Document ID: SEC-2015-1730-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: BATS Exchange, Inc.
Posted Date: 2015-10-27T04:00Z

[Federal Register Volume 80, Number 207 (Tuesday, October 27, 2015)]
[Notices]
[Pages 65828-65830]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-27221]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-76205; File No. SR-BATS-2015-90]

Self-Regulatory Organizations; BATS Exchange, Inc.; Notice of 
Filing and Immediate Effectiveness of a Proposed Rule Change To Amend 
Rule 11.25, Retail Order Attribution Program

October 21, 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 14, 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) 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).
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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 to amend Rule 11.25, which governs 
the Exchange's Retail Order Attribution Program (``Retail Program''), 
to distinguish between retail orders routed on behalf of other broker-
dealers and retail orders that are routed on behalf of introduced 
retail accounts that are carried on a fully disclosed basis, as further 
described below.
    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
    The Exchange proposes to amend Rule 11.25, which governs the 
Exchange's Retail Program,\5\ to distinguish between orders routed on 
behalf of other broker-dealers and orders routed on behalf of 
introduced retail accounts that are carried on a fully disclosed basis, 
as further described below.
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    \5\ The Exchange adopted the Retail Program as Rule 11.24 in 
2014. See Securities Exchange Act Release No. 73237 (September 26, 
2014), 79 FR 59537 (October 2, 2014) (SR-BATS-2014-043). The Retail 
Program was subsequently re-numbered as 11.25. See Securities 
Exchange Act Release No. 73677 (November 24, 2014), 79 FR 71150 
(December 1, 2014) (SR-BATS-2014-058).
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    The Exchange established the Retail Program in an attempt to 
attract retail order flow to the Exchange, primarily by offering 
pricing incentives. Under the Retail Program, Retail Member 
Organizations \6\ (``RMOs'') are permitted to submit Retail Orders,\7\ 
and receive rebates for added liquidity that are higher than the 
exchanges standard rebates for added liquidity.\8\ In addition, RMOs 
may optionally designate Retail Orders to be identified as Retail on 
the Exchange's proprietary data feeds.\9\
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    \6\ A Retail Member Organization is a Member (or a division 
thereof) that has been approved by the Exchange under Rule 11.25 to 
submit Retail Orders.
    \7\ A Retail Order is an agency order that originates from a 
natural person and is submitted to the Exchange by a RMO, provided 
that no change is made to the terms of the order with respect to 
price or side of market and the order does not originate from a 
trading algorithm or any computerized methodology.
    \8\ See BZX Exchange Fee Schedule, available at http://batstrading.com/support/fee_schedule/bzx/.
    \9\ See Rule 11.25(e).
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    Exchange Rule 11.25(b)(1) currently states that ``[t]o qualify as a 
Retail Member Organization, a Member must conduct a retail business or 
handle retail orders on behalf of another broker-dealer.'' \10\ Rather 
than stating that one way to qualify as an RMO is to ``handle'' retail 
orders on behalf of another broker-dealer, the Exchange proposes to 
state that a Member may qualify as an RMO if it ``routes'' retail 
orders on behalf of another broker-dealer. The Exchange believes that 
providing routing services on behalf of other broker-dealers with 
retail order flow was the intended meaning of the provision and that 
the term ``handle'' is vague. Thus, the Exchange believes that the 
description would be better if it referred to routing services provided 
to another broker-dealer with retail customers. The Exchange also 
proposes to distinguish such routing services on behalf of another 
broker-dealer from services provided by broker-dealers that carry 
retail customer accounts on a fully disclosed basis, as described 
below.
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    \10\ Emphasis added.
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    As background with respect to the proposed change, the Exchange 
first would like to describe the terms ``introducing broker'', 
``carrying firm'' or ``carrying broker-dealer'', and ``fully 
disclosed,'' as such terms are commonly used in the securities 
industry. An ``introducing'' broker-dealer is ``one that

[[Page 65829]]

has a contractual arrangement with another firm, known as the carrying 
or clearing firm, under which the carrying firm agrees to perform 
certain services for the introducing firm. Usually, the introducing 
firm submits its customer accounts and customer orders to the carrying 
firm, which executes the orders and carries the account. The carrying 
firm's duties include the proper disposition of the customer funds and 
securities after the trade date, the custody of customer securities and 
funds, and the recordkeeping associated with carrying customer 
accounts.'' \11\
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    \11\ See Securities Exchange Act Release No. 31511 (Nov. 24, 
1992), 57 FR 56973 (December 2, 1992).
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    Further, a ``fully disclosed'' introducing arrangement is 
``distinguished from an omnibus clearing arrangement where the clearing 
firm maintains one account for all the customer transactions of the 
introducing firm. In an omnibus relationship, the clearing firm does 
not know the identity of the customers of the introducing firm. In a 
fully disclosed clearing arrangement, the clearing firm knows the 
names, addresses, securities positions and other relevant data as to 
each customer.'' \12\
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    \12\ Id.
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    With respect to a broker-dealer that is routing on behalf of 
another broker-dealer, the Exchange does not believe that the routing 
broker-dealer has sufficient information to assess whether orders are 
truly retail in nature, and thus, requires an RMO routing on behalf of 
other broker-dealers to maintain additional supervisory procedures and 
obtain annual attestations, as described below, in order to submit 
Retail Orders to the Exchange. In contrast, however, if a broker-dealer 
is carrying a customer account on a fully disclosed basis, then such 
carrying broker-dealer is required to perform certain diligence 
regarding such account that the Exchange believes is sufficient to 
assess whether a customer is a retail customer in order to submit 
orders on behalf of such a customer to the Exchange as a Retail Order. 
The carrying broker of an account typically handles orders from its 
retail customers that are ``introduced'' by an introducing broker. 
However, as noted above, in contrast to a typical routing relationship 
on behalf of another broker-dealer, a carrying broker does obtain a 
significant level of information regarding each customer introduced by 
the introducing broker. Accordingly, the Exchange proposes to state in 
Rule 11.25(b)(1) that for purposes of Rule 11.25, ``conducting a retail 
business shall include carrying retail customer accounts on a fully 
disclosed basis.''
    Rule 11.25(b)(6) currently states, in part, that ``[i]f a Retail 
Member Organization represents Retail Orders from another broker-dealer 
customer, the Retail Member Organization's supervisory procedures must 
be reasonably designed to assure that the orders it receives from such 
broker-dealer customer that it designates as Retail Orders meet the 
definition of a Retail Order.'' This includes obtaining attestations 
from the other broker-dealers for whom the RMO routes. In addition to 
the proposed changes to Rule 11.25(b)(1) described above, the Exchange 
proposes to modify the language of Rule 11.25(b)(6) to again 
distinguish between an RMO that conducts a retail business because it 
carries accounts on a fully disclosed basis from an RMO that routes 
orders on behalf of another broker-dealer. As proposed, the additional 
attestation requirements of Rule 11.25(b)(6) would apply to an RMO that 
does not itself conduct a retail business but routes Retail Orders on 
behalf of other broker-dealers. In turn, such attestation requirements 
would not apply to an RMO that carries retail customer accounts on a 
fully disclosed basis. In connection with this change, the Exchange is 
proposing various edits to the existing rule text so that the reference 
is consistently to ``other broker-dealers'' rather than ``broker-dealer 
customers.''
    The Exchange believes that allowing an RMO that carries retail 
customer accounts on a fully disclosed basis to submit Retail Orders to 
the Exchange without obtaining attestations from broker-dealers that 
might introduce such accounts will encourage participation in the 
Retail Program. As noted above, the Exchange believes that the carrying 
broker has sufficient information to itself confirm that orders are 
Retail Orders without such attestations. The Exchange still believes it 
is necessary to require the attestation by broker-dealers that route 
Retail Orders on behalf of other broker-dealers, because, in contrast, 
such broker-dealers typically do not have a relationship with the 
retail customer and would not be in position to confirm that such 
customers are in fact retail customers.
2. Statutory Basis
    The Exchange believes the rule change proposed in this submission 
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.\13\ Specifically, the proposed change is consistent with 
Section 6(b)(5) of the Act,\14\ in that it is designed to prevent 
fraudulent and manipulative acts and practices, to promote just and 
equitable principles of trade, and to remove impediments to and perfect 
the mechanism of a free and open market and a national market system.
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    \13\ 15 U.S.C. 78f(b).
    \14\ 15 U.S.C. 78f(b)(5).
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    The Exchange believes that the proposed rule change is designed to 
prevent fraudulent and manipulative acts and practices because it 
highlights the parties for whom additional procedures are required 
because they do not maintain relationships with the end customer (i.e., 
routing brokers) and still requires the RMO to follow such procedures 
to ensure that such orders qualify as Retail Orders. As proposed, 
however, an RMO would not be required to follow such procedures, 
including obtaining annual attestations, to the extent such RMO 
actually knows the end customer and carries the account of such 
customer and thus can itself confirm that the orders qualify as Retail 
Orders.
    The Exchange believes that the proposed rule change will remove 
impediments to and perfect the mechanism of a free and open market and 
a national market system because it will allow RMOs that carry retail 
customer accounts to participate in the Program without imposing 
additional attestation requirements that the Exchange did not initially 
intend to impose upon them. By removing impediments to participation in 
the Program, the proposed change would permit expanded access of retail 
customers to the Program.

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. The Exchange believes that 
the amendment, by increasing the level of participation in the Program, 
will increase the level of competition around retail executions. The 
Exchange believes that the transparency and competitiveness of 
operating a program such as the Program on an exchange market would 
result in better prices for retail investors and benefits retail 
investors by expanding the capabilities of Exchanges to encompass 
practices currently allowed on non-exchange venues.

[[Page 65830]]

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

    The Exchange has designated this rule filing as non-controversial 
under Section 19(b)(3)(A) of the Act \15\ and paragraph (f)(6) of Rule 
19b-4 thereunder.\16\ The proposed rule change effects a change that 
(A) does not significantly affect the protection of investors or the 
public interest; (B) does not impose any significant burden on 
competition; and (C) by its terms, does not become operative for 30 
days after the date of the filing, or such shorter time as the 
Commission may designate if consistent with the protection of investors 
and the public interest; provided that the self-regulatory organization 
has given the Commission written 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.\17\
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    \15\ 15 U.S.C. 78s(b)(3)(A).
    \16\ 17 CFR 240.19b-4.
    \17\ The Exchange has satisfied this requirement.
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission may summarily temporarily suspend such rule 
change if it appears to the Commission that such action is: (1) 
Necessary or appropriate in the public interest; (2) for the protection 
of investors; or (3) 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-2015-90 on the subject line.

Paper Comments

     Send paper comments in triplicate to Brent J. Fields, 
Secretary, Securities and Exchange Commission, 100 F Street NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-BATS-2015-90. 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-2015-90, and should be 
submitted on or before November 16, 2015.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\18\
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    \18\ 17 CFR 200.30-3(a)(12).
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Brent J. Fields,
Secretary.
[FR Doc. 2015-27221 Filed 10-26-15; 8:45 am]
BILLING CODE 8011-01-P