Self-Regulatory Organizations; BATS Exchange, Inc.; Order Approving Proposed Rule Change, as Modified by Amendment No. 1, To Adopt a New Market Maker Peg Order Available to Exchange Market Makers, 54633-54635 [2012-21769]

Download as PDF Federal Register / Vol. 77, No. 172 / Wednesday, September 5, 2012 / Notices SECURITIES AND EXCHANGE COMMISSION [Release No. 34–67756; File No. SR–BATS– 2012–026] Self-Regulatory Organizations; BATS Exchange, Inc.; Order Approving Proposed Rule Change, as Modified by Amendment No. 1, To Adopt a New Market Maker Peg Order Available to Exchange Market Makers August 29, 2012. I. Introduction On June 26, 2012, BATS Exchange, Inc. (‘‘Exchange’’ or ‘‘BATS’’) 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 adopt a new Market Maker Peg Order to provide similar functionality as the automated functionality provided to market makers under Rule 11.8(e). The proposed rule change was published for comment in the Federal Register on July 16, 2012.3 The Commission received no comment letters regarding the proposed rule change. This order approves the proposed rule change, as modified by Amendment No. 1. II. Background BATS is proposing to adopt a new Market Maker Peg Order to provide a similar functionality presently available to Exchange market makers under Rule 11.8(e).4 BATS adopted Rule 11.8(e) as part of an effort to address issues uncovered by the aberrant trading that 1 15 U.S.C. 78s(b)(1). CFR 240.19b–4. 3 See Securities Exchange Act Release No. 67381 (July 10, 2012), 77 FR 41829 (‘‘Notice’’). The Commission notes that on July 6, 2012, the Exchange submitted Amendment No. 1 to the proposed rule change to make certain amendments that, in part, clarified that it is expected that market makers will perform the necessary checks to comply with Regulation SHO prior to entry of a Market Maker Peg Order. 4 BATS will continue to offer the present automated quote management functionality provided to market makers under Rule 11.8(e) for a period of 3 months after the implementation of the proposed Market Maker Peg Order. The purpose of this transition period, during which both the present automated quote management functionality under Rule 11.8(e) and the Market Maker Peg Order will operate concurrently, is to afford market makers with the opportunity to adequately test the new Market Maker Peg Order and migrate away from the present automated quote management functionality under Rule 11.8(e). Prior to the end of this three month period, BATS represents that it will submit a rule filing to retire the automated quote management functionality under Rule 11.8(e). See Notice, supra note 3 at 41829. tkelley on DSK3SPTVN1PROD with NOTICES 2 17 VerDate Mar<15>2010 19:14 Sep 04, 2012 Jkt 226001 occurred on May 6, 2010.5 According to the Exchange, the automated quote management functionality offered by these rules is designed to help Exchange market makers meet the enhanced market maker obligations adopted post May 6, 2010,6 and avoid execution of market maker ‘‘stub quotes’’ in instances of aberrant trading.7 As part of these obligations, BATS requires market makers for each stock in which they are registered to continuously maintain a two-sided quotation within a designated percentage of the National Best Bid and National Best Offer,8 as appropriate. According to BATS, the market maker quoter functionality presents difficulties to market makers in meeting their obligations under Rule 15c3–5 under the Act (the ‘‘Market Access Rule’’) 9 and Regulation SHO.10 Specifically, the current market maker quoter functionality offered to market makers reprices and ‘‘refreshes’’ a market maker’s quote when it is executed against, without any action required by the market maker. When a market maker’s quote is refreshed by the Exchange, however, the market maker has an obligation to ensure that the requirements of the Market Access Rule and Regulation SHO are met. To meet these obligations, a market maker must 5 Securities Exchange Act Release No. 63255 (November 5, 2010), 75 FR 69484 (November 12, 2010) (SR–BATS–2010–25). 6 Id. 7 For each issue in which a market maker is registered, the market maker quoter functionality optionally creates a quotation for display to comply with market making obligations. Compliant displayed quotations are thereafter allowed to rest and are not adjusted unless the relationship between the quotation and its related national best bid or national best offer, as appropriate, either: (a) Shrinks to a specified number of percentage points away from the Designated Percentage (as defined below) towards the then current national best bid or national best offer, which number of percentage points will be determined and published in a circular distributed to Members from time to time, or (b) expands to within 0.5% of the applicable percentage necessary to trigger an individual stock trading pause, whereupon such bid or offer will be cancelled and re-entered at the Designated Percentage away from the then current national best bid and national best offer, or if no national best bid or national best offer, at the Designated Percentage away from the last reported sale from the responsible single plan processor. Quotations independently entered by market makers are allowed to move freely towards the national best bid or national best offer, as appropriate, for potential execution. In the event of an execution against a quote generated pursuant to the market maker quoter functionality, the market maker’s quote is refreshed on the executed side of the market at the applicable Designated Percentage away from the then national best bid (offer), or if no national best bid (offer), the last reported sale. See Rule 11.8(e). 8 As defined by Regulation NMS Rule 600(b)(42). 17 CFR 242.600. 9 See Notice, supra note 3 at 41830. 10 17 CFR 242.200 through 204. PO 00000 Frm 00080 Fmt 4703 Sfmt 4703 54633 actively monitor the status of its quotes and ensure that the requirements of the Market Access Rule and Regulation SHO are being satisfied. Market Maker Peg Order In an effort to simplify market maker compliance with the requirements of the Market Access Rule and Regulation SHO, BATS proposes to adopt a new order type available only to Exchange market makers, which offers functionality similar to the market maker quoter functionality, but also allows a market maker to comply with the requirements of the Market Access Rule and Regulation SHO. Specifically, BATS proposes to replace the market maker quoter functionality with the Market Maker Peg Order. The Market Maker Peg Order would be a one-sided limit order and similar to other peg orders available to market participants in that the order is tied or ‘‘pegged’’ to a certain price,11 but it would not be eligible for routing pursuant to Rule 11.13(a)(2) and would always be displayed. The Market Maker Peg Order would be limited to market makers and would have its price automatically set and adjusted, both upon entry and any time thereafter, in order to comply with the Exchange’s rules regarding market maker quotation requirements and obligations.12 It is expected that market makers will perform the necessary checks to comply with Regulation SHO, as discussed above, prior to entry of a Market Maker Peg Order. Upon entry and at any time the order exceeds either the ‘‘Defined Limit’’, as described in Rule 11.8(d)(2)(E), or moves a specified number of percentage points away from the Designated Percentage towards the then current National Best Bid or National Best Offer, the Market Maker Peg Order would be priced by the Exchange at the Designated Percentage 13 away from the then current National Best Bid and National Best Offer. Where there is no National 11 Rule 11.9(c)(8). Market Maker Peg Order is one-sided so a market maker seeking to use Market Maker Peg Orders to comply with the Exchange’s rules regarding market maker quotation requirements would need to submit both a bid and an offer using the order type. 13 The ‘‘Designated Percentage’’ is the individual stock pause trigger percentage listed in Interpretations and Policies .01 to Rule 11.8, less either: (i) Two percentage points for securities that are included in the S&P 500® Index, Russell 1000® Index, and a pilot list of Exchange Traded Products and for all other NMS stocks with a price equal to or greater than $1 per share; or (ii) twenty percentage points for all NMS stocks with a price less than $1 per share that are not included in the S&P 500® Index, Russell 1000® Index, and a pilot list of Exchange Traded Products. See Rule 11.8(d)(2)(D). 12 The E:\FR\FM\05SEN1.SGM 05SEN1 54634 Federal Register / Vol. 77, No. 172 / Wednesday, September 5, 2012 / Notices tkelley on DSK3SPTVN1PROD with NOTICES Best Bid or National Best Offer, the Market Maker Peg Order would, by default, be priced at the Designated Percentage away from the last reported sale from the responsible single plan processor, unless instructed by the market maker upon entry to cancel or reject where there is no National Best Bid or National Best Offer. According to BATS, in the absence of a National Best Bid or National Best Offer and last reported sale, the order will be cancelled or rejected. Adjustment to the Designated Percentage is designed to avoid an execution against a Market Maker Peg Order that would initiate an individual stock trading pause. In the event of an execution against a Market Maker Peg Order that reduces the size of the Market Maker Peg Order below one round lot, the market maker would need to enter a new order, after performing the regulatory checks discussed above, to satisfy their obligations under Rule 11.8.14 In the event that pricing the Market Maker Peg Order at the Designated Percentage away from the then current National Best Bid and National Best Offer, or, if no National Best Bid or National Best Offer, to the Designated Percentage away from the last reported sale from the responsible single plan processor would result in the order exceeding its limit price, the order will be cancelled or rejected. BATS is also proposing to allow a market maker to designate an offset more aggressive (i.e., smaller) than the Designated Percentage for any given Market Maker Peg Order. This functionality will allow a market maker to quote at price levels that are closer to the National Best Bid and National Best Offer if it elects to do so. To use this functionality, a market maker, upon entry, must designate the desired offset and a percentage away from the National Best Bid or National Best Offer at which the price of such bid or offer will be adjusted back to the desired offset (the ‘‘Reprice Percentage’’).15 Thereafter,16 a Market Maker Peg Order 14 Rule 11.8 generally sets forth BATS’s market maker requirements, which include quotation and pricing obligations. 15 If a market maker wishes, it can designate a more aggressive bid while using the Defined Percentage and Defined Limit for its offer, or vice versa. 16 In the absence of an offset designation and/or Reprice Percentage, a Market Maker Peg Order will default to using the Defined Percentage and Defined Limit, and the repricing process whereby, upon reaching the Defined Limit, the price of a Market Maker Peg Order bid or offer will be adjusted by the System to the Designated Percentage away from the then current National Best Bid or National Best Offer, or, if no National Best Bid or National Best Offer, to the Designated Percentage away from the VerDate Mar<15>2010 19:14 Sep 04, 2012 Jkt 226001 with a market maker-designated offset will have its price automatically adjusted to the market maker-designated offset from the National Best Bid or National Best Offer or last reported sale upon reaching the Reprice Percentage.17 Identical to the behavior of Market Maker Peg Orders using the Defined Percentage and Defined Limit, in the absence of a National Best Bid or National Best Offer, Market Maker Peg Orders with a market maker-designated offset will, by default, have their price adjusted to the Market Makerdesignated offset from the price of the last reported sale from the responsible single plan processor, or, if otherwise instructed by the Market Maker, will be cancelled or rejected. In the absence of a National Best Bid or National Best Offer and a last reported sale, Market Maker Peg Orders with a market makerdesignated offset will be cancelled or rejected. In the event that pricing the Market Maker Peg Order at the market maker-designated offset away from the then current National Best Bid and National Best Offer or last reported sale would result in the order exceeding its limit price, the order will be cancelled or rejected.18 BATS claims that this order-based approach is superior in terms of the ease in complying with the requirements of the Market Access Rule and Regulation SHO while also providing similar quote adjusting functionality to its market makers.19 BATS also states that market makers would have control of order last reported sale from the responsible single plan processor. 17 Market Maker Peg Orders with a market makerdesignated offset may be able to qualify as bona-fide market making for purposes of Regulation SHO, depending on the facts and circumstances. A market maker entering such an order must consider the factors set forth by the Commission in determining whether reliance on the exception from the ‘‘locate’’ requirement of Rule 203 for bona-fide market making is appropriate with respect to the particular Market Maker Peg Order and its designated offset. See 17 CFR 242.203(b)(1). 18 The Market Maker Peg Order will be accepted during Regular Trading Hours and the Pre-Opening and After Hours Trading Sessions. The Pre-Opening Session means the time between 8 a.m. and 9:30 a.m. Eastern Time. The After Hours Trading Session means the time between 4 p.m. and 5 p.m. Eastern Time. By default, the Market Maker Peg Order will be priced at 9:30 a.m. and will only be executable during Regular Trading Hours, however, upon entry, a User may direct the Exchange to automatically price and execute a Market Maker Peg Order during the Pre-Opening Session and After Hours Trading Session (‘‘Extended Hours Market Maker Peg Orders’’). During the Pre-Opening Session and After Hours Trading Session, the wider Designated Percentage and Defined Limit associated with the 9:30 a.m.–9:45 a.m. and 3:35 p.m.–4 p.m. periods under Rule 11.8(e) will be applied to Extended Hours Market Maker Peg Orders for which the market maker has not designated an offset more aggressive than the Designated Percentage. 19 See Notice, supra note 3 at 41831. PO 00000 Frm 00081 Fmt 4703 Sfmt 4703 origination, as required by the Market Access Rule, while also allowing market makers to make marking and locate determinations prior to order entry, as required by Regulation SHO. The Exchange claims that this will allow market makers to fully comply with the requirements of the Market Access Rule and Regulation SHO, as they would when placing any order, while also meeting their Exchange market making obligations.20 III. Discussion and Commission Findings After careful review, the Commission finds that the proposed rule change is consistent with the requirements of the Act and the rules and regulations thereunder applicable to a national securities exchange.21 Specifically, the Commission finds that the proposed rule change is consistent with Section 6(b)(5) of the Act,22 which requires, among other things, the rules of an exchange to promote just and equitable principles of trade, to remove impediments to and perfect the mechanism of a free and open market and a national market system and, in general, to protect investors and the public interest. The Commission finds that the proposed rule change also is designed to support the principles of Section 11A(a)(1) 23 of the Act in that it seeks to assure fair competition among brokers and dealers and among exchange markets. The Commission finds that the Exchange’s proposal is consistent with the Act because it provides a means through which market makers may meet their minimum quoting requirements, which may assist in the maintenance of fair and orderly markets, provide additional liquidity to the Exchange, and prevent excessive volatility. The Commission notes, however, that notwithstanding the availability of the Market Maker Peg Order functionality, the market maker remains responsible for meeting its obligations under Rule 11.8, including entering, monitoring, and re-submitting, as applicable, compliant quotations. At the same time, the Commission finds that the proposal is reasonably designed to assist market makers in complying with the regulatory requirements of the Market Access Rule and Regulation SHO. The Commission notes, however, that the Market Maker Peg Order, like the 20 See id. approving this proposed rule change, the Commission has considered the proposed rule’s impact on efficiency, competition and capital formation. 15 U.S.C. 78c(f). 22 15 U.S.C. 78f(b)(5). 23 15 U.S.C. 78k–1(a)(1). 21 In E:\FR\FM\05SEN1.SGM 05SEN1 Federal Register / Vol. 77, No. 172 / Wednesday, September 5, 2012 / Notices current market maker quoter functionality, does not ensure that the market maker is satisfying the requirements of the Market Access Rule or Regulation SHO, including the satisfaction of the locate requirement of Rule 203(b)(1) or an exception thereto. The Commission also notes that, in the event a Market Maker Peg Order is executed against such that the Market Maker Peg Order is reduced in size to below one round lot, the market maker would need to perform the necessary regulatory checks pursuant to the Market Access Rule and Regulation SHO prior to entering a new Market Maker Peg Order. The Commission also believes that providing Exchange market makers with a transition period will serve to minimize the potential market impact caused by the implementation of the Market Maker Peg Order. In addition, by allowing market makers to enter a Market Maker Peg Order that is priced more aggressively than the Designated Percentage, the proposed rules are reasonably designed to provide that quotations submitted by market makers to the Exchange, and displayed to market participants, bear some relationship to the prevailing market price. 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 indicate that the interval between strike prices on short term options series (‘‘STOs’’) listed in accordance with its Short Term Option Series Program (‘‘STO Program’’) shall be $0.50 or greater where the strike price is less than $75 and $1 or greater where the strike price is between $75 and $150. The proposal would also provide that, during the expiration week of an option that is in the same class as an STO but has a longer expiration cycle (‘‘Related non-STO’’) the strike price interval for the STO and such Related non-STO shall be the same and that a Related non-STO shall be opened for trading in STO intervals in the same manner as the STO. The proposed rule change was published for comment in the Federal Register on July 20, 2012.3 The Commission received one comment letter on the proposal.4 On August 16, 2012, the Exchange filed a response to the CBOE Letter (‘‘Phlx Response’’).5 This order approves the proposed rule change. IV. Conclusion It is therefore ordered, pursuant to Section 19(b)(2) of the Act,24 that the proposed rule change, as modified by Amendment No.1, (SR–BATS–2012– 026) be, and hereby is, approved. The Exchange proposed to amend Phlx Rules 1012 (Series of Options Open for Trading) and 1101A (Terms of Options Contracts) to indicate that the interval between strike prices on STOs shall be $0.50 or greater where the strike price is less than $75 and $1 or greater where the strike price is between $75 and $150 (‘‘STO Intervals’’). The proposal would amend Phlx’s rules to indicate that, during expiration week of a Related non-STO, the strike price intervals for the STO and Related nonSTO shall be the same. Phlx also proposed to amend its rules to indicate that, during the week before the expiration week of the Related nonSTO, such Related non-STO shall be For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.25 Kevin M. O’Neill, Deputy Secretary. [FR Doc. 2012–21769 Filed 9–4–12; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–67753; File No. SR–Phlx– 2012–78] tkelley on DSK3SPTVN1PROD with NOTICES August 29, 2012. I. Introduction On July 2, 2012, NASDAQ OMX PHLX LLC (‘‘Phlx’’ or ‘‘Exchange’’) filed 25 17 U.S.C. 78s(b)(2). CFR 200.30–3(a)(12). VerDate Mar<15>2010 19:14 Sep 04, 2012 Jkt 226001 1 15 U.S.C. 78s(b)(1). CFR 240.19b–4. 3 Securities Exchange Act Release No. 67446 (July 20, 2012), 77 FR 42780 (‘‘Notice’’). 4 See letter from Jenny L. Klebes-Golding, Senior Attorney, Legal Division, Chicago Board Options Exchange, Incorporated (‘‘CBOE’’), to Elizabeth M. Murphy, Secretary, Commission, dated August 10, 2012 (‘‘CBOE Letter’’). CBOE sought, in part, further clarification on whether the current 30 series perclass limitation set forth in the STO Program would apply to the Related non-STOs when the STO strike price intervals are added in accordance with this proposal. 5 In its response, Phlx confirmed that the 30 series limitation CBOE identified applies to STOs only and would not restrict the ability to open additional series of Related non-STOs in accordance with the proposed rule change. See Phlx Response at 2–3. 2 17 Self-Regulatory Organizations; NASDAQ OMX PHLX LLC; Order Granting Approval of Proposed Rule Change Regarding Strike Price Intervals in the Short Term Options Program 24 15 II. Description of the Proposal PO 00000 Frm 00082 Fmt 4703 Sfmt 4703 54635 opened for trading in the STO Intervals and in the same manner as the STO. In the Notice, the Exchange stated that the principal reason for the proposed expansion is market demand for weekly options and continuing strong customer demand to use STOs to effectively execute hedging and trading strategies.6 Conversely, Phlx contended that inadequately narrow STO intervals can impact trading and hedging opportunities.7 Phlx also stated that listing Related non-STOs at the same strike prices intervals as STOs will ensure conformity and give investors and traders the ability to maximize trading and hedging opportunities and minimize associated costs.8 The Exchange stated that it has analyzed its capacity, and represented that it and the Options Price Reporting Authority (‘‘OPRA’’) have the necessary systems capacity to handle the potential additional traffic associated with trading in STOs at $0.50 or greater where the strike price is less than $75 and $1 or greater where the strike price is between $75 and $150. In addition, Phlx stated that it believes that the proposed rule change will not raise a capacity issue with its members.9 III. Discussion and Commission Findings After careful review of the proposed rule change and the CBOE Letter, the Commission finds that the proposed rule change is consistent with the requirements of the Act and the rules and regulations thereunder applicable to a national securities exchange.10 Specifically, the Commission finds that the proposal is consistent with Section 6(b)(5) of the Act,11 which requires, among other things, that the rules of a national securities exchange be designed to promote just and equitable principles of trade, to prevent fraudulent and manipulative acts, to remove impediments to and perfect the mechanism of a free and open market and a national market system, and, in general, to protect investors and the public interest. The Commission believes that the proposal strikes a reasonable balance between the Exchange’s desire to offer a wider array of investment opportunities and the 6 See Notice, supra note 3 at 42781. at 42782–42783. 8 Id. at 42783. 9 Id. 10 In approving this proposed rule change, the Commission has considered the proposed rule’s impact on efficiency, competition, and capital formation. See 15 U.S.C. 78c(f). 11 15 U.S.C. 78f(b)(5). 7 Id. E:\FR\FM\05SEN1.SGM 05SEN1

Agencies

[Federal Register Volume 77, Number 172 (Wednesday, September 5, 2012)]
[Notices]
[Pages 54633-54635]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-21769]



[[Page 54633]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-67756; File No. SR-BATS-2012-026]


Self-Regulatory Organizations; BATS Exchange, Inc.; Order 
Approving Proposed Rule Change, as Modified by Amendment No. 1, To 
Adopt a New Market Maker Peg Order Available to Exchange Market Makers

August 29, 2012.

I. Introduction

    On June 26, 2012, BATS Exchange, Inc. (``Exchange'' or ``BATS'') 
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 
adopt a new Market Maker Peg Order to provide similar functionality as 
the automated functionality provided to market makers under Rule 
11.8(e). The proposed rule change was published for comment in the 
Federal Register on July 16, 2012.\3\ The Commission received no 
comment letters regarding the proposed rule change. This order approves 
the proposed rule change, as modified by Amendment No. 1.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 67381 (July 10, 
2012), 77 FR 41829 (``Notice''). The Commission notes that on July 
6, 2012, the Exchange submitted Amendment No. 1 to the proposed rule 
change to make certain amendments that, in part, clarified that it 
is expected that market makers will perform the necessary checks to 
comply with Regulation SHO prior to entry of a Market Maker Peg 
Order.
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II. Background

    BATS is proposing to adopt a new Market Maker Peg Order to provide 
a similar functionality presently available to Exchange market makers 
under Rule 11.8(e).\4\ BATS adopted Rule 11.8(e) as part of an effort 
to address issues uncovered by the aberrant trading that occurred on 
May 6, 2010.\5\ According to the Exchange, the automated quote 
management functionality offered by these rules is designed to help 
Exchange market makers meet the enhanced market maker obligations 
adopted post May 6, 2010,\6\ and avoid execution of market maker ``stub 
quotes'' in instances of aberrant trading.\7\ As part of these 
obligations, BATS requires market makers for each stock in which they 
are registered to continuously maintain a two-sided quotation within a 
designated percentage of the National Best Bid and National Best 
Offer,\8\ as appropriate. According to BATS, the market maker quoter 
functionality presents difficulties to market makers in meeting their 
obligations under Rule 15c3-5 under the Act (the ``Market Access 
Rule'') \9\ and Regulation SHO.\10\ Specifically, the current market 
maker quoter functionality offered to market makers reprices and 
``refreshes'' a market maker's quote when it is executed against, 
without any action required by the market maker. When a market maker's 
quote is refreshed by the Exchange, however, the market maker has an 
obligation to ensure that the requirements of the Market Access Rule 
and Regulation SHO are met. To meet these obligations, a market maker 
must actively monitor the status of its quotes and ensure that the 
requirements of the Market Access Rule and Regulation SHO are being 
satisfied.
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    \4\ BATS will continue to offer the present automated quote 
management functionality provided to market makers under Rule 
11.8(e) for a period of 3 months after the implementation of the 
proposed Market Maker Peg Order. The purpose of this transition 
period, during which both the present automated quote management 
functionality under Rule 11.8(e) and the Market Maker Peg Order will 
operate concurrently, is to afford market makers with the 
opportunity to adequately test the new Market Maker Peg Order and 
migrate away from the present automated quote management 
functionality under Rule 11.8(e). Prior to the end of this three 
month period, BATS represents that it will submit a rule filing to 
retire the automated quote management functionality under Rule 
11.8(e). See Notice, supra note 3 at 41829.
    \5\ Securities Exchange Act Release No. 63255 (November 5, 
2010), 75 FR 69484 (November 12, 2010) (SR-BATS-2010-25).
    \6\ Id.
    \7\ For each issue in which a market maker is registered, the 
market maker quoter functionality optionally creates a quotation for 
display to comply with market making obligations. Compliant 
displayed quotations are thereafter allowed to rest and are not 
adjusted unless the relationship between the quotation and its 
related national best bid or national best offer, as appropriate, 
either: (a) Shrinks to a specified number of percentage points away 
from the Designated Percentage (as defined below) towards the then 
current national best bid or national best offer, which number of 
percentage points will be determined and published in a circular 
distributed to Members from time to time, or (b) expands to within 
0.5% of the applicable percentage necessary to trigger an individual 
stock trading pause, whereupon such bid or offer will be cancelled 
and re-entered at the Designated Percentage away from the then 
current national best bid and national best offer, or if no national 
best bid or national best offer, at the Designated Percentage away 
from the last reported sale from the responsible single plan 
processor. Quotations independently entered by market makers are 
allowed to move freely towards the national best bid or national 
best offer, as appropriate, for potential execution. In the event of 
an execution against a quote generated pursuant to the market maker 
quoter functionality, the market maker's quote is refreshed on the 
executed side of the market at the applicable Designated Percentage 
away from the then national best bid (offer), or if no national best 
bid (offer), the last reported sale. See Rule 11.8(e).
    \8\ As defined by Regulation NMS Rule 600(b)(42). 17 CFR 
242.600.
    \9\ See Notice, supra note 3 at 41830.
    \10\ 17 CFR 242.200 through 204.
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Market Maker Peg Order

    In an effort to simplify market maker compliance with the 
requirements of the Market Access Rule and Regulation SHO, BATS 
proposes to adopt a new order type available only to Exchange market 
makers, which offers functionality similar to the market maker quoter 
functionality, but also allows a market maker to comply with the 
requirements of the Market Access Rule and Regulation SHO. 
Specifically, BATS proposes to replace the market maker quoter 
functionality with the Market Maker Peg Order. The Market Maker Peg 
Order would be a one-sided limit order and similar to other peg orders 
available to market participants in that the order is tied or 
``pegged'' to a certain price,\11\ but it would not be eligible for 
routing pursuant to Rule 11.13(a)(2) and would always be displayed. The 
Market Maker Peg Order would be limited to market makers and would have 
its price automatically set and adjusted, both upon entry and any time 
thereafter, in order to comply with the Exchange's rules regarding 
market maker quotation requirements and obligations.\12\ It is expected 
that market makers will perform the necessary checks to comply with 
Regulation SHO, as discussed above, prior to entry of a Market Maker 
Peg Order. Upon entry and at any time the order exceeds either the 
``Defined Limit'', as described in Rule 11.8(d)(2)(E), or moves a 
specified number of percentage points away from the Designated 
Percentage towards the then current National Best Bid or National Best 
Offer, the Market Maker Peg Order would be priced by the Exchange at 
the Designated Percentage \13\ away from the then current National Best 
Bid and National Best Offer. Where there is no National

[[Page 54634]]

Best Bid or National Best Offer, the Market Maker Peg Order would, by 
default, be priced at the Designated Percentage away from the last 
reported sale from the responsible single plan processor, unless 
instructed by the market maker upon entry to cancel or reject where 
there is no National Best Bid or National Best Offer. According to 
BATS, in the absence of a National Best Bid or National Best Offer and 
last reported sale, the order will be cancelled or rejected. Adjustment 
to the Designated Percentage is designed to avoid an execution against 
a Market Maker Peg Order that would initiate an individual stock 
trading pause. In the event of an execution against a Market Maker Peg 
Order that reduces the size of the Market Maker Peg Order below one 
round lot, the market maker would need to enter a new order, after 
performing the regulatory checks discussed above, to satisfy their 
obligations under Rule 11.8.\14\ In the event that pricing the Market 
Maker Peg Order at the Designated Percentage away from the then current 
National Best Bid and National Best Offer, or, if no National Best Bid 
or National Best Offer, to the Designated Percentage away from the last 
reported sale from the responsible single plan processor would result 
in the order exceeding its limit price, the order will be cancelled or 
rejected.
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    \11\ Rule 11.9(c)(8).
    \12\ The Market Maker Peg Order is one-sided so a market maker 
seeking to use Market Maker Peg Orders to comply with the Exchange's 
rules regarding market maker quotation requirements would need to 
submit both a bid and an offer using the order type.
    \13\ The ``Designated Percentage'' is the individual stock pause 
trigger percentage listed in Interpretations and Policies .01 to 
Rule 11.8, less either: (i) Two percentage points for securities 
that are included in the S&P 500[supreg] Index, Russell 1000[supreg] 
Index, and a pilot list of Exchange Traded Products and for all 
other NMS stocks with a price equal to or greater than $1 per share; 
or (ii) twenty percentage points for all NMS stocks with a price 
less than $1 per share that are not included in the S&P 500[supreg] 
Index, Russell 1000[supreg] Index, and a pilot list of Exchange 
Traded Products. See Rule 11.8(d)(2)(D).
    \14\ Rule 11.8 generally sets forth BATS's market maker 
requirements, which include quotation and pricing obligations.
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    BATS is also proposing to allow a market maker to designate an 
offset more aggressive (i.e., smaller) than the Designated Percentage 
for any given Market Maker Peg Order. This functionality will allow a 
market maker to quote at price levels that are closer to the National 
Best Bid and National Best Offer if it elects to do so. To use this 
functionality, a market maker, upon entry, must designate the desired 
offset and a percentage away from the National Best Bid or National 
Best Offer at which the price of such bid or offer will be adjusted 
back to the desired offset (the ``Reprice Percentage'').\15\ 
Thereafter,\16\ a Market Maker Peg Order with a market maker-designated 
offset will have its price automatically adjusted to the market maker-
designated offset from the National Best Bid or National Best Offer or 
last reported sale upon reaching the Reprice Percentage.\17\ Identical 
to the behavior of Market Maker Peg Orders using the Defined Percentage 
and Defined Limit, in the absence of a National Best Bid or National 
Best Offer, Market Maker Peg Orders with a market maker-designated 
offset will, by default, have their price adjusted to the Market Maker-
designated offset from the price of the last reported sale from the 
responsible single plan processor, or, if otherwise instructed by the 
Market Maker, will be cancelled or rejected. In the absence of a 
National Best Bid or National Best Offer and a last reported sale, 
Market Maker Peg Orders with a market maker-designated offset will be 
cancelled or rejected. In the event that pricing the Market Maker Peg 
Order at the market maker-designated offset away from the then current 
National Best Bid and National Best Offer or last reported sale would 
result in the order exceeding its limit price, the order will be 
cancelled or rejected.\18\
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    \15\ If a market maker wishes, it can designate a more 
aggressive bid while using the Defined Percentage and Defined Limit 
for its offer, or vice versa.
    \16\ In the absence of an offset designation and/or Reprice 
Percentage, a Market Maker Peg Order will default to using the 
Defined Percentage and Defined Limit, and the repricing process 
whereby, upon reaching the Defined Limit, the price of a Market 
Maker Peg Order bid or offer will be adjusted by the System to the 
Designated Percentage away from the then current National Best Bid 
or National Best Offer, or, if no National Best Bid or National Best 
Offer, to the Designated Percentage away from the last reported sale 
from the responsible single plan processor.
    \17\ Market Maker Peg Orders with a market maker-designated 
offset may be able to qualify as bona-fide market making for 
purposes of Regulation SHO, depending on the facts and 
circumstances. A market maker entering such an order must consider 
the factors set forth by the Commission in determining whether 
reliance on the exception from the ``locate'' requirement of Rule 
203 for bona-fide market making is appropriate with respect to the 
particular Market Maker Peg Order and its designated offset. See 17 
CFR 242.203(b)(1).
    \18\ The Market Maker Peg Order will be accepted during Regular 
Trading Hours and the Pre-Opening and After Hours Trading Sessions. 
The Pre-Opening Session means the time between 8 a.m. and 9:30 a.m. 
Eastern Time. The After Hours Trading Session means the time between 
4 p.m. and 5 p.m. Eastern Time. By default, the Market Maker Peg 
Order will be priced at 9:30 a.m. and will only be executable during 
Regular Trading Hours, however, upon entry, a User may direct the 
Exchange to automatically price and execute a Market Maker Peg Order 
during the Pre-Opening Session and After Hours Trading Session 
(``Extended Hours Market Maker Peg Orders''). During the Pre-Opening 
Session and After Hours Trading Session, the wider Designated 
Percentage and Defined Limit associated with the 9:30 a.m.-9:45 a.m. 
and 3:35 p.m.-4 p.m. periods under Rule 11.8(e) will be applied to 
Extended Hours Market Maker Peg Orders for which the market maker 
has not designated an offset more aggressive than the Designated 
Percentage.
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    BATS claims that this order-based approach is superior in terms of 
the ease in complying with the requirements of the Market Access Rule 
and Regulation SHO while also providing similar quote adjusting 
functionality to its market makers.\19\ BATS also states that market 
makers would have control of order origination, as required by the 
Market Access Rule, while also allowing market makers to make marking 
and locate determinations prior to order entry, as required by 
Regulation SHO. The Exchange claims that this will allow market makers 
to fully comply with the requirements of the Market Access Rule and 
Regulation SHO, as they would when placing any order, while also 
meeting their Exchange market making obligations.\20\
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    \19\ See Notice, supra note 3 at 41831.
    \20\ See id.
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III. Discussion and Commission Findings

    After careful review, the Commission finds that the proposed rule 
change is consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to a national securities 
exchange.\21\ Specifically, the Commission finds that the proposed rule 
change is consistent with Section 6(b)(5) of the Act,\22\ which 
requires, among other things, the rules of an exchange to promote just 
and equitable principles of trade, to remove impediments to and perfect 
the mechanism of a free and open market and a national market system 
and, in general, to protect investors and the public interest. The 
Commission finds that the proposed rule change also is designed to 
support the principles of Section 11A(a)(1) \23\ of the Act in that it 
seeks to assure fair competition among brokers and dealers and among 
exchange markets.
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    \21\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition and 
capital formation. 15 U.S.C. 78c(f).
    \22\ 15 U.S.C. 78f(b)(5).
    \23\ 15 U.S.C. 78k-1(a)(1).
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    The Commission finds that the Exchange's proposal is consistent 
with the Act because it provides a means through which market makers 
may meet their minimum quoting requirements, which may assist in the 
maintenance of fair and orderly markets, provide additional liquidity 
to the Exchange, and prevent excessive volatility. The Commission 
notes, however, that notwithstanding the availability of the Market 
Maker Peg Order functionality, the market maker remains responsible for 
meeting its obligations under Rule 11.8, including entering, 
monitoring, and re-submitting, as applicable, compliant quotations. At 
the same time, the Commission finds that the proposal is reasonably 
designed to assist market makers in complying with the regulatory 
requirements of the Market Access Rule and Regulation SHO. The 
Commission notes, however, that the Market Maker Peg Order, like the

[[Page 54635]]

current market maker quoter functionality, does not ensure that the 
market maker is satisfying the requirements of the Market Access Rule 
or Regulation SHO, including the satisfaction of the locate requirement 
of Rule 203(b)(1) or an exception thereto. The Commission also notes 
that, in the event a Market Maker Peg Order is executed against such 
that the Market Maker Peg Order is reduced in size to below one round 
lot, the market maker would need to perform the necessary regulatory 
checks pursuant to the Market Access Rule and Regulation SHO prior to 
entering a new Market Maker Peg Order.
    The Commission also believes that providing Exchange market makers 
with a transition period will serve to minimize the potential market 
impact caused by the implementation of the Market Maker Peg Order. In 
addition, by allowing market makers to enter a Market Maker Peg Order 
that is priced more aggressively than the Designated Percentage, the 
proposed rules are reasonably designed to provide that quotations 
submitted by market makers to the Exchange, and displayed to market 
participants, bear some relationship to the prevailing market price.

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\24\ that the proposed rule change, as modified by Amendment No.1, 
(SR-BATS-2012-026) be, and hereby is, approved.
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    \24\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\25\
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    \25\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-21769 Filed 9-4-12; 8:45 am]
BILLING CODE 8011-01-P
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