Document ID: SEC-2011-0992-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: BATS Exchange, Inc.
Posted Date: 2011-07-14T04:00Z

[Federal Register Volume 76, Number 135 (Thursday, July 14, 2011)]
[Notices]
[Pages 41546-41549]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-17693]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-64847; File No. SR-BATS-2011-019]

Self-Regulatory Organizations; BATS Exchange, Inc.; Notice of 
Filing and Immediate Effectiveness of Proposed Rule Change Related to 
Fees for Use of BATS Exchange, Inc.

July 8, 2011.
    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 July 1, 2011, BATS Exchange, Inc. (the ``Exchange'' or ``BATS'') 
filed with the Securities and Exchange Commission (``Commission'') the 
proposed rule change as described in Items I, II, and III below, which 
Items have been prepared by the Exchange. The Exchange has designated 
the proposed rule change as one establishing or changing a member due, 
fee, or other charge imposed by the Exchange under Section 
19(b)(3)(A)(ii) of the Act \3\ and Rule 19b-4(f)(2) thereunder,\4\ 
which renders the proposed rule change 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)(ii).
    \4\ 17 CFR 240.19b-4(f)(2).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes amend the fee schedule applicable to Members 
\5\ and non-members of the Exchange pursuant to BATS Rules 15.1(a) and 
(c). Changes to the fee schedule pursuant to this proposal will be 
effective upon filing.
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    \5\ A Member is any registered broker or dealer that has been 
admitted to membership in the Exchange.
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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.

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

1. Purpose
    In addition to minor structural changes, the Exchange proposes to 
modify the fee schedule to: (i) Increase the standard fee to access the 
Exchange; (ii) introduce a tiered pricing structure applicable to the 
rebate for adding displayed liquidity to the Exchange's order book, 
including the adoption of definitions relating to such pricing 
structure; (iii) adopt a program, the ``NBBO Setter Program,'' which 
will provide an additional rebate specifically for orders that set the 
national best bid or offer (the ``NBBO''), subject to average daily 
volume requirements; (iv) reduce the rebate for adding non-displayed 
liquidity to the Exchange's order book; (v) discontinue payment of a 
liquidity rebate for non-displayed orders that add liquidity to the 
Exchange and receive price improvement when executed; (vi) increase the 
standard routing fee for the CYCLE, RECYCLE, Parallel D and Parallel 2D 
routing strategies; \6\ and (vii) make other modifications to certain 
other non-standard routing options and strategies.
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    \6\ As defined in BATS Rule 11.13.
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(i) Increase to Standard Access Fee
    The Exchange currently charges $0.0028 per share for all orders 
executed on the Exchange that remove liquidity from the Exchange. The 
Exchange proposes to increase the standard fee to remove liquidity from 
the Exchange to $0.0029 per share. Consistent with the current fee to 
remove liquidity, the charge per share for executions that remove 
liquidity from the Exchange will not apply to executions that remove 
liquidity in securities priced under $1.00 per share. The fee for such 
executions will remain at 0.10% of the total dollar value of the 
execution. Similarly, as is currently the case for the rebate for 
adding liquidity to the Exchange, there will be no liquidity rebate for 
adding liquidity in securities priced under $1.00 per share.
(ii) Tiered Rebate Structure
    The Exchange currently rebates $0.0027 per share for orders that 
add displayed liquidity to the Exchange's order book and are executed 
by the Exchange. The Exchange proposes to decrease the standard rebate 
for adding displayed liquidity to $0.0025 per share and to 
simultaneously adopt two volume-based tiers through which Members can 
realize higher rebates for adding displayed liquidity, as further 
described below.
    First, the Exchange proposes to provide a rebate of $0.0029 per 
share for orders that add displayed liquidity to the Exchange's order 
book for any Member that has an average daily volume (``ADV''), as 
defined below, equal to or greater than 1.0% of total consolidated 
volume (``TCV''), also as defined below. Accordingly, the proposal will 
result in an increased rebate of $0.0002 for Members with an ADV of 
1.0% of TCV or more.

[[Page 41547]]

    Second, the Exchange proposes to provide a rebate of $0.0027 per 
share for orders that add displayed liquidity to the Exchange's order 
book where the Member has an ADV equal to or greater than 0.5% but less 
than 1.0% of average TCV. Thus, Members qualifying for the second tier 
will receive the same rebate for adding displayed liquidity as they do 
today.
    In addition, the Exchange proposes to adopt definitions for both 
ADV and TCV. For purposes of the fee schedule, the proposed definition 
of ADV is average daily volume calculated as the number of shares added 
or removed, combined, per day on a monthly basis. The Exchange proposes 
to make clear in the definition of ADV that routed shares are not 
included in the Exchange's calculation of ADV, but rather, only volume 
executed on the Exchange counts towards a Member's ADV. The Exchange 
also proposes to allow affiliated entities to aggregate their order 
flow for purposes of the Exchange's determination of ADV with respect 
to pricing tiers if such entities provide prior notice to the Exchange. 
Specifically, to the extent two or more affiliated companies maintain 
separate memberships with the Exchange and can demonstrate their 
affiliation by showing they control, are controlled by, or are under 
common control with each other, the Exchange will permit such Members 
to count overall volume of the affiliates in calculating ADV. The 
Exchange will verify such affiliate using a Member's Form BD, which 
lists control affiliates.
    Rather than basing its pricing structure on a static number of 
shares executed by a Member each day, the Exchange proposes to adopt 
its tiered pricing structure such that it is based on total 
consolidated volume, or TCV, and is thus variable based on overall 
volumes in the securities industry. As proposed, TCV is defined as 
total consolidated volume calculated as the volume reported by all 
exchanges and trade reporting facilities to a consolidated transaction 
reporting plan for the month for which the fees apply. To illustrate 
the Exchange's application of TCV, if the overall volume of securities 
traded as reported by all exchanges and trade reporting facilities is 
100 billion shares in a given month, this amount will be used as the 
TCV against which the Exchange's tiered pricing will be measured for 
all trading activity during the month. The amount of overall TCV in the 
month will be divided by the number of trading days to determine 
average TCV; for instance, 100 billion shares divided by 20 trading 
days is an average TCV of 5 billion shares per day. Using these volumes 
as an example, to reach the Exchange's proposed tier of 1.0% of average 
TCV, and thus qualify for the higher rebate of $0.0029 per share, a 
Member would need to have an ADV of at least 50 million shares traded 
on the Exchange per day. If, in the next month, volumes doubled, and 
the TCV for the month was 200 billion shares, then a Member would need 
to have an ADV of at least 100 million shares traded on the Exchange 
per day to have an ADV equal to 1.0% of average TCV. The Exchange 
believes that basing its tiered pricing on TCV rather than a specific 
number of shares is a preferable measure of overall activity given the 
fluctuation of volumes in the securities industry.
    In conjunction with the adoption of these definitions, the Exchange 
proposes to move, but not to otherwise modify, the footnote on the 
Exchange's current fee schedule defining ``non-displayed order types'' 
as well as footnotes in the portion of the Exchange's fee schedule 
applicable to BATS Options (as defined below) and physical connection 
charges.
(iii) NBBO Setter Program
    Consistent with programs offered by the Exchange for its equity 
options platform (``BATS Options'') \7\ and by the Exchange's 
affiliated exchange, BATS Y-Exchange, Inc. (``BYX''),\8\ the Exchange 
proposes to adopt a program to attract aggressively priced displayed 
liquidity by providing an additional rebate for orders that set the 
NBBO to Members that reach either of the volume-based rebate tiers 
described above. Specifically, the Exchange proposes to provide any 
Member with an ADV equal to or greater than 0.5% of TCV with an 
additional rebate of $0.0002 per share for displayed liquidity that 
sets the NBBO and is later executed on the Exchange.
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    \7\ See Securities Exchange Act Release No. 63632 (January 3, 
2011), 76 FR 1205 (January 7, 2011) (SR-BATS-2010-038) (adopting an 
NBBO Setter Rebate for BATS Options); see also Securities Exchange 
Act Release No. 64211 (April 6, 2011), 76 FR 20414 (April 12, 2011) 
(SR-BATS-2011-012) (modifying the NBBO Setter Program for BATS 
Options to include a volume requirement based on TCV).
    \8\ See Securities Exchange Act Release No. 64429 (May 6, 2011), 
76 FR 27694 (May 12, 2011) (SR-BYX-2011-008) (adopting an NBBO 
Setter Rebate for BYX).
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    An order that is entered at the most aggressive price both on the 
Exchange's order book and according to then current consolidated data 
from the applicable securities industry processor (``SIP'') will be 
determined to have set the national best bid or offer for purposes of 
the NBBO Setter Program without regard to whether a more aggressive 
order is entered prior to the original order being executed.
(iv) Reduction of Rebate for Non-Displayed Orders
    As defined on the Exchange's current fee schedule, ``non-displayed 
liquidity'' includes liquidity resulting from all forms of Pegged 
Orders,\9\ Mid-Point Peg Orders,\10\ and Non-Displayed Orders,\11\ but 
does not include liquidity resulting from Reserve Orders\12\ or 
Discretionary Orders.\13\ The Exchange currently provides a rebate of 
$0.0020 per share for non-displayed orders executed on the Exchange. 
Consistent with other aspects of this proposal that are intended to 
incent aggressively priced, displayed liquidity, the Exchange proposes 
to reduce the rebate that it provides for non-displayed orders to 
$0.0017 per share.
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    \9\ As defined in BATS Rule 11.9(c)(8).
    \10\ As defined in BATS Rule 11.9(c)(9).
    \11\ As defined in BATS Rule 11.9(c)(11).
    \12\ As defined in BATS Rule 11.9(c)(1).
    \13\ As defined in BATS Rule 11.9(c)(10).
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(v) Discontinued Rebate for Non-Displayed Price Improved Orders
    As noted above, the Exchange currently provides a liquidity rebate 
of $0.0020 per share for all non-displayed orders that add liquidity to 
the Exchange's order book and are executed by the Exchange. The 
Exchange recently received approval of a rule to allow non-displayed 
orders that are not executable at their most aggressive price to be 
executed at one-half minimum price variation less aggressive than that 
price.\14\ Accordingly, such non-displayed orders will receive price 
improvement upon execution. Because such orders will receive price 
improvement, the Exchange proposes to execute the orders without 
providing either a liquidity rebate or charging a fee. The Exchange 
believes that price improvement received for executions of non-
displayed orders (rather than price improvement and a liquidity rebate) 
is appropriate because the price improvement received will offset the 
change in the fee structure for such orders.
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    \14\ See Securities Exchange Act Release No. 64754 (June 27, 
2011) (SR-BATS-2011-015).
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(vi) Increase to Fee for Standard Best Execution Routing Strategies
    The Exchange proposes to modify the fee charged by the Exchange for 
its CYCLE, RECYCLE, Parallel D and Parallel 2D routing strategies from 
$0.0028 per share to $0.0029 per share. To be consistent with this 
change, the Exchange proposes to charge 0.29%, rather than 0.28%, of 
the total dollar

[[Page 41548]]

value of the execution for any security priced under $1.00 per share 
that is routed away from the Exchange through these strategies.
(vii) Other Modifications to Non-Standard Routing Rates
    Various market centers, including the Exchange's affiliate, BYX, 
are implementing certain pricing changes effective July 1, 2011. The 
Exchange proposes various changes to its routing strategies in 
connection with such changes so that fees charged and rebates provided 
reflect a direct pass-through of the fee charged or rebate received 
when routing directly to such market centers. For instance, the 
Exchange's affiliate, BYX, is reducing the rebate paid for shares 
removed from BYX from $0.0003 per share to $0.0002 per share. 
Accordingly, the Exchange proposes to modify its Destination Specific 
Order; \15\ to BYX, as well as its TRIM \16\ and SLIM \17\ routing 
strategies with respect to any executions at BYX, to pay a rebate of 
$0.0002 per share. The Exchange also proposes to modify its TRIM 
routing strategy to reflect the exact rate paid or assessed for 
executions at NASDAQ BX and EDGA Exchange, respectively. The Exchange 
currently identifies both of these venues as ``low priced venues'' and 
the Exchange does not charge or rebate its Members for orders routed to 
and executed by such venues. As proposed, the Exchange will pass on 
rebates that are paid by these venues in full. Specifically, the 
Exchange proposes to rebate $0.0014 per share for TRIM routed orders 
executed at NASDAQ BX, as this is the same rate paid by NASDAQ BX and 
is thus a direct pass-through. Similarly, the Exchange proposes to 
rebate $0.00015 per share for TRIM routed orders executed at EDGA 
Exchange, as this is, again, a direct pass-through of the rebate 
provided by EDGA Exchange.
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    \15\ As defined in BATS Rule 11.9(c)(12).
    \16\ As defined in BATS Rule 11.13(a)(3)(G).
    \17\ As defined in BATS Rule 11.13(a)(3)(H).
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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 of the Act.\18\ 
Specifically, the Exchange believes that the proposed rule change is 
consistent with Section 6(b)(4) of the Act,\19\ in that it provides for 
the equitable allocation of reasonable dues, fees and other charges 
among members and other persons using any facility or system which the 
Exchange operates or controls. The Exchange notes that it operates in a 
highly competitive market in which market participants can readily 
direct order flow to competing venues if they deem fee levels at a 
particular venue to be excessive.
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    \18\ 15 U.S.C. 78f.
    \19\ 15 U.S.C. 78f(b)(4).
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    The changes to Exchange execution fees and rebates proposed by this 
filing are intended to attract order flow to the Exchange by continuing 
to offer competitive pricing while also creating incentives to 
providing aggressively priced displayed liquidity. While Members that 
remove liquidity from the Exchange and/or route orders through the 
Exchange's standard routing strategies will be paying higher fees due 
to the proposal, the increased revenue received by the Exchange will be 
used to fund programs that the Exchange believes will attract 
additional liquidity and thus improve the depth of liquidity available 
on the Exchange. Accordingly, the Exchange believes that the higher 
access and routing fees will benefit Members' results in trading on the 
Exchange to the extent the tiered rebate structure adopted by the 
Exchange for adding liquidity and the adoption of the NBBO Setter 
Program incentivize liquidity providers to provide more aggressively 
priced liquidity.
    The Exchange believes that basing its tiered rebate structure on 
overall TCV, rather than a static number irrespective of overall volume 
in the securities industry, is a fair and equitable approach to 
pricing. Volume-based tiers such as the liquidity rebate tiers proposed 
in this filing have been widely adopted in the equities markets, and 
are equitable and not unreasonably discriminatory because they are open 
to all members on an equal basis and provide rebates that are 
reasonably related to the value to an exchange's market quality 
associated with higher levels of market activity, such as higher levels 
of liquidity provision and introduction of higher volumes of orders 
into the price and volume discovery process. Accordingly, the Exchange 
believes that the proposal is not unreasonably discriminatory because 
it is consistent with the overall goals of enhancing market quality.
    The proposed modification to the Exchange's rebate structure will 
have variable affects on Members of the Exchange, dependent on the 
volume of transaction activity they conduct on the Exchange. The 
Exchange notes that Members with current volumes meeting the ADV tier 
of 0.5% to 1.0% of TCV will not be impacted by any decrease in rebates. 
Further, Members with current volumes equal to or exceeding 1.0% of TCV 
will receive larger rebates than they currently receive. Despite the 
decrease in rebate for all other Members, the Exchange believes that 
its proposed fee structure is fair and equitable as the Exchange's 
standard rebate still remains higher than standard rebates paid by 
other markets with similar fee structures, such as NYSE Arca and 
Nasdaq.
    The proposed language permitting aggregation of volume amongst 
corporate affiliates for purposes of the ADV calculation is intended to 
avoid disparate treatment of firms that have divided their various 
business activities between separate corporate entities as compared to 
firms that operate those business activities within a single corporate 
entity. By way of example, many firms that are Members of the Exchange 
operate several different business lines within the same corporate 
entity. In contrast, other firms may be part of a corporate structure 
that separates those business lines into different corporate 
affiliates, either for business, compliance or historical reasons. 
Those corporate affiliates, in turn, are required to maintain separate 
memberships with the Exchange in order to access the Exchange. Absent 
the proposed policy, such corporate affiliates would not receive the 
same treatment as firms operating similar business lines within a 
single entity that is a Member of the Exchange. Accordingly, the 
Exchange believes that its proposed policy is fair and equitable, and 
not unreasonably discriminatory. In addition to ensuring fair and equal 
treatment of its Members, the Exchange does not want to create 
incentives for its Members to restructure their business operations or 
compliance functions simply due to the Exchange's pricing structure.
    Additionally, the Exchange believes that the proposed NBBO Setter 
Rebate, similar to rebates now offered on BATS Options for six months 
and on the Exchange's affiliate, BYX, for two months, will incentivize 
the entry of more aggressive orders that will create tighter spreads, 
benefitting both Members and public investors. The Exchange further 
believes that conditioning a Member's ability to receive the NBBO 
Setter Rebate on reaching one of the Exchange's volume tiers is 
consistent with the Act for the reasons described above with respect to 
volume-based tiers generally.
    The Exchange believes that the elimination of a rebate for 
executions of non-displayed orders that receive price improvement is 
appropriate because the

[[Page 41549]]

price improvement received will offset the change in the fee structure 
for such orders. The Exchange believes that if it provided both a 
rebate and price improvement for such executions the Exchange would be 
overly incentivizing hidden liquidity, which is contrary to the goals 
of this proposal. Further, the Exchange believes that reducing the 
standard rebate for non-displayed liquidity is beneficial to market 
participants including public investors, as this change, too, allows 
the Exchange to provide additional incentives for displayed liquidity.
    Finally, the Exchange believes that the proposed changes to the 
Exchange's non-standard routing fees and strategies are competitive, 
fair and reasonable, and non-discriminatory in that they are designed 
to mirror the cost and/or rebate applicable to the execution if such 
routed orders were executed directly by the Member at each away market.

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

    No written comments were solicited or received.

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

    Pursuant to Section 19(b)(3)(A)(ii) of the Act \20\ and Rule 19b-
4(f)(2) thereunder,\21\ the Exchange has designated this proposal as 
establishing or changing a due, fee, or other charge applicable to the 
Exchange's Members and non-members, which renders the proposed rule 
change effective upon filing.
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    \20\ 15 U.S.C. 78s(b)(3)(A)(ii).
    \21\ 17 CFR 240.19b-4(f)(2).
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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 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-2011-019 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-2011-019. 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, 100 F Street, NE., 
Washington, DC 20549, on official business days between the hours of 10 
a.m. and 3 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-2011-019 and should be 
submitted on or before August 4, 2011.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\22\
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    \22\ 17 CFR 200.30-3(a)(12).
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Cathy H. Ahn,
Deputy Secretary.
[FR Doc. 2011-17693 Filed 7-13-11; 8:45 am]
BILLING CODE 8011-01-P