
[Federal Register Volume 80, Number 131 (Thursday, July 9, 2015)]
[Notices]
[Pages 39462-39463]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-16727]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-75354; File Nos. SR-BATS-2015-37; SR-BYX-2015-25; SR-
EDGA-2015-19; SR-EDGX-2015-21]


Self-Regulatory Organizations; BATS Exchange, Inc.; BATS Y-
Exchange, Inc.; EDGA Exchange, Inc.; and EDGX Exchange, Inc.; Order 
Approving Proposed Rule Changes, as Modified by Amendment No. 1, 
Relating to Liquidity Requirements for Securities Admitted to Unlisted 
Trading Privileges

July 2, 2015.

I. Introduction

    On May 5, 2015, BATS Exchange, Inc. (``BATS''); BATS Y-Exchange, 
Inc. (``BYX''); EDGA Exchange, Inc. (``EDGA''); and EDGX Exchange, Inc. 
(``EDGX'') (each, an ``Exchange'' and, collectively, the ``Exchanges'') 
filed with the Securities and Exchange Commission (the ``Commission''), 
pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of 1934 
(the ``Act''),\2\ and Rule 19b-4 thereunder,\3\ proposed rule changes 
to amend each Exchange's Rule 11.2, ``Securities Eligible for 
Trading,'' to indicate that the Exchanges may determine not to 
designate for trading any security admitted to unlisted trading 
privileges that does not meet certain consolidated average daily 
trading volume thresholds. On May 15, 2015, the Exchanges each filed 
Amendment No. 1 to their respective proposals.\4\ The proposed rule 
changes, as amended, were published for comment in the in the Federal 
Register on May 22, 2015.\5\ The Commission received two comment 
letters regarding the proposals.\6\ This order approves the proposed 
rule changes, as amended.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 15 U.S.C. 78a.
    \3\ 17 CFR 240.19b-4.
    \4\ Each Amendment No. 1 amended and replaced its original 
proposal in its entirety.
    \5\ See Securities Exchange Act Release Nos. 74987 (May 18, 
2015), 80 FR 29769 (``BATS Notice''); 74988 (May 18, 2015), 80 FR 
29781 (``BYX Notice''); 74986 (May 18, 2015), 80 FR 29772 (``EDGA 
Notice''); and 74985 (May 18, 2015), 80 FR 29778 (``EDGX Notice'').
    \6\ See letters to Brent J. Fields, Secretary, Commission, from 
John A. McCarthy, General Counsel, KCG Holdings, Inc. (``KCG''), 
dated June 12, 2015 (``KCG Letter'') available at http://www.sec.gov/comments/sr-byx-2015-25/byx201525-1.pdf; and from 
Theodore R. Lazo, Managing Director and Associate General Counsel, 
Securities Industry and Financial Markets Association (``SIFMA''), 
dated June 15, 2015 (``SIFMA Letter'') available at http://www.sec.gov/comments/sr-bats-2015-37/bats201537-1.pdf.
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II. Description of the Proposals

    Each Exchange proposes to amend its rules by adding new paragraphs 
(b), (c), and (d) to Rule 11.2.\7\ Proposed Rule 11.2(b) provides that 
an Exchange may determine not to designate for trading any security 
admitted to unlisted trading privileges on the Exchange when that 
security's consolidated average daily volume is equal to or less than 
2,500 shares during the preceding 90 calendar days.\8\ An Exchange may 
begin trading a security that it had previously not designated for 
trading pursuant to proposed Rule 11.2(b) if the security's 
consolidated average daily trading volume exceeds 5,000 shares over any 
90 calendar day period since the security was not designated for 
trading.\9\ An Exchange would be required to notify its members at 
least one trading day in advance of any securities it is making 
unavailable for trading pursuant to proposed Rule 11.2(b), and of any 
securities it is making available for trading pursuant to proposed Rule 
11.2(c).\10\
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    \7\ The existing provisions of Rule 11.2 will be included in 
proposed subparagraph (a).
    \8\ See proposed Exchange Rule 11.2(b). Based on internal 
statistics, the Exchanges anticipate that approximately 700 
securities would meet this criterion.
    \9\ See proposed Exchange Rule 11.2(c).
    \10\ See proposed Exchange Rule 11.2(d).
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    Each Exchange would retain discretion over whether to determine not 
to quote and trade securities that meet the criteria in proposed 
Exchange Rules 11.2(b) and 11.2(c).\11\ In determining whether to 
exercise its discretion under proposed Exchange Rules 11.2(b) and 
11.2(c), an Exchange would consider such factors as member and investor 
feedback, as well as whether other non-listing exchanges have decided 
to cease quoting and trading in the affected securities.\12\
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    \11\ See proposed Exchange Rule 11.2(c).
    \12\ See BATS Notice, 80 FR at 29770; BYX Notice, 80 FR at 
29782; EDGA Notice, 80 FR at 29773; and EDGX Notice, 80 FR at 29779.
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    The Exchanges state that the proposals may facilitate an 
improvement in market quality for the affected securities, which could 
increase investor interest in trading these securities. In particular, 
the Exchanges believe that concentrating the quoted liquidity in the 
affected securities on the listing exchange will provide liquidity 
providers with an incentive to quote more competitively on the listing 
exchange, resulting in narrower bid-ask spreads and greater quoted 
depth of book. Specifically, the Exchanges believe that liquidity 
providers will have an incentive to quote more competitively because 
concentrating the quoted liquidity on the listing exchange would: (i) 
Reduce liquidity providers' risk of adverse selection when quoting in a 
fragmented market; (ii) provide greater certainty of execution on the 
one exchange at which liquidity providers are quoting; and (iii) 
enhance competition for order book priority at the national best bid or 
offer and throughout the depth of book. In addition, the Exchanges 
state that concentrating liquidity on the listing exchange could 
provide the listing exchange with flexibility to innovate with 
alternative market structures, such as variable tick sizes or periodic 
batch auctions, that currently are not possible under Regulation NMS 
when multiple exchanges are quoting and trading the securities. The 
Exchanges believe that such alternative market structures could further 
enhance the market quality of the affected securities.\13\
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    \13\ See BATS Notice, 80 FR at 29770-29771; BYX Notice, 80 FR at 
29782-29783; EDGA Notice at 80 FR at 29773-29774; and EDGX Notice at 
80 FR 29779-29780.
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III. Summary of Comments Received

    The Commission received two comment letters regarding the 
proposals, both of which supported the proposals.\14\ One commenter 
stated that the proposals were ``a reasonable approach to addressing 
the persistent problem of trading illiquid securities in

[[Page 39463]]

a fragmented market.'' \15\ Another commenter stated that the market 
quality of less liquid securities could be improved if their exchange 
trading presence was concentrated on the listing exchange.\16\ Both 
commenters expressed support for similar initiatives by other 
exchanges, with one commenter encouraging other exchanges to consider 
expanding the scope of less liquid securities that would be subject to 
a concentrated trading threshold.\17\
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    \14\ See note 6, supra. The KCG Letter was addressed to File No. 
SR-BYX-2015-25, and the SIFMA Letter was addressed to File No. SR-
BATS-2015-37. Because the proposals are substantially similar, the 
Commission believes it is appropriate to consider the comments with 
respect to all of the proposals.
    \15\ KCG Letter at 1.
    \16\ See SIFMA Letter at 1-2.
    \17\ See SIFMA Letter at 2; KCG Letter at 3. While expressing 
support for the current proposals, one commenter indicated that it 
would oppose any proposal to establish concentrated exchange trading 
for actively traded stocks. The commenter also stated that the 
initiative to concentrate exchange trading must allow for the 
continuation of off-exchange trading of illiquid securities which, 
in the commenter's view, provides important supplementary benefits 
to exchange trading. See SIFMA Letter at 2.
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    One commenter stated that by providing the primary listing exchange 
with exclusivity in the quoting and trading of thinly-traded 
securities, the proposals would allow the listing exchange to better 
innovate its market structure for these securities, which likely would 
lead to improved market quality for the securities.\18\ At the same 
time, the commenter stated that that the voluntary nature of the 
program should act as a check to assure that the listing exchange does 
not abuse its monopoly position.\19\ The commenter noted, further, that 
the proposals are an incremental market structure adjustment, unlike 
other recent initiatives that the commenter characterized as being 
larger in scope and potentially disruptive.\20\
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    \18\ See KCG Letter at 2.
    \19\ See id.
    \20\ See id.
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IV. Discussion and Commission Findings

    After careful review, the Commission finds that the proposed rule 
changes, as amended, are consistent with the Act and the rules and 
regulations thereunder applicable to a national securities 
exchange.\21\ In particular, the Commission finds that the proposed 
rule changes, as amended, are consistent with Section 6(b)(5) of the 
Act,\22\ which requires that the rules of the exchange be designed, 
among other things, 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.
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    \21\ In approving this proposed rule change, the Commission 
notes that it has considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
    \22\ 15 U.S.C. 78(b)(5).
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    The Commission believes that the proposals will provide 
transparency by signaling each Exchange's general intention to 
voluntarily refrain from trading any security that does not meet the 
consolidated average daily trading volume threshold established in Rule 
11.2(b), and to continue to refrain from trading such a security until 
the security satisfies the requirements of Rule 11.2(c). The proposals 
also make clear that the Exchanges will retain discretion to quote and 
trade the affected securities. \23\ In determining whether to exercise 
this discretion, the Exchanges have represented that they will consider 
such factors as member and investor feedback, and whether other non-
listing exchanges have decided to cease quoting and trading the 
affected securities.
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    \23\ See Rule 11.2(c).
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    The Commission notes that each Exchange is required to notify its 
members at least one trading day in advance of any securities that it 
is making unavailable for trading pursuant to Rule 11.2(b), and of any 
securities it is making available for trading pursuant to Rule 
11.2(c).\24\ The Commission notes, further, that the Exchanges believe 
that the proposals potentially could enhance the market quality of the 
affected securities, and that the commenters similarly supported the 
proposals as a step toward improving the market quality of less liquid 
securities.
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    \24\ See Exchange Rule 11.2(d).
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V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\25\ that the proposed rule changes (File Nos. SR-BATS-2015-37; SR-
BYX-2015-25; SR-EDGA-2015-19; and SR-EDGX-2015-21), as amended, are 
approved.
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    \25\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\26\
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    \26\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2015-16727 Filed 7-8-15; 8:45 am]
 BILLING CODE 8011-01-P


