[Federal Register Volume 78, Number 78 (Tuesday, April 23, 2013)]
[Notices]
[Pages 23965-23967]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-09524]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-69387; File No. SR-BATS-2013-023]


Self-Regulatory Organizations; BATS Exchange, Inc.; Notice of 
Filing and Immediate Effectiveness of a Proposed Rule Change To Adopt a 
Market Order Collar for BATS Options

April 17, 2013.
    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 April 10, 2013, 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 Exchange 
has designated this proposal as a ``non-controversial'' proposed rule 
change pursuant to Section 19(b)(3)(A) of the Act \3\ and Rule 19b-
4(f)(6) thereunder,\4\ which renders it effective upon filing with the 
Commission. 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.
    \3\ 15 U.S.C. 78s(b)(3)(A).
    \4\ 17 CFR 240.19b-4(f)(6).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange filed a proposal for the BATS Options Market (``BATS 
Options'') to amend BATS Rule 21.1(d)(5) in order to add system 
functionality that will cancel any portion of a market order submitted 
to BATS Options (a ``BATS Market Order'') that would execute at a price 
that is more than 50 cents or 5 percent worse than the NBBO at the time 
the order initially reaches BATS Options (the ``Initial NBBO''), 
whichever is greater (a ``Market Order Collar''). The Exchange is also 
proposing to make two clean-up changes by eliminating references to 
discretionary orders in Rule 21.8.
    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
    The purpose of the proposed rule change is to implement a Market 
Order Collar on BATS Options and to make two clean-up changes by 
eliminating references to discretionary orders in Rule 21.8.
    The Exchange is proposing to protect market participants from 
executions at prices that are significantly worse than the NBBO at the 
time of order entry by amending the rules of BATS Options such that any 
portion of a BATS Market Order that would execute at a price that is 
the greater of 50 cents or 5 percentage points worse than the Initial 
NBBO will be cancelled by the BATS Options system (the ``System''). Any 
portion of a BATS Market Order that would otherwise execute outside of 
these thresholds will be immediately cancelled back to the User.\5\ The

[[Page 23966]]

Exchange believes that Users who submit market orders on BATS Options 
generally intend to receive executions for the full size of their 
orders at or near the Initial NBBO and are not always aware that there 
may not be enough liquidity at that price to fill the entire size of 
their orders. This could result in executions occurring at prices that 
have little or no relation to the theoretical price of the option.
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    \5\ A User defined in Exchange Rule 1.5(cc) as any Member or 
sponsored participant with access to the Exchange.
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    Accordingly, the Exchange is proposing to adopt a mechanism that 
will help prevent dramatic price swings and, potentially, executions 
qualifying as obvious errors \6\ on BATS Options. The following example 
demonstrates how the Market Order Collar would operate: Away Exchange 
Quotes:
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    \6\ See BATS Rule 20.6.

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                    Exchange                         Bid size        Bid price      Offer price     Offer size
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PHLX............................................              10           $1.00           $1.05              10
NYSE Arca.......................................              10            1.00            1.05              10
NYSE MKT........................................              10            1.00            1.10              10
BOX.............................................              10            1.00            1.15              10
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    BATS Options Price Levels:

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                    Exchange                         Bid size        Bid price      Offer price     Offer size
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BATS............................................              10           $1.00           $1.05              10
BATS............................................  ..............  ..............            1.10              10
BATS............................................  ..............  ..............            1.60              10
BATS............................................  ..............  ..............            1.70              10
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    If BATS Options receives a routable market order to buy 80 
contracts, the System will respond as described below:

 10 contracts will be executed at $1.05 on BATS Options
 10 contracts will be routed to PHLX at $1.05
 10 contracts will be routed to NYSE Arca at $1.05
 10 contracts will be executed at $1.10 on BATS Options
 10 contracts will be routed to NYSE MKT at $1.10
 10 contracts will be routed to BOX at $1.15

Assuming all orders routed away were in fact executed by such venues, 
the remaining shares of the BATS Market Order would be cancelled back 
to the User because the liquidity on BATS Options at the $1.60 price 
level exceeds the BATS Market Order thresholds set forth in proposed 
Rule 21.1(d)(5) and such order is also not eligible for routing outside 
of such thresholds. Such BATS Market Order could only be executed or 
routed by the Exchange up to and including a price of $1.55 ($0.50 
worse than the Initial NBBO). To be clear, System behavior would be the 
exact same if all of the orders executed entirely in the above example 
were entered and executed on BATS Options.
    Those Users who intend to trade against liquidity at multiple price 
points from the Initial NBBO beyond the BATS market order thresholds 
proposed in this rule filing can clearly and unambiguously specify that 
intent by submitting a marketable limit order to the Exchange. For 
example, using the scenario described above, if the User submitted a 
limit order to buy 80 contracts with a limit price of $2.00, such order 
would be executed up to its full size.
    The Exchange notes that the proposed rule change is directly based 
on the Exchange's rule that collars market orders submitted to the 
Exchange's cash equities platform (``BATS Equities''). Specifically, 
pursuant to Rule 11.9(a), the Exchange collars for BATS Equities any 
portion of a BATS Market Order that would execute at a price that is 
the greater of 50 cents or 5 percentage points worse than the Initial 
NBBO. The Exchange believes that the proposed collar is reasonable and 
appropriate for BATS Options based largely upon the experience the 
Exchange has had in maintaining the collar for BATS Equities for 
several years. Due to the prices of most options trading on the 
Exchange, the Exchange notes that the collar will likely be triggered 
more frequently at the $0.50 level than at the 5% level (i.e., there 
are fewer options that trade above $10.00 than trade below $10.00). In 
addition to believing the collar to be reasonable based on its 
experience in administering the collar for BATS Equities, the Exchange 
also believes that the collar is reasonable and appropriate because 
many market participants that are familiar with the collar on BATS 
Equities are also market participants trading on BATS Options.
    In addition to the above proposed change, the Exchange is proposing 
to eliminate two instances in Rule 21.8 which refer to the handling of 
the discretionary portion of discretionary orders. The Exchange is 
proposing to eliminate these references because the Exchange has 
removed discretionary orders from the types of orders allowed by BATS 
Options,\7\ making the references to the handling of discretionary 
orders obsolete. Specifically, the Exchange is proposing to delete 
Rules 21.8(a)(1)(B) and 21.8(a)(2)(C).
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    \7\ See Securities Exchange Act Release No. 68752 (January 29, 
2013), 78 FR 7826 (February 4, 2013) (SR-BATS-2013-003) (notice of 
filing and immediate effectiveness of proposed rule change to amend 
BATS rules in connection with the elimination of discretionary 
orders for BATS Options).
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2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act \8\ in general, and furthers the objectives of Section 
6(b)(5) of the Act \9\ in particular, in that it is designed 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, 
by helping to avoid executions of market orders on BATS Options at 
prices that are significantly worse than the NBBO at the time an order 
is initially received by BATS Options. The Exchange also believes that 
the Initial NBBO is a fair representation of then-available prices and 
accordingly provides for an appropriate pricing mechanism such

[[Page 23967]]

that BATS Market Orders should not be executed at a significantly worse 
price. Also, this proposal is consistent with existing BATS Options 
rules that allow for the breaking of trades meeting the definition of 
an obvious error \10\ as well as a recently adopted change to the rules 
of BATS Options to reject market orders received when the underlying 
security is subject to a ``Limit State'' or ``Straddle State'', as 
defined in the Limit Up-Limit Down Plan.\11\ Accordingly, the Exchange 
believes that this proposal is designed to promote just and equitable 
principles of trade, remove impediments to, and perfect the mechanism 
of, a free and open market and a national market system.
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    \8\ 15 U.S.C. 78f(b).
    \9\ 15 U.S.C. 78f(b)(5).
    \10\ See BATS Rule 20.6.
    \11\ See Securities Exchange Act Release No. 69121 (March 12, 
2013), 78 FR 16750 (March 18, 2013) (SR-BATS-2013-014) (notice of 
filing and immediate effectiveness of proposed rule change to modify 
the operation of market orders for BATS Options).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition that is not necessary or appropriate 
in furtherance of the purposes of the Act. The Exchange believes the 
proposal will provide market participants with additional protection 
from anomalous executions. Thus, the Exchange does not believe the 
proposal creates any significant impact 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 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 prior to 
30 days from the date on which it was filed, or such shorter time as 
the Commission may designate, if consistent with the protection of 
investors and the public interest, the proposed rule change has become 
effective pursuant to Section 19(b)(3)(A) of the Act \12\ and Rule 19b-
4(f)(6) thereunder.\13\
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    \12\ 15 U.S.C. 78s(b)(3)(A).
    \13\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)(iii) 
requires a self-regulatory organization to give the Commission 
written notice of its intent to file the proposed rule change, along 
with a brief description and text of the proposed rule change, at 
least five business days prior to the date of filing of the proposed 
rule change, or such shorter time as designated by the Commission. 
The Exchange has satisfied this requirement.
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    A proposed rule change filed under Rule 19b-4(f)(6) \14\ normally 
does not become operative prior to 30 days after the date of the 
filing. However, pursuant to Rule 19b4(f)(6)(iii),\15\ the Commission 
may designate a shorter time if such action is consistent with the 
protection of investors and the public interest. The Exchange has asked 
the Commission to waive the 30-day operative delay so that the Exchange 
may implement the protections proposed herein as soon as possible. The 
Exchange states that such waiver would benefit investors and market 
participants by providing additional protection from certain executions 
under all market conditions, but particularly in volatile market 
conditions, especially for market orders on BATS Options at prices that 
are significantly worse than the NBBO at the time the Exchange receives 
such orders. The Exchange further notes that waiver of the 30-day 
operative delay will permit the Exchange to collar market orders on 
BATS Options in the same manner that it currently collars market orders 
for BATS Equities. The Commission notes that waiving the 30-day 
operative delay would allow investors and market participants to 
benefit immediately from the proposed collar protection for market 
orders, and believes that waiving the 30-day operative delay is 
consistent with the protection of investors and the public 
interest.\16\ Therefore, the Commission hereby waives the 30-day 
operative delay and designates the proposal operative upon filing.
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    \14\ 17 CFR 240.19b-4(f)(6).
    \15\ 17 CFR 240.19b-4(f)(6)(iii).
    \16\ For purposes only of waiving the 30-day operative delay, 
the Commission has considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
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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-2013-023 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-2013-023. 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 
10:00 a.m. and 3:00 p.m. Copies of the 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 available publicly. All 
submissions should refer to File Number SR-BATS-2013-023 and should be 
submitted on or before May 14, 2013.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\17\
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    \17\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-09524 Filed 4-22-13; 8:45 am]
BILLING CODE 8011-01-P