[Federal Register Volume 75, Number 236 (Thursday, December 9, 2010)]
[Notices]
[Pages 76763-76766]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-30944]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-63428; File No. SR-EDGX-2010-18]
Self-Regulatory Organizations; EDGX Exchange, Inc.; Notice of
Filing and Immediate Effectiveness of Proposed Rule Change To Amend
EDGX Rule 11.9 To Offer Anti-Internalization Qualifier (``AIQ'')
Functionality to Exchange Users
December 3, 2010.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given
that on November 30, 2010, EDGX Exchange, Inc. (the ``Exchange'' or the
``EDGX'') filed with the Securities and Exchange
[[Page 76764]]
Commission (the ``Commission'') the proposed rule change as described
in Items I and II below, which Items have been prepared by the
Exchange. The Exchange has designated the proposed rule change as
constituting a ``non-controversial'' rule change under paragraph (f)(6)
of Rule 19b-4 under the Act.\3\ The Commission is publishing this
notice to solicit comments on the proposed rule change from interested
persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ 17 CFR 240.19b-4(f)(6).
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to offer Anti-Internalization Qualifier
(``AIQ'') functionality to Exchange Users pursuant to proposed Rule
11.9(f). The text of the proposed rule change is available on the
Exchange's Web site at http://www.directedge.com, at the Exchange's
principal office, at the Public Reference Room of the Commission, and
the Commission's Web site.\4\
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\4\ http://www.sec.gov.
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II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange included statements
concerning the purpose of, and basis for, the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The self-regulatory organization has prepared summaries,
set forth in Sections A, B and C below, of the most significant aspects
of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and the
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Exchange proposes to offer Anti-Internalization Qualifier
(``AIQ'') functionality to Exchange Users pursuant to proposed Rule
11.9(f).
Background
The proposed AIQ modifiers are designed to prevent two orders with
the same Unique Identifier (as defined below) from executing against
each other. The Exchange proposes to offer five AIQ modifiers that will
be implemented and can be set at the market participant identifier
(``MPID''), the Exchange Member identifier or the Anti-Internalization
Group identifier level \5\ (any such identifier, a ``Unique
Identifier'').\6\ With one exception, described below, the AIQ modifier
on the incoming order controls the interaction between two orders
marked with AIQ modifiers from the same Unique Identifier. The five AIQ
modifiers are discussed more thoroughly below.
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\5\ The Anti-Internalization Group identifier is a unique two
character ID that an Exchange Member selects.
\6\ Any Exchange Member that has an MPID issued by FINRA is
identified in the Exchange's internal systems by that MPID.
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AIQ Cancel Newest (``CN'')
An incoming order marked with the CN modifier will not execute
against opposite side resting interest marked with any AIQ modifier
originating from the same Unique Identifier. The incoming order marked
with the CN modifier will be cancelled back to the originating User.
The resting order marked with an AIQ modifier, which otherwise would
have interacted with the incoming order from the same Unique
Identifier, will remain on the EDGX book (``Book'').
AIQ Cancel Oldest (``CO'')
An incoming order marked with the CO modifier will not execute
against opposite side resting interest marked with any AIQ modifier
originating from the same Unique Identifier. The resting order marked
with the AIQ modifier, which otherwise would have interacted with the
incoming order by the same Unique Identifier, will be cancelled back to
the originating User. The incoming order marked with the CO modifier
will remain on the Book.
AIQ Decrement and Cancel (``DC'')
An incoming order marked with the DC modifier will not execute
against opposite side resting interest marked with any AIQ modifier
originating from the same Unique Identifier. If both orders are
equivalent in size, both orders will be cancelled back to the
originating User. If the orders are not equivalent in size, the smaller
order will be cancelled back to the originating User and the larger
order will be decremented by the size of the smaller order, with the
balance remaining on the Book.
AIQ Cancel Both (``CB'')
An incoming order marked with the CB modifier will not execute
against opposite side resting interest marked with any AIQ modifier
originating from the same Unique Identifier. The entire size of both
orders will be cancelled back to the originating User.
AIQ Cancel Smallest (``CS'')
An incoming order marked with the CS modifier will not execute
against opposite side resting interest marked with any AIQ modifier
originating from the same Unique Identifier. If both orders are
equivalent in size, both orders will be cancelled back to the
originating User. If the orders are not equivalent in size, the smaller
of the two orders will be cancelled back to the originating User and
the larger order will remain on the Book.
Additional Discussion
AIQ modifiers are intended to prevent interaction between the same
Unique Identifier. AIQ modifiers must be present on both the buy and
the sell order in order to prevent a trade from occurring and to effect
a cancel instruction. AIQ modifiers are available for orders entered in
either an agency or principal capacity. An incoming AIQ order cannot
cancel through resting orders that have price and/or time priority.
When an order with an AIQ modifier is entered it will first interact
with all available interest in accordance with the execution process
described in Exchange Rules 11.8 and 11.9. If there is a remaining
balance on the order after trading with all orders with higher
priority, it may then interact with an opposite side AIQ order in
accordance with the rules established above. Incoming AIQ orders that
are priced through the price of a resting AIQ order may cancel the
resting order as long as no other non-AIQ orders have priority.
The Exchange believes that adding this functionality will allow
Exchange Users to better manage order flow and prevent undesirable
executions with themselves or the potential for (or the appearance of)
``wash sales'' that may occur as a result of the velocity of trading in
today's high speed marketplace. Many Exchange Users have multiple
connections into the Exchange due to capacity and speed related
demands. Orders routed by the same User via different connections may,
in certain circumstances, trade against each other. The new AIQ
modifiers provide Users the opportunity to prevent these potentially
undesirable trades occurring under the same Unique Identifier on both
the buy and sell side of the execution. The Exchange also believes that
this functionality will allow firms to better internalize agency order
flow which in turn may decrease the costs to its customers. The
Exchange notes that the AIQ modifiers do not alleviate, or otherwise
exempt, broker-dealers from their best execution obligations. As such,
broker-dealers
[[Page 76765]]
using the AIQ modifiers will be obligated to internally cross agency
orders at the same price, or a better price than they would have
received had the orders been executed on the Exchange. Additionally,
the AIQ modifiers will assist market participants in complying with
certain rules and regulations of the Employee Retirement Income
Security Act (``ERISA'') that preclude and/or limit managing broker-
dealers of such accounts from trading as principal with orders
generated for those accounts. Finally, the Exchange notes that offering
the AIQ modifiers will streamline certain regulatory functions by
reducing false positive results that may occur on Exchange generated
wash trading surveillance reports when orders are executed under the
same Unique Identifier. For these reasons, the Exchange believes the
AIQ modifiers offer users enhanced order processing functionality that
may prevent potentially undesirable executions without negatively
impacting broker-dealer best execution obligations.
2. Statutory Basis
The rule change proposed in this submission is consistent with the
requirements of the Securities Exchange Act of 1934 (the ``Act''), and
the rules and regulations thereunder that are applicable to a national
securities exchange, and, in particular, with the requirements of
Section 6(b) \7\ of the Act. Specifically, the proposed change is
consistent with Section 6(b)(5) \8\ of the Act, because it is designed
to prevent fraudulent and manipulative acts and practices, to promote
just and equitable principles of trade, to foster cooperation and
coordination with persons engaged in facilitating transactions in
securities, and to remove impediments to, and perfect the mechanism of,
a free and open market and a national market system. Specifically, the
AIQ functionality allows firms to better manage order flow and prevent
undesirable executions against themselves, and the proposed change
described herein enhances the choices available to such firms in how
they do so.
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\7\ 15 U.S.C. 78f(b).
\8\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition
The proposed rule change does not impose any burden on competition
that is not necessary or appropriate in furtherance of the purposes of
the Act.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
The Exchange has not solicited, and does not intend to solicit,
comments on this proposed rule change. The Exchange has not received
any unsolicited written comments from members or other interested
parties.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Because the foregoing proposed rule change does not significantly
affect the protection of investors or the public interest, does not
impose any significant burden on competition, and, by its terms, does
not become operative for 30 days from the date on which it was filed,
or such shorter time as the Commission may designate, it has become
effective pursuant to Section 19(b)(3)(A) of the Act \9\ and Rule 19b-
4(f)(6) thereunder.\10\
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\9\ 15 U.S.C. 78s(b)(3)(A).
\10\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)(iii)
requires the self-regulatory organization to submit to the
Commission written notice of its intent to file the proposed rule
change, along with a brief description and text of the proposed rule
change, at least five business days prior to the date of filing of
the proposed rule change, or such shorter time as designated by the
Commission. The Exchange has satisfied this requirement.
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The Exchange has requested that the Commission waive the 30-day
pre-operative delay so that the Exchange may immediately offer Exchange
users the ability to better manage order flow and prevent undesirable
executions with themselves or the potential for or the appearance of
wash sales that may occur as a result of the velocity of trading in
today's high speed marketplace. The Commission notes that the proposal
is based on similar rules of other exchanges \11\ and believes that
waiver of the operative delay is consistent with the protection of
investors and the public interest. Therefore, the Commission designates
the proposal operative upon filing.\12\
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\11\ See Securities Exchange Act Release No. 60182 (June 26,
2009), 74 FR 32014 (July 6, 2009) (SR-NASDAQ-2009-057); Securities
Exchange Act Release No. 60191 (June 30, 2009) (SR-NYSEArca-2009-
058); Securities Exchange Act Release No. 60266 (July 9, 2009), 74
FR 34380 (July 15, 2009) (SR-BATS-2009-022); Securities Exchange Act
Release No. 62102 (May 13, 2010), 75 FR 28670 (May 21, 2010) (SR-
BATS-2010-011).
\12\ For purposes only of waiving the 30-day operative delay,
the Commission has considered the proposed rule's impact on
efficiency, competition, and capital formation. See 15 U.S.C.
78c(f).
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At any time within 60 days of the filing of the proposed rule
change, the Commission summarily may temporarily suspend such rule
change if it appears to the Commission that such action is necessary or
appropriate in the public interest, for the protection of investors, or
otherwise in furtherance of the purposes of the Act.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml or
Send an e-mail to [email protected]. Please include
File Number SR-EDGX-2010-18 on the subject line.
Paper Comments
Send paper comments in triplicate to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number SR-EDGX-2010-18. This file
number should be included on the subject line if e-mail is used. To
help the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all
written statements with respect to the proposed rule change that are
filed with the Commission, and all written communications relating to
the proposed rule change between the Commission and any person, other
than those that may be withheld from the public in accordance with the
provisions of 5 U.S.C. 552, will be available for Web site viewing and
printing in the Commission's Public Reference Room, 100 F Street, NE.,
Washington, DC 20549, on official business days between the hours of 10
a.m. and 3 p.m. Copies of the filing also will be available for
inspection and copying at the principal office of the Exchange. All
comments received will be posted without change; the Commission does
not edit personal identifying information from submissions. You should
submit only information that you wish to make available publicly. All
submissions should refer to File Number SR-EDGX-2010-18 and should be
submitted on or before December 30, 2010.
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For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\13\
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\13\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-30944 Filed 12-8-10; 8:45 am]
BILLING CODE 8011-01-P