[Federal Register Volume 77, Number 115 (Thursday, June 14, 2012)]
[Notices]
[Pages 35719-35723]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-14530]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-67165; File No. SR-BATS-2012-021]
Self-Regulatory Organizations; BATS Exchange, Inc.; Notice of
Filing and Immediate Effectiveness of Proposed Rule Change To Adopt
Rules Related to Risk Management Functionality for BATS Options
June 8, 2012.
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 1, 2012, BATS Exchange, Inc. (the ``Exchange'' or
``BATS'') 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 adopt Rule 21.16, entitled ``Risk Monitor
Mechanism'', to codify the risk monitoring functionality offered to all
Users \5\ of the BATS equity options trading platform (``BATS
Options'').
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\5\ As defined in Exchange Rule 16.1(a)(63), a User is any
Exchange member or sponsored participant authorized to obtain access
to the Exchange.
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The text of the proposed rule change is available at the Exchange's
Web site at http://www.batstrading.com, at the principal office of the
Exchange, and at the Commission's Public Reference Room.
[[Page 35720]]
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 purpose of the proposed rule change is to reflect in the
Exchange's rules that Users are able to establish certain risk control
parameters. Specifically, the Exchange proposes to adopt new Rule
21.16, Risk Monitor Mechanism, which is similar to NASDAQ Options
Market (``NOM'') Chapter VI, Section 19 and the rules of other options
exchanges (as explained in detail below). The Risk Monitor Mechanism
provides protection from the risk of multiple executions across
multiple series of an option or across multiple options. The risk to
Users is not limited to a single series in an option or even to all
series of an option; Users that quote in multiple series of multiple
options have significant exposure, requiring them to offset or hedge
their overall positions.
In particular, the Risk Monitor Mechanism will be useful for market
makers on BATS Options (``Market Makers''), who are required to
continuously quote in assigned options. Quoting across many series in
an option creates the possibility of ``rapid fire'' executions that can
create large, unintended principal positions that expose the Market
Maker to unnecessary market risk. The Risk Monitor Mechanism is
intended to assist such Users in managing their market risk.
Though the Risk Monitor Mechanism will be most useful to Market
Makers, the Exchange proposes to offer the functionality to all
participant types. There are other firms that trade on a proprietary
basis and provide liquidity to the Exchange; these firms could
potentially benefit, similarly to Market Makers, from the Risk Monitor
Mechanism. The Exchange believes that the Risk Monitor Mechanism should
help liquidity providers generally, market makers and other
participants alike, in managing risk and providing deep and liquid
markets to investors.
Pursuant to new Rule 21.16, the Risk Monitor Mechanism operates by
the System maintaining a counting program for each User. As proposed, a
single User may configure a single counting program or multiple
counting programs to govern its trading activity (i.e., on a per port
basis). The counting program will count executions of contracts traded
by each User and in specific Option Categories (as defined below) by
each User. The counting program counts executions, contract volume and
notional value, within a specified time period established by each User
(the ``specified time period'') and on an absolute basis for the
trading day (``absolute limits''). The specified time period will
commence for an option when a transaction occurs in any series in such
option. The counting program will count executions in the following
``Options Categories'': front-month puts, front-month calls, back-month
puts, and back-month calls (each an ``Option Category''). The counting
program will also count a User's executions, contract volume and
notional value across all options which a User trades (``Firm
Category''). For the purposes of new Rule 21.16, a front-month put or
call is an option that expires within the next two calendar months,
including weeklies and other non-standard expirations, and a back-month
put or call is an option that expires in any month more than two
calendar months away from the current month.
The System will engage the Risk Monitor Mechanism in a particular
option when the counting program has determined that a User's trading
has reached a Specified Engagement Trigger (as defined below)
established by such User during the specified time period or on an
absolute basis. When a Specified Engagement Trigger is reached in an
Options Category, the Risk Monitor Mechanism will automatically remove
such User's orders in all series of the particular option and reject
any additional orders from a User in such option until the counting
program has been reset in accordance with paragraph (d) of new Rule
21.16. Similarly, when a Specified Engagement Trigger is reached in the
Firm Category, the Risk Monitor Mechanism will automatically remove
such User's orders in all series of all options and reject any
additional orders from a User until the counting program has been reset
in accordance with paragraph (d) of new Rule 21.16. The Risk Monitor
Mechanism will also attempt to cancel any orders that have been routed
away to other options exchanges on behalf of the User.
As provided in proposed subparagraph (b)(ii), each User can,
optionally, establish Specified Engagement Triggers in each Options
Category, per option, or in the Firm Category. Specified Engagement
Triggers can be set as follows: (A) A contract volume trigger, measured
against the number of contracts executed (the ``volume trigger''); (B)
A notional value trigger, measured against the notional value of
executions \6\ (``notional trigger''); and (C) An execution count
trigger, measured against the number of executions (``count trigger'').
Each of these triggers can be established in isolation (e.g., a User
may choose only to implement a volume trigger) or a User can establish
multiple separate triggers with different parameters. Also, as
described above, the triggers can be implemented either as absolute
limits or over a specified period of time.
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\6\ Notional value is calculated as the sum of all premiums paid
times the number of contracts executed. For example, an option
executed with a premium of $3.00 for 5 contracts would count as
$15.00 notional value.
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For example, assume a User is quoting orders in several series of a
particular option issue, and sets Specified Engagement Triggers in an
Options Category as follows: (i) A volume trigger at 500 contracts per
second, (ii) a count trigger at 100 executions per minute, and (iii) an
absolute notional value trigger of $30,000. In this example, there are
three Specified Engagement Triggers for the option issue, any one of
which, if reached, would result in cancellations of any additional
orders of the User in the specified option issue, rejection of
additional orders by the User in that issue and attempted cancellation
of any orders in the option issue already routed to an away options
exchange on behalf of the User. The following examples illustrate the
operation of each of the User's Specified Engagement Triggers:
Volume Specified Engagement Trigger in an Options Category
If within one second, executions against the User's quotations in
any series of front-month calls of the option issue equaled or exceeded
500 contracts, the Risk Monitor Mechanism would be engaged. To
illustrate this example, assume the following quotations and executions
within the current second in front-month calls of the specified option
issue:
[[Page 35721]]
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Number of Number of
Series 1 quoted Series 2 quoted contracts contracts
Price level size size executed Series executed Series
1 2
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Level 1................................. 100 50 100 50
Level 2................................. 100 50 100 50
Level 3................................. 150 50 150 0
Level 4................................. 150 200 0 0
Level 5................................. 150 200 0 0
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Total............................... 650 600 350 100
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At this moment in time, the User has executed 450 contracts within
the applicable second (350 contracts of Series 1 and 100 contracts of
Series 2), which is less than the User's limit of 500 contracts per
second. As such, the User's established volume trigger in an Options
Category has not yet been reached. If, however, prior to the completion
of the applicable second, an order executed against the User's Level 3
quotation in Series 2, the number of contracts executed in front-month
calls of the option issue would be 500. The Risk Monitor would be
engaged, and the User's remaining orders in all series of the option
issue would be cancelled, additional orders by the User in that issue
would be rejected, and the Exchange would attempt to cancel any orders
in the option issue that had already been routed to an away options
exchange on behalf of the User.
Execution Count Specified Engagement Trigger in an Options Category
If within one minute, executions against the User's quotations in
any series of front-month puts of the option issue equaled or exceeded
100 executions per minute, the Risk Monitor Mechanism would be engaged.
To illustrate this example, assume the following quotations and
executions within the current minute in front-month puts of the
specified option issue:
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Number of Number of
Price level executions executions
Series 1 Series 2
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Level 1............................. 40 20
Level 2............................. 20 15
Level 3............................. 0 0
-----------------------------------
Total........................... 60 35
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At this moment in time, the User has received 95 total executions
within the applicable minute (60 executions in Series 1 options and 35
executions in Series 2 options), which is less than the User's limit of
100 executions per minute. As such, the User's established count
trigger in an Options Category has not yet been reached. If, however,
prior to the completion of the applicable minute, the User executed 5
more orders in either series, the number of executions in front-month
puts of the option issue would be 100. The Risk Monitor would be
engaged, and the User's remaining orders in all series of the option
issue would be cancelled, additional orders by the User in that issue
would be rejected, and the Exchange would attempt to cancel any orders
in the option issue that had already been routed to an away options
exchange on behalf of the User.
Notional Value Specified Engagement Trigger in an Options Category
If, as of any time during the trading day, executions against the
User's quotations in any series of front-month calls of the option
issue equaled or exceeded a notional value of $30,000, the Risk Monitor
Mechanism would be engaged. To illustrate this example, assume the
current notional value of all front-month calls in the option issue was
$29,900 as of 1:30 p.m. Eastern Time and the following executions
occurred:
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Number of
Execution number Price contracts Series Notional value
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1....................................... $5.00 5 Series 1 $25.00
2....................................... 3.00 15 Series 2 45.00
3....................................... 5.00 6 Series 1 30.00
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Total............................... ................ ................ ................ 100.00
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At this moment in time, execution number 3 has raised the total
notional value of all front-month calls to $30,000 for the trading day.
The Risk Monitor would be engaged, and the User's remaining orders in
all series of the option issue would be cancelled, additional orders by
the User in that issue would be rejected, and the Exchange would
attempt to cancel any orders in the option issue that had already been
routed to an away options exchange on behalf of the User.
As noted above, in addition to counting programs established across
Options Categories, any of the available Specified Engagement Triggers
are
[[Page 35722]]
configurable on a Firm Category level as well (either as absolute
limits or over a specified time period). When a Firm Category risk
limit is triggered, then all options orders of a User are cancelled,
additional orders by the User are rejected and the Exchange will
attempt to cancel any orders already routed to an away options exchange
on behalf of the User.
While the Risk Monitor Mechanism is a useful feature that serves an
important risk management purpose, it operates consistent with the firm
quote obligations of a broker-dealer pursuant to Rule 602 of Regulation
NMS. Specifically, proposed paragraph (c) provides that any marketable
orders or quotes that are executable against a User's quotation that
are received prior to the time the Risk Monitor Mechanism is engaged
will be automatically executed at the price up to the User's size,
regardless of whether such an execution results in executions in excess
of the User's Specified Engagement Trigger. Accordingly, the Risk
Monitor Mechanism cannot be used to circumvent a User's firm quote
obligation.
If a User is quoting in two series of a particular option, at
several price levels in each, and sets an Options Category volume
trigger at 400 contracts, one contra side order can result in
executions in excess of the Specified Engagement Trigger. Specifically,
if a market order to sell 500 contracts is received in Series 1, the
order will execute against the first four levels that the User is
quoting, as follows:
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Number of Number of
contracts contracts
Price level Series 1 size Series 2 size executed Series executed Series
1 2
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Level 1................................. 100 50 100 0
Level 2................................. 100 50 100 0
Level 3................................. 150 100 150 0
Level 4................................. 150 200 150 0
Level 5................................. 150 200 0 0
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Total............................... 650 600 500 0
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Although the User set a volume trigger at 400 contracts, the contra
side order executes in its entirety and the Risk Protection Mechanism
is engaged after the resulting executions have surpassed the Specified
Engagement Trigger. The remaining quoted contracts in Series 1 and all
quoted contracts in Series 2 would then be cancelled.
Proposed Rule 21.16(d) further provides that the system will reset
the counting period for absolute limits when a User refreshes its risk
limit thresholds. In addition, proposed Rule 21.16(d) provides that the
System will reset the counting program and commence a new specified
time period when: (i) A previous counting period has expired and a
transaction occurs in any series in such option; or (ii) A User
refreshes its risk limit thresholds prior to the expiration of the
specified time period. For example, assume that a User has set Options
Category limits for a particular option as follows: Volume triggers at
500 contracts per second and 20,000 contracts per minute, a count
trigger at 20 executions per second, and an absolute notional value
trigger of $30,000. Assume that at a particular point in time, 400
front-month calls have executed in the current second, 19,000 front-
month calls have executed in the current minute, 10 executions of
front-month calls have occurred in the current second and a total of
$25,000 notional has been executed in front-month calls over the course
of the trading day. Next, an incoming order from another User of BATS
Options is received that results in another 1,000 front-month call
contracts executing within the current minute, thus triggering the
volume trigger of 20,000 contracts per minute. If the User reset the
risk limit threshold, all values, including the absolute notional
calculation for the trading day, would be reset to zero.
2. Statutory Basis
The rule change proposed in this submission 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.\7\ Specifically, the
proposed change is consistent with Section 6(b)(5) of the Act,\8\
because it is 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 facilitating
transactions in securities, and to remove impediments to, and perfect
the mechanism of, a free and open market and a national market system.
The Exchange believes that the proposal is appropriate and reasonable,
because it offers functionality for Users to manage their risk.
Offering of a Risk Monitor Mechanism will allow Market Makers and other
Users to quote aggressively which removes impediments to a free and
open market and benefits all Users of BATS Options. The Exchange notes
that a similar functionality is offered by NOM and other options
exchanges.\9\
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\7\ 15 U.S.C. 78f(b).
\8\ 15 U.S.C. 78f(b)(5).
\9\ See NOM Chapter VI, Section 19; see also NASDAQ OMX PHLX
Rule 1093; CBOE Rule 8.18; NYSE AMEX Options Rule 928; NYSE ARCA
Options Rule 6.40.
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(B) Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change imposes
any burden on 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.
III. Date of Effectiveness of the Proposed Rule Changes 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) of the Act \10\ and Rule 19b-
4(f)(6)(iii) thereunder.\11\ In addition, the Exchange provided the
Commission with written notice of its intent to file the proposed rule
change, along with a brief description and text of the
[[Page 35723]]
proposed rule change, at least five business days prior to the date of
filing, or such shorter time as designated by the Commission.\12\
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\10\ 15 U.S.C. 78s(b)(3)(A).
\11\ 17 CFR 240.19b-4(f)(6)(iii).
\12\ Id.
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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.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the foregoing, including whether the proposal 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 [email protected]. Please include
File No. SR-BATS-2012-021 on the subject line.
Paper Comments
Send paper comments in triplicate to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, 100 F Street NE.,
Washington, DC 20549-1090.
All submissions should refer to File No. SR-BATS-2012-021. 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 changes 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 No. SR-BATS-2012-021 and should be
submitted on or before July 5, 2012.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\13\
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\13\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-14530 Filed 6-13-12; 8:45 am]
BILLING CODE 8011-01-P