
[Federal Register: September 24, 2010 (Volume 75, Number 185)]
[Notices]               
[Page 58460-58462]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr24se10-153]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-62945; File No. SR-BATS-2010-025]

 
Self-Regulatory Organizations; BATS Exchange, Inc.; Notice of 
Filing of a Proposed Rule Change To Amend BATS Rule 11.8, Entitled 
``Obligations of Market Makers''

September 20, 2010.
    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 17, 2010, BATS Exchange, Inc. (``BATS'' or the 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I and 
II below, which Items have been prepared by the Exchange. The 
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 is proposing to amend BATS Rule 11.8, which relates to 
the obligations of market makers registered with BATS (``Market 
Makers'').
    The text of the proposed rule change is available at the Exchange's 
Web site at http://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
    The Exchange proposes to adopt rules to enhance minimum quotation 
requirements for market makers. Under the proposal, the Exchange will 
require market makers for each stock in which they are registered to 
continuously maintain a two-sided quotation within a designated 
percentage of the National Best Bid (``NBB'') and National Best Offer 
(``NBO'') (or, if there is no NBB or NBO, the last reported sale). 
These enhanced market maker quotation requirements are intended to 
eliminate trade executions against market maker placeholder quotations 
traditionally priced far away from the inside market, commonly known as 
``stub quotes.''

[[Page 58461]]

They are also intended to augment and work in relation to the single 
stock pause standards already in place on a pilot basis for stocks in 
the S&P 500\[reg]\ Index,\3\ the Russell 1000[reg] Index, as well as a 
pilot list of Exchange Traded Products.\4\
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    \3\ See Exchange Act Release No. 62340 (June 21, 2010), 75 FR 
36768 (June 28, 2010) (SR-BATS-2010-014).
    \4\ See Securities Exchange Act Release No. 62884 (September 10, 
2010), 75 FR 56618 (September 16, 2010) (SR-BATS-2010-018).
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    Under the proposal, the Exchange will require registered market 
makers to enter and maintain quotes priced at no more than a certain 
percentage away from the national inside bid and offer. Permissible 
quotes are determined by the individual character of the security, the 
time of day in which the quote is entered, and other factors which are 
summarized below.
    For issues subject to an individual stock trading pause, a 
permissible quote is determined by first looking at the applicable 
individual stock pause trigger percentage of the security and then 
reducing that number by 2%. Since currently the individual stock pause 
trigger percentage utilized by the primary listing markets is 10%, a 
market maker's quote in a such a security may not be more than 8% away 
from the NBBO as appropriate. Once a compliant quote is entered, it may 
rest without adjustment until such time as it moves to within \1/2\ of 
1% of the applicable stock pause trigger percentage (i.e., currently 
9.5%) whereupon the market maker must immediately move its quote back 
to at least the permissible default level of 8% away from the NBBO. 
During times in which a stock pause trigger percentage is not 
applicable (e.g., before 9:45 a.m. and after 3:35 p.m.), a market maker 
must maintain a quote no further than 20% away from the inside (i.e., 
it may rest without adjustment until it reaches 21.5%). In the absence 
of a NBB or NBO, the above calculations will remain the same, but will 
use the national last sale instead of the absent bid or offer.
    For securities not subject to any individual stock trading pause, 
the proposal will a assume a hypothetical 32% stock pause trigger 
percentage, apply a 2% reduction, and require market makers in those 
issues to maintain quotes no more than 30% away from the NBBO. Like 
securities subject to stock trading pauses, once a compliant quote is 
entered, it may rest without adjustment until such time as it moves to 
within \1/2\ of 1% of its applicable pause trigger percentage (31.5%) 
whereupon the market maker must immediately move its quote back to at 
least the permissible default level of 30%. These requirements shall 
apply to Regulation NMS securities during normal market hours.
    Nothing in the above precludes a market maker from voluntarily 
quoting at price levels that are closer to the NBBO than required under 
the proposal.
    The Exchange proposes to offer optional functionality to Exchange 
Market Makers to assist such Market Makers with the quotation 
obligations proposed by this filing.\5\ Specifically, at 9:00 a.m. 
Eastern Time, the Exchange will extract information submitted by the 
Market Maker that provides specific quote instructions for the Exchange 
to enter a quote on the Market Maker's behalf consistent with proposed 
paragraph (d). The Exchange proposes to enter the initial bid and offer 
at the Designated Percentage and to cancel and replace the bid or offer 
if it drifts away from the NBBO to the Defined Limit or away from the 
Designated Percentage towards the NBBO by a number of percentage points 
determined by the Exchange. The Exchange will determine and publish 
this percentage in a circular distributed to Members from time to time; 
the Exchange wishes to retain this flexibility in the event it wishes 
to modify the number periodically in the future, for instance, to 
mitigate the amount of quotation information resulting from Exchange 
generated Market Maker quotes. If a bid or offer entered pursuant to 
proposed paragraph (e) is executed, the Exchange will re-enter a new 
bid or offer on behalf of a Market Maker. Bids and offers entered by 
the Exchange consistent with proposed paragraph (e) to replace a 
cancelled or executed quotation will be entered at the Designated 
Percentage away from the NBBO. Such orders will be posted by the 
Exchange as BATS Only Orders,\6\ and will be maintained on the Exchange 
during Regular Trading Hours\7\ unless cancelled by the Market Maker 
pursuant to the Exchange's Rules. In the event a Market Maker cancels 
the quotations entered by the Exchange in accordance with proposed 
paragraph (e), such Market Maker remains responsible for compliance 
with the requirements of paragraph (d).
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    \5\ See e-mail from Anders Franzon, Associate General Counsel, 
BATS, to David Liu, Senior Special Counsel, and Andrew Madar, 
Special Counsel, Commission, dated September 17, 2010.
    \6\ As defined in Rule 11.9(c)(4).
    \7\ Defined in Rule 1.5(w) as 9:30 a.m. to 4 p.m. Eastern Time.
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    In order to adopt the above-described market maker quotation 
obligations, the Exchange proposes to modify Rule 11.18(a)(1), which 
currently contains a two-sided quotation obligation, to cross-reference 
the above-described market maker quotation obligations in new paragraph 
(d). In addition, because proposed paragraph (d) makes clear that the 
obligations of that paragraph apply during Regular Trading Hours, the 
Exchange proposes to delete paragraph (b) of current Rule 11.8 related 
to when the current quoting obligations apply. Finally, the Exchange 
proposes deletion of current Rule 11.8(e), related to temporary 
withdrawal, because Exchange Rule 11.5(d) already provides a Market 
Maker with the ability to withdraw his or her status as a Market Maker 
and Rule 11.7(b) already provides a Market Maker with the ability to 
terminate his or her registration in a security. The Exchange believes 
that these mechanisms are sufficient for a Market Maker to withdraw or 
terminate its registration in a security or as a Market Maker without 
the need for an additional provision related to withdrawal.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with the 
requirements of the Act and the rules and regulations thereunder that 
are applicable to a national securities exchange, and, in particular, 
with the requirements of Section 6(b) of the Act.\8\ In particular, the 
proposed change is consistent with Section 6(b)(5) of the Act,\9\ 
because it would promote just and equitable principles of trade, remove 
impediments to, and perfect the mechanism of, a free and open market 
and a national market system, and, in general, protect investors and 
the public interest. The proposed rule change is also designed to 
support the principles of Section 11A(a)(1)\10\ of the Act in that it 
seeks to assure fair competition among brokers and dealers and among 
exchange markets. The Exchange believes that the proposed rule meets 
these requirements in that it promotes uniformity across markets 
concerning minimum market maker quotation requirements. The Exchange 
believes that the proposed optional functionality to assist Exchange 
Market Makers in maintaining continuous, two-sided limit orders in the 
securities in which they are registered will encourage Market Makers to 
remain registered with and trade on the Exchange, thus providing 
valuable liquidity to the Exchange; at the same time, the Exchange 
believes that the proposed functionality will keep Exchange generated 
quotations within reasonable reach of the NBBO

[[Page 58462]]

and that the elimination of ``stub quotes'' is important for the 
protection of investors and the public interest.
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    \8\ 15 U.S.C. 78f(b).
    \9\ 15 U.S.C. 78f(b)(5).
    \10\ 15 U.S.C. 78k-1(a)(1).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change imposes 
any burden on competition.

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

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

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

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period up to 90 days (i) as the 
Commission may designate if it finds such longer period to be 
appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) By order approve or disapprove the 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 e-mail to rule-comments@sec.gov. Please include 
File Number SR-BATS-2010-025 on the subject line.

Paper Comments

     Send paper comments in triplicate to Elizabeth M. Murphy, 
Secretary, Securities and Exchange Commission, Station Place, 100 F 
Street, NE., Washington, DC 20549-1090.

All submissions should refer to File Number SR-BATS-2010-025. This file 
number should be included on the subject line if e-mail 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 website (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 inspection and copying in the 
Commission's Public Reference Room, 100 F Street, NE., Washington, DC 
20549, on official business days between the hours of 10 a.m. and 3 
p.m. Copies of such 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 publicly available. All submissions 
should refer to File Number SR-BATS-2010-025 and should be submitted on 
or before October 15, 2010.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\11\
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    \11\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-23955 Filed 9-23-10; 8:45 am]
BILLING CODE 8010-01-P

