
[Federal Register: November 24, 2010 (Volume 75, Number 226)]
[Notices]               
[Page 71768-71770]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr24no10-139]                         

-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

(Release No. 34-63342; File No. SR-BYX-2010-001)

 
Self-Regulatory Organizations; BATS Y-Exchange, Inc.; Notice of 
Filing of Amendment No. 1 and Order Granting Accelerated Approval to 
Proposed Rule Change, as Modified by Amendment No. 1, to Amend BYX Rule 
11.8, Entitled ``Obligations of Market Makers''

November 18, 2010.

I. Introduction

    On September 27, 2010, BATS Y-Exchange, Inc. (``BYX'' or the 
``Exchange''), filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) \1\ of the Securities 
Exchange Act of 1934 (``Act''), and Rule 19b-4 thereunder,\2\ a 
proposed rule change to amend its rules to enhance minimum quoting 
standards for market makers registered with the Exchange. The purpose 
of this rule change is to require equity market makers to post 
continuous two-sided quotations within a designated percentage of the 
inside market to eliminate market maker ``stub quotes,'' that are so 
far away from the prevailing market that they are not intended to be 
executed (such as an order to buy at a penny or sell at $100,000).
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

    The proposed rule change was published for comment in the Federal 
Register on October 15, 2010.\3\ In addition, BYX filed an Amendment 
No. 1 to the proposed rule change.\4\ The Commission received no 
comments on the proposed rule change. The Commission is publishing this 
notice and order to solicit comments on Amendment No. 1 and to approve 
the proposed rule change, as amended, on an accelerated basis.
---------------------------------------------------------------------------

    \3\ See Securities Exchange Act Release No. 63068 (October 8, 
2010), 75 FR 63528 (SR-BYX-2010-001).
    \4\ The Exchange filed Amendment No. 1 on November 8, 2010. 
Amendment No. 1 modifies the proposal so that a market maker is not 
expected to enter a quote based on the prior day's last sale at the 
commencement of regular trading hours if there is no National Best 
Bid (``NBB'') or National Best Offer (``NBO''). As amended, in such 
a circumstance, the quoting obligation would commence as soon as 
there has been a regular-way transaction on the primary listing 
market in the security, as reported by the responsible single plan 
processor. In addition, the Amendment modifies the proposal so that 
a market maker's quoting obligation shall be suspended during a 
trading halt, suspension or pause, and shall not re-commence until 
after the first regular-way transaction on the primary listing 
market following that halt, suspension or pause, as reported by the 
responsible single plan processor. Finally, so that the markets may 
coordinate implementation upon approval of the proposed rule 
changes, BYX stated in Amendment No. 1 that the planned 
implementation date for the proposed rule change would be December 
6, 2010.
---------------------------------------------------------------------------

II. Description of the Proposal

    On May 6, 2010, the U.S. equity markets experienced a severe 
disruption.\5\ Among other things, the prices of a large number of 
individual securities suddenly declined by significant amounts in a 
very short time period, before suddenly reversing to prices consistent 
with their pre-decline levels. This severe price volatility led to a 
large number of trades being executed at temporarily depressed prices, 
including many that were more than 60% away from pre-decline prices and 
subsequently broken.
---------------------------------------------------------------------------

    \5\ The events of May 6 are described more fully in the report 
of the staffs of the Commodity Futures Trading Commission (``CFTC'') 
and the Commission, titled Report of the Staffs of the CFTC and SEC 
to the Joint Advisory Committee on Emerging Regulatory Issues, 
``Findings Regarding the Market Events of May 6, 2010,'' dated 
September 30, 2010 (``May 6 Staff Report'').
---------------------------------------------------------------------------

    As noted in the May 6 Staff Report, executions against stub quotes 
represented a significant proportion of broken trades on May 6. To 
address this aspect of the events of May 6, in coordination with the 
Commission, in addition to the Exchange, nine of the national 
securities exchanges and the Financial Industry Regulatory Authority, 
Inc. (``FINRA'') filed proposals to address stub quotes by introducing 
minimum quoting standards for market makers.\6\ Those

[[Page 71769]]

proposals were approved by the Commission on November 5, 2010.\7\
---------------------------------------------------------------------------

    \6\ See Securities Exchange Act Release Nos. 62945 (September 
20, 2010), 75 FR 58460 (September 24, 2010) (SR-BATS-2010-025); 
62954 (September 20, 2010), 75 FR 59305 (September 27, 2010) (SR-BX-
2010-66); 62951 (September 20, 2010), 75 FR 59309 (September 27, 
2010) (SR-CBOE-2010-087); 62949 (September 20, 2010), 75 FR 59315 
(September 27, 2010) (SR-CHX-2010-22); 62953 (September 20, 2010), 
75 FR 59300 (September 27, 2010) (SR-FINRA-2010-049); 62950 
(September 20, 2010), 75 FR 59311 (September 27, 2010) (SR-NASDAQ-
2010-115); 62952 (September 20, 2010), 75 FR 59316 (September 27, 
2010) (SR-NSX-2010-12); 62948 (September 20, 2010), 75 FR 58455 
(September 24, 2010) (SR-NYSE-2010-69); 62947 (September 20, 2010), 
75 FR 58453 (September 24, 2010) (SR-NYSEAmex-2010-96); 62946 
(September 20, 2010), 75 FR 58462 (September 24, 2010) (SR-NYSEArca-
2010-83).
    \7\ See Securities Exchange Act Release No. 63255 (November 5, 
2010), 75 FR 69484 (November 12, 2010) (SR-BATS-2010-025; SR-BX-
2010-66; SR-CBOE-2010-087; SR-CHX-2010-22; SR-FINRA-2010-049; SR-
NASDAQ-2010-115; SR-NSX-2010-12; SR-NYSE-2010-69; SR-NYSEAmex-2010-
96; SR-NYSEArca-2010-83).
---------------------------------------------------------------------------

    The BYX proposal is substantively identical to the market maker 
quotation requirements that were previously approved by the Commission 
for the nine national securities exchanges and FINRA. The proposal 
requires market makers to maintain continuous two-sided quotations 
throughout the trading day \8\ that are within a certain percentage 
band of the national best bid and offer (``NBBO''). These requirements 
apply to all NMS stocks \9\ during normal market hours. For stocks 
subject to the individual stock circuit breaker pilot program (i.e., 
stocks that are included in the S&P 500, stocks that are included in 
the Russell 1000, and certain exchange-traded products),\10\ market 
makers must enter quotes that are not more than 8% away from the NBBO. 
A quote that is entered at or within 8% away from the NBBO is allowed 
to drift a certain additional amount away from the NBBO before it must 
be adjusted by the market maker. However, if the NBBO moves to a point 
such that the quote is 9.5% away from the NBBO, that quote must be 
adjusted so that it is no further than 8% away from the NBBO. During 
times in which a single-stock circuit breaker is not applicable (i.e., 
before 9:45 a.m. and after 3:35 p.m.), market makers for such 
securities must maintain a quote no further than 20% away from the 
NBBO. Similar to the requirements when the single-stock circuit 
breakers are in effect, a market maker's quote may drift an additional 
1.5% away from the NBBO without adjustment (i.e., until it is 21.5% 
away from the NBBO), at which point it would need to be adjusted to a 
quote no further than 20% away from the NBBO. In the absence of an 
NBBO, the same percentages apply, but the market maker must use the 
consolidated last sale instead of the NBBO.
---------------------------------------------------------------------------

    \8\ As noted, Amendment No. 1 modifies the BYX proposal so that 
the quoting obligation would commence as soon as there has been a 
regular-way transaction on the primary listing market in the 
security, as reported by the responsible single plan processor. The 
Amendment also modifies that the market maker's quoting obligations 
shall be suspended during a trading halt, suspension or pause, and 
shall not re-commence until the first-regular way print on the 
primary listing market following that halt, suspension or pause, as 
reported by the responsible single plan processor. See supra note 4. 
The BYX amendment is substantively identical to the amendments filed 
by the nine national securities exchanges and FINRA in connection 
with their filings.
    \9\ See 17 CFR 242.600 (defining NMS stock as ``any NMS security 
other than an option'' and NMS security as ``any security or class 
of securities for which transaction reports are collected, 
processed, and made available pursuant to an effective transaction 
reporting plan, or an effective national market system plan for 
reporting transactions in listed options'').
    \10\ See Securities Exchange Act Release Nos. 62283 (September 
10, 2010), 75 FR 56608 (September 16, 2010); 62884 (September 10, 
2010), 75 FR 56618 (September 16, 2010).
---------------------------------------------------------------------------

    For securities that are not subject to the single-stock circuit 
breakers, market makers must maintain quotes that are no more than 30% 
away from the NBBO. Like securities subject to the single-stock circuit 
breakers, if the NBBO moves to a point such that the quote is 31.5% 
away from the NBBO, the quote must be adjusted to a quote no further 
than 30% away from the NBBO.
    Nothing in the BYX proposal precludes a market maker from 
voluntarily quoting at price levels that are closer to the NBBO than 
required under the proposal.
    The planned implementation date for the proposed rule change is 
December 6, 2010.
    BYX also proposed an optional functionality to automatically update 
market makers' quotes. Upon the request of a market maker, the BYX 
system would automatically enter and adjust quotes in accordance with 
the proposed quotation requirements. If a market maker cancelled the 
quotations entered by BYX through this functionality, the market maker 
would remain responsible for complying with the minimum quotation 
requirements imposed by the new rule.

III. Commission Findings

    The Commission finds that the proposed rule change implementing 
enhanced market maker quotation standards is consistent with the 
requirements of the Act and the rules and regulations thereunder 
applicable to national securities exchanges. In particular, the 
Commission finds that the proposal is consistent with Section 6(b)(5) 
of the Act,\11\ which, among other things, requires that the rules of 
national securities exchanges be designed 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 in general, 
to protect investors and the public interest.\12\ The Commission also 
believes that the proposal is consistent with Section 11A(a)(1) of the 
Act\13\ in that it seeks to assure fair competition among brokers and 
dealers and among exchange markets.
---------------------------------------------------------------------------

    \11\ 15 U.S.C. 78f(b)(5).
    \12\ In approving the proposed rule change, the Commission notes 
that it has considered the proposed rule's impact on efficiency, 
competition, and capital formation. 15 U.S.C. 78c(f).
    \13\ 15 U.S.C. 78k-1(a)(1).
---------------------------------------------------------------------------

    By requiring market makers to maintain quotes that are priced 
within a broad range around the NBBO, the proposed rule should help 
assure that quotations submitted by market makers to an exchange, and 
displayed to market participants, bear some relationship to the 
prevailing market price, and thus should promote fair and orderly 
markets and the protection of investors. In addition, by precluding 
market makers from submitting ``stub'' quotes that are so far away from 
the prevailing market price that they are not intended to be executed, 
the proposed rule should reduce the risk that trades will occur at 
irrational prices. As noted above, a large number of trades were 
executed at irrational prices on May 6, 2010 and were ultimately 
broken. In this respect, the proposal also should promote the goals of 
investor protection and fair and orderly markets. Finally, because BYX 
is proposing a rule that, in conjunction with the rules of the other 
national securities exchanges and FINRA, creates uniform rules with 
respect to these market maker quoting obligations, the proposed rule 
change as a whole will assure these baseline standards are applied 
throughout the equity markets.
    The Commission also finds that the functionality proposed by the 
Exchange is consistent with Section 6(b)(5) of the Act,\14\ which, 
among other things, requires that the rules of national securities 
exchanges be designed 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 in general, to protect investors and the 
public interest. The proposed functionality should assist market makers 
on BYX in maintaining continuous, two-sided limit orders within the 
prescribed limits in the

[[Page 71770]]

securities in which they are registered to satisfy their new quoting 
obligations.
---------------------------------------------------------------------------

    \14\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

IV. Accelerated Approval

    The Commission also finds good cause, pursuant to Section 19(b)(2) 
of the Act,\15\ for approving the proposed Amendment No. 1 on an 
accelerated basis. The amendment reflects the concern that the proposed 
market maker quoting obligations should not apply during times when 
market makers should be permitted to absorb material information 
affecting a security for which they are registered as a market maker, 
whether before or during the trading day, i.e., until there has been a 
regular-way transaction on a security's primary listing market or 
during a trading halt. Approving the amendment on an accelerated basis 
would allow these provisions to be effective as of the implementation 
date of the new market maker requirements.
---------------------------------------------------------------------------

    \15\ 15 U.S.C. 78s(b)(2).
---------------------------------------------------------------------------

V. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether Amendment No. 1 
to 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-BYX-2010-001 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-BYX-2010-001. 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 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 
a.m. and 3 p.m. Copies of such filings 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-BYX-2010-001 and should be 
submitted on or before December 15, 2010.

VI. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\16\ that the proposed rule change (SR-BYX-2010-001), as modified 
by Amendment No. 1, be, and hereby is, approved on an accelerated 
basis.
---------------------------------------------------------------------------

    \16\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\17\
---------------------------------------------------------------------------

    \17\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-29614 Filed 11-23-10; 8:45 am]
BILLING CODE 8011-01-P

