
[Federal Register Volume 81, Number 46 (Wednesday, March 9, 2016)]
[Notices]
[Pages 12543-12552]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-05185]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-77291; File No. SR-BATS-2015-108]


Self-Regulatory Organizations; BATS Exchange, Inc.; Notice of 
Filing of Partial Amendment No. 1 and Order Granting Accelerated 
Approval to a Proposed Rule Change To Adopt BATS Rule 11.27(a) To 
Implement the Quoting and Trading Requirements of the Regulation NMS 
Plan To Implement a Tick Size Pilot Program

March 3, 2016.

I. Introduction

    On November 30, 2015, BATS Exchange, Inc. (``Exchange'' or 
``BATS'') filed with the Securities and Exchange Commission 
(``Commission'' or ``SEC''), pursuant to section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposal to adopt BATS Rule 11.27(a) to implement the 
quoting and trading requirements of the Plan to Implement Tick Size 
Pilot Program (``Plan'') submitted to the Commission pursuant

[[Page 12544]]

to Rule 608 of Regulation NMS under the Act (``Tick Size Pilot'').\3\ 
The proposal was published for comment in the Federal Register on 
December 9, 2015.\4\ The Commission received three comment letters on 
the proposal and a response letter from BATS.\5\ On January 21, 2016, 
the Commission designated a longer period for Commission action on the 
proposal, until March 8, 2016.\6\ On March 2, 2016, BATS filed Partial 
Amendment No. 1.\7\ This order approves the proposal, as modified by 
Partial Amendment No. 1.
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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. 74892 (May 6, 2015), 
80 FR 27513 (May 13, 2015) (order approving the Tick Size Pilot) 
(``Approval Order'').
    \4\ See Securities Exchange Act Release No. 76552 (December 3, 
2015), 80 FR 76591 (``BATS Proposal'').
    \5\ See letters from Theodore R. Lazo, Managing Director and 
Associate General Counsel, Securities Industry and Financial Markets 
Association, dated December 18, 2015 (``SIFMA Letter''); Mary Lou 
Von Kaenel, Managing Director, Financial Information Forum, dated 
December 22, 2015 (``FIF Letter''); Brendon J. Weiss, Co-Head, 
Government Affairs, Intercontinental Exchange, Inc. and John K. 
Kerin, CEO, Chicago Stock Exchange, Inc., dated January 15, 2016 
(``NYSE Letter''); and Andrew Madar, Associate General Counsel, 
Financial Industry Regulatory Authority, Inc. (``FINRA'') and Chris 
Solgan, Assistant General Counsel, BATS, dated February 23, 2016 
(``BATS Response Letter'').
    \6\ See Securities Exchange Act Release No. 76945, 81 FR 4734 
(January 27, 2016).
    \7\ In Partial Amendment No. 1, BATS proposes to: (1) Add an 
exception to permit members to fill a customer order in a Pilot 
Security in Test Group Two or Test Group Three at a non-nickel 
increment to comply with BATS Rule 12.6 under limited circumstances; 
(2) add an exception to the Trade-at Prohibition for certain error 
correction transactions; (3) modify the stopped order exception to 
the Trade-at Prohibitions to better align it with the stopped order 
exception for Rule 611 of Regulation NMS; and (4) clarify the use of 
Trade-at Intermarket Sweep Orders in connection with the Trade-At 
Prohibition.
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II. Background

    On August 25, 2014, NYSE Group, Inc., on behalf of BATS Exchange, 
Inc., BATS Y-Exchange, Inc., Chicago Stock Exchange, Inc., EDGA 
Exchange, Inc., EDGX Exchange, Inc., FINRA, NASDAQ OMX BX, Inc., NASDAQ 
OMX PHLX LLC, the Nasdaq Stock Market LLC, New York Stock Exchange LLC 
(``NYSE''), NYSE MKT LLC, and NYSE Arca, Inc. (collectively 
``Participants'' \8\), filed with the Commission, pursuant to section 
11A of the Act \9\ and Rule 608 of Regulation NMS thereunder,\10\ the 
Plan to Implement the Tick Size Pilot.\11\ The Participants filed the 
Plan to comply with an order issued by the Commission on June 24, 
2014.\12\ The Plan was published for comment in the Federal Register on 
November 7, 2014,\13\ and approved by the Commission, as modified, on 
May 6, 2015.\14\ On November 6, 2015, the Commission issued an 
exemption to the Participants from implementing the Plan until October 
3, 2016.\15\
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    \8\ The Commission notes that on February 5, 2016, National 
Stock Exchange, Inc. (``NSX'') filed a Plan amendment with the 
Commission to become a Plan Participant pursuant to section II.C of 
the Plan. This amendment is effective upon filing pursuant to Rule 
608(b)(3)(iii) of Regulation NMS.
    \9\ 15 U.S.C. 78k-1.
    \10\ 17 CFR 242.608.
    \11\ See letter from Brendon J. Weiss, Vice President, 
Intercontinental Exchange, Inc., to Secretary, Commission, dated 
August 25, 2014.
    \12\ See Securities Exchange Act Release No. 72460, 79 FR 36840 
(June 30, 2014).
    \13\ See Securities Exchange Act Release No. 73511 (November 3, 
2014), 79 FR 66423.
    \14\ See Approval Order, supra note 3.
    \15\ See Securities Exchange Act Release No. 76382, 80 FR 70284 
(November 13, 2015).
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    The Tick Size Pilot is designed to allow the Commission, market 
participants, and the public to study and assess the impact of 
increment conventions on the liquidity and trading of the common stocks 
of certain small-capitalization companies. Each Participant is required 
to comply, and to enforce compliance by its members, as applicable, 
with the provisions of the Plan.\16\ The Plan requires Participants to 
develop quoting and trading requirements for the Tick Size Pilot as 
well as collect, publish, and submit to the Commission a variety of 
data elements such as market quality statistics and market maker 
profitability.\17\ BATS is proposing to adopt BATS Rule 11.27(a) and 
certain Interpretations and Policies to implement the quoting and 
trading requirements of the Tick Size Pilot.\18\
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    \16\ Rule 608(c) of Regulation NMS. 17 CFR 242.608(c). See also 
Plan Sections II.B and IV.
    \17\ The data collection requirements for the Plan are specified 
in Appendices B and C. See Approval Order, supra note 3. BATS has 
adopted rules to implement the data collection requirements under 
the Plan. See BATS Rule 11.27(b); see also Securities Exchange Act 
Release No. 77105 (February 10, 2016), 81 FR 8112, (February 17, 
2016).
    \18\ NYSE, on behalf of the Plan Participants, submitted a 
letter to the Commission requesting exemption from certain 
provisions of the Plan related to the quoting and trading 
requirements as they apply to Pilot Securities that have a price 
under $1.00. See letter from Elizabeth K. King, General Counsel & 
Corporate Secretary, NYSE, to Brent J. Fields, Secretary, 
Commission, dated October 14, 2015 (``October Exemption Request''). 
In addition, FINRA, on behalf of the Plan Participants, submitted a 
letter to the Commission requesting additional exemptions from 
certain provisions of the Plan related to the quoting and trading 
requirements. See letter from Marcia E. Asquith, Senior Vice 
President and Corporate Secretary, FINRA, to Robert W. Errett, 
Deputy Secretary, Commission, dated February 23, 2016 (``February 
Exemption Request''). The Commission, pursuant to its authority 
under Rule 608(e) of Regulation NMS, has granted BATS a limited 
exemption from the requirement to comply with certain provisions of 
the Plan as specified in the letters and noted herein. See letter 
from David Shillman, Associate Director, Division of Trading and 
Markets, Commission to Eric Swanson, Executive Vice President, 
General Counsel and Secretary, BATS, dated March 3, 2016 (``SEC 
Exemption Letter'').
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III. Description of the Proposed Rule Change

A. Policies and Procedures To Comply With the Plan

    Proposed BATS Rule 11.27(a) would establish the rules necessary for 
compliance with the applicable quoting and trading requirements 
specified in the Plan for BATS and its members.\19\
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    \19\ BATS proposed that its Rule 11.27(a) be in effect during a 
pilot period to coincide with the Pilot Period of the Plan, 
including any extensions. See Proposed BATS Rule 11.27(a) 
Interpretations and Policies .03.
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    Proposed BATS Rule 11.27(a)(1) provides that members shall 
establish, maintain, and enforce written policies and procedures that 
are reasonably designed to comply with the applicable quoting and 
trading requirements of the Plan. Proposed BATS Rule 11.27(a)(2) sets 
forth that BATS system will not display, quote or trade in violation of 
the applicable quoting and trading requirements for a Pilot Security 
specified in the Plan or its proposed rule, unless the quotation or 
transaction is specifically exempted under the Plan.

B. Compliance and Pilot Securities Under $1.00 During the Pilot Period

    Proposed BATS Rule 11.27(a)(3) sets forth the procedures for Pilot 
Securities whose price drops below $1.00 during the Pilot Period.\20\ 
If the price of a Pilot Security drops below $1.00 during regular 
trading hours on any trading day, the Pilot Security will continue to 
trade according to the quoting and trading requirements of its 
originally assigned Test Group within the Plan. If a Pilot Security has 
a Closing Price \21\ below $1.00 on any trading day, the Pilot Security 
would be moved from its respective Test Group into the Control Group, 
and would be quoted and traded at any price increment that is currently 
permitted for the remainder of the Pilot Period. Proposed BATS Rule 
11.27(a)(3) further provides, that notwithstanding anything to the 
contrary, all Pilot Securities will continue to be subject to BATS Rule 
11.27(b), which sets forth BATS' data collection requirements for Tick 
Size Pilot.
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    \20\ BATS has requested an exemption from the Plan related to 
this provision. See October Exemption Request, supra note 18.
    \21\ Capitalized terms used in this Order are defined in the 
Plan, unless otherwise specified herein. Further, BATS has proposed 
to use the Plan's defined terms in its Rule 11.27(a). See Proposed 
BATS Rule 11.27(a) Interpretations and Policies .01.

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[[Page 12545]]

C. Quoting and Trading Rules for Test Group One

    Proposed BATS Rule 11.27(a)(4) describes the quoting and trading 
requirements for Pilot Securities in Test Group One. Specifically, BATS 
proposes that no member may display, rank, or accept from any person 
any displayable or non-displayable bids or offers, orders, or 
indications of interest in increments other than $0.05 for Pilot 
Securities in Test Group One. Orders priced at either the midpoint of 
the national best bid and national best offer (``NBBO'') or best 
protected bid and best protected offer (``PBBO'') and orders entered 
into a Participant-operated retail liquidity program may be ranked and 
accepted in increments of less than $0.05. The provision also sets 
forth that Pilot Securities in Test Group One would continue to be able 
to trade at any price increment that is currently permitted by 
applicable Participant, Commission, and BATS rules.

D. Quoting and Trading Rules for Test Group Two

    Proposed BATS Rule 11.27(a)(5) describes the quoting and trading 
requirements of Pilot Securities in Test Group Two. Specifically, BATS 
proposes that no member may display, rank, or accept from any person 
any displayable or non-displayable bids or offers, orders, or 
indications of interest in increments other than $0.05 for Pilot 
Securities in Test Group Two.\22\ Further, BATS proposes that absent 
any enumerated exceptions, no member organization may execute an order 
in any increment other than $0.05 for Pilot Securities in Test Group 
Two.\23\
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    \22\ Similar to the exception in Test Group One, orders priced 
to trade at the midpoint of the NBBO or PBBO and orders entered into 
a Participant-operated retail liquidity price program may be ranked 
and accepted in increments of less than $0.05. See Proposed BATS 
Rule 11.27(a)(5)(A).
    \23\ Proposed BATS Rule 11.27(a)(5)(B) applies to all trades, 
including Brokered Cross Trades. A Brokered Cross Trade is defined 
in the Plan as a trade that a broker-dealer that is a member of a 
Participant executes directly by matching simultaneous buy and sell 
orders for a Pilot Security. See Plan Section I.G.
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    Proposed BATS Rule 11.27(a)(5)(C) provides that Test Group Two 
Pilot Securities may trade in increments less than $0.05 in the 
following circumstances: (1) At the midpoint between the NBBO or the 
PBBO; (2) for Retail Investor Orders that are provided with price 
improvement that is at least $0.005 better than the PBBO; and (3) 
Negotiated Trades. In Partial Amendment No. 1, BATS proposed a fourth 
exception to the Test Group Two requirement that Pilot Securities trade 
in $0.05 increments. Specifically, BATS proposed that a member may 
execute a customer order at an increment other than $0.05, following 
the execution of a permissible proprietary trade by that member, in 
order to comply with BATS Rule 12.6.\24\
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    \24\ See Partial Amendment No. 1, supra note 7. BATS has 
requested an exemption from the Plan related to this provision. See 
February Exemption Request, supra note 18.
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E. Quoting and Trading Rules for Test Group Three

    Proposed BATS Rule 11.27(a)(6) describes the quoting and trading 
requirements of Pilot Securities in Test Group Three. BATS proposes for 
Pilot Securities in Test Group Three that no member may display, rank, 
or accept from any person any displayable or non-displayable bids or 
offers, orders, or indications of interest in increments other than 
$0.05.\25\ Proposed BATS Rule 11.27(a)(6)(B) states that for Test Group 
Three Pilot Securities no member would be permitted to execute an 
order, including Brokered Cross Trades, in an increment other than 
$0.05 unless there was an exception enumerated by proposed BATS's Rule 
11.27(a)(6)(C). Proposed BATS Rule 11.27(a)(6)(C) sets forth four 
exceptions for trading of Test Group Three Pilot Securities to occur in 
increments of less than $0.05: (1) At the midpoint between the NBBO or 
the PBBO; (2) for Retail Investor Orders that are provided with price 
improvement at least $0.005 better than the PBBO; (3) for Negotiated 
Trades; and (4) for executions of a customer order to comply with BATS 
Rule 12.6 following the execution of a proprietary trade by the member 
at an increment other than $0.05, where such proprietary trade was 
permissible pursuant to an exception under the Plan.\26\
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    \25\ Similar to the exceptions for Test Group One and Test Group 
Two, orders priced to trade at the midpoint of the NBBO or PBBO and 
orders entered in a Participant-operated retail liquidity program 
may be ranked and accepted in increments of less than $0.05. See 
Proposed BATS Rule 11.27(a)(6)(A).
    \26\ See Partial Amendment No. 1, supra note 7. BATS has 
requested an exemption from the Plan related to this provision. See 
February Exemption Request, supra note 18.
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    Proposed BATS Rule 11.27(a)(6)(D)(i) sets forth that, absent an 
exception set forth in proposed BATS Rule 11.27(a)(6)(D)(ii), no member 
that operates a Trading Center may execute a sell order for a Pilot 
Security in Test Group Three at the price of a Protected Bid or execute 
a buy order for a Pilot Security in Test Group Three at the price of a 
Protected Offer during regular trading hours (i.e., the ``Trade-at 
Prohibition''). Under the Trade-at Prohibition, a member that operates 
a Trading Center that is displaying a quotation, via either a processor 
or an SRO quotation feed, that is at a price equal to the traded-at 
Protected Bid or Protected Offer is permitted to execute orders at that 
level, but only up to the amount of its displayed size. A member that 
operates a Trading Center that was not displaying a quotation at a 
price equal to the traded-at Protected Quotation, via either a 
processor or an SRO quotation feed, is prohibited from price-matching 
protected quotations unless at least one of the exceptions applies.
    Proposed BATS Rule 11.27(a)(6)(D)(ii) sets forth the exceptions to 
the Trade-at Prohibition for members that operate Trading Centers as 
follows:

    (a) The order is executed within the same independent 
aggregation unit \27\ of the member that operates the Trading Center 
that displayed the quotation via either a processor or an SRO 
quotation feed, to the extent such member uses independent 
aggregation units, at a price equal to the traded-at Protected 
Quotation that was displayed before the order was received, but only 
up to the full displayed size of that independent aggregation unit's 
previously displayed quote. Further, proposed BATS Rule 
11.27(a)(6)(D)(ii)(a) also specifies that a Trading Center that is 
displaying a quotation as agent or riskless principal may only 
execute as agent or riskless principal and a Trading Center 
displaying a quotation as principal (excluding riskless principal) 
may execute as principal, agent or riskless principal;
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    \27\ BATS proposes that, ``Independent aggregation unit'' has 
the same meaning as provided under Rule 200(f) of Regulation SHO. 
See 17 CFR 242.200(f).
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    (b) the order that is of Block Size \28\ at the time of origin 
and is not an aggregation of non-block orders; broken into orders 
smaller than Block Size prior to submitting the order to a Trading 
Center for execution; or executed on multiple Trading Centers;
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    \28\ ``Block Size'' is defined in the Plan as an order (1) of at 
least 5,000 shares or (2) for a quantity of stock having a market 
value of at least $100,000.
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    (c) the order is a Retail Investor Order that is executed with 
at least $0.005 price improvement;
    (d) the order is executed when the Trading Center displaying the 
Protected Quotation that was traded-at was experiencing a failure, 
material delay, or malfunction of its systems or equipment;
    (e) the order is executed as part of a transaction that was not 
a ``regular way'' contract;
    (f) the order is executed as part of a single-priced opening, 
reopening, or closing transaction by the Trading Center;
    (g) the order is executed when a Protected Bid is priced higher 
than a Protected Offer in the Pilot Security;
    (h) the order is identified as a Trade-at Intermarket Sweep 
Order (``ISO''); \29\
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    \29\ See Partial Amendment No. 1, supra note 7. In Partial 
Amendment No. 1, BATS proposes to define a Trade-At ISO as a limit 
order for a Pilot Security that meets the following requirements: 1. 
When routed to a Trading Center, the limit order is identified as a 
Trade-at ISO; and 2. simultaneously with the routing of the limit 
order identified as a Trade-at ISO, one of more additional limit 
orders, as necessary, are routed to execute against the full size of 
any protected bid, in the case of a limit order to sell, or the full 
displayed size of any protected offer, in the case of a limit order 
to buy, for the Pilot Security with a price that is better than or 
equal to the limit price of the limit order identified as a Trade-at 
ISO. These additional routed orders also must be marked as Trade-at 
ISOs. See Proposed BATS Rule 11.27(a)(7)(A)(i).

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[[Page 12546]]

    (i) the order is executed by a Trading Center that 
simultaneously routed Trade-at ISOs to execute against the full 
displayed size of the Protected Quotation with a price that is 
better than, or equal to, the limit price of the limit order 
identified as a Trade-at ISO;
    (j) the order is executed as part of a Negotiated Trade;
    (k) the order is executed when the Trading Center displaying the 
Protected Quotation that was traded at had displayed within one 
second prior to execution of the transaction that constituted the 
Trade-at, a Best Protected Bid or Best Protected Offer, as 
applicable, for the Pilot Security with a price that was inferior to 
the price of the Trade-at transaction;
    (l) the order is executed by a Trading Center, which at the time 
of order receipt, had guaranteed an execution at no worse than a 
specified price (a ``stopped order'') where: (1) The stopped order 
was for the account of a customer; (2) the customer agreed to the 
specified price on an order-by-order basis; and (3) the price of the 
Trade-at transaction was, for a stopped buy order, equal to or less 
than the National Best Bid in the Pilot Security at the time of 
execution or, for a stopped sell order, equal to or greater than the 
National Best Offer in the Pilot Security at the time of execution, 
as long as such order is priced at an acceptable increment; \30\
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    \30\ See Partial Amendment No. 1, supra note 7. BATS has 
requested an exemption from the Plan related to this provision. See 
February Exemption Request, supra note 18.
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    (m) the order is for a fractional share order of a Pilot 
Security, provided that such fractional share order was not the 
result of breaking an order \31\ for one or more whole shares of a 
Pilot Security into orders for fractional shares or was not 
otherwise effected to evade the requirements of the Tick Size Pilot; 
or
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    \31\ Additionally, no member shall break an order into smaller 
orders or otherwise effect or execute an order to evade the 
requirements of the Trade-at Prohibition or any other provisions of 
the Plan. See Proposed BATS Rule 11.27(a) Interpretations and 
Policies .02.
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    (n) the order is to correct a bona fide error, which is recorded 
by the Trading Center in its error account. BATS proposes to define 
a bond fide error as: 1. The inaccurate conveyance or execution of 
any term of an order including, but not limited to, price, number of 
shares or other unit of trading; identification of the security; 
identification of the account for which securities are purchased or 
sold; lost or otherwise misplaced order tickets; short sales that 
were instead sold long or vice versa; or the execution of an order 
on the wrong side of a market; 2. the unauthorized or unintended 
purchase, sale, or allocation of securities, or the failure to 
follow specific client instructions; 3. the incorrect entry of data 
into relevant systems, including reliance on incorrect cash 
positions, withdrawals, or securities positions reflected in an 
account; or 4. a delay, outage, or failure of a communication system 
used to transmit market data prices or to facilitate the delivery or 
execution of an order.\32\
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    \32\ See Partial Amendment No. 1, supra note 7. BATS has 
requested an exemption from the Plan related to this provision. See 
February Exemption Request, supra note 18.
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IV. Summary of Comments

    As noted above, the Commission received three comment letters 
concerning the proposed rule change[thinsp]\33\ and a response letter 
from BATS.\34\ All three commenters discussed various aspects of the 
Trade-at Prohibition. The commenters noted differences between the 
Trade-at Prohibition rules proposed by BATS and NYSE.\35\ One commenter 
noted that the NYSE's proposal would limit a Trading Center from price 
matching a Protected Quotation to when the Trading Center is displaying 
in a principal capacity, while the BATS Proposal would not restrict 
price matching to a Trading Center's principal capacity.\36\
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    \33\ See supra note 5. The Commission notes that the SIFMA 
Letter and the FIF Letter also addressed the proposed rule changes 
submitted by FINRA and NYSE to implement the quoting and trading 
requirements of the Tick Size Pilot. See SIFMA Letter and FIF 
Letter. Also see Securities Exchange Act Release No. See Securities 
Exchange Act Release No. 77218 (February 23, 2016), 81 FR 10290 
(February 29, 2016) (order approving the ``FINRA Proposal'') and 
Securities Exchange Act Release No. 73229 (October 22, 2015), 80 FR 
66065 (October 28, 2015) (notice of the ``NYSE Proposal'').
    \34\ As noted above, BATS and FINRA submitted a joint response 
to comment letters. See BATS Response Letter, supra note 5.
    \35\ See SIFMA Letter and FIF Letter. For example, these two 
commenters highlighted two distinctions between the NYSE Proposal 
and the BATS Proposal. The commenters noted that the BATS Proposal 
does not limit the Retail Investor Order exception to the Trade-at 
Prohibition to only orders submitted by an exchange program whereas 
the NYSE Proposal does include this limitation. Additionally, the 
commenters noted that the BATS Proposal allows for a Trade-at 
Prohibition for orders that were displayed as either an agency, 
riskless principal, or principal capacity whereas the NYSE proposal 
only allows for orders that were displayed on a principal basis. One 
commenter indicated that if the differences persisted it would be 
``virtually impossible'' for its members to comply with the Plan. 
See SIFMA Letter.
    \36\ See SIFMA Letter.
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    One commenter expressed support for BATS's Trade-at Prohibition 
proposal.\37\ However, one commenter, NYSE, stated that the BATS 
Proposal was inconsistent with the goals of the Plan because it would 
incentivize a migration of trading to dark venues.\38\ This commenter 
stated that the BATS Proposal would allow an alternative trading system 
(``ATS'') to execute matched trades of any of its participants at the 
Traded-at Protected Quotation if the ATS is displaying on an agency 
basis, a quotation of another participant at the Protected 
Quotation.\39\ The commenter noted that all participant orders 
displayed by an ATS are agency orders of the ATS and that trades 
matched by ATS participants without display are also agency orders of 
that ATS. Therefore, the commenter believes that the BATS Proposal 
would allow trades by ATS participants at the Trade-at Protected 
Quotation without that participant displaying a Protected Quotation. 
The commenter believes that the proposal allows ATS participants to 
``free-ride'' on the displayed Protected Quotation of other ATS 
participants.\40\ The commenter stated that if implemented, trading 
would continue in dark pools at a price of displayed liquidity and that 
the proposal would result in similar trading behaviors between Test 
Group Three and Test Group Two.\41\
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    \37\ See SIFMA Letter. For example, SIFMA stated that it 
believed that the Commission should approve BATS's proposal.
    \38\ The commenter also indicated that the proposal did not 
follow the procedure outlined by the Plan's Operating Committee. See 
NYSE Letter.
    \39\ See NYSE Letter.
    \40\ See NYSE Letter.
    \41\ See NYSE Letter.
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    In its response, BATS disagreed with NYSE's characterization of the 
display exception's operation as set forth in the BATS Proposal, and 
confirmed that a broker-dealer would not be permitted to trade based on 
interest that it is not responsible for displaying.\42\ BATS noted that 
it would view a broker-dealer that matches orders in the over-the-
counter (``OTC'') market, as principal, agent or riskless principal, to 
have ``executed'' such orders as a Trading Center for purposes of 
proposed BATS Rule 11.27(a), regardless of whether such broker-dealer 
ultimately executes and reports such trade through an OTC trade 
reporting facility, an ATS or another Trading Center. Accordingly, if a 
broker-dealer has displayed, as principal, a buy order at the protected 
bid on an exchange or Electronic Communications Network (``ECN'') prior 
to its receipt of a customer sell order, it could internalize that 
customer sell order, up to its displayed size, in reliance on the 
proposed BATS Rule 11.27(a)(6)(D)(ii)(a) exceptions. If, however, that 
broker-dealer has not displayed a principal buy order at the

[[Page 12547]]

protected bid, but matches its customer order with an order for its own 
account and submits the paired orders to an ECN where another broker-
dealer is displaying a buy order at the protected bid, the broker-
dealer submitting the paired orders could not rely on the proposed 
display exceptions. While the ECN, as a Trading Center, could execute 
the displayed order as agent with offsetting interest because it was 
displaying an agency quotation at the protected bid, the broker-dealer 
submitting the paired orders could not, as a Trading Center, trade with 
its customer order, because it was not displaying a principal quotation 
at the protected bid. Accordingly, such a transaction could not be 
effected consistent with the Trade-at Prohibition under the BATS 
proposal.
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    \42\ As noted above, BATS and FINRA submitted a joint response 
to comments. See BATS Response Letter, supra note 5.
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    One commenter discussed other provisions related to the Trade-at 
Prohibition.\43\ Specifically, the commenter stated the definition of 
Block Size order, used for the Block Size exception to the Trade-at 
Prohibition, would prevent a Trading Center from facilitating a block 
cross trade.\44\ The commenter requested that the proposal be amended 
to permit the aggregation of non-block orders as long as at least one 
component of the order was of the defined Block Size.\45\ In response, 
BATS opined that such an exception was inconsistent with the Plan. BATS 
believes that permitting the aggregation of non-block orders or the 
combination of Block Size orders with non-block size orders would 
undermine the Block Size exception by making it overly broad.
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    \43\ See FIF Letter. The Commission notes that FIF asked several 
interpretative questions and provided explanatory examples in its 
comment letter on the FINRA proposal that were not raised within the 
FIF Letter related to the BATS proposal. However, these issues were 
discussed in the BATS Response Letter and discussed in the FINRA 
Order.
    \44\ According to the commenter, a ``block cross trade'' is 
block size order that includes smaller orders. The commenter noted 
that the three additional qualifications contained within the BATS 
proposal are meant to ensure the purpose of the Trade-at Prohibition 
is not undermined. See FIF Letter. See also Proposed BATS Rule 
11.27(a)(6)(D)(ii)(b).
    \45\ See FIF Letter.
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    The commenter suggested that the exceptions to the Trade-at 
Prohibition contained in this proposal should be more closely aligned 
with the exemptions granted to Rule 611 of Regulation NMS.\46\ 
Specifically, the commenter referenced the Rule 611 exemptions for (1) 
certain error correction transactions and (2) certain print protection 
transactions.\47\ BATS agreed with the commenter, in part, and amended 
this proposal to include an exception for certain error correction 
transactions for the Trade-at Prohibition.\48\ BATS, however, did not 
believe that it was appropriate to provide a print protection 
transaction exception for the Trade-at Prohibition that correlates to 
the exemption for Rule 611 of Regulation NMS.\49\
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    \46\ 17 CFR 242.611.
    \47\ The commenter noted Commission orders related to Rule 611 
of Regulation NMS. Order Exempting Certain Error Correction 
Transactions from Rule 611 of Regulation NMS under the Securities 
Exchange Act of 1934 (http://www.sec.gov/rules/exorders/2007/34-55884.pdf); Order Exempting Certain Print Protection Transactions 
from Rule 611 (http://www.sec.gov/rules/exorders/2007/34-55883.pdf). 
See FIF Letter.
    \48\ See Partial Amendment No. 1, supra note 7.
    \49\ See Partial Amendment No. 1, supra note 7.
---------------------------------------------------------------------------

    The commenter also noted there was a distinction between the 
stopped order exception applicable to Rule 611 of Regulation NMS 
exception and the proposed stopped order exception for the Trade-at 
Prohibition. The commenter provided an example where an order would 
satisfy Rule 611 of Regulation NMS but would not satisfy the proposed 
Trade-at Prohibition exception. In response, BATS amended and 
harmonized the respective stopped trade exceptions to harmonize the 
stopped order exception.\50\
---------------------------------------------------------------------------

    \50\ See Partial Amendment No. 1, supra note 7.
---------------------------------------------------------------------------

    Finally, one commenter requested clarification on the treatment of 
a variety of order types, including Good Till Canceled orders entered 
in non-nickel increments before the Pilot Period, indications of 
interest priced to execute at the midpoint, and market maker peg 
orders. BATS noted that Test Group One permits indications of interest 
priced to execute at the midpoint. With regard to the other orders, 
BATS noted that the Participants are drafting FAQs to address the 
commenter's questions.

V. Discussion and Findings

    After carefully considering the proposed rule change, the comments 
submitted, and BATS's response to the comments, the Commission finds 
that the proposal is consistent with the requirements of the Act and 
the rules and regulations thereunder applicable to a national 
securities exchange.\51\ Specifically, the Commission finds that the 
proposed rule change is consistent with section 6(b)(5) of the Act,\52\ 
which requires, among other things, that the rules of an exchange 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. In addition, the Commission 
finds that the proposed rule change is consistent with section 6(b)(8) 
of the Act,\53\ which requires that the rules of an exchange not impose 
any burden on competition that is not necessary or appropriate.
---------------------------------------------------------------------------

    \51\ 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).
    \52\ 15 U.S.C. 78f(b)(5).
    \53\ 15 U.S.C. 78f(b)(8).
---------------------------------------------------------------------------

    The Commission stated in the Approval Order that the Tick Size 
Pilot should provide a data-driven approach to evaluate whether certain 
changes to the market structure for Pilot Securities would be 
consistent with the Commission's mission to protect investors, maintain 
fair, orderly and efficient markets, and facilitate capital 
formation.\54\ As discussed below, the Commission believes that BATS's 
proposal is consistent with the requirements of the Act and would 
further the purpose of the Plan to provide meaningful data.
---------------------------------------------------------------------------

    \54\ See Approval Order, supra note 3.
---------------------------------------------------------------------------

    BATS, as a Participant in the Plan, has an obligation to comply, 
and enforce compliance by its members, with the terms of the Plan. Rule 
608(c) of Regulation NMS provides that ``[e]ach self-regulatory 
organization shall comply with the terms of any effective national 
market system plan of which it is a sponsor or participant. Each self-
regulatory organization also shall, absent reasonable justification or 
excuse, enforce compliance with any such plan by its members and 
persons associated with its members.'' \55\ Proposed BATS Rule 11.27(a) 
would impose compliance obligations on its members with the quoting and 
trading requirements set forth in section VI of the Plan. As discussed 
below, the Commission also believes the proposal is consistent with the 
Act because it is designed to assist BATS in meeting its regulatory 
obligations pursuant to Rule 608 of Regulation NMS and the Plan.
---------------------------------------------------------------------------

    \55\ 17 CFR 242.608(c). See also Section II.B of the Plan which 
provides that each Participant will adopt rules requiring compliance 
by its members with provisions of the Plan. In addition, Section IV 
of the Plan requires all Participants and members of Participants to 
establish maintain and enforce written policy and procedures that 
are reasonably designed to comply with the applicable quoting and 
trading requirements specified in section VI of the Plan for the 
Pilot Securities.
---------------------------------------------------------------------------

A. Policies and Procedures To Comply With the Plan

    Proposed BATS Rule 11.27(a)(1) provides that BATS members must 
establish, maintain, and enforce written

[[Page 12548]]

policies and procedures that are reasonably designed to meet the 
applicable quoting and trading requirements of the Plan. Proposed BATS 
Rule 11.27(a)(2) states that BATS's system will not display, quote, or 
trade in violation of the applicable quoting and trading requirements 
for a Pilot Security specified in the Plan and its rule. As noted 
above, sections II.B and IV of the Plan provide that each Participant 
must establish, maintain and enforce written policies and procedures 
that are reasonably designed to comply with the quoting and trading 
requirements of the Plan and adopt rules requiring compliance by its 
members with the terms of the Plan. Accordingly, proposed BATS Rules 
11.27(a)(1) and (2) are consistent with the Act as they implement these 
Plan provisions.

B. Compliance and Pilot Securities Under $1.00 During the Pilot Period

    Proposed BATS Rule 11.27(a)(3) provides a mechanism to address 
instances where the price of a Pilot Security assigned to a Test Group 
falls below $1.00. Specifically, if the price of a Pilot Security 
assigned to a Test Group falls below $1.00 during a trading day, the 
Pilot Security would remain in its assigned Test Group. If, however, a 
Pilot Security has a Closing Price below $1.00 during any trading day, 
that Pilot Security would be moved out of its respective Test Group and 
into the Control Group.\56\ The Commission notes that the selection 
criteria for Pilot Securities were developed to minimize the likelihood 
of the inclusion of securities that trade with a share price of $1.00 
or less. However, the Commission understands that there could be 
instances over the course of the Pilot Period where a Pilot Security's 
price falls below $1.00. According to the Participants, a $0.05 quoting 
and/or trading increment could be harmful to trading for such low 
priced Pilot Securities. Accordingly, the Commission believes that this 
provision is consistent with the Act because it should help to ensure 
that the universe of Pilot Securities remains constant over the Pilot 
Period while also addressing trading concerns for Pilot Securities that 
experience a fall in price.
---------------------------------------------------------------------------

    \56\ The Commission notes that it has granted BATS an exemption 
from Rule 608(c) related to this provision. See SEC Exemption 
Letter, supra note 18.
---------------------------------------------------------------------------

    Proposed BATS Rule 11.27(a) Interpretations and Policies .03 
specifies that the rule's effectiveness shall be contemporaneous with 
the pilot period. The Commission believes that this proposed rule is 
consistent with the Act because it reinforces and clarifies important 
dates and obligations under the Plan.

C. Quoting and Trading Rules for Test Group One and Test Group Two

    Proposed BATS Rule 11.27(a)(4) provides that no member may display, 
rank, or accept from any person any displayable or non-displayable bids 
or offers, orders, or indications of interest in any Pilot Security in 
Test Group One in increments other than $0.05. However, proposed BATS 
Rule 11.27(a)(4) also provides that orders priced to execute at the 
midpoint of the NBBO or PBBO and orders entered in a Participant-
operated retail liquidity program may be ranked and accepted in 
increments of less than $0.05. Finally, proposed BATS Rule 11.27(a)(4) 
provides that Pilot Securities in Test Group One may continue to trade 
at any price increment that is currently permitted by applicable 
Participant, SEC and BATS rules. The Commission finds that proposed 
BATS Rule 11.27(a)(4) is consistent with the Act because it implements 
provisions of the Plan.
    Proposed BATS Rule 11.27(a)(5) provides that no member may display, 
rank, or accept from any person any displayable or non-displayable bids 
or offers, orders, or indications of interest in any Pilot Security in 
Test Group Two in increments other than $0.05. However, proposed BATS 
Rule 11.27(a)(5) also provides that orders priced to execute at the 
midpoint of the NBBO or PBBO and orders entered in a Participant-
operated retail liquidity program may be ranked and accepted in 
increments of less than $0.05. Proposed BATS Rule 11.27(a)(5)(B) 
further provides that no member may execute an order in a Test Group 
Two Pilot Security in an increment other than $0.05, unless an 
exception applies. Pilot Securities in Test Group Two may trade in 
increments less than $0.05 when trading: (i) At the midpoint between 
the NBBO or the PBBO; (ii) Retail Investor Orders that are provided 
price improvement that is at least $0.005 better than the PBBO; (iii) 
Negotiated Trades; and (iv) customer orders to comply with BATS Rule 
12.6 following the execution of a proprietary trade that is permissible 
pursuant to Plan exception.\57\ The Commission finds that proposed BATS 
Rules 11.27(a)(5)(C)(i), (ii) and (iii) are consistent with the Act 
because they implement provisions of the Plan.
---------------------------------------------------------------------------

    \57\ See Partial Amendment No. 1, supra note 7.
---------------------------------------------------------------------------

    In Partial Amendment No. 1, BATS proposes to add a trading 
increment exception in BATS Rule 11.27(a)(5)(C)(iv), which would allow 
the execution of a customer order following a proprietary trade by a 
BATS member at an increment less than $0.05 in the same security, on 
the same side and at the same price as (or within the prescribed amount 
of) a customer order owed a fill pursuant to BATS Rule 12.6, where the 
triggering proprietary trade was permissible pursuant to an exception 
under the Plan. BATS believes that this customer order protection 
exception should facilitate the ability of its members to continue to 
protect customer orders while retaining the flexibility to engage in 
proprietary trades that comply with an exception to the Plan. Based on 
the foregoing, the Commission finds that proposed BATS Rule 
11.27(a)(5)(C)(iv) is consistent with the Act.\58\
---------------------------------------------------------------------------

    \58\ The Commission notes that it has granted BATS an exemption 
from Rule 608(c) related to this provision. See SEC Exemption 
Letter, supra note 18.
---------------------------------------------------------------------------

D. Quoting and Trading Rules for Test Group Three

    Proposed BATS Rule 11.27(a)(6)(A) provides that no member may 
display, rank, or accept from any person any displayable or non-
displayable bids or offers, orders, or indications of interest in any 
Pilot Security in Test Group Three in increments other than $0.05. 
Proposed BATS Rule 11.27(a)(6)(A) also provides that for Test Group 
Three Pilot Securities orders priced to execute at the midpoint of the 
NBBO or PBBO and orders entered in a Participant-operated retail 
liquidity program may be ranked and accepted in increments of less than 
$0.05. Proposed BATS Rule 11.27(a)(6)(B) specifies that the $0.05 
trading increment will apply to all trades, including Brokered Cross 
Trades; and that trades for Test Group Three Pilot Securities may not 
occur in increments of less than $0.05 unless there is an applicable 
exception listed in proposed Rule BATS Rule 11.27(a)(6)(C). Pursuant to 
proposed Rule BATS Rule 11.27(a)(6)(C), Test Group Three Pilot 
Securities may trade in increments less than $0.05 when trading: (i) At 
the midpoint between the NBBO or the PBBO; (ii) Retail Investor Orders 
that are provided price improvement that is at least $0.005 better than 
the PBBO and; (iii) Negotiated Trades; and (iv) customer orders to 
comply with BATS Rule 12.6 following the execution of a proprietary

[[Page 12549]]

trade that is permissible pursuant to Plan exception.\59\
---------------------------------------------------------------------------

    \59\ See Partial Amendment No. 1, supra note 7.
---------------------------------------------------------------------------

    The Commission finds that proposed BATS Rule 11.27(a)(6)(A), 
proposed BATS Rule 11.27(a)(6)(B), and proposed BATS Rules 
11.27(a)(6)(C)(i), (ii) and (iii) are consistent with the Act because 
they implement provisions of the Plan. In addition, as discussed 
above,\60\ the Commission finds that proposed BATS Rule 
11.27(a)(6)(C)(iv) is consistent with the Act.
---------------------------------------------------------------------------

    \60\ See Section V.C above related to the discussion of proposed 
BATS Rule 11.27(a)(5)(C)(iv). The Commission notes that it has 
granted BATS an exemption from Rule 608(c) related to this 
provision. See SEC Exemption Letter, supra note 18.
---------------------------------------------------------------------------

1. Quoting and Trading Rules for Test Group Three: Trade-at Prohibition
    Proposed BATS Rule 11.27(a)(6)(D) describes the Trade-at 
Prohibition and the exceptions applicable thereto.\61\ Specifically, 
proposed BATS Rule 11.27(a)(6)(D)(i) sets forth that absent any of the 
exceptions listed in subparagraph (D)(ii), no member that operates a 
Trading Center may execute a sell order for a Pilot Security in Test 
Group Three at the price of a Protected Bid or execute a buy order for 
a Pilot Security in Test Group Three at the price of a Protected Offer 
during regular trading hours (i.e., the Trade-at Prohibition). Proposed 
BATS Rule 11.27(a)(6)(D)(i) also states that under the Trade-at 
Prohibition, a member that operates a Trading Center that is displaying 
a quotation, via either a processor or an SRO quotation feed, that is 
at a price equal to the traded-at Protected Bid or Protected Offer is 
permitted to execute orders at that level, but only up to the amount of 
its displayed size. Finally, proposed BATS Rule 11.27(a)(6)(D)(i) 
states that a member that operates a Trading Center that was not 
displaying a quotation at a price equal to the traded-at Protected 
Quotation, via either a processor or an SRO quotation feed, is 
prohibited from price-matching protected quotations unless an exception 
applies.
---------------------------------------------------------------------------

    \61\ The Commission notes that the BATS Response Letter contains 
detailed responses to a number of interpretive questions that were 
raised by a commenter in regards to the BATS and FINRA Proposals. 
See supra note43. The Commission understands that the Participants 
are developing interpretative guidance on the quoting and trading 
rules under the Plan and expects that Participants will continue to 
work with market participants on the implementation of the quoting 
and trading rules of the Tick Size Pilot.
---------------------------------------------------------------------------

    Proposed BATS Rule 11.27(a)(6)(D)(ii) lists the exceptions to the 
Trade-at Prohibition. The proposed exceptions set forth in BATS Rules 
11.27(a)(6)(D)(ii)(c) through (g), (j), (k), and (m) mirror the 
exceptions set forth in the Plan.\62\ The Commission finds these 
exceptions to be consistent with the Act because they implement Plan 
provisions.
---------------------------------------------------------------------------

    \62\ See Section VI.D(3) through (7), (10), (11) and (13) of the 
Plan.
---------------------------------------------------------------------------

    In proposed BATS Rule 11.27(a)(6)(D)(ii)(a), BATS proposes to 
implement the display exception to the Trade-at Prohibition. As 
proposed, BATS has added several details about its operation and 
implementation. For example, BATS proposes that a Trading Center that 
uses independent aggregation units execute orders within the same 
independent aggregation unit that displayed the quotation. In addition, 
BATS proposes to specify that Trading Centers that display a quotation 
as agent or riskless principal may only execute as agent or riskless 
principal. If the Trading Center is displaying a quotation as principal 
(excluding riskless principal), the Trading Center may execute as 
principal, agent or riskless principal.
    As noted above, one commenter suggested that BATS's proposal would 
create an incentive for trading in Test Group Three to migrate to dark 
venues.\63\ According to the commenter, BATS's proposal would permit a 
non-displayed Trading Center to submit matched trades to an ATS that 
was displaying on an agency basis the quotation of another ATS 
subscriber.\64\ BATS responded that it did not believe this scenario 
could occur under its proposal, and confirmed that the broker-dealer 
submitting the matched trade could not, as a Trading Center trade with 
its customer order because it was not displaying a principal quotation. 
The Commission finds that BATS's proposed Rule 11.27(a)(6)(D)(ii)(a) to 
be consistent with the Act. The Commission believes that BATS's 
proposed rule clarifies the operation of the display exception in a 
manner consistent with the goals of the Plan. First, a Trading Center 
would only be able to execute an order in the same capacity in which it 
has displayed a quotation. Accordingly, a Trading Center could not rely 
on an agency quotation to execute on a principal basis. Further, a 
Trading Center that uses independent aggregation units would be 
restricted in its ability to rely on quotations displayed by other 
independent aggregation units. As noted above, a Trading Center that 
utilizes independent aggregation units may only execute an order in the 
independent aggregation unit that displayed the quotation. The 
Commission believes that these additional rules implement the display 
exception to the Trade-at Prohibition in a manner that should incent 
the display of liquidity.\65\
---------------------------------------------------------------------------

    \63\ See NYSE Letter.
    \64\ Id.
    \65\ See Approval Order, supra note 3. In the Approval Order, 
the Commission stated that the Trade-at Prohibition should test 
whether market participants are incentivized to display more 
liquidity in a wider tick environment.
---------------------------------------------------------------------------

    Proposed BATS Rule 11.27(a)(6)(D)(ii)(b) sets forth the exception 
to the Trade-at Prohibition for orders of Block Size. BATS proposes 
additional provisions with respect to Block Size orders including that 
orders at the time of origin may not be: (1) An aggregation of non-
block orders; (2) broken into orders smaller than Block Size prior to 
submitting the order to a Trading Center for execution; or (3) executed 
on multiple Trading Centers.
    As noted above, one commenter suggested that these additional 
provisions would limit firms' ability to facilitate block cross 
trades.\66\ BATS responded that the additional criteria would clarify 
this Trade-at Prohibition exception. Further, BATS noted that 
permitting the aggregation of non-block orders or permitting members to 
combine a block order with non-block orders would overly expand the 
scope of the exception.
---------------------------------------------------------------------------

    \66\ See FIF Letter.
---------------------------------------------------------------------------

    The Commission believes that the additional criteria for the Block 
Size exception are consistent with the Act. In the Approval Order, the 
Commission modified the Block Size definition for the purposes of the 
Plan to more closely reflect the trading characteristics of potential 
Pilot Securities.\67\ The Commission believes proposed BATS Rule 
11.27(a)(6)(D)(ii)(b) appropriately limits the scope and applicability 
of the Block Size exception, and should help to exclude trades and 
order handling scenarios that were not contemplated or intended to be 
considered for an exception for the Trade-at Prohibition.
---------------------------------------------------------------------------

    \67\ See Approval Order, supra note 3.
---------------------------------------------------------------------------

    Proposed BATS Rule 11.27(a)(6)(D)(ii)(h) sets forth the exception 
to the Trade-at Prohibition for orders identified as Trade-at ISO. In 
Partial Amendment No. 1, BATS proposes to clarify the definition of a 
Trade-at ISO for purposes of the exception. Specifically, BATS proposes 
to define Trade-At ISO as a limit order for a Pilot Security that meets 
the following requirements: (1) When routed to a Trading Center, the 
limit order is identified as a Trade-at ISO; and (2) simultaneously 
with the routing of the limit order identified as a Trade-at ISO, one 
of more additional limit orders, as necessary, are routed to execute

[[Page 12550]]

against the full size of any protected bid, in the case of a limit 
order to sell, or the full displayed size of any protected offer, in 
the case of a limit order to buy, for the Pilot Security with a price 
that is better than or equal to the limit price of the limit order 
identified as a Trade-at ISO. These additional routed orders also must 
be marked as Trade-at ISO.\68\
---------------------------------------------------------------------------

    \68\ See Proposed BATS Rule 11.27(a)(7)(A)(i).
---------------------------------------------------------------------------

    According to BATS, the use of the term ISO as set forth in the Plan 
could be unclear in Test Group Three.\69\ As noted in BATS's Partial 
Amendment No. 1, an ISO may mean that the sender of the ISO has swept 
better-priced protected quotations, so that the recipient of that ISO 
may trade through the price of the protected quotation (in compliance 
with Rule 611 of Regulation NMS \70\), or it could mean that the sender 
of the ISO has swept protected quotations at the same price at which it 
wishes to execute (in addition to any better-priced quotations), so 
that the recipient of that ISO may trade at the price of the protected 
quotation (as an exception to the Trade-at Prohibition). Accordingly, 
since the meaning of an ISO may differ under Rule 611 of Regulation NMS 
and the Trade-at Prohibition under the Plan, BATS proposes Rule 
11.27(a)(6)(D)(ii)(h) to reflect that the order is a Trade-at ISO so 
that a receiving Trading Center in a Test Group Three Pilot Security 
would know, upon receipt of that Trade-at ISO, that the Trading Center 
that sent the Trade-at ISO had already executed against the full size 
of displayed quotations at that price (e.g., the recipient of that 
Trade-at ISO could permissibly trade at the price of the protected 
quotation). In addition, BATS proposes to make a corresponding change 
to BATS Rule 11.27(a)(6)(D)(ii)(i).
---------------------------------------------------------------------------

    \69\ Section VI.D(8) of the Plan provides an exception to the 
Trade-at Prohibition for ISOs. In addition, Section I(MM) defined a 
Trade-at ISO as a limit order for a Pilot Security that meets the 
following requirements: (1) When routed to a Trading Center, the 
limit order is identified as an ISO; and (2) simultaneously with the 
routing of the limit order identified as an ISO, one or more 
additional limit orders, as necessary, are routed to execute against 
the full displayed size of any protected bid, in the case of a limit 
order to sell, or the full displayed size of any protected offer, in 
the case of a limit order to buy, for the Pilot Security with a 
price that is equal to the limit price of the limit order identified 
as an ISO. These additional routed orders also must be market as 
ISO.
    \70\ 17 CFR 242.611.
---------------------------------------------------------------------------

    The Commission believes that proposed BATS Rule 
11.27(a)(6)(D)(ii)(h) and BATS Rule 11.27(a)(6)(D)(ii)(i) are 
consistent with the Act because they clarify the use and operation of 
ISOs under the Plan. The definition in the Plan provided that an ISO 
received under the Plan would indicate to the recipient that orders to 
execute against the full displayed size at a price equal to the ISO's 
limit price had been routed. However, the Commission understands that 
the use of the term ISO in connection with the exception to the Trade-
at Prohibition could cause confusion. Therefore, the Commission 
believes that BATS's proposal should clarify the use of ISOs under the 
Plan and facilitate their implementation.
    Proposed BATS Rule 11.27(a)(6)(D)(ii)(l) sets forth an exception to 
the Trade-at Prohibition for stopped orders. A stopped order is defined 
as an order executed by a Trading Center which, at the time of order 
receipt, the Trading Center had guaranteed an execution at no worse 
than a specified price where: (1) The stopped order was for the account 
of a customer; (2) the customer agreed to the specified price on an 
order-by-order basis; and (3) the price of the Trade-at transaction 
was, for a stopped buy order, equal to or less than the National Best 
Bid in the Pilot Security at the time of execution or, for a stopped 
sell order, equal to or greater than the National Best Offer in the 
Pilot Security at the time of execution, as long as such order is 
priced at an acceptable increment.
    As noted above, one commenter raised questions about how the 
stopped order exception would operate as an exception to the Trade-at 
Prohibition.\71\ In Partial Amendment No. 1, BATS amended the rule text 
of proposed BATS Rule 11.27(a)(6)(D)(ii)(l) to clarify its operation 
under the Trade-at Prohibition. The Commission finds that proposed BATS 
Rule 11.27(a)(6)(D)(ii)(l), as modified by Partial Amendment No. 1, is 
consistent with the Act because it implements the Plan provision is a 
manner that clarifies its operation for these order types.\72\
---------------------------------------------------------------------------

    \71\ See FIF Letter.
    \72\ The Commission notes that it has granted BATS an exemption 
from Rule 608(c) related to this provision. See SEC Exemption 
Letter, supra note 18.
---------------------------------------------------------------------------

    In Partial Amendment No. 1, BATS proposes an additional exception 
to the Trade-at Prohibition.\73\ Specifically, proposed BATS Rule 
11.27(a)(6)(D)(ii)(n) sets forth an exception to the Trade-at 
Prohibition for ``bona fide errors.'' \74\ Proposed BATS Rule 
11.27(a)(6)(D)(ii)(n) provides an exception to the Trade-at Prohibition 
where the order is to correct a bona fide error, which is recorded by 
the Trading Center in its error account. The proposed definition for a 
``bona fide error'' is: (i) The inaccurate conveyance or execution of 
any term of an order including, but not limited to, price, number of 
shares or other unit of trading; identification of the security; 
identification of the account for which securities are purchased or 
sold; lost or otherwise misplaced order tickets; short sales that were 
instead sold long or vice versa; or the execution of an order on the 
wrong side of a market; (ii) the unauthorized or unintended purchase, 
sale, or allocation of securities, or the failure to follow specific 
client instructions; (iii) the incorrect entry of data into relevant 
systems, including reliance on incorrect cash positions, withdrawals, 
or securities positions reflected in an account; or (iv) a delay, 
outage, or failure of a communication system used to transmit market 
data prices or to facilitate the delivery or execution of an order. In 
order to utilize this exception to the Trade-at Prohibition, the 
following conditions must be met: (1) The bona fide error must be 
evidenced by objective facts and circumstances, the Trading Center must 
maintain documentation of such facts and circumstances, and the Trading 
Center must record the transaction in its error account; (2) the 
Trading Center must establish, maintain, and enforce written policies 
and procedures that are reasonably designed to address the occurrence 
of errors and, in the event of an error, the use and terms of a 
transaction to correct the error in compliance with this exception; and 
(3) the Trading Center must regularly surveil to ascertain the 
effectiveness of its policies and

[[Page 12551]]

procedures to address errors and transactions to correct errors and 
takes prompt action to remedy deficiencies in such policies and 
procedures.\75\
---------------------------------------------------------------------------

    \73\ This additional exception was requested by a commenter. See 
FIF Letter.
    \74\ The Commission notes that one commenter suggested that 
there should be a print protection exception to the Trade-at 
Prohibition that corresponds to the print protection exemption that 
is applicable to Rule 611 of Regulation NMS. See FIF Letter. The 
Commission does not agree that a print protection exception would be 
consistent with the Trade-At Prohibition in the Plan. First, the 
print protection exemption applicable to Rule 611 is inconsistent 
with the Trade-at Prohibition because the Rule 611 print protection 
exemption explicitly contemplates protection for both displayed and 
reserve (undisplayed) size of orders. In this regard, the Commission 
believes that such an exception for the Trade-at Prohibition often 
will be unnecessary because a print protection exception for the 
Trade-at Prohibition would need to be premised upon a displayed 
customer order, which already is excepted from the Trade-at 
Prohibition if it satisfies the requirements of proposed BATS Rule 
11.27(a)(6)(D)(i) and the Plan. Moreover, providing a print 
protection exemption from the Trade-At Prohibition would create the 
potential for trading scenarios that would result in better-priced, 
displayed orders being bypassed for the execution of inferior, same-
priced orders. The Commission believes such a result is inconsistent 
with the Plan in general, and the Trade-at Prohibition in 
particular. Finally, the Commission notes that BATS represents that 
the print protection exemption applicable to Rule 611 of Regulation 
NMS is rarely used by its members.
    \75\ See Partial Amendment No. 1, supra note 7. See also 
Securities Exchange Act Release No. 55884 (June 8, 2007), 72 FR 
32926 (June 14, 2007).
---------------------------------------------------------------------------

    The Commission finds that the exception to the Trade-at Prohibition 
for the correction of bona fide errors is consistent with the Act.\76\ 
The Commission believes that this exception should promote efficiency 
and the best execution of investor orders. As noted in the Commission's 
order exempting such orders from Rule 611 of Regulation NMS, the 
exemption will allow Trading Centers to execute error correction 
transactions at the appropriate prices to correct bona fide errors 
without having to qualify for one of the exceptions to the Trade-at 
Prohibition.\77\
---------------------------------------------------------------------------

    \76\ The Commission notes that the conditions for a bona fide 
error exception for the Trade-at Prohibition would be consistent 
with the corresponding bona fide error exemption for Rule 611 and 
would apply only to the error correction transaction itself and 
would not, for example, apply to any subsequent trades effected by a 
Trading Center to eliminate a proprietary position connected with 
the error correction transaction or a broker dealer's mere failure 
to execute a not-held order in accordance with a customer's 
expectations. See also Securities Exchange Act Release No. 55884 
(June 8, 2007), 72 FR 32926 (June 14, 2007).
    \77\ The Commission notes that it has granted BATS an exemption 
from Rule 608(c) related to this provision. See SEC Exemption 
Letter, supra note 18.
---------------------------------------------------------------------------

    The Commission finds that the BATS proposal to implement the Tick 
Size Pilot quoting and trading requirements, including the 
Interpretations and Policies, are consistent with the Act. The proposal 
clarifies and implements the quoting and trading requirements set forth 
in the Plan.

VI. Solicitation of Comments of Partial Amendment No. 1

    Interested persons are invited to submit written data, views, and 
arguments concerning Partial Amendment No. 1, including whether the 
proposed rule change, as modified by Partial Amendment No. 1, is 
consistent with the Act. Comments may be submitted by any of the 
following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-BATS-2015-108 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-BATS-2015-108. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for Web site viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE., 
Washington, DC 20549, on official business days between the hours of 
10:00 a.m. and 3:00 p.m. Copies of such filing also will be available 
for inspection and copying at the principal 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-BATS-2015-108 and should be 
submitted on or before March 30, 2016.

VII. Accelerated Approval of Proposed Rule Change, as Modified by 
Partial Amendment No. 1

    The Commission finds good cause, pursuant to section 19(b)(2) of 
the Act, to approve the proposed rule change, as modified by Partial 
Amendment No. 1, prior to the 30th day after the date of publication of 
Partial Amendment No. 1 in the Federal Register. Partial Amendment No. 
1 amends four of the requirements set forth in this proposed rule 
change. First, BATS proposes to add an exception to permit members to 
fill a customer order in a Pilot Security in Test Group Two or Three at 
a non-nickel increment to comply with BATS Rule 12.6 (Prohibition 
Against Trading Ahead of Customer Orders) under limited circumstances. 
Second, BATS is amending the proposal to adopt an exception to the 
Trade-at Prohibition for certain error correction transactions. Third, 
BATS is proposing to modify the stopped order exception to the Trade-at 
Prohibition to clarify its operation under the Plan. Finally, BATS is 
proposing to clarify the use of ISOs in connection with the Trade-at 
Prohibition.
    BATS believes that the change to allow members to fill a customer 
order at a non-nickel increment to comply with BATS Rule 12.6 under 
limited circumstances best facilitates the ability of members to 
continue to protect customer orders while retaining the flexibility to 
engage in proprietary trades that comply with an exception to the Plan. 
BATS believes adding an exception to the Trade-at Prohibition for error 
correction transactions is appropriate as this exception is equally 
applicable to the Trade-at Prohibition as to Rule 611 of Regulation 
NMS, and that adopting this exception appropriately aligns the 
requirements of the Trade-at Prohibition with Rule 611 of Regulation 
NMS. Similarly, BATS believes that amending the stopped order exception 
will result in more consistent treatment under Regulation NMS and the 
Plan, which should ease compliance burdens for members. Finally, BATS 
believes that amending the reference to ISOs in connection with the 
Trade-at Prohibition is consistent with the Act because it will better 
align that reference to the definition of ``Trade-At Intermarket Sweep 
Order'' as set forth in the Plan.
    Based on the foregoing, the Commission believes that the changes 
to: (1) Add an exception to BATS Rule 11.27(a)(5)(C)(iv) and 
11.27(a)(6)(C)(iv) to permit members to fill a customer order in a 
Pilot Security at a non-nickel increment to comply with BATS Rule 12.6 
under limited circumstances, (2) create an exception to the Trade-at 
Prohibition for certain error correction transactions, (3) modify the 
stopped order exception to the Trade-at Prohibition, and (4) to clarify 
the use of ISOs in connection with the Trade-at Prohibition are all 
consistent with the Act. Accordingly, the Commission finds good cause 
for approving the proposed rule change, as modified by Partial 
Amendment No. 1, on an accelerated basis, pursuant to section 19(b)(2) 
of the Act.

VIII. Conclusion

    IT IS THEREFORE ORDERED, pursuant to section 19(b)(2) of the Act 
\78\ that the proposed rule change, as modified by Partial Amendment 
No. 1 (SR-BATS-2015-108) be, and it hereby is, approved on an 
accelerated basis.
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    \78\ 15 U.S.C. 78s(b)(2).


[[Page 12552]]


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    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\79\
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    \79\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-05185 Filed 3-8-16; 8:45 am]
BILLING CODE 8011-01-P


