[Federal Register Volume 81, Number 35 (Tuesday, February 23, 2016)]
[Notices]
[Pages 9017-9025]
[FR Doc No: 2016-03740]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-77171; File No. SR-BATS-2015-101]

Self-Regulatory Organizations; BATS Exchange, Inc.; Order
Granting Approval of a Proposed Rule Change, as Modified by Amendment
No. 1 Thereto, To Adopt Rule 8.17 To Provide a Process for an Expedited
Suspension Proceeding and Rule 12.15 To Prohibit Disruptive Quoting and
Trading Activity

February 18, 2016.

I. Introduction

    On November 6, 2015, BATS Exchange, Inc. (``BATS'' or the
``Exchange'') filed with the Securities and Exchange Commission
(``Commission''), pursuant to Section 19(b)(1) of the Securities
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a
proposed rule change to adopt new BATS Rule (``Rule'') 12.15, which
would prohibit certain disruptive quoting and trading activities on the
Exchange, and new Rule 8.17, which would permit BATS to conduct a new
Expedited Client Suspension Proceeding when it believes proposed Rule
12.15 has been violated.\3\ On November 17, 2015, the Exchange filed
Amendment No. 1 to the proposal.\4\ The proposed rule change, as
modified by Amendment No. 1, was published for comment in the Federal
Register on November 24, 2015.\5\ On January 6, 2016, pursuant to
Section 19(b)(2) of the Act,\6\ the Commission designated a longer
period within which to approve the proposed rule change, disapprove the
proposed rule change, or institute proceedings to determine whether to
disapprove the proposed rule change.\7\ The Commission received four
comment letters on the proposal and a response to the comments from the
Exchange.\8\ The Commission also received a recommendation regarding
the proposed rule change from the Office of the Investor Advocate
(``OIAD'').\9\ This order approves the proposed rule change, as
modified by Amendment No. 1.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ As discussed in Section II, this proposed rule change is a
revised version of a prior filing, BATS-2015-57, which the Exchange
withdrew on November 6, 2015. See Securities Exchange Act Release
No. 76393 (November 9, 2015), 80 FR 70851 (November 16, 2015) (BATS-
2015-57) (notice of withdrawal of BATS-2015-57). BATS filed BATS-
2015-101 in order to address certain issues raised by comments
submitted with respect to BATS-2015-57.
    \4\ Amendment No. 1 amended and replaced the original proposal
in its entirety.
    \5\ See Securities Exchange Act Release No. 76470 (November 18,
2015), 80 FR 73247 (``Notice'').
    \6\ 15 U.S.C. 78s(b)(2).
    \7\ See Securities Exchange Act Release No. 76841, 81 FR 1457
(January 12, 2016). The Commission designated February 22, 2016 as
the date by which it should approve, disapprove, or institute
proceedings to determine whether to disapprove the proposed rule
change.
    \8\ See letters from: R.T. Leuchtkafer to Brent J. Fields,
Secretary, Commission, dated December, 14, 2015 (``Leuchtkafer
Letter II''); Samuel F. Lek, Chief Executive Officer, Lek Securities
Corporation, dated December 28, 2015 (``Lek Letter III''); G.T.
Spaulding to Brent J. Fields, Secretary, Commission, dated December,
28, 2015 (``Spaulding Letter''); R.T. Leuchtkafer to Brent J.
Fields, Secretary, Commission, dated February 2, 2016 (``Leuchtkafer
Letter III''); and response letter regarding SR-BATS-2015-101 from
Anders Franzon, SVP Associate General Counsel, BATS, to Brent J.
Fields, Secretary, Commission, dated January 21, 2016 (``BATS
Response Letter II''). In addition, the Commission received comments
regarding the prior filing, SR-BATS-2015-57, which this proposal
revises and replaces. See comment letters regarding SR-BATS-2015-57
from: Teresa Machado B., dated August 19, 2015 (``Machado Letter'');
Samuel F. Lek, Chief Executive Officer, Lek Securities Corporation,
dated September 3, 2015 (``Lek Letter I''); R.T. Leuchtkafer to
Brent J. Fields, Secretary, Commission, dated September, 4, 2015
(``Leuchtkafer Letter I''); Mary Ann Burns, Chief Operating Officer,
FIA Principal Traders Group, to Brent J. Fields, Secretary,
Commission, dated September, 9, 2015 (``FIA Letter''); and Samuel F.
Lek, Chief Executive Officer, Lek Securities Corporation, dated
September 18, 2015 (``Lek Letter II''). The Exchange submitted a
response to these comments in conjunction with its withdrawal of SR-
BATS-2015-57 and filing of this proposal. See response letter
regarding SR-BATS-2015-57 from Anders Franzon, VP and Associate
General Counsel, BATS, to Brent J. Fields, Secretary, Commission,
dated November 6, 2015 (``BATS Response Letter I''). The comments
pertaining to the current proposal, the comments pertaining to SR-
BATS-2015-57, and the Exchange's responses to the comments are all
summarized below.
    \9\ See Memorandum to the Commission from Rick A. Fleming,
Office of the Investor Advocate, Commission, dated December 15, 2015
(``OIAD Recommendation''). As discussed in more detail below, the
Commission has carefully considered the OIAD Recommendation. The
OIAD was established pursuant to Section 915 of the Dodd Frank Wall
Street Reform and Consumer Protection Act, Public Law 111-203, sec.
911, 124 Stat. 1376, 1822 (July 21, 2010) (the ``Dodd-Frank Act'').
The Dodd-Frank Act authorizes the Investor Advocate, among other
things, to identify areas in which investors would benefit from
changes in the regulations of the Commission or the rules of self-
regulatory organizations and to propose to the Commission changes in
the regulations or orders of the Commission that may be appropriate
to promote the interests of investors.
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II. Description of the Proposed Rule Change

    The Exchange states that, in order to fulfill certain of its
responsibilities as a registered national securities exchange and self-
regulatory organization, it has developed a comprehensive regulatory
program that includes automated surveillance of trading activity that
is operated directly by Exchange staff and by staff of the Financial
Industry Regulatory Authority (``FINRA'') pursuant to a Regulatory
Services Agreement.\10\ According to the Exchange, under this
regulatory program, it can often take several years to resolve cases
involving disruptive and potentially manipulative or improper quoting
and trading activity even though, in some cases, the improper activity
is able to be identified in real-time or near real-time.\11\ As a
result, the Exchange states that Exchange members (``Members'')
responsible for such conduct, or responsible for their customers'
conduct, are allowed to continue the disruptive quoting and trading
activity on the Exchange and other exchanges during the entirety of
such lengthy investigations and enforcement processes.\12\ In the
Notice, the Exchange provides examples of recent cases in which this
has occurred.\13\
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    \10\ See Notice, supra note 5, at 73247-48.
    \11\ Id. at 73248.
    \12\ Id.
    \13\ Id. The Exchange notes that these cases involved
allegations of wide-spread market manipulation, and in each case,
the conduct involved a pattern of disruptive quoting and trading
activity indicative of manipulative layering or spoofing. Id.
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    The Exchange believes that a lengthy investigation and enforcement
process is generally necessary and appropriate to afford the subject
Member adequate due process.\14\ However, it also believes ``that there
are certain obvious and uncomplicated cases of disruptive and
manipulative behavior or cases where the potential harm to investors is
so large that the Exchange should have the authority to initiate an
expedited suspension proceeding in order to stop the behavior from
continuing on the Exchange.'' \15\ The Exchange further states that it
should have such authority if a Member is engaging in or facilitating
disrupting quoting and trading activity, and the Member has received
sufficient notice with an opportunity to respond, but such activity has
not ceased.\16\
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    \14\ Id.
    \15\ Id.
    \16\ Id.
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    The Exchange therefore has proposed to adopt new Rule 12.15, which
would expressly prohibit two specific types of disruptive quoting and
trading activities, and new Rule 8.17, which would permit the Exchange
to conduct an Expedited Client Suspension Proceeding when it believes
new Rule 12.15 has been violated.\17\
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    \17\ The Exchange notes that it currently has authority to
prohibit and take action against manipulative trading activity,
including disruptive quoting and trading activity, pursuant to its
general market manipulation rules, including Rule 3.1. Id. at 73250.

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Proposed Rule 12.15

    Proposed Rule 12.15 would state that no Member shall engage in or
facilitate disruptive quoting and trading activity--as described in
Interpretations and Policies .01 and .02 of proposed Rule 12.15--on the
Exchange, including acting in concert with other persons to affect such
activity.\18\
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    \18\ The Exchange believes that it is necessary to extend the
prohibition of proposed Rule 12.15 to situations when persons are
acting in concert to avoid a potential loophole where disruptive
quoting and trading activity is simply split between several brokers
or customers. See Notice, supra note 5, at 73250.
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    Proposed Interpretation and Policy .01 would describe the quoting
and trading activities prohibited by proposed Rule 12.15 and state
that, for purposes of proposed Rule 12.15, disruptive quoting and
trading activity shall include a frequent pattern of two fact
scenarios, defined as ``Disruptive Quoting and Trading Activity Type
1'' and ``Disruptive Quoting and Trading Activity Type 2,''
respectively. Disruptive Quoting and Trading Activity Type 1 would
entail a frequent pattern in which the following facts are present: (1)
A party enters multiple limit orders on one side of the market at
various price levels (the ``Displayed Orders''); (2) following the
entry of the Displayed Orders, the level of supply and demand for the
security changes; (3) the party enters one or more orders on the
opposite side of the market of the Displayed Orders (the ``Contra-Side
Orders'') that are subsequently executed; and (4) following the
execution of the Contra-Side Orders, the party cancels the Displayed
Orders. Disruptive Quoting and Trading Activity Type 2 would entail a
frequent pattern in which the following facts are present: (1) A party
narrows the spread for a security by placing an order inside the
national best bid and offer (``NBBO''); and (2) the party then submits
an order on the opposite side of the market that executes against
another market participant that joined the new inside market
established by the party.
    Proposed Interpretation and Policy .02 would state that, for
purposes of proposed Rule 12.15, disruptive quoting and trading
activity shall include a frequent pattern in which the facts listed in
Interpretation and Policy .01 are present. Proposed Interpretation and
Policy .02 would also state that, unless otherwise indicated, the order
of the events indicating the pattern does not modify the applicability
of proposed Rule 12.15. Further, proposed Interpretation and Policy .02
would state that disruptive quoting and trading activity includes a
pattern or practice in which all of the quoting and trading activity is
conducted on the Exchange as well as a pattern or practice in which
some portion of the quoting or trading activity is conducted on the
Exchange and the other portions of the quoting or trading activity are
conducted on one or more other exchanges.

Proposed Rule 8.17

    Under proposed Rule 8.17, the Exchange could initiate an Expedited
Client Suspension Proceeding when it believes that proposed Rule 12.15
has been violated. An Expedited Client Suspension Proceeding could
result in the Exchange issuing a ``suspension order,'' under which a
Respondent to the proceeding that was provided with advanced notice
could be (1) ordered to cease and desist from the violative trading
activity under proposed Rule 12.15 and/or ordered to cease and desist
from providing access to the Exchange to a client engaging in the
violative trading activity under proposed Rule 12.15, and (2) suspended
from the Exchange unless and until it takes or refrains from taking the
act or acts described in the suspension order.\19\
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    \19\ See proposed Rule 8.17(d)(2).
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    Paragraph (a) of proposed Rule 8.17 would govern the initiation of
an Expedited Client Suspension Proceeding. With the prior written
authorization of the Exchange's Chief Regulatory Officer (``CRO'') or
such other senior officers as the CRO may designate, the Office of
General Counsel or Regulatory Department of the Exchange may initiate
an Expedited Client Suspension Proceeding. The Exchange would initiate
an Expedited Client Suspension Proceeding by serving a notice on a
Member or associated person of a Member (``Respondent''), and the
notice would be effective upon service.\20\ The notice would state
whether the Exchange is requesting the Respondent to be required to
take action or to refrain from taking action, and would be accompanied
by the following: (1) A declaration of facts, signed by a person with
knowledge of the facts contained therein, that specifies the acts that
constitute the alleged violation; and (2) a proposed order that
contains the required elements of a suspension order (except the date
and hour of the order's issuance).\21\
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    \20\ Under proposed Rule 8.17, relevant documents (e.g., notice,
the suspension order) may be served via personal service or
overnight commercial carrier. See proposed Rules 8.17(a)(2),
8.17(c)(2), 8.17(d)(4), and 8.17(e).
    \21\ See proposed Rule 8.17(a)(3).
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    Paragraph (b) of proposed Rule 8.17 would govern the appointment of
a Hearing Panel to preside over an Expedited Client Suspension
Proceeding and the recusal or disqualification of a Hearing Officer
from the Hearing Panel under certain circumstances. Proposed Rule
8.17(b)(1) would require the assignment of a Hearing Panel as soon as
practicable after the Exchange initiates an Expedited Client Suspension
Proceeding.\22\ Proposed Rule 8.17(b)(2) would provide for the recusal
or disqualification of a Hearing Officer in the event he or she has a
conflict of interest or bias or other circumstances exist where his or
her fairness might reasonably be questioned. The proposed rule would
permit a Hearing Officer to recuse himself or herself and also permit a
party to the proceeding to file a motion to disqualify a Hearing
Officer. Proposed Rule 8.17(b) would require a recusal and
disqualification proceeding to be held under such circumstances, which
would be conducted in accordance with current Rule 8.6(b).\23\ However,
proposed Rule 8.17(b) would provide for shorter timeframes within which
a motion to disqualify a Hearing Officer must be filed and within which
the Exchange may respond to that motion than those set forth in Rule
8.6(b).\24\ The Exchange states that proposed Rule 8.17(b) provides for
these shorter time periods due to the compressed schedule pursuant to
which an Expedited Client Suspension Proceeding would operate.\25\
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    \22\ The Hearing Panel would be appointed in accordance with
current Rule 8.6(a), which states, among other things, that a
Hearing Panel for general disciplinary proceedings shall be
comprised of three hearing officers appointed by the Chief Executive
Officer of the Exchange. See Rule 8.6(a). Rule 8.6(a) further states
that each Hearing Panel shall be comprised of: (1) A professional
hearing officer, who shall serve as Chairman of the Hearing Panel,
(2) a hearing officer who is an Industry member, as such term is
defined in the Exchange's By-Laws, and (3) a hearing officer who is
a Member Representative member, as such term is defined in the
Exchange's By-Laws. Id.
    \23\ See Rule 8.6(b). Rule 8.6(b) sets forth the Exchange's
standard for the impartiality of Hearing Officers for general
disciplinary proceedings and the process for removing a Hearing
Officer due to bias or conflict of interest. Id.
    \24\ Under proposed Rule 8.17(b)(2), a motion seeking
disqualification of a Hearing Officer would be required to be filed
no later than five days after the announcement of the Hearing Panel,
and the Exchange would be permitted to file a brief in opposition to
that motion no later than five days after service thereof. Rule
8.6(b) provides for a 15-day period to file a motion to disqualify a
Hearing Officer and a 15-day period for the Exchange to respond.
    \25\ See Notice, supra note 5, at 73249.
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    Under paragraph (c) of proposed Rule 8.17, a hearing would be held
no later than 15 days after service of the notice initiating the
Expedited Client Suspension Proceeding, unless

otherwise extended by the Chairman of the Hearing Panel with the
consent of the parties to the proceeding for good cause shown. In the
event of a recusal or disqualification of a Hearing Officer, the
hearing would be held no later than five days after a replacement
Hearing Officer is appointed. A notice of the date, time, and place of
the hearing would be required to be served on the parties to the
proceeding no later than seven days before the hearing, unless
otherwise ordered by the Chairman of the Hearing Panel. Proposed Rule
8.17(c) would also govern the conduct of the hearing by including
provisions addressing the authority of the Hearing Officers, the
testimony of witnesses, the submission of additional information to the
Hearing Panel, the requirement that a transcript of the proceeding be
created (and the details related to availability of and corrections to
such transcript), and the creation and maintenance of the record of the
proceeding. Proposed Rule 8.17(c) would also provide that the Hearing
Panel may issue a suspension order without further proceedings if the
Respondent fails to appear at the hearing, and that the Hearing Panel
may dismiss the Expedited Client Suspension Proceeding if the Exchange
fails to appear at the hearing.
    Under paragraph (d) of proposed Rule 8.17, the Hearing Panel would
be required to issue a written decision stating whether a suspension
order would be imposed. The Hearing Panel would be required to issue
the decision no later than ten days after receipt of the hearing
transcript, unless otherwise extended by the Chairman of the Hearing
Panel with the consent of the parties to the proceeding for good cause
shown. Pursuant to proposed Rule 8.17(d)(1), a suspension order would
be imposed if the Hearing Panel finds: (1) by a preponderance of the
evidence that the alleged violation specified in the notice has
occurred and (2) that the violative conduct or continuation thereof is
likely to result in significant market disruption or other significant
harm to investors.
    Proposed Rule 8.17(d)(2) would set forth the content, scope, and
form of a suspension order. Specifically, the suspension order would be
limited to: (1) ordering a Respondent to cease and desist from
violating proposed Rule 12.15; and/or (2) ordering a Respondent to
cease and desist from providing access to the Exchange to a client of
Respondent that is causing violations of proposed Rule 12.15.\26\ The
suspension order would be required to set forth the alleged violation
and the significant market disruption or other significant harm to
investors that is likely to result without the issuance of an order, to
describe, in reasonable detail, the act or acts the Respondent is to
take or refrain from taking, and to suspend the Respondent unless and
until such action is taken or refrained from.\27\ Under proposed Rules
8.17(d)(3) and 8.17(d)(4), a suspension order would be effective upon
service and remain effective and enforceable unless modified, set
aside, limited, or revoked pursuant to proposed Rule 8.17(e).\28\
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    \26\ See supra note 18 and accompanying text.
    \27\ The suspension order would also include the date and hour
of its issuance. See proposed Rule 8.17(d)(2)(D).
    \28\ See infra.
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    Paragraph (e) of proposed Rule 8.17 would provide that, at any time
after the Respondent is served with a suspension order, a party to the
Expedited Client Suspension Proceeding may apply to the Hearing Panel
to have the order modified, set aside, limited, or revoked. Further,
under proposed Rule 8.17(e), the Hearing Panel would be required to
respond to any such request in writing within ten days after receipt of
the request, unless otherwise extended by the Chairman of the Hearing
Panel with the consent of the parties to the proceeding for good cause
shown. In addition, proposed Rule 8.17(e) would state that an
application to modify, set aside, limit or revoke a suspension order
would not stay the effectiveness of the suspension order. In the
Notice, the Exchange explains that if any part of a suspension order is
modified, set aside, limited, or revoked, proposed Rule 8.17(e) would
grant the Hearing Panel discretion to leave the cease and desist part
of the order in place while, for example, removing the suspension
component.\29\
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    \29\ See Notice, supra note 5, at 73249. In addition, the
Exchange also explains that, with its broad modification powers
under the proposed rule, the Hearing Panel would maintain the
discretion to impose conditions upon the removal of a suspension.
Id.
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    Finally, paragraph (f) of proposed Rule 8.17 would state that
sanctions issued under proposed Rule 8.17 would constitute final and
immediately effective disciplinary sanctions imposed by the Exchange,
that the right to have any action under proposed Rule 8.17 reviewed by
the Commission would be governed by Section 19 of the Act,\30\ and that
the filing of an application for review would not stay the
effectiveness of a suspension order unless the Commission otherwise
orders.
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    \30\ 15 U.S.C. 78s.
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    In the Notice, the Exchange notes that the issuance of a suspension
order would not alter the Exchange's ability to further investigate the
matter and/or later sanction the Member pursuant to the Exchange's
standard disciplinary process for supervisory violations or other
violations of Exchange rules or the Act.\31\ In addition, in the
Notice, the Exchange acknowledges that its proposed authority to issue
a suspension order is a powerful measure that should be used very
cautiously.\32\ Consequently, according to the Exchange, the proposed
rules have been designed to ensure that the Expedited Client Suspension
Proceedings are used to address only the most clear and serious types
of disruptive quoting and trading activity and that the interests of
Respondents are protected.\33\ In addition, the Exchange believes that
it would use this authority in limited circumstances, when necessary to
protect investors, other Members, and the Exchange.\34\
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    \31\ See Notice, supra note 5, at 73251.
    \32\ Id.
    \33\ Id.
    \34\ Id.
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Summary of Differences Between BATS-2015-57 and the Current Proposal

    As noted above, this proposal revises and replaces a prior
proposal, BATS-2015-57, which the Exchange withdrew in order to address
certain comments.\35\ In conjunction with that withdrawal and
replacement, the Exchange submitted a comment response letter that,
among other things, explained the main differences between the prior
proposal and the current proposal (the letter also addressed certain
comments on BATS-2015-57, as described below).\36\ As set forth in that
letter, the current proposal replaces the terms ``Layering'' and
``Spoofing'' originally used in proposed Rule 12.15 of BATS-2015-57
with the terms ``Disruptive Quoting and Trading Activity Type 1'' and
``Disruptive Quoting and Trading Activity Type 2,'' respectively, and
conforms related terminology in proposed Rules 8.17 and 12.15.\37\
Because the Exchange also believes that a suspension order issued under
proposed Rule 8.17 is enforceable against the subject Member and no
additional process is required to discipline the violation of such an
order, the current proposal omits subparagraph (f) of proposed Rule
8.17 of BATS-2015-57, which had provided a process for sanctioning
violations of a

suspension order,\38\ and also make a conforming change to what is now
Rule 8.17(f) of BATS-2015-101. In addition, the current proposal
modifies subparagraph (d)(2)(C) of proposed Rule 8.17 to clarify that a
suspension order would suspend the Respondent from access to the
Exchange unless and until there is compliance with the cease and desist
provisions of the order.\39\
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    \35\ See supra note 3.
    \36\ See BATS Response Letter I, supra note 8.
    \37\ Id. at 5; also compare BATS-2015-57 with BATS-2015-101.
    \38\ See BATS Response Letter I, supra note 8, at 5.
    \39\ Id. In Amendment No. 1, the Exchange relocated this
provision addressing suspension from the Exchange from subparagraph
(d)(2)(A) of proposed Rule 8.17 to subparagraph (d)(2)(C) of
proposed Rule 8.17.
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III. Summary of Comments

    The Commission received four comments from three different
commenters on this proposal and a comment response letter from the
Exchange.\40\ The Commission also received five comment letters from
four different commenters on BATS-2015-57,\41\ as well as a comment
response letter from the Exchange.\42\ One of the commenters on this
proposal, who also commented twice on BATS-2015-57,\43\ opposes the
proposal.\44\ Another commenter on this proposal, who also commented on
BATS-2015-57,\45\ is critical of the scope of the defined trading
activities prohibited under proposed Rule 12.15.\46\ Two commenters on
BATS-2015-57 (who did not also comment on this proposal) supported the
prior proposal overall,\47\ but one of them suggested a clarifying
amendment.\48\ Additionally, the OIAD submitted to the public comment
file its recommendation that the Commission approve this proposal.\49\
The comment letters received with respect to BATS-2015-57 and this
proposal, as well as the Exchange's responses, are summarized below,
followed by a summary of the OIAD Recommendation.
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    \40\ See supra note 8.
    \41\ Id.
    \42\ Id. As noted above, the Exchange submitted its response
letter in conjunction with its withdrawal of BATS-2015-57 and filing
of BATS-2015-101. Id.
    \43\ See Lek Letters I and II, supra note 8.
    \44\ See Lek Letter III, supra note 8.
    \45\ See Leuchtkafer Letter I, supra note 8.
    \46\ See Leuchtkafer Letters II and III, supra note 8. See also
Spaulding Letter, supra note 8 (appearing to be critical of the
proposal).
    \47\ See FIA Letter, supra note 8; Machado Letter, supra note 8.
    \48\ See FIA Letter, supra note 8.
    \49\ See OIAD Recommendation, supra note 9.
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Proposed Definitions of ``Spoofing'' and ``Layering'' in BATS-2015-57
and ``Disruptive Quoting and Trading Activity'' in the Current Proposal

    Most of the critical commentary on BATS-2015-57 centered on
proposed Rule 12.15's description of the ``layering'' and ``spoofing''
activity that would be prohibited.\50\ One commenter who supported
BATS-2015-57 expressed broad agreement with the proposed descriptions
of such activity, but believed that the descriptions should be amended
to require a manipulative intent element.\51\ This commenter noted
prior definitions of ``spoofing'' put forth by the Dodd-Frank Wall
Street Reform and Consumer Protection Act of 2010 (``Dodd-Frank Act'')
and in Commodity Futures Trading Commission guidance, which definitions
include an intent element.\52\ According to this commenter, the
omission of such an intent element raised a concern because it ``is the
cornerstone of existing disruptive trading rules'' and ``has
historically been an important factor in sanctioning market
participants for fraudulent and manipulative trading practices as it
prevents legitimate, good faith actions from being wrongly penalized.''
\53\ This commenter stated that, without the intent requirement,
proposed Rule 12.15, and its description of prohibited layering
activity in particular, could be construed to prohibit a broad range of
legitimate conduct such as market making activity.\54\
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    \50\ See FIA Letter, supra note 8, at 3-4; Leuchtkafer Letter I,
supra note 8; Lek Letter I, supra note 8, at 1-6, Lek Letter II,
supra note 8. As noted above, in the current proposal, the Exchange
changed the labels of the activities prohibited under proposed Rule
12.15 from ``Layering'' and ``Spoofing'' to ``Disruptive Quoting and
Trading Activity Type 1'' and ``Disruptive Quoting and Trading
Activity Type 2,'' respectively. The Exchange did not make any other
substantive changes to the definitions or descriptions of the
activities prohibited under proposed Rule 12.15, and accordingly,
the Commission believes that the comments received regarding
proposed Rule 12.15 under BATS-2015-57 are appropriate to consider
with respect to the current proposal.
    \51\ See FIA Letter, supra note 8, at 1, 4. The other supportive
commenter stated that a biotech company in which the commenter is an
investor has been subject to spoofing and layering, as well as naked
short attacks, which is severely harming bona fide investors. See
Machado Letter, supra note 8.
    \52\ See FIA Letter, supra note 8, at 2-3.
    \53\ Id. at 3-4.
    \54\ Id. at 4 n.13.
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    Another commenter who was opposed to BATS-2015-57 stated that the
proposed descriptions of the prohibited ``layering'' and ``spoofing''
activity in BATS-2015-57 were overbroad and would encompass legitimate
trading activity in which trading algorithms regularly engage, and that
narrows spreads, adds depth and liquidity to the market, provides price
improvement, and reduces costs for investors.\55\ The commenter stated
that prohibiting such trading activity would be anti-competitive and
would serve to eliminate risk to market participants engaged in front-
running strategies because they would be provided with a free stop-loss
on their trades.\56\ This commenter addressed each element of the
proposed ``layering'' and ``spoofing'' descriptions in BATS-2015-57 and
offered its view as to why each individual element encompassed
legitimate trading activity or was otherwise problematic.\57\ The
commenter further asserted that courts have held that an alleged
manipulator must inject false information into the market with
scienter, and that orders do not become manipulative merely because
another trader speculates about them incorrectly.\58\ The commenter
also argued that the proposed descriptions of ``layering'' and
``spoofing'' were unacceptably vague.\59\ According to the commenter,
by using the words ``include,'' ``frequent,'' ``pattern,'' and
``multiple,'' the proposed descriptions in BATS-2015-57 left open-ended
exactly what conduct would be prohibited.\60\
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    \55\ See Lek Letter I, supra note 8, at 1, 7.
    \56\ See Lek Letter I, supra note 8, at 1, 6; Lek Letter II,
supra note 8.
    \57\ See Lek Letter I, supra note 8, at 2-6.
    \58\ See Lek Letter I, supra note 8, at 2; Lek Letter II, supra
note 8.
    \59\ See Lek Letter I, supra note 8, at 2-4.
    \60\ Id.
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    Another commenter also criticized the proposed descriptions of the
prohibited ``layering'' and ``spoofing'' activity under that proposal,
but instead expressed concern that the proposed descriptions were too
narrow and would have given ``spoofers and layerers a roadmap around
exchange surveillance, and a near-perfect defense if they're somehow
roped into an enforcement action.'' \61\ This commenter noted that
other definitions of layering and spoofing, such as that put forth by
the Dodd-Frank Act, ``define spoofing or layering (collectively,
`spoofing') as a matter of the spoofer's intent without detailing
exactly where and how orders are placed or at what prices.'' \62\
According to this commenter, by being specific in proposed Rule 12.15,
the proposed descriptions of the prohibited ``layering'' and
``spoofing'' activity would have excluded certain kinds of improper
trading activity.\63\ The commenter asserted that BATS should instead
adopt principles-based language against spoofing.\64\ The commenter
also

expressed concern that other exchanges might copy BATS's definitions of
spoofing and layering.\65\
---------------------------------------------------------------------------

    \61\ See Leuchtkafer Letter I, supra note 8, at 1. See also
Leuchtkafer Letter III, supra note 8, at 2-3.
    \62\ See Leuchtkafer Letter I, supra note 8, at 2.
    \63\ Id. at 3, 6.
    \64\ Id. at 6. In addition, the commenter criticized certain
market making practices that the commenter attributed to high-
frequency traders, and suggested that these practices are anti-
competitive and contribute to market complexity. Id. at 3-5. The
commenter also questioned how such market making activity can be
distinguished from spoofing in certain contexts. Id. at 4-6. The
commenter further questioned why BATS has proposed to expedite
action in cases of spoofing or layering but not in cases of other
types of manipulative trading, like marking the close or wash
trading. Id. at 1.
    \65\ Id. at 1; see also id. at 6.
---------------------------------------------------------------------------

    In response to the above critiques of the proposed definitions of
``spoofing'' and ``layering'' in BATS-2015-57, the Exchange stated in
its response letter for BATS-2015-57 that it agrees that the harmful
practices of spoofing and layering are defined by an intent
element.\66\ According to the Exchange, the prior proposal's
definitions of the prohibited ``layering'' and ``spoofing'' activity
under proposed Rule 12.15 were intended to include an intent element by
requiring a ``frequent pattern'' of such activity.\67\ The Exchange
stated that a ``frequent pattern'' of such activity evidences
manipulative intent,\68\ and offered the observation that such a
``frequent pattern'' is typically the key factor indicating intent in
spoofing and layering cases.\69\ The Exchange also acknowledged the
concern that the proposed ``layering'' and ``spoofing'' definitions in
the prior proposal could be read to exclude other spoofing and layering
practices.\70\ The Exchange stated that it did not intend to provide
universal definitions of layering and spoofing activity, but rather to
identify and prohibit ``certain patterns and practices that are
hallmarks of the most egregious spoofing and/or layering conduct.''
\71\
---------------------------------------------------------------------------

    \66\ See BATS Response Letter I, supra note 8, at 6.
    \67\ Id.
    \68\ Id.
    \69\ Id. at 6 n.12.
    \70\ Id. at 7.
    \71\ Id. The Exchange also argued, in response to one
commenter's assertions that elements of the proposed definitions
violated the Act, that since spoofing and layering are fraudulent
and manipulative practices prohibited by the Act, the previously
proposed rules prohibiting those practices comport with Section
6(b)(5) of the Act and advance the Act's purposes. Id. at 11.
---------------------------------------------------------------------------

    Nevertheless, the Exchange recognized commenters' concerns that
certain non-spoofing or non-layering trading activity could fall within
the previously proposed definitions of ``layering'' and ``spoofing''
while, at the same time, certain manipulative layering or spoofing
activity could fall outside those proposed definitions.\72\ The
Exchange stated that, because the purpose of BATS-2015-57 was ``not to
provide a precise definition of layering and spoofing, but to protect
market participants from the harm caused by a [Member's] refusal to
cease obvious disruptive market practices,'' the Exchange modified the
defined terms in proposed Rule 12.15 under the current proposal to
replace the defined terms ``layering'' and ``spoofing'' with the terms
``Disruptive Quoting and Trading Activity Type 1'' and ``Disruptive
Quoting and Trading Activity Type 2,'' respectively.\73\ The Exchange
stated its belief that this terminology change advances its objective
of protecting market participants from harmful and manipulative trading
behavior, and also alleviates commenters' concerns regarding the prior
definitions of ``layering'' and ``spoofing'' \74\ According to the
Exchange, the terminology change also highlights that proposed Rule
8.17 is ``designed to halt a very specific, readily identifiable type
of illegal trading activity rather than an attempt to define and punish
layering and spoofing in every conceivable context.'' \75\
---------------------------------------------------------------------------

    \72\ Id. at 7.
    \73\ Id.
    \74\ Id.
    \75\ Id. at 7-8.
---------------------------------------------------------------------------

    The commenter who opposed the prior proposed rule change in BATS-
2015-57 submitted a comment letter on the current proposal, again in
opposition.\76\ In this comment letter, the commenter repeats many of
the same criticisms set forth in the commenter's first letter submitted
in opposition to BATS-2015-57,\77\ asserting that ``the currently
proposed rule has all the flaws of the original proposal.'' \78\ The
commenter also repeats its criticism from its second comment letter to
BATS-2015-57 that the proposed rule change is intended to eliminate
competition for high-frequency traders (``HFTs'')--whom the commenter
claims ``control'' the Exchange--at the expense of institutional
investors by eliminating trading strategies that add risk to front-
running strategies of HFTs.\79\ The commenter claims that the Exchange
is advocating ``the ability for HFTs to detect institutional buying
interest and to be able to front-run institutional orders risk free.''
\80\ In its comment response letter for the current proposal, the
Exchange incorporates, by reference, the statements in its comment
response letter for BATS-2015-57 addressing the commenter's criticisms
of BATS-2015-57 that are duplicative of the commenter's criticism of
the current proposal.\81\ The Exchange also states that the trading
activity it seeks to curtail under the proposal is ``not acceptable
`competitive' conduct'' and that there is no risk that the proposed
Expedited Client Suspension Proceeding ``could be used to prohibit an
isolated series of coincidental transactions,'' as asserted by the
commenter.\82\
---------------------------------------------------------------------------

    \76\ See Lek Letter III, supra note 8.
    \77\ Compare Lek Letter I, supra note 8, with Lek Letter III,
supra note 8.
    \78\ See Lek Letter III, supra note 8, at 1.
    \79\ Id. at 1-2. Compare Lek Letter II supra note 8, with Lek
Letter III, supra note 8.
    \80\ See Lek Letter III, supra note 8, at 2. The commenter
states that HFTs ``seek to buy stock ahead of the institution, bid
up the price, and re-sell the stock back to the institution at a
higher level'' and argues that HFTs ``therefore seek regulatory
protections and advocate rules that would eliminate trading
strategies that add such risk to their front running strategies.''
Id.
    \81\ See BATS Response Letter II, supra note 8, at 10.
    \82\ Id. (responding to Lek Letter III).
---------------------------------------------------------------------------

    Additionally, one of the commenters critical of the proposed
definitions of ``layering'' and ``spoofing'' under BATS-2015-57
submitted a comment letter to BATS-2015-101 that reprises much of the
same criticism set forth in the commenter's letter in opposition to
BATS-2015-57 and again centers on the Exchange's descriptions and
definitions of the prohibited trading activities in proposed Rule
12.15.\83\ The commenter argues that the Exchange should not define the
prohibited activity in ``narrow, prescriptive terms'' and that the
proposed definitions of the violative activity are inconsistent with
the ``principles-based'' definitions of what the commenter
characterizes as ``[a]ll other definitions of spoofing that [the
commenter] could find that regulators (including BATS) have set down
over the years.'' \84\ The commenter reiterates its view that the
Exchange should include principle-based language in its proposed rule
and suggests specific rule language in this regard, which includes an
intent element,\85\ and expresses renewed concern that BATS's ``deeply
flawed and superficial proposal could quickly become the surveillance
and enforcement spoofing standard for the equity markets.'' \86\
---------------------------------------------------------------------------

    \83\ Compare Leuchtkafer Letter II, supra note 8, with
Leuchtkafer Letter I, supra note 8.
    \84\ See Leuchtkafer Letter II, supra note 8, at 1-2.
    \85\ Id. at 8.
    \86\ Id. at 3. The commenter also renews its critique of certain
market making practices that the commenter attributes to HFTs, and
again suggests that these practices are anti-competitive and
contribute to market complexity, and questions how such market
making activity can be distinguished from spoofing in certain
contexts. Id. at 3-8. In addition, the commenter asserts that it is
unaware of any spoofing or layering case in which the Exchange
independently discovered the violative conduct at issue. Id. at 1-2.
---------------------------------------------------------------------------

    In response to this comment letter, the Exchange explains that
``[d]efining layering and spoofing in all of its possible permutations
is not the

purpose of this filing.'' \87\ Rather, the Exchange states that the
filing is meant to ``supplement existing prohibitions against layering
and spoofing with an expedited objective prohibition that will stop
harmful manipulative activity while the Exchange conducts necessary
extensive and time-consuming investigations and enforcement.'' \88\ The
Exchange reiterates that principles-based prohibitions of layering and
spoofing already exist and explains, however, that investigations of
``principles-based'' rules violations involving suspected layering and
spoofing conduct are lengthy due to the fact that enforcement of those
violations requires proof of subjective fraudulent intent of the actor,
which the Exchange states is ``usually very difficult to prove and
requires a thorough and lengthy investigation and enforcement
process.'' \89\ The Exchange asserts that, during the course of such an
investigation, it does not currently have the ability to stop obvious
and flagrant manipulative trading.\90\ The Exchange states that if the
current proposal is ultimately approved and implemented, the Exchange
will continue conducting its current enforcement process, and
represents that it would only seek an expedited suspension when--after
multiple requests to a Member for an explanation of activity--it
continues to see the same pattern of manipulation from the same Member
and the source of the activity is the same or has been previously
identified as a frequent source of disruptive quoting and trading
activity.\91\ Therefore, according to the Exchange, principles-based
enforcement and the proposed rule change are complementary in practice,
not mutually exclusive.\92\
---------------------------------------------------------------------------

    \87\ See BATS Response Letter II, supra note 8, at 9 n.9.
    \88\ Id.
    \89\ Id. at 8-9.
    \90\ Id. at 8.
    \91\ Id. at 6, 8-9. The Exchange explains that, currently, when
Exchange surveillance staff identifies a pattern of potentially
disruptive quoting and trading activity, the staff conducts an
initial analysis and investigation of that activity. Id. After the
initial investigation, the Exchange then contacts the Member
responsible for the orders that caused the activity to request an
explanation of the activity as well as any additional relevant
information, including the source of the activity. Id. The Exchange
represents that it will continue this practice if the Commission
approves the proposal. Id.
    \92\ Id. at 9.
---------------------------------------------------------------------------

    In response to the Exchange's letter, the commenter submitted an
additional comment, in which the commenter states that the Exchange
misread certain its criticisms of the current proposal.\93\ The
commenter cites to the Exchange's statement in the Exchange's response
letter that the commenter ``advocates that the Exchange must adopt
`principle-based' language instead of the Exchange's current
proposal.'' \94\ Rather, according to the commenter, its position is
that the Commission should require the Exchange ``to also include in
its rulebook a clearly articulated principle rather than only a
prescriptive checklist, particularly when so far as [the commenter] can
tell [the Exchange] hasn't yet independently detected the proscribed
behavior on its markets and hasn't documented any current enforcement
proceedings its proposal could expedite in the future.'' \95\ In
addition, this commenter asserts that the Exchange misinterpreted its
point regarding past cases of improper quoting and trading activity
that the Exchange cites as support for the proposal; the commenter
asserts that its point is that those are not cases in which the
Exchange independently discovered the violative layering or spoofing
conduct at issue.\96\
---------------------------------------------------------------------------

    \93\ See Leuchtkafer Letter III, supra note 8, at 2. See also
Leuchtkafer Letter II, supra note 8.
    \94\ See Leuchtkafer Letter III, supra note 8, at 2 (emphasis in
original).
    \95\ Id. (emphasis in original).
    \96\ Id. at 1.
---------------------------------------------------------------------------

Expedited Suspension Proceedings Under Proposed Rule 8.17

    One commenter that was supportive of BATS-2015-57 believed that the
Exchange's proposed investigation, notice, and hearing processes
described in connection with proposed Rule 8.17 under BATS-2015-57 were
reasonable.\97\ This commenter also suggested that the Exchange could
amend proposed Rule 8.17 to require a lower burden of proof in
Expedited Client Suspension Proceedings, which the commenter asserted
would still allow the Exchange to institute a process to quickly put a
stop to the manipulative behavior targeted by the proposal ``without
drastically expanding the Exchange's definition of prohibited layering
and spoofing to include completely unintentional conduct.'' \98\
---------------------------------------------------------------------------

    \97\ See FIA Letter, supra note 8, at 2.
    \98\ Id. at 4.
---------------------------------------------------------------------------

    Another commenter criticized the procedural components of the
proposed rules as set forth in BATS-2015-57.\99\ The commenter argued
that the Exchange has no jurisdiction to compel Members to deny access
to clients that the Exchange judges to have been involved in layering
or spoofing, and that such affected clients would be denied due process
as they are not entitled to be heard as part of the Expedited Client
Suspension Proceeding.\100\ In response to this argument, in its first
response letter, the Exchange stated that its rules ``unquestionably
confer jurisdiction to the Exchange to discipline its Members for a
Member's client's violations of the Act and the Exchange's Rules,''
\101\ and the Exchange referenced Rule 8.1 in this regard.\102\ The
Exchange further stated that ``jurisdiction over a Member for a
client's actions is not only permissible--it is essential for the
effective regulation of the Exchange.'' \103\ The Exchange also
asserted that, because a Member has ultimate responsibility for its
clients' actions and because proposed Rule 8.17 imposes discipline on a
Member--not its client--for the client's violations, it is sufficient
if due process is afforded to the Member.\104\ The Exchange noted,
however, that nothing in the proposal prevents a Member's client from
participating in an expedited suspension hearing and, in fact, the
Exchange stated that it would welcome such participation at the
hearing.\105\
---------------------------------------------------------------------------

    \99\ See Lek Letter I, supra note 8, at 6-7. This commenter also
submitted a comment letter on the current proposal that repeats
these criticisms, to which the Exchange responded by incorporating
by reference the statements in its comment response letter for BATS-
2015-57. See Lek Letter III, supra note 8, at 7-8; BATS Response
Letter II, supra note 8, at 10.
    \100\ See Lek Letter I, supra note 8, at 6.
    \101\ See BATS Response Letter I, supra note 8, at 8-9.
    \102\ Id. at 9. See also Rule 8.1 (setting forth the Exchange's
disciplinary jurisdiction).
    \103\ See BATS Response Letter I, supra note 8, at 9.
    \104\ Id.
    \105\ Id.
---------------------------------------------------------------------------

    The same commenter also argued that the proposed expedited
proceeding set forth in BATS-2015-57 was not a fair disciplinary
process under the Act because it did not provide adequate time for
discovery.\106\ In response to this point, the Exchange contended that
the proposed expedited client suspension hearing is governed by and
consistent with Section 6(d)(2) of the Act and, therefore, provides the
due process required by the Act.\107\ In addition, the Exchange noted
that it intends to initiate such a proceeding only after an initial
investigation into the allegedly improper trading activity, including
contacting the responsible member to request an explanation for the
activity and any relevant additional information.\108\ Further, the
Exchange noted that discovery would continue after the entry of a
suspension order, and that, under proposed Rule 8.17, a Member subject
to a suspension order

that discovers information that it believes to be exculpatory may apply
at any time to the Hearing Panel to have the suspension order modified,
set aside, limited, or revoked.\109\ According to the Exchange,
``[p]roposed Rule 8.17 merely places the burden on the Subject Member
to show that it has halted its harmful practice or its client's harmful
practice before being permitted to resume activity on the Exchange
rather than requiring the market to bear the harm of manipulative
conduct during the time-consuming discovery process.'' \110\
---------------------------------------------------------------------------

    \106\ See Lek Letter I, supra note 8, at 6.
    \107\ See BATS Response Letter I, supra note 8, at 10.
    \108\ Id. See also BATS Response Letter II, supra note 8, at 6.
    \109\ See BATS Response Letter I, supra note 8, at 10.
    \110\ Id.
---------------------------------------------------------------------------

Recommendation of the OIAD

    As noted above, the OIAD submitted to the public comment file its
recommendation to the Commission that the Commission approve this
proposal.\111\ In its recommendation, the OIAD states that it supports
``the Exchange's efforts to promptly initiate and quickly resolve
obvious and uncomplicated matters the Exchange believes involve
disruptive and manipulative trading activity.'' \112\ The OIAD believes
that ``[e]ven if limited to a small number of cases, such disruptive
quoting and trading behavior can cause significant harm to investors
and the markets'' and ``erode the public's confidence in fair and
orderly markets.'' \113\ The OIAD further believes that a disciplinary
proceeding against a U.S.-based broker dealer that permits a
significant volume of manipulative trading to pass through its systems
on a regular basis without establishing a supervisory system reasonably
designed to detect and prevent this activity ``must be timely.'' \114\
The OIAD states that this proposal appears to be appropriately tailored
to minimize the possibility that it would curtail legitimate trading
activities by market makers and other liquidity providers, and that the
proposed Expedited Client Suspension Proceeding appears to provide
``appropriate safeguards for innocent parties,'' such as adequate
notice, an opportunity to be heard at a meaningful time prior to the
decision, a right to appeal the determination, and a right to obtain
Commission review.'' \115\ Further, the OIAD believes that the proposed
process should act as a deterrent to U.S. broker-dealers that would
otherwise permit manipulators to continue to access U.S. markets during
the course of an enforcement proceeding.\116\ Accordingly, the OIAD
submitted its recommendation to the Commission that the Commission
approve the proposal.\117\
---------------------------------------------------------------------------

    \111\ See supra, note 9.
    \112\ See OIAD Recommendation, supra note 9, at 3.
    \113\ Id. at 4.
    \114\ Id. at 5.
    \115\ Id. at 6.
    \116\ Id. at 5-6. In its letter addressing the current proposal,
the Exchange explains that the OIAD ``correctly notes that the
proposed expedited suspension process is intended to be used
sparingly as a deterrent force--supplementing rather than replacing
the current enforcement process.'' See BATS Response Letter II,
supra note 8, at 7.
    \117\ See OIAD Recommendation, supra note 9, at 3.
---------------------------------------------------------------------------

IV. 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.\118\ In particular, the Commission finds that the proposed
rule change is consistent with the requirements of: (1) Section 6(b)(1)
of the Act,\119\ which requires, among other things, that the Exchange
be so organized and have the capacity to enforce compliance by its
members and persons associated with its members with the Act, the rules
thereunder, and the Exchange's rules; (2) Section 6(b)(5) of the
Act,\120\ which requires, among other things, that the Exchange's rules
be designed to prevent fraudulent and manipulative acts and practices,
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; (3) Section 6(b)(6) of the Act,\121\ which requires,
among other things, that the Exchange's rules provide for appropriate
discipline of members or persons associated with a member for
violations of the Act, the rules thereunder, or the Exchange's rules;
(4) Section 6(b)(7) of the Act,\122\ which requires, among other
things, that the rules of an exchange be in accordance with Section
6(d) of the Act,\123\ and in general, provide a fair procedure for the
disciplining of members and persons associated with members and the
prohibition or limitation by the exchange of any person with respect to
access to services offered by the exchange or a member thereof; and (5)
Sections 6(d)(1) and 6(d)(2) of the Act,\124\ which require, among
other things, that in any Exchange proceeding to determine whether a
member or person associated with a member should be disciplined or
whether a person should be prohibited or limited with respect to access
to services offered by the exchange or a member thereof, the Exchange
must provide notice of, and an opportunity to be heard upon, the
specific grounds for the sanction under consideration, keep a record,
and provide a statement setting forth the specific grounds upon which a
determination to impose any such sanction is based.
---------------------------------------------------------------------------

    \118\ In approving this proposed rule change, the Commission has
considered the proposed rule's impact on efficiency, competition,
and capital formation. See 15 U.S.C. 78c(f).
    \119\ 15 U.S.C. 78f(b)(1).
    \120\ 15 U.S.C. 78f(b)(5).
    \121\ 15 U.S.C. 78f(b)(6).
    \122\ 15 U.S.C. 78f(b)(7).
    \123\ 15 U.S.C. 78f(d).
    \124\ 15 U.S.C. 78f(d)(1), (d)(2).
---------------------------------------------------------------------------

    The Commission notes that the Exchange believes that the proposal
meets the requirements of Sections 6(b)(1), 6(b)(5), and 6(b)(6) of the
Act because it will provide the Exchange with a mechanism to promptly
initiate proceedings in the event that the Exchange believes it has
sufficient proof that a violation of proposed Rule 12.15 is occurring,
and also because it will help to strengthen the Exchange's ability to
carry out its oversight and enforcement responsibilities as a self-
regulatory organization in cases where awaiting the conclusion of a
full disciplinary hearing is unsuitable in view of the potential harm
to other members, their customers, and/or the Exchange that may occur
if the violative conduct is allowed to continue.\125\ The Exchange
notes that it has defined the prohibited disruptive quoting and trading
activities by modifying the traditional definitions of layering and
spoofing to eliminate an express intent element.\126\ The Exchange
states that it believes it is necessary for the protection of investors
to make such modifications to those traditional definitions in order to
adopt an expedited process rather than allowing disruptive quoting and
trading activities to continue to occur for a potentially extended
period of time.\127\ The Exchange also states that it does not intend
for this proposal to modify the definitions of layering and spoofing
that have generally been used by the Exchange and other regulators in
connection with prior disciplinary and enforcement cases.\128\
---------------------------------------------------------------------------

    \125\ See Notice, supra note 5, at 73251.
    \126\ Id.
    \127\ Id.
    \128\ Id.
---------------------------------------------------------------------------

    The Commission further notes that the Exchange already has the
authority pursuant to its existing rules to prohibit and take action
against manipulative trading activity, including the disruptive quoting
and trading activities

enumerated under proposed Rule 12.15.\129\ Violations of these rules,
however, are pursued according to the Exchange's existing disciplinary
and enforcement processes which, as the Exchange describes, can take
several years to conclude, during which time the manipulative or
disruptive quoting or trading activity may continue to the detriment of
investors and other market participants.\130\ The Commission
acknowledges that good reason exists in many cases for these lengthy
processes, not the least of which is ensuring that adequate due process
is provided. However, if an offending Member refuses to cease
disruptive quoting and trading activity that is enumerated in Rule
12.15 after the Exchange detects such activity and notifies the Member
of the alleged misconduct, the Commission also believes that it would
be consistent with the Act for the Exchange to have the authority to
seek to stop that disruptive quoting and trading activity through the
proposed expedited client suspension proceeding. The Commission
believes that the disciplinary procedures proposed herein are
reasonably designed to occur on an expedited basis in order stop two
specific types of ongoing disruptive quoting and trading activities
that the Exchange believes could result in significant harm to
investors if allowed to continue. Accordingly, the Commission believes
that the proposal is reasonably designed to further the purposes of
Sections 6(b)(1), 6(b)(5), and 6(b)(6) of the Act by enhancing the
Exchange's ability to prevent fraudulent and manipulative acts and
practices, promote just and equitable principles of trade, protect
investors and the public interest, enforce compliance by its members
and persons associated with its members with the relevant rules and
law, and appropriately discipline its members for violations of the
rules of the Exchange.
---------------------------------------------------------------------------

    \129\ See, e.g., Rules 3.1, 3.2, and 3.3. See also Notice, supra
note 5, at 73250-51.
    \130\ See Notice, supra note 5, at 73248.
---------------------------------------------------------------------------

    In addition, the Commission notes that the Exchange represents that
it ``will only seek an expedited suspension when--after multiple
requests to a Member for an explanation of [a pattern of potentially
disruptive quoting and trading] activity--it continues to see the same
pattern of manipulation from the same Member and the source of the
activity is the same or has been previously identified as a frequent
source of disruptive quoting and trading activity.'' \131\ As such, the
Commission believes that the disciplinary measures available to the
Exchange under the proposal to stop the offending trading behavior from
continuing on the Exchange--i.e., an order suspending the offending
Member unless the applicable action is taken or refrained from--are
consistent with Section 6(b)(6) of the Act.
---------------------------------------------------------------------------

    \131\ See BATS Response Letter II, supra note 8, at 6.
---------------------------------------------------------------------------

    The Commission recognizes one commenter's concern that the
definitions of the prohibited quoting and trading activities set forth
in proposed Rule 12.15 could be viewed by some to be too narrow, such
that certain other disruptive or manipulative trading activities might
not fall within those definitions.\132\ The Commission notes that, in
making revisions to its original proposal in BATS-2015-57, the Exchange
has purposely chosen to prohibit, under proposed Rule 12.15, two types
of trading activities that follow very specific fact patterns, which
the Exchange believes constitute clear and egregious disruptive quoting
and trading activity. The Commission also notes that, according the
Exchange, this proposal is not meant to define all possible
permutations of layering and spoofing.\133\ Rather, the Exchange
asserts that the proposal is meant to provide the Exchange with an
expedited disciplinary proceeding, to be used under limited
circumstances, as a complement to its current, lengthier disciplinary
process.\134\ Accordingly, the Exchange has purposely chosen not to
subject other types of disruptive or manipulative quoting or trading
activities to the prohibitions of proposed Rule 12.15 or, therefore,
the expedited disciplinary procedure under proposed Rule 8.17. That the
Exchange has purposely proposed to apply these rules to some, but not
all, types of disruptive quoting and trading activities does not render
the proposed rules inconsistent with the Act. The Exchange may exercise
its judgment as to the proper scope of its rules, so long as the rules
comply with the relevant statutory requirements under the Act and the
rules thereunder. In this instance, the Commission believes that it is
consistent with the Act for the Exchange to limit the application of
the Expedited Client Suspension Proceeding to a specific set of
disruptive quoting and trading activities rather than to have the
proposal encompass all types of disruptive or manipulative activities,
which are still subject to the Exchange's standard disciplinary
process.
---------------------------------------------------------------------------

    \132\ See Leuchtkafer Letters I, II, and III, supra note 8.
    \133\ See BATS Response Letter II, supra note 8, at 9 n.9.
    \134\ See supra, notes 87-92 and accompanying text.
---------------------------------------------------------------------------

    Furthermore, given the significant authority provided to the
Exchange under proposed Rule 8.17 for pursuing alleged violations of
proposed Rule 12.15, the Commission believes that it is appropriate and
consistent with the Act for proposed Rule 12.15 to be narrowly tailored
so as to only encompass certain specific types of disruptive quoting
and trading activities. Moreover, as noted by the OIAD, ``[e]ven if
limited to a small number of cases, such disruptive quoting and trading
behavior can cause significant harm to investors and the markets.''
\135\ The Commission believes that, by prohibiting specific types of
disruptive quoting and trading activities and providing an expeditious
process for ceasing such activities, proposed Rules 12.15 and 8.17,
respectively, are reasonably designed to protect investors and the
public interest from the potential harm associated with such
activities. Therefore, the Commission believes that the proposed rules
are consistent with the requirements under Section 6(b)(5) that the
Exchange's rules be designed to prevent fraudulent and manipulative
acts and practices, promote just and equitable principles of trade, and
protect investors and the public interest. In addition, the Commission
again notes that any quoting or trading activity that does not fall
within the express prohibitions of proposed Rule 12.15--but that is
disruptive or manipulative--may be subject to existing disciplinary and
enforcement measures if the activity constitutes a violation of one or
more of the Exchange's current rules and/or the Act and the rules
thereunder.
---------------------------------------------------------------------------

    \135\ See OIAD Recommendation, supra note 9, at 4.
---------------------------------------------------------------------------

    The Commission recognizes another concern of certain commenters
that the proposed definitions of the prohibited disruptive quoting and
trading activities may be too broad, such that they may encompass
legitimate quoting or trading activity, such as market making. The
Commission emphasizes the importance of the Exchange's acknowledgement
that the authority conferred by proposed Rules 8.17 and 12.15 is a
powerful measure that should be used very cautiously.\136\ In addition,
the Commission believes that the proposal incorporates procedural
components that are reasonably designed to mitigate the potential for
overreach of this authority into legitimate quoting or trading
activity. For example, proposed Rule 8.17 would require the CRO or
another senior officer of the Exchange to

issue written authorization before the Exchange can institute an
Expedited Client Suspension Proceeding. Additionally, the Commission
believes that the opportunity to respond before a hearing panel, and
the associated due process elements for initiating and conducting the
expedited proceeding under proposed Rule 8.17, provide additional
safeguards. Moreover, the Commission notes that a determination of the
Hearing Panel constituting final disciplinary sanction may be appealed
to the Commission pursuant to Section 19 of the Act.\137\ The
Commission also notes that the OIAD believes that the proposal
``appears to be appropriately tailored to minimize the possibility that
it would curtail legitimate trading activities by market makers and
other liquidity providers'' and ``appears to provide appropriate
safeguards for innocent parties.'' \138\
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    \136\ See Notice, supra note 5, at 73251.
    \137\ 15 U.S.C. 78s. See also proposed Rule 8.17(f).
    \138\ See OIAD Recommendation, supra note 9, at 6.
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    Lastly, the Commission notes that the Exchange believes that the
requirements of Sections 6(b)(7), 6(d)(1), and 6(d)(2) of the Act are
addressed by the notice and due process provisions included within
proposed Rule 8.17.\139\ Proposed Rule 8.17 would require the Exchange
to serve notice on the subject Respondent, which notice would include
the suspension order the Exchange seeks to impose on the Respondent.
The notice would also be accompanied by a declaration of facts that
specifies the acts that constitute the alleged violation. Proposed Rule
8.17 also would provide an opportunity for the Respondent to defend
against the charges in the notice in a hearing before a three-person
Hearing Panel,\140\ with the opportunity for witnesses and with a
transcribed record, and would detail the applicable timelines for the
proceeding. Further, proposed Rule 8.17 would require the Hearing Panel
to issue a written decision stating whether a suspension order shall be
imposed; if imposed, proposed Rule 8.17 would require the suspension
order to set forth the alleged violation and market disruption or
significant harm to investors that is likely to result without the
order, and to describe in reasonable detail what action the Respondent
is required to take or refrain from taking. In addition, proposed Rule
8.17 would allow the Respondent to appeal to the Hearing Panel to have
a suspension order modified, set aside, limited, or revoked.
Accordingly, the Commission believes that proposed Rule 8.17 is
consistent with Sections 6(b)(7), 6(d)(1), and 6(d)(2) of the Act.\141\
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    \139\ See Notice, supra note 5, at 73251.
    \140\ The Commission notes that the Hearing Panel would be
assigned according to current Rule 8.6(a), which requires that one
member of the panel be a professional hearing officer, another be an
industry representative, and the third be a Member representative.
    \141\ 15 U.S.C. 78f(b)(7), (d)(1), and (d)(2).
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V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\142\ that the proposed rule change (SR-BATS-2015-101), as modified
by Amendment No. 1, be, and it hereby is, approved.
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    \142\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\143\
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    \143\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-03740 Filed 2-22-16; 8:45 am]
 BILLING CODE 8011-01-P