[Federal Register Volume 82, Number 33 (Tuesday, February 21, 2017)]
[Notices]
[Pages 11252-11272]
[FR Doc No: 2017-03296]

-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-80041; File No. SR-CHX-2017-04]

Self-Regulatory Organizations; Chicago Stock Exchange, Inc.;
Notice of Filing of Proposed Rule Change To Adopt the CHX Liquidity
Enhancing Access Delay

February 14, 2017.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on February 10, 2017, the Chicago Stock Exchange, Inc. (``CHX'' or
``Exchange'') filed with the Securities and Exchange Commission (the
``Commission'') the proposed rule change as described in Items I, II
and III below, which Items have been prepared by the self-regulatory
organization. The Commission is publishing this notice to solicit
comments on the proposed rule change from interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change

    CHX proposes to amend the Rules of the Exchange (``CHX Rules'') to
adopt the CHX Liquidity Enhancing Access Delay. The text of this
proposed rule change is available on the Exchange's Web site at http://www.chx.com/regulatory-operations/rule-filings/, at the principal
office of the Exchange, and at the Commission's Public Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the self-regulatory organization
included statements concerning the purpose of, and basis for, the
proposed rule change and discussed any comments it received on the
proposed rule change. The text of those statements may be examined at
the places specified in Item IV below. The Exchange has prepared
summaries, set forth in sections A, B and C below, of the most
significant parts of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and the
Statutory Basis for, the Proposed Rule Change

1. Purpose
(1) Overview
    The Exchange proposes to amend the CHX Rules to adopt the CHX
Liquidity Enhancing Access Delay (``LEAD''). In sum, LEAD will require
all new incoming orders, cancel and cancel/replace messages to be
subject to a 350-microsecond intentional access delay; provided,
however, that (1) new incoming orders \3\ submitted by LEAD Market
Makers (``LEAD MM''), a new class of CHX Market Maker \4\ with
heightened quoting and trading obligations, that would be immediately
ranked on the CHX book without executing against any resting orders on
the CHX book and (2) certain cancel messages related to resting orders
that were submitted by LEAD MMs will not be delayed. LEAD will be
applied to all securities traded on the Exchange throughout the trading
day.\5\ LEAD is designed to enhance displayed liquidity and price
discovery by minimizing the effectiveness of latency arbitrage
strategies that diminish displayed liquidity and impair price
discovery, as described in detail below.
---------------------------------------------------------------------------

    \3\ ``New incoming orders'' are orders received by the Matching
System for the first time. As discussed below, LEAD will not apply
to other situations where existing orders or portions thereof are
treated as incoming orders, such as (1) resting orders that are
price slid into a new price point pursuant to the CHX Only Price
Sliding or Limit Up-Limit Down Price Sliding Processes and (2)
unexecuted remainders of routed orders released into the Matching
System. See CHX Article 1, Rule 2(b)(1)(C); see also CHX Article 20,
Rule 2A(b); see also CHX Article 20, Rule 8(b)(7). Incidentally, the
Exchange is proposing to amend CHX Article 20, Rule 8(a)(7) to
delete the word ``new'' from the last sentence, so that the rule
provides, in pertinent part, that if no balance exists at the time a
part of an unexecuted remainder of a routed order is returned to the
Matching System, it shall be treated an incoming order.
    \4\ See CHX Article 1, Rule 1(tt) defining ``Market Maker''; see
also generally CHX Article 16 (Market Makers).
    \5\ Each trading day is divided into four trading sessions:
Early session, regular trading session, late trading session and
late crossing session. See CHX Article 20, Rule 1(b). The Exchange
only accepts cross orders during the late crossing session and thus
does not accept or rank any single-sided orders during the late
crossing session. See CHX Article 1, Rule 2(a)(2) defining ``cross
order.''
---------------------------------------------------------------------------

(2) Latency Arbitrage
    As used herein, ``latency arbitrage'' means the practice of
exploiting

disparities in the price of a security or related securities that are
being traded in different markets by taking advantage of the time it
takes to access and respond to symmetric public information.\6\ At CHX,
latency arbitrage is effected by low-latency market participants that
leverage microsecond speed advantages to take resting liquidity at
stale prices from the CHX limit order book.
---------------------------------------------------------------------------

    \6\ See Letter to Brent J. Fields, Secretary, SEC, from Eric
Budish, Professor of Economic and David G. Booth Faculty Fellow, the
University of Chicago Booth School of Business (October 13, 2016)
(``Budish LTAD Letter'') at 2. Given its emphasis on speed, latency
arbitrage has resulted in a well-documented and escalating
technology race among certain market participants seeking to obtain
ever smaller speed advantages. See Eric Budish, Peter Cramton and
John Shim, ``The High-Frequency Trading Arms Race: Frequent Batch
Auctions as a Market Design Response,'' Quarterly Journal of
Economics, Vol. 130(4), November 2015 (``Budish Paper''); see also,
Elaine Wah and Michael Wellman, ``Latency Arbitrage, Market
Fragmentation, and Efficiency: A Two-Market Model,'' 4th ACM
Conference on Electronic Commerce, June 2013.
---------------------------------------------------------------------------

    In 2016, the Exchange experienced a material decline in CHX volume
and liquidity in the SPDR S&P 500 trust exchange-traded fund
(``SPY''),\7\ which the Exchange has attributed to latency arbitrage
activity in SPY first observed at CHX in January 2016 (``SPY latency
arbitrage activity'').\8\ Specifically, during the period of January
through July 2016, the Exchange observed unusual messaging patterns in
SPY whereby an execution of a large inbound Immediate Or Cancel order
(``IOC'') against a contra-side order resting on the CHX book was
frequently followed by a late cancel message for the executed resting
order soon after the execution (``Too Late to Cancel'' or ``TLTC'').\9\
Based on these observations, Participant corroboration of the
observations and market data analysis,\10\ the Exchange found that SPY
latency arbitrage activity caused CHX liquidity providers to
dramatically reduce displayed liquidity in SPY (and at times withdraw
from the market altogether), which materially decreased liquidity in
SPY market wide, especially in light of CHX's significant contributions
to overall volume and liquidity in SPY prior to the declines.\11\
---------------------------------------------------------------------------

    \7\ Most of the CHX liquidity in SPY and other S&P 500-
correlated securities is provided as part of an arbitrage strategy
between CHX and the futures markets, whereby liquidity providers
utilize, among other things, proprietary algorithms to price and
size resting orders on CHX to track index market data from a
derivatives market (e.g., E-Mini S&P traded on the Chicago
Mercantile Exchange's Globex trading platform).
    \8\ A detailed analysis (``CHX ETF Analysis'') of the impact of
latency arbitrage on displayed liquidity in SPY at CHX, for the
period of August 2015 through July 2016 (``Analysis Period''), may
be found under Appendix A. The market data utilized by the CHX ETF
Analysis, as well as defined terms and notes, may be found under
Appendix B. Additional analysis regarding the potential impact of
LEAD on liquidity takers may be found under Appendix C. As discussed
in detail under Appendix A below, prior to the beginning of the SPY
latency arbitrage activity in January 2016, CHX volume and liquidity
in SPY constituted a material portion of overall volume and
liquidity in SPY marketwide. For example, the CHX Market Share in
SPY as a percentage of Total Volume decreased from 5.73% in January
2016 to 0.57% in July 2016, while the Control Securities did not
experience similar declines. See infra Appendix A; see also infra
Appendix B Calculation Set 1a. Also, the Time-weighted Average CHX
Size At The NBBO in SPY relative to the total NMS Size At The NBBO
in SPY decreased from 44.36% in January 2016 to 3.39% of the total
NMS Size At The NBBO in SPY in July 2016, while the Control
Securities did not experience similar declines. See also infra
Appendix A; see also infra Appendix B Calculations Sets 3a and 4a.
    \9\ The Exchange did not begin maintaining TLTC data until May
2016. See infra Appendix C.
    \10\ See supra note 8.
    \11\ See id.
---------------------------------------------------------------------------

    As demonstrated by the SPY latency arbitrage activity, latency
arbitrage imposes a tax on liquidity provision \12\ that dissuades
market participants from providing displayed liquidity, which is
incompatible with a primary goal of Regulation NMS to enhance displayed
liquidity to the benefit of investors and the public interest.\13\
Latency arbitrageurs exploit the fact that updating the continuous
limit order book (utilized by every national securities exchange)
necessarily requires the processing of order-related messages serially
by time of receipt. Thus, when reacting to the same symmetric
information, a liquidity provider with a quote displayed on an exchange
must be faster than a latency arbitrageur to avoid its stale quote from
being executed.\14\ This structural bias facilitates the ability of the
latency arbitrageur to extract profits from symmetric information.\15\
The Exchange submits that this bias is contrary to a fundamental
principal of trading, that the parties agree upon the terms of the
trade, and permitting latency arbitrage to continue to diminish
displayed liquidity is wholly inconsistent with the objectives of
Regulation NMS.\16\
---------------------------------------------------------------------------

    \12\ See Eric Budish, Comment letter regarding ``Investors'
Exchange LLC Form 1 Application (Release No. 34-75925; File No. 10-
222)'' (February 5, 2016).
    \13\ The Commission has stated that ``increased displayed
liquidity [is] a principal goal of the Order Protection Rule.''
Exchange Act Release No. 51808 (June 9, 2005), 70 FR 37496, 37514
(June 29, 2005) (``Regulation NMS Adopting Release''). The
Commission has also stated that ``[t]o the extent that competition
among orders is lessened, the quality of price discovery for all
sizes of orders can be compromised. Impaired price discovery could
cause market prices to deviate from fundamental values, reduce
market depth and liquidity, and create excessive short-term
volatility that is harmful to long-term investors and listed
companies. More broadly, when market prices do not reflect
fundamental values, resources will be misallocated within the
economy and economic efficiency--as well as market efficiency--will
be impaired.'' Id. at 37499.
    \14\ See Budish LTAD Letter, supra note 6, at 2.
    \15\ See id.
    \16\ See Regulation NMS Adopting Release, supra note 13, at
37514.
---------------------------------------------------------------------------

(3) LEAD
    LEAD is designed to offset the structural bias that unfairly favors
latency arbitrageurs by giving liquidity providers who have committed
to heightened quoting and trading requirements (i.e., LEAD MMs) a small
head start to the cancellation of stale quotes in the race to react to
symmetric public information.\17\ Based on its analysis of CHX market
data,\18\ the Exchange does not believe that LEAD will have a material
impact on the ability of liquidity takers not engaged in latency
arbitrage, such as retail investors, to access displayed liquidity at
CHX.\19\ To the extent a sophisticated market participant seeks to take
displayed liquidity pursuant to better or different information (as
opposed to the same information exploited by latency arbitrageurs),
LEAD is too short to have an incrementally negative impact on such non-
latency arbitrage strategies.
---------------------------------------------------------------------------

    \17\ See Budish LTAD Letter, supra note 6, at 2. In discussing
possible alternatives to a frequent batch auction model for trading
securities, the Budish Paper provides that ``the asymmetric delay
eliminates sniping and stops the arms race.'' See Budish Paper,
supra note 6, at 1612.
    \18\ Based on the Exchange's analysis of cancel activity in SPY
at CHX for the period starting in May 2016 through July 2016, the
Exchange believes that if LEAD had been implemented during that time
period, out of a total of 18,316 partially-executed orders in SPY,
20 liquidity taking orders not attributed to latency arbitrage
activity would have not been executed, a de minimis number in the
light of the enhanced liquidity and price discovery afforded by
LEAD. See infra Appendix C.
    \19\ The Exchange notes that while LEAD is designed to
neutralize microsecond speed advantages exploited by latency
arbitrageurs, LEAD MMs would still be required to obtain speed
capabilities fast enough to take advantage of LEAD.
---------------------------------------------------------------------------

    The LEAD MM is a new class of CHX Market Maker that will be subject
to the proposed Minimum Performance Standards, as described in detail
below, which will not be applied to non-LEAD MMs. The purpose of the
Minimum Performance Standards is to ensure that LEAD MMs will be
required to meet heightened quoting and trading requirements in return
for undelayed access to the CHX book for the purposes of submitting
liquidity providing orders and cancelling its resting orders. Also,
LEAD MMs will be required to establish at least one LEAD MM Trading
Account, as described below, through which all LEAD market making
activities must originate.
    Specifically, LEAD will require the following messages in all
securities

received by the Exchange throughout a trading day to be subject to a
350-microsecond intentional delay, the same length as the Investors
Exchange LLC (``IEX'') POP/coil delay (``IEX Delay'') recently approved
by the Commission,\20\ before such delayed messages would be processed
\21\ by the Matching System: \22\
---------------------------------------------------------------------------

    \20\ See Securities Exchange Act Release No. 78101 (June 17,
2016), 81 FR 41141 (June 23, 2016) (``IEX Approval Order''). The IEX
Delay will delay all inbound order-related messages from IEX Users,
outbound message confirmations to IEX Users and outbound market data
disseminated through IEX's proprietary data feed. See id. at 41154.
By not delaying inbound market data, IEX would be able to reprice
its resting pegged orders to track changes to the NBBO before
latency arbitrageurs could execute against such pegged orders at
potentially stale prices, which facilitates the ability of IEX to
comply with its rules regarding the repricing of pegged orders. See
id. at 41155.
    \21\ For clarity, ``processed'' means executing instructions
contained in a message, including, but not limited to, permitting an
order to execute within the Matching System pursuant to the terms of
the order or cancelling an existing order, whereas ``evaluate''
means the Matching System determining whether a message should be
diverted into LEAD, as described below.
    \22\ The Matching System is an automated order execution system,
which is a part of the Exchange's ``Trading Facilities,'' as defined
under CHX Article 1, Rule 1(z).
---------------------------------------------------------------------------

     All new incoming messages that did not originate from a
Valid LEAD MM Trading Account, as described below, will be
intentionally delayed; provided, however, that the portion of any new
incoming Routable Order \23\ that is to be routed away will never be
delayed, regardless of who submitted the Routable Order.
---------------------------------------------------------------------------

    \23\ See CHX Article 1, Rule 1(oo) defining ``Routable Order.''
---------------------------------------------------------------------------

     New incoming orders, as well as the replace portion of
cancel/replace messages, that originate from a Valid LEAD MM Trading
Account that would immediately execute against existing resting orders
on the CHX book will be intentionally delayed.
     Cancel and cancel/replace messages for orders that
originate from a Valid LEAD MM Trading Account that have been delayed,
but not yet processed by the Matching System, will be intentionally
delayed.
    As such, the following messages would not be intentionally delayed
pursuant to LEAD:
     New incoming orders that originate from a Valid LEAD MM
Trading Account that would immediately be ranked on the CHX book
without executing against existing resting orders on the CHX book will
not be intentionally delayed.
     A cancel message for a resting order that originates from
a Valid LEAD MM Trading Account will not be intentionally delayed.
     A cancel/replace message related to a resting order that
originates from a Valid LEAD MM Trading Account will not be
intentionally delayed; provided, however, that if any part of the
replace portion would immediately execute against an existing resting
order on the CHX book, the replace portion will be intentionally
delayed.
     The portion of a Routable Order that is to be routed away
will not be intentionally delayed, regardless of who submitted the
Routable Order.
    Also, LEAD will not delay any outbound messages or market data.
    The Exchange notes that adopting a symmetric delay and order types
that would permit the Exchange to reprice resting orders based on
undelayed market data, such as the IEX Delay and pegged order types,
would not address latency arbitrage at CHX with respect to limit orders
because the liquidity provision strategies utilized by CHX liquidity
providers, which provide valuable liquidity to the market overall,\24\
require cancellations or adjustments to resting limit orders pursuant
to proprietary algorithms held by the CHX liquidity providers that
could not be adequately replicated by CHX.\25\ Also, as the Commission
noted in the IEX Approval Order, a symmetric delay that delays all
inbound messages would be ineffective in protecting resting limit
orders from latency arbitrage.\26\ However, the Exchange notes that
both LEAD and the IEX Delay provide processing advantages to certain
types of liquidity providers over all other order senders so as to
minimize the effectiveness of latency arbitrage and are thus similar in
this respect.\27\
---------------------------------------------------------------------------

    \24\ See supra note 8; see also infra Appendices A and B.
    \25\ See supra note 7.
    \26\ See IEX Approval Order, supra note 20, at 41157.
    \27\ See infra Section 3(b).
---------------------------------------------------------------------------

    Moreover, the Exchange submits that LEAD is consistent with the
objectives of the Exchange Act and the rules and regulations
thereunder. As described in detail below,\28\ LEAD is, among other
things, (1) a de minimis intentional access delay in that it is so
short as to not frustrate the purposes of Rule 611 of Regulation NMS
\29\ by impairing fair and efficient access to an exchange's
quotations; \30\ (2) consistent with Rule 602(b) of Regulation NMS;
\31\ and (3) furthers the objectives of the objectives of Section
6(b)(5) of the Act in that it would protect investors and the public
interest and does not unfairly discriminate among Participants.\32\
---------------------------------------------------------------------------

    \28\ See id.
    \29\ 17 CFR 242.611.
    \30\ See Securities Exchange Act Release No. 78102 (June 17,
2016), 81 FR 40785 (June 23, 2016) (``Final Interpretation'').
    \31\ See 17 CFR 242.602(b).
    \32\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

Amended Article 16, Rule 4 (Obligation of Market Makers)
    Proposed Article 16, Rule 4(f) provides rules regarding the
proposed LEAD MM Program. Specifically, proposed paragraph (f)(1)
provides defined terms for the purposes of paragraph (f). Thereunder,
proposed paragraph (f)(1)(A) provides that ``LEAD'' means the Liquidity
Enhancing Access Delay, as described under proposed Article 20, Rule
8(h); proposed paragraph (f)(1)(B) provides that ``LEAD MM'' means a
Market Maker assigned to a particular security that has committed to
maintaining Minimum Performance Standards, described under proposed
paragraph (f)(2), in the security; proposed paragraph (f)(1)(C)
provides that ``LEAD MM Security'' means a security assigned to a LEAD
MM; and proposed paragraph (f)(1)(D) provides that ``Qualified
Executions'' means all executed shares at CHX, during all trading
sessions,\33\ resulting from single-sided orders, excluding any
executed shares resulting from auctions.
---------------------------------------------------------------------------

    \33\ See supra note 5.
---------------------------------------------------------------------------

    Proposed paragraph (f)(2) provides that ``Minimum Performance
Standards'' means the Quotation Requirements and Obligations described
under current paragraph (d),\34\ which provides the current quoting and
pricing obligations for Market Makers, with the following
modifications.\35\
---------------------------------------------------------------------------

    \34\ The current Quotation Requirements and Obligations include,
among other things, a continuous two-sided quote obligation and
pricing obligations that require a continuous bid no further away
from the National Best Bid (``NBB'') and a continuous offer no
further away from the National Best Offer (``NBO'') than the
Designated Percentage or Defined Limit, as applicable. See CHX
Article 16, Rule 4(d).
    \35\ Trading days on which the Exchange does not open for
trading, for whatever reason, will be excluded from the Exchange's
calculations regarding compliance with the proposed Minimum
Performance Standards.
---------------------------------------------------------------------------

    Proposed paragraph (f)(2)(A) provides that the Designated
Percentages described under current Article 16, Rule 4(d)(2)(B) shall
be halved.\36\ Thus, new incoming orders submitted by LEAD MMs will be
required to be priced closer to the NBBO or the last reported sale in
the security, as applicable, than those of current Market Makers.
---------------------------------------------------------------------------

    \36\ For example, the 8% Designated Percentage for securities
subject to the Article 20, Rule 2A(c)(1)(A) pursuant to current CHX
Article 16, Rule 4(d)(2)(A) and (B) would be 4% for LEAD MMs.
---------------------------------------------------------------------------

    In addition, LEAD MMs will be required to meet the following

additional requirements. Proposed paragraph (f)(2)(B) provides that
LEAD MMs shall maintain a Monthly Average NBBO Quoting Percentage, as
defined thereunder, in each of its LEAD MM Securities, of at least 10%
over the course of a calendar month. For each such security, the
Exchange will determine: (i) The ``Daily NBB Quoting Percentage'' by
determining the percentage of time the LEAD MM has at least one Round
Lot \37\ of displayed interest in an Exchange bid at the NBB during the
Open Trading State \38\ of each trading day for a calendar month; (ii)
the ``Daily NBO Quoting Percentage'' by determining the percentage of
time the LEAD MM has at least one Round Lot of displayed interest in an
Exchange offer at the NBO during the Open Trading State of each trading
day for a calendar month; (iii) the ``Average Daily NBBO Quoting
Percentage'' for each trading day by summing the ``Daily NBB Quoting
Percentage'' and the ``Daily NBO Quoting Percentage'' then dividing
such sum by two; and (iv) the ``Monthly Average NBBO Quoting
Percentage'' for each security by summing the security's ``Average
Daily NBBO Quoting Percentages'' for each trading day in a calendar
month then dividing the resulting sum by the total number of trading
days in such calendar month.39 40
---------------------------------------------------------------------------

    \37\ See CHX Article 1, Rule 2(f)(3) defining ``Round Lot.''
    \38\ See CHX Article 1, Rule 1(qq) defining ``Open Trading
State.''
    \39\ For example, a LEAD MM with a Monthly Average NBBO Quoting
Percentage of 11% would meet the requirements of proposed paragraph
(f)(2)(B), even if on a particular day during the calendar month,
the LEAD MM's Average Daily Quoting Percentage was 9%.
    \40\ See supra note 35.
---------------------------------------------------------------------------

    Proposed paragraph (f)(2)(C) provides that a LEAD MM's Qualified
Executions in each of its LEAD MM Securities must comprise on an
equally-weighted daily average at least 2% of all Qualified Executions
in the same security over the course of a calendar month.\41\ The
Exchange believes that the 2% requirement is sufficiently high to
require a material contribution to overall volume in the security,
while not rendering the requirement impractical in the event the
security is assigned numerous LEAD MMs.
---------------------------------------------------------------------------

    \41\ For example, a LEAD MM whose Qualified Executions in an
assigned security comprised on average 3% of all Qualified
Executions in the assigned security over the course of a calendar
month would meet the requirements of proposed paragraph (f)(2)(C),
even if on a particular day during the calendar month, the LEAD MM's
Qualified Executions in the same assigned security comprised 1% of
all Qualified Executions in the assigned security on that day.
---------------------------------------------------------------------------

    Proposed paragraph (f)(2)(D) provides that at least 80% of the LEAD
MM's Qualified Executions in each of its LEAD MM Securities must result
from its resting orders that originated from the corresponding LEAD MM
Trading Account over the course of a calendar month.\42\
---------------------------------------------------------------------------

    \42\ Unlike the standards provided under proposed paragraphs
(f)(2)(A)-(C), this standard would be measured based on aggregate
activity over the course of a calendar month.
---------------------------------------------------------------------------

    The Exchange submits that the proposed Minimum Performance
Standards are commensurate with the benefit afforded to LEAD MMs. Given
that the only benefit afforded to LEAD MMs is the ability to cancel and
cancel/replace its resting orders without delay, the Exchange believes
that it would be inappropriate to adopt even higher quoting and trading
requirements, such as those for Designated Marker Makers (``DMMs'') on
the New York Stock Exchange (``NYSE''), who, in return for such higher
quoting and trading requirements, receive certain financial and
execution parity benefits not proposed herein.\43\
---------------------------------------------------------------------------

    \43\ See generally NYSE Rules 103B and 104.
---------------------------------------------------------------------------

    Proposed paragraph (f)(3) provides rules regarding the process by
which Market Makers would be assigned securities as a LEAD MM.
Specifically, proposed paragraph (f)(3)(A) provides that only a Market
Maker may apply to be assigned one or more securities as a LEAD MM.
Market Makers must receive written approval from the Exchange to be
assigned securities as a LEAD MM. LEAD MMs shall be selected by the
Exchange based on factors including, but not limited to, experience
with making markets in securities, adequacy of capital, willingness to
promote the Exchange as a marketplace, issuer preference, operational
capacity, support personnel and history of adherence to Exchange rules
and securities laws. Current Article 16, Rules 2(c)-(e) regarding
withdrawal from assigned securities shall also apply to LEAD MMs and
LEAD MM Securities.\44\
---------------------------------------------------------------------------

    \44\ The Exchange will expand its current procedures for
voluntary and involuntary withdrawals regarding Marker Maker
securities to apply to LEAD MM Securities.
---------------------------------------------------------------------------

    Proposed paragraph (f)(3)(B) outlines requirements regarding LEAD
MM Trading Accounts and provides that before beginning LEAD market
making activities in a security, a LEAD MM shall complete the
following, subject to Exchange approval. Thereunder, proposed
subparagraph (B)(i) provides that the LEAD MM must establish at least
one separately designated LEAD MM Trading Account through which all and
only LEAD market making activities in LEAD MM Securities shall
originate.
    Subparagraph (B)(ii) provides that the LEAD MM must register each
of its LEAD MM Securities to precisely one LEAD MM Trading Account
(``Valid LEAD MM Trading Account''); provided, however, that a LEAD MM
Trading Account may be registered with one or more LEAD MM Securities.
All messages related to a single LEAD MM Security must originate from
the Valid LEAD MM Trading Account on a given day and in the event a
LEAD MM wishes to change the Valid LEAD MM Trading Account for a given
LEAD MM Security, the LEAD MM shall so notify the Exchange in writing
by no later than 9 a.m. on the trading day immediately preceding the
effective date of the change; provided, however, that the Exchange may,
at its discretion, delay or deny the change. In addition, no change of
a Valid LEAD MM Trading Account for a given LEAD MM Security may be
effected intraday.
    Proposed paragraph (f)(3)(B) facilitates the ability of the
Exchange to monitor compliance with the proposed Minimum Performance
Standards by requiring a LEAD MM to submit all LEAD market making
activities in a particular security through a Valid LEAD MM Trading
Account. Moreover, in the event a LEAD MM would like to change the
Valid LEAD MM Trading Account for a given LEAD MM Security, the
proposed rule outlines the precise procedures to effect the change,
which promotes clarity regarding the process.
    Proposed paragraph (f)(3)(C) provides that the Exchange may, at its
discretion, approve more than one LEAD MM to be assigned to any LEAD MM
Security and limit the number of LEAD MMs assigned to any security.
    Proposed paragraph (f)(3)(D) provides that the Exchange will review
each LEAD MM's quoting and trading activity on a monthly basis to
determine whether the LEAD MM has met the Minimum Performance
Standards. Also, a LEAD MM's failure to meet the Minimum Performance
Standards on any given month will result in the Exchange (i) suspending
or terminating a LEAD MM's registration as a Market Maker pursuant to
current Article 16, Rule 1(d) or (ii) suspending or terminating
assignment to a LEAD MM Security pursuant to proposed subparagraph (A)
above. In addition, nothing in proposed subparagraph (D) will limit any
other power of the Exchange to discipline a LEAD MM pursuant to CHX
Rules.

Amended Article 20, Rule 8 (Operation of the CHX Matching System)
    Proposed Article 20, Rule 8(h) provides rules regarding the
operation of LEAD. Specifically, proposed paragraph (h) begins by
stating that after initial receipt \45\ of a new incoming message, the
Matching System will evaluate \46\ the message to determine whether it
is a Delayable Message, as defined under proposed paragraph (h)(1)
below. For the purposes of such an evaluation only, the Matching System
shall not consider Match Trade Prevention (``MTP''), as described under
current Article 1, Rule 2(b)(3)(F).\47\ If not delayable, the Matching
System will immediately process the message without delay.
---------------------------------------------------------------------------

    \45\ As used herein, ``initial receipt'' means the time at which
the Exchange receives a message and assigns the message a unique
sequence number, which the Exchange utilizes to determine, among
other things, message processing order and ranking on the CHX book.
See CHX Article 20, Rule 8(b).
    \46\ See supra note 21.
    \47\ The purpose of ignoring MTP in LEAD evaluation is to
provide a previously delayed order that would not have triggered MTP
an opportunity to execute against the resting order before the newer
incoming order would cancel the resting order after release from
LEAD. The Exchange is also proposing unrelated modifications to MTP
to contemplate LEAD, as discussed below.
---------------------------------------------------------------------------

    Proposed paragraph (h)(1) provides that ``Delayable Message'' means
all new incoming order, cancel and cancel/replace messages, except as
follows:

    (A) Any new incoming order or unrouted balance, as described
under proposed subparagraph (D) below, that originates from a Valid
LEAD MM Trading Account, as described under proposed Article 16,
Rule 4(f)(3)(B)(ii), that would, by its terms, immediately be ranked
on CHX book without executing against any existing resting orders on
the CHX book shall not be a Delayable Message.
    (B) A cancel message related to a resting order that originates
from a Valid LEAD MM Trading Account shall not be a Delayable
Message.
    (C) A cancel/replace message related to a resting order that
originates from a Valid LEAD MM Trading Account shall not be a
Delayable Message; provided, however, that if any part of the
replace portion would immediately execute against existing resting
orders on the CHX book, the replace portion shall be a Delayable
Message.
    (D) The portion of a new incoming Routable Order that is to be
routed away, pursuant to current Article 19, Rule 3(a), shall not be
diverted into the LEAD; provided, however, that the entire unrouted
balance of the Routable Order shall be diverted into the LEAD,
subject to proposed subparagraph (A).

    Mechanically, upon initial receipt of a new incoming message, the
Matching System would assign the message a unique sequence number, as
it does currently, which, in addition to establishing processing and
execution priority, will serve as the starting point for the Fixed LEAD
Period, as described below. The Matching System would then initially
evaluate the message to determine whether it is a Delayable
Message.\48\ For example, a new incoming limit order marked Post Only
\49\ that originated from a Valid LEAD MM Trading Account that would
not be immediately ranked on the CHX book due to one or more matchable
contra-side orders resting on the CHX book would be a Delayable Message
because the Post Only order would not, by its terms, immediately be
ranked on the CHX book without executing against any resting orders on
the CHX book. In such a case, the Post Only order would be diverted
into the LEAD queue before being processed by the Matching System,
which would result in the Post Only order being posted or cancelled
depending on the state of the CHX book upon its release.\50\ If,
however, the Exchange were to receive a new Post Only order that
originated from a Valid LEAD MM Trading Account that would post to the
CHX book due to no existing orders resting on the CHX book at that
time, the Post Only order would not be a Delayable Message and it would
immediately be ranked on the CHX book without delay.\51\ Similarly, a
new incoming order marked CHX Only \52\ that originated from a Valid
LEAD MM Trading Account that would trade-through a protected quotation
of an external market would not be a Delayable Message as it would be
price slid to a permissible price.\53\ Also, a new incoming order that
originated from a Valid LEAD MM Trading Account that would immediately
be ranked on the CHX book without executing against any resting orders
because MTP would cancel the resting contra-side orders against which
the order would have executed, would be a Delayable Message, as MTP is
ignored for the purposes of the LEAD evaluation only.\54\
---------------------------------------------------------------------------

    \48\ The Exchange notes that the Matching System processes
messages for a given security serially. Thus, the length of time it
takes for a message to be evaluated and/or processed by the Matching
System after initial receipt is herein called ``variable message
queuing delay,'' as the actual length of the delay depends on the
number of precedent messages that have yet to be evaluated and/or
processed by the Matching System and are residing in the ``Inbound
Queue.'' The length of time it takes for a message to be evaluated
and/or processed by the Matching System is herein called ``system
processing delay.''
    \49\ See CHX Article 1, Rule 2(b)(1)(D) defining ``Post Only.''
    \50\ See infra Example 2.
    \51\ See id.
    \52\ See CHX Article 1, Rule 2(b)(1)(C) defining ``CHX Only.''
    \53\ See CHX Article 20, Rule 5(a)(2).
    \54\ See supra note 47.
---------------------------------------------------------------------------

    Proposed paragraph (h) continues by providing that if a message is
delayable, the message will be diverted into the LEAD queue and will
remain delayed until it is released for processing. A delayed message
shall become releasable 350 microseconds after initial receipt by the
Exchange (``Fixed LEAD Period''),\55\ but shall only be processed after
the Matching System has evaluated and processed, if applicable,\56\ all
messages in the security received by the Exchange during the Fixed LEAD
Period for the delayed message. A message may be delayed for longer
than the Fixed LEAD Period depending on the then-current messaging
volume at CHX.\57\ The Matching System will utilize a new market
snapshot to process a released order.\58\ A delayed message shall
retain its original sequence number and may only be delayed once. LEAD
shall apply to all securities traded on the Exchange throughout the
trading day.\59\ LEAD shall not apply to messages received during an
auction.\60\
---------------------------------------------------------------------------

    \55\ In the event that then-current messaging volume results in
a Delayable Message being evaluated after 350 microseconds from
initial receipt, the Delayable Message shall be diverted into LEAD
and be immediately releasable. This will ensure that messages
received during the Fixed LEAD Period for a delayed message are
evaluated and processed, if applicable, before the Delayable Message
is released.
    \56\ For example, an order that would not take liquidity from
the CHX book would not be delayed and would be immediately
processed, whereas an order that would take liquidity from the CHX
book would be delayed and would not be immediately processed.
    \57\ In the event a releasable message is awaiting other
messages received during its Fixed LEAD Period to be evaluated and
processed, if applicable, the releasable message would be subject to
an additional unintentional variable delay that is a function of the
then-current messaging volume at CHX. See supra note 21; see also
supra note 45; see also infra Examples 1-3.
    \58\ The purpose of a new market snapshot is to ensure that the
released order is processed in a manner consistent with federal
securities rules and regulations, such as Regulation NMS and
Regulation SHO.
    \59\ See supra note 5.
    \60\ For example, if the Exchange receives an order after
initiation of a Sub-second Non-displayed Auction Process (``SNAP'')
in the security, the order will not be diverted into the LEAD queue
and, rather, be handled pursuant to current CHX Article 18, Rule 1.
---------------------------------------------------------------------------

    The Exchange also proposes to make corresponding amendments to
current Article 20, Rule 8(d) and (f) to contemplate LEAD.
Specifically, the Exchange proposes to add the clause ``subject to
paragraph (h) below'' at the end of current paragraph (d)(1) so that
amended paragraph (d)(1) provides as follows:

    Except for certain orders which shall be executed as described
in Rule 8(e), below, an incoming order shall be matched against one
or more resting orders in the Matching System, in the order in which
the resting orders are ranked on the CHX book, pursuant to Rule 8(b)
above, at the Working Price of each resting order, as defined under
Article 1, Rule 1(pp), for the full amount of shares available at
that price, or for the size of the incoming order, if smaller;
subject to paragraph (h) below.

The Exchange also proposes to amend paragraph (f)(1) to provide that
orders resting on the CHX book shall be immediately and automatically
cancelled upon receipt of a cancellation message, subject to paragraph
(h) below, as certain cancel messages will be diverted into the LEAD as
described above.
    Examples 1-2 below illustrate the operation of LEAD.
Amended Routing Protocol
    In light of the possible bifurcation of a Routable Order into an
immediately routed portion and a delayed unrouted portion \61\ and the
fact that the Exchange does not currently utilize any Router Feedback
to augment protected quotations,\62\ LEAD could result in a single
order being routed twice to satisfy the same protected quotation. In
order to eliminate this inefficiency, the Exchange proposes to amend
its current order routing protocol to adopt a single type of Router
Feedback utilized by the Bats BYX Exchange,\63\ Immediate Feedback, but
only on an order-by-order basis. Use of Immediate Feedback would permit
the Exchange to augment away quotes on an order-by-order basis to avoid
double routing of the same order to satisfy the same protected
quotation(s).
---------------------------------------------------------------------------

    \61\ See proposed CHX Article 20, Rule 8(h)(1)(D).
    \62\ The Exchange does not currently ignore or modify SIP quote
data for away markets under any circumstances where the SIP data
feed shows an uncrossed market. See Exchange Act Release No. 74357
(February 24, 2015), 80 FR 11252 (March 2, 2015) (SR-CHX-2015-01);
see also Securities Exchange Act Release No. 72711 (July 29, 2014),
79 FR 45570 (August 5, 2014) (SR-CHX-2014-10).
    \63\ ``Router Feedback'' refers to the use of routed orders
(``Feedback Orders'') to augment protected quotations for the
purposes of calculating the National Best Bid and Offer. See
Securities Exchange Act Release No. 74075 (January 15, 2015), 80 FR
3693 (January 23, 2015) (SR-BYX-2015-03).The three types of Router
Feedback are Immediate Feedback, Execution Feedback and Cancellation
Feedback. See id. at 3695.
---------------------------------------------------------------------------

    Specifically, Immediate Feedback would permit the Exchange to
decrease the number of shares available at an away market by an amount
equal to the size of the immediately routed portion of the Routable
Order. In the extremely unlikely event that the Exchange receives an
execution report from an away market indicating that the routed portion
of a Routable Order had partially-executed prior to the unrouted
balance being released from the LEAD queue, the Exchange would first
add the cancelled remainder to the unrouted balance in the LEAD queue
and then continue to utilize Immediate Feedback to augment the relevant
away quotes when processing the unrouted balance upon release from the
LEAD queue, unless the feedback had expired.
    Immediate Feedback would expire as soon as: (i) One second passes
or (ii) the Exchange receives new quote information from the away
market. Given that Immediate Feedback will only be applied on an order-
by-order basis, Immediate Feedback would also expire upon full
execution, cancellation or ranking of the Routable Order on the CHX
book. Also, in light of the relatively short Fixed LEAD Period, it is
unlikely that Router Feedback would expire prior to the unrouted
balance being released from the LEAD queue and processed by the
Matching System.
    Examples 2-3 illustrate the operation of the amended routing
protocol in the context of LEAD.
Amended Article 1, Rule 2(b)(3)(F) (Match Trade Prevention)
    Current Article 1, Rule 2(b)(3)(F) describes the MTP modifier,
which prevents matches between orders that originate from the same MTP
Trading Group or MTP sublevel thereunder.\64\ Also, an order sender
must designate one of the following MTP Actions for each order, with
the MTP Action noted on the incoming order controlling the MTP
interaction:
---------------------------------------------------------------------------

    \64\ See Securities Exchange Act Release No. 71216 (December 31,
2013), 79 FR 883 (January 7, 2014) (SR-CHX-2013-23); see also
Securities Exchange Act Release No. 70948 (November 26, 2013), 78 FR
72731 (December 3, 2013) (SR-CHX-2013-20).

    MTP Cancel Incoming (``N''): An incoming limit or market order
marked ``N'' will not execute against opposite side resting interest
originating from the same MTP Trading Group or MTP sublevel, if
applicable. Only the incoming order will be cancelled pursuant to
MTP.
    MTP Cancel Resting (``O''): An incoming limit or market order
marked ``O'' will not execute against opposite side resting interest
originating from the same MTP Trading Group or MTP sublevel, if
applicable. Only the resting order will be cancelled pursuant to
MTP.
    MTP Cancel Both (``B''): An incoming limit or market order
marked ``B'' will not execute against opposite side resting interest
originating from the same MTP Trading Group or MTP sublevel, if
applicable. The entire size of both orders will be cancelled
pursuant to MTP.

    Given that LEAD may result in newer orders (i.e., orders with lower
sequence numbers) becoming resting orders prior to older orders being
released from LEAD,\65\ the Exchange proposes to amend current Article
1, Rule 2(b)(3)(F)(iii)(a) and (b), which describe MTP Actions ``N''
and ``O'' respectively, to provide that the newer of the contra-side
orders, as opposed to the incoming order if it is the older order,
would be cancelled if the incoming order is marked ``N,'' and the older
of the contra-side orders, as opposed to the resting order if it is the
newer order, would be cancelled if the incoming order is marked ``O.''
Moreover, given that a price slid order that triggers MTP is not always
the newer order \66\ and because the Exchange wishes to maintain the
current handling of MTP when it is triggered by a price slid order, the
Exchange proposes to add clauses to the end of current subparagraphs
(a) and (b) that preserve that current handling. Thus, amended
subparagraphs (a) and (b) provide as follows:
---------------------------------------------------------------------------

    \65\ Currently, a new incoming order that triggers MTP is always
newer than the resting contra-side order. However, LEAD may result
in the newer of the contra-side orders being the resting order and
the older order being the incoming order. See infra Example 4.
    \66\ See Example 4 under SR-CHX-2013-20.

    (a) MTP Cancel New (``N''): An incoming limit or market order
marked ``N'' will not execute against opposite side resting interest
originating from the same MTP Trading Group or MTP sublevel, if
applicable. Only the newer order will be cancelled pursuant to MTP;
provided that the incoming order will be cancelled, even if it is
not the newer order, in the event MTP is triggered by the incoming
order being price slid pursuant to the CHX Only Price Sliding
Processes.
    (b) MTP Cancel Old (``O''): An incoming limit or market order
marked ``O'' will not execute against opposite side resting interest
originating from the same MTP Trading Group or MTP sublevel, if
applicable. Only the older order will be cancelled pursuant to MTP;
provided that the resting order will be cancelled, even if it is not
the older order, in the event MTP is triggered by the incoming order
being price slid pursuant to the CHX Only Price Sliding Processes.

    Example 4 below illustrates the operation of the amended MTP in the
context of LEAD.
(4) Examples
    The following Examples are illustrative of LEAD and related
amendments to existing functionality, but do not exhaustively depict
every possible scenario that may arise under LEAD. Moreover, the
Examples do not necessarily depict the actual technical processes of
prioritizing messages and executing orders.

    Example 1: LEAD. Assume that LEAD is operational, all messages
are for security XYZ and all orders are routable, unless marked
otherwise. Assume also that the system processing delay \67\ is 50
microseconds \68\ and the CHX book is as follows:
---------------------------------------------------------------------------

    \67\ See supra note 48.
    \68\ The Exchange does not represent that actual system
processing delay is at or near 50 microseconds or that unintentional
delays do not exist elsewhere in the Matching System processes. The
figure is being utilized for demonstrative purposes only.

------------------------------------------------------------------------
                           Fig 1(a): CHX book
-------------------------------------------------------------------------
                  Buy                                  Sell
------------------------------------------------------------------------
Empty..................................  Order A: 1000 @10.01 (LMM).\69\
------------------------------------------------------------------------

    Assume then that the Exchange receives the following messages:
---------------------------------------------------------------------------

    \69\ ``LMM'' refers to messages that originated from a Valid
Lead MM Trading Account. Absence of ``LMM'' means that the message
did not originate from a Valid LEAD MM Trading Account.

------------------------------------------------------------------------
                         Fig 1(b): Inbound queue
-------------------------------------------------------------------------
            Initial receipt                          Message
------------------------------------------------------------------------
10:00:00.000000........................  Order B: Buy 1000 @10.01.
10:00:00.000265........................  Cancel Order A (LMM).
10:00:00.000305........................  Order C: Sell 1000 @10.02.
10:00:00.000310........................  Order D: Buy 1000 @10.01 (LMM).
10:00:00.000325........................  Cancel Order B.
10:00:00.000355........................  Order E: Sell 1000 @10.01.
------------------------------------------------------------------------

    Under this Example 1:
     Order B would be evaluated and diverted into LEAD as it
originated from a non-Valid LEAD MM Trading Account and is thus a
Delayable Message. Due to the system processing delay, Order B would
be diverted into LEAD at 10:00:00.000050 and releasable at
10:00:00.000350. The result is that the LEAD queue would be as
follows:

------------------------------------------------------------------------
                          Fig 1(c): LEAD queue
-------------------------------------------------------------------------
            Releasable time                          Message
------------------------------------------------------------------------
10:00:00.000350........................  Order B: Buy 1000 @10.01.
------------------------------------------------------------------------

     Cancel Order A would be evaluated and processed at
10:00:00.000265 without being diverted into LEAD as it is a cancel
message for a resting order that originated from a Valid LEAD MM
Trading Account and is thus not a Delayable Message. Due to the
system processing delay, Order A would be cancelled at
10:00:00.000315 and the CHX book would become empty.
     Order C would then be evaluated at 10:00:00.000315, due
to the variable message queuing delay,\70\ and be diverted into LEAD
because it originated from a non-Valid LEAD MM Trading Account and
is thus a Delayable Message. Due to the system processing delay,
Order C would be diverted into LEAD at 10:00:00.000365 and
releasable at 10:00:00.000665.
---------------------------------------------------------------------------

    \70\ See supra note 48.

------------------------------------------------------------------------
                          Fig 1(d): LEAD queue
-------------------------------------------------------------------------
            Releasable time                          Message
------------------------------------------------------------------------
10:00:00.000350........................  Order B: Buy 1000 @10.01.
10:00:00.000665........................  Order C: Sell 1000 @10.02.
------------------------------------------------------------------------

     While Order C was being evaluated by the Matching
System, Order B became releasable from the LEAD queue at
10:00:00.000350. However, given that the Matching System processes
messages serially,\71\ the Matching System would not consider
releasing Order B until after Order C had been placed into the LEAD
queue at 10:00:00.000365, at which point it would be handled as
follows:
---------------------------------------------------------------------------

    \71\ See id.
---------------------------------------------------------------------------

    [cir] At 10:00:00.000365, the Matching System would compare the
releasable time of Order B to the initial receipt time of the
message at the top of the Inbound Queue: Order D. Since Order D was
received during the Fixed LEAD Period for Order B, Order D would be
evaluated before releasing Order B and processed without being
diverted into LEAD as it originated from a Valid LEAD MM Trading
Account and would be immediately ranked on the CHX book without
executing against resting orders on the CHX book and is thus not a
Delayable Message. Due to the system processing delay, Order D would
be ranked on the CHX book at 10:00:00.000415. The result is that the
CHX book would be as follows:

------------------------------------------------------------------------
                           Fig 1(e): CHX book
-------------------------------------------------------------------------
                  Buy                                  Sell
------------------------------------------------------------------------
Order D: 1000 @10.01 (LMM).............  Empty.
------------------------------------------------------------------------

    [cir] At 10:00:00.000415, the Matching System would then compare
the releasable time of Order B to the initial receipt time of the
next message at the top of the Inbound Queue: Cancel Order B. Since
Cancel Order B was received when Order B was in the LEAD queue,
Cancel Order B would be diverted into LEAD as it originated from a
non-Valid LMM Trading Account and is thus a Delayable Message.
However, due to the system processing delay, Cancel Order B would be
diverted into LEAD at 10:00:00.000465 and releasable at
10:00:00.000675. The result is that the LEAD queue would be as
follows:

------------------------------------------------------------------------
                          Fig 1(f): LEAD queue
-------------------------------------------------------------------------
            Releasable time                          Message
------------------------------------------------------------------------
10:00:00.000350........................  Order B: Buy 1000 @10.01.
10:00:00.000665........................  Order C: Sell 1000 @10.02.
10:00:00.000675........................  Cancel Order B.
------------------------------------------------------------------------

    [cir] At 10:00:00.000465, the Matching System would then compare
the releasable time of Order B to the initial receipt time of the
next message at the top of the Inbound Queue: Order E. Given that
Order E was received after the Fixed LEAD Period for Order B had
expired, the Matching System would release Order B before evaluating
Order E. Due to the system processing delay, Order B would be ranked
on the CHX book at 10:00:00.000515. Also, given that Order B was
initially received before Order D, Order B would receive execution
priority over Order D, pursuant to Article 20, Rule 8(b)(1). The
result is that the CHX book and LEAD queue would be as follows:

------------------------------------------------------------------------
                           Fig 1(g): CHX book
-------------------------------------------------------------------------
                  Buy                                  Sell
------------------------------------------------------------------------
Order B: 1000 @10.01...................  Empty.
Order D: 1000 @10.01 (LMM).............
------------------------------------------------------------------------

------------------------------------------------------------------------
                          Fig 1(h): LEAD queue
-------------------------------------------------------------------------
            Releasable time                          Message
------------------------------------------------------------------------
10:00:00.000665........................  Order C: Sell 1000 @10.02.
10:00:00.000675........................  Cancel Order B.
------------------------------------------------------------------------

     Order E would then be evaluated at 10:00:00.000515, due
to the variable message queuing delay, and then diverted into the
LEAD as it originated from a non-Valid LEAD MM Trading Account and
is thus a Delayable Message. Due to the system-processing delay,
Order E would be diverted at 10:00:00.000565 and releasable at
10:00:00.000705. The result is that the LEAD queue would be as
follows:

------------------------------------------------------------------------
                          Fig 1(i): LEAD queue
-------------------------------------------------------------------------
            Releasable time                          Message
------------------------------------------------------------------------
10:00:00.000665........................  Order C: Sell 1000 @10.02.
10:00:00.000675........................  Cancel Order B.
10:00:00.000705........................  Order E: Sell 1000 @10.01.
------------------------------------------------------------------------

     Order C would then be released from LEAD at
10:00:00.000665. Due to the system processing delay, Order C would
be ranked on the CHX book at 10:00:00.000715. The result is that the
CHX book and LEAD queue are as follows:

------------------------------------------------------------------------
                           Fig 1(j): CHX book
-------------------------------------------------------------------------
                  Buy                                  Sell
------------------------------------------------------------------------
Order B: 1000 @10.01...................  Order C: 1000 @10.02.
Order D: 1000 @10.01 (LMM).............
------------------------------------------------------------------------

------------------------------------------------------------------------
                          Fig 1(k): LEAD queue
-------------------------------------------------------------------------
            Releasable time                          Message
------------------------------------------------------------------------
10:00:00.000675........................  Cancel Order B.
10:00:00.000705........................  Order E: Sell 1000 @10.01.
------------------------------------------------------------------------

     Cancel Order B would then be released from LEAD at
10:00:00.000715, as the Matching System was processing Order C when
Cancel Order B became releasable at 10:00:00.000675. Due to the
system processing delay Order B would be cancelled at
10:00:00.000765. The result is that the CHX book and the LEAD queue
would be as follows:

------------------------------------------------------------------------
                           Fig 1(l): CHX book
-------------------------------------------------------------------------
                  Buy                                  Sell
------------------------------------------------------------------------
Order D: 1000 @10.01 (LMM).............  Order C: 1000 @10.02.
------------------------------------------------------------------------

------------------------------------------------------------------------
                          Fig 1(m): LEAD queue
-------------------------------------------------------------------------
            Releasable time                          Message
------------------------------------------------------------------------
10:00:00.000705........................  Order E: Sell 1000 @10.01.
------------------------------------------------------------------------

     Order E would then be released from LEAD at
10:00:00.000765, as the Matching System was processing Order C (then
Cancel Order B) when Order E became releasable at 10:00:00.000705.
Order E would then be processed and fully execute against Order D at
10.01/share at 10:00:00.000775, due to the system processing delay.
The result is that the Inbound Queue and the LEAD queue would be
empty and the CHX book would be as follows:

Empty..................................  Order C: 1000 @10.02.
------------------------------------------------------------------------

    Example 2: Post Only and Routing--Immediate Feedback. Assume the
same as Example 1. Assume also that after Order E was processed, the
NBBO became 10.01 x 10.02 with only one market (``Away Market
A1'') displaying 100 shares at the NBB (``Protected Bid
A1'') and no other protected bids and CHX is alone at the
NBO displaying 1000 shares at 10.02. Assume then that the Matching
System receives the following new messages in security XYZ:

------------------------------------------------------------------------
                         Fig 2(a): Inbound queue
-------------------------------------------------------------------------
            Initial receipt                          Message
------------------------------------------------------------------------
10:00:00.000900........................  Cancel Order C.
10:00:00.001000........................  Order F: Post Only Buy 100
                                          @10.02.
10:00:00.001010........................  Order G: Post Only Buy 100
                                          @10.01 (LMM).
10:00:00.001020........................  Order H: Sell 500 @9.99 (LMM).
10:00:00.001030........................  Order I: Sell 500 @9.99.
10:00:00.001600........................  Order J: Buy 600 @9.99.
10:00:00.001610........................  Order K: Sell 200 @9.99 (LMM).
10:00:00.001750........................  Cancel Order I.
10:00:00.001760........................  Cancel Order H (LMM).
------------------------------------------------------------------------

    Under this Example 2:
     Cancel Order C would be evaluated at 10:00:00.000900
and diverted into the LEAD as it originated from a non-Valid LEAD MM
Trading Account and is thus a Delayable Message. Due to the system
processing delay, Cancel Order C would be diverted at
10:00:00.000950 and releasable at 10:00:00.001250. The result is
that the CHX Book and LEAD queue would be as follows:

------------------------------------------------------------------------
                           Fig 2(b): CHX book
-------------------------------------------------------------------------
                  Buy                                  Sell
------------------------------------------------------------------------
Empty..................................  Order C: 1000 @10.02.
------------------------------------------------------------------------

------------------------------------------------------------------------
                          Fig 2(c): LEAD queue
-------------------------------------------------------------------------
            Releasable time                          Message
------------------------------------------------------------------------
10:00:00.001250........................  Cancel Order C.
------------------------------------------------------------------------

     Order F would then be evaluated at 10:00:00.001000 and
diverted into the LEAD as it originated from a non-Valid LEAD MM
Trading Account and is thus a Delayable Message. Due to the system
processing delay, Order F would be diverted at 10:00:00.001050 and
releasable at 10:00:001350. The result is that the LEAD queue would
be as follows:

------------------------------------------------------------------------
                          Fig 2(d): LEAD queue
-------------------------------------------------------------------------
            Releasable time                          Message
------------------------------------------------------------------------
10:00:00.001250........................  Cancel Order C.
10:00:00.001350........................  Order F.
------------------------------------------------------------------------

     Order G would then be evaluated at 10:00:00.001050, due
to variable message queuing delay, and would be immediately
processed without being diverted into LEAD as it originated from a
Valid LEAD MM Trading Account and would be immediately ranked on the
CHX book without executing against resting orders and is thus not a
Delayable Message. Due to the system processing delay, Order G would
be ranked on the CHX book at 10:00:00.1100. The result is that the
CHX book is as follows:

------------------------------------------------------------------------
                           Fig 2(e): CHX book
-------------------------------------------------------------------------
                  Buy                                  Sell
------------------------------------------------------------------------
Order G: 100 @10.01 (LMM)..............  Order C: 1000 @10.02.
------------------------------------------------------------------------

     Order H would then be evaluated at 10:00:00.001100, due
to variable message queuing delay. Pursuant to the Exchange's
routing protocol, the Exchange would immediately route 100 shares of
Order H priced at 10.01/share to satisfy Protected Bid
A1, and divert the unrouted 400 shares of Order H into
the LEAD queue as it is priced such that it would immediately
execute against Order G and is thus a Delayable Message. Due to the
system processing delay, Order H would be diverted at
10:00:00.001150, and releasable at 10:00:00.001370. The result is
that the LEAD queue would be as follows:

------------------------------------------------------------------------
                          Fig 2(f): LEAD queue
-------------------------------------------------------------------------
            Releasable time                          Message
------------------------------------------------------------------------
10:00:00.001250........................  Cancel Order C.
10:00:00.001350........................  Order F.
10:00:00.001370........................  Order H--Unrouted Balance
                                          (LMM).
------------------------------------------------------------------------

     Order I would then be evaluated at 10:00:00.001150, due
to variable message queuing delay. Given that the proposed Router
Feedback is only applied on an order-by-order basis, Order I would
be handled similarly to Order H. Thus, the Exchange would
immediately route 100 shares of Order I priced at 10.01/share to
satisfy Protected Bid A1, and divert the unrouted 400
shares of Order I into the LEAD queue as it originated from a non-
Valid LEAD MM Trading Account and is thus a Delayable Message. Due
to the system processing delay, Order I would be diverted at
10:00:00.001200 and releasable at 10:00:00.001380. The result is
that the LEAD queue would be as follows:

------------------------------------------------------------------------
                          Fig 2(g): LEAD queue
-------------------------------------------------------------------------
            Releasable time                          Message
------------------------------------------------------------------------
10:00:00.001250........................  Cancel Order C.
10:00:00.001350........................  Order F.
10:00:00.001370........................  Order H--Unrouted Balance
                                          (LMM).
10:00:00.001380........................  Order I--Unrouted Balance.
------------------------------------------------------------------------

     At 10:00:00.001250, Cancel Order C would be released
from the LEAD queue. Due to the system processing delay, Order C
would be cancelled at 10:00:00.01300. The result is that the CHX
book and LEAD queue would be as follows:

------------------------------------------------------------------------
                           Fig 2(h): CHX book
-------------------------------------------------------------------------
                  Buy                                  Sell
------------------------------------------------------------------------
Order G: 100 @10.01....................  Empty.
------------------------------------------------------------------------

------------------------------------------------------------------------
                          Fig 2(i): LEAD queue
-------------------------------------------------------------------------
            Releasable time                          Message
------------------------------------------------------------------------
10:00:00.001350........................  Order F.
10:00:00.001370........................  Order H--Unrouted Balance
                                          (LMM).
10:00:00.001380........................  Order I--Unrouted Balance.
------------------------------------------------------------------------

     At 10:00:00.01350, Order F would be released from the
LEAD queue. Due to the system processing delay, Order F would be
ranked on the CHX book at 10:00:00.001400. The result is that the
CHX book and the LEAD queue would be as follows:

------------------------------------------------------------------------
                           Fig 2(j): CHX book
-------------------------------------------------------------------------
                  Buy                                  Sell
------------------------------------------------------------------------
Order F: 100 @10.02....................  Empty.
Order G: 100 @10.01....................
------------------------------------------------------------------------

------------------------------------------------------------------------
                          Fig 2(k): LEAD queue
-------------------------------------------------------------------------
            Releasable time                          Message
------------------------------------------------------------------------
10:00:00.001370........................  Order H--Unrouted Balance
                                          (LMM).
10:00:00.001380........................  Order I--Unrouted Balance.
------------------------------------------------------------------------

     Due to system processing delays, Order H and Order I
would be released after their respective releasable times as
follows:
    [cir] The unrouted balance of Order H would be released from the
LEAD queue at 10:00:00.001400. Order H would then execute against
all 100 shares of Order F at 10.02/share, as well as all 100 shares
of Order G at 10.01/share, and the remaining 200 shares of Order H
would be ranked on the CHX book at 9.99. Due to the system
processing delay, the unexecuted balance would be ranked to the CHX
book at 10:00:00.001450.
    [cir] The unrouted balance of Order I would then be released
from the LEAD queue at 10:00:00.001450. All 400 shares of Order I
would then be ranked on the CHX book at 9.99. Due to the system
processing delay, Order I would be ranked on the CHX book at
10:00:00.001500. The result is that the LEAD queue would be empty
and the CHX book would be as follows:

------------------------------------------------------------------------
                           Fig 2(l): CHX book
-------------------------------------------------------------------------
                  Buy                                  Sell
------------------------------------------------------------------------
Empty..................................  Order H: 200 @9.99 (LMM).
                                         Order I: 400 @9.99.
------------------------------------------------------------------------

     Order J would be evaluated at 10:00:00.001600 and
diverted into LEAD as it originated from a non-Valid LEAD MM Trading
Account and is thus a Delayable

Message. Due to the system processing delay, Order J would be
diverted at 10:00:00.001650 and releasable at 10:00:00.001950. The
result is that the LEAD queue would be as follows:

------------------------------------------------------------------------
                          Fig 2(m): LEAD queue
-------------------------------------------------------------------------
            Releasable time                          Message
------------------------------------------------------------------------
10:00:00.001950........................  Order J.
------------------------------------------------------------------------

     Order K would be evaluated at 10:00:00.001650, due to
the variable messaging delay. Order K would be immediately ranked on
the CHX book as it originated from a Valid LEAD MM Trading Account
and would not immediately execute against any resting orders. Due to
the system processing delay, Order K would be ranked on the CHX book
at 10:00:00.001700. The result is that the CHX book would be as
follows:

------------------------------------------------------------------------
                           Fig 2(n): CHX book
-------------------------------------------------------------------------
                  Buy                                  Sell
------------------------------------------------------------------------
Empty..................................  Order H: 200 @9.99 (LMM).
                                         Order I: 400 @9.99.
                                         Order K: 200 @9.99 (LMM).
------------------------------------------------------------------------

     Cancel Order I would be evaluated at 10:00:00.001750
and diverted into the LEAD as it is originated from a non-Valid LEAD
MM Trading Account and is thus a Delayable Message. Due to the
system processing delay, Cancel Order I would be diverted at
10:00:00.001800 and releasable at 10:00:00.002100. The result is
that the LEAD queue would be as follows:

------------------------------------------------------------------------
                          Fig 2(o): LEAD queue
-------------------------------------------------------------------------
            Releasable time                          Message
------------------------------------------------------------------------
10:00:00.001950........................  Order J.
10:00:00.002100........................  Cancel Order I.
------------------------------------------------------------------------

     Cancel Order H would be evaluated and processed at
10:00:00.001800, due to variable messaging delay, without being
diverted into LEAD as it is a cancel message for a resting order
that originated from a Valid LEAD MM Trading Account and is thus not
a Delayable Message. Due to the system processing delay, Order H
would be cancelled at 10:00:00.001850. The result is that the CHX
Book would be as follows:

------------------------------------------------------------------------
                           Fig 2(p): CHX book
-------------------------------------------------------------------------
                  Buy                                  Sell
------------------------------------------------------------------------
Empty..................................  Order I: 400 @9.99.
                                         Order K: 200 @9.99 (LMM).
------------------------------------------------------------------------

     At 10:00:00.001950, Order J would be released from the
LEAD queue and would immediately execute against all 400 shares of
Order I at 9.99/share and all 200 shares of Order K at 9.99/share.
The result is that the CHX book is empty and the LEAD queue is as
follows:

------------------------------------------------------------------------
                          Fig 2(q): LEAD queue
-------------------------------------------------------------------------
            Releasable time                          Message
------------------------------------------------------------------------
10:00:00.002100........................  Cancel Order I.
------------------------------------------------------------------------

     At 10:00:00.002100, Cancel Order I would be released
from the LEAD queue. Since Order I had already been executed in
full, Cancel Order I will have no effect.
    Example 3: Routing--Expired Feedback. Assume the same as Example
2, except that immediately prior to the unrouted balance of Order H
being released, the Exchange received an updated quote from Away
Market A1 displaying 1,000 shares at the $10.01.
    Under this Example 3, the Immediate Feedback derived from the
immediately routed portion of Order H would expire and, upon release
of the unrouted delayed portion of Order H, the Matching System
would route the entire unrouted portion to satisfy the updated
Protected Bid displayed by Away Market A1.
    Similarly, the Immediate Feedback derived from the immediately
routed portion of Order I would also expire and, upon release of the
unrouted delayed portion of Order I, the Matching System would route
the entire unrouted portion to satisfy the updated Protected Bid
displayed by Away Market A1.
    Example 4: MTP. Assume the same as Example 2, except that Order
J and Order K originated from the same MTP Trading Group and Order J
has an MTP Action of ``N.''
    Under this Example 4, pursuant to the current MTP rules, MTP
would be triggered and the Order J would be cancelled, as the
current ``N'' MTP Action requires the incoming order to be
cancelled. However, pursuant to the proposed amended MTP rules,
Order K would be cancelled, as the amended ``N'' MTP action requires
the newer order to be cancelled, absent a price sliding event.
(5) Operative Date
    In the event the proposed rule change is approved by the SEC, the
proposed rule change shall be operative pursuant to notice by the
Exchange to its Participants. Prior to the operative date, the Exchange
will ensure that policies and procedures are in place to allow Exchange
operations personnel to effectively monitor the operation of LEAD and
compliance by LEAD MMs with the proposed Minimum Performance Standards.
Appendix A: CHX ETF Analysis
    The purpose of the CHX ETF Analysis is to demonstrate that latency
arbitrage activity \72\ in SPY at CHX (``SPY latency arbitrage
activity'') has (1) reduced volume and displayed liquidity in SPY at
CHX and (2) impaired liquidity provision in SPY marketwide. For the
purpose of this CHX ETF Analysis, the following terms shall have the
following meanings: \73\
---------------------------------------------------------------------------

    \72\ See supra note 6; see also supra Section 3(a)(2).
    \73\ Other capitalized terms utilized in the CHX ETF Analysis
shall have the meanings set forth under Appendix B.
---------------------------------------------------------------------------

     After Period refers to February 2016 through July 2016.
     Analysis Period refers to August 2015 through July 2016.
     Before Period refers to August 2015 through December 2015.
     Control Average refers to the arithmetic average of a
given metric for Control Securities.
     Control Securities refers to DIA, IWM, and QQQ.\74\
---------------------------------------------------------------------------

    \74\ Each of the Control Securities were selected for the
following similarities to SPY in that each is: (1) Highly correlated
in price movements with a well-known equity market index; (2) ETFs;
(3) traded in CHX's Chicago data center; (4) actively traded in the
NMS; and (5) highly correlated with a futures contract traded
electronically on the Globex trading platform.
---------------------------------------------------------------------------

     Entry Event refers to a trading day in January 2016 on
which latency arbitrage activity in SPY at CHX was first observed.
     Entry Month refers to January 2016, the month in which
latency arbitrage activity in SPY at CHX was first observed.
     Subject Securities refers to SPY and the Control
Securities.
Entry of SPY Latency Arbitrage Activity
    During the After Period, the Exchange observed unusual messaging
patterns in SPY whereby executions of large inbound IOC \75\ orders
against resting orders in SPY were frequently followed by the receipt
of late cancel messages for the executed resting orders very soon after
the execution. This observation was corroborated by feedback from
liquidity providing Participants that indicated that, unlike prior to
the Entry Event, they were no longer able to reliably cancel or cancel/
adjust resting orders on the CHX book in SPY in response to market
changes after the Entry Event. The Exchange believes that each instance
of the unusual messaging pattern is the end result of a race triggered
by an away market event (e.g., change in market data from a futures
market) whereby the liquidity taker is able to take a resting order at
a stale price before the liquidity provider could adjust the resting
order to accurately reflect the market. As such, the SPY latency
arbitrage activity has had the following impact on volume and liquidity
in SPY at CHX and away exchanges:
---------------------------------------------------------------------------

    \75\ See CHX Article 1, Rule 2(d)(4).
---------------------------------------------------------------------------

Analysis 1: SPY Latency Arbitrage Activity Reduced CHX Market Share in
SPY Relative to Total Volume in SPY and Disproportionately To Control
Securities
    As shown under Figure 1, CHX Market Share in SPY as a percentage of
Total Volume dropped by 90.1% from 5.73% in the Entry Month to 0.57% in

July 2016, while CHX Market Share in the Control Average dropped by
45.20% from 5.54% in the Entry Month to 3.03% in July 2016.\76\ As
shown under Figure 2, changes in the average Total Volume during the
Analysis Period for the Subject Securities were highly correlated.
Thus, Figure 1 and Figure 2 show that despite the high correlation
between SPY and each of the Control Securities during the Analysis
Period, the CHX Market Share in SPY decreased disproportionately to
Total Volume, which the Exchange submits is attributed to the SPY
latency arbitrage activity.
---------------------------------------------------------------------------

    \76\ See infra Appendix B Calculation Set 1a.
    [GRAPHIC] [TIFF OMITTED] TN21FE17.000

Analysis 2: SPY Latency Arbitrage Activity Resulted in Less
Aggressively Priced and Smaller Orders in SPY at CHX
---------------------------------------------------------------------------

    \77\ See infra Appendix B Calculation Sets 1a and 1b.
    \78\ The correlation coefficients ([rho]) over the twelve-month
period were: [rho](SPY, DIA) = 0.9118, [rho](SPY, IWM) = 0.8996,
[rho](SPY, QQQ) = 0.9392, [rho](SPY, Average) = 0.9493.
    \79\ See infra Appendix B Calculation Sets 2a and 2b.
---------------------------------------------------------------------------

    While the Exchange did not observe any discernable change on the
NBBO spread in SPY during the After Period, the Exchange did observe a
negative impact on the frequency at which CHX was at the NBBO in SPY
and the frequency at which CHX displayed the largest quote at the NBBO
in SPY during the After Period, while Control Securities experienced
either smaller declines or no declines at all.\80\
---------------------------------------------------------------------------

    \80\ See infra Appendix B Calculation Sets 6 and 7.
---------------------------------------------------------------------------

    Specifically, the % of Time CHX Was At The NBB decreased from 23.8%
in the Entry Month to 8.2% in July 2016; \81\ the % of Time CHX Was At
The NBO decreased from 23.3% in the Entry Month to 5.8% in July 2016;
\82\ and the % of Time CHX Was At The NBB and that CHX Was At The NBO
decreased from 3.3% in the Entry Month to 0% in July 2016.\83\
---------------------------------------------------------------------------

    \81\ See infra Appendix B Calculation Set 6a.
    \82\ See infra Appendix B Calculation Set 6b.
    \83\ See infra Appendix B Calculation Set 6c.
---------------------------------------------------------------------------

    Moreover, the % of Time CHX Was At The NBB And Was The Largest Bid
At That Price decreased from 20% in the Entry Month to 2.3% in July
2016; \84\ the % of Time CHX Was At The NBO And Was The Largest Offer
At That Price decreased from 20.7% in the Entry Month to 1.1% in July
2016; \85\ and the % of Time CHX Was At The NBB And Was The Largest Bid
At That Price and that CHX Was At The NBO And Was The Largest Offer At
That Price decreased from 1.9% to 0%.\86\
---------------------------------------------------------------------------

    \84\ See infra Appendix B Calculation Set 7a.
    \85\ See infra Appendix B Calculation Set 7b.
    \86\ See infra Appendix B Calculation Set 7c.
---------------------------------------------------------------------------

    These calculation sets clearly show that SPY latency arbitrage
activity resulted in less aggressively priced CHX displayed liquidity
in SPY and smaller CHX displayed size at the NBBO, during the After
Period. SPY latency arbitrage activity also negatively impacted the
percentage of the time that CHX was at the NBBO and the percentage of
the time CHX displayed the largest quote at the NBBO.
Analysis 3: Latency Arbitrage Activity at CHX Reduced CHX Size At The
NBBO in SPY Relative to the Control Securities and NMS Size At The NBBO
    As shown under Figure 3, during the Before Period, the Time-
weighted Average CHX Size at The NBBO for SPY tended to follow changes
to the Control Average, whereas from the Entry Month through July 2016,
the Time-weighted Average CHX Size At The NBBO for SPY decreased by
82.16% and the Time-weighted Average CHX Size At The NBBO for the
Control Average increased by 64.38%.\87\ As shown under Figure 4,
during the Before Period, the monthly changes in the Time-weighted
Average CHX Size At The NBBO tended to follow similar changes to the
Time-weighted Average NMS Size At The NBBO. However, during the After
Period, the monthly changes in the Time-weighted Average CHX Size At
The NBBO in SPY did not follow changes to the Time-weighted Average NMS
Size At The NBBO in SPY. Moreover, during the After Period, CHX went
from having a Two-Sided Market in SPY 100% of regular trading hours in
the Entry Month to 74% of regular trading hours in July 2016.\88\
---------------------------------------------------------------------------

    \87\ See infra Appendix B Calculation Sets 3a and 3b.
    \88\ See infra Appendix B Calculation Set 5.
---------------------------------------------------------------------------

    Thus, Figure 3 and Figure 4 show that SPY latency arbitrage
activity negatively impacted liquidity in SPY marketwide. Moreover, the
data shows that the change in the risk/reward of providing liquidity in
SPY at CHX which resulted from the introduction of the SPY latency
arbitrage activity resulted in a significant reduction of liquidity in
SPY provided by CHX, even during a period when significant incremental
liquidity was being added in the Control Securities.

[GRAPHIC] [TIFF OMITTED] TN21FE17.001

Analysis 4: SPY Latency Arbitrage Activity Reduced Displayed Liquidity
in SPY Marketwide
---------------------------------------------------------------------------

    \89\ See infra Appendix B Calculation Sets 3a and 3b.
    \90\ See infra Appendix B Calculation Sets 3b and 4b.
---------------------------------------------------------------------------

    Although the Time-weighted Average NMS Size At The NBBO in SPY
increased by 22.83% during the After Period, the increase in SPY did
not follow much greater increases in the Time-weighted Average NBBO
Size in the Control Group, which increased by 128.82% during the After
Period.\91\ Moreover, during the After Period, the Time-weighted
Average CHX Size At The NBBO for SPY decreased by 90.61% \92\ and, as a
% of total NMS Size At The NBBO in SPY, from 44.36% to 3.39%.\93\ These
calculations suggest that the SPY latency arbitrage activity materially
impacted displayed liquidity in SPY marketwide. The dramatic decrease
in displayed liquidity in SPY at CHX during the After Period explains
why the increase in Time-weighted Average NBBO Size in SPY lagged
behind the increase in Time-weighted Average NBBO Size in the Control
Securities. Had CHX Size At The NBBO remained at least constant during
the After Period, NBBO Size in SPY would have been at least 32.7%
higher in July 2016, as shown below: \94\
---------------------------------------------------------------------------

    \91\ See infra Appendix B Calculation Set 4a.
    \92\ See infra Appendix B Calculation Set 3a.
    \93\ See infra Appendix B Calculations Sets 3a and 4a.
    \94\ See infra Appendix B Calculation Set 4a.

----------------------------------------------------------------------------------------------------------------
                                                 NMS Size at NBBO                       Change attribution
                                 -------------------------------------------------------------------------------
                                      Jan-16          Jul-16          Change            CHX           Others
----------------------------------------------------------------------------------------------------------------
SPY.............................           9,513          11,686           2,172          -3,824           5,996
DIA.............................           2,569           4,711           2,142           1,227             915
IWM.............................           5,222          10,026           4,804             536           4,268
QQQ.............................          14,100          35,354          21,253           3,900          17,353
Control Average.................           7,297          16,697           9,400           1,888           7,512
----------------------------------------------------------------------------------------------------------------

Conclusion
    Based on its observations of unusual messaging patterns in SPY,
feedback from Participants and the analysis summarized above, the
Exchange believes that the unusual messaging activity in SPY that was
first observed in the Entry Month is attributed to SPY latency
arbitrage activity. The market data shows that in response to the SPY
latency arbitrage activity, CHX liquidity providers displayed smaller
orders in SPY at less aggressive prices during the After Period
relative to the Before Period and Entry Month. Moreover, in light of
CHX's significant contribution to overall volume and liquidity in SPY
during the Before Period and the Entry Month, diminished displayed
liquidity at CHX has materially impaired displayed liquidity in SPY
market wide.
Appendix B: Calculation Sets
    The calculations sets below were prepared with microsecond-level
trade and quote record. Trade records include the date, microsecond-
level timestamp, exchange, security symbol, price, and quantity of all
trades reported to the consolidated tape. Quote records include the
date, microsecond-level timestamp, exchange, security symbol, bid
price, bid quantity, ask price, and ask quantity of all quotes reported
to the consolidated tape. Only protected quotations are reported to the
consolidated tape.
    The Analysis Period for the calculations begins on August 1, 2015
and ends on July 31, 2016. Symbols SPY and three other Control
Securities (i.e., DIA, IWM, and QQQ) were considered. Only trades and
quotes that occurred on the national securities exchanges during the
regular trading hours \95\ were considered. Certain types of non-
standard trades were excluded.\96\ Quotes with negative prices or
quantities were excluded. Unless otherwise indicated, lengths of time
when the market was locked or crossed were not considered.
---------------------------------------------------------------------------

    \95\ See 17 CFR 242.600(b)(64).
    \96\ Non-standard trades include derivatively priced trades,
qualified contingent trades, opening trades, closing trades, and
after hours trades.
---------------------------------------------------------------------------

    In the calculations below:

     Total Volume refers to the number of shares of the
indicated symbol traded on the national securities exchanges on a
given day, excluding certain types of non-standard trades. CHX
Volume refers to the number of shares of the indicated symbol traded
on CHX on a given day, excluding certain types of non-standard
trades.
     CHX Market Share was calculated as CHX Volume divided
by Total Volume on a given day, CHX Market Share = CHX Volume /
Total Volume.
     CHX Had A Two-Sided Market refers to an indicator
variable defined as true at any microsecond when there was at least
one bid and at least one offer among all outstanding orders on CHX,
and false otherwise. CHX Had A One-Sided Market refers to an
indicator variable defined as true at any microsecond when there was
at least one bid but no offers among all outstanding orders on CHX
or when there was at least one offer but no bids among all
outstanding orders on CHX, and false otherwise. CHX Had No Market
refers to an indicator variable defined as true at any microsecond
when there were no outstanding orders on CHX, and false otherwise.
     A bid was At The NBB at any microsecond when its price
was equal to the National Best Bid. An offer was At The NBO at any
microsecond when its price was equal to the National Best Offer.
     At any microsecond, the NMS Size At The National Best
Bid (``NMS Size At The NBB'') refers to the quantity of shares in
prevailing bids on the national securities exchanges priced at the
National Best Bid and the NMS Size At The National Best Offer (``NMS
Size At The NBO'') refers to the quantity of shares in prevailing
offers on the national securities exchanges priced at the National
Best Offer. NMS Size At The NBBO was calculated as the average of
the National Best Bid Size and the National Best Offer Size at each
microsecond, NMS Size At The NBBO = (NMS Size At The NBB + NMS Size
At The NBO) / 2.
     CHX Was At The NBB refers to an indicator variable
defined as true at any microsecond when the CHX Best Bid was at the
National Best Bid, and false otherwise. CHX Was At The NBO refers to
an indicator variable defined as true at any microsecond when the
CHX Best Offer was at the National Best Offer, and false otherwise.
     At any microsecond, the CHX Size At The NBB (``CHX Size
At The NBB'') refers to the CHX Best Bid Size if CHX was at the NBB
and zero if CHX was not at the NBB. At any microsecond, the CHX Size
At The NBO (``CHX Size At The NBO'') refers to the CHX Best Offer
Size if CHX was at the NBO and zero if CHX was not at the NBO. CHX
Size At The NBBO was calculated as the average of the CHX Size At
The NBB and CHX Size At The NBO at each microsecond, CHX Size At The
NBBO = (CHX Size At The NBB + CHX Size At The NBO) / 2.
     CHX Was At The NBB And Was The Largest Bid At That
Price refers to an indicator variable defined as true at any

microsecond when CHX was at the National Best Bid and the CHX Best
Bid Size was greater than or equal to the largest quantity of shares
in prevailing bids on any one national securities exchange other
than CHX, and false otherwise. CHX Was At The NBO And Was The
Largest Offer At That Price refers to an indicator variable defined
as true at any microsecond when CHX was at the National Best Offer
and the CHX Best Offer Size was greater than or equal to the largest
quantity of shares in prevailing offers on any one national
securities exchange other than CHX, and false otherwise.
    For the calculations in the table below:
     Monthly average values are shown. Monthly
average values were calculated as the average of daily values for
each day in a month. Daily values were calculated as time-weighted
averages or as percentages of time in the trading day, as indicated
in the table. Time-weighted average values were calculated as daily
average of the specified quantity, market share, or spread value
weighted by time (in microseconds). % of time values were calculated
as the length of time (in microseconds) for which the specified
indicator variable was true divided by the length of time in that
trading day, excluding lengths of time during which the market was
locked or crossed or otherwise could not be calculated (e.g., at the
start of the trading day).

--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                Symbol
                                                                                ---------------------------------------------------------------------
                                                                                SPY           DIA           IWM           QQQ         Control
               [No.] Calculation                               Month               --------------------------------------------------------    Average
                                                                                -------------
                                                                                [1]           [2]           [3]           [4]        ([2]:[4])
--------------------------------------------------------------------------------------------------------------------------------------------------------
[1a] CHX market share (% of total volume).....  Aug 2015..........................         4.32%         3.07%         5.51%         3.40%         3.99%
                                                Sep 2015..........................         6.07%         2.61%         3.82%         3.46%         3.30%
                                                Oct 2015..........................         4.08%         5.95%         2.58%         4.42%         4.32%
                                                Nov 2015..........................         4.49%         8.58%         3.14%         5.13%         5.62%
                                                Dec 2015..........................         4.85%         4.89%         2.53%         4.49%         3.97%
                                                Jan 2016..........................         5.73%         9.13%         3.14%         4.35%         5.54%
                                                Feb 2016..........................         4.78%         9.13%         3.32%         4.41%         5.62%
                                                Mar 2016..........................         2.80%         7.54%         2.38%         3.57%         4.50%
                                                Apr 2016..........................         2.28%         4.41%         2.01%         2.69%         3.04%
                                                May 2016..........................         1.10%         3.53%         2.21%         1.93%         2.55%
                                                Jun 2016..........................         0.90%         5.17%         1.74%         3.00%         3.30%
                                                Jul 2016..........................         0.57%         6.11%         1.22%         1.77%         3.03%
[1b] CHX market share (% of total volume)       Aug 2015..........................            75            34           176            78            72
 index: January 2016 = 100.
                                                Sep 2015..........................           106            29           122            80            60
                                                Oct 2015..........................            71            65            82           102            78
                                                Nov 2015..........................            78            94           100           118           101
                                                Dec 2015..........................            85            54            81           103            72
                                                Jan 2016..........................           100           100           100           100           100
                                                Feb 2016..........................            83           100           106           102           102
                                                Mar 2016..........................            49            83            76            82            81
                                                Apr 2016..........................            40            48            64            62            55
                                                May 2016..........................            19            39            70            44            46
                                                Jun 2016..........................            16            57            55            69            60
                                                Jul 2016..........................            10            67            39            41            55
[2a] Average total volume.....................  Aug 2015..........................   130,150,083     6,153,725    26,846,599    33,963,873    23,568,046
                                                Sep 2015..........................    94,627,144     6,552,649    21,381,524    28,452,481    19,947,099
                                                Oct 2015..........................    75,881,581     4,461,519    22,420,310    22,701,556    14,268,977
                                                Nov 2015..........................    63,307,314     3,673,677    16,624,141    17,531,483    10,308,999
                                                Dec 2015..........................    87,011,822     4,969,853    23,287,782    24,474,150    16,211,695
                                                Jan 2016..........................   127,469,871     8,301,912    35,204,822    39,029,308    21,425,674
                                                Feb 2016..........................    97,911,733     6,121,299    27,668,000    35,547,824    18,060,375
                                                Mar 2016..........................    63,333,000     2,521,807    20,709,893    17,600,599     9,724,974
                                                Apr 2016..........................    53,023,531     2,337,084    15,556,074    14,984,599     8,991,216
                                                May 2016..........................    51,578,634     2,016,095    17,899,288    14,856,962     9,822,504
                                                Jun 2016..........................    78,385,026     2,740,421    20,938,721    16,963,513    10,240,678
                                                Jul 2016..........................    49,783,615     2,130,330    14,122,275    11,973,239     5,657,111
[2b] Average total volume index: Jan 2016 =     Aug 2015..........................           102            74            76            87           110
 100.
                                                Sep 2015..........................            74            79            61            73            93
                                                Oct 2015..........................            60            54            64            58            67
                                                Nov 2015..........................            50            44            47            45            48
                                                Dec 2015..........................            68            60            66            63            76
                                                Jan 2016..........................           100           100           100           100           100
                                                Feb 2016..........................            77            74            79            91            84
                                                Mar 2016..........................            50            30            59            45            45
                                                Apr 2016..........................            42            28            44            38            42
                                                May 2016..........................            40            24            51            38            46
                                                Jun 2016..........................            61            33            59            43            48
                                                Jul 2016..........................            39            26            40            31            26
[3a] Time-weighted average CHX size at the      Aug 2015..........................      7,740.13        753.47      2,294.04      3,666.82      2,238.11
 NBBO.
                                                Sep 2015..........................      6,217.48        682.18      2,157.29      4,177.88      2,339.12
                                                Oct 2015..........................      7,816.38      1,308.53      2,052.68      6,130.87      3,164.03
                                                Nov 2015..........................      8,983.84      2,439.37      2,158.33      7,182.16      3,926.62
                                                Dec 2015..........................      5,776.73      1,152.21      1,517.59      4,347.08      2,338.96
                                                Jan 2016..........................      4,220.05      1,830.97      1,726.35      4,341.83      2,633.05
                                                Feb 2016..........................      2,642.32      1,829.95      2,004.50      4,523.73      2,786.06

                                                Mar 2016..........................      1,611.90      2,347.82      2,077.08      5,987.78      3,470.89
                                                Apr 2016..........................      1,415.95      1,481.35      2,314.10      6,196.84      3,330.76
                                                May 2016..........................        485.23      1,469.69      2,374.66      7,423.33      3,755.89
                                                Jun 2016..........................        565.73      1,772.03      2,188.41      7,994.73      3,985.06
                                                Jul 2016..........................        396.37      3,057.61      2,262.70      8,241.77      4,520.69
[3b] Time-weighted average CHX size at the      Aug 2015..........................           183            41           133            84            85
 NBBO index: Jan 2016 = 100.
                                                Sep 2015..........................           147            37           125            96            89
                                                Oct 2015..........................           185            71           119           141           120
                                                Nov 2015..........................           213           133           125           165           149
                                                Dec 2015..........................           137            63            88           100            89
                                                Jan 2016..........................           100           100           100           100           100
                                                Feb 2016..........................            63           100           116           104           106
                                                Mar 2016..........................            38           128           120           138           132
                                                Apr 2016..........................            34            81           134           143           126
                                                May 2016..........................            11            80           138           171           143
                                                Jun 2016..........................            13            97           127           184           151
                                                Jul 2016..........................             9           167           131           190           172
[4a] Time-weighted average NMS size at the      Aug 2015..........................     19,257.66      2,609.35      6,511.42     18,471.79      9,197.52
 NBBO.
                                                Sep 2015..........................     11,919.38      1,679.93      6,540.46     14,223.92      7,481.44
                                                Oct 2015..........................     18,309.27      2,468.56      6,972.46     19,848.75      9,763.26
                                                Nov 2015..........................     19,257.58      3,930.75      6,963.92     23,442.48     11,445.72
                                                Dec 2015..........................     13,230.66      2,204.20      5,812.28     17,106.74      8,374.40
                                                Jan 2016..........................      9,513.33      2,569.26      5,221.94     14,100.46      7,297.22
                                                Feb 2016..........................      7,417.60      2,489.46      6,340.40     13,869.32      7,566.40
                                                Mar 2016..........................      8,638.39      3,703.26      8,521.28     20,316.43     10,846.99
                                                Apr 2016..........................      9,876.59      3,070.53      9,422.71     23,246.57     11,913.27
                                                May 2016..........................      9,398.26      3,144.93     10,295.88     28,354.88     13,931.90
                                                Jun 2016..........................      9,313.10      3,107.54      9,597.43     28,288.57     13,664.51
                                                Jul 2016..........................     11,685.53      4,711.37     10,026.35     35,353.64     16,697.12
[4b] Time-weighted average NMS size at the      Aug 2015..........................           202           102           125           131           126
 NBBO index: Jan 2016 = 100.
                                                Sep 2015..........................           125            65           125           101           103
                                                Oct 2015..........................           192            96           134           141           134
                                                Nov 2015..........................           202           153           133           166           157
                                                Dec 2015..........................           139            86           111           121           115
                                                Jan 2016..........................           100           100           100           100           100
                                                Feb 2016..........................            78            97           121            98           104
                                                Mar 2016..........................            91           144           163           144           149
                                                Apr 2016..........................           104           120           180           165           163
                                                May 2016..........................            99           122           197           201           191
                                                Jun 2016..........................            98           121           184           201           187
                                                Jul 2016..........................           123           183           192           251           229
[5a] % of time CHX had a two-sided market.....  Aug 2015..........................         99.8%         99.6%         99.7%         99.6%         99.7%
                                                Sep 2015..........................         99.9%         99.9%         99.9%         99.9%         99.9%
                                                Oct 2015..........................        100.0%         99.9%         99.9%        100.0%         99.9%
                                                Nov 2015..........................         99.9%         99.9%         99.5%         99.8%         99.7%
                                                Dec 2015..........................         98.6%         98.3%         98.6%         98.6%         98.5%
                                                Jan 2016..........................        100.0%         99.9%         99.9%        100.0%         99.9%
                                                Feb 2016..........................         99.9%        100.0%        100.0%        100.0%        100.0%
                                                Mar 2016..........................         99.8%        100.0%        100.0%        100.0%        100.0%
                                                Apr 2016..........................         99.3%         99.9%        100.0%         99.8%         99.9%
                                                May 2016..........................         85.2%         99.9%        100.0%        100.0%        100.0%
                                                Jun 2016..........................         73.2%         99.9%        100.0%        100.0%        100.0%
                                                Jul 2016..........................         74.0%         99.9%        100.0%        100.0%        100.0%
[5b] % of time CHX had a one-sided market.....  Aug 2015..........................          0.1%          0.1%          0.0%          0.2%          0.1%
                                                Sep 2015..........................          0.0%          0.0%          0.0%          0.0%          0.0%
                                                Oct 2015..........................          0.0%          0.0%          0.0%          0.0%          0.0%
                                                Nov 2015..........................          0.0%          0.0%          0.0%          0.2%          0.1%
                                                Dec 2015..........................          0.0%          0.3%          0.0%          0.0%          0.1%
                                                Jan 2016..........................          0.0%          0.1%          0.0%          0.0%          0.0%
                                                Feb 2016..........................          0.0%          0.0%          0.0%          0.0%          0.0%
                                                Mar 2016..........................          0.2%          0.0%          0.0%          0.0%          0.0%
                                                Apr 2016..........................          0.2%          0.0%          0.0%          0.0%          0.0%
                                                May 2016..........................          3.0%          0.0%          0.0%          0.0%          0.0%
                                                Jun 2016..........................          6.1%          0.0%          0.0%          0.0%          0.0%
                                                Jul 2016..........................          1.8%          0.0%          0.0%          0.0%          0.0%
[5c] % of time CHX had no market..............  Aug 2015..........................          0.1%          0.3%          0.3%          0.1%          0.2%
                                                Sep 2015..........................          0.0%          0.1%          0.1%          0.0%          0.1%

                                                Oct 2015..........................          0.0%          0.1%          0.1%          0.0%          0.1%
                                                Nov 2015..........................          0.1%          0.1%          0.4%          0.0%          0.2%
                                                Dec 2015..........................          1.4%          1.4%          1.4%          1.4%          1.4%
                                                Jan 2016..........................          0.0%          0.0%          0.0%          0.0%          0.0%
                                                Feb 2016..........................          0.1%          0.0%          0.0%          0.0%          0.0%
                                                Mar 2016..........................          0.0%          0.0%          0.0%          0.0%          0.0%
                                                Apr 2016..........................          0.5%          0.1%          0.0%          0.2%          0.1%
                                                May 2016..........................         11.8%          0.1%          0.0%          0.0%          0.0%
                                                Jun 2016..........................         20.7%          0.1%          0.0%          0.0%          0.0%
                                                Jul 2016..........................         24.2%          0.0%          0.0%          0.0%          0.0%
[6a] % of time CHX was at the NBB.............  Aug 2015..........................         16.5%         32.7%         46.9%         58.0%         45.9%
                                                Sep 2015..........................         24.0%         36.4%         44.7%         67.6%         49.6%
                                                Oct 2015..........................         30.8%         45.8%         44.3%         74.9%         55.0%
                                                Nov 2015..........................         24.5%         50.3%         54.0%         79.6%         61.3%
                                                Dec 2015..........................         29.2%         34.1%         38.3%         71.3%         47.9%
                                                Jan 2016..........................         23.8%         46.0%         40.2%         70.4%         52.2%
                                                Feb 2016..........................         15.5%         53.9%         33.7%         65.5%         51.0%
                                                Mar 2016..........................         18.5%         58.4%         35.6%         66.8%         53.6%
                                                Apr 2016..........................         18.7%         46.8%         35.9%         60.5%         47.7%
                                                May 2016..........................          7.0%         44.8%         53.5%         68.5%         55.6%
                                                Jun 2016..........................          5.4%         47.1%         44.2%         72.8%         54.7%
                                                Jul 2016..........................          8.2%         45.9%         40.8%         74.1%         53.6%
[6b] % of time CHX was at the NBO.............  Aug 2015..........................         27.9%         39.8%         57.0%         65.6%         54.1%
                                                Sep 2015..........................         29.7%         36.0%         41.8%         66.7%         48.2%
                                                Oct 2015..........................         20.9%         41.4%         42.7%         74.0%         52.7%
                                                Nov 2015..........................         28.7%         39.3%         52.9%         78.2%         56.8%
                                                Dec 2015..........................         27.1%         35.5%         42.4%         70.0%         49.3%
                                                Jan 2016..........................         23.3%         52.3%         48.8%         70.4%         57.2%
                                                Feb 2016..........................         23.2%         55.5%         46.3%         69.1%         57.0%
                                                Mar 2016..........................         19.0%         58.5%         44.4%         70.0%         57.7%
                                                Apr 2016..........................         14.0%         44.0%         36.4%         65.8%         48.7%
                                                May 2016..........................         12.4%         40.4%         49.3%         64.2%         51.3%
                                                Jun 2016..........................         11.0%         47.3%         48.4%         74.6%         56.8%
                                                Jul 2016..........................          5.8%         46.0%         34.0%         69.4%         49.8%
[6c] % of time CHX was at the NBB and that CHX  Aug 2015..........................          1.0%          8.2%         19.7%         32.5%         20.2%
 was at the NBO.
                                                Sep 2015..........................          2.0%         10.0%          9.2%         37.1%         18.8%
                                                Oct 2015..........................          3.0%         14.4%         10.2%         49.8%         24.8%
                                                Nov 2015..........................          6.0%         14.2%         17.9%         58.1%         30.1%
                                                Dec 2015..........................          4.4%          9.3%         12.5%         44.8%         22.2%
                                                Jan 2016..........................          3.3%         19.2%          7.8%         41.8%         22.9%
                                                Feb 2016..........................          1.0%         24.5%          4.8%         35.4%         21.5%
                                                Mar 2016..........................          0.5%         29.6%          4.6%         38.0%         24.1%
                                                Apr 2016..........................          0.2%         15.7%          2.2%         29.9%         15.9%
                                                May 2016..........................          0.0%         13.5%         17.5%         34.6%         21.9%
                                                Jun 2016..........................          0.0%         17.0%         12.2%         48.5%         25.9%
                                                Jul 2016..........................          0.0%         12.6%          4.0%         44.1%         20.3%
[7a] % of time CHX was at the NBB and was the   Aug 2015..........................         13.6%         26.2%         37.1%         26.6%         29.9%
 largest bid at that price.
                                                Sep 2015..........................         21.5%         34.0%         40.0%         47.6%         40.6%
                                                Oct 2015..........................         24.9%         43.8%         36.2%         57.4%         45.8%
                                                Nov 2015..........................         18.8%         47.9%         39.4%         55.9%         47.7%
                                                Dec 2015..........................         25.1%         31.7%         27.7%         39.1%         32.8%
                                                Jan 2016..........................         20.0%         43.6%         32.0%         48.1%         41.2%
                                                Feb 2016..........................         11.2%         52.7%         28.5%         45.5%         42.2%
                                                Mar 2016..........................         11.9%         55.7%         28.3%         44.8%         42.9%