Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (the “Act”), and Rule 19b-4 thereunder, notice is hereby given that on January 27, 2016, BATS Exchange, Inc. (the “Exchange” or “BATS”) filed with the Securities and Exchange Commission (“Commission”) the proposed rule change as described in Items I and II below, which Items have been prepared by the Exchange. The Exchange has designated this proposal as a “non-controversial” proposed rule change pursuant to Section 19(b)(3)(A) of the Act and Rule 19b-4(f)(6)(iii) thereunder, which renders it effective upon filing with the Commission. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons.
17 CFR 240.19b-4.
17 CFR 240.19b-4(f)(6)(iii).
I. Self-Regulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change
The Exchange filed a proposal to amend Rule 21.16, entitled “Risk Monitor Mechanism”, in order to modify the risk monitoring functionality offered to all Users of the BATS equity options trading platform (“BZX Options”).
As defined in Exchange Rule 16.1(a)(63), a User is any Exchange member or sponsored participant authorized to obtain access to the Exchange.
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
The purpose of the proposed rule change is to amend Exchange Rule 21.16 to modify the method by which the BZX Options Risk Monitor Mechanism measures risk and to modify the ability of a User to reset the Risk Monitor Mechanism when risk has been triggered in the Firm Category, as described below.
Background
Currently, the Exchange's Risk Monitor Mechanism operates by maintaining a counting program for each User. A User may configure a single counting program or multiple counting programs to govern its trading activity (i.e., on a port by port basis). The System engages the Risk Monitor Mechanism in a particular option when the counting program has determined that a User's trading has reached one of several specified triggers (“Specified Engagement Trigger”) established by such User during a specified time period or on an absolute basis.
Elimination of Option Categories
The current counting program counts executions in the following “Option Categories”: front-month puts, front-month calls, back-month puts, and back-month calls (each an “Option Category”). The counting program also counts a User's executions, contract volume and notional value across all options which a User trades (“Firm Category”). The Exchange proposes to eliminate the concept of the Option Category, such that the counting program will instead operate per option across all Option Categories (i.e., all front-month puts, front-month calls, back-month puts, and back-month calls). The Exchange does not propose to amend the Firm Category of the Risk Monitor Mechanism.
For the purposes of Rule 21.16, a front-month put or call is an option that expires within the next two calendar months, including weeklies and other non-standard expirations, and a back-month put or call is an option that expires in any month more than two calendar months away from the current month.
The Exchange believes that the change will result in a Risk Monitor Mechanism that is more consistent with that offered by other options exchanges. Although the Exchange implemented its Risk Monitor Mechanism with the concept of Option Categories for technical reasons, the Exchange is not aware of any other options exchange that uses the concept of Option Categories in the context of its risk mechanism.
Calculation of Percentage-Based Engagement Trigger
The Exchange currently offers a Specified Engagement Trigger to the Risk Monitor Mechanism based on percentage under Exchange Rule 21.16(b)(ii) (the “percentage trigger”). The percentage trigger is triggered whenever a trade counter has calculated that the User has traded a set percentage within a set time period against the User's orders in a specified class. The set percentage is specified by the User (the “Specified Percentage”) and is proposed to be calculated as follows (and as shown in the examples below): (1) A counting program would first calculate, for each series of an option class, the percentage of each User's orders or Market Maker's quotes that are executed on each side of the market, including both displayed and non-displayed size; and (2) the counting program would then sum the overall series percentages for the entire option class to calculate the percentage trigger. The Exchange proposes to specify this methodology in Rule 21.16. As proposed, the Exchange would no longer aggregate all bids and offers in each series for purposes of counting the percentage trigger, as it currently does, but would instead count bids and offers in each series separately.
For example, assume a User enters 100 contract orders at both the National Best Bid (“NBB”) and National Best Offer (“NBO”) in two series of a class, its Specified Percentage is 100%, and the four executions in the example below occur within the time period specified by the User. The counting program would calculate the percentage of quote risk mechanism as follows:
| Event/series | Bid size | Number of contracts executed— bids | Offer size | Number of contracts executed— offers | Percentage of quote of execution | Aggregate percentage of quote following execution |
|---|---|---|---|---|---|---|
| Quotes Entered: Series 1 | 100 | 0 | 100 | 0 | 0 | 0 |
| Quotes Entered: Series 2 | 100 | 0 | 100 | 0 | 0 | 0 |
| Sell order for 40 contracts: Series 1 | 100 | 40 | 100 | 0 | 40 | 40 |
| Buy order for 50 contracts: Series 1 | 60 | 0 | 100 | 50 | 50 | 90 |
| Sell order for 5 contracts: Series 2 | 100 | 5 | 100 | 0 | 5 | 95 |
| Buy order for 10 contracts: Series 2 | 95 | 0 | 100 | 10 | 10 | 105 |
In this example, the aggregate percentages of the User's quotes on each side in all series during the time period is 105%, thus exceeding the specified percentage of 100%, at which point the percentage trigger would be triggered and the User's remaining orders in the appointed class would be cancelled.
As set forth in the table and consistent with the methodology as proposed to be defined in Rule 21.16, the percentage trigger is calculated by individually calculating the percentage of each execution in each series on each of the bid and the offer and then summing each of these percentages together. The percentage, thus, does not calculate the actual percentage as a whole in the options class over the time period—in the example, 105 contracts out of 400 contracts were executed over the time period yet this does not result in a percentage calculation of 26.25%. Instead, 40% of the quoted bid in Series 1 is executed, then 50% of the quoted offer in Series 1 is executed, then 5% of the quoted bid in Series 2 is executed, and finally 10% of the quoted offer in Series 2 is executed. By summing these percentages, the percentage trigger equals 105%. As set forth elsewhere in the proposal, the Exchange believes that this counting methodology is similar to that offered by other options exchanges.
Re-Setting of Risk Monitor Mechanism
Under current Rule 21.16, when a Specified Engagement Trigger is reached in the Firm Category, the Risk Monitor Mechanism will automatically remove such User's orders in all series of all options and reject any additional orders from a User until the counting program has been reset in accordance with paragraph (d) of the rule. The Risk Monitor Mechanism will also attempt to cancel any orders that have been routed away to other options exchanges on behalf of the User. The Exchange proposes to further amend Rule 21.16 so that unless otherwise instructed by a User, in the event a Specified Engagement Trigger is reached in the Firm Category, the Exchange will not allow a User to automatically reset the counting program and Users will instead need to contact the Exchange to request a reset. Because reaching a Specified Engagement Trigger in the Firm Category should be a rare event, the Exchange believes that most Users will prefer to pause in the event of a trigger, review the circumstances, and then slowly re-enter the market. The Exchange is proposing to maintain the ability to automatically reset the counting program, however, because that is how the Risk Monitor Mechanism operates today and because it is possible that a User's risk management program is established in a way where the User would take the trigger into account but prefers the ability to automatically reset to control their re-entry to the market rather than needing to contact the Exchange.
2. Statutory Basis
The rule change proposed in this submission is consistent with the requirements of the Act and the rules and regulations thereunder that are applicable to a national securities exchange, and, in particular, with the requirements of Section 6(b) of the Act. Specifically, the proposed change is consistent with Section 6(b)(5) of the Act, because it is designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, to foster cooperation and coordination with persons engaged in facilitating transactions in securities, and to remove impediments to, and perfect the mechanism of, a free and open market and a national market system. The Exchange believes that the proposal is appropriate and reasonable because it offers additional functionality for Users to manage their risk.
15 U.S.C. 78f(b)(5).
Modifying the Risk Monitor Mechanism to eliminate the Option Category concept will allow Users to manage their risk in each option class in a way that is more consistent with the way they manage risk on other option exchanges. As noted above, although the Exchange implemented its Risk Monitor Mechanism with the concept of Option Categories for technical reasons, the Exchange is not aware of any other options exchange that uses the concept of Option Categories in the context of its risk mechanism.
Offering the percentage trigger without aggregation across the bid and the offer as part of the Risk Monitor Mechanism will provide Market Makers and other Users with greater control and flexibility with respect to managing risk and the manner in which they enter orders and quotes, which removes impediments to a free and open market and benefits all Users of BZX Options. The Exchange notes that similar functionality is offered by NYSE Arca, Inc. (“NYSE Arca Options”) and NYSE Amex Options, Inc. (“NYSE Amex Options”).
See NYSE Arca Options Rule 6.40(d); see also NYSE Amex Options Rule 928NY(d).
Finally, creating a default that prevents the automatic reset of the counting program in the event a Specified Engagement Trigger is reached in the Firm Category will provide additional controls to Users that are trying to manage their risk. At the same time, allowing Users to maintain the ability to automatically reset the counting program will maintain the status quo with respect to the current Risk Monitor Mechanism and will allow Users to tailor their risk management programs as appropriate to their operations. The Exchange believes that this change is a modest extension of the current rule, that it is consistent with the overall purpose of the rule (i.e., to mitigate risk), and that it does not raise any policy issues particularly because a User can still optionally use the same functionality offered today by informing the Exchange that it still wishes to utilize the feature to automatically reset the counting program even if a Specified Engagement Trigger has been reached in the Firm Category.
(B) Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will impose any burden on competition not necessary or appropriate in furtherance of the purposes of the act. To the contrary, the proposed changes to the Exchange's Risk Monitor Mechanism will generally make the Exchange's offering more consistent with that offered by other exchanges. Thus, the proposed rule change will promote competition because it will allow the Exchange to offer its Users similar features as are available at other exchanges and thus further compete with other exchanges for order flow.
(C) Self-Regulatory Organization's Statement on Comments on the Proposed Rule Change Received From Members, Participants or Others
The Exchange has not solicited, and does not intend to solicit, comments on this proposed rule change. The Exchange has not received any written comments from members or other interested parties.
III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action
Because the foregoing proposed rule change does not: (A) significantly affect the protection of investors or the public interest; (B) impose any significant burden on competition; and (C) by its terms, become operative for 30 days from the date on which it was filed or such shorter time as the Commission may designate it has become effective pursuant to Section 19(b)(3)(A) of the Act and paragraph (f)(6) of Rule 19b-4 thereunder, the Exchange has designated this rule filing as non-controversial. The Exchange has given the Commission written notice of its intent to file the proposed rule change, along with a brief description and text of the proposed rule change at least five business days prior to the date of filing of the proposed rule change, or such shorter time as designated by the Commission.
17 CFR 240.19b-4.
A proposed rule change filed under Rule 19b-4(f)(6) normally does not become operative prior to 30 days after the date of filing. Rule 19b-4(f)(6)(iii), however, permits the Commission to designate a shorter time if such action is consistent with the protection of investors and the public interest. The Exchange has asked the Commission to waive the noted operative delay so that the Exchange may implement the proposal on or about February 8, 2016, when the Exchange anticipates that the features will be available. The Exchange has stated that such a waiver would, without undue delay, provide its Users with a risk mechanism that is more similar to that offered by other options exchanges and that may assist its Users in providing liquidity on the Exchange consistent with their risk profile. The Commission believes that waiving the thirty day delay is consistent with the protection of investors and the public interest. Therefore, the Commission hereby waives the thirty-day operative delay.
For purposes of waiving the 30-day operative delay, the Commission has considered the proposed rule's impact on efficiency, competition, and capital formation. See 15 U.S.C. 78c(f).
At any time within 60 days of the filing of the proposed rule change, the Commission summarily may temporarily suspend such rule change if it appears to the Commission that such action is: (1) necessary or appropriate in the public interest; (2) for the protection of investors; or (3) otherwise in furtherance of the purposes of the Act. If the Commission takes such action, the Commission shall institute proceedings to determine whether the proposed rule should be approved or disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views and arguments concerning the foregoing, including whether the proposal is consistent with the Act. Comments may be submitted by any of the following methods:
Electronic Comments
- Use the Commission's Internet comment form ( http://www.sec.gov/rules/sro.shtml ); or
- Send an email to rule-comments@sec.gov. Please include File No. SR-BATS-2016-06 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 No. SR-BATS-2016-06. 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 such filing will also be available for inspection and copying at the principal office of the Exchange. All comments received will be posted without change; the Commission does not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File No. SR-BATS-2016-06 and should be submitted on or before March 8, 2016.
For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.14
Brent J. Fields,
Secretary.
[FR Doc. 2016-02983 Filed 2-12-16; 8:45 am]
BILLING CODE 8011-01-P