[Federal Register Volume 78, Number 129 (Friday, July 5, 2013)]
[Notices]
[Pages 40531-40538]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-16089]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-69889; File No. SR-BATS-2013-035]


Self-Regulatory Organizations; BATS Exchange, Inc.; Notice of 
Filing of a Proposed Rule Change, as Modified by Amendment No. 1 
Thereto, To Amend the Competitive Liquidity Provider Program

June 28, 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 June 17, 2013, BATS Exchange, Inc. (``Exchange'' or ``BATS'') 
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. On June 24, 2013, the 
Exchange submitted Amendment No. 1 to the proposed rule change.\3\ The 
Commission is publishing this notice to solicit comments on the 
proposed rule change, as modified by Amendment No. 1 thereto, from 
interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ In Amendment No. 1, the Exchange made technical corrections 
and amended the proposed rule text to clarify that any CLP Security 
listed on the Exchange shall be eligible for the CLP Program for the 
first six months that it is listed on the Exchange, regardless of 
the ETP's CADV (as such terms are defined below).
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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 to add an Interpretation and Policy 
.03 to Rule 11.8 entitled ``Competitive Liquidity Provider Program for 
Exchange Traded Products'' to incentivize competitive and aggressive 
quoting by market makers registered with the Exchange (``Market 
Makers'') \4\ in Exchange-listed ETPs.\5\ The Exchange is also 
proposing to make a corresponding amendment to Interpretation and 
Policy .02 to Rule 11.8, entitled ``Competitive Liquidity Provider 
Program'' in order to reflect the proposal to remove ETPs listed on the 
Exchange from the existing Competitive Liquidity Provider Program.
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    \4\ As defined in BATS Rules, the term ``Market Maker'' means a 
Member that acts as a market maker pursuant to Chapter XI of BATS 
Rules.
    \5\ As proposed in Interpretation and Policy .03 (b)(4) to Rule 
11.8, the term ``ETP'' includes Portfolio Depository Receipts, Index 
Fund Shares, Trust Issued Receipts, and Managed Fund Shares, which 
are defined in Rule 14.11(b), 14.11(c), 14.11(f), and 14.11(i), 
respectively, which the Exchange may propose to expand in the future 
as it adds products which may be listed on the Exchange. Any such 
expansion would require the Exchange to file a proposal with the 
Commission under Rule 19b-4 of the Act.
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    As proposed, the Competitive Liquidity Provider Program for 
Exchange Traded Products (the ``Program'') set forth in Interpretation 
and Policy .03 to Rule 11.8 will be effective for a one year pilot 
period beginning from the date of implementation of the program. During 
the pilot, the Exchange will periodically provide information to the 
Commission about market quality with respect to the Program.
    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
Background
    On August 30, 2011, the Exchange received approval of rules 
applicable to the qualification, listing and delisting of securities of 
issuers on the Exchange.\6\ 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 to enhance liquidity on the Exchange in all Exchange-listed 
securities (the ``CLP Program'').\7\ The Exchange subsequently adopted 
financial incentives for the CLP Program \8\ and thereafter amended 
certain components of the CLP Program, including financial incentives 
and quoting requirements for Competitive Liquidity Providers in the CLP 
Program.\9\
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    \6\ See Securities Exchange Act Release No. 65225 (August 30, 
2011), 76 FR 55148 (September 6, 2011) (SR-BATS-2011-018).
    \7\ See Securities Exchange Act Release No. 66307 (February 2, 
2012), 77 FR 6608 (February 8, 2012) (SR-BATS-2011-051).
    \8\ See Securities Exchange Act Release No. 66427 (February 21, 
2012), 77 FR 11608 (February 27, 2012) (SR-BATS-2012-011).
    \9\ See Securities Exchange Act Release Nos. 67854 (September 
13, 2012), 77 FR 58198 (September 19, 2012) (SR-BATS-2012-036) and 
69190 (March 20, 2013), 78 FR 18384 (March 26, 2013) (SR-BATS-2013-
005).
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    The purpose of this filing is to propose new Interpretation and 
Policy .03 to Rule 11.8, which is based substantially on the CLP 
Program, that seeks to incentivize certain market makers registered 
with the Exchange as Competitive Liquidity Providers (``CLPs'') to 
enhance liquidity on the Exchange in certain ETPs listed on the 
Exchange and thereby qualify to receive part of a daily rebate pursuant 
to the Program (a ``CLP Rebate''). The Exchange is also proposing to 
make several related amendments to existing Interpretation and Policy 
.02 to Rule 11.8 in order to remove ETPs from the CLP Program so that 
it applies only to corporate issues.
    Proposed Interpretation and Policy .03 to Rule 11.8 will be 
effective for a one year pilot period. The pilot period will commence 
when the Program is implemented by the Exchange and a CLP Company,\10\ 
on behalf of a CLP

[[Page 40532]]

Security,\11\ and one or more related market makers are accepted into 
the Program in respect of a security listed pursuant to the Program. 
The pilot program will, unless extended, end one year after 
implementation. During the pilot, the Exchange will submit monthly 
reports to the Commission about market quality with respect to the 
Program. The monthly reports will endeavor to compare, to the extent 
practicable, securities before and after they are in the Program, 
including those securities that ``graduate'' from the Program, and will 
include information regarding the Program which will enable the 
Exchange and the Commission to better analyze the effectiveness of the 
Program, such as: (1) Rule 605 metrics; \12\ (2) volume metrics; (3) 
number of CLPs in target securities; (4) spread size; and (5) 
availability of shares at the NBBO. The Exchange will endeavor to 
provide similar data to the Commission about comparable ETPs that are 
listed on the Exchange that are not in the Program; and any other 
Program related data requested by the Commission for the purpose of 
evaluating the efficacy of the Program. The Exchange will post the 
monthly reports on its Web site. The first report will be submitted 
within sixty days after the Program becomes operative.
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    \10\ As defined in proposed Interpretation and Policy .03(b)(2) 
to Rule 11.8, the term ``CLP Company'' means the trust or company 
housing the ETP or, if the ETP is not a series of a trust or 
company, then the ETP itself.
    \11\ As defined in proposed Interpretation and Policy .03(b)(3) 
to Rule 11.8, the term ``CLP Security'' means an issue of or series 
of ETP securities issued by a CLP Company that meets all of the 
requirements to be listed on the Exchange pursuant to Rule 14.11.
    \12\ 17 CFR 242.605.
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Competitive Liquidity Provider Program for Exchange Traded Products
    The Exchange is proposing to adopt a new rule titled ``Competitive 
Liquidity Provider Program for Exchange Traded Products'' as 
Interpretation and Policy .03 to Rule 11.8. The Program is designed to 
promote market quality in CLP Securities \13\ by allowing a CLP Company 
to list an eligible CLP Security on the Exchange and, in addition to 
paying the standard (non-CLP) listing fee as set forth in the fee 
schedule, a Sponsor \14\ may pay a fee (a ``CLP Fee'') in order for the 
CLP Company, on behalf of a CLP Security, to participate in the 
Program, which will be credited to the BATS General Fund. The Exchange 
will then pay the CLP Rebate out of the BATS General Fund in order to 
incentivize CLPs in the CLP Security to quote aggressively in the CLP 
Security by providing a CLP Rebate to one or more CLPs that make a 
quality market in the CLP Security pursuant to the Program.\15\
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    \13\ The Exchange notes that CLP Securities do not encompass 
derivatives on such securities.
    \14\ As defined in proposed Interpretation and Policy .03(b)(5) 
to Rule 11.8, Sponsor means the registered investment adviser that 
provides investment management services to a CLP Company or any of 
such adviser's parents or subsidiaries.
    \15\ The enhanced market quality (e.g. liquidity) would, as 
discussed below, be identical to the existing CLP Quoting 
Requirements in Interpretation and Policy .02(g) to Rule 11.8. These 
standards include, for example, posting at least five round lots in 
a CLP Security at the NBB or NBO at the time of a SET in order to 
have a Winning Bid SET or Winning Offer SET, respectively, as well 
as requiring that a CLP is quoting at least a round lot at a price 
at or within 1.2% of the CLP's bid (offer) at the time of the SET in 
order to have a Winning Bid (Offer) Set. The two CLPs that have the 
most Winning Bid SETs and the two Eligible CLPs with the most 
Winning Offer SETs in a given CLP Security will split the CLP Credit 
on a pro-rata basis. Proposed Interpretation and Policy .03(i) to 
Rule 11.8.
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    The Exchange believes that the Program will be beneficial to the 
financial markets, to market participants including traders and 
investors, and to the economy in general. First, the Program will 
encourage narrow spreads and liquid markets in securities that 
generally have not been, or may not be, conducive to naturally having 
such narrow spreads and liquidity. These securities may include less 
actively traded or less well known ETPs that are made up of securities 
of less well known or start-up companies as components.\16\ Second, in 
rewarding market makers that are willing to help to develop liquid 
markets for CLP Securities subject to the Program,\17\ the Program 
would benefit traders and investors by encouraging more quote 
competition, narrower spreads, and greater liquidity. Third, the 
Program will lower transaction costs and enhance liquidity in both ETPs 
and their components, making those securities more attractive to a 
broader range of investors. In so doing, the Program will help 
companies access capital to invest and grow.
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    \16\ These small companies and their securities (whether 
components of listed products like ETPs or direct listings) have 
been widely recognized as essential to job growth and creation and, 
by extension, the health of the economy. Being included in a 
successful ETP can provide the stocks of these companies with 
enhanced liquidity and exposure, enabling them to attract investors 
and access capital markets to fund investment and growth.
    \17\ By imposing quality quoting requirements to enhance the 
quality of the market for CLP Securities, the Program will directly 
impact one of the ways that market makers manage risk in lower tier 
or less liquid securities (e.g. the width of bid and offer pricing).
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Securities Eligible for the Program
    The Exchange is proposing that any CLP Company, on behalf of a CLP 
Security, shall be eligible for the Program, as long as: (i) The 
Exchange has accepted the Program application of the CLP Company with 
respect to the CLP Security and the Exchange has accepted the Program 
application of at least one CLP in the CLP Security; (ii) the CLP 
Security meets all requirements to be listed on the Exchange as an ETP; 
(iii) the CLP Security meets all Exchange requirements for continued 
listing at all times the CLP Security participates in the Program; (iv) 
while the CLP Security is participating in the Program, on a product-
specific Web site, the CLP Company is indicating that the product is in 
the Program and provides a link to the Exchange's Program Web site; and 
(v) the security has a consolidated average daily volume (``CADV'') of 
less than 1 million shares for at least one of the past three calendar 
months, however, any CLP Security listed on the Exchange shall be 
eligible for the Program for the first six months that it is listed on 
the Exchange, regardless of the ETP's CADV.\18\
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    \18\ Proposed Interpretation and Policy .03(d)(1) and (d)(3) to 
Rule 11.8.
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Application
    The Exchange is proposing that any entity that wishes to 
participate in the Program must submit an application in the form 
prescribed by the Exchange, which includes both CLP Companies on behalf 
of a CLP Security and CLPs.\19\
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    \19\ Proposed Interpretation and Policy .03(c)(1) to Rule 11.8.
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CLPs
    To become a CLP, a Member must submit a CLP application form with 
all supporting documentation to the Exchange. As is currently the case 
for membership applications to join the Exchange and applications to 
register as market makers on the Exchange, Exchange personnel in the 
Exchange's membership department will process such applications. 
Exchange personnel will determine whether an applicant is qualified to 
become a CLP based on the qualifications described below. After an 
applicant submits a CLP application to the Exchange, with supporting 
documentation, the Exchange shall notify the applicant Member of its 
decision. If an applicant is approved by the Exchange to receive CLP 
status, such applicant must establish connectivity with relevant 
Exchange systems before such applicant will be permitted to trade as a 
CLP on the Exchange. In the event an applicant is disapproved by the 
Exchange, such applicant may seek review under Chapter X of the 
Exchange's Rules governing adverse action and/or reapply for CLP status 
at least three (3) calendar months following the month in which the

[[Page 40533]]

applicant received the disapproval notice from the Exchange. Chapter X 
of the Exchange's Rules provides any persons who are or are about to be 
aggrieved by an adverse action taken by the Exchange with a process to 
apply for an opportunity to be heard and to have the complained of 
action reviewed.\20\
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    \20\ Proposed Interpretation and Policy .03(g) to Rule 11.8.
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    To qualify as a CLP, a Member will be required to be a registered 
Market Maker in good standing with the Exchange consistent with Rules 
11.5 through 11.8. Further, the Exchange will require each Member 
seeking to qualify as a CLP to have and maintain: (1) Adequate 
technology to support electronic trading through the systems and 
facilities of the Exchange; (2) one or more unique identifiers that 
identify to the Exchange CLP trading activity in assigned CLP 
Securities; \21\ (3) adequate trading infrastructure to support CLP 
trading activity, which includes support staff to maintain operational 
efficiencies in the Program and adequate administrative staff to manage 
the Member's participation in the Program; (4) quoting and volume 
performance that demonstrates an ability to meet the CLP quoting 
requirement in each assigned CLP Security on a daily and monthly basis; 
(5) a disciplinary history that is consistent with just and equitable 
business practices; and (6) the business unit of the Member acting as a 
CLP must have in place adequate information barriers between the CLP 
unit and the Member's customer, research and investment banking 
business.\22\ These requirements are identical to those of the existing 
CLP Program.\23\
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    \21\ As proposed, a Member may not use such unique identifiers 
for trading activity at the Exchange in assigned CLP securities that 
is not CLP trading activity, but may use the same unique identifiers 
for trading activity in securities not assigned to a CLP. If a 
Member does not identify to the Exchange the unique identifier to be 
used for CLP trading activity, the Member will not receive credit 
for such CLP trading.
    \22\ Proposed Interpretation and Policy .03(f) to Rule 11.8.
    \23\ See Interpretation and Policy .02(c) and (e) to Rule 11.8.
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Withdrawal and Renewal
    The Exchange is proposing that any entity that wishes to withdraw 
from the Program must provide written notice to the Exchange, however, 
the requirements for CLPs and CLP Companies on behalf of CLP Securities 
are different, as further explained below.
CLPs
    A CLP may withdraw from the status of a CLP by providing written 
notice to the Exchange. Such withdrawal shall become effective when 
those CLP Securities assigned to the withdrawing CLP are reassigned to 
another CLP. After the Exchange receives the notice of withdrawal from 
the withdrawing CLP, the Exchange will reassign such CLP Securities as 
soon as practicable but no later than thirty (30) days after the date 
said notice is received by the Exchange. In the event the reassignment 
of CLP Securities takes longer than the 30-day period, the withdrawing 
CLP will have no obligations under this Interpretation and Policy .03 
and will not be held responsible for any matters concerning its 
previously assigned CLP Securities upon termination of this 30-day 
period.\24\
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    \24\ Proposed Interpretation and Policy .03(h) to Rule 11.8.
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CLP Securities
    A CLP Company may, on behalf of a CLP Security, after being in the 
Program for not less than two consecutive quarters, but less than one 
year, voluntarily withdraw from the Program on a quarterly basis. The 
CLP Company must notify the Exchange in writing, not less than one 
month prior to withdrawing from the Program. The Exchange, however, 
does retain discretion to allow a CLP Company to withdraw from the 
Program earlier than required above. In making such decision, the 
Exchange may take into account the volume and price movements in the 
CLP Security; the liquidity, size quoted, and quality of the market in 
the CLP Security; and any other relevant factors. After a CLP Security 
is in the Program for one year or more, the CLP Company may voluntarily 
withdraw from the Program on a monthly basis, so long as the CLP 
Company notifies the Exchange in writing not less than one month prior 
to withdrawing from the Program.\25\
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    \25\ Proposed Interpretation and Policy .03(c)(2) to Rule 11.8.
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    After a CLP Company, on behalf of a CLP Security, is in the Program 
for one year, the Program and all obligations and requirements of the 
Program will automatically continue on an annual basis unless: (1) The 
Exchange terminates the Program by providing not less than one month 
prior notice of intent to terminate or the pilot Program is not 
extended or made permanent pursuant to a proposed rule change subject 
to filing with or approval by the Commission; (2) the CLP Company 
withdraws from the Program pursuant to the withdrawal rules described 
above; or (3) the CLP Company is terminated from the Program pursuant 
to subsection (n) of the proposal.\26\
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    \26\ Interpretation and Policy .03(n) to Rule 11.8 states that 
the Program will terminate with respect to a CLP Security under the 
following circumstances: (A) A CLP Security sustains a CADV of one 
million shares or more for three consecutive months, however, any 
CLP Security listed on the Exchange shall be eligible for the 
Program for the first six months that it is listed on the Exchange, 
regardless of the ETP's CADV; (B) A CLP Company, on behalf of a CLP 
Security, withdraws from the Program, is no longer eligible to be in 
the Program pursuant to this rule, or its Sponsor ceases to make CLP 
Fee payments to the Exchange; (C) A CLP Security is delisted or is 
no longer eligible for the Program; or (D) A CLP Security does not, 
for two consecutive quarters, have at least one CLP that is eligible 
for CLP Rebate. It should be noted, however, that termination of a 
CLP Company, CLP Security, or CLP does not preclude the Exchange 
from allowing re-entry into the Program where the Exchange deems 
such re-entry as proper.
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CLP Company Fees
    A CLP Company seeking to participate in the Program shall incur an 
annual basic CLP Fee of $30,000 per CLP Security. The basic CLP Fee 
must be paid to the Exchange prospectively on a quarterly basis.\27\
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    \27\ Proposed Interpretation and Policy .03(d)(2)(A) to Rule 
11.8.
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    A CLP Company may also incur an annual supplemental CLP Fee per CLP 
Security. The basic CLP Fee and supplemental CLP Fee, when combined, 
may not exceed $100,000 per year. The supplemental CLP Fee is a fee 
selected by a CLP Company on an annual basis, if at all. The 
supplemental CLP Fee must be paid to the Exchange prospectively on a 
quarterly basis. The amount of the supplemental CLP Fee, if any, will 
be determined by the CLP Company initially per CLP Security and will 
remain the same for the period of a year. The Exchange will provide 
notification on its Web site regarding the amount, if any, of any 
supplemental CLP Fee determined by a CLP Company per CLP Security.\28\
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    \28\ Proposed Interpretation and Policy .03(d)(2)(B) to Rule 
11.8.
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    The CLP Fee is in addition to the standard (non-CLP) Exchange 
listing fee applicable to the CLP Security and does not offset such 
standard listing fee.\29\ For a CLP Security housed by a CLP Company 
that has a Sponsor or Sponsors, the CLP Fee with respect to the CLP 
Security shall be paid by the Sponsor or Sponsors of such CLP Security. 
The Exchange will prospectively bill each CLP Company for the quarterly 
CLP Fee for each CLP Security.\30\ CLP Fees (both basic and

[[Page 40534]]

supplemental) will be credited to the BATS General Fund.
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    \29\ Proposed Interpretation and Policy .03(d)(2)(C) to Rule 
11.8. The CLP Fee with respect to an ETP shall be paid by the 
Sponsor(s) of such ETP.
    \30\ Proposed Interpretation and Policy .03(d)(2)(D) to Rule 
11.8.
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CLP Quoting Requirements
    CLPs are subject to both a daily quoting requirement in order to be 
eligible to receive financial incentives and a monthly quoting 
requirement in order to remain qualified as a CLP. These quoting 
requirements are identical to the quoting requirements of the 
Exchange's existing CLP Program.\31\ Any CLP that meets the daily 
quoting requirement set forth below will be eligible to receive a 
portion of the CLP Rebate for each day's quoting activity. A CLP that 
does not meet the CLP monthly quoting requirement is subject to the 
non-regulatory penalties described below.
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    \31\ See Interpretation and Policy .02(g) to Rule 11.8.
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    The Exchange will continue to measure the performance of a CLP in 
CLP Securities by calculating Size Event Tests (``SETs'') between 9:25 
a.m. and 4:05 p.m. on every day on which the Exchange is open for 
business. The Exchange will measure each CLP's quoted size, excluding 
odd lots, at the NBB and NBO at least once per second to determine 
SETs. The CLP with the greatest aggregate size at the NBB at each SET 
(a ``Bid SET'') will be considered to have a winning Bid SET (a 
``Winning Bid SET''). Separately, the CLP with the greatest aggregate 
size at the NBO at each SET (an ``Offer SET'') will be considered to 
have a winning Offer SET (a ``Winning Offer SET'').\32\
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    \32\ Proposed Interpretation and Policy .03(i)(1) to Rule 11.8.
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    In order to meet the daily quoting requirement, a CLP must have 
Winning Bid SETs or Winning Offer SETs equal to at least 10% of the 
total Bid SETs or total Offer SETs, respectively, on any trading day in 
order to be eligible for any CLP Rebate (each such CLP, an ``Eligible 
CLP'') for a CLP Security, as is also required under the existing CLP 
Program.\33\ Eligible CLPs will be ranked according to the number of 
Winning Bid SETs and Winning Offer SETs each trading day, and only the 
Eligible CLP or Eligible CLPs ranked number one and the Eligible CLP or 
Eligible CLPs ranked number two in each of the Winning Bid SETs and 
Winning Offer SETs will receive the CLP Rebate.\34\
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    \33\ See Interpretation and Policy .02(g)(1)(A) to Rule 11.8.
    \34\ Proposed Interpretation and Policy .03(i)(1)(A) to Rule 
11.8.
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    In order to meet the monthly quoting requirements, a CLP must be 
quoting at the NBB or the NBO 10% of the time that the Exchange 
calculates SETs.\35\
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    \35\ Proposed Interpretation and Policy .03 (i)(1)(B) to Rule 
11.8.
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    As is also required under the Exchange's existing CLP Program, a 
CLP must be quoting, at a minimum, five round lots (usually 500 
shares), excluding odd lots, of the CLP Security, at the NBB or NBO, 
respectively, at the time of a SET in order to have a Winning Bid SET 
or a Winning Offer SET. Such quoting requirements will be measured by 
utilizing the unique identifiers that the Member has identified for CLP 
trading activity.\36\ In addition, during Regular Trading Hours\37\ a 
CLP must also be quoting at least a displayed round lot offer, 
excluding odd lots, at a price at or within 1.2% of the CLP's bid at 
the time of the SET in order to have a Winning Bid SET.\38\ Similarly, 
during Regular Trading Hours, a CLP must be quoting at least a 
displayed round lot offer, excluding odd lots, at a price at or within 
1.2% of the CLP's offer at the time of the SET in order to have a 
Winning Offer Set.\39\
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    \36\ Proposed Interpretation and Policy .03(i)(4) to Rule 11.8.
    \37\ As defined in BATS Rule 1.5(w), the term ``Regular Trading 
Hours'' means the time between 9:30 a.m. and 4:00 p.m. Eastern Time.
    \38\ Proposed Interpretation and Policy .03(i)(5) to Rule 11.8.
    \39\ Id.
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    For purposes of calculating whether a CLP is in compliance with its 
CLP quoting requirements, the CLP must post displayed liquidity in 
round lots in its assigned CLP Securities at the NBB or the NBO.\40\ A 
CLP may post non-displayed liquidity; however, such liquidity will not 
be counted as credit towards the CLP quoting requirements. The CLP 
shall not be subject to any minimum or maximum quoting size requirement 
in assigned CLP Securities apart from the requirement that an order be 
for at least one round lot. The CLP quoting requirements will be 
measured by utilizing the unique identifiers that the Member has 
identified for CLP trading activity. CLPs may only enter orders 
electronically directly into Exchange systems and facilities designated 
for this purpose. All CLP orders must only be for the proprietary 
account of the CLP Member.
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    \40\ Proposed Interpretation and Policy .03(i)(2) to Rule 11.8.
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CLP Rebate
    As described above, pursuant to the Program, the Exchange will 
measure the performance of CLPs in CLP Securities by calculating SETs 
between 9:25 a.m. and 4:05 p.m. on every day on which the Exchange is 
open for business. Each day, one quarter of the total annual CLP Fees 
(basic and supplemental combined) for the CLP Security divided by the 
number of trading days in the current quarter will constitute the total 
CLP Rebate for the CLP Security. For instance, where the total CLP Fees 
for a CLP Security is $64,000 and there are 64 trading days in the 
current quarter, the total CLP Rebate for the CLP Security would be 
$250 [($64,000/4)/64].\41\
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    \41\ Proposed Interpretation and Policy .03(m)(1) to Rule 11.8.
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    Accordingly, the two Eligible CLPs with the most Winning Bid SETs 
will split half of the daily CLP Rebate for the CLP Security on a pro 
rata basis and the two Eligible CLPs with the most Winning Offer SETs 
will split half of the daily CLP Rebate for the CLP Security on a pro 
rata basis.\42\ Specifically, the Exchange is proposing to determine 
the portion of the CLP Rebate that a CLP receives based on the number 
of each CLP's Winning Bid (Offer) SETs as a percentage of total Winning 
Bid (Offer) SETs between the two CLPs with the most Winning Bid (Offer) 
SETs. For instance, where CLP1 has 6,000 Winning Bid (Offer) SETs, CLP2 
has 4,000 Winning Bid (Offer) SETS, and CLP3 has 3,000 Winning Bid 
(Offer) SETs, CLP1 would be allocated 60% of half of the daily CLP 
Rebate [6,000/(6000+4000)] and CLP2 would be allocated 40% of the half 
of the daily CLP Rebate [4,000/(6,000+4,000)]. Using the example above, 
CLP1 would receive $75 [($250/2)x.6)] and CLP2 would receive $50 
[($250/2)x.4]. In the event that there is only one Eligible CLP for the 
bid (offer) portion of the CLP Rebate for a CLP Security, such Eligible 
CLP will receive 100% of the bid (offer) half of the CLP Rebate. In the 
event that multiple CLPs have an equal number of winning SETs, the CLP 
with the highest executed volume in the CLP Security will be awarded 
the applicable portion of the CLP Rebate. Where no CLPs are eligible 
for the bid or offer portion of the CLP Rebate, no CLP Rebate will be 
awarded to any CLP and no refund will be provided.\43\
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    \42\ Id.
    \43\ Id.
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Assignment of CLP Securities
    The Exchange, in its discretion, will assign to the CLP one or more 
CLP Securities for CLP trading purposes. The Exchange shall determine 
the number of CLP Securities assigned to each CLP. The Exchange, in its 
discretion, will assign one (1) or more CLPs to each CLP Security 
subject to the Program,

[[Page 40535]]

depending upon the trading activity of the CLP Security.\44\
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    \44\ Proposed Interpretation and Policy .03 (j)(1) to Rule 11.8.
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Non-Regulatory Penalties
    If a CLP fails to meet the CLP quoting requirements, the Exchange 
may impose certain non-regulatory penalties. First, if, between 9:25 
a.m. and 4:05 p.m. on any day on which the Exchange is open for 
business, a CLP fails to meet its daily quoting requirement by failing 
to have at least 10% of the winning SETs for that trading day, the CLP 
will not be eligible to receive the CLP Rebate for that day's quoting 
activity in that particular assigned CLP Security. Second, if a CLP 
fails to meet its monthly quoting requirement for three (3) consecutive 
months in any assigned CLP Security, the CLP will be at risk of losing 
its CLP status. Thus, the Exchange may, in its discretion, take the 
following non-regulatory actions: (i) revoke the assignment of the 
affected CLP Security(ies) and/or one or more additional unaffected CLP 
Securities; or (ii) disqualify a Member's status as a CLP.\45\
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    \45\ Proposed Interpretation and Policy .03 (l)(1) to Rule 11.8.
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    The Exchange shall determine if and when a Member is disqualified 
from its status as a CLP. One (1) calendar month prior to any such 
determination, the Exchange will notify the CLP of such impending 
disqualification in writing. If the CLP fails to meet the monthly 
quoting requirements as described above for a third consecutive month 
in a particular CLP Security, the CLP may be disqualified from CLP 
status. When disqualification determinations are made, the Exchange 
will provide a disqualification notice to the Member informing such 
Member that it has been disqualified as a CLP.\46\ In the event a 
Member is disqualified from its status as a CLP, such Member may re-
apply for CLP status. Such application process shall occur at least 
three (3) calendar months following the month in which such Member 
received its disapproval or disqualification notice. Further, in the 
event a Member is determined to be ineligible for the CLP Rebate for 
failure to meet its daily quoting obligation or is disqualified from 
its status as a CLP, such Member may seek review under Chapter X of the 
Exchange's Rules governing adverse action.\47\ As noted above, Chapter 
X of the Exchange's Rules provides any persons who are or are about to 
be aggrieved by an adverse action taken by the Exchange with a process 
to apply for an opportunity to be heard and to have the complained of 
action reviewed.
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    \46\ Proposed Interpretation and Policy .03(l)(2) to Rule 11.8.
    \47\ Proposed Interpretation and Policy .03(l)(3) to Rule 11.8.
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Web Site Disclosures
    In order to provide transparency into the Program, including CLPs, 
CLP Companies, and the CLP Securities that are listed on the Exchange, 
the Exchange proposes to provide notification on its Web site regarding 
the following: (i) acceptance of a CLP Company, on behalf of a CLP 
Security, and a CLP into the Program; (ii) the total number of CLP 
Securities that any one CLP Company may have in the Program; (iii) the 
names of CLP Securities and the CLP(s) in each CLP Security, the dates 
that a CLP Company, on behalf of a CLP Security, commences 
participation in and withdraws or is terminated from the Program, and 
the name of each CLP Company and its associated CLP Security or 
Securities; (iv) a statement about the Program that sets forth a 
general description of the Program as implemented on a pilot basis and 
a fair and balanced summation of the potentially positive aspects of 
the Program as well as the potentially negative aspects and risks of 
the Program, and indicates how interested parties can get additional 
information about products in the Program; and (v) the intent of a CLP 
Company, on behalf of a CLP Security, or CLP to withdraw from the 
Program, and the date of actual withdrawal or termination from the 
Program.\48\
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    \48\ Proposed Interpretation and Policy .03(o) to Rule 11.8.
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    In addition, a CLP Company that, on behalf of a CLP Security, is 
approved to participate in the Program shall issue a press release to 
the public when the CLP Company, on behalf of a CLP Security, commences 
or ceases participation in the Program. The press release shall be in a 
form and manner prescribed by the Exchange, and, if practicable, shall 
be issued at least two days before commencing or ceasing participation 
in the Program. The CLP Company shall dedicate space on its Web site, 
or, if it does not have a Web site, on the Web site of the Sponsor of 
the CLP Security, that (i) includes any such press releases, and (ii) 
provides a hyperlink to the dedicated page on the Exchange's Web site 
that describes the Program.
Consistency With Regulation M
    Rule 102 of Regulation M prohibits an issuer from directly or 
indirectly attempting ``to induce any person to bid for or purchase, a 
covered security during the applicable restricted period'' unless an 
exemption is available.\49\ For the reasons discussed below, the 
Exchange believes that exemptive relief from Rule 102 should be granted 
for the Program.
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    \49\ Rule 102 provides that ``[i]n connection with a 
distribution of securities effected by or on behalf of an issuer or 
selling security holder, it shall be unlawful for such person, or 
any affiliated purchaser of such person, directly or indirectly, to 
bid for, purchase, or attempt to induce any person to bid for or 
purchase, a covered security during the applicable restricted 
period'' unless an exception is available. See 17 CFR 242.102.
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    First, the Exchange notes that the Commission and its staff have 
previously granted relief from Rule 102 to a number of exchange traded 
products (``Existing Relief'') in order to permit the ordinary 
operation of such exchange traded products.\50\ In granting the 
Existing Relief, the Commission has relied in part on the exclusion 
from the provisions of Rule 102 provided by paragraph (d)(4) of Rule 
102 for securities issued by an open-end management investment company 
or unit investment trust. In granting the Existing Relief from Rule 102 
to other types of exchange traded products, for which the (d)(4) 
exception is not available, the staff has relied on (i) representations 
that the fund in question would continuously redeem exchange traded 
product shares in basket-size aggregations at their NAV and that there 
should be little disparity between the market price of an exchange 
traded product share and the NAV per share and (ii) a finding that 
``[t]he creation, redemption, and secondary market transactions in 
[shares] do not appear to result in the abuses that Rules 101 and 102 
of Regulation M were designed to prevent.'' \51\ The crux of the 
Commission's findings in granting the Existing Relief rests on the 
premise that the prices of exchange traded product shares closely track 
their per-share NAVs. Given that the Program neither alters the 
derivative pricing nature of ETPs nor impacts the arbitrage 
opportunities inherent therein, the conclusion on which the Existing 
Relief is based remains unaffected by the Incentive Program. In this 
regard, most ETPs that would be eligible to participate in the Program 
would have previously been granted relief from Rule 102.
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    \50\ See, e.g., Letter from James A. Brigagliano, Acting 
Associate Director, Division of Market Regulation, to Stuart M. 
Strauss, Esq., Clifford Chance US LLP (October 24, 2006) (regarding 
class relief for exchange traded index funds).
    \51\ See Rydex Specialized Products LLC, SEC No-Action Letter 
(June 21, 2006).
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    Second, the Program requires, among other things, that a CLP make 
two-sided quotes during Regular Trading Hours in

[[Page 40536]]

order to have a winning set. The Program is not intended to raise ETP 
prices, but rather to improve market quality. In light of the 
derivative nature of ETPs, the Exchange does not expect that CLPs will 
quote outside of the normal quoting ranges for these products as a 
result of the CLP Rebate, but rather would quote within their normal 
ranges as determined by market factors. Indeed, the Program would not 
create any incentive for a CLP to quote outside such ranges.
    Finally, the staff of the Exchange, which is a self-regulatory 
organization, would be interposed between the issuer and the CLP, 
administering a rules-based program with numerous structural safeguards 
described in the previous sections. Specifically, both CLPs and CLP 
Companies would be required to apply to participate in the Program and 
to meet certain standards. CLP Companies could not cause any fee to be 
paid to a CLP under the Program. The Exchange would collect the CLP 
Fees and credit them to the Exchange's General Fund. A CLP would be 
eligible to receive a CLP Rebate, again, from the Exchange's General 
Fund, only after it qualified for the CLP Rebate, as described above. 
Such qualification standards are set and monitored by the Exchange. 
Application to, continuation in, and withdrawal from the Program would 
be governed by published Exchange rules and policies, and there would 
be extensive public notice regarding the Program and payments 
thereunder on both the Exchange's and the CLP Company's Web sites. 
Given these structural safeguards, the Exchange believes that payments 
under the Program are appropriate for exemptive relief from Rule 102.
    In summary, the Exchange believes that exemptive relief from Rule 
102 should be granted for the Program because, for example: (1) The 
Program would not create any incentive for a CLP to quote outside of 
the normal quoting ranges for the ETPs included therein; (2) the 
Program has numerous structural safeguards, such as the application 
process for CLP Companies and CLPs, the interpositioning of the 
Exchange between CLP Companies and CLPs, and significant public 
disclosure surrounding the Program; and (3) the Program does not alter 
the basis on which Existing Relief is based and, furthermore, most ETPs 
that would be eligible to participate in the Program would have 
previously been granted relief from Rule 102.\52\
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    \52\ The Exchange notes that the Commission granted a limited 
exemption from Rule 102 of Regulation M to The NASDAQ Stock Market 
LLC (``Nasdaq'') for a program similar to the Exchange's proposed 
Program. See Securities Exchange Act Release No. 69196 (March 20, 
2013), 78 FR 18410 (March 26, 2013) (Order Granting a Limited 
Exemption From Rule 102 of Regulation M Concerning the NASDAQ Market 
Quality Program Pilot Pursuant to Regulation M Rule 102(A)) (the 
``Nasdaq Exemption''). The Nasdaq Exemption includes certain 
conditions related to, among other things, notices to the public and 
disclosures with respect to Nasdaq's program. The Exchange notes 
that if the Commission were to provide exemptive relief from Rule 
102 of Regulation M for the Program, it may include similar 
conditions.
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Surveillance
    The Exchange believes that its surveillance procedures are adequate 
to properly monitor the trading of all securities trading on the 
Exchange, including ETPs participating in the Program, during all 
trading sessions, and to detect and deter violations of Exchange rules 
and applicable federal securities laws. The Exchange may obtain 
information via the Intermarket Surveillance Group (``ISG'') from other 
exchanges who are members or affiliates of the ISG or with which the 
Exchange has entered into a comprehensive surveillance sharing 
agreement,\53\ and from listed CLP Companies and public and non-public 
data sources such as, for example, Bloomberg.
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    \53\ For a list of the current members and affiliate member of 
ISG, see www.isgportal.com.
---------------------------------------------------------------------------

Changes to Interpretation and Policy .02 to Rule 11.8
    The Exchange is also proposing to make certain changes to 
Interpretation and Policy .02 to Rule 11.8 that correspond with the 
addition of Interpretation and Policy .03. These changes are designed 
to remove any part of the CLP Program described in Interpretation and 
Policy .02 that relates directly to ETPs and to make clear that ETPs 
are not covered by Interpretation and Policy .02 to Rule 11.8. 
Specifically, the Exchange is proposing to: (i) Change the title from 
``Competitive Liquidity Provider Program'' to ``Competitive Liquidity 
Provider Program for Corporate Issues''; (ii) delete section (d)(2) in 
order to make clear that ETPs are not eligible for the CLP Program; 
(iii) delete the last two sentences of section (h)(2) that relate 
specifically to the assignment of CLPs to ETPs participating in the CLP 
Program; and (iv) delete text in section (k)(1) related to financial 
incentives for ETPs.
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.\54\ In particular, 
the proposal is consistent with Section 6(b)(4) and 6(b)(5) of the 
Act,\55\ because it would provide for the equitable allocation of 
reasonable dues, fees, and other charges among Members and issuers and 
other persons using any facility or system which the Exchange operates 
or controls, and it 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, and in 
general, to protect investors and the public interest.
---------------------------------------------------------------------------

    \54\ 15 U.S.C. 78f(b).
    \55\ 15 U.S.C. 78f(b)(4) and (5).
---------------------------------------------------------------------------

    The goal of the Program is to incentivize Members to make high-
quality, liquid markets, which supports the primary goal of the Act to 
promote the development of a resilient and efficient national market 
system. The Program will enhance quote competition, improve liquidity 
on the Exchange, support the quality of price discovery, promote market 
transparency, and increase competition for listings and trade 
executions, while reducing spreads and transaction costs. Maintaining 
and increasing liquidity in Exchange-listed securities will help raise 
investors' confidence in the fairness of the market and their 
transactions.
    Each aspect of the Program adheres to and supports the Act. First, 
the Program promotes the equitable allocation of fees and dues among 
issuers. The Program is completely voluntary in that it will provide an 
additional means by which issuers may relate to the Exchange, while not 
eliminating the ability to list ETPs without participation in the 
Program. Issuers can supplement the standard listing fees with those of 
the Program, which the Exchange believes to be consistent with the Act. 
While the Program will result in higher fees for issuers that choose to 
participate, the issuers receive significant benefits for 
participating, including greater liquidity, tighter spreads, and lower 
transaction costs for their investors. Additionally, issuers will have 
the ability to withdraw from the Program after an initial commitment if 
they determine that participation is not beneficial. In that case, the 
withdrawing issuers will automatically revert to the basic listing fee 
for ETPs.
    The Program also represents an equitable allocation of fees and 
dues among Market Makers. Again, the Program is completely voluntary 
with respect to Market Maker participation in that it will provide an 
additional means

[[Page 40537]]

by which members may qualify for a CLP Rebate in a manner nearly 
identical to the existing CLP Program, without eliminating any of the 
existing means of qualifying for incentives on the Exchange. Currently, 
the Exchange employs multiple fee arrangements, including the CLP 
Program, to incentivize Market Makers to maintain high quality markets 
or to improve the quality of executions. Market Makers that choose to 
undertake increased burdens under the Program will be rewarded with 
increased rebates, while those that do not undertake such burdens will 
receive no added benefit. Where a CLP determines that the burdens 
imposed by the Program outweigh the benefits provided, the CLP may 
provide the Exchange with notice of withdrawal and will be withdrawn 
from the program in no longer than thirty days.
    Additionally, the Program establishes an equitable allocation of 
CLP Rebates among Market Makers that choose to participate and fulfill 
the obligations imposed by the rule. If one Market Maker fulfills the 
bid (offer) obligations, bid (offer) portion of the CLP Rebate will be 
distributed to that CLP; if multiple CLPs satisfy the standard, the CLP 
Rebate will be distributed pro rata to the two CLPs with the most 
Winning Bid (Offer) SETs, as described above. In other words, all of 
the benefit of the CLP Rebate will flow to the highest-performing 
Market Makers, provided that at least one Market Maker fulfills the 
obligations under the proposed rule.
    The Program is designed to avoid unfair discrimination among Market 
Makers and issuers. The proposed rule contains objective, measurable 
standards that the Exchange will apply with care. These standards will 
be applied equally to ensure that similarly situated parties are 
treated similarly. This is equally true for inclusion of issuers and 
Market Makers, withdrawal of issuers and Market Makers, and termination 
of eligibility for the Program. The standards are carefully constructed 
to protect the rights of all parties wishing to participate in the 
Program by providing notice of requirements and a description of the 
process. The Exchange will apply these standards with the same care and 
experience with which it applies the many similar rules and standards 
in the Exchange's rules.
    In contrast to the extensive benefits of the Program, the 
participation of a CLP Company in the Program is substantially limited, 
by design. In this regard, a CLP Company is limited to making only the 
following determinations regarding the Program: Whether to participate 
in the Program; what CLP Security should be in the Program; what firms 
will participate in developing and funding the CLP Security; when the 
CLP Security should exit the Program; and the level of Supplemental 
Fees, if any, that should be applied. The CLP can never influence how, 
when, or the specific amount that a CLP receives as credit for making a 
market in a CLP Security. These functions are performed solely by the 
Exchange according to standards set forth in the Program.
    The Exchange notes that it operates in a highly competitive market 
in which market participants can readily favor competing venues if they 
deem fee levels at a particular venue to be excessive, or rebate 
opportunities available at other venues to be more favorable. 
Accordingly, the listing fees and rebates are constrained by the active 
competition for listings in ETPs and for market making. If a particular 
exchange charges excessive fees for listing, ETPs will choose to list 
elsewhere. Similarly, if an exchange fails to incent market makers to 
provide sufficient liquidity, participants will likely shift their 
order flow to other venues. Accordingly, the exchange charging 
excessive listing fees or providing insufficient rebates for market 
maker would likely not accomplish the goals of the Program. As such, 
the Exchange believes that this competitive dynamic imposes powerful 
restraints on the ability of any exchange to charge unreasonable fees 
for listing or provide insufficient rebates for market making activity.
    The Exchange also notes that the Program, as proposed, is 
substantially similar to the existing functionality provided under the 
CLP Program. The Exchange believes that the CLP Program has been very 
beneficial to market participants, including investors, issuers, and 
Market Makers, by providing increased market quality in the form of 
tighter spreads and deeper liquidity. The Exchange believes that the 
proposed Program will enjoy similarly positive results to the benefit 
of issuers, investors in CLP Securities, and the financial markets as a 
whole.

(B) Self-Regulatory Organization's Statement on Burden on Competition

    Exchange does not believe that the proposed rule change will result 
in any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act, as amended. To the contrary, 
the Exchange believes that the proposal will increase competition in 
both the listings market and in competition for market makers. The 
Program will promote competition in the listings market by providing 
issuers with a vehicle for paying the Exchange additional fees in 
exchange for incentivizing tighter spreads and deeper liquidity in 
listed securities. While the Program closely resembles the existing CLP 
Program, the proposed modifications are a response to the competition 
from other markets that either have or are developing similar programs, 
including Nasdaq \56\ and NYSE Arca Equities, Inc.\57\
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    \56\ See Securities Exchange Act Release No. 69195 (March 20, 
2013), 78 FR 18393 (March 26, 2013) (SR-NASDAQ-2012-137).
    \57\ See Securities Exchange Act Release No. 69335 (April 5, 
2013), SR-NYSEARCA-2013-34 (March 21, 2013).
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    The Exchange also believes that the proposed changes will enhance 
competition among participants by creating incentives for market makers 
to compete to make better quality markets. By requiring both that 
market makers meet the quoting requirements and also to compete for the 
CLP Rebate, the quality of quotes on the Exchange will improve. This, 
in turn, will attract more liquidity to the Exchange and further 
improve the quality of trading in CLP Securities, which will also act 
to bolster the Exchange's listing business. As mentioned above, this 
proposal is in response to similar programs at or in development at 
other markets.

(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

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) By order approve or disapprove the proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposal, as 
modified by Amendment No. 1 thereto, is consistent with the Act. 
Comments

[[Page 40538]]

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-2013-035 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-2013-035. 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 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-2013-035 and should be 
submitted on or before July 26, 2013.
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    \58\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\58\
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-16089 Filed 7-3-13; 8:45 am]
BILLING CODE 8011-01-P