Document ID: SEC-2009-1730-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: BATS Exchange, Inc.
Posted Date: 2009-12-08T05:00Z

[Federal Register: December 8, 2009 (Volume 74, Number 234)]
[Notices]               
[Page 64788-64797]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr08de09-116]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-61097; File No. SR-BATS-2009-031]

 
Self-Regulatory Organizations; BATS Exchange, Inc.; Notice of 
Filing of Proposed Rule Change To Establish Rules Governing the Trading 
of Options on the BATS Options Exchange

December 2, 2009.
    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 November 10, 2009, BATS Exchange, Inc. (``Exchange'' or 
``BATS'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change to adopt rules to govern the 
trading of options on the Exchange (referred to herein as ``BATS 
Options Exchange'' or ``BATS Options'') as described in Items I, II, 
and III below, which Items have been prepared by the Exchange (the 
``Trading Rules Proposal''). 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 proposes to adopt rules to govern the trading of 
options on the Exchange. The Exchange represents that the BATS Options 
Exchange will operate a fully automated, price/time priority execution 
system built on the core functionality of the Exchange's approved 
equities platform, meaning that the Exchange will operate its options 
market much as it operates its cash equities market today.
    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. The text of 
Exhibit 5 of the proposed rule change is also available on the 
Commission's Web site at http: //www.sec.gov/rules/sro.shtml.

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 aspects 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 is proposing to adopt a series of rules in connection 
with BATS Options, which will be a facility of the Exchange. BATS 
Options will operate an electronic trading system developed to trade 
options (``System'') that will provide for the electronic display and 
execution of orders in price/time priority without regard to the status 
of the entities that are entering orders. All Exchange Members will be 
eligible to participate in BATS Options provided that the Exchange 
specifically authorizes them to trade in the System. The System will 
provide a routing service for orders when trading interest is not 
present on BATS Options, and will comply with the obligations of the 
Options Order Protection and Locked/Crossed Market Plan.

BATS Options Members

    The Exchange will authorize any Exchange Member who meets certain 
enumerated qualification requirements to obtain access to BATS Options 
(any such Member, an ``Options Member'').
    There will be two types of Options Members, Options Order Entry 
Firms (``OEFs'') and Options Market Makers. OEFs will be those Options 
Members representing orders as agent on BATS Options and non-market 
maker participants conducting proprietary trading as principal. Options 
Market Makers are Options Members registered with the Exchange as 
Options Market Makers and registered with BATS Options in an options 
series listed on BATS Options. To become an Options Market Maker, an 
Options Member is required to register by filing a written application. 
Such registration will consist of at least one series and may include 
all series traded on the Exchange. The Exchange will not place any 
limit on the number of entities that may become Options Market Makers.
    The Exchange will not list an options series for trading unless at 
least one Options Market Maker is registered in the options series. In 
addition, before the Exchange opens trading for any additional series 
of an options class, it would require at least one Options

[[Page 64789]]

Market Maker to be registered for trading that particular series.
    BATS Options Market Makers will be required to electronically 
engage in a course of dealing to enhance liquidity available on BATS 
Options and to assist in the maintenance of fair and orderly markets. 
Among other things, an Options Market Maker would have to satisfy the 
following responsibilities and duties during trading: (1) On a daily 
basis maintain a two-sided market on a continuous basis in at least 75% 
of the options series in which it is registered;\\ (2) enter a size of 
at least one contract for its best bid and its best offer; and (3) 
maintain minimum net capital in accordance with Commission and the 
Exchange rules. Substantial or continued failure by an Options Market 
Maker to meet any of its obligations and duties, will subject the 
Options Market Maker to disciplinary action, suspension, or revocation 
of the Options Market Maker's registration in one or more options 
series.
    Options Market Makers receive certain benefits for carrying out 
their duties. For example, a lender may extend credit to a broker-
dealer without regard to the restrictions in Regulation T of the Board 
of Governors of the Federal Reserve System if the credit is to be used 
to finance the broker-dealer's activities as a specialist or market 
maker on a national securities exchange. Thus, an Options Market Maker 
has a corresponding obligation to hold itself out as willing to buy and 
sell options for its own account on a regular or continuous basis to 
justify this favorable treatment.\3\
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    \3\ Boston Options Exchange (``BOX'') and the NASDAQ Options 
Market (``NOM'') have market maker obligations comparable to those 
proposed for BATS Options.
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    Every Options Member shall at all times maintain membership in 
another registered options exchange that is not registered solely under 
Section 6(g) of the Securities Exchange Act of 1934 or in FINRA. OEF's 
that transact business with customers must at all times be members of 
FINRA. Pursuant to proposed BATS Rule 17.2(g), every Options Member 
will be required to have at least one registered Options Principal who 
satisfies the criteria of that Rule, including the satisfaction of a 
proper qualification examination. An OEF may only transact business 
with Public Customers if such Options Member also is an Options Member 
of another registered national securities exchange or association with 
which the Exchange has entered into an agreement under Rule 17d-2 under 
the Exchange Act pursuant to which such other exchange or association 
shall be the designated options examining authority for the OEF.
    As provided in BATS Rule 16.2, existing Exchange Rules applicable 
to the BATS equity market contained in Chapters I through XV of the 
Exchange Rules will apply to Options Members unless a specific Exchange 
Rule applicable to the options market (Chapters XVI through XXIX of the 
Exchange Rules) governs or unless the context otherwise requires. 
Options Members can therefore provide sponsored access to the BATS 
Options Exchange to a nonmember (``Sponsored Participant'') pursuant to 
Rule 11.3 of the Exchange Rules.

Execution System

    The Exchange's options trading system will leverage the Exchange's 
current state of the art technology, including its customer 
connectivity, messaging protocols, quotation and execution engine, 
order router, data feeds, and network infrastructure. This approach 
minimizes the technical effort required for existing Exchange Members 
to begin trading options on the BATS Options Exchange. As a result, the 
BATS Options Exchange will closely resemble the Exchange's equities 
market, but will differ from most existing options exchanges by, most 
prominently, offering true price/time priority across all participants 
rather than differentiating between participant/trading interest.
    Like the Exchange system for equities, all trading interest entered 
into the System will be automatically executable. Orders entered into 
the System will be displayed anonymously. The System will offer fully 
anonymous trading, however, options trades are not currently anonymous 
through settlement. The Exchange will become an exchange member of the 
Options Clearing Corporation (``OCC''). The System will be linked to 
OCC for the Exchange to transmit locked-in trades for clearance and 
settlement.
    Hours of Operation. The options trading system will operate between 
the hours of 9:30 a.m. Eastern Time and 4 p.m. Eastern Time, with all 
orders being available for execution during that time frame.
    Minimum Quotation and Trading Increments. The Exchange is proposing 
to apply the following quotation increments: (1) If the options series 
is trading at less than $3.00, five (5) cents; (2) if the options 
series is trading at $3.00 or higher, ten (10) cents; and (3) if the 
options series is trading pursuant to the Penny Pilot program one (1) 
cent if the options series is trading at less than $3.00, five (5) 
cents if the options series is trading at $3.00 or higher, except for 
QQQQs where the minimum quoting increment will be one cent for all 
series. In addition, the Exchange is proposing that the minimum trading 
increment for options contracts traded on BATS Options will be one (1) 
cent for all series.
    Penny Pilot Program. Upon initial operation of BATS Options the 
Exchange proposes to commence trading, pursuant to the Penny Pilot 
Program (the ``Penny Pilot''), all classes that are, on that date, 
traded by other options exchanges pursuant to the Penny Pilot, which is 
scheduled to expire on December 31, 2010. Following the commencement of 
operations and trading of classes traded by other options exchanges 
pursuant to the Penny Pilot at that time, the Exchange proposes to 
expand the classes subject to the Penny Pilot on a quarterly basis, 75 
classes at a time through August 2010. For instance, if BATS Options 
commences operations on February 16, 2010, then the Exchange will trade 
all classes trading pursuant to the Penny Pilot on other options 
exchanges as of that date and will add 75 classes in May 2010 and 75 
additional classes in August 2010. In order to reduce operational 
confusion and provide for appropriate time to update databases, the 
Exchange proposes to add the eligible issues to the Penny Pilot 
effective for trading on the Monday ten days after Expiration Friday. 
Thus, as applicable, the quarterly additions would be effective on 
February 1, 2010; May 3, 2010; and August 2, 2010. For purposes of 
identifying the issues to be added per quarter, the Exchange shall use 
data from the prior six calendar months preceding the implementation 
month, except that the month immediately preceding their addition to 
the Penny Pilot would not be utilized for purposes of the analysis. The 
new classes added by the Exchange on a quarterly basis will represent 
the 75 most actively traded multiply listed options classes based on 
national average daily volume for the six months prior to selection, 
closing under $200 per share on the Expiration Friday prior to 
expansion, except that the month immediately preceding their addition 
to the Penny Pilot will not be used for the purpose of the six month 
analysis.\4\ The Exchange will specify which options trade in the Penny 
Pilot, and in what increments, in Information Circulars filed with the 
Commission pursuant to

[[Page 64790]]

Rule 19b-4 under the Exchange Act and distributed to Members. The 
Exchange represents that it has the necessary system capacity to 
support any additional series listed as part of the Penny Pilot.
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    \4\ Index products would be included in the expansion if the 
underlying index level was under 200.
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    The Exchange agrees to submit semi-annual reports to the Commission 
that will include sample data and written analysis of information 
collected from April 1 through September 30, and from October 1 through 
March 31, for each year, for first the 63 classes traded pursuant to 
the Penny Pilot by other options exchanges (the ``Initial Classes''), 
and the ten most active and twenty least active options classes added 
to the Penny Pilot with each quarterly expansion, commencing with the 
expansion that occurred on November 2, 2009. As the Penny Pilot matures 
and expands, the Exchange believes that this proposed sampling approach 
provides an appropriate means by which to monitor and assess the Penny 
Pilot's impact. The Exchange will also identify, for comparison 
purposes, a control group consisting of the ten least active options 
classes from the Initial Classes. This report will include, but is not 
limited to: (1) Data and written analysis on the number of quotations 
generated for options included in the report; (2) an assessment of the 
quotation spreads for the options included in the report; (3) an 
assessment of the impact of the Penny Pilot on the capacity of the 
Exchange's automated systems; (4) data reflecting the size and depth of 
markets; and (5) any capacity problems or other problems that arose 
related to the operation of the Penny Pilot and how the Exchange 
addressed them.
    Additionally, the Exchange proposes that any Penny Pilot issues 
that have been delisted may be replaced on a semi-annual basis by the 
next most actively traded multiply listed options classes that are not 
yet included in the Penny Pilot, based on trading activity in the 
previous six months. The replacement issues, as applicable, would be 
added to the Penny Pilot Program on the second trading day following 
January 1, 2010 and July 1, 2010. The Exchange will employ the same 
parameters to prospective replacement issues as approved and applicable 
under the Penny Pilot Program, including excluding high-priced 
underlying securities. The replacement issues will be announced in 
Information Circulars distributed to Members.
    Order Types. The proposed System will make available to Options 
Members Reserve Orders, Limit Orders, Minimum Quantity Orders, 
Discretionary Orders, Market Orders, Price Improving Orders, 
Destination Specific Orders, BATS Only Orders, BATS Post Only Orders, 
Partial Post Only at Limit Orders, Intermarket Sweep Orders, and 
Directed Intermarket Sweep Orders, with characteristics and 
functionality similar to what is currently approved for use in the 
Exchange's equities trading facility or on other options exchanges.
    ``Reserve Orders'' are limit orders that have both a displayed size 
as well as an additional non-displayed amount. Both the displayed and 
non-displayed portions of the Reserve Order are available for potential 
execution against incoming orders. If the displayed portion of a 
Reserve Order is fully executed, the System will replenish the display 
portion from reserve up to the size of the original display amount. A 
new timestamp is created for the replenished portion of the order each 
time it is replenished from reserve, while the reserve portion retains 
the timestamp of its original entry.
    ``Limit Orders'' are orders to buy or sell an option at a specified 
price or better. A limit order is marketable when, for a limit order to 
buy, at the time it is entered into the System, the order is priced at 
the current inside offer or higher, or for a limit order to sell, at 
the time it is entered into the System, the order is priced at the 
inside bid or lower.
    ``Minimum Quantity Orders'' are orders that require that a 
specified minimum quantity of contracts be obtained, or the order is 
cancelled. Minimum Quantity Orders may only be entered with a time-in-
force designation of Immediate or Cancel.
    ``Discretionary Orders'' are orders that have a displayed price and 
size, as well as a non-displayed discretionary price range, at which 
the entering party, if necessary, is also willing to buy or sell. The 
non-displayed trading interest is not entered into the BATS Options 
Book but is, along with the displayed size, converted to an IOC buy 
(sell) order priced at the highest (lowest) price in the discretionary 
price range when displayed contracts become available on the opposite 
side of the market or an execution takes place at any price within the 
discretionary price range. The generation of this IOC order is 
triggered by the automatic cancellation of the displayed contracts 
portion of the Discretionary Order. If more than one Discretionary 
Order is available for conversion to an IOC order, the System will 
convert and process all such orders in the same priority in which such 
Discretionary Orders were entered. If an IOC order is not executed in 
full, the unexecuted portion of the order is automatically re-posted 
and displayed in the BATS Options Book with a new time stamp, at its 
original displayed price, and with its non-displayed discretionary 
price range.
    ``Market Orders'' are orders to buy or sell at the best price 
available at the time of execution.
    ``Price Improving Orders'' are orders to buy or sell an option at a 
specified price at an increment smaller than the minimum price 
variation in the security. Price Improving Orders may be entered in 
increments as small as (1) one cent. Price Improving Orders that are 
available for display shall be displayed at the minimum price variation 
in that security and shall be rounded up for sell orders and rounded 
down for buy orders. Unless a User has entered instructions not to do 
so, Price Improving Orders will be subject to the ``displayed price 
sliding process.'' Pursuant to the displayed price sliding process, a 
Price Improving Order that after rounding to the minimum price 
variation, or any other order to be displayed on the BATS Book that at 
the time of entry, would lock or cross a Protected Quotation 
(collectively, ``the original locking price''): (A) Such order will be 
displayed by the System at one minimum price variation below the 
current NBO (for bids) or to one minimum price variation above the 
current NBB (for offers); and (B) in the event the NBBO changes such 
that the order at the original locking price would not lock or cross a 
Protected Quotation, the order will receive a new timestamp, and will 
be displayed at the original locking price.
    ``Destination Specific Orders'' are market or limit orders that 
instruct the System to route the order to a specified away trading 
center, after exposing the order to the BATS Options Book. Destination 
Specific Orders that are not executed in full after routing away are 
processed by the Exchange as described in Rules 21.8 and 21.9.
    ``BATS Only Orders'' are orders that are to be ranked and executed 
on the Exchange pursuant to Rule 21.8 (Order Display and Book 
Processing) or cancelled, as appropriate, without routing away to 
another trading center. A BATS Only Order that, at the time of entry, 
would cross a Protected Quotation will be repriced to the locking price 
and ranked at such price in the BATS Options Book. A BATS Only Order 
will be subject to the displayed price sliding process unless a User 
has entered instructions not to use the displayed price sliding process 
as set forth in Rule 21.1(d)(6).
    ``BATS Post Only Orders'' are orders that are to be ranked and 
executed on

[[Page 64791]]

the Exchange pursuant to Rule 21.8 or cancelled, as appropriate, 
without routing away to another trading center except that the order 
will not remove liquidity from the BATS Options Book. A BATS Post Only 
Order will be subject to the displayed price sliding process unless a 
User has entered instructions not to use the displayed price sliding 
process as set forth in Rule 21.1(d)(6).
    ``Partial Post Only at Limit Orders'' are orders that are to be 
ranked and executed on the Exchange pursuant to Rule 21.8 or cancelled, 
as appropriate, without routing away to another trading center except 
that the order will only remove liquidity from the BATS Options Book 
under the following circumstances: (a) A Partial Post Only at Limit 
Order will remove liquidity from the BATS Options Book up to the full 
size of the order if, at the time of receipt, it can be executed at 
prices better than its limit price (i.e., price improvement); (b) 
regardless of any liquidity removed from the BATS Options Book under 
the circumstances described in paragraph (a) above, a User may enter a 
Partial Post Only at Limit Order instructing the Exchange to also 
remove liquidity from the BATS Options Book at the order's limit price 
up to a designated percentage of the remaining size of the order after 
any execution pursuant to paragraph (A) above (``Maximum Remove 
Percentage'') if, after removing such liquidity at the order's limit 
price, the remainder of such order can then post to the BATS Options 
Book. If no Maximum Remove Percentage is entered, such order will only 
remove liquidity to the extent such order will obtain price improvement 
as described in paragraph (A) above. A Partial Post Only at Limit Order 
will be subject to the displayed price sliding process unless a User 
has entered instructions not to use the displayed price sliding process 
as set forth in Rule 21.1(d)(6).
    ``Intermarket Sweep Orders'' or ``ISO'' are orders that shall have 
the meaning provided in Rule 27.1, which relates to intermarket 
trading. Such orders may be executed at one or multiple price levels in 
the System without regard to Protected Quotations at other options 
exchanges (i.e., may trade through such quotations). The Exchange 
relies on the marking of an order by a User as an ISO order when 
handling such order, and thus, it is the entering Options Member's 
responsibility, not the Exchange's responsibility, to comply with the 
requirements relating to ISOs. ISOs are not eligible for routing 
pursuant to Rule 21.9.
    ``Directed Intermarket Sweep Orders'' or ``Directed ISOs'' are ISOs 
entered by a User that bypass the System and are immediately routed by 
the Exchange to another options exchange specified by the User for 
execution. It is the entering Member's responsibility, not the 
Exchange's responsibility, to comply with the requirements relating to 
Intermarket Sweep Orders.
    Time in Force Designations. Options Members entering orders into 
the System may designate such orders to remain in force and available 
for display and/or potential execution for varying periods of time. 
Unless cancelled earlier, once these time periods expire, the order (or 
the unexecuted portion thereof) is returned to the entering party.
    ``Good Til Day or ``GTD'' shall mean, for orders so designated, 
that if after entry into the System, the order is not fully executed, 
the order (or the unexecuted portion thereof) shall remain available 
for potential display and/or execution for the amount of time during 
such trading day specified by the entering User unless canceled by the 
entering party.
    ``Immediate Or Cancel'' or ``IOC'' shall mean, for an order so 
designated, a limit order that is to be executed in whole or in part as 
soon as such order is received, and the portion not so executed is 
cancelled.
    ``DAY'' shall mean, for an order so designated, a limit order to 
buy or sell which, if not executed expires at market close.
    ``WAIT'' shall mean for orders so designated, that upon entry into 
the System, the order is held for one second without processing for 
potential display and/or execution. After one second, the order is 
processed for potential display and/or execution in accordance with all 
order entry instructions as determined by the entering party. This 
modifier is designed to enhance compliance with the order exposure 
requirement set forth in Rule 22.12 (Order Exposure Requirements). Rule 
22.12 would prohibit Options Members from executing as principal on 
BATS Options orders they represent as agent unless (i) agency orders 
are first exposed on BATS Options for at least one (1) second or (ii) 
the Options Member has been bidding or offering on BATS Options for at 
least one (1) second prior to receiving an agency order that is 
executable against such bid or offer.
    One Second Exposure Period. As noted above, proposed Rule 22.12 
would require Options Members to expose their customers' orders on the 
Exchange for at least one second under certain circumstances. During 
this one second exposure period, other Options Members will be able to 
enter orders to trade against the exposed order. In adopting a one-
second order exposure period, the Exchange is proposing a requirement 
that is consistent with the Rules of other options exchanges.\5\ Thus, 
the exposure period will allow Options Members that are members of 
other options exchanges to comply with Rule 22.12 without programming 
separate time parameters into their systems for order entry or 
compliance purposes. The Exchange believes that market participants are 
sufficiently automated that a one second exposure period allows an 
adequate time for market participants to electronically respond to an 
order. Also, it is possible that market participants might wait until 
the end of the exposure period, no matter how long, before responding. 
Thus, the Exchange believes that any longer than one second would not 
further the protection of investors or market participants, but rather, 
would potentially increase market risk to investors and other market 
participants by creating a longer period of time for the exposed order 
to be subject to market risk.
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    \5\ See, e.g., CBOE Rules 6.45A, 6.45B, 6.74A and 6.74B; ISE 
Rule 717(d); NOM Chapter VII, Sec. 12.
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    The Exchange's trading system for BATS Options is identical to the 
trading system currently used for equities trading on the Exchange 
today. The Exchange has had ample experience with that trading system 
to believe that one second is an adequate exposure period.\6\ Further, 
the Exchange believes that many of its current Members will be Options 
Members and that such current Members have demonstrated an ability to 
respond to orders in a timely fashion.
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    \6\ For instance, for approximately three months in 2009, the 
Exchange offered functionality that exposed marketable orders to 
Exchange Members prior to routing, canceling or posting the order to 
the Exchange's order book. See Release No. 34-60040 (June 3, 2009), 
74 FR 27577 (June 10, 2009). Pursuant to that functionality, orders 
were exposed to Exchange Members for a variable period of time up to 
500 milliseconds. In the Exchange's experience, Exchange Members 
were able to and frequently did respond to such exposed orders.
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    Member Match Trade Prevention Modifiers. As with its equities 
market, the Exchange will allow Options Members to use Member Match 
Trade Prevention (``MMTP'') Modifiers. Any incoming order designated 
with an MMTP modifier will be prevented from executing against a 
resting opposite side order also designated with an MMTP modifier and 
originating from the same market participant identifier (``MPID''), 
Exchange Member identifier or Exchange Sponsored Participant 
identifier.
    Market Opening Procedures. The System shall open options, other 
than

[[Page 64792]]

index options, for trading based on the first transaction after 9:30 
a.m. Eastern Time in the securities underlying the options as reported 
on the first print disseminated pursuant to an effective national 
market system plan. With respect to index options, the System shall 
open such options for trading at 9:30 a.m. Eastern Time. Because the 
exchange does not propose to adopt an opening cross or similar process, 
the opening trade that occurs on the Exchange will be a trade in the 
ordinary course of dealings on the Exchange. Accordingly, the System 
will ensure that the opening trade in an options series will not trade 
through a Protected Quotation (as defined in Rule 27.2) at another 
options exchange, consistent with the general standard regarding trade 
throughs articulated in proposed Rule 21.6(e).
    Order Display/Matching System. The System will be based upon 
functionality currently approved for use in the Exchange's equities 
trading system. Specifically, the System will allow Options Members to 
enter market orders and priced limit orders to buy and sell BATS 
Options-listed options. The orders will be designated for display 
(price and size) on an anonymous basis in the order display service of 
the System.
    Routing. The BATS Options Exchange will support orders that are 
designated to be routed to the National Best Bid and Offer (``NBBO'') 
as well as orders that will execute only within BATS Options. Orders 
that are designated to execute at the NBBO will be routed to other 
options markets to be executed when the Exchange is not at the NBBO 
consistent with the Options Order Protection and Locked/Crossed Market 
Plan. Subject to the exceptions contained in proposed Rule 27.2(b), the 
System will ensure that an order will not be executed at a price that 
trades through another options exchange. An order that is designated by 
an Options Member as routable will be routed in compliance with 
applicable Trade-Through restrictions. Any order entered with a price 
that would lock or cross a Protected Quotation that is not eligible for 
either routing or the displayed price sliding process as defined in 
proposed Rule 21.1(d)(6) will be cancelled.
    BATS Options shall route orders in options via BATS Trading, Inc. 
(``BATS Trading''), which serves as the Outbound Router of the 
Exchange, as defined in Rule 2.11 (BATS Trading, Inc.). The function of 
the Outbound Router will be to route orders in options listed and open 
for trading on BATS Options to other options exchanges pursuant to BATS 
Options rules solely on behalf of BATS Options. The Outbound Router is 
subject to regulation as a facility of the Exchange, including the 
requirement to file proposed rule changes under Section 19 of the Act. 
Use of BATS Trading or Routing Services (as described below) to route 
orders to other market centers is optional. Parties that do not desire 
to use BATS Trading or other Routing Services provided by the Exchange 
must designate orders as not available for routing.
    In the event the Exchange is not able to provide order routing 
services through its affiliated broker-dealer, the Exchange will route 
orders to other options exchanges in conjunction with one or more 
routing brokers that are not affiliated with the Exchange (``Routing 
Services'').
    Book Processing. The System, like the equities facility, shall 
execute trading interest within the System in price/time priority, 
meaning it will execute all trading interest at the best price level 
within the System before executing trading interest at the next best 
price. Trading interest will be executed in the order set forth below, 
with the order clearly established as the first entered into the System 
within such category at each price level having priority up to the 
number of contracts specified in the order. At each price level between 
displayed trading interest, orders will be executed in the following 
priority: (a) Price Improving Orders and orders subject to displayed 
price sliding and then (b) discretionary portion of discretionary 
orders as set forth in Rule 21.1(d)(4). At each price level that has 
displayed trading interest, orders will be executed in the following 
priority: (a) Orders that are displayed within the System, then (b) the 
Non-Displayed portion of Reserve Orders, and then the (c) discretionary 
portion of discretionary orders as set forth in Rule 21.1(d)(4). Any 
order entered with a price that would lock or cross a Protected 
Quotation that is not eligible for either routing or the displayed 
price sliding process as defined in Rule 21.1(d)(6) will be cancelled.
    Data Feed. The System will include a proprietary data feed which 
will display without attribution to Members' MPIDs Displayed Orders on 
both the bid and offer side of the market for price levels then within 
BATS Options using the minimum price variation applicable to that 
security.
    $1 Strike Program. Pursuant to proposed Rule 19.6, Supplementary 
Material .02, the interval between strike prices of series of options 
on individual stocks may be $1.00 or greater (``$1 Strike Prices'') 
provided the strike price is $50 or less, but not less than $1. The 
listing of $1 strike prices shall be limited to option classes 
overlying no more than fifty-five (55) individual stocks (the ``$1 
Strike Price Program'') as specifically designated by BATS Options. 
BATS Options may list $1 Strike Prices on any other option classes if 
those classes are specifically designated by other national securities 
exchanges that employ a similar $1 Strike Price Program under their 
respective rules.
    To be eligible for inclusion into the $1 Strike Price Program, an 
underlying security must close below $50 in the primary market on the 
previous trading day. After a security is added to the $1 Strike Price 
Program, BATS Options may list $1 Strike Prices from $1 to $50 that are 
no more than $5 from the closing price of the underlying on the 
preceding day. For example, if the underlying security closes at $13, 
BATS Options may list strike prices from $8 to $18. BATS Options may 
not list series with $1 intervals within $0.50 of an existing $2.50 
strike price (e.g., $12.50, $17.50) in the same series. Additionally, 
for an option class selected for the $1 Strike Price Program, BATS 
Options may not list $1 Strike Prices on any series having greater than 
nine (9) months until expiration. A security shall remain in the $ 1 
Strike Price Program until otherwise designated by BATS Options.
    For options classes selected to participate in the $1 Strike 
Program, the Exchange will, on a monthly basis, review series that were 
originally listed under the $1 Strike Program with strike prices that 
are more than $5 from the current value of an options class and delist 
those series with no open interest in both the put and the call series 
having a: (1) Strike higher than the highest strike price with open 
interest in the put and/or call series for a given expiration month; 
and (2) strike lower than the lowest strike price with open interest in 
the put and/or call series for a given expiration month. If the 
Exchange identifies series for delisting pursuant to this policy, the 
Exchange shall notify other options exchanges with similar delisting 
policies regarding the eligible series for delisting, and shall work 
jointly with such other exchanges to develop a uniform list of series 
to be delisted so as to ensure uniform series delisting of multiply 
listed options classes.
    Notwithstanding the above delisting policy, the Exchange may grant 
member requests to add strikes and/or maintain strikes in series of 
options classes traded pursuant to the $1 Strike Program that are 
eligible for delisting.

[[Page 64793]]

    With regard to the impact on system capacity, the Exchange has 
analyzed its capacity and represents that it and the Options Price 
Reporting Authority have the necessary systems capacity to handle the 
additional traffic associated with the listing and trading of option 
series that may be listed and traded in $1 strikes.
    In addition to $1 strikes as proposed above, the Exchange proposes 
to offer options trading on series of options with $2.50 strike price 
intervals, consistent with other options exchanges.

Options Order Protection and Locked/Crossed Market Plan Rules

    The Exchange will participate in the recently-approved Options 
Order Protection and Locked/Crossed Market Plan (``New Plan''), and 
therefore will be required to comply with the obligations of 
Participants under the New Plan. The Exchange proposes to adopt rules 
relating to the New Plan that are substantially similar to the rules in 
place on or proposed by all of the options exchanges that are 
Participants to the New Plan.
    The New Plan replaced the Plan for the Purpose of Creating and 
Operating an Intermarket Option Linkage (``Old Plan''). The Old Plan 
required its participant exchanges to operate a stand-alone system or 
``Linkage'' for sending order-flow between exchanges to limit trade-
throughs, and the Linkage was operated by the Options Clearing 
Corporation (``OCC''). The New Plan essentially applies the Regulation 
NMS price-protection provisions to the options markets. Similar to 
Regulation NMS, the New Plan requires the New Plan Participants to 
adopt rules ``reasonably designed to prevent Trade-Throughs,'' while 
exempting Intermarket Sweep Orders (``ISOs'') from that prohibition. 
The New Plan's proposed definition of an ISO is essentially the same as 
under Regulation NMS. The remaining exceptions to the trade-through 
prohibition, discussed more specifically below, either track those 
under Regulation NMS or correspond to unique aspects of the options 
market, or both.
    The Rules in Chapter XXVII conform to the requirements of the New 
Plan. Rule 27.1 sets forth the defined terms for use under the New 
Plan. Rule 27.2 prohibits trade-throughs and exempts ISOs from that 
prohibition. Rule 27.2 also contains additional exceptions to the 
trade-through prohibition that track the exceptions under Regulation 
NMS or correspond to unique aspects of the BATS Options Exchange, or 
both.
    Rule 27.3 sets forth the general prohibition against locking/
crossing other eligible exchanges as well as several exceptions that 
permit locked markets in limited circumstances; such exceptions have 
been approved by the Commission for inclusion in the rules of other 
options exchanges. Specifically, the exceptions to the general 
prohibition on locking and crossing occur when (1) the locking or 
crossing quotation was displayed at a time when the Exchange was 
experiencing a failure, material delay, or malfunction of its systems 
or equipment; (2) the locking or crossing quotation was displayed at a 
time when there is a Crossed Market; or (3) the Member simultaneously 
routed an ISO to execute against the full displayed size of any locked 
or crossed Protected Bid or Protected Offer.
    Rule 27.4 provides that the Exchange will continue to accept 
Principal Acting as Agent (``P/A'') and Principal Orders from options 
exchanges that continue to use such orders to address trade-throughs 
via the Linkage for a temporary period.

Securities Traded on BATS Options

    General Listing Standards. The Exchange proposes to adopt listing 
standards for Options traded on BATS Options (Chapter XIX) as well as 
for Index Options (Chapter XXIX) that are identical to the approved 
rules of other options exchanges.\7\ The Exchange will join the Options 
Listings Procedures Plan and will list and trade options already listed 
on other options exchanges. The Exchange will gradually phase-in its 
trading of options, beginning with a selection of actively traded 
options. At least initially, the Exchange does not plan to develop new 
options products or listing standards.
---------------------------------------------------------------------------

    \7\ See Rules of NOM, Chapters IV and XIV and the Rules of BOX, 
Chapters IV and XIV.
---------------------------------------------------------------------------

    Quarterly Options Series Program. Pursuant to proposed Rule 
29.11(g) the Exchange may list and trade options series that expire at 
the close of business on the last business day of a calendar quarter 
(``Quarterly Options Series''). The Exchange may list Quarterly Options 
Series for up to five (5) currently listed options classes that are 
either options on exchange traded funds (``ETF'') or index options. In 
addition, the Exchange may also list Quarterly Options Series on any 
options classes that are selected by other securities exchanges that 
employ a similar program under their respective rules.
    The Exchange may list series that expire at the end of the next 
consecutive four (4) calendar quarters, as well as the fourth quarter 
of the next calendar year. For example, if the Exchange is trading 
Quarterly Options Series in the month of May 2010, it may list series 
that expire at the end of the second, third, and fourth quarters of 
2010, as well as the first and fourth quarters of 2011. Following the 
second quarter 2010 expiration, the Exchange could add series that 
expire at the end of the second quarter of 2011.
    For each class of ETF options selected for the Quarterly Options 
Series program, the Exchange may list strike prices within $5 from the 
previous day's closing price of the underlying security at the time of 
initial listing. Subsequently, the Exchange may list up to 60 
additional strike prices that are within thirty percent (30%) of the 
previous day's close, or more than 30% away from the previous day's 
close provided demonstrated customer interest exists for such 
series.\5\ [sic]
    The Exchange has also proposed a delisting policy with respect to 
Quarterly Options Series in ETF options. On a monthly basis, the 
Exchange will review series that are outside of a range of five (5) 
strikes above and five (5) strikes below the current price of the ETF, 
and delist series with no open interest in both the call and the put 
series having a (1) strike higher than the highest price with open 
interest in the put and/or call series for a given expiration month; 
and (2) strike lower than the lowest strike price with open interest in 
the put and/or the call series for a given expiration month. 
Notwithstanding the delisting policy, customer requests to add strikes 
and/or maintain strikes in Quarterly Options Series eligible for 
delisting shall be granted.
    The Exchange also may list Quarterly Option Series based on an 
underlying index pursuant to similar provisions in Rule 29.11. There 
are two noteworthy distinctions between the rules for listing Quarterly 
Options Series based on an ETF versus Quarterly Options Series based on 
an index. First, whereas the initial listing of Quarterly Options 
Series based on an underlying ETF is restricted to strike prices within 
$5 from the previous day's closing price of the underlying security, 
the initial listing of strikes for Quarterly Options Series based on an 
underlying index is restricted to: (i) A price that is within thirty 
percent (30%) of the previous day's close, and (ii) no more than five 
strikes above and five strikes below the value of the underlying index. 
Second, whereas the Exchange may list up to 60 additional strike prices 
for each Quarterly Options Series based on an ETF, there is no firm cap 
on the additional listing of strikes for Quarterly Options Series based 
on an underlying index; rather, additional strike prices

[[Page 64794]]

may be listed provided the new listings do not result in more than five 
strike prices on the same side of the underlying index value as the new 
listings.
    The interval between strike prices on Quarterly Options Series 
shall be the same as the interval for strike prices for series in that 
same options class that expire in accordance with the normal monthly 
expiration cycle.
    With regard to the impact on system capacity, the Exchange has 
analyzed its capacity and represents that it and the Options Price 
Reporting Authority have the necessary systems capacity to handle the 
additional traffic associated with the listing and trading of options 
series pursuant to the above-described Quarterly Options Series 
program.

Conduct and Operational Rules for Options Members

    BATS proposes to adopt rules that are substantially similar to the 
approved rules of other options exchanges. Thus, BATS proposes to adopt 
rules that are substantially similar to the rules of NOM regarding: 
exercises and deliveries (Chapter XXIII); records, reports and audits 
(Chapter XXIV); and minor rule violations (Chapter XXV).
    BATS proposes to adopt rules that are similar to the rules of NOM, 
with certain proposed changes and omissions, regarding: doing business 
with the public (Chapter XXVI); and margin (Chapter XXVIII). For 
example, with respect to its rules applicable to doing business with 
the public, contained in proposed Chapter XXVI, BATS has not proposed 
rules consistent with certain NOM rules to the extent the Exchange 
believes such requirements are contained in other sections of the 
Exchange's existing Rules or that such requirements are not consistent 
with the Exchange's existing regulatory structure. For example, the 
Exchange has consolidated applicable rules requiring options principal 
registration into proposed BATS Rule 17.2(g) because, as proposed, 
Options Principal registration is not limited to personnel associated 
with Options Members that do business with the public. Similarly, the 
Exchange intends to require Authorized Traders of Options Members to 
comply with existing Exchange registration requirements applicable to 
all Authorized Traders.\8\ Accordingly, the Exchange has omitted 
specific rules applicable to registration of representatives. As 
another example, the Exchange has not proposed addition of a fidelity 
bond requirement to its doing business with the public rules for BATS 
Options, but rather, as noted below, has proposed addition of a 
fidelity bond rule (Rule 2.12) to its general membership rules. With 
respect to its proposed margin rules, contained in proposed Chapter 
XXVIII, the Exchange has not proposed adoption of a rule applicable to 
joint back office arrangements because proposed Rule 28.3 requires 
Options Members to comply with either the margin rules of the New York 
Stock Exchange or the Chicago Board Options Exchange, and both 
exchanges have rules that address joint back office requirements. Thus, 
although the Exchange has proposed rules that differ in certain 
instances from the rules of NOM, the Exchange does not believe that 
such differences create any material regulatory gaps between the rules 
applicable to Exchange Options Members and members of other options 
exchanges.
---------------------------------------------------------------------------

    \8\ See BATS Rule 2.5, Interpretation and Policy .01 and BATS 
Rule 11.4.
---------------------------------------------------------------------------

    BATS further proposes to adopt Business Conduct Rules (Chapter 
XVIII) that are consistent with the NOM and BOX Business Conduct Rules, 
with certain exceptions.\9\ Specifically, with respect to Position 
Limits (Rule 18.7) and Exercise Limits (Rule 18.9), the Exchange is 
proposing to apply the limits established pursuant to the rules of the 
Chicago Board Options Exchange (``CBOE''), although the Exchange will 
establish such limits for products not traded on the CBOE. By expressly 
incorporating an already-approved limit, the Exchange will ensure that 
an appropriate limit is in place at all times without the need to 
continually adjust its rule manually or to disrupt the operations of 
its Members. With respect to financial and operational rules, the 
Exchange proposes to adopt rules similar to those of existing options 
exchanges regarding: exercises and deliveries, margin, net capital, and 
books and records.
---------------------------------------------------------------------------

    \9\ See Rules of NOM, Chapter III and BOX, Chapter III.
---------------------------------------------------------------------------

National Market System

    The BATS Options Exchange will operate as a full and equal 
participant in the national market system for options trading 
established under Section 11A of the Exchange Act, just as its equities 
market participates today. The BATS Options Exchange will become a 
member of the Options Price Reporting Authority (``OPRA''), the Options 
Linkage Authority (``OLA''), the Options Regulatory Surveillance 
Authority (``ORSA''), and the Options Listing Procedures Plan 
(``OLPP'').
    The Exchange expects to participate in those plans on the same 
terms currently applicable to current members of those plans, and it 
expects little or no plan impact due to the fact that the Exchange's 
market will operate on price/time priority. The Exchange has contacted 
the leadership of each options-related national market system plan to 
begin the membership process.

Regulation

    The Exchange will leverage many of the structures it established to 
operate a national securities exchange in compliance with Section 6 of 
the Exchange Act. As described in more detail below, there will be 
three elements of that regulation: (1) The Exchange will join the 
existing options industry agreements pursuant to Section 17(d) of the 
Exchange Act, as it did with respect to equities, (2) the Exchange's 
Regulatory Services Agreement with FINRA will govern many aspects of 
the regulation and discipline of Members that participate in options 
trading, just as it does for equities regulation, and (3) the Exchange 
will perform options listing regulation, as well as authorize Options 
Members to trade on BATS Options, and conduct surveillance of options 
trading as it does today for equities. Section 17(d) of the Exchange 
Act and the related Exchange Act rules permit SROs to allocate certain 
regulatory responsibilities to avoid duplicative oversight and 
regulation. Under Exchange Act Rule 17d-1, the SEC designates one SRO 
to be the Designated Examining Authority, or DEA, for each broker-
dealer that is a member of more than one SRO. The DEA is responsible 
for the financial aspects of that broker-dealer's regulatory oversight. 
Because BATS Options Members also must be members of at least one other 
SRO, the Exchange would generally not be designated as the DEA for any 
of its members.
    Rule 17d-2 under the Act permits SROs to file with the Commission 
plans under which the SROs allocate among each other the responsibility 
to receive regulatory reports from, and examine and enforce compliance 
with specified provisions of the Act and rules thereunder and SRO rules 
by, firms that are members of more than one SRO (``common members''). 
If such a plan is declared effective by the Commission, an SRO that is 
a party to the plan is relieved of regulatory responsibility as to any 
common member for whom responsibility is allocated under the plan to 
another SRO.
    All of the options exchanges, FINRA, and NYSE have entered into the 
Options Sales Practices Agreement, a Rule 17d-2 agreement. Under this 
Agreement, the examining SROs will examine firms that

[[Page 64795]]

are common members of the Exchange and the particular examining SRO for 
compliance with certain provisions of the Act, certain of the rules and 
regulations adopted thereunder, certain examining SRO rules, and 
certain BATS Options Rules. In addition, BATS Options Rules contemplate 
participation in this Agreement by requiring that any Options Member 
also be a member of at least one of the examining SROs.
    For those regulatory responsibilities that fall outside the scope 
of any Rule 17d-2 agreements, the Exchange will retain full regulatory 
responsibility under the Exchange Act. However, the Exchange has 
entered into a Regulatory Services Agreement with FINRA, pursuant to 
which FINRA personnel operate as agents for the Exchange in performing 
certain of these functions. As is the case with the BATS equities 
market, the Exchange will supervise FINRA and continue to bear ultimate 
regulatory responsibility for the BATS Options Exchange.
    Consistent with the Exchange's existing regulatory structure, the 
Exchange's Chief Regulatory Officer shall have general supervision of 
the regulatory operations of BATS Options, including responsibility for 
overseeing the surveillance, examination, and enforcement functions and 
for administering all regulatory services agreements applicable to BATS 
Options. Similarly, the Exchange's existing Regulatory Oversight 
Committee will be responsible for overseeing the adequacy and 
effectiveness of Exchange's regulatory and self-regulatory organization 
responsibilities, including those applicable to BATS Options.
    Finally, as it does with equities, the Exchange will perform 
automated surveillance of trading on BATS Options for the purpose of 
maintaining a fair and orderly market at all times. As it does with its 
equities trading, the Exchange will monitor BATS Options to identify 
unusual trading patterns and determine whether particular trading 
activity requires further regulatory investigation by FINRA.
    In addition, the Exchange will oversee the process for determining 
and implementing trade halts, identifying and responding to unusual 
market conditions, and administering the Exchange's process for 
identifying and remediating ``obvious errors'' by and among its Options 
Members. BATS proposed rules (Chapter XX) regarding halts, unusual 
market conditions, extraordinary market volatility, obvious errors, and 
audit trail are closely modeled on the approved rules of NOM and 
BOX.\10\
---------------------------------------------------------------------------

    \10\ See Rules of NOM, Chapter V, and BOX, Chapter V.
---------------------------------------------------------------------------

Minor Rule Violation Plan

    The Exchange's disciplinary rules, including Exchange Rules 
applicable to ``minor rule violations,'' are set forth in Chapter VIII 
of the Exchange's current Rules. Such disciplinary rules will apply to 
Options Members and their associated persons.
    The Commission approved the BATS Exchange's Minor Rule Violation 
Plan (``MRVP'') in 2008.\11\ The Exchange's MRVP specifies those 
uncontested minor rule violations with sanctions not exceeding $2,500 
that would not be subject to the provisions of Rule 19d-1(c)(1) under 
the Act \12\ requiring that an SRO promptly file notice with the 
Commission of any final disciplinary action taken with respect to any 
person or organization.\13\ The Exchange's MRVP includes the policies 
and procedures included in Exchange Rule 8.15 (Imposition of Fines for 
Minor Violation(s) of Rules) and in Rule 8.15, Interpretations and 
Policy .01.
---------------------------------------------------------------------------

    \11\ See Release No. 34-58807 (October 17, 2008), 73 FR 63219 
(October 23, 2008) (File No. 4-568) (``MRVP Order'').
    \12\ 17 CFR 240.19d-1(c)(1).
    \13\ The Commission adopted amendments to paragraph (c) of Rule 
19d-1 to allow SROs to submit for Commission approval plans for the 
abbreviated reporting of minor disciplinary infractions. See Release 
No. 34-21013 (June 1, 1984), 49 FR 23828 (June 8, 1984). Any 
disciplinary action taken by an SRO against any person for violation 
of a rule of the SRO which has been designated as a minor rule 
violation pursuant to such a plan filed with and declared effective 
by the Commission will not be considered ``final'' for purposes of 
Section 19(d)(1) of the Act if the sanction imposed consists of a 
fine not exceeding $2,500 and the sanctioned person has not sought 
an adjudication, including a hearing, or otherwise exhausted his 
administrative remedies.
---------------------------------------------------------------------------

    The Exchange proposes to amend its MRVP and Rule 8.15, 
Interpretation and Policy .01 to include proposed Rule 25.3 (Penalty 
for Minor Rule Violations).\14\ The rules included in proposed Rule 
25.3 as appropriate for disposition under the Exchange's MRVP are: (a) 
Position Limit violations for both customer accounts as well as the 
accounts of Options Members that are Exchange Members; (b) Order Entry 
violations regarding restrictions on orders entered by Market Makers, 
and (c) Continuous Quote violations regarding Market Maker continuous 
bids and offers. The rules included in Rule 25.3 are the same as the 
rules included in the MRVPs of other options exchanges.\15\
---------------------------------------------------------------------------

    \14\ In the MRVP Order, the Commission noted that the Exchange 
proposed that any amendments to Rule 8.15.01 made pursuant to a rule 
filing submitted under Rule 19b-4 of the Act would automatically be 
deemed a request by the Exchange for Commission approval of a 
modification to its MRVP. See MRVP Order, supra note 11, at note 6.
    \15\ See, e.g., NOM, Chapter X, Section 7, and BOX, Chapter X, 
Section 2.
---------------------------------------------------------------------------

    Upon implementation of this proposal, the Exchange will include the 
enumerated options trading rule violations in the Exchange's standard 
quarterly report of actions taken on minor rule violations under the 
MRVP. The quarterly report includes: The Exchange's internal file 
number for the case, the name of the individual and/or organization, 
the nature of the violation, the specific rule provision violated, the 
sanction imposed, the number of times the rule violation has occurred, 
and the date of disposition.
    The Exchange's MRVP, as proposed to be amended, is consistent with 
Sections 6(b)(1), 6(b)(5) and 6(b)(6) of the Act, which require, in 
part, that an exchange have the capacity to enforce compliance with, 
and provide appropriate discipline for, violations of the rules of the 
Commission and of the exchange.\16\ In addition, because amended Rule 
8.15 will offer procedural rights to a person sanctioned for a 
violation listed in proposed Rule 25.3, the Exchange will provide a 
fair procedure for the disciplining of members and associated persons, 
consistent with Section 6(b)(7) of the Act.\17\
---------------------------------------------------------------------------

    \16\ 15 U.S.C. 78f(b)(1), 78f(b)(5) and 78f(b)(6).
    \17\ 15 U.S.C. 78f(b)(7).
---------------------------------------------------------------------------

    This proposal to include the rules listed in Rule 25.3 in the 
Exchange's MRVP is consistent with the public interest, the protection 
of investors, or otherwise in furtherance of the purposes of the Act, 
as required by Rule 19d-1(c)(2) under the Act,\18\ because it should 
strengthen the Exchange's ability to carry out its oversight and 
enforcement responsibilities as an SRO in cases where full disciplinary 
proceedings are unsuitable in view of the minor nature of the 
particular violation. In requesting the proposed change to the MRVP, 
the Exchange in no way minimizes the importance of compliance with 
Exchange Rules and all other rules subject to the imposition of fines 
under the MRVP. However, the MRVP provides a reasonable means of 
addressing rule violations that do not rise to the level of requiring 
formal disciplinary proceedings, while providing greater flexibility in 
handling certain violations. The Exchange will continue to conduct 
surveillance with due diligence and make a determination based on its 
findings, on a case-by-case basis, whether a fine of more or less than 
the recommended amount is

[[Page 64796]]

appropriate for a violation under the MRVP or whether a violation 
requires a formal disciplinary action.
---------------------------------------------------------------------------

    \18\ 17 CFR 240.19d-1(c)(2).
---------------------------------------------------------------------------

Amendments to Existing BATS Exchange Rules

    In addition to the Rules proposed above, the Exchange proposes to 
amend certain of its existing rules in order to provide clarity 
regarding certain regulatory processes already utilized by the 
Exchange. Specifically, the Exchange proposes to add Interpretations 
and Policies .03 and .04 to Rule 2.5, which state that associated 
persons must register and terminate registration via standard industry 
forms, Forms U4 and U5, respectively. Such forms must be filed through 
the Central Registration Depositary (``CRD''). In addition, the 
Exchange currently requires applicants for membership in the Exchange 
to file information regarding their executive officers, directors, 
principal shareholders and general partners. The Exchange proposes to 
add Rule 2.6(g) in order to codify this application requirement and to 
require applicants approved as Members to keep such information current 
with the Exchange.
    The Exchange also proposes to adopt new Rules 2.12 and 3.22, 
related to fidelity bonds and gratuities, respectively, to achieve more 
consistency with the regulatory structure of other exchanges. Proposed 
Rule 2.12 is based on NASDAQ Rule 3020, and proposed Rule 3.22 is 
identical to ISE Rule 406. Finally, in order to accommodate potential 
exemption requests pursuant to the proposed fidelity bond rule, Rule 
2.12, the Exchange proposes adoption of Rule 1.6, which will provide a 
framework for requests for exemptions.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with the provisions of the Act,\19\ in general and with Section 6(b)(5) 
of the Act,\20\ in particular, in that it is designed 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 investors and the public interest; and are not designed to 
permit unfair discrimination between customers, issuers, brokers, or 
dealers, or to regulate by virtue of any authority conferred by this 
title matters not related to the purposes of this title or the 
administration of the exchange.
---------------------------------------------------------------------------

    \19\ 15 U.S.C. 78a et seq.
    \20\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    The BATS Options Exchange will benefit individual investors, 
options trading firms, and the options market generally. The entry of 
an innovative, low-cost competitor such as BATS Options will promote 
competition, spurring existing markets to improve their own execution 
systems and reduce trading costs. BATS Options will differentiate its 
market by offering executions in price/time priority, a feature that 
should increase order interaction and yield better executions. The 
execution system of the BATS Options Exchange will be designed to quote 
in penny increments where consistent with the Commission's penny pilot 
program for options, advancing the Commission's efforts to move the 
industry to penny quoting in an orderly fashion and helping to narrow 
spreads, reduce payment for order flow, and enhance price competition.

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
result in any burden on competition that is not necessary or 
appropriate in furtherance of the purposes of the Act. The Exchange 
operates in an intensely competitive global marketplace for transaction 
services. Relying on its array of services and benefits, the Exchange 
competes for the privilege of providing market services to broker-
dealers. The Exchange's ability to compete in this environment is based 
in large part on the quality of its trading systems, the overall 
quality of its market and its attractiveness to the largest number of 
investors, as measured by speed, likelihood and cost of executions, as 
well as spreads, fairness, and transparency.
    BATS Options will incorporate the best functional elements from the 
Exchange's equity market. The proposed rule change will reduce overall 
trading costs and increase price competition, both pro-competitive 
developments, and will promote further initiative and innovation among 
market centers and market participants.

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

    Written comments were neither solicited nor received.

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

    Within 35 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 self-regulatory organization consents, the Commission will:
    (1) By order approve such proposed rule change, or
    (2) 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 e-mail to rule-comments@sec.gov. Please include 
File Number SR-BATS-2009-031 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-2009-031. This file 
number should be included on the subject line if e-mail is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/
sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for inspection and 
copying in the Commission's Public Reference Room, 100 F Street, NE., 
Washington, DC 20549, on official business days

[[Page 64797]]

between the hours of 10 a.m. and 3 p.m. Copies of the filing will also 
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-2009-031 and should be submitted on or before December 29, 2009.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\21\
---------------------------------------------------------------------------

    \21\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Florence E. Harmon,
Deputy Secretary.
[FR Doc. E9-29203 Filed 12-7-09; 8:45 am]

BILLING CODE 8011-01-P