February 17, 2006
Mr. David Cummings
Chief Executive Officer
BATS Trading, Inc.
320 Armour Road, Suite 200
North Kansas City, MO 64116
BATS Trading, Inc.
No-Action Relief Request
Dear Mr. Cummings:
In your letter dated February 15, 2006, you state that BATS Trading, Inc. ("BATS") will operate a system known as the BATS ECN and request that the Division of Market Regulation (the "Division") of the Securities and Exchange Commission ("Commission") advise BATS that:
- BATS ECN will be an electronic communications network ("ECN") as that term is defined in Rule 600(b)(23) of Regulation NMS1 under the Securities Exchange Act of 1934 ("Exchange Act");
- BATS would be in compliance with the requirements of the ECN Display Alternative as described in paragraph (b)(5)(ii) of Rule 602 of Regulation NMS ("Quote Rule")2 with respect to exchange-traded securities3 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;
- BATS would be in compliance with the requirements of the ECN Display Alternative with respect to Nasdaq securities4 for which a linkage between BATS ECN and the Nasdaq Market Center is operational; and
- Upon compliance by BATS with the ECN Display Alternative, the Division would not recommend that the Commission take enforcement action against OTC market makers5 or exchange market makers6 who are subscribers to BATS ECN if such market makers enter orders into BATS ECN without modifying their public quotations in compliance with the Quote Rule and Rule 604 of Regulation NMS ("Limit Order Display Rule"),7 as applicable.
The Division hereby grants your request. Accordingly, the Division takes the position that BATS ECN will be an ECN as defined in Rule 600(b)(23) of Regulation NMS. The Division also believes that BATS will be in compliance with the requirements applicable to the ECN Display Alternative with respect to (i) exchange-traded securities for which a linkage between BATS ECN, ITS/CAES, and CQS is operational; or (ii) with respect to 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. The Division will not recommend that the Commission take enforcement action against OTC market makers or exchange market makers, who are subscribers to BATS ECN, if such market makers enter orders into BATS ECN without modifying their public quotations in compliance with the Quote Rule and the Limit Order Display Rule, as applicable. In taking this position, the Division relied on the following representations made in your letter of February 15, 2006:
- BATS is registered with the Commission as a broker-dealer and is a member of the National Association of Securities Dealers, Inc. ("NASD").
- BATS operates as an alternative trading system ("ATS") pursuant to Regulation ATS8 under the Exchange Act.
- BATS ECN will be an ECN within the meaning of Rule 600(b)(23) of Regulation NMS and will allow subscribers, including OTC market makers and exchange market makers, electronically to enter orders in exchange-traded and Nasdaq securities for dissemination to other subscribers, who can then effect executions, in whole or in part, against those orders.
- BATS will: (i) transmit to the Nasdaq Market Center for public display by the Nasdaq Market Center the best priced orders of all orders entered by OTC market makers or exchange market makers for securities in which they make markets or act as specialist; and (ii) provide to any broker or dealer access to such orders displayed that is functionally equivalent to the access available generally to OTC market maker quotations provided pursuant to the rules of the Nasdaq Market Center. All subscriber orders at the top of the BATS Order Book (i.e., best bid/ask by time priority) will be transmitted to the Nasdaq Market Center for display.9
- Likewise, with respect to exchange-traded securities, BATS has established the necessary linkage to ITS/CAES in order to satisfy the dissemination and equivalent access requirements of the ECN Display Alternative. Registration as an ITS/CAES Market Maker10 and as a CQS market maker,11 in conjunction with the linkage to ITS/CAES, will enable BATS to widely disseminate orders entered into BATS ECN.12 BATS will provide to ITS/CAES the best prices and sizes that subscribers enter into BATS ECN with respect to exchange-traded securities for inclusion in the public quotation data made available by CQS. Similarly, the linkage to ITS/CAES will assure that non-subscriber broker-dealers will have access to orders entered into BATS in a manner that is functionally equivalent to the access available generally to market maker quotations in exchange-traded securities pursuant to Nasdaq Market Center and NASD rules.
- Direct subscriber access to BATS ECN is available at a dedicated IP address configured by BATS that assures that only authorized subscribers gain access to BATS ECN. Upon receipt, BATS ECN will respond to non-subscriber orders no slower than it will respond to subscriber orders. Accordingly, BATS ECN's response time to subscriber orders and non-subscriber orders will be nearly equal and normally will occur within less than a second of receipt. BATS will charge non-subscriber broker-dealers a fee at a rate not exceeding 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 may be authorized pursuant to Regulation NMS from time to time, plus any fee charged to BATS by any securities exchange or association (e.g., transaction fees).13
- BATS ECN has sufficient capacity to handle the volume of data reasonably projected to be entered into BATS ECN. Moreover, BATS will conduct 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.14
The Division conditions its position on the continuing accuracy of these representations and 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 Act15 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 linkage between BATS ECN, ITS/CAES, and CQS or between BATS ECN and the Nasdaq Market Center. Therefore, the Division is limiting the effectiveness of this no-action position until June 28, 2006.
Robert L.D. Colby