Document ID: SEC-2015-0006-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: EDGX Exchange, Inc.
Posted Date: 2015-01-02T05:00Z

[Federal Register Volume 80, Number 1 (Friday, January 2, 2015)]
[Notices]
[Pages 63-66]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-30699]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-73940; File No. SR-EDGX-2014-35]

Self-Regulatory Organizations; EDGX Exchange, Inc.; Notice of 
Filing and Immediate Effectiveness of a Proposed Rule Change To Amend 
Rules 2.11, 2.12, 11.11 and 11.14 To Replace References to ``Direct 
Edge ECN LLC d/b/a DE Route'' and ``DE Route'' With ``BATS Trading, 
Inc.''

December 24, 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 December 22, 2014, EDGX Exchange, Inc. (the ``Exchange'' or 
``EDGX'') filed with the Securities and Exchange Commission 
(``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.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of the 
Substance of the Proposed Rule Change

    The Exchange filed a proposed rule change to amend Rules 2.11, 
2.12, 11.11 and 11.14 to replace references to ``Direct Edge ECN LLC d/
b/a DE Route'' and ``DE Route'' with ``BATS Trading, Inc.'' (``BATS 
Trading''). The Exchange does not propose to amend the requirements of 
any of these rules.
    The text of the proposed rule change is available at the Exchange's 
Web site at http://www.directedge.com/, at the principal office of the 
Exchange, and at the Commission's Public Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the Exchange included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The Exchange has prepared summaries, set forth in 
Sections A, B, and C below, of the most significant parts of such 
statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    Earlier this year, the Exchange and its affiliate, EDGA Exchange, 
Inc. (``EDGA'') received approval to effect a merger (the ``Merger'') 
of the Exchange's parent company, Direct Edge Holdings LLC, with BATS 
Global Markets, Inc., the parent of BATS Exchange, Inc. (``BZX'') and 
BATS Y-Exchange, Inc. (``BYX'', together with BZX, EDGA and EDGX, the 
``BGM Affiliated Exchanges'' or ``BATS Exchange'').\3\ As a result, the 
Exchange amended Rule 2.12 to reflect that BATS Trading, Inc., the 
affiliated BZX and BYX routing broker dealer, would also act as the 
inbound router for routing orders from BYX and BZX to the Exchange. In 
the context of the Merger, the BGM Affiliated Exchanges are working to 
migrate EDGX and EDGA onto the BATS technology platform, and align 
certain system functionality, retaining only intended differences 
between the BGM Affiliated Exchanges. As a result of these efforts, the 
Exchange proposes to amend Rules 2.11, 2.12, 11.11 and 11.14 to replace 
references to ``Direct Edge ECN LLC d/b/a DE Route'' and ``DE Route'' 
with ``BATS Trading'' to reflect that BATS Trading, Inc. will replace 
DE Route at [sic] the Exchange's routing broker-dealer upon migration 
of the Exchange onto the BATS technology platform. Thereafter, BATS 
Trading will serve as the sole inbound and outbound routing broker-
dealer for the Exchange. The Exchange does not propose to amend the 
requirements of any of these rules.
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    \3\ See Securities Exchange Act Release No. 71449 (January 30, 
2014), 79 FR 6961 (February 5, 2014) (SR-EDGX-2013-43; SR-EDGA-2013-
34).
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Rule 2.11, BATS Trading as Outbound Router
    Pursuant to Exchange Rule 2.11, the Exchange relies on DE Route to 
provide outbound routing services from itself to other Trading 
Centers.\4\ The Exchange proposes to amend Rules 2.11 to replace all 
references to DE Route with BATS Trading, as BATS Trading will replace 
DE Route as the outbound routing service for the Exchange upon 
migration of the Exchange onto the BATS technology platform. The 
Exchange does not propose to amend the requirements of this rule. 
Therefore, the conditions and limitations set forth in Exchange Rule 
2.11 will continue to require that:
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    \4\ Rule 600(b)(78) of Regulation NMS, 17 CFR 242.600(b)(78), 
defines a ``Trading Center'' as ``a national securities exchange or 
national securities association that operates an SRO trading 
facility, an alternative trading system, an exchange market maker, 
an OTC market maker, or any other broker or dealer that executes 
orders internally by trading as principal or crossing orders as 
agent.'' See also Exchange Rule 2.11(a).
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     The Exchange will regulate the BATS Trading as a facility 
(as defined in Section 3(a)(2) of the Act), subject to Section 6 of the 
Act. The Exchange will file with the Commission proposed rule changes 
and fees relating to the BATS Trading outbound router function and BATS 
Trading will be subject to the Exchange's non-discrimination 
requirements.
     FINRA will carry out oversight and enforcement 
responsibilities as the designated examining authority designated by 
the Commission pursuant to Rule 17d-1 of the Act with the 
responsibility for examining BATS Trading for compliance with 
applicable financial responsibility rules.
     A Member's \5\ use of BATS Trading to route orders to 
another Trading Center will be optional.
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    \5\ The term ``Member'' is defined as ``any registered broker or 
dealer, or any person associated with a registered broker or dealer, 
that has been admitted to membership in the Exchange. A Member will 
have the status of a ``member'' of the Exchange as that term is 
defined in Section 3(a)(3) of the Act.'' See Exchange Rule 1.5(n).
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     BATS Trading will not engage in any business other than 
(a) its outbound router function, (b) its inbound router function as 
described in Rule 2.12, (c) its usage of an error account in accordance 
with Exchange Rule 2.11(a)(7) and (d) any other activities it may 
engage in as approved by the Commission.
     The Exchange shall establish and maintain procedures and 
internal controls reasonably designed to adequately restrict the flow 
of confidential and proprietary

[[Page 64]]

information between the Exchange and BATS Trading, and any other 
entity, including any affiliate of BATS Trading, and, if BATS Trading 
or any of its affiliates engage in any other business activities other 
than providing routing services to the Exchange, between the segment of 
BATS Trading or its affiliate that provides the other business 
activities and the routing services.
     The Exchange or BATS Trading may cancel orders as either 
deems to be necessary to maintain fair and orderly markets if and when 
systems, technical or operational issues occur at the Exchange, BATS 
Trading or a Trading Center. The Exchange or BATS Trading shall provide 
notice of the cancellation of orders to affected Members as soon as 
practicable.
     BATS Trading shall maintain an error account for the 
purpose of liquidating an error position when such position, in the 
judgment of the Exchange or BATS Trading, subject to the factors 
described in Exchange Rule 2.11, cannot be fairly and practicably 
assigned to one or more Members in its entirety. An error position can 
be acquired if it results from a systems, technical or operational 
issue experienced by BATS Trading, by the Exchange, or by a Trading 
Center to which BATS Trading directed an outbound order.
    The books, records, premises, officers, agents, directors and 
employees of BATS Trading will be deemed to be the books, records, 
premises, officers, agents, directors and employees of the Exchange for 
purposes of, and subject to oversight pursuant to, the Act. The books 
and records of BATS Trading shall be subject at all times to inspection 
and copying by the Exchange and the Commission. Nothing in Rule 2.11 
will preclude officers, agents, directors or employees of the Exchange 
from also serving as officers, agents, directors and employees of BATS 
Trading.
Rule 2.12, BATS Trading as Inbound Router
    DE Route and BATS Trading provide Members of the Exchange, EDGA, 
BZX and BYX with optional routing services to other Trading Centers. 
Thus, in certain circumstances, DE Route and BATS Trading provide 
inbound routing from EDGA, BYX, or BZX to the Exchange. Exchange Rule 
2.12 governs this inbound routing of orders by DE Route and BATS 
Trading to the Exchange in DE Route's and BATS Trading's capacity as a 
facility of the Exchange. The Exchange proposes to amend Rule 2.12 to 
remove all references to DE Route as BATS Trading will be the sole 
inbound routing service for the Exchange upon migration of the Exchange 
onto the BATS technology platform. The Exchange does not propose to 
amend the requirements of this rule. Therefore, the conditions and 
limitations set forth in Exchange Rule 2.12(a) will continue to require 
that:
     The Exchange enter into (a) a plan pursuant to Rule 17d-2 
under the Act with a non-affiliated self-regulatory organization 
(``SRO'') to relieve the Exchange of regulatory responsibilities for 
BATS Trading with respect to rules that are common rules between the 
Exchange and the non-affiliated SRO, and (b) a regulatory services 
contract (``Regulatory Contract'') with a non-affiliated SRO to perform 
regulatory responsibilities for BATS Trading for unique Exchange rules.
     The Regulatory Contract require the Exchange to provide 
the non-affiliated SRO with information, in an easily accessible 
manner, regarding all exception reports, alerts, complaints, trading 
errors, cancellations, investigations, and enforcement matters 
(collectively ``Exceptions'') in which BATS Trading is identified as a 
participant that has potentially violated Exchange or Commission rules, 
and requires that the non-affiliated SRO provide a report, at least 
quarterly, to the Exchange quantifying all Exceptions in which BATS 
Trading is identified as a participant that has potentially violated 
Exchange or Commission rules.
     The Exchange, on behalf of its parent company, establish 
and maintain procedures and internal controls reasonably designed to 
ensure that BATS Trading does not develop or implement changes to its 
system based on non-public information obtained as a result of its 
affiliation with the Exchange, until such information is available 
generally to similarly situated Members of the Exchange.
     The Exchange furnish to BATS Trading only the same 
information and on the same terms as the Exchange makes available in 
the normal course of business to other users.\6\
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    \6\ See Exchange Rule 2.12(a)(2).
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    In addition, Exchange Rule 2.12(b) states that, provided the 
conditions in Exchange Rule 2.12(a) are complied with, and provided 
further that DE Route operates as an outbound router on behalf of EDGA 
on the same terms and conditions as it does for the Exchange, and in 
accordance with the rules of EDGA, DE Route may provide inbound routing 
services to the Exchange from EDGA. BATS Trading provides members of 
the BGM Affiliated Exchanges (including EDGA) with optional routing 
services to other market centers, which may include routing from a BGM 
Affiliated Exchange to the Exchange. Therefore, the Exchange proposes 
to remove reference to EDGA as BATS Trading will be required under 
Exchange Rule 2.12(b) to operate as an outbound router on behalf of 
each BATS Exchange on the same terms and conditions as it does for the 
Exchange, and in accordance with the rules of each BATS Exchange, BATS 
Trading may provide inbound routing services to the Exchange from each 
BATS Exchange. The Exchange believes that Rule 2.12 will continue to 
adequately manage the potential for conflicts of interest that could 
arise from BATS Trading routing orders to the Exchange.
Rule 11.11(i), Market Access
    Rule 11.11(i) states that, in addition to the Exchange Rules 
regarding routing to away Trading Centers, DE Route has, pursuant to 
Rule 15c3-5 under the Act, implemented certain tests designed to 
mitigate the financial and regulatory risks associated with providing 
the Exchange's Members access to such away Trading Centers. Pursuant to 
the policies and procedures developed by DE Route to comply with Rule 
15c3-5, if an order or series of orders are deemed to be erroneous or 
duplicative, would cause the entering Member's credit exposure to 
exceed a preset credit threshold, or are non-compliant with applicable 
pre-trade regulatory requirements (as defined in Rule 15c3-5), DE Route 
will reject such orders prior to routing and/or seek to cancel any 
orders that have been routed.
    The Exchange proposes to amend Rules 11.11(i) to replace all 
references to DE Route with BATS Trading, as BATS Trading will be the 
sole inbound routing service for the Exchange upon migration of the 
Exchange onto the BATS technology platform. The Exchange does not 
propose to amend the requirements of this rule. Under Rule 11.11(i) and 
BZX and BYX Rules 11.13(e), BATS trading has, pursuant to Rule 15c3-5 
under the Act, implemented certain tests designed to mitigate the 
financial and regulatory risks associated with providing the Exchange's 
Members with access to such away Trading Centers. BATS Trading also has 
policies and procedures in place to comply with Rule 15c3-5, under 
which BATS Trading will reject such orders prior to routing and/or seek 
to cancel any orders that have been routed, where an order or series of 
orders are deemed to be erroneous or duplicative, would cause the 
entering Member's credit exposure to exceed a preset credit threshold, 
or are non-compliant with applicable pre-

[[Page 65]]

trade regulatory requirements (as defined in Rule 15c3-5).
Rule 11.14, Limitation of Liability
    The Exchange also proposes to amend Exchange Rule 11.14(g) to 
replace references to DE Route with BATS Trading. Rule 11.14(g) 
authorizes the Exchange, subject to express conditions and limitations, 
to compensate Members for losses relating to orders routed by the 
Exchange through DE Route to Trading Centers that the Member claims 
resulted directly from a malfunction of the physical equipment, devices 
and/or programming, or the negligent acts or omissions of the 
employees, of such Trading Centers (``Trading Center Systems Issue''). 
Rule 11.14(g) applies to Members that experience losses due to Trading 
Center Systems Issues after DE Route routed the Members' orders to a 
Trading Center that experienced such issues. Under Rule 11.14(g), as an 
accommodation to Members, the Exchange, via DE Route, employs 
reasonable efforts to submit Members' claims for compensation on such 
Members' behalf to a Trading Center, and pass along to such Members the 
full amount of compensation, if any, obtained by DE Route from such 
Trading Center.
    Under Rule 11.14(g), the Exchange undertakes to accept claims for 
losses submitted by Members, which claims must contain representations 
from such Members as to the accuracy of the information contained 
therein and that any losses incurred were the direct result of a 
Trading Center Systems Issue.
    Upon migration of the Exchange onto BATS technology, BATS Trading 
will be the Exchange's sole routing broker-dealer and responsible for 
submitting claims under Rule 11.14(g). As amended, the Exchange would 
continue to employ reasonable efforts to submit such claims, but via 
BATS Trading instead of DE Route, to the Trading Center in question. If 
and to the extent that BATS Trading were to receive compensation from a 
Trading Center in response to a claim submitted on behalf of a Member, 
the full amount of such compensation would be passed through to the 
Member.
Implementation Date
    The Exchange intends to implement the proposed rule change on or 
about January 12, 2015, which is the anticipated date upon which the 
migration of the Exchange to the BATS technology platform will be 
complete and BATS Trading, Inc. will replace DE Route as the Exchange's 
routing broker-dealer.
2. Statutory Basis
    The Exchange believes that the proposed rule changes are consistent 
with Section 6(b) of the Act \7\ and further the objectives of Section 
6(b)(5) of the Act \8\ because they are 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, to 
foster cooperation and coordination with persons engaged in 
facilitating transactions in securities, and, in general, to protect 
investors and the public interest. The proposed rule change also is 
designed to support the principles of Section 11A(a)(1) \9\ of the Act 
in that it seeks to assure fair competition among brokers and dealers 
and among exchange markets.
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    \7\ 15 U.S.C. 78f(b).
    \8\ 15 U.S.C. 78f(b)(5).
    \9\ 15 U.S.C. 78k-1(a)(1).
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    The Exchange does not propose to amend the requirements of any of 
its rules and the proposed rule changes are intended only to reflect 
that BATS Trading will replace DE Route as the Exchange's routing 
broker-dealer upon migration of the Exchange to the BATS technology 
platform. A consistent technology offering through the use of a single 
routing broker-dealer by each of the BGM Affiliated Exchange will, in 
turn, simplify the technology implementation, changes and maintenance 
by users of the Exchange that are also participants on EDGA, BZX, and 
BYX. The proposed rule change would provide greater harmonization 
between the rules of the BGM Affiliated Exchanges, resulting in greater 
uniformity and less burdensome and more efficient regulatory 
compliance. As such, the proposed rule change would foster cooperation 
and coordination with persons engaged in facilitating transactions in 
securities and would remove impediments to and perfect the mechanism of 
a free and open market and a national market system.

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
result in any burden on competition that is not necessary or 
appropriate in furtherance of the purposes of the Act. The Exchange 
reiterates that the proposed rule change is being proposed in the 
context of the technology integration of the BGM Affiliated Exchanges. 
Thus, the Exchange believes this proposed rule change is necessary to 
permit fair competition among national securities exchanges. In 
addition, the Exchange believes the proposed rule change will benefit 
Exchange participants in that it is one of several changes necessary to 
achieve a consistent technology offering by the BGM Affiliated 
Exchanges.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    The Exchange has neither solicited nor received written comments on 
the proposed rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    The Exchange has designated this rule filing as non-controversial 
under Section 19(b)(3)(A) of the Act \10\ and paragraph (f)(6) of Rule 
19b-4 thereunder.\11\ Because the proposed rule change does not: (i) 
Significantly affect the protection of investors or the public 
interest; (ii) impose any significant burden on competition; and (iii) 
become operative prior to 30 days from the date on which it was filed, 
or such shorter time as the Commission may designate if consistent with 
the protection of investors and the public interest, the proposed rule 
change has become effective pursuant to Section 19(b)(3)(A) of the Act 
and Rule 19b-4(f)(6) thereunder.\12\
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    \10\ 15 U.S.C. 78s(b)(3)(A).
    \11\ 17 CFR 240.19b-4.
    \12\ 17 CFR 240.19b-4(f)(6). As required under Rule 19b-
4(f)(6)(iii), the Exchange provided the Commission with written 
notice of its intent to file the proposed rule change, along with a 
brief description and the text of the proposed rule change, at least 
five business days prior to the date of filing of the proposed rule 
change, or such shorter time as designated by the Commission.
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    A proposed rule change filed pursuant to Rule 19b-4(f)(6) under the 
Act \13\ normally does not become operative for 30 days after the date 
of its filing. However, Rule 19b-4(f)(6)(iii) \14\ permits the 
Commission to designate a shorter time if such action is consistent 
with the protection of investors and the public interest. The Exchange 
has asked the Commission to waive the 30-day operative delay in order 
to permit the Exchange to implement the proposed rule change on January 
12, 2015, which is the anticipated date upon which the migration of the 
Exchange to the BATS technology platform will be complete and BATS 
Trading will replace DE Route as the Exchange's routing broker-dealer. 
The Exchange states that waiver of the operative delay is consistent 
with the protection of investors and the public interest because it 
will allow the Exchange to replace DE Route with

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BATS Trading as the Exchange's routing broker-dealer upon migration of 
the Exchange to the BATS technology platform, thereby enabling BATS 
Trading to act as the routing broker-dealer for each of the BGM 
Affiliated Exchanges in a timely manner and simplifying the technology 
integration for Members of the Exchange that are also participants on 
EDGA, BZX and BYX. In this regard, the Exchange notes that, since 
completion of the Merger, both Members and the BGM Affiliated Exchanges 
have made numerous systems changes in preparation for the technology 
migration occurring on January 12, 2015, the Exchange has issued 
frequent updates to Members informing them of the BGM Affiliated 
Exchange technology migration as well as its anticipated time line so 
that Members may make the requisite system changes, and the Exchange 
has conducted multiple testing opportunities for Members to ensure that 
both Members' and the Exchange's systems will operate in accordance 
with the proposed rule change on January 12, 2015. The Commission 
believes that waiving the 30-day operative delay is consistent with the 
protection of investors and the public interest. Therefore, the 
Commission hereby waives the operative delay and designates the 
proposed rule change operative upon filing.\15\
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    \13\ 17 CFR 240.19b-4(f)(6).
    \14\ 17 CFR 240.19b-4(f)(6)(iii).
    \15\ For purposes only of waiving the 30-day operative delay, 
the Commission has considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act. If the Commission 
takes such action, the Commission shall institute proceedings under 
Section 19(b)(2)(B) of the Act \16\ to determine whether the proposed 
rule change should be approved or disapproved.
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    \16\ 15 U.S.C. 78s(b)(2)(B).
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IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-EDGX-2014-35 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.

All submissions should refer to File Number SR-EDGX-2014-35. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for Web site viewing and 
printing in the Commission's Public Reference Room at 100 F Street NE., 
Washington, DC 20549-1090 on official business days between the hours 
of 10:00 a.m. and 3:00 p.m. Copies of such filing also will be 
available for inspection and copying at the principal office of the 
Exchange. All comments received will be posted without change; the 
Commission does not edit personal identifying information from 
submissions. You should submit only information that you wish to make 
available publicly. All submissions should refer to File Number SR-
EDGX-2014-35, and should be submitted on or January 23, 2015.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\17\
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    \17\ 17 CFR 200.30-3(a)(12).
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Brent J. Fields,
Secretary.
[FR Doc. 2014-30699 Filed 12-31-14; 8:45 am]
BILLING CODE 8011-01-P