The Commission has approved the application of Investors’ Exchange LLC (IEX) to register as a national securities exchange, and took two related actions in connection with its approval. The SEC issued a final interpretation regarding automated quotations under Rule 600(b)(3) of Regulation NMS to require trading centers to honor automated securities prices that are subject to a small delay or speed bump when being accessed. The staff also issued guidance regarding the duration of de minimis intentional access delays which states that delays of less than one millisecond will be deemed de minimis (In the Matter of the Application of Investors’ Exchange, LLC, Release No. 34-78101, June 17, 2016).
Speed bump. IEX filed the application seeking to register as a national securities exchange on August 21, 2015. The application was amended five times and generated 474 comment letters. Chair Mary Jo White and Commissioners Kara Stein and Michael Piwowar voted to approve the application, but Piwowar voted in opposition to the protected quote and the SEC’s interpretation of automated quotation.
IEX describes itself as the first equity trading venue owned exclusively by a consortium of buy-side investors. The exchange says its model challenges the rising costs for data and technology while protecting investors and delivering superior execution quality. IEX will operate a fully automated electronic order book, and will not maintain or operate a physical trading floor. Only broker-dealer members of IEX and entities that enter into market access arrangements with members will have access to the IEX system.
Much of the public comment centered on issues related to specific features of IEX’s proposed trading system—its "point-of-presence" and "coil" infrastructure, known as the speed bump, and the manner in which IEX originally proposed to provide outbound routing services through its affiliated routing broker-dealer. IEX subsequently amended its Form 1 to propose a fundamentally different approach to outbound routing.
Interpretation of automated quotation. The SEC’s interpretation provides that in determining whether a trade center maintains an automated quotation for purposes of Rule 611 of Regulation NMS, the term "immediate" in Rule 600(b)(3) alone will not prohibit a trading center from implementing an intentional access delay that is de minimis, which is a delay so short that it will not frustrate the purposes of Rule 611 by impairing fair and efficient access to an exchange’s quotations. This revised interpretation will prohibit any coding of automated systems to delay the action taken with respect to a quotation unless the delay is de minimis.
The SEC’s interpretation did not specify a threshold for the maximum possible latency that could be imposed by an intentional access delay, according to the staff guidance, so the staff provided more guidance on the length of an intentional access delay which it believes will meet the de minimis standard outlined in the Commission’s interpretation.
Staff interpretation. In determining that delays of less than a millisecond would be considered a de minimis level, the staff considered the efficient operation of the markets and geographical and technological latencies experienced by market participants. One millisecond is well within the current latencies already experienced by market participants when routing orders between trading centers, according to the guidance. Commenters were divided about the appropriateness of an intentional access delay, but did not suggest a different standard. The staff concluded that intentional delays of less than a millisecond in quotation response times would not impair a market participant’s ability to fairly and efficiently access a quote.
Any other exchanges that wish to impose an intentional access delay must file a proposed rule change with the Commission. While the staff has now spoken market-wide with respect to the de minimis delay, all other aspects of any other exchanges’ proposals would have to be evaluated. The staff will monitor market conditions and the evolution of technology in connection with its guidance, and will deliver a study at the end of a two-year period to determine whether it remains appropriate and whether there are any concerns about its effects on market quality, including price discovery, that would warrant an adjustment.
The release is No. 34-78101.
Companies: Investors’ Exchange LLC
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