Self-Regulatory Organizations; Bats EDGA Exchange, Inc. f/k/a EDGA Exchange, Inc.; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Adopt Exchange Rule 11.21(a) To Implement the Quoting and Trading Provisions of the Regulation NMS Plan To Implement a Tick Size Pilot Program, 30397-30403 [2016-11403]
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Federal Register / Vol. 81, No. 94 / Monday, May 16, 2016 / Notices
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specific ATS’s matching engine assigns,
or if all ATSs must adopt a uniform
method of assigning sequence numbers.
In its response to these comments,
FINRA clarified that the requirement to
identify any counter-party restrictions is
a yes or no response, and that the ATS
would not be required to provide the
specific counter-party restriction.27 In
addition, FINRA clarified that it is not
mandating a particular or uniform
format by which ATSs must report
sequence numbers, and that requiring
an ATS to report the sequence number
as it currently exists in the ATS will
satisfy this requirement.28
potentially abusive trading activity that
the proposal is designed to detect is of
particular concern with respect to NMS
stocks. The Commission believes that
gaps in ATS order book data should be
addressed in the near-term to ensure
effective surveillance of ATSs and, by
extension, abusive algorithmic trading
activity more generally across markets.
The Commission believes that FINRA
adequately responded to the issues
raised in the comment letter.
Accordingly, for the reasons
discussed above, the Commission finds
that the proposed rule change is
consistent with Section 15A of the Act.
IV. Discussion and Commission
Findings
After careful review of the proposal,
the comment letter received, and
FINRA’s response, the Commission
finds that the proposed rule change is
consistent with the requirements of the
Act and the rules and regulations
thereunder applicable to a national
securities association.29 In particular,
the Commission finds that the proposed
rule change is consistent with Section
15A(b)(6) of the Act,30 which requires,
among other things, that FINRA rules 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.
The Commission believes that the
stated objectives of the proposal—to
enhance FINRA’s ability to surveil
activity occurring within an ATS, and
by extension FINRA’s ability to surveil
for potentially abusive algorithmic
trading activity more generally across
markets—are consistent with the
purposes of the Act and with FINRA’s
responsibility to enforce compliance by
its members with its rules and with the
Act. The additional information
provided by ATSs will better enable
FINRA to reconstruct an ATS order
book and more effectively conduct
quotation-based surveillance. FINRA
will integrate the additional information
into its surveillance patterns to support
the generation and analysis of alerts,
which will increase FINRA’s ability to
detect a wide range of potential marketspecific and cross-market manipulative
activities.
The Commission further believes that
applying this proposal to NMS stocks is
consistent with the Act because the
V. Conclusion
It Is Therefore Ordered pursuant to
Section 19(b)(2) of the Act 31 that the
proposed rule change (SR–FINRA–
2016–010) be and hereby is approved.
27 See
FINRA Response Letter at 4.
id. at 4–5.
29 In approving this proposed rule change, the
Commission has considered the proposed rule
change’s impact on efficiency, competition, and
capital formation. See 15 U.S.C. 78c(f).
30 15 U.S.C. 78o–3(b)(6).
28 See
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For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.32
Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016–11409 Filed 5–13–16; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–77792; File No. SRBatsEDGA–2016–08]
Self-Regulatory Organizations; Bats
EDGA Exchange, Inc. f/k/a EDGA
Exchange, Inc.; Notice of Filing and
Immediate Effectiveness of a Proposed
Rule Change To Adopt Exchange Rule
11.21(a) To Implement the Quoting and
Trading Provisions of the Regulation
NMS Plan To Implement a Tick Size
Pilot Program
May 10, 2016.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (the
‘‘Act’’),1 and Rule 19b–4 thereunder,2
notice is hereby given that on May 2,
2016, Bats EDGA Exchange, Inc. f/k/a
EDGA Exchange, Inc. (the ‘‘Exchange’’
or ‘‘EDGA’’) 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. The Exchange has
designated this proposal as a ‘‘noncontroversial’’ proposed rule change
pursuant to Section 19(b)(3)(A) of the
Act 3 and Rule 19b-4(f)(6)(iii)
U.S.C. 78s(b)(2).
CFR 200.30–3(a)(12).
1 15 U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 15 U.S.C. 78s(b)(3)(A).
30397
thereunder,4 which renders it effective
upon filing with the Commission. The
Commission is publishing this notice to
solicit comments on the proposed rule
change from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange filed a proposal to
adopt Exchange Rule 11.21(a) to
implement the quoting and trading
provisions of the Regulation NMS Plan
to Implement a Tick Size Pilot Program
(‘‘Plan’’). The proposed rule change is
substantially similar to a proposed rule
change approved by the Commission by
the Bats BZX Exchange, Inc. f/k/a BATS
Exchange, Inc. (‘‘BZX’’) to adopt BZX
Rule 11.27(a) which also implemented
the quoting and trading provisions of
the Plan.5
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
On August 25, 2014, NYSE Group,
Inc., on behalf of the Exchange, BZX,
Chicago Stock Exchange, Inc., Bats BYX
Exchange, Inc. f/k/a BATS Y-Exchange,
Inc., Bats EDGX Exchange, Inc. f/k/a
EDGX Exchange, Inc., Financial
Industry Regulatory Authority, Inc.
(‘‘FINRA’’), NASDAQ OMX BX, Inc.,
NASDAQ OMX PHLX LLC, the Nasdaq
Stock Market LLC, New York Stock
Exchange LLC (‘‘NYSE’’), NYSE MKT
LLC, and NYSE Arca, Inc. (collectively
‘‘Participants’’), filed with the
31 15
32 17
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4 17
CFR 240.19b–4(f)(6)(iii).
Securities Exchange Act Release No. 77291
(March 3, 2016), 81 FR 12543 (March 9, 2016)
(order approving SR–BATS–2015–108).
5 See
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Commission, pursuant to Section 11A of
the Act 6 and Rule 608 of Regulation
NMS thereunder, the Plan to implement
a tick size pilot program (‘‘Pilot’’).7 The
Participants filed the Plan to comply
with an order issued by the Commission
on June 24, 2014.8 The Plan 9 was
published for comment in the Federal
Register on November 7, 2014, and
approved by the Commission, as
modified, on May 6, 2015.10
The Plan is designed to allow the
Commission, market participants, and
the public to study and assess the
impact of increment conventions on the
liquidity and trading of the common
stocks of small-capitalization
companies. Each Participant is required
to comply with, and to enforce
compliance by its member
organizations, as applicable, with the
provisions of the Plan. As is described
more fully below, the proposed rules
would require member organizations to
comply with the applicable quoting and
trading increments for Pilot Securities.11
The Pilot will include stocks of
companies with $3 billion or less in
market capitalization, an average daily
trading volume of one million shares or
less, and a volume weighted average
price of at least $2.00 for every trading
day. The Pilot will consist of a control
group of approximately 1400 Pilot
Securities and three test groups with
400 Pilot Securities in each selected by
a stratified sampling.12 During the pilot,
Pilot securities in the control group will
be quoted and traded at the currently
permissible increments. Pilot Securities
in the first test group (‘‘Test Group
One’’) will be quoted in $0.05 minimum
increments but will continue to trade at
any price increment that is currently
permitted.13 Pilot Securities in the
second test group (‘‘Test Group Two’’)
6 15
U.S.C. 78k–1.
Letter from Brendon J. Weiss, Vice
President, Intercontinental Exchange, Inc., to
Secretary, Commission, dated August 25, 2014.
8 See Securities Exchange Act Release No. 72460
(June 24, 2014), 79 FR 36840 (June 30, 2014).
9 Unless otherwise specified, capitalized terms
used in this rule filing are defined as set forth in
the Plan. The Exchange also proposes
supplementary material as part of this proposed
rule change to, among other things, provide that the
terms used in proposed Rule 11.21 shall have the
same meaning as provided in the Plan, unless
otherwise specified.
10 See Securities Exchange Act Release No. 74892
(May 6, 2015), 80 FR 27514 (May 13, 2015)
(‘‘Approval Order’’).
11 The Exchange proposes to add Information and
Policy .03 to Rule 11.21 to provide that the Rule
shall be in effect during a pilot period to coincide
with the pilot period for the Plan (including any
extensions to the pilot period for the Plan).
12 See Section V of the Plan for identification of
Pilot Securities, including criteria for selection and
grouping.
13 See Section VI(B) of the Plan.
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7 See
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will be quoted in $0.05 minimum
increments and will trade at $0.05
minimum increments subject to a
midpoint exception, a retail investor
order exception, and a negotiated trade
exception.14 Pilot Securities in the third
test group (‘‘Test Group Three’’) will be
subject to the same restrictions as Test
Group Two and also will be subject to
the ‘‘Trade-at’’ requirement to prevent
price matching by a market participant
that is not displaying at a price of a
Trading Center’s 15 ‘‘Best Protected Bid’’
or ‘‘Best Protected Offer,’’ unless an
enumerated exception applies.16 In
addition to the exceptions provided
under Test Group Two, an exception for
Block Size orders and exceptions that
mirror those under Rule 611 of
Regulation NMS 17 will apply to the
Trade-at requirement.
Compliance With the Quoting and
Trading Increments of the Plan
The Plan requires the Exchange to
establish, maintain, and enforce written
policies and procedures that are
reasonably designed to comply with
applicable quoting and trading
requirements specified in the Plan.
Accordingly, the Exchange is proposing
new paragraph (a) to Rule 11.21
(Compliance with Regulation NMS Plan
to Implement a Tick Size Pilot Program)
to require Members 18 to comply with
the quoting and trading provisions of
the Plan.
Proposed Rule 11.21(a) (Compliance
with Quoting and Trading Restrictions)
sets forth the requirements for the
Exchange and Members in meeting their
obligations under the Plan. Rule
11.21(a)(1) will require Members to
establish, maintain and enforce written
policies and procedures that are
reasonably designed to comply with the
applicable quoting and trading
requirements of the Plan. Rule
11.21(a)(2) provides that the Exchange
Systems 19 will not display, quote or
14 See
Section VI(C) of the Plan.
Plan incorporates the definition of
‘‘Trading Center’’ from Rule 600(b)(78) of
Regulation NMS. Regulation NMS defines a Trading
Center as ‘‘a national securities exchange or
national securities association that operates an SRO
trading facility, an alternative trading system, an
exchange market maker, an OTC market maker, or
any other broker or dealer that executes orders
internally by trading as principal or crossing orders
as agent.’’
16 See Section VI(D) of the Plan.
17 17 CFR 242.611.
18 The term ‘‘Member’’ is defined as ‘‘any
registered broker or dealer, or any person associated
with a registered broker or dealer, that has been
admitted to membership in the Exchange. A
Member will have the status of a ‘‘member’’ of the
Exchange as that term is defined in Section 3(a)(3)
of the Act.’’ See Exchange Rule 1.5(n).
19 The term ‘‘System’’ is defined as ‘‘the
electronic communications and trading facility
15 The
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trade in violation of the applicable
quoting and trading requirements for a
Pilot Security specified in the Plan and
this Rule, unless such quotation or
transaction is specifically exempted
under the Plan.
Proposed Rule 11.21(a)(3) clarifies the
treatment of Pilot Securities that drop
below $1.00 during the Pilot Period. In
particular, Rule 11.21(a)(3) provides
that, if the price of a Pilot Security
drops below $1.00 during regular
trading hours on any trading day, such
Pilot Security will continue to be a Pilot
Security subject to the Plan. However, if
the Closing Price of a Pilot Security on
any given trading day is below $1.00,
such Pilot Security will be moved out of
its Pilot Test Group into the Control
Group, and may then be quoted and
traded at any price increment that is
currently permitted for the remainder of
the Pilot Period.20 Rule 11.21(a)(3) also
provides that, notwithstanding anything
contained within these rules to the
contrary, Pilot Securities (whether in
the Control Group or any Pilot Test
Group) will continue to be subject to the
data collection requirements of the Plan
at all times during the Pilot Period and
for the six-month period following the
end of the Pilot Period.
In approving the Plan, the
Commission noted that the Participants
had proposed additional selection
criteria to minimize the likelihood that
securities that trade with a share price
of $1.00 or less would be included in
the Pilot, and stated that, once
established, the universe of Pilot
Securities should stay as consistent as
possible so that the analysis and data
can be accurate throughout the Pilot
designated by the Board through which securities
orders of Users are consolidated for ranking,
execution and, when applicable, routing away.’’ See
Exchange Rule 1.5(aa).
20 The NYSE, on behalf of the Plan Participants,
submitted a letter to Commission requesting
exemption from certain provisions of the Plan
related to quoting and trading. See letter from
Elizabeth K. King, NYSE, to Brent J. Fields,
Secretary, Commission, dated October 14, 2015
(‘‘October Exemption Request’’). FINRA, also on
behalf of the Plan Participants, submitted a separate
letter to Commission requesting additional
exemptions from certain provisions of the Plan
related to quoting and trading. See letter from
Marcia E. Asquith, Senior Vice President and
Corporate Secretary, FINRA, to Robert W. Errett,
Deputy Secretary, Commission, dated February 23,
2016 (‘‘February Exemption Request’’). The
Commission, pursuant to its authority under Rule
608(e) of Regulation NMS, granted BZX a limited
exemption from the requirement to comply with
certain provisions of the Plan as specified in the
letter and noted herein. See letter from David
Shillman, Associate Director, Division of Trading
and Markets, Commission to Eric Swanson, General
Counsel, BZX, dated March 3, 2016 (‘‘Exemption
Letter’’). The Exchange is seeking the same
exemptions as requested in the October Exemption
Request and the February Exemption Request.
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Period.21 The Exchange notes that a
Pilot Security that drops below $1.00
during regular trading hours will remain
in its applicable Test Group; a Pilot
Security will only be moved to the
Control Group if its Closing Price on any
given trading day is below $1.00. The
Exchange believes that this provision is
appropriate because it will help ensure
that Pilot Securities in Test Groups One,
Two and Three continue to reflect the
Pilot’s selection criteria, helping ensure
the accuracy of the resulting data. The
Exchange also believes that this
provision is appropriate because it
responds to comments that the Plan
address the treatment of securities that
trade below $1.00 during the Pilot
Period.22
Proposed Rule 11.21(a)(4) sets forth
the applicable limitations for securities
in Test Group One. Consistent with the
language of the Plan, Rule 11.21(a)(4)
provides that no Member may display,
rank, or accept from any person any
displayable or non-displayable bids or
offers, orders, or indications of interest
in any Pilot Security in Test Group One
in increments other than $0.05.
However, orders priced to execute at the
midpoint of the national best bid and
national best offer (‘‘NBBO’’) or best
protected bid and best protected offer
(‘‘PBBO’’) 23 and orders entered in a
Participant-operated retail liquidity
program may be ranked and accepted in
increments of less than $0.05. Pilot
Securities in Test Group One may
continue to trade at any price increment
that is currently permitted by applicable
Participant, SEC and Exchange rules.
Proposed Rule 11.21(a)(5) sets forth
the applicable quoting and trading
requirements for securities in Test
Group Two. This provision states that
no Member may display, rank, or accept
from any person any displayable or nondisplayable bids or offers, orders, or
indications of interest in any Pilot
Security in Test Group Two in
increments other than $0.05. However,
21 See Approval Order, supra note 10, 80 FR at
27535.
22 Id.
23 Regulation NMS defines a protected bid or
protected offer as a quotation in an NMS stock that
(1) is displayed by an automated trading center; (2)
is disseminated pursuant to an effective national
market system plan; and (3) is an automated
quotation that is the best bid or best offer of a
national securities exchange, the best bid or best
offer of The Nasdaq Stock Market, Inc., or the best
bid or best offer of a national securities association
other than the best bid or best offer of The Nasdaq
Stock Market, Inc. See 17 CFR 242.600(57). In the
Approval Order, the Commission noted that the
protected quotation standard encompasses the
aggregate of the most aggressively priced displayed
liquidity on all Trading Centers, whereas the NBBO
standard is limited to the single best order in the
market. See Approval Order, supra note 10, 80 FR
at 27539.
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orders priced to execute at the midpoint
of the NBBO or PBBO and orders
entered in a Participant-operated retail
liquidity program may be ranked and
accepted in increments of less than
$0.05.
Proposed Rule 11.21(a)(5) also sets
forth the applicable trading restrictions
for Test Group Two securities. Absent
any of the exceptions listed in the Rule,
no Member may execute orders in any
Pilot Security in Test Group Two in
price increments other than $0.05. The
$0.05 trading increment will apply to all
trades, including Brokered Cross Trades.
Consistent with the language of the
Plan, the Rule provides that Pilot
Securities in Test Group Two may trade
in increments of less than $0.05 under
the following circumstances: (1) Trading
may occur at the midpoint between the
NBBO or the PBBO; (2) Retail Investor
Orders may be provided with price
improvement that is at least $0.005
better than the PBBO; and (3) Negotiated
Trades may trade in increments of less
than $0.05.
The Exchange also proposes to add an
exception to Rule 11.21(a)(5) to permit
Members to fill a customer order in a
Pilot Security in Test Group Two at a
non-nickel increment to comply with
Exchange Rule 12.6 (Prohibition Against
Trading Ahead of Customer Orders)
under limited circumstances.
Specifically, the exception would allow
the execution of a customer order
following a proprietary trade by the
Member at an increment other than
$0.05 in the same security, on the same
side and at the same price as (or within
the prescribed amount of) a customer
order owed a fill pursuant to Exchange
Rule 12.6, where the triggering
proprietary trade was permissible
pursuant to an exception under the
Plan.24
Thus, the Exchange is proposing to
add a customer order protection
exception to Rule 11.21(a)(5) that would
permit Members to trade Pilot Securities
in Test Group Two in increments less
than $0.05, and where the Member is
executing a customer order to comply
with Exchange Rule 12.6 following the
execution of a proprietary trade by the
Member at an increment other than
$0.05 where such proprietary trade was
permissible pursuant to an exception
under the Plan. The Exchange believes
that this approach best facilitates the
ability of Members to continue to
24 The Commission granted BZX an exemption
from Rule 608(c) related to this provision. See
February Exemption Request and Exemption Letter,
supra note 20. The Exchange is seeking the same
exemptions as requested in the October Exemption
Request and the February Exemption Request.
Supra note 20.
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30399
protect customer orders while retaining
the flexibility to engage in proprietary
trades that comply with an exception to
the Plan.
Proposed Rule 11.21(a)(6) sets forth
the applicable quoting and trading
restrictions for Pilot Securities in Test
Group Three. The rule provides that no
Member may display, rank, or accept
from any person any displayable or nondisplayable bids or offers, orders, or
indications of interest in any Pilot
Security in Test Group Three in
increments other than $0.05. However,
orders priced to execute at the midpoint
of the NBBO or PBBO and orders
entered in a Participant-operated retail
liquidity program may be ranked and
accepted in increments of less than
$0.05. The rule also states that, absent
any of the applicable exceptions, no
Member that operates a Trading Center
may execute orders in any Pilot Security
in Test Group Three in price increments
other than $0.05. The $0.05 trading
increment will apply to all trades,
including Brokered Cross Trades.25
Proposed Rule 11.21(a)(6)(C) sets forth
the exceptions pursuant to which Pilot
Securities in Test Group Three may
trade in increments of less than $0.05.
First, trading may occur at the midpoint
between the NBBO or PBBO. Second,
Retail Investor Orders may be provided
with price improvement that is at least
$0.005 better than the PBBO. Third,
Negotiated Trades may trade in
increments of less than $0.05.
Similar to that proposed under Rule
11.21(a)(5) described above, the
Exchange also proposes to add an
exception to Rule 11.21(a)(6) to permit
Members to fill a customer order in a
Pilot Security in Test Group Three at a
non-nickel increment to comply with
Exchange Rule 12.6 (Prohibition Against
Trading Ahead of Customer Orders)
under limited circumstances.
Specifically, the exception would allow
the execution of a customer order
following a proprietary trade by the
Member at an increment other than
$0.05 in the same security, on the same
side and at the same price as (or within
the prescribed amount of) a customer
order owed a fill pursuant to Exchange
Rule 12.6, where the triggering
proprietary trade was permissible
pursuant to an exception under the
Plan.26 Thus, the Exchange is proposing
25 A brokered cross trade is a trade that a brokerdealer that is a member of a Participant executes
directly by matching simultaneous buy and sell
orders for a Pilot Security. See Section I(G) of the
Plan.
26 See supra note 22. The Exchange is seeking the
same exemptions as requested in the October
Exemption Request and the February Exemption
Request. Supra note 20.
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to add a customer order protection
exception to Rule 11.21(a)(6) that would
permit Members to trade Pilot Securities
in Test Group Three in increments less
than $0.05, and where the Member is
executing a customer order to comply
with Exchange Rule 12.6 following the
execution of a proprietary trade by the
Member at an increment other than
$0.05 where such proprietary trade was
permissible pursuant to an exception
under the Plan.
Proposed Rule 11.21(a)(6)(D) sets
forth the ‘‘Trade-at Prohibition,’’ which
is the prohibition against executions by
a Member that operates a Trading Center
of a sell order for a Pilot Security in Test
Group Three at the price of a Protected
Bid or the execution of a buy order for
a Pilot Security in Test Group Three at
the price of a Protected Offer during
regular trading hours, absent any of the
exceptions set forth in Rule
11.21(a)(6)(D). Consistent with the Plan,
the rule reiterates that a Member that
operates a Trading Center that is
displaying a quotation, via either a
processor or an SRO quotation feed, that
is a Protected Bid or Protected Offer is
permitted to execute orders at that level,
but only up to the amount of its
displayed size. A Member that operates
a Trading Center that was not displaying
a quotation that is the same price as a
Protected Quotation, via either a
processor or an SRO quotation feed, is
prohibited from price-matching
protected quotations unless an
exception applies.
Consistent with the Plan, proposed
Rule 11.21(a)(6)(D) also sets forth the
exceptions to the Trade-at prohibition,
pursuant to which a Member that
operates a Trading Center may execute
a sell order for a Pilot Security in Test
Group Three at the price of a Protected
Bid or execute a buy order for a Pilot
Security in Test Group Three at the
price of a Protected Offer. The first
exception to the Trade-at Prohibition is
the ‘‘display exception,’’ which allows a
trade to occur at the price of the
Protected Quotation, up to the Trading
Center’s full displayed size, if the order
‘‘is executed by a trading center that is
displaying a quotation.’’ 27
In Rule 11.21(a)(6)(D), the Exchange
proposes that a Member that utilizes the
independent aggregation unit concept
may satisfy the display exception only
if the same independent aggregation
unit that displays interest via either a
processor or an SRO Quotation Feed
also executes an order in reliance upon
this exception. The rule provides that
‘‘independent aggregation unit’’ has the
same meaning as provided under Rule
27 See
Section VI(D)(1) of the Plan.
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Jkt 238001
200(f) of SEC Regulation SHO.28 This
provision also recognizes that not all
members may utilize the independent
aggregation unit concept as part of their
regulatory structure, and still permits
such members to utilize the display
exception if all the other requirements
of that exception are met.
As initially proposed by the
Participants, the Plan contained an
additional condition to the display
exception, which would have required
that, where the quotation is displayed
through a national securities exchange,
the execution at the size of the order
must occur against the displayed size on
that national securities exchange; and
where the quotation is displayed
through the Alternative Display Facility
or another facility approved by the
Commission that does not provide
execution functionality, the execution at
the size of the order must occur against
the displayed size in accordance with
the rules of the Alternative Display
Facility of such approved facility
(‘‘venue limitation’’).29 Some
commenters stated that this provision
was anti-competitive, as it would have
forced off-exchange Trading Centers to
route orders to the venue on which the
order was displayed.30
In approving the Plan, the
Commission modified the Trade-At
Prohibition to remove the venue
limitation.31 The Commission noted
that the venue limitation was not
prescribed in its Order mandating the
filing of the Plan.32 The Commission
also noted that the venue limitation
would have unnecessarily restricted the
ability of off-exchange market
participants to execute orders in Test
Group Three Securities, and that
removing the venue limitation should
mitigate concerns about the cost and
complexity of the Pilot by reducing the
need for off-exchange Trading Centers to
route to the exchange.33 The
Commission also stated that the venue
28 17 CFR 242.200. Treatment as an independent
aggregation unit is available if traders in an
aggregation unit pursue only the particular trading
objective(s) or strategy(ies) of that aggregation unit
and do not coordinate that strategy with any other
aggregation unit. Therefore, one independent
aggregation unit within a Trading Center cannot
execute trades pursuant to the display exception in
reliance on quotations displayed by a different
independent aggregation unit. As an example, an
agency desk of a Trading Center cannot rely on the
quotation of a proprietary desk in a separate
independent aggregation unit at that same Trading
Center.
29 See Securities Exchange Act Release No. 73511
(November 3, 2014), 79 FR 66423, 66437 (November
7, 2014).
30 See Approval Order, supra note 10, 80 FR at
27540.
31 Id.
32 Id.
33 Id.
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limitation did not create any additional
incentives to display liquidity in
furtherance of the purposes of the
Trade-At Prohibition, because the
requirement that a Trading Center could
only trade at a protected quotation up to
its displayed size should be sufficient to
incentivize displayed liquidity.34
Consistent with Plan and the SEC’s
determination to remove the venue
limitation, the Exchange is making clear
that the display exception applies to
trades done by a Trading Center
otherwise than on an exchange where
the Trading Center has previously
displayed a quotation in either an
agency or a principal capacity. As part
of the display exception, the Exchange
also proposes that a Trading Center that
is displaying a quotation as agent or
riskless principal may only execute as
agent or riskless principal, while a
Trading Center displaying a quotation as
principal (excluding riskless principal)
may execute either as principal or agent
or riskless principal. The Exchange
believes this is consistent with the Plan
and the objective of the Trade-at
Prohibition, which is to promote the
display of liquidity and generally to
prevent any Trading Center that is not
quoting from price-matching Protected
Quotations. Providing that a Trading
Center may not execute on a proprietary
basis in reliance on a quotation
representing customer interest (whether
agency or riskless principal) ensures
that the Trading Center cannot avoid
compliance with the Trade-at
Prohibition by trading on a proprietary
basis in reliance on a quotation that
does not represent such Trading
Center’s own interest. Where a Trading
Center is displaying a quotation at the
same price as a Protected Quotation in
a proprietary capacity, transactions in
any capacity at the price and up to the
size of such Trading Center’s displayed
quotation would be permissible.
Transactions executed pursuant to the
display exception may occur on the
venue on which such quotation is
displayed or over the counter.
The proposal also excepts Block Size
orders 35 and permits Trading Centers to
trade at the price of a Protected
Quotation, provided that the order is of
Block Size at the time of origin and is
not an aggregation of non-block orders,
broken into orders smaller than Block
Size prior to submitting the order to a
Trading Center for execution; or
executed on multiple Trading Centers.36
34 Id.
35 ‘‘Block Size’’ is defined in the Plan as an order
(1) of at least 5,000 shares or (2) for a quantity of
stock having a market value of at least $100,000.
36 Once a Block Size order or portion of such
Block Size order is routed from one Trading Center
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The Plan only provides that Block Size
orders shall be exempted from the
Trade-At Prohibition. In requiring that
the order be of Block Size at the time of
origin and not an aggregation of nonblock orders, or broken into orders
smaller than Block Size prior to
submitting the order to a Trading Center
for execution; or executed on multiple
Trading Centers, the Exchange believes
that it is providing clarity as to the
circumstances under which a Block Size
order will be excepted from the TradeAt Prohibition.
Consistent with the Plan, the proposal
also excepts an order that is a Retail
Investor Order that is executed with at
least $0.005 price improvement.
The exceptions set forth in proposed
Rule 11.21(a)(6)(D)(ii) d. through n. are
based on the exceptions found in Rule
611 of Regulation NMS.37 The
subparagraph d. exception applies when
the order is executed when the Trading
Center displaying the Protected
Quotation that was traded at was
experiencing a failure, material delay, or
malfunction of its systems or
equipment. The subparagraph e.
exception applies to an order that is
executed as part of a transaction that
was not a ‘‘regular way’’ contract. The
subparagraph f. exception applies to an
order that is executed as part of a singlepriced opening, reopening, or closing
transaction by the Trading Center. The
subparagraph g. exception applies to an
order that is executed when a Protected
Bid was priced higher than a Protected
Offer in a Pilot Security.
The subparagraph h. exception
applies when the order is identified as
a Trade-at Intermarket Sweep Order.
The subparagraph i. exception applies
when the order is executed by a Trading
Center that simultaneously routed
Trade-at Intermarket Sweep Orders to
execute against the full displayed size of
a Protected Quotation with a price that
is better than or equal to the limit price
of the limit order identified as a Tradeat Intermarket Sweep Order. Depending
on whether Rule 611 or the Trade-at
requirement applies, an ISO may mean
that the sender of the ISO has swept
better-priced protected quotations, so
that the recipient of that ISO may trade
through the price of the protected
quotation (Rule 611), or it could mean
that the sender of the ISO has swept
protected quotations at the same price
that it wishes to execute at (in addition
to another Trading Center in compliance with Rule
611 of Regulation NMS, the Block Size order would
lose the proposed Trade-at exemption, unless the
Block Size remaining after the first route and
execution meets the Block Size definition under the
Plan.
37 See 17 CFR 242.611.
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18:48 May 13, 2016
Jkt 238001
to any better-priced quotations), so the
recipient of that ISO may trade at the
price of the protected quotation (Tradeat). Given that the meaning of an ISO
may differ under Rule 611 and Trade-at,
the Exchange proposes Rule
11.21(a)(6)(D)(ii)(h) so that the recipient
of an ISO in a Test Group Three security
would know, upon receipt of that ISO,
that the Trading Center that sent the ISO
had already executed against the full
size of displayed quotations at that
price, e.g., the recipient of that ISO
could permissibly trade at the price of
the protected quotation.
The Exchange proposes to further
clarify the use of an ISO in connection
with the Trade-at requirement by
adopting, as part of proposed Rule
11.21(a)(7), a definition of ‘‘Trade-at
Intermarket Sweep Order.’’ As set forth
in the Plan and as noted above, the
definition of a Trade-at ISO does not
distinguish ISOs that are compliant with
Rule 611 from ISOs that are compliant
with Trade-at. The Exchange therefore
proposes to define a Trade-at ISO as a
limit order for a Pilot Security that
meets the following requirements: (1)
When routed to a Trading Center, the
limit order is identified as a Trade-at
Intermarket Sweep Order; (2)
simultaneously with the routing of the
limit order identified as a Trade-at
Intermarket Sweep Order, one or more
additional limit orders, as necessary, are
routed to execute against the full
displayed size of any protected bid, in
the case of a limit order to sell, or the
full displayed size of any protected
offer, in the case of a limit order to buy,
for the Pilot Security with a price that
is better than or equal to the limit price
of the limit order identified as a Tradeat Intermarket Sweep Order. These
additional routed orders also must be
marked as Trade-at Intermarket Sweep
Orders. The Exchange believes that this
proposed change will further clarify to
recipients of ISOs in Group Three
securities whether the ISO satisfies the
requirements of Rule 611 or Trade-at.
The exception under subparagraph j.
of proposed Rule 11.21(a)(6)(D)(ii)
applies when the order is executed as
part of a Negotiated Trade. The
subparagraph k. exception applies when
the order is executed when the Trading
Center displaying the Protected
Quotation that was traded at had
displayed, within one second prior to
execution of the transaction that
constituted the Trade-at, a Best
Protected Bid or Best Protected Offer, as
applicable, for the Pilot Security with a
price that was inferior to the price of the
Trade-at transaction.
The exception proposed in
subparagraph l. applies to a ‘‘stopped
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30401
order.’’ The stopped order exemption in
Rule 611 of SEC Regulation NMS
applies where ‘‘[t]he price of the tradethrough transaction was, for a stopped
buy order, lower than the national best
bid in the NMS stock at the time of
execution or, for a stopped sell order,
higher than the national best offer in the
NMS stock at the time of execution.’’ 38
The Trade-at stopped order exception
applies where ‘‘the price of the Tradeat transaction was, for a stopped buy
order, equal to the national best bid in
the Pilot Security at the time of
execution or, for a stopped sell order,
equal to the national best offer in the
Pilot Security at the time of
execution.’’ 39
To illustrate the application of the
stopped order exemption as it currently
operates under Rule 611 of SEC
Regulation NMS and as it is currently
proposed for Trade-at, assume the NBB
is $10.00 and another protected quote is
at $9.95. Under Rule 611 of SEC
Regulation NMS, a stopped order to buy
can be filled at $9.95 and the firm does
not have to send an ISO to access the
protected quote at $10.00 since the price
of the stopped order must be lower than
the NBB. For the stopped order to also
be executed at $9.95 and satisfy the
Trade-at requirements, the Trade-at
exception would have to be revised to
allow an order to execute at the price of
a protected quote which, in this case,
could be $9.95.
Based on the fact that a stopped order
would be treated differently under the
Regulation NMS Rule 611 exception
than under the proposed Trade-at
exception, the Exchange believes that it
is appropriate to amend the Trade-at
stopped order exception to ensure that
the application of this exception will
produce a consistent result under both
Regulation NMS and the Plan. The
Exchange therefore proposes to amend
the stopped order exception to allow a
transaction to satisfy the Trade-at
requirement if the stopped order price,
for a stopped buy order, is equal to or
less than the NBB, and for a stopped sell
order, is equal to or greater than the
NBO, as long as such order is priced at
an acceptable increment.
Proposed subparagraph l. to Rule
11.21(a)(6)(D)(ii) would define a
‘‘stopped order’’ as an order that is
executed by a Trading Center which, at
the time of order receipt, the Trading
Center had guaranteed an execution at
no worse than a specified price, where
(1) the stopped order was for the
account of a customer; (2) the customer
agreed to the specified price on an
38 See
39 See
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Plan, Section VI(D)(12).
16MYN1
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Federal Register / Vol. 81, No. 94 / Monday, May 16, 2016 / Notices
order-by-order basis; and (3) the price of
the Trade-at transaction was, for a
stopped buy order, equal to or less than
the National Best Bid in the Pilot
Security at the time of execution or, for
a stopped sell order, equal to or greater
than the National Best Offer in the Pilot
Security at the time of execution as long
as such order is priced at an acceptable
increment.40
The subparagraph m. exception
applies where the order is for a
fractional share of a Pilot Security,
provided that such fractional share
order was not the result of breaking an
order for one or more whole shares of
a Pilot Security into orders for fractional
shares or was not otherwise effected to
evade the requirements of the Trade-at
Prohibition or any other provisions of
the Plan.
The subparagraph n. exception
applies to bona fide errors transactions.
Following the adoption of Rule 611 and
its exceptions, the Commission issued
exemptive relief that created exceptions
from Rule 611 for certain error
correction transactions.41 The Exchange
has determined that it is appropriate to
incorporate the error correction
exception to the Trade-at prohibition, as
this exception is equally applicable in
the Trade-at context. Accordingly, the
Exchange is proposing to exempt certain
transactions to correct bona fide errors
in the execution of customer orders
from the Trade-at prohibition, subject to
the conditions set forth by the SEC’s
order exempting these transactions from
Rule 611 of SEC Regulation NMS.42
As with the corresponding exception
under Rule 611 of SEC Regulation NMS,
the Exchange proposes to define a ‘‘bona
fide error’’ as: (i) The inaccurate
conveyance or execution of any term of
an order including, but not limited to,
price, number of shares or other unit of
trading; identification of the security;
identification of the account for which
securities are purchased or sold; lost or
otherwise misplaced order tickets; short
sales that were instead sold long or vice
versa; or the execution of an order on
the wrong side of a market; (ii) the
unauthorized or unintended purchase,
asabaliauskas on DSK3SPTVN1PROD with NOTICES
40 The
Commission granted BZX an exemption
from Rule 608(c) related to this provision. See
Exemption Letter, supra note 20. The Exchange is
seeking the same exemptions as requested in the
October Exemption Request and the February
Exemption Request. Supra note 20.
41 See Securities Exchange Act Release No. 55884
(June 8, 2007), 72 FR 32926 (June 14, 2007).
42 The Commission granted BZX an exemption
from Rule 608(c) related to this provision. See
February Exemption Request and Exemption Letter,
supra note 20. The Exchange is seeking the same
exemptions as requested in the October Exemption
Request and the February Exemption Request.
Supra note 20.
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Jkt 238001
sale, or allocation of securities, or the
failure to follow specific client
instructions; (iii) the incorrect entry of
data into relevant systems, including
reliance on incorrect cash positions,
withdrawals, or securities positions
reflected in an account; or (iv) a delay,
outage, or failure of a communication
system used to transmit market data
prices or to facilitate the delivery or
execution of an order. The bona fide
error must be evidenced by objective
facts and circumstances, the Trading
Center must maintain documentation of
such facts and circumstances, and the
Trading Center must record the
transaction in its error account. To avail
itself of the exemption, the Trading
Center must establish, maintain, and
enforce written policies and procedures
that are reasonably designed to address
the occurrence of errors and, in the
event of an error, the use and terms of
a transaction to correct the error in
compliance with this exemption.
Finally, the Trading Center must
regularly surveil to ascertain the
effectiveness of its policies and
procedures to address errors and
transactions to correct errors and take
prompt action to remedy deficiencies in
such policies and procedures.43
Consistent with the Plan, the final
exception to the Trade-At Prohibition
and its accompanying supplementary
material applies to an order that is for
a fractional share of a Pilot Security.
The supplementary material provides
that such fractional share orders may
not be the result of breaking an order for
one or more whole shares of a Pilot
Security into orders for fractional shares
or that otherwise were effected to evade
the requirements of the Trade-at
Prohibition or any other provisions of
the Plan. In approving the Plan, the
Commission noted that this exception
was appropriate, as there could be
potential difficulty in the routing and
executing of fractional shares.44
The proposed rule change will
become operative upon the
commencement of the Pilot Period.
2. Statutory Basis
The Exchange believes that its
proposal is consistent with Section 6(b)
of the Act 45 in general, and furthers the
objectives of Section 6(b)(5) of the Act 46
in particular, in that it is designed to
promote just and equitable principles of
trade, to foster cooperation and
coordination with persons engaged in
43 See Securities Exchange Act Release No. 55884
(June 8, 2007), 72 FR 32926 (June 14, 2007).
44 See Approval Order, supra note 10, 80 FR at
27541.
45 15 U.S.C. 78f(b).
46 15 U.S.C. 78f(b)(5).
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facilitating transactions in securities, to
remove impediments to and perfect the
mechanism of a free and open market
and a national market system and, in
general, to protect investors and the
public interest.
The Exchange believes that this
proposal is consistent with the Act
because it implements, interprets, and
clarifies the provisions of the Plan, and
is designed to assist the Exchange and
Members in meeting regulatory
obligations pursuant to the Plan. In
approving the Plan, the SEC noted that
the Pilot was an appropriate, datadriven test that was designed to evaluate
the impact of a wider tick size on
trading, liquidity, and the market
quality of securities of smaller
capitalization companies, and was
therefore in furtherance of the purposes
of the Act. To the extent that this
proposal implements, interprets, and
clarifies the Plan and applies specific
requirements to Members, the Exchange
believes that this proposal is in
furtherance of the objectives of the Plan,
as identified by the SEC, and is
therefore consistent with the Act.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
The Exchange does not believe that
the proposed rule change will result in
any burden on competition that is not
necessary or appropriate in furtherance
of the purposes of the Act. The
Exchange notes that the proposed rule
change implements the provisions of the
Plan, and is designed to assist the
Exchange in meeting its regulatory
obligations pursuant to the Plan. The
Exchange also notes that the quoting
and trading requirements of the Plan
will apply equally to all Members that
trade Pilot Securities.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
Written comments were neither
solicited nor received.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Because the foregoing proposed rule
change does not: (A) Significantly affect
the protection of investors or the public
interest; (B) impose any significant
burden on competition; and (C) by its
terms, become operative for 30 days
from the date on which it was filed or
such shorter time as the Commission
may designate it has become effective
pursuant to Section 19(b)(3)(A) of the
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Federal Register / Vol. 81, No. 94 / Monday, May 16, 2016 / Notices
Act 47 and paragraph (f)(6) of Rule 19b–
4 thereunder,48 the Exchange has
designated this rule filing as noncontroversial. The Exchange has given
the Commission written notice of its
intent to file the proposed rule change,
along with a brief description and text
of the proposed rule change at least five
business days prior to the date of filing
of the proposed rule change, or such
shorter time as designated by the
Commission.
At any time within 60 days of the
filing of the proposed rule change, the
Commission summarily may
temporarily suspend such rule change if
it appears to the Commission that such
action is: (1) Necessary or appropriate in
the public interest; (2) for the protection
of investors; or (3) otherwise in
furtherance of the purposes of the Act.
If the Commission takes such action, the
Commission shall institute proceedings
to determine whether the proposed rule
should be approved or disapproved.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
asabaliauskas 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–
BatsEDGA–2016–08 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–BatsEDGA–2016–08. This
file number should be included on the
subject line if email is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
Internet Web site (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for Web site viewing and
printing in the Commission’s Public
Reference Room, 100 F Street, NE.,
Washington, DC 20549, on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of the
filing also will be available for
inspection and copying at the principal
office of the Exchange. All comments
received will be posted without change;
the Commission does not edit personal
identifying information from
submissions. You should submit only
information that you wish to make
available publicly. All submissions
should refer to File Number SR–
BatsEDGA–2016–08, and should be
submitted on or before June 6, 2016.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.49
Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016–11403 Filed 5–13–16; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–77796; File No. SR–ISE
Mercury–2016–10]
Self-Regulatory Organizations; ISE
Mercury, LLC; Notice of Filing of
Proposed Rule Change Relating to a
Corporate Transaction Involving Its
Indirect Parent
May 10, 2016.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (the
‘‘Act’’),1 and Rule 19b–4 thereunder,2
notice is hereby given that on April 28,
2016 ISE Mercury, LLC (the ‘‘Exchange’’
or ‘‘ISE Mercury’’) 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 self-regulatory
organization. The Commission is
publishing this notice to solicit
comments on the proposed rule change
from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of the Substance
of the Proposed Rule Change
The Exchange is hereby filing with
the U.S. Securities and Exchange
Commission (‘‘Commission’’) a
proposed rule change (the ‘‘Proposed
49 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
47 15
U.S.C. 78s(b)(3)(A).
48 17 CFR 240.19b–4.
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30403
Rule Change’’) in connection with a
proposed business transaction (the
‘‘Transaction’’) involving the Exchange’s
ultimate, indirect, non-U.S. upstream
¨
owners, Deutsche Borse AG (‘‘Deutsche
¨
Borse’’) and Eurex Frankfurt AG (‘‘Eurex
Frankfurt’’), and Nasdaq, Inc.
(‘‘Nasdaq’’). Nasdaq is the parent
company of The NASDAQ Stock Market
LLC (‘‘NASDAQ Exchange’’), NASDAQ
PHLX LLC (‘‘Phlx Exchange’’),
NASDAQ BX, Inc. (‘‘BX Exchange’’),
Boston Stock Exchange Clearing
Corporation (‘‘BSECC’’) and Stock
Clearing Corporation of Philadelphia
(‘‘SCCP’’).3 Upon completion of the
Transaction (the ‘‘Closing’’), the
Exchange’s indirect parent company,
U.S. Exchange Holdings, Inc. (‘‘U.S.
Exchange Holdings’’), will become a
direct subsidiary of Nasdaq. The
Exchange will therefore become an
indirect subsidiary of Nasdaq and, in
addition to the Exchange’s current
affiliation with ISE Gemini, LLC (‘‘ISE
Gemini’’) and International Securities
Exchange, LLC (‘‘ISE’’), an affiliate of
NASDAQ Exchange, Phlx Exchange, BX
Exchange, BSECC and SCCP through
common, ultimate ownership by
Nasdaq. Nasdaq will become the
ultimate parent of the Exchange.4
In order to effect the Transaction, the
Exchange hereby seeks the
Commission’s approval of the following:
(i) That certain corporate resolutions
that were previously established by
entities that will cease to be non-U.S.
upstream owners of the Exchange after
the Transaction will cease to be
considered rules of the Exchange upon
Closing; (ii) that certain governing
documents of Nasdaq will be considered
rules of the Exchange upon Closing; (iii)
that the Third Amended and Restated
Trust Agreement (the ‘‘Trust
Agreement’’) that currently exists among
International Securities Exchange
Holdings, Inc. (‘‘ISE Holdings’’), U.S.
Exchange Holdings, and the Trustees (as
defined therein) with respect to the ‘‘ISE
Trust’’ will cease to be considered rules
of the Exchange upon Closing and,
thereafter, that the parties to the Trust
Agreement would be permitted to take
the corporate steps necessary to repeal
the Trust Agreement and dissolve the
ISE Trust; (iv) to amend and restate the
Second Amended and Restated
3 See Securities Exchange Act Release Nos. 58179
(July 17, 2008), 73 FR 42874 (July 23, 2008) (SR–
Phlx–2008–31); 58324 (August 7, 2008), 73 FR
46936 (August 12, 2008) (SR–BSE–2008–02; SR–
BSE–2008–23; SR–BSE–2008–25; SR–BSECC–2008–
01).
4 The Exchange’s current affiliates, ISE Gemini
and ISE, have submitted nearly identical proposed
rule changes. See SR–ISEGemini–2016–05 and SR–
ISE–2016–11.
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]]>Agencies
[Federal Register Volume 81, Number 94 (Monday, May 16, 2016)]
[Notices]
[Pages 30397-30403]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-11403]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-77792; File No. SR-BatsEDGA-2016-08]
Self-Regulatory Organizations; Bats EDGA Exchange, Inc. f/k/a
EDGA Exchange, Inc.; Notice of Filing and Immediate Effectiveness of a
Proposed Rule Change To Adopt Exchange Rule 11.21(a) To Implement the
Quoting and Trading Provisions of the Regulation NMS Plan To Implement
a Tick Size Pilot Program
May 10, 2016.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given
that on May 2, 2016, Bats EDGA Exchange, Inc. f/k/a EDGA Exchange, Inc.
(the ``Exchange'' or ``EDGA'') 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. The Exchange has designated this proposal as a ``non-
controversial'' proposed rule change pursuant to Section 19(b)(3)(A) of
the Act \3\ and Rule 19b-4(f)(6)(iii) thereunder,\4\ which renders it
effective upon filing with the Commission. The Commission is publishing
this notice to solicit comments on the proposed rule change from
interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ 15 U.S.C. 78s(b)(3)(A).
\4\ 17 CFR 240.19b-4(f)(6)(iii).
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange filed a proposal to adopt Exchange Rule 11.21(a) to
implement the quoting and trading provisions of the Regulation NMS Plan
to Implement a Tick Size Pilot Program (``Plan''). The proposed rule
change is substantially similar to a proposed rule change approved by
the Commission by the Bats BZX Exchange, Inc. f/k/a BATS Exchange, Inc.
(``BZX'') to adopt BZX Rule 11.27(a) which also implemented the quoting
and trading provisions of the Plan.\5\
---------------------------------------------------------------------------
\5\ See Securities Exchange Act Release No. 77291 (March 3,
2016), 81 FR 12543 (March 9, 2016) (order approving SR-BATS-2015-
108).
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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
On August 25, 2014, NYSE Group, Inc., on behalf of the Exchange,
BZX, Chicago Stock Exchange, Inc., Bats BYX Exchange, Inc. f/k/a BATS
Y-Exchange, Inc., Bats EDGX Exchange, Inc. f/k/a EDGX Exchange, Inc.,
Financial Industry Regulatory Authority, Inc. (``FINRA''), NASDAQ OMX
BX, Inc., NASDAQ OMX PHLX LLC, the Nasdaq Stock Market LLC, New York
Stock Exchange LLC (``NYSE''), NYSE MKT LLC, and NYSE Arca, Inc.
(collectively ``Participants''), filed with the
[[Page 30398]]
Commission, pursuant to Section 11A of the Act \6\ and Rule 608 of
Regulation NMS thereunder, the Plan to implement a tick size pilot
program (``Pilot'').\7\ The Participants filed the Plan to comply with
an order issued by the Commission on June 24, 2014.\8\ The Plan \9\ was
published for comment in the Federal Register on November 7, 2014, and
approved by the Commission, as modified, on May 6, 2015.\10\
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\6\ 15 U.S.C. 78k-1.
\7\ See Letter from Brendon J. Weiss, Vice President,
Intercontinental Exchange, Inc., to Secretary, Commission, dated
August 25, 2014.
\8\ See Securities Exchange Act Release No. 72460 (June 24,
2014), 79 FR 36840 (June 30, 2014).
\9\ Unless otherwise specified, capitalized terms used in this
rule filing are defined as set forth in the Plan. The Exchange also
proposes supplementary material as part of this proposed rule change
to, among other things, provide that the terms used in proposed Rule
11.21 shall have the same meaning as provided in the Plan, unless
otherwise specified.
\10\ See Securities Exchange Act Release No. 74892 (May 6,
2015), 80 FR 27514 (May 13, 2015) (``Approval Order'').
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The Plan is designed to allow the Commission, market participants,
and the public to study and assess the impact of increment conventions
on the liquidity and trading of the common stocks of small-
capitalization companies. Each Participant is required to comply with,
and to enforce compliance by its member organizations, as applicable,
with the provisions of the Plan. As is described more fully below, the
proposed rules would require member organizations to comply with the
applicable quoting and trading increments for Pilot Securities.\11\
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\11\ The Exchange proposes to add Information and Policy .03 to
Rule 11.21 to provide that the Rule shall be in effect during a
pilot period to coincide with the pilot period for the Plan
(including any extensions to the pilot period for the Plan).
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The Pilot will include stocks of companies with $3 billion or less
in market capitalization, an average daily trading volume of one
million shares or less, and a volume weighted average price of at least
$2.00 for every trading day. The Pilot will consist of a control group
of approximately 1400 Pilot Securities and three test groups with 400
Pilot Securities in each selected by a stratified sampling.\12\ During
the pilot, Pilot securities in the control group will be quoted and
traded at the currently permissible increments. Pilot Securities in the
first test group (``Test Group One'') will be quoted in $0.05 minimum
increments but will continue to trade at any price increment that is
currently permitted.\13\ Pilot Securities in the second test group
(``Test Group Two'') will be quoted in $0.05 minimum increments and
will trade at $0.05 minimum increments subject to a midpoint exception,
a retail investor order exception, and a negotiated trade
exception.\14\ Pilot Securities in the third test group (``Test Group
Three'') will be subject to the same restrictions as Test Group Two and
also will be subject to the ``Trade-at'' requirement to prevent price
matching by a market participant that is not displaying at a price of a
Trading Center's \15\ ``Best Protected Bid'' or ``Best Protected
Offer,'' unless an enumerated exception applies.\16\ In addition to the
exceptions provided under Test Group Two, an exception for Block Size
orders and exceptions that mirror those under Rule 611 of Regulation
NMS \17\ will apply to the Trade-at requirement.
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\12\ See Section V of the Plan for identification of Pilot
Securities, including criteria for selection and grouping.
\13\ See Section VI(B) of the Plan.
\14\ See Section VI(C) of the Plan.
\15\ The Plan incorporates the definition of ``Trading Center''
from Rule 600(b)(78) of Regulation NMS. Regulation NMS defines a
Trading Center as ``a national securities exchange or national
securities association that operates an SRO trading facility, an
alternative trading system, an exchange market maker, an OTC market
maker, or any other broker or dealer that executes orders internally
by trading as principal or crossing orders as agent.''
\16\ See Section VI(D) of the Plan.
\17\ 17 CFR 242.611.
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Compliance With the Quoting and Trading Increments of the Plan
The Plan requires the Exchange to establish, maintain, and enforce
written policies and procedures that are reasonably designed to comply
with applicable quoting and trading requirements specified in the Plan.
Accordingly, the Exchange is proposing new paragraph (a) to Rule 11.21
(Compliance with Regulation NMS Plan to Implement a Tick Size Pilot
Program) to require Members \18\ to comply with the quoting and trading
provisions of the Plan.
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\18\ The term ``Member'' is defined as ``any registered broker
or dealer, or any person associated with a registered broker or
dealer, that has been admitted to membership in the Exchange. A
Member will have the status of a ``member'' of the Exchange as that
term is defined in Section 3(a)(3) of the Act.'' See Exchange Rule
1.5(n).
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Proposed Rule 11.21(a) (Compliance with Quoting and Trading
Restrictions) sets forth the requirements for the Exchange and Members
in meeting their obligations under the Plan. Rule 11.21(a)(1) will
require Members to establish, maintain and enforce written policies and
procedures that are reasonably designed to comply with the applicable
quoting and trading requirements of the Plan. Rule 11.21(a)(2) provides
that the Exchange Systems \19\ will not display, quote or trade in
violation of the applicable quoting and trading requirements for a
Pilot Security specified in the Plan and this Rule, unless such
quotation or transaction is specifically exempted under the Plan.
---------------------------------------------------------------------------
\19\ The term ``System'' is defined as ``the electronic
communications and trading facility designated by the Board through
which securities orders of Users are consolidated for ranking,
execution and, when applicable, routing away.'' See Exchange Rule
1.5(aa).
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Proposed Rule 11.21(a)(3) clarifies the treatment of Pilot
Securities that drop below $1.00 during the Pilot Period. In
particular, Rule 11.21(a)(3) provides that, if the price of a Pilot
Security drops below $1.00 during regular trading hours on any trading
day, such Pilot Security will continue to be a Pilot Security subject
to the Plan. However, if the Closing Price of a Pilot Security on any
given trading day is below $1.00, such Pilot Security will be moved out
of its Pilot Test Group into the Control Group, and may then be quoted
and traded at any price increment that is currently permitted for the
remainder of the Pilot Period.\20\ Rule 11.21(a)(3) also provides that,
notwithstanding anything contained within these rules to the contrary,
Pilot Securities (whether in the Control Group or any Pilot Test Group)
will continue to be subject to the data collection requirements of the
Plan at all times during the Pilot Period and for the six-month period
following the end of the Pilot Period.
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\20\ The NYSE, on behalf of the Plan Participants, submitted a
letter to Commission requesting exemption from certain provisions of
the Plan related to quoting and trading. See letter from Elizabeth
K. King, NYSE, to Brent J. Fields, Secretary, Commission, dated
October 14, 2015 (``October Exemption Request''). FINRA, also on
behalf of the Plan Participants, submitted a separate letter to
Commission requesting additional exemptions from certain provisions
of the Plan related to quoting and trading. See letter from Marcia
E. Asquith, Senior Vice President and Corporate Secretary, FINRA, to
Robert W. Errett, Deputy Secretary, Commission, dated February 23,
2016 (``February Exemption Request''). The Commission, pursuant to
its authority under Rule 608(e) of Regulation NMS, granted BZX a
limited exemption from the requirement to comply with certain
provisions of the Plan as specified in the letter and noted herein.
See letter from David Shillman, Associate Director, Division of
Trading and Markets, Commission to Eric Swanson, General Counsel,
BZX, dated March 3, 2016 (``Exemption Letter''). The Exchange is
seeking the same exemptions as requested in the October Exemption
Request and the February Exemption Request.
---------------------------------------------------------------------------
In approving the Plan, the Commission noted that the Participants
had proposed additional selection criteria to minimize the likelihood
that securities that trade with a share price of $1.00 or less would be
included in the Pilot, and stated that, once established, the universe
of Pilot Securities should stay as consistent as possible so that the
analysis and data can be accurate throughout the Pilot
[[Page 30399]]
Period.\21\ The Exchange notes that a Pilot Security that drops below
$1.00 during regular trading hours will remain in its applicable Test
Group; a Pilot Security will only be moved to the Control Group if its
Closing Price on any given trading day is below $1.00. The Exchange
believes that this provision is appropriate because it will help ensure
that Pilot Securities in Test Groups One, Two and Three continue to
reflect the Pilot's selection criteria, helping ensure the accuracy of
the resulting data. The Exchange also believes that this provision is
appropriate because it responds to comments that the Plan address the
treatment of securities that trade below $1.00 during the Pilot
Period.\22\
---------------------------------------------------------------------------
\21\ See Approval Order, supra note 10, 80 FR at 27535.
\22\ Id.
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Proposed Rule 11.21(a)(4) sets forth the applicable limitations for
securities in Test Group One. Consistent with the language of the Plan,
Rule 11.21(a)(4) provides that no Member may display, rank, or accept
from any person any displayable or non-displayable bids or offers,
orders, or indications of interest in any Pilot Security in Test Group
One in increments other than $0.05. However, orders priced to execute
at the midpoint of the national best bid and national best offer
(``NBBO'') or best protected bid and best protected offer (``PBBO'')
\23\ and orders entered in a Participant-operated retail liquidity
program may be ranked and accepted in increments of less than $0.05.
Pilot Securities in Test Group One may continue to trade at any price
increment that is currently permitted by applicable Participant, SEC
and Exchange rules.
---------------------------------------------------------------------------
\23\ Regulation NMS defines a protected bid or protected offer
as a quotation in an NMS stock that (1) is displayed by an automated
trading center; (2) is disseminated pursuant to an effective
national market system plan; and (3) is an automated quotation that
is the best bid or best offer of a national securities exchange, the
best bid or best offer of The Nasdaq Stock Market, Inc., or the best
bid or best offer of a national securities association other than
the best bid or best offer of The Nasdaq Stock Market, Inc. See 17
CFR 242.600(57). In the Approval Order, the Commission noted that
the protected quotation standard encompasses the aggregate of the
most aggressively priced displayed liquidity on all Trading Centers,
whereas the NBBO standard is limited to the single best order in the
market. See Approval Order, supra note 10, 80 FR at 27539.
---------------------------------------------------------------------------
Proposed Rule 11.21(a)(5) sets forth the applicable quoting and
trading requirements for securities in Test Group Two. This provision
states that no Member may display, rank, or accept from any person any
displayable or non-displayable bids or offers, orders, or indications
of interest in any Pilot Security in Test Group Two in increments other
than $0.05. However, orders priced to execute at the midpoint of the
NBBO or PBBO and orders entered in a Participant-operated retail
liquidity program may be ranked and accepted in increments of less than
$0.05.
Proposed Rule 11.21(a)(5) also sets forth the applicable trading
restrictions for Test Group Two securities. Absent any of the
exceptions listed in the Rule, no Member may execute orders in any
Pilot Security in Test Group Two in price increments other than $0.05.
The $0.05 trading increment will apply to all trades, including
Brokered Cross Trades.
Consistent with the language of the Plan, the Rule provides that
Pilot Securities in Test Group Two may trade in increments of less than
$0.05 under the following circumstances: (1) Trading may occur at the
midpoint between the NBBO or the PBBO; (2) Retail Investor Orders may
be provided with price improvement that is at least $0.005 better than
the PBBO; and (3) Negotiated Trades may trade in increments of less
than $0.05.
The Exchange also proposes to add an exception to Rule 11.21(a)(5)
to permit Members to fill a customer order in a Pilot Security in Test
Group Two at a non-nickel increment to comply with Exchange Rule 12.6
(Prohibition Against Trading Ahead of Customer Orders) under limited
circumstances. Specifically, the exception would allow the execution of
a customer order following a proprietary trade by the Member at an
increment other than $0.05 in the same security, on the same side and
at the same price as (or within the prescribed amount of) a customer
order owed a fill pursuant to Exchange Rule 12.6, where the triggering
proprietary trade was permissible pursuant to an exception under the
Plan.\24\
---------------------------------------------------------------------------
\24\ The Commission granted BZX an exemption from Rule 608(c)
related to this provision. See February Exemption Request and
Exemption Letter, supra note 20. The Exchange is seeking the same
exemptions as requested in the October Exemption Request and the
February Exemption Request. Supra note 20.
---------------------------------------------------------------------------
Thus, the Exchange is proposing to add a customer order protection
exception to Rule 11.21(a)(5) that would permit Members to trade Pilot
Securities in Test Group Two in increments less than $0.05, and where
the Member is executing a customer order to comply with Exchange Rule
12.6 following the execution of a proprietary trade by the Member at an
increment other than $0.05 where such proprietary trade was permissible
pursuant to an exception under the Plan. The Exchange believes that
this approach best facilitates the ability of Members to continue to
protect customer orders while retaining the flexibility to engage in
proprietary trades that comply with an exception to the Plan.
Proposed Rule 11.21(a)(6) sets forth the applicable quoting and
trading restrictions for Pilot Securities in Test Group Three. The rule
provides that no Member may display, rank, or accept from any person
any displayable or non-displayable bids or offers, orders, or
indications of interest in any Pilot Security in Test Group Three in
increments other than $0.05. However, orders priced to execute at the
midpoint of the NBBO or PBBO and orders entered in a Participant-
operated retail liquidity program may be ranked and accepted in
increments of less than $0.05. The rule also states that, absent any of
the applicable exceptions, no Member that operates a Trading Center may
execute orders in any Pilot Security in Test Group Three in price
increments other than $0.05. The $0.05 trading increment will apply to
all trades, including Brokered Cross Trades.\25\
---------------------------------------------------------------------------
\25\ A brokered cross trade is a trade that a broker-dealer that
is a member of a Participant executes directly by matching
simultaneous buy and sell orders for a Pilot Security. See Section
I(G) of the Plan.
---------------------------------------------------------------------------
Proposed Rule 11.21(a)(6)(C) sets forth the exceptions pursuant to
which Pilot Securities in Test Group Three may trade in increments of
less than $0.05. First, trading may occur at the midpoint between the
NBBO or PBBO. Second, Retail Investor Orders may be provided with price
improvement that is at least $0.005 better than the PBBO. Third,
Negotiated Trades may trade in increments of less than $0.05.
Similar to that proposed under Rule 11.21(a)(5) described above,
the Exchange also proposes to add an exception to Rule 11.21(a)(6) to
permit Members to fill a customer order in a Pilot Security in Test
Group Three at a non-nickel increment to comply with Exchange Rule 12.6
(Prohibition Against Trading Ahead of Customer Orders) under limited
circumstances. Specifically, the exception would allow the execution of
a customer order following a proprietary trade by the Member at an
increment other than $0.05 in the same security, on the same side and
at the same price as (or within the prescribed amount of) a customer
order owed a fill pursuant to Exchange Rule 12.6, where the triggering
proprietary trade was permissible pursuant to an exception under the
Plan.\26\ Thus, the Exchange is proposing
[[Page 30400]]
to add a customer order protection exception to Rule 11.21(a)(6) that
would permit Members to trade Pilot Securities in Test Group Three in
increments less than $0.05, and where the Member is executing a
customer order to comply with Exchange Rule 12.6 following the
execution of a proprietary trade by the Member at an increment other
than $0.05 where such proprietary trade was permissible pursuant to an
exception under the Plan.
---------------------------------------------------------------------------
\26\ See supra note 22. The Exchange is seeking the same
exemptions as requested in the October Exemption Request and the
February Exemption Request. Supra note 20.
---------------------------------------------------------------------------
Proposed Rule 11.21(a)(6)(D) sets forth the ``Trade-at
Prohibition,'' which is the prohibition against executions by a Member
that operates a Trading Center of a sell order for a Pilot Security in
Test Group Three at the price of a Protected Bid or the execution of a
buy order for a Pilot Security in Test Group Three at the price of a
Protected Offer during regular trading hours, absent any of the
exceptions set forth in Rule 11.21(a)(6)(D). Consistent with the Plan,
the rule reiterates that a Member that operates a Trading Center that
is displaying a quotation, via either a processor or an SRO quotation
feed, that is a Protected Bid or Protected Offer is permitted to
execute orders at that level, but only up to the amount of its
displayed size. A Member that operates a Trading Center that was not
displaying a quotation that is the same price as a Protected Quotation,
via either a processor or an SRO quotation feed, is prohibited from
price-matching protected quotations unless an exception applies.
Consistent with the Plan, proposed Rule 11.21(a)(6)(D) also sets
forth the exceptions to the Trade-at prohibition, pursuant to which a
Member that operates a Trading Center may execute a sell order for a
Pilot Security in Test Group Three at the price of a Protected Bid or
execute a buy order for a Pilot Security in Test Group Three at the
price of a Protected Offer. The first exception to the Trade-at
Prohibition is the ``display exception,'' which allows a trade to occur
at the price of the Protected Quotation, up to the Trading Center's
full displayed size, if the order ``is executed by a trading center
that is displaying a quotation.'' \27\
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\27\ See Section VI(D)(1) of the Plan.
---------------------------------------------------------------------------
In Rule 11.21(a)(6)(D), the Exchange proposes that a Member that
utilizes the independent aggregation unit concept may satisfy the
display exception only if the same independent aggregation unit that
displays interest via either a processor or an SRO Quotation Feed also
executes an order in reliance upon this exception. The rule provides
that ``independent aggregation unit'' has the same meaning as provided
under Rule 200(f) of SEC Regulation SHO.\28\ This provision also
recognizes that not all members may utilize the independent aggregation
unit concept as part of their regulatory structure, and still permits
such members to utilize the display exception if all the other
requirements of that exception are met.
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\28\ 17 CFR 242.200. Treatment as an independent aggregation
unit is available if traders in an aggregation unit pursue only the
particular trading objective(s) or strategy(ies) of that aggregation
unit and do not coordinate that strategy with any other aggregation
unit. Therefore, one independent aggregation unit within a Trading
Center cannot execute trades pursuant to the display exception in
reliance on quotations displayed by a different independent
aggregation unit. As an example, an agency desk of a Trading Center
cannot rely on the quotation of a proprietary desk in a separate
independent aggregation unit at that same Trading Center.
---------------------------------------------------------------------------
As initially proposed by the Participants, the Plan contained an
additional condition to the display exception, which would have
required that, where the quotation is displayed through a national
securities exchange, the execution at the size of the order must occur
against the displayed size on that national securities exchange; and
where the quotation is displayed through the Alternative Display
Facility or another facility approved by the Commission that does not
provide execution functionality, the execution at the size of the order
must occur against the displayed size in accordance with the rules of
the Alternative Display Facility of such approved facility (``venue
limitation'').\29\ Some commenters stated that this provision was anti-
competitive, as it would have forced off-exchange Trading Centers to
route orders to the venue on which the order was displayed.\30\
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\29\ See Securities Exchange Act Release No. 73511 (November 3,
2014), 79 FR 66423, 66437 (November 7, 2014).
\30\ See Approval Order, supra note 10, 80 FR at 27540.
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In approving the Plan, the Commission modified the Trade-At
Prohibition to remove the venue limitation.\31\ The Commission noted
that the venue limitation was not prescribed in its Order mandating the
filing of the Plan.\32\ The Commission also noted that the venue
limitation would have unnecessarily restricted the ability of off-
exchange market participants to execute orders in Test Group Three
Securities, and that removing the venue limitation should mitigate
concerns about the cost and complexity of the Pilot by reducing the
need for off-exchange Trading Centers to route to the exchange.\33\ The
Commission also stated that the venue limitation did not create any
additional incentives to display liquidity in furtherance of the
purposes of the Trade-At Prohibition, because the requirement that a
Trading Center could only trade at a protected quotation up to its
displayed size should be sufficient to incentivize displayed
liquidity.\34\
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\31\ Id.
\32\ Id.
\33\ Id.
\34\ Id.
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Consistent with Plan and the SEC's determination to remove the
venue limitation, the Exchange is making clear that the display
exception applies to trades done by a Trading Center otherwise than on
an exchange where the Trading Center has previously displayed a
quotation in either an agency or a principal capacity. As part of the
display exception, the Exchange also proposes that a Trading Center
that is displaying a quotation as agent or riskless principal may only
execute as agent or riskless principal, while a Trading Center
displaying a quotation as principal (excluding riskless principal) may
execute either as principal or agent or riskless principal. The
Exchange believes this is consistent with the Plan and the objective of
the Trade-at Prohibition, which is to promote the display of liquidity
and generally to prevent any Trading Center that is not quoting from
price-matching Protected Quotations. Providing that a Trading Center
may not execute on a proprietary basis in reliance on a quotation
representing customer interest (whether agency or riskless principal)
ensures that the Trading Center cannot avoid compliance with the Trade-
at Prohibition by trading on a proprietary basis in reliance on a
quotation that does not represent such Trading Center's own interest.
Where a Trading Center is displaying a quotation at the same price as a
Protected Quotation in a proprietary capacity, transactions in any
capacity at the price and up to the size of such Trading Center's
displayed quotation would be permissible. Transactions executed
pursuant to the display exception may occur on the venue on which such
quotation is displayed or over the counter.
The proposal also excepts Block Size orders \35\ and permits
Trading Centers to trade at the price of a Protected Quotation,
provided that the order is of Block Size at the time of origin and is
not an aggregation of non-block orders, broken into orders smaller than
Block Size prior to submitting the order to a Trading Center for
execution; or executed on multiple Trading Centers.\36\
[[Page 30401]]
The Plan only provides that Block Size orders shall be exempted from
the Trade-At Prohibition. In requiring that the order be of Block Size
at the time of origin and not an aggregation of non-block orders, or
broken into orders smaller than Block Size prior to submitting the
order to a Trading Center for execution; or executed on multiple
Trading Centers, the Exchange believes that it is providing clarity as
to the circumstances under which a Block Size order will be excepted
from the Trade-At Prohibition.
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\35\ ``Block Size'' is defined in the Plan as an order (1) of at
least 5,000 shares or (2) for a quantity of stock having a market
value of at least $100,000.
\36\ Once a Block Size order or portion of such Block Size order
is routed from one Trading Center to another Trading Center in
compliance with Rule 611 of Regulation NMS, the Block Size order
would lose the proposed Trade-at exemption, unless the Block Size
remaining after the first route and execution meets the Block Size
definition under the Plan.
---------------------------------------------------------------------------
Consistent with the Plan, the proposal also excepts an order that
is a Retail Investor Order that is executed with at least $0.005 price
improvement.
The exceptions set forth in proposed Rule 11.21(a)(6)(D)(ii) d.
through n. are based on the exceptions found in Rule 611 of Regulation
NMS.\37\ The subparagraph d. exception applies when the order is
executed when the Trading Center displaying the Protected Quotation
that was traded at was experiencing a failure, material delay, or
malfunction of its systems or equipment. The subparagraph e. exception
applies to an order that is executed as part of a transaction that was
not a ``regular way'' contract. The subparagraph f. exception applies
to an order that is executed as part of a single-priced opening,
reopening, or closing transaction by the Trading Center. The
subparagraph g. exception applies to an order that is executed when a
Protected Bid was priced higher than a Protected Offer in a Pilot
Security.
---------------------------------------------------------------------------
\37\ See 17 CFR 242.611.
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The subparagraph h. exception applies when the order is identified
as a Trade-at Intermarket Sweep Order. The subparagraph i. exception
applies when the order is executed by a Trading Center that
simultaneously routed Trade-at Intermarket Sweep Orders to execute
against the full displayed size of a Protected Quotation with a price
that is better than or equal to the limit price of the limit order
identified as a Trade-at Intermarket Sweep Order. Depending on whether
Rule 611 or the Trade-at requirement applies, an ISO may mean that the
sender of the ISO has swept better-priced protected quotations, so that
the recipient of that ISO may trade through the price of the protected
quotation (Rule 611), or it could mean that the sender of the ISO has
swept protected quotations at the same price that it wishes to execute
at (in addition to any better-priced quotations), so the recipient of
that ISO may trade at the price of the protected quotation (Trade-at).
Given that the meaning of an ISO may differ under Rule 611 and Trade-
at, the Exchange proposes Rule 11.21(a)(6)(D)(ii)(h) so that the
recipient of an ISO in a Test Group Three security would know, upon
receipt of that ISO, that the Trading Center that sent the ISO had
already executed against the full size of displayed quotations at that
price, e.g., the recipient of that ISO could permissibly trade at the
price of the protected quotation.
The Exchange proposes to further clarify the use of an ISO in
connection with the Trade-at requirement by adopting, as part of
proposed Rule 11.21(a)(7), a definition of ``Trade-at Intermarket Sweep
Order.'' As set forth in the Plan and as noted above, the definition of
a Trade-at ISO does not distinguish ISOs that are compliant with Rule
611 from ISOs that are compliant with Trade-at. The Exchange therefore
proposes to define a Trade-at ISO as a limit order for a Pilot Security
that meets the following requirements: (1) When routed to a Trading
Center, the limit order is identified as a Trade-at Intermarket Sweep
Order; (2) simultaneously with the routing of the limit order
identified as a Trade-at Intermarket Sweep Order, one or more
additional limit orders, as necessary, are routed to execute against
the full displayed size of any protected bid, in the case of a limit
order to sell, or the full displayed size of any protected offer, in
the case of a limit order to buy, for the Pilot Security with a price
that is better than or equal to the limit price of the limit order
identified as a Trade-at Intermarket Sweep Order. These additional
routed orders also must be marked as Trade-at Intermarket Sweep Orders.
The Exchange believes that this proposed change will further clarify to
recipients of ISOs in Group Three securities whether the ISO satisfies
the requirements of Rule 611 or Trade-at.
The exception under subparagraph j. of proposed Rule
11.21(a)(6)(D)(ii) applies when the order is executed as part of a
Negotiated Trade. The subparagraph k. exception applies when the order
is executed when the Trading Center displaying the Protected Quotation
that was traded at had displayed, within one second prior to execution
of the transaction that constituted the Trade-at, a Best Protected Bid
or Best Protected Offer, as applicable, for the Pilot Security with a
price that was inferior to the price of the Trade-at transaction.
The exception proposed in subparagraph l. applies to a ``stopped
order.'' The stopped order exemption in Rule 611 of SEC Regulation NMS
applies where ``[t]he price of the trade-through transaction was, for a
stopped buy order, lower than the national best bid in the NMS stock at
the time of execution or, for a stopped sell order, higher than the
national best offer in the NMS stock at the time of execution.'' \38\
The Trade-at stopped order exception applies where ``the price of the
Trade-at transaction was, for a stopped buy order, equal to the
national best bid in the Pilot Security at the time of execution or,
for a stopped sell order, equal to the national best offer in the Pilot
Security at the time of execution.'' \39\
---------------------------------------------------------------------------
\38\ See 17 CFR 242.611(b)(9).
\39\ See Plan, Section VI(D)(12).
---------------------------------------------------------------------------
To illustrate the application of the stopped order exemption as it
currently operates under Rule 611 of SEC Regulation NMS and as it is
currently proposed for Trade-at, assume the NBB is $10.00 and another
protected quote is at $9.95. Under Rule 611 of SEC Regulation NMS, a
stopped order to buy can be filled at $9.95 and the firm does not have
to send an ISO to access the protected quote at $10.00 since the price
of the stopped order must be lower than the NBB. For the stopped order
to also be executed at $9.95 and satisfy the Trade-at requirements, the
Trade-at exception would have to be revised to allow an order to
execute at the price of a protected quote which, in this case, could be
$9.95.
Based on the fact that a stopped order would be treated differently
under the Regulation NMS Rule 611 exception than under the proposed
Trade-at exception, the Exchange believes that it is appropriate to
amend the Trade-at stopped order exception to ensure that the
application of this exception will produce a consistent result under
both Regulation NMS and the Plan. The Exchange therefore proposes to
amend the stopped order exception to allow a transaction to satisfy the
Trade-at requirement if the stopped order price, for a stopped buy
order, is equal to or less than the NBB, and for a stopped sell order,
is equal to or greater than the NBO, as long as such order is priced at
an acceptable increment.
Proposed subparagraph l. to Rule 11.21(a)(6)(D)(ii) would define a
``stopped order'' as an order that is executed by a Trading Center
which, at the time of order receipt, the Trading Center had guaranteed
an execution at no worse than a specified price, where (1) the stopped
order was for the account of a customer; (2) the customer agreed to the
specified price on an
[[Page 30402]]
order-by-order basis; and (3) the price of the Trade-at transaction
was, for a stopped buy order, equal to or less than the National Best
Bid in the Pilot Security at the time of execution or, for a stopped
sell order, equal to or greater than the National Best Offer in the
Pilot Security at the time of execution as long as such order is priced
at an acceptable increment.\40\
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\40\ The Commission granted BZX an exemption from Rule 608(c)
related to this provision. See Exemption Letter, supra note 20. The
Exchange is seeking the same exemptions as requested in the October
Exemption Request and the February Exemption Request. Supra note 20.
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The subparagraph m. exception applies where the order is for a
fractional share of a Pilot Security, provided that such fractional
share order was not the result of breaking an order for one or more
whole shares of a Pilot Security into orders for fractional shares or
was not otherwise effected to evade the requirements of the Trade-at
Prohibition or any other provisions of the Plan.
The subparagraph n. exception applies to bona fide errors
transactions. Following the adoption of Rule 611 and its exceptions,
the Commission issued exemptive relief that created exceptions from
Rule 611 for certain error correction transactions.\41\ The Exchange
has determined that it is appropriate to incorporate the error
correction exception to the Trade-at prohibition, as this exception is
equally applicable in the Trade-at context. Accordingly, the Exchange
is proposing to exempt certain transactions to correct bona fide errors
in the execution of customer orders from the Trade-at prohibition,
subject to the conditions set forth by the SEC's order exempting these
transactions from Rule 611 of SEC Regulation NMS.\42\
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\41\ See Securities Exchange Act Release No. 55884 (June 8,
2007), 72 FR 32926 (June 14, 2007).
\42\ The Commission granted BZX an exemption from Rule 608(c)
related to this provision. See February Exemption Request and
Exemption Letter, supra note 20. The Exchange is seeking the same
exemptions as requested in the October Exemption Request and the
February Exemption Request. Supra note 20.
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As with the corresponding exception under Rule 611 of SEC
Regulation NMS, the Exchange proposes to define a ``bona fide error''
as: (i) The inaccurate conveyance or execution of any term of an order
including, but not limited to, price, number of shares or other unit of
trading; identification of the security; identification of the account
for which securities are purchased or sold; lost or otherwise misplaced
order tickets; short sales that were instead sold long or vice versa;
or the execution of an order on the wrong side of a market; (ii) the
unauthorized or unintended purchase, sale, or allocation of securities,
or the failure to follow specific client instructions; (iii) the
incorrect entry of data into relevant systems, including reliance on
incorrect cash positions, withdrawals, or securities positions
reflected in an account; or (iv) a delay, outage, or failure of a
communication system used to transmit market data prices or to
facilitate the delivery or execution of an order. The bona fide error
must be evidenced by objective facts and circumstances, the Trading
Center must maintain documentation of such facts and circumstances, and
the Trading Center must record the transaction in its error account. To
avail itself of the exemption, the Trading Center must establish,
maintain, and enforce written policies and procedures that are
reasonably designed to address the occurrence of errors and, in the
event of an error, the use and terms of a transaction to correct the
error in compliance with this exemption. Finally, the Trading Center
must regularly surveil to ascertain the effectiveness of its policies
and procedures to address errors and transactions to correct errors and
take prompt action to remedy deficiencies in such policies and
procedures.\43\
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\43\ See Securities Exchange Act Release No. 55884 (June 8,
2007), 72 FR 32926 (June 14, 2007).
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Consistent with the Plan, the final exception to the Trade-At
Prohibition and its accompanying supplementary material applies to an
order that is for a fractional share of a Pilot Security. The
supplementary material provides that such fractional share orders may
not be the result of breaking an order for one or more whole shares of
a Pilot Security into orders for fractional shares or that otherwise
were effected to evade the requirements of the Trade-at Prohibition or
any other provisions of the Plan. In approving the Plan, the Commission
noted that this exception was appropriate, as there could be potential
difficulty in the routing and executing of fractional shares.\44\
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\44\ See Approval Order, supra note 10, 80 FR at 27541.
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The proposed rule change will become operative upon the
commencement of the Pilot Period.
2. Statutory Basis
The Exchange believes that its proposal is consistent with Section
6(b) of the Act \45\ in general, and furthers the objectives of Section
6(b)(5) of the Act \46\ in particular, in that it is designed to
promote just and equitable principles of trade, to foster cooperation
and coordination with persons engaged in facilitating transactions in
securities, to remove impediments to and perfect the mechanism of a
free and open market and a national market system and, in general, to
protect investors and the public interest.
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\45\ 15 U.S.C. 78f(b).
\46\ 15 U.S.C. 78f(b)(5).
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The Exchange believes that this proposal is consistent with the Act
because it implements, interprets, and clarifies the provisions of the
Plan, and is designed to assist the Exchange and Members in meeting
regulatory obligations pursuant to the Plan. In approving the Plan, the
SEC noted that the Pilot was an appropriate, data-driven test that was
designed to evaluate the impact of a wider tick size on trading,
liquidity, and the market quality of securities of smaller
capitalization companies, and was therefore in furtherance of the
purposes of the Act. To the extent that this proposal implements,
interprets, and clarifies the Plan and applies specific requirements to
Members, the Exchange believes that this proposal is in furtherance of
the objectives of the Plan, as identified by the SEC, and is therefore
consistent with the Act.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
result in any burden on competition that is not necessary or
appropriate in furtherance of the purposes of the Act. The Exchange
notes that the proposed rule change implements the provisions of the
Plan, and is designed to assist the Exchange in meeting its regulatory
obligations pursuant to the Plan. The Exchange also notes that the
quoting and trading requirements of the Plan will apply equally to all
Members that trade Pilot Securities.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
Written comments were neither solicited nor received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Because the foregoing proposed rule change does not: (A)
Significantly affect the protection of investors or the public
interest; (B) impose any significant burden on competition; and (C) by
its terms, become operative for 30 days from the date on which it was
filed or such shorter time as the Commission may designate it has
become effective pursuant to Section 19(b)(3)(A) of the
[[Page 30403]]
Act \47\ and paragraph (f)(6) of Rule 19b-4 thereunder,\48\ the
Exchange has designated this rule filing as non-controversial. The
Exchange has given the Commission written notice of its intent to file
the proposed rule change, along with a brief description and text of
the proposed rule change at least five business days prior to the date
of filing of the proposed rule change, or such shorter time as
designated by the Commission.
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\47\ 15 U.S.C. 78s(b)(3)(A).
\48\ 17 CFR 240.19b-4.
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At any time within 60 days of the filing of the proposed rule
change, the Commission summarily may temporarily suspend such rule
change if it appears to the Commission that such action is: (1)
Necessary or appropriate in the public interest; (2) for the protection
of investors; or (3) otherwise in furtherance of the purposes of the
Act. If the Commission takes such action, the Commission shall
institute proceedings to determine whether the proposed rule should be
approved or disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's Internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an email to rule-comments@sec.gov. Please include
File Number SR-BatsEDGA-2016-08 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-BatsEDGA-2016-08. This
file number should be included on the subject line if email is used. To
help the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's Internet Web site (https://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all
written statements with respect to the proposed rule change that are
filed with the Commission, and all written communications relating to
the proposed rule change between the Commission and any person, other
than those that may be withheld from the public in accordance with the
provisions of 5 U.S.C. 552, will be available for Web site viewing and
printing in the Commission's Public Reference Room, 100 F Street, NE.,
Washington, DC 20549, on official business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of the filing also will be available
for inspection and copying at the principal office of the Exchange. All
comments received will be posted without change; the Commission does
not edit personal identifying information from submissions. You should
submit only information that you wish to make available publicly. All
submissions should refer to File Number SR-BatsEDGA-2016-08, and should
be submitted on or before June 6, 2016.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\49\
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\49\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-11403 Filed 5-13-16; 8:45 am]
BILLING CODE 8011-01-P
