[Federal Register Volume 81, Number 35 (Tuesday, February 23, 2016)]
[Notices]
[Pages 9017-9025]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-03740]



[[Page 9017]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-77171; File No. SR-BATS-2015-101]


Self-Regulatory Organizations; BATS Exchange, Inc.; Order 
Granting Approval of a Proposed Rule Change, as Modified by Amendment 
No. 1 Thereto, To Adopt Rule 8.17 To Provide a Process for an Expedited 
Suspension Proceeding and Rule 12.15 To Prohibit Disruptive Quoting and 
Trading Activity

February 18, 2016.

I. Introduction

    On November 6, 2015, BATS Exchange, Inc. (``BATS'' or the 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change to adopt new BATS Rule (``Rule'') 12.15, which 
would prohibit certain disruptive quoting and trading activities on the 
Exchange, and new Rule 8.17, which would permit BATS to conduct a new 
Expedited Client Suspension Proceeding when it believes proposed Rule 
12.15 has been violated.\3\ On November 17, 2015, the Exchange filed 
Amendment No. 1 to the proposal.\4\ The proposed rule change, as 
modified by Amendment No. 1, was published for comment in the Federal 
Register on November 24, 2015.\5\ On January 6, 2016, pursuant to 
Section 19(b)(2) of the Act,\6\ the Commission designated a longer 
period within which to approve the proposed rule change, disapprove the 
proposed rule change, or institute proceedings to determine whether to 
disapprove the proposed rule change.\7\ The Commission received four 
comment letters on the proposal and a response to the comments from the 
Exchange.\8\ The Commission also received a recommendation regarding 
the proposed rule change from the Office of the Investor Advocate 
(``OIAD'').\9\ This order approves the proposed rule change, as 
modified by Amendment No. 1.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ As discussed in Section II, this proposed rule change is a 
revised version of a prior filing, BATS-2015-57, which the Exchange 
withdrew on November 6, 2015. See Securities Exchange Act Release 
No. 76393 (November 9, 2015), 80 FR 70851 (November 16, 2015) (BATS-
2015-57) (notice of withdrawal of BATS-2015-57). BATS filed BATS-
2015-101 in order to address certain issues raised by comments 
submitted with respect to BATS-2015-57.
    \4\ Amendment No. 1 amended and replaced the original proposal 
in its entirety.
    \5\ See Securities Exchange Act Release No. 76470 (November 18, 
2015), 80 FR 73247 (``Notice'').
    \6\ 15 U.S.C. 78s(b)(2).
    \7\ See Securities Exchange Act Release No. 76841, 81 FR 1457 
(January 12, 2016). The Commission designated February 22, 2016 as 
the date by which it should approve, disapprove, or institute 
proceedings to determine whether to disapprove the proposed rule 
change.
    \8\ See letters from: R.T. Leuchtkafer to Brent J. Fields, 
Secretary, Commission, dated December, 14, 2015 (``Leuchtkafer 
Letter II''); Samuel F. Lek, Chief Executive Officer, Lek Securities 
Corporation, dated December 28, 2015 (``Lek Letter III''); G.T. 
Spaulding to Brent J. Fields, Secretary, Commission, dated December, 
28, 2015 (``Spaulding Letter''); R.T. Leuchtkafer to Brent J. 
Fields, Secretary, Commission, dated February 2, 2016 (``Leuchtkafer 
Letter III''); and response letter regarding SR-BATS-2015-101 from 
Anders Franzon, SVP Associate General Counsel, BATS, to Brent J. 
Fields, Secretary, Commission, dated January 21, 2016 (``BATS 
Response Letter II''). In addition, the Commission received comments 
regarding the prior filing, SR-BATS-2015-57, which this proposal 
revises and replaces. See comment letters regarding SR-BATS-2015-57 
from: Teresa Machado B., dated August 19, 2015 (``Machado Letter''); 
Samuel F. Lek, Chief Executive Officer, Lek Securities Corporation, 
dated September 3, 2015 (``Lek Letter I''); R.T. Leuchtkafer to 
Brent J. Fields, Secretary, Commission, dated September, 4, 2015 
(``Leuchtkafer Letter I''); Mary Ann Burns, Chief Operating Officer, 
FIA Principal Traders Group, to Brent J. Fields, Secretary, 
Commission, dated September, 9, 2015 (``FIA Letter''); and Samuel F. 
Lek, Chief Executive Officer, Lek Securities Corporation, dated 
September 18, 2015 (``Lek Letter II''). The Exchange submitted a 
response to these comments in conjunction with its withdrawal of SR-
BATS-2015-57 and filing of this proposal. See response letter 
regarding SR-BATS-2015-57 from Anders Franzon, VP and Associate 
General Counsel, BATS, to Brent J. Fields, Secretary, Commission, 
dated November 6, 2015 (``BATS Response Letter I''). The comments 
pertaining to the current proposal, the comments pertaining to SR-
BATS-2015-57, and the Exchange's responses to the comments are all 
summarized below.
    \9\ See Memorandum to the Commission from Rick A. Fleming, 
Office of the Investor Advocate, Commission, dated December 15, 2015 
(``OIAD Recommendation''). As discussed in more detail below, the 
Commission has carefully considered the OIAD Recommendation. The 
OIAD was established pursuant to Section 915 of the Dodd Frank Wall 
Street Reform and Consumer Protection Act, Public Law 111-203, sec. 
911, 124 Stat. 1376, 1822 (July 21, 2010) (the ``Dodd-Frank Act''). 
The Dodd-Frank Act authorizes the Investor Advocate, among other 
things, to identify areas in which investors would benefit from 
changes in the regulations of the Commission or the rules of self-
regulatory organizations and to propose to the Commission changes in 
the regulations or orders of the Commission that may be appropriate 
to promote the interests of investors.
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II. Description of the Proposed Rule Change

    The Exchange states that, in order to fulfill certain of its 
responsibilities as a registered national securities exchange and self-
regulatory organization, it has developed a comprehensive regulatory 
program that includes automated surveillance of trading activity that 
is operated directly by Exchange staff and by staff of the Financial 
Industry Regulatory Authority (``FINRA'') pursuant to a Regulatory 
Services Agreement.\10\ According to the Exchange, under this 
regulatory program, it can often take several years to resolve cases 
involving disruptive and potentially manipulative or improper quoting 
and trading activity even though, in some cases, the improper activity 
is able to be identified in real-time or near real-time.\11\ As a 
result, the Exchange states that Exchange members (``Members'') 
responsible for such conduct, or responsible for their customers' 
conduct, are allowed to continue the disruptive quoting and trading 
activity on the Exchange and other exchanges during the entirety of 
such lengthy investigations and enforcement processes.\12\ In the 
Notice, the Exchange provides examples of recent cases in which this 
has occurred.\13\
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    \10\ See Notice, supra note 5, at 73247-48.
    \11\ Id. at 73248.
    \12\ Id.
    \13\ Id. The Exchange notes that these cases involved 
allegations of wide-spread market manipulation, and in each case, 
the conduct involved a pattern of disruptive quoting and trading 
activity indicative of manipulative layering or spoofing. Id.
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    The Exchange believes that a lengthy investigation and enforcement 
process is generally necessary and appropriate to afford the subject 
Member adequate due process.\14\ However, it also believes ``that there 
are certain obvious and uncomplicated cases of disruptive and 
manipulative behavior or cases where the potential harm to investors is 
so large that the Exchange should have the authority to initiate an 
expedited suspension proceeding in order to stop the behavior from 
continuing on the Exchange.'' \15\ The Exchange further states that it 
should have such authority if a Member is engaging in or facilitating 
disrupting quoting and trading activity, and the Member has received 
sufficient notice with an opportunity to respond, but such activity has 
not ceased.\16\
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    \14\ Id.
    \15\ Id.
    \16\ Id.
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    The Exchange therefore has proposed to adopt new Rule 12.15, which 
would expressly prohibit two specific types of disruptive quoting and 
trading activities, and new Rule 8.17, which would permit the Exchange 
to conduct an Expedited Client Suspension Proceeding when it believes 
new Rule 12.15 has been violated.\17\
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    \17\ The Exchange notes that it currently has authority to 
prohibit and take action against manipulative trading activity, 
including disruptive quoting and trading activity, pursuant to its 
general market manipulation rules, including Rule 3.1. Id. at 73250.

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[[Page 9018]]

Proposed Rule 12.15

    Proposed Rule 12.15 would state that no Member shall engage in or 
facilitate disruptive quoting and trading activity--as described in 
Interpretations and Policies .01 and .02 of proposed Rule 12.15--on the 
Exchange, including acting in concert with other persons to affect such 
activity.\18\
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    \18\ The Exchange believes that it is necessary to extend the 
prohibition of proposed Rule 12.15 to situations when persons are 
acting in concert to avoid a potential loophole where disruptive 
quoting and trading activity is simply split between several brokers 
or customers. See Notice, supra note 5, at 73250.
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    Proposed Interpretation and Policy .01 would describe the quoting 
and trading activities prohibited by proposed Rule 12.15 and state 
that, for purposes of proposed Rule 12.15, disruptive quoting and 
trading activity shall include a frequent pattern of two fact 
scenarios, defined as ``Disruptive Quoting and Trading Activity Type 
1'' and ``Disruptive Quoting and Trading Activity Type 2,'' 
respectively. Disruptive Quoting and Trading Activity Type 1 would 
entail a frequent pattern in which the following facts are present: (1) 
A party enters multiple limit orders on one side of the market at 
various price levels (the ``Displayed Orders''); (2) following the 
entry of the Displayed Orders, the level of supply and demand for the 
security changes; (3) the party enters one or more orders on the 
opposite side of the market of the Displayed Orders (the ``Contra-Side 
Orders'') that are subsequently executed; and (4) following the 
execution of the Contra-Side Orders, the party cancels the Displayed 
Orders. Disruptive Quoting and Trading Activity Type 2 would entail a 
frequent pattern in which the following facts are present: (1) A party 
narrows the spread for a security by placing an order inside the 
national best bid and offer (``NBBO''); and (2) the party then submits 
an order on the opposite side of the market that executes against 
another market participant that joined the new inside market 
established by the party.
    Proposed Interpretation and Policy .02 would state that, for 
purposes of proposed Rule 12.15, disruptive quoting and trading 
activity shall include a frequent pattern in which the facts listed in 
Interpretation and Policy .01 are present. Proposed Interpretation and 
Policy .02 would also state that, unless otherwise indicated, the order 
of the events indicating the pattern does not modify the applicability 
of proposed Rule 12.15. Further, proposed Interpretation and Policy .02 
would state that disruptive quoting and trading activity includes a 
pattern or practice in which all of the quoting and trading activity is 
conducted on the Exchange as well as a pattern or practice in which 
some portion of the quoting or trading activity is conducted on the 
Exchange and the other portions of the quoting or trading activity are 
conducted on one or more other exchanges.

Proposed Rule 8.17

    Under proposed Rule 8.17, the Exchange could initiate an Expedited 
Client Suspension Proceeding when it believes that proposed Rule 12.15 
has been violated. An Expedited Client Suspension Proceeding could 
result in the Exchange issuing a ``suspension order,'' under which a 
Respondent to the proceeding that was provided with advanced notice 
could be (1) ordered to cease and desist from the violative trading 
activity under proposed Rule 12.15 and/or ordered to cease and desist 
from providing access to the Exchange to a client engaging in the 
violative trading activity under proposed Rule 12.15, and (2) suspended 
from the Exchange unless and until it takes or refrains from taking the 
act or acts described in the suspension order.\19\
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    \19\ See proposed Rule 8.17(d)(2).
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    Paragraph (a) of proposed Rule 8.17 would govern the initiation of 
an Expedited Client Suspension Proceeding. With the prior written 
authorization of the Exchange's Chief Regulatory Officer (``CRO'') or 
such other senior officers as the CRO may designate, the Office of 
General Counsel or Regulatory Department of the Exchange may initiate 
an Expedited Client Suspension Proceeding. The Exchange would initiate 
an Expedited Client Suspension Proceeding by serving a notice on a 
Member or associated person of a Member (``Respondent''), and the 
notice would be effective upon service.\20\ The notice would state 
whether the Exchange is requesting the Respondent to be required to 
take action or to refrain from taking action, and would be accompanied 
by the following: (1) A declaration of facts, signed by a person with 
knowledge of the facts contained therein, that specifies the acts that 
constitute the alleged violation; and (2) a proposed order that 
contains the required elements of a suspension order (except the date 
and hour of the order's issuance).\21\
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    \20\ Under proposed Rule 8.17, relevant documents (e.g., notice, 
the suspension order) may be served via personal service or 
overnight commercial carrier. See proposed Rules 8.17(a)(2), 
8.17(c)(2), 8.17(d)(4), and 8.17(e).
    \21\ See proposed Rule 8.17(a)(3).
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    Paragraph (b) of proposed Rule 8.17 would govern the appointment of 
a Hearing Panel to preside over an Expedited Client Suspension 
Proceeding and the recusal or disqualification of a Hearing Officer 
from the Hearing Panel under certain circumstances. Proposed Rule 
8.17(b)(1) would require the assignment of a Hearing Panel as soon as 
practicable after the Exchange initiates an Expedited Client Suspension 
Proceeding.\22\ Proposed Rule 8.17(b)(2) would provide for the recusal 
or disqualification of a Hearing Officer in the event he or she has a 
conflict of interest or bias or other circumstances exist where his or 
her fairness might reasonably be questioned. The proposed rule would 
permit a Hearing Officer to recuse himself or herself and also permit a 
party to the proceeding to file a motion to disqualify a Hearing 
Officer. Proposed Rule 8.17(b) would require a recusal and 
disqualification proceeding to be held under such circumstances, which 
would be conducted in accordance with current Rule 8.6(b).\23\ However, 
proposed Rule 8.17(b) would provide for shorter timeframes within which 
a motion to disqualify a Hearing Officer must be filed and within which 
the Exchange may respond to that motion than those set forth in Rule 
8.6(b).\24\ The Exchange states that proposed Rule 8.17(b) provides for 
these shorter time periods due to the compressed schedule pursuant to 
which an Expedited Client Suspension Proceeding would operate.\25\
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    \22\ The Hearing Panel would be appointed in accordance with 
current Rule 8.6(a), which states, among other things, that a 
Hearing Panel for general disciplinary proceedings shall be 
comprised of three hearing officers appointed by the Chief Executive 
Officer of the Exchange. See Rule 8.6(a). Rule 8.6(a) further states 
that each Hearing Panel shall be comprised of: (1) A professional 
hearing officer, who shall serve as Chairman of the Hearing Panel, 
(2) a hearing officer who is an Industry member, as such term is 
defined in the Exchange's By-Laws, and (3) a hearing officer who is 
a Member Representative member, as such term is defined in the 
Exchange's By-Laws. Id.
    \23\ See Rule 8.6(b). Rule 8.6(b) sets forth the Exchange's 
standard for the impartiality of Hearing Officers for general 
disciplinary proceedings and the process for removing a Hearing 
Officer due to bias or conflict of interest. Id.
    \24\ Under proposed Rule 8.17(b)(2), a motion seeking 
disqualification of a Hearing Officer would be required to be filed 
no later than five days after the announcement of the Hearing Panel, 
and the Exchange would be permitted to file a brief in opposition to 
that motion no later than five days after service thereof. Rule 
8.6(b) provides for a 15-day period to file a motion to disqualify a 
Hearing Officer and a 15-day period for the Exchange to respond.
    \25\ See Notice, supra note 5, at 73249.
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    Under paragraph (c) of proposed Rule 8.17, a hearing would be held 
no later than 15 days after service of the notice initiating the 
Expedited Client Suspension Proceeding, unless

[[Page 9019]]

otherwise extended by the Chairman of the Hearing Panel with the 
consent of the parties to the proceeding for good cause shown. In the 
event of a recusal or disqualification of a Hearing Officer, the 
hearing would be held no later than five days after a replacement 
Hearing Officer is appointed. A notice of the date, time, and place of 
the hearing would be required to be served on the parties to the 
proceeding no later than seven days before the hearing, unless 
otherwise ordered by the Chairman of the Hearing Panel. Proposed Rule 
8.17(c) would also govern the conduct of the hearing by including 
provisions addressing the authority of the Hearing Officers, the 
testimony of witnesses, the submission of additional information to the 
Hearing Panel, the requirement that a transcript of the proceeding be 
created (and the details related to availability of and corrections to 
such transcript), and the creation and maintenance of the record of the 
proceeding. Proposed Rule 8.17(c) would also provide that the Hearing 
Panel may issue a suspension order without further proceedings if the 
Respondent fails to appear at the hearing, and that the Hearing Panel 
may dismiss the Expedited Client Suspension Proceeding if the Exchange 
fails to appear at the hearing.
    Under paragraph (d) of proposed Rule 8.17, the Hearing Panel would 
be required to issue a written decision stating whether a suspension 
order would be imposed. The Hearing Panel would be required to issue 
the decision no later than ten days after receipt of the hearing 
transcript, unless otherwise extended by the Chairman of the Hearing 
Panel with the consent of the parties to the proceeding for good cause 
shown. Pursuant to proposed Rule 8.17(d)(1), a suspension order would 
be imposed if the Hearing Panel finds: (1) by a preponderance of the 
evidence that the alleged violation specified in the notice has 
occurred and (2) that the violative conduct or continuation thereof is 
likely to result in significant market disruption or other significant 
harm to investors.
    Proposed Rule 8.17(d)(2) would set forth the content, scope, and 
form of a suspension order. Specifically, the suspension order would be 
limited to: (1) ordering a Respondent to cease and desist from 
violating proposed Rule 12.15; and/or (2) ordering a Respondent to 
cease and desist from providing access to the Exchange to a client of 
Respondent that is causing violations of proposed Rule 12.15.\26\ The 
suspension order would be required to set forth the alleged violation 
and the significant market disruption or other significant harm to 
investors that is likely to result without the issuance of an order, to 
describe, in reasonable detail, the act or acts the Respondent is to 
take or refrain from taking, and to suspend the Respondent unless and 
until such action is taken or refrained from.\27\ Under proposed Rules 
8.17(d)(3) and 8.17(d)(4), a suspension order would be effective upon 
service and remain effective and enforceable unless modified, set 
aside, limited, or revoked pursuant to proposed Rule 8.17(e).\28\
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    \26\ See supra note 18 and accompanying text.
    \27\ The suspension order would also include the date and hour 
of its issuance. See proposed Rule 8.17(d)(2)(D).
    \28\ See infra.
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    Paragraph (e) of proposed Rule 8.17 would provide that, at any time 
after the Respondent is served with a suspension order, a party to the 
Expedited Client Suspension Proceeding may apply to the Hearing Panel 
to have the order modified, set aside, limited, or revoked. Further, 
under proposed Rule 8.17(e), the Hearing Panel would be required to 
respond to any such request in writing within ten days after receipt of 
the request, unless otherwise extended by the Chairman of the Hearing 
Panel with the consent of the parties to the proceeding for good cause 
shown. In addition, proposed Rule 8.17(e) would state that an 
application to modify, set aside, limit or revoke a suspension order 
would not stay the effectiveness of the suspension order. In the 
Notice, the Exchange explains that if any part of a suspension order is 
modified, set aside, limited, or revoked, proposed Rule 8.17(e) would 
grant the Hearing Panel discretion to leave the cease and desist part 
of the order in place while, for example, removing the suspension 
component.\29\
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    \29\ See Notice, supra note 5, at 73249. In addition, the 
Exchange also explains that, with its broad modification powers 
under the proposed rule, the Hearing Panel would maintain the 
discretion to impose conditions upon the removal of a suspension. 
Id.
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    Finally, paragraph (f) of proposed Rule 8.17 would state that 
sanctions issued under proposed Rule 8.17 would constitute final and 
immediately effective disciplinary sanctions imposed by the Exchange, 
that the right to have any action under proposed Rule 8.17 reviewed by 
the Commission would be governed by Section 19 of the Act,\30\ and that 
the filing of an application for review would not stay the 
effectiveness of a suspension order unless the Commission otherwise 
orders.
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    \30\ 15 U.S.C. 78s.
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    In the Notice, the Exchange notes that the issuance of a suspension 
order would not alter the Exchange's ability to further investigate the 
matter and/or later sanction the Member pursuant to the Exchange's 
standard disciplinary process for supervisory violations or other 
violations of Exchange rules or the Act.\31\ In addition, in the 
Notice, the Exchange acknowledges that its proposed authority to issue 
a suspension order is a powerful measure that should be used very 
cautiously.\32\ Consequently, according to the Exchange, the proposed 
rules have been designed to ensure that the Expedited Client Suspension 
Proceedings are used to address only the most clear and serious types 
of disruptive quoting and trading activity and that the interests of 
Respondents are protected.\33\ In addition, the Exchange believes that 
it would use this authority in limited circumstances, when necessary to 
protect investors, other Members, and the Exchange.\34\
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    \31\ See Notice, supra note 5, at 73251.
    \32\ Id.
    \33\ Id.
    \34\ Id.
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Summary of Differences Between BATS-2015-57 and the Current Proposal

    As noted above, this proposal revises and replaces a prior 
proposal, BATS-2015-57, which the Exchange withdrew in order to address 
certain comments.\35\ In conjunction with that withdrawal and 
replacement, the Exchange submitted a comment response letter that, 
among other things, explained the main differences between the prior 
proposal and the current proposal (the letter also addressed certain 
comments on BATS-2015-57, as described below).\36\ As set forth in that 
letter, the current proposal replaces the terms ``Layering'' and 
``Spoofing'' originally used in proposed Rule 12.15 of BATS-2015-57 
with the terms ``Disruptive Quoting and Trading Activity Type 1'' and 
``Disruptive Quoting and Trading Activity Type 2,'' respectively, and 
conforms related terminology in proposed Rules 8.17 and 12.15.\37\ 
Because the Exchange also believes that a suspension order issued under 
proposed Rule 8.17 is enforceable against the subject Member and no 
additional process is required to discipline the violation of such an 
order, the current proposal omits subparagraph (f) of proposed Rule 
8.17 of BATS-2015-57, which had provided a process for sanctioning 
violations of a

[[Page 9020]]

suspension order,\38\ and also make a conforming change to what is now 
Rule 8.17(f) of BATS-2015-101. In addition, the current proposal 
modifies subparagraph (d)(2)(C) of proposed Rule 8.17 to clarify that a 
suspension order would suspend the Respondent from access to the 
Exchange unless and until there is compliance with the cease and desist 
provisions of the order.\39\
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    \35\ See supra note 3.
    \36\ See BATS Response Letter I, supra note 8.
    \37\ Id. at 5; also compare BATS-2015-57 with BATS-2015-101.
    \38\ See BATS Response Letter I, supra note 8, at 5.
    \39\ Id. In Amendment No. 1, the Exchange relocated this 
provision addressing suspension from the Exchange from subparagraph 
(d)(2)(A) of proposed Rule 8.17 to subparagraph (d)(2)(C) of 
proposed Rule 8.17.
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III. Summary of Comments

    The Commission received four comments from three different 
commenters on this proposal and a comment response letter from the 
Exchange.\40\ The Commission also received five comment letters from 
four different commenters on BATS-2015-57,\41\ as well as a comment 
response letter from the Exchange.\42\ One of the commenters on this 
proposal, who also commented twice on BATS-2015-57,\43\ opposes the 
proposal.\44\ Another commenter on this proposal, who also commented on 
BATS-2015-57,\45\ is critical of the scope of the defined trading 
activities prohibited under proposed Rule 12.15.\46\ Two commenters on 
BATS-2015-57 (who did not also comment on this proposal) supported the 
prior proposal overall,\47\ but one of them suggested a clarifying 
amendment.\48\ Additionally, the OIAD submitted to the public comment 
file its recommendation that the Commission approve this proposal.\49\ 
The comment letters received with respect to BATS-2015-57 and this 
proposal, as well as the Exchange's responses, are summarized below, 
followed by a summary of the OIAD Recommendation.
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    \40\ See supra note 8.
    \41\ Id.
    \42\ Id. As noted above, the Exchange submitted its response 
letter in conjunction with its withdrawal of BATS-2015-57 and filing 
of BATS-2015-101. Id.
    \43\ See Lek Letters I and II, supra note 8.
    \44\ See Lek Letter III, supra note 8.
    \45\ See Leuchtkafer Letter I, supra note 8.
    \46\ See Leuchtkafer Letters II and III, supra note 8. See also 
Spaulding Letter, supra note 8 (appearing to be critical of the 
proposal).
    \47\ See FIA Letter, supra note 8; Machado Letter, supra note 8.
    \48\ See FIA Letter, supra note 8.
    \49\ See OIAD Recommendation, supra note 9.
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Proposed Definitions of ``Spoofing'' and ``Layering'' in BATS-2015-57 
and ``Disruptive Quoting and Trading Activity'' in the Current Proposal

    Most of the critical commentary on BATS-2015-57 centered on 
proposed Rule 12.15's description of the ``layering'' and ``spoofing'' 
activity that would be prohibited.\50\ One commenter who supported 
BATS-2015-57 expressed broad agreement with the proposed descriptions 
of such activity, but believed that the descriptions should be amended 
to require a manipulative intent element.\51\ This commenter noted 
prior definitions of ``spoofing'' put forth by the Dodd-Frank Wall 
Street Reform and Consumer Protection Act of 2010 (``Dodd-Frank Act'') 
and in Commodity Futures Trading Commission guidance, which definitions 
include an intent element.\52\ According to this commenter, the 
omission of such an intent element raised a concern because it ``is the 
cornerstone of existing disruptive trading rules'' and ``has 
historically been an important factor in sanctioning market 
participants for fraudulent and manipulative trading practices as it 
prevents legitimate, good faith actions from being wrongly penalized.'' 
\53\ This commenter stated that, without the intent requirement, 
proposed Rule 12.15, and its description of prohibited layering 
activity in particular, could be construed to prohibit a broad range of 
legitimate conduct such as market making activity.\54\
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    \50\ See FIA Letter, supra note 8, at 3-4; Leuchtkafer Letter I, 
supra note 8; Lek Letter I, supra note 8, at 1-6, Lek Letter II, 
supra note 8. As noted above, in the current proposal, the Exchange 
changed the labels of the activities prohibited under proposed Rule 
12.15 from ``Layering'' and ``Spoofing'' to ``Disruptive Quoting and 
Trading Activity Type 1'' and ``Disruptive Quoting and Trading 
Activity Type 2,'' respectively. The Exchange did not make any other 
substantive changes to the definitions or descriptions of the 
activities prohibited under proposed Rule 12.15, and accordingly, 
the Commission believes that the comments received regarding 
proposed Rule 12.15 under BATS-2015-57 are appropriate to consider 
with respect to the current proposal.
    \51\ See FIA Letter, supra note 8, at 1, 4. The other supportive 
commenter stated that a biotech company in which the commenter is an 
investor has been subject to spoofing and layering, as well as naked 
short attacks, which is severely harming bona fide investors. See 
Machado Letter, supra note 8.
    \52\ See FIA Letter, supra note 8, at 2-3.
    \53\ Id. at 3-4.
    \54\ Id. at 4 n.13.
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    Another commenter who was opposed to BATS-2015-57 stated that the 
proposed descriptions of the prohibited ``layering'' and ``spoofing'' 
activity in BATS-2015-57 were overbroad and would encompass legitimate 
trading activity in which trading algorithms regularly engage, and that 
narrows spreads, adds depth and liquidity to the market, provides price 
improvement, and reduces costs for investors.\55\ The commenter stated 
that prohibiting such trading activity would be anti-competitive and 
would serve to eliminate risk to market participants engaged in front-
running strategies because they would be provided with a free stop-loss 
on their trades.\56\ This commenter addressed each element of the 
proposed ``layering'' and ``spoofing'' descriptions in BATS-2015-57 and 
offered its view as to why each individual element encompassed 
legitimate trading activity or was otherwise problematic.\57\ The 
commenter further asserted that courts have held that an alleged 
manipulator must inject false information into the market with 
scienter, and that orders do not become manipulative merely because 
another trader speculates about them incorrectly.\58\ The commenter 
also argued that the proposed descriptions of ``layering'' and 
``spoofing'' were unacceptably vague.\59\ According to the commenter, 
by using the words ``include,'' ``frequent,'' ``pattern,'' and 
``multiple,'' the proposed descriptions in BATS-2015-57 left open-ended 
exactly what conduct would be prohibited.\60\
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    \55\ See Lek Letter I, supra note 8, at 1, 7.
    \56\ See Lek Letter I, supra note 8, at 1, 6; Lek Letter II, 
supra note 8.
    \57\ See Lek Letter I, supra note 8, at 2-6.
    \58\ See Lek Letter I, supra note 8, at 2; Lek Letter II, supra 
note 8.
    \59\ See Lek Letter I, supra note 8, at 2-4.
    \60\ Id.
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    Another commenter also criticized the proposed descriptions of the 
prohibited ``layering'' and ``spoofing'' activity under that proposal, 
but instead expressed concern that the proposed descriptions were too 
narrow and would have given ``spoofers and layerers a roadmap around 
exchange surveillance, and a near-perfect defense if they're somehow 
roped into an enforcement action.'' \61\ This commenter noted that 
other definitions of layering and spoofing, such as that put forth by 
the Dodd-Frank Act, ``define spoofing or layering (collectively, 
`spoofing') as a matter of the spoofer's intent without detailing 
exactly where and how orders are placed or at what prices.'' \62\ 
According to this commenter, by being specific in proposed Rule 12.15, 
the proposed descriptions of the prohibited ``layering'' and 
``spoofing'' activity would have excluded certain kinds of improper 
trading activity.\63\ The commenter asserted that BATS should instead 
adopt principles-based language against spoofing.\64\ The commenter 
also

[[Page 9021]]

expressed concern that other exchanges might copy BATS's definitions of 
spoofing and layering.\65\
---------------------------------------------------------------------------

    \61\ See Leuchtkafer Letter I, supra note 8, at 1. See also 
Leuchtkafer Letter III, supra note 8, at 2-3.
    \62\ See Leuchtkafer Letter I, supra note 8, at 2.
    \63\ Id. at 3, 6.
    \64\ Id. at 6. In addition, the commenter criticized certain 
market making practices that the commenter attributed to high-
frequency traders, and suggested that these practices are anti-
competitive and contribute to market complexity. Id. at 3-5. The 
commenter also questioned how such market making activity can be 
distinguished from spoofing in certain contexts. Id. at 4-6. The 
commenter further questioned why BATS has proposed to expedite 
action in cases of spoofing or layering but not in cases of other 
types of manipulative trading, like marking the close or wash 
trading. Id. at 1.
    \65\ Id. at 1; see also id. at 6.
---------------------------------------------------------------------------

    In response to the above critiques of the proposed definitions of 
``spoofing'' and ``layering'' in BATS-2015-57, the Exchange stated in 
its response letter for BATS-2015-57 that it agrees that the harmful 
practices of spoofing and layering are defined by an intent 
element.\66\ According to the Exchange, the prior proposal's 
definitions of the prohibited ``layering'' and ``spoofing'' activity 
under proposed Rule 12.15 were intended to include an intent element by 
requiring a ``frequent pattern'' of such activity.\67\ The Exchange 
stated that a ``frequent pattern'' of such activity evidences 
manipulative intent,\68\ and offered the observation that such a 
``frequent pattern'' is typically the key factor indicating intent in 
spoofing and layering cases.\69\ The Exchange also acknowledged the 
concern that the proposed ``layering'' and ``spoofing'' definitions in 
the prior proposal could be read to exclude other spoofing and layering 
practices.\70\ The Exchange stated that it did not intend to provide 
universal definitions of layering and spoofing activity, but rather to 
identify and prohibit ``certain patterns and practices that are 
hallmarks of the most egregious spoofing and/or layering conduct.'' 
\71\
---------------------------------------------------------------------------

    \66\ See BATS Response Letter I, supra note 8, at 6.
    \67\ Id.
    \68\ Id.
    \69\ Id. at 6 n.12.
    \70\ Id. at 7.
    \71\ Id. The Exchange also argued, in response to one 
commenter's assertions that elements of the proposed definitions 
violated the Act, that since spoofing and layering are fraudulent 
and manipulative practices prohibited by the Act, the previously 
proposed rules prohibiting those practices comport with Section 
6(b)(5) of the Act and advance the Act's purposes. Id. at 11.
---------------------------------------------------------------------------

    Nevertheless, the Exchange recognized commenters' concerns that 
certain non-spoofing or non-layering trading activity could fall within 
the previously proposed definitions of ``layering'' and ``spoofing'' 
while, at the same time, certain manipulative layering or spoofing 
activity could fall outside those proposed definitions.\72\ The 
Exchange stated that, because the purpose of BATS-2015-57 was ``not to 
provide a precise definition of layering and spoofing, but to protect 
market participants from the harm caused by a [Member's] refusal to 
cease obvious disruptive market practices,'' the Exchange modified the 
defined terms in proposed Rule 12.15 under the current proposal to 
replace the defined terms ``layering'' and ``spoofing'' with the terms 
``Disruptive Quoting and Trading Activity Type 1'' and ``Disruptive 
Quoting and Trading Activity Type 2,'' respectively.\73\ The Exchange 
stated its belief that this terminology change advances its objective 
of protecting market participants from harmful and manipulative trading 
behavior, and also alleviates commenters' concerns regarding the prior 
definitions of ``layering'' and ``spoofing'' \74\ According to the 
Exchange, the terminology change also highlights that proposed Rule 
8.17 is ``designed to halt a very specific, readily identifiable type 
of illegal trading activity rather than an attempt to define and punish 
layering and spoofing in every conceivable context.'' \75\
---------------------------------------------------------------------------

    \72\ Id. at 7.
    \73\ Id.
    \74\ Id.
    \75\ Id. at 7-8.
---------------------------------------------------------------------------

    The commenter who opposed the prior proposed rule change in BATS-
2015-57 submitted a comment letter on the current proposal, again in 
opposition.\76\ In this comment letter, the commenter repeats many of 
the same criticisms set forth in the commenter's first letter submitted 
in opposition to BATS-2015-57,\77\ asserting that ``the currently 
proposed rule has all the flaws of the original proposal.'' \78\ The 
commenter also repeats its criticism from its second comment letter to 
BATS-2015-57 that the proposed rule change is intended to eliminate 
competition for high-frequency traders (``HFTs'')--whom the commenter 
claims ``control'' the Exchange--at the expense of institutional 
investors by eliminating trading strategies that add risk to front-
running strategies of HFTs.\79\ The commenter claims that the Exchange 
is advocating ``the ability for HFTs to detect institutional buying 
interest and to be able to front-run institutional orders risk free.'' 
\80\ In its comment response letter for the current proposal, the 
Exchange incorporates, by reference, the statements in its comment 
response letter for BATS-2015-57 addressing the commenter's criticisms 
of BATS-2015-57 that are duplicative of the commenter's criticism of 
the current proposal.\81\ The Exchange also states that the trading 
activity it seeks to curtail under the proposal is ``not acceptable 
`competitive' conduct'' and that there is no risk that the proposed 
Expedited Client Suspension Proceeding ``could be used to prohibit an 
isolated series of coincidental transactions,'' as asserted by the 
commenter.\82\
---------------------------------------------------------------------------

    \76\ See Lek Letter III, supra note 8.
    \77\ Compare Lek Letter I, supra note 8, with Lek Letter III, 
supra note 8.
    \78\ See Lek Letter III, supra note 8, at 1.
    \79\ Id. at 1-2. Compare Lek Letter II supra note 8, with Lek 
Letter III, supra note 8.
    \80\ See Lek Letter III, supra note 8, at 2. The commenter 
states that HFTs ``seek to buy stock ahead of the institution, bid 
up the price, and re-sell the stock back to the institution at a 
higher level'' and argues that HFTs ``therefore seek regulatory 
protections and advocate rules that would eliminate trading 
strategies that add such risk to their front running strategies.'' 
Id.
    \81\ See BATS Response Letter II, supra note 8, at 10.
    \82\ Id. (responding to Lek Letter III).
---------------------------------------------------------------------------

    Additionally, one of the commenters critical of the proposed 
definitions of ``layering'' and ``spoofing'' under BATS-2015-57 
submitted a comment letter to BATS-2015-101 that reprises much of the 
same criticism set forth in the commenter's letter in opposition to 
BATS-2015-57 and again centers on the Exchange's descriptions and 
definitions of the prohibited trading activities in proposed Rule 
12.15.\83\ The commenter argues that the Exchange should not define the 
prohibited activity in ``narrow, prescriptive terms'' and that the 
proposed definitions of the violative activity are inconsistent with 
the ``principles-based'' definitions of what the commenter 
characterizes as ``[a]ll other definitions of spoofing that [the 
commenter] could find that regulators (including BATS) have set down 
over the years.'' \84\ The commenter reiterates its view that the 
Exchange should include principle-based language in its proposed rule 
and suggests specific rule language in this regard, which includes an 
intent element,\85\ and expresses renewed concern that BATS's ``deeply 
flawed and superficial proposal could quickly become the surveillance 
and enforcement spoofing standard for the equity markets.'' \86\
---------------------------------------------------------------------------

    \83\ Compare Leuchtkafer Letter II, supra note 8, with 
Leuchtkafer Letter I, supra note 8.
    \84\ See Leuchtkafer Letter II, supra note 8, at 1-2.
    \85\ Id. at 8.
    \86\ Id. at 3. The commenter also renews its critique of certain 
market making practices that the commenter attributes to HFTs, and 
again suggests that these practices are anti-competitive and 
contribute to market complexity, and questions how such market 
making activity can be distinguished from spoofing in certain 
contexts. Id. at 3-8. In addition, the commenter asserts that it is 
unaware of any spoofing or layering case in which the Exchange 
independently discovered the violative conduct at issue. Id. at 1-2.
---------------------------------------------------------------------------

    In response to this comment letter, the Exchange explains that 
``[d]efining layering and spoofing in all of its possible permutations 
is not the

[[Page 9022]]

purpose of this filing.'' \87\ Rather, the Exchange states that the 
filing is meant to ``supplement existing prohibitions against layering 
and spoofing with an expedited objective prohibition that will stop 
harmful manipulative activity while the Exchange conducts necessary 
extensive and time-consuming investigations and enforcement.'' \88\ The 
Exchange reiterates that principles-based prohibitions of layering and 
spoofing already exist and explains, however, that investigations of 
``principles-based'' rules violations involving suspected layering and 
spoofing conduct are lengthy due to the fact that enforcement of those 
violations requires proof of subjective fraudulent intent of the actor, 
which the Exchange states is ``usually very difficult to prove and 
requires a thorough and lengthy investigation and enforcement 
process.'' \89\ The Exchange asserts that, during the course of such an 
investigation, it does not currently have the ability to stop obvious 
and flagrant manipulative trading.\90\ The Exchange states that if the 
current proposal is ultimately approved and implemented, the Exchange 
will continue conducting its current enforcement process, and 
represents that it would only seek an expedited suspension when--after 
multiple requests to a Member for an explanation of activity--it 
continues to see the same pattern of manipulation from the same Member 
and the source of the activity is the same or has been previously 
identified as a frequent source of disruptive quoting and trading 
activity.\91\ Therefore, according to the Exchange, principles-based 
enforcement and the proposed rule change are complementary in practice, 
not mutually exclusive.\92\
---------------------------------------------------------------------------

    \87\ See BATS Response Letter II, supra note 8, at 9 n.9.
    \88\ Id.
    \89\ Id. at 8-9.
    \90\ Id. at 8.
    \91\ Id. at 6, 8-9. The Exchange explains that, currently, when 
Exchange surveillance staff identifies a pattern of potentially 
disruptive quoting and trading activity, the staff conducts an 
initial analysis and investigation of that activity. Id. After the 
initial investigation, the Exchange then contacts the Member 
responsible for the orders that caused the activity to request an 
explanation of the activity as well as any additional relevant 
information, including the source of the activity. Id. The Exchange 
represents that it will continue this practice if the Commission 
approves the proposal. Id.
    \92\ Id. at 9.
---------------------------------------------------------------------------

    In response to the Exchange's letter, the commenter submitted an 
additional comment, in which the commenter states that the Exchange 
misread certain its criticisms of the current proposal.\93\ The 
commenter cites to the Exchange's statement in the Exchange's response 
letter that the commenter ``advocates that the Exchange must adopt 
`principle-based' language instead of the Exchange's current 
proposal.'' \94\ Rather, according to the commenter, its position is 
that the Commission should require the Exchange ``to also include in 
its rulebook a clearly articulated principle rather than only a 
prescriptive checklist, particularly when so far as [the commenter] can 
tell [the Exchange] hasn't yet independently detected the proscribed 
behavior on its markets and hasn't documented any current enforcement 
proceedings its proposal could expedite in the future.'' \95\ In 
addition, this commenter asserts that the Exchange misinterpreted its 
point regarding past cases of improper quoting and trading activity 
that the Exchange cites as support for the proposal; the commenter 
asserts that its point is that those are not cases in which the 
Exchange independently discovered the violative layering or spoofing 
conduct at issue.\96\
---------------------------------------------------------------------------

    \93\ See Leuchtkafer Letter III, supra note 8, at 2. See also 
Leuchtkafer Letter II, supra note 8.
    \94\ See Leuchtkafer Letter III, supra note 8, at 2 (emphasis in 
original).
    \95\ Id. (emphasis in original).
    \96\ Id. at 1.
---------------------------------------------------------------------------

Expedited Suspension Proceedings Under Proposed Rule 8.17

    One commenter that was supportive of BATS-2015-57 believed that the 
Exchange's proposed investigation, notice, and hearing processes 
described in connection with proposed Rule 8.17 under BATS-2015-57 were 
reasonable.\97\ This commenter also suggested that the Exchange could 
amend proposed Rule 8.17 to require a lower burden of proof in 
Expedited Client Suspension Proceedings, which the commenter asserted 
would still allow the Exchange to institute a process to quickly put a 
stop to the manipulative behavior targeted by the proposal ``without 
drastically expanding the Exchange's definition of prohibited layering 
and spoofing to include completely unintentional conduct.'' \98\
---------------------------------------------------------------------------

    \97\ See FIA Letter, supra note 8, at 2.
    \98\ Id. at 4.
---------------------------------------------------------------------------

    Another commenter criticized the procedural components of the 
proposed rules as set forth in BATS-2015-57.\99\ The commenter argued 
that the Exchange has no jurisdiction to compel Members to deny access 
to clients that the Exchange judges to have been involved in layering 
or spoofing, and that such affected clients would be denied due process 
as they are not entitled to be heard as part of the Expedited Client 
Suspension Proceeding.\100\ In response to this argument, in its first 
response letter, the Exchange stated that its rules ``unquestionably 
confer jurisdiction to the Exchange to discipline its Members for a 
Member's client's violations of the Act and the Exchange's Rules,'' 
\101\ and the Exchange referenced Rule 8.1 in this regard.\102\ The 
Exchange further stated that ``jurisdiction over a Member for a 
client's actions is not only permissible--it is essential for the 
effective regulation of the Exchange.'' \103\ The Exchange also 
asserted that, because a Member has ultimate responsibility for its 
clients' actions and because proposed Rule 8.17 imposes discipline on a 
Member--not its client--for the client's violations, it is sufficient 
if due process is afforded to the Member.\104\ The Exchange noted, 
however, that nothing in the proposal prevents a Member's client from 
participating in an expedited suspension hearing and, in fact, the 
Exchange stated that it would welcome such participation at the 
hearing.\105\
---------------------------------------------------------------------------

    \99\ See Lek Letter I, supra note 8, at 6-7. This commenter also 
submitted a comment letter on the current proposal that repeats 
these criticisms, to which the Exchange responded by incorporating 
by reference the statements in its comment response letter for BATS-
2015-57. See Lek Letter III, supra note 8, at 7-8; BATS Response 
Letter II, supra note 8, at 10.
    \100\ See Lek Letter I, supra note 8, at 6.
    \101\ See BATS Response Letter I, supra note 8, at 8-9.
    \102\ Id. at 9. See also Rule 8.1 (setting forth the Exchange's 
disciplinary jurisdiction).
    \103\ See BATS Response Letter I, supra note 8, at 9.
    \104\ Id.
    \105\ Id.
---------------------------------------------------------------------------

    The same commenter also argued that the proposed expedited 
proceeding set forth in BATS-2015-57 was not a fair disciplinary 
process under the Act because it did not provide adequate time for 
discovery.\106\ In response to this point, the Exchange contended that 
the proposed expedited client suspension hearing is governed by and 
consistent with Section 6(d)(2) of the Act and, therefore, provides the 
due process required by the Act.\107\ In addition, the Exchange noted 
that it intends to initiate such a proceeding only after an initial 
investigation into the allegedly improper trading activity, including 
contacting the responsible member to request an explanation for the 
activity and any relevant additional information.\108\ Further, the 
Exchange noted that discovery would continue after the entry of a 
suspension order, and that, under proposed Rule 8.17, a Member subject 
to a suspension order

[[Page 9023]]

that discovers information that it believes to be exculpatory may apply 
at any time to the Hearing Panel to have the suspension order modified, 
set aside, limited, or revoked.\109\ According to the Exchange, 
``[p]roposed Rule 8.17 merely places the burden on the Subject Member 
to show that it has halted its harmful practice or its client's harmful 
practice before being permitted to resume activity on the Exchange 
rather than requiring the market to bear the harm of manipulative 
conduct during the time-consuming discovery process.'' \110\
---------------------------------------------------------------------------

    \106\ See Lek Letter I, supra note 8, at 6.
    \107\ See BATS Response Letter I, supra note 8, at 10.
    \108\ Id. See also BATS Response Letter II, supra note 8, at 6.
    \109\ See BATS Response Letter I, supra note 8, at 10.
    \110\ Id.
---------------------------------------------------------------------------

Recommendation of the OIAD

    As noted above, the OIAD submitted to the public comment file its 
recommendation to the Commission that the Commission approve this 
proposal.\111\ In its recommendation, the OIAD states that it supports 
``the Exchange's efforts to promptly initiate and quickly resolve 
obvious and uncomplicated matters the Exchange believes involve 
disruptive and manipulative trading activity.'' \112\ The OIAD believes 
that ``[e]ven if limited to a small number of cases, such disruptive 
quoting and trading behavior can cause significant harm to investors 
and the markets'' and ``erode the public's confidence in fair and 
orderly markets.'' \113\ The OIAD further believes that a disciplinary 
proceeding against a U.S.-based broker dealer that permits a 
significant volume of manipulative trading to pass through its systems 
on a regular basis without establishing a supervisory system reasonably 
designed to detect and prevent this activity ``must be timely.'' \114\ 
The OIAD states that this proposal appears to be appropriately tailored 
to minimize the possibility that it would curtail legitimate trading 
activities by market makers and other liquidity providers, and that the 
proposed Expedited Client Suspension Proceeding appears to provide 
``appropriate safeguards for innocent parties,'' such as adequate 
notice, an opportunity to be heard at a meaningful time prior to the 
decision, a right to appeal the determination, and a right to obtain 
Commission review.'' \115\ Further, the OIAD believes that the proposed 
process should act as a deterrent to U.S. broker-dealers that would 
otherwise permit manipulators to continue to access U.S. markets during 
the course of an enforcement proceeding.\116\ Accordingly, the OIAD 
submitted its recommendation to the Commission that the Commission 
approve the proposal.\117\
---------------------------------------------------------------------------

    \111\ See supra, note 9.
    \112\ See OIAD Recommendation, supra note 9, at 3.
    \113\ Id. at 4.
    \114\ Id. at 5.
    \115\ Id. at 6.
    \116\ Id. at 5-6. In its letter addressing the current proposal, 
the Exchange explains that the OIAD ``correctly notes that the 
proposed expedited suspension process is intended to be used 
sparingly as a deterrent force--supplementing rather than replacing 
the current enforcement process.'' See BATS Response Letter II, 
supra note 8, at 7.
    \117\ See OIAD Recommendation, supra note 9, at 3.
---------------------------------------------------------------------------

IV. Discussion and Commission Findings

    After careful review, the Commission finds that the proposed rule 
change is consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to a national securities 
exchange.\118\ In particular, the Commission finds that the proposed 
rule change is consistent with the requirements of: (1) Section 6(b)(1) 
of the Act,\119\ which requires, among other things, that the Exchange 
be so organized and have the capacity to enforce compliance by its 
members and persons associated with its members with the Act, the rules 
thereunder, and the Exchange's rules; (2) Section 6(b)(5) of the 
Act,\120\ which requires, among other things, that the Exchange's rules 
be designed to prevent fraudulent and manipulative acts and practices, 
to promote just and equitable principles of trade, to remove 
impediments to and perfect the mechanism of a free and open market and 
a national market system, and, in general, to protect investors and the 
public interest; (3) Section 6(b)(6) of the Act,\121\ which requires, 
among other things, that the Exchange's rules provide for appropriate 
discipline of members or persons associated with a member for 
violations of the Act, the rules thereunder, or the Exchange's rules; 
(4) Section 6(b)(7) of the Act,\122\ which requires, among other 
things, that the rules of an exchange be in accordance with Section 
6(d) of the Act,\123\ and in general, provide a fair procedure for the 
disciplining of members and persons associated with members and the 
prohibition or limitation by the exchange of any person with respect to 
access to services offered by the exchange or a member thereof; and (5) 
Sections 6(d)(1) and 6(d)(2) of the Act,\124\ which require, among 
other things, that in any Exchange proceeding to determine whether a 
member or person associated with a member should be disciplined or 
whether a person should be prohibited or limited with respect to access 
to services offered by the exchange or a member thereof, the Exchange 
must provide notice of, and an opportunity to be heard upon, the 
specific grounds for the sanction under consideration, keep a record, 
and provide a statement setting forth the specific grounds upon which a 
determination to impose any such sanction is based.
---------------------------------------------------------------------------

    \118\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
    \119\ 15 U.S.C. 78f(b)(1).
    \120\ 15 U.S.C. 78f(b)(5).
    \121\ 15 U.S.C. 78f(b)(6).
    \122\ 15 U.S.C. 78f(b)(7).
    \123\ 15 U.S.C. 78f(d).
    \124\ 15 U.S.C. 78f(d)(1), (d)(2).
---------------------------------------------------------------------------

    The Commission notes that the Exchange believes that the proposal 
meets the requirements of Sections 6(b)(1), 6(b)(5), and 6(b)(6) of the 
Act because it will provide the Exchange with a mechanism to promptly 
initiate proceedings in the event that the Exchange believes it has 
sufficient proof that a violation of proposed Rule 12.15 is occurring, 
and also because it will help to strengthen the Exchange's ability to 
carry out its oversight and enforcement responsibilities as a self-
regulatory organization in cases where awaiting the conclusion of a 
full disciplinary hearing is unsuitable in view of the potential harm 
to other members, their customers, and/or the Exchange that may occur 
if the violative conduct is allowed to continue.\125\ The Exchange 
notes that it has defined the prohibited disruptive quoting and trading 
activities by modifying the traditional definitions of layering and 
spoofing to eliminate an express intent element.\126\ The Exchange 
states that it believes it is necessary for the protection of investors 
to make such modifications to those traditional definitions in order to 
adopt an expedited process rather than allowing disruptive quoting and 
trading activities to continue to occur for a potentially extended 
period of time.\127\ The Exchange also states that it does not intend 
for this proposal to modify the definitions of layering and spoofing 
that have generally been used by the Exchange and other regulators in 
connection with prior disciplinary and enforcement cases.\128\
---------------------------------------------------------------------------

    \125\ See Notice, supra note 5, at 73251.
    \126\ Id.
    \127\ Id.
    \128\ Id.
---------------------------------------------------------------------------

    The Commission further notes that the Exchange already has the 
authority pursuant to its existing rules to prohibit and take action 
against manipulative trading activity, including the disruptive quoting 
and trading activities

[[Page 9024]]

enumerated under proposed Rule 12.15.\129\ Violations of these rules, 
however, are pursued according to the Exchange's existing disciplinary 
and enforcement processes which, as the Exchange describes, can take 
several years to conclude, during which time the manipulative or 
disruptive quoting or trading activity may continue to the detriment of 
investors and other market participants.\130\ The Commission 
acknowledges that good reason exists in many cases for these lengthy 
processes, not the least of which is ensuring that adequate due process 
is provided. However, if an offending Member refuses to cease 
disruptive quoting and trading activity that is enumerated in Rule 
12.15 after the Exchange detects such activity and notifies the Member 
of the alleged misconduct, the Commission also believes that it would 
be consistent with the Act for the Exchange to have the authority to 
seek to stop that disruptive quoting and trading activity through the 
proposed expedited client suspension proceeding. The Commission 
believes that the disciplinary procedures proposed herein are 
reasonably designed to occur on an expedited basis in order stop two 
specific types of ongoing disruptive quoting and trading activities 
that the Exchange believes could result in significant harm to 
investors if allowed to continue. Accordingly, the Commission believes 
that the proposal is reasonably designed to further the purposes of 
Sections 6(b)(1), 6(b)(5), and 6(b)(6) of the Act by enhancing the 
Exchange's ability to prevent fraudulent and manipulative acts and 
practices, promote just and equitable principles of trade, protect 
investors and the public interest, enforce compliance by its members 
and persons associated with its members with the relevant rules and 
law, and appropriately discipline its members for violations of the 
rules of the Exchange.
---------------------------------------------------------------------------

    \129\ See, e.g., Rules 3.1, 3.2, and 3.3. See also Notice, supra 
note 5, at 73250-51.
    \130\ See Notice, supra note 5, at 73248.
---------------------------------------------------------------------------

    In addition, the Commission notes that the Exchange represents that 
it ``will only seek an expedited suspension when--after multiple 
requests to a Member for an explanation of [a pattern of potentially 
disruptive quoting and trading] activity--it continues to see the same 
pattern of manipulation from the same Member and the source of the 
activity is the same or has been previously identified as a frequent 
source of disruptive quoting and trading activity.'' \131\ As such, the 
Commission believes that the disciplinary measures available to the 
Exchange under the proposal to stop the offending trading behavior from 
continuing on the Exchange--i.e., an order suspending the offending 
Member unless the applicable action is taken or refrained from--are 
consistent with Section 6(b)(6) of the Act.
---------------------------------------------------------------------------

    \131\ See BATS Response Letter II, supra note 8, at 6.
---------------------------------------------------------------------------

    The Commission recognizes one commenter's concern that the 
definitions of the prohibited quoting and trading activities set forth 
in proposed Rule 12.15 could be viewed by some to be too narrow, such 
that certain other disruptive or manipulative trading activities might 
not fall within those definitions.\132\ The Commission notes that, in 
making revisions to its original proposal in BATS-2015-57, the Exchange 
has purposely chosen to prohibit, under proposed Rule 12.15, two types 
of trading activities that follow very specific fact patterns, which 
the Exchange believes constitute clear and egregious disruptive quoting 
and trading activity. The Commission also notes that, according the 
Exchange, this proposal is not meant to define all possible 
permutations of layering and spoofing.\133\ Rather, the Exchange 
asserts that the proposal is meant to provide the Exchange with an 
expedited disciplinary proceeding, to be used under limited 
circumstances, as a complement to its current, lengthier disciplinary 
process.\134\ Accordingly, the Exchange has purposely chosen not to 
subject other types of disruptive or manipulative quoting or trading 
activities to the prohibitions of proposed Rule 12.15 or, therefore, 
the expedited disciplinary procedure under proposed Rule 8.17. That the 
Exchange has purposely proposed to apply these rules to some, but not 
all, types of disruptive quoting and trading activities does not render 
the proposed rules inconsistent with the Act. The Exchange may exercise 
its judgment as to the proper scope of its rules, so long as the rules 
comply with the relevant statutory requirements under the Act and the 
rules thereunder. In this instance, the Commission believes that it is 
consistent with the Act for the Exchange to limit the application of 
the Expedited Client Suspension Proceeding to a specific set of 
disruptive quoting and trading activities rather than to have the 
proposal encompass all types of disruptive or manipulative activities, 
which are still subject to the Exchange's standard disciplinary 
process.
---------------------------------------------------------------------------

    \132\ See Leuchtkafer Letters I, II, and III, supra note 8.
    \133\ See BATS Response Letter II, supra note 8, at 9 n.9.
    \134\ See supra, notes 87-92 and accompanying text.
---------------------------------------------------------------------------

    Furthermore, given the significant authority provided to the 
Exchange under proposed Rule 8.17 for pursuing alleged violations of 
proposed Rule 12.15, the Commission believes that it is appropriate and 
consistent with the Act for proposed Rule 12.15 to be narrowly tailored 
so as to only encompass certain specific types of disruptive quoting 
and trading activities. Moreover, as noted by the OIAD, ``[e]ven if 
limited to a small number of cases, such disruptive quoting and trading 
behavior can cause significant harm to investors and the markets.'' 
\135\ The Commission believes that, by prohibiting specific types of 
disruptive quoting and trading activities and providing an expeditious 
process for ceasing such activities, proposed Rules 12.15 and 8.17, 
respectively, are reasonably designed to protect investors and the 
public interest from the potential harm associated with such 
activities. Therefore, the Commission believes that the proposed rules 
are consistent with the requirements under Section 6(b)(5) that the 
Exchange's rules be designed to prevent fraudulent and manipulative 
acts and practices, promote just and equitable principles of trade, and 
protect investors and the public interest. In addition, the Commission 
again notes that any quoting or trading activity that does not fall 
within the express prohibitions of proposed Rule 12.15--but that is 
disruptive or manipulative--may be subject to existing disciplinary and 
enforcement measures if the activity constitutes a violation of one or 
more of the Exchange's current rules and/or the Act and the rules 
thereunder.
---------------------------------------------------------------------------

    \135\ See OIAD Recommendation, supra note 9, at 4.
---------------------------------------------------------------------------

    The Commission recognizes another concern of certain commenters 
that the proposed definitions of the prohibited disruptive quoting and 
trading activities may be too broad, such that they may encompass 
legitimate quoting or trading activity, such as market making. The 
Commission emphasizes the importance of the Exchange's acknowledgement 
that the authority conferred by proposed Rules 8.17 and 12.15 is a 
powerful measure that should be used very cautiously.\136\ In addition, 
the Commission believes that the proposal incorporates procedural 
components that are reasonably designed to mitigate the potential for 
overreach of this authority into legitimate quoting or trading 
activity. For example, proposed Rule 8.17 would require the CRO or 
another senior officer of the Exchange to

[[Page 9025]]

issue written authorization before the Exchange can institute an 
Expedited Client Suspension Proceeding. Additionally, the Commission 
believes that the opportunity to respond before a hearing panel, and 
the associated due process elements for initiating and conducting the 
expedited proceeding under proposed Rule 8.17, provide additional 
safeguards. Moreover, the Commission notes that a determination of the 
Hearing Panel constituting final disciplinary sanction may be appealed 
to the Commission pursuant to Section 19 of the Act.\137\ The 
Commission also notes that the OIAD believes that the proposal 
``appears to be appropriately tailored to minimize the possibility that 
it would curtail legitimate trading activities by market makers and 
other liquidity providers'' and ``appears to provide appropriate 
safeguards for innocent parties.'' \138\
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    \136\ See Notice, supra note 5, at 73251.
    \137\ 15 U.S.C. 78s. See also proposed Rule 8.17(f).
    \138\ See OIAD Recommendation, supra note 9, at 6.
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    Lastly, the Commission notes that the Exchange believes that the 
requirements of Sections 6(b)(7), 6(d)(1), and 6(d)(2) of the Act are 
addressed by the notice and due process provisions included within 
proposed Rule 8.17.\139\ Proposed Rule 8.17 would require the Exchange 
to serve notice on the subject Respondent, which notice would include 
the suspension order the Exchange seeks to impose on the Respondent. 
The notice would also be accompanied by a declaration of facts that 
specifies the acts that constitute the alleged violation. Proposed Rule 
8.17 also would provide an opportunity for the Respondent to defend 
against the charges in the notice in a hearing before a three-person 
Hearing Panel,\140\ with the opportunity for witnesses and with a 
transcribed record, and would detail the applicable timelines for the 
proceeding. Further, proposed Rule 8.17 would require the Hearing Panel 
to issue a written decision stating whether a suspension order shall be 
imposed; if imposed, proposed Rule 8.17 would require the suspension 
order to set forth the alleged violation and market disruption or 
significant harm to investors that is likely to result without the 
order, and to describe in reasonable detail what action the Respondent 
is required to take or refrain from taking. In addition, proposed Rule 
8.17 would allow the Respondent to appeal to the Hearing Panel to have 
a suspension order modified, set aside, limited, or revoked. 
Accordingly, the Commission believes that proposed Rule 8.17 is 
consistent with Sections 6(b)(7), 6(d)(1), and 6(d)(2) of the Act.\141\
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    \139\ See Notice, supra note 5, at 73251.
    \140\ The Commission notes that the Hearing Panel would be 
assigned according to current Rule 8.6(a), which requires that one 
member of the panel be a professional hearing officer, another be an 
industry representative, and the third be a Member representative.
    \141\ 15 U.S.C. 78f(b)(7), (d)(1), and (d)(2).
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V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\142\ that the proposed rule change (SR-BATS-2015-101), as modified 
by Amendment No. 1, be, and it hereby is, approved.
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    \142\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\143\
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    \143\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-03740 Filed 2-22-16; 8:45 am]
 BILLING CODE 8011-01-P