[Federal Register Volume 81, Number 129 (Wednesday, July 6, 2016)]
[Notices]
[Pages 44076-44078]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-15916]



[[Page 44076]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-78193; File No. SR-BatsBZX-2016-28]


Self-Regulatory Organizations; Bats BZX Exchange, Inc.; Notice of 
Filing and Immediate Effectiveness of a Proposed Rule Change To Remove 
Interpretation and Policy .01 From Rule 11.13, Order Execution and 
Routing

 June 29, 2016.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that on June 23, 2016, Bats BZX Exchange, Inc. (the ``Exchange'' or 
``BZX'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I and 
II below, which Items have been prepared by the Exchange. The Exchange 
has designated this proposal as a ``non-controversial'' proposed rule 
change pursuant to Section 19(b)(3)(A) of the Act \3\ and Rule 19b-
4(f)(6) thereunder,\4\ which renders it effective upon filing with the 
Commission. The Commission is publishing this notice to solicit 
comments on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 15 U.S.C. 78s(b)(3)(A).
    \4\ 17 CFR 240.19b-4(f)(6).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange filed a proposal to remove Interpretation & Policy .01 
from Exchange Rule 11.13, as further described below.
    The text of the proposed rule change is available at the Exchange's 
Web site at www.batstrading.com, at the principal office of the 
Exchange, and at the Commission's Public Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the Exchange included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The Exchange has prepared summaries, set forth in 
Sections A, B, and C below, of the most significant parts of such 
statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and the 
Statutory Basis for, the Proposed Rule Change

1. Purpose
Introduction
    In 2011, the Exchange identified an inefficiency in its handling of 
certain non-displayed orders resting on the Exchange at a price equal 
to the Exchange's best displayed orders on the opposite side of the 
market (``Locking Price'') (the non-displayed orders at the Locking 
Price, ``Non-Displayed Orders''). Similarly, the Exchange identified an 
inefficiency in its handling of certain displayed orders that were 
ranked at the Locking Price and displayed at a permissible price one 
minimum price variation away from the Locking Price (such orders 
``Resting Order Subject to NMS Price Sliding''). In order to avoid an 
apparent issue under its then-existing priority rule, the Exchange was 
rejecting incoming orders that were otherwise marketable against the 
Non-Displayed Orders or the Resting Orders Subject to NMS Price 
Sliding. In order to optimize available liquidity for incoming orders 
and to provide price improvement for market participants, the Exchange 
proposed in May of 2011 to execute a resting Non-Displayed Order or 
Resting Order Subject to NMS Price Sliding at one-half minimum price 
variation less than the Locking Price in the case of a bid and one-half 
minimum price variation more than the Locking Price in the case of an 
offer.\5\
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    \5\ See Securities Exchange Act Release No. 64754 (May 12, 
2011), 76 FR 28830 (May 18, 2011) (SR-BATS-2011-015) (``2011 
Proposal''). The reference to the most ``aggressive'' price, as used 
in that filing, means for bids the highest price the User is willing 
to pay, and for offers the lowest price at which the User is willing 
to sell.
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    To ease concerns that these new order-handling procedures could be 
abused solely for the purpose of obtaining executions at one-half 
minimum price variations--although there was no evidence to suggest 
this might occur--the Exchange included Interpretation and Policy .01 
to Rule 11.13 stating:

    The Exchange will consider it inconsistent with just and 
equitable principles of trade to engage in a pattern or practice of 
using Non-Displayed Orders or orders subject to price sliding solely 
for the purpose of executing such orders at one-half minimum price 
variation from the locking price. Evidence of such behavior may 
include, but is not limited to, a User's pattern of entering orders 
at a price that would lock or be ranked at the price of a displayed 
quotation and cancelling orders when they no longer lock the 
displayed quotation.

    The Exchange also stated in the 2011 Proposal that it would conduct 
surveillance to monitor for such potential abuse.\6\
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    \6\ See 2011 Proposal, supra note 5, at 28833.
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    The Commission approved the 2011 Proposal,\7\ and the Exchange has 
conducted nearly five years of surveillance as it promised in the 2011 
Proposal. After this lengthy period of surveillance, the Exchange has 
determined that there is no evidence that market participants attempt 
to use the Exchange's order handling procedures in Rule 11.13 solely to 
obtain executions at one-half minimum price variations. Further, the 
Exchange has found no way in which a market participant could abuse 
these order handling procedures. It is the Exchange's position, 
therefore, that Interpretation and Policy .01 and its corollary 
surveillance is now unnecessary. The Exchange proposes to remove the 
unnecessary Interpretation and Policy and to discontinue the corollary 
surveillance.
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    \7\ See Securities Exchange Act Release No. 64754 (June 27, 
2011), 76 FR 38712 (July 1, 2011) (SR-BATS-2011-015) (Order 
Approving a Proposed Rule Change To Amend BATS Rule 11.9, Entitled 
``Orders and Modifiers'' and BATS Rule 11.13, Entitled ``Order 
Execution'') (``2011 Approval'').
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Background
    Prior to the implementation of the 2011 Proposal, consistent with 
the Exchange's rule regarding priority of orders, Rule 11.12, in order 
to avoid an apparent priority issue under the Exchange's rules Non-
Displayed Orders and Resting Orders Subject to NMS Price Sliding were 
not executed by the Exchange pursuant to Rule 11.13 when such orders 
would be executed at a Locking Price. Specifically, if incoming orders 
were allowed to execute against the resting Non-Displayed Order or the 
Resting Order Subject to NMS Price Sliding at the Locking Price, such 
orders would have received a perceived priority advantage over a 
resting, displayed contra-side order at the Locking Price; accordingly, 
such executions at the Locking Price were disallowed. As noted above, 
however, the Exchange proposed functionality to optimize available 
liquidity for incoming orders and to provide price improvement for 
market participants, which was subsequently approved and implemented by 
the Exchange.\8\ Below is an example that illustrates how the Exchange 
has handled such orders following the implementation of functionality 
described in the 2011 Proposal.
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    \8\ See id.

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[[Page 44077]]

    Assume the Exchange has a posted and displayed bid to buy 100 
shares of a security priced at $10.10 per share, a resting Non-
Displayed Order bid to buy 100 shares of a security priced at $10.11 
per share, and a posted and displayed offer to sell 100 shares also at 
$10.11 per share. Assume the NBBO is also $10.10 by $10.11. The 
Exchange's order book (``BZX Book'') in this situation can be depicted 
as follows, with ``ND'' identifying the Non-Displayed Order:

------------------------------------------------------------------------
                                          Bid                  Offer
------------------------------------------------------------------------
Bats:                              $10.11 (ND)         X   $10.11
                                  $10.10
------------------------------------------------------------------------

    If an incoming offer to sell 100 shares at $10.10 is entered into 
the BZX Book, the resting Non-Displayed Order at the locking price will 
be executed at $10.105 per share, thus providing the resting Non-
Displayed bid a half-penny of price improvement from its limit price of 
$10.11 and the incoming offer a half-penny of price improvement from 
its limit price of $10.10. The result would be the same for an incoming 
market order to sell or any other incoming limit order offer priced at 
$10.10 or below, which would execute against the Non-Displayed bid at a 
price of $10.105 per share. An offer at the full price of the resting 
and displayed $10.11 offer would not execute against the resting Non-
Displayed bid, but would instead either cancel or post to the BZX Book 
behind the original $10.11 offer in priority. As described above, the 
Exchange has adopted similar functionality with respect to Resting 
Orders Subject to NMS Price Sliding.
Interpretation and Policy .01 to Rule 11.13
    In proposing the 2011 Proposal, there was concern from Commission 
staff that market participants may attempt to abuse the rule solely to 
obtain executions at one-half minimum price variations. To assuage the 
concern, the Exchange included Interpretation and Policy .01 to Rule 
11.13 to state explicitly that the Exchange will consider it 
inconsistent with just and equitable principles of trade to engage in a 
pattern or practice of using Non-Displayed Orders or Resting Orders 
Subject to NMS Price Sliding solely for the purpose of executing such 
orders at one-half minimum price variations from the locking price. The 
Exchange further explained that evidence of such behavior may include, 
but is not limited to, a User's pattern of entering orders at a price 
that would lock or be ranked at the price of a displayed quotation and 
cancelling orders when they no longer lock the displayed quotation. The 
Exchange stated in the 2011 Proposal it would ``conduct surveillance to 
ensure that Users are not intentionally seeking to create an internally 
locked Book for the purpose of obtaining an execution at one-half 
minimum price variation.'' \9\ The Exchange notes that when proposed 
the Exchange believed the functionality was a solution to a specific 
situation that was a natural consequence of the Exchange's order 
handling procedures, particularly due to offering Users the ability to 
enter orders that instruct the Exchange not to remove liquidity (i.e., 
``Post Only Orders'') and to enter orders with non-displayed 
prices.\10\ The Exchange still believes this to be the case and thus, 
as further described below, seeks to eliminate surveillance focused on 
orders and System functionality that are simply behaving as the 
Exchange intends them to behave.
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    \9\ See 2011 Proposal, supra note 5, at 28833.
    \10\ See id.
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    In approving the rule change, the Staff noted the proposed 
Interpretation and Policy .01:

    The Exchange also proposes adding Interpretation and Policy .01 
to BATS Rule 11.13 to state that the Exchange will consider it 
inconsistent with just and equitable principles of trade to engage 
in a pattern or practice of using Non-Displayed Orders or orders 
subject to price sliding solely for the purpose of executing such 
orders at one-half minimum price variation from the locking price. 
Evidence of such behavior may include, but is not limited to, a 
User's pattern of entering orders at a price that would lock or be 
ranked at the price of a displayed quotation and cancelling orders 
when they no longer lock the displayed quotation. The Exchange has 
also stated that it will conduct surveillance to ensure that users 
are not intentionally seeking to create an internally locked book 
for the purpose of obtaining an execution at a one-half minimum 
price variation.\11\
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    \11\ See 2011 Approval, supra note 7 at 38713.

    The Commission stated in its approval order that it ``believes that 
any potential abuses are mitigated by the Exchange's addition of 
Interpretation and Policy .01 to BATS Rule 11.13 and its commitment to 
monitor relevant trading on its market.'' \12\
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    \12\ Id.
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Proposal To Remove Interpretation and Policy .01 to Rule 11.13
    The Exchange designed and implemented a surveillance program to 
monitor for abuse of the order handling procedures implemented by the 
2011 Proposal and has conducted the surveillance for nearly five years. 
The Exchange has found over this period no evidence to suggest that 
market participants intentionally seek to create an internally locked 
book solely for the purpose of obtaining an execution at one-half 
minimum price variation. The evidence has shown that half-penny 
executions appear to be the natural result of order interactions on the 
Exchange. Further, since the change, market participants have received 
price improvement on both sides of a trade when that trade would have 
otherwise been prevented from occurring under the Exchange's prior 
functionality. The Exchange, therefore, no longer believes 
Interpretation and Policy .01 is necessary or appropriate.
    The purpose of Interpretation and Policy .01 and the associated 
surveillance was to ensure that market participants would not find a 
way to abuse the new order handling procedures by engaging in a pattern 
or practice of entering non-displayed locking orders solely for the 
purpose of obtaining an execution at one-half minimum price variation. 
Since the Exchange has determined there is no evidence that such abuse 
has occurred the Exchange believes that Interpretation and Policy and 
corollary surveillance have served their purpose and are no longer 
necessary. The Exchange believes that its regulatory program would be 
better served by the removal of Interpretation and Policy .01 so that 
the Exchange staff may retire the surveillance and focus its regulatory 
efforts on activity that it has identified as having an impact on the 
safety and quality of its market.
    Finally, Bats EDGX Exchange Inc. (``EDGX'') and Bats EDGA Exchange 
Inc. (``EDGA'') have substantively identical order handling 
functionality, but neither have the Interpretation and Policy this 
proposal seeks to remove. The Exchange, therefore, believes that the 
Interpretation and Policy is unnecessary and the Exchange proposes to 
remove it from Rule 11.13. Although the Exchange is proposing to remove 
Interpretation and Policy .01 from Rule 11.13, the Exchange notes that 
all trading activity on the Exchange, including orders entered and 
handled and executions resulting from the order handling procedures 
implemented by the 2011 Proposal, is subject to the Exchange's overall 
surveillance program, which monitors for potential violations of the 
federal securities laws and the regulations thereunder as well as 
Exchange Rules.
2. Statutory Basis
    The rule change proposed in this submission is consistent with the 
requirements of the Act and the rules and regulations thereunder that 
are

[[Page 44078]]

applicable to a national securities exchange, and, in particular, with 
the requirements of Section 6(b) of the Act.\13\ Specifically, the 
proposed change is consistent with Section 6(b)(5) of the Act,\14\ 
because 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, and to remove impediments to, and perfect 
the mechanism of, a free and open market and a national market system. 
The proposed change to remove Interpretation and Policy .01 from Rule 
11.13 will permit the Exchange to focus its regulatory efforts on 
conduct that more likely violates principles of just and equitable 
trade rather than dedicating regulatory staff and efforts on a topic 
which the Exchange has found no evidence of its existence. Since 2011, 
the Exchange has dedicated resources to operate regulatory surveillance 
and investigate potential abuse of the Exchange's functionality and has 
found that there is no evidence of abuse of the relevant order handling 
procedures solely for the purpose of obtaining one-half minimum price 
variations. The Exchange believes the proposal will promote just and 
equitable principles of trade and will help prevent fraudulent and 
manipulative acts by focusing regulatory efforts on activity that the 
Exchange has identified as having an impact on the safety and quality 
of its market rather than the hypothetical concern that Interpretation 
and Policy .01 was implemented to monitor.
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    \13\ 15 U.S.C. 78f(b).
    \14\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule changes will 
result in any burden on competition that is not necessary or 
appropriate in furtherance of the purposes of the Act. The proposed 
rule change simply removes an interpretation and policy that the 
Exchange does not believe is necessary, as described above, and should 
have no effect on competition.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    The Exchange has neither solicited nor received written comments on 
the proposed rule change.

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

    Because the proposed rule change does not (i) significantly affect 
the protection of investors or the public interest; (ii) impose any 
significant burden on competition; and (iii) become operative for 30 
days from the date on which it was filed, or such shorter time as the 
Commission may designate, it has become effective pursuant to Section 
19(b)(3)(A) of the Act \15\ and Rule 19b-4(f)(6) thereunder.\16\
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    \15\ 15 U.S.C. 78s(b)(3)(A).
    \16\ 17 CFR 240.19b-4(f)(6). As required under Rule 19b-
4(f)(6)(iii), the Exchange provided the Commission with written 
notice of its intent to file the proposed rule change, along with a 
brief description and the text of the proposed rule change, at least 
five business days prior to the date of filing of the proposed rule 
change, or such shorter time as designated by the Commission.
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act. If the Commission 
takes such action, the Commission shall institute proceedings to 
determine whether the proposed rule change should be approved or 
disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
File No. SR-BatsBZX-2016-28 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.
All submissions should refer to File No. SR-BatsBZX-2016-28. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for Web site viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE., 
Washington, DC 20549, on official business days between the hours of 
10:00 a.m. and 3:00 p.m. Copies of the filing also will be available 
for inspection and copying at the principal office of the Exchange. All 
comments received will be posted without change; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File No. SR-BatsBZX-2016-28, and should be 
submitted on or before July 27, 2016.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\17\
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    \17\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-15916 Filed 7-5-16; 8:45 am]
 BILLING CODE 8011-01-P