Document ID: SEC-2014-0715-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: BATS Exchange, Inc.
Posted Date: 2014-05-01T04:00Z

[Federal Register Volume 79, Number 84 (Thursday, May 1, 2014)]
[Notices]
[Pages 24807-24809]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-09920]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-72020; File No. SR-BATS-2014-015]

Self-Regulatory Organizations; BATS Exchange, Inc.; Notice of 
Filing and Immediate Effectiveness of a Proposed Rule Change To 
Institute an Incentive Program for Market Makers for BATS Exchange, 
Inc.

April 25, 2014.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on April 17, 2014, BATS Exchange, Inc. (``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 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 filed a proposal to institute an incentive program for 
market makers registered with the Exchange (``Market Makers'') \3\ in 
ETPs \4\ listed on the Exchange (the ``LMM Program''). The Exchange has 
designated this proposal as non-controversial and provided the 
Commission with the notice required by Rule 19b-4(f)(6)(iii) under the 
Act.\5\ The Exchange will implement the proposed rule change on a date 
that will be circulated in a notice from the BATS Trade Desk.\6\ The 
Exchange also intends to file a proposal to adopt the financial 
incentives related to the LMM Program through a separate filing.
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    \3\ See BATS Rule 11.5.
    \4\ As defined in proposed Rule 11.8(e)(1)(A), ETP means any 
security listed pursuant to Exchange Rule 14.11.
    \5\ 17 CFR 240.19b-4(f)(6)(iii).
    \6\ The Exchange will file a separate proposal prior to 
implementation of the proposed rule change in which it will add the 
relevant pricing to its fee schedule.
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    The text of the proposed rule change is available at the Exchange's 
Web site at http://www.batstrading.com, at the principal office of the 
Exchange, and at the Commission's Public Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the Exchange included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The Exchange has prepared summaries, set forth in 
Sections A, B, and C below, of the most significant parts of such 
statements.

[[Page 24808]]

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    On August 30, 2011, the Exchange received approval of rules 
applicable to the qualification, listing and delisting of companies on 
the Exchange.\7\ Shortly thereafter, the Exchange also received 
approval to operate a program in which all BATS-listed securities 
participate that is designed to incentivize certain Market Makers as 
Competitive Liquidity Providers (``CLPs'') to enhance liquidity on the 
Exchange in such BATS-listed securities (the ``CLP Program'') by 
offering daily financial rebates to CLPs based on the size of their 
quotes at the NBBO \8\ throughout the day.\9\ In order to provide 
issuers with an additional option for enhancing liquidity in BATS-
listed ETPs and as a competitive response to liquidity enhancement 
programs at other listing exchanges, the Exchange is proposing to 
implement an additional program designed to incentivize certain Market 
Makers that are willing to meet designated performance standards to 
enhance liquidity on the Exchange in ETPs by providing enhanced rebates 
to such Market Makers, the LMM Program, for executions in BATS-listed 
ETPs, as further described below. As proposed, the LMM Program is 
designed to incentivize select Market Makers to enter more aggressive 
orders in BATS-listed ETPs by providing enhanced rebates for executions 
in the BATS-listed ETP in which the Market Maker is registered as a 
lead market maker (a ``LMM'') where the LMM meets certain performance 
measurements designated by the Exchange. As proposed, a BATS-listed ETP 
that is participating in the CLP Program would not be eligible for 
participation in the LMM Program until and unless such ETP is no longer 
participating in the CLP Program. Further, any ETP that is listed on 
the Exchange after the implementation of the LMM Program will not be 
eligible for participation in the CLP Program. Prior to the 
implementation of the LMM Program, the Exchange intends to file a 
proposal detailing changes to the current CLP Program along with a new 
supplemental quoting incentive program in which ETPs participating in 
the LMM program may also participate.
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    \7\ See Exchange Act Release No. 65225 (August 30, 2011), 76 FR 
55148 (September 6, 2011) (SR-BATS-2011-018).
    \8\ As defined in Rule 1.5(o), NBBO means the national best bid 
or offer.
    \9\ See Exchange Act Release No. 66307 (February 2, 2012), 77 FR 
6608 (February 8, 2012) (SR-BATS-2011-051).
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    The Exchange is proposing to adopt rules that are similar to those 
regarding the SEC approved NYSE Arca, Inc. (``Arca'') program for Lead 
Market Makers \10\ (``Arca LMMs'') and The NASDAQ Stock Market LLC 
(``Nasdaq'') program for Designated Liquidity Providers (``DLPs'').\11\ 
Under both programs, an Arca LMM for a security listed on Arca or a DLP 
for a security listed on Nasdaq is required to maintain minimum 
performance standards with regard to (i) percent of time at NBBO; (ii) 
percent of executions better than the NBBO; (iii) average displayed 
size; (iv) average quoted spread; and (v) in the case of derivative 
securities listed on Arca, the ability of the Arca LMM to transact in 
underlying markets. This list, however, is not exhaustive, so Nasdaq 
(and BATS, as proposed and further discussed below) could apply any 
additional minimum performance standards, including the ability of a 
DLP to transact in underlying markets. Additionally, because Arca LMMs 
and DLPs are required to be registered market makers, they must also 
meet each respective exchange's requirements for being a market maker. 
In return, an Arca LMM receives both enhanced rebates for adding 
liquidity and reduced fees for removing liquidity and a DLP on Nasdaq 
receives enhanced rebates for adding liquidity in their respective Arca 
LMM or DLP security or securities.
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    \10\ See Arca Rule 7.24 and NYSE Arca Schedule of Fees and 
Charges for Exchange Services at https://usequities.nyx.com/sites/usequities.nyx.com/files/nyse_arca_marketplace_fees__for_2-1-14.pdf.
    \11\ See Nasdaq Rule 7018(i).
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    Under the Exchange's proposed program, a Market Maker in an ETP may 
become an LMM in an ETP. The Exchange anticipates providing enhanced 
rebates and/or reduced fees for LMM executions in the LMM Security,\12\ 
subject to a separate fee filing. Under the LMM Program, an LMM is a 
Market Maker in an ETP that has committed to maintain Minimum 
Performance Standards.\13\ As is true under the Arca and Nasdaq 
programs, such Minimum Performance Standards will vary between LMM 
Securities depending on the price, liquidity, and volatility of the LMM 
Security in which the LMM is registered and the relevant measurement 
metrics will include, but are not necessarily limited to: (i) Percent 
of time at the NBBO; (ii) percent of executions better than the NBBO; 
(iii) average displayed size; and (iv) average quoted spread. If an LMM 
does not meet the Minimum Performance Standards for a given month, fees 
and credits will revert to standard equities pricing, as provided in 
the Exchange's fee schedule. If an LMM does not meet the Minimum 
Performance Standards for three out of the past four months, the LMM is 
subject to forfeiture of LMM status for that LMM Security, at the 
Exchange's discretion. An LMM must provide 30 days written notice if it 
wishes to withdraw its registration as an LMM in an LMM Security, 
unless it is also withdrawing as a market maker in the LMM Security.
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    \12\ As defined in proposed Rule 11.8(e)(1)(C), LMM Security 
means an ETP that has an LMM.
    \13\ As defined in proposed Rule 11.8(e)(1)(D), Minimum 
Performance Standards means a set of standards applicable to an LMM 
that may be determined from time to time by the Exchange.
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    As is true under the Arca and Nasdaq programs, after indicating 
interest in being an LMM for an ETP, a Market Maker will be selected by 
the Exchange to be an LMM based on factors including, but not limited 
to, experience with making markets in ETPs, adequacy of capital, 
willingness to promote the Exchange as a marketplace, issuer 
preference, operational capacity, support personnel, and history of 
adherence to Exchange rules and securities laws. As is true under the 
Nasdaq program, the Exchange may limit the number of LMMs in a 
particular security, or modify a previously established limit, upon 
prior written notice to Members. Specifically, the Exchange may modify 
a limit either to increase or decrease the number of LMMs for a 
security upon providing such prior written notice.
2. Statutory Basis
    The Exchange believes that the proposed rule change 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.\14\ 
Specifically, the Exchange believes that the proposed rule change is 
consistent with Section 6(b)(5) of the Act,\15\ in that it is designed 
to promote just and equitable principles of trade, 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. At the outset, the Exchange notes that registration as 
an Exchange Market Maker is equally available to all Members that 
satisfy the requirements of Rule 11.8 and that LMMs will be chosen 
based on the pre-determined factors described in the proposed rule. The 
Exchange believes

[[Page 24809]]

that by allocating pricing benefits to Market Makers that make tangible 
commitments to enhancing market quality for BATS-listed ETPs, the 
proposal will encourage the development of new financial products, 
provide a better trading environment for investors in ETPs, and 
encourage greater competition between listing venues for ETPs. The 
Exchange also believes that the proposal will promote tighter spreads 
and deeper liquidity for all market participants by requiring LMMs to 
meet Minimum Performance Standards for an LMM Security based on percent 
of time at the NBBO, percent of executions better than the NBBO, 
average displayed size, and average quoted spread, plus any other 
metric that the Exchange deems appropriate for measuring performance in 
a particular LMM Security.
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    \14\ 15 U.S.C. 78f(b).
    \15\ 15 U.S.C. 78f(b)(5).
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    As proposed, the LMM Program is designed to enhance the Exchange's 
competitiveness as a listing venue and to strengthen its market quality 
for BATS-listed ETPs. The Exchange believes that the proposed change 
would increase competition with Arca and Nasdaq by incenting Exchange 
Market Makers to apply to become LMMs, which will enhance the quality 
of quoting in BATS-listed ETPs. The Exchange also believes that the LMM 
Program will further assist the Exchange to develop an alternative to 
Nasdaq and the Arca for an issuer seeking to list its ETPs. 
Accordingly, the Exchange believes that the proposal will complement 
the Exchange's program for listing ETPs on the Exchange, which will, in 
turn, provide issuers with another option for listing an ETP on the 
public markets, thereby promoting the principles discussed in Section 
6(b)(5) of the Act.\16\
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    \16\ Id.
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
result in any burden on competition that is not necessary or 
appropriate in furtherance of the purposes of the Act, as amended. In 
this regard and as indicated above, the Exchange notes that the rule 
change is being proposed as a competitive offering to the Arca LMM 
program currently in place at Arca and the DLP program in place at 
Nasdaq. The Exchange believes that this proposed rule change is 
necessary to permit fair competition among the listing exchanges. 
Further, the Exchange believes that the proposed changes as a whole 
will contribute to tighter spreads and additional liquidity on the 
Exchange in BATS-listed ETPs, which will, in turn, benefit competition 
due to the improvements to the overall market quality of the Exchange.

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

    Because the foregoing proposed rule change does not: (i) 
Significantly affect the protection of investors or the public 
interest; (ii) impose any significant burden on competition; and (iii) 
become operative for 30 days from the date on which it was filed, or 
such shorter time as the Commission may designate, if consistent with 
the protection of investors and the public interest, the proposed rule 
change has become effective pursuant to Section 19(b)(3)(A) of the Act 
\17\ and Rule 19b-4(f)(6) thereunder.\18\
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    \17\ 15 U.S.C. 78s(b)(3)(A).
    \18\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6) 
requires a self-regulatory organization to give the Commission 
written notice of its intent to file 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. 
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 summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposal 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 No. SR-BATS-2014-015 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 No. SR-BATS-2014-015. 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 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 No. SR-BATS-2014-015 and should be 
submitted on or before May 22, 2014.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\19\
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    \19\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-09920 Filed 4-30-14; 8:45 am]
BILLING CODE 8011-01-P