[Federal Register Volume 81, Number 174 (Thursday, September 8, 2016)]
[Notices]
[Pages 62219-62221]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-21647]



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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-78763; File No. SR-BatsEDGA-2016-15]


Self-Regulatory Organizations; Bats EDGA Exchange, Inc.; Notice 
of Filing of Amendment No. 1 and Order Granting Accelerated Approval of 
a Proposed Rule Change, as Modified by Amendment No. 1, To Amend 
Exchange Rule 11.21 To Describe Changes to System Functionality 
Necessary To Implement the Regulation NMS Plan To Implement a Tick Size 
Pilot Program

September 2, 2016.

I. Introduction

    On June 29, 2016, Bats EDGA Exchange, Inc. (``Exchange'' or 
``EDGA'') filed with the Securities and Exchange Commission 
(``Commission'') pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Exchange Act'' or ``Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to adopt Exchange Rule 11.21(c) 
to describe changes to System \3\ functionality to implement the 
Regulation NMS Plan to Implement a Tick Size Pilot Program (``Plan'' or 
``Pilot'').\4\ The proposed rule change was published for comment in 
the Federal Register on July 20, 2016.\5\ The Commission received one 
comment letter from the Exchange in response to the Notice.\6\ On 
September 1, 2016, the Exchange filed an amendment to the proposed rule 
change (``Amendment No. 1''), which supersedes and replaces the 
proposal in its entirety.\7\
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ The term ``System'' is defined as the ``electronic 
communications and trading facility designated by the Board of 
Directors of the Exchange through which securities orders of Users 
are consolidated for ranking, execution and, when applicable, 
routing away.'' See Exchange Rule 1.5(aa).
    \4\ See Securities Exchange Act Release No. 74892 (May 6, 2015), 
80 FR 27513 (May 13, 2015) (``Approval Order''). Unless otherwise 
specified, capitalized terms used in this rule filing are defined as 
set forth in the Plan.
    \5\ Securities Exchange Act Release No. 78330 (July 14, 2016), 
81 FR 47223 (``Notice'').
    \6\ See Letter to Brent J. Fields, Secretary, Commission, from 
Eric Swanson, General Counsel, Exchange, dated July 26, 2016 
(``Exchange Letter'').
    \7\ In Amendment No. 1, the Exchange proposes to: (1) Apply the 
changes in proposed Rule 11.21(c) to all Pilot Securities; (2) 
clarify in Rule 11.21(c)(1) that the increment for Market Orders and 
Rule 11.21(c)(5) that the increment for Market Maker Peg Orders will 
be at ``permissible'' increments; (3) state in Rule 11.21(c)(2) that 
orders with a Market Peg instruction, Rule 11.21(c)(4) that orders 
with a Discretionary Range, and Rule 11.21(c)(6) that Supplemental 
Peg Orders will not be accepted in Pilot Securities; (4) clarify in 
Rule 11.21(c)(3) that MidPoint Peg Orders may not be alternatively 
pegged to one minimum price variation inside the same side of the 
NBBO as the order; (5) delete the proposal to amend orders with a 
Non-Displayed instruction; and (6) clarify how orders subject to 
Display-Price Sliding will operate when they are unexecutable at the 
locking price.
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    This order provides notice of filing of Amendment No. 1 and 
approves the proposal, as modified by Amendment No. 1, on an 
accelerated basis.

II. Description of the Amended Proposal

    Proposed Exchange Rule 11.21(c) would specify the order handling 
for the following order types in Pilot Securities: (i) Market Orders; 
(ii) orders with a Market Peg instruction; (iii) MidPoint Peg Orders; 
(iv) orders with a Discretionary Range instruction; (v) Market Maker 
Peg Orders; (vi) Supplemental Peg Orders; and (vii) orders subject to 
the Display-Price Sliding process. As proposed, such order handling 
would apply to all orders entered into the System for Pilot Securities 
(i.e., Test Group One, Test Group Two, Test Group Three, and the 
Control Group). Additionally, the Exchange 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.
    The Exchange proposes in Exchange Rule 11.21(c) specific procedures 
for handling, executing, repricing and displaying certain order types 
and order type instructions. The provisions in proposed Rule 11.21(c) 
would apply to all Pilot Securities. Further, the Exchange proposes 
that only the provisions in Exchange Rules 11.21(a) and (b) would be 
limited to the Pilot Period.\8\
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    \8\ The Exchange proposes to clarify in the introduction to 
Exchange Rule 11.21 that only the provisions in 11.21(a) and 
11.21(b) would be in effect during the Pilot Period.
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1. Market Orders
    Proposed Exchange Rule 11.21(c)(1) provides that for purposes of 
determining whether the execution price of a Market Order is more than 
5 percent worse than the national best bid or offer (``NBBO'') \9\ 
under current Exchange Rule 11.8(a)(7), the execution price for a buy 
(sell) will be rounded down (up) to the nearest permissible 
increment.\10\
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    \9\ See Exchange Rule 1.5(o).
    \10\ See Amendment No. 1.
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2. Market Peg Instruction
    Under Exchange Rule 11.9(c)(8)(B), an order with a Market Peg 
instruction is pegged to the contra-side NBBO. EDGA Users can specify 
that such an order will offset the inside quote on the contra side of 
the market by an amount (``Offset Amount''). Under proposed Exchange 
Rule 11.21(c)(2), the Exchange proposes not to accept orders with a 
Market Peg instruction, regardless of price, in any Pilot Security.\11\
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    \11\ Id.
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3. MidPoint Peg Orders
    Under Exchange Rule 11.9(c)(9), the System automatically adjusts 
the price of a MidPoint Peg Order in response to changes in the NBBO to 
be pegged to the mid-point of the NBBO, or, alternatively, pegged to 
the less aggressive midpoint of the NBBO, or one minimum price 
variation inside the same side of the NBBO as the MidPoint Peg Order.
    Under proposed Exchange Rule 11.21(c)(3), the Exchange proposes 
that MidPoint Peg Orders for Pilot Securities would not be permitted to 
alternatively peg to one minimum price variation inside the same side 
of the NBBO as the order.\12\
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    \12\ Id.
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4. Discretionary Range Instruction
    Under Exchange Rule 11.6(d), an order with a Discretionary Range 
instructionis a limit order with a displayed or non-displayed ranked 
price and size and an additional non-displayed ``discretionary price.'' 
The Exchange proposes to not accept orders with a Discretionary Range 
instruction, regardless of price, in any Pilot Security.\13\
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    \13\ Id.
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5. Market Maker Peg Orders
    Under Exchange Rule 11.8(f), 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 national best bid (``NBB'') or national best offer 
(``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). The Exchange proposes that Market 
Marker Peg Orders to buy (sell) be rounded up (down) to the nearest 
permissible increment when the pricing results in an impermissible 
increment.
6. Supplemental Peg Orders
    Under Exchange Rule 11.8(g), a Supplemental Peg Order is a non-
displayed limit order that posts to the Exchange Book and thereafter is 
eligible for execution at the NBB for buy orders and NBO for sell 
orders against routable

[[Page 62220]]

orders that are equal to or less than the aggregate size of the 
Supplemental Peg Order interest available at that price. The Exchange 
proposes not to accept Supplemental Peg Orders, regardless of price, 
for any Pilot Security.\14\
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    \14\ Id.
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7. Display-Price Sliding
    Under Exchange Rule 11.6(l)(1)(B), 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, would be ranked at the locking price 
in the Exchange Book and displayed by the System at one minimum price 
variation below the current NBO (for bids) or one minimum price 
variation above the current NBB (for offers). The ranked and displayed 
prices of an order subject to Display-Price Sliding may be adjusted 
once or multiple times depending on the instructions of a User and 
changes to the prevailing NBBO.
    The Exchange proposes that orders subject to the Display-Price 
Sliding that are unexecutable at the locking price will be ranked at 
the midpoint of the NBBO, and displayed one minimum price variation 
below (above) the current NBO (NBB) for bids (for offers) for all Pilot 
Securities. In the Control Group, Test Group One, and Test Group Two, 
these orders would be initially ranked at the locking price and 
displayed one minimum price variation away. If a subsequent incoming 
Post-Only Order arrives on the Exchange book on the opposite side, then 
the orders subject to Display-Price Sliding would be adjusted to rank 
at the midpoint of the NBBO and continue to be displayed at one minimum 
price variation away. In Test Group Three, orders subject to Display-
Price Sliding would be ranked at the midpoint of the NBBO and displayed 
at one minimum price variation away. In addition, the Exchange proposes 
to cancel orders subject to Display-Price Sliding when the NBBO widens 
and a contra-side Non-Displayed Order is resting on the Exchange Book 
at a price that such order would adjust, and the User has selected a 
single price adjustment. Like today, if the User has selected multiple 
price adjustments an order subject to Display-Price Sliding would not 
cancel in this scenario.

III. Discussion and Commission's Findings

    After careful review of the proposed rule change, as modified by 
Amendment No. 1, the Commission finds that the proposal, as modified by 
Amendment No. 1,\15\ is consistent with the requirements of the 
Exchange Act and the rules and regulations thereunder that are 
applicable to a national securities exchange.\16\ Specifically, the 
Commission finds that the rule change is consistent with Section 
6(b)(5) of the Exchange Act, which requires that the rules of a 
national securities exchange be designed, among other things, to 
prevent fraudulent and manipulative acts and practices, to promote just 
and equitable principles of trade, to remove impediments to and perfect 
the mechanism of a free and open market and a national market system, 
and to protect investors and the public interest; and are not designed 
to permit unfair discrimination between customers, issuers, brokers, or 
dealers.
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    \15\ The Commission notes that the Exchange Letter was submitted 
in connection with the Exchange's original proposal. Because the 
Exchange has filed Amendment No. 1, which supersedes and replaces 
the Exchange's original proposal in its entirety, the Commission 
does not believe it is necessary to summarize or respond to the 
Exchange Letter.
    \16\ In approving this rule change, the Commission has 
considered the rule's impact on efficiency, competition, and capital 
formation. See 15 U.S.C. 78c(f).
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    As noted in the Approval Order, the Plan is by design, an 
objective, data-driven test to evaluate how a wider tick size would 
impact trading, liquidity, and market quality of securities of smaller 
capitalization companies. In addition, the Plan is designed with three 
Test Groups and a Control Group, to allow analysis and comparison of 
incremental market structure changes on the Pilot Securities and is 
designed to produce empirical data that could inform future policy 
decisions.
    The Exchange proposes certain changes to modify the operation of 
the System for compliance with the Plan. For example, the Exchange 
proposes to clarify how Market Orders and Market Maker Peg Orders would 
be rounded to permissible increments under the Plan. The Commission 
finds that these changes are consistent with the Section 6(b)(5) of the 
Exchange Act \17\ and Rule 608 of Regulation NMS \18\ because they 
implement the Plan and clarify Exchange rules.
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    \17\ 15 U.S.C. 78f(b)(5).
    \18\ 17 CFR 242.608.
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    In addition, the Exchange proposes to eliminate certain order types 
and modify certain order handling functions for Pilot Securities. 
Specifically, the Exchange proposes to no longer accept three order 
types: Orders with a Market Peg instruction, orders with a 
Discretionary Range instruction, and Supplemental Peg Orders. The 
Exchange noted that these orders are infrequently used in Pilot 
Securities. The Exchange stated that eliminating these order types for 
Pilot Securities could reduce System complexity and maintain consistent 
functionality among all Pilot Securities. Finally, the Exchange noted 
that these order types would have limited ability to execute under Test 
Group Three.
    The Exchange also proposes to change the handling of orders subject 
to Display-Price Sliding in Pilot Securities. Orders that are subject 
to Display Price-Sliding in Pilot Securities that are unexecutable at 
the locking price will be ranked at the midpoint of the NBBO and 
displayed one minimum variation away.
    Finally, the Exchange proposes to modify the handling of MidPoint 
Peg Orders in Pilot Securities. As proposed, MidPoint Peg Orders would 
not be able to alternatively peg to one minimum price variation inside 
the same side of the NBBO as the order. The Exchange noted that there 
is a de minimis usage of the alternative pegging function in Pilot 
Securities that does not justify the complexity and risk to the System 
that would be created by re-programming the System to support the 
function.
    In the Notice, the Commission noted 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. 
The Commission notes that the Exchange has modified its proposal so 
that those proposed changes that are not necessary for compliance with 
the Plan apply equally to all three Test Groups and the Control Group, 
and their duration is not limited to the Pilot Period. Thus, the 
Commission believes that the incremental design of the Pilot is 
maintained such that the data generated by the Test Groups and the 
Control Group could allow the Commission and interested parties to 
compare the change in market structure of each group vis-[agrave]-vis 
the other groups. Further, the Commission does not believe that the 
changes would bias the results of the Pilot or undermine the value of 
the data generated in informing future policy decisions.
    Accordingly, the Commission finds that the proposed rule change, as 
modified by Amendment No.1, is consistent with the requirements of the 
Exchange Act.

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IV. Solicitation of Comments on Amendment No. 1 to the Proposed Rule 
Change

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposal, as 
modified by Amendment No. 1, is consistent with the Exchange 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 Number SR-BatsEDGA-2016-15 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 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 20549-1090, on official business days between the hours 
of 10:00 a.m. and 3:00 p.m. Copies of such filing will also be 
available for inspection and copying at the principal office of the 
Exchange. All comments received will be posted without change; the 
Commission does not edit personal identifying information from 
submissions. You should submit only information that you wish to make 
available publicly. All submissions should refer to File Number SR-
BatsEDGA-2016-15 and should be submitted on or before September 29, 
2016.

V. Accelerated Approval of Proposed Rule Change, as Modified by 
Amendment No. 1

    The Commission finds good cause to approve the proposed rule 
change, as modified by Amendment No. 1, prior to the thirtieth day 
after the date of publication of notice of Amendment No. 1 in the 
Federal Register. In Amendment No. 1, the Exchange proposes to: (1) 
Apply the changes in proposed Rule 11.21(c) to all Pilot Securities; 
(2) clarify in Rule 11.21(c)(1) that the increment for Market Orders 
and Rule 11.21(c)(5) that the increment for Market Maker Peg Orders 
will be at ``permissible'' increments; (3) state in Rule 11.21(c)(2) 
that orders with a Market Peg instruction, Rule 11.21(c)(4) that orders 
with a Discretionary Range, and Rule 11.21(c)(6) that Supplemental Peg 
Orders will not be accepted in Pilot Securities; (4) clarify in Rule 
11.21(c)(3) that MidPoint Peg Orders may not be alternatively pegged to 
one minimum price variation inside the same side of the NBBO as the 
order; (5) delete the proposal to amend orders with a Non-Displayed 
instruction; and (6) clarify how orders subject to Display-Price 
Sliding will operate when they are unexecutable at the locking price.
    The Commission believes that Amendment No. 1 modifies the proposal 
so that it does not cause a disparate impact on different Test Groups 
and the Control Group. In addition, the Commission notes that the Pilot 
is scheduled to start on October 3, 2016, and accelerated approval 
would ensure that the rules of the Exchange would be in place for the 
start of the Pilot. Accordingly, the Commission finds good cause, 
pursuant to Section 19(b)(2) of the Exchange Act,\19\ to approve the 
proposed rule change, as modified by Amendment No. 1, on an accelerated 
basis.
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    \19\ 15 U.S.C. 78s(b)(2).
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VI. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Exchange Act,\20\ that the proposed rule change (SR-BatsEDGA-2016-15), 
as modified by Amendment No. 1, be and hereby is approved on an 
accelerated basis.
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    \20\ Id.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\21\
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    \21\ 17 CFR 200.30-3(a)(12)
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Brent J. Fields,
Secretary.
[FR Doc. 2016-21647 Filed 9-7-16; 8:45 am]
BILLING CODE 8011-01-P