[Federal Register Volume 79, Number 47 (Tuesday, March 11, 2014)]
[Notices]
[Pages 13693-13696]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-05178]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-71651; File No. SR-BATS-2014-003]


Self-Regulatory Organizations; BATS Exchange, Inc.; Order 
Approving a Proposed Rule Change, as Modified by Amendment No. 1 
Thereto, To Modify the BATS Options Opening Process

March 5, 2014.

I. Introduction

    On January 6, 2014, BATS Exchange, Inc. (``Exchange'' or ``BATS'') 
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 
modify the BATS options opening process. On January 16, 2014, the 
Exchange filed Amendment No. 1 to the proposed rule change.\3\ The 
proposed rule change, as modified by Amendment No. 1, was published for 
comment in the Federal Register on January 23, 2014.\4\ The Commission 
received no comments on the proposal. This order approves the proposed 
rule change, as modified by Amendment No. 1.
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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 corrected a typographical 
error contained in its original submission related to its 
description of how the Exchange's Rule 20.6, governing Obvious 
Errors, currently operates.
    \4\ See Securities Exchange Act Release No. 71327 (January 16, 
2014), 79 FR 3897 (January 23, 2014) (``Notice'').
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II. Description of the Proposal

    The Exchange proposes to amend its rules to allow the Exchange's 
equity

[[Page 13694]]

options trading platform (``BATS Options'') to accept orders and quotes 
in all options series, other than index options, prior to the first 
transaction in the underlying security on the primary listing market 
and during a halt, as well as to establish a process for matching such 
orders immediately prior to the opening of trading in such options 
series. According to the Exchange, BATS Options currently does not 
accept any orders or quotes while trading is not open in an options 
class, including both prior to the first transaction in the underlying 
security on the primary listing market and during a trading halt in an 
options class.\5\
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    \5\ Id. According to the Exchange, BATS Options currently opens 
trading in options: (i) After the first transaction on the primary 
listing market after 9:30 a.m. Eastern Time in the securities 
underlying the options as reported on the first print disseminated 
pursuant to an effective national market system plan; or (ii) any 
time after 9:30 a.m. Eastern Time where the Exchange determines that 
the interests of a fair and orderly market are best served by 
opening trading in the options contracts. Id. During a trading halt 
in an options class, the Exchange states that it currently cancels 
all orders and quotes, and trading does not resume until the 
Exchange determines that the conditions that led to the halt are no 
longer present or that the interests of a fair and orderly market 
are best served by a resumption of trading. Id.
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    The Exchange proposes to begin accepting orders and quotes in all 
series at 8:00 a.m. Eastern Time and immediately upon a regulatory 
halt,\6\ and would continue to accept orders and quotes until such time 
as the BATS Options opening process is initiated (``Order Entry 
Period'').\7\ Under the proposal, such orders (i.e., those received 
prior to the opening process or during a regulatory halt) will be 
queued for participation in the opening process and will not be 
eligible for execution until the opening process occurs.\8\ The 
Exchange proposes that limit orders queued during this time would be 
disseminated via the Options Price Reporting Authority (``OPRA'') as 
non-firm quotes and via BATS Multicast PITCH, but that market orders 
queued during this time would not be disseminated.\9\
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    \6\ See proposed BATS Rule 21.7(a), defining ``Regulatory Halt'' 
as ``trading being halted in an option series due to the primary 
listing market for the applicable underlying security declaring a 
regulatory trading halt, suspension, or pause with respect to such 
security.''
    \7\ See Notice, supra note 4, at 3897.
    \8\ Id. The Exchange also notes that ``Immediate or Cancel'' 
orders (``IOCs'') or ``WAIT'' orders will not be accepted for 
queuing prior to completion of the opening process. Id. See also 
BATS Rule 21.1(f)(2) and (4) (defining IOC and WAIT orders).
    \9\ See Notice, supra note 4, at 3897.
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    During a regulatory halt, the Exchange proposes that all orders 
would be cancelled unless an exchange member has entered instructions 
not to cancel its orders,\10\ which would cause such orders to queue as 
part of the Order Entry Period.\11\ However, when trading is halted, 
but it is not due to a regulatory halt, the Exchange proposes that 
there would be no Order Entry Period, all orders would be canceled, and 
trading would resume upon a determination by the Exchange that the 
conditions which led to the halt are no longer present or that the 
interests of a fair and orderly market are best served by a resumption 
of trading.\12\
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    \10\ Id.
    \11\ Id.
    \12\ Id.
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    The Exchange also proposes a method for determining the opening 
price \13\ of an options series at the time of opening or after trading 
resumes following a regulatory halt. Specifically, the Exchange 
proposes that, where there are no contracts in a particular series that 
would execute at any price at the time that the Exchange would 
determine the opening price, the Exchange would open such options for 
trading without determining an opening price.\14\ Where there is a 
price at which at least one contract would execute, the Exchange 
proposes that, within thirty seconds after the first listing market 
transaction \15\ or the regulatory halt being lifted, the Exchange 
would determine the opening price under proposed BATS Rule 21.7(a)(1) 
as follows: (i) The midpoint of the national best bid (``NBB'') and the 
national best offer (``NBO'' and, collectively, the ``NBBO Midpoint''); 
\16\ (ii) where there is no NBBO Midpoint at a ``Valid Price'' (as 
explained below), the last ``Print'' \17\ in the series; or (iii) where 
there is neither a NBBO Midpoint nor a Print at a Valid Price, the 
``Previous Close.'' \18\
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    \13\ See proposed BATS Rule 21.7(a)(1) (defining ``Opening 
Price'' as ``a single price at which a particular option series will 
be opened'').
    \14\ See Notice, supra note 4, at 3897.
    \15\ See proposed BATS Rule 21.7(a) (defining ``First Listing 
Market Transaction'' as ``the first transaction on the primary 
listing market after 9:30 a.m. Eastern Time in the securities 
underlying the options as reported on the first print disseminated 
pursuant to an effective national market system plan'').
    \16\ The Exchange proposes that, where the NBBO Midpoint would 
result in an opening price in a sub-penny increment, the Exchange 
will use the next highest non sub-penny increment as the NBBO 
Midpoint. See Notice, supra note 4, at 3898.
    \17\ See proposed BATS Rule 21.7(a)(1)(B) (defining ``Print'' as 
``the last regular way print disseminated pursuant to the OPRA Plan 
after 9:30 a.m. Eastern Time'').
    \18\ See proposed BATS Rule 21.7(a)(1)(C) (defining ``Previous 
Close'' as ``the last regular way transaction from the previous 
trading day as disseminated pursuant to the OPRA Plan'').
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    The Exchange proposes that the opening price of an options series 
must be a Valid Price.\19\ The Exchange further proposes that a NBBO 
Midpoint, a Print, and a Previous Close would constitute a Valid Price 
under proposed BATS Rule 21.7(a)(2) where: (i) There is no NBB and no 
NBO; (ii) there is either a NBB and no NBO or a NBO and no NBB and the 
price is equal to or greater than the NBB or equal to or less than the 
NBO; or (iii) there is both a NBB and NBO, the price is equal to or 
within the NBBO, and the price is less than a prescribed ``Minimum 
Amount'' away from the NBB or NBO for the series.\20\ The Exchange 
proposes to establish the Minimum Amount thresholds based on the 
standards set forth in BATS Rule 20.6 governing Obvious Errors.\21\
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    \19\ See proposed BATS Rule 21.7(a)(1).
    \20\ The prescribed Minimum Amount away thresholds would vary 
based on the price of the NBB. See proposed BATS Rule 21.7(a)(2)(C) 
(laying out the applicable Minimum Amount thresholds). For example, 
if the NBB for an option series is below $2.00, the applicable 
Minimum Amount threshold would be $0.25. Id.
    \21\ See Notice, supra note 4, at 3898.
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    Where there is no NBBO Midpoint, no Print, and no Previous Close at 
a Valid Price, the Exchange proposes to have the discretion, depending 
on the circumstances, to extend the Order Entry Period by 30 seconds or 
less, or open the series for trading.\22\ Where the Exchange decides to 
open the series for trading pursuant to this discretion and there is at 
least one price level at which at least one contract of a limit order 
could be executed, the Exchange proposes to cancel all orders that are 
priced equal to or more aggressively than the midpoint of the most 
aggressively priced bid and the most aggressively priced offer.\23\
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    \22\ Id.
    \23\ Id. (providing an example of how this would operate).
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    After the Exchange determines that an opening price is also a Valid 
Price, the Exchange proposes that orders and quotes that are priced 
equal to or more aggressively than the Opening Price would be matched 
based on price-time priority and in accordance with BATS Rule 21.8.\24\ 
Further, under the proposal, all orders and quotes or portions thereof 
that are matched pursuant to the opening process would be executed at 
the opening price.\25\ The Exchange also proposes that certain orders, 
or portions thereof, that are not executed during the opening process 
would be canceled.\26\ For all other orders and quotes that have not 
been

[[Page 13695]]

executed or canceled, including where no orders are matched at the 
opening price, the Exchange proposes that such orders will become 
eligible for trading on BATS Options immediately following the 
completion of the opening process.\27\
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    \24\ Id.
    \25\ Id.
    \26\ See Notice, supra note 4, at 3898. Under the proposal, this 
provision would apply to: (i) limit orders that are priced equal to 
or more aggressively than the opening price; and (ii) market orders. 
Id.
    \27\ See Notice, supra note 4, at 3898-99.
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    The Exchange also proposes to add some additional clarity to how 
trading will open and resume following a trading halt for index 
options. First, the Exchange represents that it would open index 
options in exactly the same manner as they open currently--at 9:30 a.m. 
Eastern Time.\28\ Second, the Exchange proposes that, where trading in 
index options is halted for any reason, BATS would open such options 
for trading upon the determination by the Exchange that the conditions 
which led to the halt are no longer present or that the interests of a 
fair and orderly market are best served by a resumption of trading.\29\ 
According to the Exchange, this too is how index options open after a 
trading halt under the current rules,\30\ and the purpose of this 
change is to clarify that trading in index options is not subject to 
the opening process, described above, under proposed BATS Rule 
21.7(a).\31\
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    \28\ See Notice, supra note 4, at 3899.
    \29\ Id.
    \30\ Id. The Exchange also notes that the opening process for 
index options is not being changed by this proposed rule change. Id.
    \31\ Id.
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    Finally, the Exchange proposes to retain discretion to deviate from 
its standard opening process, including adjusting the timing of the 
opening process in any option class, when the Exchange believes it is 
necessary in the interests of a fair and orderly market.\32\ Currently, 
in the event the underlying security has not opened within a reasonable 
time after 9:30 a.m. Eastern Time, the Exchange shall make an inquiry 
to determine the cause of the delay, and the Exchange can open trading 
in options contracts even if the underlying security has yet to open 
for trading on the primary listing market for such security if the 
Exchange determines that the interests of a fair and orderly market are 
best served by opening trading in the options contracts.\33\ In 
addition, the Exchange may delay the commencement of trading in any 
class of options in the interests of a fair and orderly market.\34\ 
Under the proposal, the Exchange could open trading in options 
contracts prior to the first listing market transaction and also delay 
the commencement of trading in any class of options, so long as it is 
in the interests of a fair and orderly market, and the Exchange would 
have discretion to manage the Opening Process in the event of 
unanticipated circumstances occurring around 9:30 a.m. Eastern Time or 
a trading halt being lifted.\35\
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    \32\ Id.
    \33\ See BATS Rule 21.7(b); Notice, supra note 4, at 3899.
    \34\ See BATS Rule 21.7(c); Notice, supra note 4, at 3899.
    \35\ See Notice, supra note 4, at 3899.
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III. Discussion and Commission Findings

    After careful review of the proposal, the Commission finds that the 
proposed rule change is consistent with the requirements of the Act and 
the rules and regulations thereunder that are applicable to a national 
securities exchange.\36\ In particular, the Commission finds that the 
proposed rule change is consistent with Section 6(b)(5) of the Act,\37\ 
which requires, among other things, that the rules of a national 
securities exchange be designed to prevent fraudulent and manipulative 
acts and practices, 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.
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    \36\ In approving the proposal, the Commission has considered 
the proposed rule's impact on efficiency, competition, and capital 
formation. See 15 U.S.C. 78c(f).
    \37\ 15 U.S.C. 78f(b)(5).
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    As described above, the Exchange proposes, among other things, to 
begin accepting orders and quotes for options series, other than index 
options, prior to the first transaction in the underlying security on 
the primary listing market and during certain trading halts. According 
to the Exchange, this will provide all Exchange members with greater 
control and flexibility with respect to entering orders and quotes by 
allowing them to enter orders and quotes beginning at 8:00 a.m. Eastern 
Time, rather than only after trading has opened for a particular 
option. Under the proposal, orders entered during the opening process 
or certain trading halts would queue, and all orders and quotes priced 
more aggressively than the opening price will be matched based on 
price-time priority and in accordance with existing BATS Rule 21.8. 
Further, all orders and quotes or portions thereof that are matched 
during the opening process will be executed at the opening price. The 
Commission notes that limit orders queued during the opening process 
would be disseminated via OPRA, which will contribute toward greater 
price discovery by providing additional information to the options 
market.
    The Commission believes that permitting BATS to accept orders and 
quotes before 9:30 a.m. Eastern Time and during certain trading halts 
should benefit investors by providing them certainty as to when their 
orders and quotes can be submitted rather than having to monitor each 
options class individually. By offering this additional functionality 
to Exchange members, the Commission believes that the proposed rule 
change is reasonably designed to remove impediments to a free and open 
market. The Commission also notes that several other exchanges already 
permit their members to submit orders and quotes prior to 9:30 a.m. 
Eastern Time and during trading halts.\38\
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    \38\ See, e.g., NASDAQ Options Market Chapter VI, Section 2(a); 
NYSE Arca Rule 6.64; NYSE MKT Rule 952NY.
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    As described above, the Exchange proposes to establish a method for 
determining an opening price for options, other than index options, and 
require that any opening price be a Valid Price. The opening price 
would be: (i) The NBBO Midpoint; (ii) where there is no NBBO Midpoint 
at a Valid Price, the Print; or (iii) where there is neither a NBBO 
Midpoint nor a Print at a Valid Price, the Previous Close. Accordingly, 
the Exchange will look to the most recently available market prices to 
determine the opening price, but will, in no case, permit an opening 
price that is not a Valid Price. To this end, the Exchange proposes to 
adopt Minimum Amount thresholds derived from the Exchange's obvious 
error rules to ensure that the opening price for an options series is, 
in the Exchange's view, appropriately priced. The Exchange believes 
that using these thresholds will prevent obvious error transactions by 
ensuring that the opening price will be within the Minimum Amount from 
either the NBB or NBO when there is both a NBB and NBO.\39\ 
Accordingly, the Commission believes that the Exchange's proposal is 
reasonably designed to protect investors and the public interest by 
establishing an opening process that should limit an opening price to a 
price that should be related to the current market for an option. The 
Commission notes that, if the Exchange determines to open an option 
series for trading without determining an opening price and there is at 
least one price level at which at least one contract of a limit order 
could be executed, the Exchange would cancel all orders that are priced 
equal to or more aggressively than the midpoint of

[[Page 13696]]

the most aggressively priced bid and the most aggressively priced 
offer, which should allow the Exchange to effectively open the series 
for trading.
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    \39\ See Notice, supra note 4, at 3899.
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    The Commission further believes that the proposed opening process, 
including the ability to deviate from such opening process in the 
interests of a fair and orderly market, is consistent with the 
protection of investors and the public interest because it should help 
BATS open trading in options contracts in a fair and orderly manner. 
Specifically, the Commission believes that allowing members to enter 
orders for queuing should create a more orderly opening and facilitate 
price formation at the opening of trading because members will be able 
to enter orders and quotes in advance, rather than submitting them to 
the Exchange in a small amount of time. In addition, the Commission 
believes that the dissemination of this information prior to the 
opening of trading in options contracts should facilitate price 
discovery and create a more orderly opening process because members 
will have access to more information before their orders become 
executable.
    Finally, the Commission believes that the Exchange's proposal 
relating to the opening, and re-opening after a trading halt, of index 
options is designed to protect investors and the public interest by 
clarifying the Exchange's rules without affecting their functionality.

V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\40\ that the proposed rule change, as modified by Amendment No. 1 
thereto (SR-BATS-2014-003), be, and hereby is, approved.
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    \40\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\41\
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    \41\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-05178 Filed 3-10-14; 8:45 am]
BILLING CODE 8011-01-P