June 28, 2006
Mr. David Cummings
Re: BATS ECN
Dear Mr. Cummings:
In your letter dated June 27, you requested that the Division of Market Regulation ("Division") of the Securities and Exchange Commission ("Commission") reaffirm its view that BATS ECN ("System"), owned and operated by BATS Trading, Inc. ("BATS"), a registered broker-dealer, is an electronic communications network ("ECN") as defined in Regulation NMS1 under the Securities Exchange Act of 1934 ("Exchange Act") and would be in compliance with the requirements applicable to the ECN Display Alternative, as described in paragraph (b)(5)(ii) of Rule 602 of Regulation NMS ("Quote Rule"),2 with respect to NMS stocks3 for which a linkage between the System and a self-regulatory organization ("SRO") is operational. The Division has previously taken that view in a number of no-action letters, most recently in May 2006.4
The Division hereby grants your request. Accordingly, the Division will not recommend that the Commission take enforcement action against OTC market makers5 or exchange market makers6 who are subscribers to the System, if those market makers enter orders into the System without modifying their public quotations, in compliance with the Quote Rule and Rule 604 of Regulation NMS ("Limit Order Display Rule"),7 as applicable. In taking this position, the Division has relied on various representations you made regarding the operation of the System, specifically that:
(i) The System is an ECN within the meaning of Rule 600(b)(23) of Regulation NMS and allows subscribers, including OTC market makers and exchange market makers, electronically to enter orders in certain NMS stocks.
(ii) BATS has established, and will maintain, an automated linkage with at least one SRO trading facility8 or SRO display-only facility.9 All subscriber orders at the top of the BATS order book (i.e., best bid/ask by time priority) are transmitted to at least one SRO trading facility or SRO display-only facility for display. More specifically, BATS transmits to one or more facilities for public display by the facility or facilities the best priced orders of all orders entered by subscribers to the System, including OTC market makers or exchange market makers for securities in which they make markets or act as specialist. BATS will provide to any broker or dealer access to the System's top of book quotes that is functionally equivalent to the access that is generally available to quotes displayed by an SRO trading facility, or, for orders displayed by an SRO display-only facility, a level and cost of access to such quotations that is substantially similar to the level and cost of access to quotations displayed by SRO trading facilities in that stock.
(iii) Upon receipt, BATS responds and intends to continue to respond to non-subscriber orders no slower than it responds to subscriber orders. Non-subscribers are able to automatically execute against the quotations displayed by the System in any SRO trading facility and/or SRO display-only facility.
(iv) BATS charges non-subscriber broker-dealers a rate that does not exceed the then current rate charged to a substantial portion of its active broker-dealer subscribers and in any event not in excess of the maximum fee as authorized by Rule 610 of Regulation NMS.10
(v) The System has sufficient capacity to handle the volume of trading reasonably projected to be conducted in the System. Moreover, BATS conducts and will continue to conduct regular and periodic system capacity reviews and tests to: (i) ensure future capacity; (ii) identify potential weaknesses; and (iii) reduce the risks of system failures and threats to system integrity.
The Division's no-action position is conditioned on BATS maintaining active connectivity with one or more SRO trading facilities and/or SRO display-only facilities. In the event that BATS loses connectivity with an SRO trading facility or SRO display-only facility, BATS, with respect to that facility, would not be in compliance with the ECN Display Alternative and the no-action relief described herein would not be available. BATS has represented that, throughout the day, BATS personnel continuously and systematically monitor the System's connection to each SRO trading facility and/or SRO display-only facility to which it links in order to ensure that the applicable connection is functioning. BATS further represents that, if the System loses connectivity with any SRO trading facility or SRO display-only facility, BATS personnel will immediately cancel all quotes previously published by the System in that facility and immediately notify all subscribers to advise them of the interruption.
The Division further conditions its position on the continuing accuracy of these representations and compliance by BATS with all applicable Commission and SRO rules, including any additional requirements applicable to ECNs. Any different facts or conditions - including, but not limited to, modifications or revisions to, or expansion of service provided by, BATS - may require a different response. The Division may request additional representations from you regarding the operation of the System. This no-action position is subject to changes in current law, regulation, and interpretations; any such change may require the Division to reevaluate and withdraw or modify this position. This no-action position concerns enforcement action under Section 11A of the Exchange Act11 only, and does not express any legal conclusions regarding the applicability of Section 11A or other statutory or regulatory provisions of the federal securities laws.
Robert L.D. Colby
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