[Federal Register Volume 81, Number 139 (Wednesday, July 20, 2016)]
[Notices]
[Pages 47223-47229]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-17090]



[[Page 47223]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-78330; File No. SR-BatsEDGA-2016-15]


Self-Regulatory Organizations; Bats EDGA Exchange, Inc.; Notice 
of Filing of a Proposed Rule Change To Adopt Paragraph (c) to Exchange 
Rule 11.21 To Describe Changes to System Functionality Necessary To 
Implement the Regulation NMS Plan To Implement a Tick Size Pilot 
Program

July 14, 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 29, 2016, Bats EDGA Exchange, Inc. (the ``Exchange'' or 
``EDGA'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I, II, 
and III below, which Items have been prepared by the Exchange. 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.
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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 adopt paragraph (c) to Exchange 
Rule 11.21 to describe changes to System \3\ functionality necessary to 
implement the Regulation NMS Plan to Implement a Tick Size Pilot 
Program (``Plan'' or ``Pilot'').\4\ In determining the scope of the 
proposed changes to implement the Pilot,\5\ the Exchange carefully 
weighed the impact on the Pilot, System complexity, and the usage of 
such order types in Pilot Securities.
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    \3\ The term ``System'' is defined as the ``electronic 
communications and trading facility designated by the Board through 
which securities orders of Users are consolidated for ranking, 
execution and, when applicable, routing away.'' See Exchange Rule 
1.5(cc).
    \4\ See Securities Exchange Act Release No. 74892 (May 6, 2015), 
80 FR 27513 (May 13, 2015) (``Approval Order'').
    \5\ Unless otherwise specified, capitalized terms used in this 
rule filing are defined as set forth in the Plan.
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    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
Background
    On August 25, 2014, NYSE Group, Inc., on behalf of the Exchange, 
Bats BYX Exchange, Inc. (``BYX''), Chicago Stock Exchange, Inc., Bats 
BZX Exchange, Inc. (``BZX''), Bats EDGX Exchange, Inc. (``EDGX''), 
Financial Industry Regulatory Authority, Inc. (``FINRA''), NASDAQ OMX 
BX, Inc., NASDAQ OMX PHLX LLC, the Nasdaq Stock Market LLC, New York 
Stock Exchange LLC (``NYSE''), NYSE MKT LLC, and NYSE Arca, Inc. 
(collectively ``Participants''), filed with the Commission, pursuant to 
Section 11A of the Act \6\ and Rule 608 of Regulation NMS thereunder, 
the Plan to implement a tick size pilot program.\7\ The Participants 
filed the Plan to comply with an order issued by the Commission on June 
24, 2014.\8\ The Plan was published for comment in the Federal Register 
on November 7, 2014, and approved by the Commission, as modified, on 
May 6, 2015.\9\
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    \6\ 15 U.S.C. 78k-1.
    \7\ See Letter from Brendon J. Weiss, Vice President, 
Intercontinental Exchange, Inc., to Secretary, Commission, dated 
August 25, 2014.
    \8\ See Securities Exchange Act Release No. 72460 (June 24, 
2014), 79 FR 36840 (June 30, 2014).
    \9\ See Approval Order, supra note 4.
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    The Plan is designed to allow the Commission, market participants, 
and the public to study and assess the impact of increment conventions 
on the liquidity and trading of the common stocks of small-
capitalization companies. Each Participant is required to comply, and 
to enforce compliance by its member organizations, as applicable, with 
the provisions of the Plan.
    The Pilot will include stocks of companies with $3 billion or less 
in market capitalization, an average daily trading volume of one 
million shares or less, and a volume weighted average price of at least 
$2.00 for every trading day. The Pilot will consist of a Control Group 
of approximately 1400 Pilot Securities and three Test Groups with 400 
Pilot Securities in each Test Group selected by a stratified 
sampling.\10\ During the Pilot, Pilot Securities in the Control Group 
will be quoted and traded at the currently permissible increments. 
Pilot Securities in the first Test Group (``Test Group One'') will be 
quoted in $0.05 minimum increments but will continue to trade at any 
price increment that is currently permitted.\11\ Pilot Securities in 
the second Test Group (``Test Group Two'') will be quoted in $0.05 
minimum increments and will trade at $0.05 minimum increments subject 
to a midpoint exception, a retail investor order exception, and a 
negotiated trade exception.\12\ Pilot Securities in the third Test 
Group (``Test Group Three'') will be subject to the same restrictions 
as Test Group Two and also will be subject to the ``Trade-at'' 
requirement to prevent price matching by a market participant that is 
not displaying at a price of a Trading Center's \13\ ``Best Protected 
Bid'' or ``Best Protected Offer,'' unless an enumerated exception 
applies.\14\ The same exceptions provided under Test Group Two will 
also be available under the Trade-at Prohibition, with an additional 
exception for Block Size orders and exceptions that mirror those under 
Rule 611 of Regulation NMS.\15\
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    \10\ See Section V of the Plan for identification of Pilot 
Securities, including criteria for selection and grouping.
    \11\ See Section VI(B) of the Plan.
    \12\ See Section VI(C) of the Plan.
    \13\ The Plan incorporates the definition of ``Trading Center'' 
from Rule 600(b)(78) of Regulation NMS. Regulation NMS defines a 
Trading Center as ``a national securities exchange or national 
securities association that operates an SRO trading facility, an 
alternative trading system, an exchange market maker, an OTC market 
maker, or any other broker or dealer that executes orders internally 
by trading as principal or crossing orders as agent.''
    \14\ See Section VI(D) of the Plan.
    \15\ 17 CFR 242.611.
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    The Plan requires the Exchange to establish, maintain, and enforce 
written policies and procedures that are reasonably designed to comply 
with applicable quoting and trading requirements specified in the Plan. 
Accordingly, the Exchange adopted paragraph (a) of Rule 11.21 to 
require Members \16\ to comply with the quoting

[[Page 47224]]

and trading provisions of the Plan.\17\ The Exchange also adopted 
paragraph (b) of Rule 11.21 to require Members to comply with the data 
collection provisions under Appendix B and C of the Plan.\18\
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    \16\ The term ``Member'' is defined as ``any registered broker 
or dealer that has been admitted to membership in the Exchange.'' 
See Exchange Rule 1.5(n).
    \17\ See Securities Exchange Act Release No. 77792 (May 10, 
2016), 81 FR 30397 (May 16, 2016) (SR-BatsEDGA-2016-08).
    \18\ See Securities Exchange Act Release No. 77417 (March 22, 
2016), 81 FR 17219 (March 28, 2016) (SR-BatsEDGA-2016-01).
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Proposed System Changes
    The Exchange proposes to adopt paragraph (c) of Exchange Rule 11.21 
to describe changes to System functionality necessary to implement the 
Plan. Paragraph (c) of Rule 11.21 would set forth the Exchange's 
specific procedures for handling, executing, re-pricing and displaying 
of certain order types and order type instructions applicable to Pilot 
Securities. Unless otherwise indicated, paragraph (c) of Rule 11.21 
would apply to order types and order type instructions in Pilot 
Securities in Test Groups One, Two, and Three and not to orders in 
Pilot Securities included in the Control Group. The proposed changes 
include select and discrete amendments to the operation of: (i) Market 
Orders; (ii) orders with a Market Peg instruction; (iii) MidPoint Peg 
Orders; (iii) orders with a Discretionary Range; (iv) orders with a 
Non-Displayed instruction; (v) Market Maker Peg Orders; (vi) 
Supplemental Peg Orders; and (vii) orders subject to the Display-Price 
Sliding process.
    In determining the scope of these proposed changes to implement the 
Plan, the Exchange carefully weighed the impact on the Pilot, System 
complexity, and the usage of such order types in Pilot Securities. 
These proposed changes are designed to directly comply with the Plan 
and to assist the Exchange in meeting its regulatory obligations 
pursuant to the Plan. As discussed below, certain of these changes are 
also intended to reduce risk in the System by eliminating unnecessary 
complexity based on infrequent current usage of certain order types in 
Pilot Securities and/or their limited ability to execute under the 
Trade-at Prohibition. Therefore, the Exchange firmly believes that 
these changes will have little or no impact on the operation and data 
collection elements of the Plan. The Exchange further believes that the 
proposed rule changes are reasonably designed to comply with applicable 
quoting and trading requirements specified in the Plan.
Market Orders
    A Market Order is an order to buy or sell a stated amount of a 
security that is to be executed at the NBBO when the order reaches the 
Exchange.\19\ Market Orders shall not trade through Protected 
Quotations. Any portion of a Market Order that would execute at a price 
more than $0.50 or 5 percent worse than the NBBO at the time the order 
initially reaches the Exchange, whichever is greater, will be 
cancelled.\20\ In order to comply with the minimum quoting increments 
set forth in the Plan, the Exchange proposes to state under proposed 
Rule 11.21(c)(1) that for purposes of determining whether a Market 
Order's execution price is more than 5 percent worse than the NBBO 
under Rule 11.8(a)(7), the execution price for a buy (sell) order will 
be rounded down (up) to the nearest $0.05 increment.
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    \19\ See Exchange Rule 11.8(a).
    \20\ Id.
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Market Peg Instruction
    The Exchange proposes to amend the operation of orders with a 
Market Peg instruction to reduce risk in its System by eliminating 
unnecessary complexity based on infrequent current usage in Pilot 
Securities and their limited ability to execute under the Trade-at 
Prohibition in Test Group Three. An order with a Pegged instruction is 
automatically adjusted by the System in response to changes in the NBBO 
and will peg to the NBB or NBO or a certain amount away from the NBB or 
NBO.\21\ An order with a Market Peg instruction is pegged to the 
contra-side NBBO.\22\ A User \23\ entering an order with a Market Peg 
instruction can specify that such order's price will offset the inside 
quote on the contra-side of the market by an amount (the ``Offset'') 
set by the User. An order with a Market Peg instruction is not eligible 
to be displayed on the Exchange.
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    \21\ See Exchange Rule 11.6(j).
    \22\ See Exchange Rule 11.6(j)(1).
    \23\ A ``User'' is defined as any member or sponsored 
participant of the Exchange who is authorized to obtain access to 
the System pursuant to Rule 11.3. See Exchange Rule 1.5(ee).
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    In Test Groups One and Two, the Exchange proposes to modify the 
behavior of an order with a Market Peg instruction when it is locked by 
an incoming order with a Post Only instruction \24\ that does not 
remove liquidity pursuant to Rule 11.6(n)(4).\25\ In such case, the 
order with a Market Peg instruction would be converted to an executable 
order and will remove liquidity against such incoming order.\26\ In no 
case would an order with a Market Peg instruction execute against an 
incoming order with a Post Only instruction if an order with higher 
priority is on the EDGA Book.\27\ Specifically, if an order other than 
an order with a Market Peg instruction maintains higher priority than 
one or more orders with a Market Peg instruction, the order(s) with a 
Market Peg instruction with lower priority will not be converted, as 
described above, and the incoming order with a Post Only instruction 
will be posted or cancelled in accordance with Rule 11.6(n)(4).
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    \24\ See Exchange Rule 11.6(n)(4).
    \25\ A Post Only Order will remove contra-side liquidity from 
the EDGA Book if the order is an order to buy or sell a security 
priced below $1.00 or if the value of such execution when removing 
liquidity equals or exceeds the value of such execution if the order 
instead posted to the EDGA Book and subsequently provided liquidity, 
including the applicable fees charged or rebates provided. See 
Exchange Rule 11.6(n)(4).
    \26\ The Exchange notes that an order with a Post Only 
instruction will, in most cases, remove liquidity from the EDGA Book 
because under its current taker-maker pricing structure, the remover 
of liquidity is provided a rebate while the provider of liquidity is 
charged a fee. Therefore, in most cases, value of the execution to 
remove liquidity will equal or exceed the value of such execution 
once posted to the EDGA Book, including the applicable fees charged 
or rebates received.
    \27\ The term ``EDGA Book'' is defined as the ``System's 
electronic file of orders.'' See Exchange Rule 1.5(d).
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    The Exchange notes that orders with a Market Peg instruction are 
aggressive by nature and believes executing the order in such 
circumstance is appropriate. The Exchange also notes that the proposed 
behavior for orders with a Market Peg instruction in Test Groups One 
and Two is identical to the operation of orders with the Super 
Aggressive Routing instruction under Exchange Rule 11.6(n)(2). When an 
order with a Super Aggressive instruction is locked by an incoming 
order with a Post Only instruction that does not remove liquidity 
pursuant to Rule 11.6(n)(4), the order is converted to an executable 
order and will remove liquidity against such incoming order. In 
addition, like as proposed above, in no case would an order with a 
Super Aggressive instruction execute against an incoming order with a 
Post Only instruction if an order with higher priority is on the EDGA 
Book. The Exchange believes this change is reasonable and appropriate 
due to the limited usage of orders with a Market Peg instruction in 
Pilot Securities, to avoid unnecessary additional System complexity, 
and to ensure the order with a Market Peg instruction may execute in 
such circumstance.
    The Exchange also proposes to not accept orders with a Market Peg

[[Page 47225]]

instruction in Test Group Three based on limited current usage, 
additional System complexity, and their limited ability to execute 
under the Trade-at Prohibition. Exchange Rule 11.21(a)(6)(D) sets forth 
the ``Trade-at Prohibition,'' which is the prohibition against 
executions by a Member that operates a Trading Center of a sell order 
for a Pilot Security in Test Group Three at the price of a Protected 
Bid or the execution of a buy order for a Pilot Security in Test Group 
Three at the price of a Protected Offer during Regular Trading 
Hours,\28\ unless an enumerated exception applies.\29\ The Exchange 
believes that their de minimis usage and limited ability to execute due 
to the Trade-at Prohibition does not justify the complexity that would 
be created by supporting orders with a Market Peg instruction in Test 
Group Three. A vast majority of orders with a Market Pegged instruction 
are entered into the System with a zero Offset and, therefore, create a 
locked market with the contra-side NBBO. Under the Trade-at 
Prohibition, an order with a Market Peg instruction would not be 
eligible for execution at the locking price, including when a Trade-at 
Intermarket Sweep Order (``ISO'') \30\ is entered, because of non-
cleared contra-side Protected Quotations. For example, assume the NBBO 
is $10.00 (NYSE) x $10.05 (Nasdaq) in a Test Group 3 security. An order 
with a Market Peg instruction to buy at $10.10 with a zero Offset is 
entered on the Exchange. The order would be ranked and hidden on the 
EDGA Book at $10.05. A Trade-at ISO to sell at $10.05 is then entered. 
In this example, no execution occurs on the Exchange because Nasdaq is 
displaying an order to sell at $10.05. The Trade-at ISO instruction 
only indicates that all of the better and equal priced buy orders have 
been cleared. It does not indicate that the seller has cleared any 
Protected Offers. Therefore, the Exchange proposes to not accept orders 
with a Market Peg instruction in Test Group Three in an effort to 
reduce unnecessary System complexity, avoid an internally locked book, 
and due to the limited execution opportunities for orders with a Market 
Peg instruction due to the Trade-at Prohibition.
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    \28\ The term ``Regular Trading Hours'' is defined as ``the time 
between 9:30 a.m. and 4:00 p.m. Eastern Time.'' See Exchange Rule 
1.5(y).
    \29\ See also Section VI(D) of the Plan.
    \30\ A Trade-at ISO is a Limit Order for a Pilot Security that 
meets the following requirements: (i) When routed to a Trading 
Center, the limit order is identified as a Trade-at Intermarket 
Sweep Order; and (ii) simultaneously with the routing of the limit 
order identified as a Trade-at Intermarket Sweep Order, one or more 
additional limit orders, as necessary, are routed to execute against 
the full size of any protected bid, in the case of a limit order to 
sell, or the full displayed size of any protected offer, in the case 
of a limit order to buy, for the Pilot Security with a price that is 
better than or equal to the limit price of the limit order 
identified as a Trade-at Intermarket Sweep Order. See Exchange Rule 
11.21(a)(7)(A)(i). These additional routed orders also must be 
marked as Trade-at Intermarket Sweep Orders. Id.
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MidPoint Peg Orders
    A MidPoint Peg Order is an order whose price is automatically 
adjusted by the System in response to changes in the NBBO to be pegged 
to the midpoint of the NBBO, or, alternatively, pegged to the less 
aggressive of the midpoint of the NBBO or one Minimum Price Variation 
\31\ inside the same side of the NBBO as the order.\32\ The Plan and 
current Exchange rules permit the acceptance of orders priced to 
execute at the midpoint of the NBBO to be ranked and accepted in 
increments of less than $0.05.\33\ Consistent with previous guidance 
issued by the Participants,\34\ the Exchange proposes to amend the 
operation of MidPoint Peg Orders to explicitly state that MidPoint Peg 
Orders in Pilot Securities may not be entered in increments other than 
$0.05. The System will execute a MidPoint Peg Order: (i) In $0.05 
increments priced better than the midpoint of the NBBO; or (ii) at the 
midpoint of the NBBO, regardless of whether the midpoint of the NBBO is 
in an increment of $0.05. In order to comply with the minimum quoting 
and trading increments of the Plan and reduce unnecessary System 
complexity, a MidPoint Peg Order will not be permitted to alternatively 
peg to one Minimum Price Variation inside the same side of the NBBO as 
the order in Pilot Securities. The Exchange believes that the current 
de minimis usage of the alternative pegging functionality in Pilot 
Securities does not justify the complexity and risk that would be 
created by re-programming the System to support this functionality 
under the Plan.
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    \31\ See Exchange Rule 11.6(i).
    \32\ See Exchange Rule 11.8(d).
    \33\ See Sections VI(B), (C), and (D) of the Plan. See also 
Exchange Rules 11.21(a)(4), (a)(5), and (a)(6).
    \34\ See e.g., Question 42 of the Tick Size Pilot Program 
Trading and Quoting FAQs available at http://www.finra.org/sites/default/files/TSPP-Trading-and-Quoting-FAQs.pdf.
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Discretionary Range Instruction
    The Exchange proposes to not accept orders with a Discretionary 
Range in all Test Groups, including the Control Group, to reduce risk 
in the System by eliminating unnecessary complexity based on infrequent 
current usage in Pilot Securities. In sum, an order with a 
Discretionary Range has a displayed or non-displayed ranked price and 
size and an additional non-displayed ``discretionary price''.\35\ The 
discretionary price is a non-displayed upward offset at which a User is 
willing to buy, if necessary, or a non-displayed downward offset at 
which a User is willing to sell, if necessary. The System changes 
necessary for orders with a Discretionary Range to comply with the Plan 
become increasingly complex because both the displayed price and 
discretionary price must comply with the Plan's minimum quoting and 
trading increments as well as the Trade-at restriction in Test Group 
Three. In addition, Users do not currently set discretionary prices 
less than $0.05 away from the order's displayed price and the Exchange 
does not anticipate Users doing so under the Plan. To date, orders with 
a Discretionary Range are rarely entered in Pilot Securities and the 
Exchange anticipates their usage to further decrease due to the Plan's 
minimum quoting increments. The Exchange believes that the current 
extremely limited usage of orders with a Discretionary Range in Pilot 
Securities does not justify the additional System complexity that would 
be created by supporting such orders. As a result of these factors the 
Exchange proposes to not accept orders with a Discretionary Range in 
all Test Groups and the Control Group.
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    \35\ See Exchange Rule 11.6(d).
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Non-Displayed Instruction
    The Exchange proposes to re-price to the midpoint of the NBBO 
orders with a Non-Displayed instruction in Test Group Three that are 
priced in a permissible increment better than the midpoint of the NBBO. 
An order with a Non-Displayed instruction is not displayed on the 
Exchange.\36\ Exchange Rule 11.21(a)(6)(D) incorporates the ``Trade-at 
Prohibition'' in the Exchange's rules. The Trade-at Prohibition 
prevents the execution of a sell order for a Pilot Security in Test 
Group Three at the price of a Protected Bid or the execution of a buy 
order for a Pilot Security in Test Group Three at the price of a 
Protected Offer during Regular Trading Hours, unless an exception 
applies. A Trading Center that is displaying a quotation, via either a 
processor or an SRO quotation feed, that is a Protected Bid or 
Protected Offer is permitted to execute orders at that level, but only 
up to the amount of its displayed size. Unless an exception applies, an 
order with a Non-Displayed instruction that is able to execute at the 
price of the Protected Quotation would not be able to do so in Test 
Group Three

[[Page 47226]]

due to the Trade-at Prohibition and the Exchange's priority rule.\37\ 
Furthermore, such aggressively priced orders would not be able to post 
to the EDGA Book at the contra-side Protected Quotation, and re-pricing 
the order to the midpoint of the NBBO would increase execution 
opportunities under normal market conditions. However, orders that are 
priced to execute at the midpoint of the NBBO are exempt from the 
Trade-at Prohibition. Therefore, to increase the execution 
opportunities for orders with a Non-Displayed instruction in Test Group 
Three, the Exchange proposes to re-price to the midpoint of the NBBO 
orders with a Non-Displayed instruction that are priced in a 
permissible increment better than the midpoint of the NBBO.
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    \36\ See Exchange Rule 11.6(e)(2).
    \37\ Under Exchange Rule 11.9(a)(2)(A), displayed Limit Orders 
have priority over non-displayed Limit Orders.
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Market Maker Peg Orders
    A Market Maker Peg Order is a Limit Order that is automatically 
priced by the System at the Designated Percentage (as defined in 
Exchange Rule 11.20(d)(2)(D)) away from the then current NBB and NBO, 
or if no NBB or NBO, at the Designated Percentage away from the last 
reported sale from the responsible single plan processor in order to 
comply with the quotation requirements for Market Makers set forth in 
Exchange Rule 11.20(d).\38\ Should the above pricing result in a Market 
Maker Peg Order being priced at an increment other than $0.05, the 
Exchange proposes to round an order to buy (sell) up (down) to the 
nearest $0.05 increment in order to comply with the minimum quoting 
increments of the Plan.
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    \38\ See Exchange Rule 11.8(f).
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Supplemental Peg Orders
    The Exchange proposes to not accept Supplemental Peg Orders in Test 
Group Three in order to reduce risk in the System by eliminating 
unnecessary complexity based on infrequent current usage in Pilot 
Securities and their limited ability to execute under the Trade-at 
Prohibition. A Supplemental Peg Order is a non-displayed Limit Order 
that posts to the EDGA Book, and thereafter is eligible for execution 
at the NBB for buy orders and NBO for sell orders against routable 
orders that are equal to or less than the aggregate size of the 
Supplemental Peg Order interest available at that price.\39\ In sum, 
Supplemental Peg Orders are only executable at the NBBO against an 
order that is in the process of being routed away. In such case, the 
Exchange is not displaying a Protected Quotation and, therefore, the 
Supplemental Peg Order would be unable to execute in Test Group Three 
due to the Trade-at Prohibition.\40\ Therefore, the Exchange proposes 
to not accept Supplemental Peg Orders in Test Group Three.
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    \39\ See Exchange Rule 11.8(g).
    \40\ The Exchange notes that the likelihood of a Supplemental 
Peg Order qualifying for an exception to the Trade-at Prohibition is 
small. For example, Supplemental Peg Orders are only executable 
against orders that are to be routed away and would not be eligible 
to execute against an incoming ISO or Trade-at ISO. Also, the 
Exchange would not be displaying a Protected Quotation. In addition, 
the Exchange does not frequently receive orders of Block Size and, 
in order to qualify for the Block exception, the contra-side Block 
Order must be routable and the Supplemental Peg Order be of Block 
Size.
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Display-Price Sliding
    Under the Display-Price Sliding process, an order eligible for 
display by the Exchange that, at the time of entry, would create a 
violation of Rule 610(d) of Regulation NMS by locking or crossing a 
Protected Quotation of an external market, will be ranked at the 
locking price in the EDGA Book and displayed by the System at one 
minimum price variation (i.e., $0.05) below the current NBO (for bids) 
or one minimum price variation above the current NBB (for offers).\41\ 
The ranked and displayed prices of an order subject to the Display-
Price Sliding process may be adjusted once or multiple times depending 
upon the instructions of a User and changes to the prevailing NBBO.\42\
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    \41\ See Exchange Rule 11.6(l)(1)(B).
    \42\ See Exchange Rule 11.6(l)(1)(B)(iii).
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    As described above, Exchange Rule 11.21(a)(6)(D) sets forth the 
Trade-at Prohibition, which is the prohibition against executions by a 
Member that operates a Trading Center of a sell order for a Pilot 
Security in Test Group Three at the price of a Protected Bid or the 
execution of a buy order for a Pilot Security in Test Group Three at 
the price of a Protected Offer during Regular Trading Hours, unless an 
exception applies. Orders that are priced to execute at the midpoint of 
the NBBO are exempt from the Trade-at Prohibition. Therefore, to 
increase the execution opportunities and qualify for the mid-point 
exception to the Trade-at Prohibition, the Exchange proposes to rank 
orders in Test Group Three that are subject to the Display-Price 
Sliding process at the midpoint of the NBBO in the BZX Book and display 
such orders one minimum price variation below the current NBO (for 
bids) or one minimum price variation above the current NBB (for 
offers).
    The Exchange also proposes to cancel orders subject to Display-
Price Sliding in Test Group Three that are only to be adjusted once and 
not multiple times in the event the NBBO widens and a contra-side order 
with a Non-Displayed instruction is resting on the EDGA Book at the 
price to which the order subject to Display-Price Sliding would be 
adjusted. Due to the increased minimum quoting increments under the 
Plan, the Exchange is unable to safely re-price an order subject to 
single Display-Price Sliding in Test Group Three to the original 
locking price in such circumstances and doing so would add additional 
System complexity and risk. As discussed above, the Exchange proposes 
to rank orders in Test Group Three subject to the Display-Price Sliding 
process at the midpoint of the NBBO. In the event the NBBO changes such 
that an order subject to Display-Price Sliding would not lock or cross 
a Protected Quotation of an external market, the order will receive a 
new timestamp, and will be displayed at the order's limit price.\43\ 
Due to technological limitations arising from the increased minimum 
quoting increments under the Plan, however, the Exchange is unable to 
safely re-program its System to re-price such order to the original 
locking price when the NBBO widens and a contra-side order with a Non-
Displayed instruction is resting on the EDGA Book at the price to which 
the order subject to Display-Price Sliding would be adjusted. 
Therefore, the Exchange proposes to cancel orders subject to the single 
Display-Price Sliding process in such circumstances. Users who prefer 
an execution in such a scenario may elect to use the multiple Display-
Price Sliding process.
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    \43\ Id.
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Ministerial Change
    Currently, both Interpretation and Policy .03 to Rule 11.21(a) and 
Interpretation and Policy .11 to Rule 11.21(b) state that Rule 11.21 
shall be in effect during a pilot period to coincide with the pilot 
period for the Plan (including any extensions to the pilot period for 
the Plan). The Exchange proposes to include this language at the 
beginning of Rule 11.21 and, therefore, proposes to delete both 
Interpretation and Policy .03 to Rule 11.21(a) and Interpretation and 
Policy .11 to Rule 11.21(b) as those provisions would be redundant and 
unnecessary. The Exchange also proposes to amend the last sentence of 
Rule 11.21(a)(4) to specify that the current permissible price 
increments are set forth under Exchange Rule 11.6(i), Minimum Price 
Variation.

[[Page 47227]]

Implementation Date
    If the Commission approves the proposed rule change, the proposed 
rule change will be effective upon Commission approval and shall become 
operative upon the commencement of the Pilot Period.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act \44\ in general, and furthers the objectives of Section 
6(b)(5) of the Act \45\ in particular, in that it is designed 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. The Plan requires the 
Exchange to establish, maintain, and enforce written policies and 
procedures that are reasonably designed to comply with applicable 
quoting and trading requirements specified in the Plan. The proposed 
rule change is designed to comply with the Plan, reduce complexity and 
enhance System resiliency while not adversely affecting the data 
collected under the Plan. Therefore, the Exchange believes that the 
proposed rule changes are reasonably designed to comply with applicable 
quoting and trading requirements specified in the Plan and, as 
discussed further below, other applicable regulations.
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    \44\ 15 U.S.C. 78f(b).
    \45\ 15 U.S.C. 78f(b)(5).
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    The Exchange believes that the proposed changes regarding Market 
Orders, MidPoint Peg Orders, Market Maker Peg Orders, and Display-Price 
Sliding are consistent with the Act because they are intended to modify 
the Exchange's System to comply with the provisions of the Plan, and 
are designed to assist the Exchange in meeting its regulatory 
obligations pursuant to the Plan. In approving the Plan, the SEC noted 
that the Pilot was an appropriate, data-driven test that was designed 
to evaluate the impact of a wider tick size on trading, liquidity, and 
the market quality of securities of smaller capitalization companies, 
and was therefore in furtherance of the purposes of the Act. To the 
extent that these proposals are intended to comply with the Plan, the 
Exchange believes that these proposals are in furtherance of the 
objectives of the Plan, as identified by the Commission, and is 
therefore consistent with the Act.
    The Exchange also believes that its proposed changes to orders with 
a Market Peg instruction, orders with a Discretionary Range, orders 
with a Non-Displayed instruction, Supplemental Peg Orders, and Display-
Price Sliding are also consistent with the Act because they are 
intended to eliminate unnecessary System complexity and risk based on 
the de minimis current usage of such order types and instructions in 
Pilot Securities and/or their limited ability to execute under the 
Plan's minimum trading and quoting increments or Trade-at 
Prohibition.\46\ For example, during March 2016, the alternative 
pegging functionality of MidPoint Peg Orders, orders with a Market Peg 
instruction, orders with a Non-Displayed instruction, and Supplemental 
Peg Orders accounted for 0.01%, 0.02%, 0.92%, and 0.01%, respectively, 
of volume in eligible Pilot Securities on the Exchange, BYX, BZX and 
EDGX combined. Notably, orders with a Discretionary Range accounted for 
0.00% of volume in eligible Pilot Securities on the Exchange, BYX, BZX 
and EDGX combined.
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    \46\ The Commission has also expressed concern regarding 
potential market instability caused by technological risks. See 
e.g., Chair Mary Jo White, Commission, Enhancing Our Equity Market 
Structure (June 5, 2014) available at https://www.sec.gov/News/Speech/Detail/Speech/1370542004312#.VD2HW610w6Y.
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    The Commission adopted Regulation Systems Compliance and Integrity 
(``Regulation SCI'') in November 2014 to strengthen the technology 
infrastructure of the U.S. securities markets.\47\ Regulation SCI is 
designed to reduce the occurrence of systems issues, improve resiliency 
when systems problems do occur, and enhance the Commission's oversight 
and enforcement of securities market technology infrastructure. 
Regulation SCI required the Exchange to establish written policies and 
procedures reasonably designed to ensure that their systems have levels 
of capacity, integrity, resiliency, availability, and security adequate 
to maintain their operational capability and promote the maintenance of 
fair and orderly markets, and that they operate in a manner that 
complies with the Exchange Act. Each of these proposed changes are 
intended to reduce complexity and risk in the System to ensure the 
Exchange's technology remains robust and resilient. In determining the 
scope of the proposed changes, the Exchange carefully weighed the 
impact on the Pilot, System complexity, and the usage of such order 
types in Pilot Securities.\48\ The potential complexity results from 
code changes for a majority of the Exchange's order types, which 
requires the implementation and testing of a separate branch of code 
for each Test Group. For example, the Exchange currently utilizes one 
branch of code for which to implement and test changes. Development 
work for the Pilot results in the creation of four additional branches 
of code that are to be developed and tested (e.g., Control Group + 
three Test Groups). The Exchange determined that the changes proposed 
herein are necessary to ensure continued System resiliency in 
accordance with the requirements of Regulation SCI. Therefore, the 
Exchange believes the proposed rule change promotes just and equitable 
principles of trade, removes impediments to and perfects 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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    \47\ See Securities Exchange Act Release No. 73639 (November 19, 
2014), 79 FR 72251 (December 5, 2014) (``Regulation SCI Approval 
Order'').
    \48\ But for the Plan, the Exchange notes that it would not have 
proposed to amend the operation of orders with a Market Peg 
instruction, orders with a Discretionary Range, orders with a Non-
Displayed instruction, Supplemental Peg Orders, and Display-Price 
Sliding as described herein.
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    In addition, each of these proposed changes would have a de minimis 
to zero impact on the data reported pursuant to the Plan. As evidenced 
above, orders with a Market Peg instruction, orders with a 
Discretionary Range, the alternative pegging functionality of MidPoint 
Peg Orders, and Supplemental Peg Orders are infrequently used in Pilot 
Securities or the execution of such orders would be scarce due to the 
Plan's minimum trading and quoting requirement and Trade-at 
Prohibition. The limited usage and execution scenarios do not justify 
the additional system complexity which would be created by modifying 
the System to support such order types in order to comply with the 
Plan. Therefore, the Exchange believes each proposed change is a 
reasonable means to ensure that the System's integrity, resiliency, and 
availability continues to promote the maintenance of fair and orderly 
markets. Due to the additional complexity, limited usage and execution 
opportunities, the Exchange believes it is not unfairly discriminatory 
to apply the changes proposed herein to only Pilot Securities as such 
changes are necessary to reduce complexity and ensure continued System 
resiliency in accordance with the requirements of Regulation SCI. The 
Exchange also believes the proposed changes to orders with a Non-
Displayed instruction, and orders subject to the Display-Price

[[Page 47228]]

Sliding process in Test Group Three are consistent with the Act because 
they are designed to increase the execution opportunities for such 
order types in compliance with the mid-point exception to the Trade-at 
Prohibition. The Exchange also believes the proposed change to Market 
Pegged Orders in Test Groups One and Two is consistent with the Act 
because it is identical to the operation of the Super Aggressive 
instruction under Exchange Rule 11.6(n)(2). The Exchange notes that 
Market Pegged Orders are aggressive by nature and believes executing 
the order in such circumstance is reasonable and appropriate.
    The Exchange also believes it is reasonable and appropriate to 
cancel an order subject to the single Display-Price Sliding process in 
Test Group Three in the event that the NBBO widens and a contra-side 
order with a Non-Displayed instruction is resting on the EDGA Book at 
the price to which the order subject to Display-Price Sliding would be 
adjusted. Due to technological limitations and the Plan's increased 
minimum quoting increments, the Exchange is unable to safely re-program 
its System to re-price such orders to the original locking price in 
such circumstances. The Exchange also anticipates that the scenario 
under which it proposes to cancel the Display-Price Sliding order will 
be infrequent in Tick Pilot Securities. Users who prefer an execution 
in such a scenario may elect to use the multiple Display-Price Sliding 
process. Therefore, the Exchange believes it is consistent with the Act 
to set forth this scenario in its rules so that Users will understand 
how the System operates and how their orders would be handled in this 
discrete scenario.
    Lastly, the Exchange believes the ministerial changes to Rule 11.21 
are also consistent with the Act as they would: (i) Clarify a provision 
under paragraph (a)(4); and (ii) remove redundant provisions from the 
rule.

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
result in any burden on competition that is not necessary or 
appropriate in furtherance of the purposes of the Act. The Exchange 
notes that the proposed rule change is designed to assist the Exchange 
in meeting its regulatory obligations pursuant to the Plan, reduce 
System complexity and enhance resiliency. The Exchange also notes that 
the proposed rule change will apply equally to all Members that trade 
Pilot Securities.

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

    Written comments were neither solicited nor received.

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

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

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. In particular, the Commission seeks 
comment on the issue described below.
    In the Approval Order, the Commission stressed the importance of 
testing the impact of wider tick sizes on the trading and liquidity of 
the securities of small capitalization companies, and doing so in a way 
that produces robust results that inform future policy decisions.\49\ 
The Commission acknowledged the complexity of the Pilot and the costs 
that its implementation would create for market participants, but 
concluded that the benefits of the empirical data that would be 
produced by the Pilot warranted incurring those costs.\50\ As a result, 
the Plan requires that each Participant, including the Exchange, adopt 
rules that are necessary for compliance with the provisions of the 
Plan.\51\
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    \49\ See Approval Order, supra note 4, at 80 FR 27515.
    \50\ Id. at 27516.
    \51\ See Section II(B) of the Plan. See also Section IV of the 
Plan.
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    While the Exchange states that the proposed rule change describes 
the system changes necessary to implement the Pilot, the Commission 
notes that the scope of the proposed changes extends beyond those 
required for compliance with the Plan, and would eliminate certain 
order types for Pilot Securities during the Pilot Period, or modify 
their operation in ways not required by the Plan. For example, the 
Exchange proposes not to accept Market Pegged Orders, Discretionary 
Orders, and Supplemental Peg Orders, and certain types of Mid-Point Peg 
Orders, in some or all Test Groups of Pilot Securities for the duration 
of the Pilot Period.\52\ These proposals appear designed to permit the 
Exchange to avoid the costs of modifying these order types to comply 
with the Plan. The Exchange notes that these order types are 
infrequently used in Pilot Securities, and takes the position that 
``[t]he limited usage and execution scenarios do not justify the 
additional system complexity which would be created by modifying the 
System to support such order types in order to comply with the Plan.'' 
\53\ At the same time, the Exchange also does not appear prepared to 
propose to eliminate these order types indefinitely. By contrast, the 
Exchange proposes to modify, in ways not required by the Plan, the 
operation of Market Pegged Orders and Non-Displayed Orders, and certain 
orders subject to the Display-Price Sliding process, in some or all 
Test Groups of Pilot Securities, and to incur the associated system 
change costs, in order to increase the ``execution opportunities'' for 
these order types for the duration of the Pilot Period.\54\
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    \52\ The Exchange also proposes to cancel certain orders subject 
to the Display-Price Sliding process in certain Pilot Securities for 
the duration of the Pilot Period.
    \53\ See supra Item II.A.2.
    \54\ See supra Item II.A.1-2.
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    The Commission is concerned that proposed rule changes, other than 
those necessary for compliance with Plan, that are targeted at Pilot 
Securities, that have a disparate impact on different Test Groups and 
the Control Group, and that are to apply temporarily only for the Pilot 
Period, could bias the results of the Pilot and undermine the value of 
the data generated in informing future policy decisions. Accordingly, 
the Commission is concerned that the proposed rule change may not be 
consistent with Act, including Section 6(b)(5) thereof and Rule 608 of 
Regulation NMS, or with the Plan.
    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 Number SR-BatsEDGA-2016-15 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange

[[Page 47229]]

Commission, 100 F Street NE., Washington, DC 20549-1090.

All submissions should refer to File Number SR-BatsEDGA-2016-15. 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 Number SR-BatsEDGA-2016-15, and should 
be submitted on or before August 10, 2016.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\55\
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    \55\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2016-17090 Filed 7-19-16; 8:45 am]
 BILLING CODE 8011-01-P