Document ID: SEC-2014-1642-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: BATS Exchange, Inc.
Posted Date: 2014-09-30T04:00Z

[Federal Register Volume 79, Number 189 (Tuesday, September 30, 2014)]
[Notices]
[Pages 58845-58847]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-23224]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-73203; File No. SR-BATS-2014-040]

Self-Regulatory Organizations; BATS Exchange, Inc.; Notice of 
Filing of a Proposed Rule Change to Rule 21.7 of BATS Exchange, Inc.

September 24, 2014.
    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 September 12, 2014, 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 
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 the 
Substance of the Proposed Rule Change

    The Exchange filed a proposal to amend Rule 21.7, entitled ``Market 
Opening Procedures'' in order to modify the process by which the 
Exchange's equity options trading platform (``BATS Options'') opens 
trading at the beginning of the day and after trading halts.
    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
    The purpose of the proposed rule changes is to amend BATS Rule 21.7 
in order to amend the Opening Process \3\ by executing orders in the 
Opening Process based on time priority instead of price-time priority, 
treating orders that are not executed during the Opening Process as if 
they had just been entered by a User \4\ rather than cancelling certain 
orders, and adding certain clarifying language to the Rule in order to 
make the Opening Process more clear. The Exchange is also proposing to 
add titles to BATS Rule 21.7(a)(1), (2), (3), and (4) in order to make 
the rule text easier to follow. The Exchange is not proposing to amend 
the process by which orders are entered or the Opening Price \5\ is 
determined or validated.
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    \3\ Opening Process is defined in BATS Rule 21.7(a).
    \4\ User is defined in BATS Rule 16.1(a)(63).
    \5\ Opening Price is defined in BATS Rule 21.7(a)(1).
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    Currently, after establishing an Opening Price that is also a Valid 
Price,\6\ orders and quotes in the System \7\ that are priced equal to 
or more aggressively than the Opening Price will be matched based on 
price-time priority and in accordance with BATS Rule 21.8. All orders 
and quotes or portions thereof that are matched pursuant to the Opening 
Process will be executed at the Opening Price. Where orders that meet 
the following criteria are not executed during the Opening Process, 
they will be cancelled: (i) Limit orders that are priced equal to or 
more aggressively than the Opening Price; and (ii) market orders. Where 
the Exchange is going to open trading in a series pursuant to Rule 
21.7(a)(1)(D) (where there is no NBBO Midpoint, no Print, and no 
Previous Close at a Valid Price) (a ``Contingent Open'') and there is 
at least one price level at which at least one contract of a limit 
order could be executed, the System will similarly cancel all orders 
that are priced equal to or more aggressively than the midpoint of the 
most aggressively priced bid and the most aggressively priced offer. 
Limit orders and quotes that are not executed during the Opening 
Process or cancelled as set forth above shall become eligible for 
trading on BATS Options immediately following the completion of the 
Opening Process. Finally, where there are no orders in a series that 
are

[[Page 58846]]

matched at the Opening Price, the System will open the series for 
trading.
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    \6\ Valid Price is defined in BATS Rule 21.7(a)(2).
    \7\ System is defined in BATS Rule 1.5(aa).
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    The Exchange is proposing to amend its Rules in order to match 
orders for execution in the Opening Process based on time priority 
rather than price-time priority and in accordance with Rule 21.9. The 
Exchange believes that handling orders in time priority makes more 
sense than price-time priority for the Opening Process because the 
price of the order is not particularly important to the Opening 
Process, so long as the order is priced at or more aggressively than 
the Opening Price, which can only be one of three prices: the midpoint 
of the NBBO; the last regular way print disseminated to the OPRA Plan 
\8\ after 9:30 a.m.; or the last regular way transaction from the 
previous trading day as disseminated pursuant to OPRA.\9\ Because the 
Opening Price is always based on a price-taking process rather than a 
price-forming process, there is no reason to reward a more aggressive 
order with priority in the Opening Process. Thus, the Exchange is 
proposing that all orders and quotes that are priced equal to or more 
aggressively than the Opening Price be matched based only on time 
priority and will be matched until there is no remaining volume or 
there is an imbalance of orders that are not executed in whole or in 
part, at which point all matched orders and quotes will be executed at 
the Opening Price. Further, the Exchange is also proposing to handle 
all orders that are not executed in the Opening Process in time 
priority. Specifically, the Exchange is proposing to handle such orders 
in time sequence, beginning with the order with the oldest time stamp 
and may, in whole or in part, place such orders on the BATS Options 
Book,\10\ cancel the orders, execute the orders, or route the orders in 
accordance with Rule 21.9. If an order is placed on the BATS Options 
Book, it will then be subject to the standard price-time priority and 
subject to Rule 21.8. This proposed functionality will apply to all 
orders, including both those orders that are not executed under 
proposed Rule 21.7(a)(3) and orders in a series that is opening subject 
to a Contingent Open. While the Exchange currently cancels any orders 
that are not executed in the Opening Process that are priced more 
aggressively than the Opening Price, the Exchange is proposing to 
simply enter these orders on to the BATS Options Book as described 
above in order to minimize the number of orders that are cancelled and 
must be reentered by Users. The Exchange notes that all order 
protections, including Trade-Through \11\ protection and a BATS Market 
Order \12\ collar, will apply to orders entered pursuant to proposed 
Rule 21.7(a)(3) and 21.7(a)(4).
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    \8\ OPRA Plan is defined in BATS Rule 27.1(15).
    \9\ OPRA is defined in BATS Rule 27.1(14).
    \10\ BATS Options Book is defined in BATS Rule 16.1(a)(9).
    \11\ Trade-Through is defined in BATS Rule 27.1(22).
    \12\ BATS Market Order is defined in BATS Rule 21.1(d)(5).
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    The Exchange is also proposing to eliminate the current 
functionality of cancelling orders that are not executed during the 
Opening Process that fit the following criteria: (i) Limit orders that 
are priced equal to or more aggressively than the Opening Price; and 
(ii) market orders. Further, the Exchange is proposing to eliminate the 
current functionality for a series subject to a Contingent Open where, 
if there is at least one price level at which at least one contract of 
a limit order can be executed, the System will cancel all orders that 
are priced equal to or more aggressively than the midpoint of the most 
aggressively priced bid and the most aggressively priced offer. While 
not cancelling these orders might result in executions at a price that 
is not the same as the Opening Price that occur as the orders are 
handled in time sequence (either on BATS Options or upon routing to 
another options exchange), these executions would be part of regular 
way trading and are distinct from the opening execution that occurs as 
a result of the Opening Process. For many Users, cancelling orders that 
were entered for participation in the Opening Process negates the 
advantages of allowing orders to be entered prior to the beginning of 
regular way trading and the Opening Process. As such, the Exchange is 
proposing this functionality in order to provide Users with the 
certainty that orders that are entered prior to the Opening Process 
will not be cancelled based on market conditions outside of a User's 
control.
    Finally, the Exchange is proposing to clarify its rules around the 
Opening Process. Specifically, the Exchange is proposing to add 
language to Rule 21.7(a)(3) stating that the Opening Process will be 
performed after the establishment of an Opening Price that is a Valid 
Price \13\ and that matches will occur until there is no remaining 
volume or there is an imbalance of orders, both of which it believes 
are implicit, but will make the rule text more clear. The Exchange is 
also proposing to add titles to Rules 21.7(a)(1) through (4) in order 
to make the rule text easier to follow. The Exchange is also proposing 
to delete Rule 21.7(a)(5), which states that where no orders are 
matched at the Opening Price, the System will open the series for 
trading because such situation will be covered by proposed Rule 
21.7(a)(3), as described above.
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    \13\ Valid Price is defined in BATS Rule 21.7(a)(2).
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2. Statutory Basis
    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.\14\ Specifically, the 
proposed change is consistent with Section 6(b)(5) of the Act,\15\ 
because 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. The Exchange believes that 
the Opening Process for options listed on the Exchange will help to 
ensure that BATS Options opens trading in options contracts in a fair 
and orderly manner. Specifically, the Exchange believes that handling 
orders in time priority will both create a more orderly opening and 
makes more sense than price-time priority for the Opening Process 
because the price of the order is not particularly important to the 
Opening Process, so long as the order is priced at or more aggressively 
than the Opening Price and, as such, there is no reason to reward a 
more aggressive order with priority in the Opening Process.
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    \14\ 15 U.S.C. 78f(b).
    \15\ 15 U.S.C. 78f(b)(5).
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    The Exchange also believes that entering orders in time sequence 
based on the time that they were received instead of cancelling certain 
orders will create a more orderly opening because Users will enter 
orders and quotes prior to the opening of trading that they know will 
either participate in the Opening Process or be handled as if they were 
entered immediately following the Opening Process and, more 
importantly, will not be cancelled, unless otherwise instructed by the 
User.
    Modifying the Opening Process will also provide Market Makers and 
other Users with greater control and flexibility with respect to 
entering orders and quotes, allowing them to enter orders and quotes in 
advance of the Opening Process that they know will not be cancelled 
because of market conditions out of the control of the User that 
entered the order. This simplifies the

[[Page 58847]]

process for Market Makers and other Users by providing them certainty 
as to when orders and quotes can be submitted without having to 
resubmit orders in options series that have been cancelled, which 
removes impediments to a free and open market and benefits all Users of 
BATS Options.
    As described above, the Exchange believes that the other proposed 
changes to its rulebook to clarify and add additional detail provides 
further clarification to Members, Users, and the investing public 
regarding the functionality of the Opening Process.

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

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition not necessary or appropriate in 
furtherance of the purposes of the act. To the contrary, the Exchange's 
current Opening Process in which certain orders and quotes may be 
cancelled based on market conditions beyond the entering User's control 
limits competition in that other exchanges are able to accept orders 
and quotes before trading in options opens that will not be cancelled. 
Thus, approval of the proposed rule change will promote competition 
because it will allow the Exchange to offer its Users the ability to 
enter orders and quotes prior to the opening of trading that will not 
be cancelled and thus compete with other exchanges for order flow that 
a User may not have directed to the Exchange if they were not able to 
enter orders and quotes prior to the open that were not eligible to be 
cancelled.

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

    The Exchange has not solicited, and does not intend to solicit, 
comments on this proposed rule change. The Exchange has not received 
any written comments from members or other interested parties.

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

    Within 45 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 Exchange consents, the Commission will: (a) By order approve 
or disapprove such proposed rule change, or (b) 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 email to rule-comments@sec.gov. Please include 
File Number SR-BATS-2014-040 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 Number SR-BATS-2014-040. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for Web site viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE., 
Washington, DC 20549, on official business days between the hours of 
10:00 a.m. and 3:00 p.m. Copies of such filing also will be available 
for inspection and copying at the principal office of the Exchange. All 
comments received will be posted without change; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File Number SR-BATS-2014-040, and should be 
submitted on or before October 21, 2014.
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    \16\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\16\
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-23224 Filed 9-29-14; 8:45 am]
BILLING CODE 8011-01-P