Federal Register / Vol. 79, No. 203 / Tuesday, October 21, 2014 / Notices 62993 

1 15 U.S.C. 78s(b)(1). 

2 17 CFR 240.19b–4. 

3See Securities Exchange Act Release No. 72946 

(August 28, 2014), 79 FR 52780 (‘‘Notice’’). 

4See proposed Rule 11.9(g). 

5As 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.’’ 

6As 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.’’ 

7See Rule 11.9(g)(1). 

8The 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 Userselected 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). 

9See proposed Rule 11.9(g)(2)(A). 

10See proposed Rule 11.9(g)(2)(D). 

11See proposed Rule 11.9(g)(2)(B). 

12 Id. 

13 Id. 

14See proposed Rule 11.9(g)(2)(C). 

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 YExchange, 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. 

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. 

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

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 displayprice 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). 

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 nonroutable 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). 

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 reranked 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 redisplayed 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 Multipleprice 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. 

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 

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62994 Federal Register / Vol. 79, No. 203 / Tuesday, October 21, 2014 / Notices 

15See proposed Rule 11.9(g)(3). 

16See proposed Rule 11.9(g)(4). 

17 Id. 

18 Id. 

19See proposed Rule 11.9(g)(6). 

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). 

22 Id. 

23 17 CFR 242.610. 

24 17 CFR 242.201. 

25See Notice, supra, note 3 at 52782. 

26 Id. 

27See id. at 52783. 28 Id. 29 Id. 30See id. at 52782. 31 Id. 32 17 CFR 242.610(d). 33 Id. 34See Notice, supra, note 3 at 52783. 35 17 CFR 242.201. 

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 unslide 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. 

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 displayprice 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 repriced again unless such orders cross a 

Protected Quotation of an external 

market (i.e., such orders are not unslid).18

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

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. 

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

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

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

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 

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Federal Register / Vol. 79, No. 203 / Tuesday, October 21, 2014 / Notices 62995 

36See Notice, supra, note 3 at 52783. 

37 15 U.S.C. 78f(b)(5). 

38 15 U.S.C. 78s(b)(2). 

39 17 CFR 200.30–3(a)(12). 

1 15 U.S.C. 78s(b)(1). 

2 17 CFR 240.19b–4. 

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

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. 

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. 

For the Commission, by the Division of 

Trading and Markets, pursuant to delegated 

authority.39

Kevin M. O’Neill, 

Deputy Secretary. 

[FR Doc. 2014–24952 Filed 10–20–14; 8:45 am] 

BILLING CODE 8011–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–73355; File No. SR–CBOE– 

2014–073] 

Self-Regulatory Organizations; 

Chicago Board Options Exchange, 

Incorporated; Notice of Filing and 

Immediate Effectiveness of a Proposed 

Rule Change Relating to Margin 

Treatment of Over-the-Counter Options 

Contracts Cleared by The Options 

Clearing Corporation 

October 15, 2014. 

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 October 

1, 2014, Chicago Board Options 

Exchange, Incorporated (the ‘‘Exchange’’ 

or ‘‘CBOE’’) filed with the Securities 

and Exchange Commission (the 

‘‘Commission’’) the proposed rule 

change as described in Items I, and II, 

below, which Items have been prepared 

by the Exchange. The Commission is 

publishing this notice to solicit 

comments on the proposed rule change 

from interested persons. 

I. Self-Regulatory Organization’s 

Statement of the Terms of Substance of 

the Proposed Rule Change 

The Exchange proposes to amend its 

rules regarding the margin treatment of 

over-the-counter (‘‘OTC’’) options 

cleared by The Options Clearing 

Corporation (‘‘OCC’’). The text of the 

proposed rule change is provided 

below. (additions are italicized; 

deletions are [bracketed]) 

* * * * * 

Chicago Board Options Exchange, 

Incorporated Rules 

* * * * * 

Rule 1.1. When used in these Rules, 

unless the context otherwise requires: 

(a)–(l) No change. 

Option Contract 

(m) Except as otherwise provided, 

[T]the term ‘‘option contract’’ means a 

put or call issued, or subject to issuance, 

by the Clearing Corporation pursuant to 

the Rules of the Clearing Corporation. 

(n)–(ooo) No change. 

OCC Cleared OTC Option Contract 

(ppp) The term ‘‘OCC cleared OTC 

option contract’’ means an over-thecounter option contract that is issued 

and guaranteed by the Clearing 

Corporation. Except as otherwise 

provided, an OCC cleared OTC option 

contract is not an ‘‘options contract’’ as 

defined in the Rules. 

. . . Interpretations and Policies: 

.01–.05 No change. 

* * * * * 

Rule 12.3. Margin Requirements 

(a) Definitions. For purposes of this 

Rule, the following terms shall have the 

meanings specified below. 

(1)–(8) No change. 

(9) The term ‘‘listed’’ for purposes of 

this Chapter 12 means a security traded 

on a registered national securities 

exchange or automated facility of a 

registered national securities association 

or issued and guaranteed by the 

Clearing Corporation and shall include 

OCC cleared OTC options contracts. 

(10)–(13) No change. 

(14) The term ‘‘OTC option’’ as used 

with reference to a call or a put option 

contract in this Chapter 12 means an 

over-the-counter option contract that is 

issued and guaranteed by the carrying 

broker-dealer and not traded on a 

national securities exchange or issued 

and guaranteed by the Clearing 

Corporation [and is issued and 

guaranteed by the carrying brokerdealer]. 

(b)–(n) No change. 

* * * * * 

Rule 12.4—Portfolio Margin 

Rule 12.4. As an alternative to the 

transaction/position specific margin 

requirements set forth in Rule 12.3 of 

this Chapter 12, a TPH organization may 

require margin for all margin equity 

securities (as defined in Section 220.2 of 

Regulation T), listed options, unlisted 

derivatives, security futures products, 

and index warrants in accordance with 

the portfolio margin requirements 

contained in this Rule 12.4. 

In addition, a TPH organization, 

provided it is a Futures Commission 

Merchant (‘‘FCM’’) and is either a 

clearing member of a futures clearing 

organization or has an affiliate that is a 

clearing member of a futures clearing 

organization, is permitted under this 

Rule 12.4 to combine a customer’s 

related instruments (as defined below), 

listed index options, unlisted 

derivatives, options on exchange traded 

funds, index warrants, and underlying 

instruments and compute a margin 

requirement for such combined 

products on a portfolio margin basis. 

Application of the portfolio margin 

provisions of this Rule 12.4 to IRA 

accounts is prohibited. 

(a) Definitions. 

(1) The term ‘‘listed option’’ for 

purposes of this Rule shall mean any 

equity (or equity index-based) option 

traded on a registered national securities 

exchange or automated facility of a 

registered national securities association 

or issued and guaranteed by the 

Clearing Corporation and shall include 

OCC cleared OTC options contracts. 

(2)–(3) No change. 

(4) The term ‘‘unlisted derivative’’ for 

purposes of this Rule means any equitybased (or equity index-based) unlisted 

option, forward contract or swap that 

can be valued by a theoretical pricing 

model approved by the Securities and 

Exchange Commission and does not 

include OCC cleared OTC options 

contracts. 

(5)–(11) No change. 

(b)–(j) No change. 

* * * * * 

The text of the proposed rule change 

is also available on the Exchange’s Web 

site (http://www.cboe.com/AboutCBOE/

CBOELegalRegulatoryHome.aspx), at 

the Exchange’s Office of the Secretary, 

and at the Commission’s Public 

Reference Room. 

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