[Federal Register Volume 77, Number 245 (Thursday, December 20, 2012)]
[Notices]
[Pages 75459-75462]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-30687]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-68442; File No. SR-BATS-2012-046]
Self-Regulatory Organizations; BATS Exchange, Inc.; Notice of
Filing of a Proposed Rule Change To Modify Exchange Rule 11.23 Relating
to Auctions of Exchange-Listed Securities
December 14, 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 December 6, 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, II,
and III 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.
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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 is filing with the Commission a proposal to amend Rule
11.23 entitled ``Auctions'' including to amend Rule 11.23(a)(6) to
incorporate the Exchange's clearly erroneous execution standards into
the definition of Collar Price Range,\3\ to amend Rule 11.23(a)(22) to
provide that any portion of a market Regular Hours Only \4\ (``RHO'')
order will be cancelled immediately following any auction in which the
order is not fully executed, to make changes to Rules 11.23(b)(2)(B),
11.23(c)(2)(B), and 11.23(d)(2)(C) to help to prevent the possibility
of erroneous executions occurring in auctions on the Exchange, and to
make changes to Rule 11.23(d)(2)(A) entitled ``Publication of BATS
Auction Information'' in order to both make clear that the rule should
apply to IPO Auctions and to make a change to the data that will be
disseminated by the Exchange.
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\3\ As defined in BATS Rule 11.23(a)(6).
\4\ As defined in BATS Rule 11.23(a)(22).
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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.
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.
[[Page 75460]]
(A) Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
Background
The Exchange recently proposed and received approval of rules
governing auctions conducted on the Exchange for securities listed on
the Exchange (``Exchange Auctions'').\5\ The Exchange adopted rules for
conducting opening and closing auctions (``Opening Auctions'' and
``Closing Auctions,'' respectively) on the Exchange, an initial public
offering auction (an ``IPO Auction''), and an auction in the event of a
halt of trading in the security (a ``Halt Auction''). As mentioned
above, the purpose of this filing is to amend the Exchange's rules to
incorporate the Exchange's clearly erroneous execution standards into
the definition of Collar Price Range, to make clear that the unexecuted
portion of certain order types that do not participate in an auction
will be cancelled immediately following the execution, to further
prevent the possibility of erroneous executions occurring in auctions
that occur on the Exchange, to make clear that certain requirements
should apply to both IPO Auctions and Halt Auctions, and to make a
change to the data that will be disseminated by the Exchange related to
Exchange Auctions.
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\5\ See Securities Exchange Act Release No. 65619 (October 25,
2011), 76 FR 67238 (October 31, 2011) (SR-BATS-2011-032).
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Collar Price Range
The Exchange proposes to amend Rule 11.23(a)(6) to amend the
definition of ``Collar Price Range'' to incorporate the Exchange's
clearly erroneous execution standards into the definition of Collar
Price Range. Specifically, the Exchange is proposing that the Collar
Price Range will be based on the Exchange's numerical guidelines for
clearly erroneous executions, as detailed in Rule 11.17(c)(1). The
Collar Price Range will be based on a collar midpoint which will be the
Volume Based Tie Breaker \6\ or, for an IPO Auction of an exchange
traded product (``ETP''), the issuing price (both the ``Collar
Midpoint'') \7\ and shall be determined as follows: Where the Collar
Midpoint is $25.00 or less, the Collar Price Range shall be the range
from 10% below the Collar Midpoint to 10% above the Collar Midpoint;
where the Collar Midpoint is greater than $25.00 but less than or equal
to $50.00, the Collar Price Range shall be the range from 5% below the
Collar Midpoint to 5% above the Collar Midpoint; and where the Collar
Midpoint is greater than $50.00, the Collar Price Range shall be the
range from 3% below the Collar Midpoint to 3% above the Collar
Midpoint.
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\6\ As defined in BATS Rule 11.23(a)(23).
\7\ The Exchange notes that, because the Collar Price Range will
be based on the Collar Midpoint and the numerical guidelines for
clearly erroneous executions are based on the Reference Price, which
is equal to the consolidated last sale immediately prior to the
execution(s) under review, the modified Collar Price Range would not
necessarily prevent all clearly erroneous executions from occurring.
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The Exchange believes that this proposed change will provide
greater transparency and certainty in Exchange Auctions by helping to
reduce the possibility that an auction would occur at a price that
would qualify as clearly erroneous under Rule 11.17(c)(1) and that may
result in cancelled executions. As currently written, the Collar Price
Range is set at 10% of the Volume Based Tie Breaker below and above the
ZBB and ZBO, the NBB and NBO, or the Final Last Sale Eligible Trade,
depending on market conditions at the time of the auction. In addition
to helping to prevent auctions from occurring at prices that would
qualify as clearly erroneous, the proposed change will also act to
narrow the Collar Price Range, which will help limit the volatility in
auction prices.
Market RHO Orders
The Exchange proposes to amend Rule 11.23(a)(22) to provide that
any unexecuted portion of a market RHO order is immediately cancelled
following any Exchange Auction in which it was eligible to participate,
rather than being eligible for execution after the Exchange Auction.
Specifically, the Exchange proposes that any portion of a market RHO
order (a ``Market RHO Auction Order'') will be cancelled immediately
following any auction in which it is not executed. This proposed change
would make clear that, consistent with the behavior of all other market
orders entered on the Exchange, including market RHO orders entered on
the Continuous Book, Market RHO Auction Orders would either execute
immediately or be cancelled.
Determination of Auction Price
The Exchange proposes to amend Rules 11.23(b)(2)(B),
11.23(c)(2)(B), and 11.23(d)(2)(C) in order to help to protect against
erroneous executions occurring in auctions on the Exchange.
Specifically, the Exchange is proposing to amend its Rules related to
the determination of the auction price for Exchange Auctions such that
where no limit orders from one or both sides would participate in the
auction, the auction will occur at the price of the Volume Based Tie
Breaker for Opening and Closing Auctions, the Final Last Sale Eligible
Trade for Halt Auctions, and the issuing price for IPO Auctions.
Currently, BATS Rule 11.23 provides that where there is at least
one limit order either: (i) On the Continuous Book or Auction Book for
Opening and Closing Auctions; or (ii) among Eligible Auction Orders for
IPO and Halt Auctions; then the auction will occur at the price level
within the Collar Price Range, where applicable, that maximizes the
number of shares executed in the auction. BATS Rule 11.23 also
currently provides that where there are no limit orders: (i) On both
the Continuous Book and the Auction Book for Opening and Closing
Auctions; or (ii) among the Eligible Auction orders for IPO and Halt
Auctions; then the auction will occur at a default price, which is
based on the type of Auction occurring (the ``Default Price''). Under
the Exchange's current rules, for Opening, Closing, and Halt Auctions,
the Default Price is the Final Last Sale Eligible Trade. For IPO
Auctions, the Default Price is the issuing price.
The proposed changes to Rule 11.23 are two-fold. First, the
Exchange is proposing to amend its Rules such that, before determining
the auction price, the Exchange will look to whether there is at least
one limit order from each side that would participate in the auction,
rather than, as currently implemented, looking to whether there is a
single limit order either on the Continuous Book and Auction Book (for
Opening and Closing Auctions) or among Eligible Auction Orders (for IPO
and Halt Auctions). Where no limit orders from either or both sides
would participate in the auction, the Exchange is proposing that the
auction will occur at the price of the Default Price. By providing that
the auction price will be the Default Price where no limit orders from
one or both sides would participate in an Exchange Auction, this
proposed change would aid in price discovery and help to prevent
erroneous executions by ensuring that a single limit order on one side
of an auction that might not even participate in the Exchange Auction
cannot on its own determine the auction price.
Secondly, the Exchange proposes to amend its Rules to change the
Default Price for Opening and Closing Auctions. Currently, the Default
Price for Opening and Closing Auctions is the price of the Final Last
Sale Eligible Trade. Specifically, the Exchange is proposing to use the
Volume Based Tie Breaker as the Default Price for Opening and Closing
Auctions. Using the Volume Based Tie Breaker as the Default Price
[[Page 75461]]
instead of the Final Last Sale Eligible Trade means that, by
definition, the Exchange will look first to the ZBBO, then the NBBO to
determine the auction price, and only where there is no ZBB or ZBO and
no NBB or NBO will the Exchange use the Final Last Sale Eligible Trade
as the auction price. This proposed change would aid in price discovery
and help to reduce the likelihood of executions in auctions occurring
at prices out of line with existing market conditions by using a
Default Price that is based on current market conditions rather than a
previous execution, the Final Last Sale Eligible Trade, to determine
the auction price where no limit orders from one or both sides would
participate in the auction.
In summary:
Opening and Closing Auctions--Currently, in Opening and
Closing Auctions, where there are no limit orders on both the
Continuous Book and the Auction Book, the auction will occur at the
price of the Final Last Sale Eligible Trade. The Exchange is proposing
to change the current Opening and Closing Auction functionality such
that, where no limit orders from either or both sides would participate
in the auction, the auction will occur at the Volume Based Tie Breaker.
IPO Auctions--Currently, in IPO Auctions, where there are
no limit orders among the Eligible Auction Orders, the auction will
occur at the issuing price. The Exchange is proposing to change the
current IPO Auction functionality such that, where no limit orders from
either or both sides would participate in the IPO Auction, the auction
will occur at the issuing price.
Halt Auctions--Currently, in Halt Auctions, where there
are no limit orders among the Eligible Auction Orders, the auction will
occur at the Final Last Sale Eligible Trade. The Exchange is proposing
to change the current Halt Auction functionality such that, where no
limit orders from either or both sides would participate in the Halt
Auction, the auction will occur at the price of the Final Last Sale
Eligible Trade.
Publication of BATS Auction Information
The Exchange proposes to amend Rule 11.23(d)(2)(A) entitled
``Publication of BATS Auction Information'' in order to both make clear
that the rule should also apply to IPO Auctions, not just Halt
Auctions, and to make a change to the data that will be disseminated.
Specifically, the Exchange proposes to add a reference to IPO Auctions
to the rule and to disseminate the lesser of the Reference Buy Shares
and the Reference Sell Shares rather than to disseminate both pieces of
information, in order to more effectively prevent the possibility of
gaming.
The Exchange is proposing to amend Rule 11.23(d)(2)(A) to
disseminate the lesser of the Reference Buy Shares and the Reference
Sell Shares in an effort to prevent possible gaming of IPO Auctions and
Halt Auctions. Specifically, the Exchange is concerned that market
participants could use information in the auction information messages
to manipulate the auction. Where an auction information message for an
IPO or Halt Auction contains both Reference Buy Shares and Reference
Sell Shares, a User knows the exact amount of liquidity available at a
given price level on both sides of the Auction Book simultaneously. In
IPO and Halt Auctions, orders can be entered up until the auction
occurs, which would allow a User to use that information to knowingly
move the price of the auction by entering and/or cancelling
sufficiently sized orders, assuming that there is at least one share of
contra-side liquidity at the next price level.
As proposed, the auction information message for IPO and Halt
Auctions would only contain the lesser of the Reference Buy Shares and
Reference Sell Shares and, therefore, a User would never have complete
knowledge of liquidity available on both sides of the book
simultaneously. This lack of full information will prevent Users from
knowing exactly how the auction will react to an order that they enter,
thus helping to prevent gaming of IPO and Halt Auctions.
These gaming concerns do not exist for Opening and Closing Auctions
because the auction information messages for the Opening and Closing
Auctions do not include information relating to the Continuous Book, so
information disseminated in the auction information messages does not
provide complete information about the auction. This prevents Users
from knowing exactly how the auction will react to an order that they
enter. In addition, auction information messages are not disseminated
until after the point in time that Eligible Auction Orders cannot be
modified or cancelled and only Late Limit on Open Orders \8\ and Late
Limit on Close Orders \9\ (collectively, ``Late Orders'') can be
entered. Specifically, in Opening and Closing Auctions, auction
information messages are not disseminated until two minutes and five
minutes prior to the auction (the ``Cutoff''), respectively, at which
point Users may not modify or cancel any Eligible Auction Orders
entered onto the Auction Book. After the Cutoff, Users may only enter
Late Orders onto the Auction Book. Late Orders cannot be modified or
cancelled by the User after entry and can only be priced as
aggressively as the ZBB for bids and the ZBO for offers, the NBB or NBO
where there is no ZBBO, or the limit price of the order where there is
no ZBBO and NBBO. In the absence of a ZBBO and NBBO a Late Order could
be entered without price restriction, however, because there may be
hidden liquidity on the Continuous Book, the User could not be certain
of how the order would affect the auction.
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\8\ As defined in BATS Rule 11.23(a)(12).
\9\ As defined in BATS Rule 11.23(a)(11).
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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.\10\ In particular,
the proposal is consistent with Section 6(b)(5) of the Act,\11\ 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, and, in general, protect investors and the
public interest. Specifically, the Exchange believes that the proposed
changes will improve the price discovery process for securities listed
on the Exchange along with reducing the likelihood that erroneous
executions will occur in auctions conducted on the Exchange by ensuring
that a single limit order on one side of an auction that might not even
participate in the Exchange Auction cannot on its own determine the
auction price. Instead, the Exchange is proposing that where there are
no limit orders on either or both sides that would participate in an
Exchange Auction, the auction price would be the Default Price. The
Exchange further believes that the proposed changes will improve the
price discovery process by changing the Default Price for Opening and
Closing Auctions from the Final Last Sale Eligible Trade to the Volume
Based Tie Breaker, which will, by definition, mean that the Exchange
will look to current market conditions rather than a previous execution
to determine the auction price where no limit orders
[[Page 75462]]
from one or both sides would participate in the auction. In addition,
the Exchange believes that the proposed changes will provide greater
transparency and certainty in Exchange Auctions by helping to reduce
the possibility that an auction would occur at a price that would
qualify as clearly erroneous under Rule 11.17(c)(1) and that may result
in cancelled executions. Further, the Exchange believes that the
proposed change will provide greater transparency and certainty in
Exchange Auctions by helping to limit the volatility in auction prices
by narrowing the Collar Price Range. The Exchange also believes that
the proposed changes will help prevent fraudulent and manipulative acts
and practices along with, in general, protecting investors and the
public interest by changing the auction information messages
disseminated by the Exchange during IPO and Halt Auctions to include
only the lesser of the Reference Buy Shares and the Reference Sell
Shares, which will more help to prevent the possibility of gaming in
the auctions, as described above. Lastly, the Exchange believes that
the proposed changes will provide greater clarity and transparency by
making clear that any portion of a Market RHO Auction Order will be
cancelled immediately following any auction in which it is not
executed, behavior that is consistent with the behavior of all other
market orders entered on the Exchange.
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\10\ 15 U.S.C. 78f(b).
\11\ 15 U.S.C. 78f(b)(5).
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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 Change and Timing for
Commission Action
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period (i) as the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reasons for so finding or (ii) as to
which the Exchange consents, the Commission will: (a) By order approve
or disapprove such proposed rule change, or (b) institute proceedings
to determine whether the proposed rule change should be disapproved.
IV. 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 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 [email protected]. Please include
File Number SR-BATS-2012-046 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 Number SR-BATS-2012-046. 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 the 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-BATS-2012-046 and should be
submitted on or before January 10, 2013.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\12\
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\12\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-30687 Filed 12-19-12; 8:45 am]
BILLING CODE 8011-01-P