[Federal Register Volume 76, Number 43 (Friday, March 4, 2011)]
[Notices]
[Pages 12173-12176]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-4905]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-63989; File No. SR-EDGX-2011-04]
Self-Regulatory Organizations; EDGX Exchange, Inc.; Notice of
Filing and Immediate Effectiveness of Proposed Rule Change To Amend
EDGX Rules 11.5, 11.9, and 11.15 To Make Certain Changes Consistent
With the Upcoming Implementation of Amendments to Regulation SHO
February 28, 2011.
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 February 25, 2011 the EDGX Exchange, Inc. (the ``Exchange'' or
the ``EDGX'') filed with the Securities and Exchange Commission
(``Commission'') the proposed rule change as described in Items I and
II below, which items have
[[Page 12174]]
been substantially prepared by the self-regulatory organization. The
Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to amend EDGX Rules 11.5, 11.9, and 11.15 to
make certain changes consistent with the upcoming implementation of
amendments to Regulation SHO.\3\ The text of the proposed rule change
is attached as Exhibit 5 and is available on the Exchange's Web site at
http://www.directedge.com, at the Exchange's principal office, and at
the Public Reference Room of the Commission.
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\3\ 17 CFR 242.200(g); 17 CFR 242.201.
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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
Statutory Basis for, the Proposed Rule Change
1. Purpose
On February 26, 2010, the Commission adopted amendments to
Regulation SHO under the Act in the form of Rule 201,\4\ pursuant to
which, among other things, short sale orders in covered securities \5\
generally cannot be executed or displayed by a trading center \6\ such
as EDGX at a price that is at or below the current national best bid
(``NBB'') \7\ when a short sale circuit breaker is in effect for the
covered security (the ``short sale price test restriction'').\8\ In
anticipation of the upcoming February 28, 2011 compliance date for Rule
201, the Exchange is proposing to amend certain EDGX rules to describe
the manner in which the System \9\ will handle short sell orders when a
short sale price test restriction is triggered under Rule 201 of
Regulation SHO. These changes include establishing a definition for
``short sale price sliding,'' which is a new form of price sliding \10\
the Exchange proposes to offer when the amendments to Regulation SHO
become operative, modifying certain EDGX rules regarding order
execution and routing when a short sale price test restriction is in
effect, and modifying EDGX rules related to order marking requirements.
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\4\ See Securities Exchange Act Release No. 61595 (February 26,
2010), 75 FR 11232 (March 10, 2010). In connection with the adoption
of Rule 201, Rule 200(g) of Regulation SHO was also amended to
include a ``short exempt'' marking requirement. The amendments to
Rule 201 and Rule 200(g) have a compliance date of February 28,
2011. See Securities Exchange Act Release No. 63247 (November 4,
2010), 75 FR 68702 (November 9, 2010). See also Division of Trading
& Markets: Responses to Frequently Asked Questions Concerning Rule
201 of Regulation SHO.
\5\ Rule 201(a)(1) defines the term ``covered security'' to mean
any ``NMS stock'' as defined under Rule 600(b)(47) of Regulation
NMS. Rule 600(b)(47) of Regulation NMS defines an ``NMS stock'' as
``any NMS security other than an option.'' Rule 600(b)(46) of
Regulation NMS defines an ``NMS security'' as ``any security or
class of securities for which transaction reports are collected,
processed, and made available pursuant to an effective transaction
reporting plan, or an effective national market system plan for
reporting transactions in listed options.'' 17 CFR 242.201(a)(1); 17
CFR 242.600(b)(46); and 17 CFR 242.600(b)(47).
\6\ Rule 201(a)(9) states that the term ``trading center'' shall
have the same meaning as in Rule 600(b)(78) of Regulation NMS. Rule
600(b)(78) defines a ``trading center'' as ``a national securities
exchange or national securities association that operates an SRO
trading facility, an alternative trading system, an exchange market
maker, an OTC market maker, or any other broker or dealer that
executes orders internally by trading as principal or crossing
orders as agent.'' 17 CFR 242.600(b)(78).
\7\ Rules 201(a)(4) defines the term ``national best bid'' to
have the same meaning as in Rule 600(b)(42) of Regulation NMS. 17
CFR 242.600(b)(42).
\8\ 17 CFR 242.201(b)(1). See also Division of Trading &
Markets: Responses to Frequently Asked Questions Concerning Rule 201
of Regulation SHO, Q&A Nos. 2.1 and 2.2 (concerning the duration of
a short sale price test restriction).
\9\ The ``System'' is defined in EDGX Rule 1.5(aa) as ``the
electronic communications and trading facility designated by the
Board through which securities orders of Users are consolidated for
ranking, execution and, when applicable, routing away.''
\10\ The Exchange currently offers a process called ``displayed
price sliding process,'' as defined in current EDGX Rule 11.5(c)(4),
which re-prices and/or displays orders at permissible prices when
such orders would lock or cross Protected Quotations in a manner
inconsistent with Rule 610(d) of Regulation NMS.
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The Exchange proposes to offer a new form of price sliding, short
sale price sliding, which will be defined in EDGX Rule 11.5(c)(4). As a
default, the Exchange will subject a User's \11\ EDGX Only Orders to
the short sale price sliding in proposed Rule 11.5(c)(4)(B) unless they
affirmatively choose to opt-out of the process. As proposed, when a
User opts out of the short sale price sliding process, any short sale
order that could not be executed or displayed due to a short sale price
test restriction would be rejected or cancelled by the Exchange upon
entry or while resting on the order book, respectively. When a User's
EDGX Only Order is subject to the short sale price sliding process, as
proposed in Rule 11.5(c)(4)(B), if it cannot be executed or displayed
at the time of entry due to a short sale price test restriction, it
will be re-priced by the System to prevent execution or display at or
below the current NBB to comply with Rule 201(b)(1)(i).\12\ Any EDGX
Only Order subject to such re-pricing by the System will be re-priced
to display at one minimum price variation (``MPV'') above the current
NBB (``Permitted Price''). The order will receive a new timestamp when
it is re-priced. Following the initial adjustment provided for in
proposed Rule 11.5(c)(4)(B), the EDGX Only Order will, to reflect
declines in the NBB, continue to be re-priced at the lowest Permitted
Price down to the order's original limit price, or if a market order,
until the order is filled. The order will receive a new timestamp each
time it is re-priced. Alternatively, following the initial adjustment
provided for in Rule 11.5(c)(4)(B), the EDGX Only Order may, in
accordance with the User's instructions, provided that in all cases the
display of such lower prices does not violate Rule 201 of Regulation
SHO: (i) Be re-priced one additional time to a price that is above the
current NBB but equal to the NBB at the time the EDGX Only Order was
received and receive a new timestamp; or (ii) not be adjusted further.
In the event the NBB changes such that the price of a Non-Displayed
Order, as defined in EDGX Rule 11.5(c)(8), subject to short sale price
sliding would lock or cross the NBB, the Non-Displayed Order will
receive a new timestamp, and will be re-priced by the System to a
Permitted Price, again in compliance with Rule 201(b)(1)(i).\13\
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\11\ A ``User'' is defined in EDGX Rule 1.5(cc) as any member or
sponsored participant of the Exchange who is authorized to obtain
access to the System.
\12\ Any execution or display will also need to be in compliance
with applicable rules regarding minimum pricing increments. 17 CFR
242.612.
\13\ See Division of Trading & Markets: Responses to Frequently
Asked Questions Concerning Rule 201 of Regulation SHO, Q&A No. 4.1
(concerning un-displayed orders).
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As proposed, EDGX Only Orders marked ``short exempt'' will not be
subject to short sale price sliding. Certain displayed short sale
orders will not be re-priced by the System after entry because under
Rule 201(b)(1)(iii)(A) a trading center's policies and procedures must
be reasonably designed to permit the execution of short sale orders of
covered securities that were displayed at a price above the current NBB
at the time of initial display. ``Short exempt'' orders
[[Page 12175]]
also will not be re-priced by the System, but instead, the Exchange
will execute, display and/or route such orders without regard to
whether the order is at a price less than or equal to the NBB or any
short sale price test restriction in effect under Regulation SHO, as
described below.
The Exchange also proposes to amend its Rule 11.9 to make clear
that it will execute, display and route an order consistent with Rule
201 of Regulation SHO, and that if it cannot do so, orders will be
cancelled back to the applicable User. In addition, the Exchange
proposes to make clear that it will not route orders away from the
Exchange that are marked ``short'' if a short sale price test
restriction is in effect for the covered security. Instead, such
orders, if immediate-or-cancel (``IOC'') will be cancelled, and all
other orders will be posted to the EDGX Book,\14\ treated as if they
are EDGX Only Orders, as defined in Rule 11.5(c)(4), and subjected to
the short sale price sliding process.\15\
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\14\ As defined in EDGX Rule 1.5(d).
\15\ Like with an EDGX Only Order, a User can affirmatively
choose to opt-out of the short sale price sliding process.
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Finally, current Rule 11.15 requires Users to identify short sale
orders as ``short'' when entered into the System. The Exchange proposes
to add the term ``short exempt'' to Rule 11.15 because pursuant to
amended Rule 200(g) of Regulation SHO, a broker-dealer can mark a short
sale order as either ``short'' or ``short exempt.'' \16\ The Exchange
also proposes to make clear in Rule 11.15 that if an order it received
is marked ``short exempt,'' the Exchange will execute, display and/or
route the order without regard to whether the order is at a price less
than or equal to the NBB or any short sale price test restriction in
effect under Regulation SHO.\17\ The Exchange also proposes to make
clear, as it does in Rule 11.5(d)(1) with respect to intermarket sweep
orders, that it relies on a Member's \18\ marking of an order, in this
case the ``short exempt'' marking, when handling such order.
Accordingly, proposed Rule 11.15 states that it is the entering
Member's responsibility, not the Exchange's responsibility, to comply
with the requirements of Regulation SHO relating to marking of orders
as ``short exempt.'' \19\
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\16\ 17 CFR 242.200(g)(2). Under Rule 200(g)(2), an order may be
marked ``short exempt'' if the broker-dealer had a reasonable basis
for believing that the order meets one of the exceptions specified
in Rule 201(d) of Regulation SHO or if it is entered during a Short
Sale Period and meets the conditions specified in Rule 201(c) of
Regulation SHO. See 17 CFR 242.201(d); 17 CFR 242.201(c); See
Division of Trading & Markets: Responses to Frequently Asked
Questions Nos. 4.2, 5.4 and 5.5.
\17\ 17 CFR 242.201(b)(1)(iii)(B).
\18\ A Member is defined in EDGX Rule 1.5(l) as any registered
broker or dealer, or any person associated with a registered broker
or dealer, that has been admitted to membership in the Exchange.
\19\ 17 CFR 242.200(g)(2). See also 17 CFR 242.201(c); 17 CFR
242.201(d). See also Division of Trading and Markets: Responses to
Frequently Asked Questions Concerning Rule 201 of Regulation SHO,
Q&A Nos. 4.2, 5.4, and 5.5.
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2. Statutory Basis
The Exchange believes that its proposal is consistent with the
requirements of 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) of the Act.\20\ In particular,
the proposed change is consistent with Section 6(b)(5) of the Act,\21\
because it would promote just and equitable principles of trade, and,
in general, protect investors and the public interest. The Exchange
believes that the proposed changes will provide clarity on the short
sale order handling procedures employed by the Exchange and certain
obligations of Members when sending short sale orders to the Exchange
consistent with Regulation SHO, as amended. The Exchange also believes
that the proposed short sale price sliding functionality will assist
Users in executing or displaying their orders consistent with
Regulation SHO, especially under fast moving conditions where the
national best bid/offer is quickly updating. In addition, as is
currently the case, the short sale price sliding process is optional to
Users. Specifically, Users can choose to opt-out of the short sale
price sliding process, and if they choose to do so, the Exchange will
cancel back their orders when such orders contradict the provisions of
Regulation SHO.
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\20\ 15 U.S.C. 78f(b).
\21\ 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: (i)
Significantly affect the protection of investors or the public
interest; (ii) impose any significant burden on competition; and (iii)
become operative for 30 days from the date on which it was filed, or
such shorter time as the Commission may designate if consistent with
the protection of investors and the public interest, it has become
effective pursuant to Section 19(b)(3)(A) of the Act \22\ and Rule 19b-
4(f)(6)(iii) thereunder.\23\
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\22\ 15 U.S.C. 78s(b)(3)(A).
\23\ 17 CFR 240.19b-4(f)(6)(iii).
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A proposed rule change filed under Rule 19b-4(f)(6) \24\ normally
does not become operative prior to 30 days after the date of the
filing.\25\ However, pursuant to Rule 19b-4(f)(6)(iii),\26\ the
Commission may designate a shorter time if such action is consistent
with the protection of investors and the public interest. The Exchange
has asked the Commission to waive the 30-day operative delay so that it
may implement the change no later than February 28, 2011 to coincide
with the compliance date for the amendments to Rules 200(g) and 201 of
Regulation SHO. The Commission believes that waiving the 30-day
operative delay is consistent with the protection of the investors and
the public interest because such waiver would ensure compliance with
the Commission's amendments to Rules 200(g) and 201 of Regulation SHO.
For this reason, the Commission designates the proposed rule change to
be operative upon filing with the Commission.\27\
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\24\ 17 CFR 240.19b-4(f)(6).
\25\ 17 CFR 240.19b-4(f)(6)(iii). In addition, Rule 19b-
4(f)(6)(iii) requires that a self regulatory organization 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.
\26\ 17 CFR 240.19b-4(f)(6)(iii).
\27\ For the 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.
[[Page 12176]]
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 No. SR-EDGX-2011-04 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-2011-04. 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 20549-1090, on official business days between the hours
of 10 a.m. and 3 p.m. Copies of such filing also will be available for
inspection and copying at the principal office of the Exchange and on
its Internet Web site at http://www.directedge.com. 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-2011-04 and should be
submitted by March 25, 2011.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\28\
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\28\ 17 CFR 200.30-3(a)(12).
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Cathy H. Ahn,
Deputy Secretary.
[FR Doc. 2011-4905 Filed 3-3-11; 8:45 am]
BILLING CODE 8011-01-P