
[Federal Register Volume 80, Number 77 (Wednesday, April 22, 2015)]
[Notices]
[Pages 22567-22568]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-09268]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-74739; File No. SR-BYX-2015-07]


Self-Regulatory Organizations; BATS Y-Exchange, Inc.; Order 
Granting Approval of a Proposed Rule Change To Amend Rules 11.9, 11.12, 
and 11.13 of BATS Y-Exchange, Inc.

April 16, 2015.

I. Introduction

    On January 30, 2015, BATS Y-Exchange, Inc. (``BYX'' or the 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'' or ``Exchange Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to amend Exchange Rules 11.9, 
11.12, and 11.13. The proposed rule change was published for comment in 
the Federal Register on February 18, 2015.\3\ The Commission received 
no comments on the proposal. This order grants approval of 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. 74250 (February 11, 
2015), 80 FR 8734 (``Notice'').
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II. Description of the Proposed Rule Change

    The Exchange conducted a comprehensive review of its system 
functionality.\4\ The proposal adds additional clarity and specificity 
regarding the current functionality of the Exchange's System,\5\ 
including the operation of its order types and order instructions. The 
Exchange proposes no substantive modifications to the System.
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    \4\ On June 5, 2014, Chair Mary Jo White asked all national 
securities exchanges to conduct a comprehensive review of each order 
type offered to members and how it operates in practice. See Mary Jo 
White, Chair, Commission, Speech at the Sandler O'Neill & Partners, 
L.P. Global Exchange and Brokerage Conference, (June 5, 2014) 
(available at http://www.sec.gov/News/Speech/Detail/Speech/1370542004312#.VD2HW610w6Y).
    \5\ Exchange Rule 1.5(aa) defines ``System'' 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.''
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    The changes include: (i) Making clear that orders with a Time-in-
Force (``TIF'') of Immediate-or-Cancel (``IOC'') can be routed away 
from the Exchange; (ii) specifying the methodology used by the Exchange 
to determine whether BATS Post Only Orders \6\ will remove liquidity 
from the BATS Book; \7\ (iii) adding additional detail to and re-
structuring the description of Pegged Orders; (iv) adding additional 
detail to the description of Mid-Point Peg Orders; (v) adding 
additional detail to the description of Discretionary Orders; (vi) 
amending Rule 11.12, Priority of Orders, and Rule 11.13, Order 
Execution, to provide additional specificity and enhance the structure 
of Exchange rules describing the process for ranking, executing and 
routing orders; (vii) adding additional detail to the description of 
orders subject to Re-Route functionality; and (viii) making a series of 
conforming changes to Rules 11.9, 11.12 and 11.13 to update cross-
references.
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    \6\ See Rule 11.9(c)(6).
    \7\ As defined in Rule 1.5(e).
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    Rule 11.9. The Exchange proposes revisions to Rule 11.9 to provide 
greater detail as to the existing functionality of certain order types 
and modifiers.\8\ Among other things, the Exchange proposes to make 
clear that orders with an IOC TIF are routable but do not post to the 
Exchange's book,\9\ whereas orders with a Fill-or-Kill (``FOK'') TIF 
are not routable.\10\ The Exchange also proposes to clarify the 
Exchange's methodology for determining whether BATS Post Only orders 
will remove liquidity from the Exchange's order book upon entry.\11\ In 
addition, the Exchange proposes to reformat the rule describing the 
Primary Pegged and Market Pegged orders,\12\ and to make clear that 
Mid-Point Peg Orders are not eligible to execute when the NBBO is 
crossed but Users may elect whether such orders will be eligible to 
execute when the NBBO is locked.\13\ Further, the Exchange proposes to 
add additional detail to the rule describing Discretionary Orders so 
that it specifies: (i) That Discretionary Orders may be fully non-
displayed, with a non-displayed ranked price (and discretionary price); 
(ii) how resting Discretionary Orders interact with incoming contra-
side orders, including how the order type, TIF and price of the 
incoming order affects whether the resting Discretionary Order removes 
liquidity against the incoming order or the incoming order removes 
liquidity against the resting Discretionary Order; and (iii) that 
Discretionary Orders are routed away from the Exchange at their full 
discretionary price.\14\
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    \8\ For additional detail regarding the specific proposed 
revisions for each order type and modifier, see Notice, supra note 3 
at 8734-36, and proposed Rule 11.9.
    \9\ See proposed Rule 11.9(b)(1). In connection with this 
proposed change the Exchange also proposes to specify that the 
cancellation of an unfilled balance of an order is one possible 
outcome after an order has been routed away. See proposed Rule 
11.13(b)(2). This is what would occur with the unfilled balance of a 
routed IOC order. See Notice, supra note 3 at 8734.
    \10\ See proposed Rule 11.9(b)(6).
    \11\ See proposed Rule 11.9(c)(6). Due to the Exchange's 
inverted fee structure, incoming BATS Post Only Orders always 
execute upon entry (and hence remove liquidity) when marketable 
against resting contra-side liquidity because it is always 
economically advantageous for them to do so. The Exchange 
nevertheless maintains this order type so that the post-only 
functionality remains available in the event the Exchange's fee 
structure changes, and proposes the clarifying changes reflected in 
proposed Rule 11.9(c)(6) so as to reflect the actual functionality 
of the System, which still performs the economic best interest 
specified in the rule despite the outcome being pre-determined by 
the Exchange's fee structure. See Notice, supra note 3 at 8735.
    \12\ See proposed Rule 11.9(c)(8).
    \13\ See proposed Rule 11.9(c)(9).
    \14\ See proposed Rule 11.9(c)(10). In addition, the Exchange 
proposes to update cross references to rules that would be re-
numbered as a result of the proposal. See proposed Rules 11.9(c), 
11.9(d) and 11.9(g).
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    Rule 11.12. The Exchange proposes several modifications to Rule 
11.12 that are intended to clarify existing functionality relating to 
order priority. Some of these modifications would revise the structure 
of Rule 11.12 or add cross references to other rules.\15\ In addition, 
the Exchange proposes to revise Rule 11.12(a)(2) to refer to ranking, 
rather than executing, equally-priced trading interest because, 
according to the Exchange, the rule is intended to describe the manner 
in which resting orders are ranked and maintained.\16\ The Exchange 
also proposes to revise the reference to Pegged Orders in the priority 
hierarchy set forth in Rule 11.12(a)(2) to make clear that the 
reference is specifically to non-displayed Pegged Orders.\17\ The 
Exchange notes that the purpose of this revision is to distinguish non-
displayed Pegged Orders from Primary Pegged

[[Page 22568]]

Orders that, if displayed, are ranked with other displayed orders.\18\ 
Further, the Exchange proposes to adopt new Rule 11.12(a)(3), which 
would codify existing match trade prevention rules that optionally 
prevent the execution of orders from the same User.\19\ Lastly, the 
Exchange proposes to renumber current Rules 11.12(a)(3) and (a)(4) as 
Rules 11.12(a)(4) and (a)(5), respectively, and to revise them to 
clarify that time priority in particular can be retained or lost in 
certain circumstances, as opposed to both price and time priority.\20\
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    \15\ See Notice, supra note 3 at 8736-37. See also proposed Rule 
11.12(a).
    \16\ See Notice, supra note 3 at 8737. See also proposed Rule 
11.12(a)(2).
    \17\ See Notice, supra note 3 at 8737. See also proposed Rule 
11.12(a)(2)(C).
    \18\ See Notice, supra note 3 at 8737.
    \19\ See Notice, supra note 3 at 8737. See also proposed Rule 
11.12(a)(3). The Exchange notes that proposed Rule 11.12(a)(3) is 
based on EDGX Rule 11.9(a)(3). See Notice, supra note 3 at 8737.
    \20\ See Notice, supra note 3 at 8737. See also proposed Rules 
11.12(a)(4) and (a)(5). In addition, the Exchange proposes to 
renumber current Rules 11.12(a)(5) and (a)(6) as Rules 11.12(a)(6) 
and (a)(7), respectively.
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    Rule 11.13. The Exchange proposes several revisions to Rule 11.13, 
which currently governs the execution and routing logic on the 
Exchange. The Exchange proposes to restructure and reformat the rule in 
certain ways, including by more clearly delineating between execution 
(to be contained in new paragraph (a)) \21\ and routing (to be 
contained in new paragraph (b)), adding sub-headings and descriptive 
titles, adding a cross reference to the Exchange's rules related to the 
Limit Up-Limit Down Plan, and revising existing cross references in the 
rule.\22\ In addition, the Exchange proposes to add Rules 
11.13(a)(4)(C) and (D), which would replace and amend existing text set 
forth in Rule 11.13(a)(1) and are intended to provide further clarity 
regarding how incoming orders are handled in certain situations when 
there is undisplayed locking interest on the Exchange.\23\
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    \21\ The Exchange proposes to move language contained within 
Rule 11.13 to the beginning of new paragraph (a) such that the 
language is more generally applicable to the rules governing 
execution. Specifically, the Exchange proposes to relocate language 
stating that any order falling within the parameters of the 
paragraph shall be referred to as ``executable'' and that an order 
will be cancelled back to the User if, based on market conditions, 
User instructions, applicable Exchange Rules and/or the Act and the 
rules and regulations thereunder, such order is not executable, 
cannot be routed to another Trading Center pursuant to Rule 11.13(b) 
(as proposed to be re-numbered) or cannot be posted to the BATS 
Book. See Notice, supra note 3 at 8737. See also proposed Rule 
11.13(a).
    \22\ See Notice, supra note 3 at 8737. See also proposed Rule 
11.13.
    \23\ See Notice, supra note 3 at 8738. See also proposed Rules 
11.13(a)(4)(C) and (D).
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    The Exchange also proposes revisions to Rule 11.13 as it relates to 
the Exchange's routing process, including its re-route functionality. 
In particular, the Exchange proposes to add language to the rule's 
description of the Aggressive Re-Route instruction (to be renumbered as 
Rule 11.13(b)(4)(A)) that states that any routable non-displayed limit 
order posted to the BATS Book that is crossed by another accessible 
Trading Center will be automatically routed to that Trading Center.\24\ 
The Exchange also proposes to adopt new Rule 11.13(b)(4)(C), which 
would specify when an order with a Super Aggressive Re-Route 
instruction will remove liquidity against an incoming order.\25\ 
Further, the Exchange proposes to revise Rule 11.13(b) (to be 
renumbered as Rule 11.13(b)(5)) to make clear that orders that have 
been routed pursuant to Rule 11.12(a) are not ranked and maintained by 
the BATS Book, and therefore are not available to execute against 
incoming orders pursuant to new Rule 11.13(a).\26\
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    \24\ See Notice, supra note 3 at 8738-40. See also proposed Rule 
11.13(b)(4)(A).
    \25\ See Notice, supra note 3 at 8738-40. See also proposed Rule 
11.13(b)(4)(C).
    \26\ See Notice, supra note 3 at 8738. See also proposed Rule 
11.13(b)(5). For additional detail regarding the Exchange's proposed 
rule changes, including examples of the operation of functionality 
addressed by this rule filing, see Notice, supra note 3 at 8734-40.
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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 applicable to a national securities 
exchange.\27\ In particular, the Commission finds that the proposed 
rule change is consistent with the requirements of Section 6(b)(5) of 
the Act,\28\ 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 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; and are not designed to permit unfair discrimination 
between customers, issuers, brokers or dealers.
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    \27\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
    \28\ 15 U.S.C. 78f(b)(5).
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    The Exchange believes that the proposed rule change will provide 
additional clarity and specificity regarding the functionality of the 
System, thus promoting just and equitable principals of trade and 
promoting a fair and open market. In addition, the Exchange believes 
the proposed rule change will contribute to the protection of investors 
and the public interest by making the Exchange's rules easier to 
understand.
    The Exchange states that the proposed rule changes add clarity and 
transparency to the Exchange's rulebook regarding existing Exchange 
functionality.\29\ For example, among other things, the Exchange's 
proposal would amend Rule 11.9 to clarify that IOC orders are routable 
and FOK orders are not routable, specify the methodology used by the 
Exchange to determine whether BATS Post Only Orders will remove 
liquidity from the BATS Book, and add additional detail describing the 
operation of Mid-Point Peg Orders and Discretionary Orders. The 
Exchange also has proposed to amend Rules 11.12 and 11.13 to provide 
additional transparency as to, but not substantively modify, the 
Exchange's process for ranking, executing and routing orders, including 
orders subject to the Exchange's re-route functionality.
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    \29\ See Notice, supra note 3 at 8726.
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    The Commission believes that these proposed changes should provide 
greater specificity, clarity and transparency with respect to certain 
order type and modifier functionality available on the Exchange, as 
well as the Exchange's methodologies for ranking, executing and routing 
orders. Therefore, the proposal should help to prevent fraudulent and 
manipulative acts and practices, promote just and equitable principles 
of trade, remove impediments to and perfect the mechanism of a free and 
open market and a national market system, and, in general, protect 
investors and the public interest.

IV. Conclusion

    IT IS THEREFORE ORDERED, pursuant to Section 19(b)(2) of the 
Act,\30\ that the proposed rule change (SR-BYX-2015-07) be, and it 
hereby is, approved.
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    \30\ 15 U.S.C. 78s(b)(2).

    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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Brent J. Fields,
Secretary.
[FR Doc. 2015-09268 Filed 4-21-15; 8:45 am]
BILLING CODE 8011-01-P


