[Federal Register Volume 81, Number 130 (Thursday, July 7, 2016)]
[Notices]
[Pages 44353-44356]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-16111]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-78221; File No. SR-BatsEDGX-2016-28]
Self-Regulatory Organizations; Bats EDGX Exchange, Inc.; Notice
of Filing and Immediate Effectiveness of a Proposed Rule Change To Add
Interpretation and Policy .01 to Rule 16.1 To Specify the Calculation
Methodology for Counting Professional Orders
July 1, 2016.
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 June 30, 2016, Bats 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 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 proposes to add Interpretation and Policy .01 to Rule
16.1 to specify the manner in which the Exchange calculates average
daily order submissions for purposes of counting Professional orders,
as further described below.
The text of the proposed rule change is available at the Exchange's
Web site at 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 the
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Exchange proposes to add Interpretation and Policy .01 to Rule
16.1 to specify the methodology for counting average daily order
submissions in listed options to determine whether a person or entity
meets the definition of a Professional (``Professional order
counting''). The proposed rule change is designed to harmonize
Professional order counting with the recently adopted rules of
competing options exchanges--specifically the Chicago Board of Options
Exchange, Inc. (``CBOE'') and NASDAQ OMX PHLX LLC (``PHLX'').\5\
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\5\ See Securities Exchange Act Release Nos. 77450 (March 25,
2016), 81 FR 18668, (March 31, 2016) (SR-CBOE-2016-005); 77449
(March 25, 2016), 81 FR 18665, (March 31, 2016) (SR-Phlx-2016-10)
(approval orders). The Exchange notes that it recently issued
guidance regarding Professional order counting. See e.g., Bats BZX
Exchange, Inc. and Bats EDGX Exchange Inc., Regulatory Circular (RC-
2015-012, respectively) dated December 21, 2015. This proposal
codifies that guidance in a manner that is consistent with CBOE and
PHLX's approved rules. The Exchange notes that various other options
exchanges refer to Professionals as ``Professional Customers.'' The
Exchange has proposed to continue to use the term Professional, as
is currently the case in Exchange rules.
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Rule 16.1(a)(46) defines a Professional ``as any person or entity
that (A) is not a broker or dealer in securities; and (B) places more
than 390 orders in listed options per day on average during a calendar
month for its own beneficial account(s).'' In adopting Rule
16.1(a)(46), the Exchange believed that identifying Professional
accounts based upon the average number of orders entered in qualified
accounts is an appropriate, objective approach that will reasonably
distinguish such persons and entities from non-professional, retail
investors or market participants. In order to properly represent orders
entered on the Exchange, Options Members are required to indicate
whether Customer orders are ``Professional'' orders.\6\ To comply with
this requirement, Options Members are required to review their
Customers' activity on at least a quarterly basis to determine whether
orders that are not for the account of a broker-dealer should be
represented as Customer orders or Professional orders.\7\
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\6\ See e.g., Rule 18.2(a)(6) (Conduct and Compliance with the
Rules) (requiring that accurate information is input into the
System, including but not limited to, the Options Member's
capacity).
\7\ Orders for any customer that had an average of more than 390
orders per day during any month of a calendar quarter must be
represented as Professional orders for the next calendar quarter.
Option Members would be required to conduct a quarterly review and
make any appropriate changes to the way in which they are
representing orders within five business days after the end of each
calendar quarter. While Option Members only would be required to
review their accounts on a quarterly basis, if during a quarter the
Exchange identifies a customer for which orders are being
represented as Customer orders but that has averaged more than 390
orders per day during a month, the Exchange would notify the Option
Member would be required to change the manner in which it is
representing the customer's orders within five business days.
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The advent of new multi-leg spread products and the proliferation
of the use of complex orders and algorithmic execution strategies by
both institutional and retail market participants has raised questions
as to what should be counted as an ``order'' for Professional order
counting purposes. The proposed changes would specifically address the
counting of multi-leg spread products, algorithm generated orders, and
complex orders for purposes of determining Professional status. In
addition, the proposal is intended to provide guidance regarding the
methodology used by the Exchange when calculating average daily orders
for Professional order counting purposes.\8\
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\8\ This proposal is consistent with CBOE and PHLX's approved
rules. See supra note 5.
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As proposed, the rule would provide that an order would count as
one order for Professional counting purposes, unless one of the
exceptions enumerated in the proposed rule stipulates otherwise (each
an ``Exception''). The first Exception relates to the treatment of
complex orders for purposes of computing orders for Professional order
counting purposes. Specifically, the proposed rule provides that a
complex order of eight (8) option legs or less would count as one
order, whereas a complex order comprised of nine (9) option legs or
more counts as
[[Page 44354]]
multiple orders with each option leg counting as its own separate
order.\9\ The Exchange believes the distinction between complex orders
with up to eight option legs from those with nine or more option legs
is appropriate in light of the purposes for which Rule 16.1(a)(46) was
adopted. In particular, the Exchange notes that multi-leg complex order
strategies with nine or more option legs are more complex in nature and
thus, more likely to be used by professional traders than traditional
two, three, and four option leg complex order strategies such as the
strangle, straddle, butterfly, collar, and condor strategies, and
combinations thereof with eight option legs or fewer, which are
generally not algorithmically generated and are frequently used by non-
professional, retail investors. Thus, the types of complex orders
traditionally placed by retail investors would continue to count as
only one order while the more complex strategy orders that are
typically used by professional traders would count as multiple orders
for Professional order counting purposes.\10\
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\9\ See proposed Interpretation and Policy .01(a)(1)-(2).
\10\ See also supra note 5.
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The second Exception relates to calculations for parent/child
orders. As proposed, if a parent order submitted for the beneficial
account(s) of a person or entity other than a broker or dealer is
subsequently broken up into multiple child orders on the same side
(buy/sell) and series by a broker or dealer, or by an algorithm housed
at the broker or dealer, or by an algorithm licensed from the broker or
dealer but housed with the customer, then the order would count as one
order even if the child orders are routed across several exchanges.\11\
The Exchange believes this proposed change would allow the orders of
public customers to be ``worked'' by a broker (or a broker's algorithm)
in order to achieve best execution without counting the multiple child
orders as separate orders for Professional order counting purposes.
Conversely, if a parent order, including a strategy order,\12\ is
broken into multiple child orders on both sides (buy/sell) of a series
and/or multiple series, then each child order would count as a separate
new order per side and series.\13\ This proposed change would allow the
Exchange, for Professional order counting purposes, to count as
multiple orders those ``child'' orders of ``parent'' orders generated
by algorithms that are typically used by sophisticated traders to
continuously update their orders in concert with market updates in
order to keep their overall trading strategies in balance.
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\11\ See proposed Interpretation and Policy .01(b)(1).
\12\ The term ``strategy order'' refers to an execution
strategy, trading instruction, or algorithm whereby multiple
``child'' orders on both sides of a series and/or multiple series
are generated prior to being sent to an options exchange(s).
\13\ See proposed Interpretation and Policy .01(b)(2).
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The third Exception would govern the counting methodology for
cancel/replace orders. As proposed, any order that cancels and replaces
an existing order would count as a separate order (or multiple orders
in the case of complex orders of nine option legs or more) for
Professional order counting purposes.\14\ However, the Exchange
proposes that an order to cancel and replace a child order would not
count as a new order if the parent order that was placed for the
beneficial account(s) of a non-broker or dealer had been subsequently
broken into multiple child orders on the same side and series as the
parent order by a broker or dealer, algorithm at a broker or dealer, or
algorithm licensed from a broker or dealer but housed at the
customer.\15\ By contrast, the Exchange proposes that an order that
cancels and replaces a child order resulting from a parent order,
including a strategy order, that generated child orders on both sides
(buy/sell) of a series and/or in multiple series would count as a new
order per side and series (``Both Sides/Multiple Series'').\16\
Finally, the Exchange proposes that, notwithstanding the treatment of a
cancel/replace relating to Same Sides/Same Series orders, an order that
cancels and replaces any child order resulting from a parent order
being pegged to the Exchange's best bid or offer (``BBO'') or the
national best bid or offer (``NBBO'') or that cancels and replaces any
child order pursuant to an algorithm that uses the BBO or NBBO in the
calculation of child orders and attempts to move with or follow the BBO
or NBBO of a particular options series would count as a new order each
time the order cancels and replaces in order to attempt to move with or
follow the BBO or NBBO.\17\
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\14\ See proposed Interpretation and Policy .01(c)(1).
\15\ See proposed Interpretation and Policy .01(c)(2).
\16\ See proposed Interpretation and Policy .01(c)(3).
\17\ See proposed Interpretation and Policy .01(c)(4).
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Implementation
The Exchange proposes to implement the rule on July 1, 2016, which
would be announced in a circular distributed to Members.
2. Statutory Basis
The Exchange believes that the proposed rule change is consistent
with Section 6(b) of the Act,\18\ in general, and furthers the
objectives of Section 6(b)(5),\19\ in particular, in that it is
designed to prevent fraudulent and manipulative acts and practices, 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. Additionally, the Exchange believes the proposed rule change
is consistent with the requirement set forth in Section 6(b)(5) \20\ of
the Act that the rules of an exchange not be designed to permit unfair
discrimination between customers, issuers, brokers, or dealers.
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\18\ 15 U.S.C. 78f(b).
\19\ 15 U.S.C. 78f(b)(5).
\20\ 15 U.S.C. 78f(b)(5).
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Specifically, the Exchange believes that the proposal is designed
to adopt a reasonable and objective approach to determine Professional
status that is consistent with the approach being utilized on other
options exchanges, which benefits market participants by providing
consistency across exchanges regarding the Professional order
counting.\21\ In this regard, the Exchange believes that codifying the
manner in which the Exchange would conduct Professional order counting
would provide Option Members with certainty and provide them with
insight as they conduct their own quarterly reviews for purposes of
designating orders.
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\21\ See supra note 5.
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The Exchange notes that it is not amending the threshold of 390
orders in listed options per day but, consistent with other exchanges,
is revising the method for counting Professional orders in the context
of multi-part orders and cancel/replace activity. In short, the
proposal addresses how to account for complex orders, parent/child
orders, and cancel/replace orders. The Exchange believes that
distinguishing between complex orders with nine or more option legs and
those orders with eight or fewer option legs is a reasonable and
objective approach. In addition, the Exchange believes the proposal
appropriately distinguishes between parent/child orders that are
generated by a broker's efforts to obtain an execution on a larger size
order while minimizing market impact and multi-part orders that used by
more sophisticated market participants. Similarly, the Exchange
believes that the proposal that cancel/replace orders would count as
separate orders with
[[Page 44355]]
limited exceptions is a reasonable and objective approach to
distinguish the orders of retail customers that are ``worked'' by a
broker from orders generated by algorithms used by more sophisticated
market participants.
In addition, the Exchange believes that proposed changes to Rule
16.1 provide a more conservative order counting regime for Professional
order counting purposes that would identify more traders as
Professionals to which the Exchange's definition of Professional was
designed to apply and create a better competitive balance for all
participants on the Exchange, consistent with the Act. As the options
markets have evolved to become more electronic and more competitive,
the Exchange believes that the distinction between registered broker-
dealers and professional traders who are currently treated as public
customers has become increasingly blurred. More and more, the category
of public customer today includes sophisticated algorithmic traders
including former market makers and hedge funds that trade with a
frequency resembling that of broker-dealers. The Exchange believes that
it is reasonable under the Act to treat those customers who meet the
high level of trading activity established in the proposal differently
than customers who do not meet that threshold and are more typical
retail investors to ensure that professional traders do not take
advantage of priority and/or fee benefits intended for public
customers. The Exchange notes that it is not unfair to differentiate
between different types of investors in order to achieve certain
marketplace balances. The Exchange's Rules currently differentiate
between Customers, Order Entry Firms, Market Makers, and the like.
These differentiations have been recognized to be consistent with
the Act. The Exchange does not believe that the rules of the Exchange
or other exchanges that accord priority or fee benefits to public
customers over broker-dealers are unfairly discriminatory. Nor does the
Exchange believe that it is unfairly discriminatory to accord such
benefits to only those public customers who on average do not place
more than one order per minute (390 per day) under the counting regime
that the Exchange proposes. The Exchange believes that such
differentiations drive competition in the marketplace and are within
the business judgment of the Exchange. Accordingly, the Exchange also
believes that its proposal is consistent with the requirement of
Section 6(b)(8) \22\ of the Act that the rules of an exchange not
impose an unnecessary or inappropriate burden upon competition in that
it treats persons who should be deemed Professionals, but who may not
be so under current Rule 16.1(a)(46), in a manner so that they do not
receive special benefits. Furthermore, the Exchange believes that the
proposed rule change will protect investors and the public interest by
helping to assure that retail customers continue to receive the
appropriate marketplace advantages on the Exchange and in the
marketplace as intended, while furthering competition among marketplace
professionals by treating them in the same manner as other similarly
situated market participants. The Exchange believes that it is
consistent with Section 6(b)(5) \23\ of the Act not to afford market
participants with similar access to information and technology as that
of brokers and dealers of securities with marketplace advantages over
such marketplace competitors. The Exchange also believes that the
proposed rule change would help to remove burdens on competition and
promote a more competitive marketplace by affording certain marketplace
advantages only to those for whom they are intended. Finally, the
Exchange believes that the proposed rule change sets forth a more
detailed and clear regulatory regime with respect to calculating
average daily order entry for Professional order counting purposes. The
Exchange believes that this additional clarity and detail will
eliminate confusion among market participants, which is in the
interests of all investors and the general public.
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\22\ 15 U.S.C. 78f(b)(8).
\23\ 15 U.S.C. 78f(b)(5).
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Based on the foregoing, the Exchange believes the proposal, which
establishes an objective methodology for counting average daily order
submissions for Professional order counting purposes, is consistent
with the Act.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that its proposed rule change will
impose any burden on competition that is not necessary or appropriate
in furtherance of the purposes of the Act. The Exchange believes that
the proposed rule change will help ensure fairness in the marketplace
and promote competition among all market participants. The Exchange
believes that this proposal would help establish more competition among
market participants and promote the purposes for which the Exchange's
Professional rule was originally adopted. Moreover, the proposal would
ensure consistency and help to eliminate confusion as to the manner in
which options exchanges compute the Professional order volume.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
The Exchange has not solicited, and does not intend to solicit,
comments on this proposed rule change. The Exchange has not received
any unsolicited written comments from Members or other interested
parties.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Because the foregoing 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 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)(iii) of the Act \24\ and
subparagraph (f)(6) of Rule 19b-4 thereunder.\25\ A proposed rule
change filed under Rule 19b-4(f)(6) normally does not become operative
prior to 30 days after the date of filing.\26\ Rule 19b-4(f)(6)(iii),
however, permits the Commission to designate a shorter time if such
action is consistent with the protection of investors and the public
interest.\27\
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\24\ 15 U.S.C. 78s(b)(3)(a)(iii).
\25\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)
requires a self-regulatory organization to give the Commission
written notice of its intent to file 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 has satisfied this requirement.
\26\ 17 CFR 240.19b-4(f)(6)(iii).
\27\ Id.
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The Exchange has requested that the Commission waive the 30-day
operative delay. The Commission notes that it has considered a
substantially similar proposed rule change filed by CBOE and PHLX which
it approved after a notice and comment period.\28\ This proposed rule
change does not raise any new or novel issues from those considered in
the CBOE and PHLX proposals. Based on the foregoing, the Commission
believes that it is consistent with the protection of investors and the
public interest to waive the 30-day operative delay and designate the
proposed rule
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change as operative upon filing with the Commission.\29\
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\28\ See Securities Exchange Act Release Nos. 77450 (March 25,
2016) (Order Approving SR-CBOE-2016-005); 77449 (March 25, 2016), 81
FR 18665, (March 31, 2016) (Order Approving SR-Phlx-2016-10).
\29\ 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 such 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 \30\ to determine whether the proposed
rule change should be approved or disapproved.
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\30\ 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-BatsEDGX-2016-28 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 BatsEDGX-2016-28. 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 the 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-BatsEDGX-2016-28, and should
be submitted on or before July 28, 2016.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\31\
Brent J. Fields,
Secretary.
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\31\ 17 CFR 200.30-3(a)(12).
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[FR Doc. 2016-16111 Filed 7-6-16; 8:45 am]
BILLING CODE 8011-01-P