[Federal Register Volume 78, Number 25 (Wednesday, February 6, 2013)]
[Notices]
[Pages 8640-8642]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-02556]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-68788, File No. SR-BATS-2012-046]
Self-Regulatory Organizations; BATS Exchange, Inc.; Order
Approving Proposed Rule Change To Modify BATS Rule 11.23 Relating to
Auctions of Exchange-Listed Securities
January 31, 2013.
I. Introduction
On December 6, 2012, BATS Exchange, Inc. (``BATS'' or ``Exchange'')
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 19b-4 thereunder,\2\ a proposed rule change to
amend its rules governing auctions conducted by the Exchange for
securities listed on the Exchange. The proposed rule change was
published for comment in the Federal Register on December 20, 2012.\3\
The Commission received no comment letters regarding the proposal. This
order approves the proposed rule change.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 68442 (December 14,
2012), 77 FR 75459 (December 20, 2012) (``Notice'').
---------------------------------------------------------------------------
II. Description of the Proposed Rule Change
The Exchange has proposed to amend BATS Rule 11.23, which governs
auctions conducted by the Exchange for securities listed on the
Exchange.\4\ These auctions include: (1) An opening auction (``Opening
Auction''); (2) a closing auction (``Closing Auction''); (3) an auction
in the event of an initial public offering (``IPO Auction''); and (4)
an auction in the event of a halt of trading in a security (``Halt
Auction'') (collectively referred to as ``Exchange Auctions'').\5\ In
connection with the Exchange Auctions, BATS offers the BATS Auction
Feed, which provides recipients with uncompressed real-time data
regarding the current status of price and size information related to
Exchange Auctions.\6\
---------------------------------------------------------------------------
\4\ See Securities Exchange Act Release No. 65619 (October 25,
2011), 76 FR 67238 (October 31, 2011) (order approving proposed rule
change by BATS to adopt rules applicable to auctions conducted by
the Exchange for exchange-listed securities).
\5\ See id.
\6\ See id.
---------------------------------------------------------------------------
A. Change to the Definition of Collar Price Range
The Exchange has proposed to amend BATS Rule 11.23(a)(6) to amend
the definition of ``Collar Price Range'' to incorporate the Exchange's
numerical guidelines for clearly erroneous executions under BATS Rule
11.17(c)(1).\7\ Currently, BATS Rule 11.23(a)(6) sets the Collar Price
Range at 10% of the Volume Based Tie Breaker \8\ below and above the
BATS Best Bid (``ZBB'') and BATS Best Offer (``ZBO''),\9\ the National
Best Bid (``NBB'') and National Best Offer (``NBO''), or the Final Last
Sale Eligible Trade,\10\ depending on market conditions at the time of
the auction.\11\ The Exchange has proposed to base its Collar Price
Range on numerical guidelines for clearly erroneous rules under BATS
Rule 11.17(c)(1), which would be determined as follows: where the
Collar Midpoint is $25.00 or less, the Collar Price Range shall be the
range from 10% below the Collar Midpoint to 10% above the Collar
Midpoint; where the Collar Midpoint is greater than $25.00 but less
than or equal to $50.00, the Collar Price Range shall be the range from
5% below the Collar Midpoint to 5% above the Collar Midpoint; and where
the Collar Midpoint is greater than $50.00, the Collar Price Range
shall be the range from 3% below the Collar Midpoint to 3% above the
Collar Midpoint.\12\ According to the Exchange, the proposed rule
change would provide greater transparency and certainty in Exchange
Auctions by helping reduce the possibility that an auction would occur
at a price that would qualify as a clearly erroneous under BATS Rule
11.17(c)(1) and limit the volatility in auction prices.\13\
---------------------------------------------------------------------------
\7\ See Notice supra note 3, at 76 FR 75460.
\8\ BATS Rule 11.23(a)(23) defines ``Volume Based Tie Breaker''
as the midpoint of the BATS Best Bid or BATS Best Offer (``ZBBO'')
for a particular security. In the event that there is either no ZBB
or ZBO for the security, the National Best Bid and Offer (``NBBO'')
will be used if there is at least one limit order on either the
Continuous Book or the Auction Book. In the event that there is no
NBB or NBO for the security or no limit orders on the Continuous
Book and the Auction Book, the price of the Final Last Sale Eligible
Trade will be used. See infra note 10 (defining ``Final Last Sale
Eligible Trade''). BATS Rule 11.23(a)(1) defines the ``Auction
Book'' as all Eligible Auction Orders on the BATS Book. BATS Rule
11.23(a)(7) defines ``Continuous Book'' as all orders on the BATS
Book that are not Eligible Auction Orders.
\9\ See BATS Rule 11.23(a)(24) (defining the ZBB and ZBO). BATS
Rule 11.23(a)(24) defines the BATS Best Bid or BATS Best Offer as
``ZBBO.''
\10\ See BATS Rule 11.23(a)(9) defines ``Final Last Sale
Eligible Trade'' as the last trade occurring during Regular Trading
Hours on the Exchange if the trade was executed within the last one
second prior to either the Closing Auction or, for Halt Auctions,
trading in the security being halted. Where the trade was not
executed within the last one second, the last trade reported to the
consolidated tape received by BATS during Regular Trading Hours and,
where applicable, prior to trading in the security being halted will
be used. If there is no qualifying trade for the current day, the
BATS Official Closing Price from the previous trading day will be
used.
\11\ See Notice supra note 3, at 76 FR 75460.
\12\ See id. The Exchange has proposed to define ``Collar
Midpoint'' in BATS Rule 11.23(a)(6) as the Volume Based Tie Breaker
for all applicable auctions, except for IPO Auctions in Exchange
Traded Products (as defined in Rule 11.8, Interpretation and Policy
.02(d)(2)), for which the Collar Midpoint will be the issue price.
See also Notice supra note 3, at 76 FR 75460.
\13\ The Exchange noted that the modified Collar Price Range
would not necessarily prevent all clearly erroneous executions from
occurring as the Collar Price Range will be based on the Collar
Midpoint and the numerical guidelines for clearly erroneous
executions are based on the Reference Price, which is equal to the
consolidated last sale immediately prior to the execution(s) under
review. See Notice supra note 3, at 76 FR 75460 n. 7.
---------------------------------------------------------------------------
B. Change to the Determination of the Auction Price
The Exchange has proposed to amend BATS Rule 11.23 to change how
the Exchange determines the price for Exchange Auctions. Currently, to
determine the auction price for an Exchange Auction, the Exchange first
looks to whether there is at least one limit order either: (1) On the
Continuous Book or Auction Book for Opening
[[Page 8641]]
Auctions and Closing Auctions; or (2) among Eligible Auction Orders for
IPO and Halt Auctions.\14\ Where there is at least one limit order,
then the auction will occur at a price level within the Collar Price
Range, where applicable, that maximizes the number of shares executed
in the auction. In the event that there are no limit orders on the
Continuous Book and Auction Book for Opening Auctions or Closing
Auctions or among Eligible Auction Orders for IPO or Halt Auctions, the
Exchange would use a default price, which currently is the Final Last
Sale Eligible Trade for Opening Auctions, Closing Auctions, and Halt
Auctions, and the issuing price for an IPO Auction.
---------------------------------------------------------------------------
\14\ See BATS Rule 11.23(a)(9) defines ``Eligible Auction
Orders'' as any Market-On-Open, Limit-On-Open, Late-Limit-On-Open,
Market-On-Close, Limit-On-Close, or Late-Limit-On-Close that is
entered in compliance with its respective cutoff for an Opening
Auction or Closing Auction, any regular hours order prior to the
Opening Auction, any limit or market order not designated to
exclusively participate in the Closing Auction entered during the
Quote-Only Period of an IPO Auction, and any limit or market order
not designated to exclusively participate in the Opening Auction or
Closing Auction entered during the Quote-Only Period of a Halt
Auction.
---------------------------------------------------------------------------
The Exchange proposes two changes to Rule 11.23 relating to the
determination of the auction price in certain circumstances. The first
change modifies when the Exchange will use a default price for
executions in Exchange Auctions. The second change modifies the
Exchange's default price for Opening Auctions and Closing Auctions.
Regarding the first change, the Exchange has proposed to amend BATS
Rules 11.23(b)(2)(B), 11.23(c)(2)(B), and 11.23(d)(2)(C) to provide
that, prior to determining the price for an Exchange Auction, the
Exchange will look to whether there is at least one limit order from
each side that would participate in the Exchange Auction. The Exchange
has proposed that where no limit orders from either or both sides would
participate in the Exchange Auction, the Exchange Auction would occur
at a default price, as modified in the description below with respect
to Opening Auctions and Closing Auctions.
In the second change to Rule 11.23, the Exchange has proposed to
amend BATS Rules 11.23(b)(2)(B) and 11.23(c)(2)(B) to use the Volume
Based Tie Breaker as the default price instead of the Final Last Sale
Eligible Trade for Opening Auctions and Closing Auctions. By using the
Volume Based Tie Breaker as the default price, the Exchange would first
look to the current market, if available, to determine the auction
price before using the Final Last Sale Eligible Trade. Specifically,
the Exchange would first look to the ZBBO to determine the auction
price for a particular security. In the event that there is either no
ZBB or ZBO, the Exchange would use the NBBO to determine the auction
price for the Opening Auction or Closing Auction, if there is at least
one limit order on either the Continuous Book or the Auction Book.
Where there is either no NBBO for the security or no limit orders on
the Continuous Book and the Auction Book, the Exchange would use the
Final Last Sale Eligible Trade as the auction price for an Opening
Auction or Closing Auction.
C. Limitation on Information Published in Connection With IPO and Halt
Auction Data
The Exchange has also proposed to amend BATS Rule 11.23(d)(2)(A)
(Publication of BATS Auction Information) in two ways. First, the
Exchange has proposed to clarify that BATS Rule 11.23(d)(2)(A) applies
to IPO Auctions as well as Halt Auctions. Second, the Exchange has
proposed to amend BATS Rule 11.23(d)(2)(A) to provide that the Exchange
will only disseminate the lesser of the Reference Buy Shares \15\ and
the Reference Sell Shares,\16\ rather than disseminate both pieces of
information, in auction information messages sent through BATS Data
Feed.\17\ The Exchange has represented that this proposal is designed
to prevent market participants from possibly gaming an IPO or Halt
Auction.\18\ Specifically, the Exchange is concerned that the
dissemination of both Reference Buy Shares and Reference Sell Share
information could allow a market participant to discern the exact
amount of liquidity available at a given price level on both sides of
the IPO or Halt Auction Book.\19\ Because market participants are
permitted to enter orders in IPO and Halt Auctions up until the auction
occurs, the Exchange believes that a market participant could use both
the Reference Buy Shares and Reference Sell Shares to potentially
manipulate the price of the auction.\20\ By disseminating only the
lesser of the Reference Buy Shares and Reference Sell Shares associated
with IPO and Halt Auctions, the Exchange believes that a market
participant would not able to manipulate an IPO or Halt Auction because
the market participant would not have complete knowledge of liquidity
available on both sides of the auction book simultaneously.\21\
---------------------------------------------------------------------------
\15\ BATS Rule 11.23(a)(18) defines ``Reference Buy Shares'' as
the total number of shares associated with buy-side Eligible Auction
Orders that are priced equal to or less than the Reference Price.
\16\ BATS Rule 11.23(a)(21) defines ``Reference Sell Shares'' as
the total number of shares associated with sell-side Eligible
Auction Orders that are priced equal to or less than the Reference
Price.
\17\ See Notice supra note 3, at 76 FR 75461.
\18\ See id.
\19\ See id.
\20\ See id.
\21\ See Notice supra note 3, at 76 FR 75461. The Exchange notes
such gaming concerns do not exist in the Opening Auctions and
Closing Auctions for two reasons. First, the Exchange represents
that auction information messages for Opening Auctions and Closing
Auctions do not provide complete information about the auctions as
such messages do not include information relating to the Continuous
Book. Second, information messages for Opening Auctions and Closing
Auctions are not disseminated until two minutes and five minutes
prior to the auction, respectfully, at which point market
participants are prohibited from modifying or canceling any Eligible
Auction Orders entered in the Auction Book.
---------------------------------------------------------------------------
D. Market Regular Hours Orders
The Exchange has proposed to amend Rule 11.23(a)(22) to provide
that any unexecuted portion of a market Regular Hours Only (``RHO'')
order is immediately cancelled following any Exchange Auction in which
it was eligible to participate.\22\ The Exchange stated that this
proposed rule change would clarify that a market RHO order would either
execute or be cancelled, which the Exchange believes would be
consistent with the behavior of all other market orders entered on the
Exchange.\23\
---------------------------------------------------------------------------
\22\ See Notice supra note 3, at 77 FR at 75460. BATS Rule
11.23(a)(22) defines a RHO order as a BATS order that is designated
for execution only during Regular Trading Hours, which includes the
Opening Auction, the Closing Auction, and IPO/Halt Auctions.
\23\ See Notice supra note 3, at 77 FR at 75460.
---------------------------------------------------------------------------
III. Discussion
After careful consideration of the proposed rule change, the
Commission finds that the proposal is consistent with the requirements
of the Act and the rules and regulations thereunder applicable to a
national securities exchange.\24\ The Commission believes that the
proposed rule change is consistent with Section 6(b) of the Act, in
general, and Section 6(b)(5) of the Act, in particular, in that it is
designed to promote just and equitable principles of trade, to foster
cooperation and coordination with persons engaged in regulating,
clearing, settling, processing information with respect to, and
facilitating transactions in securities, to remove impediments to and
perfect the mechanism of a free and open market and a national market
system, and, in
[[Page 8642]]
general, to protect investors and the public interest.
---------------------------------------------------------------------------
\24\ In approving this 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).
---------------------------------------------------------------------------
The Commission believes that the proposed changes to the Collar
Price Range definition are consistent with Section 6(b)(5) of the Act.
The Exchange notes that (1) this proposed change provides greater
transparency and certainty in Exchange Auctions by reducing the
possibility that an auction would occur at a price that would qualify
as clearly erroneous and cancelled under the Exchange's rules and (2)
by narrowing the Collar Price Range, the proposed rule change will help
limit the volatility in auction prices. The Commission notes that the
proposed changes to the definition of the Collar Price Range are based
on the numerical guidelines for clearly erroneous executions under BATS
Rule 11.17(c)(1). For these reasons, the Commission believes that the
proposed changes to the Collar Price Range definition are consistent
with the Act.
The Commission believes that the proposed changes to how the
Exchange determines the auction price are consistent with Section
6(b)(5) of the Act. The Exchanges notes that the proposed changes
regarding when the Exchange will use a default price would aid in price
discovery and help to prevent erroneous executions by ensuring that a
single limit order on one side of an auction that might not participate
in the Exchange Auction cannot on its own determine the auction price.
In addition, the Exchange notes that revisions to the default price for
Opening Auctions and Closing Auctions would also aid in price discovery
and help to reduce the likelihood of executions in auctions occurring
at prices out of line with existing market conditions. For these
reasons, the Commission believes that these proposed changes are
consistent with the Act.
The Commission also believes that the proposal to disseminate only
the lesser of the Reference Buy Shares and the Reference Sell Shares in
auction information messages for IPO and Halt Auctions is consistent
with Section 6(b)(5) of the Act. The Exchange has represented that this
proposal is designed to prevent market participants from possibly
gaming an IPO or Halt Auction, as it would hinder a market participant
from being able to discern the exact amount of liquidity available at a
given price level on both sides of the IPO or Halt Auction Book. In
this way, the Exchange believes that the proposal should make it more
difficult for a market participant to use auction information to
manipulate an IPO or Halt auction. For this reason, the Commission
believes that the proposed rule change is consistent with the Act.
Finally, the Commission believes that the proposed change to
provide that any unexecuted portion of a market RHO order is
immediately cancelled following any Exchange Auction in which it was
eligible to participate should clarify the operation of market RHO
Auction Orders, as noted by the Exchange. As such, the Commission
believes this proposed change is also consistent with the Exchange Act.
IV. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\25\ that the proposed rule change (SR-BATS-2012-046) be, and
hereby is, approved.
---------------------------------------------------------------------------
\25\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\26\
---------------------------------------------------------------------------
\26\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------
Kevin M. O'Neil,
Deputy Secretary.
[FR Doc. 2013-02556 Filed 2-5-13; 8:45 am]
BILLING CODE 8011-01-P