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[Federal Register Volume 79, Number 221 (Monday, November 17, 2014)]
[Notices]
[Pages 68492-68494]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-27065]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-73571; File No. SR-BATS-2014-040]

Self-Regulatory Organizations; BATS Exchange Inc.; Order 
Approving a Proposed Rule Change, as Modified by Amendment No. 1, 
Modifying Rule 21.7 of BATS Exchange, Inc.

November 10, 2014.

I. Introduction

    On September 12, 2014, BATS Exchange, Inc., (``BATS'' or the 
``Exchange'') filed with the Securities and Exchange Commission (the 
``Commission''), pursuant to Section

[[Page 68493]]

19(b)(1) of the Securities Exchange Act of 1934 (``Act'') \1\ and Rule 
19b-4 thereunder,\2\ a proposed rule change amending BATS Rule 21.7. 
The proposed rule change was published for comment in the Federal 
Register on September 30, 2014.\3\ On October 10, 2014, the Exchange 
filed Amendment No. 1 to the proposed rule change.\4\ The Commission 
received no comments on the proposal. This order approves the proposed 
rule change, as modified by Amendment No. 1.
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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. 73203 (September 24, 
2014), 79 FR 58845 (``Notice'').
    \4\ In Amendment No. 1, the Exchange further clarified the 
process by which the Exchange's equity options trading platform 
opens trading at the beginning of the day and after trading halts. 
Amendment No. 1 has been placed in the public comment file for SR-
BATS-2014-040 at http://www.sec.gov/comments/sr-bats-2014-040/bats2014040-1.pdf (See letter from Anders Franzon, VP, Associate 
General Counsel, BATS, to Secretary, Commission, dated October 16, 
2014) and is also available on the Exchange's Web site.
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II. Description of the Proposal

    BATS proposes to amend BATS Rule 21.7 (``Market Opening 
Procedures'') to modify the process by which the Exchange's equity 
options trading platform (``BATS Options'') opens trading at the 
beginning of the day and after trading halts. Specifically, the BATS 
proposal would modify the Opening Process \5\ set forth in BATS Rule 
21.7 as follows: (1) Orders in the Opening Process will be executed 
based on time priority instead of price-time priority; (2) certain 
orders that are not executed during the Opening Process will be treated 
as if they had been entered by a User \6\ rather than canceled; and (3) 
add certain clarifying language to BATS Rule 21.7 in order to make the 
Opening Process more clear.\7\ The Exchange is not proposing to amend 
the process by which orders are entered or the Opening Price is 
determined or validated.
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    \5\ See BATS Rule 21.7(a) (defining ``Opening Process'').
    \6\ See BATS Rule 16.1(a)(63) (defining ``User'').
    \7\ The Exchange also proposes to add titles to BATS Rule 
21.7(a)(1), (2), (3), and (4).
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    Currently, after establishing an Opening Price that is also a Valid 
Price,\8\ orders and quotes in the Exchange's System \9\ that are 
priced equal to or more aggressively than the Opening Price will be 
matched based on price-time priority and in accordance with BATS Rule 
21.8. Under the current process, all orders and quotes or portions 
thereof that are matched pursuant to the Opening Process will be 
executed at the Opening Price. Further, under the current rule, orders 
that meet the following criteria which are not executed during the 
Opening Process are cancelled: (i) Limit orders that are priced equal 
to or more aggressively than the Opening Price; and (ii) market 
orders.\10\ Where the Exchange currently opens trading in a series 
pursuant to BATS Rule 21.7(a)(1)(D) (where there is no NBBO Midpoint, 
no Print, and no Previous Close at a Valid Price) (a ``Contingent 
Open'') and there is at least one price level at which at least one 
contract of a limit order could be executed, the System similarly 
cancels all orders that are priced equal to or more aggressively than 
the midpoint of the most aggressively priced bid and the most 
aggressively priced offer.\11\ The Exchange states that under its 
current Opening Process, limit orders and quotes that are not executed 
during the Opening Process or cancelled become eligible for trading on 
BATS Options immediately following the completion of the Opening 
Process.\12\
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    \8\ See BATS Rule 21.7(a)(2) (defining ``Valid Price'').
    \9\ See BATS Rule 1.5(aa) (defining ``System'').
    \10\ See Notice, supra note 3, at 58845.
    \11\ See id.
    \12\ See id. The Exchange also notes that, under its current 
Opening Process, where there are no orders in a series that are 
matched at the Opening Price, the System will open the series for 
trading. See id. at 58845-58846.
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    The Exchange proposes to amend its rules in order to match orders 
for execution in the Opening Process based on time priority rather than 
price-time priority and in accordance with BATS Rule 21.9. The Exchange 
believes that handling orders in time priority makes more sense than 
price-time priority for the Opening Process because, according to the 
Exchange, the price of an order is not particularly important to the 
Opening Process, so long as the order is priced at or more aggressively 
than the Opening Price, which can only be one of three prices: The 
midpoint of the NBBO; the last regular way print disseminated to the 
OPRA Plan \13\ after 9:30 a.m.; or the last regular way transaction 
from the previous trading day as disseminated pursuant to OPRA.\14\ 
According to the Exchange, because the Opening Price is always based on 
a price-taking process rather than a price-forming process, there is no 
reason to reward a more aggressive order with priority in the Opening 
Process.\15\ Therefore, the Exchange proposes that all orders and 
quotes that are priced equal to or more aggressively than the Opening 
Price will be matched based only on time priority and will be matched 
until there is no remaining volume or there is an imbalance of orders 
that are not executed in whole or in part, at which point all matched 
orders and quotes will be executed at the Opening Price.\16\
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    \13\ See BATS Rule 27.1(15) (defining ``OPRA Plan'').
    \14\ See Notice, supra note 3, at 58846. See also BATS Rule 
27.1(14) (defining ``OPRA'').
    \15\ See Notice, supra note 3, at 58846.
    \16\ See id.
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    The Exchange also proposes to handle all orders that are not 
executed in the Opening Process in time priority. Specifically, the 
Exchange proposes to handle such orders in time sequence, beginning 
with the order with the oldest time stamp and may, in whole or in part, 
place such orders on the BATS Options Book,\17\ cancel the orders, 
execute the orders, or route the orders in accordance with BATS Rule 
21.9.\18\ According to the Exchange, all orders that were eligible for 
execution in the Opening Process that were not executed will be 
processed ahead of any orders received after the conclusion of the 
Opening Process.\19\ If an order is placed on the BATS Options Book, it 
will then be subject to the standard price-time priority and subject to 
BATS Rule 21.8.\20\ According to the Exchange, the proposed 
functionality will apply to all orders, including both those orders 
that are not executed under proposed BATS Rule 21.7(a)(3) and orders in 
a series that is opening subject to a Contingent Open.\21\ The Exchange 
states that although it currently cancels any orders that are not 
executed in the Opening Process that are priced more aggressively than 
the Opening Price, the Exchange now proposes to simply enter these 
orders onto the BATS Options Book as described above in order to 
minimize the number of orders that are cancelled and must be reentered 
by Users.\22\ The Exchange notes that all order protections, including 
Trade-Through \23\ protection and a BATS Market Order \24\ collar, will 
apply to orders entered pursuant to proposed BATS Rules 21.7(a)(3) and 
21.7(a)(4).
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    \17\ See BATS Rule 16.1(a)(9) (defining ``BATS Options Book'').
    \18\ See Notice, supra note 3, at 58846.
    \19\ See Amendment No. 1 at 3.
    \20\ See Notice, supra note 3, at 58846.
    \21\ See id.
    \22\ See id.
    \23\ See BATS Rule 27.1(22) (defining ``Trade-Through'').
    \24\ See BATS Rule 21.1(d)(5) (defining ``BATS Market Order'').
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    The Exchange also proposes to eliminate the current functionality 
that cancels orders that are not executed during the Opening Process 
that fit the following criteria: (i) Limit orders that are priced equal 
to or more aggressively than the Opening Price; and (ii) market

[[Page 68494]]

orders.\25\ Further, the Exchange proposes to eliminate the current 
functionality for a series subject to a Contingent Open where, if there 
is at least one price level at which at least one contract of a limit 
order can be executed, the System will cancel all orders that are 
priced equal to or more aggressively than the midpoint of the most 
aggressively priced bid and the most aggressively priced offer.\26\ 
According to BATS, for many Users, cancelling orders that were entered 
for participation in the Opening Process negates the advantages of 
allowing orders to be entered prior to the beginning of regular way 
trading and the Opening Process.\27\
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    \25\ See Notice, supra note 3, at 58846.
    \26\ See id. The Exchange notes that although not cancelling 
these orders might result in executions at a price that is not the 
same as the Opening Price that occurs as the orders are handled in 
time sequence (either on BATS Options or upon routing to another 
options exchange), these executions would be part of regular way 
trading and are distinct from the opening execution that occurs as a 
result of the Opening Process. See id.
    \27\ See id.
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    Finally, the Exchange proposes certain clarifying changes to its 
Opening Process rules. For example, the Exchange proposes to add 
language to Rule 21.7(a)(3) stating that the Opening Process will be 
performed after the establishment of an Opening Price that is a Valid 
Price \28\ and that matches will occur until there is no remaining 
volume or there is an imbalance of orders.\29\ The Exchange believes 
that both of these concepts are implicit in the rule.\30\
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    \28\ See BATS Rule 21.7(a)(2) (defining ``Valid Price'').
    \29\ See Notice, supra note 3, at 58846.
    \30\ See id.
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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 applicable to a national securities 
exchange.\31\ In particular, the Commission finds that the proposed 
rule change is consistent with Section 6(b)(5) of the Act,\32\ which 
requires, among other things, that the rules of a national securities 
exchange be designed to prevent fraudulent and manipulative acts and 
practices, 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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    \31\ In approving this proposal, the Commission has considered 
the proposed rule's impact on efficiency, competition, and capital 
formation. See 15 U.S.C. 78c(f).
    \32\ 15 U.S.C. 78f(b)(5).
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    The proposed rule change is designed to modify the Exchange's 
Opening Process for options listed on the Exchange to ensure that BATS 
Options opens trading in options contracts in a fair and orderly 
manner. As noted above, the Exchange believes that handling orders in 
time priority (as opposed to price-time priority) will create a more 
orderly opening and makes more sense because the price of the order is 
not particularly important to the Opening Process, provided the order 
is priced at or more aggressively than the Opening Price. Under such 
circumstances, the Exchange believes that there is no reason to reward 
a more aggressive order with priority in the Opening Process. In 
addition, the Exchange also believes that entering orders in time 
sequence based on the time of receipt instead of canceling certain 
orders will create a more orderly opening because Users will be able to 
enter orders and quotes prior to the opening of trading and be assured 
that such orders will either participate in the Opening Process or be 
handled as if they were entered immediately following the Opening 
Process. The Exchange believes that these changes will provide market 
makers and Users greater control and flexibility with respect to 
entering orders and quotes because they will no longer have to reenter 
orders that may have been canceled because they were not executed in 
the opening process.
    The Commission believes that the proposed rule change is designed 
to facilitate the opening of options trading on BATS Options in a fair 
and orderly manner. Further, the Commission believes that the proposal 
could benefit investors by providing Users with certainty that orders 
that are entered prior to the Opening Process will not be cancelled 
based on market conditions outside of a User's control. The Commission 
further notes that all order protections, including Trade-Through 
protection and the BATS Market Order collar, will apply to orders 
entered pursuant to proposed BATS Rules 21.7(a)(3) and 21.7(a)(4).\33\
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    \33\ See Notice, supra note 3 at 58846.
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IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\34\ that the proposed rule change (SR-BATS-2014-040), as modified 
by Amendment No.1, is approved.
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    \34\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\35\
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    \35\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-27065 Filed 11-14-14; 8:45 am]
BILLING CODE 8011-01-P
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