
[Federal Register Volume 79, Number 214 (Wednesday, November 5, 2014)]
[Notices]
[Pages 65744-65746]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-26231]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-73473; File No. SR-BATS-2014-037]


Self-Regulatory Organizations; BATS Exchange, Inc.; Order 
Granting Approval of a Proposed Rule Change To Establish an Opening 
Process for Non-BATS-Listed Securities

October 30, 2014.

I. Introduction

    On September 3, 2014, BATS Exchange, Inc. (the ``Exchange'' or 
``BATS'') filed with the Securities and Exchange Commission 
(``Commission'') pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change to add new BATS Rule (``Rule'') 11.24, entitled 
``Opening Process for Non-BATS-Listed Securities,'' and to make several 
corresponding changes, in order to modify the manner in which the 
Exchange opens trading for non-BATS-listed securities at the beginning 
of the day and after trading halts. The proposed rule change was 
published for comment in the Federal Register on September 19, 2014.\3\ 
The Commission did not receive any comments on the proposed rule 
change. This order approves the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 73093 (September 15, 
2014), 79 FR 56421 (``Notice'').
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II. Description of the Proposal

    The Exchange has proposed to implement a process for opening 
trading in non-BATS-listed securities at the beginning of Regular 
Trading Hours \4\ and re-opening trading in such securities following a 
trading halt. Currently, the Exchange accepts orders in non-BATS-listed 
securities during the Pre-Opening Session,\5\ and any such orders are 
immediately eligible for execution. Orders that are on the BATS Book 
\6\ at the beginning of Regular Trading Hours remain on the BATS Book, 
subject to the User's instructions, and trading continues into Regular 
Trading Hours without any transition period. Upon a halt, the Exchange 
currently cancels all orders on the BATS Book, except Eligible Auction 
Orders,\7\ and does not accept any orders until the halt is lifted. The 
time-in-force of Regular Hours Only (``RHO'') \8\ that the Exchange 
currently offers is not available for non-BATS-listed securities (it is 
only available for BATS-listed securities).
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    \4\ Regular Trading Hours is defined in Rule 1.5(w).
    \5\ Pre-Opening Session is defined in Rule 1.5(r).
    \6\ BATS Book is defined in Rule 1.5(e).
    \7\ Eligible Auction Order is defined in Rule 11.23(a)(8).
    \8\ Regular Hours Only is currently defined in Rule 11.23(a)(22) 
but, as described infra, the Exchange has proposed to replace Rule 
11.23(a)(22) with proposed Rule 11.9(b)(7).
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    Under the proposal, the Exchange would amend its rules to allow 
orders in non-BATS-listed securities to be designated RHO, and would 
accept and queue any such orders during the Pre-Opening Session for 
execution at the midpoint of the NBBO \9\ shortly after the beginning 
of Regular Trading Hours (the ``Opening Process'').\10\ The Exchange 
also has proposed to implement a similar process for re-opening trading 
after a halt, suspension, or pause (collectively, a ``Halt''), under 
which a User's orders would remain on the BATS Book unless the User has 
designated that they be cancelled upon a Halt (the ``Re-Opening 
Process'').
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    \9\ NBBO is defined in BATS Rule 1.5(o).
    \10\ Only orders designated RHO would be queued for Opening 
Process participation when submitted during the Pre-Opening Session; 
orders not so designated would continue to be executable immediately 
upon entry during the Pre-Opening Session.
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    Specifically, the Exchange has proposed to replace current Rule 
11.23(a)(22) with proposed new Rule 11.9(b)(7), which would re-define 
RHO as a time-in-force modifier that applies to all securities, both 
BATS-listed and non-BATS-listed.\11\ Prior to the beginning of Regular 
Trading Hours, Users \12\ that wish to participate in the Opening 
Process for a non-BATS-listed security may enter orders to buy or sell 
with a time in force of RHO.\13\ All orders that are marked as RHO may 
participate in the Opening Process except BATS Post Only Orders, 
Partial Post Only at Limit Orders, ISO orders not modified by Rule 
11.24(a)(1) (as described below), and Minimum Quantity Orders.\14\ 
Limit orders with a Reserve Quantity could participate to the full 
extent of their displayed size and Reserve Quantity.\15\ Discretionary 
Orders could participate only up to their ranked price for buy orders 
or down to their ranked price for sell orders; the discretionary range 
of such orders would not be eligible for participation in the Opening 
Process.\16\ All Pegged Orders and Mid-Point Peg Orders would be 
eligible for execution in the Opening Process based on their pegged 
prices.\17\ Orders cancelled before the Opening Process and orders not 
designated RHO would not be eligible to participate in the Opening 
Process.\18\
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    \11\ See proposed Rule 11.9(b)(7). Proposed Rule 11.9(b)(7) also 
would specify that any remaining portion of market RHO order will be 
cancelled immediately following any auction in which it is not 
executed. Id. The Exchange also has proposed to delete the word 
``limit'' from Rule 11.9(b) because a RHO order can be either a 
limit order or a market order. See proposed Rule 11.9(b).
    \12\ User is defined in Rule 1.5(cc).
    \13\ See proposed Rule 11.24(a).
    \14\ See proposed Rule 11.24(a)(2). For the definitions of BATS' 
order types, see Rule 11.9.
    \15\ See proposed Rule 11.24(a)(2).
    \16\ Id.
    \17\ Id.
    \18\ See proposed Rule 11.24(a).
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    Pursuant to proposed Rule 11.24(a)(1), during the period between 
9:30 a.m. Eastern Time and the occurrence of the Opening Process, all 
non-RHO orders, subject to order instructions, and ISOs designated RHO 
may execute against eligible Pre-Opening Session contra-side interest 
resting in the BATS Book.\19\ The Exchange has proposed to convert any 
unexecuted portion of an ISO designated RHO entered during this period 
into a non-ISO and queue the order for participation in the Opening 
Process.\20\
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    \19\ See proposed Rule 11.24(a)(1).
    \20\ Id.
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    The Exchange has proposed to implement the Opening Process shortly 
after the beginning of Regular Trading Hours, at which point the 
Exchange would attempt to execute all orders eligible for the Opening 
Process in a particular non-BATS-listed security at the midpoint of the 
NBBO.\21\ All such orders would be processed in time sequence beginning 
with the order with the oldest time stamp, and would be matched until 
there is no remaining volume or there is an order imbalance.\22\ All 
MTP modifiers would be ignored

[[Page 65745]]

during the matching process.\23\ If no matches can be made, or if 
orders are not executed in whole or part due to an imbalance, the 
Opening Process would conclude with all orders that participated in the 
Opening Process being placed in the BATS Book, cancelled, executed, or 
routed to away Trading Centers \24\ in accordance with Rule 
11.13(a)(2).\25\ The Exchange notes that because an RHO order is not 
executable until the Opening Process (rather than upon entry), to the 
extent that any RHO order is not executed during the Opening Process 
and is placed on the BATS Book, such order will receive a time stamp 
that reflects the time that the order was placed on the BATS Book 
during the Opening Process and not the time that the order was entered 
for queuing.\26\
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    \21\ See proposed Rule 11.24(a)(3).
    \22\ Id. According to the Exchange, time priority is more 
appropriate for the Opening Process than price-time priority because 
the price of the order is not particularly important to the Opening 
Process, so long as the order is priced at or more aggressively than 
the midpoint of the NBBO. As such, the Exchange believes that there 
is no reason to reward a more aggressive order with priority in the 
Opening Process. See Notice, supra note 3, 79 FR at 56422.
    \23\ See proposed Rule 11.24(b).
    \24\ Trading Center is defined in Rule 2.11(a).
    \25\ See proposed Rule 11.24(b).
    \26\ See Notice, supra note 3, 79 FR at 56423.
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    Under proposed Rule 11.24(c), the NBBO that the Exchange would use 
for purposes of setting the Opening Process price would be: (a) When 
the listing exchange is either the NYSE or NYSE MKT, the first NBBO 
subsequent to the first reported trade on the listing exchange after 
9:30:00 a.m. Eastern Time, or the then-prevailing NBBO when the first 
two-sided quotation is published by the listing exchange after 9:30:00 
a.m. Eastern Time, if no first trade is reported by the listing 
exchange within one second of publication of the first two-sided 
quotation by the listing exchange; or (b) for any other listing market 
except for the Exchange, the first NBBO disseminated after 9:30:00 a.m. 
Eastern Time.\27\ The Exchange has proposed to differentiate its 
calculation of the NBBO for NYSE and NYSE MKT-listed securities from 
its calculation of the NBBO for securities listed on other exchanges 
because NYSE and NYSE MKT do not offer continuous trading prior to 
9:30:00 a.m. Eastern Time whereas the other listing exchanges do offer 
continuous trading prior to 9:30:00 a.m. Eastern Time. Thus, according 
to the Exchange, the market for trading in NYSE and NYSE MKT-listed 
securities may take a moment to develop after 9:30:00 a.m. Eastern Time 
whereas the market for securities listed on other exchanges is more 
fully developed immediately after 9:30:00 a.m. Eastern Time.\28\
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    \27\ See proposed Rule 11.24(c).
    \28\ See Notice, supra note 3, 79 FR at 56423.
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    If the conditions to establish the price of the Opening Process set 
forth under proposed Rule 11.24(c) do not occur by 9:45:00 a.m. Eastern 
Time, the Exchange has proposed to implement a contingent opening 
process (the ``Contingent Open Process'') under which, instead of being 
matched at the midpoint of the NBBO, orders would be handled in time 
sequence, beginning with the order with the oldest time stamp, and 
placed on the BATS Book, routed, cancelled, or executed in accordance 
with the terms of the order.\29\ The Exchange notes that, because an 
RHO order is not executable until the Opening Process (rather than upon 
entry), any order subject to the Contingent Open Process that is placed 
on the BATS Book would receive a time stamp that reflects the time that 
the order was placed on the BATS Book during the Opening Process and 
not the time that the order was entered for queuing.\30\
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    \29\ See proposed Rule 11.24(d).
    \30\ See Notice, supra note 3, 79 FR at 56423.
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    In addition, the Exchange has proposed that, in the event of a 
Halt, all outstanding orders in the System \31\ will remain on the BATS 
Book except where a User has designated that its orders be 
cancelled.\32\ While a non-BATS-listed security is subject to a Halt, 
the Exchange would accept and queue orders, prior to the resumption of 
trading in the security, for participation in the Re-Opening 
Process.\33\ The Re-Opening Process would occur in the same manner as 
the Opening Process described above, with the following exceptions: (1) 
Non-RHO orders would be eligible for participation in the re-opening, 
but IOC, FOK, BATS Post Only Orders, Partial Post Only at Limit Orders, 
and Minimum Quantity Orders would be cancelled or rejected, as 
applicable, and any ISO that is not IOC or FOK would be converted into 
a non-ISO and be queued for participation in the re-opening; and (2) 
the re-opening would occur at the midpoint of: (i) The first NBBO 
subsequent to the first reported trade on the listing exchange 
following the resumption of trading after a Halt; or (ii) the NBBO when 
the first two-sided quotation is published by the listing exchange 
following the resumption of trading after a Halt if no first trade is 
reported by the listing exchange within one second of publication of 
the first two-sided quotation by the listing exchange.\34\ The Exchange 
has proposed that, where neither of the above conditions required to 
establish the price of the re-opening have occurred, the security may 
be re-opened for trading at the discretion of the Exchange and orders 
will be handled in the same manner as they are in the Contingent Open 
Process.\35\
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    \31\ System is defined in Rule 1.5(aa).
    \32\ See proposed Rule 11.18(f).
    \33\ See proposed Rule 11.24(e).
    \34\ See proposed Rule 11.24(e)(1). The Exchange has proposed to 
wait until the sooner of the first execution on the listing market 
or one second following the publication of the first two-sided 
quotation by the listing exchange because no continuous trading 
occurs on any exchange during a Halt and, according to the Exchange, 
waiting will provide time for the market to become more fully 
established before determining the price at which the Re-Opening 
Process will occur.
    \35\ See proposed Rule 11.24(e)(2).
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III. Discussion and Commission Findings

    After careful review, the Commission finds that the proposed rule 
change is consistent with the requirements of the Act and the rules and 
regulations thereunder that are applicable to a national securities 
exchange.\36\ In particular, the Commission finds that the proposed 
rule change is consistent with Section 6(b)(5) of the Act,\37\ which 
requires, among other things, that the rules of an exchange be 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, and, in general, to protect investors and 
the public interest.
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    \36\ In approving the proposal, the Commission has considered 
the proposed rule's impact on efficiency, competition, and capital 
formation. See 15 U.S.C. 78c(f).
    \37\ 15 U.S.C. 78f(b)(5).
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    The Exchange believes that the proposal is consistent with the Act 
because it is designed to create a more orderly process for opening and 
re-opening trading in non-BATS-listed securities, and to facilitate 
price formation. Specifically, the Exchange believes that the proposed 
Opening Process will create a more orderly opening for non-BATS-listed 
securities and help facilitate the price formation process at the 
beginning of Regular Trading Hours because allowing Users to enter 
orders during the Pre-Opening Session for queuing and participation in 
the Opening Process should help prevent the submission of a flood of 
orders immediately following the beginning of Regular Trading 
Hours.\38\ For similar reasons, the Exchange believes that the proposed 
Re-Opening Process will create a more orderly re-opening in non-BATS-
listed securities following a Halt and help facilitate price 
formation.\39\ In addition, the Exchange

[[Page 65746]]

states that allowing certain RHO orders (ISOs designated RHO) and all 
non-RHO orders to interact (and, in the case of non-RHO orders, to be 
added to the BATS Book where there is no contra-side interest) during 
the period between 9:30 a.m. Eastern Time and the occurrence of the 
Opening Process will create a more orderly opening and facilitate the 
price formation process because Users will have the option to enter 
orders that will either participate in the Opening Process or 
immediately interact with liquidity from the Pre-Opening Session, 
allowing trading to continue while the Exchange is waiting for the 
conditions necessary to complete the Opening Process.\40\
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    \38\ See Notice, supra note 3, 79 FR at 56423-24. The Exchange 
further states that, because the Opening Process price will be the 
midpoint of the NBBO, the Opening Process will occur at a price that 
is based on the best available pricing under current market 
conditions, which also will help create a more orderly opening and 
facilitate the price formation process. Id. at 56424.
    \39\ Id. at 56424.
    \40\ Id.
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    The Exchange also believes that certain features of the Opening 
Process and Re-Opening Process are consistent with the Act. The 
Exchange states that the proposed exclusion of BATS Post Only Orders, 
Partial Post Only at Limit Orders, ISOs, and Minimum Quantity Orders 
from participation in the Opening Process is consistent with Section 
6(b)(5) of the Act because such order types do not make sense in the 
context of queuing orders for the Opening Process.\41\ Moreover, 
according to the Exchange, its proposal to allow an ISO marked RHO to 
execute against eligible Pre-Opening Session interest during the period 
between 9:30 a.m. Eastern Time and the occurrence of the Opening 
Process, and then convert the unexecuted portion of the order into a 
non-ISO for queuing for participation in the Opening Process, is 
consistent with the requirements of Regulation NMS.\42\ According to 
the Exchange, after 9:30 a.m. Eastern Time, there may be a protected 
bid or offer displayed by the Exchange that a User who has submitted an 
ISO designated RHO would like to execute against, and this aspect of 
the proposal would permit such an execution to occur prior to the ISO 
being converted into a non-ISO and queued for participation in the 
Opening Process.\43\
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    \41\ Id.
    \42\ Id.; see also 17 CFR 242.600.
    \43\ See Notice, supra note 3, 79 FR at 56424.
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    In addition, the Exchange states that the proposed Contingent 
Opening Process is designed 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 because it will 
help to ensure that the Exchange opens trading in a fair and orderly 
manner by providing a means for opening trading in a non-BATS-listed 
security when there is no two-sided NBBO in the security for fifteen 
minutes after the beginning of Regular Trading Hours.\44\ The Exchange 
believes that fifteen minutes is a reasonable amount of time to wait 
for the establishment of a two-sided NBBO because it marks a point at 
which the market in a security has had a sufficient amount of time to 
develop while simultaneously providing a reasonable cut-off point at 
which the Exchange may open the security for Regular Trading Hours 
trading.\45\ The Exchange also believes that handling all orders queued 
for participation in the Opening Process in time sequence after fifteen 
minutes will help to ensure that trading opens in as fair and orderly a 
manner as possible.\46\
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    \44\ Id.
    \45\ Id.
    \46\ Id.
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    Lastly, the Exchange states that the proposed Opening Process will 
provide Users with greater control and flexibility when entering orders 
in non-BATS-listed securities by allowing them to enter orders for 
participation in Regular Hours Trading during the Pre-Opening Session, 
rather than permitting them to enter such orders only after Regular 
Trading Hours have begun.\47\ According to the Exchange, allowing Users 
that do not want to participate in the Pre-Opening Session to enter RHO 
orders prior to Regular Trading Hours will simplify the order entry 
process for such Users and remove impediments to a free and open 
market.\48\
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    \47\ Id.
    \48\ Id.
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    For the reasons noted above, the Commission finds that the proposed 
rule change is consistent with the Act, including Section 6(b)(5) of 
the Act,\49\ which requires, among other things, that the rules of an 
exchange be 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, and, in general, to protect 
investors and the public interest.
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    \49\ 15 U.S.C. 78f(b)(5).
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V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\50\ that the proposed rule change, SR-BATS-2014-037, be, and 
hereby is, approved.
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    \50\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\51\
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    \51\ 17 CFR 200.30-3(a)(12).
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Brent J. Fields,
Secretary.
[FR Doc. 2014-26231 Filed 11-4-14; 8:45 am]
BILLING CODE 8011-01-P


