Self-Regulatory Organizations; Bats BZX Exchange, Inc.; Notice of Filing of a Proposed Rule Change To Adopt Paragraph (c) to Exchange Rule 11.27 To Describe Changes to System Functionality Necessary To Implement the Regulation NMS Plan To Implement a Tick Size Pilot Program, 47187-47193 [2016-17093]
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Federal Register / Vol. 81, No. 139 / Wednesday, July 20, 2016 / Notices
members who satisfy the Exchange’s
independence requirements.56 The
Delegation Agreement recently was
terminated in connection with the
Exchange’s reorganization of its
regulatory structure that had resulted in
the creation of the ROC. Because the
Fine Income Procedures were instituted
in connection with the delegation of
certain of the Exchange’s regulatory
functions to NYSE Regulation, the
Commission believes that it is
appropriate for the Exchange to remove
the Procedures because NYSE
Regulation no longer performs any
regulatory services on behalf of the
Exchange. Further, given that the
Exchange has reintegrated its regulatory
functions under the oversight of the
ROC, the Commission believes that
Section 4.05 should continue to help
ensure that the Exchange does not
inappropriately use its regulatory assets,
fees, fines or penalties for commercial
purposes or to distribute such assets,
fees, fines or penalties to its direct
parent, NYSE Group, Inc., or to any
other entity. Finally, the Commission
believes that creation of the ROC, along
with its responsibilities under Section
2.03(h)(ii) of the Operating Agreement,
should help to ensure the proper
oversight of the Exchange’s regulatory
program, including the exercise by the
Exchange’s regulatory staff of its power
to fine member organizations, and the
use of regulatory assets, fees, fines and
penalties collected by the Exchange’s
regulatory staff.
As noted above, the commenter raises
several concerns regarding the
Exchange’s proposal, including by
asserting that the proposal was
insufficient because it did not include
rule text indicating the deletion of the
Procedures. The Exchange responds that
the Procedures are available in the
Exchange’s filing and on the Exchange’s
Web site. The Commission believes that,
because the Fine Income Procedures
were internal procedures of the
Exchange and were not part of the
Exchange’s rulebook or governing
documents, it was appropriate for the
Exchange to include the Procedures in
its Form 19b–4 describing the proposed
rule change, which were published by
the Commission as part of the Notice.57
The commenter remarks that the
NYSE should be ‘‘held to a higher
standard’’ than other exchanges. In
response, the Exchange states that, as a
national securities exchange, treating it
differently than any other national
securities exchange based on its size,
prominence or any of the other factors
56 See
57 See
NYSE Approval Order, supra note 10.
Notice, supra note 4, at 34394.
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noted in the comment letter, among
other things, would be contrary to just
and equitable principles of trade.58 The
Commission previously found that
Section 4.05 is consistent with the Act 59
and continues to believe that it is
consistent with the Act, and that it is
substantially similar to requirements
relating to the use of regulatory assets,
fees, fines and penalties that were
approved by the Commission with
respect to other exchanges, including
the Exchange’s affiliates—NYSE MKT
LLC and NYSE Arca, Inc.60
The commenter also expresses the
view that deleting the Fine Income
Procedures would remove rules that
serve to separate the Exchange’s
business function from its regulatory
obligations, and that the Exchange’s
disciplinary process did not provide an
adequate safeguard against ‘‘regulator
misbehavior.’’ The Commission believes
that the Exchange has adopted several
measures to ensure the independence of
its regulatory functions including,
among other things, creating a ROC,
which is composed entirely of directors
of the Exchange who satisfy the
Exchange’s independence requirements,
and the CFR, which is composed of
Exchange members and directors who
satisfy the Exchange’s independence
requirements.61
The commenter further expresses
concern that deleting the Fine Income
Procedures may imply that the conduct
banned by the Procedures no longer is
prohibited. The Commission believes,
however, that even with the deletion of
the Fine Income Procedures, given the
scope of Section 4.05, the Exchange
would continue to be prohibited from
using regulatory assets, fees, fines or
penalties for other than regulatory
purposes.
Finally, the commenter states that
Exchange did not adequately describe
why the circumstances that existed at
the time the Fine Income Procedures
were adopted no longer exist. The
Commission notes that the Exchange’s
proposal states that NYSE Regulation no
longer performs regulatory services on
behalf of the Exchange.
IV. Conclusion
NYSE Response Letter, supra note 6, at 5.
NYSE Approval Order, supra note 10, at
59842–43.
60 See Notice, supra note 4, at 34395–96 nn.18–
26 and accompanying text.
61 See NYSE Approval Order, supra note 10, at
59838–41.
PO 00000
58 See
59 See
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For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.62
Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2016–17096 Filed 7–19–16; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–78334; File No. SR–
BatsBZX–2016–29]
Self-Regulatory Organizations; Bats
BZX Exchange, Inc.; Notice of Filing of
a Proposed Rule Change To Adopt
Paragraph (c) to Exchange Rule 11.27
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 BZX Exchange, Inc. (the
‘‘Exchange’’ or ‘‘BZX’’) filed with the
Securities and Exchange Commission
(‘‘Commission’’) the proposed rule
change as described in Items I and II
below, which Items have been prepared
by the Exchange. The Commission is
publishing this notice to solicit
comments on the proposed rule change
from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange filed a proposal to
adopt paragraph (c) to Exchange Rule
11.27 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
62 17
It is therefore ordered, pursuant to
Section 19(b)(2) of the Act, that the
proposed rule change (SR–NYSE–2016–
37) is approved.
Sfmt 4703
47187
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 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(aa).
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.
1 15
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Federal Register / Vol. 81, No. 139 / Wednesday, July 20, 2016 / Notices
at www.batstrading.com, at the
principal office of the Exchange, and at
the Commission’s Public Reference
Room.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
Exchange included statements
concerning the purpose of and basis for
the proposed rule change and discussed
any comments it received on the
proposed rule change. The text of these
statements may be examined at the
places specified in Item IV below. The
Exchange has prepared summaries, set
forth in Sections A, B, and C below, of
the most significant parts of such
statements.
(A) Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
mstockstill on DSK3G9T082PROD with NOTICES
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 EDGA
Exchange, Inc. (‘‘EDGA’’), 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
6 15
U.S.C. 78k–1.
Letter from Brendon J. Weiss, Vice
President, Intercontinental Exchange, Inc., to
Secretary, Commission, dated August 25, 2014.
8 See Securities Exchange Act Release No. 72460
(June 24, 2014), 79 FR 36840 (June 30, 2014).
9 See Approval Order, supra note 4.
7 See
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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
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 11.27 to require
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.
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Members 16 to comply with the quoting
and trading provisions of the Plan.17
The Exchange also adopted paragraph
(b) of Rule 11.27 to require Members to
comply with the data collection
provisions under Appendix B and C of
the Plan.18
Proposed System Changes
The Exchange proposes to adopt
paragraph (c) of Exchange Rule 11.27 to
describe changes to System
functionality necessary to implement
the Plan. Paragraph (c) of Rule 11.27
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 11.27 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) BZX Market Orders; (ii)
Market Pegged Orders; (iii) Mid-Point
Peg Orders; (iii) [sic] Discretionary
Orders; (iv) [sic] Non-Displayed Orders;
(v) [sic] Market Maker Peg Orders; (vi)
[sic] Supplemental Peg Orders; and (vii)
[sic] 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
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. 77291
(March 3, 2016), 81 FR 12543 (March 9, 2016) (SR–
BATS–2015–108).
18 See Securities Exchange Act Release Nos.
77105 (February 10, 2016), 81 FR 8112 (February
17, 2016) (SR–BATS–2015–102); and 77310 (March
7, 2016), 81 FR 13012 (March 11, 2016) (SR–BATS–
2016–27).
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Federal Register / Vol. 81, No. 139 / Wednesday, July 20, 2016 / Notices
changes are reasonably designed to
comply with applicable quoting and
trading requirements specified in the
Plan.
BZX Market Orders
A BZX 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. BZX
Market Orders shall not trade through
Protected Quotations.19 Any portion of
a BZX 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 11.27(c)(1)
that for purposes of determining
whether a BZX Market Order’s
execution price is more than 5 percent
worse than the NBBO under Rule
11.9(a)(2), the execution price for a buy
(sell) order will be rounded down (up)
to the nearest $0.05 increment.
Market Pegged Orders
The Exchange proposes to amend the
operation of Market Pegged Orders 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. A Pegged Order is
a limit order that after entry into the
System, the price of the order is
automatically adjusted by the System in
response to changes in the NBBO. A
Pegged Order will peg to the NBB or
NBO or a certain amount away from the
NBB or NBO.21 A Market Pegged Order
is pegged to the contra-side NBBO.22 A
User 23 entering a Market Pegged Order
can specify that such order’s price will
offset the inside quote on the contraside of the market by an amount (the
‘‘Offset’’) set by the User. Market Pegged
Orders are not eligible to be displayed
on the Exchange.
In Test Groups One and Two, the
Exchange proposes to modify the
behavior of Market Pegged Order when
it is locked by an incoming BZX Post
Only Order 24 or Partial Post Only at
Limit Order 25 that does not remove
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19 See
Exchange Rule 11.9(a)(2).
20 Id.
21 See
Exchange Rule 11.9(c)(8).
Exchange Rule 11.9(c)(8)(B).
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(cc).
24 See Exchange Rule 11.9(c)(6).
25 See Exchange Rule 11.9(c)(7).
22 See
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liquidity pursuant to Rule 11.9(c)(6) or
Rule 11.9(c)(7),26 respectively. In such
case, the Market Pegged Order would be
converted to an executable order and
will remove liquidity against such
incoming order. In no case would a
Market Pegged Order execute against an
incoming BZX Post Only Order or
Partial Post Only at Limit Order if an
order with higher priority is on the BZX
Book.27 Specifically, if an order other
than a Market Pegged Order maintains
higher priority than one or more Market
Pegged Orders, the Market Pegged
Order(s) with lower priority will not be
converted, as described above, and the
incoming BZX Post Only Order or
Partial Post Only at Limit Order will be
posted or cancelled in accordance with
Rule 11.9(c)(6) or Rule 11.9(c)(7).
The Exchange notes that Market
Pegged Orders are aggressive by nature
and believes executing the order in such
circumstance is appropriate. The
Exchange also notes that the proposed
behavior for Market Pegged Orders in
Test Groups One and Two is identical
to the operation of orders with the
Super Aggressive Routing instruction
under Exchange Rule 11.13(b)(4)(C).
When an order with a Super Aggressive
instruction is locked by an incoming
BZX Post Only Order or Partial Post
Only at Limit Order that does not
remove liquidity pursuant to Rule
11.9(c)(6) or Rule 11.9(c)(7),
respectively, 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 BZX Post Only Order or
Partial Post Only at Limit Order if an
order with higher priority is on the BZX
Book. The Exchange believes this
change is reasonable and appropriate
due to the limited usage of Market
Pegged Orders in Pilot Securities, to
avoid unnecessary additional System
complexity, and to ensure the Market
Pegged Order may execute in such
circumstance.
26 A BZX Post Only Order will remove contra-side
liquidity from the BZX 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 BZX
Book and subsequently provided liquidity,
including the applicable fees charged or rebates
provided. See Exchange Rule 11.9(c)(6). A Partial
Post Only at Limit Order will remove liquidity from
the BZX Book up to the full size of the order if, at
the time of receipt, it can be executed at prices
better than its limit price. See Exchange Rule
11.9(c)(7).
27 The term ‘‘BZX Book’’ is defined as the
‘‘System’s electronic file of orders.’’ See Exchange
Rule 1.5(e).
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47189
The Exchange also proposes to not
accept Market Pegged Orders 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 11.27(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 Market Pegged
Orders in Test Group Three. A vast
majority of Market Pegged Orders 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, a
Market Pegged Order 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 contraside Protected Quotations. For example,
assume the NBBO is $10.00 (NYSE) ×
$10.05 (Nasdaq) in a Test Group 3
security. A Market Pegged Order to buy
at $10.10 with a zero Offset is entered
on the Exchange. The order would be
ranked and hidden on the BZX 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 Market Pegged
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(w).
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 11.27(a)(7)(A)(i). These additional routed
orders also must be marked as Trade-at Intermarket
Sweep Orders. Id.
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Orders 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 Market Pegged Orders
due to the Trade-at Prohibition.
Mid-Point Peg Orders
A Mid-Point 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 Mid-Point Peg Orders to
explicitly state that Mid-Point Peg
Orders in Pilot Securities may not be
entered in increments other than $0.05.
The System will execute a Mid-Point
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 reprogramming the System to support this
functionality under the Plan.
mstockstill on DSK3G9T082PROD with NOTICES
Discretionary Orders
The Exchange proposes to not accept
Discretionary Orders 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, a Discretionary
Order is a Limit Order with a displayed
or non-displayed ranked price and size
and an additional non-displayed
31 See
Exchange Rule 11.11.
Exchange Rule 11.9(c)(9).
33 See Sections VI(B), (C), and (D) of the Plan. See
also Exchange Rules 11.27(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.
32 See
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‘‘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 a Discretionary
Order 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, Discretionary Orders 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 Discretionary
Orders in Pilot Securities does not
justify the additional System complexity
that would be created by supporting
Discretionary Orders. As a result of
these factors the Exchange proposes to
not accept Discretionary Orders in all
Test Groups and the Control Group.
Non-Displayed Orders
The Exchange proposes to re-price to
the midpoint of the NBBO NonDisplayed Orders in Test Group Three
that are priced in a permissible
increment better than the midpoint of
the NBBO. A Non-Displayed Order is a
Market or Limit Order that is not
displayed on the Exchange.36 Exchange
Rule 11.27(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, a NonDisplayed Order that is able to execute
at the price of the Protected Quotation
would not be able to do so in Test
Group Three due to the Trade-at
Prohibition and the Exchange’s priority
PO 00000
35 See
36 See
Exchange Rule 11.9(c)(10).
Exchange Rule 11.9(c)(11).
Frm 00036
Fmt 4703
Sfmt 4703
rule.37 Furthermore, such aggressively
priced orders would not be able to post
to the BZX 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 Non-Displayed Orders
in Test Group Three, the Exchange
proposes to re-price to the midpoint of
the NBBO Non-Displayed Orders that
are priced in a permissible increment
better than the midpoint of the NBBO.
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 11.8) 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
11.8(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 BZX 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
37 Under Exchange Rule 11.12(a)(2), displayed
Limit Orders have priority over Non-Displayed
Limit Orders.
38 See Exchange Rule 11.9(c)(16).
39 See Exchange Rule 11.9(c)(19).
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Federal Register / Vol. 81, No. 139 / Wednesday, July 20, 2016 / Notices
Prohibition.40 Therefore, the Exchange
proposes to not accept Supplemental
Peg Orders in Test Group Three.
Display-Price Sliding
mstockstill on DSK3G9T082PROD with NOTICES
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 BZX 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
11.27(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
in Test Group Three that are only to be
adjusted once and not multiple times in
the event the NBBO widens and a
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 11.9(g)(1)(A).
42 See Exchange Rule 11.9(g)(1)(C).
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18:24 Jul 19, 2016
Jkt 238001
contra-side Non-Displayed Order is
resting on the BZX 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 Non-Displayed
Order is resting on the BZX 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 11.27(a) and
Interpretation and Policy .11 to Rule
11.27(b) state that Rule 11.27 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 11.27 and, therefore,
proposes to delete both Interpretation
and Policy .03 to Rule 11.27(a) and
Interpretation and Policy .11 to Rule
11.27(b) as those provisions would be
redundant and unnecessary. The
Exchange also proposes to amend the
last sentence of Rule 11.27(a)(4) to
specify that the current permissible
price increments are set forth under
Exchange Rule 11.11, Price Variations.
Implementation Date
If the Commission approves the
proposed rule change, the proposed rule
change will be effective upon
Commission approval and shall become
PO 00000
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.
The Exchange believes that the
proposed changes regarding BZX Market
Orders, Mid-Point 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 Market Pegged
Orders, Discretionary Orders, NonDisplayed Orders, Supplemental Peg
Orders, and Display-Price Sliding are
also consistent with the Act because
44 15
43 Id.
Frm 00037
45 15
Fmt 4703
Sfmt 4703
47191
E:\FR\FM\20JYN1.SGM
U.S.C. 78f(b).
U.S.C. 78f(b)(5).
20JYN1
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Federal Register / Vol. 81, No. 139 / Wednesday, July 20, 2016 / Notices
mstockstill on DSK3G9T082PROD with NOTICES
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, Market Pegged Orders,
Non-Displayed Orders, 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, EDGA
and EDGX combined. Notably,
Discretionary Orders accounted for
0.00% of volume in eligible Pilot
Securities on the Exchange, BYX, EDGA
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
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
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’’).
48 But for the Plan, the Exchange notes that it
would not have proposed to amend the operation
of Market Pegged Orders, Discretionary Orders,
Non-Displayed Orders, Supplemental Peg Orders,
and Display-Price Sliding as described herein.
VerDate Sep<11>2014
18:24 Jul 19, 2016
Jkt 238001
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, Market Pegged Orders,
Discretionary Orders, the alternative
pegging functionality of Mid-Point 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 NonDisplayed Orders, and orders subject to
the Display-Price 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 midpoint 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
PO 00000
Frm 00038
Fmt 4703
Sfmt 4703
Aggressive instruction under Exchange
Rule 11.13(b)(4)(C). 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 Non-Displayed Order is
resting on the BZX 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 reprogram 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 11.27 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.
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Federal Register / Vol. 81, No. 139 / Wednesday, July 20, 2016 / Notices
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.
mstockstill on DSK3G9T082PROD with NOTICES
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views and
arguments concerning the foregoing,
including whether the proposal 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
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
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.
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18:24 Jul 19, 2016
Jkt 238001
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 No. SR–
BatsBZX–2016–29 on the subject line.
Paper Comments
• Send paper comments in triplicate
to Secretary, Securities and Exchange
Commission, 100 F Street NE.,
Washington, DC 20549–1090.
All submissions should refer to File No.
SR–BatsBZX–2016–29. This file number
should be included on the subject line
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.
PO 00000
Frm 00039
Fmt 4703
Sfmt 4703
47193
if email is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
Internet Web site (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for Web site viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE.,
Washington, DC 20549, on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of such
filing will also 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 No. SR–BatsBZX–
2016–29 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
Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2016–17093 Filed 7–19–16; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–78332; File No. TP 16–10]
Order Granting Limited Exemptions
From Exchange Act Rule 10b–17 and
Rules 101 and 102 of Regulation M to
Janus Detroit Street Trust, the Janus
Velocity Tail Risk Hedged Large Cap
ETF, and the Janus Velocity Volatility
Hedged Large Cap ETF
July 14, 2016.
By letter dated July 14, 2016 (the
‘‘Letter’’), as supplemented by
conversations with the staff of the
Division of Trading and Markets,
counsel for Janus Detroit Street Trust
(the ‘‘Trust’’) on behalf of the Trust, the
Janus Velocity Tail Risk Hedged Large
Cap ETF and the Janus Velocity
55 17
E:\FR\FM\20JYN1.SGM
CFR 200.30–3(a)(12).
20JYN1
]]>Agencies
[Federal Register Volume 81, Number 139 (Wednesday, July 20, 2016)]
[Notices]
[Pages 47187-47193]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-17093]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-78334; File No. SR-BatsBZX-2016-29]
Self-Regulatory Organizations; Bats BZX Exchange, Inc.; Notice of
Filing of a Proposed Rule Change To Adopt Paragraph (c) to Exchange
Rule 11.27 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 BZX Exchange, Inc. (the ``Exchange'' or
``BZX'') filed with the Securities and Exchange Commission
(``Commission'') the proposed rule change as described in Items I and
II below, which Items have been prepared by the Exchange. The
Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons.
---------------------------------------------------------------------------
\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 11.27 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(aa).
\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
[[Page 47188]]
at www.batstrading.com, at the principal office of the Exchange, and at
the Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The Exchange has prepared summaries, set forth in
Sections A, B, and C below, of the most significant parts of such
statements.
(A) Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
Background
On August 25, 2014, NYSE Group, Inc., on behalf of the Exchange,
Bats BYX Exchange, Inc. (``BYX''), Chicago Stock Exchange, Inc., Bats
EDGA Exchange, Inc. (``EDGA''), 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\
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\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.
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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 11.27 to
require Members \16\ to comply with the quoting and trading provisions
of the Plan.\17\ The Exchange also adopted paragraph (b) of Rule 11.27
to require Members to comply with the data collection provisions under
Appendix B and C of the Plan.\18\
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\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. 77291 (March 3,
2016), 81 FR 12543 (March 9, 2016) (SR-BATS-2015-108).
\18\ See Securities Exchange Act Release Nos. 77105 (February
10, 2016), 81 FR 8112 (February 17, 2016) (SR-BATS-2015-102); and
77310 (March 7, 2016), 81 FR 13012 (March 11, 2016) (SR-BATS-2016-
27).
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Proposed System Changes
The Exchange proposes to adopt paragraph (c) of Exchange Rule 11.27
to describe changes to System functionality necessary to implement the
Plan. Paragraph (c) of Rule 11.27 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 11.27
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) BZX
Market Orders; (ii) Market Pegged Orders; (iii) Mid-Point Peg Orders;
(iii) [sic] Discretionary Orders; (iv) [sic] Non-Displayed Orders; (v)
[sic] Market Maker Peg Orders; (vi) [sic] Supplemental Peg Orders; and
(vii) [sic] 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
[[Page 47189]]
changes are reasonably designed to comply with applicable quoting and
trading requirements specified in the Plan.
BZX Market Orders
A BZX 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. BZX Market Orders shall not trade through Protected
Quotations.\19\ Any portion of a BZX 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 11.27(c)(1) that for purposes of determining whether a BZX Market
Order's execution price is more than 5 percent worse than the NBBO
under Rule 11.9(a)(2), the execution price for a buy (sell) order will
be rounded down (up) to the nearest $0.05 increment.
---------------------------------------------------------------------------
\19\ See Exchange Rule 11.9(a)(2).
\20\ Id.
---------------------------------------------------------------------------
Market Pegged Orders
The Exchange proposes to amend the operation of Market Pegged
Orders 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. A Pegged Order is a limit order that after entry into the
System, the price of the order is automatically adjusted by the System
in response to changes in the NBBO. A Pegged Order will peg to the NBB
or NBO or a certain amount away from the NBB or NBO.\21\ A Market
Pegged Order is pegged to the contra-side NBBO.\22\ A User \23\
entering a Market Pegged Order 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. Market Pegged Orders are not eligible
to be displayed on the Exchange.
---------------------------------------------------------------------------
\21\ See Exchange Rule 11.9(c)(8).
\22\ See Exchange Rule 11.9(c)(8)(B).
\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(cc).
---------------------------------------------------------------------------
In Test Groups One and Two, the Exchange proposes to modify the
behavior of Market Pegged Order when it is locked by an incoming BZX
Post Only Order \24\ or Partial Post Only at Limit Order \25\ that does
not remove liquidity pursuant to Rule 11.9(c)(6) or Rule
11.9(c)(7),\26\ respectively. In such case, the Market Pegged Order
would be converted to an executable order and will remove liquidity
against such incoming order. In no case would a Market Pegged Order
execute against an incoming BZX Post Only Order or Partial Post Only at
Limit Order if an order with higher priority is on the BZX Book.\27\
Specifically, if an order other than a Market Pegged Order maintains
higher priority than one or more Market Pegged Orders, the Market
Pegged Order(s) with lower priority will not be converted, as described
above, and the incoming BZX Post Only Order or Partial Post Only at
Limit Order will be posted or cancelled in accordance with Rule
11.9(c)(6) or Rule 11.9(c)(7).
---------------------------------------------------------------------------
\24\ See Exchange Rule 11.9(c)(6).
\25\ See Exchange Rule 11.9(c)(7).
\26\ A BZX Post Only Order will remove contra-side liquidity
from the BZX 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 BZX Book and subsequently provided liquidity,
including the applicable fees charged or rebates provided. See
Exchange Rule 11.9(c)(6). A Partial Post Only at Limit Order will
remove liquidity from the BZX Book up to the full size of the order
if, at the time of receipt, it can be executed at prices better than
its limit price. See Exchange Rule 11.9(c)(7).
\27\ The term ``BZX Book'' is defined as the ``System's
electronic file of orders.'' See Exchange Rule 1.5(e).
---------------------------------------------------------------------------
The Exchange notes that Market Pegged Orders are aggressive by
nature and believes executing the order in such circumstance is
appropriate. The Exchange also notes that the proposed behavior for
Market Pegged Orders in Test Groups One and Two is identical to the
operation of orders with the Super Aggressive Routing instruction under
Exchange Rule 11.13(b)(4)(C). When an order with a Super Aggressive
instruction is locked by an incoming BZX Post Only Order or Partial
Post Only at Limit Order that does not remove liquidity pursuant to
Rule 11.9(c)(6) or Rule 11.9(c)(7), respectively, 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 BZX Post Only Order or Partial Post Only at Limit Order if an
order with higher priority is on the BZX Book. The Exchange believes
this change is reasonable and appropriate due to the limited usage of
Market Pegged Orders in Pilot Securities, to avoid unnecessary
additional System complexity, and to ensure the Market Pegged Order may
execute in such circumstance.
The Exchange also proposes to not accept Market Pegged Orders 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 11.27(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
Market Pegged Orders in Test Group Three. A vast majority of Market
Pegged Orders 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, a Market Pegged Order 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. A Market Pegged
Order to buy at $10.10 with a zero Offset is entered on the Exchange.
The order would be ranked and hidden on the BZX 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 Market Pegged
[[Page 47190]]
Orders 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 Market Pegged Orders 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(w).
\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
11.27(a)(7)(A)(i). These additional routed orders also must be
marked as Trade-at Intermarket Sweep Orders. Id.
---------------------------------------------------------------------------
Mid-Point Peg Orders
A Mid-Point 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 Mid-Point Peg Orders to explicitly state that Mid-Point
Peg Orders in Pilot Securities may not be entered in increments other
than $0.05. The System will execute a Mid-Point 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 Mid-Point 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 11.11.
\32\ See Exchange Rule 11.9(c)(9).
\33\ See Sections VI(B), (C), and (D) of the Plan. See also
Exchange Rules 11.27(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 Orders
The Exchange proposes to not accept Discretionary Orders 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, a Discretionary Order is a Limit Order
with 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 a
Discretionary Order 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, Discretionary Orders 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
Discretionary Orders in Pilot Securities does not justify the
additional System complexity that would be created by supporting
Discretionary Orders. As a result of these factors the Exchange
proposes to not accept Discretionary Orders in all Test Groups and the
Control Group.
---------------------------------------------------------------------------
\35\ See Exchange Rule 11.9(c)(10).
---------------------------------------------------------------------------
Non-Displayed Orders
The Exchange proposes to re-price to the midpoint of the NBBO Non-
Displayed Orders in Test Group Three that are priced in a permissible
increment better than the midpoint of the NBBO. A Non-Displayed Order
is a Market or Limit Order that is not displayed on the Exchange.\36\
Exchange Rule 11.27(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, a Non-Displayed Order that
is able to execute at the price of the Protected Quotation would not be
able to do so in Test Group Three 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 BZX 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 Non-Displayed Orders in Test
Group Three, the Exchange proposes to re-price to the midpoint of the
NBBO Non-Displayed Orders that are priced in a permissible increment
better than the midpoint of the NBBO.
---------------------------------------------------------------------------
\36\ See Exchange Rule 11.9(c)(11).
\37\ Under Exchange Rule 11.12(a)(2), 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 11.8) 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
11.8(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 11.9(c)(16).
---------------------------------------------------------------------------
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 BZX 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
[[Page 47191]]
Prohibition.\40\ Therefore, the Exchange proposes to not accept
Supplemental Peg Orders in Test Group Three.
---------------------------------------------------------------------------
\39\ See Exchange Rule 11.9(c)(19).
\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 BZX 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 11.9(g)(1)(A).
\42\ See Exchange Rule 11.9(g)(1)(C).
---------------------------------------------------------------------------
As described above, Exchange Rule 11.27(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 Non-
Displayed Order is resting on the BZX 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 Non-Displayed Order is
resting on the BZX 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 11.27(a) and
Interpretation and Policy .11 to Rule 11.27(b) state that Rule 11.27
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 11.27 and, therefore, proposes to delete both
Interpretation and Policy .03 to Rule 11.27(a) and Interpretation and
Policy .11 to Rule 11.27(b) as those provisions would be redundant and
unnecessary. The Exchange also proposes to amend the last sentence of
Rule 11.27(a)(4) to specify that the current permissible price
increments are set forth under Exchange Rule 11.11, Price Variations.
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 BZX
Market Orders, Mid-Point 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 Market
Pegged Orders, Discretionary Orders, Non-Displayed Orders, Supplemental
Peg Orders, and Display-Price Sliding are also consistent with the Act
because
[[Page 47192]]
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 Mid-Point Peg Orders, Market
Pegged Orders, Non-Displayed Orders, 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, EDGA and EDGX
combined. Notably, Discretionary Orders accounted for 0.00% of volume
in eligible Pilot Securities on the Exchange, BYX, EDGA 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 Market Pegged Orders,
Discretionary Orders, Non-Displayed Orders, 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, Market Pegged Orders, Discretionary Orders, the alternative
pegging functionality of Mid-Point 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 Non-Displayed Orders, and orders
subject to the Display-Price 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
11.13(b)(4)(C). 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
Non-Displayed Order is resting on the BZX 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 11.27
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.
[[Page 47193]]
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period (i) as the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reasons for so finding or (ii) as to
which the Exchange consents, the Commission will: (a) By order approve
or disapprove such proposed rule change, or (b) institute proceedings
to determine whether the proposed rule change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the foregoing, including whether the proposal 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\
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\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.
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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\
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\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.
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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 No. SR-BatsBZX-2016-29 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.
All submissions should refer to File No. SR-BatsBZX-2016-29. This file
number should be included on the subject line if email is used. To help
the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's Internet Web site (https://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all
written statements with respect to the proposed rule change that are
filed with the Commission, and all written communications relating to
the proposed rule change between the Commission and any person, other
than those that may be withheld from the public in accordance with the
provisions of 5 U.S.C. 552, will be available for Web site viewing and
printing in the Commission's Public Reference Room, 100 F Street NE.,
Washington, DC 20549, on official business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of such filing will also 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 No. SR-BatsBZX-2016-29 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\
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\55\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2016-17093 Filed 7-19-16; 8:45 am]
BILLING CODE 8011-01-P
