
[Federal Register Volume 80, Number 54 (Friday, March 20, 2015)]
[Notices]
[Pages 15046-15048]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2015-06361]



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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-74513; File No. SR-BATS-2015-16]


Self-Regulatory Organizations; BATS Exchange, Inc.; Notice of 
Filing and Immediate Effectiveness of a Proposed Rule Change To Adopt 
Rule 12.14, Front Running of Block Transactions

March 16, 2015.
    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 March 3, 2015, BATS Exchange, Inc. (the ``Exchange'' or 
``BATS'') filed with the Securities and Exchange Commission 
(``Commission'') a proposed rule change as described in Items I and II 
below, which Items have been prepared by the Exchange. The Commission 
is publishing this notice to solicit comments on the proposed rule 
change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange filed a proposal to adopt new Rule 12.14, Front 
Running of Block Transactions, to conform with the rules of the 
Financial Industry Regulatory Authority, Inc. (``FINRA'') for purposes 
of an agreement between the Exchange and FINRA pursuant to Rule 17d-2 
under the Act.\3\ The proposed rule change is identical to proposed 
rule changes submitted by the EDGX Exchange, Inc. (``EDGX'') and the 
EDGA Exchange, Inc. (``EDGA'') that were published by the 
Commission.\4\
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    \3\ 17 CFR 240.17d-2.
    \4\ See Securities Exchange Act Release Nos. 70625 (October 8, 
2013), 78 FR 62842 (October 22, 2013) (SR-EDGA-2013-29) (Notice of 
Filing and Immediate Effectiveness of Proposed Rule Change to Amend 
EDGA Rules 3.22, 13.3, and Adopt Rule 12.14, Front Running of Block 
Transactions to Conform With the Rules of Other Self-Regulatory 
Organizations); and 70626 (October 8, 2013), 78 FR 62855 (October 
22, 2013) (SR-EDGX-2013-36) (Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change to Amend EDGA [sic] Rules 
3.22, 13.3, and Adopt Rule 12.14, Front Running of Block 
Transactions to Conform With the Rules of Other Self-Regulatory 
Organizations).
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    The text of the proposed rule change is available at the Exchange's 
Web site at 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 adopt new Rule 12.14, Front Running of 
Block Transactions, which would require that Members and persons 
associated with a Member shall comply with FINRA Rule 5270 as if such 
Rule were part of the Exchange's Rules.\5\ FINRA Rule 5270 states that 
no FINRA member or person associated with a member shall cause to be 
executed an order to buy or sell a security or a related financial 
instrument \6\ when such member or person associated with a member has 
material, non-public market information concerning an imminent block 
transaction \7\ in that security, a related financial instrument or a 
security underlying the related financial instrument.
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    \5\ The proposed rule text is substantially the same as IM-2110-
3 of the Nasdaq Stock Market LLC (``Nasdaq''), which has been 
approved by the Commission. See Securities Exchange Act Release No. 
53128 (January 13, 2006), 71 FR 3550 (January 23, 2006) (order 
approving Nasdaq's application for registration as a national 
securities exchange). See also Securities Exchange Act Release No. 
58069 (June 30, 2008), 73 FR 39360 (July 9, 2008) (SR-Nasdaq-2008-
054) (Notice of Filing and Immediate Effectiveness). Securities 
Exchange Act Release No. 34-67774 (September 4, 2012), 77 FR 55519 
(September 12 [sic], 2012) (Approval Order). See also supra note 4.
    \6\ FINRA Rule 5270 defines the term ``related financial 
instrument'' as ``any option, derivative, security-based swap, or 
other financial instrument overlying a security, the value of which 
is materially related to, or otherwise acts as a substitute for, 
such security, as well as any contract that is the functional 
economic equivalent of a position in such security.''
    \7\ Under FINRA Rule 5270, a transaction involving 10,000 shares 
or more of a security, an underlying security, or a related 
financial instrument overlying such number of shares, is generally 
deemed to be a block transaction, although a transaction of fewer 
than 10,000 shares could be considered a block transaction. A block 
transaction that has been agreed upon does not lose its identity as 
such by arranging for partial executions of the full transaction in 
portions which themselves are not of block size if the execution of 
the full transaction may have a material impact on the market.
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    FINRA Rule 5270 includes exceptions to the general prohibitions of 
the rule where a member can demonstrate that a transaction is unrelated 
to the material, non-public market information received in connection 
with the customer order. The Supplementary Material to FINRA Rule 5270 
includes an illustrative list of potentially permitted transactions as 
examples of transactions that, depending upon the circumstances, may be 
unrelated to the customer block order. These types of transactions may 
include: Where the member has information barriers established to 
prevent internal disclosure of such information; actions [sic] in the 
same security related to a prior customer order in that security; 
transactions to correct bona fide errors; or transactions to offset 
odd-lot orders.
    In addition, Rule 5270 does not preclude transactions undertaken 
for the purpose of fulfilling, or facilitating the execution of, the 
customer block order. However, when engaging in trading activity that 
could affect the market for the security that is the subject of the 
customer block order, the member must minimize any potential 
disadvantage or harm in the execution of the customer's order, must not 
place the member's financial interests ahead of those of its customer, 
and must obtain the customer's consent to such trading activity. A 
member may obtain its customers' consent through affirmative written 
consent or through the use of a negative consent letter. The negative 
consent letter must clearly disclose to the customer the terms and 
conditions for handling the customer's orders; if the customer does not 
object, then the member may reasonably conclude that the customer has 
consented and the member may rely on such letter for all or a portion 
of the customer's orders. In addition, a member may provide clear and 
comprehensive oral disclosure to and obtain consent from the customer 
on an order-by-order basis, provided that the member documents who 
provided such consent and such consent evidences the customer's 
understanding of the terms and conditions for handling the customer's 
order.
    The Exchange also proposes to state in new Rule 12.14 that although 
the prohibitions in Rule 5270 are limited to imminent block 
transactions, the front running of other types of orders that place the 
financial interests of the Member or persons associated with a Member 
ahead of those of its customer or the misuse of knowledge of an 
imminent customer order may violate

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other Exchange rules, including Rule 3.1 and Rule 12.6, or provisions 
of the federal securities laws.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6(b)(5) of the Act,\8\ which requires, among other things, 
that the Exchange's rules be 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. By incorporating FINRA Rule 5270, 
new Rule 12.14 prohibits front running trading activity that the 
Exchange believes is inconsistent with just and equitable principles of 
trade while also ensuring that Members may continue to engage in 
transactions that do not present the risk of abusive trading practices 
that the rule is intended to prevent. The Exchange believes that Rule 
12.14 would enhance the protection of customer orders by addressing 
various types of abusive trading that may be intended to take advantage 
of customer orders. As previously noted, the proposed rule text is 
substantially similar to Nasdaq's IM-2110-3, which has been approved by 
the Commission,\9\ as well as EDGA Rule 12.14 and EDGX Rule 12.14, 
which have been previously published by the Commission.\10\ By adopting 
Rule 12.14, the Exchange believes that imminent customer block orders 
would be better protected and that the proposed rule change will 
prevent fraudulent and manipulative acts and practices, promote just 
and equitable principles of trade, and better protect investors and the 
public interest.
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    \8\ 15 U.S.C. 78f(b)(5).
    \9\ See Securities Exchange Act Release No. 53128 (January 13, 
2006), 71 FR 3550 (January 23, 2006) (order approving Nasdaq's 
application for registration as a national securities exchange). See 
also Securities Exchange Act Release No. 58069 (June 30, 2008), 73 
FR 39360 (July 9, 2008) (SR-Nasdaq-2008-054) (Notice of Filing and 
Immediate Effectiveness). Securities Exchange Act Release No. 34-
67774 (September 4, 2012), 77 FR 55519 (September 12, 2012) 
(Approval Order).
    \10\ See supra note 4.
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change would 
impose any burden on competition that is not necessary or appropriate 
in furtherance of the purposes of the Act. The proposed rule change is 
not designed to address any competitive issues but rather is designed 
to enable the Exchange to better protect imminent customer block 
orders, as well as to provide greater harmonization among Exchange and 
FINRA rules, resulting in less burdensome and more efficient regulatory 
compliance for common members.

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)(iii) of the Act \11\ and Rule 19b-4(f)(6) thereunder.\12\ 
Because the 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, if consistent with the protection of 
investors and the public interest, the proposed rule change has become 
effective pursuant to Section 19(b)(3)(A) of the Act \13\ and Rule 19b-
4(f)(6)(iii) thereunder.\14\
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    \11\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \12\ 17 CFR 240.19b-4(f)(6).
    \13\ 15 U.S.C. 78s(b)(3)(A).
    \14\ 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.
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    A proposed rule change filed under Rule 19b-4(f)(6) \15\ normally 
does not become operative prior to 30 days after the date of the 
filing. However, pursuant to Rule 19b-4(f)(6)(iii),\16\ the Commission 
may designate a shorter time if such action is consistent with the 
protection of investors and the public interest. The Exchange has asked 
the Commission to waive the 30-day operative delay so that the proposed 
rule change may become operative immediately upon filing. The Exchange 
argues that waiver of the operative delay would enable it to enhance 
its rules protecting customer orders in a timely manner by explicitly 
prohibiting Members from trading ahead of block transaction in 
violation of proposed Rule 12.14 during what would be the operative 
delay period.\17\ The Exchange also represents that waiver of the 
operative delay would allow it to promptly incorporate Rule 12.14 into 
the 17d-2 Agreement, further reducing duplicative regulation of 
Exchange Members that are also members of FINRA. In addition, the 
Exchange states that waiving the operative delay would provide greater 
harmonization among Exchange, EDGA, EDGX, and FINRA rules, resulting in 
less burdensome and more efficient regulatory compliance for Members 
and facilitating FINRA's performance of its regulatory functions under 
the 17d-2 Agreement in a timelier manner. Based on the foregoing, the 
Commission believes that waiver of the operative delay is consistent 
with the protection of investors and the public interest. Accordingly, 
the Commission hereby waives the 30-day operative delay and designates 
the proposal operative upon filing.\18\
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    \15\ 17 CFR 240.19b-4(f)(6).
    \16\ 17 CFR 240.19b-4(f)(6)(iii).
    \17\ The Exchange also represents that it has already informed 
its Members that it will implement the proposed rule change on March 
23, 2015, a date that was determined based upon the effective date 
of a prior version of this filing. See BZX and BYX Regulatory 
Circular 15-003, Front Running of Block Transactions, dated February 
24, 2015.
    \18\ 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).
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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. 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 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-2015-16 on the subject line.

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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-2015-16. 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 offices 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-2015-16, 
and should be submitted on or before April 10, 2015.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\19\
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    \19\ 17 CFR 200.30-3(a)(12).
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Brent J. Fields,
Secretary.
[FR Doc. 2015-06361 Filed 3-19-15; 8:45 am]
 BILLING CODE 8011-01-P


