
[Federal Register Volume 81, Number 30 (Tuesday, February 16, 2016)]
[Notices]
[Pages 7851-7853]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-02983]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-77090; File No. SR-BATS-2016-06]


Self-Regulatory Organizations; BATS Exchange, Inc.; Notice of 
Filing and Immediate Effectiveness of a Proposed Rule Change To Amend 
Rule 21.16, Risk Monitor Mechanism, Relating to the BATS Equity Options 
Trading Platform

February 9, 2016.
    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 January 27, 2016, BATS Exchange, Inc. (the ``Exchange'' or 
``BATS'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I and 
II 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 Substance 
of the Proposed Rule Change

    The Exchange filed a proposal to amend Rule 21.16, entitled ``Risk 
Monitor Mechanism'', in order to modify the risk monitoring 
functionality offered to all Users \5\ of the BATS equity options 
trading platform (``BZX Options'').
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    \5\ As defined in Exchange Rule 16.1(a)(63), a User is any 
Exchange member or sponsored participant authorized to obtain access 
to the Exchange.
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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 purpose of the proposed rule change is to amend Exchange Rule 
21.16 to modify the method by which the BZX Options Risk Monitor 
Mechanism measures risk and to modify the ability of a User to reset 
the Risk Monitor Mechanism when risk has been triggered in the Firm 
Category, as described below.
Background
    Currently, the Exchange's Risk Monitor Mechanism operates by 
maintaining a counting program for each User. A User may configure a 
single counting program or multiple counting programs to govern its 
trading activity (i.e., on a port by port basis). The System engages 
the Risk Monitor Mechanism in a particular option when the counting 
program has determined that a User's trading has reached one of several 
specified triggers (``Specified Engagement Trigger'') established by 
such User during a specified time period or on an absolute basis.
Elimination of Option Categories
    The current counting program counts executions in the following 
``Option Categories'': front-month puts, front-month calls, back-month 
puts, and back-month calls (each an ``Option Category'').\6\ The 
counting program also counts a User's executions, contract volume and 
notional value across all options which a User trades (``Firm 
Category''). The Exchange proposes to eliminate the concept of the 
Option Category, such that the counting program will instead operate 
per option across all Option Categories (i.e., all front-month puts, 
front-month calls, back-month puts, and back-month calls). The Exchange 
does not propose to amend the Firm Category of the Risk Monitor 
Mechanism.
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    \6\ For the purposes of Rule 21.16, a front-month put or call is 
an option that expires within the next two calendar months, 
including weeklies and other non-standard expirations, and a back-
month put or call is an option that expires in any month more than 
two calendar months away from the current month.
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    The Exchange believes that the change will result in a Risk Monitor 
Mechanism that is more consistent with that offered by other options 
exchanges. Although the Exchange implemented its Risk Monitor Mechanism 
with the concept of Option Categories for technical reasons, the 
Exchange is not aware of any other options exchange that uses the 
concept of Option Categories in the context of its risk mechanism.
Calculation of Percentage-Based Engagement Trigger
    The Exchange currently offers a Specified Engagement Trigger to the 
Risk Monitor Mechanism based on percentage under Exchange Rule 
21.16(b)(ii) (the ``percentage trigger''). The percentage trigger is 
triggered whenever a trade counter has calculated that the User has 
traded a set percentage within a set time period against the User's 
orders in a specified class. The set percentage is specified by the 
User (the ``Specified Percentage'') and is proposed to be calculated as 
follows (and as shown in the examples below): (1) A counting program 
would first calculate, for each series of an option class, the 
percentage of each User's orders or Market Maker's quotes that are 
executed on each side of the market, including both displayed and non-
displayed size; and (2) the counting program would then sum the overall 
series percentages for the entire option

[[Page 7852]]

class to calculate the percentage trigger. The Exchange proposes to 
specify this methodology in Rule 21.16. As proposed, the Exchange would 
no longer aggregate all bids and offers in each series for purposes of 
counting the percentage trigger, as it currently does, but would 
instead count bids and offers in each series separately.
    For example, assume a User enters 100 contract orders at both the 
National Best Bid (``NBB'') and National Best Offer (``NBO'') in two 
series of a class, its Specified Percentage is 100%, and the four 
executions in the example below occur within the time period specified 
by the User. The counting program would calculate the percentage of 
quote risk mechanism as follows:

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                                                                                                                                             Aggregate
                                                                             Number of                       Number of     Percentage of   percentage of
                      Event/series                           Bid size        contracts      Offer size       contracts       quote of          quote
                                                                            executed--                      executed--       execution       following
                                                                               bids                           offers                         execution
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Quotes Entered: Series 1................................             100               0             100               0               0               0
Quotes Entered: Series 2................................             100               0             100               0               0               0
Sell order for 40 contracts: Series 1...................             100              40             100               0              40              40
Buy order for 50 contracts: Series 1....................              60               0             100              50              50              90
Sell order for 5 contracts: Series 2....................             100               5             100               0               5              95
Buy order for 10 contracts: Series 2....................              95               0             100              10              10             105
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    In this example, the aggregate percentages of the User's quotes on 
each side in all series during the time period is 105%,\7\ thus 
exceeding the specified percentage of 100%, at which point the 
percentage trigger would be triggered and the User's remaining orders 
in the appointed class would be cancelled.
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    \7\ As set forth in the table and consistent with the 
methodology as proposed to be defined in Rule 21.16, the percentage 
trigger is calculated by individually calculating the percentage of 
each execution in each series on each of the bid and the offer and 
then summing each of these percentages together. The percentage, 
thus, does not calculate the actual percentage as a whole in the 
options class over the time period--in the example, 105 contracts 
out of 400 contracts were executed over the time period yet this 
does not result in a percentage calculation of 26.25%. Instead, 40% 
of the quoted bid in Series 1 is executed, then 50% of the quoted 
offer in Series 1 is executed, then 5% of the quoted bid in Series 2 
is executed, and finally 10% of the quoted offer in Series 2 is 
executed. By summing these percentages, the percentage trigger 
equals 105%. As set forth elsewhere in the proposal, the Exchange 
believes that this counting methodology is similar to that offered 
by other options exchanges.
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Re-Setting of Risk Monitor Mechanism
    Under current Rule 21.16, when a Specified Engagement Trigger is 
reached in the Firm Category, the Risk Monitor Mechanism will 
automatically remove such User's orders in all series of all options 
and reject any additional orders from a User until the counting program 
has been reset in accordance with paragraph (d) of the rule. The Risk 
Monitor Mechanism will also attempt to cancel any orders that have been 
routed away to other options exchanges on behalf of the User. The 
Exchange proposes to further amend Rule 21.16 so that unless otherwise 
instructed by a User, in the event a Specified Engagement Trigger is 
reached in the Firm Category, the Exchange will not allow a User to 
automatically reset the counting program and Users will instead need to 
contact the Exchange to request a reset. Because reaching a Specified 
Engagement Trigger in the Firm Category should be a rare event, the 
Exchange believes that most Users will prefer to pause in the event of 
a trigger, review the circumstances, and then slowly re-enter the 
market. The Exchange is proposing to maintain the ability to 
automatically reset the counting program, however, because that is how 
the Risk Monitor Mechanism operates today and because it is possible 
that a User's risk management program is established in a way where the 
User would take the trigger into account but prefers the ability to 
automatically reset to control their re-entry to the market rather than 
needing to contact the Exchange.
2. Statutory Basis
    The rule change proposed in this submission is consistent with the 
requirements of the Act and the rules and regulations thereunder that 
are applicable to a national securities exchange, and, in particular, 
with the requirements of Section 6(b) of the Act.\8\ Specifically, the 
proposed change is consistent with Section 6(b)(5) of the Act,\9\ 
because it is 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. 
The Exchange believes that the proposal is appropriate and reasonable 
because it offers additional functionality for Users to manage their 
risk.
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    \8\ 15 U.S.C. 78f(b).
    \9\ 15 U.S.C. 78f(b)(5).
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    Modifying the Risk Monitor Mechanism to eliminate the Option 
Category concept will allow Users to manage their risk in each option 
class in a way that is more consistent with the way they manage risk on 
other option exchanges. As noted above, although the Exchange 
implemented its Risk Monitor Mechanism with the concept of Option 
Categories for technical reasons, the Exchange is not aware of any 
other options exchange that uses the concept of Option Categories in 
the context of its risk mechanism.
    Offering the percentage trigger without aggregation across the bid 
and the offer as part of the Risk Monitor Mechanism will provide Market 
Makers and other Users with greater control and flexibility with 
respect to managing risk and the manner in which they enter orders and 
quotes, which removes impediments to a free and open market and 
benefits all Users of BZX Options. The Exchange notes that similar 
functionality is offered by NYSE Arca, Inc. (``NYSE Arca Options'') and 
NYSE Amex Options, Inc. (``NYSE Amex Options'').\10\
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    \10\ See NYSE Arca Options Rule 6.40(d); see also NYSE Amex 
Options Rule 928NY(d).
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    Finally, creating a default that prevents the automatic reset of 
the counting program in the event a Specified Engagement Trigger is 
reached in the Firm Category will provide additional controls to Users 
that are trying to manage their risk. At the same time, allowing Users 
to maintain the ability to automatically reset the counting program 
will maintain the status quo with respect to the current Risk Monitor 
Mechanism and will allow Users to tailor their risk management programs 
as appropriate to their operations. The Exchange believes that this 
change is a modest extension of the current rule, that it is consistent 
with the overall purpose of the rule (i.e., to mitigate risk), and that 
it does not raise any policy issues particularly because a

[[Page 7853]]

User can still optionally use the same functionality offered today by 
informing the Exchange that it still wishes to utilize the feature to 
automatically reset the counting program even if a Specified Engagement 
Trigger has been reached in the Firm Category.

(B) Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition not necessary or appropriate in 
furtherance of the purposes of the act. To the contrary, the proposed 
changes to the Exchange's Risk Monitor Mechanism will generally make 
the Exchange's offering more consistent with that offered by other 
exchanges. Thus, the proposed rule change will promote competition 
because it will allow the Exchange to offer its Users similar features 
as are available at other exchanges and thus further compete with other 
exchanges for order flow.

(C) Self-Regulatory Organization's Statement on Comments on the 
Proposed Rule Change Received From Members, Participants or Others

    The Exchange has not solicited, and does not intend to solicit, 
comments on this proposed rule change. The Exchange has not received 
any written comments from members or other interested parties.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Because the foregoing proposed rule change does not: (A) 
significantly affect the protection of investors or the public 
interest; (B) impose any significant burden on competition; and (C) by 
its terms, become operative for 30 days from the date on which it was 
filed or such shorter time as the Commission may designate it has 
become effective pursuant to Section 19(b)(3)(A) of the Act \11\ and 
paragraph (f)(6) of Rule 19b-4 thereunder,\12\ the Exchange has 
designated this rule filing as non-controversial. The Exchange 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.
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    \11\ 15 U.S.C. 78s(b)(3)(A).
    \12\ 17 CFR 240.19b-4.
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    A proposed rule change filed under Rule 19b-4(f)(6) normally does 
not become operative prior to 30 days after the date of filing. Rule 
19b-4(f)(6)(iii), however, permits the Commission to 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 noted operative delay so that the Exchange may 
implement the proposal on or about February 8, 2016, when the Exchange 
anticipates that the features will be available. The Exchange has 
stated that such a waiver would, without undue delay, provide its Users 
with a risk mechanism that is more similar to that offered by other 
options exchanges and that may assist its Users in providing liquidity 
on the Exchange consistent with their risk profile. The Commission 
believes that waiving the thirty day delay is consistent with the 
protection of investors and the public interest. Therefore, the 
Commission hereby waives the thirty-day operative delay.\13\
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    \13\ For purposes 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: (1) 
necessary or appropriate in the public interest; (2) for the protection 
of investors; or (3) 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 proposal 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 No. SR-BATS-2016-06 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 No. SR-BATS-2016-06. 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 will also 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 No. SR-BATS-2016-06 and should be 
submitted on or before March 8, 2016.
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    \14\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\14\
Brent J. Fields,
Secretary.
[FR Doc. 2016-02983 Filed 2-12-16; 8:45 am]
 BILLING CODE 8011-01-P


