82 FR 9804 - Self-Regulatory Organizations; Bats EDGX Exchange, Inc.; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change Related to Functionality Offered by the Exchange's Options Platform To Adopt Qualified Contingent Cross Orders

SECURITIES AND EXCHANGE COMMISSION

Federal Register Volume 82, Issue 25 (February 8, 2017)

[Federal Register Volume 82, Number 25 (Wednesday, February 8, 2017)]
[Notices]
[Pages 9804-9807]
From the Federal Register Online  [www.thefederalregister.org]
[FR Doc No: 2017-02545]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-79942; File No. SR-BatsEDGX-2017-11]


Self-Regulatory Organizations; Bats EDGX Exchange, Inc.; Notice 
of Filing and Immediate Effectiveness of a Proposed Rule Change Related 
to Functionality Offered by the Exchange's Options Platform To Adopt 
Qualified Contingent Cross Orders

February 2, 2017.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that on February 1, 2017, Bats EDGX Exchange, Inc. (the ``Exchange'' or 
``EDGX'') filed with the Securities and Exchange Commission (the 
``Commission'') the proposed rule change as described in Items I, II, 
and III below, which Items have been prepared by the Exchange. The 
Exchange has designated this proposal as a ``non-controversial'' 
proposed rule change pursuant to Section 19(b)(3)(A) of the Act \3\ and 
Rule 19b-4(f)(6)(iii) thereunder,\4\ which renders it effective upon 
filing with the Commission. The Commission is publishing this notice to 
solicit comments on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 15 U.S.C. 78s(b)(3)(A).
    \4\ 17 CFR 240.19b-4(f)(6)(iii).
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I. Self-Regulatory Organization's Statement of the Terms of the 
Substance of the Proposed Rule Change

    The Exchange filed a proposal related to functionality offered by 
the Exchange's options platform (``EDGX Options'') to adopt Qualified 
Contingent Cross Orders, as described below.

[[Page 9805]]

    The text of the proposed rule change is available at the Exchange's 
Web site at www.bats.com, at the principal office of the Exchange, and 
at the Commission's Public Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the Exchange included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The Exchange has prepared summaries, set forth in 
Sections A, B, and C below, of the most significant parts of such 
statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Exchange is filing this proposal related to functionality 
offered by EDGX Options to adopt Qualified Contingent Cross Orders 
(``QCC Orders''), as described below.
Background
    The purpose of this filing is to adopt rules related to QCC Orders. 
The proposed rule change is based on the rules of other options 
exchanges, including an International Securities Exchange (``ISE'') 
proposal that was previously approved by the Securities and Exchange 
Commission (``Commission'').\5\
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    \5\ See Securities Exchange Act Release No. 63955 (February 24, 
2011), 76 FR 11533 (March 2, 2011) (SR-ISE-2010-73) (``ISE 
Approval'').
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    The Exchange is currently a party to the Options Order Protection 
and Locked/Crossed Market Plan (``Linkage Plan''), and has implemented 
Exchange rules in conjunction with that plan, which are set forth in 
Chapter XXVII of the Exchange's Rules (the ``Linkage Rules''). Similar 
to Regulation NMS under the Act, the Linkage Plan requires, among other 
things, that the Exchange establish, maintain and enforce written 
policies and procedures that are reasonably designed to prevent 
``Trade-Throughs.'' \6\ A Trade-Through is a transaction in an options 
series at a price that is inferior to the best price available in the 
market.\7\ The Linkage Plan replaced the Plan for the Purpose of 
Creating and Operating an Intermarket Option Linkage (``Old Linkage 
Plan''). The Old Linkage Plan provided a limited Trade-Through 
exemption for ``Block Trades,'' defined to be trades of 500 or more 
contracts with a premium value of at least $150,000.\8\ However, as 
with Regulation NMS, the Linkage Plan does not provide a Block Trade 
exemption. Since its original adoption by the ISE in 2011, QCC has been 
offered by multiple options exchanges as a limited substitute for the 
Block Trade exemption.\9\
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    \6\ See Section 5(a) of the Linkage Plan.
    \7\ See Section 2(21) of the Linkage Plan.
    \8\ See Old Linkage Plan Sections 2(3) and 8(c)(i)(C).
    \9\ See ISE Rule 715(j), Supplementary Material .01 to ISE Rule 
715 and ISE Rule 721(b); see also CBOE Rule 6.53(u); NASDAQ PHLX 
Rule 1080(o); NYSE Arca Rule 6.62(bb), Commentary .02 to NYSE Arca 
Rule 6.62 and NYSE Arca Rule 6.90.
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Proposal Regarding Qualified Contingent Cross Orders
    The purpose of the proposed change is to provide the Exchange Users 
\10\ with the ability to submit to the Exchange Qualified Contingent 
Cross Orders, an order type offered by multiple other options 
exchanges.\11\ The proposed operation of Qualified Contingent Cross 
Orders on the Exchange is substantially similar in all material 
respects to the operation of such orders on such other exchanges.
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    \10\ The term ``User'' means any Options Member or Sponsored 
Participant who is authorized to obtain access to the System 
pursuant to Rule 11.3 (Access). See Exchange Rule 16.1(a)(63).
    \11\ See supra, note 9.
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    The Exchange proposes to adopt new paragraph (d)(11) to Rule 21.1 
to govern the operation of Qualified Contingent Cross Orders. As 
proposed, a Qualified Contingent Cross Order would be an originating 
order to buy or sell at least 1,000 standard option contracts that is 
identified as being part of a qualified contingent trade (as that term 
is proposed to be defined in paragraph (d)(11)(A) to Rule 21.1), 
coupled with a contra-side order or orders totaling an equal number of 
contracts. As proposed, a ``qualified contingent trade'' is a 
transaction consisting of two or more component orders, executed as 
agent or principal, where: (i) At least one component is an NMS stock, 
as defined in Rule 600 of Regulation NMS under the Act; (ii) all 
components are effected with a product or price contingency that either 
has been agreed to by all the respective counterparties or arranged for 
by a broker-dealer as principal or agent; (iii) the execution of one 
component is contingent upon the execution of all other components at 
or near the same time; (iv) the specific relationship between the 
component orders (e.g., the spread between the prices of the component 
orders) is determined by the time the contingent order is placed; (v) 
the component orders bear a derivative relationship to one another, 
represent different classes of shares of the same issuer, or involve 
the securities of participants in mergers or with intentions to merge 
that have been announced or cancelled; and (vi) the transaction is 
fully hedged (without regard to any prior existing position) as a 
result of other components of the contingent trade.
    As proposed, Qualified Contingent Cross Orders would be allowed to 
execute automatically on entry without exposure provided the execution: 
(i) Is not at the same price as a Priority Customer Order \12\ resting 
in the EDGX Options Book; \13\ and (ii) is at or between the national 
best bid or offer (``NBBO''). As such, the Exchange also proposes to 
specify in proposed Rule 21.1(d)(11)(B) that Rule 22.12, related to 
exposure of orders on EDGX Options, does not apply to Qualified 
Contingent Cross Orders. The proposed Rule would also specify that 
Qualified Contingent Cross Orders will be cancelled if they cannot be 
executed. Also, pursuant to the proposed rule, Qualified Contingent 
Cross Orders may only be entered in the standard increments applicable 
to the options class under Rule 21.5.
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    \12\ See Exchange Rule 16.1(a)(45) (defining ``Priority 
Customer'' and ``Priority Customer Order'').
    \13\ See Exchange Rule 16.1(a)(9) (defining ``EDGX Options 
Book'').
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    The Exchange will track and monitor QCC Orders to determine which 
is the originating side of the order and which is the contra-side(s) of 
the order to ensure that Members are complying with the minimum 1,000 
contract size limitation on the originating side of the QCC Order. The 
Exchange will check to see if Members are aggregating multiple orders 
to meet the 1,000 contract minimum on the originating side of the trade 
in violation of the requirements of the rule. The rule requires that 
the originating side of the trade consist of one party who is 
submitting a QCC Order for at least 1,000 contracts. The Exchange 
represents that it will enforce compliance with this portion of the 
rule by checking to see if a Member breaks up the originating side of 
the order in a post trade allocation to different clearing firms, 
allocating less than 1,000 contracts to a party or multiple parties. 
For example, a Member enters a QCC Order into the system for 1,500 
contracts and receives an execution. Subsequent to the execution, the 
Member allocates the originating side of the order to two different 
clearing firms

[[Page 9806]]

on a post trade allocation basis, thereby allocating 500 contracts to 
one clearing firm and 1,000 contracts to another clearing firm. This 
type of transaction would not meet the requirements of a QCC Order 
under the current and proposed rule.
    With regard to order entry, a Member will have to mark the 
originating side as the first order in the system and the contra-
side(s) as the second. The Exchange will monitor order entries to 
ensure that Members are properly entering QCC Orders into the system.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with the 
requirements of the Act and the rules and regulations thereunder that 
are applicable to a national securities exchange, and, in particular, 
with the requirements of Section 6(b) of the Act.\14\ In particular, 
the proposal is consistent with Section 6(b)(5) of the Act \15\ because 
it is designed to offer market participants greater flexibility by 
allowing such market participant to submit QCC Orders to the EDGX 
Options Book in the same way they are permitted to send QCC Orders to 
other options exchanges, thereby promoting just and equitable 
principles of trade, fostering cooperation and coordination with 
persons engaged in facilitating transactions in securities, removing 
impediments to, and perfecting the mechanism of, a free and open market 
and a national market system.
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    \14\ 15 U.S.C. 78f(b).
    \15\ 15 U.S.C. 78f(b)(5).
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    The proposed rules are consistent with the protection of investors 
in that they are designed to prevent Trade-Throughs. In addition, the 
proposed rule change would promote a free and open market by permitting 
the Exchange to compete with other options exchanges for these types of 
orders. In this regard, competition would result in benefits to the 
investing public, whereas a lack of competition would serve to limit 
the choices that participants have for execution of their options 
business. As noted above, the proposed operation of Qualified 
Contingent Cross Orders on the Exchange is substantially similar in all 
material respects to the operation of such orders on such other 
exchanges.\16\ As such, permitting the Exchange to operate on an even 
playing field relative to other exchanges removes impediments to and to 
perfects the mechanism for a free and open market and a national market 
system.
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    \16\ See supra, note 9.
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change to 
adopt QCC Orders will impose any burden on competition that is not 
necessary or appropriate in furtherance of the purposes of the Act. The 
Exchange's proposed functionality is open to all market participants. 
Further, the proposed rule will allow the Exchange to compete with 
other options exchanges that currently offer QCC Orders, thus 
alleviating the burden on competition that would arise if such 
exchanges were permitted to continue offering such functionality and 
the Exchange was not. For these reasons, the Exchange does not believe 
that the proposed rule changes will impose any burden on competition 
not necessary or appropriate in furtherance of the purposes of the Act, 
and believes the proposed change will enhance competition.

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

    The Exchange has neither solicited nor received written comments on 
the proposed rule change. The Exchange has not received any written 
comments from members or other interested parties.

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

    Because the foregoing proposed rule change does not: (A) 
Significantly affect the protection of investors or the public 
interest; (B) impose any significant burden on competition; and (C) by 
its terms, become operative for 30 days from the date on which it was 
filed or such shorter time as the Commission may designate it has 
become effective pursuant to Section 19(b)(3)(A) of the Act \17\ and 
paragraph (f)(6) of Rule 19b-4 thereunder,\18\ the Exchange has 
designated this rule filing as non-controversial. The Exchange has 
given the Commission written notice of its intent to file the proposed 
rule change, along with a brief description and text of the proposed 
rule change at least five business days prior to the date of filing of 
the proposed rule change, or such shorter time as designated by the 
Commission.
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    \17\ 15 U.S.C. 78s(b)(3)(A).
    \18\ 17 CFR 240.19b-4.
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is: (1) 
Necessary or appropriate in the public interest; (2) for the protection 
of investors; or (3) otherwise in furtherance of the purposes of the 
Act. If the Commission takes such action, the Commission shall 
institute proceedings to determine whether the proposed rule should be 
approved or disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
File Number SR-BatsEDGX-2017-11 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.

All submissions should refer to File Number SR-BatsEDGX-2017-11. This 
file number should be included on the subject line if email is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for Web site viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE., 
Washington, DC 20549 on official business days between the hours of 
10:00 a.m. and 3:00 p.m. Copies of such filing also will be available 
for inspection and copying at the principal office of the Exchange. All 
comments received will be posted without change; the Commission does 
not edit personal identifying information from submissions. You should
    submit only information that you wish to make available publicly. 
All submissions should refer to File

[[Page 9807]]

Number SR-BatsEDGX-2017-11, and should be submitted on or before March 
1, 2017.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\19\
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    \19\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2017-02545 Filed 2-7-17; 8:45 am]
 BILLING CODE 8011-01-P