[Federal Register Volume 79, Number 203 (Tuesday, October 21, 2014)]
[Notices]
[Pages 63003-63005]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-24949]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-73363; File No. SR-BATS-2014-038]


Self-Regulatory Organizations; BATS Exchange, Inc.; Order 
Granting Approval of a Proposed Rule Change to Rules 11.9 and 21.1 of 
BATS Exchange, Inc. To Add Price Adjust Functionality

October 15, 2014.

I. Introduction

    On August 26, 2014, BATS Exchange, Inc. (the ``Exchange'' or 
``BATS'') 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 and 21.1 to add Price 
Adjust functionality to the Exchange's equities and options trading 
platforms. 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. 72945 (August 28, 
2014), 79 FR 52790 (``Notice'').
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II. Description of the Proposal

    The Exchange has proposed to amend BATS Rule (``Rule'') 11.9 to add 
a new, optional Price Adjust functionality to the Exchange's cash 
equities trading platform (``BATS Equities'').\4\ Consistent with its 
practice of offering similar functionality for the Exchange's equity 
options trading platform (``BATS Options'') as it does for BATS 
Equities, the Exchange also has proposed to amend Rule 21.1 to add 
Price Adjust functionality to BATS Options.\5\ On both BATS Equities 
and BATS Options, the Price Adjust functionality would have to be 
elected by a User \6\ in order to be applied by the Exchange.
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    \4\ See proposed Rule 11.9(g).
    \5\ See proposed Rules 21.1(i) and (j).
    \6\ 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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BATS Equities

    Currently, the Exchange offers price sliding to ensure compliance 
with Regulation NMS and Regulation SHO for BATS Equities, as well as 
price sliding for BATS Options to ensure compliance with rules 
analogous to Regulation NMS adopted by the Exchange and other options 
exchanges. With respect to price sliding offered to ensure compliance 
with Regulation NMS (``display-price sliding''), under the Exchange's 
current rules for BATS Equities, if, at the time of entry, a non-
routable order would lock or cross a Protected Quotation \7\ 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.\8\ 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.\9\
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    \7\ As defined in Rule 1.5(t), applicable to BATS Equities, 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.'' As defined in BATS Rule 27.1, 
applicable to BATS Options, a ``Protected Quotation'' is ``a 
Protected Bid or Protected Offer.'' In turn, the term ``Protected 
Bid'' or ``Protected Offer'' means ``a Bid or Offer in an options 
series, respectively, that: (A) Is disseminated pursuant to the OPRA 
Plan; and (B) Is the Best Bid or Best Offer, respectively, displayed 
by an Eligible Exchange.'' An ``Eligible Exchange'' is defined in 
Rule 27.1 as means ``a national securities exchange registered with 
the SEC in accordance with Section 6(a) of the Exchange Act that: 
(a) is a Participant Exchange in OCC (as that term is defined in 
Section VII of the OCC by-laws); (b) is a party to the OPRA Plan (as 
that term is described in Section I of the OPRA Plan); and (c) if 
the national securities exchange chooses not to become a party to 
this Plan, is a participant in another plan approved by the 
Commission providing for comparable Trade-Through and Locked and 
Crossed Market protection.''
    \8\ See Rule 11.9(g)(1).
    \9\ 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).\10\ 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

[[Page 63004]]

(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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    \10\ 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,\11\ 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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    \11\ 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.\12\ 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.\13\ 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.\14\ 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.\15\ 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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    \12\ See proposed Rule 11.9(g)(2)(B).
    \13\ Id.
    \14\ Id.
    \15\ 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 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).\16\ 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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    \16\ 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.\17\ As such, Non-
Displayed Orders that are subject to Price Adjust (or display-price 
sliding) would be ranked at the locking price on entry.\18\ 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).\19\
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    \17\ See proposed Rule 11.9(g)(4).
    \18\ Id.
    \19\ 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.\20\
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    \20\ See proposed Rule 11.9(g)(6).
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BATS Options--Price Adjust

    In order to maintain consistency between analogous processes 
offered by BATS Equities and BATS Options, the Exchange has proposed to 
amend Rule 21.1 to add Price Adjust functionality to BATS Options, 
largely in conformance with the changes described above related to the 
Price Adjust process on BATS Equities. BATS Options currently offers 
display-price sliding (including multiple display-price sliding) to 
ensure compliance with locked and crossed market rules relevant to 
participation on BATS Options. The proposed Price Adjust functionality 
for BATS Options, as described in proposed Rules 21.1(i) and (j), is 
similar to the proposed functionality for BATS Equities, with the 
exception that it omits language related to applying Price Adjust to 
non-displayed orders because BATS Options does not have non-displayed 
orders.

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.\21\ In particular, the Commission finds that the 
proposed rule change is consistent with Section 6(b)(5) of the Act,\22\ 
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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    \21\ 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).
    \22\ 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

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6(b)(5) of the Act,\23\ as well as Rule 610 of Regulation NMS \24\ and 
Rule 201 of Regulation SHO.\25\ 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.\26\ 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).\27\
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    \23\ Id.
    \24\ 17 CFR 242.610.
    \25\ 17 CFR 242.201.
    \26\ See Notice, supra, note 3 at 52793.
    \27\ 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.\28\ 
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.\29\ 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.\30\
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    \28\ Id.
    \29\ Id.
    \30\ 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.\31\ 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.\32\
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    \31\ Id.
    \32\ 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.'' \33\ 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.'' \34\ The Exchange believes that the proposed Price Adjust 
functionality for BATS Equities as well as BATS Options will assist 
Users by displaying orders at permissible prices.\35\ Similarly, Rule 
201 of Regulation SHO \36\ requires trading centers to establish, 
maintain, and enforce written policies and procedures reasonably 
designed to 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.\37\
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    \33\ 17 CFR 242.610(d).
    \34\ Id.
    \35\ See Notice, supra, note 3 at 52793.
    \36\ 17 CFR 242.201.
    \37\ See Notice, supra, note 3 at 52793.
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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,\38\ 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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    \38\ 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,\39\ that the proposed rule change, SR-BATS-2014-038, be, and 
hereby is, approved.
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    \39\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\40\
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    \40\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-24949 Filed 10-20-14; 8:45 am]
BILLING CODE 8011-01-P