The BATS Exchange, Inc. filed with the Securities and Exchange Commission for its approval a new rule and interpretation to expressly prohibit layering and spoofing-type activity. In addition, the BATs Exchange seeks to adopt a new rule to provide for expedited suspension proceedings in cases involving these types of disruptive practices. The BATs Exchange is seeking approval for an express prohibition against spoofing and layering activity by members, although it claims that it currently has sufficient authority to prosecute manipulative trading conduct under its existing rules, including its requirement that members observe “high standards of commercial honor and just and equitable principles of trade.” (Click here to access BATS Exchange Rule 3.1.) Under a proposed new interpretation, layering would include a “frequent pattern” where a party enters orders on one side of the market at various price levels, and following the layering orders (a) the level and demand for the security changes; (b) the party enters one or more orders on the other side of the market that are subsequently executed; and (c) following the execution, the original layering orders are cancelled. Spoofing would include “a frequent pattern” where a party narrows a spread by placing an order inside the national best bid and offer and the party then submits an order on the opposite side of the market that executes against a market participant that joined the new inside market established by the spoofing order. If authorized by the BATS Exchange’s chief regulatory officer, an expedited client suspension hearing alleging spoofing or layering activity would ordinarily be held by no later than 15 days after service of a notice initiating the enforcement action. After a hearing, within 10 days of its receipt of the hearing transcript, the hearing panel should issue a decision whether a suspension order should be imposed. The BATS Exchange claims that an expedited suspension hearing process is appropriate for layering and spoofing offenses because “the potential harm to investors is so large.” The public will have an opportunity to comment on the BATS Exchange’s proposed new rules and interpretation for 21 days following the SEC’s publication of it in the Federal Register.
Compliance Weeds: There are many differences between the regulatory approaches taken by US securities and futures regulators and self-regulators. Another one potentially now involves the definition of spoofing. Whereas futures self-regulators, drawing on applicable law, typically define spoofing in terms of potentially a single transaction (click here to access the 2013 Interpretive Guidance and Policy Statement regarding disruptive trading practices adopted by the Commodity Futures Trading Commission), the BATS Exchange seeks to make it expressly clear in its proposed new interpretation that spoofing or layering involves a “frequent pattern” of transactions. Moreover, while it is unlawful bidding or offering alone that could trigger a spoofing offense under the futures regulatory regime – without regard to whether any order is actually executed – BATS Exchange’s proposed interpretation would require an actual trade execution as part of a series of transactions in order to constitute an offense.