[Federal Register Volume 79, Number 148 (Friday, August 1, 2014)]
[Notices]
[Pages 44926-44929]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-18122]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-72687; File No. SR-BYX-2014-012]
Self-Regulatory Organizations; BATS Y-Exchange, Inc.; Notice of
Filing and Immediate Effectiveness of a Proposed Rule Change To Clarify
for Members and Non-Members the Use of Certain Data Feeds for Order
Handling and Execution, Order Routing and Regulatory Compliance of BATS
Y-Exchange, Inc.
July 28, 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 July 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 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 Substance
of the Proposed Rule Change
The Exchange proposes to clarify for Members \3\ and non-Members
the Exchange's use of certain data feeds for order handling and
execution, order routing, and regulatory compliance. The Exchange has
designated this proposal
[[Page 44927]]
as non-controversial and provided the Commission with the notice
required by Rule 19b-4(f)(6)(iii) under the Act.\4\
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\3\ The term ``Member'' is defined as ``any 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).
\4\ 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 submits this filing to clarify for Members and non-
Members the Exchange's use of certain data feeds for order handling and
execution, order routing, and regulatory compliance.
Order Handling and Execution
In order to calculate the national best bid and offer (``NBBO'') in
its Matching Engine (the ``ME''), the Exchange uses quotes disseminated
by market centers through proprietary data feeds (generally referred to
as ``Direct Feeds'') as well as by the Securities Information
Processors (``SIP''). The ME uses quotes disseminated from SIP feeds
for the Chicago Stock Exchange, Inc. and NYSE MKT LLC. The Exchange
notes that the ME receives Direct Feeds from the Exchange's affiliates,
BATS Exchange Inc., EDGA Exchange, Inc., and EDGX Exchange, Inc.
In addition to receiving Direct Feeds and SIP feeds, the ME's
calculation of the NBBO may be adjusted based on orders sent to other
venues with protected quotations, execution reports received from those
venues, and certain orders received by the Exchange (collectively
``Feedback''). The Exchange does not include its quotes in the
calculation of the Exchange's NBBO because the system is designed such
that all incoming orders are separately compared to the Exchange's Best
Bid or Offer and the Exchange calculated NBBO, which together create a
complete view of the NBBO, prior to display, execution, or routing.
Feedback from the receipt of Intermarket Sweep Orders (``ISOs'')
with a time-in-force of Day (``Day ISOs'') and feedback from the
Exchange's routing broker/dealer, BATS Trading, Inc., (``BATS
Trading''), as described below, are used to augment the market data
received by Direct Feeds and the SIP feeds. The Exchange's ME will
update the NBBO upon receipt of a Day ISO. When a Day ISO is posted on
the BATS Book,\5\ the ME uses the receipt of a Day ISO as evidence that
the protected quotes have been cleared, and the ME does not check away
markets for equal or better-priced protected quotes.\6\ The ME will
then display and execute non-ISO orders at the same price as the Day
ISO.
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\5\ See Exchange Rule 1.5(e).
\6\ Pursuant to Regulation NMS, a broker-dealer routing a Day
ISO is required to simultaneously route one or more additional ISOs,
as necessary, to execute against the full displayed size of any
protected quote priced equal to or better than the Day ISO. See also
Question 5.02 in the ``Division of Trading and Markets, Responses to
Frequently Asked Questions Concerning Rule 611 and Rule 610 of
Regulation NMS'' (last updated April 4, 2008) available at http://www.sec.gov/divisions/marketreg/nmsfaq610-11.htm.
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All Feedback expires as soon as: (i) One (1) second passes; (ii)
the Exchange receives new quote information; or (iii) the Exchange
receives updated Feedback information. With the exception of Day ISO
Feedback, the Exchange only generates Feedback where the order was
routed using one of the following routing strategies: Parallel D,
Parallel 2D, Parallel T, SLIM, and TRIM (collectively ``Smart Order
Routing'').\7\
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\7\ See Exchange Rule 11.13(a)(3). Thus, the Exchange does not
generate Feedback from routing options where the User directs the
Exchange to route an order to a particular venue, such as
Destination Specific Orders and Directed ISOs, as defined in Rules
11.9(c)(12) and 11.9(d)(2), respectively, nor does the Exchange
generate Feedback from the DRT routing option defined in Rule
11.13(a)(3)(E), which routes to alternative trading systems.
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The Pegged NBBO (``PBBO'') comprises the Exchange's calculation of
the NBBO for purposes of determining the price at which a Pegged
Order,\8\ Mid-Point Peg Order,\9\ or Market Maker Peg Order \10\ is to
be pegged. The PBBO includes the Exchange's quotes from the SIP feeds
in the calculation but is otherwise derived using the same Direct
Feeds, SIP feeds, and Feedback used for the NBBO calculation.
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\8\ See Exchange Rule 11.9(c)(8).
\9\ See Exchange Rule 11.9(c)(9).
\10\ See Exchange Rule 11.9(c)(16).
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Order Routing
When the Exchange has a marketable order with instructions from the
sender that the order is eligible to be routed, and the ME identifies
that there is no matching price available on the Exchange, but there is
a matching price represented at another venue that displays protected
quotes, then the ME will send the order to the Routing Engine (``RE'')
of BATS Trading.
In determining whether to route an order, the RE makes its own
calculation of the NBBO using the Direct Feeds, SIP feeds, and Router
Feedback, as described below.\11\ The RE does not utilize Day ISO
Feedback in constructing the NBBO; however, because all orders
initially flow through the ME, to the extent Day ISO Feedback has
updated the ME's calculation of the NBBO, all orders processed by the
RE do take Day ISO Feedback into account. The RE receives Feedback from
all Smart Order Routing strategies.
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\11\ The Exchange uses the same Direct Feeds and quotes from the
SIP feeds in the RE as is described above with respect to the ME.
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There are three types of Router Feedback that contribute to the
Exchange's calculation of the NBBO:
Immediate Feedback. Where BATS Trading routes an order to
a venue with a protected quotation using Smart Order Routing (a
``Feedback Order''), the number of shares available at that venue is
immediately decreased by the number of shares routed to the venue at
the applicable price level.
Execution Feedback. Where BATS Trading receives an
execution report associated with a Feedback Order that indicates that
the order has fully executed with no remaining shares associated with
the order, all opposite side quotes on the venue's order book that are
priced more aggressively than the price at which the order was executed
will be ignored.
Cancellation Feedback. Where BATS Trading receives an
execution report associated with a Feedback Order that indicates that
the order has not fully executed (either a partial execution or a
cancellation), all opposite side quotes on the venue's order book that
are priced equal to or more aggressively than the limit price for the
order will be ignored.
All Feedback expires as soon as: (i) One (1) second passes; (ii)
the Exchange receives new quote information; or (iii) the Exchange
receives updated Feedback information.
Regulatory Compliance
Locked or Crossed Markets. The ME determines whether the display of
an
[[Page 44928]]
order would lock or cross the market. At the time an order is entered
into the ME, the ME will establish, based upon its calculation of the
NBBO from Direct Feeds, SIP feeds and Feedback, whether the order will
lock or cross the prevailing NBBO for a security. In the event that the
order would produce a locking or crossing condition, the ME will cancel
the order, re-price \12\ the order, or route the order based on the
Member's instructions. Two exceptions to this logic are Day ISOs and
declarations of self-help.
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\12\ See Rule 11.9(g).
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Pursuant to Regulation NMS, when an Exchange receives a Day ISO,
the sender of the ISO retains the responsibility to comply with
applicable rules relating to locked and crossed markets.\13\ In such
case, the Exchange is obligated only to display a Day ISO order at the
Member's price, even if such price would lock or cross the market.\14\
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\13\ See supra note 6.
\14\ See supra note 6.
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Declarations of self-help occur when the RE detects that an
exchange displaying protected quotes is slow, as defined in Regulation
NMS, or non-responsive to the Exchange's routed orders. In this
circumstance, according to Rule 611(b) of Regulation NMS, the Exchange
may display a quotation that may lock or cross the market where the
quotation that it may lock or cross is displayed by the market that the
Exchange invoked self-help against.\15\ The Exchange may also declare
self-help where another exchange's SIP quotes are slow or non-
responsive resulting in a locked or crossed market. Once the Exchange
declares self-help, the ME and RE will ignore the quotes generated from
the self-helped market in their calculations of the NBBO for execution
and routing determinations in compliance with Regulation NMS. The
Exchange will also disable all routing to the self-helped market. The
ME and RE will continue to consume the self-helped market center's
quotes; however, in order to immediately include the quote in the NBBO
calculation and enable routing once self-help is revoked.
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\15\ See also Question 5.03 in the ``Division of Trading and
Markets, Responses to Frequently Asked Questions Concerning Rule 611
and Rule 610 of Regulation NMS'' (last updated April 4, 2008)
available at http://www.sec.gov/divisions/marketreg/nmsfaq610-11.htm.
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Trade-Through Rule. Pursuant to Rule 611 of Regulation NMS, the
Exchange shall establish, maintain, and enforce written policies and
procedures that are reasonably designed to prevent trade-throughs on
trading centers of protected quotations in NMS stocks that do not fall
within a valid exception and, if relying on such an exception, that are
reasonably designed to ensure compliance with the terms of the
exception. The ME will not permit an execution on the Exchange if there
are better-priced protected quotations displayed in the market unless
the order is an ISO. At the time an order is entered into the ME, the
ME uses the view of the NBBO as described above. If the NBBO is priced
better than what is resident on the Exchange, the Exchange will not
match such order on the BATS Book, and based on the Member's
instructions, the ME will cancel the order, re-price the order or route
the order.
Regulation SHO. The Exchange cannot execute a Short Sale Order \16\
equal to or below the current National Best Bid (``NBB'') when a short
sale price restriction is in effect pursuant to Rule 201 of Regulation
SHO (``Short Sale Circuit Breaker'').\17\ When a Short Sale Circuit
Breaker is in effect, the Exchange utilizes information received from
Direct Feeds, SIP feeds, and Feedback, and a view of the BATS Book to
assess its compliance with Rule 201 of Regulation SHO. The primary
difference between the NBBO used for compliance with Rule 201 of
Regulation SHO and other constructions of the NBBO, however, is that
the Exchange includes market centers against which it has declared
self-help in its view of the NBBO.
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\16\ See Exchange Rule 11.19.
\17\ 17 CFR 242.200(g); 17 CFR 242.201. On February 26, 2010,
the Commission adopted amendments to Regulation SHO under the Act in
the form of Rule 201, pursuant to which, among other things, short
sale orders in covered securities generally cannot be executed or
displayed by a trading center, such as the Exchange, at a price that
is at or below the current NBB when a Short Sale Circuit Breaker is
in effect for the covered security. See Securities Exchange Act
Release No. 61595 (February 26, 2010), 75 FR 11232 (March 10, 2010).
In connection with the adoption of Rule 201, Rule 200(g) of
Regulation SHO was also amended to include a ``short exempt''
marking requirement. See also Securities Exchange Act Release No.
63247 (November 4, 2010), 75 FR 68702 (November 9, 2010) (extending
the compliance date for Rules 201 and 200(g) to February 28, 2011).
See also Division of Trading & Markets: Responses to Frequently
Asked Questions Concerning Rule 201 of Regulation SHO, www.sec.gov/divisions/marketreg/rule201faq.htm.
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Latent or Inaccurate Direct Feeds. Where the Exchange's systems
detect problems with one or more Direct Feeds, the Exchange will
immediately fail over to the SIP feed to calculate the NBBO for the
market center(s) where the applicable Direct Feed is experiencing
issues. Problems that lead to immediate failover to the SIP feed may
include a significant loss of information (i.e., packet loss) or
identifiable latency, among other things. The Exchange can also
manually failover to the SIP feed in lieu of Direct Feed data upon
identification by a market center of an issue with its Direct Feed(s).
2. Statutory Basis
The Exchange believes that its proposal is consistent with Section
6(b) of the Act \18\ in general, and furthers the objectives of Section
6(b)(5) of the Act \19\ in particular, in that it is designed to
promote just and equitable principles of trade, to foster cooperation
and coordination with persons engaged in facilitating transactions in
securities, 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. The Exchange does not
believe that this proposal will permit unfair discrimination among
customers, brokers, or dealers because it will be available to all
Users.
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\18\ 15 U.S.C. 78f(b).
\19\ 15 U.S.C. 78f(b)(5).
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The Exchange believes that its proposal to describe the Exchange's
use of data feeds removes impediments to and perfects the mechanism of
a free and open market and protects investors and the public interest
because it provides additional specificity and transparency. The
Exchange's proposal will enable investors to better assess the quality
of the Exchange's execution and routing services. The proposal does not
change the operation of the Exchange or its use of data feeds; rather
it describes how, and for what purposes, the Exchange uses the quotes
disseminated from data feeds to calculate the NBBO for a security for
purposes of Regulation NMS, Regulation SHO and various order types that
update based on changes to the applicable NBBO. The Exchange believes
the additional transparency into the operation of the Exchange as
described in the proposal will remove impediments to and perfect the
mechanism of a free and open market and a national market system, and,
in general, protect investors and the public interest.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposal will impose any
burden on competition not necessary or appropriate in furtherance of
the purposes of the Act. On the contrary, the Exchange believes the
proposal would enhance competition because describing the Exchange's
use of data feeds enhances transparency and enables investors to better
assess the
[[Page 44929]]
quality of the Exchange's execution and routing services.
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.
II. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
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 for 30
days from the date on which it was filed, or such shorter time as the
Commission may designate, the proposed rule change has become effective
pursuant to Section 19(b)(3)(A) of the Act \20\ and Rule 19b-4(f)(6)
thereunder.\21\
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\20\ 15 U.S.C. 78s(b)(3)(A).
\21\ 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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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 to
determine whether the proposed rule should be approved or disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the foregoing, including whether the 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-BYX-2014-012 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-2014-012. 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
a.m. and 3 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-BYX-2014-012 and should be
submitted on or before August 22, 2014.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\22\
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\22\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-18122 Filed 7-31-14; 8:45 am]
BILLING CODE 8011-01-P