Document ID: SEC-2012-1248-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: BATS Exchange, Inc.
Posted Date: 2012-08-02T04:00Z

[Federal Register Volume 77, Number 149 (Thursday, August 2, 2012)]
[Notices]
[Pages 46131-46132]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-18822]

[[Page 46131]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-67516; File No. SR-BATS-2012-029]

Self-Regulatory Organizations; BATS Exchange, Inc.; Notice of 
Filing and Immediate Effectiveness of Proposed Rule Change To Amend 
Rule 20.6, Entitled ``Obvious Error''

July 27, 2012.
    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 July 16, 2012, BATS Exchange, Inc. (the ``Exchange'' or 
``BATS'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I, II 
and III below, which Items have been prepared by the Exchange. The 
Exchange has designated this proposal as a ``non-controversial'' 
proposed rule change pursuant to Section 19(b)(3)(A) of the Act \3\ and 
Rule 19b-4(f)(6)(iii) thereunder,\4\ which renders it effective upon 
filing with the Commission. 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.
    \3\ 15 U.S.C. 78s(b)(3)(A).
    \4\ 17 CFR 240.19b-4(f)(6)(iii).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to amend Rule 20.6, entitled ``Obvious 
Error'', to modify the calculation of the Theoretical Price used in 
connection with Obvious Error \5\ rulings and to clarify the Obvious 
Error transactions for which the Exchange can either adjust the 
execution price of the transaction or nullify the transaction.
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    \5\ As defined in Exchange Rule 20.6(b).
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    The text of the proposed rule change is available at the Exchange's 
Web site at http://www.batstrading.com, at the principal office of the 
Exchange, and at the Commission's Public Reference Room.

II. Self-Regulatory Organization's Statement

    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
    The purpose of this filing is to amend Rule 20.6, which is 
applicable to the Exchange's equity options platform (``BATS 
Options''), to modify the calculation of the Theoretical Price used in 
connection with Obvious Error rulings, as described below. Under 
current Rule 20.6, the Exchange defines the Theoretical Price, if the 
series is traded on at least one other options exchange, as the mid-
point of the National Best Bid and Offer (``NBBO'') just prior to the 
transaction in question. The Exchange proposes to define the 
Theoretical Price for purposes of Rule 20.6 as the last National Best 
Bid (``NBB'') price with respect to an erroneous sell transaction and 
the last National Best Offer (``NBO'') price with respect to an 
erroneous buy transaction, just prior to the transaction. The proposed 
methodology is used by several other options exchanges.\6\
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    \6\ See NYSE Arca Options Rule 6.87(a)(2)(A); see also NYSE Amex 
Options Rule 975NY(a)(2)(A); CBOE Rule 6.25(a)(1)(i); NASDAQ OMX 
PHLX Rule 1092(b)(i); ISE Rule 720(a)(3).
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    The proposed rule change would also amend Rule 20.6(e) to delete 
the requirement that each party to a transaction be an Options 
Member,\7\ in order to permit the Exchange to adjust the execution 
price. It is implicit that all transactions that occur on BATS Options 
must be executed between Options Members so deleting this explicit 
requirement will have no impact on the ultimate functionality of the 
Rule. Furthermore, the proposed rule change would amend Rule 20.6(e) to 
clarify that if at least one party to the Obvious Error transaction is 
for the account of or on behalf of a party other than a Market Maker, 
then the trade will be nullified unless the parties otherwise agree to 
an adjustment price for the transaction within thirty (30) minutes of 
being notified by the Exchange of the Obvious Error. Making a 
distinction between the parties to an Obvious Error transaction when 
the Exchange takes action to either adjust the execution price or 
nullify the trade is proper in that if a transaction involves a Market 
Maker on both sides, these parties are better able to understand the 
risk of an adjustment to the execution price than if one or both sides 
of the transaction is for the account of a non-Market Maker. The 
Exchange believes that the proposal to amend Rule 20.6(e) is consistent 
with existing rules of the Exchange's competitors.\8\
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    \7\ As defined in Exchange Rule 16.1(a)(38).
    \8\ See NYSE Arca Options Rule 6.87(a)(3)(A) and (B); see also 
NYSE Amex Options Rule 975NY(a)(3)(A) and (B); CBOE Rule 6.25(a)(1); 
NASDAQ OMX PHLX Rule 1092(e)(ii); ISE Rule 720(b)(2)(ii).
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2. Statutory Basis
    The Exchange believes that its proposal is consistent with the 
requirements of the Act and the rules and regulations thereunder that 
are applicable to a national securities exchange, and, in particular, 
with the requirements of Section 6(b) of the Act.\9\ In particular, the 
proposal is consistent with Section 6(b)(5) of the Act,\10\ because it 
would 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. Specifically, the definition of 
Theoretical Price, as proposed, is consistent with the Act due to the 
fact that it provides a specific and objective definition for use in 
determining whether a particular transaction was or was not an Obvious 
Error. Further, the proposal will define the Theoretical Price for 
purposes of Obvious Error determinations in a manner that is consistent 
with the majority of the other options exchanges. The proposal will 
also make a distinction that transactions on behalf of a party other 
than a Market Maker will be nullified rather than adjusted, eliminating 
the risk that the transaction execution price will be adjusted under 
those circumstances where a party to the transaction may not fully 
appreciate the risks associated with such action.
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    \9\ 15 U.S.C. 78f(b).
    \10\ 15 U.S.C. 78f(b)(5).
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    The proposal is consistent with Section 6(b)(8) of the Act,\11\ in 
that it does not impose any burden on competition not necessary or 
appropriate in furtherance of the purposes of the Act. The proposal 
also promotes transparency in that it (i) aligns the definition of 
Theoretical Price with that used by most other options exchanges, 
reducing the potential for confusion by Exchange members; (ii) puts 
Market Maker only transactions in a separate category from transactions 
that are on the behalf of non-Market Makers, thereby protecting non-
Market makers from execution price adjustment where nullification of 
the transaction is more appropriate; and (iii) puts procedural 
safeguards around

[[Page 46132]]

transactions that are on behalf of non-Market Makers, thereby 
protecting non-Market makers from execution price adjustment where 
nullification of the transaction is more appropriate.
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    \11\ 15 U.S.C. 78f(b)(8).
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    The proposed rule change to Rule 20.6(e) is also consistent with 
Section 11A(a)(1) of the Act \12\ in that it seeks to assure fair 
competition among brokers and dealers and exchange markets by handling 
obvious error reviews in a manner consistent with the Exchange's 
competitors.\13\ As described above, all aspects of the proposal will 
serve to align the Exchange's Obvious Error procedures with those of 
other options exchanges.
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    \12\ 15 U.S.C. 78k-1(a)(1).
    \13\ See supra notes 5 and 7.
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(B) Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change imposes 
any burden on competition.

(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

    Because the foregoing 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 for 30 days from the date on which it was filed, or 
such shorter time as the Commission may designate, it has become 
effective pursuant to Section 19(b)(3)(A) of the Act \14\ and Rule 19b-
4(f)(6)(iii) thereunder.\15\
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    \14\ 15 U.S.C. 78s(b)(3)(A).
    \15\ 17 CFR 240.19b-4(f)(6).
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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.

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-BATS-2012-029 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-BATS-2012-029. 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, 100 F Street NE., 
Washington, DC 20549, on official business days between the hours of 10 
a.m. and 3 p.m. Copies of such filing also will be available for 
inspection and copying at the principal offices 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-BATS-2012-029, and should be 
submitted on or before August 23, 2012.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\16\
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    \16\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-18822 Filed 8-1-12; 8:45 am]
BILLING CODE 8011-01-P