
[Federal Register Volume 76, Number 198 (Thursday, October 13, 2011)]
[Notices]
[Pages 63686-63689]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-26437]


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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-65500; File No. SR-BATS-2011-041]


Self-Regulatory Organizations; BATS Exchange, Inc.; Notice of 
Filing and Immediate Effectiveness of Proposed Rule Change To Adopt a 
Definition of Professional and Require That All Professional Orders Be 
Appropriately Marked

October 6, 2011.
    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 29, 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, II, 
and III below, which Items have been prepared by the Exchange. The 
Exchange has designated this proposal as a ``non-controversial'' 
proposed rule change pursuant to Section 19(b)(3)(A) of the Act \3\ and 
Rule 19b-4(f)(6)(iii) thereunder,\4\ which renders it effective upon 
filing with the Commission. The Commission is publishing this notice to 
solicit comments on the proposed rule change from interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 15 U.S.C. 78s(b)(3)(A).
    \4\ 17 CFR 240.19b-4(f)(6)(iii).
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange filed a proposal for the BATS Options Market (``BATS 
Options'') to amend Rule 16.1 (Definitions) to adopt a definition of 
``Professional'' on the Exchange and require that all Professional 
orders be appropriately marked by Exchange members.
    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

[[Page 63687]]

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 purpose of this proposal is to amend Rule 16.1 (Definitions) to 
adopt a definition of ``Professional'' on the Exchange and require that 
all Professional orders be appropriately marked.
    This filing is similar to previous filings of NASDAQ OMX BX, Inc. 
in connection with the rules of the Boston Options Exchange Group, LLC 
(``BOX''), the Nasdaq Stock Market LLC on behalf of the NASDAQ Options 
Market (``NOM''), PHLX NASDAQ OMX, Inc. (``Phlx''), the International 
Securities Exchange, LLC (``ISE''), and Chicago Board Options Exchange, 
Incorporated, (``CBOE''), which dealt with establishing a new 
definition of ``Professional'' as a person or entity that places a 
certain high volume of orders in listed options per day on average 
during a calendar month in his or her own beneficial account.\5\
---------------------------------------------------------------------------

    \5\ See Securities Exchange Act Release Nos. 65036 (August 4, 
2011), 76 FR 49517 (August 10, 2011) (SR-BX-2011-049); 63028 
(October 1, 2010), 75 FR 62443 (October 8, 2010) (SR-NASDAQ-2010-
099); 61802 (March 30, 2010), 75 FR 17193 (April 5, 2010) (SR-Phlx-
2010-05); 61198 (December 17, 2009), 74 FR 68880 (December 29, 
2009)(SR-CBOE-2009-078); and 59287 (January 23, 2009), 74 FR 5694 
(January 30, 2009) (SR-ISE-2006-26). A filing by NYSE Amex LLC 
(``NYSE Amex'') proposing a similar Professional designation was 
based on the Phlx, ISE, and CBOE proposals. See Securities Exchange 
Act Release No. 61818 (March 31, 2010), 75 FR 17457 (April 6, 2010) 
(SR-NYSEAmex-2010-18). The cited filings discuss, among other 
things, the need for a Professional designation to be applied by 
members of the respective exchanges because the systems of such 
exchanges differentiate for execution or processing purposes based 
on order origin. BATS Options, like NOM and BOX, does not 
differentiate among orders based on their origin.
---------------------------------------------------------------------------

Background
    A member of BATS Options is known as an Options Member.\6\ This is 
a firm or organization that is registered with the Exchange pursuant to 
Chapter XVII of the Exchange's Rules for purposes of participating in 
options trading on BATS Options as an Options Order Entry Firm or 
Options Market Maker.\7\ Options traded by Options Members (which may 
include trades on behalf of Public Customers) \8\ on BATS Options, a 
wholly electronic exchange, are electronically executable and routable. 
The System \9\ and rules provide for the ranking, display, and 
execution of all orders in price/time priority without regard to the 
status of the person or entity entering an order.\10\ The Exchange 
notes that BATS Options has, similar to BOX and NOM and in contrast to 
certain other options markets, a ``flat'' system that does not 
differentiate for execution or processing purposes among orders on the 
basis of who or what entity enters an order on the Exchange.\11\ The 
Exchange notes that no change to execution priority on BATS Options is 
being proposed as part of this rule change.
---------------------------------------------------------------------------

    \6\ See Rule 16.1(a)(38). Some Options Members are also members 
of other options exchanges such as, for example, ISE, CBOE, Phlx, or 
NOM.
    \7\ An ``Options Order Entry Firm'' or ``Order Entry Firm'' or 
``OEF'' is defined in Rule 16.1(a)(36) as: ``those Options Members 
representing as agent Customer Orders on BATS Options and those non-
Market Maker Members conducting proprietary trading.'' Options 
Market Maker or Market Maker is defined in Rule 16.1(a)(37) as: ``an 
Options Member registered with the Exchange for the purpose of 
making markets in options contracts traded on the Exchange and that 
is vested with the rights and responsibilities specified in Chapter 
XXII of [the Exchange's] Rules.''
    \8\ ``Public Customer'' is defined in Rule 16.1(a)(46) as: ``a 
person that is not a broker or dealer in securities.''
    \9\ ``System'' is defined in Rule 16.1(a)(58) as: ``the 
automated trading system used by BATS Options for the trading of 
options contracts.''
    \10\ See Securities Exchange Act Release No. 61419 (January 26, 
2010), 75 FR 5157, 5159 (February 1, 2010) (SR-BATS-2009-031). See 
also Rule 22.8, which discusses the price/time execution algorithm 
for System orders and states, in relevant part, that the System will 
execute trading interest at the best price in the System before 
executing trading interest at the next best price, and that the 
System will execute displayed orders before non-displayed orders at 
the same price.
    \11\ In contrast to BATS Options, hybrid options exchanges such 
as, for example, Phlx and CBOE blend auction and electronic market 
structures that differentiate certain order priority and execution 
functions based upon, among other things, the origin of the order 
(e.g., whether the order was a customer, market maker, broker or 
dealer, firm, or other type of order); these exchanges also charge 
different fees based on order origin. BATS Options does, like other 
exchanges, differentiate fees based on order origin. For example, 
fees for removing liquidity are different for customers than they 
are for market makers and firms. This filing does not propose any 
changes in respect of the BATS Options fee structure, though the 
Exchange does intend to file a proposal separately to adopt fees for 
Professional orders.
---------------------------------------------------------------------------

    The Exchange routes orders to other options exchanges (``Away 
Exchanges'') through its affiliate, BATS Trading, Inc. (``BATS 
Trading''), and through non-affiliated third-party broker-dealers. The 
Exchange's general routing procedures are set forth in Rule 21.9 (Order 
Routing), which states in paragraph (c) that, among other things, once 
routed by the System, an order becomes subject to the rules and 
procedures of the destination market.\12\
---------------------------------------------------------------------------

    \12\ Rule 21.1(b) states: ``Orders sent by the System to other 
options exchanges do not retain time priority with respect to other 
orders in the System and the System shall continue to execute other 
orders while routed orders are away at another options exchange. 
Once routed by the System, an order becomes subject to the rules and 
procedures of the destination options exchange including, but not 
limited to, order cancellation. If a routed order is subsequently 
returned, in whole or in part, that order, or its remainder, shall 
receive a new time stamp reflecting the time of its return to the 
System.''
---------------------------------------------------------------------------

    Many other options exchanges, namely the CBOE, ISE, NYSE AMEX, 
Phlx, NOM and BOX, already have rules that are similar to the 
Professional designation rule proposed by the Exchange. The above noted 
exchanges make differentiations based on whether an order is marked 
Professional or otherwise. Some Options Members, including BATS Trading 
and the Exchange's third-party routing broker-dealers, are, as noted, 
also members of other options exchanges that have a Professional 
designation. As members of these exchanges, such Options Members are 
subject to their Professional designation rules. And, as mentioned 
previously, Exchange Rules indicate that orders routed by these broker-
dealers become subject to the rules and procedures of the Away 
Exchanges.\13\
---------------------------------------------------------------------------

    \13\ Once routed by the System, an order becomes subject to the 
rules and procedures of the destination market including, but not 
limited to, order cancellation. See Rule 21.9.
---------------------------------------------------------------------------

    The Exchange believes that disparate rules with respect to 
Professional order designation, and lack of uniform application of such 
rules, do not promote the best regulation and may, in fact, encourage 
regulatory arbitrage.\14\ The Exchange believes that it is therefore 
prudent and necessary to have a Professional designation rule as is 
commonplace in the industry, particularly where BATS Trading and the 
Exchange's third-party routing broker-dealers (like other Options 
Members) are members of several

[[Page 63688]]

exchanges that have rules requiring Professional order designations.
---------------------------------------------------------------------------

    \14\ The Exchange believes that the risk of regulatory arbitrage 
is heightened where not all exchanges have Professional designation 
rules; and there is a lack of uniformity regarding Professional Rule 
Exchanges marking orders as Professional when routing such orders 
away.
---------------------------------------------------------------------------

The Proposal
    The Exchange proposes new Rule 16.1(a)(45) to state that the term 
``Professional'' means any person or entity that (i) is not a broker or 
dealer in securities, and (ii) places more than 390 orders in listed 
options per day on average during a calendar month for its own 
beneficial account(s). Moreover, in order to properly represent orders 
entered on the Exchange according to the new definition, an Options 
Member will be required to appropriately mark all Professional 
orders.\15\ To comply with this requirement, Options Members will be 
required to review their Public Customers' activity on at least a 
quarterly basis to determine whether orders that are not for the 
account of a broker-dealer should be represented as Professional 
orders.\16\ Upon publication of the notice regarding this proposal, the 
Exchange will issue a notice to Options Members providing them at least 
ten business days notice of the procedures for the implementation of 
the proposal.
---------------------------------------------------------------------------

    \15\ The Exchange intends to require Members to identify 
Professional orders submitted electronically, and will separately 
notify its Members regarding this requirement.
    \16\ Members will be required to conduct a quarterly review and 
make any appropriate changes to the way in which they are 
representing orders within five business days after the end of each 
calendar quarter. While Members will only be required to review 
their accounts on a quarterly basis, if during a quarter the 
Exchange identifies a customer for which orders are being 
represented as other than Professional orders but that has averaged 
more than 390 orders per day during a month, the Exchange will 
notify the Member and the Member will be required to change the 
manner in which it is representing the customer's orders within five 
business days. This is similar to the process of other options 
exchanges that have adopted a Professional designation. See, e.g., 
Securities Exchange Act Release No. 61802 (March 30, 2010), 75 FR 
17193 (April 5, 2010) (SR-Phlx-2010-05).
---------------------------------------------------------------------------

    The Professional definition proposed by BATS Options is similar to 
the Professional designation that has been adopted by BOX, NOM, Phlx, 
ISE, CBOE, and NYSE Amex.\17\ As noted, the Professional definition 
will not impact the Exchange's price/time order entry (priority) 
system.\18\ Instead, the Exchange's proposal will ensure that Options 
Members mark their Professional orders properly, that is, similarly in 
terms of Professional order identification regardless of whether the 
order is placed on BATS Options or some other another of the options 
exchanges with a Professional designation. Moreover, with the proposed 
Professional designation in place, the Exchange will be able to accept 
orders that are marked Professional.\19\
---------------------------------------------------------------------------

    \17\ See supra note 5.
    \18\ For example, unlike the Phlx proposal (which, among other 
things, discusses that Professional orders on Phlx will be treated 
in the same manner as off-floor brokers in terms of certain priority 
rules), the Exchange's proposal does not address or impact any 
priority relationship for Professional as opposed to other BATS 
Options orders.
    \19\ Currently, BATS Options only accepts orders that are marked 
as customer, firm, or market maker. While the Exchange does not 
intend to differentiate among Professional and other orders for 
priority purposes, it may, in the future, feel that it is 
appropriate to differentiate its routing or other fees in respect of 
Professional as opposed to other orders; and if so, the Exchange 
intends to file an appropriate fee-related rule filing(s). The 
Exchange does not address its fee structure in the present filing.
---------------------------------------------------------------------------

    The designation of an order as a Professional order would not 
result in any different treatment of such order for purposes of BATS 
Options rules concerning away order protection or routing to Away 
Exchanges. That is, all non broker or dealer orders, including those 
that meet the definition of Professional orders, would continue to be 
treated as Public Customers for purposes of the Exchange's rules 
regarding order protection and routing to Away Exchanges.\20\
---------------------------------------------------------------------------

    \20\ See, e.g., Rule 21.9 and Chapter XXVII.
---------------------------------------------------------------------------

    The Exchange believes that identifying Professional accounts based 
upon the average number of orders entered in qualified accounts is an 
appropriately objective approach that will reasonably distinguish such 
persons and entities from retail investors or market participants. The 
Exchange proposes the threshold of 390 orders per day on average over a 
calendar month, because it believes that this number far exceeds the 
number of orders that are entered by retail investors in a single 
day.\21\ Moreover, the 390 orders per day threshold proposed by the 
Exchange directly corresponds to the daily order volume recognized by 
Phlx, NOM, ISE, and other options exchanges that have, as previously 
discussed, established Professional order designations.\22\ In 
addition, basing the standard on the number of orders that are entered 
in listed options for a qualified account(s) assures that Professional 
account holders cannot inappropriately avoid the purpose of the rule by 
spreading their trading activity over multiple exchanges, and using an 
average number over a calendar month will prevent gaming of the 390 
order threshold.
---------------------------------------------------------------------------

    \21\ 390 orders is equal to the total number of orders that a 
person would place in a day if that person entered one order every 
minute from market open to market close. Many of the largest retail-
oriented electronic brokers offer lower commission rates to 
customers they define as ``active traders.'' Publicly available 
information from the Web sites of Charles Schwab, Fidelity, TD 
Ameritrade and OptionsXpress all define ``active trader'' as someone 
who executes only a few options trades per month. The highest 
required trading activity to qualify as an active trader among these 
four firms was 35 trades per quarter. See note 11 of Securities 
Exchange Act Release No. 57254 (February 1, 2008), 73 FR 7345, 7347 
(SR-ISE-2006-26) (which also notes that a study of one of the 
largest retail-oriented options brokerage firms indicated that on a 
typical trading day, options orders were entered with respect to 
5,922 different customer accounts. There was only one order entered 
with respect to 3,765 of the 5,922 different customer accounts on 
this day, and there were only 17 customer accounts with respect to 
which more than ten orders were entered. The highest number of 
orders entered with respect to any one account over the course of an 
entire week was 27).
    \22\ The similarity of the Exchange's proposed Professional 
order definition to that of other options exchanges is important 
from the regulatory perspective, that is from a desire to promote a 
national market system that minimizes regulatory arbitrage.
---------------------------------------------------------------------------

2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act \23\ in general, and furthers the objectives of Section 
6(b)(5) of the Act \24\ in particular, in that it is designed to 
prevent fraudulent and manipulative acts and practices, to promote just 
and equitable principles of trade, to foster cooperation and 
coordination with persons engaged in facilitating transactions in 
securities, and to remove impediments to and perfect the mechanisms of 
a free and open market and a national market system, by defining 
Professional and indicating that all Professional orders shall be 
appropriately marked by Options Members. The Exchange believes that the 
proposal is particularly consistent with Section 6(b)(5) of the 
Act,\25\ with respect to removal of impediments to, and perfection the 
mechanism of, a free and open market and a national market system, 
because the proposed changes will provide for consistent regulation for 
Options Members that are members of other SROs with analogous rules, as 
described above.
---------------------------------------------------------------------------

    \23\ 15 U.S.C. 78f(b).
    \24\ 15 U.S.C. 78f(b)(5).
    \25\ Id.
---------------------------------------------------------------------------

    Further, the Exchange believes that disparate rules regarding 
Professional order designation, and a lack of uniform application of 
such rules, do not promote the best regulation and may, in fact, 
encourage regulatory arbitrage. The Exchange believes that it is 
therefore prudent and necessary to have a Professional designation rule 
as is commonplace in the industry, particularly where BATS Trading or 
the Exchange's third-party routing broker-dealers (like other Options 
Members) are members of several exchanges that

[[Page 63689]]

have rules requiring Professional order designations. The designation 
of Professional orders would not result in any different treatment of 
such orders for purposes of the Exchange's Rules concerning order 
protection or routing to Away Exchanges. That is, all non broker or 
dealer orders, including those that meet the definition of Professional 
orders, would continue to be treated as Public Customers for purposes 
of the Exchange's Rules regarding order protection and routing to Away 
Exchanges. As such, the Exchange believes the proposed rule change is 
consistent with the Act.

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

    Because the foregoing proposed rule change does not: (i) 
Significantly affect the protection of investors or the public 
interest; (ii) impose any significant burden on competition; and (iii) 
become operative for 30 days from the date on which it was filed, or 
such shorter time as the Commission may designate, it has become 
effective pursuant to Section 19(b)(3)(A) of the Act \26\ and Rule 19b-
4(f)(6)(iii) thereunder.\27\
---------------------------------------------------------------------------

    \26\ 15 U.S.C. 78s(b)(3)(A).
    \27\ 17 CFR 240.19b-4(f)(6).
---------------------------------------------------------------------------

    At any time within 60 days of the filing of the proposed rule 
change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act.

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-2011-041 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-BATS-2011-041. 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 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-2011-041 and should be 
submitted on or before November 3, 2011.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\28\
---------------------------------------------------------------------------

    \28\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Elizabeth M. Murphy,
Secretary.
[FR Doc. 2011-26437 Filed 10-12-11; 8:45 am]
BILLING CODE 8011-01-P


