SEC Division of Trading and Markets no-action letter: BATS Trading, Inc.

June 28, 2006

Mr. David Cummings Chief Executive Officer BATS Trading, Inc. 4151 N. Mulberry Drive, Suite 275 Kansas City, MO 64116

Re: BATS ECN

Dear Mr. Cummings:

In your letter dated June 27, you requested that the Division of Market Regulation ("Division") of the Securities and Exchange Commission ("Commission") reaffirm its view that BATS ECN ("System"), owned and operated by BATS Trading, Inc. ("BATS"), a registered broker-dealer, is an electronic communications network ("ECN") as defined in Regulation NMS 1 under the Securities Exchange Act of 1934 ("Exchange Act") and would be in compliance with the requirements applicable to the ECN Display Alternative, as described in paragraph (b)(5)(ii) of Rule 602 of Regulation NMS ("Quote Rule"), 2 with respect to NMS stocks 3 for which a linkage between the System and a self-regulatory organization ("SRO") is operational. The Division has previously taken that view in a number of no-action letters, most recently in May 2006. 4

The Division hereby grants your request. Accordingly, the Division will not recommend that the Commission take enforcement action against OTC market makers 5 or exchange market makers 6 who are subscribers to the System, if those market makers enter orders into the System without modifying their public quotations, in compliance with the Quote Rule and Rule 604 of Regulation NMS ("Limit Order Display Rule"), 7 as applicable. In taking this position, the Division has relied on various representations you made regarding the operation of the System, specifically that:

(i) The System is an ECN within the meaning of Rule 600(b)(23) of Regulation NMS and allows subscribers, including OTC market makers and exchange market makers, electronically to enter orders in certain NMS stocks.

(ii) BATS has established, and will maintain, an automated linkage with at least one SRO trading facility 8 or SRO display-only facility. 9 All subscriber orders at the top of the BATS order book (i.e., best bid/ask by time priority) are transmitted to at least one SRO trading facility or SRO display-only facility for display. More specifically, BATS transmits to one or more facilities for public display by the facility or facilities the best priced orders of all orders entered by subscribers to the System, including OTC market makers or exchange market makers for securities in which they make markets or act as specialist. BATS will provide to any broker or dealer access to the System's top of book quotes that is functionally equivalent to the access that is generally available to quotes displayed by an SRO trading facility, or, for orders displayed by an SRO display-only facility, a level and cost of access to such quotations that is substantially similar to the level and cost of access to quotations displayed by SRO trading facilities in that stock.

(iii) Upon receipt, BATS responds and intends to continue to respond to non-subscriber orders no slower than it responds to subscriber orders. Non-subscribers are able to automatically execute against the quotations displayed by the System in any SRO trading facility and/or SRO display-only facility.

(iv) BATS charges non-subscriber broker-dealers a rate that does not exceed the then current rate charged to a substantial portion of its active broker-dealer subscribers and in any event not in excess of the maximum fee as authorized by Rule 610 of Regulation NMS. 10

(v) The System has sufficient capacity to handle the volume of trading reasonably projected to be conducted in the System. Moreover, BATS conducts and will continue to conduct regular and periodic system capacity reviews and tests to: (i) ensure future capacity; (ii) identify potential weaknesses; and (iii) reduce the risks of system failures and threats to system integrity.

The Division's no-action position is conditioned on BATS maintaining active connectivity with one or more SRO trading facilities and/or SRO display-only facilities. In the event that BATS loses connectivity with an SRO trading facility or SRO display-only facility, BATS, with respect to that facility, would not be in compliance with the ECN Display Alternative and the no-action relief described herein would not be available. BATS has represented that, throughout the day, BATS personnel continuously and systematically monitor the System's connection to each SRO trading facility and/or SRO display-only facility to which it links in order to ensure that the applicable connection is functioning. BATS further represents that, if the System loses connectivity with any SRO trading facility or SRO display-only facility, BATS personnel will immediately cancel all quotes previously published by the System in that facility and immediately notify all subscribers to advise them of the interruption.

The Division further conditions its position on the continuing accuracy of these representations and compliance by BATS with all applicable Commission and SRO rules, including any additional requirements applicable to ECNs. Any different facts or conditions - including, but not limited to, modifications or revisions to, or expansion of service provided by, BATS - may require a different response. The Division may request additional representations from you regarding the operation of the System. This no-action position is subject to changes in current law, regulation, and interpretations; any such change may require the Division to reevaluate and withdraw or modify this position. This no-action position concerns enforcement action under Section 11A of the Exchange Act 11 only, and does not express any legal conclusions regarding the applicability of Section 11A or other statutory or regulatory provisions of the federal securities laws.

Sincerely,

Robert L.D. Colby Deputy Director

Endnotes

1 See 17 CFR 242.600(b)(23).

2 17 CFR 242.602(b)(5)(ii).

3 See 17 CFR 242.600(b)(47).

4 See letter from Robert L.D. Colby, Acting Director, Division, Commission, to David Cummings, Chief Executive Officer, BATS, dated May 8, 2006.

5 See 17 CFR 242.600(b)(52).

6 See 17 CFR 242.600(b)(24).

7 17 CFR 242.604.

8 See 17 CFR 242.600(b)(72).

9 See 17 CFR 242.600(b)(71).

10 The Division notes that Rule 610(c) of Regulation NMS, 17 CFR 242.610(c), generally limits the fee that a trading center may charge for accessing a protected quotation to no more than $0.003 per share. Rule 610(c) became effective as of August 29, 2005, and is subject to delayed compliance. See Securities Exchange Act Release No. 53829 (May 18, 2006) (extending compliance dates for Rule 610 and Rule 611 of Regulation NMS from June 29, 2006 to a series of dates for different functional stages of compliance).

11 15 U.S.C. 78k-1.

Incoming Letter:

The Incoming Letter is in Acrobat format.

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A ~etterw~~lternative Trading System
June 27,2006
Robert L D Colby
Acting Director
Division of Market Regulation
Securities and Exchange Commission
100 F Street, N E
Washington, DC 20549
Re: BATSECN
Dear MI Colby:
BATS Trading, Inc ("BATS") is registered with the Securities and Exchange Commission (the "Commission") as a broker-dealer and is currently a member of the National Association of Securities Dealers, Inc ("NASD) and the National Stock Exchange ("NSX") BATS operates as an alternative trading system pusuant to Regulation ATS of the Securities Exchange Act of 1934, as amended ("Exchange Act"), and owns and operates the electronic communications network ("ECN) known as the BATS ECN (the "System") The Division of Market Regulation (the "Division") already has taken two separate temporary no-action positions with respect to BATS and the System BATS respectfully requests that the Division extend its curent no-action position regarding BATS' activities Pursuant to the Commission's letter originally granting no-action relief, dated February 17,2006 (the "Original No-Action Letter") and the Commission's letter ~eaffirming this no-action relief, dated May 8,2006 (the "Second No-Action Letter"), BATS is currently recognized as an ECN with respect to its connections to the Nasdaq Market Center and the NSX In connection with the additional facts set forth in this letter, BATS respectfully requests that the Division advise BATS that:
1 The System is an ECN as that term is defined in Rule 600(b)(23) of Regulation NMS of the Exchange Act; 2 BATS would be in compliance with the requirements applicable to the "ECN Display Alternative" as described in paraya h (b)(5)(ii) of Rule 602 of Regulation NMS ("Quote Rule") with respect to NMS stocks Pfor which a linkage between the System and a selE regulatory organization ("SRO) is operational; and ' 17 CFR 242 600(b)(47), IEL 816285 9900 1 FAX 8162859919 1 4151 N MULBERRY DR SUlIE275 1 KANSAS CITY, MO64116 1 BATSIRADlNGCOM

3 Upon compliance by BATS with the E,CN Display Alternative, the Division would not recommend that the Commission take enforcement action against OTC market makers2 or exchange market makers3, as those terms are defined in Rule 600 of. Regulation NMS, who are subscribers to the System if such market makers enter orders into the System without modifying their public quotations in compliance with the Quote Rule and Rule 604 of' Regulation NMS ("Limit Order Display Rule"), as applicable, The BATS letter requesting no-action relief from the Commission, dated February 15, 2006 (the "Original Request Letter"), describes: background information regarding BATS and the System, subscriber access to the System, connections of the System to the Nasdaq Market Center, the hnctionality of the System's matching engine and hade reporting, clearance and settlement In a second letter from BATS requesting no-action relief from the Commission, dated May 4, 2006 (the "Second Request Letter"), BATS requested that the Commission extend the no￾action relief to include its connection to the NSX The facts set forth in the Original Request Letter and the Second Request Letter have not changed. The System currently provides subscribers with automatic execution, clearance and settlement of trades in exchange-traded securities and Nasdaq securities via BATS' computerized, proprietary trading system Broker-dealers registered with the Commission are permitted to become subscribers The System provides the opportunity for all subscribers to obtain execution of their orders. All subscribers' orders displayed over the System are available for execution in whole or, where permitted by the terms of the order, in part Direct subscriber access to the System is available at a dedicated IP address configured by BATS that assures that only authorized subscribers gain access to the System The System currently permits subscribers to enter buy and sell orders in exchange￾traded securities and Nasdaq securities on an anonymous basis as described below Orders entered into the System must be priced and must have a designated size (-'limit orders") or must be "market orders", which are defined and treated by BATS as immediate￾or-cancel ("IOC") buy orders priced five cents above the national best offer or IOC sell orders priced five cents below the national best bid at the time the order is received by BATS Indications of interest may not be entered into the System Unless entered with a limitation on display, the unexecuted portion of limit orders are available for display to all subscribers

• 17 CFR 242 600(b)(52)
  3 17 CFR 242 600(b)(24) The term "exchange market maker" is defined to include "any member of a national securities exchange that is registered as a specialist or market maker pursuant to the rules of such exchange "

Request fbr No-Action Letter
In connection with its request for no-action relief, BATS makes the following Iepr esentations:
1 The System is an ECN within the meaning of Rule 600(l~XB) of Regulation NMS Rule 600(b)(23) of Regulation NMS defines an ECN as "any electronic system that widely disseminates to third parties orders entered therein by an exchange market maker or OTC market maker, and permits such orders to be executed against in whole or in part " The System allows subscribers, including OTC market makers and exchange market makers, electronically to enter orders in certain NMS stocks for dissemination to other subsctibers, who can then effect executions, in whole or in part, against those orders Accordingly, the System satisfies the definition of an ECN 2 Compliance with the ECN Display Alternative BATS has established, and will maintain, an automated linkage with at least one SRO trading facility4 or SRO display-only facility5 All subscriber orders at the top of the BATS order book (i e, best bidlask by time priority) are transmitted to at least one SRO trading facility or SRO display-only facility for display More specifically, BATS transmits to one or more facilities for public display by the facility or facilities the best priced orders of all orders entered by subscribers to the System, including OTC market makers or exchange market makers for securities in which they make markets or act as specialist Throughout the day, BATS personnel continuously and systematically monitor the System's connection to each SRO trading facility and/or SRO display-only facility to which it links in order to ensure that the applicable connection is hctioning BATS personnel also continuously and systematically monitor the speed of the System's connection to any SRO trading facility and/or SRO display-only facility If a connection is not responding in a timely fashion, BATS personnel receive warning messages alerting them of the interruption and immediately investigate the interruption If the System loses connectivity with any SRO trading facility or SRO display-only facility, BATS personnel will immediately cancel all quotes previously published by the System in that facility In addition, BATS personnel will immediately notify all subscribers to advise them of the interruption BATS will provide to any broker or dealer access to the System's top of book quotes6 that is functionally equivalent to the access that is generally available to quotes displayed by 17 CFR 242 600(b)('72) 17 CFR 242 600(b)(71) As noted above, all subscriber orders at the top of the BATS order book (i e ,best bidask by time priority) ae transmitted to at least one SRO trading facility or SRO display-only facility for display

an SRO trading facility, or, for orders displayed by an SRO display-only facility, a level and cost of access to such quotations that is substantially similar to the level and cost of access to quotations displayed by SRO trading facilities in that stock7 Non-subscribers are able to automatically execute against the uotations displayed by the System in any SRO trading facility andlor SRO display-only facility 1 Upon receipt, BATS responds and intends to continue to respond to non￾subscriber orders no slower than it responds to subscriber orders Accordingly, BATS' response time to subscriber orders and non-subscriber orders is nearly equal and normally occurs within less than a second of receipt BATS charges non-subsc~iber broker-dealers a rate that does not exceed the then current rate charged to a substantial portion of' its active broker-dealer subscribers and in any event not in excess of the maximum fee as authorized by Rule 610 of Regulation NMS 4 Capacity and Security BATS further represents that the System has sufficient capacity to handle the volume of trading ~easonably projected to be conducted in the System Moreover, BATS conducts and will continue to conduct regular and periodic system capacity reviews and tests to: (i) ensure future capacity; (ii) identif)- potential weaknesses; and (iii) reduce the risks of system failures and threats to system integrity BATS has and will maintain procedures to ensure that only certain designated personnel have access to the System Those designated personnel will keep all trading information entered into the System confidential and will not use such information for trading in BATS' or any affiliate's proprietary account, its customers' accounts, or their own personal trading accounts For example, firewalls are implemented at the network level on the processing system, allowing only authorized personnel to access the System Key cards are necessary to physically access BATS facilities and all computer systems are password protected Access to information about the trading 7 Were BATS to establish a linkage with an SRO display-only facility, BATS would contract with a reputable party engaged in the securities industry that would be able to provide order delivery services on behalf of the System Such a relationship would be established in order to provide meaningful access to BATS' quotations Non-sub~cribers may access quotes published by BATS in various ways For instance, a broker￾dealer member of an SRO t~ading facility that is not a subscriber to BATS, but that seeks to access a quote published by BATS in such SRO trading facility, could send a message through the SRO trading facility's automated systems to execute against BATS' published quote Alternatively, a non-subscriber that has established a connection to another ECN or market participant could access BATS' published quote indirectly through such ECN or market participant if such ECN or market participant has a connection to the SRO trading
facility where BATS publishes its quotes Finally, it is possible for a non-subscriber to send its order to a broker-dealer that is a subscriber to the System, and such subscriber may route the order directly to BATS, Rule 610(c) of Regulation NMS generally limits the fee that market participants, including ECNs, may in the aggregate charge for accessing a protected quotation to no more than $ 0,003 per share Rule 610(c) became effective as ofAugust 29,2005, but is subject to delayed compliance dates and thus, is not yet applicable to BATS See Securities Exchange Act Release 51808 (June 9,2005), 70 FR 37496,37576 (June 29,2005),

activity of subscribers is limited to a need-to-know basis for all employees, officers and directors of BATS Fwthermore, the operation of the System will be kept separate from other business activities of BATS lo For contingency pulposes, each service is duplicated at the hardware, network and software levels BATS has redundant network connections from its core system into the SAVVIS network The SAVVIS network utilizes redundant backbone segments and redundant edge devices, The matching engine architectu~e at BATS allows for trade activity load balancing across multiple instances. In this way, the operations team at BATS can move a group of' securities traded on one matching unit (should it fail or realize degradation in performance) to one or more alternate matching units In addition, BATS has redundant access to any SRO trading facility or SRO display-only facility to which it connects for trade reporting as well as for the execution of orders (including both outbound and inbound orders) This redundant infrastructure significantly reduces the risk that the System will lose connectivity to a trading facility Conclusion that:
On the basis ofthe foregoing, we respectfully request that the Division advise BATS NMS; 1 The System is an ECN as that term is defined in Rule 600(b)(23) of Regulation 2 BATS would be in compliance with the requirements applicable to the ECN Display Alternative with respect to NMS stocks for which a linkage between the System and an SRO is operational; and 3 Upon compliance by BATS with the ECN Display Alternative, the Division would not recommend that the Commission take enforcement action against OTC market makers or exchange market makers (including exchange specialists) who are subscribers to the System if such market makers enter orders into the System without modifying their public quotations in compliance with the Quote Rule and the Limit Order Display Rule If' you have any questions or seek any additional information regarding this matter, please contact the undersigned at (816) 285-9900 Sincerely, David Cummings Chief Executive Officer BATS Trading, Inc lo BATS currently has one business line, the operation of the System, and thus has no separate business activities If, in the future, BATS develops other business lines, it will keep the operation of the System separate from such other business lines