
[Federal Register Volume 78, Number 235 (Friday, December 6, 2013)]
[Notices]
[Pages 73577-73580]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-29092]



[[Page 73577]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-70964; File No. SR-BATS-2013-060]


Self-Regulatory Organizations; BATS Exchange, Inc.; Notice of 
Filing and Immediate Effectiveness of a Proposed Rule Change To Modify 
the Risk Monitoring Functionality Offered by the Exchange

December 2, 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 November 18, 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 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 filed a proposal to amend Rule 21.16, entitled ``Risk 
Monitor Mechanism'', in order to modify the risk monitoring 
functionality offered to all Users \5\ of the BATS equity options 
trading platform (``BATS Options'') and to make a clarifying change to 
the rule text.
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    \5\ As defined in Exchange Rule 16.1(a)(63), a User is any 
Exchange member or sponsored participant authorized to obtain access 
to the Exchange.
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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.

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

1. Purpose
    The purpose of the proposed rule changes are: (1) to amend Exchange 
Rule 21.16(b)(ii) in order add a new percentage-based Specified 
Engagement Trigger \6\ to the Risk Monitor Mechanism; (2) to amend BATS 
Rule 21.16(c) in order to provide more granular cancellation of orders 
under the Risk Monitor Mechanism; (3) to make a clarifying change to 
BATS Rule 22.11; and (4) to add BATS Rule 21.16(e). Specifically, the 
Exchange proposes to amend Rule 21.16(b)(ii), entitled ``Specified 
Engagement Triggers'', in order to adopt a new type of Specified 
Engagement Trigger that will be triggered whenever a trade counter has 
calculated that the User has traded a certain percentage within a time 
period specified by the Exchange against the User's orders in a 
specified class. The Exchange also proposes to amend Rule 21.16(c) such 
that an incoming order that is received prior to the time that the Risk 
Monitor Mechanism is engaged and is executable against a User's 
quotation will execute up to the entire size of the User's quotation 
that would cause executions in excess of the User's Specified 
Engagement Trigger, but any additional executable quotations will be 
cancelled. The Exchange further proposes to amend Rule 22.11 in order 
to clarify the functionality of mass cancellation of trading interest, 
and to add Rule 21.16(e) in order to make clear that a User may engage 
the Risk Monitor Mechanism in order to implement such mass cancellation 
functionality.
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    \6\ As defined in Exchange Rule 21.16(b)(ii).
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Overview

    Currently, the Exchange's Risk Monitor Mechanism operates by the 
System maintaining a counting program for each User. A single User may 
configure a single counting program or multiple counting programs to 
govern its trading activity (i.e., on a port by port basis). The 
counting program will count executions of contracts traded by each User 
and in specific Option Categories (as defined below) by each User. The 
counting program counts executions, contract volume, and notional 
value, within a specified time period established by each User (the 
``specified time period'') and on an absolute basis for the trading day 
(``absolute limits''). The specified time period commences for an 
option when a transaction occurs in any series in such option. The 
counting program also counts a User's executions, contract volume, and 
notional value across all options which a User trades. The counting 
program counts executions in the following ``Options Categories'': 
front-month puts, front-month calls, back-month puts, and back month 
calls (each an ``Option Category''). The counting program also counts a 
User's executions, contract volume, and notional value across all 
options which a User trades (``Firm Category''). For the purposes of 
the Risk Monitor Mechanism, a front-month put or call is an option that 
expires within the next two calendar months, including weeklies and 
other non-standard expirations, and a back-month put or call is an 
option that expires in any month more than two calendar months away 
from the current month.
    The System engages the Risk Monitor Mechanism in a particular 
option when the counting program has determined that a User's trading 
has reached a Specified Engagement Trigger established by such User 
during the specified time period or on an absolute basis. When a 
Specified Engagement Trigger is reached in an Options Category, the 
Risk Monitor Mechanism will automatically remove such User's orders in 
all series of the particular option and reject any additional orders 
from a User in such option until the counting program has been reset in 
accordance with paragraph (d) of Rule 21.16. The Risk Monitor Mechanism 
also attempts to cancel any orders that have been routed away to other 
options exchanges on behalf of the User.
    As provided in subparagraph (b)(ii) of BATS Rule 21.16, each User 
can, optionally, establish Specified Engagement Triggers in each 
Options Category, per option, or in the Firm Category. Specified 
Engagement Triggers can be set as follows: (A) a contract volume 
trigger, measured against the number of contracts executed (the 
``volume trigger''); (B) a notional value trigger, measured against the 
notional value of executions \7\ (the ``notional trigger''); and (C) an 
execution count trigger, measured against the number of executions 
(``count trigger'').

[[Page 73578]]

Each of these triggers can be established in isolation (e.g., a User 
may choose only to implement a volume trigger) or a User can establish 
multiple separate triggers with different parameters. Also, as 
described above, the triggers can be implemented either as absolute 
limits or over a specified period of time.
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    \7\ Notional value is calculated as the sum of all premiums paid 
times the number of contracts executed. For example, an option 
executed with a premium of $3.00 for 5 contracts would count as 
$15.00 notional value.
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    Rule 22.11, entitled ``Mass Cancellation of Trading Interest'' 
currently provides that a User may simultaneously cancel all its bids, 
offers, and orders in all series of options by requesting the Exchange 
staff to effect such cancellation. The form of such requests includes 
but is not limited to email or phone call from authorized individuals, 
and the Risk Monitor Mechanism. As part of Rule 22.11, a User may 
submit a request to cancel a subset or the entirety of its outstanding 
orders.

Percentage-Based Engagement Trigger

    The Exchange proposes to create a new Specified Engagement Trigger 
to the Risk Monitor Mechanism based on percentage under BATS Rule 
21.16(b)(ii) (the ``percentage trigger''). The proposed percentage 
trigger would be triggered whenever a trade counter has calculated that 
the User has traded a set percentage (designated by the User) within a 
set time period (designated by the Exchange) against the User's orders 
in a specified class. The set percentage is specified by the User (the 
``Specified Percentage'') and will be calculated as follows (and as 
shown in the examples below): (1) a counting program would first 
calculate, for each series of an option class, the percentage of a 
User's combined order and quote size that is executed on each side of 
the market, including both displayed and non-displayed size; and (2) a 
counting program would then sum the overall series percentages for the 
entire option class to calculate the percentage.

Example 1

    For Examples 1 and 2, if a User enters orders at the National Best 
Bid or Offer (``NBBO'') in four series of a class and its Specified 
Percentage is 100%, a counting program would calculate such percentage 
as follows:

----------------------------------------------------------------------------------------------------------------
                                                                                of
                         Series                              Quote size         Contracts      Series percentage
                                                                                 executed             (%)
----------------------------------------------------------------------------------------------------------------
Series 1...............................................                100                 40                 40
Series 2...............................................                 50                 20                 40
Series 3...............................................                200                 20                 10
Series 4...............................................                150                 15                 10
    Total..............................................                500                 95                100
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    In Example 1, the aggregate number of contracts executed among all 
series during the time period specified by the Exchange that equals the 
specified percentage of 100% is 95 contracts, at which point the 
percentage trigger would be triggered and the User's remaining orders 
in the appointed class would be cancelled.

Example 2

----------------------------------------------------------------------------------------------------------------
                                                                                of
                         Series                              Quote size         Contracts      Series Percentage
                                                                                 Executed             (%)
----------------------------------------------------------------------------------------------------------------
Series 1...............................................                100                  0                  0
Series 2...............................................                 50                  0                  0
Series 3...............................................                200                  0                  0
Series 4...............................................                150                150                100
Total..................................................                500                150                100
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    In Example 2, the aggregate number of contracts executed among all 
series during the time period specified by the Exchange that equals the 
specified percentage of 100% is 150 contracts, at which point the 
percentage trigger would be triggered and the User's remaining quotes 
in the appointed class would be cancelled.

Example 3

    For Example 3, if a User is quoting at the NBBO in four series of a 
particular option class, and specifies its percentage trigger at 200%, 
a trade counter would calculate such percentage as follows:

----------------------------------------------------------------------------------------------------------------
                                                                                of
                         Series                              Quote size         Contracts      Series percentage
                                                                                 executed             (%)
----------------------------------------------------------------------------------------------------------------
Series 1...............................................                100                 80                 80
Series 2...............................................                 50                 40                 80
Series 3...............................................                200                 40                 20
Series 4...............................................                150                 30                 20
    Total..............................................                500                190                200
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    In Example 3, the aggregate number of contracts executed among all 
series during the time period specified by the Exchange that equals the 
specified percentage of 200% is 190 contracts, at which point the 
percentage trigger would be triggered and the User's remaining quotes 
in the appointed class would be cancelled.

Order Cancellation

    The Exchange also proposes to amend Rule 21.16(c) regarding what 
will happen to marketable orders that are executable against a User's 
quotation that are received prior to the time that the Risk Monitor 
Mechanism is engaged. Specifically, the Exchange is proposing to amend 
the rule such that where there are marketable orders that are 
executable against a User's order or quotation that are received prior 
to the

[[Page 73579]]

time that the Risk Monitor Mechanism is engaged will be automatically 
executed up to the size of the User's quotation (but not all of the 
User's quotations, as currently implemented). For example, where a 
single User's Specified Engagement Trigger is 150 contracts, the User 
has entered the following sell orders in a given series that are 
resting at the Exchange, and the next most aggressively priced sell 
order in the series is 10.04:

------------------------------------------------------------------------
                       Price Level                          Quoted Size
------------------------------------------------------------------------
10.01...................................................             100
10.02...................................................             100
10.03...................................................             150
------------------------------------------------------------------------

Where another User then enters a 300 contract buy order priced at 
10.03, the Exchange will allow the orders priced at 10.01 and 10.02 to 
execute in full, even though the execution of the 10.02 order will 
result in an execution of a total of 200 contracts, which will exceed 
the Specified Engagement Trigger of 150 contracts. The Exchange will 
then cancel the entirety of the 10.03 order and the remaining portion 
of the buy order will behave as indicated by the other User indicated 
upon entry. Under the current implementation, the Exchange would allow 
the entirety of the buy order to execute before cancelling any of the 
User's orders, meaning that the orders priced at 10.01 and 10.02 would 
execute in full and 100 shares of the order priced at 10.03 would 
execute, at which point the remaining 50 shares of the order priced at 
10.03 would be cancelled. The Exchange believes that this change in the 
implementation of the Risk Monitor Mechanism will provide an 
appropriate level of additional protection for firms using the 
mechanism such that, while their risk limits can be exceeded to satisfy 
an incoming order, such limits will be better protected by cancelling 
interest after the first quotation has been executed that equals or 
exceeds the User's Specified Engagement Trigger (i.e., the Exchange 
will not allow an incoming order to execute against all of a User's 
quotations even after their risk limits have been breached).

Clarifying Changes

    The Exchange also proposes to make a clarifying amendment to Rule 
22.11 in order to make the mass cancellation functionality more clear. 
As described above, a User may submit a request to cancel any subset or 
the entirety of its outstanding orders. The Exchange is proposing to 
clarify Rule 22.11 in order to make clear that a User may request to 
cancel orders for a specified underlying security.
    Similarly, the Exchange proposes to make a clarifying change by 
adding paragraph 21.16(e) in order to make clear that a User may engage 
the Risk Monitor Mechanism in order to use the mass cancellation 
functionality from Rule 22.11.
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.\8\ Specifically, the 
proposed change is consistent with Section 6(b)(5) of the Act,\9\ 
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 perfect 
the mechanism of, a free and open market and a national market system. 
The Exchange believes that the proposal is appropriate and reasonable 
because it offers additional functionality for Users to manage their 
risk. Offering the percentage trigger and more granular order 
cancellation as part of the Risk Monitor Mechanism will provide Market 
Makers and other Users with greater control and flexibility with 
respect to managing risk and the manner in which they enter orders and 
quotes, allowing them to quote more aggressively, which removes 
impediments to a free and open market and benefits all Users of BATS 
Options. The Exchange notes that a similar functionality is offered by 
NYSE Arca, Inc. (``NYSE Arca Options'') and NYSE Amex Options, Inc. 
(``NYSE Amex Options'').\10\
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    \8\ 15 U.S.C. 78f(b).
    \9\ 15 U.S.C. 78f(b)(5).
    \10\ See NYSE Arca Options Rule 6.40(d); see also NYSE Amex 
Options Rule 928NY(d).
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(B) 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 current 
variances between the Exchange's Risk Monitor Mechanism and the risk 
monitoring available at other exchanges limit competition in that other 
exchanges are able to employ their risk management tools using a 
percentage-based trigger, while the Exchange cannot employ such a 
trigger. Thus, approval of the proposed rule change will promote 
competition because it will allow the Exchange to offer its Users 
similar percentage triggers as are available at other exchanges and 
thus compete with other exchanges for order flow that a User may not 
have directed to the Exchange if the percentage trigger was not 
available.

(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 foregoing proposed rule change does not: (1) 
significantly affect the protection of investors or the public 
interest; (2) impose any significant burden on competition; and (3) 
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) of the Act \11\ and Rule 19b-
4(f)(6)(iii) thereunder.\12\
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    \11\ 15 U.S.C. 78s(b)(3)(A).
    \12\ 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: (i) 
necessary or appropriate in the public interest; (ii) for the 
protection of investors; or (iii) otherwise in furtherance of the 
purposes of the Act. If the Commission takes such action, the 
Commission shall institute proceedings to determine whether the 
proposed rule should be approved or disapproved.

IV. 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 No. SR-BATS-2013-060 on the subject line.

[[Page 73580]]

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-2013-060. 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-2013-060 and should be 
submitted on or before December 27, 2013.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\13\
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    \13\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-29092 Filed 12-5-13; 8:45 am]
BILLING CODE 8011-01-P


