Document ID: SEC-2013-0230-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: BATS Exchange, Inc.
Posted Date: 2013-02-06T05:00Z

[Federal Register Volume 78, Number 25 (Wednesday, February 6, 2013)]
[Notices]
[Pages 8655-8657]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-02557]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-68789; File No. SR-BATS-2013-005]

Self-Regulatory Organizations; BATS Exchange, Inc.; Notice of 
Filing of Proposed Rule Change To Modify the Competitive Liquidity 
Provider Program to, Among Other Things, Modify the Calculation of Size 
Event Tests

January 31, 2013.
    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 January 18, 2013, BATS Exchange, Inc. (``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 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 Substance 
of the Proposed Rule Change

    The Exchange is filing with the Commission a proposal to amend 
Interpretation and Policy .02 to Rule 11.8, entitled ``Competitive 
Liquidity Provider Program.''
    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
    On August 30, 2011, the Exchange received approval of rules 
applicable to the qualification, listing and delisting of securities of 
issuers on the Exchange.\3\ More recently, the Exchange received 
approval to operate a program that is designed to incentivize certain 
market makers registered with the Exchange as Competitive Liquidity 
Providers (``CLPs'') to enhance liquidity on the Exchange in Exchange-
listed securities (the ``Competitive Liquidity Provider Program'' or 
``CLP Program'').\4\ The Program seeks to establish a venue for the 
execution of retail orders with greater price competition and 
transparency than existing execution arrangements. The Exchange 
subsequently adopted financial incentives for the CLP Program \5\ and 
thereafter amended certain financial incentives for the CLP Program.\6\
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    \3\ See Securities Exchange Act Release No. 65225 (August 30, 
2011), 76 FR 55148 (September 6, 2011) (SR-BATS-2011-018).
    \4\ See Securities Exchange Act Release No. 66307 (February 2, 
2012), 77 FR 6608 (February 8, 2012) (SR-BATS-2011-051).
    \5\ See Securities Exchange Act Release No. 66427 (February 21, 
2012), 77 FR 11608 (February 27, 2012) (SR-BATS-2012-011).
    \6\ See Securities Exchange Act Release No. 67854 (September 13, 
2012), 77 FR 58198 (September 19, 2012) (SR-BATS-2012-036).
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    The purpose of this filing is to modify Interpretation and Policy 
.02 of Rule 11.8 regarding certain details around the implementation of 
the CLP Program. Specifically, the Exchange proposes to: (1) Expand the 
time during which the Exchange will calculate Size Event Tests 
(``SETs'') to between 9:25 a.m. and 4:05 p.m.; (2) calculate SETs 
separately for bids and offers; (3) provide separate daily rebates 
based on the greatest number of winning bid SETs and winning offer 
SETs; (4) increase the

[[Page 8656]]

minimum quote to have a winning SET to five round lots; (5) require a 
CLP to also quote at least one round lot at or within 1.2% of the CLP's 
bid or offer in order to have a winning SET during Regular Trading 
Hours; \7\ and (6) change the system for allocating the daily rebate to 
the CLPs with the highest and second highest winning SETs from a set 
percentage to a pro rata basis.
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    \7\ Regular Trading Hours is defined in BATS Rule 1.5(w).
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Extending the Time of the CLP Program
    The Exchange is proposing to expand the time during which SETs are 
calculated on the Exchange. Currently, the Exchange calculates SETs at 
least once per second, but only during Regular Trading Hours. This 
Exchange proposes to expand the time during which SETs are calculated 
to include the period five minutes before the beginning of Regular 
Trading Hours and five minutes after Regular Trading Hours, or 9:25 
a.m. to 4:05 p.m. The Exchange is proposing this change in order to 
encourage CLPs to enter aggressively priced orders immediately prior 
to, during, and immediately after both Opening Auctions \8\ and Closing 
Auctions \9\ in BATS listed securities.
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    \8\ The process for Opening Auctions in BATS listed securities 
is described in BATS Rule 11.23(b).
    \9\ The process for Closing Auctions in BATS listed securities 
is described in BATS Rule 11.23(c).
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Calculating SETs Separately for Bids and Offers
    The Exchange also proposes to calculate SETs and provide rebates 
separately for bids and offers. Currently, the Exchange calculates and 
determines the winner(s) of each SET by adding together the total 
number of bid shares that a CLP is quoting at the NBB and the number of 
offer shares that the CLP is quoting at the NBO (the ``Combined 
Shares''). The Exchange then determines the SET winner based on the 
highest total Combined Shares.
    This proposal intends to amend Interpretation and Policy .02(g) of 
Rule 11.8 so that the Exchange calculates SETs separately for bids and 
offers. As proposed, the Exchange would evaluate a CLP's bid quotes and 
offer quotes separately, meaning that the CLP or CLPs with the greatest 
aggregate size at the NBB will be considered to have a winning bid SET 
and the CLP or CLPs with the greatest aggregate size at the NBO will be 
considered to have a winning offer SET. No CLPs would be considered to 
have a winning SET for having the greatest aggregate size at the NBB 
and NBO combined.
Minimum Quote Size Requirement
    The Exchange is proposing to increase the minimum quote size 
requirement to be eligible to have a winning SET during Regular Trading 
Hours. Currently, the Exchange only requires that a CLP's orders are 
for at least one round lot. Specifically, this proposal to amend sub-
paragraph (g)(4) of Interpretation and Policy .02 to Rule 11.8 is 
intended to increase the minimum quote size requirement to five round 
lots (usually 500 shares) for a CLP to have a winning bid or offer SET. 
The Exchange is proposing this change to encourage CLPs to provide 
additional liquidity at the NBBO in BATS listed securities.
Contra-Side Quoting Requirement
    The Exchange also proposes that a CLP be required to quote at least 
one round lot at or within 1.2% of the CLP's bid or offer in order to 
have a winning SET during Regular Trading Hours. Currently, outside of 
daily and monthly quoting requirements, the Exchange does not have any 
quoting requirements for CLPs. More specifically, the Exchange does not 
currently have any contra-side quoting requirements that a CLP must 
meet in order to be considered to have a winning SET.
    This proposal to add sub-paragraph (g)(5) to Interpretation and 
Policy .02 to Rule 11.8 is intended to require that, in order to have a 
winning bid SET or winning offer SET during Regular Trading Hours, a 
CLP must have a bid or offer on the contra-side at a price at or within 
1.2% of the CLP's winning offer or bid, respectively. For example, as 
proposed, in order for a CLP to have a winning bid SET for a 500 share 
bid priced at $10.00, the CLP must, at the time of the SET, also have 
at least one round lot offer for between $10.00 and $10.12. For a CLP 
to have a winning offer SET for a 500 share offer priced at $10.00, the 
CLP must, at the time of the SET, also have at least one round lot bid 
priced between $9.88 and $10.00. The Exchange is proposing this 
amendment in order to require CLPs to provide liquidity on both sides 
of the market in order to be considered to have a winning bid or offer 
SET. The Exchange is proposing to have this requirement apply only to 
SETs during Regular Trading Hours in order to mitigate exposure due to 
potentially high volatility in pricing that occurs outside of Regular 
Trading Hours.
Providing Daily Financial Rebates Separately for Bid SETs and Offer 
SETs
    The Exchange proposes to provide separate daily rebates based on 
the greatest number of winning bid SETs and winning offer SETs. 
Currently, the one or two CLPs (depending on the type of security) with 
the greatest number of winning SETs (subject to other requirements, not 
relevant for the purposes of this proposed change) win a set percentage 
of a single daily rebate. The Exchange is proposing, in conjunction 
with the above proposed change to calculate SETs separately for bids 
and offers, to amend Interpretation and Policy .02 (g)(1)(A) and (k)(1) 
of Rule 11.8 to provide daily financial rebates to CLPs based on which 
CLP or CLPs have the greatest number of winning bid SETs and, 
separately, winning offer SETs.
Allocation of Daily Financial Rebates
    The Exchange is also proposing to amend the way that it allocates 
daily financial rebates to CLPs. Currently, for all CLP eligible 
securities with the exception of Tier II securities,\10\ the Exchange 
allocates daily financial rebates on an 80/20 basis in which the 
eligible CLP with the highest number of winning SETs receives 80% of 
the daily financial rebate and the eligible CLP with the second highest 
number of winning SETs receives 20% of the daily financial rebate.\11\ 
Frequently, the Exchange has found that the CLP with the most or second 
most winning SETs will realize that they are so far in front of the 
next CLP and/or so far behind the CLP in front of them that they no 
longer have incentive to continue to provide aggressive quotes.
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    \10\ As defined in BATS Rule 14.9.
    \11\ It is worth noting that the Exchange currently does not 
distinguish between bid SETs and offer SETs and awards the daily 
financial rebates to CLPs based only on the total number of winning 
SETs (whether on an 80/20 basis or, as under Tier II, 100% to a 
single CLP). As described above, the Exchange is proposing to 
calculate both winning bid SETs and winning offer SETs and, as such, 
is also proposing to provide separate and independent financial 
rebates to CLPs for bid SETs and offer SETs.
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    In order to incentivize CLPs to continue to quote aggressively 
throughout the day, the Exchange is proposing to amend paragraph (k)(1) 
of Interpretation and Policy .02 to Rule 11.8 to allocate daily 
financial rebates to CLPs on a pro rata basis. Specifically, the 
Exchange is proposing to determine the two CLPs that receive the daily 
financial rebates on the same basis, however, rather than receiving a 
pre-set percentage of the financial rebate, the CLPs will split the 
financial rebate based on the number of each CLP's winning SETs as a 
percentage of total winning SETs between the two winning CLPs. For 
instance, where CLP1 has 6,000 winning SETs, CLP2 has 4,000

[[Page 8657]]

winning SETS, and CLP3 has 3,000 winning SETs, currently, the Exchange 
would award 80% to CLP1 and 20% to CLP2, based on the set percentages. 
However, as proposed, CLP1 would be allocated 60% of the financial 
rebate [6,000/(6000+4000)] and CLP2 would be allocated 40% of the 
financial rebate [4,000/(6,000+4,000)]. The Exchange is not proposing 
to reallocate the daily financial rebates for Tier II securities.
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.\12\ In particular, 
the proposal is consistent with Section 6(b)(5) of the Act,\13\ 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. The Exchange believes that the proposal 
will benefit market participants by incentivizing increased 
participation in the Opening and Closing Auction by expanding the time 
during which the Exchange will conduct SETs, thus improving the price 
discovery process. The Exchange also believes that the proposal will 
promote tighter spreads for all market participants by separately 
calculating SETs and providing rebates for bids and offers rather than 
combined bids and offers, which will incentivize CLPs to quote more 
aggressively on both the bid and offer. Further, the Exchange believes 
that the proposal will promote tighter spreads by requiring that CLPs 
quote at least one round lot at or within 1.2% of a bid or offer in 
order to have a winning SET during Regular Trading Hours. In addition 
to creating tighter spreads, the Exchange further believes that the 
proposal is consistent with the Act because it will help to increase 
liquidity at the NBBO by increasing the minimum quote size from one 
round lot to five round lots. Finally, the Exchange believes that the 
proposed pro-rata structure will incentivize CLPs to quote aggressively 
on a continuous basis throughout each trading day.
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    \12\ 15 U.S.C. 78f(b).
    \13\ 15 U.S.C. 78f(b)(5).
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(B) Self-Regulatory Organization's Statement on Burden on Competition

    The proposed rule change does not impose any burden on competition. 
The Exchange believes that the proposal will merely improve the 
incentives and, in turn, the results, of its CLP Program. The Exchange 
believes that the proposed changes will enhance competition amongst 
participants in the CLP Program.

(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

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the Exchange consents, the Commission will: (a) By order approve 
or disapprove such proposed rule change, or (b) institute proceedings 
to determine whether the proposed rule change should be disapproved.

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-2013-005 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-2013-005. 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 
10:00 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-BATS-2013-005 and should be 
submitted on or before February 27, 2013.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\14\
Kevin M. O'Neill,
Deputy Secretary.
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    \14\ 17 CFR 200.30-3(a)(12).
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[FR Doc. 2013-02557 Filed 2-5-13; 8:45 am]
BILLING CODE 8011-01-P