Notice2023-00555
Self-Regulatory Organizations; Investors Exchange LLC; Order Granting Approval of a Proposed Rule Change To Modify IEX Rule 11.190(b)(7) To Adopt an Optional Cancel or Re-Price Functionality for D-Limit Orders
Primary source
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Published
January 13, 2023
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 88 Issue 9 (Friday, January 13, 2023)</title>
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[Federal Register Volume 88, Number 9 (Friday, January 13, 2023)]
[Notices]
[Pages 2379-2381]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2023-00555]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-96611; File No. SR-IEX-2022-10]
Self-Regulatory Organizations; Investors Exchange LLC; Order
Granting Approval of a Proposed Rule Change To Modify IEX Rule
11.190(b)(7) To Adopt an Optional Cancel or Re-Price Functionality for
D-Limit Orders
January 9, 2023.
I. Introduction
On November 4, 2022, the Investors Exchange LLC (``IEX'' or the
``Exchange'') filed with the Securities and Exchange Commission
(``Commission''), pursuant to Section 19(b)(1) of the Securities
Exchange Act of 1934 (``Exchange Act'') \1\ and Rule 19b-4
thereunder,\2\ a proposed rule change to allow Users \3\ of
Discretionary Limit orders (``D-Limit orders'') to opt for their D-
Limit orders to either automatically cancel or re-price--under certain
conditions--after after an initial price adjustment. The proposed rule
change was published for comment in the Federal Register on November
25, 2022.\4\ The Commission received no comments on the proposed rule
change. This order approves the proposed rule change.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See IEX Rule 1.160(qq) (defining ``User''). Users include
both Members and Sponsored Participants. See IEX Rule 1.160(ll)
(defining ``Sponsored Participant'').
\4\ See Securities Exchange Act Release No. 96352 (November 18,
2022), 87 FR 72523 (``Notice'').
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II. Description of the Proposed Rule Change
The Exchange seeks to amend IEX Rule 11.190(b)(7) to allow a User
to attach an optional instruction to a D-Limit order so that the order
will either re-price or cancel following an initial price adjustment
during a period of quote instability \5\ under certain circumstances.
Specifically, the D-Limit order would either reprice or cancel if,
after the most recent quote instability determination \6\ that resulted
in the D-Limit order being price adjusted, ten (10) milliseconds have
passed and the order is resting at a price that is less aggressive than
the NBB \7\ for buy orders or less aggressive than the NBO \8\ for sell
orders.
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\5\ See infra notes 10-14 and accompanying text.
\6\ Id.
\7\ See IEX Rule 1.160(u).
\8\ See IEX Rule 1.160(u).
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Current D-Limit Functionality
D-Limit orders are limit orders that may be either displayed or
non-displayed and are initially priced and ranked in the Exchange's
Order Book at the order's limit price.\9\
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\9\ See IEX Rule 1.160(p).
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When a D-Limit order is resting on the Exchange's Order Book, it
will reprice automatically when the Exchange's Crumbling Quote
Indicator (``CQI'') is triggered (i.e., during a period of relative
quote instability).\10\ The CQI that applies to D-Limit orders is
governed by IEX Rule 11.190(g)(1), under which the Exchange utilizes
quoting activity of eight away exchanges' Protected Quotations \11\ and
a mathematical calculation to assess the probability of an imminent
change to the current Protected NBB \12\ to a lower price or imminent
change to the current Protected NBO \13\ to a higher price for a
[[Page 2380]]
particular security. When the quoting activity meets predetermined
criteria, the System treats the quote as not stable (``quote
instability'' or a ``crumbling quote'') and the CQI is then ``on'' at
that price level for two milliseconds. During all other times, the
quote is considered stable and the CQI is ``off''. The System
independently assesses the stability of the Protected NBB and Protected
NBO for each security.\14\
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\10\ See IEX Rule 11.190(g) (describing crumbling quotes and
quote instability).
\11\ See IEX Rule 1.160(bb) (defining ``Protected Quotation'' as
an automated quotation that is calculated by IEX to be the best bid
or best offer of an exchange).
\12\ See IEX Rule 1.160(cc).
\13\ See id.
\14\ After this proposal was filed and published for comment,
the Commission approved IEX Rule 11.190(g)(2), which provides a new
alternative calculation for determining when there is quote
instability and therefore, when the CQI is triggered. See Securities
Exchange Act Release No. 96416 (December 1, 2022), 87 FR 75099
(December 7, 2022). However, the alternative calculation under Rule
11.190(g)(2) may not be applied to D-Limit orders, so D-Limit orders
only price adjust when there is quote instability pursuant to IEX
Rule 11.190(g)(1). Thus, these recent changes to Rule 11.190(g) do
not affect the present proposal.
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After the CQI is triggered, all D-Limit orders--both resting and
those being entered at the time of quote instability--are adjusted to a
less-aggressive price and will subsequently rest on the Exchange's
Order Book at that new price. Specifically, if the System receives a D-
Limit buy (sell) order during a period of quote instability, and the D-
Limit order has a limit price equal to or higher (lower) than the quote
instability determination price level (``CQI Price''), the price of the
order will be automatically adjusted by the System to one (1) minimum
price variation (``MPV'') \15\ lower (higher) than the CQI Price.\16\
Similarly, when unexecuted shares of a D-Limit buy (sell) order are
posted to the Order Book, if the CQI turns on and such shares are
ranked (and displayed in the case of a displayed order) by the System
at a price equal to or higher (lower) than the CQI Price, the price of
the order will be automatically adjusted to a price one MPV lower
(higher) than the quote instability price level.\17\
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\15\ See IEX Rule 11.210.
\16\ See IEX Rule 11.190(b)(7)(A) and (B).
\17\ See IEX Rule 11.190(b)(7)(C) and (D).
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A D-Limit order that has been subject to an automatic price
adjustment will not revert to the price at which it was previously
ranked (and, if applicable, displayed). Further, whenever the price of
a D-Limit order is adjusted, the order will receive a new time
priority, and the User that entered the order will receive an order
restatement message from the Exchange.\18\
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\18\ If multiple D-Limit orders are adjusted at the same time,
their relative time priority is maintained.
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Proposal
The Exchange proposes to provide Users with an option to either
reprice or cancel a price-adjusted D-Limit order under certain
circumstances by attaching an instruction to their D-Limit orders
pursuant to new IEX Rule 11.190(b)(7)(E).\19\ If a D-Limit order that
is entered with this optional instruction is then subject to an
automatic price adjustment pursuant to IEX Rule 11.190(b)(7) and is
resting at a price that is less aggressive than the NBBO ten (10)
milliseconds after the most recent quote instability determination that
resulted in the order being price adjusted, the order will either be
canceled (if the User selected the cancel instruction) or re-priced to
the less aggressive of the order's limit price or the NBB (for a buy
order) or NBO (for a sell order) (if the User selected the re-price
instruction).\20\
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\19\ The Exchange also proposes to reorganize IEX Rule 11.190(b)
so that the text in current IEX Rule 11.190(b)(7)(E) will become
Rule 11.190(7)(F). Additionally, the Exchange proposes to add a
reference to new IEX Rule 11.190(b)(7)(E) into paragraph (F).
\20\ Additionally, displayed D-Limit orders that re-price to the
NBB (for a buy order) or the NBO (for a sell order) will be subject
to IEX's Display-Price Sliding rule (IEX Rule 11.190(b)(h)(1)) and
will be displayed at the ``most aggressive permissible price''
without locking or crossing a Protected Quotation (IEX Rule
1.160(bb) of an away market, which means they will be priced one MPV
less aggressive than the locking (IEX Rule 11.190(b)(h)(3)(A)(ii))
or crossing (IEX Rule 11.190(b)(h)(3)(B)(ii)) price. Non-displayed
D-Limit orders that re-price to the NBB (for a buy order) or the NBO
(or a sell order) will be subject to IEX's Non-Displayed Price
Sliding rule, which means they will be able to post at the locking
or crossing price. See IEX Rule 11.190(b)(h)(2). In the Notice, the
Exchange provides examples to demonstrate how the new cancel or re-
price instruction would operate. See Notice, supra note 4, at 72525.
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III. Discussion and Commission Findings
After careful review, the Commission finds that the Exchange's
proposal is consistent with the requirements of the Exchange Act and
the rules and regulations thereunder applicable to a national
securities exchange.\21\ In particular, the Commission finds that the
proposed rule change is consistent with Sections 6(b)(5) \22\ and
6(b)(8) \23\ of the Exchange Act. Section 6(b)(5) of the Exchange Act
requires that the rules of a national securities exchange be designed,
among other things, to promote just and equitable principles of trade,
to remove impediments to and perfect the mechanism of a free and open
market and a national market system and, in general, to protect
investors and the public interest, and not be designed to permit unfair
discrimination between customers, issuers, brokers, or dealers. Section
6(b)(8) of the Exchange Act requires that the rules of a national
securities exchange not impose any burden on competition that is not
necessary or appropriate in furtherance of the purposes of the Exchange
Act.
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\21\ In approving this proposed rule change, the Commission has
considered the proposed rule's impact on efficiency, competition,
and capital formation. See 15 U.S.C. 78c(f).
\22\ 15 U.S.C. 78f(b)(5).
\23\ 15 U.S.C. 78f(b)(8).
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In its proposal, IEX represents that some Users of D-Limit orders
have informed IEX that they ``cannot readily configure their trading
systems to receive, process, and respond to the restatement messages
IEX transmits to [Users] after each price adjustment.'' \24\ IEX states
that these Users ``are unable to track whether their D-Limit orders
have been re-priced, and if so, the price at which they are currently
resting.'' \25\ As such, ``[w]ithout this information, IEX understands
that such [Users] are hindered in their ability to timely cancel or
adjust the prices of their resting D-Limit orders to meet their trading
objectives.'' \26\ IEX says that to address this issue, some Users have
requested that IEX provide optional order type functionality to allow a
D-Limit order that has been subject to an automatic price adjustment to
be automatically either canceled or re-priced.\27\
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\24\ Notice, supra note 4, at 72524. IEX also states that these
Users note that their trading systems are not currently configured
to ingest the D-Limit restatement messages (and, in some cases,
other restatement messages), and they would have to devote
significant resources to build the logic in order to ingest, and
respond to, the messages for this one order type. See id.
\25\ Id.
\26\ Id.
\27\ See id.
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IEX asserts that the proposed 10 millisecond delay after which a
re-priced D-Limit order could either cancel or re-price to a more
aggressive price, as described above, will not provide any speed
advantages to Users that elect to use the order type's new optional
cancel or re-price functionality when compared to Users who cancel or
re-price a price-adjusted D-Limit themselves.\28\ Specifically, IEX
notes that all orders are subject to the Exchange's existing latency
for all orders, which are 37 and 350 microseconds for outbound and
inbound messages, respectively.\29\ The Exchange explains that this
aggregate 387 microseconds of latency for a ``round trip'' that would
be required for a User to respond to a D-Limit price adjustment is more
than 9 milliseconds less than the proposed 10 millisecond time after
which the proposed order type's new instruction will result in the
System canceling or re-pricing a D-Limit
[[Page 2381]]
order that was automatically adjusted.\30\ IEX represents that this
``timing differential is designed to ensure that orders canceled or re-
priced by IEX have no advantage over orders canceled or repriced by a
User that processed the restatement message'' because ``the Exchange
would cancel or re-price orders more slowly than orders canceled or re-
priced by a User.'' \31\
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\28\ See Notice, supra note 4, at 72524.
\29\ See id.
\30\ See id.
\31\ Id.
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The Commission previously found that the D-Limit order type is a
``narrowly tailored tool that balances the ability of long-term
investors to access displayed liquidity in the ordinary course against
the current structural advantages enjoyed by short-term latency
arbitrage trading strategies that rely on superior access to the
fastest data and connectivity, while also encouraging liquidity
providers to post more displayed liquidity.'' \32\ The key feature of
the D-Limit order type is that, when IEX's CQI is triggered, the order
(if its limit price is equal to or higher (for a buy order; or lower
for a sell order) than the CQI Price) will automatically adjust to a
price one MPV lower (higher) than the CQI Price and the price will not
revert to the prior, more aggressive price.
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\32\ Securities Exchange Act Release No. 89686 (August 26,
2020), 85 FR 54438, 54443 (September 1, 2020) (SR-IEX-2019-15) (``D-
Limit Approval Order'').
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IEX now seeks to offer Users the ability to attach an optional
instruction on a D-Limit order to either cancel or reprice the order
if, after 10 milliseconds since the D-Limit was price adjusted, the D-
Limit order is resting at a price that is less aggressive than the NBB
for buy orders or less aggressive than the NBO for sell orders.
Accordingly, the optional cancellation or re-pricing feature would
occur after a D-Limit order is initially adjusted to a less aggressive
price. It neither affects when nor how a D-Limit order is initially
price adjusted during a period of quote instability, and therefore, the
Commission believes that this proposal does not alter the core
attributes of the D-Limit order type.
The Commission further believes that the triggering of the proposed
cancellation or re-pricing functionality is approporiately delayed to
an extent that would not be expected to confer a special advantage to
the User over other Users that elect to retain for themselves the
responsibility for canceling or updating their resting D-Limit orders.
To the extent some Users do not presently have the ability or capacity
to build the IEX-specific capability to track and respond when their D-
Limit orders have been price adjusted during periods of quote
instability, the proposal would allow those Users to utilize D-Limit
orders and manage those orders like Users that do have such ability. As
the Exchange notes in its filing, the 10 millisecond delay is
significantly longer than the aggregate sub-millisecond ``round trip''
latency that a User would encounter when manually re-pricing or
canceling a price-adjusted D-Limit order. The Commission accordingly
finds that the proposal does not permit unfair discrimination between
cutomers, issuers, brokers, or dealers in offering the option for Users
to instruct IEX to cancel or reprice its D-Limit order as described
above after 10 milliseconds have passed and the order remains priced
less aggressive than the national best quote. Given the 10 millisecond
delay, that functionlality should not provide a special advantage to
Users when compared to Users that have the technology and ability to
track and directly respond to D-Limit price adjustments more quickly by
themselves.
Finally, the Commission finds that the proposal promotes just and
equitable principles of trade, removes impediments to and perfects the
mechanism of a free and open market and a national market system and,
in general, protects investors and the public interest in that it is
designed to cancel an adjusted D-Limit order only after 10 milliseconds
have passed and only where the order remains priced less aggressive
than the national best quote where it is less likely to receive an
execution. Alternatively, if the User selects the re-price option, the
D-Limit order will only re-price to a price more aggressive than that
at which it was resting and will not reprice to a less aggressive
price. As such, the new D-Limit functionality will re-price the D-Limit
order to join the NBB (for a buy order) or NBO (for a sell order), if
allowable given the order's limit price. In doing so, the proposal will
increase the liquidity available on IEX to all investors at the
national best quote.
For the reasons discussed above, the Commission finds that the
proposal is narrowly tailored to not impose any burden on competition
that is not necessary or appropriate in furtherance of the purposes of
the Exchange Act, and is reasonably designed to among other things,
remove impediments to and perfect the mechanism of a free and open
market and a national market system and, in general, protect investors
and the public interest. Accordingly, the Commission finds the proposed
rule change to be consistent with the Exchange Act, including the
requirements of Section 6(b)(5) and Section 6(b)(8) of the Exchange
Act.
IV. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Exchange Act,\33\ that the proposed rule change (SR-IEX-2022-10), be,
and it hereby is, approved.
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\33\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\34\
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\34\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023-00555 Filed 1-12-23; 8:45 am]
BILLING CODE 8011-01-P
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