Self-Regulatory Organizations; BATS Exchange, Inc.; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Adopt Rules Related to Risk Management Functionality for BATS Options, 35719-35723 [2012-14530]
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Federal Register / Vol. 77, No. 115 / Thursday, June 14, 2012 / Notices
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2012.
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Victor M. Fortuno,
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[FR Doc. 2012–14497 Filed 6–13–12; 8:45 am]
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BILLING CODE 7050–01–P
NATIONAL FOUNDATION ON THE
ARTS AND THE HUMANITIES
National Council on the Arts 176th
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35719
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Kathy Plowitz-Worden,
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[FR Doc. 2012–14501 Filed 6–13–12; 8:45 am]
BILLING CODE 7537–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–67165; File No. SR–BATS–
2012–021]
Self-Regulatory Organizations; BATS
Exchange, Inc.; Notice of Filing and
Immediate Effectiveness of Proposed
Rule Change To Adopt Rules Related
to Risk Management Functionality for
BATS Options
June 8, 2012.
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 June 1,
2012, 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 Exchange has
designated this proposal as a ‘‘noncontroversial’’ proposed rule change
pursuant to Section 19(b)(3)(A) of the
Act 3 and Rule 19b–4(f)(6)(iii)
thereunder,4 which renders it effective
upon filing with the Commission. 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 Substance of
the Proposed Rule Change
The Exchange proposes to adopt Rule
21.16, entitled ‘‘Risk Monitor
Mechanism’’, to codify the risk
monitoring functionality offered to all
Users 5 of the BATS equity options
trading platform (‘‘BATS Options’’).
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.
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 15 U.S.C. 78s(b)(3)(A).
4 17 CFR 240.19b–4(f)(6)(iii).
5 As defined in Exchange Rule 16.1(a)(63), a User
is any Exchange member or sponsored participant
authorized to obtain access to the Exchange.
2 17
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(A) Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
The purpose of the proposed rule
change is to reflect in the Exchange’s
rules that Users are able to establish
certain risk control parameters.
Specifically, the Exchange proposes to
adopt new Rule 21.16, Risk Monitor
Mechanism, which is similar to
NASDAQ Options Market (‘‘NOM’’)
Chapter VI, Section 19 and the rules of
other options exchanges (as explained
in detail below). The Risk Monitor
Mechanism provides protection from
the risk of multiple executions across
multiple series of an option or across
multiple options. The risk to Users is
not limited to a single series in an
option or even to all series of an option;
Users that quote in multiple series of
multiple options have significant
exposure, requiring them to offset or
hedge their overall positions.
In particular, the Risk Monitor
Mechanism will be useful for market
makers on BATS Options (‘‘Market
Makers’’), who are required to
continuously quote in assigned options.
Quoting across many series in an option
creates the possibility of ‘‘rapid fire’’
executions that can create large,
unintended principal positions that
expose the Market Maker to unnecessary
market risk. The Risk Monitor
Mechanism is intended to assist such
Users in managing their market risk.
Though the Risk Monitor Mechanism
will be most useful to Market Makers,
the Exchange proposes to offer the
functionality to all participant types.
There are other firms that trade on a
proprietary basis and provide liquidity
to the Exchange; these firms could
potentially benefit, similarly to Market
Makers, from the Risk Monitor
6 Notional value is calculated as the sum of all
premiums paid times the number of contracts
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Mechanism. The Exchange believes that
the Risk Monitor Mechanism should
help liquidity providers generally,
market makers and other participants
alike, in managing risk and providing
deep and liquid markets to investors.
Pursuant to new Rule 21.16, the Risk
Monitor Mechanism operates by the
System maintaining a counting program
for each User. As proposed, a single
User may configure a single counting
program or multiple counting programs
to govern its trading activity (i.e., on a
per port basis). The counting program
will count executions of contracts
traded by each User and in specific
Option Categories (as defined below) by
each User. The counting program counts
executions, contract volume and
notional value, within a specified time
period established by each User (the
‘‘specified time period’’) and on an
absolute basis for the trading day
(‘‘absolute limits’’). The specified time
period will commence for an option
when a transaction occurs in any series
in such option. The counting program
will count executions in the following
‘‘Options Categories’’: front-month puts,
front-month calls, back-month puts, and
back-month calls (each an ‘‘Option
Category’’). The counting program will
also count a User’s executions, contract
volume and notional value across all
options which a User trades (‘‘Firm
Category’’). For the purposes of new
Rule 21.16, a front-month put or call is
an option that expires within the next
two calendar months, including
weeklies and other non-standard
expirations, and a back-month put or
call is an option that expires in any
month more than two calendar months
away from the current month.
The System will engage the Risk
Monitor Mechanism in a particular
option when the counting program has
determined that a User’s trading has
reached a Specified Engagement Trigger
(as defined below) established by such
User during the specified time period or
on an absolute basis. When a Specified
Engagement Trigger is reached in an
Options Category, the Risk Monitor
Mechanism will automatically remove
such User’s orders in all series of the
particular option and reject any
additional orders from a User in such
option until the counting program has
been reset in accordance with paragraph
(d) of new Rule 21.16. Similarly, when
a Specified Engagement Trigger is
reached in the Firm Category, the Risk
Monitor Mechanism will automatically
remove such User’s orders in all series
of all options and reject any additional
orders from a User until the counting
program has been reset in accordance
with paragraph (d) of new Rule 21.16.
The Risk Monitor Mechanism will also
attempt to cancel any orders that have
been routed away to other options
exchanges on behalf of the User.
As provided in proposed
subparagraph (b)(ii), each User can,
optionally, establish Specified
Engagement Triggers in each Options
Category, per option, or in the Firm
Category. Specified Engagement
Triggers can be set as follows: (A) A
contract volume trigger, measured
against the number of contracts
executed (the ‘‘volume trigger’’); (B) A
notional value trigger, measured against
the notional value of executions 6
(‘‘notional trigger’’); and (C) An
execution count trigger, measured
against the number of executions
(‘‘count trigger’’). Each of these triggers
can be established in isolation (e.g., a
User may choose only to implement a
volume trigger) or a User can establish
multiple separate triggers with different
parameters. Also, as described above,
the triggers can be implemented either
as absolute limits or over a specified
period of time.
For example, assume a User is quoting
orders in several series of a particular
option issue, and sets Specified
Engagement Triggers in an Options
Category as follows: (i) A volume trigger
at 500 contracts per second, (ii) a count
trigger at 100 executions per minute,
and (iii) an absolute notional value
trigger of $30,000. In this example, there
are three Specified Engagement Triggers
for the option issue, any one of which,
if reached, would result in cancellations
of any additional orders of the User in
the specified option issue, rejection of
additional orders by the User in that
issue and attempted cancellation of any
orders in the option issue already routed
to an away options exchange on behalf
of the User. The following examples
illustrate the operation of each of the
User’s Specified Engagement Triggers:
executed. For example, an option executed with a
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 parts of such
statements.
premium of $3.00 for 5 contracts would count as
$15.00 notional value.
PO 00000
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Volume Specified Engagement Trigger
in an Options Category
If within one second, executions
against the User’s quotations in any
series of front-month calls of the option
issue equaled or exceeded 500 contracts,
the Risk Monitor Mechanism would be
engaged. To illustrate this example,
assume the following quotations and
executions within the current second in
front-month calls of the specified option
issue:
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Number of
contracts
executed
Series 1
Number of
contracts
executed
Series 2
Series 1 quoted
size
Series 2 quoted
size
.............................................................................................
.............................................................................................
.............................................................................................
.............................................................................................
.............................................................................................
100
100
150
150
150
50
50
50
200
200
100
100
150
0
0
50
50
0
0
0
Total ..........................................................................................
650
600
350
100
Price level
Level
Level
Level
Level
Level
1
2
3
4
5
At this moment in time, the User has
executed 450 contracts within the
applicable second (350 contracts of
Series 1 and 100 contracts of Series 2),
which is less than the User’s limit of
500 contracts per second. As such, the
User’s established volume trigger in an
Options Category has not yet been
reached. If, however, prior to the
completion of the applicable second, an
order executed against the User’s Level
3 quotation in Series 2, the number of
contracts executed in front-month calls
of the option issue would be 500. The
Risk Monitor would be engaged, and the
User’s remaining orders in all series of
the option issue would be cancelled,
additional orders by the User in that
issue would be rejected, and the
Exchange would attempt to cancel any
orders in the option issue that had
already been routed to an away options
exchange on behalf of the User.
Execution Count Specified Engagement
Trigger in an Options Category
If within one minute, executions
against the User’s quotations in any
series of front-month puts of the option
issue equaled or exceeded 100
executions per minute, the Risk Monitor
Mechanism would be engaged. To
illustrate this example, assume the
following quotations and executions
within the current minute in frontmonth puts of the specified option
issue:
Number of
executions
Series 1
Price level
Number of
executions
Series 2
Level 1 .............................................................................................................................................................
Level 2 .............................................................................................................................................................
Level 3 .............................................................................................................................................................
40
20
0
20
15
0
Total ..........................................................................................................................................................
60
35
At this moment in time, the User has
received 95 total executions within the
applicable minute (60 executions in
Series 1 options and 35 executions in
Series 2 options), which is less than the
User’s limit of 100 executions per
minute. As such, the User’s established
count trigger in an Options Category has
not yet been reached. If, however, prior
to the completion of the applicable
minute, the User executed 5 more orders
in either series, the number of
executions in front-month puts of the
option issue would be 100. The Risk
Monitor would be engaged, and the
User’s remaining orders in all series of
the option issue would be cancelled,
additional orders by the User in that
issue would be rejected, and the
Exchange would attempt to cancel any
orders in the option issue that had
already been routed to an away options
exchange on behalf of the User.
Notional Value Specified Engagement
Trigger in an Options Category
quotations in any series of front-month
calls of the option issue equaled or
exceeded a notional value of $30,000,
the Risk Monitor Mechanism would be
engaged. To illustrate this example,
assume the current notional value of all
front-month calls in the option issue
was $29,900 as of 1:30 p.m. Eastern
Time and the following executions
occurred:
If, as of any time during the trading
day, executions against the User’s
Execution number
Number of
contracts
Price
Series
Notional value
$5.00
3.00
5.00
5
15
6
Series 1
Series 2
Series 1
$25.00
45.00
30.00
Total ..........................................................................................
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1 .......................................................................................................
2 .......................................................................................................
3 .......................................................................................................
............................
............................
............................
100.00
At this moment in time, execution
number 3 has raised the total notional
value of all front-month calls to $30,000
for the trading day. The Risk Monitor
would be engaged, and the User’s
remaining orders in all series of the
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option issue would be cancelled,
additional orders by the User in that
issue would be rejected, and the
Exchange would attempt to cancel any
orders in the option issue that had
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already been routed to an away options
exchange on behalf of the User.
As noted above, in addition to
counting programs established across
Options Categories, any of the available
Specified Engagement Triggers are
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configurable on a Firm Category level as
well (either as absolute limits or over a
specified time period). When a Firm
Category risk limit is triggered, then all
options orders of a User are cancelled,
additional orders by the User are
rejected and the Exchange will attempt
to cancel any orders already routed to
an away options exchange on behalf of
the User.
While the Risk Monitor Mechanism is
a useful feature that serves an important
risk management purpose, it operates
consistent with the firm quote
obligations of a broker-dealer pursuant
to Rule 602 of Regulation NMS.
Specifically, proposed paragraph (c)
provides that any marketable orders or
quotes that are executable against a
User’s quotation that are received prior
to the time the Risk Monitor Mechanism
is engaged will be automatically
executed at the price up to the User’s
size, regardless of whether such an
execution results in executions in
excess of the User’s Specified
Engagement Trigger. Accordingly, the
Risk Monitor Mechanism cannot be
Price level
1
2
3
4
5
Number of
contracts
executed
Series 1
Series 2 size
Number of
contracts
executed
Series 2
.............................................................................................
.............................................................................................
.............................................................................................
.............................................................................................
.............................................................................................
100
100
150
150
150
50
50
100
200
200
100
100
150
150
0
0
0
0
0
0
Total ..........................................................................................
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Level
Level
Level
Level
Level
Series 1 size
used to circumvent a User’s firm quote
obligation.
If a User is quoting in two series of a
particular option, at several price levels
in each, and sets an Options Category
volume trigger at 400 contracts, one
contra side order can result in
executions in excess of the Specified
Engagement Trigger. Specifically, if a
market order to sell 500 contracts is
received in Series 1, the order will
execute against the first four levels that
the User is quoting, as follows:
650
600
500
0
Although the User set a volume
trigger at 400 contracts, the contra side
order executes in its entirety and the
Risk Protection Mechanism is engaged
after the resulting executions have
surpassed the Specified Engagement
Trigger. The remaining quoted contracts
in Series 1 and all quoted contracts in
Series 2 would then be cancelled.
Proposed Rule 21.16(d) further
provides that the system will reset the
counting period for absolute limits
when a User refreshes its risk limit
thresholds. In addition, proposed Rule
21.16(d) provides that the System will
reset the counting program and
commence a new specified time period
when: (i) A previous counting period
has expired and a transaction occurs in
any series in such option; or (ii) A User
refreshes its risk limit thresholds prior
to the expiration of the specified time
period. For example, assume that a User
has set Options Category limits for a
particular option as follows: Volume
triggers at 500 contracts per second and
20,000 contracts per minute, a count
trigger at 20 executions per second, and
an absolute notional value trigger of
$30,000. Assume that at a particular
point in time, 400 front-month calls
have executed in the current second,
19,000 front-month calls have executed
in the current minute, 10 executions of
front-month calls have occurred in the
current second and a total of $25,000
notional has been executed in frontmonth calls over the course of the
trading day. Next, an incoming order
from another User of BATS Options is
received that results in another 1,000
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front-month call contracts executing
within the current minute, thus
triggering the volume trigger of 20,000
contracts per minute. If the User reset
the risk limit threshold, all values,
including the absolute notional
calculation for the trading day, would
be reset to zero.
2. Statutory Basis
The rule change 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.7
Specifically, the proposed change is
consistent with Section 6(b)(5) of the
Act,8 because it is designed to prevent
fraudulent and manipulative acts and
practices, to promote just and equitable
principles of trade, to foster cooperation
and coordination with persons engaged
in facilitating transactions in securities,
and to remove impediments to, and
perfect the mechanism of, a free and
open market and a national market
system. The Exchange believes that the
proposal is appropriate and reasonable,
because it offers functionality for Users
to manage their risk. Offering of a Risk
Monitor Mechanism will allow Market
Makers and other Users to quote
aggressively which removes
impediments to a free and open market
and benefits all Users of BATS Options.
The Exchange notes that a similar
7 15
8 15
PO 00000
U.S.C. 78f(b).
U.S.C. 78f(b)(5).
Frm 00066
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functionality is offered by NOM and
other options exchanges.9
(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.
III. Date of Effectiveness of the
Proposed Rule Changes and Timing for
Commission Action
Because the foregoing proposed rule
change does not: (i) Significantly affect
the protection of investors or the public
interest; (ii) impose any significant
burden on competition; and (iii) become
operative for 30 days from the date on
which it was filed, or such shorter time
as the Commission may designate, it has
become effective pursuant to Section
19(b)(3)(A) of the Act 10 and Rule 19b–
4(f)(6)(iii) thereunder.11 In addition, the
Exchange provided the Commission
with written notice of its intent to file
the proposed rule change, along with a
brief description and text of the
9 See NOM Chapter VI, Section 19; see also
NASDAQ OMX PHLX Rule 1093; CBOE Rule 8.18;
NYSE AMEX Options Rule 928; NYSE ARCA
Options Rule 6.40.
10 15 U.S.C. 78s(b)(3)(A).
11 17 CFR 240.19b–4(f)(6)(iii).
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Federal Register / Vol. 77, No. 115 / Thursday, June 14, 2012 / Notices
proposed rule change, at least five
business days prior to the date of filing,
or such shorter time as designated by
the Commission.12
At any time within 60 days of the
filing of the proposed rule change, the
Commission summarily may
temporarily suspend such rule change if
it appears to the Commission that such
action is necessary or appropriate in the
public interest, for the protection of
investors, or otherwise in furtherance of
the purposes of the Act.
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:
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–
2012–021 and should be submitted on
or before July 5, 2012.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.13
Kevin M. O’Neill,
Deputy Secretary.
[FR Doc. 2012–14530 Filed 6–13–12; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
pmangrum on DSK3VPTVN1PROD with NOTICES
Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rulecomments@sec.gov. Please include File
No. SR–BATS–2012–021 on the subject
line.
[Release No. 34–67168; File No. SR–ISE–
2012–46]
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–2012–021. This file number
should be included on the subject line
if email 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 Web site 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
10:00 a.m. and 3:00 p.m. Copies of such
filing will also be available for
inspection and copying at the principal
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (the
‘‘Exchange Act’’),1 and Rule 19b–4
thereunder,2 notice is hereby given that
on June 1, 2012, the International
Securities Exchange, LLC (the
‘‘Exchange’’ or the ‘‘ISE’’) filed with the
Securities and Exchange Commission
the proposed rule change, as described
in Items I and II below, which items
have been prepared by the selfregulatory organization. The
Commission is publishing this notice to
solicit comments on the proposed rule
change from interested persons.
Self-Regulatory Organizations;
International Securities Exchange,
LLC; Notice of Filing and Immediate
Effectiveness of Proposed Rule
Change To Delete Certain Fees
June 8, 2012.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The ISE proposes to eliminate three
fees from its Schedule of Fees. The text
of the proposed rule change is available
on the Exchange’s Web site (https://
www.ise.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
self-regulatory organization included
statements concerning the purpose of,
13 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
1 15
12 Id.
VerDate Mar<15>2010
14:34 Jun 13, 2012
Jkt 226001
PO 00000
Frm 00067
Fmt 4703
Sfmt 4703
35723
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 self-regulatory organization 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 proposed rule
change is to eliminate three fees from
the Exchange’s Schedule of Fees. First,
the Exchange currently has a fee of
$0.25 per contract applicable to
customers that transact in complex
orders, i.e., customer complex orders
that interact with complex orders
residing on the complex order book
thereby taking liquidity from the
complex order book (‘‘Complex Order
Taker Fee’’).3 This fee was introduced
before the Exchange introduced the
Professional Customer category with the
intent to charge non-broker dealer
customers that use highly developed
trading systems and are quickly able to
hit the bid or lift an offer thereby taking
liquidity, i.e., interacting with complex
orders resident on the complex order
book. The Exchange adopted this fee to
put Professional Customers on more
equal footing with broker dealer orders
that were already subject to this fee. The
purpose of this fee was not to charge
retail investors, who are now known on
the Exchange as Priority Customers, and
therefore the Exchange adopted a waiver
from this fee for the first 1,000 orders
that a Member, acting on behalf of one
or more of its customers, transacts in
one month that takes liquidity from the
complex order book. Now that the
Exchange is able to distinguish between
Priority and non-Priority Customers, the
Exchange believes this fee is no longer
necessary and proposes to eliminate it.
In 2010, the Exchange began assessing
per contract transaction fees and rebates
to market participants that add or
remove liquidity from the Exchange
(‘‘maker/taker fees and rebates’’) 4 in a
number of options classes (the ‘‘Select
3 See Exchange Act Release Nos. 34–54751
(November 14, 2006), 71 FR 67667 (November 22,
2006) (SR–ISE–2006–56); 55247 (February 6, 2007),
72 FR 7099 (February 14, 2007) (SR–ISE–2007–03);
59576 (March 13, 2009), 74 FR 11982 (March 20,
2009) (SR–ISE–2009–07); and 60778 (October 2,
2009), 74 FR 51896 (October 8, 2009) (SR–ISE–
2009–72).
4 See Exchange Act Release No. 61869 (April 7,
2010), 75 FR 19449 (April 14, 2010) (SR–ISE–2010–
25).
E:\FR\FM\14JNN1.SGM
14JNN1
]]>Agencies
[Federal Register Volume 77, Number 115 (Thursday, June 14, 2012)]
[Notices]
[Pages 35719-35723]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-14530]
=======================================================================
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-67165; File No. SR-BATS-2012-021]
Self-Regulatory Organizations; BATS Exchange, Inc.; Notice of
Filing and Immediate Effectiveness of Proposed Rule Change To Adopt
Rules Related to Risk Management Functionality for BATS Options
June 8, 2012.
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 June 1, 2012, 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 Exchange
has designated this proposal as a ``non-controversial'' proposed rule
change pursuant to Section 19(b)(3)(A) of the Act \3\ and Rule 19b-
4(f)(6)(iii) thereunder,\4\ which renders it effective upon filing with
the Commission. The Commission is publishing this notice to solicit
comments on the proposed rule change from interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ 15 U.S.C. 78s(b)(3)(A).
\4\ 17 CFR 240.19b-4(f)(6)(iii).
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to adopt Rule 21.16, entitled ``Risk Monitor
Mechanism'', to codify the risk monitoring functionality offered to all
Users \5\ of the BATS equity options trading platform (``BATS
Options'').
---------------------------------------------------------------------------
\5\ As defined in Exchange Rule 16.1(a)(63), a User is any
Exchange member or sponsored participant authorized to obtain access
to the Exchange.
---------------------------------------------------------------------------
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.
[[Page 35720]]
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 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 purpose of the proposed rule change is to reflect in the
Exchange's rules that Users are able to establish certain risk control
parameters. Specifically, the Exchange proposes to adopt new Rule
21.16, Risk Monitor Mechanism, which is similar to NASDAQ Options
Market (``NOM'') Chapter VI, Section 19 and the rules of other options
exchanges (as explained in detail below). The Risk Monitor Mechanism
provides protection from the risk of multiple executions across
multiple series of an option or across multiple options. The risk to
Users is not limited to a single series in an option or even to all
series of an option; Users that quote in multiple series of multiple
options have significant exposure, requiring them to offset or hedge
their overall positions.
In particular, the Risk Monitor Mechanism will be useful for market
makers on BATS Options (``Market Makers''), who are required to
continuously quote in assigned options. Quoting across many series in
an option creates the possibility of ``rapid fire'' executions that can
create large, unintended principal positions that expose the Market
Maker to unnecessary market risk. The Risk Monitor Mechanism is
intended to assist such Users in managing their market risk.
Though the Risk Monitor Mechanism will be most useful to Market
Makers, the Exchange proposes to offer the functionality to all
participant types. There are other firms that trade on a proprietary
basis and provide liquidity to the Exchange; these firms could
potentially benefit, similarly to Market Makers, from the Risk Monitor
Mechanism. The Exchange believes that the Risk Monitor Mechanism should
help liquidity providers generally, market makers and other
participants alike, in managing risk and providing deep and liquid
markets to investors.
Pursuant to new Rule 21.16, the Risk Monitor Mechanism operates by
the System maintaining a counting program for each User. As proposed, a
single User may configure a single counting program or multiple
counting programs to govern its trading activity (i.e., on a per port
basis). The counting program will count executions of contracts traded
by each User and in specific Option Categories (as defined below) by
each User. The counting program counts executions, contract volume and
notional value, within a specified time period established by each User
(the ``specified time period'') and on an absolute basis for the
trading day (``absolute limits''). The specified time period will
commence for an option when a transaction occurs in any series in such
option. The counting program will count executions in the following
``Options Categories'': front-month puts, front-month calls, back-month
puts, and back-month calls (each an ``Option Category''). The counting
program will also count a User's executions, contract volume and
notional value across all options which a User trades (``Firm
Category''). For the purposes of new Rule 21.16, a front-month put or
call is an option that expires within the next two calendar months,
including weeklies and other non-standard expirations, and a back-month
put or call is an option that expires in any month more than two
calendar months away from the current month.
The System will engage the Risk Monitor Mechanism in a particular
option when the counting program has determined that a User's trading
has reached a Specified Engagement Trigger (as defined below)
established by such User during the specified time period or on an
absolute basis. When a Specified Engagement Trigger is reached in an
Options Category, the Risk Monitor Mechanism will automatically remove
such User's orders in all series of the particular option and reject
any additional orders from a User in such option until the counting
program has been reset in accordance with paragraph (d) of new Rule
21.16. Similarly, when a Specified Engagement Trigger is reached in the
Firm Category, the Risk Monitor Mechanism will automatically remove
such User's orders in all series of all options and reject any
additional orders from a User until the counting program has been reset
in accordance with paragraph (d) of new Rule 21.16. The Risk Monitor
Mechanism will also attempt to cancel any orders that have been routed
away to other options exchanges on behalf of the User.
As provided in proposed subparagraph (b)(ii), each User can,
optionally, establish Specified Engagement Triggers in each Options
Category, per option, or in the Firm Category. Specified Engagement
Triggers can be set as follows: (A) A contract volume trigger, measured
against the number of contracts executed (the ``volume trigger''); (B)
A notional value trigger, measured against the notional value of
executions \6\ (``notional trigger''); and (C) An execution count
trigger, measured against the number of executions (``count trigger'').
Each of these triggers can be established in isolation (e.g., a User
may choose only to implement a volume trigger) or a User can establish
multiple separate triggers with different parameters. Also, as
described above, the triggers can be implemented either as absolute
limits or over a specified period of time.
---------------------------------------------------------------------------
\6\ Notional value is calculated as the sum of all premiums paid
times the number of contracts executed. For example, an option
executed with a premium of $3.00 for 5 contracts would count as
$15.00 notional value.
---------------------------------------------------------------------------
For example, assume a User is quoting orders in several series of a
particular option issue, and sets Specified Engagement Triggers in an
Options Category as follows: (i) A volume trigger at 500 contracts per
second, (ii) a count trigger at 100 executions per minute, and (iii) an
absolute notional value trigger of $30,000. In this example, there are
three Specified Engagement Triggers for the option issue, any one of
which, if reached, would result in cancellations of any additional
orders of the User in the specified option issue, rejection of
additional orders by the User in that issue and attempted cancellation
of any orders in the option issue already routed to an away options
exchange on behalf of the User. The following examples illustrate the
operation of each of the User's Specified Engagement Triggers:
Volume Specified Engagement Trigger in an Options Category
If within one second, executions against the User's quotations in
any series of front-month calls of the option issue equaled or exceeded
500 contracts, the Risk Monitor Mechanism would be engaged. To
illustrate this example, assume the following quotations and executions
within the current second in front-month calls of the specified option
issue:
[[Page 35721]]
----------------------------------------------------------------------------------------------------------------
Number of Number of
Series 1 quoted Series 2 quoted contracts contracts
Price level size size executed Series executed Series
1 2
----------------------------------------------------------------------------------------------------------------
Level 1................................. 100 50 100 50
Level 2................................. 100 50 100 50
Level 3................................. 150 50 150 0
Level 4................................. 150 200 0 0
Level 5................................. 150 200 0 0
-----------------------------------------------------------------------
Total............................... 650 600 350 100
----------------------------------------------------------------------------------------------------------------
At this moment in time, the User has executed 450 contracts within
the applicable second (350 contracts of Series 1 and 100 contracts of
Series 2), which is less than the User's limit of 500 contracts per
second. As such, the User's established volume trigger in an Options
Category has not yet been reached. If, however, prior to the completion
of the applicable second, an order executed against the User's Level 3
quotation in Series 2, the number of contracts executed in front-month
calls of the option issue would be 500. The Risk Monitor would be
engaged, and the User's remaining orders in all series of the option
issue would be cancelled, additional orders by the User in that issue
would be rejected, and the Exchange would attempt to cancel any orders
in the option issue that had already been routed to an away options
exchange on behalf of the User.
Execution Count Specified Engagement Trigger in an Options Category
If within one minute, executions against the User's quotations in
any series of front-month puts of the option issue equaled or exceeded
100 executions per minute, the Risk Monitor Mechanism would be engaged.
To illustrate this example, assume the following quotations and
executions within the current minute in front-month puts of the
specified option issue:
------------------------------------------------------------------------
Number of Number of
Price level executions executions
Series 1 Series 2
------------------------------------------------------------------------
Level 1............................. 40 20
Level 2............................. 20 15
Level 3............................. 0 0
-----------------------------------
Total........................... 60 35
------------------------------------------------------------------------
At this moment in time, the User has received 95 total executions
within the applicable minute (60 executions in Series 1 options and 35
executions in Series 2 options), which is less than the User's limit of
100 executions per minute. As such, the User's established count
trigger in an Options Category has not yet been reached. If, however,
prior to the completion of the applicable minute, the User executed 5
more orders in either series, the number of executions in front-month
puts of the option issue would be 100. The Risk Monitor would be
engaged, and the User's remaining orders in all series of the option
issue would be cancelled, additional orders by the User in that issue
would be rejected, and the Exchange would attempt to cancel any orders
in the option issue that had already been routed to an away options
exchange on behalf of the User.
Notional Value Specified Engagement Trigger in an Options Category
If, as of any time during the trading day, executions against the
User's quotations in any series of front-month calls of the option
issue equaled or exceeded a notional value of $30,000, the Risk Monitor
Mechanism would be engaged. To illustrate this example, assume the
current notional value of all front-month calls in the option issue was
$29,900 as of 1:30 p.m. Eastern Time and the following executions
occurred:
----------------------------------------------------------------------------------------------------------------
Number of
Execution number Price contracts Series Notional value
----------------------------------------------------------------------------------------------------------------
1....................................... $5.00 5 Series 1 $25.00
2....................................... 3.00 15 Series 2 45.00
3....................................... 5.00 6 Series 1 30.00
-----------------------------------------------------------------------
Total............................... ................ ................ ................ 100.00
----------------------------------------------------------------------------------------------------------------
At this moment in time, execution number 3 has raised the total
notional value of all front-month calls to $30,000 for the trading day.
The Risk Monitor would be engaged, and the User's remaining orders in
all series of the option issue would be cancelled, additional orders by
the User in that issue would be rejected, and the Exchange would
attempt to cancel any orders in the option issue that had already been
routed to an away options exchange on behalf of the User.
As noted above, in addition to counting programs established across
Options Categories, any of the available Specified Engagement Triggers
are
[[Page 35722]]
configurable on a Firm Category level as well (either as absolute
limits or over a specified time period). When a Firm Category risk
limit is triggered, then all options orders of a User are cancelled,
additional orders by the User are rejected and the Exchange will
attempt to cancel any orders already routed to an away options exchange
on behalf of the User.
While the Risk Monitor Mechanism is a useful feature that serves an
important risk management purpose, it operates consistent with the firm
quote obligations of a broker-dealer pursuant to Rule 602 of Regulation
NMS. Specifically, proposed paragraph (c) provides that any marketable
orders or quotes that are executable against a User's quotation that
are received prior to the time the Risk Monitor Mechanism is engaged
will be automatically executed at the price up to the User's size,
regardless of whether such an execution results in executions in excess
of the User's Specified Engagement Trigger. Accordingly, the Risk
Monitor Mechanism cannot be used to circumvent a User's firm quote
obligation.
If a User is quoting in two series of a particular option, at
several price levels in each, and sets an Options Category volume
trigger at 400 contracts, one contra side order can result in
executions in excess of the Specified Engagement Trigger. Specifically,
if a market order to sell 500 contracts is received in Series 1, the
order will execute against the first four levels that the User is
quoting, as follows:
----------------------------------------------------------------------------------------------------------------
Number of Number of
contracts contracts
Price level Series 1 size Series 2 size executed Series executed Series
1 2
----------------------------------------------------------------------------------------------------------------
Level 1................................. 100 50 100 0
Level 2................................. 100 50 100 0
Level 3................................. 150 100 150 0
Level 4................................. 150 200 150 0
Level 5................................. 150 200 0 0
-----------------------------------------------------------------------
Total............................... 650 600 500 0
----------------------------------------------------------------------------------------------------------------
Although the User set a volume trigger at 400 contracts, the contra
side order executes in its entirety and the Risk Protection Mechanism
is engaged after the resulting executions have surpassed the Specified
Engagement Trigger. The remaining quoted contracts in Series 1 and all
quoted contracts in Series 2 would then be cancelled.
Proposed Rule 21.16(d) further provides that the system will reset
the counting period for absolute limits when a User refreshes its risk
limit thresholds. In addition, proposed Rule 21.16(d) provides that the
System will reset the counting program and commence a new specified
time period when: (i) A previous counting period has expired and a
transaction occurs in any series in such option; or (ii) A User
refreshes its risk limit thresholds prior to the expiration of the
specified time period. For example, assume that a User has set Options
Category limits for a particular option as follows: Volume triggers at
500 contracts per second and 20,000 contracts per minute, a count
trigger at 20 executions per second, and an absolute notional value
trigger of $30,000. Assume that at a particular point in time, 400
front-month calls have executed in the current second, 19,000 front-
month calls have executed in the current minute, 10 executions of
front-month calls have occurred in the current second and a total of
$25,000 notional has been executed in front-month calls over the course
of the trading day. Next, an incoming order from another User of BATS
Options is received that results in another 1,000 front-month call
contracts executing within the current minute, thus triggering the
volume trigger of 20,000 contracts per minute. If the User reset the
risk limit threshold, all values, including the absolute notional
calculation for the trading day, would be reset to zero.
2. Statutory Basis
The rule change 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.\7\ Specifically, the
proposed change is consistent with Section 6(b)(5) of the Act,\8\
because it is designed to prevent fraudulent and manipulative acts and
practices, to promote just and equitable principles of trade, to foster
cooperation and coordination with persons engaged in facilitating
transactions in securities, and to remove impediments to, and perfect
the mechanism of, a free and open market and a national market system.
The Exchange believes that the proposal is appropriate and reasonable,
because it offers functionality for Users to manage their risk.
Offering of a Risk Monitor Mechanism will allow Market Makers and other
Users to quote aggressively which removes impediments to a free and
open market and benefits all Users of BATS Options. The Exchange notes
that a similar functionality is offered by NOM and other options
exchanges.\9\
---------------------------------------------------------------------------
\7\ 15 U.S.C. 78f(b).
\8\ 15 U.S.C. 78f(b)(5).
\9\ See NOM Chapter VI, Section 19; see also NASDAQ OMX PHLX
Rule 1093; CBOE Rule 8.18; NYSE AMEX Options Rule 928; NYSE ARCA
Options Rule 6.40.
---------------------------------------------------------------------------
(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.
III. Date of Effectiveness of the Proposed Rule Changes and Timing for
Commission Action
Because the foregoing proposed rule change does not: (i)
Significantly affect the protection of investors or the public
interest; (ii) impose any significant burden on competition; and (iii)
become operative for 30 days from the date on which it was filed, or
such shorter time as the Commission may designate, it has become
effective pursuant to Section 19(b)(3)(A) of the Act \10\ and Rule 19b-
4(f)(6)(iii) thereunder.\11\ In addition, the Exchange provided the
Commission with written notice of its intent to file the proposed rule
change, along with a brief description and text of the
[[Page 35723]]
proposed rule change, at least five business days prior to the date of
filing, or such shorter time as designated by the Commission.\12\
---------------------------------------------------------------------------
\10\ 15 U.S.C. 78s(b)(3)(A).
\11\ 17 CFR 240.19b-4(f)(6)(iii).
\12\ Id.
---------------------------------------------------------------------------
At any time within 60 days of the filing of the proposed rule
change, the Commission summarily may temporarily suspend such rule
change if it appears to the Commission that such action is necessary or
appropriate in the public interest, for the protection of investors, or
otherwise in furtherance of the purposes of the Act.
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 email to rule-comments@sec.gov. Please include
File No. SR-BATS-2012-021 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-2012-021. This file
number should be included on the subject line if email 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 Web site 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
10:00 a.m. and 3:00 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-2012-021 and should be
submitted on or before July 5, 2012.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\13\
---------------------------------------------------------------------------
\13\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-14530 Filed 6-13-12; 8:45 am]
BILLING CODE 8011-01-P
