[Federal Register Volume 75, Number 234 (Tuesday, December 7, 2010)]
[Notices]
[Pages 76059-76062]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-30577]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-63403; File No. SR-BATS-2010-034]
Self-Regulatory Organizations; BATS Exchange, Inc.; Notice of
Filing of a Proposed Rule Change To Create a Directed Order Program
December 1, 2010.
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 November 19, 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
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 is filing with the Commission a proposal for the BATS
Exchange Options Market (``BATS Options'') to create new BATS Rule
21.1(d)(13), entitled ``Market Maker Price Improving Orders,'' create
new BATS Rule 21.1(d)(14), entitled ``Directed Orders,'' and amend
existing BATS Rule 21.1(d)(2), entitled ``Price Improving Orders.''
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
[[Page 76060]]
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 Exchange is proposing certain modifications and additions to
its rules related to the trading of options. First, the Exchange is
proposing the establishment of new Rule 21.1(d)(13), entitled Market
Maker Price Improving Orders. Second, the Exchange is proposing the
establishment of new Rule 21.1(d)(14), entitled Directed Orders. Third,
the Exchange is proposing to modify Rule 21.1(d)(6), entitled Price
Improving Orders.
The Exchange is proposing the rule changes described below to
establish a directed order program through which Options Members can
direct an order to a particular BATS Options Market Maker for potential
execution at a price improved over the existing National Best Bid
(``NBB'') or National Best Offer (``NBO''). As part of this program,
BATS is proposing to define two new order types. The first would be new
Rule 21.1(d)(13), entitled Market Maker Price Improving Orders, which
are orders from a BATS Options Market Maker to buy or sell an option
that has a displayed price and size and a non-displayed price at which
the BATS Options Market Maker is willing to trade with a Directed
Order. As proposed, a Market Maker Price Improving Order would be
ranked on the BATS Options Book at its displayed price. The non-
displayed price of the Market Maker Price Improving Order would not be
entered into the BATS Options Book, but would be, along with its
displayed size, converted to a buy or sell order at its non-displayed
price in response to a Directed Order directed to the BATS Options
Market Maker.
The second new order type proposed would be new Rule 21.1(d)(14),
entitled Directed Orders, which are orders from a BATS Options Member
that are directed for execution to a particular BATS Options Market
Maker. For a BATS Options Market Maker to participate in an execution
against a Directed Order, (1) the Directed Order must be from a BATS
Options Member that is on a list of eligible Options Members provided
to the Exchange by the BATS Options Market Maker, in a manner
prescribed by the Exchange, (2) the BATS Options Market Maker must be
publicly quoting on BATS at the NBB (for sell Directed Orders) or NBO
(for buy Directed Orders) with a Market Maker Price Improving Order
that contains a non-displayed amount of price improvement over the NBB
or NBO at the time the Directed Order arrives to the Exchange, and (3)
the Directed Order must be marketable against the non-displayed price
of the Market Maker Price Improving Order.
If the above conditions are met, and if there are no other non-
displayed orders at prices equal to or better than the non-displayed
price of the Market Maker Price Improving Order, the Directed Order
will trade with the Market Maker Price Improving Order up to the full
size of the Market Maker Price Improving Order. Any remaining contracts
from the Directed Order will be handled, consistent with the
instructions on the Directed Order, in accordance with the order
display and book processing requirements of Rule 21.8 and, if
applicable, processed in accordance with the order routing requirements
of Rule 21.9.
If there are non-displayed orders on the BATS Options Book at
prices equal to or better than the non-displayed price of the Market
Maker Price Improving Order, those other non-displayed orders will in
all cases have priority over the non-displayed price of the Market
Maker Price Improving Order. In such circumstances, the Market Maker
Price Improving Order may still execute at its non-displayed price
against the Directed Order consistent with the price/time priority
provisions of Rule 21.8 to the extent of any remaining contracts of the
Directed Order. Any contracts remaining of the Directed Order will
continue to be processed in a manner consistent with the order display
and book processing provisions of Rule 21.8, and if applicable, the
order routing provisions of Rule 21.9.
As proposed, an Options Market Maker Price Improving Order would be
required to have a non-displayed price better than the displayed limit
price that could be entered in an increment as small as (1) one cent or
may be designated at the midpoint of the National Best Bid and Offer
(``NBBO''). In addition, BATS is proposing to amend existing Rule
21.1(6), entitled Price Improving Orders, to provide all BATS Options
Members with the ability to enter Price Improving Orders in an
increment designated at the midpoint of the NBBO. Price Improving
Orders will in all cases include a displayed price and a better, non-
displayed price. Price Improving Orders with a non-displayed price
designated at the midpoint of the NBBO will receive a new timestamp
each time the non-displayed midpoint price automatically adjusts in
response to changes in the NBBO and will be displayed at the NBBO at
the time of entry. The displayed price will not subsequently adjust to
changes in the NBBO. Price Improving Orders with a non-midpoint price
will be displayed at the minimum price variation in that security and
will be rounded up for sell orders and rounded down for buy orders.
Market Maker Price Improving Orders with a non-displayed price
designated at the midpoint of the NBBO will not receive a new timestamp
in response to changes in the NBBO. Unlike Price Improving Orders, the
non-displayed price of a Market Maker Price Improving Order is not
entered into the BATS Options Book, and is only eligible to trade with
a Directed Order to the extent that certain conditions precedent are
satisfied, including (1) that the displayed price of the Market Maker
Price Improving Order is equal to the NBB (for sell directed orders) or
the NBO (for buy directed orders) at the time the Directed Order
arrives to the Exchange, and (2) that there are no other orders on the
BATS Options Book at prices equal to or better than the non-displayed
prices of the Market Maker Price Improving Order.\3\
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\3\ As described in proposed Rule 11.9(c)(13)(B), all other
interest on the BATS Book at prices equal to or better than the non-
displayed price of the Market Maker Price Improving Order has
priority over the Market Maker Price Improving Order and, hence,
will execute first against the Directed Order.
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The Exchange is also proposing to delete certain language from its
existing Price Improving Order rule text. In particular, as currently
written, Rule 21.1(d)(6) states that ``Price Improving Orders that are
available for display * * *.'' \4\ The Exchange is proposing to delete
the clause ``that are available to display,'' which although intended
to simply distinguish an order executed upon arrival to the Exchange
from an order posting to the BATS Options Book, has the potential to
cause confusion to the extent it may suggest that Price Improving
Orders can be posted on the BATS Options Book without a displayed
price. That is not the case today, would not be the case under the
proposed changes to the rule, and BATS is proposing to delete this
clause to eliminate any confusion on this point.
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\4\ Emphasis added.
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The elements of the Exchange's proposal to create a directed order
program are specifically designed to enhance opportunities available in
the market for Options Members to obtain price improvement for customer
orders
[[Page 76061]]
in the context of BATS' price/time priority, continuous auction market.
By requiring BATS Options Market Makers to be quoting at the NBB or NBO
to participate in an execution against a Directed Order directed to it,
BATS' proposal incentivizes market makers to competitively quote and
thereby furthers the public price discovery process. By further
requiring BATS Options Market Makers to include a non-displayed price
better than the displayed limit price at an increment as small as (1)
one cent or the midpoint of the NBBO, the proposal increases the
opportunities for customer orders to receive price improvement over the
NBBO. Moreover, by permitting all Options Members to enter orders in
the same increments as Market Maker Price Improving Orders, including
as proposed at the midpoint of the NBBO, and according those orders in
all cases priority at their non-displayed prices over Market Maker
Price Improving Orders, the proposal avoids creating participation
guarantees in place at other markets and instead promotes market-wide
competition for executions at prices between the NBBO.
Pursuant to the proposed directed order program, a BATS Options
Member who notifies a BATS Options Market Maker of its intention to
submit a Directed Order to BATS Options so that the BATS Options Market
Maker could change its quotation to match the NBB or NBO immediately
prior to submission of the Directed Order would be engaging in conduct
inconsistent with just and equitable principles of trade in violation
of Rule 3.1 and Rule 18.4(f). In addition, a BATS Options Market Maker
who becomes aware of a customer order from an affiliated broker-dealer
or desk within the same broker-dealer and acts on such information to
change its quotations to match the NBB or NBO immediately prior to
submission of a Directed Order would be in violation of the Exchange's
Rule 22.10, ``Limitations on Dealings''. BATS will proactively conduct
surveillance for such conduct and enforce against such violations.
2. Statutory Basis
Approval of the rule changes 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.\5\ In particular, the proposed change is consistent with
Section 6(b)(5) of the Act,\6\ 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.
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\5\ 15 U.S.C. 78f(b).
\6\ 15 U.S.C. 78f(b)(5).
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The Exchange believes that the proposed rule meets these
requirements in that it promotes competition for customer orders and
furthers the public price discovery process by both incentivizing BATS
Options Market Makers to publicly display aggressive quotes at the
NBBO, as well as incentivizing BATS Options Market Makers and all other
BATS Options Members to post non-displayed prices better than the NBBO.
BATS notes that the Commission has previously found consistent with the
Act non-displayed order types designed to provide price improvement at
prices smaller than the minimum price variation in listed options.\7\
While those order types have to date been limited to permitting
increments as small as (1) one cent, BATS notes that the Commission has
previously found midpoint order types consistent with the Act in the
equity markets,\8\ and as the options market structure has converged
with the equity market structure in recent years through expansion of
the penny pilot as well as the implementation of Regulation NMS-like
protections, BATS believes customers in the options markets would
similarly benefit from the potential price improvement afforded by
midpoint executions.
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\7\ See, e.g., BATS Options Rule 21.1(d)(6) ``Price Improving
Orders''; Nasdaq Options Market Rule Chapter VI, Section 1(e)(6)
``Price Improving Orders''.
\8\ See, e.g., BATS Rule 11.9(c)(9) ``Mid-Point Peg Order''.
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Moreover, the Commission has previously approved rules that provide
specialist or market maker guarantees up to a certain percentage so
long as the specialist or market maker is quoting at the NBBO and such
guarantees do not rise to a level that could have a material adverse
impact on quote competition with a particular exchange.\9\ While BATS'
directed order program requires BATS Options Market Makers to be
quoting at the NBB or NBO to be eligible to trade with an incoming
Directed Order directed to it, in contrast to prior rules approved by
the Commission, BATS' proposed directed order program provides no
participation guarantees that could negatively impact quote
competition. By not providing such guarantees, BATS's proposed directed
order program provides incentives to BATS Options Market Makers as well
as all other BATS Options Members to aggressively quote, both at the
NBBO and at non-displayed prices better than the NBBO.
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\9\ See, e.g., Securities Exchange Act Release No. 51759 (May
27, 2005), 70 FR 32860 (June 6, 2005) (SR-Phlx-2004-91) (order
approving the establishment of a directed order process with certain
specialist participation guarantees).
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In addition, the Commission has previously approved rules that
permit a specialist or market maker to determine the firms from which
it will accept directed or preferenced orders. The Commission has
explicitly approved a process similar to that proposed by BATS in the
equity markets in which only those members who have been permissioned
by a market maker are eligible to submit directed orders to the market
maker.\10\ And, the Commission has implicitly approved such processes
in the options markets by allowing certain price improvement auctions
to exist pursuant to pilot programs, which auctions provide the ability
of an options member to submit a customer order along with a contra-
side principal order from the options member into a brief price
improvement auction in which all members have the ability to compete
for the execution.\11\ BATS' proposed rule changes are similar in
nature to these price improvement auctions, except that under BATS'
proposal, competition for the execution with a Directed Order occurs in
the context of BATS' continuous, price/time priority auction, and as
previously mentioned, BATS Options Market Makers would have no
participation guarantees.
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\10\ See Securities Exchange Act Release No. 52827 (November 23,
2005), 70 FR 72193 (December 1, 2005) (SR-PCX-2005-56) (order
approving certain modifications to the PCX Equities, Inc.'s Directed
Order Process on the Archipelago Exchange).
\11\ See, e.g., BOX Rule Section 18 ``The Price Improvement
Period'' and ISE Rule 723 ``Price Improvement Mechanism for Crossing
Transactions'' (both of which providing a mechanism for options
members that want to internalize customer orders the ability to do
so on the exchanges subject to a requirement that such orders first
be exposed to all other options members through a brief price
improvement auction).
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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.
[[Page 76062]]
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 up to 90 days (i) as the
Commission may designate if it finds such longer period to be
appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization 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 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 e-mail to [email protected]. Please include
File No. SR-BATS-2010-034 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 No. SR-BATS-2010-034. 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 changes 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 website
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-
2010-034 and should be submitted on or before December 28, 2010.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\12\
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\12\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-30577 Filed 12-6-10; 8:45 am]
BILLING CODE 8011-01-P