81 FR 47187 - Self-Regulatory Organizations; Bats BZX Exchange, Inc.; Notice of Filing of a Proposed Rule Change To Adopt Paragraph (c) to Exchange Rule 11.27 To Describe Changes to System Functionality Necessary To Implement the Regulation NMS Plan To Implement a Tick Size Pilot Program

SECURITIES AND EXCHANGE COMMISSION

Federal Register Volume 81, Issue 139 (July 20, 2016)

Page Range47187-47193
FR Document2016-17093

Federal Register, Volume 81 Issue 139 (Wednesday, July 20, 2016)
[Federal Register Volume 81, Number 139 (Wednesday, July 20, 2016)]
[Notices]
[Pages 47187-47193]
From the Federal Register Online  [www.thefederalregister.org]
[FR Doc No: 2016-17093]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-78334; File No. SR-BatsBZX-2016-29]


Self-Regulatory Organizations; Bats BZX Exchange, Inc.; Notice of 
Filing of a Proposed Rule Change To Adopt Paragraph (c) to Exchange 
Rule 11.27 To Describe Changes to System Functionality Necessary To 
Implement the Regulation NMS Plan To Implement a Tick Size Pilot 
Program

July 14, 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 29, 2016, Bats BZX Exchange, Inc. (the ``Exchange'' or 
``BZX'') 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 filed a proposal to adopt paragraph (c) to Exchange 
Rule 11.27 to describe changes to System \3\ functionality necessary to 
implement the Regulation NMS Plan to Implement a Tick Size Pilot 
Program (``Plan'' or ``Pilot'').\4\ In determining the scope of the 
proposed changes to implement the Pilot,\5\ the Exchange carefully 
weighed the impact on the Pilot, System complexity, and the usage of 
such order types in Pilot Securities.
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    \3\ The term ``System'' is defined as the ``electronic 
communications and trading facility designated by the Board through 
which securities orders of Users are consolidated for ranking, 
execution and, when applicable, routing away.'' See Exchange Rule 
1.5(aa).
    \4\ See Securities Exchange Act Release No. 74892 (May 6, 2015), 
80 FR 27513 (May 13, 2015) (``Approval Order'').
    \5\ Unless otherwise specified, capitalized terms used in this 
rule filing are defined as set forth in the Plan.
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    The text of the proposed rule change is available at the Exchange's 
Web site

[[Page 47188]]

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 
Statutory Basis for, the Proposed Rule Change

1. Purpose
Background
    On August 25, 2014, NYSE Group, Inc., on behalf of the Exchange, 
Bats BYX Exchange, Inc. (``BYX''), Chicago Stock Exchange, Inc., Bats 
EDGA Exchange, Inc. (``EDGA''), Bats EDGX Exchange, Inc. (``EDGX''), 
Financial Industry Regulatory Authority, Inc. (``FINRA''), NASDAQ OMX 
BX, Inc., NASDAQ OMX PHLX LLC, the Nasdaq Stock Market LLC, New York 
Stock Exchange LLC (``NYSE''), NYSE MKT LLC, and NYSE Arca, Inc. 
(collectively ``Participants''), filed with the Commission, pursuant to 
Section 11A of the Act \6\ and Rule 608 of Regulation NMS thereunder, 
the Plan to implement a tick size pilot program.\7\ The Participants 
filed the Plan to comply with an order issued by the Commission on June 
24, 2014.\8\ The Plan was published for comment in the Federal Register 
on November 7, 2014, and approved by the Commission, as modified, on 
May 6, 2015.\9\
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    \6\ 15 U.S.C. 78k-1.
    \7\ See Letter from Brendon J. Weiss, Vice President, 
Intercontinental Exchange, Inc., to Secretary, Commission, dated 
August 25, 2014.
    \8\ See Securities Exchange Act Release No. 72460 (June 24, 
2014), 79 FR 36840 (June 30, 2014).
    \9\ See Approval Order, supra note 4.
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    The Plan is designed to allow the Commission, market participants, 
and the public to study and assess the impact of increment conventions 
on the liquidity and trading of the common stocks of small-
capitalization companies. Each Participant is required to comply, and 
to enforce compliance by its member organizations, as applicable, with 
the provisions of the Plan.
    The Pilot will include stocks of companies with $3 billion or less 
in market capitalization, an average daily trading volume of one 
million shares or less, and a volume weighted average price of at least 
$2.00 for every trading day. The Pilot will consist of a Control Group 
of approximately 1400 Pilot Securities and three Test Groups with 400 
Pilot Securities in each Test Group selected by a stratified 
sampling.\10\ During the Pilot, Pilot Securities in the Control Group 
will be quoted and traded at the currently permissible increments. 
Pilot Securities in the first Test Group (``Test Group One'') will be 
quoted in $0.05 minimum increments but will continue to trade at any 
price increment that is currently permitted.\11\ Pilot Securities in 
the second Test Group (``Test Group Two'') will be quoted in $0.05 
minimum increments and will trade at $0.05 minimum increments subject 
to a midpoint exception, a retail investor order exception, and a 
negotiated trade exception.\12\ Pilot Securities in the third Test 
Group (``Test Group Three'') will be subject to the same restrictions 
as Test Group Two and also will be subject to the ``Trade-at'' 
requirement to prevent price matching by a market participant that is 
not displaying at a price of a Trading Center's \13\ ``Best Protected 
Bid'' or ``Best Protected Offer,'' unless an enumerated exception 
applies.\14\ The same exceptions provided under Test Group Two will 
also be available under the Trade-at Prohibition, with an additional 
exception for Block Size orders and exceptions that mirror those under 
Rule 611 of Regulation NMS.\15\
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    \10\ See Section V of the Plan for identification of Pilot 
Securities, including criteria for selection and grouping.
    \11\ See Section VI(B) of the Plan.
    \12\ See Section VI(C) of the Plan.
    \13\ The Plan incorporates the definition of ``Trading Center'' 
from Rule 600(b)(78) of Regulation NMS. Regulation NMS defines a 
Trading Center as ``a national securities exchange or national 
securities association that operates an SRO trading facility, an 
alternative trading system, an exchange market maker, an OTC market 
maker, or any other broker or dealer that executes orders internally 
by trading as principal or crossing orders as agent.''
    \14\ See Section VI(D) of the Plan.
    \15\ 17 CFR 242.611.
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    The Plan requires the Exchange to establish, maintain, and enforce 
written policies and procedures that are reasonably designed to comply 
with applicable quoting and trading requirements specified in the Plan. 
Accordingly, the Exchange adopted paragraph (a) of Rule 11.27 to 
require Members \16\ to comply with the quoting and trading provisions 
of the Plan.\17\ The Exchange also adopted paragraph (b) of Rule 11.27 
to require Members to comply with the data collection provisions under 
Appendix B and C of the Plan.\18\
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    \16\ The term ``Member'' is defined as ``any registered broker 
or dealer that has been admitted to membership in the Exchange.'' 
See Exchange Rule 1.5(n).
    \17\ See Securities Exchange Act Release No. 77291 (March 3, 
2016), 81 FR 12543 (March 9, 2016) (SR-BATS-2015-108).
    \18\ See Securities Exchange Act Release Nos. 77105 (February 
10, 2016), 81 FR 8112 (February 17, 2016) (SR-BATS-2015-102); and 
77310 (March 7, 2016), 81 FR 13012 (March 11, 2016) (SR-BATS-2016-
27).
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Proposed System Changes
    The Exchange proposes to adopt paragraph (c) of Exchange Rule 11.27 
to describe changes to System functionality necessary to implement the 
Plan. Paragraph (c) of Rule 11.27 would set forth the Exchange's 
specific procedures for handling, executing, re-pricing and displaying 
of certain order types and order type instructions applicable to Pilot 
Securities. Unless otherwise indicated, paragraph (c) of Rule 11.27 
would apply to order types and order type instructions in Pilot 
Securities in Test Groups One, Two, and Three and not to orders in 
Pilot Securities included in the Control Group. The proposed changes 
include select and discrete amendments to the operation of: (i) BZX 
Market Orders; (ii) Market Pegged Orders; (iii) Mid-Point Peg Orders; 
(iii) [sic] Discretionary Orders; (iv) [sic] Non-Displayed Orders; (v) 
[sic] Market Maker Peg Orders; (vi) [sic] Supplemental Peg Orders; and 
(vii) [sic] orders subject to the Display-Price Sliding process.
    In determining the scope of these proposed changes to implement the 
Plan, the Exchange carefully weighed the impact on the Pilot, System 
complexity, and the usage of such order types in Pilot Securities. 
These proposed changes are designed to directly comply with the Plan 
and to assist the Exchange in meeting its regulatory obligations 
pursuant to the Plan. As discussed below, certain of these changes are 
also intended to reduce risk in the System by eliminating unnecessary 
complexity based on infrequent current usage of certain order types in 
Pilot Securities and/or their limited ability to execute under the 
Trade-at Prohibition. Therefore, the Exchange firmly believes that 
these changes will have little or no impact on the operation and data 
collection elements of the Plan. The Exchange further believes that the 
proposed rule

[[Page 47189]]

changes are reasonably designed to comply with applicable quoting and 
trading requirements specified in the Plan.
BZX Market Orders
    A BZX Market Order is an order to buy or sell a stated amount of a 
security that is to be executed at the NBBO when the order reaches the 
Exchange. BZX Market Orders shall not trade through Protected 
Quotations.\19\ Any portion of a BZX Market Order that would execute at 
a price more than $0.50 or 5 percent worse than the NBBO at the time 
the order initially reaches the Exchange, whichever is greater, will be 
cancelled.\20\ In order to comply with the minimum quoting increments 
set forth in the Plan, the Exchange proposes to state under proposed 
Rule 11.27(c)(1) that for purposes of determining whether a BZX Market 
Order's execution price is more than 5 percent worse than the NBBO 
under Rule 11.9(a)(2), the execution price for a buy (sell) order will 
be rounded down (up) to the nearest $0.05 increment.
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    \19\ See Exchange Rule 11.9(a)(2).
    \20\ Id.
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Market Pegged Orders
    The Exchange proposes to amend the operation of Market Pegged 
Orders to reduce risk in its System by eliminating unnecessary 
complexity based on infrequent current usage in Pilot Securities and 
their limited ability to execute under the Trade-at Prohibition in Test 
Group Three. A Pegged Order is a limit order that after entry into the 
System, the price of the order is automatically adjusted by the System 
in response to changes in the NBBO. A Pegged Order will peg to the NBB 
or NBO or a certain amount away from the NBB or NBO.\21\ A Market 
Pegged Order is pegged to the contra-side NBBO.\22\ A User \23\ 
entering a Market Pegged Order can specify that such order's price will 
offset the inside quote on the contra-side of the market by an amount 
(the ``Offset'') set by the User. Market Pegged Orders are not eligible 
to be displayed on the Exchange.
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    \21\ See Exchange Rule 11.9(c)(8).
    \22\ See Exchange Rule 11.9(c)(8)(B).
    \23\ A ``User'' is defined as any member or sponsored 
participant of the Exchange who is authorized to obtain access to 
the System pursuant to Rule 11.3. See Exchange Rule 1.5(cc).
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    In Test Groups One and Two, the Exchange proposes to modify the 
behavior of Market Pegged Order when it is locked by an incoming BZX 
Post Only Order \24\ or Partial Post Only at Limit Order \25\ that does 
not remove liquidity pursuant to Rule 11.9(c)(6) or Rule 
11.9(c)(7),\26\ respectively. In such case, the Market Pegged Order 
would be converted to an executable order and will remove liquidity 
against such incoming order. In no case would a Market Pegged Order 
execute against an incoming BZX Post Only Order or Partial Post Only at 
Limit Order if an order with higher priority is on the BZX Book.\27\ 
Specifically, if an order other than a Market Pegged Order maintains 
higher priority than one or more Market Pegged Orders, the Market 
Pegged Order(s) with lower priority will not be converted, as described 
above, and the incoming BZX Post Only Order or Partial Post Only at 
Limit Order will be posted or cancelled in accordance with Rule 
11.9(c)(6) or Rule 11.9(c)(7).
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    \24\ See Exchange Rule 11.9(c)(6).
    \25\ See Exchange Rule 11.9(c)(7).
    \26\ A BZX Post Only Order will remove contra-side liquidity 
from the BZX Book if the order is an order to buy or sell a security 
priced below $1.00 or if the value of such execution when removing 
liquidity equals or exceeds the value of such execution if the order 
instead posted to the BZX Book and subsequently provided liquidity, 
including the applicable fees charged or rebates provided. See 
Exchange Rule 11.9(c)(6). A Partial Post Only at Limit Order will 
remove liquidity from the BZX Book up to the full size of the order 
if, at the time of receipt, it can be executed at prices better than 
its limit price. See Exchange Rule 11.9(c)(7).
    \27\ The term ``BZX Book'' is defined as the ``System's 
electronic file of orders.'' See Exchange Rule 1.5(e).
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    The Exchange notes that Market Pegged Orders are aggressive by 
nature and believes executing the order in such circumstance is 
appropriate. The Exchange also notes that the proposed behavior for 
Market Pegged Orders in Test Groups One and Two is identical to the 
operation of orders with the Super Aggressive Routing instruction under 
Exchange Rule 11.13(b)(4)(C). When an order with a Super Aggressive 
instruction is locked by an incoming BZX Post Only Order or Partial 
Post Only at Limit Order that does not remove liquidity pursuant to 
Rule 11.9(c)(6) or Rule 11.9(c)(7), respectively, the order is 
converted to an executable order and will remove liquidity against such 
incoming order. In addition, like as proposed above, in no case would 
an order with a Super Aggressive instruction execute against an 
incoming BZX Post Only Order or Partial Post Only at Limit Order if an 
order with higher priority is on the BZX Book. The Exchange believes 
this change is reasonable and appropriate due to the limited usage of 
Market Pegged Orders in Pilot Securities, to avoid unnecessary 
additional System complexity, and to ensure the Market Pegged Order may 
execute in such circumstance.
    The Exchange also proposes to not accept Market Pegged Orders in 
Test Group Three based on limited current usage, additional System 
complexity, and their limited ability to execute under the Trade-at 
Prohibition. Exchange Rule 11.27(a)(6)(D) sets forth the Trade-at 
Prohibition, which is the prohibition against executions by a Member 
that operates a Trading Center of a sell order for a Pilot Security in 
Test Group Three at the price of a Protected Bid or the execution of a 
buy order for a Pilot Security in Test Group Three at the price of a 
Protected Offer during Regular Trading Hours,\28\ unless an enumerated 
exception applies.\29\ The Exchange believes that their de minimis 
usage and limited ability to execute due to the Trade-at Prohibition 
does not justify the complexity that would be created by supporting 
Market Pegged Orders in Test Group Three. A vast majority of Market 
Pegged Orders are entered into the System with a zero Offset and, 
therefore, create a locked market with the contra-side NBBO. Under the 
Trade-at Prohibition, a Market Pegged Order would not be eligible for 
execution at the locking price, including when a Trade-at Intermarket 
Sweep Order (``ISO'') \30\ is entered, because of non-cleared contra-
side Protected Quotations. For example, assume the NBBO is $10.00 
(NYSE) x $10.05 (Nasdaq) in a Test Group 3 security. A Market Pegged 
Order to buy at $10.10 with a zero Offset is entered on the Exchange. 
The order would be ranked and hidden on the BZX Book at $10.05. A 
Trade-at ISO to sell at $10.05 is then entered. In this example, no 
execution occurs on the Exchange because Nasdaq is displaying an order 
to sell at $10.05. The Trade-at ISO instruction only indicates that all 
of the better and equal priced buy orders have been cleared. It does 
not indicate that the seller has cleared any Protected Offers. 
Therefore, the Exchange proposes to not accept Market Pegged

[[Page 47190]]

Orders in Test Group Three in an effort to reduce unnecessary System 
complexity, avoid an internally locked book, and due to the limited 
execution opportunities for Market Pegged Orders due to the Trade-at 
Prohibition.
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    \28\ The term ``Regular Trading Hours'' is defined as ``the time 
between 9:30 a.m. and 4:00 p.m. Eastern Time.'' See Exchange Rule 
1.5(w).
    \29\ See also Section VI(D) of the Plan.
    \30\ A Trade-at ISO is a Limit Order for a Pilot Security that 
meets the following requirements: (i) When routed to a Trading 
Center, the limit order is identified as a Trade-at Intermarket 
Sweep Order; and (ii) simultaneously with the routing of the limit 
order identified as a Trade-at Intermarket Sweep Order, one or more 
additional limit orders, as necessary, are routed to execute against 
the full size of any protected bid, in the case of a limit order to 
sell, or the full displayed size of any protected offer, in the case 
of a limit order to buy, for the Pilot Security with a price that is 
better than or equal to the limit price of the limit order 
identified as a Trade-at Intermarket Sweep Order. See Exchange Rule 
11.27(a)(7)(A)(i). These additional routed orders also must be 
marked as Trade-at Intermarket Sweep Orders. Id.
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Mid-Point Peg Orders
    A Mid-Point Peg Order is an order whose price is automatically 
adjusted by the System in response to changes in the NBBO to be pegged 
to the midpoint of the NBBO, or, alternatively, pegged to the less 
aggressive of the midpoint of the NBBO or one minimum price variation 
\31\ inside the same side of the NBBO as the order.\32\ The Plan and 
current Exchange rules permit the acceptance of orders priced to 
execute at the midpoint of the NBBO to be ranked and accepted in 
increments of less than $0.05.\33\ Consistent with previous guidance 
issued by the Participants,\34\ the Exchange proposes to amend the 
operation of Mid-Point Peg Orders to explicitly state that Mid-Point 
Peg Orders in Pilot Securities may not be entered in increments other 
than $0.05. The System will execute a Mid-Point Peg Order: (i) In $0.05 
increments priced better than the midpoint of the NBBO; or (ii) at the 
midpoint of the NBBO, regardless of whether the midpoint of the NBBO is 
in an increment of $0.05. In order to comply with the minimum quoting 
and trading increments of the Plan and reduce unnecessary System 
complexity, a Mid-Point Peg Order will not be permitted to 
alternatively peg to one minimum price variation inside the same side 
of the NBBO as the order in Pilot Securities. The Exchange believes 
that the current de minimis usage of the alternative pegging 
functionality in Pilot Securities does not justify the complexity and 
risk that would be created by re-programming the System to support this 
functionality under the Plan.
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    \31\ See Exchange Rule 11.11.
    \32\ See Exchange Rule 11.9(c)(9).
    \33\ See Sections VI(B), (C), and (D) of the Plan. See also 
Exchange Rules 11.27(a)(4), (a)(5), and (a)(6).
    \34\ See e.g., Question 42 of the Tick Size Pilot Program 
Trading and Quoting FAQs available at http://www.finra.org/sites/default/files/TSPP-Trading-and-Quoting-FAQs.pdf.
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Discretionary Orders
    The Exchange proposes to not accept Discretionary Orders in all 
Test Groups, including the Control Group, to reduce risk in the System 
by eliminating unnecessary complexity based on infrequent current usage 
in Pilot Securities. In sum, a Discretionary Order is a Limit Order 
with a displayed or non-displayed ranked price and size and an 
additional non-displayed ``discretionary price''.\35\ The discretionary 
price is a non-displayed upward offset at which a User is willing to 
buy, if necessary, or a non-displayed downward offset at which a User 
is willing to sell, if necessary. The System changes necessary for a 
Discretionary Order to comply with the Plan become increasingly complex 
because both the displayed price and discretionary price must comply 
with the Plan's minimum quoting and trading increments as well as the 
Trade-at restriction in Test Group Three. In addition, Users do not 
currently set discretionary prices less than $0.05 away from the 
order's displayed price and the Exchange does not anticipate Users 
doing so under the Plan. To date, Discretionary Orders are rarely 
entered in Pilot Securities and the Exchange anticipates their usage to 
further decrease due to the Plan's minimum quoting increments. The 
Exchange believes that the current extremely limited usage of 
Discretionary Orders in Pilot Securities does not justify the 
additional System complexity that would be created by supporting 
Discretionary Orders. As a result of these factors the Exchange 
proposes to not accept Discretionary Orders in all Test Groups and the 
Control Group.
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    \35\ See Exchange Rule 11.9(c)(10).
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Non-Displayed Orders
    The Exchange proposes to re-price to the midpoint of the NBBO Non-
Displayed Orders in Test Group Three that are priced in a permissible 
increment better than the midpoint of the NBBO. A Non-Displayed Order 
is a Market or Limit Order that is not displayed on the Exchange.\36\ 
Exchange Rule 11.27(a)(6)(D) incorporates the Trade-at Prohibition in 
the Exchange's rules. The Trade-at Prohibition prevents the execution 
of a sell order for a Pilot Security in Test Group Three at the price 
of a Protected Bid or the execution of a buy order for a Pilot Security 
in Test Group Three at the price of a Protected Offer during Regular 
Trading Hours, unless an exception applies. A Trading Center that is 
displaying a quotation, via either a processor or an SRO quotation 
feed, that is a Protected Bid or Protected Offer is permitted to 
execute orders at that level, but only up to the amount of its 
displayed size. Unless an exception applies, a Non-Displayed Order that 
is able to execute at the price of the Protected Quotation would not be 
able to do so in Test Group Three due to the Trade-at Prohibition and 
the Exchange's priority rule.\37\ Furthermore, such aggressively priced 
orders would not be able to post to the BZX Book at the contra-side 
Protected Quotation, and re-pricing the order to the midpoint of the 
NBBO would increase execution opportunities under normal market 
conditions. However, orders that are priced to execute at the midpoint 
of the NBBO are exempt from the Trade-at Prohibition. Therefore, to 
increase the execution opportunities for Non-Displayed Orders in Test 
Group Three, the Exchange proposes to re-price to the midpoint of the 
NBBO Non-Displayed Orders that are priced in a permissible increment 
better than the midpoint of the NBBO.
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    \36\ See Exchange Rule 11.9(c)(11).
    \37\ Under Exchange Rule 11.12(a)(2), displayed Limit Orders 
have priority over Non-Displayed Limit Orders.
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Market Maker Peg Orders
    A Market Maker Peg Order is a Limit Order that is automatically 
priced by the System at the Designated Percentage (as defined in 
Exchange Rule 11.8) away from the then current NBB and NBO, or if no 
NBB or NBO, at the Designated Percentage away from the last reported 
sale from the responsible single plan processor in order to comply with 
the quotation requirements for Market Makers set forth in Exchange Rule 
11.8(d).\38\ Should the above pricing result in a Market Maker Peg 
Order being priced at an increment other than $0.05, the Exchange 
proposes to round an order to buy (sell) up (down) to the nearest $0.05 
increment in order to comply with the minimum quoting increments of the 
Plan.
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    \38\ See Exchange Rule 11.9(c)(16).
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Supplemental Peg Orders
    The Exchange proposes to not accept Supplemental Peg Orders in Test 
Group Three in order to reduce risk in the System by eliminating 
unnecessary complexity based on infrequent current usage in Pilot 
Securities and their limited ability to execute under the Trade-at 
Prohibition. A Supplemental Peg Order is a non-displayed Limit Order 
that posts to the BZX Book, and thereafter is eligible for execution at 
the NBB for buy orders and NBO for sell orders against routable orders 
that are equal to or less than the aggregate size of the Supplemental 
Peg Order interest available at that price.\39\ In sum, Supplemental 
Peg Orders are only executable at the NBBO against an order that is in 
the process of being routed away. In such case, the Exchange is not 
displaying a Protected Quotation and, therefore, the Supplemental Peg 
Order would be unable to execute in Test Group Three due to the Trade-
at

[[Page 47191]]

Prohibition.\40\ Therefore, the Exchange proposes to not accept 
Supplemental Peg Orders in Test Group Three.
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    \39\ See Exchange Rule 11.9(c)(19).
    \40\ The Exchange notes that the likelihood of a Supplemental 
Peg Order qualifying for an exception to the Trade-at Prohibition is 
small. For example, Supplemental Peg Orders are only executable 
against orders that are to be routed away and would not be eligible 
to execute against an incoming ISO or Trade-at ISO. Also, the 
Exchange would not be displaying a Protected Quotation. In addition, 
the Exchange does not frequently receive orders of Block Size and, 
in order to qualify for the Block exception, the contra-side Block 
Order must be routable and the Supplemental Peg Order be of Block 
Size.
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Display-Price Sliding
    Under the Display-Price Sliding process, an order eligible for 
display by the Exchange that, at the time of entry, would create a 
violation of Rule 610(d) of Regulation NMS by locking or crossing a 
Protected Quotation of an external market, will be ranked at the 
locking price in the BZX Book and displayed by the System at one 
minimum price variation (i.e., $0.05) below the current NBO (for bids) 
or one minimum price variation above the current NBB (for offers).\41\ 
The ranked and displayed prices of an order subject to the Display-
Price Sliding process may be adjusted once or multiple times depending 
upon the instructions of a User and changes to the prevailing NBBO.\42\
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    \41\ See Exchange Rule 11.9(g)(1)(A).
    \42\ See Exchange Rule 11.9(g)(1)(C).
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    As described above, Exchange Rule 11.27(a)(6)(D) sets forth the 
Trade-at Prohibition, which is the prohibition against executions by a 
Member that operates a Trading Center of a sell order for a Pilot 
Security in Test Group Three at the price of a Protected Bid or the 
execution of a buy order for a Pilot Security in Test Group Three at 
the price of a Protected Offer during Regular Trading Hours, unless an 
exception applies. Orders that are priced to execute at the midpoint of 
the NBBO are exempt from the Trade-at Prohibition. Therefore, to 
increase the execution opportunities and qualify for the mid-point 
exception to the Trade-at Prohibition, the Exchange proposes to rank 
orders in Test Group Three that are subject to the Display-Price 
Sliding process at the midpoint of the NBBO in the BZX Book and display 
such orders one minimum price variation below the current NBO (for 
bids) or one minimum price variation above the current NBB (for 
offers).
    The Exchange also proposes to cancel orders subject to Display-
Price Sliding in Test Group Three that are only to be adjusted once and 
not multiple times in the event the NBBO widens and a contra-side Non-
Displayed Order is resting on the BZX Book at the price to which the 
order subject to Display-Price Sliding would be adjusted. Due to the 
increased minimum quoting increments under the Plan, the Exchange is 
unable to safely re-price an order subject to single Display-Price 
Sliding in Test Group Three to the original locking price in such 
circumstances and doing so would add additional System complexity and 
risk. As discussed above, the Exchange proposes to rank orders in Test 
Group Three subject to the Display-Price Sliding process at the 
midpoint of the NBBO. In the event the NBBO changes such that an order 
subject to Display-Price Sliding would not lock or cross a Protected 
Quotation of an external market, the order will receive a new 
timestamp, and will be displayed at the order's limit price.\43\ Due to 
technological limitations arising from the increased minimum quoting 
increments under the Plan, however, the Exchange is unable to safely 
re-program its System to re-price such order to the original locking 
price when the NBBO widens and a contra-side Non-Displayed Order is 
resting on the BZX Book at the price to which the order subject to 
Display-Price Sliding would be adjusted. Therefore, the Exchange 
proposes to cancel orders subject to the single Display-Price Sliding 
process in such circumstances. Users who prefer an execution in such a 
scenario may elect to use the multiple Display-Price Sliding process.
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    \43\ Id.
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Ministerial Change
    Currently, both Interpretation and Policy .03 to Rule 11.27(a) and 
Interpretation and Policy .11 to Rule 11.27(b) state that Rule 11.27 
shall be in effect during a pilot period to coincide with the pilot 
period for the Plan (including any extensions to the pilot period for 
the Plan). The Exchange proposes to include this language at the 
beginning of Rule 11.27 and, therefore, proposes to delete both 
Interpretation and Policy .03 to Rule 11.27(a) and Interpretation and 
Policy .11 to Rule 11.27(b) as those provisions would be redundant and 
unnecessary. The Exchange also proposes to amend the last sentence of 
Rule 11.27(a)(4) to specify that the current permissible price 
increments are set forth under Exchange Rule 11.11, Price Variations.
Implementation Date
    If the Commission approves the proposed rule change, the proposed 
rule change will be effective upon Commission approval and shall become 
operative upon the commencement of the Pilot Period.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act \44\ in general, and furthers the objectives of Section 
6(b)(5) of the Act \45\ 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 Plan requires the 
Exchange to establish, maintain, and enforce written policies and 
procedures that are reasonably designed to comply with applicable 
quoting and trading requirements specified in the Plan. The proposed 
rule change is designed to comply with the Plan, reduce complexity and 
enhance System resiliency while not adversely affecting the data 
collected under the Plan. Therefore, the Exchange believes that the 
proposed rule changes are reasonably designed to comply with applicable 
quoting and trading requirements specified in the Plan and, as 
discussed further below, other applicable regulations.
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    \44\ 15 U.S.C. 78f(b).
    \45\ 15 U.S.C. 78f(b)(5).
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    The Exchange believes that the proposed changes regarding BZX 
Market Orders, Mid-Point Peg Orders, Market Maker Peg Orders, and 
Display-Price Sliding are consistent with the Act because they are 
intended to modify the Exchange's System to comply with the provisions 
of the Plan, and are designed to assist the Exchange in meeting its 
regulatory obligations pursuant to the Plan. In approving the Plan, the 
SEC noted that the Pilot was an appropriate, data-driven test that was 
designed to evaluate the impact of a wider tick size on trading, 
liquidity, and the market quality of securities of smaller 
capitalization companies, and was therefore in furtherance of the 
purposes of the Act. To the extent that these proposals are intended to 
comply with the Plan, the Exchange believes that these proposals are in 
furtherance of the objectives of the Plan, as identified by the 
Commission, and is therefore consistent with the Act.
    The Exchange also believes that its proposed changes to Market 
Pegged Orders, Discretionary Orders, Non-Displayed Orders, Supplemental 
Peg Orders, and Display-Price Sliding are also consistent with the Act 
because

[[Page 47192]]

they are intended to eliminate unnecessary System complexity and risk 
based on the de minimis current usage of such order types and 
instructions in Pilot Securities and/or their limited ability to 
execute under the Plan's minimum trading and quoting increments or 
Trade-at Prohibition.\46\ For example, during March 2016, the 
alternative pegging functionality of Mid-Point Peg Orders, Market 
Pegged Orders, Non-Displayed Orders, and Supplemental Peg Orders 
accounted for 0.01%, 0.02%, 0.92%, and 0.01%, respectively, of volume 
in eligible Pilot Securities on the Exchange, BYX, EDGA and EDGX 
combined. Notably, Discretionary Orders accounted for 0.00% of volume 
in eligible Pilot Securities on the Exchange, BYX, EDGA and EDGX 
combined.
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    \46\ The Commission has also expressed concern regarding 
potential market instability caused by technological risks. See 
e.g., Chair Mary Jo White, Commission, Enhancing Our Equity Market 
Structure (June 5, 2014) available at https://www.sec.gov/News/Speech/Detail/Speech/1370542004312#.VD2HW610w6Y.
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    The Commission adopted Regulation Systems Compliance and Integrity 
(``Regulation SCI'') in November 2014 to strengthen the technology 
infrastructure of the U.S. securities markets.\47\ Regulation SCI is 
designed to reduce the occurrence of systems issues, improve resiliency 
when systems problems do occur, and enhance the Commission's oversight 
and enforcement of securities market technology infrastructure. 
Regulation SCI required the Exchange to establish written policies and 
procedures reasonably designed to ensure that their systems have levels 
of capacity, integrity, resiliency, availability, and security adequate 
to maintain their operational capability and promote the maintenance of 
fair and orderly markets, and that they operate in a manner that 
complies with the Exchange Act. Each of these proposed changes are 
intended to reduce complexity and risk in the System to ensure the 
Exchange's technology remains robust and resilient. In determining the 
scope of the proposed changes, the Exchange carefully weighed the 
impact on the Pilot, System complexity, and the usage of such order 
types in Pilot Securities.\48\ The potential complexity results from 
code changes for a majority of the Exchange's order types, which 
requires the implementation and testing of a separate branch of code 
for each Test Group. For example, the Exchange currently utilizes one 
branch of code for which to implement and test changes. Development 
work for the Pilot results in the creation of four additional branches 
of code that are to be developed and tested (e.g., Control Group + 
three Test Groups). The Exchange determined that the changes proposed 
herein are necessary to ensure continued System resiliency in 
accordance with the requirements of Regulation SCI. Therefore, the 
Exchange believes the proposed rule change promotes just and equitable 
principles of trade, removes impediments to and perfects the mechanism 
of a free and open market and a national market system and, in general, 
to protect investors and the public interest.
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    \47\ See Securities Exchange Act Release No. 73639 (November 19, 
2014), 79 FR 72251 (December 5, 2014) (``Regulation SCI Approval 
Order'').
    \48\ But for the Plan, the Exchange notes that it would not have 
proposed to amend the operation of Market Pegged Orders, 
Discretionary Orders, Non-Displayed Orders, Supplemental Peg Orders, 
and Display-Price Sliding as described herein.
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    In addition, each of these proposed changes would have a de minimis 
to zero impact on the data reported pursuant to the Plan. As evidenced 
above, Market Pegged Orders, Discretionary Orders, the alternative 
pegging functionality of Mid-Point Peg Orders, and Supplemental Peg 
Orders are infrequently used in Pilot Securities or the execution of 
such orders would be scarce due to the Plan's minimum trading and 
quoting requirement and Trade-at Prohibition. The limited usage and 
execution scenarios do not justify the additional system complexity 
which would be created by modifying the System to support such order 
types in order to comply with the Plan. Therefore, the Exchange 
believes each proposed change is a reasonable means to ensure that the 
System's integrity, resiliency, and availability continues to promote 
the maintenance of fair and orderly markets. Due to the additional 
complexity, limited usage and execution opportunities, the Exchange 
believes it is not unfairly discriminatory to apply the changes 
proposed herein to only Pilot Securities as such changes are necessary 
to reduce complexity and ensure continued System resiliency in 
accordance with the requirements of Regulation SCI. The Exchange also 
believes the proposed changes to Non-Displayed Orders, and orders 
subject to the Display-Price Sliding process in Test Group Three are 
consistent with the Act because they are designed to increase the 
execution opportunities for such order types in compliance with the 
mid-point exception to the Trade-at Prohibition. The Exchange also 
believes the proposed change to Market Pegged Orders in Test Groups One 
and Two is consistent with the Act because it is identical to the 
operation of the Super Aggressive instruction under Exchange Rule 
11.13(b)(4)(C). The Exchange notes that Market Pegged Orders are 
aggressive by nature and believes executing the order in such 
circumstance is reasonable and appropriate.
    The Exchange also believes it is reasonable and appropriate to 
cancel an order subject to the single Display-Price Sliding process in 
Test Group Three in the event that the NBBO widens and a contra-side 
Non-Displayed Order is resting on the BZX Book at the price to which 
the order subject to Display-Price Sliding would be adjusted. Due to 
technological limitations and the Plan's increased minimum quoting 
increments, the Exchange is unable to safely re-program its System to 
re-price such orders to the original locking price in such 
circumstances. The Exchange also anticipates that the scenario under 
which it proposes to cancel the Display-Price Sliding order will be 
infrequent in Tick Pilot Securities. Users who prefer an execution in 
such a scenario may elect to use the multiple Display-Price Sliding 
process. Therefore, the Exchange believes it is consistent with the Act 
to set forth this scenario in its rules so that Users will understand 
how the System operates and how their orders would be handled in this 
discrete scenario.
    Lastly, the Exchange believes the ministerial changes to Rule 11.27 
are also consistent with the Act as they would: (i) Clarify a provision 
under paragraph (a)(4); and (ii) remove redundant provisions from the 
rule.

(B) Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
result in any burden on competition that is not necessary or 
appropriate in furtherance of the purposes of the Act. The Exchange 
notes that the proposed rule change is designed to assist the Exchange 
in meeting its regulatory obligations pursuant to the Plan, reduce 
System complexity and enhance resiliency. The Exchange also notes that 
the proposed rule change will apply equally to all Members that trade 
Pilot Securities.

(C) Self-Regulatory Organization's Statement on Comments on the 
Proposed Rule Change Received From Members, Participants or Others

    Written comments were neither solicited nor received.

[[Page 47193]]

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the Exchange consents, the Commission will: (a) By order approve 
or disapprove such proposed rule change, or (b) institute proceedings 
to determine whether the proposed rule change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposal is 
consistent with the Act. In particular, the Commission seeks comment on 
the issue described below.
    In the Approval Order, the Commission stressed the importance of 
testing the impact of wider tick sizes on the trading and liquidity of 
the securities of small capitalization companies, and doing so in a way 
that produces robust results that inform future policy decisions.\49\ 
The Commission acknowledged the complexity of the Pilot and the costs 
that its implementation would create for market participants, but 
concluded that the benefits of the empirical data that would be 
produced by the Pilot warranted incurring those costs.\50\ As a result, 
the Plan requires that each Participant, including the Exchange, adopt 
rules that are necessary for compliance with the provisions of the 
Plan.\51\
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    \49\ See Approval Order, supra note 4, at 80 FR 27515.
    \50\ Id at 27516.
    \51\ See Section II(B) of the Plan. See also Section IV of the 
Plan.
---------------------------------------------------------------------------

    While the Exchange states that the proposed rule change describes 
the system changes necessary to implement the Pilot, the Commission 
notes that the scope of the proposed changes extends beyond those 
required for compliance with the Plan, and would eliminate certain 
order types for Pilot Securities during the Pilot Period, or modify 
their operation in ways not required by the Plan. For example, the 
Exchange proposes not to accept Market Pegged Orders, Discretionary 
Orders, and Supplemental Peg Orders, and certain types of Mid-Point Peg 
Orders, in some or all Test Groups of Pilot Securities for the duration 
of the Pilot Period.\52\ These proposals appear designed to permit the 
Exchange to avoid the costs of modifying these order types to comply 
with the Plan. The Exchange notes that these order types are 
infrequently used in Pilot Securities, and takes the position that 
``[t]he limited usage and execution scenarios do not justify the 
additional system complexity which would be created by modifying the 
System to support such order types in order to comply with the Plan.'' 
\53\ At the same time, the Exchange also does not appear prepared to 
propose to eliminate these order types indefinitely. By contrast, the 
Exchange proposes to modify, in ways not required by the Plan, the 
operation of Market Pegged Orders and Non-Displayed Orders, and certain 
orders subject to the Display-Price Sliding process, in some or all 
Test Groups of Pilot Securities, and to incur the associated system 
change costs, in order to increase the ``execution opportunities'' for 
these order types for the duration of the Pilot Period.\54\
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    \52\ The Exchange also proposes to cancel certain orders subject 
to the Display-Price Sliding process in certain Pilot Securities for 
the duration of the Pilot Period.
    \53\ See supra Item II.A.2.
    \54\ See supra Item II.A.1-2.
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    The Commission is concerned that proposed rule changes, other than 
those necessary for compliance with Plan, that are targeted at Pilot 
Securities, that have a disparate impact on different Test Groups and 
the Control Group, and that are to apply temporarily only for the Pilot 
Period, could bias the results of the Pilot and undermine the value of 
the data generated in informing future policy decisions. Accordingly, 
the Commission is concerned that the proposed rule change may not be 
consistent with Act, including Section 6(b)(5) thereof and Rule 608 of 
Regulation NMS, or with the Plan.
    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 No. SR-BatsBZX-2016-29 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 No. SR-BatsBZX-2016-29. 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 such filing will also 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 No. SR-BatsBZX-2016-29 and should be 
submitted on or before August 10, 2016.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\55\
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    \55\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2016-17093 Filed 7-19-16; 8:45 am]
 BILLING CODE 8011-01-P


81_FR_47326
Current View
CategoryRegulatory Information
CollectionFederal Register
sudoc ClassAE 2.7:
GS 4.107:
AE 2.106:
PublisherOffice of the Federal Register, National Archives and Records Administration
SectionNotices
FR Citation81 FR 47187 

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