Self-Regulatory Organizations; Bats EDGX Exchange, Inc.; Notice of Filing and Order Granting Accelerated Approval of a Proposed Rule Change to EDGX Rule 21.19, Bats Auction Mechanism, as it Applies to the Equity Options Platform, 8462-8464 [2017-01616]
Download as PDF
8462
Federal Register / Vol. 82, No. 15 / Wednesday, January 25, 2017 / Notices
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.36
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017–01614 Filed 1–24–17; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–79838; File No. SR–
BatsEDGX–2017–05]
Self-Regulatory Organizations; Bats
EDGX Exchange, Inc.; Notice of Filing
and Order Granting Accelerated
Approval of a Proposed Rule Change
to EDGX Rule 21.19, Bats Auction
Mechanism, as it Applies to the Equity
Options Platform
January 18, 2017.
mstockstill on DSK3G9T082PROD with NOTICES
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 January
13, 2017, Bats EDGX Exchange, Inc. (the
‘‘Exchange’’ or ‘‘EDGX’’) filed with the
Securities and Exchange Commission
(the ‘‘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 and, for the
reasons discussed below, is approving
the proposal on an accelerated basis.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange filed a proposal for the
Exchange’s equity options platform
(‘‘EDGX Options’’) concerning a price
improvement mechanism operated by
EDGX Options, the Bats Auction
Mechanism (‘‘BAM’’ or ‘‘BAM
Auction’’), which was recently
approved by the Commission.3 A
specific aspect of BAM is currently
operating on a pilot basis (‘‘Pilot’’),
which is set to expire on January 18,
2017.4 The Pilot concerns the fact that
there is no minimum size requirement
for orders to be eligible for a BAM
Auction, as described below. The
Exchange seeks to make the Pilot
permanent but does not propose any
other changes to BAM.
The text of the proposed rule change
is available at the Exchange’s Web site
36 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 See Securities Exchange Act Release No. 79718
(January 3, 2017) (SR–BatsEDGX–2016–41).
4 See id.
1 15
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21:08 Jan 24, 2017
Jkt 241001
at www.bats.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 III below. The
Exchange has prepared summaries, set
forth in sections A, B, and C below, of
the most significant aspects of such
statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
The purpose of this filing is to make
permanent an aspect of BAM that is
operating as a Pilot by removing
Interpretation and Policy .05 from Rule
21.19.
Background
The Exchange proposed BAM in
September of 2016 as a price
improvement mechanism on the
Exchange.5 The Proposal was amended
by the Exchange on December 15, 2016,6
and approved, as amended, on January
3, 2017.7 BAM Auctions were launched
on the Exchange effective January 4,
2017. BAM includes functionality in
which a Member (an ‘‘Initiating
Member’’) may electronically submit for
execution an order it represents as agent
on behalf of a Priority Customer,8 broker
dealer, or any other person or entity
(‘‘Agency Order’’) against principal
interest or against any other order it
represents as agent (an ‘‘Initiating
Order’’) provided it submits the Agency
5 See Securities Exchange Act Release No. 78988
(September 29, 2016), 81 FR 69172 (October 5,
2016) (SR–BatsEDGX–2016–41) (‘‘Proposal’’).
6 See supra, note 3; see also SR–BatsEDGX–2016–
41 Amendment No. 1, available at: http://
www.bats.com/us/options/regulation/rule_filings/
edgx/.
7 See supra, note 3.
8 The term ‘‘Priority Customer’’ means any person
or entity that is not: (A) A broker or dealer in
securities; or (B) a Professional. The term ‘‘Priority
Customer Order’’ means an order for the account of
a Priority Customer. See Rule 16.1(a)(45). A
‘‘Professional’’ is any person or entity that: (A) is
not a broker or dealer in securities; and (B) places
more than 390 orders in listed options per day on
average during a calendar month for its own
beneficial account(s). All Professional orders shall
be appropriately marked by Options Members. See
Rule 16.1(a)(46).
PO 00000
Frm 00067
Fmt 4703
Sfmt 4703
Order for electronic execution into the
BAM Auction pursuant Rule 21.19. All
options traded on EDGX Options are
eligible for BAM.
Pilot Program
One component of BAM as approved
by the Commission is currently
operating as a Pilot, which is set to
expire on January 18, 2017. The Pilot
concerns that there is no minimum size
requirement for orders to be eligible for
a BAM Auction. The Exchange now
seeks to remove Interpretation and
Policy .05 from Rule 21.19 so that the
Pilot may operate on a permanent basis.
Pursuant to the Pilot, there is no
minimum size requirement for orders to
be eligible for a BAM Auction. During
this Pilot, the Exchange agreed to
submit certain data, periodically as
required by the Commission, to provide
supporting evidence that, among other
things, there is meaningful competition
for all size orders and that there is an
active and liquid market functioning on
the Exchange outside of the Auction
mechanism. The Exchange proposed to
adopt this provision on a pilot basis
based on the fact that multiple other
options exchanges have a similar
provision with respect to their own
price improvement mechanisms and
such provisions have been operating on
a pilot basis.9 Although the Exchange
only recently launched BAM and does
not yet have meaningful data to analyze
pursuant to the Pilot, the Exchange is
proposing to make the Pilot permanent
based on the recent filings by multiple
other options exchanges to make
analogous provisions permanent.10 The
9 See, e.g., Securities Exchange Act Release Nos.
53222 (February 3, 2006), 71 FR 7089 (February 10,
2006) (SR–CBOE–2005–60) (order approving the
CBOE AIM price improvement mechanism,
including that there is no minimum size
requirement on a pilot basis); 73590 (November 13,
2014), 79 FR 68919 (November 19, 2014) (SR–
MIAX–2014–56) (order approving the MIAX PRIME
price improvement mechanism, including that there
is no minimum size requirement on a pilot basis);
76301 (October 29, 2015), 80 FR 68347 (November
4, 2015) (SR–BX–2015–032) (order approving the
NASDAQ BX PRISM price improvement
mechanism, including that there is no minimum
size requirement on a pilot basis).
10 See, e.g., Securities Exchange Act Release Nos.
79499 (December 7 2016), 81 FR 90012 (December
13, 2016) (SR–CBOE–2016–084) (proposal to
modify the CBOE AIM price improvement
mechanism including the proposal to make the
process permanent, specifically that there is no
minimum size requirement); 79500 (December 7,
2016), 81 FR 90030 (December 13, 2016) (SR–
MIAX–2016–46) (proposal to modify the MIAX
PRIME price improvement mechanism including
the proposal to make the process permanent,
specifically that there is no minimum size
requirement); 79465 (December 5, 2016), 81 FR
79465 [sic] (December 9, 2016) (SR–BX–2016–063)
(proposal to modify certain aspects of the NASDAQ
BX PRISM price improvement mechanism
including the proposal to make the process
E:\FR\FM\25JAN1.SGM
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Exchange believes that BAM is
sufficiently similar to these processes
that there is no need to continue the
Pilot in light of the recent filings to
operate similar processes on a
permanent basis. In particular, based on
the rules discussed in additional detail
below as well as the results of similar
mechanisms operated by several other
options exchanges, the Exchange
believes that there will be meaningful
competition in BAM for auctions of all
sizes, that there will continue to be an
active and liquid market functioning on
the Exchange outside of the auction
mechanism, and that there will be
opportunities for price improvement for
orders executed through BAM.
The Exchange believes BAM process
will promote meaningful competition
because it is open to all Members of the
Exchange and, thus, all Members will
have an equal opportunity to respond
with their best prices during a BAM
Auction. Since the Exchange considers
all interest present in the Exchange’s
system, and not solely BAM responses,
for execution against Agency Orders,
those participants who are not explicit
responders to a BAM Auction will
expect executions via BAM as well.11
Further, once an Initiating Member has
submitted an Agency Order for
processing in a BAM Auction, such
Agency Order may not be modified or
cancelled.12 In addition, the Exchange
believes there will be meaningful
competition because an Initiating Order
may not be a solicited order for the
account of any market maker on EDGX
Options (‘‘Options Market Maker’’)
assigned in the affected series on the
Exchange.13 Thus, such Options Market
Makers assigned in the affected series
will presumably be actively quoting in
such series, and participate in BAM as
unrelated orders, and/or will be
responding to BAM Auctions in such
series.
Similarly, the Exchange believes there
will continue to be an active and liquid
market functioning on the Exchange
outside of the auction mechanism for
the same reason noted above, namely
that an Initiating Order may not be a
solicited order for the account of an
Options Market Maker.14 In addition,
resting quotes and orders that were at a
price that is equal to the NBBO on the
opposite side of the market from the
Agency Order (‘‘Priority Orders’’) would
have priority up to their size in the
permanent, including that there is no minimum size
requirement).
11 See Exchange Rule 21.19(b)(3).
12 See Exchange Rule 21.19(b)(1)(A).
13 See Exchange Rule 21.19(a)(6).
14 See id.
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20:29 Jan 24, 2017
Jkt 241001
NBBO at the time an Auction is initiated
(‘‘Initial NBBO’’) at each price level at
or better than such Initial NBBO after
Priority Customer and the Initiating
Member have received allocations.15
Thus, the concept of Priority Orders is
intended to incentivize active
participation on the EDGX Options
order book outside of BAM Auctions.
Finally, the Exchange believes that
there will be opportunities for price
improvement for orders executed
through BAM, including for smaller
sized Agency Orders when the
difference between the NBB and NBO is
$0.01. Pursuant to BAM, if any Agency
Order is for less than 50 option
contracts and the difference between the
NBB and NBO is $0.01, the Initiating
Member must stop the entire Agency
Order at one minimum price
improvement increment better than the
NBBO, which increment shall be
determined by the Exchange but may
not be smaller than $0.01.16 Thus, even
for an Agency Order that may be less
likely to receive price improvement as
compared to other Agency Orders,
namely a smaller order when the spread
is one penny wide, the rules of BAM
require that such order will receive
price improvement.
Based on the foregoing, the Exchange
believes it is appropriate to continue the
no minimum size requirement on a
permanent basis.
2. Statutory Basis
The Exchange believes that its
proposal is consistent with the
requirements of the Act and the rules
and regulations thereunder that are
applicable to a national securities
exchange, and, in particular, with the
requirements of Section 6(b) of the
Act.17 In particular, the proposal is
consistent with Section 6(b)(5) of the
Act 18 because it would promote just
and equitable principles of trade,
remove impediments to, and perfect the
mechanism of, a free and open market
and a national market system.
Specifically, the Exchange believes
that BAM, including the Pilot, results in
increased liquidity available at
improved prices, with competitive final
pricing out of the Initiating Member’s
complete control. The Exchange
believes that BAM promotes and fosters
competition and affords the opportunity
for price improvement to more options
contracts. The Exchange believes that
allowing BAM to continue without a
minimum size requirement is consistent
with the Act based on similar pilots
operated by other options exchanges
with respect to similar price
improvement mechanisms and the
recent filings to operate such
mechanisms and certain aspects thereof
on a permanent basis.19 In addition, the
Exchange believes that the rules
governing BAM, as adopted, will
ensure: (i) That there is meaningful
competition in BAM for auctions of all
sizes; 20 (ii) that there continues to be an
active and liquid market functioning on
the Exchange outside of the auction
mechanism; 21 and (iii) that there will be
opportunities for price improvement for
orders executed through BAM.22 The
Exchange notes that this proposal does
not propose any new policies or
provisions that are unique or unproven,
but instead relates to the continuation of
a program that briefly operated on a
pilot basis.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
The Exchange does not believe that
the proposed rule change will impose
any burden on competition that is not
necessary or appropriate in furtherance
of the purposes of the Act. In this
regard, the Exchange notes that the rule
change is being proposed in order to
continue BAM without a minimum size
requirement. BAM itself was a
competitive response to analogous
programs offered by other options
exchanges but was only recently
approved and launched. At the same
time, other options exchanges that have
been operating similar price
improvement mechanisms for longer
periods of time recently filed to operate
such mechanisms on a permanent basis,
including with regard to the fact that
such mechanisms to not have a
minimum size requirement.23
Accordingly, the Exchange’s proposal to
operate BAM without a minimum size
requirement is a competitive proposal
and the Exchange believes this proposed
rule change is necessary to permit fair
competition among the options
exchanges.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
The Exchange has not solicited, and
does not intend to solicit, comments on
this proposed rule change. The
Exchange has not received any written
19 See
15 See
Exchange Rule 21.19(b)(4)(B)(iii).
16 See Exchange Rule 21.19(a)(1)(A).
17 15 U.S.C. 78f(b).
18 15 U.S.C. 78f(b)(5).
PO 00000
Frm 00068
Fmt 4703
Sfmt 4703
8463
supra, note 10.
supra, notes 11–13 and accompanying text.
21 See supra, notes 14–15 and accompanying text.
22 See supra, note 16 and accompanying text.
23 See supra, note 10.
20 See
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Federal Register / Vol. 82, No. 15 / Wednesday, January 25, 2017 / Notices
IV. Commission’s Findings and Order
Granting Accelerated Approval of
Proposed Rule Change
comments from members or other
interested parties.
III. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
Electronic Comments
• Use the Commission’s Internet
comment form (http://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include File Number SR–
BatsEDGX–2017–05 on the subject line.
Paper Comments
mstockstill on DSK3G9T082PROD with NOTICES
• Send paper comments in triplicate
to Secretary, Securities and Exchange
Commission, 100 F Street NE.,
Washington, DC 20549–1090.
All submissions should refer to File
Number SR–BatsEDGX–2017–05. 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 (http://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for Web site viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE.,
Washington, DC 20549 on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of such
filing also will be available for
inspection and copying at the principal
office of the Exchange. All comments
received will be posted without change;
the Commission does not edit personal
identifying information from
submissions. You should submit only
information that you wish to make
available publicly. All submissions
should refer to File Number SR–
BatsEDGX–2017–05, and should be
submitted on or before February 15,
2017.
VerDate Sep<11>2014
21:25 Jan 24, 2017
Jkt 241001
After careful review, the Commission
finds that the proposed rule change is
consistent with the requirements of the
Act and the rules and regulations
thereunder applicable to a national
securities exchange and, in particular,
with Section 6(b) of the Act.24 In
particular, the Commission finds that
the proposed rule change is consistent
with Section 6(b)(5) of the Act,25 which
requires, among other things, that the
rules of a national securities exchange
be designed to prevent fraudulent and
manipulative acts and practices, to
promote just and equitable principles of
trade, to foster cooperation and
coordination with persons engaged in
regulating, clearing, settling, processing
information with respect to, and
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 customers, issuers,
brokers and dealers.
The Commission notes that BAM is
designed to provide customers with an
opportunity for price improvement to
orders, including orders of fewer than
50 contracts. The Commission also
notes that BAM currently requires price
improvement for Agency Orders of
fewer than 50 contracts when the NBBO
has a bid/ask differential of $0.01, a
situation in which an Agency Order
may be less likely to receive price
improvement due to the limited
spread.26 In addition, the Commission
notes that BAM is designed to
encourage competition and promote an
active and liquid market outside of
BAM. Specifically, the Commission
notes that the Exchange’s rules provide
for broad participation in BAM,27
promote market maker participation by
prohibiting an Initiating Order from
being a solicited order for the account
of a market maker assigned in the
affected series,28 and encourage
competitive quoting outside BAM by
providing Priority Order status in a
24 15 U.S.C. 78f(b). In approving this proposed
rule change, the Commission has considered the
proposed rule’s impact on efficiency, competition,
and capital formation. See 15 U.S.C. 78c(f).
25 15 U.S.C. 78f(b)(5).
26 See Exchange Rule 21.19(a)(1)(A). Other
options exchanges with price improvement
auctions have provided data to the Commission
demonstrating that such orders receive relatively
small amounts of price improvement. See, e.g.,
Securities Exchange Act Release No. 79465
(December 5, 2016), 81 FR 89167, 89169 (December
9, 2016) (SR–BX–2016–063).
27 See, e.g., Exchange Rule 21.19(b)(3).
28 See Exchange Rule 21.19(a)(6).
PO 00000
Frm 00069
Fmt 4703
Sfmt 9990
BAM Auction.29 Finally, the
Commission notes that the rules
governing EDGX’s BAM are similar to
those governing auction mechanisms
operating at other options exchanges.30
Thus, the Commission has determined
to approve the Exchange’s proposal to
approve the Pilot on a permanent basis.
The Exchange has requested that the
Commission find good cause for
approving the proposed rule change
prior to the 30th day after publication of
the notice thereof in the Federal
Register. The Exchange stated that
accelerated approval of its proposal
would allow the applicable rules to
remain in effect following the expiration
of the Pilot on January 18, 2017, which
would provide certainty to members of
the Exchange because it will allow BAM
to continue on the Exchange
uninterrupted. For this reason, the
Commission believes that good cause
exists for accelerated approval of the
proposed rule change. Accordingly, the
Commission finds good cause, pursuant
to Section 19(b)(2) of the Act,31 to
approve the proposed rule change prior
to the 30th day after the date of
publication of the notice of filing thereof
in the Federal Register.
V. Conclusion
It is therefore ordered, pursuant to
Section 19(b)(2) of the Act,32 that the
proposed rule change (SR–BatsEDGX–
2017–05) be, and hereby is, approved on
an accelerated basis.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.33
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017–01616 Filed 1–24–17; 8:45 am]
BILLING CODE 8011–01–P
29 See
Exchange Rule 21.19(b)(4)(B)(iii).
e.g., CBOE Rule 6.74A and Chapter VI,
Section 9 of the BX Options Rules. These rules have
also been operating on a pilot basis, which the
exchanges have similarly proposed to make
permanent. See supra note 10. The Commission
notes that, in conjunction with EDGX’s proposal, it
is approving comparable pilot programs in effect on
other options exchanges. See e.g., Securities
Exchange Act Release No. 79812 (January 17, 2017)
(SR–BOX–2016–58).
31 15 U.S.C. 78s(b)(2).
32 15 U.S.C. 78s(b)(2).
33 17 CFR 200.30–3(a)(12).
30 See,
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Agencies
[Federal Register Volume 82, Number 15 (Wednesday, January 25, 2017)]
[Notices]
[Pages 8462-8464]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-01616]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-79838; File No. SR-BatsEDGX-2017-05]
Self-Regulatory Organizations; Bats EDGX Exchange, Inc.; Notice
of Filing and Order Granting Accelerated Approval of a Proposed Rule
Change to EDGX Rule 21.19, Bats Auction Mechanism, as it Applies to the
Equity Options Platform
January 18, 2017.
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 January 13, 2017, Bats EDGX Exchange, Inc. (the ``Exchange''
or ``EDGX'') filed with the Securities and Exchange Commission (the
``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 and, for the reasons discussed below, is
approving the proposal on an accelerated basis.
---------------------------------------------------------------------------
\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 for the Exchange's equity options
platform (``EDGX Options'') concerning a price improvement mechanism
operated by EDGX Options, the Bats Auction Mechanism (``BAM'' or ``BAM
Auction''), which was recently approved by the Commission.\3\ A
specific aspect of BAM is currently operating on a pilot basis
(``Pilot''), which is set to expire on January 18, 2017.\4\ The Pilot
concerns the fact that there is no minimum size requirement for orders
to be eligible for a BAM Auction, as described below. The Exchange
seeks to make the Pilot permanent but does not propose any other
changes to BAM.
---------------------------------------------------------------------------
\3\ See Securities Exchange Act Release No. 79718 (January 3,
2017) (SR-BatsEDGX-2016-41).
\4\ See id.
---------------------------------------------------------------------------
The text of the proposed rule change is available at the Exchange's
Web site at www.bats.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 III below. The Exchange has prepared summaries, set forth in
sections A, B, and C below, of the most significant aspects of such
statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
The purpose of this filing is to make permanent an aspect of BAM
that is operating as a Pilot by removing Interpretation and Policy .05
from Rule 21.19.
Background
The Exchange proposed BAM in September of 2016 as a price
improvement mechanism on the Exchange.\5\ The Proposal was amended by
the Exchange on December 15, 2016,\6\ and approved, as amended, on
January 3, 2017.\7\ BAM Auctions were launched on the Exchange
effective January 4, 2017. BAM includes functionality in which a Member
(an ``Initiating Member'') may electronically submit for execution an
order it represents as agent on behalf of a Priority Customer,\8\
broker dealer, or any other person or entity (``Agency Order'') against
principal interest or against any other order it represents as agent
(an ``Initiating Order'') provided it submits the Agency Order for
electronic execution into the BAM Auction pursuant Rule 21.19. All
options traded on EDGX Options are eligible for BAM.
---------------------------------------------------------------------------
\5\ See Securities Exchange Act Release No. 78988 (September 29,
2016), 81 FR 69172 (October 5, 2016) (SR-BatsEDGX-2016-41)
(``Proposal'').
\6\ See supra, note 3; see also SR-BatsEDGX-2016-41 Amendment
No. 1, available at: http://www.bats.com/us/options/regulation/rule_filings/edgx/.
\7\ See supra, note 3.
\8\ The term ``Priority Customer'' means any person or entity
that is not: (A) A broker or dealer in securities; or (B) a
Professional. The term ``Priority Customer Order'' means an order
for the account of a Priority Customer. See Rule 16.1(a)(45). A
``Professional'' is any person or entity that: (A) is not a broker
or dealer in securities; and (B) places more than 390 orders in
listed options per day on average during a calendar month for its
own beneficial account(s). All Professional orders shall be
appropriately marked by Options Members. See Rule 16.1(a)(46).
---------------------------------------------------------------------------
Pilot Program
One component of BAM as approved by the Commission is currently
operating as a Pilot, which is set to expire on January 18, 2017. The
Pilot concerns that there is no minimum size requirement for orders to
be eligible for a BAM Auction. The Exchange now seeks to remove
Interpretation and Policy .05 from Rule 21.19 so that the Pilot may
operate on a permanent basis.
Pursuant to the Pilot, there is no minimum size requirement for
orders to be eligible for a BAM Auction. During this Pilot, the
Exchange agreed to submit certain data, periodically as required by the
Commission, to provide supporting evidence that, among other things,
there is meaningful competition for all size orders and that there is
an active and liquid market functioning on the Exchange outside of the
Auction mechanism. The Exchange proposed to adopt this provision on a
pilot basis based on the fact that multiple other options exchanges
have a similar provision with respect to their own price improvement
mechanisms and such provisions have been operating on a pilot basis.\9\
Although the Exchange only recently launched BAM and does not yet have
meaningful data to analyze pursuant to the Pilot, the Exchange is
proposing to make the Pilot permanent based on the recent filings by
multiple other options exchanges to make analogous provisions
permanent.\10\ The
[[Page 8463]]
Exchange believes that BAM is sufficiently similar to these processes
that there is no need to continue the Pilot in light of the recent
filings to operate similar processes on a permanent basis. In
particular, based on the rules discussed in additional detail below as
well as the results of similar mechanisms operated by several other
options exchanges, the Exchange believes that there will be meaningful
competition in BAM for auctions of all sizes, that there will continue
to be an active and liquid market functioning on the Exchange outside
of the auction mechanism, and that there will be opportunities for
price improvement for orders executed through BAM.
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\9\ See, e.g., Securities Exchange Act Release Nos. 53222
(February 3, 2006), 71 FR 7089 (February 10, 2006) (SR-CBOE-2005-60)
(order approving the CBOE AIM price improvement mechanism, including
that there is no minimum size requirement on a pilot basis); 73590
(November 13, 2014), 79 FR 68919 (November 19, 2014) (SR-MIAX-2014-
56) (order approving the MIAX PRIME price improvement mechanism,
including that there is no minimum size requirement on a pilot
basis); 76301 (October 29, 2015), 80 FR 68347 (November 4, 2015)
(SR-BX-2015-032) (order approving the NASDAQ BX PRISM price
improvement mechanism, including that there is no minimum size
requirement on a pilot basis).
\10\ See, e.g., Securities Exchange Act Release Nos. 79499
(December 7 2016), 81 FR 90012 (December 13, 2016) (SR-CBOE-2016-
084) (proposal to modify the CBOE AIM price improvement mechanism
including the proposal to make the process permanent, specifically
that there is no minimum size requirement); 79500 (December 7,
2016), 81 FR 90030 (December 13, 2016) (SR-MIAX-2016-46) (proposal
to modify the MIAX PRIME price improvement mechanism including the
proposal to make the process permanent, specifically that there is
no minimum size requirement); 79465 (December 5, 2016), 81 FR 79465
[sic] (December 9, 2016) (SR-BX-2016-063) (proposal to modify
certain aspects of the NASDAQ BX PRISM price improvement mechanism
including the proposal to make the process permanent, including that
there is no minimum size requirement).
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The Exchange believes BAM process will promote meaningful
competition because it is open to all Members of the Exchange and,
thus, all Members will have an equal opportunity to respond with their
best prices during a BAM Auction. Since the Exchange considers all
interest present in the Exchange's system, and not solely BAM
responses, for execution against Agency Orders, those participants who
are not explicit responders to a BAM Auction will expect executions via
BAM as well.\11\ Further, once an Initiating Member has submitted an
Agency Order for processing in a BAM Auction, such Agency Order may not
be modified or cancelled.\12\ In addition, the Exchange believes there
will be meaningful competition because an Initiating Order may not be a
solicited order for the account of any market maker on EDGX Options
(``Options Market Maker'') assigned in the affected series on the
Exchange.\13\ Thus, such Options Market Makers assigned in the affected
series will presumably be actively quoting in such series, and
participate in BAM as unrelated orders, and/or will be responding to
BAM Auctions in such series.
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\11\ See Exchange Rule 21.19(b)(3).
\12\ See Exchange Rule 21.19(b)(1)(A).
\13\ See Exchange Rule 21.19(a)(6).
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Similarly, the Exchange believes there will continue to be an
active and liquid market functioning on the Exchange outside of the
auction mechanism for the same reason noted above, namely that an
Initiating Order may not be a solicited order for the account of an
Options Market Maker.\14\ In addition, resting quotes and orders that
were at a price that is equal to the NBBO on the opposite side of the
market from the Agency Order (``Priority Orders'') would have priority
up to their size in the NBBO at the time an Auction is initiated
(``Initial NBBO'') at each price level at or better than such Initial
NBBO after Priority Customer and the Initiating Member have received
allocations.\15\ Thus, the concept of Priority Orders is intended to
incentivize active participation on the EDGX Options order book outside
of BAM Auctions.
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\14\ See id.
\15\ See Exchange Rule 21.19(b)(4)(B)(iii).
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Finally, the Exchange believes that there will be opportunities for
price improvement for orders executed through BAM, including for
smaller sized Agency Orders when the difference between the NBB and NBO
is $0.01. Pursuant to BAM, if any Agency Order is for less than 50
option contracts and the difference between the NBB and NBO is $0.01,
the Initiating Member must stop the entire Agency Order at one minimum
price improvement increment better than the NBBO, which increment shall
be determined by the Exchange but may not be smaller than $0.01.\16\
Thus, even for an Agency Order that may be less likely to receive price
improvement as compared to other Agency Orders, namely a smaller order
when the spread is one penny wide, the rules of BAM require that such
order will receive price improvement.
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\16\ See Exchange Rule 21.19(a)(1)(A).
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Based on the foregoing, the Exchange believes it is appropriate to
continue the no minimum size requirement on a permanent basis.
2. Statutory Basis
The Exchange believes that its proposal is consistent with the
requirements of the Act and the rules and regulations thereunder that
are applicable to a national securities exchange, and, in particular,
with the requirements of Section 6(b) of the Act.\17\ In particular,
the proposal is consistent with Section 6(b)(5) of the Act \18\ because
it would promote just and equitable principles of trade, remove
impediments to, and perfect the mechanism of, a free and open market
and a national market system.
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\17\ 15 U.S.C. 78f(b).
\18\ 15 U.S.C. 78f(b)(5).
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Specifically, the Exchange believes that BAM, including the Pilot,
results in increased liquidity available at improved prices, with
competitive final pricing out of the Initiating Member's complete
control. The Exchange believes that BAM promotes and fosters
competition and affords the opportunity for price improvement to more
options contracts. The Exchange believes that allowing BAM to continue
without a minimum size requirement is consistent with the Act based on
similar pilots operated by other options exchanges with respect to
similar price improvement mechanisms and the recent filings to operate
such mechanisms and certain aspects thereof on a permanent basis.\19\
In addition, the Exchange believes that the rules governing BAM, as
adopted, will ensure: (i) That there is meaningful competition in BAM
for auctions of all sizes; \20\ (ii) that there continues to be an
active and liquid market functioning on the Exchange outside of the
auction mechanism; \21\ and (iii) that there will be opportunities for
price improvement for orders executed through BAM.\22\ The Exchange
notes that this proposal does not propose any new policies or
provisions that are unique or unproven, but instead relates to the
continuation of a program that briefly operated on a pilot basis.
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\19\ See supra, note 10.
\20\ See supra, notes 11-13 and accompanying text.
\21\ See supra, notes 14-15 and accompanying text.
\22\ See supra, note 16 and accompanying text.
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B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition that is not necessary or appropriate
in furtherance of the purposes of the Act. In this regard, the Exchange
notes that the rule change is being proposed in order to continue BAM
without a minimum size requirement. BAM itself was a competitive
response to analogous programs offered by other options exchanges but
was only recently approved and launched. At the same time, other
options exchanges that have been operating similar price improvement
mechanisms for longer periods of time recently filed to operate such
mechanisms on a permanent basis, including with regard to the fact that
such mechanisms to not have a minimum size requirement.\23\
Accordingly, the Exchange's proposal to operate BAM without a minimum
size requirement is a competitive proposal and the Exchange believes
this proposed rule change is necessary to permit fair competition among
the options exchanges.
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\23\ See supra, note 10.
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C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
The Exchange has not solicited, and does not intend to solicit,
comments on this proposed rule change. The Exchange has not received
any written
[[Page 8464]]
comments from members or other interested parties.
III. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
Send an email to rule-comments@sec.gov. Please include
File Number SR-BatsEDGX-2017-05 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.
All submissions should refer to File Number SR-BatsEDGX-2017-05.
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 (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments,
all written statements with respect to the proposed rule change that
are filed with the Commission, and all written communications relating
to the proposed rule change between the Commission and any person,
other than those that may be withheld from the public in accordance
with the provisions of 5 U.S.C. 552, will be available for Web site
viewing and printing in the Commission's Public Reference Room, 100 F
Street NE., Washington, DC 20549 on official business days between the
hours of 10:00 a.m. and 3:00 p.m. Copies of such filing also will be
available for inspection and copying at the principal office of the
Exchange. All comments received will be posted without change; the
Commission does not edit personal identifying information from
submissions. You should submit only information that you wish to make
available publicly. All submissions should refer to File Number SR-
BatsEDGX-2017-05, and should be submitted on or before February 15,
2017.
IV. Commission's Findings and Order Granting Accelerated Approval of
Proposed Rule Change
After careful review, the Commission finds that the proposed rule
change is consistent with the requirements of the Act and the rules and
regulations thereunder applicable to a national securities exchange
and, in particular, with Section 6(b) of the Act.\24\ In particular,
the Commission finds that the proposed rule change is consistent with
Section 6(b)(5) of the Act,\25\ which requires, among other things,
that the rules of a national securities exchange be designed to prevent
fraudulent and manipulative acts and practices, to promote just and
equitable principles of trade, to foster cooperation and coordination
with persons engaged in regulating, clearing, settling, processing
information with respect to, and 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 customers, issuers, brokers and dealers.
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\24\ 15 U.S.C. 78f(b). In approving this proposed rule change,
the Commission has considered the proposed rule's impact on
efficiency, competition, and capital formation. See 15 U.S.C.
78c(f).
\25\ 15 U.S.C. 78f(b)(5).
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The Commission notes that BAM is designed to provide customers with
an opportunity for price improvement to orders, including orders of
fewer than 50 contracts. The Commission also notes that BAM currently
requires price improvement for Agency Orders of fewer than 50 contracts
when the NBBO has a bid/ask differential of $0.01, a situation in which
an Agency Order may be less likely to receive price improvement due to
the limited spread.\26\ In addition, the Commission notes that BAM is
designed to encourage competition and promote an active and liquid
market outside of BAM. Specifically, the Commission notes that the
Exchange's rules provide for broad participation in BAM,\27\ promote
market maker participation by prohibiting an Initiating Order from
being a solicited order for the account of a market maker assigned in
the affected series,\28\ and encourage competitive quoting outside BAM
by providing Priority Order status in a BAM Auction.\29\ Finally, the
Commission notes that the rules governing EDGX's BAM are similar to
those governing auction mechanisms operating at other options
exchanges.\30\ Thus, the Commission has determined to approve the
Exchange's proposal to approve the Pilot on a permanent basis.
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\26\ See Exchange Rule 21.19(a)(1)(A). Other options exchanges
with price improvement auctions have provided data to the Commission
demonstrating that such orders receive relatively small amounts of
price improvement. See, e.g., Securities Exchange Act Release No.
79465 (December 5, 2016), 81 FR 89167, 89169 (December 9, 2016) (SR-
BX-2016-063).
\27\ See, e.g., Exchange Rule 21.19(b)(3).
\28\ See Exchange Rule 21.19(a)(6).
\29\ See Exchange Rule 21.19(b)(4)(B)(iii).
\30\ See, e.g., CBOE Rule 6.74A and Chapter VI, Section 9 of the
BX Options Rules. These rules have also been operating on a pilot
basis, which the exchanges have similarly proposed to make
permanent. See supra note 10. The Commission notes that, in
conjunction with EDGX's proposal, it is approving comparable pilot
programs in effect on other options exchanges. See e.g., Securities
Exchange Act Release No. 79812 (January 17, 2017) (SR-BOX-2016-58).
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The Exchange has requested that the Commission find good cause for
approving the proposed rule change prior to the 30th day after
publication of the notice thereof in the Federal Register. The Exchange
stated that accelerated approval of its proposal would allow the
applicable rules to remain in effect following the expiration of the
Pilot on January 18, 2017, which would provide certainty to members of
the Exchange because it will allow BAM to continue on the Exchange
uninterrupted. For this reason, the Commission believes that good cause
exists for accelerated approval of the proposed rule change.
Accordingly, the Commission finds good cause, pursuant to Section
19(b)(2) of the Act,\31\ to approve the proposed rule change prior to
the 30th day after the date of publication of the notice of filing
thereof in the Federal Register.
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\31\ 15 U.S.C. 78s(b)(2).
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V. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\32\ that the proposed rule change (SR-BatsEDGX-2017-05) be, and
hereby is, approved on an accelerated basis.
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\32\ 15 U.S.C. 78s(b)(2).
\33\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\33\
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-01616 Filed 1-24-17; 8:45 am]
BILLING CODE 8011-01-P