82 FR 41452 - Self-Regulatory Organizations; Investors Exchange LLC; Order Approving a Proposed Rule Change To Introduce a New Market Maker Peg Order

SECURITIES AND EXCHANGE COMMISSION

Federal Register Volume 82, Issue 168 (August 31, 2017)

[Federal Register Volume 82, Number 168 (Thursday, August 31, 2017)]
[Notices]
[Pages 41452-41454]
From the Federal Register Online  [www.thefederalregister.org]
[FR Doc No: 2017-18455]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-81482; File No. SR-IEX-2017-22]


Self-Regulatory Organizations; Investors Exchange LLC; Order 
Approving a Proposed Rule Change To Introduce a New Market Maker Peg 
Order

August 25, 2017.

I. Introduction

    On June 30, 2017, the Investors Exchange LLC (``IEX'' or 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 (i) introduce a new Market Maker Peg Order; 
(ii) amend IEX Rule 11.510(c) to specify connectivity within the 
Exchange System when repricing a Market Maker Peg Order; and (iii) 
amend IEX Rule 11.340(d) to describe how Market Maker Peg Orders will 
be priced in order to comply with the Plan to Implement a Tick Size 
Pilot Program (``Tick Pilot Plan'').\3\ The proposed rule change was 
published for comment in the Federal Register on July 11, 2017.\4\ The 
Commission received no comments on the proposed rule change. This order 
approves the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities and Exchange Act Release No. 74892 (May 6, 
2015), 80 FR 27513 (File No. 4-657). See also Securities and 
Exchange Act Release No. 76382 (November 6, 2015) (File No. 4-657), 
80 FR 70284 (File No. 4-657) (November 13, 2015), which extended the 
pilot period commencement date from May 6, 2015 to October 3, 2016.
    \4\ See Securities Exchange Act Release No. 81078 (July 5, 
2017), 82 FR 32026 (``Notice'').
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II. Description of the Proposed Rule Change

    The Exchange proposes to introduce a new Market Maker Peg Order 
that the Exchange states is designed to promote compliance by market 
makers with the continuous quoting and pricing obligations of IEX Rule 
11.151 (Market Maker Obligations),\5\ in a manner consistent with the 
requirements under Rule 15c3-5 of the Act (``Market Access Rule'') \6\ 
and Regulation SHO.\7\ The Exchange states that ``this order-based 
approach would provide an effective compliance tool to facilitate 
market makers compliance with the requirements of the Market Access 
Rule and Regulation SHO while also providing quotation adjusting 
functionality to its market makers.'' \8\ IEX also states that market 
makers will have control of order origination, as required by the 
Market Access Rule, and retain the ability to make marking and locate 
determinations prior to order entry, as required by Regulation SHO.\9\
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    \5\ IEX Rule 11.151 requires market makers for each stock in 
which they are registered to continuously maintain a two-sided 
quotation within a designated percentage of the National Best Bid 
(``NBB'') and National Best Offer (``NBO'').
    \6\ 17 CFR 240.15c3-5.
    \7\ See Notice, supra note 4, at 32027. See also 17 CFR 242.200 
through 204 (Regulation SHO).
    \8\ See Notice, supra note 4, at 32027.
    \9\ See id.
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    As proposed, the Market Maker Peg Order will be a one-sided limit 
order

[[Page 41453]]

that, similar to other peg orders available to market participants on 
the Exchange,\10\ will be tied or ``pegged'' to a certain price. Unlike 
other peg orders on the Exchange, however, it will be distinguishable 
in that it will always be displayed. Use of the Market Maker Peg Order 
will be limited to the Exchange's registered market makers.\11\ Market 
Maker Peg Orders will have their price automatically set and adjusted 
by the System,\12\ both upon entry and any time thereafter, in order to 
comply with the Exchange's rules regarding market maker quoting and 
pricing obligations.\13\
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    \10\ See Rule 11.190(a)(3).
    \11\ See IEX Rule 11.150.
    \12\ The term ``System'' is defined in IEX Rule 1.160(nn).
    \13\ The Market Maker Peg Order is one-sided, and thus a market 
maker seeking to use Market Maker Peg Orders as a backstop to help 
facilitate compliance with the Exchange's continuous two-sided 
quotation requirements set forth in IEX Rule 11.151 would need to 
submit both a bid and an offer using the order type.
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    Specifically, upon entry or at the beginning of the Regular Market 
Session,\14\ as applicable, the entered bid or offer will be 
automatically priced by the System at the Designated Percentage (as 
defined in IEX Rule 11.151(a)(6)) away from the then current NBB or 
NBO, as applicable, or if there is no NBB or NBO, at the Designated 
Percentage away from the last reported sale from the responsible single 
plan processor in order to comply with the quotation requirements for 
market makers set forth in IEX Rule 11.151(a). Market makers will be 
able to submit Market Maker Peg Orders to the Exchange starting at the 
beginning of the Pre-Market Session, but the order will not be 
executable or automatically priced until the beginning of the Regular 
Market Session, and will expire at the end of the Regular Market 
Session.
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    \14\ The term ``Regular Market Session'' is defined in IEX Rule 
1.160(gg).
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    Upon reaching the Defined Limit (as defined in IEX Rule 
11.151(a)(7)), the price of a Market Maker Peg Order will be adjusted 
by the System to the Designated Percentage away from the then current 
NBB or NBO, or, if there is no NBB or NBO, the order will, by default, 
be the Designated Percentage away from the last reported sale from the 
responsible single plan processor. If a Market Maker Peg Order bid or 
offer moves a specified number of percentage points away from the 
Designated Percentage towards the then current NBB or NBO, its price 
will be adjusted by the System to the Designated Percentage away from 
the then current NBB or NBO, as applicable. If there is no NBB or NBO, 
as applicable, the order will be adjusted by the System to the 
Designated Percentage away from the last reported sale from the 
responsible single plan processor. In the event that pricing a Market 
Maker Peg Order at the Designated Percentage away from the then current 
NBB and NBO, or, if no NBB or NBO, to the Designated Percentage away 
from the last reported sale from the responsible single plan processor, 
would result in the order exceeding its limit price, the order will be 
cancelled or rejected.\15\
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    \15\ According to the Exchange, a limit price entered on a 
Market Maker Peg Order is designed to allow a market maker to 
specify a price at which the initial pricing and any subsequent 
repricing of the order to the Designated Percentage will be 
constrained. See Notice, supra note 4, at 32028.
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    If, after entry, the Market Maker Peg Order is priced based on the 
last reported sale from the single plan processor and such Market Maker 
Peg Order is established as the NBB or NBO, the Market Maker Peg Order 
will not be subsequently adjusted until either there is a new 
consolidated last sale or a new NBB or NBO is established.
    For purposes of the proposed rule, the Exchange will apply the 
Designated Percentage and Defined Limit as set forth in IEX Rules 
11.151(a)(6) and (7), respectively, subject to the following exception: 
For all NMS stocks with a price less than $1 per share that are not 
included in the S&P 500[supreg] Index, Russell 1000[supreg] Index, and 
a pilot list of Exchange Traded Products, the Exchange will use the 
Designated Percentage and Defined Limit applicable to NMS stocks equal 
to or greater than $1 per share that are not included in the S&P 
500[supreg] Index, Russell 1000[supreg] Index, and a pilot list of 
Exchange Traded Products.
    Market Maker Peg Orders will not be eligible for routing pursuant 
to IEX Rule 11.230(b) and are always displayed on the Exchange. 
Notwithstanding the availability of Market Maker Peg Order 
functionality, a market maker will remain responsible for entering, 
monitoring, and resubmitting, as applicable, quotations that meet the 
requirements of IEX Rule 11.151. A new timestamp will be created for 
the order each time that it is automatically adjusted in accordance 
with the proposed rule.
    The Exchange states that the System will be available for entry, 
modification, and cancellation of Market Maker Peg Orders only via the 
POP \16\ pursuant to IEX Rule 11.510(b), and thus will be subject to 
the Inbound and Outbound POP Latency upon entry, accordingly.\17\ In 
addition, the Exchange proposes to amend IEX Rule 11.510(c) (System 
Connectivity) to provide that each time a Market Maker Peg Order is 
automatically adjusted by the System in accordance with proposed IEX 
Rule 11.190(b)(13), all inbound and outbound communications related to 
the modified order instruction will traverse an additional POP between 
the Market Maker Peg Order repricing logic and the Order Book, which is 
subject to an equivalent 350 microseconds of latency.\18\ The Exchange 
states that this approach is designed so that a market maker using a 
Market Maker Peg Order will be in the same position as a market maker 
updating its own quote through the POP.\19\
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    \16\ The term ``POP'' is defined in IEX Rule 11.510(a).
    \17\ See 11.510(b)(1) and (2), respectively, which define the 
``Inbound POP Latency'' as an equivalent 350 microseconds of latency 
from the Exchange-provided network interface at the IEX POP to the 
System at the primary data center; and ``Outbound POP Latency'' as 
an equivalent 350 microseconds of latency from the System at the 
primary data center to the Exchange-provided network interface at 
the IEX POP.
    \18\ The Exchange states that the same ``additional POP'' that 
is used to implement an equivalent 350 microseconds of latency to 
all routable orders sent by the System to the Order Book pursuant to 
Rule 11.510(c)(1) will be used to implement such delay to all 
modified order instructions for Market Maker Peg Orders pursuant to 
proposed Rule 11.190(b)(13). See Notice, supra note 4, at 32028 fn 
19.
    \19\ See Notice, supra note 4, at 32028. For additional details 
concerning IEX's approach to subject all inbound and outbound 
communications related to the repricing of Market Maker Peg Orders 
to POP latency, see Notice, supra note 4, at 32028-29.
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    Finally, the Exchange proposes to amend IEX Rule 11.340 (Compliance 
with Regulation NMS Plan to Implement a Tick Size Pilot) to specify 
that if, pursuant to proposed IEX Rule 11.190(b)(13), a Market Maker 
Peg Order in a Pilot Security \20\ will be priced at an increment other 
than $0.05, the System will round such order to buy (sell) up (down) to 
the nearest permissible increment.\21\ IEX states that this approach is 
designed to ensure that Market Maker Peg Orders for Pilot Securities 
are appropriately priced in $0.05 increments by rounding such orders to 
the nearest permissible increment that is also compliant with the 
minimum market maker quoting obligations set forth in IEX Rule 
11.151.\22\
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    \20\ The term ``Pilot Security'' has the meaning specified in 
the Tick Pilot Plan.
    \21\ The Exchange states that if the rounding methodology 
results in a Market Maker Peg Order being priced to a price below 
$0.05, the order will be cancelled back to the market maker that 
entered the order. See Notice, supra note 4, at 32028.
    \22\ See id.
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    In its proposal, the Exchange noted its intention to implement the 
proposed

[[Page 41454]]

changes during the third quarter of 2017.\23\
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    \23\ See id. at 32029.
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III. Discussion and Commission Findings

    After careful review, the Commission finds that the proposed rule 
change is consistent with the requirements of the Act and the rules and 
regulations thereunder that are applicable to a national securities 
exchange.\24\ Specifically, the Commission finds that the proposed rule 
change is consistent with Section 6(b)(5) of the Act,\25\ 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 facilitating 
transactions in securities, to remove impediments to and perfect the 
mechanism of a free and open market and a national market system, and, 
in general, to protect investors and the public interest. The 
Commission finds that the proposed rule change also is designed to 
support the principles of Section 11A(a)(1) \26\ of the Act in that it 
seeks to assure fair competition among brokers and dealers and among 
exchange markets.
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    \24\ In approving this rule change, the Commission has 
considered the rule's impact on efficiency, competition, and capital 
formation. See 15 U.S.C. 78c(f).
    \25\ 15 U.S.C. 78f(b)(5).
    \26\ 15 U.S.C. 78k-1(a)(1).
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    The Commission finds that the Exchange's proposal is consistent 
with the Act because it provides an optional tool that market makers 
may use as a backstop to help maintain a continuous quote in 
satisfaction of the Exchange's minimum continuous quoting requirements, 
which may assist in the maintenance of fair and orderly markets. The 
Commission notes, however, that notwithstanding the availability of the 
Market Maker Peg Order functionality, the market maker remains 
responsible for meeting its obligations under IEX Rule 11.151, 
including entering, monitoring, and re-submitting, as applicable, 
compliant quotations. At the same time, the Commission finds that the 
proposal is reasonably designed to assist market makers in complying 
with the regulatory requirements of the Market Access Rule and 
Regulation SHO. The Commission notes, however, the Market Maker Peg 
Order does not by itself ensure that the market maker is satisfying the 
requirements of the Market Access Rule or Regulation SHO, including the 
satisfaction of the locate requirements of Rule 203(b)(1) of the Act or 
any exception thereto.
    The Commission believes that the Exchange's proposal to subject all 
inbound and outbound communications related to Market Maker Peg Orders, 
including the automatic repricing of such orders, to POP latency is 
consistent with the Act. In particular, this treatment of the Market 
Maker Peg Order places a market maker using this order type in the same 
position as another market maker placing and updating its own quote 
directly without using the Market Maker Peg Order type--both will be 
subject to the POP and experience the same latency. In addition, this 
approach is consistent with the treatment of other displayed orders on 
the Exchange, all of which are subject to the POP latency.
    Further, the Commission believes that the Exchange's proposal to 
specify how Market Maker Peg Orders will be priced in order to comply 
with the Tick Pilot Plan is consistent with the Act and Rule 608 of 
Regulation NMS \27\ because it implements the Tick Pilot Plan and 
conforms Exchange rules to those requirements.\28\
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    \27\ 17 CFR 242.608.
    \28\ The Commission notes that in this regard IEX's proposal is 
substantially similar to Bats BZX Exchange, Inc. (``Bats'') Rule 
11.27(c)(5).
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    Finally, the Commission notes that other national securities 
exchanges offer similar order types to the Exchange's proposed Market 
Maker Peg Order,\29\ and the Commission received no comments on the 
Exchange's proposed rule change.
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    \29\ See, e.g., Bats Rule 11.9(c)(16), Nasdaq Stock Market LLC 
Rule 4702(b)(7), and Bats EDGX Exchange, Inc. Rule 11.8(e).
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IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\30\ that the proposed rule change (SR-IEX-2017-22), be and hereby 
is, approved.
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    \30\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\31\
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    \31\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-18455 Filed 8-30-17; 8:45 am]
 BILLING CODE 8011-01-P