[Federal Register Volume 77, Number 172 (Wednesday, September 5, 2012)]
[Notices]
[Pages 54633-54635]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-21769]
[[Page 54633]]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-67756; File No. SR-BATS-2012-026]
Self-Regulatory Organizations; BATS Exchange, Inc.; Order
Approving Proposed Rule Change, as Modified by Amendment No. 1, To
Adopt a New Market Maker Peg Order Available to Exchange Market Makers
August 29, 2012.
I. Introduction
On June 26, 2012, BATS Exchange, Inc. (``Exchange'' or ``BATS'')
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 to
adopt a new Market Maker Peg Order to provide similar functionality as
the automated functionality provided to market makers under Rule
11.8(e). The proposed rule change was published for comment in the
Federal Register on July 16, 2012.\3\ The Commission received no
comment letters regarding the proposed rule change. This order approves
the proposed rule change, as modified by Amendment No. 1.
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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. 67381 (July 10,
2012), 77 FR 41829 (``Notice''). The Commission notes that on July
6, 2012, the Exchange submitted Amendment No. 1 to the proposed rule
change to make certain amendments that, in part, clarified that it
is expected that market makers will perform the necessary checks to
comply with Regulation SHO prior to entry of a Market Maker Peg
Order.
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II. Background
BATS is proposing to adopt a new Market Maker Peg Order to provide
a similar functionality presently available to Exchange market makers
under Rule 11.8(e).\4\ BATS adopted Rule 11.8(e) as part of an effort
to address issues uncovered by the aberrant trading that occurred on
May 6, 2010.\5\ According to the Exchange, the automated quote
management functionality offered by these rules is designed to help
Exchange market makers meet the enhanced market maker obligations
adopted post May 6, 2010,\6\ and avoid execution of market maker ``stub
quotes'' in instances of aberrant trading.\7\ As part of these
obligations, BATS requires market makers for each stock in which they
are registered to continuously maintain a two-sided quotation within a
designated percentage of the National Best Bid and National Best
Offer,\8\ as appropriate. According to BATS, the market maker quoter
functionality presents difficulties to market makers in meeting their
obligations under Rule 15c3-5 under the Act (the ``Market Access
Rule'') \9\ and Regulation SHO.\10\ Specifically, the current market
maker quoter functionality offered to market makers reprices and
``refreshes'' a market maker's quote when it is executed against,
without any action required by the market maker. When a market maker's
quote is refreshed by the Exchange, however, the market maker has an
obligation to ensure that the requirements of the Market Access Rule
and Regulation SHO are met. To meet these obligations, a market maker
must actively monitor the status of its quotes and ensure that the
requirements of the Market Access Rule and Regulation SHO are being
satisfied.
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\4\ BATS will continue to offer the present automated quote
management functionality provided to market makers under Rule
11.8(e) for a period of 3 months after the implementation of the
proposed Market Maker Peg Order. The purpose of this transition
period, during which both the present automated quote management
functionality under Rule 11.8(e) and the Market Maker Peg Order will
operate concurrently, is to afford market makers with the
opportunity to adequately test the new Market Maker Peg Order and
migrate away from the present automated quote management
functionality under Rule 11.8(e). Prior to the end of this three
month period, BATS represents that it will submit a rule filing to
retire the automated quote management functionality under Rule
11.8(e). See Notice, supra note 3 at 41829.
\5\ Securities Exchange Act Release No. 63255 (November 5,
2010), 75 FR 69484 (November 12, 2010) (SR-BATS-2010-25).
\6\ Id.
\7\ For each issue in which a market maker is registered, the
market maker quoter functionality optionally creates a quotation for
display to comply with market making obligations. Compliant
displayed quotations are thereafter allowed to rest and are not
adjusted unless the relationship between the quotation and its
related national best bid or national best offer, as appropriate,
either: (a) Shrinks to a specified number of percentage points away
from the Designated Percentage (as defined below) towards the then
current national best bid or national best offer, which number of
percentage points will be determined and published in a circular
distributed to Members from time to time, or (b) expands to within
0.5% of the applicable percentage necessary to trigger an individual
stock trading pause, whereupon such bid or offer will be cancelled
and re-entered at the Designated Percentage away from the then
current national best bid and national best offer, or if no national
best bid or national best offer, at the Designated Percentage away
from the last reported sale from the responsible single plan
processor. Quotations independently entered by market makers are
allowed to move freely towards the national best bid or national
best offer, as appropriate, for potential execution. In the event of
an execution against a quote generated pursuant to the market maker
quoter functionality, the market maker's quote is refreshed on the
executed side of the market at the applicable Designated Percentage
away from the then national best bid (offer), or if no national best
bid (offer), the last reported sale. See Rule 11.8(e).
\8\ As defined by Regulation NMS Rule 600(b)(42). 17 CFR
242.600.
\9\ See Notice, supra note 3 at 41830.
\10\ 17 CFR 242.200 through 204.
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Market Maker Peg Order
In an effort to simplify market maker compliance with the
requirements of the Market Access Rule and Regulation SHO, BATS
proposes to adopt a new order type available only to Exchange market
makers, which offers functionality similar to the market maker quoter
functionality, but also allows a market maker to comply with the
requirements of the Market Access Rule and Regulation SHO.
Specifically, BATS proposes to replace the market maker quoter
functionality with the Market Maker Peg Order. The Market Maker Peg
Order would be a one-sided limit order and similar to other peg orders
available to market participants in that the order is tied or
``pegged'' to a certain price,\11\ but it would not be eligible for
routing pursuant to Rule 11.13(a)(2) and would always be displayed. The
Market Maker Peg Order would be limited to market makers and would have
its price automatically set and adjusted, both upon entry and any time
thereafter, in order to comply with the Exchange's rules regarding
market maker quotation requirements and obligations.\12\ It is expected
that market makers will perform the necessary checks to comply with
Regulation SHO, as discussed above, prior to entry of a Market Maker
Peg Order. Upon entry and at any time the order exceeds either the
``Defined Limit'', as described in Rule 11.8(d)(2)(E), or moves a
specified number of percentage points away from the Designated
Percentage towards the then current National Best Bid or National Best
Offer, the Market Maker Peg Order would be priced by the Exchange at
the Designated Percentage \13\ away from the then current National Best
Bid and National Best Offer. Where there is no National
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Best Bid or National Best Offer, the Market Maker Peg Order would, by
default, be priced at the Designated Percentage away from the last
reported sale from the responsible single plan processor, unless
instructed by the market maker upon entry to cancel or reject where
there is no National Best Bid or National Best Offer. According to
BATS, in the absence of a National Best Bid or National Best Offer and
last reported sale, the order will be cancelled or rejected. Adjustment
to the Designated Percentage is designed to avoid an execution against
a Market Maker Peg Order that would initiate an individual stock
trading pause. In the event of an execution against a Market Maker Peg
Order that reduces the size of the Market Maker Peg Order below one
round lot, the market maker would need to enter a new order, after
performing the regulatory checks discussed above, to satisfy their
obligations under Rule 11.8.\14\ In the event that pricing the Market
Maker Peg Order at the Designated Percentage away from the then current
National Best Bid and National Best Offer, or, if no National Best Bid
or National Best Offer, to the Designated Percentage away from the last
reported sale from the responsible single plan processor would result
in the order exceeding its limit price, the order will be cancelled or
rejected.
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\11\ Rule 11.9(c)(8).
\12\ The Market Maker Peg Order is one-sided so a market maker
seeking to use Market Maker Peg Orders to comply with the Exchange's
rules regarding market maker quotation requirements would need to
submit both a bid and an offer using the order type.
\13\ The ``Designated Percentage'' is the individual stock pause
trigger percentage listed in Interpretations and Policies .01 to
Rule 11.8, less either: (i) Two percentage points for securities
that are included in the S&P 500[supreg] Index, Russell 1000[supreg]
Index, and a pilot list of Exchange Traded Products and for all
other NMS stocks with a price equal to or greater than $1 per share;
or (ii) twenty percentage points for all NMS stocks with a price
less than $1 per share that are not included in the S&P 500[supreg]
Index, Russell 1000[supreg] Index, and a pilot list of Exchange
Traded Products. See Rule 11.8(d)(2)(D).
\14\ Rule 11.8 generally sets forth BATS's market maker
requirements, which include quotation and pricing obligations.
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BATS is also proposing to allow a market maker to designate an
offset more aggressive (i.e., smaller) than the Designated Percentage
for any given Market Maker Peg Order. This functionality will allow a
market maker to quote at price levels that are closer to the National
Best Bid and National Best Offer if it elects to do so. To use this
functionality, a market maker, upon entry, must designate the desired
offset and a percentage away from the National Best Bid or National
Best Offer at which the price of such bid or offer will be adjusted
back to the desired offset (the ``Reprice Percentage'').\15\
Thereafter,\16\ a Market Maker Peg Order with a market maker-designated
offset will have its price automatically adjusted to the market maker-
designated offset from the National Best Bid or National Best Offer or
last reported sale upon reaching the Reprice Percentage.\17\ Identical
to the behavior of Market Maker Peg Orders using the Defined Percentage
and Defined Limit, in the absence of a National Best Bid or National
Best Offer, Market Maker Peg Orders with a market maker-designated
offset will, by default, have their price adjusted to the Market Maker-
designated offset from the price of the last reported sale from the
responsible single plan processor, or, if otherwise instructed by the
Market Maker, will be cancelled or rejected. In the absence of a
National Best Bid or National Best Offer and a last reported sale,
Market Maker Peg Orders with a market maker-designated offset will be
cancelled or rejected. In the event that pricing the Market Maker Peg
Order at the market maker-designated offset away from the then current
National Best Bid and National Best Offer or last reported sale would
result in the order exceeding its limit price, the order will be
cancelled or rejected.\18\
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\15\ If a market maker wishes, it can designate a more
aggressive bid while using the Defined Percentage and Defined Limit
for its offer, or vice versa.
\16\ In the absence of an offset designation and/or Reprice
Percentage, a Market Maker Peg Order will default to using the
Defined Percentage and Defined Limit, and the repricing process
whereby, upon reaching the Defined Limit, the price of a Market
Maker Peg Order bid or offer will be adjusted by the System to the
Designated Percentage away from the then current National Best Bid
or National Best Offer, or, if no National Best Bid or National Best
Offer, to the Designated Percentage away from the last reported sale
from the responsible single plan processor.
\17\ Market Maker Peg Orders with a market maker-designated
offset may be able to qualify as bona-fide market making for
purposes of Regulation SHO, depending on the facts and
circumstances. A market maker entering such an order must consider
the factors set forth by the Commission in determining whether
reliance on the exception from the ``locate'' requirement of Rule
203 for bona-fide market making is appropriate with respect to the
particular Market Maker Peg Order and its designated offset. See 17
CFR 242.203(b)(1).
\18\ The Market Maker Peg Order will be accepted during Regular
Trading Hours and the Pre-Opening and After Hours Trading Sessions.
The Pre-Opening Session means the time between 8 a.m. and 9:30 a.m.
Eastern Time. The After Hours Trading Session means the time between
4 p.m. and 5 p.m. Eastern Time. By default, the Market Maker Peg
Order will be priced at 9:30 a.m. and will only be executable during
Regular Trading Hours, however, upon entry, a User may direct the
Exchange to automatically price and execute a Market Maker Peg Order
during the Pre-Opening Session and After Hours Trading Session
(``Extended Hours Market Maker Peg Orders''). During the Pre-Opening
Session and After Hours Trading Session, the wider Designated
Percentage and Defined Limit associated with the 9:30 a.m.-9:45 a.m.
and 3:35 p.m.-4 p.m. periods under Rule 11.8(e) will be applied to
Extended Hours Market Maker Peg Orders for which the market maker
has not designated an offset more aggressive than the Designated
Percentage.
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BATS claims that this order-based approach is superior in terms of
the ease in complying with the requirements of the Market Access Rule
and Regulation SHO while also providing similar quote adjusting
functionality to its market makers.\19\ BATS also states that market
makers would have control of order origination, as required by the
Market Access Rule, while also allowing market makers to make marking
and locate determinations prior to order entry, as required by
Regulation SHO. The Exchange claims that this will allow market makers
to fully comply with the requirements of the Market Access Rule and
Regulation SHO, as they would when placing any order, while also
meeting their Exchange market making obligations.\20\
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\19\ See Notice, supra note 3 at 41831.
\20\ See id.
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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.\21\ Specifically, the Commission finds that the proposed rule
change is consistent with Section 6(b)(5) of the Act,\22\ which
requires, among other things, the rules of an exchange 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. The
Commission finds that the proposed rule change also is designed to
support the principles of Section 11A(a)(1) \23\ of the Act in that it
seeks to assure fair competition among brokers and dealers and among
exchange markets.
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\21\ 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).
\22\ 15 U.S.C. 78f(b)(5).
\23\ 15 U.S.C. 78k-1(a)(1).
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The Commission finds that the Exchange's proposal is consistent
with the Act because it provides a means through which market makers
may meet their minimum quoting requirements, which may assist in the
maintenance of fair and orderly markets, provide additional liquidity
to the Exchange, and prevent excessive volatility. The Commission
notes, however, that notwithstanding the availability of the Market
Maker Peg Order functionality, the market maker remains responsible for
meeting its obligations under Rule 11.8, including entering,
monitoring, and re-submitting, as applicable, compliant quotations. At
the same time, the Commission finds that the proposal is reasonably
designed to assist market makers in complying with the regulatory
requirements of the Market Access Rule and Regulation SHO. The
Commission notes, however, that the Market Maker Peg Order, like the
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current market maker quoter functionality, does not ensure that the
market maker is satisfying the requirements of the Market Access Rule
or Regulation SHO, including the satisfaction of the locate requirement
of Rule 203(b)(1) or an exception thereto. The Commission also notes
that, in the event a Market Maker Peg Order is executed against such
that the Market Maker Peg Order is reduced in size to below one round
lot, the market maker would need to perform the necessary regulatory
checks pursuant to the Market Access Rule and Regulation SHO prior to
entering a new Market Maker Peg Order.
The Commission also believes that providing Exchange market makers
with a transition period will serve to minimize the potential market
impact caused by the implementation of the Market Maker Peg Order. In
addition, by allowing market makers to enter a Market Maker Peg Order
that is priced more aggressively than the Designated Percentage, the
proposed rules are reasonably designed to provide that quotations
submitted by market makers to the Exchange, and displayed to market
participants, bear some relationship to the prevailing market price.
IV. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\24\ that the proposed rule change, as modified by Amendment No.1,
(SR-BATS-2012-026) be, and hereby is, approved.
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\24\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\25\
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\25\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-21769 Filed 9-4-12; 8:45 am]
BILLING CODE 8011-01-P