
[Federal Register Volume 79, Number 191 (Thursday, October 2, 2014)]
[Notices]
[Pages 59527-59530]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-23449]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-73234; File No. SR-BATS-2014-042]


Self-Regulatory Organizations; BATS Exchange, Inc.; Notice of 
Filing and Immediate Effectiveness of a Proposed Rule Change To Amend 
Rule 11.9(c) To Adopt a Supplemental Peg Order

September 26, 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 September 15, 2014, 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 
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 the 
Substance of the Proposed Rule Change

    The Exchange proposed to amend: (i) Rule 11.9(c) to adopt a new 
order type called the Supplemental Peg Order and; (ii) Rule 11.12(a) to 
reflect the priority of Supplemental Peg Orders. The proposed 
Supplemental Peg Order is identical to the existing Route Peg Order 
available on EDGX Exchange, Inc. (``EDGX'') and EDGA Exchange, Inc. 
(``EDGA'') \5\ and similar to order types offered by the Nasdaq Stock 
Market LLC (``Nasdaq'') and NYSE Arca, Inc. (``NYSE Arca'').\6\ 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.\7\
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    \5\ See EDGA Rules 11.5(c)(14), 11.8(a)(2) and 11.8(a)(7); EDGX 
Rules 11.5(c)(17), 11.8(a)(2) and 11.8(a)(7).
    \6\ See Nasdaq Rules 4751(f)(14) and 4757(a)(1)(D); NYSE Arca 
Rule 7.31(f).
    \7\ 17 CFR 240.19b-4(f)(6)(iii).
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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 Exchange proposes to amend: (i) Rule 11.9(c) to adopt a new 
order type called the Supplemental Peg Order and; (ii) Rule 11.12(a) to 
reflect the priority of Supplemental Peg Orders. The proposed 
Supplemental Peg Order is identical to the existing Route Peg Order 
available on EDGX and EDGA \8\ and similar to order types offered by 
the NYSE and NYSE Arca.\9\
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    \8\ See supra note 5.
    \9\ See supra note 6.
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    Earlier this year, the Exchange and its affiliate, BATS Y-Exchange, 
Inc. (``BYX''), received approval to affect a merger (the ``Merger'') 
of the Exchange's parent company, BATS Global Markets, Inc., with 
Direct Edge Holdings LLC, the indirect parent of EDGX and EDGA 
(together with BATS, BYX and EDGX, the ``BGM Affiliated 
Exchanges'').\10\ In the context of the Merger, the BGM Affiliated 
Exchanges are working to align certain system functionality, retaining 
only intended differences between the BGM Affiliated Exchanges. Thus, 
the proposal set forth below is intended to add certain system 
functionality currently offered by EDGA and EDGX in order to provide a 
consistent technology offering for users of the BGM Affiliated 
Exchanges.
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    \10\ See Securities Exchange Act Release No. 71375 (January 23, 
2014), 79 FR 4771 (January 29, 2014) (SR-BATS-2013-059; SR-BYX-2013-
039).
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    Like the Route Peg Order on EDGA and EDGX,\11\ the proposed 
Supplemental Peg Order would be a non-displayed limit order that posts 
to

[[Page 59528]]

the BATS Book,\12\ and thereafter be eligible for execution at the 
National Best Bid (``NBB'') for buy orders and National Best Offer 
(``NBO'') for sell orders against routable orders that are equal to or 
less than the aggregate size of the Supplemental Peg Order interest 
available at that price. Supplemental Peg Orders are passive, resting 
orders on the BATS Book and do not take liquidity. A User \13\ may 
specify a minimum execution quantity for a Supplemental Peg Order. A 
minimum execution quantity on a Supplemental Peg Order will no longer 
apply where the number of shares remaining after a partial execution 
are less than the minimum execution quantity. Supplemental Peg Orders 
are eligible for execution in a given security during the Pre-Opening 
Session, Regular Trading Hours, and After Hours Trading Session.\14\ 
Supplemental Peg Orders are not eligible for execution in the Opening 
Process.\15\ A Supplemental Peg Order does not execute at a price that 
is inferior to a Protected Quotation, and is not permitted to execute 
if the National Best Bid or Offer (``NBBO'') is locked or crossed. Any 
and all remaining, unexecuted Supplemental Peg Orders are cancelled at 
the conclusion of the After Hours Trading Session. The Exchange notes 
that the proposed rule text is substantially identical to the rules of 
EDGA and EDGX.\16\
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    \11\ See EDGA Rule 11.5(c)(14); EDGX Rule 11.5 (c)(17).
    \12\ The ``BATS Book'' is defined as ``the System's electronic 
file of orders.'' See Exchange Rule 1.5(e).
    \13\ The term ``User'' is defined under Exchange Rule 11.5(cc) 
as ``any Member or Sponsored Participant who is authorized to obtain 
access to the System pursuant to Rule 11.3.''
    \14\ Route Peg Orders on EDGA and EDGX are currently only 
eligible for execution during Regular Trading Hours. See supra note 
11. The Exchange understands that EDGA and EDGX are to file a 
propose rule change with the Commission to permit Route Peg Orders 
to be eligible for execution during the Pre-Opening and Post-Closing 
Sessions.
    \15\ The Exchange's process currently applies only to BATS-
listed securities. The Exchange has filed a proposed rule change 
with the Commission to implement an Opening Process for non-BATS-
listed securities. See SR-BYX-2014-018. Because there is currently 
no Opening Process for non-BATS-listed securities, if Supplemental 
Peg Orders are offered prior to the approval of the proposed rule 
change or if the proposed rule change is never approved, then this 
restriction will only apply to BATS-listed securities.
    \16\ See supra note 11.
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    The Exchange also proposes to amend Rule 11.12(a)(2) to outline the 
execution priority of the proposed Supplemental Peg Order. Like a Route 
Peg Order on EDGA and EDGX,\17\ an incoming order that is eligible for 
routing would first be matched against orders other than Supplemental 
Peg Orders in price/time priority in accordance with Rule 
11.12(a)(2).\18\ Any unexecuted portion of that order would then be 
eligible to execute against any Supplemental Peg Orders resting on the 
BATS Book. The Exchange also proposes to amend Rule 11.12(a)(4) and add 
new subparagraph (a)(6) to Rule 11.12 to state that if a Supplemental 
Peg Order is partially executed, the remaining portion of the order 
would continue to be eligible for execution but it would be assigned a 
new timestamp after each partial execution. Assigning a new timestamp 
after each partial execution would allow for a rotating priority of 
executions for Users who place Supplemental Peg Orders. The Exchange 
notes that the proposed rule text is substantially similar to the rules 
of EDGA and EDGX.\19\
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    \17\ See EDGA Rule 11.8(a)(2); EDGX Rule 11.8(a)(2).
    \18\ In sum, Exchange Rule 11.12(a)(2) states that the System 
shall execute equally priced trading interest within the System in 
time priority in the following order: displayed size of Limit 
Orders; non-displayed Limit Orders; Pegged Orders; Mid-Point Peg 
Orders; Reserve size of orders; and discretionary portion of 
Discretionary Orders as set forth in Exchange Rule 11.9(c)(9).
    \19\ See EDGA Rule 11.8(a)(5) and (7); EDGX Rule 11.8(a)(5) and 
(7).
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Implementation Date
    The Exchange will announce the effective date of the proposed rule 
change in a Trade Desk Notice to be published following publication of 
the proposed rule change by the Commission.
2. Statutory Basis
    The Exchange believes that the proposed rule changes are consistent 
with Section 6(b) of the Act \20\ and further the objectives of Section 
6(b)(5) of the Act \21\ because they are designed 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, to 
foster cooperation and coordination with persons engaged in 
facilitating transactions in securities, and, in general, to protect 
investors and the public interest.
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    \20\ 15 U.S.C. 78f(b).
    \21\ 15 U.S.C. 78f(b)(5).
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    The proposed rule change adds certain system functionality 
currently offered by EDGA and EDGX in order to provide a consistent 
technology offering across the BGM Affiliated Exchanges. A consistent 
technology offering, in turn, will simplify the technology 
implementation, changes and maintenance by Users of the Exchange that 
are also participants on BYX, EDGA and/or EDGX. The proposed rule 
changes would also provide Users with access to functionality that may 
result in the efficient execution of such orders and will provide 
additional flexibility as well as increased functionality to the 
Exchange's System and its Users. As explained elsewhere in this 
proposal, the proposed Supplemental Peg Order is available on numerous 
other market centers and is substantially identical to the Route Peg 
Order available on EDGA and EDGX. Thus, the Exchange believes that the 
proposed functionality has already been accepted as consistent with the 
Act and offered by various market centers for many years.
    The benefits to investors of enhanced depth of liquidity at the 
NBBO in today's market structure cannot be understated. The 
Supplemental Peg Order is designed to incentivize Users to place 
greater liquidity at the NBBO, thereby promoting more favorable and 
efficient executions for the benefit of public customers. It would do 
so by (1) offering liquidity providers a means to use the Exchange to 
post larger limit orders that are only executable at the NBBO and that 
do not disclose their trading interest to other market participants in 
advance of execution; (2) offering market participants seeking to 
access liquidity a greater expectation of market depth at the NBBO than 
may currently be the case; and (3) offering more predictable executions 
at the NBBO for Users by reducing the risk that incremental latency 
associated with routing an order to an away destination may result in 
an inferior execution. Thus, by providing an additional means by which 
market participants can be encouraged to post liquidity at the NBBO on 
the Exchange, which would add depth and support to the NBBO on the 
Exchange and mitigate the negative effects of market fragmentation, the 
proposed rule changes would promote just and equitable principles of 
trade and remove impediments to and perfect the mechanism of a free and 
open market and national market system. Moreover, the proposed rule 
changes would protect investors and the public interest by increasing 
the probability of an execution on the Exchange at the NBBO in the 
event that the order would otherwise be shipped to an external 
destination and potentially miss an execution at the NBBO while in 
transit.
    The Exchange believes, however, that the benefits to be derived 
from Supplemental Peg Orders would only be realized if Supplemental Peg 
Orders only interact with orders eligible for routing. Routable orders 
are typically characteristic of public customers, both retail and 
institutional (colloquially referred to as well as ``natural'' 
investors), who are concerned with executing at the best price. On the 
other hand, non-routable orders typically

[[Page 59529]]

expect to post liquidity on the BATS Book or seek to execute 
immediately, such as via an Immediate-or-Cancel Order, against the 
Exchange's best displayed bid or offer or against hidden liquidity at 
or inside the NBBO. Professional traders, in particular, are more apt 
to submit, and often immediately cancel, ``pinging'' orders, as 
reflected in generally higher message-to-trade ratios. The Exchange 
believes this type of order behavior, while it has its own business 
purposes, would not be suitable to interact with Supplemental Peg 
Orders simply because Users would be reticent to post liquidity via 
Supplemental Peg Orders given the uncertain, and therefore difficult to 
manage, exposure to executions against orders attributable to 
professional traders. Indeed, the Exchange believes potential liquidity 
providers would be more apt to provide liquidity in alternative trading 
systems and other non-exchange market centers where the customization 
and segmentation experience may be less transparent and objective.
    While non-routable orders would not be permitted to execute against 
Supplemental Peg Orders, the Exchange does not believe that the 
proposed rule changes would be designed to permit unfair discrimination 
between customers, brokers, or dealers. First, the Exchange believes 
this limited exception is constructed narrowly enough, based on 
rational and legitimate grounds, so that the compelling policy 
objectives, which are wholly consistent with the Act, can be realized. 
Second, the Exchange is not proposing to limit the type of User that 
can place routable orders, or that can place Supplemental Peg Orders. 
So any disadvantage resulting from the limitation to executing against 
routable orders would not target particular segments of market 
participants, per se, but rather a particular type of market behavior. 
Therefore, the Exchange believes that not only would the proposed rule 
changes not be designed to permit unfair discrimination between 
customers, brokers, or dealers, the differentiation between routable 
and non-routable orders is an important element for the Supplemental 
Peg Order to be able to achieve the objectives of protecting investors 
and the public interest and promoting just and equitable principles of 
trade.
    The Exchange also believes that permitting executions against 
routable orders that are equal to or less than the aggregate size of 
the Supplemental Peg Order interest available at that price would 
remove impediments to and perfect the mechanism of a free and open 
market and protect investors and the public interest because it would 
incentivize Users seeking large size executions to route orders to the 
Exchange by increasing opportunities for executions against 
Supplemental Peg Orders in a manner similar to existing functionality 
available on EDGA and EDGX \22\ as well as Nasdaq and NYSE Arca.\23\
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    \22\ See supra note 5.
    \23\ See supra note 6.
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    The Exchange also believes its proposal to provide optional 
functionality that would allow Users to designate a minimum execution 
quantity on a Supplemental Peg Order removes impediments to and 
perfects the mechanism of a free and open market and protects investors 
and the public interest because it would provide an incentive for 
Members seeking larger-sized executions both to post liquidity at the 
Exchange using this feature and to route larger-sized orders to the 
Exchange because of the potential for an execution against such 
liquidity. The Exchange further believes that adding an optional 
minimum quantity would remove impediments to and perfect the mechanism 
of a free and open market system because the proposed functionality is 
similar to functionality available at the NYSE Arca.\24\ The Exchange 
believes it is appropriate to provide an option for Users seeking to 
provide such liquidity to not only designate a minimum execution 
quantity, but for a minimum execution quantity on a Supplemental Peg 
order to no longer apply where the number of shares remaining after a 
partial execution are less than the minimum execution quantity. Doing 
so would permit Users to continue to have their Supplemental Peg Orders 
eligible for execution in such circumstances. In such case, Users will 
have the option to cancel their Supplemental Peg Order if they wish.
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    \24\ Id.
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    Lastly, the Exchange believes that the proposal will promote 
competition by offering an order type that is similar to order types 
offered by EDGA, EDGX, Nasdaq and NYSE Arca.\25\ Therefore, the 
Exchange believes the proposed rule change is designed to support the 
principles of Section 11A(a)(1) \26\ of the Act in that it seeks to 
assure fair competition among brokers and dealers and among exchange 
markets.
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    \25\ See supra notes 5 and 6.
    \26\ 15 U.S.C. 78k-1(a)(1).
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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 
result in any burden on competition that is not necessary or 
appropriate in furtherance of the purposes of the Act. To the contrary, 
the Exchange believes that the proposal will promote competition by 
enhancing the value of the Exchange's Route Peg Order by mirroring the 
functionality of similar order types offered by EDGA, EDGX, Nasdaq and 
NYSE Arca.\27\ Thus, the Exchange believes this proposed rule change is 
necessary to permit fair competition among national securities 
exchanges. The Exchange reiterates that the proposed rule change is 
being proposed in the context of the technology integration of the BGM 
Affiliated Exchanges. Therefore, the Exchange believes the proposed 
rule change will benefit Exchange participants in that it is one of 
several changes necessary to achieve a consistent technology offering 
by the BGM Affiliated Exchanges.
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    \27\ See supra notes 5 and 6.
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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 foregoing rule change has become effective pursuant to Section 
19(b)(3)(A) \28\ of the Act and Rule 19b-4(f)(6) \29\ thereunder. The 
proposed rule change effects a change that (A) does not significantly 
affect the protection of investors or the public interest; (B) does not 
impose any significant burden on competition; and (C) by its terms, 
does not become operative for 30 days after the date of the filing, or 
such shorter time as the Commission may designate if consistent with 
the protection of investors and the public interest; provided that the 
self-regulatory organization has given 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 
provided the Commission with written notice of its intent to file the 
proposed rule change, along with a

[[Page 59530]]

brief description and text of the proposed rule change, at least five 
business days prior to the date of filing.\30\
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    \28\ 15 U.S.C. 78s(b)(3)(A).
    \29\ 17 CFR 240.19b-4(f)(6).
    \30\ 17 CFR 240.19b-4(f)(6)(iii).
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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-2014-042 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-BATS-2014-042. 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 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-BATS-2014-042, and should be 
submitted on or before October 23, 2014.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\31\
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    \31\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-23449 Filed 10-1-14; 8:45 am]
BILLING CODE 8011-01-P


