[Federal Register Volume 77, Number 114 (Wednesday, June 13, 2012)]
[Notices]
[Pages 35446-35448]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-14405]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-67162; File No. SR-BATS-2012-019]


Self-Regulatory Organizations; BATS Exchange, Inc.; Notice of 
Filing and Immediate Effectiveness of a Proposed Rule Change To Modify 
Exchange Rule 11.19, Entitled ``Short Sales''

 June 7, 2012.
    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 May 24, 2012, 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 
Exchange Rule 11.19, entitled ``Short Sales,'' to adopt certain changes 
related to Regulation SHO in connection with the Exchange's recent 
status as the primary listing market for certain securities.
    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 Rules 
200(g) and 201 of Regulation SHO.\3\ Rule 201 of Regulation SHO, as 
amended, requires trading centers \4\ such as the Exchange to 
establish, maintain, and enforce certain written policies and 
procedures reasonably designed to comply with the rule.\5\ The Exchange 
has proposed and received approval of rule changes \6\ in connection 
with the amendments to Rules 201 and 200 of Regulation SHO that were 
implemented in 2011.\7\ The Exchange recently began operation as a 
primary listing market of certain securities, and is thus proposing 
additional rules in connection with Regulation SHO, as amended.
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    \3\ 17 CFR 242.200(g); 17 CFR 242.201. See Securities Exchange 
Act Release No. 61595 (Feb. 26, 2010), 75 FR 11232 (Mar. 10, 2010) 
(``Adopting Release'') (amending Rules 201 and 200 of Regulation SHO 
to adopt a short sale price test restriction and ``short exempt'' 
marking requirement).
    \4\ Rule 201(a)(9) states the term ``trading center'' will have 
the same meaning as in Rule 600(b)(78). 17 CFR 242.201(a)(9). Rule 
600(b)(78) of Regulation NMS 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).
    \5\ See 17 CFR 242.201(b). The amendments to Rule 200(g) of 
Regulation SHO provide a ``short exempt'' marking requirement. See 
17 CFR 242.200(g).
    \6\ See Securities Exchange Act Release No. 63948 (Feb. 23, 
2011), 76 FR 11303 (Mar. 1, 2011) (SR-BATS-2011-002). See Rule 
11.9(g)(2), which describes the handling of orders pursuant to 
Exchange ``short sale price sliding'' functionality in connection 
with the short sale price test restriction; see also, Rule 11.13, 
which codifies in the Exchange's rules the execution restrictions of 
Rule 201; see also Rule 11.19, which requires marking of short sale 
orders as either ``short'' or ``short exempt.''
    \7\ See supra note 3; see also Securities Exchange Act Release 
No. 63247 (Nov. 4, 2010), 75 FR 68702 (Nov. 9, 2010) (extending the 
compliance date of the amendments to Rules 201 and 200 of Regulation 
SHO until February 28, 2011).
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    Proposed Exchange Rule 11.19(b)(1), ``Definitions,'' defines the 
terms ``covered security,'' ``listing market,'' and ``national best 
bid'' as having the same meaning as such terms have in Rule 201 of 
Regulation SHO.\8\
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    \8\ See Rule 201(a) of Regulation SHO. The System will utilize 
the national best bid from the systems information processor. Rule 
201(a)(1) defines ``covered security'' to mean any ``NMS stock'' as 
defined under Rule 600(b)(47) of Regulation NMS. 17 CFR 
242.201(a)(1). Rule 600(b)(47) of Regulation NMS defines an ``NMS 
stock'' as ``any NMS security other than an option.'' 17 CFR 
242.600(b)(47). 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 242.600(b)(46).

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[[Page 35447]]

    Under Proposed Exchange Rule 11.19(b)(2), Short Sale Price Test, 
the System \9\ will not execute or display a short sale order with 
respect to a covered security at a price that is less than or equal to 
the current national best bid if the price of that security decreases 
by 10% or more from the security's closing price on the listing market 
as of the end of regular trading hours on the prior day (``Trigger 
Price'').\10\ For covered securities for which the Exchange is the 
listing market, the BATS Official Closing Price for each security is 
established by the Exchange pursuant to procedures set forth in 
Exchange Rule 11.23.\11\
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    \9\ See Exchange Rule 1.5(aa). The term ``System'' means 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.
    \10\ See Rule 201(b)(1)(i) of Regulation SHO. Such execution or 
display needs to be in compliance with applicable rules concerning 
minimum pricing increments. See 17 CFR 242.612.
    \11\ See Exchange Rule 11.23. The Closing Auction for any BATS 
listed security will occur at 4:00 p.m. EST on each day when the 
Exchange is open for business. The Exchange's Closing Auction 
establishes the Closing Auction price by determining the price level 
that maximizes the number of shares of eligible interest that can be 
executed, subject to certain price collars.
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    Under Proposed Exchange Rule 11.19(b)(3), ``Determination of 
Trigger Price,'' the Exchange will continuously compare each execution 
by the System with the BATS Official Closing Price \12\ and alert the 
single plan processor \13\ when a Trigger Price has been reached.\14\ 
The single plan processor will then disseminate a notice to market 
participants in accordance with procedures established by the single 
plan processor. When the single plan processor disseminates such 
notice, the Exchange will systematically apply the short sale price 
test restriction for short sale orders in the covered security in the 
manner described in Proposed Exchange Rule 11.19(b)(2).
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    \12\ Under Proposed Rule 11.19(b)(3)(B), if a covered security 
did not trade on the Exchange on the prior trading day (due to a 
trading halt, trading suspension, or otherwise), the Exchange's 
determination of the Trigger Price shall be based on the last sale 
price on the Exchange for that security on the most recent day on 
which the security traded. See also Division of Trading and Markets: 
Responses to Frequently Asked Questions Concerning Rule 201 of 
Regulation SHO, Q&A No. 3.1.
    \13\ See 17 CFR 242.201(a)(6).
    \14\ See Rule 201(b)(3) of Regulation SHO. See Division of 
Trading and Markets: Responses to Frequently Asked Questions 
Concerning Rule 201 of Regulation SHO, Q&A No. 1.1 (explaining 
calculation of the Trigger Price).
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    Under Proposed Exchange Rule 11.19(b)(4), ``Duration of Short Sale 
Price Test,'' once triggered, the short sale price test restriction 
shall remain in effect until the next trading day when a national best 
bid for the covered security is calculated and disseminated on a 
current and continuing basis by a plan processor pursuant to an effect 
[sic] national market system [sic],\15\ as provided for in Regulation 
SHO Rule 201(b)(1)(ii) (the ``Short Sale Period''). There are two 
exceptions in the proposed rule.\16\ First, if the Exchange determines 
pursuant to Proposed Exchange Rule 11.19(b)(4)(A) that the short sale 
price test restriction for a covered security was triggered because of 
a clearly erroneous execution,\17\ the Exchange may lift the short sale 
price test restriction before the Short Sale Period ends for covered 
securities for which the Exchange is the listing market.\18\ The 
Exchange also proposes to include language in Exchange Rule 
11.19(b)(4)(A) to provide that the Exchange may also lift the short 
sale price test restrictions before the Short Sale Period ends, for 
covered securities for which the Exchange is the listing market, if the 
Exchange has been informed by another exchange or self-regulatory 
organization (``SRO'') that a transaction in the covered security that 
occurred at the Trigger Price was a clearly erroneous execution, as 
determined by that exchange or SRO under its rules.\19\ Second, if the 
Exchange determines pursuant to Proposed Exchange Rule 11.19(b)(4)(B) 
that the prior day's closing price for a covered security is incorrect 
in the System and resulted in an incorrect determination of the Trigger 
Price, the Exchange may correct the prior day's BATS Official Closing 
Price and lift the short sale price test restriction before the Short 
Sale Period ends.
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    \15\ See 17 CFR 242.201(b)(1)(ii). See also Division of Trading 
and Markets: Responses to Frequently Asked Questions Concerning Rule 
201 of Regulation SHO, Q&A No. 2.1.
    \16\ If the price of a covered security declines intra-day by at 
least 10% on a day on which the security is already subject to the 
short sale price test restriction of Rule 201, the restriction will 
be re-triggered and, therefore, will continue in effect for the 
remainder of that day and the following day. See Adopting Release, 
75 FR at 11253, n. 290. In addition, Rule 201 does not place any 
limit on the frequency or number of times the circuit breaker can be 
re-triggered with respect to a particular stock. See Division of 
Trading and Markets: Responses to Frequently Asked Questions 
Concerning Rule 201 of Regulation SHO, Q&A No. 2.2.
    \17\ See Exchange Rule 11.17, which sets forth the standards for 
determining when a trade is ``clearly erroneous.'' The terms of a 
transaction executed on the Exchange are ``clearly erroneous'' when 
there is an obvious error in any term, such as price, number of 
shares or other unit of trading, or identification of the security. 
A transaction made in clearly erroneous error and cancelled by both 
parties or determined by the Exchange to be clearly erroneous will 
be removed from the consolidated tape.
    \18\ See 17 CFR 242.201(a)(3).
    \19\ The Exchange will only lift the short sale price test 
restrictions before the Short Sale Period ends under these 
circumstances when informed by another exchange or SRO that a 
triggering transaction has been determined to be a clearly erroneous 
execution under the rules of the exchange or SRO, consistent with 
the authority of that exchange or SRO for making such 
determinations.
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    The proposed language for Exchange Rule 11.19(b) is substantively 
identical to paragraphs (a) through (d) of Rule 4763 of the rules of 
The NASDAQ Stock Market LLC (``Nasdaq''), paragraphs (a) through (d) of 
Rule 440B of the rules of the New York Stock Exchange, LLC (``NYSE'') 
and sub-paragraphs (i) through (iv) of Rule 7.16(f) of the rules of 
NYSE Arca Equities, Inc. (``NYSE Arca''). The Exchange has separately 
adopted rules implementing other aspects related to the amendments to 
Regulation SHO, which are described in the remainder of Nasdaq Rule 
4763, NYSE Rule 440B and NYSE Arca Rule 7.16.\20\
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    \20\ See supra note 6.
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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 proposal is consistent with Section 6(b)(5) of the Act,\22\ because 
it would promote just and equitable principles of trade. Regulation 
SHO, among other purposes, was implemented to help to strengthen 
investor confidence in the markets and, thus, was intended to enhance 
and promote capital formation.\23\ The Exchange believes that the 
proposed rule promotes just and equitable principles of trade in that 
it implements rules adopted by the Commission in

[[Page 35448]]

Regulation SHO under the Act. The proposed rule change is also 
consistent with Section 11A(a)(1) of the Act \24\ in that it seeks to 
assure fair competition among brokers and dealers and exchange 
markets.\25\ The Exchange believes that the proposed rule change 
promotes just and equitable principles of trade in that it promotes 
uniformity across listing markets concerning the application of 
Regulation SHO, as amended.
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    \21\ 15 U.S.C. 78f(b).
    \22\ 15 U.S.C. 78f(b)(5).
    \23\ The Commission notes that Rule 201 of Regulation SHO was 
adopted to prevent short selling, including potentially manipulative 
or abusive short selling, from driving down further the price of a 
security that has already experienced a significant intra-day price 
decline, facilitate the ability of long sellers to sell first upon 
such a decline and address erosions in investor confidence.
    \24\ 15 U.S.C. 78k-1(a)(1).
    \25\ See supra note 3.
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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

    Because the foregoing proposed rule change does not: (i) 
Significantly affect the protection of investors or the public 
interest; (ii) impose any significant burden on competition; and (iii) 
become operative for 30 days from the date on which it was filed, or 
such shorter time as the Commission may designate, it has become 
effective pursuant to Section 19(b)(3)(A) of the Act \26\ and Rule 19b-
4(f)(6)(iii) thereunder.\27\
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    \26\ 15 U.S.C. 78s(b)(3)(A).
    \27\ 17 CFR 240.19b-4(f)(6)(iii).
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    A proposed rule change filed under Rule 19b-4(f)(6) normally does 
not become operative for 30 days after the date of filing. However, 
Rule 19b-4(f)(6)(iii) permits the Commission to designate a shorter 
time if such action is consistent with the protection of investors and 
the public interest. The Commission believes that waiving the 30-day 
operative delay is consistent with the protection of investors and the 
public interest.\28\ The Commission notes the proposal is substantially 
similar to and based on the rules of other exchanges,\29\ and does not 
raise any new regulatory issues. In addition, the Exchange's operation 
as a listing market for certain securities requires it to comply with 
the provisions of Rule 201 of Regulation SHO. Codification within the 
Exchange's rules of the provisions of Rule 201 of Regulation SHO as 
described above will help to avoid any confusion regarding the 
Exchange's status as a listing market, including, but not limited to, 
the manner in which the Exchange calculates the Trigger Price and the 
Exchange's ability to lift a Short Sale Price Test in the event it was 
triggered by a clearly erroneous execution. Accordingly, waiver of the 
operative delay will help to ensure uniformity across listing markets 
concerning the application of Rule 201 of Regulation SHO. For these 
reasons, the Commission designates the proposed rule change as 
operative upon filing.
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    \28\ For purposes only of waiving the 30-day operative delay, 
the Commission has also considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
    \29\ See, e.g., Nasdaq Rule 4763(a)-(d); NYSE Rule 440B(a)-(d); 
NYSE Arca Rule 7.16(f)(i)-(iv).
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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 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 email to [email protected]. Please include 
File No. SR-BATS-2012-019 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-2012-019. 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 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, on official business days between the hours of 
10:00 a.m. and 3:00 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-2012-019 and should be 
submitted on or before July 5, 2012.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\30\
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    \30\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-14405 Filed 6-12-12; 8:45 am]
BILLING CODE 8011-01-P