[Federal Register Volume 81, Number 193 (Wednesday, October 5, 2016)]
[Notices]
[Pages 69172-69181]
[FR Doc No: 2016-24010]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-78988; File No. SR-BatsEDGX-2016-41]

Self-Regulatory Organizations; Bats EDGX Exchange, Inc.; Notice
of Filing of a Proposed Rule Change Related to the Exchange's Equity
Options Platform To Adopt a Price Improvement Auction, the Bats Auction
Mechanism

September 29, 2016.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\, and Rule 19b-4 thereunder,\2\ notice is hereby given
that on September 16, 2016, Bats EDGX Exchange, Inc. (the ``Exchange''
or ``EDGX'') filed with the Securities and Exchange Commission
(``Commission'') the proposed rule change as described in Items I, II,
and III below, which Items have been prepared by the Exchange. The
Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change

    The Exchange filed a proposal for the Exchange's equity options
platform (``EDGX Options'') to adopt a price improvement auction, the
Bats Auction Mechanism, as further discussed below.
    The text of the proposed rule change is available at the Exchange's
Web site at www.batstrading.com, at the principal office of the
Exchange, and at the Commission's Public Reference Room.

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

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

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

1. Purpose
Overview
    The purpose of the proposed rule change is to establish a price
improvement auction, the Bats Auction Mechanism (``BAM'', ``BAM
Auction'', or ``Auction'') on the Exchange. BAM includes functionality
in which a Member (an ``Initiating Member'') may electronically submit
for execution an order it represents as agent on behalf of a Priority
Customer,\3\ broker dealer, or any other person or entity (``Agency
Order'') against principal interest or against any other order it
represents as agent (an ``Initiating Order'') provided it submits the
Agency Order for electronic execution into the BAM Auction pursuant to
the proposed Rule. For purposes of this filing and the proposed Rule,
the term ``NBBO'' shall mean the national best bid or national best
offer at the particular point in time applicable to the reference and
the term ``Initial NBBO'' shall mean the national best bid or national
best offer at the time an Auction is initiated.
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    \3\ The term ``Priority Customer'' means any person or entity
that is not: (A) a broker or dealer in securities; or (B) a
Professional. The term ``Priority Customer Order'' means an order
for the account of a Priority Customer. See Rule 16.1(a)(45). A
``Professional'' is any person or entity that: (A) is not a broker
or dealer in securities; and (B) places more than 390 orders in
listed options per day on average during a calendar month for its
own beneficial account(s). All Professional orders shall be
appropriately marked by Options Members. See Rule 16.1(a)(46).
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    The Exchange believes that the BAM Auction, as proposed herein,
will encourage participants on EDGX Options to quote or display orders
at the NBBO with additional size and thereby result in tighter and
deeper markets, resulting in more liquidity on EDGX Options.
Specifically, by offering all EDGX Options participants (``Users'') the
ability to receive priority in the proposed allocation during the BAM
Auction up to the size of their quote, an EDGX User will be encouraged
to maintain quotes or orders with additional size outside of the BAM
Auction at the best and most aggressive prices. The Exchange believes
that this incentive may result in a narrowing of quotes and thus
further enhance EDGX's market quality. Within the BAM Auction, EDGX
believes that the rules that are proposed will encourage EDGX Users to
compete vigorously to provide the opportunity for price improvement in
a competitive auction process.

Auction Eligibility Requirements
    All options traded on the Exchange are eligible for BAM. Proposed
Rule 21.19(a) describes the circumstances under which an Initiating
Member may initiate an Auction. The Initiating Member may initiate an
Auction provided the conditions which follow are met: the Initiating
Member must stop the entire Agency Order as principal or with a
solicited order at a price in an increment of $0.01 that is: (A) If the
Agency Order is for less than 50 option contracts and the difference
between the NBB and NBO is $0.01, the Initiating Member must stop the
entire Agency Order at one minimum price improvement increment, which
increment shall be determined by the Exchange but may not be smaller
than $0.01; or (B) for any other Agency Order, the Initiating Member
must stop the entire Agency Order at the better of the NBBO or the
Agency Order's limit price (if the order is a limit order). Agency
Orders that do not meet these conditions will be rejected. Also, Agency
Orders submitted at or before the opening of trading or when the NBBO
is crossed are not eligible to initiate an Auction and will be
rejected.
Auction Process
Initiating and Pricing of Auctions
    With respect to Agency Orders for less than 50 contracts, only one
such Auction may be ongoing at any given time in a series and Auctions
in the same series may not queue or overlap in any manner. Auctions for
Agency Orders of 50 contracts or more will be allowed to occur at the
same time as other Auctions in the same series. Because multiple
Auctions of Agency Orders of 50 contracts or more will be allowed to
occur at the same time as other Auctions, there will be no queuing of
Auctions for Agency orders of 50 contracts or more.
    To initiate the Auction, the Initiating Member must mark the Agency
Order for Auction processing, and specify either: (i) A single price at
which it seeks to execute the Agency Order (a ``single-price
submission''); or (ii) that it is willing to automatically match as
principal or as agent on behalf of an Initiating Order the price and
size of all BAM Auction notification responses (``BAM responses'') and
other trading interest (``auto-match'') as follows: (a) stopping the
entire order at a single stop price and auto-matching BAM responses and
other trading interest at all prices that improve the stop price to a
specified price; or (b) stopping the entire order at a single stop
price and auto-matching all BAM responses and other trading interest at
all prices that improve the stop price. For both single-price
submissions and auto-match, if the EDGX BBO on the same side of the
market as the Agency Order represents a Priority Customer on the book,
the stop price must be at least $0.01 better than the booked order's
limit price. Once the Initiating Member has submitted an Agency Order
for processing as described herein, such Agency Order may not be
modified or cancelled. Under no circumstances will the Initiating
Member receive an allocation percentage, at the final price point, of
more than 50% of the initial Agency Order in the event there is one
competing quote, order or BAM response or 40% of the initial Agency
Order in the event there are multiple competing quotes, orders or BAM
responses.\4\
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    \4\ See proposed Rule 21.19(b)(1)(A).
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Last Priority
    When starting an Auction, the Initiating Member may submit the
Initiating Order with a designation of ``last priority'' to other BAM
participants (``Last Priority''), which will result in the Initiating
Member forfeiting priority and trade allocation privileges to which it
is otherwise entitled pursuant to the proposed Rule.\5\ If Last
Priority is specified, the Initiating Order will only trade if there is
not enough interest available to fully execute the Agency Order at
prices which are equal to or improve upon the stop price. Last Priority
will not be applied if both the Initiating Order and Agency Order are
Priority Customer Orders. Last Priority cannot be designated on an
Agency Order specified as auto-match, and thus, is only compatible with
single-price submissions. Finally, Last Priority information will not
be available to other market participants and may not be modified.
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    \5\ The Chicago Board Options Exchange, Incorporated's
(``CBOE'') has a process whereby initiating participants may elect
to receive last priority in an allocation. See CBOE Rule
6.74A(b)(3)(J) (Automated Improvement Mechanism (``AIM'')). See also
Miami International Securities Exchange, LLC (``MIAX'') Rule
5.15(A)(a)(2)(iii)(J); NASDAQ OMX BX, Inc. (``BX Options'') Chapter
VI, Section 9(ii)(A)(1).
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Auction Notification Messages
    When the Exchange receives an Agency Order for Auction processing,
an auction notification message detailing the side, size, price, and
options series of the Agency Order will be sent over the Exchange's
Multicast PITCH Feed and Auction Feed.\6\ Agency Orders will not be
included in the Exchange's disseminated best bid or offer and will not
be disseminated to OPRA.
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    \6\ Both data feeds are currently provided free of charge.
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Auction Period
    The Auction will last for a period of time, as determined by the
Exchange and announced on the Exchange's Web site. The Auction period
will be no less than one hundred milliseconds and no more than one
second.\7\
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    \7\ CBOE's AIM auction is a duration of one second. See CBOE
Rule 6.74A(b)(1)(C).
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    According to filings made by NASDAQ OMX PHLX LLC (``PHLX'') and BX
Options,\8\ PHLX staff previously distributed a survey to all PHLX
market maker firms inquiring as to the timeframe within which these
market participants respond to an auction with a duration time ranging
from less than fifty (50) milliseconds to more than one (1) second.
According to the Filings, an overwhelming number of the market maker
firms that responded to the survey indicated that they were capable of
responding to auctions with a duration time of at least 50
milliseconds.\9\ Based on the results of the survey previously
conducted by PHLX, the commonality of participants on the Exchange and
other options exchanges, including PHLX, and the Exchange's direct
knowledge of its own technology and customer base, the Exchange
believes that allowing for an auction period of no less than one
hundred (100) milliseconds and no more than one (1) second would
provide a meaningful opportunity for Members to respond to the BAM
Auction while at the same time facilitating the prompt execution of
orders.\10\ The Exchange believes that Members will have sufficient
time to ensure competition for Agency Orders, and could provide

orders within the Auction additional opportunities for price
improvement.
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    \8\ See, e.g., Securities Exchange Act Release No. 77557 (April
7, 2016), 81 FR 21935 (April 13, 2016) (SR-Phlx-2016-40) (the ``PHLX
PIXL Amendment''); Securities Exchange Act Release No. 76301
(October 29, 2015), 80 FR 68347 (November 4, 2015) (SR-BX-2015-032)
(the ``BX Options Prism Approval,'' and together with the PHLX PIXL
Amendment, the ``Filings'').
    \9\ Of the thirty five (35) PHLX market maker firms that were
surveyed, twenty (20) of these market makers responded to the survey
and of those respondents 100% indicated that that their firm could
respond to auctions with a duration time of at least 50
milliseconds. This survey was conducted in May 2014. See id.
    \10\ As of the date of this proposal, all Market Makers on EDGX
Options are also members of the PHLX, and thus, rather than conduct
an additional survey of the same market participants when such a
survey was recently conducted, the Exchange is proposing to adopt
the same Auction time parameters as have been approved based on that
study. See BX Options PRISM Approval, supra note 8.
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    The Exchange believes the proposed rule change could provide orders
within BAM an opportunity for price improvement. Also, the shorter
duration of time for the auction reduces the market risk for all
Members executing trades in BAM. Initiating Members are required to
guarantee an execution at the NBBO or at a better price, and are
subject to market risk while their Agency Order is exposed to other
Options Members. While other Members are also subject to market risk,
those providing responses in BAM may cancel or modify their orders
while the Initiating Member cannot. The Exchange believes that the
Initiating Member acts in a critical role within the BAM Auction. Their
willingness to guarantee the orders entered into BAM an execution at
the NBBO or a better price is the keystone to an order gaining the
opportunity for price improvement. The Exchange believes that allowing
for an auction period of no less than one hundred milliseconds and no
more than one second will benefit Members trading in BAM. EDGX believes
it is in these Members' best interests to minimize the auction time
while continuing to allow Members adequate time to electronically
respond. Both the order being exposed and the responding orders are
subject to market risk during the auction.
    While some Members may wait to respond until later in the auction,
presumably to minimize their market risk, the Exchange believes that a
majority of BAM participants will respond early in an Auction. BAM
Auctions are intended to provide all market participants with
sufficient time to respond, compete, and provide price improvement for
orders while also providing investors and other market participants
with timely executions, thereby reducing their market risk. The
proposed rule to cap the Auction time at one second will allow
participants to respond quickly at the most favorable price while
reducing the risk that the market will move against the response.
    EDGX believes that its Members operate electronic systems that
enable them to react and respond to orders in a meaningful way in
fractions of a second. EDGX believes that its Members will be able to
compete within 100 milliseconds and this is a sufficient amount of time
to respond to, compete for, and provide price improvement for orders,
and will provide investors and other market participants with more
timely executions, and reduce their market risk.
Auction Responses
    As proposed, any person or entity other than the Initiating Member
may submit responses to an Auction, provided such responses are
properly marked specifying price, size, side of the market and
information identifying the Auction to which the response is targeted.
BAM responses will not be visible to Auction participants, and will not
be disseminated to OPRA. A BAM response with a size greater than the
size of the Agency Order will be capped at the size of the Agency Order
(i.e., the excess size will be ignored when processing the Auction).
    Multiple BAM responses from the same User may be submitted during
the Auction. Multiple orders at a particular price point submitted by a
User in response to an Auction or resting on the EDGX Options Book will
be aggregated together and will be capped at the size of the Agency
Order (i.e., the excess size will be ignored when processing the
Auction).
    BAM responses may be modified or cancelled during the Auction. BAM
responses on the same side of the market as the Agency Order are
considered invalid and will be immediately cancelled. BAM responses
cannot cross the price of the Initial NBBO but will be executed, if
possible, at the most aggressive permissible price within such Initial
NBBO.
    Finally, with respect to the impact of this proposal on System \11\
capacity, EDGX has analyzed its capacity and represents that it has the
necessary systems capacity to handle the potential additional traffic
associated with BAM Auctions. Because neither BAM notification messages
nor responses will be published to OPRA, the Exchange does not expect
any additional capacity necessary with respect to OPRA and the
operation of BAM on the Exchange. Additionally, in terms of overall
capacity, the Exchange represents that its Systems will be able to
sufficiently maintain an audit trail for order and trade information
with the BAM Auction.
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    \11\ The term ``System'' is defined in Rule 16.1(a)(59).
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Conclusion of an Auction
    The BAM Auction would conclude at the earliest of: the end of the
Auction period, upon receipt by the Exchange of a Priority Customer
order on the same side of the market and at the stop price of the
Agency Order that is to be posted to the EDGX Options Book, upon
receipt by the Exchange of an unrelated order on the same side of the
market as the Agency Order that would cause the Agency Order's stop
price to be outside of the EDGX BBO, at the close of trading, or any
time there is a trading halt on the Exchange in the affected
series.\12\
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    \12\ See proposed Rule 21.19(b)(2).
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    If the Auction concludes for any of the reasons set forth above
other than a trading halt, then the Auction will be processed pursuant
to the order allocation process set forth in proposed Rule 21.19(d),
which is described in further detail below. In the event of a trading
halt on the Exchange in the affected series, the Auction will be
cancelled without execution.
    An unrelated market or marketable limit order (against the EDGX
BBO) on the opposite side of the market from the Agency Order received
during the Auction will not cause the Auction to end early and will
execute against interest outside of the Auction.\13\ If contracts
remain from such unrelated order at the time the Auction ends, they
will be considered for participation in the order allocation process
described below. The Exchange notes that it also proposes to make clear
that all unrelated orders submitted to the Exchange with contracts
remaining at the time the Auction ends, including orders marked as Post
Only Orders pursuant to Rule 21.1(d)(8), will be considered for
participation as described below.\14\
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    \13\ See proposed Rule 21.19(b)(3).
    \14\ Id.
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Order Allocation
Allocations
    At the conclusion of the Auction, the Agency Order will be
allocated at the best price(s) as follows. First, Priority Customer
Orders would have time priority at each price level. Next, the
Initiating Member would be allocated after Priority Customer Orders.
    If the Initiating Member selected the single-price submission
option of the Auction, BAM executions will occur at prices that improve
the stop price, and then at the stop price with up to 40% of the
initial Agency Order allocated to the Initiating Member.\15\ However,
if only one other quote, order or BAM response matches the stop price,
then the Initiating Member may be allocated up to 50% of the initial
Agency Order when executed at such price. Remaining contracts would be
allocated, pursuant to proposed sub-paragraphs (iii) and (iv) to Rule
21.19(b)(4)(B), among remaining quotes, orders and BAM responses at the
stop price. Thereafter, remaining

contracts, if any, would be allocated to the Initiating Member. The
allocation will account for Last Priority, if applicable.
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    \15\ The Exchange notes that the International Securities
Exchange (``ISE'') bases the percentage-based allocations to an
initiating member on the initial or original size of an agency order
before other interest is executed. See ISE Rule 723(d)(3).
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    If the Initiating Member selected the auto-match option of the
Auction the Initiating Member would be allocated an equal number of
contracts as the aggregate size of all other quotes, orders and BAM
responses at each price point until a price point is reached where the
balance of the order can be fully executed, except that the Initiating
Member would be entitled to receive up to 40% (multiple competing
quotes, orders or BAM responses) or 50% (one competing quote, order or
BAM response) of the initial Agency Order at the final price point
(including situations where the stop price is the final price) after
Priority Customer interest has been satisfied but before remaining
interest. If there are other quotes, orders and BAM responses at the
final price point the contracts will be allocated to such interest
pursuant to proposed sub-paragraphs (iii) and (iv) to Rule
21.19(b)(4)(B). Any remaining contracts would be allocated to the
Initiating Member.
    Next, for classes designated by the Exchange as eligible for
``Priority Quote'' status, Users with resting quotes and orders that
were at a price that is equal to the Initial NBBO on the opposite side
of the market from the Agency Order (``Priority Quotes'') would have
priority up to their size in the Initial NBBO at each price level at or
better than such Initial NBBO after Priority Customer and the
Initiating Member have received allocations.\16\ Priority Quotes and
BAM responses will be allocated pursuant to the algorithm set forth in
Rule 21.8(c).\17\ Priority Quote status is only valid for the duration
of the particular Auction.
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    \16\ MIAX allocates executions resulting from Public Customer
interest and priority Market Maker quotes ahead of other interest.
MIAX's system may designate Market Maker quotes as either priority
quotes or non-priority quotes in accordance with the provisions in
MIAX Rule 517(b). Although not limited to EDGX Market Makers, the
Exchange is prioritizing Priority Quote allocations in the proposed
EDGX BAM Auction in a similar manner, ahead of other non-Priority
Customer interest. See also, BX Options Chapter VI, Section
9(ii)(E)(3).
    \17\ See proposed Rule 21.19(b)(4)(B)(iii).
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    Finally, after Priority Customers, the Initiating Member and Users
with Priority Quotes, if applicable, have received allocations, all
other interest will be allocated pursuant to Rule 21.8(c).\18\
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    \18\ See proposed Rule 21.19(b)(4)(B)(iv).
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Additional Details
    Any unexecuted BAM responses will be cancelled.\19\ With respect to
``Intermarket Sweep Orders'' or ``ISO'' Orders,\20\ if an Auction is
initiated for an Agency Order designated as an ISO Order, executions
will be permitted at a price inferior to the Initial NBBO.\21\
Specifically, a BAM ISO is the transmission of two orders for crossing
without regard for better priced Protected Bids or Protected Offers
because the Member transmitting the BAM ISO to the Exchange has,
simultaneous with the routing of the BAM ISO, routed one or more ISOs,
as necessary, to execute against the full size of any Protected Bid or
Protected Offer that is superior to the Auction price, including all
interest in the Exchange's book priced better than the proposed Auction
price. The Exchange will accept a BAM ISO provided the order adheres to
the Agency Order acceptance requirements, but without regard to the
NBBO. The Exchange will execute the BAM ISO in the same manner as other
Agency Orders, except that it will not protect prices away. Instead,
order flow providers will bear the responsibility to clear all better
priced interest away simultaneously with submitting the BAM ISO Order.
There is no other impact to BAM functionality. Specifically, liquidity
present at the end of the BAM Auction will continue to be included in
the BAM Auction as it is with Agency Orders not marked as ISOs. This
order type is offered by other options exchanges.\22\
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    \19\ See proposed Rule 21.19(b)(7).
    \20\ ``Intermarket Sweep Orders'' or ``ISO'' are limit orders
that are designated as ISOs in the manner prescribed by EDGX and are
executed within the System at one or multiple price levels without
regard to Protected Quotations of other Eligible Exchanges as
defined in Rule 27.1. ISOs are not eligible for routing pursuant to
Rule 21.9.
    \21\ See proposed Rule 21.19(b)(7).
    \22\ See PHLX Rules at 1080(n), which indicates that PIXL ISO
Orders are permissible. See also CBOE Rule 6.53(q); BX Options
Chapter VI, Section 9(ii)(K).
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    The Exchange proposes to limit the use of Match Trade Prevention
(``MTP'') functionality, set forth in Rule 21.1(g), in the context of
BAM responses to the MTP Cancel Newest option. A BAM response with any
other MTP modifier will be rejected.
Crossing and Agency Orders
    In lieu of the procedures in proposed paragraphs (a)-(b) to Rule
21.19, an Initiating Member may enter an Agency Order for the account
of a Priority Customer paired with an order for the account of a
Priority Customer and such paired orders will be automatically executed
without an Auction (``Customer-to-Customer Immediate Cross''), subject
to the following proposed conditions. A Customer-to-Customer Immediate
Cross must be priced at or between the EDGX BBO. Further, a Customer-
to-Customer Immediate Cross will not be initiated but will instead be
cancelled if there is a resting Priority Customer order on the same
side of the market and at the same price as the Agency Order. Finally,
a Customer-to-Customer Immediate Cross will not be initiated if there
is a resting Priority Customer order on the opposite side of the market
from, and at the same price as, the Agency Order. Instead, the Agency
Order will be subject to the Auction process set forth above, and the
resting Priority Customer order will participate in such process.\23\
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    \23\ See proposed Rule 21.19(c).
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Regulatory Provisions
    Bona Fide Transactions; Disrupting or Manipulating Auctions
    Under the proposed Rule, the Auction may be used only where there
is a genuine intention to execute a bona fide transaction.\24\ Also,
under the proposed Rule, a pattern or practice of submitting orders or
quotes for the purpose of disrupting or manipulating BAM Auctions would
be deemed conduct inconsistent with just and equitable principles of
trade and a violation of Rule 3.1. It would also be deemed conduct
inconsistent with just and equitable principles of trade and a
violation of Rule 3.1 to engage in a pattern of conduct where the
Initiating Member breaks up an Agency Order into separate orders for
the purpose of gaining a higher allocation percentage than the
Initiating Member would have otherwise received in accordance with the
allocation procedures contained in sub-paragraph (b)(4) of the proposed
Rule.\25\
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    \24\ See proposed Interpretation and Policy .01 of Rule 21.19.
    \25\ See proposed Interpretation and Policy .02 of Rule 21.19.
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Order Exposure
    EDGX Rule 22.12 prevents an Options Member from executing agency
orders to increase its economic gain from trading against the order
without first giving other trading interests on the Exchange an
opportunity to either trade with the agency order or to trade at the
execution price when the Options Member was already bidding or offering
on the book. However, the Exchange recognizes that it may be possible
for an Options Member to establish a relationship with a Priority
Customer or other person to deny agency orders the opportunity to
interact on the Exchange

and to realize similar economic benefits as it would achieve by
executing agency orders as principal. Under the proposed Rule, it would
be a violation of Rule 22.12 for an Options Member to circumvent such
rule by providing an opportunity for (i) a Priority Customer affiliated
with the Options Member, or (ii) a Priority Customer with whom the
Options Member has an arrangement that allows the Options Member to
realize similar economic benefits from the transaction as the Options
Member would achieve by executing agency orders as principal, to
regularly execute against agency orders handled by the firm immediately
upon their entry as BAM Priority Customer-to-Priority Customer
immediate crosses pursuant to paragraph (c) of the proposed Rule.\26\
In addition to the proposed Interpretation and Policy described above,
the Exchange proposes to amend Rule 22.12 to add reference to BAM as an
exception to the general restriction on the execution of orders as
principal against orders they represent as agent.
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    \26\ See proposed Interpretation and Policy .03 to Rule 21.19.
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Pilot Program Information to the Commission
    Subject to a Pilot expiring January 18, 2017, there will be no
minimum size requirement for orders to be eligible for the Auction.
During this Pilot Period, the Exchange will submit certain data,
periodically as required by the Commission, to provide supporting
evidence that, among other things, there is meaningful competition for
all size orders and that there is an active and liquid market
functioning on the Exchange outside of the Auction mechanism. Any raw
data which is submitted to the Commission will be provided on a
confidential basis.\27\
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    \27\ See proposed Interpretation and Policy .04 to Rule 21.19.
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    The Exchange will provide the following additional information on a
monthly basis:
    (1) The number of contracts (of orders of 50 contracts or greater)
entered into BAM Auctions;
    (2) the number of contracts (of orders of fewer than 50 contracts)
entered into BAM Auctions;
    (3) the number of orders of 50 contracts or greater entered into
BAM Auctions; and
    (4) the number of orders of fewer than 50 contracts entered into
BAM Auctions.
Implementation
    If the Commission approves this proposed rule change, the Exchange
anticipates that it will deploy BAM within 45 days of approval. Members
will be notified of the deployment date through a Trade Desk Notice.
Examples of Agency Order Executions

Example No. 1

    Summary: Initiating Member & Priority Quote interest fully
satisfies Agency Order; all participants eligible for Priority Quote
status.
    Assumptions:

 NBBO = .97-1.03
 EDGX BBO = .95-1.03(60) with Market Maker A and Member Firm
1 (non-Market Maker) offering 30 contracts each
 Class is designated as eligible for Priority Quotes
 Agency Order to buy 100 contracts stopped at 1.02 is
received

    BAM Process:
 Auction begins
 During Auction:
    [cir] Market Maker A responds to sell 30 contracts at 1.02
(Priority Quote status);
    [cir] Market Maker B responds to sell 20 contracts at 1.02; and
    [cir] Member Firm 1 responds to sell 30 contracts at 1.02
(Priority Quote status).
 Auction ends:
    [cir] Initiating Member is allocated 40 contracts at 1.02 (40%
carve out);
    [cir] Market Maker A and Member Firm 1 each trade 30 contracts
since they maintained Priority Quotes for 30 contracts; and
    [cir] Market Maker B's response is cancelled since there were no
contracts open after Priority Quotes were filled at that price.

Example No. 2

    Summary: Initiating Member & Priority Quote interest fully
satisfies Agency Order with Priority Quote interest exceeding
remainder; Pro-Rata Amongst Priority Quote interest.
    Assumptions:

 NBBO = .97-1.03
 EDGX BBO = .95-1.03(60) with Market Maker A and Market
Maker B offering 30 contracts each
 Class is designated as eligible for Priority Quotes
 Agency Order to buy 100 contracts stopped at 1.02 is
received

    BAM Process:

 Auction begins
 During auction:
    [cir] Market Maker A responds to sell 30 contracts at 1.02;
    [cir] Market Maker B responds to sell 30 contracts at 1.02;
    [cir] Market Maker C responds to sell 10 at 1.01; and
    [cir] Market Maker D responds to sell 10 contracts at 1.02.
 Auction ends:
    [cir] Market Maker C trades 10 at 1.01 since it was the only
interest offered at the best price;
    [cir] Initiating Member is allocated 40 contracts at 1.02 (40%
carve out);
    [cir] Market Maker A and Market Maker B each trades 25 contracts
(pro rata among Priority Quotes).
    [cir] Market Maker D's response is cancelled since there were no
contracts open after Priority Quotes were filled at that price.

Example No. 3

    Summary: Market Makers improve upon the price and receive both
Priority Quote status and non-Priority Quote status based on their
size at initial NBBO; Initiating Member does not receive an
allocation.
    Assumptions:

 NBBO = .97-1.03
 EDGX BBO = .95-1.03(60) with Market Maker A and Market
Maker B offering 30 contracts each
 Class is designated as eligible for Priority Quotes
 Agency Order to buy 90 contracts stopped at 1.03 is
received

    BAM Process:

 Auction begins
 During auction:
    [cir] Market Maker A responds to sell 50 contracts at 1.02
(Priority Quote status for 30 contracts and non-Priority Quote
status for 20 contracts);
    [cir] Market Maker B responds to sell 50 contracts at 1.02
(Priority Quote status for 30 contracts and non-Priority Quote
status for 20 contracts);
    [cir] Market Maker C responds to sell 10 at 1.01; and
    [cir] Market Maker D responds to sell 50 contracts at 1.02.
 Auction ends:
    [cir] Market Maker C trades 10 at 1.01 since it was the only
interest offered at the best price;
    [cir] Market Maker A and Market Maker B each trade 30 contracts
at 1.02 since they have priority up to their size at the NBBO when
the Auction started;
    [cir] Market Maker A, Market Maker B, and Market Maker D then
pro-rata split the balance of 20 contracts at 1.02 based on their
remaining interest size with Market Maker A being allocated 4
contracts (=20/90*20), Market Maker B being allocated 4 (=20/90*20)
contracts, and Market Maker D being allocated 11 contracts (=50/
90*20);
    [cir] The residual 1 contract will be allocated in time priority
to Market Maker A;
    [cir] Initiating Member does not participate as entirety of
order was price improved.

Example No. 4

    Summary: Initiating Member utilizes Auto-Match feature with
specified price and Market Makers with Priority Quotes participate;
Initiating Member & Priority Quote interest fully satisfies Agency
Order.
    Assumptions:

 NBBO = .97-1.03
 EDGX BBO = .95-1.03(60) with Market Maker A and Market
Maker B offering 30 contracts each
 Class is designated as eligible for Priority Quotes
 Agency Order to buy 90 contracts stopped at 1.03 with Auto-
Match feature to 1.02 is received

    BAM Process:

 Auction begins
 During auction:

    [cir] Market Maker A responds to sell 50 contracts at 1.02
(Priority Quote status for 30 contracts and non-Priority Quote
status for 20 contracts);
    [cir] Market Maker B responds to sell 50 contracts at 1.02
(Priority Quote status for 30 contracts and non-Priority Quote
status for 20 contracts);
    [cir] Market Maker C responds to sell 10 at 1.01; and
    [cir] Market Maker D responds to sell 50 contracts at 1.02.
 Auction ends:
    [cir] Market Maker C trades 10 at 1.01 since it was the only
interest offered at the best price; note that the Initiating Member
specified a limit of 1.02 so such Initiating Member does not receive
an Auto-Match execution at 1.01;
    [cir] Initiating Member is allocated 40% or 36 contracts at 1.02
since it will be the final price point and Auto-Match is enabled;
    [cir] Market Maker A and Market Maker B each trades 22 contracts
at 1.02 since they have Priority Quote status ahead of Market Maker
D up to their size at the NBBO when the Auction started; and
    [cir] Market Maker D's response is cancelled.

Example No. 5

    Summary: Initiating Member utilizes Auto-Match feature with
specified price and Market Makers with Priority Quote status and
non-Priority Quote status participate; Agency Order exceeds size of
Initiating Member execution and Priority Quotes.
    Assumptions:

 NBBO = .97-1.03
 EDGX BBO = .95-1.03(60) with Market Maker A and Market
Maker B offering 30 contracts each
 Class is designated as eligible for Priority Quotes
 Agency Order to buy 150 contracts stopped at 1.03 with
Auto-Match feature to 1.02 is received

    BAM Process:

 Auction begins
 During auction:
    [cir] Market Maker A responds to sell 50 contracts at 1.02
(Priority Quote status for 30 contracts and non-Priority Quote
status for 20 contracts);
    [cir] Market Maker B responds to sell 50 contracts at 1.02
(Priority Quote status for 30 contracts and non-Priority Quote
status for 20 contracts);
    [cir] Market Maker C responds to sell 10 at 1.01; and
    [cir] Market Maker D responds to sell 50 contracts at 1.02.
 Auction ends:
    [cir] Market Maker C trades 10 at 1.01 since it was the only
interest offered at the best price; note that the Initiating Member
specified a limit of 1.02 so such Initiating Member does not receive
an Auto-Match execution at 1.01;
    [cir] Initiating Member is allocated 40% or 60 contracts at 1.02
since it will be the final price point;
    [cir] Market Maker A and Market Maker B each trade 30 contracts
at 1.02 since they have Priority Quote status up to their size at
the NBBO when the Auction started;
    [cir] Market Maker A, Market Maker B, and Market Maker D then
pro-rata split the balance with Market Maker A and Market Maker B
each trading 4 additional contracts at 1.02 (20/90*20) and Market
Maker D trading 11 contracts at 1.02 (50/90*20);
    [cir] The residual 1 contract will be allocated in time priority
to Market Maker A.

Example No. 6

    Summary: Initiating Member utilizes Auto-Match feature without
specified price and Market Makers with Priority Quote status and
non-Priority Quote status participate; Agency Order exceeds size of
Initiating Member execution and Priority Quotes.
    Assumptions:

 NBBO = .97-1.03
 EDGX BBO = .95-1.03(60) with Market Maker A and Market
Maker B offering 30 contracts each
 Class is designated as eligible for Priority Quotes
 Agency Order to buy 150 contracts stopped at 1.03 with
Auto-Match feature is received

    BAM Process:

 Auction begins
 During auction:
    [cir] Market Maker A responds to sell 50 contracts at 1.02
(Priority Quote status for 30 contracts and non-Priority Quote
status for 20 contracts);
    [cir] Market Maker B responds to sell 50 contracts at 1.02
(Priority Quote status for 30 contracts and non-Priority Quote
status for 20 contracts);
    [cir] Market Maker C responds to sell 10 at 1.01; and
    [cir] Market Maker D responds to sell 50 contracts at 1.02.
 Auction ends:
    [cir] Market Maker C trades 10 at 1.01;
    [cir] Initiating Member auto-matches and trades 10 at 1.01;
    [cir] Initiating Member is allocated 40% or 60 contracts at 1.02
since it will be the final price point;
    [cir] Market Maker A and Market Maker B each trade 30 contracts
at 1.02 since they have Priority Quote status up to their size at
the NBBO when the Auction started;
    [cir] Market Maker A, Market Maker B, and Market Maker D then
pro-rata split the balance with Market Maker A and Market Maker B
each trading 2 contracts at 1.02 (20/90*10) and Market Maker D
trading 6 contracts at 1.02 (50/90*10).

Example No. 7

    Summary: All executions occurring at initial NBBO price and
Public Customer order received.
    Assumptions:

 NBBO = .97-1.03
 Class is designated as eligible for Priority Quotes
 EDGX BBO = .95-1.03(60) with Market Maker A and Market
Maker B offering 30 contracts each
 Agency Order to buy 100 contracts stopped at 1.03 is
received

    BAM Process:

 Auction begins
 During auction:
    [cir] Market Maker C responds to sell 20 at 1.03; and
    [cir] Priority Customer offers 2 contracts at 1.03.
 Auction ends:
    [cir] Priority Customer trades 2 contracts at 1.03;
    [cir] Initiating Member is allocated 40% or 40 contracts at
1.03;
    [cir] Remaining allocation is pro-rata among Priority Quote
interest with Market Maker A trading 29 contracts (30/60*58) and
Market Maker B trading 29 contracts (30/60*58).
    [ssquf] Note that in this example the Priority Quote interest
from Market Maker A and Market Maker B is from quotations published
on the Exchange's order book and not from BAM responses received
from such Market Makers.

Example No. 8

    Summary: Initiating Member specifying Auto-Match feature without
specified price, Market Maker with Priority Quotes has multiple
price levels of interest, and executions occur at initial NBBO
price.
    Assumptions:

 NBBO = .97-1.03
 EDGX BBO = .95-1.03(60) with Market Maker A and Market
Maker B offering 30 contracts each
 Agency Order to buy 300 contracts stopped at 1.03 with
Auto-Match feature is received

    BAM Process:

 Auction begins
 During auction:
    [cir] Market Maker A responds to sell 10 contracts at 1.02
(considered as Priority Quote);
    [cir] Market Maker B responds to sell 50 contracts at 1.02 (30
of the 50 contracts are considered as Priority Quote);
    [cir] Market Maker C responds to sell 5 at 1.01; and
    [cir] Market Maker D responds to sell 40 contracts at 1.02.
 Next, during auction:
    [cir] Market Maker A responds with 30 additional contracts at
1.03 (considered as Priority Quote).
 Next, during auction:
    [cir] Market Maker A moves his quote (maintain Priority Quote
status) and EDGX BBO becomes .95-1.02 for 10 contracts; and
    [cir] An order from Member Firm 1 arrives offering 10 contracts
at 1.02 such that the EDGX BBO becomes .95-1.02 for 20 contracts.
 Auction ends:
    [cir] Market Maker C trades 5 at 1.01;
    [cir] Initiating Member auto-matches and trades 5 at 1.01;
    [cir] Next, interest is then allocated at 1.02 as follows:
    [ssquf] Market Maker A response (Priority Quote status) trades
10 contracts;
    [ssquf] Market Maker B response (Priority Quote status) trades
30 contracts;
    [ssquf] Market Maker A quote trades 10 contracts at 1.02;
    [ssquf] Market Maker B response (non-Priority Quote status)
trades 20 contracts;

    [ssquf] Market Maker D's response (non-Priority Quote status)
trades 40 contracts at 1.02;
    [ssquf] Member Firm 1's quote (non-Priority Quote status) trades
10 contracts at 1.02.
    [cir] Next, the Initiating Member order matches the full volume
trading at 1.02 (because of Auto-Match feature) which is 120
contracts.
    [cir] The remaining 50 contracts are traded by the Initiating
Member at 1.03 since it will be the final price point (40% carve
out; 0.4*300 = 75).

Example No. 9

    Summary: Initiating Member utilizing Last Priority.
    Assumptions:

 NBBO = .97-1.03
 EDGX BBO = .95-1.03(60) with Market Maker A and Market
Maker B offering 30 contracts each
 Agency Order to buy 100 contracts stopped at 1.02 marked
with Last Priority is received

    BAM Process:

 Auction begins
 During auction:
    [cir] Market Maker C responds to sell 5 at 1.01;
    [cir] Market Maker A responds to sell 5 contracts at 1.02;
    [cir] Market Maker B responds to sell 40 contracts at 1.02; and
    [cir] Market Maker D responds to sell 20 contracts at 1.02.
 Next, during auction:
    [cir] Market Maker A moves his quote (maintains Priority Quote
status);
    [cir] EDGX BBO becomes .95-1.02 for 5 contracts; and
    [cir] NBBO becomes .97-1.02.
 Auction ends:
    [cir] Market Maker C trades 5 contracts at 1.01;
    [cir] Market Maker A response with Priority Quote status
executes 5 contracts at 1.02;
    [cir] Market Maker B response with Priority Quote status
executes 30 contracts;
    [cir] Market Maker A quote with Priority Quote status executes 5
contracts;
    [cir] Non-Priority Quote interest at 1.02 then executes with
Market Maker B trading 10 contracts and Market Maker D trading 20
contracts. The Initiating Member then executes the remaining 25
contracts at 1.02 since there is no other interest to satisfy the
Agency Order at a price equal to or better than the stop price of
1.02.

Example No. 10

    Summary: Initiating Member utilizing Last Priority and no
responders.
    Assumptions:

 EDGX BBO = .95-1.03(60) with Market Maker A and Market
Maker B offering 30 contracts each
 Agency Order to buy 20 contracts stopped at 1.02 marked
with Last Priority is received

    BAM Process:

 Auction begins
 During auction:
    [cir] Market Maker C quotes .95-1.02 for 10 contracts and EDGX
BBO becomes .95-1.02 for 10 contracts; and
    [cir] NBBO becomes .97-1.02.
 Next, during auction:
    [cir] Market Maker A moves his quote (maintains Priority Quote
status) and joins the EDGX BBO at .95-1.02 for 10 contracts; and
    [cir] NBBO remains .97-1.02.
 Auction ends:
    [cir] Priority Quote interest trades first: Market Maker A gets
allocated 10 contracts of Agency Order.
    [cir] Non-Priority Quote interest trades next: Market Maker C
gets allocated 10 contracts.
    [cir] Neither the Initiating Member nor Market Maker B receives
any execution in this example.

Example No. 11

    Summary: Initiating Member utilizing an ISO Order priced through
NBBO.
    Assumptions:

 NBBO = .97-1.03
 EDGX BBO = .95-1.04
 Agency Order to buy 50 contracts stopped at 1.04 marked
with an ISO flag is received

    BAM Process:
 Auction begins
 During auction:
    [cir] Market Maker A responds to sell 20 at 1.02; and
    [cir] Market Maker B responds to sell 20 at 1.02.
 Auction ends:
    [cir] Market Maker A gets allocated 20 contracts of Agency Order
at 1.02.
    [cir] Market Maker B gets allocated 20 contracts of Agency Order
at 1.02.
    [cir] The Initiating Member gets allocated the remaining 10
contracts at 1.04.

Example No. 12

    Summary: Initiating Member utilizing an ISO Order priced through
EDGX BBO.
    Assumptions:

 NBBO = .97-1.03
 EDGX BBO = .95-1.03
 Agency Order to buy 50 contracts stopped at 1.04 marked
with an ISO flag is received
Agency Order is rejected.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent
with the provisions of the Act,\28\ in general, and with Section
6(b)(5) of the Act,\29\ in particular, in that it is designed to
promote just and equitable principles of trade, to foster cooperation
and coordination with persons engaged in regulating, clearing,
settling, 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; and is not
designed to permit unfair discrimination between customers, issuers,
brokers, or dealers.
---------------------------------------------------------------------------

    \28\ 15 U.S.C. 78a et seq.
    \29\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    The Exchange believes that the proposal will result in increased
liquidity available at improved prices, with competitive final pricing
out of the Initiating Member's complete control. BAM should promote and
foster competition and provide more options contracts with the
opportunity for price improvement. As a result of the increased
opportunities for price improvement, the Exchange believes that
participants will use BAM to increase the number of Priority Customer
Orders that are provided with the opportunity to receive price
improvement over the NBBO.
    The Exchange believes that the BAM Auction will encourage
participants on EDGX Options to quote or display orders at the NBBO
with additional size and thereby result in tighter and deeper markets,
resulting in more liquidity on EDGX Options. Specifically, by offering
all Users the ability to receive priority in the proposed allocation
during the BAM Auction up to the size of their quote, an EDGX User will
be encouraged to maintain quotes or orders with additional size outside
of the BAM Auction at the best and most aggressive prices. The Exchange
believes that this incentive may result in a narrowing of quotes and
thus further enhance EDGX's market quality. Within the BAM Auction,
EDGX believes that the rules that are proposed will encourage EDGX
Users to compete vigorously to provide the opportunity for price
improvement in a competitive auction process.
    As noted above, the Exchange has proposed to allow BAM Auctions for
50 contracts or more to occur concurrently with other BAM Auctions.
Although Auctions for larger Agency Orders will be allowed to overlap,
the Exchange does not believe that this raises any issues that are not
addressed through the proposal as described above. For example,
although overlapping, each Auction will be started in a sequence and
with a time that will determine its processing. Thus, even if there are
two Auctions that commence and conclude, at nearly the same time, each
Auction will have a distinct conclusion at which time the Auction will
be allocated. In turn, when the first Auction concludes, unrelated
orders that then exist will be considered for participation in the
Auction.\30\ If unrelated orders are fully executed in such Auction,
then there will be no unrelated orders for consideration when the
subsequent Auction is processed (unless new unrelated order interest
has arrived). If instead there is remaining unrelated order interest
after the first Auction has

been allocated, then such unrelated order interest will be considered
for allocation when the subsequent Auction is processed. As another
example, each BAM response is required to specifically identify the
Auction for which it is targeted \31\ and if not fully executed will be
cancelled back at the conclusion of the Auction.\32\ Thus, BAM
responses will be specifically considered only in the specified
Auction.
---------------------------------------------------------------------------

    \30\ See proposed Rule 21.19(b)(3).
    \31\ See proposed Rule 21.19(b)(1)(E).
    \32\ See proposed Rule 21.19(b)(5).
---------------------------------------------------------------------------

    The Exchange does not believe that allowing multiple auctions to
overlap for Agency Orders of 50 contracts or more presents any unique
issues that differ from functionality already in place on other
exchanges. The Exchange notes that other options exchanges offer
auctions for orders 50 contracts or greater (generally referred to as
``facilitation auctions'') that are permitted to overlap.\33\ In
contrast, similar to the Exchange's proposal, other options exchanges
do prevent simultaneous auctions to occur for orders less than 50
contracts (generally referred to as ``price improvement
auctions'').\34\ Instead of proposing two separate auction processes
that are functionally the same with only minor differences, such as the
restriction on overlapping or queuing auctions--which is present in
other options exchanges' price improvement auctions but not in their
facilitation auctions--the Exchange is proposing to have a single
process that recognizes these specific nuances to avoid introducing new
policy issues regarding such topics.
---------------------------------------------------------------------------

    \33\ See, e.g., ISE Rule 716(d), which governs ISE's
facilitation mechanism and does not restrict such auctions to one
auction at a time. See also Boston Options Exchange (``BOX'') Rule
7270.
    \34\ See ISE Rule 723, Interpretation and Policy .04. See also
BOX IM-7150-3.
---------------------------------------------------------------------------

    Further, the new functionality may lead to an increase in Exchange
volume and should allow the Exchange to better compete against other
markets that already offer an electronic solicitation mechanism, while
providing an opportunity for price improvement for agency orders. The
Exchange believes that its proposal will allow the Exchange to better
compete for solicited transactions, while providing an opportunity for
price improvement for agency orders and assuring that Priority
Customers on the book are protected. The new solicitation mechanism
should promote and foster competition and provide more options
contracts with the opportunity for price improvement, which should
benefit market participants, investors, and traders. The Exchange has
proposed a range between no less than one hundred milliseconds and no
more than one second for the duration of the BAM Auction; therefore the
proposed rule change will provide investors with more timely execution
of their options orders than a mechanism that has a one second auction,
while ensuring that there is an adequate exposure of orders in EDGX
BAM. The Exchange preliminary expects to use a default of 100
milliseconds for all symbols. The time will be announced to Members and
available on the Exchange's Web site. The proposed auction response
time of no less than one hundred milliseconds and no more than one
second should allow investors the opportunity to receive price
improvement through BAM while reducing market risk. The Exchange
believes a briefer time period reduces the market risk for the
Initiating Member, versus an auction with a one second period, as well
as for any Member providing orders in response to a broadcast. As such,
EDGX believes the proposed rule change would help perfect the mechanism
for a free and open national market system, and generally help protect
investors' and the public interest. The Exchange believes the proposed
rule change is not unfairly discriminatory because the BAM duration
would be the same for all Members and symbols. All Members will have an
equal opportunity to respond with their best prices during the BAM
Auction. Since the Exchange considers all interest present in the
System, and not solely BAM responses, for execution against the Agency
Order, those participants who are not explicit responders to the
Auction will expect executions via BAM as well.
    With respect to trading halts, as described herein, in the case of
a trading halt on the Exchange in the affected series, the Auction will
be cancelled without execution. Cancelling Auctions without execution
in this circumstance is consistent with Exchange handling of trading
halts in the context of continuous trading on EDGX Options and promotes
just and equitable principles of trade and, in general, protects
investors and the public interest.\35\
---------------------------------------------------------------------------

    \35\ The Exchange notes that trading on the Exchange in any
option contract will be halted whenever trading in the underlying
security has been paused or halted by the primary listing market and
other circumstances. See Rule 20.3.
---------------------------------------------------------------------------

    The Exchange further believes that the proposal is consistent with
the requirements of Section 11(a) of the Act \36\ and Rule 11a2-2(T)
\37\ thereunder. Section 11(a) prohibits a member of a national
securities exchange from effecting transactions on the exchange for its
own account, the account of an associated person, or an account in
which it or an associated person exercises investment discretion,
unless an exception applies (collectively ``Covered Accounts''). Rule
11a2-2(T) under the Act,\38\ 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.\39\ 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; \40\ (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. For the reasons set forth below, the Exchange believes that
Exchange Members entering orders into BAM would satisfy the
requirements of Rule 11a2-2(T).
---------------------------------------------------------------------------

    \36\ 15 U.S.C. 78k(a)(1).
    \37\ 17 CFR 240.11a2-2(T).
    \38\ CFR 240.11a2-2(T).
    \39\ In enacting this provision, Congress was concerned about
members benefiting in their principal transactions from special
``time and place'' advantages associated with floor trading--such as
the ability to ``execute decisions faster than public investors.''
The Commission, however, has adopted a number of exceptions to the
general statutory prohibition for situations in which the principal
transactions contribute to the fairness and orderliness of exchange
markets or do not reflect any time and place trading advantages. See
Securities Exchange Act Release No. 14563 (March 14, 1978), 43 FR
11542 (March 17, 1978); Securities Exchange Act Release No. 14713
(April 28, 1978), 43 FR 18557 (May 1, 1978); Securities Exchange Act
Release No. 15533 (January 29, 1979), 44 FR 6093 (Jan. 31, 1979).
The 1978 and 1979 Releases cite the House Report at 54-57.
    \40\ The member may, however, participate in clearing and
settling the transaction.
---------------------------------------------------------------------------

    The Exchange does not operate a physical trading floor, rather the
Exchange operates an electronic market. Rule 11a2-2(T)'s first
condition is that orders for Covered Accounts be transmitted from off
the exchange floor. In the context of 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.\41\ EDGX
represents

that the System and the proposed BAM Auction receive all orders
electronically through remote terminals or computer-to-computer
interfaces. The Exchange represents that orders for Covered Accounts
from Members will be transmitted from a remote location directly to the
proposed BAM mechanisms by electronic means.
---------------------------------------------------------------------------

    \41\ See, e.g., Securities Exchange Act Release Nos. 61419
(January 26, 2010), 75 FR 5157 (February 1, 2010) (SR-BATS-2009-031)
(approving BATS options trading); 59154 (December 23, 2008), 73 FR
80468 (December 31, 2008) (SRBSE-2008-48) (approving equity
securities listing and trading on BSE); 57478 (March 12, 2008), 73
FR 14521 (March 18, 2008) (SR-NASDAQ-2007-004 and SR-NASDAQ-2007-
080) (approving NOM options trading); 53128 (January 13, 2006), 71
FR 3550 (January 23, 2006) (File No. 10-131) (approving The 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'').
---------------------------------------------------------------------------

    The second condition of Rule 11a2-2(T) requires that neither a
member nor an associated person participate in the execution of its
order once the order is transmitted to the floor for execution. The
Exchange represents that, upon submission to the BAM Auction, an order
will be executed automatically pursuant to the rules set forth for BAM.
In particular, execution of an order sent to the mechanism depends not
on the Initiating Member entering the order, but rather on what other
orders are present and the priority of those orders. Thus, at no time
following the submission of an order is a Member able to acquire
control or influence over the result or timing of order execution.\42\
Once the Agency Order has been transmitted, the Exchange Initiating
Member that transmitted the order will not participate in the execution
of the Agency Order. Initiating Members submitting Agency Orders will
relinquish control to modify their Agency Orders upon transmission to
the Exchange's System. Further, no Member, including the Initiating
Member, will see a BAM response submitted into BAM and therefore and
will not be able to influence or guide the execution of their Agency
Orders. Finally, the Last Priority feature will not permit a Member to
have any control over an order. The election to Last Priority an order
is available prior to the submission of the order and therefore could
not be utilized to gain influence or guide the execution of the Agency
Order. The information provided with respect to the Last Priority
feature by the Initiating Member will not be broadcast and further, the
information may not be modified by the Initiating Member during the
auction.
---------------------------------------------------------------------------

    \42\ The Exchange notes that a Member may not cancel or modify
an order after it has been submitted into BAM.
---------------------------------------------------------------------------

    Rule 11a2-2(T)'s third condition requires that the order be
executed by an exchange member who is unaffiliated with the member
initiating the order. The Commission has stated that the requirement is
satisfied when automated exchange facilities, such as the BAM Auction
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.\43\ The Exchange
represents that the BAM Auction is designed so that no Member has any
special or unique trading advantage in the handling of its orders after
transmitting its orders to the mechanism.
---------------------------------------------------------------------------

    \43\ 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.
---------------------------------------------------------------------------

    Rule 11a2-2(T)'s fourth condition requires that, 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) thereunder.\44\ The
Exchange recognizes that Members relying on Rule 11a2-2(T) for
transactions effected through the BAM Auction must comply with this
condition of the Rule and the Exchange will enforce this requirement
pursuant to its obligations under Section 6(b)(1) of the Act to enforce
compliance with federal securities laws.
---------------------------------------------------------------------------

    \44\ See 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 which amount must be exclusive of all amounts paid to
others during that period for services rendered to effect such
transactions. See also 1978 (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'').
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    The Exchange believes that the instant proposal is consistent with
Rule 11a2-2(T), and that therefore the exception should apply in this
case.
    The Exchange also believes that the proposed rule changes would
further the objectives of the Act to protect investors by promoting the
intermarket price protection goals of the Options Intermarket Linkage
Plan.\45\ The Exchange believes its proposal would help ensure inter-
market competition across all exchanges and facilitate compliance with
best execution practices. The Exchange believes that these objectives
are consistent with the Act and the rules and regulations thereunder
applicable to the Exchange and, in particular, the requirements of
Section 11A of the Act.
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    \45\ See Rule 27.3 regarding Locked and Crossed Markets.
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will
result in any burden on competition that is not necessary or
appropriate in furtherance of the purposes of the Act. The competition
among the options exchanges is vigorous and this proposal is intended
to afford the EDGX Options market the opportunity to compete for order
flow by offering an auction mechanism on EDGX similar to that of other
exchanges.
    With respect to intra-market competition, the Auction will be
available to all EDGX Options Members. Moreover, as explained above,
the proposal should encourage EDGX Options Members to compete amongst
each other by responding with their best price and size for a
particular auction. With respect to overall market quality, the
Exchange believes that the BAM Auction, as proposed herein, will
encourage will encourage participants on EDGX Options to quote or
display orders at the NBBO with additional size and thereby result in
tighter and deeper markets, resulting in more liquidity on EDGX
Options. Specifically, by offering all Users the ability to receive
priority in the proposed allocation during the BAM Auction up to the
size of their quote, an EDGX User will be encouraged to maintain quotes
or orders with additional size outside of the BAM Auction at the best
and most aggressive prices. The Exchange believes that this incentive
may result in a narrowing of quotes and thus further enhance EDGX's

market quality. Within the BAM Auction, EDGX believes that the rules
that are proposed will encourage EDGX Users to compete vigorously to
provide the opportunity for price improvement in a competitive auction
process.
    The Exchange's proposal is a competitive response to similar
provisions in the price improvement auction rules of other options
exchanges.\46\ The Exchange believes this proposed rule change is
necessary to permit fair competition among the options exchanges and to
establish more uniform price improvement auction rules on the various
options exchanges. The Exchange anticipates that this auction proposal
will create new opportunities for EDGX to attract new business and
compete on equal footing with those options exchanges with auctions and
for this reason the proposal does not create an undue burden on inter-
market competition. Rather, the Exchange believes that the proposed
rule would bolster inter-market competition by promoting fair
competition among individual markets, while at the same time assuring
that market participants receive the benefits of markets that are
linked together, through facilities and rules, in a unified system,
which promotes interaction among the orders of buyers and sellers. The
Exchange believes its proposal would help ensure inter-market
competition across all exchanges and facilitate compliance with best
execution practices. In addition, the Exchange believes that the
proposed rule change would help promote fair and orderly markets by
helping ensure compliance with Options Order Protection and Locked and
Crossed Market Rules.\47\ Thus, the Exchange does not believe the
proposal creates any significant impact on competition.
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    \46\ Today, the following options markets offer auctions: CBOE,
ISE, BOX, MIAX, PHLX and BX Options. See CBOE Rule 6.74A, ISE Rule
723, BOX Rule 7150, MIAX Rule 5.15, PHLX Rule 1080(n), and BX
Options Chapter VI, Section 9.
    \47\ See Chapter XXVII of the Exchange's Rules.
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C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others

    Written comments were neither solicited nor received.

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

    Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period (i) as the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reasons for so finding or (ii) as to
which the Exchange consents, the Commission will: (a) By order approve
or disapprove such proposed rule change, or (b) institute proceedings
to determine whether the proposed rule change should be disapproved.

IV. Solicitation of Comments

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

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to<EMAIL_ADDRESS>Please
include File Number SR-BatsEDGX-2016-41 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-BatsEDGX-2016-41. This
file number should be included on the subject line if email is used. To
help the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all
written statements with respect to the proposed rule change that are
filed with the Commission, and all written communications relating to
the proposed rule change between the Commission and any person, other
than those that may be withheld from the public in accordance with the
provisions of 5 U.S.C. 552, will be available for Web site viewing and
printing in the Commission's Public Reference Room, 100 F Street NE.,
Washington, DC 20549, on official business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of the filing also will be available
for inspection and copying at the principal office of the Exchange. All
comments received will be posted without change; the Commission does
not edit personal identifying information from submissions. You should
submit only information that you wish to make available publicly. All
submissions should refer to File Number SR-BatsEDGX-2016-41 and should
be submitted on or before October 26, 2016.

    For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\48\
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    \48\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-24010 Filed 10-4-16; 8:45 am]
BILLING CODE 8011-01-P