[Federal Register Volume 76, Number 40 (Tuesday, March 1, 2011)]
[Notices]
[Pages 11301-11303]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-4479]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-63947; File No. SR-BYX-2011-002]
Self-Regulatory Organizations; BATS Y-Exchange, Inc.; Order
Granting Accelerated Approval of a Proposed Rule Change To Amend BYX
Rules in Connection With the Implementation of Amendments to Regulation
SHO
February 23, 2011.
I. Introduction
On January 14, 2011, BATS Y-Exchange, Inc. (the ``Exchange'' or
``BYX'') filed with the Securities and Exchange Commission
(``Commission''), pursuant to Section 19(b)(1) of the Securities
Exchange Act of 1934 (the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ a
proposed rule change to amend BYX Rules 11.9, 11.13 and 11.19 to make
certain changes consistent with the upcoming implementation of
amendments to Regulation SHO.\3\ The proposed rule change was published
for comment in the Federal Register on January 31, 2011.\4\ The
Commission received no comments on the proposed rule change. This order
approves the proposed rule change on an accelerated basis.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ 17 CFR 242.200(g); 17 CFR 242.201.
\4\ See Securities Exchange Act Release No. 63767 (January 25,
2011), 76 FR 5420 (January 31, 2011).
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II. Description of the Proposal
On February 26, 2010, the Commission adopted amendments to
Regulation SHO under the Act in the
[[Page 11302]]
form of Rule 201,\5\ pursuant to which, among other things, short sale
orders in covered securities \6\ generally cannot be executed or
displayed by a trading center \7\ such as BYX 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'').\8\ In anticipation of the upcoming February 28,
2011 compliance date for Rule 201, the Exchange proposes to amend
certain BYX rules to describe the manner in which the System \9\ will
handle short 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 BYX
rules regarding order execution and routing when a short sale price
test restriction is in effect, and modifying BYX rules related to order
marking requirements. Additionally, the Exchange proposes to modify the
definition of the current ``displayed price sliding process'' offered
by BYX.
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\5\ 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.
\6\ 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).
\7\ 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).
\8\ 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).
\9\ The ``System'' is defined in BYX 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 BYX Rule 11.9(g). As a default,
the Exchange will subject a User's \10\ orders to 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).\11\
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).\12\
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\10\ A ``User'' is defined in BYX Rule 1.5(cc) as any member or
sponsored participant of the Exchange who is authorized to obtain
access to the System.
\11\ Any execution or display will also need to be in compliance
with applicable rules regarding minimum pricing increments. 17 CFR
242.612.
\12\ 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 \13\ in a manner inconsistent
with Rule 610(d) of Regulation NMS.\14\ 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.\15\ Also, consistent with the changes described above,
the Exchange proposes to replace the term ``displayed price sliding
process'' throughout its trading rules with the term ``price sliding
process.'' 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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\13\ As defined in BYX 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.
\14\ 17 CFR 242.610(d).
\15\ The Exchange acknowledges that potential differences can
exist between Protected Bids, as defined above (see supra note 13),
and the NBB, upon which the requirements of Regulation SHO, as
amended, are based.
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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
[[Page 11303]]
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 BYX 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, 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 BYX 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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III. Commission Findings
The Commission finds that the proposed rule change to amend BYX
Rules 11.9, 11.13 and 11.19 to make certain changes consistent with the
upcoming implementation of amendments to Regulation SHO is consistent
with the Act and the rules and regulations thereunder applicable to
national securities exchanges and national securities associations.\21\
In particular, the Commission finds that the proposal is consistent
with the requirements of Section 6(b) of the Act \22\ and with Section
6(b)(5) of the Act,\23\ which, among other things, requires that rules
of national securities exchanges be designed to prevent fraudulent and
manipulative acts and practices, to promote just and equitable
principles of trade, and, in general, to protect investors and the
public interest.
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\21\ In approving the proposed rule change, the Commission has
considered the proposed rule's impact on efficiency, competition,
and capital formation. See 15 U.S.C. 78c(f).
\22\ 15 U.S.C. 78f(b).
\23\ 15 U.S.C. 78f(b)(5).
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The Commission believes that the proposed rule change will provide
clarity on the short sale order handling procedures employed by the
Exchange and certain obligations of its Members when sending short sale
orders to the Exchange consistent with Regulation SHO, as amended. The
Commission also believes that the proposed short sale price sliding
functionality and amendments to the existing displayed price sliding
process should assist Users in executing or displaying their orders
consistent with Regulation SHO and Regulation NMS.
The Commission also finds good cause, pursuant to Section 19(b)(2)
of the Act,\24\ for approving the proposed rule change on an
accelerated basis. The proposed rule change makes changes consistent
with the amendments to Regulation SHO. The Commission believes that
accelerating approval of the proposed rule change is appropriate as it
will allow the proposed amendments to be implemented by the compliance
date for the amendments to Regulation SHO. In addition, the Commission
believes that the proposed rule change should further the goals of
investor protection and fair and orderly markets.
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\24\ 15 U.S.C. 78s(b)(2).
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IV. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\25\ that the proposed rule change (File No. SR-BYX-2011-002) be
and hereby is approved on an accelerated basis.
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\25\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\26\
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\26\ 17 CFR 200.30-3(a)(12).
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Cathy H. Ahn,
Deputy Secretary.
[FR Doc. 2011-4479 Filed 2-28-11; 8:45 am]
BILLING CODE 8011-01-P