Self-Regulatory Organizations; BATS Exchange, Inc.; Notice of Filing of a Proposed Rule Change, as Modified by Amendment No. 1 Thereto, To Adopt New Rule 8.17 To Provide a Process for an Expedited Suspension Proceeding and Rule 12.15 To Prohibit Layering and Spoofing on BATS Exchange, Inc., 50370-50375 [2015-20421]
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be, registered as an investment adviser
under the Investment Advisers Act of
1940 (‘‘Advisers Act’’). The Adviser and
the Trust may retain one or more
subadvisers (each a ‘‘Subadviser’’) to
manage the portfolios of the Funds. Any
Subadviser will be registered, or not
subject to registration, under the
Advisers Act.
3. The Distributor is a Nebraska
limited liability company and a brokerdealer registered under the Securities
Exchange Act of 1934 and will act as the
principal underwriter of Shares of the
Funds. Applicants request that the
requested relief apply to any distributor
of Shares, whether affiliated or
unaffiliated with the Adviser (included
in the term ‘‘Distributor’’). Any
Distributor will comply with the terms
and conditions of the Order.
Applicants’ Requested Exemptive Relief
4. Applicants seek the requested
Order under section 6(c) of the Act for
an exemption from sections 2(a)(32),
5(a)(1), 22(d) and 22(e) of the Act and
rule 22c–1 under the Act, under
sections 6(c) and 17(b) of the Act for an
exemption from sections 17(a)(1) and
17(a)(2) of the Act, and under section
12(d)(1)(J) of the Act for an exemption
from sections 12(d)(1)(A) and (B) of the
Act. The requested Order would permit
applicants to offer exchange-traded
managed funds. Because the relief
requested is the same as the relief
granted by the Commission under the
Reference Order and because the
Adviser has entered into, or anticipates
entering into, a licensing agreement
with Eaton Vance Management, or an
affiliate thereof in order to offer
exchange-traded managed funds,2 the
Order would incorporate by reference
the terms and conditions of the
Reference Order.
5. Applicants request that the Order
apply to the Initial Funds and to any
other existing or future open-end
management investment company or
series thereof that: (a) Is advised by the
Adviser or any entity controlling,
controlled by, or under common control
with the Adviser (any such entity
included in the term ‘‘Adviser’’); and (b)
operates as an exchange-traded managed
fund as described in the Reference
Order; and (c) complies with the terms
and conditions of the Order and of the
Reference Order, which is incorporated
by reference herein (each such company
or series and Initial Fund, a ‘‘Fund’’).3
6. Section 6(c) of the Act provides that
the Commission may exempt any
person, security or transaction, or any
class of persons, securities or
transactions, from any provisions of the
Act, if and to the extent that such
exemption is necessary or appropriate
in the public interest and consistent
with the protection of investors and the
purposes fairly intended by the policy
and provisions of the Act. Section 17(b)
of the Act authorizes the Commission to
exempt a proposed transaction from
section 17(a) of the Act if evidence
establishes that the terms of the
transaction, including the consideration
to be paid or received, are reasonable
and fair and do not involve
overreaching on the part of any person
concerned, and the proposed
transaction is consistent with the
policies of the registered investment
company and the general purposes of
the Act. Section 12(d)(1)(J) of the Act
provides that the Commission may
exempt any person, security, or
transaction, or any class or classes of
persons, securities or transactions, from
any provision of section 12(d)(1) if the
exemption is consistent with the public
interest and the protection of investors.
7. Applicants submit that for the
reasons stated in the Reference Order:
(1) With respect to the relief requested
pursuant to section 6(c) of the Act, the
relief is appropriate, in the public
interest and consistent with the
protection of investors and the purposes
fairly intended by the policy and
provisions of the Act; (2) with respect to
the relief request pursuant to section
17(b) of the Act, the proposed
transactions are reasonable and fair and
do not involve overreaching on the part
of any person concerned, are consistent
with the policies of each registered
investment company concerned and
consistent with the general purposes of
the Act; and (3) with respect to the relief
requested pursuant to section 12(d)(1)(J)
of the Act, the relief is consistent with
the public interest and the protection of
investors.
By the Division of Investment
Management, pursuant to delegated
authority.
Brent J. Fields,
Secretary.
[FR Doc. 2015–20419 Filed 8–18–15; 8:45 am]
BILLING CODE 8011–01–P
2 Eaton
Vance Management has obtained patents
with respect to certain aspects of the Funds’ method
of operation as exchange-traded managed funds.
3 All entities that currently intend to rely on the
Order are named as applicants. Any other entity
that relies on the Order in the future will comply
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SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–75693; File No. SR–BATS–
2015–57]
Self-Regulatory Organizations; BATS
Exchange, Inc.; Notice of Filing of a
Proposed Rule Change, as Modified by
Amendment No. 1 Thereto, To Adopt
New Rule 8.17 To Provide a Process
for an Expedited Suspension
Proceeding and Rule 12.15 To Prohibit
Layering and Spoofing on BATS
Exchange, Inc.
August 13, 2015.
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 July 30,
2015, BATS Exchange, Inc. (the
‘‘Exchange’’ or ‘‘BATS’’) filed with the
Securities and Exchange Commission
(‘‘SEC’’ or ‘‘Commission’’) the proposed
rule change as described in Items I and
II below, which Items have been
prepared by the Exchange. On August
11, 2015, the Exchange filed
Amendment No. 1 to the proposal.3 The
Commission is publishing this notice to
solicit comments on the proposed rule
change from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange is proposing to adopt a
new rule to clearly prohibit layering and
spoofing activity on the Exchange, as
further described below. Further, the
Exchange proposes to amend Exchange
Rules to permit the Exchange to take
prompt action to suspend Members or
their clients that violate such rule.
The text of the proposed rule change
is available at the Exchange’s Web site
at 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
1 15
with the terms and conditions of the Order and of
the Reference Order, which is incorporated by
reference herein.
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U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 Amendment No. 1 amended and replaced the
original proposal in its entirety.
2 17
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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
Background
As a national securities exchange
registered pursuant to section 6 of the
Act, the Exchange is required to be
organized and to have the capacity to
enforce compliance by its members and
persons associated with its members,
with the Act, the rules and regulations
thereunder, and the Exchange’s Rules.4
Further, the Exchange’s Rules are
required to be ‘‘designed to prevent
fraudulent and manipulative acts and
practices, to promote just and equitable
principles of trade . . . and, in general,
to protect investors and the public
interest.’’ 5 In fulfilling these
requirements, the Exchange has
developed a comprehensive regulatory
program that includes automated
surveillance of trading activity that is
both operated directly by Exchange staff
and by staff of the Financial Industry
Regulatory Authority (‘‘FINRA’’)
pursuant to a Regulatory Services
Agreement (‘‘RSA’’). When disruptive
and potentially manipulative or
improper quoting and trading activity is
identified, the Exchange or FINRA
(acting as an agent of the Exchange)
conducts an investigation into the
activity, requesting additional
information from the Member or
Members involved. To the extent
violations of the Act, the rules and
regulations thereunder, or Exchange
Rules have been identified and
confirmed, the Exchange or FINRA as its
agent will commence the enforcement
process, which might result in, among
other things, a censure, a requirement to
take certain remedial actions, one or
more restrictions on future business
activities, a monetary fine, or even a
temporary or permanent ban from the
securities industry.
The process described above, from the
identification of disruptive and
potentially manipulative or improper
quoting and trading activity to a final
resolution of the matter, can often take
several years. The Exchange believes
that this time period is generally
necessary and appropriate to afford the
subject Member adequate due process,
particularly in complex cases. However,
as described below, the Exchange
4 15
5 15
U.S.C. 78f(b)(1).
U.S.C. 78f(b)(5).
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believes that there are certain obvious
and uncomplicated cases of disruptive
and manipulative behavior or cases
where the potential harm to investors is
so large that the Exchange should have
the authority to initiate an expedited
suspension proceeding in order to stop
the behavior from continuing on the
Exchange.
In recent years, several cases have
been brought and resolved by the
Exchange and other SROs that involved
allegations of wide-spread market
manipulation, much of which was
ultimately being conducted by foreign
persons and entities using relatively
rudimentary technology to access the
markets and over which the Exchange
and other SROs had no direct
jurisdiction. In each case, the conduct
involved a pattern of disruptive quoting
and trading activity indicative of
manipulative layering 6 or spoofing.7
The Exchange and other SROs were able
to identify the disruptive quoting and
trading activity in real-time or near realtime; nonetheless, in accordance with
Exchange Rules and the Act, the
Members responsible for such conduct
or responsible for their customers’
conduct were allowed to continue the
disruptive quoting and trading activity
on the Exchange and other exchanges
during the entirety of the subsequent
lengthy investigation and enforcement
process. The Exchange believes that it
should have the authority to initiate an
expedited suspension proceeding in
order to stop the behavior from
continuing on the Exchange if a Member
is engaging in or facilitating layering or
spoofing activity and the Member has
received sufficient notice with an
opportunity to respond, but such
activity has not ceased.
The following two examples are
instructive on the Exchange’s rationale
for the proposed rule change.
In July 2012, Biremis Corp. (formerly
Swift Trade Securities USA, Inc.) (the
‘‘Firm’’) and its CEO were barred from
the industry for, among other things,
supervisory violations related to a
failure by the Firm to detect and prevent
disruptive and allegedly manipulative
6 ‘‘Layering’’ is a form of market manipulation in
which multiple, non-bona fide limit orders are
entered on one side of the market at various price
levels in order to create the appearance of a change
in the levels of supply and demand, thereby
artificially moving the price of the security. An
order is then executed on the opposite side of the
market at the artificially created price, and the nonbona fide orders are cancelled.
7 ‘‘Spoofing’’ is a form of market manipulation
that involves the market manipulator placing nonbona fide orders that are intended to trigger some
type of market movement and/or response from
other market participants, from which the market
manipulator might benefit by trading bona fide
orders.
PO 00000
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50371
trading activities, including layering,
short sale violations, and anti-money
laundering violations.8 The Firm’s sole
business was to provide trade execution
services via a proprietary day trading
platform and order management system
to day traders located in foreign
jurisdictions. Thus, the disruptive and
allegedly manipulative trading activity
introduced by the Firm to U.S. markets
originated directly or indirectly from
foreign clients of the Firm. The pattern
of disruptive and allegedly
manipulative quoting and trading
activity was widespread across multiple
exchanges, and the Exchange, FINRA,
and other SROs identified clear patterns
of the behavior in 2007 and 2008.
Although the Firm and its principals
were on notice of the disruptive and
allegedly manipulative quoting and
trading activity that was occurring, the
Firm took little to no action to attempt
to supervise or prevent such quoting
and trading activity until at least 2009.
Even when it put some controls in
place, they were deficient and the
pattern of disruptive and allegedly
manipulative trading activity continued
to occur. As noted above, the final
resolution of the enforcement action to
bar the Firm and its CEO from the
industry was not concluded until 2012,
four years after the disruptive and
allegedly manipulative trading activity
was first identified.
In September of 2012, Hold Brothers
On-Line Investment Services, Inc. (the
‘‘Firm’’) settled a regulatory action in
connection with the Firm’s provision of
a trading platform, trade software and
trade execution, support and clearing
services for day traders.9 Many traders
using the Firm’s services were located
in foreign jurisdictions. The Firm
ultimately settled the action with
FINRA and several exchanges, including
the Exchange, for a total monetary fine
of $3.4 million. In a separate action, the
Firm settled with the Commission for a
monetary fine of $2.5 million.10 Among
the alleged violations in the case were
disruptive and allegedly manipulative
quoting and trading activity, including
spoofing, layering, wash trading, and
pre-arranged trading. Through its
conduct and insufficient procedures and
controls, the Firm also allegedly
committed anti-money laundering
violations by failing to detect and report
8 See Biremis Corp. and Peter Beck, FINRA Letter
of Acceptance, Waiver and Consent No.
2010021162202, July 30, 2012.
9 See Hold Brothers On-Line Investment Services,
LLC, FINRA Letter of Acceptance, Waiver and
Consent No. 20100237710001, September 25, 2012.
10 In the Matter of Hold Brothers On-Line
Investment Services, LLC, Exchange Act Release No.
67924, September 25, 2012.
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manipulative and suspicious trading
activity. The Firm was alleged to have
not only provided foreign traders with
access to the U.S. markets to engage in
such activities, but that its principals
also owned and funded foreign
subsidiaries that engaged in the
disruptive and allegedly manipulative
quoting and trading activity. Although
the pattern of disruptive and allegedly
manipulative quoting and trading
activity was identified in 2009, as noted
above, the enforcement action was not
concluded until 2012. Thus, although
disruptive and allegedly manipulative
quoting and trading was promptly
detected, it continued for several years.
The Exchange also notes the current
criminal proceedings that have
commenced against Navinder Singh
Sarao. Mr. Sarao’s allegedly
manipulative trading activity, which
included forms of layering and spoofing
in the futures markets, has been linked
as a contributing factor to the ‘‘Flash
Crash’’ of 2010, and yet continued
through 2015.
The Exchange believes that the
activities described in the cases above
provide justification for the proposed
rule change, which is described below.
Rule 8.17—Expedited Client Suspension
Proceeding
The Exchange proposes to adopt new
Rule 8.17 to set forth procedures for
issuing suspension orders, immediately
prohibiting a Member from conducting
continued layering or spoofing activity
on the Exchange. Importantly, these
procedures would also provide the
Exchange the authority to order a
Member to cease and desist from
providing access to the Exchange to a
client of the Member that is conducting
layering or spoofing activity in violation
of proposed Rule 12.15.
Under proposed paragraph (a) of Rule
8.17, with the prior written
authorization of the Chief Regulatory
Officer (‘‘CRO’’) or such other senior
officers as the CRO may designate, the
Office of General Counsel or Regulatory
Department of the Exchange (such
departments generally referred to as the
‘‘Exchange’’ for purposes of proposed
Rule 8.17) may initiate an expedited
suspension proceeding with respect to
alleged violations of Rule 12.15, which
is proposed as part of this filing and
described in detail below. Proposed
paragraph (a) would also set forth the
requirements for notice and service of
such notice pursuant to the Rule,
including the required method of
service and the content of notice.
Proposed paragraph (b) of Rule 8.17
would govern the appointment of a
Hearing Panel as well as potential
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disqualification or recusal of Hearing
Officers. The proposed provision is
consistent with existing Exchange Rule
8.6 and includes the requirement for a
Hearing Officer to be recused in the
event he or she has a conflict of interest
or bias or other circumstances exist
where his or her fairness might
reasonably be questioned. In addition to
recusal initiated by such a Hearing
Officer, a party to the proceeding will be
permitted to file a motion to disqualify
a Hearing Officer. However, due to the
compressed schedule pursuant to which
the process would operate under Rule
8.17, the proposed rule would require
such motion to be filed no later than 5
days after the announcement of the
Hearing Panel and the Exchange’s brief
in opposition to such motion would be
required to be filed no later than 5 days
after service thereof. Pursuant to
existing Rule 8.6(b), if the Hearing Panel
believes the Respondent has provided
satisfactory evidence in support of the
motion to disqualify, the applicable
Hearing Officer shall remove himself or
herself and request the Chief Executive
Officer to reassign the hearing to
another Hearing Officer such that the
Hearing Panel still meets the
compositional requirements described
in Rule 8.6(a). If the Hearing Panel
determines that the Respondent’s
grounds for disqualification are
insufficient, it shall deny the
Respondent’s motion for
disqualification by setting forth the
reasons for the denial in writing and the
Hearing Panel will proceed with the
hearing.
Under paragraph (c) of the proposed
Rule, the hearing would be held not
later than 15 days after service of the
notice initiating the suspension
proceeding, unless otherwise extended
by the Chairman of the Hearing Panel
with the consent of the Parties for good
cause shown. In the event of a recusal
or disqualification of a Hearing Officer,
the hearing shall be held not later than
five days after a replacement Hearing
Officer is appointed. Proposed
paragraph (c) would also govern how
the hearing is conducted, including the
authority of Hearing Officers, witnesses,
additional information that may be
required by the Hearing Panel, the
requirement that a transcript of the
proceeding be created and details
related to such transcript, and details
regarding the creation and maintenance
of the record of the proceeding.
Proposed paragraph (c) would also state
that if a Respondent fails to appear at a
hearing for which it has notice, the
allegations in the notice and
accompanying declaration may be
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deemed admitted, and the Hearing
Panel may issue a suspension order
without further proceedings. Finally, as
proposed, if the Exchange fails to appear
at a hearing for which it has notice, the
Hearing Panel may order that the
suspension proceeding be dismissed.
Under paragraph (d) of the proposed
Rule, the Hearing Panel would be
authorized to issue a written decision
stating whether a suspension order
would be imposed. The Hearing Panel
would be required to issue the decision
not later than 10 days after receipt of the
hearing transcript, unless otherwise
extended by the Chairman of the
Hearing Panel with the consent of the
Parties for good cause shown. The Rule
would state that a suspension order
shall be imposed if the Hearing Panel
finds by a preponderance of the
evidence that the alleged violation
specified in the notice has occurred and
that the violative conduct or
continuation thereof is likely to result in
significant market disruption or other
significant harm to investors.
Proposed paragraph (d) would also
describe the content, scope and form of
a suspension order. As proposed, a
suspension order shall be limited to
ordering a Respondent to cease and
desist from violating proposed Rule
12.15, and, where applicable, to
ordering a Respondent to cease and
desist from providing access to the
Exchange to a client of Respondent that
is causing violations of Rule 12.15.
Under the proposed rule, a suspension
order shall also set forth the alleged
violation and the significant market
disruption or other significant harm to
investors that is likely to result without
the issuance of an order, describe in
reasonable detail the act or acts the
Respondent is to take or refrain from
taking, and include the date and hour of
its issuance. As proposed, a suspension
order would remain effective and
enforceable unless modified, set aside,
limited, or revoked pursuant to
proposed paragraph (e), as described
below. Finally, paragraph (d) would
require service of the Hearing Panel’s
decision and any suspension order
consistent with other portions of the
proposed rule related to service.
Proposed paragraph (e) of Rule 8.17
would state that at any time after the
Office of Hearing Officers served the
Respondent with a suspension order, a
Party could apply to the Hearing Panel
to have the order modified, set aside,
limited, or revoked. The Hearing Panel
generally would be required to respond
to the request in writing within 10 days
after receipt of the request. An
application to modify, set aside, limit or
revoke a suspension order would not
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stay the effectiveness of the suspension
order.
Paragraph (f) of the proposed Rule
would authorize the cancellation of a
Respondent’s membership with the
Exchange or bar from associating with
any member of the Exchange if the
Respondent violated a suspension order.
The Exchange believes that this
authority is necessary in particular in
the event a Member is ordered to but
fails to prevent access to the Exchange
by a client that is engaging in activity
prohibited by Rule 12.15. Paragraph (f)
would require notice of such action,
served in accordance with the proposed
Rule. The notice would be required to
explicitly identify the provision of the
suspension order that is alleged to have
been violated and contain a statement of
facts specifying the alleged violation.
The notice would also state when the
Exchange’s action will take effect and
explain what the respondent must do to
avoid such action.
Finally, proposed paragraph (g) would
provide that sanctions issued under the
proposed Rule 8.17 would constitute
final and immediately effective
disciplinary sanctions imposed by the
Exchange, and that the right to have any
action under the Rule reviewed by the
Commission would be governed by
section 19 of the Act. The filing of an
application for review would not stay
the effectiveness of a suspension order,
cancellation of membership or a bar
from associating with any member,
unless the Commission otherwise
ordered.
tkelley on DSK3SPTVN1PROD with NOTICES
Rule 12.15—Layering and Spoofing
Prohibited
The Exchange currently has authority
to prohibit and take action against
manipulative trading activity, including
layering and spoofing, pursuant to its
general market manipulation rules,
including Rule 3.1. The Exchange
proposes to adopt new Rule 12.15,
which would more specifically define
and prohibit layering and spoofing
activity on the Exchange. As noted
above, the Exchange also proposes to
apply the proposed suspension rules to
proposed Rule 12.15.
Proposed Rule 12.15 would prohibit
Members from engaging in or facilitating
layering or spoofing activity on the
Exchange, as described in proposed
Interpretation and Policy .01 of the
Rule, including acting in concert with
other persons to effect such activity. The
Exchange believes that it is necessary to
extend the prohibition to situations
when persons are acting in concert to
avoid a potential loophole where
layering and spoofing activity is simply
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split between several brokers or
customers.
To provide proper context for the
situations in which the Exchange
proposes to utilize its proposed
authority, the Exchange believes it is
necessary to describe the types of
disruptive and manipulative layering
and spoofing activity that would cause
the Exchange to use its authority.
Accordingly, the Exchange proposes to
adopt Interpretation and Policy .01 and
.02, providing additional details
regarding layering and spoofing activity.
Proposed Interpretation and Policy .01,
related to layering, would describe a
layering activity as a frequent pattern in
which the following facts are present:
(a) A party enters multiple limit orders
on one side of the market at various
price levels (the ‘‘Layering Orders’’);
and (b) following the entry of the
Layering Orders, the level of supply and
demand for the security changes; and (c)
the party enters one or more orders on
the opposite side of the market of the
Layering Orders (the ‘‘Contra-Side
Orders’’) that are subsequently
executed; and (d) following the
execution of the Contra-Side Orders, the
party cancels the Layering Orders.
Proposed Interpretation and Policy .02,
related to spoofing, would describe
spoofing activity as a frequent pattern in
which the following facts are present:
(a) A party narrows the spread for a
security by placing an order inside the
national best bid or offer (the ‘‘Spoofing
Order’’); and (b) the party then submits
an order on the opposite side of the
market (‘‘Contra-Side Order’’) that
executes against another market
participant that joined the new inside
market established by the Spoofing
Order. The Exchange believes that the
proposed descriptions of layering and
spoofing activity articulated in the rule
are consistent with the activities that
have been identified and described in
the client access cases described above.
The Exchange further believes that the
proposed descriptions will provide
Members with clear descriptions of
layering and spoofing activity that will
help them to avoid engaging in such
activities or allowing their clients to
engage in such activities.
The Exchange proposes to make clear
in Interpretation and Policy .03 that,
unless otherwise indicated, the
descriptions of layering activity and
spoofing activity do not require the facts
to occur in a specific order in order for
the rule to apply. For instance, it is of
no consequence whether a party first
enters Layering Orders and then Contraside Orders or vice-versa. However, as
proposed, it is required for supply and
demand to change following the entry of
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Layering Orders. The Exchange also
proposes to make clear that layering
activity and spoofing activity includes a
pattern or practice in which some
portion of the layering or spoofing
activity is conducted on the Exchange
and the other portions of the layering or
spoofing activity are conducted on one
or more other exchanges. The Exchange
believes that this authority is necessary
to address market participants who
would otherwise seek to avoid the
prohibitions of the proposed Rule by
spreading their activity amongst various
execution venues.
In sum, proposed Rule 12.15 coupled
with proposed Rule 8.17 would provide
the Exchange with authority to
promptly act to prevent layering activity
and spoofing activity from continuing
on the Exchange. Below is an example
of how the proposed rule would
operate.
Assume that through its surveillance
program, Exchange staff identifies a
pattern of potential layering activity.
After an initial investigation the
Exchange would then contact the
Member responsible for the orders that
caused the activity to request an
explanation of the activity as well as
any additional relevant information,
including the source of the activity. If
the Exchange were to continue to see
the same pattern from the same Member
and the source of the activity is the
same or has been previously identified
as a frequent source of layering activity
then the Exchange could initiate an
expedited suspension proceeding by
serving notice on the Member that
would include details regarding the
alleged violations as well as the
proposed sanction. In such a case the
proposed sanction would likely be to
order the Member to cease and desist
providing access to the Exchange to the
client that is responsible for the layering
activity. The Member would have the
opportunity to be heard in front of a
Hearing Panel at a hearing to be
conducted within 15 days of the notice.
If the Hearing Panel determined that the
violation alleged in the notice did not
occur or that the conduct or its
continuation would not have the
potential to result in significant market
disruption or other significant harm to
investors, then the Hearing Panel would
dismiss the suspension order
proceeding. If the Hearing Panel
determined that the violation alleged in
the notice did occur and that the
conduct or its continuation is likely to
result in significant market disruption
or other significant harm to investors,
then the Hearing Panel would issue the
order including the proposed sanction,
ordering the Member to cease providing
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access to the client at issue. If the
Member obeyed the order and ceased
providing such access, then the Member
would be permitted to do business on
the Exchange without any limit to
access for such Member or its other
clients. The Exchange notes, however,
that abiding by a suspension order and
continuing to be permitted to access the
Exchange would not alter the
Exchange’s ability to further investigate
the matter and/or later sanction the
Member pursuant to the Exchange’s
standard disciplinary process for
supervisory violations or other
violations of Exchange rules or the Act.
If the Exchange instead learned that the
Member failed to abide by the order and
continued to provide access to the client
at issue in the suspension order, the
Exchange would have the authority to
cancel the Member’s membership with
the Exchange or to bar an individual
from associating with any Member of
the Exchange.
The Exchange reiterates that it already
has broad authority to take action
against a Member in the event that such
Member is engaging in or facilitating
disruptive or manipulative trading
activity on the Exchange. For the
reasons described above, and in light of
recent cases like the client access cases
described above, as well as other cases
currently under investigation, the
Exchange believes that it is equally
important for the Exchange to have the
authority to promptly initiate expedited
suspension proceedings against any
Member who has demonstrated a clear
pattern or practice of layering or
spoofing activity, as described above
and to take action including ordering
such Member to terminate access to the
Exchange to one or more of such
Member’s clients if such clients are
responsible for the activity. The
Exchange recognizes that its proposed
authority to issue a suspension order is
a powerful measure that should be used
very cautiously. Consequently, the
proposed rules have been designed to
ensure that the proceedings are used to
address only the most clear and serious
types of layering and spoofing activity
and that the interests of Respondents are
protected. For example, to ensure that
proceedings are used appropriately and
that the decision to initiate a proceeding
is made only at the highest staff levels,
the proposed rules require the CRO or
another senior officer of the Exchange to
issue written authorization before the
Exchange can institute an expedited
suspension proceeding. In addition, the
Exchange believes that it would use this
authority in limited circumstances,
when necessary to protect investors,
VerDate Sep<11>2014
19:14 Aug 18, 2015
Jkt 235001
other Members and the Exchange.
Further, the Exchange believes that the
proposed expedited suspension
provisions described above that provide
the opportunity to respond as well as a
Hearing Panel determination prior to
taking action will ensure that the
Exchange would not utilize its authority
in the absence of a clear pattern or
practice of layering or spoofing activity.
2. Statutory Basis
The Exchange believes that the
proposed rule changes are consistent
with section 6(b) of the Act 11 and
further the objectives of section 6(b)(5)
of the Act 12 because they are 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 regulating
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. Pursuant to the
proposal, the Exchange will have a
mechanism to promptly initiate
expedited suspension proceedings in
the event the Exchange believes that it
has sufficient proof that a violation of
Rule 12.15 has occurred and is ongoing.
Further, the Exchange believes that
the proposal is consistent with sections
6(b)(1) and 6(b)(6) of the Act,13 which
require that the rules of an exchange
enforce compliance with, and provide
appropriate discipline for, violations of
the Commission and Exchange rules.
The Exchange also believes that the
proposal is consistent with the public
interest, the protection of investors, or
otherwise in furtherance of the purposes
of the Act because the proposal helps to
strengthen the Exchange’s ability to
carry out its oversight and enforcement
responsibilities as a self-regulatory
organization in cases where awaiting the
conclusion of a full disciplinary
proceeding is unsuitable in view of the
potential harm to other Members and
their customers as well as the Exchange
if conduct is allowed to continue on the
Exchange.
The Exchange further believes that the
proposal is consistent with section
6(b)(7) of the Act,14 which requires that
the rules of an exchange ‘‘provide a fair
procedure for the disciplining of
members and persons associated with
persons . . . and the prohibition or
limitation by the exchange of any
11 15
U.S.C. 78f(b).
U.S.C. 78f(b)(5).
13 15 U.S.C. 78f(b)(1) and 78f(b)(6).
14 15 U.S.C. 78f(b)(7).
12 15
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person with respect to access to services
offered by the exchange or a member
thereof.’’ Finally, the Exchange also
believes the proposal is consistent with
sections 6(d)(1) and 6(d)(2) of the Act,15
which require that the rules of an
exchange with respect to a disciplinary
proceeding or proceeding that would
limit or prohibit access to or
membership in the exchange require the
exchange to: provide adequate and
specific notice of the charges brought
against a member or person associated
with a member, provide an opportunity
to defend against such charges, keep a
record, and provide details regarding
the findings and applicable sanctions in
the event a determination to impose a
disciplinary sanction is made. The
Exchange believes that each of these
requirements is addressed by the notice
and due process provisions included
within proposed Rule 8.17. Importantly,
as noted above, the Exchange
anticipates using the authority proposed
in this filing only in clear and egregious
cases when necessary to protect
investors, other Members and the
Exchange, and even in such cases, the
Respondent will be afforded due
process in connection with the
suspension proceedings.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
The Exchange does not believe that
the proposed rule changes will result in
any burden on competition that is not
necessary or appropriate in furtherance
of the purposes of the Act. To the
contrary, the Exchange believes that
each self-regulatory organization should
be empowered to regulate trading
occurring on their market consistent
with the Act and without regard to
competitive issues. The Exchange is
requesting authority to take appropriate
action if necessary for the protection of
investors, other Members and the
Exchange.
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 changes.
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
up to 90 days (i) as the Commission may
designate if it finds such longer period
15 15
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U.S.C. 78f(d)(1).
19AUN1
Federal Register / Vol. 80, No. 160 / Wednesday, August 19, 2015 / Notices
to be appropriate and publishes its
reasons for so finding or (ii) as to which
the Exchange consents, the Commission
will:
(A) By order approve or disapprove
such 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, as modified by Amendment No.
1, is consistent with the Act. Comments
may be submitted by any of the
following methods:
tkelley on DSK3SPTVN1PROD with NOTICES
Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include File Number SR–
BATS–2015–57 on the subject line.
Paper Comments
• Send paper comments in triplicate
to Secretary, Securities and Exchange
Commission, 100 F Street NE.,
Washington, DC 20549–1090.
All submissions should refer to File
Number SR–BATS–2015–57. 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 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
VerDate Sep<11>2014
19:14 Aug 18, 2015
Jkt 235001
should refer to File Number SR–BATS–
2015–57, and should be submitted on or
before September 9, 2015.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.16
Brent J. Fields,
Secretary.
[FR Doc. 2015–20421 Filed 8–18–15; 8:45 am]
BILLING CODE 8011–01–P
DEPARTMENT OF STATE
[Public Notice 9226]
Notice of Public Meeting
The Department of State will conduct
an open meeting at 9 a.m. on
Wednesday, September 2, 2015, in
Conference Room 8–9–10 of the
Department of Transportation (DOT)
Headquarters Conference Center, West
Building, 1200 New Jersey Avenue SE.,
Washington, DC 20590. The primary
purpose of the meeting is to prepare for
the second Session of the International
Maritime Organization’s (IMO) SubCommittee on Carriage of Cargoes and
Containers to be held at the IMO
Headquarters, United Kingdom,
September 14–18, 2015.
The agenda items to be considered
include:
—Adoption of the agenda
—Decisions of other IMO bodies
—Amendments to the IGF Code and
development of guidelines for lowflashpoint fuels
—Safety requirements for carriage of
liquefied hydrogen in bulk
—Amendments to the IMSBC Code and
supplements
—Amendments to the IMDG Code and
supplements
—Amendments to CSC 1972 and associated
circulars
—Revised Guidelines for packing of cargo
transport units
—Unified interpretation to provisions of IMO
safety, security and environment related
Conventions
—Consideration of reports of incidents
involving dangerous goods or marine
pollutants in packaged form on board ships
or in port areas
—Mandatory requirements for classification
and declaration of solid bulk cargoes as
harmful to the marine environment
—Biennial agenda and provisional agenda for
CCC 3
—Election of Chairman and Vice-Chairman
for 2016
—Any other business
—Report to the Committees
Members of the public may attend
this meeting up to the seating capacity
of the room. Upon request, members of
16 17
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Frm 00114
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50375
the public may also participate via
teleconference, up to the capacity of the
teleconference phone line. To facilitate
the building security process, and to
request reasonable accommodation,
those who plan to attend, or participate
via the teleconference line, should
contact the meeting coordinator, Ms.
Amy Parker, by email at Amy.M.Parker@
uscg.mil, by phone at (202) 372–1423, or
in writing at 2703 Martin Luther King Jr.
Ave. SE., Stop 7509, Washington, DC
20593–7509, not later than August 24,
2015, or 7 business days prior to the
meeting. Requests made after August 24,
2015 might not be able to be
accommodated. Please note that due to
security considerations, a valid,
government issued photo identification
must be presented to gain entrance to
the DOT Headquarters building. DOT
Headquarters is accessible by metro via
the Navy Yard Metrorail Station, taxi,
and privately owned conveyance.
However, parking in the vicinity of the
building is extremely limited.
Additional information regarding this
and other IMO-related public meetings
may be found at: www.uscg.mil/imo.
Dated: August 10, 2015.
Jonathan W. Burby,
Coast Guard Liaison Officer, Office of Ocean
and Polar Affairs Department of State.
[FR Doc. 2015–20490 Filed 8–18–15; 8:45 am]
BILLING CODE 4710–09–P
DEPARTMENT OF STATE
[Public Notice 9229]
Advisory Committee on International
Postal and Delivery Services
September 2015 Meeting
As required by the Federal
Advisory Committee Act, Public Law
92–463, the Department of State gives
notice of a meeting of the Advisory
Committee on International Postal and
Delivery Services. This Committee will
meet on Wednesday, September 9, 2015,
from 1:00 p.m. to 5:00 p.m. Eastern
Time at the American Institute of
Architects, Board Room, 1735 New York
Avenue NW., Washington, DC 20006.
Any member of the public interested
in providing input to the meeting
should contact Ms. Shereece Robinson,
whose contact information is listed
below (see the FOR FURTHER INFORMATION
section of this notice). Each individual
providing oral input is requested to
limit his or her comments to five
minutes. Requests to be added to the
speakers list must be received in writing
(letter or email) prior to the close of
business on Wednesday, September 2,
2015; written comments from members
SUMMARY:
E:\FR\FM\19AUN1.SGM
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]]>Agencies
[Federal Register Volume 80, Number 160 (Wednesday, August 19, 2015)]
[Notices]
[Pages 50370-50375]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-20421]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-75693; File No. SR-BATS-2015-57]
Self-Regulatory Organizations; BATS Exchange, Inc.; Notice of
Filing of a Proposed Rule Change, as Modified by Amendment No. 1
Thereto, To Adopt New Rule 8.17 To Provide a Process for an Expedited
Suspension Proceeding and Rule 12.15 To Prohibit Layering and Spoofing
on BATS Exchange, Inc.
August 13, 2015.
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 July 30, 2015, BATS Exchange, Inc. (the ``Exchange'' or ``BATS'')
filed with the Securities and Exchange Commission (``SEC'' or
``Commission'') the proposed rule change as described in Items I and II
below, which Items have been prepared by the Exchange. On August 11,
2015, the Exchange filed Amendment No. 1 to the proposal.\3\ 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\ Amendment No. 1 amended and replaced the original proposal
in its entirety.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange is proposing to adopt a new rule to clearly prohibit
layering and spoofing activity on the Exchange, as further described
below. Further, the Exchange proposes to amend Exchange Rules to permit
the Exchange to take prompt action to suspend Members or their clients
that violate such rule.
The text of the proposed rule change is available at the Exchange's
Web site at 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
[[Page 50371]]
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
Background
As a national securities exchange registered pursuant to section 6
of the Act, the Exchange is required to be organized and to have the
capacity to enforce compliance by its members and persons associated
with its members, with the Act, the rules and regulations thereunder,
and the Exchange's Rules.\4\ Further, the Exchange's Rules are required
to be ``designed to prevent fraudulent and manipulative acts and
practices, to promote just and equitable principles of trade . . . and,
in general, to protect investors and the public interest.'' \5\ In
fulfilling these requirements, the Exchange has developed a
comprehensive regulatory program that includes automated surveillance
of trading activity that is both operated directly by Exchange staff
and by staff of the Financial Industry Regulatory Authority (``FINRA'')
pursuant to a Regulatory Services Agreement (``RSA''). When disruptive
and potentially manipulative or improper quoting and trading activity
is identified, the Exchange or FINRA (acting as an agent of the
Exchange) conducts an investigation into the activity, requesting
additional information from the Member or Members involved. To the
extent violations of the Act, the rules and regulations thereunder, or
Exchange Rules have been identified and confirmed, the Exchange or
FINRA as its agent will commence the enforcement process, which might
result in, among other things, a censure, a requirement to take certain
remedial actions, one or more restrictions on future business
activities, a monetary fine, or even a temporary or permanent ban from
the securities industry.
---------------------------------------------------------------------------
\4\ 15 U.S.C. 78f(b)(1).
\5\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
The process described above, from the identification of disruptive
and potentially manipulative or improper quoting and trading activity
to a final resolution of the matter, can often take several years. The
Exchange believes that this time period is generally necessary and
appropriate to afford the subject Member adequate due process,
particularly in complex cases. However, as described below, the
Exchange believes that there are certain obvious and uncomplicated
cases of disruptive and manipulative behavior or cases where the
potential harm to investors is so large that the Exchange should have
the authority to initiate an expedited suspension proceeding in order
to stop the behavior from continuing on the Exchange.
In recent years, several cases have been brought and resolved by
the Exchange and other SROs that involved allegations of wide-spread
market manipulation, much of which was ultimately being conducted by
foreign persons and entities using relatively rudimentary technology to
access the markets and over which the Exchange and other SROs had no
direct jurisdiction. In each case, the conduct involved a pattern of
disruptive quoting and trading activity indicative of manipulative
layering \6\ or spoofing.\7\ The Exchange and other SROs were able to
identify the disruptive quoting and trading activity in real-time or
near real-time; nonetheless, in accordance with Exchange Rules and the
Act, the Members responsible for such conduct or responsible for their
customers' conduct were allowed to continue the disruptive quoting and
trading activity on the Exchange and other exchanges during the
entirety of the subsequent lengthy investigation and enforcement
process. The Exchange believes that it should have the authority to
initiate an expedited suspension proceeding in order to stop the
behavior from continuing on the Exchange if a Member is engaging in or
facilitating layering or spoofing activity and the Member has received
sufficient notice with an opportunity to respond, but such activity has
not ceased.
---------------------------------------------------------------------------
\6\ ``Layering'' is a form of market manipulation in which
multiple, non-bona fide limit orders are entered on one side of the
market at various price levels in order to create the appearance of
a change in the levels of supply and demand, thereby artificially
moving the price of the security. An order is then executed on the
opposite side of the market at the artificially created price, and
the non-bona fide orders are cancelled.
\7\ ``Spoofing'' is a form of market manipulation that involves
the market manipulator placing non-bona fide orders that are
intended to trigger some type of market movement and/or response
from other market participants, from which the market manipulator
might benefit by trading bona fide orders.
---------------------------------------------------------------------------
The following two examples are instructive on the Exchange's
rationale for the proposed rule change.
In July 2012, Biremis Corp. (formerly Swift Trade Securities USA,
Inc.) (the ``Firm'') and its CEO were barred from the industry for,
among other things, supervisory violations related to a failure by the
Firm to detect and prevent disruptive and allegedly manipulative
trading activities, including layering, short sale violations, and
anti-money laundering violations.\8\ The Firm's sole business was to
provide trade execution services via a proprietary day trading platform
and order management system to day traders located in foreign
jurisdictions. Thus, the disruptive and allegedly manipulative trading
activity introduced by the Firm to U.S. markets originated directly or
indirectly from foreign clients of the Firm. The pattern of disruptive
and allegedly manipulative quoting and trading activity was widespread
across multiple exchanges, and the Exchange, FINRA, and other SROs
identified clear patterns of the behavior in 2007 and 2008. Although
the Firm and its principals were on notice of the disruptive and
allegedly manipulative quoting and trading activity that was occurring,
the Firm took little to no action to attempt to supervise or prevent
such quoting and trading activity until at least 2009. Even when it put
some controls in place, they were deficient and the pattern of
disruptive and allegedly manipulative trading activity continued to
occur. As noted above, the final resolution of the enforcement action
to bar the Firm and its CEO from the industry was not concluded until
2012, four years after the disruptive and allegedly manipulative
trading activity was first identified.
---------------------------------------------------------------------------
\8\ See Biremis Corp. and Peter Beck, FINRA Letter of
Acceptance, Waiver and Consent No. 2010021162202, July 30, 2012.
---------------------------------------------------------------------------
In September of 2012, Hold Brothers On-Line Investment Services,
Inc. (the ``Firm'') settled a regulatory action in connection with the
Firm's provision of a trading platform, trade software and trade
execution, support and clearing services for day traders.\9\ Many
traders using the Firm's services were located in foreign
jurisdictions. The Firm ultimately settled the action with FINRA and
several exchanges, including the Exchange, for a total monetary fine of
$3.4 million. In a separate action, the Firm settled with the
Commission for a monetary fine of $2.5 million.\10\ Among the alleged
violations in the case were disruptive and allegedly manipulative
quoting and trading activity, including spoofing, layering, wash
trading, and pre-arranged trading. Through its conduct and insufficient
procedures and controls, the Firm also allegedly committed anti-money
laundering violations by failing to detect and report
[[Page 50372]]
manipulative and suspicious trading activity. The Firm was alleged to
have not only provided foreign traders with access to the U.S. markets
to engage in such activities, but that its principals also owned and
funded foreign subsidiaries that engaged in the disruptive and
allegedly manipulative quoting and trading activity. Although the
pattern of disruptive and allegedly manipulative quoting and trading
activity was identified in 2009, as noted above, the enforcement action
was not concluded until 2012. Thus, although disruptive and allegedly
manipulative quoting and trading was promptly detected, it continued
for several years.
---------------------------------------------------------------------------
\9\ See Hold Brothers On-Line Investment Services, LLC, FINRA
Letter of Acceptance, Waiver and Consent No. 20100237710001,
September 25, 2012.
\10\ In the Matter of Hold Brothers On-Line Investment Services,
LLC, Exchange Act Release No. 67924, September 25, 2012.
---------------------------------------------------------------------------
The Exchange also notes the current criminal proceedings that have
commenced against Navinder Singh Sarao. Mr. Sarao's allegedly
manipulative trading activity, which included forms of layering and
spoofing in the futures markets, has been linked as a contributing
factor to the ``Flash Crash'' of 2010, and yet continued through 2015.
The Exchange believes that the activities described in the cases
above provide justification for the proposed rule change, which is
described below.
Rule 8.17--Expedited Client Suspension Proceeding
The Exchange proposes to adopt new Rule 8.17 to set forth
procedures for issuing suspension orders, immediately prohibiting a
Member from conducting continued layering or spoofing activity on the
Exchange. Importantly, these procedures would also provide the Exchange
the authority to order a Member to cease and desist from providing
access to the Exchange to a client of the Member that is conducting
layering or spoofing activity in violation of proposed Rule 12.15.
Under proposed paragraph (a) of Rule 8.17, with the prior written
authorization of the Chief Regulatory Officer (``CRO'') or such other
senior officers as the CRO may designate, the Office of General Counsel
or Regulatory Department of the Exchange (such departments generally
referred to as the ``Exchange'' for purposes of proposed Rule 8.17) may
initiate an expedited suspension proceeding with respect to alleged
violations of Rule 12.15, which is proposed as part of this filing and
described in detail below. Proposed paragraph (a) would also set forth
the requirements for notice and service of such notice pursuant to the
Rule, including the required method of service and the content of
notice.
Proposed paragraph (b) of Rule 8.17 would govern the appointment of
a Hearing Panel as well as potential disqualification or recusal of
Hearing Officers. The proposed provision is consistent with existing
Exchange Rule 8.6 and includes the requirement for a Hearing Officer to
be recused in the event he or she has a conflict of interest or bias or
other circumstances exist where his or her fairness might reasonably be
questioned. In addition to recusal initiated by such a Hearing Officer,
a party to the proceeding will be permitted to file a motion to
disqualify a Hearing Officer. However, due to the compressed schedule
pursuant to which the process would operate under Rule 8.17, the
proposed rule would require such motion to be filed no later than 5
days after the announcement of the Hearing Panel and the Exchange's
brief in opposition to such motion would be required to be filed no
later than 5 days after service thereof. Pursuant to existing Rule
8.6(b), if the Hearing Panel believes the Respondent has provided
satisfactory evidence in support of the motion to disqualify, the
applicable Hearing Officer shall remove himself or herself and request
the Chief Executive Officer to reassign the hearing to another Hearing
Officer such that the Hearing Panel still meets the compositional
requirements described in Rule 8.6(a). If the Hearing Panel determines
that the Respondent's grounds for disqualification are insufficient, it
shall deny the Respondent's motion for disqualification by setting
forth the reasons for the denial in writing and the Hearing Panel will
proceed with the hearing.
Under paragraph (c) of the proposed Rule, the hearing would be held
not later than 15 days after service of the notice initiating the
suspension proceeding, unless otherwise extended by the Chairman of the
Hearing Panel with the consent of the Parties for good cause shown. In
the event of a recusal or disqualification of a Hearing Officer, the
hearing shall be held not later than five days after a replacement
Hearing Officer is appointed. Proposed paragraph (c) would also govern
how the hearing is conducted, including the authority of Hearing
Officers, witnesses, additional information that may be required by the
Hearing Panel, the requirement that a transcript of the proceeding be
created and details related to such transcript, and details regarding
the creation and maintenance of the record of the proceeding. Proposed
paragraph (c) would also state that if a Respondent fails to appear at
a hearing for which it has notice, the allegations in the notice and
accompanying declaration may be deemed admitted, and the Hearing Panel
may issue a suspension order without further proceedings. Finally, as
proposed, if the Exchange fails to appear at a hearing for which it has
notice, the Hearing Panel may order that the suspension proceeding be
dismissed.
Under paragraph (d) of the proposed Rule, the Hearing Panel would
be authorized to issue a written decision stating whether a suspension
order would be imposed. The Hearing Panel would be required to issue
the decision not later than 10 days after receipt of the hearing
transcript, unless otherwise extended by the Chairman of the Hearing
Panel with the consent of the Parties for good cause shown. The Rule
would state that a suspension order shall be imposed if the Hearing
Panel finds by a preponderance of the evidence that the alleged
violation specified in the notice has occurred and that the violative
conduct or continuation thereof is likely to result in significant
market disruption or other significant harm to investors.
Proposed paragraph (d) would also describe the content, scope and
form of a suspension order. As proposed, a suspension order shall be
limited to ordering a Respondent to cease and desist from violating
proposed Rule 12.15, and, where applicable, to ordering a Respondent to
cease and desist from providing access to the Exchange to a client of
Respondent that is causing violations of Rule 12.15. Under the proposed
rule, a suspension order shall also set forth the alleged violation and
the significant market disruption or other significant harm to
investors that is likely to result without the issuance of an order,
describe in reasonable detail the act or acts the Respondent is to take
or refrain from taking, and include the date and hour of its issuance.
As proposed, a suspension order would remain effective and enforceable
unless modified, set aside, limited, or revoked pursuant to proposed
paragraph (e), as described below. Finally, paragraph (d) would require
service of the Hearing Panel's decision and any suspension order
consistent with other portions of the proposed rule related to service.
Proposed paragraph (e) of Rule 8.17 would state that at any time
after the Office of Hearing Officers served the Respondent with a
suspension order, a Party could apply to the Hearing Panel to have the
order modified, set aside, limited, or revoked. The Hearing Panel
generally would be required to respond to the request in writing within
10 days after receipt of the request. An application to modify, set
aside, limit or revoke a suspension order would not
[[Page 50373]]
stay the effectiveness of the suspension order.
Paragraph (f) of the proposed Rule would authorize the cancellation
of a Respondent's membership with the Exchange or bar from associating
with any member of the Exchange if the Respondent violated a suspension
order. The Exchange believes that this authority is necessary in
particular in the event a Member is ordered to but fails to prevent
access to the Exchange by a client that is engaging in activity
prohibited by Rule 12.15. Paragraph (f) would require notice of such
action, served in accordance with the proposed Rule. The notice would
be required to explicitly identify the provision of the suspension
order that is alleged to have been violated and contain a statement of
facts specifying the alleged violation. The notice would also state
when the Exchange's action will take effect and explain what the
respondent must do to avoid such action.
Finally, proposed paragraph (g) would provide that sanctions issued
under the proposed Rule 8.17 would constitute final and immediately
effective disciplinary sanctions imposed by the Exchange, and that the
right to have any action under the Rule reviewed by the Commission
would be governed by section 19 of the Act. The filing of an
application for review would not stay the effectiveness of a suspension
order, cancellation of membership or a bar from associating with any
member, unless the Commission otherwise ordered.
Rule 12.15--Layering and Spoofing Prohibited
The Exchange currently has authority to prohibit and take action
against manipulative trading activity, including layering and spoofing,
pursuant to its general market manipulation rules, including Rule 3.1.
The Exchange proposes to adopt new Rule 12.15, which would more
specifically define and prohibit layering and spoofing activity on the
Exchange. As noted above, the Exchange also proposes to apply the
proposed suspension rules to proposed Rule 12.15.
Proposed Rule 12.15 would prohibit Members from engaging in or
facilitating layering or spoofing activity on the Exchange, as
described in proposed Interpretation and Policy .01 of the Rule,
including acting in concert with other persons to effect such activity.
The Exchange believes that it is necessary to extend the prohibition to
situations when persons are acting in concert to avoid a potential
loophole where layering and spoofing activity is simply split between
several brokers or customers.
To provide proper context for the situations in which the Exchange
proposes to utilize its proposed authority, the Exchange believes it is
necessary to describe the types of disruptive and manipulative layering
and spoofing activity that would cause the Exchange to use its
authority. Accordingly, the Exchange proposes to adopt Interpretation
and Policy .01 and .02, providing additional details regarding layering
and spoofing activity. Proposed Interpretation and Policy .01, related
to layering, would describe a layering activity as a frequent pattern
in which the following facts are present: (a) A party enters multiple
limit orders on one side of the market at various price levels (the
``Layering Orders''); and (b) following the entry of the Layering
Orders, the level of supply and demand for the security changes; and
(c) the party enters one or more orders on the opposite side of the
market of the Layering Orders (the ``Contra-Side Orders'') that are
subsequently executed; and (d) following the execution of the Contra-
Side Orders, the party cancels the Layering Orders. Proposed
Interpretation and Policy .02, related to spoofing, would describe
spoofing activity as a frequent pattern in which the following facts
are present: (a) A party narrows the spread for a security by placing
an order inside the national best bid or offer (the ``Spoofing
Order''); and (b) the party then submits an order on the opposite side
of the market (``Contra-Side Order'') that executes against another
market participant that joined the new inside market established by the
Spoofing Order. The Exchange believes that the proposed descriptions of
layering and spoofing activity articulated in the rule are consistent
with the activities that have been identified and described in the
client access cases described above. The Exchange further believes that
the proposed descriptions will provide Members with clear descriptions
of layering and spoofing activity that will help them to avoid engaging
in such activities or allowing their clients to engage in such
activities.
The Exchange proposes to make clear in Interpretation and Policy
.03 that, unless otherwise indicated, the descriptions of layering
activity and spoofing activity do not require the facts to occur in a
specific order in order for the rule to apply. For instance, it is of
no consequence whether a party first enters Layering Orders and then
Contra-side Orders or vice-versa. However, as proposed, it is required
for supply and demand to change following the entry of Layering Orders.
The Exchange also proposes to make clear that layering activity and
spoofing activity includes a pattern or practice in which some portion
of the layering or spoofing activity is conducted on the Exchange and
the other portions of the layering or spoofing activity are conducted
on one or more other exchanges. The Exchange believes that this
authority is necessary to address market participants who would
otherwise seek to avoid the prohibitions of the proposed Rule by
spreading their activity amongst various execution venues.
In sum, proposed Rule 12.15 coupled with proposed Rule 8.17 would
provide the Exchange with authority to promptly act to prevent layering
activity and spoofing activity from continuing on the Exchange. Below
is an example of how the proposed rule would operate.
Assume that through its surveillance program, Exchange staff
identifies a pattern of potential layering activity. After an initial
investigation the Exchange would then contact the Member responsible
for the orders that caused the activity to request an explanation of
the activity as well as any additional relevant information, including
the source of the activity. If the Exchange were to continue to see the
same pattern from the same Member and the source of the activity is the
same or has been previously identified as a frequent source of layering
activity then the Exchange could initiate an expedited suspension
proceeding by serving notice on the Member that would include details
regarding the alleged violations as well as the proposed sanction. In
such a case the proposed sanction would likely be to order the Member
to cease and desist providing access to the Exchange to the client that
is responsible for the layering activity. The Member would have the
opportunity to be heard in front of a Hearing Panel at a hearing to be
conducted within 15 days of the notice. If the Hearing Panel determined
that the violation alleged in the notice did not occur or that the
conduct or its continuation would not have the potential to result in
significant market disruption or other significant harm to investors,
then the Hearing Panel would dismiss the suspension order proceeding.
If the Hearing Panel determined that the violation alleged in the
notice did occur and that the conduct or its continuation is likely to
result in significant market disruption or other significant harm to
investors, then the Hearing Panel would issue the order including the
proposed sanction, ordering the Member to cease providing
[[Page 50374]]
access to the client at issue. If the Member obeyed the order and
ceased providing such access, then the Member would be permitted to do
business on the Exchange without any limit to access for such Member or
its other clients. The Exchange notes, however, that abiding by a
suspension order and continuing to be permitted to access the Exchange
would not alter the Exchange's ability to further investigate the
matter and/or later sanction the Member pursuant to the Exchange's
standard disciplinary process for supervisory violations or other
violations of Exchange rules or the Act. If the Exchange instead
learned that the Member failed to abide by the order and continued to
provide access to the client at issue in the suspension order, the
Exchange would have the authority to cancel the Member's membership
with the Exchange or to bar an individual from associating with any
Member of the Exchange.
The Exchange reiterates that it already has broad authority to take
action against a Member in the event that such Member is engaging in or
facilitating disruptive or manipulative trading activity on the
Exchange. For the reasons described above, and in light of recent cases
like the client access cases described above, as well as other cases
currently under investigation, the Exchange believes that it is equally
important for the Exchange to have the authority to promptly initiate
expedited suspension proceedings against any Member who has
demonstrated a clear pattern or practice of layering or spoofing
activity, as described above and to take action including ordering such
Member to terminate access to the Exchange to one or more of such
Member's clients if such clients are responsible for the activity. The
Exchange recognizes that its proposed authority to issue a suspension
order is a powerful measure that should be used very cautiously.
Consequently, the proposed rules have been designed to ensure that the
proceedings are used to address only the most clear and serious types
of layering and spoofing activity and that the interests of Respondents
are protected. For example, to ensure that proceedings are used
appropriately and that the decision to initiate a proceeding is made
only at the highest staff levels, the proposed rules require the CRO or
another senior officer of the Exchange to issue written authorization
before the Exchange can institute an expedited suspension proceeding.
In addition, the Exchange believes that it would use this authority in
limited circumstances, when necessary to protect investors, other
Members and the Exchange. Further, the Exchange believes that the
proposed expedited suspension provisions described above that provide
the opportunity to respond as well as a Hearing Panel determination
prior to taking action will ensure that the Exchange would not utilize
its authority in the absence of a clear pattern or practice of layering
or spoofing activity.
2. Statutory Basis
The Exchange believes that the proposed rule changes are consistent
with section 6(b) of the Act \11\ and further the objectives of section
6(b)(5) of the Act \12\ because they are 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 regulating 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. Pursuant to the proposal, the Exchange will have a
mechanism to promptly initiate expedited suspension proceedings in the
event the Exchange believes that it has sufficient proof that a
violation of Rule 12.15 has occurred and is ongoing.
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\11\ 15 U.S.C. 78f(b).
\12\ 15 U.S.C. 78f(b)(5).
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Further, the Exchange believes that the proposal is consistent with
sections 6(b)(1) and 6(b)(6) of the Act,\13\ which require that the
rules of an exchange enforce compliance with, and provide appropriate
discipline for, violations of the Commission and Exchange rules. The
Exchange also believes that the proposal is consistent with the public
interest, the protection of investors, or otherwise in furtherance of
the purposes of the Act because the proposal helps to strengthen the
Exchange's ability to carry out its oversight and enforcement
responsibilities as a self-regulatory organization in cases where
awaiting the conclusion of a full disciplinary proceeding is unsuitable
in view of the potential harm to other Members and their customers as
well as the Exchange if conduct is allowed to continue on the Exchange.
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\13\ 15 U.S.C. 78f(b)(1) and 78f(b)(6).
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The Exchange further believes that the proposal is consistent with
section 6(b)(7) of the Act,\14\ which requires that the rules of an
exchange ``provide a fair procedure for the disciplining of members and
persons associated with persons . . . and the prohibition or limitation
by the exchange of any person with respect to access to services
offered by the exchange or a member thereof.'' Finally, the Exchange
also believes the proposal is consistent with sections 6(d)(1) and
6(d)(2) of the Act,\15\ which require that the rules of an exchange
with respect to a disciplinary proceeding or proceeding that would
limit or prohibit access to or membership in the exchange require the
exchange to: provide adequate and specific notice of the charges
brought against a member or person associated with a member, provide an
opportunity to defend against such charges, keep a record, and provide
details regarding the findings and applicable sanctions in the event a
determination to impose a disciplinary sanction is made. The Exchange
believes that each of these requirements is addressed by the notice and
due process provisions included within proposed Rule 8.17. Importantly,
as noted above, the Exchange anticipates using the authority proposed
in this filing only in clear and egregious cases when necessary to
protect investors, other Members and the Exchange, and even in such
cases, the Respondent will be afforded due process in connection with
the suspension proceedings.
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\14\ 15 U.S.C. 78f(b)(7).
\15\ 15 U.S.C. 78f(d)(1).
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B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule changes will
result in any burden on competition that is not necessary or
appropriate in furtherance of the purposes of the Act. To the contrary,
the Exchange believes that each self-regulatory organization should be
empowered to regulate trading occurring on their market consistent with
the Act and without regard to competitive issues. The Exchange is
requesting authority to take appropriate action if necessary for the
protection of investors, other Members and the Exchange.
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 changes.
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 up to 90 days (i) as the
Commission may designate if it finds such longer period
[[Page 50375]]
to be appropriate and publishes its reasons for so finding or (ii) as
to which the Exchange consents, the Commission will:
(A) By order approve or disapprove such 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, as modified by Amendment No. 1, 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-BATS-2015-57 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.
All submissions should refer to File Number SR-BATS-2015-57. 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 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-2015-57,
and should be submitted on or before September 9, 2015.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\16\
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\16\ 17 CFR 200.30-3(a)(12).
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Brent J. Fields,
Secretary.
[FR Doc. 2015-20421 Filed 8-18-15; 8:45 am]
BILLING CODE 8011-01-P
