I. Introduction

On December 16, 2022, the Financial Industry Regulatory Authority, Inc. (“FINRA”) filed with the Securities and Exchange Commission (“Commission” or “SEC”), pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (“Exchange Act”) ^[1] and Rule 19b-4 thereunder,^[2] a proposed rule change (the “Proposal”) to add IntelligentCross ATS (“IntelligentCross”) as a new entrant to the Alternative Display Facility (“ADF”). The proposed rule change was published for comment in the Federal Register on December 27, 2022.^[3] On February 9, 2023, the Commission extended the time 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 to March 27, 2023.^[4] On March 24, 2023, the Commission initiated proceedings under Section 19(b)(2)(B) of the Exchange Act ^[5] to determine whether to approve or disapprove the proposed rule change.^[6] On June 21, 2023, the Commission extended the time period for Commission action to August 24, 2023.^[7] The Commission has received comments on the proposed rule change.^[8] This order approves the proposed rule change.

II. Description of the Proposed Rule Change

The ADF is a quotation collection and trade reporting facility that provides ADF participants ( i.e., ADF-registered market makers or electronic communications networks) ^[9] the ability to post quotations, display orders and report transactions in NMS stocks ^[10] for submission to the securities information processors (“SIP”) for consolidation and dissemination to vendors and other market participants.^[11] The ADF is also designed to deliver real-time data to FINRA for regulatory purposes, including enforcement of requirements imposed by Regulation NMS.^[12]

In particular, Regulation NMS includes an order protection rule that provides that a trading center “shall establish, maintain, and enforce written policies and procedures that are reasonably designed to prevent trade-throughs on that trading center of protected quotations in NMS stocks” that do not fall within one of the exceptions set forth in the rule.^[13] For quotations to be protected under the rule, they must be, among other things, executable “immediately and automatically” against an incoming immediate-or-cancel (“IOC”) order.^[14] In 2016, the Commission interpreted Regulation NMS's immediacy requirement to allow for “an intentional access delay that is de minimis — i.e., a delay so short as to not frustrate the purposes of Rule 611 by impairing fair and efficient access to an exchange's quotations.” ^[15] The Commission stated that “[i]n the context of Regulation NMS, the term `immediate' does not preclude all intentional delays regardless of their duration, and such preclusion is not necessary to achieve the objectives of Rule 611. As long as any intentional delay is de minimis — i.e., does not impair fair and efficient access to an exchange's protected quotations—it is consistent with both the text and purpose of Rule 611.” ^[16]

In addition, Rule 610 of Regulation NMS requires that a trading center displaying quotations in an NMS stock through a self-regulatory organization (“SRO”) display-only facility (such as the ADF) “provide a level and cost of access to such quotations that is substantially equivalent to the level and cost of access to quotations displayed by SRO trading facilities in that stock.” ^[17] Rule 610 also requires that a trading center displaying quotations in an NMS stock through an SRO display-only facility not impose unfairly discriminatory terms that prevent or inhibit any person from obtaining efficient access to such quotations through a member, subscriber, or customer of the trading center.^[18] In articulating this standard, the Commission stated that the level and cost of access would “encompass both (1) the policies, procedures, and standards that govern access to quotations of the trading center, and (2) the connectivity through which market participants can obtain access and the cost of such connectivity.” ^[19] The nature and cost of connections for market participants seeking to access an ADF participant's quotations would need to be substantially equivalent to the nature and cost of connections to SRO trading facilities.^[20]

In evaluating whether a prospective ADF participant meets the access standards under Rule 610, Regulation NMS requires FINRA to submit a proposed rule change under Section 19(b) of the Exchange Act in order to add the new ADF participant.^[21] Accordingly, FINRA is proposing to add IntelligentCross as a new ADF participant.^[22] IntelligentCross is an NMS stock alternative trading system (“ATS”) operating pursuant to an effective Form ATS-N.^[23] IntelligentCross currently operates three separate limit order books with optional display capability distinguished by different fee structures—the ASPEN fee/fee limit order book (“ASPEN Fee/Fee book”), ASPEN maker/taker limit order book, and ASPEN taker/maker limit order book (collectively, “IntelligentCross ASPEN”).^[24] FINRA ( printed page 59959) states that the ASPEN Fee/Fee book would be the only order book displaying orders on the ADF.^[25]

IntelligentCross provided FINRA with a summary of its policies and procedures regarding access to its quotations in an NMS stock displayed on the ADF, and a summary of its proposed fees for such access.^[26] Based on IntelligentCross' representations, FINRA believes that IntelligentCross' proposed level and cost of access to quotations on the ASPEN Fee/Fee book is substantially equivalent to the level and cost of access to quotations displayed by an SRO trading facility, both in absolute and relative terms.^[27] FINRA also believes that the quotations displayed on ASPEN Fee/Fee book would meet the definition of an “automated quotation” under Regulation NMS.^[28]

In particular, FINRA states that IntelligentCross only permits registered broker-dealers to be subscribers to IntelligentCross, and subscribers can interact with the ASPEN Fee/Fee book using conventional order types.^[29] The ASPEN Fee/Fee book will accept incoming intermarket sweep orders (“ISOs”) ^[30] once it displays orders on the ADF.^[31]

FINRA states that the ASPEN Fee/Fee book establishes a matching schedule ^[32] using an overnight optimization process based on historical performance measurements from prior days' matches across all three IntelligentCross ASPEN books.^[33] The match event time is randomized within the time band throughout the course of the trading day and any order that arrives prior to a match event (and that has not been cancelled, become unmarketable, or repriced) ^[34] is eligible to participate in the next match event for that security.^[35]

IntelligentCross has represented to FINRA that, in the following cases, an incoming order on ASPEN Fee/Fee book may not execute against a resting order at match event time when: (i) an existing resting order cancels prior to the next match event; (ii) an incoming order is cancelled prior to the next match event; (iii) the NBBO moves between the time an order is received and the next match event takes place, making either the incoming order or the resting order non-marketable; or (iv) the NBBO changed before the next match event and pegged orders were repriced to the new NBBO, making the incoming order or the resting pegged order non-marketable.^[36]

FINRA states that the ASPEN Fee/Fee book's matching engine operates near-continuously and that, when a new order arrives in the ASPEN Fee/Fee book, it would participate in the next scheduled match event by interacting with existing orders in the order book within a maximum time capped at 900 microseconds.^[37]

FINRA states that for each match event time, the ASPEN Fee/Fee book retrieves the NBBO and processes all the orders that have arrived and have not been cancelled in price-time priority.^[38] No subscriber to IntelligentCross (or non-subscriber accessing IntelligentCross through a subscriber) is given any priority through the matching process and the matching process is blind to the identity of the subscriber.^[39] All matches are reported immediately to subscribers and the SIPs via a FINRA trade reporting facility and disseminated on IntelligentCross' market data feed.^[40]

FINRA further states that IntelligentCross utilizes a fee/fee pricing model for activity on the ASPEN Fee/Fee book where both sides are charged the same fee ^[41] for transactions.^[42] Eligible displayed orders are published via a free market data feed (“IQX Market Data Feed”).^[43] IntelligentCross does not charge connectivity fees to its subscribers.^[44] FINRA states that firms wishing to access liquidity on the ASPEN Fee/Fee book may connect in a variety of ways.^[45] Firms that are IntelligentCross subscribers can connect to the ASPEN Fee/Fee book via a Financial Information Exchange (“FIX”) connection.^[46] Such access is available to subscribers through an internet protocol address via communications that are compliant with the FIX application programming interface (“API”) provided by IntelligentCross.^[47] IntelligentCross does not accept orders via any other forms of communication ( e.g., telephone, email, instant message).^[48] IntelligentCross allows a subscriber to determine its level of connectivity and ( printed page 59960) does not tier or discriminate among subscribers.^[49]

Additionally, FINRA states that IntelligentCross has established and maintains policies and procedures related to periodic system capacity reviews and tests to ensure future capacity, as well as policies and procedures to identify potential weaknesses and reduce the risks of system failures and threats to system integrity.^[50] FINRA also states that, for purposes of displaying orders through the ADF, IntelligentCross' policies and procedures require continuous monitoring of the ASPEN Fee/Fee book's connections with an SRO display-only facility and, in the event that the ASPEN Fee/Fee book loses connection with the ADF, IntelligentCross has contingency plans in place, including removing ( i.e., “zeroing out”) all quotes previously published by the system to the ADF and notifying its subscribers of such interruption.^[51]

In the event that IntelligentCross makes a material change to the policies and procedures governing access to IntelligentCross, including a change to its fees, IntelligentCross has represented to FINRA that it will submit the changes made to FINRA, and acknowledges that FINRA will post on its website an amended description of IntelligentCross' policies, procedures and fees governing access.^[52]

Finally, FINRA states that all members in good standing of an SRO would be eligible to become a subscriber to the ASPEN Fee/Fee book and would be subject to eligibility requirements set by IntelligentCross.^[53]

III. Discussion and Commission Findings

After careful review, the Commission finds that the proposed rule change is consistent with the requirements of the Exchange Act and the rules and regulations thereunder applicable to a national securities association.^[54] Specifically, the Commission finds that the proposed rule change is consistent with the provisions of Section 15A(b)(6) of the Exchange Act,^[55] which requires, among other things, that FINRA rules must be designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, and, in general, to protect investors and the public interest. The Commission also finds that the proposed rule change by FINRA to allow IntelligentCross to operate as an ADF participant is consistent with Rule 610(b) of Regulation NMS,^[56] which requires that any trading center that displays quotations in an NMS stock through an SRO display-only facility (such as the ADF) provide a level and cost of access to such quotations that is substantially equivalent to the level and cost of access to quotations displayed by an SRO trading facility in that stock, and not impose unfairly discriminatory terms that would prevent or inhibit any person from obtaining efficient access to such quotations through a member, subscriber, or customer of the trading center. In addition, the Commission finds that IntelligentCross would operate as an automated trading center, in compliance with Rule 600(b)(7) of Regulation NMS,^[57] such that its quotations would be “automated” under Rule 600(b)(6),^[58] and thus “protected” under Rule 611 of Regulation NMS.^[59]

The Commission received several comment letters opposing the Proposal,^[60] a comment letter supporting the Proposal,^[61] and responses by FINRA and IntelligentCross.^[62] Commenters opposing the Proposal generally state the Proposal lacks sufficient detail necessary for the Commission to approve the Proposal and raise concerns about whether the Proposal: (1) complies with the requirements of Regulation NMS; (2) should contain additional processes for the ongoing operations of IntelligentCross while it is an ADF participant; (3) provides a sufficient implementation period for the industry to adopt changes due to the addition of IntelligentCross as an ADF participant; and (4) has provided information that the ADF has appropriate technological infrastructure.^[63]

1. Compliance With Regulation NMS and Ongoing Obligation To File

a. Definition of Automated Quotation and Protected Quote Status

As discussed above, FINRA believes that the quotations displayed on the ASPEN Fee/Fee book would meet the definition of an “automated quotation” under Regulation NMS,^[64] and thus “protected” under the Order Protection Rule.^[65]

Some commenters raise concern that IntelligentCross' displayed quotations do not meet the Commission's definition of “automated quotations” due to the intentional delay built into IntelligentCross' delayed matching process.^[66] In particular, some commenters state that the Proposal does not demonstrate how the intentionally delayed matching process is de minimis.^[67] Some commenters state that the Proposal wrongly assumes that any delay under a millisecond is de minimis.^[68] One commenter questions whether IntelligentCross' delayed matching process “frustrates the purposes of Rule 611 by impairing fair and efficient access” as required by the Commission Interpretation of Automated Quotations.^[69]

In response, IntelligentCross states that its matching process is consistent with the Commission Interpretation of Automated Quotations.^[70] IntelligentCross states that, while the Commission did not establish a “bright line de minimis threshold,” the ASPEN Fee/Fee book's matching engine “operates near-continuously and when a new order arrives in the ASPEN Fee/Fee book, it will participate in the next scheduled match event by interacting with existing orders in the order book within a maximum time capped at 900 microseconds.” ^[71] The Commission also disagrees with commenters who assert that as a result of IntelligentCross' matching system, quotations displayed on the ASPEN Fee/Fee book would not meet the definition of an “automated quotation” under Regulation NMS. The Commission issued a final interpretation that, when determining whether a trading center maintains an “automated quotation” for purposes of Rule 611 of Regulation NMS, the term “immediate” in Rule 600(b)(6) precludes any coding of automated systems or other type of intentional device that would delay the action taken with respect to a quotation unless such delay is de minimis — i.e., so short as to not frustrate the purposes of Rule 611 by impairing fair and efficient access to an exchange's quotations.^[72] In accordance with that interpretation, the Commission does not believe that IntelligentCross' delayed matching functionality precludes IntelligentCross from maintaining an automated quotation. Because the delay imposed by IntelligentCross is well within geographic and technological latencies experienced today that do not impair fair and efficient access to an exchange's quotations or otherwise frustrate the objectives of Regulation NMS, the Commission believes that such intentional delay will not frustrate the purposes of Regulation NMS by impairing fair and efficient access to IntelligentCross' quotations.^[73] Accordingly, the delay in IntelligentCross' matching functionality (a randomized delay of up to 900 microseconds) is de minimis and thus IntelligentCross can maintain a protected quotation.^[74]

One commenter states that the “novel features” of the Proposal have not been adequately assessed to provide the Commission with sufficient basis to make an affirmative finding that the Proposal is consistent with the Exchange Act.^[75] One commenter states that IntelligentCross should provide additional transparency on the operation of its matching process.^[76] This commenter states that all markets, including ATSs and registered exchanges, “should be subject to an equivalent level of transparency and review” regarding “how their quotes may be accessed and displayed and how executions involving those quotes may occur.” ^[77] This commenter also states that market participants need enough information “so that those who wish to do so can replicate how the mechanism will affect results in various market conditions.” ^[78] Additionally, this commenter states that it is unclear whether market participants could alter their routing strategies to account for IntelligentCross' “randomized delay in the same way they can account for static ( printed page 59962) and geographic delays.” ^[79] Similarly, another commenter states that the randomized nature of the matching process “creates significant challenges for best execution for brokers” and prevents “predictable staging of order sending activity by brokers across multiple venues,” resulting in “significant risk of material information leakage and quote fading—leading to materially worse execution quality for investors.” ^[80]

One commenter raises concerns about the relative ability of different market participants to react to market price movements in deciding whether to cancel after their orders have been accepted by the IntelligentCross system and during the delay before execution.^[81] This commenter believes that some “participants could use their superior ability to track price changes on other markets within the variable delay period to determine whether to cancel their orders.” ^[82] This commenter asserts that this is a unique challenge that market participants do not face in managing the orders that they send to other protected quote venues.^[83]

Some commenters state that the ability for liquidity providers to cancel displayed ADF orders through IntelligentCross' functionality at any time raises questions about whether its functionality is consistent with Regulation NMS and prior Commission guidance.^[84] For example, some commenters state that they are concerned that a resting limit order could be cancelled at any time (even after the incoming order is received) prior to the match, including when such incoming orders are routed to IntelligentCross consistent with regulatory obligations under the Order Protection Rule.^[85] One commenter states, according to data it compiled on typical routing latencies using fiber infrastructure between datacenters, a liquidity provider on IntelligentCross has ample time to observe the trades executed on other U.S. equities exchanges before determining whether to cancel its own resting order.^[86] The commenter states that this option to cancel benefits liquidity providers on IntelligentCross at the expense of liquidity takers and hurts market competition across venues.^[87] The commenter further states that the non-match event data stated in the Proposal is a “material” figure that “likely understates expected cancellation rates” if market participants are required to route order flow to IntelligentCross.^[88] Another commenter states that order posters in the ASPEN Fee/Fee book have the ability to immediately cancel their orders, whereas order transmitters seeking to interact with that interest at the NBBO do not have the same ability to cancel their orders due to their regulatory obligation to attempt to access the protected quote.^[89] One commenter asserts that the IntelligentCross “price-sliding” mechanism to avoid locking its own market can result in quotations that may be “impossible to access” for incoming orders.^[90] Another commenter states that the Proposal “lacks basic information, such as whether the speed bump is symmetric or asymmetric and how it operates in practice.” ^[91] One commenter states that it has concerns about IntelligentCross creating a new protected NBB or NBO for orders that are pending a match and for which new, incoming orders will be “very likely inaccessible.” ^[92] The commenter provides a hypothetical example to support its assertion where, after a number of events occur in the markets, the NBBO is made up solely of two 100 share orders on IntelligentCross such that, if another market participant responded to the quote, the new participant would be sequentially added to the queue and would not trade.^[93] Another commenter requests more transparency on how the consolidated market data feeds would reflect the state of IntelligentCross' protected quotes.^[94]

In its response letters, IntelligentCross states that it disagrees with the characterizations made by commenters of the IntelligentCross matching process.^[95] Specifically, IntelligentCross states that its matching process is “completely symmetric in nature and does not favor a particular side of the trade; there is no differential treatment of certain market participants.” ^[96] IntelligentCross states that both sides—the buyer and the seller—“can cancel or update their orders at any time prior to a match” and “must equally wait for the next scheduled match event to occur.” ^[97] It states that no information is provided to any market participant regarding the status (or existence) of the ( printed page 59963) matchable state or the match event.^[98] IntelligentCross also emphasizes that the regulatory obligations attendant to “protected quotations” under Regulation NMS do not provide a guarantee of an execution.^[99] Accordingly, IntelligentCross states that a market participant that routes an order to any market with the intention of matching against a displayed order may not ultimately receive an execution.^[100] Moreover, IntelligentCross disagrees with a commenter's statement that non-match events on IntelligentCross are “material” ^[101] and states that there is no evidence to the effect that non-match rates would increase if market participants are required to route order flow to IntelligentCross.^[102] IntelligentCross states that “it is just as likely that cancellations will decrease” as “the IntelligentCross order book will be in a matchable state more frequently.” ^[103]

IntelligentCross also disagrees with commenters ^[104] that express concern regarding the ability for liquidity providers to cancel their order in IntelligentCross prior to a match event and believe it to be detrimental to the markets and investors.^[105] IntelligentCross' stated purpose is to provide a “venue that optimizes price discovery, achieves maximum price stability after trades, and provides an opportunity for market participants to improve performance and achieve best execution by reducing market impact and adverse selection.” ^[106] IntelligentCross points to its own user experience on the platform, and data specifying that “in January 2023, ASPEN Fee/Fee [book] improved the NBBO over 5.3 million times per day (for orders of round-lot size or larger on arrival).” ^[107] Additionally, IntelligentCross states that any “trade-offs” due to the manner of IntelligentCross' matching process “certainly do not frustrate the purpose of Regulation NMS by impairing fair and efficient access to IntelligentCross' displayed quotations.” ^[108] IntelligentCross also states that in the scenario where the NBBO moves between the time an order is received and the next match event takes place, depending on the direction the NBBO moves, the liquidity taker may end up better off not executing at the old NBBO.^[109] Additionally, the “price sliding mechanism” raised by one commenter ^[110] is designed to address Rule 610 requirements to establish, maintain, and enforce specific written rules that are generally aimed at limiting the display of quotations that lock or cross any protected quotations in an NMS stock.^[111] Moreover, IntelligentCross states that there is no basis for the assumption by a commenter ^[112] that there is a significant risk of information leakage and quote fading due to an IntelligentCross protected quote.^[113]

With respect to commenter concerns regarding “speed” in the markets related to the ability to cancel on IntelligentCross,^[114] IntelligentCross states that speed advantages already exist for faster market participants related to executions on all markets, including those currently with protected quotations such as exchanges.^[115] Accordingly, Intelligent states that “it is unrealistic to claim that there is no speed advantage across all trading markets, including on continuous exchange markets.” ^[116]

With respect to commenter concerns regarding “predictability” and the ability for market participants to “replicate” the matching process due to the randomization of the matching delay,^[117] IntelligentCross responds that the randomization of the matching process “is what contributes to [the] matching process not discriminating in favor of a particular market participant or category of participants, and also makes any would-be manipulation of the matching process difficult by reducing the potential for `systematical gaming.' ” ^[118]

In addressing commenter concerns regarding any difficulties for market participants to adapt to an IntelligentCross protected quote,^[119] IntelligentCross states it is already widely used by most major broker-dealer and electronic trading firms.^[120] IntelligentCross states that these firms and others “make routing decisions every day in response to the numerous order types already in place by exchanges, as well as implement a plethora of routing strategies to interact with, and respond to, the displayed liquidity in the markets.” ^[121] IntelligentCross further states that “brokers must currently consider and account for technological and geographic differences and latencies when routing.” ^[122] Additionally, ( printed page 59964) IntelligentCross points to the “technological capabilities of order routers today” and believes that a market participant “should not have difficulties in configuring their routers to adopt to the IntelligentCross matching process.” ^[123] IntelligentCross states that market participants already use “tools to manage order routing and repricing on the scale of hundreds of microseconds” such as “mechanisms that adapt to the changing technology on trading venues,” including adaptations that address delay periods.^[124] Accordingly, IntelligentCross believes that any market participants should be able to account for the IntelligentCross protected quote without significant or material changes to its technology and without adopting any change that would frustrate the purposes of Regulation NMS.^[125]

In response to questions regarding how IntelligentCross protected quotes would be reflected in consolidated market data feeds,^[126] IntelligentCross states that it will provide any quotes or quote updates to the ADF no later than when it is disseminated via the IQX Market Data Feed.^[127] In response to commenter questions regarding additional transparency of the matching process,^[128] IntelligentCross states that it publicly posts its Form ATS-N disclosures on EDGAR.^[129] IntelligentCross also states that in calculating its matching schedules, the firm uses an “overnight optimization process” that uses, among other things, historical performance measurements from prior days' matches, and each security has an individualized matching schedule.^[130] IntelligentCross further states that it has policies and procedures in place to oversee and to review the calculation and application of its matching schedules.^[131] In particular, IntelligentCross states that it performs reviews on a daily basis to ensure that its matching parameters are within the correct time bands,^[132] and, on a weekly basis, reviews performance of its systems “to ensure that it is accomplishing its objectives and to ensure that the matching process does not act in a discriminatory manner in favor of or against any participant or category of participants.” ^[133]

The other concerns related to the IntelligentCross matching process and the qualification of its displayed quotes as a protected quotation, have been adequately addressed in the response letters by IntelligentCross and FINRA, as well as in the Proposal, such that the Proposal is consistent with the requirements of the Exchange Act and the rules and regulations applicable to a national securities association. Specifically, with respect to requests for more transparency and detail on access to its displayed quotations and the differential treatment of market participants,^[134] IntelligentCross has provided more detail, demonstrating that its matching process is symmetric in nature and does not favor a particular side of the trade.^[135] Match schedules are defined by minimum/maximum time bands for each security (between 150 and 900 microseconds) based on an overnight optimization process that uses historical performance measurements from prior days' matches. The time of the actual match event is randomized within the match event band throughout the course of the trading day. As described by IntelligentCross, the delayed matching process is calibrated to reduce market impact and adverse selection for market participants, thereby fostering increased access to displayed liquidity through the ADF and more competition among markets to the benefit of all market participants. Both sides—the buyer and the seller—can cancel their orders at any time prior to a match and must wait equally for the next scheduled match event to occur in price-time priority, thus not resembling an asymmetric delay as supposed by certain commenters.^[136] The IntelligentCross matching process provides both sides a fair opportunity to manage their orders, as both sides are blind to the length of the delay once an order is accepted by the system or where the order sits in the delay mechanism ( e.g., whether there are 5 microseconds or 500 microseconds remaining before a match event takes place), and neither side knows when submitting their order which direction the market may move if there are changes in the NBBO that occur during the delay. Accordingly, depending on the side of the market the NBBO moves, the buyer or seller may be as equally likely to attempt to cancel their orders prior to a match event as there is not a systematized delay on one side of a trade, and thus the matching process does not impose unfairly discriminatory terms against efficient access to displayed quotations.

With respect to more information on “fill rates and execution quality” on IntelligentCross in assessing protected quotation status to the market, IntelligentCross provided additional data highlighting execution quality metrics for the first six months of 2023.^[137]

The Commission also agrees with IntelligentCross that the regulatory obligations associated with protected quotations under Regulation NMS do not provide a guarantee of an execution, which commenters appear to suppose when highlighting non-match events or cancellation rates.^[138] While market participants accessing the IntelligentCross protected quotation would be subject to IntelligentCross' delayed, randomized matching process, the Commission believes, as stated above, that the length of ( printed page 59965) IntelligentCross' specific delay or its randomized nature would not frustrate the purposes of Regulation NMS by impairing fair and efficient access to IntelligentCross' displayed quotations. Furthermore, as described above, the information provided in the Proposal, the response letters by IntelligentCross and FINRA, and the availability of further information on IntelligentCross' publicly posted Form ATS-N and website, have addressed transparency concerns surrounding the IntelligentCross matching process such that the information will promote fair and efficient access to its quotations.

The Commission is also unpersuaded by comments regarding the difficulties for market participants to adapt to an IntelligentCross protected quote.^[139] With respect to ISOs,^[140] the Commission believes that market participants can satisfy their obligations under Regulation NMS by simply routing ISOs to IntelligentCross' protected quotations, as necessary. While some commenters state that the IntelligentCross matching mechanism could pose challenges for market participants to deploy certain order routing strategies or lead to information leakage,^[141] IntelligentCross is already widely used by most major broker-dealer and electronic trading firms,^[142] which no other commenter disputed, and the commenters did not present evidence that the current considerations that market participants face when interacting with IntelligentCross' liquidity and displayed liquidity in other markets would be appreciably affected by the Proposal.

b. Compliance With Rule 610 of Regulation NMS and Ongoing Obligations

As discussed above, FINRA believes that IntelligentCross' proposed level and cost of access to quotations on the ASPEN Fee/Fee book is substantially equivalent to the level and cost of access to quotations displayed by an SRO trading facility, both in absolute and relative terms.^[143] Two commenters raise questions regarding the regulatory process in connection with proposed changes to IntelligentCross' operations and fees associated with displaying protected quotations on the ADF.^[144] One commenter states that there is currently no regulatory process for ongoing operational changes at non-exchange venues with protected quotes and intentional access delays.^[145] This commenter states that without the exchange notice and comment process in connection with changes to operations, it seeks additional information on the regulatory process for managing such changes at IntelligentCross and the ADF.^[146] One commenter states that even if IntelligentCross agrees to a method of review for material changes as an ADF participant, IntelligentCross does not offer suggestions about how rule filing and review process would work or suggest any alternatives.^[147] This commenter also states that FINRA has made no representation in the record to indicate it would be willing to undertake a rule filing obligation with respect to material changes by IntelligentCross as an ADF participant.^[148]

One commenter states that if the Commission chooses to permit any trading center to disseminate quotations using the ADF, it must condition approval with limitations that are consistent with limitations imposed upon other trading venues ( i.e., exchanges) whose quotations have protected quotation status.^[149] In particular, this commenter states that approval of the Proposal should be conditioned upon IntelligentCross: (1) continuing to not charge for market data or connectivity; (2) having fees and rebates (if adopted) that are at or below those charged by exchanges; (3) notifying the Commission and FINRA of all changes related to the ASPEN Fee/Fee book; and (4) describing how any such changes are consistent with the ASPEN Fee/Fee book quotations continuing to be included as a protected quotation is consistent with the Exchange Act and protection of investors.^[150] This commenter also states that both the Commission and FINRA should detail how they would “gather, review, analyze, and publish for public consideration” any changes to IntelligentCross' policies and procedures related to the Proposal, as well as describe how they would intervene to block or disallow any concerning changes in IntelligentCross' policies and procedures related to the ADF.^[151] Overarching this commenter's concerns with the Proposal are that any changes to the ASPEN Fee/Fee book rules and operations should be treated the same for regulatory purposes as if they were changes made by an exchange, including that they are put out for notice and public comment, and subject to Commission disapproval.^[152]

In its response letters, IntelligentCross points to its current regulatory responsibilities associated with being a registered broker-dealer and an ATS, as well as the Regulation NMS obligations attached to being an ADF participant.^[153] FINRA also states that its rules set forth requirements applicable to an ADF participant and require that such participants meet the requisite standards on an ongoing basis.^[154] IntelligentCross states its belief that the level and cost of access to its quotations complies with Rule 610 as it is substantially equivalent to the level and cost of access to quotations displayed by SRO trading facilities and will not impose burdens on market participants.^[155] Additionally, IntelligentCross states that it does not impose unfairly discriminatory terms that would prevent or inhibit any person from accessing its quotations through a subscriber of the trading ( printed page 59966) center.^[156] Specifically, IntelligentCross represents that “it does not tier or discriminate among subscribers” and any registered US broker-dealer in good standing of an SRO may become a subscriber of IntelligentCross.^[157]

IntelligentCross also states that, while an ATS is not subject to the same regulatory requirements as exchanges, it also does not share the same benefits as exchanges.^[158] However, IntelligentCross states that it does not object to notifying the Commission and FINRA in advance if changes are made to the level and cost of access to the ASPEN Fee/Fee book impacting the display of IntelligentCross' protected quotations on the ADF, or the operation of the ASPEN Fee/Fee book impacting the provision of the protected quote.^[159] IntelligentCross also states that it does not object to an “appropriately structured process” to engage the Commission in evaluating and commenting on such changes.^[160] Further, IntelligentCross acknowledges that it may be subject to other regulatory obligations in the future depending on changes to its platform or its volume.^[161] But IntelligentCross disagrees with the commenter's recommendation to condition IntelligentCross' approval on “continuing to not charge for market data or connectivity” ^[162] given that it believes such a requirement would not be consistent with the limitations imposed on exchanges and the “substantially equivalent” basis under Rule 610.^[163]

FINRA, as the SRO responsible for enforcing compliance by ADF participants with the requirements of the Exchange Act, must act as the “gatekeeper” for the ADF, and, as such, is required to closely evaluate the extent to which ADF participants, including IntelligentCross and any future ADF participants, meet the access standards of Rule 610.^[164] As part of this process, the Commission stated in the NMS Adopting Release that NASD (now FINRA) would be required to submit a proposed rule change under Section 19(b) of the Exchange Act in order to add a new ADF participant.^[165] If an ADF participant is not complying with the access standards under Rule 610, FINRA has the responsibility to stop publishing the participant's quotations until the participant comes into compliance.^[166] The Commission believes that a reasonable and appropriate method for FINRA to satisfy its ongoing responsibility for ensuring that an ADF participant is complying with Rule 610 is to submit material changes that affect access, including the level and cost of access, to quotations displayed by the ADF participant as proposed rule changes under Section 19(b) of the Exchange Act that would be subject to notice and comment.

The fees and the policies and procedures governing access to protected quotations displayed on the ADF by IntelligentCross as described above would provide market participants with fair and efficient access and are not unfairly discriminatory such that they would prevent a market participant from obtaining efficient access to such quotations. All members in good standing of an SRO are eligible to become IntelligentCross subscribers, and both subscribers and non-subscribers may access IntelligentCross liquidity. IntelligentCross offers both subscribers and non-subscribers multiple options to access its liquidity. In addition, IntelligentCross has policies and procedures that require it to respond to orders by non-subscribers as promptly as it responds to orders by subscribers and allow for non-subscribers to be able to automatically execute against quotations displayed by the system. IntelligentCross does not assess charges that may be assessed by exchanges, such as membership fees, trading rights fees, risk gateway fees, and other miscellaneous fees. IntelligentCross' proposed level and cost of access to quotations on the ASPEN Fee/Fee book is substantially equivalent to the level and cost of access to quotations displayed by an SRO trading facility, both in absolute terms and relative to its trading volume.^[167] Both sides—the buyer and the seller—can cancel or update their orders at any time prior to a match and both must equally wait for the next scheduled match event to occur. In addition, the Commission does not believe that the level of cancellation during the delay imposes unfairly discriminatory terms that prevent or inhibit any person from obtaining efficient access to such quotations as it has been shown that non-match events occur in a minority of cases, and market participants receive an execution the majority of the time.^[168] IntelligentCross has policies and procedures in place to oversee and review the calculation and application of its matching schedules to help ensure the matching process does not act in a discriminatory manner in favor of or against any market participants.^[169] Furthermore, the Commission believes that the cancellation rate alone does not demonstrate that IntelligentCross imposes unfairly discriminatory terms given that the ability of any market participant to successfully execute against any particular displayed quote is subject to a number of factors and is not guaranteed on any market, as at any time any market participant can be seeking to execute against an order that is being repriced, changed, cancelled, or executed by a different market participant.^[170]

Further, as discussed above, in the event that IntelligentCross intends to make a material change to the policies and procedures governing access to IntelligentCross, including a change to its fees, it has represented that it will submit the changes made to FINRA, and acknowledges that FINRA will post on its website an amended description of IntelligentCross' policies, procedures, and fees governing access.^[171] In response to comments on the lack of a notice and comment process in connection with the potential for future material changes to the operations and ( printed page 59967) fees of IntelligentCross as an ADF participant,^[172] FINRA has represented to the Commission that it will file such material changes as a proposed rule change with the Commission under Section 19(b) of the Exchange Act.^[173] Under this process, the Commission would review the proposed rule change and consider any public comments received. In addition, changes to the operations of IntelligentCross, as well as its disclosures on its public Form ATS-N, are subject to the requirements of Rule 304 of Regulation ATS. Accordingly, the Commission believes that commenter concerns regarding the regulatory process for proposed changes to IntelligentCross' operations and fees associated with displaying protected quotations on the ADF have been adequately addressed by IntelligentCross and FINRA.^[174] FINRA's ongoing obligation to ensure compliance by IntelligentCross as an ADF participant with its Regulation NMS obligations, FINRA's commitment to file proposed rule changes relating IntelligentCross' operations, and IntelligentCross' regulatory responsibilities as an ATS, appropriately ensures transparency and ongoing assessment of consistency with the Exchange Act.

Finally, in response to one commenter's recommendation that approval of the Proposal be conditioned on IntelligentCross “continuing to not charge for market data or connectivity,” ^[175] such a condition is inconsistent with the limitations imposed on an ADF participant under Rule 610 which requires a level and cost of access that is substantially equivalent to the level and cost of access to quotations displayed by SRO trading facilities.^[176]

2. Implementation Period

FINRA states that the “effective date” of the Proposal would be the date of the Commission's approval.^[177]

Two commenters suggest that the proposed implementation period for the Proposal is too short given the connectivity arrangements that the industry would need time to establish.^[178] One commenter suggests an implementation period of no less than 120 days following the date of Commission approval.^[179] Another commenter recommends an implementation period of no less than 90 days following the date of Commission approval.^[180] In one of its response letters, IntelligentCross states that it has been working with industry participants to ensure that they have all the information necessary to prepare for the IntelligentCross protected quote.^[181] IntelligentCross also states that most major broker-dealers and electronic trading firms are already connected to, and trading within, IntelligentCross.^[182] Moreover, IntelligentCross believes that a reasonable implementation timeframe would be to require that industry participants begin treating IntelligentCross' quotes as a protected quotation no later than 90 days after the date of the Commission's approval order.^[183] One commenter states that the 90-day implementation period proposed by IntelligentCross is in line with previous Commission guidance on treating new exchange quotes as protected.^[184]

Following the issuance of this order and IntelligentCross having met the conditions to begin operating as an ADF participant, market participants will be required to have reasonably designed policies and procedures to treat IntelligentCross' best bid and best offer as a protected quotation.^[185] At the same time, to meet their regulatory responsibilities under Rule 611(a) of Regulation NMS, market participants must have sufficient notice of new protected quotations, as well as all necessary information (such as final technical specifications).^[186] Given that the Commission understands IntelligentCross is already widely used by most major broker-dealer and electronic trading firms,^[187] and has engaged in market participant outreach regarding its status as an ADF participant,^[188] the Commission believes that an implementation period of no less than 90 days following the date of Commission approval is a sufficient timeframe for market participants to establish connectivity to the IntelligentCross protected quotation in order to meet their obligations under Rule 611. Accordingly, the Commission believes that it would be a reasonable policy and procedure under Rule 611(a) to require that industry participants to begin treating IntelligentCross' best bid and best offer as a protected quotation within 90 days after the date of this order, or such later date as IntelligentCross begins operation as a new ADF participant.

3. ADF Technological Infrastructure

One commenter states that the Commission and FINRA should consider whether to “wind down” the ADF due to concerns regarding the latency and technological infrastructure of the ADF.^[189] Specifically, this commenter states that the Proposal does not provide any details of the ADF's systems capabilities and questions whether the “intake, processing, and dissemination systems [are] up to 2023 speed and capacity standards.” ^[190] This commenter also expresses concern regarding the speed at which the ADF disseminates quotation data compared to the speed at which IntelligentCross' proprietary quotation feed is disseminated to market participants.^[191] This commenter states that it is unclear the extent to which “FINRA has attempted to upgrade the system” to address the latency gap.^[192] One commenter requests more transparency regarding any latency tests conducted by FINRA with IntelligentCross to determine the latency related to transmission from IntelligentCross to the ADF and the time for the ADF to process and publish updates to the SIPs.^[193]

In its response letter, FINRA states that it has made technological updates to the ADF infrastructure that make it “well-equipped to support use of the ADF by multiple market participants for ( printed page 59968) quoting and trading purposes.” ^[194] FINRA also states that its recent technological updates to the ADF have significantly reduced the ADF's processing latency times as compared to when the ADF was last operational in 2015.^[195] FINRA also represents that it continues to conduct capacity requirement testing with IntelligentCross and “aim[s] to address any potential areas identified for further improvement prior to IntelligentCross becoming an ADF [p]articipant and sending quotes to the ADF (subject to SEC approval).” ^[196] Additionally, based on the results of FINRA's ADF testing with IntelligentCross, FINRA states that ADF latency is generally in line with exchange latency to dissemination by the SIPs.^[197] FINRA also states that it expects the ADF latency in production to be lower than in the ADF test environment.^[198] Accordingly, FINRA believes that any processing latency for the ADF would generally be in line with exchange processing latencies once IntelligentCross begins quoting on the ADF.^[199]

The Commission believes that FINRA has demonstrated that, with the recent technological updates to address latency in the ADF's system capabilities,^[200] along with recent tests to the ADF application with IntelligentCross, the ADF technology infrastructure will be consistent with current speed and capacity standards for processing and disseminating IntelligentCross' quotations. Moreover, FINRA and IntelligentCross have represented that they will continue to conduct testing and explore technological enhancements to further reduce ADF latency, thus ensuring that the ADF technology infrastructure continues to be consistent with current processing latencies.^[201]

IV. Conclusion

It is therefore ordered, pursuant to Section 19(b)(2) of the Exchange Act,^[202] that the proposed rule change (SR-FINRA-2022-032) is approved.