
[Federal Register Volume 76, Number 250 (Thursday, December 29, 2011)]
[Notices]
[Pages 82011-82014]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-33377]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-66034; File No. SR-BATS-2011-51]


Self-Regulatory Organizations; BATS Exchange, Inc.; Notice of 
Filing of Proposed Rule Change To Implement a Competitive Liquidity 
Provider Program

December 22, 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 December 16, 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 filed with the Commission a proposal to adopt new 
Interpretation and Policy .02 to Rule 11.8 to implement a Competitive 
Liquidity Provider (``CLP'') program (the ``CLP Program'') to incent 
competitive and aggressive quoting by market makers registered with the 
Exchange (``Market Makers'') in Exchange-listed securities.

[[Page 82012]]

    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
Background
    On August 30, 2011, the Exchange received approval of rules 
applicable to the qualification, listing and delisting of companies on 
the Exchange.\3\ In connection with the commencement of its program for 
listing companies on the Exchange, the Exchange proposes to adopt rules 
to operate a program to incentivize certain market makers registered 
with the Exchange as Competitive Liquidity Providers (``CLPs'') to 
enhance liquidity on the Exchange in securities listed on the Exchange 
(the ``Competitive Liquidity Provider Program'' or ``CLP Program''). 
The Exchange intends to file a proposal to adopt the financial 
incentives for the Competitive Liquidity Provider Program through a 
separate filing.
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    \3\ See Securities Exchange Act Release No. 65225 (August 30, 
2011), 76 FR 55148 (September 6, 2011).
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    By establishing this new class of market participant, the Exchange 
is seeking to provide incentives for quoting and to add competition to 
the existing group of liquidity providers. By requiring CLPs to quote 
at the National Best Bid (``NBB'') or the National Best Offer (``NBO'') 
a percentage of the regular trading day in their assigned securities in 
order to qualify for financial incentives, the Exchange is rewarding 
aggressive liquidity providers in the market. The Exchange believes 
that this rebate program will encourage the additional utilization of, 
and interaction with, the Exchange and provide customers with a premier 
venue for price discovery, liquidity, competitive quotes and price 
improvement.
    The Exchange proposes to adopt the Competitive Liquidity Provider 
Program as set forth in a new Interpretation and Policy to Rule 11.8, 
which contains the obligations applicable to Exchange Market Makers. A 
Competitive Liquidity Provider will be a Member that electronically 
enters proprietary orders into the systems and facilities of the 
Exchange and is obligated to maintain a bid or an offer at the NBB or 
NBO in each assigned security in round lots consistent with the 
requirements of new Interpretation and Policy .02 to Rule 11.8. As 
proposed, CLPs will be subject to both a daily quoting requirement in 
order to be eligible to receive financial incentives and a monthly 
quoting requirement in order to remain qualified as a CLP. A CLP that 
does not meet the CLP daily quoting requirement will not be eligible to 
receive the financial incentives of the CLP Program. A CLP that does 
not meet the CLP monthly quoting requirements will be subject to 
certain other non-regulatory penalties, including the potential to lose 
its CLP status.
Qualifications of a CLP
    To qualify as a CLP, a Member will be required to be a registered 
Market Maker in good standing with the Exchange consistent with Rules 
11.5 through 11.8. Further, the Exchange will a require each Member 
seeking to qualify as a CLP to have and maintain: (1) Adequate 
technology to support electronic trading through the systems and 
facilities of the Exchange; (2) one or more unique identifiers that 
identify to the Exchange CLP trading activity in assigned CLP 
securities; \4\ (3) adequate trading infrastructure to support CLP 
trading activity, which includes support staff to maintain operational 
efficiencies in the CLP program and adequate administrative staff to 
manage the Member's participation in the CLP program; (4) quoting and 
volume performance that demonstrates an ability to meet the CLP quoting 
requirement in each assigned security on a daily and monthly basis; (5) 
a disciplinary history that is consistent with just and equitable 
business practices; and (6) the business unit of the Member acting as a 
CLP must have in place adequate information barriers between the CLP 
unit and the Member's customer, research and investment banking 
business.
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    \4\ As proposed, a Member may not use such unique identifiers 
for trading activity at the Exchange in assigned CLP securities that 
is not CLP trading activity, but may use the same unique identifiers 
for trading activity in securities not assigned to a CLP. If a 
Member does not identify to the Exchange the unique identifier to be 
used for CLP trading activity, the Member will not receive credit 
for such CLP trading.
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Securities Eligible for the CLP
    Any Exchange-listed security that is listed on the Exchange 
pursuant to Rule 14.8 (relating to Tier I securities), Rule 14.9 
(relating to Tier II securities) or Rule 14.11 (relating to exchange 
traded funds and other exchange traded products (collectively, 
``ETPs'') shall be eligible for the CLP Program unless and until such 
security has had a consolidated average daily volume (``CADV'') of 
equal to or greater than 2 million shares for two (2) consecutive 
calendar months during the first two (2) years the security is subject 
to the CLP Program; or (2) has been subject to the CLP Program for two 
(2) years. Thus, the CLP Program is designed to encourage support of 
Exchange-listed securities during their period of initial listing on 
the Exchange, when the security needs to develop an active trading 
market in order to succeed. To avoid ETP sponsors from being dissuaded 
from initially listing ETPs on the Exchange, the Exchange proposes to 
permit ETPs that are initially listed on the Exchange to remain in the 
CLP Program for six months regardless of the ETP's CADV. CADV will be 
measured by statistics provided through the consolidated tape plans.
Application Process
    To become a CLP, a Member must submit a CLP application form with 
all supporting documentation to the Exchange. As is currently the case 
for membership applications to join the Exchange and applications to 
register as market makers on the Exchange, Exchange personnel in the 
Exchange's membership department will process such applications. 
Exchange personnel will determine whether an applicant is qualified to 
become a CLP based on the qualifications described above. After an 
applicant submits a CLP application to the Exchange, with supporting 
documentation, the Exchange shall notify the applicant Member of its 
decision. If an applicant is approved by the Exchange to receive CLP 
status, such applicant must establish connectivity with relevant 
Exchange systems before such applicant will be permitted to trade as a 
CLP on the Exchange. In the event an applicant is disapproved by the 
Exchange, such applicant may seek review under Chapter X of the 
Exchange's Rules governing adverse

[[Page 82013]]

action and/or reapply for CLP status at least three (3) calendar months 
following the month in which the applicant received the disapproval 
notice from the Exchange. Chapter X of the Exchange's Rules provides 
any persons who are or are about to be aggrieved by an adverse action 
taken by the Exchange with a process to apply for an opportunity to be 
heard and to have the complained of action reviewed.
Voluntary Withdrawal of CLP Status
    A CLP may withdraw from the status of a CLP by giving notice to the 
Exchange. Such withdrawal shall become effective when those securities 
assigned to the withdrawing CLP are reassigned to another CLP. After 
the Exchange receives the notice of withdrawal from the withdrawing 
CLP, the Exchange will reassign such securities as soon as practicable 
but no later than thirty (30) days after the date said notice is 
received by the Exchange. In the event the reassignment of securities 
takes longer than the 30-day period, the withdrawing CLP will have no 
obligations under this Interpretation and Policy .02 and will not be 
held responsible for any matters concerning its previously assigned CLP 
securities upon termination of this 30-day period.
CLP Quoting Requirements
    The Exchange will measure the performance of a CLP in assigned 
securities by calculating Size Event Tests (``SETs'') during Regular 
Trading Hours on every day on which the Exchange is open for business. 
The Exchange will measure each CLP's quoted size at the NBB and NBO at 
least once per second to determine SETs. The CLP with the greatest 
aggregate size at the NBB and NBO at each SET will be considered to 
have a ``winning SET.''
    As noted above, the Exchange proposes to adopt both daily and 
monthly quoting requirements.
    First, a CLP must have at least 10% of the winning SETs on any 
trading day in order to meet its daily quoting requirement and to be 
eligible for any daily quotation rebate provided by the Exchange (each 
such CLP, an ``Eligible CLP''). Eligible CLPs will be ranked according 
to the number of winning SETs each trading day, and only the Eligible 
CLP ranked number one, and in some cases the Eligible CLP ranked number 
two, will receive the daily rebate. In addition to providing a daily 
rebate to CLPs that have the highest demonstrated size at the NBB and 
NBO during the trading day, as measured by the Exchange through the 
calculation of SETs, the Exchange also plans to propose incentives by 
providing special pricing for executions that occur in any auction 
operated by the Exchange pursuant to Rule 11.23. As noted above, the 
Exchange intends to separately propose the specific details regarding 
the financial incentives applicable to the CLP Program. The financial 
incentives adopted by the Exchange will specify the amount and 
allocation of rebates provided to CLPs as well as the parameters for 
receiving special pricing in Exchange auctions.
    Second, a CLP must be quoting at the NBB or the NBO 10% of the time 
the Exchange calculates SETs to meet its monthly quoting requirement.
    For purposes of calculating whether a CLP is in compliance with its 
CLP quoting requirements, the CLP must post displayed liquidity in 
round lots in its assigned securities at the NBB or the NBO. A CLP may 
post non-displayed liquidity; however, such liquidity will not be 
counted as credit towards the CLP quoting requirements. The CLP shall 
not be subject to any minimum or maximum quoting size requirement in 
assigned securities apart from the requirement that an order be for at 
least one round lot. The CLP quoting requirements will be measured by 
utilizing the unique identifiers that the Member has identified for CLP 
trading activity.
    CLPs may only enter orders electronically directly into Exchange 
systems and facilities designated for this purpose. All CLP orders must 
only be for the proprietary account of the CLP Member.
Assignment of Securities
    The Exchange, in its discretion, will assign to the CLP one or more 
securities consisting of Exchange-listed securities for CLP trading 
purposes. The Exchange shall determine the number of Exchange-listed 
securities within the group of securities assigned to each CLP. The 
Exchange, in its discretion, will assign one (1) or more CLPs to each 
security subject to the CLP Program, depending upon the trading 
activity of the security. The Exchange will restrict the CLPs assigned 
to any newly issued security that is listed on the Exchange pursuant to 
Rule 14.11, which relates to ETPs, to those Members that have actively 
participated in the development or funding of such product. This 
restriction will remain in effect for six (6) months following the 
initial offering of the ETP on the Exchange after which time there will 
be no limitation on the Members that can be assigned as CLPs for such a 
product.
Non-Regulatory Penalties
    If a CLP fails to meet the CLP quoting requirements, the Exchange 
may impose certain non-regulatory penalties. First, if, during Regular 
Trading Hours on any day on which the Exchange is open for business, 
fails to meet its daily quoting requirement by failing to have at least 
10% of the winning SETs for that trading day, the CLP will not be 
eligible to receive a financial rebate for that day's quoting activity 
in that particular assigned security. Second, if a CLP fails to meet 
its monthly quoting requirement for three (3) consecutive months in any 
assigned security, the CLP will be at risk of losing its CLP status. 
Thus, the Exchange may, in its discretion, take the following non-
regulatory actions: (i) Revoke the assignment of the affected 
security(ies) and/or one or more additional unaffected securities; or 
(ii) disqualify a Member's status as a CLP.
    The Exchange shall determine if and when a Member is disqualified 
from its status as a CLP. One (1) calendar month prior to any such 
determination, the Exchange will notify the CLP of such impending 
disqualification in writing. When disqualification determinations are 
made, the Exchange will provide a disqualification notice to the Member 
informing such Member that it has been disqualified as a CLP. In the 
event a Member is disqualified from its status as a CLP, such Member 
may re-apply for CLP status. Such application process shall occur at 
least three (3) calendar months following the month in which such 
Member received its disapproval or disqualification notice. Further, in 
the event a Member is determined to be ineligible for a financial 
rebate for failure to meet its daily quoting obligation or is 
disqualified from its status as a CLP, such Member may seek review 
under Chapter X of the Exchange's Rules governing adverse action. As 
noted above, Chapter X of the Exchange's Rules provides any persons who 
are or are about to be aggrieved by an adverse action taken by the 
Exchange with a process to apply for an opportunity to be heard and to 
have the complained-of action reviewed.
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.\5\ In particular, the 
proposed change is consistent with Section 6(b)(5) of the

[[Page 82014]]

Act,\6\ because it would promote just and equitable principles of 
trade, and, in general, protect investors and the public interest. At 
the outset, the Exchange believes that the proposal is not unfairly 
discriminatory due to the fact that registration as an Exchange Market 
Maker, and, in turn, as a CLP, is equally available to all Members that 
satisfy the requirements of Rule 11.8. The Exchange believes that the 
CLP Program will encourage the development of new financial products, 
provide a better trading environment for investors in Exchange-listed 
securities, and generally encourage greater competition between listing 
venues.
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    \5\ 15 U.S.C. 78f(b).
    \6\ 15 U.S.C. 78f(b)(5).
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    As proposed, the CLP Program is designed to enhance the Exchange's 
competitiveness as a listing venue and to strengthen its market quality 
for Exchange-listed securities. The Exchange is launching its listings 
business at a time in which there are two dominant primary listing 
venues, the New York Stock Exchange and Nasdaq. The Exchange believes 
that the proposed change would increase competition by incenting 
Exchange Market Makers to register as CLPs, which will enhance the 
quality of quoting in Exchange-listed securities and help to reduce 
imbalances in Exchange auctions, and will further assist the Exchange 
to develop an alternative to Nasdaq and the New York Stock Exchange for 
a company seeking to list its securities. Accordingly, the Exchange 
believes that the proposal will compliment the Exchange's program for 
listing securities on the Exchange, which will, in turn, provide 
companies with another option for raising capital in the public 
markets, thereby promoting the principles discussed in Section 6(b)(5) 
of the Act.\7\
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    \7\ 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 (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 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 email to rule-comments@sec.gov. Please include 
File Number SR-BATS-2011-51 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-2011-51. 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 
a.m. and 3 p.m. Copies of the 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 publicly available. All 
submissions should refer to File Number SR-BATS-2011-51 and should be 
submitted on or before January 19, 2012.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority. \8\
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    \8\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2011-33377 Filed 12-28-11; 8:45 am]
BILLING CODE 8011-01-P


