Document ID: SEC-2015-1761-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: BATS Exchange, Inc.
Posted Date: 2015-10-28T04:00Z

[Federal Register Volume 80, Number 208 (Wednesday, October 28, 2015)]
[Notices]
[Pages 66069-66072]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-27351]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-76231; File No. SR-BATS-2015-91]

Self-Regulatory Organizations; BATS Exchange, Inc.; Notice of 
Filing and Immediate Effectiveness of a Proposed Rule Change to Rule 
20.6, Nullification and Adjustment of Options Transactions Including 
Obvious Errors

October 22, 2015.
    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 October 20, 2015, BATS Exchange, Inc. (the ``Exchange'' or 
``BATS'') 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 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 the 
Substance of the Proposed Rule Change

    The Exchange filed a proposal for the Exchange's equity options 
platform (``BATS Options'') to extend the pilot program that suspends 
certain obvious error provisions of Rule 20.6 during limit up-limit 
down states in securities that underlie options traded on the Exchange.
    The text of the proposed rule change is available at the Exchange's 
Web site at 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
    Earlier this year, the Exchange adopted new Rule 20.6 related to 
the adjustment and nullification of transactions that occur on the 
Exchange's equity options platform (``BATS Options'').\5\ 
Interpretation and Policy .01 to Rule 20.6 is designed to address 
certain issues related to the Plan to Address Extraordinary Market 
Volatility Pursuant to Rule 608 of

[[Page 66070]]

Regulation NMS under the Act (the ``Limit Up-Limit Down Plan'' or the 
``Plan'').\6\ Specifically, pursuant to a pilot program set forth in 
Interpretation and Policy .01 to Rule 20.6, the Exchange excludes from 
certain provisions of Rule 20.6 transactions executed during a ``Limit 
State'' or ``Straddle State,'' as such terms are defined in the Plan.
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    \5\ See Securities Exchange Act Release No. 74556 (March 20, 
2015), 80 FR 16031 (March 26, 2015) (SR-BATS-2014-067).
    \6\ See Securities Exchange Act Release No. 67091 (May 31, 
2012), 77 FR 33498 (June 6, 2012) (the ``Limit Up-Limit Down 
Release'').
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    The purpose of this filing is to extend the effectiveness of the 
pilot program of Interpretation and Policy .01 of Rule 20.6 to coincide 
with the pilot period for the Limit Up-Limit Down Plan, including any 
extensions to the pilot period for the Plan. The Exchange also proposes 
to amend a cross-reference contained within Interpretation and Policy 
.01, as described below.
    The Exchange believes the benefits to market participants from 
Interpretation and Policy .01 should continue on a pilot basis. The 
Exchange continues to believe that adding certainty to the execution of 
orders in Limit or Straddle States will encourage market participants 
to continue to provide liquidity to the Exchange, and, thus, promote a 
fair and orderly market during these periods. Barring this provision, 
the obvious error provisions of Rule 20.6 would likely apply in many 
instances during Limit States and Straddle States. The Exchange 
believes that continuing the pilot will protect against any 
unanticipated consequences in the options markets during a Limit State 
or Straddle State. Thus, the Exchange believes that the protections of 
the current rule should continue while the industry gains further 
experience operating the Plan. Rather than extending the pilot program 
to a specific date, the Exchange proposes to extend the pilot to 
coincide with the operation of the Plan, which is also a pilot 
program.\7\
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    \7\ Currently, the pilot period for the Plan is proposed to be 
extended to April 22, 2016. See Securities Exchange Act Release No. 
75917 (September 14, 2015), 80 FR 56515 (September 18, 2015).
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    The Exchange represents that it will conduct its own analysis 
concerning the elimination of the Obvious Error and Catastrophic Error 
provisions during Limit and Straddle States and agrees to provide the 
Commission with relevant data to assess the impact of this proposed 
rule change. As part of its analysis, the Exchange will evaluate (1) 
the options market quality during Limit and Straddle States, (2) assess 
the character of incoming order flow and transactions during Limit and 
Straddle States, and (3) review any complaints from Members and their 
customers concerning executions during Limit and Straddle States. The 
Exchange also agrees to provide to the Commission data requested to 
evaluate the impact of the inapplicability of the Obvious Error and 
Catastrophic Error provisions, including data relevant to assessing the 
various analyses noted above.
    In connection with this proposal, each month the Exchange will 
provide to the Commission and the public a dataset containing the data 
for each Straddle State and Limit State in NMS Stocks underlying 
options traded on the Exchange, limited to those option classes that 
have at least one (1) trade on the Exchange during a Straddle State or 
Limit State. For each of those option classes affected, each data 
record will contain the following information:
     Stock symbol, option symbol, time at the start of the 
Straddle or Limit State, an indicator for whether it is a Straddle or 
Limit State.
     For activity on the Exchange:
      executed volume, time-weighted quoted bid-ask spread, 
time-weighted average quoted depth at the bid, time-weighted average 
quoted depth at the offer;
      high execution price, low execution price;
      number of trades for which a request for review for error 
was received during Straddle and Limit States;
     an indicator variable for whether those options outlined 
above have a price change exceeding 30% during the underlying stock's 
Limit or Straddle State compared to the last available option price as 
reported by OPRA before the start of the Limit or Straddle State (1 if 
observe 30% and 0 otherwise). Another indicator variable for whether 
the option price within five minutes of the underlying stock leaving 
the Limit or Straddle state (or halt if applicable) is 30% away from 
the price before the start of the Limit or Straddle State.
    In addition, the Exchange shall provide to the Commission and the 
public assessments relating to the impact of the operation of the 
Obvious Error rules during Limit and Straddle States as follows: (1) 
Evaluate the statistical and economic impact of Limit and Straddle 
States on liquidity and market quality in the options markets; and (2) 
Assess whether the lack of Obvious Error rules in effect during the 
Straddle and Limit States are problematic. The Exchange agrees to 
provide the analysis and data to the Commission to help evaluate the 
impact of the pilot program no later than five months prior to the 
pilot expiration, including any extensions. If the Plan extension is 
approved, the next data assessment will be due on December 18, 2015.
    As noted above, pursuant to the pilot program, the Exchange 
excludes from certain provisions of Rule 20.6 transactions executed 
during a Limit State or Straddle State, as such terms are defined in 
the Plan. The Exchange, however, retains authority to review 
transactions on an Official's own motion pursuant to sub-paragraph 
(c)(3) of Rule 20.6 and to bust or adjust transactions pursuant to 
provisions governing Significant Market Events, as defined in the Rule, 
trading halts, erroneous prints and quotes in the underlying security, 
and in connection with stop and stop limit orders that have been 
triggered by an erroneous execution. The Exchange believes that these 
safeguards will provide the Exchange with the flexibility to act when 
necessary and appropriate to nullify or adjust a transaction, while 
also providing market participants with certainty that, under normal 
circumstances, the trades they affect with quotes and/or orders having 
limit prices will stand irrespective of subsequent moves in the 
underlying security. Subsequent to the adoption of new Rule 20.6, the 
Exchange adopted a provision, paragraph (k), which governs erroneous 
trades occurring from disruptions and/or malfunctions of Exchange 
systems. The Exchange proposes to extend the authority to nullify 
transactions pursuant to paragraph (k) even in the event of a Limit 
State or Straddle State for the underlying security, thereby excluding 
such provision from the pilot program. The Exchange notes that other 
options exchanges that have a provision governing erroneous trades 
occurring from disruptions and/or malfunctions of Exchange systems have 
also excluded such provision from the pilot program.\8\
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    \8\ See, e.g., NYSE MKT Rule 975NY, Interpretation and Policy 
.03, which excludes paragraph (l) of Rule 975NY from the pilot 
program; see also, CBOE Rule 6.25, Interpretation and Policy .01, 
which excludes Interpretation and Policy .05 from the pilot program.
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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

[[Page 66071]]

impediments to, and perfect the mechanism of, a free and open market 
and a national market system. Additionally, the Exchange believes the 
proposed rule change is consistent with the Section 6(b)(5) \11\ 
requirement that the rules of an exchange not be designed to permit 
unfair discrimination between customers, issuers, brokers, or dealers.
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    \9\ 15 U.S.C. 78f(b).
    \10\ 15 U.S.C. 78f(b)(5).
    \11\ Id.
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    In particular, the Exchange further believes that it is necessary 
and appropriate in the interest of promoting fair and orderly markets 
to exclude transactions executed during a Limit or Straddle State from 
certain aspects of Rule 20.6. The Exchange believes the application of 
the current rule will be impracticable given the lack of a reliable 
national best bid or offer in the options market during Limit States 
and Straddle States, and that the resulting actions (i.e., nullified 
trades or adjusted prices) may not be appropriate given market 
conditions. Extension of this pilot to coincide with the pilot period 
for the Limit Up-Limit Down Plan would ensure that limit orders that 
are filled during a Limit or Straddle State would have certainty of 
execution in a manner that promotes just and equitable principles of 
trade, removes impediments to, and perfects the mechanism of a free and 
open market and a national market system. Thus, the Exchange believes 
that the protections of the pilot should continue while the industry 
gains further experience operating the Plan. The Exchange also believes 
it is necessary and appropriate in the interest of promoting fair and 
orderly markets to retain authority to nullify erroneous trades 
occurring from disruptions and/or malfunctions of Exchange systems 
without regard to whether the underlying security was in a Limit State 
or Straddle State. As noted above, this will ensure consistency with 
the rules of other options exchanges.\12\
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    \12\ See supra note 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 will 
impose any burden on competition that is not necessary or appropriate 
in furtherance of the purposes of the Act. Specifically, the Exchange 
believes that, by extending the expiration of the pilot, the proposed 
rule change will allow for further analysis of the pilot and a 
determination of how the pilot shall be structured in the future. In 
doing so, the proposed rule change will also serve to promote 
regulatory clarity and consistency, thereby reducing burdens on the 
marketplace and facilitating investor protection.

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

    The Exchange has not solicited, and does not intend to solicit, 
comments on this proposed rule change. The Exchange has not received 
any written comments from members or other interested parties.

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

    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 for 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 \13\ and Rule 19b-
4(f)(6)(iii) thereunder.\14\
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    \13\ 15 U.S.C. 78s(b)(3)(A).
    \14\ 17 CFR 240.19b-4(f)(6)(iii). 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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    The Exchange has asked the Commission to waive the 30-day operative 
delay so that the proposal may become operative immediately upon 
filing. The Commission believes that waiving the 30-day operative delay 
is consistent with the protection of investors and the public interest, 
as it will allow the obvious error pilot program to continue 
uninterrupted while the industry gains further experience operating 
under the Plan, and avoid any investor confusion that could result from 
a temporary interruption in the pilot program. For this reason, the 
Commission designates the proposed rule change to be operative upon 
filing.\15\
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    \15\ For purposes only of waiving the 30-day operative delay, 
the Commission has also 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 to 
determine whether the proposed rule should be approved or 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-2015-91 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-2015-91. 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-2015-91, and should be 
submitted on or before November 18, 2015.

[[Page 66072]]

    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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Brent J. Fields,
Secretary.
[FR Doc. 2015-27351 Filed 10-27-15; 8:45 am]
 BILLING CODE 8011-01-P