Document ID: SEC-2010-0807-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: BATS Exchange, Inc.
Posted Date: 2010-06-03T04:00Z

[Federal Register: June 3, 2010 (Volume 75, Number 106)]
[Notices]               
[Page 31491-31494]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr03jn10-100]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-62177; File No. SR-BATS-2010-013]

 
Self-Regulatory Organizations; BATS Exchange, Inc.; Notice of 
Filing and Immediate Effectiveness of Proposed Rule Change To Amend 
BATS Rule 19.5, entitled ``Minimum Participation Requirement for 
Opening Trading of Option Series''

May 26, 2010.
    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 May 13, 2010, BATS Exchange, Inc. (the ``Exchange'' or ``BATS'') 
filed with the Securities and Exchange Commission (``Commission'') the 
proposed rule change as described in Items I and II below, which Items 
have been prepared by the Exchange. The Exchange has designated this 
proposal as a ``non-controversial'' proposed rule change pursuant to 
Section 19(b)(3)(A) of the Act \3\ and Rule 19b-4(f)(6)(iii) 
thereunder,\4\ which renders it effective upon filing with the 
Commission. The Commission is publishing this notice to solicit 
comments on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 15 U.S.C. 78s(b)(3)(A).
    \4\ 17 CFR 240.19b-4(f)(6)(iii).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange is proposing to amend BATS Rule 19.5, entitled 
``Minimum Participation Requirement for Opening Trading of Option 
Series.'' 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 aspects of such 
statements.

[[Page 31492]]

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

1. Purpose
    The Exchange is proposing the elimination of a requirement that at 
least one Options Market Maker be registered for trading a particular 
series before it may be opened for trading on BATS Options.
    An Options Market Maker is an Options Member \5\ registered with 
the Exchange as a Market Maker.\6\ Options Market Makers on BATS 
Options have certain obligations such as maintaining two-sided markets 
and participating in transactions that are ``reasonably calculated to 
contribute to the maintenance of a fair and orderly market.'' \7\ To 
register as an Options Market Maker, an Options Member must file a 
written application with the Exchange, which will consider an 
applicant's market making ability and other factors it deems 
appropriate in determining whether to approve an applicant's 
registration.\8\ All Options Market Makers are designated as 
specialists on BATS Options for all purposes under the Act or rules 
thereunder.\9\ The BATS Options Rules place no limit on the number of 
qualifying entities that may become Options Market Makers.\10\ The good 
standing of an Options Market Maker may be suspended, terminated, or 
withdrawn if the conditions for approval cease to be maintained or the 
Options Market Maker violates any of its agreements with the Exchange 
or any provisions of the BATS Options Rules.\11\ An Options Member that 
has qualified as an Options Market Maker may register to make markets 
in individual series of options.\12\
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    \5\ The term ``Options Member'' means a firm, or organization 
that is registered with the Exchange pursuant to Chapter XVII of the 
Exchange's rules for purposes of participating in options trading on 
BATS Options as an ``Options Order Entry Firm'' or ``Options Market 
Maker.''
    \6\ See Exchange Rule 22.2.
    \7\ See Exchange Rule 22.5(a).
    \8\ See Exchange Rule 22.2(a).
    \9\ See Exchange Rule 22.2.
    \10\ See Exchange Rule 22.2(c).
    \11\ See Exchange Rule 22.4(b).
    \12\ See Exchange Rule 22.3(a).
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    Currently Exchange Rule 19.5 provides in relevant part that after a 
particular class of options has been approved for listing on BATS 
Options, the Exchange will allow trading in series of options in that 
class only if there is at least one Options Market Maker registered for 
trading that particular series. The Exchange is proposing to eliminate 
this requirement in order to expand the number of series available to 
investors for trading and for hedging risks associated with securities 
underlying those options, as well as to enhance markets in products 
which are likely to receive customer order flow. The Exchange believes 
that eliminating the listing requirement to have an Options Market 
Maker in every series would permit Options Market Makers, who currently 
may choose to serve as Options Market Makers solely to permit an 
options to trade on BATS Options, to focus their expertise on the 
products that are more consistent with their business objectives or 
more likely to receive customer order flow.
    Eliminating the Options Market Maker listing requirement would 
provide the Exchange the opportunity to trade options that may have 
occasional interest but that do not necessarily require a two-sided 
market at all times. The lack of a two-sided market would not cause 
customer orders to receive prices inferior to the best prices available 
across all exchanges. BATS Options is designed to systematically avoid 
trading through protected quotations on other options exchanges, and as 
such, orders accepted into BATS Options in options that do not have 
Options Market Makers will not trade at inferior prices even if there 
is not a two-sided market on BATS Options. As a result, incoming orders 
are protected from receiving inferior execution prices simply by the 
fact that there is robust quote competition in the exchange-listed 
options business with eight competing options exchanges and a multitude 
of competing Market Makers and liquidity providers. Additionally, the 
Options Order Protection and Locked/Crossed Market Plan requires plan 
participants to ``establish, maintain and enforce written policies and 
procedures that are reasonably designed to prevent Trade-Throughs in 
that participant's market in Eligible Options Classes.'' \13\ With the 
implementation of this plan, a robust network of private routing has 
been constructed that ensures routable customer orders can access the 
best prevailing prices in the market.
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    \13\ See Securities Exchange Act Release No. 60405 (July 30, 
2009), 74 FR 39362 (August 6, 2009) (File No. 4-546) (approval order 
for the Protection and Locked/Crossed Plan); see also Securities 
Exchange Act Release No 61419 (January 26, 2010), 75 FR 5157 
(February 1, 2010) (File No. SR-BATS-2009-031) (approval order of 
BATS Options rules, including rules governing participation in 
Protection and Locked/Crossed Plan).
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    Moreover, the Commission recently approved the proposed rule change 
filing of the NASDAQ Options Market (``NOM''), which has rules that are 
substantially similar to the Exchange's, in which NOM eliminated the 
requirements for having at least one Options Market Maker registered 
for trading in a particular series before it may be opened for trading 
on NOM.\14\ In its recent approval order for NOM's identical rule 
change the Commission cited certain findings that it made in its 
earlier approval of NOM, including that ``the Act does not mandate a 
particular market model for national securities exchanges'' and that 
``many different types of market models could satisfy the requirements 
of the Act''.\15\ The Commission stated that it does not believe that 
the Act requires an exchange to have Market Makers.\16\ The Commission 
also noted that in the context of approving NOM, it had previously 
stated that although Options Market Makers could be an important source 
of liquidity on NOM, they likely would not be the only source.\17\ The 
Exchange notes that the NOM System operates in a substantially similar 
manner to the Exchange's System, and is designed to match buying and 
selling interest of all participants on the Exchange. The Exchange is 
proposing simply to remove the Options Market Maker participation 
requirement as superfluous to the existence of a vibrant options 
market, nevertheless acknowledging the value Options Market Makers 
provide to the Exchange.
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    \14\ See Securities Exchange Act Release No. 61735 (March 18, 
2010), 75 FR 14227 (March 24, 2010) (File No. SR-NASDAQ-2010-007).
    \15\ Id. (citing Securities Exchange Act Release No. 57478 
(March 12, 2008), 73 FR 14521, 14527 (March 18, 2008) (File No. SR-
NASDAQ-2007-004) (``NOM Approval Order'')).
    \16\ As the Commission noted in its approval order for the NOM 
filing, in its release adopting Regulation ATS, the Commission 
rejected the suggestion that a guaranteed source of liquidity was a 
necessary component of an exchange. See Securities Exchange Act 
Release No. 40760 (December 8, 1998), 63 FR 70844 (December 22, 
1998) (``Regulation ATS Release).
    \17\ See NOM Approval Order, supra note 15, at 14527.
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    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 an 
expanded number of series as proposed by this filing.
    The Exchange also proposes to delete paragraph (b) of Rule 19.5, 
which states that a class of options will be put into a non-regulatory 
halt if at least one series for that class is not open for trading. 
Originally, this provision was put in place so that the Exchange could 
approve underlying securities for the listing of options but delay the 
listing if

[[Page 31493]]

the Options Market Makers on the Exchange were not yet ready to 
register in any series of options for that class. With the elimination 
of the other paragraphs in Rule 19.5 requiring an Options Market Maker, 
the Exchange will no longer need to delay the listings of particular 
series and thus will no longer need this provision.
    Finally, the Exchange proposes to delete paragraph (c) of Rule 
19.5, which addresses the situation where a series of options only has 
one Options Market Maker that then withdraws its registration. Based on 
the proposed change described above, this provision is no longer 
necessary.
2. Statutory Basis
    Approval of 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.\18\ In particular, the proposed change is consistent with 
Section 6(b)(5) of the Act,\19\ because it would promote just and 
equitable principles of trade, remove impediments to, and perfect the 
mechanism of, a free and open market and a national market system, and, 
in general, protect investors and the public interest. Specifically, 
the Exchange believes that the proposed amendment would expand the 
ability of investors to trade options and hedge risks associated with 
securities underlying options which are not currently listed due to the 
lack of an Options Market Maker registration in such options series.
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    \18\ 15 U.S.C. 78f(b).
    \19\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change imposes 
any burden on competition.

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 proposed rule change: (i) Does not significantly affect 
the protection of investors or the public interest; (ii) does not 
impose any significant burden on competition; and (iii) 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, the proposed rule change has 
become effective pursuant to Section 19(b)(3)(A) of the Act \20\ and 
Rule 19b-4(f)(6) thereunder.\21\
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    \20\ 15 U.S.C. 78s(b)(3)(A).
    \21\ 17 CFR 240.19b-4(f)(6). Pursuant to Rule 19b-4(f)(6)(iii) 
under the Act, the Exchange is required to give 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. 
The Exchange has satisfied this requirement.
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    A proposed rule change filed pursuant to Rule 19b-4(f)(6) under the 
Act \22\ normally does not become operative for 30 days after the date 
of its filing. However, Rule 19b-4(f)(6)(iii) \23\ permits the 
Commission to designate a shorter time if such action is consistent 
with the protection of investors and the public interest. The Exchange 
has requested that the Commission waive the 30-day operative delay.
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    \22\ 17 CFR 240.19b 4(f)(6).
    \23\ 17 CFR 240.19b 4(f)(6)(iii).
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    The Commission believes that waiving the 30-day operative delay is 
consistent with the protection of investors and the public interest. In 
making this determination, the Commission notes that BAT's proposed 
rule change is substantially similar to Nasdaq's recently approved rule 
change to eliminate its requirement that at least one options Market 
Maker be registered for trading a particular series before it could be 
opened for trading on NOM,\24\ and the Commission believes that BATS' 
proposed rule change raises no new regulatory issues. The Commission 
believes that waiving the operative delay will allow BATS to 
immediately expand the number of series available for trading, 
permitting BATS to compete with NOM in the trading of these series and 
should foster intermarket price competition by providing an additional 
market and source of liquidity for options series that would otherwise 
have been prohibited from trading on BATS due to the lack of a Market 
Maker registered in that series. For these reasons, the Commission 
designates that the proposed rule change become operative 
immediately.\25\
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    \24\ See supra note 14.
    \25\ For purposes only of waiving the 30-day operative delay, 
the Commission has considered the proposed rule's impact on 
efficiency, competition, and capital formation. 15 U.S.C. 78c(f).
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission may summarily abrogate the 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 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-2010-013 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-2010-013. 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 Web site viewing and 
printing in the Commission's Public Reference Room, on official 
business days between the hours of 10 a.m. and 3 p.m. Copies of the 
filing also will be available for inspection and copying at the 
principal office of the Exchange. All comments received will be posted 
without change; the Commission does not edit personal identifying 
information from submissions. You should submit only information that 
you wish to make available publicly. All submissions should refer to 
File Number SR-BATS-2010-013 and

[[Page 31494]]

should be submitted on or before June 24, 2010.
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    \26\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\26\
Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-13341 Filed 6-2-10; 8:45 am]
BILLING CODE 8010-01-P