SEC Approves IEX Proposal to Launch National Exchange, Issues Interpretation on Automated Securities Prices

“Today’s actions promote competition and innovation, which our equity markets depend on to continue to deliver robust, efficient service to both retail and institutional investors,” said SEC Chair Mary Jo White.  “A critical role of the Commission’s regulatory framework is to facilitate the ability of market participants to craft appropriate market-based initiatives, consistent with our mission to protect investors, maintain market integrity, and promote capital formation.”

IEX must satisfy certain standard conditions specified in the Commission’s order before it is able to begin the process of transitioning its operation to a national securities exchange, including participating in a variety of national market system plans and joining the Intermarket Surveillance Group.

The Commission’s interpretation applies to the Order Protection Rule under Regulation NMS, which protects the best priced automated quotations of certain trading centers by generally obligating other trading centers to honor those protected quotations and not execute trades at inferior prices.  Under Regulation NMS, an automated quotation is one that, among other things, can be executed immediately and automatically against an incoming immediate-or-cancel order.

The Commission’s updated interpretation determined that a small delay will not prevent investors from accessing stock prices in a fair and efficient manner consistent with the goals of the Order Protection Rule.  In doing so, the Commission interprets the term “immediate” under Rule 600(b)(3) of Regulation NMS as precluding any coding of automated systems or other type of intentional action that would delay access to a security price beyond a de minimis amount of time.

Additionally, Commission staff issued guidance concerning the duration of the de minimisintentional access delays. The staff guidance states that delays of less than one millisecond are at a de minimis level.

Within two years of the Commission’s interpretation, staff will conduct a study regarding the effects of any intentional access delays on market quality, including asset pricing and report back to the Commission with the results of any recommendations.  Based on the results of that study, or earlier as it determines, the Commission will reassess whether further action is appropriate.