[Federal Register Volume 76, Number 20 (Monday, January 31, 2011)]
[Notices]
[Pages 5418-5420]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-1986]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-63766; File No. SR-BATS-2011-002]
Self-Regulatory Organizations; BATS Exchange, Inc.; Notice of
Proposed Rule Change To Amend BATS Rules in Connection With the
Implementation of Amendments to Regulation SHO
January 25, 2011.
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 January 14, 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 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 to amend BATS
Rules 11.9, 11.13 and 11.19 to make certain changes consistent with the
upcoming implementation of amendments to Regulation SHO.\3\
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\3\ 17 CFR 242.200(g); 17 CFR 242.201.
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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
On February 26, 2010, the Commission adopted amendments to
Regulation SHO under the Act in the form of Rule 201,\4\ pursuant to
which, among other things, short sale orders in covered securities \5\
generally cannot be executed or displayed by a trading center \6\ such
as BATS at a price that is at or below the current national best bid
(``NBB'') when a short sale circuit breaker is in effect for the
covered security (the ``short sale price test restriction'').\7\ In
anticipation of the upcoming February 28, 2011 compliance date for Rule
201, the Exchange is proposing to amend certain BATS rules to describe
the manner in which the System \8\ will handle short
[[Page 5419]]
sell orders when a short sale price test restriction is triggered under
Rule 201 of Regulation SHO. These changes include establishing a
definition for ``short sale price sliding,'' which is a new form of
price sliding the Exchange proposes to offer when the amendments to
Regulation SHO become operative, modifying certain BATS rules regarding
order execution and routing when a short sale price test restriction is
in effect, and modifying BATS rules related to order marking
requirements. Additionally, the Exchange proposes to modify the
definition of the current ``displayed price sliding process'' offered
by BATS.
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\4\ See Securities Exchange Act Release No. 61595 (February 26,
2010), 75 FR 11232 (March 10, 2010). In connection with the adoption
of Rule 201, Rule 200(g) of Regulation SHO was also amended to
include a ``short exempt'' marking requirement. The amendments to
Rule 201 and Rule 200(g) have a compliance date of February 28,
2011. See Securities Exchange Act Release No. 63247 (Nov. 4, 2010),
75 FR 68702 (Nov. 9, 2010). See also Division of Trading & Markets,
Responses to Frequently Asked Questions Concerning Rule 201 of
Regulation SHO.
\5\ Rule 201(a)(1) defines the term ``covered security'' to mean
any ``NMS stock'' as defined under Rule 600(b)(47) of Regulation
NMS. Rule 600(b)(47) of Regulation NMS defines an ``NMS stock'' as
``any NMS security other than an option.'' Rule 600(b)(46) of
Regulation NMS defines an ``NMS security'' as ``any security or
class of securities for which transaction reports are collected,
processed, and made available pursuant to an effective transaction
reporting plan, or an effective national market system plan for
reporting transactions in listed options.'' 17 CFR 242.201(a)(1); 17
CFR 242.600(b)(46); and 17 CFR 242.600(b)(47).
\6\ Rule 201(a)(9) states that the term ``trading center'' shall
have the same meaning as in Rule 600(b)(78) of Regulation NMS. Rule
600(b)(78) defines a ``trading center'' as ``a national securities
exchange or national securities association that operates an SRO
trading facility, an alternative trading system, an exchange market
maker, an OTC market maker, or any other broker or dealer that
executes orders internally by trading as principal or crossing
orders as agent.'' 17 CFR 242.600(b)(78).
\7\ 17 CFR 242.201(b)(1). See also Division of Trading &
Markets, Responses to Frequently Asked Questions Concerning Rule 201
of Regulation SHO, Q&A Nos. 2.1 and 2.2 (concerning the duration of
a short sale price test restriction).
\8\ The ``System'' is defined in BATS Rule 1.5(aa) as ``the
electronic communications and trading facility designated by the
Board through which securities orders of Users are consolidated for
ranking, execution and, when applicable, routing away.''
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In order to comply with the short sale price test restriction of
Regulation SHO, as amended, the Exchange proposes to offer short sale
price sliding, which will be defined in BATS Rule 11.9(g). As a
default, the Exchange will subject a User's \9\ orders to the short
sale price sliding unless they affirmatively choose to opt-out of the
process. As proposed, when a User opts out of the price sliding
process, any short sale order that could not be executed or displayed
due to a short sale price test restriction would be rejected or
cancelled by the Exchange upon entry or while resting on the order
book, respectively. When a User's order is subject to the price sliding
process, as proposed, orders subject to short sale price sliding that,
at the time of entry, could not be executed or displayed due to a short
sale price test restriction will be repriced by the System at one
minimum price variation above the current NBB to comply with Rule
201(b)(1)(i).\10\ An order subject to short sale price sliding will not
be readjusted downward even if it could be displayed at a lower price
without violation of Rule 201 of Regulation SHO. In the event the NBB
changes such that the price of a non-displayed order subject to short
sale price sliding would lock or cross the NBB, the order will receive
a new timestamp, and will be repriced by the System at one minimum
price variation above the current NBB, again in compliance with Rule
201(b)(1)(i).\11\
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\9\ A ``User'' is defined in BATS Rule 1.5(cc) as any member or
sponsored participant of the Exchange who is authorized to obtain
access to the System.
\10\ Any execution or display will also need to be in compliance
with applicable rules regarding minimum pricing increments. 17 CFR
242.612.
\11\ See Division of Trading & Markets, Responses to Frequently
Asked Questions Concerning Rule 201 of Regulation SHO, Q&A No. 4.1
(concerning un-displayed orders).
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As proposed, neither orders marked ``short exempt'' nor orders
displayed by the System at a price above the then current NBB at the
time of initial display when a short sale price test restriction is in
effect for a covered security will be subject to short sale price
sliding. Certain displayed short sale orders will not be repriced by
the System after entry because under Rule 201(b)(1)(iii)(A) a trading
center's policies and procedures must be reasonably designed to permit
the execution of short sale orders of covered securities that were
displayed at a price above the current NBB at the time of initial
display. ``Short exempt'' orders will not be repriced by the System,
but instead, the Exchange will execute, display and/or route such
orders without regard to the NBB or any short sale price test
restriction in effect under Regulation SHO, as described below.
The Exchange currently offers a process called ``displayed price
sliding process,'' as defined in current Rule 11.9(c)(4), which re-
prices and/or displays orders at permissible prices when such orders
would lock or cross Protected Quotations \12\ in a manner inconsistent
with Rule 610(d) of Regulation NMS.\13\ The Exchange proposes to rename
the ``displayed price sliding process'' as ``NMS price sliding,'' to be
included in new paragraph (g) of Rule 11.9, and to define the ``price
sliding process'' as inclusive of both NMS price sliding and short sale
price sliding.\14\ Also, consistent with the changes described above,
the Exchange proposes to replace the term ``displayed price sliding
process'' throughout its equity trading rules with the term ``price
sliding process.'' \15\ As is true for displayed price sliding today
and short sale price sliding as proposed, if a User chooses to opt-out
of the price sliding process, the order will not be subject to NMS
price sliding, and thus, the Exchange will cancel back their orders
when display or execution of such orders contradict the provisions of
Regulation NMS.
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\12\ As defined in BATS Rule 1.5(t), the term ``Protected
Quotation'' means a quotation that is a Protected Bid or Protected
Offer. In turn, a ``Protected Bid'' or ``Protected Offer'' shall
mean a bid or offer in a stock that is (i) displayed by an automated
trading center; (ii) disseminated pursuant to an effective national
market system plan; and (iii) an automated quotation that is the
best bid or best offer of a national securities exchange or
association.
\13\ 17 CFR 242.610(d).
\14\ The Exchange acknowledges that potential differences can
exist between Protected Bids, as defined above (see supra note 12),
and the NBB, upon which the requirements of Regulation SHO, as
amended, are based.
\15\ The rules of BATS Exchange Options Market (``BATS
Options'') also contain references to the displayed price sliding
process. The Exchange is not proposing to modify its displayed price
sliding process for BATS Options at this time.
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The Exchange also proposes a substantive change to NMS price
sliding (today known as the displayed price sliding process). Under
current System behavior, the Exchange cancels all non-displayed orders
when the national best bid or offer (``NBBO'') changes such that the
non-displayed order would cross a Protected Quotation, regardless of
whether the order is subject to the displayed price sliding process.
Under the proposed amendment, instead of cancelling such orders, unless
a User has opted out of the price sliding process, the Exchange
proposes to allow a resting non-displayed order to receive a new
timestamp and be repriced at the locking price in the event that the
NBBO changes such that the order would cross a Protected Quotation.
The Exchange also proposes to amend its Rule 11.13 to make clear
that it will execute, display and route an order consistent with Rule
201 of Regulation SHO, and that if it cannot do so, orders will be
cancelled back to the applicable Exchange User. In addition, the
Exchange proposes to make clear that it will not route orders away from
the Exchange that are marked ``short'' if a short sale price test
restriction is in effect. Instead, such orders, if immediate-or-cancel
(``IOC'') or market orders, will be cancelled, and if limit orders,
will be posted to the BATS Book,\16\ subject to the price sliding
process.
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\16\ As defined in BATS Rule 1.5(e).
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Finally, current Rule 11.19 requires Exchange Users to identify
short sale orders as ``short'' when entered into the Exchange's System.
The Exchange proposes to add the term ``short exempt'' to Rule 11.19
because pursuant to amended Rule 200(g) of Regulation SHO, a broker-
dealer can mark a short sale order as either ``short'' or ``short
exempt.'' \17\ The Exchange also proposes to make clear in Rule 11.19
that if an order it received is marked ``short exempt,'' the Exchange
will execute, display and/or route the order without regard to the NBB
or any short sale price test restriction in effect under Regulation
SHO.\18\ The Exchange also proposes to make clear, as it does in Rule
11.9(d)(1) with respect to intermarket sweep orders, that it relies on
a Member's \19\ marking of an order, in this case the ``short exempt''
marking, when handling such order. Accordingly,
[[Page 5420]]
proposed Rule 11.19 states that it is the entering Member's
responsibility, not the Exchange's responsibility, to comply with the
requirements of Regulation SHO relating to marking of orders as ``short
exempt.'' \20\
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\17\ 17 CFR 242.200(g). Rule 200(g)(2) provides that a sale
order shall be marked ``short exempt'' only if the provisions of
paragraphs (c) or (d) of Rule 201 of Regulation SHO are met. See
also Division of Trading and Markets: Responses to Frequently Asked
Questions Concerning Rule 201 of Regulation SHO, Q&A Nos. 5.4 and
5.5.
\18\ 17 CFR 242.201(b)(1)(iii)(B).
\19\ A ``Member'' is defined in BATS Rule 1.5(n) as any
registered broker or dealer that has been admitted to membership in
the Exchange.
\20\ 17 CFR 242.200(g)(2). See also 17 CFR 242.201(c); 17 CFR
242.201(d).
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2. Statutory Basis
The Exchange believes that its proposal 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.\21\ In particular,
the proposed change is consistent with Section 6(b)(5) of the Act,\22\
because it would promote just and equitable principles of trade, and,
in general, protect investors and the public interest. The Exchange
believes that the proposed changes will provide clarity on the short
sale order handling procedures employed by the Exchange and certain
obligations of Members when sending short sale orders to the Exchange
consistent with Regulation SHO, as amended. The Exchange also believes
that the proposed short sale price sliding functionality and amendments
to the existing displayed price sliding process will assist Users in
executing or displaying their orders consistent with Regulation SHO and
Regulation NMS, especially under fast moving conditions where the NBBO
is quickly updating. In addition, as is currently the case, the amended
price sliding process is optional to Users. Specifically, Users can
choose to opt-out of the price sliding process, and if they choose to
do so, the Exchange will cancel back their orders when such orders
contradict the provisions of Regulation SHO or Regulation NMS.
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\21\ 15 U.S.C. 78f(b).
\22\ 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
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 the 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 Number SR-BATS-2011-002 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-2011-002. 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 Web site viewing and
printing in the Commission's Public Reference Room, 100 F Street, NE.,
Washington, DC 20549. 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-2011-002 and should be
submitted on or before February 22, 2011.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\23\
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\23\ 17 CFR 200.30-3(a)(12).
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Elizabeth M. Murphy,
Secretary.
[FR Doc. 2011-1986 Filed 1-28-11; 8:45 am]
BILLING CODE 8011-01-P