[Federal Register Volume 81, Number 193 (Wednesday, October 5, 2016)]
[Notices]
[Pages 69172-69181]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-24010]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-78988; File No. SR-BatsEDGX-2016-41]


Self-Regulatory Organizations; Bats EDGX Exchange, Inc.; Notice 
of Filing of a Proposed Rule Change Related to the Exchange's Equity 
Options Platform To Adopt a Price Improvement Auction, the Bats Auction 
Mechanism

September 29, 2016.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\, and Rule 19b-4 thereunder,\2\ notice is hereby given 
that on September 16, 2016, Bats EDGX Exchange, Inc. (the ``Exchange'' 
or ``EDGX'') 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 for the Exchange's equity options 
platform (``EDGX Options'') to adopt a price improvement auction, the 
Bats Auction Mechanism, as further discussed 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 
Statutory Basis for, the Proposed Rule Change

1. Purpose
Overview
    The purpose of the proposed rule change is to establish a price 
improvement auction, the Bats Auction Mechanism (``BAM'', ``BAM 
Auction'', or ``Auction'') on the Exchange. BAM includes functionality 
in which a Member (an ``Initiating Member'') may electronically submit 
for execution an order it represents as agent on behalf of a Priority 
Customer,\3\ broker dealer, or any other person or entity (``Agency 
Order'') against principal interest or against any other order it 
represents as agent (an ``Initiating Order'') provided it submits the 
Agency Order for electronic execution into the BAM Auction pursuant to 
the proposed Rule. For purposes of this filing and the proposed Rule, 
the term ``NBBO'' shall mean the national best bid or national best 
offer at the particular point in time applicable to the reference and 
the term ``Initial NBBO'' shall mean the national best bid or national 
best offer at the time an Auction is initiated.
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    \3\ The term ``Priority Customer'' means any person or entity 
that is not: (A) a broker or dealer in securities; or (B) a 
Professional. The term ``Priority Customer Order'' means an order 
for the account of a Priority Customer. See Rule 16.1(a)(45). A 
``Professional'' is any person or entity that: (A) is not a broker 
or dealer in securities; and (B) places more than 390 orders in 
listed options per day on average during a calendar month for its 
own beneficial account(s). All Professional orders shall be 
appropriately marked by Options Members. See Rule 16.1(a)(46).
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    The Exchange believes that the BAM Auction, as proposed herein, 
will encourage participants on EDGX Options to quote or display orders 
at the NBBO with additional size and thereby result in tighter and 
deeper markets, resulting in more liquidity on EDGX Options. 
Specifically, by offering all EDGX Options participants (``Users'') the 
ability to receive priority in the proposed allocation during the BAM 
Auction up to the size of their quote, an EDGX User will be encouraged 
to maintain quotes or orders with additional size outside of the BAM 
Auction at the best and most aggressive prices. The Exchange believes 
that this incentive may result in a narrowing of quotes and thus 
further enhance EDGX's market quality. Within the BAM Auction, EDGX 
believes that the rules that are proposed will encourage EDGX Users to 
compete vigorously to provide the opportunity for price improvement in 
a competitive auction process.

[[Page 69173]]

Auction Eligibility Requirements
    All options traded on the Exchange are eligible for BAM. Proposed 
Rule 21.19(a) describes the circumstances under which an Initiating 
Member may initiate an Auction. The Initiating Member may initiate an 
Auction provided the conditions which follow are met: the Initiating 
Member must stop the entire Agency Order as principal or with a 
solicited order at a price in an increment of $0.01 that is: (A) If the 
Agency Order is for less than 50 option contracts and the difference 
between the NBB and NBO is $0.01, the Initiating Member must stop the 
entire Agency Order at one minimum price improvement increment, which 
increment shall be determined by the Exchange but may not be smaller 
than $0.01; or (B) for any other Agency Order, the Initiating Member 
must stop the entire Agency Order at the better of the NBBO or the 
Agency Order's limit price (if the order is a limit order). Agency 
Orders that do not meet these conditions will be rejected. Also, Agency 
Orders submitted at or before the opening of trading or when the NBBO 
is crossed are not eligible to initiate an Auction and will be 
rejected.
Auction Process
Initiating and Pricing of Auctions
    With respect to Agency Orders for less than 50 contracts, only one 
such Auction may be ongoing at any given time in a series and Auctions 
in the same series may not queue or overlap in any manner. Auctions for 
Agency Orders of 50 contracts or more will be allowed to occur at the 
same time as other Auctions in the same series. Because multiple 
Auctions of Agency Orders of 50 contracts or more will be allowed to 
occur at the same time as other Auctions, there will be no queuing of 
Auctions for Agency orders of 50 contracts or more.
    To initiate the Auction, the Initiating Member must mark the Agency 
Order for Auction processing, and specify either: (i) A single price at 
which it seeks to execute the Agency Order (a ``single-price 
submission''); or (ii) that it is willing to automatically match as 
principal or as agent on behalf of an Initiating Order the price and 
size of all BAM Auction notification responses (``BAM responses'') and 
other trading interest (``auto-match'') as follows: (a) stopping the 
entire order at a single stop price and auto-matching BAM responses and 
other trading interest at all prices that improve the stop price to a 
specified price; or (b) stopping the entire order at a single stop 
price and auto-matching all BAM responses and other trading interest at 
all prices that improve the stop price. For both single-price 
submissions and auto-match, if the EDGX BBO on the same side of the 
market as the Agency Order represents a Priority Customer on the book, 
the stop price must be at least $0.01 better than the booked order's 
limit price. Once the Initiating Member has submitted an Agency Order 
for processing as described herein, such Agency Order may not be 
modified or cancelled. Under no circumstances will the Initiating 
Member receive an allocation percentage, at the final price point, of 
more than 50% of the initial Agency Order in the event there is one 
competing quote, order or BAM response or 40% of the initial Agency 
Order in the event there are multiple competing quotes, orders or BAM 
responses.\4\
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    \4\ See proposed Rule 21.19(b)(1)(A).
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Last Priority
    When starting an Auction, the Initiating Member may submit the 
Initiating Order with a designation of ``last priority'' to other BAM 
participants (``Last Priority''), which will result in the Initiating 
Member forfeiting priority and trade allocation privileges to which it 
is otherwise entitled pursuant to the proposed Rule.\5\ If Last 
Priority is specified, the Initiating Order will only trade if there is 
not enough interest available to fully execute the Agency Order at 
prices which are equal to or improve upon the stop price. Last Priority 
will not be applied if both the Initiating Order and Agency Order are 
Priority Customer Orders. Last Priority cannot be designated on an 
Agency Order specified as auto-match, and thus, is only compatible with 
single-price submissions. Finally, Last Priority information will not 
be available to other market participants and may not be modified.
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    \5\ The Chicago Board Options Exchange, Incorporated's 
(``CBOE'') has a process whereby initiating participants may elect 
to receive last priority in an allocation. See CBOE Rule 
6.74A(b)(3)(J) (Automated Improvement Mechanism (``AIM'')). See also 
Miami International Securities Exchange, LLC (``MIAX'') Rule 
5.15(A)(a)(2)(iii)(J); NASDAQ OMX BX, Inc. (``BX Options'') Chapter 
VI, Section 9(ii)(A)(1).
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Auction Notification Messages
    When the Exchange receives an Agency Order for Auction processing, 
an auction notification message detailing the side, size, price, and 
options series of the Agency Order will be sent over the Exchange's 
Multicast PITCH Feed and Auction Feed.\6\ Agency Orders will not be 
included in the Exchange's disseminated best bid or offer and will not 
be disseminated to OPRA.
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    \6\ Both data feeds are currently provided free of charge.
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Auction Period
    The Auction will last for a period of time, as determined by the 
Exchange and announced on the Exchange's Web site. The Auction period 
will be no less than one hundred milliseconds and no more than one 
second.\7\
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    \7\ CBOE's AIM auction is a duration of one second. See CBOE 
Rule 6.74A(b)(1)(C).
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    According to filings made by NASDAQ OMX PHLX LLC (``PHLX'') and BX 
Options,\8\ PHLX staff previously distributed a survey to all PHLX 
market maker firms inquiring as to the timeframe within which these 
market participants respond to an auction with a duration time ranging 
from less than fifty (50) milliseconds to more than one (1) second. 
According to the Filings, an overwhelming number of the market maker 
firms that responded to the survey indicated that they were capable of 
responding to auctions with a duration time of at least 50 
milliseconds.\9\ Based on the results of the survey previously 
conducted by PHLX, the commonality of participants on the Exchange and 
other options exchanges, including PHLX, and the Exchange's direct 
knowledge of its own technology and customer base, the Exchange 
believes that allowing for an auction period of no less than one 
hundred (100) milliseconds and no more than one (1) second would 
provide a meaningful opportunity for Members to respond to the BAM 
Auction while at the same time facilitating the prompt execution of 
orders.\10\ The Exchange believes that Members will have sufficient 
time to ensure competition for Agency Orders, and could provide

[[Page 69174]]

orders within the Auction additional opportunities for price 
improvement.
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    \8\ See, e.g., Securities Exchange Act Release No. 77557 (April 
7, 2016), 81 FR 21935 (April 13, 2016) (SR-Phlx-2016-40) (the ``PHLX 
PIXL Amendment''); Securities Exchange Act Release No. 76301 
(October 29, 2015), 80 FR 68347 (November 4, 2015) (SR-BX-2015-032) 
(the ``BX Options Prism Approval,'' and together with the PHLX PIXL 
Amendment, the ``Filings'').
    \9\ Of the thirty five (35) PHLX market maker firms that were 
surveyed, twenty (20) of these market makers responded to the survey 
and of those respondents 100% indicated that that their firm could 
respond to auctions with a duration time of at least 50 
milliseconds. This survey was conducted in May 2014. See id.
    \10\ As of the date of this proposal, all Market Makers on EDGX 
Options are also members of the PHLX, and thus, rather than conduct 
an additional survey of the same market participants when such a 
survey was recently conducted, the Exchange is proposing to adopt 
the same Auction time parameters as have been approved based on that 
study. See BX Options PRISM Approval, supra note 8.
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    The Exchange believes the proposed rule change could provide orders 
within BAM an opportunity for price improvement. Also, the shorter 
duration of time for the auction reduces the market risk for all 
Members executing trades in BAM. Initiating Members are required to 
guarantee an execution at the NBBO or at a better price, and are 
subject to market risk while their Agency Order is exposed to other 
Options Members. While other Members are also subject to market risk, 
those providing responses in BAM may cancel or modify their orders 
while the Initiating Member cannot. The Exchange believes that the 
Initiating Member acts in a critical role within the BAM Auction. Their 
willingness to guarantee the orders entered into BAM an execution at 
the NBBO or a better price is the keystone to an order gaining the 
opportunity for price improvement. The Exchange believes that allowing 
for an auction period of no less than one hundred milliseconds and no 
more than one second will benefit Members trading in BAM. EDGX believes 
it is in these Members' best interests to minimize the auction time 
while continuing to allow Members adequate time to electronically 
respond. Both the order being exposed and the responding orders are 
subject to market risk during the auction.
    While some Members may wait to respond until later in the auction, 
presumably to minimize their market risk, the Exchange believes that a 
majority of BAM participants will respond early in an Auction. BAM 
Auctions are intended to provide all market participants with 
sufficient time to respond, compete, and provide price improvement for 
orders while also providing investors and other market participants 
with timely executions, thereby reducing their market risk. The 
proposed rule to cap the Auction time at one second will allow 
participants to respond quickly at the most favorable price while 
reducing the risk that the market will move against the response.
    EDGX believes that its Members operate electronic systems that 
enable them to react and respond to orders in a meaningful way in 
fractions of a second. EDGX believes that its Members will be able to 
compete within 100 milliseconds and this is a sufficient amount of time 
to respond to, compete for, and provide price improvement for orders, 
and will provide investors and other market participants with more 
timely executions, and reduce their market risk.
Auction Responses
    As proposed, any person or entity other than the Initiating Member 
may submit responses to an Auction, provided such responses are 
properly marked specifying price, size, side of the market and 
information identifying the Auction to which the response is targeted. 
BAM responses will not be visible to Auction participants, and will not 
be disseminated to OPRA. A BAM response with a size greater than the 
size of the Agency Order will be capped at the size of the Agency Order 
(i.e., the excess size will be ignored when processing the Auction).
    Multiple BAM responses from the same User may be submitted during 
the Auction. Multiple orders at a particular price point submitted by a 
User in response to an Auction or resting on the EDGX Options Book will 
be aggregated together and will be capped at the size of the Agency 
Order (i.e., the excess size will be ignored when processing the 
Auction).
    BAM responses may be modified or cancelled during the Auction. BAM 
responses on the same side of the market as the Agency Order are 
considered invalid and will be immediately cancelled. BAM responses 
cannot cross the price of the Initial NBBO but will be executed, if 
possible, at the most aggressive permissible price within such Initial 
NBBO.
    Finally, with respect to the impact of this proposal on System \11\ 
capacity, EDGX has analyzed its capacity and represents that it has the 
necessary systems capacity to handle the potential additional traffic 
associated with BAM Auctions. Because neither BAM notification messages 
nor responses will be published to OPRA, the Exchange does not expect 
any additional capacity necessary with respect to OPRA and the 
operation of BAM on the Exchange. Additionally, in terms of overall 
capacity, the Exchange represents that its Systems will be able to 
sufficiently maintain an audit trail for order and trade information 
with the BAM Auction.
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    \11\ The term ``System'' is defined in Rule 16.1(a)(59).
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Conclusion of an Auction
    The BAM Auction would conclude at the earliest of: the end of the 
Auction period, upon receipt by the Exchange of a Priority Customer 
order on the same side of the market and at the stop price of the 
Agency Order that is to be posted to the EDGX Options Book, upon 
receipt by the Exchange of an unrelated order on the same side of the 
market as the Agency Order that would cause the Agency Order's stop 
price to be outside of the EDGX BBO, at the close of trading, or any 
time there is a trading halt on the Exchange in the affected 
series.\12\
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    \12\ See proposed Rule 21.19(b)(2).
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    If the Auction concludes for any of the reasons set forth above 
other than a trading halt, then the Auction will be processed pursuant 
to the order allocation process set forth in proposed Rule 21.19(d), 
which is described in further detail below. In the event of a trading 
halt on the Exchange in the affected series, the Auction will be 
cancelled without execution.
    An unrelated market or marketable limit order (against the EDGX 
BBO) on the opposite side of the market from the Agency Order received 
during the Auction will not cause the Auction to end early and will 
execute against interest outside of the Auction.\13\ If contracts 
remain from such unrelated order at the time the Auction ends, they 
will be considered for participation in the order allocation process 
described below. The Exchange notes that it also proposes to make clear 
that all unrelated orders submitted to the Exchange with contracts 
remaining at the time the Auction ends, including orders marked as Post 
Only Orders pursuant to Rule 21.1(d)(8), will be considered for 
participation as described below.\14\
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    \13\ See proposed Rule 21.19(b)(3).
    \14\ Id.
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Order Allocation
Allocations
    At the conclusion of the Auction, the Agency Order will be 
allocated at the best price(s) as follows. First, Priority Customer 
Orders would have time priority at each price level. Next, the 
Initiating Member would be allocated after Priority Customer Orders.
    If the Initiating Member selected the single-price submission 
option of the Auction, BAM executions will occur at prices that improve 
the stop price, and then at the stop price with up to 40% of the 
initial Agency Order allocated to the Initiating Member.\15\ However, 
if only one other quote, order or BAM response matches the stop price, 
then the Initiating Member may be allocated up to 50% of the initial 
Agency Order when executed at such price. Remaining contracts would be 
allocated, pursuant to proposed sub-paragraphs (iii) and (iv) to Rule 
21.19(b)(4)(B), among remaining quotes, orders and BAM responses at the 
stop price. Thereafter, remaining

[[Page 69175]]

contracts, if any, would be allocated to the Initiating Member. The 
allocation will account for Last Priority, if applicable.
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    \15\ The Exchange notes that the International Securities 
Exchange (``ISE'') bases the percentage-based allocations to an 
initiating member on the initial or original size of an agency order 
before other interest is executed. See ISE Rule 723(d)(3).
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    If the Initiating Member selected the auto-match option of the 
Auction the Initiating Member would be allocated an equal number of 
contracts as the aggregate size of all other quotes, orders and BAM 
responses at each price point until a price point is reached where the 
balance of the order can be fully executed, except that the Initiating 
Member would be entitled to receive up to 40% (multiple competing 
quotes, orders or BAM responses) or 50% (one competing quote, order or 
BAM response) of the initial Agency Order at the final price point 
(including situations where the stop price is the final price) after 
Priority Customer interest has been satisfied but before remaining 
interest. If there are other quotes, orders and BAM responses at the 
final price point the contracts will be allocated to such interest 
pursuant to proposed sub-paragraphs (iii) and (iv) to Rule 
21.19(b)(4)(B). Any remaining contracts would be allocated to the 
Initiating Member.
    Next, for classes designated by the Exchange as eligible for 
``Priority Quote'' status, Users with resting quotes and orders that 
were at a price that is equal to the Initial NBBO on the opposite side 
of the market from the Agency Order (``Priority Quotes'') would have 
priority up to their size in the Initial NBBO at each price level at or 
better than such Initial NBBO after Priority Customer and the 
Initiating Member have received allocations.\16\ Priority Quotes and 
BAM responses will be allocated pursuant to the algorithm set forth in 
Rule 21.8(c).\17\ Priority Quote status is only valid for the duration 
of the particular Auction.
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    \16\ MIAX allocates executions resulting from Public Customer 
interest and priority Market Maker quotes ahead of other interest. 
MIAX's system may designate Market Maker quotes as either priority 
quotes or non-priority quotes in accordance with the provisions in 
MIAX Rule 517(b). Although not limited to EDGX Market Makers, the 
Exchange is prioritizing Priority Quote allocations in the proposed 
EDGX BAM Auction in a similar manner, ahead of other non-Priority 
Customer interest. See also, BX Options Chapter VI, Section 
9(ii)(E)(3).
    \17\ See proposed Rule 21.19(b)(4)(B)(iii).
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    Finally, after Priority Customers, the Initiating Member and Users 
with Priority Quotes, if applicable, have received allocations, all 
other interest will be allocated pursuant to Rule 21.8(c).\18\
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    \18\ See proposed Rule 21.19(b)(4)(B)(iv).
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Additional Details
    Any unexecuted BAM responses will be cancelled.\19\ With respect to 
``Intermarket Sweep Orders'' or ``ISO'' Orders,\20\ if an Auction is 
initiated for an Agency Order designated as an ISO Order, executions 
will be permitted at a price inferior to the Initial NBBO.\21\ 
Specifically, a BAM ISO is the transmission of two orders for crossing 
without regard for better priced Protected Bids or Protected Offers 
because the Member transmitting the BAM ISO to the Exchange has, 
simultaneous with the routing of the BAM ISO, routed one or more ISOs, 
as necessary, to execute against the full size of any Protected Bid or 
Protected Offer that is superior to the Auction price, including all 
interest in the Exchange's book priced better than the proposed Auction 
price. The Exchange will accept a BAM ISO provided the order adheres to 
the Agency Order acceptance requirements, but without regard to the 
NBBO. The Exchange will execute the BAM ISO in the same manner as other 
Agency Orders, except that it will not protect prices away. Instead, 
order flow providers will bear the responsibility to clear all better 
priced interest away simultaneously with submitting the BAM ISO Order. 
There is no other impact to BAM functionality. Specifically, liquidity 
present at the end of the BAM Auction will continue to be included in 
the BAM Auction as it is with Agency Orders not marked as ISOs. This 
order type is offered by other options exchanges.\22\
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    \19\ See proposed Rule 21.19(b)(7).
    \20\ ``Intermarket Sweep Orders'' or ``ISO'' are limit orders 
that are designated as ISOs in the manner prescribed by EDGX and are 
executed within the System at one or multiple price levels without 
regard to Protected Quotations of other Eligible Exchanges as 
defined in Rule 27.1. ISOs are not eligible for routing pursuant to 
Rule 21.9.
    \21\ See proposed Rule 21.19(b)(7).
    \22\ See PHLX Rules at 1080(n), which indicates that PIXL ISO 
Orders are permissible. See also CBOE Rule 6.53(q); BX Options 
Chapter VI, Section 9(ii)(K).
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    The Exchange proposes to limit the use of Match Trade Prevention 
(``MTP'') functionality, set forth in Rule 21.1(g), in the context of 
BAM responses to the MTP Cancel Newest option. A BAM response with any 
other MTP modifier will be rejected.
Crossing and Agency Orders
    In lieu of the procedures in proposed paragraphs (a)-(b) to Rule 
21.19, an Initiating Member may enter an Agency Order for the account 
of a Priority Customer paired with an order for the account of a 
Priority Customer and such paired orders will be automatically executed 
without an Auction (``Customer-to-Customer Immediate Cross''), subject 
to the following proposed conditions. A Customer-to-Customer Immediate 
Cross must be priced at or between the EDGX BBO. Further, a Customer-
to-Customer Immediate Cross will not be initiated but will instead be 
cancelled if there is a resting Priority Customer order on the same 
side of the market and at the same price as the Agency Order. Finally, 
a Customer-to-Customer Immediate Cross will not be initiated if there 
is a resting Priority Customer order on the opposite side of the market 
from, and at the same price as, the Agency Order. Instead, the Agency 
Order will be subject to the Auction process set forth above, and the 
resting Priority Customer order will participate in such process.\23\
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    \23\ See proposed Rule 21.19(c).
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Regulatory Provisions
    Bona Fide Transactions; Disrupting or Manipulating Auctions
    Under the proposed Rule, the Auction may be used only where there 
is a genuine intention to execute a bona fide transaction.\24\ Also, 
under the proposed Rule, a pattern or practice of submitting orders or 
quotes for the purpose of disrupting or manipulating BAM Auctions would 
be deemed conduct inconsistent with just and equitable principles of 
trade and a violation of Rule 3.1. It would also be deemed conduct 
inconsistent with just and equitable principles of trade and a 
violation of Rule 3.1 to engage in a pattern of conduct where the 
Initiating Member breaks up an Agency Order into separate orders for 
the purpose of gaining a higher allocation percentage than the 
Initiating Member would have otherwise received in accordance with the 
allocation procedures contained in sub-paragraph (b)(4) of the proposed 
Rule.\25\
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    \24\ See proposed Interpretation and Policy .01 of Rule 21.19.
    \25\ See proposed Interpretation and Policy .02 of Rule 21.19.
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Order Exposure
    EDGX Rule 22.12 prevents an Options Member from executing agency 
orders to increase its economic gain from trading against the order 
without first giving other trading interests on the Exchange an 
opportunity to either trade with the agency order or to trade at the 
execution price when the Options Member was already bidding or offering 
on the book. However, the Exchange recognizes that it may be possible 
for an Options Member to establish a relationship with a Priority 
Customer or other person to deny agency orders the opportunity to 
interact on the Exchange

[[Page 69176]]

and to realize similar economic benefits as it would achieve by 
executing agency orders as principal. Under the proposed Rule, it would 
be a violation of Rule 22.12 for an Options Member to circumvent such 
rule by providing an opportunity for (i) a Priority Customer affiliated 
with the Options Member, or (ii) a Priority Customer with whom the 
Options Member has an arrangement that allows the Options Member to 
realize similar economic benefits from the transaction as the Options 
Member would achieve by executing agency orders as principal, to 
regularly execute against agency orders handled by the firm immediately 
upon their entry as BAM Priority Customer-to-Priority Customer 
immediate crosses pursuant to paragraph (c) of the proposed Rule.\26\ 
In addition to the proposed Interpretation and Policy described above, 
the Exchange proposes to amend Rule 22.12 to add reference to BAM as an 
exception to the general restriction on the execution of orders as 
principal against orders they represent as agent.
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    \26\ See proposed Interpretation and Policy .03 to Rule 21.19.
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Pilot Program Information to the Commission
    Subject to a Pilot expiring January 18, 2017, there will be no 
minimum size requirement for orders to be eligible for the Auction. 
During this Pilot Period, the Exchange will submit certain data, 
periodically as required by the Commission, to provide supporting 
evidence that, among other things, there is meaningful competition for 
all size orders and that there is an active and liquid market 
functioning on the Exchange outside of the Auction mechanism. Any raw 
data which is submitted to the Commission will be provided on a 
confidential basis.\27\
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    \27\ See proposed Interpretation and Policy .04 to Rule 21.19.
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    The Exchange will provide the following additional information on a 
monthly basis:
    (1) The number of contracts (of orders of 50 contracts or greater) 
entered into BAM Auctions;
    (2) the number of contracts (of orders of fewer than 50 contracts) 
entered into BAM Auctions;
    (3) the number of orders of 50 contracts or greater entered into 
BAM Auctions; and
    (4) the number of orders of fewer than 50 contracts entered into 
BAM Auctions.
Implementation
    If the Commission approves this proposed rule change, the Exchange 
anticipates that it will deploy BAM within 45 days of approval. Members 
will be notified of the deployment date through a Trade Desk Notice.
Examples of Agency Order Executions

Example No. 1

    Summary: Initiating Member & Priority Quote interest fully 
satisfies Agency Order; all participants eligible for Priority Quote 
status.
    Assumptions:

 NBBO = .97-1.03
 EDGX BBO = .95-1.03(60) with Market Maker A and Member Firm 
1 (non-Market Maker) offering 30 contracts each
 Class is designated as eligible for Priority Quotes
 Agency Order to buy 100 contracts stopped at 1.02 is 
received

    BAM Process:
 Auction begins
 During Auction:
    [cir] Market Maker A responds to sell 30 contracts at 1.02 
(Priority Quote status);
    [cir] Market Maker B responds to sell 20 contracts at 1.02; and
    [cir] Member Firm 1 responds to sell 30 contracts at 1.02 
(Priority Quote status).
 Auction ends:
    [cir] Initiating Member is allocated 40 contracts at 1.02 (40% 
carve out);
    [cir] Market Maker A and Member Firm 1 each trade 30 contracts 
since they maintained Priority Quotes for 30 contracts; and
    [cir] Market Maker B's response is cancelled since there were no 
contracts open after Priority Quotes were filled at that price.

Example No. 2

    Summary: Initiating Member & Priority Quote interest fully 
satisfies Agency Order with Priority Quote interest exceeding 
remainder; Pro-Rata Amongst Priority Quote interest.
    Assumptions:

 NBBO = .97-1.03
 EDGX BBO = .95-1.03(60) with Market Maker A and Market 
Maker B offering 30 contracts each
 Class is designated as eligible for Priority Quotes
 Agency Order to buy 100 contracts stopped at 1.02 is 
received

    BAM Process:

 Auction begins
 During auction:
    [cir] Market Maker A responds to sell 30 contracts at 1.02;
    [cir] Market Maker B responds to sell 30 contracts at 1.02;
    [cir] Market Maker C responds to sell 10 at 1.01; and
    [cir] Market Maker D responds to sell 10 contracts at 1.02.
 Auction ends:
    [cir] Market Maker C trades 10 at 1.01 since it was the only 
interest offered at the best price;
    [cir] Initiating Member is allocated 40 contracts at 1.02 (40% 
carve out);
    [cir] Market Maker A and Market Maker B each trades 25 contracts 
(pro rata among Priority Quotes).
    [cir] Market Maker D's response is cancelled since there were no 
contracts open after Priority Quotes were filled at that price.

Example No. 3

    Summary: Market Makers improve upon the price and receive both 
Priority Quote status and non-Priority Quote status based on their 
size at initial NBBO; Initiating Member does not receive an 
allocation.
    Assumptions:

 NBBO = .97-1.03
 EDGX BBO = .95-1.03(60) with Market Maker A and Market 
Maker B offering 30 contracts each
 Class is designated as eligible for Priority Quotes
 Agency Order to buy 90 contracts stopped at 1.03 is 
received

    BAM Process:

 Auction begins
 During auction:
    [cir] Market Maker A responds to sell 50 contracts at 1.02 
(Priority Quote status for 30 contracts and non-Priority Quote 
status for 20 contracts);
    [cir] Market Maker B responds to sell 50 contracts at 1.02 
(Priority Quote status for 30 contracts and non-Priority Quote 
status for 20 contracts);
    [cir] Market Maker C responds to sell 10 at 1.01; and
    [cir] Market Maker D responds to sell 50 contracts at 1.02.
 Auction ends:
    [cir] Market Maker C trades 10 at 1.01 since it was the only 
interest offered at the best price;
    [cir] Market Maker A and Market Maker B each trade 30 contracts 
at 1.02 since they have priority up to their size at the NBBO when 
the Auction started;
    [cir] Market Maker A, Market Maker B, and Market Maker D then 
pro-rata split the balance of 20 contracts at 1.02 based on their 
remaining interest size with Market Maker A being allocated 4 
contracts (=20/90*20), Market Maker B being allocated 4 (=20/90*20) 
contracts, and Market Maker D being allocated 11 contracts (=50/
90*20);
    [cir] The residual 1 contract will be allocated in time priority 
to Market Maker A;
    [cir] Initiating Member does not participate as entirety of 
order was price improved.

Example No. 4

    Summary: Initiating Member utilizes Auto-Match feature with 
specified price and Market Makers with Priority Quotes participate; 
Initiating Member & Priority Quote interest fully satisfies Agency 
Order.
    Assumptions:

 NBBO = .97-1.03
 EDGX BBO = .95-1.03(60) with Market Maker A and Market 
Maker B offering 30 contracts each
 Class is designated as eligible for Priority Quotes
 Agency Order to buy 90 contracts stopped at 1.03 with Auto-
Match feature to 1.02 is received

    BAM Process:

 Auction begins
 During auction:

[[Page 69177]]

    [cir] Market Maker A responds to sell 50 contracts at 1.02 
(Priority Quote status for 30 contracts and non-Priority Quote 
status for 20 contracts);
    [cir] Market Maker B responds to sell 50 contracts at 1.02 
(Priority Quote status for 30 contracts and non-Priority Quote 
status for 20 contracts);
    [cir] Market Maker C responds to sell 10 at 1.01; and
    [cir] Market Maker D responds to sell 50 contracts at 1.02.
 Auction ends:
    [cir] Market Maker C trades 10 at 1.01 since it was the only 
interest offered at the best price; note that the Initiating Member 
specified a limit of 1.02 so such Initiating Member does not receive 
an Auto-Match execution at 1.01;
    [cir] Initiating Member is allocated 40% or 36 contracts at 1.02 
since it will be the final price point and Auto-Match is enabled;
    [cir] Market Maker A and Market Maker B each trades 22 contracts 
at 1.02 since they have Priority Quote status ahead of Market Maker 
D up to their size at the NBBO when the Auction started; and
    [cir] Market Maker D's response is cancelled.

Example No. 5

    Summary: Initiating Member utilizes Auto-Match feature with 
specified price and Market Makers with Priority Quote status and 
non-Priority Quote status participate; Agency Order exceeds size of 
Initiating Member execution and Priority Quotes.
    Assumptions:

 NBBO = .97-1.03
 EDGX BBO = .95-1.03(60) with Market Maker A and Market 
Maker B offering 30 contracts each
 Class is designated as eligible for Priority Quotes
 Agency Order to buy 150 contracts stopped at 1.03 with 
Auto-Match feature to 1.02 is received

    BAM Process:

 Auction begins
 During auction:
    [cir] Market Maker A responds to sell 50 contracts at 1.02 
(Priority Quote status for 30 contracts and non-Priority Quote 
status for 20 contracts);
    [cir] Market Maker B responds to sell 50 contracts at 1.02 
(Priority Quote status for 30 contracts and non-Priority Quote 
status for 20 contracts);
    [cir] Market Maker C responds to sell 10 at 1.01; and
    [cir] Market Maker D responds to sell 50 contracts at 1.02.
 Auction ends:
    [cir] Market Maker C trades 10 at 1.01 since it was the only 
interest offered at the best price; note that the Initiating Member 
specified a limit of 1.02 so such Initiating Member does not receive 
an Auto-Match execution at 1.01;
    [cir] Initiating Member is allocated 40% or 60 contracts at 1.02 
since it will be the final price point;
    [cir] Market Maker A and Market Maker B each trade 30 contracts 
at 1.02 since they have Priority Quote status up to their size at 
the NBBO when the Auction started;
    [cir] Market Maker A, Market Maker B, and Market Maker D then 
pro-rata split the balance with Market Maker A and Market Maker B 
each trading 4 additional contracts at 1.02 (20/90*20) and Market 
Maker D trading 11 contracts at 1.02 (50/90*20);
    [cir] The residual 1 contract will be allocated in time priority 
to Market Maker A.

Example No. 6

    Summary: Initiating Member utilizes Auto-Match feature without 
specified price and Market Makers with Priority Quote status and 
non-Priority Quote status participate; Agency Order exceeds size of 
Initiating Member execution and Priority Quotes.
    Assumptions:

 NBBO = .97-1.03
 EDGX BBO = .95-1.03(60) with Market Maker A and Market 
Maker B offering 30 contracts each
 Class is designated as eligible for Priority Quotes
 Agency Order to buy 150 contracts stopped at 1.03 with 
Auto-Match feature is received

    BAM Process:

 Auction begins
 During auction:
    [cir] Market Maker A responds to sell 50 contracts at 1.02 
(Priority Quote status for 30 contracts and non-Priority Quote 
status for 20 contracts);
    [cir] Market Maker B responds to sell 50 contracts at 1.02 
(Priority Quote status for 30 contracts and non-Priority Quote 
status for 20 contracts);
    [cir] Market Maker C responds to sell 10 at 1.01; and
    [cir] Market Maker D responds to sell 50 contracts at 1.02.
 Auction ends:
    [cir] Market Maker C trades 10 at 1.01;
    [cir] Initiating Member auto-matches and trades 10 at 1.01;
    [cir] Initiating Member is allocated 40% or 60 contracts at 1.02 
since it will be the final price point;
    [cir] Market Maker A and Market Maker B each trade 30 contracts 
at 1.02 since they have Priority Quote status up to their size at 
the NBBO when the Auction started;
    [cir] Market Maker A, Market Maker B, and Market Maker D then 
pro-rata split the balance with Market Maker A and Market Maker B 
each trading 2 contracts at 1.02 (20/90*10) and Market Maker D 
trading 6 contracts at 1.02 (50/90*10).

Example No. 7

    Summary: All executions occurring at initial NBBO price and 
Public Customer order received.
    Assumptions:

 NBBO = .97-1.03
 Class is designated as eligible for Priority Quotes
 EDGX BBO = .95-1.03(60) with Market Maker A and Market 
Maker B offering 30 contracts each
 Agency Order to buy 100 contracts stopped at 1.03 is 
received

    BAM Process:

 Auction begins
 During auction:
    [cir] Market Maker C responds to sell 20 at 1.03; and
    [cir] Priority Customer offers 2 contracts at 1.03.
 Auction ends:
    [cir] Priority Customer trades 2 contracts at 1.03;
    [cir] Initiating Member is allocated 40% or 40 contracts at 
1.03;
    [cir] Remaining allocation is pro-rata among Priority Quote 
interest with Market Maker A trading 29 contracts (30/60*58) and 
Market Maker B trading 29 contracts (30/60*58).
    [ssquf] Note that in this example the Priority Quote interest 
from Market Maker A and Market Maker B is from quotations published 
on the Exchange's order book and not from BAM responses received 
from such Market Makers.

Example No. 8

    Summary: Initiating Member specifying Auto-Match feature without 
specified price, Market Maker with Priority Quotes has multiple 
price levels of interest, and executions occur at initial NBBO 
price.
    Assumptions:

 NBBO = .97-1.03
 EDGX BBO = .95-1.03(60) with Market Maker A and Market 
Maker B offering 30 contracts each
 Agency Order to buy 300 contracts stopped at 1.03 with 
Auto-Match feature is received

    BAM Process:

 Auction begins
 During auction:
    [cir] Market Maker A responds to sell 10 contracts at 1.02 
(considered as Priority Quote);
    [cir] Market Maker B responds to sell 50 contracts at 1.02 (30 
of the 50 contracts are considered as Priority Quote);
    [cir] Market Maker C responds to sell 5 at 1.01; and
    [cir] Market Maker D responds to sell 40 contracts at 1.02.
 Next, during auction:
    [cir] Market Maker A responds with 30 additional contracts at 
1.03 (considered as Priority Quote).
 Next, during auction:
    [cir] Market Maker A moves his quote (maintain Priority Quote 
status) and EDGX BBO becomes .95-1.02 for 10 contracts; and
    [cir] An order from Member Firm 1 arrives offering 10 contracts 
at 1.02 such that the EDGX BBO becomes .95-1.02 for 20 contracts.
 Auction ends:
    [cir] Market Maker C trades 5 at 1.01;
    [cir] Initiating Member auto-matches and trades 5 at 1.01;
    [cir] Next, interest is then allocated at 1.02 as follows:
    [ssquf] Market Maker A response (Priority Quote status) trades 
10 contracts;
    [ssquf] Market Maker B response (Priority Quote status) trades 
30 contracts;
    [ssquf] Market Maker A quote trades 10 contracts at 1.02;
    [ssquf] Market Maker B response (non-Priority Quote status) 
trades 20 contracts;

[[Page 69178]]

    [ssquf] Market Maker D's response (non-Priority Quote status) 
trades 40 contracts at 1.02;
    [ssquf] Member Firm 1's quote (non-Priority Quote status) trades 
10 contracts at 1.02.
    [cir] Next, the Initiating Member order matches the full volume 
trading at 1.02 (because of Auto-Match feature) which is 120 
contracts.
    [cir] The remaining 50 contracts are traded by the Initiating 
Member at 1.03 since it will be the final price point (40% carve 
out; 0.4*300 = 75).

Example No. 9

    Summary: Initiating Member utilizing Last Priority.
    Assumptions:

 NBBO = .97-1.03
 EDGX BBO = .95-1.03(60) with Market Maker A and Market 
Maker B offering 30 contracts each
 Agency Order to buy 100 contracts stopped at 1.02 marked 
with Last Priority is received

    BAM Process:

 Auction begins
 During auction:
    [cir] Market Maker C responds to sell 5 at 1.01;
    [cir] Market Maker A responds to sell 5 contracts at 1.02;
    [cir] Market Maker B responds to sell 40 contracts at 1.02; and
    [cir] Market Maker D responds to sell 20 contracts at 1.02.
 Next, during auction:
    [cir] Market Maker A moves his quote (maintains Priority Quote 
status);
    [cir] EDGX BBO becomes .95-1.02 for 5 contracts; and
    [cir] NBBO becomes .97-1.02.
 Auction ends:
    [cir] Market Maker C trades 5 contracts at 1.01;
    [cir] Market Maker A response with Priority Quote status 
executes 5 contracts at 1.02;
    [cir] Market Maker B response with Priority Quote status 
executes 30 contracts;
    [cir] Market Maker A quote with Priority Quote status executes 5 
contracts;
    [cir] Non-Priority Quote interest at 1.02 then executes with 
Market Maker B trading 10 contracts and Market Maker D trading 20 
contracts. The Initiating Member then executes the remaining 25 
contracts at 1.02 since there is no other interest to satisfy the 
Agency Order at a price equal to or better than the stop price of 
1.02.

Example No. 10

    Summary: Initiating Member utilizing Last Priority and no 
responders.
    Assumptions:

 EDGX BBO = .95-1.03(60) with Market Maker A and Market 
Maker B offering 30 contracts each
 Agency Order to buy 20 contracts stopped at 1.02 marked 
with Last Priority is received

    BAM Process:

 Auction begins
 During auction:
    [cir] Market Maker C quotes .95-1.02 for 10 contracts and EDGX 
BBO becomes .95-1.02 for 10 contracts; and
    [cir] NBBO becomes .97-1.02.
 Next, during auction:
    [cir] Market Maker A moves his quote (maintains Priority Quote 
status) and joins the EDGX BBO at .95-1.02 for 10 contracts; and
    [cir] NBBO remains .97-1.02.
 Auction ends:
    [cir] Priority Quote interest trades first: Market Maker A gets 
allocated 10 contracts of Agency Order.
    [cir] Non-Priority Quote interest trades next: Market Maker C 
gets allocated 10 contracts.
    [cir] Neither the Initiating Member nor Market Maker B receives 
any execution in this example.

Example No. 11

    Summary: Initiating Member utilizing an ISO Order priced through 
NBBO.
    Assumptions:

 NBBO = .97-1.03
 EDGX BBO = .95-1.04
 Agency Order to buy 50 contracts stopped at 1.04 marked 
with an ISO flag is received

    BAM Process:
 Auction begins
 During auction:
    [cir] Market Maker A responds to sell 20 at 1.02; and
    [cir] Market Maker B responds to sell 20 at 1.02.
 Auction ends:
    [cir] Market Maker A gets allocated 20 contracts of Agency Order 
at 1.02.
    [cir] Market Maker B gets allocated 20 contracts of Agency Order 
at 1.02.
    [cir] The Initiating Member gets allocated the remaining 10 
contracts at 1.04.

Example No. 12

    Summary: Initiating Member utilizing an ISO Order priced through 
EDGX BBO.
    Assumptions:

 NBBO = .97-1.03
 EDGX BBO = .95-1.03
 Agency Order to buy 50 contracts stopped at 1.04 marked 
with an ISO flag is received
Agency Order is rejected.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with the provisions of the Act,\28\ in general, and with Section 
6(b)(5) of the Act,\29\ in particular, in that it is designed to 
promote just and equitable principles of trade, to foster cooperation 
and coordination with persons engaged in regulating, clearing, 
settling, processing information with respect to, and 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; and is not 
designed to permit unfair discrimination between customers, issuers, 
brokers, or dealers.
---------------------------------------------------------------------------

    \28\ 15 U.S.C. 78a et seq.
    \29\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    The Exchange believes that the proposal will result in increased 
liquidity available at improved prices, with competitive final pricing 
out of the Initiating Member's complete control. BAM should promote and 
foster competition and provide more options contracts with the 
opportunity for price improvement. As a result of the increased 
opportunities for price improvement, the Exchange believes that 
participants will use BAM to increase the number of Priority Customer 
Orders that are provided with the opportunity to receive price 
improvement over the NBBO.
    The Exchange believes that the BAM Auction will encourage 
participants on EDGX Options to quote or display orders at the NBBO 
with additional size and thereby result in tighter and deeper markets, 
resulting in more liquidity on EDGX Options. Specifically, by offering 
all Users the ability to receive priority in the proposed allocation 
during the BAM Auction up to the size of their quote, an EDGX User will 
be encouraged to maintain quotes or orders with additional size outside 
of the BAM Auction at the best and most aggressive prices. The Exchange 
believes that this incentive may result in a narrowing of quotes and 
thus further enhance EDGX's market quality. Within the BAM Auction, 
EDGX believes that the rules that are proposed will encourage EDGX 
Users to compete vigorously to provide the opportunity for price 
improvement in a competitive auction process.
    As noted above, the Exchange has proposed to allow BAM Auctions for 
50 contracts or more to occur concurrently with other BAM Auctions. 
Although Auctions for larger Agency Orders will be allowed to overlap, 
the Exchange does not believe that this raises any issues that are not 
addressed through the proposal as described above. For example, 
although overlapping, each Auction will be started in a sequence and 
with a time that will determine its processing. Thus, even if there are 
two Auctions that commence and conclude, at nearly the same time, each 
Auction will have a distinct conclusion at which time the Auction will 
be allocated. In turn, when the first Auction concludes, unrelated 
orders that then exist will be considered for participation in the 
Auction.\30\ If unrelated orders are fully executed in such Auction, 
then there will be no unrelated orders for consideration when the 
subsequent Auction is processed (unless new unrelated order interest 
has arrived). If instead there is remaining unrelated order interest 
after the first Auction has

[[Page 69179]]

been allocated, then such unrelated order interest will be considered 
for allocation when the subsequent Auction is processed. As another 
example, each BAM response is required to specifically identify the 
Auction for which it is targeted \31\ and if not fully executed will be 
cancelled back at the conclusion of the Auction.\32\ Thus, BAM 
responses will be specifically considered only in the specified 
Auction.
---------------------------------------------------------------------------

    \30\ See proposed Rule 21.19(b)(3).
    \31\ See proposed Rule 21.19(b)(1)(E).
    \32\ See proposed Rule 21.19(b)(5).
---------------------------------------------------------------------------

    The Exchange does not believe that allowing multiple auctions to 
overlap for Agency Orders of 50 contracts or more presents any unique 
issues that differ from functionality already in place on other 
exchanges. The Exchange notes that other options exchanges offer 
auctions for orders 50 contracts or greater (generally referred to as 
``facilitation auctions'') that are permitted to overlap.\33\ In 
contrast, similar to the Exchange's proposal, other options exchanges 
do prevent simultaneous auctions to occur for orders less than 50 
contracts (generally referred to as ``price improvement 
auctions'').\34\ Instead of proposing two separate auction processes 
that are functionally the same with only minor differences, such as the 
restriction on overlapping or queuing auctions--which is present in 
other options exchanges' price improvement auctions but not in their 
facilitation auctions--the Exchange is proposing to have a single 
process that recognizes these specific nuances to avoid introducing new 
policy issues regarding such topics.
---------------------------------------------------------------------------

    \33\ See, e.g., ISE Rule 716(d), which governs ISE's 
facilitation mechanism and does not restrict such auctions to one 
auction at a time. See also Boston Options Exchange (``BOX'') Rule 
7270.
    \34\ See ISE Rule 723, Interpretation and Policy .04. See also 
BOX IM-7150-3.
---------------------------------------------------------------------------

    Further, the new functionality may lead to an increase in Exchange 
volume and should allow the Exchange to better compete against other 
markets that already offer an electronic solicitation mechanism, while 
providing an opportunity for price improvement for agency orders. The 
Exchange believes that its proposal will allow the Exchange to better 
compete for solicited transactions, while providing an opportunity for 
price improvement for agency orders and assuring that Priority 
Customers on the book are protected. The new solicitation mechanism 
should promote and foster competition and provide more options 
contracts with the opportunity for price improvement, which should 
benefit market participants, investors, and traders. The Exchange has 
proposed a range between no less than one hundred milliseconds and no 
more than one second for the duration of the BAM Auction; therefore the 
proposed rule change will provide investors with more timely execution 
of their options orders than a mechanism that has a one second auction, 
while ensuring that there is an adequate exposure of orders in EDGX 
BAM. The Exchange preliminary expects to use a default of 100 
milliseconds for all symbols. The time will be announced to Members and 
available on the Exchange's Web site. The proposed auction response 
time of no less than one hundred milliseconds and no more than one 
second should allow investors the opportunity to receive price 
improvement through BAM while reducing market risk. The Exchange 
believes a briefer time period reduces the market risk for the 
Initiating Member, versus an auction with a one second period, as well 
as for any Member providing orders in response to a broadcast. As such, 
EDGX believes the proposed rule change would help perfect the mechanism 
for a free and open national market system, and generally help protect 
investors' and the public interest. The Exchange believes the proposed 
rule change is not unfairly discriminatory because the BAM duration 
would be the same for all Members and symbols. All Members will have an 
equal opportunity to respond with their best prices during the BAM 
Auction. Since the Exchange considers all interest present in the 
System, and not solely BAM responses, for execution against the Agency 
Order, those participants who are not explicit responders to the 
Auction will expect executions via BAM as well.
    With respect to trading halts, as described herein, in the case of 
a trading halt on the Exchange in the affected series, the Auction will 
be cancelled without execution. Cancelling Auctions without execution 
in this circumstance is consistent with Exchange handling of trading 
halts in the context of continuous trading on EDGX Options and promotes 
just and equitable principles of trade and, in general, protects 
investors and the public interest.\35\
---------------------------------------------------------------------------

    \35\ The Exchange notes that trading on the Exchange in any 
option contract will be halted whenever trading in the underlying 
security has been paused or halted by the primary listing market and 
other circumstances. See Rule 20.3.
---------------------------------------------------------------------------

    The Exchange further believes that the proposal is consistent with 
the requirements of Section 11(a) of the Act \36\ and Rule 11a2-2(T) 
\37\ thereunder. Section 11(a) prohibits a member of a national 
securities exchange from effecting transactions on the exchange for its 
own account, the account of an associated person, or an account in 
which it or an associated person exercises investment discretion, 
unless an exception applies (collectively ``Covered Accounts''). Rule 
11a2-2(T) under the Act,\38\ known as the effect versus execute'' rule, 
provides exchange members with an exemption from the Section 11(a)(1) 
prohibition. Rule 11a2-2(T) permits an exchange member, subject to 
certain conditions, to effect transactions for Covered Accounts by 
arranging for an unaffiliated member to execute transactions on the 
exchange.\39\ To comply with Rule 11a2-2(T)'s conditions, a member: (i) 
Must transmit the order from off the exchange floor; (ii) may not 
participate in the execution of the transaction once it has been 
transmitted to the member performing the execution; \40\ (iii) may not 
be affiliated with the executing member; and (iv) with respect to an 
account over which the member has investment discretion, neither the 
member nor its associated person may retain any compensation in 
connection with effecting the transaction except as provided in the 
Rule. For the reasons set forth below, the Exchange believes that 
Exchange Members entering orders into BAM would satisfy the 
requirements of Rule 11a2-2(T).
---------------------------------------------------------------------------

    \36\ 15 U.S.C. 78k(a)(1).
    \37\ 17 CFR 240.11a2-2(T).
    \38\ CFR 240.11a2-2(T).
    \39\ In enacting this provision, Congress was concerned about 
members benefiting in their principal transactions from special 
``time and place'' advantages associated with floor trading--such as 
the ability to ``execute decisions faster than public investors.'' 
The Commission, however, has adopted a number of exceptions to the 
general statutory prohibition for situations in which the principal 
transactions contribute to the fairness and orderliness of exchange 
markets or do not reflect any time and place trading advantages. See 
Securities Exchange Act Release No. 14563 (March 14, 1978), 43 FR 
11542 (March 17, 1978); Securities Exchange Act Release No. 14713 
(April 28, 1978), 43 FR 18557 (May 1, 1978); Securities Exchange Act 
Release No. 15533 (January 29, 1979), 44 FR 6093 (Jan. 31, 1979). 
The 1978 and 1979 Releases cite the House Report at 54-57.
    \40\ The member may, however, participate in clearing and 
settling the transaction.
---------------------------------------------------------------------------

    The Exchange does not operate a physical trading floor, rather the 
Exchange operates an electronic market. Rule 11a2-2(T)'s first 
condition is that orders for Covered Accounts be transmitted from off 
the exchange floor. In the context of automated trading systems, the 
Commission has found that the off-floor transmission requirement is met 
if a Covered Account order is transmitted from a remote location 
directly to an exchange's floor by electronic means.\41\ EDGX 
represents

[[Page 69180]]

that the System and the proposed BAM Auction receive all orders 
electronically through remote terminals or computer-to-computer 
interfaces. The Exchange represents that orders for Covered Accounts 
from Members will be transmitted from a remote location directly to the 
proposed BAM mechanisms by electronic means.
---------------------------------------------------------------------------

    \41\ See, e.g., Securities Exchange Act Release Nos. 61419 
(January 26, 2010), 75 FR 5157 (February 1, 2010) (SR-BATS-2009-031) 
(approving BATS options trading); 59154 (December 23, 2008), 73 FR 
80468 (December 31, 2008) (SRBSE-2008-48) (approving equity 
securities listing and trading on BSE); 57478 (March 12, 2008), 73 
FR 14521 (March 18, 2008) (SR-NASDAQ-2007-004 and SR-NASDAQ-2007-
080) (approving NOM options trading); 53128 (January 13, 2006), 71 
FR 3550 (January 23, 2006) (File No. 10-131) (approving The Nasdaq 
Stock Market LLC); 44983 (October 25, 2001), 66 FR 55225 (November 
1, 2001) (SR-PCX-00-25) (approving Archipelago Exchange); 29237 (May 
24, 1991), 56 FR 24853 (May 31, 1991) (SR-NYSE-90-52 and SR-NYSE-90-
53) (approving NYSE's Off-Hours Trading Facility); and 15533 
(January 29, 1979), 44 FR 6084 (January 31, 1979) (``1979 
Release'').
---------------------------------------------------------------------------

    The second condition of Rule 11a2-2(T) requires that neither a 
member nor an associated person participate in the execution of its 
order once the order is transmitted to the floor for execution. The 
Exchange represents that, upon submission to the BAM Auction, an order 
will be executed automatically pursuant to the rules set forth for BAM. 
In particular, execution of an order sent to the mechanism depends not 
on the Initiating Member entering the order, but rather on what other 
orders are present and the priority of those orders. Thus, at no time 
following the submission of an order is a Member able to acquire 
control or influence over the result or timing of order execution.\42\ 
Once the Agency Order has been transmitted, the Exchange Initiating 
Member that transmitted the order will not participate in the execution 
of the Agency Order. Initiating Members submitting Agency Orders will 
relinquish control to modify their Agency Orders upon transmission to 
the Exchange's System. Further, no Member, including the Initiating 
Member, will see a BAM response submitted into BAM and therefore and 
will not be able to influence or guide the execution of their Agency 
Orders. Finally, the Last Priority feature will not permit a Member to 
have any control over an order. The election to Last Priority an order 
is available prior to the submission of the order and therefore could 
not be utilized to gain influence or guide the execution of the Agency 
Order. The information provided with respect to the Last Priority 
feature by the Initiating Member will not be broadcast and further, the 
information may not be modified by the Initiating Member during the 
auction.
---------------------------------------------------------------------------

    \42\ The Exchange notes that a Member may not cancel or modify 
an order after it has been submitted into BAM.
---------------------------------------------------------------------------

    Rule 11a2-2(T)'s third condition requires that the order be 
executed by an exchange member who is unaffiliated with the member 
initiating the order. The Commission has stated that the requirement is 
satisfied when automated exchange facilities, such as the BAM Auction 
are used, as long as the design of these systems ensures that members 
do not possess any special or unique trading advantages in handling 
their orders after transmitting them to the exchange.\43\ The Exchange 
represents that the BAM Auction is designed so that no Member has any 
special or unique trading advantage in the handling of its orders after 
transmitting its orders to the mechanism.
---------------------------------------------------------------------------

    \43\ In considering the operation of automated execution systems 
operated by an exchange, the Commission noted that, while there is 
not an independent executing exchange member, the execution of an 
order is automatic once it has been transmitted into the system. 
Because the design of these systems ensures that members do not 
possess any special or unique trading advantages in handling their 
orders after transmitting them to the exchange, the Commission has 
stated that executions obtained through these systems satisfy the 
independent execution requirement of Rule 11a2-2(T). See 1979 
Release.
---------------------------------------------------------------------------

    Rule 11a2-2(T)'s fourth condition requires that, in the case of a 
transaction effected for an account with respect to which the 
initiating member or an associated person thereof exercises investment 
discretion, neither the initiating member nor any associated person 
thereof may retain any compensation in connection with effecting the 
transaction, unless the person authorized to transact business for the 
account has expressly provided otherwise by written contract referring 
to Section 11(a) of the Act and Rule 11a2-2(T) thereunder.\44\ The 
Exchange recognizes that Members relying on Rule 11a2-2(T) for 
transactions effected through the BAM Auction must comply with this 
condition of the Rule and the Exchange will enforce this requirement 
pursuant to its obligations under Section 6(b)(1) of the Act to enforce 
compliance with federal securities laws.
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    \44\ See 17 CFR 240.11a2-2(T)(a)(2)(iv). In addition, Rule 11a2-
2(T)(d) requires a member or associated person authorized by written 
contract to retain compensation, in connection with effecting 
transactions for Covered Accounts over which such member or 
associated persons thereof exercises investment discretion, to 
furnish at least annually to the person authorized to transact 
business for the account a statement setting forth the total amount 
of compensation retained by the member in connection with effecting 
transactions for the account during the period covered by the 
statement which amount must be exclusive of all amounts paid to 
others during that period for services rendered to effect such 
transactions. See also 1978 (stating ``[t]he contractual and 
disclosure requirements are designed to assure that accounts 
electing to permit transaction-related compensation do so only after 
deciding that such arrangements are suitable to their interests'').
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    The Exchange believes that the instant proposal is consistent with 
Rule 11a2-2(T), and that therefore the exception should apply in this 
case.
    The Exchange also believes that the proposed rule changes would 
further the objectives of the Act to protect investors by promoting the 
intermarket price protection goals of the Options Intermarket Linkage 
Plan.\45\ The Exchange believes its proposal would help ensure inter-
market competition across all exchanges and facilitate compliance with 
best execution practices. The Exchange believes that these objectives 
are consistent with the Act and the rules and regulations thereunder 
applicable to the Exchange and, in particular, the requirements of 
Section 11A of the Act.
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    \45\ See Rule 27.3 regarding Locked and Crossed Markets.
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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 competition 
among the options exchanges is vigorous and this proposal is intended 
to afford the EDGX Options market the opportunity to compete for order 
flow by offering an auction mechanism on EDGX similar to that of other 
exchanges.
    With respect to intra-market competition, the Auction will be 
available to all EDGX Options Members. Moreover, as explained above, 
the proposal should encourage EDGX Options Members to compete amongst 
each other by responding with their best price and size for a 
particular auction. With respect to overall market quality, the 
Exchange believes that the BAM Auction, as proposed herein, will 
encourage will encourage participants on EDGX Options to quote or 
display orders at the NBBO with additional size and thereby result in 
tighter and deeper markets, resulting in more liquidity on EDGX 
Options. Specifically, by offering all Users the ability to receive 
priority in the proposed allocation during the BAM Auction up to the 
size of their quote, an EDGX User will be encouraged to maintain quotes 
or orders with additional size outside of the BAM Auction at the best 
and most aggressive prices. The Exchange believes that this incentive 
may result in a narrowing of quotes and thus further enhance EDGX's

[[Page 69181]]

market quality. Within the BAM Auction, EDGX believes that the rules 
that are proposed will encourage EDGX Users to compete vigorously to 
provide the opportunity for price improvement in a competitive auction 
process.
    The Exchange's proposal is a competitive response to similar 
provisions in the price improvement auction rules of other options 
exchanges.\46\ The Exchange believes this proposed rule change is 
necessary to permit fair competition among the options exchanges and to 
establish more uniform price improvement auction rules on the various 
options exchanges. The Exchange anticipates that this auction proposal 
will create new opportunities for EDGX to attract new business and 
compete on equal footing with those options exchanges with auctions and 
for this reason the proposal does not create an undue burden on inter-
market competition. Rather, the Exchange believes that the proposed 
rule would bolster inter-market competition by promoting fair 
competition among individual markets, while at the same time assuring 
that market participants receive the benefits of markets that are 
linked together, through facilities and rules, in a unified system, 
which promotes interaction among the orders of buyers and sellers. The 
Exchange believes its proposal would help ensure inter-market 
competition across all exchanges and facilitate compliance with best 
execution practices. In addition, the Exchange believes that the 
proposed rule change would help promote fair and orderly markets by 
helping ensure compliance with Options Order Protection and Locked and 
Crossed Market Rules.\47\ Thus, the Exchange does not believe the 
proposal creates any significant impact on competition.
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    \46\ Today, the following options markets offer auctions: CBOE, 
ISE, BOX, MIAX, PHLX and BX Options. See CBOE Rule 6.74A, ISE Rule 
723, BOX Rule 7150, MIAX Rule 5.15, PHLX Rule 1080(n), and BX 
Options Chapter VI, Section 9.
    \47\ See Chapter XXVII of the Exchange's Rules.
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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. 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-BatsEDGX-2016-41 on the subject line.

Paper Comments

     Send paper comments in triplicate to Brent J. Fields, 
Secretary, Securities and Exchange Commission, 100 F Street NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-BatsEDGX-2016-41. 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-BatsEDGX-2016-41 and should 
be submitted on or before October 26, 2016.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\48\
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    \48\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-24010 Filed 10-4-16; 8:45 am]
BILLING CODE 8011-01-P