[Federal Register Volume 77, Number 75 (Wednesday, April 18, 2012)]
[Notices]
[Pages 23294-23295]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-9342]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-66808; File No. SR-BATS-2012-013]
Self-Regulatory Organizations; BATS Exchange, Inc.; Order
Approving a Proposed Rule Change To Amend BATS Exchange, Inc. Rule 2.12
To Make Permanent the Pilot Program That Permits BATS Exchange, Inc. To
Receive Inbound Routes of Equities Orders Through BATS Trading, Inc.,
BATS Exchange's Routing Broker-Dealer, From BATS-Y Exchange, Inc.
April 13, 2012.
I. Introduction
On March 8, 2012, BATS Exchange, Inc. (``BATS'' or ``Exchange'')
filed with the Securities and Exchange Commission (``Commission''),
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ a proposed rule change
requesting permanent approval of the Exchange's pilot program that
permits the Exchange to receive inbound routes of equities orders
through BATS Trading, Inc. (``BATS Trading''), the Exchange's routing
broker-dealer, from BATS Y-Exchange, Inc. (``BATS-Y''). The proposed
rule change was published for comment in the Federal Register on March
14, 2012.\3\ The Commission received no comment letters regarding the
proposed rule change. This order approves the proposed rule change.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 66571 (March 12,
2012), 77 FR 15153 (``Notice'').
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II. Background
BATS Trading is a broker-dealer that is a member of the Exchange
and is permitted to provide members of BATS-Y optional routing services
to other market centers.\4\ BATS Trading is owned by BATS Global
Markets (``Corporation''). The Corporation also owns two registered
securities exchanges--the Exchange \5\ and BATS-Y.\6\ Thus, BATS
Trading is an affiliate of the Exchange and BATS-Y.
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\4\ BATS Trading operates as a facility of BATS-Y that provides
outbound routing from BATS-Y to other market centers, subject to
certain conditions. See Securities Exchange Act Release No. 62716
(August 13, 2010), 75 FR 51295 (August 19, 2010) (File No. 10-198)
(Order granting the exchange registration of BATS-Y Exchange, Inc.)
(``BATS-Y Approval Order'').
\5\ See Securities Exchange Act Release No. 58375 (August 18,
2008), 73 FR 49498 (August 21, 2008) (File No. 10-182) (order
granting the exchange registration of BATS Exchange, Inc.).
\6\ See generally BATS-Y Approval Order, supra note 4.
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On September 9, 2010, the Exchange filed an immediately effective
proposed rule change to, among other things, permit the Exchange to
receive inbound routes of orders that BATS Trading routes in its
capacity as a facility of BATS-Y on a pilot basis ending October 15,
2011.\7\ On September 29, 2011, the Exchange filed an immediately
effective proposed rule change to extend the pilot period six months
ending April 15, 2012.\8\ The Exchange now seeks permanent approval of
this inbound routing pilot.\9\
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\7\ See Securities Exchange Act Release No. 62901 (September 13,
2010), 75 FR 57097 (September 17, 2010) (SR-BATS-2010-024)
(``Inbound Router Notice'').
\8\ See Securities Exchange Act Release No. 65516 (October 7,
2011), 76 FR 63977 (October 14, 2011) (SR-BATS-2011-040).
\9\ See Notice, supra note 3.
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III. Discussion and Commission Findings
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.\10\ Specifically, the Commission finds that the proposed rule
change is consistent with Section 6(b)(1) of the Act,\11\ which
requires, among other things, that a national securities exchange be so
organized and have the capacity to carry out the purposes of the Act,
and to comply and enforce compliance by its members and persons
associated with its members, with the provisions of the Act, the rules
and regulation thereunder, and the rules of the Exchange. Further, the
Commission finds that the proposed rule change is consistent with
Section 6(b)(5) of the Act,\12\ 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, and 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 investors and the public interest. Section 6(b)(5) also
requires that the rules of an exchange not be designed to permit unfair
discrimination among customers, issuers, brokers, or dealers.
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\10\ In approving this proposed rule change, the Commission has
considered the proposed rule's impact on efficiency, competition and
capital formation. 15 U.S.C. 78c(f).
\11\ 15 U.S.C. 78f(b)(1).
\12\ 15 U.S.C. 78f(b)(5).
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Recognizing that the Commission has previously expressed concern
regarding the potential for conflicts of interest in instances where a
member firm is affiliated with an exchange to which it is routing
orders, the Exchange previously implemented limitations and conditions
to BATS Trading's affiliation with the Exchange to permit the Exchange
to accept inbound orders that BATS Trading routes in its capacity as a
facility of BATS-Y, on a pilot basis.\13\ The Exchange now seeks to
make this pilot permanent. Specifically, the Exchange states it is in
compliance with the following limitations and conditions: \14\
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\13\ See Inbound Router Notice, 75 FR at 57097.
\14\ See Notice, 77 FR at 15154.
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[[Page 23295]]
The Exchange shall enter into a plan pursuant to Rule 17d-
2 under the Exchange Act with a non-affiliated self-regulatory
organization (``SRO'') to relieve the Exchange of regulatory
responsibilities for BATS Trading with respect to rules that are common
rules between the Exchange and the non-affiliated SRO, and enter into a
regulatory contract (``Regulatory Contract'') with a non-affiliated SRO
to perform regulatory responsibilities for BATS Trading for unique
Exchange rules.
The Regulatory Contract shall require the Exchange to
provide the non-affiliated SRO with information, in an easily
accessible manner, regarding all exception reports, alerts, complaints,
trading errors, cancellations, investigations, and enforcement matters
(collectively ``Exceptions'') in which BATS Trading is identified as a
participant that has potentially violated Exchange or Commission Rules,
and shall require that the non-affiliated SRO provide a report, at
least quarterly, to the Exchange quantifying all Exceptions in which
BATS Trading is identified as a participant that has potentially
violated Exchange or Commission Rules.
The Exchange, on behalf of the Corporation, shall
establish and maintain procedures and internal controls reasonably
designed to ensure that BATS Trading does not develop or implement
changes to its system on the basis of non-public information regarding
planned changes to Exchange systems, obtained as a result of its
affiliation with the Exchange, until such information is available
generally to similarly situated member organizations of the Exchange in
connection with the provision of inbound order routing to the Exchange.
The Exchange may furnish to BATS Trading the same
information on the same terms that the Exchange makes available in the
normal course of business to any other member organization.
The Exchange believes that by meeting the above-listed conditions it
has set up mechanisms that protect the independence of the Exchange's
regulatory responsibility with respect to BATS Trading, and has
demonstrated that BATS Trading cannot use any information that it may
have because of its affiliation with the Exchange to its advantage.\15\
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\15\ See id.
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In the past, the Commission has expressed concern that the
affiliation of an exchange with one of its members raises potential
conflicts of interest, and the potential for unfair competitive
advantage.\16\ Although the Commission continues to be concerned about
potential unfair competition and conflicts of interest between an
exchange's self-regulatory obligations and its commercial interest when
the exchange is affiliated with one of its members, for the reasons
discussed below, the Commission believes that it is consistent with the
Act to permit BATS Trading, in its capacity as a facility of BATS-Y, to
provide inbound routing to the Exchange on a permanent basis instead of
a pilot basis, subject to the other conditions described above.
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\16\ See, e.g., Securities Exchange Act Release Nos. 54170 (July
18, 2006), 71 FR 42149 (July 25, 2006) (SR-NASDAQ-2006-006) (order
approving Nasdaq's proposal to adopt Nasdaq Rule 2140, restricting
affiliations between Nasdaq and its members); 53382 (February 27,
2006), 71 FR 11251 (March 6, 2006) (SR-NYSE-2005-77) (order
approving the combination of the New York Stock Exchange, Inc. and
Archipelago Holdings, Inc.); 58673 (September 29, 2008), 73 FR 57707
(October 8, 2008) (SR-Amex-2008-62) (order approving the combination
of NYSE Euronext and the American Stock Exchange LLC); 59135
(December 22, 2008), 73 FR 79954 (December 30, 2008) (SR-ISE-2009-
85) (order approving the purchase by ISE Holdings of an ownership
interest in DirectEdge Holdings LLC); and 59281 (January 22, 2009),
74 FR 5014 (January 28, 2009) (SR-NYSE-2008-120) (order approving a
joint venture between NYSE and BIDS Holdings L.P.).
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The Exchange has proposed four ongoing conditions applicable to
BATS Trading's inbound routing activities in its capacity as a facility
of BATS-Y, which are enumerated above. The Commission believes that
these conditions mitigate its concerns about potential conflicts of
interest and unfair competitive advantage. In particular, the
Commission believes that a non-affiliated SRO's oversight of BATS
Trading,\17\ combined with a non-affiliated SRO's monitoring of BATS
Trading's compliance with the Exchange's rules and quarterly reporting
to the Exchange, will help to protect the independence of the
Exchange's regulatory responsibilities with respect to BATS Trading.
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\17\ This oversight will be accomplished through a 17d-2
Agreement. See Inbound Router Notice, 75 FR at 57097.
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V. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\18\ that the proposed rule change (SR-BATS-2012-013) be, and
hereby is, approved.
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\18\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\19\
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\19\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-9342 Filed 4-17-12; 8:45 am]
BILLING CODE 8011-01-P