
[Federal Register Volume 77, Number 128 (Tuesday, July 3, 2012)]
[Notices]
[Pages 39532-39535]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-16214]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-67274; File No. SR-BYX-2012-011]


Self-Regulatory Organizations; BATS Y-Exchange, Inc.; Notice of 
Filing and Immediate Effectiveness of a Proposed Rule Change To Modify 
Exchange Rule 11.13, Entitled ``Order Execution''

June 27, 2012.
    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 June 15, 2012, BATS Y-Exchange, Inc. (the ``Exchange'' or 
``BYX'') 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 Rule 
11.13 entitled ``Order Execution'' to modify Exchange system 
functionality when the consolidated market is crossed and to modify the 
handling of orders that have been rejected after routing away through 
the Exchange's affiliated broker-dealer.
    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 is proposing changes to its system functionality to 
implement a price constraint in the event the Exchange receives a non-
routable order and a Protected Bid \3\ and a Protected Offer \4\ are 
crossed (a ``Crossed Market''). The Exchange is also proposing to 
provide its Users with the option to avoid any execution when there is 
a Crossed Market. Finally, the Exchange is proposing a change to the 
way that it responds to rejections of orders that were routed to a 
Protected Quotation.\5\
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    \3\ As defined in BYX Rule 1.5(t), Protected Bid means a bid in 
a stock that is displayed by an automated trading center, 
disseminated pursuant to an effective national market system plan, 
and an automated quotation that is the best bid of a national 
securities exchange or association.
    \4\ As defined in BYX Rule 1.5(t), Protected Offer means an 
offer in a stock that is displayed by an automated trading center, 
disseminated pursuant to an effective national market system plan, 
and an automated quotation that is the best offer of a national 
securities exchange or association.
    \5\ As defined in BYX Rule 1.5(t), Protected Quotation means a 
quotation that is a Protected Bid or Protected Offer.
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    Under current BYX Rules, for any execution to occur during Regular 
Trading Hours,\6\ the price must be equal to or better than the 
Protected NBBO,\7\ unless the order is marked ISO or unless the 
execution falls within another exception set forth in Rule 611(b) of 
Regulation NMS. For any execution to occur during the Pre-Opening 
Session \8\ or the After Hours Trading Session,\9\ the price must be 
equal to or better than the highest Protected Bid or lowest Protected 
Offer. As noted below, the Exchange also currently allows executions of 
orders outside of Regular Trading Hours when an order is marked ISO and 
there is a Crossed Market.
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    \6\ As defined in BYX Rule 1.5(w), Regular Trading Hours means 
the time between 9:30 a.m. and 4:00 p.m. Eastern Time.
    \7\ As defined in BYX Rule 1.5(s), Protected NBBO means the 
national best bid or offer that is a Protected Quotation.
    \8\ As defined in BYX Rule 1.5(r), the Pre-Opening Session means 
the time between 8:00 a.m. and 9:30 a.m. Eastern Time.
    \9\ As defined in BYX Rule 1.5(c), the After Hours Trading 
Session means the time between 4:00 p.m. and 5:00 p.m. Eastern Time.
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    The restrictions on executions described above reflect the 
Exchange's implementation of the trade-through rule of Regulation NMS, 
Rule 611, which only applies during Regular Trading Hours; however the 
Exchange has also implemented trade-through protection outside of 
Regular Trading Hours in order to promote the handling of orders in a 
consistent and orderly fashion. Pursuant to the exception of Rule 
611(b)(4) during Regular Trading Hours, as well as during the Pre-
Opening Session and the After Hours Trading Session, the Exchange does 
not currently impose trade-through protections when there is a Crossed 
Market. In order to constrain the price of executions when there is a 
Crossed Market, in the event that a Protected Bid is crossing a 
Protected Offer, whether during or outside of Regular Trading Hours, 
unless an order is marked ISO, the Exchange will not execute any 
portion of a bid at a price more than the greater of 5 cents or 0.5 
percent higher than the lowest Protected Offer or any portion of an 
offer that is not marked ISO that would execute at a price more than 
the greater of 5 cents or 0.5 percent lower than the highest Protected 
Bid. In order to provide an additional option for Users \10\ that do 
not want any orders to

[[Page 39533]]

execute when there is a Crossed Market, upon instruction from a User, 
the Exchange will not execute any incoming order from such User in the 
event a Protected Bid is crossing a Protected Offer. The Exchange 
believes that the thresholds proposed in this rule filing will help 
avoid executions of orders at prices that are significantly worse than 
the NBBO.\11\
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    \10\ As defined in BYX Rule 1.5(cc), a User is any Member or 
Sponsored Participant who is authorized to access the Exchange's 
system pursuant to Exchange Rules.
    \11\ As defined in BYX Rule 1.5(o), NBBO shall mean the national 
best bid or offer.
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    The following example demonstrates how the Exchange's Crossed 
Market threshold would operate:
     The NBBO in security ABC is $5.00 (bid) by $4.98 (offer), 
and thus, there is a Crossed Market;
     A User submits a non-routable market order (e.g., 
designated as a ``BATS Only'' order) to buy 1,000 shares of ABC;
     The Exchange has liquidity in ABC as follows: 100 shares 
to sell for $4.98, 100 shares to sell for $5.00, 200 shares to sell for 
$5.03, and 300 shares to sell for $5.05.

Under the circumstances described above, the incoming market order to 
buy would be executed as follows:

     100 shares executed on the Exchange at the $4.98 price 
level;
     100 shares executed on the Exchange at the $5.00 price 
level;
     200 shares executed on the Exchange at the $5.03 price 
level;
     600 shares cancelled back to the User.

As proposed, with a Crossed Market of $5.00 by $4.98, the Exchange will 
execute any incoming buy orders up to and including $5.03 and any 
incoming sell orders down to and including $4.95 per share. 
Accordingly, under this example, 400 shares of the incoming buy order 
would be executed, including 200 shares at the Crossed Market threshold 
of $5.03. The remaining 600 shares of the market order would be 
cancelled back to the User because the liquidity on the Exchange at the 
$5.05 price level exceeds the thresholds set forth in proposed Rule 
11.13. The Exchange notes that in the event the order was designated as 
eligible for routing, the Exchange's normal routing strategies would 
apply, and, to the extent that other market centers have better prices 
than are available on the BATS Book,\12\ the Exchange would route the 
order away to such other market centers rather than executing solely on 
the Exchange. Accordingly, the Exchange proposes to add language to 
Rule 11.13 to make clear that to the extent an incoming order is 
executable because a Protected Bid is crossing a Protected Offer but 
such incoming order is eligible for routing and there is a Protected 
Bid or Protected Offer available at another Trading Center \13\ that is 
better priced than the bid or offer against which the order would 
execute on the Exchange, the Exchange will first seek to route the 
order to such better priced quotation pursuant to Rule 11.13(a)(2).
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    \12\ As defined in BYX Rule 1.5(e), BATS Book means the System's 
electronic file of orders.
    \13\ As defined in BYX Rule 2.11, a Trading Center is another 
securities exchange, facility of a securities exchange, automated 
trading system, electronic communication network or other broker or 
dealer.
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    The Exchange has proposed to exclude ISOs from the proposed pricing 
threshold because a User is subject to certain specific obligations 
when pricing and submitting an order as an ISO.\14\ The Exchange 
believes that rejecting an ISO upon receipt due to a Crossed Market is 
inconsistent with the general notion of an ISO, which allows a User to 
designate a price at which the Exchange can execute the order without 
regard to the Exchange's view of the NBBO.
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    \14\ See 17 CFR 240.600(b)(30) and 611(c); see also BYX Rule 
11.9(d)(1), which states that ``[t]he Exchange relies on the marking 
of an order as an ISO order when handling such order, and thus, it 
is the entering Member's responsibility, not the Exchange's 
responsibility, to comply with the requirements of Regulation NMS 
relating to Intermarket Sweep Orders.'' The Exchange notes that as a 
self-regulatory organization it conducts regulatory oversight of 
each Exchange Member's use of Intermarket Sweep Orders on the 
Exchange.
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    In addition to the implementation of Crossed Market price 
constraints and the ability to designate orders as ineligible for 
execution during a Crossed Market, the Exchange is proposing to modify 
the way that it handles rejections received from other Trading Centers. 
Currently the Exchange routes all orders through its affiliated broker-
dealer, BATS Trading, Inc. (``BATS Trading''). In certain instances, 
BATS Trading, in turn, routes to certain third party broker-dealers in 
order to ensure that the Exchange has effective and redundant 
connections to all other Trading Centers with Protected Quotations. 
BATS Trading occasionally receives ``rejections'' of orders either from 
the Trading Centers to which it routes directly or through the third 
party broker-dealers through which it routes. Such rejections can be 
for various reasons, including a technical problem with the order, 
market access thresholds implemented pursuant to SEC Rule 15c3-5, or 
other operational thresholds. The Exchange currently handles orders on 
which it receives rejections by either cancelling the order back to the 
User or, if the order submitted by the User instructs the Exchange to 
do so, by posting the order to the Exchange's order book after 
subjecting such order to its price sliding process pursuant to Rule 
11.9(g) in order to avoid locking any Protected Quotation that it 
cannot access. Rather than posting an order to its book, the Exchange 
proposes to cancel all orders for which it has received a rejection due 
to an inability to access another Trading Center, providing a User with 
the opportunity to submit a new order or seek another path to the 
applicable Protected Quotation. The Exchange has also proposed to make 
clear that such a cancellation will not apply to Protected Quotations 
published by a Trading Center against which the Exchange has declared 
self-help pursuant to Exchange Rule 11.13(d). Although a Protected 
Quotation may be inaccessible to the Exchange, once the Exchange has 
declared self-help pursuant to Rule 11.13(d), the Exchange disregards, 
and will continue to execute transactions and route orders without 
regard to, such Protected Quotations. Notwithstanding the foregoing, 
however, even after the Exchange has received a rejection from a 
Trading Center, if there are multiple Trading Centers included in the 
routing option selected by the User that have Protected Quotations at 
the NBBO, the System \15\ will continue to route the order to the 
Protected Quotations at other such other Trading Centers at that price 
level.
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    \15\ As defined in BYX Rule 1.5(aa), System means the electronic 
communications and trading facility designate [sic] by the Board 
through which securities orders of Users are consolidated for 
ranking, execution and, when applicable, routing away.
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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.\16\ In particular, 
the proposal is consistent with Section 6(b)(5) of the Act,\17\ 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 by helping to avoid executions of orders 
on the Exchange at prices that are significantly worse than the NBB 
\18\ or NBO \19\ at the time an order is initially received by the 
Exchange, even if executions are

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permissible pursuant to Regulation NMS. The Exchange believes that 
permitting Users to avoid any execution of an incoming order in a 
Crossed Market is an additional functionality that is consistent with 
the protection of investors and the public interest. Although the 
Exchange does not believe that any other self-regulatory organization 
has exactly the same Crossed Market threshold in place, the Exchange as 
well as other market centers have implemented a variety of pricing 
thresholds to constrain executions and protect market participants.\20\ 
Also, this proposal is consistent with existing Exchange rules that 
allow for the breaking of trades deemed clearly erroneous by reference 
to objective thresholds worse than the NBBO.\21\ The Exchange believes 
that the proposed pricing thresholds are reasonable because they are 
significantly narrower than thresholds in place on the Exchange for 
market orders received by the Exchange \22\ and also narrower than 
applicable clearly erroneous thresholds. A narrow threshold will 
protect market participants and their customers from potentially 
executing at prices away from the NBBO when there is a Crossed Market, 
which can be an indication of a pricing anomaly in a security or a 
potential systems issue at another Trading Center. Further, the 
proposed threshold is consistent with the protection of investors and 
the public interest because it will help to avoid clearly erroneous 
executions from occurring in the first place, rather than allowing an 
execution to occur and breaking the trade based on clearly erroneous 
rules. Finally, the Exchange believes that the cancellation of all 
orders that have been rejected by other market centers or third party 
routers, rather than posting such orders to the Exchange's book will 
provide Users with more immediate certainty regarding their orders, and 
will provide Users the ability to modify and re-submit or send their 
orders via a different path to attempt to access the applicable 
Protected Quotation. Accordingly, the modifications to BYX Rule 11.13 
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.
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    \16\ 15 U.S.C. 78f(b).
    \17\ 15 U.S.C. 78f(b)(5).
    \18\ As defined in BYX Rule 1.5(o), NBB means the national best 
bid.
    \19\ As defined in BYX Rule 1.5(o), NBO means the national best 
offer.
    \20\ See, e.g., BYX Rule 11.9(a)(2), which constrains the 
executions of a market order on BYX to $0.50 or 5 percent away from 
the NBBO at the time the order initially reaches the Exchange; see 
also NYSE Arca Rule 7.31(a); NASDAQ Rule 4751(f)(13).
    \21\ See BYX Rule 11.17.
    \22\ See supra note 20.
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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

    Because the 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 if consistent with the protection of investors 
and the public interest, the proposed rule change has become effective 
pursuant to Section 19(b)(3)(A) of the Act \23\ and Rule 19b-4(f)(6) 
thereunder.\24\
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    \23\ 15 U.S.C. 78s(b)(3)(A).
    \24\ 17 CFR 240.19b-4(f)(6). As required under Rule 19b-
4(f)(6)(iii), the Exchange provided the Commission with written 
notice of its intent to file the proposed rule change along with a 
brief description and the text of the proposed rule change, at least 
five business days prior to the date of filing of the proposed rule 
change, or such shorter time as designated by the Commission.
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    A proposed rule change filed pursuant to Rule 19b-4(f)(6) under the 
Act \25\ normally does not become operative for 30 days after the date 
of its filing. However, Rule 19b-4(f)(6) \26\ permits the Commission to 
designate a shorter time if such action is consistent with the 
protection of investors and the public interest. The Exchange has asked 
the Commission to waive the 30-day operative delay, noting that doing 
so would allow investors and market participants to benefit immediately 
from additional protection against certain executions in Crossed Market 
conditions and from the ability to re-route or re-submit orders that 
are unable to access, and therefore rejected by, other market centers 
with Protected Quotations at the NBBO. The Commission believes that 
waiving the 30-day operative delay is consistent with the protection of 
investors and the public interest.\27\ Therefore, the Commission 
designates the proposal operative upon filing.
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    \25\ 17 CFR 240.19b-4(f)(6).
    \26\ 17 CFR 240.19b-4(f)(6).
    \27\ For purposes only of waiving the 30-day operative delay, 
the Commission has considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
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    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 Exchange 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-BYX-2012-011 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-2012-011. 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 
10:00 a.m. and 3:00 p.m. Copies of the 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

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submissions. You should submit only information that you wish to make 
available publicly. All submissions should refer to File Number SR-BYX-
2012-011 and should be submitted on or before July 24, 2012.

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

    \28\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-16214 Filed 7-2-12; 8:45 am]
BILLING CODE 8011-01-P


