Self-Regulatory Organizations; BATS Exchange, Inc.; Notice of Filing of a Proposed Rule Change To Create a Directed Order Program, 76059-76062 [2010-30577]
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Federal Register / Vol. 75, No. 234 / Tuesday, December 7, 2010 / Notices
‘‘X’’ to indicate that the offer side of a
quote is not firm while the bid side is
firm, and ‘‘Y’’ to indicate that the bid
side of a quote is not firm while the
offer side is firm. The use of ‘‘X’’ and ‘‘Y’’
in these circumstances is similar to the
use of ‘‘E’’ and ‘‘F’’ by the CQS network
in respect of stock quotations (the letter
‘‘F’’ is already used by OPRA and thus
is unavailable for this purpose), so the
concept should be familiar to most
OPRA subscribers.
Consistent with the addition of these
two new codes to Sections 4.04 and
4.15, Appendix D of the OPRA Spec,
which describes how options Best Bids
and Offers (BBOs) are determined, is
proposed to be revised to provide that
when one side of a quote is indicated as
not firm, that side will not be
considered for the purpose of
determining what is the BBO in the
subject option, but the firm side of the
quote will be so considered.
The text of the proposed amendment
to the OPRA Plan is available at OPRA,
the Commission’s Public Reference
Room, https://opradata.com, and on the
Commission’s Web site at https://
www.sec.gov.
emcdonald on DSK2BSOYB1PROD with NOTICES
II. Implementation of the OPRA Plan
Amendment
OPRA designated this amendment as
qualified to be put into effect upon
filing with the Commission in
accordance with clause (iii) of
paragraph (b)(3) of Rule 608 under the
Act 4 since the proposed changes to the
Data Recipient Interface Specification
and Participant Interface Specification
are solely technical or ministerial in
nature. OPRA intends to implement the
revised OPRA Spec in late January or
early February, 2011, when the
necessary systems work is expected to
be completed by OPRA’s Processor. As
required by OPRA’s Vendor and
Subscriber Agreements, OPRA will
provide its Vendors and Subscribers
with not less than sixty days notice of
this change.
The Commission may summarily
abrogate the amendment within sixty
days of its filing and require refiling and
approval of the amendment by
Commission order pursuant to Rule
608(b)(2) under the Act 5 if it appears to
the Commission that such action is
necessary or appropriate in the public
interest, for the protection of investors,
or the maintenance of fair and orderly
markets, to remove impediments to, and
perfect the mechanisms of, a national
4 17
5 17
CFR 242.608(b)(3)(iii).
CFR 242.608(b)(2).
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market system, or otherwise in
furtherance of the purposes of the Act.
III. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed OPRA
Plan amendment is consistent with the
Act. Comments may be submitted by
any of the following methods:
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.6
Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010–30575 Filed 12–6–10; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an e-mail to rulecomments@sec.gov. Please include File
No. SR–OPRA–2010–04 on the subject
line.
[Release No. 34–63403; File No. SR–BATS–
2010–034]
Self-Regulatory Organizations; BATS
Exchange, Inc.; Notice of Filing of a
Proposed Rule Change To Create a
Directed Order Program
December 1, 2010.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (the
‘‘Act’’),1 and Rule 19b–4 thereunder,2
• Send paper comments in triplicate
notice is hereby given that on November
to Elizabeth M. Murphy, Secretary,
19, 2010, BATS Exchange, Inc. (the
Securities and Exchange Commission,
‘‘Exchange’’ or ‘‘BATS’’) filed with the
100 F Street, NE., Washington, DC
Securities and Exchange Commission
20549–1090.
(‘‘Commission’’) the proposed rule
All submissions should refer to File
change as described in Items I and II
Number SR–OPRA–2010–04. This file
below, which Items have been prepared
number should be included on the
subject line if e-mail is used. To help the by the Exchange. The Commission is
publishing this notice to solicit
Commission process and review your
comments on the proposed rule change
comments more efficiently, please use
only one method. The Commission will from interested persons.
post all comments on the Commission’s I. Self-Regulatory Organization’s
Internet Web site (https://www.sec.gov/
Statement of the Terms of Substance of
rules/sro.shtml). Copies of the
the Proposed Rule Change
submission, all subsequent
The Exchange is filing with the
amendments, all written statements
Commission a proposal for the BATS
with respect to the proposed plan
Exchange Options Market (‘‘BATS
amendment that are filed with the
Options’’) to create new BATS Rule
Commission, and all written
21.1(d)(13), entitled ‘‘Market Maker
communications relating to the
Price Improving Orders,’’ create new
proposed plan amendment between the
BATS Rule 21.1(d)(14), entitled
Commission and any person, other than
‘‘Directed Orders,’’ and amend existing
those that may be withheld from the
BATS Rule 21.1(d)(2), entitled ‘‘Price
public in accordance with the
Improving Orders.’’
provisions of 5 U.S.C. 552, will be
The text of the proposed rule change
available for Web site viewing and
is available at the Exchange’s Web site
printing in the Commission’s Public
at https://www.batstrading.com, at the
Reference Room, 100 F Street, NE.,
principal office of the Exchange, and at
Washington, DC 20549, on official
the Commission’s Public Reference
business days between the hours of 10
Room.
a.m. and 3 p.m. Copies of such filing
also will be available for inspection and II. Self-Regulatory Organization’s
copying at the principal office of OPRA. Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
All comments received will be posted
Change
without change; the Commission does
not edit personal identifying
In its filing with the Commission, the
information from submissions. You
Exchange included statements
should submit only information that
concerning the purpose of and basis for
you wish to make available publicly. All the proposed rule change and discussed
submissions should refer to File
any comments it received on the
Number SR–OPRA–2010–04 and should proposed rule change. The text of these
be submitted on or before December 28, statements may be examined at the
2010.
Paper Comments
1 15
6 17
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U.S.C. 78s(b)(1).
CFR 240.19b–4.
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Federal Register / Vol. 75, No. 234 / Tuesday, December 7, 2010 / Notices
places specified in Item IV below. The
Exchange has prepared summaries, set
forth in Sections A, B, and C below, of
the most significant parts of such
statements.
emcdonald on DSK2BSOYB1PROD with NOTICES
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
The Exchange is proposing certain
modifications and additions to its rules
related to the trading of options. First,
the Exchange is proposing the
establishment of new Rule 21.1(d)(13),
entitled Market Maker Price Improving
Orders. Second, the Exchange is
proposing the establishment of new
Rule 21.1(d)(14), entitled Directed
Orders. Third, the Exchange is
proposing to modify Rule 21.1(d)(6),
entitled Price Improving Orders.
The Exchange is proposing the rule
changes described below to establish a
directed order program through which
Options Members can direct an order to
a particular BATS Options Market
Maker for potential execution at a price
improved over the existing National
Best Bid (‘‘NBB’’) or National Best Offer
(‘‘NBO’’). As part of this program, BATS
is proposing to define two new order
types. The first would be new Rule
21.1(d)(13), entitled Market Maker Price
Improving Orders, which are orders
from a BATS Options Market Maker to
buy or sell an option that has a
displayed price and size and a nondisplayed price at which the BATS
Options Market Maker is willing to
trade with a Directed Order. As
proposed, a Market Maker Price
Improving Order would be ranked on
the BATS Options Book at its displayed
price. The non-displayed price of the
Market Maker Price Improving Order
would not be entered into the BATS
Options Book, but would be, along with
its displayed size, converted to a buy or
sell order at its non-displayed price in
response to a Directed Order directed to
the BATS Options Market Maker.
The second new order type proposed
would be new Rule 21.1(d)(14), entitled
Directed Orders, which are orders from
a BATS Options Member that are
directed for execution to a particular
BATS Options Market Maker. For a
BATS Options Market Maker to
participate in an execution against a
Directed Order, (1) the Directed Order
must be from a BATS Options Member
that is on a list of eligible Options
Members provided to the Exchange by
the BATS Options Market Maker, in a
manner prescribed by the Exchange, (2)
the BATS Options Market Maker must
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be publicly quoting on BATS at the NBB
(for sell Directed Orders) or NBO (for
buy Directed Orders) with a Market
Maker Price Improving Order that
contains a non-displayed amount of
price improvement over the NBB or
NBO at the time the Directed Order
arrives to the Exchange, and (3) the
Directed Order must be marketable
against the non-displayed price of the
Market Maker Price Improving Order.
If the above conditions are met, and
if there are no other non-displayed
orders at prices equal to or better than
the non-displayed price of the Market
Maker Price Improving Order, the
Directed Order will trade with the
Market Maker Price Improving Order up
to the full size of the Market Maker
Price Improving Order. Any remaining
contracts from the Directed Order will
be handled, consistent with the
instructions on the Directed Order, in
accordance with the order display and
book processing requirements of Rule
21.8 and, if applicable, processed in
accordance with the order routing
requirements of Rule 21.9.
If there are non-displayed orders on
the BATS Options Book at prices equal
to or better than the non-displayed price
of the Market Maker Price Improving
Order, those other non-displayed orders
will in all cases have priority over the
non-displayed price of the Market
Maker Price Improving Order. In such
circumstances, the Market Maker Price
Improving Order may still execute at its
non-displayed price against the Directed
Order consistent with the price/time
priority provisions of Rule 21.8 to the
extent of any remaining contracts of the
Directed Order. Any contracts
remaining of the Directed Order will
continue to be processed in a manner
consistent with the order display and
book processing provisions of Rule 21.8,
and if applicable, the order routing
provisions of Rule 21.9.
As proposed, an Options Market
Maker Price Improving Order would be
required to have a non-displayed price
better than the displayed limit price that
could be entered in an increment as
small as (1) one cent or may be
designated at the midpoint of the
National Best Bid and Offer (‘‘NBBO’’).
In addition, BATS is proposing to
amend existing Rule 21.1(6), entitled
Price Improving Orders, to provide all
BATS Options Members with the ability
to enter Price Improving Orders in an
increment designated at the midpoint of
the NBBO. Price Improving Orders will
in all cases include a displayed price
and a better, non-displayed price. Price
Improving Orders with a non-displayed
price designated at the midpoint of the
NBBO will receive a new timestamp
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each time the non-displayed midpoint
price automatically adjusts in response
to changes in the NBBO and will be
displayed at the NBBO at the time of
entry. The displayed price will not
subsequently adjust to changes in the
NBBO. Price Improving Orders with a
non-midpoint price will be displayed at
the minimum price variation in that
security and will be rounded up for sell
orders and rounded down for buy
orders.
Market Maker Price Improving Orders
with a non-displayed price designated
at the midpoint of the NBBO will not
receive a new timestamp in response to
changes in the NBBO. Unlike Price
Improving Orders, the non-displayed
price of a Market Maker Price Improving
Order is not entered into the BATS
Options Book, and is only eligible to
trade with a Directed Order to the extent
that certain conditions precedent are
satisfied, including (1) that the
displayed price of the Market Maker
Price Improving Order is equal to the
NBB (for sell directed orders) or the
NBO (for buy directed orders) at the
time the Directed Order arrives to the
Exchange, and (2) that there are no other
orders on the BATS Options Book at
prices equal to or better than the nondisplayed prices of the Market Maker
Price Improving Order.3
The Exchange is also proposing to
delete certain language from its existing
Price Improving Order rule text. In
particular, as currently written, Rule
21.1(d)(6) states that ‘‘Price Improving
Orders that are available for display
* * *.’’ 4 The Exchange is proposing to
delete the clause ‘‘that are available to
display,’’ which although intended to
simply distinguish an order executed
upon arrival to the Exchange from an
order posting to the BATS Options
Book, has the potential to cause
confusion to the extent it may suggest
that Price Improving Orders can be
posted on the BATS Options Book
without a displayed price. That is not
the case today, would not be the case
under the proposed changes to the rule,
and BATS is proposing to delete this
clause to eliminate any confusion on
this point.
The elements of the Exchange’s
proposal to create a directed order
program are specifically designed to
enhance opportunities available in the
market for Options Members to obtain
price improvement for customer orders
3 As described in proposed Rule 11.9(c)(13)(B), all
other interest on the BATS Book at prices equal to
or better than the non-displayed price of the Market
Maker Price Improving Order has priority over the
Market Maker Price Improving Order and, hence,
will execute first against the Directed Order.
4 Emphasis added.
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Federal Register / Vol. 75, No. 234 / Tuesday, December 7, 2010 / Notices
in the context of BATS’ price/time
priority, continuous auction market. By
requiring BATS Options Market Makers
to be quoting at the NBB or NBO to
participate in an execution against a
Directed Order directed to it, BATS’
proposal incentivizes market makers to
competitively quote and thereby
furthers the public price discovery
process. By further requiring BATS
Options Market Makers to include a
non-displayed price better than the
displayed limit price at an increment as
small as (1) one cent or the midpoint of
the NBBO, the proposal increases the
opportunities for customer orders to
receive price improvement over the
NBBO. Moreover, by permitting all
Options Members to enter orders in the
same increments as Market Maker Price
Improving Orders, including as
proposed at the midpoint of the NBBO,
and according those orders in all cases
priority at their non-displayed prices
over Market Maker Price Improving
Orders, the proposal avoids creating
participation guarantees in place at
other markets and instead promotes
market-wide competition for executions
at prices between the NBBO.
Pursuant to the proposed directed
order program, a BATS Options Member
who notifies a BATS Options Market
Maker of its intention to submit a
Directed Order to BATS Options so that
the BATS Options Market Maker could
change its quotation to match the NBB
or NBO immediately prior to
submission of the Directed Order would
be engaging in conduct inconsistent
with just and equitable principles of
trade in violation of Rule 3.1 and Rule
18.4(f). In addition, a BATS Options
Market Maker who becomes aware of a
customer order from an affiliated
broker-dealer or desk within the same
broker-dealer and acts on such
information to change its quotations to
match the NBB or NBO immediately
prior to submission of a Directed Order
would be in violation of the Exchange’s
Rule 22.10, ‘‘Limitations on Dealings’’.
BATS will proactively conduct
surveillance for such conduct and
enforce against such violations.
emcdonald on DSK2BSOYB1PROD with NOTICES
2. Statutory Basis
Approval of the rule changes
proposed in this submission is
consistent with the requirements of the
Act and the rules and regulations
thereunder that are applicable to a
national securities exchange, and, in
particular, with the requirements of
Section 6(b) of the Act.5 In particular,
the proposed change is consistent with
5 15
U.S.C. 78f(b).
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Section 6(b)(5) of the Act,6 because it
would promote just and equitable
principles of trade, remove
impediments to, and perfect the
mechanism of, a free and open market
and a national market system, and, in
general, protect investors and the public
interest.
The Exchange believes that the
proposed rule meets these requirements
in that it promotes competition for
customer orders and furthers the public
price discovery process by both
incentivizing BATS Options Market
Makers to publicly display aggressive
quotes at the NBBO, as well as
incentivizing BATS Options Market
Makers and all other BATS Options
Members to post non-displayed prices
better than the NBBO. BATS notes that
the Commission has previously found
consistent with the Act non-displayed
order types designed to provide price
improvement at prices smaller than the
minimum price variation in listed
options.7 While those order types have
to date been limited to permitting
increments as small as (1) one cent,
BATS notes that the Commission has
previously found midpoint order types
consistent with the Act in the equity
markets,8 and as the options market
structure has converged with the equity
market structure in recent years through
expansion of the penny pilot as well as
the implementation of Regulation NMSlike protections, BATS believes
customers in the options markets would
similarly benefit from the potential
price improvement afforded by
midpoint executions.
Moreover, the Commission has
previously approved rules that provide
specialist or market maker guarantees
up to a certain percentage so long as the
specialist or market maker is quoting at
the NBBO and such guarantees do not
rise to a level that could have a material
adverse impact on quote competition
with a particular exchange.9 While
BATS’ directed order program requires
BATS Options Market Makers to be
quoting at the NBB or NBO to be eligible
to trade with an incoming Directed
Order directed to it, in contrast to prior
rules approved by the Commission,
BATS’ proposed directed order program
provides no participation guarantees
6 15
U.S.C. 78f(b)(5).
e.g., BATS Options Rule 21.1(d)(6) ‘‘Price
Improving Orders’’; Nasdaq Options Market Rule
Chapter VI, Section 1(e)(6) ‘‘Price Improving
Orders’’.
8 See, e.g., BATS Rule 11.9(c)(9) ‘‘Mid-Point Peg
Order’’.
9 See, e.g., Securities Exchange Act Release No.
51759 (May 27, 2005), 70 FR 32860 (June 6, 2005)
(SR–Phlx–2004–91) (order approving the
establishment of a directed order process with
certain specialist participation guarantees).
7 See,
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76061
that could negatively impact quote
competition. By not providing such
guarantees, BATS’s proposed directed
order program provides incentives to
BATS Options Market Makers as well as
all other BATS Options Members to
aggressively quote, both at the NBBO
and at non-displayed prices better than
the NBBO.
In addition, the Commission has
previously approved rules that permit a
specialist or market maker to determine
the firms from which it will accept
directed or preferenced orders. The
Commission has explicitly approved a
process similar to that proposed by
BATS in the equity markets in which
only those members who have been
permissioned by a market maker are
eligible to submit directed orders to the
market maker.10 And, the Commission
has implicitly approved such processes
in the options markets by allowing
certain price improvement auctions to
exist pursuant to pilot programs, which
auctions provide the ability of an
options member to submit a customer
order along with a contra-side principal
order from the options member into a
brief price improvement auction in
which all members have the ability to
compete for the execution.11 BATS’
proposed rule changes are similar in
nature to these price improvement
auctions, except that under BATS’
proposal, competition for the execution
with a Directed Order occurs in the
context of BATS’ continuous, price/time
priority auction, and as previously
mentioned, BATS Options Market
Makers would have no participation
guarantees.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
The Exchange does not believe that
the proposed rule change imposes any
burden on competition.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants or Others
The Exchange has neither solicited
nor received written comments on the
proposed rule change.
10 See Securities Exchange Act Release No. 52827
(November 23, 2005), 70 FR 72193 (December 1,
2005) (SR–PCX–2005–56) (order approving certain
modifications to the PCX Equities, Inc.’s Directed
Order Process on the Archipelago Exchange).
11 See, e.g., BOX Rule Section 18 ‘‘The Price
Improvement Period’’ and ISE Rule 723 ‘‘Price
Improvement Mechanism for Crossing
Transactions’’ (both of which providing a
mechanism for options members that want to
internalize customer orders the ability to do so on
the exchanges subject to a requirement that such
orders first be exposed to all other options members
through a brief price improvement auction).
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Federal Register / Vol. 75, No. 234 / Tuesday, December 7, 2010 / Notices
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of
publication of this notice in the Federal
Register or within such longer period
up to 90 days (i) as the Commission may
designate if it finds such longer period
to be appropriate and publishes its
reasons for so finding or (ii) as to which
the self-regulatory organization
consents, the Commission will:
(A) by order approve or disapprove
such proposed rule change, or
(B) institute proceedings to determine
whether the proposed rule change
should be disapproved.
will also be available for inspection and
copying at the principal office of the
Exchange. All comments received will
be posted without change; the
Commission does not edit personal
identifying information from
submissions. You should submit only
information that you wish to make
available publicly. All submissions
should refer to File No. SR–BATS–
2010–034 and should be submitted on
or before December 28, 2010.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.12
Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010–30577 Filed 12–6–10; 8:45 am]
Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an e-mail to rulecomments@sec.gov. Please include File
No. SR–BATS–2010–034 on the subject
line.
emcdonald on DSK2BSOYB1PROD with NOTICES
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views and
arguments concerning the foregoing,
including whether the proposal is
consistent with the Act. Comments may
be submitted by any of the following
methods:
Self-Regulatory Organizations;
NASDAQ OMX PHLX LLC; Notice of
Filing and Immediate Effectiveness of
Proposed Rule Change Relating to
Extension of the Exchange’s Penny
Pilot Program and Replacement, on a
Semi-Annual Basis, of Penny Pilot
Issues that Have Been Delisted
Paper Comments
• Send paper comments in triplicate
to Elizabeth M. Murphy, Secretary,
Securities and Exchange Commission,
100 F Street, NE., Washington, DC
20549–1090.
All submissions should refer to File
No. SR–BATS–2010–034. This file
number should be included on the
subject line if e-mail is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
Internet Web site (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule changes between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for website viewing and
printing in the Commission’s Public
Reference Room, 100 F Street, NE.,
Washington, DC 20549, on official
business days between the hours of 10
a.m. and 3 p.m. Copies of such filing
November 30, 2010.
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BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–63395; File No. SR–Phlx2010–167]
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’),1 and Rule 19b–4 2 thereunder,
notice is hereby given that on November
22, 2010, NASDAQ OMX PHLX LLC
(‘‘Phlx’’ or ‘‘Exchange’’) filed with the
Securities and Exchange Commission
(‘‘SEC’’ or ‘‘Commission’’) the proposed
rule change as described in Items I, II
and III below, which Items have been
prepared by the Exchange. The
Commission is publishing this notice to
solicit comments on the proposed rule
change from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of the Substance
of the Proposed Rule Change
The Exchange is filing with the
Commission a proposal to amend Phlx
Rule 1034 (Minimum Increments) to:
Extend through December 31, 2011, the
Penny Pilot Program in options classes
in certain issues (‘‘Penny Pilot’’ or
‘‘Pilot’’); and replace, on a semi-annual
basis, any Penny Pilot issues that have
been delisted.3
12 17
CFR 200.30–3(a)(12).
U.S.C.78s(b)(1).
2 17 CFR 240.19b–4.
3 The Penny Pilot was established in January 2007
and in October 2009 was expanded and extended
1 15
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The text of the proposed rule change
is available on the Exchange’s Website
at https://
nasdaqomxphlx.cchwallstreet.com/
NASDAQOMXPHLX/Filings/, at the
principal office of the Exchange, and at
the Commission’s Public Reference
Room.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
Exchange included statements
concerning the purpose of and basis for
the proposed rule change and discussed
any comments it received on the
proposed rule change. The text of these
statements may be examined at the
places specified in Item IV below. The
Exchange has prepared summaries, set
forth in sections A, B, and C below, of
the most significant aspects of such
statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
The purpose of this filing is to amend
Phlx Rule 1034 to: (1) Extend through
December 31, 2011, the Penny Pilot; and
(2) replace, on a semi-annual basis, any
Penny Pilot issues that have been
delisted.
For a pilot period scheduled to expire
on December 31, 2010, the Penny Pilot
allows certain options to be quoted and
traded on the Exchange in minimum
increments of $0.01 for all series in such
options with a price of less than $3.00;
and in minimum increments of $0.05 for
all series in such options with a price
of $3.00 or higher. Options overlying the
PowerShares QQQ Trust (‘‘QQQQ’’),®
SPDR S&P 500 Exchange Traded Funds
(‘‘SPY’’), and iShares Russell 2000 Index
Funds (‘‘IWM’’), however, are quoted
through December 31, 2010. See Securities
Exchange Act Release Nos. 55153 (January 23,
2007), 72 FR 4553 (January 31, 2007)(SR–Phlx–
2006–74)(notice of filing and approval order
establishing Penny Pilot); 60873 (October 23, 2009),
74 FR 56675 (November 2, 2009)(SR–Phlx–2009–
91)(notice of filing and immediate effectiveness
expanding and extending Penny Pilot); 60966
(November 9, 2009), 74 FR 59331 (November 17,
2009)(SR–Phlx–2009–94)(notice of filing and
immediate effectiveness adding seventy-five classes
to Penny Pilot); 61454 (February 1, 2010), 75 FR
6233 (February 8, 2010)(SR–Phlx–2010–12)(notice
of filing and immediate effectiveness adding
seventy-five classes to Penny Pilot); 62028 (May 4,
2010), 75 FR 25890 (May 10, 2010)(SR–Phlx–2010–
65)(notice of filing and immediate effectiveness
adding seventy-five classes to Penny Pilot); and
62616 (July 30, 2010), 75 FR 47664 (August 6,
2010)(SR–Phlx–2010–103)(notice of filing and
immediate effectiveness adding seventy-five classes
to Penny Pilot).
E:\FR\FM\07DEN1.SGM
07DEN1
]]>Agencies
[Federal Register Volume 75, Number 234 (Tuesday, December 7, 2010)]
[Notices]
[Pages 76059-76062]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2010-30577]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-63403; File No. SR-BATS-2010-034]
Self-Regulatory Organizations; BATS Exchange, Inc.; Notice of
Filing of a Proposed Rule Change To Create a Directed Order Program
December 1, 2010.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given
that on November 19, 2010, BATS Exchange, Inc. (the ``Exchange'' or
``BATS'') filed with the Securities and Exchange Commission
(``Commission'') the proposed rule change as described in Items I and
II below, which Items have been prepared by the Exchange. The
Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange is filing with the Commission a proposal for the BATS
Exchange Options Market (``BATS Options'') to create new BATS Rule
21.1(d)(13), entitled ``Market Maker Price Improving Orders,'' create
new BATS Rule 21.1(d)(14), entitled ``Directed Orders,'' and amend
existing BATS Rule 21.1(d)(2), entitled ``Price Improving Orders.''
The text of the proposed rule change is available at the Exchange's
Web site at https://www.batstrading.com, at the principal office of the
Exchange, and at the Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the
[[Page 76060]]
places specified in Item IV below. The Exchange has prepared summaries,
set forth in Sections A, B, and C below, of the most significant parts
of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Exchange is proposing certain modifications and additions to
its rules related to the trading of options. First, the Exchange is
proposing the establishment of new Rule 21.1(d)(13), entitled Market
Maker Price Improving Orders. Second, the Exchange is proposing the
establishment of new Rule 21.1(d)(14), entitled Directed Orders. Third,
the Exchange is proposing to modify Rule 21.1(d)(6), entitled Price
Improving Orders.
The Exchange is proposing the rule changes described below to
establish a directed order program through which Options Members can
direct an order to a particular BATS Options Market Maker for potential
execution at a price improved over the existing National Best Bid
(``NBB'') or National Best Offer (``NBO''). As part of this program,
BATS is proposing to define two new order types. The first would be new
Rule 21.1(d)(13), entitled Market Maker Price Improving Orders, which
are orders from a BATS Options Market Maker to buy or sell an option
that has a displayed price and size and a non-displayed price at which
the BATS Options Market Maker is willing to trade with a Directed
Order. As proposed, a Market Maker Price Improving Order would be
ranked on the BATS Options Book at its displayed price. The non-
displayed price of the Market Maker Price Improving Order would not be
entered into the BATS Options Book, but would be, along with its
displayed size, converted to a buy or sell order at its non-displayed
price in response to a Directed Order directed to the BATS Options
Market Maker.
The second new order type proposed would be new Rule 21.1(d)(14),
entitled Directed Orders, which are orders from a BATS Options Member
that are directed for execution to a particular BATS Options Market
Maker. For a BATS Options Market Maker to participate in an execution
against a Directed Order, (1) the Directed Order must be from a BATS
Options Member that is on a list of eligible Options Members provided
to the Exchange by the BATS Options Market Maker, in a manner
prescribed by the Exchange, (2) the BATS Options Market Maker must be
publicly quoting on BATS at the NBB (for sell Directed Orders) or NBO
(for buy Directed Orders) with a Market Maker Price Improving Order
that contains a non-displayed amount of price improvement over the NBB
or NBO at the time the Directed Order arrives to the Exchange, and (3)
the Directed Order must be marketable against the non-displayed price
of the Market Maker Price Improving Order.
If the above conditions are met, and if there are no other non-
displayed orders at prices equal to or better than the non-displayed
price of the Market Maker Price Improving Order, the Directed Order
will trade with the Market Maker Price Improving Order up to the full
size of the Market Maker Price Improving Order. Any remaining contracts
from the Directed Order will be handled, consistent with the
instructions on the Directed Order, in accordance with the order
display and book processing requirements of Rule 21.8 and, if
applicable, processed in accordance with the order routing requirements
of Rule 21.9.
If there are non-displayed orders on the BATS Options Book at
prices equal to or better than the non-displayed price of the Market
Maker Price Improving Order, those other non-displayed orders will in
all cases have priority over the non-displayed price of the Market
Maker Price Improving Order. In such circumstances, the Market Maker
Price Improving Order may still execute at its non-displayed price
against the Directed Order consistent with the price/time priority
provisions of Rule 21.8 to the extent of any remaining contracts of the
Directed Order. Any contracts remaining of the Directed Order will
continue to be processed in a manner consistent with the order display
and book processing provisions of Rule 21.8, and if applicable, the
order routing provisions of Rule 21.9.
As proposed, an Options Market Maker Price Improving Order would be
required to have a non-displayed price better than the displayed limit
price that could be entered in an increment as small as (1) one cent or
may be designated at the midpoint of the National Best Bid and Offer
(``NBBO''). In addition, BATS is proposing to amend existing Rule
21.1(6), entitled Price Improving Orders, to provide all BATS Options
Members with the ability to enter Price Improving Orders in an
increment designated at the midpoint of the NBBO. Price Improving
Orders will in all cases include a displayed price and a better, non-
displayed price. Price Improving Orders with a non-displayed price
designated at the midpoint of the NBBO will receive a new timestamp
each time the non-displayed midpoint price automatically adjusts in
response to changes in the NBBO and will be displayed at the NBBO at
the time of entry. The displayed price will not subsequently adjust to
changes in the NBBO. Price Improving Orders with a non-midpoint price
will be displayed at the minimum price variation in that security and
will be rounded up for sell orders and rounded down for buy orders.
Market Maker Price Improving Orders with a non-displayed price
designated at the midpoint of the NBBO will not receive a new timestamp
in response to changes in the NBBO. Unlike Price Improving Orders, the
non-displayed price of a Market Maker Price Improving Order is not
entered into the BATS Options Book, and is only eligible to trade with
a Directed Order to the extent that certain conditions precedent are
satisfied, including (1) that the displayed price of the Market Maker
Price Improving Order is equal to the NBB (for sell directed orders) or
the NBO (for buy directed orders) at the time the Directed Order
arrives to the Exchange, and (2) that there are no other orders on the
BATS Options Book at prices equal to or better than the non-displayed
prices of the Market Maker Price Improving Order.\3\
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\3\ As described in proposed Rule 11.9(c)(13)(B), all other
interest on the BATS Book at prices equal to or better than the non-
displayed price of the Market Maker Price Improving Order has
priority over the Market Maker Price Improving Order and, hence,
will execute first against the Directed Order.
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The Exchange is also proposing to delete certain language from its
existing Price Improving Order rule text. In particular, as currently
written, Rule 21.1(d)(6) states that ``Price Improving Orders that are
available for display * * *.'' \4\ The Exchange is proposing to delete
the clause ``that are available to display,'' which although intended
to simply distinguish an order executed upon arrival to the Exchange
from an order posting to the BATS Options Book, has the potential to
cause confusion to the extent it may suggest that Price Improving
Orders can be posted on the BATS Options Book without a displayed
price. That is not the case today, would not be the case under the
proposed changes to the rule, and BATS is proposing to delete this
clause to eliminate any confusion on this point.
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\4\ Emphasis added.
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The elements of the Exchange's proposal to create a directed order
program are specifically designed to enhance opportunities available in
the market for Options Members to obtain price improvement for customer
orders
[[Page 76061]]
in the context of BATS' price/time priority, continuous auction market.
By requiring BATS Options Market Makers to be quoting at the NBB or NBO
to participate in an execution against a Directed Order directed to it,
BATS' proposal incentivizes market makers to competitively quote and
thereby furthers the public price discovery process. By further
requiring BATS Options Market Makers to include a non-displayed price
better than the displayed limit price at an increment as small as (1)
one cent or the midpoint of the NBBO, the proposal increases the
opportunities for customer orders to receive price improvement over the
NBBO. Moreover, by permitting all Options Members to enter orders in
the same increments as Market Maker Price Improving Orders, including
as proposed at the midpoint of the NBBO, and according those orders in
all cases priority at their non-displayed prices over Market Maker
Price Improving Orders, the proposal avoids creating participation
guarantees in place at other markets and instead promotes market-wide
competition for executions at prices between the NBBO.
Pursuant to the proposed directed order program, a BATS Options
Member who notifies a BATS Options Market Maker of its intention to
submit a Directed Order to BATS Options so that the BATS Options Market
Maker could change its quotation to match the NBB or NBO immediately
prior to submission of the Directed Order would be engaging in conduct
inconsistent with just and equitable principles of trade in violation
of Rule 3.1 and Rule 18.4(f). In addition, a BATS Options Market Maker
who becomes aware of a customer order from an affiliated broker-dealer
or desk within the same broker-dealer and acts on such information to
change its quotations to match the NBB or NBO immediately prior to
submission of a Directed Order would be in violation of the Exchange's
Rule 22.10, ``Limitations on Dealings''. BATS will proactively conduct
surveillance for such conduct and enforce against such violations.
2. Statutory Basis
Approval of the rule changes proposed in this submission is
consistent with the requirements of the Act and the rules and
regulations thereunder that are applicable to a national securities
exchange, and, in particular, with the requirements of Section 6(b) of
the Act.\5\ In particular, the proposed change is consistent with
Section 6(b)(5) of the Act,\6\ because it would promote just and
equitable principles of trade, remove impediments to, and perfect the
mechanism of, a free and open market and a national market system, and,
in general, protect investors and the public interest.
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\5\ 15 U.S.C. 78f(b).
\6\ 15 U.S.C. 78f(b)(5).
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The Exchange believes that the proposed rule meets these
requirements in that it promotes competition for customer orders and
furthers the public price discovery process by both incentivizing BATS
Options Market Makers to publicly display aggressive quotes at the
NBBO, as well as incentivizing BATS Options Market Makers and all other
BATS Options Members to post non-displayed prices better than the NBBO.
BATS notes that the Commission has previously found consistent with the
Act non-displayed order types designed to provide price improvement at
prices smaller than the minimum price variation in listed options.\7\
While those order types have to date been limited to permitting
increments as small as (1) one cent, BATS notes that the Commission has
previously found midpoint order types consistent with the Act in the
equity markets,\8\ and as the options market structure has converged
with the equity market structure in recent years through expansion of
the penny pilot as well as the implementation of Regulation NMS-like
protections, BATS believes customers in the options markets would
similarly benefit from the potential price improvement afforded by
midpoint executions.
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\7\ See, e.g., BATS Options Rule 21.1(d)(6) ``Price Improving
Orders''; Nasdaq Options Market Rule Chapter VI, Section 1(e)(6)
``Price Improving Orders''.
\8\ See, e.g., BATS Rule 11.9(c)(9) ``Mid-Point Peg Order''.
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Moreover, the Commission has previously approved rules that provide
specialist or market maker guarantees up to a certain percentage so
long as the specialist or market maker is quoting at the NBBO and such
guarantees do not rise to a level that could have a material adverse
impact on quote competition with a particular exchange.\9\ While BATS'
directed order program requires BATS Options Market Makers to be
quoting at the NBB or NBO to be eligible to trade with an incoming
Directed Order directed to it, in contrast to prior rules approved by
the Commission, BATS' proposed directed order program provides no
participation guarantees that could negatively impact quote
competition. By not providing such guarantees, BATS's proposed directed
order program provides incentives to BATS Options Market Makers as well
as all other BATS Options Members to aggressively quote, both at the
NBBO and at non-displayed prices better than the NBBO.
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\9\ See, e.g., Securities Exchange Act Release No. 51759 (May
27, 2005), 70 FR 32860 (June 6, 2005) (SR-Phlx-2004-91) (order
approving the establishment of a directed order process with certain
specialist participation guarantees).
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In addition, the Commission has previously approved rules that
permit a specialist or market maker to determine the firms from which
it will accept directed or preferenced orders. The Commission has
explicitly approved a process similar to that proposed by BATS in the
equity markets in which only those members who have been permissioned
by a market maker are eligible to submit directed orders to the market
maker.\10\ And, the Commission has implicitly approved such processes
in the options markets by allowing certain price improvement auctions
to exist pursuant to pilot programs, which auctions provide the ability
of an options member to submit a customer order along with a contra-
side principal order from the options member into a brief price
improvement auction in which all members have the ability to compete
for the execution.\11\ BATS' proposed rule changes are similar in
nature to these price improvement auctions, except that under BATS'
proposal, competition for the execution with a Directed Order occurs in
the context of BATS' continuous, price/time priority auction, and as
previously mentioned, BATS Options Market Makers would have no
participation guarantees.
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\10\ See Securities Exchange Act Release No. 52827 (November 23,
2005), 70 FR 72193 (December 1, 2005) (SR-PCX-2005-56) (order
approving certain modifications to the PCX Equities, Inc.'s Directed
Order Process on the Archipelago Exchange).
\11\ See, e.g., BOX Rule Section 18 ``The Price Improvement
Period'' and ISE Rule 723 ``Price Improvement Mechanism for Crossing
Transactions'' (both of which providing a mechanism for options
members that want to internalize customer orders the ability to do
so on the exchanges subject to a requirement that such orders first
be exposed to all other options members through a brief price
improvement auction).
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B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change imposes
any burden on competition.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants or Others
The Exchange has neither solicited nor received written comments on
the proposed rule change.
[[Page 76062]]
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period up to 90 days (i) as the
Commission may designate if it finds such longer period to be
appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
(A) by order approve or disapprove such proposed rule change, or
(B) institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the foregoing, including whether the proposal is
consistent with the Act. Comments may be submitted by any of the
following methods:
Electronic Comments
Use the Commission's Internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an e-mail to rule-comments@sec.gov. Please include
File No. SR-BATS-2010-034 on the subject line.
Paper Comments
Send paper comments in triplicate to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-1090.
All submissions should refer to File No. SR-BATS-2010-034. This
file number should be included on the subject line if e-mail is used.
To help the Commission process and review your comments more
efficiently, please use only one method. The Commission will post all
comments on the Commission's Internet Web site (https://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments,
all written statements with respect to the proposed rule change that
are filed with the Commission, and all written communications relating
to the proposed rule changes between the Commission and any person,
other than those that may be withheld from the public in accordance
with the provisions of 5 U.S.C. 552, will be available for website
viewing and printing in the Commission's Public Reference Room, 100 F
Street, NE., Washington, DC 20549, on official business days between
the hours of 10 a.m. and 3 p.m. Copies of such filing will also be
available for inspection and copying at the principal office of the
Exchange. All comments received will be posted without change; the
Commission does not edit personal identifying information from
submissions. You should submit only information that you wish to make
available publicly. All submissions should refer to File No. SR-BATS-
2010-034 and should be submitted on or before December 28, 2010.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\12\
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\12\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-30577 Filed 12-6-10; 8:45 am]
BILLING CODE 8011-01-P
