SEC Approves BATS Exchange Supplemental Competitive Liquidity Provider Program (with Lofchie Comment)

The SEC approved BATS Exchange, Inc.'s ("BATS") Supplemental Competitive Liquidity Provider Program (the "Program") for a one-year pilot period.

The Program is designed to incentivize quoting and volume in participating exchange-traded securities by paying a rebate to liquidity providers that are market makers in participating securities. The Program would be funded by participating issuers (or sponsors on behalf of issuers) that would pay an additional fee (the "SCLP Fee") beyond the standard BATS exchange listing fee. The Program is similar to other programs, such as the NYSE Arca's "ETP Incentive Program" and the NASDAQ Stock Market LLC's "Market Quality Program."

In order to approve the Program, the SEC also granted BATS temporary exemptive relief from Rule 102 under Regulation M. Rule 102 makes it unlawful for an issuer (or a person on behalf of an issuer), in connection with a distribution, to "directly or indirectly . . . bid for, purchase, or attempt to induce any person to bid for or purchase, a covered security during the applicable restricted period." The SEC views the payment of the SCLP Fee by a participating issuer as an indirect attempt by the issuer to induce a bid or purchase of a covered security during a restricted period. Therefore, without the exemptive relief, an issuer participating in the Program would be in violation Rule 102 under Regulation M.

Lofchie Comment: The notion of allowing an issuer to pay market makers to provide liquidity in the issuer's stock makes a good deal of sense. In fact, it would be a great thing if this experiment could be extended to allow issuers to reward investment banks or other providers for writing research on an issuer's stock. It should be possible to establish research-reward programs in which the payments are based on the value that investors found in the research, and to prevent issuers from rewarding research providers that simply touted the issuer's stock.

See: SEC Order of Approval; SEC Order Granting Limited Exemption.