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Commission process and review your Securities and Exchange Commission quotations (‘‘NBBO’’),7 representing the comments more efficiently, please use (‘‘SEC’’ or ‘‘Commission’’) the proposed best displayed bid and offer prices that only one method. The Commission will rule change as described in Items I and are available in the market at any point post all comments on the Commission’s II below, which Items have been in time. By sending orders to ‘‘take internet website (http://www.sec.gov/ prepared by the Exchange. The liquidity’’ against orders that are resting rules/sro.shtml). Copies of the Commission is publishing this notice to on exchanges or other trading venues in submission, all subsequent solicit comments on the proposed rule very small windows of time, generally amendments, all written statements change from interested persons. no more than a few milliseconds before with respect to the proposed rule an anticipated change in the NBBO, change that are filed with the I. Self-Regulatory Organization’s trading firms seeking to exploit these Commission, and all written Statement of the Terms of Substance of speed and information asymmetry communications relating to the the Proposed Rule Change advantages can profit, to the proposed rule change between the (a) Pursuant to the provisions of corresponding disadvantage of Commission and any person, other than Section 19(b)(1) under the Act,4 and institutional investors and other those that may be withheld from the Rule 19b–4 thereunder,5 IEX is filing participants, whose resting orders are public in accordance with the with the Commission a proposed rule ‘‘picked off’’ by these faster firms at provisions of 5 U.S.C. 552, will be change to add a new Discretionary Limit ‘‘stale’’ prices. available for website viewing and order type (a ‘‘D-Limit’’ order). IEX further believes that this trading printing in the Commission’s Public The text of the proposed rule change activity creates a substantial Reference Room, 100 F Street NE, is available at the Exchange’s website at disincentive to market participants to Washington, DC 20549 on official www.iextrading.com, at the principal provide exchange quotes and other business days between the hours of office of the Exchange, and at the orders that rest on exchanges’ order 10:00 a.m. and 3:00 p.m. Copies of the Commission’s Public Reference Room. books. To compensate for the resulting filing also will be available for adverse selection, among other reasons, inspection and copying at the principal II. Self-Regulatory Organization’s many exchanges employ maker-taker office of the Exchange. All comments Statement of the Purpose of, and style fee schedules which pay rebates to received will be posted without change. Statutory Basis for, the Proposed Rule liquidity providers that trade on their Persons submitting comments are Change markets (‘‘Maker-Taker’’). cautioned that we do not redact or edit This phenomenon, commonly In its filing with the Commission, the personal identifying information from referred to as ‘‘latency arbitrage,’’ has self-regulatory organization included comment submissions. You should led to proposals by equity and futures statements concerning the purpose of submit only information that you wish markets specifically designed to provide and basis for the proposed rule change to make available publicly. All protection for resting orders in order to and discussed any comments it received submissions should refer to File incentivize market makers and other on the proposed rule change. The text Number SR–CBOE–2019–118 and liquidity providers to maintain tighter of these statements may be examined at should be submitted on or before spreads with larger size. Most recently, the places specified in Item IV below. January 21, 2020. Cboe EDGA Exchange, Inc. (‘‘EDGA’’) The self-regulatory organization has proposed a four-millisecond For the Commission, by the Division of prepared summaries, set forth in asymmetrical delay mechanism or Trading and Markets, pursuant to delegated Sections A, B, and C below, of the most authority.20 ‘‘speed bump’’ that would apply only to significant aspects of such statements. Eduardo A. Aleman, incoming executable orders.8 As set Deputy Secretary. A. Self-Regulatory Organization’s forth in its rule change proposal seeking [FR Doc. 2019–28174 Filed 12–27–19; 8:45 am] Statement of the Purpose of, and Commission approval of this BILLING CODE 8011–01–P Statutory Basis for, the Proposed Rule asymmetrical speedbump, EDGA states Change that the purpose of the asymmetrical speed bump is to provide ‘‘an 1. Purpose SECURITIES AND EXCHANGE opportunity for liquidity providers to COMMISSION The Exchange proposes to introduce a process cross-asset signals, and update their published quotations accordingly, [Release No. 34–87814; File No. SR–IEX– new order type, a Discretionary Limit or 2019–15] ‘‘D-Limit’’ order, that is designed to before trading at stale prices with orders protect liquidity providers from submitted by opportunistic trading Self-Regulatory Organizations: potential adverse selection by latency firms that benefit from a latency Investors Exchange LLC; Notice of arbitrage trading strategies.6 advantage.’’ 9 The EDGA proposal describes the challenges for liquidity Filing of Proposed Rule Change To Background Add a New Discretionary Limit Order providers as follows: Type IEX believes that in the current Today, liquidity providers are frequently market environment, market unable to adjust their displayed quotes based December 20, 2019. participants that have access to the on changes in market information . . . before 1 Pursuant to Section 19(b)(1) of the fastest and most complete view of the fastest trading firms can trade against Securities Exchange Act of 1934 (the market data from all the major their quotes. Market makers and other 2 3 ‘‘Act’’), and Rule 19b–4 thereunder, exchanges are able to predict imminent liquidity providers use sophisticated pricing notice is hereby given that on December changes to national best bid and offer 16, 2019, the Investors Exchange LLC 7 The term ‘‘NBBO’’ means the national best bid (‘‘IEX’’ or the ‘‘Exchange’’) filed with the or offer, as set forth in Rule 600(b) of Regulation 4 15 U.S.C. 78s(b)(1). NMS under the Act, determined as set forth in IEX 5 17 CFR 240.19b–4. Rule 11.410(b). See IEX Rule 1.160(u). 20 17 CFR 200.30–3(a)(12). 6 As proposed, a D-Limit order is also eligible to 8 See Securities Exchange Act Release No. 86168 1 15 U.S.C. 78s(b)(1). take resting liquidity on entry. If not executed on (June 20, 2019), 84 FR 30282 (June 26, 2019) (SR– 2 15 U.S.C. 78a. entry, the order will post to the Order Book and be CboeEDGA–2019–012). 3 17 CFR 240.19b–4. available to provide liquidity. 9 See supra note 8, at 30283.

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algorithms to determine how to price executed at stale prices when incoming Quotations 17 and a proprietary securities in the often hundreds or thousands orders by other exchange participants mathematical calculation (the ‘‘quote of equity securities that they quote. . . . The with the advantage of a more current instability calculation’’) to assess the potential for trading at stale prices increases risk for firms that wish to provide liquidity view of market prices seek to execute probability of an imminent change to to the market, and harms market quality by against resting pegged orders on IEX. the current Protected NBB to a lower causing liquidity providers to enter quotes The speed bump works together with price or Protected NBO to a higher price that are wider or for a smaller size than they certain non-displayed order types that for a particular security (‘‘quote may otherwise be willing to trade.10 are designed to provide further instability factor’’). When the quoting As discussed more fully below, IEX’s protection to non-displayed orders and activity meets predefined criteria and proposal to establish a D-Limit order encourage brokers to place those orders the quote instability factor calculated is type is designed to protect liquidity on IEX. These include Discretionary greater than the Exchange’s defined providers, institutional investors as well Peg 13 (‘‘DPeg’’), which, in its current quote instability threshold, the as market makers, from potential iteration, is an order pegged to trade at System 18 treats the quote as unstable adverse selection by latency arbitrage one minimum price variation, or ‘‘tick,’’ and the CQI is on at that price level for trading strategies in a fair and below the national best bid (‘‘NBB’’),14 up to two milliseconds (hereafter nondiscriminatory manner, without, as in the case of buy orders, or one tick referred to as the ‘‘quote instability some commenters have mentioned, above the national best offer (‘‘NBO’’),15 determination price level’’ or the ‘‘CQI introducing concerns around in the case of sell orders, unless the Price’’). During all other times, the quote unnecessary complexity, disparate submitter of the order has specified a is considered stable, and the CQI is off. treatment, and fair access by limit price that is less aggressive than The System independently assesses the institutional investors to displayed this default resting price. For most stability of the Protected NBB and quotations that have been voiced with stocks, the minimum tick under Protected NBO for each security.19 regard to the EDGA asymmetrical speed Commission rules is one cent. In most When IEX determines, pursuant to the bump proposal.11 circumstances, DPeg orders can also CQI methodology, that the current Since before and after it became an trade at a more aggressive price (one market for a security is unstable— exchange, IEX has sought to design its more favorable to the counterparty), but meaning there is a heightened market in a way that creates a only to the midpoint, when there are probability of an imminent quote transparent and level playing field incoming orders that are willing to trade change at the NBB or NBO—IEX’s where both investors and market at that price. System will prevent DPeg and PPeg professionals can participate and have Similarly, the primary peg 16 (‘‘PPeg’’) orders on that side of the market from confidence in the fairness of the system. order type is pegged to one tick below exercising discretion and trading at a In general, these aspects of our market the NBB, for a buy order, and one tick price that is more aggressive than their involve ways to counter or reduce speed above the NBO, for a sell order, but is default resting prices. In this way, IEX advantages that can harm investors by also available to trade at a price up to seeks to protect these orders from being exposing them to execution at stale the NBB or down to the NBO, unless executed at unfavorable prices during prices when their orders are traded further restricted by the order’s limit these very short periods of time when against by traders with more complete price. When DPeg and PPeg orders are they face a high risk that the market and timely information about market eligible to trade at prices more price will immediately move against prices. aggressive than their default prices, they them, and IEX’s System allows them to These aspects include the use of a so- are said to be ‘‘exercising discretion’’ to trade at more aggressive prices, with a called ‘‘speed bump,’’ a symmetrical trade at these more aggressive prices. higher probability of execution, in all delay mechanism consisting of a length In addition, IEX uses a proprietary other circumstances. of coiled optical fiber, which, together mathematical calculation, the crumbling DPeg and PPeg orders have been with the physical distance from the quote indicator (‘‘CQI’’), to determine widely adopted by a diverse group of location where members connect to the when its pegged order types are eligible IEX Members. During September 2019, IEX systems where orders are matched, to exercise discretion. The CQI is a such orders constituted 38% of overall delays all incoming orders by 350 transparent formula, codified in IEX’s IEX traded volume (DPeg volume was microseconds. The speed bump is rulebook, designed to predict whether a 35% and PPeg volume was 3%) and designed to protect non-displayed particular quote is unstable or 55% of liquidity adding volume (DPeg orders, typically placed on behalf of ‘‘crumbling,’’ meaning that the NBB is volume was 49% and PPeg volume was institutional investors, that are likely about to decline or the NBO is 6%). 70 of 145 IEX Members traded ‘‘pegged’’ to a given price, often the likely about to increase. As set forth in using DPeg or PPeg orders (these midpoint of the NBBO, i.e., the IEX Rule 11.190(g), the Exchange Members represent 90% of the total 12 Midpoint Price. The speed bump utilizes real time relative quoting volume traded on IEX), with 84% of this allows IEX’s matching engine to update activity of certain Protected volume originating from full-service the prices of resting pegged orders in firms, 9% from proprietary trading line with price changes on other 13 See IEX Rule 11.190(b)(10). IEX has two other markets to lessen the possibility of order types that are based on the DPeg order type: 17 Pursuant to IEX Rule 11.190(g), references to adverse selection when a new Midpoint The Retail Liquidity Provider order and the ‘‘Protected Quotations’’ include quotations from the Price is established. By repricing the Corporate Discretionary Peg order. See Rule New York Stock Exchange LLC (‘‘NYSE’’); The order based on the current market, 11.190(b)(14) and (16). Nasdaq Stock Market LLC (‘‘Nasdaq’’); NYSE Arca, 14 The term ‘‘NBB’’ shall mean the national best Inc. (‘‘NYSE Arca’’); Nasdaq BX, Inc. (‘‘Nasdaq resting orders are less likely to be bid, as set forth in Rule 600(b) of Regulation NMS BX’’); Cboe BZX Exchange, Inc. (‘‘Cboe BZX’’); Cboe under the Act, determined as set forth in IEX Rule BYX Exchange, Inc. (‘‘Cboe BYX’’); Cboe EDGX 10 See supra note 8, at 30283. 11.410(b). See Rule 1.160(u). Exchange, Inc. (‘‘EDGX’’); and EDGA. 11 See comments on Release No. 34–86168; File 15 The term ‘‘NBO’’ shall mean the national best 18 See IEX Rule 1.160(nn). No. SR–CboeEDGA–2019–012 available at: https:// offer, as set forth in Rule 600(b) of Regulation NMS 19 IEX has revised the CQI formula twice since its www.sec.gov/comments/sr-cboeedga-2019-012/ under the Act, determined as set forth in IEX Rule exchange launch in order to enhance the accuracy srcboeedga2019012.htm. 11.410(b). See Rule 1.160(u). of the CQI in predicting quote instability and 12 See IEX Rule 1.160(t). 16 See IEX Rule 11.190(b)(8). increasing the protection provided to pegged orders.

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firms, and 7% from agency firms.20 IEX when the CQI is on, compared to only The Exchange further believes that believes that this usage evidences that a 3% of nondisplayed volume during providing such protection would large range of market participants with September 2019. As discussed in detail incentivize the entry of liquidity diverse business models have a high below, IEX trading data reveals that providing orders on IEX by protecting degree of confidence in the utility of the liquidity-providing orders that are such orders from adverse selection by CQI formula. executed while the CQI is on are subject market participants leveraging All of these aspects of IEX’s design— to significant differences in short term sophisticated latency arbitrage strategies the speed bump, the pegged order types, markouts,23 compared to liquidity- to exploit informational advantages and the CQI—are designed to work providing orders executed when the CQI when IEX’s probabilistic model together to provide better execution is off, and the significant volume of determines that the market appears to be opportunities for these orders, which orders that are sent during these very moving adversely to them. are favored by institutional investors, by small time intervals (on IEX as well as Accordingly, IEX is proposing the D- protecting them from being executed at other exchanges) accentuates this Limit order type as an alternative means inferior prices in narrow time windows impact. of encouraging market makers and other when the NBBO is in transition. As Maker-Taker exchanges use rebate participants, including institutional described further below, these features payments to induce participants to post investors, to provide liquidity, by have provided substantial benefits in quotes and other resting orders on adjusting the price of these orders in the terms of execution outcomes to exchanges notwithstanding these narrow time windows when the CQI is investors and other participants using negative impacts. A variety of on, to better protect them from being these IEX order types. significant concerns have been raised ‘‘picked off’’ during those intervals. IEX In addition to these other features of regarding the effect of paying rebates as believes that D-Limit represents a IEX’s market, since January 1, 2018, IEX compensation to a relatively small logical extension of its efforts to date to has imposed an additional fee on number of liquidity providers, which create a trading platform that Members that send more than a certain include conflicts of interest, increased encourages participation by investors threshold of their orders to take market fragmentation, effectiveness, and and market professionals and liquidity during periods when the CQI adding unnecessary complexity to maximizes opportunities for investors to is on (the ‘‘CQ Remove Fee’’). The CQ overall equity market structure by trade at a fair price. D-Limit orders Remove Fee is intended to incentivize incentivizing market participants to would be available to all IEX Members participants to send orders to provide attempt to continually readjust their in a fair and nondiscriminatory manner. liquidity to IEX by reducing the volume order routing to navigate a multitude of As discussed further below, IEX of orders involving trading strategies constantly changing transaction fee believes that exchanges must be allowed that seek to exploit information schedules.24 The Commission has to innovate in narrowly targeted ways to advantages while the NBBO is in adopted a transaction fee pilot, to assess protect resting orders from being transition. The CQ Remove Fee has these concerns about existing exchange unfairly exploited by information resulted in an incremental reduction in fee structures, which is designed to test asymmetries. IEX also believes such the use of such strategies on IEX. IEX potential improvements to market measures are important to enhance the believes the limited impact from the fee quality from reducing access fees and value and integrity of protected quotes is a result of the fact that the potential prohibiting rebates on all exchanges.25 generally, and that D-Limit will benefit profits from the use of such strategies Moreover, the substantial use of ‘‘Taker- market quality by leading to deeper substantially exceed the profits lost Maker’’ exchange fee models, which liquidity, displayed and non-displayed, from the CQ Remove Fee.21 charge fees to liquidity providing orders and increased opportunities for The innovations IEX has introduced participants interacting with this have succeeded in providing new and pay rebates to liquidity taking orders, evidences that exchanges can liquidity to receive favorable execution opportunities for investors, executions. particularly through the use of the compete for displayed order flow pegged order types described above, and without paying rebates. Proposal they have provided IEX participants In view of these factors, the Exchange The Exchange proposes to amend IEX with opportunities for improved believes that it is appropriate to also Rule 11.190(b)(7), which is currently executions compared to other venues.22 leverage the CQI to expand the IEX reserved, to add a D-Limit order which At the same time, IEX believes that the protective design to displayed and non- 26 may be a displayed or non-displayed willingness of market participants to pegged non-displayed limit orders. limit order that upon entry and when provide liquidity through other order 27 23 posting to the Order Book, is priced to types, including displayed orders, is The term markouts refers to changes in the midpoint of the NBBO measured from the be equal to and ranked at the order’s substantially negatively affected by the perspective of either the liquidity providing resting limit price,28 but will be adjusted to a trading strategies described above. order or liquidity removing taking order over a less-aggressive price during periods of Without an order type that leverages the specified period of time following the time of quote instability, as defined in IEX Rule protective features of the CQI, 24% of execution. 24 See generally, transcript of Commission 11.190(g), as described more fully displayed volume on IEX is executed ‘‘Roundtable on Market Data Products, Market Access Services, and their Associated Fees’’ pegged order. See IEX Rule 11.190(b)(3). 20 See infra note 58 and accompanying text for a (October 25, 2018) available at: https:// Furthermore, pegged orders can be submitted with discussion of IEX’s classification of its Members’ www.sec.gov/spotlight/equity-market-structure- or without a limit price, with the exception of logical order entry ports. roundtables/roundtable-market-data-market- Market Maker Peg orders, which must be limit 21 The Exchange is effectively limited in setting access-102518-transcript.pdf. orders. See IEX Rule 11.190(b)(8), (9), (10), (13), and the CQ Remove Fee by Rule 610(c) of Regulation 25 See Securities Exchange Act Release 84875 (16). NMS. 17 CFR 242.610(c). (December 19, 2018); 84 FR 5202 (February 20, 27 See IEX Rule 1.160(p). 22 See, e.g., Wah, Elaine, et al. ‘‘A Comparison of 2019). 28 A non-displayed D-Limit order with a limit Execution Quality across U.S. Stock Exchanges,’’ 26 IEX currently allows limit orders to be either price more aggressive than the Midpoint Price will (April 19, 2017), available at https://iextrading.com/ ‘‘displayed, non-displayed, or partially displayed.’’ be subject to the Midpoint Price Constraint and be docs/A%20Comparison%20 See IEX Rule 11.190(a)(1). Displayed orders must be booked and ranked on the Order Book at a price of%20Execution%20Quality%20 limit orders, see IEX Rule 11.190(b)(1), but non- equal to the Midpoint Price pursuant to IEX Rule across%20U.S.%20Stock%20Exchanges.pdf. displayed orders can be either a market, limit, or 11.190(h)(2).

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below. Otherwise, a D-Limit order will market condition changes such that the price of 10.05 is resting on the IEX Order operate in the same manner as a condition necessitating the price sliding Book at its limit price. A quote instability displayed or non-displayed limit order, is no longer applicable.34 determination is made at the PBB 42 of 10.05. as applicable. Pursuant to proposed IEX Rule Because the limit (and displayed) price of the D-Limit order is equal to the CQI Price, the As proposed, if upon entry of a D- 11.190(b)(7), a D-Limit order: price of the order is adjusted to 10.04. Limit buy (sell) order the CQI is on and (A) Must be submitted with a limit price. 2. The PBBO in XYZ is 10.05–10.10 and a the order has a limit price equal to or (B) May have a TIF of DAY, GTX, SYS or displayed D-Limit order to buy with a limit higher (lower) than the quote instability GTT. price of 10.04 is resting on the IEX Order determination price level (i.e., the CQI (C) Is not eligible for routing pursuant to Book at its limit price. A quote instability Price), the price of the order will be IEX Rule 11.230(b) and (c)(2). determination is made at the PBB of 10.05. automatically adjusted by the System to (D) May not be an ISO.35 Because the limit and displayed price of the one (1) MPV 29 lower (higher) than the (E) Is eligible to trade only during the D-Limit order is less than the CQI Price, the Regular Market Session.36 A D-Limit order price of the order is not adjusted. CQI price. Similarly, when unexecuted marked with a TIF of DAY that is submitted 3. Following the order adjustment in shares of a D-Limit buy (sell) order are to the System before the opening of the Example 1, the PBB reverts to 10.05. The posted to the Order Book, if a quote Regular Market Session will be queued by the order remains displayed at its adjusted limit instability determination is made and System until the start of the Regular Market price of 10.04 because a D-Limit order that such shares are ranked and displayed Session; a D-Limit order marked with a TIF has been adjusted continues to be ranked and (in the case of a displayed order) by the other than DAY will be rejected when displayed at its adjusted price, regardless of System at a price equal to or higher submitted to the System during the Pre- a change in the PBB, unless subject to 37 (lower) than the CQI Price, the price of Market Session. A D-Limit order submitted another automatic adjustment. into the System after the closing of the 4. Following the order adjustment in the order will be automatically adjusted Regular Market Session will be rejected. Example 1, a new quote instability by the System to one (1) MPV lower (F) May not be a minimum quantity determination is made at the PBB of 10.04. (higher) than the CQI Price. A D-Limit order.38 Because the limit and displayed price of the order that is subject to an automatic (G) May be an odd lot, round lot, or mixed D-Limit order is equal to the CQI Price, the adjustment will not revert to the price lot. However, a D-Limit order marked for price of the order is adjusted again to 10.03. at which it was previously ranked and display will not be displayed unless it is at 5. Following the order adjustment in displayed (in the case of a displayed least one round lot. If a D-Limit order marked Example 1, the PBB reverts to 10.05 and a order). Once the price of a D-Limit order for display is submitted with, or decremented new quote instability determination is made either by execution or the User order at the PBB of 10.05. Because the limit and that has been posted to the Order Book amendment to an order quantity of less than displayed price of the D-Limit order is lower is automatically adjusted by the System, one round lot, it will be treated as an odd lot than the CQI Price, the price of the order is the order will continue to be ranked and order which is, by definition, non-displayed not adjusted. displayed (in the case of a displayed and will receive a new time stamp, pursuant 6. The PBBO in XYZ is 10.05–10.10 and a order) at the adjusted price, unless to IEX Rule 11.220(a)(3). non-displayed D-Limit order to buy with a subject to another automatic adjustment, (H) May not be a Reserve Order.39 limit price of 10.06 is resting on the IEX or if the order is subject to the price (I) Displayed Discretionary Limit orders are Order Book at its limit price. A quote sliding provisions of IEX Rule 11.190(h). not eligible to be invited by the System to instability determination is made at the PBB Recheck as described in IEX Rule of 10.05. Because the limit price of the D- When the price of a D-Limit order is 11.230(a)(4)(D). Limit order is higher than the CQI Price, the adjusted the order will receive a new (J) Discretionary Limit orders are subject to price of the order is adjusted to 10.04. time priority. If multiple D-Limit orders the Price Sliding provisions of IEX Rule 7. The PBBO in XYZ is 10.05–10.10 and a are adjusted at the same time, their 11.190(h). non-displayed D-Limit order to buy with a relative time priority will be The proposed rule change would thus limit price of 10.05 is resting on the IEX maintained. Further, when the price of Order Book at its limit price. A quote extend the protective features of the CQI instability determination is made at the PBB a D-Limit order is adjusted, the Member to displayed and non-displayed D-Limit that entered the order will receive an of 10.05. Because the limit price of the D- orders to protect such orders from Limit order is equal to the CQI Price, the order restatement message from the potential adverse selection by price of the order is adjusted to 10.04. Exchange notifying the Member of the Subsequently, the PBB moves to 10.03 and a 30 preventing them from trading at a price price adjustment. that IEX’s CQI formula predicts is new quote instability determination is made D-Limit orders are subject to the price unstable and thus imminently stale. at the PBB of 10.03. The price of the order sliding provisions of IEX Rule 11.190(h), The following examples illustrate the is adjusted to a price of 10.02. as noted above. This provision provides 8. The PBBO in XYZ is 10.05–10.10 and operation of the price adjustment the quote instability determination is in for price sliding in the event of a locked functionality of D-Limit orders: 40 or crossed market, to enforce the effect for the PBB at 10.05. A D-Limit order Midpoint Price Constraint,31 to comply 1. The PBBO 41 in XYZ is 10.05–10.10 and to buy XYZ with a limit price of 10.05 enters a displayed D-Limit order to buy with a limit the IEX Order Book. Because the limit price with the display or execution of the order is equal to the CQI Price in effect, requirements for a short sale order not 34 See IEX Rule 11.190(h) for a complete the price of the order is adjusted to and marked short exempt during a Short description of the price sliding provisions. See also booked at 10.04.43 Sale Period,32 or to comply with the note 28 supra regarding applicability of the 9. The PBBO in XYZ is 10.05–10.10 and Limit Up-Limit Down Price Midpoint Price Constraint. the quote instability determination is in Constraint.33 As set forth in IEX Rule 35 See IEX Rule 11.190(b)(12). 11.190(h), an order that has been subject 36 See IEX Rule 1.160(gg). set forth in IEX Rule 11.410(b). See IEX Rule 37 See IEX Rule 1.160(z). 1.160(cc). to price sliding will be repriced back to 38 its more aggressive limit price when the See IEX Rule 11.190(b)(11). 42 The term ‘‘PBB’’ refers to the national best bid 39 See IEX Rule 11.190(b)(2). that is a protected quotation, determined as set forth 40 The following examples all describe D-Limit in IEX Rule 11.410(b). See IEX Rule 1.160(cc). 29 See IEX Rule 11.210. buy orders. Each of the examples also applies to a 43 The order is not executable on entry at 10.04 30 A restatement notice is an automated message D-Limit sell order, except that any price because of the Midpoint Price Constraint. Pursuant from the Exchange System informing the Member adjustments to a D-Limit sell order would adjust the to IEX Rule 11.190(h)(2), a non-displayed limit that the price of its order has been adjusted. order price to one MPV above the CQI Price in order posting to the Order Book which has a limit 31 See note 28 supra. effect. price more aggressive than the Midpoint Price will 32 See IEX Rule 11.290(d). 41 The term ‘‘PBBO’’ refers to the national best bid be booked and ranked on the Order Book non- 33 See IEX Rule 11.190(h)(5). or offer that is a protected quotation, determined as displayed at a price equal to the Midpoint Price.

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effect for the PBB at 10.05. A D-Limit order adjust an order in the brief time period profile on the Exchange to the benefit of to buy XYZ with a limit price of 10.04 enters that an incoming order is delayed. all market participants. Based on market the IEX Order Book. Because the limit price IEX is not proposing any changes to data analysis during September 2019, of the order is lower than the CQI Price in IEX Rule 11.240(c) which specifies that the Exchange identified that there are effect, the price of the order is not adjusted.44 10. The PBBO in XYZ is 10.05–10.10 and the System operates as an ‘‘automated significant differences in short term the quote instability determination is in market center’’ and displays ‘‘automated markouts (and pro forma profit and effect for the PBB at 10.05. A D-Limit order quotations’’ within the meaning of loss) 55 for resting and taking orders to buy XYZ with a limit price of 10.06 enters Regulation NMS, except in the event between executions when the CQI is on the IEX Order Book. Because the limit price that a systems malfunction renders the and off, regardless of whether the NBB of the order is higher than the CQI Price in System incapable of displaying (NBO) moves lower (higher) within two effect, the price of the order is adjusted to automated quotations. Automated milliseconds of the Exchange’s and booked at 10.04.45 11. The PBBO in XYZ is 10.05–10.10 and quotations of an automated trading determination of quote instability. the quote instability determination is in center are protected quotations pursuant Specifically, when the CQI is on, effect for the PBB at 10.05. The PBB crumbles to Rule 600(b)(62) of Regulation NMS 50 liquidity removing orders that execute to 10.04 but the quote instability and entitled to trade-through protection on IEX (trading with a liquidity determination is still in effect at 10.05. A D- pursuant to Rule 611 of Regulation providing order resting on the Order Limit order to buy XYZ with a limit price of NMS 51 (the ‘‘Order Protection Rule’’). Book, including but not limited to 10.05 enters the IEX Order Book. Because the Consequently, displayed D-Limit orders Discretionary Peg and primary peg limit price of the order is equal to the CQI will qualify as automated quotations orders) experience positive price Price in effect, the price of the order is adjusted to and booked at 10.04.46 within the meaning of Regulation NMS markouts one second after the trade on 12. The PBBO in XYZ is 10.04–10.10 and (except in the event that a systems a share basis 76% of the time, compared the quote instability determination is in malfunction renders the System to 23.5% of the time when the CQI is effect at 10.05 (the prior PBB). A D-Limit incapable of displaying automated off. Correspondingly, resting liquidity order to buy XYZ with a limit price of 10.05 quotations).52 providing orders that trade when the enters the IEX Order Book. Because the limit CQI is on experience negative price 2. Statutory Basis price of the order is equal to the CQI Price markouts one second after the trade in effect, the price of the order is adjusted to IEX believes that the proposed rule 76% of the time, compared to 23.5% of and booked at 10.04.47 change is consistent with the provisions the time when CQI is off. Similarly, 13. The PBBO in XYZ is 10.04–10.10 and of Section 6(b) 53 of the Act in general, the quote instability determination is in 55.9% of all orders received when the effect at 10.05 (the prior PBB). A D-Limit and furthers the objectives of Section CQI is on (whether or not executed on order to buy XYZ with a limit price of 10.06 6(b)(5) of the Act 54 in particular, in that IEX) arrive immediately prior to a enters the IEX Order Book. Because the limit it is designed to prevent fraudulent and favorable price move (based on one price of the order is higher than the CQI Price manipulative acts and practices, to second markouts), compared to 19.5% in effect, the price of the order is adjusted to promote just and equitable principles of of orders received when the CQI is off. 48 and booked at 10.04. trade, to remove impediments to and Moreover, the breakdown of orders 14. The PBBO in XYZ is 10.04–10.10 and perfect the mechanism of a free and entered and shares removed when the the quote instability determination is in open market and a national market effect at 10.05 (the prior PBB). A D-Limit CQI is on or off evidences that certain order to buy XYZ with a limit price of 10.04 system, and, in general, to protect trading strategies appear to involve enters the IEX Order Book. Because the limit investors and the public interest. entering liquidity taking orders targeting price of the order is lower than the CQI Price Specifically, the Exchange believes the resting orders at prices that are likely to in effect, the price of the order is booked at proposed rule change is consistent with imminently move adversely from the 10.04.49 the protection of investors and the perspective of the resting order. Across D-Limit orders would be available to public interest because it is designed to all approximately 8,000 symbols all Members on a fair and impartial protect resting D-Limit orders from available for trading on IEX, the CQI is basis and no particular technology or adverse selection associated with on only 1.64 seconds per symbol per access to high speed connectivity or latency arbitrage by limiting execution day on average (0.007% of the time market data is necessary to obtain the to one MPV lower than the CQI Price during regular market hours),56 but protective benefits of a D-Limit order. (for buy orders) or one MPV higher than 33.7% of marketable orders 57 are The Exchange will adjust the price of a the CQI Price (for sell orders) when the received during those time periods, D-Limit order based on the transparent, Exchange’s probabilistic model which indicates that certain types of rule-based CQI formula. In contrast, the identifies that the NBB or NBO appears trading strategies are seeking to use of ‘‘asymmetric’’ speed bumps to be moving adversely to them, thereby (those imposed only on the taker of reducing the potential to execute at an 55 For purposes of this analysis, a pro forma profit liquidity) in order to provide a benefit imminently stale price. or loss is calculated as the difference between the midpoint of the NBBO at the time of the execution to resting orders, requires access to In addition, the Exchange believes that the proposed rule change is compared to one second after. sophisticated technology, connectivity 56 On a volume weighted basis, the CQI is on for and market data in order to cancel or consistent with the protection of 5.9 seconds per day per symbol, 0.025% of the time investors and the public interest during regular market hours. IEX plans to file a proposed rule change with the Commission shortly 44 The order is not executable on entry. See supra because it is designed to incentivize the to incrementally optimize and enhance the note 43. entry of additional resting orders, effectiveness of the quote instability calculation in 45 The order is not executable on entry. See supra including displayed orders on the determining whether the CQI is on. Based on a note 43. Exchange, thereby enhancing price modeling analysis, IEX estimates that the updated 46 The order is not executable on entry. See supra discovery and the overall liquidity calculation will result in the CQI being on 0.009% note 43. of the time during regular market hours, on average, 47 The order is not executable on entry. See supra and incrementally increase the expected number of 50 note 43. 17 CFR 242.600(b)(62). CQI determinations by approximately 20%. 51 48 The order is not executable on entry. See supra 17 CFR 242.611. 57 An order is considered marketable for this note 43. 52 17 CFR 242.602(a)(3)(i). analysis if it was a market order or its limit price 49 The order is not executable on entry. See supra 53 15 U.S.C. 78f. is at or more aggressive than the contra-side note 43. 54 15 U.S.C. 78f(b)(5). quotation.

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aggressively target liquidity providers Moreover, for displayed limit orders above, IEX believes that these pricing during periods of quote instability. that added liquidity during September schemes can contribute to a number of Further, based upon IEX’s 2019, the disparity in markouts between conflicts of interest and market classification of its Members’ logical such orders that traded when the CQI distortions including, among others, order entry ports (also known as was on versus off was material and conflicts of interests, excess ‘‘sessions’’) as originating from evident of latency arbitrage.59 For such intermediation and potential adverse proprietary trading firms, full service orders that traded when the CQI was on, selection, market fragmentation, broker-dealers, or agency broker- the average markouts were negative complexity, the proliferation of new dealers,58 proprietary trading firms are $.0036 per share ten milliseconds after order types to enable avoidance of fees, more likely to seek to trade against IEX trade time. In contrast, when the CQI and elevated fees to subsidize rebates.61 resting orders while the CQI is on, while was off, the average markouts were In contrast, IEX seeks to incentivize sessions classified as full-service and positive $.0045 at 10 milliseconds, a liquidity providing orders through agency are more likely to seek to trade performance difference of $.0081 per superior execution quality, but this against IEX resting orders during the share at 10 milliseconds post trade. incentive can be undercut by trading remainder of the day. Within the two From one second through five minutes strategies that target resting orders millisecond periods following CQI the performance difference between CQI during periods of quote instability. determinations, proprietary trading on vs CQI off trades was never smaller Thus, IEX believes that additional firms submit 6.8 times as many than $.0048 per share. approaches to incentivize displayed marketable-to-mid shares (i.e., shares The Exchange believes that this data liquidity are warranted, and that the D- priced at least as aggressively as the is particularly significant and evidences Limit order type is one reasonable midpoint and eligible to trade) that Members entering liquidity taking approach to compete with other venues compared to full-service and agency orders when the CQI is on appear to be for liquidity providing order flow firms; while outside of those two able to engage in a form of latency without relying on rebates and tiered millisecond periods, the situation is arbitrage by leveraging fast proprietary pricing. As discussed above, the market data feeds and connectivity reversed, with full-service and agency widespread adoption of DPeg and PPeg along with predictive strategies to chase firms submitting 3.4 times as many order types that utilize the CQI formula short-term price momentum and marketable-to-mid shares compared to evidences that a diverse group of successfully target resting orders at proprietary trading firms (based on daily Members have confidence in the utility unstable prices. IEX believes that these averages from September 2019). of the CQI and its protective features. types of trading strategies, with IEX believes that, as a result, a similarly When looking at the impact of trading concentrated and aggressive tactics when the CQI is on and off for non- diverse group of Members are likely to during moments of quote instability, are use D-Limit orders. pegged limit orders, the data strongly detrimental to the experience of other supports that such orders are The Exchange further believes that the IEX participants. As further discussed proposed rule change is consistent with systematically subjected to adverse below, IEX believes that such trading impacts of latency arbitrage strategies. the Act because it would be available to strategies create disparate burdens on all Members on a fair, equal and During September 2019, non-pegged resting orders, particularly limit orders limit orders accounted for 17% of nondiscriminatory basis. All Members, that do not currently benefit from the regardless of their technological volume traded on IEX (13% of traded CQI or the speedbump. volume was from displayed limit sophistication, can enter D-Limit orders The Exchange believes that IEX data and benefit from their protection against orders). In the aggregate, these orders thus demonstrates that displayed and latency arbitrage. More specifically, a experienced significant differences in non-displayed limit orders are subject to Member using a D-Limit order would short term markouts (and pro forma systematic adverse impacts from latency not need to be able to have the profit and loss) between executions arbitrage strategies. The Exchange technological capability (e.g., through when the CQI is on and off, regardless believes that these adverse impacts the use of high speed connectivity and of whether the NBB (NBO) moves lower constitute an implicit tax on liquidity market data purchased from other (higher) within two milliseconds of the providers that operates to disincentivize exchanges) to identify that the quote is Exchange’s determination of quote market participants from entering limit unstable and send an order message to instability. Resting limit orders that orders that contribute to meaningful cancel or reprice its resting order faster trade when the CQI is on experience price discovery. Other exchanges use negative price markouts one second rebates and volume tiers to essentially than another Member with such after the trade 76% of the time, compensate market makers and other technological capability can trade compared to 34% of the time when CQI liquidity providers for posting against the order. The Exchange will is off. In addition, for marketable aggressive limit orders.60 As discussed adjust the price of a D-Limit order based incoming orders to take liquidity that on the transparent, rule-based CQI formula. arrive when IEX has a displayed quote, 59 See Stockland, Eric. ‘‘Modern Day Latency IEX believes the fact that the D-Limit 21% arrive during the 0.007% of the Arbitrage: Predicting Price Changes,’’ (April 10, 2017), available at https://medium.com/boxes-and- order is specifically designed to trading day when the CQI is on. lines/modern-day-latency-arbitrage-predicting- disincentivize trading strategies seeking price-changes-738edc25a28d. to take liquidity while the CQI is on 58 On a best efforts basis, IEX classifies 60 See, e.g., NYSE Price List 2019, available at proprietary trading firms as those that are trading https://www.nyse.com/publicdocs/nyse/markets/ does not amount to ‘‘unfair for their own account rather than acting in an nyse/NYSE_Price_List.pdf; see also Nasdaq General discrimination between customers, agency capacity for an independent beneficial Equity and Options Rule, Equity 7 Section 118(a)(1) issuers, brokers, or dealers,’’ within the owner. Agency broker-dealers are firms that trade available at http://nasdaq.cchwallstreet.com/ meaning of the Act. The existing equity on behalf of customers that are independent NASDAQTools/PlatformViewer.asp?selectednode= beneficial owner but do not commit capital to chp%5F1%5F1%5F2%5F2& market structure is replete with facilitate their customers’ orders. Full-service manual=%2Fnasdaq%2Fmain%2 broker-dealers are also trading on behalf of an Fnasdaq%2Dllcrules%2F; Cboe BZX U.S. Equities 61 See Wah, Elaine, ‘‘Gone in Sixty Seconds’’ independent beneficial owner but they also have Exchange Fee Schedule, available at https:// (September 21, 2018) available at: https:// the ability to commit capital to facilitate a customer markets.cboe.com/us/equities/membership/fee_ medium.com/boxes-and-lines/gone-in-sixty- order. schedule/bzx/. seconds-22094adeb0de.

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examples of exchange rules that seek to designed to protect impacted order to and including the midpoint of the incentivize, disincentivize, or deter types during these very narrow NBBO or the order’s limit price.66 A various types of trading activity. Maker- windows of time. Even if IEX enhances MidPoint Discretionary order can be Taker price structures, which are used the CQI formula (as noted above), the displayed or non-displayed. In the case by all the largest exchanges, by their nature of the CQI will remain intact— of a displayed MidPoint Discretionary nature provide more favorable exchange it will continue to focus on protecting order, the order’s display price is economics to liquidity-providing impacted orders against latency adjusted in response to changes in the compared to liquidity-taking activity. arbitrage trading strategies during very NBB (for buy orders) or NBO (for sell Nasdaq charges ‘‘excess order fees’’ on narrow windows of time. Even though orders) which can result in a displayed certain members that have a relatively D-Limit orders may not be accessible to order being adjusted to a less aggressive high ratio of orders entered away from other market participants during these price than it was previously displayed the NBBO to orders that are executed, narrow timeframes, the Exchange does at if the NBB or NBO moves to a less subject to carve-outs for certain low- not believe that this impact is unfairly aggressive price. Thus, displayed volume members and certain registered discriminatory because during the vast MidPoint Discretionary orders are market makers.62 Nasdaq justified the majority of time D-Limit quotes will be subject to quote fading if the NBB or fee based on its design to improve the accessible. Moreover, the purpose of NBO, as applicable, moves to a less quality of displayed liquidity to the limiting such accessibility is to aggressive price. IEX believes that this benefit of all market participants.63 incentivize liquidity providers to post price adjustment functionality is Further, IEX’s CQI Remove Fee is displayed orders on IEX by protecting substantially similar to the proposed D- expressly designed to benefit and them as discussed above. To the extent Limit price adjustment functionality in incentivize the placing of resting, non- that such incentive is successful, all that both order types will adjust to a less displayed orders by limiting the market participants, including takers of aggressive price in response to certain profitability of the same trading liquidity, will benefit. objective criteria. The displayed price of strategies that motivate the current The CQI formula used to determine a MidPoint Discretionary order will proposal. Moreover, IEX’s existing whether and when to adjust an order’s move to a less aggressive price if the speed bump is designed to limit price is codified in IEX Rule 11.190(g) NBB or NBO moves to a less aggressive executions of non-displayed, pegged and is, on average, on for only 0.007% price, while the displayed price of a D- orders before the Exchange has the of the trading day for each security. Limit order will move to a less ability to update and reprice those During the remaining 99.993% of the aggressive price if IEX’s CQI formula orders based on its own view of market trading day, D-Limit orders would be predicts that the NBB or NBO is likely prices. In approving the speed bump, available to trade at their resting price to move to a less aggressive price. the Commission found that: in the same manner as any other limit EDGA adopted the MidPoint order. In contrast, whether an order will Discretionary order through an IEX’s [speed bump] is thus narrowly be cancelled or adjusted in an exchange 67 designed to allow IEX to update the prices of immediately effective rule filing. Four non-displayed resting pegged orders so that with an asymmetrical speed bump years later, EDGA’s affiliate, EDGX filed they can achieve their intended purpose— would not be transparent or predictable an immediately effective rule filing to pricing that is accurately benchmarked to the since such changes are determined adopt a comparable MidPoint NBBO.... The Commission thus finds that exclusively by the market participant Discretionary order type, the displayed IEX’s ability to update the prices of resting that entered the order. Further, the price version of which is also pegged to the pegged orders . . . is not designed to unfairly of a D-Limit order would only be same-side NBB or NBO and thus subject discriminate among members to the adjusted when the CQI formula predicts to price adjustments to a less aggressive detriment of investors or the public interest that the relevant quote is unstable while and is intended to benefit investors that post price when the NBBO moves to such a pegged orders.’’ 64 an asymmetrical speed bump enables a price.68 Neither the EDGA nor EDGX market participant to cancel or adjust rule filings raised any issues or concerns The Exchange believes that it is the price of an order on an ad hoc basis regarding quote fading of displayed similarly not unfairly discriminatory to for any reason and frequency. MidPoint Discretionary orders. In use a narrowly tailored means to Notwithstanding that D-Limit orders addition, Nasdaq offers a discretionary provide protection to and encourage the will be subject to price adjustment when order type for which the display price placing of displayed limit orders on IEX the CQI is on, IEX believes that this can be pegged to a floating price range 69 by investors and market makers by functionality is consistent with the and NYSE Arca and NYSE each offers providing them a measure of protection ‘‘firm quote’’ requirements of Regulation a primary pegged order type that has a from the trading strategies documented NMS Rule 602(b) 65 in that it will not above. The Exchange further believes result in a meaningful amount of quote 66 See EDGA Equity Rule 11.8(e). that the proposed rule change is ‘‘fading’’ compared to the quote fading, 67 See Securities Exchange Act Release No. 67226 consistent with the protection of both explicit and implicit, that exists (June 20, 2012), 77 FR 38113 (June 26, 2012) (SR– investors and the public interest and is permitted today. This quote EDGA–2012–022) (Notice of Filing and Immediate because the circumstances under which fading falls into three broad categories. Effectiveness to Amend EDGA Rules to Add the MidPoint Discretionary order). Two years later, in a D-Limit order will be adjusted are First, several other exchanges offer 2014, EDGA filed another rule change proposal to narrowly tailored, transparent and displayed order types that are pegged to restructure its order type rules, including the predictable. As discussed above, the the NBBO and thus are subject to price MidPoint Discretionary order. See Securities CQI is only on for an extremely small adjustments, including to a less Exchange Act Release No. 73592 (November 13, 2014), 79 FR 68937 (November 19, 2014) (SR– percentage of the trading day and is aggressive price as the NBBO changes EDGA–2014–020). (i.e., explicit quote fading). EDGA, for 68 See Securities Exchange Act Release No. 84327 62 See Nasdaq General Equity and Options Rule, example, offers a MidPoint (October 1, 2018), 83 FR 50416 (October 5, 2018) Equity 7 Section 118(m). Discretionary order that is pegged to the (SR–CboeEDGX–2018–041). 63 See Securities Exchange Act Release No. 66951 same-side NBB or NBO with discretion 69 See Nasdaq Rule 4703(g) and Section 3.3.2 of (May 9, 2012), 77 FR 28647 (May 15, 2012) (SR– Nasdaq’s SUMO FIX Programming Specification for NASDAQ–2012–055). to execute at more aggressive prices up FIX 4.2 available at: https://nasdaqtrader.com/ 64 Securities Exchange Act Release No. 78101 content/technicalsupport/specifications/ (June 17, 2016), 81 FR 41142, 41157 (June 23, 2016). 65 17 CFR 242.602(b). TradingProducts/fix_orders_sb.pdf.

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working price pegged to the same-side formula which itself is based on participants engaged in sophisticated PBBO that must include a minimum of publicly available market data inputs latency arbitrage efforts. one round lot displayed.70 Thus, these and designed to protect liquidity Third, an example of implicit quote displayed pegged orders will also be providers from adverse selection by fading is the manner in which other adjusted to a less aggressive price when latency arbitrage trading strategies. exchanges offer expensive, high-speed the same-side NBBO or PBBO, as Although such protection is designed to proprietary market data feeds and applicable, moves to a less aggressive benefit liquidity providers, IEX believes connectivity products that sophisticated price. Similarly, the Commission’s that it will also benefit liquidity takers market participants can leverage (along approval of a Nasdaq rule filing that to the extent that the protection results with predictive strategies) to not only includes adoption of its displayed in more resting liquidity available to target resting orders at unstable prices discretionary order type does not liquidity takers. Consequently, IEX but to cancel or adjust resting orders include any discussion of potential believes that its D-Limit order type more quickly than market participants quote fading issues.71 proposal is approvable in accordance not using such products and strategies Data for September 2019 identified with this precedent. can access their resting orders. As a that there were approximately 5,500 Second, explicit quote fading exists result, when the market for a particular volume-weighted average NBBO quote on options exchanges, which offer security is in transition, these changes per symbol each day to a less several mechanisms to assist their sophisticated market participants are aggressive price, compared to 5,427 members in managing risk and avoiding often able to cancel resting orders before volume-weighted average CQI unintended executions. These less sophisticated market participants determinations per symbol each day. mechanisms include risk management can access them.74 IEX believes that this data evidences functionality that will automatically Thus, the Exchange believes that D- that D-Limit orders would be subject to cancel resting orders and quotes based Limit orders will operate in a manner a comparable number of changes to a on member configured triggers such as consistent with the ‘‘firm quote’’ less aggressive price as order types of total traded volume, percent traded requirements of Regulation NMS Rule 75 other exchanges that peg to the near side volume, notional, net Delta or Vega 602(b) and with existing order types, NBBO or PBBO. And as discussed exposure.72 Notably, the automatic practices and precedent for protected earlier, the CQI is on for only 1.64 triggers appear to occur inside the quotations under the Order Protection seconds per symbol per day on average exchange matching engine as opposed Rule, as discussed above. D-Limit orders (0.007% of the time during regular to requiring an order or cancel message will be subject to execution at their market hours). Thus, IEX believes that from the member. Other exchanges also ranked and displayed price (if this data supports that D-Limit, like the offer order and quote purge displayable) at the time an incoming other exchanges’ order types discussed functionality that is designed to help order reaches the Exchange for execution against the D-Limit order. above, is a narrowly tailored approach members manage risk by providing Any price adjustment that occurs must to provide for price adjustments to a less dedicated (and effectively faster) ports occur before that point in time. This is aggressive price for displayed orders to enter mass cancellations of multiple 73 similar to the EDGA displayed MidPoint pursuant to transparent and objective resting orders. While IEX appreciates Discretionary order type, which is criteria. IEX believes that order types that market makers and other market subject to price adjustment to a less that are subject to repricing in response participants posting displayed orders on aggressive displayed price in response to an exchange determining that the options exchanges face materially to NBBO changes. As a result, a NBBO has changed provide relevant greater risks than on equities markets, in displayed MidPoint Discretionary order precedent to repricing based on an view of the enormous number of individual option series available for may not be available for execution at its exchange determining—pursuant to a previously displayed price by the time transparent formula—that the NBBO is quoting on options markets, IEX believes that they nonetheless provide an incoming order reaches the exchange likely in the process of changing. In for execution. Although a D-Limit both cases, the repricing trigger is based relevant precedent for the risk management protections that D-Limit displayed order would be adjusted to a on the NBBO. Although D-Limit orders less aggressive price than the NBBO, would be repriced based on a orders would provide. Market participants on both options and while a MidPoint Discretionary order transparent formula predicting an will be adjusted to a less aggressive imminent change to the NBBO, rather equities markets face significant challenges in cancelling or adjusting price that has become the same-side than an exchange’s determination that NBBO, in both cases the order is no the NBBO has changed, the formula is resting orders during times of market transition, in the face of other market longer available for execution at its narrowly tailored, designed to provide previously displayed price. Further, protection to market participants at all options exchanges cancel quotes and levels of sophistication, and codified in 72 See, e.g., NYSE Arca Rule 6.40–O; Nasdaq ISE, LLC Options 3, Section 15(a)(3)(B); Nasdaq GEMX, displayed orders as a result of an IEX rule. And in both cases, the LCC Options 3, Section 15(a)(3)(B); Nasdaq MRX, automated risk management automatic change to the quote’s price is LLC Options 3, Section 15(a)(3)(B); Miami functionality or enable cancellation explicitly intended to prevent International Securities Exchange LLC (‘‘MIAX’’) through faster purge ports. In those executions at the originally displayed Rule 519A; Nasdaq Rule 6130; Market Maker Risk Management Information Sheet for Nasdaq PHLX price. While the D-Limit proposal is LLC (‘‘Nasdaq PHLX’’)/Nasdaq Options Market 74 See, e.g., Malinova, Katya and Park, Andreas, novel in that it would provide an (‘‘NOM’’)/Nasdaq BX available at https:// ‘‘Does High Frequency Trading Add Noise to exchange with flexibility to reprice a www.nasdaq.com/docs/ Prices?’’ (April 17, 2017) at 5, available at https:// displayed order, that flexibility is MarketMakerRiskManagement_PHLX_NOM_ www.rsm.nl/fileadmin/home/Department_of _ BX.pdf; and Order Risk Management Information Finance_VG5_/LQ2017/Malinova_Katya.pdf limited by the narrowly tailored CQI Sheet for Nasdaq PHLX/NOM/Nasdaq BX available (‘‘When someone trades against their quotes on one at https://www.nasdaq.com/docs/ venue, market makers rush to cancel their quotes 70 See NYSE Arca Rule 7.31–E(h)(2) and NYSE OrderRiskManagement_PHLX_NOM_BX.pdf. on the other venue; if the market maker is very fast, Rule 7.31(h)(2). 73 See ‘‘CBOE Purge Ports Frequently Asked it may be able to cancel the other quote before 71 See Securities Exchange Act Release No. 75252 Questions’’ available at https://cdn.cboe.com/ portions of a presumed multi-market order reach (June 22, 2015), 80 FR 36865 (June 26, 2015) (SR– resources/features/Cboe_USO_PurgePortsFAQs.pdf the other venue.’’). NASDAQ–2015–024). and MIAX Rule 519C. 75 See supra note 65.

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situations, an order or quote that was Commission determined that IEX’s 350 has been repriced by the exchange in previously displayed may not be microsecond ‘‘speed bump,’’ which is the time between the transmission of the available for execution by the time an applied to incoming and outbound order and its receipt and processing by incoming order reaches the exchange messages, is ‘‘well within the range of the exchange’s systems. The potential engine for execution. Moreover, all geographic and technological latencies that this will occur depends on various resting displayed orders may be that market participants experience factors, including, among others, the unavailable in the event that another today’’ and therefore is ‘‘comparable distance between the point where the order or a cancel message is actionable to—and even less than—delays sender transmits the order to the prior to an incoming order reaching the attributable to other markets that exchange’s systems and how quickly engine, particularly when targeted by a currently are included in the NBBO.’’ 79 those systems update their sophisticated market participant The Commission thus concluded that, understanding of the NBBO relative to engaged in latency arbitrage. And, as because IEX’s speed bump is de the speed at which they process orders noted above, D-Limit orders will only be minimis, its displayed quotes were to take liquidity. subject to price adjustment on average immediately accessible and entitled to Because the use of a de minimis delay for 0.007% of the trading day, while the protected quotation status.80 does not affect the ability of a displayed frequency of order cancellation or non- Access to D-Limit quotes will not be order to qualify as a protected quotation, availability attributable to the existing subject to any delay beyond that to there is no reason it should lose that exchange mechanisms and practices is which all IEX’s orders, displayed and status because its price is adjusted determined by each market participant non-displayed, are now subject. automatically by the exchange in and not subject to any transparent Accordingly, all D-Limit quotes will be response to changes in the NBBO, as is limitations. immediately accessible under the case with the EDGA Midpoint Further, IEX believes that displayed Regulation NMS. Discretionary Order or the Nasdaq D-Limit orders would clearly qualify as Moreover, based on precedent, the displayed discretionary order. IEX does ‘‘automated quotations’’ and therefore fact that D-Limit displayed orders are not believe that there are any material ‘‘protected quotations’’ under subject to automatic repricing based on differences in this regard between Regulation NMS, as discussed in the changes in market prices does not affect repricing that occurs in response to an Purpose section. This conclusion is their status as protected quotations. For exchange determining the NBBO has supported by two key considerations. example, as discussed above, EDGA has changed, and repricing based on an First, IEX will not impose any delay on an approved Midpoint Discretionary exchange determining—pursuant to a orders seeking to access D-Limit Order, which allows members to post transparent formula—that the NBBO is quotations beyond that which the displayed or non-displayed liquidity at likely in the process of changing. In Commission has already approved as the NBBO with discretion to execute at either case, the automatic change to the consistent with the requirements for prices extending to and including the quote’s price is explicitly intended to ‘‘automated quotations.’’ Second, 81 NBBO midpoint. This EDGA order prevent executions at the originally adjusting prices of D-Limit displayed type automatically reprices the order displayed price. orders when the CQI is on is consistent based on changes in the NBBO D-Limit orders are differentiated with well-established precedent (including to a less aggressive price), because they are explicitly designed to allowing other exchanges to which benefits market participants that prevent executions in small time automatically adjust the prices of use the order type by helping to assure increments when the CQI is on. While protected quotations based on changes they are not executed at ‘‘stale’’ prices this functionality discriminates against in overall market prices. as well as to provide an opportunity for Under Rule 611 of Regulation NMS,76 the use of trading strategies with more those orders to execute at a more complete and timely information about ‘‘trade-through’’ protections are aggressive NBBO when prices move in extended to each protected bid or offer, market prices that intentionally seek to that direction. Similarly, various trade against resting orders during these which is defined in relevant part as ‘‘an exchanges, including IEX, have received automated quotation that is the best bid time periods at stale prices, IEX believes approval for ‘‘market maker peg’’ order that the D-Limit functionality is not or best offer of a national securities types, which automatically reprice 77 unfairly discriminatory within the exchange.’’ The term ‘‘automated orders to allow market makers to meet quotation’’ is defined as one that meaning of the Act because it is a their quoting obligations on those narrowly tailored means of protecting, permits an incoming order to be marked exchanges by automatically repricing as immediate-or-cancel (‘‘IOC’’) and that and thereby encouraging the use of, those orders to within a designated displayed quotations by both investors ‘‘immediately and automatically’’ 82 percentage away from the NBBO. and market makers. Moreover, for the executes an IOC order against the All these order types allow an displayed quotation up to its full size, reasons discussed in the Purpose exchange to automatically reprice section, the Exchange believes that the cancels any unexecuted portion, resting orders based on determinations transmits to the sender a message proposed D-Limit order type may result by the individual exchanges, in reading in market participants entering more indicating the action taken, and updates price updates from all exchanges, that the quotation to reflect a change to its displayed and other resting limit orders the NBBO has changed. With respect to on IEX, and at more aggressive prices, material terms.78 the automated quotation definition, a In approving IEX’s exchange sizes and duration, which would benefit participant seeking to access a Midpoint all market participants and thereby application, in response to arguments Discretionary Order or market maker that federal securities regulations did further the purposes of the Act. peg order displayed at any one time may Further, IEX believes that the not permit exchanges to impose any fail to execute at that price if the order intentional delay, however small, on specified order attributes for D-Limit orders are consistent with the Act access to protected quotations, the 79 See note 64 supra at 41161. 80 See note 64 supra at 41162. because they are structured to facilitate 76 17 CFR 242.611. 81 See note 66 supra. efficient execution of D-Limit orders in 77 17 CFR 242.600(b)(61)(iii). 82 See, e.g., IEX Rule 11.190(b)(13); Cboe BZX a manner consistent with existing 78 17 CFR 242.600(b)(4). Rule 11.9(c)(15); Nasdaq Rule 4702(b)(7). functionality and order types.

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Additionally, IEX believes that the market participants, in part to avoid protections offered by the D-Limit order proposal is consistent with protection of being subject to adverse latency type, as proposed, are intended in part investors and the public interest in that arbitrage. While the proposed rule to incentivize additional resting limit the D-Limit order type is designed to change will not enable counter-party orders to be entered on the Exchange, assist Members in obtaining best selection, IEX believes that to the degree which would provide additional execution for their customers by it is successful in reducing the impact available liquidity to all Members. providing an opportunity to execute at of latency arbitrage strategies targeting C. Self-Regulatory Organization’s the NBBO, but limiting executions at the resting orders at stale prices, it may Statement on Comments on the NBBO when the NBBO appears to be reduce the need for counter-party Proposed Rule Change Received From unstable, thereby reducing the potential selection and thereby incentivize such Members, Participants, or Others to execute at an imminently stale price. market participants to post displayed In conclusion, IEX believes that the and other limit orders on IEX. Written comments were neither proposed new D-Limit order type is Accordingly, the Exchange also believes solicited nor received. that the proposed rule change will not consistent with the protection of III. Date of Effectiveness of the result in any burden on inter-market investors and the public interest Proposed Rule Change and Timing for competition that is not necessary or purposes of the Act in that it is designed Commission Action to protect liquidity providers from appropriate in furtherance of the certain adverse impacts of latency purposes of the Act. Within 45 days of the date of arbitrage strategies, and thereby With regards to intra-market publication of this notice in the Federal incentivize the entry of additional competition, D-Limit orders will be Register or within such longer period resting orders, including displayed available to all Members on a fair, up to 90 days (i) as the Commission may orders on the Exchange, thus enhancing impartial and nondiscriminatory basis. designate if it finds such longer period price discovery and the overall liquidity While the proposed rule change is to be appropriate and publishes its profile on the Exchange to the benefit of designed to provide certain protections reasons for so finding or (ii) as to which all market participants. to limit orders, all Members are eligible the Exchange consents, the Commission to enter D-Limit orders on the same shall: B. Self-Regulatory Organization’s terms and the protections will be (a) By order approve or disapprove Statement on Burden on Competition available to all Members on the same such proposed rule change, or IEX does not believe that the terms. Moreover, the Exchange does not (b) institute proceedings to determine proposed rule change will result in any believe that the proposed change will whether the proposed rule change burden on competition that is not result in any burden on Members should be disapproved. necessary or appropriate in furtherance seeking to cross the spread and execute IV. Solicitation of Comments of the purposes of the Act. To the at the far side quote (the NBO (NBB) for contrary, the proposal is designed to buy (sell) orders) or to Members seeking Interested persons are invited to enhance IEX’s competitiveness by to conduct a market wide sweep with submit written data, views, and incentivizing the entry of increased intermarket sweep orders. D-Limit arguments concerning the foregoing, liquidity. With regards to inter-market orders will only be subject to potential including whether the proposed rule competition, other exchanges are free to adjustment for an extremely small change is consistent with the Act. adopt similar order types to the extent percentage of the trading day and the Comments may be submitted by any of that the proposed changes pose a rest of the time will be available for the following methods: competitive threat to their business. In execution, if consistent with the order’s Electronic Comments this regard, the Exchange notes that limit price, at the far side quote. To the • Use the Commission’s internet NYSE American LLC (‘‘NYSE Amex’’) extent that a D-Limit order is adjusted comment form (http://www.sec.gov/ previously adopted a rule copying an to a less aggressive price while a Member is seeking to access the full rules/sro.shtml); or earlier iteration of the Exchange’s • Send an email to rule-comments@ Discretionary Peg order type and quote displayed size of the order at the prior 83 more aggressive price with an sec.gov. Please include File Number SR– stability calculation. IEX–2019–15 on the subject line. In addition, the Exchange believes intermarket sweep order, the Member that the proposed rule change will would be permitted to trade-through the Paper Comments D-Limit order at the more aggressive enhance its ability to compete with • Send paper comments in triplicate alternative trading systems (‘‘ATSs’’). In price pursuant to Rule 611(b)(6) of Regulation NMS.85 Moreover, the to Secretary, Securities and Exchange this regard, IEX believes that a Commission, 100 F Street NE, meaningful segment of market proposed change would provide potential benefits to such Members to Washington, DC 20549–1090. participants choose to rest orders on All submissions should refer to File non-displayed ATSs in order to obtain the extent there is more liquidity available on IEX as a result of the Number SR–IEX–2019–15. This file protection from latency arbitrage number should be included on the strategies. As opposed to exchanges, protections provided to users of D-Limit orders. As discussed above, the subject line if email is used. To help the ATSs can be structured to enable Commission process and review your counter-party selection so that 85 comments more efficiently, please use participants can choose to avoid Regulation NMS Rule 611(b)(6) provides an exception to its trade-through requirements if the only one method. The Commission will interacting with certain counterparties transaction that constituted the trade-through was post all comments on the Commission’s deemed to be undesirable.84 The effected by a trading center that simultaneously routed an intermarket sweep order to execute internet website (http://www.sec.gov/ Exchange believes that counter-party rules/sro.shtml). Copies of the selection is important to some of these against the full displayed size of any protected quotation in the NMS stock that was traded submission, all subsequent through. See 17 CFR 242.611(b); see also Question amendments, all written statements 83 See NYSE Amex Rule 7.31E(h)(3)(D). 4.06 in ‘‘Responses to Frequently Asked Questions 84 See Securities Exchange Act Release No. 83663 Concerning Rule 611 and 610 of Regulation NMS’’ with respect to the proposed rule (July 18, 2018), 83 FR 38768, 38853 (August 7, (April 4, 2008), available at https://www.sec.gov/ change that are filed with the 2018). divisions/marketreg/nmsfaq610-11.htm. Commission, and all written

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communications relating to the I. Self-Regulatory Organization’s Subject to certain exceptions, Clearing proposed rule change between the Statement of the Terms of Substance of Participants 6 are subject to the Net Commission and any person, other than the Proposed Rule Change Capital Rules.7 However, a subset of those that may be withheld from the The Exchange proposes to adopt a Clearing Participants are subsidiaries of public in accordance with the new rule titled ‘‘Off-Exchange RWA U.S. bank holding companies, which, provisions of 5 U.S.C. 552, will be Transfers’’ at BX Options 6, Section 6. due to their affiliations with their parent available for website viewing and The text of the proposed rule change U.S.-bank holding companies, must printing in the Commission’s Public is available on the Exchange’s website at comply with additional bank regulatory Reference Room, 100 F Street, NE, http://nasdaqbx.cchwallstreet.com/, at capital requirements pursuant to Washington, DC 20549 on official the principal office of the Exchange, and rulemaking required under the Dodd- business days between the hours of at the Commission’s Public Reference Frank Wall Street Reform and Consumer 8 10:00 a.m. and 3:00 p.m. Copies of the Room. Protection Act. Pursuant to this filing also will be available for mandate, the Board of Governors of the inspection and copying at the principal II. Self-Regulatory Organization’s Federal Reserve System, the Office of offices of the Exchange. All comments Statement of the Purpose of, and the Comptroller of the Currency, and the received will be posted without change. Statutory Basis for, the Proposed Rule Federal Deposit Insurance Corporation Persons submitting comments are Change have approved a regulatory capital cautioned that we do not redact or edit In its filing with the Commission, the framework for subsidiaries of U.S. bank 9 personal identifying information from Exchange included statements holding company clearing firms. comment submissions. You should concerning the purpose of and basis for Generally, these rules, among other submit only information that you wish the proposed rule change and discussed things, impose higher minimum capital to make available publicly. All any comments it received on the and higher asset risk weights than were submissions should refer to File proposed rule change. The text of these previously mandated for Clearing Number SR–IEX–2019–15, and should statements may be examined at the Participants that are subsidiaries of U.S. be submitted on or before January 21, places specified in Item IV below. The bank holding companies under the Net Capital Rules. Furthermore, the new 2020. Exchange has prepared summaries, set forth in sections A, B, and C below, of rules do not fully permit deductions for For the Commission, by the Division of the most significant aspects of such hedged securities or offsetting options Trading and Markets, pursuant to delegated 10 statements. positions. Rather, capital charges authority.86 under these standards are, in large part, J. Matthew DeLesDernier, A. Self-Regulatory Organization’s based on the aggregate notional value of Assistant Secretary. Statement of the Purpose of, and short positions regardless of offsets. As Statutory Basis for, the Proposed Rule [FR Doc. 2019–28024 Filed 12–27–19; 8:45 am] a result, in general, Clearing Participants Change that are subsidiaries of U.S. bank BILLING CODE 8011–01–P 1. Purpose holding companies must hold substantially more bank regulatory The Exchange proposes to adopt a capital than would otherwise be SECURITIES AND EXCHANGE new rule titled, ‘‘Off-Exchange RWA COMMISSION required under the Net Capital Rules. Transfers’’ at BX Options 6, Section 6. The Exchange is concerned with the This proposal is substantially the same ability of Market Makers to provide [Release No. 34–87817; File No. SR–BX– as Cboe Exchange, Inc. (‘‘Cboe’’) Rule liquidity in their appointed classes. The 2019–042] 6.8.3 Exchange believes that permitting Proposed Options 6, Section 6 is market participants to efficiently Self-Regulatory Organizations; Nasdaq intended to facilitate the reduction of transfer existing options positions BX, Inc.; Notice of Filing and risk-weighted assets (‘‘RWA’’) through an off-exchange transfer process Immediate Effectiveness of Proposed attributable to open options positions. Rule Change To Adopt a New Rule SEC Rule 15c3–1 (Net Capital allowed to offset another position’s loss at the same Titled ‘‘Off-Exchange RWA Transfers’’ Requirements for Brokers or Dealers) valuation point (e.g. vertical spreads). at BX Options 6, Section 6 (‘‘Net Capital Rules’’) requires registered 6 The term Clearing Participant is defined within broker-dealers, unless otherwise Options 1, Section 1(a)(16). All Clearing December 20, 2019. Participants must also be clearing members of The excepted, to maintain certain specified Options Clearing Corporation (‘‘OCC’’). Pursuant to Section 19(b)(1) of the minimum levels of capital.4 The Net 7 In the event federal regulators modify bank Securities Exchange Act of 1934 Capital Rules are designed to protect capital requirements in the future, the Exchange 1 2 will reevaluate the proposed rule change at that (‘‘Act’’), and Rule 19b–4 thereunder, securities customers, counterparties, time to determine whether any corresponding notice is hereby given that on December and creditors by requiring that broker- changes to the proposed rule are appropriate. 17, 2019, Nasdaq BX, Inc. (‘‘BX’’ or dealers have sufficient liquid resources 8 H.R. 4173 (amending section 3(a) of the ‘‘Exchange’’) filed with the Securities on hand, at all times, to meet their Securities Exchange Act of 1934 (the ‘‘Act’’) (15 and Exchange Commission (‘‘SEC’’ or financial obligations. Notably, hedged U.S.C. 78c(a))). 9 12 CFR 50; 79 FR 61440 (Liquidity Coverage ‘‘Commission’’) the proposed rule positions, including offsetting futures Ratio: Liquidity Risk Measurement Standards). change as described in Items I, II, and and options contract positions, result in 10 Many options strategies, including relatively III, below, which Items have been certain net capital requirement simple strategies often used by retail customers and prepared by the Exchange. The reductions under the Net Capital Rules.5 more sophisticated strategies used by broker- dealers, are risk limited strategies or options spread Commission is publishing this notice to strategies that employ offsets or hedges to achieve 3 solicit comments on the proposed rule See Securities Exchange Act Release No. 87374 certain investment outcomes. Such strategies change from interested persons. (October 21, 2019), 84 FR 57542 (October 25, 2019) typically involve the purchase and sale of multiple (SR–Cboe–2019–044). options (and may be coupled with purchases or 4 17 CFR 240.15c3–1. sales of the underlying securities), executed 86 17 CFR 200.30–3(a)(12). 5 In addition, the Net Capital Rules permit various simultaneously as part of the same strategy. In 1 15 U.S.C. 78s(b)(1). offsets under which a percentage of an option many cases, the potential market exposure of these 2 17 CFR 240.19b–4. position’s gain at any one valuation point is strategies is limited and defined.

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