SEC Requests Comments on Proposed De Minimis Interpretation of Definition of "Automated Quotation" under Reg. NMS

The SEC requested comments on a proposed interpretation of the definition of "automated quotation" under Rule 600(b)(3) of Regulation National Market System ("Reg. NMS"). The SEC indicated that the proposal is a response to the "extensive" comments that it received concerning the application by Investors' Exchange LLC ("IEX") for registration as a national securities exchange under Section 6 of the Securities Exchange Act of 1934, as amended.

According to the SEC, several comments on IEX's application argued that a unique feature of IEX's design – specifically, its Point-of-Presence ("POP") and "coil" access delay – would "preclude IEX's best-priced quotation from being a 'protected quotation' under Regulation NMS" if the SEC granted IEX's exchange registration, since such quotations would not be "automated quotations." In general, Rule 611 under Regulation NMS (the "Order Protection Rule") protects the best automated quotations of national securities exchanges by obligating other trading centers to honor those quotes by not executing trades at inferior prices. In order to qualify as an "automated quotation" for purposes of the Order Protection Rule, a quotation, inter alia, has to interact with incoming orders "immediately."

The SEC responded to the comments it received on IEX's application by proposing that when determining whether a trading center maintains an "automated quotation" for purposes of the Order Protection Rule, the term "immediate" should be interpreted to include response time delays at trading centers that are de minimis "whether intentional or not." According to the SEC, its stated goal in proposing this interpretation was to "request[] comment on an updated interpretation to permit more flexibility for trading centers with respect to automated quotations to allow them to develop innovative business models that do not undermine the goals of Rule 611 of Regulation NMS."

The SEC solicited feedback on the following questions:

• Would delays of less than a millisecond in quotation response times impair a market participant's ability to access a quote or its efficient compliance with Rule 611?

• In the current market, should the SEC interpret "immediate" to include a de minimis delay of less than one millisecond? Should the SEC consider other lengths of time? If so, what should they be?

• Should the SEC be concerned about market manipulation? If so, then what, specifically, warrants the SEC's focus?

• Should the SEC consider an alternative interpretation? If so, what should it be?

Comments on the SEC's proposal must be submitted within 21 days following the proposal's publication in the Federal Register.