
[Federal Register Volume 78, Number 25 (Wednesday, February 6, 2013)]
[Notices]
[Pages 8640-8642]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-02556]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-68788, File No. SR-BATS-2012-046]


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

 January 31, 2013.

I. Introduction

    On December 6, 2012, BATS Exchange, Inc. (``BATS'' or ``Exchange'') 
filed with the Securities and Exchange Commission (``Commission''), 
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ a proposed rule change to 
amend its rules governing auctions conducted by the Exchange for 
securities listed on the Exchange. The proposed rule change was 
published for comment in the Federal Register on December 20, 2012.\3\ 
The Commission received no comment letters regarding the proposal. This 
order approves the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 68442 (December 14, 
2012), 77 FR 75459 (December 20, 2012) (``Notice'').
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II. Description of the Proposed Rule Change

    The Exchange has proposed to amend BATS Rule 11.23, which governs 
auctions conducted by the Exchange for securities listed on the 
Exchange.\4\ These auctions include: (1) An opening auction (``Opening 
Auction''); (2) a closing auction (``Closing Auction''); (3) an auction 
in the event of an initial public offering (``IPO Auction''); and (4) 
an auction in the event of a halt of trading in a security (``Halt 
Auction'') (collectively referred to as ``Exchange Auctions'').\5\ In 
connection with the Exchange Auctions, BATS offers the BATS Auction 
Feed, which provides recipients with uncompressed real-time data 
regarding the current status of price and size information related to 
Exchange Auctions.\6\
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    \4\ See Securities Exchange Act Release No. 65619 (October 25, 
2011), 76 FR 67238 (October 31, 2011) (order approving proposed rule 
change by BATS to adopt rules applicable to auctions conducted by 
the Exchange for exchange-listed securities).
    \5\ See id.
    \6\ See id.
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A. Change to the Definition of Collar Price Range

    The Exchange has proposed to amend BATS Rule 11.23(a)(6) to amend 
the definition of ``Collar Price Range'' to incorporate the Exchange's 
numerical guidelines for clearly erroneous executions under BATS Rule 
11.17(c)(1).\7\ Currently, BATS Rule 11.23(a)(6) sets the Collar Price 
Range at 10% of the Volume Based Tie Breaker \8\ below and above the 
BATS Best Bid (``ZBB'') and BATS Best Offer (``ZBO''),\9\ the National 
Best Bid (``NBB'') and National Best Offer (``NBO''), or the Final Last 
Sale Eligible Trade,\10\ depending on market conditions at the time of 
the auction.\11\ The Exchange has proposed to base its Collar Price 
Range on numerical guidelines for clearly erroneous rules under BATS 
Rule 11.17(c)(1), which would 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.\12\ According to the Exchange, the proposed rule 
change would provide greater transparency and certainty in Exchange 
Auctions by helping reduce the possibility that an auction would occur 
at a price that would qualify as a clearly erroneous under BATS Rule 
11.17(c)(1) and limit the volatility in auction prices.\13\
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    \7\ See Notice supra note 3, at 76 FR 75460.
    \8\ BATS Rule 11.23(a)(23) defines ``Volume Based Tie Breaker'' 
as the midpoint of the BATS Best Bid or BATS Best Offer (``ZBBO'') 
for a particular security. In the event that there is either no ZBB 
or ZBO for the security, the National Best Bid and Offer (``NBBO'') 
will be used if there is at least one limit order on either the 
Continuous Book or the Auction Book. In the event that there is no 
NBB or NBO for the security or no limit orders on the Continuous 
Book and the Auction Book, the price of the Final Last Sale Eligible 
Trade will be used. See infra note 10 (defining ``Final Last Sale 
Eligible Trade''). BATS Rule 11.23(a)(1) defines the ``Auction 
Book'' as all Eligible Auction Orders on the BATS Book. BATS Rule 
11.23(a)(7) defines ``Continuous Book'' as all orders on the BATS 
Book that are not Eligible Auction Orders.
    \9\ See BATS Rule 11.23(a)(24) (defining the ZBB and ZBO). BATS 
Rule 11.23(a)(24) defines the BATS Best Bid or BATS Best Offer as 
``ZBBO.''
    \10\ See BATS Rule 11.23(a)(9) defines ``Final Last Sale 
Eligible Trade'' as the last trade occurring during Regular Trading 
Hours on the Exchange if the trade was executed within the last one 
second prior to either the Closing Auction or, for Halt Auctions, 
trading in the security being halted. Where the trade was not 
executed within the last one second, the last trade reported to the 
consolidated tape received by BATS during Regular Trading Hours and, 
where applicable, prior to trading in the security being halted will 
be used. If there is no qualifying trade for the current day, the 
BATS Official Closing Price from the previous trading day will be 
used.
    \11\ See Notice supra note 3, at 76 FR 75460.
    \12\ See id. The Exchange has proposed to define ``Collar 
Midpoint'' in BATS Rule 11.23(a)(6) as the Volume Based Tie Breaker 
for all applicable auctions, except for IPO Auctions in Exchange 
Traded Products (as defined in Rule 11.8, Interpretation and Policy 
.02(d)(2)), for which the Collar Midpoint will be the issue price. 
See also Notice supra note 3, at 76 FR 75460.
    \13\ The Exchange noted that the modified Collar Price Range 
would not necessarily prevent all clearly erroneous executions from 
occurring as 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. See Notice supra note 3, at 76 FR 75460 n. 7.
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B. Change to the Determination of the Auction Price

    The Exchange has proposed to amend BATS Rule 11.23 to change how 
the Exchange determines the price for Exchange Auctions. Currently, to 
determine the auction price for an Exchange Auction, the Exchange first 
looks to whether there is at least one limit order either: (1) On the 
Continuous Book or Auction Book for Opening

[[Page 8641]]

Auctions and Closing Auctions; or (2) among Eligible Auction Orders for 
IPO and Halt Auctions.\14\ Where there is at least one limit order, 
then the auction will occur at a price level within the Collar Price 
Range, where applicable, that maximizes the number of shares executed 
in the auction. In the event that there are no limit orders on the 
Continuous Book and Auction Book for Opening Auctions or Closing 
Auctions or among Eligible Auction Orders for IPO or Halt Auctions, the 
Exchange would use a default price, which currently is the Final Last 
Sale Eligible Trade for Opening Auctions, Closing Auctions, and Halt 
Auctions, and the issuing price for an IPO Auction.
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    \14\ See BATS Rule 11.23(a)(9) defines ``Eligible Auction 
Orders'' as any Market-On-Open, Limit-On-Open, Late-Limit-On-Open, 
Market-On-Close, Limit-On-Close, or Late-Limit-On-Close that is 
entered in compliance with its respective cutoff for an Opening 
Auction or Closing Auction, any regular hours order prior to the 
Opening Auction, any limit or market order not designated to 
exclusively participate in the Closing Auction entered during the 
Quote-Only Period of an IPO Auction, and any limit or market order 
not designated to exclusively participate in the Opening Auction or 
Closing Auction entered during the Quote-Only Period of a Halt 
Auction.
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    The Exchange proposes two changes to Rule 11.23 relating to the 
determination of the auction price in certain circumstances. The first 
change modifies when the Exchange will use a default price for 
executions in Exchange Auctions. The second change modifies the 
Exchange's default price for Opening Auctions and Closing Auctions.
    Regarding the first change, the Exchange has proposed to amend BATS 
Rules 11.23(b)(2)(B), 11.23(c)(2)(B), and 11.23(d)(2)(C) to provide 
that, prior to determining the price for an Exchange Auction, the 
Exchange will look to whether there is at least one limit order from 
each side that would participate in the Exchange Auction. The Exchange 
has proposed that where no limit orders from either or both sides would 
participate in the Exchange Auction, the Exchange Auction would occur 
at a default price, as modified in the description below with respect 
to Opening Auctions and Closing Auctions.
    In the second change to Rule 11.23, the Exchange has proposed to 
amend BATS Rules 11.23(b)(2)(B) and 11.23(c)(2)(B) to use the Volume 
Based Tie Breaker as the default price instead of the Final Last Sale 
Eligible Trade for Opening Auctions and Closing Auctions. By using the 
Volume Based Tie Breaker as the default price, the Exchange would first 
look to the current market, if available, to determine the auction 
price before using the Final Last Sale Eligible Trade. Specifically, 
the Exchange would first look to the ZBBO to determine the auction 
price for a particular security. In the event that there is either no 
ZBB or ZBO, the Exchange would use the NBBO to determine the auction 
price for the Opening Auction or Closing Auction, if there is at least 
one limit order on either the Continuous Book or the Auction Book. 
Where there is either no NBBO for the security or no limit orders on 
the Continuous Book and the Auction Book, the Exchange would use the 
Final Last Sale Eligible Trade as the auction price for an Opening 
Auction or Closing Auction.

C. Limitation on Information Published in Connection With IPO and Halt 
Auction Data

    The Exchange has also proposed to amend BATS Rule 11.23(d)(2)(A) 
(Publication of BATS Auction Information) in two ways. First, the 
Exchange has proposed to clarify that BATS Rule 11.23(d)(2)(A) applies 
to IPO Auctions as well as Halt Auctions. Second, the Exchange has 
proposed to amend BATS Rule 11.23(d)(2)(A) to provide that the Exchange 
will only disseminate the lesser of the Reference Buy Shares \15\ and 
the Reference Sell Shares,\16\ rather than disseminate both pieces of 
information, in auction information messages sent through BATS Data 
Feed.\17\ The Exchange has represented that this proposal is designed 
to prevent market participants from possibly gaming an IPO or Halt 
Auction.\18\ Specifically, the Exchange is concerned that the 
dissemination of both Reference Buy Shares and Reference Sell Share 
information could allow a market participant to discern the exact 
amount of liquidity available at a given price level on both sides of 
the IPO or Halt Auction Book.\19\ Because market participants are 
permitted to enter orders in IPO and Halt Auctions up until the auction 
occurs, the Exchange believes that a market participant could use both 
the Reference Buy Shares and Reference Sell Shares to potentially 
manipulate the price of the auction.\20\ By disseminating only the 
lesser of the Reference Buy Shares and Reference Sell Shares associated 
with IPO and Halt Auctions, the Exchange believes that a market 
participant would not able to manipulate an IPO or Halt Auction because 
the market participant would not have complete knowledge of liquidity 
available on both sides of the auction book simultaneously.\21\
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    \15\ BATS Rule 11.23(a)(18) defines ``Reference Buy Shares'' as 
the total number of shares associated with buy-side Eligible Auction 
Orders that are priced equal to or less than the Reference Price.
    \16\ BATS Rule 11.23(a)(21) defines ``Reference Sell Shares'' as 
the total number of shares associated with sell-side Eligible 
Auction Orders that are priced equal to or less than the Reference 
Price.
    \17\ See Notice supra note 3, at 76 FR 75461.
    \18\ See id.
    \19\ See id.
    \20\ See id.
    \21\ See Notice supra note 3, at 76 FR 75461. The Exchange notes 
such gaming concerns do not exist in the Opening Auctions and 
Closing Auctions for two reasons. First, the Exchange represents 
that auction information messages for Opening Auctions and Closing 
Auctions do not provide complete information about the auctions as 
such messages do not include information relating to the Continuous 
Book. Second, information messages for Opening Auctions and Closing 
Auctions are not disseminated until two minutes and five minutes 
prior to the auction, respectfully, at which point market 
participants are prohibited from modifying or canceling any Eligible 
Auction Orders entered in the Auction Book.
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D. Market Regular Hours Orders

    The Exchange has proposed to amend Rule 11.23(a)(22) to provide 
that any unexecuted portion of a market Regular Hours Only (``RHO'') 
order is immediately cancelled following any Exchange Auction in which 
it was eligible to participate.\22\ The Exchange stated that this 
proposed rule change would clarify that a market RHO order would either 
execute or be cancelled, which the Exchange believes would be 
consistent with the behavior of all other market orders entered on the 
Exchange.\23\
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    \22\ See Notice supra note 3, at 77 FR at 75460. BATS Rule 
11.23(a)(22) defines a RHO order as a BATS order that is designated 
for execution only during Regular Trading Hours, which includes the 
Opening Auction, the Closing Auction, and IPO/Halt Auctions.
    \23\ See Notice supra note 3, at 77 FR at 75460.
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III. Discussion

    After careful consideration of the proposed rule change, the 
Commission finds that the proposal is consistent with the requirements 
of the Act and the rules and regulations thereunder applicable to a 
national securities exchange.\24\ The Commission believes that the 
proposed rule change is consistent with Section 6(b) of the Act, in 
general, and Section 6(b)(5) of the Act, in particular, in that it is 
designed to promote just and equitable principles of trade, to foster 
cooperation and coordination with persons engaged in regulating, 
clearing, settling, processing information with respect to, and 
facilitating transactions in securities, to remove impediments to and 
perfect the mechanism of a free and open market and a national market 
system, and, in

[[Page 8642]]

general, to protect investors and the public interest.
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    \24\ In approving this proposed rule change, 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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    The Commission believes that the proposed changes to the Collar 
Price Range definition are consistent with Section 6(b)(5) of the Act. 
The Exchange notes that (1) this proposed change provides greater 
transparency and certainty in Exchange Auctions by reducing the 
possibility that an auction would occur at a price that would qualify 
as clearly erroneous and cancelled under the Exchange's rules and (2) 
by narrowing the Collar Price Range, the proposed rule change will help 
limit the volatility in auction prices. The Commission notes that the 
proposed changes to the definition of the Collar Price Range are based 
on the numerical guidelines for clearly erroneous executions under BATS 
Rule 11.17(c)(1). For these reasons, the Commission believes that the 
proposed changes to the Collar Price Range definition are consistent 
with the Act.
    The Commission believes that the proposed changes to how the 
Exchange determines the auction price are consistent with Section 
6(b)(5) of the Act. The Exchanges notes that the proposed changes 
regarding when the Exchange will use a default price 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 participate 
in the Exchange Auction cannot on its own determine the auction price. 
In addition, the Exchange notes that revisions to the default price for 
Opening Auctions and Closing Auctions would also aid in price discovery 
and help to reduce the likelihood of executions in auctions occurring 
at prices out of line with existing market conditions. For these 
reasons, the Commission believes that these proposed changes are 
consistent with the Act.
    The Commission also believes that the proposal to disseminate only 
the lesser of the Reference Buy Shares and the Reference Sell Shares in 
auction information messages for IPO and Halt Auctions is consistent 
with Section 6(b)(5) of the Act. The Exchange has represented that this 
proposal is designed to prevent market participants from possibly 
gaming an IPO or Halt Auction, as it would hinder a market participant 
from being able to discern the exact amount of liquidity available at a 
given price level on both sides of the IPO or Halt Auction Book. In 
this way, the Exchange believes that the proposal should make it more 
difficult for a market participant to use auction information to 
manipulate an IPO or Halt auction. For this reason, the Commission 
believes that the proposed rule change is consistent with the Act.
    Finally, the Commission believes that the proposed change 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 should clarify the operation of market RHO 
Auction Orders, as noted by the Exchange. As such, the Commission 
believes this proposed change is also consistent with the Exchange Act.

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\25\ that the proposed rule change (SR-BATS-2012-046) be, and 
hereby is, approved.
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    \25\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\26\
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    \26\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neil,
Deputy Secretary.
[FR Doc. 2013-02556 Filed 2-5-13; 8:45 am]
BILLING CODE 8011-01-P


