[Federal Register Volume 80, Number 1 (Friday, January 2, 2015)]
[Notices]
[Pages 63-66]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-30699]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-73940; File No. SR-EDGX-2014-35]
Self-Regulatory Organizations; EDGX Exchange, Inc.; Notice of
Filing and Immediate Effectiveness of a Proposed Rule Change To Amend
Rules 2.11, 2.12, 11.11 and 11.14 To Replace References to ``Direct
Edge ECN LLC d/b/a DE Route'' and ``DE Route'' With ``BATS Trading,
Inc.''
December 24, 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 December 22, 2014, EDGX Exchange, Inc. (the ``Exchange'' or
``EDGX'') 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
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 the
Substance of the Proposed Rule Change
The Exchange filed a proposed rule change to amend Rules 2.11,
2.12, 11.11 and 11.14 to replace references to ``Direct Edge ECN LLC d/
b/a DE Route'' and ``DE Route'' with ``BATS Trading, Inc.'' (``BATS
Trading''). The Exchange does not propose to amend the requirements of
any of these rules.
The text of the proposed rule change is available at the Exchange's
Web site at http://www.directedge.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
Earlier this year, the Exchange and its affiliate, EDGA Exchange,
Inc. (``EDGA'') received approval to effect a merger (the ``Merger'')
of the Exchange's parent company, Direct Edge Holdings LLC, with BATS
Global Markets, Inc., the parent of BATS Exchange, Inc. (``BZX'') and
BATS Y-Exchange, Inc. (``BYX'', together with BZX, EDGA and EDGX, the
``BGM Affiliated Exchanges'' or ``BATS Exchange'').\3\ As a result, the
Exchange amended Rule 2.12 to reflect that BATS Trading, Inc., the
affiliated BZX and BYX routing broker dealer, would also act as the
inbound router for routing orders from BYX and BZX to the Exchange. In
the context of the Merger, the BGM Affiliated Exchanges are working to
migrate EDGX and EDGA onto the BATS technology platform, and align
certain system functionality, retaining only intended differences
between the BGM Affiliated Exchanges. As a result of these efforts, the
Exchange proposes to amend Rules 2.11, 2.12, 11.11 and 11.14 to replace
references to ``Direct Edge ECN LLC d/b/a DE Route'' and ``DE Route''
with ``BATS Trading'' to reflect that BATS Trading, Inc. will replace
DE Route at [sic] the Exchange's routing broker-dealer upon migration
of the Exchange onto the BATS technology platform. Thereafter, BATS
Trading will serve as the sole inbound and outbound routing broker-
dealer for the Exchange. The Exchange does not propose to amend the
requirements of any of these rules.
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\3\ See Securities Exchange Act Release No. 71449 (January 30,
2014), 79 FR 6961 (February 5, 2014) (SR-EDGX-2013-43; SR-EDGA-2013-
34).
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Rule 2.11, BATS Trading as Outbound Router
Pursuant to Exchange Rule 2.11, the Exchange relies on DE Route to
provide outbound routing services from itself to other Trading
Centers.\4\ The Exchange proposes to amend Rules 2.11 to replace all
references to DE Route with BATS Trading, as BATS Trading will replace
DE Route as the outbound routing service for the Exchange upon
migration of the Exchange onto the BATS technology platform. The
Exchange does not propose to amend the requirements of this rule.
Therefore, the conditions and limitations set forth in Exchange Rule
2.11 will continue to require that:
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\4\ Rule 600(b)(78) of Regulation NMS, 17 CFR 242.600(b)(78),
defines a ``Trading Center'' as ``a national securities exchange or
national securities association that operates an SRO trading
facility, an alternative trading system, an exchange market maker,
an OTC market maker, or any other broker or dealer that executes
orders internally by trading as principal or crossing orders as
agent.'' See also Exchange Rule 2.11(a).
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The Exchange will regulate the BATS Trading as a facility
(as defined in Section 3(a)(2) of the Act), subject to Section 6 of the
Act. The Exchange will file with the Commission proposed rule changes
and fees relating to the BATS Trading outbound router function and BATS
Trading will be subject to the Exchange's non-discrimination
requirements.
FINRA will carry out oversight and enforcement
responsibilities as the designated examining authority designated by
the Commission pursuant to Rule 17d-1 of the Act with the
responsibility for examining BATS Trading for compliance with
applicable financial responsibility rules.
A Member's \5\ use of BATS Trading to route orders to
another Trading Center will be optional.
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\5\ The term ``Member'' is defined as ``any registered broker or
dealer, or any person associated with a registered broker or dealer,
that has been admitted to membership in the Exchange. A Member will
have the status of a ``member'' of the Exchange as that term is
defined in Section 3(a)(3) of the Act.'' See Exchange Rule 1.5(n).
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BATS Trading will not engage in any business other than
(a) its outbound router function, (b) its inbound router function as
described in Rule 2.12, (c) its usage of an error account in accordance
with Exchange Rule 2.11(a)(7) and (d) any other activities it may
engage in as approved by the Commission.
The Exchange shall establish and maintain procedures and
internal controls reasonably designed to adequately restrict the flow
of confidential and proprietary
[[Page 64]]
information between the Exchange and BATS Trading, and any other
entity, including any affiliate of BATS Trading, and, if BATS Trading
or any of its affiliates engage in any other business activities other
than providing routing services to the Exchange, between the segment of
BATS Trading or its affiliate that provides the other business
activities and the routing services.
The Exchange or BATS Trading may cancel orders as either
deems to be necessary to maintain fair and orderly markets if and when
systems, technical or operational issues occur at the Exchange, BATS
Trading or a Trading Center. The Exchange or BATS Trading shall provide
notice of the cancellation of orders to affected Members as soon as
practicable.
BATS Trading shall maintain an error account for the
purpose of liquidating an error position when such position, in the
judgment of the Exchange or BATS Trading, subject to the factors
described in Exchange Rule 2.11, cannot be fairly and practicably
assigned to one or more Members in its entirety. An error position can
be acquired if it results from a systems, technical or operational
issue experienced by BATS Trading, by the Exchange, or by a Trading
Center to which BATS Trading directed an outbound order.
The books, records, premises, officers, agents, directors and
employees of BATS Trading will be deemed to be the books, records,
premises, officers, agents, directors and employees of the Exchange for
purposes of, and subject to oversight pursuant to, the Act. The books
and records of BATS Trading shall be subject at all times to inspection
and copying by the Exchange and the Commission. Nothing in Rule 2.11
will preclude officers, agents, directors or employees of the Exchange
from also serving as officers, agents, directors and employees of BATS
Trading.
Rule 2.12, BATS Trading as Inbound Router
DE Route and BATS Trading provide Members of the Exchange, EDGA,
BZX and BYX with optional routing services to other Trading Centers.
Thus, in certain circumstances, DE Route and BATS Trading provide
inbound routing from EDGA, BYX, or BZX to the Exchange. Exchange Rule
2.12 governs this inbound routing of orders by DE Route and BATS
Trading to the Exchange in DE Route's and BATS Trading's capacity as a
facility of the Exchange. The Exchange proposes to amend Rule 2.12 to
remove all references to DE Route as BATS Trading will be the sole
inbound routing service for the Exchange upon migration of the Exchange
onto the BATS technology platform. The Exchange does not propose to
amend the requirements of this rule. Therefore, the conditions and
limitations set forth in Exchange Rule 2.12(a) will continue to require
that:
The Exchange enter into (a) a plan pursuant to Rule 17d-2
under the Act with a non-affiliated self-regulatory organization
(``SRO'') to relieve the Exchange of regulatory responsibilities for
BATS Trading with respect to rules that are common rules between the
Exchange and the non-affiliated SRO, and (b) a regulatory services
contract (``Regulatory Contract'') with a non-affiliated SRO to perform
regulatory responsibilities for BATS Trading for unique Exchange rules.
The Regulatory Contract require the Exchange to provide
the non-affiliated SRO with information, in an easily accessible
manner, regarding all exception reports, alerts, complaints, trading
errors, cancellations, investigations, and enforcement matters
(collectively ``Exceptions'') in which BATS Trading is identified as a
participant that has potentially violated Exchange or Commission rules,
and requires that the non-affiliated SRO provide a report, at least
quarterly, to the Exchange quantifying all Exceptions in which BATS
Trading is identified as a participant that has potentially violated
Exchange or Commission rules.
The Exchange, on behalf of its parent company, establish
and maintain procedures and internal controls reasonably designed to
ensure that BATS Trading does not develop or implement changes to its
system based on non-public information obtained as a result of its
affiliation with the Exchange, until such information is available
generally to similarly situated Members of the Exchange.
The Exchange furnish to BATS Trading only the same
information and on the same terms as the Exchange makes available in
the normal course of business to other users.\6\
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\6\ See Exchange Rule 2.12(a)(2).
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In addition, Exchange Rule 2.12(b) states that, provided the
conditions in Exchange Rule 2.12(a) are complied with, and provided
further that DE Route operates as an outbound router on behalf of EDGA
on the same terms and conditions as it does for the Exchange, and in
accordance with the rules of EDGA, DE Route may provide inbound routing
services to the Exchange from EDGA. BATS Trading provides members of
the BGM Affiliated Exchanges (including EDGA) with optional routing
services to other market centers, which may include routing from a BGM
Affiliated Exchange to the Exchange. Therefore, the Exchange proposes
to remove reference to EDGA as BATS Trading will be required under
Exchange Rule 2.12(b) to operate as an outbound router on behalf of
each BATS Exchange on the same terms and conditions as it does for the
Exchange, and in accordance with the rules of each BATS Exchange, BATS
Trading may provide inbound routing services to the Exchange from each
BATS Exchange. The Exchange believes that Rule 2.12 will continue to
adequately manage the potential for conflicts of interest that could
arise from BATS Trading routing orders to the Exchange.
Rule 11.11(i), Market Access
Rule 11.11(i) states that, in addition to the Exchange Rules
regarding routing to away Trading Centers, DE Route has, pursuant to
Rule 15c3-5 under the Act, implemented certain tests designed to
mitigate the financial and regulatory risks associated with providing
the Exchange's Members access to such away Trading Centers. Pursuant to
the policies and procedures developed by DE Route to comply with Rule
15c3-5, if an order or series of orders are deemed to be erroneous or
duplicative, would cause the entering Member's credit exposure to
exceed a preset credit threshold, or are non-compliant with applicable
pre-trade regulatory requirements (as defined in Rule 15c3-5), DE Route
will reject such orders prior to routing and/or seek to cancel any
orders that have been routed.
The Exchange proposes to amend Rules 11.11(i) to replace all
references to DE Route with BATS Trading, as BATS Trading will be the
sole inbound routing service for the Exchange upon migration of the
Exchange onto the BATS technology platform. The Exchange does not
propose to amend the requirements of this rule. Under Rule 11.11(i) and
BZX and BYX Rules 11.13(e), BATS trading has, pursuant to Rule 15c3-5
under the Act, implemented certain tests designed to mitigate the
financial and regulatory risks associated with providing the Exchange's
Members with access to such away Trading Centers. BATS Trading also has
policies and procedures in place to comply with Rule 15c3-5, under
which BATS Trading will reject such orders prior to routing and/or seek
to cancel any orders that have been routed, where an order or series of
orders are deemed to be erroneous or duplicative, would cause the
entering Member's credit exposure to exceed a preset credit threshold,
or are non-compliant with applicable pre-
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trade regulatory requirements (as defined in Rule 15c3-5).
Rule 11.14, Limitation of Liability
The Exchange also proposes to amend Exchange Rule 11.14(g) to
replace references to DE Route with BATS Trading. Rule 11.14(g)
authorizes the Exchange, subject to express conditions and limitations,
to compensate Members for losses relating to orders routed by the
Exchange through DE Route to Trading Centers that the Member claims
resulted directly from a malfunction of the physical equipment, devices
and/or programming, or the negligent acts or omissions of the
employees, of such Trading Centers (``Trading Center Systems Issue'').
Rule 11.14(g) applies to Members that experience losses due to Trading
Center Systems Issues after DE Route routed the Members' orders to a
Trading Center that experienced such issues. Under Rule 11.14(g), as an
accommodation to Members, the Exchange, via DE Route, employs
reasonable efforts to submit Members' claims for compensation on such
Members' behalf to a Trading Center, and pass along to such Members the
full amount of compensation, if any, obtained by DE Route from such
Trading Center.
Under Rule 11.14(g), the Exchange undertakes to accept claims for
losses submitted by Members, which claims must contain representations
from such Members as to the accuracy of the information contained
therein and that any losses incurred were the direct result of a
Trading Center Systems Issue.
Upon migration of the Exchange onto BATS technology, BATS Trading
will be the Exchange's sole routing broker-dealer and responsible for
submitting claims under Rule 11.14(g). As amended, the Exchange would
continue to employ reasonable efforts to submit such claims, but via
BATS Trading instead of DE Route, to the Trading Center in question. If
and to the extent that BATS Trading were to receive compensation from a
Trading Center in response to a claim submitted on behalf of a Member,
the full amount of such compensation would be passed through to the
Member.
Implementation Date
The Exchange intends to implement the proposed rule change on or
about January 12, 2015, which is the anticipated date upon which the
migration of the Exchange to the BATS technology platform will be
complete and BATS Trading, Inc. will replace DE Route as the Exchange's
routing broker-dealer.
2. Statutory Basis
The Exchange believes that the proposed rule changes are consistent
with Section 6(b) of the Act \7\ and further the objectives of Section
6(b)(5) of the Act \8\ 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. The proposed rule change also is
designed to support the principles of Section 11A(a)(1) \9\ of the Act
in that it seeks to assure fair competition among brokers and dealers
and among exchange markets.
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\7\ 15 U.S.C. 78f(b).
\8\ 15 U.S.C. 78f(b)(5).
\9\ 15 U.S.C. 78k-1(a)(1).
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The Exchange does not propose to amend the requirements of any of
its rules and the proposed rule changes are intended only to reflect
that BATS Trading will replace DE Route as the Exchange's routing
broker-dealer upon migration of the Exchange to the BATS technology
platform. A consistent technology offering through the use of a single
routing broker-dealer by each of the BGM Affiliated Exchange will, in
turn, simplify the technology implementation, changes and maintenance
by users of the Exchange that are also participants on EDGA, BZX, and
BYX. The proposed rule change would provide greater harmonization
between the rules of the BGM Affiliated Exchanges, resulting in greater
uniformity and less burdensome and more efficient regulatory
compliance. As such, the proposed rule change would foster cooperation
and coordination with persons engaged in facilitating transactions in
securities and would remove impediments to and perfect the mechanism of
a free and open market and a national market system.
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. The Exchange
reiterates that the proposed rule change is being proposed in the
context of the technology integration of the BGM Affiliated Exchanges.
Thus, the Exchange believes this proposed rule change is necessary to
permit fair competition among national securities exchanges. In
addition, 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.
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 Exchange has designated this rule filing as non-controversial
under Section 19(b)(3)(A) of the Act \10\ and paragraph (f)(6) of Rule
19b-4 thereunder.\11\ Because the proposed rule change does not: (i)
Significantly affect the protection of investors or the public
interest; (ii) impose any significant burden on competition; and (iii)
become operative prior to 30 days from the date on which it was filed,
or such shorter time as the Commission may designate if consistent with
the protection of investors and the public interest, the proposed rule
change has become effective pursuant to Section 19(b)(3)(A) of the Act
and Rule 19b-4(f)(6) thereunder.\12\
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\10\ 15 U.S.C. 78s(b)(3)(A).
\11\ 17 CFR 240.19b-4.
\12\ 17 CFR 240.19b-4(f)(6). As required under Rule 19b-
4(f)(6)(iii), the Exchange provided the Commission with written
notice of its intent to file the proposed rule change, along with a
brief description and the 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.
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A proposed rule change filed pursuant to Rule 19b-4(f)(6) under the
Act \13\ normally does not become operative for 30 days after the date
of its filing. However, Rule 19b-4(f)(6)(iii) \14\ permits the
Commission to designate a shorter time if such action is consistent
with the protection of investors and the public interest. The Exchange
has asked the Commission to waive the 30-day operative delay in order
to permit the Exchange to implement the proposed rule change on January
12, 2015, which is the anticipated date upon which the migration of the
Exchange to the BATS technology platform will be complete and BATS
Trading will replace DE Route as the Exchange's routing broker-dealer.
The Exchange states that waiver of the operative delay is consistent
with the protection of investors and the public interest because it
will allow the Exchange to replace DE Route with
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BATS Trading as the Exchange's routing broker-dealer upon migration of
the Exchange to the BATS technology platform, thereby enabling BATS
Trading to act as the routing broker-dealer for each of the BGM
Affiliated Exchanges in a timely manner and simplifying the technology
integration for Members of the Exchange that are also participants on
EDGA, BZX and BYX. In this regard, the Exchange notes that, since
completion of the Merger, both Members and the BGM Affiliated Exchanges
have made numerous systems changes in preparation for the technology
migration occurring on January 12, 2015, the Exchange has issued
frequent updates to Members informing them of the BGM Affiliated
Exchange technology migration as well as its anticipated time line so
that Members may make the requisite system changes, and the Exchange
has conducted multiple testing opportunities for Members to ensure that
both Members' and the Exchange's systems will operate in accordance
with the proposed rule change on January 12, 2015. The Commission
believes that waiving the 30-day operative delay is consistent with the
protection of investors and the public interest. Therefore, the
Commission hereby waives the operative delay and designates the
proposed rule change operative upon filing.\15\
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\13\ 17 CFR 240.19b-4(f)(6).
\14\ 17 CFR 240.19b-4(f)(6)(iii).
\15\ For purposes only of waiving the 30-day operative delay,
the Commission has considered the proposed rule's impact on
efficiency, competition, and capital formation. See 15 U.S.C.
78c(f).
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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. If the Commission
takes such action, the Commission shall institute proceedings under
Section 19(b)(2)(B) of the Act \16\ to determine whether the proposed
rule change should be approved or disapproved.
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\16\ 15 U.S.C. 78s(b)(2)(B).
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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-EDGX-2014-35 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-EDGX-2014-35. 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 at 100 F Street NE.,
Washington, DC 20549-1090 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-
EDGX-2014-35, and should be submitted on or January 23, 2015.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\17\
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\17\ 17 CFR 200.30-3(a)(12).
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Brent J. Fields,
Secretary.
[FR Doc. 2014-30699 Filed 12-31-14; 8:45 am]
BILLING CODE 8011-01-P