Self-Regulatory Organizations; Bats EDGA Exchange, Inc.; Notice of Filing of a Proposed Rule Change To Adopt Paragraph (c) to Exchange Rule 11.21 To Describe Changes to System Functionality Necessary To Implement the Regulation NMS Plan To Implement a Tick Size Pilot Program, 47223-47229 [2016-17090]
Download as PDF
<![CDATA[
Federal Register / Vol. 81, No. 139 / Wednesday, July 20, 2016 / Notices
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–78330; File No. SR–
BatsEDGA–2016–15]
Self-Regulatory Organizations; Bats
EDGA Exchange, Inc.; Notice of Filing
of a Proposed Rule Change To Adopt
Paragraph (c) to Exchange Rule 11.21
To Describe Changes to System
Functionality Necessary To Implement
the Regulation NMS Plan To Implement
a Tick Size Pilot Program
July 14, 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 June 29,
2016, Bats 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
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 paragraph (c) to Exchange Rule
11.21 to describe changes to System 3
functionality necessary to implement
the Regulation NMS Plan to Implement
a Tick Size Pilot Program (‘‘Plan’’ or
‘‘Pilot’’).4 In determining the scope of
the proposed changes to implement the
Pilot,5 the Exchange carefully weighed
the impact on the Pilot, System
complexity, and the usage of such order
types in Pilot Securities.
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.
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 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(cc).
4 See Securities Exchange Act Release No. 74892
(May 6, 2015), 80 FR 27513 (May 13, 2015)
(‘‘Approval Order’’).
5 Unless otherwise specified, capitalized terms
used in this rule filing are defined as set forth in
the Plan.
mstockstill on DSK3G9T082PROD with NOTICES
2 17
VerDate Sep<11>2014
18:24 Jul 19, 2016
Jkt 238001
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 the
Statutory Basis for, the Proposed Rule
Change
1. Purpose
Background
On August 25, 2014, NYSE Group,
Inc., on behalf of the Exchange, Bats
BYX Exchange, Inc. (‘‘BYX’’), Chicago
Stock Exchange, Inc., Bats BZX
Exchange, Inc. (‘‘BZX’’), Bats EDGX
Exchange, Inc. (‘‘EDGX’’), 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
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.7 The
Participants filed the Plan to comply
with an order issued by the Commission
on June 24, 2014.8 The Plan was
published for comment in the Federal
Register on November 7, 2014, and
approved by the Commission, as
modified, on May 6, 2015.9
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, and to enforce compliance
by its member organizations, as
applicable, with the provisions of the
Plan.
The Pilot will include stocks of
companies with $3 billion or less in
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 See Approval Order, supra note 4.
PO 00000
6 15
7 See
Frm 00069
Fmt 4703
Sfmt 4703
47223
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 Test Group
selected by a stratified sampling.10
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.11
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.12 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 13 ‘‘Best Protected Bid’’
or ‘‘Best Protected Offer,’’ unless an
enumerated exception applies.14 The
same exceptions provided under Test
Group Two will also be available under
the Trade-at Prohibition, with an
additional exception for Block Size
orders and exceptions that mirror those
under Rule 611 of Regulation NMS.15
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 adopted
paragraph (a) of Rule 11.21 to require
Members 16 to comply with the quoting
10 See Section V of the Plan for identification of
Pilot Securities, including criteria for selection and
grouping.
11 See Section VI(B) of the Plan.
12 See Section VI(C) of the Plan.
13 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.’’
14 See Section VI(D) of the Plan.
15 17 CFR 242.611.
16 The term ‘‘Member’’ is defined as ‘‘any
registered broker or dealer that has been admitted
to membership in the Exchange.’’ See Exchange
Rule 1.5(n).
E:\FR\FM\20JYN1.SGM
20JYN1
47224
Federal Register / Vol. 81, No. 139 / Wednesday, July 20, 2016 / Notices
and trading provisions of the Plan.17
The Exchange also adopted paragraph
(b) of Rule 11.21 to require Members to
comply with the data collection
provisions under Appendix B and C of
the Plan.18
mstockstill on DSK3G9T082PROD with NOTICES
Proposed System Changes
The Exchange proposes to adopt
paragraph (c) of Exchange Rule 11.21 to
describe changes to System
functionality necessary to implement
the Plan. Paragraph (c) of Rule 11.21
would set forth the Exchange’s specific
procedures for handling, executing, repricing and displaying of certain order
types and order type instructions
applicable to Pilot Securities. Unless
otherwise indicated, paragraph (c) of
Rule 11.21 would apply to order types
and order type instructions in Pilot
Securities in Test Groups One, Two, and
Three and not to orders in Pilot
Securities included in the Control
Group. The proposed changes include
select and discrete amendments to the
operation of: (i) Market Orders; (ii)
orders with a Market Peg instruction;
(iii) MidPoint Peg Orders; (iii) orders
with a Discretionary Range; (iv) orders
with a Non-Displayed instruction; (v)
Market Maker Peg Orders; (vi)
Supplemental Peg Orders; and (vii)
orders subject to the Display-Price
Sliding process.
In determining the scope of these
proposed changes to implement the
Plan, the Exchange carefully weighed
the impact on the Pilot, System
complexity, and the usage of such order
types in Pilot Securities. These
proposed changes are designed to
directly comply with the Plan and to
assist the Exchange in meeting its
regulatory obligations pursuant to the
Plan. As discussed below, certain of
these changes are also intended to
reduce risk in the System by eliminating
unnecessary complexity based on
infrequent current usage of certain order
types in Pilot Securities and/or their
limited ability to execute under the
Trade-at Prohibition. Therefore, the
Exchange firmly believes that these
changes will have little or no impact on
the operation and data collection
elements of the Plan. The Exchange
further believes that the proposed rule
changes are reasonably designed to
comply with applicable quoting and
trading requirements specified in the
Plan.
17 See Securities Exchange Act Release No. 77792
(May 10, 2016), 81 FR 30397 (May 16, 2016) (SR–
BatsEDGA–2016–08).
18 See Securities Exchange Act Release No. 77417
(March 22, 2016), 81 FR 17219 (March 28, 2016)
(SR–BatsEDGA–2016–01).
VerDate Sep<11>2014
18:24 Jul 19, 2016
Jkt 238001
Market Orders
A Market Order is an order to buy or
sell a stated amount of a security that is
to be executed at the NBBO when the
order reaches the Exchange.19 Market
Orders shall not trade through Protected
Quotations. Any portion of a Market
Order that would execute at a price
more than $0.50 or 5 percent worse than
the NBBO at the time the order initially
reaches the Exchange, whichever is
greater, will be cancelled.20 In order to
comply with the minimum quoting
increments set forth in the Plan, the
Exchange proposes to state under
proposed Rule 11.21(c)(1) that for
purposes of determining whether a
Market Order’s execution price is more
than 5 percent worse than the NBBO
under Rule 11.8(a)(7), the execution
price for a buy (sell) order will be
rounded down (up) to the nearest $0.05
increment.
Market Peg Instruction
The Exchange proposes to amend the
operation of orders with a Market Peg
instruction to reduce risk in its System
by eliminating unnecessary complexity
based on infrequent current usage in
Pilot Securities and their limited ability
to execute under the Trade-at
Prohibition in Test Group Three. An
order with a Pegged instruction is
automatically adjusted by the System in
response to changes in the NBBO and
will peg to the NBB or NBO or a certain
amount away from the NBB or NBO.21
An order with a Market Peg instruction
is pegged to the contra-side NBBO.22 A
User 23 entering an order with a Market
Peg instruction can specify that such
order’s price will offset the inside quote
on the contra-side of the market by an
amount (the ‘‘Offset’’) set by the User.
An order with a Market Peg instruction
is not eligible to be displayed on the
Exchange.
In Test Groups One and Two, the
Exchange proposes to modify the
behavior of an order with a Market Peg
instruction when it is locked by an
incoming order with a Post Only
instruction 24 that does not remove
liquidity pursuant to Rule 11.6(n)(4).25
19 See
Exchange Rule 11.8(a).
20 Id.
Exchange Rule 11.6(j).
Exchange Rule 11.6(j)(1).
23 A ‘‘User’’ is defined as any member or
sponsored participant of the Exchange who is
authorized to obtain access to the System pursuant
to Rule 11.3. See Exchange Rule 1.5(ee).
24 See Exchange Rule 11.6(n)(4).
25 A Post Only Order will remove contra-side
liquidity from the EDGA Book if the order is an
order to buy or sell a security priced below $1.00
or if the value of such execution when removing
liquidity equals or exceeds the value of such
PO 00000
21 See
22 See
Frm 00070
Fmt 4703
Sfmt 4703
In such case, the order with a Market
Peg instruction would be converted to
an executable order and will remove
liquidity against such incoming order.26
In no case would an order with a Market
Peg instruction execute against an
incoming order with a Post Only
instruction if an order with higher
priority is on the EDGA Book.27
Specifically, if an order other than an
order with a Market Peg instruction
maintains higher priority than one or
more orders with a Market Peg
instruction, the order(s) with a Market
Peg instruction with lower priority will
not be converted, as described above,
and the incoming order with a Post
Only instruction will be posted or
cancelled in accordance with Rule
11.6(n)(4).
The Exchange notes that orders with
a Market Peg instruction are aggressive
by nature and believes executing the
order in such circumstance is
appropriate. The Exchange also notes
that the proposed behavior for orders
with a Market Peg instruction in Test
Groups One and Two is identical to the
operation of orders with the Super
Aggressive Routing instruction under
Exchange Rule 11.6(n)(2). When an
order with a Super Aggressive
instruction is locked by an incoming
order with a Post Only instruction that
does not remove liquidity pursuant to
Rule 11.6(n)(4), the order is converted to
an executable order and will remove
liquidity against such incoming order.
In addition, like as proposed above, in
no case would an order with a Super
Aggressive instruction execute against
an incoming order with a Post Only
instruction if an order with higher
priority is on the EDGA Book. The
Exchange believes this change is
reasonable and appropriate due to the
limited usage of orders with a Market
Peg instruction in Pilot Securities, to
avoid unnecessary additional System
complexity, and to ensure the order
with a Market Peg instruction may
execute in such circumstance.
The Exchange also proposes to not
accept orders with a Market Peg
execution if the order instead posted to the EDGA
Book and subsequently provided liquidity,
including the applicable fees charged or rebates
provided. See Exchange Rule 11.6(n)(4).
26 The Exchange notes that an order with a Post
Only instruction will, in most cases, remove
liquidity from the EDGA Book because under its
current taker-maker pricing structure, the remover
of liquidity is provided a rebate while the provider
of liquidity is charged a fee. Therefore, in most
cases, value of the execution to remove liquidity
will equal or exceed the value of such execution
once posted to the EDGA Book, including the
applicable fees charged or rebates received.
27 The term ‘‘EDGA Book’’ is defined as the
‘‘System’s electronic file of orders.’’ See Exchange
Rule 1.5(d).
E:\FR\FM\20JYN1.SGM
20JYN1
Federal Register / Vol. 81, No. 139 / Wednesday, July 20, 2016 / Notices
instruction in Test Group Three based
on limited current usage, additional
System complexity, and their limited
ability to execute under the Trade-at
Prohibition. Exchange 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,28 unless an enumerated
exception applies.29 The Exchange
believes that their de minimis usage and
limited ability to execute due to the
Trade-at Prohibition does not justify the
complexity that would be created by
supporting orders with a Market Peg
instruction in Test Group Three. A vast
majority of orders with a Market Pegged
instruction are entered into the System
with a zero Offset and, therefore, create
a locked market with the contra-side
NBBO. Under the Trade-at Prohibition,
an order with a Market Peg instruction
would not be eligible for execution at
the locking price, including when a
Trade-at Intermarket Sweep Order
(‘‘ISO’’) 30 is entered, because of noncleared contra-side Protected
Quotations. For example, assume the
NBBO is $10.00 (NYSE) × $10.05
(Nasdaq) in a Test Group 3 security. An
order with a Market Peg instruction to
buy at $10.10 with a zero Offset is
entered on the Exchange. The order
would be ranked and hidden on the
EDGA Book at $10.05. A Trade-at ISO to
sell at $10.05 is then entered. In this
example, no execution occurs on the
Exchange because Nasdaq is displaying
an order to sell at $10.05. The Trade-at
ISO instruction only indicates that all of
the better and equal priced buy orders
have been cleared. It does not indicate
that the seller has cleared any Protected
Offers. Therefore, the Exchange
proposes to not accept orders with a
mstockstill on DSK3G9T082PROD with NOTICES
28 The
term ‘‘Regular Trading Hours’’ is defined
as ‘‘the time between 9:30 a.m. and 4:00 p.m.
Eastern Time.’’ See Exchange Rule 1.5(y).
29 See also Section VI(D) of the Plan.
30 A Trade-at ISO is a Limit Order for a Pilot
Security that meets the following requirements: (i)
When routed to a Trading Center, the limit order
is identified as a Trade-at Intermarket Sweep Order;
and (ii) 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 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. See Exchange
Rule 11.21(a)(7)(A)(i). These additional routed
orders also must be marked as Trade-at Intermarket
Sweep Orders. Id.
VerDate Sep<11>2014
18:24 Jul 19, 2016
Jkt 238001
Market Peg instruction in Test Group
Three in an effort to reduce unnecessary
System complexity, avoid an internally
locked book, and due to the limited
execution opportunities for orders with
a Market Peg instruction due to the
Trade-at Prohibition.
MidPoint Peg Orders
A MidPoint Peg Order is an order
whose price is automatically adjusted
by the System in response to changes in
the NBBO to be pegged to the midpoint
of the NBBO, or, alternatively, pegged to
the less aggressive of the midpoint of
the NBBO or one Minimum Price
Variation 31 inside the same side of the
NBBO as the order.32 The Plan and
current Exchange rules permit the
acceptance of orders priced to execute at
the midpoint of the NBBO to be ranked
and accepted in increments of less than
$0.05.33 Consistent with previous
guidance issued by the Participants,34
the Exchange proposes to amend the
operation of MidPoint Peg Orders to
explicitly state that MidPoint Peg
Orders in Pilot Securities may not be
entered in increments other than $0.05.
The System will execute a MidPoint Peg
Order: (i) In $0.05 increments priced
better than the midpoint of the NBBO;
or (ii) at the midpoint of the NBBO,
regardless of whether the midpoint of
the NBBO is in an increment of $0.05.
In order to comply with the minimum
quoting and trading increments of the
Plan and reduce unnecessary System
complexity, a MidPoint Peg Order will
not be permitted to alternatively peg to
one Minimum Price Variation inside the
same side of the NBBO as the order in
Pilot Securities. The Exchange believes
that the current de minimis usage of the
alternative pegging functionality in Pilot
Securities does not justify the
complexity and risk that would be
created by re-programming the System
to support this functionality under the
Plan.
Discretionary Range Instruction
The Exchange proposes to not accept
orders with a Discretionary Range in all
Test Groups, including the Control
Group, to reduce risk in the System by
eliminating unnecessary complexity
based on infrequent current usage in
Pilot Securities. In sum, an order with
a Discretionary Range has a displayed or
non-displayed ranked price and size
Exchange Rule 11.6(i).
Exchange Rule 11.8(d).
33 See Sections VI(B), (C), and (D) of the Plan. See
also Exchange Rules 11.21(a)(4), (a)(5), and (a)(6).
34 See e.g., Question 42 of the Tick Size Pilot
Program Trading and Quoting FAQs available at
https://www.finra.org/sites/default/files/TSPPTrading-and-Quoting-FAQs.pdf.
PO 00000
31 See
32 See
Frm 00071
Fmt 4703
Sfmt 4703
47225
and an additional non-displayed
‘‘discretionary price’’.35 The
discretionary price is a non-displayed
upward offset at which a User is willing
to buy, if necessary, or a non-displayed
downward offset at which a User is
willing to sell, if necessary. The System
changes necessary for orders with a
Discretionary Range to comply with the
Plan become increasingly complex
because both the displayed price and
discretionary price must comply with
the Plan’s minimum quoting and trading
increments as well as the Trade-at
restriction in Test Group Three. In
addition, Users do not currently set
discretionary prices less than $0.05
away from the order’s displayed price
and the Exchange does not anticipate
Users doing so under the Plan. To date,
orders with a Discretionary Range are
rarely entered in Pilot Securities and the
Exchange anticipates their usage to
further decrease due to the Plan’s
minimum quoting increments. The
Exchange believes that the current
extremely limited usage of orders with
a Discretionary Range in Pilot Securities
does not justify the additional System
complexity that would be created by
supporting such orders. As a result of
these factors the Exchange proposes to
not accept orders with a Discretionary
Range in all Test Groups and the
Control Group.
Non-Displayed Instruction
The Exchange proposes to re-price to
the midpoint of the NBBO orders with
a Non-Displayed instruction in Test
Group Three that are priced in a
permissible increment better than the
midpoint of the NBBO. An order with
a Non-Displayed instruction is not
displayed on the Exchange.36 Exchange
Rule 11.21(a)(6)(D) incorporates the
‘‘Trade-at Prohibition’’ in the
Exchange’s rules. The Trade-at
Prohibition prevents the execution 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, unless an
exception applies. 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. Unless an exception
applies, an order with a Non-Displayed
instruction that is able to execute at the
price of the Protected Quotation would
not be able to do so in Test Group Three
35 See
36 See
E:\FR\FM\20JYN1.SGM
Exchange Rule 11.6(d).
Exchange Rule 11.6(e)(2).
20JYN1
47226
Federal Register / Vol. 81, No. 139 / Wednesday, July 20, 2016 / Notices
due to the Trade-at Prohibition and the
Exchange’s priority rule.37 Furthermore,
such aggressively priced orders would
not be able to post to the EDGA Book
at the contra-side Protected Quotation,
and re-pricing the order to the midpoint
of the NBBO would increase execution
opportunities under normal market
conditions. However, orders that are
priced to execute at the midpoint of the
NBBO are exempt from the Trade-at
Prohibition. Therefore, to increase the
execution opportunities for orders with
a Non-Displayed instruction in Test
Group Three, the Exchange proposes to
re-price to the midpoint of the NBBO
orders with a Non-Displayed instruction
that are priced in a permissible
increment better than the midpoint of
the NBBO.
mstockstill on DSK3G9T082PROD with NOTICES
Market Maker Peg Orders
A Market Maker Peg Order is a Limit
Order that is automatically priced by the
System at the Designated Percentage (as
defined in Exchange Rule
11.20(d)(2)(D)) away from the then
current NBB and NBO, or if no NBB or
NBO, at the Designated Percentage away
from the last reported sale from the
responsible single plan processor in
order to comply with the quotation
requirements for Market Makers set
forth in Exchange Rule 11.20(d).38
Should the above pricing result in a
Market Maker Peg Order being priced at
an increment other than $0.05, the
Exchange proposes to round an order to
buy (sell) up (down) to the nearest $0.05
increment in order to comply with the
minimum quoting increments of the
Plan.
Supplemental Peg Orders
The Exchange proposes to not accept
Supplemental Peg Orders in Test Group
Three in order to reduce risk in the
System by eliminating unnecessary
complexity based on infrequent current
usage in Pilot Securities and their
limited ability to execute under the
Trade-at Prohibition. A Supplemental
Peg Order is a non-displayed Limit
Order that posts to the EDGA Book, and
thereafter is eligible for execution at the
NBB for buy orders and NBO for sell
orders against routable orders that are
equal to or less than the aggregate size
of the Supplemental Peg Order interest
available at that price.39 In sum,
Supplemental Peg Orders are only
executable at the NBBO against an order
that is in the process of being routed
away. In such case, the Exchange is not
37 Under Exchange Rule 11.9(a)(2)(A), displayed
Limit Orders have priority over non-displayed
Limit Orders.
38 See Exchange Rule 11.8(f).
39 See Exchange Rule 11.8(g).
VerDate Sep<11>2014
18:24 Jul 19, 2016
Jkt 238001
displaying a Protected Quotation and,
therefore, the Supplemental Peg Order
would be unable to execute in Test
Group Three due to the Trade-at
Prohibition.40 Therefore, the Exchange
proposes to not accept Supplemental
Peg Orders in Test Group Three.
Display-Price Sliding
Under the Display-Price Sliding
process, an order eligible for display by
the Exchange that, at the time of entry,
would create a violation of Rule 610(d)
of Regulation NMS by locking or
crossing a Protected Quotation of an
external market, will be ranked at the
locking price in the EDGA Book and
displayed by the System at one
minimum price variation (i.e., $0.05)
below the current NBO (for bids) or one
minimum price variation above the
current NBB (for offers).41 The ranked
and displayed prices of an order subject
to the Display-Price Sliding process may
be adjusted once or multiple times
depending upon the instructions of a
User and changes to the prevailing
NBBO.42
As described above, Exchange 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, unless an exception
applies. Orders that are priced to
execute at the midpoint of the NBBO are
exempt from the Trade-at Prohibition.
Therefore, to increase the execution
opportunities and qualify for the midpoint exception to the Trade-at
Prohibition, the Exchange proposes to
rank orders in Test Group Three that are
subject to the Display-Price Sliding
process at the midpoint of the NBBO in
the BZX Book and display such orders
one minimum price variation below the
current NBO (for bids) or one minimum
price variation above the current NBB
(for offers).
The Exchange also proposes to cancel
orders subject to Display-Price Sliding
40 The Exchange notes that the likelihood of a
Supplemental Peg Order qualifying for an exception
to the Trade-at Prohibition is small. For example,
Supplemental Peg Orders are only executable
against orders that are to be routed away and would
not be eligible to execute against an incoming ISO
or Trade-at ISO. Also, the Exchange would not be
displaying a Protected Quotation. In addition, the
Exchange does not frequently receive orders of
Block Size and, in order to qualify for the Block
exception, the contra-side Block Order must be
routable and the Supplemental Peg Order be of
Block Size.
41 See Exchange Rule 11.6(l)(1)(B).
42 See Exchange Rule 11.6(l)(1)(B)(iii).
PO 00000
Frm 00072
Fmt 4703
Sfmt 4703
in Test Group Three that are only to be
adjusted once and not multiple times in
the event the NBBO widens and a
contra-side order with a Non-Displayed
instruction is resting on the EDGA Book
at the price to which the order subject
to Display-Price Sliding would be
adjusted. Due to the increased minimum
quoting increments under the Plan, the
Exchange is unable to safely re-price an
order subject to single Display-Price
Sliding in Test Group Three to the
original locking price in such
circumstances and doing so would add
additional System complexity and risk.
As discussed above, the Exchange
proposes to rank orders in Test Group
Three subject to the Display-Price
Sliding process at the midpoint of the
NBBO. In the event the NBBO changes
such that an order subject to DisplayPrice Sliding would not lock or cross a
Protected Quotation of an external
market, the order will receive a new
timestamp, and will be displayed at the
order’s limit price.43 Due to
technological limitations arising from
the increased minimum quoting
increments under the Plan, however, the
Exchange is unable to safely re-program
its System to re-price such order to the
original locking price when the NBBO
widens and a contra-side order with a
Non-Displayed instruction is resting on
the EDGA Book at the price to which the
order subject to Display-Price Sliding
would be adjusted. Therefore, the
Exchange proposes to cancel orders
subject to the single Display-Price
Sliding process in such circumstances.
Users who prefer an execution in such
a scenario may elect to use the multiple
Display-Price Sliding process.
Ministerial Change
Currently, both Interpretation and
Policy .03 to Rule 11.21(a) and
Interpretation and Policy .11 to Rule
11.21(b) state that Rule 11.21 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). The Exchange
proposes to include this language at the
beginning of Rule 11.21 and, therefore,
proposes to delete both Interpretation
and Policy .03 to Rule 11.21(a) and
Interpretation and Policy .11 to Rule
11.21(b) as those provisions would be
redundant and unnecessary. The
Exchange also proposes to amend the
last sentence of Rule 11.21(a)(4) to
specify that the current permissible
price increments are set forth under
Exchange Rule 11.6(i), Minimum Price
Variation.
43 Id.
E:\FR\FM\20JYN1.SGM
20JYN1
Federal Register / Vol. 81, No. 139 / Wednesday, July 20, 2016 / Notices
Implementation Date
If the Commission approves the
proposed rule change, the proposed rule
change will be effective upon
Commission approval and shall become
operative upon the commencement of
the Pilot Period.
mstockstill on DSK3G9T082PROD with NOTICES
2. Statutory Basis
The Exchange believes that its
proposal is consistent with Section 6(b)
of the Act 44 in general, and furthers the
objectives of Section 6(b)(5) of the Act 45
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. 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. The
proposed rule change is designed to
comply with the Plan, reduce
complexity and enhance System
resiliency while not adversely affecting
the data collected under the Plan.
Therefore, the Exchange believes that
the proposed rule changes are
reasonably designed to comply with
applicable quoting and trading
requirements specified in the Plan and,
as discussed further below, other
applicable regulations.
The Exchange believes that the
proposed changes regarding Market
Orders, MidPoint Peg Orders, Market
Maker Peg Orders, and Display-Price
Sliding are consistent with the Act
because they are intended to modify the
Exchange’s System to comply with the
provisions of the Plan, and are designed
to assist the Exchange in meeting its
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 these
proposals are intended to comply with
the Plan, the Exchange believes that
these proposals are in furtherance of the
objectives of the Plan, as identified by
the Commission, and is therefore
consistent with the Act.
44 15
45 15
U.S.C. 78f(b).
U.S.C. 78f(b)(5).
VerDate Sep<11>2014
18:24 Jul 19, 2016
Jkt 238001
The Exchange also believes that its
proposed changes to orders with a
Market Peg instruction, orders with a
Discretionary Range, orders with a NonDisplayed instruction, Supplemental
Peg Orders, and Display-Price Sliding
are also consistent with the Act because
they are intended to eliminate
unnecessary System complexity and
risk based on the de minimis current
usage of such order types and
instructions in Pilot Securities and/or
their limited ability to execute under the
Plan’s minimum trading and quoting
increments or Trade-at Prohibition.46
For example, during March 2016, the
alternative pegging functionality of
MidPoint Peg Orders, orders with a
Market Peg instruction, orders with a
Non-Displayed instruction, and
Supplemental Peg Orders accounted for
0.01%, 0.02%, 0.92%, and 0.01%,
respectively, of volume in eligible Pilot
Securities on the Exchange, BYX, BZX
and EDGX combined. Notably, orders
with a Discretionary Range accounted
for 0.00% of volume in eligible Pilot
Securities on the Exchange, BYX, BZX
and EDGX combined.
The Commission adopted Regulation
Systems Compliance and Integrity
(‘‘Regulation SCI’’) in November 2014 to
strengthen the technology infrastructure
of the U.S. securities markets.47
Regulation SCI is designed to reduce the
occurrence of systems issues, improve
resiliency when systems problems do
occur, and enhance the Commission’s
oversight and enforcement of securities
market technology infrastructure.
Regulation SCI required the Exchange to
establish written policies and
procedures reasonably designed to
ensure that their systems have levels of
capacity, integrity, resiliency,
availability, and security adequate to
maintain their operational capability
and promote the maintenance of fair
and orderly markets, and that they
operate in a manner that complies with
the Exchange Act. Each of these
proposed changes are intended to
reduce complexity and risk in the
System to ensure the Exchange’s
technology remains robust and resilient.
In determining the scope of the
proposed changes, the Exchange
carefully weighed the impact on the
Pilot, System complexity, and the usage
46 The Commission has also expressed concern
regarding potential market instability caused by
technological risks. See e.g., Chair Mary Jo White,
Commission, Enhancing Our Equity Market
Structure (June 5, 2014) available at https://
www.sec.gov/News/Speech/Detail/Speech/
1370542004312#.VD2HW610w6Y.
47 See Securities Exchange Act Release No. 73639
(November 19, 2014), 79 FR 72251 (December 5,
2014) (‘‘Regulation SCI Approval Order’’).
PO 00000
Frm 00073
Fmt 4703
Sfmt 4703
47227
of such order types in Pilot Securities.48
The potential complexity results from
code changes for a majority of the
Exchange’s order types, which requires
the implementation and testing of a
separate branch of code for each Test
Group. For example, the Exchange
currently utilizes one branch of code for
which to implement and test changes.
Development work for the Pilot results
in the creation of four additional
branches of code that are to be
developed and tested (e.g., Control
Group + three Test Groups). The
Exchange determined that the changes
proposed herein are necessary to ensure
continued System resiliency in
accordance with the requirements of
Regulation SCI. Therefore, the Exchange
believes the proposed rule change
promotes just and equitable principles
of trade, removes impediments to and
perfects the mechanism of a free and
open market and a national market
system and, in general, to protect
investors and the public interest.
In addition, each of these proposed
changes would have a de minimis to
zero impact on the data reported
pursuant to the Plan. As evidenced
above, orders with a Market Peg
instruction, orders with a Discretionary
Range, the alternative pegging
functionality of MidPoint Peg Orders,
and Supplemental Peg Orders are
infrequently used in Pilot Securities or
the execution of such orders would be
scarce due to the Plan’s minimum
trading and quoting requirement and
Trade-at Prohibition. The limited usage
and execution scenarios do not justify
the additional system complexity which
would be created by modifying the
System to support such order types in
order to comply with the Plan.
Therefore, the Exchange believes each
proposed change is a reasonable means
to ensure that the System’s integrity,
resiliency, and availability continues to
promote the maintenance of fair and
orderly markets. Due to the additional
complexity, limited usage and execution
opportunities, the Exchange believes it
is not unfairly discriminatory to apply
the changes proposed herein to only
Pilot Securities as such changes are
necessary to reduce complexity and
ensure continued System resiliency in
accordance with the requirements of
Regulation SCI. The Exchange also
believes the proposed changes to orders
with a Non-Displayed instruction, and
orders subject to the Display-Price
48 But for the Plan, the Exchange notes that it
would not have proposed to amend the operation
of orders with a Market Peg instruction, orders with
a Discretionary Range, orders with a Non-Displayed
instruction, Supplemental Peg Orders, and DisplayPrice Sliding as described herein.
E:\FR\FM\20JYN1.SGM
20JYN1
47228
Federal Register / Vol. 81, No. 139 / Wednesday, July 20, 2016 / Notices
mstockstill on DSK3G9T082PROD with NOTICES
Sliding process in Test Group Three are
consistent with the Act because they are
designed to increase the execution
opportunities for such order types in
compliance with the mid-point
exception to the Trade-at Prohibition.
The Exchange also believes the
proposed change to Market Pegged
Orders in Test Groups One and Two is
consistent with the Act because it is
identical to the operation of the Super
Aggressive instruction under Exchange
Rule 11.6(n)(2). The Exchange notes that
Market Pegged Orders are aggressive by
nature and believes executing the order
in such circumstance is reasonable and
appropriate.
The Exchange also believes it is
reasonable and appropriate to cancel an
order subject to the single Display-Price
Sliding process in Test Group Three in
the event that the NBBO widens and a
contra-side order with a Non-Displayed
instruction is resting on the EDGA Book
at the price to which the order subject
to Display-Price Sliding would be
adjusted. Due to technological
limitations and the Plan’s increased
minimum quoting increments, the
Exchange is unable to safely re-program
its System to re-price such orders to the
original locking price in such
circumstances. The Exchange also
anticipates that the scenario under
which it proposes to cancel the DisplayPrice Sliding order will be infrequent in
Tick Pilot Securities. Users who prefer
an execution in such a scenario may
elect to use the multiple Display-Price
Sliding process. Therefore, the
Exchange believes it is consistent with
the Act to set forth this scenario in its
rules so that Users will understand how
the System operates and how their
orders would be handled in this discrete
scenario.
Lastly, the Exchange believes the
ministerial changes to Rule 11.21 are
also consistent with the Act as they
would: (i) Clarify a provision under
paragraph (a)(4); and (ii) remove
redundant provisions from the rule.
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 is designed to assist the
Exchange in meeting its regulatory
obligations pursuant to the Plan, reduce
System complexity and enhance
resiliency. The Exchange also notes that
the proposed rule change will apply
equally to all Members that trade Pilot
Securities.
VerDate Sep<11>2014
18:24 Jul 19, 2016
Jkt 238001
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
Within 45 days of the date of
publication of this notice in the Federal
Register or within such longer period (i)
as the Commission may designate up to
90 days of such date if it finds such
longer period to be appropriate and
publishes its reasons for so finding or
(ii) as to which the Exchange consents,
the Commission will: (a) By order
approve or disapprove such proposed
rule change, or (b) institute proceedings
to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act. In
particular, the Commission seeks
comment on the issue described below.
In the Approval Order, the
Commission stressed the importance of
testing the impact of wider tick sizes on
the trading and liquidity of the
securities of small capitalization
companies, and doing so in a way that
produces robust results that inform
future policy decisions.49 The
Commission acknowledged the
complexity of the Pilot and the costs
that its implementation would create for
market participants, but concluded that
the benefits of the empirical data that
would be produced by the Pilot
warranted incurring those costs.50 As a
result, the Plan requires that each
Participant, including the Exchange,
adopt rules that are necessary for
compliance with the provisions of the
Plan.51
While the Exchange states that the
proposed rule change describes the
system changes necessary to implement
the Pilot, the Commission notes that the
scope of the proposed changes extends
beyond those required for compliance
with the Plan, and would eliminate
certain order types for Pilot Securities
during the Pilot Period, or modify their
operation in ways not required by the
Plan. For example, the Exchange
49 See
Approval Order, supra note 4, at 80 FR
27515.
50 Id. at 27516.
51 See Section II(B) of the Plan. See also Section
IV of the Plan.
PO 00000
Frm 00074
Fmt 4703
Sfmt 4703
proposes not to accept Market Pegged
Orders, Discretionary Orders, and
Supplemental Peg Orders, and certain
types of Mid-Point Peg Orders, in some
or all Test Groups of Pilot Securities for
the duration of the Pilot Period.52 These
proposals appear designed to permit the
Exchange to avoid the costs of
modifying these order types to comply
with the Plan. The Exchange notes that
these order types are infrequently used
in Pilot Securities, and takes the
position that ‘‘[t]he limited usage and
execution scenarios do not justify the
additional system complexity which
would be created by modifying the
System to support such order types in
order to comply with the Plan.’’ 53 At
the same time, the Exchange also does
not appear prepared to propose to
eliminate these order types indefinitely.
By contrast, the Exchange proposes to
modify, in ways not required by the
Plan, the operation of Market Pegged
Orders and Non-Displayed Orders, and
certain orders subject to the DisplayPrice Sliding process, in some or all
Test Groups of Pilot Securities, and to
incur the associated system change
costs, in order to increase the
‘‘execution opportunities’’ for these
order types for the duration of the Pilot
Period.54
The Commission is concerned that
proposed rule changes, other than those
necessary for compliance with Plan, that
are targeted at Pilot Securities, that have
a disparate impact on different Test
Groups and the Control Group, and that
are to apply temporarily only for the
Pilot Period, could bias the results of the
Pilot and undermine the value of the
data generated in informing future
policy decisions. Accordingly, the
Commission is concerned that the
proposed rule change may not be
consistent with Act, including Section
6(b)(5) thereof and Rule 608 of
Regulation NMS, or with the Plan.
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–2016–15 on the subject line.
Paper Comments
• Send paper comments in triplicate
to Secretary, Securities and Exchange
52 The Exchange also proposes to cancel certain
orders subject to the Display-Price Sliding process
in certain Pilot Securities for the duration of the
Pilot Period.
53 See supra Item II.A.2.
54 See supra Item II.A.1–2.
E:\FR\FM\20JYN1.SGM
20JYN1
Federal Register / Vol. 81, No. 139 / Wednesday, July 20, 2016 / Notices
Commission, 100 F Street NE.,
Washington, DC 20549–1090.
SECURITIES AND EXCHANGE
COMMISSION
All submissions should refer to File
Number SR–BatsEDGA–2016–15. 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–2016–15, and should be
submitted on or before August 10, 2016.
[Release No. 34–78327; File No. SR–FINRA–
2016–026]
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.55
Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2016–17090 Filed 7–19–16; 8:45 am]
mstockstill on DSK3G9T082PROD with NOTICES
BILLING CODE 8011–01–P
Self-Regulatory Organizations;
Financial Industry Regulatory
Authority, Inc.; Notice of Filing and
Immediate Effectiveness of a Proposed
Rule Change to Update Rule CrossReferences and Make Non-Substantive
Technical Changes to Certain FINRA
Rules
July 14, 2016.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’) 1 and Rule 19b-4 thereunder,2
notice is hereby given that on July 7,
2016, Financial Industry Regulatory
Authority, Inc. (‘‘FINRA’’) filed with the
Securities and Exchange Commission
(‘‘SEC’’ or ‘‘Commission’’) the proposed
rule change as described in Items I and
II below, which Items have been
prepared by FINRA. FINRA has
designated the proposed rule change as
constituting a ‘‘non-controversial’’ rule
change under paragraph (f)(6) of Rule
19b-4 under the Act,3 which renders the
proposal effective upon receipt of this
filing by 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 the Substance
of the Proposed Rule Change
FINRA is proposing to update crossreferences and make other nonsubstantive changes within FINRA
rules, due in part to the adoption of a
new consolidated FINRA rule.
The text of the proposed rule change
is available on FINRA’s Web site at
https://www.finra.org, at the principal
office of FINRA 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,
FINRA 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. FINRA has prepared
summaries, set forth in sections A, B,
and C below, of the most significant
aspects of such statements.
1 15
U.S.C. 78s(b)(1).
CFR 240.19b-4.
3 17 CFR 240.19b-4(f)(6).
2 17
55 17
CFR 200.30–3(a)(12).
VerDate Sep<11>2014
18:24 Jul 19, 2016
Jkt 238001
PO 00000
Frm 00075
Fmt 4703
Sfmt 4703
47229
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
FINRA has been developing a
consolidated rulebook (‘‘Consolidated
FINRA Rulebook’’).4 That process
involves FINRA submitting to the
Commission for approval a series of
proposed rule changes over time to
adopt rules in the Consolidated FINRA
Rulebook. The phased adoption and
implementation of those rules
necessitates periodic amendments to
update rule cross-references and other
non-substantive changes in the
Consolidated FINRA Rulebook.
The proposed rule change would
make some of those changes, as well as
other non-substantive changes unrelated
to the adoption of rules in the
Consolidated FINRA Rulebook.
First, the proposed rule change would
update rule cross-references to reflect
the adoption of a consolidated
investment company securities rule. On
June 9, 2016, FINRA filed with the SEC
a proposed rule change, for immediate
effectiveness, to adopt NASD Rule 2830
as FINRA Rule 2341 (Investment
Company Securities), without any
substantive changes. As part of that rule
filing, FINRA also deleted in its entirety
NASD Rule 2830.5 Rule 2341 will be
implemented on July 9, 2016. As such,
the proposed rule change would update
references to the new rule number in
FINRA Rules 2320 (Variable Contracts
of an Insurance Company) and 6630
(Applicability of FINRA Rules to
Securities Previously Designated as
PORTAL Securities). The proposed rule
change further would delete from the
FINRA Manual the heading for the
NASD Rule 2800 Series (Special
Products) and the placeholder for NASD
Rule 2870 (Reserved) to reflect that the
NASD Rule 2800 Series 6 has fully been
consolidated into the FINRA rules.
4 The current FINRA rulebook consists of (1)
FINRA Rules; (2) NASD Rules; and (3) rules
incorporated from NYSE (‘‘Incorporated NYSE
Rules’’) (together, the NASD Rules and Incorporated
NYSE Rules are referred to as the ‘‘Transitional
Rulebook’’). While the NASD Rules generally apply
to all FINRA members, the Incorporated NYSE
Rules apply only to those members of FINRA that
are also members of the NYSE (‘‘Dual Members’’).
The FINRA Rules apply to all FINRA members,
unless such rules have a more limited application
by their terms. For more information about the
rulebook consolidation process, see Information
Notice, March 12, 2008 (Rulebook Consolidation
Process).
5 See Securities Exchange Act Release No. 78130
(June 22, 2016), 81 FR 42016 (June 28, 2016) (Notice
of Filing and Immediate Effectiveness of File No.
SR–FINRA–2016–019).
6 See supra note 5.
E:\FR\FM\20JYN1.SGM
20JYN1
]]>Agencies
[Federal Register Volume 81, Number 139 (Wednesday, July 20, 2016)]
[Notices]
[Pages 47223-47229]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-17090]
[[Page 47223]]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-78330; File No. SR-BatsEDGA-2016-15]
Self-Regulatory Organizations; Bats EDGA Exchange, Inc.; Notice
of Filing of a Proposed Rule Change To Adopt Paragraph (c) to Exchange
Rule 11.21 To Describe Changes to System Functionality Necessary To
Implement the Regulation NMS Plan To Implement a Tick Size Pilot
Program
July 14, 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 June 29, 2016, Bats 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
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.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange filed a proposal to adopt paragraph (c) to Exchange
Rule 11.21 to describe changes to System \3\ functionality necessary to
implement the Regulation NMS Plan to Implement a Tick Size Pilot
Program (``Plan'' or ``Pilot'').\4\ In determining the scope of the
proposed changes to implement the Pilot,\5\ the Exchange carefully
weighed the impact on the Pilot, System complexity, and the usage of
such order types in Pilot Securities.
---------------------------------------------------------------------------
\3\ 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(cc).
\4\ See Securities Exchange Act Release No. 74892 (May 6, 2015),
80 FR 27513 (May 13, 2015) (``Approval Order'').
\5\ Unless otherwise specified, capitalized terms used in this
rule filing are defined as set forth in the Plan.
---------------------------------------------------------------------------
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 the
Statutory Basis for, the Proposed Rule Change
1. Purpose
Background
On August 25, 2014, NYSE Group, Inc., on behalf of the Exchange,
Bats BYX Exchange, Inc. (``BYX''), Chicago Stock Exchange, Inc., Bats
BZX Exchange, Inc. (``BZX''), Bats EDGX Exchange, Inc. (``EDGX''),
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 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.\7\ The Participants
filed the Plan to comply with an order issued by the Commission on June
24, 2014.\8\ The Plan was published for comment in the Federal Register
on November 7, 2014, and approved by the Commission, as modified, on
May 6, 2015.\9\
---------------------------------------------------------------------------
\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\ See Approval Order, supra note 4.
---------------------------------------------------------------------------
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, and
to enforce compliance by its member organizations, as applicable, with
the provisions of the Plan.
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 Test Group selected by a stratified
sampling.\10\ 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.\11\ 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.\12\ 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 \13\ ``Best Protected
Bid'' or ``Best Protected Offer,'' unless an enumerated exception
applies.\14\ The same exceptions provided under Test Group Two will
also be available under the Trade-at Prohibition, with an additional
exception for Block Size orders and exceptions that mirror those under
Rule 611 of Regulation NMS.\15\
---------------------------------------------------------------------------
\10\ See Section V of the Plan for identification of Pilot
Securities, including criteria for selection and grouping.
\11\ See Section VI(B) of the Plan.
\12\ See Section VI(C) of the Plan.
\13\ 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.''
\14\ See Section VI(D) of the Plan.
\15\ 17 CFR 242.611.
---------------------------------------------------------------------------
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 adopted paragraph (a) of Rule 11.21 to
require Members \16\ to comply with the quoting
[[Page 47224]]
and trading provisions of the Plan.\17\ The Exchange also adopted
paragraph (b) of Rule 11.21 to require Members to comply with the data
collection provisions under Appendix B and C of the Plan.\18\
---------------------------------------------------------------------------
\16\ The term ``Member'' is defined as ``any registered broker
or dealer that has been admitted to membership in the Exchange.''
See Exchange Rule 1.5(n).
\17\ See Securities Exchange Act Release No. 77792 (May 10,
2016), 81 FR 30397 (May 16, 2016) (SR-BatsEDGA-2016-08).
\18\ See Securities Exchange Act Release No. 77417 (March 22,
2016), 81 FR 17219 (March 28, 2016) (SR-BatsEDGA-2016-01).
---------------------------------------------------------------------------
Proposed System Changes
The Exchange proposes to adopt paragraph (c) of Exchange Rule 11.21
to describe changes to System functionality necessary to implement the
Plan. Paragraph (c) of Rule 11.21 would set forth the Exchange's
specific procedures for handling, executing, re-pricing and displaying
of certain order types and order type instructions applicable to Pilot
Securities. Unless otherwise indicated, paragraph (c) of Rule 11.21
would apply to order types and order type instructions in Pilot
Securities in Test Groups One, Two, and Three and not to orders in
Pilot Securities included in the Control Group. The proposed changes
include select and discrete amendments to the operation of: (i) Market
Orders; (ii) orders with a Market Peg instruction; (iii) MidPoint Peg
Orders; (iii) orders with a Discretionary Range; (iv) orders with a
Non-Displayed instruction; (v) Market Maker Peg Orders; (vi)
Supplemental Peg Orders; and (vii) orders subject to the Display-Price
Sliding process.
In determining the scope of these proposed changes to implement the
Plan, the Exchange carefully weighed the impact on the Pilot, System
complexity, and the usage of such order types in Pilot Securities.
These proposed changes are designed to directly comply with the Plan
and to assist the Exchange in meeting its regulatory obligations
pursuant to the Plan. As discussed below, certain of these changes are
also intended to reduce risk in the System by eliminating unnecessary
complexity based on infrequent current usage of certain order types in
Pilot Securities and/or their limited ability to execute under the
Trade-at Prohibition. Therefore, the Exchange firmly believes that
these changes will have little or no impact on the operation and data
collection elements of the Plan. The Exchange further believes that the
proposed rule changes are reasonably designed to comply with applicable
quoting and trading requirements specified in the Plan.
Market Orders
A Market Order is an order to buy or sell a stated amount of a
security that is to be executed at the NBBO when the order reaches the
Exchange.\19\ Market Orders shall not trade through Protected
Quotations. Any portion of a Market Order that would execute at a price
more than $0.50 or 5 percent worse than the NBBO at the time the order
initially reaches the Exchange, whichever is greater, will be
cancelled.\20\ In order to comply with the minimum quoting increments
set forth in the Plan, the Exchange proposes to state under proposed
Rule 11.21(c)(1) that for purposes of determining whether a Market
Order's execution price is more than 5 percent worse than the NBBO
under Rule 11.8(a)(7), the execution price for a buy (sell) order will
be rounded down (up) to the nearest $0.05 increment.
---------------------------------------------------------------------------
\19\ See Exchange Rule 11.8(a).
\20\ Id.
---------------------------------------------------------------------------
Market Peg Instruction
The Exchange proposes to amend the operation of orders with a
Market Peg instruction to reduce risk in its System by eliminating
unnecessary complexity based on infrequent current usage in Pilot
Securities and their limited ability to execute under the Trade-at
Prohibition in Test Group Three. An order with a Pegged instruction is
automatically adjusted by the System in response to changes in the NBBO
and will peg to the NBB or NBO or a certain amount away from the NBB or
NBO.\21\ An order with a Market Peg instruction is pegged to the
contra-side NBBO.\22\ A User \23\ entering an order with a Market Peg
instruction can specify that such order's price will offset the inside
quote on the contra-side of the market by an amount (the ``Offset'')
set by the User. An order with a Market Peg instruction is not eligible
to be displayed on the Exchange.
---------------------------------------------------------------------------
\21\ See Exchange Rule 11.6(j).
\22\ See Exchange Rule 11.6(j)(1).
\23\ A ``User'' is defined as any member or sponsored
participant of the Exchange who is authorized to obtain access to
the System pursuant to Rule 11.3. See Exchange Rule 1.5(ee).
---------------------------------------------------------------------------
In Test Groups One and Two, the Exchange proposes to modify the
behavior of an order with a Market Peg instruction when it is locked by
an incoming order with a Post Only instruction \24\ that does not
remove liquidity pursuant to Rule 11.6(n)(4).\25\ In such case, the
order with a Market Peg instruction would be converted to an executable
order and will remove liquidity against such incoming order.\26\ In no
case would an order with a Market Peg instruction execute against an
incoming order with a Post Only instruction if an order with higher
priority is on the EDGA Book.\27\ Specifically, if an order other than
an order with a Market Peg instruction maintains higher priority than
one or more orders with a Market Peg instruction, the order(s) with a
Market Peg instruction with lower priority will not be converted, as
described above, and the incoming order with a Post Only instruction
will be posted or cancelled in accordance with Rule 11.6(n)(4).
---------------------------------------------------------------------------
\24\ See Exchange Rule 11.6(n)(4).
\25\ A Post Only Order will remove contra-side liquidity from
the EDGA Book if the order is an order to buy or sell a security
priced below $1.00 or if the value of such execution when removing
liquidity equals or exceeds the value of such execution if the order
instead posted to the EDGA Book and subsequently provided liquidity,
including the applicable fees charged or rebates provided. See
Exchange Rule 11.6(n)(4).
\26\ The Exchange notes that an order with a Post Only
instruction will, in most cases, remove liquidity from the EDGA Book
because under its current taker-maker pricing structure, the remover
of liquidity is provided a rebate while the provider of liquidity is
charged a fee. Therefore, in most cases, value of the execution to
remove liquidity will equal or exceed the value of such execution
once posted to the EDGA Book, including the applicable fees charged
or rebates received.
\27\ The term ``EDGA Book'' is defined as the ``System's
electronic file of orders.'' See Exchange Rule 1.5(d).
---------------------------------------------------------------------------
The Exchange notes that orders with a Market Peg instruction are
aggressive by nature and believes executing the order in such
circumstance is appropriate. The Exchange also notes that the proposed
behavior for orders with a Market Peg instruction in Test Groups One
and Two is identical to the operation of orders with the Super
Aggressive Routing instruction under Exchange Rule 11.6(n)(2). When an
order with a Super Aggressive instruction is locked by an incoming
order with a Post Only instruction that does not remove liquidity
pursuant to Rule 11.6(n)(4), the order is converted to an executable
order and will remove liquidity against such incoming order. In
addition, like as proposed above, in no case would an order with a
Super Aggressive instruction execute against an incoming order with a
Post Only instruction if an order with higher priority is on the EDGA
Book. The Exchange believes this change is reasonable and appropriate
due to the limited usage of orders with a Market Peg instruction in
Pilot Securities, to avoid unnecessary additional System complexity,
and to ensure the order with a Market Peg instruction may execute in
such circumstance.
The Exchange also proposes to not accept orders with a Market Peg
[[Page 47225]]
instruction in Test Group Three based on limited current usage,
additional System complexity, and their limited ability to execute
under the Trade-at Prohibition. Exchange 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,\28\ unless an enumerated exception applies.\29\ The Exchange
believes that their de minimis usage and limited ability to execute due
to the Trade-at Prohibition does not justify the complexity that would
be created by supporting orders with a Market Peg instruction in Test
Group Three. A vast majority of orders with a Market Pegged instruction
are entered into the System with a zero Offset and, therefore, create a
locked market with the contra-side NBBO. Under the Trade-at
Prohibition, an order with a Market Peg instruction would not be
eligible for execution at the locking price, including when a Trade-at
Intermarket Sweep Order (``ISO'') \30\ is entered, because of non-
cleared contra-side Protected Quotations. For example, assume the NBBO
is $10.00 (NYSE) x $10.05 (Nasdaq) in a Test Group 3 security. An order
with a Market Peg instruction to buy at $10.10 with a zero Offset is
entered on the Exchange. The order would be ranked and hidden on the
EDGA Book at $10.05. A Trade-at ISO to sell at $10.05 is then entered.
In this example, no execution occurs on the Exchange because Nasdaq is
displaying an order to sell at $10.05. The Trade-at ISO instruction
only indicates that all of the better and equal priced buy orders have
been cleared. It does not indicate that the seller has cleared any
Protected Offers. Therefore, the Exchange proposes to not accept orders
with a Market Peg instruction in Test Group Three in an effort to
reduce unnecessary System complexity, avoid an internally locked book,
and due to the limited execution opportunities for orders with a Market
Peg instruction due to the Trade-at Prohibition.
---------------------------------------------------------------------------
\28\ The term ``Regular Trading Hours'' is defined as ``the time
between 9:30 a.m. and 4:00 p.m. Eastern Time.'' See Exchange Rule
1.5(y).
\29\ See also Section VI(D) of the Plan.
\30\ A Trade-at ISO is a Limit Order for a Pilot Security that
meets the following requirements: (i) When routed to a Trading
Center, the limit order is identified as a Trade-at Intermarket
Sweep Order; and (ii) 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 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. See Exchange Rule
11.21(a)(7)(A)(i). These additional routed orders also must be
marked as Trade-at Intermarket Sweep Orders. Id.
---------------------------------------------------------------------------
MidPoint Peg Orders
A MidPoint Peg Order is an order whose price is automatically
adjusted by the System in response to changes in the NBBO to be pegged
to the midpoint of the NBBO, or, alternatively, pegged to the less
aggressive of the midpoint of the NBBO or one Minimum Price Variation
\31\ inside the same side of the NBBO as the order.\32\ The Plan and
current Exchange rules permit the acceptance of orders priced to
execute at the midpoint of the NBBO to be ranked and accepted in
increments of less than $0.05.\33\ Consistent with previous guidance
issued by the Participants,\34\ the Exchange proposes to amend the
operation of MidPoint Peg Orders to explicitly state that MidPoint Peg
Orders in Pilot Securities may not be entered in increments other than
$0.05. The System will execute a MidPoint Peg Order: (i) In $0.05
increments priced better than the midpoint of the NBBO; or (ii) at the
midpoint of the NBBO, regardless of whether the midpoint of the NBBO is
in an increment of $0.05. In order to comply with the minimum quoting
and trading increments of the Plan and reduce unnecessary System
complexity, a MidPoint Peg Order will not be permitted to alternatively
peg to one Minimum Price Variation inside the same side of the NBBO as
the order in Pilot Securities. The Exchange believes that the current
de minimis usage of the alternative pegging functionality in Pilot
Securities does not justify the complexity and risk that would be
created by re-programming the System to support this functionality
under the Plan.
---------------------------------------------------------------------------
\31\ See Exchange Rule 11.6(i).
\32\ See Exchange Rule 11.8(d).
\33\ See Sections VI(B), (C), and (D) of the Plan. See also
Exchange Rules 11.21(a)(4), (a)(5), and (a)(6).
\34\ See e.g., Question 42 of the Tick Size Pilot Program
Trading and Quoting FAQs available at https://www.finra.org/sites/default/files/TSPP-Trading-and-Quoting-FAQs.pdf.
---------------------------------------------------------------------------
Discretionary Range Instruction
The Exchange proposes to not accept orders with a Discretionary
Range in all Test Groups, including the Control Group, to reduce risk
in the System by eliminating unnecessary complexity based on infrequent
current usage in Pilot Securities. In sum, an order with a
Discretionary Range has a displayed or non-displayed ranked price and
size and an additional non-displayed ``discretionary price''.\35\ The
discretionary price is a non-displayed upward offset at which a User is
willing to buy, if necessary, or a non-displayed downward offset at
which a User is willing to sell, if necessary. The System changes
necessary for orders with a Discretionary Range to comply with the Plan
become increasingly complex because both the displayed price and
discretionary price must comply with the Plan's minimum quoting and
trading increments as well as the Trade-at restriction in Test Group
Three. In addition, Users do not currently set discretionary prices
less than $0.05 away from the order's displayed price and the Exchange
does not anticipate Users doing so under the Plan. To date, orders with
a Discretionary Range are rarely entered in Pilot Securities and the
Exchange anticipates their usage to further decrease due to the Plan's
minimum quoting increments. The Exchange believes that the current
extremely limited usage of orders with a Discretionary Range in Pilot
Securities does not justify the additional System complexity that would
be created by supporting such orders. As a result of these factors the
Exchange proposes to not accept orders with a Discretionary Range in
all Test Groups and the Control Group.
---------------------------------------------------------------------------
\35\ See Exchange Rule 11.6(d).
---------------------------------------------------------------------------
Non-Displayed Instruction
The Exchange proposes to re-price to the midpoint of the NBBO
orders with a Non-Displayed instruction in Test Group Three that are
priced in a permissible increment better than the midpoint of the NBBO.
An order with a Non-Displayed instruction is not displayed on the
Exchange.\36\ Exchange Rule 11.21(a)(6)(D) incorporates the ``Trade-at
Prohibition'' in the Exchange's rules. The Trade-at Prohibition
prevents the execution 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, unless an exception
applies. 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. Unless an exception applies, an
order with a Non-Displayed instruction that is able to execute at the
price of the Protected Quotation would not be able to do so in Test
Group Three
[[Page 47226]]
due to the Trade-at Prohibition and the Exchange's priority rule.\37\
Furthermore, such aggressively priced orders would not be able to post
to the EDGA Book at the contra-side Protected Quotation, and re-pricing
the order to the midpoint of the NBBO would increase execution
opportunities under normal market conditions. However, orders that are
priced to execute at the midpoint of the NBBO are exempt from the
Trade-at Prohibition. Therefore, to increase the execution
opportunities for orders with a Non-Displayed instruction in Test Group
Three, the Exchange proposes to re-price to the midpoint of the NBBO
orders with a Non-Displayed instruction that are priced in a
permissible increment better than the midpoint of the NBBO.
---------------------------------------------------------------------------
\36\ See Exchange Rule 11.6(e)(2).
\37\ Under Exchange Rule 11.9(a)(2)(A), displayed Limit Orders
have priority over non-displayed Limit Orders.
---------------------------------------------------------------------------
Market Maker Peg Orders
A Market Maker Peg Order is a Limit Order that is automatically
priced by the System at the Designated Percentage (as defined in
Exchange Rule 11.20(d)(2)(D)) away from the then current NBB and NBO,
or if no NBB or NBO, at the Designated Percentage away from the last
reported sale from the responsible single plan processor in order to
comply with the quotation requirements for Market Makers set forth in
Exchange Rule 11.20(d).\38\ Should the above pricing result in a Market
Maker Peg Order being priced at an increment other than $0.05, the
Exchange proposes to round an order to buy (sell) up (down) to the
nearest $0.05 increment in order to comply with the minimum quoting
increments of the Plan.
---------------------------------------------------------------------------
\38\ See Exchange Rule 11.8(f).
---------------------------------------------------------------------------
Supplemental Peg Orders
The Exchange proposes to not accept Supplemental Peg Orders in Test
Group Three in order to reduce risk in the System by eliminating
unnecessary complexity based on infrequent current usage in Pilot
Securities and their limited ability to execute under the Trade-at
Prohibition. A Supplemental Peg Order is a non-displayed Limit Order
that posts to the EDGA Book, and thereafter is eligible for execution
at the NBB for buy orders and NBO for sell orders against routable
orders that are equal to or less than the aggregate size of the
Supplemental Peg Order interest available at that price.\39\ In sum,
Supplemental Peg Orders are only executable at the NBBO against an
order that is in the process of being routed away. In such case, the
Exchange is not displaying a Protected Quotation and, therefore, the
Supplemental Peg Order would be unable to execute in Test Group Three
due to the Trade-at Prohibition.\40\ Therefore, the Exchange proposes
to not accept Supplemental Peg Orders in Test Group Three.
---------------------------------------------------------------------------
\39\ See Exchange Rule 11.8(g).
\40\ The Exchange notes that the likelihood of a Supplemental
Peg Order qualifying for an exception to the Trade-at Prohibition is
small. For example, Supplemental Peg Orders are only executable
against orders that are to be routed away and would not be eligible
to execute against an incoming ISO or Trade-at ISO. Also, the
Exchange would not be displaying a Protected Quotation. In addition,
the Exchange does not frequently receive orders of Block Size and,
in order to qualify for the Block exception, the contra-side Block
Order must be routable and the Supplemental Peg Order be of Block
Size.
---------------------------------------------------------------------------
Display-Price Sliding
Under the Display-Price Sliding process, an order eligible for
display by the Exchange that, at the time of entry, would create a
violation of Rule 610(d) of Regulation NMS by locking or crossing a
Protected Quotation of an external market, will be ranked at the
locking price in the EDGA Book and displayed by the System at one
minimum price variation (i.e., $0.05) below the current NBO (for bids)
or one minimum price variation above the current NBB (for offers).\41\
The ranked and displayed prices of an order subject to the Display-
Price Sliding process may be adjusted once or multiple times depending
upon the instructions of a User and changes to the prevailing NBBO.\42\
---------------------------------------------------------------------------
\41\ See Exchange Rule 11.6(l)(1)(B).
\42\ See Exchange Rule 11.6(l)(1)(B)(iii).
---------------------------------------------------------------------------
As described above, Exchange 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, unless an
exception applies. Orders that are priced to execute at the midpoint of
the NBBO are exempt from the Trade-at Prohibition. Therefore, to
increase the execution opportunities and qualify for the mid-point
exception to the Trade-at Prohibition, the Exchange proposes to rank
orders in Test Group Three that are subject to the Display-Price
Sliding process at the midpoint of the NBBO in the BZX Book and display
such orders one minimum price variation below the current NBO (for
bids) or one minimum price variation above the current NBB (for
offers).
The Exchange also proposes to cancel orders subject to Display-
Price Sliding in Test Group Three that are only to be adjusted once and
not multiple times in the event the NBBO widens and a contra-side order
with a Non-Displayed instruction is resting on the EDGA Book at the
price to which the order subject to Display-Price Sliding would be
adjusted. Due to the increased minimum quoting increments under the
Plan, the Exchange is unable to safely re-price an order subject to
single Display-Price Sliding in Test Group Three to the original
locking price in such circumstances and doing so would add additional
System complexity and risk. As discussed above, the Exchange proposes
to rank orders in Test Group Three subject to the Display-Price Sliding
process at the midpoint of the NBBO. In the event the NBBO changes such
that an order subject to Display-Price Sliding would not lock or cross
a Protected Quotation of an external market, the order will receive a
new timestamp, and will be displayed at the order's limit price.\43\
Due to technological limitations arising from the increased minimum
quoting increments under the Plan, however, the Exchange is unable to
safely re-program its System to re-price such order to the original
locking price when the NBBO widens and a contra-side order with a Non-
Displayed instruction is resting on the EDGA Book at the price to which
the order subject to Display-Price Sliding would be adjusted.
Therefore, the Exchange proposes to cancel orders subject to the single
Display-Price Sliding process in such circumstances. Users who prefer
an execution in such a scenario may elect to use the multiple Display-
Price Sliding process.
---------------------------------------------------------------------------
\43\ Id.
---------------------------------------------------------------------------
Ministerial Change
Currently, both Interpretation and Policy .03 to Rule 11.21(a) and
Interpretation and Policy .11 to Rule 11.21(b) state that Rule 11.21
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). The Exchange proposes to include this language at the
beginning of Rule 11.21 and, therefore, proposes to delete both
Interpretation and Policy .03 to Rule 11.21(a) and Interpretation and
Policy .11 to Rule 11.21(b) as those provisions would be redundant and
unnecessary. The Exchange also proposes to amend the last sentence of
Rule 11.21(a)(4) to specify that the current permissible price
increments are set forth under Exchange Rule 11.6(i), Minimum Price
Variation.
[[Page 47227]]
Implementation Date
If the Commission approves the proposed rule change, the proposed
rule change will be effective upon Commission approval and shall 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 \44\ in general, and furthers the objectives of Section
6(b)(5) of the Act \45\ 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. 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. The proposed
rule change is designed to comply with the Plan, reduce complexity and
enhance System resiliency while not adversely affecting the data
collected under the Plan. Therefore, the Exchange believes that the
proposed rule changes are reasonably designed to comply with applicable
quoting and trading requirements specified in the Plan and, as
discussed further below, other applicable regulations.
---------------------------------------------------------------------------
\44\ 15 U.S.C. 78f(b).
\45\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
The Exchange believes that the proposed changes regarding Market
Orders, MidPoint Peg Orders, Market Maker Peg Orders, and Display-Price
Sliding are consistent with the Act because they are intended to modify
the Exchange's System to comply with the provisions of the Plan, and
are designed to assist the Exchange in meeting its 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 these proposals are intended to comply with the Plan, the
Exchange believes that these proposals are in furtherance of the
objectives of the Plan, as identified by the Commission, and is
therefore consistent with the Act.
The Exchange also believes that its proposed changes to orders with
a Market Peg instruction, orders with a Discretionary Range, orders
with a Non-Displayed instruction, Supplemental Peg Orders, and Display-
Price Sliding are also consistent with the Act because they are
intended to eliminate unnecessary System complexity and risk based on
the de minimis current usage of such order types and instructions in
Pilot Securities and/or their limited ability to execute under the
Plan's minimum trading and quoting increments or Trade-at
Prohibition.\46\ For example, during March 2016, the alternative
pegging functionality of MidPoint Peg Orders, orders with a Market Peg
instruction, orders with a Non-Displayed instruction, and Supplemental
Peg Orders accounted for 0.01%, 0.02%, 0.92%, and 0.01%, respectively,
of volume in eligible Pilot Securities on the Exchange, BYX, BZX and
EDGX combined. Notably, orders with a Discretionary Range accounted for
0.00% of volume in eligible Pilot Securities on the Exchange, BYX, BZX
and EDGX combined.
---------------------------------------------------------------------------
\46\ The Commission has also expressed concern regarding
potential market instability caused by technological risks. See
e.g., Chair Mary Jo White, Commission, Enhancing Our Equity Market
Structure (June 5, 2014) available at https://www.sec.gov/News/Speech/Detail/Speech/1370542004312#.VD2HW610w6Y.
---------------------------------------------------------------------------
The Commission adopted Regulation Systems Compliance and Integrity
(``Regulation SCI'') in November 2014 to strengthen the technology
infrastructure of the U.S. securities markets.\47\ Regulation SCI is
designed to reduce the occurrence of systems issues, improve resiliency
when systems problems do occur, and enhance the Commission's oversight
and enforcement of securities market technology infrastructure.
Regulation SCI required the Exchange to establish written policies and
procedures reasonably designed to ensure that their systems have levels
of capacity, integrity, resiliency, availability, and security adequate
to maintain their operational capability and promote the maintenance of
fair and orderly markets, and that they operate in a manner that
complies with the Exchange Act. Each of these proposed changes are
intended to reduce complexity and risk in the System to ensure the
Exchange's technology remains robust and resilient. In determining the
scope of the proposed changes, the Exchange carefully weighed the
impact on the Pilot, System complexity, and the usage of such order
types in Pilot Securities.\48\ The potential complexity results from
code changes for a majority of the Exchange's order types, which
requires the implementation and testing of a separate branch of code
for each Test Group. For example, the Exchange currently utilizes one
branch of code for which to implement and test changes. Development
work for the Pilot results in the creation of four additional branches
of code that are to be developed and tested (e.g., Control Group +
three Test Groups). The Exchange determined that the changes proposed
herein are necessary to ensure continued System resiliency in
accordance with the requirements of Regulation SCI. Therefore, the
Exchange believes the proposed rule change promotes just and equitable
principles of trade, removes impediments to and perfects the mechanism
of a free and open market and a national market system and, in general,
to protect investors and the public interest.
---------------------------------------------------------------------------
\47\ See Securities Exchange Act Release No. 73639 (November 19,
2014), 79 FR 72251 (December 5, 2014) (``Regulation SCI Approval
Order'').
\48\ But for the Plan, the Exchange notes that it would not have
proposed to amend the operation of orders with a Market Peg
instruction, orders with a Discretionary Range, orders with a Non-
Displayed instruction, Supplemental Peg Orders, and Display-Price
Sliding as described herein.
---------------------------------------------------------------------------
In addition, each of these proposed changes would have a de minimis
to zero impact on the data reported pursuant to the Plan. As evidenced
above, orders with a Market Peg instruction, orders with a
Discretionary Range, the alternative pegging functionality of MidPoint
Peg Orders, and Supplemental Peg Orders are infrequently used in Pilot
Securities or the execution of such orders would be scarce due to the
Plan's minimum trading and quoting requirement and Trade-at
Prohibition. The limited usage and execution scenarios do not justify
the additional system complexity which would be created by modifying
the System to support such order types in order to comply with the
Plan. Therefore, the Exchange believes each proposed change is a
reasonable means to ensure that the System's integrity, resiliency, and
availability continues to promote the maintenance of fair and orderly
markets. Due to the additional complexity, limited usage and execution
opportunities, the Exchange believes it is not unfairly discriminatory
to apply the changes proposed herein to only Pilot Securities as such
changes are necessary to reduce complexity and ensure continued System
resiliency in accordance with the requirements of Regulation SCI. The
Exchange also believes the proposed changes to orders with a Non-
Displayed instruction, and orders subject to the Display-Price
[[Page 47228]]
Sliding process in Test Group Three are consistent with the Act because
they are designed to increase the execution opportunities for such
order types in compliance with the mid-point exception to the Trade-at
Prohibition. The Exchange also believes the proposed change to Market
Pegged Orders in Test Groups One and Two is consistent with the Act
because it is identical to the operation of the Super Aggressive
instruction under Exchange Rule 11.6(n)(2). The Exchange notes that
Market Pegged Orders are aggressive by nature and believes executing
the order in such circumstance is reasonable and appropriate.
The Exchange also believes it is reasonable and appropriate to
cancel an order subject to the single Display-Price Sliding process in
Test Group Three in the event that the NBBO widens and a contra-side
order with a Non-Displayed instruction is resting on the EDGA Book at
the price to which the order subject to Display-Price Sliding would be
adjusted. Due to technological limitations and the Plan's increased
minimum quoting increments, the Exchange is unable to safely re-program
its System to re-price such orders to the original locking price in
such circumstances. The Exchange also anticipates that the scenario
under which it proposes to cancel the Display-Price Sliding order will
be infrequent in Tick Pilot Securities. Users who prefer an execution
in such a scenario may elect to use the multiple Display-Price Sliding
process. Therefore, the Exchange believes it is consistent with the Act
to set forth this scenario in its rules so that Users will understand
how the System operates and how their orders would be handled in this
discrete scenario.
Lastly, the Exchange believes the ministerial changes to Rule 11.21
are also consistent with the Act as they would: (i) Clarify a provision
under paragraph (a)(4); and (ii) remove redundant provisions from the
rule.
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 is designed to assist the Exchange
in meeting its regulatory obligations pursuant to the Plan, reduce
System complexity and enhance resiliency. The Exchange also notes that
the proposed rule change 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
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period (i) as the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reasons for so finding or (ii) as to
which the Exchange consents, the Commission will: (a) By order approve
or disapprove such proposed rule change, or (b) institute proceedings
to determine whether the proposed rule change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. In particular, the Commission seeks
comment on the issue described below.
In the Approval Order, the Commission stressed the importance of
testing the impact of wider tick sizes on the trading and liquidity of
the securities of small capitalization companies, and doing so in a way
that produces robust results that inform future policy decisions.\49\
The Commission acknowledged the complexity of the Pilot and the costs
that its implementation would create for market participants, but
concluded that the benefits of the empirical data that would be
produced by the Pilot warranted incurring those costs.\50\ As a result,
the Plan requires that each Participant, including the Exchange, adopt
rules that are necessary for compliance with the provisions of the
Plan.\51\
---------------------------------------------------------------------------
\49\ See Approval Order, supra note 4, at 80 FR 27515.
\50\ Id. at 27516.
\51\ See Section II(B) of the Plan. See also Section IV of the
Plan.
---------------------------------------------------------------------------
While the Exchange states that the proposed rule change describes
the system changes necessary to implement the Pilot, the Commission
notes that the scope of the proposed changes extends beyond those
required for compliance with the Plan, and would eliminate certain
order types for Pilot Securities during the Pilot Period, or modify
their operation in ways not required by the Plan. For example, the
Exchange proposes not to accept Market Pegged Orders, Discretionary
Orders, and Supplemental Peg Orders, and certain types of Mid-Point Peg
Orders, in some or all Test Groups of Pilot Securities for the duration
of the Pilot Period.\52\ These proposals appear designed to permit the
Exchange to avoid the costs of modifying these order types to comply
with the Plan. The Exchange notes that these order types are
infrequently used in Pilot Securities, and takes the position that
``[t]he limited usage and execution scenarios do not justify the
additional system complexity which would be created by modifying the
System to support such order types in order to comply with the Plan.''
\53\ At the same time, the Exchange also does not appear prepared to
propose to eliminate these order types indefinitely. By contrast, the
Exchange proposes to modify, in ways not required by the Plan, the
operation of Market Pegged Orders and Non-Displayed Orders, and certain
orders subject to the Display-Price Sliding process, in some or all
Test Groups of Pilot Securities, and to incur the associated system
change costs, in order to increase the ``execution opportunities'' for
these order types for the duration of the Pilot Period.\54\
---------------------------------------------------------------------------
\52\ The Exchange also proposes to cancel certain orders subject
to the Display-Price Sliding process in certain Pilot Securities for
the duration of the Pilot Period.
\53\ See supra Item II.A.2.
\54\ See supra Item II.A.1-2.
---------------------------------------------------------------------------
The Commission is concerned that proposed rule changes, other than
those necessary for compliance with Plan, that are targeted at Pilot
Securities, that have a disparate impact on different Test Groups and
the Control Group, and that are to apply temporarily only for the Pilot
Period, could bias the results of the Pilot and undermine the value of
the data generated in informing future policy decisions. Accordingly,
the Commission is concerned that the proposed rule change may not be
consistent with Act, including Section 6(b)(5) thereof and Rule 608 of
Regulation NMS, or with the Plan.
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-2016-15 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange
[[Page 47229]]
Commission, 100 F Street NE., Washington, DC 20549-1090.
All submissions should refer to File Number SR-BatsEDGA-2016-15. 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-2016-15, and should
be submitted on or before August 10, 2016.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\55\
---------------------------------------------------------------------------
\55\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------
Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2016-17090 Filed 7-19-16; 8:45 am]
BILLING CODE 8011-01-P
