[Federal Register Volume 78, Number 235 (Friday, December 6, 2013)]
[Notices]
[Pages 73577-73580]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-29092]
[[Page 73577]]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-70964; File No. SR-BATS-2013-060]
Self-Regulatory Organizations; BATS Exchange, Inc.; Notice of
Filing and Immediate Effectiveness of a Proposed Rule Change To Modify
the Risk Monitoring Functionality Offered by the Exchange
December 2, 2013.
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 November 18, 2013, 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 filed a proposal to amend Rule 21.16, entitled ``Risk
Monitor Mechanism'', in order to modify the risk monitoring
functionality offered to all Users \5\ of the BATS equity options
trading platform (``BATS Options'') and to make a clarifying change to
the rule text.
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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.
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 changes are: (1) to amend Exchange
Rule 21.16(b)(ii) in order add a new percentage-based Specified
Engagement Trigger \6\ to the Risk Monitor Mechanism; (2) to amend BATS
Rule 21.16(c) in order to provide more granular cancellation of orders
under the Risk Monitor Mechanism; (3) to make a clarifying change to
BATS Rule 22.11; and (4) to add BATS Rule 21.16(e). Specifically, the
Exchange proposes to amend Rule 21.16(b)(ii), entitled ``Specified
Engagement Triggers'', in order to adopt a new type of Specified
Engagement Trigger that will be triggered whenever a trade counter has
calculated that the User has traded a certain percentage within a time
period specified by the Exchange against the User's orders in a
specified class. The Exchange also proposes to amend Rule 21.16(c) such
that an incoming order that is received prior to the time that the Risk
Monitor Mechanism is engaged and is executable against a User's
quotation will execute up to the entire size of the User's quotation
that would cause executions in excess of the User's Specified
Engagement Trigger, but any additional executable quotations will be
cancelled. The Exchange further proposes to amend Rule 22.11 in order
to clarify the functionality of mass cancellation of trading interest,
and to add Rule 21.16(e) in order to make clear that a User may engage
the Risk Monitor Mechanism in order to implement such mass cancellation
functionality.
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\6\ As defined in Exchange Rule 21.16(b)(ii).
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Overview
Currently, the Exchange's Risk Monitor Mechanism operates by the
System maintaining a counting program for each User. A single User may
configure a single counting program or multiple counting programs to
govern its trading activity (i.e., on a port by 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 commences for an
option when a transaction occurs in any series in such option. The
counting program also counts a User's executions, contract volume, and
notional value across all options which a User trades. The counting
program counts 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 also counts a
User's executions, contract volume, and notional value across all
options which a User trades (``Firm Category''). For the purposes of
the Risk Monitor Mechanism, 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 engages 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 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 Rule 21.16. The Risk Monitor Mechanism
also attempts to cancel any orders that have been routed away to other
options exchanges on behalf of the User.
As provided in subparagraph (b)(ii) of BATS Rule 21.16, 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 \7\ (the ``notional trigger''); and (C) an
execution count trigger, measured against the number of executions
(``count trigger'').
[[Page 73578]]
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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\7\ 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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Rule 22.11, entitled ``Mass Cancellation of Trading Interest''
currently provides that a User may simultaneously cancel all its bids,
offers, and orders in all series of options by requesting the Exchange
staff to effect such cancellation. The form of such requests includes
but is not limited to email or phone call from authorized individuals,
and the Risk Monitor Mechanism. As part of Rule 22.11, a User may
submit a request to cancel a subset or the entirety of its outstanding
orders.
Percentage-Based Engagement Trigger
The Exchange proposes to create a new Specified Engagement Trigger
to the Risk Monitor Mechanism based on percentage under BATS Rule
21.16(b)(ii) (the ``percentage trigger''). The proposed percentage
trigger would be triggered whenever a trade counter has calculated that
the User has traded a set percentage (designated by the User) within a
set time period (designated by the Exchange) against the User's orders
in a specified class. The set percentage is specified by the User (the
``Specified Percentage'') and will be calculated as follows (and as
shown in the examples below): (1) a counting program would first
calculate, for each series of an option class, the percentage of a
User's combined order and quote size that is executed on each side of
the market, including both displayed and non-displayed size; and (2) a
counting program would then sum the overall series percentages for the
entire option class to calculate the percentage.
Example 1
For Examples 1 and 2, if a User enters orders at the National Best
Bid or Offer (``NBBO'') in four series of a class and its Specified
Percentage is 100%, a counting program would calculate such percentage
as follows:
----------------------------------------------------------------------------------------------------------------
of
Series Quote size Contracts Series percentage
executed (%)
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Series 1............................................... 100 40 40
Series 2............................................... 50 20 40
Series 3............................................... 200 20 10
Series 4............................................... 150 15 10
Total.............................................. 500 95 100
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In Example 1, the aggregate number of contracts executed among all
series during the time period specified by the Exchange that equals the
specified percentage of 100% is 95 contracts, at which point the
percentage trigger would be triggered and the User's remaining orders
in the appointed class would be cancelled.
Example 2
----------------------------------------------------------------------------------------------------------------
of
Series Quote size Contracts Series Percentage
Executed (%)
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Series 1............................................... 100 0 0
Series 2............................................... 50 0 0
Series 3............................................... 200 0 0
Series 4............................................... 150 150 100
Total.................................................. 500 150 100
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In Example 2, the aggregate number of contracts executed among all
series during the time period specified by the Exchange that equals the
specified percentage of 100% is 150 contracts, at which point the
percentage trigger would be triggered and the User's remaining quotes
in the appointed class would be cancelled.
Example 3
For Example 3, if a User is quoting at the NBBO in four series of a
particular option class, and specifies its percentage trigger at 200%,
a trade counter would calculate such percentage as follows:
----------------------------------------------------------------------------------------------------------------
of
Series Quote size Contracts Series percentage
executed (%)
----------------------------------------------------------------------------------------------------------------
Series 1............................................... 100 80 80
Series 2............................................... 50 40 80
Series 3............................................... 200 40 20
Series 4............................................... 150 30 20
Total.............................................. 500 190 200
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In Example 3, the aggregate number of contracts executed among all
series during the time period specified by the Exchange that equals the
specified percentage of 200% is 190 contracts, at which point the
percentage trigger would be triggered and the User's remaining quotes
in the appointed class would be cancelled.
Order Cancellation
The Exchange also proposes to amend Rule 21.16(c) regarding what
will happen to marketable orders that are executable against a User's
quotation that are received prior to the time that the Risk Monitor
Mechanism is engaged. Specifically, the Exchange is proposing to amend
the rule such that where there are marketable orders that are
executable against a User's order or quotation that are received prior
to the
[[Page 73579]]
time that the Risk Monitor Mechanism is engaged will be automatically
executed up to the size of the User's quotation (but not all of the
User's quotations, as currently implemented). For example, where a
single User's Specified Engagement Trigger is 150 contracts, the User
has entered the following sell orders in a given series that are
resting at the Exchange, and the next most aggressively priced sell
order in the series is 10.04:
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Price Level Quoted Size
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10.01................................................... 100
10.02................................................... 100
10.03................................................... 150
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Where another User then enters a 300 contract buy order priced at
10.03, the Exchange will allow the orders priced at 10.01 and 10.02 to
execute in full, even though the execution of the 10.02 order will
result in an execution of a total of 200 contracts, which will exceed
the Specified Engagement Trigger of 150 contracts. The Exchange will
then cancel the entirety of the 10.03 order and the remaining portion
of the buy order will behave as indicated by the other User indicated
upon entry. Under the current implementation, the Exchange would allow
the entirety of the buy order to execute before cancelling any of the
User's orders, meaning that the orders priced at 10.01 and 10.02 would
execute in full and 100 shares of the order priced at 10.03 would
execute, at which point the remaining 50 shares of the order priced at
10.03 would be cancelled. The Exchange believes that this change in the
implementation of the Risk Monitor Mechanism will provide an
appropriate level of additional protection for firms using the
mechanism such that, while their risk limits can be exceeded to satisfy
an incoming order, such limits will be better protected by cancelling
interest after the first quotation has been executed that equals or
exceeds the User's Specified Engagement Trigger (i.e., the Exchange
will not allow an incoming order to execute against all of a User's
quotations even after their risk limits have been breached).
Clarifying Changes
The Exchange also proposes to make a clarifying amendment to Rule
22.11 in order to make the mass cancellation functionality more clear.
As described above, a User may submit a request to cancel any subset or
the entirety of its outstanding orders. The Exchange is proposing to
clarify Rule 22.11 in order to make clear that a User may request to
cancel orders for a specified underlying security.
Similarly, the Exchange proposes to make a clarifying change by
adding paragraph 21.16(e) in order to make clear that a User may engage
the Risk Monitor Mechanism in order to use the mass cancellation
functionality from Rule 22.11.
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.\8\ Specifically, the
proposed change is consistent with Section 6(b)(5) of the Act,\9\
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 additional functionality for Users to manage their
risk. Offering the percentage trigger and more granular order
cancellation as part of the Risk Monitor Mechanism will provide Market
Makers and other Users with greater control and flexibility with
respect to managing risk and the manner in which they enter orders and
quotes, allowing them to quote more 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
NYSE Arca, Inc. (``NYSE Arca Options'') and NYSE Amex Options, Inc.
(``NYSE Amex Options'').\10\
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\8\ 15 U.S.C. 78f(b).
\9\ 15 U.S.C. 78f(b)(5).
\10\ See NYSE Arca Options Rule 6.40(d); see also NYSE Amex
Options Rule 928NY(d).
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(B) Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition not necessary or appropriate in
furtherance of the purposes of the act. To the contrary, the current
variances between the Exchange's Risk Monitor Mechanism and the risk
monitoring available at other exchanges limit competition in that other
exchanges are able to employ their risk management tools using a
percentage-based trigger, while the Exchange cannot employ such a
trigger. Thus, approval of the proposed rule change will promote
competition because it will allow the Exchange to offer its Users
similar percentage triggers as are available at other exchanges and
thus compete with other exchanges for order flow that a User may not
have directed to the Exchange if the percentage trigger was not
available.
(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
Because the foregoing proposed rule change does not: (1)
significantly affect the protection of investors or the public
interest; (2) impose any significant burden on competition; and (3)
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 \11\ and Rule 19b-
4(f)(6)(iii) thereunder.\12\
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\11\ 15 U.S.C. 78s(b)(3)(A).
\12\ 17 CFR 240.19b-4(f)(6).
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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: (i)
necessary or appropriate in the public interest; (ii) for the
protection of investors; or (iii) otherwise in furtherance of the
purposes of the Act. If the Commission takes such action, the
Commission shall institute proceedings to determine whether the
proposed rule should be approved or disapproved.
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-2013-060 on the subject line.
[[Page 73580]]
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-2013-060. 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-2013-060 and should be
submitted on or before December 27, 2013.
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. 2013-29092 Filed 12-5-13; 8:45 am]
BILLING CODE 8011-01-P