[Federal Register Volume 79, Number 191 (Thursday, October 2, 2014)]
[Notices]
[Pages 59524-59527]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-23450]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-73235; File No. SR-BYX-2014-025]
Self-Regulatory Organizations; BATS Y-Exchange, Inc.; Notice of
Filing and Immediate Effectiveness of a Proposed Rule Change To Amend
Rule 11.9(c) To Adopt a Supplemental Peg Order
September 26, 2014.
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 September 15, 2014, BATS Y-Exchange, Inc. (the ``Exchange'' or
``BYX'') 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
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 the
Substance of the Proposed Rule Change
The Exchange proposed to amend: (i) Rule 11.9(c) to adopt a new
order type called the Supplemental Peg Order and; (ii) Rule 11.12(a) to
reflect the priority of Supplemental Peg Orders. The proposed
Supplemental Peg Order is identical to the existing Route Peg Order
available on EDGX Exchange, Inc. (``EDGX'') and EDGA Exchange, Inc.
(``EDGA'') \5\ and similar to order types offered by the Nasdaq Stock
Market LLC (``Nasdaq'') and NYSE Arca, Inc. (``NYSE Arca'').\6\ The
Exchange has designated this proposal as non-controversial and provided
the Commission with the notice required by Rule 19b-4(f)(6)(iii) under
the Act.\7\
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\5\ See EDGA Rules 11.5(c)(14), 11.8(a)(2) and 11.8(a)(7); EDGX
Rules 11.5(c)(17), 11.8(a)(2) and 11.8(a)(7).
\6\ See Nasdaq Rules 4751(f)(14) and 4757(a)(1)(D); NYSE Arca
Rule 7.31(f).
\7\ 17 CFR 240.19b-4(f)(6)(iii).
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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 Exchange proposes to amend: (i) Rule 11.9(c) to adopt a new
order type called the Supplemental Peg Order and; (ii) Rule 11.12(a) to
reflect the priority of Supplemental Peg Orders. The proposed
Supplemental Peg Order is identical to the existing Route Peg Order
available on EDGX and EDGA \8\ and similar to order types offered by
the NYSE and NYSE Arca.\9\
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\8\ See supra note 5.
\9\ See supra note 6.
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Earlier this year, the Exchange and its affiliate, BATS Exchange,
Inc. (``BZX''), received approval to affect a merger (the ``Merger'')
of the Exchange's parent company, BATS Global Markets, Inc., with
Direct Edge Holdings LLC, the indirect parent of EDGX and EDGA
(together with BZX, BYX and EDGX, the ``BGM Affiliated
Exchanges'').\10\ In the context of the Merger, the BGM Affiliated
Exchanges are working to align certain system functionality, retaining
only intended differences between the BGM Affiliated Exchanges. Thus,
the proposal set forth below is intended to add certain system
functionality currently offered by EDGA and EDGX in order to provide a
consistent technology offering for users of the BGM Affiliated
Exchanges.
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\10\ See Securities Exchange Act Release No. 71375 (January 23,
2014), 79 FR 4771 (January 29, 2014) (SR-BATS-2013-059; SR-BYX-2013-
039).
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Like the Route Peg Order on EDGA and EDGX,\11\ the proposed
Supplemental Peg Order would be a non-displayed limit order that posts
to the BATS Book,\12\ and thereafter be eligible for execution at the
National Best Bid (``NBB'') for buy orders and National Best Offer
(``NBO'') for sell orders against routable orders that are equal to or
less than the aggregate size of the Supplemental Peg Order interest
available at that price. Supplemental Peg Orders are passive, resting
orders on the BATS Book and do not take liquidity. A User \13\ may
specify a minimum execution quantity for a Supplemental Peg Order. A
minimum execution quantity on a Supplemental Peg Order will no longer
apply where the number of shares remaining after a partial execution
are less than the
[[Page 59525]]
minimum execution quantity. Supplemental Peg Orders are eligible for
execution in a given security during the Pre-Opening Session, Regular
Trading Hours, and After Hours Trading Session.\14\ Supplemental Peg
Orders are not eligible for execution in the Opening Process.\15\ A
Supplemental Peg Order does not execute at a price that is inferior to
a Protected Quotation, and is not permitted to execute if the National
Best Bid or Offer (``NBBO'') is locked or crossed. Any and all
remaining, unexecuted Supplemental Peg Orders are cancelled at the
conclusion of the After Hours Trading Session. The Exchange notes that
the proposed rule text is substantially identical to the rules of EDGA
and EDGX.\16\
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\11\ See EDGA Rule 11.5(c)(14); EDGX Rule 11.5 (c)(17).
\12\ The ``BATS Book'' is defined as ``the System's electronic
file of orders.'' See Exchange Rule 1.5(e).
\13\ The term ``User'' is defined under Exchange Rule 11.5(cc)
as ``any Member or Sponsored Participant who is authorized to obtain
access to the System pursuant to Rule 11.3.''
\14\ Route Peg Orders on EDGA and EDGX are currently only
eligible for execution during Regular Trading Hours. See supra note
11. The Exchange understands that EDGA and EDGX are to file a
propose rule change with the Commission to permit Route Peg Orders
to be eligible for execution during the Pre-Opening and Post-Closing
Sessions.
\15\ The Exchange's process currently applies only to BATS-
listed securities. The Exchange has filed a proposed rule change
with the Commission to implement an Opening Process for non-BATS-
listed securities. See SR-BYX-2014-018. Because there is currently
no Opening Process for non-BATS-listed securities, if Supplemental
Peg Orders are offered prior to the approval of the proposed rule
change or if the proposed rule change is never approved, then this
restriction will only apply to BATS-listed securities.
\16\ See supra note 11.
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The Exchange also proposes to amend Rule 11.12(a)(2) to outline the
execution priority of the proposed Supplemental Peg Order. Like a Route
Peg Order on EDGA and EDGX,\17\ an incoming order that is eligible for
routing would first be matched against orders other than Supplemental
Peg Orders in price/time priority in accordance with Rule
11.12(a)(2).\18\ Any unexecuted portion of that order would then be
eligible to execute against any Supplemental Peg Orders resting on the
BATS Book. The Exchange also proposes to amend Rule 11.12(a)(4) and add
new subparagraph (a)(6) to Rule 11.12 to state that if a Supplemental
Peg Order is partially executed, the remaining portion of the order
would continue to be eligible for execution but it would be assigned a
new timestamp after each partial execution. Assigning a new timestamp
after each partial execution would allow for a rotating priority of
executions for Users who place Supplemental Peg Orders. The Exchange
notes that the proposed rule text is substantially similar to the rules
of EDGA and EDGX.\19\
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\17\ See EDGA Rule 11.8(a)(2); EDGX Rule 11.8(a)(2).
\18\ In sum, Exchange Rule 11.12(a)(2) states that the System
shall execute equally priced trading interest within the System in
time priority in the following order: Displayed size of Limit
Orders; non-displayed Limit Orders; Pegged Orders; Mid-Point Peg
Orders; Reserve size of orders; and discretionary portion of
Discretionary Orders as set forth in Exchange Rule 11.9(c)(9).
\19\ See EDGA Rule 11.8(a)(5) and (7); EDGX Rule 11.8(a)(5) and
(7).
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Implementation Date
The Exchange will announce the effective date of the proposed rule
change in a Trade Desk Notice to be published following publication of
the proposed rule change by the Commission.
2. Statutory Basis
The Exchange believes that the proposed rule changes are consistent
with Section 6(b) of the Act \20\ and further the objectives of Section
6(b)(5) of the Act \21\ because they are designed 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, to
foster cooperation and coordination with persons engaged in
facilitating transactions in securities, and, in general, to protect
investors and the public interest.
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\20\ 15 U.S.C. 78f(b).
\21\ 15 U.S.C. 78f(b)(5).
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The proposed rule change adds certain system functionality
currently offered by EDGA and EDGX in order to provide a consistent
technology offering across the BGM Affiliated Exchanges. A consistent
technology offering, in turn, will simplify the technology
implementation, changes and maintenance by Users of the Exchange that
are also participants on BZX, EDGA and/or EDGX. The proposed rule
changes would also provide Users with access to functionality that may
result in the efficient execution of such orders and will provide
additional flexibility as well as increased functionality to the
Exchange's System and its Users. As explained elsewhere in this
proposal, the proposed Supplemental Peg Order is available on numerous
other market centers and is substantially identical to the Route Peg
Order available on EDGA and EDGX. Thus, the Exchange believes that the
proposed functionality has already been accepted as consistent with the
Act and offered by various market centers for many years.
The benefits to investors of enhanced depth of liquidity at the
NBBO in today's market structure cannot be understated. The
Supplemental Peg Order is designed to incentivize Users to place
greater liquidity at the NBBO, thereby promoting more favorable and
efficient executions for the benefit of public customers. It would do
so by (1) offering liquidity providers a means to use the Exchange to
post larger limit orders that are only executable at the NBBO and that
do not disclose their trading interest to other market participants in
advance of execution; (2) offering market participants seeking to
access liquidity a greater expectation of market depth at the NBBO than
may currently be the case; and (3) offering more predictable executions
at the NBBO for Users by reducing the risk that incremental latency
associated with routing an order to an away destination may result in
an inferior execution. Thus, by providing an additional means by which
market participants can be encouraged to post liquidity at the NBBO on
the Exchange, which would add depth and support to the NBBO on the
Exchange and mitigate the negative effects of market fragmentation, the
proposed rule changes would promote just and equitable principles of
trade and remove impediments to and perfect the mechanism of a free and
open market and national market system. Moreover, the proposed rule
changes would protect investors and the public interest by increasing
the probability of an execution on the Exchange at the NBBO in the
event that the order would otherwise be shipped to an external
destination and potentially miss an execution at the NBBO while in
transit.
The Exchange believes, however, that the benefits to be derived
from Supplemental Peg Orders would only be realized if Supplemental Peg
Orders only interact with orders eligible for routing. Routable orders
are typically characteristic of public customers, both retail and
institutional (colloquially referred to as well as ``natural''
investors), who are concerned with executing at the best price. On the
other hand, non-routable orders typically expect to post liquidity on
the BATS Book or seek to execute immediately, such as via an Immediate-
or-Cancel Order, against the Exchange's best displayed bid or offer or
against hidden liquidity at or inside the NBBO. Professional traders,
in particular, are more apt to submit, and often immediately cancel,
``pinging'' orders, as reflected in generally higher message-to-trade
ratios. The Exchange believes this type of order behavior, while it has
its own business purposes, would not be suitable to interact with
Supplemental Peg Orders simply because Users would be reticent to post
liquidity via Supplemental Peg Orders given the uncertain, and
therefore difficult to manage, exposure to executions against orders
attributable to professional traders. Indeed, the Exchange believes
[[Page 59526]]
potential liquidity providers would be more apt to provide liquidity in
alternative trading systems and other non-exchange market centers where
the customization and segmentation experience may be less transparent
and objective.
While non-routable orders would not be permitted to execute against
Supplemental Peg Orders, the Exchange does not believe that the
proposed rule changes would be designed to permit unfair discrimination
between customers, brokers, or dealers. First, the Exchange believes
this limited exception is constructed narrowly enough, based on
rational and legitimate grounds, so that the compelling policy
objectives, which are wholly consistent with the Act, can be realized.
Second, the Exchange is not proposing to limit the type of User that
can place routable orders, or that can place Supplemental Peg Orders.
So any disadvantage resulting from the limitation to executing against
routable orders would not target particular segments of market
participants, per se, but rather a particular type of market behavior.
Therefore, the Exchange believes that not only would the proposed rule
changes not be designed to permit unfair discrimination between
customers, brokers, or dealers, the differentiation between routable
and non-routable orders is an important element for the Supplemental
Peg Order to be able to achieve the objectives of protecting investors
and the public interest and promoting just and equitable principles of
trade.
The Exchange also believes that permitting executions against
routable orders that are equal to or less than the aggregate size of
the Supplemental Peg Order interest available at that price would
remove impediments to and perfect the mechanism of a free and open
market and protect investors and the public interest because it would
incentivize Users seeking large size executions to route orders to the
Exchange by increasing opportunities for executions against
Supplemental Peg Orders in a manner similar to existing functionality
available on EDGA and EDGX \22\ as well as Nasdaq and NYSE Arca.\23\
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\22\ See supra note 5.
\23\ See supra note 6.
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The Exchange also believes its proposal to provide optional
functionality that would allow Users to designate a minimum execution
quantity on a Supplemental Peg Order removes impediments to and
perfects the mechanism of a free and open market and protects investors
and the public interest because it would provide an incentive for
Members seeking larger-sized executions both to post liquidity at the
Exchange using this feature and to route larger-sized orders to the
Exchange because of the potential for an execution against such
liquidity. The Exchange further believes that adding an optional
minimum quantity would remove impediments to and perfect the mechanism
of a free and open market system because the proposed functionality is
similar to functionality available at the NYSE Arca.\24\ The Exchange
believes it is appropriate to provide an option for Users seeking to
provide such liquidity to not only designate a minimum execution
quantity, but for a minimum execution quantity on a Supplemental Peg
order to no longer apply where the number of shares remaining after a
partial execution are less than the minimum execution quantity. Doing
so would permit Users to continue to have their Supplemental Peg Orders
eligible for execution in such circumstances. In such case, Users will
have the option to cancel their Supplemental Peg Order if they wish.
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\24\ Id.
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Lastly, the Exchange believes that the proposal will promote
competition by offering an order type that is similar to order types
offered by EDGA, EDGX, Nasdaq and NYSE Arca.\25\ Therefore, the
Exchange believes the proposed rule change is designed to support the
principles of Section 11A(a)(1) \26\ of the Act in that it seeks to
assure fair competition among brokers and dealers and among exchange
markets.
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\25\ See supra notes 5 and 6.
\26\ 15 U.S.C. 78k-1(a)(1).
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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
result in any burden on competition that is not necessary or
appropriate in furtherance of the purposes of the Act. To the contrary,
the Exchange believes that the proposal will promote competition by
enhancing the value of the Exchange's Route Peg Order by mirroring the
functionality of similar order types offered by EDGA, EDGX, Nasdaq and
NYSE Arca.\27\ Thus, the Exchange believes this proposed rule change is
necessary to permit fair competition among national securities
exchanges. The Exchange reiterates that the proposed rule change is
being proposed in the context of the technology integration of the BGM
Affiliated Exchanges. Therefore, the Exchange believes the proposed
rule change will benefit Exchange participants in that it is one of
several changes necessary to achieve a consistent technology offering
by the BGM Affiliated Exchanges.
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\27\ See supra notes 5 and 6.
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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
The foregoing rule change has become effective pursuant to Section
19(b)(3)(A) \28\ of the Act and Rule 19b-4(f)(6) \29\ thereunder. The
proposed rule change effects a change that (A) does not significantly
affect the protection of investors or the public interest; (B) does not
impose any significant burden on competition; and (C) by its terms,
does not become operative for 30 days after the date of the filing, or
such shorter time as the Commission may designate if consistent with
the protection of investors and the public interest; provided that the
self-regulatory organization has given the Commission written notice of
its intent to file the proposed rule change, along with a brief
description and text of the proposed rule change, at least five
business days prior to the date of filing of the proposed rule change,
or such shorter time as designated by the Commission. The Exchange
provided the Commission with written notice of its intent to file the
proposed rule change, along with a brief description and text of the
proposed rule change, at least five business days prior to the date of
filing.\30\
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\28\ 15 U.S.C. 78s(b)(3)(A).
\29\ 17 CFR 240.19b-4(f)(6).
\30\ 17 CFR 240.19b-4(f)(6)(iii).
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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 necessary or
appropriate in the public interest, for the protection of investors, or
otherwise in furtherance of the purposes of the Act.
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:
[[Page 59527]]
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-BYX-2014-025 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.
All submissions should refer to File Number SR-BYX-2014-025. 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-BYX-2014-025, and should be
submitted on or before October 23, 2014.
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\31\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\31\
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-23450 Filed 10-1-14; 8:45 am]
BILLING CODE 8011-01-P