Self-Regulatory Organizations; Investors Exchange LLC; Notice of Filing of Amendment No. 3 and Order Granting Accelerated Approval of Proposed Rule Change, as Modified by Amendment No. 3, To Modify the Manner in Which the Exchange Opens Trading for Non-IEX-Listed Securities

I. Introduction

On April 13, 2017, 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 (“Act”) and Rule 19b-4 thereunder, a proposed rule change to: (i) Amend IEX Rule 11.231 to modify the manner in which the Exchange opens trading for non-IEX-listed securities beginning at the start of Regular Market Hours; and (ii) amend IEX Rules 11.190 and 11.220 to specify the order types eligible to participate in the proposed opening process for non-IEX listed securities and priority of such orders. The proposed rule change was published for comment in the Federal Register on April 28, 2017. On May 19, 2017, IEX filed Amendment No. 1 to the proposal. On June 9, 2017, IEX consented to an extension of time for the Commission to act on the proposal until July 5, 2017. On June 22, 2017, IEX filed Amendment No. 2 to the proposal, which superseded and replaced Amendment No. 1 in its entirety. On June 29, 2017, IEX filed Amendment No. 3 to the proposal, which superseded and replaced Amendment No. 2 in its entirety. Also on June 29, 2017, pursuant to Section 19(b)(2) of the Act, the Commission designated a longer period within which to approve the proposed rule change, disapprove the proposed rule change, or institute proceedings to determine whether to approve or disapprove the proposed rule change. The Commission received no comments on the proposed rule change. The Commission is publishing this notice to solicit comment on Amendment No. 3 to the proposed rule change from interested persons, and is approving the proposed rule change, as modified by Amendment No. 3, on an accelerated basis.

II. Description of the Proposed Rule Change, as Modified by Amendment No. 3

IEX has proposed to amend IEX Rule (“Rule”) 11.231 to modify the manner in which the Exchange opens trading for non-IEX-listed securities beginning at the start of Regular Market Hours (the “Opening Process”). According to the Exchange, it will attempt to perform the Opening Process in each non-IEX-listed security pursuant to which eligible interest resting on the Exchange's Continuous Book in the Pre-Market Session or queued for the Regular Market Session will be matched, to the greatest extent possible, at a single price at the start of the Regular Market Session. The Exchange explained that the proposed Opening Process is designed to efficiently maximize the number of shares executed at a single price that is reflective of the broader market for the security.

Currently, at the beginning of the Pre-Market Session, the Exchange begins accepting limit orders with certain time-in-force indicators that are immediately eligible for execution. Separately, the Exchange accepts during the Pre-Market Session limit orders that are only eligible for execution starting with the Regular Market Session, including orders with a time-in-force of DAY or Good `til Extended Day (“GTX”) and pegged orders with a time-in-force of DAY. The Exchange queues these orders in sequence until the start of the Regular Market Session. Currently, at the start of Regular Market Hours, the Exchange releases these queued orders in relative time priority, after which they are eligible for trading in the Regular Market Session, subject to User instructions and market conditions.

Under proposed Rule 11.231(a), IEX would maintain a separate “Cross Book” on which certain types of orders would queue prior to Regular Market Hours. Orders on the new Cross Book, together with orders resting on the Order Book during the Pre-Market Session (i.e., orders on the Continuous Book), would be eligible for execution in the new Opening Process. Collectively, the orders eligible for execution in the Opening Process would be “Cross Eligible Orders.” Orders on the Continuous Book and on the Cross Book would be ranked and maintained for the Opening Process pursuant to Rule 11.220(a)(2), as described below.

Currently, Users may only submit market orders during the Regular Market Session and the System rejects market orders submitted during the Pre-Market or Post-Market Sessions. By default, the System currently rejects market orders with a time-in-force of DAY. Under proposed Rule 11.190(a)(2)(E), the Exchange will allow non-routable DAY market orders submitted in the Pre-Market Session to queue for the Opening Process.

Orders resting on the Order Book will be ranked and maintained for the Opening Process based on price-display-time priority. Once booked, a Cross Eligible Order would maintain its time priority until one of the following occur, at which time the order would receive a new timestamp: (i) It is incremented or re-priced, in the case of an order on the Cross Book; (ii) it is re-priced by the System in response to changes in the NBBO, in the case of a pegged order on the Cross Book; or (iii) it experiences an event specified in Rule 11.220(a)(1)(C), in the case of an order on the Continuous Book.

Under proposed Rule 11.231(b), at the start of Regular Market Hours, the Exchange will perform the Opening Process in which it matches buy and sell Cross Eligible Orders that are executable at the single price determined by IEX (the “Opening Match Price”), as described further below. First, market orders would execute at the Opening Match Price in time priority. Second, remaining Cross Eligible Orders priced more aggressively than the Opening Match Price would execute in price-display-time priority at the Opening Match Price. Finally, remaining Cross Eligible Orders priced equal to the Opening Match Price would execute in display-time priority at the Opening Match Price. This process, called the “Opening Match,” would continue until either there is no remaining volume or there is an imbalance of Cross Eligible Orders.

Proposed Rule 11.231(c) details the Exchange's process for determining the Opening Match Price, and will take into consideration the current pricing at away markets. The Opening Match would be “collared” in that it generally will have to occur within specified upper and lower threshold prices, known as the “Cross Price Constraint,” which will generally be set at the Away Protected NBB and Away Protected NBO. If, at the time of the Opening Process, there is a crossed market in a particular security and the upper threshold price of the Cross Price Constraint is below the lower threshold price, no Opening Match would occur for that security, orders eligible to post on the Order Book would price slide in accordance with the price sliding process in IEX Rule 11.190(h), and the security would open for trading on the Exchange in accordance with prevailing market session rules.

As described further below, in certain circumstances when needed to help determine the Opening Match Price, the Exchange will consider the price of the most current Order Collar Reference Price pursuant to Rule 11.190(f), rounded to the nearest minimum price variant (“MPV”) or Midpoint Price at the start of the Opening Process, whichever is closer (the “Cross Tie Breaker”). The Exchange explained that it included the rounding approach for the Cross Tie Breaker to avoid a potential inconsistency with the Tick Size Pilot if a Cross Tie Breaker in a non-nickel increment were to set the Opening Match Price for a pilot security required to be traded in nickel increments.

Proposed Rule 11.231(c)(2) provides the Exchange's process for determining the Opening Match Price when both an Away Protected Bid and Away Protected Offer exist for the subject security (i.e., a two-sided market). In general, the Opening Match will occur at the price that maximizes the number of shares of Cross Eligible Orders to be executed. If multiple prices are possible, resulting in a cross price range, IEX's rule provides a series of steps it would follow to determine the Opening Match Price.

Alternatively, proposed Rule 11.231(c)(3) provides the Exchange's process for determining the Opening Match Price if there is a lack of an Away Protected Bid, Away Protected Offer, or both, for the subject security at the time of the Opening Process (i.e., a one-sided or zero-sided market). In such cases, the Opening Match generally will occur at the price of the Cross Tie Breaker, subject to the Cross Price Constraint.

After the Opening Process, all remaining unexecuted interest would be released to the Order Book for continuous trading or cancelled in accordance with the terms of the order. Routable orders that are released to the Order Book would be routed in accordance with IEX Rule 11.230(c)(3), subject to the orders' instructions.

If a disruption occurs that prevents the execution of the Opening Process described above, IEX will apply the contingency procedures established in proposed Rule 11.231(d). Specifically, IEX would publicly announce that no Opening Process will occur, all orders on the Order Book would be cancelled, and IEX would open the security for trading without an Opening Match.

If a security is subject to a halt, suspension, or pause in trading during the Pre-Market Session, the Exchange would not accept orders in the security, including for queuing in the Cross Book and participation in the Opening Process. Orders submitted during the halt would be rejected, while orders resting on the Order Book would remain unless cancelled by the User, but would be unavailable for trading during the halt. If the halt, suspension, or pause remained in effect at the start of Regular Market Hours, the Opening Process would not start at the normally scheduled time, but would be conducted once the security resumes trading.

Under proposed Rule 11.231(f), pursuant to Rule 611(b)(3) of Regulation NMS and section VI(D)(6) of the Tick Size Pilot, orders executed in the Opening Process would constitute a single-priced opening transaction by the Exchange and would be allowed to trade-through or trade-at the price of any other Trading Center's Manual or Protected Quotations.

Finally, the Exchange has proposed to make a minor conforming change to the language used to reference LULD Price Bands in Rule 11.190(a)(2).

III. Discussion and Commission Findings

After careful review, the Commission finds that the proposed rule change, as modified by Amendment No. 3, is consistent with the requirements of the Act and the rules and regulations thereunder applicable to a national securities exchange. In particular, the Commission finds that the proposed rule change is consistent with Section 6(b)(5) of the Act, which requires, among other things, that the rules of a national securities exchange be 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, 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.

The Exchange has stated that its proposed Opening Process for non-IEX-listed securities is designed to match at a single price all eligible buy and sell orders that are resting on the Exchange's order book and available for continuous trading during the Pre-Market Session, as well as orders that have been queued until Regular Market Hours. According to the Exchange, the proposed Opening Process will provide for orderly and timely openings.

The Commission believes that the proposed Opening Process is designed to open Regular Market Hours trading on the Exchange in non-IEX-listed securities in a fair and orderly manner, which is consistent with the protection of investors and the public interest. Currently, the Exchange does not conduct an opening process for non-listed-IEX securities that is designed to match marketable buy and sell interest at a single price; rather, at the beginning of Regular Market Hours, the Exchange handles orders that have been queued during the Pre-Market Session by releasing them, according to their relative time priority, into continuous trading as incoming orders. To the extent the Exchange's proposal helps facilitate an orderly transition to regular trading in a fair and transparent manner, the Commission believes that it is consistent with the Act.

The Commission also believes that the proposed rule change is consistent with the Act because it is designed to open Regular Market Hours trading in each non-IEX-listed security by matching as much interest as it can at a price determined through an objective process set forth in its proposed rule. The Commission notes that, under proposed Rule 11.231(c)(2), the Exchange would attempt to set the Opening Match Price in a two-sided market at the price where the maximum number of shares of Cross Eligible Orders would be executed, taking into account the prices and relative volume balance of eligible buy and sell orders resting on the Exchange in the particular security. In the event that a single Opening Match Price cannot be established in a two-sided market based on the eligible interest resting on the Exchange, or in the event that there is a one-sided or zero-sided market, the Exchange would rely on the Cross Tie Breaker price to determine the Opening Match Price. The Commission believes that these aspects of the proposed Opening Process are consistent with Section 6(b)(5) of the Act in that they are designed to promote just and equitable principles of trade and protect investors.

Further, the Commission notes that, based on the Exchange's proposed definition of Cross Tie Breaker, which incorporates the Exchange's current definition of Order Collar Reference Price, the Exchange effectively would rely on the most recent last sale price to determine the Opening Match Price when a single Opening Match Price cannot be determined based on the Cross Eligible Orders resting on the Exchange in a two-sided market, or when there is a one-sided or zero-sided market. The Commission also notes that the Cross Tie Breaker price (i.e., the most recent last sale price) would be rounded as proposed for certain non-IEX listed securities subject to the Tick Size Pilot in order to ensure that the Opening Match occurs at a price that is permissible under the pilot, as well as for other non-pilot non-IEX-listed securities in order to maintain continuity and reduce complexity in the Exchange's handling of securities during the Opening Process. The Commission believes that relying on the most recent last sale price in these circumstances, and rounding that price as necessary, is consistent with the Act, including Section 6(b)(5) of the Act.

The Commission also notes that the Exchange has proposed to apply a Cross Price Constraint to prevent the Opening Match from occurring at a price that would be outside the Away Protected NBB and/or NBO, as applicable. The Commission believes that this collar feature of the proposed Opening Process is reasonably designed to ensure that the Opening Match occurs at a price that is within the broad market price for the security, and therefore should help to protect investors and remove impediments to and perfect the mechanism of a national market system, consistent with Section 6(b)(5) of the Act.

In addition, the Commission believes that the Exchange's proposed order handling during the Opening Process is consistent with the Act. The Commission notes that the Exchange's proposed priority hierarchy for the ranking and execution of opening-cross-eligible orders is consistent with the Exchange's order execution priority hierarchy during continuous trading. Further, the Exchange has proposed to handle unexecuted opening-cross-eligible orders consistent with their terms, subject to the price sliding provisions of Rule 11.190(h) as appropriate. The Commission believes that these aspects of the proposal provide continuity with the Exchange's order handling practices and should reduce the potential for investor confusion when the Exchange transitions to continuous trading.

The Commission also notes that the Exchange believes that allowing non-routable DAY market orders to be submitted and queue for the Opening Process will provide members with greater flexibility. The Commission believes that allowing non-routable DAY market orders to queue for the Opening Process may accommodate market participants that use DAY market orders on other exchanges and therein may help promote the orderly submission of those orders to the Exchange in advance of the Regular Market Session.

Further, the Commission believes that the components of the proposal that are designed to address what would occur if a disruption prevents the execution of the opening process, and what would occur if a security is subject to a halt, suspension, or pause in trading during the Pre-Market Session, set forth procedures that are reasonably designed to protect investors and the public interest, and remove impediments to and perfect the mechanism of a national market system, consistent with Section 6(b)(5) of the Act.

Finally, the Commission notes that another national securities exchange conducts an opening process for non-listed securities, and the Commission received no comments on the Exchange's proposed rule change.

IV. Solicitation of Comments on Amendment No. 3

Interested persons are invited to submit written data, views, and arguments concerning whether Amendment No. 3 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 email to rule-comments@sec.gov. Please include File Number SR-IEX-2017-11 on the subject line.

Paper Comments

• Send paper comments in triplicate to Brent J. Fields, Secretary, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.

All submissions should refer to File Number SR-IEX-2017-11. This file number should be included on the subject line if email 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 10:00 a.m. and 3:00 p.m. Copies of such 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-IEX-2017-11, and should be submitted on or before August 18, 2017.

V. Accelerated Approval of Proposed Rule Change, as Modified by Amendment No. 3

The Commission finds good cause to approve the proposed rule change, as modified by Amendment No. 3, prior to the thirtieth day after the date of publication of the notice of Amendment No. 3 in the Federal Register. The Commission believes that the proposed changes to the description of the process for determining the Opening Match Price that were included in Amendment No. 3 add clarity to the price determination process without materially changing the proposal from what the Exchange originally filed. Additionally, the Commission believes that the proposed addition of a rounding process for the Cross Tie Breaker to prevent certain Tick Size Pilot securities from trading in an impermissible increment eliminates a potential conflict between the Tick Size Pilot and the Opening Process. Moreover, the Commission believes that applying the rounding process to all non-IEX-listed securities will allow for consistent handling of securities in the Opening Process and avoid introducing unnecessary technical complexities. The Commission does not believe that any of the changes proposed in Amendment No. 3 introduce novel concepts, but rather add detail to better reflect in the proposed rule text how the proposed Opening Process would work for non-IEX-listed securities, and also reconciles the proposed Opening Process with the tick-size requirements of the Tick Size Pilot. Accordingly, for the reasons noted above, the Commission finds good cause for approving the proposed rule change, as modified by Amendment No. 3, on an accelerated basis, pursuant to Section 19(b)(2) of the Act.

VI. Conclusion

It is therefore ordered, pursuant to Section 19(b)(2) of the Act, that the proposed rule change (SR-IEX-2017-11), as modified by Amendment No. 3 thereto, be, and hereby is, approved on an accelerated basis.