SECURITIES AND EXCHANGE COMMISSION
(Release No. 34-57322; File No. 10-182)
February 13, 2008
Form 1 Application and Exhibits
* This exhibit index summarizes the exhibits required by the Form 1 Application for Registration as a National Securities Exchange.
A copy of the constitution, articles of incorporation or association with all subsequent amendments, and of existing by-laws or corresponding rules or instruments, whatever the name, of the applicant.
BATS Exchange, Inc. (“BATS Exchange” or the “Exchange”) is applying to register as a national securities exchange pursuant to Section 6(a) of the Securities Exchange Act of 1934. The following materials are submitted in response to this Exhibit A:
A copy of all written rulings, settled practices having the effect of rules, and interpretations of the Governing Board or other committee of the applicant in respect of any provisions of the constitution, by-laws, rules, or trading practices of the applicant which are not included in Exhibit A.
For each subsidiary or affiliate of the applicant, and for any entity with whom the applicant has a contractual or other agreement relating to the operation of an electronic trading system to be used to effect transactions on the exchange ("System"), provide the following information:
Response: Please see below responses for the following entities:
A. BATS Trading, Inc.
B. BATS Holdings, Inc.
* To be appointed at next meeting of the Board of Directors of BATS Holdings.
For each subsidiary or affiliate of the exchange, provide unconsolidated financial statements for the latest fiscal year. Such financial statements shall consist, at a minimum, of a balance sheet and an income statement with such footnotes and other disclosures as are necessary to avoid rendering the financial statements misleading. If any affiliate or subsidiary is required by another Commission rule to submit annual financial statements, a statement to that effect with a citation to the other Commission rule, may be provided in lieu of the financial statements required here.
Exhibit E: Proposed Operation of BATS Exchange
Describe the manner of operation of the System. This description should include the following:
BATS Exchange, Inc. (“Exchange”) proposes to register as a national securities exchange under Section 6 of the Securities Exchange Act of 1934, as amended (“Exchange Act”). The Exchange will be owned by its parent company, BATS Holdings, Inc. (“BATS Holdings”), which will elect all directors of the Board of Directors of the Exchange, except for those directors approved by members pursuant to Article III, Section 4 of the By-Laws of the Exchange. The members of the Exchange (“Members”) will consist of those broker-dealers admitted to membership and entitled to enter orders in, and receive executions through, the Exchange’s order book (as defined below) or otherwise. Members will be subject to the rules of the Exchange, and will have representation on the Exchange’s Board of Directors and committees. Members who are not also shareholders of BATS Holdings shall not have any ownership interest in the Exchange.
Once registered, the Exchange will operate a fully automated electronic book (“order book”) for orders to buy or sell securities (“orders”) with a continuous, automated matching function. Liquidity will be derived from orders to buy and orders to sell submitted to the Exchange electronically by its Members from remote locations. There will be no Exchange trading floor, nor will there be Exchange specialists or market makers with affirmative and negative market making obligations.
Membership in the Exchange will be open to any broker-dealer registered under Section 15(b) of the Exchange Act that meets the standards for membership set forth in proposed Exchange Rules 2.3 through 2.5. There will only be one class of membership, with all Members enjoying the same rights and privileges on the Exchange. Members will be subject to fees for orders executed on the Exchange as set forth in the Rules of the Exchange or as may otherwise be determined by the Board of Directors of the Exchange from time-to-time. Exchange memberships will not be transferable except in the event of a change in control of a Member, and such transfer will be subject to the written consent of the Exchange, and to any conditions to such transfers imposed by the Exchange. The Exchange currently does not contemplate charging a fee for membership in the Exchange. A more detailed description of the membership criteria is set forth in Chapter II of the Exchange’s proposed rules. See Exhibit B, supra.
This exhibit describes, in summary form, the proposed operation of the Exchange. A more detailed description of the proposed Exchange is set forth in the proposed By-Laws and Rules of the Exchange. See Exhibits A and B to this Application.
B. Access to the Exchange (#1)
Member Access. Members of the Exchange and/or Service Bureaus on behalf of a Member (collectively referred to as “Access Participants” for purposes of this paragraph B) will be permitted to send orders to buy and sell securities listed or traded on the Exchange to the Exchange electronically through the use of a variety of systems. The Exchange will not accept telephone orders.
The Exchange has designed its systems to allow its Members to individually determine the best method for accessing the Exchange. Thus, Members may develop their own customized front-end software using protocols determined by the Exchange, or may use third-party vendors to route orders to the Exchange via a front end or service bureau configuration. Access Participants will be able to access the Exchange remotely through a variety of methods and connections that support a minimum data exchange rate, as may be determined by the Exchange from time-to-time.
Direct access to the Exchange is available to Access Participants at an Internet Protocol (“IP”) address by one or more of the following methods: (i) electronic access at the Exchange’s IP network address by the Access Participant’s own software, via communications that are compliant with the Financial Information Exchange (“FIX”) protocol application programmer interface (“API”) provided by the Exchange; (ii) electronic access at the IP network address maintained by the Exchange by the Access Participant’s own software that is compliant with the API provided by the Exchange; or (iii) other means of access provided from time to time by the Exchange.
Access Participants provide a unique IP address the Exchange for each requested connection, and the Exchange then configures its routers to only allow access from the Access Participant’s IP address to a dedicated IP address on the Exchange’s order handling network. In this way, only authorized Access Participants can gain access to BATS via registered physical IP addresses.
Access Participants will be responsible for having procedures reasonably designed for safeguarding access to the Exchange and for notifying the Exchange upon learning that such safeguards have been compromised. Connectivity to the Exchange will occur through secure telecommunications “ports” or points of entry. Specifically, each Access Participant will be assigned a specific port, or multiple ports, each of which has a unique session identification code provided only to such Access Participant.
Non-Member Access. As necessary, the Exchange will join any plan that other national securities exchanges create or join to the extent such plans have replaced the ITS Plan or the Linkage Plan.1 The Exchange plans to become a participant in the NASDAQ/National Market System/Unlisted Trading Privileges Plan (“Nasdaq-UTP Plan”). The Exchange proposes to discuss with the committee supervising any plan, including the Nasdaq-UTP Plan, how the Exchange might best participate in such Plans. If admitted as a participant in each Plan, other plan participants would be able to send orders to the Exchange in accordance with the terms of the applicable plan (including the Nasdaq-UTP Plan) as they ultimately would be applied to the Exchange.
Non-members also may access the Exchange pursuant to Exchange rules governing “sponsored access” to the Exchange, as described below.
Sponsored Participant Access to the Exchange. The Exchange plans to permit access to the Exchange to entities (“Sponsored Participants”) whose access is authorized in advance by one or more members (“Sponsoring Member”) in accordance with Exchange Rules. The Sponsoring Member must agree to be responsible for all orders entered into on the Exchange by the Sponsored Participant. In addition, Sponsored Participants must agree to comply with all applicable Rules of the Exchange governing the entry, execution, reporting, clearing and settling of orders in securities eligible for trading on the Exchange.
C. Entry and Display of Quotations and Orders in the System (#2)
Entry of Orders on the Exchange. The Exchange will accept the submission of orders by Exchange Members in securities admitted to unlisted trading privileges (“UTP”) on the Exchange. The Exchange will not list securities initially, though it may do so in the future. Accordingly, while this Application, including certain rules included in Exhibit B, contains references to securities listed or trading pursuant to UTP, the reference to securities listed on the Exchange is intended to be read prospectively.
Orders entered into BATS Exchange must be priced and must have a designated size (“limit orders”) or must be orders to buy or sell a stated amount of a security at the national best bid or offer when the order reaches the Exchange (“market orders”). Limit orders and market orders, as defined above, are hereinafter collectively referred to as “orders”.
Orders will be accepted for any such security, whether submitted by a Member on a proprietary or agency basis, in any size up to 999,999 shares. Orders may be submitted in round lots or odd lots. To reduce the possibility of the entry of erroneously large orders, the Exchange will provide Members with the ability to establish parameters as to the maximum number of shares that can be entered on their behalf or on behalf of their clients in any given order.
Members may submit the following orders to the Exchange: IOC; Day; Good ‘til Cancel; Good ‘til Day; Reserve; Odd Lot; Mixed Lot; BATS Only; BATS Post Only; Pegged; Mid-Point Peg; Discretionary; Non-Displayed; Destination Specific; and Intermarket Sweep. Each of these types of orders is described in detail in proposed Exchange Rule 11.5. Members will also be permitted to enter short sales, in accordance with the provisions of Regulation SHO of the Exchange Act. The Exchange will maintain a full audit trail of every order submitted to the Exchange’s System. Members may receive status reports regarding orders submitted to the Exchange or change or cancel an order at any time before that order is executed on the Exchange. Based on Exchange system functionality, a locked or crossed market will not be displayed by the Exchange with respect to orders to buy and orders to sell submitted to the Exchange.
All securities will be traded in decimals on the Exchange. The actual minimum price increment for orders for securities listed or trading pursuant to UTP on the Exchange will be determined from time-to-time by the Board of Directors of the Exchange, consistent with any Commission rules or regulations adopted in this regard.
Display of Orders. All orders submitted to the Exchange will be displayed unless designated otherwise by the Member submitting the order (“non-displayed orders”). Orders submitted to the Exchange for display shall be displayed on an anonymous basis at the price specified by the Member submitting the order. Non-displayed orders will not be displayed to any Member of the Exchange and will not have time priority over displayed orders. In addition, the Exchange intends to become a participant in the Consolidated Quotation Plan (“CQ Plan”) and Nasdaq-UTP Plan and will collect and submit to the relevant plan processor the best buy order and the best sell order displayed on the Exchange in Eligible Securities, as defined in these Plans, in accordance with the terms of the Plans.
Finally, to enhance transparency throughout the market, the Exchange intends to make its order book for any security traded on the Exchange available for viewing by any member of the public through the Exchange’s web site.
D. Order Routing to other Market Centers
Members may enter into agreements to use the routing services of an affiliated broker-dealer of the Exchange, which will enable Members to route to other market centers the unexecuted portions of designated Routable Orders entered on the Exchange. In this capacity, the affiliated broker-dealer will act as an agent of the Member. See Exhibit C and proposed Exchange Rule 2.11 for further details regarding the affiliated router. Members will have no obligation, however, to utilize the order routing functionality provided by the Exchange’s broker-dealer affiliate. Accordingly, Members can select other broker-dealers to provide order-routing functions or use their own internal order-routing systems.
E. Execution, Reporting, Clearance and Settlement Procedures (#3)
Execution of Orders Submitted to Exchange’s order book. Trades will occur when an order to buy and an order to sell match on the Exchange’s order book. An order to buy submitted to the Exchange’s order book will be automatically executed by the Exchange’s order book to the extent that it is priced at an amount that equals or exceeds any order to sell for the same security submitted to the Exchange’s order book. Such order to buy shall be executed at the price of the lowest-priced order to sell having precedence on the Exchange’s order book. All orders are matched according to price-display-time priority. An order to sell submitted to the Exchange’s order book will be automatically executed by the Exchange’s order book to the extent that it is priced at an amount that equals or is less than any order to buy for the same security submitted to the Exchange’s order book. Such order to sell shall be executed at the price of the highest-priced order to buy having precedence on the Exchange’s order book. Proposed Rule 11.8 describes the priority given to orders at the same price. Non-displayed orders will have priority over orders at inferior prices, whether displayed or non-displayed, but will not have priority or time precedence over orders displayed at equal or superior prices. In the event that less than the full size of an order is executed, whether displayed or non-displayed, the unexecuted size of the order will continue to reside on the Exchange’s order book, and if displayed, will be redisplayed at such price. Such partially executed orders retain priority and precedence at the same price.
In executing orders submitted to the Exchange’s order book, the Exchange will not distinguish between orders submitted by Members for their own accounts and orders submitted by Members for their customers. Unlike exchanges that conduct trading via a physical trading floor, all Exchange Members will submit orders to the Exchange from remote locations and have equal access to orders residing on the Exchange. Similarly, because orders on the Exchange will be executed automatically, no Member of the Exchange will have the ability to control the timing of execution (other than to change or cancel an order prior to execution) or otherwise enjoy the type of special order handling advantages that may be available on the physical floor of an exchange. Moreover, as noted above, non-Members will have access to the display of orders on the Exchange’s order book through the Exchange’s web site.
The Exchange will have a policy that will permit it to address those instances in which transactions occurring on the Exchange involve obvious errors (“Clearly Erroneous Policy”). Under the Clearly Erroneous Policy, Members receiving an execution based on the entry of a buy or sell order that clearly was in error – in terms of price, quantity, or identification of the proper symbol for a security – will be permitted to request that the Exchange void or modify the transaction. Designated Exchange officials will review the transaction to determine whether, in fact, the transaction was clearly erroneous. If such officials determine that a trade is clearly erroneous, they shall void or modify the terms of the trade to achieve an equitable rectification of the error. A Member may appeal the initial decision by Exchange officials to the Clearly Erroneous Panel, which will be comprised of the CRO, or a designee of the CRO, and representatives from two (2) Members. An officer of the Exchange also will have the authority, on his or her own motion, to review and declare null and void, or otherwise modify the terms of, transactions arising out of the use of the Exchange’s order book during a period of disruption or malfunction, or in the event of extraordinary market conditions or other circumstances in which the nullification or modification of transactions may be necessary for the maintenance of a fair and orderly market or the protection of investors and the public interest.
Trade Reporting. The Exchange intends to become a participant in the Consolidated Tape Association Plan (“CTA Plan”) and will report trades in Eligible Securities (as defined in the CTA Plan) pursuant to the terms of the plan. Similarly, the Exchange expects to join the Nasdaq-UTP Plan and will report trades in Nasdaq securities traded on the Exchange that have been admitted to unlisted traded privileges pursuant to the provisions of that plan.
Clearance and Settlement of Exchange Trades. The Exchange will require each Member to be a member of a registered clearing agency or clear its transactions through a Member that is a member of a registered clearing agency.
F. Exchange Fees (#4)
Fees Generally. The Exchange currently does not propose to charge a fee for Exchange membership. The Exchange may, in the future, however, prescribe such reasonable dues, fees, and assessments or other charges as it may deem appropriate. Similarly, where there is no existing, matching, contra-side buy or sell order residing on the Exchange, Members entering orders on the Exchange’s order book will not be assessed a fee. Instead, Members entering orders under such circumstances will receive a credit from the Exchange for orders2 entered and later executed on the Exchange. There will not be a fee charged for changing or canceling an order prior to execution of such order. Exchange Members submitting buy or sell orders2 that execute against existing, matching, contra-side orders already residing on the Exchange will be charged a per share fee, payable to the Exchange on a monthly basis. The Exchange may also charge a connectivity fee based on the number of ports utilized by the Member. Exchange Members will be solely responsible for all telecommunications costs and all other expenses incurred in linking to, and maintaining links to, the Exchange. The Exchange may determine to revise or impose different fees upon its Members from time-to-time.
G. Procedures for Ensuring Compliance with Exchange Usage Guidelines (#5)
The Exchange System contains embedded Member order entry and trade guidelines. All data representing a Member’s order must comply with these guidelines. Members cannot override these embedded guidelines. With respect to technical standards, prior to allowing a new Member to begin trading, the Exchange and the Member will thoroughly test the Member’s connectivity. In addition, the Member may enter orders in test securities to ensure compatibility with the Exchange’s system protocol. A Member may begin trading only after the Exchange is satisfied that both the Member’s hardware and software meet the Exchange’s standards.
Members also must agree to maintain an adequate connection to the Exchange as defined from time-to-time by the Exchange that includes a connection of sufficient speed and equipment of minimum quality.
H. Hours of Operation and Proposed Commencement of the Exchange (#6)
The Exchange proposes to operate Monday to Friday from 9:00 a.m. Eastern Time to 4:00 p.m. Eastern Time, or during any other day or time approved by the Board of Directors of the Exchange.
The Exchange proposes to commence operations upon the Commission’s approval of its Form 1 Application for Registration as a National Securities Exchange.
I. Exchange Users Manual (#7)
As discussed above, Members will be provided with the Exchange’s technical specifications, which will enable them to develop or purchase their own, customized front-end software for interfacing with the Exchange. Members also may use third-party vendors to route orders to the Exchange via a front end or service bureau configuration. At a time closer to its initial operation as an exchange, the Exchange will file a draft Users Manual that will be provided to all Members and prospective Members of the Exchange. The Users Manual will describe the Exchange’s technical specifications and will provide Members, prospective Members and other users of the Exchange with additional information that the Exchange believes will be useful to such persons for trading on the Exchange.
J. Possession of Funds or Securities (#8)
The Exchange will not hold funds or securities of its Members.
|Name:||Title:||Date of Commencement”|
|Joseph Ratterman||Chief Executive Officer, President||[UPON APPROVAL]|
|Christopher Isaacson||Executive Vice President, Chief Operating Officer, Treasurer||[UPON APPROVAL]|
|Tamara Tucker||Chief Regulatory Officer, Secretary||[UPON APPROVAL]|
|Phillip Ratterman||Vice President Software Development||[UPON APPROVAL]|
|Kenneth Conklin III||Senior Vice President, Sales & Marketing||[UPON APPROVAL]|
|Charles R. Williams||Vice President, Marketing & Communications||[UPON APPROVAL]|
On a temporary basis, Joseph Ratterman has been appointed as the sole director of the Exchange entity. Upon the approval of BATS Exchange’s Form 1 Application for Registration as a National Securities Exchange by the Commission, BATS Holdings, Inc. (“BATS Holdings”), as the sole owner of the common stock in the Exchange, will elect directors in accordance with the Certificate of Incorporation and By-Laws of the Exchange and of BATS Holdings. Directors of the Exchange will serve staggered, three-year terms. The initial directors of the Exchange will likely be the persons listed below:
|Chairman:||[TO BE PROVIDED]|
|Member Representative:||[TO BE PROVIDED]|
|Member Representative:||[TO BE PROVIDED]|
|Industry:||[TO BE PROVIDED]|
|Industry:||[TO BE PROVIDED]|
|Non-Industry (Independent):||[TO BE PROVIDED]|
|Non-Industry:||[TO BE PROVIDED]|
|Non-Industry:||[TO BE PROVIDED]|
|Non-Industry:||[TO BE PROVIDED]|
|Non-Industry:||[TO BE PROVIDED]|
The committees of the Board shall consist of a Compensation Committee, an Audit Committee, a Regulatory Oversight Committee, an Appeals Committee, and such other committees as may be from time to time established by the Board. Upon the approval of BATS Exchange’s Form 1 Application for Registration as a National Securities Exchange by the Commission, and after the election of the Board, the Chairman, with the approval of the Board, shall appoint persons to sit on the standing committees of the Board, consistent with the Exchange’s By-Laws.
This Exhibit is applicable only to exchanges that have one or more owners, shareholders, or partners that are not also members of the exchange. If the exchange is a corporation, please provide a list of each shareholder that directly owns 5% or more of a class of a voting security of the applicant. If the exchange is a partnership, please provide a list of all general partners and those limited and special partners that have the right to receive upon dissolution, or have contributed, 5% or more of the partnership’s capital. For each of the persons listed in the Exhibit K, please provide the following:
BATS Exchange will be wholly-owned by BATS Holdings, Inc. (“BATS Holdings”). BATS Holdings will exercise “control” over the Exchange, as that term is defined in the Form 1 instructions. BATS Holdings will acquire its interest in the Exchange closer to the time of anticipated operation of the Exchange.
Describe the exchange’s criteria for membership in the exchange. Describe conditions under which members may be subject to suspension or termination with regard to access to the exchange. Describe any procedures that will be involved in the suspension or termination of a member.
Membership on the Exchange will be open to any registered broker or dealer or any natural person associated with a registered broker or dealer. Any person may become an associated person of a Member of the Exchange. Exchange Members will be entitled to enter and view orders to buy and sell securities listed or admitted to unlisted trading privileges on the Exchange in accordance with Exchange Rules.
To become a Member of the Exchange, or continue as a Member of the Exchange, a person: (1) if other than a natural person, must be a registered broker or dealer, (2) if a natural person, must be either a registered broker or dealer or associated with a registered broker or dealer, (3) must be a member of another self-regulatory organization, (4) must either be a member of a registered clearing agency qualified by the Exchange or clear transactions through a member of such a qualified clearing agency, (5) must not be subject to a statutory disqualification (except pursuant to an order of the Securities and Exchange Commission permitting such membership), (6) must meet the standards of training, experience and competence as the exchange may prescribe, (7) must comply with Rule 15c3-1 of the Securities Exchange Act of 1934, as amended (“Exchange Act”), and other financial responsibility and operational capability requirements that may be established by the Exchange, (8) must be able to comply with the rules of the Exchange, including rules related to the maintenance of appropriate books and records, (9) must be able to demonstrate adequate systems capability, capacity, integrity and security, (10) must not be subject to unsatisfied material liens, judgments, and claims, (11) must not have been subject to any bankruptcy, receivership or arrangement for the benefit of creditors within a three year period, (12) must not have established a pattern of failure to pay just debts or defaulted, without reasonable explanation, on an obligation to another self-regulatory organization or member thereof, and (13) must not have engaged in acts or practices inconsistent with just and equitable principles of trade. Members may be suspended for failure to pay Exchange dues, fees and assessments, or if they have been expelled or suspended from membership, or association in another self-regulatory organization.
Applicants for membership on the Exchange will be required to complete a membership application agreeing, among other things, to comply with the By-Laws, Rules and interpretations of the Exchange. Existing members of SROs that are also current or former subscribers to the electronic communications network operated by BATS Trading, Inc. will, for a short time after the commencement of trading on the Exchange, be permitted to submit a short-form waive-in membership application form. Membership applications will be reviewed by the Exchange staff. Denials of membership by the staff may be appealed pursuant to the Adverse Action procedures set forth in Chapter X of the Exchange’s proposed Rules.
The Exchange may revoke the membership of a Member or an associated person whenever it has reason to believe that such Member fails to meet the membership qualification requirements of the Exchange.
Persons subject to suspension or termination with regard to access to the Exchange will be afforded an opportunity to be heard under Exchange Rules governing adverse actions. Persons applying for a hearing pursuant to these rules will be required to do so within 15 business days after being notified of such action. Applicants are permitted to submit any additional documents, statements, arguments or other materials in support of their application. Hearings will be held by the Appeals Committee, which will render its decision on the matter in writing. Decisions of the Appeals Committee will be subject to review by the Board of Directors of the Exchange either on its own motion or upon the written request of an applicant. The Board may affirm, reverse or modify, in whole or in part, the decision of the Appeals Committee.
A more detailed description of the Exchange’s Adverse Actions procedure is set forth in Chapter X of the Exchange’s proposed rules.
It is the Exchange’s intention to enter into a regulatory services agreement with another self-regulatory organization, such as the Financial Industry Regulatory Authority (“FINRA”), to conduct various regulatory services on behalf of the Exchange. In addition, it is the Exchange’s intention to file with the Commission a plan setting forth the allocation of certain regulatory responsibilities between itself and one or more other self-regulatory organization pursuant to Rule 17d-2 of the Exchange Act.
Provide an alphabetical list of all members, participants, subscribers or other users, including the following information:
BATS Exchange has not commenced operations and currently has no Members.
BATS Exchange has not commenced operations and, therefore, it has no securities that are listed or traded pursuant to unlisted trading privileges. As explained in Exhibit E, the Exchange will not list securities initially, though it may do so in the future.
Upon the effectiveness of its Form 1 Application for Registration as a National Securities Exchange, the Exchange intends to allow trading of Nasdaq National Market and Nasdaq Capital Market securities (both “Nasdaq securities” as defined in Rule 600(b)(41) of Regulation NMS) through BATS Exchange. BATS Exchange also plans to allow trading of exchange-traded securities, as defined in Rule 600(b)(25) of Regulation NMS, including exchange-traded funds or ETFs, through BATS Exchange. All securities that BATS Exchange will trade through the BATS Exchange System are “NMS stocks”, as such term is defined in Rule 600(b)(47) of Regulation NMS, and will be, at least initially, admitted pursuant to unlisted trading privileges.
|Home | Previous Page||