Self-Regulatory Organizations; BATS Exchange, Inc.; Notice of Filing of a Proposed Rule Change, as Modified by Amendment No. 1 Thereto, To Adopt Rule 8.17 To Provide a Process for an Expedited Suspension Proceeding and Rule 12.15 To Prohibit Disruptive Quoting and Trading Activity, 73247-73252 [2015-29843]
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Federal Register / Vol. 80, No. 226 / Tuesday, November 24, 2015 / Notices
making recommendations on how to
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Dated: November 13, 2015.
Andrea Andersen,
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[FR Doc. 2015–29873 Filed 11–23–15; 8:45 am]
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BILLING CODE 4310–4R–P
[Release No. 34–76470; File No. SR–BATS–
2015–101]
Self-Regulatory Organizations; BATS
Exchange, Inc.; Notice of Filing of a
Proposed Rule Change, as Modified by
Amendment No. 1 Thereto, To Adopt
Rule 8.17 To Provide a Process for an
Expedited Suspension Proceeding and
Rule 12.15 To Prohibit Disruptive
Quoting and Trading Activity
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
SECURITIES AND EXCHANGE
COMMISSION
November 18, 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 November
6, 2015, BATS Exchange, Inc.
(‘‘Exchange’’ or ‘‘BATS’’) filed with the
Securities and Exchange Commission
(‘‘Commission’’) the proposed rule
change as described in Items I, II and III
below, which Items have been prepared
by the Exchange. On November 17,
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 filed a proposal to
adopt a new rule to clearly prohibit
disruptive quoting and trading 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. This Amendment No.
1 to SR–BATS–2015–101 amends and
replaces the original proposal in its
entirety.
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
1 15
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 As the Exchange states in Item I, Amendment
No. 1 amended and replaced the original proposal
in its entirety.
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1. Purpose
Introduction
The Exchange is filing this proposal to
adopt a new rule to clearly prohibit
disruptive quoting and trading activity
on the Exchange and to amend
Exchange Rules to permit the Exchange
to take prompt action to suspend
Members or their clients that violate
such rule. The Exchange notes, as
further described below, that it
previously filed this proposal as File
No. SR–BATS–2015–57 and
Amendment No. 1 thereto (the ‘‘Initial
Proposal’’). The Exchange received
comments on the Initial Proposal and
simultaneously with this filing both
responded to such comments 4 and
withdrew such Initial Proposal. The
Exchange submits this proposal, as
revised, in order to solicit additional
comment. The Exchange believes that
the revisions it has made to the Initial
Proposal satisfactorily address
comments received and that there is
good cause to approve the proposal, as
revised.
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.5
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.’’ 6 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
4 See letter to Brent J. Fields, Secretary,
Commission, from Anders Franzon, VP, Associate
General Counsel, BATS, dated November 6, 2015
(‘‘BATS Comment Response Letter’’).
5 15 U.S.C. 78f(b)(1).
6 15 U.S.C. 78f(b)(5).
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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
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 7 or spoofing.8
7 ‘‘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.
8 ‘‘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
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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 disruptive
quoting and trading 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
trading activities, including layering,
short sale violations, and anti-money
laundering violations.9 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.10 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.11 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
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.
other market participants, from which the market
manipulator might benefit by trading bona fide
orders.
9 See Biremis Corp. and Peter Beck, FINRA Letter
of Acceptance, Waiver and Consent No.
2010021162202, July 30, 2012.
10 See Hold Brothers On-Line Investment Services,
LLC, FINRA Letter of Acceptance, Waiver and
Consent No. 20100237710001, September 25, 2012.
11 In the Matter of Hold Brothers On-Line
Investment Services, LLC, Exchange Act Release No.
67924, September 25, 2012.
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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 disruptive quoting and
trading 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 disruptive quoting and
trading 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
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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
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73249
ordering a Respondent to cease and
desist from violating proposed Rule
12.15, and/or 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. The
order shall describe in reasonable detail
the act or acts the Respondent is to take
or refrain from taking, and suspend such
Respondent unless and until such
action is taken or refrained from.
Finally, the order shall 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. If any part of a
suspension order is modified, set aside,
limited, or revoked, proposed paragraph
(e) of Rule 8.17 provides the Hearing
Panel discretion to leave the cease and
desist part of the order in place. For
example, if a suspension order suspends
Respondent unless and until
Respondent ceases and desists
providing access to the Exchange to a
client of Respondent, and after the order
is entered the Respondent complies, the
Hearing Panel is permitted to modify
the order to lift the suspension portion
of the order while keeping in place the
cease and desist portion of the order.
With its broad modification powers, the
Hearing Panel also maintains the
discretion to impose conditions upon
the removal of a suspension—for
example, the Hearing Panel could
modify an order to lift the suspension
portion of the order in the event a
Respondent complies with the cease
and desist portion of the order but
additionally order that the suspension
will be re-imposed if Respondent
violates the cease and desist provisions
modified order in the future. 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
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order would not stay the effectiveness of
the suspension order.
Finally, proposed paragraph (f) 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
unless the Commission otherwise
ordered.
Rule 12.15—Disruptive Quoting and
Trading Activity Prohibited
The Exchange currently has authority
to prohibit and take action against
manipulative trading activity, including
disruptive quoting and trading activity,
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
disruptive quoting and trading 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
disruptive quoting and trading activity
on the Exchange, as described in
proposed Interpretation and Policies .01
and .02 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 disruptive quoting and trading
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 quoting and trading 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 disruptive quoting and
trading activity. Proposed Interpretation
and Policy .01(a), which describes
disruptive quoting and trading activity
containing many of the elements
indicative of layering, would describe
disruptive quoting and trading 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
‘‘Displayed Orders’’); and (b) following
the entry of the Displayed Orders, the
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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
Displayed Orders (the ‘‘Contra-Side
Orders’’) that are subsequently
executed; and (d) following the
execution of the Contra-Side Orders, the
party cancels the Displayed Orders.
Proposed Interpretation and Policy
.01(b), which describes disruptive
quoting and trading activity containing
many of the elements indicative of
spoofing, would describe disruptive
quoting and trading 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; and
(b) the party then submits an order on
the opposite side of the market that
executes against another market
participant that joined the new inside
market established by the order
described in (a) that narrowed the
spread. The Exchange believes that the
proposed descriptions of disruptive
quoting and trading 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 disruptive quoting and
trading 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 .02 that,
unless otherwise indicated, the
descriptions of disruptive quoting and
trading activity do not require the facts
to occur in a specific order in order for
the rule to apply. For instance, with
respect to the pattern defined in
proposed Interpretation and Policy
.01(a) it is of no consequence whether
a party first enters Displayed 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 the Displayed Orders. The
Exchange also proposes to make clear
that disruptive quoting and trading
activity includes a pattern or practice in
which some portion of the disruptive
quoting and trading activity is
conducted on the Exchange and the
other portions of the disruptive quoting
and trading 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
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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 disruptive
quoting and trading 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 potentially disruptive quoting
and trading 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 disruptive
quoting and trading 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 disruptive quoting
and trading activity and to suspend
such Member unless and until such
action is taken. 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
access to the client at issue and
suspending such Member unless and
until such action is taken. If such
Member wished for the suspension to be
lifted because the client ultimately
responsible for the activity no longer
would be provided access to the
Exchange, then such Member could
apply to the Hearing Panel to have the
order modified, set aside, limited or
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revoked. The Exchange notes that the
issuance of a suspension order 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.
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 disruptive quoting
and trading 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 disruptive quoting and trading
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 disruptive quoting and
trading activity.
2. Statutory Basis
17:20 Nov 23, 2015
Jkt 238001
U.S.C. 78f(b).
U.S.C. 78f(b)(5).
14 15 U.S.C. 78f(b)(1) and 78f(b)(6).
15 See supra, notes 7 and 8.
connection with actions like those cited
above.
The Exchange further believes that the
proposal is consistent with Section
6(b)(7) of the Act,16 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,17
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.
12 15
The Exchange believes that the
proposed rule changes are consistent
VerDate Sep<11>2014
with Section 6(b) of the Act 12 and
further the objectives of Section 6(b)(5)
of the Act 13 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,14 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. As explained above, the
Exchange notes that it has defined the
prohibited disruptive quoting and
trading activity by modifying the
traditional definitions of layering and
spoofing 15 to eliminate an express
intent element that would not be proven
on an expedited basis and would
instead require a thorough investigation
into the activity. As noted throughout
this filing, the Exchange believes it is
necessary for the protection of investors
to make such modifications in order to
adopt an expedited process rather than
allowing disruptive quoting and trading
activity to occur for several years.
Through this proposal, the Exchange
does not intend to modify the
definitions of spoofing and layering that
have generally been used by the
Exchange and other regulators in
13 15
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Sfmt 4703
73251
16 15
17 15
E:\FR\FM\24NON1.SGM
U.S.C. 78f(b)(7).
U.S.C. 78f(d)(1).
24NON1
73252
Federal Register / Vol. 80, No. 226 / Tuesday, November 24, 2015 / Notices
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
As explained above, a similar
proposal was filed by the Exchange as
File No. SR–BATS–2015–57 and
Amendment No. 1 thereto. The
Exchange received five comments in
response to the Initial Proposal and
responded to such comments in the
BATS Comment Response Letter.18 The
Exchange believes that the BATS
Comment Response Letter as well as the
changes to the Initial Proposal that are
reflected in this proposal adequately
address comments received.
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 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 proposal, as
modified by Amendment No. 1, is
consistent with the Act. Comments may
be submitted by any of the following
methods:
mstockstill on DSK4VPTVN1PROD 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–2015–101 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–2015–101. 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–
2015–101, and should be submitted on
or before December 15, 2015.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.19
Robert W. Errett,
Deputy Secretary.
[FR Doc. 2015–29843 Filed 11–23–15; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–76467; SR–ISE–2015–36]
Self-Regulatory Organizations;
International Securities Exchange,
LLC; Notice of Withdrawal of a
Proposed Rule Change Relating to a
Corporate Transaction Involving Its
Indirect Parent
November 18, 2015.
On October 30, 2015, the International
Securities Exchange, LLC (the
‘‘Exchange’’) filed with the Securities
and Exchange Commission
(‘‘Commission’’), pursuant to Section
19(b)(1) of the Securities Exchange Act
of 1934 (‘‘Act’’) 1 and Rule 19b–4
thereunder,2 a proposed rule change to
amend and restate certain corporate
governance documents in connection
with a proposal to remove Eurex
Frankfurt AG as an indirect, non-U.S.
upstream owner of the Exchange. The
proposed rule change was published for
19 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b-4.
1 15
18 See
supra note 4.
VerDate Sep<11>2014
17:20 Nov 23, 2015
Jkt 238001
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Frm 00091
Fmt 4703
Sfmt 4703
comment in the Federal Register on
November 17, 2015.3
On November 13, 2015, the Exchange
withdrew the proposed rule change
(SR–ISE–2015–36).
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.4
Robert W. Errett,
Deputy Secretary.
[FR Doc. 2015–29840 Filed 11–23–15; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–76469; File No. SR–CBOE–
2015–077]
Self-Regulatory Organizations;
Chicago Board Options Exchange,
Incorporated; Order Granting Approval
of Proposed Rule Change Relating to
Margin Requirements
November 18, 2015.
I. Introduction
On September 22, 2015, Chicago
Board Options Exchange, Incorporated
(‘‘Exchange’’ or ‘‘CBOE’’) filed with the
Securities and Exchange Commission
(‘‘Commission’’), pursuant to Section
19(b)(1) of the Securities Exchange Act
of 1934 (‘‘Act’’) 1 and Rule 19b–4
thereunder,2 a proposed rule change
relating to margin requirements. The
proposed rule change was published for
comment in the Federal Register on
October 8, 2015.3 The Commission
received no comments on the proposed
rule change. This order grants approval
of the proposed rule change.
II. Description of the Proposed Rule
Change
CBOE proposes to amend its rules
related to margin requirements. Rule
12.3 sets forth margin requirements, and
certain exceptions to those
requirements, applicable to security
positions of Trading Permit Holders’
customers. Rule 12.3(c)(5)(C)(2)
currently requires no margin for covered
calls and puts. Specifically, that rule
provides the following:
• No margin need be required in
respect of an option contract, stock
index warrant, currency index warrant
or currency warrant carried in a short
position which is covered by a long
position in equivalent units of the
3 See Securities Exchange Act Release No. 76415
(Nov. 10, 2015), 80 FR 71864.
4 17 CFR 200.30–3(a)(57).
1 15 U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 See Securities Exchange Act Release No. 76068
(October 2, 2015), 80 FR 60941 (‘‘Notice’’).
E:\FR\FM\24NON1.SGM
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]]>Agencies
[Federal Register Volume 80, Number 226 (Tuesday, November 24, 2015)]
[Notices]
[Pages 73247-73252]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-29843]
=======================================================================
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-76470; File No. SR-BATS-2015-101]
Self-Regulatory Organizations; BATS Exchange, Inc.; Notice of
Filing of a Proposed Rule Change, as Modified by Amendment No. 1
Thereto, To Adopt Rule 8.17 To Provide a Process for an Expedited
Suspension Proceeding and Rule 12.15 To Prohibit Disruptive Quoting and
Trading Activity
November 18, 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 November 6, 2015, BATS Exchange, Inc. (``Exchange'' or ``BATS'')
filed with the Securities and Exchange Commission (``Commission'') the
proposed rule change as described in Items I, II and III below, which
Items have been prepared by the Exchange. On November 17, 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\ As the Exchange states in Item I, 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 filed a proposal to adopt a new rule to clearly
prohibit disruptive quoting and trading 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. This Amendment No. 1
to SR-BATS-2015-101 amends and replaces the original proposal in its
entirety.
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 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 is filing this proposal to adopt a new rule to clearly
prohibit disruptive quoting and trading activity on the Exchange and to
amend Exchange Rules to permit the Exchange to take prompt action to
suspend Members or their clients that violate such rule. The Exchange
notes, as further described below, that it previously filed this
proposal as File No. SR-BATS-2015-57 and Amendment No. 1 thereto (the
``Initial Proposal''). The Exchange received comments on the Initial
Proposal and simultaneously with this filing both responded to such
comments \4\ and withdrew such Initial Proposal. The Exchange submits
this proposal, as revised, in order to solicit additional comment. The
Exchange believes that the revisions it has made to the Initial
Proposal satisfactorily address comments received and that there is
good cause to approve the proposal, as revised.
---------------------------------------------------------------------------
\4\ See letter to Brent J. Fields, Secretary, Commission, from
Anders Franzon, VP, Associate General Counsel, BATS, dated November
6, 2015 (``BATS Comment Response Letter'').
---------------------------------------------------------------------------
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.\5\ 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.'' \6\ 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
[[Page 73248]]
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.
---------------------------------------------------------------------------
\5\ 15 U.S.C. 78f(b)(1).
\6\ 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 \7\ or spoofing.\8\ 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 disruptive quoting and trading activity and the Member has
received sufficient notice with an opportunity to respond, but such
activity has not ceased.
---------------------------------------------------------------------------
\7\ ``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.
\8\ ``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.\9\ 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.
---------------------------------------------------------------------------
\9\ 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.\10\ 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.\11\ 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 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.
---------------------------------------------------------------------------
\10\ See Hold Brothers On-Line Investment Services, LLC, FINRA
Letter of Acceptance, Waiver and Consent No. 20100237710001,
September 25, 2012.
\11\ 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.
[[Page 73249]]
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 disruptive quoting and trading
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 disruptive quoting and trading 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/or 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. The order
shall describe in reasonable detail the act or acts the Respondent is
to take or refrain from taking, and suspend such Respondent unless and
until such action is taken or refrained from. Finally, the order shall
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. If any part of a
suspension order is modified, set aside, limited, or revoked, proposed
paragraph (e) of Rule 8.17 provides the Hearing Panel discretion to
leave the cease and desist part of the order in place. For example, if
a suspension order suspends Respondent unless and until Respondent
ceases and desists providing access to the Exchange to a client of
Respondent, and after the order is entered the Respondent complies, the
Hearing Panel is permitted to modify the order to lift the suspension
portion of the order while keeping in place the cease and desist
portion of the order. With its broad modification powers, the Hearing
Panel also maintains the discretion to impose conditions upon the
removal of a suspension--for example, the Hearing Panel could modify an
order to lift the suspension portion of the order in the event a
Respondent complies with the cease and desist portion of the order but
additionally order that the suspension will be re-imposed if Respondent
violates the cease and desist provisions modified order in the future.
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
[[Page 73250]]
order would not stay the effectiveness of the suspension order.
Finally, proposed paragraph (f) 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 unless the Commission otherwise ordered.
Rule 12.15--Disruptive Quoting and Trading Activity Prohibited
The Exchange currently has authority to prohibit and take action
against manipulative trading activity, including disruptive quoting and
trading activity, 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 disruptive quoting
and trading 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 disruptive quoting and trading activity on the Exchange,
as described in proposed Interpretation and Policies .01 and .02 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 disruptive quoting and trading 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 quoting and trading
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 disruptive quoting
and trading activity. Proposed Interpretation and Policy .01(a), which
describes disruptive quoting and trading activity containing many of
the elements indicative of layering, would describe disruptive quoting
and trading 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 ``Displayed Orders''); and (b)
following the entry of the Displayed 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 Displayed Orders (the
``Contra-Side Orders'') that are subsequently executed; and (d)
following the execution of the Contra-Side Orders, the party cancels
the Displayed Orders. Proposed Interpretation and Policy .01(b), which
describes disruptive quoting and trading activity containing many of
the elements indicative of spoofing, would describe disruptive quoting
and trading 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; and (b) the party then
submits an order on the opposite side of the market that executes
against another market participant that joined the new inside market
established by the order described in (a) that narrowed the spread. The
Exchange believes that the proposed descriptions of disruptive quoting
and trading 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 disruptive
quoting and trading 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
.02 that, unless otherwise indicated, the descriptions of disruptive
quoting and trading activity do not require the facts to occur in a
specific order in order for the rule to apply. For instance, with
respect to the pattern defined in proposed Interpretation and Policy
.01(a) it is of no consequence whether a party first enters Displayed
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
the Displayed Orders. The Exchange also proposes to make clear that
disruptive quoting and trading activity includes a pattern or practice
in which some portion of the disruptive quoting and trading activity is
conducted on the Exchange and the other portions of the disruptive
quoting and trading 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
disruptive quoting and trading 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 potentially disruptive quoting and trading
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 disruptive quoting and trading
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 disruptive quoting and trading activity and to
suspend such Member unless and until such action is taken. 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
access to the client at issue and suspending such Member unless and
until such action is taken. If such Member wished for the suspension to
be lifted because the client ultimately responsible for the activity no
longer would be provided access to the Exchange, then such Member could
apply to the Hearing Panel to have the order modified, set aside,
limited or
[[Page 73251]]
revoked. The Exchange notes that the issuance of a suspension order
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.
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 disruptive quoting and
trading 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 disruptive quoting and trading 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 disruptive quoting and trading activity.
2. Statutory Basis
The Exchange believes that the proposed rule changes are consistent
with Section 6(b) of the Act \12\ and further the objectives of Section
6(b)(5) of the Act \13\ 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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\12\ 15 U.S.C. 78f(b).
\13\ 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,\14\ 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.
As explained above, the Exchange notes that it has defined the
prohibited disruptive quoting and trading activity by modifying the
traditional definitions of layering and spoofing \15\ to eliminate an
express intent element that would not be proven on an expedited basis
and would instead require a thorough investigation into the activity.
As noted throughout this filing, the Exchange believes it is necessary
for the protection of investors to make such modifications in order to
adopt an expedited process rather than allowing disruptive quoting and
trading activity to occur for several years. Through this proposal, the
Exchange does not intend to modify the definitions of spoofing and
layering that have generally been used by the Exchange and other
regulators in connection with actions like those cited above.
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\14\ 15 U.S.C. 78f(b)(1) and 78f(b)(6).
\15\ See supra, notes 7 and 8.
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The Exchange further believes that the proposal is consistent with
Section 6(b)(7) of the Act,\16\ 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,\17\ 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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\16\ 15 U.S.C. 78f(b)(7).
\17\ 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.
[[Page 73252]]
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
As explained above, a similar proposal was filed by the Exchange as
File No. SR-BATS-2015-57 and Amendment No. 1 thereto. The Exchange
received five comments in response to the Initial Proposal and
responded to such comments in the BATS Comment Response Letter.\18\ The
Exchange believes that the BATS Comment Response Letter as well as the
changes to the Initial Proposal that are reflected in this proposal
adequately address comments received.
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\18\ See supra note 4.
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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 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 proposal, 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-2015-101 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-2015-101. 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-2015-101,
and should be submitted on or before December 15, 2015.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\19\
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\19\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2015-29843 Filed 11-23-15; 8:45 am]
BILLING CODE 8011-01-P
