This PDF is the current document as it appeared on Public Inspection on 08/04/2016 at 08:45 am.
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 July 20, 2016, Bats EDGX Exchange, Inc. (the “Exchange” or “EDGX”) filed with the Securities and Exchange Commission (the “Commission”) the proposed rule Start Printed Page 51952change as described in Items I, II, and III below, which Items have been prepared by the Exchange. The Exchange has designated the proposed rule change as one establishing or changing a member due, fee, or other charge imposed by the Exchange under section 19(b)(3)(A)(ii) of the Act  and Rule 19b-4(f)(2) thereunder, which renders the proposed rule change effective upon filing with the Commission. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons.
I. Self-Regulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change
The Exchange filed a proposal to amend the fee schedule applicable to Members  and non-members of the Exchange pursuant to EDGX Rules 15.1(a) and (c).
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 the Statutory Basis for, the Proposed Rule Change
The Exchange proposes to modify the fee schedule applicable to the Exchange's options platform (“EDGX Options”) to adopt an ORF in the amount of $0.0002 per contract side. The per-contract ORF will be assessed by the Exchange to each Member and non-Member for all options transactions cleared by OCC in the “customer” range, regardless of the exchange on which the transaction occurs. The ORF will be collected indirectly from Members and non-Members through their clearing firms by OCC on behalf of the Exchange. The ORF will be collected indirectly from Members and non-Members through their clearing firms by OCC on behalf of EDGX Options.
The Exchange believes it is appropriate to charge the ORF to transactions by Members and non-Members that clear as customer at the OCC, irrespective of where the transactions takes place. Many of the Exchange's surveillance programs for customer trading activity require the Exchange to look at activity across all options markets, such as surveillances for position limit violations, manipulation, insider trading, front-running and contrary exercise advice violations/expiring exercise declarations. Accordingly, there is a strong nexus between the ORF and the Exchange's regulatory activities with respect to its Members', as well as non-Members', customer trading activity. These activities span across multiple exchanges.
In addition to its own surveillance programs, the Exchange works with other SROs and exchanges on intermarket surveillance related issues. Through its participation in the Intermarket Surveillance Group (“ISG”), the Exchange shares information and coordinates inquiries and investigations with other exchanges designed to address potential intermarket manipulation and trading abuses. Also, the Exchange and the other options exchanges are required to populate a consolidated options audit trail (“COATS”)  system in order to surveil trading activities across markets.
The Exchange proposes to assess ORF monthly based on information received from the OCC regarding transactions that cleared in the customer range. Notably, the Exchange believes that this will help to alleviate confusion or even potential double-billing of customer transactions. In particular, by billing all customer transactions on a monthly basis the Exchange will be able to capture transactions that may have been executed on the Exchange that were submitted for clearing by a Member but then “flipped” to the account of a non-Member. Thus, the Exchange believes that charging the ORF to Members and non-Members across all markets will avoid having non-Members clear their trades through non-Members in order to avoid the fee and to thereby avoid paying for their fair share for regulation. If the ORF did not apply to activity across markets then a Member or non-Member would send their orders to the least cost, least regulated exchange. In addition, applying the fee to all Members' and non-Members' activity across all market will avoid options participants from terminating their membership status on or not becoming a Members of certain exchanges simply to avoid being assessed ORF.
As discussed above, the ORF is designed to recover a material portion of the costs to the Exchange of the supervision and regulation of Members' and non-Member's customer options business, including performing routine surveillances and investigations, as well as policy, rulemaking, interpretive and enforcement activities. The Exchange believes that revenue generated from the ORF, when combined with all of the Exchange's other regulatory fees and fines, will cover a material portion, but not all, of the Exchange's regulatory costs.
The Exchange will monitor the amount of revenue collected from the ORF to ensure that it, in combination with its other regulatory fees and fines, does not exceed the Exchange's total regulatory costs. The Exchange expects to monitor its regulatory costs and revenues at a minimum on a semi-annual basis. If the Exchange determines regulatory revenues exceed or are insufficient to cover a material portion of its regulatory costs, the Exchange will adjust the ORF by submitting a fee change filing to the Commission. The Exchange will notify Members and non-Members of adjustments to the ORF at least 30 calendar days prior to the effective date of the change.Start Printed Page 51953
The Exchange notes that there is established precedent for an SRO charging a fee across markets, namely, FINRAs Trading Activity Fee  and the BZX, MIAX, NYSE Amex, NYSE Arca, CBOE, PHLX, ISE and BOX ORFs. While the Exchange does not have all of the same regulatory responsibilities as FINRA, the Exchange believes that, like other exchanges that have adopted an ORF, its broad regulatory responsibilities with respect to a Member's and non-Members' activities, irrespective of where their transactions take place, support a regulatory fee applicable to transactions on other markets. Unlike FINRA's Trading Activity Fee, the ORF would apply only to a Member's and non-Member's customer options transactions.
The Exchange proposes to implement the ORF on August 1, 2016.
2. Statutory Basis
The Exchange believes that the proposed rule change 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 of the Act. Specifically, the Exchange believes that the proposed rule change is consistent with section 6(b)(4) of the Act, in that it provides for the equitable allocation of reasonable dues, fees and other charges among members and other persons using any facility or system which the Exchange operates or controls. The Exchange notes that it operates in a highly competitive market in which market participants can readily direct order flow to competing venues or providers of routing services if they deem fee levels to be excessive.
The Exchange believes the ORF is equitable and not unfairly discriminatory because it would be objectively allocated to Members and non-Members in that it would be charged to all Members and non-Members on all their transactions that clear as customer transactions at the OCC. Moreover, the Exchange believes the ORF ensures fairness by assessing fees to those Members and non-Members that are directly based on the amount of customer options business they conduct. Regulating customer trading activity is much more labor intensive and requires greater expenditure of human and technical resources than regulating non-customer trading activity, which tends to be more automated and less labor-intensive. As a result, the costs associated with administering the customer component of the Exchange's overall regulatory program are materially higher than the costs associated with administering the non-customer component (e.g., Member proprietary transactions) of its regulatory program. In addition, the Exchange believes the amount of the ORF is reasonable as it is significantly lower than ORFs charged by other exchanges. By way of comparison, MIAX charges an ORF of $0.0045 per contract side, and both NYSE Arca and NYSE Amex charge an ORF of $0.0055 per contract side. The CBOE charges an ORF of $0.0081 per contract.
The Exchange believes applying the ORF to transactions executed or cleared by non-Members is equitable and not unfairly discriminatory because it should avoid having transactions cleared through non-Members in order to avoid the fee and to thereby avoid paying for their fair share for regulation. If the ORF did not apply to activity across markets then a non-Member would send their orders to the least cost, least regulated exchange. In addition, applying the fee to all Members' and non-Members' activity across all market will avoid options participants from terminating their membership status on or not becoming a Members of certain exchanges simply to avoid being assessed ORF. Moreover, the Exchange believes the ORF ensures fairness by assessing fees to those Members and non-Members that are directly based on the amount of customer options business they conduct.
The Exchange also believes it is reasonable and appropriate for the Exchange to charge the ORF for options transactions by a non-Member regardless of the exchange on which the transactions occur. The Exchange has a statutory obligation to enforce compliance by Members and their associated persons under the Act and the rules of the Exchange and cannot effectively surveil for manipulative conduct by market participants (including non-Members) trading on the Exchange without looking at and evaluating activity across all options markets. Many of the Exchange's market surveillance programs require the Exchange to look at and evaluate activity across all options markets, such as surveillance for position limit violations, manipulation, front-running and contrary exercise advice violations/expiring exercise declarations.
The ORF is designed to recover a material portion of the costs of supervising and regulating Members' and non-Members' customer options business including performing routine surveillances, investigations, examinations, financial monitoring, and policy, rulemaking, interpretive, and enforcement activities. The Exchange will monitor, on at least a semi-annual basis the amount of revenue collected from the ORF to ensure that it, in combination with its other regulatory fees and fines, does not exceed the Exchange's total regulatory costs. If the Exchange determines regulatory revenues exceed or are insufficient to cover a material portion of its regulatory costs, the Exchange will adjust the ORF by submitting a fee change filing to the Commission. The Exchange will notify Members and non-Members of adjustments to the ORF via regulatory circular.
The Exchange has designed the ORF to generate revenues that, when combined with all of the Exchange's other regulatory fees, will be less than or equal to the Exchange's regulatory costs, which is consistent with the Commission's view that regulatory fees be used for regulatory purposes and not to support the Exchange's business side. In this regard, the Exchange believes that the initial level of the fee is reasonable.
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. The ORF is not intended to have any impact on competition. Rather, it is designed to Start Printed Page 51954enable the Exchange to recover a material portion of the Exchange's cost related to its regulatory activities. The proposed ORF is also comparable to, and in most instances less than, ORF fees charged by other options exchanges. Further, the expansion of ORF to non-Members is also not designed to have an impact on competition as the Exchange believes based on conversations from market participants that it is consistent with the practice by other exchanges in applying ORF to non-Member transactions, despite rule text to the contrary.
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
The foregoing rule change has become effective pursuant to section 19(b)(3)(A) of the Act  and paragraph (f) of Rule 19b-4 thereunder. 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 necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of the Act.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposed rule change is consistent with the Act. Comments may be submitted by any of the following methods:
- Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
- Send an email to email@example.com. Please include File No. SR-BatsEDGX-2016-33 on the subject line.
- 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-BatsEDGX-2016-33. 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 No. SR-BatsEDGX-2016-33, and should be submitted on or before August 26, 2016.Start Signature
For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.
Robert W. Errett,
5. 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).Back to Citation
6. ISG is an industry organization formed in 1983 to coordinate intermarket surveillance among the SROs by co-operatively sharing regulatory information pursuant to a written agreement between the parties. The goal of the ISG's information sharing is to coordinate regulatory efforts to address potential intermarket trading abuses and manipulations.Back to Citation
7. COATS effectively enhances intermarket options surveillance by enabling the options exchanges to reconstruct the market promptly to effectively surveil certain rules.Back to Citation
8. The Exchange notes that its regulatory responsibilities with respect to compliance with options sales practice rules has been allocated to the Financial Industry Regulatory Authority, Inc. (“FINRA”) under a 17d-2 Agreement. The ORF is not designed to cover the cost of options sales practice regulation.Back to Citation
9. The Exchange announced its intent to charge an ORF on June 30, 2016. See Bats Options Exchange Regulatory Fee Schedule Update Effective August 1, 2016 available at: http://cdn.batstrading.com/resources/fee_schedule/2016/Bats-Options-Exchange-Regulatory-Fee-Schedule-Update-Effective-August-1-2016.pdf. The semi-annual review and notice provisions are similar to those adopted by NYSE Arca, Inc. (“NYSE Arca”). See Securities Exchange Act Release No. 70500 (September 25, 2013), 78 FR 60361 (October 1, 2013) (SR-NYSEArca-2013-91).Back to Citation
10. See Securities Exchange Act Release No. 47946 (May 30, 2003), 68 FR 3402 (June 6, 2003).Back to Citation
13. See MIAX fee schedule available at http://www.miaxoptions.com/sites/default/files/MIAX_Options_Fee_Schedule_06012016.pdf (date May 1, 2016).Back to Citation
14. See NYSE Arca Options fee schedule available at https://www.nyse.com/publicdocs/nyse/markets/arca-options/NYSE_Arca_Options_Fee_Schedule.pdf (dated June 6, 2016); and NYSE Amex fee schedule available at https://www.nyse.com/publicdocs/nyse/markets/amex-options/NYSE_Amex_Options_Fee_Schedule.pdf (dated June 9, 2016).Back to Citation
15. See CBOE fee schedule available at http://www.cboe.com/framed/pdfframed.aspx?content=/publish/feeschedule/CBOEFeeSchedule.pdf§ion=SEC_RESOURCES&title=CBOE%20Fee%20Schedule (dated May 16, 2016).Back to Citation
16. Despite rule text to the contrary, the Exchange believes based on conversations with market participants that other options exchanges currently charge an ORF on all options transactions cleared by the OCC in the customer range regardless of whether they are executed or cleared by their member.Back to Citation
[FR Doc. 2016-18570 Filed 8-4-16; 8:45 am]
BILLING CODE 8011-01-P