[Federal Register Volume 81, Number 121 (Thursday, June 23, 2016)]
[Notices]
[Pages 41141-41170]
[FR Doc No: 2016-14875]

Vol. 81

Thursday,

No. 121

June 23, 2016

Part V

Securities and Exchange Commission

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

In the Matter of the Application of: Investors' Exchange, LLC for
Registration as a National Securities Exchange; Findings, Opinion, and
Order of the Commission; Notices

Federal Register / Vol. 81 , No. 121 / Thursday, June 23, 2016 /
Notices

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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-78101; File No. 10-222]

In the Matter of the Application of: Investors' Exchange, LLC for
Registration as a National Securities Exchange; Findings, Opinion, and
Order of the Commission

June 17, 2016.

I. Introduction and Procedural History

    On August 21, 2015, Investors' Exchange, LLC (``IEX'' or ``IEX
Exchange'') submitted to the Securities and Exchange Commission
(``Commission'') a Form 1 application (``Form 1'') under the Securities
Exchange Act of 1934 (``Act''), seeking registration as a national
securities exchange pursuant to Section 6 of the Act.\1\ IEX has
amended its Form 1 five times, as detailed below. The Commission has
reviewed the exchange registration application, as amended, together
with all comments received, in order to make a determination whether to
grant the registration.\2\
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78f.
    \2\ See 15 U.S.C. 78f and 15 U.S.C. 78s.
---------------------------------------------------------------------------

    On September 9, 2015, IEX submitted Amendment No. 1 to its Form
1.\3\ Notice of the application, as amended by Amendment No. 1, was
published for comment in the Federal Register on September 22, 2015.\4\
On December 18, 2015, IEX consented to an extension of time to March
21, 2016 for Commission consideration of its Form 1 application and the
comments received thereon.\5\ In response to comments, IEX submitted an
amendment to its Form 1 on February 29, 2016 to propose a new approach
to outbound routing, which had been the subject of extensive public
comment as originally proposed.\6\ IEX submitted a third amendment to
its Form 1 on March 4, 2016.\7\ IEX submitted a fourth amendment to its
Form 1 on March 7, 2016.\8\ IEX submitted a fifth amendment to its Form
1 on May 27, 2016.\9\ All together, the Commission received 474
comments regarding the IEX Exchange Form 1.\10\ IEX submitted several
responses to comments.\11\
---------------------------------------------------------------------------

    \3\ In Amendment No. 1, IEX submitted updated portions of its
Form 1, including revised exhibits, a revised version of the
proposed IEX Rule Book, and revised Addenda C-2, C-3, C-4, D-1, D-2,
F-1, F-2, F-3, F-4, F-5, F-6, F-7, F-8, F-9, F-10, F-11, F-12, F-13.
    \4\ See Securities Exchange Act Release No. 75925 (September 15,
2015), 80 FR 57261 (``Notice'').
    \5\ See Letter from Sophia Lee, General Counsel, IEX, to Brent
J. Fields, Secretary, Commission, dated December 18, 2015.
    \6\ In Amendment No. 2, IEX proposed changes to its Form 1 to,
among other things, redesign its outbound routing functionality to
direct routable orders first to the IEX routing logic instead of
directly to the IEX matching engine. See Letter from Sophia Lee,
General Counsel, IEX, to Brent J. Fields, Secretary, Commission,
dated February 29, 2016, at 1. In this manner, the IEX router would
``interact with the IEX matching system over a 350 microsecond
speed-bump in the same way an independent third party broker would
be subject to a speed bump.'' Id.
    \7\ In Amendment No. 3, IEX proposed changes to its Form 1 to
clarify and correct revisions to its rulebook that it made in
Amendment No. 2. See Letter from Sophia Lee, General Counsel, IEX,
to Brent J. Fields, Secretary, Commission, dated March 4, 2016.
    \8\ In Amendment No. 4, IEX proposed changes to its Form 1 to
update Exhibit E to reflect changes it proposed in Amendment No. 2.
See Letter from Sophia Lee, General Counsel, IEX, to Brent J.
Fields, Secretary, Commission, dated March 7, 2016.
    \9\ In Amendment No. 5, IEX updated Exhibits J and K to reflect
changes since its initial filing. See Letter from Sophia Lee,
General Counsel, IEX, to Brent J. Fields, Secretary, Commission,
dated May 27, 2016.
    \10\ See Appendix A (listing comments received on this matter).
    \11\ See Letter from Sophia Lee, General Counsel, IEX, to Brent
J. Fields, Secretary, Commission, dated November 13, 2015 (``IEX
First Response''); Letter from Sophia Lee, General Counsel, IEX, to
Brent J. Fields, Secretary, Commission, dated November 23, 2015
(``IEX Second Response''); Letter from Sophia Lee, General Counsel,
IEX, to Brent J. Fields, Secretary, Commission, dated February 9,
2016 (``IEX Third Response''); Letter from Donald Bollerman, Head of
Markets and Sales, IEX Group, Inc., to File No. 10-222, dated
February 16, 2016 (``IEX Fourth Response''); Letter from IEX Group,
Inc., to File No. 10-222, dated February 19, 2016 (``IEX Fifth
Response''); and Letter from Sophia Lee, General Counsel, IEX, to
Brent J. Fields, Secretary, Commission, dated February 29, 2016
(``IEX Sixth Response'').
---------------------------------------------------------------------------

    On March 18, 2016, the Commission issued an order (``Order
Instituting Proceedings'' or ``OIP'') that provided public notice of
the significant changes IEX proposed to its application in Amendment
Nos. 2, 3, and 4, and solicited comment on the amended Form 1, while
simultaneously instituting proceedings under Section 19(a)(1)(B) of the
Act \12\ to determine whether to grant or deny IEX's exchange
registration application, as amended.\13\ By publishing notice of, and
soliciting comment on, IEX's Form 1, as amended by Amendment Nos. 2, 3,
and 4, and simultaneously instituting proceedings, the Commission
sought public input in particular on whether IEX's proposed new
outbound routing structure, as reflected by IEX's Form 1 and rules as
amended by Amendment Nos. 2, 3, and 4 is consistent with the Act, and
accordingly, whether IEX should be registered as a national securities
exchange.\14\ The Order Instituting Proceedings extended until June 18,
2016, the date by which the Commission shall grant or deny IEX's Form
1, as amended, for registration as a national securities exchange. The
Commission received additional comment on IEX's amended Form 1
subsequent to the publication of the Order Instituting Proceedings. A
list of the comments received on IEX's Form 1 is set forth in Appendix
A.
---------------------------------------------------------------------------

    \12\ 15 U.S.C. 78s(a)(1)(B).
    \13\ See Securities Exchange Act Release No. 77406, 81 FR 15765
(March 24, 2016) (File No. 10-222) (``Order Instituting
Proceedings'' or ``OIP''). Also on March 18, 2016, the Commission
separately issued a notice of a proposed Commission interpretation
regarding automated quotations under Regulation NMS. See Securities
Exchange Act Release No. 77407, 81 FR 15660 (March 24, 2016) (File
No. S7-03-16) (``Notice of Proposed Interpretation''). Separately,
today, the Commission has adopted a final interpretation. See
Securities Exchange Act Release No. 78102 (June 17, 2016) (File No.
S7-03-16) (``Final Interpretation'').
    \14\ While IEX's proposed outbound routing structure was one
focus of the Commission's solicitation of comment in the Order
Instituting Proceedings, it is but one of several aspects of IEX's
Form 1 that the Commission must consider in determining whether to
grant or deny IEX's exchange registration application. All such
aspects are discussed below.
---------------------------------------------------------------------------

    For the reasons set forth below, and based on the representations
set forth in IEX's Form 1, as amended, as supplemented in IEX's
responses to comments included in the public comment file, this order
approves IEX's Form 1 application, as amended, for registration as a
national securities exchange.

II. Statutory Standards

    Pursuant to Sections 6(b) and 19(a) of the Act,\15\ the Commission
shall by order grant an application for registration as a national
securities exchange if the Commission finds, among other things, that
the proposed exchange is so organized and has the capacity to carry out
the purposes of the Act and can comply, and can enforce compliance by
its members and persons associated with its members, with the
provisions of the Act, the rules and regulations thereunder, and the
rules of the exchange.
---------------------------------------------------------------------------

    \15\ 15 U.S.C. 78f(b) and 15 U.S.C. 78s(a), respectively.
---------------------------------------------------------------------------

    As discussed in greater detail below, the Commission finds that IEX
Exchange's application, as amended, for exchange registration meets the
requirements of the Act and the rules and regulations thereunder.
Further, the Commission finds that the proposed rules of IEX Exchange
are consistent with Section 6 of the Act in that, among other things,
they are designed to: (1) Assure fair representation of the exchange's
members in the selection of its directors and administration of its
affairs and provide that, among other things, one or more directors
shall be representative of investors and not be associated with the
exchange, or with a

broker or dealer; \16\ (2) prevent fraudulent and manipulative acts and
practices, promote just and equitable principles of trade, foster
cooperation and coordination with persons engaged in regulating,
clearing, settling, processing information with respect to, and
facilitating transactions in securities, and remove impediments to and
perfect the mechanisms of a free and open market and a national market
system; \17\ (3) not permit unfair discrimination between customers,
issuers, or dealers; \18\ and (4) protect investors and the public
interest.\19\ The Commission also finds that the rules of IEX Exchange
are consistent with Section 11A of the Act.\20\ Finally, the Commission
finds that IEX Exchange's proposed rules at this time do not impose any
burden on competition not necessary or appropriate in furtherance of
the purposes of the Act.\21\
---------------------------------------------------------------------------

    \16\ See 15 U.S.C. 78f(b)(3).
    \17\ See 15 U.S.C. 78f(b)(5).
    \18\ See id.
    \19\ See id.
    \20\ 15 U.S.C. 78k-1.
    \21\ 15 U.S.C. 78f(b)(8).
---------------------------------------------------------------------------

III. Discussion

A. Governance of IEX Exchange \22\
---------------------------------------------------------------------------

    \22\ The Commission did not receive any comments addressing the
substance of the governance provisions.
---------------------------------------------------------------------------

    IEX Group, Inc. (``IEXG''), a Delaware corporation, will own 100%
of IEX Exchange as well as IEX Services LLC (``IEXS''), a registered
broker-dealer that currently operates an alternative trading system
(``IEX ATS''). Following the launch of operations of IEX Exchange, IEXS
would be a facility of IEX Exchange and would provide outbound order
routing services to IEX Exchange.\23\
---------------------------------------------------------------------------

    \23\ See Form 1, Exhibit C. See also IEX Exchange Rule 2.220.
---------------------------------------------------------------------------

1. IEX Exchange Board of Directors
    The board of directors of IEX Exchange (``Exchange Board'') will be
its governing body and will possess all of the powers necessary for the
management of its business and affairs, including governance of IEX
Exchange as a self-regulatory organization (``SRO'').\24\
---------------------------------------------------------------------------

    \24\ See IEX Exchange Operating Agreement, Article III, Section
1.
---------------------------------------------------------------------------

    Under the Amended and Restated Operating Agreement of Investors'
Exchange LLC (``IEX Exchange Operating Agreement''): \25\
---------------------------------------------------------------------------

    \25\ See Form 1, Exhibit A-3.
---------------------------------------------------------------------------

     The Exchange Board will initially be composed of seven
directors; \26\
---------------------------------------------------------------------------

    \26\ See IEX Exchange Operating Agreement, Article III, Section
2(a).
---------------------------------------------------------------------------

     One director will be the Chief Executive Officer of IEX
Exchange;\27\
---------------------------------------------------------------------------

    \27\ See IEX Exchange Operating Agreement, Article III, Section
2(b).
---------------------------------------------------------------------------

     The number of Non-Industry Directors,\28\ including at
least two Independent Directors,\29\ will equal or exceed the sum of
the number of Industry Directors \30\ and Member Representative
Directors; \31\
---------------------------------------------------------------------------

    \28\ ``Non-Industry Director'' means a Director who is an
Independent Director or any other individual who would not be an
Industry Director. See IEX Exchange Operating Agreement, Article
I(x).
    \29\ ``Independent Director'' means a ``Director who has no
material relationship with the [IEX Exchange] or any affiliate of
the [IEX Exchange], or any [IEX member] or any affiliate of any such
[IEX member]; provided, however, that an individual who otherwise
qualifies as an Independent Director shall not be disqualified from
serving in such capacity solely because such Director is a Director
of the [IEX Exchange] or [IEXG].'' See IEX Exchange Operating
Agreement, Article I(n).
    \30\ Generally, an ``Industry Director'' is, among other things,
a Director that is or has been within the prior three years an
officer, director, employee, or owner of a broker or dealer, as well
as any Director who has, or has had, a consulting or employment
relationship with IEX Exchange or any affiliate of IEX Exchange
within the prior three years. See IEX Exchange Operating Agreement
Article I(p). This definition is consistent with what the Commission
has approved for other exchanges. See, e.g., Securities Exchange Act
Release Nos. 62716 (August 13, 2010), 75 FR 51295 (August 19, 2010)
(``BATS Y Exchange Order''); and 68341 (December 3, 2012), 77 FR
73065 (December 7, 2012) (``MIAX Exchange Order'').
    \31\ See IEX Exchange Operating Agreement, Article III, Section
2(b). ``Member Representative Director'' means a Director who has
been appointed by IEXG as an initial Director pursuant to Article
III, Section 4(g) of the IEX Exchange Operating Agreement to serve
until the first annual meeting or who has been ``elected by the LLC
Member after having been nominated by the Member Nominating
Committee or by an Exchange Member pursuant to [the] Operating
Agreement and confirmed as the nominee of Exchange Members after
majority vote of Exchange Members, if applicable. A Member
Representative Director must be an officer, director, employee, or
agent of an Exchange Member that is not a Stockholder Exchange
Member.'' See IEX Exchange Operating Agreement, Article I(u). See
also IEX Exchange Operating Agreement, Article III, Section 4(g).
---------------------------------------------------------------------------

     At least twenty percent of the directors on the Exchange
Board will be Member Representative Directors; \32\ and
---------------------------------------------------------------------------

    \32\ See IEX Exchange Operating Agreement, Article III, Section
2(b).
---------------------------------------------------------------------------

     A majority of the Board of Directors will be Independent
Directors.\33\
---------------------------------------------------------------------------

    \33\ See id.
---------------------------------------------------------------------------

    In addition, during such time as IEX Exchange operates a listings
business, the Exchange Board must have one Director who is an officer
or director of an issuer and one Director who is a representative of
investors, and in each case, such Director must not be associated with
a member.\34\
---------------------------------------------------------------------------

    \34\ See id.
---------------------------------------------------------------------------

    As discussed further below, the initial Directors of the Exchange
Board shall be appointed by IEXG and shall serve until the first annual
meeting of holders of LLC interests of Investors' Exchange LLC, of
which IEX Group, Inc. is the sole holder (``LLC Member''). In its Form
1 application, IEX committed to hold its first annual meeting as a
registered exchange within 90 days after the date of final action by
the Commission on IEX's application for registration as a national
securities exchange (``Approval Date'').\35\ At the first annual
meeting of the LLC Member and each annual meeting thereafter, IEXG, as
the sole LLC Member of IEX Exchange, will elect the Exchange Board
pursuant to the IEX Exchange Operating Agreement and consistent with
the compositional requirements specified therein.\36\ In addition, IEXG
will appoint the initial Nominating Committee \37\ and Member
Nominating Committee,\38\ consistent with each committee's
compositional requirements,\39\ to nominate candidates for election to
the Exchange Board. Each of the Nominating Committee and Member
Nominating Committee, after completion of its respective duties for
nominating directors for election to the Board for that year, shall
nominate candidates to serve on the succeeding year's Nominating
Committee or Member Nominating Committee, as applicable, such
candidates to be voted on by IEXG at the annual meeting of the LLC
Member.\40\ IEX Exchange members have rights to nominate and elect
additional candidates for the Member Nominating Committee pursuant to a
petition process.\41\
---------------------------------------------------------------------------

    \35\ See IEX Exchange Operating Agreement, Article III, Section
4(g). See also discussion of ``Interim Exchange Board'' infra.
    \36\ See IEX Exchange Operating Agreement, Article IV, Section
1(a).
    \37\ The number of Non-Industry members on the Nominating
Committee must equal or exceed the number of Industry members. All
Nominating Committee members must be Independent Directors. See IEX
Exchange Operating Agreement Article VI, Section 2. See also IEX
Exchange Operating Agreement Article V, Section 2(a).
    \38\ Each member of the Member Nominating Committee shall be a
Member Representative member. See IEX Exchange Operating Agreement
Article VI, Section 3. See also IEX Exchange Operating Agreement
Article V, Section 2(a). Pursuant to IEX Exchange Operating
Agreement Article I(v), a ``Member Representative member'' is a
member of any committee or hearing panel who is an officer,
director, employee or agent of an Exchange Member that is not a
Stockholder Exchange Member.
    \39\ See IEX Exchange Operating Agreement Article VI, Section 1.
    \40\ See id.
    \41\ See id. See also IEX Exchange Operating Agreement Article
III, Section 4.
---------------------------------------------------------------------------

    The Nominating Committee will nominate candidates for each director
position, and IEXG, as the sole LLC Member, will elect those directors.
For Member Representative Director

positions, the Member Nominating Committee will solicit input from IEX
members and members may submit petition candidates.\42\ If no
candidates are nominated pursuant to a petition process, then the
initial nominees submitted by the Member Nominating Committee will be
nominated as Member Representative Directors by the Nominating
Committee. If a petition process produces additional candidates, then
the candidates nominated pursuant to the petition process, together
with those nominated by the Member Nominating Committee, will be
presented to IEX Exchange members for election to determine the final
nominees for any open Member Representative Director positions.\43\ In
the event of a contested election, the candidates who receive the most
votes will be selected as the Member Representative Director nominees
by the Nominating Committee.\44\
---------------------------------------------------------------------------

    \42\ See IEX Exchange Operating Agreement Article III, Section
4(c). The petition must be signed by executive representatives of
10% or more of the IEX Exchange members. No IEX Exchange member,
together with its affiliates, may account for more than 50% of the
signatures endorsing a particular candidate. See id.
    \43\ See IEX Exchange Operating Agreement, Article III, Section
4(e) and (f). Each IEX Exchange Member shall have the right to cast
one vote for each available Member Representative Director
nomination, provided that any such vote must be cast for a person on
the List of Candidates and that no IEX Exchange member, together
with its affiliates, may account for more than 20% of the votes cast
for a candidate. See IEX Exchange Operating Agreement, Article III,
Section 4(f).
    \44\ See IEX Exchange Operating Agreement, Article III, Section
4(f).
---------------------------------------------------------------------------

    Thereafter, the Member Nominating Committee will nominate a final
slate of candidates to the Nominating Committee, and the Nominating
Committee must accept those candidates and submit them to the LLC
Member.\45\ IEXG, as the sole LLC Member, is obligated to elect the
Member Representative Director nominees that are nominated by the
Nominating Committee.\46\
---------------------------------------------------------------------------

    \45\ See IEX Exchange Operating Agreement, Article III, Section
4(a). The Member Nominating Committee will solicit comments from IEX
Exchange members for the purpose of approving and submitting names
of candidates for election to the position of Member Representative
Director. See IEX Exchange Operating Agreement, Article III, Section
4(b).
    \46\ See id.
---------------------------------------------------------------------------

    In addition, with respect to the requirement that the number of
Non-Industry Directors, including at least two Independent Directors,
will equal or exceed the sum of the number of Industry Directors and
Member Representative Directors, the Commission believes that the
proposed composition of the Exchange Board satisfies the requirements
in Section 6(b)(3) of the Act,\47\ which requires in part that one or
more directors be representative of issuers and investors and not be
associated with a member of the exchange, or with a broker or dealer.
The Commission previously has stated that the inclusion of public, non-
industry representatives on exchange oversight bodies is an important
mechanism to support an exchange's ability to protect the public
interest.\48\ Further, the presence of public, non-industry
representatives can help to ensure that no single group of market
participants has the ability to systematically disadvantage other
market participants through the exchange governance process.\49\ The
Commission believes that public directors can provide unbiased
perspectives, which may enhance the ability of the Exchange Board to
address issues in a non-discriminatory fashion and foster the integrity
of IEX Exchange.\50\ For similar reasons, the Commission also believes
that the additional compositional requirement that applies during such
time as IEX Exchange operates a primary listings business (i.e., the
requirement that one Director be an officer or director of an issuer
and one Director be a representative of investors, in each case, not
associated with a Member \51\) is consistent with the requirements of
Section 6(b)(3) of the Act.
---------------------------------------------------------------------------

    \47\ 15 U.S.C. 78f(b)(3).
    \48\ See, e.g., Regulation of Exchanges and Alternative Trading
Systems, Securities Exchange Act Release No. 40760 (December 8,
1998), 63 FR 70844 (December 22, 1998) (``Regulation ATS Release'').
    \49\ See, e.g., MIAX Exchange Order, supra note 30, at 73067.
    \50\ See, e.g., Securities Exchange Act Release No. 53128
(January 13, 2006), 71 FR 3550, 3553 (January 23, 2006) (granting
the exchange registration of Nasdaq Stock Market, Inc.) (``Nasdaq
Exchange Order''); Securities Exchange Act Release No. 53382
(February 27, 2006), 71 FR 11251, 11261 (March 6, 2006) (``NYSE/
Archipelago Merger Approval Order''); and BATS Y Exchange Order,
supra note 30 at 51298.
    \51\ See IEX Exchange Operating Agreement, Article III, Section
2(b).
---------------------------------------------------------------------------

    The Commission believes that the IEX Exchange governance provisions
are consistent with the Act. In particular, the Commission believes
that the requirement in the IEX Exchange Operating Agreement that 20%
of the directors be Member Representative Directors and the means by
which they will be chosen by IEX Exchange members provide for the fair
representation of members in the selection of directors and the
administration of IEX Exchange and therefore are consistent with
Section 6(b)(3) of the Act.\52\ As the Commission has previously noted,
this requirement helps to ensure that members have a voice in an
exchange's self-regulatory program, and that an exchange is
administered in a way that is equitable to all those who trade on its
market or through its facilities.\53\
---------------------------------------------------------------------------

    \52\ 15 U.S.C. 78f(b)(3).
    \53\ See, e.g., Nasdaq Exchange Order, supra note 50; and BATS Y
Exchange Order, supra note 30. See also NYSE/Archipelago Merger
Approval Order, supra note 50.
---------------------------------------------------------------------------

2. Interim Exchange Board
    IEXG will appoint an interim Exchange board of directors (``Interim
Exchange Board'') at a special meeting, which will include interim
Member Representative Directors. The interim Member Representative
Directors will be selected by the Buy-Side Trading Advisory Committee
(``TAC'') of IEXG from a list of potential candidates submitted by
current subscribers of the IEX ATS.\54\ IEX represents that these IEX
ATS subscribers are expected to become members of IEX Exchange through
submission of and approval of an Exchange Waive-In Membership
Application.\55\ IEX also represents that it currently expects that the
Exchange's initial membership would consist substantially of the
current group of IEX ATS subscribers, including, but not limited to,
those IEX ATS subscribers that have submitted potential candidates to
the TAC, and that it does not expect to receive a meaningful number of
applications for Exchange membership from non-IEX ATS subscribers
during the tenure of the Interim Exchange Board.\56\ Upon the
appointment of the interim directors by IEXG, the Interim Exchange
Board will meet the board composition requirements set forth in the IEX
Exchange Operating Agreement.\57\
---------------------------------------------------------------------------

    \54\ See Form 1, Exhibit J.
    \55\ See id.
    \56\ See id.
    \57\ See id.
---------------------------------------------------------------------------

    The Interim Exchange Board will serve until the first annual
meeting of the LLC Member, which will take place within 90 days after
the Approval Date, when the Exchange Board will be elected pursuant to
the full nomination, petition, and voting process set forth in the IEX
Exchange Operating Agreement.\58\ IEX represents that it will complete
the full nomination, petition, and voting process set forth in the IEX
Exchange Operating Agreement as promptly as possible after the
effective date of the IEX Exchange Operating Agreement and within
ninety (90) days after the Approval Date.\59\
---------------------------------------------------------------------------

    \58\ See id. See also IEX Exchange Operating Agreement, Article
III, Section 4.
    \59\ See Form 1, Exhibit J.

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

    The Commission believes that the process for electing the Interim
Exchange Board, as proposed, is consistent with the requirements of the
Act, including that the rules of the exchange assure fair
representation of the exchange's members in the selection of its
directors and administration of its affairs.\60\ As noted above, the
interim Member Representative Directors will be selected by IEXG from a
list of potential candidates submitted by a group of current
subscribers of the IEX ATS. IEX expects its IEX ATS subscribers to
become the initial members of IEX Exchange and does not expect
significant numbers of new members initially, and therefore conducting
the initial Member Representative Director process among these entities
is an appropriate way to put in place promptly at IEX's launch as an
exchange a board with Member Representative directors that represent
the exchange's initial membership. The Commission notes that this
Interim Exchange Board is only temporary, as IEX Exchange represents
that it will complete the full nomination, petition, and voting process
as set forth in the IEX Exchange Operating Agreement, which will
provide persons that are approved as members after the date of this
Order with the opportunity to participate in the selection of the
Member Representative Directors, within 90 days of when IEX Exchange's
application for registration as a national securities exchange is
granted.\61\ The Commission therefore believes that IEX Exchange's
initial interim board process is consistent with the Act, including
Section 6(b)(3), in that it is designed to provide representation among
the persons and firms likely to become members when IEX commences
operations as an exchange and is sufficient to allow IEX to commence
operations as an exchange for an interim period prior to going through
the regular process to elect a new Exchange Board pursuant to the full
nomination, petition, and voting process set forth in the IEX Exchange
Operating Agreement.
---------------------------------------------------------------------------

    \60\ See 15 U.S.C. 78f(b)(3).
    \61\ IEX's proposed timeline for the interim board process
follows a process similar to what the Commission recently approved
for the MIAX Exchange. See MIAX Exchange Order, supra note 30.
---------------------------------------------------------------------------

3. Exchange Committees
    In the IEX Exchange Operating Agreement, IEX Exchange has proposed
to establish several committees of the Exchange Board. Specifically,
IEX Exchange has proposed to establish the following committees of the
Exchange Board that would be appointed by the Chairman of the Exchange
Board, with the approval of the Exchange Board: An Appeals Committee
and a Regulatory Oversight Committee.\62\ In addition, IEX Exchange has
proposed to establish a Nominating Committee and a Member Nominating
Committee, which would be elected on an annual basis by IEXG, as the
sole LLC Member.\63\ Further, the IEX Chairman, with approval of the
Exchange Board, may appoint a Compensation Committee, an Audit
Committee, an Executive Committee, and a Finance Committee of the
Exchange Board.\64\
---------------------------------------------------------------------------

    \62\ See IEX Exchange Operating Agreement, Article V, Section 1.
    \63\ See IEX Exchange Operating Agreement Article VI, Section 1.
    \64\ See IEX Exchange Operating Agreement Article V, Section 6.
---------------------------------------------------------------------------

    The Appeals Committee will consist of two Independent Directors,
and one Member Representative Director.\65\ Each member of the
Regulatory Oversight Committee must be an Independent Director.\66\ If
established, each voting member of the Compensation Committee must be a
Non-Industry Director.\67\ If established, a majority of the Audit
Committee members must be Non-Industry Directors, all Audit Committee
Directors must be Independent Directors, and a Non-Industry Director
will serve as Chairman.\68\
---------------------------------------------------------------------------

    \65\ See IEX Exchange Operating Agreement Article V, Section
6(d).
    \66\ See IEX Exchange Operating Agreement Article V, Section
6(c).
    \67\ See IEX Exchange Operating Agreement Article V, Section
6(a).
    \68\ See IEX Exchange Operating Agreement Article V, Section
6(b).
---------------------------------------------------------------------------

    Because the Executive Committee will have the powers and authority
of the Exchange Board in the management of the business and affairs of
the IEX Exchange between meetings of the Exchange Board, its
composition must reflect that of the Exchange Board. Accordingly, if
established, the number of Non-Industry Directors on the Executive
Committee must equal or exceed the number of Industry Directors and the
percentages of Independent Directors and Member Representative
Directors must be at least as great as the corresponding percentages on
the Exchange Board as a whole.\69\
---------------------------------------------------------------------------

    \69\ See IEX Exchange Operating Agreement Article V, Section
6(e).
---------------------------------------------------------------------------

    As discussed above, the Nominating and Member Nominating Committees
will have responsibility for, among other things, nominating candidates
for election to the Exchange Board. On an annual basis, the members of
these committees will nominate candidates for the succeeding year's
respective committees to be elected by IEXG, as the sole LLC
Member.\70\
---------------------------------------------------------------------------

    \70\ See IEX Exchange Operating Agreement Article VI, Section 1.
Additional candidates for the Member Nominating Committee may be
nominated and elected by IEX Exchange members pursuant to a petition
process. See supra note 42 and accompanying text.
---------------------------------------------------------------------------

    The Commission believes that IEX Exchange's proposed committees,
which are similar to the committees maintained by other exchanges,\71\
are designed to help enable IEX Exchange to carry out its
responsibilities under the Act and are consistent with the Act,
including Section 6(b)(1), which requires, in part, an exchange to be
so organized and have the capacity to carry out the purposes of the
Act.\72\
---------------------------------------------------------------------------

    \71\ See, e.g., BATS Y Exchange Order and MIAX Exchange Order,
supra note 30.
    \72\ 15 U.S.C. 78f(b)(1).
---------------------------------------------------------------------------

B. IEX Group and Regulation of IEX Exchange \73\
---------------------------------------------------------------------------

    \73\ The Commission did not receive any comments addressing the
substance of regulation.
---------------------------------------------------------------------------

    When IEX Exchange commences operations as a national securities
exchange, IEX Exchange will have all the attendant regulatory
obligations under the Act. In particular, IEX Exchange will be
responsible for the operation and regulation of its trading system and
the regulation of its members. The Commission believes that certain
provisions in the IEX Exchange and IEXG governance documents are
designed to facilitate the ability of IEX Exchange and the Commission
to fulfill their regulatory obligations. The discussion below
summarizes some of these key provisions.
1. Ownership Structure; Ownership and Voting Limitations
    IEX Exchange will be structured as a Delaware limited liability
company (``LLC''), which will be wholly owned by the sole member of the
LLC, IEXG. The proposed Third Amended and Restated Certificate of
Incorporation of IEX Group, Inc. (``IEXG Certificate'') includes
restrictions on the ability to own and vote shares of capital stock of
IEXG.\74\ These limitations are designed to prevent any IEXG
shareholder from exercising undue control over the operation of IEX
Exchange and to ensure that the IEX Exchange and the

Commission are able to carry out their regulatory obligations under the
Act.
---------------------------------------------------------------------------

    \74\ These provisions are consistent with ownership and voting
limits approved by the Commission for other SROs. See e.g., BATS Y
Exchange Order and MIAX Exchange Order, supra note 30. See also
Securities Exchange Act Release Nos. 61698 (March 12, 2010), 75 FR
13151 (March 18, 2010) (``DirectEdge Exchanges Order''); and 58375
(August 18, 2008) 73 FR 49498 (August 21, 2008) (File No. 10-182)
(``BATS Exchange Order'').
---------------------------------------------------------------------------

    In particular, for so long as IEXG directly or indirectly controls
IEX Exchange, no person, either alone or together with its related
persons,\75\ may beneficially own more than 40% of any class of capital
stock of IEXG.\76\ IEX will have a more restrictive condition for IEX
Exchange members, wherein IEX Exchange members, either alone or
together with their related persons, are prohibited from beneficially
owning more than 20% of shares of any class of capital stock of
IEXG.\77\ If any stockholder violates these ownership limits, IEXG
would redeem the shares in excess of the applicable ownership limit at
their par value.\78\ In addition, no person, alone or together with its
related persons, may vote or cause the voting of more than 20% of the
voting power of the then issued and outstanding capital stock of
IEXG.\79\ If any stockholder purports to vote, or cause the voting of,
shares that would violate this voting limit, IEXG would not honor such
vote in excess of the voting limit.\80\
---------------------------------------------------------------------------

    \75\ See IEXG Certificate TENTH (A)(2) (defining ``related
persons'').
    \76\ See IEXG Certificate TENTH (B)(1.1).
    \77\ See IEXG Certificate TENTH (B)(1.2).
    \78\ See IEXG Certificate TENTH (E). Any shares which have been
called for redemption shall not be deemed outstanding shares for the
purpose of voting or determining the total number of shares entitled
to vote. Once redeemed by IEXG, such shares shall become treasury
shares and shall no longer be deemed to be outstanding. See id.
Furthermore, if any redemption results in another stockholder owning
shares in violation of the ownership limits described above, IEXG
shall redeem such shares. See id.
    \79\ See IEXG Certificate TENTH (B)(1.3).
    \80\ See IEXG Certificate TENTH (D).
---------------------------------------------------------------------------

    Any person that proposes or attempts to own shares of capital stock
in excess of the 40% ownership limitation, or vote or grant proxies or
consents with respect to shares of capital stock in excess of the 20%
voting limitation, must deliver written notice to the IEXG board of
directors (``IEXG Board'') to notify the IEXG Board of its
intention.\81\ The notice must be delivered to the IEXG Board not less
than 45 days before the proposed ownership of such shares or proposed
exercise of such voting rights or the granting of such proxies or
consents.\82\ The IEXG Board may waive the 40% ownership limitation and
the 20% voting limitation for non-members, pursuant to a resolution
duly adopted by the IEXG Board, if it makes certain findings.\83\ The
IEXG Board is specifically prohibited from waiving the voting and
ownership limits above 20% for IEX Exchange members and their related
persons.\84\ As required by the IEXG Certificate, any waiver for non-
members would not be effective unless and until approved by the
Commission pursuant to Section 19 of the Act.\85\
---------------------------------------------------------------------------

    \81\ See IEXG Certificate TENTH (B)(4).
    \82\ See id.
    \83\ See IEXG Certificate TENTH (B)(2.2). The required
determinations are that (A) such waiver will not impair the ability
of IEX Exchange to carry out its functions and responsibilities
under the Act and the rules and regulations promulgated thereunder,
(B) such waiver is otherwise in the best interests of IEXG, its
stockholders, and IEX Exchange, (C) such waiver will not impair the
ability of the Commission to enforce the Act and the rules and
regulations promulgated thereunder, and (D) the transferee in such
transfer and its related persons are not subject to any applicable
``statutory disqualification'' (within the meaning of Section
3(a)(39) of the Act). See IEXG Certificate TENTH (B)(2.2) and
(B)(3). The Commission has previously approved identical rules of
other exchanges that provide for the ability of the exchange to
waive the ownership and voting limitations discussed above for non-
members of the exchange. See, e.g., BATS Y Exchange Order, supra
note 30 at 51296; and MIAX Exchange Order, supra note 30 at 73069.
See also Amended and Restated Certificate of Incorporation of Miami
International Holdings, Inc. Article Ninth(b)(ii)(B) and (iii); and
Amended and Restated Certificate of Incorporation of BATS Global
Markets, Inc. Article Fifth(b)(ii)(B) and (iii) (containing
identical provisions).
    \84\ See IEXG Certificate TENTH (B)(2.2) (``. . . and such
resolution shall not be effective until it is filed with and
approved by the Commission.''). These provisions are generally
consistent with waiver of ownership and voting limits approved by
the Commission for other SROs. See e.g., BATS Y Exchange Order and
MIAX Exchange Order, supra note 30. See also BATS Exchange Order and
DirectEdge Exchanges Order, supra note 74.
    \85\ See IEXG Certificate TENTH (B)(2.2).
---------------------------------------------------------------------------

    The IEXG Certificate also contains provisions that are designed to
further safeguard the ownership and voting limitations described above,
or are otherwise related to direct and indirect changes in control.
Specifically, any person that, either alone or together with its
related persons owns, directly or indirectly, of record or
beneficially, 5% or more of the capital stock of IEXG will be required
to immediately notify the IEXG Board in writing upon acquiring
knowledge of such ownership.\86\ Thereafter, such persons will be
required to update IEXG of any increase or decrease of 1% or more in
their previously reported ownership percentage.\87\
---------------------------------------------------------------------------

    \86\ See IEXG Certificate TENTH(C)(1). The notice will require
the person's full legal name; the person's title or status; the
person's approximate ownership interest in IEXG; and whether the
person has power, directly or indirectly, to direct the management
or policies of IEXG. See id.
    \87\ See IEXG Certificate TENTH(C)(2). Changes of less than 1%
must also be reported to IEXG if they result in such person crossing
a 20% or 40% ownership threshold. See id. In addition, IEX Exchange
rules also impose limits on affiliation between the IEX Exchange and
a member of the IEX Exchange. See IEX Exchange Rule 2.210 (No
Affiliation between Exchange and any Member).
---------------------------------------------------------------------------

    The IEX Exchange Operating Agreement does not include change of
control provisions that are similar to those in the IEXG Certificate;
however the IEX Exchange Operating Agreement explicitly provides that
IEXG is the sole LLC Member of IEX Exchange.\88\ Thus, if IEXG ever
proposes to no longer be the sole LLC Member of IEX Exchange (and
therefore no longer its sole owner), IEX Exchange would be required to
amend the IEX Exchange Operating Agreement. Any changes to the IEX
Exchange Operating Agreement, including any change in the provisions
that identify IEXG as the sole owner of IEX Exchange, would be a rule
change that must be filed with, or filed with and approved by, the
Commission pursuant to Section 19(b) of the Act and Rule 19b-4.\89\
Further, pursuant to the IEX Exchange Operating Agreement, IEXG may not
transfer or assign, in whole or in part, its ownership interest in IEX
Exchange, unless such transfer or assignment is filed with and approved
by the Commission pursuant to Section 19 of the Act.\90\
---------------------------------------------------------------------------

    \88\ See IEX Exchange Operating Agreement Article I(s).
    \89\ See IEX Exchange Operating Agreement, Article IX, Section
1(b) and Section 4. See also 15 U.S.C. 78s(b) and 17 CFR 240.19b-4.
    \90\ See IEX Exchange Operating Agreement Article IV, Section 4
and Article XI, Section 12.
---------------------------------------------------------------------------

    Although IEXG is not directly responsible for regulation, its
activities with respect to the operation of IEX Exchange must be
consistent with, and must not interfere with, the self-regulatory
obligations of IEX Exchange. As described above, the provisions
applicable to direct and indirect changes in control of IEXG and IEX
Exchange, as well as the voting limitation imposed on owners of IEXG
who also are IEX Exchange members, are designed to help prevent any
owner of IEXG from exercising undue influence or control over the
operation of IEX Exchange and to help ensure that IEX Exchange retains
a sufficient degree of independence to effectively carry out its
regulatory obligations under the Act. In addition, these limitations
are designed to address the conflicts of interests that might result
from a member of a national securities exchange owning interests in the
exchange. As the Commission has noted in the past, a member's ownership
interest in an entity that controls an exchange could become so large
as to cast doubt on whether the exchange may fairly and objectively
exercise its self-regulatory responsibilities with respect to such
member.\91\ A member that is a controlling shareholder of an exchange
could seek to exercise that controlling influence by directing the
exchange to refrain from, or the

exchange may hesitate to, diligently monitor and conduct surveillance
of the member's conduct or diligently enforce the exchange's rules and
the federal securities laws with respect to conduct by the member that
violates such provisions. As such, the Commission believes that these
requirements are designed to minimize the potential that a person or
entity can improperly interfere with or restrict the ability of IEX
Exchange to effectively carry out its regulatory oversight
responsibilities under the Act.
---------------------------------------------------------------------------

    \91\ See, e.g., BATS Y Exchange Order and MIAX Exchange Order,
supra note 30.
---------------------------------------------------------------------------

    The Commission believes that IEX's and IEXG's proposed governance
provisions are consistent with the Act, including Section 6(b)(1),
which requires, in part, an exchange to be so organized and have the
capacity to carry out the purposes of the Act.\92\ In particular, these
requirements are designed to minimize the potential that a person could
improperly interfere with or restrict the ability of the Commission or
IEX Exchange to effectively carry out their regulatory oversight
responsibilities under the Act.
---------------------------------------------------------------------------

    \92\ 15 U.S.C. 78f(b)(1).
---------------------------------------------------------------------------

2. Regulatory Independence and Oversight
    Although IEXG will not itself carry out regulatory functions, its
activities with respect to the operation of IEX Exchange must be
consistent with, and must not interfere with, IEX Exchange's self-
regulatory obligations. In this regard, IEX Exchange and IEXG propose
to adopt certain provisions in their respective governing documents
that are designed to help maintain the independence of the regulatory
functions of IEX Exchange. These proposed provisions are substantially
similar to those included in the governing documents of other exchanges
that recently have been granted registration.\93\ Specifically:
---------------------------------------------------------------------------

    \93\ See, e.g., MIAX Exchange Order and BATS Y Order, supra note
30. See also DirectEdge Exchanges Order, supra note 74.
---------------------------------------------------------------------------

     The directors, officers, employees, and agents of IEXG
must give due regard to the preservation of the independence of the
self-regulatory function of IEX Exchange and to its obligations to
investors and the general public and must not take actions that would
interfere with the effectuation of decisions by the Exchange Board
relating to its regulatory functions or that would interfere with IEX
Exchange's ability to carry out its responsibilities under the Act.\94\
---------------------------------------------------------------------------

    \94\ See proposed Amended and Restated By-Laws of IEX Group,
Inc. (``IEXG By-Laws''), Article VII, Section 34. Similarly, Article
III, Section 1(d) of the IEX Exchange Operating Agreement requires
the Exchange Board and each Director to, when managing the business
and affairs of IEX Exchange, consider the requirements of Section
6(b) of the Act. Article III, Section 1(e) also requires the
Exchange Board, when evaluating any proposal to take into account
(among other things and to the extent relevant), the potential
impact on the integrity, continuity and stability of the national
securities exchange operated by IEX Exchange and the other
operations of IEX Exchange, on the ability to prevent fraudulent and
manipulative acts and practices, and on investors and the public,
and whether such would promote just and equitable principles of
trade, foster cooperation and coordination with persons engaged in
regulating, clearing, settling, processing information with respect
to and facilitating transactions in securities or assist in the
removal of impediments to or perfection of the mechanisms for a free
and open market and a national market system.
---------------------------------------------------------------------------

     IEXG must comply with federal securities laws and the
rules and regulations promulgated thereunder, and agrees to cooperate
with the Commission and IEX Exchange pursuant to, and to the extent of,
their respective regulatory authority. In addition, IEXG's officers,
directors, employees, and agents must comply with federal securities
laws and the rules and regulations promulgated thereunder and are
deemed to agree to cooperate with the Commission and IEX Exchange in
respect of the Commission's oversight responsibilities regarding IEX
Exchange and the self-regulatory functions and responsibilities of IEX
Exchange and IEXG shall take reasonable steps necessary to cause its
officers, directors, employees and agents to so cooperate.\95\
---------------------------------------------------------------------------

    \95\ See IEXG By-Laws, Article VII, Section 37. Similarly,
Article III, Section 1(d) of the IEX Exchange Operating Agreement
requires IEX Exchange's directors, officers and employees, in
discharging their duties, to comply with the federal securities laws
and the rules and regulations promulgated thereunder and to
cooperate with the Commission and IEX Exchange pursuant to their
respective regulatory authority.
---------------------------------------------------------------------------

     IEXG, and its officers, directors, employees, and agents
submit to the jurisdiction of the U.S. federal courts, the Commission,
and IEX Exchange, for purposes of any action, suit, or proceeding
pursuant to U.S. federal securities laws, and the rules and regulations
thereunder, arising out of, or relating to, IEX Exchange
activities.\96\
---------------------------------------------------------------------------

    \96\ See IEXG By-Laws, Article VII, Section 38.
---------------------------------------------------------------------------

     All books and records of IEX Exchange reflecting
confidential information pertaining to the self-regulatory function of
IEX Exchange (including but not limited to disciplinary matters,
trading data, trading practices, and audit information) shall be
retained in confidence by IEX Exchange and its personnel, including its
directors, officers, employees and agents, and will not be used by IEX
Exchange for any non-regulatory purposes and shall not be made
available to any person (including, without limitation, any IEX
Exchange member) other than to personnel of the Commission, and those
personnel of IEX Exchange, members of committees of the Exchange Board,
members of the Exchange Board, or hearing officers and other agents of
IEX Exchange, to the extent necessary or appropriate to properly
discharge the self-regulatory responsibilities of IEX Exchange.\97\
Similar provisions apply to IEXG and its directors, officers, employees
and agents.\98\
---------------------------------------------------------------------------

    \97\ See IEX Exchange Operating Agreement Article XI, Section 4.
    \98\ The IEXG By-Laws also provide that all books and records of
IEX Exchange reflecting confidential information pertaining to the
self-regulatory function of IEX Exchange that come into the
possession of IEXG, and the information contained in those books and
records, will be subject to confidentiality restrictions and will
not be used for any non-regulatory purposes. See IEXG By-Laws
Article VII, Section 35. The IEXG governing documents acknowledge
that requirements to keep such information confidential shall not
limit or impede the rights of the Commission to access and examine
such information or limit the ability of officers, directors,
employees, or agents of IEX Exchange or IEXG to disclose such
information to the Commission. See IEX Exchange Operating Agreement
Article XI, Section 4 and IEXG By-Laws Article VII, Section 35.
---------------------------------------------------------------------------

     The books and records of IEX Exchange and IEXG must be
maintained in the United States \99\ and, to the extent they are
related to the operation or administration of IEX Exchange, IEXG's
books and records will be subject at all times to inspection and
copying by the Commission and IEX Exchange.\100\
---------------------------------------------------------------------------

    \99\ See IEX Exchange Operating Agreement Article XI, Section 4;
and IEXG By-Laws Article VII, Section 36.
    \100\ See IEXG By-Laws Article VII, Section 36.
---------------------------------------------------------------------------

     Furthermore, to the extent they relate to the activities
of IEX Exchange, the books, records, premises, officers, directors,
employees, and agents of IEXG will be deemed to be the books, records,
premises, officers, directors, employees, and agents of IEX Exchange,
for purposes of, and subject to oversight pursuant to, the Act.\101\
---------------------------------------------------------------------------

    \101\ See IEXG By-Laws Article VII, Section 36.
---------------------------------------------------------------------------

     IEXG will take reasonable steps necessary to cause its
officers, directors, employees, and agents, prior to accepting a
position as an officer, director, employee or agent (as applicable) to
consent in writing to the applicability of provisions regarding books
and records, confidentiality, jurisdiction, and regulatory obligations,
with respect to their activities related to IEX Exchange.\102\
---------------------------------------------------------------------------

    \102\ See IEXG By-Laws Article VII, Section 39.
---------------------------------------------------------------------------

     The IEXG Certificate and By-Laws require that, so long as
IEXG controls IEX Exchange, any changes to those documents must be
submitted to the

Exchange Board for approval, and, if such change is required to be
filed with the Commission pursuant to Section 19(b) of the Act and the
rules and regulations thereunder, such change shall not be effective
until filed with and effective by operation of law, or filed with, and
approved by, the Commission.\103\
---------------------------------------------------------------------------

    \103\ See IEXG Certificate Article NINTH; and IEXG By-Laws,
Article XIV, Section 51.
---------------------------------------------------------------------------

    The Commission believes that the provisions discussed in this
section, which are designed to help ensure the independence of IEX
Exchange's regulatory function and facilitate the ability of IEX
Exchange to carry out its responsibility and operate in a manner
consistent with the Act, are appropriate and consistent with the
requirements of the Act, particularly with Section 6(b)(1), which
requires, in part, an exchange to be so organized and have the capacity
to carry out the purposes of the Act.\104\ Whether IEX Exchange
operates in compliance with the Act, however, depends on how it and
IEXG in practice implement the governance and other rules that are the
subject of this Order.
---------------------------------------------------------------------------

    \104\ 15 U.S.C. 78f(b)(1).
---------------------------------------------------------------------------

    Further, Section 19(h)(1) of the Act \105\ provides the Commission
with the authority ``to suspend for a period not exceeding twelve
months or revoke the registration of [an SRO], or to censure or impose
limitations upon the activities, functions, and operations of [an SRO],
if [the Commission] finds, on the record after notice and opportunity
for hearing, that [the SRO] has violated or is unable to comply with
any provision of the Act, the rules or regulations thereunder, or its
own rules or without reasonable justification or excuse has failed to
enforce compliance . . .'' with any such provision by its members
(including associated persons thereof).\106\ If the Commission were to
find, or become aware of, through staff review and inspection or
otherwise, facts indicating any violations of the Act, including
without limitation Sections 6(b)(1) and 19(g)(1), these matters could
provide the basis for a disciplinary proceeding under Section 19(h)(1)
of the Act.
---------------------------------------------------------------------------

    \105\ See 15 U.S.C. 78s(h)(1).
    \106\ Id.
---------------------------------------------------------------------------

    The Commission also notes that, even in the absence of the
governance provisions described above, under Section 20(a) of the Act
any person with a controlling interest in IEX Exchange would be jointly
and severally liable with and to the same extent that IEX Exchange is
liable under any provision of the Act, unless the controlling person
acted in good faith and did not directly or indirectly induce the act
or acts constituting the violation or cause of action.\107\ In
addition, Section 20(e) of the Act creates aiding and abetting
liability for any person who knowingly provides substantial assistance
to another person in violation of any provision of the Act or rule
thereunder.\108\ Further, Section 21C of the Act authorizes the
Commission to enter a cease-and-desist order against any person who has
been ``a cause of'' a violation of any provision of the Act through an
act or omission that the person knew or should have known would
contribute to the violation.\109\ These provisions are applicable to
all entities' dealings with IEX Exchange, including IEXG.
---------------------------------------------------------------------------

    \107\ 15 U.S.C. 78t(a).
    \108\ 15 U.S.C. 78t(e).
    \109\ 15 U.S.C. 78u-3.
---------------------------------------------------------------------------

3. Regulatory Oversight Committee
    The regulatory operations of IEX Exchange will be monitored by the
Regulatory Oversight Committee of the Exchange Board. The Regulatory
Oversight Committee will consist of at least two members, all of whom
must be Independent Directors. The Regulatory Oversight Committee will
be responsible for overseeing the adequacy and effectiveness of IEX
Exchange's regulatory and SRO responsibilities, assessing IEX
Exchange's regulatory performance, and assisting the Exchange Board
(and committees of the Exchange Board) in reviewing IEX Exchange's
regulatory plan and the overall effectiveness of IEX Exchange's
regulatory functions.\110\
---------------------------------------------------------------------------

    \110\ See IEX Exchange Operating Agreement Article V, Section
6(c). The Regulatory Oversight Committee is responsible for
reviewing IEX Exchange's regulatory budget, and also will meet
regularly with the Chief Regulatory Officer. See id.
---------------------------------------------------------------------------

    Further, a Chief Regulatory Officer (``CRO'') of IEX Exchange will
have general supervision over IEX Exchange's regulatory operations,
including responsibility for overseeing IEX Exchange's surveillance,
examination, and enforcement functions and for administering any
regulatory services agreements with another self-regulatory
organization to which IEX Exchange is a party.\111\ The Regulatory
Oversight Committee, in consultation with the Chief Executive Officer
of IEX Exchange, will be responsible for establishing the goals,
assessing the performance, and fixing the compensation of the Chief
Regulatory Officer and for recommending personnel actions involving the
Chief Regulatory Officer and senior regulatory personnel.\112\
---------------------------------------------------------------------------

    \111\ See IEX Exchange Operating Agreement Article VII, Section
9.
    \112\ See IEX Exchange Operating Agreement Article V, Section
6(c). To the extent that the Chief Executive Officer of IEX Exchange
has any indirect supervisory responsibility for the role or function
of the CRO, including but not limited to, implementation of the
budget for the regulatory function or regulatory personnel matters,
the Regulatory Oversight Committee will take all steps reasonably
necessary to ensure that the Chief Executive Officer does not
compromise the regulatory autonomy and independence of the CRO or
the regulatory function. See id.
---------------------------------------------------------------------------

4. Regulatory Funding and Services
    As a prerequisite for the Commission's granting of an exchange's
application for registration, an exchange must be organized and have
the capacity to carry out the purposes of the Act.\113\ Specifically,
an exchange must be able to enforce compliance by its members, and
persons associated with its members, with the federal securities laws
and rules thereunder and the rules of the exchange.\114\ The discussion
below summarizes how IEX Exchange proposes to conduct and structure its
regulatory operations.
---------------------------------------------------------------------------

    \113\ See Section 6(b)(1) of the Act, 15 U.S.C. 78f(b)(1).
    \114\ See id. See also Section 19(g) of the Act, 15 U.S.C.
78s(g).
---------------------------------------------------------------------------

a. Regulatory Funding
    To help ensure that IEX has and will continue to have adequate
funding to be able to meet its responsibilities under the Act, IEX
Exchange represents that, if the Commission approves IEX's application
for registration as a national securities exchange, IEXG will allocate
sufficient assets to IEX Exchange to enable the exchange's
operation.\115\ Specifically, IEX Exchange represents that IEXG will
make a cash contribution to IEX Exchange of $5,000,000, in addition to
any previously-provided in-kind contributions, such as legal,
regulatory, and infrastructure-related services.\116\
---------------------------------------------------------------------------

    \115\ See Form 1, Exhibit I.
    \116\ See id.
---------------------------------------------------------------------------

    IEX Exchange also represents that such cash and in-kind
contributions from IEXG will be adequate to operate IEX Exchange,
including the regulation of the exchange, and that IEXG and IEX
Exchange will enter into an agreement that requires IEXG to provide
adequate funding over time for the exchange's operations, including the
regulation of IEX Exchange.\117\
---------------------------------------------------------------------------

    \117\ See id. IEX Exchange represents that this agreement will
provide that IEX Exchange receive all fees, including regulatory
fees and trading fees, payable by IEX Exchange's members, as well as
any funds received from any applicable market data fees and tape
revenue, and will further provide that IEXG will reimburse IEX
Exchange for its costs and expenses to the extent the exchange's
assets are insufficient to meet its costs and expenses. Id.

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

    Further, any ``Regulatory Funds'' received by IEX Exchange will not
be used for non-regulatory purposes or distributed to IEXG, but rather
will be applied to fund the regulatory operations of IEX Exchange, or,
as applicable, used to pay restitution and disgorgement to customers as
part of a regulatory proceeding.\118\ Any excess non-regulatory funds,
as determined by IEX Exchange, may be remitted to IEXG.\119\
---------------------------------------------------------------------------

    \118\ See IEX Exchange Operating Agreement Article X, Section 4.
IEX Exchange Operating Agreement Article I(zz) defines ``Regulatory
Funds'' as ``fees, fines, or penalties derived from the regulatory
operations of the [IEX Exchange],'' but such term does not include
``revenues derived from listing fees, market data revenues,
transaction revenues, or any other aspect of the commercial
operations of the [IEX Exchange], even if a portion of such revenues
are used to pay costs associated with the regulatory operations of
the [IEX Exchange].'' This definition of is consistent with the
rules of other SROs. See e.g., By-Laws of MIAX Exchange, Article
1(ee); By-Laws of NASDAQ PHLX LLC, Article I(ii); and By-Laws of
NASDAQ BX, Inc., Article I(ii).
    \119\ See Form 1, Exhibit I. See also IEX Exchange Operating
Agreement, Article XI, Section 5. Further, IEX Exchange will not be
required to make a distribution to IEXG if such distribution would
violate the Act or any other applicable law. See id.
---------------------------------------------------------------------------

b. Regulatory Contract With FINRA
    Although IEX Exchange will be an SRO with all of the attendant
regulatory obligations under the Act, it has represented to the
Commission that it intends to enter into a Regulatory Services
Agreement (``RSA'') with FINRA, under which FINRA will perform certain
regulatory functions on IEX Exchange's behalf.\120\ Specifically, IEX
Exchange represents that FINRA will perform certain regulatory
surveillance of trading activity on IEX Exchange and conduct various
regulatory services on behalf of IEX Exchange, which are expected to
include performance of investigation, disciplinary, and hearing
services.\121\ Notwithstanding the RSA, IEX Exchange will retain legal
responsibility for the regulation of its members and its market and the
performance of FINRA as its regulatory services provider. Because IEX
Exchange anticipates entering into an RSA with FINRA, it has not made
provisions to fulfill the regulatory services that would be undertaken
by FINRA. Accordingly, the Commission is conditioning the operation of
IEX Exchange on IEX Exchange and FINRA entering into a final RSA that
specifies the services that FINRA will provide to IEX Exchange.
---------------------------------------------------------------------------

    \120\ See Form 1, Exhibits C and L. See also IEX Exchange Rules
1.160(hh) and 6.170.
    \121\ See Form 1, Exhibit C.
---------------------------------------------------------------------------

    The Commission believes that it is consistent with the Act for IEX
Exchange to contract with FINRA to perform certain examination,
enforcement, and disciplinary functions.\122\ These functions are
fundamental elements of a regulatory program, and constitute core self-
regulatory functions. The Commission believes that FINRA has the
expertise and experience to perform these functions for IEX
Exchange.\123\ However, IEX Exchange, unless relieved by the Commission
of its responsibility, bears the self-regulatory responsibilities and
primary liability for self-regulatory failures, not the SRO retained to
perform regulatory functions on IEX Exchange's behalf. \124\ In
performing these regulatory functions, however, FINRA may nonetheless
bear liability for causing or aiding and abetting the failure of IEX
Exchange to perform its regulatory functions.\125\ Accordingly,
although FINRA will not act on its own behalf under its SRO
responsibilities in carrying out these regulatory services for IEX
Exchange, FINRA may have secondary liability if, for example, the
Commission finds that the contracted functions are being performed so
inadequately as to cause a violation of the federal securities laws or
rules thereunder by IEX Exchange.\126\
---------------------------------------------------------------------------

    \122\ See, e.g., Regulation ATS Release, supra note 48. See also
Nasdaq Exchange Order, supra note 50; and BATS Exchange Order and
DirectEdge Exchanges Order, supra note 74.
    \123\ See, e.g., BATS Y Exchange Order, supra note 30;
DirectEdge Exchanges Order, supra note 74; and Nasdaq Exchange
Order, supra note 50. The Commission notes that the RSA is not
before the Commission and, therefore, the Commission is not acting
on it.
    \124\ See Section 19(g) of the Act, 15 U.S.C. 78s(g); and
Section 17(d)(1) of the Act and Rule 17d-2 thereunder, 15 U.S.C.
78q(d)(1) and 17 CFR 240.17d-2, respectively. See also infra notes
127-135 and accompanying text.
    \125\ For example, if failings by FINRA have the effect of
leaving IEX Exchange in violation of any aspect of IEX Exchange's
self-regulatory obligations, IEX Exchange would bear direct
liability for the violation, while FINRA may bear liability for
causing or aiding and abetting the violation. See, e.g., Nasdaq
Exchange Order, supra note 50; BATS Exchange Order, supra note 74;
and DirectEdge Exchange Order, supra note 74.
    \126\ See, e.g., Nasdaq Exchange Order, supra note 50.
---------------------------------------------------------------------------

c. 17d-2 Agreements
    Section 19(g)(1) of the Act,\127\ among other things, requires
every SRO registered as either a national securities exchange or
national securities association to examine for, and enforce compliance
by, its members and persons associated with its members with the Act,
the rules and regulations thereunder, and the SRO's own rules, unless
the SRO is relieved of this responsibility pursuant to Section 17(d) or
Section 19(g)(2) of the Act.\128\ Rule 17d-2 of the Act permits SROs to
propose joint plans to allocate regulatory responsibilities amongst
themselves for their common rules with respect to their common
members.\129\ These agreements, which must be filed with and declared
effective by the Commission, generally cover areas where each SRO's
rules substantively overlap, including such regulatory functions as
personnel registration and sales practices. Without this relief, the
statutory obligation of each individual SRO could result in a pattern
of multiple examinations of broker-dealers that maintain memberships in
more than one SRO.\130\ Such regulatory duplication would add
unnecessary expenses for common members and their SROs.\131\
---------------------------------------------------------------------------

    \127\ 15 U.S.C. 78s(g)(1).
    \128\ 15 U.S.C. 78q(d) and 15 U.S.C. 78s(g)(2), respectively.
    \129\ See Section 17(d)(1) of the Act and Rule 17d-2 thereunder,
15 U.S.C. 78q(d)(1) and 17 CFR 240.17d-2, respectively. Section
17(d)(1) of the Act allows the Commission to relieve an SRO of
certain responsibilities with respect to members of the SRO who are
also members of another SRO (``common members''). Specifically,
Section 17(d)(1) allows the Commission to relieve an SRO of its
responsibilities to: (i) Receive regulatory reports from such
members; (ii) examine such members for compliance with the Act and
the rules and regulations thereunder, and the rules of the SRO; or
(iii) carry out other specified regulatory responsibilities with
respect to such members. Section 17(d) was intended, in part, to
eliminate unnecessary multiple examinations and regulatory
duplication with respect common members. See Securities Exchange Act
Release No. 12935 (October 28, 1976), 41 FR 49091 (November 8, 1976)
(``Rule 17d-2 Adopting Release'').
    \130\ See, e.g., Securities Exchange Act Release No. 76998
(January 29, 2016), 81 FR 6066, 6074 (ISE Mercury exchange order).
    \131\ See id.
---------------------------------------------------------------------------

    A 17d-2 plan that is declared effective by the Commission relieves
the specified SRO of those regulatory responsibilities allocated by the
plan to another SRO.\132\ Many SROs have entered into Rule 17d-2
agreements.\133\ IEX has represented to the Commission that IEX
Exchange and FINRA intend to file a 17d-2 agreement with the Commission
covering common members of IEX Exchange and FINRA.\134\ This agreement
would allocate to FINRA

regulatory responsibility, with respect to common members, for
specified regulatory and enforcement matters arising out of specified
common rules and specified provisions of the Act and the rules and
regulations thereunder. In addition, IEX Exchange has represented to
the Commission that it intends to become a party to the existing
multiparty Rule 17d-2 plan for the surveillance, investigation, and
enforcement of common insider trading rules.\135\
---------------------------------------------------------------------------

    \132\ See Rule 17d-2 Adopting Release, supra note 129.
    \133\ See, e.g., Securities Exchange Act Release Nos. 59218
(January 8, 2009), 74 FR 2143 (January 14, 2009) (File No. 4-575)
(FINRA/Boston Stock Exchange, Inc.); 58818 (October 20, 2008), 73 FR
63752 (October 27, 2008) (File No. 4-569) (FINRA/BATS Exchange,
Inc.); 55755 (May 14, 2007), 72 FR 28057 (May 18, 2007) (File No. 4-
536) (National Association of Securities Dealers, Inc. (``NASD'')
(n/k/a FINRA) and CBOE concerning the CBOE Stock Exchange); 55367
(February 27, 2007), 72 FR 9983 (March 6, 2007) (File No. 4-529)
(NASD/ISE); and 54136 (July 12, 2006), 71 FR 40759 (July 18, 2006)
(File No. 4-517) (NASD/Nasdaq).
    \134\ See Form 1, Exhibit C.
    \135\ See id. See also Securities Exchange Act Release No. 65991
(December 16, 2011), 76 FR 79714 (December 22, 2011) (File No. 4-
566) (notice of filing and order approving and declaring effective
an amendment to the multiparty 17d-2 plan relating to the
surveillance, investigation, and enforcement of insider trading
rules).
---------------------------------------------------------------------------

    Because IEX Exchange anticipates entering into these 17d-2
agreements, it has not made provision to fulfill the regulatory
obligations that would be undertaken by FINRA and other SROs under
these agreements with respect to common members.\136\ Accordingly, the
Commission is conditioning the operation of IEX Exchange on approval by
the Commission of a 17d-2 agreement between IEX Exchange and FINRA that
allocates the above specified matters to FINRA, and the approval of an
amendment to the existing multiparty Rule 17d-2 agreement specified
above to add IEX Exchange as a party.
---------------------------------------------------------------------------

    \136\ The Commission notes that regulation that is to be covered
by the 17d-2 agreement for common members will be carried out by
FINRA under the RSA for IEX Exchange members that are not also
members of FINRA.
---------------------------------------------------------------------------

C. IEX Trading System

    Numerous comment letters the Commission received on IEX's Form 1
application focused on IEX's proposed trading rules and the operation
of its system. Much of the public comment centered on issues related to
specific features of IEX's proposed trading system--namely, its
``Point-of-Presence'' (``POP'') and ``coil'' infrastructure (sometimes
referred to as IEX's ``speed bump'') and the manner in which IEX
originally proposed (prior to Amendment Nos. 2, 3, and 4) to provide
outbound routing services through its affiliated routing broker-dealer.
IEX submitted several response letters to address these issues before
amending its Form 1 in Amendment Nos. 2, 3, and 4 to propose a
fundamentally different approach to outbound routing. As detailed in
the Order Instituting Proceedings, in these amendments IEX proposed a
material change to its approach to outbound routing through its
affiliated routing broker-dealer. In the Order Instituting Proceedings,
the Commission provided public notice of IEX's amendments and solicited
commenters' views as to whether IEX's proposed revisions, including the
changes to its outbound routing functionality, were consistent with the
Act. The outbound routing issue, other issues related to IEX's POP and
coil infrastructure, and other issues that are relevant to IEX's
proposed trading system in the context of the Commission's
consideration of IEX's Form 1 are addressed below.
1. Public Comment Overview and Commission Discussion
    The Commission received letters in support,\137\ as well as letters
opposing or criticizing in whole or part some of IEX's proposed
features.\138\ Among the commenters who supported IEX's Form 1, most
argued that IEX would offer a market solution to address certain market
inefficiencies and conflicts of interest in a manner that is intended
to protect the interests of retail and buy-side investors.\139\ In
particular, though IEX did not propose any fees in its Form 1,
commenters noted IEX's stated intent not to pursue ``maker-taker''
pricing and instead offer flat transaction fees.\140\ Some commenters
praised IEX for offering fewer order types.\141\ Several commenters
highlighted IEX's ``coil'' delay, discussed in detail below, and
asserted that it may help counter latency arbitrage.\142\ In addition,
one commenter

believed that the coil delay as initially proposed should not be
grounds for denying IEX's exchange application, and suggested that IEX
be phased into the national market system under a pilot program so that
the effect of IEX's access delay on the wider market could be better
assessed.\143\
---------------------------------------------------------------------------

    \137\ See, e.g., Leuchtkafer First Letter; Leuchtkafer Second
Letter; Verret Letter; Shatto Letters 1, 2, and 3; Simonelis Letter;
Capital Group Letter; Southeastern Letter; Navari Letter; DV
Advisors Letter; Cowen Letter; Themis First Letter; Themis Second
Letter; Oppenheimer Funds Letter; Murphy Letter; Birch Bay Letter;
Healthy Markets Letter; Keblish Letter; Bowcott Letter; Secrist
Letter; Stevens Letter; Oltean Letter; Park Letter; Crespo Letter;
Colbert Letter; Lewis Letter; Hovanec First Letter; Hovanec Second
Letter; Meskill Letter; Brian S. Letter; Glennon Letter; Shaw
Letter; Upson Letter; Goldman Sachs Letter; Robeson Letter; Lynch
Letter; Budish Letter; Chen & Foley Letter; Liquidnet Letter; T.
Rowe Price Letter; Sherman Letter; CALSTRS Letter; PSRS/PEERS
Letter; Asset Owners/Investment Managers March 21 Letter; Maqbool
Letter; Israel Letter.
    \138\ See, e.g., BATS First Letter; BATS Second Letter; BATS
Third Letter; NYSE First Letter; NYSE Second Letter; NYSE Third
Letter; Nasdaq First Letter; Nasdaq Second Letter; Nasdaq Third
Letter; Citadel First Letter; Citadel Second Letter; Citadel Third
Letter; Citadel Fourth Letter; Citadel Fifth Letter; FIA First
Letter; FIA Second Letter; Hudson River Trading First Letter; Hudson
River Trading Second Letter; Anonymous December 5 Letter; Hunsacker
Letter; Modern Markets Initiative Letter; Tabb Letter; Weldon First
Letter; Markit First Letter; Markit Second Letter; Direct Match
Letter; Duffy Letter; Scott Letter; Loh Letter; Anonymous June 16
Letter.
    \139\ See, e.g., Capital Group Letter at 1 (noting the
``technologies and practices to discourage predatory behavior''
including the ``350 microsecond buffer,'' the lack of maker-taker
pricing, and ``simple order types''); Southeastern Letter (submitted
on behalf of a group of undersigned asset managers) (complimenting
IEX's proposed benefits to investors in ``reducing structural
inefficiencies in the market, and offering a more balanced and
simplified market design''); Navari Letter at 1 (noting certain
features that ``have great promise for the [r]etail [i]nvestor'');
DV Advisors Letter; Cowen Letter; Themis First Letter (noting that
IEX's ``unconflicted investor-friendly alternative'' will ``employ
technology designed to even playing fields, rather than exploit
information asymmetry'' and that IEX will be ``a stark alternative
to other stock exchange models that seem to be more focused on
selling speed and data,'' and noting that as an ATS, IEX allowed it
and its customers ``to achieve best execution''); Oppenheimer Funds
Letter; Murphy Letter (arguing that IEX's design should ``help to
limit and even eliminate'' what it characterized as ``the electronic
front running that is central to the problems in the market
today''); Lewis Letter; Keblish Letter; Secrist Letter; Stevens
Letter; Oltean Letter; Meskill Letter; fi360 Letter; TRS Letter;
Lynch Letter; Jefferies Letter; T. Rowe Price Letter; Liquidnet
Letter; Sherman Letter; Anonymous March 18 Letter (group of
anonymous traders noting that they ``have empirically found IEX
orders to lower transactions costs'' relative to other exchanges);
Israel Letter (noting that IEX's 350 microsecond delay is
``explicitly designed to . . . level the playing field for ordinary
investors''). One supportive commenter focused on the fee structure
for the IEX ATS, asserting that it is simple and thus favors
investors and issuers rather than traders seeking arbitrage profits.
See ModernIR Letter at 1-3. This commenter also asserts that trades
in the IEX ATS generally are not ``offset by predatory activity,''
which ``offers a beneficial environment to the money public
companies seek: long-term committed capital.'' See id. at 1. Some
commenters questioned the motive of other commenters, including
exchanges, who opposed the proposal. See Verret Letter at 2 (arguing
that ``incumbent firms have long sought to utilize regulatory
barriers to entry to minimize competition, and it would appear a
number of firms are presently using the regulatory comment process
regarding IEX's application as a venue to replicate that strategy
here''); Shatto Letter 2 at 1 (noting that the critical commenters
``do not represent investors or institutional investors'' in arguing
that ``the SEC does not have to preserve market advantages for these
people''); Shatto Letter 3; Stevens Letter; Crespo Letter; Meskill
Letter; Brian S. Letter; Hovanec Third Letter; Hovanec Fourth
Letter; Hovanec Sixth Letter; Hovanec Seventh Letter.
    \140\ See, e.g., Capital Group Letter; Southeastern Letter;
Navari First Letter; Navari Second Letter; Themis First Letter;
Oppenheimer Funds Letter; Healthy Markets Letter; Abel/Noser Letter;
Goldman Sachs Letter; Liquidnet Letter; Franklin Templeton
Investments Letter; TRS Letter. The Commission notes that IEX will
be required to submit separate filings under Section 19(b) of the
Act and Rule 19b-4 to establish fees that it will charge to members
and others persons using its facilities. Nevertheless, in its Second
Response Letter, IEX noted that, as an exchange, it intended to
charge a flat transaction fee. See IEX Second Response at 9.
    \141\ See, e.g., Capital Group Letter; Southeastern Letter;
Shatto First Letter; Navari First Letter; Oppenheimer Funds Letter;
Healthy Markets Letter; Norges Bank Letter; Burgess Letter; fi360
Letter; TRS Letter. But see NYSE First Letter at 9 (arguing that
IEX's proposed menu of order types is not necessarily ``simple'' and
the potential different combinations of instructions for limit
orders is in the hundreds).
    \142\ See, e.g., T. Rowe Price Letter at 1-2; Navari Second
Letter; Healthy Markets Letter at 2-4; Jefferies Letter at 3; Chen &
Foley Letter at 2-3; Leuchtkafer Second Letter at 9; Budish Letter
at 4. See also Burgess Letter; Capital Group Letter; Franklin
Templeton Investments Letter; Schroeder M Letter; Leeson Letter;
Lupinski Letter; Oorjitham Letter; Eric K Letter; Grey Letter; Spear
Letter; Baggins Letter; Nixon Letter; Campbell Letter; Moses Letter;
Huff Letter; Kaye Letter; Jean Letter; Gloy Letter; Givehchi Letter;
Kara Letter; Hiester Letter; Benites Letter; Eustace Letter; Ramirez
Letter; Luce Letter; Arnold Letter; Tidwell Letter; Doyle Letter;
Long Letter; Kim Letter; Mannheim Letter; Oppenheimer Funds Letter;
Israel Letter.
    \143\ See Angel Letter at 3-5. The pilot program suggested by
this commenter would be to measure the effect on the market of
protecting IEX's quotation notwithstanding the ``speed bump.'' See
id. at 4-5. According to the commenter, if the pilot caused material
harm, it could be halted, in which case IEX could still operate as
an exchange but without having its quotes protected under Regulation
NMS. See id. at 5. See also Wolfe Letter at 3 (agreeing with the
pilot approach suggested in the Angel Letter). IEX has not proposed
such an approach and therefore such an approach is not before the
Commission. See Exchange Act Section 19(a)(1).
---------------------------------------------------------------------------

    Among the commenters who were critical of aspects of IEX's
proposal, most focused on issues surrounding the coil, the operation of
and advantages that IEX initially proposed to be provided to IEX's
affiliated outbound router, and IEX's proposed order types, which are
discussed in detail below.\144\ Some commenters suggested that retail
orders would not receive better executions on IEX,\145\ and that IEX
has not used historical data or other methods to support its investor
protection claims.\146\ Other commenters did not express a view on
whether the Commission should approve or disapprove IEX's
application.\147\
---------------------------------------------------------------------------

    \144\ See NYSE First Letter; Nasdaq First Letter; BATS First
Letter; Citadel First Letter; Citadel Second Letter; Citadel Third
Letter; Hudson River Trading First Letter; Hudson River Trading
Second Letter; FIA First Letter. In addition, one commenter opposed
to approval of IEX's exchange application asserted that IEX has not
provided any data establishing the negative aspects of speed-based
trading that IEX's intentional delay is meant to counteract or any
data that quantifies how its intentional delay would protect
investors from such speed-based trading in a way that existing
exchanges do not. See Modern Markets Initiative Letter. Another
commenter opposed to IEX's application believed it is highly
probable that the potential marginal savings in execution costs for
the ``limited population that use IEX would not exceed the wide
increase in infrastructure costs for all market participants'' as a
result of further fragmentation of the market. See Loh Letter. See
discussion, infra Section III.C., of IEX's proposed POP/coil delay,
including the comments thereon.
    \145\ See Markit Second Letter at 4-6; AK Financial Engineering
Consultants First Letter; Anonymous June 16 Letter.
    \146\ See Anonymous March 14 Letter at 1-2. But see Anonymous
March 18 Letter (group of anonymous traders noting that they ``have
empirically found IEX orders to lower transactions costs'' relative
to other exchanges).
    \147\ See, e.g., Virtu Letter; Healthy Markets Letter; Tabb
Letter; Aesthetic Integration Letter.
---------------------------------------------------------------------------

2. Trading System Overview
    IEX will operate a fully automated electronic order book, and will
not maintain or operate a physical trading floor. Only broker-dealer
members of IEX and entities that enter into market access arrangements
with members (collectively, ``Users'') will have access to the IEX
system.\148\ Users will be able to electronically submit market orders,
limit orders, and numerous other types of orders to the Exchange from
remote locations. IEX will allow firms to register as market makers
with affirmative and negative market making obligations, but will not
require market makers to be registered before IEX lists or trades a
security.\149\ Non-marketable orders submitted to IEX could be
displayed or non-displayed, depending on the instructions indicated by
the IEX member submitting the order.\150\ Displayed orders will be
displayed on an anonymous basis at a specified price. The IEX system
will continuously and automatically match orders pursuant to price/time
priority, provided that displayed orders and displayed portions of
orders will have priority over non-displayed orders and non-displayed
portions of orders at the same price without regard to time.\151\ For
any portion of an order that does not execute on IEX, IEX will direct
the unfilled portion to away markets for execution through IEX Services
LLC (``IEXS''), IEX's wholly owned single-purpose outbound router,
unless the terms of the order direct IEX not to route such order
away.\152\
---------------------------------------------------------------------------

    \148\ To obtain authorized access to the IEX System, each User
must enter into a User Agreement with IEX. See IEX Rule 11.130(a).
    \149\ See IEX Rules 11.150 through 11.154. IEX's rules relating
to market makers are similar to the rules of other national
securities exchanges. See, e.g., BATS Exchange Rules 11.5 through
11.8.
    \150\ See IEX Rule 11.220(a)(1).
    \151\ See IEX Rule 11.220(a)(1). The Commission notes that some
commenters referenced a feature of the IEX ATS called ``broker
priority.'' See Citadel First Letter at 8; Birch Bay Letter at 1-2;
Loh Letter. IEX has not included as part of its Form 1 application a
``broker priority'' feature and therefore that feature is not before
the Commission as it considers IEX's Form 1 application.
    \152\ See IEX Rule 11.230(b). See also Amendment Nos. 2 and 3.
---------------------------------------------------------------------------

    With respect to the price of executions that would occur on IEX,
the IEX system is designed to comply with the order protection
requirements of Rule 611 of Regulation NMS,\153\ commonly referred to
as the ``Order Protection Rule,'' by requiring that, for any execution
to occur on the IEX Exchange during regular trading hours, the price
must be equal to, or better than, the ``protected quotation,'' unless
an exception to Rule 611 applies.\154\ IEX also will protect the
national protected best bid and offer during its pre-market and post-
market sessions.\155\ In addition, the Commission believes that IEX's
rules address locked and crossed markets, as required by Rule 610(d) of
Regulation NMS,\156\ in that they reflect that IEX is designed not to
disseminate interest that locks or crosses a protected quote, require
Users to reasonably avoid displaying interest that locks or crosses any
protected quotation, and are reasonably designed to assure the
reconciliation of locked or crossed interest.\157\
---------------------------------------------------------------------------

    \153\ 17 CFR 242.611.
    \154\ See IEX Rule 11.230(a)(2). See also 17 CFR 242.611
(defining ``protected quotation'').
    \155\ See IEX Rule 11.230(a)(2)(B).
    \156\ 17 CFR 242.610(d).
    \157\ See IEX Rule 11.310.
---------------------------------------------------------------------------

3. Non-Displayed Order Types and Processing
    Limit orders that a User marks as non-displayed will not be
displayed to anyone and will be ranked in the IEX system at their
specified price, subject to the ``Midpoint Price Constraint,'' which is
a price sliding process that prevents non-displayed limit orders from
being ranked in the IEX system at a price that is more aggressive than
the midpoint of the NBBO.\158\ The Midpoint Price Constraint will
prevent a non-displayed limit order on IEX's order book from resting at
a price that locks or crosses the NBBO.
---------------------------------------------------------------------------

    \158\ See IEX Rule 11.190(h)(2). Specifically, a non-displayed
order on IEX with a limit price more aggressive than the midpoint of
the NBBO would be priced at the midpoint, and the price would
automatically be adjusted in response to changes in the NBBO to be
equal to the less aggressive of the order's limit price or the
midpoint of the NBBO. Id.
---------------------------------------------------------------------------

    Due to IEX's Midpoint Price Constraint functionality, IEX has
proposed a ``Book Recheck'' functionality that is activated in response
to a change to the NBBO, the IEX order book, or when IEX receives
inbound messages. When Book Recheck is activated, certain resting, non-
displayed orders become ``active'' \159\ and eligible to execute (as
the remover of liquidity) against the updated contra-side in IEX's
order book.\160\ As a result of the Book Recheck functionality, these
resting, non-displayed orders may

execute against contra-side orders on the order book that were
ineligible for execution, or did not satisfy the order's conditions
(i.e., minimum quantity), when they were originally booked. Through
such executions, Book Recheck also may help alleviate internal locks
that may occur on IEX's order book at the midpoint of the NBBO in
certain scenarios involving contra-side, non-displayed, minimum
quantity orders.
---------------------------------------------------------------------------

    \159\ The term ``active order'' is defined by IEX to mean an
order checking against the IEX order book for contra-side interest
against which to execute, and includes new incoming orders, orders
posting to the order book after having been routed to away trading
centers, and orders re-checking the order book pursuant to IEX Rule
11.230(a)(4)(D).
    \160\ See IEX Rule 11.230(a)(4)(D).
---------------------------------------------------------------------------

    In addition, IEX proposed several pegged order types--primary peg,
midpoint peg, and discretionary peg--all of which would be non-
displayed with prices that are automatically adjusted by the IEX system
in response to changes in the national best bid and offer (``NBBO'')
(subject to a limit price, if any).\161\ As noted below, updates to
these types of non-displayed pegged orders would be processed within
the IEX trading system without being subject to the proposed coil
delay.\162\ Some commenters criticized IEX's proposed non-displayed
order types, and in particular IEX's proposed handling of pegged
orders.\163\ Some of these commenters also specifically criticized
IEX's proposed discretionary peg order type.\164\
---------------------------------------------------------------------------

    \161\ See IEX Rule 11.190(a)-(b).
    \162\ See note 206, infra, discussing how the proposed coil
delay also does not apply to non-displayed limit orders subject to
the Midpoint Price Constraint.
    \163\ See, e.g., FIA First Letter at 4; FIA Second Letter at 2;
Citadel First Letter at 7-10; Citadel Fifth Letter at 2-5; NYSE
First Letter at 9-10; NYSE Third Letter at 4-7; Hudson River Trading
First Letter at 2-7; Jones C Letter at 2-3; Nasdaq Third Letter at
2. These commenters argue that IEX's proposed handling of resting
pegged orders--which, as detailed below, would occur without any
delay from IEX's POP/coil--would incentivize dark liquidity over
displayed liquidity on IEX. This argument is discussed in the
section below that addresses the POP/coil.
    \164\ See NYSE First Letter at 10; NYSE Fourth Letter at 3-4;
Citadel First Letter at 9-10; Citadel Fifth Letter at 5-7; Nasdaq
Third Letter at 2-3.
---------------------------------------------------------------------------

    IEX's proposed discretionary peg order type is a non-displayed,
pegged order that, upon entry, is priced by the IEX system to be equal
to the less aggressive of the midpoint of the NBBO or the order's limit
price, if any. Any unexecuted portion of the order is posted non-
displayed on the order book and ranked at the less aggressive of the
near-side primary quote (i.e., the NBB for buy orders, the NBO for sell
orders) or the order's limit price, if any. The IEX system
automatically adjusts the price and ranking of the order in response to
changes in the NBB (NBO) for buy (sell) orders so that it remains
pegged at the near-side primary quote, up (down) to the order's limit
price, if any. Once posted to the IEX order book, a discretionary peg
order can ``exercise discretion'' up to (for buy orders) or down to
(for sell orders) the midpoint of the NBBO in order to meet the limit
price of active orders on the order book, but only when the IEX system
determines the near-side, primary quote to be ``stable,'' i.e., not in
the process of moving down (up) in the case of buy (sell) orders. If
the IEX system deems the near-side primary quote to be ``unstable''
(sometimes referred to as a ``crumbling quote'') and therefore in the
process of moving down (up) in the case of buy (sell) orders, the
discretionary peg order will not be permitted to exercise any
discretion in order to meet the limit price of an active order, and
will be executable only at its pegged price, i.e., the near-side
primary quote.
    Quote ``stability'' or ``instability'' is an assessment that the
IEX system makes in what IEX describes as real-time, based on a pre-
determined, objective set of conditions that are detailed in IEX's
proposed rule.\165\ By not permitting resting discretionary peg orders
to execute at a price that is more aggressive than the primary quote
during periods of quote ``instability,'' the IEX system is intended to
attempt to protect resting discretionary peg orders from unfavorable
executions when the market is moving against them. Once the market has
moved and the IEX system deems the near-side primary quote to be
``stable,'' discretionary peg orders are re-ranked at the new near-side
primary quote, and permitted to exercise discretion up to (for buy
orders) or down to (for sell orders) the midpoint of the NBBO in order
to meet the limit price of active orders on the order book and thereby
potentially provide price improvement to such active orders.
---------------------------------------------------------------------------

    \165\ See, e.g., IEX Rules 11.190(b)(10) (concerning the
discretionary peg order type) and 11.190(g) (concerning quote
stability). This functionality is also referred to as IEX's
``crumbling quote'' indicator.
---------------------------------------------------------------------------

    Certain commenters that criticized IEX's discretionary peg order
assert that IEX's determination of quote stability and the resulting
implications for resting discretionary peg orders amounts to IEX
performing services that are typically performed by broker-dealers
exercising discretion over customer orders.\166\ Two of these
commenters claim that allowing IEX to offer its discretionary peg
functionality would be inconsistent with the Commission's prior
disapproval of a Nasdaq proposal to establish ``benchmark orders'' and
suggests that the Commission articulate when it is and is not
appropriate for an exchange to offer services that have traditionally
been performed by broker-dealers.\167\ The other commenter contends
that, due to what it refers to as ``the doctrine of regulatory
immunity,'' IEX would be shielded from liability for any errors it
makes in determining quote stability whereas broker-dealers can be
liable to their customers for order handling errors.\168\ This
commenter also asserts that IEX's discretionary peg order is overly
complex and ``would potentially open the door to a virtually infinite
range of exchange predictive order types.'' \169\
---------------------------------------------------------------------------

    \166\ See, e.g., NYSE First Letter at 10; NYSE Fourth Letter at
2-4; Citadel First Letter at 9-10; Citadel Fifth Letter at 5-7;
Nasdaq Third Letter at 2-3.
    \167\ See NYSE First Letter at 10 (citing Securities Exchange
Act Release No. 68629 (January 11, 2013), 78 FR 3928 (January 17,
2013) (SR-NASDAQ-2012-059) (``Benchmark Order Disapproval''); NYSE
Fourth Letter at 3-4; Nasdaq Third Letter at 2-3.
    \168\ See Citadel First Letter at 9-10.
    \169\ Citadel Fifth Letter at 6-7.
---------------------------------------------------------------------------

    With regard to its discretionary peg order, IEX states that any
action taken with respect to such an order is based on system logic and
entirely automated, like other pegged orders.\170\ IEX also represents
that its rules set forth ``the precise mathematical formula'' that IEX
uses to determine whether a ``crumbling quote'' situation exists.\171\
In addition, IEX notes that other exchanges offer non-displayed pegging
and discretionary order types and asserts that IEX's discretionary peg
order type does not raise any novel regulatory issues.\172\ Further,
IEX argues that the Commission's disapproval of Nasdaq's proposal to
offer ``benchmark orders'' was based on Nasdaq's failure to adequately
explain ``how it would apply the controls required by Rule 15c3-5 under
the Exchange Act to benchmark child orders'' and the fact that
``benchmark orders would not initially be directed to the Nasdaq
matching engine, raising potential competitive concerns in relation to
Nasdaq members.'' \173\ IEX claims that the Commission's disapproval of
Nasdaq's proposal ``clearly differentiates the proposed Nasdaq
functionality from IEX's Discretionary Peg order type'' and that IEX's
discretionary peg functionality ``is entirely different than the Nasdaq
proposal to offer benchmark order routing strategies.'' \174\
---------------------------------------------------------------------------

    \170\ See IEX First Response at 17.
    \171\ See IEX Second Response at 18.
    \172\ See IEX First Response at 17.
    \173\ See IEX Second Response at 13.
    \174\ See id.
---------------------------------------------------------------------------

    The Commission does not believe that its disapproval of the Nasdaq
benchmark order proposal is apposite here. In contrast to IEX's
proposed discretionary peg order, Nasdaq's proposed ``benchmark
orders'' were not actually exchange orders that would

have been executable by the Nasdaq matching engine upon entry. Rather,
the initial parent order would have been directed to a third-party
application that operated a suite of order execution algorithms (i.e.,
Volume Weighted Average Price, Time Weighted Average Price, or Percent
of Volume).\175\ The algorithm thereafter would have attempted to
replicate the selected benchmark by generating and routing child orders
to the Nasdaq matching engine or other trading centers.\176\ The
Commission determined that there were inadequate assurances in Nasdaq's
proposal as to how the child orders generated by the Nasdaq application
would be subject to appropriate risk controls under the Market Access
Rule, Rule 15c3-5 under the Act, and how Nasdaq's provision of such
services would not impose an undue burden on competition.\177\ In
contrast, IEX's discretionary peg order is an order type that is
received directly into the IEX book and executable by the matching
engine upon entry, and thus the same issues of whether child orders
generated by an exchange facility are subject to appropriate risk
controls under the Market Access Rule or would result in the exchange
imposing an undue burden on competition are not implicated by IEX's
discretionary peg order type.
---------------------------------------------------------------------------

    \175\ See Benchmark Order Disapproval, supra note 167, at 3928.
    \176\ See id.
    \177\ 17 CFR 240.15c3-5. See also Benchmark Order Disapproval,
supra note 167.
---------------------------------------------------------------------------

    The Commission also notes that existing exchanges offer both
discretion and pegging functionalities, including the combination of
both of those features in a single order type.\178\ Thus, an order type
that offers both discretion and pegging features is not novel.
Nevertheless, IEX's proposed discretionary peg order type is unique in
the way that the discretion functionality will be turned ``on'' or
``off'' depending on IEX's quote stability determination. With respect
to this feature, IEX Rule 11.190(g) delineates the specific conditions
under which IEX discretionary peg orders will or will not be eligible
for execution up (down) to the midpoint by setting forth the
mathematical formula that IEX uses to determine quote stability.\179\
IEX has thus encoded in its rule the totality of the discretionary
feature of its proposed discretionary peg order type, which the
Commission believes is a close variant on the discretion and pegging
functionality that presently exists on other exchanges. Moreover, as a
self-regulatory organization, IEX would be required to submit a
proposed rule change to the Commission pursuant to Section 19(b) of the
Act \180\ prior to implementing any change to the proposed
discretionary peg order type, including the quote stability formula.
Thus, contrary to the assertions of commenters critical of IEX's
proposed ``discretionary'' peg order type,\181\ the Commission does not
believe that the hardcoded conditionality of the IEX proposed
``discretionary'' peg order type provides IEX with actual discretion or
the ability to exercise individualized judgment when executing an
order. Rather, if IEX's fixed formula determines the quote to be
stable, the discretionary peg order can execute up to the midpoint; if
it does not deem the quote to be stable, then it will hold the order to
its pegged price. As such, IEX would not exercise discretion over the
routing and execution of a resting order.\182\ The Commission
reiterates that if, for any reason, IEX determines to alter or deviate
from its quote stability formula set forth in its rule as it applies to
determining quote stability when handling discretionary peg orders, IEX
would need to file a proposed rule change with the Commission pursuant
to Section 19(b) of the Act \183\ prior to implementing any such
change.
---------------------------------------------------------------------------

    \178\ See, e.g., Nasdaq Rule 4703(g).
    \179\ See IEX Rule 11.190(g). One commenter asserted that IEX's
crumbling quote determination is novel but also fully transparent,
as IEX's rules disclose the full equation for determining whether
there is a crumbling quote. See Healthy Markets Letter at 5.
    \180\ 15 U.S.C. 78s(b).
    \181\ See supra note 166.
    \182\ Thus, the Commission believes that one commenter's
concerns related to what it refers to as ``the doctrine of
regulatory immunity'' (see supra note 168) does not present any
novel issues. As discussed, the Commission does not believe that
IEX's quote stability determination provides IEX with actual
discretion or the ability to exercise individualized judgment when
executing an order. IEX will have liability similar to other
registered national securities exchanges with respect to its order
types, including its ``discretionary'' peg order type. Further, in
response to this commenter's additional concern that the
discretionary peg order ``would potentially open the door to a
virtually infinite range of exchange predictive order types'' (see
supra note 169), the Commission notes that new exchange proposed
order types are subject to the rule filing process of Section 19(b)
of the Act and Rule 19b-4 and the standards in Exchange Act Section
6(b), among other provisions. See also Form 19b-4, General
Instructions.
    \183\ 15 U.S.C. 78s(b).
---------------------------------------------------------------------------

4. Order Type Transparency and Complexity, and Odd Lots
    More generally, some commenters contend that IEX's order types are
not adequately described in IEX's rulebook, or suggest that they are
uniquely complex.\184\ In addition, one commenter argued that IEX
should be required to add additional detail to its rules, including
adding examples and a justification of the statutory basis for their
consistency with the Exchange Act.\185\ In response, IEX asserts that
it ``provides the same basic order types that are offered by all
markets, along with the standard modifiers that are sought by investors
and their brokers.'' \186\
---------------------------------------------------------------------------

    \184\ See, e.g., NYSE First Letter at 9 (noting that certain of
[IEX's] proposed order types, such as the discretionary pegged
order, are even more complex than those of other exchanges'' and
that the ``tally of potential different combinations of instructions
for limit orders alone is in the hundreds''). See also Citadel First
Letter at 8-9; Nasdaq First Letter at 1-2; Nasdaq Third Letter at 1-
2. Other commenters suggested the opposite though, and applauded IEX
for offering a limited number of order types, which they assert
simplifies trading and reduces risks for investors. See, e.g.,
Healthy Markets Letter at 4; Oppenheimer Letter at 2; Southeastern
Letter at 1; Navari Letter at 1; Capital Group Letter at 2; fi360
Letter at 3.
    \185\ See Nasdaq First Letter at 1-2.
    \186\ See IEX Second Response at 8.
---------------------------------------------------------------------------

    The Commission believes that IEX constructed its proposed order
type rules in a manner that is reasonably designed to present
sufficient and comprehensive information on the available options and
possible combinations. While IEX is responsible for ensuring that its
rules fully and accurately reflect its systems capabilities and
operations, the Commission believes that IEX has structured many of its
rules using a template-like approach that is designed to provide basic
information about fundamental combinations and system functionality. In
addition, the Commission does not believe that IEX's order type rules
are uniquely complex in light of existing exchange order type
offerings. Accordingly, the Commission believes that IEX's order type
rules are consistent with the Act and, in particular, the Section
6(b)(5) requirement that an exchange's rules be designed to promote
just and equitable principles of trade, remove impediments to and
perfect the mechanisms of a free and open market and a national market
system, and protect investors and the public interest.\187\
---------------------------------------------------------------------------

    \187\ See 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    In addition, one commenter noted that IEX proposes not to display
odd-lot orders and suggests that the Commission should consider whether
this would systematically disadvantage smaller orders that might be
submitted by retail investors.\188\ In response, IEX noted that current
exchanges vary in how they handle odd-lots, and stated that IEX's
approach ``is designed to ensure that the IEX proprietary market data
feed does not include information

that cannot be reported to the SIPs.'' \189\ IEX also contends that the
commenter's conflation of the treatment of odd-lots with the treatment
of retail investors is improper because ``these do not necessarily go
hand-in-hand.'' \190\ The Commission is not aware of any evidence that
the non-display of odd lot orders through proprietary market data feeds
would systematically disadvantage retail investors. The Commission does
not believe this approach would unfairly discriminate against any type
of investor, as any investor may use odd-lot orders.
---------------------------------------------------------------------------

    \188\ See Nasdaq First Letter at 4.
    \189\ See IEX Second Response at 13.
    \190\ See id. (noting that ``one study found that `20-25% of
trades initiated by HFTs are odd lots, and that trades initiated by
HFTs are more likely to be odd lots than trades initiated by non-
HFTs.' '')
---------------------------------------------------------------------------

5. The POP and the Coil
    IEX's Point-of-Presence (``POP'') and ``coil'' infrastructure
(collectively referred to as the ``POP/coil delay'') is how IEX Users
will connect to IEX, and is one of the most widely commented upon
features of IEX. As described in the Order Instituting Proceedings,
several commenters expressed concern, among other things, that IEX's
initially-published Form 1 lacked specific detail about how the POP/
coil structure would work, including what messages and activity would--
and would not--be subject to the delay.\191\ IEX responded by
supplementing the record through its first two response letters, and
then amending its Form 1 in Amendment Nos. 2, 3, and 4.\192\ IEX did
include additional detail in proposed new rules as part of Amendment
Nos. 2, 3, and 4 and the Commission published notice of those changes
and solicited comment on them.\193\ The POP/coil delay is material to
the operation of IEX and so materially affects access of Users to the
system that, as an exchange, IEX's rules must reflect with specificity
the purpose, operation, and effect of the POP and coil. The Commission
notes that IEX's two letters in response to comments provided the
necessary detailed information on the POP and coil, and IEX's Amendment
No. 2 contained, among other things, a proposed new rule to detail the
POP and coil. The Commission believes that IEX has addressed the
commenters' concern by adding a sufficiently detailed new rule to its
rulebook to provide a description of the POP/coil structure. The
Commission notes that commenters did not raise further concerns on this
issue after publication of Amendment No. 2.
---------------------------------------------------------------------------

    \191\ See, e.g., NYSE First Letter; Nasdaq First Letter; Citadel
First Letter at 10-11; Citadel Second Letter at 2-3; BATS First
Letter at 2; Weldon Letter. IEX noted that the POP/coil is described
in its Form ATS, which has been published on IEX's Web site since it
commenced operations as an ATS in October 2013, and has been
``widely chronicled'' across numerous publications. See IEX Second
Response at 17-18.
    \192\ See IEX First Response; IEX Second Response; Amendment
Nos. 2, 3 and 4. Under IEX Rule 11.510, the IEX routing logic would
be able to access the IEX book via an access delay that imposes 350
microseconds of latency, identical to the POP/coil delay experienced
by non-affiliated IEX users when they submit a non-routable order to
the IEX book.
    \193\ See Order Instituting Proceedings, supra note 13.
---------------------------------------------------------------------------

    Access to IEX by all Users will be obtained through a POP,\194\
which IEX represents is located in Secaucus, New Jersey.\195\ According
to IEX, after entering through the POP, a User's electronic message
sent to the IEX trading system must physically traverse the IEX
``coil,'' which is a box of compactly coiled optical fiber cable
equivalent to a prescribed physical distance of 61,625 meters
(approximately 38 miles).\196\ After exiting the coil, the User's
message travels an additional physical distance to the IEX trading
system, located in Weehawken, New Jersey.\197\ According to IEX, when
the length of coil is combined with the physical distance from the POP
to the IEX trading system in Weehawken, it equates to an equivalent 350
microseconds of latency.\198\ All incoming messages (e.g., orders to
buy or sell and any modification to a previously sent open order) from
any User would traverse the coil from the POP in order to initially
reach IEX.\199\ In addition, all outbound messages from IEX back to a
User (e.g., confirmations of an execution that occurred on IEX) would
pass through the same route in reverse.\200\ IEX's direct proprietary
market data feed, which is an optional data feed that IEX would make
available to subscribers, also would traverse the coil before being
accessible to Users at the POP.\201\
---------------------------------------------------------------------------

    \194\ See IEX Rule 11.510; see also Amendment Nos. 2 and 3.
    \195\ See IEX First Response at 3.
    \196\ See IEX First Response at 3. The Commission notes, by way
of analogy, that this is equivalent to a trading center locating its
matching engine a certain distance (equivalent to the distance
traversed during the POP/coil delay) from its nearest user or,
alternatively, not permitting any user to be located closer than
that distance to the matching engine.
    \197\ See Exhibit E to IEX's Form 1 submission, at 12. See also
IEX First Response at 3.
    \198\ See IEX Rule 11.510 (``Communications with the System from
the POP are subject to an equivalent 350 microseconds of latency
between the network access point of the POP and the System at the
primary data center (due to traversing the physical distance
provided by coiled optical fiber and geographic distribution)'');
see also IEX First Response at 3. A microsecond is one millionth of
a second.
    \199\ See id.
    \200\ See id. As a result, a non-routable immediate-or-cancel
(``IOC'') order, which is a type of order that IEX would permit
Users to send to the IEX system, would traverse the proposed POP/
coil (and its attendant 350 microsecond delay) before arriving at
the IEX system and potentially executing against a displayed
quotation on IEX. Likewise, the response from the IEX system to the
User indicating the action taken by the IEX system with respect to
such IOC order also would traverse the POP/coil and experience a 350
microsecond delay. See id. The POP/coil delay's consistency with the
Act is discussed further below in this section. See also Final
Interpretation, supra note 13.
    \201\ See IEX Rule 11.510; see also IEX First Response at 3.
---------------------------------------------------------------------------

    Further, under IEX's Form 1 as amended, there is one type of
inbound message and one type of outbound message that would not
traverse the POP/coil, specifically:

    1. Inbound proprietary market data feeds from other trading
centers as well as the SIP feed to the IEX system would not traverse
the POP/coil; and
    2. Outbound transaction and quote messages sent from IEX to the
applicable securities information processor (``SIP'') would not pass
through the POP/coil, but instead would be sent directly from the
IEX system to the SIP processor for inclusion in the public
consolidated market data feeds on the same basis as any other
exchange.\202\
---------------------------------------------------------------------------

    \202\ See IEX Rule 11.510(c)(2); see also IEX First Response at
4. As explained in the Order Instituting Proceedings, under IEX's
Form 1 as it existed prior to Amendment No. 2, orders routed
outbound from IEX through IEXS to away trading centers for execution
(as well as reports back to IEX from those away trading centers)
also would not have traversed the POP/coil (though execution and
transaction reports sent from IEX back to Users would traverse the
POP/coil and thus would be delayed). This is because IEX would have
initially directed the entirety of all orders, including routable
orders, to the IEX matching engine and then routed away any excess
shares via IEXS directly (and without having to first pass through
the POP/coil delay as it routes shares outbound). In Amendment Nos.
2, 3, and 4, IEX proposed to re-design the way the IEX system would
handle routable orders, as described below, in order to place its
outbound routing function on parity with competing broker-dealers.

    In addition, updates to resting pegged orders on IEX would be
processed within the IEX trading system and would not require that
separate messages be transmitted from outside the trading system, which
would otherwise traverse the POP/coil, for each update.\203\ The effect
of this, in connection with the fact that orders sent inbound to IEX
must traverse the POP/coil while IEX's matching engine will take in
direct market data feeds from other trading centers without any POP/
coil delay,\204\ is that IEX intentionally employs a methodology using
physical path latency to affect how long it takes for a packet of
information to travel from the User to its matching engine but

does not delay the IEX system's ability to detect and react to price
changes at other trading centers.\205\
---------------------------------------------------------------------------

    \203\ See IEX Rule 11.510(c)(1) (noting that order book
processing occurs within the IEX system and does not traverse the
POP); see also IEX First Response at 3-4.
    \204\ See IEX Rule 11.510; see also IEX First Response at 4.
    \205\ See IEX Rule 11.410 (detailing the direct feeds that IEX
uses as the primary source of market data that it uses to inform its
matching engine's view of the consolidated best prices in the
marketplace).
---------------------------------------------------------------------------

    Accordingly, IEX imposes an intentional delay on Users' ability to
access IEX's matching engine but the delay does not apply to IEX's
adjustment of resting pegged order prices on its book.\206\ This
provides IEX's matching engine with a time advantage \207\ to allow it
to more effectively manage the price update process for non-displayed
pegged orders resting on its book when the market moves. However, as a
by-product of delaying access to non-displayed pegged orders on its
book, IEX necessarily delays access to all other interest on its book,
including its displayed quotation.
---------------------------------------------------------------------------

    \206\ In addition, the POP/coil delay does not apply to the
operation of IEX's Midpoint Price Constraint, discussed above, which
affects resting non-displayed limit orders with limit prices that
are more aggressive than the midpoint of the NBBO. See IEX Rule
11.190(h)(2). References herein to ``pegged'' orders for purposes of
discussing IEX's adjustment of resting order prices with no access
delay includes non-displayed limit orders subject to the operation
of the Midpoint Price Constraint, which are effectively pegged by
IEX to the NBBO midpoint, subject to the order's limit price.
    \207\ See IEX Second Response at 2.
---------------------------------------------------------------------------

    In other words, the purpose of IEX's coil is to provide an
intentional buffer that slows down incoming orders to allow IEX's
matching engine to update the prices of resting ``pegged'' orders when
away prices change to protect resting pegged orders from the
possibility of adverse selection when the market moves to a new
midpoint price.\208\ The allowable price of a ``pegged'' order will
change whenever the best displayed price across all exchanges changes,
but it takes time for IEX's system to receive other exchange data feeds
and recalculate the price of each pegged order resting on its book. For
various reasons, IEX's systems may not recalculate prices as fast as
some of the fastest low-latency traders in the market are able to send
orders accessing pegged orders resting on IEX at potentially ``stale''
prices. The Commission believes that the application of the POP/coil
delay delays the ability of low-latency market participants to take a
``stale''-priced resting pegged order on IEX (i.e., before IEX finishes
its process of re-pricing the pegged order in response to changes in
the NBBO) based on those market participants' ability to more
effectively digest direct market data feeds and swiftly submit an order
before IEX finishes its process of updating the prices of pegged orders
resting on its book. According to IEX, this setup is designed to
``ensure that no market participants can take action on IEX in reaction
to changes in market prices before IEX is aware of the same price
changes on behalf of all IEX members.'' \209\
---------------------------------------------------------------------------

    \208\ However, as a byproduct of delaying access to non-
displayed pegged orders on its book, IEX necessarily delays access
to all other interest on its book, including its displayed
quotation.
    \209\ See IEX First Response at 4.
---------------------------------------------------------------------------

    Aside from whether the POP/coil delay affects IEX's ability to have
an ``automated'' and thus ``protected'' quotation under Regulation NMS,
discussed below,\210\ the Commission has considered whether it is