82 FR 23381 - Self-Regulatory Organizations; NYSE MKT LLC; Order Approving Proposed Rule Change Amending Rules 7.29E and 1.1E To Provide for a Delay Mechanism
SECURITIES AND EXCHANGE COMMISSION Federal Register Volume 82, Issue 97 (May 22, 2017)
Federal Register Volume 82, Issue 97 (May 22, 2017)
| Page Range | 23381-23385 | |
| FR Document | 2017-10304 |
[Federal Register Volume 82, Number 97 (Monday, May 22, 2017)] [Notices] [Pages 23381-23385] From the Federal Register Online [www.thefederalregister.org] [FR Doc No: 2017-10304] ----------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION [Release No. 34-80700; File No. SR-NYSEMKT-2017-05] Self-Regulatory Organizations; NYSE MKT LLC; Order Approving Proposed Rule Change Amending Rules 7.29E and 1.1E To Provide for a Delay Mechanism May 16, 2017. I. Introduction On January 27, 2017, NYSE MKT LLC (the ``Exchange'') filed with the Securities and Exchange Commission (``Commission'') pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a proposed rule change to amend Rules 7.29E and 1.1E to provide for an intentional access delay to certain inbound and outbound order messages on the Exchange. The proposed rule change was published for comment in the Federal Register on February 15, 2017.\3\ On March 17, 2017, pursuant to Section 19(b)(2) of the Act,\4\ the Commission designated a longer period within which to approve the proposed rule change, disapprove the proposed rule change, or institute proceedings to determine whether to approve or disapprove the proposed rule change.\5\ The Commission has received six comment letters on the proposal from five commenters.\6\ On March 31, 2017, the Exchange submitted a comment response letter.\7\ On April 28, 2017, the Exchange submitted a second comment response letter.\8\ On May 11, 2017, the Exchange submitted a third comment response letter.\9\ This order approves the proposed rule change. --------------------------------------------------------------------------- \1\ 15 U.S.C. 78s(b)(1). \2\ 17 CFR 240.19b-4. \3\ See Securities Exchange Act Release No. 79998 (Feb. 9, 2017), 82 FR 10828 (Feb. 15, 2017) (``Notice''). \4\ 15 U.S.C. 78s(b)(2). \5\ See Securities Exchange Act Release No. 80268 (Mar. 17, 2017), 82 FR 14932 (Mar. 23, 2017). The Commission designated May 16, 2017 as the date by which the Commission shall approve or disapprove, or institute proceedings to determine whether to approve or disapprove, the proposed rule change. \6\ See Letters to Brent J. Fields, Secretary, Commission, from John Ramsay, Chief Market Policy Officer, Investors Exchange LLC (Mar. 10, 2017) (``IEX Letter I''); Tyler Gellasch, Executive Director, Healthy Markets Association (Mar. 10, 2017) (``HMA Letter''); Joanna Mallers, Secretary, FIA Principal Traders Group (Mar. 24, 2017) (``FIA PTG Letter''); John Ramsay, Chief Market Policy Officer, Investors Exchange LLC (Apr. 21, 2017) (``IEX Letter II''); Joanne Moffic-Silver, Executive Vice President, General Counsel, and Corporate Secretary, Bats Global Markets, Inc. (Apr. 24, 2017) (``Bats Letter''); and Stephen John Berger, Managing Director, Government & Regulatory Policy, Citadel Securities (Apr. 28, 2017) (``Citadel Letter''). \7\ See Letter to Brent J. Fields, Secretary, Commission, from Elizabeth K. King, General Counsel and Corporate Secretary, New York Stock Exchange (Mar. 31, 2017) (``NYSE MKT Response Letter I''). \8\ See Letter to Brent J. Fields, Secretary, Commission, from Elizabeth K. King, General Counsel and Corporate Secretary, New York Stock Exchange (Apr. 28, 2017) (``NYSE MKT Response Letter II''). \9\ See Letter to Brent J. Fields, Secretary, Commission, from Elizabeth K. King, General Counsel and Corporate Secretary, New York Stock Exchange (May 11, 2017) (``NYSE MKT Response Letter III''). --------------------------------------------------------------------------- II. Description of the Proposed Rule Change The Exchange proposes to amend Rules 7.29E and 1.1E to provide for an intentional delay to specified message and order processing (the ``Delay Mechanism''). The Exchange has separately proposed rules to transition its cash equities trading to the Pillar trading platform and to transition its cash equities market from a Floor-based market with a parity allocation model to a fully automated price-time-priority allocation model that trades all NMS Stocks.\10\ --------------------------------------------------------------------------- \10\ See Securities Exchange Act Release Nos. 79242 (Nov. 4, 2016), 81 FR 79081 (Nov. 10, 2016) (SR-NYSEMKT-2016-97); 79400 (November 25, 2016), 81 FR 86750 (Dec. 1, 2016) (SR-NYSEMKT-2016- 103); 79993 (Feb. 9, 2017); 82 FR 10814 (Feb. 15, 2017) (SR-NYSEMKT- 2017-01); and 79982 (Feb. 7, 2017); 82 FR 10508 (Feb. 13, 2017) (SR- NYSEMKT-2017-04). According to the Exchange, if the Commission approves these proposed rule changes, it will transition to Pillar on a date announced by Trader Update. --------------------------------------------------------------------------- The Exchange now proposes to include an intentional access delay on Pillar that would add 350 microseconds of latency to inbound and outbound order messages, as described in greater detail below.\11\ The Exchange states that its proposed Delay Mechanism is based in part on the operation of the intentional 350-microsecond delay mechanism of Investors Exchange LLC (``IEX'') \12\ and that the proposed rule change is ``designed to create a competitive trading model to IEX.'' \13\ --------------------------------------------------------------------------- \11\ The Exchange notes that, when it implements the Delay Mechanism, it will no longer offer Add Liquidity Only (``ALO'') Order or Day Intermarket Sweep Order (``ISO'') functionality and all Pegged Orders will not be displayed. The Exchange represents that, before implementing the Delay Mechanism, it will file a separate proposed rule change to eliminate ALO and Day ISO Orders and related functionality and to provide that Primary Pegged Orders will not be displayed. See Notice, supra note 3, 82 FR at 10829 n.6. \12\ IEX uses a hardware solution to add the equivalent of 350 microseconds of latency between the network access point of the ``POP'' and IEX's matching engine at its primary data center through geographic distance and coiled optical fiber. See IEX Rule 11.510. \13\ See Notice, supra note 3, 82 FR at 10831. --------------------------------------------------------------------------- Unlike IEX, the Exchange proposes to use a software solution to create the delay. The delay added by the Exchange would be in addition to any natural latency inherent in accessing the Exchange and Away Markets.\14\ In addition, the Exchange would further provide that it would periodically monitor the latency and adjust the latency as necessary to achieve consistency with the 350 microsecond target.\15\ If the Exchange determines to increase or decrease the delay period, it would be required to submit a rule filing pursuant to Section 19 of the Act.\16\ --------------------------------------------------------------------------- \14\ The term ``Away Market'' is any exchange, alternate trading system (``ATS'') or other broker-dealer (1) with which the Exchange maintains an electronic linkage and (2) that provides instantaneous responses to orders routed from the Exchange and that the Exchange will designate from time to time those ATS's or other broker-dealers that qualify as Away Markets. See Rule 1.1E(ff). \15\ See Proposed Rule 1.1E(y). \16\ See id. --------------------------------------------------------------------------- The Exchange proposes to apply the Delay Mechanism to the following:All inbound communications from an ETP Holder.\17\ The Exchange's proposal to apply the Delay Mechanism to all inbound communications from an ETP Holder would cover all incoming orders, as well as any requests to cancel or modify a resting order. --------------------------------------------------------------------------- \17\ See Proposed Rule 7.29E(b)(1)(A). --------------------------------------------------------------------------- All outbound communications to an ETP Holder.\18\ The Exchange's proposal to apply the Delay Mechanism to all outbound communications to an ETP Holder would cover Exchange messages to an ETP Holder that an order has been accepted, rejected, cancelled, modified, or executed. Together with the application of the proposed Delay Mechanism to all inbound communications to the Exchange, there would be 700 microseconds of round-trip latency for an ETP Holder to receive a report of an execution or partial execution on the Exchange. --------------------------------------------------------------------------- \18\ See Proposed Rule 7.29E(b)(1)(B). --------------------------------------------------------------------------- All outbound communications the Exchange routes to an Away Market,\19\ and all inbound communications from an Away Market about a routed order.\20\ If the Exchange determines to route an order, either because it would trade through a protected quotation or has an instruction to be routed to a primary [[Page 23382]] listing market, the Exchange would apply the Delay Mechanism before routing such order. This proposed rule text would therefore provide that an order that the Exchange routes to an Away Market would have 700 microseconds of added delay before it is routed: First, a 350 microsecond delay before the order is received by the Exchange's matching engines; and second, an additional 350 microsecond delay when the order is routed.\21\ Any inbound communications to the Exchange from the Away Market about such routed order, whether a rejection or execution report, would also be subject to the Delay Mechanism. In addition, any such report forwarded to the ETP Holder that entered the order would then be subject to an additional Delay Mechanism. Accordingly, the Exchange would add a total of 1,400 microseconds of round-trip delay to an order that the Exchange routes to an Away Market. --------------------------------------------------------------------------- \19\ See Proposed Rule 7.29E(b)(1)(C). \20\ See Proposed Rule 7.29E(b)(1)(D). \21\ After the Exchange applies the Delay Mechanism to a routable order, the routed order would be subject to any natural latency inherent in accessing such Away Market. --------------------------------------------------------------------------- All outbound communications (e.g., bids, offers, and trades) to the Exchange's proprietary data feeds.\22\ The Exchange proposes to apply add 350 microseconds of delay to all outbound messages to its proprietary data feeds. --------------------------------------------------------------------------- \22\ See Proposed Rule 7.29E(b)(1)(E). --------------------------------------------------------------------------- Finally, the Exchange proposes also to apply the Delay Mechanism when the Exchange is operating out of its secondary data center. The Exchange proposes not to apply the Delay Mechanism to the following: All inbound communications from data feeds.\23\ The Delay Mechanism would not apply to communications to the Exchange from data feeds received directly from Away Markets and data feeds disseminated by a plan processor. --------------------------------------------------------------------------- \23\ See Proposed Rule 7.29E(b)(2)(A). --------------------------------------------------------------------------- Order processing and order execution on the Exchange's Book.\24\ All actions taken within the Exchange's Book, including calculating the BBO, NBBO, or PBBO,\25\ assigning working prices and working times to orders,\26\ and ranking and executing orders, would not be subject to the Delay Mechanism. For example, the Exchange would not apply the Delay Mechanism to update the working price of Pegged Orders, which would not be displayed on the Exchange, based on an updated PBBO. --------------------------------------------------------------------------- \24\ See Proposed Rule 7.29E(b)(2)(B). \25\ The term ``BBO'' is the best bid or offer that is a protected quotation on the Exchange. See Rule 1.1E(h). The terms ``NBBO'' and ``PBBO'' are the national best bid or offer and the protected best bid and offer, respectively. See Rule 1.1E(dd). \26\ The Exchange proposed to define the term ``working price'' as the price at which an order is eligible to trade at any given time, which may be different from the limit price or display price of the order, and to define the term ``working time'' as the effective time sequence assigned to an order for purposes of determining its priority ranking. See Securities Exchange Act Release No. 79993 (Feb. 9, 2017), 82 FR 10814 (Feb. 15, 2017) (SR- NYSEMKT-2017-01). --------------------------------------------------------------------------- All outbound communications (e.g., bids, offers, and trades) to the plan processors under Rules 601 and 602 of Regulation NMS.\27\ The Exchange proposes not to apply the Delay Mechanism to outbound communications with the SIP to disseminate quotation and last sale information. --------------------------------------------------------------------------- \27\ See Proposed Rule 7.29E(b)(2)(C). --------------------------------------------------------------------------- III. Summary of Comments and NYSE MKT's Responses As noted above, the Commission has received six letters from five commenters on the proposal, as well as three response letters from the Exchange.\28\ Three commenters express opposition to the proposal in its current form.\29\ One commenter generally opposes the proposal, but acknowledged that it would be difficult for the Commission to disapprove the proposal in light of the Commission's interpretation relating to exchange access delays.\30\ Another commenter expresses concerns with exchange access delays more generally, but also notes that it does not see any legal grounds for disapproval of the Exchange's proposal in light of the Commission's interpretation and approval of IEX's access delay.\31\ As discussed in more detail below, commenters generally: (i) Request additional information regarding the proposal (including the Exchange's rationale for proposing a delay, the objective of the delay, and how the delay will protect investors); (ii) raise questions regarding the differences between the Exchange's proposal and the IEX access delay; and (iii) urge the Commission to complete a holistic review of equity market structure or the impact of access delays in particular and to provide more comprehensive guidance with respect to access delays, rather than considering new delays on an ad hoc basis through the SRO rule filing process. --------------------------------------------------------------------------- \28\ See supra notes 6-9. \29\ See IEX Letter I; IEX Letter II; HMA Letter; Citadel Letter. \30\ See FIA PTG Letter at 2. See also Securities Exchange Act Release No. 78102 (June 17, 2016), 81 FR 40785 (June 23, 2016) (File No. S7-03-16) (``Interpretation''); infra note 82. \31\ See Bats Letter at 1. --------------------------------------------------------------------------- First, the three commenters that oppose the proposal in its current form request additional information from the Exchange to better understand its proposal and the Exchange's underlying rationale.\32\ These commenters note the opposition of the New York Stock Exchange (``NYSE''), an affiliate of the Exchange, to IEX's application for registration as a national securities exchange and, in particular, to IEX's proposal to utilize an intentional delay on its market.\33\ These commenters request that the Exchange provide more detail regarding the reasoning behind its decision to adopt an intentional delay, including the objectives of the delay and how it will accomplish those objectives, how it is intended to benefit investors and promote fair and orderly markets, and whether the Exchange's views about the impact of such a delay differ from those raised in NYSE's comments on IEX's application.\34\ One commenter argues that the Exchange should not be permitted to rely simply on its similarity to the IEX access delay, and must instead provide a more thorough explanation as to why it proposes to implement an access delay.\35\ Two commenters request that the Exchange provide an explanation as to how it determined to set the latency of the Delay Mechanism at 350 microseconds.\36\ --------------------------------------------------------------------------- \32\ See IEX Letter I at 2-3; HMA Letter at 4; Citadel Letter at 2-3. \33\ See IEX Letter I at 2; HMA Letter at 4; Citadel Letter at 1. \34\ See IEX Letter I at 2; HMA Letter at 4; Citadel Letter at 2-3. \35\ See IEX Letter II at 2-3. This commenter explains that, in connection with its exchange application, it provided the Commission with a detailed explanation of the IEX POP, including its intent in implementing the IEX POP and how its features were determined relevant to its unique circumstances. See id. at 3. \36\ See IEX Letter I at 2; HMA Letter at 4. --------------------------------------------------------------------------- Second, commenters raise questions related to the specifics of the Exchange's proposal, in particular how it differs from IEX's access delay. Two commenters ask about the impact of the delay being implemented through a software process rather than a hardware mechanism, and they ask whether this could lead to any variability in the delay and how the Exchange would monitor any such variation from the 350 microsecond target.\37\ One commenter asks the Exchange to clarify how the additional delay it proposes for routable orders would impact the ability to access quotations on other exchanges that may be modified before the routed order subject to the delay is received by the away exchange.\38\ This commenter also asks whether the intentional delay on the Exchange would unfairly harm [[Page 23383]] investors on another of the Exchange's affiliated markets.\39\ This commenter further asks the Exchange to clarify if all communications with electronic designated market makers (``DMMs'') would be subject to the Delay Mechanism and what impact this may have on the DMMs.\40\ This commenter expresses concern that an NYSE DMM that is also an Exchange DMM may be subject to informational advantages or conflicts if trading on both exchanges, only one of which would be subject to an access delay.\41\ --------------------------------------------------------------------------- \37\ See IEX Letter I at 3; HMA Letter at 5. \38\ See IEX Letter I at 3. \39\ See id. at 2. \40\ See id. at 3. \41\ See id. --------------------------------------------------------------------------- Finally, two commenters assert that, rather than considering new artificial delays on an ad hoc basis through the SRO rule-filing process, the Commission should complete a holistic review of equity market structure and provide more comprehensive guidance with respect to access delays.\42\ Another commenter similarly suggests that the Commission complete the comprehensive review of the market impact of exchange access delays contemplated as part of its interpretation of Rule 611 under Regulation NMS before approving any new exchange proposals seeking to implement such delays.\43\ With respect to the Exchange's specific proposal, two commenters express concern that intentional delays in protected quotations increase market complexity; increase pricing uncertainty; \44\ and, according to one commenter, may amplify the risk of market disruptions during periods of high volatility.\45\ Finally, one commenter argues that the Delay Mechanism would encourage the use of non-displayed orders, which the commenter states would decrease market transparency and potentially harm price discovery.\46\ --------------------------------------------------------------------------- \42\ See FIA PTG Letter at 2; Bats Letter at 1-2. These commenters acknowledge, however, that despite their concerns with exchange access delays, the precedent set by IEX's exchange approval, including the Commission's related interpretation, may make it difficult for the Commission to disapprove the Exchange's proposal. See FIA PTG Letter at 2; Bats Letter at 1. One of these commenters suggests that the Commission limit the approval of any exchange access delays to proposals that closely track IEX's delay mechanism, such as the current proposal. See FIA PTG Letter at 2. \43\ See Citadel Letter at 2. See also Interpretation, supra note 30, 81 FR at 40793. \44\ See FIA PTG Letter at 2; Citadel Letter at 3. \45\ See FIA PTG Letter at 2. \46\ See Citadel Letter at 3-4. --------------------------------------------------------------------------- In response to comments, the Exchange states that it is proposing the Delay Mechanism ``in order to provide broker-dealers and issuers with a competitive model'' to the IEX access delay.\47\ The Exchange argues that its proposal is consistent with the Act in that it is designed to protect investors and the public interest in a manner that is not unfairly discriminatory and does not impose an unnecessary or inappropriate burden on competition.\48\ In particular, the Exchange states that the Delay Mechanism would allow non-displayed orders to dynamically update in accordance with their order instructions.\49\ --------------------------------------------------------------------------- \47\ See NYSE MKT Response Letter I at 4. \48\ See NYSE MKT Response Letter II at 2. \49\ See id. --------------------------------------------------------------------------- In light of this purpose, the Exchange believes that the proposed length of 350 microseconds for its Delay Mechanism would provide Exchange systems with the appropriate amount of time to update prices based on market data it receives from other markets.\50\ The Exchange further states that the 350 microsecond delay is not ``too short so as to frustrate the purpose of the Delay Mechanism'' nor ``overly long so as to be unfairly discriminatory to orders subject to the Delay Mechanism.'' \51\ In addition, the proposed delay would be applied equally to all Exchange members and could not be bypassed by payment of a fee or otherwise. Specifically, the delay on outbound market data would be applied uniformly to all Exchange data recipients except for outbound communications with the SIP to disseminate quotation and last sale information, and the delay on inbound order messages would be applied uniformly to all users.\52\ --------------------------------------------------------------------------- \50\ See NYSE Response Letter III at 1. Specifically, the Exchange notes that it processes market data updates and re-prices non-displayed orders in less than 100 microseconds, and that the theoretical minimum transmission time for information generated in other exchanges' primary systems located in Carteret, New Jersey to reach the Exchange's primary systems (located in Mahwah, New Jersey) is approximately 185 microseconds. See id. at n.1. Accounting for the Exchange's processing time and the time it takes the Exchange to receive market data updates from nearby exchanges, the Exchange believes that its proposed 350 microsecond Delay Mechanism is appropriately designed to achieve the stated purpose of allowing the Exchange to dynamically update the prices of undisplayed resting pegged orders. See id. at 1-2. \51\ See id. at 1-2. \52\ See NYSE MKT Response Letter II at 2. --------------------------------------------------------------------------- The Exchange further notes that its Delay Mechanism operates in a manner that is identical to the IEX access delay, except for its treatment of routable orders, which the Exchange believes is consistent with the model approved by the Commission for IEX.\53\ The Exchange does not believe this difference would cause its proposal to be unfairly discriminatory or to impose an unfair burden on competition, and states that this difference is simply a result of its system architecture.\54\ The Exchange further states that its proposed Delay Mechanism does not raise any issues that have not already been considered in connection with IEX's exchange application.\55\ The Exchange also notes that the Commission's interpretation of Rule 611 under Regulation NMS found a de minimis delay on exchange response times to be consistent with Rule 611.\56\ --------------------------------------------------------------------------- \53\ See NYSE MKT Response Letter I at 2. \54\ See id. \55\ See NYSE MKT Response Letter I at 1; NYSE MKT Response Letter II at 1-2. \56\ See NYSE MKT Response Letter I at 1-2; NYSE MKT Response Letter II at 2. See also Interpretation, supra note 30; infra note 82. --------------------------------------------------------------------------- The Exchange does not believe that its proposal to implement the Delay Mechanism through a software mechanism should be relevant to evaluating the proposal, noting that the Commission has not examined existing exchange access delays with respect to the manner in which the delay is implemented.\57\ The Exchange further states that both hardware and software mechanisms may be subject to variability and the Exchange would be required, in accordance with its proposed rules, to monitor the latency of the Delay Mechanism and make any reasonable adjustments to ensure consistency with the 350 microsecond target.\58\ --------------------------------------------------------------------------- \57\ See NYSE MKT Response Letter I at 2. \58\ See id. at 3. --------------------------------------------------------------------------- With respect to Exchange DMMs, the Exchange notes that it would only have electronic DMMs on its new trading platform and that these participants would be subject to its access delay just as any other market participant on the Exchange.\59\ The Exchange further states that it does not believe that any conflicts would arise if an NYSE DMM were also an Exchange electronic DMM, because the NYSE DMM would not be able to trade its assigned securities on the Exchange while on the NYSE trading floor.\60\ --------------------------------------------------------------------------- \59\ See id. \60\ See id. --------------------------------------------------------------------------- IV. Discussion and Commission Findings After careful review, the Commission finds that the proposed rule change is consistent with the requirements of Section 6 of the Act \61\ and the rules and regulations thereunder applicable to a national securities exchange.\62\ In particular, the Commission finds that the proposed rule change is consistent [[Page 23384]] with Section 6(b)(5) of the Act,\63\ which requires, among other things, that the rules of a national securities exchange be 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 regulating, clearing, settling, processing information with respect to, and 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 and that the rules not be designed to permit unfair discrimination between customers, issuers, brokers, or dealers. --------------------------------------------------------------------------- \61\ 15 U.S.C. 78f. \62\ In approving this proposed rule change, the Commission has considered the proposed rule's impact on efficiency, competition, and capital formation. See 15 U.S.C. 78c(f). \63\ 15 U.S.C. 78f(b)(5). --------------------------------------------------------------------------- As summarized above, commenters have requested that the Exchange provide more explanation of its proposal, including the reasoning behind its decision to propose an access delay, as well as whether its views on access delays generally differ from those raised in NYSE's comments on IEX's exchange application. In particular, one commenter argues that ``NYSE has said nothing about what it is trying to achieve, or how its design is tailored to its own situation.'' \64\ --------------------------------------------------------------------------- \64\ IEX Letter II at 3. --------------------------------------------------------------------------- The Commission believes that the Exchange has provided a sufficient description of the operation and purpose of its proposal in its initial filing and its responses to comments.\65\ As described above, the Exchange's proposed Delay Mechanism would add 350 microseconds of one- way latency to inbound and outbound communications--including order messages between the Exchange and its members or other markets--as well as data messages from the Exchange's proprietary feeds. The proposal would therefore impose a cumulative inbound and outbound intentional delay of 700 microseconds on non-routable orders. The Delay Mechanism would apply to all messages except for outbound communications from the Exchange to the SIP; inbound communications from external market data feeds; and actions taken by the Exchange within the Exchange's book, including calculating the BBO, NBBO, or PBBO, assigning working prices and working times to orders, and ranking and executing orders.\66\ --------------------------------------------------------------------------- \65\ The Commission does not believe that the comments submitted by NYSE, the Exchange's affiliate, on a separate matter previously before the Commission are relevant to the Commission's consideration of the current proposal, nor is the Exchange bound by its affiliate's prior arguments in relation to that matter. \66\ See Proposed Rule 7.29E(b)(2). --------------------------------------------------------------------------- The Exchange states that the purpose of its proposal is to ``allow undisplayed orders to meet their order instruction to be dynamically updated to prices based on changes to the PBBO before a new, incoming order generated in response to the same PBBO change can access the resting order.'' \67\ In light of this purpose, the Exchange believes that the proposed length of 350 microseconds for its Delay Mechanism would achieve this purpose by providing Exchange systems with the appropriate amount of time to update prices based on market data it receives from other markets.\68\ Specifically, the Exchange notes that it processes market data updates and re-prices non-displayed orders in less than 100 microseconds, and that the theoretical minimum transmission time for information generated in other exchanges' primary systems located in Carteret, New Jersey to reach the Exchange's primary systems (located in Mahwah, New Jersey) is approximately 185 microseconds.\69\ Accounting for the Exchange's processing time and the time it takes the Exchange to receive market data updates from nearby exchanges, the Exchange believes that its proposed 350 microsecond Delay Mechanism is therefore appropriately designed to achieve the stated purpose of allowing the Exchange to dynamically update the prices of undisplayed resting pegged orders and that the 350 microsecond delay is not ``too short so as to frustrate the purpose of the Delay Mechanism'' nor ``overly long so as to be unfairly discriminatory to orders subject to the Delay Mechanism.'' \70\ The Exchange further asserts that its proposed Delay Mechanism ``provide[s] a competitive trading model to IEX,'' \71\ so that broker-dealers and issuers seeking a trading venue that offers an intentional delay mechanism will have an additional option.\72\ --------------------------------------------------------------------------- \67\ See NYSE Response Letter III at 1. See also NYSE Response Letter II at 2. \68\ See NYSE Response Letter III at 1. \69\ See id. at n.1. \70\ See id. at 1-2. \71\ See supra note 13 and accompanying text. \72\ See Notice, supra note 3, 82 FR at 10831. --------------------------------------------------------------------------- The Commission believes the Exchange has sufficiently demonstrated that the proposed rule change is consistent with the Act, and the Commission does not find any legal basis to distinguish the Exchange's proposed Delay Mechanism from the IEX access delay. In particular, the Commission believes that the Exchange has sufficiently demonstrated that its proposal would not be unfairly discriminatory. The Commission notes that the Act does not foreclose reasonable and not unfairly discriminatory innovations, including those that are designed to protect investors who seek to reliably place passive, non-displayed pegged orders on an exchange.\73\ --------------------------------------------------------------------------- \73\ See Securities Exchange Act Release No. 78101 (June 17, 2016), 81 FR 41142, 41157 (June 23, 2016) (File No. 10-222) (``IEX Exchange Approval''). --------------------------------------------------------------------------- According to the Exchange, its proposal is tailored to achieve the purposes of its proposed access delay and, as stated above, would provide additional choice for market participants desiring to trade or list on an exchange that offers a delay mechanism.\74\ The Commission further notes that, as described above, the Exchange's Delay Mechanism would apply to all members equally, and may not be bypassed, for a fee or otherwise. Though the proposal would not subject order processing and order execution on the Exchange's Book to the Delay Mechanism, this aspect of the proposal is intended to allow undisplayed orders to function as intended by providing the Exchange with the time it needs to dynamically update prices of those orders based on the protected NBBO, which purpose and process the Exchange believes is not unfairly discriminatory and does not impose an unnecessary or inappropriate burden on competition.\75\ --------------------------------------------------------------------------- \74\ See Notice, supra note 3, 82 FR at 10831. \75\ See NYSE Response Letter II at 2. See also Notice, supra note 3, 82 FR at 10830. --------------------------------------------------------------------------- The Commission has previously found that a similar advantage provided to pegged orders by means of an exchange access delay was not unfairly discriminatory and did not impose an unnecessary or inappropriate burden on competition.\76\ As the Commission noted in that case, the delay was designed to ensure that pegged orders operate as designed by accurately tracking the NBBO and to ensure that users of pegged orders can better achieve their goals when their pegged orders operate efficiently.\77\ --------------------------------------------------------------------------- \76\ See IEX Exchange Approval, supra note 73, 81 FR at 41157. \77\ See id. --------------------------------------------------------------------------- For the current proposal, the Exchange has explained how its proposed Delay Mechanism is tailored to achieve its stated purpose of allowing the Exchange to dynamically update the prices of undisplayed pegged orders to meet their order instructions in response to market- data updates. As noted above, the Exchange has explained its choice of 350 microseconds based on its system processing time combined with its [[Page 23385]] determination of the theoretical minimum transmission time of information to the Exchange from other exchanges, and has affirmed that the delay is not ``too short'' so as to not allow the Exchange to achieve the purpose of the Delay Mechanism, nor is it ``overly long'' so as to be an unnecessary burden on market participants. Accordingly, the Commission finds that the Exchange's proposed Delay Mechanism is designed to protect investors and the public interest in a manner that is not unfairly discriminatory and that does not impose an unnecessary or inappropriate burden on competition and is therefore consistent with Sections 6(b)(5) and 6(b)(8) of the Act.\78\ --------------------------------------------------------------------------- \78\ While some commenters expressed concern that intentional delays in protected quotations may increase market complexity and requested that the Commission impose a moratorium on new proposals to implement such delays, the Commission notes that it carefully considers each exchange proposal for consistency with the Act. --------------------------------------------------------------------------- Further, as described above, all members of the Exchange would be equally subject to the Delay Mechanism, and no member would be permitted to avoid the delay by payment of a fee or through any other means. In addition, the Commission believes the Exchange's proposal to subject all outbound routable orders to the Delay Mechanism is designed to ensure that the Exchange's ability to provide outbound routing services under the proposal will be on substantively comparable terms to a third-party routing broker that is a member of the Exchange. In particular, both the Exchange routing logic and a third-party routing broker-dealer would experience 350 microseconds of one-way latency in receiving order information about routable orders from the Exchange's matching engine. Although the Exchange's proposal is not identical in all respects to the routing structure at another exchange with an access delay,\79\ the Commission believes that the Exchange's proposal would not provide it with any structural or informational advantages in its provision of routing services as compared to a third-party broker- dealer member performing a similar function for itself or others. Therefore, the Commission believes that the Exchange's proposal as applicable to routable orders would not be unfairly discriminatory and would not impose an inappropriate burden on competition and is therefore consistent with Sections 6(b)(5) and 6(b)(8) of the Act. --------------------------------------------------------------------------- \79\ See IEX Rule 11.510. See also IEX Exchange Approval, supra note 73, 81 FR at 41157-60. --------------------------------------------------------------------------- The Commission acknowledges that, as commenters have noted, the Exchange's proposal would differ from the access delay on another exchange in that it would be software-based, as opposed to being implemented through a physical hardware mechanism. However, the Commission does not believe that a software-based delay is inherently inferior to a hardware-based delay or that this specific distinction is material to its analysis of the proposal, and the Commission notes that the Exchange would be required, as with any hardware-based delay, to comply with its rules requiring the Exchange to periodically monitor the actual latency and make adjustments as reasonably necessary to achieve consistency with the 350 microsecond target set forth in the proposed rule.\80\ --------------------------------------------------------------------------- \80\ See Proposed Rule 1.1E(y). --------------------------------------------------------------------------- Finally, the Commission does not believe that implementation of the Exchange's Delay Mechanism would preclude the Exchange from maintaining an automated quotation. Similar to an existing access delay on another market,\81\ the duration of the proposed Delay Mechanism is well within the geographic and technological latencies experienced today, and the Commission believes that it would not impair a market participant's ability to access a displayed quotation consistent with the goals of Rule 611.\82\ Accordingly, the proposed intentional one-way 350 microsecond delay is de minimis, and thus, following approval of the instant proposal, the Exchange can maintain a protected quotation when it operates the Delay Mechanism in the manner described above. --------------------------------------------------------------------------- \81\ See IEX Exchange Approval, supra note 73. \82\ See Interpretation, supra note 30, 81 FR at 40792 (noting that, in response to technological and market developments since the adoption of Regulation NMS, the Commission has provided an updated interpretation of the meaning of the term ``immediate'' in Rule 600(b)(3) of Regulation NMS, when determining whether a trading center maintains an ``automated quotation'' for purposes of Rule 611 of Regulation NMS, to preclude 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, or as the Commission noted, so short as to not frustrate the purposes of Rule 611 by impairing fair and efficient access to an exchange's quotations). The Commission further stated that such a de minimis access delay would satisfy Rules 600 and 611 under the updated interpretation even if it involved the use of an ``intentional device'' to delay access to an exchange's quotation. See id. For purposes of determining whether an exchange access delay is de minimis, the Commission did not set out a specific threshold; however, Commission staff has determined that, today, any delay of less than one millisecond is a de minimis amount of delay in accessing an exchange's facilities for purposes of the interpretation. See Commission Staff Guidance on Automated Quotations under Regulation NMS (June 17, 2016), https://www.sec.gov/divisions/marketreg/automated-quotations-under-regulation-nms.htm. --------------------------------------------------------------------------- V. Conclusion It is therefore ordered, pursuant to Section 19(b)(2) of the Act,\83\ that the proposed rule change (SR-NYSEMKT-2017-05) be, and hereby is, approved. --------------------------------------------------------------------------- \83\ 15 U.S.C. 78s(b)(2). For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.\84\ --------------------------------------------------------------------------- \84\ 17 CFR 200.30-3(a)(12). --------------------------------------------------------------------------- Eduardo A. Aleman, Assistant Secretary. [FR Doc. 2017-10304 Filed 5-19-17; 8:45 am] BILLING CODE 8011-01-P
![Federal Register / Vol. 82, No. 97 / Monday, May 22, 2017 / Notices 23381
For the Commission, by the Division of the Exchange submitted a comment (‘‘IEX’’) 12 and that the proposed rule
Trading and Markets, pursuant to delegated response letter.7 On April 28, 2017, the change is ‘‘designed to create a
authority.62 Exchange submitted a second comment competitive trading model to IEX.’’ 13
Eduardo A. Aleman, response letter.8 On May 11, 2017, the Unlike IEX, the Exchange proposes to
Assistant Secretary. Exchange submitted a third comment use a software solution to create the
[FR Doc. 2017–10297 Filed 5–19–17; 8:45 am] response letter.9 This order approves the delay. The delay added by the Exchange
BILLING CODE 8011–01–P proposed rule change. would be in addition to any natural
latency inherent in accessing the
II. Description of the Proposed Rule Exchange and Away Markets.14 In
SECURITIES AND EXCHANGE Change addition, the Exchange would further
COMMISSION The Exchange proposes to amend provide that it would periodically
monitor the latency and adjust the
[Release No. 34–80700; File No. SR– Rules 7.29E and 1.1E to provide for an
latency as necessary to achieve
NYSEMKT–2017–05] intentional delay to specified message
consistency with the 350 microsecond
and order processing (the ‘‘Delay
Self-Regulatory Organizations; NYSE target.15 If the Exchange determines to
Mechanism’’). The Exchange has
MKT LLC; Order Approving Proposed increase or decrease the delay period, it
separately proposed rules to transition
Rule Change Amending Rules 7.29E would be required to submit a rule filing
its cash equities trading to the Pillar
and 1.1E To Provide for a Delay pursuant to Section 19 of the Act.16
trading platform and to transition its The Exchange proposes to apply the
Mechanism cash equities market from a Floor-based Delay Mechanism to the following:
May 16, 2017. market with a parity allocation model to • All inbound communications from
a fully automated price-time-priority an ETP Holder.17 The Exchange’s
I. Introduction allocation model that trades all NMS proposal to apply the Delay Mechanism
On January 27, 2017, NYSE MKT LLC Stocks.10 to all inbound communications from an
(the ‘‘Exchange’’) filed with the The Exchange now proposes to ETP Holder would cover all incoming
Securities and Exchange Commission include an intentional access delay on orders, as well as any requests to cancel
(‘‘Commission’’) pursuant to Section Pillar that would add 350 microseconds or modify a resting order.
19(b)(1) of the Securities Exchange Act of latency to inbound and outbound • All outbound communications to
of 1934 (‘‘Act’’) 1 and Rule 19b–4 order messages, as described in greater an ETP Holder.18 The Exchange’s
thereunder,2 a proposed rule change to detail below.11 The Exchange states that proposal to apply the Delay Mechanism
amend Rules 7.29E and 1.1E to provide its proposed Delay Mechanism is based to all outbound communications to an
for an intentional access delay to certain in part on the operation of the ETP Holder would cover Exchange
inbound and outbound order messages intentional 350-microsecond delay messages to an ETP Holder that an order
on the Exchange. The proposed rule mechanism of Investors Exchange LLC has been accepted, rejected, cancelled,
change was published for comment in modified, or executed. Together with
the Federal Register on February 15, Secretary, Bats Global Markets, Inc. (Apr. 24, 2017) the application of the proposed Delay
2017.3 On March 17, 2017, pursuant to (‘‘Bats Letter’’); and Stephen John Berger, Managing Mechanism to all inbound
Section 19(b)(2) of the Act,4 the Director, Government & Regulatory Policy, Citadel communications to the Exchange, there
Securities (Apr. 28, 2017) (‘‘Citadel Letter’’).
Commission designated a longer period 7 See Letter to Brent J. Fields, Secretary,
would be 700 microseconds of round-
within which to approve the proposed Commission, from Elizabeth K. King, General trip latency for an ETP Holder to receive
rule change, disapprove the proposed Counsel and Corporate Secretary, New York Stock a report of an execution or partial
rule change, or institute proceedings to Exchange (Mar. 31, 2017) (‘‘NYSE MKT Response execution on the Exchange.
determine whether to approve or Letter I’’). • All outbound communications the
8 See Letter to Brent J. Fields, Secretary,
disapprove the proposed rule change.5 Commission, from Elizabeth K. King, General
Exchange routes to an Away Market,19
The Commission has received six Counsel and Corporate Secretary, New York Stock and all inbound communications from
comment letters on the proposal from Exchange (Apr. 28, 2017) (‘‘NYSE MKT Response an Away Market about a routed order.20
five commenters.6 On March 31, 2017, Letter II’’). If the Exchange determines to route an
9 See Letter to Brent J. Fields, Secretary,
order, either because it would trade
Commission, from Elizabeth K. King, General
62 17 CFR 200.30–3(a)(12).
Counsel and Corporate Secretary, New York Stock through a protected quotation or has an
1 15 U.S.C. 78s(b)(1). Exchange (May 11, 2017) (‘‘NYSE MKT Response instruction to be routed to a primary
2 17 CFR 240.19b–4.
Letter III’’).
3 See Securities Exchange Act Release No. 79998 10 See Securities Exchange Act Release Nos. 12 IEX uses a hardware solution to add the
(Feb. 9, 2017), 82 FR 10828 (Feb. 15, 2017) 79242 (Nov. 4, 2016), 81 FR 79081 (Nov. 10, 2016) equivalent of 350 microseconds of latency between
(‘‘Notice’’). (SR–NYSEMKT–2016–97); 79400 (November 25, the network access point of the ‘‘POP’’ and IEX’s
4 15 U.S.C. 78s(b)(2).
2016), 81 FR 86750 (Dec. 1, 2016) (SR–NYSEMKT– matching engine at its primary data center through
5 See Securities Exchange Act Release No. 80268 2016–103); 79993 (Feb. 9, 2017); 82 FR 10814 (Feb. geographic distance and coiled optical fiber. See
(Mar. 17, 2017), 82 FR 14932 (Mar. 23, 2017). The 15, 2017) (SR–NYSEMKT–2017–01); and 79982 IEX Rule 11.510.
Commission designated May 16, 2017 as the date (Feb. 7, 2017); 82 FR 10508 (Feb. 13, 2017) (SR– 13 See Notice, supra note 3, 82 FR at 10831.
by which the Commission shall approve or NYSEMKT–2017–04). According to the Exchange, if 14 The term ‘‘Away Market’’ is any exchange,
disapprove, or institute proceedings to determine the Commission approves these proposed rule alternate trading system (‘‘ATS’’) or other broker-
whether to approve or disapprove, the proposed changes, it will transition to Pillar on a date dealer (1) with which the Exchange maintains an
rule change. announced by Trader Update. electronic linkage and (2) that provides
6 See Letters to Brent J. Fields, Secretary, 11 The Exchange notes that, when it implements
instantaneous responses to orders routed from the
Commission, from John Ramsay, Chief Market the Delay Mechanism, it will no longer offer Add Exchange and that the Exchange will designate from
mstockstill on DSK30JT082PROD with NOTICES
Policy Officer, Investors Exchange LLC (Mar. 10, Liquidity Only (‘‘ALO’’) Order or Day Intermarket time to time those ATS’s or other broker-dealers
2017) (‘‘IEX Letter I’’); Tyler Gellasch, Executive Sweep Order (‘‘ISO’’) functionality and all Pegged that qualify as Away Markets. See Rule 1.1E(ff).
Director, Healthy Markets Association (Mar. 10, Orders will not be displayed. The Exchange 15 See Proposed Rule 1.1E(y).
2017) (‘‘HMA Letter’’); Joanna Mallers, Secretary, represents that, before implementing the Delay 16 See id.
FIA Principal Traders Group (Mar. 24, 2017) (‘‘FIA Mechanism, it will file a separate proposed rule 17 See Proposed Rule 7.29E(b)(1)(A).
PTG Letter’’); John Ramsay, Chief Market Policy change to eliminate ALO and Day ISO Orders and
18 See Proposed Rule 7.29E(b)(1)(B).
Officer, Investors Exchange LLC (Apr. 21, 2017) related functionality and to provide that Primary
19 See Proposed Rule 7.29E(b)(1)(C).
(‘‘IEX Letter II’’); Joanne Moffic-Silver, Executive Pegged Orders will not be displayed. See Notice,
Vice President, General Counsel, and Corporate supra note 3, 82 FR at 10829 n.6. 20 See Proposed Rule 7.29E(b)(1)(D).
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![23384 Federal Register / Vol. 82, No. 97 / Monday, May 22, 2017 / Notices
with Section 6(b)(5) of the Act,63 which orders, and ranking and executing discriminatory. The Commission notes
requires, among other things, that the orders.66 that the Act does not foreclose
rules of a national securities exchange The Exchange states that the purpose reasonable and not unfairly
be designed to prevent fraudulent and of its proposal is to ‘‘allow undisplayed discriminatory innovations, including
manipulative acts and practices, to orders to meet their order instruction to those that are designed to protect
promote just and equitable principles of be dynamically updated to prices based investors who seek to reliably place
trade, to foster cooperation and on changes to the PBBO before a new, passive, non-displayed pegged orders on
coordination with persons engaged in incoming order generated in response to an exchange.73
regulating, clearing, settling, processing the same PBBO change can access the According to the Exchange, its
information with respect to, and resting order.’’ 67 In light of this proposal is tailored to achieve the
facilitating transactions in securities, to purpose, the Exchange believes that the purposes of its proposed access delay
remove impediments to and perfect the proposed length of 350 microseconds and, as stated above, would provide
mechanism of a free and open market for its Delay Mechanism would achieve additional choice for market
this purpose by providing Exchange participants desiring to trade or list on
and a national market system, and, in
systems with the appropriate amount of an exchange that offers a delay
general, to protect investors and the
time to update prices based on market mechanism.74 The Commission further
public interest and that the rules not be
data it receives from other markets.68 notes that, as described above, the
designed to permit unfair Specifically, the Exchange notes that it Exchange’s Delay Mechanism would
discrimination between customers, processes market data updates and re- apply to all members equally, and may
issuers, brokers, or dealers. prices non-displayed orders in less than not be bypassed, for a fee or otherwise.
As summarized above, commenters 100 microseconds, and that the Though the proposal would not subject
have requested that the Exchange theoretical minimum transmission time order processing and order execution on
provide more explanation of its for information generated in other the Exchange’s Book to the Delay
proposal, including the reasoning exchanges’ primary systems located in Mechanism, this aspect of the proposal
behind its decision to propose an access Carteret, New Jersey to reach the is intended to allow undisplayed orders
delay, as well as whether its views on Exchange’s primary systems (located in to function as intended by providing the
access delays generally differ from those Mahwah, New Jersey) is approximately Exchange with the time it needs to
raised in NYSE’s comments on IEX’s 185 microseconds.69 Accounting for the dynamically update prices of those
exchange application. In particular, one Exchange’s processing time and the time orders based on the protected NBBO,
commenter argues that ‘‘NYSE has said it takes the Exchange to receive market which purpose and process the
nothing about what it is trying to data updates from nearby exchanges, the Exchange believes is not unfairly
achieve, or how its design is tailored to Exchange believes that its proposed 350 discriminatory and does not impose an
its own situation.’’ 64 microsecond Delay Mechanism is unnecessary or inappropriate burden on
therefore appropriately designed to competition.75
The Commission believes that the achieve the stated purpose of allowing The Commission has previously
Exchange has provided a sufficient the Exchange to dynamically update the found that a similar advantage provided
description of the operation and prices of undisplayed resting pegged to pegged orders by means of an
purpose of its proposal in its initial orders and that the 350 microsecond exchange access delay was not unfairly
filing and its responses to comments.65 delay is not ‘‘too short so as to frustrate discriminatory and did not impose an
As described above, the Exchange’s the purpose of the Delay Mechanism’’ unnecessary or inappropriate burden on
proposed Delay Mechanism would add nor ‘‘overly long so as to be unfairly competition.76 As the Commission
350 microseconds of one-way latency to discriminatory to orders subject to the noted in that case, the delay was
inbound and outbound Delay Mechanism.’’ 70 The Exchange designed to ensure that pegged orders
communications—including order further asserts that its proposed Delay operate as designed by accurately
messages between the Exchange and its Mechanism ‘‘provide[s] a competitive tracking the NBBO and to ensure that
members or other markets—as well as trading model to IEX,’’ 71 so that broker- users of pegged orders can better
data messages from the Exchange’s dealers and issuers seeking a trading achieve their goals when their pegged
proprietary feeds. The proposal would venue that offers an intentional delay orders operate efficiently.77
therefore impose a cumulative inbound mechanism will have an additional For the current proposal, the
and outbound intentional delay of 700 option.72 Exchange has explained how its
microseconds on non-routable orders. The Commission believes the proposed Delay Mechanism is tailored
The Delay Mechanism would apply to Exchange has sufficiently demonstrated to achieve its stated purpose of allowing
all messages except for outbound that the proposed rule change is the Exchange to dynamically update the
communications from the Exchange to consistent with the Act, and the prices of undisplayed pegged orders to
the SIP; inbound communications from Commission does not find any legal meet their order instructions in
external market data feeds; and actions basis to distinguish the Exchange’s response to market-data updates. As
taken by the Exchange within the proposed Delay Mechanism from the noted above, the Exchange has
Exchange’s book, including calculating IEX access delay. In particular, the explained its choice of 350
the BBO, NBBO, or PBBO, assigning Commission believes that the Exchange microseconds based on its system
working prices and working times to has sufficiently demonstrated that its processing time combined with its
proposal would not be unfairly
mstockstill on DSK30JT082PROD with NOTICES
63 15 73 See Securities Exchange Act Release No. 78101
U.S.C. 78f(b)(5).
66 SeeProposed Rule 7.29E(b)(2).
64 IEX Letter II at 3. (June 17, 2016), 81 FR 41142, 41157 (June 23, 2016)
65 The Commission does not believe that the
67 See NYSE Response Letter III at 1. See also (File No. 10–222) (‘‘IEX Exchange Approval’’).
NYSE Response Letter II at 2. 74 See Notice, supra note 3, 82 FR at 10831.
comments submitted by NYSE, the Exchange’s 68 See NYSE Response Letter III at 1. 75 See NYSE Response Letter II at 2. See also
affiliate, on a separate matter previously before the
69 See id. at n.1. Notice, supra note 3, 82 FR at 10830.
Commission are relevant to the Commission’s
70 See id. at 1–2. 76 See IEX Exchange Approval, supra note 73, 81
consideration of the current proposal, nor is the
Exchange bound by its affiliate’s prior arguments in 71 See supra note 13 and accompanying text. FR at 41157.
relation to that matter. 72 See Notice, supra note 3, 82 FR at 10831. 77 See id.
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![Federal Register / Vol. 82, No. 97 / Monday, May 22, 2017 / Notices 23385
determination of the theoretical Exchange’s proposal would differ from V. Conclusion
minimum transmission time of the access delay on another exchange in
information to the Exchange from other that it would be software-based, as It is therefore ordered, pursuant to
exchanges, and has affirmed that the opposed to being implemented through Section 19(b)(2) of the Act,83 that the
delay is not ‘‘too short’’ so as to not a physical hardware mechanism. proposed rule change (SR–NYSEMKT–
allow the Exchange to achieve the However, the Commission does not 2017–05) be, and hereby is, approved.
purpose of the Delay Mechanism, nor is believe that a software-based delay is For the Commission, by the Division of
it ‘‘overly long’’ so as to be an inherently inferior to a hardware-based Trading and Markets, pursuant to delegated
unnecessary burden on market delay or that this specific distinction is authority.84
participants. Accordingly, the material to its analysis of the proposal, Eduardo A. Aleman,
Commission finds that the Exchange’s and the Commission notes that the
proposed Delay Mechanism is designed Assistant Secretary.
Exchange would be required, as with
to protect investors and the public [FR Doc. 2017–10304 Filed 5–19–17; 8:45 am]
any hardware-based delay, to comply
interest in a manner that is not unfairly with its rules requiring the Exchange to BILLING CODE 8011–01–P
discriminatory and that does not impose periodically monitor the actual latency
an unnecessary or inappropriate burden and make adjustments as reasonably
on competition and is therefore necessary to achieve consistency with SECURITIES AND EXCHANGE
consistent with Sections 6(b)(5) and the 350 microsecond target set forth in COMMISSION
6(b)(8) of the Act.78 the proposed rule.80
Further, as described above, all [Release No. 34–80685; File No. SR–FINRA–
Finally, the Commission does not
members of the Exchange would be 2017–012]
believe that implementation of the
equally subject to the Delay Mechanism,
Exchange’s Delay Mechanism would
and no member would be permitted to Self-Regulatory Organizations;
preclude the Exchange from
avoid the delay by payment of a fee or Financial Industry Regulatory
maintaining an automated quotation.
through any other means. In addition, Authority, Inc.; Notice of Filing of a
Similar to an existing access delay on
the Commission believes the Exchange’s Proposed Rule Change To Amend
another market,81 the duration of the
proposal to subject all outbound FINRA Rule 7730 To Reduce the Delay
proposed Delay Mechanism is well
routable orders to the Delay Mechanism Period for the Historic TRACE Data
within the geographic and technological
is designed to ensure that the Sets Relating to Corporate and Agency
latencies experienced today, and the
Exchange’s ability to provide outbound Debt Securities
Commission believes that it would not
routing services under the proposal will
impair a market participant’s ability to
be on substantively comparable terms to May 16, 2017.
access a displayed quotation consistent
a third-party routing broker that is a Pursuant to Section 19(b)(1) of the
with the goals of Rule 611.82
member of the Exchange. In particular,
Accordingly, the proposed intentional Securities Exchange Act of 1934
both the Exchange routing logic and a
one-way 350 microsecond delay is de (‘‘Act’’) 1 and Rule 19b–4 thereunder,2
third-party routing broker-dealer would
minimis, and thus, following approval notice is hereby given that on May 12,
experience 350 microseconds of one-
of the instant proposal, the Exchange 2017, Financial Industry Regulatory
way latency in receiving order
can maintain a protected quotation Authority, Inc. (‘‘FINRA’’) filed with the
information about routable orders from
when it operates the Delay Mechanism Securities and Exchange Commission
the Exchange’s matching engine.
in the manner described above. (‘‘SEC’’ or ‘‘Commission’’) the proposed
Although the Exchange’s proposal is not
identical in all respects to the routing rule change as described in Items I, II,
80 See Proposed Rule 1.1E(y).
structure at another exchange with an and III below, which Items have been
81 See IEX Exchange Approval, supra note 73.
access delay,79 the Commission believes 82 See Interpretation, supra note 30, 81 FR at
prepared by FINRA.
that the Exchange’s proposal would not 40792 (noting that, in response to technological and The Commission is publishing this
provide it with any structural or market developments since the adoption of notice to solicit comments on the
informational advantages in its Regulation NMS, the Commission has provided an
updated interpretation of the meaning of the term proposed rule change from interested
provision of routing services as ‘‘immediate’’ in Rule 600(b)(3) of Regulation NMS, persons.
compared to a third-party broker-dealer when determining whether a trading center
member performing a similar function maintains an ‘‘automated quotation’’ for purposes of I. Self-Regulatory Organization’s
for itself or others. Therefore, the Rule 611 of Regulation NMS, to preclude any Statement of the Terms of Substance of
coding of automated systems or other type of
Commission believes that the intentional device that would delay the action taken
the Proposed Rule Change
Exchange’s proposal as applicable to with respect to a quotation unless such delay is de
routable orders would not be unfairly minimis, or as the Commission noted, so short as FINRA is proposing to amend Rule
discriminatory and would not impose to not frustrate the purposes of Rule 611 by 7730 to reduce the delay period for the
impairing fair and efficient access to an exchange’s Historic TRACE Data Sets relating to
an inappropriate burden on competition quotations). The Commission further stated that
and is therefore consistent with Sections such a de minimis access delay would satisfy Rules
corporate and agency debt securities
6(b)(5) and 6(b)(8) of the Act. 600 and 611 under the updated interpretation even from 18 months to six months.
The Commission acknowledges that, if it involved the use of an ‘‘intentional device’’ to
delay access to an exchange’s quotation. See id. For
The text of the proposed rule change
as commenters have noted, the purposes of determining whether an exchange is available on FINRA’s Web site at
access delay is de minimis, the Commission did not http://www.finra.org, at the principal
mstockstill on DSK30JT082PROD with NOTICES
78 While some commenters expressed concern
set out a specific threshold; however, Commission office of FINRA and at the
that intentional delays in protected quotations may staff has determined that, today, any delay of less
increase market complexity and requested that the than one millisecond is a de minimis amount of Commission’s Public Reference Room.
Commission impose a moratorium on new delay in accessing an exchange’s facilities for
proposals to implement such delays, the purposes of the interpretation. See Commission 83 15 U.S.C. 78s(b)(2).
Commission notes that it carefully considers each Staff Guidance on Automated Quotations under 84 17 CFR 200.30–3(a)(12).
exchange proposal for consistency with the Act. Regulation NMS (June 17, 2016), https://
79 See IEX Rule 11.510. See also IEX Exchange 1 15 U.S.C. 78s(b)(1).
www.sec.gov/divisions/marketreg/automated-
Approval, supra note 73, 81 FR at 41157–60. quotations-under-regulation-nms.htm. 2 17 CFR 240.19b–4.
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Document Created: 2018-11-08 08:49:43
Document Modified: 2018-11-08 08:49:43
| 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 23381 |
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