SEC Division of Trading and Markets no-action letter: Investors' Exchange LLC

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DIVISION OF
TRADING AND MARKETS
July 26, 2016
Claudia Crowley
Chief Regulatory Officer
IEX Group, Inc.
4 World Trade Center
150 Greenwich Street, 44th Floor
New York, NY 10007
Dear Ms. Crowley:
In your letter dated July 19, 2016,1 you request assurance that the Staff will not recommend enforcement action to the Commission under paragraph (a) of Rule lOb-10 under the Exchange Act if a Member confirms its capacity as "agent" when the Member submits a customer's order to the IEX, in its role as the customer's agent, and the order is executed on IEX in a trade with an anonymous contra-party that turns out to be the Member trading in a principal (including proprietary) capacity. Your request is limited to those situations in which both: (1) the No Knowledge Requirement; and (2) the Parity Requirement are satisfied. In addition, you ask that the Staff not recommend enforcement action to the Commission under Rules 17a-3(a)(1) and 17a-4(a) under the Exchange Act if, in lieu of making and preserving a separate record, abroker-dealer relies on the Exchange's retention of the identities of Members that execute anonymous trades on IEX to satisfy the requirements under those rules. Based on the facts and representations set forth in your letter, the Staff will not recommend enforcement action to the Commission under paragraph (a) of Rule l Ob-10 if a Member indicates on confirmations to its customers that the Member acted as agent on a customer's behalf when a representative of the Member submits a customer order to IEX on an agency basis and that order is executed on IEX in a trade with an anonymous contra-party that turns out to be the Member trading in a principal (including proprietary) capacity, provided that the Member complies with all other requirements of Rule lOb-10 in confirming the customer's order, including paragraph (a)(2)(i) thereof, and provided Unless otherwise noted, each defined term in this letter has the same meaning as defined, directly or by reference, in your letter.

Ms. Claudia Crowley
July 26, 2016 that the handling and execution of the customer order complies with the No Knowledge Requirement and the Parity Requirement.z In taking this position, we note in particular your representation regarding your expectation that same firm volume, as a percentage of total volume, will not be material for either high or low trading volume securities.3 We also note that Members continue to have a duty of best execution.4 The Staff will not recommend enforcement action to the Commission if, in lieu of making and preserving a separate record, Members rely on the Exchange to make, keep current, and preserve a record of the identities of the Members that execute anonymous trades on the Exchange, for the period and manner specified Rule 17a-4, to satisfy the requirements of Rules 17a-3(a)(1) and 17a-4 under the Exchange Act. The Staff notes, however, that a Member has the responsibility to make, keep current, and preserve records of all purchases and sales of securities in accordance with Rules 17a-3 and 17a-4 of the Exchange Act for trades on IEX if the Member knows the identity of the contra￾P~3' These no-action positions are subject to modification or revocation if at any time the Staff determines that such action is necessary or appropriate in furtherance of the purposes of the Exchange Act. In addition, these positions are based solely upon the representations you have made and are limited strictly to the facts and conditions described in your letter. Any different facts or circumstances, including any change to This Staff position applies only to trades that Members execute on the Exchange's Trading System. This Staff position does not apply to orders routed to an away trading center for execution. In this regard, we note your representation that, one year after the Trading System becomes fully operational, you will review trade data to determine the actual percentage of same firm volume versus total volume in high and low volume securities to confirm that this number is not material, and that you will create and maintain a record of your determination. See, e.g., Regulation NMS, Exchange Act Rel. No. 49325 (Feb. 26, 2004), 69 FR 11126, 11137 (Mar. 9, 2004) ("A broker-dealer still must seek the most advantageous terms reasonably available under the circumstances for all customer orders. Abroker-dealer must carry out a regular and rigorous review of the quality of market centers to evaluate its best execution policies, including the determination as to which markets it routes customer order flow."}.

Ms. Claudia Crowley
July 26, 2016 the operation of the Exchange, may require a different responses Finally, we express no view with respect to other questions the proposed activities of the Exchange or any Members relying on this exemption or on these no-action positions may raise, including the applicability of any other federal or state laws or the applicability ofself-regulatory organization rules concerning customer account statements or confirmations. Sincerely, ^~ Paula Jenson Deputy Chief Counsel In this regard, we note your representation that the Exchange's rules do not provide for any special order type that would be an exception to the strict price￾display-time priority handling of orders as set forth in Rule 11.220 of the Exchange.

IEX Group, Inc.Claudia Crowley
4 f World Trade Center, 44'^ FI Chief Regulatory Officer New York, New York 10007 (646) 343-2041 www.iextrading.com claudia.crowley@iextrading.com July 19, 2016 Ms. Heather Seidel Chief Counsel Division of Trading and Markets Securities and Exchange Commission 100 F Street, N.E. Washington, DC 20549-0001

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  Re: Request for a Limited Exemption from Paragraph (a)(2)(i)(A) of Rule l Ob-10 Under the Securities Exchange Act of 1934 (the "Act") and Request for No￾Action Relief from Rules lOb-10(a)(2), 17a-3(a) and 17a-4(a) Under the Act Dear Ms. Seidel:
  Investors' Exchange LLC ("IEX" or the "Exchange") respectfully requests on behalf of members of the Exchange that execute trades on the Exchange for their customers ("Members") a limited exemption from the requirement in paragraph (a)(2)(i)(A) of Rule l Ob-10' under the Act to disclose to their customers the name of-the person from whom a security was purchased, or to whom it was sold, or the fact that such information will be provided upon the customer's written request. The Exchange will operate a fully automated electronic book ("order book") for orders to buy and sell securities ("orders") with a continuous, automated matching function which will provide for strict price-display-time priority execution ("Trading System").2 The order book and rules also provide for post trade anonymity through settlement for trades executed through IEX.3 IEX also requests, on behalf of its Members, your assurance that the staff of the Division of Trading and Markets ("Staff') will not recommend that the Commission take any enforcement action under paragraph (a) of Rule l Ob-10 under the Act in connection with the activities of members executing orders for their customers in the circumstances described below. ~ Paragraph (~ of Rule lOb-10 under the Act provides the Securities and Exchange Commission ("SEC") or "Commission") authority to issue exemptions from the requirements contained in paragraph (a) and (b) of Rule lOb-10. . 2See, IEX Rule 11.220. The Exchange rules do not provide for any special order type that would be an exception to the strict price-display-time priority handling of orders set forth in Rule 11.220. 3 As explained herein the Exchange does not request an exemption for when it reveals the identity of a Member or a Member's clearing firm: (i) for regulatory purposes or to comply with an order of a court or arbitrator; or (ii) when a Registered Clearing Agency (as defined in Exchange Rule 1.1600 such as the National Securities Clearing Corporation ceases to act for a Member or the Member's clearing firm, and determines not to guarantee the settlement of the Member's trades. See IEX Rule 11.250(d)(2).

Ms.Heather Seidel
July 19,2016
Specifically,IEX requests this reliefto permit a Member to indicate on a customer confirmation that the Member acted as agent(where the Member submits a customer's order on IEX in the Member's role as the customer's agent(hereinafter"Customer Order"))and the order is executed in atrade with an anonymous contra-party thatturns outto be the Member or one ofits affiliates trading in a principal(including proprietary)capacity(hereinafter"Principal Order"),so long as the conditions set out below are metand the Member otherwise complies with all other requirements ofRule lOb-10 in confirming the customer's order,including paragraph(a)(2)(i) thereof. This requestfor no-action reliefis limited, however,to those situations in which the following requirements are met:(1)the representatives ofthe Member or its affiliates submitting Principal Orders do not have knowledge about Customer Orders submitted by the Member and the Member representatives submitting Customer Orders do not have knowledge about Principal Orders submitted by the Member or its affiliates(the"No Knowledge Requirement");and(2)the Member does not determine or influence the selection ofthe contra-party(ies)against which such Customer Orders will be executed(the"Parity Requirement"). Finally,IEX requests certain no-action relieffrom the requirements ofRules 17a-3(a)(1)and 17a￾4(a)under the Act,as described below. A. Background — IEX IEX is a registered national securities exchange under Section 6ofthe Exchange Act.4 The Members ofthe Exchange("Members".)consist ofthose broker-dealers admitted to Membership and entitled to enter orders in, and receive executions through,the Exchange's order book or otherwise. The Exchange will operate an order book for orders with a continuous,automated matching function,in compliance with the Exchange's rules and Regulation NMSunder the Act("Reg NMS"). Liquidity will be derived from orders to buy and orders to sell submitted to the Exchange electronically by its Membersfrom remote locations. The order book and the Exchange's rules will provide for strict price-display-time priority execution. Under Rule 11.220,orders will be prioritized on a strict price-display-time basis,first by price,then by display(with displayed orders and displayed portions oforders having precedence over non-displayed orders and non-displayed portions oforders at a given price)and then by time. Incoming orders are first matched for execution against orders in the IEX order book. Orders that cannot be executed are eligible for routing to away trading centers,if 4IEX received approval ofits application for registration asa national securities exchange on June 17,
2016. See Exchange ActRelease No.34-78101;File No. 10-222(June 17,2016). Exchange rules cited
herein were approved as part ofthe application.

Ms.Heather Seidel
July 19,2016 consistent with the terms ofthe orders.5 All trades will be executed through the Exchange's Trading System on an anonymous basis. The transaction reports produced by the Trading System will indicate the details oftransactions executed in the Trading System but shall- not reveal the contra party identities. Transactions executed in the Trading System will also be cleared and settled anonymously.6 The order book's matching system algorithm permits orders originated by an IEX Member to execute against other orders from the same participant on the same basis as orders from other Members. In the order book's handling ofdisplayed orders, which is based on strict price￾display-time priority,a Member could receive an execution against itself, and under the Exchange's Rules,the Member would not know that it was the contra-side ofthe trade at the time ofexecution. B. Rule lOb-10 Contra-Party Identity Requirement Rule lOb-10,among other things,requires abroker-dealer to disclose to its customers the identity ofthe party the broker-dealer sold to or boughtfrom to fill the customer's order. Specifically, under paragraph(i)(A)ofRule lOb-10(a)(2), when abroker-dealer is acting as agentfor a customer,some other person,or for both the customer and some other person,the broker-dealer must disclose "[t]he name ofthe person from whom the security was purchased,or to whom it was sold,for such customer or the fact that the information will be furnished upon written request ofsuch customer"(the "Contra-Party Identity Requirement"). Abroker-dealer can provide this information on the confirmation,or it has the option to provide the information to a customer at a later time after receiving a written request from the customer. Abroker-dealer has this option as long as it discloses on the confirmation that the contra-party information is available upon written request. Trades are executed with total anonymity atIEX,where the identity ofthe actual contra-party is not revealed when the trade is executed. Therefore, Members will not know the identity ofthe party to whom they sold securities or from whom they purchased securities. Withoutthis information, Members cannot comply with the Contra-Party Identity Requirement. To permit IEX Members to utilize the Exchange without violating Rule lOb-10,the Exchange is seeking an exemption,on behalfofsuch Members,from the Contra-Party Identity Requirement when Members execute transaction at IEX. 5 See IEX Rule 11.230. The Exchange understands that the exemptive and no-action relief would not apply to any situation in which the Trading System routes an order to an away trading center for execution, as such executions would be governed by the rules ofthe away trading center. 6 Except for the conditions set forth in IEX Rule IEX Rule 11.250(d)(2). See supra n. 3. Id.

Ms. Heather Seidel
July 19, 2016
The Contra-Party Identity Requirement, in conjunction with the other requirements of paragraph (a)(2) of Rule lob-10, is designed to provide customers with information that could alert them to potential conflicts of interest their broker-dealer may have had when handling their orders.8 The Exchange believes an exemption from the Contra-Party Identity Requirement when a Member trades through IEX would not diminish the public policy and investor protection objectives of the Contra- Party Identity Requirement of Rule lOb-10. The Exchange believes the potential for a conflict of interest is less likely in those circumstances when a Member trades through IEX because the trades are executed at the best price available on the Exchange and the contra-party is determined based upon multiple factors not controlled by the Member. In such situations, Members are not permitted the discretion in executing the order that would normally give rise to the opportunity for a conflict of interest.
2. Identification as Agent on Confirmation
The Exchange requests no-action relief, on behalf of its members, to permit Members to indicate on a customer confirmation that the Member has acted as agent where the Member submits a customer's order through the electronic trading facilities of IEX, in the Member's role as the customer's agent, and the order is executed in a trade with an anonymous contra-party that turns out to be the Member or one of its affiliates trading in a principal (including proprietary) capacity. a. No Knowledge Requirement This request is limited to those circumstances in which the representatives of a Member and its affiliates submitting Principal Orders do not have knowledge about Customer Orders submitted by the Member, and the Member representatives submitting Customer Orders have no knowledge about Principal Orders submitted by the Member or its affiliates. A Member will be able to satisfy the No Knowledge Requirement if it implements and utilizes an effective system of internal controls such as appropriate information barriers, that operate to prevent the representatives of the Member or its affiliates submitting Principal Orders from obtaining knowledge about the Customer Orders submitted by the Member, and the representative of the Members submitting Customer Orders from obtaining knowledge about the Principal Orders submitted by the Member or its affiliates. To be effective, such a system of internal controls must include specific policies and procedures that prevent each Principal Order submitter separated by the information barriers from obtaining knowledge regarding Customer Orders submitted by the Member, and each Customer Order submitter separated by the information barriers from obtaining knowledge regarding Principal Orders submitted by the Member or its affiliates. b. Parity Requirement $ Paragraph (a)(2) of Rule lOb-10 requires abroker-dealer to disclose on a confirmation to a customer the capacity in which the broker-dealer handled the customer's order (i.e., as agent or principal), and whether the broker-dealer acted as agent for some other person, or as agent for both the customer and some other person. Paragraph (i)(D) of Rule l Ob-10(a)(2) requires abroker-dealer to disclose to its customer the source and amount of remuneration received, or to be received, by the broker-dealer in connection with the trade.

Ms. Heather Seidel
July 19, 2016
In addition to this No Knowledge Requirement, this request is limited to those situations in which the Member does not in any way determine or influence the selection of the trading interest against which a customer order will be executed.9 As stated, IEX's order book will not support functionality that would allow abroker-dealer to select or influence against whom its orders will be executed.lo Where a Customer Order and the Principal Order are executed against each other by the order book, a Member indicating in the confirmation that the firm acted as agent does not increase the risk of fraud against the customer, where the No Knowledge Requirement and the Parity Requirement are met. To the contrary, the matching of the agency and the proprietary trading interests occurs at the best price available and the contra-side is determined based upon priority factors established by the rules of the Exchange." Moreover, the proposed action does not diminish investor protection because it does not relieve a Member's duty of best execution.12
C. Books and Record Retention
Rule 17a-3(a)(1) under the Act requires that broker-dealers make and keep current records of all purchases and sales of securities, including "the name or other designation of the person from whom purchased or received or to whom sold or delivered." Rule 17a-4(a) under the Act requires that the records be preserved for six (6) years, the first two (2) years "in an easily accessible place." 9 The SEC has issued no-action relief for Rule lOb-10 under these circumstances. See Letter from James L. Eastman, Associate Director and Chief Counsel, Division of Trading and Markets, to Eric Swanson, SVP, General Counsel, BATS Exchange, Inc. (February 25, 2010); Letter from Brian A. Bussey, Assistant Chief Counsel, Division of Market Regulation, to James C. Yong, Chief Regulatory Officer, National Stock Exchange (October 13, 2006); Letter from Brian A. Bussey, Assistant Chief Counsel, Division of Market Regulation, to Edward S. Knight, Executive Vice President and General Counsel, Nasdaq (January 26, 2005); and Letter from Brian A. Bussey, Assistant Chief Counsel, Division of Market Regulation, to Aleksandra Radakovic, Vice President, J.P Morgan Securities Inc. (August 4, 2005). 10 If such functionality were to be offered in the future, IEX understands that the relief requested by this letter would not apply to this functionality. " The Exchange expects that same firm volume, i.e., an execution in which a firm's agency order is matched against the same firm's principal (including proprietary) trading interest, as a percentage of total volume in a security through the Trading System will not be material for either high or low trading volume securities. The Exchange represents that one year after the Trading System becomes fully operational, the Exchange will review trade data to determine the actual percentage of same firm volume versus total volume in high and low volume securities to confirm that this number is not material. The Exchange will create and maintain a record of the determination. 12 See Regulation NMS, Exchange Act Rel. No. 49325 (Feb. 26, 2004), 69 Fed. Reg. 1 1 126, 1 1137 (March 9, 2004) ("A broker-dealer still must seek the most advantageous terms reasonably available under the circumstances for all customer orders. Abroker-dealer must carry out a regular and rigorous review of the quality of the market centers to evaluate its best execution policies, including the determination as to which markets it routes customer order flow.")

Ms. Heather Seidel
July 19, 2016
The Exchange asks that the Commission staff not recommend enforcement action to the Commission if, in lieu of making and preserving a separate record, abroker-dealer relies on the Exchange's retention of the identities of Members that execute anonymous trades through IEX in a manner consistent with and for the period prescribed in Rule 17a-4 to satisfy requirements of Rules 17a-3(a)(1) and 17a-4 under the Act. Abroker-dealer would retain the responsibility to make, keep current and preserve records of all purchase and sales of securities in accordance with Exchange Act Rules 17a-3 and 17a-4 for trades through IEX if the broker-dealer knows of the contra-party, including those instances where IEX discloses the contra-party to a trade.

In view of the foregoing, the Exchange respectfully requests that the Commission issue an exemption and such other relief as reflected in this letter. If you have any questions, please contact me at (646) 343-2041 or claudia.crowley@iextrading.com. Very truly yow•s, ~c~ ~~. G~~~~—