
[Federal Register Volume 78, Number 25 (Wednesday, February 6, 2013)]
[Notices]
[Pages 8617-8621]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-02559]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-68791; File No. SR-BATS-2013-007]


Self-Regulatory Organizations; BATS Exchange, Inc.; Notice of 
Filing and Immediate Effectiveness of Proposed Rule Change To Amend 
BATS Rules Related to Price Sliding Functionality

January 31, 2013.
    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 January 25, 2013, 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 Exchange 
has designated this proposal as a ``non-controversial'' proposed rule 
change pursuant to Section 19(b)(3)(A) of the

[[Page 8618]]

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

    The Exchange is proposing to amend Rule 11.9, entitled ``Orders and 
Modifiers'', and Rule 21.1, entitled ``Definitions'', to modify the 
operation of the Exchange's price sliding functionality described in 
Rules 11.9 and 21.1 applicable to the BATS equity securities trading 
platform (``BATS Equities'') and the BATS equity options trading 
platform (``BATS Options''), respectively.
    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 currently offers various forms of sliding which, in 
all cases, result in the ranking and/or display of an order at a price 
other than an order's limit price in order to comply with applicable 
securities laws and/or Exchange rules. Specifically, the Exchange 
currently offers price sliding to ensure compliance with Regulation NMS 
and Regulation SHO for BATS Equities, as well as price sliding for BATS 
Options to ensure compliance rules analogous to Regulation NMS adopted 
by the Exchange and other options exchanges. Price sliding currently 
offered by the Exchange re-prices and displays an order upon entry and 
in certain cases again re-prices and re-displays an order at a more 
aggressive price based on changes in the national best bid (``NBB'') or 
national best offer (``NBO'', and together with the NBB, the ``NBBO''). 
As described below, the Exchange proposes to modify the operation of 
display-price sliding in the event the Exchange displays an order 
subject to price sliding as a Protected Quotation \5\ and such order's 
displayed price is locked or crossed by another equities market or 
options exchange, as applicable.
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    \5\ As defined in BATS Rule 1.5(t), applicable to BATS Equities, 
a ``Protected Quotation'' is ``a quotation that is a Protected Bid 
or Protected Offer.'' In turn, the term ``Protected Bid'' or 
``Protected Offer'' means ``a bid or offer in a stock that is (i) 
displayed by an automated trading center; (ii) disseminated pursuant 
to an effective national market system plan; and (iii) an automated 
quotation that is the best bid or best offer of a national 
securities exchange or association.'' As defined in BATS Rule 27.1, 
applicable to BATS Options, a ``Protected Quotation'' is ``a 
Protected Bid or Protected Offer.'' In turn, the term ``Protected 
Bid'' or ``Protected Offer'' means ``a Bid or Offer in an options 
series, respectively, that: (A) Is disseminated pursuant to the OPRA 
Plan; and (B) Is the Best Bid or Best Offer, respectively, displayed 
by an Eligible Exchange.'' An ``Eligible Exchange'' is defined in 
Rule 27.1 as ``a national securities exchange registered with the 
SEC in accordance with Section 6(a) of the Exchange Act that: (a) is 
a Participant Exchange in OCC (as that term is defined in Section 
VII of the OCC by-laws); (b) is a party to the OPRA Plan (as that 
term is described in Section I of the OPRA Plan); and (c) if the 
national securities exchange chooses not to become a party to this 
Plan, is a participant in another plan approved by the Commission 
providing for comparable Trade-Through and Locked and Crossed Market 
protection.''
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    Under the Exchange's current rules for BATS Equities, if, at the 
time of entry, an order would lock or cross a Protected Quotation 
displayed by another trading center the Exchange ranks orders subject 
to display-price sliding at the locking price and displays such orders 
at one minimum price variation below the current NBO (for bids) or to 
one minimum price variation above the current NBB (for offers). 
Following the initial ranking and display of an order subject to 
display-price sliding, an order is typically only re-ranked and re-
displayed to the extent it achieves a more aggressive price. However, 
the Exchange proposes to re-rank an order at the same price as the 
displayed price (i.e., a less aggressive price) in the event such 
order's displayed price is locked or crossed by a Protected Quotation 
of an external market.\6\ This will avoid the potential of a ranked 
price that crosses the Protected Quotation displayed by such external 
market, which could, in turn, lead to a trade through of such Protected 
Quotation at such ranked price. The Exchange notes that, as described 
below, when an external market crosses the Exchange's Protected 
Quotation and the Exchange's Protected Quotation is a displayed order 
subject to price sliding, the Exchange proposes to re-rank such order 
at the displayed price. Thus, the order displayed by the Exchange will 
still be ranked and permitted to execute at a price that crosses the 
other market's Protected Quotation, which is consistent with Rule 
611(b)(4) of Regulation NMS.\7\
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    \6\ The Exchange notes that as a general matter Regulation NMS 
should prevent external markets from displaying Protected Quotations 
that lock or cross Protected Quotations displayed by the Exchange. 
However, in a dynamic market, such an event can and does happen for 
a variety of reasons. For example, if the Exchange updates its 
Protected Quotation for a security at the same time another market 
updates its contra-side Protected Quotation, it is possible that 
such quotations lock or cross each other. Neither the Exchange nor 
the other market would know in this circumstance that such 
quotations would lock or cross each other when publishing their 
quotation updates. As another example, in the event another market 
receives an intermarket sweep order, such market may permissibly 
display such order without regard to other Protected Quotations, 
including quotations displayed by the Exchange that lock or cross 
such order.
    \7\ 17 CFR 242.611(b)(4).
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    As an example of the behavior described above, assume the Exchange 
has a posted and displayed bid to buy 100 shares of a security priced 
at $10.10 per share and a posted and displayed offer to sell 100 shares 
at $10.13 per share. Assume the NBBO is $10.10 by $10.12. If the 
Exchange receives a non-routable bid to buy 100 shares at $10.12 per 
share the Exchange will rank the order to buy at $10.12 and display the 
order at $10.11 because displaying the bid at $10.12 would lock an 
external market's Protected Offer to sell for $10.12. If an external 
market then updated its Protected Offer to $10.11, thus locking the 
Exchange's displayed bid (i.e., the order subject to price sliding that 
is ranked at $10.12 and displayed at $10.11), then the Exchange 
proposes to modify the ranked price of such bid to the same price as 
the displayed price (i.e., $10.11). By re-ranking the bid in this 
example to $10.11, the Exchange will not allow an order to maintain a 
ranked price that is crossing the NBO when the displayed price of such 
order is locking the NBO, and thus, such order will not have the 
ability to trade through the NBO if the Exchange receives a marketable 
contra-side offer during the locked market condition.
    The Exchange notes that as proposed when an external market 
publishes a Protected Quotation that crosses an order displayed by the 
Exchange, the Exchange has proposed to slide the ranked price of its 
displayed order to

[[Page 8619]]

the displayed price. Thus, an order will still be permitted to be 
ranked at a price that crosses an external market's Protected 
Quotation, and could thus trade through such quotation if executed. For 
instance, using the example above, assume that the NBBO is $10.10 by 
$10.12 and the Exchange has a price slid bid to buy 100 shares that is 
ranked at $10.12 and displayed at $10.11. If an external market then 
updated its Protected Offer to $10.10, thus crossing the Exchange's 
displayed bid (i.e., the order subject to price sliding that is ranked 
at $10.12 and displayed at $10.11), then the Exchange will modify the 
ranked price of such bid to the same price as the displayed price 
(i.e., $10.11). The order displayed by the Exchange will be permitted 
to remain executable at a price that crosses the other market's 
Protected Offer. The Exchange has proposed this functionality because 
it is consistent with its proposed functionality when an external 
market locks the Exchange's Protected Quotation. While the Exchange 
believes such an order should still be permitted to execute pursuant to 
the exception in Regulation NMS when the market is crossed, and does 
not believe that the displayed price of its Protected Quotations should 
be adjusted based on another market published Protected Quotations that 
lock or cross such quotations, the Exchange believes that executing 
such an order at the displayed price of such order is a better result 
because the existence of a crossing quotation is evidence of some price 
discrepancy in the market. The Exchange also believes that consistency 
between the functionality when the Exchange's quotation is locked and 
when the Exchange's quotation is crossed is preferable.\8\
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    \8\ Id.
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    The Exchange also proposes to make clear that this re-ranking will 
not result in a change in priority for the order at its displayed 
price. For instance, in the example above, assume the bid described had 
been posted and displayed at $10.11 and ranked at $10.12 (``Order A''), 
and then a later arriving bid is received by the Exchange at $10.11 
(``Order B'') and posted as well, with priority behind Order A. If the 
Exchange then re-ranks Order A because it has been locked or crossed by 
another market center's Protected Quotation, the Exchange does not 
believe it would be fair to cause such order to lose priority when it 
was originally first in priority amongst displayed orders on the 
Exchange.
    As set forth in the Exchange's current price sliding rules, the 
ranked and displayed prices of an order subject to display-price 
sliding may be adjusted once or multiple times depending upon the 
instructions of a User \9\ and changes to the prevailing NBBO. The 
Exchange's default price sliding process slides and ranks an order on 
entry so that it is ranked at the locking price and displayed at one 
price less aggressive and then unslides the order so that it is 
displayed at the ranked/locking price one time if such display becomes 
permissible. Multiple price sliding continues to rank and display 
orders at the most aggressive permissible prices based on changes to 
the NBBO. Multiple price sliding is optional and must be explicitly 
selected by a User before it will be applied. The Exchange proposes to 
make clear that, in connection with the changes above, if an order 
subject to the Exchange's default price sliding process has been locked 
or crossed by a Protected Quotation of an external market then the 
Exchange will adjust the ranked price of such order and it will not be 
further re-ranked or re-displayed at any other price. While in most 
circumstances the Exchange unslides orders subject to price sliding to 
a more aggressive price when permissible, in this limited circumstance, 
when such an order's displayed price is locked or crossed by an 
external market the Exchange will be sliding the ranked price to the 
less aggressive displayed price and will not further unslide the order. 
Orders subject to the optional multiple price sliding process will be 
further re-ranked and re-displayed as permissible based on changes to 
the prevailing NBBO. Thus, once slid, an order subject to multiple 
price sliding, including its ranked price, will be slid to more 
aggressive prices as permissible.
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    \9\ As defined in BATS Rule 1.5(cc), a User is ``any Member or 
Sponsored Participant who is authorized to obtain access to the 
System pursuant to Rule 11.3.''
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    As a continuation of the example above, assume that the NBBO is 
$10.10 by $10.12 and the Exchange has a price slid bid to buy 100 
shares that is ranked at $10.12 and displayed at $10.11. If an external 
market then updated its Protected Offer to $10.11, thus locking the 
Exchange's displayed bid (i.e., the order subject to price sliding that 
is ranked at $10.12 and displayed at $10.11), then the Exchange will 
modify the ranked price of such bid to the same price as the displayed 
price (i.e., $10.11). If a User has selected the default price sliding 
process then the order will not further re-rank or re-display such 
order, even if the NBO moves back to $10.12 such that the order could 
again be ranked at that price. However, if a User has opted into 
multiple price sliding, the Exchange will re-rank such order at $10.12 
(still displayed at $10.11), and if the NBO then moved to $10.13, the 
Exchange will re-display such order at $10.12.
BATS Options--Display-Price Sliding
    In order to maintain consistency between analogous processes 
offered by BATS Equities and BATS Options, the Exchange proposes to 
modify the rules of BATS Options to conform with the changes described 
above related to display-price sliding. Accordingly, the Exchange 
proposes to modify Rule 21.1(h), which is based on Rule 11.9, as 
amended. Proposed Rule 21.1(h) relates to display-price sliding offered 
to ensure compliance with locked and crossed market rules relevant to 
participation on BATS Options. As proposed, in order to adopt a similar 
change for BATS Options display-price sliding, Rule 21.1(h) will 
provide that an order will only be re-ranked and re-displayed to the 
extent it achieves a more aggressive price, provided, however, that the 
Exchange will re-rank an order at the same price as the displayed price 
in the event such order's displayed price is locked or crossed by a 
Protected Quotation of another options exchange. Such event will not 
result in a change in priority for the order at its displayed price. As 
is true for BATS Equities, display-price sliding for BATS Options will 
default to re-ranking such an order only once unless a User opts-in to 
multiple price sliding. As drafted, the amendments to Rule 21.1(h) are 
identical to the amendments proposed for Rule 11.9 as described above 
with the exception of minor references necessary due to the difference 
between rules applicable to BATS Equities and BATS Options.
2. Statutory Basis
    The rule change proposed in this submission 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\ Specifically, the 
proposed change is consistent with Section 6(b)(5) of the Act,\11\ 
because 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

[[Page 8620]]

perfect the mechanism of, a free and open market and a national market 
system.
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    \10\ 15 U.S.C. 78f(b).
    \11\ 15 U.S.C. 78f(b)(5).
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    The Exchange believes that the proposed changes to price sliding 
are consistent with Section 6(b)(5) of the Act,\12\ as well as Rules 
610 and 611 of Regulation NMS.\13\ The Exchange is not modifying the 
overall functionality of price sliding, which, to avoid locking or 
crossing quotations of other market centers, displays orders at 
permissible prices while retaining a price at which the User is willing 
to buy or sell, in the event display at such price or an execution at 
such price becomes possible. Instead, the Exchange is making changes to 
ensure that if the Exchange's own Protected Quotation is a price slid 
order that is locked or crossed by an external market's Protected 
Quotation, that [sic] the Exchange will re-rank such order so that its 
displayed price is the same as its ranked price.
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    \12\ Id.
    \13\ 17 CFR 242.610; 17 CFR 242.611.
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    Rule 610(d) requires exchanges to establish, maintain, and enforce 
rules that require members reasonably to avoid ``[d]isplaying 
quotations that lock or cross any protected quotation in an NMS 
stock.'' \14\ Such rules must be ``reasonably designed to assure the 
reconciliation of locked or crossed quotations in an NMS stock,'' and 
must ``prohibit * * * members from engaging in a pattern or practice of 
displaying quotations that lock or cross any quotation in an NMS 
stock.'' \15\ Thus, display-price sliding offered by the Exchange, 
including the functionality offered for BATS Options, assists Users by 
displaying orders at permissible prices.
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    \14\ 17 CFR 242.610(d).
    \15\ Id.
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    Rule 611 requires trading centers to ``establish, maintain, and 
enforce written policies and procedures that are reasonably designed to 
prevent trade-throughs on that trading center of protected quotations'' 
unless an exception applies. The Exchange believes that the proposal to 
modify its price sliding functionality to prevent the ranked prices of 
orders subject to price sliding from working at a price that could 
trade through other market centers when the Exchange's quotation is 
locked is consistent with this Rule 611. Similarly, although a trade 
through would be permissible if the Exchange's quotation is crossed by 
another market center based on an applicable exception, the Exchange 
believes that the proposal to re-rank orders in such a circumstance to 
the displayed price is consistent with the protection of investors and 
the public interest.

B. Self-Regulatory Organization's Statement on Burden on Competition

    The proposed rule change does not impose any burden on competition. 
To the contrary, the proposal will ensure that the Exchange's processes 
are designed to prevent trade throughs consistent with Regulation NMS 
in the event the Exchange's own quotations are locked or crossed by 
external markets.

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, the proposed rule change has become effective 
pursuant to Section 19(b)(3)(A) of the Act \16\ and Rule 19b-4(f)(6) 
thereunder.\17\
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    \16\ 15 U.S.C. 78s(b)(3)(A).
    \17\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6) 
requires a self-regulatory organization to give the Commission 
written notice of its intent to file the proposed rule change, along 
with a brief description and 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. 
The Exchange has satisfied this requirement.
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    A proposed rule change filed pursuant to Rule 19b-4(f)(6) under the 
Act \18\ normally does not become operative for 30 days after the date 
of its filing. However, Rule 19b-4(f)(6) \19\ 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 will allow the Exchange to immediately enhance its price sliding 
functionality to avoid potential trade throughs when the Exchange's 
quotation is locked by an external market. The Commission believes that 
waiving the 30-day operative delay is consistent with the protection of 
investors and the public interest. Therefore, the Commission hereby 
waives the 30-day operative delay and designates the proposal operative 
upon filing.\20\
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    \18\ 17 CFR 240.19b-4(f)(6).
    \19\ 17 CFR 240.19b-4(f)(6).
    \20\ 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 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-2013-007 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-2013-007. 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

[[Page 8621]]

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-2013-007 and should be 
submitted on or before February 27, 2013].

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\21\
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    \21\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-02559 Filed 2-5-13; 8:45 am]
BILLING CODE 8011-01-P


