[Federal Register Volume 79, Number 203 (Tuesday, October 21, 2014)]
[Notices]
[Pages 62993-62995]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-24952]



[[Page 62993]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-73366; File No. SR-BYX-2014-019]


Self-Regulatory Organizations; BATS Y-Exchange, Inc.; Order 
Granting Approval of a Proposed Rule Change to Rules 11.9 of BATS Y-
Exchange, Inc. To Add Price Adjust Functionality

October 15, 2014.

I. Introduction

    On August 26, 2014, BATS Y-Exchange, Inc. (the ``Exchange'' or 
``BYX'') filed with the Securities and Exchange Commission 
(``Commission'') pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change to amend Exchange Rules 11.9 to add Price Adjust 
functionality to the Exchange. The proposed rule change was published 
for comment in the Federal Register on September 4, 2014.\3\ The 
Commission did not receive any comments on the proposed rule change. 
This order approves the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 72946 (August 28, 
2014), 79 FR 52780 (``Notice'').
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II. Description of the Proposal

    The Exchange has proposed to amend BYX Rule (``Rule'') 11.9 to add 
a new, optional Price Adjust functionality.\4\ The Price Adjust 
functionality would have to be elected by a User \5\ in order to be 
applied by the Exchange.
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    \4\ See proposed Rule 11.9(g).
    \5\ As defined in 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.''
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    Currently, the Exchange offers price sliding to ensure compliance 
with Regulation NMS and Regulation SHO. With respect to price sliding 
offered to ensure compliance with Regulation NMS (``display-price 
sliding''), under the Exchange's current rules, if, at the time of 
entry, a non-routable order would lock or cross a Protected Quotation 
\6\ displayed by another trading center, the Exchange ranks (and in the 
case of a cross, re-prices) such order at the locking price, and 
displays such order at one minimum price variation below the NBO for 
bids and above the NBB for offers.\7\ The Exchange currently offers 
display-price sliding functionality to avoid locking or crossing other 
markets' Protected Quotations, but does not price slide to avoid 
executions on the Exchange's order book (``BATS Book''). Specifically, 
when the Exchange receives an incoming order that could execute against 
resting displayed liquidity but an execution does not occur because 
such incoming order is designated as an order that will not remove 
liquidity (e.g., a BATS Post Only Order), then the Exchange will cancel 
the incoming order unless it is permitted to remove liquidity upon 
entry.\8\
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    \6\ As defined in Rule 1.5(t), a ``Protected Quotation'' is ``a 
quotation that is a Protected Bid or Protected Offer.'' In turn, the 
term ``Protected Bid'' or ``Protected Offer'' means ``a bid or offer 
in a stock that is (i) displayed by an automated trading center; 
(ii) disseminated pursuant to an effective national market system 
plan; and (iii) an automated quotation that is the best bid or best 
offer of a national securities exchange or association.''
    \7\ See Rule 11.9(g)(1).
    \8\ The Exchange notes that BATS Post Only Orders are permitted 
to 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. See Rule 11.9(c)(6). 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).
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    Under the proposed Price Adjust process, by contrast, an order 
eligible for display by the Exchange that, at the time of entry, would 
create a violation of Rule 610(d) of Regulation NMS by locking or 
crossing a Protected Quotation of an external market or the Exchange 
will be ranked and displayed at one minimum price variation below the 
current NBO (for bids) or to one minimum price variation above the 
current NBB (for offers).\9\ Thus, the proposed Price Adjust process 
differs from the Exchange's current display-price sliding process in 
two main ways. First, the Price Adjust process would both rank and 
display such an order at one minimum price variation below the current 
NBO or above the current NBB (rather than ranking the order at the 
locking price). Second, Price Adjust would be based on Protected 
Quotations at external markets and at the Exchange (rather than just 
Protected Quotations at external markets).
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    \9\ See proposed Rule 11.9(g)(2)(A).
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    Because the Exchange will route orders to external markets with 
locking or crossing quotations, the Exchange notes that the Price 
Adjust process would only be applicable to non-routable orders, 
including BATS Only Orders, BATS Post Only Orders and Partial Post Only 
at Limit Orders. In turn, because BATS Only Orders will execute against 
locking or crossing interest on the Exchange (including both Protected 
Quotations as well as any non-displayed interest), the fact that Price 
Adjust would be based on Protected Quotations at the Exchange is only 
relevant for BATS Post Only Orders and Partial Post Only at Limit 
Orders. The Price Adjust process would adjust, as described above, the 
price of a display-eligible BATS Post Only Order or Partial Post Only 
at Limit Order that would lock or cross a Protected Quotation displayed 
by the Exchange unless such order is permitted to remove liquidity as 
described in Rules 11.9(c)(6) and (c)(7), respectively,\10\ whereas the 
display-price sliding process would cancel such order back to the User 
unless it is permitted to remove liquidity under Rules 11.9(c)(6) or 
(c)(7).
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    \10\ See proposed Rule 11.9(g)(2)(D).
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    In addition, the Exchange has proposed that, in the event the NBBO 
changes such that an order subject to Price Adjust would not lock or 
cross a Protected Quotation, the order will receive a new timestamp, 
and will be displayed at the price that originally locked the NBO (for 
bids) or NBB (for offers) on entry.\11\ All orders that are re-ranked 
and re-displayed pursuant to Price Adjust would retain their priority 
as compared to other orders subject to Price Adjust based upon the time 
such orders were initially received by the Exchange.\12\ Further, as 
proposed, following the initial ranking and display of an order subject 
to Price Adjust, an order will only be re-ranked and re-displayed to 
the extent it achieves a more aggressive price.\13\ In order to offer 
multiple-price sliding to Exchange Users that select Price Adjust, the 
Exchange also has proposed that the ranked and displayed prices of an 
order subject to Price Adjust may be adjusted once or multiple times 
depending upon the instructions of a User and changes to the prevailing 
NBBO.\14\ Multiple-price sliding pursuant to Price Adjust would be 
optional and would have to be explicitly selected by a User before it 
will be applied (the same is true for display-price sliding). Orders 
subject to multiple price sliding for Price Adjust would be permitted 
to move all the way back to their most aggressive price, whereas orders 
subject to Price Adjust without an explicit selection of multiple price 
sliding may not be adjusted to their most aggressive price, depending 
upon market conditions and the limit price of the order upon entry.
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    \11\ See proposed Rule 11.9(g)(2)(B).
    \12\ Id.
    \13\ Id.
    \14\ See proposed Rule 11.9(g)(2)(C).
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    Further, the Exchange has proposed that in the event the NBBO 
changes such that display-eligible orders subject to display-price 
sliding and Price Adjust

[[Page 62994]]

would not lock or cross a Protected Quotation and are eligible to be 
displayed at a more aggressive price, the System will first display all 
orders subject to display-price sliding at their ranked price followed 
by orders subject to Price Adjust, which will be re-ranked and re-
displayed as set forth in proposed Rule 11.9(g)(2).\15\ The Exchange 
believes it is reasonable to un-slide orders subject to display-price 
sliding before it un-slides orders subject to Price Adjust because 
Price Adjust is a less aggressive form of price sliding than display-
price sliding, in that an order submitted by a User that elects Price 
Adjust will be displayed and ranked at the same price rather than 
ranked at the locking price and displayed at a less aggressive price.
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    \15\ See proposed Rule 11.9(g)(3).
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    The Exchange currently applies display-price sliding to Non-
Displayed Orders that cross Protected Quotations of external markets. 
The Exchange is not proposing to change its handling of Non-Displayed 
Orders other than by updating the language of its rule to reflect that 
it will handle Non-Displayed Orders for which a User has selected Price 
Adjust in the same way as it currently handles Non-Displayed Orders for 
which a User has selected display-price sliding.\16\ As such, Non-
Displayed Orders that are subject to Price Adjust (or display-price 
sliding) would be ranked at the locking price on entry.\17\ The 
proposed rule also would state that price sliding for Non-Displayed 
Orders is functionally equivalent to the handling of displayable orders 
except that such orders will not have a displayed price and will not be 
re-priced again unless such orders cross a Protected Quotation of an 
external market (i.e., such orders are not un-slid).\18\
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    \16\ See proposed Rule 11.9(g)(4).
    \17\ Id.
    \18\ Id.
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    Lastly, the Exchange does not propose to modify its current short 
sale price sliding functionality, which is designed to ensure 
compliance with Regulation SHO, and proposes to apply that 
functionality to orders for which Price Adjust is chosen. As a result, 
orders for which a User selects either display-price sliding or Price 
Adjust will be subject to the Exchange's existing short sale price 
sliding functionality.\19\
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    \19\ See proposed Rule 11.9(g)(6).
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III. Discussion and Commission Findings

    After careful review of the proposal, the Commission finds that the 
proposed rule change is consistent with the requirements of the Act and 
the rules and regulations thereunder that are applicable to a national 
securities exchange.\20\ In particular, the Commission finds that the 
proposed rule change is consistent with Section 6(b)(5) of the Act,\21\ 
which requires, among other things, that the rules of an exchange be 
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, and, in general, to protect investors and 
the public interest.
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    \20\ In approving the proposal, the Commission has considered 
the proposed rule's impact on efficiency, competition, and capital 
formation. See 15 U.S.C. 78c(f).
    \21\ 15 U.S.C. 78f(b)(5).
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    The Exchange believes that its proposal to offer Price Adjust 
functionality is consistent with Section 6(b)(5) of the Act,\22\ as 
well as Rule 610 of Regulation NMS \23\ and Rule 201 of Regulation 
SHO.\24\ The Exchange notes that it is not modifying the overall 
functionality of price sliding, which, to avoid locking or crossing 
quotations of other market centers or to comply with applicable short 
sale restrictions, displays orders at permissible prices while 
retaining a price at which the User is willing to buy or sell, in the 
event display at such price or an execution at such price becomes 
possible.\25\ Instead, the Exchange is making changes to adopt an 
optional form of price sliding, Price Adjust, which will rank orders at 
their displayed price rather than, as with the current display-price 
sliding process, at the locking price. The exchange notes that, as a 
result, while subject to Price Adjust sliding, an order is ranked at a 
less aggressive price than it would be under the display-price sliding 
process, which may be preferable to certain Users that wish to provide 
liquidity but do not wish to cross the spread (i.e., if buying, do not 
wish to trade at the NBO or if selling, do not wish to trade at the 
NBB).\26\
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    \22\ Id.
    \23\ 17 CFR 242.610.
    \24\ 17 CFR 242.201.
    \25\ See Notice, supra, note 3 at 52782.
    \26\ Id.
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    In addition, as noted above, in contrast to display-price sliding, 
which is based solely on Protected Quotations at equities markets and 
options exchanges other than the Exchange, the proposed Price Adjust 
process would be based on Protected Quotations at external markets and 
at the Exchange. According to the Exchange, applying the Price Adjust 
process to orders that, upon entry, cannot be executed or displayed at 
their limit price should contribute to more displayed liquidity on the 
Exchange than if such orders were cancelled back to the User.\27\ 
Therefore, the Exchange believes the proposal to apply the Price Adjust 
process to orders that cannot be displayed because they would lock or 
cross displayed contra-side interest on the Exchange (and not just 
external markets) will 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.\28\ The Exchange also states that 
the proposed Price Adjust process will enable the System to avoid 
displaying a locking or crossing quotation in order to ensure 
compliance with Rule 610(d) of Regulation NMS.\29\
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    \27\ See id. at 52783.
    \28\ Id.
    \29\ Id.
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    Further, the Exchange believes it is reasonable to un-slide 
display-price sliding orders before it un-slides Price Adjust orders 
because Price Adjust is a less aggressive form of price sliding than 
display-price sliding, in that an order submitted by a User would be 
displayed and ranked at the same price rather than ranked at the 
locking price and displayed at a less aggressive price.\30\ Because 
orders subject to display-price sliding are ranked at and subject to 
execution at higher prices when buying and lower prices when selling, 
the Exchange believes that such orders should be re-displayed before 
orders subject to Price Adjust orders in response to changes to the 
NBBO.\31\
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    \30\ See id. at 52782.
    \31\ Id.
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    Rule 610(d) requires exchanges to establish, maintain, and enforce 
rules that require members reasonably to avoid ``[d]isplaying 
quotations that lock or cross any protected quotation in an NMS 
stock.'' \32\ Such rules must be ``reasonably designed to assure the 
reconciliation of locked or crossed quotations in an NMS stock,'' and 
must ``prohibit . . . members from engaging in a pattern or practice of 
displaying quotations that lock or cross any quotation in an NMS 
stock.'' \33\ The Exchange believes that the proposed Price Adjust 
functionality will assist Users by displaying orders at permissible 
prices.\34\ Similarly, Rule 201 of Regulation SHO \35\ requires trading 
centers to establish, maintain, and enforce written policies and 
procedures reasonably designed to

[[Page 62995]]

prevent the execution or display of a short sale order at a price at or 
below the current NBB under certain circumstances. The Exchange 
represents that its short sale price sliding will continue to operate 
the same for Users that select Price Adjust as it does for Users that 
select the display-price sliding process currently offered by the 
Exchange.\36\
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    \32\ 17 CFR 242.610(d).
    \33\ Id.
    \34\ See Notice, supra, note 3 at 52783.
    \35\ 17 CFR 242.201.
    \36\ See Notice, supra, note 3 at 52783.
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    For the reasons noted above, the Commission finds that the proposed 
rule change is consistent with the Act, including Section 6(b)(5) of 
the Act,\37\ which requires, among other things, that the rules of an 
exchange be designed to 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, and, in general, protect investors 
and the public.
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    \37\ 15 U.S.C. 78f(b)(5).
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V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\38\ that the proposed rule change, SR-BYX-2014-019, be, and hereby 
is, approved.
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    \38\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\39\
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    \39\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-24952 Filed 10-20-14; 8:45 am]
BILLING CODE 8011-01-P