[Federal Register Volume 80, Number 32 (Wednesday, February 18, 2015)]
[Notices]
[Pages 8734-8741]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-03223]



[[Page 8734]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-74250; File No. SR-BYX-2015-07)


Self-Regulatory Organizations; BATS Y-Exchange, Inc.; Notice of 
Filing of a Proposed Rule Change to Rules 11.9 of BATS Y-Exchange, Inc.

 February 11, 2015.
    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 30, 2015, BATS Y-Exchange, Inc. (the ``Exchange'' or 
``BYX'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I, II 
and III below, which Items have been prepared by the Exchange. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of the 
Substance of the Proposed Rule Change

    The Exchange filed a proposal to amend Rules 11.9, 11.12, and 11.13 
to clarify and to include additional specificity regarding the current 
functionality of the Exchange's System,\3\ including the operation of 
its order types and order instructions, as further described below.
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    \3\ Exchange Rule 1.5(aa) defines ``System'' 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.''
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    The text of the proposed rule change is available at the Exchange's 
Web site at www.batstrading.com, at the principal office of the 
Exchange, and at the Commission's Public Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the Exchange included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The Exchange has prepared summaries, set forth in 
Sections A, B, and C below, of the most significant parts of such 
statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    On June 5, 2014, Chair Mary Jo White asked all national securities 
exchanges to conduct a comprehensive review of each order type offered 
to members and how it operates.\4\ The proposals set forth below, 
therefore, are the product of a comprehensive review of Exchange system 
functionality conducted by the Exchange and are intended to add 
additional clarity and specificity regarding the current functionality 
of the Exchange's System,\5\ including the operation of its order types 
and order instructions. The Exchange is not proposing any substantive 
modifications to the System.
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    \4\ See Mary Jo White, Chair, Commission, Speech at the Sandler 
O'Neill & Partners, L.P. Global Exchange and Brokerage Conference, 
(June 5, 2014) (available at http://www.sec.gov/News/Speech/Detail/Speech/1370542004312#.VD2HW610w6Y).
    \5\ Exchange Rule 1.5(aa) defines ``System'' 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.''
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    The changes proposed below are designed to update the rulebook to 
reflect current System functionality and include: (i) Making clear that 
orders with a Time-in-Force (``TIF'') of Immediate-or-Cancel (``IOC'') 
can be routed away from the Exchange; (ii) specifying the methodology 
used by the Exchange to determine whether BATS Post Only Orders \6\ 
will remove liquidity from the BATS Book; \7\ (iii) adding additional 
detail to and re-structuring the description of Pegged Orders; (iv) 
adding additional detail to the description of Mid-Point Peg Orders; 
(v) adding additional detail to the description of Discretionary 
Orders; (vi) amending Rule 11.12, Priority of Orders, and Rule 11.13, 
Order Execution, to provide additional specificity and enhance the 
structure of Exchange rules describing the process for ranking, 
executing and routing orders; (vii) adding additional detail to the 
description of orders subject to Re-Route functionality; and (viii) 
making a series of conforming changes to Rules 11.9, 11.12 and 11.13 to 
update cross-references.
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    \6\ See Rule 11.9(c)(6).
    \7\ As defined in Rule 1.5(e).
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Routable Orders With Time in Force of Immediate-or-Cancel
    The Exchange proposes to modify Rule 11.9(b)(1) to update the 
description of the TIF of IOC to make clear that orders with a TIF of 
IOC are routable even though such TIF indicates an instruction to 
execute an order immediately in whole or in part and/or cancel it back. 
Under current rules, the TIF of IOC indicates that an order is to be 
executed in whole or in part as soon as such order is received and the 
portion not executed is to be cancelled. The Exchange proposes to 
expand upon the description of IOC to specify that an order with such 
TIF may be routed away from the Exchange but that in no event will an 
order with such TIF be posted to the BATS Book. The Exchange notes that 
IOC orders routed away from the Exchange are in turn routed as IOC 
orders. The Exchange also notes that current Rule 11.13(a)(2) already 
includes reference to routable IOCs, and the proposed modifications to 
the rule text are intended to add further specificity that IOCs are 
routable.
    In addition to the change described above, the Exchange proposes to 
make clear in Rule 11.9(b)(6) that an order with a TIF of FOK is not 
eligible for routing. Although orders with a TIF of FOK are generally 
treated the same as IOCs, the Exchange does not permit routing of 
orders with a FOK because the Exchange is unable to ensure the 
instruction of FOK (i.e., execution of an order in its entirety) 
through the routing process.
    Finally, in connection with these changes, the Exchange also 
proposes to modify current Rule 11.13(a)(2) (to be re-numbered as Rule 
11.13(b)(2)) to add the cancellation of an unfilled balance of an order 
as one possible outcome after an order has been routed away. Rule 
11.13(a)(2) currently describes other variations of how the Exchange 
handles an order after it has been routed away, but does not 
specifically state that it may be cancelled after the routing process, 
which would be the case with an order submitted to the Exchange with a 
TIF of IOC.
Computation of Economic Best Interest for BATS Post Only Orders
    The Exchange proposes to modify Rule 11.9(c)(6) to specify the 
methodology used by the Exchange to determine whether BATS Post Only 
Orders will remove liquidity from the Exchange's order book. Under the 
Exchange's current rules, a BATS Post Only Order is an order that an 
entering User \8\ intends to be posted to the BATS Book, and thus will 
not ordinarily remove liquidity from the Exchange. However, BATS Post 
Only Orders will

[[Page 8735]]

remove liquidity from the BATS Book if such execution is in the 
economic best interests of the User entering the BATS Post Only Order, 
taking into account applicable fees and rebates.\9\ Specifically, as 
set forth in Rule 11.9(c)(6), BATS Post Only Orders remove liquidity 
from the BATS Book if the value of ``price improvement'' associated 
with such execution equals or exceeds the sum of fees charged for such 
execution and the value of any rebate that would be provided if the 
order posted to the BATS Book and subsequently provided liquidity. The 
Exchange proposes three changes to the description of BATS Post Only 
Orders to make clear the methodology used in calculating whether a BATS 
Post Only Order should remove liquidity on entry. The Exchange notes 
that each of these changes will conform the Exchange's rule governing 
BATS Post Only Orders with Rule 11.6(n)(4) of the Exchange's affiliate, 
EDGX Exchange, Inc. (``EDGX'').
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    \8\ As defined in Exchange Rule 1.5(cc), a User is ``any Member 
or Sponsored Participant who is authorized to obtain access to the 
System pursuant to Rule 11.3.''
    \9\ See Securities Exchange Act Release No. 67092 (June 1, 
2012), 77 FR 33800 (June 7, 2012) (SR-BYX-2012-009) (notice of 
filing and immediate effectiveness of rule change to amend the 
operation of BATS Post Only Orders).
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    First, the Exchange proposes to clarify that rather than requiring 
price improvement, which indicates an execution at a better price level 
than an order's limit price, the Exchange calculates the value of the 
overall execution taking into account applicable fees and rebates. 
Accordingly, to the extent the fee and rebate structure on its own 
(i.e., even at the limit price) makes it economically advantageous to 
remove liquidity rather than post to the BATS Book and subsequently 
provide liquidity, the Exchange will allow a BATS Post Only Order to 
remove liquidity. The Exchange notes that under its current fee 
structure, which provides a rebate for orders that remove liquidity and 
a fee for orders that add liquidity, this, in turn, results in an 
execution of a BATS Post Only Order upon entry any time that there is 
contra-side liquidity. The Exchange proposes the changes herein and to 
generally maintain BATS Post Only Orders, however, to reflect the 
actual functionality of the System, which does perform the specified 
economic best interest analysis and also in the event the Exchange's 
fees change.
    Second, the Exchange proposes to make clear that this methodology 
is applied only to securities priced at $1.00 and above, and thus, that 
all BATS Post Only Orders in securities priced below $1.00 remove 
contra-side liquidity. The Exchange believes it is reasonable to allow 
BATS Post Only Orders to remove liquidity in lower priced securities 
because the Exchange's fee structure never has provided a significant 
rebate or charged a significant fee for such orders. Because the 
execution cost economics are relatively flat, the Exchange believes it 
is more efficient to simply allow all orders in such securities to 
remove liquidity.
    Third, the Exchange proposes to make clear its methodology for 
determining the applicable fees and rebates given the fact that the 
Exchange maintains a tiered pricing structure. Under the Exchange's 
current tiered pricing structure, an entering User may receive a 
variable rebate for adding liquidity depending on the User's volume 
during the month in question. The Exchange determines whether Users 
qualify for higher rebates at the end of the month, looking back at the 
User's activity during the month. To account for this variable rebate 
structure and to ensure that the Exchange does not determine that an 
execution is in an entering User's economic best interests when, in 
fact, it is not due to a different rebate or fee \10\ ultimately 
achieved by the User, the Exchange applies the highest possible rebate 
provided and highest possible fee charged for such executions on the 
Exchange. The Exchange proposes to make this rebate and fee assumption 
clear in the Exchange's rule text.
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    \10\ The Exchange notes that its current fee structure does not 
have a variable fee depending on trading activity during the month. 
If, in the future, the Exchange implements such a fee structure the 
Exchange will use the highest possible fee for purposes of Rule 
11.9(c)(6).
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Pegged Orders
    The Exchange proposes to restructure Rule 11.9(c)(8), related to 
Pegged Orders, and to add additional detail to such Rule regarding the 
handling of such orders. With respect to restructuring, the Exchange 
currently offers two types of Pegged Orders pursuant to Rule 
11.9(c)(8), Primary Pegged Orders and Market Pegged Orders, and 
believes that each types of Pegged Order would be easier to understand 
if described in separate paragraphs. Given the proposal to split the 
Rule to address Primary Pegged Orders and Market Pegged Orders 
separately, the Exchange also proposes to add an additional lead-in 
sentence that summarizes the operation of Pegged Orders generally.
Mid-Point Peg Orders
    The Exchange proposes to add additional specificity regarding Mid-
Point Peg Orders and the handling of such orders when the market is 
locked or crossed. Specifically, the Exchange proposes to add language 
stating that upon instruction from a User Mid-Point Peg Orders will not 
execute when the market is locked. The Exchange makes this feature 
optional because while some Users may prefer not to execute in a locked 
market given that there is no real mid-point in such a situation and it 
might be evidence of a pricing disparity in a security, other Users may 
prefer an execution. The Exchange also proposes to state that Mid-Point 
Peg Orders are not eligible to execute when the NBBO is crossed. The 
Exchange does not execute Mid-Point Peg Orders in a crossed market 
because the pricing of the mid-point, and the security generally, is 
uncertain in such a situation.
Discretionary Orders
    The Exchange proposes to amend the description of Discretionary 
Orders contained in Rule 11.9(c)(10) and to add additional detail 
regarding the execution of such orders, as set forth below. First, the 
current description indicates that a Discretionary Order has a 
displayed price and size and a non-displayed ``discretionary price.'' 
The Exchange proposes to make clear that although a Discretionary Order 
may have a displayed price and size as well as a discretionary price, a 
Discretionary Order may also be fully non-displayed, and thus, will 
have a non-displayed ranked price as well as a discretionary price. In 
addition to reflecting the ability to have a non-displayed 
Discretionary Order, the Exchange proposes various minor wording 
changes to improve the description of Discretionary Orders to make 
clear that such orders use the minimum amount of discretion when 
executing against incoming orders.
    The Exchange also proposes to make clear how a Discretionary Order 
interacts with a BATS Post Only Order or Partial Post Only at Limit 
Order entered at the displayed or non-displayed ranked price of such 
Discretionary Order that does not remove liquidity on entry pursuant to 
Rule 11.9(c)(6) or Rule 11.9(c)(7), respectively, by stating that the 
Discretionary Order is converted to an executable order and will remove 
liquidity against such incoming order. Similar to the Re-Route 
functionality described below, due to the fact that Discretionary 
Orders contain more aggressive prices at which they are willing to 
execute, the Exchange treats Discretionary Orders as aggressive orders 
that would prefer to execute at their displayed or non-displayed ranked 
price than to forgo an execution due to

[[Page 8736]]

applicable fees or rebates. Accordingly, in order to facilitate 
transactions consistent with the instructions of its Users, the 
Exchange executes resting Discretionary Orders (and certain orders with 
a Re-Route instruction, as described below) against incoming orders, 
when such incoming orders would otherwise forego an execution. The 
Exchange notes that the determination of whether an order should 
execute on entry against resting interest, including against resting 
Discretionary Orders, is made prior to determining whether the price of 
such an incoming order should be adjusted pursuant to the Exchange's 
price sliding functionality pursuant to Rule 11.9(g). In other words, 
an execution will have already occurred as set forth above before the 
Exchange would consider whether an order could be displayed and/or 
posted to the BATS Book, and if so, at what price.
Examples--Discretionary Order Executes Against BATS Post Only Orders
    Assume that the NBBO is $10.00 by $10.05, and the Exchange's BBO is 
$9.99 by $10.06. Assume that the Exchange receives a non-routable order 
to buy 100 shares of a security at $10.00 per share designated with 
discretion to pay up to an additional $0.05 per share.
    <bullet> Assume that the next order received by the Exchange is a 
BATS Post Only Order to sell 100 shares of the security at priced at 
$10.03 per share. The BATS Post Only Order would not remove any 
liquidity upon entry pursuant to the Exchange's economic best interest 
functionality, and would post to the BATS Book at $10.03. This would, 
in turn, trigger the discretion of the resting buy order and an 
execution would occur at $10.03. The BATS Post Only Order to sell would 
be treated as the adder of liquidity and the buy order with discretion 
would be treated as the remover of liquidity.
    <bullet> Assume the same facts as above, but that the incoming BATS 
Post Only Order is priced at $10.00 instead of $10.03. As described 
above, under the Exchange's current fee structure, which provides a 
rebate for orders that remove liquidity and a fee for orders that add 
liquidity, the BATS Post Only Order would execute on entry at $10.00 
against the buy order with discretion pursuant to the Exchange's best 
interest functionality. The buy order with discretion would be treated 
as the adder of liquidity and the BATS Post Only Order to sell would be 
treated as the remover of liquidity. Assume, however, for purposes of 
this example that the BATS Post Only Order would not remove any 
liquidity upon entry pursuant to the Exchange's economic best interest 
functionality. Rather than cancelling the incoming BATS Post Only Order 
to sell back to the User, particularly when the resting order is 
willing to buy the security for up to $10.05 per share, the Exchange 
executes at $10.00 the BATS Post Only Order against the resting buy 
order with discretion. As is true in the example above, the BATS Post 
Only Order to sell would be treated as the liquidity adder and the buy 
order with discretion would be treated as the liquidity remover. As set 
forth in more detail below, if the incoming order was not a BATS Post 
Only Order to sell, the incoming order could be executed at the ranked 
price of the Discretionary Order without restriction and would 
therefore be treated as the liquidity remover.
    Additionally, the Exchange proposes to codify the process by which 
it handles all incoming orders that interact with Discretionary Orders. 
First, the Exchange proposes to codify its handling of a contra-side 
order that executes against a resting Discretionary Order at its 
displayed or non-displayed ranked price or that contains a time-in-
force of IOC or FOK and a price in the discretionary range by expressly 
stating that such an incoming order will remove liquidity against the 
Discretionary Order. Second, the Exchange proposes to codify its 
handling of orders that are intended to post to the BATS Book at a 
price within a Discretionary Order's discretionary range. This 
includes, but is not limited to, BATS Post Only Orders and Partial Post 
Only at Limit Orders. Specifically, the Exchange proposes to codify 
current System functionality whereby any contra-side order with a time-
in-force other than IOC or FOK and a price within the discretionary 
range but not at the displayed or non-displayed ranked price of a 
Discretionary Order will be posted to the BATS Book and then the 
Discretionary Order will remove liquidity against such posted order.
Examples--Discretionary Order Executes Against Non-Post Only Orders
    Assume that the NBBO is $10.00 by $10.05, and the Exchange's BBO is 
$9.99 by $10.06. Assume that the Exchange receives an order to buy 100 
shares of a security at $10.00 per share designated with discretion to 
pay up to an additional $0.05 per share.
    <bullet> Assume that the next order received by the Exchange is a 
BATS Only Order to sell 100 shares of the security with a TIF other 
than IOC or FOK priced at $10.03 per share. The BATS Only Order would 
not remove any liquidity upon entry and would post to the BATS Book at 
$10.03. This would, in turn, trigger the discretion of the resting buy 
order and an execution would occur at $10.03. The BATS Only Order to 
sell would be treated as the adder of liquidity and the buy order with 
discretion would be treated as the remover of liquidity.
    <bullet> Assume the same facts as above, but that the incoming BATS 
Only Order is priced at $10.00 instead of $10.03. The BATS Only Order 
would remove liquidity upon entry at $10.00 per share pursuant to the 
Exchange's order execution rules, as described in detail below. 
Contrary to the examples set forth above, the BATS Only Order to sell 
would be treated as the liquidity remover and the resting buy order 
with discretion would be treated as the liquidity adder. The Exchange 
notes that this example operates the same whether an order contains a 
TIF of IOC, FOK or any other TIF.
    The Exchange also proposes to modify the current description of the 
Discretionary Order by eliminating language stating, ``[i]f a 
Discretionary Order is not executed in full, the unexecuted portion of 
the order is automatically re-posted and displayed in the BATS Book 
with a new timestamp, at its original displayed price, and with its 
non-displayed discretionary price offset.'' The Exchange believes this 
language is unnecessarily confusing because the unexecuted portion of 
Discretionary Orders does not actually re-post solely because part of 
the order was executed. Rather, the remaining portion will remain 
resting on the BATS Book without being removed from the BATS Book.
    Finally, because Discretionary Orders have both a price at which 
they will be ranked and an additional discretionary price, the Exchange 
proposes to expressly state how the Exchange handles a routable 
Discretionary Order by stating that such an order will be routed away 
from the Exchange at its full discretionary price. As an example, 
assume the NBBO is $10.00 by $10.05 and the Exchange's BBO is $9.99 by 
$10.06. If the Exchange receives a routable Discretionary Order to buy 
at $10.00 with discretion to pay up to an additional $0.05 per share, 
the Exchange would route the order as a limit order to buy at $10.05. 
Any unexecuted portion of the order would be posted to the BATS Book 
with a ranked price of $10.00 and discretion to pay up to $10.05.
Priority and Execution Algorithm
    With respect to the Exchange's priority and execution algorithm, 
the

[[Page 8737]]

Exchange is proposing various minor and structural changes that are 
intended to emphasize the processes by which orders are accepted, 
priced, ranked and executed, as well as a new provision related to the 
ability of orders to rest at locking prices that is consistent with the 
changes to provisions related to the operation of Discretionary Orders 
described above. First, the Exchange proposes to modify Rule 11.12, 
Priority of Orders, to make clear that the ranking of orders described 
in such rule is in turn dependent on Exchange Rule 11.13(a) which 
discusses the pricing and execution of orders. The Exchange believes 
that this has always been the case under Exchange rules based on the 
reference to the ``Execution Process'' in Rule 11.12; however, this 
reference did not include a cross-reference to Rule 11.13. The Exchange 
also proposes to change the reference within Rule 11.12 to refer to 
ranking rather than executing equally priced trading interest, as the 
Rule as a whole is intended to describe the manner in which resting 
orders are ranked and maintained, specifically in price and time 
priority, while awaiting execution against incoming orders. The 
Exchange does not believe that the proposed modifications substantively 
modify the operation of the rules; however, the Exchange believes that 
it is important to clarify that the ranking of orders is a separate 
process from the execution of orders.
    The Exchange also proposes to specify in Rule 11.12(a)(2)(C) that 
the priority afforded to Pegged Orders is applicable to all non-
displayed Pegged Orders. The Exchange recently began accepting Primary 
Pegged Orders that can be displayed, and if so displayed, the Exchange 
ranks such orders with all other displayed orders. Thus, the Exchange 
proposes to clarify that reference to Pegged Orders in 11.12(a)(2)(C), 
which have lower priority than the displayed size of limit orders and 
non-displayed orders, is a reference specifically to non-displayed 
Pegged Orders.
    Further, the Exchange proposes to adopt new Rule 11.12(a)(3), which 
recognizes existing match trade prevention rules that optionally 
prevent the execution of orders from the same User (i.e., based on the 
User's ``Unique Identifier'', as set forth in Rule 11.9(f)) by stating 
that in such a case the System will not permit such orders to execute 
against one another regardless of priority ranking. Proposed Rule 
11.12(a)(3) is based on EDGX Rule 11.9(a)(3). The Exchange also 
proposes changes to current Rule 11.9(a)(3) and (a)(4) to re-number 
such rules as (a)(4) and (a)(5) as well as to clarify that orders 
retain and lose ``time'' priority under certain circumstances, as 
opposed to priority generally, because retaining or losing price 
priority does not require the same descriptions, as price priority will 
always be retained unless the price of an order changes.
    Next, the Exchange proposes to re-structure Rule 11.13, which 
currently governs both execution and routing logic on the Exchange, by 
more clearly delineating between execution (to be contained in new 
paragraph (a)) and routing (to be contained in new paragraph (b)) and 
by adding additional sub-headings to the execution section. In this 
connection, the Exchange proposes to move language contained within 
Rule 11.13 to the beginning of new paragraph (a) such that the language 
is more generally applicable to the rules governing execution. 
Specifically, the Exchange proposes to relocate language stating that 
any order falling within the parameters of this paragraph shall be 
referred to as ``executable'' and that an order will be cancelled back 
to the User if, based on market conditions, User instructions, 
applicable Exchange Rules and/or the Act and the rules and regulations 
thereunder, such order is not executable, cannot be routed to another 
Trading Center pursuant to Rule 11.13(b) (as proposed to be re-
numbered) or cannot be posted to the BATS Book. The proposed sub-
headings for paragraph (a) regarding order execution are intended to 
delineate between the various rules and National Market System 
(``NMS'') plans that may render an order executable or not, including 
Regulation NMS and Regulation SHO. The Exchange is proposing to add a 
cross-reference in Rule 11.13(a)(3) to its rules related to the Limit 
Up-Limit Down Plan, which is contained in Rule 11.18(e).
    The Exchange proposes to adopt paragraph (C) of Rule 11.13(a)(4) to 
provide further clarity regarding the situations where orders are not 
executable, which although covered in other existing rules, would focus 
on the incoming order on the same side of a displayed order rather than 
the resting order that is rendered not executable because it is 
opposite such displayed order. The proposed provision would replace 
existing text set forth in Rule 11.13(a)(1) to acknowledge that, under 
certain circumstances, there can be locking interest on the Exchange 
but that such interest will not be displayed by the System as a locked 
market. Proposed paragraph (C) would further state that if an incoming 
order is on the same side of the market as an order displayed on the 
BATS Book and upon entry would execute against contra-side interest at 
the same price as such displayed order, such incoming order will be 
cancelled or posted to the BATS Book and ranked in accordance with Rule 
11.12. The Exchange does not allow non-displayed interest that locks a 
contra-side displayed order to execute at such price to avoid an 
apparent priority issue.
    To demonstrate the functionality in place on the Exchange described 
above, assume the NBBO is $10.10 by $10.11. Assume the Exchange has a 
posted and displayed bid to buy 100 shares of a security priced at 
$10.10 per share and a resting non-displayed bid to buy 100 shares of a 
security priced at $10.11 per share. For purposes of this example, 
assume the resting non-displayed bid has not selected the Re-Route 
functionality, which, as described in further detail below, could make 
a resting order executable against an incoming BATS Post Only Order 
under certain circumstances.
    <bullet> Assume that the next order received by the Exchange is a 
BATS Post Only Order to sell 100 shares of the security priced at 
$10.11 per share. As described above, under the Exchange's current fee 
structure, which provides a rebate for orders that remove liquidity and 
a fee for orders that add liquidity, the BATS Post Only Order would 
execute on entry at $10.11 against the resting non-displayed bid 
pursuant to the Exchange's best interest functionality. The non-
displayed bid would be treated as the adder of liquidity and the BATS 
Post Only Order to sell would be treated as the remover of liquidity. 
Assume, however, for purposes of this example that the BATS Post Only 
Order would not remove any liquidity upon entry pursuant to the 
Exchange's economic best interest functionality. With that assumption, 
the BATS Post Only Order would instead post to the BATS Book, and would 
be displayed at $10.11. The display of this order would, in turn, make 
the resting non-displayed bid not executable at $10.11.
    <bullet> Assume the next order received by the Exchange is an order 
to sell 100 shares of the security priced at $10.11 per share. The 
order would not remove any liquidity upon entry because there is a 
displayed order to sell at $10.11 posted on the BATS Book and thus, by 
rule, the Exchange does not maintain any executable buy interest priced 
at $10.11. If the later arriving order to sell at $10.11 contained a 
TIF other than IOC or FOK, it would be posted to the BATS Book and 
displayed at $10.11. If the later arriving order to sell at $10.11 
contained a TIF of IOC or FOK, it would be cancelled back to the User.

[[Page 8738]]

    <bullet> To the extent the BATS Book is in the state set forth to 
conclude the examples above, with a non-executable bid to buy at $10.11 
and one or more offers to sell displayed by the Exchange at $10.11; 
there are several potential outcomes. For instance, any incoming order 
to buy at $10.11 or higher \11\ will execute against the displayed 
order(s) to sell, as such resting orders are fully executable and 
displayed as available offers on the BATS Book. Once all displayed 
liquidity to sell at $10.11 has been executed on the Exchange, the 
resting non-displayed bid to buy at $10.11 will again be fully 
executable. Similarly, if the resting displayed orders to sell that are 
priced at $10.11 are cancelled then the resting non-displayed bid to 
buy at $10.11 will again be fully executable at that price. As 
described in the text and examples below, an incoming sell order priced 
at $10.10 or better will execute against the resting bid at $10.105. 
Finally, the User representing the non-displayed bid to buy at $10.11 
could cancel the order.
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    \11\ The Exchange notes that an incoming order for purposes of 
comparison to a resting order can be any incoming order unless the 
terms of that incoming order itself preclude execution. For 
instance, in this example, an incoming buy order could be routable 
or non-routable, the order could be selected for potential display 
or could include instructions not to display the order, the order 
could have a discretionary price, or several other characteristics. 
Upon entry, unless the terms of the order preclude removing 
liquidity, such as a BATS Post Only order, the characteristics that 
govern the way that the order may be handled once posted to the 
Exchange's order book are irrelevant and any incoming buy order 
priced at $10.11 or higher will execute against the resting offers.
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    The Exchange is also proposing to modify and place in new paragraph 
(D) rule language contained in current Rule 11.13(a)(1) that governs 
the price at which non-displayed locking interest is executable in 
order to further clarify such rule text. Specifically, for bids or 
offers equal to or greater than $1.00 per share, in the event that an 
incoming order is a market order or is a limit order priced more 
aggressively than an order displayed on the Exchange, the Exchange will 
execute the incoming order at, in the case of an incoming sell order, 
one-half minimum price variation less than the price of the displayed 
order, and, in the case of an incoming buy order, at one-half minimum 
price variation more than the price of the displayed order. As is true 
under existing functionality, this order handling is inapplicable for 
bids or offers under $1.00 per share. Proposed paragraph (D) does not 
substantively modify the existing operation of the System but is 
intended to better describe in rule text the process for matching an 
incoming order against an order on the BATS Book when there is a 
displayed order on the same side of the market as the incoming order.
    To demonstrate the operation of this provision, again assume the 
NBBO is $10.10 by $10.11. Assume the Exchange has a posted and 
displayed bid to buy 100 shares of a security priced at $10.10 per 
share and a resting non-displayed bid to buy 100 shares of a security 
priced at $10.11 per share.
    <bullet> Assume that the next order received by the Exchange is a 
BATS Post Only Order to sell 100 shares of the security priced at 
$10.11 per share. As described above, under the Exchange's current fee 
structure, which provides a rebate for orders that remove liquidity and 
a fee for orders that add liquidity, the BATS Post Only Order would 
execute on entry at $10.11 against the resting non-displayed bid 
pursuant to the Exchange's best interest functionality. The non-
displayed bid would be treated as the adder of liquidity and the BATS 
Post Only Order to sell would be treated as the remover of liquidity. 
Assume, however, for purposes of this example that the BATS Post Only 
Order would not remove any liquidity upon entry pursuant to the 
Exchange's economic best interest functionality. With that assumption, 
the BATS Post Only Order to sell would post to the BATS Book and would 
be displayed at $10.11. The display of this order would, in turn, make 
the resting non-displayed bid not executable at $10.11.
    <bullet> If an incoming offer to sell 100 shares at $10.10 is 
entered into the BATS Book, the resting non-displayed bid originally 
priced at $10.11 will be executed at $10.105 per share, thus providing 
a half-penny of price improvement as compared to the order's limit 
price of $10.11. The execution at $10.105 per share also provides the 
incoming offer with a half-penny of price improvement as compared to 
its limit price of $10.10. The result would be the same for an incoming 
market order to sell or any other incoming limit order offer priced at 
$10.10 or below, which would execute against the non-displayed bid at a 
price of $10.105 per share. As above, an offer at the full price of the 
resting and displayed $10.11 offer would not execute against the 
resting non-displayed bid, but would instead either cancel or post to 
the BATS Book behind the original $10.11 offer in priority.
    The Exchange notes that it is proposing to add descriptive titles 
to paragraphs (A) and (B) of Rule 11.13(a)(4), which describe the 
process by which executable orders are matched within the System. 
Specifically, so long as it is otherwise executable, an incoming order 
to buy will be automatically executed to the extent that it is priced 
at an amount that equals or exceeds any order to sell in the BATS Book 
and an incoming order to sell will be automatically executed to the 
extent that it is priced at an amount that equals or is less than any 
order to buy in the BATS Book. These rules further state that an order 
to buy shall be executed at the price(s) of the lowest order(s) to sell 
having priority in the BATS Book and an order to sell shall be executed 
at the price(s) of the highest order(s) to buy having priority in the 
BATS Book. The Exchange emphasizes these current rules only insofar as 
to highlight the interconnected nature of the priority rule.
    The Exchange also proposes to modify existing paragraph (b) of Rule 
11.13 to re-number it as paragraph (b)(5) and to clarify the Exchange's 
rule regarding the priority of routed orders. Paragraph (b) currently 
sets forth the proposition that a routed order does not retain priority 
on the Exchange while it is being routed to other markets. The Exchange 
believes that its proposed clarification to paragraph (b) is 
appropriate because it more clearly states that a routed order is not 
ranked and maintained in the BATS Book pursuant to Rule 11.12(a), and 
therefore is not available to execute against incoming orders pursuant 
to Rule 11.13.
Re-Route Functionality
    The Exchange currently allows Users to submit various types of 
limit orders to the Exchange that are processed pursuant to current 
Exchange Rule 11.13, as described elsewhere in this proposal. To the 
extent an order has not been executed in its entirety against the BATS 
Book, Rule 11.13 describes the process of routing marketable limit 
orders \12\ to one or more Trading Centers, including a description of 
how the Exchange treats any unfilled balance that returns to the 
Exchange following the first attempt to fill the order through the 
routing process. If not filled through routing, and based on the order 
instructions, the unfilled balance of the order may be posted to the 
BATS Book.
---------------------------------------------------------------------------

    \12\ Market orders are also routed away pursuant to Rule 11.13, 
however the Exchange is not proposing any changes to the treatment 
of routed market orders at this time.
---------------------------------------------------------------------------

    Pursuant to Exchange Rule 11.13(a)(4) (to be re-numbered as Rule 
11.13(b)(4) pursuant to this proposal), under certain circumstances the 
Exchange will re-route an order that has been posted to the BATS Book 
if subsequently locked or crossed by another accessible Trading Center. 
The Exchange offers two

[[Page 8739]]

optional Re-Route instructions, the Super Aggressive Re-Route 
instruction and the Aggressive Re-Route instruction. The Super 
Aggressive Re-Route instruction reflects the willingness of the sender 
of the routable order posted to the BATS Book to route to away Trading 
Centers and to remove liquidity from such Trading Centers any time such 
order is locked or crossed (i.e., rather than passively waiting for an 
execution on the BATS Book). The Aggressive Re-Route instruction 
subjects an order to the routing process after being posted to the BATS 
Book only if the order is subsequently crossed by an accessible Trading 
Center (rather than if the order is locked or crossed). The Exchange 
proposes two changes to its rules to reflect current operation of the 
System in connection with Re-Route functionality, as described below.
Non-Displayed Routable Orders
    First, the Exchange proposes to add language to the Aggressive Re-
Route instruction that makes clear that any routable non-displayed 
limit order posted to the BATS Book that is crossed by another 
accessible Trading Center will be automatically routed to that Trading 
Center. As described in Rule 11.9(g)(4), the Exchange re-prices non-
displayed orders to the extent they are crossed by another Trading 
Center to avoid trading-through Protected Quotations displayed by such 
Trading Center. In the process of such price sliding, to the extent a 
non-displayed order is routable, the Exchange will attempt to route the 
order to the Trading Center displaying the crossing quotation that 
prompted the price sliding process.
    As an example of a routable non-displayed order that is handled 
consistent with the Aggressive Re-Route instruction, assume the 
Exchange receives a non-displayed order to buy 300 shares of a security 
at $10.10 per share. Assume further that the NBBO is $10.09 by $10.10 
when the order is received, and the Exchange's lowest priced offer is 
priced at $10.11. The Exchange will route the order away from the 
Exchange as a bid to buy 300 shares at $10.10. Assume that the order 
obtains one 100 share execution through the routing process and then 
returns to the Exchange. The Exchange will post the order as a non-
displayed bid to buy 200 shares at $10.10. If displayed liquidity then 
appears at one or more Trading Centers priced at $10.09 or lower (i.e., 
crossing the posted bid to buy at $10.10), the Exchange will take the 
non-displayed bid off of the BATS Book and again route such order to 
the displayed liquidity at other Trading Centers.
    Second, the Exchange proposes to codify existing System 
functionality by adding rule text to state that, consistent with the 
Super Aggressive Re-Route instruction described in Rule 11.13(b)(4)(B), 
when any order with a Super Aggressive Re-Route instruction is locked 
by an incoming BATS 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,\13\ the Re-Route order is converted to an 
executable order and will remove liquidity against such incoming order. 
The Exchange applies this logic in order to facilitate executions that 
would otherwise not occur due to the instruction of a BATS Post Only 
Order or Partial Post Only at Limit Order to not remove liquidity. 
Because a Super Aggressive Re-Route eligible order is willing to route 
to an away Trading Center and remove liquidity (i.e., pay a fee at such 
Trading Center) when locked or crossed, the Exchange believes it is 
reasonable and consistent with the instruction to force an execution 
between an incoming BATS Post Only Order and an order that has been 
posted to the BATS Book with the Super Aggressive Re-Route instruction. 
The Exchange notes that the determination of whether an order should 
execute on entry against resting interest, including against resting 
orders with a Super Aggressive Re-Route instruction, is made prior to 
determining whether the price of such an incoming order should be 
adjusted pursuant to the Exchange's price sliding functionality 
pursuant to Rule 11.9(g). The Exchange has limited the proposed 
language to BATS Post Only Orders that lock orders with a Super 
Aggressive Re-Route instruction because BATS Post Only Orders that 
cross resting orders will always remove liquidity because it is in 
their economic best interest to do so.\14\ Similarly, Partial Post Only 
Limit Orders execute against crossing interest as set forth in Rule 
11.9(c)(7)(A). The Exchange also proposes to make clear that although 
it will execute an order with a Super Aggressive Re-Route instruction 
against a BATS Post Only Order that would lock it, if an order that 
does not contain a Super Aggressive Re-Route instruction maintains 
higher priority than one or more Super Aggressive Re-Route eligible 
orders, the Super Aggressive Re-Route eligible order(s) with lower 
priority will not be converted, as described above, and the incoming 
BATS 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), 
respectively. The Exchange believes it is necessary to avoid applying 
the Re-Route functionality to Re-Route eligible orders that are resting 
behind orders that are not Re-Route eligible orders to avoid violating 
the Exchange's priority rule, Rule 11.12.
---------------------------------------------------------------------------

    \13\ The Exchange notes that pursuant to Rule 11.9(c)(6), BATS 
Post Only Orders remove liquidity in certain circumstances based on 
an economic analysis that takes into account applicable fees and 
rebates. The Exchange has proposed clarifications to this economic 
analysis as described above. Similarly, Partial Post Only at Limit 
Orders are permitted to remove price improving liquidity as well as 
a User-selected percentage of the remaining order at the limit price 
if, following such removal, the order can post at its limit price. 
See Rule 11.9(c)(7).
    \14\ See id.
---------------------------------------------------------------------------

Example--Super Aggressive Re-Route and BATS Post Only Orders
    Assume that the Exchange receives an order to buy 300 shares of a 
security at $10.10 per share designated with a Super Aggressive Re-
Route instruction. Assume further that the NBBO is $10.09 by $10.10 
when the order is received, and the Exchange's lowest offer is priced 
at $10.11. The Exchange will route the order away from the Exchange as 
a bid to buy 300 shares at $10.10. Assume that the order obtains one 
100 share execution through the routing process and then returns to the 
Exchange. The Exchange will post the order as a bid to buy 200 shares 
at $10.10. If the Exchange subsequently receives a BATS Post Only Order 
to sell priced at $10.09 per share, such order will execute against the 
posted order to buy with an execution price of $10.10. The posted buy 
order will be treated as the liquidity provider and the incoming BATS 
Post Only Order to sell will be treated as the liquidity remover, based 
on the Exchange's rules that execute BATS Post Only Orders on entry if 
such execution is in their economic interest.
    However, assuming the same facts as above, if the incoming BATS 
Post Only Order to sell is priced at $10.10 and also assuming that the 
incoming BATS Post Only Order does not remove liquidity pursuant to the 
economic best interest functionality,\15\ the posted order with a Super 
Aggressive Re-Route instruction will execute against such order at 
$10.10. In this scenario, the posted order to buy will be treated as 
the liquidity remover and the incoming BATS Post Only Order to sell 
will be treated as the liquidity provider.
---------------------------------------------------------------------------

    \15\ As described above, an incoming BATS Post Only Order to 
sell would in fact remove on entry at $10.10 based on the Exchange's 
current fee structure and economic best interest functionality.
---------------------------------------------------------------------------

    Finally, assume that the NBBO is $10.10 by $10.11 and that the 
Exchange has a displayed bid to buy 100 shares

[[Page 8740]]

of a security at $10.10 and a displayed offer to sell 100 shares of a 
security at $10.11. Assume that the displayed bid has not been 
designated with the Super Aggressive Re-Route instruction. Assume next 
that the Exchange receives a second displayable bid to buy 100 shares 
of the same security at $10.10 that has been designated as routable and 
subject to the Super Aggressive Re-Route instruction. Because there is 
no liquidity to which the Exchange can route the order, the second 
order will post to the BATS Book as a bid to buy at $10.10 behind the 
original displayed bid to buy at $10.10. If the Exchange then received 
a BATS Post Only Order to sell 100 shares at $10.10 then no execution 
would occur assuming again that the incoming BATS Post Only Order 
cannot remove liquidity at $10.10 based on the economic best interest 
analysis,\16\ the first order with priority to buy at $10.10 was not 
designated with the Super Aggressive Re-Route instruction and the 
second booked order to buy at $10.10 is not permitted to bypass the 
first order as this would result in a violation of the Exchange's 
priority rule, Rule 11.12.
---------------------------------------------------------------------------

    \16\ Id.
---------------------------------------------------------------------------

2. Statutory Basis
    The Exchange believes that the proposed rule changes are consistent 
with Section 6(b) of the Securities Exchange Act of 1934 (the ``Act'') 
\17\ and further the objectives of Section 6(b)(5) of the Act \18\ 
because they are designed to promote just and equitable principles of 
trade, to remove impediments to and perfect the mechanism of a free and 
open market and a national market system, to foster cooperation and 
coordination with persons engaged in facilitating transactions in 
securities, and, in general, to protect investors and the public 
interest. The proposed rule changes are also designed to support the 
principles of Section 11A(a)(1) \19\ of the Act in that they seek to 
assure fair competition among brokers and dealers and among exchange 
markets.
---------------------------------------------------------------------------

    \17\ 15 U.S.C. 78f(b).
    \18\ 15 U.S.C. 78f(b)(5).
    \19\ 15 U.S. C. 78k-1(a)(1).
---------------------------------------------------------------------------

    The modifications related to routable orders with a TIF of IOC, 
Pegged Orders, Mid-Point Peg Orders, Discretionary Orders, and the 
Exchange's priority, execution and routing rules are each designed to 
add clarity and transparency regarding Exchange System functionality 
without substantively modifying such functionality. Specifically, the 
Exchange believes that the proposed rule changes will provide 
additional clarity and specificity regarding the functionality of the 
System and thus would promote just and equitable principles of trade 
and remove impediments to a free and open market. The Exchange also 
believes that the proposed amendments will contribute to the protection 
of investors and the public interest by making the Exchange's rules 
easier to understand.
    With respect to the additional specificity proposed in connection 
with BATS Post Only Orders, the Exchange believes that the proposed 
rule change is consistent with the Act in that the change will help to 
clarify the methodology used by the Exchange to determine whether BATS 
Post Only Orders will remove liquidity from the BATS Book. The Exchange 
again notes that any methodology other than using the highest possible 
rebate and highest possible fee could result in the Exchange 
determining that an execution was in an entering User's economic best 
interest when, in fact, it was not. For the reasons articulated above, 
the Exchange believes that the proposal is consistent with and supports 
just and equitable principles of trade, removes impediments to, and 
helps to perfect the mechanism of, a free and open market and a 
national market system, and, in general, protects investors and the 
public interest.
    The Exchange also believes it is consistent with the Act to execute 
Discretionary orders and orders with a Super Aggressive Re-Route 
instruction against marketable liquidity (i.e., BATS Post Only Orders 
and Partial Post Only Orders) when an execution would not otherwise 
occur is consistent with both: (i) The Act, by facilitating executions, 
removing impediments and perfecting the mechanism of a free and open 
market and national market system; and (ii) a User's instructions, 
which have evidenced a willingness by the User to pay applicable 
execution fees and/or execute at more aggressive prices than they are 
currently ranked in favor of an execution. The Exchange also believes 
that the proposed rule change provides additional specificity regarding 
the functionality of the System with regard to routable non-displayed 
orders that have been crossed by another accessible Trading Center, 
thereby promoting just and equitable principles of trade and removing 
impediments to a free and open market.

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule changes will 
result in any burden on competition that is not necessary or 
appropriate in furtherance of the purposes of the Act. The proposed 
rule changes are not designed to address any competitive issue but 
rather to add specificity and clarity to Exchange rules, thus providing 
greater transparency regarding the operation of the System.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    The Exchange has neither solicited nor received written comments on 
the proposed rule changes.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the Exchange consents, the Commission will: (a) By order approve 
or disapprove such proposed rule change, or (b) institute proceedings 
to determine whether the proposed rule change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

    <bullet> Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
    <bullet> Send an email to <a href="/cdn-cgi/l/email-protection#740601181159171b1919111a0007340711175a131b02"><span class="__cf_email__" data-cfemail="f381869f96de909c9e9e969d8780b3809690dd949c85">[email protected]</span></a>. Please include 
File Number SR-BYX-2015-07 on the subject line.

Paper Comments

    <bullet> Send paper comments in triplicate to Brent J. Fields, 
Secretary, Securities and Exchange Commission, 100 F Street NE., 
Washington, DC 20549-1090.
    All submissions should refer to File Number SR-BYX-2015-07. 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

[[Page 8741]]

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 at 100 F Street NE., Washington, DC 20549-1090 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-BYX-2015-07, and should be submitted on 
or before March 11, 2015.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\20\
---------------------------------------------------------------------------

    \20\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Brent J. Fields,
Secretary.
[FR Doc. 2015-03223 Filed 2-17-15; 8:45 am]
BILLING CODE 8011-01-P


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