
[Federal Register Volume 81, Number 39 (Monday, February 29, 2016)]
[Notices]
[Pages 10310-10315]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-04251]



[[Page 10310]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-77213; File No. SR-BYX-2016-03]


Self-Regulatory Organizations; BATS Y-Exchange, Inc.; Notice of 
Filing of a Proposed Rule Change To Adopt an Early Trading Session and 
Three New Time-In Force Instructions

February 23, 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 February 16, 2016, BATS Y-Exchange, Inc. (the ``Exchange'' or 
``BYX'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I, II 
and III 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 amend its rules to: (i) Create a 
new trading session to be known as the Early Trading Session, which 
will run from 7:00 a.m. to 8:00 a.m. Eastern Time; and (ii) adopt three 
new Time-in-Force (``TIF'') instructions.\3\
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    \3\ The Exchange notes that its affiliate, BATS Exchange, Inc., 
(``BZX'') filed a proposed rule change for immediate effectiveness 
with the Commission on January 7, 2016 to amend its rules to also: 
(i) Create a new trading session to be known as the Early Trading 
Session, which will run from 7:00 a.m. to 8:00 a.m. Eastern Time; 
and (ii) adopt identical TIF instructions. See file no. SR-BATS-
2016-01 [sic].
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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 amend its rules to: (i) Create a new 
trading session to be known as the Early Trading Session, which will 
run from 7:00 a.m. to 8:00 a.m. Eastern Time; and (ii) adopt three new 
TIF instructions.
Early Trading Session
    The Exchange trading day is currently divided into three sessions 
of which a User \4\ may select their order(s) be eligible for 
execution: (i) The Pre-Opening Session which starts at 8:00 a.m. and 
ends at 9:30 a.m. Eastern Time; (ii) Regular Trading Hours which runs 
from 9:30 a.m. to 4:00 p.m. Eastern Time; and (iii) the After Hours 
Session, which runs from 4:00 p.m. to 5:00 p.m. Eastern Time. The 
Exchange proposes to amend its rules to create a new trading session to 
be known as the Early Trading Session, which will run from 7:00 a.m. to 
8:00 a.m. Eastern Time.\5\ Exchange Rule 1.5 would be amended to add a 
new definition for the term ``Early Trading Session'' under new 
paragraph (ee). ``Early Trading Session'' would be defined as ``the 
time between 7:00 a.m. and 8:00 a.m. Eastern Time.'' \6\
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    \4\ ``User'' is defined as ``any Member or Sponsored Participant 
who is authorized to obtain access to the System pursuant to Rule 
11.3.'' See Exchange Rule 1.5(cc).
    \5\ The Exchange notes that NYSE Arca, Inc. (``NYSE Arca'') 
operates an Opening Session that starts at 4:00 a.m. Eastern Time 
(1:00 a.m. Pacific Time) and ends at 9:30 a.m. Eastern Time (6:30 
a.m. Pacific Time). See NYSE Arca Rule 7.34(a)(1). The Nasdaq Stock 
Market LLC (``Nasdaq'') operates a pre-market session that also 
opens at 4:00 a.m. and ends at 9:30 a.m. Eastern Time. See Nasdaq 
Rule 4701(g). See also Securities Exchange Act Release No. 69151 
(March 15, 2013), 78 FR 17464 (March 21, 2013) (SR-Nasdaq-2013-033) 
(Notice of Filing and Immediate Effectiveness of Proposed Rule 
Change to Extend the Pre-Market Hours of the Exchange to 4:00 a.m. 
EST).
    \6\ An Exchange having bifurcated after hours trading sessions 
is not novel. For example, the Chicago Stock Exchange, Inc. 
(``CHX'') maintains two after hours trading sessions. See CHX 
Article 20, Rule 1(b). See also Securities Exchange Act Release No. 
60605 (September 1, 2009), 74 FR 46277 (September 8, 2009) (SR-CHX-
2009-13) (Notice of Filing and Immediate Effectiveness of Proposed 
Rule Change Adding Additional Trading Sessions).
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    The Exchange also proposes to amend Rule 11.1(a) to account for the 
Early Trading Session starting at 7:00 a.m. Eastern Time. Other than 
the proposal to adopt an Early Trading Session starting at 7:00 a.m. 
Eastern Time, the Exchange does not propose to amend the substance or 
operation of Rule 11.1(a).
    Users currently designate when their orders are eligible for 
execution by selecting the desired TIF instruction under Exchange Rule 
11.9(b). Orders entered between 6:00 a.m. and 8:00 a.m. Eastern Time 
are not eligible for execution until the start of the Pre-Opening 
Session, or Regular Trading Hours,\7\ depending on the TIF selected by 
the User. Users may enter orders in advance of the trading session they 
intend the order to be eligible for. For example, Users may enter 
orders starting at 6:00 a.m. Eastern Time with a TIF of Regular Hours 
Only, which designates that the order only be eligible for execution 
during Regular Trading Hours.\8\ As stated above, Users may enter 
orders as early as 6:00 a.m. Eastern Time, but those orders would not 
be eligible for execution until the start of the Pre-Opening Session at 
8:00 a.m. Some Users have requested the ability for their orders to be 
eligible for execution starting at 7:00 a.m. Eastern Time. Therefore, 
the Exchange is proposing to adopt the Early Trading Session as 
discussed herein.
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    \7\ ``Regular Trading Hours'' is defined as ``the time between 
9:30 a.m. and 4:00 p.m. Eastern Time.'' See Exchange Rule 1.5(w).
    \8\ See Exchange Rule 11.9(b)(7).
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    Order entry and execution during the Early Trading Session would 
operate in the same manner as it does during the Pre-Opening Session. 
As amended, Exchange Rule 11.1(a) would state that orders entered 
between 6:00 a.m. and 7:00 a.m. Eastern Time, rather than 6:00 a.m. and 
8:00 a.m. Eastern Time, would not be eligible for execution until the 
start of the Early Trading Session, Pre-Opening Session, or Regular 
Trading Hours, depending on the TIF selected by the User. Exchange Rule 
11.1(a) will also be amended to state that the Exchange will not accept 
the following orders prior to 7:00 a.m. Eastern Time, rather than 8:00 
a.m.: BATS Post Only Orders,\9\ Partial Post Only at Limit Orders,\10\ 
Intermarket Sweep Orders (``ISOs''),\11\ BATS Market Orders \12\ with a 
TIF other than Regular Hours Only, Minimum Quantity Orders \13\ that 
also include a TIF of Regular Hours Only, and all orders with a TIF 
instruction of Immediate-or-Cancel (``IOC'') \14\ or Fill-or-Kill 
(``FOK'').\15\ At the commencement of the Early Trading Session, orders 
entered between 6:00

[[Page 10311]]

a.m. and 7:00 a.m. Eastern Time, rather than 6:00 a.m. and 8:00 a.m. 
Eastern Time, will be handled in time sequence, beginning with the 
order with the oldest time stamp, and will be placed on the BATS 
Book,\16\ routed, cancelled, or executed in accordance with the terms 
of the order. As amended, Rule 11.1(a) would state that orders may be 
executed on the Exchange or routed away from the Exchange during 
Regular Trading Hours and during the Early Trading, Pre-Opening and 
After Hours Trading Sessions.
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    \9\ See Exchange Rule 11.9(c)(6).
    \10\ See Exchange Rule 11.9(c)(7).
    \11\ See Exchange Rule 11.9(d).
    \12\ See Exchange Rule 11.9(a)(2).
    \13\ See Exchange Rule 11.9(c)(5).
    \14\ See Exchange Rule 11.9(b)(1).
    \15\ See Exchange Rule 11.9(b)(6).
    \16\ See Exchange Rule 1.5(e).
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    Operations. From the Members' operational perspective, the 
Exchange's goal is to permit trading for those that choose to trade, 
without imposing burdens on those that do not. Thus, for example, the 
Exchange will not require any Member to participate in the Early 
Trading Session, including not requiring registered market makers to 
make two-sided markets between 7:00 a.m. and 8:00 a.m., just as it does 
not require such participation between 8:00 a.m. and 9:30 a.m.\17\ The 
Exchange will minimize Members' preparation efforts to the greatest 
extent possible by allowing Members to trade beginning at 7:00 a.m. 
with the same equipment, connectivity, order types, and data feeds they 
currently use from 8:00 a.m. onwards.
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    \17\ See Exchange Rule 11.8(d)(2) (stating that for NMS stocks 
(as defined in Rule 600 under Regulation NMS) a Market Maker shall 
adhere to the pricing obligations established by this Rule during 
Regular Trading Hours).
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    Opening Process. The Exchange will offer no opening process at 7:00 
a.m., just as it offers no opening process at 8:00 a.m. today. Instead, 
at 7:00 a.m., the System will ``wake up'' by loading in price/time 
priority all open trading interest entered after 6:00 a.m.\18\ Also at 
7:00 a.m., the Exchange will open the execution system and accept new 
eligible orders, just as it currently does at 8:00 a.m. Members will be 
permitted to enter orders beginning at 6:00 a.m. Market Makers will be 
permitted but not required to open their quotes beginning at 7:00 a.m. 
in the same manner they open their quotes today beginning at 8:00 a.m.
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    \18\ See Exchange Rule 11.1(a).
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    Order Types. Every order type that is currently available beginning 
at 8:00 a.m. will be available beginning at 7:00 a.m.\19\ All other 
order types, and all order type behaviors, will otherwise remain 
unchanged. The Exchange will not extend the expiration times of any 
orders. For example, an order that is currently available from 8:00 
a.m. to 4:00 p.m. will be modified to be available from 7:00 a.m. to 
4:00 p.m. An order that is available from 8:00 a.m. to 9:30 a.m. will 
be modified to be available from 7:00 a.m. to 9:30 a.m. Users must 
continue to enter a TIF instruction along with their order to indicate 
when the order is eligible for execution.\20\
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    \19\ Id.
    \20\ Id.
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    Routing Services. The Exchange will route orders to away markets 
between 7:00 a.m. and 8:00 a.m., just as it does today between 8:00 
a.m. and 9:30 a.m.\21\ All routing strategies set forth in Exchange 
Rule 11.13 will remain otherwise unchanged, performing the same 
instructions they perform between 7:00 a.m. and 8:00 a.m. today.\22\
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    \21\ Id.
    \22\ See Exchange Rule 11.13(b) (Routing to Away Trading 
Centers).
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    Order Processing. Order processing will operate beginning at 7:00 
a.m. just as it does today beginning at 8:00 a.m. There will be no 
changes to the ranking, display, and execution processes or rules.
    Data Feeds. The Exchange will report the best bid and offer on the 
Exchange to the appropriate network processor, as it currently does 
beginning 8:00 a.m.\23\ The Exchange's proprietary data feeds will be 
disseminated beginning at 7:00 a.m. using the same formats and delivery 
mechanisms with which the Exchange currently disseminates them 
beginning at 8:00 a.m.
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    \23\ See Exchange Rule 11.14 (Trade Execution and Reporting).
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    Trade Reporting. Trades executed between 7:00 a.m. and 8:00 a.m. 
will be reported to the appropriate network processor with the ``.T'' 
modifier, just as they are reported today between at 8:00 a.m. and 9:30 
a.m.\24\
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    \24\ Id.
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    Market Surveillance. The Exchange's commitment to high-quality 
regulation at all times will extend to 7:00 a.m. The Exchange will 
offer all surveillance coverage currently performed by the Exchange's 
surveillance systems, which will launch by the time trading starts at 
7:00 a.m.
    Clearly Erroneous Trade Processing. The Exchange will process trade 
breaks beginning at 7:00 a.m. pursuant to Exchange Rule 11.17, just as 
it does today beginning at 8:00 a.m.
    Related changes to Rules 3.21, 11.9, 11.13, 11.17 and 14.1. The 
Exchange proposes to also make the following changes to Rules 3.21, 
11.9, 11.13, 11.17 and 14.1 to reflect the adoption of the Early 
Trading Session:
     Rule 3.21, Customer Disclosures. In sum, Exchange Rule 
3.21 prohibits Members from accepting an order from a customer for 
execution in the Pre-Opening or After Hours Trading Session without 
disclosing to their customer that extended hours trading involves 
material trading risks, including the possibility of lower liquidity, 
high volatility, changing prices, unlinked markets, an exaggerated 
effect from news announcements, wider spreads and any other relevant 
risk. The Exchange proposes to amend Rule 3.21 to include the Early 
Trading Session as part of the Member's required disclosures to their 
customers.
     Rule 11.9, Orders and Modifiers. The Exchange proposes to 
amend the description of BATS Market Orders under Rule 11.9(a)(2), 
Market Maker Peg Orders under Rule 11.9(c)(16), and Supplemental Peg 
Orders under Rule 11.9(c)(19) to account for the Early Trading Session. 
BATS Market Orders are currently not eligible for execution during the 
Pre-Opening Session or After Hours Trading Session. Rule 11.9(a)(2) 
would be amended to state that BATS Market Orders would also not be 
eligible for execution during the Early Trading Session. Market Maker 
Peg Orders may currently be submitted to the Exchange starting at the 
beginning of the Pre-Opening Session, but the order will not be 
executable or automatically priced until the beginning of Regular 
Trading Hours. Rule 11.9(c)(16) would be amended to state that Market 
Maker Peg Orders may be submitted to the Exchange starting at the 
beginning of the Early Trading Session. Market Maker Peg Orders would 
continue to not be executable or automatically priced until the 
beginning of Regular Trading Hours. Rule 11.9(c)(19) states that 
Supplemental Peg Orders are eligible for execution during the Pre-
Opening Session, Regular Trading Hours, and the After Hours Trading 
Session. Rule 11.9(c)(19) would be amended to state that Supplemental 
Peg Orders are also eligible for execution during the Early Trading 
Session. As stated above, every order type that is currently available 
beginning at 8:00 a.m. will be available beginning at 7:00 a.m. for 
inclusion in the Early Trading Session.\25\ All other order types, and 
all order type behaviors, will otherwise remain unchanged. The above 
rules describing BATS Market Orders, Market Maker Peg Orders, and 
Supplemental Peg Orders specifically reference the trading sessions 
during which the order type is eligible for execution. Therefore, the 
Exchange proposes to amend the description of each order type to 
account for the Early Trading Session.
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    \25\ See proposed amendments to Exchange Rule 11.1(a).

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[[Page 10312]]

     Rule 11.13, Order Execution and Routing. Exchange Rule 
11.13(a)(2)(B) discusses compliance with Regulation NMS and Trade 
Through Protections and states that the price of any execution 
occurring during the Pre-Opening Session or the After Hours Trading 
Session must be equal to or better than the highest Protected Bid or 
lowest Protected Offer, unless the order is marked ISO or a Protected 
Bid is crossing a Protected Offer. The Exchange proposes to amend Rule 
11.13(a)(2)(B) to expand the rule's requirements to the Early Trading 
Session.
     Rule 11.17, Clearly Erroneous Executions. Exchange Rule 
11.17 outlines under which conditions the Exchange may determine that 
an execution is clearly erroneous. The Exchange proposes to amend Rule 
11.17 to include executions that occur during the Early Trading 
Session.\26\ Exchange Rule 11.17(c)(1) sets forth the numerical 
guidelines the Exchange is to follow when determining whether an 
execution was clearly erroneous during Regular Trading Hours or the 
Pre-Opening or After Hours Trading Session. Exchange Rule 11.17(c)(3) 
sets forth additional factors the Exchange may consider in determining 
whether a transaction is clearly erroneous. These factors include Pre-
Opening and After Hours Trading Session executions. The Exchange 
proposes to amend Rule 11.17(c)(1) and (3) to include executions 
occurring during the Early Trading Session.
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    \26\ The Exchange notes that it also proposes to delete the 
``s'' from the word ``tapes'' in paragraph (c)(3) of Rule 11.17.
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     Rule 14.1, Unlisted Trading Privileges. The Exchange 
proposes to amend Rules 14.1(c)(2), and Interpretation and Policies 
.01(a) and (b) to account for the proposed Early Trading Session. 
Specifically, the Exchange proposes to amend paragraph (c)(2) to state 
that an information circular distributed by the Exchange prior to the 
commencement of trading of a UTP Derivative Security \27\ will include 
the risk of trading during the Early Trading Session, in addition to 
the Pre-Opening Session and After Hours Trading Session. In addition, 
the Exchange proposes to amend Interpretation and Policies .01(a) to 
add Early Trading Session to the paragraph's title and to state that if 
a UTP Derivative Security begins trading on the Exchange in the Early 
Trading Session or Pre-Opening Session and subsequently a temporary 
interruption occurs in the calculation or wide dissemination of the 
Intraday Indicative Value (``IIV'') or the value of the underlying 
index, as applicable, to such UTP Derivative Security, by a major 
market data vendor, the Exchange may continue to trade the UTP 
Derivative Security for the remainder of the Early Trading Session and 
Pre-Opening Session. Lastly, the Exchange proposes to amend 
Interpretation and Policies .01(b) to add Early Trading Session to the 
paragraph's title and to amend subparagraph (ii) of that section to 
state that if the IIV or the value of the underlying index continues 
not to be calculated or widely available as of the commencement of the 
Early Trading Session or Pre-Opening Session on the next business day, 
the Exchange shall not commence trading of the UTP Derivative Security 
in the Early Trading Session or Pre-Opening Session that day.
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    \27\ See Exchange Rule 14.1(c).
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TIF Instructions
    The Exchange proposes to adopt three new TIF instructions under 
Rule 11.9(b). Under Rule 11.1(a), a User may designate when their order 
is eligible for execution by selecting the desired TIF instruction 
under Exchange Rule 11.9(b). Currently, orders entered between 6:00 
a.m. and 8:00 a.m. Eastern Time are not eligible for execution until 
the start of the Pre-Opening Session, or Regular Trading Hours, 
depending on the TIF selected by the User. Users may enter orders in 
advance of the trading session they intend the order to be eligible 
for. For example, Users may enter orders starting at 6:00 a.m. Eastern 
Time with a TIF of Regular Hours Only, which designates that the order 
only be eligible for execution during Regular Trading Hours.\28\ As 
stated above, Users may enter orders as early as 6:00 a.m. Eastern 
Time, but those orders would not be eligible for execution until the 
start of the Pre-Opening Session at 8:00 a.m.
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    \28\ See Exchange Rule 11.9(b)(7).
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    As discussed above, the Exchange proposed the Early Trading Session 
in response to User requests for their orders to be eligible for 
execution starting at 7:00 a.m. Eastern Time. Some Users, however, do 
not wish for their orders to be executed during the Early Trading 
Session and have requested their orders continue to not be eligible for 
execution until the start of the Pre-Opening Session at 8:00 a.m. 
Therefore, the Exchange proposes to adopt the following three new TIF 
instructions under Rule 11.9(b):
     Pre-Opening Session Plus (``PRE''). A limit order that is 
designated for execution during the Pre-Opening Session and Regular 
Trading Hours. Like the current Good-'til Cancel (``GTC'') TIF 
instruction,\29\ any portion not executed expires at the end of Regular 
Trading Hours.
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    \29\ See Exchange Rule 11.9(b)(3).
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     Pre-Opening Session 'til Extended Day (``PTX''). A limit 
order that is designated for execution during the Pre-Opening Session, 
Regular Trading Hours, and the After Hours Session. Like the current 
Good-'til Extended Day (``GTX'') TIF instruction,\30\ any portion not 
executed expires at the end of the After Hours Session.
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    \30\ See Exchange Rule 11.9(b)(5).
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     Pre-Opening Session 'til Day (``PTD''). A limit order that 
is designated for execution during the Pre-Opening Session, Regular 
Trading Hours, and the After Hours Session. Like the current Good-'til 
Day (``GTD'') TIF instruction,\31\ any portion not executed will be 
cancelled at the expiration time assigned to the order, which can be no 
later than the close of the After Hours Trading Session.
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    \31\ See Exchange Rule 11.9(b)(4).
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    Under each proposed TIF instruction, Users may designate that their 
orders only be eligible for execution starting with the Pre-Opening 
Session. This is similar to the existing TIF of Regular Hours Only, 
which designates that the order only be eligible for execution during 
Regular Trading Hours, which starts at 9:30 a.m. Eastern Time. In such 
case, a User may enter orders starting at 6:00 a.m. Eastern Time, but 
such order would not be eligible for execution until 9:30 a.m. Eastern 
Time. Likewise, under each of the proposed TIF instructions, a User may 
continue to enter orders as early as 6:00 a.m., but such orders would 
not be eligible for execution until 8:00 a.m. Eastern Time, the start 
of the Pre-Opening Session.\32\ At the commencement of the Pre-Opening 
Session, orders entered between 6:00 a.m. and 8:00 a.m. Eastern Time 
with one of the proposed TIF instructions will be handled in time 
sequence, beginning with the order with the oldest time stamp, and will 
be placed on the BATS Book, routed, cancelled, or executed in 
accordance with the terms of the order.\33\
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    \32\ Orders utilizing one of the proposed TIF instructions would 
not be eligible for execution during the proposed Early Trading 
Session.
    \33\ See Exchange Rule 11.1(a).
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 2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6(b) of the Act,\34\ in general, and furthers the 
objectives of Section 6(b)(5) of the Act,\35\ in particular, in that it 
is designed to prevent fraudulent and

[[Page 10313]]

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. The Exchange also 
believes that the proposed rule change is non-discriminatory as it 
would apply to all Members uniformly. The proposed rule change in whole 
is designed to attract more order flow to the Exchange between 7:00 
a.m. and 9:30 a.m. Eastern Time. Increased liquidity during this time 
will lead to improved price discovery and increased execution 
opportunities on the Exchange, therefore, promoting just and equitable 
principles of trade, and removing impediments to and perfecting the 
mechanism of a free and open market and a national market system.
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    \34\ 15 U.S.C. 78f.
    \35\ 15 U.S.C. 78f(b)(5).
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Early Trading Session
    The Exchange believes its proposal to adopt the Early Trading 
Session promotes just and equitable principles of trade, removes 
impediments to and perfects the mechanism of a free and open market and 
a national market system, prevents fraudulent and manipulative acts and 
practices, and, in general, protects investors and the public interest. 
The Exchange believes that the Early Trading Session will benefit 
investors, the national market system, Members, and the Exchange market 
by increasing competition for order flow and executions, and thereby 
spur product enhancements and lower prices. The Early Trading Session 
will benefit Members and the Exchange market by increasing trading 
opportunities between 7:00 a.m. and 8:00 a.m. without increasing 
ancillary trading costs (telecommunications, data, connectivity, etc.) 
and, thereby, decreasing average trading costs per share. The Exchange 
notes that trading during the proposed Early Trading Session has been 
available on NYSE Arca and Nasdaq.\36\ The Exchange believes that the 
availability of trading between 7:00 a.m. and 8:00 a.m. has been 
beneficial to market participants including investors and issuers on 
other markets. Introduction of the Early Trading Session on the 
Exchange will further expand these benefits.
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    \36\ See supra note 5.
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    Additionally, the Exchange Act's goal of creating an efficient 
market system includes multiple policies such as price discovery, order 
interaction, and competition among markets. The Exchange believes that 
offering a competing trading session will promote all of these policies 
and will enhance quote competition, improve liquidity in the market, 
support the quality of price discovery, promote market transparency, 
and increase competition for trade executions while reducing spreads 
and transaction costs. Additionally, increasing liquidity during the 
Early Trading Session will raise investors' confidence in the fairness 
of the markets and their transactions, particularly due to the lower 
volume of trading occurring prior to opening.
    Although the Exchange will be operating with bifurcated pre-opening 
trading sessions, the Exchange notes that having bifurcated after hours 
trading sessions is not novel. For example, the CHX maintains two after 
hours trading sessions,\37\ the Late Trading Session, which runs from 
4:00 p.m. to 4:15 p.m. Eastern Time, and the Late Crossing Session, 
which runs from 4:15 p.m. to 5:00 Eastern Time. As such, the Exchange 
does not believe that the proposed rule change will disproportionately 
increase the complexity of the market.
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    \37\ See supra note 6.
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    The expansion of trading hours through the creation of the Early 
Trading Session promotes just and equitable principles of trade by 
providing market participants with additional options in seeking 
execution on the Exchange. Order entry and execution during the Early 
Trading Session would operate in the same manner as it does today 
during the Pre-Opening Session. In addition, the Exchange will report 
the best bid and offer on the Exchange to the appropriate network 
processor, and the Exchange's proprietary data feeds will be 
disseminated, beginning at 7:00 a.m. The proposal will, therefore, 
facilitate a well-regulated, orderly, and efficient market during a 
period of time that is currently underserved.
    The Exchange believes that the proposed rule change is designed to 
prevent fraudulent and manipulative acts and practices because all 
surveillance coverage currently performed by the Exchange's 
surveillance systems will launch by the time trading starts at 7:00 
a.m. Eastern Time. Further, the Exchange believes that the proposed 
rule change will protect investors and the public interest because the 
Exchange is updating its customer disclosure requirements to prohibit 
Members from accepting an order from a customer for execution in the 
Early Trading Session without disclosing to their customer that 
extended hours trading involves material trading risks, including the 
possibility of lower liquidity, high volatility, changing prices, 
unlinked markets, an exaggerated effect from news announcements, wider 
spreads and any other relevant risk.
TIF Instructions
    The Exchange believes its proposed TIF instructions promote just 
and equitable principles of trade, and remove impediments to and 
perfect the mechanism of a free and open market and a national market 
system. The Exchange believes that the proposed TIF instructions will 
benefit investors by providing them with greater control over their 
orders. The proposed TIF instructions simply provide investors with 
additional optionality for when their orders may be eligible for 
execution.
    The ability to select the trading sessions or time upon which an 
order is to be eligible for execution is not novel and is currently 
available on the Exchange and other market centers. For example, on the 
Exchange, a User may enter an order starting at 6:00 a.m. Eastern Time 
and select that such order not be eligible for execution until 9:30 
a.m., the start of Regular Trading Hours using TIF instructions of 
Regular Hours Only.\38\ In addition, like each of the proposed TIF 
instructions, Nasdaq utilizes a TIF, referred to as ESCN, under which 
an order using its SCAN routing strategy entered prior to 8:00 a.m. 
Eastern Time is not eligible for execution until 8:00 a.m. Eastern 
Time.\39\
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    \38\ See Exchange Rule 11.9(b)(7). See also Nasdaq Rule 4703(a) 
(outlining TIF instructions that do not activate orders until 9:30 
a.m. Eastern Time).
    \39\ See Nasdaq Rule 4703(a). See also Nasdaq Rule 4703(a)(7).
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    The Exchange proposed the Early Trading Session discussed above in 
response to User requests for their orders to be eligible for execution 
starting at 7:00 a.m. Eastern Time. However, some Users have requested 
their orders continue to not be eligible for execution until the start 
of the Pre-Opening Session at 8:00 a.m. Therefore, the Exchange 
proposed the three new TIF instructions in order for Users to designate 
their orders as eligible for execution as of the start of the Pre-
Opening Session.
    Members will maintain the ability to cancel or modify the terms of 
their order at any time, including during the time from when the order 
is routed to the Exchange until the start of the Pre-Opening Session. 
As a result, a Member who utilizes the proposed TIF instructions, but 
later determines that market conditions favor execution

[[Page 10314]]

during Early Trading Session, can cancel the order residing at the 
Exchange and enter a separate order to execute during the Early Trading 
Session. While a User must make every effort to execute a marketable 
customer order it receives fully and promptly,\40\ doing so might not 
result in the best execution possible for the customer. Such Users may 
wish to delay the execution of their orders until the start of the Pre-
Opening Session for various reasons, including the characteristics of 
the market for the security as well as the amount of liquidity 
available in the market as part of their best execution 
obligations.\41\
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    \40\ See Supplemental Material .01 to Financial Industry 
Regulatory Authority, Inc. (``FINRA'') Rule 5310.
    \41\ A Member's best execution obligation may also include 
cancelling an order when market conditions deteriorate and could 
result in an inferior execution or informing customers where the 
execution of their order may be delayed intentionally as the Member 
utilizes reasonable diligence to ascertain the best market for the 
security. See FINRA Rule 5130. See also FINRA Regulatory Notice 15-
46, Best Execution. Guidance on Best Execution Obligations in 
Equity, Options, and Fixed Income Markets, (November 2015).
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    Specifically, FINRA Rule 5310(a)(1) provides that a Member must use 
reasonable diligence to ascertain the best market for a security and 
buy or sell in such market so that the resultant price to the customer 
is as favorable as possible under prevailing market conditions. And 
importantly, FINRA Rule 5310(a)(1)(A) states that one of the factors 
that will be considered in determining whether a member has used 
``reasonable diligence'' is ``the character of the market for the 
security (e.g., price, volatility, relative liquidity, and pressure on 
available communication).\42\ As such, a Member conducting ``reasonable 
diligence'' may determine that due to the character of the Early 
Trading Session, along with considering other relevant factors, the 
Member wants to utilize the proposed TIF instructions.
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    \42\ Tellingly, these characteristics are reflected in the 
disclosure requirements mandated by Exchange Rule 3.21 before a 
Member may accept an order from a customer for execution in the Pre-
Opening, After Hours, and proposed Early Trading Sessions.
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    Members will be accustomed to this additional analysis in 
determining whether to participate in the Early Trading Session, Pre-
Opening Session, or Regular Trading Hours. The regulatory guidance with 
respect to best execution anticipates the continued evolution of 
execution venues:

    [B]est execution is a facts and circumstances determination. A 
broker-dealer must consider several factors affecting the quality of 
execution, including, for example, the opportunity for price 
improvement, the likelihood of execution . . . , the speed of 
execution and the trading characteristics of the security, together 
with other non-price factors such as reliability and service.\43\
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    \43\ See Securities Exchange Act Release No. 43950 (November 17, 
2000), 65 FR 75414 (December 1, 2000) (``Disclosure of Order 
Execution and Routing Practices release'').

    To the extent there may be best execution obligations at issue, 
they are no different than the best execution obligations faced by 
brokers in the current market structure,\44\ including the use of the 
currently available Regular Trading Hours TIF instruction or SCAN/ESCN 
routing strategy available on Nasdaq discussed above.\45\ However, 
similar to why a Member may utilize the Regular Trading Hours TIF 
instruction, a User may wish to forgo a possible execution during the 
Early Trading Session and/or Pre-Opening Session if they believe doing 
so is consistent with their best execution obligations as they 
anticipate that the market for the security may improve upon the start 
of the Pre-Opening Session and/or Regular Trading Hours.\46\ Applicable 
best execution guidance contains no formulaic mandate as to whether or 
how brokers should direct orders. The optionality created by the 
proposed rule change simply represents one tool available to Members in 
order to meet their best execution obligations.
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    \44\ The Commission has also indicated a User's best execution 
obligation may not be satisfied simply by obtaining the best bid or 
offer (``BBO''). See Securities Exchange Act Release No. 37619A 
(September 6, 1996), 61 FR 48290 (September 12, 1996) (``Order 
Executions Obligations release''). While a User may seek the most 
favorable terms reasonably available under the circumstances of the 
transaction, such terms may not necessarily in every case be the 
best price available. Id. See also FINRA Regulatory Notice 15-46, 
Best Execution. Guidance on Best Execution Obligations in Equity, 
Options, and Fixed Income Markets, (November 2015).
    \45\ See supra note 39.
    \46\ Exchange Rule 3.21 requires Member make certain disclosures 
to their customers prior to accepting an order for execution outside 
of Regular Trading Hours. These disclosures include, among other 
things, the risk of lower liquidity, higher volatility, wider 
spreads, and changing prices in extended hours trading as compared 
to regular market hours. See Exchange Rule 3.21(a)-(g).
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    The Exchange notes that it would subject orders that are eligible 
for execution as of the start of the Pre-Opening Session to all of the 
Exchange's standard regulatory checks, as it currently does with all 
orders upon entry. These checks include compliance with Regulation 
NMS,\47\ Regulation SHO,\48\ as well as relevant Exchange rules.\49\
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    \47\ 17 CFR 242.610-611.
    \48\ 17 CFR 242.200-204.
    \49\ See, e.g., Exchange Rule 11.13(a).
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    Lastly, the Exchange reminds Members of their regulatory 
obligations when submitting an order one of the proposed TIF 
instructions. The Market Access Rule under Rule 15c3-5 of the Act 
requires broker-dealers to, among other things, implement regulatory 
risk management controls and procedures that are reasonably designed to 
prevent the entry of orders that fail to comply with regulatory 
requirements that apply on a pre-order entry basis.\50\ These pre-trade 
controls must, for example, be reasonably designed to assure compliance 
with Exchange trading rules and Commission rules under Regulation SHO 
\51\ and Regulation NMS.\52\ In accordance with the Market Access Rule, 
a Member's procedures must be reasonably designed to ensure compliance 
with their applicable regulatory requirements, not just at the time the 
order is routed to the Exchange, but also at the time the order becomes 
eligible for execution.
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    \50\ See Securities Exchange Act Release No. 63241 (November 3, 
2010), 75 FR 69792 (November 15, 2010) (File no. S7-03-10).
    \51\ See e.g., Question 2.6 of the Division of Trading and 
Markets: Response to Frequently Asked Questions Concerning 
Regulations SHO, available at https://www.sec.gov/divisions/marketreg/mrfaqregsho1204.htm.
    \52\ 17 CFR 240.610-611.
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(B) Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that its proposed rule change will 
impose any burden on competition that is not necessary or appropriate 
in furtherance of the purposes of the Act. The Exchange believes that 
the proposed rule change will benefit investors, the national market 
system, Members, and the Exchange market by increasing competition for 
order flow and executions during the pre-market sessions, thereby 
spurring product enhancements and lowering prices. The Exchange 
believes the proposed Early Trading Session would enhance competition 
by enabling the Exchange to directly compete with NYSE Arca and Nasdaq 
for order flow and executions starting at 7:00 a.m., rather than 8:00 
a.m. Eastern Time. In addition, the proposed TIF instructions will 
enhance competition by enabling the Exchange to offer functionality 
similar to Nasdaq.\53\ The fact that the extending of the proposed 
Early Trading Session and TIF instructions are themselves a response to 
the competition provided by other markets is evidence of its pro-
competitive nature.
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    \53\ See supra note 39.

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[[Page 10315]]

(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 unsolicited written comments from Members or other interested 
parties.

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

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the Exchange consents, the Commission will: (a) By order approve 
or disapprove such proposed rule change, or (b) institute proceedings 
to determine whether the proposed rule change should be 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-BYX-2016-03 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 Number SR-BYX-2016-03. 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 the 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 Number SR-BYX-2016-03 and should be 
submitted on or before March 21, 2016.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\54\
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    \54\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-04251 Filed 2-26-16; 8:45 am]
BILLING CODE 8011-01-P


