[Federal Register: February 1, 2010 (Volume 75, Number 20)]
[Notices]
[Page 5157-5166]
[DOCID:fr01fe10-122]

-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-61419; File No. SR-BATS-2009-031]

Self-Regulatory Organizations; BATS Exchange, Inc.; Notice of
Filing of Amendment No. 1 and Order Granting Accelerated Approval of a
Proposed Rule Change, as Modified by Amendment No. 1 Thereto, To
Establish Rules Governing the Trading of Options on the BATS Options
Exchange

January 26, 2010.

I. Introduction

    On November 10, 2009, BATS Exchange, Inc. (``Exchange'' or
``BATS'') filed with the Securities and Exchange Commission
(``Commission'') a proposed rule change pursuant to Section 19(b)(1) of
the Securities Exchange Act of 1934 (``Act''),\1\ and Rule 19b-4
thereunder,\2\ to adopt rules governing the trading of options on the
BATS Options Exchange Market (``BATS Options Exchange'' or ``BATS
Options''), which will be an options trading facility of the Exchange.
The proposed rule change was published for comment in the Federal
Register on December 8, 2009.\3\ On January 21, 2010, BATS filed
Amendment 1 to the proposed rule change.\4\ The Commission received no

comments on the proposal. This order provides notice of the filing of
Amendment No. 1 and approves the proposed rule change, as modified by
Amendment No. 1 thereto, on an accelerated basis.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 61097 (December 2,
2009), 74 FR 64788 (``Notice'').
    \4\ In Amendment No. 1, the Exchange: (1) Clarified the Form
19b-4 discussion regarding establishing strike prices for Quarterly
Options Series to conform to the proposed rule text; (2) clarified
in its Form 19b-4 that the Exchange will not include options classes
in its pilot program for quoting certain options in one-cent
increments when the issuer of the underlying security is subject to
an announced merger or is in the process of being acquired by
another company or is in bankruptcy and that, for purposes of
assessing average daily volume, the Exchange will use Options
Clearing Corporation data; (3) amended its Form 19b-4 and rules
relating to that pilot program to provide for the quoting of all
options on IWM and SPY in one-cent increments; (4) included in its
Exhibit 5 an updated table of contents; (5) made technical changes
to defined terms in BATS Rule 2.12(d) and proposed BATS Options Rule
21.1(d)(6) to conform to the terms as defined in proposed BATS
Options Rule 16.1(a); (6) deleted proposed BATS Option Rule 16.2(d);
(7) added references to ``BATS Options'' in the title of Chapters
XVI and XVII of the proposed rules; (8) stated its intent to amend
its existing regulatory services agreement with FINRA to capture
certain aspects of regulation specifically applicable to BATS
Options and the regulation and discipline of Options Members; (9)
clarified proposed BATS Options Rule 26.14(a) to conform to FINRA
Rule 2150(c)(1); and (10) represented that it will comply with the
specifications of the Consolidated Options Audit Trail System
(``COATS'') in submitting data for purposes of creating a
consolidated audit trail, as well as receive COATS data for purposes
of its surveillance operations.
---------------------------------------------------------------------------

II. 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.\5\
Specifically, the Commission finds that the proposal is consistent with
Section 6(b)(5) of the Act,\6\ which requires, among other things, that
the rules of a national securities exchange be designed to prevent
fraudulent and manipulative acts and practices; to promote just and
equitable principles of trade; to foster cooperation and coordination
with persons engaged in regulating, clearing, settling, and processing
information with respect to, and facilitating transactions in
securities; to remove impediments to and perfect the mechanism of a
free and open market and a national market system; and, in general, to
protect investors and the public interest. Section 6(b)(5) also
requires that the rules of an exchange not be designed to permit unfair
discrimination among customers, issuers, brokers, or dealers. Further,
the Commission finds that the proposal is consistent with Sections
6(b)(1) of the Act,\7\ which requires, among other things, that a
national securities exchange be so organized and have the capacity to
carry out the purposes of the Act, and to comply and enforce compliance
by its members and persons associated with its members, with the
provisions of the Act, the rules and regulation thereunder, and the
rules of the exchange.
---------------------------------------------------------------------------

    \5\ In approving this proposed rule change, the Commission has
considered the proposed rule's impact on efficiency, competition,
and capital formation. 15 U.S.C. 78c(f).
    \6\ 15 U.S.C. 78f(b)(5).
    \7\ 15 U.S.C. 78f(b)(1).
---------------------------------------------------------------------------

    Overall, the Commission believes that approving the proposed rule
change could confer important benefits on the public and market
participants. In particular, BATS Options' entry into the marketplace
could provide market participants with an additional venue for
executing orders in standardized options, enhance innovation, and
increase competition between and among the options exchanges, resulting
in better prices and executions for investors.
    This discussion does not review every detail of the proposal, but
focuses on the most significant rules and policy issues considered in
review of the proposal.

A. BATS Options Members

    Only Options Members may transact business on BATS Options via the
System.\8\ There will be two types of Options Members: Options Order
Entry Firms (``OEFs'') and Options Market Makers. An Options Member
must be a member of BATS Exchange, and another registered options
exchange that is not registered solely under Section 6(g) of the Act
\9\ or FINRA.\10\ As a BATS Exchange Member, Options Members must
satisfy the requirements in Chapter II of the Exchange Rules, as well
as additional requirements set forth in the BATS Options Rules.\11\ An
OEF may only transact business with Public Customers if such Options
Member also is an Options Member of another registered national
securities exchange or association with which the Exchange has entered
into an agreement under Rule 17d-2 under the Act pursuant to which such
other exchange or association shall be the designated options examining
authority for the OEF.\12\ Further, Options Members that transact
business with Public Customers must at all times be members of
FINRA.\13\
---------------------------------------------------------------------------

    \8\ See proposed BATS Options Rule 17.1(a). An Options Member
means a firm or organization that is registered with the Exchange
pursuant to Chapter XVII of the BATS Options Rules for purposes of
participating in options trading on BATS Options. See proposed BATS
Options Rule 16.1(a)(38).
    \9\ 15 U.S.C. 78f(g).
    \10\ See proposed BATS Options Rule 17.2(f).
    \11\ See Chapter XVII of the proposed BATS Options Rules. Except
to the extent that specific rules relating to options govern or
unless the context otherwise requires, the provisions of the
Exchange Rules shall be applicable to Options Members and to the
trading of option contracts on BATS Options. See proposed BATS
Options Rule 16.2(b). Exchange Rules is defined to mean the rules of
the Exchange, including those for equities and options. See proposed
BATS Options Rule 16.1(a)(5).
    \12\ See proposed BATS Options Rule 26.1.
    \13\ See id.
---------------------------------------------------------------------------

    Among other things, each Options Member must be registered as a
broker-dealer and have as the principal purpose of being an Options
Member the conduct of a securities business, which shall be deemed to
exist if and so long as: (1) The Options Member has qualified and acts
in respect of its business on BATS Options as either an OEF or an
Options Market Maker or both; and (2) all transactions effected by the
Options Member are in compliance with Section 11(a) of the Act and the
rules and regulation adopted thereunder. Participants may trade options
for their own proprietary accounts or, if authorized to do so under
applicable law, may conduct business on behalf of customers.\14\
---------------------------------------------------------------------------

    \14\ See proposed BATS Options Rule 17.1(a).
---------------------------------------------------------------------------

    OEFs are those Options Members representing as agent Customer
Orders on BATS Options or trading as principal on BATS Options. OEFs
also may register as Market Makers.\15\ A Market Maker that engages in
specified Other Business Activities, or that is affiliated with a
broker-dealer that engages in Other Business Activities, including
functioning as an OEF, must have an Information Barrier between the
market making activities and the Other Business Activities.\16\ Options
Market Makers are Options Members registered with the Exchange as
Options Market Makers and registered with BATS Options in an option
series listed on BATS Options. To become an Options Market Maker, an
Options Member is required to register by filing a written application
with BATS, which will consider an applicant's market making ability and
other factors it deems appropriate in determining whether to approve an
applicant's registration.\17\ Such registration will consist of at
least one options series and may include all series traded on the
Exchange.\18\ All Market Makers are designated as specialists on BATS
Options for all purposes under the Act or rules thereunder. The
Exchange will not place any limit on the number of entities that may
become Options Market Makers.\19\ The good standing of a Market Maker
may be suspended, terminated, or withdrawn if the conditions for
approval cease to be maintained or the Market Maker violates any of its
agreements with BATS or any provision of the BATS Options Rules.\20\
---------------------------------------------------------------------------

    \15\ See proposed BATS Options Rule 22.1.
    \16\ See proposed BATS Options Rule 17.1(a).
    \17\ See proposed BATS Options Rule 22.2.
    \18\ See proposed BATS Options Rule 22.3.
    \19\ See proposed BATS Options Rule 22.2(c).
    \20\ See proposed BATS Options Rule 22.4(b).
---------------------------------------------------------------------------

    The Exchange will not list an options series for trading unless at
least one Options Market Maker is registered in the options series.\21\
In addition, before

the Exchange opens trading for any additional series of an options
class, it will require at least one Options Market Maker to be
registered for trading that particular series.\22\
---------------------------------------------------------------------------

    \21\ See proposed BATS Options Rule 19.5(a).
    \22\ See id.
---------------------------------------------------------------------------

    BATS Options Market Makers are required to electronically engage in
a course of dealing to enhance liquidity available on BATS Options and
to assist in the maintenance of fair and orderly markets.\23\ Among
other things, an Options Market Maker must: (1) On a daily basis
maintain a two-sided market on a continuous basis in at least 75% of
the options series in which it is registered; (2) enter a size of at
least one contract for its best bid and its best offer; and (3)
maintain minimum net capital in accordance with Commission and Exchange
rules.\24\ Substantial or continued failure by an Options Market Maker
to meet any of its obligations and duties would subject the Options
Market Maker to disciplinary action, suspension, or revocation of the
Options Market Maker's registration in one or more options series.\25\
---------------------------------------------------------------------------

    \23\ See proposed BATS Options Rule 22.5.
    \24\ See, e.g., proposed BATS Options Rules 22.5 and 22.6.
    \25\ See proposed BATS Options Rule 22.5(c).
---------------------------------------------------------------------------

    The Commission finds that BATS Options Market Maker qualification
requirements are consistent with the Act and notes that they are
similar to those of other options exchanges.\26\ The Commission also
finds that the BATS Options Market Maker participation requirements are
consistent with the Act. Market Makers receive certain benefits for
carrying out their responsibilities. For example, a lender may extend
credit to a broker-dealer without regard to the restrictions in
Regulation T of the Board of Governors of the Federal Reserve System if
the credit is used to finance a broker-dealer's activities as a
specialist or market maker on a national securities exchange.\27\ In
addition, market makers are exempted from the prohibition in Section
11(a) of the Act. The Commission believes that a market maker must have
sufficient affirmative obligations, including the obligation to hold
itself out as willing to buy and sell options for its own account on a
regular or continuous basis, to justify this favorable treatment. The
Commission believes that BATS Options Market Maker participation
requirements impose sufficient affirmative obligations on BATS Options
Market Makers and, accordingly, that BATS Options requirements are
consistent with the Act.
---------------------------------------------------------------------------

    \26\ See, e.g., ISE Rule 804, and NOM Rules, Chapter VII,
Sections 5 and 6.
    \27\ 12 CFR 221.5(c)(6).
---------------------------------------------------------------------------

B. BATS Options Trading System

    The BATS Options trading system will leverage the Exchange's
current technology, including its customer connectivity, messaging
protocols, quotation and execution engine, order router, data feeds,
and network infrastructure. BATS Options will operate an electronic
trading system to trade options (``System'') that will provide for the
electronic display and automatic execution of orders in price/time
priority, without regard to the status of the entities that are
entering orders.\28\ The System will operate between the hours of 9:30
a.m. Eastern Time and 4 p.m. Eastern Time, with all orders being
available for execution during that time frame.\29\ The System will
include a proprietary data feed, which will display the bid and offer
at multiple price levels on an anonymous basis using the minimum price
variation applicable to that security.\30\
---------------------------------------------------------------------------

    \28\ The System includes: (1) An order execution service that
enables Options Members to automatically execute transactions in
securities listed and traded on BATS Options; (2) a trade reporting
service that submits ``locked-in'' trades for clearing to a
registered clearing agency for clearance and settlement, transmits
last-sale reports of transactions automatically to OPRA for
dissemination to the public and industry, and provides participants
with monitoring and risk management capabilities to facilitate
participation in a ``locked-in'' trading environment; and (3) a data
feed(s) that can be used to display without attribution to Options
Members' MPIDs Displayed Orders on both the bid and offer side of
the market for price levels then within BATS Options using the
minimum price variation applicable to that security. See proposed
BATS Options Rule 21.1(a). See Notice, supra note 3, for a more
complete description of BATS Options operation and rules. The
Commission notes that the Plan for Reporting of Consolidated Options
Last Sale Reports and Quotation Information (``OPRA Plan'') requires
each party to the Plan to collect and promptly transmit to the
Options Price Reporting Authority (``OPRA'') all last sale reports
relating to its market. See OPRA Plan, Article V, Section 5.2(a).
    \29\ See proposed BATS Options Rule 21.2(a).
    \30\ See proposed BATS Options Rule 21.1(a)(3).
---------------------------------------------------------------------------

    Options Members will be able to enter the following types of orders
into the System: Market Orders; Limit Orders; Reserve Orders; \31\
Minimum Quantity Orders; \32\ Discretionary Orders; \33\ Price
Improving Orders; \34\ Destination Specific Orders; \35\ BATS Only
Orders; \36\ BATS Post Only Orders; \37\ Partial Post

Only at Limit Orders; \38\ Intermarket Sweep Orders; \39\ and Directed
Intermarket Sweep Orders,\40\ with characteristics and functionality
similar to what is currently approved for use in the Exchange's
equities trading facility or on other options exchanges.\41\ Orders
entered into the System will be designated for display (price and size)
on an anonymous basis in the order display service of the System.\42\
---------------------------------------------------------------------------

    \31\ Reserve Orders are limit orders that have both a displayed
size as well as an additional non-displayed amount. Both the
displayed and non-displayed portions of the Reserve Order are
available for potential execution against incoming orders. If the
displayed portion of a Reserve Order is fully executed, the System
will replenish the display portion from reserve up to the size of
the original display amount. A new timestamp is created for the
replenished portion of the order each time it is replenished from
reserve, while the reserve portion retains the timestamp of its
original entry.
    \32\ Minimum Quantity Orders are orders that require that a
specified minimum quantity of contracts be obtained, or the order is
cancelled. Minimum Quantity Orders may only be entered with a time-
in-force designation of Immediate or Cancel.
    \33\ Discretionary Orders are orders that have a displayed price
and size, as well as a non-displayed discretionary price range, at
which the entering party is also willing to buy or sell. When
displayed contracts become available on the opposite side of the
market or an execution takes place at any price within the
discretionary price range, the displayed price and size is
automatically cancelled and an IOC buy (sell) order is generated
priced at the highest (lowest) price in the discretionary price
range. If more than one Discretionary Order is available for
conversion to an IOC order, the System will convert and process all
such orders in the same priority in which such Discretionary Orders
were entered. If the IOC order is not executed in full, the
unexecuted portion of the order is automatically re-posted and
displayed in the BATS Options Book with a new time stamp, at its
original displayed price, and with its non-displayed discretionary
price range.
    \34\ Price Improving Orders are orders to buy or sell an option
at a specified price at an increment smaller than the minimum price
variation in the security. Price Improving Orders may be entered in
increments as small as one cent. Price Improving Orders that are
available for display shall be displayed at the minimum price
variation in that security and shall be rounded up for sell orders
and rounded down for buy orders. Unless a User has entered
instructions not to do so, Price Improving Orders will be subject to
the ``displayed price sliding process.'' Pursuant to the displayed
price sliding process, a Price Improving Order that after rounding
to the minimum price variation, or any other order to be displayed
on the BATS Book that at the time of entry, would lock or cross a
Protected Quotation (collectively, ``the original locking price''):
(a) will be displayed by the System at one minimum price variation
below the current NBO (for bids) or to one minimum price variation
above the current NBB (for offers); and (b) in the event the NBBO
changes such that the order at the original locking price would not
lock or cross a Protected Quotation, the order will receive a new
timestamp, and will be displayed at the original locking price.
    \35\ Destination Specific Orders are market or limit orders that
instruct the System to route the order to a specified away trading
center, after exposing the order to the BATS Options Book.
Destination Specific Orders that are not executed in full after
routing away are processed by the Exchange, as described in proposed
BATS Options Rules 21.8 and 21.9.
    \36\ BATS Only Orders are orders that are to be ranked and
executed on the Exchange or cancelled, as appropriate, without
routing away to another trading center. A BATS Only Order that, at
the time of entry, would cross a Protected Quotation will be
repriced to the locking price and ranked at such price in the BATS
Options Book. A BATS Only Order will be subject to the displayed
price sliding process unless a User has entered instructions not to
use the displayed price sliding process.
    \37\ BATS Post Only Orders are orders that are to be ranked and
executed on the Exchange or cancelled, as appropriate, without
routing away to another trading center. Such orders will not remove
liquidity from the BATS Options Book. A BATS Post Only Order will be
subject to the displayed price sliding process unless a User has
entered instructions not to use the displayed price sliding process.
    \38\ Partial Post Only at Limit Orders are orders that are to be
ranked and executed on the Exchange or cancelled, as appropriate,
without routing away to another trading center. Such orders will
only remove liquidity from the BATS Options Book under the following
circumstances: (a) a Partial Post Only at Limit Order will remove
liquidity from the BATS Options Book up to the full size of the
order if, at the time of receipt, it can be executed at prices
better than its limit price (i.e., price improvement); (b)
regardless of any liquidity removed from the BATS Options Book under
the circumstances described in paragraph (a) above, a User may enter
a Partial Post Only at Limit Order instructing the Exchange to also
remove liquidity from the BATS Options Book at the order's limit
price up to a designated percentage of the remaining size of the
order after any execution pursuant to paragraph (a) above (``Maximum
Remove Percentage'') if, after removing such liquidity at the
order's limit price, the remainder of such order can then post to
the BATS Options Book. If no Maximum Remove Percentage is entered,
such order will only remove liquidity to the extent such order will
obtain price improvement as described in paragraph (a) above. A
Partial Post Only at Limit Order will be subject to the displayed
price sliding process unless a User has entered instructions not to
use the displayed price sliding process.
    \39\ Intermarket Sweep Orders (``ISOs'') are orders that have
the meaning provided in proposed BATS Options Rule 27.1, which
relates to intermarket trading. Such orders may be executed at one
or multiple price levels in the System without regard to Protected
Quotations at other options exchanges (i.e., may trade through such
quotations). The Exchange relies on the marking of an order by a
User as an ISO order when handling such order, and thus, it is the
entering Options Member's responsibility, not the Exchange's
responsibility, to comply with the requirements relating to ISOs.
ISOs are not eligible for routing.
    Nothwithstanding the Exchange's reliance on a User's marking of
an order as an ISO, the Exchange has an obligation under Rule
608(c), 17 CFR 242.608(c), and Section 19(g)(1) of the Act, 15
U.S.C. 78s(g)(1), to enforce members' compliance with the plan and
exchange rules related to the plan. Accordingly, BATS must have a
robust regulatory program, including surveillance, examination,
investigative, and disciplinary programs, to enforce its members'
compliance with its rules and the plan provisions.
    \40\ Directed Intermarket Sweep Orders are ISOs entered by a
User that bypass the System and are immediately routed by the
Exchange to another options exchange specified by the User for
execution. It is the entering Member's responsibility, not the
Exchange's responsibility, to comply with the requirements relating
to ISOs.
    \41\ See proposed BATS Options Rule 21.1(d). Options Members
entering orders into the System may designate such orders to remain
in force and available for display and/or potential execution for
varying periods of time. Unless cancelled earlier, once these time
periods expire, the order (or the unexecuted portion thereof) is
returned to the entering party. Such ``Time in Force'' designations
for orders include ``Good Til Day'' or ``GTD,'' ``Immediate Or
Cancel'' or ``IOC,'' ``DAY,'' and ``WAIT.'' See proposed BATS
Options Rule 21.1(f).
    \42\ See proposed BATS Options Rules 21.8 and 21.10.
---------------------------------------------------------------------------

    The System will execute trading interest within the System in
price/time priority, meaning it will execute all trading interest at
the best price level within the System before executing trading
interest at the next best price.\43\ At each price level, displayed
trading interest \44\ will be executed before non-displayed trading
interest.\45\
---------------------------------------------------------------------------

    \43\ See proposed BATS Options Rule 21.8(a).
    \44\ Trading interest at each price level where the price is not
displayed will be executed in the following priority: (a) Price
Improving Orders and orders subject to displayed price sliding, and
then (b) discretionary portion of discretionary orders as set forth
in proposed BATS Options Rule 21.1(d)(4).
    \45\ After orders that are displayed within the System at each
price level are executed, the non-displayed portion of Reserve
Orders will be executed followed by the discretionary portion of
discretionary orders. See proposed BATS Options Rules 21.8(a)(1) and
21.8(a)(2).
     As with its equities market, the Exchange will allow Options
Members to use Member Match Trade Prevention (``MMTP'') Modifiers.
See proposed BATS Options Rule 21.1(g). Any incoming order
designated with an MMTP modifier would be prevented from executing
against a resting opposite side order also designated with an MMTP
modifier and originating from the same market participant identifier
(``MPID''), Exchange Member identifier, or Exchange Sponsored
Participant identifier. Id.
---------------------------------------------------------------------------

    The Commission believes that BATS' proposed execution priority
rules and order types are consistent with the Act, and in particular,
with the requirements in Section 6(b)(5) of the Act, which requires an
exchange's rules be, among other things, designed 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, and are not
designed to permit unfair discrimination between customers, issuers,
brokers, or dealers. The Commission further finds that BATS Options
proposed trading rules are consistent with the requirements of the
Options Order Protection and Locked/Crossed Market Plan. Specifically,
subject to the exceptions contained in proposed BATS Options Rule
27.2(b), the System will ensure that an order is not executed at a
price that trades through another options exchange.\46\ In this regard,
the Commission notes that BATS is required under Rule 608(c) of
Regulation NMS to comply with and enforce compliance by its members
with the Options Order Protection and Locked/Crossed Market Plan,
including the requirement to avoid trading through better prices
available on other markets.\47\ Any order entered with a price that
would lock or cross a Protected Quotation that is not eligible for
either routing or the displayed price sliding process, as defined in
proposed BATS Options Rule 21.1(d)(6), will be cancelled.\48\
---------------------------------------------------------------------------

    \46\ See proposed BATS Options Rules 21.6(e) and 27.2.
    \47\ See 17 CFR 242.608(c).
    \48\ See proposed BATS Options Rule 21.6(f).
---------------------------------------------------------------------------

    Proposed BATS Options Rule 22.12 prohibits Options Members from
executing, as principal, orders they represent as agent unless the
agency order is first exposed on BATS Options for at least one second
or the Options Member has been bidding or offering on BATS Options for
at least one second prior to receiving an agency order that is
executable against such bid or offer.
    The Commission believes that in the electronic environment of BATS
Options, a one second exposure period could facilitate the prompt
execution of orders while continuing to provide option members with an
opportunity to compete for exposed bids and offers. The Exchange
represents that market participants are sufficiently automated that a
one second exposure period allows an adequate time for market
participants to electronically respond to an order.\49\ In addition,
the Exchange's trading system for BATS Options is identical to the
trading system currently used for equities trading on the Exchange
today. The Exchange believes, based on its experience with that trading
system, that one second is an adequate exposure period. Further, the
Exchange believes that many of its current Members will be Options
Members and that such current Members have demonstrated an ability to
respond to orders in a timely fashion.\50\ Accordingly, the Commission
believes it is consistent with the Act to have an order exposure time
of one second.
---------------------------------------------------------------------------

    \49\ See Notice, supra note 3, at 64791.
    \50\ Id.
---------------------------------------------------------------------------

C. Openings

    The System will open options, other than index options, for trading
based on the first transaction after 9:30 a.m. Eastern Time in the
securities underlying the options as reported on the first print
disseminated pursuant to an effective national market system plan.\51\
With respect to index options, the System will open such options for
trading at 9:30 a.m. Eastern Time.\52\ Because the exchange does not
propose to adopt an opening cross or similar process, the opening trade
that occurs on the Exchange will be a trade in the

ordinary course of dealings on the Exchange. Accordingly, the System
will ensure that the opening trade in an options series will not trade
through a Protected Quotation (as defined in proposed BATS Options Rule
27.1) at another options exchange, consistent with the general standard
regarding trade-throughs articulated in proposed BATS Options Rule
21.6(e). The Commission believes that BATS Options rules regarding the
opening of trading on BATS Options, particularly the fact that a trade
will not occur until the underlying security has begun trading and that
any opening trade will be subject to the trade-through provisions of
BATS Options Rule 21.6(e), is reasonably designed to provide for an
orderly opening and is consistent with the Act.
---------------------------------------------------------------------------

    \51\ See proposed BATS Options Rule 21.7(a).
    \52\ See id.
---------------------------------------------------------------------------

D. Routing

    Options Members may designate orders to be routed to another
options exchange when trading interest is not available on BATS Options
or to execute only on BATS Options. An order that is designated as
routable will be routed to other options markets to be executed when
the Exchange is not at the NBBO consistent with the Options Order
Protection and Locked/Crossed Market Plan. Orders routed to other
options exchanges do not retain time priority with respect to orders in
the System, and the System will continue to execute orders while routed
orders are away at another exchange.\53\ If a routed order is returned,
in whole or in part, that order (or its remainder) will receive a new
time stamp reflecting the time of its return to the System.\54\ Options
Members whose orders are routed away will be obligated to honor trades
executed on other exchanges to the same extent they would be obligated
to honor a trade executed on BATS Options.\55\
---------------------------------------------------------------------------

    \53\ See proposed BATS Options Rule 21.9(b).
    \54\ Id.
    \55\ See proposed BATS Options Rule 21.9(c).
---------------------------------------------------------------------------

    BATS Options will route orders in options via BATS Trading, Inc.
(``BATS Trading''), which currently serves as the Outbound Router of
the Exchange, pursuant to Rule 2.11.\56\ The function of the Outbound
Router will be to route orders in options listed and open for trading
on BATS Options to other options exchanges pursuant to BATS Options
rules solely on behalf of BATS Options.\57\ The Outbound Router will be
subject to regulation as a facility of the Exchange, including the
requirement to file proposed rule changes under Section 19 of the
Act.\58\
---------------------------------------------------------------------------

    \56\ See proposed BATS Options Rule 21.9(d).
    \57\ Id.
    \58\ Id.
---------------------------------------------------------------------------

    Pursuant to Rule 2.11, BATS Trading is required to be a member of
an SRO unaffiliated with BATS that is its designated examining
authority, and BATS Trading is required to establish and maintain
procedures and internal controls reasonably designed to restrict the
flow of confidential and proprietary information between BATS and its
facilities, including BATS Trading, and any other entity.\59\ In
addition, the books, records, premises, officers, directors, agents,
and employees of BATS Trading, as a facility of BATS, are deemed to be
those of the Exchange for purposes of and subject to oversight pursuant
to the Act.\60\
---------------------------------------------------------------------------

    \59\ See BATS Rule 2.11(a)(5).
    \60\ See BATS Rule 2.11(b).
---------------------------------------------------------------------------

    In the event the Exchange is not able to provide order routing
services through its affiliated broker-dealer, the Exchange would route
orders to other options exchanges in conjunction with one or more
routing brokers that are not affiliated with the Exchange (``Routing
Services'').\61\ The Exchange will determine the logic that provides
when, how, and where orders are routed away to other options
exchanges.\62\ The routing broker will receive routing instructions
from the Exchange to route orders to other options exchanges and report
the executions back to the Exchange.\63\ The routing broker cannot
change the terms of an order or the routing instructions, nor does the
routing broker have any discretion about where to route an order.\64\
The Exchange would enter into an agreement with each routing broker
used by the Exchange that would, among other things, restrict the use
of any confidential and proprietary information that the routing broker
receives to legitimate business purposes necessary for the routing of
the order at the direction of the Exchange.\65\ Further, the Exchange
would establish and maintain procedures and internal controls
reasonably designed to adequately restrict the flow of confidential and
proprietary information between (1) the Exchange and the routing
broker, and any other entity, including any affiliate of the routing
broker; and (2) if the routing broker or any of its affiliates engages
in any other business activities, other than providing routing services
to the Exchange, the segment of the routing broker or affiliate that
provides the other business activities and the segment of the routing
broker that provides the routing services.\66\
---------------------------------------------------------------------------

    \61\ See proposed BATS Options Rule 21.9(e).
    \62\ See proposed BATS Options Rule 21.9(e)(5).
    \63\ See proposed BATS Options Rule 21.9(e)(6).
    \64\ Id.
    \65\ See proposed BATS Options Rule 21.9(e)(1).
    \66\ See proposed BATS Options Rule 21.9(e)(2).
---------------------------------------------------------------------------

    The Exchange may not use a routing broker for which the Exchange or
any affiliate of the Exchange is the designated examining
authority.\67\ In addition, the Exchange will provide its Routing
Services in compliance with the provisions of the Act and the rules
thereunder, including, but not limited to, the requirements in Section
6(b)(4) and (5) of the Act that the rules of a national securities
exchange provide for the equitable allocation of reasonable dues, fees,
and other charges among its members and issuers and other persons using
its facilities, and not be designed to permit unfair discrimination
between customers, issuers, brokers, or dealers.\68\ Any bid or offer
entered on the Exchange routed to another options exchange through a
routing broker that results in an execution shall be binding on the
Options Member that entered such bid or offer.\69\
---------------------------------------------------------------------------

    \67\ See proposed BATS Options Rule 21.9(e)(3).
    \68\ See proposed BATS Options Rule 21.9(e)(4). See also 15
U.S.C. 78f(b)(4) and (5).
    \69\ See proposed BATS Options Rule 21.9(e)(7).
---------------------------------------------------------------------------

    Use of BATS Trading or the Routing Services to route orders to
other market centers is optional.\70\ Parties that do not desire to use
BATS Trading or other Routing Services provided by the Exchange must
designate orders as not available for routing.\71\
---------------------------------------------------------------------------

    \70\ See proposed BATS Options Rule 21.9(d).
    \71\ See id.
---------------------------------------------------------------------------

    In light of these protections, for both the use of BATS Trading or
an unaffiliated router, the Commission believes that BATS rules and
procedures regarding the use of BATS Trading or an unaffiliated router
to route orders to away exchanges are consistent with the Act.

E. Minimum Quoting and Trading Increments

    The Exchange is proposing to apply the following minimum quoting
increments: (1) if the option price is less than $3.00, five (5) cents;
and (2) if the option price is $3.00 or higher, ten (10) cents. In
addition, the Exchange proposes to participate in a pilot program,
until December 31, 2010, to allow quoting in certain options in smaller
increments (``Pilot Program''). BATS will include in the Pilot Program
all classes that are, on that date, included by other options exchanges
in substantially similar pilot programs. The Exchange further proposes
to expand the classes subject to the Pilot

Program on a quarterly basis, by adding 75 classes at a time through
August 2010.\72\ If an options class is included in the Pilot Program,
BATS will allow quoting in one (1) cent increments any option priced
less than $3.00 or options on QQQQs, IWM, and SPY. Options priced at
$3.00 or higher that are in the Pilot Program will be quoted in five
(5) cent increments.\73\
---------------------------------------------------------------------------

    \72\ See Notice, supra note 3 (providing additional details
regarding the Pilot Program). The Exchange will not include in the
Pilot Program options classes in which the issuer of the underlying
security is subject to an announced merger or is in the process of
being acquired by another company or if the issuer is in bankruptcy,
and, for purposes of assessing average daily volume, the Exchange
will use data compiled and disseminated by the Options Clearing
Corporation (``OCC''). See Amendment No. 1, supra note 4.
    \73\ See proposed BATS Options Rule 21.5(a). See also Amendment
No. 1, supra note 4.
---------------------------------------------------------------------------

    In addition, the Exchange is proposing that the minimum trading
increment for options contracts traded on BATS Options would be one (1)
cent for all series.\74\
---------------------------------------------------------------------------

    \74\ See proposed BATS Options Rule 21.5(b).
---------------------------------------------------------------------------

    The Commission believes that BATS' proposal to commence quoting
pursuant to the Pilot Program, which is consistent with the rules of
the other options exchanges, is consistent with the Act. As the
Commission noted in approving the latest expansion of the Pilot
Program, allowing market participants to quote in smaller increments
has been shown to reduce spreads, thereby lowering costs to
investors.\75\ In addition, permitting options to be quoted in smaller
increments pursuant to the Pilot Program provides the opportunity for
reduced spreads for a significant amount of trading volume.\76\ The
Commission believes that BATS' proposal to commence quoting pursuant to
the Pilot Program would promote the continuing narrowing of spreads.
Further, although the Pilot Program has contributed to the increase in
quote message traffic, the Commission notes that it has been manageable
by the exchanges and OPRA, and the Commission has not received any
reports of disruptions in the dissemination of pricing information.\77\
Although the Commission anticipates that BATS' proposal will contribute
to further increases in quotation message traffic, the Commission
believes that BATS' proposal is sufficiently limited such that it is
unlikely to increase quotation message traffic beyond the capacity of
market participants' systems and disrupt the timely receipt of
information.\78\
---------------------------------------------------------------------------

    \75\ See Securities Exchange Act Release No. 60711 (September
23, 2009), 74 FR 49419, 49424 (September 28, 2009) (SR-NYSEArca-
2009-44) (partially approving a proposed rule change to expand the
Pilot Program).
    \76\ See id.
    \77\ See id.
    \78\ The Commission believes that the continued operation and
phased expansion of the Pilot Program will provide valuable
information to the exchanges, the Commission, and others about the
impact of penny quoting in the options market. See Securities
Exchange Act Release No. 60711, supra note 75. In particular,
extending and expanding the Pilot Program will allow further
analysis of the impact of penny quoting in the Pilot Program classes
over a longer period of time on, among other things: (1) spreads;
(2) peak quotation rates; (3) quotation message traffic; (4)
displayed size; (5) ``depth of book'' liquidity; and (6) market
structure. See id. The Exchange has committed to provide the
Commission with periodic reports that will analyze the impact of the
expanded Pilot Program. See Notice, supra note 3. The Commission
expects the Exchange to include statistical information relating to
these factors in its periodic reports.
---------------------------------------------------------------------------

F. Securities Traded on BATS Options

    The Exchange proposes to adopt initial and continued listing
standards for equity and index options that are substantially similar
to the listing standards adopted by other options exchanges.\79\ The
Commission believes that BATS' proposed initial and continued listing
standards are consistent with the Act, including Section 6(b)(5), in
that they are designed to protect investors and the public interest and
to promote just and equitable principles of trade. BATS' operation of
the BATS Options Exchange, however, is conditioned on BATS becoming a
Plan Sponsor in the Plan for the Purpose of Developing and Implementing
Procedures Designed to Facilitate the Listing and Trading of
Standardized Options Submitted Pursuant to Section 11A(a)(3)(B) of the
Act (``OLPP''). The Exchange represents that it will join OLPP.\80\ In
addition, BATS will need to become a participant in the OCC.
---------------------------------------------------------------------------

    \79\ See, e.g., Rules of NOM, Chapters IV and XIV; Rules of BOX,
Chapters IV and XIV.
    \80\ See Notice, supra note 3, at 64793.
---------------------------------------------------------------------------

G. Regulation

    According to the Exchange, consistent with the Exchange's existing
regulatory structure, the Exchange's Chief Regulatory Officer will have
general supervision of the regulatory operations of BATS Options,
including responsibility for overseeing the surveillance, examination,
and enforcement functions and for administering all regulatory services
agreements applicable to BATS Options. Similarly, the Exchange's
existing Regulatory Oversight Committee will be responsible for
overseeing the adequacy and effectiveness of Exchange's regulatory and
self-regulatory organization (``SRO'') responsibilities, including
those applicable to BATS Options.\81\
---------------------------------------------------------------------------

    \81\ Pursuant to a Regulatory Services Agreement, FINRA would
perform certain regulatory functions on behalf of the Exchange. See
infra note 90 and accompanying text.
---------------------------------------------------------------------------

    BATS rules provide that is has disciplinary jurisdiction over its
members, including Options Members, so that it can enforce its members'
compliance with its rules and the federal securities laws.\82\ The
Exchange's rules also permit it to sanction members, including Options
Members, for violations of its rules and of the federal securities laws
by, among other things, expelling or suspending members, limiting
members' activities, functions, or operations, fining or censuring
members, or suspending or barring a person from being associated with a
member.\83\ BATS rules also provide for the imposition of fines for
minor rule violations in lieu of commencing disciplinary
proceedings.\84\
---------------------------------------------------------------------------

    \82\ See proposed BATS Options Rules 17.3 and 25.1.
    \83\ See BATS Rule 8.1 and proposed BATS Options Rule 25.1.
    \84\ See infra notes 100 to 107 and accompanying text.
---------------------------------------------------------------------------

    Moreover, the Exchange will: (1) Join the existing options industry
agreements pursuant to Section 17(d) of the Act; (2) amend as necessary
the Exchange's existing Regulatory Services Agreement (``RSA'') with
FINRA to cover many aspects of the regulation and discipline of Members
that participate in options trading; (3) perform options listing
regulation, as well as authorize Options Members to trade on BATS
Options; and (4) perform automated surveillance of trading on BATS
Options for the purpose of maintaining a fair and orderly market at all
times.\85\
---------------------------------------------------------------------------

    \85\ As it does with its equities trading, the Exchange will
monitor BATS Options to identify unusual trading patterns and
determine whether particular trading activity requires further
regulatory investigation by FINRA. The Exchange represents that it
will comply with COATS specifications in submitting data for
purposes of creating a consolidated audit trail, as well as receive
COATS data for purposes of its surveillance operations. See
Amendment No. 1, supra note 4.
---------------------------------------------------------------------------

    In addition, the Exchange will oversee the process for determining
and implementing trading halts, identifying and responding to unusual
market conditions, and administering the Exchange's process for
identifying and remediating ``obvious errors'' by and among its Options
Members. BATS proposed rules (Chapter XX) regarding halts, unusual
market conditions, extraordinary market volatility, obvious errors, and
audit trail are closely modeled on the approved rules of The NASDAQ
Options Market LLC (``NOM'')

and the Boston Options Exchange Group, LLC (``BOX'').\86\
---------------------------------------------------------------------------

    \86\ See Rules of NOM, Chapter V, and Rules of BOX, Chapter V.
---------------------------------------------------------------------------

    The Commission finds that the Exchange's proposed rules and
regulatory structure with respect to BATS Options Exchange are
consistent with the requirements of the Act, and in particular with
Section 6(b)(1) of the Act, which requires an exchange to be so
organized and have the capacity to be able to carry out the purposes of
the Act and to comply, and to enforce compliance by its members and
persons associated with its members, with the Act and the rules and
regulations thereunder, and the rules of the Exchange,\87\ and with
Section 6(b)(6) and 6(b)(7) of the Act \88\ which require an Exchange
to provide fair procedures for the disciplining of members and persons
associated with members.\89\
---------------------------------------------------------------------------

    \87\ 15 U.S.C. 78f(b)(1).
    \88\ 15 U.S.C. 78f(b)(6) and (b)(7).
    \89\ Every Options Member will be required to have at least one
registered Options Principal who satisfies the criteria of that
rule, including passing an appropriate qualification examination.
See proposed BATS Options Rule 17.2(g). In addition, all Options
Principals will be required to comply with the Exchange's existing
continuing education requirements. See BATS Rule 2.5, Interpretation
and Policy .02. and proposed BATS Options Rule 17.2(g)(4). The
Commission believes these rules will help ensure that the Exchange
can meet its obligations under Section 6(b)(1) of the Act to, among
other things, enforce compliance by associated persons of its
Members with the Act, the rules thereunder, and the Exchange's
rules, and are consistent with the Act. The Commission further notes
that Authorized Traders of Options Members will be required to
comply with existing Exchange registration and continuing education
requirements applicable to Authorized Traders. See BATS Rule 2.5,
Interpretation and Policy .01 and .02, BATS Rule 11.4., and proposed
BATS Options Rule 16.2(b). ``Authorized Trader'' is defined as a
person who may submit orders (or who supervises a routing engine
that may automatically submit orders) to the Exchange's trading
facilities on behalf of his or her Member or Sponsored Participant.
See BATS Rule 1.5(d).
---------------------------------------------------------------------------

1. Regulatory Services Agreement
    Currently, the Exchange and FINRA are parties to an existing RSA,
pursuant to which FINRA personnel operate as agents for the Exchange in
performing certain functions. According to the Exchange, the RSA
between the Exchange and FINRA will be amended to capture certain
aspects of regulation specifically applicable to BATS Options and the
regulation and discipline of Options Members.\90\ The Commission notes
that BATS will continue to bear ultimate regulatory responsibility for
functions performed on BATS' behalf under the RSA. Further, BATS
retains ultimate legal responsibility for the regulation of its Members
and its market.
---------------------------------------------------------------------------

    \90\ See Amendment No. 1, supra note 4.
---------------------------------------------------------------------------

    The Commission believes that it is consistent with the Act to allow
BATS Exchange to contract with FINRA to perform examination,
enforcement, and disciplinary functions.\91\ These functions are
fundamental elements to a regulatory program and constitute core self-
regulatory functions. It is essential to the public interest and the
protection of investors that these functions are carried out in an
exemplary manner, and the Commission believes that FINRA has the
expertise and experience to perform these functions on behalf of BATS
Exchange.\92\ The Commission is conditioning the operation of BATS
Options Exchange on the finalization of the provisions in the RSA that
will expand the scope of that agreement to options trading and specify
the BATS Exchange and Commission rules for which FINRA will provide
regulatory functions for the trading of options on the BATS Options
Exchange.
---------------------------------------------------------------------------

    \91\ See, e.g., Regulation of Exchanges and Alternative Trading
Systems, Securities Exchange Act Release No. 40760 (December 8,
1998), 63 FR 70844 (December 22, 1998). See also, e.g., Securities
Exchange Act Release Nos. 50122 (July 29, 2004), 69 FR 47962 (August
6, 2004) (SR-Amex-2004-32) (approving rule that allowed Amex to
contract with another SRO for regulatory services) (``Amex
Regulatory Services Approval Order''); 57478 (March 12, 2008), 73 FR
14521 (March 18, 2008) (SR-NASDAQ-2007-004) (``NOM Approval
Order''); and 53128 (January 13, 2006), 71 FR 3550 (January 23,
2006) (File No. 10-131) (``Nasdaq Exchange Registration Order'').
    \92\ See Amex Regulatory Services Approval Order; NOM Approval
Order; and Nasdaq Exchange Registration Order, id.
---------------------------------------------------------------------------

    The Commission notes that, unless relieved by the Commission of its
responsibility,\93\ BATS bears the responsibility for self-regulatory
conduct and primary liability for self-regulatory failures, not the SRO
retained to perform regulatory functions on the Exchange's behalf. In
performing these functions, however, FINRA may nonetheless bear
liability for causing or aiding and abetting the failure of the
Exchange to perform its regulatory functions.\94\ Accordingly, although
FINRA will not act on its own behalf under its SRO responsibilities in
carrying out these regulatory services for BATS relating to the
operation of BATS Options, FINRA also may have secondary liability if,
for example, the Commission finds the contracted functions are being
performed so inadequately as to cause a violation of the federal
securities laws by BATS Exchange.\95\
---------------------------------------------------------------------------

    \93\ See Section 17(d)(1) of the Act and Rule 17d-2 thereunder
(15 U.S.C. 78q(d)(1) and 17 CFR 240.17d-2). The Commission notes
that this order is not approving the RSA.
    \94\ For example, if failings by FINRA have the effect of
leaving BATS Exchange in violation of any aspect of BATS Exchange's
self-regulatory obligations, BATS Exchange would bear direct
liability for the violation, while FINRA may bear liability for
causing or aiding and abetting the violation. See Nasdaq Exchange
Registration Order, supra note 91. See also Securities Exchange Act
Release No. 42455 (February 24, 2000), 65 FR 11388 (March 2, 2000)
(File No. 10-127) (approving the International Securities Exchange
LLC's application for registration as a national securities
exchange).
    \95\ See id.
---------------------------------------------------------------------------

2. 17d-2 Agreements
    Rule 17d-2 under the Act permits SROs to file with the Commission
plans under which the SROs allocate among each other the responsibility
to receive regulatory reports from, and examine and enforce compliance
with specified provisions of the Act and rules thereunder and SRO rules
by, firms that are members of more than one SRO (``common members'').
If such a plan is declared effective by the Commission, an SRO that is
a party to the plan is relieved of regulatory responsibility as to any
common member for whom responsibility is allocated under the plan to
another SRO.\96\
---------------------------------------------------------------------------

    \96\ Rule 17d-2 provides that any two or more SROs may file with
the Commission a plan for allocating among such SROs the
responsibility to receive regulatory reports from persons who are
members or participants of more than one of such SROs to examine
such persons for compliance, or to enforce compliance by such
persons, with specified provisions of the Act, the rules and
regulations thereunder, and the rules of such SROs, or to carry out
other specified regulatory functions with respect to such persons.
See 17 CFR 240.17d-2.
---------------------------------------------------------------------------

    All of the options exchanges, FINRA, and the New York Stock
Exchange LLC (``NYSE'') have entered into the Options Sales Practices
Agreement, a Rule 17d-2 Agreement, which allocates to certain SROs
(``examining SROs'') regulatory responsibility for common members with
respect to certain options-related sales practice matters.\97\ Under
this Agreement, the examining SROs would examine firms that are common
members of the Exchange and the particular examining SRO for compliance
with certain provisions of the Act, certain of the rules and
regulations adopted thereunder, certain examining SRO rules, and
certain BATS Options Rules. In addition, BATS Options Rules contemplate
participation in this Agreement by requiring that any Options Member
also be a member of at least one of the examining SROs.\98\
---------------------------------------------------------------------------

    \97\ See Securities Exchange Act Release No. 57987 (June 18,
2008), 73 FR 36156 (June 25, 2008) (File No. S7-966).
    \98\ See proposed BATS Options Rule 26.1.
---------------------------------------------------------------------------

    Moreover, all of the options exchanges and FINRA have entered into
the Options Related Market Surveillance Agreement, which allocates
regulatory responsibility for certain options-related

market surveillance matters among the participants.\99\ Under this
agreement, the examining SRO would assume regulatory responsibility
with respect to firms that are common members of the Exchange and the
particular examining SRO for compliance with applicable common rules
for certain accounts.
---------------------------------------------------------------------------

    \99\ See Securities Exchange Act Release No. 58765 (October 9,
2008), 73 FR 62344 (October 20, 2008) (File No. 4-551).
---------------------------------------------------------------------------

    The Commission notes that, as a condition to this order, BATS must
become a party to each of these 17d-2 Agreements, which will cover BATS
Members that are Options Members.
3. Minor Rule Violation Plan
    The Commission approved the BATS Exchange's Minor Rule Violation
Plan (``MRVP'') in 2008.\100\ The Exchange's MRVP specifies those
uncontested minor rule violations with sanctions not exceeding $2,500
that would not be subject to the provisions of Rule 19d-1(c)(1) under
the Act \101\ requiring that an SRO promptly file notice with the
Commission of any final disciplinary action taken with respect to any
person or organization.\102\ The Exchange's MRVP includes the policies
and procedures included in BATS Rule 8.15 (Imposition of Fines for
Minor Violation(s) of Rules) and in BATS Rule 8.15, Interpretations and
Policy .01.
---------------------------------------------------------------------------

    \100\ See Securities Exchange Act Release No. 58807 (October 17,
2008), 73 FR 63219 (October 23, 2008) (File No. 4-568) (``BATS MRVP
Order'').
    \101\ 17 CFR 240.19d-1(c)(1).
    \102\ The Commission adopted amendments to paragraph (c) of Rule
19d-1 to allow SROs to submit for Commission approval plans for the
abbreviated reporting of minor disciplinary infractions. See
Securities Exchange Act Release No. 21013 (June 1, 1984), 49 FR
23828 (June 8, 1984) (File No. S7-983A). Any disciplinary action
taken by an SRO against any person for violation of a rule of the
SRO which has been designated as a minor rule violation pursuant to
such a plan filed with and declared effective by the Commission
would not be considered ``final'' for purposes of Section 19(d)(1)
of the Act if the sanction imposed consists of a fine not exceeding
$2,500 and the sanctioned person has not sought an adjudication,
including a hearing, or otherwise exhausted his administrative
remedies.
---------------------------------------------------------------------------

    The Exchange proposes to amend its MRVP and BATS Rule 8.15,
Interpretation and Policy .01, to include proposed BATS Options Rule
25.3 (Penalty for Minor Rule Violations).\103\ The rules included in
proposed BATS Options Rule 25.3 as appropriate for disposition under
the Exchange's MRVP are: (a) Position Limit violations for both
customer accounts as well as the accounts of Options Members that are
Exchange Members; (b) Order Entry violations regarding restrictions on
orders entered by Market Makers, and (c) Continuous Quote violations
regarding Market Maker continuous bids and offers.
---------------------------------------------------------------------------

    \103\ In the BATS MRVP Order, the Commission noted that any
amendments to Rule 8.15.01 made pursuant to a rule filing submitted
under Rule 19b-4 would automatically be deemed a request by the
Exchange for Commission approval of a modification to its MRVP. See
BATS MRVP Order, supra note 100, at note 6.
---------------------------------------------------------------------------

    The Commission notes that the rules included in proposed BATS
Options Rule 25.3 are similar to rules included in the MRVPs of other
options exchanges.\104\ The Commission finds that BATS' MRVP, as
amended to include the rules listed in proposed BATS Options Rule 25.3,
is consistent with Sections 6(b)(1), 6(b)(5), and 6(b)(6) of the Act,
which require, in part, that an exchange have the capacity to enforce
compliance with, and provide appropriate discipline for, violations of
the rules of the Commission and of the exchange.\105\ In addition,
because BATS Rule 8.15 will offer procedural rights to a person
sanctioned for a violation listed in proposed BATS Options Rule 25.3,
the Commission believes that BATS' rules provide a fair procedure for
the disciplining of members and associated persons, consistent with
Section 6(b)(7) of the Act.\106\
---------------------------------------------------------------------------

    \104\ See, e.g., Rules of NOM, Chapter X, Section 7, and Rules
of BOX, Chapter X, Section 2.
    \105\ 15 U.S.C. 78f(b)(1), 78f(b)(5), and 78f(b)(6).
    \106\ 15 U.S.C. 78f(b)(7).
---------------------------------------------------------------------------

    The Commission also finds that the proposal to include the
provisions in proposed BATS Options Rule 25.3 in BATS' MRVP is
consistent with the public interest, the protection of investors, or
otherwise in furtherance of the purposes of the Act, as required by
Rule 19d-1(c)(2) under the Act,\107\ because it should strengthen BATS'
ability to carry out its oversight and enforcement responsibilities as
an SRO in cases where full disciplinary proceedings are unsuitable in
view of the minor nature of the particular violation.
---------------------------------------------------------------------------

    \107\ 17 CFR 250.19d-1(c)(2).
---------------------------------------------------------------------------

    In approving the proposed change to BATS' MRVP, the Commission in
no way minimizes the importance of compliance with BATS rules and all
other rules subject to the imposition of fines under BATS' MRVP. The
Commission believes that the violation of any SRO rules, as well as
Commission rules, is a serious matter. However, BATS' MRVP provides a
reasonable means of addressing rule violations that do not rise to the
level of requiring formal disciplinary proceedings, while providing
greater flexibility in handling certain violations. The Commission
expects that BATS will continue to conduct surveillance with due
diligence and make a determination based on its findings, on a case-by-
case basis, whether a fine of more or less than the recommended amount
is appropriate for a violation under BATS' MRVP or whether a violation
requires a formal disciplinary action.

H. Section 11(a) of the Act

    Section 11(a)(1) of the Act \108\ prohibits a member of a national
securities exchange from effecting transactions on that exchange for
its own account, the account of an associated person, or an account
over which it or its associated person exercises discretion
(collectively, ``covered accounts'') unless an exception applies. Rule
11a2-2(T) under the Act,\109\ known as the ``effect versus execute''
rule, provides exchange members with an exemption from the Section
11(a)(1) prohibition. Rule 11a2-2(T) permits an exchange member,
subject to certain conditions, to effect transactions for covered
accounts by arranging for an unaffiliated member to execute
transactions on the exchange. To comply with Rule 11a2-2(T)'s
conditions, a member: (i) Must transmit the order from off the exchange
floor; (ii) may not participate in the execution of the transaction
once it has been transmitted to the member performing the execution;
\110\ (iii) may not be affiliated with the executing member; and (iv)
with respect to an account over which the member has investment
discretion, neither the member nor its associated person may retain any
compensation in connection with effecting the transaction except as
provided in the Rule.
---------------------------------------------------------------------------

    \108\ 15 U.S.C. 78k(a)(1).
    \109\ 17 CFR 240.11a2-2(T).
    \110\ The member may, however, participate in clearing and
settling the transaction.
---------------------------------------------------------------------------

    In a letter to the Commission, BATS requests that the Commission
concur with BATS' conclusion that Options Members that enter orders
into the System satisfy the requirements of Rule 11a2-2(T).\111\ For
the reasons set forth below, the Commission believes that Options
Members entering orders into the System would satisfy the conditions of
the Rule.
---------------------------------------------------------------------------

    \111\ See Letter from Eric Swanson, Senior Vice President and
General Counsel, BATS Exchange, to Elizabeth M. Murphy, Secretary,
Commission, dated January 20, 2010 (``BATS 11(a) Letter'').
---------------------------------------------------------------------------

    The Rule's first condition is that orders for covered accounts be
transmitted from off the exchange floor. The BATS Options System
receives orders electronically through remote terminals or computer-to-
computer interfaces. In the context of other automated trading systems,
the Commission has found that the off-floor

transmission requirement is met if a covered account order is
transmitted from a remote location directly to an exchange's floor by
electronic means.\112\ Because the BATS Options System receives orders
electronically through remote terminals or computer-to-computer
interfaces, the Commission believes that the System satisfies the off-
floor transmission requirement.
---------------------------------------------------------------------------

    \112\ See, e.g., NOM Approval Order, supra note 91; Securities
Exchange Act Release Nos. 53128 (January 13, 2006), 71 FR 3550
(January 23, 2006) (File No. 10-131) (approving Nasdaq Stock Market
LLC); 44983 (October 25, 2001), 66 FR 55225 (November 1, 2001) (SR-
PCX-00-25) (approving Archipelago Exchange); 29237 (May 24, 1991),
56 FR 24853 (May 31, 1991) (SR-NYSE-90-52 and SR-NYSE-90-53)
(approving NYSE's Off-Hours Trading Facility); and 15533 (January
29, 1979), 44 FR 6084 (January 31, 1979) (``1979 Release'').
---------------------------------------------------------------------------

    Second, the Rule requires that the member not participate in the
execution of its order. BATS has represented that at no time following
the submission of an order is an Options Member able to acquire control
or influence over the result or timing of an order's execution.\113\
According to BATS, the execution of a member's order is determined
solely by what other orders, bids, or offers are present in the System
at the time the Options Member submits the order and on the priority of
those orders, bids, and offers.\114\ Accordingly, the Commission
believes that an Options Member does not participate in the execution
of an order submitted to the System.
---------------------------------------------------------------------------

    \113\ See BATS 11(a) Letter, supra note 111.
    \114\ See id. An Options Member may cancel or modify the order,
or modify the instruction for executing the order, but only from off
the floor. The Commission has stated that the non-participation
requirement is satisfied under such circumstances, so long as such
modifications or cancellations are also transmitted from off the
floor. See Securities Exchange Act Release No. 14713 (April 27,
1978), 43 FR 18557 (May 1, 1978) (``1978 Release'') (stating that
the ``non-participation requirement does not prevent initiating
members from canceling or modifying orders (or the instructions
pursuant to which the initiating member wishes orders to be
executed) after the orders have been transmitted to the executing
member, provided that any such instructions are also transmitted
from off the floor'').
---------------------------------------------------------------------------

    Third, Rule 11a2-2(T) requires that the order be executed by an
exchange member who is unaffiliated with the member initiating the
order. The Commission has stated that this requirement is satisfied
when automated exchange facilities, such as the BATS Options System,
are used, as long as the design of these systems ensures that members
do not possess any special or unique trading advantages in handling
their orders after transmitting them to the exchange.\115\ BATS has
represented that the design of the System ensures that no Options
Member has any special or unique trading advantage in the handling of
its orders after transmitting its orders to the Exchange.\116\ Based on
BATS' representation, the Commission believes that the BATS Options
System satisfies this requirement.
---------------------------------------------------------------------------

    \115\ In considering the operation of automated execution
systems operated by an exchange, the Commission noted that while
there is not an independent executing exchange member, the execution
of an order is automatic once it has been transmitted into the
system. Because the design of these systems ensures that members do
not possess any special or unique trading advantages in handling
their orders after transmitting them to the exchange, the Commission
has stated that executions obtained through these systems satisfy
the independent execution requirement of Rule 11a2-2(T). See 1979
Release, supra note 112.
    \116\ See BATS 11(a) Letter, supra note 111.
---------------------------------------------------------------------------

    Fourth, in the case of a transaction effected for an account with
respect to which the initiating member or an associated person thereof
exercises investment discretion, neither the initiating member nor any
associated person thereof may retain any compensation in connection
with effecting the transaction, unless the person authorized to
transact business for the account has expressly provided otherwise by
written contract referring to Section 11(a) of the Act and Rule 11a2-
2(T).\117\ BATS represents that Options Members trading for covered
accounts over which they exercise investment discretion must comply
with this condition in order to rely on the rule's exemption.\118\
---------------------------------------------------------------------------

    \117\ 17 CFR 240.11a2-2(T)(a)(2)(iv). In addition, Rule 11a2-
2(T)(d) requires a member or associated person authorized by written
contract to retain compensation, in connection with effecting
transactions for covered accounts over which such member or
associated persons thereof exercises investment discretion, to
furnish at least annually to the person authorized to transact
business for the account a statement setting forth the total amount
of compensation retained by the member in connection with effecting
transactions for the account during the period covered by the
statement. See 17 CFR 240.11a2-2(T)(d). See also 1978 Release, supra
note 114 (stating ``[t]he contractual and disclosure requirements
are designed to assure that accounts electing to permit transaction-
related compensation do so only after deciding that such
arrangements are suitable to their interests'').
    \118\ See BATS 11(a) Letter, supra note 111.
---------------------------------------------------------------------------

III. Solicitation of Comments

    Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether Amendment No. 1
to 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 e-mail to<EMAIL_ADDRESS>Please include
File Number SR-BATS-2009-031 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-BATS-2009-031. This file
number should be included on the subject line if e-mail 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 inspection and
copying in the Commission's Public Reference Room, 100 F Street, NE.,
Washington, DC 20549, on official business days between the hours of 10
a.m. and 3 p.m. Copies of the filing will also be available for
inspection and copying at the principal office of the Exchange. All
comments received will be posted without change; the Commission does
not edit personal identifying information from submissions. You should
submit only information that you wish to make available publicly. All
submissions should refer to File Number SR-BATS-2009-031 and should be
submitted on or before February 22, 2010.

IV. Accelerated Approval of the Proposal, as Amended

    The Commission finds good cause for approving the proposal, as
amended, prior to the thirtieth day after the date of publication of
notice of filing of the amended proposal in the Federal Register. The
changes proposed in Amendment No. 1 are technical or non-substantive in
nature, or are designed to clarify BATS Options Rules or make them
consistent with the rules adopted by other options exchanges.
Specifically, in Amendment No. 1, the Exchange (1) clarified its
discussion regarding the establishment of strike prices for Quarterly
Options Series to conform to the proposed rule text, the substance of
which is consistent with the rules of other SROs; (2) clarified,

consistent with the rules of other SROs, that it will not include
options classes in the Pilot Program when the issuer of the underlying
security is subject to an announced merger or is in the process of
being acquired by another company or is in bankruptcy and that, for
purposes of assessing average daily volume, it will use OCC data; (3)
amended its rules relating to the Pilot Program to provide for the
quoting of all options on IWM and SPY in one-cent increments,
consistent with what the Commission has previously approved for another
options exchange; (4) included in its Exhibit 5, as a technical matter,
an updated table of contents; (5) made non-substantive changes to
defined terms in BATS Rule 2.12(d) and proposed BATS Options Rule
21.1(d)(6) to conform to the terms as defined in proposed BATS Options
Rule 16.1(a); (6) deleted proposed BATS Option Rule 16.2(d) as
unnecessary; (7) added references to ``BATS Options'' in the title of
Chapters XVI and XVII of the proposed rules; (8) stated its intent to
amend its existing RSA with FINRA to capture certain aspects of
regulation specifically applicable to BATS Options and the regulation
and discipline of Options Members; (9) in the interest of protecting
investors, amended proposed BATS Options Rule 26.14(a) (Profit Sharing)
to make it consistent with FINRA Rule 2150(c)(1); and (10) made clear
that it will comply with COATS specifications in submitting data for
purposes of creating a consolidated audit trail, as well as receive
COATS data for purposes of its surveillance operations. For these
reasons, the Commission finds good cause for approving the proposed
rule change, as amended, on an accelerated basis, pursuant to Section
19(b)(2) of the Act.

V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\119\ that the proposed rule change (SR-BATS-2009-031), as modified
by Amendment No. 1 thereto, be, and hereby is, approved on an
accelerated basis.
---------------------------------------------------------------------------

    \119\ 15 U.S.C. 78s(b)(2).
---------------------------------------------------------------------------

    Although the Commission's approval of the proposed rule change is
final, and the proposed rules are therefore effective, it is further
ordered that the operation of BATS Options Exchange is conditioned on
the satisfaction of the requirements below:
    A. Participation in National Market System Plans Relating to
Options Trading. BATS must join the OPRA, the OLPP, the Options Order
Protection and Locked/Crossed Market Plan, and the National Market
System Plan of the Options Regulatory Surveillance Authority.
    B. Examination by the Commission. BATS must have, and represent in
a letter to the staff in the Commission's Office of Compliance
Inspections and Examinations that it has adequate surveillance
procedures and programs in place to effectively regulate the BATS
Options Exchange.
    C. RSA and 17d-2 Agreements. BATS must ensure that all necessary
changes are made to its Regulatory Services Agreement with FINRA and
must become a party to the multi-party Rule 17d-2 agreements concerning
sales practice regulation and market surveillance.\120\
---------------------------------------------------------------------------

    \120\ See supra notes 97 and 99 and accompanying text. See also
17 CFR 240.17d-2.
---------------------------------------------------------------------------

    D. Participation in the Options Clearing Corporation. BATS must
join the Options Clearing Corporation.
---------------------------------------------------------------------------

    \121\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\121\
Elizabeth M. Murphy,
Secretary.
[FR Doc. 2010-1969 Filed 1-29-10; 8:45 am]
BILLING CODE 8011-01-P


[Federal Register Volume 79, Number 116 (Tuesday, June 17, 2014)]
[Rules and Regulations]
[Pages 34416-34417]
[FR Doc No: 2014-14168]

-----------------------------------------------------------------------

DEPARTMENT OF HOMELAND SECURITY

Coast Guard

33 CFR Part 117

[Docket No. USCG-2014-0416]

Drawbridge Operation Regulations; Reynolds Channel, Nassau, NY

AGENCY: Coast Guard, DHS.

ACTION: Notice of deviation from drawbridge regulation.

-----------------------------------------------------------------------

SUMMARY: The Coast Guard has issued a temporary deviation from the
operating schedule that governs the operation of the Long Beach Bridge,
across Reynolds Channel, mile 4.7, at Nassau, New York. The deviation
is necessary to allow the bridge to remain in the closed position for
two and a half hours to facilitate a public event; the Town of
Hempstead Annual Fireworks Display.

DATES: This deviation is effective between 9:30 p.m. and 12 a.m. on
June 28, 2014 and June 29, 2014.

ADDRESSES: The docket for this deviation, [USCG-2014-0416] is available
at http://www.regulations.gov. Type the docket number in the ``SEARCH''
box and click ``SEARCH.'' Click on Open Docket Folder on the line
associated with this deviation. You may also visit the Docket
Management Facility in Room W12-140, on the ground floor of the
Department of Transportation West Building, 1200 New Jersey Avenue SE.,
Washington, DC, 20590, between 9 a.m. and 5 p.m., Monday through
Friday, except Federal holidays.

FOR FURTHER INFORMATION CONTACT: If you have questions on this
temporary deviation, call or email Ms. Judy Leung-Yee, Project Officer,
First Coast Guard District<EMAIL_ADDRESS>or (212) 668-
7165. If you have questions on viewing the docket, call Cheryl Collins,
Program Manager, Docket Operations, telephone<PHONE_NUMBER>.

SUPPLEMENTARY INFORMATION: The Long Beach Bridge has a vertical
clearance of 20 feet at mean high water, and 24 feet at mean low water
in the closed position. The existing drawbridge operating regulations
are found at 33 CFR 117.799(g).
    The Town of Hempstead Department of Public Safety, requested a
bridge closure to facilitate a public event, the Town of Hempstead
Annual Salute to Veterans Fireworks Display.
    Under this temporary deviation, the Long Beach Bridge may remain in
the closed position between 9:30 p.m. and 12 a.m. on June 28, 2014,
with a rain

date of June 29, 2014. Vessels that can pass under the bridge in the
closed position may do so at all times.
    Reynolds Channel has commercial and recreational vessel traffic.
There are no alternate routes. The bridge can be opened in the event of
an emergency. No objections were received from the waterway users.
    In accordance with 33 CFR 117.35(e), the drawbridge must return to
its regular operating schedule immediately at the end of the effective
period of this temporary deviation. This deviation from the operating
regulations is authorized under 33 CFR 117.35.

    Dated: June 6, 2014.
C.J. Bisignano,
Supervisory Bridge Management Specialist, First Coast Guard District.
[FR Doc. 2014-14168 Filed 6-16-14; 8:45 am]
BILLING CODE 9110-04-P