Self-Regulatory Organizations; BATS Exchange, Inc.; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Modify Rule 11.13 Entitled “Order Execution,” Rule 21.9 Entitled “Order Routing” and Rule 27.2 Entitled “Order Protection”, 39538-39543 [2012-16215]
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srobinson on DSK4SPTVN1PROD with NOTICES
39538
Federal Register / Vol. 77, No. 128 / Tuesday, July 3, 2012 / Notices
dues, fees and other charges among
members and issuers and other persons
using any facility or system which Phlx
operates or controls, and is not designed
to permit unfair discrimination between
customers, issuers, brokers, or dealers.
As originally proposed and as
modified by this proposed rule change,
Phlx believes that the Order Entry Fee
is reasonable because it is designed to
achieve improvements in the quality of
displayed liquidity and market data that
will benefit all market participants. In
addition, although the level of the fee
may theoretically be very high, the fee
is reasonable because market
participants may readily avoid the fee
by making improvements in their order
entry practices that reduce the number
of orders they enter, bring the prices of
their orders closer to the NBBO, and/or
increase the percentage of their orders
that execute. The proposed change to
the fee is reasonable because it will
reduce the likelihood of the fee being
imposed on an MPID that is considered
acceptably efficient during regular
market hours, when the impact of
inefficient trading on PSX and other
market participants is highest.
For similar reasons, the fee is
consistent with an equitable allocation
of fees, because although the fee may
apply to only a small number of market
participants, the fee would be applied to
them in order to encourage better order
entry practices that will benefit all
market participants. Ideally, the fee will
be applied to no one, because market
participants will adjust their behavior in
order to avoid the fee. The proposed
change will increase the likelihood that
the fee will not be imposed in
unwarranted circumstances. Finally,
Phlx believes that the fee is not unfairly
discriminatory. Although the fee may
apply to only a small number of market
participants, it will be imposed because
of the negative externalities that such
market participants impose on others
through inefficient order entry practices.
The proposed modification to the fee is
not unfairly discriminatory because
although it will lessen the potential
impact of the fee on MPIDs that are
active outside of regular market hours,
this change is rationally related to the
fee’s purpose of promoting efficient
trading practices in conditions where
inefficiency may negatively impact Phlx
and other market participants.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
Phlx does not believe that the
proposed rule change will result in any
burden on competition that is not
necessary or appropriate in furtherance
of the purposes of the Act, as amended.
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Specifically, Phlx believes that the fee
will constrain market participants from
pursuing certain inefficient and
potentially abusive trading strategies. To
the extent that this change may be
construed as a burden on competition,
Phlx believes that it is appropriate in
order to further the purposes of Section
6(b)(5) of the Act.7 The proposed change
will lessen any burden on competition
by removing from consideration orders
entered outside of regular market hours,
when concerns about the impact of
inefficient trading on Phlx and other
market participants are diminished.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
Written comments were neither
solicited nor received.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
The foregoing rule change has become
effective pursuant to Section
19(b)(3)(A)(ii) of the Act.8 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. If the Commission
takes such action, the Commission shall
institute proceedings to determine
whether the proposed rule should be
approved or disapproved.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change 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 rulecomments@sec.gov. Please include File
Number SR–Phlx–2012–85 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.
PO 00000
All submissions should refer to File
Number SR–Phlx–2012–85. 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 change 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 on official business
days between the hours of 10:00 a.m.
and 3:00 p.m. Copies of such filing also
will be available for inspection and
copying at the principal offices 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 Number SR–Phlx2012–85, and should be submitted on or
before July 24, 2012.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.9
Kevin M. O’Neill,
Deputy Secretary.
[FR Doc. 2012–16211 Filed 7–2–12; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–67275; File No. SR–BATS–
2012–024]
Self-Regulatory Organizations; BATS
Exchange, Inc.; Notice of Filing and
Immediate Effectiveness of a Proposed
Rule Change To Modify Rule 11.13
Entitled ‘‘Order Execution,’’ Rule 21.9
Entitled ‘‘Order Routing’’ and Rule 27.2
Entitled ‘‘Order Protection’’
June 27, 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 15,
9 17
7 15
U.S.C. 78f(b)(5).
8 15 U.S.C. 78s(b)(3)(a)(ii). [sic]
Frm 00076
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CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b-4.
1 15
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Federal Register / Vol. 77, No. 128 / Tuesday, July 3, 2012 / Notices
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 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 is filing with the
Commission a proposal to amend Rule
11.13 entitled ‘‘Order Execution’’, Rule
21.9 entitled ‘‘Order Routing’’ and Rule
27.2 entitled ‘‘Order Protection’’, to
modify Exchange system functionality
when the consolidated market is crossed
and to modify the handling of orders
that have been rejected after routing
away through the Exchange’s affiliated
broker-dealer. The proposal applies to
both the BATS equity securities trading
platform (‘‘BATS Equities’’) and 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.
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
srobinson on DSK4SPTVN1PROD with NOTICES
1. Purpose
The purpose of this rule filing is to
modify Exchange system functionality
when the consolidated market is crossed
and to modify the handling of orders
that have been rejected after routing
away through the Exchange’s affiliated
broker-dealer. The proposal applies to
both BATS Equities and BATS Options,
as described below.
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BATS Equities
The Exchange is proposing changes to
its system functionality for BATS
Equities to implement a price constraint
in the event the Exchange receives a
non-routable order and a Protected Bid 3
and a Protected Offer 4 are crossed (a
‘‘Crossed Market’’). The Exchange is
also proposing to provide its Users with
the option to avoid any execution when
there is a Crossed Market. Finally, the
Exchange is proposing a change to the
way that it responds to rejections of
orders that were routed to a Protected
Quotation.5
Under current BATS Rules, for any
execution to occur on BATS Equities
during Regular Trading Hours,6 the
price must be equal to or better than the
Protected NBBO,7 unless the order is
marked ISO or unless the execution falls
within another exception set forth in
Rule 611(b) of Regulation NMS. For any
execution to occur during the PreOpening Session 8 or the After Hours
Trading Session,9 the price must be
equal to or better than the highest
Protected Bid or lowest Protected Offer.
As noted below, the Exchange also
currently allows executions of orders
outside of Regular Trading Hours when
an order is marked ISO and there is a
Crossed Market.
The restrictions on executions
described above reflect the Exchange’s
implementation of the trade-through
rule of Regulation NMS, Rule 611,
which only applies during Regular
Trading Hours; however the Exchange
has also implemented trade-through
protection outside of Regular Trading
Hours in order to promote the handling
of orders in a consistent and orderly
fashion. Pursuant to the exception of
Rule 611(b)(4) during Regular Trading
3 As defined in BATS Rule 1.5(t), Protected Bid
means a bid in a stock that is displayed by an
automated trading center, disseminated pursuant to
an effective national market system plan, and an
automated quotation that is the best bid of a
national securities exchange or association.
4 As defined in BATS Rule 1.5(t), Protected Offer
means an offer in a stock that is displayed by an
automated trading center, disseminated pursuant to
an effective national market system plan, and an
automated quotation that is the best offer of a
national securities exchange or association.
5 As defined in BATS Rule 1.5(t), Protected
Quotation means a quotation that is a Protected Bid
or Protected Offer.
6 As defined in BATS Rule 1.5(w), Regular
Trading Hours means the time between 9:30 a.m.
and 4:00 p.m. Eastern Time.
7 As defined in BATS Rule 1.5(s), Protected
NBBO means the national best bid or offer that is
a Protected Quotation.
8 As defined in BATS Rule 1.5(r), the Pre-Opening
Session means the time between 8:00 a.m. and 9:30
a.m. Eastern Time.
9 As defined in BATS Rule 1.5(c), the After Hours
Trading Session means the time between 4:00 p.m.
and 5:00 p.m. Eastern Time.
PO 00000
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39539
Hours, as well as during the PreOpening Session and the After Hours
Trading Session, the Exchange does not
currently impose trade-through
protections when there is a Crossed
Market. In order to constrain the price
of executions when there is a Crossed
Market, in the event that a Protected Bid
is crossing a Protected Offer, whether
during or outside of Regular Trading
Hours, unless an order is marked ISO,
BATS Equities will not execute any
portion of a bid at a price more than the
greater of 5 cents or 0.5 percent higher
than the lowest Protected Offer or any
portion of an offer that is not marked
ISO that would execute at a price more
than the greater of 5 cents or 0.5 percent
lower than the highest Protected Bid. In
order to provide an additional option for
Users 10 that do not want any orders to
execute when there is a Crossed Market,
upon instruction from a User, BATS
Equities will not execute any incoming
order from such User in the event a
Protected Bid is crossing a Protected
Offer. The Exchange believes that the
thresholds proposed in this rule filing
will help avoid executions of orders at
prices that are significantly worse than
the NBBO.11
The following example demonstrates
how the Exchange’s Crossed Market
threshold would operate for BATS
Equities:
• The NBBO in security ABC is $5.00
(bid) by $4.98 (offer), and thus, there is
a Crossed Market;
• A User submits a non-routable
market order (e.g., designated as a
‘‘BATS Only’’ order) to buy 1,000 shares
of ABC;
• The Exchange has liquidity in ABC
as follows: 100 shares to sell for $4.98,
100 shares to sell for $5.00, 200 shares
to sell for $5.03, and 300 shares to sell
for $5.05.
Under the circumstances described
above, the incoming market order to buy
would be executed as follows:
• 100 shares executed on the
Exchange at the $4.98 price level;
• 100 shares executed on the
Exchange at the $5.00 price level;
• 200 shares executed on the
Exchange at the $5.03 price level;
• 600 shares cancelled back to the
User.
As proposed, with a Crossed Market
of $5.00 by $4.98, the Exchange will
execute any incoming buy orders up to
and including $5.03 and any incoming
sell orders down to and including $4.95
10 As defined in BATS Rule 1.5(cc), a User is any
Member or Sponsored Participant who is
authorized to access the Exchange’s system
pursuant to Exchange Rules.
11 As defined in BATS Rule 1.5(o), NBBO shall
mean the national best bid or offer.
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srobinson on DSK4SPTVN1PROD with NOTICES
per share. Accordingly, under this
example, 400 shares of the incoming
buy order would be executed, including
200 shares at the Crossed Market
threshold of $5.03. The remaining 600
shares of the market order would be
cancelled back to the User because the
liquidity on the Exchange at the $5.05
price level exceeds the thresholds set
forth in proposed Rule 11.13. The
Exchange notes that in the event the
order was designated as eligible for
routing, the Exchange’s normal routing
strategies would apply, and, to the
extent that other market centers have
better prices than are available on the
BATS Book,12 the Exchange would
route the order away to such other
market centers rather than executing
solely on the Exchange. Accordingly,
the Exchange proposes to add language
to Rule 11.13 to make clear that to the
extent an incoming order is executable
because a Protected Bid is crossing a
Protected Offer but such incoming order
is eligible for routing and there is a
Protected Bid or Protected Offer
available at another Trading Center 13
that is better priced than the bid or offer
against which the order would execute
on the Exchange, the Exchange will first
seek to route the order to such better
priced quotation pursuant to Rule
11.13(a)(2).
The Exchange has proposed to
exclude ISOs from the proposed pricing
threshold because a User is subject to
certain specific obligations when
pricing and submitting an order as an
ISO.14 The Exchange believes that
rejecting an ISO upon receipt due to a
Crossed Market is inconsistent with the
general notion of an ISO, which allows
a User to designate a price at which the
Exchange can execute the order without
regard to the Exchange’s view of the
NBBO.
In addition to the implementation of
Crossed Market price constraints and
the ability to designate orders as
ineligible for execution during a Crossed
Market, the Exchange is proposing to
modify the way that it handles
12 As defined in BATS Rule 1.5(e), BATS Book
means the System’s electronic file of orders.
13 As defined in BATS Rule 2.11, a Trading
Center is another securities exchange, facility of a
securities exchange, automated trading system,
electronic communication network or other broker
or dealer.
14 See 17 CFR 240.600(b)(30) and 611(c); see also
BATS Rule 11.9(d)(1), which states that ‘‘[t]he
Exchange relies on the marking of an order as an
ISO order when handling such order, and thus, it
is the entering Member’s responsibility, not the
Exchange’s responsibility, to comply with the
requirements of Regulation NMS relating to
Intermarket Sweep Orders.’’ The Exchange notes
that as a self-regulatory organization it conducts
regulatory oversight of each Exchange Member’s use
of Intermarket Sweep Orders on the Exchange.
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rejections received from other Trading
Centers. Currently the Exchange routes
all orders through its affiliated brokerdealer, BATS Trading, Inc. (‘‘BATS
Trading’’). In certain instances, BATS
Trading, in turn, routes to certain third
party broker-dealers in order to ensure
that the Exchange has effective and
redundant connections to all other
Trading Centers with Protected
Quotations. BATS Trading occasionally
receives ‘‘rejections’’ of orders either
from the Trading Centers to which it
routes directly or through the third
party broker-dealers through which it
routes. Such rejections can be for
various reasons, including a technical
problem with the order, market access
thresholds implemented pursuant to
SEC Rule 15c3–5, or other operational
thresholds. The Exchange currently
handles orders on which it receives
rejections by either cancelling the order
back to the User or, if the order
submitted by the User instructs the
Exchange to do so, by posting the order
to the Exchange’s order book after
subjecting such order to its price sliding
process pursuant to Rule 11.9(g) in
order to avoid locking any Protected
Quotation that it cannot access. Rather
than posting an order to its book, the
Exchange proposes to cancel all orders
for which it has received a rejection due
to an inability to access another Trading
Center, providing a User with the
opportunity to submit a new order or
seek another path to the applicable
Protected Quotation. The Exchange has
also proposed to make clear that such a
cancellation will not apply to Protected
Quotations published by a Trading
Center against which the Exchange has
declared self-help pursuant to Exchange
Rule 11.13(d). Although a Protected
Quotation may be inaccessible to the
Exchange, once the Exchange has
declared self-help pursuant to Rule
11.13(d), the Exchange disregards, and
will continue to execute transactions
and route orders without regard to, such
Protected Quotations. Notwithstanding
the foregoing, however, even after the
Exchange has received a rejection from
a Trading Center, if there are multiple
Trading Centers included in the routing
option selected by the User that have
Protected Quotations at the NBBO, the
System 15 will continue to route the
order to the Protected Quotations at
other such other Trading Centers at that
price level.
15 As defined in BATS Rule 1.5(aa), System
means the electronic communications and trading
facility designate [sic] by the Board through which
securities orders of Users are consolidated for
ranking, execution and, when applicable, routing
away.
PO 00000
Frm 00078
Fmt 4703
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BATS Options
The Exchange proposes to make each
of the proposed changes described
above to the functionality applicable to
trading on and routing away from,
BATS Options. The Exchange notes that
there are no substantive differences to
the proposed functionality; rather, the
only differences between the proposal
for BATS Equities and BATS Options
are the references to applicable rules
and terms.
The Exchange is proposing changes to
its system functionality for BATS
Options to implement a price constraint
in the event the Exchange receives a
non-routable order and a Protected Bid
is higher than a Protected Offer 16 in a
series of an Eligible Class (a ‘‘Crossed
Market’’).17 The Exchange is also
proposing to provide its Users with the
option to avoid any execution when
there is a Crossed Market. Finally, the
Exchange is proposing a change to the
way that it responds to rejections of
orders that were routed to a Protected
Quotation.18
Under current BATS Rules, Members
are prohibited from effecting TradeThroughs 19 on BATS Options unless
the execution falls within another
exception set forth in BATS Rule
27.2(b), which includes an exception for
any order that is marked ISO. Pursuant
to the exception of Rule 27.2(b)(3), the
Exchange does not prohibit TradeThroughs when there is a Crossed
Market. In order to constrain the price
of executions when there is a Crossed
Market, in the event that a Protected Bid
is crossing a Protected Offer, unless an
order is marked ISO, BATS Options will
not execute any portion of a bid at a
price more than the greater of 5 cents or
0.5 percent higher than the lowest
Protected Offer or any portion of an
16 As defined in BATS 27.1(18), ‘‘Protected Bid’’
or ‘‘Protected Offer’’ means a Bid or Offer in an
options series, respectively, that: (A) Is
disseminated pursuant to the OPRA Plan; and (B)
Is the Best Bid or Best Offer, respectively, displayed
by an Eligible Exchange. An ‘‘Eligible Exchange’’ is
a national securities exchange registered with the
SEC in accordance with Section 6(a) of the
Exchange Act that: (a) Is a Participant Exchange in
OCC (as that term is defined in Section VII of the
OCC by-laws); (b) is a party to the OPRA Plan (as
that term is described in Section I of the OPRA
Plan); and (c) if the national securities exchange
chooses not to become a party to this Plan, is a
participant in another plan approved by the
Commission providing for comparable TradeThrough and Locked and Crossed Market
protection.
17 This definition for Crossed Market is consistent
with the definition contained in BATS Rule 27.1(5).
18 As defined in BATS Rule 27.1(19), Protected
Quotation means a Protected Bid or Protected Offer.
19 As defined in BATS Rule 27.1(22), a TradeThrough is a transaction in an options series at a
price that is lower than a Protected Bid or higher
than a Protected Offer.
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Federal Register / Vol. 77, No. 128 / Tuesday, July 3, 2012 / Notices
offer that is not marked ISO that would
execute at a price more than the greater
of 5 cents or 0.5 percent lower than the
highest Protected Bid. In order to
provide an additional option for Users 20
that do not want any orders to execute
when there is a Crossed Market, upon
instruction from a User, BATS Options
will not execute any incoming order
from such User in the event a Protected
Bid is crossing a Protected Offer. The
Exchange believes that the thresholds
proposed in this rule filing will help
avoid executions of orders at prices that
are significantly worse than the
NBBO.21
The following example demonstrates
how the Exchange’s Crossed Market
threshold would operate for BATS
Options:
• The NBBO in options series XYZ is
$2.00 (bid) by $1.98 (offer), and thus,
there is a Crossed Market;
• A User submits a non-routable
market order (e.g., designated as a
‘‘BATS Only’’ order) to buy 100
contracts of XYZ;
• The Exchange has liquidity in XYZ
as follows: 10 contracts to sell for $1.98,
10 contracts to sell for $2.00, 20
contracts to sell for $2.03, and 30
contracts to sell for $2.05.
Under the circumstances described
above, the incoming market order to buy
would be executed as follows:
• 10 contracts executed on the
Exchange at the $1.98 price level;
• 10 contracts executed on the
Exchange at the $2.00 price level;
• 20 contracts executed on the
Exchange at the $2.03 price level;
• 60 contracts cancelled back to the
User.
As proposed, with a Crossed Market of
$2.00 by $1.98, the Exchange will
execute any incoming buy orders up to
and including $2.03 and any incoming
sell orders down to and including $1.95
per share. Accordingly, under this
example, 40 contracts of the incoming
buy order would be executed, including
20 contracts at the Crossed Market
threshold of $2.03. The remaining 60
contracts of the market order would be
cancelled back to the User because the
liquidity on the Exchange at the $2.05
price level exceeds the thresholds set
forth in proposed Interpretation and
Policy .01 to Rule 27.2. The Exchange
notes that in the event the order was
designated as eligible for routing, the
Exchange’s normal routing strategies
20 As defined in BATS Rule 16.1(a)(63), a User is
any Options Member or Sponsored Participant who
is authorized to access the Exchange’s system
pursuant to Exchange Rules.
21 As defined in BATS Rule 27.1(11), NBBO shall
mean the national best bid and offer in an option
series as calculated by an Eligible Exchange.
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Jkt 226001
would apply, and, to the extent that
other market centers have better prices
than are available on the BATS Options
Book,22 the Exchange would route the
order away to such other market centers
rather than executing solely on the
Exchange. Accordingly, the Exchange
proposes to add Interpretation and
Policy .02 to Rule 27.2 to make clear
that to the extent an incoming order is
executable because a Protected Bid is
crossing a Protected Offer but such
incoming order is eligible for routing
and there is a Protected Bid or Protected
Offer available at another options
exchange that is better priced than the
bid or offer against which the order
would execute on the Exchange, the
Exchange will first seek to route the
order to such better priced quotation
pursuant to Rule 21.9.
As described for BATS Equities, the
Exchange has proposed to exclude ISOs
from the proposed pricing threshold for
BATS Options because a User is subject
to certain specific obligations when
pricing and submitting an order as an
ISO. The Exchange believes that
rejecting an ISO upon receipt due to a
Crossed Market is inconsistent with the
general notion of an ISO, which allows
a User to designate a price at which the
Exchange can execute the order without
regard to the Exchange’s view of the
NBBO.
In addition to the implementation of
Crossed Market price constraints and
the ability to designate orders as
ineligible for execution during a Crossed
Market, the Exchange is proposing to
modify the way that it handles
rejections received from other options
exchanges. Currently the Exchange
routes all orders through its affiliated
broker-dealer, BATS Trading, Inc.
(‘‘BATS Trading’’). In certain instances,
BATS Trading, in turn, routes to certain
third party broker-dealers in order to
ensure that the Exchange has effective
and redundant connections to all other
options exchanges with Protected
Quotations. BATS Trading occasionally
receives ‘‘rejections’’ of orders either
from the options exchanges to which it
routes directly or through the third
party broker-dealers through which it
routes. Such rejections can be for
various reasons, including a technical
problem with the order, market access
thresholds implemented pursuant to
SEC Rule 15c3–5, or other operational
thresholds. The Exchange currently
handles orders on which it receives
rejections by either cancelling the order
back to the User or, if the order
22 As defined in BATS Rule 16.1(a)(9), BATS
Options Book means the means the electronic book
of options orders maintained by the System.
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39541
submitted by the User instructs the
Exchange to do so, by posting the order
to the Exchange’s order book after
subjecting such order to its price sliding
process pursuant to Rule 21.1 in order
to avoid locking any Protected
Quotation that it cannot access. Rather
than posting an order to its book, the
Exchange proposes to cancel all orders
for which it has received a rejection due
to an inability to access another options
exchange, providing a User with the
opportunity to submit a new order or
seek another path to the applicable
Protected Quotation. The Exchange has
also proposed to make clear that such a
cancellation will not apply to Protected
Quotations published by an options
exchange against which the Exchange
has declared self-help pursuant to
Exchange Rule 27.2(b)(1). Although a
Protected Quotation may be inaccessible
to the Exchange, once the Exchange has
declared self-help pursuant to Rule
27.2(b)(1), the Exchange disregards, and
will continue to execute transactions
and route orders without regard to, such
Protected Quotations. Notwithstanding
the foregoing, however, even after the
Exchange has received a rejection from
an options exchange, if there are
multiple options exchanges included in
the routing option selected by the User
that have Protected Quotations at the
NBBO, the System 23 will continue to
route the order to the Protected
Quotations at other such other options
exchanges at that price level.
2. Statutory Basis
The Exchange believes that its
proposal 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.24 In particular, the proposal is
consistent with Section 6(b)(5) of the
Act,25 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 by helping
to avoid executions of orders on the
Exchange at prices that are significantly
worse than the national best bid or
national best offer at the time an order
is initially received by the Exchange,
even if executions are permissible
pursuant to Regulation NMS or under
the Exchange’s analogous rules for
BATS Options. The Exchange believes
23 As defined in BATS Rule 16.1(a)(59), System
means the automated trading system used by BATS
Options for the trading of options contracts.
24 15 U.S.C. 78f(b).
25 15 U.S.C. 78f(b)(5).
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Federal Register / Vol. 77, No. 128 / Tuesday, July 3, 2012 / Notices
srobinson on DSK4SPTVN1PROD with NOTICES
that permitting Users to avoid any
execution of an incoming order in a
Crossed Market is an additional
functionality that is consistent with the
protection of investors and the public
interest. Although the Exchange does
not believe that any other self-regulatory
organization has exactly the same
Crossed Market threshold in place, the
Exchange as well as other market
centers have implemented a variety of
pricing thresholds to constrain
executions and protect market
participants.26 Also, this proposal is
consistent with existing Exchange rules
that allow for the breaking of trades
deemed clearly erroneous 27 or in
obvious error 28 by reference to objective
thresholds worse than the NBBO. The
Exchange believes that the proposed
pricing thresholds are reasonable
because they are significantly narrower
than thresholds in place on BATS
Equities for market orders received by
the Exchange 29 and also narrower than
applicable clearly erroneous thresholds
for BATS Equities. A narrow threshold
will protect market participants and
their customers from potentially
executing at prices away from the NBBO
when there is a Crossed Market, which
can be an indication of a pricing
anomaly in a security or a potential
systems issue at another Trading Center
or options exchange. Further, the
proposed threshold is consistent with
the protection of investors and the
public interest because it will help to
avoid clearly erroneous executions or
obvious error transactions from
occurring in the first place, rather than
allowing an execution to occur and
breaking the trade based on Exchange
rules.
Finally, the Exchange believes that
the cancellation of all orders that have
been rejected by other market centers or
third party routers, rather than posting
such orders to the Exchange’s book will
provide Users with more immediate
certainty regarding their orders, and will
provide Users the ability to modify and
re-submit or send their orders via a
different path to attempt to access the
applicable Protected Quotation.
Accordingly, the modifications to BATS
Rules 11.13 and 20.9 [sic] 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.
(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 Change and Timing for
Commission Action
Because the 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 if
consistent with the protection of
investors and the public interest, the
proposed rule change has become
effective pursuant to Section 19(b)(3)(A)
of the Act 30 and Rule 19b–4(f)(6)
thereunder.31
A proposed rule change filed
pursuant to Rule 19b–4(f)(6) under the
Act 32 normally does not become
operative for 30 days after the date of its
filing. However, Rule 19b–4(f)(6) 33
permits the Commission to designate a
shorter time if such action is consistent
with the protection of investors and the
public interest. The Exchange has asked
the Commission to waive the 30-day
operative delay, noting that doing so
would allow investors and market
participants to benefit immediately from
additional protection against certain
executions in Crossed Market
conditions and from the ability to reroute or re-submit orders that are unable
to access, and therefore rejected by,
other market centers with Protected
Quotations at the NBBO. The
Commission believes that waiving the
30-day operative delay is consistent
with the protection of investors and the
30 15
U.S.C. 78s(b)(3)(A).
CFR 240.19b–4(f)(6). As required under Rule
19b–4(f)(6)(iii), the Exchange provided the
Commission with written notice of its intent to file
the proposed rule change along with a brief
description and the text of the proposed rule
change, at least five business days prior to the date
of filing of the proposed rule change, or such
shorter time as designated by the Commission.
32 17 CFR 240.19b–4(f)(6).
33 17 CFR 240.19b–4(f)(6).
31 17
26 See, e.g., BATS Rule 11.9(a)(2), which
constrains the executions of a market order on
BATS to $0.50 or 5 percent away from the NBBO
at the time the order initially reaches the Exchange;
see also NYSE Arca Rule 7.31(a); NASDAQ Rule
4751(f)(13).
27 See BATS Rule 11.17.
28 See BATS Rule 20.6.
29 See supra note 26.
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Sfmt 4703
public interest.34 Therefore, the
Commission designates the proposal
operative upon filing.
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 proposed rule
change is consistent with the Exchange
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 rulecomments@sec.gov. Please include File
Number SR–BATS–2012–024 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
Number SR–BATS–2012–024. 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 change 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 the
34 For purposes only of waiving the 30-day
operative delay, the Commission has considered the
proposed rule’s impact on efficiency, competition,
and capital formation. See 15 U.S.C. 78c(f).
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Federal Register / Vol. 77, No. 128 / Tuesday, July 3, 2012 / Notices
filing also will 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 Number SR–BATS–
2012–024 and should be submitted on
or before July 24, 2012.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.35
Kevin M. O’Neill,
Deputy Secretary.
[FR Doc. 2012–16215 Filed 7–2–12; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–67281; File No. SR–
NASDAQ–2012–057]
Self-Regulatory Organizations; The
NASDAQ Stock Market LLC; Order
Approving a Proposed Rule Change
With Respect to the Authority of
NASDAQ or NASDAQ Execution
Services To Cancel Orders When a
Technical or Systems Issue Occurs
and To Describe the Operation of an
Error Account
June 27, 2012.
srobinson on DSK4SPTVN1PROD with NOTICES
I. Introduction
On April 30, 2012, The NASDAQ
Stock Market LLC (‘‘Exchange’’ or
‘‘NASDAQ’’) filed with the Securities
and Exchange Commission
(‘‘Commission’’), pursuant to Section
19(b)(1) of the Securities Exchange Act
of 1934 (‘‘Act’’) 1 and Rule 19b–4
thereunder,2 a proposed rule change to
amend NASDAQ Equity Rule 4758 by
adding a new paragraph (d) that
addresses the authority of NASDAQ or
NASDAQ Execution Services (‘‘NES’’) to
cancel orders when a technical or
systems issue occurs and to describe the
operation of an error account for NES.
The proposed rule change was
published for comment in the Federal
Register on May 16, 2012.3 The
Commission received no comment
letters regarding the proposed rule
change. This order approves the
proposed rule change.
35 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 Securities Exchange Act Release No. 66964 (May
10, 2012), 77 FR 28905 (May 16, 2012) (SR–
NASDAQ–2012–057) (‘‘Notice’’).
1 15
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II. Description of the Proposal
NES, a broker-dealer that is a facility
and an affiliate of NASDAQ, provides
outbound routing services from
NASDAQ to other market centers
pursuant to NASDAQ rules.4 In its
proposal, NASDAQ states that a
technical or systems issue may occur at
NASDAQ, NES, or a routing destination
that causes NASDAQ or NES to cancel
orders, if NASDAQ or NES determines
that such action is necessary to maintain
a fair and orderly market.5 NASDAQ
also states that a technical or systems
issue that occurs at NASDAQ, NES, a
routing destination, or a non-affiliate
third-party Routing Broker 6 may result
in NES acquiring an error position that
it must resolve.7
New paragraph (d) to NASDAQ
Equity Rule 4758 provides NASDAQ or
NES with general authority to cancel
orders to maintain fair and orderly
markets when a technical or systems
issue occurs at NASDAQ, NES, or a
routing destination. It also provides
authority for NES to maintain an error
account for the purpose of addressing,
and sets forth the procedures for
resolving, error positions. Specifically,
paragraph (d)(1) of NASDAQ Equity
Rule 4758 authorizes NASDAQ or NES
to cancel orders as either deems
necessary to maintain fair and orderly
markets if a technical or systems issue
occurs at NASDAQ, NES, or a routing
destination. NASDAQ or NES will be
required to provide notice of the
cancellation to all affected members as
soon as practicable.8
Paragraph (d)(2) of NASDAQ Equity
Rule 4758 will allow NES to maintain
an error account for the purpose of
4 See Notice, 77 FR at 28906, n.3 and
accompanying text, and text accompanying n.4. See
also NASDAQ Equity Rule 4758.
NASDAQ also has authority to receive equities
orders routed inbound to NASDAQ by NES from
NASDAQ OMX BX and the NASDAQ OMX PSX of
NASDAQ OMX PHLX on a pilot basis. See Notice,
77 FR at 28906, n.4. See also Securities Exchange
Act Release No. 65554 (October 13, 2011), 76 FR
65311 (October 20, 2011) (SR–NASDAQ–2011–142).
5 See Notice, 77 FR at 28906. For examples of
some of the circumstances in which NASDAQ or
NES may decide to cancel orders, see id.
6 NASDAQ states that, from time to time, it also
uses non-affiliate third-party broker-dealers to
provide outbound routing services. In its proposal,
the Exchange refers to these broker-dealers as ‘‘third
party Routing Brokers.’’ See Notice, 77 FR at 28906,
n.3.
7 See Notice, 77 FR at 28906. Specifically,
NASDAQ Equity Rule 4758(d)(2) defines ‘‘error
positions’’ as ‘‘positions that result from a technical
or systems issue at Nasdaq Execution Services,
Nasdaq, a routing destination, or a non-affiliate
third-party Routing Broker that affects one or more
orders.’’
For examples of some of the circumstances that
may lead to error positions, see Notice, 77 FR at
28906–07.
8 See NASDAQ Equity Rule 4758(d)(1).
PO 00000
Frm 00081
Fmt 4703
Sfmt 4703
39543
addressing error positions that result
from a technical or systems issue at
NASDAQ, NES, a routing destination, or
a non-affiliate third-party Routing
Broker.
For purposes of NASDAQ Equity Rule
4758(d), an error position will not
include any position that results from
an order submitted by a member to
NASDAQ that is executed on NASDAQ
and automatically processed for
clearance and settlement on a locked-in
basis.9 NES will not be permitted to (i)
accept any positions in its error account
from a member’s account or (ii) permit
any member to transfer any positions
from the member’s account to NES’s
error account.10 In other words, NES
may not accept from a member positions
that are delivered to the member
through the clearance and settlement
process, even if those positions may
have been related to a technical or
systems issue at NASDAQ, NES, a
routing destination, or a non-affiliate
third-party Routing Broker.11 If a
member receives locked-in positions in
connection with a technical or systems
issue and experiences a loss in
unwinding those positions, that member
may seek to rely on NASDAQ Equity
Rule 4626, which provides members
with the ability to file claims against
NASDAQ ‘‘for losses directly resulting
from the [NASDAQ] systems’ actual
failure to correctly process an order,
Quote/Order, message, or other data,
provided the Nasdaq Market Center has
acknowledged receipt of the order,
Quote/Order, message, or data.’’ 12 If,
however, a technical or systems issue
results in NASDAQ not having valid
clearing instructions for a member to a
trade, NES may assume that member’s
side of the trade so that the trade can be
9 See
NASDAQ Equity Rule 4758(d)(2)(A).
NASDAQ Equity Rule 4758(d)(2)(B).
11 See Notice, 77 FR at 28907, n.11. This
provision would not apply if NES incurred a short
position to settle a member’s purchase, as the
member would not have had a position in its
account as a result of the purchase at the time of
NES’s action. Similarly, if a systems issue occurs
that causes one member to receive an execution for
which there is not an available counterparty, action
by NES would be required for the positions to settle
into that member’s account. See id.
If error positions result in connection with
NASDAQ’s use of a third-party Routing Broker for
outbound routing and those positions are delivered
to NES through the clearance and settlement
process, NES would be permitted to resolve those
positions. If, however, such positions were not
delivered to NES through the clearance and
settlement process, then the third-party Routing
Broker would resolve the error positions itself, and
NES would not be permitted to accept the positions.
See Notice, 77 FR at 28906, n.3.
12 See Notice, 77 FR at 28907, n.11.
10 See
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]]>Agencies
[Federal Register Volume 77, Number 128 (Tuesday, July 3, 2012)]
[Notices]
[Pages 39538-39543]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-16215]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-67275; File No. SR-BATS-2012-024]
Self-Regulatory Organizations; BATS Exchange, Inc.; Notice of
Filing and Immediate Effectiveness of a Proposed Rule Change To Modify
Rule 11.13 Entitled ``Order Execution,'' Rule 21.9 Entitled ``Order
Routing'' and Rule 27.2 Entitled ``Order Protection''
June 27, 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 15,
[[Page 39539]]
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 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.
---------------------------------------------------------------------------
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 to amend Rule
11.13 entitled ``Order Execution'', Rule 21.9 entitled ``Order
Routing'' and Rule 27.2 entitled ``Order Protection'', to modify
Exchange system functionality when the consolidated market is crossed
and to modify the handling of orders that have been rejected after
routing away through the Exchange's affiliated broker-dealer. The
proposal applies to both the BATS equity securities trading platform
(``BATS Equities'') and 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.
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 this rule filing is to modify Exchange system
functionality when the consolidated market is crossed and to modify the
handling of orders that have been rejected after routing away through
the Exchange's affiliated broker-dealer. The proposal applies to both
BATS Equities and BATS Options, as described below.
BATS Equities
The Exchange is proposing changes to its system functionality for
BATS Equities to implement a price constraint in the event the Exchange
receives a non-routable order and a Protected Bid \3\ and a Protected
Offer \4\ are crossed (a ``Crossed Market''). The Exchange is also
proposing to provide its Users with the option to avoid any execution
when there is a Crossed Market. Finally, the Exchange is proposing a
change to the way that it responds to rejections of orders that were
routed to a Protected Quotation.\5\
---------------------------------------------------------------------------
\3\ As defined in BATS Rule 1.5(t), Protected Bid means a bid in
a stock that is displayed by an automated trading center,
disseminated pursuant to an effective national market system plan,
and an automated quotation that is the best bid of a national
securities exchange or association.
\4\ As defined in BATS Rule 1.5(t), Protected Offer means an
offer in a stock that is displayed by an automated trading center,
disseminated pursuant to an effective national market system plan,
and an automated quotation that is the best offer of a national
securities exchange or association.
\5\ As defined in BATS Rule 1.5(t), Protected Quotation means a
quotation that is a Protected Bid or Protected Offer.
---------------------------------------------------------------------------
Under current BATS Rules, for any execution to occur on BATS
Equities during Regular Trading Hours,\6\ the price must be equal to or
better than the Protected NBBO,\7\ unless the order is marked ISO or
unless the execution falls within another exception set forth in Rule
611(b) of Regulation NMS. For any execution to occur during the Pre-
Opening Session \8\ or the After Hours Trading Session,\9\ the price
must be equal to or better than the highest Protected Bid or lowest
Protected Offer. As noted below, the Exchange also currently allows
executions of orders outside of Regular Trading Hours when an order is
marked ISO and there is a Crossed Market.
---------------------------------------------------------------------------
\6\ As defined in BATS Rule 1.5(w), Regular Trading Hours means
the time between 9:30 a.m. and 4:00 p.m. Eastern Time.
\7\ As defined in BATS Rule 1.5(s), Protected NBBO means the
national best bid or offer that is a Protected Quotation.
\8\ As defined in BATS Rule 1.5(r), the Pre-Opening Session
means the time between 8:00 a.m. and 9:30 a.m. Eastern Time.
\9\ As defined in BATS Rule 1.5(c), the After Hours Trading
Session means the time between 4:00 p.m. and 5:00 p.m. Eastern Time.
---------------------------------------------------------------------------
The restrictions on executions described above reflect the
Exchange's implementation of the trade-through rule of Regulation NMS,
Rule 611, which only applies during Regular Trading Hours; however the
Exchange has also implemented trade-through protection outside of
Regular Trading Hours in order to promote the handling of orders in a
consistent and orderly fashion. Pursuant to the exception of Rule
611(b)(4) during Regular Trading Hours, as well as during the Pre-
Opening Session and the After Hours Trading Session, the Exchange does
not currently impose trade-through protections when there is a Crossed
Market. In order to constrain the price of executions when there is a
Crossed Market, in the event that a Protected Bid is crossing a
Protected Offer, whether during or outside of Regular Trading Hours,
unless an order is marked ISO, BATS Equities will not execute any
portion of a bid at a price more than the greater of 5 cents or 0.5
percent higher than the lowest Protected Offer or any portion of an
offer that is not marked ISO that would execute at a price more than
the greater of 5 cents or 0.5 percent lower than the highest Protected
Bid. In order to provide an additional option for Users \10\ that do
not want any orders to execute when there is a Crossed Market, upon
instruction from a User, BATS Equities will not execute any incoming
order from such User in the event a Protected Bid is crossing a
Protected Offer. The Exchange believes that the thresholds proposed in
this rule filing will help avoid executions of orders at prices that
are significantly worse than the NBBO.\11\
---------------------------------------------------------------------------
\10\ As defined in BATS Rule 1.5(cc), a User is any Member or
Sponsored Participant who is authorized to access the Exchange's
system pursuant to Exchange Rules.
\11\ As defined in BATS Rule 1.5(o), NBBO shall mean the
national best bid or offer.
---------------------------------------------------------------------------
The following example demonstrates how the Exchange's Crossed
Market threshold would operate for BATS Equities:
The NBBO in security ABC is $5.00 (bid) by $4.98 (offer),
and thus, there is a Crossed Market;
A User submits a non-routable market order (e.g.,
designated as a ``BATS Only'' order) to buy 1,000 shares of ABC;
The Exchange has liquidity in ABC as follows: 100 shares
to sell for $4.98, 100 shares to sell for $5.00, 200 shares to sell for
$5.03, and 300 shares to sell for $5.05.
Under the circumstances described above, the incoming market order
to buy would be executed as follows:
100 shares executed on the Exchange at the $4.98 price
level;
100 shares executed on the Exchange at the $5.00 price
level;
200 shares executed on the Exchange at the $5.03 price
level;
600 shares cancelled back to the User.
As proposed, with a Crossed Market of $5.00 by $4.98, the Exchange
will execute any incoming buy orders up to and including $5.03 and any
incoming sell orders down to and including $4.95
[[Page 39540]]
per share. Accordingly, under this example, 400 shares of the incoming
buy order would be executed, including 200 shares at the Crossed Market
threshold of $5.03. The remaining 600 shares of the market order would
be cancelled back to the User because the liquidity on the Exchange at
the $5.05 price level exceeds the thresholds set forth in proposed Rule
11.13. The Exchange notes that in the event the order was designated as
eligible for routing, the Exchange's normal routing strategies would
apply, and, to the extent that other market centers have better prices
than are available on the BATS Book,\12\ the Exchange would route the
order away to such other market centers rather than executing solely on
the Exchange. Accordingly, the Exchange proposes to add language to
Rule 11.13 to make clear that to the extent an incoming order is
executable because a Protected Bid is crossing a Protected Offer but
such incoming order is eligible for routing and there is a Protected
Bid or Protected Offer available at another Trading Center \13\ that is
better priced than the bid or offer against which the order would
execute on the Exchange, the Exchange will first seek to route the
order to such better priced quotation pursuant to Rule 11.13(a)(2).
---------------------------------------------------------------------------
\12\ As defined in BATS Rule 1.5(e), BATS Book means the
System's electronic file of orders.
\13\ As defined in BATS Rule 2.11, a Trading Center is another
securities exchange, facility of a securities exchange, automated
trading system, electronic communication network or other broker or
dealer.
---------------------------------------------------------------------------
The Exchange has proposed to exclude ISOs from the proposed pricing
threshold because a User is subject to certain specific obligations
when pricing and submitting an order as an ISO.\14\ The Exchange
believes that rejecting an ISO upon receipt due to a Crossed Market is
inconsistent with the general notion of an ISO, which allows a User to
designate a price at which the Exchange can execute the order without
regard to the Exchange's view of the NBBO.
---------------------------------------------------------------------------
\14\ See 17 CFR 240.600(b)(30) and 611(c); see also BATS Rule
11.9(d)(1), which states that ``[t]he Exchange relies on the marking
of an order as an ISO order when handling such order, and thus, it
is the entering Member's responsibility, not the Exchange's
responsibility, to comply with the requirements of Regulation NMS
relating to Intermarket Sweep Orders.'' The Exchange notes that as a
self-regulatory organization it conducts regulatory oversight of
each Exchange Member's use of Intermarket Sweep Orders on the
Exchange.
---------------------------------------------------------------------------
In addition to the implementation of Crossed Market price
constraints and the ability to designate orders as ineligible for
execution during a Crossed Market, the Exchange is proposing to modify
the way that it handles rejections received from other Trading Centers.
Currently the Exchange routes all orders through its affiliated broker-
dealer, BATS Trading, Inc. (``BATS Trading''). In certain instances,
BATS Trading, in turn, routes to certain third party broker-dealers in
order to ensure that the Exchange has effective and redundant
connections to all other Trading Centers with Protected Quotations.
BATS Trading occasionally receives ``rejections'' of orders either from
the Trading Centers to which it routes directly or through the third
party broker-dealers through which it routes. Such rejections can be
for various reasons, including a technical problem with the order,
market access thresholds implemented pursuant to SEC Rule 15c3-5, or
other operational thresholds. The Exchange currently handles orders on
which it receives rejections by either cancelling the order back to the
User or, if the order submitted by the User instructs the Exchange to
do so, by posting the order to the Exchange's order book after
subjecting such order to its price sliding process pursuant to Rule
11.9(g) in order to avoid locking any Protected Quotation that it
cannot access. Rather than posting an order to its book, the Exchange
proposes to cancel all orders for which it has received a rejection due
to an inability to access another Trading Center, providing a User with
the opportunity to submit a new order or seek another path to the
applicable Protected Quotation. The Exchange has also proposed to make
clear that such a cancellation will not apply to Protected Quotations
published by a Trading Center against which the Exchange has declared
self-help pursuant to Exchange Rule 11.13(d). Although a Protected
Quotation may be inaccessible to the Exchange, once the Exchange has
declared self-help pursuant to Rule 11.13(d), the Exchange disregards,
and will continue to execute transactions and route orders without
regard to, such Protected Quotations. Notwithstanding the foregoing,
however, even after the Exchange has received a rejection from a
Trading Center, if there are multiple Trading Centers included in the
routing option selected by the User that have Protected Quotations at
the NBBO, the System \15\ will continue to route the order to the
Protected Quotations at other such other Trading Centers at that price
level.
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\15\ As defined in BATS Rule 1.5(aa), System means the
electronic communications and trading facility designate [sic] by
the Board through which securities orders of Users are consolidated
for ranking, execution and, when applicable, routing away.
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BATS Options
The Exchange proposes to make each of the proposed changes
described above to the functionality applicable to trading on and
routing away from, BATS Options. The Exchange notes that there are no
substantive differences to the proposed functionality; rather, the only
differences between the proposal for BATS Equities and BATS Options are
the references to applicable rules and terms.
The Exchange is proposing changes to its system functionality for
BATS Options to implement a price constraint in the event the Exchange
receives a non-routable order and a Protected Bid is higher than a
Protected Offer \16\ in a series of an Eligible Class (a ``Crossed
Market'').\17\ The Exchange is also proposing to provide its Users with
the option to avoid any execution when there is a Crossed Market.
Finally, the Exchange is proposing a change to the way that it responds
to rejections of orders that were routed to a Protected Quotation.\18\
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\16\ As defined in BATS 27.1(18), ``Protected Bid'' or
``Protected Offer'' means a Bid or Offer in an options series,
respectively, that: (A) Is disseminated pursuant to the OPRA Plan;
and (B) Is the Best Bid or Best Offer, respectively, displayed by an
Eligible Exchange. An ``Eligible Exchange'' is a national securities
exchange registered with the SEC in accordance with Section 6(a) of
the Exchange Act that: (a) Is a Participant Exchange in OCC (as that
term is defined in Section VII of the OCC by-laws); (b) is a party
to the OPRA Plan (as that term is described in Section I of the OPRA
Plan); and (c) if the national securities exchange chooses not to
become a party to this Plan, is a participant in another plan
approved by the Commission providing for comparable Trade-Through
and Locked and Crossed Market protection.
\17\ This definition for Crossed Market is consistent with the
definition contained in BATS Rule 27.1(5).
\18\ As defined in BATS Rule 27.1(19), Protected Quotation means
a Protected Bid or Protected Offer.
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Under current BATS Rules, Members are prohibited from effecting
Trade-Throughs \19\ on BATS Options unless the execution falls within
another exception set forth in BATS Rule 27.2(b), which includes an
exception for any order that is marked ISO. Pursuant to the exception
of Rule 27.2(b)(3), the Exchange does not prohibit Trade-Throughs when
there is a Crossed Market. In order to constrain the price of
executions when there is a Crossed Market, in the event that a
Protected Bid is crossing a Protected Offer, unless an order is marked
ISO, BATS Options will not execute any portion of a bid at a price more
than the greater of 5 cents or 0.5 percent higher than the lowest
Protected Offer or any portion of an
[[Page 39541]]
offer that is not marked ISO that would execute at a price more than
the greater of 5 cents or 0.5 percent lower than the highest Protected
Bid. In order to provide an additional option for Users \20\ that do
not want any orders to execute when there is a Crossed Market, upon
instruction from a User, BATS Options will not execute any incoming
order from such User in the event a Protected Bid is crossing a
Protected Offer. The Exchange believes that the thresholds proposed in
this rule filing will help avoid executions of orders at prices that
are significantly worse than the NBBO.\21\
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\19\ As defined in BATS Rule 27.1(22), a Trade-Through is a
transaction in an options series at a price that is lower than a
Protected Bid or higher than a Protected Offer.
\20\ As defined in BATS Rule 16.1(a)(63), a User is any Options
Member or Sponsored Participant who is authorized to access the
Exchange's system pursuant to Exchange Rules.
\21\ As defined in BATS Rule 27.1(11), NBBO shall mean the
national best bid and offer in an option series as calculated by an
Eligible Exchange.
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The following example demonstrates how the Exchange's Crossed
Market threshold would operate for BATS Options:
The NBBO in options series XYZ is $2.00 (bid) by $1.98
(offer), and thus, there is a Crossed Market;
A User submits a non-routable market order (e.g.,
designated as a ``BATS Only'' order) to buy 100 contracts of XYZ;
The Exchange has liquidity in XYZ as follows: 10 contracts
to sell for $1.98, 10 contracts to sell for $2.00, 20 contracts to sell
for $2.03, and 30 contracts to sell for $2.05.
Under the circumstances described above, the incoming market order
to buy would be executed as follows:
10 contracts executed on the Exchange at the $1.98 price
level;
10 contracts executed on the Exchange at the $2.00 price
level;
20 contracts executed on the Exchange at the $2.03 price
level;
60 contracts cancelled back to the User.
As proposed, with a Crossed Market of $2.00 by $1.98, the Exchange will
execute any incoming buy orders up to and including $2.03 and any
incoming sell orders down to and including $1.95 per share.
Accordingly, under this example, 40 contracts of the incoming buy order
would be executed, including 20 contracts at the Crossed Market
threshold of $2.03. The remaining 60 contracts of the market order
would be cancelled back to the User because the liquidity on the
Exchange at the $2.05 price level exceeds the thresholds set forth in
proposed Interpretation and Policy .01 to Rule 27.2. The Exchange notes
that in the event the order was designated as eligible for routing, the
Exchange's normal routing strategies would apply, and, to the extent
that other market centers have better prices than are available on the
BATS Options Book,\22\ the Exchange would route the order away to such
other market centers rather than executing solely on the Exchange.
Accordingly, the Exchange proposes to add Interpretation and Policy .02
to Rule 27.2 to make clear that to the extent an incoming order is
executable because a Protected Bid is crossing a Protected Offer but
such incoming order is eligible for routing and there is a Protected
Bid or Protected Offer available at another options exchange that is
better priced than the bid or offer against which the order would
execute on the Exchange, the Exchange will first seek to route the
order to such better priced quotation pursuant to Rule 21.9.
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\22\ As defined in BATS Rule 16.1(a)(9), BATS Options Book means
the means the electronic book of options orders maintained by the
System.
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As described for BATS Equities, the Exchange has proposed to
exclude ISOs from the proposed pricing threshold for BATS Options
because a User is subject to certain specific obligations when pricing
and submitting an order as an ISO. The Exchange believes that rejecting
an ISO upon receipt due to a Crossed Market is inconsistent with the
general notion of an ISO, which allows a User to designate a price at
which the Exchange can execute the order without regard to the
Exchange's view of the NBBO.
In addition to the implementation of Crossed Market price
constraints and the ability to designate orders as ineligible for
execution during a Crossed Market, the Exchange is proposing to modify
the way that it handles rejections received from other options
exchanges. Currently the Exchange routes all orders through its
affiliated broker-dealer, BATS Trading, Inc. (``BATS Trading''). In
certain instances, BATS Trading, in turn, routes to certain third party
broker-dealers in order to ensure that the Exchange has effective and
redundant connections to all other options exchanges with Protected
Quotations. BATS Trading occasionally receives ``rejections'' of orders
either from the options exchanges to which it routes directly or
through the third party broker-dealers through which it routes. Such
rejections can be for various reasons, including a technical problem
with the order, market access thresholds implemented pursuant to SEC
Rule 15c3-5, or other operational thresholds. The Exchange currently
handles orders on which it receives rejections by either cancelling the
order back to the User or, if the order submitted by the User instructs
the Exchange to do so, by posting the order to the Exchange's order
book after subjecting such order to its price sliding process pursuant
to Rule 21.1 in order to avoid locking any Protected Quotation that it
cannot access. Rather than posting an order to its book, the Exchange
proposes to cancel all orders for which it has received a rejection due
to an inability to access another options exchange, providing a User
with the opportunity to submit a new order or seek another path to the
applicable Protected Quotation. The Exchange has also proposed to make
clear that such a cancellation will not apply to Protected Quotations
published by an options exchange against which the Exchange has
declared self-help pursuant to Exchange Rule 27.2(b)(1). Although a
Protected Quotation may be inaccessible to the Exchange, once the
Exchange has declared self-help pursuant to Rule 27.2(b)(1), the
Exchange disregards, and will continue to execute transactions and
route orders without regard to, such Protected Quotations.
Notwithstanding the foregoing, however, even after the Exchange has
received a rejection from an options exchange, if there are multiple
options exchanges included in the routing option selected by the User
that have Protected Quotations at the NBBO, the System \23\ will
continue to route the order to the Protected Quotations at other such
other options exchanges at that price level.
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\23\ As defined in BATS Rule 16.1(a)(59), System means the
automated trading system used by BATS Options for the trading of
options contracts.
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2. Statutory Basis
The Exchange believes that its proposal 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.\24\ In particular,
the proposal is consistent with Section 6(b)(5) of the Act,\25\ 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 by helping to avoid executions of orders
on the Exchange at prices that are significantly worse than the
national best bid or national best offer at the time an order is
initially received by the Exchange, even if executions are permissible
pursuant to Regulation NMS or under the Exchange's analogous rules for
BATS Options. The Exchange believes
[[Page 39542]]
that permitting Users to avoid any execution of an incoming order in a
Crossed Market is an additional functionality that is consistent with
the protection of investors and the public interest. Although the
Exchange does not believe that any other self-regulatory organization
has exactly the same Crossed Market threshold in place, the Exchange as
well as other market centers have implemented a variety of pricing
thresholds to constrain executions and protect market participants.\26\
Also, this proposal is consistent with existing Exchange rules that
allow for the breaking of trades deemed clearly erroneous \27\ or in
obvious error \28\ by reference to objective thresholds worse than the
NBBO. The Exchange believes that the proposed pricing thresholds are
reasonable because they are significantly narrower than thresholds in
place on BATS Equities for market orders received by the Exchange \29\
and also narrower than applicable clearly erroneous thresholds for BATS
Equities. A narrow threshold will protect market participants and their
customers from potentially executing at prices away from the NBBO when
there is a Crossed Market, which can be an indication of a pricing
anomaly in a security or a potential systems issue at another Trading
Center or options exchange. Further, the proposed threshold is
consistent with the protection of investors and the public interest
because it will help to avoid clearly erroneous executions or obvious
error transactions from occurring in the first place, rather than
allowing an execution to occur and breaking the trade based on Exchange
rules.
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\24\ 15 U.S.C. 78f(b).
\25\ 15 U.S.C. 78f(b)(5).
\26\ See, e.g., BATS Rule 11.9(a)(2), which constrains the
executions of a market order on BATS to $0.50 or 5 percent away from
the NBBO at the time the order initially reaches the Exchange; see
also NYSE Arca Rule 7.31(a); NASDAQ Rule 4751(f)(13).
\27\ See BATS Rule 11.17.
\28\ See BATS Rule 20.6.
\29\ See supra note 26.
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Finally, the Exchange believes that the cancellation of all orders
that have been rejected by other market centers or third party routers,
rather than posting such orders to the Exchange's book will provide
Users with more immediate certainty regarding their orders, and will
provide Users the ability to modify and re-submit or send their orders
via a different path to attempt to access the applicable Protected
Quotation. Accordingly, the modifications to BATS Rules 11.13 and 20.9
[sic] 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.
(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 Change and Timing for
Commission Action
Because the 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 if consistent with the protection of investors
and the public interest, the proposed rule change has become effective
pursuant to Section 19(b)(3)(A) of the Act \30\ and Rule 19b-4(f)(6)
thereunder.\31\
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\30\ 15 U.S.C. 78s(b)(3)(A).
\31\ 17 CFR 240.19b-4(f)(6). As required under Rule 19b-
4(f)(6)(iii), the Exchange provided the Commission with written
notice of its intent to file the proposed rule change along with a
brief description and the text of the proposed rule change, at least
five business days prior to the date of filing of the proposed rule
change, or such shorter time as designated by the Commission.
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A proposed rule change filed pursuant to Rule 19b-4(f)(6) under the
Act \32\ normally does not become operative for 30 days after the date
of its filing. However, Rule 19b-4(f)(6) \33\ permits the Commission to
designate a shorter time if such action is consistent with the
protection of investors and the public interest. The Exchange has asked
the Commission to waive the 30-day operative delay, noting that doing
so would allow investors and market participants to benefit immediately
from additional protection against certain executions in Crossed Market
conditions and from the ability to re-route or re-submit orders that
are unable to access, and therefore rejected by, other market centers
with Protected Quotations at the NBBO. The Commission believes that
waiving the 30-day operative delay is consistent with the protection of
investors and the public interest.\34\ Therefore, the Commission
designates the proposal operative upon filing.
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\32\ 17 CFR 240.19b-4(f)(6).
\33\ 17 CFR 240.19b-4(f)(6).
\34\ For purposes only of waiving the 30-day operative delay,
the Commission has considered the proposed rule's impact on
efficiency, competition, and capital formation. See 15 U.S.C.
78c(f).
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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 proposed rule
change is consistent with the Exchange 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 Number SR-BATS-2012-024 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 Number SR-BATS-2012-024. 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 change 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 the
[[Page 39543]]
filing also will 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 Number SR-BATS-2012-024 and should be submitted on or before July
24, 2012.
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\35\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\35\
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-16215 Filed 7-2-12; 8:45 am]
BILLING CODE 8011-01-P
