[Federal Register Volume 81, Number 139 (Wednesday, July 20, 2016)]
[Notices]
[Pages 47205-47211]
[FR Doc No: 2016-17091]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-78331; File No. SR-BatsEDGX-2016-26]

Self-Regulatory Organizations; Bats EDGX Exchange, Inc.; Notice
of Filing of a Proposed Rule Change To Adopt Paragraph (c) to Exchange
Rule 11.22 To Describe Changes to System Functionality Necessary To
Implement the Regulation NMS Plan To Implement a Tick Size Pilot
Program

July 14, 2016.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given
that on June 29, 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 to adopt paragraph (c) to Exchange
Rule 11.22 to describe changes to System \3\ functionality necessary to
implement the Regulation NMS Plan to Implement a Tick Size Pilot
Program (``Plan'' or ``Pilot'').\4\ In determining the scope of the
proposed changes to implement the Pilot,\5\ the Exchange carefully
weighed the impact on the Pilot, System complexity, and the usage of
such order types in Pilot Securities.
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    \3\ The term ``System'' is defined as the ``electronic
communications and trading facility designated by the Board through
which securities orders of Users are consolidated for ranking,
execution and, when applicable, routing away.'' See Exchange Rule
1.5(cc).
    \4\ See Securities Exchange Act Release No. 74892 (May 6, 2015),
80 FR 27513 (May 13, 2015) (``Approval Order'').
    \5\ Unless otherwise specified, capitalized terms used in this
rule filing are defined as set forth in the Plan.
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    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
Background
    On August 25, 2014, NYSE Group, Inc., on behalf of the Exchange,
Bats BYX Exchange, Inc. (``BYX''), Chicago Stock Exchange, Inc., Bats
BZX Exchange, Inc. (``BZX''), Bats EDGA Exchange, Inc. (``EDGA''),
Financial Industry Regulatory Authority, Inc. (``FINRA''), NASDAQ OMX
BX, Inc., NASDAQ OMX PHLX LLC, the Nasdaq Stock Market LLC, New York
Stock Exchange LLC (``NYSE''), NYSE MKT LLC, and NYSE Arca, Inc.
(collectively ``Participants''), filed with the Commission, pursuant to
Section 11A of the Act \6\ and Rule 608 of Regulation NMS thereunder,
the Plan to implement a tick size pilot program.\7\ The Participants
filed the Plan to comply with an order issued by the Commission

on June 24, 2014.\8\ The Plan was published for comment in the Federal
Register on November 7, 2014, and approved by the Commission, as
modified, on May 6, 2015.\9\
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    \6\ 15 U.S.C. 78k-1.
    \7\ See Letter from Brendon J. Weiss, Vice President,
Intercontinental Exchange, Inc., to Secretary, Commission, dated
August 25, 2014.
    \8\ See Securities Exchange Act Release No. 72460 (June 24,
2014), 79 FR 36840 (June 30, 2014).
    \9\ See Approval Order, supra note 4.
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    The Plan is designed to allow the Commission, market participants,
and the public to study and assess the impact of increment conventions
on the liquidity and trading of the common stocks of small-
capitalization companies. Each Participant is required to comply, and
to enforce compliance by its member organizations, as applicable, with
the provisions of the Plan.
    The Pilot will include stocks of companies with $3 billion or less
in market capitalization, an average daily trading volume of one
million shares or less, and a volume weighted average price of at least
$2.00 for every trading day. The Pilot will consist of a Control Group
of approximately 1400 Pilot Securities and three Test Groups with 400
Pilot Securities in each Test Group selected by a stratified
sampling.\10\ During the Pilot, Pilot Securities in the Control Group
will be quoted and traded at the currently permissible increments.
Pilot Securities in the first Test Group (``Test Group One'') will be
quoted in $0.05 minimum increments but will continue to trade at any
price increment that is currently permitted.\11\ Pilot Securities in
the second Test Group (``Test Group Two'') will be quoted in $0.05
minimum increments and will trade at $0.05 minimum increments subject
to a midpoint exception, a retail investor order exception, and a
negotiated trade exception.\12\ Pilot Securities in the third Test
Group (``Test Group Three'') will be subject to the same restrictions
as Test Group Two and also will be subject to the ``Trade-at''
requirement to prevent price matching by a market participant that is
not displaying at a price of a Trading Center's \13\ ``Best Protected
Bid'' or ``Best Protected Offer,'' unless an enumerated exception
applies.\14\ The same exceptions provided under Test Group Two will
also be available under the Trade-at Prohibition, with an additional
exception for Block Size orders and exceptions that mirror those under
Rule 611 of Regulation NMS.\15\
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    \10\ See Section V of the Plan for identification of Pilot
Securities, including criteria for selection and grouping.
    \11\ See Section VI(B) of the Plan.
    \12\ See Section VI(C) of the Plan.
    \13\ The Plan incorporates the definition of ``Trading Center''
from Rule 600(b)(78) of Regulation NMS. Regulation NMS defines a
Trading Center as ``a national securities exchange or national
securities association that operates an SRO trading facility, an
alternative trading system, an exchange market maker, an OTC market
maker, or any other broker or dealer that executes orders internally
by trading as principal or crossing orders as agent.''
    \14\ See Section VI(D) of the Plan.
    \15\ 17 CFR 242.611.
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    The Plan requires the Exchange to establish, maintain, and enforce
written policies and procedures that are reasonably designed to comply
with applicable quoting and trading requirements specified in the Plan.
Accordingly, the Exchange adopted paragraph (a) of Rule 11.22 to
require Members \16\ to comply with the quoting and trading provisions
of the Plan.\17\ The Exchange also adopted paragraph (b) of Rule 11.22
to require Members to comply with the data collection provisions under
Appendix B and C of the Plan.\18\
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    \16\ The term ``Member'' is defined as ``any registered broker
or dealer that has been admitted to membership in the Exchange.''
See Exchange Rule 1.5(n).
    \17\ See Securities Exchange Act Release No. 77791 (May 10,
2016), 81 FR 30375 (May 16, 2016) (SR-BatsEDGX-2016-14).
    \18\ See Securities Exchange Act Release No. 77416 (March 22,
2016), 81 FR 17225 (March 28, 2016) (SR-BatsEDGX-2016-01).
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Proposed System Changes
    The Exchange proposes to adopt paragraph (c) of Exchange Rule 11.22
to describe changes to System functionality necessary to implement the
Plan. Paragraph (c) of Rule 11.22 would set forth the Exchange's
specific procedures for handling, executing, re-pricing and displaying
of certain order types and order type instructions applicable to Pilot
Securities. Unless otherwise indicated, paragraph (c) of Rule 11.22
would apply to order types and order type instructions in Pilot
Securities in Test Groups One, Two, and Three and not to orders in
Pilot Securities included in the Control Group. The proposed changes
include select and discrete amendments to the operation of: (i) Market
Orders; (ii) orders with a Market Peg instruction; (iii) MidPoint Peg
Orders; (iii) orders with a Discretionary Range; (iv) orders with a
Non-Displayed instruction; (v) Market Maker Peg Orders; (vi)
Supplemental Peg Orders; and (vii) orders subject to the Display-Price
Sliding process.
    In determining the scope of these proposed changes to implement the
Plan, the Exchange carefully weighed the impact on the Pilot, System
complexity, and the usage of such order types in Pilot Securities.
These proposed changes are designed to directly comply with the Plan
and to assist the Exchange in meeting its regulatory obligations
pursuant to the Plan. As discussed below, certain of these changes are
also intended to reduce risk in the System by eliminating unnecessary
complexity based on infrequent current usage of certain order types in
Pilot Securities and/or their limited ability to execute under the
Trade-at Prohibition. Therefore, the Exchange firmly believes that
these changes will have little or no impact on the operation and data
collection elements of the Plan. The Exchange further believes that the
proposed rule changes are reasonably designed to comply with applicable
quoting and trading requirements specified in the Plan.
Market Orders
    A Market Order is an order to buy or sell a stated amount of a
security that is to be executed at the NBBO when the order reaches the
Exchange.\19\ Market Orders shall not trade through Protected
Quotations. Any portion of a Market Order that would execute at a price
more than $0.50 or 5 percent worse than the NBBO at the time the order
initially reaches the Exchange, whichever is greater, will be
cancelled.\20\ In order to comply with the minimum quoting increments
set forth in the Plan, the Exchange proposes to state under proposed
Rule 11.22(c)(1) that for purposes of determining whether a Market
Order's execution price is more than 5 percent worse than the NBBO
under Rule 11.8(a)(7), the execution price for a buy (sell) order will
be rounded down (up) to the nearest $0.05 increment.
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    \19\ See Exchange Rule 11.8(a).
    \20\ Id.
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Market Peg Instruction
    The Exchange proposes to amend the operation of orders with a
Market Peg instruction to reduce risk in its System by eliminating
unnecessary complexity based on infrequent current usage in Pilot
Securities and their limited ability to execute under the Trade-at
Prohibition in Test Group Three. An order with a Pegged instruction is
automatically adjusted by the System in response to changes in the NBBO
and will peg to the NBB or NBO or a certain amount away from the NBB or
NBO.\21\ An order with a Market Peg instruction is pegged to the
contra-side NBBO.\22\ A User \23\ entering an order with a Market Peg
instruction can specify that such

order's price will offset the inside quote on the contra-side of the
market by an amount (the ``Offset'') set by the User. An order with a
Market Peg instruction is not eligible to be displayed on the Exchange.
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    \21\ See Exchange Rule 11.6(j).
    \22\ See Exchange Rule 11.6(j)(1).
    \23\ A ``User'' is defined as any member or sponsored
participant of the Exchange who is authorized to obtain access to
the System pursuant to Rule 11.3. See Exchange Rule 1.5(ee).
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    In Test Groups One and Two, the Exchange proposes to modify the
behavior of an order with a Market Peg instruction when it is locked by
an incoming order with a Post Only instruction \24\ that does not
remove liquidity pursuant to Rule 11.6(n)(4).\25\ In such case, the
order with a Market Peg instruction would be converted to an executable
order and will remove liquidity against such incoming order. In no case
would an order with a Market Peg instruction execute against an
incoming order with a Post Only instruction if an order with higher
priority is on the EDGX Book.\26\ Specifically, if an order other than
an order with a Market Peg instruction maintains higher priority than
one or more orders with a Market Peg instruction, the order(s) with a
Market Peg instruction with lower priority will not be converted, as
described above, and the incoming order with a Post Only instruction
will be posted or cancelled in accordance with Rule 11.6(n)(4).
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    \24\ See Exchange Rule 11.6(n)(4).
    \25\ A Post Only Order will remove contra-side liquidity from
the EDGX Book if the order is an order to buy or sell a security
priced below $1.00 or if the value of such execution when removing
liquidity equals or exceeds the value of such execution if the order
instead posted to the EDGX Book and subsequently provided liquidity,
including the applicable fees charged or rebates provided. See
Exchange Rule 11.6(n)(4).
    \26\ The term ``EDGX Book'' is defined as the ``System's
electronic file of orders.'' See Exchange Rule 1.5(d).
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    The Exchange notes that orders with a Market Peg instruction are
aggressive by nature and believes executing the order in such
circumstance is appropriate. The Exchange also notes that the proposed
behavior for orders with a Market Peg instruction in Test Groups One
and Two is identical to the operation of orders with the Super
Aggressive Routing instruction under Exchange Rule 11.6(n)(2). When an
order with a Super Aggressive instruction is locked by an incoming
order with a Post Only instruction that does not remove liquidity
pursuant to Rule 11.6(n)(4), the order is converted to an executable
order and will remove liquidity against such incoming order. In
addition, like as proposed above, in no case would an order with a
Super Aggressive instruction execute against an incoming order with a
Post Only instruction if an order with higher priority is on the EDGX
Book. The Exchange believes this change is reasonable and appropriate
due to the limited usage of orders with a Market Peg instruction in
Pilot Securities, to avoid unnecessary additional System complexity,
and to ensure the order with a Market Peg instruction may execute in
such circumstance.
    The Exchange also proposes to not accept orders with a Market Peg
instruction in Test Group Three based on limited current usage,
additional System complexity, and their limited ability to execute
under the Trade-at Prohibition. Exchange Rule 11.22(a)(6)(D) sets forth
the ``Trade-at Prohibition,'' which is the prohibition against
executions by a Member that operates a Trading Center of a sell order
for a Pilot Security in Test Group Three at the price of a Protected
Bid or the execution of a buy order for a Pilot Security in Test Group
Three at the price of a Protected Offer during Regular Trading
Hours,\27\ unless an enumerated exception applies.\28\ The Exchange
believes that their de minimis usage and limited ability to execute due
to the Trade-at Prohibition does not justify the complexity that would
be created by supporting orders with a Market Peg instruction in Test
Group Three. A vast majority of orders with a Market Pegged instruction
are entered into the System with a zero Offset and, therefore, create a
locked market with the contra-side NBBO. Under the Trade-at
Prohibition, an order with a Market Peg instruction would not be
eligible for execution at the locking price, including when a Trade-at
Intermarket Sweep Order (``ISO'') \29\ is entered, because of non-
cleared contra-side Protected Quotations. For example, assume the NBBO
is $10.00 (NYSE) x $10.05 (Nasdaq) in a Test Group 3 security. An order
with a Market Peg instruction to buy at $10.10 with a zero Offset is
entered on the Exchange. The order would be ranked and hidden on the
EDGX Book at $10.05. A Trade-at ISO to sell at $10.05 is then entered.
In this example, no execution occurs on the Exchange because Nasdaq is
displaying an order to sell at $10.05. The Trade-at ISO instruction
only indicates that all of the better and equal priced buy orders have
been cleared. It does not indicate that the seller has cleared any
Protected Offers. Therefore, the Exchange proposes to not accept orders
with a Market Peg instruction in Test Group Three in an effort to
reduce unnecessary System complexity, avoid an internally locked book,
and due to the limited execution opportunities for orders with a Market
Peg instruction due to the Trade-at Prohibition.
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    \27\ The term ``Regular Trading Hours'' is defined as ``the time
between 9:30 a.m. and 4:00 p.m. Eastern Time.'' See Exchange Rule
1.5(y).
    \28\ See also Section VI(D) of the Plan.
    \29\ A Trade-at ISO is a Limit Order for a Pilot Security that
meets the following requirements: (i) When routed to a Trading
Center, the limit order is identified as a Trade-at Intermarket
Sweep Order; and (ii) simultaneously with the routing of the limit
order identified as a Trade-at Intermarket Sweep Order, one or more
additional limit orders, as necessary, are routed to execute against
the full size of any protected bid, in the case of a limit order to
sell, or the full displayed size of any protected offer, in the case
of a limit order to buy, for the Pilot Security with a price that is
better than or equal to the limit price of the limit order
identified as a Trade-at Intermarket Sweep Order. See Exchange Rule
11.22(a)(7)(A)(i). These additional routed orders also must be
marked as Trade-at Intermarket Sweep Orders. Id.
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MidPoint Peg Orders
    A MidPoint Peg Order is an order whose price is automatically
adjusted by the System in response to changes in the NBBO to be pegged
to the midpoint of the NBBO, or, alternatively, pegged to the less
aggressive of the midpoint of the NBBO or one Minimum Price Variation
\30\ inside the same side of the NBBO as the order.\31\ The Plan and
current Exchange rules permit the acceptance of orders priced to
execute at the midpoint of the NBBO to be ranked and accepted in
increments of less than $0.05.\32\ Consistent with previous guidance
issued by the Participants,\33\ the Exchange proposes to amend the
operation of MidPoint Peg Orders to explicitly state that MidPoint Peg
Orders in Pilot Securities may not be entered in increments other than
$0.05. The System will execute a MidPoint Peg Order: (i) In $0.05
increments priced better than the midpoint of the NBBO; or (ii) at the
midpoint of the NBBO, regardless of whether the midpoint of the NBBO is
in an increment of $0.05. In order to comply with the minimum quoting
and trading increments of the Plan and reduce unnecessary System
complexity, a MidPoint Peg Order will not be permitted to alternatively
peg to one Minimum Price Variation inside the same side of the NBBO as
the order in Pilot Securities. The Exchange believes that the current
de minimis usage of the alternative pegging functionality in Pilot
Securities does not justify the complexity and risk that would be
created by re-programming the System to support this functionality
under the Plan.
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    \30\ See Exchange Rule 11.6(i).
    \31\ See Exchange Rule 11.8(d).
    \32\ See Sections VI(B), (C), and (D) of the Plan. See also
Exchange Rules 11.22(a)(4), (a)(5), and (a)(6).
    \33\ See e.g., Question 42 of the Tick Size Pilot Program
Trading and Quoting FAQs available at http://www.finra.org/sites/default/files/TSPP-Trading-and-Quoting-FAQs.pdf.

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Discretionary Range Instruction
    The Exchange proposes to not accept orders with a Discretionary
Range in all Test Groups, including the Control Group, to reduce risk
in the System by eliminating unnecessary complexity based on infrequent
current usage in Pilot Securities. In sum, an order with a
Discretionary Range has a displayed or non-displayed ranked price and
size and an additional non-displayed ``discretionary price''.\34\ The
discretionary price is a non-displayed upward offset at which a User is
willing to buy, if necessary, or a non-displayed downward offset at
which a User is willing to sell, if necessary. The System changes
necessary for orders with a Discretionary Range to comply with the Plan
become increasingly complex because both the displayed price and
discretionary price must comply with the Plan's minimum quoting and
trading increments as well as the Trade-at restriction in Test Group
Three. In addition, Users do not currently set discretionary prices
less than $0.05 away from the order's displayed price and the Exchange
does not anticipate Users doing so under the Plan. To date, orders with
a Discretionary Range are rarely entered in Pilot Securities and the
Exchange anticipates their usage to further decrease due to the Plan's
minimum quoting increments. The Exchange believes that the current
extremely limited usage of orders with a Discretionary Range in Pilot
Securities does not justify the additional System complexity that would
be created by supporting such orders. As a result of these factors the
Exchange proposes to not accept orders with a Discretionary Range in
all Test Groups and the Control Group.
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    \34\ See Exchange Rule 11.6(d).
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Non-Displayed Instruction
    The Exchange proposes to re-price to the midpoint of the NBBO
orders with a Non-Displayed instruction in Test Group Three that are
priced in a permissible increment better than the midpoint of the NBBO.
An order with a Non-Displayed instruction is not displayed on the
Exchange.\35\ Exchange Rule 11.22(a)(6)(D) incorporates the ``Trade-at
Prohibition'' in the Exchange's rules. The Trade-at Prohibition
prevents the execution of a sell order for a Pilot Security in Test
Group Three at the price of a Protected Bid or the execution of a buy
order for a Pilot Security in Test Group Three at the price of a
Protected Offer during Regular Trading Hours, unless an exception
applies. A Trading Center that is displaying a quotation, via either a
processor or an SRO quotation feed, that is a Protected Bid or
Protected Offer is permitted to execute orders at that level, but only
up to the amount of its displayed size. Unless an exception applies, an
order with a Non-Displayed instruction that is able to execute at the
price of the Protected Quotation would not be able to do so in Test
Group Three due to the Trade-at Prohibition and the Exchange's priority
rule.\36\ Furthermore, such aggressively priced orders would not be
able to post to the EDGX Book at the contra-side Protected Quotation,
and re-pricing the order to the midpoint of the NBBO would increase
execution opportunities under normal market conditions. However, orders
that are priced to execute at the midpoint of the NBBO are exempt from
the Trade-at Prohibition. Therefore, to increase the execution
opportunities for orders with a Non-Displayed instruction in Test Group
Three, the Exchange proposes to re-price to the midpoint of the NBBO
orders with a Non-Displayed instruction that are priced in a
permissible increment better than the midpoint of the NBBO.
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    \35\ See Exchange Rule 11.6(e)(2).
    \36\ Under Exchange Rule 11.9(a)(2)(A), displayed Limit Orders
have priority over non-displayed Limit Orders.
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Market Maker Peg Orders
    A Market Maker Peg Order is a Limit Order that is automatically
priced by the System at the Designated Percentage (as defined in
Exchange Rule 11.20(d)(2)(D)) away from the then current NBB and NBO,
or if no NBB or NBO, at the Designated Percentage away from the last
reported sale from the responsible single plan processor in order to
comply with the quotation requirements for Market Makers set forth in
Exchange Rule 11.20(d).\37\ Should the above pricing result in a Market
Maker Peg Order being priced at an increment other than $0.05, the
Exchange proposes to round an order to buy (sell) up (down) to the
nearest $0.05 increment in order to comply with the minimum quoting
increments of the Plan.
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    \37\ See Exchange Rule 11.8(e).
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Supplemental Peg Orders
    The Exchange proposes to not accept Supplemental Peg Orders in Test
Group Three in order to reduce risk in the System by eliminating
unnecessary complexity based on infrequent current usage in Pilot
Securities and their limited ability to execute under the Trade-at
Prohibition. A Supplemental Peg Order is a non-displayed Limit Order
that posts to the EDGX Book, and thereafter is eligible for execution
at the NBB for buy orders and NBO for sell orders against routable
orders that are equal to or less than the aggregate size of the
Supplemental Peg Order interest available at that price.\38\ In sum,
Supplemental Peg Orders are only executable at the NBBO against an
order that is in the process of being routed away. In such case, the
Exchange is not displaying a Protected Quotation and, therefore, the
Supplemental Peg Order would be unable to execute in Test Group Three
due to the Trade-at Prohibition.\39\ Therefore, the Exchange proposes
to not accept Supplemental Peg Orders in Test Group Three.
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    \38\ See Exchange Rule 11.8(f).
    \39\ The Exchange notes that the likelihood of a Supplemental
Peg Order qualifying for an exception to the Trade-at Prohibition is
small. For example, Supplemental Peg Orders are only executable
against orders that are to be routed away and would not be eligible
to execute against an incoming ISO or Trade-at ISO. Also, the
Exchange would not be displaying a Protected Quotation. In addition,
the Exchange does not frequently receive orders of Block Size and,
in order to qualify for the Block exception, the contra-side Block
Order must be routable and the Supplemental Peg Order be of Block
Size.
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Display-Price Sliding
    Under the Display-Price Sliding process, an order eligible for
display by the Exchange that, at the time of entry, would create a
violation of Rule 610(d) of Regulation NMS by locking or crossing a
Protected Quotation of an external market, will be ranked at the
locking price in the EDGX Book and displayed by the System at one
minimum price variation (i.e., $0.05) below the current NBO (for bids)
or one minimum price variation above the current NBB (for offers).\40\
The ranked and displayed prices of an order subject to the Display-
Price Sliding process may be adjusted once or multiple times depending
upon the instructions of a User and changes to the prevailing NBBO.\41\
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    \40\ See Exchange Rule 11.6(l)(1)(B).
    \41\ See Exchange Rule 11.6(l)(1)(B)(iii).
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    As described above, Exchange Rule 11.22(a)(6)(D) sets forth the
Trade-at Prohibition, which is the prohibition against executions by a
Member that operates a Trading Center of a sell order for a Pilot
Security in Test Group Three at the price of a Protected Bid or the
execution of a buy order for a Pilot Security in Test Group Three at
the price of a Protected Offer during Regular Trading Hours, unless an
exception applies. Orders that are priced to execute at the midpoint of
the NBBO are exempt from the Trade-at Prohibition. Therefore, to
increase the execution opportunities and qualify for the mid-

point exception to the Trade-at Prohibition, the Exchange proposes to
rank orders in Test Group Three that are subject to the Display-Price
Sliding process at the midpoint of the NBBO in the BZX Book and display
such orders one minimum price variation below the current NBO (for
bids) or one minimum price variation above the current NBB (for
offers).
    The Exchange also proposes to cancel orders subject to Display-
Price Sliding in Test Group Three that are only to be adjusted once and
not multiple times in the event the NBBO widens and a contra-side order
with a Non-Displayed instruction is resting on the EDGX Book at the
price to which the order subject to Display-Price Sliding would be
adjusted. Due to the increased minimum quoting increments under the
Plan, the Exchange is unable to safely re-price an order subject to
single Display-Price Sliding in Test Group Three to the original
locking price in such circumstances and doing so would add additional
System complexity and risk. As discussed above, the Exchange proposes
to rank orders in Test Group Three subject to the Display-Price Sliding
process at the midpoint of the NBBO. In the event the NBBO changes such
that an order subject to Display-Price Sliding would not lock or cross
a Protected Quotation of an external market, the order will receive a
new timestamp, and will be displayed at the order's limit price.\42\
Due to technological limitations arising from the increased minimum
quoting increments under the Plan, however, the Exchange is unable to
safely re-program its System to re-price such order to the original
locking price when the NBBO widens and a contra-side order with a Non-
Displayed instruction is resting on the EDGX Book at the price to which
the order subject to Display-Price Sliding would be adjusted.
Therefore, the Exchange proposes to cancel orders subject to the single
Display-Price Sliding process in such circumstances. Users who prefer
an execution in such a scenario may elect to use the multiple Display-
Price Sliding process.
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    \42\ Id.
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Ministerial Change
    Currently, both Interpretation and Policy .03 to Rule 11.22(a) and
Interpretation and Policy .11 to Rule 11.22(b) state that Rule 11.22
shall be in effect during a pilot period to coincide with the pilot
period for the Plan (including any extensions to the pilot period for
the Plan). The Exchange proposes to include this language at the
beginning of Rule 11.22 and, therefore, proposes to delete both
Interpretation and Policy .03 to Rule 11.22(a) and Interpretation and
Policy .11 to Rule 11.22(b) as those provisions would be redundant and
unnecessary. The Exchange also proposes to amend the last sentence of
Rule 11.22(a)(4) to specify that the current permissible price
increments are set forth under Exchange Rule 11.6(i), Minimum Price
Variation.
Implementation Date
    If the Commission approves the proposed rule change, the proposed
rule change will be effective upon Commission approval and shall become
operative upon the commencement of the Pilot Period.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section
6(b) of the Act \43\ in general, and furthers the objectives of Section
6(b)(5) of the Act \44\ in particular, in that it is designed to
promote just and equitable principles of trade, to foster cooperation
and coordination with persons engaged in 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. The Plan requires the
Exchange to establish, maintain, and enforce written policies and
procedures that are reasonably designed to comply with applicable
quoting and trading requirements specified in the Plan. The proposed
rule change is designed to comply with the Plan, reduce complexity and
enhance System resiliency while not adversely affecting the data
collected under the Plan. Therefore, the Exchange believes that the
proposed rule changes are reasonably designed to comply with applicable
quoting and trading requirements specified in the Plan and, as
discussed further below, other applicable regulations.
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    \43\ 15 U.S.C. 78f(b).
    \44\ 15 U.S.C. 78f(b)(5).
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    The Exchange believes that the proposed changes regarding Market
Orders, MidPoint Peg Orders, Market Maker Peg Orders, and Display-Price
Sliding are consistent with the Act because they are intended to modify
the Exchange's System to comply with the provisions of the Plan, and
are designed to assist the Exchange in meeting its regulatory
obligations pursuant to the Plan. In approving the Plan, the SEC noted
that the Pilot was an appropriate, data-driven test that was designed
to evaluate the impact of a wider tick size on trading, liquidity, and
the market quality of securities of smaller capitalization companies,
and was therefore in furtherance of the purposes of the Act. To the
extent that these proposals are intended to comply with the Plan, the
Exchange believes that these proposals are in furtherance of the
objectives of the Plan, as identified by the Commission, and is
therefore consistent with the Act.
    The Exchange also believes that its proposed changes to orders with
a Market Peg instruction, orders with a Discretionary Range, orders
with a Non-Displayed instruction, Supplemental Peg Orders, and Display-
Price Sliding are also consistent with the Act because they are
intended to eliminate unnecessary System complexity and risk based on
the de minimis current usage of such order types and instructions in
Pilot Securities and/or their limited ability to execute under the
Plan's minimum trading and quoting increments or Trade-at
Prohibition.\45\ For example, during March 2016, the alternative
pegging functionality of MidPoint Peg Orders, orders with a Market Peg
instruction, orders with a Non-Displayed instruction, and Supplemental
Peg Orders accounted for 0.01%, 0.02%, 0.92%, and 0.01%, respectively,
of volume in eligible Pilot Securities on the Exchange, BYX, BZX and
EDGA combined. Notably, orders with a Discretionary Range accounted for
0.00% of volume in eligible Pilot Securities on the Exchange, BYX, BZX
and EDGA combined.
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    \45\ The Commission has also expressed concern regarding
potential market instability caused by technological risks. See
e.g., Chair Mary Jo White, Commission, Enhancing Our Equity Market
Structure (June 5, 2014) available at https://www.sec.gov/News/Speech/Detail/Speech/1370542004312#.VD2HW610w6Y.
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    The Commission adopted Regulation Systems Compliance and Integrity
(``Regulation SCI'') in November 2014 to strengthen the technology
infrastructure of the U.S. securities markets.\46\ Regulation SCI is
designed to reduce the occurrence of systems issues, improve resiliency
when systems problems do occur, and enhance the Commission's oversight
and enforcement of securities market technology infrastructure.
Regulation SCI required the Exchange to establish written policies and
procedures reasonably designed to ensure that their systems have levels
of capacity, integrity, resiliency, availability, and security adequate
to maintain their operational capability and promote the maintenance of
fair

and orderly markets, and that they operate in a manner that complies
with the Exchange Act. Each of these proposed changes are intended to
reduce complexity and risk in the System to ensure the Exchange's
technology remains robust and resilient. In determining the scope of
the proposed changes, the Exchange carefully weighed the impact on the
Pilot, System complexity, and the usage of such order types in Pilot
Securities.\47\ The potential complexity results from code changes for
a majority of the Exchange's order types, which requires the
implementation and testing of a separate branch of code for each Test
Group. For example, the Exchange currently utilizes one branch of code
for which to implement and test changes. Development work for the Pilot
results in the creation of four additional branches of code that are to
be developed and tested (e.g., Control Group + three Test Groups). The
Exchange determined that the changes proposed herein are necessary to
ensure continued System resiliency in accordance with the requirements
of Regulation SCI. Therefore, the Exchange believes the proposed rule
change promotes just and equitable principles of trade, removes
impediments to and perfects the mechanism of a free and open market and
a national market system and, in general, to protect investors and the
public interest.
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    \46\ See Securities Exchange Act Release No. 73639 (November 19,
2014), 79 FR 72251 (December 5, 2014) (``Regulation SCI Approval
Order'').
    \47\ But for the Plan, the Exchange notes that it would not have
proposed to amend the operation of orders with a Market Peg
instruction, orders with a Discretionary Range, orders with a Non-
Displayed instruction, Supplemental Peg Orders, and Display-Price
Sliding as described herein.
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    In addition, each of these proposed changes would have a de minimis
to zero impact on the data reported pursuant to the Plan. As evidenced
above, orders with a Market Peg instruction, orders with a
Discretionary Range, the alternative pegging functionality of MidPoint
Peg Orders, and Supplemental Peg Orders are infrequently used in Pilot
Securities or the execution of such orders would be scarce due to the
Plan's minimum trading and quoting requirement and Trade-at
Prohibition. The limited usage and execution scenarios do not justify
the additional system complexity which would be created by modifying
the System to support such order types in order to comply with the
Plan. Therefore, the Exchange believes each proposed change is a
reasonable means to ensure that the System's integrity, resiliency, and
availability continues to promote the maintenance of fair and orderly
markets. Due to the additional complexity, limited usage and execution
opportunities, the Exchange believes it is not unfairly discriminatory
to apply the changes proposed herein to only Pilot Securities as such
changes are necessary to reduce complexity and ensure continued System
resiliency in accordance with the requirements of Regulation SCI. The
Exchange also believes the proposed changes to orders with a Non-
Displayed instruction, and orders subject to the Display-Price Sliding
process in Test Group Three are consistent with the Act because they
are designed to increase the execution opportunities for such order
types in compliance with the mid-point exception to the Trade-at
Prohibition. The Exchange also believes the proposed change to Market
Pegged Orders in Test Groups One and Two is consistent with the Act
because it is identical to the operation of the Super Aggressive
instruction under Exchange Rule 11.6(n)(2). The Exchange notes that
Market Pegged Orders are aggressive by nature and believes executing
the order in such circumstance is reasonable and appropriate.
    The Exchange also believes it is reasonable and appropriate to
cancel an order subject to the single Display-Price Sliding process in
Test Group Three in the event that the NBBO widens and a contra-side
order with a Non-Displayed instruction is resting on the EDGX Book at
the price to which the order subject to Display-Price Sliding would be
adjusted. Due to technological limitations and the Plan's increased
minimum quoting increments, the Exchange is unable to safely re-program
its System to re-price such orders to the original locking price in
such circumstances. The Exchange also anticipates that the scenario
under which it proposes to cancel the Display-Price Sliding order will
be infrequent in Tick Pilot Securities. Users who prefer an execution
in such a scenario may elect to use the multiple Display-Price Sliding
process. Therefore, the Exchange believes it is consistent with the Act
to set forth this scenario in its rules so that Users will understand
how the System operates and how their orders would be handled in this
discrete scenario.
    Lastly, the Exchange believes the ministerial changes to Rule 11.22
are also consistent with the Act as they would: (i) Clarify a provision
under paragraph (a)(4); and (ii) remove redundant provisions from the
rule.

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 Exchange
notes that the proposed rule change is designed to assist the Exchange
in meeting its regulatory obligations pursuant to the Plan, reduce
System complexity and enhance resiliency. The Exchange also notes that
the proposed rule change will apply equally to all Members that trade
Pilot Securities.

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. In particular, the Commission seeks
comment on the issue described below.
    In the Approval Order, the Commission stressed the importance of
testing the impact of wider tick sizes on the trading and liquidity of
the securities of small capitalization companies, and doing so in a way
that produces robust results that inform future policy decisions.\48\
The Commission acknowledged the complexity of the Pilot and the costs
that its implementation would create for market participants, but
concluded that the benefits of the empirical data that would be
produced by the Pilot warranted incurring those costs.\49\ As a result,
the Plan requires that each Participant, including the Exchange, adopt
rules that are necessary for compliance with the provisions of the
Plan.\50\
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    \48\ See Approval Order, supra note 4, at 80 FR 27515.
    \49\ Id. at 27516.
    \50\ See Section II(B) of the Plan. See also Section IV of the
Plan.

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    While the Exchange states that the proposed rule change describes
the system changes necessary to implement the Pilot, the Commission
notes that the scope of the proposed changes extends beyond those
required for compliance with the Plan, and would eliminate certain
order types for Pilot Securities during the Pilot Period, or modify
their operation in ways not required by the Plan. For example, the
Exchange proposes not to accept Market Pegged Orders, Discretionary
Orders, and Supplemental Peg Orders, and certain types of Mid-Point Peg
Orders, in some or all Test Groups of Pilot Securities for the duration
of the Pilot Period.\51\ These proposals appear designed to permit the
Exchange to avoid the costs of modifying these order types to comply
with the Plan. The Exchange notes that these order types are
infrequently used in Pilot Securities, and takes the position that
``[t]he limited usage and execution scenarios do not justify the
additional system complexity which would be created by modifying the
System to support such order types in order to comply with the Plan.''
\52\ At the same time, the Exchange also does not appear prepared to
propose to eliminate these order types indefinitely. By contrast, the
Exchange proposes to modify, in ways not required by the Plan, the
operation of Market Pegged Orders and Non-Displayed Orders, and certain
orders subject to the Display-Price Sliding process, in some or all
Test Groups of Pilot Securities, and to incur the associated system
change costs, in order to increase the ``execution opportunities'' for
these order types for the duration of the Pilot Period.\53\
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    \51\ The Exchange also proposes to cancel certain orders subject
to the Display-Price Sliding process in certain Pilot Securities for
the duration of the Pilot Period.
    \52\ See supra Item II.A.2.
    \53\ See supra Item II.A.1-2.
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    The Commission is concerned that proposed rule changes, other than
those necessary for compliance with Plan, that are targeted at Pilot
Securities, that have a disparate impact on different Test Groups and
the Control Group, and that are to apply temporarily only for the Pilot
Period, could bias the results of the Pilot and undermine the value of
the data generated in informing future policy decisions. Accordingly,
the Commission is concerned that the proposed rule change may not be
consistent with Act, including Section 6(b)(5) thereof and Rule 608 of
Regulation NMS, or with the Plan.
    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-2016-26 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-BatsEDGX-2016-26. 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-2016-26, and should
be submitted on or before August 10, 2016.
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    \54\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\54\
Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2016-17091 Filed 7-19-16; 8:45 am]
 BILLING CODE 8011-01-P