Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Notice of Filing of a Proposed Rule Change To Amend the Opening Auction Process Provided Under Rule 11.23(b)(2)(B), 53514-53522 [2022-18764]
Download as PDF
<![CDATA[
53514
Federal Register / Vol. 87, No. 168 / Wednesday, August 31, 2022 / Notices
type of business, business registration
location, members of the business
organization who will be receiving mail,
customer’s authorized representative,
address that mail is forward to, copies
of protective court orders submitted by
the customer.
3. Customer Mail Receiving Agent
(CMRA) Agency information: Agent
name, address, signature. Email address,
and phone number. Customer
information collected on PS Form 1583
Application for Delivery of Mail
Through Agent will be collected and
maintained by the CMRA.
4. Verification information:
Photocopies or scanned images of IDs
and address documents, customer name,
address, signature, date of birth ID or
document expiration date, business
name, registration number.
RECORD SOURCE CATEGORIES:
Customers, designated individuals
authorized to collect mail on behalf of
a customer, and Commercial Mail
Receiving Agency (CMRA) owners and
managers.
ROUTINE USES OF RECORDS MAINTAINED IN THE
SYSTEM, INCLUDING CATEGORIES OF USERS AND
PURPOSES OF SUCH USES:
Standard routine uses 1. through 7.,
10., and 11. apply. In addition:
a. Information may be disclosed for
the purpose of identifying an address as
an address of an agent to whom mail is
delivered on behalf of other persons.
This routine use does not authorize the
disclosure of the identities of persons on
behalf of whom agents receive mail.
All routine uses are subject to the
following exception: Information
concerning an individual who has filed
an appropriate protective court order
with their CMRA application will not be
disclosed under any routine use except
pursuant to the order of a court of
competent jurisdiction and subject to
the approval of the USPS General
Counsel.
POLICIES AND PRACTICES FOR STORAGE OF
RECORDS:
Automated databases, computer
storage media, and paper.
POLICIES AND PRACTICES FOR RETRIEVAL OF
RECORDS:
lotter on DSK11XQN23PROD with NOTICES1
By Commercial Mail Receiving
Agency (CMRA) location, customer
name, address, private mailbox number,
or by customer ID(s).
POLICIES AND PRACTICES FOR RETENTION AND
DISPOSAL OF RECORDS:
16:59 Aug 30, 2022
Jkt 256001
SECURITIES AND EXCHANGE
COMMISSION
ADMINISTRATIVE, TECHNICAL, AND PHYSICAL
SAFEGUARDS:
Self-Regulatory Organizations; Cboe
BZX Exchange, Inc.; Notice of Filing of
a Proposed Rule Change To Amend
the Opening Auction Process Provided
Under Rule 11.23(b)(2)(B)
Paper records, computers, and
computer storage media are located in
controlled-access areas under
supervision of program personnel.
Access to these areas is limited to
authorized personnel, who must be
identified with a badge.
Access to records is limited to
individuals whose official duties require
such access. Contractors and licensees
are subject to contract controls and
unannounced on-site audits and
inspections.
Computers are protected by
mechanical locks, card key systems, or
other physical access control methods.
The use of computer systems is
regulated with installed security
software, computer logon
identifications, and operating system
controls including access controls,
terminal and transaction logging, and
file management software.
RECORD ACCESS PROCEDURES:
Requests for access must be made in
accordance with the Notification
Procedure above and USPS Privacy Act
regulations regarding access to records
and verification of identity under 39
CFR 266.5.
CONTESTING RECORD PROCEDURES:
See Notification Procedures below
and Record Access Procedures above.
NOTIFICATION PROCEDURES:
Customers wanting to know if
information about them is maintained in
this system pertaining to mail delivery
by agents, noncompliant mailboxes,
must address inquiries to their local
postmasters. Customers should include
name, address, and other identifying
information.
EXEMPTIONS PROMULGATED FOR THE SYSTEM:
None.
HISTORY:
None.
1. Records related to CMRA customer
applications are retained for 2 years
after the private mailbox is closed.
2. Records existing on paper are
destroyed by burning, pulping, or
VerDate Sep<11>2014
shredding. Records existing on
computer storage media are destroyed
according to the applicable USPS media
sanitization practice.
Sarah Sullivan,
Attorney, Ethics & Legal Compliance.
[Release No. 95601; File No. SR–CboeBZX–
2022–045]
August 25, 2022.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (the
‘‘Act’’),1 and Rule 19b–4 thereunder,2
notice is hereby given that on August
15, 2022, Cboe BZX Exchange, Inc. (the
‘‘Exchange’’ or ‘‘BZX’’) filed with the
Securities and Exchange Commission
(the ‘‘Commission’’) the proposed rule
change as described in Items I, II, and
III below, which Items have been
prepared by the Exchange. The
Commission is publishing this notice to
solicit comments on the proposed rule
change from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
Cboe BZX Exchange, Inc. (the
‘‘Exchange’’ or ‘‘BZX’’) is filing with the
Securities and Exchange Commission
(‘‘Commission’’) a proposal to amend
the Opening Auction process provided
under Rule 11.23(b)(2)(B) (the ‘‘Opening
Auction Process’’) to better align with
current market conditions, and, where
certain market conditions are not
optimal, to delay the Opening Auction
from occurring until those market
conditions have improved. The text of
the proposed rule change is provided in
Exhibit 5.
The text of the proposed rule change
is also available on the Exchange’s
website (https://markets.cboe.com/us/
equities/regulation/rule_filings/bzx/), at
the Exchange’s Office of the Secretary,
and at the Commission’s Public
Reference Room.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
Exchange included statements
concerning the purpose of and basis for
the proposed rule change and discussed
any comments it received on the
proposed rule change. The text of these
statements may be examined at the
places specified in Item IV below. The
Exchange has prepared summaries, set
forth in sections A, B, and C below, of
[FR Doc. 2022–18822 Filed 8–30–22; 8:45 am]
1
BILLING CODE 7710–12–P
PO 00000
Frm 00074
Fmt 4703
2
Sfmt 4703
15 U.S.C. 78s(b)(1).
17 CFR 240.19b–4.
E:\FR\FM\31AUN1.SGM
31AUN1
Federal Register / Vol. 87, No. 168 / Wednesday, August 31, 2022 / Notices
the most significant aspects of such
statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
lotter on DSK11XQN23PROD with NOTICES1
1. Purpose
The Exchange proposes to amend
Rule 11.23(b)(2)(B) to make the Opening
Auction Process more dynamic by,
under certain circumstances delaying
the Opening Auction in order to
incorporate additional information into
the determination of the Opening
Auction price. Specifically, as proposed
the Rule would provide that when there
is no Valid NBBO 3 in a BZX-listed
security and there is an Indicative
Price 4 that is not within the Collar Price
Range,5 the Opening Auction will be
delayed until market conditions
improve or the delay period has lapsed,
as further described below.
The Exchange notes that the official
opening price disseminated by the
primary listing market provides market
participants valuable information which
in most cases is used to calculate the
initial limit up-limit down (‘‘LULD’’)
bands and also may serve as the basis
for trading strategies for that trading
day. However, the official opening price
is not as important or time sensitive as
the official closing price disseminated
by the primary listing market, which is
used for the pricing and valuation of
certain indices, funds and derivative
products. The Exchange believes the
benefit of allowing crossed auction
interest to execute at the best possible
price outweighs the minimal and finite
delay in the dissemination of the BZX
Opening Price and LULD bands.
3 As provided in Rule 11.23(a)(23), an NBBO is
a Valid NBBO where: (i) there is both a NBB and
NBO for the security; (ii) the NBBO is not crossed;
and (iii) the midpoint of the NBBO is less than the
Maximum Percentage away from both the NBB and
the NBO. See Exchange Rule 11.23(a)(23). The
Maximum Percentage will vary depending on the
price of the NBBO midpoint. Currently, the
Maximum Percentages are as follows: for a NBBO
midpoint price less than or equal to $25, the
Maximum Percentage is 5%; for a NBBO midpoint
price greater than $25 but less than or equal to $50,
the Maximum Percentage is 2.5%; for a NBBO
midpoint price greater than $50, the Maximum
Percentage is 1.5%. See Section 1.5 (Definitions) of
the US Equities Auction Process at https://
cdn.cboe.com/resources/membership/Cboe_US_
Equities_Auction_Process.pdf.
4 The term ‘‘Indicative Price’’ shall mean the
price at which the most shares from the Auction
Book and the Continuous Book would match. In the
event of a volume based tie at multiple price levels,
the Indicative Price will be the price which results
in the minimum total imbalance. In the event of a
volume based tie and a tie in minimum total
imbalance at multiple price levels, the Indicative
Price will be the price closest to the Volume Based
Tie Breaker. See Exchange Rule 11.23(a)(10).
5 See Exchange Rule 11.23(a)(6).
VerDate Sep<11>2014
16:59 Aug 30, 2022
Jkt 256001
Specifically, as discussed further below,
the Exchange believes that the possible
downside of delaying the dissemination
of the LULD bands is mitigated by the
infrequency with which LULD halts
occur within the first four minutes and
30 seconds of the trading day and is also
offset by the benefits to the opportunity
for increased executions in the Opening
Auction. As further noted below, this
delayed dissemination of LULD bands is
also a tradeoff that already exists as it
relates to the opening process on the
New York Stock Exchange LLC
(‘‘NYSE’’), which may delay its opening
process indefinitely. Finally, the
Exchange notes that because the
proposed functionality would only
apply where there is crossed interest
that is outside the Collar Price Range
and there is not a Valid NBBO, the
Exchange would only delay the Opening
Auction (and thus delay the
dissemination of the LULD bands) in
certain situations. In those situations, it
is more likely that the LULD bands
disseminated without a delay in the
Opening Auction are based on a price
that is not reflective of current market
conditions.
As such, the Exchange believes that
the proposal strikes an appropriate
balance by providing additional time for
the Opening Auction Process to occur so
that under such circumstances BZXlisted securities have an opportunity for
more meaningful price formation that is
more representative of current market
conditions, but limiting any such delay
so that the BZX Official Opening Price
is reported to the Securities Information
Processor (‘‘SIP’’) by 9:35 a.m. and will
therefore be used to set the LULD
bands.6
Background
As noted above, the Exchange is
proposing that under limited
circumstances its current Opening
Auction Process would be amended to
delay the process such that additional
information could be incorporated into
the determination of the Opening
Auction price. Currently, Rule
11.23(b)(2)(B) sets forth the process by
which the BZX Official Opening Price 7
is determined for BZX-listed securities
during the Opening Auction Process.
Specifically, as provided in Rule
11.23(b)(2)(B), the Opening Auction
price will be the price level within the
Collar Price Range that maximizes the
number of shares executed between the
6 The SIP links the U.S. markets by processing
and consolidating all protected bid/ask quotes and
trades from every trading venue into a single data
feed.
7 See Exchange Rule 11.23(a)(5).
PO 00000
Frm 00075
Fmt 4703
Sfmt 4703
53515
Continuous Book 8 and Auction Book 9
in the Opening Auction. In the event of
a volume based tie at multiple price
levels, the Opening Auction price will
be the price which results in the
minimum total imbalance. In the event
of a volume based tie and a tie in
minimum total imbalance at multiple
price levels, the Opening Auction price
will be the price closest to the Volume
Based Tie Breaker.10
The Volume Based Tie Breaker for an
Opening Auction will be the midpoint
of the NBBO where there is a Valid
NBBO. Where there is no Valid NBBO,
the Final Last Sale Eligible Trade
(‘‘FLSET’’) 11 will be used as the Volume
Based Tie Breaker.12 Because the FLSET
is typically based on the most recent
execution in a security during Regular
Trading Hours, its value may be
significantly away from the Indicative
Price at the time of the Opening Auction
Process, especially in more thinly
traded securities. As a result, the
Exchange has observed instances where
auction eligible orders priced in-line
with the Indicative Price were not
executed in the Opening Auction
because they were outside the Collar
Price Range established using the
FLSET. Based on analysis by the
Exchange and feedback from market
participants, certain of these instances
resulted in orders not receiving
executions in the Opening Auction that
would have otherwise occurred at prices
that would have been acceptable to both
parties to the execution. To illustrate
this point, the Exchange presents the
following example.
Example 1
Consider a security with a prevailing
NBBO at 9:30:00 a.m. of $27.10 × $29.54
and two Limit-On-Open orders on the
Auction Book—a buy for 1,000 shares at
$27.90 and a sell for 1,500 shares at
$27.90.13 The Indicative Price, which is
the price at which the most shares from
the Auction Book and the Continuous
Book would match, would be $27.90
because the only crossed interest comes
from the two orders on the Auction
Book. Therefore, there is crossed
interest willing to execute at a price
See Exchange Rule 11.23(a)(7).
See Exchange Rule 11.23(a)(1).
10 The Volume Based Tie Breaker is the midpoint
of the NBBO for a particular security where the
NBBO is a Valid NBBO. Where the NBBO is not a
Valid NBBO, the price of the FLSET is used as the
Volume Based Tie Breaker. See Exchange Rule
11.23(a)(23).
11 See Exchange Rule 11.23(a)(9).
12 The Exchange estimates that there is no Valid
NBBO for approximately 5.81% of the Exchange’s
Opening Auctions.
13 For purposes of this example, there are no
orders on the Continuous Book.
8
9
E:\FR\FM\31AUN1.SGM
31AUN1
53516
Federal Register / Vol. 87, No. 168 / Wednesday, August 31, 2022 / Notices
within the NBBO. However, because the
midpoint of the NBBO (i.e., $28.32) is
more than the Maximum Percentage 14
away from both the NBB and NBO, the
NBBO is not a Valid NBBO and thus the
NBBO midpoint would not be used as
the Volume Based Tie Breaker. Instead,
the Volume Based Tie Breaker would be
the FLSET, which would, by definition,
be the BZX Official Closing Price from
the previous business day, which was
$26.52. Using the FLSET as the Collar
Midpoint,15 the Collar Price Range
would be $25.19 × $27.85.16 Because the
Indicative Price is outside of the Collar
Price Range and there is no crossed
interest within the Collar Price Range,
there would be no execution as part of
the Opening Auction. Therefore, crossed
interest from the Auction Book that was
priced equal to or more aggressive than
the Indicative Price and was within the
NBBO would be canceled without
execution.17
lotter on DSK11XQN23PROD with NOTICES1
Proposal
Based on the scenario described
above, the Exchange is proposing to
change its Opening Auction
functionality only in circumstances
where (i) there is an Indicative Price, (ii)
there is not a Valid NBBO, and/or (iii)
the Indicative Price is not within the
FLSET-established Collar Price Range.
As proposed and described in further
detail below, the Opening Auction
would occur pursuant to the Standard
Opening Auction Process if the NBBO
becomes a Valid NBBO (i.e., the spread
narrows as markets open such that the
midpoint of the NBBO is less than the
Maximum Percentage away from both
the NBB and the NBO) before 9:30:05,
or if the Indicative Price moves within
the Collar Price Range set by the FLSET
(i.e., orders on the Auction Book and/or
non-displayed orders on the Continuous
Book change the price level at which the
most shares from the Auction Book and
the Continuous Book would match to be
within the Collar Price Range) prior to
9:34:30.
Proposed Rule 11.23(b)(2)(B)(i) would
set forth the ‘‘Standard Opening
Process’’, which mirrors the current
process described in Rule 11.23(b)(2)(B).
Proposed Rule 11.23(b)(2)(B)(ii) would
provide that if there is no Valid NBBO
and the Indicative Price is within the
14 As noted above, the Maximum Percentage for
a NBBO midpoint price greater than $25 but less
than or equal to $50 is 2.5%.
15 As provided in Rule 11.23(a)(6), the Collar
Midpoint is the Volume Based Tie Breaker for
Opening Auctions.
16 The Collar Price Range is always double the
Maximum Percentage. Therefore, the Collar Price
Range in Example 1 is 5%.
17 See Exchange Rule 11.23(b)(3)(C).
VerDate Sep<11>2014
16:59 Aug 30, 2022
Jkt 256001
Collar Price Range, the Opening Auction
price will be established pursuant to the
Standard Opening Process. Proposed
Rule 11.23(b)(2)(B)(iii) would delay and
set forth an alternative Opening Auction
Process in the event there is no Valid
NBBO and the Indicative Price is not
within the Collar Price Range. The
proposal is designed to prevent the
cancellation of auction eligible orders
priced equally or more aggressive than
the Indicative Price which the Exchange
believes will facilitate the presence of
sufficient liquidity and information to
make the Opening Auction a meaningful
price formation event in BZX-listed
securities.
Proposed Rule 11.23(b)(2)(B)(iii)
would provide that the Opening
Auction price will be delayed as set
forth in subparagraphs (a) and (b) as
follows:
(a) If after the one-second delay there is a
Valid NBBO or the Indicative Price is within
the Collar Price Range, the Opening Auction
price will be established pursuant to the
Standard Opening Auction Process. If there
is no Valid NBBO and the Indicative Price is
not within the Collar Price Range after the
one-second delay, the Opening Auction will
be delayed by one additional second, at
which point if there is a Valid NBBO or the
Indicative Price is within the Collar Price
Range, the Opening Auction price will be
established pursuant to the Standard
Opening Process. If after the additional onesecond delay there is a Valid NBBO or the
Indicative Price is not within the Collar Price
Range, the process described in this
paragraph (a) will continue to be applied in
one-second increments until either the
Opening Auction occurs or until five seconds
has lapsed (i.e., 9:30:05 a.m.).
(b) If the Opening Auction has not
occurred by 9:30:05, the System will widen
the Collar Price Range in the direction of the
Indicative Price by 5% of the Volume Based
Tie Breaker, which will be Final Last Sale
Eligible Trade as of 9:30:05 a.m. (the
‘‘Widening Amount’’).18 If the Indicative
Price is within the widened Collar Price
Range, the Opening Auction price will be
established pursuant to the Standard
Opening Auction Process. If the Indicative
Price is not within the widened Collar Price
Range, the Opening Auction will be further
delayed, as discussed below.
In sum, the process described in proposed
paragraph Rule 11.23(b)(2)(B)(iii)(a) would
simply allow for the Opening Auction to
occur using the Standard Opening Process
described in paragraph 11.23(b)(2)(B)(i), the
only difference between the current process
being that such Opening Auction could
instead occur within the first five seconds of
Regular Trading Hours 19 based on whether
18 The Exchange notes that Widening Amount
will be locked-in as of 9:30:05, and will not change
between 9:30:05 and 9:34:30 even in the event that
a round lot trade reported to the consolidated tape
was received by the Exchange during that time (i.e.,
a FLSET).
19 See Exchange Rule 1.5(w).
PO 00000
Frm 00076
Fmt 4703
Sfmt 4703
there is a Valid NBBO or the Indicative Price
is within the Collar Price Range. If, after each
one-second delay, there is no longer an
Indicative Price (i.e., there is no longer
crossed interest), the Opening Auction would
occur immediately pursuant to proposed
Rule 11.23(2)(B)(v). After the first five
seconds of Regular Trading Hours, the
System will only check for whether the
Indicative Price is within the Collar Price
Range and will not check for a Valid NBBO
because the process described in Proposed
Rules 11.23(b)(2)(B)(iii)(b)(1) through (4) is
intended to closely follow the reopening
process that is described in the Twelfth
Amendment of the Plan to Address
Extraordinary Market Volatility 20 (the
‘‘Plan’’) and corresponding Exchange Rules,
as described in further detail below.
Proposed Rules
11.23(b)(2)(B)(iii)(b)(1) through (4)
would set forth the delay of the Opening
Auction if no auction has occurred
between 9:30:05 and 9:34:30.
Specifically, the proposed Rules would
provide:
(1) The System will check to see whether
the Indicative Price is inside the widened
Collar Price Range every second between
9:30:05 and 9:30:30 a.m. If an Indicative Price
is inside the widened Collar Price Range
during a check, the Opening Auction price
will be established pursuant to the Standard
Opening Auction Process.
(2) If by 9:30:30 a.m. the Indicative Price
is not within the widened Collar Price Range,
the Collar Price Range will again widen by
the Widening Amount. The System will
check to see whether the Indicative Price is
inside the widened Collar Price Range every
second between 9:30:30 and 9:31:30 a.m. If
an Indicative Price is inside the widened
Collar Price Range during a check, the
Opening Auction price will be established
pursuant to the Standard Opening Auction
Process.
(3) If by 9:31:30 a.m. the Indicative Price
is not within the widened Collar Price Range,
the System will check to see whether the
Indicative Price is inside the widened Collar
Price Range every second between 9:31:30
and 9:34:30 a.m. If an Indicative Price is
inside the widened Collar Price Range during
a check, the Opening Auction price will be
established pursuant to the Standard
Opening Auction Process. Unless the
Opening Auction has occurred, the Collar
Price Range will widen in the direction of the
Indicative Price by the Widening Amount
each minute from 9:31:30 to 9:34:30.
(4) If no Opening Auction has occurred by
9:34:30 a.m., the Opening Auction will occur
pursuant to the Standard Opening Auction
Process using the expanded Collar Price
Range as of 9:34:30.
The Exchange first notes that if,
during after each one-second delay,
20 See Securities and Exchange Act no. 79410
(November 28, 2016) 81 FR 87114 (December 2,
2016) (Notice of Filing of the Twelfth Amendment
to the National Market System Plan To Address
Extraordinary Market Volatility (‘‘Amendment
12’’)).
E:\FR\FM\31AUN1.SGM
31AUN1
Federal Register / Vol. 87, No. 168 / Wednesday, August 31, 2022 / Notices
lotter on DSK11XQN23PROD with NOTICES1
there is no longer an Indicative Price
(i.e., there is no longer crossed interest),
the Opening Auction would occur
immediately pursuant to proposed Rule
11.23(2)(B)(v).21 The Exchange is also
proposing to stop extending the
Opening Auction Process at 9:34:30 a.m.
in part to ensure that the Exchange is
able to disseminate the BZX Official
Opening Price with sufficient time to be
used in the determination of the
opening price 22 pursuant to the Plan,
from which the reference price 23 is used
to calculate the LULD bands.
Specifically, the reference price for
trading is typically the opening price on
the primary listing exchange in an NMS
Stock if such opening price occurs less
than five minutes after the start of
Regular Trading Hours. Therefore,
because under the proposal the Opening
Auction Process would occur no later
than 9:34:30, the LULD bands would be
determined based on the BZX Official
Opening Price. While the LULD bands
for BZX-listed securities could be
determined pursuant to the Plan
without a BZX Official Opening Price,
the Exchange believes that the inclusion
of such price provides for LULD bands
that more accurately reflect current
market conditions.
The Exchange also proposes to move
the last two sentences of existing Rule
11.23(b)(2)(B) to proposed Rules
11.23(b)(2)(B)(iv) and (v), respectively,
with certain modifications to Rule
11.23(b)(2)(B)(v). Specifically, proposed
Rule 11.23(b)(2)(B)(iv) would provide
that the Opening Auction Price will be
the BZX Official Opening Price.
Proposed Rule 11.23(b)(2)(B)(v) would
21 The Exchange notes that the BZX Official
Opening Price will be the price of the FLSET,
which will be the previous BZX Official Closing
Price unless an FLSET occurred after 9:30:00.
22 For purposes of the Plan, ‘‘opening price’’ shall
mean the price of a transaction that opens trading
on the primary listing exchange. If the primary
listing exchange opens with quotations, the
‘‘opening price’’ shall mean the closing price of the
NMS Stock on the primary listing exchange on the
previous trading day, or if no such closing price
exists, the last sale on the primary listing exchange.
See section I(I) of the Plan.
23 For purposes of the plan, ‘‘reference price’’
shall have the meaning provided in Section V of the
Plan. See section I(R) of the Plan. Section V of the
Plan provides that the LULD price bands are based
on a reference price for each NMS Stock that, for
purposes of the first reference price for a trading
day shall be the opening price on the primary
listing exchange in an NMS Stock if such opening
price occurs less than five minutes after the start of
Regular Trading Hours. If the opening price on the
primary listing exchange in an NMS Stock does not
occur within five minutes after the start of Regular
Trading Hours, the first reference price for a trading
day shall be the arithmetic mean price of eligible
reported transactions for the NMS Stock over the
preceding five minute time period. If there is no
opening price on the primary listing exchange in an
NMS Stock and no trades have occurred by 9:35:00,
the previous reference price shall remain in effect.
VerDate Sep<11>2014
16:59 Aug 30, 2022
Jkt 256001
provide that in the event that there is no
Opening Auction for an issue, the BZX
Official Opening Price will be the price
of the FLSET. The Exchange proposes to
eliminate the provision that states that
the FLSET will be the previous BZX
Official Closing Price as it is possible
that an FLSET may occur between
9:30:00 and 9:34:30.
Based on the above proposed
amendments, the Exchange proposes to
amend Rules 11.23(b)(1)(A) and (B) to
reflect that the Opening Auction may
occur at a time other than 9:30 a.m.
Specifically, the Exchange proposes to
amend paragraph (A) to provide the
following: Users may submit orders to
the Exchange as set forth in Rule 11.1.
Any Eligible Auction Orders 24
designated for the Opening Auction will
be queued for participation in the
Opening Auction. Users may submit
limit-on-open (‘‘LOO’’) and market-onopen (‘‘MOO’’) orders until 9:28 a.m., at
which point any additional LOO and
MOO orders submitted to the Exchange
will be rejected. Regular Hours Only 25
(‘‘RHO’’) market orders will also be
rejected from 9:28 a.m. until the
Opening Auction has concluded. Users
may submit late-limit-on-open 26
(‘‘LLOO’’) orders from 9:28 a.m. until
the Opening Auction has concluded.
Any LLOO orders submitted before 9:28
a.m. or after the Opening Auction has
concluded will be rejected. RHO limit
orders submitted from 9:28 a.m. until
the Opening Auction has concluded
will be treated as LLOO orders.
The Exchange proposes to amend
Rule 11.23(b)(1)(B) to provide that
Eligible Auction Orders designated for
the Opening Auction may not be
cancelled or modified from 9:28 a.m.
until the Opening Auction has
concluded except that RHO limit orders
designated for the Opening Auction may
be modified, but not cancelled, from
9:28 a.m. until the time the Opening
Auction has concluded. Any such RHO
limit orders modified from 9:28 a.m.
until the Opening Auction has
concluded will be treated as LLOO
orders.
To illustrate the proposed
functionality, consider the following
examples.
Example 2
Applying the same facts from
Example 1 related to current
functionality above, assume a security
has a prevailing NBBO at 9:30:00 a.m.
of $27.10 × $29.54 and two Limit-OnOpen orders on the Auction Book—a
See Exchange Rule 11.23(a)(8).
25 See Exchange Rule 11.9(b)(7).
26 See Exchange Rule 11.23(a)(12).
24
PO 00000
Frm 00077
Fmt 4703
Sfmt 4703
53517
buy for 1,000 shares at $27.90 and a sell
for 1,500 shares at $27.90.27 The
Indicative Price, which is the price at
which the most shares from the Auction
Book and the Continuous Book would
match, would be $27.90 because the
only crossed interest comes from the
two orders on the Auction Book.
Because there was no Valid NBBO
and the Indicative Price was outside of
the Collar Price Range, the System
would check at each second starting at
9:30:00 and ending at 9:30:05 for a Valid
NBBO and for the Indicative Price that
is within the Collar Price Range.
Assuming that these checks did not find
a Valid NBBO or an Indicative Price
within the Collar Price Range, after the
check at 9:30:05 the Collar Price Range
is widened in the direction of the
Indicative Price by 5% of the FLSET
(i.e., $26.52) as of 9:30:05, or $1.33,
resulting in a Collar Price Range of
$25.19 × $29.18. Upon the first one
second check thereafter, the Indicative
Price of $27.90 is within the widened
Collar Price Range and the auction
occurs immediately pursuant to the
Standard Opening Auction Process.
Example 3
Applying the facts from Example 2
above, but also considering that another
two orders exist on the Auction Book
including a buy order for 2,000 shares
at $30.50 and a sell order for 500 shares
at $30.50.28 The additional orders
entered to the Auction Book would
move the Indicative Price to $30.50
because $30.50 would be the price at
which the most shares would match
(i.e., 2,000 shares). Given that the
Indicative Price ($30.50) is not within
the widened Collar Price Range
calculated above ($25.19 × $29.18), the
Opening Auction would not occur after
the first collar widening. As such, the
System would check at each second
starting at 9:30:05 and ending at 9:30:30
for an Indicative Price that is within the
Collar Price Range. Assuming that the
Indicative Price did not change and thus
the checks would not find an Indicative
Price within the Collar Price Range,
after the check at 9:30:30 the Collar
Price Range would once again be
widened in the direction of the
Indicative Price by the same 5% amount
used for the initial collar widening at
9:30:05 ($1.33). The Collar Price Range
from 9:30:30 to 9:31:30 would then be
$25.19 × $30.51. Upon the first one
second check thereafter, the Indicative
Price of $30.50 is within the widened
27 For purposes of this example, there are no
orders on the Continuous Book.
28 For purposes of this example, assume there are
no orders on the BZX Continuous Book.
E:\FR\FM\31AUN1.SGM
31AUN1
53518
Federal Register / Vol. 87, No. 168 / Wednesday, August 31, 2022 / Notices
lotter on DSK11XQN23PROD with NOTICES1
Collar Price Range and the auction
would occur immediately pursuant to
the Standard Opening Auction Process.
Example 4
Applying the facts from Example 3
above, but replacing the two additional
orders to the Auction Book a buy order
for 2,000 shares at $34.75 and a sell
order for 500 shares at $34.75. The
orders entered to the Auction Book
would move the Indicative Price to
$34.75 because $34.75 would be the
price at which the most shares would
match (i.e., 2,000 shares). Given that the
Indicative Price ($34.75) is not within
the widened Collar Price Range
calculated above at 9:30:30 ($25.19 ×
$30.51), the Opening Auction would not
occur after the second collar widening.
As such, the System would check at
each second starting at 9:30:30 and
ending at 9:31:30 for the Indicative Price
being within the Collar Price Range.
Assuming that the Indicative Price did
not change and thus the checks would
not find an Indicative Price within the
Collar Price Range, after the check at
9:31:30 the Collar Price Range would
again widen in the direction of the
Indicative Price by the same 5% amount
used for the initial collar widening at
9:30:05 (i.e., $1.33). Therefore, the
Collar Price Range would be $25.19 ×
$31.84 for the period between 9:31:30
and 9:32:30. Again, assuming there is no
change to the Indicative Price, at 9:32:30
the Collar Price Range would widen by
$1.33 in the direction of the Indicative
Price, which would be $25.19 × $33.17
for the period between 9:32:30 and
9:33:30. Again, assuming there is no
change to the Indicative Price, at 9:33:30
the Collar Price Range would widen by
$1.33 in the direction of the Indicative
Price, which would be $25.19 × $34.50
for the period between 9:33:30 and
9:34:30. At this point, the Indicative
Price (i.e., $34.75) remains higher than
the top end of the Collar Price Range
(i.e., $34.50). As such, the Opening
Auction would occur at 9:34:30, but
would occur within the final Collar
Price Range at $27.91, which is the price
level tied for the most volume (i.e.,
1,500 shares), lowest imbalance (i.e.,
500 shares), and closest to the Volume
Based Tie Breaker (i.e., the FLSET of
$26.52), instead of at the Indicative
Price.
As described above, the current
functionality described in Example 1
would result in no opening auction
because all crossed interest was outside
the Collar Price Range set using the
FLSET. Examples 2 and 3 demonstrate
scenarios in which the proposed
functionality of delaying the Opening
Auction Process and widening the
VerDate Sep<11>2014
16:59 Aug 30, 2022
Jkt 256001
Collar Price Range would allow
participants to execute in an opening
auction that would occur at a price more
reflective of current market conditions,
and that would permit the greatest
volume of crossed interest to execute.
Alternatively, Example 4 demonstrates
that even with the proposed delay and
widened Collar Price Range, the
Opening Auction may not occur at a
price for which any or all crossed
interest may execute. The Exchange
includes Example 4 in order to illustrate
that not all crossed interest in an
auction should necessarily be executed
and that at some point the benefit of
continuing to delay the Opening
Auction would be outweighed by the
need to establish the BZX Official
Opening Price, in particular to ensure
that it is reported to the SIP in advance
of 9:35 a.m. so that it can be used as the
reference price from which the LULD
bands are calculated.
Under the proposal, the Opening
Auction would be delayed until either
(1) the NBBO becomes a Valid NBBO,
(2) the Indicative Price is within the
Collar Price Range (i.e., if the Opening
Auction occurred between 9:30:01 and
9:30:05) or within the widened Collar
Price Range (i.e., if the Opening Auction
occurred between 9:30:06 and 9:34:30),
or (3) the delay period of four minutes
and 30 seconds lapsed. While the
proposal does not guarantee that certain
orders priced equally or more aggressive
to the Indicative Price will execute in
the Opening Auction, it provides for
additional time for the market to
develop at the beginning of the trading
day before conducting the Opening
Auction.
2. Statutory Basis
The Exchange believes that the
proposed rule change is consistent with
Section 6(b) of the Act.29 Specifically,
the proposed change is consistent with
Section 6(b)(5) of the Act,30 because it
would promote just and equitable
principles of trade, remove
impediments to and perfect the
mechanism of a free and open market
and a national market system, and, in
general, protect investors and the public
interest. The Exchange also believes the
proposed rule change is consistent with
Section 6(b)(1) of the Act, which
provides that the Exchange be organized
and have the capacity to be able to carry
out the purposes of the Act and to
enforce compliance by the Exchange’s
Members and persons associated with
its Members with the Act, the rules and
regulations thereunder, and the rules of
29
30
PO 00000
15 U.S.C. 78f(b).
15 U.S.C. 78f(b)(5).
Frm 00078
Fmt 4703
Sfmt 4703
the Exchange.31 Generally, the Exchange
believes that the proposed changes will
improve the price discovery process in
the Opening Auction for securities
listed on the Exchange along with
additional benefits set forth below.
First, the Exchange believes proposed
Rules 11.23(b)(2)(B)(i) and (ii) are
consistent with the Act as the proposed
paragraphs are substantially similar to
existing Rule 11.23(b)(2)(B) and involve
no change in the Opening Auction
functionality. Second, the Exchange
believes proposed Rule
11.23(b)(2)(B)(iii) would promote just
and equitable principles of trade,
remove impediments to and perfect the
mechanism of a free and open market
and a national market system and, in
general, protect investors and the public
interest. The proposal is designed to
increase the likelihood that auction
eligible orders that are priced equally or
more aggressive than the Indicative
Price of the security are able to
participate in the Opening Auction
instead of being canceled because they
are priced outside the Collar Price
Range established using the FLSET. As
stated above, current Rule 11.23(b)(2)(B)
provides that in the event there is no
Valid NBBO, the FLSET will be used as
the Volume Based Tie Breaker and basis
for calculating the Collar Price Range.
Because the current Opening Auction
Process occurs at 9:30:00 a.m., such a
Collar Price Range is based on an FLSET
that may not have occurred recently or
may not otherwise be reflective of
current market conditions. As a result,
the Exchange has observed instances
where auction eligible orders priced
equally or more aggressive than the
Indicative Price were canceled without
execution because they were outside the
Collar Price Range established using the
FLSET. While these observed instances
have been infrequent, the Exchange
believes it is important to ensure that
the BZX Opening Process is designed to
maximize the greatest volume of
executions so that the BZX Official
Opening Price accurately reflects
current market conditions and to allow
for executions between willing buying
and sellers. Further to this point,
Market-On-Open orders (also known as
MOO orders) 32 are market orders only
eligible for execution in the Opening
Auction that are designed for
participants that want to get an
execution without regard to price.
Because such orders are not price
15 U.S.C. 78f(b)(1).
As defined in Rule 11.23(a)(16), the term
‘‘Market-On-Open’’ or ‘‘MOO’’ shall mean a BZX
market order that is designated for execution only
in the Opening Auction.
31
32
E:\FR\FM\31AUN1.SGM
31AUN1
Federal Register / Vol. 87, No. 168 / Wednesday, August 31, 2022 / Notices
lotter on DSK11XQN23PROD with NOTICES1
sensitive, they are more likely to cross
contra-side orders outside of the Collar
Price Range and the Exchange believes
that the greater opportunity for
execution afforded by the proposed
changes will create a better opening
process for such MOO orders. From
January 1, 2022 through July 12, 2022
there have been 324 instances in which
MOO orders did not receive an
execution in the Opening Auction and
were thus cancelled. In 168 of those
instances the Opening Auction would
have been extended under the proposed
changes to the BZX Opening Process
and 10,936 shares could have
potentially received an execution.33 As
noted above, the proposed new
functionality would result in extending
the Opening Auction relatively
infrequently, but could be particularly
meaningful for orders that are willing to
execute in the Opening Auction,
especially where such orders are
Market-On-Open orders that are looking
for an execution without price
sensitivity. Further, the Exchange
believes that the possible downside of
delaying the dissemination of the LULD
bands is mitigated by the infrequency
with which LULD halts occur within the
first four minutes and 30 seconds of the
trading day and is also offset by the
benefits to the opportunity for increased
executions in the Opening Auction. As
further noted below, this delayed
dissemination of LULD bands is also a
tradeoff that already exists as it relates
to the opening process on the NYSE.
The Exchange is not aware of any
issues that the proposal would create
and does not expect the proposal to
impact other markets that trade BZXlisted securities pursuant to unlisted
trading privileges (‘‘UTP’’) in a manner
that is not necessary or appropriate in
furtherance of the purposes of the Act.
For example, the proposal will have no
impact on the UTP opening process for
the Exchange’s affiliated markets, Cboe
BYX Exchange, Inc. (‘‘BYX’’), Cboe
EDGA Exchange, Inc. (‘‘EDGA’’), and
Cboe EDGX Exchange, Inc. (‘‘EDGX’’
33 This calculation is across 73,927 total Opening
Auctions in BZX-listed securities during the
applicable period. The Exchange notes that this
calculation only includes MOO orders that were not
executed and would thus not include the following
scenarios: (i) Limit-On-Open orders that were
crossed with MOO orders (although the MOO order
portion is captured), other Limit-On-Open orders,
or limit orders on the Continuous Book; and (ii)
limit orders in the Continuous Book that were
crossed with MOO orders (although the MOO order
portion is captured). The Exchange believes that the
MOO orders likely represent the majority of the
instances in which crossed-interest was unexecuted
because it was outside of the Collar Price Range
because MOO orders are submitted for participation
in the Opening Auction more frequently than very
aggressively priced Limit-On-Open orders.
VerDate Sep<11>2014
16:59 Aug 30, 2022
Jkt 256001
and collectively with BYX and EDGA
referred to as the ‘‘Cboe Exchanges’’).
Each of the Cboe Exchanges provide for
an opening process for securities listed
pursuant to UTP (the ‘‘UTP Opening
Process’’),34 which state that the
opening process ‘‘will be priced at the
midpoint of the first NBBO subsequent
to the first two-sided quotation
published by the listing exchange after
9:30:00 a.m. Eastern Time.’’ 35 Such
process occurs regardless of NBBO
width. Because the Exchange will
continue to disseminate an NBBO
regardless of the timing of the Opening
Auction and the UTP Opening Process
takes place where there is a ‘‘two-sided
quotation published by the listing
exchange,’’ the proposed new
functionality will have no impact on the
UTP Opening Process rules of the Cboe
Exchanges. Further to this point, the
Exchange notes that MIAX Pearl
Exchange, an exchange that only offers
UTP trading, has identical language
related to its opening process and,
therefore, the Exchange would not
expect this change to have an impact on
its opening process.36
Furthermore, the Exchange notes that
it is the responsibility of each exchange
that offers UTP trading to establish and
maintain their opening process for UTP
securities such that it works with the
opening process of the applicable
primary listing venue. The Exchange
believes that it is generally in the public
interest for a primary listing venue to
improve the price discovery process for
its listed securities and that the rule
filing process provides the opportunity
for anyone to provide public comment
on any issues that might offset such
benefits, including operational issues
for exchanges offering UTP trading. The
Cboe Exchanges’ UTP Opening Process
was designed with the opening process
of the primary listing venue for the UTP
security in mind and provides different
processes depending on the listing
exchange of the applicable UTP
security.37 Because certain exchanges
allow for a security to be opened
manually, which often results in an
opening that occurs after 9:30:00 a.m.
ET, the UTP Opening Process rules
differentiate the opening process based
on the listing exchange of the applicable
UTP security. As such, other exchanges
have presumably also designed and
34 See BYX Rule 11.23, EDGA Rule 11.7, and
EDGX Rule 11.7 (collectively, the ‘‘UTP Opening
Process Rules’’).
35 See paragraph (c)(2) of UTP Opening Process
Rules.
36 See MIAX Pearl Exchange Rule 2615,
particularly Rule 2615(c)(2).
37 See paragraphs (c)(1) and (c)(2) of the UTP
Opening Process rules.
PO 00000
Frm 00079
Fmt 4703
Sfmt 4703
53519
maintain their respective UTP opening
processes with an eye toward the
opening process of the primary listing
exchange. To the extent that the
proposed change hypothetically created
issues for the UTP opening process of
other market centers or that such other
market centers otherwise disagree with
the Exchange’s proposed new
functionality, no such issues have been
raised through the public comment
process. Accordingly, the Exchange
believes that its proposal benefits
investors generally by enhancing the
Exchange’s price discovery process for
Opening Auctions without any
anticipated impact to other UTP
exchanges and, as such, that the
proposal is consistent with the Act.
The Exchange also believes the
proposal strikes a balance between
providing a better price discovery
mechanism by offering additional
execution opportunities for auction
eligible orders priced equally or more
aggressive than the Indicative Price of
the security and limiting any such delay
so that the BZX Official Opening Price
is reported to the SIP by 9:35 a.m. and
will therefore be used to set the LULD
bands. The Exchange notes that, while
there will be no LULD bands until the
Exchange disseminates a reference price
and thus there will be no LULD bands
during the period before the Opening
Auction Process occurs, this is a tradeoff
that already exists as it relates to the
opening process on the NYSE, which
may delay the opening process for an
indefinite period of time. The Exchange
also notes that LULD bands
disseminated during the circumstances
in which the proposed delay would be
applied are more likely to be based on
a price that may not be reflective of
current market conditions. For example,
in situations where the proposed delay
would be applied, the LULD bands
would be based off an FLSET that
occurred on the prior trading day, and
thus the LULD bands could be based on
a stale price. The Exchange is only
proposing to delay the Opening Auction
in circumstances where there is crossed
interest and no Valid NBBO meaning
that there are parties willing to execute
at a particular price and the NBBO is
not narrow enough to provide any
meaningful guidance about the actual
market value of the security. Therefore,
the Exchange believes any potential
drawback in a delay of the LULD bands
is mitigated by the limited
circumstances in which the delay would
occur and that any LULD bands
disseminated during such a delay may
not be reflective of current market
conditions. Delaying the opening
E:\FR\FM\31AUN1.SGM
31AUN1
lotter on DSK11XQN23PROD with NOTICES1
53520
Federal Register / Vol. 87, No. 168 / Wednesday, August 31, 2022 / Notices
auction process under certain
circumstances provides an opportunity
for more meaningful price formation
that is more representative of current
market conditions, especially in thinly
traded or less liquid securities which
are by definition less likely to have
executions during the period before the
Opening Auction Process occurs.
Further to this point, the Exchange
expects that: (i) the Opening Auction
Process will not be delayed frequently;
and (ii) even where the Opening
Auction Process is delayed, it is
unlikely that the price of the underlying
security will hit a price at which it
would have been subject to an LULD
halt if the Exchange had not delayed the
Opening Auction Process.38
Separately, the Exchange believes that
creating functionality that could delay
the Opening Auction Process by four
minutes and 30 seconds is consistent
with the Act because it also ensures that
the Exchange’s opening process is used
to determine the LULD band reference
price. If the opening price on a primary
listing exchange is not reported to the
SIPs within five minutes after the start
of Regular Trading Hours, the first
reference price for a trading day is the
arithmetic mean price of eligible
reported transactions for the NMS stock
over the preceding five minute period.39
However, if no eligible reported
transactions have occurred in the NMS
stock over the preceding five minute
period, there will be no reference price
and thus no LULD bands in the security
until an eligible reported transaction
occurs. The Exchange believes that
LULD bands are an important
mechanism for investor protection,
especially in thinly traded or illiquid
securities and, as such, is proposing to
calculate a BZX Official Opening Price
no later than 9:34:30 a.m. which will
allow it to continue to report the BZX
Official Opening price to the SIP prior
to 9:35 a.m. so that it serves as the
reference price on which the LULD
bands are based.
To the extent that the Exchange’s
proposed opening process results in a
more accurate BZX Official Opening
Price, it follows that such a price would
also provide a better foundation for the
LULD bands without negatively
impacting the LULD process because the
Exchange would continue to provide the
BZX Official Opening Price to the SIP
prior to 9:35. As a result, the Exchange
believes that the proposal would
38 The Exchange notes that during the period of
June 1, 2021 through May 31, 2022, a LULD halt
occurred in BZX listed symbols during the first four
minutes and 30 seconds of the trading day roughly
0.01% of the time (15/134,615).
39 See Section V(B)(2) of the Plan.
VerDate Sep<11>2014
16:59 Aug 30, 2022
Jkt 256001
promote just and equitable principles of
trade, remove impediments to and
perfect the mechanism of a free and
open market and a national market
system and, in general, protect investors
and the public interest.
The Exchange notes that the concept
of delaying an auction and widening the
Collar Price Range as provided in
proposed paragraphs
11.23(b)(2)(B)(iii)(b)(1) through (4) is
similar to the Twelfth Amendment of
the Plan and corresponding
amendments by the primary listing
exchanges. Specifically, Amendment 12
was created to improve re-openings
following a trading pause,40 with an eye
towards carefully balancing halt auction
price quality and the speed with which
continuous trading can be resumed.
Amendment 12 provided that auction
halt periods would be extended if either
the auction price at which the most
shares would be traded is outside the
range of the pre-defined price threshold
collars (the ‘‘price threshold collars’’) or
there is a market order share imbalance.
Further, Amendment 12 provided that
the price threshold collars would be
widened in the event that the auction’s
halt period is extended. In its approval
of Amendment 12, the Commission
stated that it is appropriate in the public
interest, for the protection of investors
and the maintenance of a fair and
orderly market to provide that a trading
pause continue until the primary listing
exchange has reopened trading using its
established reopening procedures, even
if such reopening is more than 10
minutes after the beginning of a trading
pause, and to require that trading
centers may not resume trading in an
NMS Stock following a trading pause
without price bands in such NMS Stock.
The Commission stated that these two
provisions together support a more
standardized process for reopening
trading after a trading pause has been
declared.
As a primary listing exchange, the
Exchange amended Rule 11.23(d) to
incorporate the provisions of
Amendment 12.41 Specifically, under
40 A ‘‘trading pause’’ refers to a function of the
LULD mechanism provided under the Plan.
Specifically, the Plan sets for procedures that
provide for market-wide LULD requirements that
prevent trades in individual NMS stocks from
occurring outside of the specified price bands and
provides for trading pauses to accommodate more
fundamental price moves.
41 See Securities Exchange Act No. 75879
(October 26, 2016) 81 FR 75875 (November 1, 2016)
(SR–BatsBZX–2016–61) (Notice of Filing of a
Proposed Rule Change To Amend Exchange Rule
11.23, Auctions, To Enhance the Reopening
Auction Process Following a Trading Halt Declared
Pursuant to the Plan To Address Extraordinary
Market Volatility Pursuant to Rule 608 of
Regulation NMS). See also Securities Exchange Act
PO 00000
Frm 00080
Fmt 4703
Sfmt 4703
Rule 11.23(d)(1)(A) the Quote-Only
Period 42 with respect to a halt auction
commences five (5) minutes prior to
such halt auction. Adopted Rule
11.23(d)(2)(C) provides for the QuoteOnly Period to be extended an
additional five (5) minutes should a halt
auction be unable to be performed due
to Market Order 43 imbalance under
11.23(d)(2)(B)(i) 44 or if the indicative
price, before being adjusted for halt
auction collars, is outside the halt
auction collars set forth in adopted
subparagraphs (i) 45 and (ii) 46 to
Exchange Rule 11.23(d)(2)(C) (either, an
‘‘Impermissible Price’’) (‘‘Initial
Extension Period’’). Similar to the
proposal, Rule 11.23(d)(2)(C)(ii)
provides that at the beginning of the
Initial Extension Period the upper
(lower) halt auction collar shall be
increased (decreased) by five (5) percent
in the direction of the Impermissible
Price, rounded to the nearest minimum
price variation. For securities with a
halt auction reference price of $3.00 or
less, the halt auction collar shall be
increased (decreased) in $0.15
increments in the direction of the
Impermissible Price. At the beginning of
each additional extension period, the
halt auction collar shall be widened in
accordance with this paragraph by the
same amount as the Initial Extension
Period. In its approval order,47 the
Commission stated that ‘‘extending the
Trading Pause and widening the halt
auction collar on the side of the
Impermissible Price would be a
measured approach to provide
additional time to attract offsetting
interest, to help to address an imbalance
that may not be resolved within the
prior halt auction collars, and to reduce
the potential for triggering another
Trading Pause.’’
The Exchange notes that the purpose
of Amendment 12 and corresponding
No. 79885 (January 26, 2017) 82 FR 8968 (February
1, 2017) (SR–BatsBZX–2016–61) (Order Granting
Approval of Proposed Rule Change, as Modified by
Amendment No. 1, To Amend Exchange Rule 11.23,
Auctions, To Enhance the Reopening Auction
Process Following a Trading Halt Declared Pursuant
to the Plan To Address Extraordinary Market
Volatility Pursuant to Rule 608 of Regulation NMS)
42 ‘‘Quote-Only Period’’ is defined as ‘‘a
designated period of time prior to a halt auction,
a Volatility Closing Auction, or an IPO Auction
during which Users may submit orders to the
Exchange for participation in the auction.’’ See
Exchange Rule 11.23(a)(17).
43 See Rule 11.9(a)(2).
44 Under 11.23(d)(2)(B)(i), the Quote-Only Period
may be extended where there are unmatched
Market Orders on the Auction Book associated with
the auction.
45 Rule 11.23(d)(2)(C)(i) provides for the initial
halt auction collar calculations.
46 Rule 11.23(d)(2)(C)(ii) provides for the
widening of the halt auction collars.
47 Supra note 26.
E:\FR\FM\31AUN1.SGM
31AUN1
lotter on DSK11XQN23PROD with NOTICES1
Federal Register / Vol. 87, No. 168 / Wednesday, August 31, 2022 / Notices
Exchange amendment was intended to
delay a halt auction to attract offsetting
interest, while the purpose of this
proposal is intended to delay the
Opening Auction Process in order to
provide the Opening Auction price
additional time to reflect current market
conditions. While Exchange Rule
11.23(d) and Amendment 12 apply only
to re-opening auctions that are single
venue liquidity events and this proposal
applies to the opening auction which is
not a single venue liquidity event,48
applying a common functionality across
the two remains logical because the
Exchange believes that delaying the
Opening Auction Process under certain
conditions such that the delay will be
coincident with the increasing liquidity
that comes shortly after the beginning of
Regular Trading Hours, which the
Exchange believes is similar to
extending halt auctions in order to
allow for greater participation and
simultaneous expansion of executable
price range. Even though trading is
ongoing while the Opening Auction
Process is underway, orders on the
Continuous Book are included in the
Opening Auction Process and the
increased liquidity around the open will
generally increase liquidity in the
Opening Auction Process even if market
participants are entering orders in the
Continuous Book rather than auction
specific orders. To this point, both are
designed to balance auction price
quality and the speed with which an
auction can occur and thus continuous
trading can be resumed, in the case of
a halt auction, or when the Opening
Auction Process completes, in the case
of an Opening Auction. Further, this
consistency in approach offers a process
that market participants are already
familiar with. Having consistent auction
processes benefits all investors because
market participants are already familiar
with the proposed functionality and
will not have to learn a new set of
nuanced rules designed to accomplish
the same end goal, will understand how
the functionality operates because of its
common usage in the LULD context,
and will generally help with quick
understanding and adoption while
reducing the need for market
participants to build systems designed
to accommodate an entirely new
process. Therefore, the Exchange
believes the proposal is appropriate, in
the public interest, for the protection of
The Exchange’s Opening Auction is not a
single venue liquidity event because trading is
occurring on the Exchange’s Continuous book and
at away market centers before and during the
Opening Auction.
48
VerDate Sep<11>2014
16:59 Aug 30, 2022
Jkt 256001
investors and the maintenance of a fair
and orderly market.
The Exchange also believes its
proposal to the last two sentences of
existing Rule 11.23(b)(2)(B) to
paragraphs 11.23(b)(2)(B)(iv) and (v),
respectively, will improve clarity and
readability of the rule. Further, the
proposal to remove the provision of
paragraph 11.23(b)(2)(B)(v) that states
the FLSET will be the previous BZX
Official Closing Price is consistent with
the new proposed functionality, which
would allow for an FLSET to occur
between 9:30 and 9:34:30.
Finally, the Exchange believes its
proposed clarifications to Rules
11.23(b)(1)(A) and (B) to reflect that the
Opening Auction may occur at a time
other than 9:30 a.m. will allow the
Exchange to more easily administer its
rules, and Members can more clearly
understand how the Opening Auction
Process may occur. Specifically, the
proposed amendments to Rules
11.23(b)(1)(A) and (B) will add clarity,
transparency and internal consistency to
Exchange rules making them easier to
navigate, in light of the other proposed
Rule changes described herein.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
The Exchange does not believe that
the proposed rule change will impose
any burden on competition not
necessary or appropriate in furtherance
of the purposes of the Act. To the
contrary, allowing the Exchange to make
the above proposed modifications will
allow the Exchange to better compete
with other exchanges as a listing venue
by improving the Exchange’s auction
process by allowing more executions to
occur at more reasonable prices that are
based on the current value of the
security. As mentioned above, the
Exchange has received feedback from
market participants regarding the issue
under the current process, and the
proposed amendments will both address
this feedback and improve the
Exchange’s auction process, allowing it
to better compete as both a listing and
execution venue.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
The Exchange neither solicited nor
received comments on the proposed
rule change.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of
publication of this notice in the Federal
PO 00000
Frm 00081
Fmt 4703
Sfmt 4703
53521
Register or within such longer period
up to 90 days (i) as the Commission may
designate if it finds such longer period
to be appropriate and publishes its
reasons for so finding or (ii) as to which
the Exchange consents, the Commission
will:
A. by order approve or disapprove
such proposed rule change, or
B. institute proceedings to determine
whether the proposed rule change
should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
Electronic Comments
• Use the Commission’s internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include File Number SR–
CboeBZX–2022–045 on the subject line.
Paper Comments
• Send paper comments in triplicate
to Secretary, Securities and Exchange
Commission, 100 F Street NE,
Washington, DC 20549–1090.
All submissions should refer to File
Number SR–CboeBZX–2022–045. This
file number should be included on the
subject line if email is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
internet website (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for website viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE,
Washington, DC 20549, on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of such
filing also will be available for
inspection and copying at the principal
office of the Exchange. All comments
received will be posted without change.
Persons submitting comments are
cautioned that we do not redact or edit
personal identifying information from
E:\FR\FM\31AUN1.SGM
31AUN1
53522
Federal Register / Vol. 87, No. 168 / Wednesday, August 31, 2022 / Notices
comment submissions. You should
submit only information that you wish
to make available publicly. All
submissions should refer to File
Number SR–CboeBZX–2022–045 and
should be submitted on or before
September 21, 2022.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.49
J. Matthew DeLesDernier,
Deputy Secretary.
[FR Doc. 2022–18764 Filed 8–30–22; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–95605; File No. SR–FICC–
2022–005]
Self-Regulatory Organizations; Fixed
Income Clearing Corporation; Order
Approving Proposed Rule Change To
Revise the Formula Used To Calculate
the VaR Charge for Repo Interest
Volatility
August 25, 2022.
I. Introduction
On June 29, 2022, Fixed Income
Clearing Corporation (‘‘FICC’’) filed
with the Securities and Exchange
Commission (‘‘Commission’’), pursuant
to Section 19(b)(1) of the Securities
Exchange Act of 1934 (‘‘Act’’) 1 and Rule
19b–4 thereunder,2 proposed rule
change SR–FICC–2022–005. The
proposed rule change was published for
comment in the Federal Register on July
15, 2022.3 The Commission did not
receive any comment letters on the
proposed rule change. For the reasons
discussed below, the Commission is
approving the proposed rule change.
II. Description of the Proposed Rule
Change
FICC proposes to amend its
Government Securities Division
(‘‘GSD’’) 4 Quantitative Risk
Management (‘‘QRM’’) Methodology
Document—GSD Initial Market Risk
17 CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 Securities Exchange Act Release No. 95256 (July
12, 2022), 87 FR 42524 (July 15, 2022) (SR–FICC–
2022–005) (‘‘Notice’’).
4 FICC operates two divisions, GSD and the
Mortgage Backed Securities Division (‘‘MBSD’’).
GSD provides trade comparison, netting, risk
management, settlement, and central counterparty
(‘‘CCP’’) services for the U.S. Government securities
market, including repos. MBSD provides the same
services for the U.S. mortgage-backed securities
market. GSD and MBSD maintain separate sets of
rules, margin models, and clearing funds. The
proposed rule change relates solely to GSD.
49
lotter on DSK11XQN23PROD with NOTICES1
1 15
VerDate Sep<11>2014
16:59 Aug 30, 2022
Jkt 256001
Margin Model (‘‘QRM Methodology
Document’’) 5 in order to (i) revise the
formula FICC uses to calculate the Value
at Risk charge (‘‘VaR Charge’’) 6 margin
component for repurchase agreement
(‘‘repo’’) interest volatility, and (ii) make
certain technical and conforming
changes.
A. Background
Repos involve a pair of transactions
between two parties. The first
transaction consists of the sale of
securities, in which one party (the ‘‘cash
borrower’’) delivers securities in
exchange for the other party’s (the ‘‘cash
lender’’) delivery of cash. The second
transaction occurs on a date after that of
the first transaction and consists of a
repurchase of the securities, in which
the obligations to deliver cash and
securities are reversed. FICC’s members
submit repos to FICC for matching,
comparison, risk management, and
ultimately, net settlement. FICC
guarantees that the cash borrower
receives its repo collateral back at the
close of a repo transaction, while the
cash lender receives the amount paid at
the repo’s start, plus interest. Interest on
a repo transaction is the difference
between the repurchase settlement
amount and the start amount paid on
the repo inception date.
A key tool that FICC uses to manage
its credit exposures to its members is
the daily collection of margin from each
member. The aggregated amount of all
members’ margin constitutes the
Clearing Fund,7 which FICC would be
able to access should a defaulted
member’s own margin be insufficient to
satisfy losses to FICC caused by the
liquidation of that member’s portfolio.
Each member’s margin consists of a
number of applicable components,
including the VaR Charge which is
designed to capture the potential market
price risk associated with the securities
in a member’s portfolio.8 The VaR
Charge is typically the largest
component of a member’s margin
requirement. FICC designed the VaR
5 FICC filed an excerpt of the QRM Methodology
Document showing the proposed changes as a
confidential exhibit to this proposed rule change,
pursuant to 17 CFR 240.24–b2. FICC originally filed
the QRM Methodology Document confidentially as
part of a previous proposed rule change and
advance notice approved by the Commission
regarding FICC’s GSD sensitivity VaR. See
Securities Exchange Act Release Nos. 83362 (June
1, 2018), 83 FR 26514 (June 7, 2018) (SR–FICC–
2018–001) and 83223 (May 11, 2018), 83 FR 23020
(May 17, 2018) (SR–FICC–2018–801).
6 Capitalized terms not defined herein are defined
in FICC’s GSD Rulebook, available at https://
www.dtcc.com/∼/media/Files/Downloads/legal/
rules/ficc_gov_rules.pdf (‘‘Rules’’).
7 See Rule 4 of the Rules, supra note 6.
8 See Rule 1 of the Rules, supra note 6.
PO 00000
Frm 00082
Fmt 4703
Sfmt 4703
Charge to cover FICC’s projected
liquidation losses with respect to a
defaulted member’s portfolio at a 99
percent confidence level.
The VaR Charge includes, among
other things, a component that
addresses repo interest volatility (the
‘‘repo interest volatility charge’’).9 The
QRM Methodology Document describes
FICC’s formula for calculating the repo
interest volatility charge. The market
value of interest payments for the
duration of a repo transaction are
subject to the risk of movements of the
market repo interest rates. Since FICC
guarantees the repo interest payment to
the cash lenders, FICC must mitigate the
risk arising out of fluctuations in market
repo interest rates for a specified period
of time after a member default.10
Under the current formula, the repo
interest positions for a given member
portfolio are put into different risk
buckets based on (i) whether the
underlying repo trade is a generic repo
trade or a special repo trade,11 and (ii)
the time to settlement of the underlying
repo trade. FICC assesses the repo
interest volatility charge by applying a
haircut schedule to the different risk
buckets, with a single haircut rate
applied to each risk bucket after netting
the short and long repo interest
positions within the relevant bucket.
The total net amount of each risk bucket
equals the sum of the products of the
repo start amount and the time to
settlement of each repo interest position
in that risk bucket. If the total net
amount is positive (i.e., long), FICC
applies a long repo haircut rate to the
total net amount for that risk bucket to
calculate the repo interest volatility
charge for that risk bucket. If the total
net amount is negative (i.e., short), FICC
applies a short repo haircut rate to the
absolute value of the total net amount
for that risk bucket to calculate the repo
interest volatility charge for that risk
bucket. The total repo interest volatility
charge for a member’s portfolio is the
sum of the repo interest volatility
charges of all of the risk buckets in the
portfolio. Accordingly, the current
formula reflects a repo interest rate
9 Currently, the repo interest volatility constitutes
approximately 3 percent of the total GSD margin (at
the CCP level). See Notice, supra note 3, at 42524.
10 This time period is currently set at three days,
which represents the duration of time that FICC
would be subject to market risk after a member
default, starting from the time of the last successful
margin collection to the time the market risk
exposure is effectively mitigated. See Notice, supra
note 3, at 42524.
11 FICC designates repo trades as either generic or
special depending on how the repo rate of the
trade’s particular collateral compares to the
prevailing market rates of similar repo transactions.
E:\FR\FM\31AUN1.SGM
31AUN1
]]>Agencies
[Federal Register Volume 87, Number 168 (Wednesday, August 31, 2022)]
[Notices]
[Pages 53514-53522]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-18764]
=======================================================================
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 95601; File No. SR-CboeBZX-2022-045]
Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Notice of
Filing of a Proposed Rule Change To Amend the Opening Auction Process
Provided Under Rule 11.23(b)(2)(B)
August 25, 2022.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given
that on August 15, 2022, Cboe BZX Exchange, Inc. (the ``Exchange'' or
``BZX'') filed with the Securities and Exchange Commission (the
``Commission'') the proposed rule change as described in Items I, II,
and III below, which Items have been prepared by the Exchange. The
Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
Cboe BZX Exchange, Inc. (the ``Exchange'' or ``BZX'') is filing
with the Securities and Exchange Commission (``Commission'') a proposal
to amend the Opening Auction process provided under Rule 11.23(b)(2)(B)
(the ``Opening Auction Process'') to better align with current market
conditions, and, where certain market conditions are not optimal, to
delay the Opening Auction from occurring until those market conditions
have improved. The text of the proposed rule change is provided in
Exhibit 5.
The text of the proposed rule change is also available on the
Exchange's website (https://markets.cboe.com/us/equities/regulation/rule_filings/bzx/), at the Exchange's Office of the Secretary, and at
the Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The Exchange has prepared summaries, set forth in
sections A, B, and C below, of
[[Page 53515]]
the most significant aspects of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Exchange proposes to amend Rule 11.23(b)(2)(B) to make the
Opening Auction Process more dynamic by, under certain circumstances
delaying the Opening Auction in order to incorporate additional
information into the determination of the Opening Auction price.
Specifically, as proposed the Rule would provide that when there is no
Valid NBBO \3\ in a BZX-listed security and there is an Indicative
Price \4\ that is not within the Collar Price Range,\5\ the Opening
Auction will be delayed until market conditions improve or the delay
period has lapsed, as further described below.
---------------------------------------------------------------------------
\3\ As provided in Rule 11.23(a)(23), an NBBO is a Valid NBBO
where: (i) there is both a NBB and NBO for the security; (ii) the
NBBO is not crossed; and (iii) the midpoint of the NBBO is less than
the Maximum Percentage away from both the NBB and the NBO. See
Exchange Rule 11.23(a)(23). The Maximum Percentage will vary
depending on the price of the NBBO midpoint. Currently, the Maximum
Percentages are as follows: for a NBBO midpoint price less than or
equal to $25, the Maximum Percentage is 5%; for a NBBO midpoint
price greater than $25 but less than or equal to $50, the Maximum
Percentage is 2.5%; for a NBBO midpoint price greater than $50, the
Maximum Percentage is 1.5%. See Section 1.5 (Definitions) of the US
Equities Auction Process at https://cdn.cboe.com/resources/membership/Cboe_US_Equities_Auction_Process.pdf.
\4\ The term ``Indicative Price'' shall mean the price at which
the most shares from the Auction Book and the Continuous Book would
match. In the event of a volume based tie at multiple price levels,
the Indicative Price will be the price which results in the minimum
total imbalance. In the event of a volume based tie and a tie in
minimum total imbalance at multiple price levels, the Indicative
Price will be the price closest to the Volume Based Tie Breaker. See
Exchange Rule 11.23(a)(10).
\5\ See Exchange Rule 11.23(a)(6).
---------------------------------------------------------------------------
The Exchange notes that the official opening price disseminated by
the primary listing market provides market participants valuable
information which in most cases is used to calculate the initial limit
up-limit down (``LULD'') bands and also may serve as the basis for
trading strategies for that trading day. However, the official opening
price is not as important or time sensitive as the official closing
price disseminated by the primary listing market, which is used for the
pricing and valuation of certain indices, funds and derivative
products. The Exchange believes the benefit of allowing crossed auction
interest to execute at the best possible price outweighs the minimal
and finite delay in the dissemination of the BZX Opening Price and LULD
bands. Specifically, as discussed further below, the Exchange believes
that the possible downside of delaying the dissemination of the LULD
bands is mitigated by the infrequency with which LULD halts occur
within the first four minutes and 30 seconds of the trading day and is
also offset by the benefits to the opportunity for increased executions
in the Opening Auction. As further noted below, this delayed
dissemination of LULD bands is also a tradeoff that already exists as
it relates to the opening process on the New York Stock Exchange LLC
(``NYSE''), which may delay its opening process indefinitely. Finally,
the Exchange notes that because the proposed functionality would only
apply where there is crossed interest that is outside the Collar Price
Range and there is not a Valid NBBO, the Exchange would only delay the
Opening Auction (and thus delay the dissemination of the LULD bands) in
certain situations. In those situations, it is more likely that the
LULD bands disseminated without a delay in the Opening Auction are
based on a price that is not reflective of current market conditions.
As such, the Exchange believes that the proposal strikes an
appropriate balance by providing additional time for the Opening
Auction Process to occur so that under such circumstances BZX-listed
securities have an opportunity for more meaningful price formation that
is more representative of current market conditions, but limiting any
such delay so that the BZX Official Opening Price is reported to the
Securities Information Processor (``SIP'') by 9:35 a.m. and will
therefore be used to set the LULD bands.\6\
---------------------------------------------------------------------------
\6\ The SIP links the U.S. markets by processing and
consolidating all protected bid/ask quotes and trades from every
trading venue into a single data feed.
---------------------------------------------------------------------------
Background
As noted above, the Exchange is proposing that under limited
circumstances its current Opening Auction Process would be amended to
delay the process such that additional information could be
incorporated into the determination of the Opening Auction price.
Currently, Rule 11.23(b)(2)(B) sets forth the process by which the BZX
Official Opening Price \7\ is determined for BZX-listed securities
during the Opening Auction Process. Specifically, as provided in Rule
11.23(b)(2)(B), the Opening Auction price will be the price level
within the Collar Price Range that maximizes the number of shares
executed between the Continuous Book \8\ and Auction Book \9\ in the
Opening Auction. In the event of a volume based tie at multiple price
levels, the Opening Auction price will be the price which results in
the minimum total imbalance. In the event of a volume based tie and a
tie in minimum total imbalance at multiple price levels, the Opening
Auction price will be the price closest to the Volume Based Tie
Breaker.\10\
---------------------------------------------------------------------------
\7\ See Exchange Rule 11.23(a)(5).
\8\ See Exchange Rule 11.23(a)(7).
\9\ See Exchange Rule 11.23(a)(1).
\10\ The Volume Based Tie Breaker is the midpoint of the NBBO
for a particular security where the NBBO is a Valid NBBO. Where the
NBBO is not a Valid NBBO, the price of the FLSET is used as the
Volume Based Tie Breaker. See Exchange Rule 11.23(a)(23).
---------------------------------------------------------------------------
The Volume Based Tie Breaker for an Opening Auction will be the
midpoint of the NBBO where there is a Valid NBBO. Where there is no
Valid NBBO, the Final Last Sale Eligible Trade (``FLSET'') \11\ will be
used as the Volume Based Tie Breaker.\12\ Because the FLSET is
typically based on the most recent execution in a security during
Regular Trading Hours, its value may be significantly away from the
Indicative Price at the time of the Opening Auction Process, especially
in more thinly traded securities. As a result, the Exchange has
observed instances where auction eligible orders priced in-line with
the Indicative Price were not executed in the Opening Auction because
they were outside the Collar Price Range established using the FLSET.
Based on analysis by the Exchange and feedback from market
participants, certain of these instances resulted in orders not
receiving executions in the Opening Auction that would have otherwise
occurred at prices that would have been acceptable to both parties to
the execution. To illustrate this point, the Exchange presents the
following example.
---------------------------------------------------------------------------
\11\ See Exchange Rule 11.23(a)(9).
\12\ The Exchange estimates that there is no Valid NBBO for
approximately 5.81% of the Exchange's Opening Auctions.
---------------------------------------------------------------------------
Example 1
Consider a security with a prevailing NBBO at 9:30:00 a.m. of
$27.10 x $29.54 and two Limit-On-Open orders on the Auction Book--a buy
for 1,000 shares at $27.90 and a sell for 1,500 shares at $27.90.\13\
The Indicative Price, which is the price at which the most shares from
the Auction Book and the Continuous Book would match, would be $27.90
because the only crossed interest comes from the two orders on the
Auction Book. Therefore, there is crossed interest willing to execute
at a price
[[Page 53516]]
within the NBBO. However, because the midpoint of the NBBO (i.e.,
$28.32) is more than the Maximum Percentage \14\ away from both the NBB
and NBO, the NBBO is not a Valid NBBO and thus the NBBO midpoint would
not be used as the Volume Based Tie Breaker. Instead, the Volume Based
Tie Breaker would be the FLSET, which would, by definition, be the BZX
Official Closing Price from the previous business day, which was
$26.52. Using the FLSET as the Collar Midpoint,\15\ the Collar Price
Range would be $25.19 x $27.85.\16\ Because the Indicative Price is
outside of the Collar Price Range and there is no crossed interest
within the Collar Price Range, there would be no execution as part of
the Opening Auction. Therefore, crossed interest from the Auction Book
that was priced equal to or more aggressive than the Indicative Price
and was within the NBBO would be canceled without execution.\17\
---------------------------------------------------------------------------
\13\ For purposes of this example, there are no orders on the
Continuous Book.
\14\ As noted above, the Maximum Percentage for a NBBO midpoint
price greater than $25 but less than or equal to $50 is 2.5%.
\15\ As provided in Rule 11.23(a)(6), the Collar Midpoint is the
Volume Based Tie Breaker for Opening Auctions.
\16\ The Collar Price Range is always double the Maximum
Percentage. Therefore, the Collar Price Range in Example 1 is 5%.
\17\ See Exchange Rule 11.23(b)(3)(C).
---------------------------------------------------------------------------
Proposal
Based on the scenario described above, the Exchange is proposing to
change its Opening Auction functionality only in circumstances where
(i) there is an Indicative Price, (ii) there is not a Valid NBBO, and/
or (iii) the Indicative Price is not within the FLSET-established
Collar Price Range. As proposed and described in further detail below,
the Opening Auction would occur pursuant to the Standard Opening
Auction Process if the NBBO becomes a Valid NBBO (i.e., the spread
narrows as markets open such that the midpoint of the NBBO is less than
the Maximum Percentage away from both the NBB and the NBO) before
9:30:05, or if the Indicative Price moves within the Collar Price Range
set by the FLSET (i.e., orders on the Auction Book and/or non-displayed
orders on the Continuous Book change the price level at which the most
shares from the Auction Book and the Continuous Book would match to be
within the Collar Price Range) prior to 9:34:30.
Proposed Rule 11.23(b)(2)(B)(i) would set forth the ``Standard
Opening Process'', which mirrors the current process described in Rule
11.23(b)(2)(B). Proposed Rule 11.23(b)(2)(B)(ii) would provide that if
there is no Valid NBBO and the Indicative Price is within the Collar
Price Range, the Opening Auction price will be established pursuant to
the Standard Opening Process. Proposed Rule 11.23(b)(2)(B)(iii) would
delay and set forth an alternative Opening Auction Process in the event
there is no Valid NBBO and the Indicative Price is not within the
Collar Price Range. The proposal is designed to prevent the
cancellation of auction eligible orders priced equally or more
aggressive than the Indicative Price which the Exchange believes will
facilitate the presence of sufficient liquidity and information to make
the Opening Auction a meaningful price formation event in BZX-listed
securities.
Proposed Rule 11.23(b)(2)(B)(iii) would provide that the Opening
Auction price will be delayed as set forth in subparagraphs (a) and (b)
as follows:
(a) If after the one-second delay there is a Valid NBBO or the
Indicative Price is within the Collar Price Range, the Opening
Auction price will be established pursuant to the Standard Opening
Auction Process. If there is no Valid NBBO and the Indicative Price
is not within the Collar Price Range after the one-second delay, the
Opening Auction will be delayed by one additional second, at which
point if there is a Valid NBBO or the Indicative Price is within the
Collar Price Range, the Opening Auction price will be established
pursuant to the Standard Opening Process. If after the additional
one-second delay there is a Valid NBBO or the Indicative Price is
not within the Collar Price Range, the process described in this
paragraph (a) will continue to be applied in one-second increments
until either the Opening Auction occurs or until five seconds has
lapsed (i.e., 9:30:05 a.m.).
(b) If the Opening Auction has not occurred by 9:30:05, the
System will widen the Collar Price Range in the direction of the
Indicative Price by 5% of the Volume Based Tie Breaker, which will
be Final Last Sale Eligible Trade as of 9:30:05 a.m. (the ``Widening
Amount'').\18\ If the Indicative Price is within the widened Collar
Price Range, the Opening Auction price will be established pursuant
to the Standard Opening Auction Process. If the Indicative Price is
not within the widened Collar Price Range, the Opening Auction will
be further delayed, as discussed below.
---------------------------------------------------------------------------
\18\ The Exchange notes that Widening Amount will be locked-in
as of 9:30:05, and will not change between 9:30:05 and 9:34:30 even
in the event that a round lot trade reported to the consolidated
tape was received by the Exchange during that time (i.e., a FLSET).
---------------------------------------------------------------------------
In sum, the process described in proposed paragraph Rule
11.23(b)(2)(B)(iii)(a) would simply allow for the Opening Auction to
occur using the Standard Opening Process described in paragraph
11.23(b)(2)(B)(i), the only difference between the current process
being that such Opening Auction could instead occur within the first
five seconds of Regular Trading Hours \19\ based on whether there is
a Valid NBBO or the Indicative Price is within the Collar Price
Range. If, after each one-second delay, there is no longer an
Indicative Price (i.e., there is no longer crossed interest), the
Opening Auction would occur immediately pursuant to proposed Rule
11.23(2)(B)(v). After the first five seconds of Regular Trading
Hours, the System will only check for whether the Indicative Price
is within the Collar Price Range and will not check for a Valid NBBO
because the process described in Proposed Rules
11.23(b)(2)(B)(iii)(b)(1) through (4) is intended to closely follow
the reopening process that is described in the Twelfth Amendment of
the Plan to Address Extraordinary Market Volatility \20\ (the
``Plan'') and corresponding Exchange Rules, as described in further
detail below.
---------------------------------------------------------------------------
\19\ See Exchange Rule 1.5(w).
\20\ See Securities and Exchange Act no. 79410 (November 28,
2016) 81 FR 87114 (December 2, 2016) (Notice of Filing of the
Twelfth Amendment to the National Market System Plan To Address
Extraordinary Market Volatility (``Amendment 12'')).
Proposed Rules 11.23(b)(2)(B)(iii)(b)(1) through (4) would set
forth the delay of the Opening Auction if no auction has occurred
between 9:30:05 and 9:34:30. Specifically, the proposed Rules would
---------------------------------------------------------------------------
provide:
(1) The System will check to see whether the Indicative Price is
inside the widened Collar Price Range every second between 9:30:05
and 9:30:30 a.m. If an Indicative Price is inside the widened Collar
Price Range during a check, the Opening Auction price will be
established pursuant to the Standard Opening Auction Process.
(2) If by 9:30:30 a.m. the Indicative Price is not within the
widened Collar Price Range, the Collar Price Range will again widen
by the Widening Amount. The System will check to see whether the
Indicative Price is inside the widened Collar Price Range every
second between 9:30:30 and 9:31:30 a.m. If an Indicative Price is
inside the widened Collar Price Range during a check, the Opening
Auction price will be established pursuant to the Standard Opening
Auction Process.
(3) If by 9:31:30 a.m. the Indicative Price is not within the
widened Collar Price Range, the System will check to see whether the
Indicative Price is inside the widened Collar Price Range every
second between 9:31:30 and 9:34:30 a.m. If an Indicative Price is
inside the widened Collar Price Range during a check, the Opening
Auction price will be established pursuant to the Standard Opening
Auction Process. Unless the Opening Auction has occurred, the Collar
Price Range will widen in the direction of the Indicative Price by
the Widening Amount each minute from 9:31:30 to 9:34:30.
(4) If no Opening Auction has occurred by 9:34:30 a.m., the
Opening Auction will occur pursuant to the Standard Opening Auction
Process using the expanded Collar Price Range as of 9:34:30.
The Exchange first notes that if, during after each one-second
delay,
[[Page 53517]]
there is no longer an Indicative Price (i.e., there is no longer
crossed interest), the Opening Auction would occur immediately pursuant
to proposed Rule 11.23(2)(B)(v).\21\ The Exchange is also proposing to
stop extending the Opening Auction Process at 9:34:30 a.m. in part to
ensure that the Exchange is able to disseminate the BZX Official
Opening Price with sufficient time to be used in the determination of
the opening price \22\ pursuant to the Plan, from which the reference
price \23\ is used to calculate the LULD bands. Specifically, the
reference price for trading is typically the opening price on the
primary listing exchange in an NMS Stock if such opening price occurs
less than five minutes after the start of Regular Trading Hours.
Therefore, because under the proposal the Opening Auction Process would
occur no later than 9:34:30, the LULD bands would be determined based
on the BZX Official Opening Price. While the LULD bands for BZX-listed
securities could be determined pursuant to the Plan without a BZX
Official Opening Price, the Exchange believes that the inclusion of
such price provides for LULD bands that more accurately reflect current
market conditions.
---------------------------------------------------------------------------
\21\ The Exchange notes that the BZX Official Opening Price will
be the price of the FLSET, which will be the previous BZX Official
Closing Price unless an FLSET occurred after 9:30:00.
\22\ For purposes of the Plan, ``opening price'' shall mean the
price of a transaction that opens trading on the primary listing
exchange. If the primary listing exchange opens with quotations, the
``opening price'' shall mean the closing price of the NMS Stock on
the primary listing exchange on the previous trading day, or if no
such closing price exists, the last sale on the primary listing
exchange. See section I(I) of the Plan.
\23\ For purposes of the plan, ``reference price'' shall have
the meaning provided in Section V of the Plan. See section I(R) of
the Plan. Section V of the Plan provides that the LULD price bands
are based on a reference price for each NMS Stock that, for purposes
of the first reference price for a trading day shall be the opening
price on the primary listing exchange in an NMS Stock if such
opening price occurs less than five minutes after the start of
Regular Trading Hours. If the opening price on the primary listing
exchange in an NMS Stock does not occur within five minutes after
the start of Regular Trading Hours, the first reference price for a
trading day shall be the arithmetic mean price of eligible reported
transactions for the NMS Stock over the preceding five minute time
period. If there is no opening price on the primary listing exchange
in an NMS Stock and no trades have occurred by 9:35:00, the previous
reference price shall remain in effect.
---------------------------------------------------------------------------
The Exchange also proposes to move the last two sentences of
existing Rule 11.23(b)(2)(B) to proposed Rules 11.23(b)(2)(B)(iv) and
(v), respectively, with certain modifications to Rule
11.23(b)(2)(B)(v). Specifically, proposed Rule 11.23(b)(2)(B)(iv) would
provide that the Opening Auction Price will be the BZX Official Opening
Price. Proposed Rule 11.23(b)(2)(B)(v) would provide that in the event
that there is no Opening Auction for an issue, the BZX Official Opening
Price will be the price of the FLSET. The Exchange proposes to
eliminate the provision that states that the FLSET will be the previous
BZX Official Closing Price as it is possible that an FLSET may occur
between 9:30:00 and 9:34:30.
Based on the above proposed amendments, the Exchange proposes to
amend Rules 11.23(b)(1)(A) and (B) to reflect that the Opening Auction
may occur at a time other than 9:30 a.m. Specifically, the Exchange
proposes to amend paragraph (A) to provide the following: Users may
submit orders to the Exchange as set forth in Rule 11.1. Any Eligible
Auction Orders \24\ designated for the Opening Auction will be queued
for participation in the Opening Auction. Users may submit limit-on-
open (``LOO'') and market-on-open (``MOO'') orders until 9:28 a.m., at
which point any additional LOO and MOO orders submitted to the Exchange
will be rejected. Regular Hours Only \25\ (``RHO'') market orders will
also be rejected from 9:28 a.m. until the Opening Auction has
concluded. Users may submit late-limit-on-open \26\ (``LLOO'') orders
from 9:28 a.m. until the Opening Auction has concluded. Any LLOO orders
submitted before 9:28 a.m. or after the Opening Auction has concluded
will be rejected. RHO limit orders submitted from 9:28 a.m. until the
Opening Auction has concluded will be treated as LLOO orders.
---------------------------------------------------------------------------
\24\ See Exchange Rule 11.23(a)(8).
\25\ See Exchange Rule 11.9(b)(7).
\26\ See Exchange Rule 11.23(a)(12).
---------------------------------------------------------------------------
The Exchange proposes to amend Rule 11.23(b)(1)(B) to provide that
Eligible Auction Orders designated for the Opening Auction may not be
cancelled or modified from 9:28 a.m. until the Opening Auction has
concluded except that RHO limit orders designated for the Opening
Auction may be modified, but not cancelled, from 9:28 a.m. until the
time the Opening Auction has concluded. Any such RHO limit orders
modified from 9:28 a.m. until the Opening Auction has concluded will be
treated as LLOO orders.
To illustrate the proposed functionality, consider the following
examples.
Example 2
Applying the same facts from Example 1 related to current
functionality above, assume a security has a prevailing NBBO at 9:30:00
a.m. of $27.10 x $29.54 and two Limit-On-Open orders on the Auction
Book--a buy for 1,000 shares at $27.90 and a sell for 1,500 shares at
$27.90.\27\ The Indicative Price, which is the price at which the most
shares from the Auction Book and the Continuous Book would match, would
be $27.90 because the only crossed interest comes from the two orders
on the Auction Book.
---------------------------------------------------------------------------
\27\ For purposes of this example, there are no orders on the
Continuous Book.
---------------------------------------------------------------------------
Because there was no Valid NBBO and the Indicative Price was
outside of the Collar Price Range, the System would check at each
second starting at 9:30:00 and ending at 9:30:05 for a Valid NBBO and
for the Indicative Price that is within the Collar Price Range.
Assuming that these checks did not find a Valid NBBO or an Indicative
Price within the Collar Price Range, after the check at 9:30:05 the
Collar Price Range is widened in the direction of the Indicative Price
by 5% of the FLSET (i.e., $26.52) as of 9:30:05, or $1.33, resulting in
a Collar Price Range of $25.19 x $29.18. Upon the first one second
check thereafter, the Indicative Price of $27.90 is within the widened
Collar Price Range and the auction occurs immediately pursuant to the
Standard Opening Auction Process.
Example 3
Applying the facts from Example 2 above, but also considering that
another two orders exist on the Auction Book including a buy order for
2,000 shares at $30.50 and a sell order for 500 shares at $30.50.\28\
The additional orders entered to the Auction Book would move the
Indicative Price to $30.50 because $30.50 would be the price at which
the most shares would match (i.e., 2,000 shares). Given that the
Indicative Price ($30.50) is not within the widened Collar Price Range
calculated above ($25.19 x $29.18), the Opening Auction would not occur
after the first collar widening. As such, the System would check at
each second starting at 9:30:05 and ending at 9:30:30 for an Indicative
Price that is within the Collar Price Range. Assuming that the
Indicative Price did not change and thus the checks would not find an
Indicative Price within the Collar Price Range, after the check at
9:30:30 the Collar Price Range would once again be widened in the
direction of the Indicative Price by the same 5% amount used for the
initial collar widening at 9:30:05 ($1.33). The Collar Price Range from
9:30:30 to 9:31:30 would then be $25.19 x $30.51. Upon the first one
second check thereafter, the Indicative Price of $30.50 is within the
widened
[[Page 53518]]
Collar Price Range and the auction would occur immediately pursuant to
the Standard Opening Auction Process.
---------------------------------------------------------------------------
\28\ For purposes of this example, assume there are no orders on
the BZX Continuous Book.
---------------------------------------------------------------------------
Example 4
Applying the facts from Example 3 above, but replacing the two
additional orders to the Auction Book a buy order for 2,000 shares at
$34.75 and a sell order for 500 shares at $34.75. The orders entered to
the Auction Book would move the Indicative Price to $34.75 because
$34.75 would be the price at which the most shares would match (i.e.,
2,000 shares). Given that the Indicative Price ($34.75) is not within
the widened Collar Price Range calculated above at 9:30:30 ($25.19 x
$30.51), the Opening Auction would not occur after the second collar
widening. As such, the System would check at each second starting at
9:30:30 and ending at 9:31:30 for the Indicative Price being within the
Collar Price Range. Assuming that the Indicative Price did not change
and thus the checks would not find an Indicative Price within the
Collar Price Range, after the check at 9:31:30 the Collar Price Range
would again widen in the direction of the Indicative Price by the same
5% amount used for the initial collar widening at 9:30:05 (i.e.,
$1.33). Therefore, the Collar Price Range would be $25.19 x $31.84 for
the period between 9:31:30 and 9:32:30. Again, assuming there is no
change to the Indicative Price, at 9:32:30 the Collar Price Range would
widen by $1.33 in the direction of the Indicative Price, which would be
$25.19 x $33.17 for the period between 9:32:30 and 9:33:30. Again,
assuming there is no change to the Indicative Price, at 9:33:30 the
Collar Price Range would widen by $1.33 in the direction of the
Indicative Price, which would be $25.19 x $34.50 for the period between
9:33:30 and 9:34:30. At this point, the Indicative Price (i.e., $34.75)
remains higher than the top end of the Collar Price Range (i.e.,
$34.50). As such, the Opening Auction would occur at 9:34:30, but would
occur within the final Collar Price Range at $27.91, which is the price
level tied for the most volume (i.e., 1,500 shares), lowest imbalance
(i.e., 500 shares), and closest to the Volume Based Tie Breaker (i.e.,
the FLSET of $26.52), instead of at the Indicative Price.
As described above, the current functionality described in Example
1 would result in no opening auction because all crossed interest was
outside the Collar Price Range set using the FLSET. Examples 2 and 3
demonstrate scenarios in which the proposed functionality of delaying
the Opening Auction Process and widening the Collar Price Range would
allow participants to execute in an opening auction that would occur at
a price more reflective of current market conditions, and that would
permit the greatest volume of crossed interest to execute.
Alternatively, Example 4 demonstrates that even with the proposed delay
and widened Collar Price Range, the Opening Auction may not occur at a
price for which any or all crossed interest may execute. The Exchange
includes Example 4 in order to illustrate that not all crossed interest
in an auction should necessarily be executed and that at some point the
benefit of continuing to delay the Opening Auction would be outweighed
by the need to establish the BZX Official Opening Price, in particular
to ensure that it is reported to the SIP in advance of 9:35 a.m. so
that it can be used as the reference price from which the LULD bands
are calculated.
Under the proposal, the Opening Auction would be delayed until
either (1) the NBBO becomes a Valid NBBO, (2) the Indicative Price is
within the Collar Price Range (i.e., if the Opening Auction occurred
between 9:30:01 and 9:30:05) or within the widened Collar Price Range
(i.e., if the Opening Auction occurred between 9:30:06 and 9:34:30), or
(3) the delay period of four minutes and 30 seconds lapsed. While the
proposal does not guarantee that certain orders priced equally or more
aggressive to the Indicative Price will execute in the Opening Auction,
it provides for additional time for the market to develop at the
beginning of the trading day before conducting the Opening Auction.
2. Statutory Basis
The Exchange believes that the proposed rule change is consistent
with Section 6(b) of the Act.\29\ Specifically, the proposed change is
consistent with Section 6(b)(5) of the Act,\30\ because it would
promote just and equitable principles of trade, remove impediments to
and perfect the mechanism of a free and open market and a national
market system, and, in general, protect investors and the public
interest. The Exchange also believes the proposed rule change is
consistent with Section 6(b)(1) of the Act, which provides that the
Exchange be organized and have the capacity to be able to carry out the
purposes of the Act and to enforce compliance by the Exchange's Members
and persons associated with its Members with the Act, the rules and
regulations thereunder, and the rules of the Exchange.\31\ Generally,
the Exchange believes that the proposed changes will improve the price
discovery process in the Opening Auction for securities listed on the
Exchange along with additional benefits set forth below.
---------------------------------------------------------------------------
\29\ 15 U.S.C. 78f(b).
\30\ 15 U.S.C. 78f(b)(5).
\31\ 15 U.S.C. 78f(b)(1).
---------------------------------------------------------------------------
First, the Exchange believes proposed Rules 11.23(b)(2)(B)(i) and
(ii) are consistent with the Act as the proposed paragraphs are
substantially similar to existing Rule 11.23(b)(2)(B) and involve no
change in the Opening Auction functionality. Second, the Exchange
believes proposed Rule 11.23(b)(2)(B)(iii) would promote just and
equitable principles of trade, remove impediments to and perfect the
mechanism of a free and open market and a national market system and,
in general, protect investors and the public interest. The proposal is
designed to increase the likelihood that auction eligible orders that
are priced equally or more aggressive than the Indicative Price of the
security are able to participate in the Opening Auction instead of
being canceled because they are priced outside the Collar Price Range
established using the FLSET. As stated above, current Rule
11.23(b)(2)(B) provides that in the event there is no Valid NBBO, the
FLSET will be used as the Volume Based Tie Breaker and basis for
calculating the Collar Price Range. Because the current Opening Auction
Process occurs at 9:30:00 a.m., such a Collar Price Range is based on
an FLSET that may not have occurred recently or may not otherwise be
reflective of current market conditions. As a result, the Exchange has
observed instances where auction eligible orders priced equally or more
aggressive than the Indicative Price were canceled without execution
because they were outside the Collar Price Range established using the
FLSET. While these observed instances have been infrequent, the
Exchange believes it is important to ensure that the BZX Opening
Process is designed to maximize the greatest volume of executions so
that the BZX Official Opening Price accurately reflects current market
conditions and to allow for executions between willing buying and
sellers. Further to this point, Market-On-Open orders (also known as
MOO orders) \32\ are market orders only eligible for execution in the
Opening Auction that are designed for participants that want to get an
execution without regard to price. Because such orders are not price
[[Page 53519]]
sensitive, they are more likely to cross contra-side orders outside of
the Collar Price Range and the Exchange believes that the greater
opportunity for execution afforded by the proposed changes will create
a better opening process for such MOO orders. From January 1, 2022
through July 12, 2022 there have been 324 instances in which MOO orders
did not receive an execution in the Opening Auction and were thus
cancelled. In 168 of those instances the Opening Auction would have
been extended under the proposed changes to the BZX Opening Process and
10,936 shares could have potentially received an execution.\33\ As
noted above, the proposed new functionality would result in extending
the Opening Auction relatively infrequently, but could be particularly
meaningful for orders that are willing to execute in the Opening
Auction, especially where such orders are Market-On-Open orders that
are looking for an execution without price sensitivity. Further, the
Exchange believes that the possible downside of delaying the
dissemination of the LULD bands is mitigated by the infrequency with
which LULD halts occur within the first four minutes and 30 seconds of
the trading day and is also offset by the benefits to the opportunity
for increased executions in the Opening Auction. As further noted
below, this delayed dissemination of LULD bands is also a tradeoff that
already exists as it relates to the opening process on the NYSE.
---------------------------------------------------------------------------
\32\ As defined in Rule 11.23(a)(16), the term ``Market-On-
Open'' or ``MOO'' shall mean a BZX market order that is designated
for execution only in the Opening Auction.
\33\ This calculation is across 73,927 total Opening Auctions in
BZX-listed securities during the applicable period. The Exchange
notes that this calculation only includes MOO orders that were not
executed and would thus not include the following scenarios: (i)
Limit-On-Open orders that were crossed with MOO orders (although the
MOO order portion is captured), other Limit-On-Open orders, or limit
orders on the Continuous Book; and (ii) limit orders in the
Continuous Book that were crossed with MOO orders (although the MOO
order portion is captured). The Exchange believes that the MOO
orders likely represent the majority of the instances in which
crossed-interest was unexecuted because it was outside of the Collar
Price Range because MOO orders are submitted for participation in
the Opening Auction more frequently than very aggressively priced
Limit-On-Open orders.
---------------------------------------------------------------------------
The Exchange is not aware of any issues that the proposal would
create and does not expect the proposal to impact other markets that
trade BZX-listed securities pursuant to unlisted trading privileges
(``UTP'') in a manner that is not necessary or appropriate in
furtherance of the purposes of the Act. For example, the proposal will
have no impact on the UTP opening process for the Exchange's affiliated
markets, Cboe BYX Exchange, Inc. (``BYX''), Cboe EDGA Exchange, Inc.
(``EDGA''), and Cboe EDGX Exchange, Inc. (``EDGX'' and collectively
with BYX and EDGA referred to as the ``Cboe Exchanges''). Each of the
Cboe Exchanges provide for an opening process for securities listed
pursuant to UTP (the ``UTP Opening Process''),\34\ which state that the
opening process ``will be priced at the midpoint of the first NBBO
subsequent to the first two-sided quotation published by the listing
exchange after 9:30:00 a.m. Eastern Time.'' \35\ Such process occurs
regardless of NBBO width. Because the Exchange will continue to
disseminate an NBBO regardless of the timing of the Opening Auction and
the UTP Opening Process takes place where there is a ``two-sided
quotation published by the listing exchange,'' the proposed new
functionality will have no impact on the UTP Opening Process rules of
the Cboe Exchanges. Further to this point, the Exchange notes that MIAX
Pearl Exchange, an exchange that only offers UTP trading, has identical
language related to its opening process and, therefore, the Exchange
would not expect this change to have an impact on its opening
process.\36\
---------------------------------------------------------------------------
\34\ See BYX Rule 11.23, EDGA Rule 11.7, and EDGX Rule 11.7
(collectively, the ``UTP Opening Process Rules'').
\35\ See paragraph (c)(2) of UTP Opening Process Rules.
\36\ See MIAX Pearl Exchange Rule 2615, particularly Rule
2615(c)(2).
---------------------------------------------------------------------------
Furthermore, the Exchange notes that it is the responsibility of
each exchange that offers UTP trading to establish and maintain their
opening process for UTP securities such that it works with the opening
process of the applicable primary listing venue. The Exchange believes
that it is generally in the public interest for a primary listing venue
to improve the price discovery process for its listed securities and
that the rule filing process provides the opportunity for anyone to
provide public comment on any issues that might offset such benefits,
including operational issues for exchanges offering UTP trading. The
Cboe Exchanges' UTP Opening Process was designed with the opening
process of the primary listing venue for the UTP security in mind and
provides different processes depending on the listing exchange of the
applicable UTP security.\37\ Because certain exchanges allow for a
security to be opened manually, which often results in an opening that
occurs after 9:30:00 a.m. ET, the UTP Opening Process rules
differentiate the opening process based on the listing exchange of the
applicable UTP security. As such, other exchanges have presumably also
designed and maintain their respective UTP opening processes with an
eye toward the opening process of the primary listing exchange. To the
extent that the proposed change hypothetically created issues for the
UTP opening process of other market centers or that such other market
centers otherwise disagree with the Exchange's proposed new
functionality, no such issues have been raised through the public
comment process. Accordingly, the Exchange believes that its proposal
benefits investors generally by enhancing the Exchange's price
discovery process for Opening Auctions without any anticipated impact
to other UTP exchanges and, as such, that the proposal is consistent
with the Act.
---------------------------------------------------------------------------
\37\ See paragraphs (c)(1) and (c)(2) of the UTP Opening Process
rules.
---------------------------------------------------------------------------
The Exchange also believes the proposal strikes a balance between
providing a better price discovery mechanism by offering additional
execution opportunities for auction eligible orders priced equally or
more aggressive than the Indicative Price of the security and limiting
any such delay so that the BZX Official Opening Price is reported to
the SIP by 9:35 a.m. and will therefore be used to set the LULD bands.
The Exchange notes that, while there will be no LULD bands until the
Exchange disseminates a reference price and thus there will be no LULD
bands during the period before the Opening Auction Process occurs, this
is a tradeoff that already exists as it relates to the opening process
on the NYSE, which may delay the opening process for an indefinite
period of time. The Exchange also notes that LULD bands disseminated
during the circumstances in which the proposed delay would be applied
are more likely to be based on a price that may not be reflective of
current market conditions. For example, in situations where the
proposed delay would be applied, the LULD bands would be based off an
FLSET that occurred on the prior trading day, and thus the LULD bands
could be based on a stale price. The Exchange is only proposing to
delay the Opening Auction in circumstances where there is crossed
interest and no Valid NBBO meaning that there are parties willing to
execute at a particular price and the NBBO is not narrow enough to
provide any meaningful guidance about the actual market value of the
security. Therefore, the Exchange believes any potential drawback in a
delay of the LULD bands is mitigated by the limited circumstances in
which the delay would occur and that any LULD bands disseminated during
such a delay may not be reflective of current market conditions.
Delaying the opening
[[Page 53520]]
auction process under certain circumstances provides an opportunity for
more meaningful price formation that is more representative of current
market conditions, especially in thinly traded or less liquid
securities which are by definition less likely to have executions
during the period before the Opening Auction Process occurs. Further to
this point, the Exchange expects that: (i) the Opening Auction Process
will not be delayed frequently; and (ii) even where the Opening Auction
Process is delayed, it is unlikely that the price of the underlying
security will hit a price at which it would have been subject to an
LULD halt if the Exchange had not delayed the Opening Auction
Process.\38\
---------------------------------------------------------------------------
\38\ The Exchange notes that during the period of June 1, 2021
through May 31, 2022, a LULD halt occurred in BZX listed symbols
during the first four minutes and 30 seconds of the trading day
roughly 0.01% of the time (15/134,615).
---------------------------------------------------------------------------
Separately, the Exchange believes that creating functionality that
could delay the Opening Auction Process by four minutes and 30 seconds
is consistent with the Act because it also ensures that the Exchange's
opening process is used to determine the LULD band reference price. If
the opening price on a primary listing exchange is not reported to the
SIPs within five minutes after the start of Regular Trading Hours, the
first reference price for a trading day is the arithmetic mean price of
eligible reported transactions for the NMS stock over the preceding
five minute period.\39\ However, if no eligible reported transactions
have occurred in the NMS stock over the preceding five minute period,
there will be no reference price and thus no LULD bands in the security
until an eligible reported transaction occurs. The Exchange believes
that LULD bands are an important mechanism for investor protection,
especially in thinly traded or illiquid securities and, as such, is
proposing to calculate a BZX Official Opening Price no later than
9:34:30 a.m. which will allow it to continue to report the BZX Official
Opening price to the SIP prior to 9:35 a.m. so that it serves as the
reference price on which the LULD bands are based.
---------------------------------------------------------------------------
\39\ See Section V(B)(2) of the Plan.
---------------------------------------------------------------------------
To the extent that the Exchange's proposed opening process results
in a more accurate BZX Official Opening Price, it follows that such a
price would also provide a better foundation for the LULD bands without
negatively impacting the LULD process because the Exchange would
continue to provide the BZX Official Opening Price to the SIP prior to
9:35. As a result, the Exchange believes that the proposal would
promote just and equitable principles of trade, remove impediments to
and perfect the mechanism of a free and open market and a national
market system and, in general, protect investors and the public
interest.
The Exchange notes that the concept of delaying an auction and
widening the Collar Price Range as provided in proposed paragraphs
11.23(b)(2)(B)(iii)(b)(1) through (4) is similar to the Twelfth
Amendment of the Plan and corresponding amendments by the primary
listing exchanges. Specifically, Amendment 12 was created to improve
re-openings following a trading pause,\40\ with an eye towards
carefully balancing halt auction price quality and the speed with which
continuous trading can be resumed. Amendment 12 provided that auction
halt periods would be extended if either the auction price at which the
most shares would be traded is outside the range of the pre-defined
price threshold collars (the ``price threshold collars'') or there is a
market order share imbalance. Further, Amendment 12 provided that the
price threshold collars would be widened in the event that the
auction's halt period is extended. In its approval of Amendment 12, the
Commission stated that it is appropriate in the public interest, for
the protection of investors and the maintenance of a fair and orderly
market to provide that a trading pause continue until the primary
listing exchange has reopened trading using its established reopening
procedures, even if such reopening is more than 10 minutes after the
beginning of a trading pause, and to require that trading centers may
not resume trading in an NMS Stock following a trading pause without
price bands in such NMS Stock. The Commission stated that these two
provisions together support a more standardized process for reopening
trading after a trading pause has been declared.
---------------------------------------------------------------------------
\40\ A ``trading pause'' refers to a function of the LULD
mechanism provided under the Plan. Specifically, the Plan sets for
procedures that provide for market-wide LULD requirements that
prevent trades in individual NMS stocks from occurring outside of
the specified price bands and provides for trading pauses to
accommodate more fundamental price moves.
---------------------------------------------------------------------------
As a primary listing exchange, the Exchange amended Rule 11.23(d)
to incorporate the provisions of Amendment 12.\41\ Specifically, under
Rule 11.23(d)(1)(A) the Quote-Only Period \42\ with respect to a halt
auction commences five (5) minutes prior to such halt auction. Adopted
Rule 11.23(d)(2)(C) provides for the Quote-Only Period to be extended
an additional five (5) minutes should a halt auction be unable to be
performed due to Market Order \43\ imbalance under 11.23(d)(2)(B)(i)
\44\ or if the indicative price, before being adjusted for halt auction
collars, is outside the halt auction collars set forth in adopted
subparagraphs (i) \45\ and (ii) \46\ to Exchange Rule 11.23(d)(2)(C)
(either, an ``Impermissible Price'') (``Initial Extension Period'').
Similar to the proposal, Rule 11.23(d)(2)(C)(ii) provides that at the
beginning of the Initial Extension Period the upper (lower) halt
auction collar shall be increased (decreased) by five (5) percent in
the direction of the Impermissible Price, rounded to the nearest
minimum price variation. For securities with a halt auction reference
price of $3.00 or less, the halt auction collar shall be increased
(decreased) in $0.15 increments in the direction of the Impermissible
Price. At the beginning of each additional extension period, the halt
auction collar shall be widened in accordance with this paragraph by
the same amount as the Initial Extension Period. In its approval
order,\47\ the Commission stated that ``extending the Trading Pause and
widening the halt auction collar on the side of the Impermissible Price
would be a measured approach to provide additional time to attract
offsetting interest, to help to address an imbalance that may not be
resolved within the prior halt auction collars, and to reduce the
potential for triggering another Trading Pause.''
---------------------------------------------------------------------------
\41\ See Securities Exchange Act No. 75879 (October 26, 2016) 81
FR 75875 (November 1, 2016) (SR-BatsBZX-2016-61) (Notice of Filing
of a Proposed Rule Change To Amend Exchange Rule 11.23, Auctions, To
Enhance the Reopening Auction Process Following a Trading Halt
Declared Pursuant to the Plan To Address Extraordinary Market
Volatility Pursuant to Rule 608 of Regulation NMS). See also
Securities Exchange Act No. 79885 (January 26, 2017) 82 FR 8968
(February 1, 2017) (SR-BatsBZX-2016-61) (Order Granting Approval of
Proposed Rule Change, as Modified by Amendment No. 1, To Amend
Exchange Rule 11.23, Auctions, To Enhance the Reopening Auction
Process Following a Trading Halt Declared Pursuant to the Plan To
Address Extraordinary Market Volatility Pursuant to Rule 608 of
Regulation NMS)
\42\ ``Quote-Only Period'' is defined as ``a designated period
of time prior to a halt auction, a Volatility Closing Auction, or an
IPO Auction during which Users may submit orders to the Exchange for
participation in the auction.'' See Exchange Rule 11.23(a)(17).
\43\ See Rule 11.9(a)(2).
\44\ Under 11.23(d)(2)(B)(i), the Quote-Only Period may be
extended where there are unmatched Market Orders on the Auction Book
associated with the auction.
\45\ Rule 11.23(d)(2)(C)(i) provides for the initial halt
auction collar calculations.
\46\ Rule 11.23(d)(2)(C)(ii) provides for the widening of the
halt auction collars.
\47\ Supra note 26.
---------------------------------------------------------------------------
The Exchange notes that the purpose of Amendment 12 and
corresponding
[[Page 53521]]
Exchange amendment was intended to delay a halt auction to attract
offsetting interest, while the purpose of this proposal is intended to
delay the Opening Auction Process in order to provide the Opening
Auction price additional time to reflect current market conditions.
While Exchange Rule 11.23(d) and Amendment 12 apply only to re-opening
auctions that are single venue liquidity events and this proposal
applies to the opening auction which is not a single venue liquidity
event,\48\ applying a common functionality across the two remains
logical because the Exchange believes that delaying the Opening Auction
Process under certain conditions such that the delay will be coincident
with the increasing liquidity that comes shortly after the beginning of
Regular Trading Hours, which the Exchange believes is similar to
extending halt auctions in order to allow for greater participation and
simultaneous expansion of executable price range. Even though trading
is ongoing while the Opening Auction Process is underway, orders on the
Continuous Book are included in the Opening Auction Process and the
increased liquidity around the open will generally increase liquidity
in the Opening Auction Process even if market participants are entering
orders in the Continuous Book rather than auction specific orders. To
this point, both are designed to balance auction price quality and the
speed with which an auction can occur and thus continuous trading can
be resumed, in the case of a halt auction, or when the Opening Auction
Process completes, in the case of an Opening Auction. Further, this
consistency in approach offers a process that market participants are
already familiar with. Having consistent auction processes benefits all
investors because market participants are already familiar with the
proposed functionality and will not have to learn a new set of nuanced
rules designed to accomplish the same end goal, will understand how the
functionality operates because of its common usage in the LULD context,
and will generally help with quick understanding and adoption while
reducing the need for market participants to build systems designed to
accommodate an entirely new process. Therefore, the Exchange believes
the proposal is appropriate, in the public interest, for the protection
of investors and the maintenance of a fair and orderly market.
---------------------------------------------------------------------------
\48\ The Exchange's Opening Auction is not a single venue
liquidity event because trading is occurring on the Exchange's
Continuous book and at away market centers before and during the
Opening Auction.
---------------------------------------------------------------------------
The Exchange also believes its proposal to the last two sentences
of existing Rule 11.23(b)(2)(B) to paragraphs 11.23(b)(2)(B)(iv) and
(v), respectively, will improve clarity and readability of the rule.
Further, the proposal to remove the provision of paragraph
11.23(b)(2)(B)(v) that states the FLSET will be the previous BZX
Official Closing Price is consistent with the new proposed
functionality, which would allow for an FLSET to occur between 9:30 and
9:34:30.
Finally, the Exchange believes its proposed clarifications to Rules
11.23(b)(1)(A) and (B) to reflect that the Opening Auction may occur at
a time other than 9:30 a.m. will allow the Exchange to more easily
administer its rules, and Members can more clearly understand how the
Opening Auction Process may occur. Specifically, the proposed
amendments to Rules 11.23(b)(1)(A) and (B) will add clarity,
transparency and internal consistency to Exchange rules making them
easier to navigate, in light of the other proposed Rule changes
described herein.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition not necessary or appropriate in
furtherance of the purposes of the Act. To the contrary, allowing the
Exchange to make the above proposed modifications will allow the
Exchange to better compete with other exchanges as a listing venue by
improving the Exchange's auction process by allowing more executions to
occur at more reasonable prices that are based on the current value of
the security. As mentioned above, the Exchange has received feedback
from market participants regarding the issue under the current process,
and the proposed amendments will both address this feedback and improve
the Exchange's auction process, allowing it to better compete as both a
listing and execution venue.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
The Exchange neither solicited nor received comments on the
proposed rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period up to 90 days (i) as the
Commission may designate if it finds such longer period to be
appropriate and publishes its reasons for so finding or (ii) as to
which the Exchange consents, the Commission will:
A. by order approve or disapprove such proposed rule change, or
B. institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
File Number SR-CboeBZX-2022-045 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
All submissions should refer to File Number SR-CboeBZX-2022-045. This
file number should be included on the subject line if email is used. To
help the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's internet website (https://www.sec.gov/rules/sro.shtml).
Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule change that are filed with
the Commission, and all written communications relating to the proposed
rule change between the Commission and any person, other than those
that may be withheld from the public in accordance with the provisions
of 5 U.S.C. 552, will be available for website viewing and printing in
the Commission's Public Reference Room, 100 F Street NE, Washington, DC
20549, on official business days between the hours of 10:00 a.m. and
3:00 p.m. Copies of such filing also will be available for inspection
and copying at the principal office of the Exchange. All comments
received will be posted without change. Persons submitting comments are
cautioned that we do not redact or edit personal identifying
information from
[[Page 53522]]
comment submissions. You should submit only information that you wish
to make available publicly. All submissions should refer to File Number
SR-CboeBZX-2022-045 and should be submitted on or before September 21,
2022.
---------------------------------------------------------------------------
\49\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\49\
J. Matthew DeLesDernier,
Deputy Secretary.
[FR Doc. 2022-18764 Filed 8-30-22; 8:45 am]
BILLING CODE 8011-01-P
