[Federal Register Volume 77, Number 38 (Monday, February 27, 2012)]
[Notices]
[Pages 11608-11611]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-4401]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-66427; File No. SR-BATS-2012-011]


 Self-Regulatory Organizations; BATS Exchange, Inc.; Notice of 
Filing and Immediate Effectiveness of Proposed Rule Change Adopting 
Rebates for the Competitive Liquidity Provider Program

February 21, 2012.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on February

[[Page 11609]]

8, 2012, BATS Exchange, Inc. (``BATS'' or ``Exchange'') filed with the 
Securities and Exchange Commission (``Commission'') the proposed rule 
change as described in Items I, II, and III 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 proposes to institute a fee change in connection with 
an incentive program for Exchange-registered market makers (``Market 
Makers'') in securities listed on the Exchange. Changes to the 
Exchange's fees pursuant to this proposal will be effective upon 
filing.
    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 August 30, 2011, the Exchange received approval of rules 
applicable to the qualification, listing and delisting of securities of 
issuers on the Exchange.\3\ More recently, the Exchange received 
approval to operate a program that is designed to incentivize certain 
market makers registered with the Exchange as Competitive Liquidity 
Providers (``CLPs'') to enhance liquidity on the Exchange in securities 
listed on the Exchange (the ``Competitive Liquidity Provider Program'' 
or ``CLP Program'').\4\ The Exchange proposes to adopt financial 
incentives for the Competitive Liquidity Provider Program, as described 
below. These incentives include competition amongst CLPs for daily 
rebates awarded based on quoting activity and the ability to earn free 
executions in Exchange auctions of Exchange-listed securities.
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    \3\ See Securities Exchange Act Release No. 65225 (August 30, 
2011), 76 FR 55148 (September 6, 2011) (SR-BATS-2011-018).
    \4\ See Securities Exchange Act Release No. 66307 (February 2, 
2012), 77 FR 6608 (February 8, 2012) (SR-BATS-2011-051).
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Daily Rebates
    Pursuant to the CLP Program, the Exchange will measure the 
performance of CLPs in assigned securities by calculating Size Event 
Tests (``SETs'') in each second of trading during every day on which 
the Exchange is open for business. At a randomly selected point in time 
during Regular Trading Hours, at least once per second, the Exchange 
will measure each CLP's quoted size at the NBB and NBO. The CLP with 
the greatest aggregate size at the NBB and NBO at each SET (i.e., the 
combined size at the NBB and NBO) will be considered to have a 
``winning SET.'' 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 the daily rebates proposed below. As proposed, any Market 
Maker registered in a security as a CLP that has satisfied the daily 
quoting requirement will be eligible to receive a single daily 
financial rebate for each day's quoting activity as follows:

------------------------------------------------------------------------
                                 Amount of total    Allocation of daily
       Class of security           daily rebate            rebate
------------------------------------------------------------------------
Tier I Securities Listed on     $500 per day.....  80% ($400) to CLP
 the Exchange Pursuant to Rule                      with highest number
 14.8 for Six Months                                of winning SETs; 20%
 Commencing from the Date of                        ($100) to CLP with
 Initial Listing on the                             second highest
 Exchange.                                          number of winning
                                                    SETs.
Tier I Securities Listed on     250 per day......  80% ($200) to CLP
 the Exchange Pursuant to Rule                      with highest number
 14.8 for Remaining Time                            of winning SETs; 20%
 Subject to CLP Program.                            ($50) to CLP with
                                                    second highest
                                                    number of winning
                                                    SETs.
Tier II Securities Listed on    100 per day......  100% to CLP with
 the Exchange Pursuant to Rule                      highest number of
 14.9.                                              winning SETs.
ETPs Listed Pursuant to Rule    250 per day......  80% ($200) to CLP
 14.11.                                             with highest number
                                                    of winning SETs; 20%
                                                    ($50) to CLP with
                                                    second highest
                                                    number of winning
                                                    SETs.
------------------------------------------------------------------------

    As set forth in the chart above, for all Tier I securities and 
exchange traded products (``ETPs'') listed on the Exchange, the 
Exchange proposes to offer quoting incentives to the two CLPs with the 
highest number of winning SETs during Regular Trading Hours on the 
Exchange. For each award, the Exchange will provide 80% of the 
incentive to the first-place CLP and 20% of the incentive to the 
second-place CLP. In the event only one CLP is eligible for the daily 
rebate, 100% of such rebate will be provided to such CLP. In the event 
that multiple CLPs have an equal number of winning SETs, the CLP with 
the highest executed volume in the security will be awarded the 
applicable daily rebate. For Tier II securities listed on the Exchange, 
the Exchange will provide 100% of the quoting incentive to the first-
place CLP.
    The Exchange proposes to offer a daily quoting incentive of $500 
for CLPs ($400 for the first-place CLP and $100 for the second-place 
CLP) CLPs for the first six months that a Tier I corporate security is 
listed on the Exchange pursuant to Rule 14.8. Such listing could either 
be the result of an issuers initial public offering (``IPO'') on the 
Exchange or due to the transfer of an issuer from another exchange to 
the Exchange. For the remainder of the time a Tier I corporate security 
is listed on the Exchange, and for all ETPs, the Exchange proposes to 
offer a $250 daily quoting incentive ($200 for the first-place CLP and 
$50 for the second-place CLP). Finally, the Exchange proposes to offer 
a daily quoting incentive of $100 for Tier II securities listed on the 
Exchange pursuant to Rule 14.9.

[[Page 11610]]

Waiver of Fees for Auction Executions
    In order to further incentivize Members to register as CLPs and 
participate in the CLP Program, the Exchange proposes to waive 
applicable execution fees in Exchange auctions for any CLP that 
receives a daily rebate for a specific Exchange-listed security on at 
least two (2) trading days during a calendar month. The auction fee 
waiver will be provided on a security-by-security basis in the 
subsequent calendar month for CLPs that qualify. Further, because a CLP 
cannot qualify for this incentive until at least the second calendar 
month of a security's listing, in the initial calendar month of a 
security's listing on the Exchange, a CLP that is assigned the security 
will not be charged for any executions in the security that occur in 
any auction of the security that is conducted by the Exchange pursuant 
to Rule 11.23.
2. Statutory Basis
    The Exchange believes 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 of the Act.\5\ 
Specifically, the Exchange believes that the proposed rule change is 
consistent with Sections 6(b)(4) and (b)(5) of the Act,\6\ in that it 
provides for the equitable allocation of reasonable dues, fees and 
other charges among issuers, and it does not unfairly discriminate 
between customers, issuers, brokers or dealers.
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    \5\ 15 U.S.C. 78f.
    \6\ 15 U.S.C. 78f(b)(4) and (b)(5).
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    At the outset, the Exchange believes that the proposal is not 
unfairly discriminatory due to the fact that registration as an 
Exchange Market Maker, and, in turn, as a CLP, is equally available to 
all Members that satisfy the requirements of Rule 11.8. The Exchange 
believes that by allocating pricing benefits to CLPs that make tangible 
commitments to enhancing market quality for securities listed on the 
Exchange, the proposal will encourage the development of new financial 
products, provide a better trading environment for investors in 
Exchange-listed securities, and generally encourage greater competition 
between listing venues.
    As proposed, the CLP Program is designed to enhance the Exchange's 
competitiveness as a listing venue and to strengthen its market quality 
for Exchange-listed securities. The Exchange is launching its listings 
business at a time in which there are two dominant primary listing 
venues, the New York Stock Exchange and Nasdaq. The Exchange believes 
that the proposed change would increase competition by incenting 
Exchange Market Makers to register as CLPs, which will enhance the 
quality of quoting in Exchange-listed securities and will further 
assist the Exchange to develop an alternative to Nasdaq and the New 
York Stock Exchange for an issuer seeking to list its securities. 
Accordingly, the Exchange believes that the proposal will compliment 
the Exchange's program for listing securities on the Exchange, which 
will, in turn, provide issuers with another option for raising capital 
in the public markets, thereby promoting the principles discussed in 
Section 6(b)(5) of the Act.\7\
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    \7\ 15 U.S.C. 78f(b)(5).
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    The Exchange believes that the proposed quoting incentives are fair 
and equitable in that registered CLPs will be competing for rewards 
that are calculated based solely on the Exchange's measurement of SETs, 
and the quoting incentive provided varies only depending on the type of 
security for which such CLP is registered. The Exchange further 
believes that differentiation between various types of Exchange-listed 
securities is fair and equitable and not unreasonably discriminatory 
because the risks and necessary incentives for a market maker to make a 
market in different securities vary, as described in further detail 
below.
    The Exchange proposes a lower quoting incentive for Tier II 
corporate issues than other Exchange listed securities. Specifically, 
the Exchange proposes to provide an incentive of $100 per day for the 
CLP with the highest number of winning SETs during the applicable 
trading day with respect to a Tier II corporate issue subject to the 
CLP Program. The Exchange has also chosen not to offer a quoting 
incentive to the CLP with the second highest number of winning SETs 
during the applicable trading day for Tier II corporate issues. The 
Exchange believes that this quoting incentive structure for Tier II 
corporate issues is reasonable because the Exchange does not expect to 
have as many registered CLPs for Tier II corporate issues as compared 
to Tier I corporate issues and ETPs. This is because if there is indeed 
less competition in Tier II issues, then the registered CLPs in Tier II 
issues will have a better opportunity to receive the daily quoting 
incentive. Also, because the quoting incentive is lower, the Exchange 
believes it is reasonable to simply provide a single quoting incentive 
to the CLP with the highest number of winning SETs during the 
applicable trading day for Tier II corporate issues.
    The Exchange proposes a daily quoting incentive of $250 per day for 
ETPs listed pursuant to Exchange Rule 14.11, with $200 for the first-
place CLP and $50 for the second-place CLP. The Exchange believes that 
this quoting incentive is reasonable because the Exchange expects to 
have several competing CLPs for each ETP, and thus, the daily quoting 
incentive must be slightly larger (to incent competition even by CLPs 
that may receive the incentive less frequently). Due to the additional 
competition, the Exchange also believes it is reasonable to provide a 
quoting incentive to both the first and second-place CLP for ETPs.
    The Exchange also expects to have several competing CLPs for Tier I 
corporate issues. While the value of an ETP can be readily monitored 
and updated based on analysis conducted of the underlying securities or 
products, market making for a corporate issue requires additional 
analysis and imposes different risks. Due to the additional risks, the 
Exchange believes that additional incentives are necessary and 
appropriate in order to encourage CLPs to register as CLPs for Tier I 
corporate issues listed on the Exchange pursuant to Rule 14.8 for a 
six-month period commencing from the date of initial listing on the 
Exchange. Based on the additional risks and the additional competition, 
the Exchange believes that the proposed quoting incentive for Tier I 
corporate issues of $500 is reasonable for the first six months that a 
security is listed on the Exchange. After six months, because CLPs 
should become more familiar with the market for the applicable issue, 
the Exchange believes it is reasonable to provide the same quoting 
incentive as it provides for ETPs.
    Finally, as described above, in order to further incentivize 
Members to register as CLPs and participate in the CLP Program, the 
Exchange proposes to waive applicable execution fees in Exchange 
auctions for any CLP that receives a daily rebate for a specific 
Exchange-listed security on at least two (2) trading days during a 
calendar month. The Exchange believes that the waiver of auction fees 
is equitable and not unreasonably discriminatory because it will be 
available to all CLPs registered for the applicable issue and will be 
awarded based on objective criteria. Also, as noted above, registration 
as an Exchange Market Maker, and, in turn, as a CLP, is equally 
available to all Members that satisfy the requirements of Rule 11.8. 
The

[[Page 11611]]

Exchange believes that the waiver of auction fees is reasonable because 
it is based on a relatively low threshold, and thus, will help to 
incentivize Members to register as CLPs and participate in the CLP 
Program and to stay registered in the CLP Program even if such Members 
rarely receive the applicable daily quoting incentive.

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

    No written comments were solicited or received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Pursuant to Section 19(b)(3)(A)(ii) of the Act \8\ and Rule 19b-
4(f)(2) thereunder,\9\ the Exchange has designated this proposal as 
establishing or changing a due, fee, or other charge applicable to the 
Exchange's Members and non-members, which renders the proposed rule 
change effective upon filing.
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    \8\ 15 U.S.C. 78s(b)(3)(A)(ii).
    \9\ 17 CFR 240.19b-4(f)(2).
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change 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 email to [email protected]. Please include 
File Number SR-BATS-2012-011 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 Number SR-BATS-2012-011. This file 
number should be included on the subject line if email 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 change 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, on official business days between the hours of 10 
a.m. and 3 p.m. Copies of such filing also will 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 publicly available. All 
submissions should refer to File Number SR-BATS-2012-011 and should be 
submitted on or before March 19, 2012.
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    \10\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\10\
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-4401 Filed 2-24-12; 8:45 am]
BILLING CODE 8011-01-P