
[Federal Register Volume 81, Number 96 (Wednesday, May 18, 2016)]
[Notices]
[Pages 31283-31286]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-11641]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-77818; File No. SR-BatsBZX-2016-16]


Self-Regulatory Organizations; Bats BZX Exchange, Inc.; Notice of 
Filing and Immediate Effectiveness of a Proposed Rule Change To Add 
Subparagraph (5) to Rule 21.1(h) Modifying the Operation of Orders 
Subject to the Display Price Sliding Process When a Contra-Side Post 
Only Order Is Received by the Bats BZX Exchange Options Platform

May 12, 2016.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that on May 3, 2016, Bats BZX Exchange, Inc. (the ``Exchange'' or 
``BZX'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I and 
II below, which Items have been prepared by the Exchange. The Exchange 
has designated this proposal as a ``non-controversial'' proposed rule 
change pursuant to Section 19(b)(3)(A) of the Act \3\ and Rule 19b-
4(f)(6)(iii) thereunder,\4\ which renders it effective upon filing with 
the Commission. The Commission is publishing this notice to solicit 
comments on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 15 U.S.C. 78s(b)(3)(A).
    \4\ 17 CFR 240.19b-4(f)(6)(iii).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange filed a proposal to add subparagraph (5) to Rule 
21.1(h) modifying the operation of orders subject to the display price 
sliding process when a contra-side Post Only Order \5\ is received by 
the Exchange's options platform (``BZX Options'').
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    \5\ See Exchange Rule 21.1(d)(8).
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    The text of the proposed rule change is available at the Exchange's 
Web site at www.batstrading.com, at the principal office of the 
Exchange, and at the Commission's Public Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the Exchange included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The Exchange has prepared summaries, set forth in 
Sections A, B, and C below, of the most significant parts of such 
statements.

(A) Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Exchange is proposing to add subparagraph (5) to Rule 21.1(h) 
modifying the operation of orders subject to the display price sliding 
process when a contra-side Post Only Order is received by BZX Options.
    Under current Exchange Rule 21.1(h), an order subject to the 
display price sliding process that, at the time of entry, would lock or 
cross a Protected Quotation of another options exchange will be ranked 
at the locking price in the BZX Options Book \6\ and displayed by the 
System at one minimum price variation below the current National

[[Page 31284]]

Best Offer (``NBO'') \7\ (for bids) or to one minimum price variation 
above the current National Best Bid (``NBB'') \8\ (for offers). Post 
Only Orders are orders that are to be ranked and executed on the 
Exchange pursuant to Rule 21.8 (Order Display and Book Processing) or 
cancelled, as appropriate, without routing away to another trading 
center.\9\ Currently, a Post Only Order will not remove liquidity from 
the BZX Options Book unless the value of price improvement associated 
with such execution equals or exceeds the sum of fees charged for such 
execution and the value of any rebate that would be provided if the 
order posted to the BZX Options Book and subsequently provided 
liquidity. In order to prevent circumstances on the BZX Options Book 
where an order is ranked at the displayed price of a resting contra-
side order, which could result in apparent violations of the Exchange's 
priority rule, an incoming Post Only Order is currently rejected if it 
would be posted at the locking price of a contra-side order subject to 
the display price sliding process. In particular, accepting such order 
would result in a situation where an order is displayed on the Exchange 
and a contra-side order is ranked at the same price as such order. In 
turn, if an execution at that price is reported by the Exchange, the 
Exchange believes a User \10\ representing the order displayed on the 
Exchange might believe that an incoming order was received by the 
Exchange and then bypassed such order (i.e., removing some other 
liquidity on the same side of the market as the displayed order). As 
described in further detail below, the proposal will avoid the 
possibility of an execution of an order subject to display-price 
sliding at the same price as an order displayed on the Exchange. The 
Exchange notes that the circumstance described above, where an incoming 
Post Only Order is rejected by the Exchange, is limited to times when 
the Exchange is not already quoting at the NBBO and a Post Only Order 
is seeking to join either the NBB or NBO but there is a resting 
display-price slid order on the contra-side of the Exchange's order 
book.
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    \6\ ``BZX Options Book'' is defined as ``the electronic book of 
options orders maintained by the Trading System.'' See Exchange Rule 
16.1(a)(9).
    \7\ See Exchange Rule 16.1(a)(29) (defining the terms ``NBB'', 
``NBO'', and ``NBBO'').
    \8\ Id.
    \9\ See Exchange Rule 21.1(d)(8).
    \10\ ``User'' is defined as ``any Options Member or Sponsored 
Participant who is authorized to obtain access to the System 
pursuant to Rule 11.3 (Access).'' See Exchange Rule 16.1(a)(63).
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    In order to facilitate the entry of orders priced at the National 
Best Bid or Offer (``NBBO''), the Exchange proposes to add subparagraph 
(5) to Rule 21.1(h) modifying the operation of orders subject to the 
display price sliding process when a contra-side Post Only Order is 
received by BZX Options. Under proposed subparagraph (5), to the extent 
an incoming Post Only Order would be ranked and displayed at a price 
equal to the ranked price of a contra-side order subject to display-
price sliding (i.e., the locking price) the order subject to display-
price sliding would be re-ranked at one (1) cent above the current NBB 
(for offers) or one (1) cent below the current NBO (for bids). An order 
subject to display price sliding that is re-ranked pursuant to proposed 
subparagraph (5) of Rule 21.1(h) would be re-ranked at the locking 
price in the event there is no longer displayed contra-side interest at 
the locking price. In both cases, the order would remain displayed by 
the System at one minimum price variation below the current NBO (for 
bids) or to one minimum price variation above the current NBB (for 
offers).
    The below examples describe the operation of orders subject to 
display price sliding under proposed subparagraph (5) to Rule 21.1(h).

    Example 1: Securities Quoted in Penny Increments--Proposed 
Operation. Assume the NBBO is $1.00 x $1.01 and that the Exchange's 
displayed best bid and offer (``BBO'') is $1.00 x $1.02. Also assume 
that a non-routable order to buy at $1.01 subject to display price 
sliding is resting on the BZX Options Book, ranked at $1.01 and 
displayed at $1.00. Assume a Post Only Order to sell at $1.01 is 
entered and, under current functionality, would be rejected because 
it is executable at the locking price of the order to buy subject to 
display price sliding resting on the BZX Options Book. As proposed, 
the order to buy subject to display price sliding would be re-ranked 
and would remain displayed at $1.00, one (1) cent below the current 
NBO. The Post Only Order to sell would be posted to the BZX Options 
Book, ranked and displayed at $1.01 (i.e., allowing the Exchange to 
join the NBBO of $1.00 x $1.01). If the Post Only Order to sell is 
executed or cancelled, the order to buy subject to display price 
sliding would be re-ranked at $1.01, its original ranked price, and 
would remain displayed at $1.00.
    Example 2: Securities Quoted in Non-Penny Increments--Proposed 
Operation. Assume the NBBO is $1.00 x $1.05 and that the Exchange's 
BBO is $1.00 x $1.10. Also assume that a non-routable order to buy 
at $1.05 subject to display price sliding is resting on the BZX 
Options Book, ranked at $1.05 and displayed at $1.00. Assume a Post 
Only Order to sell at $1.05 is entered and, under current 
functionality, would be rejected because it is executable at the 
locking price of the order to buy subject to display price sliding 
resting on the BZX Options Book. As proposed, the order to buy 
subject to display price sliding would be re-ranked at $1.04, one 
(1) cent below the NBO, and would remain displayed at $1.00. The 
Post Only Order to sell would be posted to the BZX Options Book, 
ranked and displayed at $1.05 (i.e., allowing the Exchange to join 
the NBBO of $1.00 x $1.01). If the Post Only Order to sell is 
executed or cancelled, the order to buy subject to display price 
sliding would be re-ranked at $1.05, its original ranked price, and 
would remain displayed at $1.00.

    The Exchange notes that similar behavior currently exists on its 
equities platform that permits an order to buy(sell) subject to display 
price sliding to be executed at one-half minimum price variation 
more(less) than the price of a contra-side displayed BZX Post Only 
Order.\11\ Specifically, under Exchange Rule 11.9(g)(1)(E), BZX Post 
Only Orders are permitted to post and be displayed opposite the ranked 
price of orders subject to display-price sliding. In the event an order 
subject to display-price sliding is ranked on the BZX Book \12\ at a 
price equal to an opposite side order displayed by the Exchange, it 
cannot be executed at that price and instead will be subject to 
processing as set forth in Rule 11.13(a)(4)(D). Under Exchange Rule 
11.13(a)(4)(D), in the event that an incoming order is a market order 
or is a limit order priced more aggressively than the displayed order, 
the Exchange will execute the incoming order at, in the case of an 
incoming sell order, one-half minimum price variation less than the 
price of the displayed order, and, in the case of an incoming buy 
order, at one-half minimum price variation more than the price of the 
displayed order. This behavior is designed to avoid an apparent 
priority issue. In particular, in such a situation the Exchange 
believes a User representing an order that is displayed on the Exchange 
might believe that an incoming order was received by the Exchange and 
then bypassed such displayed order, removing some other non-displayed 
liquidity on the same side of the market as such displayed order. 
Similar to what the Exchange proposes for BZX Options, the above 
described functionality on its equites platform also effectively 
changes the ranked price of the order subject to display price sliding. 
Although the underlying solution is intended to solve the same 
circumstance, because half-penny executions are not permitted with 
respect to options transactions, on BZX Options the Exchange proposes 
to adjust the ranked price of the display-price slid order when a 
contra-side Post Only order is received by BZX and posted at the 
locking price.
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    \11\ See Exchange Rule 11.9(c)(6).
    \12\ See BZX Rule 1.5(e).

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[[Page 31285]]

2. Statutory Basis
    The Exchange believes that its proposal is consistent with the 
requirements of the Act and the rules and regulations thereunder that 
are applicable to a national securities exchange, and, in particular, 
with the requirements of Section 6(b) of the Act.\13\ In particular, 
the proposal is consistent with Section 6(b)(5) of the Act \14\ because 
it is designed to encourage displayed liquidity and offer market 
participants greater flexibility to post liquidity on the BZX Options 
Book, thereby promoting just and equitable principles of trade, 
fostering cooperation and coordination with persons engaged in 
facilitating transactions in securities, removing impediments to, and 
perfecting the mechanism of, a free and open market and a national 
market system.
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    \13\ 15 U.S.C. 78f(b).
    \14\ 15 U.S.C. 78f(b)(5).
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    Under current functionality, an incoming Post Only Order would be 
rejected if it is executable at the locking price of a contra-side 
order subject to display price sliding resting on the BZX Options Book. 
This, at times, inhibits market participants, including Market Makers 
\15\ from utilizing Post Only Orders to quote at the NBBO. Post Only 
Orders allow Users to post aggressively priced liquidity, as such Users 
have certainty as to the fee or rebate they will receive from the 
Exchange if their order is executed. Without such ability and by 
rejecting such Post Only Orders in scenarios described herein, the 
Exchange believes that certain Users would simply post less 
aggressively priced liquidity, and prices available for market 
participants, including retail investors, would deteriorate. 
Accordingly, the Exchange believes that the proposed rule change 
promotes just and equitable principles of trade by enhancing the 
liquidity available to all market participants by allowing Market 
Makers and other liquidity providers to add liquidity to the Exchange 
at the NBBO without fear that their order would be rejected. In 
addition, the proposed rule change would assist Market Makers in 
satisfying their two-sided quoting obligations under Exchange Rules 
22.5(a)(1) and 22.6(d)(1). The proposed rule change should increase 
displayed liquidity at the NBBO on the Exchange, resulting in improved 
market quality and price discovery for all participants. The Exchange 
also notes that similar behavior currently exists on its equities 
platform that permits an order to buy(sell) subject to display price 
sliding to be executed at one-half minimum price variation more(less) 
than the price of a contra-side displayed BZX Post Only Order.\16\
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    \15\ See Exchange Rule 16.1(a)(37).
    \16\ See Exchange Rules 11.9(g)(1)(E) and 11.13(a)(4)(D). See 
also Securities Exchange Act Release No. 64754 (June 27, 2011), 76 
FR 38712 (July 1, 2011) (SR-BATS-2011-015) (Order Approving a 
Proposed Rule Change to Amend BATS Rule 11.9, Entitled ``Orders and 
Modifiers'' and BATS Rule 11.13, Entitled ``Order Execution'').
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(B) Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition that is not necessary or appropriate 
in furtherance of the purposes of the Act. To the contrary, the 
Exchange believes the proposed rule change would enhance competition by 
enabling market participants to post liquidity at the NBBO, thereby 
increasing the liquidity on the Exchange at the NBBO. For all the 
reasons stated above, the Exchange does not believe that the proposed 
rule changes will impose any burden on competition not necessary or 
appropriate in furtherance of the purposes of the Act, and believes the 
proposed change will enhance competition.

(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. The Exchange has not received any written 
comments from members or other interested parties.

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

    The Exchange has filed the proposed rule change pursuant to Section 
19(b)(3)(A)(iii) of the Act \17\ and Rule 19b-4(f)(6) thereunder.\18\ 
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 \19\ and Rule 19b-
4(f)(6) thereunder.\20\
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    \17\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \18\ 17 CFR 240.19b-4(f)(6).
    \19\ 15 U.S.C. 78s(b)(3)(A).
    \20\ 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.
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    A proposed rule change filed under Rule 19b-4(f)(6) under the Act 
\21\ normally does not become operative for 30 days after the date of 
filing. However, Rule 19b-4(f)(6)(iii) \22\ permits the Commission to 
designate a shorter time if such action is consistent with the 
protection of investors and the public interest. The Exchange has asked 
the Commission to waive the 30-day operative delay so that the proposal 
may become operative immediately upon filing. The Exchange states that 
the proposed rule change will benefit market participants by enhancing 
their ability to post liquidity at the NBBO, and that waiver of the 
operative delay may increase displayed liquidity at the NBBO on the 
Exchange, resulting in improved market quality and price discovery for 
all participants in a timely manner. Further, the Exchange notes that 
the proposed rule change will not require any systems changes by 
Exchange Users that would necessitate a delay, as the Exchange will now 
accept and no longer reject Post Only Orders in the situations 
described herein. Based on the foregoing, the Commission believes that 
waiving the 30-day operative delay is consistent with the protection of 
investors and the public interest.\23\ The Commission hereby grants the 
Exchange's request and designates the proposal operative upon filing.
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    \21\ 17 CFR 240.19b-4(f)(6).
    \22\ 17 CFR 240.19b-4(f)(6)(iii).
    \23\ For purposes only of waiving the 30-day operative delay, 
the Commission has also considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is 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 should be approved or disapproved.

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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-BatsBZX-2016-16 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-BatsBZX-2016-16. This 
file number should be included on the subject line if email is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for Web site viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE., 
Washington, DC 20549, on official business days between the hours of 
10:00 a.m. and 3:00 p.m. Copies of such filing will also be available 
for inspection and copying at the principal office of the Exchange. All 
comments received will be posted without change; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File Number SR-BatsBZX-2016-16 and should 
be submitted on or before June 8, 2016.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\24\
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    \24\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-11641 Filed 5-17-16; 8:45 am]
 BILLING CODE 8011-01-P


