protected NBBO spread is less than or equal to the thirty (30) day
median Protected NBBO spread during the Regular Market Session, and
there are more Protected Quotations on the far side, i.e., more
Protected Quotations on the Protected NBO than the Protected NBB for
buy orders or more Protected Quotations on the Protected NBO for
sell orders.
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3. The Exchange proposes to revise the quote stability variables
currently specified in subparagraph (1)(D)(i)(b) of Rule 11.190(g) by
adding seven (7) new variables (NC, FC, Delta, EPos, ENeg, EPosPrev,
and ENegPrev) and retiring four (4) variables (N-1, F-1, E, and D).\9\
Specifically, based on our analysis of market data, as described above,
the Exchange identified that considering the maximum change over the
course of the previous millisecond up to the most recent Protected NBBO
change was a more accurate indicator of a crumbling quote than simply
looking at the absolute state of the market one millisecond previously.
The replacement of N-1, F-1, and D with NC, FC, and Delta,
respectively, reflects this finding. Additionally, we found that
looking at the previous two quote changes on a more granular basis
(specifically, looking at whether each of the last two events
individually was a

[[Page 14060]]

quote dropping off the near side or joining the near side, rather than
whether both of the last two events dropped off the near side) was a
more accurate indicator of a crumbling quote than a simple boolean
factor indicating whether both of the last two events were quotes
dropping off the inside. Replacing E with 4 separate factors--EPos,
ENeg, EPosPrev, and ENegPrev--reflects this finding.
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\9\ Two (2) of the existing variables (N and F) will be
retained.
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4. The Quote Stability Coefficients specified in subparagraph
(1)(D)(i) of Rule 11.190(g) are proposed to be modified to take into
account the recent market data analysis, as well as the changes to the
quote stability variables as described above. Specifically, as proposed
the seven (7) existing coefficients will be modified and three (3) new
coefficients will be added. The Exchange believes that the
modifications, as proposed, will increase the accuracy of the quote
instability calculation.
5. The Exchange proposes to modify and re-optimize the Quote
Instability Threshold specified in subparagraph (1)(D)(ii) of Rule
11.190(g) based on the recent market data analysis and the new quote
stability variables. Specifically, the threshold size would vary based
on the spread of the Protected NBBO.\10\ Based on its data analysis, as
described above, the Exchange concluded that tiering the threshold
would reduce the rate of false positives. Consequently, the Exchange
believes that the modifications, as proposed, will increase the
accuracy of the quote instability calculation.
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\10\ The spread is defined in proposed paragraph (1)(D)(ii) as
the Protected Best Offer minus Protected Best Bid.
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6. Finally, the Exchange proposes conforming numbering changes to
Rule 11.190(g) to reflect elimination of the three (3) preconditions
for the crumbling quote calculation specified in Rule 11.190(g)(1) as
described above.
The Exchange will announce the implementation date of the proposed
rule change by Trader Notice at least five business days in advance of
such implementation date and within 90 days of effectiveness of this
proposed rule change.
2. Statutory Basis
IEX believes that the proposed rule change is consistent with
Section 6(b) \11\ of the Act in general, and furthers the objectives of
Section 6(b)(5) of the Act,\12\ in particular, in that it is designed
to prevent fraudulent and manipulative acts and practices, to promote
just and equitable principles of trade, to foster cooperation and
coordination with persons engaged in facilitating transactions in
securities, to remove impediments to and perfect the mechanism of a
free and open market and a national market system and, in general, to
protect investors and the public interest. Specifically, and as
discussed above, the proposal is designed to optimize and enhance the
effectiveness of the quote instability calculation in determining
whether a crumbling quote exists. The Exchange believes that the
proposed changes are designed to protect investors and the public
interest by enhancing the accuracy of the Exchange's quote instability
calculation in determining whether a crumbling quote exists thereby
preventing Discretionary Peg orders from trading at prices more
aggressive than the near side of the market (NBB for buy orders, NBO
for sell orders) to protect such orders from unfavorable executions
when the market appears to be moving against them. As discussed in the
Purpose section, each of the proposed changes are based on the
Exchange's analysis of market data, which supports that, in the
aggregate and individually, the proposed changes would increase the
accuracy of the Exchange's quote instability calculation.
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\11\ 15 U.S.C. 78f.
\12\ 15 U.S.C. 78f(b)(5).
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As proposed, the new quote instability calculation will continue to
be a fixed formula specified transparently in IEX's rules. The Exchange
is not proposing to add any new functionality, but merely to revise the
fixed formula based on market data analysis designed to increase the
accuracy of the formula in predicting a crumbling quote, and as
contemplated by the rule.

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

IEX does not believe that the proposed rule change will result in
any burden on competition that is not necessary or appropriate in
furtherance of the purposes of the Act. The proposed change will apply
equally to all IEX Members. The Commission has already considered the
Exchange's Discretionary Peg order type in connection with its grant of
IEX's application for registration as a national securities exchange
under Sections 6 and 19 of the Act.\13\ The proposed rule change is
designed to merely enhance the accuracy of the quote instability
calculation specified in Rule 11.190(g); therefore, no new burdens are
being proposed.
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\13\ See Securities Exchange Act Release No. 34-78101 (June 17,
2016), 81 FR 41142 (June 23, 2016) (File No. 10-222).
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C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others

Written comments were neither solicited nor received.

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

Because the foregoing proposed rule change does not: (i)
Significantly affect the protection of investors or the public
interest; (ii) impose any significant burden on competition; and (iii)
become operative for 30 days from the date on which it was filed, or
such shorter time as the Commission may designate, it has become
effective pursuant to Section 19(b)(3)(A) of the Act \14\ and Rule 19b-
4(f)(6) thereunder.\15\
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\14\ 15 U.S.C. 78s(b)(3)(A).
\15\ 17 CFR 240.19b-4(f)(6). As required under Rule 19b-
4(f)(6)(iii), IEX provided the Commission with written notice of its
intent to file the proposed rule change, along with a brief
description and the text of the proposed rule change, at least five
business days prior to the date of filing of the proposed rule
change, or such shorter time as designated by the Commission.
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A proposed rule change filed under Rule 19b-4(f)(6) \16\ normally
does not become operative prior to 30 days after the date of the
filing. However, pursuant to Rule 19b-4(f)(6)(iii),\17\ the Commission
may designate a shorter time if such action is consistent with the
protection of investors and the public interest. The Exchange has asked
the Commission to waive the 30-day operative delay. The Exchange stated
that the proposed rule change is designed to optimize the fixed quote
instability equation contained in the rule without introducing new
functionality or materially changing the operation of the current
functionality in a manner not contemplated by the rule. The Exchange
believes that its proposal will operate to protect Members that enter
Discretionary Peg orders from unfavorable executions when the market is
moving against such orders, and noted that waiver of the operative
delay would allow the Exchange to implement the optimized formula
without delay. As the Exchange's proposal is intended to further refine
the ability of the discretionary peg order type to meet its stated
objectives as reflected in the Exchange's rule, the Commission believes
that waiver of the operative delay is consistent with the protection of
investors and the public interest. Therefore, the Commission hereby

[[Page 14061]]

waives the operative delay and designates the proposed rule change
operative upon filing.\18\
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\16\ 17 CFR 240.19b-4(f)(6).
\17\ 17 CFR 240.19b-4(f)(6)(iii).
\18\ For purposes only of waiving the 30-day operative delay,
the Commission has also considered the proposed rule's impact on
efficiency, competition, and capital formation. See 15 U.S.C.
78c(f).
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At any time within 60 days of the filing of the proposed rule
change, the Commission summarily may temporarily suspend such rule
change if it appears to the Commission that such action is necessary or
appropriate in the public interest, for the protection of investors, or
otherwise in furtherance of the purposes of the Act. If the Commission
takes such action, the Commission shall institute proceedings to
determine whether the proposed rule should be approved or 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 SR-IEX-2017-06 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-IEX-2017-06. 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 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-IEX-2017-06 and should be
submitted on or before April 6, 2017.

For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\19\
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\19\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-05210 Filed 3-15-17; 8:45 am]
BILLING CODE 8011-01-P

14058 Federal Register / Vol. 82, No. 50 / Thursday, March 16, 2017 / Notices

2017–15 and should be submitted on or notice required by Rule 19b–4(f)(6)(iii) Midpoint Price or the order’s limit
before April 6,2017. under the Act.6 price, if any. When unexecuted shares
For the Commission, by the Division of The text of the proposed rule change of such order are posted to the Order
Trading and Markets, pursuant to delegated is available at the Exchange’s Web site Book, the price of the order is
authority.21 at www.iextrading.com, at the principal automatically adjusted by the System to
Eduardo A. Aleman, office of the Exchange, and at the be equal to and ranked at the less
Assistant Secretary.
Commission’s Public Reference Room. aggressive of the primary quote or the
order’s limit price and is automatically
[FR Doc. 2017–05214 Filed 3–15–17; 8:45 am] II. Self-Regulatory Organization’s
adjusted by the System in response to
BILLING CODE 8011–01–P Statement of the Purpose of, and
changes in the NBB (NBO) for buy (sell)
Statutory Basis for, the Proposed Rule
orders up (down) to the order’s limit
Change
price, if any. In order to meet the limit
SECURITIES AND EXCHANGE In its filing with the Commission, the price of active orders on the Order Book,
COMMISSION self-regulatory organization included a Discretionary Peg order will exercise
statements concerning the purpose of the least amount of price discretion
[Release No. 34–80202; File No. SR–IEX– and basis for the proposed rule change necessary from the Discretionary Peg
2017–06] and discussed any comments it received order’s resting price to its discretionary
on the proposed rule change. The text price (defined as the less aggressive of
Self-Regulatory Organizations; of these statement may be examined at the Midpoint Price or the Discretionary
Investors Exchange LLC; Notice of the places specified in Item IV below. Peg order’s limit price, if any), except
Filing and Immediate Effectiveness of The self-regulatory organization has during periods of quote instability (i.e.,
Proposed Rule Change To Amend Rule prepared summaries, set forth in when a crumbling quote exists) as
11.190(g) To Modify the Quote Sections A, B, and C below, of the most defined in paragraph Rule 11.190(g).
Instability Coefficients and Quote significant aspects of such statements. In determining whether a crumbling
Instability Threshold Included in the quote exists, the Exchange utilizes real
Quote Instability Calculation Specified A. Self-Regulatory Organization’s
time relative quoting activity of
in Subparagraph (g)(1) for Purposes of Statement of the Purpose of, and Protected Quotations (not including
Determining Whether a Crumbling Statutory Basis for, the Proposed Rule quotations of the Exchange) and a
Quote Exists Change proprietary mathematical calculation
March 10, 2017. 1. Purpose (the ‘‘quote instability calculation’’) to
assess the probability of an imminent
Pursuant to Section 19(b)(1) 1 of the Overview
change to the current Protected NBB to
Securities Exchange Act of 1934 2 and The purpose of the proposed rule a lower price or Protected NBO to a
Rule 19b–4 thereunder,3 notice is change is to amend Rule 11.190(g) to higher price for a particular security
hereby given that, on Februrary 28, modify the quote instability coefficients (‘‘quote instability factor’’). When the
2017, the Investors Exchange LLC filed and quote instability threshold included quoting activity meets predefined
with the Securities and Exchange in the quote instability calculation criteria and the quote instability factor
Commission (‘‘Commission’’) the specified in subparagraph (g)(1) for calculated is greater than the Exchange’s
proposed rule change as described in purposes of determining whether a defined threshold (‘‘quote instability
Items I and II below, which Items have crumbling quote exists. When the threshold’’), the System treats the quote
been prepared by the self-regulatory Exchange determines that the quote in as not stable (‘‘quote instability’’ or a
organization. The Commission is a particular security is crumbling from ‘‘crumbling quote’’). During all other
publishing this notice to solicit the national best bid, as comprised of times, the quote is considered stable
comments on the proposed rule change Protected Quotations (‘‘Protected (‘‘quote stability’’). The System
from interested persons. NBB’’), Discretionary Peg buy orders are independently assesses the stability of
restricted from exercising price the Protected NBB and Protected NBO
I. Self-Regulatory Organization’s
discretion to trade against interest above for each security.
Statement of the Terms of Substance of
the NBB. Similarly, when the Exchange When the System determines that a
the Proposed Rule Change
determines that the quote in a particular quote, either the Protected NBB or the
Pursuant to the provisions of Section security is crumbling from the national Protected NBO, is unstable, the
19(b)(1) under the Securities Exchange best offer, as comprised of Protected determination remains in effect at that
Act of 1934 (‘‘Act’’),4 and Rule 19b–4 Quotations (‘‘Protected NBO’’ and price level for two (2) milliseconds. The
thereunder,5 Investors Exchange LLC collectively with the Protected NBB the System will only treat one side of the
(‘‘IEX’’ or ‘‘Exchange’’) is filing with the ‘‘Protected NBBO’’), Discretionary Peg Protected NBBO as unstable in a
Commission a proposed rule change to sell orders are restricted from exercising particular security at any given time.7
amend Rule 11.190(g) to incrementally price discretion to trade against interest By not permitting resting Discretionary
optimize and enhance the effectiveness below the NBO. Peg orders to execute at a price that is
of the quote instability calculation in more aggressive than the near-side
Discretionary Peg Order protected NBB or NBO (as applicable)
determining whether a crumbling quote
exists. The Exchange has designated this The manner in which Discretionary during periods of quote instability, the
proposal as non-controversial and Peg orders operate is described in Rule Exchange System is intended to attempt
11.190(b)(10). Specifically, a to protect such orders from unfavorable
mstockstill on DSK3G9T082PROD with NOTICES

provided the Commission with the
Discretionary Peg order is a non- executions when the market is moving
21 17 CFR 200.30–3(a)(12).
displayed, pegged order that upon entry against them. Once the market has
1 15 U.S.C. 78s(b)(1). into the System, the price of the order moved and the Exchange System deems
2 15 U.S.C. 78a. is automatically adjusted by the System the near-side Protected NBB or NBO (as
3 17 CFR 240.19b–4. to be equal to the less aggressive of the applicable) to be stable (pursuant to a
4 15 U.S.C. 78s(b)(1).
5 17 CFR 240.19b–4. 6 17 CFR 240.19b–4(f)(6)(iii). 7 See, Rule 11.190(g).

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Federal Register / Vol. 82, No. 50 / Thursday, March 16, 2017 / Notices 14059

pre-determined, objective set of orders and Protected NBO for sell analysis of market data, as described
conditions as described below), orders. above, the Exchange considered several
Discretionary Peg orders are permitted (2) F = the number of Protected different permutations of which
to exercise discretion up to (for buy Quotations on the far side of the market, exchanges to include in the model. The
orders) or down to (for sell orders) the i.e. Protected NBO for buy orders and research identified that using the
midpoint of the NBBO in order to meet Protected NBB for sell orders. Protected Quotations of these specific
the limit price of active orders on the (3) N¥1 = the number of Protected eight exchanges in the aggregate
order book and thereby potentially Quotations on the near side of the resulted in the greatest predictive power
provide price improvement to such market one (1) millisecond ago. of all permutations of exchanges
active orders. (4) F¥1 = the number of Protected assessed for determining a crumbling
Quote stability or instability (also Quotations on the far side of the market quote.
referred to as a crumbling quote) is an one (1) millisecond ago. 2. The Exchange proposes to simplify
assessment that the Exchange System (5) E = a Boolean indicator that equals the crumbling quote calculation
makes on a real-time basis, based on a 1 if the last two quotation updates have specified in Rule 11.190(g)(1) by
pre-determined, objective set of been quotations of protected markets eliminating the three (3) preconditions
conditions specified in Rule moving away from the near side of the related to the stability and ratio of the
11.190(g)(1). Specifically, quote market on the same side of the market protected national best bid and offer
instability, or the presence of a and at the same price. (‘‘NBBO’’),8 and base the determination
crumbling quote, is determined by the (6) D = the number of these three (3) solely on whether the quote instability
System when the following factors venues that moved away from the near factor result from the quote stability
occur: side of the market on the same side of calculation is greater than the defined
(A) The Protected NBB and Protected the market and at the same price in the quote instability threshold. Based on
NBO are the same as the Protected NBB prior one (1) millisecond: XNGS, EDGX, our analysis of market data, as described
and Protected NBO one (1) millisecond BATS. above, the Exchange believes that the
ago; and (ii) Quote Instability Threshold. The
simplification would incrementally
(B) the Protected NBBO spread is less Exchange utilizes a quote instability
increase the accuracy of the formula in
than or equal to the thirty (30) day threshold of 0.6.
Rule 11.190(g)(1)(D)(iii) provides that predicting a crumbling quote by
median Protected NBBO spread during expanding the scope of the model to
the Regular Market Session; and the Exchange reserves the right to
modify the quote instability coefficients additional situations where a crumbling
(C) there are more Protected quote exists in the absence of the pre-
Quotations on the far side, i.e. more or quote instability threshold at any
time, subject to a filing of a proposed conditions.
Protected Quotations on the Protected 3. The Exchange proposes to revise
NBO than the Protected NBB for buy rule change with the SEC. The Exchange
is proposing such changes in this rule the quote stability variables currently
orders, or more Protected Quotations on specified in subparagraph (1)(D)(i)(b) of
the Protected NBB than the Protected filing.
Rule 11.190(g) by adding seven (7) new
NBO for sell orders; and Changes to Quote Instability variables (NC, FC, Delta, EPos, ENeg,
(D) the quote instability factor result Coefficients and Quote Instability EPosPrev, and ENegPrev) and retiring
from the quote stability calculation is Threshold four (4) variables (N–1, F–1, E, and D).9
greater than the defined quote Specifically, based on our analysis of
IEX conducted an analysis of the
instability threshold. market data, as described above, the
effectiveness of the existing factors in
(i) Quote Instability Factor. The Exchange identified that considering the
predicting whether a crumbling quote
Exchange’s proprietary quote stability maximum change over the course of the
would occur, by reviewing randomly
calculation used to determine the previous millisecond up to the most
selected market data from November
current quote instability factor is recent Protected NBBO change was a
2016 through mid-February 2017. The
defined by the following formula that more accurate indicator of a crumbling
results of the analysis were verified by
utilizes the quote stability coefficients quote than simply looking at the
reviewing randomly selected market
and quote stability variables defined absolute state of the market one
data from January and mid-February
below: millisecond previously. The
2017. Based on this analysis, the
1/(1 + e ∧¥(C0 + C1 * N + C2 * F + C3 Exchange has determined that further replacement of N–1, F–1, and D with
* N¥1 + C4 * F¥1 + C5 * E + C6 * optimization of the existing factors NC, FC, and Delta, respectively, reflects
D)) would incrementally increase the this finding. Additionally, we found
(a) Quote Stability Coefficients. The accuracy of the formula in predicting that looking at the previous two quote
Exchange utilizes the values below for whether a crumbling quote will occur. changes on a more granular basis
the quote stability coefficients. The following describes the proposed (specifically, looking at whether each of
(1) C0 = ¥1.3493 changes: the last two events individually was a
(2) C1 = ¥1.1409 1. Rule 11.190(g) states that the
8 Currently IEX Rule 11.190(g)(1) provides that in
(3) C2 = 0.2671 Exchange utilizes real time relative
determining whether a crumbling quote exists the
(4) C3 = 0.5141 quoting activity of Protected Quotations, following other factors will be considered: The
(5) C4 = ¥0.1970 not including IEX protected quotations, Protected NBB and Protected NBO are the same as
(6) C5 = 0.1347 in the quote instability calculation. As the Protected NBB and Protected NBO one (1)
(7) C6 = 0.6862 proposed, the Exchange is proposing to millisecond ago, the Protected NBBO spread is less
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than or equal to the thirty (30) day median
(b) Quote Stability Variables. The include the protection quotations of the Protected NBBO spread during the Regular Market
Exchange utilizes the quote stability following exchanges in the quote Session, and there are more Protected Quotations
variables defined below to calculate the instability calculation: New York Stock on the far side, i.e., more Protected Quotations on
current quote instability factor. Exchange, NYSE Arca, Nasdaq BX, Bats the Protected NBO than the Protected NBB for buy
orders or more Protected Quotations on the
(1) N = the number of Protected BZX Exchange, Bats BYX Exchange, Protected NBO for sell orders.
Quotations on the near side of the Bats EDGX Exchange, and Bats EDGA 9 Two (2) of the existing variables (N and F) will

market, i.e. Protected NBB for buy Exchange. In connection with our be retained.

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14060 Federal Register / Vol. 82, No. 50 / Thursday, March 16, 2017 / Notices

quote dropping off the near side or equitable principles of trade, to foster therefore, no new burdens are being
joining the near side, rather than cooperation and coordination with proposed.
whether both of the last two events persons engaged in facilitating
C. Self-Regulatory Organization’s
dropped off the near side) was a more transactions in securities, to remove
Statement on Comments on the
accurate indicator of a crumbling quote impediments to and perfect the
Proposed Rule Change Received From
than a simple boolean factor indicating mechanism of a free and open market Members, Participants, or Others
whether both of the last two events were and a national market system and, in
quotes dropping off the inside. general, to protect investors and the Written comments were neither
Replacing E with 4 separate factors— public interest. Specifically, and as solicited nor received.
EPos, ENeg, EPosPrev, and ENegPrev— discussed above, the proposal is III. Date of Effectiveness of the
reflects this finding. designed to optimize and enhance the Proposed Rule Change and Timing for
4. The Quote Stability Coefficients effectiveness of the quote instability Commission Action
specified in subparagraph (1)(D)(i) of calculation in determining whether a
Because the foregoing proposed rule
Rule 11.190(g) are proposed to be crumbling quote exists. The Exchange
change does not: (i) Significantly affect
modified to take into account the recent believes that the proposed changes are
the protection of investors or the public
market data analysis, as well as the designed to protect investors and the
interest; (ii) impose any significant
changes to the quote stability variables public interest by enhancing the
burden on competition; and (iii) become
as described above. Specifically, as accuracy of the Exchange’s quote
operative for 30 days from the date on
proposed the seven (7) existing instability calculation in determining
which it was filed, or such shorter time
coefficients will be modified and three whether a crumbling quote exists
as the Commission may designate, it has
(3) new coefficients will be added. The thereby preventing Discretionary Peg
become effective pursuant to Section
Exchange believes that the orders from trading at prices more 19(b)(3)(A) of the Act 14 and Rule 19b–
modifications, as proposed, will aggressive than the near side of the 4(f)(6) thereunder.15
increase the accuracy of the quote market (NBB for buy orders, NBO for A proposed rule change filed under
instability calculation. sell orders) to protect such orders from Rule 19b–4(f)(6) 16 normally does not
5. The Exchange proposes to modify unfavorable executions when the market become operative prior to 30 days after
and re-optimize the Quote Instability appears to be moving against them. As the date of the filing. However, pursuant
Threshold specified in subparagraph discussed in the Purpose section, each to Rule 19b–4(f)(6)(iii),17 the
(1)(D)(ii) of Rule 11.190(g) based on the of the proposed changes are based on Commission may designate a shorter
recent market data analysis and the new the Exchange’s analysis of market data, time if such action is consistent with the
quote stability variables. Specifically, which supports that, in the aggregate protection of investors and the public
the threshold size would vary based on and individually, the proposed changes interest. The Exchange has asked the
the spread of the Protected NBBO.10 would increase the accuracy of the Commission to waive the 30-day
Based on its data analysis, as described Exchange’s quote instability calculation. operative delay. The Exchange stated
above, the Exchange concluded that As proposed, the new quote that the proposed rule change is
tiering the threshold would reduce the instability calculation will continue to designed to optimize the fixed quote
rate of false positives. Consequently, the be a fixed formula specified instability equation contained in the
Exchange believes that the transparently in IEX’s rules. The rule without introducing new
modifications, as proposed, will Exchange is not proposing to add any functionality or materially changing the
increase the accuracy of the quote new functionality, but merely to revise operation of the current functionality in
instability calculation. the fixed formula based on market data a manner not contemplated by the rule.
6. Finally, the Exchange proposes analysis designed to increase the The Exchange believes that its proposal
conforming numbering changes to Rule accuracy of the formula in predicting a will operate to protect Members that
11.190(g) to reflect elimination of the crumbling quote, and as contemplated enter Discretionary Peg orders from
three (3) preconditions for the by the rule. unfavorable executions when the market
crumbling quote calculation specified in is moving against such orders, and
Rule 11.190(g)(1) as described above. B. Self-Regulatory Organization’s noted that waiver of the operative delay
The Exchange will announce the Statement on Burden on Competition would allow the Exchange to implement
implementation date of the proposed the optimized formula without delay.
IEX does not believe that the
rule change by Trader Notice at least As the Exchange’s proposal is intended
proposed rule change will result in any
five business days in advance of such to further refine the ability of the
burden on competition that is not
implementation date and within 90 days discretionary peg order type to meet its
necessary or appropriate in furtherance
of effectiveness of this proposed rule stated objectives as reflected in the
of the purposes of the Act. The
change. Exchange’s rule, the Commission
proposed change will apply equally to
believes that waiver of the operative
2. Statutory Basis all IEX Members. The Commission has
delay is consistent with the protection
IEX believes that the proposed rule already considered the Exchange’s
of investors and the public interest.
change is consistent with Section 6(b) 11 Discretionary Peg order type in
Therefore, the Commission hereby
of the Act in general, and furthers the connection with its grant of IEX’s
objectives of Section 6(b)(5) of the Act,12 application for registration as a national 14 15 U.S.C. 78s(b)(3)(A).
in particular, in that it is designed to securities exchange under Sections 6 15 17 CFR 240.19b–4(f)(6). As required under Rule
mstockstill on DSK3G9T082PROD with NOTICES

prevent fraudulent and manipulative and 19 of the Act.13 The proposed rule 19b–4(f)(6)(iii), IEX provided the Commission with
acts and practices, to promote just and change is designed to merely enhance written notice of its intent to file the proposed rule
the accuracy of the quote instability change, along with a brief description and the text
of the proposed rule change, at least five business
10 The spread is defined in proposed paragraph calculation specified in Rule 11.190(g); days prior to the date of filing of the proposed rule
(1)(D)(ii) as the Protected Best Offer minus change, or such shorter time as designated by the
Protected Best Bid. 13 See Securities Exchange Act Release No. 34– Commission.
11 15 U.S.C. 78f. 16 17 CFR 240.19b–4(f)(6).
78101 (June 17, 2016), 81 FR 41142 (June 23, 2016)
12 15 U.S.C. 78f(b)(5). (File No. 10–222). 17 17 CFR 240.19b–4(f)(6)(iii).

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Federal Register / Vol. 82, No. 50 / Thursday, March 16, 2017 / Notices 14061

waives the operative delay and business days between the hours of I. Self-Regulatory Organization’s
designates the proposed rule change 10:00 a.m. and 3:00 p.m. Copies of the Statement of the Terms of Substance of
operative upon filing.18 filing also will be available for the Proposed Rule Change
At any time within 60 days of the inspection and copying at the principal
filing of the proposed rule change, the The Exchange filed a proposal to
office of the Exchange. All comments amend Rule 11.21 to modify the date of
Commission summarily may received will be posted without change;
temporarily suspend such rule change if Appendix B Web site data publication
the Commission does not edit personal pursuant to the Regulation NMS Plan to
it appears to the Commission that such identifying information from
action is necessary or appropriate in the Implement a Tick Size Pilot Program
submissions. You should submit only (‘‘Plan’’).
public interest, for the protection of
information that you wish to make The text of the proposed rule change
investors, or otherwise in furtherance of
the purposes of the Act. If the available publicly. All submissions is available at the Exchange’s Web site
Commission takes such action, the should refer to File Number SR–IEX– at www.bats.com, at the principal office
Commission shall institute proceedings 2017–06 and should be submitted on or of the Exchange, and at the
to determine whether the proposed rule before April 6, 2017. Commission’s Public Reference Room.
should be approved or disapproved. For the Commission, by the Division of II. Self-Regulatory Organization’s
IV. Solicitation of Comments Trading and Markets, pursuant to delegated Statement of the Purpose of, and
authority.19 Statutory Basis for, the Proposed Rule
Interested persons are invited to
Eduardo A. Aleman, Change
submit written data, views and
arguments concerning the foregoing, Assistant Secretary.
In its filing with the Commission, the
including whether the proposed rule [FR Doc. 2017–05210 Filed 3–15–17; 8:45 am]
Exchange included statements
change is consistent with the Act. BILLING CODE 8011–01–P concerning the purpose of and basis for
Comments may be submitted by any of the proposed rule change and discussed
the following methods: any comments it received on the
SECURITIES AND EXCHANGE proposed rule change. The text of these
Electronic Comments
COMMISSION statements may be examined at the
• Use the Commission’s Internet places specified in Item IV below. The
comment form (http://www.sec.gov/ [Release No. 34–80215; File No. SR– Exchange has prepared summaries, set
rules/sro.shtml); or BatsEDGA–2017–05] forth in Sections A, B, and C below, of
• Send an email to rule-comments@
the most significant parts of such
sec.gov. Please include File SR–IEX– Self-Regulatory Organizations; Bats statements.
2017–06 on the subject line. EDGA Exchange, Inc.; Notice of Filing
Paper Comments and Immediate Effectiveness of a A. Self-Regulatory Organization’s
Proposed Rule Change to Rule 11.21 Statement of the Purpose of, and
• Send paper comments in triplicate Statutory Basis for, the Proposed Rule
to Secretary, Securities and Exchange To Modify the Date of Appendix B Web
Change
Commission, 100 F Street NE., Site Data Publication Pursuant to the
Washington, DC 20549–1090. Regulation NMS Plan To Implement a 1. Purpose
All submissions should refer to File Tick Size Pilot Program
Rule 11.21(b) (Compliance with Data
Number SR–IEX–2017–06. This file March 10, 2017. Collection Requirements) 5 implements
number should be included on the the data collection and Web site
subject line if email is used. To help the Pursuant to Section 19(b)(1) of the publication requirements of the Plan.6
Commission process and review your Securities Exchange Act of 1934 (the Rule 11.21(b).08 provides, among other
comments more efficiently, please use ‘‘Act’’),1 and Rule 19b–4 thereunder,2 things, that the requirement that the
only one method. The Commission will notice is hereby given that on February Exchange or Designated Examining
post all comments on the Commission’s 28, 2017, Bats EDGA Exchange, Inc. (the Authority (‘‘DEA’’) make certain data
Internet Web site (http://www.sec.gov/ ‘‘Exchange’’ or ‘‘EDGA’’) filed with the publicly available on their Web site
rules/sro.shtml). Copies of the Securities and Exchange Commission pursuant to Appendix B and C to the
submission, all subsequent (‘‘Commission’’) the proposed rule Plan shall commence at the beginning of
amendments, all written statements change as described in Items I and II the Pilot Period,7 and that the Exchange
with respect to the proposed rule below, which Items have been prepared or DEA shall make data for the Pre-Pilot
change that are filed with the by the Exchange. The Exchange has Period publicly available on their Web
Commission, and all written designated this proposal as a ‘‘non-
communications relating to the controversial’’ proposed rule change 5 See Exchange Rule 11.21(b). See also Securities
proposed rule change between the pursuant to Section 19(b)(3)(A) of the Exchange Act Release Nos. 77417 (March 22, 2016),
Commission and any person, other than Act 3 and Rule 19b–4(f)(6)(iii)
81 FR 17219 (March 28, 2016); and 78799
those that may be withheld from the (September 9, 2016), 81 FR 63549 (September 15,
thereunder,4 which renders it effective 2016).
public in accordance with the
upon filing with the Commission. The 6 The Participants filed the Plan to comply with
provisions of 5 U.S.C. 552, will be an order issued by the Commission on June 24,
available for Web site viewing and Commission is publishing this notice to
2014. See Letter from Brendon J. Weiss, Vice
printing in the Commission’s Public solicit comments on the proposed rule President, Intercontinental Exchange, Inc., to
mstockstill on DSK3G9T082PROD with NOTICES

Reference Room, 100 F Street NE., change from interested persons. Secretary, Commission, dated August 25, 2014
(‘‘SRO Tick Size Plan Proposal’’). See Securities
Washington, DC 20549, on official Exchange Act Release No 72460 (June 24, 2014), 79
19 17 CFR 200.30–3(a)(12). FR 36840 (June 30, 2014); see also Securities
18 For purposes only of waiving the 30-day 1 15 Exchange Act Release No. 74892 (May 6, 2015), 80
U.S.C. 78s(b)(1).
operative delay, the Commission has also FR 27513 (May 13, 2015).
2 17 CFR 240.19b–4.
considered the proposed rule’s impact on 7 Unless otherwise defined herein, capitalized
3 15 U.S.C. 78s(b)(3)(A).
efficiency, competition, and capital formation. See terms have the meaning ascribed to them in Rule
15 U.S.C. 78c(f). 4 17 CFR 240.19b–4(f)(6)(iii). 11.21.

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Document Created: 2017-03-16 02:18:44
Document Modified: 2017-03-16 02:18:44

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 14058