[Federal Register Volume 78, Number 71 (Friday, April 12, 2013)]
[Notices]
[Pages 22015-22017]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-08556]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-69331; File No. SR-BATS-2013-016]
Self-Regulatory Organizations; BATS Exchange, Inc.; Order
Approving, on an Accelerated Basis, Proposed Rule Change To Modify the
BATS Options Market Maker Obligation Rule
April 5, 2013.
I. Introduction
On March 1, 2013, BATS Exchange, Inc. (the ``Exchange'' or
``BATS'') filed with the Securities and Exchange Commission
(``Commission''), pursuant to Section 19(b)(1) \1\ of the Securities
Exchange Act of 1934 (``Act''),\2\ and Rule 19b-4 thereunder,\3\ a
proposed rule change to modify the BATS Options Market (``BATS
Options'') Market Maker
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obligation rule. The proposed rule change was published for comment in
the Federal Register on March 12, 2013.\4\ The Commission received no
comment letters on the proposal. This order approves the proposed rule
change on an accelerated basis.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 15 U.S.C. 78a.
\3\ 17 CFR 240.19b-4.
\4\ See Securities Exchange Act Release No. 69038 (March 5,
2013), 78 FR 15773.
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II. Background
On May 6, 2010, the U.S. equity markets experienced a severe
disruption that, among other things, resulted in the prices of a large
number of individual securities suddenly declining by significant
amounts in a very short time period before suddenly reversing to prices
consistent with their pre-decline levels.\5\ This severe price
volatility led to a large number of trades being executed at
temporarily depressed prices, including many that were more than 60%
away from pre-decline prices. One response to the events of May 6,
2010, was the development of the single-stock circuit breaker pilot
program, which was implemented through a series of rule filings by the
equity exchanges and by FINRA.\6\ The single-stock circuit breaker was
designed to reduce extraordinary market volatility in NMS stocks by
imposing a five-minute trading pause when a trade was executed at a
price outside of a specified percentage threshold.\7\
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\5\ The events of May 6 are described more fully in a joint
report by the staffs of the Commodity Futures Trading Commission
(``CFTC'') and the Commission. See Report of the Staffs of the CFTC
and SEC to the Joint Advisory Committee on Emerging Regulatory
Issues, ``Findings Regarding the Market Events of May 6, 2010,''
dated September 30, 2010, available at http://www.sec.gov/news/studies/2010/marketevents-report.pdf.
\6\ For further discussion on the development of the single-
stock circuit breaker pilot program, see Securities Exchange Act
Release No. 67091 (May 31, 2012), 77 FR 33498 (June 6, 2012)
(``Limit Up-Limit Down Plan'' or ``Plan'').
\7\ See Securities Exchange Act Release Nos. 62884 (September
10, 2010), 75 FR 56618 (September 16, 2010) and Securities Exchange
Act Release No. 62883 (September 10, 2010), 75 FR 56608 (September
16, 2010) (SR-FINRA-2010-033) (describing the ``second stage'' of
the single-stock circuit breaker pilot) and Securities Exchange Act
Release No. 64735 (June 23, 2011), 76 FR 38243 (June 29, 2011)
(describing the ``third stage'' of the single-stock circuit breaker
pilot).
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To replace the single-stock circuit breaker pilot program, the
equity exchanges filed a National Market System Plan \8\ pursuant to
Section 11A of the Act,\9\ and Rule 608 thereunder,\10\ which featured
a ``limit up-limit down'' mechanism (as amended, the ``Limit Up-Limit
Down Plan'' or ``Plan'').
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\8\ NYSE Euronext filed on behalf of New York Stock Exchange LLC
(``NYSE''), NYSE Amex LLC (``NYSE Amex''), and NYSE Arca, Inc.
(``NYSE Arca''), and the parties to the proposed National Market
System Plan, BATS Exchange, Inc., BATS Y-Exchange, Inc., Chicago
Board Options Exchange, Incorporated (``CBOE''), Chicago Stock
Exchange, Inc., EDGA Exchange, Inc., EDGX Exchange, Inc., Financial
Industry Regulatory Authority, Inc., NASDAQ OMX BX, Inc., NASDAQ OMX
PHLX LLC, the Nasdaq Stock Market LLC, and National Stock Exchange,
Inc. (collectively with NYSE, NYSE MKT, and NYSE Arca, the
``Participants''). On May 14, 2012, NYSE Amex filed a proposed rule
change on an immediately effective basis to change its name to NYSE
MKT LLC (``NYSE MKT''). See Securities Exchange Act Release No.
67037 (May 21, 2012) (SR-NYSEAmex-2012-32).
\9\ 15 U.S.C. 78k-1.
\10\ 17 CFR 242.608.
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The Plan sets forth requirements that are designed to prevent
trades in individual NMS stocks from occurring outside of the specified
price bands. The price bands consist of a lower price band and an upper
price band for each NMS stock. When one side of the market for an
individual security is outside the applicable price band, i.e., the
National Best Bid is below the Lower Price Band, or the National Best
Offer is above the Upper Price band, the Processors \11\ are required
to disseminate such National Best Bid or National Best Offer \12\ with
a flag identifying that quote as non-executable. When the other side of
the market reaches the applicable price band, i.e., the National Best
Offer reaches the lower price band, or the National Best Bid reaches
the upper price band, the market for an individual security enters a
15-second Limit State, and the Processors are required disseminate such
National Best Offer or National Best Bid with an appropriate flag
identifying it as a Limit State Quotation. Trading in that stock would
exit the Limit State if, within 15 seconds of entering the Limit State,
all Limit State Quotations were executed or canceled in their entirety.
If the market does not exit a Limit State within 15 seconds, then the
Primary Listing Exchange will declare a five-minute trading pause,
which is applicable to all markets trading the security.
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\11\ As used in the Plan, the Processor refers to the single
plan processor responsible for the consolidation of information for
an NMS Stock pursuant to Rule 603(b) of Regulation NMS under the
Exchange Act. See id.
\12\ ``National Best Bid'' and ``National Best Offer'' has the
meaning provided in Rule 600(b)(42) of Regulation NMS under the
Exchange Act. See id.
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The Primary Listing Exchange may also declare a trading pause when
the stock is in a Straddle State, i.e., the National Best Bid (Offer)
is below (above) the Lower (Upper) Price Band and the NMS Stock is not
in a Limit State. In order to declare a trading pause in this scenario,
the Primary Listing Exchange must determine that trading in that stock
deviates from normal trading characteristics such that declaring a
trading pause would support the Plan's goal to address extraordinary
market volatility.\13\
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\13\ As set forth in more detail in the Plan, all trading
centers would be required to establish, maintain, and enforce
written policies and procedures reasonably designed to prevent the
display of offers below the Lower Price Band and bids above the
Upper Price Band for an NMS Stock. The Processors would be able to
disseminate an offer below the Lower Price Band or bid above the
Upper Price Band that nevertheless may be inadvertently submitted
despite such reasonable policies and procedures, but with an
appropriate flag identifying it as non-executable; such bid or offer
would not be included in National Best Bid or National Best Offer
calculations. In addition, all trading centers would be required to
develop, maintain, and enforce policies and procedures reasonably
designed to prevent trades at prices outside the price bands, with
the exception of single-priced opening, reopening, and closing
transactions on the Primary Listing Exchange.
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On May 31, 2012, the Commission approved the Plan as a one-year
pilot, which shall be implemented in two phases.\14\ The first phase of
the Plan shall be implemented beginning April 8, 2013.\15\
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\14\ See ``Limit Up-Limit Down Plan,'' supra note 6. See also
Securities Exchange Act Release No. 68953 (February 20, 2013), 78 FR
13113 (February 26, 2013) (Second Amendment to Limit Up-Limit Down
Plan by BATS Exchange, Inc., BATS Y-Exchange, Inc., Chicago Board
Options Exchange, Inc., et al.) and Securities Exchange Act Release
No. 69062 (March 7, 2013), 78 FR 15757 (March 12, 2013) (Third
Amendment to Limit Up-Limit Down Plan by BATS Exchange, Inc., BATS
Y- Exchange, Inc., Chicago Board Options Exchange, Inc., et al.)
\15\ See ``Second Amendment to Limit Up-Limit Down Plan,'' supra
note 14.
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III. Description of the Proposal
In light of and in connection with the Limit Up-Limit Down Plan,
BATS is amending Rule 22.6(d) to suspend the obligation of Market
Makers registered with BATS Options to enter continuous bids and offers
during a halt, suspension, or pause in trading of the underlying
security.
Currently, under Rule 22.6(d), BATS Options requires Market Makers
to enter continuous bids and offers for the options series to which it
is registered in at least 75% of the options series in which the Market
Maker is registered. The Exchange's proposal would suspend a Market
Maker's continuous quoting obligation for the duration that an
underlying NMS stock is in a Limit State or a Straddle State. The
Exchange's proposal would also suspend those obligations during a
trading halt, suspension, or pause (collectively, a ``Trading Halt'')
in the underlying security. Following a trading halt, the market
maker's quoting obligations would only resume following the first
regular-way transaction on the primary listing market in the underlying
security.
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IV. Discussion and Commission Findings
After careful review, the Commission finds that the proposed rule
change is consistent with the requirements of the Act and rules and
regulations thereunder applicable to a national securities
exchange.\16\ In particular, the Commission finds that the proposed
rule change is consistent with Section 6(b)(5) of the Act,\17\ which,
among other things, requires a national securities exchange to be so
organized and have the capacity to be able to carry out the purposes of
the Act and to enforce compliance by its members and persons associated
with its members with the provisions of the Act, the rules and
regulations thereunder, and the rules of the exchange, and 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 regulation, clearing, settling,
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.
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\16\ In approving the proposed rule changes, the Commission has
considered their impact on efficiency, competition, and capital
formation. See 15 U.S.C. 78c(f).
\17\ 15 U.S.C. 78f(b).
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The Commission finds that the proposal to suspend a Market Maker's
obligations when the underlying security is in a limit up-limit down
state is consistent with the Act. When the underlying is in a Limit or
Straddle State or is subject to a Trading Halt,\18\ there may not be a
reliable price for the underlying security to serve as a benchmark for
market makers to price options. In addition, the absence of an
executable bid or offer for the underlying security will make it more
difficult for market makers to hedge the purchase or sale of an option.
Given these significant changes to the normal operating conditions of
market makers, the Commission finds that the Exchange's decision to
suspend a Market Maker's obligations in these limited circumstances is
consistent with the Act.
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\18\ The Commission notes that, pursuant to BATS Rule 20.5, BATS
will halt trading in the option when the trading in the underlying
is halted as a result of a circuit breaker. Therefore, the proposal
to suspend market maker quoting obligations when the underlying is
subject to a trading halt would apply to other, non-circuit breaker-
related instances when the underlying is no longer trading, but,
pursuant to Rule 20.3, BATS has elected to continue trading the
overlying option.
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The Commission notes, however, that the Plan was approved on a
pilot basis and its Participants will monitor how it is functioning in
the equity markets during the pilot period. To this end, the Commission
expects that, upon implementation of the Plan, the Exchange will
continue monitoring the quoting requirements that are being amended in
this proposed rule change and determine if any necessary adjustments
are required to ensure that they remain consistent with the Act.
In addition, the Commission finds good cause, pursuant to Section
19(b)(2) of the Act \19\ for approving the proposed rule change on an
accelerated basis. The proposal is in part related to the Plan, which
will become operative on April 8, 2013.\20\ Without accelerated
approval, the proposed rule change, and any attendant benefits, would
take effect after the Plan's implementation date. Accordingly, the
Commission finds that good cause exists for approving the proposed rule
change on an accelerated basis.
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\19\ 15 U.S.C. 78s(b)(2).
\20\ See supra note 15.
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V. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the Act
\21\ that the proposed rule change (SR-BATS-2013-016) is approved on an
accelerated basis.
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\21\ 15 U.S.C. 78f(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\22\
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\22\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-08556 Filed 4-11-13; 8:45 am]
BILLING CODE 8011-01-P