SEC Division of Trading and Markets no-action letter: Exemption Under Rule 608(e) of Regulation NMS under the Securities Exchange Act of 1934 from Certain Provisions of the Plan to Implement a Tick Size Pilot Program to Investor Exchange LLC

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UNITED STATES
~'3 SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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DIVISION OF
TRADING AND MARKETS
August 30, 2016
Ms. Claudia Crowley
Chief Regulatory Officer
IEX Group, Inc.
4 World Trade Center
150 Greenwich Street, 44~' Floor
New York, NY 10007
Re: Exemption Under Rule 608(e) of Regulation NMS under the Securities Ezchange Act of 1934 from Certain Provisions of the "Plan to Implement a Tick Size Pilot Program" Dear Ms. Crowley, In its letter dated December 9, 2015,1 the Financial Indushy Regulatory Authority, Inc. ("FINRA"), on behalf of itself and BATS BZX Exchange, Inc. f/k/a BATS Exchange, Inc., BATS BYX Exchange, Inc. f/k/a BATS Y-Exchange, Inc., Chicago Stock Exchange, Inc., BATS EDGA Exchange, Inc. f/k/a EDGA Exchange Inc., BATS EDGX, Inc. f/k/a EDGX Exchange, Inc., NASDAQ OMX BX, Inc., NASDAQ OMX PHLX LLC, the Nasdaq Stock Market LLC, New York Stock Exchange LLC, NYSE MKT LLC, and NYSE Arca Inc. (collectively, "Participants")Z requests an exemption from certain data collection requirements set forth in the Plan to Implement a Tick Size Pilot Program ("Tick Size Pilot Plan").3 Specifically, the Participants request that the Commission, pursuant to Rule 608(e) of Regulation NMS under the Securities See letter from Marcia E. Asquith, Senior Vice President and Corporate Secretary, FINRA, to Robert W. Errett, Deputy Secretary, Securities and Exchange Commission ("Commission") dated December 9, 2015 ("Exemption Request"). The Commission notes that IEX Group, Inc. (the "Exchange" or "IEX") became a Participant of the Tick Size Pilot Plan after the Exemption Request was submitted. See Securities Exchange Act Release No. 78702 (August 26, 2016). In addition, the Commission notes that the National Stock Exchange, Inc. ("NSX") became a Participant of the Tick Size Pilot Plan. See Securities Exchange Act Release No. 77277 (March 3, 2016), 81 12162 (March 8, 2016). Accordingly, the term Participant as defined herein includes IEX and NSX. See Securities Exchange Act Release No. 74892 (May 6, 2015), 80 FR 27513 (May 13, 2015).

Exchange Act of 1934 ("Exchange Act"), exempt the Participants from the requirements of Rule 608(c) of Regulation NMS that they comply with, and enforce compliance by its members with: (I) Appendix B.II.n, which requires the identification of Retail Investor Orders;4(II) certain time reporting requirements of Appendix B.I.a(15) and (22); (III) the time used for performing certain calculations set forth in Appendix B.I.a(31) through B.I.a(33); (IV) the methodology for calculating Market Maker profitabiliTy for purposes of Appendix C.I.b and C.I.c; and (V) the requirement under the Tick Size Pilot Plan that Participants provide data collected under the Tick Size Pilot Plan within 30 calendar days following the month-end of the initial data collection date to the Commission. IEX has submitted a proposed rule change to implement the data collection requirements set forth in the Tick Size Pilot Plan and that the proposed rule change includes rules that address the items described herein for which IEX seeks exemption from Rule 608(c) of Regulation NMS.S Rule 608(c) of Regulation NMS requires the Participants to comply with the terms of the Tick Size Pilot Plan.6 Further, Rule 608(c) of Regulation NMS requires each Participant to enforce compliance with the Tick Size Pilot Plan by its members and persons associated with its members. Rule 608(e) of Regulation NMS provides that the Commission may exempt from the provisions of Rule 608 of Regulation NMS, either conditionally or on specified terms and conditions, any self-regulatory organization, if the Commission determines that such exemption is consistent with the public interest, the protection of investors, the maintenance of fair and orderly markets, and the removal of impediments to, and the perfection of the mechanisms of, a national market system.$ As discussed below, the Commission, pursuant to its authority under Rule 608(e) of Regulation NMS, is hereby granting to IEX a limited exemption from the requirement to comply with certain provisions of the Tick Size Pilot Plan as required under Rule 608(c) of Regulation NMS.9 4 Capitalized terms not otherwise defined herein shall have the same meaning as they are defined in the Tick Size Pilot Plan. 5 See Securities Exchange Act Release No. 78481 (August 4, 2016), 81 FR 52933 (August 10, 2016) (File No. SR-IEX-2016-07) ("IEX Proposal"). 6 17 CFR 242.608(c). ~ 17 CFR 242.608(c). g 17 CFR 242.608(e). 9 The Commission notes that while the Exemption Request seeks exemptive relief for all of the Participants, the Commission is granting exemptive relief only to IEX. The Commission would consider granting similar limited exemptions to other Tick Size Pilot Plan Participants should they submit proposed rule changes pursuant to Section 19(b) of the Exchange Act that are substantially similaz to the IEX Proposal.

Exemption from Certain Provisions of the Tick Size Pilot Plan
I. Exemption from the Requirement to Enforce Compliance with Certain Retail
Investor Order Identification Requirements Under Appendix B.II.n
Appendix B.II. to the Tick Size Pilot Plan lists the columns of information to be
provided with respect to mazket orders and non-booked portions of Marketable Limit Orders. Paragraph B.II.n provides that a flag (Y/N) should be used to identify Retail Investor Orders. In the Exemption Request, the Participants request an exemption from the requirement in Appendix B.II.n for those orders that may satisfy the definition of Retail Investor Order set forth in the Tick Size Pilot Plan but do not utilize the exceptions provided for such orders in Test Groups Two and Three. In the IEX Proposal, IEX proposes IEX Rule 11.340(b), Supplementary Material .02 to require Trading Centers to report "Y" when it is relying upon the Retail Investor Order exception in Test Groups Two and Three, and "N" in all other instances.lo The Commission grants the exemption to IEX from the requirement in Appendix B.II.n relating to the identification of Retail Investor Orders for those orders that satisfy the definition of Retail Investor Order but do not utilize the exceptions set forth in Test Group Two or Test Group Three. Rather, as set forth in the IEX Rule 11.340(b), Supplementary Materia1.02, IEX members that operate a Trading Center will be required to identify only those Retail Investor Orders that actually rely on the exceptions provided in Test Group Two and Test Group Three of the Tick Size Pilot Plan with a "Y." All other orders will be reported with an "N." The Commission has determined that this exemption should enhance the utility of the Tick Size Pilot Plan data by narrowing the identification of Retail Investor Orders to those that actually utilize the Tick Size Pilot Plan's exceptions. In addition, this exemption could lower implementation costs for IEX members by not requiring them to identify and report all Retail Investor Orders. Therefore, the Commission finds that granting this exemption is consistent with the public interest, the protection of investors, the maintenance of fair and orderly markets and the removal of impediments to, and the perfection of a national market system.
II. Exemption from the Requirement to Report Certain Order Information in
Microsecond Increments
Appendix B.I.a to the Tick Size Pilot Plan lists the daily market quality statistics
that are to be reported for orders in Pilot Securities. Paragraphs (14), (15), (16), (21), (22), and (23) require that certain information be reported based upon specified time ranges. l ~ to See supra note 5. 11 Specifically, paragraph (14) provides "the cumulative number of share of orders executed from 0 to less than 100 microseconds after time of order receipt;" 3

In the Exemption Request, the Participants indicate that not all Participants and non-Participant Trading Centers currently capture data or report all orders and trades in either microseconds or milliseconds. Accordingly, the Participants request an exemption from the time reporting requirements of Appendix B.I.a(15) and (22). In the IEX Proposal, IEX proposes in Supplemental Materia1.04 to IEX Rule 11.340(b) to provide additional reporting fields and modify certain existing reporting fields to permit Participants and non-Participant Trading Centers to submit data pursuant to Appendix B.I.a in seconds or such smaller increments as aze available. The IEX Proposal separates the time requirements in the pazagraphs into distinct microsecond and millisecond categories to allow Participants and non-Participant Trading Centers to submit their data under the category that is consistent with their reporting capabilities.12 The Commission grants the exemption to IEX from the requirements of paragraphs (15) and (22) of Appendix B.I.a, so long as IEX complies with, and enforces compliance with IEX Rule 11.340(b), Supplementary Materia1.04. The exemption should reduce implementation costs by accommodating the current reporting capabilities of Participant and non-Participant Trading Centers. The Commission notes that Participants and non-Participant Trading Centers will continue to provide the data required under the Tick Size Pilot Plan but in a manner that is consistent with their individual capabilities. Therefore, the Commission has determined that this exemption is consistent with the public interest, the protection of investors, the maintenance of fair and orderly markets and the removal of impediments to, and the perfection of a national market system.
III. Exemption from the Requirement Under Appendix B.I.a(31) through (33, to
Report Certain Information "At the Time of Order Execution"
Appendix B.I.a(31) through (33) provides that certain data be measured and
reported "at the time of order execution."13 According to the Exemption Request, the paragraph (15) provides that "the cumulative number of shares of orders executed from 100 microseconds to less than 100 milliseconds after time of order receipt;" and paragraph (16) provides "the cumulative number of shares of orders executed from 100 milliseconds to less than 1 second after the time of order receipt," should each be reported in separate columns. Further, paragraph (21) provides "the cumulative number of shares canceled from 0 to less than 100 microseconds after time of order receipt;" paragraph (22) provides "the cumulative number of shares canceled from 100 microseconds to less than 100 milliseconds after time of order receipt;" and pazagraph (23) provides "the cumulative number of shares canceled from 100 milliseconds to less than 1 second after the time of order receipt," should each be reported in separate columns. 12 See supra note 5. 13 Specifically, paragraph (31) provides "[q]uoted size at the National Best Bid and National Best Offer —the share-weighted average of the consolidated quoted size 4

Participants believe that this information should be captured at the time of order receipt as evaluating share-weighted average prices at the time of order receipt is more consistent with the goal of observing the effect of the Tick Size Pilot Plan on the liquidity of Pilot Securities. Accordingly, the Participants have requested an exemption from the requirement to calculate this data at the time of order execution. In the IEX Proposal, IEX proposes to adopt Supplementary Materia1.05 to IEX Rule 11.340(b) to require IEX and its members to calculate this data at the time of order receipt.la The Commission grants the exemption to IEX from the requirements in Appendix B.I.a (31) through (33) to calculate the data at the time of order execution, so long as IEX complies with, and enforces compliance with IEX Rule 11.340(b), Supplementary Materia1.05. The Commission has determined that this exemption is consistent with the public interest, the protection of investors, the maintenance of fair and orderly markets and the removal of impediments to, and the perfection of a national market system because it will provide data that should facilitate thorough analysis of the impact on liquidity of the Tick Size Pilot Plan. The Commission also notes that several data elements under current rules, including Rule 605 of Regulation NMS, are captured based at the time of order receipt. Therefore, utilizing the data calculated at the time of order receipt may reduce implementation costs.
IV. Exemption Related to the Methodology for Calculating Market Maker
Profitability Under Appendix C.I.b and C.I.c
Appendix C.I. to the Tick Size Pilot Plan requires Participants that aze Designated
Examining Authorities of Market Makers to collect certain data from Market Makers related to Market Maker profitability. Thereafter, the relevant Participants are responsible for aggregating the data and providing that data to the Commission as prescribed under Appendix C.II. to the Tick Size Pilot Plan. In the Exemption Request, the Participants propose to calculate Market Maker profitability under Appendix C.I. differently.
Appendix C.I.b of the Tick Size Pilot Plan defines raw Market Maker realized
trading profits as "the difference between the market value of Market Maker sales (shares sold x price) and the market value of Market Maker purchases (shares purchased x price). A LIFO-like method will be used for determining which share prices to use in the calculation." In the Exemption Request, the Participants propose to calculate this statistic for each trading day on a daily LIFO basis using reported trade prices and including only trades executed on the subject trading day. The daily LIFO calculation shall not include any positions carried over from previous trading days. at the inside price at the time of order execution;" paragraph (32) provides "[s]hare-weighted average NBBO Spread at the time of order execution;" and paragraph (33) provides "[s]hare-weighted average BBO Spread of reporting exchange at the time of order execution," shall be reported. 14 See su ra note 5.

Appendix C.I.c of the Tick Size Pilot Plan defines raw Market Maker unrealized
trading profits as "the difference between the purchase or sale price of the end-of-day inventory position of the Market Maker and the Closing Price. In [the] case of a short position, the Closing Price from the sale will be subtracted. In the case of a long position, the purchase price will be subtracted from the Closing Price." In the Exemption Request, the Participants propose to calculate daily Market Maker unrealized profitability statistics for each trading day on an average basis. Specifically, the Participants propose to calculate the volume-weighted average price of the excess (deficit) of buy volume over sell volume for the current trading day using reported trade prices. Further, the gain (loss) of the excess (deficit) of buy volume over sell volume shall be determined by using the volume weighted average price compazed to the closing price of the security as reported by the Primary Listing Exchange. Participants shall report the number of excess (deficit) shares held by the Market Maker, the volume weighted average price of that excess (deficit) and the closing price of the security as reported by the Primary Listing Exchange. In the IEX Proposal, IEX proposes to adopt these alternative calculations for
Appendix C.I. Specifically, Supplementary Materia1.09 to IEX Rule 11.340(b) sets forth
the alternative calculations for Appendix C.I.b and C.I.c.ls The Commission grants the exemption to IEX from the requirement of collecting the data set forth in paragraphs C.I.b and C.I.c to Appendix C.I. of the Tick Size Pilot Plan so long as IEX calculates and provides to the Commission the statistics and data described in its Supplementary Materia1.09 to IEX Rule 11.340(b). This calculation should result in a consistent, uniform, and more cost-effective calculation of Market Maker profitability, which should enhance the Commission's ability to assess the impact of the Tick Size Pilot Plan on Mazket Maker profitability. Therefore, the Commission has determined that this exemption is consistent with the public interest, the protection of investors, the maintenance of fair and orderly markets and the removal of impediments to, and the perfection of a national market system.
V. Exemption Related to the Initial Submission of Tick Size Pilot Data to the
Commission
The Tick Size Pilot Plan provides that the data collected by the Participants must be provided to the Commission within 30 calendar days following the month end.16 In the Exemption Request, the Participants request an exemption from this requirement for the data collected prior to the start of the Tick Size Pilot Plan. The Participants propose to make their initial submission to the Commission on August 30, 2016 and include data from April, May, June and July of 2016. The Participants have requested this exemption so that they can conduct testing to ensure the accuracy of the data prior to the first submission to the Commission and publication on their respective websites. is See supra note 5. 16 See Appendix B and Appendix C. C'.

The Commission grants the exemption to IEX from having to submit data set forth in Appendix B and C to the Tick Size Pilot Plan to the Commission within 30 calendar days following the month end during the period before the Pilot Period begins, so long as IEX submits the data consistent with dates described herein. Accordingly, IEX must submit its initial submission of Tick Size Pilot Plan data on August 30, 2016 and include data from April, May, June and July of 2016. Submission in this manner should provide IEX with sufficient time to test their systems and ensure the accuracy of the data. Therefore, the Commission has determined that this exemption is consistent with the public interest, the protection of investors, the maintenance of fair and orderly markets and the removal of impediments to, and the perfection of a national market system. This exemption is conditioned on the facts and representations presented in your letter. In the event any material change occurs with respect to any of the facts or representations presented, the exemption will expire and IEX must immediately resume operating in accordance with all of the provisions in the Tick Size Pilot Plan. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority. l~ i ~~. David S. Spillman Associate Director 17 17 CFR 200.30-3(a)(42). 7