May 8, 2006
Mr. David Cummings
Dear Mr. Cummings:
In your letter dated May 4, 2006 ("May 2006 Request Letter"), you request that the Division of Market Regulation ("Division") of the Securities and Exchange Commission ("Commission") reaffirm its view that BATS Trading, Inc. ("BATS"), which operates an electronic trading system known as the BATS ECN, would continue to be an electronic communications network ("ECN") as defined in Rule 600(b)(23) of Regulation NMS1 under the Securities Exchange Act of 1934 ("Exchange Act") and would be in compliance with the ECN Display Alternative as described in paragraph (b)(5)(ii) of Rule 602 of Regulation NMS ("Quote Rule")2 after BATS establishes a new linkage with the National Stock Exchange ("NSX").
The Division previously has taken the view that BATS was an ECN and would be in compliance with the ECN Display Alternative with respect to: (1) exchange-traded securities for which a linkage between BATS ECN, the Computer Assisted Execution System ("CAES"), the Intermarket Trading System ("ITS"), and the Consolidated Quotation System ("CQS") is operational; or (2) Nasdaq securities for which a linkage between BATS ECN and the Nasdaq Market Center is operational, and in each case BATS ECN provides access to certain orders pursuant to the terms of the ECN Display Alternative.3 The Division also stated that it would not recommend that the Commission take enforcement action against an OTC market maker4 or exchange market maker5 that is a subscriber to BATS ECN if the market maker enters orders into BATS ECN without modifying its public quotation in compliance with the Quote Rule and Rule 604 of Regulation NMS ("Limit Order Display Rule"),6 as applicable.
In the May 2006 Request Letter, you state that BATS ECN is now connected to the NSX through the Customer Automated Messaging System ("CAMS"), which is an automated system operated by NSX that allows NSX members to direct orders in exchange-traded and Nasdaq securities to NSX. You further state that, because NSX is a direct participant in the ITS Plan, NSX members may direct agency and principal orders in exchange-traded securities to, and receive orders from, participating ITS7 exchanges. You represent that BATS ECN interacts with NSX in substantially the same manner that it interacts with the Nasdaq Market Center.
On the basis of the foregoing, the Division hereby takes the position that BATS ECN would continue to be an ECN and would be in compliance with the ECN Display Alternative with respect to: (1) exchange-traded securities for which a linkage between BATS ECN, CAES or CAMS, ITS, and CQS is operational; or (2) Nasdaq securities for which a linkage between BATS ECN and the Nasdaq Market Center or NSX is operational, and in each case BATS ECN provides access to certain orders pursuant to the terms of the ECN Display Alternative.8 The Division would not recommend that the Commission take enforcement action against an OTC market maker or exchange market maker that is a subscriber to BATS ECN if such market maker enters orders into BATS ECN without modifying its public quotation in compliance with the Quote Rule and the Limit Order Display Rule, as applicable.
The Division conditions its position on the continuing accuracy of the representations made in from the May 2006 Request Letter and the February 2006 Request Letter. The Division further conditions its position on compliance by BATS with all applicable Commission and self-regulatory organization 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 ECN may require a different response. The Division may request additional representations from you regarding the operation of BATS ECN. 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 Act9 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.
Compliance with the ECN Display Alternative depends in many respects on the practical effect of the operational conditions established by BATS ECN and the manner of operation of the linkages BATS ECN maintains. Therefore, the Division is limiting the effectiveness of this no-action position until June 28, 2006.
Robert L.D. Colby
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