[Federal Register Volume 79, Number 214 (Wednesday, November 5, 2014)]
[Notices]
[Pages 65735-65738]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-26230]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-73472; File No. SR-BYX-2014-018]


Self-Regulatory Organizations; BATS Y-Exchange, Inc.; Order 
Granting Approval of a Proposed Rule Change To Establish an Opening 
Process

October 30, 2014.

I. Introduction

    On September 3, 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 add new BATS Rule (``Rule'') 11.23, entitled 
``Opening Process,'' and to make several corresponding changes, in 
order to modify the manner in which the Exchange opens trading in 
individual securities at the beginning of the day and after trading 
halts. The proposed rule change was published for comment in the 
Federal Register on September 19, 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. 73094 (September 15, 
2014), 79 FR 56411 (``Notice'').
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II. Description of the Proposal

    The Exchange has proposed to implement a process for opening 
trading at the beginning of Regular Trading Hours \4\ and re-opening 
trading in such securities following a trading halt. Currently, the 
Exchange accepts orders during the Pre-Opening Session,\5\ and any such 
orders are immediately eligible for execution. Orders that are on the 
BATS Book \6\ at the beginning of Regular Trading Hours remain on the 
BATS Book, subject to the User's instructions, and trading continues 
into Regular Trading Hours without any transition period. Upon a halt, 
the Exchange currently cancels all orders on the BATS Book and does not 
accept any orders until the halt is lifted. The Exchange does not 
currently have a Regular Hours Only (``RHO'') time-in-force.
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    \4\ Regular Trading Hours is defined in Rule 1.5(w).
    \5\ Pre-Opening Session is defined in Rule 1.5(r).
    \6\ BATS Book is defined in Rule 1.5(e).
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    Under the proposal, the Exchange would amend its rules to allow 
orders to be designated RHO, and would accept and queue any such orders 
during the Pre-Opening Session for execution at

[[Page 65736]]

the midpoint of the NBBO \7\ shortly after the beginning of Regular 
Trading Hours (the ``Opening Process'').\8\ The Exchange also has 
proposed to implement a similar process for re-opening trading after a 
halt, suspension, or pause (collectively, a ``Halt''), under which a 
User's orders would remain on the BATS Book unless the User has 
designated that they be cancelled upon a Halt (the ``Re-Opening 
Process'').
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    \7\ NBBO is defined in Rule 1.5(o).
    \8\ Only orders designated RHO would be queued for Opening 
Process participation when submitted during the Pre-Opening Session; 
orders not so designated would continue to be executable immediately 
upon entry during the Pre-Opening Session.
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    Specifically, the Exchange has proposed new Rule 11.9(b)(7), which 
would define RHO as a time-in-force modifier that applies to all 
securities.\9\ Prior to the beginning of Regular Trading Hours, Users 
\10\ that wish to participate in the Opening Process may enter orders 
to buy or sell with a time in force of RHO.\11\ All orders that are 
marked as RHO may participate in the Opening Process except BATS Post 
Only Orders, Partial Post Only at Limit Orders, ISO orders not modified 
by Rule 11.23(a)(1) (as described below), and Minimum Quantity 
Orders.\12\ Limit orders with a Reserve Quantity could participate to 
the full extent of their displayed size and Reserve Quantity.\13\ 
Discretionary Orders could participate only up to their ranked price 
for buy orders or down to their ranked price for sell orders; the 
discretionary range of such orders would not be eligible for 
participation in the Opening Process.\14\ All Pegged Orders and Mid-
Point Peg Orders would be eligible for execution in the Opening Process 
based on their pegged prices.\15\ Orders cancelled before the Opening 
Process and orders not designated RHO would not be eligible to 
participate in the Opening Process.\16\
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    \9\ See proposed Rule 11.9(b)(7). The Exchange also has proposed 
to delete the word ``limit'' from Rule 11.9(b) because a RHO order 
can be either a limit order or a market order. See proposed Rule 
11.9(b).
    \10\ User is defined in Rule 1.5(cc).
    \11\ See proposed Rule 11.23(a).
    \12\ See proposed Rule 11.23(a)(2). For the definitions of BYX's 
order types, see Rule 11.9.
    \13\ See proposed Rule 11.23(a)(2).
    \14\ Id.
    \15\ Id.
    \16\ See proposed Rule 11.23(a).
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    Pursuant to proposed Rule 11.23(a)(1), during the period between 
9:30 a.m. Eastern Time and the occurrence of the Opening Process, all 
non-RHO orders, subject to order instructions, and ISOs designated RHO 
may execute against eligible Pre-Opening Session contra-side interest 
resting in the BATS Book.\17\ The Exchange has proposed to convert any 
unexecuted portion of an ISO designated RHO entered during this period 
into a non-ISO and queue the order for participation in the Opening 
Process.\18\
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    \17\ See proposed Rule 11.23(a)(1).
    \18\ Id.
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    The Exchange has proposed to implement the Opening Process shortly 
after the beginning of Regular Trading Hours, at which point the 
Exchange would attempt to execute all orders eligible for the Opening 
Process in a particular security at the midpoint of the NBBO.\19\ All 
such orders would be processed in time sequence beginning with the 
order with the oldest time stamp, and would be matched until there is 
no remaining volume or there is an order imbalance.\20\ All MTP 
modifiers would be ignored during the matching process.\21\ If no 
matches can be made, or if orders are not executed in whole or part due 
to an imbalance, the Opening Process would conclude with all orders 
that participated in the Opening Process being placed in the BATS Book, 
cancelled, executed, or routed to away Trading Centers \22\ in 
accordance with Rule 11.13(a)(2).\23\ The Exchange notes that because 
an RHO order is not executable until the Opening Process (rather than 
upon entry), to the extent that any RHO order is not executed during 
the Opening Process and is placed on the BATS Book, such order will 
receive a time stamp that reflects the time that the order was placed 
on the BATS Book during the Opening Process and not the time that the 
order was entered for queuing.\24\
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    \19\ See proposed Rule 11.23(a)(3).
    \20\ Id. According to the Exchange, time priority is more 
appropriate for the Opening Process than price-time priority because 
the price of the order is not particularly important to the Opening 
Process, so long as the order is priced at or more aggressively than 
the midpoint of the NBBO. As such, the Exchange believes that there 
is no reason to reward a more aggressive order with priority in the 
Opening Process. See Notice, supra note 3, 79 FR at 56412-13.
    \21\ See proposed Rule 11.23(b).
    \22\ Trading Center is defined in Rule 2.11(a).
    \23\ See proposed Rule 11.23(b).
    \24\ See Notice, supra note 3, 79 FR at 56413.
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    Under proposed Rule 11.23(c), the NBBO that the Exchange would use 
for purposes of setting the Opening Process price would be: (a) When 
the listing exchange is either the NYSE or NYSE MKT, the first NBBO 
subsequent to the first reported trade on the listing exchange after 
9:30:00 a.m. Eastern Time, or the then-prevailing NBBO when the first 
two-sided quotation is published by the listing exchange after 9:30:00 
a.m. Eastern Time, if no first trade is reported by the listing 
exchange within one second of publication of the first two-sided 
quotation by the listing exchange; or (b) for any other listing market, 
the first NBBO disseminated after 9:30:00 a.m. Eastern Time.\25\ The 
Exchange has proposed to differentiate its calculation of the NBBO for 
NYSE and NYSE MKT-listed securities from its calculation of the NBBO 
for securities listed on other exchanges because NYSE and NYSE MKT do 
not offer continuous trading prior to 9:30:00 a.m. Eastern Time whereas 
the other listing exchanges do offer continuous trading prior to 
9:30:00 a.m. Eastern Time. Thus, according to the Exchange, the market 
for trading in NYSE and NYSE MKT-listed securities may take a moment to 
develop after 9:30:00 a.m. Eastern Time whereas the market for 
securities listed on other exchanges is more fully developed 
immediately after 9:30:00 a.m. Eastern Time.\26\
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    \25\ See proposed Rule 11.23(c).
    \26\ See Notice, supra note 3, 79 FR at 56413.
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    If the conditions to establish the price of the Opening Process set 
forth under proposed Rule 11.23(c) do not occur by 9:45:00 a.m. Eastern 
Time, the Exchange has proposed to implement a contingent opening 
process (the ``Contingent Open Process'') under which, instead of being 
matched at the midpoint of the NBBO, orders would be handled in time 
sequence, beginning with the order with the oldest time stamp, and 
placed on the BATS Book, routed, cancelled, or executed in accordance 
with the terms of the order.\27\ The Exchange notes that, because an 
RHO order is not executable until the Opening Process (rather than upon 
entry), any order subject to the Contingent Open Process that is placed 
on the BATS Book would receive a time stamp that reflects the time that 
the order was placed on the BATS Book during the Opening Process and 
not the time that the order was entered for queuing.\28\
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    \27\ See proposed Rule 11.23(d).
    \28\ See Notice, supra note 3, 79 FR at 56413.
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    In addition, the Exchange has proposed that, in the event of a 
Halt, all outstanding orders in the System \29\ will remain on the BATS 
Book except where a User has designated that its orders be 
cancelled.\30\ While a security is subject to a Halt, the Exchange 
would accept and queue orders, prior to the resumption of trading in 
the security, for participation in the Re-Opening Process.\31\ The Re-
Opening Process would occur in the same manner as the Opening Process 
described above, with the following exceptions: (1) Non-RHO orders 
would be eligible for

[[Page 65737]]

participation in the re-opening, but IOC, FOK, BATS Post Only Orders, 
Partial Post Only at Limit Orders, and Minimum Quantity Orders would be 
cancelled or rejected, as applicable, and any ISO that is not IOC or 
FOK would be converted into a non-ISO and be queued for participation 
in the re-opening; and (2) the re-opening would occur at the midpoint 
of: (i) The first NBBO subsequent to the first reported trade on the 
listing exchange following the resumption of trading after a Halt; or 
(ii) the NBBO when the first two-sided quotation is published by the 
listing exchange following the resumption of trading after a Halt if no 
first trade is reported by the listing exchange within one second of 
publication of the first two-sided quotation by the listing 
exchange.\32\ The Exchange has proposed that, where neither of the 
above conditions required to establish the price of the re-opening have 
occurred, the security may be re-opened for trading at the discretion 
of the Exchange and orders will be handled in the same manner as they 
are in the Contingent Open Process.\33\
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    \29\ System is defined in Rule 1.5(aa).
    \30\ See proposed Rule 11.18(f).
    \31\ See proposed Rule 11.23(e).
    \32\ See proposed Rule 11.23(e)(1). The Exchange has proposed to 
wait until the sooner of the first execution on the listing market 
or one second following the publication of the first two-sided 
quotation by the listing exchange because no continuous trading 
occurs on any exchange during a Halt and, according to the Exchange, 
waiting will provide time for the market to become more fully 
established before determining the price at which the Re-Opening 
Process will occur.
    \33\ See proposed Rule 11.23(e)(2).
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III. Discussion and Commission Findings

    After careful review, the Commission finds that the proposed rule 
change is consistent with the requirements of the Act and the rules and 
regulations thereunder that are applicable to a national securities 
exchange.\34\ In particular, the Commission finds that the proposed 
rule change is consistent with Section 6(b)(5) of the Act,\35\ 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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    \34\ 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).
    \35\ 15 U.S.C. 78f(b)(5).
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    The Exchange believes that the proposal is consistent with the Act 
because it is designed to create a more orderly process for opening and 
re-opening trading in securities, and to facilitate price formation. 
Specifically, the Exchange believes that the proposed Opening Process 
will create a more orderly opening for securities and help facilitate 
the price formation process at the beginning of Regular Trading Hours 
because allowing Users to enter orders during the Pre-Opening Session 
for queuing and participation in the Opening Process should help 
prevent the submission of a flood of orders immediately following the 
beginning of Regular Trading Hours.\36\ For similar reasons, the 
Exchange believes that the proposed Re-Opening Process will create a 
more orderly re-opening in securities following a Halt and help 
facilitate price formation.\37\ In addition, the Exchange states that 
allowing certain RHO orders (ISOs designated RHO) and all non-RHO 
orders to interact (and, in the case of non-RHO orders, to be added to 
the BATS Book where there is no contra-side interest) during the period 
between 9:30 a.m. Eastern Time and the occurrence of the Opening 
Process will create a more orderly opening and facilitate the price 
formation process because Users will have the option to enter orders 
that will either participate in the Opening Process or immediately 
interact with liquidity from the Pre-Opening Session, allowing trading 
to continue while the Exchange is waiting for the conditions necessary 
to complete the Opening Process.\38\
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    \36\ See Notice, supra note 3, 79 FR at 564214. The Exchange 
further states that, because the Opening Process price will be the 
midpoint of the NBBO, the Opening Process will occur at a price that 
is based on the best available pricing under current market 
conditions, which also will help create a more orderly opening and 
facilitate the price formation process. Id. at 56414.
    \37\ Id. at 56414.
    \38\ Id.
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    The Exchange also believes that certain features of the Opening 
Process and Re-Opening Process are consistent with the Act. The 
Exchange states that the proposed exclusion of BATS Post Only Orders, 
Partial Post Only at Limit Orders, ISOs, and Minimum Quantity Orders 
from participation in the Opening Process is consistent with Section 
6(b)(5) of the Act because such order types do not make sense in the 
context of queuing orders for the Opening Process.\39\ Moreover, 
according to the Exchange, its proposal to allow an ISO marked RHO to 
execute against eligible Pre-Opening Session interest during the period 
between 9:30 a.m. Eastern Time and the occurrence of the Opening 
Process, and then convert the unexecuted portion of the order into a 
non-ISO for queuing for participation in the Opening Process, is 
consistent with the requirements of Regulation NMS.\40\ According to 
the Exchange, after 9:30 a.m. Eastern Time, there may be a protected 
bid or offer displayed by the Exchange that a User who has submitted an 
ISO designated RHO would like to execute against, and this aspect of 
the proposal would permit such an execution to occur prior to the ISO 
being converted into a non-ISO and queued for participation in the 
Opening Process.\41\
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    \39\ Id.
    \40\ Id.; see also 17 CFR 242.600.
    \41\ See Notice, supra note 3, 79 FR at 56414.
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    In addition, the Exchange states that the proposed Contingent 
Opening Process is designed 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 because it will 
help to ensure that the Exchange opens trading in a fair and orderly 
manner by providing a means for opening trading in a security when 
there is no two-sided NBBO in the security for fifteen minutes after 
the beginning of Regular Trading Hours.\42\ The Exchange believes that 
fifteen minutes is a reasonable amount of time to wait for the 
establishment of a two-sided NBBO because it marks a point at which the 
market in a security has had a sufficient amount of time to develop 
while simultaneously providing a reasonable cut-off point at which the 
Exchange may open the security for Regular Trading Hours trading.\43\ 
The Exchange also believes that handling all orders queued for 
participation in the Opening Process in time sequence after fifteen 
minutes will help to ensure that trading opens in as fair and orderly a 
manner as possible.\44\
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    \42\ Id.
    \43\ Id.
    \44\ Id.
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    Lastly, the Exchange states that the proposed Opening Process will 
provide Users with greater control and flexibility when entering orders 
in securities by allowing them to enter orders for participation in 
Regular Hours Trading during the Pre-Opening Session, rather than 
permitting them to enter such orders only after Regular Trading Hours 
have begun.\45\ According to the Exchange, allowing Users that do not 
want to participate in the Pre-Opening Session to enter RHO orders 
prior to Regular Trading Hours will simplify the order entry process 
for such Users and remove impediments to a free and open market.\46\
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    \45\ Id.
    \46\ Id.
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    For the reasons noted above, the Commission finds that the proposed

[[Page 65738]]

rule change is consistent with the Act, including Section 6(b)(5) of 
the Act,\47\ 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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    \47\ 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,\48\ that the proposed rule change, SR-BYX-2014-018, be, and hereby 
is, approved.
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    \48\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\49\
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    \49\ 17 CFR 200.30-3(a)(12).
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Brent J. Fields,
Secretary.
[FR Doc. 2014-26230 Filed 11-4-14; 8:45 am]
BILLING CODE 8011-01-P