Self-Regulatory Organizations; BATS Y-Exchange, Inc.; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Amend Rule 2.11, Entitled “BATS Trading, Inc. as Outbound Router”, 36612-36616 [2013-14391]
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Federal Register / Vol. 78, No. 117 / Tuesday, June 18, 2013 / Notices
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activity that may inadvertently and
unknowingly result in executions with
no change in beneficial ownership, and
that such conduct should not always be
treated as a wash sale violation if the
market participant did not act with
purpose. The Exchange noted that
activity involving an off-floor market
participant’s algorithmic orders that
inadvertently execute against
themselves due to latency issues could
be deemed a violation of the second
prong of NYSE Rule 476(a)(8), thus the
Exchange has proposed to eliminate
NYSE Rule 476(a)(8) because it believes
that such conduct should not be treated
as a wash sale violation in all instances,
and stated that it will instead utilize
NYSE Rule 6140 for disciplinary actions
involving wash sales.
The Exchange also proposes to make
a conforming amendment to NYSE Rule
6140(a) and (b) to expand its coverage
to include principal executives,
approved persons, registered or nonregistered employees of a member or
member organization or persons
otherwise subject to the jurisdiction of
the Exchange. The change to NYSE Rule
6140 will cover the persons originally
covered by NYSE Rule 476(a)(8) who
would be subject to disciplinary action
for wash sales.
III. Discussion and Commission
Findings
The Commission has carefully
reviewed the proposed rule change and
finds that it is consistent with the
requirements of Section 6 of the Act 8
and the rules and regulations
thereunder applicable to a national
securities exchange.9 In particular, the
Commission finds that the proposal is
consistent with Section 6(b)(5) of the
Act,10 which requires, among other
things, that the Exchange’s rules be
designed to prevent fraudulent and
manipulative acts and practices, 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 Exchange is deleting NYSE Rule
476(a)(8), a rule which the Exchange
explained was adopted to address
manual, floor-based trading activity.
The Exchange stated that NYSE Rule
6140, which has a scienter standard that
the second prong of NYSE Rule
476(a)(8) lacks, substantively covers the
8 15
U.S.C. 78f.
9 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).
10 15 U.S.C. 78f(b)(5).
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same conduct as NYSE Rule 476(a)(8).
The Exchange has explained that in
today’s markets, algorithmic trading can
result in unintended executions with no
change in beneficial ownership. The
Exchange believes that such executions
should not be treated as wash sale
violations because they lack the intent
to create or induce a false or misleading
appearance of activity in a security. In
addition, the Exchange is amending
NYSE Rule 6140 to cover the same
persons that NYSE Rule 476(a)(8)
covered.
The Commission understands that
algorithmic trading can result in
inadvertent executions with no change
in beneficial ownership.11 The
Exchange has represented that the
proposed rule change would not result
in any material change in the
surveillance of potentially violative
activity nor any material diminution of
the Exchange’s enforcement authority as
it may still bring a disciplinary action in
cases where a market participant
engages in a significant number of
trades without a change of beneficial
ownership, even if such activity does
not per se violate Rule 6140(b) because
the participant did not act with
‘‘purpose.’’ The Exchange further
represented that such unintended
activity could also give rise to other
violations, such as a failure to supervise
under NYSE Rule 342, or a violation of
just and equitable principles of trade or
could otherwise constitute unethical
activity under NYSE Rule 2010.
Accordingly, the Commission expects
the Exchange to continue to surveil for
potential wash sale activity and to take
necessary action as appropriate.
The Commission believes that the
proposed deletion of NYSE Rule
476(a)(8) promotes harmonization,
consistency and clarity with respect to
the Exchange’s rules 12 by resolving the
inconsistent scienter standards of NYSE
Rule 476(a)(8) and NYSE Rule 6140 and
FINRA Rule 6140, as well as extending
the breadth of persons covered by NYSE
Rule 6140 to those persons covered by
NYSE Rule 476(a)(8). The Commission
further believes that the proposed rule
change would result in less burdensome
and more efficient regulatory
compliance for firms that are members
of FINRA and the NYSE. As such, the
11 The Commission notes that algorithmic trading
resulting in executions with no change in beneficial
ownership, even if unintended, raises concerns.
12 The Exchange stated that it can bring
disciplinary actions under NYSE Rule 476(a)(8) for
conduct that occurred prior to the time the rule is
deleted. Thus, the proposed rule change would
have no impact on ongoing disciplinary actions
involving violations of NYSE Rule 476(a)(8).
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Exchange’s rules would continue to
protect investors and the public interest.
For the foregoing reasons, the
Commission finds that the proposed
rule change is consistent with Section
6(b)(5) of the Act 13 and the rules and
regulations thereunder applicable to a
national securities exchange.
IV. Conclusion
It is therefore ordered, pursuant to
Section 19(b)(2) of the Exchange Act,14
that the proposed rule change (SR–
NYSE–2013–29) be, and it hereby is,
approved.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.15
Kevin M. O’Neill,
Deputy Secretary.
[FR Doc. 2013–14467 Filed 6–17–13; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–69744; File No. SR–BYX–
2013–018]
Self-Regulatory Organizations; BATS
Y-Exchange, Inc.; Notice of Filing and
Immediate Effectiveness of a Proposed
Rule Change To Amend Rule 2.11,
Entitled ‘‘BATS Trading, Inc. as
Outbound Router’’
June 12, 2013.
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 3,
2013, BATS Y-Exchange, Inc. (the
‘‘Exchange’’ or ‘‘BYX’’) filed with the
Securities and Exchange Commission
(‘‘Commission’’) the proposed rule
change as described in Items I and II
below, which Items have been prepared
by the Exchange. The Exchange has
designated this proposal as a ‘‘noncontroversial’’ proposed rule change
pursuant to Section 19(b)(3)(A) of the
Act 3 and Rule 19b–4(f)(6)(iii)
thereunder,4 which renders it effective
upon filing with the Commission. The
Commission is publishing this notice to
solicit comments on the proposed rule
change from interested persons.
13 15
U.S.C. 78f(b)(5).
U.S.C. 78s(b)(2).
15 17 CFR 200.30–3(a)(12).
1 15 U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 15 U.S.C. 78s(b)(3)(A).
4 17 CFR 240.19b–4(f)(6)(iii).
14 15
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Federal Register / Vol. 78, No. 117 / Tuesday, June 18, 2013 / Notices
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange filed a proposal to
amend Rule 2.11, entitled ‘‘BATS
Trading, Inc. as Outbound Router’’, with
respect to the authority of the Exchange
or BATS Trading, Inc. (‘‘BATS
Trading’’) to cancel orders on the
Exchange’s equity securities platform
when a technical or system issue occurs,
as well as to describe the operation of
an error account for BATS Trading.
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
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1. Purpose
The Exchange proposes to amend
Rule 2.11(a) by amending subparagraph
(4) and adding new subparagraphs (6)
and (7) that address the authority of the
Exchange or BATS Trading to cancel
orders when a technical or systems
issue occurs and to describe the
operation of an error account for BATS
Trading as it relates to the Exchange.5
5 BATS Trading is a facility of the Exchange.
Accordingly, under Rule 2.11, the Exchange is
responsible for filing with the Commission rule
changes and fees relating to the functions of BATS
Trading. In addition, the Exchange is using the
phrase ‘‘BATS Trading or the Exchange’’ in this rule
filing to reflect the fact that a decision to take action
with respect to orders affected by a technical or
systems issue may be made in the capacity of BATS
Trading or the Exchange depending on the
circumstances of the issue.
From time to time, the Exchange also uses nonaffiliate third-party broker-dealers to provide
outbound routing services (i.e., third-party Routing
Brokers). In those cases, orders are submitted to the
third-party Routing Broker through BATS Trading,
the third-party Routing Broker routes the orders to
the Routing Destination in its name, and any
executions are submitted for clearance and
settlement in the name of BATS Trading so that any
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BATS Trading is the approved routing
broker of the Exchange, subject to the
conditions listed in Rule 2.11, 2.12. The
Exchange relies on BATS Trading to
provide outbound routing services from
itself to routing destinations of BATS
Trading (‘‘Routing Destinations’’).
Additionally, the Exchange relies on
BATS Trading to provide inbound
routing services for BATS Exchange,
Inc. (‘‘BZX’’).6 When BATS Trading
routes orders to a Routing Destination,
it does so by sending a corresponding
order in its own name to the Routing
Destination. In the normal course,
routed orders that are executed at
Routing Destinations are submitted for
clearance and settlement in the name of
BATS Trading, and BATS Trading
arranges for any resulting securities
positions to be delivered to the Member
that submitted the corresponding order
to the Exchange.
Examples of Situations That May Lead
to Cancelled Orders
A technical or systems issue may arise
at BATS Trading, a Routing Destination,
or the Exchange that may cause the
Exchange or BATS Trading to take steps
to cancel orders if the Exchange or
BATS Trading determines that such
action is necessary to maintain a fair
and orderly market. The examples set
forth below describe some of the
situations in which the Exchange or
BATS Trading may decide to cancel
orders.7
resulting positions are delivered to BATS Trading
upon settlement. As described above, BATS
Trading normally arranges for any resulting
securities positions to be delivered to the Member
that submitted the corresponding order to the
Exchange. If error positions (as defined in proposed
Rule 2.11(a)(7)) result in connection with the
Exchange’s use of a third-party Routing Broker for
outbound routing, and those positions are delivered
to BATS Trading through the clearance and
settlement process, BATS Trading would be
permitted to resolve those positions in accordance
with proposed Rule 2.11(a)(7)(B)–(E). If the thirdparty Routing Broker received error positions in
connection with its role as a routing broker for the
Exchange, and the error positions were not
delivered to BATS Trading through the clearance
and settlement process, then the third-party Routing
Broker would resolve the error positions itself and
BATS Trading would not be permitted to accept the
error positions, as set forth in proposed Rule
2.11(a)(7)(B).
6 The Exchange has authority to receive inbound
routes of equities orders by BATS Trading from
BZX. See Securities Exchange Act Release No.
66807 (April 13, 2012), 77 FR 23300 (April 18,
2012) (SR–BYX–2012–006).
7 The examples described in this filing are not
intended to be comprehensive or exclusive. Rule
2.11, as proposed, would provide general authority
for the Exchange or BATS Trading to cancel orders
in order to maintain fair and orderly markets when
technical and systems issues occur and would also
set forth the manner in which error positions may
be handled by the Exchange or BATS Trading. The
proposed rule change is not limited to addressing
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36613
Example 1. If BATS Trading or a Routing
Destination experiences a technical or
systems issue that results in BATS Trading
not receiving responses to immediate or
cancel (‘‘IOC’’) orders that it sent to the
Routing Destination and that issue is not
resolved in a timely manner, BATS Trading
or the Exchange would seek to cancel the
routed orders affected by the issue.8 For
instance, if BATS Trading experiences a
connectivity issue affecting the manner in
which it sends or receives order messages to
or from Routing Destinations, it may be
unable to receive timely execution or
cancellation reports from the Routing
Destinations, and BATS Trading or the
Exchange may consequently seek to cancel
the affected routed orders. Once the decision
is made to cancel those routed orders, any
cancellation that a Member submitted to the
Exchange on its initial order during such a
situation would be honored.9
Example 2. If the Exchange experiences a
systems issue, the Exchange may take steps
to cancel all outstanding orders affected by
that issue and notify affected Members of the
cancellations. In those cases, the Exchange
would seek to cancel any routed orders
related to the Members’ initial orders.
Examples of Situations That May Lead
to Error Positions
In some instances, the technical or
systems issue at BATS Trading, a
Routing Destination, the Exchange, or a
non-affiliate third party Routing Broker
may also result in BATS Trading
acquiring an error position that it must
resolve. The examples set forth below
describe some of the circumstances in
which error positions may arise.
Example A. Error positions may result from
routed orders that the Exchange or BATS
Trading attempts to cancel but that are
executed before the Routing Destination
receives the cancellation message or that are
executed because the Routing Destination is
unable to process the cancellation message.
Using the situation described in Example 1
above, assume that the Exchange seeks to
cancel orders routed to a Routing Destination
because it is not receiving timely execution
or cancellation reports from the Routing
Destination. In such a situation, BATS
order cancellation or error positions resulting only
from the specific examples described in this filing.
8 In a normal situation (i.e., one in which a
technical or systems issue does not occur), BATS
Trading should receive an immediate response to
an IOC order from a Routing Destination and would
pass the resulting fill or cancellation on to the
Member. After submitting an order that is routed to
a Routing Destination, if a Member sends an
instruction to cancel that order, the cancellation is
held by the Exchange until a response is received
from the Routing Destination. For instance, if the
Routing Destination executes that order, the
execution would be passed on to the Member and
the cancellation instruction would be disregarded.
9 If a Member did not submit a cancellation to the
Exchange, however, that initial order would remain
‘‘live’’ and thus be eligible for execution or posting
on the Exchange, and neither the Exchange nor
BATS Trading would treat any execution of that
initial order or any subsequent routed order related
to that initial order as an error.
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Trading may still receive executions from the
Routing Destination after connectivity is
restored, which it would not then allocate to
Members because of the earlier decision to
cancel the affected routed orders. Instead,
BATS Trading would post those positions
into its error account and resolve the
positions in the manner described below.
Example B. Error positions may result from
an order processing issue at a Routing
Destination. For instance, if a Routing
Destination experienced a systems problem
that affects its order processing, it may
transmit back a message purporting to cancel
a routed order, but then subsequently submit
an execution of that same order (i.e., a
locked-in trade) to The Depository Trust &
Clearing Corporation (‘‘DTCC’’) for clearance
and settlement. In such a situation, the
Exchange would not then allocate the
execution to the Member because of the
earlier cancellation message from the Routing
Destination. Instead, BATS Trading would
post those positions into its error account
and resolve the positions in the manner
described below.
Example C. Error positions may result if
BATS Trading receives an execution report
from a Routing Destination but does not
receive clearing instructions for the
execution from the Routing Destination. For
instance, assume that a Member sends the
Exchange an order to buy 100 shares of ABC
stock, which causes BATS Trading to send an
order to a Routing Destination that is
subsequently executed, cleared, and closed
out by that Routing Destination, and the
execution is ultimately communicated back
to that Member. On the next trading day
(T+1), if the Routing Destination does not
provide clearing instructions for that
execution, BATS Trading would still be
responsible for settling that Member’s
purchase, but would be left with a short
position in its error account.10 BATS Trading
would resolve the position in the manner
described below.
Example D. Error positions may result from
a technical or systems issue that causes
orders to be executed in the name of BATS
Trading that are not related to BATS
Trading’s function as the Exchange’s routing
broker and are not related to any
corresponding orders of Members. As a
result, BATS Trading would not be able to
assign any positions resulting from such an
issue to Members. Instead, BATS Trading
would post those positions into its error
account and resolve the positions in the
manner described below.
Example E. Error positions may result from
a technical or systems issue at the Exchange
through which the Exchange does not receive
sufficient notice that a Member that has
executed trades on the Exchange has lost the
ability to clear trades through DTCC, as well
as where the Exchange received notice of
such Member’s loss of ability to clear trades
through DTCC, but, because of a technical or
systems issue at the Exchange, the Exchange
was unable to react to such notice in a timely
10 To the extent that BATS Trading incurred a
loss in covering its positions, short or long, it would
submit reimbursement claim to that Routing
Destination.
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manner. In such a situation, the Exchange
would not have valid clearing information,
which would prevent the trade from being
automatically processed for clearance and
settlement on a locked-in basis. Accordingly,
BATS Trading would assume that Member’s
side of the trades so that the counterparties
can settle the trades. BATS Trading would
post those positions into its error account
and resolve the positions in the manner
described below.
Example F. Error positions may result from
a technical or systems issue at the Exchange
that does not involve routing of orders
through BATS Trading. For example, a
situation may arise in which a posted order
was validly cancelled, but the system
erroneously matched that order with an order
that was seeking to access it. In such a
situation, BATS Trading would have to
assume the side of the trade opposite the
order seeking to access the cancelled order.
BATS Trading would post the position in its
error account and resolve the position in the
manner described below.
In each of the circumstances
described above, it is possible that
neither the Exchange nor BATS Trading
may learn about an error position until
T+1, either: (1) During the clearing
process when a Routing Destination has
submitted to DTCC a transaction for
clearance and settlement for which
BATS Trading never received an
execution confirmation; or (2) when a
Routing Destination does not recognize
a transaction submitted by BATS
Trading to DTCC for clearance and
settlement. Moreover, the affected
Members’ trades may not be nullified
absent express authority under BYX
rules.11
Proposed Amendments to Rule 2.11
The Exchange proposes to amend
Rule 2.11(a) to add new paragraphs (6)
and (7) and to add certain language to
Rule 2.11(a)(4). Specifically, the
Exchange proposes to amend Rule
2.11(a)(4) to state that BATS Trading
may employ an error account in
compliance with proposed paragraph
(a)(7). Under paragraph (6) of the
proposed rule, the Exchange or BATS
Trading would be expressly authorized
to cancel orders as may be necessary to
maintain fair and orderly markets if a
technical or systems issue occurred at
the Exchange, BATS Trading, or a
Routing Destination.12 The Exchange or
11 See, e.g., Rule 11.17 (regarding clearly
erroneous executions).
12 Such a situation may not cause the Exchange
to declare self-help against the routing destination
pursuant to Rule 611 of Regulation NMS. If the
Exchange or BATS Trading determines to cancel
orders routed to a routing destination under
proposed Rule 2.11(a)(7), but does not declare selfhelp against that routing destination, the Exchange
would continue to be subject to the trade-through
requirements in Rule 611 with respect to that
routing destination.
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BATS Trading would be required to
provide notice of the cancellation to
affected Members as soon as is
practicable.
Paragraph (a)(7)(A) of the proposed
rule would permit BATS Trading to
maintain an error account for the
purpose of addressing positions that are
the result of an execution or executions
that are not clearly erroneous 13 under
Rule 11.17 and result from a technical
or systems issue at BATS Trading, the
Exchange, a Routing Destination, or a
non-affiliate third-party Routing Broker
that affects one or more orders (‘‘Error
Positions’’). By definition, an Error
Position would not include any position
that results from an order submitted by
a Member to the Exchange that is
executed on the Exchange and
automatically processed for clearance
and settlement on a locked-in basis.
Under paragraph (a)(7)(B) of the
proposed rule, BATS Trading also
would not be permitted to accept any
positions in its error account from an
account of a Member and could not
permit any Member to transfer any
positions from the Member’s account to
BATS Trading’s error account under the
proposed rule.14 However, under
paragraph (a)(7)(C) of the proposed rule,
if a technical or systems issue results in
the Exchange not having valid clearing
instructions for a Member to a trade,
BATS Trading may assume that
13 As defined in Rule 11.17(a), a transaction
executed on the Exchange is ‘‘clearly erroneous’’
when there is an obvious error in any term, such
as price, number of shares or other unit of trading,
or identification of the security.
14 The purpose of this provision is to clarify that
BATS Trading may address error positions under
the proposed rule that are caused by a technical or
systems issue, but that BATS Trading 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 BATS
Trading, the Exchange, a Routing Destination of
BATS Trading, or a non-affiliate third-party Routing
Broker. This provision would not apply, however,
to situations like the one described in Example C
in which BATS Trading incurred a short position
to settle a Member’s purchase, as the Member did
not yet have a position in its account as a result of
the purchase at the time of BATS Trading’s action
(i.e., BATS Trading’s action was necessary for the
purchase to settle into the Member’s account).
Similarly, the provision would not apply to
situations like the one described in Example F,
where a system issue caused one Member to receive
an execution for which there was not an available
contra-party, in which case action by BATS Trading
would be necessary for the position to settle into
that Member’s account. Moreover, to the extent a
Member receives locked-in positions in connection
with a technical or systems issue, that Member may
seek to rely on BYX Rule 11.16 if it experiences a
loss. That rule provides Members with the ability
to file claims against the Exchange for ‘‘losses
resulting directly from the malfunction of the
Exchange’s physical equipment, devices and/or
programming or the negligent acts or omissions of
its employees.’’
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Member’s side of the trade so that the
trade can be processed for clearing and
settlement on a locked-in basis.15
Under paragraph (a)(7)(D), in
connection with a particular technical
or systems issue, BATS Trading or the
Exchange would be permitted to either
(i) assign all resulting Error Positions to
Members; or (ii) have all resulting Error
Positions liquidated, as described
below. Any determination to assign or
liquidate Error Positions, as well as any
resulting assignments, would be
required to be made in a
nondiscriminatory fashion.
BATS Trading or the Exchange would
be required to assign all Error Positions
resulting from a particular technical or
systems issue to the applicable Members
affected by that technical or systems
issue if BATS Trading or the Exchange:
(i) Determines that it has accurate and
sufficient information (including valid
clearing information) to assign the
positions to all of the applicable
Members affected by that technical or
systems issue; (ii) determines that it has
sufficient time pursuant to normal
clearance and settlement deadlines to
evaluate the information necessary to
assign the positions to all of the
applicable Members affected by that
technical or systems issue; and (iii) does
not determine to cancel all orders
affected by that technical or systems
issue.
For example, a technical or systems
issue of limited scope or duration may
occur at a Routing Destination and the
resulting trades may be submitted for
clearance and settlement by such
Routing Destination to DTCC. If there
were a small number of trades, there
may be sufficient time to match
positions with Member orders and avoid
using the error account.
There may be scenarios, however,
where BATS Trading determines that it
is unable to assign all Error Positions
resulting from a particular technical or
systems issue to all of the affected
Members, or determines to cancel all
affected routed orders. For example, in
some cases, the volume of questionable
executions and positions resulting from
a technical or systems issue might be
such that the research necessary to
determine which Members to assign
those executions to could be expected to
extend past the normal settlement cycle
for such executions. Furthermore, if a
Routing Destination experiences a
technical or systems issue after BATS
Trading has transmitted IOC orders to it
that prevents BATS Trading from
receiving responses to those orders,
BATS Trading or the Exchange may
15 See
Example E above.
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determine to cancel all routed orders
affected by that issue. In such a
situation, BATS Trading or the
Exchange would not pass on to the
Members any executions on the routed
orders received from the Routing
Destination.
Proposed Rule 2.11(a)(7)(D) would
require BATS Trading to liquidate Error
Positions as soon as practicable.16 In
liquidating Error Positions, BATS
Trading would be required to provide
complete time and price discretion for
the trading to liquidate the Error
Positions to a third-party broker-dealer
and could not attempt to exercise any
influence or control over the timing or
methods of trading to liquidate the Error
Positions.17 BATS Trading also would
be required to establish and enforce
policies and procedures reasonably
designed to restrict the flow of
confidential and proprietary
information between the third-party
broker-dealer and BATS Trading/the
Exchange associated with the
liquidation of the Error Positions.
Under proposed paragraph (a)(7)(E),
BATS Trading and the Exchange would
be required to make and keep records to
document all determinations to treat
positions as Error Positions and all
determinations for the assignment of
Error Positions to Members or the
liquidation of Error Positions, as well as
records associated with the liquidation
of Error Positions through the thirdparty broker-dealer.
2. Statutory Basis
The Exchange believes that the
proposed rule change 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 of the Act.18
Specifically, the Exchange believes that
the proposed rule change is consistent
with Section 6(b)(5) of the Act,19 in that
it is designed to prevent fraudulent and
manipulative acts and practices, to
promote just and equitable principles of
16 If BATS Trading determines in connection with
a particular technical or systems issue that some
error positions can be assigned to some affected
Members, but other error positions cannot be
assigned, BATS Trading would be required under
the proposed rule to liquidate all such error
positions (including those positions that could be
assigned to the affected Members).
17 This provision is not intended to preclude
BATS Trading from providing the third-party
broker with standing instructions with respect to
the manner in which it should handle all error
account transactions. For example, BATS Trading
might instruct the broker to treat all orders as ‘‘not
held’’ and to attempt to minimize any market
impact on the price of the stock being traded.
18 15 U.S.C. 78f.
19 15 U.S.C. 78f(b)(5).
PO 00000
Frm 00110
Fmt 4703
Sfmt 4703
36615
trade, to foster cooperation and
coordination with persons engaged in
facilitating transactions in securities, 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, and it is not designed to
permit unfair discrimination among
customers, brokers, or dealers. The
Exchange believes that this proposal is
in keeping with those principles since
BATS Trading’s or the Exchange’s
ability to cancel orders during a
technical and systems issue and to
maintain an error account facilitates the
smooth and efficient operation of the
market. Specifically, the Exchange
believes that allowing BATS Trading or
the Exchange to cancel orders during a
technical or systems issue would allow
the Exchange to maintain fair and
orderly markets. Moreover, the
Exchange believes that allowing BATS
Trading to assume Error Positions in an
error account and to liquidate those
positions, subject to the conditions set
forth in the proposed amendments to
Rule 2.11, would be the least disruptive
means to correct these errors, except in
cases where BATS Trading can assign
all such Error Positions to all affected
Members of the Exchange. Overall, the
proposed amendments are designed to
ensure full trade certainty for market
participants and to avoid disrupting the
clearance and settlement process. The
proposed amendments are also designed
to provide a consistent methodology for
handling Error Positions in a manner
that does not discriminate among
Members. The proposed amendments
are also consistent with Section 6 of the
Act insofar as they would require BATS
Trading to establish controls to restrict
the flow of any confidential information
between the third-party broker and
BATS Trading/the Exchange associated
with the liquidation of Error Positions.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
The Exchange does not believe that
the proposed rule change will impose
any burden on competition not
necessary or appropriate in furtherance
of the purposes of the Act. To the
contrary, the proposed amendment will
align the Exchange’s rules with other
competing market centers. Specifically,
the rule change proposed herein is
substantially similar to the rules of other
exchanges, including NASDAQ Stock
Market LLC (‘‘Nasdaq’’) Rule 4758(d),
NYSE Arca Equities, Inc. (‘‘Arca’’) Rule
7.45(d)(2), and EDGX Exchange, Inc.
(‘‘EDGX’’) Rule 2.11(a).
E:\FR\FM\18JNN1.SGM
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36616
Federal Register / Vol. 78, No. 117 / Tuesday, June 18, 2013 / Notices
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 foregoing proposed rule
change does not: (i) Significantly affect
the protection of investors or the public
interest; (ii) impose any significant
burden on competition; and (iii) become
operative for 30 days after the date of
the filing, or such shorter time as the
Commission may designate, it has
become effective pursuant to Section
19(b)(3)(A) of the Act 20 and Rule 19b–
4(f)(6) 21 thereunder.
The Exchange has asked the
Commission to waive the 30-day
operative delay. The Commission
believes that waiver of the operative
delay is consistent with the protection
of investors and the public interest.
Such waiver would allow the Exchange,
without delay, to implement the
proposed rule change, which is
designed to provide a consistent
methodology for handling Error
Positions in a manner that does not
discriminate among Members. The
Commission also notes that the
proposed rule change is based on, and
substantially similar to, rules of NYSE
Arca, Inc.,22 EDGX Exchange, Inc,23 and
NASDAQ Stock Market LLC,24 which
the Commission previously approved.
Accordingly, the Commission
designates the proposal operative upon
filing.25
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
20 15
U.S.C. 78s(b)(3)(A).
CFR 240.19b–4(f)(6). In addition, Rule 19b–
4(f)(6) requires a self-regulatory organization to give
the Commission written notice of its intent to file
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. The Exchange has satisfied this
requirement.
22 See Securities Exchange Act Release No. 66963
(May 10, 2012), 77 FR 28919 (May 16, 2012) (SR–
NYSEArca–2012–22).
23 See Securities Exchange Act Release No. 67010
(May 17, 2012), 77 FR 30564 (May 23, 2012) (SR–
EDGX–2012–08).
24 See Securities Exchange Act Release No. 67281
(June 27, 2012), 77 FR 39543 (July 3, 2012) (SR–
NASDAQ–2012–057).
25 For purposes only of waiving the 30-day
operative delay, the Commission has considered the
proposed rule change’s impact on efficiency,
competition, and capital formation. 15 U.S.C. 78c(f).
mstockstill on DSK4VPTVN1PROD with NOTICES
21 17
VerDate Mar<15>2010
16:52 Jun 17, 2013
Jkt 229001
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–BYX–2013–018 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–BYX–2013–018. 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
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
PO 00000
Frm 00111
Fmt 4703
Sfmt 4703
should refer to File Number SR–BYX–
2013–018 and should be submitted on
or before July 9, 2013.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.26
Kevin M. O’Neill,
Deputy Secretary.
[FR Doc. 2013–14391 Filed 6–17–13; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–69741; File No. SR–DTC–
2013–03]
Self-Regulatory Organizations; The
Depository Trust Company; Order
Approving Proposed Rule Change in
Connection With the Implementation of
The Foreign Account Tax Compliance
Act (FATCA)
June 12, 2013.
On April 22, 2013, The Depository
Trust Company (‘‘DTC’’) filed with the
Securities and Exchange Commission
(‘‘Commission’’) the proposed rule
change SR–DTC–2013–03 pursuant to
Section 19(b)(1) of the Securities
Exchange Act of 1934 (‘‘Act’’) 1 and Rule
19b–4 thereunder.2 The proposed rule
change was published for comment in
the Federal Register on May 8, 2013.3
The Commission did not receive
comments on the proposed rule change.
This order approves the proposed rule
change.
I. Description
DTC is amending various DTC rules
‘‘in connection with the implementation
of sections 1471 through 1474 of the
Internal Revenue Code of 1986, as
amended, which sections were enacted
as part of the Foreign Account Tax
Compliance Act, and the Treasury
Regulations or other official
interpretations thereunder (collectively
‘‘FATCA’’).’’ 4 In its filing with the
Commission, DTC provided information
concerning FATCA background,
implementation, and DTC’s proposed
rule changes.
DTCC’s Background Statement
FATCA was enacted on March 18,
2010, as part of the Hiring Incentives to
Restore Employment Act, and became
effective, subject to transition rules, on
26 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. 69494 (May
2, 2013), 78 FR 26823 (May 8, 2013) (SR–DTC–
2013–03).
4 Id. at 26823.
1 15
E:\FR\FM\18JNN1.SGM
18JNN1
]]>Agencies
[Federal Register Volume 78, Number 117 (Tuesday, June 18, 2013)]
[Notices]
[Pages 36612-36616]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-14391]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-69744; File No. SR-BYX-2013-018]
Self-Regulatory Organizations; BATS Y-Exchange, Inc.; Notice of
Filing and Immediate Effectiveness of a Proposed Rule Change To Amend
Rule 2.11, Entitled ``BATS Trading, Inc. as Outbound Router''
June 12, 2013.
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 3, 2013, BATS Y-Exchange, Inc. (the ``Exchange'' or
``BYX'') filed with the Securities and Exchange Commission
(``Commission'') the proposed rule change as described in Items I and
II below, which Items have been prepared by the Exchange. The Exchange
has designated this proposal as a ``non-controversial'' proposed rule
change pursuant to Section 19(b)(3)(A) of the Act \3\ and Rule 19b-
4(f)(6)(iii) thereunder,\4\ which renders it effective upon filing with
the Commission. The Commission is publishing this notice to solicit
comments on the proposed rule change from interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ 15 U.S.C. 78s(b)(3)(A).
\4\ 17 CFR 240.19b-4(f)(6)(iii).
---------------------------------------------------------------------------
[[Page 36613]]
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange filed a proposal to amend Rule 2.11, entitled ``BATS
Trading, Inc. as Outbound Router'', with respect to the authority of
the Exchange or BATS Trading, Inc. (``BATS Trading'') to cancel orders
on the Exchange's equity securities platform when a technical or system
issue occurs, as well as to describe the operation of an error account
for BATS Trading.
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 Exchange proposes to amend Rule 2.11(a) by amending
subparagraph (4) and adding new subparagraphs (6) and (7) that address
the authority of the Exchange or BATS Trading to cancel orders when a
technical or systems issue occurs and to describe the operation of an
error account for BATS Trading as it relates to the Exchange.\5\ BATS
Trading is the approved routing broker of the Exchange, subject to the
conditions listed in Rule 2.11, 2.12. The Exchange relies on BATS
Trading to provide outbound routing services from itself to routing
destinations of BATS Trading (``Routing Destinations''). Additionally,
the Exchange relies on BATS Trading to provide inbound routing services
for BATS Exchange, Inc. (``BZX'').\6\ When BATS Trading routes orders
to a Routing Destination, it does so by sending a corresponding order
in its own name to the Routing Destination. In the normal course,
routed orders that are executed at Routing Destinations are submitted
for clearance and settlement in the name of BATS Trading, and BATS
Trading arranges for any resulting securities positions to be delivered
to the Member that submitted the corresponding order to the Exchange.
---------------------------------------------------------------------------
\5\ BATS Trading is a facility of the Exchange. Accordingly,
under Rule 2.11, the Exchange is responsible for filing with the
Commission rule changes and fees relating to the functions of BATS
Trading. In addition, the Exchange is using the phrase ``BATS
Trading or the Exchange'' in this rule filing to reflect the fact
that a decision to take action with respect to orders affected by a
technical or systems issue may be made in the capacity of BATS
Trading or the Exchange depending on the circumstances of the issue.
From time to time, the Exchange also uses non-affiliate third-
party broker-dealers to provide outbound routing services (i.e.,
third-party Routing Brokers). In those cases, orders are submitted
to the third-party Routing Broker through BATS Trading, the third-
party Routing Broker routes the orders to the Routing Destination in
its name, and any executions are submitted for clearance and
settlement in the name of BATS Trading so that any resulting
positions are delivered to BATS Trading upon settlement. As
described above, BATS Trading normally arranges for any resulting
securities positions to be delivered to the Member that submitted
the corresponding order to the Exchange. If error positions (as
defined in proposed Rule 2.11(a)(7)) result in connection with the
Exchange's use of a third-party Routing Broker for outbound routing,
and those positions are delivered to BATS Trading through the
clearance and settlement process, BATS Trading would be permitted to
resolve those positions in accordance with proposed Rule
2.11(a)(7)(B)-(E). If the third-party Routing Broker received error
positions in connection with its role as a routing broker for the
Exchange, and the error positions were not delivered to BATS Trading
through the clearance and settlement process, then the third-party
Routing Broker would resolve the error positions itself and BATS
Trading would not be permitted to accept the error positions, as set
forth in proposed Rule 2.11(a)(7)(B).
\6\ The Exchange has authority to receive inbound routes of
equities orders by BATS Trading from BZX. See Securities Exchange
Act Release No. 66807 (April 13, 2012), 77 FR 23300 (April 18, 2012)
(SR-BYX-2012-006).
---------------------------------------------------------------------------
Examples of Situations That May Lead to Cancelled Orders
A technical or systems issue may arise at BATS Trading, a Routing
Destination, or the Exchange that may cause the Exchange or BATS
Trading to take steps to cancel orders if the Exchange or BATS Trading
determines that such action is necessary to maintain a fair and orderly
market. The examples set forth below describe some of the situations in
which the Exchange or BATS Trading may decide to cancel orders.\7\
---------------------------------------------------------------------------
\7\ The examples described in this filing are not intended to be
comprehensive or exclusive. Rule 2.11, as proposed, would provide
general authority for the Exchange or BATS Trading to cancel orders
in order to maintain fair and orderly markets when technical and
systems issues occur and would also set forth the manner in which
error positions may be handled by the Exchange or BATS Trading. The
proposed rule change is not limited to addressing order cancellation
or error positions resulting only from the specific examples
described in this filing.
---------------------------------------------------------------------------
Example 1. If BATS Trading or a Routing Destination experiences
a technical or systems issue that results in BATS Trading not
receiving responses to immediate or cancel (``IOC'') orders that it
sent to the Routing Destination and that issue is not resolved in a
timely manner, BATS Trading or the Exchange would seek to cancel the
routed orders affected by the issue.\8\ For instance, if BATS
Trading experiences a connectivity issue affecting the manner in
which it sends or receives order messages to or from Routing
Destinations, it may be unable to receive timely execution or
cancellation reports from the Routing Destinations, and BATS Trading
or the Exchange may consequently seek to cancel the affected routed
orders. Once the decision is made to cancel those routed orders, any
cancellation that a Member submitted to the Exchange on its initial
order during such a situation would be honored.\9\
---------------------------------------------------------------------------
\8\ In a normal situation (i.e., one in which a technical or
systems issue does not occur), BATS Trading should receive an
immediate response to an IOC order from a Routing Destination and
would pass the resulting fill or cancellation on to the Member.
After submitting an order that is routed to a Routing Destination,
if a Member sends an instruction to cancel that order, the
cancellation is held by the Exchange until a response is received
from the Routing Destination. For instance, if the Routing
Destination executes that order, the execution would be passed on to
the Member and the cancellation instruction would be disregarded.
\9\ If a Member did not submit a cancellation to the Exchange,
however, that initial order would remain ``live'' and thus be
eligible for execution or posting on the Exchange, and neither the
Exchange nor BATS Trading would treat any execution of that initial
order or any subsequent routed order related to that initial order
as an error.
---------------------------------------------------------------------------
Example 2. If the Exchange experiences a systems issue, the
Exchange may take steps to cancel all outstanding orders affected by
that issue and notify affected Members of the cancellations. In
those cases, the Exchange would seek to cancel any routed orders
related to the Members' initial orders.
Examples of Situations That May Lead to Error Positions
In some instances, the technical or systems issue at BATS Trading,
a Routing Destination, the Exchange, or a non-affiliate third party
Routing Broker may also result in BATS Trading acquiring an error
position that it must resolve. The examples set forth below describe
some of the circumstances in which error positions may arise.
Example A. Error positions may result from routed orders that
the Exchange or BATS Trading attempts to cancel but that are
executed before the Routing Destination receives the cancellation
message or that are executed because the Routing Destination is
unable to process the cancellation message. Using the situation
described in Example 1 above, assume that the Exchange seeks to
cancel orders routed to a Routing Destination because it is not
receiving timely execution or cancellation reports from the Routing
Destination. In such a situation, BATS
[[Page 36614]]
Trading may still receive executions from the Routing Destination
after connectivity is restored, which it would not then allocate to
Members because of the earlier decision to cancel the affected
routed orders. Instead, BATS Trading would post those positions into
its error account and resolve the positions in the manner described
below.
Example B. Error positions may result from an order processing
issue at a Routing Destination. For instance, if a Routing
Destination experienced a systems problem that affects its order
processing, it may transmit back a message purporting to cancel a
routed order, but then subsequently submit an execution of that same
order (i.e., a locked-in trade) to The Depository Trust & Clearing
Corporation (``DTCC'') for clearance and settlement. In such a
situation, the Exchange would not then allocate the execution to the
Member because of the earlier cancellation message from the Routing
Destination. Instead, BATS Trading would post those positions into
its error account and resolve the positions in the manner described
below.
Example C. Error positions may result if BATS Trading receives
an execution report from a Routing Destination but does not receive
clearing instructions for the execution from the Routing
Destination. For instance, assume that a Member sends the Exchange
an order to buy 100 shares of ABC stock, which causes BATS Trading
to send an order to a Routing Destination that is subsequently
executed, cleared, and closed out by that Routing Destination, and
the execution is ultimately communicated back to that Member. On the
next trading day (T+1), if the Routing Destination does not provide
clearing instructions for that execution, BATS Trading would still
be responsible for settling that Member's purchase, but would be
left with a short position in its error account.\10\ BATS Trading
would resolve the position in the manner described below.
---------------------------------------------------------------------------
\10\ To the extent that BATS Trading incurred a loss in covering
its positions, short or long, it would submit reimbursement claim to
that Routing Destination.
---------------------------------------------------------------------------
Example D. Error positions may result from a technical or
systems issue that causes orders to be executed in the name of BATS
Trading that are not related to BATS Trading's function as the
Exchange's routing broker and are not related to any corresponding
orders of Members. As a result, BATS Trading would not be able to
assign any positions resulting from such an issue to Members.
Instead, BATS Trading would post those positions into its error
account and resolve the positions in the manner described below.
Example E. Error positions may result from a technical or
systems issue at the Exchange through which the Exchange does not
receive sufficient notice that a Member that has executed trades on
the Exchange has lost the ability to clear trades through DTCC, as
well as where the Exchange received notice of such Member's loss of
ability to clear trades through DTCC, but, because of a technical or
systems issue at the Exchange, the Exchange was unable to react to
such notice in a timely manner. In such a situation, the Exchange
would not have valid clearing information, which would prevent the
trade from being automatically processed for clearance and
settlement on a locked-in basis. Accordingly, BATS Trading would
assume that Member's side of the trades so that the counterparties
can settle the trades. BATS Trading would post those positions into
its error account and resolve the positions in the manner described
below.
Example F. Error positions may result from a technical or
systems issue at the Exchange that does not involve routing of
orders through BATS Trading. For example, a situation may arise in
which a posted order was validly cancelled, but the system
erroneously matched that order with an order that was seeking to
access it. In such a situation, BATS Trading would have to assume
the side of the trade opposite the order seeking to access the
cancelled order. BATS Trading would post the position in its error
account and resolve the position in the manner described below.
In each of the circumstances described above, it is possible that
neither the Exchange nor BATS Trading may learn about an error position
until T+1, either: (1) During the clearing process when a Routing
Destination has submitted to DTCC a transaction for clearance and
settlement for which BATS Trading never received an execution
confirmation; or (2) when a Routing Destination does not recognize a
transaction submitted by BATS Trading to DTCC for clearance and
settlement. Moreover, the affected Members' trades may not be nullified
absent express authority under BYX rules.\11\
---------------------------------------------------------------------------
\11\ See, e.g., Rule 11.17 (regarding clearly erroneous
executions).
---------------------------------------------------------------------------
Proposed Amendments to Rule 2.11
The Exchange proposes to amend Rule 2.11(a) to add new paragraphs
(6) and (7) and to add certain language to Rule 2.11(a)(4).
Specifically, the Exchange proposes to amend Rule 2.11(a)(4) to state
that BATS Trading may employ an error account in compliance with
proposed paragraph (a)(7). Under paragraph (6) of the proposed rule,
the Exchange or BATS Trading would be expressly authorized to cancel
orders as may be necessary to maintain fair and orderly markets if a
technical or systems issue occurred at the Exchange, BATS Trading, or a
Routing Destination.\12\ The Exchange or BATS Trading would be required
to provide notice of the cancellation to affected Members as soon as is
practicable.
---------------------------------------------------------------------------
\12\ Such a situation may not cause the Exchange to declare
self-help against the routing destination pursuant to Rule 611 of
Regulation NMS. If the Exchange or BATS Trading determines to cancel
orders routed to a routing destination under proposed Rule
2.11(a)(7), but does not declare self-help against that routing
destination, the Exchange would continue to be subject to the trade-
through requirements in Rule 611 with respect to that routing
destination.
---------------------------------------------------------------------------
Paragraph (a)(7)(A) of the proposed rule would permit BATS Trading
to maintain an error account for the purpose of addressing positions
that are the result of an execution or executions that are not clearly
erroneous \13\ under Rule 11.17 and result from a technical or systems
issue at BATS Trading, the Exchange, a Routing Destination, or a non-
affiliate third-party Routing Broker that affects one or more orders
(``Error Positions''). By definition, an Error Position would not
include any position that results from an order submitted by a Member
to the Exchange that is executed on the Exchange and automatically
processed for clearance and settlement on a locked-in basis. Under
paragraph (a)(7)(B) of the proposed rule, BATS Trading also would not
be permitted to accept any positions in its error account from an
account of a Member and could not permit any Member to transfer any
positions from the Member's account to BATS Trading's error account
under the proposed rule.\14\ However, under paragraph (a)(7)(C) of the
proposed rule, if a technical or systems issue results in the Exchange
not having valid clearing instructions for a Member to a trade, BATS
Trading may assume that
[[Page 36615]]
Member's side of the trade so that the trade can be processed for
clearing and settlement on a locked-in basis.\15\
---------------------------------------------------------------------------
\13\ As defined in Rule 11.17(a), a transaction executed on the
Exchange is ``clearly erroneous'' when there is an obvious error in
any term, such as price, number of shares or other unit of trading,
or identification of the security.
\14\ The purpose of this provision is to clarify that BATS
Trading may address error positions under the proposed rule that are
caused by a technical or systems issue, but that BATS Trading 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
BATS Trading, the Exchange, a Routing Destination of BATS Trading,
or a non-affiliate third-party Routing Broker. This provision would
not apply, however, to situations like the one described in Example
C in which BATS Trading incurred a short position to settle a
Member's purchase, as the Member did not yet have a position in its
account as a result of the purchase at the time of BATS Trading's
action (i.e., BATS Trading's action was necessary for the purchase
to settle into the Member's account). Similarly, the provision would
not apply to situations like the one described in Example F, where a
system issue caused one Member to receive an execution for which
there was not an available contra-party, in which case action by
BATS Trading would be necessary for the position to settle into that
Member's account. Moreover, to the extent a Member receives locked-
in positions in connection with a technical or systems issue, that
Member may seek to rely on BYX Rule 11.16 if it experiences a loss.
That rule provides Members with the ability to file claims against
the Exchange for ``losses resulting directly from the malfunction of
the Exchange's physical equipment, devices and/or programming or the
negligent acts or omissions of its employees.''
\15\ See Example E above.
---------------------------------------------------------------------------
Under paragraph (a)(7)(D), in connection with a particular
technical or systems issue, BATS Trading or the Exchange would be
permitted to either (i) assign all resulting Error Positions to
Members; or (ii) have all resulting Error Positions liquidated, as
described below. Any determination to assign or liquidate Error
Positions, as well as any resulting assignments, would be required to
be made in a nondiscriminatory fashion.
BATS Trading or the Exchange would be required to assign all Error
Positions resulting from a particular technical or systems issue to the
applicable Members affected by that technical or systems issue if BATS
Trading or the Exchange: (i) Determines that it has accurate and
sufficient information (including valid clearing information) to assign
the positions to all of the applicable Members affected by that
technical or systems issue; (ii) determines that it has sufficient time
pursuant to normal clearance and settlement deadlines to evaluate the
information necessary to assign the positions to all of the applicable
Members affected by that technical or systems issue; and (iii) does not
determine to cancel all orders affected by that technical or systems
issue.
For example, a technical or systems issue of limited scope or
duration may occur at a Routing Destination and the resulting trades
may be submitted for clearance and settlement by such Routing
Destination to DTCC. If there were a small number of trades, there may
be sufficient time to match positions with Member orders and avoid
using the error account.
There may be scenarios, however, where BATS Trading determines that
it is unable to assign all Error Positions resulting from a particular
technical or systems issue to all of the affected Members, or
determines to cancel all affected routed orders. For example, in some
cases, the volume of questionable executions and positions resulting
from a technical or systems issue might be such that the research
necessary to determine which Members to assign those executions to
could be expected to extend past the normal settlement cycle for such
executions. Furthermore, if a Routing Destination experiences a
technical or systems issue after BATS Trading has transmitted IOC
orders to it that prevents BATS Trading from receiving responses to
those orders, BATS Trading or the Exchange may determine to cancel all
routed orders affected by that issue. In such a situation, BATS Trading
or the Exchange would not pass on to the Members any executions on the
routed orders received from the Routing Destination.
Proposed Rule 2.11(a)(7)(D) would require BATS Trading to liquidate
Error Positions as soon as practicable.\16\ In liquidating Error
Positions, BATS Trading would be required to provide complete time and
price discretion for the trading to liquidate the Error Positions to a
third-party broker-dealer and could not attempt to exercise any
influence or control over the timing or methods of trading to liquidate
the Error Positions.\17\ BATS Trading also would be required to
establish and enforce policies and procedures reasonably designed to
restrict the flow of confidential and proprietary information between
the third-party broker-dealer and BATS Trading/the Exchange associated
with the liquidation of the Error Positions.
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\16\ If BATS Trading determines in connection with a particular
technical or systems issue that some error positions can be assigned
to some affected Members, but other error positions cannot be
assigned, BATS Trading would be required under the proposed rule to
liquidate all such error positions (including those positions that
could be assigned to the affected Members).
\17\ This provision is not intended to preclude BATS Trading
from providing the third-party broker with standing instructions
with respect to the manner in which it should handle all error
account transactions. For example, BATS Trading might instruct the
broker to treat all orders as ``not held'' and to attempt to
minimize any market impact on the price of the stock being traded.
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Under proposed paragraph (a)(7)(E), BATS Trading and the Exchange
would be required to make and keep records to document all
determinations to treat positions as Error Positions and all
determinations for the assignment of Error Positions to Members or the
liquidation of Error Positions, as well as records associated with the
liquidation of Error Positions through the third-party broker-dealer.
2. Statutory Basis
The Exchange believes that the proposed rule change 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 of the Act.\18\
Specifically, the Exchange believes that the proposed rule change is
consistent with Section 6(b)(5) of the Act,\19\ in that it is designed
to prevent fraudulent and manipulative acts and practices, to promote
just and equitable principles of trade, to foster cooperation and
coordination with persons engaged in facilitating transactions in
securities, 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, and it is not designed to
permit unfair discrimination among customers, brokers, or dealers. The
Exchange believes that this proposal is in keeping with those
principles since BATS Trading's or the Exchange's ability to cancel
orders during a technical and systems issue and to maintain an error
account facilitates the smooth and efficient operation of the market.
Specifically, the Exchange believes that allowing BATS Trading or the
Exchange to cancel orders during a technical or systems issue would
allow the Exchange to maintain fair and orderly markets. Moreover, the
Exchange believes that allowing BATS Trading to assume Error Positions
in an error account and to liquidate those positions, subject to the
conditions set forth in the proposed amendments to Rule 2.11, would be
the least disruptive means to correct these errors, except in cases
where BATS Trading can assign all such Error Positions to all affected
Members of the Exchange. Overall, the proposed amendments are designed
to ensure full trade certainty for market participants and to avoid
disrupting the clearance and settlement process. The proposed
amendments are also designed to provide a consistent methodology for
handling Error Positions in a manner that does not discriminate among
Members. The proposed amendments are also consistent with Section 6 of
the Act insofar as they would require BATS Trading to establish
controls to restrict the flow of any confidential information between
the third-party broker and BATS Trading/the Exchange associated with
the liquidation of Error Positions.
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\18\ 15 U.S.C. 78f.
\19\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition not necessary or appropriate in
furtherance of the purposes of the Act. To the contrary, the proposed
amendment will align the Exchange's rules with other competing market
centers. Specifically, the rule change proposed herein is substantially
similar to the rules of other exchanges, including NASDAQ Stock Market
LLC (``Nasdaq'') Rule 4758(d), NYSE Arca Equities, Inc. (``Arca'') Rule
7.45(d)(2), and EDGX Exchange, Inc. (``EDGX'') Rule 2.11(a).
[[Page 36616]]
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 foregoing proposed rule change does not: (i)
Significantly affect the protection of investors or the public
interest; (ii) impose any significant burden on competition; and (iii)
become operative for 30 days after the date of the filing, or such
shorter time as the Commission may designate, it has become effective
pursuant to Section 19(b)(3)(A) of the Act \20\ and Rule 19b-4(f)(6)
\21\ thereunder.
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\20\ 15 U.S.C. 78s(b)(3)(A).
\21\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)
requires a self-regulatory organization to give the Commission
written notice of its intent to file 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.
The Exchange has satisfied this requirement.
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The Exchange has asked the Commission to waive the 30-day operative
delay. The Commission believes that waiver of the operative delay is
consistent with the protection of investors and the public interest.
Such waiver would allow the Exchange, without delay, to implement the
proposed rule change, which is designed to provide a consistent
methodology for handling Error Positions in a manner that does not
discriminate among Members. The Commission also notes that the proposed
rule change is based on, and substantially similar to, rules of NYSE
Arca, Inc.,\22\ EDGX Exchange, Inc,\23\ and NASDAQ Stock Market
LLC,\24\ which the Commission previously approved. Accordingly, the
Commission designates the proposal operative upon filing.\25\
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\22\ See Securities Exchange Act Release No. 66963 (May 10,
2012), 77 FR 28919 (May 16, 2012) (SR-NYSEArca-2012-22).
\23\ See Securities Exchange Act Release No. 67010 (May 17,
2012), 77 FR 30564 (May 23, 2012) (SR-EDGX-2012-08).
\24\ See Securities Exchange Act Release No. 67281 (June 27,
2012), 77 FR 39543 (July 3, 2012) (SR-NASDAQ-2012-057).
\25\ For purposes only of waiving the 30-day operative delay,
the Commission has considered the proposed rule change's impact on
efficiency, competition, and capital formation. 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. 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 rule-comments@sec.gov. Please include
File Number SR-BYX-2013-018 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-BYX-2013-018. 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 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-BYX-2013-018 and should be
submitted on or before July 9, 2013.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\26\
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\26\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-14391 Filed 6-17-13; 8:45 am]
BILLING CODE 8011-01-P
