
[Federal Register Volume 81, Number 174 (Thursday, September 8, 2016)]
[Notices]
[Pages 62192-62195]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-21649]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-78766; File No. SR-BatsBYX-2016-17]


Self-Regulatory Organizations; Bats BYX Exchange, Inc.; Notice of 
Filing of Amendment No. 1 and Order Granting Accelerated Approval of a 
Proposed Rule Change, as Modified by Amendment No. 1, To Amend Exchange 
Rule 11.27 To Describe Changes to System Functionality Necessary To 
Implement the Regulation NMS Plan To Implement a Tick Size Pilot 
Program

September 2, 2016.

I. Introduction

    On June 29, 2016, Bats BYX Exchange, Inc. (``Exchange'' or ``BYX'') 
filed with the Securities and Exchange Commission (``Commission'') 
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Exchange Act'' or ``Act'') \1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change to amend Exchange Rule 11.27(a) to specify that 
orders entered into the Exchange's Retail Price Improvement (``RPI'') 
Program qualify for certain exceptions to the Regulation NMS Plan to 
Implement a Tick Size Pilot Program (``Plan'' or ``Pilot'') and to 
adopt Exchange Rule 11.27(c) to describe changes to System \3\ 
functionality to

[[Page 62193]]

implement the Plan.\4\ The proposed rule change was published for 
comment in the Federal Register on July 20, 2016.\5\ The Commission 
received one comment letter from the Exchange in response to the 
Notice.\6\ On September 1, 2016, the Exchange filed an amendment to the 
proposed rule change (``Amendment No. 1''), which supersedes and 
replaces the proposal in its entirety.\7\
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ The term ``System'' is defined as the ``electronic 
communications and trading facility designated by the Board of 
Directors of the Exchange through which securities orders of Users 
are consolidated for ranking, execution and, when applicable, 
routing away.'' See Exchange Rule 1.5(aa).
    \4\ See Securities Exchange Act Release No. 74892 (May 6, 2015), 
80 FR 27513 (May 13, 2015) (``Approval Order''). Unless otherwise 
specified, capitalized terms used in this rule filing are defined as 
set forth in the Plan.
    \5\ Securities Exchange Act Release No. 78333 (July 14, 2016), 
81 FR 47198 (``Notice'').
    \6\ See Letter to Brent J. Fields, Secretary, Commission, from 
Eric Swanson, General Counsel, Exchange, dated July 26, 2016 
(``Exchange Letter'').
    \7\ In Amendment No. 1, the Exchange proposes to: (1) Apply the 
changes in proposed Rule 11.27(c) to all Pilot Securities; (2) 
clarify in Rule 11.27(c)(1) that the increment for BYX Market Orders 
and Rule 11.27(c)(5) that the increment for Market Maker Peg Orders 
will be at ``permissible'' increments; (3) state in Rule 11.27(c)(2) 
that Market Pegged Orders, Rule 11.27(c)(4) that Discretionary 
Orders, and Rule 11.27(c)(6) that Supplemental Peg Orders will not 
be accepted in Pilot Securities; (4) clarify in Rule 11.27(c)(3) 
that Mid-Point Peg Orders may not be alternatively pegged to one 
minimum price variation inside the same side of the NBBO as the 
order; (5) delete the proposal to amend Non-Displayed Orders; and 
(6) clarify how orders subject to Display-Price Sliding will operate 
when they are unexecutable at the locking price.
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    This order provides notice of filing of Amendment No. 1 and 
approves the proposal, as modified by Amendment No. 1, on an 
accelerated basis.

II. Description of the Amended Proposal

    The proposed amendments to Exchange Rule 11.27(a) would specify 
that orders entered into the Exchange's RPI Program would qualify for 
certain exceptions to the Plan.
    Proposed Exchange Rule 11.27(c) would specify the order handling 
for the following order types in Pilot Securities: (i) BYX Market 
Orders; (ii) Market Pegged Orders; (iii) Mid-Point Peg Orders; (iv) 
Discretionary Orders; (v) Market Maker Peg Orders; (vi) Supplemental 
Peg Orders; and (vii) orders subject to Display-Price Sliding. As 
proposed, such order handling would apply to all orders entered into 
the System for Pilot Securities (i.e., Test Group One, Test Group Two, 
Test Group Three, and the Control Group).

A. Amendment to Exchange Rule 11.27(a)

    The proposed amendments to Exchange Rule 11.27(a) would specify 
that the RPI Program qualifies as a Participant-operated retail 
liquidity program under the Plan and that Retail Orders \8\ entered 
into the Exchange's RPI Program qualify as Retail Investor Orders under 
the Plan. Accordingly, amended Exchange Rule 11.27(a)(4), (a)(5), and 
(a)(6) would allow orders entered into the RPI Program to be ranked and 
accepted in increments of less than $0.05 in Test Groups One, Two, and 
Three, respectively; amended Exchange Rule 11.27 (a)(5) and (a)(6) 
would specify that Retail Orders entered into the Exchange's RPI 
Program may be provided with price improvement that is at least $0.005 
better than the best protected bid and best protected offer (``PBBO'') 
\9\ in Test Groups Two and Three, respectively; and amended Exchange 
Rule 11.27(a)(6)(D) would specify that Retail Orders entered into the 
Exchange's RPI Program that are executed with at least $0.005 price 
improvement qualify for the exception to the Trade-at Prohibition in 
Test Group Three. In addition, amended Exchange Rule 11.27(a)(4) would 
specify that in Test Group One Pilot Securities trades may continue at 
any price increment that is permitted under Exchange Rule 11.11, Price 
Variations.
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    \8\ A ``Retail Order'' is defined in Exchange Rule 11.24(a)(2) 
as an agency order or riskless principal order that meets the 
criteria of FINRA Rule 5320.03 that originates from a natural person 
and is submitted to the Exchange by a Retail Member organization 
(``RMO''), provided that no change is made to the terms of the order 
with respect to price or side of market and the order does not 
originate from a trading algorithm or any computerized methodology. 
The Exchange believes that the definition of Retail Order is also 
substantially similar to the definition of Retail Investor Order 
under the Plan. See Section I(DD) of the Plan.
    \9\ See 17 CFR 242.600(57). See also Section I.Z of the Plan.
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B. Proposed Exchange Rule 11.27(c)

    The Exchange proposes in Exchange Rule 11.27(c) specific procedures 
for handling, executing, repricing and displaying certain order types 
and order type instructions. The provisions in proposed Rule 11.27(c) 
would apply to all Pilot Securities. Further, the Exchange proposes 
that only the provisions in Exchange Rules 11.27(a) and (b) would be 
limited to the Pilot Period.\10\
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    \10\ The Exchange proposes to clarify in the introduction to 
Exchange Rule 11.27 that only the provisions in 11.27(a) and 
11.27(b) would be in effect during the Pilot Period.
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1. BYX Market Orders
    Proposed Exchange Rule 11.27(c)(1) provides that for purposes of 
determining whether the execution price of a BYX Market Order is more 
than 5 percent worse than the national best bid or offer (``NBBO'') 
\11\ under current Exchange Rule 11.9(a)(2), the execution price for a 
buy (sell) will be rounded down (up) to the nearest permissible 
increment.\12\
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    \11\ See Exchange Rule 1.5(o).
    \12\ See Amendment No. 1.
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2. Market Pegged Orders
    Under Exchange Rule 11.9(c)(8)(B), a Market Pegged Order is pegged 
to the contra-side NBBO. BYX Users can specify that a Market Pegged 
Order will offset the inside quote on the contra side of the market by 
an amount (``Offset Amount''). Under proposed Exchange Rule 
11.27(c)(2), the Exchange proposes not to accept Market Pegged Orders, 
regardless of price, in any Pilot Security.\13\
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    \13\ Id.
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3. Mid-Point Peg Orders
    Under Exchange Rule 11.9(c)(9), the System automatically adjusts 
the price of a Mid-Point Peg Order in response to changes in the NBBO 
to be pegged to the mid-point of the NBBO, or, alternatively, pegged to 
the less aggressive midpoint of the NBBO, or one minimum price 
variation inside the same side of the NBBO as the Mid-Point Peg Order.
    Under proposed Exchange Rule 11.27(c)(3), the Exchange proposes 
that Mid-Point Peg Orders for Pilot Securities would not be permitted 
to alternatively peg to one minimum price variation inside the same 
side of the NBBO as the order. \14\
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    \14\ Id.
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4. Discretionary Orders
    Under Exchange Rule 11.9(c)(10), a Discretionary Order is a limit 
order with a displayed or non-displayed ranked price and size and an 
additional non-displayed ``discretionary price.'' The Exchange proposes 
to not accept Discretionary Orders, regardless of price, in any Pilot 
Security.\15\
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    \15\ Id.
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5. Market Maker Peg Orders
    Under Exchange Rule 11.9(c)(16), a Market Maker Peg Order is a 
limit order that is automatically priced by the System at the 
Designated Percentage (as defined in Exchange Rule 11.8(d)) away from 
the then current national best bid (``NBB'') or national best offer 
(``NBO''), or if no NBB or NBO, at the Designated Percentage away from 
the last reported sale from the responsible single plan processor in 
order to comply with the quotation requirements for Market Makers set 
forth in Exchange Rule 11.8(d). The Exchange proposes that Market 
Marker Peg Orders to buy (sell) be rounded up (down) to the nearest 
permissible increment when the pricing results in an impermissible 
increment.

[[Page 62194]]

6. Supplemental Peg Orders
    Under Exchange Rule 11.9(c)(19), a Supplemental Peg Order is a non-
displayed limit order that posts to the Exchange Book and thereafter is 
eligible for execution at the NBB for buy orders and NBO for sell 
orders against routable orders that are equal to or less than the 
aggregate size of the Supplemental Peg Order interest available at that 
price. The Exchange proposes not to accept Supplemental Peg Orders, 
regardless of price, for any Pilot Security.\16\
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    \16\ Id.
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7. Display-Price Sliding
    Under Exchange Rule 11.9(g)(1), an order eligible for display by 
the Exchange, that at the time of entry would create a violation of 
Rule 610(d) of Regulation NMS by locking or crossing a Protected 
Quotation of an external market, would be ranked at the locking price 
in the Exchange Book and displayed by the System at one minimum price 
variation below the current NBO (for bids) or one minimum price 
variation above the current NBB (for offers). The ranked and displayed 
prices of an order subject to Display-Price Sliding may be adjusted 
once or multiple times depending on the instructions of a User and 
changes to the prevailing NBBO.
    The Exchange proposes that orders subject to the Display-Price 
Sliding that are unexecutable at the locking price will be ranked at 
the midpoint of the NBBO, and displayed one minimum price variation 
below (above) the current NBO (NBB) for bids (for offers) for all Pilot 
Securities. In the Control Group, Test Group One, and Test Group Two, 
these orders would be initially ranked at the locking price and 
displayed one minimum price variation away. If a subsequent incoming 
Post-Only Order arrives on the Exchange book on the opposite side, then 
the orders subject to Display-Price Sliding would be adjusted to rank 
at the midpoint of the NBBO and continue to be displayed at one minimum 
price variation away. In Test Group Three, orders subject to Display-
Price Sliding would be ranked at the midpoint of the NBBO and displayed 
at one minimum price variation away. In addition, the Exchange proposes 
to cancel orders subject to Display-Price Sliding when the NBBO widens 
and a contra-side Non-Displayed Order is resting on the Exchange Book 
at a price that such order would adjust, and the User has selected a 
single price adjustment. Like today, if the User has selected multiple 
price adjustments an order subject to Display-Price Sliding would not 
cancel in this scenario.

III. Discussion and Commission's Findings

    After careful review of the proposed rule change, as modified by 
Amendment No. 1, the Commission finds that the proposal, as modified by 
Amendment No. 1,\17\ is consistent with the requirements of the 
Exchange Act and the rules and regulations thereunder that are 
applicable to a national securities exchange.\18\ Specifically, the 
Commission finds that the rule change is consistent with Section 
6(b)(5) of the Exchange Act, which requires that the rules of a 
national securities exchange be designed, among other things, 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 to protect investors and the public interest; and are not designed 
to permit unfair discrimination between customers, issuers, brokers, or 
dealers.
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    \17\ The Commission notes that the Exchange Letter was submitted 
in connection with the Exchange's original proposal. Because the 
Exchange has filed Amendment No. 1, which supersedes and replaces 
the Exchange's original proposal in its entirety, the Commission 
does not believe it is necessary to summarize or respond to the 
Exchange Letter.
    \18\ In approving this rule change, the Commission has 
considered the rule's impact on efficiency, competition, and capital 
formation. See 15 U.S.C. 78c(f).
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    As noted in the Approval Order, the Plan is by design, an 
objective, data-driven test to evaluate how a wider tick size would 
impact trading, liquidity, and market quality of securities of smaller 
capitalization companies. In addition, the Plan is designed with three 
Test Groups and a Control Group, to allow analysis and comparison of 
incremental market structure changes on the Pilot Securities and is 
designed to produce empirical data that could inform future policy 
decisions.
    The Exchange proposes certain changes to modify the operation of 
the System for compliance with the Plan. For example, the Exchange 
proposes to clarify how BYX Market Orders and Market Maker Peg Orders 
would be rounded to permissible increments under the Plan. In addition, 
the Exchange proposes to reflect its RPI Program in its Tick Pilot 
Rule. The Commission finds that these changes are consistent with the 
Section 6(b)(5) of the Exchange Act \19\ and Rule 608 of Regulation NMS 
\20\ because they implement the Plan and clarify Exchange rules.
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    \19\ 15 U.S.C. 78f(b)(5).
    \20\ 17 CFR 242.608.
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    In addition, the Exchange proposes to eliminate certain order types 
and modify certain order handling functions for Pilot Securities 
Specifically, the Exchange proposes to no longer accept three order 
types: Market Peg Orders, Discretionary Orders, and Supplemental Peg 
Orders. The Exchange noted that these orders are infrequently used in 
Pilot Securities. The Exchange stated that eliminating these order 
types for Pilot Securities could reduce System complexity and maintain 
consistent functionality among all Pilot Securities. Finally, the 
Exchange noted that these order types would have limited ability to 
execute under Test Group Three.
    The Exchange also proposes to change the handling of orders subject 
to Display-Price Sliding in Pilot Securities. Orders that are subject 
to Display Price-Sliding in Pilot Securities that are unexecutable at 
the locking price will be ranked at the midpoint of the NBBO and 
displayed one minimum variation away.
    Finally, the Exchange proposes to modify the handling of Mid-Point 
Peg Orders in Pilot Securities. As proposed, Mid-Point Peg Orders would 
not be able to alternatively peg to one minimum price variation inside 
the same side of the NBBO as the order. The Exchange noted that there 
is a de minimis usage of the alternative pegging function in Pilot 
Securities that does not justify the complexity and risk to the System 
that would be created by re-programming the System to support the 
function.
    In the Notice, the Commission noted that proposed rule changes, 
other than those necessary for compliance with Plan, that are targeted 
at Pilot Securities, that have a disparate impact on different Test 
Groups and the Control Group, and that are to apply temporarily only 
for the Pilot Period, could bias the results of the Pilot and undermine 
the value of the data generated in informing future policy decisions. 
The Commission notes that the Exchange has modified its proposal so 
that those proposed changes that are not necessary for compliance with 
the Plan apply equally to all three Test Groups and the Control Group, 
and their duration is not limited to the Pilot Period. Thus, the 
Commission believes that the incremental design of the Pilot is 
maintained such that the data generated by the Test Groups and the 
Control Group could allow the Commission and interested parties to 
compare the change in market structure of each group vis-[agrave]-vis 
the other groups. Further, the Commission does not believe that the 
changes would bias the results of the Pilot or undermine the

[[Page 62195]]

value of the data generated in informing future policy decisions.
    Accordingly, the Commission finds that the proposed rule change, as 
modified by Amendment No.1, is consistent with the requirements of the 
Exchange Act.

IV. Solicitation of Comments on Amendment No. 1 to the Proposed Rule 
Change

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposal, as 
modified by Amendment No. 1, is consistent with the Exchange 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-BatsBYX-2016-17 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-BatsBYX-2016-17. 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 20549-1090, 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-
BatsBYX-2016-17 and should be submitted on or before September 29, 
2016.

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

    The Commission finds good cause to approve the proposed rule 
change, as modified by Amendment No. 1, prior to the thirtieth day 
after the date of publication of notice of Amendment No. 1 in the 
Federal Register. In Amendment No. 1, the Exchange proposes to: (1) 
Apply the changes in proposed Rule 11.27(c) to all Pilot Securities; 
(2) clarify in Rule 11.27(c)(1) that the increment for BYX Market 
Orders and Rule 11.27(c)(5) that the increment for Market Maker Peg 
Orders will be at ``permissible'' increments; (3) state in Rule 
11.27(c)(2) that Market Pegged Orders, Rule 11.27(c)(4) that 
Discretionary Orders, and Rule 11.27(c)(6) that Supplemental Peg Orders 
will not be accepted in Pilot Securities; (4) clarify in Rule 
11.27(c)(3) that Mid-Point Peg Orders may not be alternatively pegged 
to one minimum price variation inside the same side of the NBBO as the 
order; (5) delete the proposal to amend Non-Displayed Orders; and (6) 
clarify how orders subject to Display-Price Sliding will operate when 
they are unexecutable at the locking price.
    The Commission believes that Amendment No. 1 modifies the proposal 
so that it does not cause a disparate impact on different Test Groups 
and the Control Group. In addition, the Commission notes that the Pilot 
is scheduled to start on October 3, 2016, and accelerated approval 
would ensure that the rules of the Exchange would be in place for the 
start of the Pilot. Accordingly, the Commission finds good cause, 
pursuant to Section 19(b)(2) of the Exchange Act,\21\ to approve the 
proposed rule change, as modified by Amendment No. 1, on an accelerated 
basis.
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    \21\ 15 U.S.C. 78s(b)(2).
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VI. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Exchange Act,\22\ that the proposed rule change (SR-BatsBYX-2016-17), 
as modified by Amendment No. 1, be and hereby is approved on an 
accelerated basis.
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    \22\ Id.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\23\
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    \23\ 17 CFR 200.30-3(a)(12).
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Brent J. Fields,
Secretary.
[FR Doc. 2016-21649 Filed 9-7-16; 8:45 am]
 BILLING CODE 8011-01-P


