Document ID: SEC-2017-0023-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Bats EDGX Exchange, Inc.
Posted Date: 2017-01-09T05:00Z

[Federal Register Volume 82, Number 5 (Monday, January 9, 2017)]
[Notices]
[Pages 2428-2433]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-00096]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-79718; File No. SR-BatsEDGX-2016-41]

Self-Regulatory Organizations; Bats EDGX Exchange, Inc.; Notice 
of Filing of Amendment No. 1 and Order Granting Accelerated Approval of 
a Proposed Rule Change, as Modified by Amendment No. 1, Related to the 
Exchange's Equity Options Platform To Adopt a Price Improvement 
Auction, the Bats Auction Mechanism

January 3, 2017.

I. Introduction

    On September 16, 2016, Bats EDGX Exchange, Inc. (the ``Exchange'' 
or ``EDGX'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change for the Exchange's equity options platform (``EDGX 
Options'') to adopt a price improvement auction, the Bats Auction 
Mechanism. The proposed rule change was published for comment in the 
Federal Register on October 5, 2016.\3\ The Commission received no 
comments regarding the proposal. On November 17, 2016, the Commission 
extended the time period within which to approve the proposed rule 
change, disapprove the proposed rule change, or institute proceedings 
to determine whether to disapprove the proposed rule change.\4\ On 
December 15, 2016, EDGX filed Amendment No. 1 to the proposal.\5\ The 
Commission is publishing this notice to solicit comment on Amendment 
No. 1 from interested persons and is approving the proposed rule 
change, as modified by Amendment No. 1, on an accelerated basis, with 
certain provisions subject to a pilot period scheduled to expire on 
January 18, 2017.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 78988 (September 29, 
2016), 81 FR 69172.
    \4\ See Securities Exchange Act Release No. 79339, 81 FR 84625 
(November 23, 2016).
    \5\ In Amendment No. 1, EDGX provided additional details to its 
proposal and made certain changes to original aspects of the 
proposal. Specifically, the proposal as revised would: (i) Restrict 
an Auction from commencing with a stop price equal to a same side 
resting order unless the resting order is not a Priority Customer 
order, the Exchange's ``Customer Overlay'' is in effect, and the 
incoming Agency Order is a Priority Customer order; (ii) prohibit an 
Initiating Order from being a solicited order for the account of an 
Options Market Maker assigned in the affected series on the 
Exchange; (iii) describe a survey conducted by the Exchange 
regarding the ability of participants to respond to an Auction 
lasting no less than one hundred milliseconds and no more than one 
second; (iv) provide additional explanation and justification of 
certain aspects of the proposal, including additional examples 
describing Auction processing and order allocation in various 
scenarios and details regarding the handling of overlapping Auctions 
for 50 contracts or more; and (v) make other minor structural, 
technical, and clarifying amendments to the proposal and the 
proposed rule text that EDGX believes does not result in any 
material differences over its original proposal. Amendment No. 1 
amends and replaces the original filing in its entirety. To promote 
transparency of its proposed amendment, when EDGX filed Amendment 
No. 1 with the Commission, it also submitted a comment letter to the 
file with a brief description of Amendment No. 1, which the 
Commission posted on its Web site and placed in the public comment 
file for SR-BatsEDGX-2016-41. The Exchange also posted a copy of its 
Amendment No. 1 on its Web site when it filed the amendment with the 
Commission.
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II. Description of the Proposal, as Amended

    EDGX proposes to establish a price-improvement auction, the Bats 
Auction Mechanism (``BAM,'' ``BAM Auction,'' or ``Auction'') on the 
Exchange's equity options platform, in which an Exchange Member (an 
``Initiating Member'') may electronically submit for execution a two-
sided paired order, where one side is an order it represents as agent 
on behalf of a Priority Customer,\6\ broker-dealer, or any other person 
or entity (``Agency Order'') and the other side is principal interest 
or any other order it represents as agent (an ``Initiating Order'') 
provided that the Member first exposes the Agency Order in the BAM 
Auction pursuant to the proposed Rule.
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    \6\ A ``Priority Customer'' means any person or entity that is 
not: (A) A broker or dealer in securities; or (B) a Professional. 
The term ``Priority Customer Order'' means an order for the account 
of a Priority Customer. See EDGX Rule 16.1(a)(45). A 
``Professional'' is any person or entity that: (A) Is not a broker 
or dealer in securities; and (B) places more than 390 orders in 
listed options per day on average during a calendar month for its 
own beneficial account(s). All Professional orders shall be 
appropriately marked by Options Members. See EDGX Rule 16.1(a)(46).
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A. Auction Eligibility Requirements

    All options traded on the Exchange are eligible for BAM.\7\ To 
initiate a BAM Auction, an Initiating Member first must ``stop'' the 
Agency Order such that: (A) If the Agency Order is for less than 50 
option contracts and the difference between the National Best Bid and 
Offer (``NBBO'') is $0.01, the Initiating Member must stop the entire 
Agency Order at one minimum price improvement increment better than the 
NBBO; or (B) for any other Agency Order, the Initiating Member must 
stop the entire Agency Order at the better of the NBBO or the Agency 
Order's limit price. In addition, if the EDGX BBO on the same side of 
the market as the Agency Order represents a Priority Customer order on 
the book, the stop price must be at least $0.01 better than the booked 
order's limit price. If the EDGX BBO on the same side of the market as 
the Agency Order represents a quote or order that is not a Priority 
Customer order on the book, the stop price must be at least $0.01 
better than the booked order's limit price unless the Agency Order is a 
Priority Customer order and the Customer Overlay set forth in Rule 
21.8(d)(1) is in effect.\8\ In addition, Auctions in the same series of 
Agency Orders for less than 50 contracts may not queue or overlap in 
any manner; however, Auctions of Agency Orders for 50 contracts or more 
will be allowed to occur at the same time as other Auctions (of any 
size Agency Order) in the same series.\9\ Finally, an

[[Page 2429]]

Agency Order may not be a solicited order for the account of any 
Options Market Maker assigned in the affected series.\10\ Agency Orders 
that do not comply with the aforementioned auction eligibility 
requirements will be rejected. In addition, Agency Orders submitted at 
or before the opening of trading or when the NBBO is crossed are not 
eligible to initiate an Auction and will be rejected.
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    \7\ See proposed EDGX Rule 21.19(a).
    \8\ According to the Exchange, this condition is consistent with 
the operation of the Exchange generally, where Priority Customer 
orders receive a priority advantage over all other orders. See 
Amendment No. 1, supra note 5. See also EDGX Rule 21.8(d)(1), which 
specifies that when the Customer Overlay is in effect, Priority 
Customer Orders shall have priority over orders on behalf of all 
other types of participants (``non-Customers'') at the same price. 
The Exchange noted that the Customer Overlay is currently in effect 
with respect to all options traded on the Exchange. See Amendment 
No. 1, supra note 5.
    \9\ In its proposal, the Exchange notes that although it is 
possible for one or more Auctions for 50 contracts or more to 
overlap, each Auction will be started in a sequence and will have a 
distinct conclusion at which time the Auction will be allocated. 
Therefore, when the first Auction concludes, unrelated orders that 
then exist will be considered for participation in that Auction. If 
there is remaining unrelated order interest after the first Auction 
has been allocated, then such unrelated order interest will be 
considered for allocation when the subsequent Auction is processed. 
If there are multiple Auctions underway that are each terminated 
early pursuant to proposed EDGX Rule 21.19(b)(2)(B) or (C), the 
Auctions will be processed sequentially based on the order in which 
they commenced. See Notice, supra note 3, at 69178-79 and Amendment 
No. 1, supra note 5. See also proposed EDGX Rule 21.19(b)(3) and 
proposed Interpretation and Policy .04 to EDGX Rule 21.19. In 
addition, each BAM response must specifically identify the Auction 
for which it is targeted and will only be considered in the 
specified Auction. See Notice, supra note 3, at 69179 and Amendment 
No. 1, supra note 5. See also proposed EDGX Rule 21.19(b)(1)(E).
    \10\ See proposed EDGX Rule 21.19(a)(6). The Exchange stated 
that this prohibition is based on a prohibition contained in other 
options exchanges' auction mechanisms. See Amendment No. 1, supra 
note 5. See also Chapter VI, Section 9(i)(F) of the NASDAQ BX, Inc. 
(``BX'') Rules.
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B. Auction Process

    To initiate the Auction, the Initiating Member must mark the Agency 
Order for Auction processing, and specify either: (A) A single price at 
which it seeks to execute the Agency Order (a ``single-price 
submission''); (B) that it is willing to automatically match as 
principal or as agent on behalf of an Initiating Order the price and 
size of all BAM Auction Notification responses (``BAM responses'') and 
other trading interest (``auto-match'') as follows: (i) Stopping the 
entire order at a single stop price and auto-matching BAM responses and 
other trading interest at all prices that improve the stop price to a 
specified price; or (ii) stopping the entire order at a single stop 
price and auto-matching all BAM responses and other trading interest at 
all prices that improve the stop price. Once the Initiating Member has 
submitted an Agency Order for exposure in the Auction, such Agency 
Order may not be modified or cancelled.
    Under no circumstances will the Initiating Member receive an 
allocation percentage, at the final price point, of more than 50% of 
the initial Agency Order in the event there is one competing quote, 
order, or BAM response or 40% of the initial Agency Order in the event 
there are multiple competing quotes, orders, or BAM responses.\11\ 
However, when starting an Auction, the Initiating Member may submit the 
Agency Order with a designation of ``last priority'' to other BAM 
participants (``Last Priority''), which will result in the Initiating 
Member forfeiting priority and trade allocation privileges. If Last 
Priority is specified, the Initiating Order would trade only if there 
were not enough interest available to fully execute the Agency Order at 
prices which are equal to or improve upon the stop price.\12\ Last 
Priority information would not be available to other market 
participants and may not be modified after the order is submitted to 
the Auction.
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    \11\ See proposed EDGX Rule 21.19(b)(1)(A).
    \12\ Last Priority will not be permitted if both the Initiating 
Order and Agency Order are Priority Customer Orders. See proposed 
EDGX Rule 21.19(b)(1)(B)(ii). In addition, Last Priority is only 
compatible with single-price submissions and cannot be designated on 
an Agency Order specified as auto-match. See proposed EDGX Rule 
21.19(b)(1)(B)(iii).
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    When the Exchange receives an Agency Order for Auction processing, 
an auction notification message detailing the side, size, price, and 
options series of the Agency Order would be sent over the Exchange's 
Multicast PITCH Feed and Auction Feed. BAM Auctions would be for a 
specified duration of no less than one hundred milliseconds and no more 
than one second, as determined by the Exchange and announced on the 
Exchange's Web site.\13\ Any person or entity other than the Initiating 
Member may submit a response to the Auction, provided such response is 
properly marked specifying price, size, side of the market, and 
information identifying the Auction to which the response is targeted. 
BAM responses would not be visible to Auction participants, and would 
not be disseminated to OPRA. The minimum price increment for BAM 
responses and for an Initiating Member's submission would be $0.01, 
regardless if the class trades in another increment.\14\
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    \13\ The Exchange states that, in September 2016, it conducted a 
survey of active EDGX market maker firms and other active liquidity 
providers inquiring as to the timeframe within which these market 
participants can respond to an auction with a duration time ranging 
from less than fifty (50) milliseconds to more than one (1) second. 
Of the ten (10) active EDGX market maker firms that were surveyed, 
eight (8) responded to the survey. In addition, the Exchange 
included six (6) additional liquidity providers that are not active 
EDGX market makers but are active participants on EDGX Options. Of 
the survey respondents, 93% indicated that that their firm could 
respond to auctions with a duration time of at least 50 
milliseconds, and 100% indicated that that their firm could respond 
to auctions with a duration time of at least 100 milliseconds. Based 
on the results of the survey, the Exchange believes that allowing 
for an auction period of no less than one hundred (100) milliseconds 
and no more than one (1) second would provide a meaningful 
opportunity for Members to respond to the BAM Auction while at the 
same time facilitating the prompt execution of orders. The Exchange 
believes that 100 milliseconds will continue to provide all market 
participants with sufficient time to respond, compete, and provide 
price improvement for orders and will provide investors and other 
market participants with more timely executions, thereby reducing 
their market risk. See Amendment No. 1, supra note 5.
    \14\ See proposed EDGX Rule 21.19(b)(1)(G). See also Amendment 
No. 1, supra note 5.
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    A BAM response with a size greater than the size of the Agency 
Order will be capped at the size of the Agency Order (i.e., the excess 
size will be ignored when processing the Auction). BAM responses may be 
modified or cancelled during the Auction. BAM responses on the same 
side of the market as the Agency Order or with a Time in Force of IOC 
or FOK are considered invalid and will be immediately cancelled.\15\ 
Finally, multiple BAM responses from the same User may be submitted 
during the Auction. However, multiple orders at a particular price 
point submitted by a User in response to an Auction or resting on the 
EDGX Options Book will be aggregated together and will be capped at the 
size of the Agency Order (i.e., the excess size will be ignored when 
processing the Auction).\16\ BAM responses cannot cross the price of 
the Initial NBBO but will be executed, if possible, at the most 
aggressive permissible price within such Initial NBBO.
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    \15\ See proposed EDGX Rule 21.19(b)(1)(K). See also Amendment 
No. 1, supra note 5.
    \16\ See proposed EDGX Rule 21.19(b)(1)(I).
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C. Conclusion of an Auction and Order Allocation

    The BAM Auction would conclude at the earlier of: (i) The end of 
the Auction period; (ii) upon receipt by the Exchange of a Priority 
Customer order on the same side of the market and at the stop price of 
the Agency Order that is to be posted to the EDGX Options Book; (iii) 
upon receipt by the Exchange of an unrelated order or quote that is not 
a Priority Customer order that is on the same side of the market as the 
Agency Order that would cause the Agency Order's stop price to be 
outside of the EDGX BBO; (iv) at the close of trading; or (v) any time 
there is a trading halt on the Exchange in the affected series.\17\
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    \17\ See proposed EDGX Rule 21.19(b)(2). In Amendment No. 1, the 
Exchange stated that the proposed difference between scenario (ii), 
where an unrelated, same-side Priority Customer order will cause 
early termination of an Auction when it arrives on the Exchange at 
the stop price, and scenario (iii), where an unrelated, same-side 
order or quote from a non-Priority Customer will cause early 
termination of an Auction only when it would be better than the stop 
price, is consistent with the Exchange's belief that a Priority 
Customer order received and placed on the Exchange's order book 
should have certainty that it will be the first order executed at 
that price in response to contra-side liquidity. See Amendment No. 
1, supra note 5.
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    If the BAM Auction concludes earlier than the end of the prescribed 
Auction period for any of the reasons described

[[Page 2430]]

above other than a trading halt, the Auction will be processed pursuant 
to the order allocation process set forth in proposed EDGX Rule 
21.19(b)(4).\18\ In the event of a trading halt on the Exchange in the 
affected series, the Auction will be cancelled without execution.\19\
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    \18\ See proposed EDGX Rule 21.19(b)(2)(A)-(D).
    \19\ See proposed EDGX Rule 21.19(b)(2)(E).
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    Any unexecuted BAM responses will be cancelled.\20\ An unrelated 
market or marketable limit order (against the EDGX BBO) on the opposite 
side of the market from the Agency Order received during the Auction 
will not cause the Auction to end early and will execute against 
interest outside of the Auction.\21\ If contracts remain from such 
unrelated order at the time the auction ends, they will be considered 
for participation in the order allocation process. All unrelated orders 
submitted to the Exchange with contracts remaining at the time the 
Auction ends, including orders marked as Post Only Orders pursuant to 
EDGX Rule 21.1(d)(8),\22\ will be considered for participation in the 
order allocation process. If an Auction is initiated for an Agency 
Order designated as an ``Intermarket Sweep Order'' or ``ISO'' 
Order,\23\ responses and executions will be permitted at a price 
inferior to the Initial NBBO.\24\
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    \20\ See proposed EDGX Rule 21.19(b)(5).
    \21\ See proposed EDGX Rule 21.19(b)(3).
    \22\ The Exchange noted that Post Only Orders would participate 
in an Auction in the same manner as any other unrelated order even 
if the Post Only Order would be considered to be removing liquidity 
from the Auction. See Amendment No. 1, supra note 5.
    \23\ ``Intermarket Sweep Orders'' or ``ISO'' Orders are limit 
orders that are designated as ISOs in the manner prescribed by EDGX 
and are executed within the System at one or multiple price levels 
without regard to Protected Quotations of other Eligible Exchanges 
as defined in EDGX Rule 27.1. ISOs are not eligible for routing 
pursuant to EDGX Rule 21.9. In Amendment No. 1, the Exchange 
described in greater detail how a BAM ISO would be handled if any 
better priced interest arrived on the Exchange's order book after 
the BAM ISO was sent but before the corresponding Auction commenced. 
See Amendment No. 1, supra note 5 (stating that in this 
circumstance, any better priced interest in the order book at the 
time of such BAM Auction would be executed pursuant to the proposed 
Auction functionality).
    \24\ See proposed EDGX Rule 21.19(b)(6).
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    At the conclusion of the Auction, the Agency Order will be 
allocated at the best price(s), pursuant to the priority set forth in 
proposed EDGX Rule 21.19(b)(4).\25\ First, Priority Customer orders 
would have time priority at each price level. Next, the Initiating 
Member would receive an allocation after Priority Customer orders.\26\
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    \25\ See Notice, supra note 3, at 69176-78 and Amendment No. 1, 
supra note 5, for examples illustrating trade allocations under 
various auction scenarios.
    \26\ The Initiating Participant shall receive additional 
allocation only if contracts remain after any allocation pursuant to 
proposed EDGX Rule 21.19(b)(4).
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    If the Initiating Member selected the single-price submission 
option, BAM executions will occur first at prices that improve the stop 
price, and then at the stop price with up to 40% of the remaining 
contracts after Priority Customer interest is satisfied being allocated 
to the Initiating Member at the stop price. However, if only one other 
quote, order, or BAM response matches the stop price, the Initiating 
Member may be allocated up to 50% of the contracts executed at such 
price.
    If the Initiating Member selected the auto-match option, the 
Initiating Member would be allocated a number of contracts equal to the 
aggregate size of all other quotes, orders, and BAM responses at each 
price point until a price point is reached where the balance of the 
order can be fully executed, except that the Initiating Member would be 
entitled to receive up to 40% (if there are multiple competing quotes, 
orders, or BAM responses) or 50% (if there is only one competing quote, 
order, or BAM response) of the initial Agency Order at the final price 
point (including situations where the stop price is the final price), 
after Priority Customer interest has been satisfied but before 
remaining interest receives an allocation.
    After Public Customers and the Initiating Participant receive their 
allocations, and for classes designated by the Exchange as eligible for 
``Priority Order'' status, Users with resting quotes and orders that 
were at a price that is equal to the Initial NBBO on the opposite side 
of the market from the Agency Order (``Priority Orders'') would have 
priority up to their size in the Initial NBBO at each price level at or 
better than such Initial NBBO. Priority Orders and BAM responses 
submitted by Users with Priority Order Status will be allocated 
pursuant to the algorithm set forth in EDGX Rule 21.8(c).\27\
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    \27\ See proposed EDGX Rule 21.19(b)(4)(B)(iii). Priority Order 
status is only valid for the duration of the particular Auction.
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    Finally, after Priority Customers, the Initiating Member, and Users 
with Priority Orders, if applicable, have received allocations, all 
other interest will be allocated pursuant to Rule 21.8(c).\28\ Any 
remaining contracts will be allocated to the Initiating Member.
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    \28\ See proposed EDGX Rule 21.19(b)(4)(B)(iv).
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D. Crossing Agency Orders

    The Exchange also proposes, in lieu of the BAM Auction procedures 
set forth in proposed paragraphs (a)-(b) to EDGX Rule 21.19, to allow 
an Initiating Member to enter an Agency Order for the account of a 
Priority Customer paired with an order for the account of another 
Priority Customer, and such paired orders will be automatically 
executed without an Auction. In its proposal, the Exchange notes that 
it would be a violation of EDGX Rule 22.12 for an Options Member to 
circumvent EDGX Rule 22.12 by providing an opportunity for (i) a 
Priority Customer affiliated with the Options Member, or (ii) a 
Priority Customer with whom the Options Member has an arrangement that 
allows the Options Member to realize similar economic benefits from the 
transaction as the Options Member would achieve by executing agency 
orders as principal, to regularly execute against agency orders handled 
by the firm immediately upon their entry as BAM Priority Customer-to-
Priority Customer immediate crosses.\29\
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    \29\ See Notice, supra note 3, at 69176. See also Amendment No. 
1, supra note 5 and proposed Interpretation and Policy .03 to EDGX 
Rule 21.19.
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E. Pilot Program Information to the Commission

    Subject to a pilot program expiring January 18, 2017,\30\ there 
will be no minimum size requirement for orders to be eligible for the 
Auction. During this pilot period, the Exchange represents that it 
periodically will submit certain data, as requested by the Commission 
staff, to provide supporting evidence that, among other things, there 
is meaningful competition in BAM Auctions for all size orders and that 
there is an active and liquid market functioning on the Exchange 
outside of the Auction mechanism.\31\ The Exchange further noted that 
it would seek to request confidential treatment for any raw data that 
it submits to the Commission.\32\
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    \30\ See proposed Interpretation and Policy .05 to EDGX Rule 
21.19.
    \31\ See Notice, supra note 3, at 69176. See also Amendment No. 
1, supra note 5.
    \32\ See Notice, supra note 3, at 69176; Amendment No. 1, supra 
note 5. See also proposed Interpretation and Policy .05 to EDGX Rule 
21.19.
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    The Exchange represented that it will provide the following 
additional information on a monthly basis:
    (i) The number of contracts (of orders of 50 contracts or greater) 
entered into BAM Auctions;
    (ii) The number of contracts (of orders of fewer than 50 contracts) 
entered into BAM Auctions;

[[Page 2431]]

    (iii) The number of orders of 50 contracts or greater entered into 
BAM Auctions; and
    (iv) The number of orders of fewer than 50 contracts entered into 
BAM Auctions.

III. Discussion and Commission Findings

    After careful review, the Commission finds that the proposed rule 
change is consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to a national securities exchange 
and, in particular, with Section 6(b) of the Act.\33\ In particular, 
the Commission finds that the proposed rule change is consistent with 
Section 6(b)(5) of the Act,\34\ which requires, among other things, 
that the rules of a national securities exchange be designed to prevent 
fraudulent and manipulative acts and practices, to promote just and 
equitable principles of trade, to foster cooperation and coordination 
with persons engaged in regulating, clearing, settling, processing 
information with respect to, and facilitating transactions in 
securities, to remove impediments to and perfect the mechanism of a 
free and open market and a national market system, and, in general, to 
protect customers, issuers, brokers and dealers. The Commission 
believes that the Exchange's proposal to establish the BAM may increase 
competition among those options exchanges that offer similar price 
improvement mechanisms. The Commission further believes that allowing 
EDGX Members to enter orders into the BAM will provide additional 
opportunities for such orders to receive price improvement over the 
NBBO and, in some instances, will result in such orders receiving price 
improvement over the NBBO.
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    \33\ 15 U.S.C. 78f(b). In approving this proposed rule change, 
the Commission has considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
    \34\ 15 U.S.C. 78f(b)(5).
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    In particular, the Commission notes that, in order to initiate an 
Auction, the Initiating Member must stop the entire Agency Order as 
principal or with a solicited order at a price in an increment of $0.01 
such that if the Agency Order is for less than 50 option contracts and 
the difference between the NBB and NBO is $0.01, the Initiating Member 
must stop the entire Agency Order at one minimum price improvement 
increment better than the NBBO, which increment shall be determined by 
the Exchange but may not be smaller than $0.01. The Commission believes 
that guaranteed price improvement for Agency Orders of fewer than 50 
contracts when the difference between the NBB and NBO is $0.01 will 
benefit such Agency Orders. The Commission notes further that, for any 
other Agency Order, the Initiating Member must stop the entire Agency 
Order at the better of the NBBO or the Agency Order's limit price (if 
the order is a limit order). Accordingly, the proposed rule change will 
provide customers with an opportunity for price improvement over the 
NBBO in those instances.
    If the EDGX BBO on the same side of the market as the Agency Order 
represents a Priority Customer order on the book, the stop price must 
be at least $0.01 better than the booked order's limit price. If the 
EDGX BBO on the same side of the market as the Agency Order represents 
a quote or order that is not a Priority Customer order on the book, the 
stop price must be at least $0.01 better than the booked order's limit 
price unless the Agency Order is a Priority Customer order and the 
Customer Overlay set forth in Exchange Rule 21.8(d)(1) is in effect. 
The Commission notes that the Exchange has represented that this 
condition is consistent with the operation of the Exchange generally, 
where the Customer Overlay is currently in effect with respect to all 
options traded on the Exchange, and Priority Customer Orders have first 
priority over other orders at the same price.
    With respect to Agency Orders for less than 50 contracts, only one 
BAM Auction may be ongoing at any given time in a series and Auctions 
in the same series may not queue or overlap in any manner. However, BAM 
Auctions for Agency Orders of 50 contracts or more will be allowed to 
occur at the same time as other Auctions in the same series. The 
Commission notes that the BAM rules regarding the processing of 
overlapping BAM Auctions for Agency Orders of 50 contracts or more have 
been made transparent in the proposed rule change and are reasonable, 
given that the electronic nature of BAM makes the sequence of auction 
start times readily discernable.\35\ In particular, the Commission 
notes that a BAM response will only be considered for its specified 
Auction. Each BAM response must specifically identify the BAM Auction 
for which it is targeted, and if not fully executed, the BAM response 
will be cancelled back at the conclusion of the auction.
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    \35\ See proposed Interpretation and Policy .04 to EDGX Rule 
21.19.
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    All BAM Auctions will last for a period of no less than 100 
milliseconds and no more than one second, as determined by the Exchange 
and announced on the Exchange's Web site. As the Exchange discussed in 
its proposal, the Exchange conducted a survey of active EDGX market 
maker firms and other active liquidity providers inquiring as to the 
timeframe within which these market participants respond to an auction 
with a duration time ranging from less than fifty (50) milliseconds to 
more than one (1) second. According to the Exchange, a majority of the 
market maker firms and active liquidity providers on EDGX Options that 
responded to the survey indicated that they were capable of responding 
to auctions with a duration time of at least 50 milliseconds.\36\ Based 
on the Exchange's statements, the Commission believes that the proposed 
duration of the BAM Auction could facilitate the prompt execution of 
orders in the BAM, while providing market participants with an 
opportunity to compete for exposed bids and offers. The Commission 
notes that other exchanges' price improvement auctions provide for 
auction response periods within the range of the response duration 
proposed by EDGX.\37\
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    \36\ Of the ten (10) active EDGX market maker firms that were 
surveyed, eight (8) of these market makers responded to the survey. 
In addition, because EDGX is a relatively new options exchange and 
is still encouraging market makers to register and participate on 
the Exchange as such, and to increase the sample size, the Exchange 
included six (6) additional liquidity providers that are not active 
EDGX market makers but are active participants on EDGX Options. 
Thirteen (13) of the fourteen (14) respondents, or 93% indicated 
that that their firm could respond to auctions with a duration time 
of at least 50 milliseconds, though one of these firms indicated a 
preference of auctions with a duration of 100 milliseconds. The 
remaining firm indicated that it could respond to auctions with a 
duration of at least 100 milliseconds. This survey was conducted in 
September of 2016.
    \37\ See Chapter VI, Section 9(ii)(A)(3) of the BX Rules 
(auction period between 100 milliseconds and 1 section), 
International Securities Exchange, LLC (``ISE'') Rule 723(c)(5) 
(auction period of 500 milliseconds), CBOE Rule 6.74A(b)(1)(C) 
(auction period of 1 second), and BOX Options Exchange LLC (``BOX'') 
Rule 7150(f)(1) (auction period of 100 milliseconds).
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    The Commission believes that the Exchange's proposed matching 
algorithm is sufficiently clear regarding how orders are to be 
allocated in the BAM Auction and is designed in a manner that should 
facilitate a competitive auction process. The Commission further 
believes that permitting Priority Orders to have enhanced priority may 
encourage EDGX Users to quote aggressively with additional size outside 
of the BAM Auction and, therefore, may enhance competition and 
liquidity on the EDGX market.
    Under the proposal, the BAM Auction would be available for orders 
of fewer

[[Page 2432]]

than 50 contracts. There would be no minimum size requirement for 
orders entered into the BAM Auction for a pilot period expiring on 
January 18, 2017. The Exchange has represented its commitment to submit 
certain data on BAM Auctions at the request of Commission staff. The 
Commission expects such data to be used, by both the Exchange and the 
Commission staff, to assess the performance of the BAM Auction, 
including, among other things, to study whether there is meaningful 
competition for all size orders with the BAM, the degree of price 
improvement for all orders executed through the BAM, and whether there 
is an active and liquid market functioning on the Exchange outside of 
the BAM. The data provided will enable the Commission, as well as the 
Exchange itself, to evaluate the BAM Auction to determine its 
performance and possible impact on EDGX and options market structure in 
general and the degree to which it is beneficial to customers and to 
the options market as a whole.

IV. Section 11(a) of the Act

    Section 11(a)(1) of the Act \38\ prohibits a member of a national 
securities exchange from effecting transactions on that exchange for 
its own account, the account of an associated person, or an account 
over which it or its associated person exercises investment discretion 
(collectively, ``covered accounts'') unless an exception applies. Rule 
11a2-2(T) under the Act,\39\ known as the ``effect versus execute'' 
rule, provides exchange members with an exemption from the Section 
11(a)(1) prohibition. Rule 11a2-2(T) permits an exchange member, 
subject to certain conditions, to effect transactions for covered 
accounts by arranging for an unaffiliated member to execute 
transactions on the exchange. To comply with Rule 11a2-2(T)'s 
conditions, a member: (i) must transmit the order from off the exchange 
floor; (ii) may not participate in the execution of the transaction 
once it has been transmitted to the member performing the execution; 
\40\ (iii) may not be affiliated with the executing member; and (iv) 
with respect to an account over which the member or an associated 
person has investment discretion, neither the member nor its associated 
person may retain any compensation in connection with effecting the 
transaction except as provided in the Rule. For the reasons set forth 
below, the Commission believes that Exchange members entering orders 
into the BAM Auction would satisfy the requirements of Rule 11a2-2(T).
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    \38\ 15 U.S.C. 78k(a)(1).
    \39\ 17 CFR 240.11a2-2(T).
    \40\ This prohibition also applies to associated persons. The 
member may, however, participate in clearing and settling the 
transaction.
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    The Rule's first condition is that orders for covered accounts be 
transmitted from off the exchange floor. In the context of automated 
trading systems, the Commission has found that the off-floor 
transmission requirement is met if a covered account order is 
transmitted from a remote location directly to an exchange's floor by 
electronic means.\41\ EDGX represents that the EDGX trading system and 
the proposed BAM Auction receive all orders electronically through 
remote terminals or computer-to-computer interfaces.\42\ The Exchange 
also represents that orders for covered accounts from Members will be 
transmitted from a remote location directly to the proposed BAM 
mechanism by electronic means. Because no Exchange members may submit 
orders into the BAM Auction from on the floor of the Exchange, the 
Commission believes that the BAM Auction satisfies the off-floor 
transmission requirement.
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    \41\ See, e.g., Securities Exchange Act Release Nos. 61419 
(January 26, 2010), 75 FR 5157 (February 1, 2010) (SR-BATS-2009-031) 
(approving BATS options trading); 59154 (December 23, 2008), 73 FR 
80468 (December 31, 2008) (SR-BSE-2008-48) (approving equity 
securities listing and trading on BSE); 57478 (March 12, 2008), 73 
FR 14521 (March 18, 2008) (SR-NASDAQ-2007-004 and SR-NASDAQ-2007-
080) (approving NOM options trading); 53128 (January 13, 2006), 71 
FR 3550 (January 23, 2006) (File No. 10-131) (approving The Nasdaq 
Stock Market LLC); 44983 (October 25, 2001), 66 FR 55225 (November 
1, 2001) (SR-PCX-00-25) (approving Archipelago Exchange); 29237 (May 
24, 1991), 56 FR 24853 (May 31, 1991) (SR-NYSE-90-52 and SR-NYSE-90-
53) (approving NYSE's Off-Hours Trading Facility); and 15533 
(January 29, 1979), 44 FR 6084 (January 31, 1979) (``1979 
Release'').
    \42\ See Notice, supra note 3, at 69179-80. See also Amendment 
No. 1, supra note 5.
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    Second, the Rule requires that the member and any associated person 
not participate in the execution of its order after the order has been 
transmitted. The Exchange represents that at no time following the 
submission of an order is a Member able to acquire control or influence 
over the result or timing of the order's execution.\43\ According to 
the Exchange, the execution of an order sent to the BAM mechanism is 
determined by what other orders are present and the priority of those 
orders.\44\ Accordingly, the Commission believes that a member does not 
participate in the execution of an order submitted to the BAM 
mechanism.
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    \43\ See Notice, supra note 3, at 69180. See also Amendment No. 
1, supra note 5 (also representing, among other things, that: 1) no 
Member, including the Initiating Member, will see a BAM response 
submitted into BAM and therefore will not be able to influence or 
guide the execution of their Agency Orders, 2) the Last Priority 
feature will not permit a Member to have any control over an order, 
and the election to Last Priority an order is available prior to the 
submission of the order, will not be broadcast and further, the Last 
Priority option may not be modified by the Initiating Member during 
the auction).
    \44\ See Notice, supra note 3, at 69180. See also Amendment No. 
1, supra note 5. The Exchange notes that a Member may not cancel or 
modify an order after it has been submitted into BAM.
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    Third, Rule 11a2-2(T) requires that the order be executed by an 
exchange member who is unaffiliated with the member initiating the 
order. The Commission has stated that this requirement is satisfied 
when automated exchange facilities, such as the BAM mechanism, are 
used, as long as the design of these systems ensures that members do 
not possess any special or unique trading advantages in handling their 
orders after transmitting them to the exchange.\45\ EDGX represents 
that the BAM Auction is designed so that no Member has any special or 
unique trading advantage in the handling of its orders after 
transmitting its orders to the mechanism.\46\ Based on the Exchange's 
representation, the Commission believes that the BAM mechanism 
satisfies this requirement.
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    \45\ In considering the operation of automated execution systems 
operated by an exchange, the Commission noted that, while there is 
not an independent executing exchange member, the execution of an 
order is automatic once it has been transmitted into the system. 
Because the design of these systems ensures that members do not 
possess any special or unique trading advantages in handling their 
orders after transmitting them to the exchange, the Commission has 
stated that executions obtained through these systems satisfy the 
independent execution requirement of Rule 11a2-2(T). See 1979 
Release, supra note 41.
    \46\ See Notice, supra note 3, at 69180. See also Amendment No. 
1, supra note 5.
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    Fourth, in the case of a transaction effected for an account with 
respect to which the initiating member or an associated person thereof 
exercises investment discretion, neither the initiating member nor any 
associated person thereof may retain any compensation in connection 
with effecting the transaction, unless the person authorized to 
transact business for the account has expressly provided otherwise by 
written contract referring to Section 11(a) of the Act and Rule 11a2-
2(T) thereunder.\47\ EDGX

[[Page 2433]]

represents that Members relying on Rule 11a2-2(T) for transactions 
effected through the BAM Auction must comply with this condition of the 
Rule and that the Exchange will enforce this requirement pursuant to 
its obligations under Section 6(b)(1) of the Act to enforce compliance 
with federal securities laws.\48\
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    \47\ In addition, Rule 11a2-2(T)(d) requires a member or 
associated person authorized by written contract to retain 
compensation, in connection with effecting transactions for covered 
accounts over which such member or associated persons thereof 
exercises investment discretion, to furnish at least annually to the 
person authorized to transact business for the account a statement 
setting forth the total amount of compensation retained by the 
member or any associated person thereof in connection with effecting 
transactions for the account during the period covered by the 
statement. See 17 CFR 240.11a2-2(T)(d). See also Securities Exchange 
Act Release No. 14563 (March 14, 1978), 43 FR 11542 (March 17, 1978) 
(stating ``[t]he contractual and disclosure requirements are 
designed to assure that accounts electing to permit transaction-
related compensation do so only after deciding that such 
arrangements are suitable to their interests'').
    \48\ See Notice, supra note 3, at 69180. See also Amendment No. 
1, supra note 5.
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V. Accelerated Approval of Proposal, as Modified by Amendment No. 1

    The Commission finds good cause, pursuant to Section 19(b)(2) of 
the Exchange Act, to approve the proposal, as modified by Amendment No. 
1, prior to the 30th day after publication of Amendment No. 1 in the 
Federal Register. In Amendment No. 1, EDGX revised the original 
proposal to make the changes discussed in detail above. Notably, in 
Amendment No. 1, EDGX revises its proposal to restrict an Auction from 
commencing with a stop price equal to a same side resting order except 
in limited circumstances, as described above, and prohibit an 
Initiating Order from being a solicited order for the account of an 
Options Market Maker assigned in the affected series on the Exchange. 
EDGX also made changes to clarify and add detail to its proposal and 
the proposed rule text. The Commission believes that Amendment No. 1 
does not raise any novel regulatory issues and instead better aligns 
EDGX's proposed Auction functionality with existing functionality on 
the Exchange and with that of similar auction mechanisms operated by 
other options exchanges, and provides additional clarity in the rule 
text, which is consistent with EDGX's original proposal and supports 
EDGX's analysis of how its proposal is consistent with the Act, thus 
facilitating the Commission's ability to make the findings set forth 
above to approve the proposal. Accordingly, the Commission finds that 
good cause exists to approve the proposal, as modified by Amendment No. 
1, on an accelerated basis.

VI. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether Amendment No. 1 
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-BatsEDGX-2016-41 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-BatsEDGX-2016-41. 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 20549-1090, on official business days between the hours of 10:00 
a.m. and 3:00 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-BatsEDGX-2016-41 and should 
be submitted on or before January 30, 2017.

VII. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\49\ that the proposed rule change (SR-BatsEDGX-2016-41), as 
modified by Amendment No. 1, be and hereby is approved on an 
accelerated basis, except that there shall be no minimum size 
requirement for orders to be eligible for the Auction for a pilot 
period expiring on January 18, 2017.
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    \49\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\50\
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    \50\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-00096 Filed 1-6-17; 8:45 am]
 BILLING CODE 8011-01-P