[Federal Register Volume 81, Number 75 (Tuesday, April 19, 2016)]
[Notices]
[Pages 23032-23035]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-08955]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-77607; File No. SR-BYX-2016-03]


Self-Regulatory Organizations; BATS-Y Exchange, Inc.; Order 
Approving Proposed Rule Change, as Modified by Amendment No. 1 Thereto, 
To Adopt an Early Trading Session and Three New Time-In-Force 
Instructions

April 13, 2016.

I. Introduction

    On February 16, 2016, BATS-Y Exchange, Inc. (n/k/a Bats BYX 
Exchange, Inc.) (the ``Exchange'' or ``BYX'') filed with the Securities 
and Exchange Commission (the ``Commission''), pursuant to Section 
19(b)(1) \1\ of the Securities Exchange Act of 1934 (``Act'') \2\ and 
Rule 19b-4 thereunder,\3\ a proposed rule change to amend its rules to: 
(i) Create a new trading session to be known as the Early Trading 
Session, which will run from 7:00 a.m. to 8:00 a.m. Eastern Time; and 
(ii) adopt three new Time-in-Force (``TIF'') instructions. The proposed 
rule change was published for comment in the Federal Register on 
February 29, 2016.\4\ On April 11, 2016, the Exchange filed Amendment 
No. 1 to the proposed rule change.\5\ The Commission received no 
comments on the proposed rule change. 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\ 15 U.S.C. 78a.
    \3\ 17 CFR 240.19b-4.
    \4\ See Securities Exchange Act Release No. 77213 (February 23, 
2016), 81 FR 10310 (``Notice'').
    \5\ Amendment No. 1 amended and replaced the proposed rule 
change in its entirety. In Amendment No. 1, the Exchange made 
technical, non-substantive changes to the proposed rule text to 
replace references to ``BATS'' with ``BYX,'' and otherwise revised 
Exhibit 5, so that the proposed rule text therein is consistent with 
the Exchange's current rule text. See Securities Exchange Act 
Release No. 77308 (March 7, 2016) 81 FR 12975 (March 11, 2016) (SR-
BYX-2016-07). In Amendment No. 1, the Exchange also proposes a non-
substantive change to Exchange Rule 14.1 to correct an inaccurate 
description of the start time for the Pre-Opening Session. Because 
Amendment No. 1 adds clarification and does not materially alter the 
substance of the proposed rule change or raise unique or novel 
regulatory issues, Amendment No. 1 is not subject to notice and 
comment.
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II. Description of the Proposal

    The Exchange proposes to amend its rules to: (i) Create a new 
trading session, the Early Trading Session, which will run from 7:00 
a.m. to 8:00 a.m. Eastern Time; and (ii) adopt three new TIF 
instructions.

A. Early Trading Session

    The Exchange trading day is currently divided into three sessions: 
(i) The Pre-Opening Session, which starts at 8:00 a.m. and ends at 9:30 
a.m. Eastern Time; (ii) Regular Trading Hours, which run from 9:30 a.m. 
to 4:00 p.m. Eastern Time; and (iii) the After Hours Session, which 
runs from 4:00 p.m. to 5:00 p.m. Eastern Time.\6\ The Exchange proposes 
to amend its rules to create the Early Trading Session. Exchange Rule 
1.5 would be amended to add a new term, ``Early Trading Session,'' 
under proposed paragraph (ee). ``Early Trading Session'' would be 
defined as ``the time between 7:00 a.m. and 8:00 a.m. Eastern Time.''
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    \6\ See Notice, supra note 4, at 10310.
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    The Exchange also proposes to amend Exchange Rule 11.1(a) to state 
that orders may be entered or executed on, or routed away from, the 
Exchange during the Early Trading Session and to reflect the start time 
of the Early Trading Session as 7:00 a.m. Eastern Time. Other than the 
proposal to adopt an Early Trading Session, the Exchange does not 
propose to amend the substance or operation of Exchange Rule 
11.1(a).\7\
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    \7\ See id.
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    Users \8\ currently designate when their orders are eligible for 
execution by selecting a desired TIF instruction. Orders entered 
between 6:00 a.m. and 8:00 a.m. Eastern Time are not eligible for 
execution until the start of the Pre-Opening Session or Regular Trading 
Hours, depending on the TIF selected by the User. A User may enter 
orders in advance of the trading session for which its orders are 
eligible. For example, Users may enter orders starting at 6:00 a.m. 
Eastern Time with a TIF of Regular Hours Only (``RHO''), which 
designates that the order only be eligible for execution during Regular 
Trading Hours.\9\ Users may enter orders as early as 6:00 a.m. Eastern 
Time, but those orders would not be eligible for execution until the 
start of the Pre-Opening Session at 8:00 a.m. According to the 
Exchange, some Users have requested the ability for their orders to be 
eligible for execution starting at 7:00 a.m. Eastern Time. Therefore, 
the Exchange is proposing to adopt the Early Trading Session.\10\
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    \8\ ``User'' is defined as ``any Member or Sponsored Participant 
who is authorized to obtain access to the System pursuant to Rule 
11.3.'' See Exchange Rule 1.5(cc).
    \9\ See Exchange Rule 11.9(b)(7).
    \10\ See Notice, supra note 4, at 10310.
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    As amended, Exchange Rule 11.1(a) would state that orders entered 
between 6:00 a.m. and 7:00 a.m. Eastern Time, rather than 6:00 a.m. and 
8:00 a.m.

[[Page 23033]]

Eastern Time, would not be eligible for execution until the start of 
the Early Trading Session, Pre-Opening Session, or Regular Trading 
Hours, depending on the TIF selected by the User. Exchange Rule 11.1(a) 
would also be amended to state that the Exchange would not accept the 
following orders prior to 7:00 a.m. Eastern Time, rather than 8:00 
a.m.: (i) BYX Post Only Orders; \11\ (ii) Partial Post Only at Limit 
Orders; \12\ (iii) Intermarket Sweep Orders (``ISOs''); \13\ (iv) BYX 
Market Orders \14\ with a TIF other than RHO; (v) Minimum Quantity 
Orders \15\ that also include a TIF of RHO; (vi) Retail Price 
Improvement Orders; \16\ and (vii) all orders with a TIF instruction of 
Immediate-or-Cancel (``IOC'') \17\ or Fill-or-Kill (``FOK'').\18\ At 
the commencement of the Early Trading Session, orders entered between 
6:00 a.m. and 7:00 a.m. Eastern Time, rather than 6:00 a.m. and 8:00 
a.m. Eastern Time, would be handled in time sequence, beginning with 
the order with the oldest time stamp, and would be placed on the BYX 
Book,\19\ routed, cancelled, or executed in accordance with the terms 
of the order. As amended, Exchange Rule 11.1(a) would state that orders 
may be executed on the Exchange or routed away from the Exchange during 
Regular Trading Hours and during the Early Trading, Pre-Opening, and 
After Hours Trading Sessions.\20\
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    \11\ See Exchange Rule 11.9(c)(6).
    \12\ See Exchange Rule 11.9(c)(7).
    \13\ See Exchange Rule 11.9(d).
    \14\ See Exchange Rule 11.9(a)(2).
    \15\ See Exchange Rule 11.9(c)(5).
    \16\ See Exchange Rule 11.24(a)(3).
    \17\ See Exchange Rule 11.9(b)(1).
    \18\ See Exchange Rule 11.9(b)(6).
    \19\ See Exchange Rule 1.5(e).
    \20\ See Notice, supra note 4, at 10310-11. Amendment No. 1 
updated Exhibit 5 so that the names of orders, order modifiers, and 
the Exchange's book stated therein conform with those used in the 
current Exchange Rules. See supra, note 5. The Exchange also 
describes how the Early Trading Session will affect its Members' 
operations and the Exchange's opening process, order types, routing 
services, order processing, data feeds, trade reporting, market 
surveillance, and clearly erroneous trade processing. The Exchange 
clarifies that these processes would operate in the same manner with 
the exception of changes in time to reflect the adoption of the 
Early Trading Session. See Notice, supra note 4, at 10311.
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    The Exchange also proposes to make the changes described below to 
Exchange Rules 3.21, 11.9, 11.13, 11.17, and 14.1 to reflect the 
adoption of the Early Trading Session:
     Exchange Rule 3.21, Customer Disclosures. Exchange Rule 
3.21 prohibits Members from accepting an order from a customer for 
execution in the Pre-Opening or After Hours Trading Session without 
disclosing to their customer that extended hours trading involves 
material trading risks, including the possibility of lower liquidity, 
high volatility, changing prices, unlinked markets, an exaggerated 
effect from news announcements, wider spreads and any other relevant 
risk. The Exchange proposes to amend Exchange Rule 3.21 to also require 
such disclosures for customer orders that are to be executed during the 
Early Trading Session.\21\
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    \21\ See id.
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     Exchange Rule 11.9, Orders and Modifiers. The Exchange 
proposes to amend the description of BYX Market Orders under Exchange 
Rule 11.9(a)(2), Market Maker Peg Orders under Rule 11.9(c)(16), and 
Supplementary Peg Orders under Rule 11.9(c)(19) to account for the 
Early Trading Session. Every order type that is currently available 
beginning at 8:00 a.m. would be available beginning at 7:00 a.m. for 
inclusion in the Early Trading Session. All other order types, and all 
order type behaviors, would otherwise remain unchanged. Therefore, each 
of the above rules for BYX Market Orders, Market Maker Peg Orders, and 
Supplemental Peg Orders would be amended to account for the Early 
Trading Session.\22\
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    \22\ See id. at 10311-12. Amendment No. 1 updated Exhibit 5 so 
that the names of orders and order modifiers stated therein conform 
with those used in the current Exchange Rules. See supra, note 5.
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     Exchange Rule 11.13, Order Execution and Routing. Exchange 
Rule 11.13(a)(2)(B) discusses compliance with Regulation NMS and Trade 
Through Protections and states that the price of any execution 
occurring during the Pre-Opening Session or the After Hours Trading 
Session must be equal to or better than the highest Protected Bid or 
lowest Protected Offer, unless the order is marked ISO or a Protected 
Bid is crossing a Protected Offer. The Exchange proposes to amend 
Exchange Rule 11.13(a)(2)(B) to expand the Exchange Rule's requirements 
to the Early Trading Session.\23\
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    \23\ See Notice, supra note 4, at 10312.
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     Exchange Rule 11.17, Clearly Erroneous Executions. 
Exchange Rule 11.17 outlines under which conditions the Exchange may 
determine that an execution is clearly erroneous. The Exchange proposes 
to amend Exchange Rule 11.17 to include executions that occur during 
the Early Trading Session. Exchange Rule 11.17(c)(1) sets forth the 
numerical guidelines the Exchange is to follow when determining whether 
an execution was clearly erroneous during Regular Trading Hours or the 
Pre-Opening or After Hours Trading Session. Exchange Rule 11.17(c)(3) 
sets forth additional factors the Exchange may consider in determining 
whether a transaction is clearly erroneous. These factors include 
whether the transaction was executed during the Pre-Opening or After 
Hours Trading Sessions. The Exchange proposes to amend Exchange Rule 
11.17(c)(1) and (3) to include executions occurring during the Early 
Trading Session.\24\
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    \24\ See id. The Exchange also proposes technical amendments to 
Exchange Rules 11.17(c)(1) and (3) to delete the letter ``s'' from 
the word ``Trading Sessions'' and the letter ``s'' from the word 
``tapes,'' respectively.
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     Rule 14.1, Unlisted Trading Privileges. The Exchange 
proposes to amend Rules 14.1(c)(2), and Interpretation and Policies 
.01(a) and (b) to account for the proposed Early Trading Session. 
Specifically, the Exchange proposes to amend paragraph (c)(2) to state 
that an information circular distributed by the Exchange prior to the 
commencement of trading of a UTP Derivative Security will include the 
risk of trading during the Early Trading Session, in addition to the 
Pre-Opening Session and After Hours Trading Session.\25\ In addition, 
the Exchange proposes to amend Interpretation and Policies .01(a) to 
add Early Trading Session to the paragraph's title and to state that if 
a UTP Derivative Security begins trading on the Exchange in the Early 
Trading Session or Pre-Opening Session and subsequently a temporary 
interruption occurs in the calculation or wide dissemination of the 
Intraday Indicative Value (``IIV'') or the value of the underlying 
index, as applicable, to such UTP Derivative Security, by a major 
market data vendor, the Exchange may continue to trade the UTP 
Derivative Security for the remainder of the Early Trading Session and 
Pre-Opening Session. Lastly, the Exchange proposes to amend 
Interpretation and Policies .01(b) to add Early Trading Session to the 
paragraph's title and to amend subparagraph (ii) of that section to 
state that if the IIV or the value of the underlying index continues 
not to be calculated or widely available as of the commencement of the 
Early Trading Session or Pre-Opening Session on the next business day, 
the Exchange shall not commence trading of the UTP Derivative Security 
in the Early Trading Session or Pre-Opening Session that day.\26\
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    \25\ In Amendment No. 1, the Exchange also proposes to amend 
Rule 14.1(c)(2) to correct an inaccurate description of the Pre-
Opening Session, which currently reads as 9:00 a.m. to 9:30 a.m. 
rather than 8:00 a.m. to 9:30 a.m. as is set forth throughout 
Exchange Rules.
    \26\ See Notice, supra note 4, at 10312.

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[[Page 23034]]

B. TIF Instructions

    The Exchange proposes to adopt three new TIF instructions under 
Exchange Rule 11.9(b). As discussed above, a User may designate when 
its order is eligible for execution by selecting the desired TIF 
instruction under Exchange Rule 11.9(b).\27\
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    \27\ See Exchange Rule 11.1(a).
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    Although the Exchange states that the proposal to adopt an Early 
Trading Session is in response to User requests for their orders to be 
eligible for execution starting at 7:00 a.m. Eastern Time, the Exchange 
states that some Users have requested that their orders continue to not 
be eligible for execution until the start of the Pre-Opening Session at 
8:00 a.m. Therefore, the Exchange proposes to adopt the following three 
new TIF instructions under Exchange Rule 11.9(b): \28\
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    \28\ See Notice, supra note 4, at 10312.
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     Pre-Opening Session Plus (``PRE''). A limit order that is 
designated for execution during the Pre-Opening Session and Regular 
Trading Hours. Like the current Good `til Cancel TIF instruction,\29\ 
any portion not executed would expire at the end of Regular Trading 
Hours.
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    \29\ See Exchange Rule 11.9(b)(3).
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     Pre-Opening Session `til Extended Day (``PTX''). A limit 
order that is designated for execution during the Pre-Opening Session, 
Regular Trading Hours, and the After Hours Session. Like the current 
Good `til Extended Day TIF instruction,\30\ any portion not executed 
would expire at the end of the After Hours Session.
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    \30\ See Exchange Rule 11.9(b)(5).
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     Pre-Opening Session `til Day (``PTD''). A limit order that 
is designated for execution during the Pre-Opening Session, Regular 
Trading Hours, and the After Hours Session. Like the current Good `til 
Day TIF instruction,\31\ any portion not executed would be cancelled at 
the expiration time assigned to the order, which can be no later than 
the close of the After Hours Trading Session.
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    \31\ See Exchange Rule 11.9(b)(4).
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    Under each proposed TIF instruction, Users may designate that their 
orders only be eligible for execution starting with the Pre-Opening 
Session. Users may continue to enter orders as early as 6:00 a.m., but 
orders with the proposed TIF instructions would not be eligible for 
execution until 8:00 a.m. Eastern Time, which is the start of the Pre-
Opening Session. At the commencement of the Pre-Opening Session, orders 
entered between 6:00 a.m. and 8:00 a.m. Eastern Time with one of the 
proposed TIF instructions would be handled in time sequence, beginning 
with the order with the oldest time stamp, and would be placed on the 
BYX Book, routed, cancelled, or executed in accordance with the terms 
of the order.\32\
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    \32\ See Notice, supra note 4, at 10312. Amendment No. 1 updated 
Exhibit 5 so that the name of the Exchange's book stated therein 
conforms with the name used in the current Exchange Rules. See 
supra, note 5. Orders utilizing one of the proposed TIF instructions 
would not be eligible for execution during the Early Trading 
Session. See Notice, supra note 4, at 10312, n.32.
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III. Discussion and Commission Findings

    After careful consideration, the Commission finds that the proposed 
rule change, as modified by Amendment No. 1, is consistent with the 
requirements of the Act and the rules and regulations thereunder 
applicable to a national securities exchange.\33\ The Commission 
believes that the proposed rule change is consistent with Section 
6(b)(5) \34\ in particular, in that it is designed to prevent 
fraudulent and manipulative acts and practices, to promote just and 
equitable principles of trade, to foster cooperation and coordination 
with persons engaged in facilitating transactions in securities, to 
remove impediments to and perfect the mechanism of a free and open 
market and a national market system, and, in general, to protect 
investors and the public interest.
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    \33\ In approving this rule change, the Commission notes that it 
has considered the proposed rule's impact on efficiency, 
competition, and capital formation. See 15 U.S.C. 78c(f).
    \34\ 15 U.S.C. 78f(b)(5).
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    The Exchange proposes to adopt an Early Trading Session and three 
new TIF instructions and to make related changes to its rules as 
discussed above.\35\ The Commission believes that the proposed rules 
would provide Users with additional options for trading on the 
Exchange. The Commission notes that the proposed Early Trading Session 
hours are similar to those of other exchanges,\36\ and that the 
proposed TIF instructions would offer functionality similar to existing 
functionality available on the Exchange and other exchanges that allows 
Members to select when their orders become eligible for execution.\37\
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    \35\ See supra section II.
    \36\ For example, NYSE Arca, Inc. operates an Opening Session 
that starts at 4:00 a.m. Eastern Time and ends at 9:30 a.m. Eastern 
Time, and Nasdaq Stock Market LLC operates a pre-market session that 
also opens at 4:00 a.m. and ends at 9:30 a.m. Eastern Time. See NYSE 
Arca Rule 7.34(a)(1); Nasdaq Rule 4701(g). See also Securities 
Exchange Act Release No. 60605 (September 1, 2009), 74 FR 46277 
(September 8, 2009) (SR-CHX-2009-13) (adopting bifurcated post-
trading session on the Chicago Stock Exchange, Inc.).
    \37\ Specifically, on the Exchange, Users may enter an order 
starting at 6:00 a.m. Eastern Time with a TIF of Regular Hours Only, 
which designates that the order only be eligible for execution 
during Regular Trading Hours, which begin at 9:30 a.m. Eastern Time. 
See Exchange Rule 11.9(b)(7); see also NASDAQ Rule 4703(a)(7).
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    The Commission notes that the Exchange has represented that it 
would subject orders that are eligible for execution as of the start of 
the Pre-Opening Session to all of the Exchange's standard regulatory 
checks, as it currently does with all orders upon entry.\38\ 
Specifically, the Exchange would subject such orders to checks for 
compliance with, including but not limited to, Regulation NMS,\39\ 
Regulation SHO,\40\ and relevant Exchange rules.\41\ Moreover, the 
Exchange reminds its Members of their regulatory obligations when 
submitting an order with one of the proposed TIF instructions.\42\ In 
particular, the Exchange states that Members must comply with the 
Market Access Rule,\43\ which requires, among other things, pre-trade 
controls and procedures that are reasonably designed to assure 
compliance with Exchange trading rules and Commission rules pursuant to 
Regulation SHO and Regulation NMS. The Exchange also notes that a 
Member's procedures must be reasonably designed to ensure compliance 
with the applicable regulatory requirements, not just at the time the 
order is routed to the Exchange, but also at the time the order becomes 
eligible for execution.\44\
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    \38\ See Notice, supra note 4, at 10314.
    \39\ See 17 CFR 242.600-613.
    \40\ See 17 CFR 242.200-204.
    \41\ See Notice, supra note 4, at 10314.
    \42\ See id.
    \43\ See 17 CFR 240.15c3-5.
    \44\ See Notice, supra note 4, at 10314.
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    The Commission further notes the Exchange's discussion of the best 
execution obligations of Members utilizing the proposed TIF 
instructions.\45\ Specifically, the Exchange states that a Member's 
best execution obligations may include cancelling an order when market 
conditions deteriorate and could result in an inferior execution or 
informing customers when the execution of their order may be delayed 
intentionally while the Member utilizes reasonable diligence to 
ascertain the best market for the security.\46\ The Exchange further 
notes that Members will maintain the ability to cancel or modify the 
terms of an order utilizing any of the proposed TIF instructions at any 
time, including during the time from when the order is routed to the 
Exchange until the start of the Pre-Opening Session.\47\ As a result,

[[Page 23035]]

the Exchange states that a Member who utilizes the proposed TIF 
instructions, but later determines that market conditions favor 
execution during Early Trading Session, can cancel the order residing 
at the Exchange and enter a separate order to execute during the Early 
Trading Session.\48\
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    \45\ See id. at 10314.
    \46\ See id. at n.41.
    \47\ See id. at 10313.
    \48\ See id. at 10313-14.
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    Furthermore, the Exchange proposes technical amendments to its 
Rules to correct erroneous plural words and an inaccurate description 
of the Pre-Opening Session times in Exchange Rules 11.17 and 14.1, 
respectively. The Commission believes these proposed amendments would 
help alleviate potential confusion among Users and Members regarding 
the operation of the Exchange's rules and are, therefore, consistent 
with the Act.

IV. Conclusion

    IT IS THEREFORE ORDERED, pursuant to Section 19(b)(2) of the Act 
\49\ that the proposed rule change (SR-BYX-2016-03), as modified by 
Amendment No.1, be, and it hereby is, approved.
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    \49\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\50\
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    \50\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-08955 Filed 4-18-16; 8:45 am]
 BILLING CODE 8011-01-P