
[Federal Register Volume 79, Number 151 (Wednesday, August 6, 2014)]
[Notices]
[Pages 45857-45860]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-18534]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-72730; File No. SR-BYX-2014-013]


Self-Regulatory Organizations; BATS Y-Exchange, Inc.; Notice of 
Filing and Immediate Effectiveness of a Proposed Rule Change To Amend 
Rule 11.24(a)(2) to Include Riskless Principal Orders To the Types of 
Orders that May Qualify as Retail Orders under the Retail Price 
Improvement Program

July 31, 2014.
    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 July 24, 2014, BATS Y-Exchange, Inc. (the ``Exchange'' or 
``BYX'') 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.
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

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

    The Exchange proposes to amend Exchange Rule 11.24(a)(2) to include 
riskless principal orders to the types of orders that may qualify as 
Retail Orders under the Exchange's Retail Price Improvement Program 
(the ``RPI Program''). The Exchange has designated this proposal as 
non-controversial and provided the Commission with the notice required 
by Rule 19b-4(f)(6)(iii) under the Act.\5\
---------------------------------------------------------------------------

    \5\ 17 CFR 240.19b-4(f)(6)(iii).
---------------------------------------------------------------------------

    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 amend Exchange Rule 11.24(a)(2) to include 
riskless principal orders to the types of orders that may qualify as 
Retail Orders under the Exchange's RPI Program.\6\ The Exchange 
established the RPI Program in an attempt to attract retail order flow 
to the Exchange by potentially providing price improvement to such 
order flow.\7\ Under the RPI Program, all Exchange Users \8\ are 
permitted members to submit Retail Price Improvement Orders (``RPI 
Orders'') \9\ which are designed to provide potential price improvement 
for Retail Orders in the form of non-displayed interest that is better 
than the national best bid that is a Protected Quotation (``Protected 
NBB'') or the national best offer that is a Protected Quotation 
(``Protected NBO'', and together with the Protected NBB, the 
``Protected NBBO'').\10\ The Exchange believes that the RPI Program 
promotes competition for retail order flow by allowing Exchange Users 
to submit RPI Orders to interact with Retail Orders.
---------------------------------------------------------------------------

    \6\ The Exchange notes that in order to qualify as a Retail 
Order, a riskless principal order must satisfy the criteria set 
forth in FINRA Rule 5320.03.
    \7\ See Securities Exchange Act Release No. 68303 (November 27, 
2012), 77 FR 71652 (December 3, 2012) (``RPI Approval Order'') (SR-
BYX-2012-019). See also Securities Exchange Act Release No. 71249 
(January 7, 2014), 79 FR 2229 (January 13, 2014) (SR-BYX-2014-001) 
(Notice of Filing and Immediate Effectiveness extending pilot period 
until January 31, 2015).
    \8\ A ``User'' is defined ``as any member or sponsored 
participant of the Exchange who is authorized to obtain access to 
the System.'' BYX Rule 1.5(cc).
    \9\ A ``Retail Price Improvement Order'' is defined in Rule 
11.24(a)(3) as an order that consists of non-displayed interest on 
the Exchange that is priced better than the Protected NBB or 
Protected NBO by at least $0.001 and that is identified as such. See 
Rule 11.24(a)(3).
    \10\ The term Protected Quotation is defined in BYX Rule 1.5(t) 
and has the same meaning as is set forth in Regulation NMS Rule 
600(b)(58). The terms Protected NBB and Protected NBO are defined in 
BYX Rule 1.5(s). The Protected NBB is the best-priced protected bid 
and the Protected NBO is the best-priced protected offer. Generally, 
the Protected NBB and Protected NBO and the national best bid 
(``NBB'') and national best offer (``NBO'', together with the NBB, 
the ``NBBO'') will be the same. However, a market center is not 
required to route to the NBB or NBO if that market center is subject 
to an exception under Regulation NMS Rule 611(b)(1) or if such NBB 
or NBO is otherwise not available for an automatic execution. In 
such case, the Protected NBB or Protected NBO would be the best-
priced protected bid or offer to which a market center must route 
interest pursuant to Regulation NMS Rule 611.
---------------------------------------------------------------------------

    Exchange Rule 11.24(a)(2) currently defines a Retail Order as, ``an 
agency order that originates from a natural person and is submitted to 
the Exchange by a Retail Member Organization, provided that no change 
is made to the terms of the order with respect to price or side of the 
market and the order does not originate from a trading algorithm or any 
other computerized methodology.'' The Exchange believes that its 
definition of a Retail Order is unnecessarily restrictive compared to 
that of other exchanges because it does not include ``riskless 
principal orders'' in its definition.\11\ The Exchange believes that 
its comparatively narrow definition may create confusion among the 
Exchange's Members,\12\ preventing

[[Page 45858]]

Members from participating in the RPI Program. In addition, the 
Exchange believes that the restrictiveness of the Exchange's definition 
may inadvertently put the Exchange at a competitive disadvantage in 
relation to other exchanges that provide a less restrictive definition 
of a Retail Order.
---------------------------------------------------------------------------

    \11\ The Exchange notes that other market centers include 
``riskless principal orders'' as part of their definitions of 
``Retail Orders.'' See, e.g., Securities Exchange Act Release No. 
68937 (February 15, 2013), 78 FR 12397 (February 22, 2013) (SR-
NASDAQ-2012-129); Securities Exchange Act Release No. 69103 (March 
11, 2013), 78 FR 16547 (March 15, 2013) (SR-NYSE-2013-20); 
Securities Exchange Release No. 69104 (March 11, 2013), 78 FR 16556 
(March 15, 2013) (SR-NYSEMKT-2013-22); and Securities Exchange Act 
Release No. 69378 (April 15, 2013), 78 FR 23617 (April 19, 2013) 
(SR-EDGX-2013-13).
    \12\ The term ``Member'' is defined as ``any registered broker 
or dealer that has been admitted to membership in the Exchange. A 
Member will have the status of a ``member'' of the Exchange as that 
term is defined in Section 3(a)(3) of the Act. Membership may be 
granted to a sole proprietor, partnership, corporation, limited 
liability company or other organization which is a registered broker 
or dealer pursuant to Section 15 of the Act, and which has been 
approved by the Exchange.'' See Exchange Rule 1.5(n).
---------------------------------------------------------------------------

    Accordingly, the Exchange proposes to amend the definition of a 
Retail Order in under Rule 11.24(a)(2) to include riskless principal 
orders to the types of orders that may qualify as Retail Orders.\13\ 
The Exchange proposes to amend Rule 11.24(a)(2) to define a Retail 
Order as, ``an agency order or riskless principal that meets the 
criteria of FINRA Rule 5320.03 that originates from a natural person 
and is submitted to the Exchange by a Retail Member organization, 
provided that no change is made to the terms of the order with respect 
to price or side of market and the order does not originate from a 
trading algorithm or any other computerized methodology'' (emphasis 
added).\14\ The Exchange believes that, for purposes of determining 
whether an order should qualify as a Retail Order, there is no 
substantive difference between an agency order and a riskless principal 
order that meets the requirements of FINRA Rule 5320.03. A riskless 
principal transaction is a transaction in which a Member, after having 
received an order to buy (sell) a security, purchases (sells) the 
security as principal and, contemporaneously, satisfies the original 
order by selling (buying) as principal at the same price. Generally, a 
riskless principal transaction involves two orders, the execution of 
one being dependent upon the receipt or execution of the other; thus, 
there is no ``risk'' in the interdependent transactions when completed. 
Unlike a riskless principal transaction, an agency order is entered 
directly in the System \15\ by a Member on behalf of a customer. 
Ultimately, however, the results of a riskless principal transaction 
and an agency order are the same: the customer receives an execution 
while the involved Member acts as an intermediary to effect the 
transaction.\16\
---------------------------------------------------------------------------

    \13\ The Exchange notes that in order to qualify as a Retail 
Order, a riskless principal order must satisfy the criteria set 
forth in FINRA Rule 5320.03.
    \14\ The Exchange notes that it will amend its attestation form 
for Members designating Retail Orders to conform to these new 
requirements. The definition of Retail Order under Rule 11.24(a)(2) 
will continue to state that a Retail Order is an Immediate or Cancel 
(``IOC'') Order and shall operate in accordance with paragraph (f) 
of Rule 11.24 and that a Retail Order may be an odd lot, round lot, 
or mixed lot.
    \15\ The term ``System'' is defined as ``the electronic 
communications and trading facility designated by the Board through 
which securities orders of Users are consolidated for ranking, 
execution and, when applicable, routing away.'' Exchange Rule 
1.5(aa).
    \16\ A principal transaction differs from both a riskless 
principal transaction and an agency order in that it is an order for 
the principal account of the entering Member.
---------------------------------------------------------------------------

    The Exchange believes that the requirement that the entry of such 
riskless principal orders satisfy FINRA Rule 5320.03 provides 
sufficient protection against Members submitting orders for their own 
account to the Exchange. A Member entering a riskless principal 
transaction will have to, contemporaneously with the execution of the 
customer's order, submit a report identifying the trade as riskless 
principal to FINRA. Additionally, the Member will need to have written 
policies and procedures to ensure that riskless principal transactions 
comply with applicable FINRA rules. The policies and procedures, at a 
minimum, must require that the customer order be received prior to the 
offsetting principal transaction, and that the offsetting principal 
transaction is at the same price as the customer order exclusive of any 
markup or markdown, commission equivalent, or other fee, and is 
allocated to a riskless principal or customer account in a consistent 
manner and within 60 seconds of execution. Additionally, the Member 
must have supervisory systems in place that produce records that enable 
the Member and FINRA to reconstruct accurately, readily, and in a time-
sequenced manner all Retail Orders that are entered on a riskless 
principal basis.
    The Exchange believes that the Member must also ensure that non-
Retail Orders from customers are not included with the Retail Orders as 
part of a riskless principal transaction. The above requirements ensure 
that despite the procedural differences between the execution of a 
riskless principal transaction and an agency order, the only difference 
will be the procedure in which the transactions are effected and not 
the result.
    The Exchange further believes that clarifying that riskless 
principal orders that meet the requirements of FINRA Rule 5320.03 are 
able to be submitted as Retail Orders on the same basis as agency 
orders will enable Members, and in turn, their retail customers, to 
benefit from the price improvement opportunities available under the 
Exchange's RPI Program.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act \17\ in general, and furthers the objectives of Section 
6(b)(5) of the Act \18\ in particular, in that it is designed to 
promote just and equitable principles of trade, to foster cooperation 
and coordination with persons engaged in 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 general, to 
protect investors and the public interest.
---------------------------------------------------------------------------

    \17\ 15 U.S.C. 78f(b).
    \18\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    The Exchange believes that the proposed rule change promotes just 
and equitable principles of trade because it will ensure that riskless 
principal orders that meet the requirements of FINRA Rule 5320.03 will 
have the same opportunity to be submitted as Retail Orders as agency 
orders. As discussed above, there is no functional distinction for 
purposes of Retail Orders between an order entered by a Member on an 
agency basis and one entered on a riskless principal basis. The 
Exchange believes that the proposed change would tend to reduce any 
potential discrimination between similarly situated customers or 
brokers by ensuring that the ability of retail customers to benefit 
from the use of Retail Orders and price improvement opportunities 
available under the Exchange's RPI Program does not depend on a 
distinction in capacity that is not meaningful for purposes of 
submitting Retail Orders. As a result of the change, a retail customer 
would be able to in the RPI Program utilizing Retail Orders without 
regards to whether the Member enters the order on a riskless principal 
or agency basis.
    The Exchange believes that the proposed rule change will remove 
impediments to and perfect the mechanism of a free and open market and 
a national market system because it will clarify that riskless 
principal orders that meet the requirements of FINRA Rule 5320.03 are 
eligible to be submitted as Retail Orders on the same basis as agency 
orders. By allowing all orders that are functionally equivalent to 
agency orders to be submitted as Retail Orders, the proposed change 
would potentially stimulate further competition for retail order flow 
because it is similar to the definition of

[[Page 45859]]

retail order available on other exchanges.\19\
---------------------------------------------------------------------------

    \19\ See Footnote 4 of the EDGX Exchange, Inc. (``EDGX'') fee 
schedule available at http://www.directedge.com/Trading/EDGXFeeSchedule.aspx (last visited July 16, 2014); NASDAQ Stock 
Market LLC Rule 4780(a)(2); New York Stock Exchange, Inc. Rule 
107C(a)(3)' and NYSE MKT LLC Rule 107C(a)(3).
---------------------------------------------------------------------------

    The Exchange believes that the proposed change would protect 
investors and the public interest by expanding the access of Members to 
the RPI Program offered by the Exchange as well as the access of the 
public to an exchange sponsored alternative to broker-operated 
internalization venues. In this regard, the Exchange believes that 
maintaining or increasing the proportion of Retail Orders in exchange-
listed securities that are executed on a registered national securities 
exchange (rather than relying on certain available off-exchange 
execution methods) would contribute to investors' confidence in the 
fairness of their transactions and would benefit all investors by 
deepening the Exchange's liquidity pool, supporting the quality of 
price discovery, promoting market transparency and improving investor 
protection.

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 that is not necessary or appropriate 
in furtherance of the purposes of the Act. The Exchange believes that 
the amendment, by increasing the level of participation in the RPI 
Program, will increase the level of competition around retail 
executions such that retail investors would receive better prices than 
they currently do on the Exchange and potentially through bilateral 
internalization arrangements. The Exchange believes that the 
transparency and competitiveness of operating a program such as the RPI 
Program on an exchange market would result in better prices for retail 
investors and benefits retail investors by expanding the capabilities 
of the Exchange to encompass practices currently allowed on non-
exchange venues. In addition, by allowing all orders that are 
functionally equivalent to agency orders to be submitted as Retail 
Orders, the proposed change would potentially stimulate further 
competition for retail order flow because it is similar to the 
definition of retail order available on other exchanges.\20\
---------------------------------------------------------------------------

    \20\ Id.
---------------------------------------------------------------------------

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

    The Exchange has filed the proposed rule change pursuant to Section 
19(b)(3)(A) of the Act \21\ and Rule 19b-4(f)(6) \22\ thereunder. 
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) of the Act \23\ and subparagraph (f)(6) of Rule 
19b-4 thereunder.\24\
---------------------------------------------------------------------------

    \21\ 15 U.S.C. 78s(b)(3)(A).
    \22\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)(iii) 
requires the Exchange to give the Commission written notice of the 
Exchange's 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.
    \23\ 15 U.S.C. 78s(b)(3)(A).
    \24\ 17 CFR 240.19b-4(f)(6).
---------------------------------------------------------------------------

    A proposed rule change filed under Rule 19b-4(f)(6) normally does 
not become operative for 30 days after the date of filing.\25\ However, 
Rule 19b-4(f)(6)(iii) permits the Commission to designate a shorter 
time if such action is consistent with the protection of investors and 
the public interest.\26\ The Exchange has asked the Commission to waive 
the 30-day operative delay so that the proposal may become operative 
immediately upon filing. The Exchange believes that waiving the 30-day 
operative delay is consistent with the protection of investors and the 
public interest because such waiver would allow riskless principal 
orders meeting the requirements of FINRA Rule 5320.03 to immediately 
qualify as retail orders, and thereby allow more Exchange members to 
benefit from the price improvement opportunities available under the 
Exchange's RPI Program. The Exchange also believes that waiving the 30-
day operative delay would enable the Exchange to remain competitive 
with other market centers by providing an additional choice to its 
members as to where they send retail orders on a riskless principal 
basis. The Exchange notes that several other exchanges presently 
include riskless principal orders within their definition of a retail 
order.\27\ 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.\28\
---------------------------------------------------------------------------

    \25\ 17 CFR 240.19b-4(f)(6)(iii).
    \26\ Id.
    \27\ See, e.g., Securities Exchange Act Release Nos. 68937 
(February 15, 2013), 78 FR 12397 (February 22, 2013) (SR-NASDAQ-
2012-129); 69103 (March 11, 2013), 78 FR 16547 (March 15, 2013) (SR-
NYSE-2013-20); 69104 (March 11, 2013), 78 FR 16556 (March 15, 2013) 
(SR-NYSEMKT-2013-22); and 69378 (April 15, 2013), 78 FR 23617 (April 
19, 2013) (SR-EDGX-2013-13).
    \28\ 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).
---------------------------------------------------------------------------

    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.\29\ If the Commission takes such action, the 
Commission shall institute proceedings to determine whether the 
proposed rule change should be approved or disapproved.\30\
---------------------------------------------------------------------------

    \29\ 15 U.S.C. 78s(b)(3)(C).
    \30\ Id.
---------------------------------------------------------------------------

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-BYX-2014-013 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.

All submissions should refer to File Number SR-BYX-2014-013. 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

[[Page 45860]]

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 
such filing also will be available for inspection and copying at the 
principal office of the Exchange. All comments received will be posted 
without change; the Commission does not edit personal identifying 
information from submissions. You should submit only information that 
you wish to make available publicly. All submissions should refer to 
File Number SR-BYX-2014-013, and should be submitted on or before 
August 27, 2014.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\31\
---------------------------------------------------------------------------

    \31\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-18534 Filed 8-5-14; 8:45 am]
BILLING CODE 8011-01-P


