Self-Regulatory Organizations; BATS Exchange, Inc.; Notice of Filing of a Proposed Rule Change To Adopt Rules To Hold a Volatility Closing Auction, 79030-79033 [2013-30933]

Download as PDF 79030 Federal Register / Vol. 78, No. 249 / Friday, December 27, 2013 / Notices including whether the proposed rule change is consistent with the Act. Comments may be submitted by any of the following methods: Electronic Comments For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.4 Kevin M. O’Neill, Deputy Secretary. [FR Doc. 2013–30936 Filed 12–26–13; 8:45 am] • Use the Commission’s Internet comment form (http://www.sec.gov/ rules/sro.shtml); or • Send an email to rulecomments@sec.gov. Please include File No. SR–NSCC–2013–13 on the subject line. Paper Comments tkelley on DSK3SPTVN1PROD with NOTICES • Send paper comments in triplicate to Elizabeth M. Murphy, Secretary, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549–1090. All submissions should refer to File No. SR–NSCC–2013–13. 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 (http://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 such filings also will be available for inspection and copying at the principal office of NSCC and on NSCC’s Web site at (http://dtcc.com/legal/rule_filings/ nscc/2013.php). All comments received will be posted without change; the Commission does not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File No. SR–NSCC–2013–13 and should be submitted on or before January 17, 2014. BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–71162; File No. SR–BATS– 2013–066] Self-Regulatory Organizations; BATS Exchange, Inc.; Notice of Filing of a Proposed Rule Change To Adopt Rules To Hold a Volatility Closing Auction December 20, 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 December 19, 2013, BATS Exchange, Inc. (the ‘‘Exchange’’ or ‘‘BATS’’) filed with the Securities and Exchange Commission (‘‘Commission’’) the proposed rule change as described in Items I and II below, which Items have been prepared by the Exchange. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. I. Self-Regulatory Organization’s Statement of the Terms of the Substance of the Proposed Rule Change The Exchange filed a proposal to amend Rule 11.23, which governs auctions conducted on the Exchange for Exchange listed-securities. The text of the proposed rule change is available at the Exchange’s Web site at http://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. 4 17 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 1 15 VerDate Mar<15>2010 23:48 Dec 26, 2013 Jkt 232001 PO 00000 Frm 00221 Fmt 4703 Sfmt 4703 A. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change 1. Purpose Introduction The Exchange proposes to add a new auction type to its rules, a Volatility Closing Auction, which will apply any time that an Exchange-listed security is halted between 3:50 p.m. and 4:00 p.m. E.T. In particular, the Exchange proposes to add the Volatility Closing Auction in preparation for the operation during the last 15 minutes of Regular Trading Hours 3 of the Plan to Address Extraordinary Market Volatility Pursuant to Rule 608 of Regulation NMS under the Act (the ‘‘Limit Up-Limit Down Plan’’ or ‘‘Plan’’), as further described below.4 The Plan is designed to prevent trades in individual NMS Stocks from occurring outside of specified Price Bands.5 The requirements of the Plan are coupled with Trading Pauses, or halts, to accommodate more fundamental price moves (as opposed to erroneous trades or momentary gaps in liquidity). Background On May 31, 2012, the Commission approved the Plan, as amended, on a one-year pilot basis.6 The Plan first became operational in April of 2013, with a staged rollout with respect to the portion of the trading day to which the Plan applies as well as the securities subject to the Plan. All trading centers in NMS Stocks, including both those operated by Participants and those operated by members of Participants, are required to establish, maintain, and enforce written policies and procedures that are reasonably designed to comply with the requirements specified in the Plan.7 As set forth in more detail in the Plan, Price Bands consisting of a Lower Price Band and an Upper Price Band for each NMS Stock are calculated by the Processors.8 When the National Best Bid (Offer) is below (above) the Lower (Upper) Price Band, the Processors disseminate the National Best Bid (Offer) with an appropriate flag 3 Regular Trading Hours are defined in Exchange Rule 1.5(w) as the time between 9:30 a.m. to 4:00 p.m. E.T. 4 See Securities Exchange Act Release No. 67091 (May 31, 2012), 77 FR 33498 (June 6, 2012) (File No. 4–631) (Order Approving, on a Pilot Basis, the National Market System Plan To Address Extraordinary Market Volatility). 5 Unless otherwise specified, capitalized terms used in this rule filing are based on the defined terms of the Plan. 6 See supra note 4. 7 The Exchange is a Participant in the Plan. 8 See Section (V)(A) of the Plan. E:\FR\FM\27DEN1.SGM 27DEN1 Federal Register / Vol. 78, No. 249 / Friday, December 27, 2013 / Notices tkelley on DSK3SPTVN1PROD with NOTICES identifying it as non-executable. When the National Best Bid (Offer) is equal to the Upper (Lower) Price Band, the Processors distribute the National Best Bid (Offer) with an appropriate flag identifying it as a Limit State Quotation.9 Trading in an NMS Stock immediately enters a Limit State if the National Best Offer (Bid) equals but does not cross the Lower (Upper) Price Band.10 Trading for an NMS stock exits a Limit State if, within 15 seconds of entering the Limit State, all Limit State Quotations were executed or canceled in their entirety. If the market does not exit a Limit State within 15 seconds, then the Primary Listing Exchange declares a five-minute Trading Pause pursuant to Section VII of the Limit UpLimit Down Plan, which Trading Pause is applicable to all markets trading the security.11 In addition, the Plan defines a Straddle State as when the National Best Bid (Offer) is below (above) the Lower (Upper) Price Band and the NMS Stock is not in a Limit State. For example, assume the Lower Price Band for an NMS Stock is $9.50 and the Upper Price Band is $10.50, such NMS stock would be in a Straddle State if the National Best Bid were below $9.50, and therefore non-executable, and the National Best Offer were above $9.50 (including a National Best Offer that could be above $10.50). If an NMS Stock is in a Straddle State and trading in that stock deviates from normal trading characteristics, the Primary Listing Exchange may declare a Trading Pause for that NMS Stock. As currently implemented, the Limit Up-Limit Down Plan applies to securities between 9:30 a.m. and 3:45 p.m. E.T. each trading day. In the near future, the operation of the Plan will be extended to include the time between 3:45 p.m. and 4:00 p.m. E.T., which is the end of Regular Trading Hours on the Exchange and is when the Exchange typically conducts a Closing Auction for each of its listed securities. The Exchange proposes to adopt rules for a Volatility Closing Auction in connection with the extension of the Plan to the end of Regular Trading Hours. As described in additional detail below, the Volatility Closing Auction will operate in some ways like a Halt Auction, for which the Exchange’s process is described in Rule 9 See Section VI(A) of the Plan. Section VI(B)(1) of the Plan. 11 The primary listing market would declare a trading pause in an NMS Stock; upon notification by the primary listing market, the Processor would disseminate this information to the public. No trades in that NMS Stock could occur during the trading pause, but all bids and offers may be displayed. See Section VII(A) of the Plan. 10 See VerDate Mar<15>2010 23:48 Dec 26, 2013 Jkt 232001 11.23(d), and in some ways like a Closing Auction, for which the Exchange’s process is described in Rule 11.23(c). Proposed Amendment to Rule 11.23 The Exchange proposes to add new paragraph (e) to Rule 11.23 to govern the operation of Volatility Closing Auctions on the Exchange, which will be auctions of Exchange-listed securities that are halted in the last 10 minutes of Regular Trading Hours. As noted above, a Volatility Closing Auction would operate in certain respects like an Exchange Halt Auction and in other respects like an Exchange Closing Auction. Similar to a Halt Auction on the Exchange, a Volatility Closing Auction will have a period of time that orders are accepted for participation in such auction during which no trading is occurring on the Exchange (the ‘‘QuoteOnly Period’’). The Quote-Only Period with respect to a Volatility Closing Auction would commence at the time a security is halted between 3:50 p.m. and 4:00 p.m. and will end at 4:00 p.m. Thus, to the extent the Exchange halts a security after 3:55 p.m. but before 4:00 p.m., such security will be halted for less than five minutes prior to the Volatility Closing Auction. The Exchange believes this is appropriate because it will ensure that the final auction of the day in all Exchange-listed securities consistently occurs at 4:00 p.m. E.T. During the Quote-Only Period of a Volatility Closing Auction the Exchange will accept all orders eligible to participate in both a Halt Auction and a Closing Auction in order to avoid participant confusion and to facilitate participation in the Volatility Closing Auction. This includes limit and market orders as well as any Eligible Auction Orders applicable to a Closing Auction on the Exchange. Thus, the Exchange will accept Regular Hours Only orders (‘‘RHOs’’), Limit-On-Close orders (‘‘LOCs’’), Late-Limit-On-Close orders (‘‘LLOCs’’) and Market-On-Close orders (‘‘MOCs’’) for participation in a Volatility Closing Auction, and the typical restrictions on such orders will apply. For instance, as with a Closing Auction, the Exchange will not accept any LOCs or MOCs after 3:55 p.m. E.T. Similarly, the Exchange will not accept any LLOCs before 3:55 p.m. E.T. The Exchange would like to note, however, that, while these restrictions remain in place, regular limit and market orders can be entered and cancelled without restriction at any time prior to execution. In contrast to a typical Closing Auction, however, because the PO 00000 Frm 00222 Fmt 4703 Sfmt 4703 79031 Exchange is accepting Eligible Auction Orders only to facilitate participation in and avoid confusion during the Volatility Closing Auction and because a User could alternatively enter and cancel limit orders and market orders without restriction during the QuoteOnly Period, Eligible Auction Orders associated with a Volatility Closing Auction may also be cancelled at any time prior to execution.12 The Exchange will disseminate the same information that it does for other auctions conducted on the Exchange. Thus, coinciding with the beginning of the Quote-Only Period for a security and updated every five seconds thereafter, the Reference Price, Indicative Price, Auction Only Price, and the lesser of Reference Buy Shares and Reference Sell Shares associated with the Volatility Closing Auction will be disseminated by the Exchange via electronic means. As a general matter, the Exchange will not extend the Quote-Only Period associated with a Volatility Closing Auction, which is the same as with a Closing Auction. In contrast, the Exchange’s rules related to Exchange Halt Auctions provide that the QuoteOnly Period may be extended where there are unmatched market orders on the auction book associated with the auction and where the indicative price moves the greater of 10% or fifty (50) cents in the fifteen (15) seconds prior to the Halt Auction, both to ensure that there is sufficient interest and stability after a halt to reopen the security for trading. Halt Auctions, however, occur during Regular Trading Hours and the Exchange retains discretion to not extend the Quote-Only Period of a Halt Auction such that it would interfere with a Closing Auction. While the Exchange acknowledges that some of the same issues for which the ability to extend the Quote-Only Period of a Halt Auction may exist where there are unmatched market orders or dramatic price movements near the end of the Quote-Only Period of the Volatility Closing Auction, the Exchange believes that these concerns are outweighed by the importance of providing Members and the investing public with a definitive market close and a BATS Official Closing Price at 4:00 p.m. E.T. More specifically, the Exchange believes that the clarity that comes from requiring that a Volatility Closing Auction occurs at 4:00 p.m. E.T. will help reduce uncertainty for Members participating in the Volatility Closing 12 In a Closing Auction, LOC and MOC orders cannot be cancelled in the five minutes leading up to the auction. E:\FR\FM\27DEN1.SGM 27DEN1 tkelley on DSK3SPTVN1PROD with NOTICES 79032 Federal Register / Vol. 78, No. 249 / Friday, December 27, 2013 / Notices Auction. Even where a halt is declared very near 4:00 p.m. E.T., the Exchange believes that it is in the interest of a fair and orderly market to hold the Volatility Closing Auction at 4:00 p.m. E.T. and has proposed that all Volatility Closing Auctions be required to close at a price level within the Collar Price Range in order to ensure that the Volatility Closing Auction price is based on rational and based on current market conditions. The Exchange further restricts the price of a Volatility Closing Auction by using the Final Last Sale Eligible Trade as the Volatility Closing Auction price where no limit orders from one or both sides would participate in the Volatility Closing Auction. This restriction ensures that there is crossed limit interest in the Volatility Closing Auction if the Volatility Closing Auction price is going to look to the entered limit interest to determine the price, which prevents a single limit order from interacting with market orders to determine the Volatility Closing Auction Price. Finally, the Exchange notes that it retains discretion under Rule 11.23(f) (re-numbered pursuant to this proposal, as described below) to adjust the timing of or suspend an auction with prior notice to Users where the interests of a fair and orderly market so require. In a situation where the Exchange deemed it necessary to adjust the timing of a Volatility Closing Auction in order to maintain a fair and orderly market, i.e., to a time later than 4:00 p.m. E.T., the Exchange would notify Exchange Users in advance of the time that the auction would occur and would provide for a Quote-Only period prior to such auction. The Exchange will conduct a Volatility Closing Auction in a manner similar to a Halt Auction. Specifically, orders will be executed at the price that maximizes the number of shares executed in the auction. For ETPs, orders will be executed at the price level within the Collar Price Range that maximizes the number of shares executed in the auction. In the event of a volume based tie at multiple price levels, the price level closest to the Final Last Sale Eligible Trade will be used for Volatility Closing Auctions. Where no limit orders from one or both sides (the buy side, the sell side, or both the buy and sell side) would participate in a Volatility Closing Auction, the Volatility Closing Auction will occur at the price of the Final Last Sale Eligible Trade. The only differences between the processing of a Halt Auction and a Volatility Closing Auction are that: (1) The Volatility Closing Auction price VerDate Mar<15>2010 23:48 Dec 26, 2013 Jkt 232001 will be used as the official closing price for dissemination to the consolidated tape (the ‘‘BATS Official Closing Price’’), and (2) a Volatility Closing Auction will not be delayed due to a market order imbalance or due to a significant change in the Indicative Price, which can extend the Quote-Only Period of a Halt Auction, as explained above. The Exchange also proposes to process a Volatility Closing Auction in a manner consistent with both all auctions conducted by the Exchange, in that, as proposed, market orders, including MOCs, will have higher priority than other Volatility Closing Auction Eligible Orders. To the extent there is executable contra side interest, such market orders will be executed at the BATS Official Closing Price according to time priority. After the execution of all market orders, the remaining orders priced at or more aggressively than the BATS Official Closing Price will be executed on the basis of price/time priority. The Exchange will transition to the After Hours Trading Session 13 following a Volatility Closing Auction in much the way that it does for a Closing Auction. Thus, limit order shares that are not executed in the Volatility Closing Auction will remain on the Exchange’s order book during the After Hours Trading Session, subject to a User’s instructions and the fact that certain auction specific limit orders will be cancelled. RHO, LOC, LLOC, MOC and market order shares that are not executed in the Volatility Closing Auction will be cancelled at the conclusion of the Volatility Closing Auction. Thus, the only difference between this transition and a typical Closing Auction is that market orders are also cancelled, which differs only because such orders may enter the Volatility Closing Auction in the first place. Other than MOCs, which are specifically designated for a Closing Auction, market orders cannot participate in Closing Auctions because they do not post to the Continuous Book,14 and thus the Exchange does not address their transition to the After Hours Trading Session in its Closing Auction transition process. In addition to the changes described above, in order to correct a 13 The After Hours Trading Session is defined in Exchange Rule 1.5(c) and currently means the time between 4:00 p.m. to 5:00 p.m. E.T. 14 Market orders received by the Exchange are executed or routed by the Exchange to other market centers but do not post to the Exchange’s Continuous Book. See Rules 11.9(a)(2), 11.13(a)(1) and 11.13(a)(2). The Continuous Book is defined in Exchange Rule 11.23(a)(7) as all orders on the BATS Book that are not Eligible Auction Orders. PO 00000 Frm 00223 Fmt 4703 Sfmt 4703 typographical error in the original filing that proposed Rule 11.23, the Exchange proposes to re-number paragraphs (g), (h) and (i) as (f), (g) and (h), respectively. Finally, the Exchange proposes to add a reference to the new auction type, a Volatility Closing Auction, to current paragraph (h) (to be re-numbered as (g)). 2. Statutory Basis Approval of the rule changes proposed in this submission is consistent with the requirements of the Act and the rules and regulations thereunder that are applicable to a national securities exchange, and, in particular, with the requirements of Section 6(b) of the Act.15 In particular, the proposed change is consistent with Section 6(b)(5) of the Act,16 because it would promote just and equitable principles of trade, remove impediments to, and perfect the mechanism of, a free and open market and a national market system, and, in general, protect investors and the public interest. The Exchange believes that operation of a Volatility Closing Auction for securities listed on the Exchange will assist in the price discovery process and help to ensure a fair and orderly market for securities listed on the Exchange that are halted at the end of the trading day. Specifically, the proposed Volatility Closing Auction will address situations where a security is halted in the last 10 minutes of the trading day in order to hold a single auction at the end of Regular Trading Hours. The Exchange believes this proposal is consistent with the Act and the Plan as it will ensure that market participants have a single closing price at the end of the trading day. Consistent with this belief, as discussed above, although the same conditions could occur with a Volatility Closing Auction that in certain circumstances cause the extension of the Quote-Only Period for a Halt Auction on the Exchange (i.e., a significant imbalance or price movement), the Exchange believes that concerns related to these conditions are outweighed by the importance of providing Members and the investing public with a definitive market close and a BATS Official Closing Price at 4:00 p.m. E.T. More specifically, the Exchange believes that the clarity that comes from requiring that a Volatility Closing Auction occurs at 4:00 p.m. E.T. will help reduce uncertainty for Members participating in the Volatility Closing Auction. As explained above, the Exchange has proposed various price and execution constraints for the 15 15 16 15 E:\FR\FM\27DEN1.SGM U.S.C. 78f(b). U.S.C. 78f(b)(5). 27DEN1 Federal Register / Vol. 78, No. 249 / Friday, December 27, 2013 / Notices Volatility Closing Auction to ensure that the auction occurs at a price that is based on rational and based on current market conditions. Finally, the Exchange reiterates that it retains discretion under Rule 11.23(f) to adjust the timing of or suspend an auction with prior notice to Users where the interests of a fair and orderly market so require. Without the proposal, the Exchange could potentially have a Halt Auction within minutes of the Closing Auction, which could cause unnecessary confusion. The Exchange reiterates that all aspects of the proposed Volatility Closing Auction are based upon existing processes built into both the Exchanges’ Halt Auction and the Exchange’s Closing Auction. The Exchange further believes that its proposal to allow participants to cancel orders specifically designated for a Closing Auction up to the time of the Volatility Closing Auction is appropriate because the halt in the last 10 minutes of the trading day necessitating a Volatility Closing Auction may be indicative of price dislocation in a security and because such orders may have been entered well before such halt occurred. The Exchange believes it is appropriate and in the best interests of investors and the public interest to allow orders to be cancelled in such an event. Finally, the Exchange notes that its existing Halt Auction process allows orders to be cancelled prior to such auction. tkelley on DSK3SPTVN1PROD with NOTICES 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 Exchange believes that the proposal enhances cooperation among markets and other trading venues to promote fair and orderly markets and to protect the interests of the public and of investors. The Limit Up-Limit Down Plan is part of a coordinated effort amongst various parties including the Exchange and other self-regulatory organizations as well as other market participants. While the specific proposals to implement changes to Exchange functionality consistent with the Plan may differ in certain ways from the implementation adopted by other market centers, the Exchange believes its proposals are consistent with the requirements and purpose of the Plan. Specifically, the proposed Volatility Closing Auction will address situations where a security is halted in the last 10 minutes of the trading day in order to VerDate Mar<15>2010 23:48 Dec 26, 2013 Jkt 232001 hold a single auction at the end of Regular Trading Hours. 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 Within 45 days of the date of publication of this notice in the Federal Register or within such longer period (i) as the Commission may designate up to 90 days of such date if it finds such longer period to be appropriate and publishes its reasons for so finding or (ii) as to which the self-regulatory organization consents, the Commission will: (A) By order approve or disapprove the proposed rule change, or (B) institute proceedings to determine whether the proposed rule change should be disapproved. IV. Solicitation of Comments Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the 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 (http://www.sec.gov/ rules/sro.shtml); or • Send an email to rule-comments@ sec.gov. Please include File Number SR– BATS–2013–066 on the subject line. Paper Comments • Send paper comments in triplicate to Elizabeth M. Murphy, Secretary, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549–1090. All submissions should refer to File Number SR–BATS–2013–066. 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 (http://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 PO 00000 Frm 00224 Fmt 4703 Sfmt 4703 79033 proposed rule change between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for Web site viewing and printing in the Commission’s Public Reference Room on official business days between the hours of 10:00 a.m. and 3:00 p.m. Copies of such filing also will be available for inspection and copying at the principal offices of the Exchange. All comments received will be posted without change; the Commission does not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR–BATS– 2013–066, and should be submitted on or before January 17, 2014. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.17 Kevin M. O’Neill, Deputy Secretary. [FR Doc. 2013–30933 Filed 12–26–13; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–71167; File No. SR– NASDAQ–2013–160] Self-Regulatory Organizations; The NASDAQ Stock Market LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Modify the Definition of ‘‘System Securities’’ in NASDAQ Rule 4751 December 20, 2013. Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’),1 and Rule 19b–4 thereunder,2 notice is hereby given that on December 19, 2013, The NASDAQ Stock Market LLC (‘‘NASDAQ’’ or ‘‘Exchange’’), filed with the Securities and Exchange Commission (‘‘Commission’’) the proposed rule change as described in Items I and II below, which Items have been prepared by the Exchange. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change The Exchange proposes to modify the definition of ‘‘System Securities’’ set forth in NASDAQ Rule 4751. 17 17 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 1 15 E:\FR\FM\27DEN1.SGM 27DEN1

Agencies

[Federal Register Volume 78, Number 249 (Friday, December 27, 2013)]
[Notices]
[Pages 79030-79033]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-30933]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-71162; File No. SR-BATS-2013-066]


Self-Regulatory Organizations; BATS Exchange, Inc.; Notice of 
Filing of a Proposed Rule Change To Adopt Rules To Hold a Volatility 
Closing Auction

December 20, 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 December 19, 2013, BATS Exchange, Inc. (the ``Exchange'' or 
``BATS'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I and 
II below, which Items have been prepared by the Exchange. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of the 
Substance of the Proposed Rule Change

    The Exchange filed a proposal to amend Rule 11.23, which governs 
auctions conducted on the Exchange for Exchange listed-securities.
    The text of the proposed rule change is available at the Exchange's 
Web site at http://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
Introduction
    The Exchange proposes to add a new auction type to its rules, a 
Volatility Closing Auction, which will apply any time that an Exchange-
listed security is halted between 3:50 p.m. and 4:00 p.m. E.T. In 
particular, the Exchange proposes to add the Volatility Closing Auction 
in preparation for the operation during the last 15 minutes of Regular 
Trading Hours \3\ of the Plan to Address Extraordinary Market 
Volatility Pursuant to Rule 608 of Regulation NMS under the Act (the 
``Limit Up-Limit Down Plan'' or ``Plan''), as further described 
below.\4\ The Plan is designed to prevent trades in individual NMS 
Stocks from occurring outside of specified Price Bands.\5\ The 
requirements of the Plan are coupled with Trading Pauses, or halts, to 
accommodate more fundamental price moves (as opposed to erroneous 
trades or momentary gaps in liquidity).
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    \3\ Regular Trading Hours are defined in Exchange Rule 1.5(w) as 
the time between 9:30 a.m. to 4:00 p.m. E.T.
    \4\ See Securities Exchange Act Release No. 67091 (May 31, 
2012), 77 FR 33498 (June 6, 2012) (File No. 4-631) (Order Approving, 
on a Pilot Basis, the National Market System Plan To Address 
Extraordinary Market Volatility).
    \5\ Unless otherwise specified, capitalized terms used in this 
rule filing are based on the defined terms of the Plan.
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Background
    On May 31, 2012, the Commission approved the Plan, as amended, on a 
one-year pilot basis.\6\ The Plan first became operational in April of 
2013, with a staged rollout with respect to the portion of the trading 
day to which the Plan applies as well as the securities subject to the 
Plan. All trading centers in NMS Stocks, including both those operated 
by Participants and those operated by members of Participants, are 
required to establish, maintain, and enforce written policies and 
procedures that are reasonably designed to comply with the requirements 
specified in the Plan.\7\ As set forth in more detail in the Plan, 
Price Bands consisting of a Lower Price Band and an Upper Price Band 
for each NMS Stock are calculated by the Processors.\8\ When the 
National Best Bid (Offer) is below (above) the Lower (Upper) Price 
Band, the Processors disseminate the National Best Bid (Offer) with an 
appropriate flag

[[Page 79031]]

identifying it as non-executable. When the National Best Bid (Offer) is 
equal to the Upper (Lower) Price Band, the Processors distribute the 
National Best Bid (Offer) with an appropriate flag identifying it as a 
Limit State Quotation.\9\
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    \6\ See supra note 4.
    \7\ The Exchange is a Participant in the Plan.
    \8\ See Section (V)(A) of the Plan.
    \9\ See Section VI(A) of the Plan.
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    Trading in an NMS Stock immediately enters a Limit State if the 
National Best Offer (Bid) equals but does not cross the Lower (Upper) 
Price Band.\10\ Trading for an NMS stock exits a Limit State if, within 
15 seconds of entering the Limit State, all Limit State Quotations were 
executed or canceled in their entirety. If the market does not exit a 
Limit State within 15 seconds, then the Primary Listing Exchange 
declares a five-minute Trading Pause pursuant to Section VII of the 
Limit Up-Limit Down Plan, which Trading Pause is applicable to all 
markets trading the security.\11\ In addition, the Plan defines a 
Straddle State as when the National Best Bid (Offer) is below (above) 
the Lower (Upper) Price Band and the NMS Stock is not in a Limit State. 
For example, assume the Lower Price Band for an NMS Stock is $9.50 and 
the Upper Price Band is $10.50, such NMS stock would be in a Straddle 
State if the National Best Bid were below $9.50, and therefore non-
executable, and the National Best Offer were above $9.50 (including a 
National Best Offer that could be above $10.50). If an NMS Stock is in 
a Straddle State and trading in that stock deviates from normal trading 
characteristics, the Primary Listing Exchange may declare a Trading 
Pause for that NMS Stock.
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    \10\ See Section VI(B)(1) of the Plan.
    \11\ The primary listing market would declare a trading pause in 
an NMS Stock; upon notification by the primary listing market, the 
Processor would disseminate this information to the public. No 
trades in that NMS Stock could occur during the trading pause, but 
all bids and offers may be displayed. See Section VII(A) of the 
Plan.
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    As currently implemented, the Limit Up-Limit Down Plan applies to 
securities between 9:30 a.m. and 3:45 p.m. E.T. each trading day. In 
the near future, the operation of the Plan will be extended to include 
the time between 3:45 p.m. and 4:00 p.m. E.T., which is the end of 
Regular Trading Hours on the Exchange and is when the Exchange 
typically conducts a Closing Auction for each of its listed securities. 
The Exchange proposes to adopt rules for a Volatility Closing Auction 
in connection with the extension of the Plan to the end of Regular 
Trading Hours. As described in additional detail below, the Volatility 
Closing Auction will operate in some ways like a Halt Auction, for 
which the Exchange's process is described in Rule 11.23(d), and in some 
ways like a Closing Auction, for which the Exchange's process is 
described in Rule 11.23(c).
Proposed Amendment to Rule 11.23
    The Exchange proposes to add new paragraph (e) to Rule 11.23 to 
govern the operation of Volatility Closing Auctions on the Exchange, 
which will be auctions of Exchange-listed securities that are halted in 
the last 10 minutes of Regular Trading Hours. As noted above, a 
Volatility Closing Auction would operate in certain respects like an 
Exchange Halt Auction and in other respects like an Exchange Closing 
Auction.
    Similar to a Halt Auction on the Exchange, a Volatility Closing 
Auction will have a period of time that orders are accepted for 
participation in such auction during which no trading is occurring on 
the Exchange (the ``Quote-Only Period''). The Quote-Only Period with 
respect to a Volatility Closing Auction would commence at the time a 
security is halted between 3:50 p.m. and 4:00 p.m. and will end at 4:00 
p.m. Thus, to the extent the Exchange halts a security after 3:55 p.m. 
but before 4:00 p.m., such security will be halted for less than five 
minutes prior to the Volatility Closing Auction. The Exchange believes 
this is appropriate because it will ensure that the final auction of 
the day in all Exchange-listed securities consistently occurs at 4:00 
p.m. E.T.
    During the Quote-Only Period of a Volatility Closing Auction the 
Exchange will accept all orders eligible to participate in both a Halt 
Auction and a Closing Auction in order to avoid participant confusion 
and to facilitate participation in the Volatility Closing Auction. This 
includes limit and market orders as well as any Eligible Auction Orders 
applicable to a Closing Auction on the Exchange. Thus, the Exchange 
will accept Regular Hours Only orders (``RHOs''), Limit-On-Close orders 
(``LOCs''), Late-Limit-On-Close orders (``LLOCs'') and Market-On-Close 
orders (``MOCs'') for participation in a Volatility Closing Auction, 
and the typical restrictions on such orders will apply. For instance, 
as with a Closing Auction, the Exchange will not accept any LOCs or 
MOCs after 3:55 p.m. E.T. Similarly, the Exchange will not accept any 
LLOCs before 3:55 p.m. E.T. The Exchange would like to note, however, 
that, while these restrictions remain in place, regular limit and 
market orders can be entered and cancelled without restriction at any 
time prior to execution. In contrast to a typical Closing Auction, 
however, because the Exchange is accepting Eligible Auction Orders only 
to facilitate participation in and avoid confusion during the 
Volatility Closing Auction and because a User could alternatively enter 
and cancel limit orders and market orders without restriction during 
the Quote-Only Period, Eligible Auction Orders associated with a 
Volatility Closing Auction may also be cancelled at any time prior to 
execution.\12\
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    \12\ In a Closing Auction, LOC and MOC orders cannot be 
cancelled in the five minutes leading up to the auction.
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    The Exchange will disseminate the same information that it does for 
other auctions conducted on the Exchange. Thus, coinciding with the 
beginning of the Quote-Only Period for a security and updated every 
five seconds thereafter, the Reference Price, Indicative Price, Auction 
Only Price, and the lesser of Reference Buy Shares and Reference Sell 
Shares associated with the Volatility Closing Auction will be 
disseminated by the Exchange via electronic means.
    As a general matter, the Exchange will not extend the Quote-Only 
Period associated with a Volatility Closing Auction, which is the same 
as with a Closing Auction. In contrast, the Exchange's rules related to 
Exchange Halt Auctions provide that the Quote-Only Period may be 
extended where there are unmatched market orders on the auction book 
associated with the auction and where the indicative price moves the 
greater of 10% or fifty (50) cents in the fifteen (15) seconds prior to 
the Halt Auction, both to ensure that there is sufficient interest and 
stability after a halt to reopen the security for trading. Halt 
Auctions, however, occur during Regular Trading Hours and the Exchange 
retains discretion to not extend the Quote-Only Period of a Halt 
Auction such that it would interfere with a Closing Auction. While the 
Exchange acknowledges that some of the same issues for which the 
ability to extend the Quote-Only Period of a Halt Auction may exist 
where there are unmatched market orders or dramatic price movements 
near the end of the Quote-Only Period of the Volatility Closing 
Auction, the Exchange believes that these concerns are outweighed by 
the importance of providing Members and the investing public with a 
definitive market close and a BATS Official Closing Price at 4:00 p.m. 
E.T. More specifically, the Exchange believes that the clarity that 
comes from requiring that a Volatility Closing Auction occurs at 4:00 
p.m. E.T. will help reduce uncertainty for Members participating in the 
Volatility Closing

[[Page 79032]]

Auction. Even where a halt is declared very near 4:00 p.m. E.T., the 
Exchange believes that it is in the interest of a fair and orderly 
market to hold the Volatility Closing Auction at 4:00 p.m. E.T. and has 
proposed that all Volatility Closing Auctions be required to close at a 
price level within the Collar Price Range in order to ensure that the 
Volatility Closing Auction price is based on rational and based on 
current market conditions. The Exchange further restricts the price of 
a Volatility Closing Auction by using the Final Last Sale Eligible 
Trade as the Volatility Closing Auction price where no limit orders 
from one or both sides would participate in the Volatility Closing 
Auction. This restriction ensures that there is crossed limit interest 
in the Volatility Closing Auction if the Volatility Closing Auction 
price is going to look to the entered limit interest to determine the 
price, which prevents a single limit order from interacting with market 
orders to determine the Volatility Closing Auction Price. Finally, the 
Exchange notes that it retains discretion under Rule 11.23(f) (re-
numbered pursuant to this proposal, as described below) to adjust the 
timing of or suspend an auction with prior notice to Users where the 
interests of a fair and orderly market so require. In a situation where 
the Exchange deemed it necessary to adjust the timing of a Volatility 
Closing Auction in order to maintain a fair and orderly market, i.e., 
to a time later than 4:00 p.m. E.T., the Exchange would notify Exchange 
Users in advance of the time that the auction would occur and would 
provide for a Quote-Only period prior to such auction.
    The Exchange will conduct a Volatility Closing Auction in a manner 
similar to a Halt Auction. Specifically, orders will be executed at the 
price that maximizes the number of shares executed in the auction. For 
ETPs, orders will be executed at the price level within the Collar 
Price Range that maximizes the number of shares executed in the 
auction. In the event of a volume based tie at multiple price levels, 
the price level closest to the Final Last Sale Eligible Trade will be 
used for Volatility Closing Auctions. Where no limit orders from one or 
both sides (the buy side, the sell side, or both the buy and sell side) 
would participate in a Volatility Closing Auction, the Volatility 
Closing Auction will occur at the price of the Final Last Sale Eligible 
Trade. The only differences between the processing of a Halt Auction 
and a Volatility Closing Auction are that: (1) The Volatility Closing 
Auction price will be used as the official closing price for 
dissemination to the consolidated tape (the ``BATS Official Closing 
Price''), and (2) a Volatility Closing Auction will not be delayed due 
to a market order imbalance or due to a significant change in the 
Indicative Price, which can extend the Quote-Only Period of a Halt 
Auction, as explained above.
    The Exchange also proposes to process a Volatility Closing Auction 
in a manner consistent with both all auctions conducted by the 
Exchange, in that, as proposed, market orders, including MOCs, will 
have higher priority than other Volatility Closing Auction Eligible 
Orders. To the extent there is executable contra side interest, such 
market orders will be executed at the BATS Official Closing Price 
according to time priority. After the execution of all market orders, 
the remaining orders priced at or more aggressively than the BATS 
Official Closing Price will be executed on the basis of price/time 
priority.
    The Exchange will transition to the After Hours Trading Session 
\13\ following a Volatility Closing Auction in much the way that it 
does for a Closing Auction. Thus, limit order shares that are not 
executed in the Volatility Closing Auction will remain on the 
Exchange's order book during the After Hours Trading Session, subject 
to a User's instructions and the fact that certain auction specific 
limit orders will be cancelled. RHO, LOC, LLOC, MOC and market order 
shares that are not executed in the Volatility Closing Auction will be 
cancelled at the conclusion of the Volatility Closing Auction. Thus, 
the only difference between this transition and a typical Closing 
Auction is that market orders are also cancelled, which differs only 
because such orders may enter the Volatility Closing Auction in the 
first place. Other than MOCs, which are specifically designated for a 
Closing Auction, market orders cannot participate in Closing Auctions 
because they do not post to the Continuous Book,\14\ and thus the 
Exchange does not address their transition to the After Hours Trading 
Session in its Closing Auction transition process.
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    \13\ The After Hours Trading Session is defined in Exchange Rule 
1.5(c) and currently means the time between 4:00 p.m. to 5:00 p.m. 
E.T.
    \14\ Market orders received by the Exchange are executed or 
routed by the Exchange to other market centers but do not post to 
the Exchange's Continuous Book. See Rules 11.9(a)(2), 11.13(a)(1) 
and 11.13(a)(2). The Continuous Book is defined in Exchange Rule 
11.23(a)(7) as all orders on the BATS Book that are not Eligible 
Auction Orders.
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    In addition to the changes described above, in order to correct a 
typographical error in the original filing that proposed Rule 11.23, 
the Exchange proposes to re-number paragraphs (g), (h) and (i) as (f), 
(g) and (h), respectively. Finally, the Exchange proposes to add a 
reference to the new auction type, a Volatility Closing Auction, to 
current paragraph (h) (to be re-numbered as (g)).
2. Statutory Basis
    Approval of the rule changes proposed in this submission is 
consistent with the requirements of the Act and the rules and 
regulations thereunder that are applicable to a national securities 
exchange, and, in particular, with the requirements of Section 6(b) of 
the Act.\15\ In particular, the proposed change is consistent with 
Section 6(b)(5) of the Act,\16\ because it would promote just and 
equitable principles of trade, remove impediments to, and perfect the 
mechanism of, a free and open market and a national market system, and, 
in general, protect investors and the public interest. The Exchange 
believes that operation of a Volatility Closing Auction for securities 
listed on the Exchange will assist in the price discovery process and 
help to ensure a fair and orderly market for securities listed on the 
Exchange that are halted at the end of the trading day. Specifically, 
the proposed Volatility Closing Auction will address situations where a 
security is halted in the last 10 minutes of the trading day in order 
to hold a single auction at the end of Regular Trading Hours. The 
Exchange believes this proposal is consistent with the Act and the Plan 
as it will ensure that market participants have a single closing price 
at the end of the trading day. Consistent with this belief, as 
discussed above, although the same conditions could occur with a 
Volatility Closing Auction that in certain circumstances cause the 
extension of the Quote-Only Period for a Halt Auction on the Exchange 
(i.e., a significant imbalance or price movement), the Exchange 
believes that concerns related to these conditions are outweighed by 
the importance of providing Members and the investing public with a 
definitive market close and a BATS Official Closing Price at 4:00 p.m. 
E.T. More specifically, the Exchange believes that the clarity that 
comes from requiring that a Volatility Closing Auction occurs at 4:00 
p.m. E.T. will help reduce uncertainty for Members participating in the 
Volatility Closing Auction. As explained above, the Exchange has 
proposed various price and execution constraints for the

[[Page 79033]]

Volatility Closing Auction to ensure that the auction occurs at a price 
that is based on rational and based on current market conditions. 
Finally, the Exchange reiterates that it retains discretion under Rule 
11.23(f) to adjust the timing of or suspend an auction with prior 
notice to Users where the interests of a fair and orderly market so 
require. Without the proposal, the Exchange could potentially have a 
Halt Auction within minutes of the Closing Auction, which could cause 
unnecessary confusion. The Exchange reiterates that all aspects of the 
proposed Volatility Closing Auction are based upon existing processes 
built into both the Exchanges' Halt Auction and the Exchange's Closing 
Auction. The Exchange further believes that its proposal to allow 
participants to cancel orders specifically designated for a Closing 
Auction up to the time of the Volatility Closing Auction is appropriate 
because the halt in the last 10 minutes of the trading day 
necessitating a Volatility Closing Auction may be indicative of price 
dislocation in a security and because such orders may have been entered 
well before such halt occurred. The Exchange believes it is appropriate 
and in the best interests of investors and the public interest to allow 
orders to be cancelled in such an event. Finally, the Exchange notes 
that its existing Halt Auction process allows orders to be cancelled 
prior to such auction.
---------------------------------------------------------------------------

    \15\ 15 U.S.C. 78f(b).
    \16\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

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 Exchange 
believes that the proposal enhances cooperation among markets and other 
trading venues to promote fair and orderly markets and to protect the 
interests of the public and of investors. The Limit Up-Limit Down Plan 
is part of a coordinated effort amongst various parties including the 
Exchange and other self-regulatory organizations as well as other 
market participants. While the specific proposals to implement changes 
to Exchange functionality consistent with the Plan may differ in 
certain ways from the implementation adopted by other market centers, 
the Exchange believes its proposals are consistent with the 
requirements and purpose of the Plan. Specifically, the proposed 
Volatility Closing Auction will address situations where a security is 
halted in the last 10 minutes of the trading day in order to hold a 
single auction at the end of Regular Trading Hours.

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

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) By order approve or disapprove the proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the 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 (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-BATS-2013-066 on the subject line.

Paper Comments

     Send paper comments in triplicate to Elizabeth M. Murphy, 
Secretary, Securities and Exchange Commission, 100 F Street NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-BATS-2013-066. 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 (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for Web site viewing and 
printing in the Commission's Public Reference Room on official business 
days between the hours of 10:00 a.m. and 3:00 p.m. Copies of such 
filing also will be available for inspection and copying at the 
principal offices of the Exchange. All comments received will be posted 
without change; the Commission does not edit personal identifying 
information from submissions. You should submit only information that 
you wish to make available publicly. All submissions should refer to 
File Number SR-BATS-2013-066, and should be submitted on or before 
January 17, 2014.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\17\
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    \17\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-30933 Filed 12-26-13; 8:45 am]
BILLING CODE 8011-01-P