Document ID: SEC-2008-1466-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: BATS Exchange, Inc.
Posted Date: 2008-10-24T04:00Z

[Federal Register: October 24, 2008 (Volume 73, Number 207)]
[Notices]               
[Page 63529-63531]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr24oc08-133]                         

-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-58776; File No. SR-BATS-2008-007]

 
Self-Regulatory Organizations; BATS Exchange, Inc.; Notice of 
Filing and Immediate Effectiveness of Proposed Rule Change To Amend 
BATS Rule 11.13, Entitled ``Order Execution''

October 14, 2008.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on October 10, 2008, BATS Exchange, Inc. (``BATS'' or the ``Exchange'') 
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. BATS has designated the proposed 
rule change as constituting a non-controversial rule change under Rule 
19b-4(f)(6) under the Act,\3\ which renders the proposal effective upon 
filing with the Commission. BATS has also requested that the Commission 
waive the 30-day pre-operative waiting period contained in Rule 19b-
4(f)(6)(iii) under the Act.\4\ If such waiver is granted by the 
Commission, the Exchange will implement this rule proposal immediately 
upon commencement of its operations as a national securities exchange. 
The Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 17 CFR 240.19b-4(f)(6).
    \4\ Id.
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange is proposing to amend BATS Rule 11.13, entitled 
``Order Execution,'' to more closely mirror the rules of other self-
regulatory organizations related to order routing and to provide the 
Exchange's Outbound Router (as defined below) with additional 
flexibility when routing orders away from the Exchange.
    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 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
    The routing performed in connection with the operation of the 
Exchange will be conducted by an affiliate of the Exchange, BATS 
Trading, Inc. (the ``Outbound Router''), which is regulated as a 
facility of the Exchange (as defined in Section 3(a)(2) of the Act),\5\ 
subject to Section 6 of the Act.\6\ The role and functions of the 
Outbound Router are set forth in BATS Rule 2.11, which has previously 
been approved by the Commission.
---------------------------------------------------------------------------

    \5\ 15 U.S.C. 78c(a)(2).
    \6\ 15 U.S.C. 78f.
---------------------------------------------------------------------------

    The purpose of the proposed rule change is to provide the 
Exchange's Outbound Router with additional flexibility when routing 
orders away from the Exchange. The proposed modifications will permit 
the Outbound Router to route to additional Trading Centers (as defined 
in Exchange Rule 2.11),\7\ without limiting the permissible 
destinations to execution venues with ``protected quotations'' (as 
defined in Rule 600(b)(58) of the Act).\8\ Under the proposed rule, 
orders could be routed to one or more Trading Centers provided that 
such routing is compliant with Regulation NMS, specifically, Rule 611 
thereof (the ``Order Protection Rule'').\9\ Such Trading Centers may 
include execution venues known as ``dark books.''
---------------------------------------------------------------------------

    \7\ The Exchange's definition of Trading Center, contained in 
Rule 2.11, is consistent with the definition of ``trading center'' 
contained in Rule 600(b)(78) of Regulation NMS.
    \8\ 17 CFR 242.600(b)(58).
    \9\ 17 CFR 242.611.
---------------------------------------------------------------------------

    Under current Rule 11.13, when an incoming market or marketable 
limit order is received by the Exchange, the order will first check the 
BATS Book. If such order is not executed in full against liquidity on 
the BATS Book, and is eligible for routing based on the User's 
instructions, then the order will be transmitted to the Outbound Router 
to be routed away. The Outbound Router will then route the order to one 
or more protected quotations for potential execution in compliance with 
the Order Protection Rule of Regulation NMS. This process continues 
until the order has been executed in full or the Outbound Router has 
confirmed that there are no available protected quotations at the 
routed price level or at a better price level. Following the routing 
process described above, the order will return to the Exchange to check 
available liquidity at the next permissible price level, and, if not 
executed in full, will either be posted to the BATS Book or again 
routed away to protected quotations at that next permissible price 
level.
    After the proposed rule change, the Order Router may route orders 
not only to protected quotations, but also to other Trading Centers, so 
long as such routing is in compliance with the Order Protection Rule of 
Regulation NMS. With the exception of this proposed change, the order 
routing process will continue as it does currently. Thus, orders will 
continue to be routed in the order routing process until the order has 
been executed in full or the Outbound Router has confirmed that there 
are no available protected quotations at the routed price level or at a 
better price level. The order will then return to the Exchange to check 
available liquidity at the next permissible price level, and, if not 
executed in full, will either be

[[Page 63530]]

posted to the BATS Book or again routed away to available Trading 
Centers at that next permissible price level.
    Routing under the proposed rule change will be subject to the 
requirements as those contained in Rule 2.11. Such requirements include 
that: (1) The Outbound Router will operate as a facility of the 
Exchange, and thus, the Exchange will be responsible for filing with 
the Commission rule changes related to the operation of, and fees for 
services provided by, the Outbound Router, and the Outbound Router 
shall be subject to exchange non-discrimination requirements; (2) for 
purposes of Rule 17d-1 under the Act,\10\ the designated examining 
authority of the Outbound router will be a self-regulatory organization 
unaffiliated with the Exchange or any of its affiliates; (3) use of the 
Outbound Router is optional; (4) the Outbound Router will not engage in 
any business other than (a) its Outbound Router function and (b) any 
other activities it may engage in as approved by the Commission; (5) 
the Exchange shall establish and maintain procedures and internal 
controls reasonably designed to adequately restrict the flow of 
confidential and proprietary information between the Exchange and its 
facilities (including the Outbound Router), and any other entity, 
including any affiliate of the Outbound Router, and, if the Outbound 
Router or any of its affiliates engages in any other business 
activities other than providing routing services to the Exchange, 
between the segment of the Outbound Router or its affiliate that 
provides the other business activities and the routing services; and 
(6) the books, records, premises, officers, agents, directors and 
employees of the Outbound Router as a facility of the Exchange shall 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, and the books and records of the Outbound Router, 
as a facility of the Exchange shall be subject at all times to 
inspection and copying by the Exchange and the Commission. Accordingly, 
the Exchange believes that routing of orders away from the Exchange 
under the proposed rule change is consistent with the previously 
approved functions of the Outbound Router, and the Exchange does not 
believe that such functions are expanded through the proposed rule 
change.
---------------------------------------------------------------------------

    \10\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

    The Exchange believes that routing under the proposed rule change 
will enhance order execution opportunities for market participants by 
allowing such participants to benefit from the Outbound Router's 
ability to route orders to additional Trading Centers,\11\ rather than 
limiting such routing to market centers with protected quotations. 
Accordingly, the modifications to BATS Rule 11.13 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. As 
described in more detail below, the Exchange also believes that the 
proposed modification is similar to routing capabilities provided by 
other national securities exchanges and permissible under such 
exchanges' approved rules.\12\
---------------------------------------------------------------------------

    \11\ Such benefits may include, for example, potentially 
receiving lower transaction fees or executions at a single price.
    \12\ See, e.g., Rule 4758(a)(1)(A)(iii) of the Nasdaq Stock 
Market LLC (``NASDAQ''); see also NYSE Arca Equities Rule 7.37(d).
---------------------------------------------------------------------------

2. Statutory Basis
    The Exchange believes the 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).\13\ In particular, for the 
reasons described above, the proposed change is consistent with Section 
6(b)(5) of the Act,\14\ 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, and, in 
general, protect investors and the public interest, by providing the 
Outbound Router with additional flexibility when routing orders away 
from the Exchange, which may allow market participants to obtain better 
prices and/or lower access fees for such orders, while making clear the 
requirement that such routing be compliant with the Order Protection 
Rule.
---------------------------------------------------------------------------

    \13\ 15 U.S.C. 78(f)(b).
    \14\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

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

    No written comments were solicited or received.

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 \15\ and Rule 19b-
4(f)(6) thereunder.\16\
---------------------------------------------------------------------------

    \15\ 15 U.S.C. 78s(b)(3)(A).
    \16\ 17 CFR 240.19b-4(f)(6). Rule 19b-4(f)(6) also requires the 
self-regulatory organization to give the Commission notice of its 
intent to file the proposed rule change, along with a brief 
description and 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. BATS 
has satisfied the five-day pre-filing requirement.
---------------------------------------------------------------------------

    At any time within 60 days of the filing of the proposed rule 
change, the Commission may summarily abrogate 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.
    BATS has requested that the Commission waive the 30-day operative 
delay. The Commission believes that waiver of the 30-day operative 
delay is consistent with the protection of investors and the public 
interest. The Commission notes that the proposal is designed to provide 
for more efficient routing of orders of BATS members, and may provide 
further benefits to investors such as lower transaction fees or 
executions at a single price.\17\ The Commission also notes that BATS 
Rule 11.13, as amended pursuant to the proposal, will be similar to 
rules of other exchanges that the Commission has previously approved 
\18\ in that it will permit BATS to route to trading centers other than 
only those displaying protected quotations, and in this regard raises 
no new regulatory issues. Waiver of the 30-day operative delay will 
allow the Exchange to implement the proposed rule change upon 
commencement of its operations as a national securities exchange.

[[Page 63531]]

Accordingly, the Commission designates the proposal to be operative 
upon filing with the Commission.\19\
---------------------------------------------------------------------------

    \17\ See supra note 11 and accompanying text.
    \18\ See supra note 12 and accompanying text. See also 
Securities Exchange Act Release Nos. 54155 (July 14, 2006), 71 FR 
41291 (July 20, 2006) (SR-NASDAQ-2006-001) (order approving The 
Nasdaq Stock Market LLC's ``Single Book'' proposal, including Nasdaq 
Rule 4758) and 54549 (September 29, 2006), 71 FR 59179 (October 6, 
2006) (SR-NYSEArca-2006-59) (order approving NYSE Arca, Inc.'s 
proposed rule change relating to the adoption of Regulation NMS, 
including revisions to NYSEArca Rule 7.37(d)).
    \19\ For purposes only of waiving the 30-day operative delay of 
this proposal, the Commission has considered the proposed rule's 
impact on efficiency, competition, and capital formation. 15 U.S.C. 
78c(f).
---------------------------------------------------------------------------

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 e-mail to rule-comments@sec.gov. Please include 
File Number SR-BATS-2008-007 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-BATS-2008-007. This file 
number should be included on the subject line if e-mail 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 inspection and 
copying in the Commission's Public Reference Room, on official business 
days between the hours of 10 a.m. and 3 p.m. Copies of the 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-
BATS-2008-007 and should be submitted on or before November 13, 2008.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\20\
---------------------------------------------------------------------------

    \20\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Jill M. Peterson,
Assistant Secretary.
 [FR Doc. E8-25388 Filed 10-23-08; 8:45 am]

BILLING CODE 8011-01-P