[Federal Register Volume 80, Number 99 (Friday, May 22, 2015)]
[Notices]
[Pages 29769-29772]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-12414]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-74987; File No. SR-BATS-2015-37]


Self-Regulatory Organizations; BATS Exchange, Inc.; Notice of 
Filing of a Proposed Rule Change, and Amendment No. 1 Thereto, To Amend 
Rule 11.2 To State That the BATS Exchange, Inc. Will Not Designate for 
Trading Any Security Admitted to Unlisted Trading Privileges on the 
Exchange Unless That Security Satisfies Certain Liquidity Requirements

May 18, 2015.
    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 May 5, 2015, BATS Exchange, Inc. (the ``Exchange'' or ``BATS'') 
filed with the Securities and Exchange Commission (``Commission'') the 
proposed rule change as described in Items I, II and III below, which 
Items have been prepared by the Exchange. On May 15, 2015, the Exchange 
filed Amendment No. 1 to the proposal. Amendment No. 1 amended and 
replaced the original proposal in its entirety. The Commission is 
publishing this notice to solicit comments on the proposed rule change, 
as modified by Amendment No. 1, 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 filed a proposal to amend Rule 11.2 to state that the 
Exchange will not designate for trading any security admitted to 
unlisted trading privileges on the Exchange unless that security 
satisfies certain liquidity requirements, as further described below.
    The text of the proposed rule change is available at the Exchange's 
Web site at 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
    With limited exception, the current equity market structure under 
Regulation NMS applies the same rules with respect to, among other 
things, tick sizes, order protection, locked and crossed markets, and 
access fees to all exchange-listed securities. The Exchange believes 
that Regulation NMS, along with technological advancements, has 
produced great efficiencies to the equity market, resulting in intense 
competition between exchanges and broker-dealers. The Exchange believes 
the net result for most exchange-listed securities has been decreases 
in transaction costs, including decreases in explicit commissions and 
the narrowing of effective spreads investors pay to enter and exit 
positions. However, the Exchange recognizes that not all

[[Page 29770]]

exchange-listed securities have benefited to the same extent under the 
current one-size fits all approach to the equity market. In particular, 
investors continue to experience difficulty trading illiquid 
securities, including paying higher effective spreads and difficulty 
sourcing liquidity across multiple exchanges and non-exchange trading 
venues while minimizing market impact.
    The Exchange believes the market quality of securities that are 
today illiquid could benefit from a concentration of quoted liquidity 
on the listing exchange. By concentrating quoted liquidity on the 
listing exchange, for the reasons discussed below, the Exchange 
believes liquidity providers will quote more competitively, resulting 
in more efficient price formation and a narrower national best bid or 
offer (``NBBO''), as well as the display of more quoted size at price 
levels outside the NBBO (``depth of book''). In turn, the Exchange 
believes that these enhancements to market quality could ultimately 
increase investor and member interest in such securities resulting in 
greater average daily trading volume. As such, as described below, the 
Exchange is proposing to adopt rules to clarify the circumstances under 
which the Exchange would voluntarily provide advance notice to the 
industry that it is ceasing to quote and trade certain specific 
illiquid securities until such securities meet and sustain an average 
daily volume threshold indicative of increased liquidity.
    In particular, the Exchange proposes to amend Rule 11.2 to state 
that the Exchange may determine not to designate for trading any 
security admitted to unlisted trading privileges on the Exchange if 
that security falls below certain consolidated average daily volume 
requirements, as further described below. Rule 11.2 currently states 
that any class of securities listed or admitted to unlisted trading 
privileges on the Exchange pursuant to Chapter XIV of the Exchange's 
rules \3\ shall be eligible to become designated for trading on the 
Exchange. The Rule further states that all securities designated for 
trading are eligible for odd-lot, round-lot and mixed-lot executions, 
unless otherwise indicated by the Exchange or limited pursuant to 
Exchange rules. The Exchange proposes to include these existing 
provisions of Rule 11.2 within subparagraph (a) of the proposed rule in 
order to separately propose additional provisions under subparagraphs 
(b), (c), and (d).
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    \3\ Chapter XIV of the Exchange's rules discusses the securities 
eligible to be designated for trading on the Exchange. Exchange Rule 
14.11(j), in particular, states that the Exchange may extend 
unlisted trading privileges to NMS Stock (as defined in Rule 600 of 
Regulation NMS under the Act) that is listed on another national 
securities exchange.
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    The Exchange proposes to add new subparagraph (b) to Rule 11.2, 
which would state that the Exchange may determine not to designate for 
trading any security admitted to unlisted trading privileges on the 
Exchange pursuant to Chapter XIV of the Exchange's rules when that 
security's consolidated average daily trading volume is equal to or 
less than 2,500 shares during the preceding 90 calendar days.\4\ The 
Exchange further proposes to add new subparagraph (c) to Rule 11.2, 
which would state that any security not designated for trading by the 
Exchange pursuant to subparagraph (b) of this Rule may be designated 
for trading by the Exchange if its consolidated average daily trading 
volume exceeds 5,000 shares over any 90 calendar day period since the 
security was not designated for trading pursuant to subparagraph (b). 
The Exchange also proposes to make clear that new subparagraph (c) is 
not intended to limit the Exchange's ability to designate any security 
for trading pursuant to the Exchange's general authority under 
subparagraph (a) of Rule 11.2. The Exchange also proposes to add new 
subparagraph (d) to Rule 11.2, which would require the Exchange to 
provide notice at least one trading day in advance of any securities it 
is making unavailable for trading pursuant to subparagraph (b) of Rule 
11.2, and any securities it is making available for trading under 
subparagraph (c) of Rule 11.2.
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    \4\ Based on internal statistics, the Exchange anticipates that 
limiting the rule's applicability to those securities with a 
consolidated average daily trading volume of 2,500 shares or less 
during the preceding 90 calendar days will affect approximately 700 
securities.
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    While the Exchange is proposing to retain discretion over whether 
it will in fact determine not to quote and trade securities that meet 
the criteria described in proposed new subparagraphs (b) and (c) of 
Rule 11.2, the Exchange notes that nothing in its rules or applicable 
securities regulation requires it to designate for trading any class of 
securities listed or admitted to unlisted trading privileges on the 
Exchange pursuant to Chapter XIV of the Exchange's rules. The Exchange 
believes that adopting such a provision in its rules could enhance 
market quality for securities falling below the consolidated average 
daily volume threshold by facilitating the concentration of quoted 
liquidity on the listing exchange.\5\ In determining whether to 
exercise its discretion under proposed new subparagraphs (b) and (c) of 
Rule 11.2, the Exchange would consider such factors as member and 
investor feedback as well as whether the other non-listing exchanges 
have decided to cease quoting and trading in the effected securities. 
The Exchange further believes that adoption of a rule requiring it to 
provide advance notice to its members of any securities the Exchange is 
choosing not to trade under proposed new subparagraph (b) of Rule 11.2 
and any securities it is making available for trading pursuant to 
proposed new subparagraph (c) of Rule 11.2 will help avoid confusion by 
providing transparency and certainty to members and investors regarding 
the securities the Exchange is or is not designating for quoting and 
trading on the Exchange.
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    \5\ The Exchange understands that the EDGX Exchange, Inc., EDGA 
Exchange, Inc., and BATS Y-Exchange, Inc. will separately file 
substantially similar proposed rule changes with the Commission.
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    The Exchange believes that limiting the impact of paragraph (b) of 
the proposed rule change to securities with a consolidated average 
daily trading volume that is equal to or less than 2,500 shares during 
the preceding 90 calendar days is reasonable because such securities 
tend to be illiquid, as reflected by larger quoted and effective 
spreads, with smaller quoted size at both the NBBO and throughout the 
depth of book than more actively-traded securities. Similarly, the 
Exchange believes that considering to designate for trading those 
securities that have not been trading on the Exchange pursuant to 
paragraph (b) once such securities have a consolidated average daily 
trading volume that exceeds 5,000 shares over a 90 calendar day period 
since the security was not designated for trading pursuant to proposed 
subparagraph (b) of Rule 11.2 is reasonable because such activity may 
demonstrate that such securities are now trading more effectively. The 
Exchange believes that its proposed rule changes may facilitate an 
improvement in market quality for the effected securities.\6\ In 
particular, the Exchange

[[Page 29771]]

believes that by concentrating the quoted liquidity in such securities 
on the listing exchange, liquidity providers will be incented to quote 
on such exchange more competitively, resulting in narrower bid-ask 
spreads and greater quoted depth of book. The Exchange believes 
liquidity providers would be so incented because concentrating the 
quoted liquidity in such securities on the listing exchange would: (i) 
Reduce liquidity providers' risk of adverse selection inherent in 
quoting in a fragmented market, (ii) provide greater certainty of 
execution on the one exchange at which liquidity providers are quoting, 
and (iii) enhance competition for order book priority at the NBBO and 
throughout the depth of book. Although the Exchange would be 
voluntarily foregoing potential market share by not quoting and trading 
securities subject to the Rule, the Exchange believes the 
aforementioned enhancements in market quality may increase investor 
interest in trading such securities, which in turn would generate 
increased volume and ultimately benefit the Exchange once such 
securities become eligible for trading on the Exchange under the rule 
in the future.
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    \6\ Based on an internal study, the Exchange believes a majority 
of the securities that would be covered by the Rule's criteria are 
small-cap companies (i.e., companies with a market capitalization of 
$250 million or less). Suggesting that the current U.S. equity 
market often fails to provide sufficient liquidity for the 
securities of small-cap companies, the Commission's Advisory 
Committee on Small and Emerging Companies (``Advisory Committee'') 
recommended to the Commission concentrating the market for such 
securities through the creation of a separate U.S. equity market. 
See Recommendations Regarding Separate U.S. Equity Market for 
Securities of Small and Emerging Companies, by the Advisory 
Committee on Small and Emerging Companies, dated February 1, 2013. 
The Advisory Committee also stated that other actions with respect 
to trading venues may also be warranted to facilitate liquidity in 
small and emerging companies. Id.
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2. Statutory Basis
    The Exchange believes that the proposed rule changes are consistent 
with Section 6(b) of the Securities Exchange Act of 1934 (the ``Act'') 
\7\ and further the objectives of Section 6(b)(5) of the Act \8\ 
because they are 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, to foster cooperation and 
coordination with persons engaged in facilitating transactions in 
securities, and, in general, to protect investors and the public 
interest.
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    \7\ 15 U.S.C. 78f(b).
    \8\ 15 U.S.C. 78f(b)(5).
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    The Exchange notes that nothing in its rules or any applicable 
securities regulation requires it to designate for trading any class of 
securities listed or admitted to unlisted trading privileges on the 
Exchange pursuant to Chapter XIV of the Exchange's rules. However, the 
Exchange believes adopting a rule to clarify the circumstances under 
which the Exchange would voluntarily provide advance notice to the 
industry that it is ceasing to quote and trade certain specific 
illiquid securities until such securities meet and sustain a 
consolidated average daily volume threshold indicative of increased 
liquidity would promote just and equitable principles of trade, remove 
impediments to and perfect the mechanism of a free and open market and 
a national market system by facilitating the concentration of displayed 
liquidity on the listing exchange for effected securities, which the 
Exchange believes could enhance the market quality of such 
securities.\9\ The Exchange believes that concentrating displayed 
liquidity on the listing exchange in certain illiquid securities may 
enhance market quality of such securities by enabling liquidity 
providers to more efficiently form competitive prices at the NBBO, and 
to provide greater quoted depth of book. In addition, the Exchange 
believes that if displayed liquidity is concentrated on the listing 
exchange in such securities, the listing exchange may have flexibility 
to innovate with alternative market structures, such as variable tick 
sizes or periodic batch auctions that are not currently possible under 
Regulation NMS when multiple exchanges are quoting and trading the 
securities, and which may further enhance the market quality of the 
effected illiquid securities.\10\
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    \9\ See supra note 6.
    \10\ The Exchange is not proposing or advocating any form of 
trade-at prohibition, which, depending on its various iterations, 
would generally act to prevent trading off-exchange without first 
executing against all equal or better priced protected quotations. 
Rather, the Exchange is proposing and advocating a reduction in the 
number of displayed venues on which certain illiquid securities will 
be quoted and traded, which the Exchange believes will concentrate 
the quoting activity serving to enhance quote competition and 
thereby increase market quality by narrowing the NBBO and increasing 
the quoted depth of book for effected securities, without regard to 
off-exchange trading.
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    The proposed rule change promotes just and equitable principles of 
trade because it will provide certainty and transparency to members and 
investors with respect to which securities the Exchange will or will 
not designate for quoting and trading on the Exchange, thereby avoiding 
confusion.

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

    The Exchange does not believe that the proposed rule changes will 
result in any burden on competition that is not necessary or 
appropriate in furtherance of the purposes of the Act. The Exchange 
notes that nothing in its rules or any applicable securities regulation 
require it to designate for trading any class of securities listed or 
admitted to unlisted trading privileges on the Exchange pursuant to 
Chapter XIV of the Exchange's rules. The Exchange believes enacting 
such a provision in its rules would not impose a burden on competition 
that is not necessary or appropriate in furtherance of the purposes of 
the Act. While the Exchange will be voluntarily foregoing potential 
market share by not quoting and trading securities subject to the rule, 
the Exchange believes the proposal will enhance market quality in such 
securities by increasing quoting competition among liquidity providers 
on the listing exchange, which will result in better prices at the NBBO 
and greater depth of book. The Exchange further believes these 
enhancements in market quality may increase investor interest in 
trading such securities, which in turn would improve competition by 
generating increased volume which would also ultimately benefit the 
Exchange once such securities become eligible for trading on the 
Exchange under the rule in the future.

(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 changes.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

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

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change, as modified by Amendment No. 1, 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

[[Page 29772]]

     Send an email to [email protected]. Please include 
File Number SR-BATS-2015-37 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-BATS-2015-37. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for Web site viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE., 
Washington, DC 20549, on official business days between the hours of 
10:00 a.m. and 3:00 p.m. Copies of the filing will also be available 
for inspection and copying at the principal office of the Exchange. All 
comments received will be posted without change; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File Number SR-BATS-2015-37 and should be 
submitted on or before June 12, 2015.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\11\
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    \11\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2015-12414 Filed 5-21-15; 8:45 am]
BILLING CODE 8011-01-P