
[Federal Register Volume 81, Number 74 (Monday, April 18, 2016)]
[Notices]
[Pages 22691-22696]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-08820]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-77589; File No. SR-BatsEDGX-2016-04]


Self-Regulatory Organizations; Bats EDGX Exchange, Inc.; Notice 
of Filing and Immediate Effectiveness of a Proposed Rule Change To 
Adopt Rule 8.17 To Provide a Process for an Expedited Suspension 
Proceeding and Rule 12.15 To Prohibit Layering and Spoofing

April 12, 2016.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on March 30, 2016, Bats EDGX Exchange, Inc. (the ``Exchange'' or 
``EDGX'') filed with the Securities and Exchange Commission (``SEC'' or 
``Commission'') the proposed rule change as described in Items I and II 
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.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange filed a proposal to adopt a new rule to clearly 
prohibit disruptive quoting and trading activity on the Exchange, as 
further described below. Further, the Exchange proposes to amend 
Exchange Rules to permit the Exchange to take prompt action to suspend 
Members or their clients that violate such rule.
    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
Introduction
    The Exchange is filing this proposal to adopt a new rule to clearly 
prohibit disruptive quoting and trading activity on the Exchange and to 
amend Exchange Rules to permit the Exchange to take prompt action to 
suspend Members or their clients that violate such rule. The proposal 
is identical to the proposal of Bats BZX Exchange, Inc., formerly known 
as BATS Exchange, Inc. (``BZX''),\3\ which was recently approved by the 
Commission.\4\
---------------------------------------------------------------------------

    \3\ The Exchange notes that the membership of the Exchange and 
the membership of BZX is nearly identical. BZX members and the 
public had the opportunity to comment--and did comment--on an 
identical BZX proposal to the current proposal before the Staff 
approved the BZX proposal. See https://www.sec.gov/comments/sr-bats-2015-101/bats2015101.shtml.
    \4\ See Securities Exchange Act Release No. 77171 (February 18, 
2016) (SR-BATS-2015-101).
---------------------------------------------------------------------------

Background
    As a national securities exchange registered pursuant to Section 6 
of the

[[Page 22692]]

Act, the Exchange is required to be organized and to have the capacity 
to enforce compliance by its members and persons associated with its 
members, with the Act, the rules and regulations thereunder, and the 
Exchange's Rules.\5\ Further, the Exchange's Rules are required to be 
``designed to prevent fraudulent and manipulative acts and practices, 
to promote just and equitable principles of trade. . . and, in general, 
to protect investors and the public interest.'' \6\ In fulfilling these 
requirements, the Exchange has developed a comprehensive regulatory 
program that includes automated surveillance of trading activity that 
is both operated directly by Exchange staff and by staff of the 
Financial Industry Regulatory Authority (``FINRA'') pursuant to a 
Regulatory Services Agreement (``RSA''). When disruptive and 
potentially manipulative or improper quoting and trading activity is 
identified, the Exchange or FINRA (acting as an agent of the Exchange) 
conducts an investigation into the activity, requesting additional 
information from the Member or Members involved. To the extent 
violations of the Act, the rules and regulations thereunder, or 
Exchange Rules have been identified and confirmed, the Exchange or 
FINRA as its agent will commence the enforcement process, which might 
result in, among other things, a censure, a requirement to take certain 
remedial actions, one or more restrictions on future business 
activities, a monetary fine, or even a temporary or permanent ban from 
the securities industry.
---------------------------------------------------------------------------

    \5\ 15 U.S.C. 78f(b)(1).
    \6\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    The process described above, from the identification of disruptive 
and potentially manipulative or improper quoting and trading activity 
to a final resolution of the matter, can often take several years. The 
Exchange believes that this time period is generally necessary and 
appropriate to afford the subject Member adequate due process, 
particularly in complex cases. However, as described below, the 
Exchange believes that there are certain obvious and uncomplicated 
cases of disruptive and manipulative behavior or cases where the 
potential harm to investors is so large that the Exchange should have 
the authority to initiate an expedited suspension proceeding in order 
to stop the behavior from continuing on the Exchange.
    In recent years, several cases have been brought and resolved by an 
affiliate of the Exchange and other SROs that involved allegations of 
wide-spread market manipulation, much of which was ultimately being 
conducted by foreign persons and entities using relatively rudimentary 
technology to access the markets and over which the Exchange and other 
SROs had no direct jurisdiction. In each case, the conduct involved a 
pattern of disruptive quoting and trading activity indicative of 
manipulative layering \7\ or spoofing.\8\ An affiliate of the Exchange 
and other SROs were able to identify the disruptive quoting and trading 
activity in real-time or near real-time; nonetheless, in accordance 
with Exchange Rules and the Act, the Members responsible for such 
conduct or responsible for their customers' conduct were allowed to 
continue the disruptive quoting and trading activity during the 
entirety of the subsequent lengthy investigation and enforcement 
process. The Exchange believes that it should have the authority to 
initiate an expedited suspension proceeding in order to stop the 
behavior from continuing on the Exchange if a Member is engaging in or 
facilitating disruptive quoting and trading activity and the Member has 
received sufficient notice with an opportunity to respond, but such 
activity has not ceased.
---------------------------------------------------------------------------

    \7\ ``Layering'' is a form of market manipulation in which 
multiple, non-bona fide limit orders are entered on one side of the 
market at various price levels in order to create the appearance of 
a change in the levels of supply and demand, thereby artificially 
moving the price of the security. An order is then executed on the 
opposite side of the market at the artificially created price, and 
the non-bona fide orders are cancelled.
    \8\ ``Spoofing'' is a form of market manipulation that involves 
the market manipulator placing non-bona fide orders that are 
intended to trigger some type of market movement and/or response 
from other market participants, from which the market manipulator 
might benefit by trading bona fide orders.
---------------------------------------------------------------------------

    The following two examples are instructive on the Exchange's 
rationale for the proposed rule change.
    In July 2012, Biremis Corp. (formerly Swift Trade Securities USA, 
Inc.) (the ``Firm'') and its CEO were barred from the industry for, 
among other things, supervisory violations related to a failure by the 
Firm to detect and prevent disruptive and allegedly manipulative 
trading activities, including layering, short sale violations, and 
anti-money laundering violations.\9\ The Firm's sole business was to 
provide trade execution services via a proprietary day trading platform 
and order management system to day traders located in foreign 
jurisdictions. Thus, the disruptive and allegedly manipulative trading 
activity introduced by the Firm to U.S. markets originated directly or 
indirectly from foreign clients of the Firm. The pattern of disruptive 
and allegedly manipulative quoting and trading activity was widespread 
across multiple exchanges, and FINRA and other SROs identified clear 
patterns of the behavior in 2007 and 2008. Although the Firm and its 
principals were on notice of the disruptive and allegedly manipulative 
quoting and trading activity that was occurring, the Firm took little 
to no action to attempt to supervise or prevent such quoting and 
trading activity until at least 2009. Even when it put some controls in 
place, they were deficient and the pattern of disruptive and allegedly 
manipulative trading activity continued to occur. As noted above, the 
final resolution of the enforcement action to bar the Firm and its CEO 
from the industry was not concluded until 2012, four years after the 
disruptive and allegedly manipulative trading activity was first 
identified.
---------------------------------------------------------------------------

    \9\ See Biremis Corp. and Peter Beck, FINRA Letter of 
Acceptance, Waiver and Consent No. 2010021162202, July 30, 2012.
---------------------------------------------------------------------------

    In September of 2012, Hold Brothers On-Line Investment Services, 
Inc. (the ``Firm'') settled a regulatory action in connection with the 
Firm's provision of a trading platform, trade software and trade 
execution, support and clearing services for day traders.\10\ Many 
traders using the Firm's services were located in foreign 
jurisdictions. The Firm ultimately settled the action with FINRA and 
several exchanges for a total monetary fine of $3.4 million. In a 
separate action, the Firm settled with the Commission for a monetary 
fine of $2.5 million.\11\ Among the alleged violations in the case were 
disruptive and allegedly manipulative quoting and trading activity, 
including spoofing, layering, wash trading, and pre-arranged trading. 
Through its conduct and insufficient procedures and controls, the Firm 
also allegedly committed anti-money laundering violations by failing to 
detect and report manipulative and suspicious trading activity. The 
Firm was alleged to have not only provided foreign traders with access 
to the U.S. markets to engage in such activities, but that its 
principals also owned and funded foreign subsidiaries that engaged in 
the disruptive and allegedly manipulative quoting and trading activity. 
Although the pattern of disruptive and allegedly manipulative quoting 
and trading activity was identified in 2009, as noted above, the 
enforcement action was not concluded until 2012. Thus, although 
disruptive

[[Page 22693]]

and allegedly manipulative quoting and trading was promptly detected, 
it continued for several years.
---------------------------------------------------------------------------

    \10\ See Hold Brothers On-Line Investment Services, LLC, FINRA 
Letter of Acceptance, Waiver and Consent No. 20100237710001, 
September 25, 2012.
    \11\ In the Matter of Hold Brothers On-Line Investment Services, 
LLC, Exchange Act Release No. 67924, September 25, 2012.
---------------------------------------------------------------------------

    The Exchange also notes the current criminal proceedings that have 
commenced against Navinder Singh Sarao. Mr. Sarao's allegedly 
manipulative trading activity, which included forms of layering and 
spoofing in the futures markets, has been linked as a contributing 
factor to the ``Flash Crash'' of 2010, and yet continued through 2015.
    The Exchange believes that the activities described in the cases 
above provide justification for the proposed rule change, which is 
described below.
Rule 8.17--Expedited Client Suspension Proceeding
    The Exchange proposes to adopt new Rule 8.17 to set forth 
procedures for issuing suspension orders, immediately prohibiting a 
Member from conducting continued disruptive quoting and trading 
activity on the Exchange. Importantly, these procedures would also 
provide the Exchange the authority to order a Member to cease and 
desist from providing access to the Exchange to a client of the Member 
that is conducting disruptive quoting and trading activity in violation 
of proposed Rule 12.15.
    Under proposed paragraph (a) of Rule 8.17, with the prior written 
authorization of the Chief Regulatory Officer (``CRO'') or such other 
senior officers as the CRO may designate, the Office of General Counsel 
or Regulatory Department of the Exchange (such departments generally 
referred to as the ``Exchange'' for purposes of proposed Rule 8.17) may 
initiate an expedited suspension proceeding with respect to alleged 
violations of Rule 12.15, which is proposed as part of this filing and 
described in detail below. Proposed paragraph (a) would also set forth 
the requirements for notice and service of such notice pursuant to the 
Rule, including the required method of service and the content of 
notice.
    Proposed paragraph (b) of Rule 8.17 would govern the appointment of 
a Hearing Panel as well as potential disqualification or recusal of 
Hearing Officers. The proposed provision is consistent with existing 
Exchange Rule 8.6 and includes the requirement for a Hearing Officer to 
be recused in the event he or she has a conflict of interest or bias or 
other circumstances exist where his or her fairness might reasonably be 
questioned. In addition to recusal initiated by such a Hearing Officer, 
a party to the proceeding will be permitted to file a motion to 
disqualify a Hearing Officer. However, due to the compressed schedule 
pursuant to which the process would operate under Rule 8.17, the 
proposed rule would require such motion to be filed no later than 5 
days after the announcement of the Hearing Panel and the Exchange's 
brief in opposition to such motion would be required to be filed no 
later than 5 days after service thereof. Pursuant to existing Rule 
8.6(b), if the Hearing Panel believes the Respondent has provided 
satisfactory evidence in support of the motion to disqualify, the 
applicable Hearing Officer shall remove himself or herself and request 
the Chief Executive Officer to reassign the hearing to another Hearing 
Officer such that the Hearing Panel still meets the compositional 
requirements described in Rule 8.6(a). If the Hearing Panel determines 
that the Respondent's grounds for disqualification are insufficient, it 
shall deny the Respondent's motion for disqualification by setting 
forth the reasons for the denial in writing and the Hearing Panel will 
proceed with the hearing.
    Under paragraph (c) of the proposed Rule, the hearing would be held 
not later than 15 days after service of the notice initiating the 
suspension proceeding, unless otherwise extended by the Chairman of the 
Hearing Panel with the consent of the Parties for good cause shown. In 
the event of a recusal or disqualification of a Hearing Officer the 
hearing shall be held not later than five days after a replacement 
Hearing Officer is appointed. Proposed paragraph (c) would also govern 
how the hearing is conducted, including the authority of Hearing 
Officers, witnesses, additional information that may be required by the 
Hearing Panel, the requirement that a transcript of the proceeding be 
created and details related to such transcript, and details regarding 
the creation and maintenance of the record of the proceeding. Proposed 
paragraph (c) would also state that if a Respondent fails to appear at 
a hearing for which it has notice, the allegations in the notice and 
accompanying declaration may be deemed admitted, and the Hearing Panel 
may issue a suspension order without further proceedings. Finally, as 
proposed, if the Exchange fails to appear at a hearing for which it has 
notice, the Hearing Panel may order that the suspension proceeding be 
dismissed.
    Under paragraph (d) of the proposed Rule, the Hearing Panel would 
be authorized to issue a written decision stating whether a suspension 
order would be imposed. The Hearing Panel would be required to issue 
the decision not later than 10 days after receipt of the hearing 
transcript, unless otherwise extended by the Chairman of the Hearing 
Panel with the consent of the Parties for good cause shown. The Rule 
would state that a suspension order shall be imposed if the Hearing 
Panel finds by a preponderance of the evidence that the alleged 
violation specified in the notice has occurred and that the violative 
conduct or continuation thereof is likely to result in significant 
market disruption or other significant harm to investors.
    Proposed paragraph (d) would also describe the content, scope and 
form of a suspension order. As proposed, a suspension order shall be 
limited to ordering a Respondent to cease and desist from violating 
proposed Rule 12.15, and/or to ordering a Respondent to cease and 
desist from providing access to the Exchange to a client of Respondent 
that is causing violations of Rule 12.15. Under the proposed rule, a 
suspension order shall also set forth the alleged violation and the 
significant market disruption or other significant harm to investors 
that is likely to result without the issuance of an order. The order 
shall describe in reasonable detail the act or acts the Respondent is 
to take or refrain from taking, and suspend such Respondent unless and 
until such action is taken or refrained from. Finally, the order shall 
include the date and hour of its issuance. As proposed, a suspension 
order would remain effective and enforceable unless modified, set 
aside, limited, or revoked pursuant to proposed paragraph (e), as 
described below. Finally, paragraph (d) would require service of the 
Hearing Panel's decision and any suspension order consistent with other 
portions of the proposed rule related to service.
    Proposed paragraph (e) of Rule 8.17 would state that at any time 
after the Office of Hearing Officers served the Respondent with a 
suspension order, a Party could apply to the Hearing Panel to have the 
order modified, set aside, limited, or revoked. If any part of a 
suspension order is modified, set aside, limited, or revoked, proposed 
paragraph (e) of Rule 8.17 provides the Hearing Panel discretion to 
leave the cease and desist part of the order in place. For example, if 
a suspension order suspends Respondent unless and until Respondent 
ceases and desists providing access to the Exchange to a client of 
Respondent, and after the order is entered the Respondent complies, the 
Hearing Panel is permitted to modify the order to lift the suspension 
portion of the order while keeping in place the cease and desist 
portion of the order. With its broad modification powers, the Hearing 
Panel also maintains the

[[Page 22694]]

discretion to impose conditions upon the removal of a suspension--for 
example, the Hearing Panel could modify an order to lift the suspension 
portion of the order in the event a Respondent complies with the cease 
and desist portion of the order but additionally order that the 
suspension will be re-imposed if Respondent violates the cease and 
desist provisions modified order in the future. The Hearing Panel 
generally would be required to respond to the request in writing within 
10 days after receipt of the request. An application to modify, set 
aside, limit or revoke a suspension order would not stay the 
effectiveness of the suspension order.
    Finally, proposed paragraph (f) would provide that sanctions issued 
under the proposed Rule 8.17 would constitute final and immediately 
effective disciplinary sanctions imposed by the Exchange, and that the 
right to have any action under the Rule reviewed by the Commission 
would be governed by Section 19 of the Act. The filing of an 
application for review would not stay the effectiveness of a suspension 
order unless the Commission otherwise ordered.
Rule 12.15--Disruptive Quoting and Trading Activity Prohibited
    The Exchange currently has authority to prohibit and take action 
against manipulative trading activity, including disruptive quoting and 
trading activity, pursuant to its general market manipulation rules, 
including Rule 3.1. The Exchange proposes to adopt new Rule 12.15, 
which would more specifically define and prohibit disruptive quoting 
and trading activity on the Exchange. As noted above, the Exchange also 
proposes to apply the proposed suspension rules to proposed Rule 12.15.
    Proposed Rule 12.15 would prohibit Members from engaging in or 
facilitating disruptive quoting and trading activity on the Exchange, 
as described in proposed Interpretation and Policies .01 and .02 of the 
Rule, including acting in concert with other persons to effect such 
activity. The Exchange believes that it is necessary to extend the 
prohibition to situations when persons are acting in concert to avoid a 
potential loophole where disruptive quoting and trading activity is 
simply split between several brokers or customers.
    To provide proper context for the situations in which the Exchange 
proposes to utilize its proposed authority, the Exchange believes it is 
necessary to describe the types of disruptive quoting and trading 
activity that would cause the Exchange to use its authority. 
Accordingly, the Exchange proposes to adopt Interpretation and Policy 
.01 and .02, providing additional details regarding disruptive quoting 
and trading activity. Proposed Interpretation and Policy .01(a), which 
describes disruptive quoting and trading activity containing many of 
the elements indicative of layering, would describe disruptive quoting 
and trading activity as a frequent pattern in which the following facts 
are present: (a) A party enters multiple limit orders on one side of 
the market at various price levels (the ``Displayed Orders''); and (b) 
following the entry of the Displayed Orders, the level of supply and 
demand for the security changes; and (c) the party enters one or more 
orders on the opposite side of the market of the Displayed Orders (the 
``Contra-Side Orders'') that are subsequently executed; and (d) 
following the execution of the Contra-Side Orders, the party cancels 
the Displayed Orders. Proposed Interpretation and Policy .01(b), which 
describes disruptive quoting and trading activity containing many of 
the elements indicative of spoofing, would describe disruptive quoting 
and trading activity as a frequent pattern in which the following facts 
are present: (a) A party narrows the spread for a security by placing 
an order inside the national best bid or offer; and (b) the party then 
submits an order on the opposite side of the market that executes 
against another market participant that joined the new inside market 
established by the order described in (a) that narrowed the spread. The 
Exchange believes that the proposed descriptions of disruptive quoting 
and trading activity articulated in the rule are consistent with the 
activities that have been identified and described in the client access 
cases described above. The Exchange further believes that the proposed 
descriptions will provide Members with clear descriptions of disruptive 
quoting and trading activity that will help them to avoid engaging in 
such activities or allowing their clients to engage in such activities.
    The Exchange proposes to make clear in Interpretation and Policy 
.02 that, unless otherwise indicated, the descriptions of disruptive 
quoting and trading activity do not require the facts to occur in a 
specific order in order for the rule to apply. For instance, with 
respect to the pattern defined in proposed Interpretation and Policy 
.01(a) it is of no consequence whether a party first enters Displayed 
Orders and then Contra-side Orders or vice-versa. However, as proposed, 
it is required for supply and demand to change following the entry of 
the Displayed Orders. The Exchange also proposes to make clear that 
disruptive quoting and trading activity includes a pattern or practice 
in which some portion of the disruptive quoting and trading activity is 
conducted on the Exchange and the other portions of the disruptive 
quoting and trading activity are conducted on one or more other 
exchanges. The Exchange believes that this authority is necessary to 
address market participants who would otherwise seek to avoid the 
prohibitions of the proposed Rule by spreading their activity amongst 
various execution venues.
    In sum, proposed Rule 12.15 coupled with proposed Rule 8.17 would 
provide the Exchange with authority to promptly act to prevent 
disruptive quoting and trading activity from continuing on the 
Exchange. Below is an example of how the proposed rule would operate.
    Assume that through its surveillance program, Exchange staff 
identifies a pattern of potentially disruptive quoting and trading 
activity. After an initial investigation the Exchange would then 
contact the Member responsible for the orders that caused the activity 
to request an explanation of the activity as well as any additional 
relevant information, including the source of the activity. If the 
Exchange were to continue to see the same pattern from the same Member 
and the source of the activity is the same or has been previously 
identified as a frequent source of disruptive quoting and trading 
activity then the Exchange could initiate an expedited suspension 
proceeding by serving notice on the Member that would include details 
regarding the alleged violations as well as the proposed sanction. In 
such a case the proposed sanction would likely be to order the Member 
to cease and desist providing access to the Exchange to the client that 
is responsible for the disruptive quoting and trading activity and to 
suspend such Member unless and until such action is taken. The Member 
would have the opportunity to be heard in front of a Hearing Panel at a 
hearing to be conducted within 15 days of the notice. If the Hearing 
Panel determined that the violation alleged in the notice did not occur 
or that the conduct or its continuation would not have the potential to 
result in significant market disruption or other significant harm to 
investors, then the Hearing Panel would dismiss the suspension order 
proceeding. If the Hearing Panel determined that the violation alleged 
in the notice did occur and that the conduct or its continuation is 
likely to

[[Page 22695]]

result in significant market disruption or other significant harm to 
investors, then the Hearing Panel would issue the order including the 
proposed sanction, ordering the Member to cease providing access to the 
client at issue and suspending such Member unless and until such action 
is taken. If such Member wished for the suspension to be lifted because 
the client ultimately responsible for the activity no longer would be 
provided access to the Exchange, then such Member could apply to the 
Hearing Panel to have the order modified, set aside, limited or 
revoked. The Exchange notes that the issuance of a suspension order 
would not alter the Exchange's ability to further investigate the 
matter and/or later sanction the Member pursuant to the Exchange's 
standard disciplinary process for supervisory violations or other 
violations of Exchange rules or the Act.\12\
---------------------------------------------------------------------------

    \12\ The proposal will not supplant the Exchange's current 
investigative and enforcement process. Currently, when Exchange 
surveillance staff identifies a pattern of potentially disruptive 
quoting and trading activity, the staff conducts an initial analysis 
and investigation of that activity. After the initial investigation, 
the Exchange then contacts the Member responsible for the orders 
that caused the activity to request an explanation of the activity 
as well as any additional relevant information, including the source 
of the activity. The Exchange will continue this practice after this 
proposal becomes operative. The Exchange will only seek an expedited 
suspension when--after multiple requests to a Member for an 
explanation of activity--it continues to see the same pattern of 
manipulation from the same Member and the source of the activity is 
the same or has been previously identified as a frequent source of 
disruptive quoting and trading activity.
---------------------------------------------------------------------------

    The Exchange reiterates that it already has broad authority to take 
action against a Member in the event that such Member is engaging in or 
facilitating disruptive or manipulative trading activity on the 
Exchange. For the reasons described above, and in light of recent cases 
like the client access cases described above, as well as other cases 
currently under investigation, the Exchange believes that it is equally 
important for the Exchange to have the authority to promptly initiate 
expedited suspension proceedings against any Member who has 
demonstrated a clear pattern or practice of disruptive quoting and 
trading activity, as described above, and to take action including 
ordering such Member to terminate access to the Exchange to one or more 
of such Member's clients if such clients are responsible for the 
activity. The Exchange recognizes that its proposed authority to issue 
a suspension order is a powerful measure that should be used very 
cautiously. Consequently, the proposed rules have been designed to 
ensure that the proceedings are used to address only the most clear and 
serious types of disruptive quoting and trading activity and that the 
interests of Respondents are protected. For example, to ensure that 
proceedings are used appropriately and that the decision to initiate a 
proceeding is made only at the highest staff levels, the proposed rules 
require the CRO or another senior officer of the Exchange to issue 
written authorization before the Exchange can institute an expedited 
suspension proceeding. In addition, the Exchange believes that it would 
use this authority in limited circumstances, when necessary to protect 
investors, other Members and the Exchange. Further, the Exchange 
believes that the proposed expedited suspension provisions described 
above that provide the opportunity to respond as well as a Hearing 
Panel determination prior to taking action will ensure that the 
Exchange would not utilize its authority in the absence of a clear 
pattern or practice of disruptive quoting and trading activity.
2. Statutory Basis
    The Exchange believes that the proposed rule changes are consistent 
with Section 6(b) of the Act \13\ and further the objectives of Section 
6(b)(5) of the Act \14\ because they are designed to prevent fraudulent 
and manipulative acts and practices, to promote just and equitable 
principles of trade, to foster cooperation and coordination with 
persons engaged in regulating transactions in securities, 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. Pursuant to the proposal, the Exchange will have a 
mechanism to promptly initiate expedited suspension proceedings in the 
event the Exchange believes that it has sufficient proof that a 
violation of Rule 12.15 has occurred and is ongoing.
---------------------------------------------------------------------------

    \13\ 15 U.S.C. 78f(b).
    \14\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    Further, the Exchange believes that the proposal is consistent with 
Sections 6(b)(1) and 6(b)(6) of the Act,\15\ which require that the 
rules of an exchange enforce compliance with, and provide appropriate 
discipline for, violations of the Commission and Exchange rules. The 
Exchange also believes that the proposal is consistent with the public 
interest, the protection of investors, or otherwise in furtherance of 
the purposes of the Act because the proposal helps to strengthen the 
Exchange's ability to carry out its oversight and enforcement 
responsibilities as a self-regulatory organization in cases where 
awaiting the conclusion of a full disciplinary proceeding is unsuitable 
in view of the potential harm to other Members and their customers as 
well as the Exchange if conduct is allowed to continue on the Exchange. 
As explained above, the Exchange notes that it has defined the 
prohibited disruptive quoting and trading activity by modifying the 
traditional definitions of layering and spoofing \16\ to eliminate an 
express intent element that would not be proven on an expedited basis 
and would instead require a thorough investigation into the activity. 
As noted throughout this filing, the Exchange believes it is necessary 
for the protection of investors to make such modifications in order to 
adopt an expedited process rather than allowing disruptive quoting and 
trading activity to occur for several years. Through this proposal, the 
Exchange does not intend to modify the definitions of spoofing and 
layering that have generally been used by the Exchange and other 
regulators in connection with actions like those cited above.
---------------------------------------------------------------------------

    \15\ 15 U.S.C. 78f(b)(1) and 78f(b)(6).
    \16\ See supra, notes 7 and 8.
---------------------------------------------------------------------------

    The Exchange further believes that the proposal is consistent with 
Section 6(b)(7) of the Act,\17\ which requires that the rules of an 
exchange ``provide a fair procedure for the disciplining of members and 
persons associated with persons . . . and the prohibition or limitation 
by the exchange of any person with respect to access to services 
offered by the exchange or a member thereof.'' Finally, the Exchange 
also believes the proposal is consistent with Sections 6(d)(1) and 
6(d)(2) of the Act,\18\ which require that the rules of an exchange 
with respect to a disciplinary proceeding or proceeding that would 
limit or prohibit access to or membership in the exchange require the 
exchange to: Provide adequate and specific notice of the charges 
brought against a member or person associated with a member, provide an 
opportunity to defend against such charges, keep a record, and provide 
details regarding the findings and applicable sanctions in the event a 
determination to impose a disciplinary sanction is made. The Exchange 
believes that each of these requirements is addressed by the notice and 
due process provisions included within proposed Rule 8.17. Importantly, 
as noted above, the Exchange anticipates using the authority proposed 
in this filing only in clear and egregious cases when necessary to 
protect

[[Page 22696]]

investors, other Members and the Exchange, and even in such cases, the 
Respondent will be afforded due process in connection with the 
suspension proceedings.
---------------------------------------------------------------------------

    \17\ 15 U.S.C. 78f(b)(7).
    \18\ 15 U.S.C. 78f(d)(1).
---------------------------------------------------------------------------

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule changes will 
result in any burden on competition that is not necessary or 
appropriate in furtherance of the purposes of the Act. To the contrary, 
the Exchange believes that each self-regulatory organization should be 
empowered to regulate trading occurring on their market consistent with 
the Act and without regard to competitive issues. The Exchange is 
requesting authority to take appropriate action if necessary for the 
protection of investors, other Members and the Exchange.

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

    The Exchange has neither solicited nor received written comments on 
the proposed rule change.

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

    The Exchange has filed the proposed rule change pursuant to Section 
19(b)(3)(A)(iii) of the Act \19\ and Rule 19b-4(f)(6) thereunder.\20\ 
Because the proposed rule change does not: (i) Significantly affect the 
protection of investors or the public interest; (ii) impose any 
significant burden on competition; and (iii) become operative for 30 
days from the date on which it was filed, or such shorter time as the 
Commission may designate, if consistent with the protection of 
investors and the public interest, the proposed rule change has become 
effective pursuant to Section 19(b)(3)(A) of the Act \21\ and Rule 19b-
4(f)(6) thereunder.\22\
---------------------------------------------------------------------------

    \19\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \20\ 17 CFR 240.19b-4(f)(6).
    \21\ 15 U.S.C. 78s(b)(3)(A).
    \22\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)(iii) 
requires the Exchange to give the Commission written notice of the 
Exchange's intent to file the proposed rule change, along with a 
brief description and text of the proposed rule change, at least 
five business days prior to the date of filing of the proposed rule 
change, or such shorter time as designated by the Commission. The 
Exchange has satisfied this requirement.
---------------------------------------------------------------------------

    A proposed rule change filed under Rule 19b-4(f)(6) \23\ normally 
does not become operative prior to 30 days after the date of the 
filing. However, pursuant to Rule 19b-4(f)(6)(iii),\24\ the Commission 
may designate a shorter time if such action is consistent with the 
protection of investors and the public interest. The Exchange has asked 
the Commission to waive the 30-day operative delay so that the proposed 
rule change may become operative immediately. The Exchange asserts that 
the waiver of the 30-day operative delay will allow the Exchange to 
immediately enforce the proposed rules to protect its members and 
market participants from the behavior proscribed by the proposed rules. 
The Exchange further states that waiver of the operative delay is 
consistent with the protection of investors and the public interest 
because it is designed to protect investors and the public from 
disruptive quoting and trading activity. Furthermore, the Commission 
notes that it recently approved an identical expedited disciplinary 
procedure for an affiliate of the Exchange, BatsBZX,\25\ and the 
Exchange represents above that the membership of the Exchange and the 
membership of BatsBZX is nearly identical.\26\ Based on the foregoing, 
the Commission believes that waiver of the operative delay is 
consistent with the protection of investors and the public interest. 
Accordingly, Commission hereby waives the 30-day operative delay and 
designates the proposal operative upon filing.\27\
---------------------------------------------------------------------------

    \23\ 17 CFR 240.19b-4(f)(6).
    \24\ 17 CFR 240.19b-4(f)(6)(iii).
    \25\ See supra note 4.
    \26\ See supra note 3.
    \27\ For purposes only of waiving the 30-day operative delay, 
the Commission has considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
---------------------------------------------------------------------------

    At any time within 60 days of the filing of the proposed rule 
change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act. If the Commission 
takes such action, the Commission shall institute proceedings to 
determine whether the proposed rule change should be approved or 
disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the 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-BatsEDGX-2016-04 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-BatsEDGX-2016-04. 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-BatsEDGX-2016-04, and should 
be submitted on or before May 9, 2016.
---------------------------------------------------------------------------

    \28\ 17 CFR 200.30-3(a)(12), (59).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\28\
Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-08820 Filed 4-15-16; 8:45 am]
 BILLING CODE 8011-01-P


