
[Federal Register Volume 82, Number 15 (Wednesday, January 25, 2017)]
[Notices]
[Pages 8462-8464]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-01616]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-79838; File No. SR-BatsEDGX-2017-05]


Self-Regulatory Organizations; Bats EDGX Exchange, Inc.; Notice 
of Filing and Order Granting Accelerated Approval of a Proposed Rule 
Change to EDGX Rule 21.19, Bats Auction Mechanism, as it Applies to the 
Equity Options Platform

January 18, 2017.
    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 January 13, 2017, Bats EDGX Exchange, Inc. (the ``Exchange'' 
or ``EDGX'') filed with the Securities and Exchange Commission (the 
``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 and, for the reasons discussed below, is 
approving the proposal on an accelerated basis.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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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 for the Exchange's equity options 
platform (``EDGX Options'') concerning a price improvement mechanism 
operated by EDGX Options, the Bats Auction Mechanism (``BAM'' or ``BAM 
Auction''), which was recently approved by the Commission.\3\ A 
specific aspect of BAM is currently operating on a pilot basis 
(``Pilot''), which is set to expire on January 18, 2017.\4\ The Pilot 
concerns the fact that there is no minimum size requirement for orders 
to be eligible for a BAM Auction, as described below. The Exchange 
seeks to make the Pilot permanent but does not propose any other 
changes to BAM.
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    \3\ See Securities Exchange Act Release No. 79718 (January 3, 
2017) (SR-BatsEDGX-2016-41).
    \4\ See id.
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    The text of the proposed rule change is available at the Exchange's 
Web site at www.bats.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 III below. The Exchange has prepared summaries, set forth in 
sections A, B, and C below, of the most significant aspects of such 
statements.

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

1. Purpose
    The purpose of this filing is to make permanent an aspect of BAM 
that is operating as a Pilot by removing Interpretation and Policy .05 
from Rule 21.19.
Background
    The Exchange proposed BAM in September of 2016 as a price 
improvement mechanism on the Exchange.\5\ The Proposal was amended by 
the Exchange on December 15, 2016,\6\ and approved, as amended, on 
January 3, 2017.\7\ BAM Auctions were launched on the Exchange 
effective January 4, 2017. BAM includes functionality in which a Member 
(an ``Initiating Member'') may electronically submit for execution an 
order it represents as agent on behalf of a Priority Customer,\8\ 
broker dealer, or any other person or entity (``Agency Order'') against 
principal interest or against any other order it represents as agent 
(an ``Initiating Order'') provided it submits the Agency Order for 
electronic execution into the BAM Auction pursuant Rule 21.19. All 
options traded on EDGX Options are eligible for BAM.
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    \5\ See Securities Exchange Act Release No. 78988 (September 29, 
2016), 81 FR 69172 (October 5, 2016) (SR-BatsEDGX-2016-41) 
(``Proposal'').
    \6\ See supra, note 3; see also SR-BatsEDGX-2016-41 Amendment 
No. 1, available at: http://www.bats.com/us/options/regulation/rule_filings/edgx/.
    \7\ See supra, note 3.
    \8\ The term ``Priority Customer'' means any person or entity 
that is not: (A) A broker or dealer in securities; or (B) a 
Professional. The term ``Priority Customer Order'' means an order 
for the account of a Priority Customer. See Rule 16.1(a)(45). A 
``Professional'' is 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). All Professional orders shall be 
appropriately marked by Options Members. See Rule 16.1(a)(46).
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Pilot Program
    One component of BAM as approved by the Commission is currently 
operating as a Pilot, which is set to expire on January 18, 2017. The 
Pilot concerns that there is no minimum size requirement for orders to 
be eligible for a BAM Auction. The Exchange now seeks to remove 
Interpretation and Policy .05 from Rule 21.19 so that the Pilot may 
operate on a permanent basis.
    Pursuant to the Pilot, there is no minimum size requirement for 
orders to be eligible for a BAM Auction. During this Pilot, the 
Exchange agreed to submit certain data, periodically as required by the 
Commission, to provide supporting evidence that, among other things, 
there is meaningful competition for all size orders and that there is 
an active and liquid market functioning on the Exchange outside of the 
Auction mechanism. The Exchange proposed to adopt this provision on a 
pilot basis based on the fact that multiple other options exchanges 
have a similar provision with respect to their own price improvement 
mechanisms and such provisions have been operating on a pilot basis.\9\ 
Although the Exchange only recently launched BAM and does not yet have 
meaningful data to analyze pursuant to the Pilot, the Exchange is 
proposing to make the Pilot permanent based on the recent filings by 
multiple other options exchanges to make analogous provisions 
permanent.\10\ The

[[Page 8463]]

Exchange believes that BAM is sufficiently similar to these processes 
that there is no need to continue the Pilot in light of the recent 
filings to operate similar processes on a permanent basis. In 
particular, based on the rules discussed in additional detail below as 
well as the results of similar mechanisms operated by several other 
options exchanges, the Exchange believes that there will be meaningful 
competition in BAM for auctions of all sizes, that there will continue 
to be an active and liquid market functioning on the Exchange outside 
of the auction mechanism, and that there will be opportunities for 
price improvement for orders executed through BAM.
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    \9\ See, e.g., Securities Exchange Act Release Nos. 53222 
(February 3, 2006), 71 FR 7089 (February 10, 2006) (SR-CBOE-2005-60) 
(order approving the CBOE AIM price improvement mechanism, including 
that there is no minimum size requirement on a pilot basis); 73590 
(November 13, 2014), 79 FR 68919 (November 19, 2014) (SR-MIAX-2014-
56) (order approving the MIAX PRIME price improvement mechanism, 
including that there is no minimum size requirement on a pilot 
basis); 76301 (October 29, 2015), 80 FR 68347 (November 4, 2015) 
(SR-BX-2015-032) (order approving the NASDAQ BX PRISM price 
improvement mechanism, including that there is no minimum size 
requirement on a pilot basis).
    \10\ See, e.g., Securities Exchange Act Release Nos. 79499 
(December 7 2016), 81 FR 90012 (December 13, 2016) (SR-CBOE-2016-
084) (proposal to modify the CBOE AIM price improvement mechanism 
including the proposal to make the process permanent, specifically 
that there is no minimum size requirement); 79500 (December 7, 
2016), 81 FR 90030 (December 13, 2016) (SR-MIAX-2016-46) (proposal 
to modify the MIAX PRIME price improvement mechanism including the 
proposal to make the process permanent, specifically that there is 
no minimum size requirement); 79465 (December 5, 2016), 81 FR 79465 
[sic] (December 9, 2016) (SR-BX-2016-063) (proposal to modify 
certain aspects of the NASDAQ BX PRISM price improvement mechanism 
including the proposal to make the process permanent, including that 
there is no minimum size requirement).
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    The Exchange believes BAM process will promote meaningful 
competition because it is open to all Members of the Exchange and, 
thus, all Members will have an equal opportunity to respond with their 
best prices during a BAM Auction. Since the Exchange considers all 
interest present in the Exchange's system, and not solely BAM 
responses, for execution against Agency Orders, those participants who 
are not explicit responders to a BAM Auction will expect executions via 
BAM as well.\11\ Further, once an Initiating Member has submitted an 
Agency Order for processing in a BAM Auction, such Agency Order may not 
be modified or cancelled.\12\ In addition, the Exchange believes there 
will be meaningful competition because an Initiating Order may not be a 
solicited order for the account of any market maker on EDGX Options 
(``Options Market Maker'') assigned in the affected series on the 
Exchange.\13\ Thus, such Options Market Makers assigned in the affected 
series will presumably be actively quoting in such series, and 
participate in BAM as unrelated orders, and/or will be responding to 
BAM Auctions in such series.
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    \11\ See Exchange Rule 21.19(b)(3).
    \12\ See Exchange Rule 21.19(b)(1)(A).
    \13\ See Exchange Rule 21.19(a)(6).
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    Similarly, the Exchange believes there will continue to be an 
active and liquid market functioning on the Exchange outside of the 
auction mechanism for the same reason noted above, namely that an 
Initiating Order may not be a solicited order for the account of an 
Options Market Maker.\14\ In addition, resting quotes and orders that 
were at a price that is equal to the NBBO on the opposite side of the 
market from the Agency Order (``Priority Orders'') would have priority 
up to their size in the NBBO at the time an Auction is initiated 
(``Initial NBBO'') at each price level at or better than such Initial 
NBBO after Priority Customer and the Initiating Member have received 
allocations.\15\ Thus, the concept of Priority Orders is intended to 
incentivize active participation on the EDGX Options order book outside 
of BAM Auctions.
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    \14\ See id.
    \15\ See Exchange Rule 21.19(b)(4)(B)(iii).
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    Finally, the Exchange believes that there will be opportunities for 
price improvement for orders executed through BAM, including for 
smaller sized Agency Orders when the difference between the NBB and NBO 
is $0.01. Pursuant to BAM, if any Agency Order is for less than 50 
option contracts and the difference between the NBB and NBO is $0.01, 
the Initiating Member must stop the entire Agency Order at one minimum 
price improvement increment better than the NBBO, which increment shall 
be determined by the Exchange but may not be smaller than $0.01.\16\ 
Thus, even for an Agency Order that may be less likely to receive price 
improvement as compared to other Agency Orders, namely a smaller order 
when the spread is one penny wide, the rules of BAM require that such 
order will receive price improvement.
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    \16\ See Exchange Rule 21.19(a)(1)(A).
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    Based on the foregoing, the Exchange believes it is appropriate to 
continue the no minimum size requirement on a permanent basis.
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.\17\ In particular, 
the proposal is consistent with Section 6(b)(5) of the Act \18\ because 
it would promote just and equitable principles of trade, remove 
impediments to, and perfect the mechanism of, a free and open market 
and a national market system.
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    \17\ 15 U.S.C. 78f(b).
    \18\ 15 U.S.C. 78f(b)(5).
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    Specifically, the Exchange believes that BAM, including the Pilot, 
results in increased liquidity available at improved prices, with 
competitive final pricing out of the Initiating Member's complete 
control. The Exchange believes that BAM promotes and fosters 
competition and affords the opportunity for price improvement to more 
options contracts. The Exchange believes that allowing BAM to continue 
without a minimum size requirement is consistent with the Act based on 
similar pilots operated by other options exchanges with respect to 
similar price improvement mechanisms and the recent filings to operate 
such mechanisms and certain aspects thereof on a permanent basis.\19\ 
In addition, the Exchange believes that the rules governing BAM, as 
adopted, will ensure: (i) That there is meaningful competition in BAM 
for auctions of all sizes; \20\ (ii) that there continues to be an 
active and liquid market functioning on the Exchange outside of the 
auction mechanism; \21\ and (iii) that there will be opportunities for 
price improvement for orders executed through BAM.\22\ The Exchange 
notes that this proposal does not propose any new policies or 
provisions that are unique or unproven, but instead relates to the 
continuation of a program that briefly operated on a pilot basis.
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    \19\ See supra, note 10.
    \20\ See supra, notes 11-13 and accompanying text.
    \21\ See supra, notes 14-15 and accompanying text.
    \22\ See supra, note 16 and accompanying text.
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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. In this regard, the Exchange 
notes that the rule change is being proposed in order to continue BAM 
without a minimum size requirement. BAM itself was a competitive 
response to analogous programs offered by other options exchanges but 
was only recently approved and launched. At the same time, other 
options exchanges that have been operating similar price improvement 
mechanisms for longer periods of time recently filed to operate such 
mechanisms on a permanent basis, including with regard to the fact that 
such mechanisms to not have a minimum size requirement.\23\ 
Accordingly, the Exchange's proposal to operate BAM without a minimum 
size requirement is a competitive proposal and the Exchange believes 
this proposed rule change is necessary to permit fair competition among 
the options exchanges.
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    \23\ See supra, note 10.
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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 written

[[Page 8464]]

comments from members or other interested parties.

III. 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-2017-05 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-2017-05. 
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-2017-05, and should be submitted on or before February 15, 
2017.

IV. Commission's Findings and Order Granting Accelerated Approval of 
Proposed Rule Change

    After careful review, the Commission finds that the proposed rule 
change is consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to a national securities exchange 
and, in particular, with Section 6(b) of the Act.\24\ In particular, 
the Commission finds that the proposed rule change is consistent with 
Section 6(b)(5) of the Act,\25\ which requires, among other things, 
that the rules of a national securities exchange be 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, clearing, settling, processing 
information with respect to, and facilitating 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 customers, issuers, brokers and dealers.
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    \24\ 15 U.S.C. 78f(b). In approving this proposed rule change, 
the Commission has considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
    \25\ 15 U.S.C. 78f(b)(5).
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    The Commission notes that BAM is designed to provide customers with 
an opportunity for price improvement to orders, including orders of 
fewer than 50 contracts. The Commission also notes that BAM currently 
requires price improvement for Agency Orders of fewer than 50 contracts 
when the NBBO has a bid/ask differential of $0.01, a situation in which 
an Agency Order may be less likely to receive price improvement due to 
the limited spread.\26\ In addition, the Commission notes that BAM is 
designed to encourage competition and promote an active and liquid 
market outside of BAM. Specifically, the Commission notes that the 
Exchange's rules provide for broad participation in BAM,\27\ promote 
market maker participation by prohibiting an Initiating Order from 
being a solicited order for the account of a market maker assigned in 
the affected series,\28\ and encourage competitive quoting outside BAM 
by providing Priority Order status in a BAM Auction.\29\ Finally, the 
Commission notes that the rules governing EDGX's BAM are similar to 
those governing auction mechanisms operating at other options 
exchanges.\30\ Thus, the Commission has determined to approve the 
Exchange's proposal to approve the Pilot on a permanent basis.
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    \26\ See Exchange Rule 21.19(a)(1)(A). Other options exchanges 
with price improvement auctions have provided data to the Commission 
demonstrating that such orders receive relatively small amounts of 
price improvement. See, e.g., Securities Exchange Act Release No. 
79465 (December 5, 2016), 81 FR 89167, 89169 (December 9, 2016) (SR-
BX-2016-063).
    \27\ See, e.g., Exchange Rule 21.19(b)(3).
    \28\ See Exchange Rule 21.19(a)(6).
    \29\ See Exchange Rule 21.19(b)(4)(B)(iii).
    \30\ See, e.g., CBOE Rule 6.74A and Chapter VI, Section 9 of the 
BX Options Rules. These rules have also been operating on a pilot 
basis, which the exchanges have similarly proposed to make 
permanent. See supra note 10. The Commission notes that, in 
conjunction with EDGX's proposal, it is approving comparable pilot 
programs in effect on other options exchanges. See e.g., Securities 
Exchange Act Release No. 79812 (January 17, 2017) (SR-BOX-2016-58).
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    The Exchange has requested that the Commission find good cause for 
approving the proposed rule change prior to the 30th day after 
publication of the notice thereof in the Federal Register. The Exchange 
stated that accelerated approval of its proposal would allow the 
applicable rules to remain in effect following the expiration of the 
Pilot on January 18, 2017, which would provide certainty to members of 
the Exchange because it will allow BAM to continue on the Exchange 
uninterrupted. For this reason, the Commission believes that good cause 
exists for accelerated approval of the proposed rule change. 
Accordingly, the Commission finds good cause, pursuant to Section 
19(b)(2) of the Act,\31\ to approve the proposed rule change prior to 
the 30th day after the date of publication of the notice of filing 
thereof in the Federal Register.
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    \31\ 15 U.S.C. 78s(b)(2).
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V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\32\ that the proposed rule change (SR-BatsEDGX-2017-05) be, and 
hereby is, approved on an accelerated basis.
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    \32\ 15 U.S.C. 78s(b)(2).
    \33\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\33\
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-01616 Filed 1-24-17; 8:45 am]
 BILLING CODE 8011-01-P


