
[Federal Register Volume 81, Number 130 (Thursday, July 7, 2016)]
[Notices]
[Pages 44353-44356]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-16111]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-78221; File No. SR-BatsEDGX-2016-28]


Self-Regulatory Organizations; Bats EDGX Exchange, Inc.; Notice 
of Filing and Immediate Effectiveness of a Proposed Rule Change To Add 
Interpretation and Policy .01 to Rule 16.1 To Specify the Calculation 
Methodology for Counting Professional Orders

July 1, 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 June 30, 2016, Bats EDGX Exchange, Inc. (the ``Exchange'' or 
``EDGX'') 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 proposes to add Interpretation and Policy .01 to Rule 
16.1 to specify the manner in which the Exchange calculates average 
daily order submissions for purposes of counting Professional orders, 
as further described below.
    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 the 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Exchange proposes to add Interpretation and Policy .01 to Rule 
16.1 to specify the methodology for counting average daily order 
submissions in listed options to determine whether a person or entity 
meets the definition of a Professional (``Professional order 
counting''). The proposed rule change is designed to harmonize 
Professional order counting with the recently adopted rules of 
competing options exchanges--specifically the Chicago Board of Options 
Exchange, Inc. (``CBOE'') and NASDAQ OMX PHLX LLC (``PHLX'').\5\
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    \5\ See Securities Exchange Act Release Nos. 77450 (March 25, 
2016), 81 FR 18668, (March 31, 2016) (SR-CBOE-2016-005); 77449 
(March 25, 2016), 81 FR 18665, (March 31, 2016) (SR-Phlx-2016-10) 
(approval orders). The Exchange notes that it recently issued 
guidance regarding Professional order counting. See e.g., Bats BZX 
Exchange, Inc. and Bats EDGX Exchange Inc., Regulatory Circular (RC-
2015-012, respectively) dated December 21, 2015. This proposal 
codifies that guidance in a manner that is consistent with CBOE and 
PHLX's approved rules. The Exchange notes that various other options 
exchanges refer to Professionals as ``Professional Customers.'' The 
Exchange has proposed to continue to use the term Professional, as 
is currently the case in Exchange rules.
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    Rule 16.1(a)(46) defines a Professional ``as any person or entity 
that (A) is not a broker or dealer in securities; and (B) places more 
than 390 orders in listed options per day on average during a calendar 
month for its own beneficial account(s).'' In adopting Rule 
16.1(a)(46), the Exchange believed that identifying Professional 
accounts based upon the average number of orders entered in qualified 
accounts is an appropriate, objective approach that will reasonably 
distinguish such persons and entities from non-professional, retail 
investors or market participants. In order to properly represent orders 
entered on the Exchange, Options Members are required to indicate 
whether Customer orders are ``Professional'' orders.\6\ To comply with 
this requirement, Options Members are required to review their 
Customers' activity on at least a quarterly basis to determine whether 
orders that are not for the account of a broker-dealer should be 
represented as Customer orders or Professional orders.\7\
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    \6\ See e.g., Rule 18.2(a)(6) (Conduct and Compliance with the 
Rules) (requiring that accurate information is input into the 
System, including but not limited to, the Options Member's 
capacity).
    \7\ Orders for any customer that had an average of more than 390 
orders per day during any month of a calendar quarter must be 
represented as Professional orders for the next calendar quarter. 
Option Members would be required to conduct a quarterly review and 
make any appropriate changes to the way in which they are 
representing orders within five business days after the end of each 
calendar quarter. While Option Members only would be required to 
review their accounts on a quarterly basis, if during a quarter the 
Exchange identifies a customer for which orders are being 
represented as Customer orders but that has averaged more than 390 
orders per day during a month, the Exchange would notify the Option 
Member would be required to change the manner in which it is 
representing the customer's orders within five business days.
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    The advent of new multi-leg spread products and the proliferation 
of the use of complex orders and algorithmic execution strategies by 
both institutional and retail market participants has raised questions 
as to what should be counted as an ``order'' for Professional order 
counting purposes. The proposed changes would specifically address the 
counting of multi-leg spread products, algorithm generated orders, and 
complex orders for purposes of determining Professional status. In 
addition, the proposal is intended to provide guidance regarding the 
methodology used by the Exchange when calculating average daily orders 
for Professional order counting purposes.\8\
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    \8\ This proposal is consistent with CBOE and PHLX's approved 
rules. See supra note 5.
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    As proposed, the rule would provide that an order would count as 
one order for Professional counting purposes, unless one of the 
exceptions enumerated in the proposed rule stipulates otherwise (each 
an ``Exception''). The first Exception relates to the treatment of 
complex orders for purposes of computing orders for Professional order 
counting purposes. Specifically, the proposed rule provides that a 
complex order of eight (8) option legs or less would count as one 
order, whereas a complex order comprised of nine (9) option legs or 
more counts as

[[Page 44354]]

multiple orders with each option leg counting as its own separate 
order.\9\ The Exchange believes the distinction between complex orders 
with up to eight option legs from those with nine or more option legs 
is appropriate in light of the purposes for which Rule 16.1(a)(46) was 
adopted. In particular, the Exchange notes that multi-leg complex order 
strategies with nine or more option legs are more complex in nature and 
thus, more likely to be used by professional traders than traditional 
two, three, and four option leg complex order strategies such as the 
strangle, straddle, butterfly, collar, and condor strategies, and 
combinations thereof with eight option legs or fewer, which are 
generally not algorithmically generated and are frequently used by non-
professional, retail investors. Thus, the types of complex orders 
traditionally placed by retail investors would continue to count as 
only one order while the more complex strategy orders that are 
typically used by professional traders would count as multiple orders 
for Professional order counting purposes.\10\
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    \9\ See proposed Interpretation and Policy .01(a)(1)-(2).
    \10\ See also supra note 5.
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    The second Exception relates to calculations for parent/child 
orders. As proposed, if a parent order submitted for the beneficial 
account(s) of a person or entity other than a broker or dealer is 
subsequently broken up into multiple child orders on the same side 
(buy/sell) and series by a broker or dealer, or by an algorithm housed 
at the broker or dealer, or by an algorithm licensed from the broker or 
dealer but housed with the customer, then the order would count as one 
order even if the child orders are routed across several exchanges.\11\ 
The Exchange believes this proposed change would allow the orders of 
public customers to be ``worked'' by a broker (or a broker's algorithm) 
in order to achieve best execution without counting the multiple child 
orders as separate orders for Professional order counting purposes. 
Conversely, if a parent order, including a strategy order,\12\ is 
broken into multiple child orders on both sides (buy/sell) of a series 
and/or multiple series, then each child order would count as a separate 
new order per side and series.\13\ This proposed change would allow the 
Exchange, for Professional order counting purposes, to count as 
multiple orders those ``child'' orders of ``parent'' orders generated 
by algorithms that are typically used by sophisticated traders to 
continuously update their orders in concert with market updates in 
order to keep their overall trading strategies in balance.
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    \11\ See proposed Interpretation and Policy .01(b)(1).
    \12\ The term ``strategy order'' refers to an execution 
strategy, trading instruction, or algorithm whereby multiple 
``child'' orders on both sides of a series and/or multiple series 
are generated prior to being sent to an options exchange(s).
    \13\ See proposed Interpretation and Policy .01(b)(2).
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    The third Exception would govern the counting methodology for 
cancel/replace orders. As proposed, any order that cancels and replaces 
an existing order would count as a separate order (or multiple orders 
in the case of complex orders of nine option legs or more) for 
Professional order counting purposes.\14\ However, the Exchange 
proposes that an order to cancel and replace a child order would not 
count as a new order if the parent order that was placed for the 
beneficial account(s) of a non-broker or dealer had been subsequently 
broken into multiple child orders on the same side and series as the 
parent order by a broker or dealer, algorithm at a broker or dealer, or 
algorithm licensed from a broker or dealer but housed at the 
customer.\15\ By contrast, the Exchange proposes that an order that 
cancels and replaces a child order resulting from a parent order, 
including a strategy order, that generated child orders on both sides 
(buy/sell) of a series and/or in multiple series would count as a new 
order per side and series (``Both Sides/Multiple Series'').\16\ 
Finally, the Exchange proposes that, notwithstanding the treatment of a 
cancel/replace relating to Same Sides/Same Series orders, an order that 
cancels and replaces any child order resulting from a parent order 
being pegged to the Exchange's best bid or offer (``BBO'') or the 
national best bid or offer (``NBBO'') or that cancels and replaces any 
child order pursuant to an algorithm that uses the BBO or NBBO in the 
calculation of child orders and attempts to move with or follow the BBO 
or NBBO of a particular options series would count as a new order each 
time the order cancels and replaces in order to attempt to move with or 
follow the BBO or NBBO.\17\
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    \14\ See proposed Interpretation and Policy .01(c)(1).
    \15\ See proposed Interpretation and Policy .01(c)(2).
    \16\ See proposed Interpretation and Policy .01(c)(3).
    \17\ See proposed Interpretation and Policy .01(c)(4).
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Implementation
    The Exchange proposes to implement the rule on July 1, 2016, which 
would be announced in a circular distributed to Members.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6(b) of the Act,\18\ in general, and furthers the 
objectives of Section 6(b)(5),\19\ in particular, in that it is 
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. Additionally, the Exchange believes the proposed rule change 
is consistent with the requirement set forth in Section 6(b)(5) \20\ of 
the Act that the rules of an exchange not be designed to permit unfair 
discrimination between customers, issuers, brokers, or dealers.
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    \18\ 15 U.S.C. 78f(b).
    \19\ 15 U.S.C. 78f(b)(5).
    \20\ 15 U.S.C. 78f(b)(5).
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    Specifically, the Exchange believes that the proposal is designed 
to adopt a reasonable and objective approach to determine Professional 
status that is consistent with the approach being utilized on other 
options exchanges, which benefits market participants by providing 
consistency across exchanges regarding the Professional order 
counting.\21\ In this regard, the Exchange believes that codifying the 
manner in which the Exchange would conduct Professional order counting 
would provide Option Members with certainty and provide them with 
insight as they conduct their own quarterly reviews for purposes of 
designating orders.
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    \21\ See supra note 5.
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    The Exchange notes that it is not amending the threshold of 390 
orders in listed options per day but, consistent with other exchanges, 
is revising the method for counting Professional orders in the context 
of multi-part orders and cancel/replace activity. In short, the 
proposal addresses how to account for complex orders, parent/child 
orders, and cancel/replace orders. The Exchange believes that 
distinguishing between complex orders with nine or more option legs and 
those orders with eight or fewer option legs is a reasonable and 
objective approach. In addition, the Exchange believes the proposal 
appropriately distinguishes between parent/child orders that are 
generated by a broker's efforts to obtain an execution on a larger size 
order while minimizing market impact and multi-part orders that used by 
more sophisticated market participants. Similarly, the Exchange 
believes that the proposal that cancel/replace orders would count as 
separate orders with

[[Page 44355]]

limited exceptions is a reasonable and objective approach to 
distinguish the orders of retail customers that are ``worked'' by a 
broker from orders generated by algorithms used by more sophisticated 
market participants.
    In addition, the Exchange believes that proposed changes to Rule 
16.1 provide a more conservative order counting regime for Professional 
order counting purposes that would identify more traders as 
Professionals to which the Exchange's definition of Professional was 
designed to apply and create a better competitive balance for all 
participants on the Exchange, consistent with the Act. As the options 
markets have evolved to become more electronic and more competitive, 
the Exchange believes that the distinction between registered broker-
dealers and professional traders who are currently treated as public 
customers has become increasingly blurred. More and more, the category 
of public customer today includes sophisticated algorithmic traders 
including former market makers and hedge funds that trade with a 
frequency resembling that of broker-dealers. The Exchange believes that 
it is reasonable under the Act to treat those customers who meet the 
high level of trading activity established in the proposal differently 
than customers who do not meet that threshold and are more typical 
retail investors to ensure that professional traders do not take 
advantage of priority and/or fee benefits intended for public 
customers. The Exchange notes that it is not unfair to differentiate 
between different types of investors in order to achieve certain 
marketplace balances. The Exchange's Rules currently differentiate 
between Customers, Order Entry Firms, Market Makers, and the like.
    These differentiations have been recognized to be consistent with 
the Act. The Exchange does not believe that the rules of the Exchange 
or other exchanges that accord priority or fee benefits to public 
customers over broker-dealers are unfairly discriminatory. Nor does the 
Exchange believe that it is unfairly discriminatory to accord such 
benefits to only those public customers who on average do not place 
more than one order per minute (390 per day) under the counting regime 
that the Exchange proposes. The Exchange believes that such 
differentiations drive competition in the marketplace and are within 
the business judgment of the Exchange. Accordingly, the Exchange also 
believes that its proposal is consistent with the requirement of 
Section 6(b)(8) \22\ of the Act that the rules of an exchange not 
impose an unnecessary or inappropriate burden upon competition in that 
it treats persons who should be deemed Professionals, but who may not 
be so under current Rule 16.1(a)(46), in a manner so that they do not 
receive special benefits. Furthermore, the Exchange believes that the 
proposed rule change will protect investors and the public interest by 
helping to assure that retail customers continue to receive the 
appropriate marketplace advantages on the Exchange and in the 
marketplace as intended, while furthering competition among marketplace 
professionals by treating them in the same manner as other similarly 
situated market participants. The Exchange believes that it is 
consistent with Section 6(b)(5) \23\ of the Act not to afford market 
participants with similar access to information and technology as that 
of brokers and dealers of securities with marketplace advantages over 
such marketplace competitors. The Exchange also believes that the 
proposed rule change would help to remove burdens on competition and 
promote a more competitive marketplace by affording certain marketplace 
advantages only to those for whom they are intended. Finally, the 
Exchange believes that the proposed rule change sets forth a more 
detailed and clear regulatory regime with respect to calculating 
average daily order entry for Professional order counting purposes. The 
Exchange believes that this additional clarity and detail will 
eliminate confusion among market participants, which is in the 
interests of all investors and the general public.
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    \22\ 15 U.S.C. 78f(b)(8).
    \23\ 15 U.S.C. 78f(b)(5).
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    Based on the foregoing, the Exchange believes the proposal, which 
establishes an objective methodology for counting average daily order 
submissions for Professional order counting purposes, is consistent 
with the Act.

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

    The Exchange does not believe that its proposed rule change will 
impose any burden on competition that is not necessary or appropriate 
in furtherance of the purposes of the Act. The Exchange believes that 
the proposed rule change will help ensure fairness in the marketplace 
and promote competition among all market participants. The Exchange 
believes that this proposal would help establish more competition among 
market participants and promote the purposes for which the Exchange's 
Professional rule was originally adopted. Moreover, the proposal would 
ensure consistency and help to eliminate confusion as to the manner in 
which options exchanges compute the Professional order volume.

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

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

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

    Because the foregoing 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, it has become 
effective pursuant to Section 19(b)(3)(A)(iii) of the Act \24\ and 
subparagraph (f)(6) of Rule 19b-4 thereunder.\25\ A proposed rule 
change filed under Rule 19b-4(f)(6) normally does not become operative 
prior to 30 days after the date of filing.\26\ Rule 19b-4(f)(6)(iii), 
however, permits the Commission to designate a shorter time if such 
action is consistent with the protection of investors and the public 
interest.\27\
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    \24\ 15 U.S.C. 78s(b)(3)(a)(iii).
    \25\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6) 
requires a self-regulatory organization to give the Commission 
written notice of its intent to file 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.
    \26\ 17 CFR 240.19b-4(f)(6)(iii).
    \27\ Id.
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    The Exchange has requested that the Commission waive the 30-day 
operative delay. The Commission notes that it has considered a 
substantially similar proposed rule change filed by CBOE and PHLX which 
it approved after a notice and comment period.\28\ This proposed rule 
change does not raise any new or novel issues from those considered in 
the CBOE and PHLX proposals. Based on the foregoing, the Commission 
believes that it is consistent with the protection of investors and the 
public interest to waive the 30-day operative delay and designate the 
proposed rule

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change as operative upon filing with the Commission.\29\
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    \28\ See Securities Exchange Act Release Nos. 77450 (March 25, 
2016) (Order Approving SR-CBOE-2016-005); 77449 (March 25, 2016), 81 
FR 18665, (March 31, 2016) (Order Approving SR-Phlx-2016-10).
    \29\ 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).
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    At any time within 60 days of the filing of such 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 under 
Section 19(b)(2)(B) of the Act \30\ to determine whether the proposed 
rule change should be approved or disapproved.
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    \30\ 15 U.S.C. 78s(b)(2)(B).
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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-BatsEDGX-2016-28 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-2016-28. This 
file number should be included on the subject line if email is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for Web site viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE., 
Washington, DC 20549, on official business days between the hours of 
10:00 a.m. and 3:00 p.m. Copies of the filing 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-2016-28, and should 
be submitted on or before July 28, 2016.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\31\
Brent J. Fields,
Secretary.
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    \31\ 17 CFR 200.30-3(a)(12).
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[FR Doc. 2016-16111 Filed 7-6-16; 8:45 am]
 BILLING CODE 8011-01-P


