[Federal Register Volume 79, Number 148 (Friday, August 1, 2014)]
[Notices]
[Pages 44889-44891]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-18120]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-72685; File No. SR-BATS-2014-029]


Self-Regulatory Organizations; BATS Exchange, Inc.; Notice of 
Filing and Immediate Effectiveness of a Proposed Rule Change To Clarify 
for Members and Non-Members the Use of Certain Data Feeds for Order 
Handling and Execution, Order Routing and Regulatory Compliance of BATS 
Exchange, Inc.

July 28, 2014.
    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 July 15, 2014, BATS Exchange, Inc. (the ``Exchange'' or 
``BATS'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I and 
II below, which Items have been prepared by the Exchange. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to clarify for Members \3\ and non-Members 
the Exchange's use of certain data feeds for order handling and 
execution, order routing, and regulatory compliance. The Exchange has 
designated this proposal as non-controversial and provided the 
Commission with the notice required by Rule 19b-4(f)(6)(iii) under the 
Act.\4\
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    \3\ The term ``Member'' is defined as ``any registered broker or 
dealer that has been admitted to membership in the Exchange. A 
Member will have the status of a ``member'' of the Exchange as that 
term is defined in Section 3(a)(3) of the Act.'' See Exchange Rule 
1.5(n).
    \4\ 17 CFR 240.19b-4(f)(6)(iii).
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    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 Exchange submits this filing to clarify for Members and non-
Members the Exchange's use of certain data feeds for order handling and 
execution, order routing, and regulatory compliance.
Order Handling and Execution
    In order to calculate the national best bid and offer (``NBBO'') in 
its Matching Engine (the ``ME''), the Exchange uses quotes disseminated 
by market centers through proprietary data feeds (generally referred to 
as ``Direct Feeds'') as well as by the Securities Information 
Processors (``SIP''). The ME uses quotes disseminated from SIP feeds 
for the Chicago Stock Exchange, Inc. and NYSE MKT LLC. The Exchange 
notes that the ME receives Direct Feeds from the Exchange's affiliates, 
BATS Y-Exchange Inc., EDGA Exchange, Inc., and EDGX Exchange, Inc.
    In addition to receiving Direct Feeds and SIP feeds, the ME's 
calculation of the NBBO may be adjusted based on orders sent to other 
venues with protected quotations, execution reports received from those 
venues, and certain orders received by the Exchange (collectively 
``Feedback''). The Exchange does not include its quotes in the 
calculation of the Exchange's NBBO because the system is designed such 
that all incoming orders are separately compared to the Exchange's Best 
Bid or Offer and the Exchange calculated NBBO, which together create a 
complete view of the NBBO, prior to display, execution, or routing.
    Feedback from the receipt of Intermarket Sweep Orders (``ISOs'') 
with a time-in-force of Day (``Day ISOs'') and feedback from the 
Exchange's routing broker/dealer, BATS Trading, Inc., (``BATS 
Trading''), as described below, are used to augment the market data 
received by Direct Feeds and the SIP feeds. The Exchange's ME will 
update the NBBO upon receipt of a Day ISO. When a Day ISO is posted on 
the BATS Book,\5\ the ME uses the receipt of a Day ISO as evidence that 
the protected quotes have been cleared, and the ME does not check away 
markets for equal or better-priced protected quotes.\6\ The ME will 
then display and execute non-ISO orders at the same price as the Day 
ISO.
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    \5\ See Exchange Rule 1.5(e).
    \6\ Pursuant to Regulation NMS, a broker-dealer routing a Day 
ISO is required to simultaneously route one or more additional ISOs, 
as necessary, to execute against the full displayed size of any 
protected quote priced equal to or better than the Day ISO. See also 
Question 5.02 in the ``Division of Trading and Markets, Responses to 
Frequently Asked Questions Concerning Rule 611 and Rule 610 of 
Regulation NMS'' (last updated April 4, 2008) available at http://www.sec.gov/divisions/marketreg/nmsfaq610-11.htm.
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    All Feedback expires as soon as: (i) One (1) second passes; (ii) 
the Exchange receives new quote information; or (iii) the Exchange 
receives updated Feedback information. With the exception of Day ISO 
Feedback, the Exchange only generates Feedback where the order was 
routed using one of the following routing strategies: Parallel D, 
Parallel 2D, Parallel T, SLIM, and TRIM (collectively ``Smart Order 
Routing'').\7\
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    \7\ See Exchange Rule 11.13(a)(3). Thus, the Exchange does not 
generate Feedback from routing options where the User directs the 
Exchange to route an order to a particular venue, such as 
Destination Specific Orders and Directed ISOs, as defined in Rules 
11.9(c)(12) and 11.9(d)(2), respectively, nor does the Exchange 
generate Feedback from the DRT routing option defined in Rule 
11.13(a)(3)(E), which routes to alternative trading systems.

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[[Page 44890]]

    The Pegged NBBO (``PBBO'') comprises the Exchange's calculation of 
the NBBO for purposes of determining the price at which a Pegged 
Order,\8\ Mid-Point Peg Order,\9\ or Market Maker Peg Order \10\ is to 
be pegged. The PBBO includes the Exchange's quotes from the SIP feeds 
in the calculation but is otherwise derived using the same Direct 
Feeds, SIP feeds, and Feedback used for the NBBO calculation.
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    \8\ See Exchange Rule 11.9(c)(8).
    \9\ See Exchange Rule 11.9(c)(9).
    \10\ See Exchange Rule 11.9(c)(16).
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Order Routing
    When the Exchange has a marketable order with instructions from the 
sender that the order is eligible to be routed, and the ME identifies 
that there is no matching price available on the Exchange, but there is 
a matching price represented at another venue that displays protected 
quotes, then the ME will send the order to the Routing Engine (``RE'') 
of BATS Trading.
    In determining whether to route an order, the RE makes its own 
calculation of the NBBO using the Direct Feeds, SIP feeds, and Router 
Feedback, as described below.\11\ The RE does not utilize Day ISO 
Feedback in constructing the NBBO; however, because all orders 
initially flow through the ME, to the extent Day ISO Feedback has 
updated the ME's calculation of the NBBO, all orders processed by the 
RE do take Day ISO Feedback into account. The RE receives Feedback from 
all Smart Order Routing strategies.
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    \11\ The Exchange uses the same Direct Feeds and quotes from the 
SIP feeds in the RE as is described above with respect to the ME.
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    There are three types of Router Feedback that contribute to the 
Exchange's calculation of the NBBO:
     Immediate Feedback. Where BATS Trading routes an order to 
a venue with a protected quotation using Smart Order Routing (a 
``Feedback Order''), the number of shares available at that venue is 
immediately decreased by the number of shares routed to the venue at 
the applicable price level.
     Execution Feedback. Where BATS Trading receives an 
execution report associated with a Feedback Order that indicates that 
the order has fully executed with no remaining shares associated with 
the order, all opposite side quotes on the venue's order book that are 
priced more aggressively than the price at which the order was executed 
will be ignored.
     Cancellation Feedback. Where BATS Trading receives an 
execution report associated with a Feedback Order that indicates that 
the order has not fully executed (either a partial execution or a 
cancellation), all opposite side quotes on the venue's order book that 
are priced equal to or more aggressively than the limit price for the 
order will be ignored.
    All Feedback expires as soon as: (i) One (1) second passes; (ii) 
the Exchange receives new quote information; or (iii) the Exchange 
receives updated Feedback information.
Regulatory Compliance
    Locked or Crossed Markets. The ME determines whether the display of 
an order would lock or cross the market. At the time an order is 
entered into the ME, the ME will establish, based upon its calculation 
of the NBBO from Direct Feeds, SIP feeds and Feedback, whether the 
order will lock or cross the prevailing NBBO for a security. In the 
event that the order would produce a locking or crossing condition, the 
ME will cancel the order, re-price \12\ the order, or route the order 
based on the Member's instructions. Two exceptions to this logic are 
Day ISOs and declarations of self-help.
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    \12\ See Rule 11.9(g).
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    Pursuant to Regulation NMS, when an Exchange receives a Day ISO, 
the sender of the ISO retains the responsibility to comply with 
applicable rules relating to locked and crossed markets.\13\ In such 
case, the Exchange is obligated only to display a Day ISO order at the 
Member's price, even if such price would lock or cross the market.\14\
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    \13\ See supra note 6.
    \14\ See supra note 6.
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    Declarations of self-help occur when the RE detects that an 
exchange displaying protected quotes is slow, as defined in Regulation 
NMS, or non-responsive to the Exchange's routed orders. In this 
circumstance, according to Rule 611(b) of Regulation NMS, the Exchange 
may display a quotation that may lock or cross the market where the 
quotation that it may lock or cross is displayed by the market that the 
Exchange invoked self-help against.\15\ The Exchange may also declare 
self-help where another exchange's SIP quotes are slow or non-
responsive resulting in a locked or crossed market. Once the Exchange 
declares self-help, the ME and RE will ignore the quotes generated from 
the self-helped market in their calculations of the NBBO for execution 
and routing determinations in compliance with Regulation NMS. The 
Exchange will also disable all routing to the self-helped market. The 
ME and RE will continue to consume the self-helped market center's 
quotes; however, in order to immediately include the quote in the NBBO 
calculation and enable routing once self-help is revoked.
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    \15\ See also Question 5.03 in the ``Division of Trading and 
Markets, Responses to Frequently Asked Questions Concerning Rule 611 
and Rule 610 of Regulation NMS'' (last updated April 4, 2008) 
available at http://www.sec.gov/divisions/marketreg/nmsfaq610-11.htm.
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    Trade-Through Rule. Pursuant to Rule 611 of Regulation NMS, the 
Exchange shall establish, maintain, and enforce written policies and 
procedures that are reasonably designed to prevent trade-throughs on 
trading centers of protected quotations in NMS stocks that do not fall 
within a valid exception and, if relying on such an exception, that are 
reasonably designed to ensure compliance with the terms of the 
exception. The ME will not permit an execution on the Exchange if there 
are better-priced protected quotations displayed in the market unless 
the order is an ISO. At the time an order is entered into the ME, the 
ME uses the view of the NBBO as described above. If the NBBO is priced 
better than what is resident on the Exchange, the Exchange will not 
match such order on the BATS Book, and based on the Member's 
instructions, the ME will cancel the order, re-price the order or route 
the order.
    Regulation SHO. The Exchange cannot execute a Short Sale Order \16\ 
equal to or below the current National Best Bid (``NBB'') when a short 
sale price restriction is in effect pursuant to Rule 201 of Regulation 
SHO (``Short Sale Circuit Breaker'').\17\ When a Short Sale Circuit 
Breaker is in effect, the Exchange utilizes information received from 
Direct Feeds, SIP feeds, and Feedback, and a view of the BATS Book to 
assess its compliance with Rule 201 of Regulation SHO. The primary 
difference between the NBBO used for compliance with Rule 201 of 
Regulation

[[Page 44891]]

SHO and other constructions of the NBBO, however, is that the Exchange 
includes market centers against which it has declared self-help in its 
view of the NBBO.
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    \16\ See Exchange Rule 11.19.
    \17\ 17 CFR 242.200(g); 17 CFR 242.201. On February 26, 2010, 
the Commission adopted amendments to Regulation SHO under the Act in 
the form of Rule 201, pursuant to which, among other things, short 
sale orders in covered securities generally cannot be executed or 
displayed by a trading center, such as the Exchange, at a price that 
is at or below the current NBB when a Short Sale Circuit Breaker is 
in effect for the covered security. See Securities Exchange Act 
Release No. 61595 (February 26, 2010), 75 FR 11232 (March 10, 2010). 
In connection with the adoption of Rule 201, Rule 200(g) of 
Regulation SHO was also amended to include a ``short exempt'' 
marking requirement. See also Securities Exchange Act Release No. 
63247 (November 4, 2010), 75 FR 68702 (November 9, 2010) (extending 
the compliance date for Rules 201 and 200(g) to February 28, 2011). 
See also Division of Trading & Markets: Responses to Frequently 
Asked Questions Concerning Rule 201 of Regulation SHO, www.sec.gov/divisions/marketreg/rule201faq.htm.
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    Latent or Inaccurate Direct Feeds. Where the Exchange's systems 
detect problems with one or more Direct Feeds, the Exchange will 
immediately fail over to the SIP feed to calculate the NBBO for the 
market center(s) where the applicable Direct Feed is experiencing 
issues. Problems that lead to immediate failover to the SIP feed may 
include a significant loss of information (i.e., packet loss) or 
identifiable latency, among other things. The Exchange can also 
manually failover to the SIP feed in lieu of Direct Feed data upon 
identification by a market center of an issue with its Direct Feed(s).
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act \18\ in general, and furthers the objectives of Section 
6(b)(5) of the Act \19\ in particular, in that it is designed to 
promote just and equitable principles of trade, to foster cooperation 
and coordination with persons engaged in facilitating transactions in 
securities, to remove impediments to and perfect the mechanism of a 
free and open market and a national market system and, in general, to 
protect investors and the public interest. The Exchange does not 
believe that this proposal will permit unfair discrimination among 
customers, brokers, or dealers because it will be available to all 
Users.
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    \18\ 15 U.S.C. 78f(b).
    \19\ 15 U.S.C. 78f(b)(5).
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    The Exchange believes that its proposal to describe the Exchange's 
use of data feeds removes impediments to and perfects the mechanism of 
a free and open market and protects investors and the public interest 
because it provides additional specificity and transparency. The 
Exchange's proposal will enable investors to better assess the quality 
of the Exchange's execution and routing services. The proposal does not 
change the operation of the Exchange or its use of data feeds; rather 
it describes how, and for what purposes, the Exchange uses the quotes 
disseminated from data feeds to calculate the NBBO for a security for 
purposes of Regulation NMS, Regulation SHO and various order types that 
update based on changes to the applicable NBBO. The Exchange believes 
the additional transparency into the operation of the Exchange as 
described in the proposal will remove impediments to and perfect the 
mechanism of a free and open market and a national market system, and, 
in general, protect investors and the public interest.

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposal will impose any 
burden on competition not necessary or appropriate in furtherance of 
the purposes of the Act. On the contrary, the Exchange believes the 
proposal would enhance competition because describing the Exchange's 
use of data feeds enhances transparency and enables investors to better 
assess the quality of the Exchange's execution and routing services.

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 for 30 
days from the date on which it was filed, or such shorter time as the 
Commission may designate, the proposed rule change has become effective 
pursuant to Section 19(b)(3)(A) of the Act \20\ and Rule 19b-4(f)(6) 
thereunder.\21\
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    \20\ 15 U.S.C. 78s(b)(3)(A).
    \21\ 17 CFR 240.19b-4(f)(6). As required under Rule 19b-
4(f)(6)(iii), the Exchange provided the Commission with written 
notice of its intent to file the proposed rule change, along with a 
brief description and the 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.
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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. If the Commission 
takes such action, the Commission shall institute proceedings to 
determine whether the proposed rule should be approved or disapproved.

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-2014-029 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.

All submissions should refer to File Number SR-BATS-2014-029. 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 
a.m. and 3 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-2014-029 and should be 
submitted on or before August 22, 2014.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\22\
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    \22\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-18120 Filed 7-31-14; 8:45 am]
BILLING CODE 8011-01-P