
[Federal Register Volume 77, Number 245 (Thursday, December 20, 2012)]
[Notices]
[Pages 75459-75462]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-30687]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-68442; File No. SR-BATS-2012-046]


Self-Regulatory Organizations; BATS Exchange, Inc.; Notice of 
Filing of a Proposed Rule Change To Modify Exchange Rule 11.23 Relating 
to Auctions of Exchange-Listed Securities

December 14, 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 December 6, 2012, 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 
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 
11.23 entitled ``Auctions'' including to amend Rule 11.23(a)(6) to 
incorporate the Exchange's clearly erroneous execution standards into 
the definition of Collar Price Range,\3\ to amend Rule 11.23(a)(22) to 
provide that any portion of a market Regular Hours Only \4\ (``RHO'') 
order will be cancelled immediately following any auction in which the 
order is not fully executed, to make changes to Rules 11.23(b)(2)(B), 
11.23(c)(2)(B), and 11.23(d)(2)(C) to help to prevent the possibility 
of erroneous executions occurring in auctions on the Exchange, and to 
make changes to Rule 11.23(d)(2)(A) entitled ``Publication of BATS 
Auction Information'' in order to both make clear that the rule should 
apply to IPO Auctions and to make a change to the data that will be 
disseminated by the Exchange.
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    \3\ As defined in BATS Rule 11.23(a)(6).
    \4\ As defined in BATS Rule 11.23(a)(22).
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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.

[[Page 75460]]

(A) Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
Background
    The Exchange recently proposed and received approval of rules 
governing auctions conducted on the Exchange for securities listed on 
the Exchange (``Exchange Auctions'').\5\ The Exchange adopted rules for 
conducting opening and closing auctions (``Opening Auctions'' and 
``Closing Auctions,'' respectively) on the Exchange, an initial public 
offering auction (an ``IPO Auction''), and an auction in the event of a 
halt of trading in the security (a ``Halt Auction''). As mentioned 
above, the purpose of this filing is to amend the Exchange's rules to 
incorporate the Exchange's clearly erroneous execution standards into 
the definition of Collar Price Range, to make clear that the unexecuted 
portion of certain order types that do not participate in an auction 
will be cancelled immediately following the execution, to further 
prevent the possibility of erroneous executions occurring in auctions 
that occur on the Exchange, to make clear that certain requirements 
should apply to both IPO Auctions and Halt Auctions, and to make a 
change to the data that will be disseminated by the Exchange related to 
Exchange Auctions.
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    \5\ See Securities Exchange Act Release No. 65619 (October 25, 
2011), 76 FR 67238 (October 31, 2011) (SR-BATS-2011-032).
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Collar Price Range
    The Exchange proposes to amend Rule 11.23(a)(6) to amend the 
definition of ``Collar Price Range'' to incorporate the Exchange's 
clearly erroneous execution standards into the definition of Collar 
Price Range. Specifically, the Exchange is proposing that the Collar 
Price Range will be based on the Exchange's numerical guidelines for 
clearly erroneous executions, as detailed in Rule 11.17(c)(1). The 
Collar Price Range will be based on a collar midpoint which will be the 
Volume Based Tie Breaker \6\ or, for an IPO Auction of an exchange 
traded product (``ETP''), the issuing price (both the ``Collar 
Midpoint'') \7\ and shall be determined as follows: Where the Collar 
Midpoint is $25.00 or less, the Collar Price Range shall be the range 
from 10% below the Collar Midpoint to 10% above the Collar Midpoint; 
where the Collar Midpoint is greater than $25.00 but less than or equal 
to $50.00, the Collar Price Range shall be the range from 5% below the 
Collar Midpoint to 5% above the Collar Midpoint; and where the Collar 
Midpoint is greater than $50.00, the Collar Price Range shall be the 
range from 3% below the Collar Midpoint to 3% above the Collar 
Midpoint.
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    \6\ As defined in BATS Rule 11.23(a)(23).
    \7\ The Exchange notes that, because the Collar Price Range will 
be based on the Collar Midpoint and the numerical guidelines for 
clearly erroneous executions are based on the Reference Price, which 
is equal to the consolidated last sale immediately prior to the 
execution(s) under review, the modified Collar Price Range would not 
necessarily prevent all clearly erroneous executions from occurring.
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    The Exchange believes that this proposed change will provide 
greater transparency and certainty in Exchange Auctions by helping to 
reduce the possibility that an auction would occur at a price that 
would qualify as clearly erroneous under Rule 11.17(c)(1) and that may 
result in cancelled executions. As currently written, the Collar Price 
Range is set at 10% of the Volume Based Tie Breaker below and above the 
ZBB and ZBO, the NBB and NBO, or the Final Last Sale Eligible Trade, 
depending on market conditions at the time of the auction. In addition 
to helping to prevent auctions from occurring at prices that would 
qualify as clearly erroneous, the proposed change will also act to 
narrow the Collar Price Range, which will help limit the volatility in 
auction prices.
Market RHO Orders
    The Exchange proposes to amend Rule 11.23(a)(22) to provide that 
any unexecuted portion of a market RHO order is immediately cancelled 
following any Exchange Auction in which it was eligible to participate, 
rather than being eligible for execution after the Exchange Auction. 
Specifically, the Exchange proposes that any portion of a market RHO 
order (a ``Market RHO Auction Order'') will be cancelled immediately 
following any auction in which it is not executed. This proposed change 
would make clear that, consistent with the behavior of all other market 
orders entered on the Exchange, including market RHO orders entered on 
the Continuous Book, Market RHO Auction Orders would either execute 
immediately or be cancelled.
Determination of Auction Price
    The Exchange proposes to amend Rules 11.23(b)(2)(B), 
11.23(c)(2)(B), and 11.23(d)(2)(C) in order to help to protect against 
erroneous executions occurring in auctions on the Exchange. 
Specifically, the Exchange is proposing to amend its Rules related to 
the determination of the auction price for Exchange Auctions such that 
where no limit orders from one or both sides would participate in the 
auction, the auction will occur at the price of the Volume Based Tie 
Breaker for Opening and Closing Auctions, the Final Last Sale Eligible 
Trade for Halt Auctions, and the issuing price for IPO Auctions.
    Currently, BATS Rule 11.23 provides that where there is at least 
one limit order either: (i) On the Continuous Book or Auction Book for 
Opening and Closing Auctions; or (ii) among Eligible Auction Orders for 
IPO and Halt Auctions; then the auction will occur at the price level 
within the Collar Price Range, where applicable, that maximizes the 
number of shares executed in the auction. BATS Rule 11.23 also 
currently provides that where there are no limit orders: (i) On both 
the Continuous Book and the Auction Book for Opening and Closing 
Auctions; or (ii) among the Eligible Auction orders for IPO and Halt 
Auctions; then the auction will occur at a default price, which is 
based on the type of Auction occurring (the ``Default Price''). Under 
the Exchange's current rules, for Opening, Closing, and Halt Auctions, 
the Default Price is the Final Last Sale Eligible Trade. For IPO 
Auctions, the Default Price is the issuing price.
    The proposed changes to Rule 11.23 are two-fold. First, the 
Exchange is proposing to amend its Rules such that, before determining 
the auction price, the Exchange will look to whether there is at least 
one limit order from each side that would participate in the auction, 
rather than, as currently implemented, looking to whether there is a 
single limit order either on the Continuous Book and Auction Book (for 
Opening and Closing Auctions) or among Eligible Auction Orders (for IPO 
and Halt Auctions). Where no limit orders from either or both sides 
would participate in the auction, the Exchange is proposing that the 
auction will occur at the price of the Default Price. By providing that 
the auction price will be the Default Price where no limit orders from 
one or both sides would participate in an Exchange Auction, this 
proposed change would aid in price discovery and help to prevent 
erroneous executions by ensuring that a single limit order on one side 
of an auction that might not even participate in the Exchange Auction 
cannot on its own determine the auction price.
    Secondly, the Exchange proposes to amend its Rules to change the 
Default Price for Opening and Closing Auctions. Currently, the Default 
Price for Opening and Closing Auctions is the price of the Final Last 
Sale Eligible Trade. Specifically, the Exchange is proposing to use the 
Volume Based Tie Breaker as the Default Price for Opening and Closing 
Auctions. Using the Volume Based Tie Breaker as the Default Price

[[Page 75461]]

instead of the Final Last Sale Eligible Trade means that, by 
definition, the Exchange will look first to the ZBBO, then the NBBO to 
determine the auction price, and only where there is no ZBB or ZBO and 
no NBB or NBO will the Exchange use the Final Last Sale Eligible Trade 
as the auction price. This proposed change would aid in price discovery 
and help to reduce the likelihood of executions in auctions occurring 
at prices out of line with existing market conditions by using a 
Default Price that is based on current market conditions rather than a 
previous execution, the Final Last Sale Eligible Trade, to determine 
the auction price where no limit orders from one or both sides would 
participate in the auction.
    In summary:
     Opening and Closing Auctions--Currently, in Opening and 
Closing Auctions, where there are no limit orders on both the 
Continuous Book and the Auction Book, the auction will occur at the 
price of the Final Last Sale Eligible Trade. The Exchange is proposing 
to change the current Opening and Closing Auction functionality such 
that, where no limit orders from either or both sides would participate 
in the auction, the auction will occur at the Volume Based Tie Breaker.
     IPO Auctions--Currently, in IPO Auctions, where there are 
no limit orders among the Eligible Auction Orders, the auction will 
occur at the issuing price. The Exchange is proposing to change the 
current IPO Auction functionality such that, where no limit orders from 
either or both sides would participate in the IPO Auction, the auction 
will occur at the issuing price.
     Halt Auctions--Currently, in Halt Auctions, where there 
are no limit orders among the Eligible Auction Orders, the auction will 
occur at the Final Last Sale Eligible Trade. The Exchange is proposing 
to change the current Halt Auction functionality such that, where no 
limit orders from either or both sides would participate in the Halt 
Auction, the auction will occur at the price of the Final Last Sale 
Eligible Trade.
Publication of BATS Auction Information
    The Exchange proposes to amend Rule 11.23(d)(2)(A) entitled 
``Publication of BATS Auction Information'' in order to both make clear 
that the rule should also apply to IPO Auctions, not just Halt 
Auctions, and to make a change to the data that will be disseminated. 
Specifically, the Exchange proposes to add a reference to IPO Auctions 
to the rule and to disseminate the lesser of the Reference Buy Shares 
and the Reference Sell Shares rather than to disseminate both pieces of 
information, in order to more effectively prevent the possibility of 
gaming.
    The Exchange is proposing to amend Rule 11.23(d)(2)(A) to 
disseminate the lesser of the Reference Buy Shares and the Reference 
Sell Shares in an effort to prevent possible gaming of IPO Auctions and 
Halt Auctions. Specifically, the Exchange is concerned that market 
participants could use information in the auction information messages 
to manipulate the auction. Where an auction information message for an 
IPO or Halt Auction contains both Reference Buy Shares and Reference 
Sell Shares, a User knows the exact amount of liquidity available at a 
given price level on both sides of the Auction Book simultaneously. In 
IPO and Halt Auctions, orders can be entered up until the auction 
occurs, which would allow a User to use that information to knowingly 
move the price of the auction by entering and/or cancelling 
sufficiently sized orders, assuming that there is at least one share of 
contra-side liquidity at the next price level.
    As proposed, the auction information message for IPO and Halt 
Auctions would only contain the lesser of the Reference Buy Shares and 
Reference Sell Shares and, therefore, a User would never have complete 
knowledge of liquidity available on both sides of the book 
simultaneously. This lack of full information will prevent Users from 
knowing exactly how the auction will react to an order that they enter, 
thus helping to prevent gaming of IPO and Halt Auctions.
    These gaming concerns do not exist for Opening and Closing Auctions 
because the auction information messages for the Opening and Closing 
Auctions do not include information relating to the Continuous Book, so 
information disseminated in the auction information messages does not 
provide complete information about the auction. This prevents Users 
from knowing exactly how the auction will react to an order that they 
enter. In addition, auction information messages are not disseminated 
until after the point in time that Eligible Auction Orders cannot be 
modified or cancelled and only Late Limit on Open Orders \8\ and Late 
Limit on Close Orders \9\ (collectively, ``Late Orders'') can be 
entered. Specifically, in Opening and Closing Auctions, auction 
information messages are not disseminated until two minutes and five 
minutes prior to the auction (the ``Cutoff''), respectively, at which 
point Users may not modify or cancel any Eligible Auction Orders 
entered onto the Auction Book. After the Cutoff, Users may only enter 
Late Orders onto the Auction Book. Late Orders cannot be modified or 
cancelled by the User after entry and can only be priced as 
aggressively as the ZBB for bids and the ZBO for offers, the NBB or NBO 
where there is no ZBBO, or the limit price of the order where there is 
no ZBBO and NBBO. In the absence of a ZBBO and NBBO a Late Order could 
be entered without price restriction, however, because there may be 
hidden liquidity on the Continuous Book, the User could not be certain 
of how the order would affect the auction.
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    \8\ As defined in BATS Rule 11.23(a)(12).
    \9\ As defined in BATS Rule 11.23(a)(11).
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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.\10\ In particular, 
the proposal is consistent with Section 6(b)(5) of the Act,\11\ 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, and, in general, protect investors and the 
public interest. Specifically, the Exchange believes that the proposed 
changes will improve the price discovery process for securities listed 
on the Exchange along with reducing the likelihood that erroneous 
executions will occur in auctions conducted on the Exchange by ensuring 
that a single limit order on one side of an auction that might not even 
participate in the Exchange Auction cannot on its own determine the 
auction price. Instead, the Exchange is proposing that where there are 
no limit orders on either or both sides that would participate in an 
Exchange Auction, the auction price would be the Default Price. The 
Exchange further believes that the proposed changes will improve the 
price discovery process by changing the Default Price for Opening and 
Closing Auctions from the Final Last Sale Eligible Trade to the Volume 
Based Tie Breaker, which will, by definition, mean that the Exchange 
will look to current market conditions rather than a previous execution 
to determine the auction price where no limit orders

[[Page 75462]]

from one or both sides would participate in the auction. In addition, 
the Exchange believes that the proposed changes will provide greater 
transparency and certainty in Exchange Auctions by helping to reduce 
the possibility that an auction would occur at a price that would 
qualify as clearly erroneous under Rule 11.17(c)(1) and that may result 
in cancelled executions. Further, the Exchange believes that the 
proposed change will provide greater transparency and certainty in 
Exchange Auctions by helping to limit the volatility in auction prices 
by narrowing the Collar Price Range. The Exchange also believes that 
the proposed changes will help prevent fraudulent and manipulative acts 
and practices along with, in general, protecting investors and the 
public interest by changing the auction information messages 
disseminated by the Exchange during IPO and Halt Auctions to include 
only the lesser of the Reference Buy Shares and the Reference Sell 
Shares, which will more help to prevent the possibility of gaming in 
the auctions, as described above. Lastly, the Exchange believes that 
the proposed changes will provide greater clarity and transparency by 
making clear that any portion of a Market RHO Auction Order will be 
cancelled immediately following any auction in which it is not 
executed, behavior that is consistent with the behavior of all other 
market orders entered on the Exchange.
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    \10\ 15 U.S.C. 78f(b).
    \11\ 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 Exchange consents, the Commission will: (a) By order approve 
or disapprove such 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 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-BATS-2012-046 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-2012-046. 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 submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File Number SR-BATS-2012-046 and should be 
submitted on or before January 10, 2013.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\12\
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    \12\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-30687 Filed 12-19-12; 8:45 am]
BILLING CODE 8011-01-P


