By John Filar Atwood
In a letter to the SEC, Nasdaq suggested that the Commission’s proposed interpretation that would allow Investors’ Exchange LLC (IEX) to operate with a delay on quotation response times would likely be subject to judicial scrutiny. Nasdaq urged the SEC to abandon its plan to interpret the term “immediate” to allow for IEX’s 350 microsecond delay on response times, saying that the Commission lacks the authority to treat the delayed quotations as protected.
As previously reported in Securities Regulation Daily, the SEC is seeking comment on a proposed interpretation of the definition of “automated quotation” under Rule 600 of Regulation NMS in connection with IEX’s application for registration as a national securities exchange. The SEC’s proposal would interpret “immediate” when determining whether a trading center maintains an “automated quotation” for purposes of Rule 611 of Regulation NMS to include response time delays at trading centers that are de minimis, whether intentional or not.
IEX delay. IEX, which currently operates as an alternative trading system, provides access to users through a “point of presence” (POP) located in Secaucus, New Jersey. After entering through the POP, a user’s electronic message sent to the IEX trading system traverses the IEX coiled optical fiber cable and an additional physical distance to the IEX system in Weehawken, New Jersey. According to IEX, the Pop and coil structure provides IEX users sending non-routable orders to IEX with a one-way delay of 350 microseconds.
Nasdaq does not believe that IEX’s system and its intentional delay on quotation times is consistent with Regulation NMS and the SEC’s prior interpretations of the regulation. In Nasdaq’s opinion, the proposed interpretation of “immediate” would conflict with the plain language of Regulation NMS, with the requirements of decisions under the Administrative Procedure Act, and with the Commission’s duty to consider the effect of its actions on competition, and capital formation.
Rewriting Reg NMS. According to Nasdaq, the proposed interpretation of “immediate” would rewrite Regulation NMS, not interpret it. The interpretation would depart from the unambiguous meaning of that term by condoning intentional response time delays of up to one millisecond in duration, Nasdaq said.
Nasdaq pointed out that the SEC recognized when it first adopted Regulation NMS that the requirement of immediacy imposed by Rule 600(b)(3) is incompatible with intentional delays in response time. In promulgating Regulation NMS, Nasdaq noted, the Commission rejected commenters’ requests to specify a specific time standard that may become obsolete as systems improve over time.
Instead, the SEC confirmed that the definition of “automated quotation” does not include a specific time standard for responding to an incoming order, emphasizing that a trading center’s systems should provide the fastest response possible without any programmed delay. As a result, an intentional response time delay like the 350-microsecond delay imposed by IEX’s POP/coil system is inconsistent with the plain meaning of “immediate” and with the Commission’s own understanding that the term requires response times that are as fast as technologically feasible, Nasdaq argued.
Judicial scrutiny. In its letter, Nasdaq warned that although courts often afford deference to an agency’s interpretation of its own regulations, that deference is not boundless and would not shield the proposed interpretation from judicial scrutiny. Nasdaq cited judicial decisions holding that deference to an agency’s interpretation of a regulation is not warranted unless the language of the regulation is ambiguous. When the text of a regulation is unambiguous, Nasdaq continued, a conflicting agency interpretation will be plainly erroneous or inconsistent with the regulation.
Nasdaq argued that the term “immediate” in Rule 600(b)(3) unambiguously forecloses an intentional, planned delay, and a court would afford no deference to the Commission’s construction of Rule 600(b)(3) as permitting intentional delays of less than one millisecond. Deference to the proposed interpretation would be particularly inappropriate, Nasdaq concluded, because it conflicts not only with the meaning of “immediate” but also with the SEC’s prior interpretation of Rule 600(b)(3) issued contemporaneously with Regulation NMS.