81 FR 9017 - Self-Regulatory Organizations; BATS Exchange, Inc.; Order Granting Approval of a Proposed Rule Change, as Modified by Amendment No. 1 Thereto, To Adopt Rule 8.17 To Provide a Process for an Expedited Suspension Proceeding and Rule 12.15 To Prohibit Disruptive Quoting and Trading Activity
SECURITIES AND EXCHANGE COMMISSION Federal Register Volume 81, Issue 35 (February 23, 2016)
Federal Register Volume 81, Issue 35 (February 23, 2016)
| Page Range | 9017-9025 | |
| FR Document | 2016-03740 |
[Federal Register Volume 81, Number 35 (Tuesday, February 23, 2016)] [Notices] [Pages 9017-9025] From the Federal Register Online [www.thefederalregister.org] [FR Doc No: 2016-03740] [[Page 9017]] ----------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION [Release No. 34-77171; File No. SR-BATS-2015-101] Self-Regulatory Organizations; BATS Exchange, Inc.; Order Granting Approval of a Proposed Rule Change, as Modified by Amendment No. 1 Thereto, To Adopt Rule 8.17 To Provide a Process for an Expedited Suspension Proceeding and Rule 12.15 To Prohibit Disruptive Quoting and Trading Activity February 18, 2016. I. Introduction On November 6, 2015, BATS Exchange, Inc. (``BATS'' or the ``Exchange'') filed with the Securities and Exchange Commission (``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 adopt new BATS Rule (``Rule'') 12.15, which would prohibit certain disruptive quoting and trading activities on the Exchange, and new Rule 8.17, which would permit BATS to conduct a new Expedited Client Suspension Proceeding when it believes proposed Rule 12.15 has been violated.\3\ On November 17, 2015, the Exchange filed Amendment No. 1 to the proposal.\4\ The proposed rule change, as modified by Amendment No. 1, was published for comment in the Federal Register on November 24, 2015.\5\ On January 6, 2016, pursuant to Section 19(b)(2) of the Act,\6\ the Commission designated a longer period within which to approve the proposed rule change, disapprove the proposed rule change, or institute proceedings to determine whether to disapprove the proposed rule change.\7\ The Commission received four comment letters on the proposal and a response to the comments from the Exchange.\8\ The Commission also received a recommendation regarding the proposed rule change from the Office of the Investor Advocate (``OIAD'').\9\ 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\ As discussed in Section II, this proposed rule change is a revised version of a prior filing, BATS-2015-57, which the Exchange withdrew on November 6, 2015. See Securities Exchange Act Release No. 76393 (November 9, 2015), 80 FR 70851 (November 16, 2015) (BATS- 2015-57) (notice of withdrawal of BATS-2015-57). BATS filed BATS- 2015-101 in order to address certain issues raised by comments submitted with respect to BATS-2015-57. \4\ Amendment No. 1 amended and replaced the original proposal in its entirety. \5\ See Securities Exchange Act Release No. 76470 (November 18, 2015), 80 FR 73247 (``Notice''). \6\ 15 U.S.C. 78s(b)(2). \7\ See Securities Exchange Act Release No. 76841, 81 FR 1457 (January 12, 2016). The Commission designated February 22, 2016 as the date by which it should approve, disapprove, or institute proceedings to determine whether to disapprove the proposed rule change. \8\ See letters from: R.T. Leuchtkafer to Brent J. Fields, Secretary, Commission, dated December, 14, 2015 (``Leuchtkafer Letter II''); Samuel F. Lek, Chief Executive Officer, Lek Securities Corporation, dated December 28, 2015 (``Lek Letter III''); G.T. Spaulding to Brent J. Fields, Secretary, Commission, dated December, 28, 2015 (``Spaulding Letter''); R.T. Leuchtkafer to Brent J. Fields, Secretary, Commission, dated February 2, 2016 (``Leuchtkafer Letter III''); and response letter regarding SR-BATS-2015-101 from Anders Franzon, SVP Associate General Counsel, BATS, to Brent J. Fields, Secretary, Commission, dated January 21, 2016 (``BATS Response Letter II''). In addition, the Commission received comments regarding the prior filing, SR-BATS-2015-57, which this proposal revises and replaces. See comment letters regarding SR-BATS-2015-57 from: Teresa Machado B., dated August 19, 2015 (``Machado Letter''); Samuel F. Lek, Chief Executive Officer, Lek Securities Corporation, dated September 3, 2015 (``Lek Letter I''); R.T. Leuchtkafer to Brent J. Fields, Secretary, Commission, dated September, 4, 2015 (``Leuchtkafer Letter I''); Mary Ann Burns, Chief Operating Officer, FIA Principal Traders Group, to Brent J. Fields, Secretary, Commission, dated September, 9, 2015 (``FIA Letter''); and Samuel F. Lek, Chief Executive Officer, Lek Securities Corporation, dated September 18, 2015 (``Lek Letter II''). The Exchange submitted a response to these comments in conjunction with its withdrawal of SR- BATS-2015-57 and filing of this proposal. See response letter regarding SR-BATS-2015-57 from Anders Franzon, VP and Associate General Counsel, BATS, to Brent J. Fields, Secretary, Commission, dated November 6, 2015 (``BATS Response Letter I''). The comments pertaining to the current proposal, the comments pertaining to SR- BATS-2015-57, and the Exchange's responses to the comments are all summarized below. \9\ See Memorandum to the Commission from Rick A. Fleming, Office of the Investor Advocate, Commission, dated December 15, 2015 (``OIAD Recommendation''). As discussed in more detail below, the Commission has carefully considered the OIAD Recommendation. The OIAD was established pursuant to Section 915 of the Dodd Frank Wall Street Reform and Consumer Protection Act, Public Law 111-203, sec. 911, 124 Stat. 1376, 1822 (July 21, 2010) (the ``Dodd-Frank Act''). The Dodd-Frank Act authorizes the Investor Advocate, among other things, to identify areas in which investors would benefit from changes in the regulations of the Commission or the rules of self- regulatory organizations and to propose to the Commission changes in the regulations or orders of the Commission that may be appropriate to promote the interests of investors. --------------------------------------------------------------------------- II. Description of the Proposed Rule Change The Exchange states that, in order to fulfill certain of its responsibilities as a registered national securities exchange and self- regulatory organization, it has developed a comprehensive regulatory program that includes automated surveillance of trading activity that is operated directly by Exchange staff and by staff of the Financial Industry Regulatory Authority (``FINRA'') pursuant to a Regulatory Services Agreement.\10\ According to the Exchange, under this regulatory program, it can often take several years to resolve cases involving disruptive and potentially manipulative or improper quoting and trading activity even though, in some cases, the improper activity is able to be identified in real-time or near real-time.\11\ As a result, the Exchange states that Exchange members (``Members'') responsible for such conduct, or responsible for their customers' conduct, are allowed to continue the disruptive quoting and trading activity on the Exchange and other exchanges during the entirety of such lengthy investigations and enforcement processes.\12\ In the Notice, the Exchange provides examples of recent cases in which this has occurred.\13\ --------------------------------------------------------------------------- \10\ See Notice, supra note 5, at 73247-48. \11\ Id. at 73248. \12\ Id. \13\ Id. The Exchange notes that these cases involved allegations of wide-spread market manipulation, and in each case, the conduct involved a pattern of disruptive quoting and trading activity indicative of manipulative layering or spoofing. Id. --------------------------------------------------------------------------- The Exchange believes that a lengthy investigation and enforcement process is generally necessary and appropriate to afford the subject Member adequate due process.\14\ However, it also believes ``that there are certain obvious and uncomplicated cases of disruptive and manipulative behavior or cases where the potential harm to investors is so large that the Exchange should have the authority to initiate an expedited suspension proceeding in order to stop the behavior from continuing on the Exchange.'' \15\ The Exchange further states that it should have such authority if a Member is engaging in or facilitating disrupting quoting and trading activity, and the Member has received sufficient notice with an opportunity to respond, but such activity has not ceased.\16\ --------------------------------------------------------------------------- \14\ Id. \15\ Id. \16\ Id. --------------------------------------------------------------------------- The Exchange therefore has proposed to adopt new Rule 12.15, which would expressly prohibit two specific types of disruptive quoting and trading activities, and new Rule 8.17, which would permit the Exchange to conduct an Expedited Client Suspension Proceeding when it believes new Rule 12.15 has been violated.\17\ --------------------------------------------------------------------------- \17\ The Exchange notes that it currently has authority to prohibit and take action against manipulative trading activity, including disruptive quoting and trading activity, pursuant to its general market manipulation rules, including Rule 3.1. Id. at 73250. --------------------------------------------------------------------------- [[Page 9018]] Proposed Rule 12.15 Proposed Rule 12.15 would state that no Member shall engage in or facilitate disruptive quoting and trading activity--as described in Interpretations and Policies .01 and .02 of proposed Rule 12.15--on the Exchange, including acting in concert with other persons to affect such activity.\18\ --------------------------------------------------------------------------- \18\ The Exchange believes that it is necessary to extend the prohibition of proposed Rule 12.15 to situations when persons are acting in concert to avoid a potential loophole where disruptive quoting and trading activity is simply split between several brokers or customers. See Notice, supra note 5, at 73250. --------------------------------------------------------------------------- Proposed Interpretation and Policy .01 would describe the quoting and trading activities prohibited by proposed Rule 12.15 and state that, for purposes of proposed Rule 12.15, disruptive quoting and trading activity shall include a frequent pattern of two fact scenarios, defined as ``Disruptive Quoting and Trading Activity Type 1'' and ``Disruptive Quoting and Trading Activity Type 2,'' respectively. Disruptive Quoting and Trading Activity Type 1 would entail a frequent pattern in which the following facts are present: (1) A party enters multiple limit orders on one side of the market at various price levels (the ``Displayed Orders''); (2) following the entry of the Displayed Orders, the level of supply and demand for the security changes; (3) the party enters one or more orders on the opposite side of the market of the Displayed Orders (the ``Contra-Side Orders'') that are subsequently executed; and (4) following the execution of the Contra-Side Orders, the party cancels the Displayed Orders. Disruptive Quoting and Trading Activity Type 2 would entail a frequent pattern in which the following facts are present: (1) A party narrows the spread for a security by placing an order inside the national best bid and offer (``NBBO''); and (2) the party then submits an order on the opposite side of the market that executes against another market participant that joined the new inside market established by the party. Proposed Interpretation and Policy .02 would state that, for purposes of proposed Rule 12.15, disruptive quoting and trading activity shall include a frequent pattern in which the facts listed in Interpretation and Policy .01 are present. Proposed Interpretation and Policy .02 would also state that, unless otherwise indicated, the order of the events indicating the pattern does not modify the applicability of proposed Rule 12.15. Further, proposed Interpretation and Policy .02 would state that disruptive quoting and trading activity includes a pattern or practice in which all of the quoting and trading activity is conducted on the Exchange as well as a pattern or practice in which some portion of the quoting or trading activity is conducted on the Exchange and the other portions of the quoting or trading activity are conducted on one or more other exchanges. Proposed Rule 8.17 Under proposed Rule 8.17, the Exchange could initiate an Expedited Client Suspension Proceeding when it believes that proposed Rule 12.15 has been violated. An Expedited Client Suspension Proceeding could result in the Exchange issuing a ``suspension order,'' under which a Respondent to the proceeding that was provided with advanced notice could be (1) ordered to cease and desist from the violative trading activity under proposed Rule 12.15 and/or ordered to cease and desist from providing access to the Exchange to a client engaging in the violative trading activity under proposed Rule 12.15, and (2) suspended from the Exchange unless and until it takes or refrains from taking the act or acts described in the suspension order.\19\ --------------------------------------------------------------------------- \19\ See proposed Rule 8.17(d)(2). --------------------------------------------------------------------------- Paragraph (a) of proposed Rule 8.17 would govern the initiation of an Expedited Client Suspension Proceeding. With the prior written authorization of the Exchange's Chief Regulatory Officer (``CRO'') or such other senior officers as the CRO may designate, the Office of General Counsel or Regulatory Department of the Exchange may initiate an Expedited Client Suspension Proceeding. The Exchange would initiate an Expedited Client Suspension Proceeding by serving a notice on a Member or associated person of a Member (``Respondent''), and the notice would be effective upon service.\20\ The notice would state whether the Exchange is requesting the Respondent to be required to take action or to refrain from taking action, and would be accompanied by the following: (1) A declaration of facts, signed by a person with knowledge of the facts contained therein, that specifies the acts that constitute the alleged violation; and (2) a proposed order that contains the required elements of a suspension order (except the date and hour of the order's issuance).\21\ --------------------------------------------------------------------------- \20\ Under proposed Rule 8.17, relevant documents (e.g., notice, the suspension order) may be served via personal service or overnight commercial carrier. See proposed Rules 8.17(a)(2), 8.17(c)(2), 8.17(d)(4), and 8.17(e). \21\ See proposed Rule 8.17(a)(3). --------------------------------------------------------------------------- Paragraph (b) of proposed Rule 8.17 would govern the appointment of a Hearing Panel to preside over an Expedited Client Suspension Proceeding and the recusal or disqualification of a Hearing Officer from the Hearing Panel under certain circumstances. Proposed Rule 8.17(b)(1) would require the assignment of a Hearing Panel as soon as practicable after the Exchange initiates an Expedited Client Suspension Proceeding.\22\ Proposed Rule 8.17(b)(2) would provide for the recusal or disqualification of a Hearing Officer in the event he or she has a conflict of interest or bias or other circumstances exist where his or her fairness might reasonably be questioned. The proposed rule would permit a Hearing Officer to recuse himself or herself and also permit a party to the proceeding to file a motion to disqualify a Hearing Officer. Proposed Rule 8.17(b) would require a recusal and disqualification proceeding to be held under such circumstances, which would be conducted in accordance with current Rule 8.6(b).\23\ However, proposed Rule 8.17(b) would provide for shorter timeframes within which a motion to disqualify a Hearing Officer must be filed and within which the Exchange may respond to that motion than those set forth in Rule 8.6(b).\24\ The Exchange states that proposed Rule 8.17(b) provides for these shorter time periods due to the compressed schedule pursuant to which an Expedited Client Suspension Proceeding would operate.\25\ --------------------------------------------------------------------------- \22\ The Hearing Panel would be appointed in accordance with current Rule 8.6(a), which states, among other things, that a Hearing Panel for general disciplinary proceedings shall be comprised of three hearing officers appointed by the Chief Executive Officer of the Exchange. See Rule 8.6(a). Rule 8.6(a) further states that each Hearing Panel shall be comprised of: (1) A professional hearing officer, who shall serve as Chairman of the Hearing Panel, (2) a hearing officer who is an Industry member, as such term is defined in the Exchange's By-Laws, and (3) a hearing officer who is a Member Representative member, as such term is defined in the Exchange's By-Laws. Id. \23\ See Rule 8.6(b). Rule 8.6(b) sets forth the Exchange's standard for the impartiality of Hearing Officers for general disciplinary proceedings and the process for removing a Hearing Officer due to bias or conflict of interest. Id. \24\ Under proposed Rule 8.17(b)(2), a motion seeking disqualification of a Hearing Officer would be required to be filed no later than five days after the announcement of the Hearing Panel, and the Exchange would be permitted to file a brief in opposition to that motion no later than five days after service thereof. Rule 8.6(b) provides for a 15-day period to file a motion to disqualify a Hearing Officer and a 15-day period for the Exchange to respond. \25\ See Notice, supra note 5, at 73249. --------------------------------------------------------------------------- Under paragraph (c) of proposed Rule 8.17, a hearing would be held no later than 15 days after service of the notice initiating the Expedited Client Suspension Proceeding, unless [[Page 9019]] otherwise extended by the Chairman of the Hearing Panel with the consent of the parties to the proceeding for good cause shown. In the event of a recusal or disqualification of a Hearing Officer, the hearing would be held no later than five days after a replacement Hearing Officer is appointed. A notice of the date, time, and place of the hearing would be required to be served on the parties to the proceeding no later than seven days before the hearing, unless otherwise ordered by the Chairman of the Hearing Panel. Proposed Rule 8.17(c) would also govern the conduct of the hearing by including provisions addressing the authority of the Hearing Officers, the testimony of witnesses, the submission of additional information to the Hearing Panel, the requirement that a transcript of the proceeding be created (and the details related to availability of and corrections to such transcript), and the creation and maintenance of the record of the proceeding. Proposed Rule 8.17(c) would also provide that the Hearing Panel may issue a suspension order without further proceedings if the Respondent fails to appear at the hearing, and that the Hearing Panel may dismiss the Expedited Client Suspension Proceeding if the Exchange fails to appear at the hearing. Under paragraph (d) of proposed Rule 8.17, the Hearing Panel would be required to issue a written decision stating whether a suspension order would be imposed. The Hearing Panel would be required to issue the decision no later than ten days after receipt of the hearing transcript, unless otherwise extended by the Chairman of the Hearing Panel with the consent of the parties to the proceeding for good cause shown. Pursuant to proposed Rule 8.17(d)(1), a suspension order would be imposed if the Hearing Panel finds: (1) by a preponderance of the evidence that the alleged violation specified in the notice has occurred and (2) that the violative conduct or continuation thereof is likely to result in significant market disruption or other significant harm to investors. Proposed Rule 8.17(d)(2) would set forth the content, scope, and form of a suspension order. Specifically, the suspension order would be limited to: (1) ordering a Respondent to cease and desist from violating proposed Rule 12.15; and/or (2) ordering a Respondent to cease and desist from providing access to the Exchange to a client of Respondent that is causing violations of proposed Rule 12.15.\26\ The suspension order would be required to set forth the alleged violation and the significant market disruption or other significant harm to investors that is likely to result without the issuance of an order, to describe, in reasonable detail, the act or acts the Respondent is to take or refrain from taking, and to suspend the Respondent unless and until such action is taken or refrained from.\27\ Under proposed Rules 8.17(d)(3) and 8.17(d)(4), a suspension order would be effective upon service and remain effective and enforceable unless modified, set aside, limited, or revoked pursuant to proposed Rule 8.17(e).\28\ --------------------------------------------------------------------------- \26\ See supra note 18 and accompanying text. \27\ The suspension order would also include the date and hour of its issuance. See proposed Rule 8.17(d)(2)(D). \28\ See infra. --------------------------------------------------------------------------- Paragraph (e) of proposed Rule 8.17 would provide that, at any time after the Respondent is served with a suspension order, a party to the Expedited Client Suspension Proceeding may apply to the Hearing Panel to have the order modified, set aside, limited, or revoked. Further, under proposed Rule 8.17(e), the Hearing Panel would be required to respond to any such request in writing within ten days after receipt of the request, unless otherwise extended by the Chairman of the Hearing Panel with the consent of the parties to the proceeding for good cause shown. In addition, proposed Rule 8.17(e) would state that an application to modify, set aside, limit or revoke a suspension order would not stay the effectiveness of the suspension order. In the Notice, the Exchange explains that if any part of a suspension order is modified, set aside, limited, or revoked, proposed Rule 8.17(e) would grant the Hearing Panel discretion to leave the cease and desist part of the order in place while, for example, removing the suspension component.\29\ --------------------------------------------------------------------------- \29\ See Notice, supra note 5, at 73249. In addition, the Exchange also explains that, with its broad modification powers under the proposed rule, the Hearing Panel would maintain the discretion to impose conditions upon the removal of a suspension. Id. --------------------------------------------------------------------------- Finally, paragraph (f) of proposed Rule 8.17 would state that sanctions issued under proposed Rule 8.17 would constitute final and immediately effective disciplinary sanctions imposed by the Exchange, that the right to have any action under proposed Rule 8.17 reviewed by the Commission would be governed by Section 19 of the Act,\30\ and that the filing of an application for review would not stay the effectiveness of a suspension order unless the Commission otherwise orders. --------------------------------------------------------------------------- \30\ 15 U.S.C. 78s. --------------------------------------------------------------------------- In the Notice, the Exchange notes that the issuance of a suspension order would not alter the Exchange's ability to further investigate the matter and/or later sanction the Member pursuant to the Exchange's standard disciplinary process for supervisory violations or other violations of Exchange rules or the Act.\31\ In addition, in the Notice, the Exchange acknowledges that its proposed authority to issue a suspension order is a powerful measure that should be used very cautiously.\32\ Consequently, according to the Exchange, the proposed rules have been designed to ensure that the Expedited Client Suspension Proceedings are used to address only the most clear and serious types of disruptive quoting and trading activity and that the interests of Respondents are protected.\33\ In addition, the Exchange believes that it would use this authority in limited circumstances, when necessary to protect investors, other Members, and the Exchange.\34\ --------------------------------------------------------------------------- \31\ See Notice, supra note 5, at 73251. \32\ Id. \33\ Id. \34\ Id. --------------------------------------------------------------------------- Summary of Differences Between BATS-2015-57 and the Current Proposal As noted above, this proposal revises and replaces a prior proposal, BATS-2015-57, which the Exchange withdrew in order to address certain comments.\35\ In conjunction with that withdrawal and replacement, the Exchange submitted a comment response letter that, among other things, explained the main differences between the prior proposal and the current proposal (the letter also addressed certain comments on BATS-2015-57, as described below).\36\ As set forth in that letter, the current proposal replaces the terms ``Layering'' and ``Spoofing'' originally used in proposed Rule 12.15 of BATS-2015-57 with the terms ``Disruptive Quoting and Trading Activity Type 1'' and ``Disruptive Quoting and Trading Activity Type 2,'' respectively, and conforms related terminology in proposed Rules 8.17 and 12.15.\37\ Because the Exchange also believes that a suspension order issued under proposed Rule 8.17 is enforceable against the subject Member and no additional process is required to discipline the violation of such an order, the current proposal omits subparagraph (f) of proposed Rule 8.17 of BATS-2015-57, which had provided a process for sanctioning violations of a [[Page 9020]] suspension order,\38\ and also make a conforming change to what is now Rule 8.17(f) of BATS-2015-101. In addition, the current proposal modifies subparagraph (d)(2)(C) of proposed Rule 8.17 to clarify that a suspension order would suspend the Respondent from access to the Exchange unless and until there is compliance with the cease and desist provisions of the order.\39\ --------------------------------------------------------------------------- \35\ See supra note 3. \36\ See BATS Response Letter I, supra note 8. \37\ Id. at 5; also compare BATS-2015-57 with BATS-2015-101. \38\ See BATS Response Letter I, supra note 8, at 5. \39\ Id. In Amendment No. 1, the Exchange relocated this provision addressing suspension from the Exchange from subparagraph (d)(2)(A) of proposed Rule 8.17 to subparagraph (d)(2)(C) of proposed Rule 8.17. --------------------------------------------------------------------------- III. Summary of Comments The Commission received four comments from three different commenters on this proposal and a comment response letter from the Exchange.\40\ The Commission also received five comment letters from four different commenters on BATS-2015-57,\41\ as well as a comment response letter from the Exchange.\42\ One of the commenters on this proposal, who also commented twice on BATS-2015-57,\43\ opposes the proposal.\44\ Another commenter on this proposal, who also commented on BATS-2015-57,\45\ is critical of the scope of the defined trading activities prohibited under proposed Rule 12.15.\46\ Two commenters on BATS-2015-57 (who did not also comment on this proposal) supported the prior proposal overall,\47\ but one of them suggested a clarifying amendment.\48\ Additionally, the OIAD submitted to the public comment file its recommendation that the Commission approve this proposal.\49\ The comment letters received with respect to BATS-2015-57 and this proposal, as well as the Exchange's responses, are summarized below, followed by a summary of the OIAD Recommendation. --------------------------------------------------------------------------- \40\ See supra note 8. \41\ Id. \42\ Id. As noted above, the Exchange submitted its response letter in conjunction with its withdrawal of BATS-2015-57 and filing of BATS-2015-101. Id. \43\ See Lek Letters I and II, supra note 8. \44\ See Lek Letter III, supra note 8. \45\ See Leuchtkafer Letter I, supra note 8. \46\ See Leuchtkafer Letters II and III, supra note 8. See also Spaulding Letter, supra note 8 (appearing to be critical of the proposal). \47\ See FIA Letter, supra note 8; Machado Letter, supra note 8. \48\ See FIA Letter, supra note 8. \49\ See OIAD Recommendation, supra note 9. --------------------------------------------------------------------------- Proposed Definitions of ``Spoofing'' and ``Layering'' in BATS-2015-57 and ``Disruptive Quoting and Trading Activity'' in the Current Proposal Most of the critical commentary on BATS-2015-57 centered on proposed Rule 12.15's description of the ``layering'' and ``spoofing'' activity that would be prohibited.\50\ One commenter who supported BATS-2015-57 expressed broad agreement with the proposed descriptions of such activity, but believed that the descriptions should be amended to require a manipulative intent element.\51\ This commenter noted prior definitions of ``spoofing'' put forth by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (``Dodd-Frank Act'') and in Commodity Futures Trading Commission guidance, which definitions include an intent element.\52\ According to this commenter, the omission of such an intent element raised a concern because it ``is the cornerstone of existing disruptive trading rules'' and ``has historically been an important factor in sanctioning market participants for fraudulent and manipulative trading practices as it prevents legitimate, good faith actions from being wrongly penalized.'' \53\ This commenter stated that, without the intent requirement, proposed Rule 12.15, and its description of prohibited layering activity in particular, could be construed to prohibit a broad range of legitimate conduct such as market making activity.\54\ --------------------------------------------------------------------------- \50\ See FIA Letter, supra note 8, at 3-4; Leuchtkafer Letter I, supra note 8; Lek Letter I, supra note 8, at 1-6, Lek Letter II, supra note 8. As noted above, in the current proposal, the Exchange changed the labels of the activities prohibited under proposed Rule 12.15 from ``Layering'' and ``Spoofing'' to ``Disruptive Quoting and Trading Activity Type 1'' and ``Disruptive Quoting and Trading Activity Type 2,'' respectively. The Exchange did not make any other substantive changes to the definitions or descriptions of the activities prohibited under proposed Rule 12.15, and accordingly, the Commission believes that the comments received regarding proposed Rule 12.15 under BATS-2015-57 are appropriate to consider with respect to the current proposal. \51\ See FIA Letter, supra note 8, at 1, 4. The other supportive commenter stated that a biotech company in which the commenter is an investor has been subject to spoofing and layering, as well as naked short attacks, which is severely harming bona fide investors. See Machado Letter, supra note 8. \52\ See FIA Letter, supra note 8, at 2-3. \53\ Id. at 3-4. \54\ Id. at 4 n.13. --------------------------------------------------------------------------- Another commenter who was opposed to BATS-2015-57 stated that the proposed descriptions of the prohibited ``layering'' and ``spoofing'' activity in BATS-2015-57 were overbroad and would encompass legitimate trading activity in which trading algorithms regularly engage, and that narrows spreads, adds depth and liquidity to the market, provides price improvement, and reduces costs for investors.\55\ The commenter stated that prohibiting such trading activity would be anti-competitive and would serve to eliminate risk to market participants engaged in front- running strategies because they would be provided with a free stop-loss on their trades.\56\ This commenter addressed each element of the proposed ``layering'' and ``spoofing'' descriptions in BATS-2015-57 and offered its view as to why each individual element encompassed legitimate trading activity or was otherwise problematic.\57\ The commenter further asserted that courts have held that an alleged manipulator must inject false information into the market with scienter, and that orders do not become manipulative merely because another trader speculates about them incorrectly.\58\ The commenter also argued that the proposed descriptions of ``layering'' and ``spoofing'' were unacceptably vague.\59\ According to the commenter, by using the words ``include,'' ``frequent,'' ``pattern,'' and ``multiple,'' the proposed descriptions in BATS-2015-57 left open-ended exactly what conduct would be prohibited.\60\ --------------------------------------------------------------------------- \55\ See Lek Letter I, supra note 8, at 1, 7. \56\ See Lek Letter I, supra note 8, at 1, 6; Lek Letter II, supra note 8. \57\ See Lek Letter I, supra note 8, at 2-6. \58\ See Lek Letter I, supra note 8, at 2; Lek Letter II, supra note 8. \59\ See Lek Letter I, supra note 8, at 2-4. \60\ Id. --------------------------------------------------------------------------- Another commenter also criticized the proposed descriptions of the prohibited ``layering'' and ``spoofing'' activity under that proposal, but instead expressed concern that the proposed descriptions were too narrow and would have given ``spoofers and layerers a roadmap around exchange surveillance, and a near-perfect defense if they're somehow roped into an enforcement action.'' \61\ This commenter noted that other definitions of layering and spoofing, such as that put forth by the Dodd-Frank Act, ``define spoofing or layering (collectively, `spoofing') as a matter of the spoofer's intent without detailing exactly where and how orders are placed or at what prices.'' \62\ According to this commenter, by being specific in proposed Rule 12.15, the proposed descriptions of the prohibited ``layering'' and ``spoofing'' activity would have excluded certain kinds of improper trading activity.\63\ The commenter asserted that BATS should instead adopt principles-based language against spoofing.\64\ The commenter also [[Page 9021]] expressed concern that other exchanges might copy BATS's definitions of spoofing and layering.\65\ --------------------------------------------------------------------------- \61\ See Leuchtkafer Letter I, supra note 8, at 1. See also Leuchtkafer Letter III, supra note 8, at 2-3. \62\ See Leuchtkafer Letter I, supra note 8, at 2. \63\ Id. at 3, 6. \64\ Id. at 6. In addition, the commenter criticized certain market making practices that the commenter attributed to high- frequency traders, and suggested that these practices are anti- competitive and contribute to market complexity. Id. at 3-5. The commenter also questioned how such market making activity can be distinguished from spoofing in certain contexts. Id. at 4-6. The commenter further questioned why BATS has proposed to expedite action in cases of spoofing or layering but not in cases of other types of manipulative trading, like marking the close or wash trading. Id. at 1. \65\ Id. at 1; see also id. at 6. --------------------------------------------------------------------------- In response to the above critiques of the proposed definitions of ``spoofing'' and ``layering'' in BATS-2015-57, the Exchange stated in its response letter for BATS-2015-57 that it agrees that the harmful practices of spoofing and layering are defined by an intent element.\66\ According to the Exchange, the prior proposal's definitions of the prohibited ``layering'' and ``spoofing'' activity under proposed Rule 12.15 were intended to include an intent element by requiring a ``frequent pattern'' of such activity.\67\ The Exchange stated that a ``frequent pattern'' of such activity evidences manipulative intent,\68\ and offered the observation that such a ``frequent pattern'' is typically the key factor indicating intent in spoofing and layering cases.\69\ The Exchange also acknowledged the concern that the proposed ``layering'' and ``spoofing'' definitions in the prior proposal could be read to exclude other spoofing and layering practices.\70\ The Exchange stated that it did not intend to provide universal definitions of layering and spoofing activity, but rather to identify and prohibit ``certain patterns and practices that are hallmarks of the most egregious spoofing and/or layering conduct.'' \71\ --------------------------------------------------------------------------- \66\ See BATS Response Letter I, supra note 8, at 6. \67\ Id. \68\ Id. \69\ Id. at 6 n.12. \70\ Id. at 7. \71\ Id. The Exchange also argued, in response to one commenter's assertions that elements of the proposed definitions violated the Act, that since spoofing and layering are fraudulent and manipulative practices prohibited by the Act, the previously proposed rules prohibiting those practices comport with Section 6(b)(5) of the Act and advance the Act's purposes. Id. at 11. --------------------------------------------------------------------------- Nevertheless, the Exchange recognized commenters' concerns that certain non-spoofing or non-layering trading activity could fall within the previously proposed definitions of ``layering'' and ``spoofing'' while, at the same time, certain manipulative layering or spoofing activity could fall outside those proposed definitions.\72\ The Exchange stated that, because the purpose of BATS-2015-57 was ``not to provide a precise definition of layering and spoofing, but to protect market participants from the harm caused by a [Member's] refusal to cease obvious disruptive market practices,'' the Exchange modified the defined terms in proposed Rule 12.15 under the current proposal to replace the defined terms ``layering'' and ``spoofing'' with the terms ``Disruptive Quoting and Trading Activity Type 1'' and ``Disruptive Quoting and Trading Activity Type 2,'' respectively.\73\ The Exchange stated its belief that this terminology change advances its objective of protecting market participants from harmful and manipulative trading behavior, and also alleviates commenters' concerns regarding the prior definitions of ``layering'' and ``spoofing'' \74\ According to the Exchange, the terminology change also highlights that proposed Rule 8.17 is ``designed to halt a very specific, readily identifiable type of illegal trading activity rather than an attempt to define and punish layering and spoofing in every conceivable context.'' \75\ --------------------------------------------------------------------------- \72\ Id. at 7. \73\ Id. \74\ Id. \75\ Id. at 7-8. --------------------------------------------------------------------------- The commenter who opposed the prior proposed rule change in BATS- 2015-57 submitted a comment letter on the current proposal, again in opposition.\76\ In this comment letter, the commenter repeats many of the same criticisms set forth in the commenter's first letter submitted in opposition to BATS-2015-57,\77\ asserting that ``the currently proposed rule has all the flaws of the original proposal.'' \78\ The commenter also repeats its criticism from its second comment letter to BATS-2015-57 that the proposed rule change is intended to eliminate competition for high-frequency traders (``HFTs'')--whom the commenter claims ``control'' the Exchange--at the expense of institutional investors by eliminating trading strategies that add risk to front- running strategies of HFTs.\79\ The commenter claims that the Exchange is advocating ``the ability for HFTs to detect institutional buying interest and to be able to front-run institutional orders risk free.'' \80\ In its comment response letter for the current proposal, the Exchange incorporates, by reference, the statements in its comment response letter for BATS-2015-57 addressing the commenter's criticisms of BATS-2015-57 that are duplicative of the commenter's criticism of the current proposal.\81\ The Exchange also states that the trading activity it seeks to curtail under the proposal is ``not acceptable `competitive' conduct'' and that there is no risk that the proposed Expedited Client Suspension Proceeding ``could be used to prohibit an isolated series of coincidental transactions,'' as asserted by the commenter.\82\ --------------------------------------------------------------------------- \76\ See Lek Letter III, supra note 8. \77\ Compare Lek Letter I, supra note 8, with Lek Letter III, supra note 8. \78\ See Lek Letter III, supra note 8, at 1. \79\ Id. at 1-2. Compare Lek Letter II supra note 8, with Lek Letter III, supra note 8. \80\ See Lek Letter III, supra note 8, at 2. The commenter states that HFTs ``seek to buy stock ahead of the institution, bid up the price, and re-sell the stock back to the institution at a higher level'' and argues that HFTs ``therefore seek regulatory protections and advocate rules that would eliminate trading strategies that add such risk to their front running strategies.'' Id. \81\ See BATS Response Letter II, supra note 8, at 10. \82\ Id. (responding to Lek Letter III). --------------------------------------------------------------------------- Additionally, one of the commenters critical of the proposed definitions of ``layering'' and ``spoofing'' under BATS-2015-57 submitted a comment letter to BATS-2015-101 that reprises much of the same criticism set forth in the commenter's letter in opposition to BATS-2015-57 and again centers on the Exchange's descriptions and definitions of the prohibited trading activities in proposed Rule 12.15.\83\ The commenter argues that the Exchange should not define the prohibited activity in ``narrow, prescriptive terms'' and that the proposed definitions of the violative activity are inconsistent with the ``principles-based'' definitions of what the commenter characterizes as ``[a]ll other definitions of spoofing that [the commenter] could find that regulators (including BATS) have set down over the years.'' \84\ The commenter reiterates its view that the Exchange should include principle-based language in its proposed rule and suggests specific rule language in this regard, which includes an intent element,\85\ and expresses renewed concern that BATS's ``deeply flawed and superficial proposal could quickly become the surveillance and enforcement spoofing standard for the equity markets.'' \86\ --------------------------------------------------------------------------- \83\ Compare Leuchtkafer Letter II, supra note 8, with Leuchtkafer Letter I, supra note 8. \84\ See Leuchtkafer Letter II, supra note 8, at 1-2. \85\ Id. at 8. \86\ Id. at 3. The commenter also renews its critique of certain market making practices that the commenter attributes to HFTs, and again suggests that these practices are anti-competitive and contribute to market complexity, and questions how such market making activity can be distinguished from spoofing in certain contexts. Id. at 3-8. In addition, the commenter asserts that it is unaware of any spoofing or layering case in which the Exchange independently discovered the violative conduct at issue. Id. at 1-2. --------------------------------------------------------------------------- In response to this comment letter, the Exchange explains that ``[d]efining layering and spoofing in all of its possible permutations is not the [[Page 9022]] purpose of this filing.'' \87\ Rather, the Exchange states that the filing is meant to ``supplement existing prohibitions against layering and spoofing with an expedited objective prohibition that will stop harmful manipulative activity while the Exchange conducts necessary extensive and time-consuming investigations and enforcement.'' \88\ The Exchange reiterates that principles-based prohibitions of layering and spoofing already exist and explains, however, that investigations of ``principles-based'' rules violations involving suspected layering and spoofing conduct are lengthy due to the fact that enforcement of those violations requires proof of subjective fraudulent intent of the actor, which the Exchange states is ``usually very difficult to prove and requires a thorough and lengthy investigation and enforcement process.'' \89\ The Exchange asserts that, during the course of such an investigation, it does not currently have the ability to stop obvious and flagrant manipulative trading.\90\ The Exchange states that if the current proposal is ultimately approved and implemented, the Exchange will continue conducting its current enforcement process, and represents that it would only seek an expedited suspension when--after multiple requests to a Member for an explanation of activity--it continues to see the same pattern of manipulation from the same Member and the source of the activity is the same or has been previously identified as a frequent source of disruptive quoting and trading activity.\91\ Therefore, according to the Exchange, principles-based enforcement and the proposed rule change are complementary in practice, not mutually exclusive.\92\ --------------------------------------------------------------------------- \87\ See BATS Response Letter II, supra note 8, at 9 n.9. \88\ Id. \89\ Id. at 8-9. \90\ Id. at 8. \91\ Id. at 6, 8-9. The Exchange explains that, currently, when Exchange surveillance staff identifies a pattern of potentially disruptive quoting and trading activity, the staff conducts an initial analysis and investigation of that activity. Id. After the initial investigation, the Exchange then contacts the Member responsible for the orders that caused the activity to request an explanation of the activity as well as any additional relevant information, including the source of the activity. Id. The Exchange represents that it will continue this practice if the Commission approves the proposal. Id. \92\ Id. at 9. --------------------------------------------------------------------------- In response to the Exchange's letter, the commenter submitted an additional comment, in which the commenter states that the Exchange misread certain its criticisms of the current proposal.\93\ The commenter cites to the Exchange's statement in the Exchange's response letter that the commenter ``advocates that the Exchange must adopt `principle-based' language instead of the Exchange's current proposal.'' \94\ Rather, according to the commenter, its position is that the Commission should require the Exchange ``to also include in its rulebook a clearly articulated principle rather than only a prescriptive checklist, particularly when so far as [the commenter] can tell [the Exchange] hasn't yet independently detected the proscribed behavior on its markets and hasn't documented any current enforcement proceedings its proposal could expedite in the future.'' \95\ In addition, this commenter asserts that the Exchange misinterpreted its point regarding past cases of improper quoting and trading activity that the Exchange cites as support for the proposal; the commenter asserts that its point is that those are not cases in which the Exchange independently discovered the violative layering or spoofing conduct at issue.\96\ --------------------------------------------------------------------------- \93\ See Leuchtkafer Letter III, supra note 8, at 2. See also Leuchtkafer Letter II, supra note 8. \94\ See Leuchtkafer Letter III, supra note 8, at 2 (emphasis in original). \95\ Id. (emphasis in original). \96\ Id. at 1. --------------------------------------------------------------------------- Expedited Suspension Proceedings Under Proposed Rule 8.17 One commenter that was supportive of BATS-2015-57 believed that the Exchange's proposed investigation, notice, and hearing processes described in connection with proposed Rule 8.17 under BATS-2015-57 were reasonable.\97\ This commenter also suggested that the Exchange could amend proposed Rule 8.17 to require a lower burden of proof in Expedited Client Suspension Proceedings, which the commenter asserted would still allow the Exchange to institute a process to quickly put a stop to the manipulative behavior targeted by the proposal ``without drastically expanding the Exchange's definition of prohibited layering and spoofing to include completely unintentional conduct.'' \98\ --------------------------------------------------------------------------- \97\ See FIA Letter, supra note 8, at 2. \98\ Id. at 4. --------------------------------------------------------------------------- Another commenter criticized the procedural components of the proposed rules as set forth in BATS-2015-57.\99\ The commenter argued that the Exchange has no jurisdiction to compel Members to deny access to clients that the Exchange judges to have been involved in layering or spoofing, and that such affected clients would be denied due process as they are not entitled to be heard as part of the Expedited Client Suspension Proceeding.\100\ In response to this argument, in its first response letter, the Exchange stated that its rules ``unquestionably confer jurisdiction to the Exchange to discipline its Members for a Member's client's violations of the Act and the Exchange's Rules,'' \101\ and the Exchange referenced Rule 8.1 in this regard.\102\ The Exchange further stated that ``jurisdiction over a Member for a client's actions is not only permissible--it is essential for the effective regulation of the Exchange.'' \103\ The Exchange also asserted that, because a Member has ultimate responsibility for its clients' actions and because proposed Rule 8.17 imposes discipline on a Member--not its client--for the client's violations, it is sufficient if due process is afforded to the Member.\104\ The Exchange noted, however, that nothing in the proposal prevents a Member's client from participating in an expedited suspension hearing and, in fact, the Exchange stated that it would welcome such participation at the hearing.\105\ --------------------------------------------------------------------------- \99\ See Lek Letter I, supra note 8, at 6-7. This commenter also submitted a comment letter on the current proposal that repeats these criticisms, to which the Exchange responded by incorporating by reference the statements in its comment response letter for BATS- 2015-57. See Lek Letter III, supra note 8, at 7-8; BATS Response Letter II, supra note 8, at 10. \100\ See Lek Letter I, supra note 8, at 6. \101\ See BATS Response Letter I, supra note 8, at 8-9. \102\ Id. at 9. See also Rule 8.1 (setting forth the Exchange's disciplinary jurisdiction). \103\ See BATS Response Letter I, supra note 8, at 9. \104\ Id. \105\ Id. --------------------------------------------------------------------------- The same commenter also argued that the proposed expedited proceeding set forth in BATS-2015-57 was not a fair disciplinary process under the Act because it did not provide adequate time for discovery.\106\ In response to this point, the Exchange contended that the proposed expedited client suspension hearing is governed by and consistent with Section 6(d)(2) of the Act and, therefore, provides the due process required by the Act.\107\ In addition, the Exchange noted that it intends to initiate such a proceeding only after an initial investigation into the allegedly improper trading activity, including contacting the responsible member to request an explanation for the activity and any relevant additional information.\108\ Further, the Exchange noted that discovery would continue after the entry of a suspension order, and that, under proposed Rule 8.17, a Member subject to a suspension order [[Page 9023]] that discovers information that it believes to be exculpatory may apply at any time to the Hearing Panel to have the suspension order modified, set aside, limited, or revoked.\109\ According to the Exchange, ``[p]roposed Rule 8.17 merely places the burden on the Subject Member to show that it has halted its harmful practice or its client's harmful practice before being permitted to resume activity on the Exchange rather than requiring the market to bear the harm of manipulative conduct during the time-consuming discovery process.'' \110\ --------------------------------------------------------------------------- \106\ See Lek Letter I, supra note 8, at 6. \107\ See BATS Response Letter I, supra note 8, at 10. \108\ Id. See also BATS Response Letter II, supra note 8, at 6. \109\ See BATS Response Letter I, supra note 8, at 10. \110\ Id. --------------------------------------------------------------------------- Recommendation of the OIAD As noted above, the OIAD submitted to the public comment file its recommendation to the Commission that the Commission approve this proposal.\111\ In its recommendation, the OIAD states that it supports ``the Exchange's efforts to promptly initiate and quickly resolve obvious and uncomplicated matters the Exchange believes involve disruptive and manipulative trading activity.'' \112\ The OIAD believes that ``[e]ven if limited to a small number of cases, such disruptive quoting and trading behavior can cause significant harm to investors and the markets'' and ``erode the public's confidence in fair and orderly markets.'' \113\ The OIAD further believes that a disciplinary proceeding against a U.S.-based broker dealer that permits a significant volume of manipulative trading to pass through its systems on a regular basis without establishing a supervisory system reasonably designed to detect and prevent this activity ``must be timely.'' \114\ The OIAD states that this proposal appears to be appropriately tailored to minimize the possibility that it would curtail legitimate trading activities by market makers and other liquidity providers, and that the proposed Expedited Client Suspension Proceeding appears to provide ``appropriate safeguards for innocent parties,'' such as adequate notice, an opportunity to be heard at a meaningful time prior to the decision, a right to appeal the determination, and a right to obtain Commission review.'' \115\ Further, the OIAD believes that the proposed process should act as a deterrent to U.S. broker-dealers that would otherwise permit manipulators to continue to access U.S. markets during the course of an enforcement proceeding.\116\ Accordingly, the OIAD submitted its recommendation to the Commission that the Commission approve the proposal.\117\ --------------------------------------------------------------------------- \111\ See supra, note 9. \112\ See OIAD Recommendation, supra note 9, at 3. \113\ Id. at 4. \114\ Id. at 5. \115\ Id. at 6. \116\ Id. at 5-6. In its letter addressing the current proposal, the Exchange explains that the OIAD ``correctly notes that the proposed expedited suspension process is intended to be used sparingly as a deterrent force--supplementing rather than replacing the current enforcement process.'' See BATS Response Letter II, supra note 8, at 7. \117\ See OIAD Recommendation, supra note 9, at 3. --------------------------------------------------------------------------- IV. Discussion and Commission Findings After careful review, 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.\118\ In particular, the Commission finds that the proposed rule change is consistent with the requirements of: (1) Section 6(b)(1) of the Act,\119\ which requires, among other things, that the Exchange be so organized and have the capacity to enforce compliance by its members and persons associated with its members with the Act, the rules thereunder, and the Exchange's rules; (2) Section 6(b)(5) of the Act,\120\ which requires, among other things, that the Exchange's rules 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; (3) Section 6(b)(6) of the Act,\121\ which requires, among other things, that the Exchange's rules provide for appropriate discipline of members or persons associated with a member for violations of the Act, the rules thereunder, or the Exchange's rules; (4) Section 6(b)(7) of the Act,\122\ which requires, among other things, that the rules of an exchange be in accordance with Section 6(d) of the Act,\123\ and in general, provide a fair procedure for the disciplining of members and persons associated with members and the prohibition or limitation by the exchange of any person with respect to access to services offered by the exchange or a member thereof; and (5) Sections 6(d)(1) and 6(d)(2) of the Act,\124\ which require, among other things, that in any Exchange proceeding to determine whether a member or person associated with a member should be disciplined or whether a person should be prohibited or limited with respect to access to services offered by the exchange or a member thereof, the Exchange must provide notice of, and an opportunity to be heard upon, the specific grounds for the sanction under consideration, keep a record, and provide a statement setting forth the specific grounds upon which a determination to impose any such sanction is based. --------------------------------------------------------------------------- \118\ In approving this proposed rule change, the Commission has considered the proposed rule's impact on efficiency, competition, and capital formation. See 15 U.S.C. 78c(f). \119\ 15 U.S.C. 78f(b)(1). \120\ 15 U.S.C. 78f(b)(5). \121\ 15 U.S.C. 78f(b)(6). \122\ 15 U.S.C. 78f(b)(7). \123\ 15 U.S.C. 78f(d). \124\ 15 U.S.C. 78f(d)(1), (d)(2). --------------------------------------------------------------------------- The Commission notes that the Exchange believes that the proposal meets the requirements of Sections 6(b)(1), 6(b)(5), and 6(b)(6) of the Act because it will provide the Exchange with a mechanism to promptly initiate proceedings in the event that the Exchange believes it has sufficient proof that a violation of proposed Rule 12.15 is occurring, and also because it will help to strengthen the Exchange's ability to carry out its oversight and enforcement responsibilities as a self- regulatory organization in cases where awaiting the conclusion of a full disciplinary hearing is unsuitable in view of the potential harm to other members, their customers, and/or the Exchange that may occur if the violative conduct is allowed to continue.\125\ The Exchange notes that it has defined the prohibited disruptive quoting and trading activities by modifying the traditional definitions of layering and spoofing to eliminate an express intent element.\126\ The Exchange states that it believes it is necessary for the protection of investors to make such modifications to those traditional definitions in order to adopt an expedited process rather than allowing disruptive quoting and trading activities to continue to occur for a potentially extended period of time.\127\ The Exchange also states that it does not intend for this proposal to modify the definitions of layering and spoofing that have generally been used by the Exchange and other regulators in connection with prior disciplinary and enforcement cases.\128\ --------------------------------------------------------------------------- \125\ See Notice, supra note 5, at 73251. \126\ Id. \127\ Id. \128\ Id. --------------------------------------------------------------------------- The Commission further notes that the Exchange already has the authority pursuant to its existing rules to prohibit and take action against manipulative trading activity, including the disruptive quoting and trading activities [[Page 9024]] enumerated under proposed Rule 12.15.\129\ Violations of these rules, however, are pursued according to the Exchange's existing disciplinary and enforcement processes which, as the Exchange describes, can take several years to conclude, during which time the manipulative or disruptive quoting or trading activity may continue to the detriment of investors and other market participants.\130\ The Commission acknowledges that good reason exists in many cases for these lengthy processes, not the least of which is ensuring that adequate due process is provided. However, if an offending Member refuses to cease disruptive quoting and trading activity that is enumerated in Rule 12.15 after the Exchange detects such activity and notifies the Member of the alleged misconduct, the Commission also believes that it would be consistent with the Act for the Exchange to have the authority to seek to stop that disruptive quoting and trading activity through the proposed expedited client suspension proceeding. The Commission believes that the disciplinary procedures proposed herein are reasonably designed to occur on an expedited basis in order stop two specific types of ongoing disruptive quoting and trading activities that the Exchange believes could result in significant harm to investors if allowed to continue. Accordingly, the Commission believes that the proposal is reasonably designed to further the purposes of Sections 6(b)(1), 6(b)(5), and 6(b)(6) of the Act by enhancing the Exchange's ability to prevent fraudulent and manipulative acts and practices, promote just and equitable principles of trade, protect investors and the public interest, enforce compliance by its members and persons associated with its members with the relevant rules and law, and appropriately discipline its members for violations of the rules of the Exchange. --------------------------------------------------------------------------- \129\ See, e.g., Rules 3.1, 3.2, and 3.3. See also Notice, supra note 5, at 73250-51. \130\ See Notice, supra note 5, at 73248. --------------------------------------------------------------------------- In addition, the Commission notes that the Exchange represents that it ``will only seek an expedited suspension when--after multiple requests to a Member for an explanation of [a pattern of potentially disruptive quoting and trading] activity--it continues to see the same pattern of manipulation from the same Member and the source of the activity is the same or has been previously identified as a frequent source of disruptive quoting and trading activity.'' \131\ As such, the Commission believes that the disciplinary measures available to the Exchange under the proposal to stop the offending trading behavior from continuing on the Exchange--i.e., an order suspending the offending Member unless the applicable action is taken or refrained from--are consistent with Section 6(b)(6) of the Act. --------------------------------------------------------------------------- \131\ See BATS Response Letter II, supra note 8, at 6. --------------------------------------------------------------------------- The Commission recognizes one commenter's concern that the definitions of the prohibited quoting and trading activities set forth in proposed Rule 12.15 could be viewed by some to be too narrow, such that certain other disruptive or manipulative trading activities might not fall within those definitions.\132\ The Commission notes that, in making revisions to its original proposal in BATS-2015-57, the Exchange has purposely chosen to prohibit, under proposed Rule 12.15, two types of trading activities that follow very specific fact patterns, which the Exchange believes constitute clear and egregious disruptive quoting and trading activity. The Commission also notes that, according the Exchange, this proposal is not meant to define all possible permutations of layering and spoofing.\133\ Rather, the Exchange asserts that the proposal is meant to provide the Exchange with an expedited disciplinary proceeding, to be used under limited circumstances, as a complement to its current, lengthier disciplinary process.\134\ Accordingly, the Exchange has purposely chosen not to subject other types of disruptive or manipulative quoting or trading activities to the prohibitions of proposed Rule 12.15 or, therefore, the expedited disciplinary procedure under proposed Rule 8.17. That the Exchange has purposely proposed to apply these rules to some, but not all, types of disruptive quoting and trading activities does not render the proposed rules inconsistent with the Act. The Exchange may exercise its judgment as to the proper scope of its rules, so long as the rules comply with the relevant statutory requirements under the Act and the rules thereunder. In this instance, the Commission believes that it is consistent with the Act for the Exchange to limit the application of the Expedited Client Suspension Proceeding to a specific set of disruptive quoting and trading activities rather than to have the proposal encompass all types of disruptive or manipulative activities, which are still subject to the Exchange's standard disciplinary process. --------------------------------------------------------------------------- \132\ See Leuchtkafer Letters I, II, and III, supra note 8. \133\ See BATS Response Letter II, supra note 8, at 9 n.9. \134\ See supra, notes 87-92 and accompanying text. --------------------------------------------------------------------------- Furthermore, given the significant authority provided to the Exchange under proposed Rule 8.17 for pursuing alleged violations of proposed Rule 12.15, the Commission believes that it is appropriate and consistent with the Act for proposed Rule 12.15 to be narrowly tailored so as to only encompass certain specific types of disruptive quoting and trading activities. Moreover, as noted by the OIAD, ``[e]ven if limited to a small number of cases, such disruptive quoting and trading behavior can cause significant harm to investors and the markets.'' \135\ The Commission believes that, by prohibiting specific types of disruptive quoting and trading activities and providing an expeditious process for ceasing such activities, proposed Rules 12.15 and 8.17, respectively, are reasonably designed to protect investors and the public interest from the potential harm associated with such activities. Therefore, the Commission believes that the proposed rules are consistent with the requirements under Section 6(b)(5) that the Exchange's rules be designed to prevent fraudulent and manipulative acts and practices, promote just and equitable principles of trade, and protect investors and the public interest. In addition, the Commission again notes that any quoting or trading activity that does not fall within the express prohibitions of proposed Rule 12.15--but that is disruptive or manipulative--may be subject to existing disciplinary and enforcement measures if the activity constitutes a violation of one or more of the Exchange's current rules and/or the Act and the rules thereunder. --------------------------------------------------------------------------- \135\ See OIAD Recommendation, supra note 9, at 4. --------------------------------------------------------------------------- The Commission recognizes another concern of certain commenters that the proposed definitions of the prohibited disruptive quoting and trading activities may be too broad, such that they may encompass legitimate quoting or trading activity, such as market making. The Commission emphasizes the importance of the Exchange's acknowledgement that the authority conferred by proposed Rules 8.17 and 12.15 is a powerful measure that should be used very cautiously.\136\ In addition, the Commission believes that the proposal incorporates procedural components that are reasonably designed to mitigate the potential for overreach of this authority into legitimate quoting or trading activity. For example, proposed Rule 8.17 would require the CRO or another senior officer of the Exchange to [[Page 9025]] issue written authorization before the Exchange can institute an Expedited Client Suspension Proceeding. Additionally, the Commission believes that the opportunity to respond before a hearing panel, and the associated due process elements for initiating and conducting the expedited proceeding under proposed Rule 8.17, provide additional safeguards. Moreover, the Commission notes that a determination of the Hearing Panel constituting final disciplinary sanction may be appealed to the Commission pursuant to Section 19 of the Act.\137\ The Commission also notes that the OIAD believes that the proposal ``appears to be appropriately tailored to minimize the possibility that it would curtail legitimate trading activities by market makers and other liquidity providers'' and ``appears to provide appropriate safeguards for innocent parties.'' \138\ --------------------------------------------------------------------------- \136\ See Notice, supra note 5, at 73251. \137\ 15 U.S.C. 78s. See also proposed Rule 8.17(f). \138\ See OIAD Recommendation, supra note 9, at 6. --------------------------------------------------------------------------- Lastly, the Commission notes that the Exchange believes that the requirements of Sections 6(b)(7), 6(d)(1), and 6(d)(2) of the Act are addressed by the notice and due process provisions included within proposed Rule 8.17.\139\ Proposed Rule 8.17 would require the Exchange to serve notice on the subject Respondent, which notice would include the suspension order the Exchange seeks to impose on the Respondent. The notice would also be accompanied by a declaration of facts that specifies the acts that constitute the alleged violation. Proposed Rule 8.17 also would provide an opportunity for the Respondent to defend against the charges in the notice in a hearing before a three-person Hearing Panel,\140\ with the opportunity for witnesses and with a transcribed record, and would detail the applicable timelines for the proceeding. Further, proposed Rule 8.17 would require the Hearing Panel to issue a written decision stating whether a suspension order shall be imposed; if imposed, proposed Rule 8.17 would require the suspension order to set forth the alleged violation and market disruption or significant harm to investors that is likely to result without the order, and to describe in reasonable detail what action the Respondent is required to take or refrain from taking. In addition, proposed Rule 8.17 would allow the Respondent to appeal to the Hearing Panel to have a suspension order modified, set aside, limited, or revoked. Accordingly, the Commission believes that proposed Rule 8.17 is consistent with Sections 6(b)(7), 6(d)(1), and 6(d)(2) of the Act.\141\ --------------------------------------------------------------------------- \139\ See Notice, supra note 5, at 73251. \140\ The Commission notes that the Hearing Panel would be assigned according to current Rule 8.6(a), which requires that one member of the panel be a professional hearing officer, another be an industry representative, and the third be a Member representative. \141\ 15 U.S.C. 78f(b)(7), (d)(1), and (d)(2). --------------------------------------------------------------------------- V. Conclusion It is therefore ordered, pursuant to Section 19(b)(2) of the Act,\142\ that the proposed rule change (SR-BATS-2015-101), as modified by Amendment No. 1, be, and it hereby is, approved. --------------------------------------------------------------------------- \142\ 15 U.S.C. 78s(b)(2). For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.\143\ --------------------------------------------------------------------------- \143\ 17 CFR 200.30-3(a)(12). --------------------------------------------------------------------------- Robert W. Errett, Deputy Secretary. [FR Doc. 2016-03740 Filed 2-22-16; 8:45 am] BILLING CODE 8011-01-P
![Federal Register / Vol. 81, No. 35 / Tuesday, February 23, 2016 / Notices 9017
SECURITIES AND EXCHANGE to the comments from the Exchange.8 Regulatory Authority (‘‘FINRA’’)
COMMISSION The Commission also received a pursuant to a Regulatory Services
recommendation regarding the proposed Agreement.10 According to the
[Release No. 34–77171; File No. SR–BATS–
2015–101]
rule change from the Office of the Exchange, under this regulatory
Investor Advocate (‘‘OIAD’’).9 This program, it can often take several years
Self-Regulatory Organizations; BATS order approves the proposed rule to resolve cases involving disruptive
Exchange, Inc.; Order Granting change, as modified by Amendment No. and potentially manipulative or
Approval of a Proposed Rule Change, 1. improper quoting and trading activity
as Modified by Amendment No. 1 II. Description of the Proposed Rule even though, in some cases, the
Thereto, To Adopt Rule 8.17 To Change improper activity is able to be identified
Provide a Process for an Expedited in real-time or near real-time.11 As a
Suspension Proceeding and Rule 12.15 The Exchange states that, in order to result, the Exchange states that
To Prohibit Disruptive Quoting and fulfill certain of its responsibilities as a Exchange members (‘‘Members’’)
Trading Activity registered national securities exchange responsible for such conduct, or
and self-regulatory organization, it has responsible for their customers’
February 18, 2016. developed a comprehensive regulatory conduct, are allowed to continue the
I. Introduction program that includes automated disruptive quoting and trading activity
surveillance of trading activity that is on the Exchange and other exchanges
On November 6, 2015, BATS operated directly by Exchange staff and during the entirety of such lengthy
Exchange, Inc. (‘‘BATS’’ or the by staff of the Financial Industry investigations and enforcement
‘‘Exchange’’) filed with the Securities
processes.12 In the Notice, the Exchange
and Exchange Commission 8 See letters from: R.T. Leuchtkafer to Brent J.
provides examples of recent cases in
(‘‘Commission’’), pursuant to Section Fields, Secretary, Commission, dated December, 14,
19(b)(1) of the Securities Exchange Act 2015 (‘‘Leuchtkafer Letter II’’); Samuel F. Lek, Chief which this has occurred.13
of 1934 (‘‘Act’’) 1 and Rule 19b–4 Executive Officer, Lek Securities Corporation, dated The Exchange believes that a lengthy
thereunder,2 a proposed rule change to
December 28, 2015 (‘‘Lek Letter III’’); G.T. investigation and enforcement process
Spaulding to Brent J. Fields, Secretary, is generally necessary and appropriate
adopt new BATS Rule (‘‘Rule’’) 12.15, Commission, dated December, 28, 2015 (‘‘Spaulding
which would prohibit certain disruptive Letter’’); R.T. Leuchtkafer to Brent J. Fields, to afford the subject Member adequate
quoting and trading activities on the Secretary, Commission, dated February 2, 2016 due process.14 However, it also believes
Exchange, and new Rule 8.17, which
(‘‘Leuchtkafer Letter III’’); and response letter ‘‘that there are certain obvious and
regarding SR–BATS–2015–101 from Anders uncomplicated cases of disruptive and
would permit BATS to conduct a new Franzon, SVP Associate General Counsel, BATS, to
Expedited Client Suspension Brent J. Fields, Secretary, Commission, dated manipulative behavior or cases where
Proceeding when it believes proposed January 21, 2016 (‘‘BATS Response Letter II’’). In the potential harm to investors is so
Rule 12.15 has been violated.3 On addition, the Commission received comments large that the Exchange should have the
regarding the prior filing, SR–BATS–2015–57, authority to initiate an expedited
November 17, 2015, the Exchange filed which this proposal revises and replaces. See
Amendment No. 1 to the proposal.4 The comment letters regarding SR–BATS–2015–57 from: suspension proceeding in order to stop
proposed rule change, as modified by Teresa Machado B., dated August 19, 2015 the behavior from continuing on the
Amendment No. 1, was published for (‘‘Machado Letter’’); Samuel F. Lek, Chief Executive Exchange.’’ 15 The Exchange further
Officer, Lek Securities Corporation, dated states that it should have such authority
comment in the Federal Register on September 3, 2015 (‘‘Lek Letter I’’); R.T. Leuchtkafer
November 24, 2015.5 On January 6, to Brent J. Fields, Secretary, Commission, dated if a Member is engaging in or facilitating
2016, pursuant to Section 19(b)(2) of the September, 4, 2015 (‘‘Leuchtkafer Letter I’’); Mary disrupting quoting and trading activity,
Act,6 the Commission designated a Ann Burns, Chief Operating Officer, FIA Principal and the Member has received sufficient
Traders Group, to Brent J. Fields, Secretary, notice with an opportunity to respond,
longer period within which to approve Commission, dated September, 9, 2015 (‘‘FIA
the proposed rule change, disapprove Letter’’); and Samuel F. Lek, Chief Executive but such activity has not ceased.16
the proposed rule change, or institute Officer, Lek Securities Corporation, dated The Exchange therefore has proposed
proceedings to determine whether to September 18, 2015 (‘‘Lek Letter II’’). The Exchange to adopt new Rule 12.15, which would
submitted a response to these comments in expressly prohibit two specific types of
disapprove the proposed rule change.7 conjunction with its withdrawal of SR–BATS–
The Commission received four comment 2015–57 and filing of this proposal. See response disruptive quoting and trading
letters on the proposal and a response letter regarding SR–BATS–2015–57 from Anders activities, and new Rule 8.17, which
Franzon, VP and Associate General Counsel, BATS, would permit the Exchange to conduct
1 15
to Brent J. Fields, Secretary, Commission, dated an Expedited Client Suspension
U.S.C. 78s(b)(1).
November 6, 2015 (‘‘BATS Response Letter I’’). The
2 17 CFR 240.19b–4. comments pertaining to the current proposal, the Proceeding when it believes new Rule
3 As discussed in Section II, this proposed rule
comments pertaining to SR–BATS–2015–57, and 12.15 has been violated.17
change is a revised version of a prior filing, BATS– the Exchange’s responses to the comments are all
2015–57, which the Exchange withdrew on summarized below. 10 See Notice, supra note 5, at 73247–48.
November 6, 2015. See Securities Exchange Act 9 See Memorandum to the Commission from Rick 11 Id.
Release No. 76393 (November 9, 2015), 80 FR 70851 at 73248.
A. Fleming, Office of the Investor Advocate, 12 Id.
(November 16, 2015) (BATS–2015–57) (notice of Commission, dated December 15, 2015 (‘‘OIAD 13 Id. The Exchange notes that these cases
withdrawal of BATS–2015–57). BATS filed BATS– Recommendation’’). As discussed in more detail
2015–101 in order to address certain issues raised involved allegations of wide-spread market
below, the Commission has carefully considered the
by comments submitted with respect to BATS– manipulation, and in each case, the conduct
OIAD Recommendation. The OIAD was established
2015–57. involved a pattern of disruptive quoting and trading
pursuant to Section 915 of the Dodd Frank Wall
4 Amendment No. 1 amended and replaced the activity indicative of manipulative layering or
Street Reform and Consumer Protection Act, Public
original proposal in its entirety. spoofing. Id.
Law 111–203, sec. 911, 124 Stat. 1376, 1822 (July
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5 See Securities Exchange Act Release No. 76470 14 Id.
21, 2010) (the ‘‘Dodd-Frank Act’’). The Dodd-Frank
(November 18, 2015), 80 FR 73247 (‘‘Notice’’). Act authorizes the Investor Advocate, among other
15 Id.
6 15 U.S.C. 78s(b)(2). 16 Id.
things, to identify areas in which investors would
7 See Securities Exchange Act Release No. 76841, benefit from changes in the regulations of the 17 The Exchange notes that it currently has
81 FR 1457 (January 12, 2016). The Commission Commission or the rules of self-regulatory authority to prohibit and take action against
designated February 22, 2016 as the date by which organizations and to propose to the Commission manipulative trading activity, including disruptive
it should approve, disapprove, or institute changes in the regulations or orders of the quoting and trading activity, pursuant to its general
proceedings to determine whether to disapprove the Commission that may be appropriate to promote the market manipulation rules, including Rule 3.1. Id.
proposed rule change. interests of investors. at 73250.
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![Federal Register / Vol. 81, No. 35 / Tuesday, February 23, 2016 / Notices 9021
expressed concern that other exchanges participants from the harm caused by a the statements in its comment response
might copy BATS’s definitions of [Member’s] refusal to cease obvious letter for BATS–2015–57 addressing the
spoofing and layering.65 disruptive market practices,’’ the commenter’s criticisms of BATS–2015–
In response to the above critiques of Exchange modified the defined terms in 57 that are duplicative of the
the proposed definitions of ‘‘spoofing’’ proposed Rule 12.15 under the current commenter’s criticism of the current
and ‘‘layering’’ in BATS–2015–57, the proposal to replace the defined terms proposal.81 The Exchange also states
Exchange stated in its response letter for ‘‘layering’’ and ‘‘spoofing’’ with the that the trading activity it seeks to
BATS–2015–57 that it agrees that the terms ‘‘Disruptive Quoting and Trading curtail under the proposal is ‘‘not
harmful practices of spoofing and Activity Type 1’’ and ‘‘Disruptive acceptable ‘competitive’ conduct’’ and
layering are defined by an intent Quoting and Trading Activity Type 2,’’ that there is no risk that the proposed
element.66 According to the Exchange, respectively.73 The Exchange stated its Expedited Client Suspension
the prior proposal’s definitions of the belief that this terminology change Proceeding ‘‘could be used to prohibit
prohibited ‘‘layering’’ and ‘‘spoofing’’ advances its objective of protecting an isolated series of coincidental
activity under proposed Rule 12.15 were market participants from harmful and transactions,’’ as asserted by the
intended to include an intent element manipulative trading behavior, and also commenter.82
by requiring a ‘‘frequent pattern’’ of alleviates commenters’ concerns Additionally, one of the commenters
such activity.67 The Exchange stated regarding the prior definitions of critical of the proposed definitions of
that a ‘‘frequent pattern’’ of such activity ‘‘layering’’ and ‘‘spoofing’’ 74 According ‘‘layering’’ and ‘‘spoofing’’ under
evidences manipulative intent,68 and to the Exchange, the terminology change BATS–2015–57 submitted a comment
offered the observation that such a also highlights that proposed Rule 8.17 letter to BATS–2015–101 that reprises
‘‘frequent pattern’’ is typically the key is ‘‘designed to halt a very specific, much of the same criticism set forth in
factor indicating intent in spoofing and readily identifiable type of illegal the commenter’s letter in opposition to
layering cases.69 The Exchange also trading activity rather than an attempt to BATS–2015–57 and again centers on the
acknowledged the concern that the define and punish layering and spoofing Exchange’s descriptions and definitions
proposed ‘‘layering’’ and ‘‘spoofing’’ in every conceivable context.’’ 75 of the prohibited trading activities in
definitions in the prior proposal could The commenter who opposed the proposed Rule 12.15.83 The commenter
be read to exclude other spoofing and prior proposed rule change in BATS– argues that the Exchange should not
layering practices.70 The Exchange 2015–57 submitted a comment letter on define the prohibited activity in
stated that it did not intend to provide the current proposal, again in ‘‘narrow, prescriptive terms’’ and that
universal definitions of layering and opposition.76 In this comment letter, the the proposed definitions of the violative
spoofing activity, but rather to identify commenter repeats many of the same activity are inconsistent with the
and prohibit ‘‘certain patterns and criticisms set forth in the commenter’s ‘‘principles-based’’ definitions of what
practices that are hallmarks of the most first letter submitted in opposition to the commenter characterizes as ‘‘[a]ll
egregious spoofing and/or layering BATS–2015–57,77 asserting that ‘‘the other definitions of spoofing that [the
conduct.’’ 71 currently proposed rule has all the flaws
Nevertheless, the Exchange commenter] could find that regulators
of the original proposal.’’ 78 The (including BATS) have set down over
recognized commenters’ concerns that commenter also repeats its criticism
certain non-spoofing or non-layering the years.’’ 84 The commenter reiterates
from its second comment letter to its view that the Exchange should
trading activity could fall within the BATS–2015–57 that the proposed rule
previously proposed definitions of include principle-based language in its
change is intended to eliminate proposed rule and suggests specific rule
‘‘layering’’ and ‘‘spoofing’’ while, at the competition for high-frequency traders
same time, certain manipulative language in this regard, which includes
(‘‘HFTs’’)—whom the commenter claims an intent element,85 and expresses
layering or spoofing activity could fall ‘‘control’’ the Exchange—at the expense
outside those proposed definitions.72 renewed concern that BATS’s ‘‘deeply
of institutional investors by eliminating flawed and superficial proposal could
The Exchange stated that, because the trading strategies that add risk to front-
purpose of BATS–2015–57 was ‘‘not to quickly become the surveillance and
running strategies of HFTs.79 The enforcement spoofing standard for the
provide a precise definition of layering commenter claims that the Exchange is
and spoofing, but to protect market equity markets.’’ 86
advocating ‘‘the ability for HFTs to In response to this comment letter, the
detect institutional buying interest and Exchange explains that ‘‘[d]efining
contribute to market complexity. Id. at 3–5. The
commenter also questioned how such market
to be able to front-run institutional layering and spoofing in all of its
making activity can be distinguished from spoofing orders risk free.’’ 80 In its comment possible permutations is not the
in certain contexts. Id. at 4–6. The commenter response letter for the current proposal,
further questioned why BATS has proposed to the Exchange incorporates, by reference,
expedite action in cases of spoofing or layering but 81 See BATS Response Letter II, supra note 8, at
not in cases of other types of manipulative trading, 10.
73 Id.
like marking the close or wash trading. Id. at 1. 82 Id. (responding to Lek Letter III).
65 Id. at 1; see also id. at 6. 74 Id.
83 Compare Leuchtkafer Letter II, supra note 8,
66 See BATS Response Letter I, supra note 8, at 75 Id. at 7–8. with Leuchtkafer Letter I, supra note 8.
6. 76 See Lek Letter III, supra note 8. 84 See Leuchtkafer Letter II, supra note 8, at 1–
67 Id. 77 Compare Lek Letter I, supra note 8, with Lek
2.
68 Id. Letter III, supra note 8. 85 Id. at 8.
69 Id. at 6 n.12. 78 See Lek Letter III, supra note 8, at 1. 86 Id. at 3. The commenter also renews its critique
70 Id. at 7. 79 Id. at 1–2. Compare Lek Letter II supra note 8,
of certain market making practices that the
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71 Id. The Exchange also argued, in response to with Lek Letter III, supra note 8. commenter attributes to HFTs, and again suggests
one commenter’s assertions that elements of the 80 See Lek Letter III, supra note 8, at 2. The that these practices are anti-competitive and
proposed definitions violated the Act, that since commenter states that HFTs ‘‘seek to buy stock contribute to market complexity, and questions how
spoofing and layering are fraudulent and ahead of the institution, bid up the price, and re- such market making activity can be distinguished
manipulative practices prohibited by the Act, the sell the stock back to the institution at a higher from spoofing in certain contexts. Id. at 3–8. In
previously proposed rules prohibiting those level’’ and argues that HFTs ‘‘therefore seek addition, the commenter asserts that it is unaware
practices comport with Section 6(b)(5) of the Act regulatory protections and advocate rules that of any spoofing or layering case in which the
and advance the Act’s purposes. Id. at 11. would eliminate trading strategies that add such Exchange independently discovered the violative
72 Id. at 7. risk to their front running strategies.’’ Id. conduct at issue. Id. at 1–2.
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![9022 Federal Register / Vol. 81, No. 35 / Tuesday, February 23, 2016 / Notices
purpose of this filing.’’ 87 Rather, the The commenter cites to the Exchange’s the Exchange judges to have been
Exchange states that the filing is meant statement in the Exchange’s response involved in layering or spoofing, and
to ‘‘supplement existing prohibitions letter that the commenter ‘‘advocates that such affected clients would be
against layering and spoofing with an that the Exchange must adopt denied due process as they are not
expedited objective prohibition that will ‘principle-based’ language instead of the entitled to be heard as part of the
stop harmful manipulative activity Exchange’s current proposal.’’ 94 Rather, Expedited Client Suspension
while the Exchange conducts necessary according to the commenter, its position Proceeding.100 In response to this
extensive and time-consuming is that the Commission should require argument, in its first response letter, the
investigations and enforcement.’’ 88 The the Exchange ‘‘to also include in its Exchange stated that its rules
Exchange reiterates that principles- rulebook a clearly articulated principle ‘‘unquestionably confer jurisdiction to
based prohibitions of layering and rather than only a prescriptive checklist, the Exchange to discipline its Members
spoofing already exist and explains, particularly when so far as [the for a Member’s client’s violations of the
however, that investigations of commenter] can tell [the Exchange] Act and the Exchange’s Rules,’’ 101 and
‘‘principles-based’’ rules violations hasn’t yet independently detected the the Exchange referenced Rule 8.1 in this
involving suspected layering and proscribed behavior on its markets and regard.102 The Exchange further stated
spoofing conduct are lengthy due to the hasn’t documented any current that ‘‘jurisdiction over a Member for a
fact that enforcement of those violations enforcement proceedings its proposal client’s actions is not only permissible—
requires proof of subjective fraudulent could expedite in the future.’’ 95 In it is essential for the effective regulation
intent of the actor, which the Exchange addition, this commenter asserts that of the Exchange.’’ 103 The Exchange also
states is ‘‘usually very difficult to prove the Exchange misinterpreted its point asserted that, because a Member has
and requires a thorough and lengthy regarding past cases of improper quoting ultimate responsibility for its clients’
investigation and enforcement and trading activity that the Exchange actions and because proposed Rule 8.17
process.’’ 89 The Exchange asserts that, cites as support for the proposal; the imposes discipline on a Member—not
during the course of such an commenter asserts that its point is that its client—for the client’s violations, it
investigation, it does not currently have those are not cases in which the is sufficient if due process is afforded to
the ability to stop obvious and flagrant Exchange independently discovered the the Member.104 The Exchange noted,
manipulative trading.90 The Exchange violative layering or spoofing conduct at however, that nothing in the proposal
states that if the current proposal is issue.96 prevents a Member’s client from
ultimately approved and implemented, participating in an expedited
Expedited Suspension Proceedings
the Exchange will continue conducting suspension hearing and, in fact, the
Under Proposed Rule 8.17
its current enforcement process, and Exchange stated that it would welcome
represents that it would only seek an One commenter that was supportive such participation at the hearing.105
expedited suspension when—after of BATS–2015–57 believed that the The same commenter also argued that
multiple requests to a Member for an Exchange’s proposed investigation, the proposed expedited proceeding set
explanation of activity—it continues to notice, and hearing processes described forth in BATS–2015–57 was not a fair
see the same pattern of manipulation in connection with proposed Rule 8.17 disciplinary process under the Act
from the same Member and the source under BATS–2015–57 were because it did not provide adequate
of the activity is the same or has been reasonable.97 This commenter also time for discovery.106 In response to this
previously identified as a frequent suggested that the Exchange could point, the Exchange contended that the
source of disruptive quoting and trading amend proposed Rule 8.17 to require a proposed expedited client suspension
activity.91 Therefore, according to the lower burden of proof in Expedited hearing is governed by and consistent
Exchange, principles-based enforcement Client Suspension Proceedings, which with Section 6(d)(2) of the Act and,
and the proposed rule change are the commenter asserted would still therefore, provides the due process
complementary in practice, not allow the Exchange to institute a required by the Act.107 In addition, the
mutually exclusive.92 process to quickly put a stop to the Exchange noted that it intends to
In response to the Exchange’s letter, manipulative behavior targeted by the initiate such a proceeding only after an
the commenter submitted an additional proposal ‘‘without drastically expanding initial investigation into the allegedly
comment, in which the commenter the Exchange’s definition of prohibited improper trading activity, including
states that the Exchange misread certain layering and spoofing to include contacting the responsible member to
its criticisms of the current proposal.93 completely unintentional conduct.’’ 98 request an explanation for the activity
Another commenter criticized the and any relevant additional
87 See BATS Response Letter II, supra note 8, at procedural components of the proposed information.108 Further, the Exchange
9 n.9. rules as set forth in BATS–2015–57.99 noted that discovery would continue
88 Id.
The commenter argued that the after the entry of a suspension order,
89 Id. at 8–9.
Exchange has no jurisdiction to compel and that, under proposed Rule 8.17, a
90 Id. at 8.
Members to deny access to clients that Member subject to a suspension order
91 Id. at 6, 8–9. The Exchange explains that,
currently, when Exchange surveillance staff 100 See
identifies a pattern of potentially disruptive quoting
94 See Leuchtkafer Letter III, supra note 8, at 2 Lek Letter I, supra note 8, at 6.
and trading activity, the staff conducts an initial (emphasis in original). 101 See BATS Response Letter I, supra note 8, at
analysis and investigation of that activity. Id. After
95 Id. (emphasis in original). 8–9.
96 Id. at 1. 102 Id. at 9. See also Rule 8.1 (setting forth the
the initial investigation, the Exchange then contacts
the Member responsible for the orders that caused 97 See FIA Letter, supra note 8, at 2. Exchange’s disciplinary jurisdiction).
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103 See BATS Response Letter I, supra note 8, at
the activity to request an explanation of the activity 98 Id. at 4.
as well as any additional relevant information, 99 See Lek Letter I, supra note 8, at 6–7. This 9.
104 Id.
including the source of the activity. Id. The commenter also submitted a comment letter on the
Exchange represents that it will continue this current proposal that repeats these criticisms, to
105 Id.
practice if the Commission approves the proposal. which the Exchange responded by incorporating by 106 See Lek Letter I, supra note 8, at 6.
Id. reference the statements in its comment response 107 See BATS Response Letter I, supra note 8, at
92 Id. at 9. 10.
letter for BATS–2015–57. See Lek Letter III, supra
93 See Leuchtkafer Letter III, supra note 8, at 2. note 8, at 7–8; BATS Response Letter II, supra note 108 Id. See also BATS Response Letter II, supra
See also Leuchtkafer Letter II, supra note 8. 8, at 10. note 8, at 6.
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![Federal Register / Vol. 81, No. 35 / Tuesday, February 23, 2016 / Notices 9023
that discovers information that it access U.S. markets during the course of 6(d)(2) of the Act,124 which require,
believes to be exculpatory may apply at an enforcement proceeding.116 among other things, that in any
any time to the Hearing Panel to have Accordingly, the OIAD submitted its Exchange proceeding to determine
the suspension order modified, set recommendation to the Commission whether a member or person associated
aside, limited, or revoked.109 According that the Commission approve the with a member should be disciplined or
to the Exchange, ‘‘[p]roposed Rule 8.17 proposal.117 whether a person should be prohibited
merely places the burden on the Subject or limited with respect to access to
IV. Discussion and Commission
Member to show that it has halted its services offered by the exchange or a
Findings
harmful practice or its client’s harmful member thereof, the Exchange must
practice before being permitted to After careful review, the Commission provide notice of, and an opportunity to
resume activity on the Exchange rather finds that the proposed rule change is be heard upon, the specific grounds for
than requiring the market to bear the consistent with the requirements of the the sanction under consideration, keep
harm of manipulative conduct during Act and the rules and regulations a record, and provide a statement setting
the time-consuming discovery thereunder applicable to a national forth the specific grounds upon which
process.’’ 110 securities exchange.118 In particular, the a determination to impose any such
Commission finds that the proposed sanction is based.
Recommendation of the OIAD rule change is consistent with the The Commission notes that the
As noted above, the OIAD submitted requirements of: (1) Section 6(b)(1) of Exchange believes that the proposal
to the public comment file its the Act,119 which requires, among other meets the requirements of Sections
recommendation to the Commission things, that the Exchange be so 6(b)(1), 6(b)(5), and 6(b)(6) of the Act
that the Commission approve this organized and have the capacity to because it will provide the Exchange
proposal.111 In its recommendation, the enforce compliance by its members and with a mechanism to promptly initiate
OIAD states that it supports ‘‘the persons associated with its members proceedings in the event that the
Exchange’s efforts to promptly initiate with the Act, the rules thereunder, and Exchange believes it has sufficient proof
and quickly resolve obvious and the Exchange’s rules; (2) Section 6(b)(5) that a violation of proposed Rule 12.15
uncomplicated matters the Exchange of the Act,120 which requires, among is occurring, and also because it will
believes involve disruptive and other things, that the Exchange’s rules help to strengthen the Exchange’s ability
manipulative trading activity.’’ 112 The be designed to prevent fraudulent and to carry out its oversight and
OIAD believes that ‘‘[e]ven if limited to manipulative acts and practices, to enforcement responsibilities as a self-
a small number of cases, such disruptive promote just and equitable principles of regulatory organization in cases where
quoting and trading behavior can cause trade, to remove impediments to and awaiting the conclusion of a full
significant harm to investors and the perfect the mechanism of a free and disciplinary hearing is unsuitable in
markets’’ and ‘‘erode the public’s open market and a national market view of the potential harm to other
confidence in fair and orderly system, and, in general, to protect members, their customers, and/or the
markets.’’ 113 The OIAD further believes investors and the public interest; (3) Exchange that may occur if the violative
that a disciplinary proceeding against a Section 6(b)(6) of the Act,121 which conduct is allowed to continue.125 The
U.S.-based broker dealer that permits a requires, among other things, that the Exchange notes that it has defined the
significant volume of manipulative Exchange’s rules provide for appropriate prohibited disruptive quoting and
trading to pass through its systems on a discipline of members or persons trading activities by modifying the
regular basis without establishing a associated with a member for violations traditional definitions of layering and
supervisory system reasonably designed of the Act, the rules thereunder, or the spoofing to eliminate an express intent
to detect and prevent this activity ‘‘must Exchange’s rules; (4) Section 6(b)(7) of element.126 The Exchange states that it
be timely.’’ 114 The OIAD states that this the Act,122 which requires, among other believes it is necessary for the
proposal appears to be appropriately things, that the rules of an exchange be protection of investors to make such
tailored to minimize the possibility that in accordance with Section 6(d) of the modifications to those traditional
it would curtail legitimate trading Act,123 and in general, provide a fair definitions in order to adopt an
activities by market makers and other procedure for the disciplining of expedited process rather than allowing
liquidity providers, and that the members and persons associated with disruptive quoting and trading activities
proposed Expedited Client Suspension members and the prohibition or to continue to occur for a potentially
Proceeding appears to provide limitation by the exchange of any extended period of time.127 The
‘‘appropriate safeguards for innocent person with respect to access to services Exchange also states that it does not
parties,’’ such as adequate notice, an offered by the exchange or a member intend for this proposal to modify the
opportunity to be heard at a meaningful thereof; and (5) Sections 6(d)(1) and definitions of layering and spoofing that
time prior to the decision, a right to have generally been used by the
appeal the determination, and a right to 116 Id. at 5–6. In its letter addressing the current
Exchange and other regulators in
obtain Commission review.’’ 115 Further, proposal, the Exchange explains that the OIAD
‘‘correctly notes that the proposed expedited connection with prior disciplinary and
the OIAD believes that the proposed suspension process is intended to be used sparingly enforcement cases.128
process should act as a deterrent to U.S. as a deterrent force—supplementing rather than The Commission further notes that
broker-dealers that would otherwise replacing the current enforcement process.’’ See
the Exchange already has the authority
permit manipulators to continue to BATS Response Letter II, supra note 8, at 7.
117 See OIAD Recommendation, supra note 9, at pursuant to its existing rules to prohibit
3. and take action against manipulative
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109 See BATS Response Letter I, supra note 8, at 118 In approving this proposed rule change, the
10. trading activity, including the
Commission has considered the proposed rule’s
110 Id.
impact on efficiency, competition, and capital
disruptive quoting and trading activities
111 See supra, note 9. formation. See 15 U.S.C. 78c(f).
112 See 119 15 U.S.C. 78f(b)(1). 124 15 U.S.C. 78f(d)(1), (d)(2).
OIAD Recommendation, supra note 9, at
3. 120 15 U.S.C. 78f(b)(5). 125 See Notice, supra note 5, at 73251.
113 Id. at 4. 121 15 U.S.C. 78f(b)(6). 126 Id.
114 Id. at 5. 122 15 U.S.C. 78f(b)(7). 127 Id.
115 Id. at 6. 123 15 U.S.C. 78f(d). 128 Id.
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![9024 Federal Register / Vol. 81, No. 35 / Tuesday, February 23, 2016 / Notices
enumerated under proposed Rule believes that the disciplinary measures which are still subject to the Exchange’s
12.15.129 Violations of these rules, available to the Exchange under the standard disciplinary process.
however, are pursued according to the proposal to stop the offending trading Furthermore, given the significant
Exchange’s existing disciplinary and behavior from continuing on the authority provided to the Exchange
enforcement processes which, as the Exchange—i.e., an order suspending the under proposed Rule 8.17 for pursuing
Exchange describes, can take several offending Member unless the applicable alleged violations of proposed Rule
years to conclude, during which time action is taken or refrained from—are 12.15, the Commission believes that it is
the manipulative or disruptive quoting consistent with Section 6(b)(6) of the appropriate and consistent with the Act
or trading activity may continue to the Act. for proposed Rule 12.15 to be narrowly
detriment of investors and other market The Commission recognizes one tailored so as to only encompass certain
participants.130 The Commission commenter’s concern that the specific types of disruptive quoting and
acknowledges that good reason exists in definitions of the prohibited quoting trading activities. Moreover, as noted by
many cases for these lengthy processes, and trading activities set forth in the OIAD, ‘‘[e]ven if limited to a small
not the least of which is ensuring that proposed Rule 12.15 could be viewed by number of cases, such disruptive
adequate due process is provided. some to be too narrow, such that certain quoting and trading behavior can cause
However, if an offending Member other disruptive or manipulative trading significant harm to investors and the
refuses to cease disruptive quoting and activities might not fall within those markets.’’ 135 The Commission believes
trading activity that is enumerated in definitions.132 The Commission notes that, by prohibiting specific types of
Rule 12.15 after the Exchange detects that, in making revisions to its original disruptive quoting and trading activities
such activity and notifies the Member of proposal in BATS–2015–57, the and providing an expeditious process
the alleged misconduct, the Commission Exchange has purposely chosen to for ceasing such activities, proposed
also believes that it would be consistent prohibit, under proposed Rule 12.15, Rules 12.15 and 8.17, respectively, are
with the Act for the Exchange to have two types of trading activities that reasonably designed to protect investors
the authority to seek to stop that follow very specific fact patterns, which and the public interest from the
disruptive quoting and trading activity the Exchange believes constitute clear potential harm associated with such
through the proposed expedited client and egregious disruptive quoting and activities. Therefore, the Commission
suspension proceeding. The trading activity. The Commission also believes that the proposed rules are
Commission believes that the notes that, according the Exchange, this consistent with the requirements under
disciplinary procedures proposed proposal is not meant to define all Section 6(b)(5) that the Exchange’s rules
herein are reasonably designed to occur possible permutations of layering and be designed to prevent fraudulent and
on an expedited basis in order stop two spoofing.133 Rather, the Exchange manipulative acts and practices,
specific types of ongoing disruptive asserts that the proposal is meant to promote just and equitable principles of
quoting and trading activities that the provide the Exchange with an expedited trade, and protect investors and the
Exchange believes could result in disciplinary proceeding, to be used public interest. In addition, the
significant harm to investors if allowed under limited circumstances, as a Commission again notes that any
to continue. Accordingly, the complement to its current, lengthier quoting or trading activity that does not
Commission believes that the proposal disciplinary process.134 Accordingly, fall within the express prohibitions of
is reasonably designed to further the the Exchange has purposely chosen not proposed Rule 12.15—but that is
purposes of Sections 6(b)(1), 6(b)(5), and to subject other types of disruptive or disruptive or manipulative—may be
6(b)(6) of the Act by enhancing the manipulative quoting or trading subject to existing disciplinary and
Exchange’s ability to prevent fraudulent activities to the prohibitions of enforcement measures if the activity
and manipulative acts and practices, proposed Rule 12.15 or, therefore, the constitutes a violation of one or more of
promote just and equitable principles of expedited disciplinary procedure under the Exchange’s current rules and/or the
trade, protect investors and the public proposed Rule 8.17. That the Exchange Act and the rules thereunder.
interest, enforce compliance by its The Commission recognizes another
has purposely proposed to apply these
members and persons associated with concern of certain commenters that the
rules to some, but not all, types of
its members with the relevant rules and proposed definitions of the prohibited
disruptive quoting and trading activities
law, and appropriately discipline its disruptive quoting and trading activities
does not render the proposed rules
members for violations of the rules of may be too broad, such that they may
inconsistent with the Act. The Exchange
the Exchange. encompass legitimate quoting or trading
may exercise its judgment as to the
In addition, the Commission notes activity, such as market making. The
proper scope of its rules, so long as the
that the Exchange represents that it Commission emphasizes the importance
rules comply with the relevant statutory
‘‘will only seek an expedited suspension of the Exchange’s acknowledgement that
requirements under the Act and the
when—after multiple requests to a the authority conferred by proposed
rules thereunder. In this instance, the
Member for an explanation of [a pattern Rules 8.17 and 12.15 is a powerful
Commission believes that it is
of potentially disruptive quoting and measure that should be used very
consistent with the Act for the Exchange
trading] activity—it continues to see the cautiously.136 In addition, the
to limit the application of the Expedited
same pattern of manipulation from the Client Suspension Proceeding to a Commission believes that the proposal
same Member and the source of the specific set of disruptive quoting and incorporates procedural components
activity is the same or has been trading activities rather than to have the that are reasonably designed to mitigate
previously identified as a frequent proposal encompass all types of the potential for overreach of this
mstockstill on DSK4VPTVN1PROD with NOTICES
source of disruptive quoting and trading disruptive or manipulative activities, authority into legitimate quoting or
activity.’’ 131 As such, the Commission trading activity. For example, proposed
132 See Leuchtkafer Letters I, II, and III, supra note
Rule 8.17 would require the CRO or
129 See, e.g., Rules 3.1, 3.2, and 3.3. See also 8. another senior officer of the Exchange to
Notice, supra note 5, at 73250–51. 133 See BATS Response Letter II, supra note 8, at
130 See Notice, supra note 5, at 73248. 9 n.9. 135 See OIAD Recommendation, supra note 9, at
131 See BATS Response Letter II, supra note 8, at 134 See supra, notes 87–92 and accompanying 4.
6. text. 136 See Notice, supra note 5, at 73251.
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![Federal Register / Vol. 81, No. 35 / Tuesday, February 23, 2016 / Notices 9025
issue written authorization before the Panel to have a suspension order hours. The Exchange proposes to
Exchange can institute an Expedited modified, set aside, limited, or revoked. implement the fee change effective
Client Suspension Proceeding. Accordingly, the Commission believes February 4, 2016. The proposed rule
Additionally, the Commission believes that proposed Rule 8.17 is consistent change is available on the Exchange’s
that the opportunity to respond before a with Sections 6(b)(7), 6(d)(1), and Web site at www.nyse.com, at the
hearing panel, and the associated due 6(d)(2) of the Act.141 principal office of the Exchange, and at
process elements for initiating and the Commission’s Public Reference
conducting the expedited proceeding V. Conclusion
Room.
under proposed Rule 8.17, provide It is therefore ordered, pursuant to
additional safeguards. Moreover, the Section 19(b)(2) of the Act,142 that the II. Self-Regulatory Organization’s
Commission notes that a determination proposed rule change (SR–BATS–2015– Statement of the Purpose of, and
of the Hearing Panel constituting final 101), as modified by Amendment No. 1, Statutory Basis for, the Proposed Rule
disciplinary sanction may be appealed be, and it hereby is, approved. Change
to the Commission pursuant to Section For the Commission, by the Division of In its filing with the Commission, the
19 of the Act.137 The Commission also Trading and Markets, pursuant to delegated self-regulatory organization included
notes that the OIAD believes that the authority.143 statements concerning the purpose of,
proposal ‘‘appears to be appropriately Robert W. Errett, and basis for, the proposed rule change
tailored to minimize the possibility that Deputy Secretary. and discussed any comments it received
it would curtail legitimate trading [FR Doc. 2016–03740 Filed 2–22–16; 8:45 am] on the proposed rule change. The text
activities by market makers and other of those statements may be examined at
BILLING CODE 8011–01–P
liquidity providers’’ and ‘‘appears to the places specified in Item IV below.
provide appropriate safeguards for The Exchange has prepared summaries,
innocent parties.’’ 138 SECURITIES AND EXCHANGE set forth in sections A, B, and C below,
Lastly, the Commission notes that the COMMISSION of the most significant parts of such
Exchange believes that the requirements statements.
of Sections 6(b)(7), 6(d)(1), and 6(d)(2) [Release No. 34–77169; File No. SR–
of the Act are addressed by the notice NYSEARCA–2016–26] A. Self-Regulatory Organization’s
and due process provisions included Statement of the Purpose of, and the
Self-Regulatory Organizations; NYSE Statutory Basis for, the Proposed Rule
within proposed Rule 8.17.139 Proposed
Arca, Inc.; Notice of Filing and Change
Rule 8.17 would require the Exchange to
Immediate Effectiveness of Proposed
serve notice on the subject Respondent, 1. Purpose
Rule Change Amending the NYSE Arca
which notice would include the
Schedule of Options Fees and Charges
suspension order the Exchange seeks to The Exchange proposes to amend its
impose on the Respondent. The notice February 18, 2016. Fee Schedule to exclude from its
would also be accompanied by a Pursuant to Section 19(b)(1) 1 of the average daily volume (‘‘ADV’’)
declaration of facts that specifies the Securities Exchange Act of 1934 (the calculations any trading day on which
acts that constitute the alleged violation. ‘‘Act’’) 2 and Rule 19b–4 thereunder,3 (1) the Exchange is not open for the
Proposed Rule 8.17 also would provide notice is hereby given that, on February entire trading day and/or (2) a
an opportunity for the Respondent to 4, 2016, NYSE Arca, Inc. (the disruption affects an Exchange system
defend against the charges in the notice ‘‘Exchange’’ or ‘‘NYSE Arca’’) filed with that lasts for more than 60 minutes
in a hearing before a three-person the Securities and Exchange during regular trading hours. The
Hearing Panel,140 with the opportunity Commission (the ‘‘Commission’’) the Exchange proposes to implement the fee
for witnesses and with a transcribed proposed rule change as described in change effective February 4, 2016.
record, and would detail the applicable Items I, II, and III below, which Items As provided in the Exchange’s Fee
timelines for the proceeding. Further, have been prepared by the self- Schedule, several of the Exchange’s
proposed Rule 8.17 would require the regulatory organization. The transaction fees and credits are based on
Hearing Panel to issue a written Commission is publishing this notice to trading, quoting and liquidity
decision stating whether a suspension solicit comments on the proposed rule thresholds that involve an ADV
order shall be imposed; if imposed, change from interested persons. calculation. The Exchange proposes to
proposed Rule 8.17 would require the add a clause permitting the Exchange to
suspension order to set forth the alleged I. Self-Regulatory Organization’s
Statement of the Terms of Substance of exclude from its ADV calculation, when
violation and market disruption or determining the qualification threshold
significant harm to investors that is the Proposed Rule Change
for electronic customer executions that
likely to result without the order, and to The Exchange proposes to amend the take liquidity in a non-Penny Pilot class
describe in reasonable detail what NYSE Arca schedule of Options Fees from the trading interest of an Lead
action the Respondent is required to and Charges (‘‘Fee Schedule’’) to Market Maker (‘‘LMM’’) (including
take or refrain from taking. In addition, exclude from its average daily volume orders and quotes) and for applicable
proposed Rule 8.17 would allow the calculations any trading day on which rebate tiers generally, contracts traded
Respondent to appeal to the Hearing the Exchange is not open for the entire on any day on which the Exchange is
trading day and/or a disruption affects not is not [sic] open for the entire
137 15 U.S.C. 78s. See also proposed Rule 8.17(f). an Exchange system that lasts for more trading day. This would allow the
mstockstill on DSK4VPTVN1PROD with NOTICES
138 See OIAD Recommendation, supra note 9, at than 60 minutes during regular trading Exchange to exclude days where the
6.
139 See
Notice, supra note 5, at 73251. Exchange declares a trading halt in all
141 15 U.S.C. 78f(b)(7), (d)(1), and (d)(2).
140 The
Commission notes that the Hearing Panel 142 15
securities or honors a market-wide
U.S.C. 78s(b)(2).
would be assigned according to current Rule 8.6(a), 143 17 CFR 200.30–3(a)(12).
trading halt declared by another market
which requires that one member of the panel be a as well as days on which the market
1 15 U.S.C.78s(b)(1).
professional hearing officer, another be an industry
representative, and the third be a Member 2 15 U.S.C. 78a. closes early for holiday observances.
representative. 3 17 CFR 240.19b–4. The Exchange’s proposal is consistent
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Document Created: 2018-02-02 14:33:22
Document Modified: 2018-02-02 14:33:22
| 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 9017 |
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