[Federal Register Volume 78, Number 25 (Wednesday, February 6, 2013)]
[Notices]
[Pages 8655-8657]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-02557]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-68789; File No. SR-BATS-2013-005]
Self-Regulatory Organizations; BATS Exchange, Inc.; Notice of
Filing of Proposed Rule Change To Modify the Competitive Liquidity
Provider Program to, Among Other Things, Modify the Calculation of Size
Event Tests
January 31, 2013.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on January 18, 2013, BATS Exchange, Inc. (``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
Interpretation and Policy .02 to Rule 11.8, entitled ``Competitive
Liquidity Provider Program.''
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.
(A) Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
On August 30, 2011, the Exchange received approval of rules
applicable to the qualification, listing and delisting of securities of
issuers on the Exchange.\3\ More recently, the Exchange received
approval to operate a program that is designed to incentivize certain
market makers registered with the Exchange as Competitive Liquidity
Providers (``CLPs'') to enhance liquidity on the Exchange in Exchange-
listed securities (the ``Competitive Liquidity Provider Program'' or
``CLP Program'').\4\ The Program seeks to establish a venue for the
execution of retail orders with greater price competition and
transparency than existing execution arrangements. The Exchange
subsequently adopted financial incentives for the CLP Program \5\ and
thereafter amended certain financial incentives for the CLP Program.\6\
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\3\ See Securities Exchange Act Release No. 65225 (August 30,
2011), 76 FR 55148 (September 6, 2011) (SR-BATS-2011-018).
\4\ See Securities Exchange Act Release No. 66307 (February 2,
2012), 77 FR 6608 (February 8, 2012) (SR-BATS-2011-051).
\5\ See Securities Exchange Act Release No. 66427 (February 21,
2012), 77 FR 11608 (February 27, 2012) (SR-BATS-2012-011).
\6\ See Securities Exchange Act Release No. 67854 (September 13,
2012), 77 FR 58198 (September 19, 2012) (SR-BATS-2012-036).
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The purpose of this filing is to modify Interpretation and Policy
.02 of Rule 11.8 regarding certain details around the implementation of
the CLP Program. Specifically, the Exchange proposes to: (1) Expand the
time during which the Exchange will calculate Size Event Tests
(``SETs'') to between 9:25 a.m. and 4:05 p.m.; (2) calculate SETs
separately for bids and offers; (3) provide separate daily rebates
based on the greatest number of winning bid SETs and winning offer
SETs; (4) increase the
[[Page 8656]]
minimum quote to have a winning SET to five round lots; (5) require a
CLP to also quote at least one round lot at or within 1.2% of the CLP's
bid or offer in order to have a winning SET during Regular Trading
Hours; \7\ and (6) change the system for allocating the daily rebate to
the CLPs with the highest and second highest winning SETs from a set
percentage to a pro rata basis.
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\7\ Regular Trading Hours is defined in BATS Rule 1.5(w).
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Extending the Time of the CLP Program
The Exchange is proposing to expand the time during which SETs are
calculated on the Exchange. Currently, the Exchange calculates SETs at
least once per second, but only during Regular Trading Hours. This
Exchange proposes to expand the time during which SETs are calculated
to include the period five minutes before the beginning of Regular
Trading Hours and five minutes after Regular Trading Hours, or 9:25
a.m. to 4:05 p.m. The Exchange is proposing this change in order to
encourage CLPs to enter aggressively priced orders immediately prior
to, during, and immediately after both Opening Auctions \8\ and Closing
Auctions \9\ in BATS listed securities.
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\8\ The process for Opening Auctions in BATS listed securities
is described in BATS Rule 11.23(b).
\9\ The process for Closing Auctions in BATS listed securities
is described in BATS Rule 11.23(c).
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Calculating SETs Separately for Bids and Offers
The Exchange also proposes to calculate SETs and provide rebates
separately for bids and offers. Currently, the Exchange calculates and
determines the winner(s) of each SET by adding together the total
number of bid shares that a CLP is quoting at the NBB and the number of
offer shares that the CLP is quoting at the NBO (the ``Combined
Shares''). The Exchange then determines the SET winner based on the
highest total Combined Shares.
This proposal intends to amend Interpretation and Policy .02(g) of
Rule 11.8 so that the Exchange calculates SETs separately for bids and
offers. As proposed, the Exchange would evaluate a CLP's bid quotes and
offer quotes separately, meaning that the CLP or CLPs with the greatest
aggregate size at the NBB will be considered to have a winning bid SET
and the CLP or CLPs with the greatest aggregate size at the NBO will be
considered to have a winning offer SET. No CLPs would be considered to
have a winning SET for having the greatest aggregate size at the NBB
and NBO combined.
Minimum Quote Size Requirement
The Exchange is proposing to increase the minimum quote size
requirement to be eligible to have a winning SET during Regular Trading
Hours. Currently, the Exchange only requires that a CLP's orders are
for at least one round lot. Specifically, this proposal to amend sub-
paragraph (g)(4) of Interpretation and Policy .02 to Rule 11.8 is
intended to increase the minimum quote size requirement to five round
lots (usually 500 shares) for a CLP to have a winning bid or offer SET.
The Exchange is proposing this change to encourage CLPs to provide
additional liquidity at the NBBO in BATS listed securities.
Contra-Side Quoting Requirement
The Exchange also proposes that a CLP be required to quote at least
one round lot at or within 1.2% of the CLP's bid or offer in order to
have a winning SET during Regular Trading Hours. Currently, outside of
daily and monthly quoting requirements, the Exchange does not have any
quoting requirements for CLPs. More specifically, the Exchange does not
currently have any contra-side quoting requirements that a CLP must
meet in order to be considered to have a winning SET.
This proposal to add sub-paragraph (g)(5) to Interpretation and
Policy .02 to Rule 11.8 is intended to require that, in order to have a
winning bid SET or winning offer SET during Regular Trading Hours, a
CLP must have a bid or offer on the contra-side at a price at or within
1.2% of the CLP's winning offer or bid, respectively. For example, as
proposed, in order for a CLP to have a winning bid SET for a 500 share
bid priced at $10.00, the CLP must, at the time of the SET, also have
at least one round lot offer for between $10.00 and $10.12. For a CLP
to have a winning offer SET for a 500 share offer priced at $10.00, the
CLP must, at the time of the SET, also have at least one round lot bid
priced between $9.88 and $10.00. The Exchange is proposing this
amendment in order to require CLPs to provide liquidity on both sides
of the market in order to be considered to have a winning bid or offer
SET. The Exchange is proposing to have this requirement apply only to
SETs during Regular Trading Hours in order to mitigate exposure due to
potentially high volatility in pricing that occurs outside of Regular
Trading Hours.
Providing Daily Financial Rebates Separately for Bid SETs and Offer
SETs
The Exchange proposes to provide separate daily rebates based on
the greatest number of winning bid SETs and winning offer SETs.
Currently, the one or two CLPs (depending on the type of security) with
the greatest number of winning SETs (subject to other requirements, not
relevant for the purposes of this proposed change) win a set percentage
of a single daily rebate. The Exchange is proposing, in conjunction
with the above proposed change to calculate SETs separately for bids
and offers, to amend Interpretation and Policy .02 (g)(1)(A) and (k)(1)
of Rule 11.8 to provide daily financial rebates to CLPs based on which
CLP or CLPs have the greatest number of winning bid SETs and,
separately, winning offer SETs.
Allocation of Daily Financial Rebates
The Exchange is also proposing to amend the way that it allocates
daily financial rebates to CLPs. Currently, for all CLP eligible
securities with the exception of Tier II securities,\10\ the Exchange
allocates daily financial rebates on an 80/20 basis in which the
eligible CLP with the highest number of winning SETs receives 80% of
the daily financial rebate and the eligible CLP with the second highest
number of winning SETs receives 20% of the daily financial rebate.\11\
Frequently, the Exchange has found that the CLP with the most or second
most winning SETs will realize that they are so far in front of the
next CLP and/or so far behind the CLP in front of them that they no
longer have incentive to continue to provide aggressive quotes.
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\10\ As defined in BATS Rule 14.9.
\11\ It is worth noting that the Exchange currently does not
distinguish between bid SETs and offer SETs and awards the daily
financial rebates to CLPs based only on the total number of winning
SETs (whether on an 80/20 basis or, as under Tier II, 100% to a
single CLP). As described above, the Exchange is proposing to
calculate both winning bid SETs and winning offer SETs and, as such,
is also proposing to provide separate and independent financial
rebates to CLPs for bid SETs and offer SETs.
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In order to incentivize CLPs to continue to quote aggressively
throughout the day, the Exchange is proposing to amend paragraph (k)(1)
of Interpretation and Policy .02 to Rule 11.8 to allocate daily
financial rebates to CLPs on a pro rata basis. Specifically, the
Exchange is proposing to determine the two CLPs that receive the daily
financial rebates on the same basis, however, rather than receiving a
pre-set percentage of the financial rebate, the CLPs will split the
financial rebate based on the number of each CLP's winning SETs as a
percentage of total winning SETs between the two winning CLPs. For
instance, where CLP1 has 6,000 winning SETs, CLP2 has 4,000
[[Page 8657]]
winning SETS, and CLP3 has 3,000 winning SETs, currently, the Exchange
would award 80% to CLP1 and 20% to CLP2, based on the set percentages.
However, as proposed, CLP1 would be allocated 60% of the financial
rebate [6,000/(6000+4000)] and CLP2 would be allocated 40% of the
financial rebate [4,000/(6,000+4,000)]. The Exchange is not proposing
to reallocate the daily financial rebates for Tier II securities.
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.\12\ In particular,
the proposal is consistent with Section 6(b)(5) of the Act,\13\ 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. The Exchange believes that the proposal
will benefit market participants by incentivizing increased
participation in the Opening and Closing Auction by expanding the time
during which the Exchange will conduct SETs, thus improving the price
discovery process. The Exchange also believes that the proposal will
promote tighter spreads for all market participants by separately
calculating SETs and providing rebates for bids and offers rather than
combined bids and offers, which will incentivize CLPs to quote more
aggressively on both the bid and offer. Further, the Exchange believes
that the proposal will promote tighter spreads by requiring that CLPs
quote at least one round lot at or within 1.2% of a bid or offer in
order to have a winning SET during Regular Trading Hours. In addition
to creating tighter spreads, the Exchange further believes that the
proposal is consistent with the Act because it will help to increase
liquidity at the NBBO by increasing the minimum quote size from one
round lot to five round lots. Finally, the Exchange believes that the
proposed pro-rata structure will incentivize CLPs to quote aggressively
on a continuous basis throughout each trading day.
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\12\ 15 U.S.C. 78f(b).
\13\ 15 U.S.C. 78f(b)(5).
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(B) Self-Regulatory Organization's Statement on Burden on Competition
The proposed rule change does not impose any burden on competition.
The Exchange believes that the proposal will merely improve the
incentives and, in turn, the results, of its CLP Program. The Exchange
believes that the proposed changes will enhance competition amongst
participants in the CLP Program.
(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 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-2013-005 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-2013-005. 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-BATS-2013-005 and should be
submitted on or before February 27, 2013.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\14\
Kevin M. O'Neill,
Deputy Secretary.
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\14\ 17 CFR 200.30-3(a)(12).
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[FR Doc. 2013-02557 Filed 2-5-13; 8:45 am]
BILLING CODE 8011-01-P