Commission Interpretation Regarding Automated Quotations Under Regulation NMS

See Securities Exchange Act Release No. 51808 (June 9, 2005) 70 FR 37496, 37500 & n.21, 37501 (June 29, 2005) (“Regulation NMS Adopting Release”). The Commission notes that the smallest time increment suggested by commenters at the time Regulation NMS was adopted was 250 milliseconds. See id. at 37518. See also infra note 15 (discussing the distinction between “automated quotations” and “manual quotations” and noting that “[t]he difference in speed between automated and manual markets often is the difference between a 1-second response and a 15-second response . . . .”).

See Regulation NMS Adopting Release, supra note 1, at 37534.

See Securities Exchange Act Release Nos. 75925 (September 15, 2015), 80 FR 57261 (September 22, 2015) (File No. 10-222) (original notice); and 77406 (March 18, 2016), 81 FR 15765 (March 24, 2016) (File No. 10-222) (notice of amendments, order instituting proceedings, and extension of time).

IEX's Form 1 includes an intentional access delay that imposes 350 microseconds of one-way latency for non-routable orders. IEX's access delay is discussed in the Commission's final order on IEX's Form 1. See Securities Exchange Act Release No. 78101 (June 17, 2016) (File No. 10-222) (order granting IEX's exchange registration) (“IEX Form 1 Approval Order”).

See Regulation NMS Adopting Release, supra note 1, at 37520 (noting that “[f]or a trading center to qualify as entitled to display any protected quotations, the public in general must have fair and efficient access to a trading center's quotations”).

See 17 CFR 242.611. When it adopted Regulation NMS, the Commission explained that one purpose of the Order Protection Rule was to incentivize greater use of displayed limit orders, which contribute to price discovery and market liquidity, by protecting them from trade-throughs. See Regulation NMS Adopting Release, supra note 1, at 37516-17. In discussing whether to apply order protection to non-automated, “manual” quotations, the Commission stated that “providing protection to manual quotations, even limited to trade-throughs beyond a certain amount, potentially would lead to undue delays in the routing of investor orders, thereby not justifying the benefits of price protection.” Id. at 37518. The Commission also noted that “those who route limit orders will be able to control whether their orders are protected by evaluating the extent to which various trading centers display automated versus manual quotations.” Id. In addition, the Commission intended that the Order Protection Rule would reinforce a broker's duty of best execution by prohibiting executions at inferior prices absent an exception. See id. at 37516 (“Given the large number of trades that fail to obtain the best displayed prices (e.g., approximately 1 in 40 trades for both Nasdaq and NYSE stocks), the Commission is concerned that many of the investors that ultimately received the inferior price in these trades may not be aware that their orders did not, in fact, obtain the best price. The Order Protection Rule will backstop a broker's duty of best execution on an order-by-order basis by prohibiting the practice of executing orders at inferior prices, absent an applicable exception.”).

See 17 CFR 242.600(b)(4). References to “exchange” used herein apply also to facilities of national securities associations. See 17 CFR 242.600(b)(57).

See 17 CFR 242.600(b)(3).

See 17 CFR 242.600(b)(57) (defining “protected bid or protected offer”) and 242.600(b)(58) (defining “protected quotation”). See also Regulation NMS Adopting Release, supra note 1, at 37504 (stating that “[t]o qualify for protection, a quotation must be automated”).

17 CFR 242.611(a)(1).

17 CFR 242.600(b)(58).

17 CFR 242.600(b)(57).

17 CFR 242.600(b)(4). Rule 600(b)(4) contains additional requirements that must be satisfied in order to be an automated trading center. Those requirements are not at issue for purposes of this interpretation.

See 17 CFR 242.600(b)(3). See also Regulation NMS Adopting Release, supra note 1, at 37504.

Regulation NMS Adopting Release, supra note 1, at 37534. See also 17 CFR 242.600(b)(37) (defining “manual quotation”). The Commission also provided context as to the distinction between “automated quotations” and “manual quotations.” At the time of the adoption of Regulation NMS, manual quotations and markets that primarily were centered around human interaction in a floor-based trading environment, including “hybrid” manual-automated trading facilities, experienced processing delays for inbound orders that were measured in multiple seconds. See Regulation NMS Adopting Release, supra note 1, at 37500 n.21 (“One of the primary effects of the Order Protection Rule adopted today will be to promote much greater speed of execution in the market for exchange-listed stocks. The difference in speed between automated and manual markets often is the difference between a 1-second response and a 15-second response . . . .”). In contrast to floor-based and hybrid markets that existed at the time Regulation NMS was adopted, newer automated matching systems coming more widely into use removed the human element and instead immediately matched buyers and sellers electronically. The Commission also explained that the Order Protection Rule took a substantially different approach to intermarket price protection than the existing trade-through protection regime at the time—the Intermarket Trading System (“ITS”) Plan. See id. at 37501. As the Commission noted, the ITS provisions did not distinguish between manual and automated quotations and “fail[ed] to reflect the disparate speed of response between manual and automated quotations” as they “were drafted for a world of floor-based markets.” Id. As a result, “[b]y requiring order routers to wait for a response from a manual market, the ITS trade-through provisions can cause an order to miss both the best price of a manual quotation and slightly inferior prices at automated markets that would have been immediately accessible.” Id. In addition, the Commission emphasized that Rule 611 does not “supplant or diminish” a broker-dealer's duty of best execution. See id. at 37538.

See infra note 23 and accompanying text (discussing the exception in Rule 611(b)(1) for small unintentional delays).

A millisecond is one thousandth of a second.

See Regulation NMS Adopting Release, supra note 1, at 37519.

See id. at 37519 (“The definition of automated quotation as adopted does not set forth a specific time standard for responding to an incoming order.”).

Id. at 37534. The Commission also stated that the standard for responding to an incoming order “should be `immediate,' i.e., a trading center's systems should provide the fastest response possible without any programmed delay.” Id. at 37519. Further, the Commission also stated that, for a quotation “[t]o qualify as `automatic,' no human discretion in determining any action taken with respect to an order may be exercised after the time an order is received,” and “a quotation will not qualify as `automated' if any human intervention after the time an order is received is allowed to determine the action taken with respect to the quotation.” Id. at 37519 and 37534.

See 17 CFR 242.611(b)(1) and (8); see also Regulation NMS Adopting Release, supra note 1, at 37519 (discussing the one-second standard in Rule 611(b)(1)) and id. at 37523 (discussing the one-second standard in Rule 611(b)(8)). One second is 1,000,000 microseconds.

17 CFR 242.611(b)(1).

See Regulation NMS Adopting Release, supra note 1, at 37519. In other words, the Commission viewed the phrase “fastest response possible” as consistent with an unintentional delay of less than one second whereby participants could consider an automated trading center experiencing a delay beyond that limit to no longer be “immediately” accessible.

See 17 CFR 242.611(b)(8).

Regulation NMS Adopting Release, supra note 1, at 37523.

Securities Exchange Act Release No. 77407 (March 18, 2016), 81 FR 15660, 15661 (March 24, 2016) (S7-03-16) (“Notice of Proposed Interpretation”). Because IEX's POP/coil delay is designed purposefully and intentionally to delay access to its matching engine, and consequently delays access to IEX's displayed quotation (See Letter from Sophia Lee, IEX, to Brent J. Fields, Secretary, Commission, dated November 13, 2015 (“IEX First Form 1 Letter”) at 4 (comment letter on File No. 10-222)), IEX would not be an automated market under the interpretation of “immediate” in the Regulation NMS Adopting Release as “[t]he term `immediate' precludes any coding of automated systems or other type of intentional device that would delay the action taken with respect a quotation.” Regulation NMS Adopting Release, supra note 1, at 37534.

Notice of Proposed Interpretation, supra note 26, at 15665.

See Letters (“Interp Letter(s)”) from Rajiv Sethi to Brent J. Fields, Secretary, Commission, dated March 21, 2016; Stacius Sakato to Brent J. Fields, Secretary, Commission, dated March 28, 2016; David Lauer, Healthy Markets Association, to Brent J. Fields, Secretary, Commission, dated April 1, 2016; Hazel Henderson, Ethical Markets Media, to Brent J. Fields, Secretary, Commission, dated April 1, 2016; R.T. Leuchtkafer to Brent J. Fields, Secretary, Commission, dated April 8, 2016; Sal Arnuk and Joe Saluzzi, Themis Trading, to Brent J. Fields, Secretary, Commission, dated April 12, 2016; R. Glenn Hubbard, John L. Thornton, and Hal S. Scott, Committee on Capital Markets Regulation, to Brent J. Fields, Secretary, Commission, dated April 14, 2016; Mary Ann Burns, FIA Principal Traders Group, to Brent J. Fields, Secretary, Commission, dated April 14, 2016; William J. Stephenson, Franklin Templeton Investments, to Brent J. Fields, Secretary, Commission, dated April 14, 2016; John Nagel, Citadel, to Brent J. Fields, Secretary, Commission, dated April 14, 2016; Eric Budish to Brent J. Fields, Secretary, Commission, dated April 14, 2016; Bryan Thompson, British Columbia Investment Management Corporation, to Brent J. Fields, Secretary, Commission, dated April 14, 2016; Adam Nunes, Hudson River Trading (“HRT”), to Brent J. Fields, Secretary, Commission, dated April 14, 2016; William R. Harts, Modern Markets Initiative, to Brent J. Fields, Secretary, Commission, dated April 14, 2016; Joan C. Conley, Nasdaq, to Brent J. Fields, Secretary, Commission, dated April 14, 2016; D. Keith Ross, PDQ Enterprises, to Brent J. Fields, Secretary, Commission, dated April 15, 2016; David Weisberger, Markit, to Brent J. Fields, Secretary, Commission, dated April 18, 2016; Elizabeth K. King, NYSE, to Brent J. Fields, Secretary, Commission, dated April 18, 2016; Kevin J. Weldon to Brent J. Fields, Secretary, Commission, dated April 20, 2016; Sophia Lee, IEX, to Brent J. Fields, Secretary, Commission, dated April 25, 2016; Abraham Kohen, AK Financial Engineering Consultants, to Brent J. Fields, Secretary, Commission, dated April 25, 2016; Theodore R. Lazo, SIFMA, to Brent J. Fields, Secretary, Commission, dated May 2, 2016; The Honorable Randy Hultgren to Mary Jo White, Commission, dated May 2, 2016; Amir C. Tayrani, Gibson, Dunn & Crutcher LLP to Brent J. Fields, Secretary, Commission, dated May 19, 2016.

As discussed and summarized in the Commission's notice of its proposed interpretation, the Commission also received comments on the issue addressed by this interpretation in response to the initial notice of IEX's Form 1. See Notice of Proposed Interpretation, supra note 26, at 15660, 15663-64. Those comments are also discussed in the Commission's order approving IEX's Form 1 application for exchange registration, which the Commission is separately issuing today. See IEX Form 1 Approval Order, supra note 4.

Gibson Dunn Interp Letter at 3.

Gibson Dunn Interp Letter at 2 (citing to Black's Law Dictionary and Webster's Third New International Dictionary).

HRT Interp Letter at 2. The commenter further noted that one millisecond is “approximately three times the time via fiber between the furthest New Jersey data centers and approximately 1/8th the time to Chicago via fiber from the New Jersey datacenters.” Id. at 2-3.

HRT Interp Letter at 2. This commenter also cited to the Commission's MIDAS data from the fourth quarter of 2015, which showed that over 13% of displayed orders in large stocks are cancelled within one millisecond and over 9% of displayed orders in large stocks are executed within one millisecond, and concluded that “[g]iven that over 20% of orders are either executed or canceled during the first millisecond they were displayed, it seems likely that a one millisecond delay would have a material impact on a participant's ability to access the quotations.” See id. The commenter qualified its observation by noting that these figures are relevant “[t]o the extent that a market with similar order cancellation patterns implemented a one millisecond delay.” See id. The commenter also recommended that an exchange that imposes an intentional delay “allow market participants to bypass the delay when attempting to access `protected quotations'.” Id. at 1-2. See also Citadel Interp Letter at 4 (“A time interval in which approximately 10% of executions in many of the most widely traded stocks typically occur is manifestly not de minimis.”); NYSE Interp Letter at 7. The Commission notes that it is not clear whether an exchange with an access delay that does not offer features (like co-location, post-only orders, or maker-taker fees) that typically attract latency-sensitive traders, who may be more likely to cancel their orders within one millisecond of placing them, would experience those cancellation rates. Further, the Commission notes that Rule 611 focuses on inter-market order protection, which applies only when market participants access protected quotations at geographically dispersed trading centers that are already subject to varying processing delays, some of which may be a millisecond or more. A one millisecond intentional access delay is well within the current geographic and technological latencies already experienced by market participants when routing orders between trading centers.

FIA PTG Interp Letter at 3. The commenter further noted that “[f]or comparison, modern exchange matching engines process orders in considerably less than 1/20 of that time, and geographic latencies between the major exchange data centers in New Jersey are generally less than 1/4 of that time.” Id. See also Nasdaq Interp Letter at 6 (noting that the throughput time of Nasdaq's system is 40 microseconds); Kohen Interp Letter at 1 (noting that the Bombay Stock Exchange processes a transaction in 6 microseconds).

See Nasdaq Interp Letter at 3. See also HRT Interp Letter at 3 (noting that “a one millisecond time standard . . . is already obsolete”); FIA PTG Interp Letter at 6 (“One millisecond is slow by today's computer standards, and will be even slower (relatively speaking) in the future.”). Some commenters criticized the proposed interpretation as lacking empirical support for a sub-millisecond threshold or consideration of alternative delays. See Nasdaq Interp Letter at 4; Citadel Interp Letter at 3; Budish Interp Letter at 2. As discussed above, the Commission notes that the interpretation uses a de minimis standard, and not a specific time frame demarcating permissible versus impermissible access delays.

FIA PTG Interp Letter at 2.

FIA PTG Interp Letter at 5. The commenter argued that this might result in the appearance of more locked and crossed markets, which may interfere with market stability during periods of high volatility. See id.

PDQ Interp Letter at 1.

Id. at 2.

Nasdaq Interp Letter at 3-4; Gibson Dunn Interp Letter at 7.

Letter from James J. Angel to Securities and Exchange Commission, dated December 5, 2015, at 3 (comment letter on IEX Form 1, File No. 10-222). See also Letter from Larry Tabb, TABB Group, to Brent J. Fields, Secretary, Commission, dated November 23, 2015, at 1 (comment letter on IEX Form 1, File No. 10-222) (arguing that IEX's 350 microsecond delay is not “particularly problematic, as the time gap is minimal, and (even including the speed bump) IEX matches orders faster than a number of other markets”); Letter from Charles M. Jones to Brent Fields, Secretary, Commission, dated March 2, 2016, at 2 (comment letter on IEX Form 1, File No. 10-222) (noting that “from an economic point of view the 350-microsecond delay [proposed by IEX] per se should not be a particular cause for concern, as it is well within the bounds of the existing, geographically dispersed National Market System, and does not seem likely to contribute substantially to a phantom liquidity problem”).

See supra note 31 (citing to the Gibson Dunn Interp Letter).

For example, the Rule 611(b)(1) exception refers to a “material” delay, which the Commission interpreted as one second or more. See Regulation NMS Adopting Release, supra note 1, at 37519. In addition, the comment letters on Regulation NMS expressed a multitude of views on the appropriate standard for assessing the accessibility of a protected quotation. See also supra text accompanying note 17 (noting that commenters on Regulation NMS who advocated for setting a specific time standard for automated quotations recommended a range of times from one second down to 250 milliseconds).

See supra text accompanying note 17 (noting that commenters on Regulation NMS who advocated for setting a specific time standard for automated quotations recommended a range of times from one second down to 250 milliseconds).

Exchanges currently have delays within their systems, including access gateways of varying speeds as well as within their co-location infrastructure. For example, some exchanges intentionally employ a “delay coil” in their co-location facilities or offer different access gateways of varying speeds where one is not as “fast as technologically feasible” as the other. See IEX First Form 1 Letter at 3 (comment letter on File No. 10-222) (referring to varying connectivity options offered by exchanges from the NYSE, Nasdaq, and BATS groups, and citing the CEO of Nasdaq referring to the intentional “delay coil” that Nasdaq uses inside its co-location infrastructure). Compare Gibson Dunn Interp Letter at 3 (writing on behalf of Nasdaq) (stating “the term `immediate[]' in Rule 600(b)(3) unambiguously forecloses intentional, planned delay” and referring to “the Commission's own understanding that the term [immediately] requires response times that are as fast as technologically feasible”).

See, e.g., supra note 45 (discussing intentional delays imposed in the exchange co-location context).

See supra note 34 (discussing comments on exchange processing times).

Similarly, they would encounter delays in reaching other “away” exchanges located in other data centers. See, e.g., Letter from David Lauer, Healthy Markets Association, to Brent J. Fields, Secretary, Commission, dated November 6, 2015, at 4 (comment letter on IEX Form 1, File No. 10-222) (noting that “[t]he NBBO already includes quotes with varied degrees of time lag” and that the length of IEX's coiled cable “is far less than the distance between NY and Chicago, and is remarkably similar to the distance between Carteret and Mahwah (36 miles)”); Letter from Sophia Lee, IEX, to Brent J. Fields, Secretary, Commission, dated November 23, 2016, at 4 and 7 (comment letter on IEX Form 1, File No. 10-222) (referring to data from certain subscribers to IEX's ATS that, according to IEX, indicate that those subscribers' average latency when trading on IEX is comparable to that when trading on certain other exchanges, “is an order of magnitude less than that of the Chicago Stock Exchange,” and “is on average less than the round-trip latency of the NYSE as well”).

From the perspective of a market participant based in New Jersey, classifying a New Jersey market with an intentional sub-millisecond delay as “manual” while classifying a Chicago market with geographic delay measured in multiple milliseconds as “automated” would be inequitable and would not further the goals of Regulation NMS.

One commenter argued that there is “no evidence of a need for a de minimis exception or that planned delays will benefit investors in any meaningful way.” Gibson Dunn Interp Letter at 7. See also Nasdaq Interp Letter at 5. As discussed above, however, the Commission believes that its updated interpretation is warranted in light of technological and market developments and is consistent with the purposes of Rule 611. See also comments submitted on IEX's exchange registration (File No. 10-222), a number of which supported the intentional delay proposed by IEX.

Regulation NMS Adopting Release, supra note 1, at 37519.

See, e.g., FIA PTG Interp Letter at 6; MMI Interp Letter at 1; Weldon Interp Letter at 1-2.; NYSE Interp Letter at 4; Citadel Interp Letter at 8; Markit Interp Letter at 2-3.

Healthy Markets Interp Letter at 2. See also Ethical Markets Interp Letter at 2-3, Franklin Templeton Interp Letter, British Columbia Investment Management Corporation Interp Letter (each repeating the recommendation of the Healthy Markets Interp Letter); and Themis Interp Letter at 2.

Healthy Markets Interp Letter at 3. See also Ethical Markets Interp Letter at 2-3, Franklin Templeton Interp Letter, and British Columbia Investment Management Corporation Interp Letter (each repeating the recommendation of the Healthy Markets Interp Letter). The commenters further urged that the interpretation be conditioned on: (1) Delays always being less than one millisecond; (2) delays being applied equally to all participants and across all order types; (3) data sent to the Securities Information Processors should not be delayed; and (4) the purpose of each delay is expressly stated and intended to benefit long-term investors. See Healthy Markets Interp Letter at 4. See also Ethical Markets Interp Letter at 2-3, Franklin Templeton Interp Letter, and British Columbia Investment Management Corporation Interp Letter (each repeating the recommendation of the Healthy Markets Interp Letter). Another commenter raised a similar concern, and urged the Commission to review each proposed access delay separately and “ensure that any such delays are equally applied to all market participants.” See Committee on Capital Markets Regulation Interp Letter at 2. One commenter urged the Commission to consider “one single measuring stick: Will the proposed delay serve long term investors?” Themis Interp Letter at 2.

Sethi Interp Letter at 2 (emphasis in original). Another commenter suggested an alternative definition of “immediate” that is not “elapsed-time dependent” but instead would consider an exchange's response to an incoming order to be “immediate” if the transition of the displayed quote from point A (before the order is received) to B (after the order is received) can be “fully attributed to the execution of [the order] in a determinative way.” Sakato Interp Letter at 1-2. The Commission believes that at this time an order-by-order determination of whether a quotation is “protected” could introduce unworkable complexity into order routing and could frustrate the incentive provided to market participants to post the resting displayed limit orders that underpin much of the price discovery in the market.

Only registered exchanges and associations can have “automated quotations” that are “protected quotations.” See 17 CFR 242.611(b)(57). Such entities are required by Section 19 of the Act to file all rules and proposed changes to their rules with the Commission so that the Commission can review and publish them for public notice and comment. See 15 U.S.C. 78s(b). Further, no proposed rule change can take effect unless approved by the Commission or otherwise permitted to become effective under the Act and rules thereunder. See id. Similarly, an applicant seeking to register as an exchange is required to file all proposed rules with the Commission on Form 1, which the Commission publishes for notice and comment. Once filed, the Commission evaluates each proposed rule change for consistency with the Act and the rules thereunder. An access delay would constitute a “rule” of an exchange because it would be a “stated policy, practice, or interpretation” that concerns a “material aspect” of the operation of an exchange, and thus any new or amended delay would require a filing. See 15 U.S.C. 78c(a)(27) (defining “rules of an exchange”); 17 CFR 240.19b-4(a)(6) (defining “stated policy, practice, or interpretation”); 17 CFR 240.19b-4 (noting that a stated policy, practice, or interpretation is deemed to be a proposed change unless it is fairly and reasonably implied by an existing rule or is concerned solely with the administration of the exchange). As required by Section 19(b) of the Act, Rule 19b-4, and Form 19b-4, such exchange would be required to, among other things, detail the purpose of the proposed delay and analyze how the delay is consistent with the Act, including the Section 6 standards governing, among other things, unfair discrimination, protection of investors and the public interest, inappropriate burdens on competition, and just and equitable principles of trade. See Section 19(b), Rule 19b-4 and Form 19b-4 (on which exchanges file their proposed rule changes).

See Citadel Interp Letter at 6-7 (acknowledging that new access delays would need to be filed with the Commission before they can be implemented, but expressing concern that it would “be exceedingly difficult for the staff to recognize all of the implications and impacts of each delay mechanism”).

In the case of IEX, the Commission's separate order approving IEX's Form 1 addresses the POP/coil delay's consistency with the Act. See also SIFMA Interp Letter at 3 (recommending that “any intentional delay should be predictable and universally applied to all market participants in a non-discriminatory manner”).

See, e.g., HRT Interp Letter at 3; Nasdaq Interp Letter at 3.

See HRT Interp Letter at 3. See also Citadel Interp Letter at 9.

See, e.g., Citadel Interp Letter at 9-10. One commenter asked whether there would be a process to remove protected quotation status from an exchange that has an intentional delay that equals or exceeds one millisecond. See id. at 10. If any market participant experiences issues in accessing that exchange's quotation, it may consider the applicability of the exceptions specified in Rule 611(b), including the “material delay” condition of Rule 611(b)(1). See 17 CFR 242.611(b)(1). The Commission notes that the Rule 611(b)(1) “self-help” exception refers to a “material delay,” and in the Regulation NMS Adopting Release, the Commission provided an interpretation of the phrase “material delay” as one where a market was “repeatedly failing to respond within one second after receipt of an order.” See Regulation NMS Adopting Release, supra note 1, at 37519.

See 17 CFR 242.611(b)(1). See also supra note 61 (discussing the self-help exception). Accordingly, the Commission is not including as part of the interpretation the phrase “whether intentional or not” to focus its interpretation on access delays that are intentional. While the Commission acknowledges that the one-second (i.e., 1,000,000 microseconds) interpretation included in the Regulation NMS Adopting Release for this exception, as well as the “one second” exception in Rule 600(b)(8), may warrant reconsideration in the future, that would be a separate analysis and the Commission is not addressing those exceptions in this interpretation. See also SIFMA Interp Letter at 4 (requesting that the Commission clarify that it is not changing the self-help threshold).

See 17 CFR 242.600(b)(3)(ii), (iii), and (iv), respectively. See also Regulation NMS Adopting Release, supra note 1, at 37534. In the case of IEX, the POP/coil delay imposes a 350 microsecond delay inbound to the matching engine for non-routable orders (but no additional delay when cancelling the unexecuted portion of the order) and a 350 microsecond delay outbound on the confirmation back to the order sender, for a cumulative 700 microsecond delay. In addition, the Commission notes that IEX permits incoming orders to be marked as immediate-or-cancel, as is required by Rule 600(b)(3). See 17 CFR 242.600(b)(3)(i). One commenter argued that a delay in outbound data could cause the data reported to “not accurately reflect the state of a quotation.” See Gibson Dunn Interp Letter at 7. This commenter also asserted that intentional delays in communicating reports of transactions would decrease their “informational value.” See Gibson Dunn Interp Letter at 7; Nasdaq Interp Letter at 2. The Commission notes that the geographic and technological latencies that market participants experience when routing to access a quotation also affect data disseminated from the trading center to the market participant. In other words, market participants already experience latencies when receiving quotation updates and transaction information. At least with respect to delays well within those existing latencies, the Commission does not believe that a market participant's general experience in receiving this information is likely to be altered depending on whether the delay is intentional or unintentional.

Citadel Interp Letter at 1. See also Hultgren Interp Letter at 1; Gibson Dunn Interp Letter at 1-2.

Citadel Interp Letter at 2-3.

Id. at 6.

Id.

NYSE Interp Letter at 8. See also Citadel Interp Letter at 8 (arguing that “every time market prices tick up or down, the NBBO would be incorrect for at least the duration of any intentional delays” which would lead some pegged orders to track at “inaccurate prices”).

NYSE Interp Letter at 8. See also HRT Interp Letter at 3 (citing to a comment from Instinet on IEX's Form 1 that discussed the potential for “spoofing” by entering an order, waiting for 700 microseconds, and cancelling the order without the risk of another market participant seeing or responding to it, but which could provide a false or misleading appearance that could affect the trading of other participants); FIA PTG Interp Letter at 7 (also citing to the Instinet letter).

Nevertheless, the Commission believes that the scenarios discussed by commenters would, as a practical matter, be difficult to implement. For example, in the closing auction scenario, the Commission believes it would be practically difficult to successfully implement a coordinated single-digit microsecond strategy during a broad-based auction because of the precision it would require to ensure order arrival at the final microsecond and not have it trade with a multitude of other interest in the auction. Further, concerns surrounding pegged orders on away markets would affect only the most latency sensitive traders and only apply when the exchange with the access delay is alone at the NBBO, has exhausted all displayed and non-displayed interest at its best price, and is in the process of transitioning to a new price. However, that possibility is not uniquely introduced by an exchange with an access delay, but is currently present in a fragmented market with geographically dispersed venues. For example, the same problem (only exacerbated with considerably more latency) would be present if the Chicago Stock Exchange was alone at the NBBO on a symbol it trades from Chicago.

HRT Interp Letter at 3.

See 15 U.S.C. 78s(g)(1).

A number of factors affect the speed at which a market participant can receive market and quote data, submit orders, obtain an execution, and receive information on trades, including hardware, software, and physical distance. See, e.g., Securities Exchange Act Release No. 61358 (January 14, 2010), 75 FR 3594, 3610-11 (January 21, 2010) (Concept Release on Equity Market Structure). Recent technological advances have reduced the “latency” that these factors introduce into the order handling process, both in absolute and relative terms, and some market participants and liquidity providers have invested in low-latency systems that take into account the advances in technology. See id. at 3606; see also Securities Exchange Act Release No. 76474 (November 18, 2015), 80 FR 80997, 81000 (December 28, 2015) (Regulation of NMS Stock Alternative Trading Systems; Proposed Rule) (stating that “[t]he growth in trading centers and trading activity has been fueled primarily by advances in technology for generating, routing, and executing orders” and that “[t]hese technologies have markedly improved the speed, capacity, and sophistication of the trading mechanisms and processes that are available to market participants”).

An exchange that proposed to provide any member or user (including the exchange's inbound or outbound routing functionality, or the exchange's affiliates) with exclusive privileged faster access to its facilities over any other member or user would raise concerns under the Act, including under Section 6(b)(5) and 6(b)(8) of the Act, and would need to address those concerns in a Form 1 exchange registration application or a proposed rule change submitted pursuant to Section 19 of the Act, as applicable.

As discussed above, any exchange that seeks to impose an intentional access delay must first file a proposed rule change with the Commission, which the Commission would publish for notice and comment, and approve only after finding that it is consistent with the applicable standards set forth in the Act. For example, a proposed access delay that is only imposed on certain market participants or certain types of orders would be scrutinized to determine whether or not the discriminatory application of that delay is unfair. See, e.g., Securities Exchange Act Release No. 77406, 81 FR 15765 (March 24, 2016) (File No. 10-222) (order instituting proceedings on IEX's Form 1) (discussing the potentially unfairly discriminatory application of an access delay to advantage an affiliated outbound routing broker). If the Commission cannot find that a proposed access delay is consistent with the Act, it would disapprove the proposal, rendering moot the issue of whether a quotation with such a delay is protected. Generally, the Commission would be concerned about access delays that were imposed only on certain market participants or intentional access delays that were relieved based upon payment of certain fees.

Notice of Proposed Interpretation, supra note 26, at 15665.

See supra note 56 (discussing the proposed rule change process under the Exchange Act). See also IEX Form 1 Approval Order, supra note 4.