
[Federal Register Volume 76, Number 20 (Monday, January 31, 2011)]
[Notices]
[Pages 5418-5420]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-1986]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-63766; File No. SR-BATS-2011-002]


Self-Regulatory Organizations; BATS Exchange, Inc.; Notice of 
Proposed Rule Change To Amend BATS Rules in Connection With the 
Implementation of Amendments to Regulation SHO

January 25, 2011.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act''),\1\ and Rule 19b 4 thereunder,\2\ notice is hereby given 
that on January 14, 2011, BATS Exchange, Inc. (the ``Exchange'' or 
``BATS'') 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 filing with the Commission a proposal to amend BATS 
Rules 11.9, 11.13 and 11.19 to make certain changes consistent with the 
upcoming implementation of amendments to Regulation SHO.\3\
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    \3\ 17 CFR 242.200(g); 17 CFR 242.201.
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    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
    On February 26, 2010, the Commission adopted amendments to 
Regulation SHO under the Act in the form of Rule 201,\4\ pursuant to 
which, among other things, short sale orders in covered securities \5\ 
generally cannot be executed or displayed by a trading center \6\ such 
as BATS at a price that is at or below the current national best bid 
(``NBB'') when a short sale circuit breaker is in effect for the 
covered security (the ``short sale price test restriction'').\7\ In 
anticipation of the upcoming February 28, 2011 compliance date for Rule 
201, the Exchange is proposing to amend certain BATS rules to describe 
the manner in which the System \8\ will handle short

[[Page 5419]]

sell orders when a short sale price test restriction is triggered under 
Rule 201 of Regulation SHO. These changes include establishing a 
definition for ``short sale price sliding,'' which is a new form of 
price sliding the Exchange proposes to offer when the amendments to 
Regulation SHO become operative, modifying certain BATS rules regarding 
order execution and routing when a short sale price test restriction is 
in effect, and modifying BATS rules related to order marking 
requirements. Additionally, the Exchange proposes to modify the 
definition of the current ``displayed price sliding process'' offered 
by BATS.
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    \4\ See Securities Exchange Act Release No. 61595 (February 26, 
2010), 75 FR 11232 (March 10, 2010). In connection with the adoption 
of Rule 201, Rule 200(g) of Regulation SHO was also amended to 
include a ``short exempt'' marking requirement. The amendments to 
Rule 201 and Rule 200(g) have a compliance date of February 28, 
2011. See Securities Exchange Act Release No. 63247 (Nov. 4, 2010), 
75 FR 68702 (Nov. 9, 2010). See also Division of Trading & Markets, 
Responses to Frequently Asked Questions Concerning Rule 201 of 
Regulation SHO.
    \5\ Rule 201(a)(1) defines the term ``covered security'' to mean 
any ``NMS stock'' as defined under Rule 600(b)(47) of Regulation 
NMS. Rule 600(b)(47) of Regulation NMS defines an ``NMS stock'' as 
``any NMS security other than an option.'' Rule 600(b)(46) of 
Regulation NMS defines an ``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.'' 17 CFR 242.201(a)(1); 17 
CFR 242.600(b)(46); and 17 CFR 242.600(b)(47).
    \6\ Rule 201(a)(9) states that the term ``trading center'' shall 
have the same meaning as in Rule 600(b)(78) of Regulation NMS. Rule 
600(b)(78) defines a ``trading center'' as ``a national securities 
exchange or national securities association that operates an SRO 
trading facility, an alternative trading system, an exchange market 
maker, an OTC market maker, or any other broker or dealer that 
executes orders internally by trading as principal or crossing 
orders as agent.'' 17 CFR 242.600(b)(78).
    \7\ 17 CFR 242.201(b)(1). See also Division of Trading & 
Markets, Responses to Frequently Asked Questions Concerning Rule 201 
of Regulation SHO, Q&A Nos. 2.1 and 2.2 (concerning the duration of 
a short sale price test restriction).
    \8\ The ``System'' is defined in BATS Rule 1.5(aa) as ``the 
electronic communications and trading facility designated by the 
Board through which securities orders of Users are consolidated for 
ranking, execution and, when applicable, routing away.''
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    In order to comply with the short sale price test restriction of 
Regulation SHO, as amended, the Exchange proposes to offer short sale 
price sliding, which will be defined in BATS Rule 11.9(g). As a 
default, the Exchange will subject a User's \9\ orders to the short 
sale price sliding unless they affirmatively choose to opt-out of the 
process. As proposed, when a User opts out of the price sliding 
process, any short sale order that could not be executed or displayed 
due to a short sale price test restriction would be rejected or 
cancelled by the Exchange upon entry or while resting on the order 
book, respectively. When a User's order is subject to the price sliding 
process, as proposed, orders subject to short sale price sliding that, 
at the time of entry, could not be executed or displayed due to a short 
sale price test restriction will be repriced by the System at one 
minimum price variation above the current NBB to comply with Rule 
201(b)(1)(i).\10\ An order subject to short sale price sliding will not 
be readjusted downward even if it could be displayed at a lower price 
without violation of Rule 201 of Regulation SHO. In the event the NBB 
changes such that the price of a non-displayed order subject to short 
sale price sliding would lock or cross the NBB, the order will receive 
a new timestamp, and will be repriced by the System at one minimum 
price variation above the current NBB, again in compliance with Rule 
201(b)(1)(i).\11\
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    \9\ A ``User'' is defined in BATS Rule 1.5(cc) as any member or 
sponsored participant of the Exchange who is authorized to obtain 
access to the System.
    \10\ Any execution or display will also need to be in compliance 
with applicable rules regarding minimum pricing increments. 17 CFR 
242.612.
    \11\ See Division of Trading & Markets, Responses to Frequently 
Asked Questions Concerning Rule 201 of Regulation SHO, Q&A No. 4.1 
(concerning un-displayed orders).
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    As proposed, neither orders marked ``short exempt'' nor orders 
displayed by the System at a price above the then current NBB at the 
time of initial display when a short sale price test restriction is in 
effect for a covered security will be subject to short sale price 
sliding. Certain displayed short sale orders will not be repriced by 
the System after entry because under Rule 201(b)(1)(iii)(A) a trading 
center's policies and procedures must be reasonably designed to permit 
the execution of short sale orders of covered securities that were 
displayed at a price above the current NBB at the time of initial 
display. ``Short exempt'' orders will not be repriced by the System, 
but instead, the Exchange will execute, display and/or route such 
orders without regard to the NBB or any short sale price test 
restriction in effect under Regulation SHO, as described below.
    The Exchange currently offers a process called ``displayed price 
sliding process,'' as defined in current Rule 11.9(c)(4), which re-
prices and/or displays orders at permissible prices when such orders 
would lock or cross Protected Quotations \12\ in a manner inconsistent 
with Rule 610(d) of Regulation NMS.\13\ The Exchange proposes to rename 
the ``displayed price sliding process'' as ``NMS price sliding,'' to be 
included in new paragraph (g) of Rule 11.9, and to define the ``price 
sliding process'' as inclusive of both NMS price sliding and short sale 
price sliding.\14\ Also, consistent with the changes described above, 
the Exchange proposes to replace the term ``displayed price sliding 
process'' throughout its equity trading rules with the term ``price 
sliding process.'' \15\ As is true for displayed price sliding today 
and short sale price sliding as proposed, if a User chooses to opt-out 
of the price sliding process, the order will not be subject to NMS 
price sliding, and thus, the Exchange will cancel back their orders 
when display or execution of such orders contradict the provisions of 
Regulation NMS.
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    \12\ As defined in BATS Rule 1.5(t), the term ``Protected 
Quotation'' means a quotation that is a Protected Bid or Protected 
Offer. In turn, a ``Protected Bid'' or ``Protected Offer'' shall 
mean a bid or offer in a stock that is (i) displayed by an automated 
trading center; (ii) disseminated pursuant to an effective national 
market system plan; and (iii) an automated quotation that is the 
best bid or best offer of a national securities exchange or 
association.
    \13\ 17 CFR 242.610(d).
    \14\ The Exchange acknowledges that potential differences can 
exist between Protected Bids, as defined above (see supra note 12), 
and the NBB, upon which the requirements of Regulation SHO, as 
amended, are based.
    \15\ The rules of BATS Exchange Options Market (``BATS 
Options'') also contain references to the displayed price sliding 
process. The Exchange is not proposing to modify its displayed price 
sliding process for BATS Options at this time.
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    The Exchange also proposes a substantive change to NMS price 
sliding (today known as the displayed price sliding process). Under 
current System behavior, the Exchange cancels all non-displayed orders 
when the national best bid or offer (``NBBO'') changes such that the 
non-displayed order would cross a Protected Quotation, regardless of 
whether the order is subject to the displayed price sliding process. 
Under the proposed amendment, instead of cancelling such orders, unless 
a User has opted out of the price sliding process, the Exchange 
proposes to allow a resting non-displayed order to receive a new 
timestamp and be repriced at the locking price in the event that the 
NBBO changes such that the order would cross a Protected Quotation.
    The Exchange also proposes to amend its Rule 11.13 to make clear 
that it will execute, display and route an order consistent with Rule 
201 of Regulation SHO, and that if it cannot do so, orders will be 
cancelled back to the applicable Exchange User. In addition, the 
Exchange proposes to make clear that it will not route orders away from 
the Exchange that are marked ``short'' if a short sale price test 
restriction is in effect. Instead, such orders, if immediate-or-cancel 
(``IOC'') or market orders, will be cancelled, and if limit orders, 
will be posted to the BATS Book,\16\ subject to the price sliding 
process.
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    \16\ As defined in BATS Rule 1.5(e).
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    Finally, current Rule 11.19 requires Exchange Users to identify 
short sale orders as ``short'' when entered into the Exchange's System. 
The Exchange proposes to add the term ``short exempt'' to Rule 11.19 
because pursuant to amended Rule 200(g) of Regulation SHO, a broker-
dealer can mark a short sale order as either ``short'' or ``short 
exempt.'' \17\ The Exchange also proposes to make clear in Rule 11.19 
that if an order it received is marked ``short exempt,'' the Exchange 
will execute, display and/or route the order without regard to the NBB 
or any short sale price test restriction in effect under Regulation 
SHO.\18\ The Exchange also proposes to make clear, as it does in Rule 
11.9(d)(1) with respect to intermarket sweep orders, that it relies on 
a Member's \19\ marking of an order, in this case the ``short exempt'' 
marking, when handling such order. Accordingly,

[[Page 5420]]

proposed Rule 11.19 states that it is the entering Member's 
responsibility, not the Exchange's responsibility, to comply with the 
requirements of Regulation SHO relating to marking of orders as ``short 
exempt.'' \20\
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    \17\ 17 CFR 242.200(g). Rule 200(g)(2) provides that a sale 
order shall be marked ``short exempt'' only if the provisions of 
paragraphs (c) or (d) of Rule 201 of Regulation SHO are met. See 
also Division of Trading and Markets: Responses to Frequently Asked 
Questions Concerning Rule 201 of Regulation SHO, Q&A Nos. 5.4 and 
5.5.
    \18\ 17 CFR 242.201(b)(1)(iii)(B).
    \19\ A ``Member'' is defined in BATS Rule 1.5(n) as any 
registered broker or dealer that has been admitted to membership in 
the Exchange.
    \20\ 17 CFR 242.200(g)(2). See also 17 CFR 242.201(c); 17 CFR 
242.201(d).
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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.\21\ In particular, 
the proposed change is consistent with Section 6(b)(5) of the Act,\22\ 
because it would promote just and equitable principles of trade, and, 
in general, protect investors and the public interest. The Exchange 
believes that the proposed changes will provide clarity on the short 
sale order handling procedures employed by the Exchange and certain 
obligations of Members when sending short sale orders to the Exchange 
consistent with Regulation SHO, as amended. The Exchange also believes 
that the proposed short sale price sliding functionality and amendments 
to the existing displayed price sliding process will assist Users in 
executing or displaying their orders consistent with Regulation SHO and 
Regulation NMS, especially under fast moving conditions where the NBBO 
is quickly updating. In addition, as is currently the case, the amended 
price sliding process is optional to Users. Specifically, Users can 
choose to opt-out of the price sliding process, and if they choose to 
do so, the Exchange will cancel back their orders when such orders 
contradict the provisions of Regulation SHO or Regulation NMS.
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    \21\ 15 U.S.C. 78f(b).
    \22\ 15 U.S.C. 78f(b)(5).
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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 proposal 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-2011-002 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 No. SR-BATS-2011-002. 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 changes 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. Copies of such filing will also be available for 
inspection and copying at the principal office of the Exchange. All 
comments received will be posted without change; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File No. SR-BATS-2011-002 and should be 
submitted on or before February 22, 2011.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\23\
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    \23\ 17 CFR 200.30-3(a)(12).
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Elizabeth M. Murphy,
Secretary.
[FR Doc. 2011-1986 Filed 1-28-11; 8:45 am]
BILLING CODE 8011-01-P


