SEC Exemption Under Rule 608(e) of Regulation NMS for BATS Exchange from Tick Size Pilot Program Provisions

UN ITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON , DC 20549

DIVISION O F
TRADIN G AND MARKETS March 3, 2016
Mr. Eric Swanson

Executive Vice President, General Counsel & Secretary

BATS Exchange, Inc.

17 State Street, 31st Floor

New York, NY 10004
Re: Exemption Under Rule 608(e) of Regulation NMS under the Securities Exchange Act of 1934 from Certain Provisions of the "Plan to Implement a Tick Size Pilot Program" Dear Mr. Swanson:
In its letter dated October 14, 2015, 1 the New York Stock Exchange ("NYSE"), on behalf of itself and BATS Exchange, Inc., BATS Y-Exchange, Inc., Chicago Stock Exchange, Inc., EDGA Exchange Inc., EDGX Exchange, Inc., Financial Industry Regulatory Authority ("FINRA"), NASDAQ OMX BX, Inc., NASDAQ OMX PHLX LLC, the Nasdaq Stock Market LLC, NYSE MKT LLC, and NYSE Area Inc. (collectively, "Participants"i requests an exemption from certain quoting and trading requirements set forth in the Plan to Implement a Tick Size Pilot Program ("Tick Size Pilot Plan"). 3 Specifically, in the October Exemption Request, the Participants request that the Commission, pursuant to Rule 608( e) of Regulation NMS under the Securities Exchange Act of 1934 ("Exchange Act"), exempt the Participants from the requirements of Rule 608(c) of Regulation NMS that they comply, and enforce the compliance by its members, with certain provisions of Section VI ofthe Tick Size Pilot Plan when the Closing Price4 of a Pilot Security assigned to any Test Group is below $1.00. See letter from Elizabeth K. King, New York Stock Exchange, to Brent J. Fields, Secretary, Securities and Exchange Commission ("Commission") dated October 14, 2015 ("October Exemption Request"). 2 The Commission notes that on February 5, 2016, the National Stock Exchange, Inc. ("NSX") filed a Plan amendment with the Commission to become a Plan Participant pursuant to Section II.C ofthe Plan. This amendment is effective upon filing pursuant to Rule 608(b)(3)(iii) ofRegulation NMS. See Securities Exchange Act Release No. 77277 (March 3, 2016). 3 See Securities Exchange Act Release No. 74892 (May 6, 2015), 80 FR 27513 (May 13, 2015). 4 Unless otherwise specified, capitalized terms in this rule filing are based on the defined terms of the Plan. 1

On February 23, 2016, FINRA, on behalf ofitself and the Participants, submitted an additional request for exemption from certain quoting and trading provisions set forth in the Tick Size Pilot Plan.5 Specifically, FINRA on behalfthe Participants requests that the Commission, pursuant to Rule 608(e) ofRegulation NMS under the Exchange Act, exempt them from the requirements ofRule 608(c) ofRegulation NMS that they comply, and enforce compliance by its members, with (1) certain provisions of Section VI.C and Section VI.D ofthe Tick Size Pilot Plan to permit a member to execute certain orders in increments other than $0.05 when a member has executed a proprietary trade in an increment other than $0.05 that triggers the obligation to execute another customer order held by the member; and (2) certain provisions of
Section VI.D to permit members to execute certain error correction transactions in Test Group
Three as an additional exception to the Trade-at Prohibition; and (2) Section IV.D(12) ofthe Tick Size Pilot Plan. The Commission notes that BATS submitted a proposed rule change to implement the quoting and trading requirements set forth in the Tick Size Pilot Plan and that the proposed rule change includes rules that address the items described herein for which BATS seeks exemption from Rule 608( c) ofRegulation NMS. 6 Rule 608(c) ofRegulation NMS requires the Participants to comply with the terms of the Tick Size Pilot Plan.7 Further, Rule 608(c) of Regulation NMS requires each Participant to enforce compliance with the Tick Size Pilot Plan by its members and persons associated with its members.8 Rule 608( e) of Regulation NMS provides that the Commission may exempt from the provisions ofRule 608 ofRegulation NMS, either conditionally or on specified terms and conditions, any self-regulatory organization, if the Commission determines that such exemption is consistent with the public interest, the protection ofinvestors, the maintenance of fair and orderly markets, and the removal ofimpediments to, and the perfection ofthe mechanisms of, a national market system. 9 As discussed below, the Commission, pursuant to its authority under Rule 608( e) of Regulation NMS, is hereby granting BATS a limited exemption from the requirement to comply with certain provisions ofthe Tick Size Pilot Plan as required under Rule 608( c) ofRegulation NMS. 10 5 See letter from Marcia E. Asquith, Senior Vice President and Corporate Secretary, FINRA, to Robert W. Errett, Deputy Secretary, Commission dated February 23, 2016 ("February Exemption Request"). 6 See Securities Exchange Act Release No. 76552 (November 30, 2015), 80 FR 76591 (December 9, 2015) (SR-BATS-2015-108) ("BATS Proposal"). Concurrent with the grant ofthis exemption, the Commission is approving the BATS Proposal. See Securities Exchange Act Release No. 77291 (March 3, 2016). 7 17 CFR 242.608(c). 8 Id. 9 17 CFR 242.608( e). 10 The Commission notes that while the October Exemption Request and the February Exemptive Request seek exemptive relief for all ofthe Participants, the Commission is granting exemptive relief only to BATS. The Commission would consider granting 2

Exemption from the Certain Provisions of the Plan to Implement a Tick Size Pilot Program
I. Exemption from the Requirement to Enforce Compliance with Certain Grouping,
Quoting and Trading Requirements for Pilot Securities Under Sections VI of the Tick Size Pilot Plan
Section V ofthe Tick Size Pilot Plan sets forth the criteria for identifying Pilot Securities
and the method by which Pilot Securities will be grouped and placed into the three Test Groups. Pursuant to Section V ofthe Tick Size Pilot Plan, Pilot Securities that are not placed into the three Test Groups will constitute the Control Group. Section VI of the Tick Size Pilot Plan sets forth the quoting and trading requirements established for the Control Group and each Test Group. In the October Exemption Request, the Participants request an exemption from Section VI of the Tick Size Pilot Plan to permit Participants to move a Pilot Security from its assigned Test Group to the Control Group ifthe Closing Price of a Pilot Security is below $1.00 on any trading day during the Pilot Period. 11 A Pilot Security that is reassigned to the Control Group would be subject to the quoting and trading requirements of the Control Group. In addition, any reassigned Pilot Security would continue to be subject to the data collection provisions of the Tick Size Pilot Plan. In the BATS Proposal, BATS Rule 11.27(a)(3) provides, in pertinent part, that if a Pilot Security's Closing Price is below $1.00, then that Pilot Security would be moved from its respective Test Group to the Control Group, and would quote and trade in accordance with the rules for Pilot Securities in the Control Group for the remainder of the Pilot Period. 12 In addition, such Pilot Security would continue to be subject to the data collection requirements under the Tick Size Pilot Plan and BATS Rule 11.27(b ). In the October Exemption Request, the Participants state that requiring a Pilot Security whose price falls below $1.00 to quote and/or trade in $0.05 increments could be potentially harmful as the spread for such Pilot Security could become too large in comparison to its price. Further, the Participants believe that this could have a negative impact on the trading activity for such securities. Finally, the Participants believe if such Pilot Securities are not moved into the Control Group, the quality of data generated and collected could be impacted because the spreads associated with such Pilot Securities would not correlate with their actual price. The Commission grants the exemption to BATS from requirements in Section VI of the Tick Size Pilot Plan that Pilot Securities with a Closing Price below $1.00 to quote and trade according to the provisions ofits assigned Test Group, so long as BATS complies, and enforces compliance by its members with, BATS Rule 11.27(a)(3). Accordingly, BATS may move any similar limited exemptions to other Tick Size Pilot Plan Participants should they submit proposed rule changes pursuant to Section 19(b) of the Exchange Act that are substantially similar to the BATS Proposal. II See October Exemption Request, supra note 1. 12 BATS 11.27(a)(3) also provides that if a Pilot Security's price drops below $1.00 during regular trading hours but does not have a Closing Price below $1.00 the Pilot Security will continue to trade according to the quoting and
trading requirements of its assigned Test Group. 3

Pilot Security that has a Closing Price below $1.00 during the Pilot Period from a Tick Size Pilot Plan Test Group to the Control Group. Thereafter, such Pilot Security would be permitted to quote and trade according to the provisions ofthe Control Group for the remainder of the Pilot Period. Further, BATS and its members must continue to collect and submit the data related to such Pilot Securities as set forth in the Tick Size Pilot Plan and BATS Rule 11.27(b ). The Commission has determined that this exemption is consistent with the public interest, the protection ofinvestors, the maintenance offair and orderly markets and the removal of impediments to, and the perfection of a national market system, because requiring Pilot Securities with a Closing Price ofless than $1.00 to quote and or trade at increments larger than as provided under the Control Group could cause the spread for such Pilot Securities to become too large relative to its price, which could potentially harm the trading of such securities and the quality of the data generated under the Plan.
II. Exemption from the Requirement to Enforce Compliance with Certain Trading

Requirements Under Sections VI.C and VI.D ofthe Tick Size Pilot Plan

Section VI.C ofthe Tick Size Pilot Plan sets forth the quoting and trading requirements
for Pilot Securities in Test Group Two. Specifically, Test Group Two Pilot Securities may only be quoted and traded in $0.05 increments, subject to the following three trading exceptions: 13 (1) trading may occur at the midpoint between the National Best Bid and National Best Offer or the midpoint between the best protected bid and best protected offer; (2) Retail Investor Orders may be provided with price improvement that is at least better than $0.005 better than the best protected bid or the best protected offer; and (3) Negotiated Trades may trade in increments less than $0.05. BATS proposes to implement these provisions in BATS Rule 11.27(a)(5)(C). 14
Section VI.D ofthe Tick Size Pilot Plan sets forth the quoting and trading requirements
for Pilot Securities in Test Group Three. Specifically, Test Group Three Pilot Securities may only be quoted and traded in $0.05 increments, subject to same three trading exceptions noted above for Test Group Two, 15 and are subject to the Trade-at Prohibition. BATS proposes to implement these provisions in BATS Rule 11.27(a)(6)(C). 16 In the February Exemption Request, the Participants note that a member of a Participant may be obligated under its rules (e.g., BATS Rule 12.6) to execute a customer order in a Pilot Security after executing a proprietary trade in that same Pilot Security. In these instances, the Participants request that members be exempted from having to execute such a customer order in a Test Group Two Pilot Security or a Test Group Three Pilot Security in a $0.05 increment. Rather, the Participants propose to allow its members in these instances to execute the customer order at the same price as (or within the prescribed amount of), for the same Pilot Security, on the same side as the triggering proprietary trade. In the BATS Proposal, amended BATS Rule 11.27(a)(5)(C)(iv) would provide an additional exception in Test Group Two to the $0.05 increment for execution of customer orders 13 Section VI.C ofthe Tick Size Pilot Plan also provides certain quoting exceptions. 14 See BATS Proposal supra note 6. · 15 Section VI.D ofthe Tick Size Pilot Plan also provides certain quoting exceptions. 16 See BATS Proposal supra note 6. 4

17 to comply with BATS Rule 12.6 following the execution of a proprietary trade by the member at an increment other than $0.05, where such proprietary trade was permissible pursuant to an exception under the Tick Size Pilot Plan. BATS Rule 11.27(a)(6)(C)(iv) would provide the same exception for Test Group Three. In the February Exemption Request, the Participants note that they believe that an additional exception to the $0.05 trading increment in Test Group Two and Test Group Three would best facilitate the ability of members to continue to protect customer order while retaining the flexibility to engage in proprietary trades that are permissible under the Tick Size Pilot Plan. The Commission grants the exemption to BATS from the $0.05 increment trading requirements of Sections VI.C and VI.D for certain transactions so long as BATS complies with, and enforces compliance with its Rule 11.27(a)(5)(C)(iv) and Rule 11.27(a)(6)(C)(iv). The Commission has determined that this exemption is consistent with the public interest, the protection ofinvestors, the maintenance offair and orderly markets and the removal of impediments to, and the perfection of a national market system, because it will facilitate the execution of customer orders.
III. Exemption from the Requirement to Enforce Compliance with Certain Trading
Requirements Under Section VI.D ofthe Tick Size Pilot Plan for Error Correction Transactions As noted above. Section VI.D ofthe Tick Size Pilot Plan sets forth the quoting and trading requirements for Pilot Securities in Test Group Three, which includes the Trade-at Prohibition. In the February Exemption Request, the Participants request an exemption from having to comply, and enforce compliance by its members with, the Trade-at Prohibition for certain error correction transactions. Rather, as set forth in amended BATS Rule 11.27(a)(6)(D)(ii)(n), certain error correction transactions as defined in amended BATS Rule 11.27(a)(6)(D)(ii)(n) would be excepted from the Trade-at Prohibition. In addition, BATS notes in its proposal that its Rule 11.27(a)(6)(D)(ii)(n) would be subject to conditions set forth in the Commission's order exempting error correction transactions from Rule 611 of Regulation NMS. 17 The Participants note that certain error transactions are exempt from the provisions of Rule 611 of Regulation NMS. Accordingly, the Participants believe that certain transactions to See Partial Amendment No. 1 to the BATS Proposal. See also Securities Exchange Act Release No. 55884 (June 8, 2007) (order exempting certain error correction transactions from Rule 611 of Regulation NMS). Specifically, the bona fide error must be evidenced by objective facts and circumstances. The Trading Center must maintain documentation of such facts and circumstances. The Trading Center must record the transaction in its error account. Further, the Trading Center must establish, maintain, and enforce written policies and procedure that are reasonably designed to address the occurrence of errors, and, in the event of an error, the use and terms of a transaction to correct the error in compliance with this exemption. Finally, the Trading Center must regularly surveil to ascertain the effectiveness of its policies and procedures to address errors and transactions to correct errors and takes prompt action to remedy deficiencies in such policies and procedures. 5

correct bona fide errors in the execution of customer orders should likewise be excepted from the Trade-at Prohibition. The Commission grants the exemption to BATS from the requirements of Section VI.D ofthe Tick Size Pilot Plan so that certain error correction transactions would be excepted from the Trade-at Prohibition, so long as BATS complies with, and enforces compliance with its Rule 11.27(a)(6)(D)(ii)(n). The Commission has determined that this exemption is consistent with the public interest, the protection ofinvestors, the maintenance of fair and orderly markets and the removal of impediments to, and the perfection of a national market system, because it would provide consistency in how error correction transactions are treated. BATS has proposed to use the same definitions and process for error correction transactions under the Tick Size Pilot Plan as it does under Rule 611 of Regulation NMS.
IV. Exemption from the Requirement to Enforce Compliance with Certain Trading
Requirements Under Section VI.D ofthe Tick Size Pilot Plan for "Stopped Orders"
Section VI.D(12) provides an exception to the Trade-at Prohibition for "stopped orders."
In the Tick Size Pilot Plan, the stopped order exception provides, among other things, that "the price of the trade-at transaction was, for a stopped buy order, equal to the national best bid in the Pilot Security at the time of execution or, for a stopped sell order, equal to the national best offer in the Pilot Security at the time of execution." In the BATS proposal, BATS proposes to adopt the stopped order exception in BATS Rule 11.27(a)(6)(D)(ii)(l). However, BATS proposes a modification to the stopped order exception in its rule. Specifically, BAT proposes to modify its paragraph (3) to provide that "the price ofthe Trade-at transaction was, for a stopped buy order, equal to or less than the National Best Bid in the Pilot Security at the time of execution or, for a stopped sell order, equal to or greater than the National Best Offer in the Pilot Security at the time of execution, as long as such order is priced at an acceptable increment." According to the Participants, the stopped order exception to the Trade-at Prohibition is based upon the exception provided for stopped orders in Rule 611 of Regulation NMS . 18 However, as currently drafted, the Trade-At exception would result in an inconsistent result with the Rule 611 exception. Accordingly, the Participants believe that the proposed stopped order exception to the Trade-at Prohibition would result in a more consistent approach for stopped orders. The Commission grants the exemption to BATS from the requirements of Section VI.D(12)(c) so long as BATS complies with, and enforces compliance with its amended BATS Rule 11.27(a)(6)(D)(ii)(l). The Commission has determined that this exemption is consistent with the public interest, the protection of investors, the maintenance offair and orderly markets and the removal of impediments to, and the perfection of a national market system, because it would provide consistency in stopped order transactions are treated under Regulation NMS and Rule 61l(b)(9)(iii) provides that "the price is the trade-through transaction was, for a stopped buy order, lower than the national best bid in the NMS stock at the time of execution or, for a stopped sell order, higher than the national best offer in the NMS stock at the time of execution." 6

18

the Tick Size Pilot Plan. The exemption should facilitate and ease implementation of the stopped order exception to the Trade-at Prohibition.

---

This exemption is conditioned on the facts and representations presented in the letters described herein. l 11 he event any material change occurs with respect to any of the facts or representations pre s·-·nted, the exemption will expire and BATS must immediately resume operating in accordance with all ofthe provisions in the Tick Size Pilot Plan. For the Commission,

by the Division of Trading and Markets,

pursuant to delegated authority. 19

DavidS. Shillman

Associate Director

17 CFR 200.30-J(a)( 42).
7

19