83 FR 1087 - Self-Regulatory Organizations; Investors Exchange LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change Related to the Optional IEX Aggregate Risk Controls Mechanism

SECURITIES AND EXCHANGE COMMISSION

Federal Register Volume 83, Issue 6 (January 9, 2018)

[Federal Register Volume 83, Number 6 (Tuesday, January 9, 2018)]
[Notices]
[Pages 1087-1090]
From the Federal Register Online  [www.thefederalregister.org]
[FR Doc No: 2018-00157]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-82435; File No. SR-IEX-2017-44]


Self-Regulatory Organizations; Investors Exchange LLC; Notice of 
Filing and Immediate Effectiveness of Proposed Rule Change Related to 
the Optional IEX Aggregate Risk Controls Mechanism

January 3, 2018.
    Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of 
1934 (the ``Act'') \2\ and Rule 19b-4 thereunder,\3\ notice is hereby 
given that, on December 22, 2017, the Investors Exchange LLC (``IEX'' 
or the ``Exchange'') filed with the Securities and Exchange Commission 
(the ``Commission'') the proposed rule change as described in Items I, 
II and III below, which Items have been prepared by the self-regulatory 
organization. The Commission is publishing this notice to solicit 
comments on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 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 11.380 to clarify that 
the optional IEX Aggregate Risk Controls (``ARC'') mechanism will not 
cancel certain orders eligible for execution in the Opening or Closing 
Auction after the applicable Lock-in Time and before the Opening or 
Closing Auction match, respectively.\6\ The Exchange has designated 
this rule change as non-controversial under Section 19(b)(3)(A) of the 
Act \7\ and provided the Commission with the notice required by Rule 
19b-4(f)(6)(iii) thereunder.\8\ The text of the proposed rule change is 
available at the Exchange's website at www.iextrading.com, at the 
principal office of the Exchange, and at the Commission's Public 
Reference Room.
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    \4\ 15 U.S.C. 78s(b)(1).
    \5\ 17 CFR 240.19b-4.
    \6\ See Rules 11.350(c) and (d), governing the IEX Opening and 
Closing Auction, respectively.
    \7\ 15 U.S.C. 78s(b)(3)(A).
    \8\ 17 CFR 240.19b-4(f)(6)(iii).
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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 the 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The purpose of this proposed rule change is to amend Rule 11.380 
(Risk

[[Page 1088]]

Management) to account for Opening and Closing Auctions in IEX-listed 
securities pursuant to Rule 11.350(c) and (d), respectively. Rule 
11.380, entitled Risk Management, describes the optional ARC mechanism 
that is designed to assist IEX Members \9\ and clearing firms \10\ in 
their risk management efforts. IEX does not charge a fee for use of 
ARC. ARC can be configured to provide trading limits based on the gross 
notional exposure for matched and routed trades for a Member or 
clearing firm's broker correspondent across MPIDs, by MPID, by FIX 
session or in combination, per clearing firm relationship or Member, as 
applicable.\11\ Currently, once the gross notional exposure, as elected 
and configured by the Member or clearing firm, has exceeded the pre-
determined limit, IEX will reject new orders and cancel all open orders 
for the applicable MPID(s) and/or FIX session specified. As specified 
in paragraph (a)(2)(A) of Rule 11.380, gross notional exposure is 
calculated as the absolute sum of the notional value of all buy and 
sell trades: equal to the value of executed buys plus the absolute 
value of executed long sells plus the absolute value of executed short 
sells. There is no netting of buys and sales in the same symbol or 
across symbols. Gross notional exposure resets for each new trading 
day.
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    \9\ See Rule 11.160(s).
    \10\ As described in Rule 11.250(a), a clearing firm is an IEX 
Member that is a member of a registered clearing agency. Pursuant to 
IEX Rule 2.160(c)(4) an IEX Member must be a member of a registered 
clearing agency or clear transactions executed on the Exchange 
through another Member that is a member of a registered clearing 
agency.
    \11\ In the case of a Member that is subject to ARC limits set 
by its clearing firm, the Member will be advised of such limits by 
IEX. In the event a Member that is subject to ARC limits set by its 
clearing firm also elects to set ARC limits for its own trading, the 
Exchange will apply both such limits with a lower limit(s) being 
applicable.
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    On August 4, 2017, the Commission approved a proposed rule change 
filed by the Exchange to adopt rules governing auctions in IEX-listed 
securities, including Opening and Closing Auction processes that 
establish IEX Official Opening and Closing Prices for each trading 
day.\12\
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    \12\ See Securities Exchange Act Release No. 81316 (August 4, 
2017), 82 FR 37474 (August 10, 2017) (SR-IEX-2017-10). See also 
Rules 11.350(a)(12) and (10), respectively.
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    Pursuant to Rule 11.350(c)(1), the Exchange allows Users to submit 
orders eligible for execution in the Opening Auction at the beginning 
of the Pre-Market Session,\13\ which begins at 8:00 a.m.\14\ Any orders 
designated for the Opening Auction Book are queued until 9:30 a.m. at 
which time they will be eligible to be executed in the Opening Auction. 
Pursuant to Rule 11.350(a)(1)(A), orders on the Opening Auction Book 
would include MOO orders,\15\ LOO orders,\16\ market orders with a 
time-in-force of DAY,\17\ and limit orders with a time-in-force of DAY 
or GTX.\18\ In addition to orders on the Opening Auction Book, limit 
orders on the Continuous Book \19\ with a time-in-force of SYS or GTT 
are eligible to execute in the Opening Auction (``Pre-market Continuous 
Book'').\20\
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    \13\ See Rule 1.160(z).
    \14\ All times are in Eastern Time.
    \15\ See Rule 11.350(a)(25).
    \16\ See Rule 11.350(a)(21).
    \17\ See Rule 11.190(a)(2)(E)(iii).
    \18\ See Rule 11.190(a)(1)(E)(iii) and (v).
    \19\ See Rule 11.350(a)(4).
    \20\ See Rule 11.190(a)(1)(E)(iv) and (vi).
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    Pursuant to Rule 11.350(c)(1)(B), beginning at the Opening Auction 
Lock-in Time \21\ (i.e., 9:28 a.m.), the Opening Auction will be 
subject to certain ``lock-in'' and ``lock-out'' restrictions. 
Specifically, Users may enter, cancel, or modify Auction Eligible 
Orders until the Opening Auction Lock-in Time, at which time orders on 
the Opening Auction Book can no longer be canceled or modified before 
the Opening Auction match. After the Opening Auction Lock-in Time, the 
Exchange will begin to reject Hyper-aggressive Auction Orders upon 
entry. Pursuant to Rule 11.350(a)(8), Hyper-aggressive Auction Orders 
include market and MOO orders, as well as LOO and limit orders with a 
time in-force of DAY or GTX with a limit price more aggressive than the 
latest Opening/Closing Auction Collar \22\ calculated by the System 
(i.e., buy (sell) orders priced above (below) the latest upper (lower) 
threshold of the Opening/Closing Auction Collar calculated by the 
System). However, LOO orders and limit orders with a time-in-force of 
DAY or GTX will continue to be accepted until the Opening Auction Lock-
out Time \23\ (i.e., 9:29:50 a.m., ten (10) seconds prior to the 
Opening Auction match) so long as they are not Hyper-aggressive Auction 
Orders. Restricting orders on the Opening Auction Book from cancelation 
or modification (i.e., locking them in) and rejecting Hyper-Aggressive 
Auction Orders, while still allowing Users to enter reasonably priced 
LOO and limit orders with a time in-force of DAY or GTX is designed to 
allow Users to continue to express interest for the auction and offset 
imbalances via orders designated for the Auction Book in the minutes 
leading up to the auction match, while minimizing the increase of 
imbalances or large price swings resulting from the cancellation of 
auction eligible orders or the entry of aggressively priced orders to 
the Auction Book during the last two minutes of the auction process.
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    \21\ See Rule 11.350(a)(22).
    \22\ See Rule 11.350(a)(27).
    \23\ See Rule 11.350(a)(23).
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    Similarly, pursuant to Rule 11.350(d)(1), the Exchange allows Users 
to submit orders eligible for execution in the Closing Auction at the 
beginning of the Pre-Market Session, which begins at 8:00 a.m. Any 
orders designated for the Closing Auction Book are queued until 4:00 
p.m. (or such earlier time as the Regular Market Session \24\ ends on 
days that IEX is subject to an early closing) at which time they will 
be eligible to be executed in the Closing Auction. Pursuant to Rule 
11.350(a)(1)(B), orders on the Closing Auction Book would include MOC 
orders \25\ and LOC orders.\26\ In addition to orders on the Closing 
Auction Book, all limit and pegged orders resting on the Continuous 
Book \27\ with a time-in-force of DAY, GTX, GTT, or SYS are eligible 
for execution in the Closing Auction, (``Regular-Market Continuous 
Book'').\28\
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    \24\ See Rule 1.160(gg).
    \25\ See Rule 11.350(a)(24).
    \26\ See Rule 11.350(a)(20).
    \27\ See Rule 11.350(a)(4).
    \28\ The following types of orders are not eligible for 
execution in the Closing Auction: Market orders (except MOC orders) 
and orders with a time-in-force of IOC or FOK, because Market orders 
entered during the Regular Market Session and orders marked IOC or 
FOK do not rest on the Continuous Book, and therefore are not 
eligible for the Closing Auction.
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    Pursuant to Rule 11.350(d)(1)(B), beginning at the Closing Auction 
Lock-in Time \29\ (i.e., 3:50 p.m., or 10 minutes prior to the end of 
the Regular Market Session on days that IEX is subject to an early 
closing), the Closing Auction will be subject to certain ``lock-in'' 
and ``lock-out'' restrictions. Specifically, Users may enter, cancel, 
or modify Auction Eligible Orders until the Closing Auction Lock-in 
Time, at which time orders on the Closing Auction Book can no longer be 
canceled or modified, except that between the Closing Auction Lock-in 
Time and five minutes before the Closing Auction match (e.g., 3:55 
p.m.), LOC and MOC orders can be canceled only if the participant 
requests that IEX correct a legitimate error in the order (e.g., side, 
size, symbol, price, or duplication of an order). LOC and MOC orders 
cannot be canceled or modified at or after five minutes before the 
Closing Auction match (e.g., 3:55 p.m.) for any reason. After the 
Closing Auction Lock-in Time, the Exchange will begin to reject Hyper-
aggressive Auction Orders upon entry.

[[Page 1089]]

Pursuant to Rule 11.350(a)(8)(B), Hyper-aggressive Auction Orders 
include MOC orders, and LOC orders with a limit price more aggressive 
than the latest Opening/Closing Auction Collar calculated by the System 
(i.e., buy orders priced above the latest upper auction collar 
threshold and sell orders priced below the latest lower auction collar 
threshold calculated by the System). However, LOC orders will continue 
to be accepted until the Closing Auction Lock-out Time \30\ (i.e., 
3:59:50 p.m., ten (10) seconds prior to the Closing Auction match) so 
long as they are not Hyper-aggressive Auction Orders. As with the 
Opening Auction, restricting orders on the Closing Auction Book from 
cancelation or modification (i.e., locking them in) and rejecting 
Hyper-Aggressive Auction Orders, while still allowing Users to enter 
reasonably priced LOC orders is designed to allow Users to continue to 
express interest for the auction and offset imbalances via orders 
designated for the Auction Book in the minutes leading up to the 
auction match, while minimizing the increase of imbalances or large 
price swings resulting from aggressively priced orders in the Auction 
Book during the last ten minutes of the auction process.
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    \29\ See Rule 11.350(a)(22).
    \30\ See Rule 11.350(a)(23).
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    IEX proposes to amend Rule 11.380 to clarify that the ARC mechanism 
will not cancel orders eligible for execution in the Opening or Closing 
Auction after the applicable Lock-in Time and before the match. 
Specifically, the Exchange propose to add paragraph (3) to Rule 
11.380(a), to provide that, notwithstanding subparagraphs (1) and (2) 
regarding ARC, after the Opening (Closing) Auction Lock-in Time and 
before the Opening (Closing) Auction match, if a Member exceeds its 
pre-determined ARC limit as configured by the Member or their clearing 
firm, IEX will not cancel such Member's orders if they are on the 
Opening (Closing) Auction Book (``Locked-in Orders'').\31\ Any 
unexecuted portion of Locked-in Orders will be canceled immediately 
after the Opening or Closing Auction match.\32\ The proposed rule 
change is designed to ensure fair and orderly execution of the Opening 
and Closing Auctions, consistent with fair and orderly markets, the 
protection of investors, and the public interest. Specifically, the 
Exchange believes that to the extent a Member has breached its pre-
determined gross notional exposure limit after the Lock-in Time for the 
Opening or Closing Auction, and such Member has Locked-in Orders on the 
Opening or Closing Auction Book (which, as discussed above, are not 
eligible for modification or cancelation pursuant to Rules 11.350(c) 
and (d), respectively), ARC's cancelation of such interest could 
significantly disrupt the price discovery process by generating or 
exacerbating an order imbalance, or causing large price swings in the 
minutes leading into the auction match.
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    \31\ The Exchange notes that if a Member's ARC limit is breached 
after the Opening Auction Lock-In Time, any MOC or LOC orders on the 
Closing Auction Book will be canceled, along with all Pre-market 
Continuous Book orders.
    \32\ The Exchange notes the proposed change is not applicable to 
IPO, Halt, or Volatility Auctions, because their respective auction 
processes do not have ``Lock-in'' or ``Lock-out'' provisions, and 
instead include automatic extensions to allow price discovery to 
continue when there is a market order imbalance, or a security 
experiences price volatility leading into the auction match. See 
Rules 11.350(e) and (f).
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    As described above, IEX rules explicitly provide that orders 
eligible for execution in the Opening or Closing Auction may not be 
modified or cancelled after the applicable Lock-in Time and before the 
auction match. In order to avoid any confusion as to how the ARC 
mechanism would operate in the event that a Member exceeds its pre-
determined ARC limit (as configured by the Member or its clearing firm) 
after the Opening or Closing Lock-in Time and before the match, the 
Exchange believes that it is appropriate to amend Rule 11.380(a) to 
clarify that the ARC mechanism will not cancel such orders.
    The Exchange believes that the Opening and Closing Auctions will 
provide a critical price discovery mechanism that establishes IEX 
Official Opening and Closing Prices for IEX-listed securities, and 
allows market participants to move in and out of sizable positions 
during a single centralized liquidity event. The Exchange also notes 
that the official closing price of all securities is generally the data 
point most closely scrutinized by investors, securities analysts, and 
the financial media, and is used to value and assess management fees on 
mutual funds, hedge funds, and individual investor portfolios. 
Accordingly, the Exchange believes that Opening and Closing Auctions 
should not be disrupted by momentary price dislocations or the creation 
or exacerbation of large imbalances that can be caused by the 
cancelation of Locked-in Orders, and should instead reflect all 
available trading interest in a stable and transparent manner.
    The Exchange also believes that ARC, as described above, provides a 
useful risk management tool for Members and clearing firms. However, 
the Exchange notes that use of ARC by a Member does not automatically 
constitute compliance with IEX rules or SEC rules, nor does it replace 
Member-managed risk management solutions. The Exchange does not require 
Members to use ARC, and Members may use any other appropriate risk-
management tool or service instead of, or in combination with, ARC. 
Furthermore, the Exchange believes that Members should be aware of 
their auction order flow, and clearing firms should be aware of the 
auction order flow of their broker correspondents, in order to 
appropriately manage their risk limits to account for the fact that 
Locked-In Orders cannot be canceled after the Lock-in Time. Thus, the 
proposed rule change is designed to balance the utility of the optional 
ARC functionality that is voluntarily offered by the Exchange free of 
charge, and the interests of fair and orderly markets, the protection 
of investors, and the public interest. Accordingly, the Exchange 
believes the proposed rule change strikes an appropriate balance 
between these two goals by continuing to allow Members and clearing 
firms to utilize ARC to assist with risk management, while protecting 
the Opening and Closing Auctions from undue price dislocation or the 
creation or exacerbation of large imbalances by preventing Locked-in 
Orders from being canceled after the Lock-in Time.
2. Statutory Basis
    IEX believes that the proposed rule change is consistent with the 
provisions of Sections 6(b) \33\ of the Act in general, and furthers 
the objectives of Section 6(b)(5) \34\ of the Act, in particular, in 
that it is designed to prevent fraudulent and manipulative acts and 
practices, to promote just and equitable principles of trade, 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.
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    \33\ 15 U.S.C. 78f.
    \34\ 15 U.S.C. 78f(b)(5).
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    Specifically, the Exchange believes that the proposed rule change 
supports these objectives in that it is designed to ensure fair and 
orderly execution of the Opening and Closing Auctions, as described in 
the Purpose section, by minimizing the creation or exacerbation of 
large imbalances and the resultant auction price dislocations that can 
be caused by the cancelation of Locked-in Orders after the Lock-in Time 
and before the Opening or Closing Auction match. As discussed in the 
Purpose section, while ARC provides a useful risk management tool for 
Members and clearing firms, the proposed rule change

[[Page 1090]]

is designed to balance the utility of the optional ARC functionality 
that is voluntarily offered by the Exchange free of charge, and the 
interests of fair and orderly markets, the protection of investors, and 
the public interest. The Exchange believes the proposed rule change 
strikes an appropriate balance between these two goals by continuing to 
allow Members and clearing firms to utilize ARC to assist with risk 
management, while protecting the Opening and Closing Auctions from 
undue price dislocation or the creation or exacerbation of large 
imbalances by preventing Locked-in Orders from being canceled after the 
Lock-in Time and before the Opening or Closing Auction match.
    Furthermore, the Exchange believes the proposed rule change is 
consistent with the protection of investors and the public interest 
because it will provide enhanced clarity on the operation of the ARC 
mechanism with respect to orders eligible for execution in the Opening 
or Closing Auction after the Lock-in Time and before the auction match, 
thereby eliminating any potential confusion in this regard.

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. To the contrary, the Exchange 
believes that the proposed rule change will increase intermarket 
competition because it is designed to protect the Exchange's Opening 
and Closing Auctions thereby enhancing its ability to compete in the 
market for corporate listings.
    The Exchange also does not believe that the proposal will impose an 
intramarket burden on competition because, notwithstanding the limited 
proposed exception for Locked-in Orders, ARC remains available to all 
Members on a fair and equal basis, and the Exchange continues to 
provide a mechanism to enable Members to manage their risk by 
preventing trading that is erroneous or exceeds a Member's financial 
resources, thereby contributing to the stability of the equities 
markets.

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

    The Exchange has designated this rule filing as non-controversial 
under Section 19(b)(3)(A) \35\ of the Act and Rule 19b-4(f)(6) \36\ 
thereunder. Because the 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 and Rule 19b-
4(f)(6) thereunder.
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    \35\ 15 U.S.C. 78s(b)(3)(A).
    \36\ 17 CFR 240.19b-4(f)(6).
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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 under 
Section 19(b)(2)(B)\37\ of the Act to determine whether the proposed 
rule change should be approved or disapproved.
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    \37\ 15 U.S.C. 78s(b)(2)(B).
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IV. Solicitation of Comments

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

Electronic Comments

     Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
File Number SR-IEX-2017-44 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-2017-44. 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 website (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 website 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 this filing will also be available for inspection 
and copying at the principal office of the Exchange. All comments 
received will be posted without change. Persons submitting comments are 
cautioned that we do not redact or edit personal identifying 
information from comment submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to File Number SR-IEX-2017-44 and should be submitted on 
or before January 30, 2018.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\38\
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    \38\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-00157 Filed 1-8-18; 8:45 am]
 BILLING CODE 8011-01-P