[Federal Register Volume 79, Number 214 (Wednesday, November 5, 2014)]
[Notices]
[Pages 65735-65738]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-26230]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-73472; File No. SR-BYX-2014-018]
Self-Regulatory Organizations; BATS Y-Exchange, Inc.; Order
Granting Approval of a Proposed Rule Change To Establish an Opening
Process
October 30, 2014.
I. Introduction
On September 3, 2014, BATS Y-Exchange, Inc. (the ``Exchange'' or
``BYX'') filed with the Securities and Exchange Commission
(``Commission'') pursuant to Section 19(b)(1) of the Securities
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a
proposed rule change to add new BATS Rule (``Rule'') 11.23, entitled
``Opening Process,'' and to make several corresponding changes, in
order to modify the manner in which the Exchange opens trading in
individual securities at the beginning of the day and after trading
halts. The proposed rule change was published for comment in the
Federal Register on September 19, 2014.\3\ The Commission did not
receive any comments on the proposed rule change. This order approves
the proposed rule change.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 73094 (September 15,
2014), 79 FR 56411 (``Notice'').
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II. Description of the Proposal
The Exchange has proposed to implement a process for opening
trading at the beginning of Regular Trading Hours \4\ and re-opening
trading in such securities following a trading halt. Currently, the
Exchange accepts orders during the Pre-Opening Session,\5\ and any such
orders are immediately eligible for execution. Orders that are on the
BATS Book \6\ at the beginning of Regular Trading Hours remain on the
BATS Book, subject to the User's instructions, and trading continues
into Regular Trading Hours without any transition period. Upon a halt,
the Exchange currently cancels all orders on the BATS Book and does not
accept any orders until the halt is lifted. The Exchange does not
currently have a Regular Hours Only (``RHO'') time-in-force.
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\4\ Regular Trading Hours is defined in Rule 1.5(w).
\5\ Pre-Opening Session is defined in Rule 1.5(r).
\6\ BATS Book is defined in Rule 1.5(e).
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Under the proposal, the Exchange would amend its rules to allow
orders to be designated RHO, and would accept and queue any such orders
during the Pre-Opening Session for execution at
[[Page 65736]]
the midpoint of the NBBO \7\ shortly after the beginning of Regular
Trading Hours (the ``Opening Process'').\8\ The Exchange also has
proposed to implement a similar process for re-opening trading after a
halt, suspension, or pause (collectively, a ``Halt''), under which a
User's orders would remain on the BATS Book unless the User has
designated that they be cancelled upon a Halt (the ``Re-Opening
Process'').
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\7\ NBBO is defined in Rule 1.5(o).
\8\ Only orders designated RHO would be queued for Opening
Process participation when submitted during the Pre-Opening Session;
orders not so designated would continue to be executable immediately
upon entry during the Pre-Opening Session.
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Specifically, the Exchange has proposed new Rule 11.9(b)(7), which
would define RHO as a time-in-force modifier that applies to all
securities.\9\ Prior to the beginning of Regular Trading Hours, Users
\10\ that wish to participate in the Opening Process may enter orders
to buy or sell with a time in force of RHO.\11\ All orders that are
marked as RHO may participate in the Opening Process except BATS Post
Only Orders, Partial Post Only at Limit Orders, ISO orders not modified
by Rule 11.23(a)(1) (as described below), and Minimum Quantity
Orders.\12\ Limit orders with a Reserve Quantity could participate to
the full extent of their displayed size and Reserve Quantity.\13\
Discretionary Orders could participate only up to their ranked price
for buy orders or down to their ranked price for sell orders; the
discretionary range of such orders would not be eligible for
participation in the Opening Process.\14\ All Pegged Orders and Mid-
Point Peg Orders would be eligible for execution in the Opening Process
based on their pegged prices.\15\ Orders cancelled before the Opening
Process and orders not designated RHO would not be eligible to
participate in the Opening Process.\16\
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\9\ See proposed Rule 11.9(b)(7). The Exchange also has proposed
to delete the word ``limit'' from Rule 11.9(b) because a RHO order
can be either a limit order or a market order. See proposed Rule
11.9(b).
\10\ User is defined in Rule 1.5(cc).
\11\ See proposed Rule 11.23(a).
\12\ See proposed Rule 11.23(a)(2). For the definitions of BYX's
order types, see Rule 11.9.
\13\ See proposed Rule 11.23(a)(2).
\14\ Id.
\15\ Id.
\16\ See proposed Rule 11.23(a).
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Pursuant to proposed Rule 11.23(a)(1), during the period between
9:30 a.m. Eastern Time and the occurrence of the Opening Process, all
non-RHO orders, subject to order instructions, and ISOs designated RHO
may execute against eligible Pre-Opening Session contra-side interest
resting in the BATS Book.\17\ The Exchange has proposed to convert any
unexecuted portion of an ISO designated RHO entered during this period
into a non-ISO and queue the order for participation in the Opening
Process.\18\
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\17\ See proposed Rule 11.23(a)(1).
\18\ Id.
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The Exchange has proposed to implement the Opening Process shortly
after the beginning of Regular Trading Hours, at which point the
Exchange would attempt to execute all orders eligible for the Opening
Process in a particular security at the midpoint of the NBBO.\19\ All
such orders would be processed in time sequence beginning with the
order with the oldest time stamp, and would be matched until there is
no remaining volume or there is an order imbalance.\20\ All MTP
modifiers would be ignored during the matching process.\21\ If no
matches can be made, or if orders are not executed in whole or part due
to an imbalance, the Opening Process would conclude with all orders
that participated in the Opening Process being placed in the BATS Book,
cancelled, executed, or routed to away Trading Centers \22\ in
accordance with Rule 11.13(a)(2).\23\ The Exchange notes that because
an RHO order is not executable until the Opening Process (rather than
upon entry), to the extent that any RHO order is not executed during
the Opening Process and is placed on the BATS Book, such order will
receive a time stamp that reflects the time that the order was placed
on the BATS Book during the Opening Process and not the time that the
order was entered for queuing.\24\
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\19\ See proposed Rule 11.23(a)(3).
\20\ Id. According to the Exchange, time priority is more
appropriate for the Opening Process than price-time priority because
the price of the order is not particularly important to the Opening
Process, so long as the order is priced at or more aggressively than
the midpoint of the NBBO. As such, the Exchange believes that there
is no reason to reward a more aggressive order with priority in the
Opening Process. See Notice, supra note 3, 79 FR at 56412-13.
\21\ See proposed Rule 11.23(b).
\22\ Trading Center is defined in Rule 2.11(a).
\23\ See proposed Rule 11.23(b).
\24\ See Notice, supra note 3, 79 FR at 56413.
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Under proposed Rule 11.23(c), the NBBO that the Exchange would use
for purposes of setting the Opening Process price would be: (a) When
the listing exchange is either the NYSE or NYSE MKT, the first NBBO
subsequent to the first reported trade on the listing exchange after
9:30:00 a.m. Eastern Time, or the then-prevailing NBBO when the first
two-sided quotation is published by the listing exchange after 9:30:00
a.m. Eastern Time, if no first trade is reported by the listing
exchange within one second of publication of the first two-sided
quotation by the listing exchange; or (b) for any other listing market,
the first NBBO disseminated after 9:30:00 a.m. Eastern Time.\25\ The
Exchange has proposed to differentiate its calculation of the NBBO for
NYSE and NYSE MKT-listed securities from its calculation of the NBBO
for securities listed on other exchanges because NYSE and NYSE MKT do
not offer continuous trading prior to 9:30:00 a.m. Eastern Time whereas
the other listing exchanges do offer continuous trading prior to
9:30:00 a.m. Eastern Time. Thus, according to the Exchange, the market
for trading in NYSE and NYSE MKT-listed securities may take a moment to
develop after 9:30:00 a.m. Eastern Time whereas the market for
securities listed on other exchanges is more fully developed
immediately after 9:30:00 a.m. Eastern Time.\26\
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\25\ See proposed Rule 11.23(c).
\26\ See Notice, supra note 3, 79 FR at 56413.
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If the conditions to establish the price of the Opening Process set
forth under proposed Rule 11.23(c) do not occur by 9:45:00 a.m. Eastern
Time, the Exchange has proposed to implement a contingent opening
process (the ``Contingent Open Process'') under which, instead of being
matched at the midpoint of the NBBO, orders would be handled in time
sequence, beginning with the order with the oldest time stamp, and
placed on the BATS Book, routed, cancelled, or executed in accordance
with the terms of the order.\27\ The Exchange notes that, because an
RHO order is not executable until the Opening Process (rather than upon
entry), any order subject to the Contingent Open Process that is placed
on the BATS Book would receive a time stamp that reflects the time that
the order was placed on the BATS Book during the Opening Process and
not the time that the order was entered for queuing.\28\
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\27\ See proposed Rule 11.23(d).
\28\ See Notice, supra note 3, 79 FR at 56413.
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In addition, the Exchange has proposed that, in the event of a
Halt, all outstanding orders in the System \29\ will remain on the BATS
Book except where a User has designated that its orders be
cancelled.\30\ While a security is subject to a Halt, the Exchange
would accept and queue orders, prior to the resumption of trading in
the security, for participation in the Re-Opening Process.\31\ The Re-
Opening Process would occur in the same manner as the Opening Process
described above, with the following exceptions: (1) Non-RHO orders
would be eligible for
[[Page 65737]]
participation in the re-opening, but IOC, FOK, BATS Post Only Orders,
Partial Post Only at Limit Orders, and Minimum Quantity Orders would be
cancelled or rejected, as applicable, and any ISO that is not IOC or
FOK would be converted into a non-ISO and be queued for participation
in the re-opening; and (2) the re-opening would occur at the midpoint
of: (i) The first NBBO subsequent to the first reported trade on the
listing exchange following the resumption of trading after a Halt; or
(ii) the NBBO when the first two-sided quotation is published by the
listing exchange following the resumption of trading after a Halt if no
first trade is reported by the listing exchange within one second of
publication of the first two-sided quotation by the listing
exchange.\32\ The Exchange has proposed that, where neither of the
above conditions required to establish the price of the re-opening have
occurred, the security may be re-opened for trading at the discretion
of the Exchange and orders will be handled in the same manner as they
are in the Contingent Open Process.\33\
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\29\ System is defined in Rule 1.5(aa).
\30\ See proposed Rule 11.18(f).
\31\ See proposed Rule 11.23(e).
\32\ See proposed Rule 11.23(e)(1). The Exchange has proposed to
wait until the sooner of the first execution on the listing market
or one second following the publication of the first two-sided
quotation by the listing exchange because no continuous trading
occurs on any exchange during a Halt and, according to the Exchange,
waiting will provide time for the market to become more fully
established before determining the price at which the Re-Opening
Process will occur.
\33\ See proposed Rule 11.23(e)(2).
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III. Discussion and Commission Findings
After careful review, the Commission finds that the proposed rule
change is consistent with the requirements of the Act and the rules and
regulations thereunder that are applicable to a national securities
exchange.\34\ In particular, the Commission finds that the proposed
rule change is consistent with Section 6(b)(5) of the Act,\35\ which
requires, among other things, that the rules of an exchange be 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, and, in general, to protect investors and
the public interest.
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\34\ In approving the proposal, the Commission has considered
the proposed rule's impact on efficiency, competition, and capital
formation. See 15 U.S.C. 78c(f).
\35\ 15 U.S.C. 78f(b)(5).
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The Exchange believes that the proposal is consistent with the Act
because it is designed to create a more orderly process for opening and
re-opening trading in securities, and to facilitate price formation.
Specifically, the Exchange believes that the proposed Opening Process
will create a more orderly opening for securities and help facilitate
the price formation process at the beginning of Regular Trading Hours
because allowing Users to enter orders during the Pre-Opening Session
for queuing and participation in the Opening Process should help
prevent the submission of a flood of orders immediately following the
beginning of Regular Trading Hours.\36\ For similar reasons, the
Exchange believes that the proposed Re-Opening Process will create a
more orderly re-opening in securities following a Halt and help
facilitate price formation.\37\ In addition, the Exchange states that
allowing certain RHO orders (ISOs designated RHO) and all non-RHO
orders to interact (and, in the case of non-RHO orders, to be added to
the BATS Book where there is no contra-side interest) during the period
between 9:30 a.m. Eastern Time and the occurrence of the Opening
Process will create a more orderly opening and facilitate the price
formation process because Users will have the option to enter orders
that will either participate in the Opening Process or immediately
interact with liquidity from the Pre-Opening Session, allowing trading
to continue while the Exchange is waiting for the conditions necessary
to complete the Opening Process.\38\
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\36\ See Notice, supra note 3, 79 FR at 564214. The Exchange
further states that, because the Opening Process price will be the
midpoint of the NBBO, the Opening Process will occur at a price that
is based on the best available pricing under current market
conditions, which also will help create a more orderly opening and
facilitate the price formation process. Id. at 56414.
\37\ Id. at 56414.
\38\ Id.
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The Exchange also believes that certain features of the Opening
Process and Re-Opening Process are consistent with the Act. The
Exchange states that the proposed exclusion of BATS Post Only Orders,
Partial Post Only at Limit Orders, ISOs, and Minimum Quantity Orders
from participation in the Opening Process is consistent with Section
6(b)(5) of the Act because such order types do not make sense in the
context of queuing orders for the Opening Process.\39\ Moreover,
according to the Exchange, its proposal to allow an ISO marked RHO to
execute against eligible Pre-Opening Session interest during the period
between 9:30 a.m. Eastern Time and the occurrence of the Opening
Process, and then convert the unexecuted portion of the order into a
non-ISO for queuing for participation in the Opening Process, is
consistent with the requirements of Regulation NMS.\40\ According to
the Exchange, after 9:30 a.m. Eastern Time, there may be a protected
bid or offer displayed by the Exchange that a User who has submitted an
ISO designated RHO would like to execute against, and this aspect of
the proposal would permit such an execution to occur prior to the ISO
being converted into a non-ISO and queued for participation in the
Opening Process.\41\
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\39\ Id.
\40\ Id.; see also 17 CFR 242.600.
\41\ See Notice, supra note 3, 79 FR at 56414.
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In addition, the Exchange states that the proposed Contingent
Opening Process is designed 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 because it will
help to ensure that the Exchange opens trading in a fair and orderly
manner by providing a means for opening trading in a security when
there is no two-sided NBBO in the security for fifteen minutes after
the beginning of Regular Trading Hours.\42\ The Exchange believes that
fifteen minutes is a reasonable amount of time to wait for the
establishment of a two-sided NBBO because it marks a point at which the
market in a security has had a sufficient amount of time to develop
while simultaneously providing a reasonable cut-off point at which the
Exchange may open the security for Regular Trading Hours trading.\43\
The Exchange also believes that handling all orders queued for
participation in the Opening Process in time sequence after fifteen
minutes will help to ensure that trading opens in as fair and orderly a
manner as possible.\44\
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\42\ Id.
\43\ Id.
\44\ Id.
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Lastly, the Exchange states that the proposed Opening Process will
provide Users with greater control and flexibility when entering orders
in securities by allowing them to enter orders for participation in
Regular Hours Trading during the Pre-Opening Session, rather than
permitting them to enter such orders only after Regular Trading Hours
have begun.\45\ According to the Exchange, allowing Users that do not
want to participate in the Pre-Opening Session to enter RHO orders
prior to Regular Trading Hours will simplify the order entry process
for such Users and remove impediments to a free and open market.\46\
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\45\ Id.
\46\ Id.
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For the reasons noted above, the Commission finds that the proposed
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rule change is consistent with the Act, including Section 6(b)(5) of
the Act,\47\ which requires, among other things, that the rules of an
exchange be 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, and, in general, to protect
investors and the public interest.
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\47\ 15 U.S.C. 78f(b)(5).
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V. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\48\ that the proposed rule change, SR-BYX-2014-018, be, and hereby
is, approved.
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\48\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\49\
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\49\ 17 CFR 200.30-3(a)(12).
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Brent J. Fields,
Secretary.
[FR Doc. 2014-26230 Filed 11-4-14; 8:45 am]
BILLING CODE 8011-01-P