Subscriber Manual July 22, 2008

Transcription

1 Subscriber Manual July 22, 2008

2 Introduction This document explains the policies, procedures, and technology used by BATS. Information contained in this document is subject to change at any time. For the latest updates, please refer to our web site Our Mission To create a better alternative trading system. BATS Trading, Inc. was incorporated in June 2005 in response to the rapid consolidation in the ECN space. We believe competition drives innovation, and subscribers should have a choice between multiple competing electronic markets. Our second-generation trading platform was designed from the ground up to handle high speed, high volume, anonymous, reliable, algorithmic trading that has become increasingly common in the equity markets today. We are rapidly working to enhance our product functionality. We want to earn your business. Become a Subscriber Subscribers must be US broker-dealers, registered with a Self Regulatory Organization (SRO), and be able to clear trades. The following documents are available for subscribers: BATS Subscriber Agreement contract between BATS and subscribers BATS Subscriber Information Form contact, connectivity and clearing information about subscribers BATS Subscriber Manual general policies and procedures on BATS (this document) BATS Fee Schedule access fees and liquidity rebates The following technical specifications are also available to help subscribers get connected: BATS Connectivity Manual network connectivity options. BATS FIX Specification orders using FIX format. BATS PITCH Specification BATS direct market data feed. BATS DROP Specification execution information. Please contact BATS at (816) for more information about becoming a subscriber. BATS Trading, Inc Page 2 of 11

3 How BATS Works BATS second-generation trading platform was designed from the ground up to handle high-speed, high-volume, anonymous, reliable, algorithmic trading that has become increasingly common in the equity markets today. Subscribers connect to the system via the BATS FIX Order Handler using the industry standard FIX protocol, with BATS specific extensions. The BATS FIX Order Handler validates incoming orders, converts them to an internal proprietary format, and forwards them to the appropriate matching unit. At the core of the system are several Matching Units. Each matching unit handles a bin of symbols, which can be reallocated to balance the load across the system. The matching unit compares the limit price of an incoming order with the price of resting limit orders on the BATS Order Book and the price of other markets displayed quotes. If the order is immediately marketable against the BATS Order Book, and the BATS quote is equal to or better than the consolidated quote, an immediate match is made and communicated back to the subscribers. If another market is displaying a better quote, the order is forwarded to the other market, directly or indirectly, to attempt to fill the order at the best available price. Resting orders are matched according to the following priorities: Price the displayed limit price of the order Display displayed orders have priority over non-displayed (reserve) orders Time the time the order was received by BATS BATS makes its top of book quotes available via the National Stock Exchange or the International Stock Exchange depending on the symbol being quoted. Refer to to view the quoting venue for each symbol. Full depth of book market data is available via the BATS PITCH protocol. Unlike some competitors, BATS does not charge subscribers per terminal to use its market data internally. Subscribers or their clearing firms may also receive copies of their executions via the BATS DROP protocol. This protocol works either in real-time or in a batch mode. Technology The BATS trading platform is housed in a world-class data center in Weehawken, New Jersey maintained by SAVVIS, Inc. The same building is used to host the NYSE Arca Exchange. BATS maintains a copy of its trading platform at its disaster recovery site, a data center in Nutley, New Jersey maintained by BT Radianz. Both data centers provide a high level of security, redundant power supplies including an on-site backup generator, and reliable cooling. Datacenter personnel are available 24/7 to maintain and service the system. The BATS trading platform is distributed across several Linux blade servers to maximize throughput and minimize bottlenecks. More blades can be added easily to expand system capacity. Fast, reliable data storage is provided by a Storage Area Network (SAN) provided by Hitachi. BATS Trading, Inc Page 3 of 11

4 Order Types BATS accepts limit orders and market orders. On BATS, market buy orders are defined as an IOC bid at a price 10 cents or 1% above the consolidated best offer, whichever is greater, at the time of order execution. Conversely, market sell orders are defined as an IOC offer at a price 10 cents or 1% below the consolidated best bid, whichever is lower, at the time of order execution. If the consolidated quote is unavailable, market orders are rejected. Orders are limited to a maximum of 999,999 shares. Refer to the BATS FIX Specification for more detailed descriptions of how order types are implemented. Minimum Trading Increment Most stocks trade in increments of $0.01. Refer to for a list of stocks eligible for trading in sub-penny increments of $ Orders that are priced in increments finer than the minimum trading increment are rejected. Time in Force Values IOC immediate-or-cancel DAY available for trading during pre-opening, core, and extended sessions GTD expires at the earlier of specified Expire Time or end of the extended trading day All remaining orders (including GTC orders) expire at the end of the BATS extended trading session. Routing Instructions By default, BATS routes orders to other trading destinations as IOC limit orders when the liquidity on the BATS order book has been exhausted at a given price level that is displayed in the consolidated quote feed. BATS is directly connected to Inet. BATS accesses other market centers indirectly by allowing the market to which it is directly connected to outbound orders to the remaining markets when necessary. BATS algorithms may determine which other market centers to route to based on economics, the order handling statistics of the other markets, or other factors. BATS offers BATS Only orders which are not routed to other markets. BATS also offers Add Liquidity Only orders which will only add liquidity, never removing liquidity from the BATS order book (these orders are also not routed). Non-displayed Orders BATS allows non-displayed (hidden) orders. Displayed orders receive highest price/time priority. Non-displayed orders receive lowest price/time priority. Reserve and Discretionary Orders Reserve quantities of an order are filled only after displayed and hidden orders are filled at a given price point. With this order type a customer can set the amount of the order to be displayed and the amount of the order to keep in reserve and how many shares are to be reloaded after the displayed portion is filled with each execution. The discretionary portion of an order is considered for execution only after all displayed orders have been filled at a given price point. Discretionary orders allow customers to assign a maximum amount of discretion that will be applied to an order from it s original entry / limit price. These orders are displayed at their original limit price only. BATS Trading, Inc Page 4 of 11

5 Crossing the Market Orders that would cross the consolidated market are slid or rejected depending upon the request of the subscriber. Price Sliding Reg. NMS requires market centers to have rules reasonably designed to avoid a pattern or practice of displaying a quote which would lock or cross the consolidated quote. BATS Price Sliding allows subscribers to enter orders on the BATS book which would lock or cross the NBBO, as long as the order would not lock the other orders on the BATS limit order book (visible or hidden). Without Price Sliding, algorithmic traders would likely need to retry orders multiple times in rapid succession in order to attempt to get on the BATS book when the consolidated NBBO moves, putting needless load on the system. BATS Price Sliding allows the more aggressive orders to reside in the BATS matching engine, even when their display price must be constrained by the NBBO. BATS Price Sliding is most likely to occur with non-routable and BATS Post Only orders. By default, orders route to away market centers when the away market center displays a better quote in the consolidated NBBO than is available on the BATS order book. BATS offers two forms sliding, Display Price Sliding and Active Price Sliding. Subscribers may disable BATS Price Sliding by setting FIX tag 9479=R ( DisplayIndicator ) on their orders, or changing their default port setting by calling the BATS Trade Desk. Option 1 - Display Price Sliding: BATS Display Price Sliding will permanently re-price orders that cross the NBBO on entry to work at the locking price. The display price of the order is temporarily slid to a less aggressive level in order to avoid putting out a quote which would lock the consolidated NBBO. Regular incoming orders receive price improvement relative to the NBBO when they match against the slid order at a price more aggressive than its display price. When the consolidated NBBO widens, the display price is automatically unslid to re-display the order at the previous locking price. The new "unslid" price is reflected both in our PITCH feed and in our quote at NSX or ISE for inclusion in the consolidated NBBO. Display Price Sliding is the default setting for BATS FIX ports. Upon subscriber request, the permanent working price and initial display price can be reflected back in the FIX acknowledgement sent to subscribers in FIX tags 9690 ( Working Price ) and 9691 ("Display Price"). Example of BATS Display Price Sliding: NBBO: 10.00X10.01 BATS: 10.00X ) Buy BATS-Only order at ) Order is re-priced and ranked and displayed down to (10.01 would lock the NBBO) 3) NBBO goes to 10.00X ) Order is re-displayed at using its existing priority BATS Trading, Inc Page 5 of 11

6 5) NBBO goes to 10.01X ) Order remains unchanged (it s only allowed to unslide once after entry) Note: Order will always execute at regardless of its display price at the time Option 2 - Active Price Sliding: Both the display price and working price of the order are temporarily "slid" to avoid locking or crossing the NBBO. Unlike Display Price Sliding, with Active Price Sliding, the display price and working price are always the same. When the consolidated NBBO widens, both the display price and working price are automatically unslid to redisplay the order at the previous locking price. The new "unslid" price is reflected both in our PITCH feed and in our quote at NSX or ISE for inclusion in the consolidated NBBO. As with Display Price Sliding the order will never be "unslid" past the price that would have locked the NBBO at original time of entry. Subscribers may enable Active Price Sliding by setting FIX tag 9479=D ( DisplayIndicator ) on their orders, or changing their default port setting by calling the BATS Trade Desk. Upon subscriber request, the initial working and display price can be reflected back in the FIX acknowledgement sent to subscribers in FIX tags 9690 ( Working Price ) and 9691 ("Display Price"). Example of BATS Active Price Sliding: NBBO: 10.00X10.01 BATS: 10.00X ) Buy BATS-Only order at ) Order is re-priced and displayed at (10.01 would lock the NBBO) 3) NBBO goes to 10.00X ) Order is re-priced (new priority) and displayed at ) NBBO goes to 10.01X ) Order remains unchanged (it s only allowed to re-price once after entry) Pegged Orders BATS allows orders to peg to the NBBO in four ways: 1. Primary - pegs to the same side of the NBBO as the order 2. Market - pegs to the opposite side of the NBBO from the order 3. Midpoint - pegs to the midpoint of the NBBO 4. Alternate Midpoint - pegs to the less aggressive of the midpoint of the NBBO or 1 tick inside the same side of the NBBO as the order All pegged orders must be hidden. Primary and Market pegs may include a non-aggressive offset. Midpoint pegs may not include an offset, and may result in executions at half-penny increments. Peg prices will be temporarily clipped as necessary to avoid crossing the market or resting at a price that would create a short sale test reject. All pegged orders are ranked at a lower priority than non-pegged orders. Pegging may be used in conjunction with reserve and discretion. Pegged orders are not routable and therefore must be BATS Only or Add Liquidity Only. Midpoint peg orders have a lower priority than other peg orders ranked at the same price. BATS Trading, Inc Page 6 of 11

7 Throttles No guarantee is made about system performance, especially during periods of high volatility and order traffic. However, the BATS system was designed to handle at least 500 orders per second, per port, while providing acceptable order acknowledgement times. Subscribers planning to send orders at a higher rate than 500 orders per second should make arrangements to connect to multiple ports. Connectivity Choices Subscribers are responsible for choosing their telecommunications provider and arranging for connections to the primary BATS datacenter in Weehawken, New Jersey and the disaster recovery datacenter in Nutley, New Jersey. Subscribers are strongly encouraged to establish connectivity to both data centers to minimize service disruption in the event of an issue at either data center. BATS supports the following connectivity methods: Cross-Connect: Subscribers that are co-located in either datacenter may request an in-house cross-connect from the subscriber s Point of Presence (PoP) to BATS. Extranet Provider: BATS is currently on-network with SAVVIS, BT Radianz, TNSi, Yipes, and SFTI. VPN: Subscribers may connect via a Virtual Private Network (VPN) over the Internet, utilizing the IP Security Protocol (IPSec). VPN connectivity is also available for certification testing. PITCH and FAST PITCH market data are NOT available via VPN. Point-to-Point: Subscribers may connect using a point-to-point connection using leased lines or other network methods (e.g MetroE, T-3). For more detailed information and instructions on how to connect to the BATS ECN, please refer to the BATS Connectivity Manual. Bandwidth Requirements PITCH and FAST PITCH Market Data Feeds BATS recommends that subscribers allocate at least 25 Mbps per uncompressed PITCH connection and 10 Mbps per FAST PITCH connection. During spikes in quote updates, subscribers using less than the recommended bandwidth will experience queuing of their market data. Subscribers using the same bandwidth to both receive quotes and transmit orders should also expect their orders to be slightly delayed. Many subscribers will find these delays unacceptable and may wish to upgrade their bandwidth to reduce these serialization delays. The table below shows the bandwidth statistics for both the PITCH and FAST PITCH market data feeds for the busiest trading day in the first quarter of 2008 (January 23 rd, 2008). The table shows the bandwidth peaks for 1, 5, 10, 30, and 60-second intervals. The statistics include 11 bytes for TCP/IP overhead per packet and do not include the data link layer overhead. Interval Seconds Time of Peak Messages per Second PITCH Peak Mbps FAST PITCH Peak Mbps # times >= 90 percent 1 15:35:18 73, :37:33 51, :02:40 46, :02:36 41, :02:09 38, BATS Trading, Inc Page 7 of 11

8 BATS FAST PITCH can achieve up to 73% compression on the BATS PITCH market data stream. For the full details on FAST PITCH, see As the volume of trades on the BATS ECN continues to increase, the PITCH market data feed bandwidth requirement will also continue to grow. Subscribers will be notified of PITCH bandwidth requirements as the requirements change. FIX Order Entry Bandwidth recommended for submitting orders via FIX depends on expected subscriber order volume. If a subscriber intends to submit orders to BATS and will not receive the PITCH quote feed, then it is possible that the subscriber can connect with less than a T1 equivalent connection. The following table shows the maximum number of inbound orders (and/or cancels) per second that can be handled, with no buffering or delay, with different capacity connections: Example Connection Rates Order Protocol 256Kb 512Kb 1.5Mb FIX Capacity 75 / second 150 / second 450 / second Clearing and Settlement BATS Trading, Inc. acts as an introducing broker, and provides through its clearing firm, Wedbush Morgan Securities (Wedbush), a choice of the following clearing and settlement options: Qualified Special Representative (QSR) Clearing Correspondent Clearing Subscribers need to work with their clearing firm and BATS Subscriber Services to fill out the necessary paperwork and get approval for the method of clearing and settlement they will be using. Qualified Special Representative (QSR) For QSR clearing, subscriber s Clearing firm would authorize Wedbush to act as its Qualified Special Representative (QSR). This allows Wedbush to lock in trades and submit transactions directly to the NSCC for clearance. Qualified Special Representatives are granted authorization by the contra clearing firm to submit trade information to NSCC on behalf of the contra clearing firm, and the contra clearing firm agrees to accept responsibility for the trades submitted. NSCC receives this information and reports it on the NSCC OTC Contract Sheets. Both Wedbush and the subscriber s clearing firm then use these Contract Sheets to compare and reconcile all transactions effected on BATS. When clearing QSR Trades, the subscriber s clearing broker authorizes Wedbush to bypass NASDAQ s ACT system and submit locked-in transactions directly to the NSCC for clearing. The subscriber s clearing broker may request real-time drop copies of the trades to enter into whatever risk management system it uses. In order to clear via QSR, the subscriber s clearing firm must sign and return the required QSR agreements (Attachment 1) to BATS. After Wedbush receives the executed forms from BATS, Wedbush will submit the documentation to NSCC for processing. By submitting transactions directly to the NSCC for clearing, the process is simplified and the potential for trade breaks or discrepancies is greatly reduced. When using the QSR clearing method, subscribers can elect to have BATS compress their trades or to have their trades submitted individually for clearing. BATS Trading, Inc Page 8 of 11

9 Correspondent Clearing For Correspondent Clearing, subscriber s Clearing firm would authorize Wedbush to act as its Special Representative. This allows Wedbush to submit transactions directly to the NSCC for clearance. Wedbush is granted authorization by the contra clearing firm to submit trade information to NSCC on behalf of the contra clearing firm, and the contra clearing firm agrees to accept responsibility for the trades submitted. NSCC receives this information and reports it on the NSCC Correspondent Clearing Sheets. Both Wedbush and the subscriber s clearing firm then use the Correspondent Clearing Sheets to compare and reconcile all transactions effected on BATS. When clearing via Correspondent Clearing, the subscriber s clearing broker authorizes Wedbush to bypass NASDAQ s ACT system and submit flip transactions directly to the NSCC for clearing. The subscriber s clearing broker may request real-time drop copies of the trades to enter into whatever risk management system it uses. In order to clear via Correspondent Clearing, the subscriber s clearing firm must sign and return the required Correspondent Clearing Agreements. Wedbush will execute an Application for Status as a Special Representative (Form 9-A); and the contra clearing firm will execute a Special Representative Consent (Form 9-B). After Wedbush receives the executed forms from BATS, Wedbush will submit the documentation to NSCC for processing. By submitting transactions directly to the NSCC for clearing, the process is simplified and the potential for trade breaks or discrepancies is greatly reduced. When using the Correspondent clearing method, subscribers can elect to have BATS compress their trades or to have their trades submitted individually for clearing. Trading Hours Pre-Opening Session Core Trading Session 8:00 am to 9:30 am Eastern Time 9:30 am to 4:00 pm Eastern Time Holiday Schedule BATS will be closed in observance of the following holidays: 2008 New Year s Day January 1 Martin Luther King, Jr. Day January 21 President s Day February 18 Good Friday March 21 Memorial Day May 26 Independence Day July 4 Labor Day September 1 Thanksgiving Day November 27 Christmas December 25 Eligible Stocks BATS offers trading in all NASDAQ National Market and NASDAQ Capital Market (formerly Small Cap) securities. BATS also offers trading in Tape A and Tape B listed stocks. Prior Notice of Changes to Subscriber Information Subscribers are required to provide at least 10 days prior written notice of any material change to Subscriber information on file at BATS, including, but not limited to, name changes, MPID changes, clearing firm changes, FINRA and/or SRO Membership status changes, etc. After receiving notice from a Subscriber regarding any such material change, BATS will make reasonable efforts to timely effect any changes in its system, if any, necessary to prevent interruption to Subscriber s use of the BATS ECN. However, in no event will BATS be responsible, or have any liability, for any interruption to Subscriber s use of the BATS ECN. BATS Trading, Inc Page 9 of 11

10 Clearly Erroneous Trade Policy A Clearly Erroneous Trade (CET) is defined as an execution at a price, for a quantity of shares, or with a symbol, that is substantially inconsistent with the current trading pattern of the issue. The use of BATS trading system by a subscriber constitutes acceptance of BATS right to break any trade, or modify the terms of any trade Transaction reviews may be instituted by BATS personnel or a subscriber. Subscribers should submit a request by calling the trade desk and also ing reviewtrade@batstrading.com. The should contain the name of the subscriber, time(s) of the trade, the symbol(s), the quantity, the side (bought or sold) and the requested resolution (break trade or adjust price to what new price). A principal in the subscriber s firm is required to approve the request. BATS may or may not forward the contents of the , with the subscribers names removed, to the contra parties to the trade. All s will be retained by BATS and may be reviewed by regulators. A subscriber s request for a transaction review should be submitted within 20 minutes of the transaction. If a subscriber submits a request for a review after 20 minutes have passed, the review may be done or not done, depending on the facts and circumstances, at the sole discretion of BATS. Under no circumstances may a request to review a transaction be submitted by a subscriber more than 30 minutes after the close of trading on BATS. Once a request is submitted, it may not be withdrawn without the consent of both parties to the trade. Trades done within 10 cents of the prevailing market will generally not be broken or adjusted, unless very unusual circumstances, such as a system wide malfunction, are present. Review of trades resulting from orders routed to other market centers, such as ECN s or exchanges, are subject to the policies and procedures of the other market center. BATS may make a request on a subscriber s behalf, but the outcome will be subject to the decision of the other market center. When BATS initiates a trade review, it will attempt to notify all parties to the trade via and/or phone. If the trades under review effect a large number of subscribers, BATS may instead issue a notice to all subscribers via e- mail that a series of trades are under review. A final determination generally will be made within one hour of a request being submitted. In all cases, designated principals will make a final determination prior to the open of the next trading day following the request. BATS will notify all parties to the trade via as soon as the final determination has been made. BATS Trading, Inc Page 10 of 11

11 Contact BATS Web Site Main Number (816) Trade Desk (816) Subscriber Services (816) Billing (816) Clearing & Compliance (816) Network Operations (816) Career Opportunities - please send resume and a cover letter FAX (816) Mailing Address Primary Data Center DR Data Center BATS Trading, Inc North Mulberry Drive, Suite 275 Kansas City, MO SAVVIS, Inc. 300 Boulevard East Weehawken, NJ BT Radianz 492 River Road Nutley, NJ BATS Trading, Inc Page 11 of 11