Document ID: SEC-2012-0226-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: BATS Exchange, Inc.
Posted Date: 2012-02-08T05:00Z

[Federal Register Volume 77, Number 26 (Wednesday, February 8, 2012)]
[Notices]
[Pages 6608-6610]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-2801]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-66307; File No. SR-BATS-2011-051]

 Self-Regulatory Organizations; BATS Exchange, Inc.; Order 
Granting Approval of Proposed Rule Change To Implement a Competitive 
Liquidity Provider Program

February 2, 2012.

I. Introduction

    On December 16, 2011, BATS Exchange, Inc. (``BATS'' or the 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4

[[Page 6609]]

thereunder,\2\ a proposed rule change to implement a Competitive 
Liquidity Provider Program. The proposed rule change was published for 
comment in the Federal Register on December 29, 2011.\3\ The Commission 
received no comment letters on the proposal. This order approves the 
proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Securities Exchange Act Release No. 66034 (December 22, 
2011), 76 FR 82011 (``Notice'').
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II. Description of the Proposal

    BATS proposes to create a new category of market participants, 
known as Competitive Liquidity Providers (``CLPs''), to enhance 
liquidity on the Exchange in Exchange-listed securities through 
participating in a Competitive Liquidity Provider Program (``CLP 
Program'').
    The securities eligible to be included in the CLP Program would 
include any security that is listed on the Exchange pursuant to 
Exchange Rules 14.8 (relating to Tier I securities), 14.9 (relating to 
Tier II securities) or 14.11 (relating to exchange traded funds and 
other exchange traded products (collectively, ``ETPs'')), unless and 
until such security has had a consolidated average daily volume 
(``CADV'') \4\ of equal to or greater than 2 million shares for two 
consecutive calendar months during the first two years the security is 
subject to the CLP Program, or until the security has been subject to 
the CLP Program for two years. In addition, the Exchange proposes to 
permit ETPs that are initially listed on the Exchange to remain in the 
CLP Program for six months regardless of CADV.
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    \4\ CADV will be measured by statistics provided through the 
consolidated tape plans.
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    To qualify as a CLP, a member must be a registered market maker in 
good standing with the Exchange.\5\ The Exchange would also require 
each member seeking to qualify as a CLP to have and maintain: (1) 
Adequate technology to support electronic trading through the systems 
and facilities of the Exchange; (2) one or more unique identifiers that 
identify to the Exchange CLP trading activity in assigned CLP 
securities; (3) adequate trading infrastructure to support CLP trading 
activity, which includes support staff to maintain operational 
efficiencies in the CLP program and adequate administrative staff to 
manage the member's participation in the CLP program; (4) quoting and 
volume performance that demonstrates an ability to meet the CLP quoting 
requirement in each assigned security on a daily and monthly basis; (5) 
a disciplinary history that is consistent with just and equitable 
business practices; and (6) the business unit of the member acting as a 
CLP must have in place adequate information barriers between the CLP 
unit and the member's customer, research and investment banking 
business.
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    \5\ See Exchange Rules 11.5-11.8.
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    To become a CLP, a member must submit a CLP application form with 
all supporting documentation to the Exchange. Exchange personnel in the 
Exchange's membership department would process such applications. 
Exchange personnel would determine whether an applicant is qualified to 
become a CLP based on the qualifications described above. After an 
applicant submits a CLP application to the Exchange, with supporting 
documentation, the Exchange shall notify the applicant member of its 
decision. After Exchange approval, the applicant must establish 
connectivity with relevant Exchange systems before such applicant would 
be permitted to trade as a CLP on the Exchange. In the event an 
applicant is disapproved by the Exchange, such applicant may seek 
review under Chapter X of the Exchange's rules governing adverse action 
and/or reapply for CLP status at least three calendar months following 
the month in which the applicant received the disapproval notice from 
the Exchange.\6\ A CLP may withdraw from the CLP Program by giving 
notice to the Exchange. Such withdrawal shall become effective within 
30 days of the CLP's notice, or when the Exchange reassigns that CLP's 
securities to another CLP, whichever comes sooner.
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    \6\ Chapter X of the Exchange's rules provides any persons who 
are or are about to be aggrieved by an adverse action taken by the 
Exchange with a process to apply for an opportunity to be heard and 
to have the complained of action reviewed.
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    The Exchange would measure the performance of a CLP in assigned 
securities by calculating Size Event Tests (``SETs'') during Regular 
Trading Hours \7\ on every day on which the Exchange is open for 
business. The Exchange will measure each CLP's quoted size at the NBB 
and NBO \8\ at least once per second during such trading hours to 
determine SETs. The CLP with the greatest aggregate size at the NBB and 
NBO at each SET would be considered to have a ``winning SET.''
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    \7\ The term ``Regular Trading Hours'' is defined in Exchange 
Rule 1.5(w) as the time between 9:30 a.m. and 4:00 p.m. Eastern 
Time.
    \8\ Exchange Rule 1.5(o) defines ``NBB'' as the national best 
bid, and ``NBO'' as the national best offer.
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    The Exchange proposes to adopt both daily and monthly quoting 
requirements. First, a CLP must have at least 10% of the winning SETs 
on any trading day in order meet its daily quoting requirement and to 
be eligible for any daily quotation rebate provided by the Exchange 
(each such CLP, an ``Eligible CLP''). Eligible CLPs would be ranked 
according to the number of winning SETs each trading day, and only the 
Eligible CLP ranked number one, and in some cases the Eligible CLP 
ranked number two, would receive the daily rebate. In addition to 
providing a daily rebate to CLPs that have the highest demonstrated 
size at the NBB and NBO during the trading day, the Exchange also plans 
to propose incentives by providing special pricing for executions that 
occur in any auction operated by the Exchange pursuant to Exchange Rule 
11.23. The financial incentives to be proposed by the Exchange would 
specify the amount and allocation of rebates provided to CLPs as well 
as the parameters for receiving special pricing in Exchange auctions.
    Second, a CLP must be quoting at the NBB or the NBO 10% of the time 
the Exchange calculates SETs to meet its monthly quoting requirement. 
For purposes of calculating whether a CLP is in compliance with its CLP 
quoting requirements, the CLP must post displayed liquidity in round 
lots in its assigned securities at the NBB or the NBO. A CLP may post 
non-displayed liquidity; however, such liquidity will not be counted as 
credit towards the CLP quoting requirements. The CLP would not be 
subject to any minimum or maximum quoting size requirement in assigned 
securities apart from the requirement that an order be for at least one 
round lot. The CLP quoting requirements would be measured by utilizing 
the unique identifiers for CLP trading activity. A CLP that fails to 
meet its monthly quoting requirements in any of its assigned securities 
for three consecutive months may be subject to disqualification from 
the CLP Program.
    CLPs may only enter orders electronically directly into Exchange 
systems and facilities. All CLP orders must only be for the proprietary 
account of the member.
    The Exchange, in its discretion, would assign to the CLP one or 
more securities consisting of Exchange-listed securities for CLP 
trading purposes. The Exchange would determine the number of Exchange-
listed securities within the group of securities assigned to each CLP. 
The Exchange, in its discretion, would assign one or more CLPs to each 
security subject to the CLP Program, depending upon the trading 
activity of the security. The Exchange would restrict the CLPs assigned 
to any newly issued security that is listed on the Exchange pursuant to 
Exchange Rule

[[Page 6610]]

14.11, which relates to ETPs, to those members that have actively 
participated in the development or funding of such product. This 
restriction would remain in effect for six months following the initial 
offering of the ETP on the Exchange after which time there would be no 
limitation on the members that can be assigned as CLPs for such a 
product.

III. Discussion and Commission Findings

    After careful review, the Commission finds 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.\9\ In particular, the proposed change is consistent with 
Section 6(b)(5) of the Act,\10\ because it would promote just and 
equitable principles of trade, and, in general, protect investors and 
the public interest.\11\
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    \9\ 15 U.S.C. 78f(b).
    \10\ 15 U.S.C. 78f(b)(5).
    \11\ In approving the proposed rule change, the Commission notes 
that it has considered the proposed rules' impact on efficiency, 
competition, and capital formation. 15 U.S.C. 78c(f).
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    The Commission believes that the CLP Program may benefit investors 
because it is reasonably designed to provide greater liquidity for the 
securities that participate in the CLP Program. The securities eligible 
for the CLP Program are generally newly listed securities that could 
particularly benefit from potentially greater liquidity as a result of 
enhanced quoting obligations.
    As proposed by the Exchange, each CLP must comply with a monthly 
quoting requirement in order to remain a CLP, and must comply with a 
daily quoting requirement in order to be eligible for the financial 
incentives of the CLP Program. With respect to the monthly quoting 
requirement, a CLP must be quoting at the NBB or NBO 10% of the time 
that the Exchange is calculating SETs. With respect to the daily 
quoting requirement, the CLP with the greatest aggregate size at the 
NBB and NBO at each SET would be considered to have the winning SET, 
with the CLP with the greatest number of winning SETs (and, in some 
instances, the CLP with second-greatest number of winning SETs) each 
day receiving the daily rebate. Thus, this proposal would incentivize 
both quoting frequency at the NBBO and quoted size at the NBBO, 
potentially improving the market quality of the securities that 
participate in the CLP Program.
    The Commission also finds that this program is reasonably designed 
to encourage listings on the Exchange. This may promote competition 
among listing venues, and an issuer seeking to list its securities 
could benefit from the potential impact such competition has on listing 
fees or quoting obligations across venues.
    The Commission also finds that the proposal is not unfairly 
discriminatory. Registration as an Exchange market maker is available 
to all Exchange members that satisfy the requirements of Exchange Rule 
11.7, and all Exchange market makers are eligible to apply to become 
CLPs. The Commission finds further that the proposal to establish 
procedures for the registration, withdrawal, and disqualification of 
CLPs, and the CLP quoting requirements, are consistent with the 
requirements of Section 6(b)(5) of the Act. The Exchange's proposed 
rules provide an objective process by which a member could become a CLP 
and for appropriate oversight by the Exchange to monitor for continued 
compliance with the terms of these provisions. The Commission also 
notes that these provisions, including the CLP quoting requirements, 
are similar to those of at least one other exchange.\12\ As a result, 
the Commission believes that these aspects of the proposal are 
consistent with the requirements of the Act.
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    \12\ See NYSE Rule 107B (governing Supplemental Liquidity 
Providers).
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IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\13\ that the proposed rule change (SR-BATS-2011-051) be, and it 
hereby is, approved.
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    \13\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\14\
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    \14\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-2801 Filed 2-7-12; 8:45 am]
BILLING CODE 8011-01-P