On July 30, BATS Exchange, Inc. filed a rule proposal with the Securities and Exchange Commission to expressly prohibit certain manipulative trading activity and to permit BATS to take prompt action against market participants that it believes are engaged in such activity. Specifically, proposed BATS Rule 12.15 defines and prohibits layering and spoofing activity by exchange members. Under a proposed interpretation, layering is described as a trading pattern in which: (1) a market participant enters multiple limit orders on one side of the market at various price levels (layering orders); (2) following the entry of the layering orders, the level of supply and demand for the security changes; (3) the market participant enters one or more orders on the opposite side of the market of the layering orders (contra-side orders) that are subsequently executed; and (4) following the execution of the contra-side orders, the market participant cancels the layering orders.

Another interpretation under the proposed rule describes spoofing as a trading pattern in which: (1) a market participant narrows the spread for a security by placing an order inside the national best bid or offer (spoofing order); and (2) the market participant thereafter submits an order on the opposite side of the market (contra-side order) that executes against another market participant that joined the new inside market established by the spoofing order.

Proposed BATS Rule 8.17 establishes procedures for issuing suspension orders; these orders would immediately prohibit an exchange member from engaging in layering and spoofing activity prohibited under proposed BATS Rule 12.15. Proposed BATS Rule 8.17 also would authorize BATS to order an exchange member to cease and desist from providing exchange access to a customer if such exchange member engaged in layering or spoofing activity prohibited under proposed BATS Rule 12.15.

Interested parties will be able to comment on the rule proposal for 21 days after publication in the Federal Register. The text of the proposed rule change is available here.