[Federal Register Volume 79, Number 148 (Friday, August 1, 2014)]
[Notices]
[Pages 44908-44917]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-18127]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-72692; File No. SR-BATS-2014-022]


Self-Regulatory Organizations; BATS Exchange, Inc.; Order 
Granting Approval of a Proposed Rule Change To Amend the Competitive 
Liquidity Provider Program

July 28, 2014.
    On June 3, 2014, BATS Exchange, Inc. (``Exchange'' or ``BATS'') 
filed with the Securities and Exchange Commission (``SEC'' or 
``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'' or ``Exchange Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to add Interpretation and Policy 
.03 to Rule 11.8 to establish the Supplemental Competitive Liquidity 
Provider Program (``Program'') for Exchange Traded Products (``ETPs'') 
listed on the Exchange for a one year pilot period, and to amend 
Interpretation and Policy .02 to Rule 11.8, which governs the existing 
Competitive Liquidity Provider Program (``CLP Program''), to reflect 
the transition for Exchange-listed ETPs from the existing CLP Program 
to the proposed Program. The proposed rule change was published for 
comment in the Federal Register on June 13, 2014.\3\ The Commission did 
not receive any comment letters on the proposed rule change. This order 
grants approval of the proposed rule change.\4\
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Securities Exchange Act Release No. 72346 (Jun. 9, 2014), 79 
FR 33982 (``Notice'').
    \4\ Today the Commission also is granting exemptive relief from 
Rule 102 under Regulation M concerning the Program. See Securities 
Exchange Act Release No. 72693 (Jul. 28, 2014) (Order Granting a 
Limited Exemption from Rule 102 of Regulation M Concerning the BATS 
Exchange, Inc.'s Supplemental Competitive Liquidity Provider Program 
Pilot Pursuant to Regulation M Rule 102(e)).
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I. Description of the Proposal

    As set forth in more detail in the Notice,\5\ the Exchange is 
proposing to amend its rules to add Interpretation and Policy .03 to 
Rule 11.8 to establish the Program, which seeks to incentivize certain 
Market Makers registered with the Exchange (``Market Makers'') \6\ as 
ETP Competitive Liquidity Providers (``ETP CLPs'') \7\ to enhance 
liquidity on

[[Page 44909]]

the Exchange in certain Exchange-listed ETPs \8\ and thereby qualify to 
receive part of a daily rebate pursuant to the Program (a ``CLP 
Rebate'').\9\ As proposed, the Program will operate for a one year 
pilot period beginning from the date of implementation of the 
Program.\10\ The Exchange is also proposing to amend Interpretation and 
Policy .02 to Rule 11.8 (Competitive Liquidity Provider Program) \11\ 
to reflect the transition for Exchange-listed ETPs from the existing 
CLP Program to the proposed Program.
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    \5\ See Notice, supra note 3.
    \6\ 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.
    \7\ As defined in proposed Interpretation and Policy .03(b)(1) 
to Rule 11.8, the term ``ETP CLP'' means a Member that 
electronically enters proprietary orders into the systems and 
facilities of the Exchange and is obligated to maintain a bid or an 
offer at the NBBO in each assigned CLP Security in round lots 
consistent with paragraph (i) of Interpretation and Policy .03 to 
Rule 11.8.
    \8\ 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.
    \9\ See Notice, supra note 3, 79 FR at 33982.
    \10\ See proposed Interpretation and Policy .03(p) to Rule 11.8.
    \11\ The Exchange currently operates the existing CLP Program, 
which 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, 
including ETFs. See Securities Exchange Act Release No. 66307 
(February 2, 2012), 77 FR 6608 (February 8, 2012) (SR-BATS-2011-051) 
(order approving proposed rule change to implement the Competitive 
Liquidity Provider Program). See also Securities Exchange Act 
Release Nos. 66427 (February 21, 2012), 77 FR 11608 (February 27, 
2012) (SR-BATS-2012-011) (Notice of filing and immediate 
effectiveness of proposed rule change adopting rebates for the CLP 
Program); 67854 (September 13, 2012), 77 FR 58198 (September 19, 
2012) (SR-BATS-2012-036) (Notice of filing and immediate 
effectiveness of proposed rule change related to fees applicable to 
the CLP Program); 69190 (March 20, 2013), 78 FR 18384 (March 26, 
2013) (SR-BATS-2013-005) (Order approving proposed rule change to 
modify the CLP Program to, among other things, modify the 
calculation of Size Event Tests); 69857 (June 25, 2013), 78 FR 39392 
(July 1, 2013) (SR-BATS-2013-037) (Notice of filing and immediate 
effectiveness of a proposed rule change to amend the requirements of 
the CLP Program); 70865 (November 13, 2013), 78 FR 69509 (November 
19, 2013) (SR-BATS-2013-057) (Notice of filing and immediate 
effectiveness of a proposed rule change to amend the CLP Program); 
and 71284 (January 10, 2014), 79 FR 2921 (January 16, 2014) (SR-
BATS-2014-002) (Notice of filing and immediate effectiveness of a 
proposed rule change to extend the applicability of the CLP 
Program).
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    The Exchange plans to implement the Program and the corresponding 
amendments to existing Interpretation and Policy .02 to Rule 11.8 on a 
date that will be circulated in a notice from the BATS Trade Desk.\12\ 
The Exchange proposes to maintain existing Interpretation and Policy 
.02 in its current form until such implementation, and the Exchange 
states that it will notify all interested parties of the implementation 
date of these changes through a notice distributed to all Members of 
the Exchange.\13\
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    \12\ See Notice, supra note 3, 79 FR at 33982.
    \13\ Id. The Exchange states that it is proposing to provide 
notice of the implementation date through a notice rather than 
implementing the changes to the rule immediately upon approval by 
the Commission in order to provide the Exchange with the flexibility 
necessary to ensure an uninterrupted transition from the CLP Program 
to the Program. Id.
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Summary of the Program

    The Program is voluntary and is designed to promote market quality 
in CLP Securities \14\ by allowing a CLP Company \15\ 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 \16\ 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.\17\ The CLP Fee will 
be used to incentivize one or more ETP CLPs to enhance the market 
quality of the CLP Security.\18\ Subject to the conditions set forth in 
the proposed rule, the Exchange will pay the CLP Rebate out of the BATS 
General Fund to one or more ETP CLPs that make a market in the CLP 
Security.\19\
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    \14\ 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 as an ETP pursuant to Rule 
14.11.
    \15\ 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.
    \16\ 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.
    \17\ See proposed Interpretation and Policy .03(a) to Rule 11.8.
    \18\ Id.
    \19\ Id.
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Securities Eligible for the Program

    Under the proposal, for a CLP Company, on behalf of a CLP Security, 
to be eligible to participate in the Program, the following conditions 
must be satisfied: (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 ETP CLP 
in the same 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; and (iv) while the CLP Security 
is participating in the Program, on a product-specific Web site, the 
CLP Company must indicate that the product is in the Program and 
provide a link to the Exchange's Program Web site.\20\ In addition, a 
CLP Company, on behalf of a CLP Security, is eligible for the Program 
unless and until such CLP Security has had a consolidated average daily 
volume (``CADV'') of equal to or greater than one million shares for 
three consecutive calendar months; however any CLP Security initially 
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.\21\ Notwithstanding the foregoing, the Exchange proposes that an 
ETP participating in the CLP Program under BATS Rule 11.8, 
Interpretation and Policy .02, shall not be eligible for participation 
in the Program until and unless such ETP is no longer participating in 
the CLP Program.\22\
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    \20\ See proposed Interpretation and Policy .03(d)(1) to Rule 
11.8.
    \21\ See proposed Interpretation and Policy .03(d)(3) to Rule 
11.8.
    \22\ Id.
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Qualifications of ETP CLPs

    To qualify as an ETP CLP, a Member must be a registered Market 
Maker in good standing with the Exchange consistent with Rules 11.5 
through 11.8.\23\ Further, the Exchange will require each Member 
seeking to qualify as an ETP 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 ETP CLP trading activity in assigned CLP 
Securities; \24\ (3) adequate trading infrastructure to support ETP 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 ETP CLP quoting 
requirement in each assigned CLP Security on a daily and monthly basis; 
and (5) a disciplinary history that is consistent with just and 
equitable business practices.\25\
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    \23\ See proposed Interpretation and Policy .03(f) to Rule 11.8.
    \24\ A Member may not use such unique identifiers for trading 
activity at the Exchange in assigned CLP Securities that is not ETP 
CLP trading activity, but may use the same unique identifiers for 
trading activity in securities not assigned to an ETP CLP. If a 
Member does not identify to the Exchange the unique identifier to be 
used for ETP CLP trading activity, the Member will not receive 
credit for such ETP CLP trading. See proposed Interpretation and 
Policy .03(f)(2) to Rule 11.8.
    \25\ See Proposed Interpretation and Policy .03(f) to Rule 11.8.

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[[Page 44910]]

Application

    Under the proposal, any entity that wishes to participate in the 
Program must submit an application in the form prescribed by the 
Exchange, including both CLP Companies on behalf of a CLP Security and 
ETP CLPs.\26\
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    \26\ See Proposed Interpretation and Policy .03(c)(1) to Rule 
11.8.
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    The proposed rule sets forth a specific application process for ETP 
CLPs.\27\ To become an ETP CLP, a Member must submit an application 
form with all supporting documentation to the Exchange.\28\ The 
Exchange will determine whether an applicant is qualified to become an 
ETP CLP based on the qualifications set forth in the rule, as described 
above.\29\ After an applicant submits an ETP CLP application to the 
Exchange, with supporting documentation, the Exchange shall notify the 
applicant Member of its decision.\30\ If an applicant is approved by 
the Exchange to receive ETP CLP status, such applicant must establish 
connectivity with relevant Exchange systems before such applicant will 
be permitted to trade as an ETP CLP on the Exchange.\31\ 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 ETP CLP status at least three (3) calendar months 
following the month in which the applicant received the disapproval 
notice from the Exchange.\32\
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    \27\ See Proposed Interpretation and Policy .03(g) to Rule 11.8.
    \28\ See Proposed Interpretation and Policy .03(g)(1) to Rule 
11.8.
    \29\ See Proposed Interpretation and Policy .03(g)(2) to Rule 
11.8.
    \30\ See Proposed Interpretation and Policy .03(g)(3) to Rule 
11.8.
    \31\ See Proposed Interpretation and Policy .03(g)(4) to Rule 
11.8.
    \32\ See Proposed Interpretation and Policy .03(g)(5) to Rule 
11.8.
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Assignment of CLP Securities

    The Exchange, in its discretion, will assign to the ETP CLP one or 
more CLP Securities for ETP CLP trading purposes.\33\ The Exchange 
shall determine the number of CLP Securities assigned to each ETP 
CLP.\34\ The Exchange, in its discretion, will assign one or more ETP 
CLPs to each CLP Security subject to the Program, depending upon the 
trading activity of the CLP Security.\35\
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    \33\ See proposed Interpretation and Policy .03(j)(1) to Rule 
11.8.
    \34\ Id.
    \35\ See proposed Interpretation and Policy .03(j)(2) to Rule 
11.8.
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ETP CLP Withdrawal & Reallocation

    An ETP CLP may withdraw from the status of an ETP CLP by providing 
written notice to the Exchange. Such withdrawal shall become effective 
when those CLP Securities assigned to the withdrawing ETP CLP are 
reassigned to another ETP CLP. After the Exchange receives the notice 
of withdrawal from the withdrawing ETP 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 ETP CLP will have no obligations under 
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.\36\
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    \36\ See proposed Interpretation and Policy .03(h) to Rule 11.8.
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CLP Security Withdrawal & Renewal; Termination

    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. In making such a determination, 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.\37\ After a CLP Company, on behalf of a 
CLP Security, is in the Program for one year or more, it 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.\38\ 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.\39\
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    \37\ See proposed Interpretation and Policy .03(c)(2)(A) to Rule 
11.8.
    \38\ See proposed Interpretation and Policy .03(c)(2)(B) to Rule 
11.8.
    \39\ See proposed Interpretation and Policy .03(c)(3) to Rule 
11.8.
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    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 initially 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 CLP Security'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 the proposed 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 ETP CLP that is 
eligible for CLP Rebate.\40\ The termination of a CLP Company, CLP 
Security, or ETP CLP does not preclude the Exchange from allowing re-
entry into the Program where the Exchange deems such re-entry as 
proper.\41\
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    \40\ See proposed Interpretation and Policy .03(n)(1) to Rule 
11.8.
    \41\ See proposed Interpretation and Policy .03(n)(2) to Rule 
11.8.
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Web Site Disclosures

    The Exchange will provide notification on its Web site regarding 
the following: (i) Acceptance of a CLP Company, on behalf of a CLP 
Security, and an ETP 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 ETP 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(ies); (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 (e.g., 
enhancement of liquidity and market quality in CLP Securities) as well 
as the potentially negative aspects and risks of the Program (e.g., 
possible

[[Page 44911]]

lack of liquidity and negative price impact on CLP Securities that are 
withdrawn or are terminated from the ETP CLP Program), and indicates 
how interested parties can get additional information about CLP 
Securities in the Program; and (v) the intent of a CLP Company, on 
behalf of a CLP Security, or ETP CLP to withdraw from the Program, and 
the date of actual withdrawal or termination from the Program.\42\
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    \42\ See 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.\43\ 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.\44\ 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, which space will (i) include any such 
press releases, and (ii) provide a hyperlink to the dedicated page on 
the Exchange's Web site that describes the Program.\45\
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    \43\ See proposed Interpretation and Policy .03(d)(4) to Rule 
11.8.
    \44\ Id.
    \45\ Id.
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CLP Company Fees

    A CLP Company participating in the Program shall incur an annual 
basic CLP Fee of $10,000 per CLP Security. The basic CLP Fee must be 
paid to the Exchange prospectively on a quarterly basis.\46\
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    \46\ See 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.\47\
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    \47\ See 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.\48\ 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.\49\ The Exchange will prospectively bill each CLP Company for 
the quarterly CLP Fee for each CLP Security.\50\ CLP Fees (both basic 
and supplemental) will be credited to the BATS General Fund.\51\
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    \48\ See proposed Interpretation and Policy .03(d)(2)(C) to Rule 
11.8.
    \49\ See proposed Interpretation and Policy .03(d)(2)(C)(i) to 
Rule 11.8. See also proposed Interpretation and Policy .03(b)(2) to 
Rule 11.8.
    \50\ See proposed Interpretation and Policy .03(d)(2)(D) to Rule 
11.8.
    \51\ See proposed Interpretation and Policy .03(d)(2)(E) to Rule 
11.8.
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ETP CLP Quoting Requirements

    ETP CLPs will be 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 an ETP CLP. Any ETP 
CLP that meets the daily quoting requirement set forth below will be 
eligible to receive a CLP Rebate for each day's quoting activity. An 
ETP CLP that does not meet the ETP CLP monthly quoting requirement is 
subject to the non-regulatory penalties described below.\52\
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    \52\ See proposed Interpretation and Policy .03(e) to Rule 11.8.
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    The Exchange will measure the performance of an ETP CLP in assigned 
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 ETP CLP's quoted size, 
excluding odd lots, at the National Best Bid (``NBB'') and National 
Best Offer (``NBO'') at least once per second to determine SETs. The 
three ETP CLPs with the greatest aggregate size at the NBB at the time 
of each SET (a ``Bid SET'') will be considered to have a winning Bid 
SET (a ``Winning Bid SET''). In the event of a tie, all ETP CLPs with 
the same aggregate size at the NBB will be considered to have a Winning 
Bid SET if there are two or less CLPs that have greater aggregate size 
at the NBB. Of the ETP CLPs with a Winning Bid SET for a particular Bid 
SET, the ETP CLPs with the greatest aggregate size at the NBB will 
receive three Bid SET credits (``Bid SET Credits''); the ETP CLPs with 
the second greatest aggregate size at the NBB will receive two Bid SET 
Credits; and the ETP CLPs with the third greatest aggregate size at the 
NBB will receive one Bid SET Credit. Separately, the three ETP CLPs 
with the greatest aggregate size at the NBO at the time of each SET (an 
``Offer SET'') will be considered to have a winning Offer SET (a 
``Winning Offer SET''). In the event of a tie, all ETP CLPs with the 
same aggregate size at the NBO will be considered to have a Winning 
Offer SET if there are two or less CLPs that have greater aggregate 
size at the NBO. Of the ETP CLPs with a Winning Offer SET for a 
particular Offer SET, the ETP CLPs with the greatest aggregate size at 
the NBO will receive three Offer SET credits (``Offer SET Credits''); 
the ETP CLPs with the second greatest aggregate size at the NBO will 
receive two Offer SET Credits; and the ETP CLPs with the third greatest 
aggregate size at the NBO will receive one Offer SET Credit.\53\
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    \53\ See proposed Interpretation and Policy .03(i)(1) to Rule 
11.8. In the Notice, the Exchange provided examples of how SET 
Credits are distributed. See Notice, supra note 3, 79 FR at 33985.
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    An ETP 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.\54\ In addition, in order for an ETP CLP to 
have a Winning Bid SET during Regular Trading Hours,\55\ the ETP 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 ETP CLP's bid at the time 
of the SET.\56\ Similarly, in order for an ETP CLP to have a Winning 
Offer SET during Regular Trading Hours, the ETP CLP must be quoting at 
least a displayed round lot offer, excluding odd lots, at a price at or 
within 1.2% of the ETP CLP's offer at the time of the SET.\57\
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    \54\ See proposed Interpretation and Policy .03(i)(4) to Rule 
11.8.
    \55\ 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.
    \56\ See proposed Interpretation and Policy .03(i)(5) to Rule 
11.8.
    \57\ Id.
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    In order to meet the daily quoting requirement, an ETP 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 ETP CLP, an 
``Eligible ETP CLP'') for a CLP Security. Eligible ETP CLPs will be 
ranked according to the number of Bid SET Credits and Offer SET Credits 
each trading day, and only the Eligible ETP CLP(s) ranked number one 
and the Eligible ETP CLP(s) ranked number two in each of the Bid SET

[[Page 44912]]

Credits and Offer SET Credits will receive the CLP Rebate.\58\
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    \58\ See proposed Interpretation and Policy .03(i)(1)(A) to Rule 
11.8.
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    In order to meet the monthly quoting requirements, an ETP CLP must 
be quoting at the NBB or the NBO 10% of the time that the Exchange 
calculates SETs.\59\
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    \59\ See proposed Interpretation and Policy .03(i)(1)(B) to Rule 
11.8.
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    For purposes of calculating whether an ETP CLP is in compliance 
with its ETP CLP quoting requirements, the ETP CLP must post displayed 
liquidity in round lots in its assigned CLP Securities at the NBB or 
the NBO.\60\ An ETP CLP may post non-displayed liquidity; however, such 
liquidity will not be counted as credit towards the ETP CLP quoting 
requirements.\61\ The ETP CLP shall not be subject to any minimum or 
maximum quoting size requirement in assigned CLP Securities (other than 
requirements relating to Winning SETs as described above) apart from 
the requirement that an order be for at least one round lot.\62\ The 
ETP CLP quoting requirements will be measured by utilizing the unique 
identifiers that the Member has identified for ETP CLP trading 
activity.\63\
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    \60\ See proposed Interpretation and Policy .03(i)(2) to Rule 
11.8.
    \61\ See proposed Interpretation and Policy .03(i)(3) to Rule 
11.8.
    \62\ See proposed Interpretation and Policy .03(i)(4) to Rule 
11.8.
    \63\ Id.
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    ETP CLPs may only enter orders electronically directly into 
Exchange systems and facilities designated for this purpose and all ETP 
CLP orders must only be for the proprietary account of the CLP 
Member.\64\
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    \64\ See proposed Interpretation and Policy .03(k) to Rule 11.8.
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CLP Rebate

    As described above, pursuant to the Program, the Exchange will 
measure the performance of ETP 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. The amount of the total daily CLP Rebate 
available will be equal to 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.\65\
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    \65\ See proposed Interpretation and Policy .03(m)(1) to Rule 
11.8. In the Notice, the Exchange provides the following example: 
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). See Notice, supra note 
3, 79 FR at 33986.
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    The Eligible CLPs with the highest and second highest number of Bid 
SET Credits will receive 60% and 40%, respectively, of half of the 
daily CLP Rebate for the CLP Security.\66\ Similarly, the Eligible CLPs 
with the highest and second highest number of Offer SET Credits will 
receive 60% and 40%, respectively, of half of the daily CLP Rebate for 
the CLP Security.\67\ In the event that there is only one Eligible ETP 
CLP for the bid or offer portion of the CLP Rebate for a CLP Security, 
such Eligible ETP CLP will receive 100% of such rebate.\68\ In the 
event that multiple Eligible ETP CLPs have an equal number of Bid SET 
Credits or Offer SET Credits, the Eligible ETP CLP with the highest 
executed volume in the CLP Security will be awarded the greater portion 
of the CLP Rebate.\69\ Where no ETP CLPs are eligible for the bid or 
offer portion of the CLP Rebate, no CLP Rebate will be awarded to any 
ETP CLP and no refund will be provided to the applicable CLP Company or 
its Sponsor.\70\
---------------------------------------------------------------------------

    \66\ See proposed Interpretation and Policy .03(m)(1) to Rule 
11.8.
    \67\ Id.
    \68\ Id.
    \69\ Id. Specifically, if the tie is for the most Bid (Offer) 
SET Credits, the Eligible ETP CLP with the highest executed volume 
in the CLP Security will receive 60% of the applicable portion of 
the CLP Rebate and the Eligible ETP CLP with the second highest 
executed volume in the CLP Security will receive 40% and no other 
Eligible ETOP CLPs will receive any portion of the CLP Rebate. 
Similarly, where the tie is for the second most Bid (Offer) SET 
Credits, the Eligible ETP CLP with the highest executed volume in 
the CLP Security will receive 40% of the of the applicable portion 
of the CLP Rebate and no other Eligible CLPs with equal or less Bid 
(Offer) SET Credits will receive any portion of the CLP Rebate. See 
Notice, supra note 3, 79 FR at 33986.
    \70\ See proposed Interpretation and Policy .03(m)(1) to Rule 
11.8.
---------------------------------------------------------------------------

Non-Regulatory Penalties

    If an ETP CLP fails to meet the ETP CLP quoting requirements, the 
Exchange may impose certain non-regulatory penalties on the ETP CLP. 
First, if, between 9:25 a.m. and 4:05 p.m. on any day on which the 
Exchange is open for business, an ETP CLP fails to meet its daily 
quoting requirement by failing to have at least 10% of the Winning Bid 
SETs or Winning Offer SETs for that trading day, the ETP CLP will not 
be eligible to receive a CLP Rebate for that day's quoting activity in 
that particular assigned CLP Security.\71\ Second, if an ETP CLP fails 
to meet its monthly quoting requirement for three consecutive months in 
any assigned CLP Security, the ETP CLP will be at risk of losing its 
ETP CLP status, and 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 an ETP CLP.\72\
---------------------------------------------------------------------------

    \71\ See proposed Interpretation and Policy .03(l)(1)(A) to Rule 
11.8.
    \72\ See proposed Interpretation and Policy .03(l)(1)(B) to Rule 
11.8.
---------------------------------------------------------------------------

    The Exchange shall determine if and when a Member is disqualified 
from its status as an ETP CLP.\73\ One calendar month prior to any such 
determination, the Exchange will notify the ETP CLP of such impending 
disqualification in writing.\74\ If the ETP CLP fails to meet the 
monthly quoting requirements as described above for a third consecutive 
month in a particular CLP Security, the ETP CLP may be disqualified 
from ETP CLP status.\75\ When disqualification determinations are made, 
the Exchange will provide a disqualification notice to the Member 
informing such Member that it has been disqualified as an ETP CLP.\76\ 
In the event a Member is disqualified from its status as an ETP CLP, 
such Member may re-apply for ETP CLP status in accordance with the 
proposed rules, and such application process shall occur at least three 
calendar months following the month in which such Member received its 
disqualification notice.\77\ 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 an ETP 
CLP, such Member may seek review under Chapter X of the Exchange's 
Rules governing adverse action.\78\
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    \73\ See proposed Interpretation and Policy .03(l)(2) to Rule 
11.8.
    \74\ Id.
    \75\ Id.
    \76\ Id.
    \77\ See proposed Interpretation and Policy .03(l)(3) to Rule 
11.8.
    \78\ Id.
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Program Implementation on a Pilot Basis

    The Exchange proposes that the Commission approve the Program for a 
pilot period of one year from the date of implementation, which shall 
occur no later than 90 days after Commission approval of the proposal 
(the date of which will be circulated in a notice from BATS Trade 
Desk).\79\ During the pilot, the Exchange will periodically provide 
information to the Commission about market quality with respect to the 
Program. During the pilot, the Exchange will submit monthly reports to 
the Commission about market quality with respect to the Program, which 
reports will endeavor to compare, to the extent practicable, securities 
before and after they are in the Program, including those

[[Page 44913]]

securities that ``graduate'' from the Program or, where no securities 
have ``graduated'' from the Program, securities that have ``graduated'' 
from comparable programs at other exchanges to the extent that such 
securities exist.\80\ Such monthly reports will include information 
regarding the Program which will enable the Exchange, the Commission, 
and the public to better analyze the effectiveness of the Program, such 
as: (i) Rule 605 metrics; \81\ (ii) volume metrics; (iii) number of 
CLPs in target securities; (iv) spread size; and (v) availability of 
shares at the NBBO.\82\ The Exchange states that it 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.\83\ The Exchange will post the 
monthly reports on its Web site, and the first report will be submitted 
within sixty days after the Program becomes operative.\84\
---------------------------------------------------------------------------

    \79\ See Notice, supra note 3, 79 FR at 33982.
    \80\ Id. at 33982-3.
    \81\ 17 CFR 242.605.
    \82\ See Notice, supra note 3, 79 FR at 33983.
    \83\ Id.
    \84\ Id.
---------------------------------------------------------------------------

Surveillance

    The Exchange states 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.\85\ The Exchange states that it 
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, and from listed CLP Companies and public and non-
public data sources such as, for example, Bloomberg.\86\
---------------------------------------------------------------------------

    \85\ Id. at 33987.
    \86\ Id.
---------------------------------------------------------------------------

Changes to Interpretation and Policy .02 to Rule 11.8

    The Exchange is also proposing to make certain changes to paragraph 
(d)(2) of Interpretation and Policy .02 to Rule 11.8, which governs ETP 
participation in the existing CLP Program. The Exchange states that 
these changes are designed to create a ``sunset'' period for any ETPs 
that are currently participating in the CLP Program pursuant to 
Interpretation and Policy .02 to Rule 11.8.\87\ Specifically, the 
proposed rule change will allow any ETP listed on the Exchange prior to 
the implementation of Rule 11.8(e), which governs the Exchange's Lead 
Market Maker Program,\88\ that is participating in the CLP Program to 
continue to participate in the CLP Program until the first of the 
following to occur: (i) Such security has had a CADV of equal to or 
greater than two million shares for two consecutive calendar months 
during the first three years the security is subject to the CLP 
Program, provided, however, that any ETP initially 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; (ii) 
such security has been subject to the CLP Program for three years; or 
(3) December 31, 2014.\89\ Thus, all ETPs participating in the CLP 
Program would no longer be eligible to participate in such program 
after December 31, 2014.
---------------------------------------------------------------------------

    \87\ Id.
    \88\ See Securities Exchange Act Release No. 72020 (April 25, 
2014), 79 FR 24807 (May 1, 2014) (SR-BATS-2014-015). The Lead Market 
Maker Program was implemented on June 2, 2014. See Notice, supra 
note 3, 79 FR at 33982.
    \89\ See proposed Interpretation and Policy .02(d)(2) to Rule 
11.8.
---------------------------------------------------------------------------

II. Discussion and Commission Findings

    The Commission has carefully considered the proposed rule change 
and finds that the proposed rule change is consistent with the 
requirements of the Act and the rules and regulations thereunder 
applicable to national securities exchanges. In particular, as 
discussed below, the Commission finds that the proposed rule change is 
consistent with Section 6(b)(4) of the Act,\90\ which requires that the 
rules of a national securities exchange provide for the equitable 
allocation of reasonable dues, fees, and other charges among its 
members and issuers and other persons using its facilities, and with 
Section 6(b)(5) of the Act,\91\ which requires, among other things, 
that the rules of a national securities exchange be designed to promote 
just and equitable principles of trade, to remove impediments to and 
perfect the mechanism of a free and open market and a national market 
system, and, in general, to protect investors and the public interest, 
and that the rules not be designed to permit unfair discrimination 
between customers, issuers, brokers, or dealers. Further, as required 
by Section 3(f) of the Act, the Commission has considered the proposed 
rule's impact on efficiency, competition, and capital formation.\92\
---------------------------------------------------------------------------

    \90\ 15 U.S.C. 78f(b)(4).
    \91\ 15 U.S.C. 78f(b)(5).
    \92\ See 15 U.S.C. 78c(f).
---------------------------------------------------------------------------

    The Program, as proposed to be implemented on a pilot basis, is 
designed to enhance the market quality for certain lower volume ETPs 
participating in the Program by incentivizing Market Makers to take ETP 
CLP assignments in such ETPs by offering an alternative fee structure 
for such ETP CLPs. As proposed by the Exchange, each ETP CLP must 
comply with a monthly quoting requirement in order to remain qualified 
as an ETP CLP, and must comply with a daily quoting requirement in 
order to be eligible for the daily CLP Rebates, which are higher than 
the standard quoting requirements applicable to Market Makers on the 
Exchange.\93\ Specifically, with respect to the daily quoting 
requirement, the three ETP CLPs with the greatest aggregate size at the 
NBB or NBO at each SET will be considered to have a Winning Bid (Offer) 
SET, provided each ETP CLP is quoting at least 500 shares of the ETP at 
the NBB (NBO) and quoting at least 100 shares on the other side of the 
market at a price at or within 1.2% of such ETP CLP's best bid (offer). 
The ETP CLPs with a Winning Bid (Offer) SET for a particular Bid 
(Offer) SET will each receive an amount of Bid (Offer) Set Credits that 
is based upon each ETP CLP's quoted aggregate size at the NBB (NBO). 
The ETP CLPs with the highest and second highest number of Bid (Offer) 
SET Credits each day will receive a portion of the daily CLP Rebate, 
provided that such ETP CLPs have Winning Bid (Offer) SETs equal to at 
least 10% of the total Bid (Offer) SETs on any trading day. With 
respect to the monthly quoting requirement, an ETP CLP must be quoting 
at least 100 shares at the NBB or NBO at least 10% of the time that the 
Exchange is calculating Bid (Offer) SETs. Thus, the proposal is 
designed to incentivize both quoting frequency at the NBBO and quoted 
size at the NBBO, by conditioning eligibility for ETP CLP status, 
eligibility for the daily CLP Rebate, and allocation of the daily CLP 
Rebate on whether an ETP CLP meets or exceeds various quoting 
requirements. In addition, the Program is separately designed to 
incentivize ETP CLPs to compete with each other to receive the CLP 
Rebates, as only the eligible ETP CLPs with the highest and second 
highest numbers of Bid (Offer) SET Credits will receive a portion of 
the daily CLP Rebate, and if multiple ETP

[[Page 44914]]

CLPs have an equal number of Bid (Offer) SET Credits, the ETP CLP with 
the higher executed volume in the CLP Security on the Exchange on the 
particular trading day will be awarded the applicable portion of the 
daily CLP Rebate. As a result, the proposal has the potential to 
improve the market quality of the ETPs that participate in the Program 
by encouraging ETP CLPs to provide liquidity in such ETPs consistent 
with the performance standards. This potential improved market quality, 
were it to occur, could benefit investors in the form of enhanced 
liquidity, narrowed spreads, and reduced transaction costs.\94\
---------------------------------------------------------------------------

    \93\ See BATS Rule 11.8(d) (setting forth the quoting 
requirements and obligations of Market Makers).
    \94\ In support of the proposal, the Exchange argues that the 
Program will, among other things, lower transaction costs and 
enhance liquidity in both ETPs and their components, making both 
more attractive to a broader range of investors, and that, in so 
doing, the Program will help companies access capital to invest and 
grow. See Notice, supra note 3, 79 FR at 33983. The Exchange asserts 
that 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. See id. at 33983, n. 17 and accompanying text. As 
constructed, any potential benefit to operating companies from the 
Program could be derived from the company being included within an 
index or other benchmark that underlies an ETP that participates in 
the Program.
---------------------------------------------------------------------------

    In addition, because the quoted bid-ask spread in a security 
represents one of the main drivers of transaction costs for investors, 
and because high price volatility should generally deter investors from 
trading low-liquidity ETPs, the Program, were the potential benefits of 
the program to occur, should facilitate a more-efficient and less-
uncertain trading environment for investors.\95\ Furthermore, were the 
potential benefits of the Program to occur, improving the liquidity of 
certain low-volume ETPs may lead to both an overall increase in ETP 
trading volume and a redistribution of trading volume toward lower-
volume ETPs that would not otherwise attract sufficient liquidity to 
successfully participate in the market.
---------------------------------------------------------------------------

    \95\ Transaction costs are generally defined as the penalty that 
an investor pays for transacting. Transaction costs have four 
components: commissions; bid/ask spread; market impact; and 
opportunity cost. See Grinold, Kahn. Active Portfolio Management, 
Second Edition, Chapter 16. An increase in bid-ask spreads will 
inevitably increase the transaction costs of an investor. In 
addition, transactions in low-liquidity securities have a higher 
market impact when compared to other more liquid securities. See 
Albert Kyle's (1985) measure of market impact (Kyle's Lambda), 
defining an inverse relationship between volume and price impact. 
Therefore, the lower the volume of the ETP or stock, the higher the 
market impact of any transaction in that stock. This last effect 
acts as a disincentive to trading that security. Therefore, an 
environment where an ETP trades more often and with a larger number 
of shares will reduce transaction costs both through the narrowing 
of spreads and lower market impact.
---------------------------------------------------------------------------

    While the Commission believes that the Program has the potential to 
improve market quality of the CLP Securities participating in the 
Program, the Commission is concerned about unintended consequences of 
the Program. For example, the Program could have the potential to 
distort market forces because the Program may act to artificially 
influence trading in ETPs that otherwise would not be traded. 
Similarly, the Commission recognizes concerns about the potential 
negative impact on a CLP Security participating in the Program, such as 
reduced liquidity and wider spreads, when a CLP Company is withdrawn or 
terminated from the Program. While the Commission is mindful of these 
concerns, the Commission believes, for the reasons described below, 
that certain aspects of the Program could help mitigate these concerns.
    First, the proposal contains disclosure provisions that will help 
to alert and educate potential and existing investors in the CLP 
Securities participating in the Program about the Program. 
Specifically, the Exchange will disclose on its Web site the following 
information: (i) The names of CLP Securities and the ETP CLP(s) in each 
CLP Security; (ii) the dates that a CLP Company, on behalf of a CLP 
Security, commences participation in and withdraws or is terminated 
from the Program; (iii) the name of each CLP Company and the associated 
CLP Securities on behalf of which it is participating in the Program; 
(iv) the acceptance of a CLP Company, on behalf of a CLP Security, and 
an ETP CLP into the Program; (v) the intent of a CLP Company, on behalf 
of a CLP Security, or ETP CLP to withdraw from the Program, and the 
date of actual withdrawal or termination from the ETP CLP Program; (vi) 
the total number of CLP Securities that any one CLP Company may have in 
the ETP CLP Program; and (vii) for each CLP Security, the amount, if 
any, of the supplemental CLP Fee determined by a CLP Company per CLP 
Security that would be in addition to the fixed basic CLP Fee of 
$10,000. The Exchange also will include on its Web site a description 
of the Program, as implemented on a pilot basis, including a fair and 
balanced summation of the potentially positive aspects of the Program, 
as well as the potentially negative aspects and risks that may be 
attendant with an ETP's participation in the Program. Furthermore, a 
CLP Company will be required to disclose on a product-specific Web site 
for each CLP Security that the CLP Security is participating in the 
Program and will be required to provide a link on that Web site to the 
Exchange's Program Web site. Finally, a CLP Company that, on behalf of 
a CLP Security, is approved to participate in the Program will be 
required to issue a press release to the public when a CLP Company, on 
behalf of a CLP security, commences or ceases participation in the 
Program, to post such press release on its Web site (or if it does not 
have a Web site, on the Web site of the Sponsor of the CLP Security), 
and to provide on its Web site a hyperlink to the Exchange's Web page 
describing the Program. This disclosure will help to inform investors 
and other market participants which securities are participating in the 
Program, which ETP CLPs are assigned to each CLP Security, the amount 
of CLP Fees a CLP Company will incur as a result of participating in 
the Program, the amount of the daily CLP Rebates that ETP CLPs may be 
eligible to receive from the Exchange under the Program, and the 
potential benefits and risks of the Program. A wide variety of ETPs are 
currently listed and trading today, and the Commission believes that 
such disclosure could be helpful for investors and other market 
participants to discern which ETPs listed on the Exchange are and are 
not subject to the Program and to make informed investment decisions 
with respect to ETPs.\96\
---------------------------------------------------------------------------

    \96\ The concurrent exemptive relief the Commission is issuing 
today from Rule 102 under Regulation M concerning the Program also 
contains additional disclosure requirements. See Securities Exchange 
Act Release No. 72693 (Jul. 28, 2014), supra note 4.
---------------------------------------------------------------------------

    Second, the Program is targeted at a subset of ETPs, namely those 
ETPs that are generally less liquid and which the Exchange believes 
might benefit most from the Program. Specifically, as proposed, ETPs 
that are otherwise eligible for the Program will not be eligible if 
they have a CADV of equal to or greater than 1,000,000 shares for three 
consecutive calendar months.\97\ Likewise, the Program will terminate 
with respect to a particular CLP Security if the security sustains a 
CADV of 1,000,000 shares or more for three consecutive months.\98\
---------------------------------------------------------------------------

    \97\ However, any CLP Security initially listed on the Exchange 
will remain eligible for the Program for the first six months that 
it is listed on the Exchange, regardless of the ETP's CADV.
    \98\ The same exception applies to the termination provision. 
See supra note 97.
---------------------------------------------------------------------------

    Finally, as proposed by the Exchange, the Program will be limited 
to a one-year pilot. The Commission believes that it is important to 
implement the Program as a pilot. Operating the Program as a pilot will 
allow assessment

[[Page 44915]]

of whether the Program is in fact achieving its goal of improving the 
market quality of CLP Securities, prior to any proposal or 
determination to make the Program permanent.\99\ In addition, approval 
on a pilot basis will allow the assessment, prior to any proposal or 
determination to make the Program permanent, of whether the Program has 
any unintended impact on the CLP Securities, securities not 
participating in the Program, or the market or market participants 
generally.
---------------------------------------------------------------------------

    \99\ The Exchange would be required to file with the Commission 
any proposal to extend the Program beyond the pilot period or to 
make the Program permanent pursuant to Section 19(b) of the Exchange 
Act and the rules and regulations thereunder. Such a filing would be 
published for comment in the Federal Register pursuant to Section 
19(b) and Rule 19b-4.
---------------------------------------------------------------------------

    The Exchange has represented that during the pilot it will submit 
monthly reports to the Commission about market quality in respect of 
the Program and that these reports will be posted on the Exchange's 
public Web site. The Exchange has represented that such reports will 
compare securities before and after they are in the Program, and will 
include information regarding CLP Security volume metrics, the number 
of ETP CLPs in CLP Securities, quotation spread and size statistics, 
and data and analysis about the market quality of CLP Securities that 
exceed the one million CADV threshold and ``graduate'' from the Program 
(or, where no securities have ``graduated'' from the Program, 
securities that have ``graduated'' from comparable programs at other 
exchanges to the extent that such securities exist). The Exchange also 
has represented that it will provide to the Commission similar data and 
analyses about comparable ETPs listed on the Exchange that are not 
participating in the Program, as well as any other Program-related data 
and analyses the Commission staff requests from the Exchange for the 
purpose of evaluating the efficacy of the Program. The Commission 
expects that this data and analyses provided by the Exchange should 
help the Commission, the Exchange, and other interested members of the 
public to evaluate whether the Program has resulted in the intended 
benefits it is designed to achieve, any unintended consequences 
resulting from the Program, and the extent to which the Program 
alleviates or aggravates the concerns the Commission has noted, 
including previously-stated Commission concerns relating to issuer 
payments to market makers.\100\
---------------------------------------------------------------------------

    \100\ See infra notes 102-105 and accompanying text.
---------------------------------------------------------------------------

    For example, the Exchange and the Commission will look to assess 
what impact, if any, there is on the market quality of CLP Securities 
that are withdrawn or are otherwise terminated from the Program. One 
way for a CLP Security to be terminated from the Program is if it 
exceeds the 1,000,000 CADV threshold included within the rules. The 
Commission recognizes that the Program may not, in the one-year pilot 
period, produce sufficient data (i.e., a large number of CLP Securities 
that enter and exit the Program) to allow a full assessment of whether 
termination (or withdrawal) of a CLP Security from the Program has 
resulted in any unintended consequences on the market quality of the 
CLP Security or otherwise. However, the Commission believes that the 
proposal strikes a reasonable balance between (i) setting the threshold 
for ``graduation'' from the Program high enough to encourage 
participation in the Program and (ii) setting the threshold low enough 
to have a sufficient number of CLP Securities graduate from the Program 
within the pilot period so that the Exchange, the Commission, and other 
interested persons can assess the impact, if any, of the Program, 
including ``graduation'' of CLP Securities from the Program. The 
Commission also notes that if no securities ``graduate'' from the 
Program during the pilot period, the Exchange has represented that it 
will provide data and analysis to the Commission relating to securities 
that have ``graduated'' from comparable programs at other exchanges to 
the extent that such securities exist.
    Furthermore, the pilot structure of the Program has the potential 
to generate data that is useful in evaluating the transition of ETPs 
from the existing CLP Program to the Program. The validity of inference 
and conclusions from statistical analysis of the pilot data may be 
limited by the pilot's small scale, however.
    The Commission believes that the design of the Program and the 
public disclosure requirements, coupled with implementation of the 
proposal on a pilot basis, should help mitigate potential concerns the 
Commission has noted above relating to any unintended or negative 
effects of the Program on the ETP market and investors.
    The Commission has previously expressed concerns relating to 
payments by issuers to market makers. FINRA Rule 5250 (formerly NASD 
Rule 2460) prohibits FINRA members and their associated persons from 
directly or indirectly accepting any payment from an issuer for acting 
as a market maker.\101\ FINRA Rule 5250 was implemented, in part, to 
address concerns about issuers paying market makers, directly or 
indirectly, to improperly influence the price of an issuer's stock and 
because of conflict of interest concerns between issuers and market 
makers.\102\ FINRA Rule 5250 was designed to preserve ``the integrity 
of the marketplace by ensuring that quotations accurately reflect a 
broker-dealer's interest in buying or selling a security.'' \103\ 
Specifically, in the NASD Rule 2460 Approval Order, the Commission 
found that the

    \101\ FINRA has amended Rule 5250 to create an exception for 
payments to members that are expressly provided for under the rules 
of a national securities exchange that are effective after being 
filed with, or filed with and approved by, the Commission pursuant 
to the requirements of the Act. See Securities Exchange Act Release 
No. 69398 (Apr. 18, 2013), 78 FR 24261 (Apr. 24, 2013). This 
amendment to FINRA Rule 5250 became effective May 15, 2013.
    \102\ See Securities Exchange Act Release No. 38812 (July 3, 
1997), 62 FR 37105 (July 10, 1997) (SR-NASD-97-29) (``NASD Rule 2460 
Approval Order''), at 37107.
    \103\ See id. at 37107.

decision by a firm to make a market in a given security and the 
question of price generally are dependent on a number of factors, 
including, among others, supply and demand, the firm's expectations 
toward the market, its current inventory position, and exposure to 
risk and competition. This decision should not be influenced by 
payments to the member from issuers or promoters. Public investors 
expect broker-dealers' quotations to be based on the factors 
described above. If payments to broker-dealers by promoters and 
issuers were permitted, investors would not be able to ascertain 
which quotations in the marketplace are based on actual interest and 
which quotations are supported by issuers or promoters. This 
structure would harm investor confidence in the overall integrity of 
the marketplace.\104\
---------------------------------------------------------------------------

    \104\ See id.

    The Commission also added that ``such payments may be viewed as a 
conflict of interest since they may influence the member's decision as 
to whether to quote or make a market in a security and, thereafter, the 
prices that the member would quote.'' \105\
---------------------------------------------------------------------------

    \105\ See id. at 37106.
---------------------------------------------------------------------------

    The Commission believes that a number of aspects of the Program 
mitigate the concerns that FINRA Rule 5250 was designed to address. 
First, the Commission believes that the terms of the Program are 
generally objective, clear, and transparent. The standards for the 
Program are set forth in proposed Interpretation and Policy .03 to Rule 
11.8. (further described above) \106\ and set forth the application and 
withdrawal process, the CLP Company eligibility

[[Page 44916]]

requirements, the ETP CLP qualification requirements, the fee and 
rebate structure, the market quality standards that an ETP CLP must 
meet and maintain to secure a portion of the daily CLP Rebate and 
maintain eligibility as an ETP CLP, the termination process, and the 
disclosure requirements. These requirements apply to all CLP 
Securities, CLP Companies, and ETP CLPs participating in the Program.
---------------------------------------------------------------------------

    \106\ See supra Section I.
---------------------------------------------------------------------------

    Second, the Exchange also will provide notification on its public 
Web site regarding the various aspects of the Program. As discussed 
above, this disclosure will include: (i) The CLP Securities and 
associated CLP Companies participating in the Program and the ETP CLPs 
assigned to each CLP Security; (ii) the date a particular CLP Company, 
on behalf of a CLP Security, begins participating or ceases 
participating in the Program; (iii) the acceptance of a CLP Company, on 
behalf of a CLP Security, and an ETP CLP into the Program; (iv) the 
intent of a CLP Company, on behalf of a CLP Security, or ETP CLP to 
withdraw from the Program, and the date of actual withdrawal or 
termination from the ETP CLP Program; (v) the total number of CLP 
Securities that any one CLP Company may have in the ETP CLP Program; 
(vi) the amount of the supplemental CLP Fee, if any, for each CLP 
Security; and (vii) a description of the Program, including 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.
    In addition, a CLP Company will be required to: (i) Disclose on a 
product-specific Web site for each CLP Security that the CLP Security 
is participating in the Program and provide on its Web site a hyperlink 
to the Exchange's Web page describing the Program; and (ii) issue a 
press release when the CLP Company, on behalf of a CLP security, 
commences or ceases participation in the Program and post such press 
release on its Web site (or if it does not have a Web site, on the Web 
site of the Sponsor of the CLP Security).
    And third, CLP Securities will be traded on the Exchange, which is 
a regulated market, pursuant to the current trading and reporting rules 
of the Exchange, and pursuant to the Exchange's established market 
surveillance and trade monitoring procedures. The Exchange will 
administer the application and acceptance of the CLP Companies and ETP 
CLPs into the Program, as well as the continuation in and withdrawal 
from the Program. The Exchange will collect the CLP Fees from CLP 
Companies and/or Sponsors and credit them to the Exchange's General 
Fund. An ETP CLP will be eligible to receive a CLP Rebate from the 
Exchange's General Fund only after it meets the proposed ETP CLP 
quoting requirements, as determined by the Exchange. Furthermore, the 
CLP Fees will be paid into the Exchange's General Fund, and the CLP 
Rebates will be paid out of the Exchange's General Fund. If no ETP CLP 
is eligible for the bid or offer portion of the CLP Rebate for a 
particular CLP Security on a particular day, no CLP Rebate will be 
awarded to any ETP CLP on that day and no refund will be provided to 
the applicable CLP Company or its Sponsor. The Commission believes that 
these factors, taken together, should help to mitigate the conflict of 
interest and other concerns that the Commission has previously 
identified \107\ relating to issuers paying for market making.
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    \107\ See NASD Rule 2460 Approval Order, supra note 102, and 
supra notes 102-105. See also Securities Act Release No. 6334 (Aug. 
6, 1981), 46 FR 42001 (Aug. 18, 1981), at Section IV.B (Treatment as 
Statutory Underwriter).
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    The Commission believes that it is reasonable and consistent with 
the Act for the Exchange to limit the Program to certain types of 
securities to allow the Exchange, through a pilot, to assess whether 
the Program will have the desired effect of improving the market 
quality of these securities before implementing the Program on a 
permanent basis. The Commission believes that it is reasonable and 
consistent with the Act for the Exchange to limit the Program to 
products under the 1,000,000 CADV threshold, to support the Exchange's 
stated purpose to ``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.'' \108\
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    \108\ See Notice, supra note 3, 79 FR at 33983.
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    The Commission believes that the CLP Fees are an equitable 
allocation of reasonable fees. First, participation in the Program is 
voluntary. An entity is free to determine whether it would be 
economically desirable to pay the CLP Fee, given the amount of the fee, 
the trading characteristics of the ETP, and the anticipated benefit. If 
a CLP Company chooses to participate in the Program on behalf of a CLP 
Security, it will incur the basic CLP Fee of $10,000, and the CLP 
Company will have discretion to incur the supplemental CLP Fee in an 
amount up to an additional $90,000. The CLP Fee will be paid for by the 
CLP Company that has a CLP Security participating in the Program or, 
for a CLP Security housed by a CLP Company that has a Sponsor, by the 
Sponsor associated with such CLP Company. Thus, the CLP Fee will be 
incurred and paid for by an entity that has chosen to participate in, 
and that may potentially benefit from, the Program.\109\ An entity that 
chooses not to participate will not be required to pay any additional 
fee beyond the standard listing and annual fees. Further, the basic CLP 
Fee will be the same for any CLP Company wishing to participate in the 
Program.
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    \109\ Issuers of exchange-traded funds registered under the 
Investment Company Act of 1940 (``1940 Act'') are prohibited from 
paying directly or indirectly for distribution of their shares 
(i.e., directly or indirectly financing any activity that is 
primarily intended to result in the sale of shares), unless such 
payments are made pursuant to a plan that meets the requirements of 
Rule 12b-1 under the 1940 Act. Although the services at issue could 
be primarily intended to result in the sale of fund shares, the 
Commission has stated that such a determination will depend on the 
surrounding circumstances. See Payment of Asset-Based Sales Loads by 
Registered Open-End Management Investment Companies, Investment 
Company Act Release No. 16431 (June 13, 1988) (``1988 12b-1 
Release''). As the Commission has noted previously, if a fund makes 
payments that are ostensibly for a non-distribution purpose, and the 
recipient of those payments finances distribution, the question 
arises whether the fund's assets are being used indirectly for 
distribution. The Commission has stated that there can be no precise 
definition of what types of expenditures constitute indirect use of 
fund assets, and this determination is based on the facts and 
circumstances of each individual case. In addition, fund directors, 
particularly independent directors bear substantial responsibility 
for making that judgment. See Bearing of Distribution Expenses by 
Mutual Funds, Investment Company Act Release No. 11414 (October 28, 
1980).
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    The Commission also believes that availability of the discretionary 
supplemental CLP Fee is consistent with the Act. Each CLP Company 
participating in the Program will have the choice of whether or not to 
incur, as well as the exact amount (up to $90,000) of, the supplemental 
CLP Fee. Not all ETPs are alike, and trading in certain products may be 
riskier or more costly than trading in others. The Commission believes 
that it is reasonable to allow each CLP Company to choose to 
participate in the Program and to determine whether (and if so, at what 
amount) it is desirable to incentivize ETP CLPs through the 
supplemental CLP Fee to improve the market quality of certain CLP 
Securities. Finally, as discussed above, the payment of the 
supplemental CLP Fee will be transparent to the marketplace, as this 
information will be disclosed on the Exchange's Web site.

Section 11(d)(1) of the Exchange Act

    Section 11(d)(1) of the Exchange Act \110\ generally prohibits a 
broker-dealer from extending or maintaining

[[Page 44917]]

credit, or arranging for the extension or maintenance of credit, on 
shares of new issue securities, if the broker-dealer participated in 
the distribution of the new issue securities within the preceding 30 
days. The Commission's view is that shares of open-end investment 
companies and unit investment trusts registered under the 1940 Act, 
such as ETP shares, are distributed in a continuous manner, and broker-
dealers that sell such securities are therefore participating in the 
``distribution'' of a new issue for purposes of Section 11(d)(1).\111\
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    \110\ 15 U.S.C. 78k(d)(1).
    \111\ See, e.g., Exchange Act Release Nos. 6726 (Feb. 8, 1962), 
27 FR 1415 (Feb. 15, 1962) and 21577 (Dec. 18, 1984), 49 FR 50174 
(Dec. 27, 1984).
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    The Division of Trading and Markets, acting under delegated 
authority, granted an exemption from Section 11(d)(1) and Rule 11d1-2 
thereunder for broker-dealers that have entered into an agreement with 
an exchange-traded fund's distributor to place orders with the 
distributor to purchase or redeem the exchange-traded fund's shares 
(``Broker-Dealer APs).\112\ The SIA Exemption allows a Broker-Dealer AP 
to extend or maintain credit, or arrange for the extension or 
maintenance of credit, to or for customers on the shares of qualifying 
exchange-traded funds subject to the condition that neither the Broker-
Dealer AP, nor any natural person associated with the Broker-Dealer AP, 
directly or indirectly (including through any affiliate of the Broker-
Dealer AP), receives from the fund complex any payment, compensation, 
or other economic incentive to promote or sell the shares of the 
exchange-traded fund to persons outside the fund complex, other than 
non-cash compensation permitted under NASD Rule 2830(l)(5)(A), (B), or 
(C). This condition is intended to eliminate special incentives that 
Broker-Dealer APs and their associated persons might otherwise have to 
``push'' exchange-traded fund shares.\113\
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    \112\ See Letter from Catherine McGuire, Chief Counsel, Division 
of Trading and Markets, Securities and Exchange Commission to 
Securities Industry Association (Nov. 21, 2005) (``SIA Exemption'').
    \113\ Trading and markets staff provided no-action relief from 
Section 11(d)(1) for broker-dealers engaging in secondary market 
proprietary or customer transactions in securities of Commodity-
based Exchange-Traded Trusts (``CBETTs'') similar to the 
Commission's SIA Exemption. This relief is conditioned on the 
broker-dealer and any natural person associated with the broker-
dealer not receiving from the Fund complex, directly or indirectly, 
any payment, compensation or other economic incentive to promote or 
sell Shares to persons outside of the Fund complex, other than non-
cash compensation permitted under NASD Rule 2830(1)(5)(A), (B), or 
(C). See No-Action Letter re: DB Commodity Index Tracking Fund and 
DB Commodity Services LLC (Jan. 19, 2006); No-Action Letter re: 
Rydex Specialized Products LLC (Dec. 5, 2005); No-Action Letter re: 
streetTRACKS Gold Trust (Dec. 12, 2005); and No-Action Letter re: 
iShares COMEX Gold Trust (Dec. 12, 2005).
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    The Program will permit certain ETPs to voluntarily incur increased 
listing fees payable to the Exchange. In turn, the Exchange will use 
the fees to make CLP Rebates to market makers that improve the 
liquidity of participating issuers' securities, and thus enhance the 
market quality for the participating issuers. CLP Rebates will be 
accrued for, among other things, maintaining continuous, two-sided 
displayed quotes or orders. Receipt of the CLP Rebates by certain 
broker-dealers will implicate the conditions of the SIA Exemption \114\ 
from the new issue lending restriction in Section 11(d)(1) of the 
Exchange Act discussed above. The Commission's view is that the CLP 
Rebates market makers will receive under the proposal are indirect 
payments from the fund complex to the market maker and that those 
payments are compensation to promote the shares of the ETP. Therefore, 
a market maker that is also a broker-dealer receiving the incentives 
will not be able to rely on the SIA Exemption from Section 
11(d)(1).\115\ This does not mean that broker-dealers cannot 
participate in the Program; it merely means they cannot rely on the SIA 
Exemption \116\ while doing so. Thus, broker-dealers that participate 
in the Program will need to comply with Section 11(d)(1) unless there 
is another applicable exemption.
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    \114\ See also note 113, supra.
    \115\ Id.
    \116\ Id.
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III. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\117\ that the proposed rule change (SR-BATS-2014-022), be, and it 
hereby is, approved.
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    \117\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\118\
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    \118\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-18127 Filed 7-31-14; 8:45 am]
BILLING CODE 8011-01-P