
[Federal Register Volume 78, Number 126 (Monday, July 1, 2013)]
[Notices]
[Pages 39392-39395]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-15697]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-69857; File No. SR-BATS-2013-037]


Self-Regulatory Organizations; BATS Exchange, Inc.; Notice of 
Filing and Immediate Effectiveness of a Proposed Rule Change To Amend 
the Requirements of the Competitive Liquidity Provider Program

June 25, 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 June 20, 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, 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 filed a proposal to amend Rule 11.8 to eliminate the 
requirement that Competitive Liquidity Providers (``CLPs'') have 
information barriers between the CLP unit and the Member's customer, 
research, and investment banking business because CLPs already are 
subject to principles-based Exchange rules governing the misuse of 
nonpublic, material information.
    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 proposes to eliminate the requirement in subparagraph 
(c)(6) of Interpretation and Policy .02 to Rule 11.8 that the business 
unit of a Member acting as a CLP maintain adequate information barriers 
between the CLP unit and the Member's customer, research, and 
investment banking business. The Exchange believes that the information 
barrier requirement is unnecessary because CLPs already are subject to 
the Exchange's existing principles-based rules governing the misuse of 
nonpublic, material information. Elimination of the information barrier 
requirement clarifies that CLPs have the flexibility to adapt their 
policies and procedures as appropriate to reflect changes to their 
business model, business activities, or the securities market. The 
Exchange believes that its rules clearly identify prohibited conduct 
(i.e., misuse of material, non-public information) without further 
requiring CLPs to establish and maintain specific compliance mechanisms 
(e.g., information barriers).

Background

    The CLP Program and its requirements are set out in Interpretation 
and Policy .02 to Rule 11.8, the rule that contains the obligations 
applicable to Exchange Market Makers. A CLP is a Member that 
electronically enters proprietary orders into the systems and 
facilities of the Exchange. It is obligated to maintain a bid or an 
offer at the NBB or NBO in each assigned security in round lots 
consistent with the requirements of Interpretation and Policy .02 to 
Rule 11.8. CLPs are subject to both a daily quoting requirement to be 
eligible to receive financial incentives and a monthly quoting 
requirement to remain qualified as a CLP. A CLP that does not meet the 
CLP daily requirement is not eligible to receive the financial 
incentives of the CLP Program. A CLP that does not meet the CLP monthly 
quoting requirements is subject to certain non-regulatory penalties, 
including the potential to lose its CLP status.
    To qualify as a CLP, a Member is required to be a registered Market 
Maker in good standing with the Exchange, consistent with Rules 11.5 
through 11.8. Further, the Exchange requires each Member seeking to 
qualify as a CLP to have and maintain: (1) adequate

[[Page 39393]]

technology to support trading through the systems and facilities of the 
Exchange; (2) one or more unique identifiers that identify to the 
Exchange CLP trading activity in assigned CLP securities; (3) adequate 
trading infrastructure to support trading activity, which includes 
support staff to maintain operational efficiencies in the CLP program 
and adequate administrative staff to manage the Member's participation 
in the CLP Program; (4) quoting and volume performance that 
demonstrates an ability to meet the CLP quoting requirement in each 
assigned security on a daily and monthly basis; (5) a disciplinary 
history that is consistent with just and equitable business practices; 
and (6) with respect to the business unit of the Member acting as a 
CLP, adequate information barriers between the CLP unit and the 
Member's customer, research, and investment banking business.

Proposed Rule Change

    The Exchange believes it is appropriate to delete subparagraph 
(c)(6) of Interpretation and Policy .02 to Rule 11.8, which requires 
that the business unit of the Member acting as a CLP have in place 
adequate information barriers between the CLP unit and the Member's 
customer, research, and investment banking business. Instead, the 
Exchange believes that its rules governing the misuse of material 
nonpublic information provide an appropriate principles-based approach 
to preventing the market abuses addressed by subparagraph (c)(6).\3\ 
The Exchange, therefore, believes that specifically requiring 
information barriers is unnecessary.
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    \3\ The Exchange adopted these principles-based rules in 
February 2010. See Securities Exchange Act Release No. 61574 
(February 23, 2010), 75 FR 9455 (March 2, 2010).
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    The requirement that exchange market makers, in general, have in 
place information barriers between a market making unit and other 
business units traces its roots from concerns that an inappropriate 
sharing of material, non-public information between the market making 
unit and other business units of a member could result in the misuse of 
non-public information, manipulation and other improper trading 
practices, as well as give rise to conflicts of interest.\4\ One such 
concern is that a market maker or affiliate engaging in other business 
activities might trade on non-public information that the market maker 
acquired through its market making activities.\5\ Another concern is 
that a market maker may misuse material, non-public information 
received from its other business activities, such as trading based on a 
change in the firm's buy or sell recommendation.\6\
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    \4\ See, e.g., Securities Exchange Act Release No. 61336 (Jan. 
12, 2010), 75 FR 2908, 2910 (Jan. 19, 2010) (``CBOE Rule 8.91 
addresses concerns arising from the potential for the sharing of 
material non-public information between a DPM's market making 
activities and other business activities of the DPM or its 
affiliates.''); Securities Exchange Act Release No. 58328 (Aug. 7, 
2008), 73 FR 48260, 48265 (Aug. 18, 2008) (``The restrictions in 
current NYSE Rule 98 and related rules are intended to address two 
primary concerns. The first concern is the potential that an 
affiliate could unfairly use non-public information, such as 
information on a specialist's book or information regularly provided 
to him by other market participants because of his central role as a 
primary market specialist. . . . The second concern is that a 
specialist unit could favor its affiliates by providing orders 
placed by the affiliate with more favorable executions and by 
providing useful market information to the affiliated firm (or to 
its broker on the exchange trading floor) but not to others. In some 
cases, such conflicts of interest could result in the specialist 
neglecting his duty to make a fair and orderly market by giving an 
affiliate's principal or agency orders a more favorable 
execution.''); see also Broker-Dealer Policies and Procedures 
Designed to Segment the Flow and Prevent the Misuse of Material 
Nonpublic Information, Securities and Exchange Commission Division 
of Market Regulation, March 1990.
    \5\ See Securities Exchange Act Release No. 61574 (February 23, 
2010), 75 FR 9455, 9458 (March 2, 2010).
    \6\ Id.
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    Exchanges have recently adopted principles-based rules intended to 
prevent such market abuses, rather than specific sets of requirements 
designed to accomplish the same end, such as the information barriers 
set out in subparagraph (c)(6). NYSE Arca, Inc. (``NYSE Arca''), Nasdaq 
Stock Market, LLC (``Nasdaq''), and the Exchange, for example, have 
amended their rules to eliminate specific information barrier 
requirements for Members.\7\ Those exchanges have instead enacted 
principles-based approaches that permit Members to develop and apply 
their own policies and procedures to, among other things, prohibit and 
prevent the misuse of material nonpublic information. While the 
specific policies and procedures are no longer mandated, these 
principles-based rules are ``reasonably designed to ensure compliance 
with applicable federal securities law and regulations, and with the 
rules of the applicable exchange'' and have been approved by the 
Commission.\8\
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    \7\ See Securities Exchange Act Release No. 61574 (February 23, 
2010), 75 FR 9455 (March 2, 2010); Securities Exchange Act Release 
No. 60604 (September 1, 2009), 74 FR 46272 (September 8, 2009) (SR-
NYSEArca-2009-78); Securities Exchange Act Release No. 53128 
(January 13, 2006), 71 FR 3550 (January 23, 2006) (adopting Nasdaq 
IM-2110-2; IM-2110-3; IM-2110-4; and Rule 3010).
    \8\ See 75 FR at 9458 (``The Commission believes that, with 
adequate oversight by the Exchange of its members, elimination of 
prescriptive information barrier requirements should not reduce the 
effectiveness of BATS rules requiring Members to establish and 
maintain systems to supervise the activities of Members, and written 
procedures that are reasonably designed to comply with applicable 
securities laws and Exchange rules, including the prohibition on 
misuse of material nonpublic information.'')
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    Consistent with the principles-based approach described above, 
Exchange Rule 5.5 requires that each Member establish, maintain, and 
enforce written policies and procedures reasonably designed to prevent 
the misuse of material, non-public information by the Member or persons 
associated with the Member. For purposes of this requirement, conduct 
constituting the misuse of material, non-public information includes, 
but is not limited to, the following:
    (a) trading in any securities issued by a corporation, or in any 
related securities or related options or other derivative securities, 
while in possession of material, non-public information concerning that 
issuer; or
    (b) trading in a security or related options or other derivative 
securities, while in possession of material, non-public information 
concerning imminent transactions in the security or related securities; 
or
    (c) disclosing to another person or entity any material, non-public 
information involving a corporation whose shares are publicly traded or 
an imminent transaction in an underlying security or related securities 
for the purpose of facilitating the possible misuse of such material, 
non-public information.
    The Exchange also has several rules prohibiting Members from 
disadvantaging their customers or other market participants by 
improperly capitalizing on the Members' access to or receipt of 
material, non-public information. For example, Rule 12.6 prohibits a 
Member from trading ahead of its customer's limit orders. Rule 12.13 
prohibits a Member from establishing an inventory position in a 
security or a derivative of such security based on non-public advance 
knowledge of the content or timing of a research report in that 
security. Rule 5.1 requires each Member to (i) establish, maintain, and 
enforce written procedures that will enable it to supervise properly 
the activities of associated persons; and (ii) establish, maintain, and 
enforce written procedures to assure associated persons comply with 
applicable securities laws, rules, regulations, and statements of 
policy promulgated thereunder, with the rules of the designated self-

[[Page 39394]]

regulatory organization, where appropriate, and with Exchange Rules.
    The elimination of the information barrier requirements in the CLP 
Program would allow CLPs to tailor their policies and procedures with 
respect to the handling of material, non-public information as 
appropriate to reflect their business models and activities, and to 
adapt to changes in such models, activities, and the securities market 
in general.\9\ Consistent with the practices of other national 
securities exchanges, the Exchange, therefore, proposes to eliminate 
the information barrier requirement set out in subparagraph (c)(6) of 
Interpretation and Policy .02 to Rule 11.8. The Exchange believes that 
this approach will foster a fair and orderly marketplace without being 
overly burdensome to its Members.
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    \9\ While information barriers are not specifically required 
under the Exchange's rules, a CLP's business model or business 
activities may dictate that an information barrier or a functional 
separation be part of the appropriate set of policies and procedures 
that would be reasonably designed to achieve compliance with 
applicable securities laws and regulations, and with applicable 
Exchange rules.
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    By amending its rules in accordance with this proposal, the 
Exchange reinforces a regulatory structure that clearly prohibits 
certain conduct (e.g., misuse of material, non-public information 
pursuant to Rule 5.5) without further requiring Members to establish 
and maintain specific compliance mechanisms (e.g., information 
barriers). The Exchange believes that the approach proposed herein is 
consistent with Nasdaq and NYSE Arca's respective structures. 
Importantly, like Nasdaq and NYSE Arca, market makers registered with 
BATS and other firms that are Members of BATS that trade for their own 
accounts do not have any advantages regarding relevant trading 
information provided by the Exchange, either at, or prior to, the point 
of execution vis-[agrave]-vis other market participants. Accordingly, 
the Exchange believes that its procedures based approach is reasonable.
    Pursuant to this proposed rule change, Members may utilize a 
flexible, principles-based approach to modify their policies and 
procedures as appropriate to reflect changes to their business model, 
business activities, or to the securities market itself. A Member 
should be proactive in assuring that its policies and procedures 
reflect the current state of its business and continue to be reasonably 
designed to achieve compliance with applicable federal securities law 
and regulations, and with applicable Exchange rules. In addition, in 
the context of approving the proposal by NYSE Arca, the Commission 
stated that, ``while information barriers are not specifically required 
under the proposal, a [firm's] business model or business activities 
may dictate that an information barrier or a functional separation be 
part of the appropriate set of policies and procedures that would be 
reasonably designed to achieve compliance with applicable securities 
law and regulations, and with applicable Exchange rules.'' \10\
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    \10\ See Securities Exchange Act Release No. 60604 (September 1, 
2009), 74 FR at 46275.
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2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act \11\ in general, and furthers the objectives of Section 
6(b)(5) of the Act \12\ in particular, in that it is designed to 
prevent fraudulent and manipulative acts and practices, to promote just 
and equitable principles of trade, to remove impediments to and perfect 
the mechanism of a free and open market and a national market system, 
and, in general to protect investors and the public interest. The 
Exchange believes the proposal is designed to prevent fraudulent and 
manipulative acts and practices and to promote just and equitable 
principles of trade because existing rules make clear to CLPs the type 
of conduct that is prohibited by the Exchange. Thus, while the proposal 
eliminates prescriptive information barrier requirements, CLPs will 
remain subject to existing Exchange rules requiring them to establish 
and maintain systems to supervise their activities, and to create, 
implement, and maintain written procedures that are reasonably designed 
to comply with applicable securities laws and Exchange rules, including 
the prohibition on the misuse of material, nonpublic information. The 
Exchange also believes the proposal is designed to remove impediments 
to and perfect the mechanism of a free and open market and national 
market system because the proposal will allow CLPs to utilize a 
flexible, principles-based approach to adapt their policies and 
procedures as appropriate to reflect their business models, business 
activities, and the securities markets at a given point in time.
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    \11\ 15 U.S.C. 78f(b).
    \12\ 15 U.S.C. 78f(b)(5).
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Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition not necessary or appropriate in 
furtherance of the purposes of the Act. To the contrary, the Exchange 
believes that the proposal will enhance competition by allowing CLPs to 
comply with applicable Exchange rules in a manner best suited to their 
business models, business activities, and the securities markets, thus 
reducing regulatory burdens while still ensuring compliance with 
applicable securities laws and regulations, and with applicable 
Exchange rules. The Exchange believes that the proposal will foster a 
fair and orderly marketplace without being overly burdensome upon its 
Members.

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.

Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Because the foregoing 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, it has become 
effective pursuant to Section 19(b)(3)(A)(ii) of the Act \13\ and 
subparagraph (f)(6) of Rule 19b-4 thereunder.\14\
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    \13\ 15 U.S.C. 78s(b)(3)(a)(ii).
    \14\ 17 CFR 240.19b-4(f)(6).
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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.

Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposal 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

[[Page 39395]]

No. SR-BATS-2013-037 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 No. SR-BATS-2013-037. 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 changes 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 such filing will also be available 
for inspection and copying at the principal office of the Exchange. All 
comments received will be posted without change; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File No. SR-BATS-2013-037 and should be 
submitted on or before July 22, 2013.
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    \15\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\15\
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-15697 Filed 6-28-13; 8:45 am]
BILLING CODE 8011-01-P


