81 FR 19661 - Self-Regulatory Organizations; BATS Exchange, Inc.; Order Approving Proposed Rule Change, as Modified by Amendment No. 1 Thereto, To Amend BATS' Rules Regarding the Auction Process for Securities Subject to an Initial Public Offering

SECURITIES AND EXCHANGE COMMISSION

Federal Register Volume 81, Issue 65 (April 5, 2016)

Page Range		19661-19664
FR Document		2016-07683
Federal Register, Volume 81 Issue 65 (Tuesday, April 5, 2016)
[Federal Register Volume 81, Number 65 (Tuesday, April 5, 2016)]
[Notices]
[Pages 19661-19664]
From the Federal Register Online  [www.thefederalregister.org]
[FR Doc No: 2016-07683]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-77476; File No. SR-BATS-2016-17]


Self-Regulatory Organizations; BATS Exchange, Inc.; Order 
Approving Proposed Rule Change, as Modified by Amendment No. 1 Thereto, 
To Amend BATS' Rules Regarding the Auction Process for Securities 
Subject to an Initial Public Offering

March 30, 2016.

I. Introduction

    On February 10, 2016, BATS Exchange, Inc. (the ``Exchange'' or 
``BATS'') filed with the Securities and Exchange Commission (``SEC'' or 
``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 amend BATS Rule 11.23, entitled ``Auctions,'' 
with regard to the handling of orders during an initial public offering 
(``IPO'') auction. On February 22, 2016, the Exchange filed Amendment 
No. 1 to the proposed rule change.\3\ The proposed rule change, as 
modified by Amendment No. 1, was published for comment in the Federal 
Register on February 29, 2016.\4\ The Commission has received no 
comment letters regarding the proposal. This order approves the 
proposed rule change, as modified by Amendment No. 1.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ In Amendment No. 1, the Exchange corrected a technical error 
regarding incorrect terminology used in a footnote and clarified a 
sentence regarding an order with a time-in-force of ``Regular Hours 
Only'' (``RHO'') that would be converted to an order with a time-in-
force of ``Day'' under the proposed rule change.
    \4\ See Securities Exchange Act Release No. 77222 (February 24, 
2016), 81 FR 10345 (SR-BATS-2016-17) (``Notice'').
---------------------------------------------------------------------------

II. Description of the Proposal

    The Exchange proposes to: (1) Amend BATS Rule 11.23(a)(8) to modify 
the term ``Eligible Auction Order'' to delineate the types of orders 
that may participate in an auction for a BATS listed corporate security 
\5\ in an IPO on the Exchange (``IPO Auction''); \6\ and (2) amend 
subparagraphs (d)(1)(A) and (d)(2) of BATS Rule 11.23 to modify the 
rules governing the Quote-Only Period \7\ during an Auction.
---------------------------------------------------------------------------

    \5\ A BATS listed corporate security is a security listed on the 
Exchange pursuant to Chapter 14 of the Exchange's Rules that is not 
an Exchange Traded Product (``ETP'') listed on the Exchange pursuant 
to Exchange Rule 14.11.
    \6\ See Notice, supra note 4, at 10345-48. The Exchange also 
proposes a conforming change to BATS Rule 11.1, entitled ``Hours of 
Trading and Trading Days.'' See Notice, supra note 4, at 10346, 
n.19.
    \7\ See BATS Rule 11.23(a)(17) (defining ``Quote-Only Period'' 
as a designated period of time prior to a Halt Auction, a Volatility 
Closing Auction, or an IPO Auction during which Users may submit 
orders to the Exchange for participation in the auction). A ``User'' 
is means any Member or Sponsored Participant who is authorized to 
obtain access to the Exchange's system pursuant to BATS Rule 11.3. 
See BATS Rule 1.5(cc).
---------------------------------------------------------------------------

A. Changes to the Definition of Eligible Auction Order

    Currently, ``Eligible Auction Order'' is defined as any Market-On-
Open (``MOO''),\8\ Limit-On-Open (``LOO''),\9\ Late-Limit-On-Open 
(``LLOO''),\10\ Market-On-Close (``MOC''),\11\ Limit-On-Close 
(``LOC''),\12\ or Late-Limit-On-Close (``LLOC'')\13\ order that is 
entered in compliance with its respective cutoff for an Opening or 
Closing Auction,\14\ any RHO \15\ order prior to the Opening Auction, 
any Limit Order \16\ or Market Order \17\ not designated to exclusively 
participate in the Closing Auction entered during the Quote-Only Period 
of an IPO Auction,\18\ and any Limit or Market Order not designated to 
exclusively participate in the Opening or Closing Auction entered 
during the Quote-Only Period of a Halt Auction.\19\ The Exchange 
proposes to amend the definition of Eligible Auction Orders to either 
reject, convert, or ignore certain types of orders.\20\ As proposed, 
Limit Orders and BATS Market Orders, the two main types of orders 
offered by the Exchange, that are entered during the Quote-Only Period 
would be allowed to participate in an IPO Auction for a BATS listed 
corporate security provided they do not also include one or more of the 
modifiers described below.\21\
---------------------------------------------------------------------------

    \8\ See BATS Rule 11.23(a)(16).
    \9\ See BATS Rule 11.23(a)(14).
    \10\ See BATS Rule 11.23(a)(12).
    \11\ See BATS Rule 11.23(a)(15).
    \12\ See BATS Rule 11.23(a)(13).
    \13\ See BATS Rule 11.23(a)(11).
    \14\ The Opening and Closing Auction processes are described in 
BATS Rules 11.23(b) and (c).
    \15\ See BATS Rule 11.9(b)(7).
    \16\ See BATS Rule 11.9(a)(1).
    \17\ See BATS Rule 11.9(a)(2).
    \18\ See BATS Rule 11.23(d)(1)(A) (describing Quote-Only 
Period).
    \19\ See BATS Rule 11.23(a)(8). The Exchange also proposes to 
amend BATS Rule 11.1(a) to make clear that it will not accept BATS 
Market Orders that are not Eligible Auction Orders prior to 8:00 
a.m. Eastern Time, see Notice, supra note 4, at 10346, n.19, and to 
make conforming changes to BATS Rules 11.23(b) and 11.23(c).
    \20\ See Notice, supra note 4, at 10345.
    \21\ See Notice, supra note 4, at 10345-48. The Exchange does 
not propose to amend the types of Eligible Auction Orders that may 
participate in an auction for a newly listed ETP. See id. at 10345. 
An Exchange Traded Product is a security that is listed on the 
Exchange pursuant to BATS Rule 14.11.
---------------------------------------------------------------------------

Types of Orders to be Accepted or Rejected
    The Exchange proposes to exclude the following types of orders from 
participation in an IPO Auction and would reject such orders: (1) Stop 
Orders \22\ and Stop Limit Orders; \23\ (2) Pegged Orders,\24\ Mid-
Point Peg Orders,\25\ Market Maker Peg Orders \26\ and Supplemental Peg 
Orders; \27\ (3) Minimum Quantity Orders \28\ and Discretionary Orders; 
\29\ (4) MOC, LOC and LLOC orders; and (5) orders with a time-in-force 
of Fill-or-Kill (``FOK'') \30\ and orders with a time-in-force of Good-
`til-Day (``GTD'') \31\ with an expiration time earlier than 4:00 p.m. 
Eastern Time. Such orders entered to participate in an IPO Auction 
would be rejected.\32\
---------------------------------------------------------------------------

    \22\ See BATS Rule 11.9(c)(17).
    \23\ See BATS Rule 11.9(c)(18).
    \24\ See BATS Rule 11.9(c)(8).
    \25\ See BATS Rule 11.9(c)(9).
    \26\ See BATS Rule 11.9(c)(16).
    \27\ See BATS Rule 11.9(c)(19).
    \28\ See BATS Rule 11.9(c)(5).
    \29\ See BATS Rule 11.9(c)(10).
    \30\ See BATS Rule 11.9(b)(6).
    \31\ See BATS Rule 11.9(b)(4).
    \32\ See proposed BATS Rule 11.23(a)(8)(A). See also Notice, 
supra note 4, at 10346.
---------------------------------------------------------------------------

Types of Orders to be Converted
    The Exchange also proposes to specify the types of orders that 
would be converted by the Exchange for purposes of participating in the 
IPO Auction for a BATS listed corporate security.\33\ Specifically, 
under the proposal, the following types of orders would be converted: 
(1) Market Orders with a time-in-force of Immediate-or-Cancel (``IOC'') 
\34\ would be converted to a MOO and a Limit Order with a time-in-force 
of IOC would be converted to a LOO; (2) orders with a time-in-force of 
RHO would be converted to orders with a time-in-force of Day; and (3) 
any orders eligible to be routed would be

[[Page 19662]]

converted to a BATS Only Order.\35\ Under the proposal, upon completion 
of the IPO Auction, any remainder not executed in the auction would be 
placed on the BATS Book, executed, cancelled or routed away in 
accordance with the converted terms of the order. Such orders would not 
revert back to the original type modifier the User included with the 
order.\36\
---------------------------------------------------------------------------

    \33\ See proposed BATS Rule 11.23(a)(8)(B). See also Notice, 
supra note 4, at 10346-47.
    \34\ See BATS Rule 11.9(b)(1).
    \35\ See proposed BATS Rule 11.23(a)(8)(B). See also Notice, 
supra note 4, at 10346.
    \36\ See Notice, supra note 4, at 10346.
---------------------------------------------------------------------------

Modifiers To Be Ignored
    The Exchange also proposes to ignore certain order modifiers for 
orders that have been entered to participate in an IPO Auction.\37\ 
Specifically, the following modifiers would be handled as follows 
during an IPO Auction: (1) A Match Trade Prevention (``MTP'') 
modifier,\38\ would not be applied until the IPO Auction is complete, 
but it would be applied in the event any unexecuted portion is placed 
on the BATS Book; \39\ (2) an instruction to treat an order as an 
Attributable Order \40\ would not be applied in an IPO Auction and 
would be permanently ignored with respect to the order, meaning that 
any such order's execution would be displayed anonymously; \41\ (3) an 
Intermarket Sweep Order (``ISO'') \42\ Instruction or a Post Only 
instruction included with a Limit Order would not be applied in an IPO 
Auction and would be permanently ignored with respect to the order; 
\43\ (4) the Maximum Remove Percentage of a Partial Post Only at Limit 
Order \44\ would not be applied in an IPO Auction and would be 
permanently ignored with respect to the order; and (5) the 
replenishment range of a Reserve Order with a Random Replenishment 
instruction \45\ would not be applied in an IPO Auction and would be 
permanently ignored with respect to the order.\46\ Thus, with the 
exception of MTP modifiers, all modifiers listed above would not be 
further considered with respect to an order upon completion of the IPO 
Auction, and any remainder not executed in the auction would be placed 
on the BATS Book, executed, cancelled, or routed away in accordance 
with the modified terms of the order.\47\
---------------------------------------------------------------------------

    \37\ See proposed BATS Rule 11.23(a)(8)(C). See also Notice, 
supra note 4, at 10347-48.
    \38\ See BATS Rule 11.9(f).
    \39\ Pursuant to BATS Rule 11.9(f), any incoming order 
designated with an MTP modifier is normally prevented from executing 
against a resting opposite side order also designated with an MTP 
modifier and originating from the same User. Under the proposal, the 
MTP Modifier would be ignored during an IPO Auction, and such 
opposite side orders originating from the same User would be 
eligible to be matched against each other. Upon completion of the 
IPO Auction, an MTP modifier would be recognized again, and any 
remainder not executed in the auction would be placed on the BATS 
Book and executed or cancelled in accordance with the original MTP 
modifier appended to the order. See Notice, supra note 4, at 10347.
    \40\ See BATS Rule 11.9(c)(14).
    \41\ See Notice, supra note 4, at 10347.
    \42\ See BATS Rule 11.9(d).
    \43\ See Notice, supra note 4, at 10347.
    \44\ See BATS Rule 11.9(c)(7).
    \45\ See Notice, supra note 4, at 10348, n.38 (citing BATS Rule 
11.9(c)(1)(A)).
    \46\ See Notice, supra note 4, at 10347-48.
    \47\ See Notice, supra note 4, at 10348.
---------------------------------------------------------------------------

B. Changes to the Quote-Only Period

    The Quote-Only Period is the designated period of time prior to a 
Halt Auction, a Volatility Closing Auction, or an IPO Auction during 
which Users may submit orders to the Exchange for participation in the 
auction.\48\ Currently, the Quote-Only Period for an IPO Auction begins 
fifteen (15) minutes plus a short random period prior to such IPO 
Auction.\49\
---------------------------------------------------------------------------

    \48\ See BATS Rule 11.23(a)(17). See also Notice, supra note 4, 
at 10348.
    \49\ See BATS Rule 11.23(d)(1)(A).
---------------------------------------------------------------------------

    The Exchange proposes to extend the Quote-Only Period with respect 
to an IPO Auction for an ETP such that it would commence at 8:00 
a.m.,\50\ which is the beginning of the Exchange's Pre-Opening 
Session.\51\ The Exchange also proposes to extend the Quote-Only Period 
with respect to an IPO Auction for a BATS listed corporate security to 
begin at a time announced in advance by the Exchange that would be 
between fifteen (15) and thirty (30) minutes plus a short random period 
prior to such IPO Auction.\52\ The Exchange would determine the length 
of time of the Quote-Only Period for a BATS listed corporate security 
(i.e., what time between fifteen (15) and thirty (30) minutes) in 
consultation with the issuer of the IPO Security and would announce the 
length of time for the Quote-Only Period in advance of the commencement 
of such period.\53\ The Exchange also proposes to make a technical 
amendment to paragraph (d)(2)(A) of BATS Rule 11.23 to replace the 
current term ``quotation only period'' with the defined term ``Quote 
Only Period.''
---------------------------------------------------------------------------

    \50\ See proposed BATS Rule 11.23(d)(1)(A).
    \51\ See BATS Rule 1.5(r).
    \52\ See proposed BATS Rule 11.23(d)(1)(A).
    \53\ See Notice, supra note 4, at 10348. According to the 
Exchange, the scope of market participants notified regarding the 
anticipated commencement of the Quote-Only Period (or extension of 
Quote-Only Period) would include, but would not be limited to 
Members of the Exchange. Such notice would also include those market 
participants, individuals or entities that have subscribed to the 
Exchange's notification system. The Exchange represents that it 
intends to send notifications regarding the Quote-Only Period via 
email, as it does with most public notifications today. The Exchange 
further notes that it does, in certain circumstances, post 
information on its public Web site in addition to email 
dissemination. See id., n.41.
---------------------------------------------------------------------------

    Finally, the Exchange proposes to extend the Quote-Only Period in 
the event of a technical or systems issue at the Exchange that may 
impair the ability of Users to participate in the IPO Auction or of the 
Exchange to complete the IPO Auction.\54\ As proposed, the Exchange 
would notify market participants in the event of any extension to the 
Quote-Only Period, including due to a technical or systems issue during 
an IPO Auction. Such notice would provide details regarding the 
circumstances and length of the extension.\55\
---------------------------------------------------------------------------

    \54\ See proposed BATS Rule 11.23(d)(2)(B)(iv). See also Notice, 
supra note 4, at 10348. Currently, the Exchange may extend the 
Quote-Only Period under Rule 11.23(d)(2)(B) for an Auction beyond 
the stated timeframes where: (i) There are unmatched Market Orders 
on the Auction Book associated with the auction; (ii) in an IPO 
Auction, the underwriter requests an extension; or (iii) where the 
Indicative Price moves the greater of 10% or fifty (50) cents in the 
fifteen (15) seconds prior to the auction. See id.
    \55\ See proposed BATS Rule 11.23(d)(2)(C). See also Notice, 
supra note 4, at 10348.
---------------------------------------------------------------------------

III. Discussion

    After careful review of the proposal, the Commission finds that the 
proposed rule change is consistent with the requirements of the Act and 
the rules and regulations thereunder applicable to a national 
securities exchange.\56\ In particular, the Commission finds that the 
proposal is consistent with Section 6(b)(5) of the Act,\57\ which 
requires, among other things, that the rules of a national securities 
exchange be 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.
---------------------------------------------------------------------------

    \56\ In approving this proposal, the Commission has considered 
the proposed rule's impact on efficiency, competition, and capital 
formation. See 15 U.S.C. 78c(f).
    \57\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

A. Changes to the Definition of Eligible Auction Order

    The Exchange believes that refining the types of orders processed 
in an IPO Auction and/or those that would be placed onto the BATS Book 
\58\ following such IPO Auction would simplify and reduce the 
complexity of the IPO Auction for BATS listed corporate securities.\59\ 
The Exchange further

[[Page 19663]]

believes that doing so would aid in ensuring a robust, but streamlined, 
IPO Auction process for a newly listed corporate securities.\60\
---------------------------------------------------------------------------

    \58\ See BATS Rule 1.5(e) (defining BZX Book as the System's 
electronic file of orders).
    \59\ See Notice, supra note 4, at 10345.
    \60\ See id.
---------------------------------------------------------------------------

    Specifically, the Exchange believes it is reasonable to reject 
orders with the characteristics described above from participating in 
the IPO Auction because doing so would aid in reducing systems 
complexity and risk associated both with completing the IPO Auction and 
with transferring any unexecuted portion of such orders to the BATS 
Book once the auction is complete.\61\ Further, the Exchange states 
that the orders it proposes to reject are not commonly utilized and 
therefore the rejection of such orders should not have a significant 
impact on its Members.\62\ In addition, the Exchange believes these 
types of orders contain certain attributes that are not compatible with 
the IPO Auction process.\63\
---------------------------------------------------------------------------

    \61\ See id. at 10346.
    \62\ See id. See also BATS Rule 1.5(n)(defining ``Member'' as 
any registered broker or dealer that has been admitted to membership 
in the Exchange).
    \63\ See Notice, supra note 4, at 10346.
---------------------------------------------------------------------------

    In addition, in contrast to those orders that would be rejected, 
the Exchange notes that the types of orders the Exchange proposes to 
convert are more commonly used by Members than those order types the 
Exchange proposes to reject.\64\ The Exchange believes that it is 
reasonable to convert rather than reject the order types described 
above because such orders are more commonly used by Members and doing 
so would accommodate those Members that have automated their systems to 
send orders to the Exchange without significantly altering the 
operation of the order from what the Member originally instructed.\65\ 
According to the Exchange, such Members also may not be able to re-
submit a rejected order with the correct modifier in time to 
participate in the IPO Auction.\66\ Therefore, the Exchange notes that 
it is concerned that rejecting, rather than converting those types of 
orders as proposed, would inappropriately burden those Members and 
deter their participation in an IPO Auction.\67\
---------------------------------------------------------------------------

    \64\ See id. at 10346-47.
    \65\ See id. at 10347.
    \66\ See id.
    \67\ See id.
---------------------------------------------------------------------------

    The Exchange further believes it is reasonable to ignore certain 
modifiers on an order during the IPO Auction because doing so would 
simplify and reduce the complexity of the auction process or such 
modifiers are incompatible with the IPO Auction process.\68\ For 
instance, the Exchange believes that it is reasonable to ignore 
instructions to treat an order as an Attributable Order because orders 
entered into an IPO Auction are not displayed individually, but rather, 
are displayed as aggregated interest in the Exchange's data feeds.\69\
---------------------------------------------------------------------------

    \68\ See id. at 10347-49.
    \69\ See id. at 10347.
---------------------------------------------------------------------------

    For the reasons stated above, the Commission believes that amending 
the definition of Eligible Auction Orders to reject, convert, or ignore 
certain types of orders in connection with the IPO Auction process for 
a BATS listed corporate security is consistent with Section 6(b)(5) of 
the Act. The Commission believes that it is reasonable for the Exchange 
to seek to simplify and reduce the complexity of the IPO Auction 
process and to clearly describe the treatment of those orders and 
modifiers submitted during an IPO Auction that would be rejected, 
converted, or ignored.\70\
---------------------------------------------------------------------------

    \70\ The Commission also believes that the Exchange's proposal 
to amend BATS Rule 11.1(a) to make clear that it will not accept 
BATS Market Orders that are not Eligible Auction Orders prior to 
8:00 a.m. Eastern Time and to make conforming changes to BATS Rules 
11.23(b) and 11.23(c) is consistent with Act. The Commission 
believes that these proposed changes would help reduce confusion 
among Members regarding the operation of BATS Market Orders that are 
entered prior to the start of the Exchange's Pre-Opening Session and 
the operation of the Exchange's rules.
---------------------------------------------------------------------------

B. Changes to the Quote-Only Period

    The Exchange states that it believes that a longer Quote-Only 
Period for ETPs is warranted because it will encourage the entry of 
orders prior to an IPO Auction for newly issued ETPs, which typically 
have lower participation rates especially as compared to IPO Auctions 
for corporate securities.\71\ The Exchange further states that while an 
IPO Auction for a corporate security is typically conducted at least 
thirty minutes after the commencement of Regular Trading Hours, an IPO 
Auction for a newly issued ETP is typically conducted at the beginning 
of Regular Trading Hours (i.e., 9:30 Eastern Time), and thus may not 
afford much time for participants to enter orders prior to such 
auction.\72\
---------------------------------------------------------------------------

    \71\ See Notice, supra note 4, at 10348.
    \72\ See id.
---------------------------------------------------------------------------

    In addition, the Exchange believes it is reasonable to extend the 
Quote-Only Period for a BATS listed corporate security to begin at a 
time announced in advance by the Exchange that shall be between fifteen 
and thirty minutes plus a short random period prior to such IPO Auction 
because it will allow market participants more time to enter orders to 
participate in the IPO Auction.\73\ Further, according to the Exchange, 
such an extension would afford underwriters more time to evaluate the 
scope of demand for, and supply of, the security subject to the IPO 
Auction (``IPO Security''), which in turn, would allow the underwriter 
to make a more informed decision about the appropriate time to initiate 
the opening of the IPO Security through the IPO Auction.\74\
---------------------------------------------------------------------------

    \73\ See id. at 10348-49.
    \74\ See id.
---------------------------------------------------------------------------

    The Exchange also believes it is reasonable to extend the Quote-
Only Period in the event of a technical or systems issue at the 
Exchange that may impair the ability of market participants to 
participate in an IPO Auction as such an event may prevent market 
participants from entering orders during the Quote-Only Period, which 
in turn could result in less liquidity that may prevent the 
underwriters from adequately accessing the trading interest of the IPO 
Security.\75\ Thus, the Exchange believes it is reasonable to extend 
the Quote-Only Period in the event of a technical or systems issue to 
provide market participants adequate time to enter orders to 
participate in the IPO auction.\76\ Finally, the Exchange states that 
its proposal to make a technical amendment to paragraph (d)(2)(A) of 
BATS Rule 11.23 to replace the current term ``quotation only period'' 
with the defined term ``Quote Only Period'' is intended to make the 
rule easier to understand and avoid potential investor confusion.\77\
---------------------------------------------------------------------------

    \75\ See id. at 10348-49.
    \76\ See id.
    \77\ See id. at 10349.
---------------------------------------------------------------------------

    For the foregoing reasons, the Commission believes that the 
proposed changes to the Quote-Only Period are consistent with the Act 
because these changes are designed to allow market participants 
additional time in advance of an IPO Auction, and the proposed 
technical amendment to BATS Rule 11.23(d)(2)(A) conforms the 
terminology used in that section of BATS Rule 11.23(d) with the current 
terminology used in the BATS rule book.

IV. Conclusion

    For the foregoing reasons, the Commission finds that the proposed 
rule change, as modified by Amendment No.1, is consistent with the Act 
and the rules and regulations thereunder applicable to a national 
securities exchange.
    IT IS THEREFORE ORDERED, pursuant to Section 19(b)(2) of the Act 
\78\ that the proposed rule change (SR-BATS-2016-17) is approved.
---------------------------------------------------------------------------

    \78\ 15 U.S.C. 78s(b)(2).
    \79\ 17 CFR 200.30-3(a)(12).


[[Page 19664]]


---------------------------------------------------------------------------

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\79\
Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-07683 Filed 4-4-16; 8:45 am]
 BILLING CODE 8011-01-P
19662 Federal Register / Vol. 81, No. 65 / Tuesday, April 5, 2016 / Notices

converted to a BATS Only Order.35 be permanently ignored with respect to (d)(2)(A) of BATS Rule 11.23 to replace
Under the proposal, upon completion of the order.46 Thus, with the exception of the current term ‘‘quotation only
the IPO Auction, any remainder not MTP modifiers, all modifiers listed period’’ with the defined term ‘‘Quote
executed in the auction would be placed above would not be further considered Only Period.’’
on the BATS Book, executed, cancelled with respect to an order upon Finally, the Exchange proposes to
or routed away in accordance with the completion of the IPO Auction, and any extend the Quote-Only Period in the
converted terms of the order. Such remainder not executed in the auction event of a technical or systems issue at
orders would not revert back to the would be placed on the BATS Book, the Exchange that may impair the ability
original type modifier the User included executed, cancelled, or routed away in of Users to participate in the IPO
with the order.36 accordance with the modified terms of Auction or of the Exchange to complete
the order.47 the IPO Auction.54 As proposed, the
Modifiers To Be Ignored Exchange would notify market
The Exchange also proposes to ignore B. Changes to the Quote-Only Period participants in the event of any
certain order modifiers for orders that The Quote-Only Period is the extension to the Quote-Only Period,
have been entered to participate in an designated period of time prior to a Halt including due to a technical or systems
IPO Auction.37 Specifically, the Auction, a Volatility Closing Auction, or issue during an IPO Auction. Such
following modifiers would be handled an IPO Auction during which Users may notice would provide details regarding
as follows during an IPO Auction: (1) A submit orders to the Exchange for the circumstances and length of the
Match Trade Prevention (‘‘MTP’’) participation in the auction.48 extension.55
modifier,38 would not be applied until Currently, the Quote-Only Period for an
the IPO Auction is complete, but it IPO Auction begins fifteen (15) minutes III. Discussion
would be applied in the event any plus a short random period prior to such After careful review of the proposal,
unexecuted portion is placed on the IPO Auction.49 the Commission finds that the proposed
BATS Book; 39 (2) an instruction to treat The Exchange proposes to extend the rule change is consistent with the
an order as an Attributable Order 40 Quote-Only Period with respect to an requirements of the Act and the rules
would not be applied in an IPO Auction IPO Auction for an ETP such that it and regulations thereunder applicable to
and would be permanently ignored with would commence at 8:00 a.m.,50 which a national securities exchange.56 In
respect to the order, meaning that any is the beginning of the Exchange’s Pre- particular, the Commission finds that
such order’s execution would be Opening Session.51 The Exchange also the proposal is consistent with Section
displayed anonymously; 41 (3) an proposes to extend the Quote-Only 6(b)(5) of the Act,57 which requires,
Intermarket Sweep Order (‘‘ISO’’) 42 Period with respect to an IPO Auction among other things, that the rules of a
Instruction or a Post Only instruction for a BATS listed corporate security to national securities exchange be
included with a Limit Order would not begin at a time announced in advance designed to prevent fraudulent and
be applied in an IPO Auction and would by the Exchange that would be between manipulative acts and practices, to
be permanently ignored with respect to fifteen (15) and thirty (30) minutes plus promote just and equitable principles of
the order; 43 (4) the Maximum Remove a short random period prior to such IPO trade, to remove impediments to and
Percentage of a Partial Post Only at Auction.52 The Exchange would perfect the mechanism of a free and
Limit Order 44 would not be applied in determine the length of time of the open market and a national market
an IPO Auction and would be Quote-Only Period for a BATS listed system, and, in general, to protect
permanently ignored with respect to the corporate security (i.e., what time investors and the public interest.
order; and (5) the replenishment range between fifteen (15) and thirty (30)
A. Changes to the Definition of Eligible
of a Reserve Order with a Random minutes) in consultation with the issuer
Auction Order
Replenishment instruction 45 would not of the IPO Security and would
be applied in an IPO Auction and would announce the length of time for the The Exchange believes that refining
Quote-Only Period in advance of the the types of orders processed in an IPO
35 See proposed BATS Rule 11.23(a)(8)(B). See commencement of such period.53 The Auction and/or those that would be
also Notice, supra note 4, at 10346. Exchange also proposes to make a placed onto the BATS Book 58 following
36 See Notice, supra note 4, at 10346.
technical amendment to paragraph such IPO Auction would simplify and
37 See proposed BATS Rule 11.23(a)(8)(C). See
reduce the complexity of the IPO
also Notice, supra note 4, at 10347–48.
38 See BATS Rule 11.9(f).
46 See Notice, supra note 4, at 10347–48. Auction for BATS listed corporate
39 Pursuant to BATS Rule 11.9(f), any incoming
47 See Notice, supra note 4, at 10348. securities.59 The Exchange further
48 See BATS Rule 11.23(a)(17). See also Notice,
order designated with an MTP modifier is normally
prevented from executing against a resting opposite supra note 4, at 10348. 54 See proposed BATS Rule 11.23(d)(2)(B)(iv). See
49 See BATS Rule 11.23(d)(1)(A).
side order also designated with an MTP modifier also Notice, supra note 4, at 10348. Currently, the
and originating from the same User. Under the 50 See proposed BATS Rule 11.23(d)(1)(A). Exchange may extend the Quote-Only Period under
proposal, the MTP Modifier would be ignored 51 See BATS Rule 1.5(r). Rule 11.23(d)(2)(B) for an Auction beyond the
during an IPO Auction, and such opposite side 52 See proposed BATS Rule 11.23(d)(1)(A). stated timeframes where: (i) There are unmatched
orders originating from the same User would be 53 See Notice, supra note 4, at 10348. According Market Orders on the Auction Book associated with
eligible to be matched against each other. Upon the auction; (ii) in an IPO Auction, the underwriter
to the Exchange, the scope of market participants
completion of the IPO Auction, an MTP modifier requests an extension; or (iii) where the Indicative
notified regarding the anticipated commencement
would be recognized again, and any remainder not Price moves the greater of 10% or fifty (50) cents
of the Quote-Only Period (or extension of Quote-
executed in the auction would be placed on the in the fifteen (15) seconds prior to the auction. See
Only Period) would include, but would not be
BATS Book and executed or cancelled in id.
asabaliauskas on DSK3SPTVN1PROD with NOTICES

limited to Members of the Exchange. Such notice
accordance with the original MTP modifier 55 See proposed BATS Rule 11.23(d)(2)(C). See
appended to the order. See Notice, supra note 4, at would also include those market participants,
individuals or entities that have subscribed to the also Notice, supra note 4, at 10348.
10347. 56 In approving this proposal, the Commission has
40 See BATS Rule 11.9(c)(14). Exchange’s notification system. The Exchange
represents that it intends to send notifications considered the proposed rule’s impact on
41 See Notice, supra note 4, at 10347.
regarding the Quote-Only Period via email, as it efficiency, competition, and capital formation. See
42 See BATS Rule 11.9(d).
does with most public notifications today. The 15 U.S.C. 78c(f).
43 See Notice, supra note 4, at 10347. 57 15 U.S.C. 78f(b)(5).
Exchange further notes that it does, in certain
44 See BATS Rule 11.9(c)(7). 58 See BATS Rule 1.5(e) (defining BZX Book as
circumstances, post information on its public Web
45 See Notice, supra note 4, at 10348, n.38 (citing site in addition to email dissemination. See id., the System’s electronic file of orders).
BATS Rule 11.9(c)(1)(A)). n.41. 59 See Notice, supra note 4, at 10345.

VerDate Sep<11>2014 17:18 Apr 04, 2016 Jkt 238001 PO 00000 Frm 00114 Fmt 4703 Sfmt 4703 E:\FR\FM\05APN1.SGM 05APN1
Federal Register / Vol. 81, No. 65 / Tuesday, April 5, 2016 / Notices 19663

believes that doing so would aid in believes that it is reasonable to ignore such an extension would afford
ensuring a robust, but streamlined, IPO instructions to treat an order as an underwriters more time to evaluate the
Auction process for a newly listed Attributable Order because orders scope of demand for, and supply of, the
corporate securities.60 entered into an IPO Auction are not security subject to the IPO Auction
Specifically, the Exchange believes it displayed individually, but rather, are (‘‘IPO Security’’), which in turn, would
is reasonable to reject orders with the displayed as aggregated interest in the allow the underwriter to make a more
characteristics described above from Exchange’s data feeds.69 informed decision about the appropriate
participating in the IPO Auction For the reasons stated above, the time to initiate the opening of the IPO
because doing so would aid in reducing Commission believes that amending the Security through the IPO Auction.74
systems complexity and risk associated definition of Eligible Auction Orders to The Exchange also believes it is
both with completing the IPO Auction reject, convert, or ignore certain types of reasonable to extend the Quote-Only
and with transferring any unexecuted orders in connection with the IPO Period in the event of a technical or
portion of such orders to the BATS Book Auction process for a BATS listed systems issue at the Exchange that may
once the auction is complete.61 Further, corporate security is consistent with impair the ability of market participants
the Exchange states that the orders it Section 6(b)(5) of the Act. The to participate in an IPO Auction as such
proposes to reject are not commonly Commission believes that it is an event may prevent market
utilized and therefore the rejection of reasonable for the Exchange to seek to participants from entering orders during
such orders should not have a simplify and reduce the complexity of the Quote-Only Period, which in turn
significant impact on its Members.62 In the IPO Auction process and to clearly could result in less liquidity that may
addition, the Exchange believes these describe the treatment of those orders prevent the underwriters from
types of orders contain certain attributes and modifiers submitted during an IPO adequately accessing the trading interest
that are not compatible with the IPO Auction that would be rejected,
of the IPO Security.75 Thus, the
Auction process.63 converted, or ignored.70
In addition, in contrast to those orders Exchange believes it is reasonable to
that would be rejected, the Exchange B. Changes to the Quote-Only Period extend the Quote-Only Period in the
notes that the types of orders the The Exchange states that it believes event of a technical or systems issue to
Exchange proposes to convert are more that a longer Quote-Only Period for provide market participants adequate
commonly used by Members than those ETPs is warranted because it will time to enter orders to participate in the
order types the Exchange proposes to encourage the entry of orders prior to an IPO auction.76 Finally, the Exchange
reject.64 The Exchange believes that it is IPO Auction for newly issued ETPs, states that its proposal to make a
reasonable to convert rather than reject which typically have lower technical amendment to paragraph
the order types described above because participation rates especially as (d)(2)(A) of BATS Rule 11.23 to replace
such orders are more commonly used by compared to IPO Auctions for corporate the current term ‘‘quotation only
Members and doing so would securities.71 The Exchange further states period’’ with the defined term ‘‘Quote
accommodate those Members that have that while an IPO Auction for a Only Period’’ is intended to make the
automated their systems to send orders corporate security is typically rule easier to understand and avoid
to the Exchange without significantly conducted at least thirty minutes after potential investor confusion.77
altering the operation of the order from the commencement of Regular Trading For the foregoing reasons, the
what the Member originally Hours, an IPO Auction for a newly Commission believes that the proposed
instructed.65 According to the issued ETP is typically conducted at the changes to the Quote-Only Period are
Exchange, such Members also may not beginning of Regular Trading Hours consistent with the Act because these
be able to re-submit a rejected order (i.e., 9:30 Eastern Time), and thus may changes are designed to allow market
with the correct modifier in time to not afford much time for participants to participants additional time in advance
participate in the IPO Auction.66 enter orders prior to such auction.72 of an IPO Auction, and the proposed
Therefore, the Exchange notes that it is In addition, the Exchange believes it technical amendment to BATS Rule
concerned that rejecting, rather than is reasonable to extend the Quote-Only 11.23(d)(2)(A) conforms the terminology
converting those types of orders as Period for a BATS listed corporate used in that section of BATS Rule
proposed, would inappropriately security to begin at a time announced in 11.23(d) with the current terminology
burden those Members and deter their advance by the Exchange that shall be used in the BATS rule book.
participation in an IPO Auction.67 between fifteen and thirty minutes plus
a short random period prior to such IPO IV. Conclusion
The Exchange further believes it is
reasonable to ignore certain modifiers Auction because it will allow market For the foregoing reasons, the
on an order during the IPO Auction participants more time to enter orders to Commission finds that the proposed
because doing so would simplify and participate in the IPO Auction.73 rule change, as modified by Amendment
reduce the complexity of the auction Further, according to the Exchange, No.1, is consistent with the Act and the
process or such modifiers are rules and regulations thereunder
69 See id. at 10347.
incompatible with the IPO Auction 70 The
applicable to a national securities
Commission also believes that the
process.68 For instance, the Exchange Exchange’s proposal to amend BATS Rule 11.1(a) exchange.
to make clear that it will not accept BATS Market IT IS THEREFORE ORDERED,
60 See id. Orders that are not Eligible Auction Orders prior to pursuant to Section 19(b)(2) of the Act 78
8:00 a.m. Eastern Time and to make conforming
asabaliauskas on DSK3SPTVN1PROD with NOTICES

61 See id. at 10346.
62 See id. See also BATS Rule 1.5(n)(defining changes to BATS Rules 11.23(b) and 11.23(c) is that the proposed rule change (SR–
‘‘Member’’ as any registered broker or dealer that consistent with Act. The Commission believes that BATS–2016–17) is approved.
these proposed changes would help reduce
has been admitted to membership in the Exchange).
63 See Notice, supra note 4, at 10346.
confusion among Members regarding the operation 74 See
of BATS Market Orders that are entered prior to the id.
64 See id. at 10346–47. 75 See id. at 10348–49.
start of the Exchange’s Pre-Opening Session and the
65 See id. at 10347. 76 See id.
operation of the Exchange’s rules.
66 See id. 71 See Notice, supra note 4, at 10348. 77 See id. at 10349.
67 See id. 72 See id. 78 15 U.S.C. 78s(b)(2).
68 See id. at 10347–49. 73 See id. at 10348–49. 79 17 CFR 200.30–3(a)(12).

VerDate Sep<11>2014 17:18 Apr 04, 2016 Jkt 238001 PO 00000 Frm 00115 Fmt 4703 Sfmt 4703 E:\FR\FM\05APN1.SGM 05APN1
19664 Federal Register / Vol. 81, No. 65 / Tuesday, April 5, 2016 / Notices

For the Commission, by the Division of the most significant aspects of such cooperation and coordination with
Trading and Markets, pursuant to delegated statements. persons engaged in facilitating
authority.79 transactions in securities, to remove
Robert W. Errett, A. Self-Regulatory Organization’s
impediments to and perfect the
Deputy Secretary.
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule mechanism of a free and open market
[FR Doc. 2016–07683 Filed 4–4–16; 8:45 am]
Change and a national market system and, in
BILLING CODE 8011–01–P general, to protect investors and the
1. Purpose public interest.
The Exchange proposes to delete The Exchange believes that Rules 902
SECURITIES AND EXCHANGE certain Phlx membership rules in order and 907(a) are burdensome and
COMMISSION to harmonize and modernize the unnecessary. These rules regarding
[Release No. 34–77475; File No. SR–Phlx– Exchange’s Rulebook. Specifically, admission of partnerships and changes
2016–36] Exchange proposes to delete Rules: 902 to the partnership serve no modern
entitled, ‘‘Admission to Partnership- purpose to the Exchange. The former
Self-Regulatory Organizations; Partnership Arrangements’’; and 907, ownership structure required the
NASDAQ PHLX LLC; Notice of Filing entitled ‘‘Partners and Officers.’’ Rule Exchange to be vigilant of the
and Immediate Effectiveness of 902 was retained through the ownership structure of its members in
Proposed Rule Change Relating to demutualization process in 2004 and is case of financial distress or bankruptcy
Partnerships no longer applicable to the business as the seat structure was vital to the
today. Although Rule 907 was financial condition of the Exchange.
March 30, 2016. Before demutualization, members had
established following the
Pursuant to section 19(b)(1) of the demutualization the requirements are an ownership interest in the Exchange.
Securities Exchange Act of 1934 no longer necessary. The proposed Today, permits convey no ownership
(‘‘Act’’),1 and Rule 19b–4 thereunder, 2 changes related to the former need for and therefore such vigilance as to the
notice is hereby given that on March 17, the Exchange to more acutely ownership structure of members is not
2016, NASDAQ PHLX LLC (‘‘Phlx’’ or understand the ownership structure of warranted.
‘‘Exchange’’) filed with the Securities partnerships as discussed in greater The only changes to the rules since
and Exchange Commission (‘‘SEC’’ or detail below. demutualization were in 2009 in order
‘‘Commission’’) the proposed rule Rule 902 was applicable when Phlx to replace the term ‘‘Membership
change as described in Items I, II, and offered seats to its members, prior to Committee’’ with ‘‘Membership
III, below, which Items have been demutualization. Before Department,’’ which was done in
prepared by the Exchange. The demutualization, Phlx seats conveyed conjunction with other changes to the
Commission is publishing this notice to ownership of the Exchange, which Exchange’s standing committees and
solicit comments on the proposed rule created a greater obligation on Phlx to corporate governance processes in order
change from interested persons. gather information on the members’ to make the Exchange more similar to
I. Self-Regulatory Organization’s corporate structure. Specifically, Phlx the other Nasdaq SROs.
Statement of the Terms of Substance of was obligated to maintain a heighted Rule 907(b) is burdensome and
the Proposed Rule Change vigilance on the structure, ownership, unnecessary as well. The obligations on
and change of control in a partnership the firm, its employees, and officers are
The Exchange proposes to delete in order to ensure the financial integrity
these Rules: 902 entitled, ‘‘Admission to not predicated on the requirement that
of its ownership structure. one of the officers be a member of the
Partnership-Partnership Arrangements’’; Today, permits are issued to Exchange
and 907 entitled, ‘‘Partners and exchange, therefore this rule has become
members and member organizations. obsolete. These rules have remained on
Officers.’’ The text of the proposed rule The Exchange no longer needs to
change is available on the Exchange’s the books of the exchange for several
differentiate ownership structure as years, despite their obsolescence
Web site at http:// required under Rule 902 and 907
www.nasdaqtrader.com/ because they were not inconsistent with
because the permit structure conveys no
micro.aspx?id=PHLXRulefilings, at the the membership process and the overall
ownership of the Exchange to the
principal office of the Exchange, and at regulatory goals of the Exchange.
membership. These membership rules
the Commission’s Public Reference The removal of Rules 902 and 907
related to partnerships are no longer
Room. applicable today. The distinctions will promote just and equitable
regarding the admission of member as a principles of trade, and foster
II. Self-Regulatory Organization’s cooperation and coordination with
Statement of the Purpose of, and partnership, as compared to a
corporation, are no longer relevant. The persons engaged in facilitating
Statutory Basis for, the Proposed Rule transactions in securities by removing
Change Exchange proposes to remove these
outdated Rules. burdensome requirements so that
In its filing with the Commission, the members and member organizations
Exchange included statements Statutory Basis may properly focus on other relevant
concerning the purpose of and basis for The Exchange believes that its requirements which benefit the
the proposed rule change and discussed proposal is consistent with section 6(b) marketplace.
asabaliauskas on DSK3SPTVN1PROD with NOTICES

any comments it received on the of the Act,3 in general, and furthers the B. Self-Regulatory Organization’s
proposed rule change. The text of these objectives of section 6(b)(5) of the Act,4 Statement on Burden on Competition
statements may be examined at the in particular, in that it is designed to
places specified in Item IV below. The prevent fraudulent and manipulative The proposed rule change does not
Exchange has prepared summaries, set acts and practices, to promote just and impose any burden on competition that
forth in sections A, B, and C below, of equitable principles of trade, to foster is not necessary or appropriate in
furtherance of the purposes of the Act.
1 15 U.S.C. 78s(b)(1). 3 15 U.S.C. 78f(b). The Exchange’s proposed amendments
2 17 CFR 240.19b–4. 4 15 U.S.C. 78f(b)(5). seek to delete certain unnecessary rules

VerDate Sep<11>2014 17:18 Apr 04, 2016 Jkt 238001 PO 00000 Frm 00116 Fmt 4703 Sfmt 4703 E:\FR\FM\05APN1.SGM 05APN1
Document Created: 2018-02-07 13:53:15
Document Modified: 2018-02-07 13:53:15
Category		Regulatory Information
Collection		Federal Register
sudoc Class		AE 2.7: GS 4.107: AE 2.106:
Publisher		Office of the Federal Register, National Archives and Records Administration
Section		Notices
FR Citation		81 FR 19661