SEC Division of Trading and Markets no-action letter: MEMX LLC

Anders Franzon
General Counsel
MEMX LLC
111 Town Square Place, Suite 520
Jersey City, NJ 07310
Dear Mr. Franzon:
In your letter dated September 18, 2020,1 you request assurance that the Staff will not recommend enforcement action to the Commission under paragraph (a) of Rule 10b￾l0 under the Exchange Act if a Member confirms its capacity as “agent” when the Member submits a customer’s order to the MEMX LLC (“MEMX” or the “Exchange”), in its role as the customer’s agent, and the order is executed on MEMX 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, a broker-dealer relies on the Exchange’s retention of the identities of Members that execute anonymous trades on MEMX 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 10b-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 MEMX on an agency basis and that order is executed on MEMX 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

Unless otherwise noted, each defined term in this letter has the same meaning as defined, directly or by reference, in your letter.

Rule l0b-10 in confirming the customer’s order, including paragraph (a)(2)(i) thereof, and provided that the handling and execution of the customer order complies with the No Knowledge Requirement and the Parity Requirement.2 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 a Member does not make, keep current, and preserve a record of the identity of the contra-party of an anonymous trade executed on the Exchange as part of the records required to be made and kept current under Rule 17a-3(a)(1) and to be preserved under Rule 17a-4, provided that the Exchange makes, keeps current, and preserves a record of the identities of the parties to each anonymous trade executed on the Exchange for the period and manner specified Rule 17a-4. The Staff notes, however, that this relief does not extend to trades on the Exchange if the Member knows the identity of the contra-party.

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. A broker-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.”).

The position of the Staff is based strictly on the facts and circumstances discussed in your request, and any different facts or circumstances might require a different response.5 Furthermore, this response expresses the Staff's position on enforcement action only and does not purport to express any legal conclusions on the questions presented. The Staff expresses no view with respect to any other questions that the proposed activities may raise, including the applicability of any other federal or state laws, or self-regulatory organization rules. This position is subject to modification or revocation by the Staff at any time. Sincerely, Joanne Rutkowski Assistant Chief Counsel

5 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-time priority execution of orders as set forth in MEMX Rule 11.9.

111 Town Square Place, Suite 520
Jersey City, NJ 07310
Chief Counsel
Division of Trading and Markets
Securities and Exchange Commission
100 F Street, N.E.
Washington, DC 20549
Re: Request for a Limited Exemption from Paragraph (a)(2)(i)(A) of Rule 10b-10 Under the Securities Exchange Act of 1934 (the “Act”) and Request for No￾Action Relief from Rules 10b-10(a)(2), 17a-3(a) and 17a-4(a) Under the Act Dear Ms. Russell:
MEMX LLC (“MEMX” or the “Exchange”) respectfully requests on behalf of members of the Exchange (“Members”) that execute trades on the Exchange for their customers a limited exemption from the requirement in paragraph (a)(2)(i)(A) of Rule 10b-101 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-time priority execution (“Trading System”).2 The order book and rules also provide for post trade anonymity through settlement for trades executed through MEMX. MEMX 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 l0b-10 under the Act in connection with the activities of Members executing orders for their customers in the circumstances described below. 1 Paragraph (f) of Rule 10b-10 under the Act provides the Securities and Exchange Commission (“SEC” or “Commission”) authority to issue exemptions from the requirements contained in paragraphs (a) and (b) of Rule 10b-10. 2 See MEMX Rule 11.9. 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: (1) for regulatory purposes or to comply with an order of a court or arbitrator; or (2) when a registered clearing agency 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 MEMX Rule 11.13(e).

Specifically, MEMX requests this relief to permit a Member to indicate on a customer confirmation that the Member acted as agent (where the Member submits a customer’s order on MEMX in the Member’s role as the customer’s agent (hereinafter “Customer Order”)) 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 (hereinafter “Principal Order”), so long as the conditions set out below are met and the Member otherwise complies with all other requirements of Rule l0b-10 in confirming the customer’s order, including paragraph (a)(2)(i) thereof. This request for no-action relief is limited, however, to those situations in which the following requirements are met: (1) the representatives of the 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 of the contra-party(ies) against which such Customer Orders will be executed (the “Parity Requirement”). Finally, MEMX requests certain no-action relief from the requirements of Rules 17a-3(a)(1) and 17a-4(a) under the Act, as described below. A. Background – MEMX MEMX is a registered national securities exchange under Section 6 of the Act. 4 Members of the Exchange (“Members”) will consist of those 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 NMS under the Act (“Reg NMS”). Liquidity will be derived from orders to buy and orders to sell submitted to the Exchange electronically by its Members from remote locations. The order book and the Exchange’s rules will provide for strict price-time priority execution. Under MEMX Rule 11.9, orders will be prioritized on a strict price-time basis, first by price and then by time. Incoming orders are first matched for execution against orders in the MEMX order book. Orders that cannot be executed are eligible for routing to away trading centers, if 4 MEMX received approval of its application for registration as a national securities exchange on May 4, 2020. See Exchange Act Release No. 88806; File No.10-237 (May 4, 2020). Exchange rules cited herein were approved as part of the application.

consistent with the terms of the 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 of transactions executed in the Trading System but shall not reveal 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 a MEMX 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 of displayed orders, which is based on strict price-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 of the trade at the time of execution. MEMX does permit a Member to prevent its incoming orders from being executed against its own trading interest. Specifically, Members have the ability to use self trade prevention (“STP Modifier”). Once set, the Trading System will not execute the order against the Member’s trading interest submitted under the same unique identifier.7 For example, if Member 1, a Member of the Exchange, submits an order to sell with the STP Modifier, the Trading System will determine whether Member 1 has a bid for the security under the same unique identifier that would match with the order to sell. If Member 1’s bid would execute against Member 1’s incoming order to sell, the Trading System will, in accordance with Member 1’s instructions, cancel or adjust either or both of the orders.8 B. Rule 10b-10

1. Contra-Party Identity Requirement
   Rule l0b-10, among other things, requires a broker-dealer to disclose to its customers the identity of the party the broker-dealer sold to or bought from to fill the customer’s order. Specifically, under paragraph (i)(A) of Rule l0b-10(a)(2), when a broker-dealer is acting as agent for a customer, some other person, or for both the customer and some other person, the broker-dealer must disclose “[t]he name of the 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 5 See MEMX Rule 11.11. 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 of the away trading center. 6 Except for the conditions set forth in MEMX Rule 11.13(e). See supra n. 3. 7 See MEMX Rule 11.10(d). 8 Members use the STP Modifier for compliance and business reasons. For example, using the STP Modifier prevents order flow from appearing as a wash sale on an exchange or a broker/dealer’s compliance reports.

request of such customer” (the “Contra-Party Identity Requirement”). A broker-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. A broker-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 at MEMX, where the identity of the actual contra-party is not revealed when the trade is executed.9 Therefore, Members will not know the identity of the party to whom they sold securities or from whom they purchased securities. Without this information, Members cannot comply with the Contra-Party Identity Requirement. To permit MEMX Members to utilize the Exchange without violating Rule l0b-10, the Exchange is seeking an exemption, on behalf of such Members, from the Contra-Party Identity Requirement when Members execute transactions at MEMX. The Contra-Party Identity Requirement, in conjunction with the other requirements of paragraph (a)(2) of Rule l0b-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.10 The Exchange believes an exemption from the Contra-Party Identity Requirement when a Member trades through MEMX would not diminish the public policy and investor protection objectives of the Contra-Party Identity Requirement of Rule l0b-10. The Exchange believes the potential for a conflict of interest is less likely in those circumstances when a Member trades through MEMX 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 MEMX, 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. 9 Except for the conditions set forth in MEMX Rule 11.13(e). See supra n. 3. 10 Paragraph (a)(2) of Rule l0b-10 requires a broker-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 l0b-10(a)(2) requires a broker-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.

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 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. 11 As stated, MEMX’s order book will not support functionality that would allow a broker-dealer to select or influence against whom its orders will be executed.12 Where the 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 11 The SEC has issued no-action relief for Rule l0b-10 under these circumstances. See Letter from Paula Jenson, Deputy Chief Counsel, Division of Trading and Markets, to Claudia Crowley, CRO, IEX Group, Inc. (July 26, 2016); Letter from Paula Jenson, Deputy Chief Counsel, Division of Trading and Markets, to Eric W. Hess, General Counsel and Secretary, EDGA Exchange, Inc. and EDGX Exchange, Inc. (May 26, 2010); 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 Trading and Markets, to J. Craig Long, Foley & Lardner LLP (October 23, 2008); 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). 12 If such functionality were to be offered in the future, MEMX understands that the relief requested by this letter would not apply to this functionality.

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.13 Moreover, the proposed action does not diminish investor protection because it does not relieve a Member's duty of best execution.14
C. Books and Records 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.” The Exchange asks that the Commission staff not recommend enforcement action to the Commission if, in lieu of making and preserving a separate record, a broker-dealer relies on the Exchange’s retention of the identities of Members that execute anonymous trades through MEMX in a manner consistent with and for the period prescribed in Rule 17a-4 under the Act to satisfy requirements of Rules 17a-3(a)(1) and 17a-4 under the Act. A broker-dealer would retain the responsibility to make, keep current and preserve records of all purchase and sales of securities in accordance with Rules 17a-3 and 17a-4 under the Act for trades through MEMX if the broker-dealer knows of the contra-party, including those instances where MEMX discloses the contra-party to a trade.

---

13 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. 14 See Regulation NMS, Exchange Act Release No. 49325 (Feb. 26, 2004), 69 Fed. Reg. 11126, 11137 (March 9,
2004) (“A broker-dealer still must seek the most advantageous terms reasonably available under the circumstances
for all customer orders. A broker-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.”)

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 (551) 370-1003 or afranzon@memx.com. Sincerely, Anders Franzon General Counsel