[Federal Register Volume 76, Number 127 (Friday, July 1, 2011)]
[Notices]
[Pages 38712-38713]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-16551]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-64754; File No. SR-BATS-2011-015]


Self-Regulatory Organizations; BATS Exchange, Inc.; Order 
Approving a Proposed Rule Change To Amend BATS Rule 11.9, Entitled 
``Orders and Modifiers'' and BATS Rule 11.13, Entitled ``Order 
Execution''

June 27, 2011.

I. Introduction

    On May 9, 2011, BATS Exchange, Inc. (the``Exchange'' or ``BATS'') 
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 19-4 thereunder,\2\ a proposed rule change to 
amend BATS Rule 11.9, entitled ``Orders and Modifiers'' and BATS Rule 
11.13, entitled ``Order Execution.'' The proposed rule change was 
published for comment in the Federal Register on May 18, 2011.\3\ The 
Commission received no comment letters on the proposed rule change. 
This order approves the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19-4.
    \3\ See Securities Exchange Act Release No. 64475 (May 12, 
2011); 76 FR 28830 (``Notice'').
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II. Description

    First, the Exchange proposes to change its order handling 
procedures to allow both Non-Displayed Orders \4\ and orders subject to 
price sliding that are not executable at their most aggressive price to 
be executed in the manner and under the circumstances described 
below.\5\ Second, the Exchange proposes to modify the Exchange's rules 
to make clear that an order subject to ``NMS price sliding'' \6\ can be 
ranked at the same price as an order displayed on the other side of the 
BATS Book,\7\ although temporarily not executable at that price and 
displayed at one minimum price variation less aggressive than its 
price.
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    \4\ BATS Rule 11.9(c)(11) defines a Non-Displayed Order as ``a 
market or limit order that is not displayed on the Exchange.''
    \5\ The reference to the most ``aggressive'' price means for 
bids the highest price the User is willing to pay, and for offers 
the lowest price at which the User is willing to sell.
    \6\ For bids, this means that a price slid order is displayed at 
one minimum price variation less than the current national best 
offer (``NBO''), and for offers, this means that a price slid order 
is displayed at one minimum price variation more than the current 
national best bid (``NBB''). See BATS Rule 11.9(g)(1).
    \7\ As defined in BATS Rule 1.5(e), the BATS Book is ``the 
System's electronic file of orders.''
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    The Exchange's first proposed change noted above, amending BATS 
Rules 11.9 and 11.13, is intended to address two specific scenarios 
that currently exist on the Exchange: (1) Non-Displayed Orders posted 
opposite same-priced displayed orders and (2) orders subject to price 
sliding under BATS Rule 11.9(g) that are ranked at a price equal to an 
opposite-side displayed order (collectively ``Resting Orders'').\8\ 
These two scenarios can occur when an order on either side of the 
market is a BATS Post Only Order.\9\ Consistent with the Exchange's 
current rule regarding priority of orders, BATS Rule 11.12, these 
Resting Orders cannot be executed by the Exchange pursuant to BATS Rule 
11.13 when such orders would be executed at prices equal to displayed 
orders on the opposite side of the market (the ``locking price'') 
because if the incoming orders were allowed to execute against such 
Resting Orders at

[[Page 38713]]

the locking price, such incoming orders would receive a priority 
advantage over the prior, displayed order at the locking price.\10\
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    \8\ See Notice, supra note 3.
    \9\ See id. As defined in BATS Rule 11.9(c)(6), a BATS Post Only 
Order is ``[a]n order that is to be ranked and executed on the 
Exchange pursuant to Rule 11.12 and Rule 11.13(a)(1) or cancelled, 
as appropriate, without routing away to another trading center 
except that the order will not remove liquidity from the BATS 
Book.'' Accordingly, a BATS Post Only Order does not remove 
liquidity, but posts to the BATS Book to the extent permissible.
    \10\ See id.
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    The Exchange proposes to provide for the execution of these Resting 
Orders under certain circumstances. For bids or offers equal to or 
greater than $1.00 per share, in the event that an order submitted to 
the Exchange on the side opposite such Resting Order is a market order 
or a limit order priced more aggressively than the locking price, the 
Exchange proposes to amend BATS Rule 11.13 to provide for the execution 
of the Resting Order at, in the case of a Resting Order bid, one-half 
minimum price variation less than the locking price, and, in the case 
of a Resting Order offer, at one-half minimum price variation more than 
the locking price.\11\ The Exchange also proposes adding Interpretation 
and Policy .01 to BATS Rule 11.13 to state that the Exchange will 
consider it inconsistent with just and equitable principles of trade to 
engage in a pattern or practice of using Non-Displayed Orders or orders 
subject to price sliding solely for the purpose of executing such 
orders at one-half minimum price variation from the locking price.\12\ 
Evidence of such behavior may include, but is not limited to, a User's 
pattern of entering orders at a price that would lock or be ranked at 
the price of a displayed quotation and cancelling orders when they no 
longer lock the displayed quotation.\13\ The Exchange has also stated 
that it will conduct surveillance to ensure that users are not 
intentionally seeking to create an internally locked book for the 
purpose of obtaining an execution at a one-half minimum price 
variation.\14\
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    \11\ See proposed changes to BATS Rule 11.13(a)(1). For bids or 
offers under $1.00 per share, Resting Orders priced at the locking 
price will not be executed by the Exchange. Id.
    \12\ See proposed Interpretation and Policy .01 to BATS Rule 
11.13.
    \13\ See id.
    \14\ See Notice, supra note 3.
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    The Exchange notes that its proposal to modify its handling of 
Resting Orders is intended to address specific conditions that are a 
current, natural consequence of the Exchange's order handling 
procedures because such orders are priced at the very inside of the 
market but are temporarily un-executable at their full limit price due 
to the Exchange's priority rule and order handling procedures.\15\ The 
Exchange believes the proposed change will provide incoming orders with 
the benefit of price improvement against such aggressively priced 
Resting Orders.\16\ The Exchange believes this will optimize available 
liquidity for incoming orders and provide price improvement for market 
participants at times when such participants are not receiving 
executions from the Exchange or are receiving less price improvement 
than is currently available.\17\
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    \15\ See id. The Exchange further notes that by permitting a 
Member's Non-Displayed Order to rest at a locking price on the other 
side of a displayed order, the Exchange is incenting Members to post 
aggressively priced liquidity, rather than discouraging such 
liquidity by leaving it unexecuted. Id.
    \16\ See id. In addition, if the BATS Book changes so that such 
orders are no longer resting or ranked opposite a displayed order, 
then such orders will again be executable at their full limit price, 
and in the case of price slid orders, will be displayed at that 
price. Id.
    \17\ See id.
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    The Exchange's second proposed change is to clarify, by amending 
BATS Rule 11.9, that an order subject to NMS price sliding can be 
ranked at the same price as an order displayed on the other side of the 
BATS Book.

III. Discussion and Commission's Findings

    After careful review, the Commission finds that the proposed rule 
change is consistent with the requirements of Section 6 of the Act \18\ 
and the rules and regulations thereunder applicable to a national 
securities exchange.\19\ In particular, the Commission finds that the 
proposal is consistent with Section 6(b)(5) of the Act,\20\ which 
requires, among other things, that the Exchange's rules be designed to 
prevent fraudulent and manipulative acts and practices, 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. 
Additionally, the Commission finds that the proposal is consistent with 
Rules 610(d) \21\ and 612 \22\ of Regulation NMS.
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    \18\ 15 U.S.C. 78f.
    \19\ In approving this proposal, the Commission has considered 
the proposed rule's impact on efficiency, competition, and capital 
formation. See 15 U.S.C. 78c(f).
    \20\ 15 U.S.C. 78f(b)(5).
    \21\ SEC Rule 610(d) of Regulation NMS requires policies and 
procedures to avoid the display of quotations that lock or cross 
protected quotations. 17 CFR 242.610(d).
    \22\ SEC Rule 612 of Regulation NMS states that no national 
securities exchange, national securities association, alternative 
trading system, vendor, or broker or dealer shall display, rank, or 
accept from any person a bid or offer, an order, or an indication of 
interest in any NMS stock priced in an increment smaller than $0.01 
if that bid or offer, order, or indication of interest is priced 
equal to or greater than $1.00 per share. 17 CFR 242.612.
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    The Commission believes that the proposed order handling rule 
change providing for the execution, under certain circumstances, of 
certain Non-Displayed Orders and orders subject to price sliding that 
are not executable at their most aggressive prices should serve to 
enhance the quality of execution on the Exchange by facilitating 
executions that would not occur pursuant to the Exchange's current 
order handling process. In addition to facilitating executions that 
currently would not take place, the proposed rule change will offer 
price improvement to the orders executed under the new order handling 
process. The Commission believes that the new order handling process 
should benefit market participants by, among other things, providing 
greater opportunities for buy and sell orders to interact with each 
other and potentially reducing certain trading costs for market 
participants. The Commission further believes that any potential abuses 
are mitigated by the Exchange's addition of Interpretation and Policy 
.01 to BATS Rule 11.13 and its commitment to monitor relevant trading 
on its market. Additionally, the Commission believes that this proposed 
order handling process is consistent with Rule 612 of Regulation NMS 
because any executions in an increment smaller than $0.01 are the 
result of bids, offers or orders that are priced in increments at least 
equal to $0.01.\23\ With regard to the proposed rule change clarifying 
that an order subject to NMS price sliding pursuant to BATS Rule 11.9 
can be ranked at the same price as an order displayed on the other side 
of the BATS Book, the Commission believes that such clarification is 
consistent with Rule 610(d) of Regulation NMS because the proposed rule 
change would not result in the display of a locking quotation.\24\
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    \23\ See Rule 612 of Regulation NMS. 17 CFR 242.612.
    \24\ See Rule 610(d) of Regulation NMS. 17 CFR 242.610(d).
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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 (SR-BATS-2011-015) be, and 
hereby is, approved.
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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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Elizabeth M. Murphy,
Secretary.
[FR Doc. 2011-16551 Filed 6-30-11; 8:45 am]
BILLING CODE 8011-01-P