In the Matter of the Application of 24X National Exchange LLC for Registration as a National Securities Exchange; Order Instituting Proceedings To Determine Whether To Grant or Deny an Application for Registration as a National Securities Exchange Under Section 6 of the Securities Exchange Act of 1934, 54736-54746 [2022-19264]
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Federal Register / Vol. 87, No. 172 / Wednesday, September 7, 2022 / Notices
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
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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 the
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
comment submissions. You should
submit only information that you wish
to make available publicly. All
submissions should refer to File
Number SR–NYSEARCA–2022–55 and
should be submitted on or before
September 28, 2022.
The General Counsel of the
Commission, or his designee, has
certified that, in his opinion, one or
more of the exemptions set forth in 5
U.S.C. 552b(c)(3), (5), (6), (7), (8), 9(B)
and (10) and 17 CFR 200.402(a)(3),
(a)(5), (a)(6), (a)(7), (a)(8), (a)(9)(ii) and
(a)(10), permit consideration of the
scheduled matters at the closed meeting.
The subject matter of the closed
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Institution and settlement of
injunctive actions;
Institution and settlement of
administrative proceedings;
Resolution of litigation claims; and
Other matters relating to examinations
and enforcement proceedings.
At times, changes in Commission
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scheduling of meeting agenda items that
may consist of adjudicatory,
examination, litigation, or regulatory
matters.
CONTACT PERSON FOR MORE INFORMATION:
For further information; please contact
Vanessa A. Countryman from the Office
of the Secretary at (202) 551–5400.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.68
J. Matthew DeLesDernier,
Deputy Secretary.
Dated: September 1, 2022.
Vanessa A. Countryman,
Secretary.
(Authority: 5 U.S.C. 552b.)
[FR Doc. 2022–19345 Filed 9–2–22; 11:15 am]
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SECURITIES AND EXCHANGE
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SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–95651; File No. 10–239]
Sunshine Act Meetings
2:00 p.m. on Thursday,
September 8, 2022.
PLACE: The meeting will be held via
remote means and/or at the
Commission’s headquarters, 100 F
Street NE, Washington, DC 20549.
STATUS: This meeting will be closed to
the public.
MATTERS TO BE CONSIDERED:
Commissioners, Counsel to the
Commissioners, the Secretary to the
Commission, and recording secretaries
will attend the closed meeting. Certain
staff members who have an interest in
the matters also may be present.
In the event that the time, date, or
location of this meeting changes, an
announcement of the change, along with
the new time, date, and/or place of the
meeting will be posted on the
Commission’s website at https://
www.sec.gov.
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TIME AND DATE:
In the Matter of the Application of 24X
National Exchange LLC for
Registration as a National Securities
Exchange; Order Instituting
Proceedings To Determine Whether To
Grant or Deny an Application for
Registration as a National Securities
Exchange Under Section 6 of the
Securities Exchange Act of 1934
September 1, 2022.
I. Introduction
On March 25, 2022, 24X National
Exchange LLC (‘‘24X’’ or ‘‘Exchange’’)
filed with the Securities and Exchange
Commission (‘‘Commission’’) a Form 1
application under the Securities
Exchange Act of 1934 (‘‘Act’’), seeking
registration as a national securities
exchange under Section 6 of the Act.1
Notice of the application was published
for comment in the Federal Register on
June 6, 2022.2 The Commission received
1 15
U.S.C. 78f.
Securities Exchange Act Release No. 95007
(May 31, 2022), 87 FR 34333 (‘‘Notice’’).
2 See
68 17
CFR 200.30–3(a)(12).
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three comments on the application.3 As
discussed further below, the
commenters stated that 24X’s
application does not include sufficient
information about several aspects of its
proposed operation.4 One commenter
stated that the application ‘‘does not
meet the legal and administrative
requirements’’ under the Act.5 Another
commenter questioned whether ‘‘24X
has the necessary structure and checks
in place to protect investors and ensure
a fair and orderly market’’ and stated
that certain elements of 24X’s proposal
were not sufficiently described and that
additional information was required to
evaluate the proposal.6 This commenter
stated that 24X ‘‘contemplates trading
concepts that have not been tested
within the U.S. equities markets’’ and
that the application raises a number of
questions ‘‘including how its new
exchange will interact with the current
trading ecosystem.’’ 7 Another
commenter stated that the 24X Form 1
should not be approved because the
regulatory infrastructure necessary to
support its proposed trading system
does not yet exist.8
Section 19(a)(1) of the Act 9 requires
the Commission, within ninety days of
the date of publication of notice of an
application for registration as a national
securities exchange, or such longer
period as to which the applicant
consents, to, by order, grant such
registration 10 or institute proceedings to
determine whether such registration
should be denied.11 This order is
instituting proceedings under Section
19(a)(1)(B) of the Act 12 to determine
whether 24X’s application for
registration as a national securities
exchange should be granted or denied,
and provides notice of the grounds for
denial under consideration by the
Commission, as set forth below.
3 See letters from Brian Hyndman, President and
Chief Executive Officer, Blue Ocean ATS, LLC,
dated July 21, 2022 (‘‘Blue Ocean Letter’’); Eun Ah
Choi, Senior Vice President, The Nasdaq Stock
Market LLC, dated July 21, 2022 (‘‘Nasdaq Letter’’);
and Hope Jarkowski, General Counsel, NYSE
Group, dated July 29, 2022 (‘‘NYSE Letter’’) to
Vanessa A. Countryman, Secretary, Commission.
The public comment file for 24X’s Form 1
application (File No. 10–239) is available on the
Commission’s website at: https://www.sec.gov/
comments/10-239/10-239.htm.
4 See Blue Ocean Letter at 2–6, Nasdaq Letter at
2–5 and NYSE Letter at 2–4.
5 See Blue Ocean Letter at 6.
6 See Nasdaq Letter at 5.
7 Id.
8 See NYSE Letter at 4.
9 15 U.S.C. 78s(a)(1).
10 15 U.S.C. 78s(a)(1)(A).
11 15 U.S.C. 78a(a)(1)(B).
12 15 U.S.C. 78s(a)(1)(B).
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II. Description of 24X’s Proposed
Trading System
According to 24X’s Form 1, 24X
proposes to operate a fully automated
electronic trading platform for the
trading of listed NMS stocks pursuant to
unlisted trading privileges (‘‘UTP’’).13
24X would not maintain a physical
trading floor.14 Liquidity would be
derived from quotes as well as orders to
buy and orders to sell submitted to 24X
electronically by exchange members 15
from remote locations.16 The Exchange
proposes to operate an electronic limit
order book with a continuous matching
function. Orders resting on the book
would be ranked in price/time
priority.17 24X proposes to accept
market orders, limit orders and pegged
orders with various modifiers and timein-force instructions.18 Orders may be
submitted in round lots, mixed lots or
odd-lots.19 One novel feature of 24X’s
proposal is that it proposes to allow the
unit of trading of an order to be 1/
1,000th of a share.20 24X proposes to
report executions to the appropriate
consolidated transaction reporting
system ‘‘to the extent required by the
Act and the rules and regulations
thereunder.’’ 21
24X proposes a retail order program.22
Pursuant to this program, retail orders 23
submitted by retail organization
members 24 would be eligible to receive
price improvement from retail market
makers.25 Pursuant to proposed 24X
Rule 11.21(d)(2), retail market makers
would be required to provide
continuous two-sided quotes of at least
13 See
Exhibit E of 24X’s Form 1 at 1, 4.
at 1.
15 24X proposes to have one class of membership
open to registered broker-dealers. See proposed 24X
Rule 2.3 (stating that, ‘‘any registered broker or
dealer that is and remains a member of a national
securities association registered under Section
15A(a) of the Act or a member of another national
securities exchange registered under Section 6(a) of
the Act shall be eligible to be, and to remain, a
Member.’’).
16 See Exhibit E of 24X’s Form 1 at 1.
17 Proposed 24X Rule 11.8(a).
18 Proposed 24X Rule 11.7. See also Exhibit B–1
of 24X’s Form 1.
19 Proposed 24X Rule 11.6(q). See also Exhibit E–
1 of 24X’s Form 1 at 4.
20 Proposed 24X Rule 11.6(q).
21 Proposed 24X Rule 11.11(a); see also Exhibit E
to 24X Form 1 at 10 (stating that 24X intends to join
the CTA and Nasdaq UTP Plans).
22 Proposed 24X Rules 11.17–11.21.
23 See proposed 24X Rule 11.17(a)(2) for the
proposed definition of ‘‘retail order.’’
24 See proposed 24X Rule 11.17(a)(1) for the
proposed definition of ‘‘retail organization
member.’’
25 See proposed 24X Rule 11.18 for the proposed
registration requirements for retail market makers.
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14 Id.
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100 shares during ‘‘Regular Trading
Hours.’’ 26
As discussed further below, one novel
feature of 24X’s proposed trading rules
is that 24X proposes to allow trading in
NMS stocks 24 hours a day, 7 days per
week, 365 days a year.27 24X has
proposed specific rules to govern
trading during regular trading hours 28
as well as trading outside of regular
trading hours.29
III. Proceedings To Determine Whether
To Grant or Deny the Application and
Grounds for Potential Denial Under
Consideration
As required by Section 19(a)(1)(B) of
the Act,30 the Commission is hereby
providing notice of grounds for denial
under consideration, as set forth below.
Institution of such proceedings is
appropriate at this time in view of the
issues raised by the application.
Institution of proceedings does not
indicate that the Commission has
reached any conclusions with respect to
any of the issues involved.
Under Section 19(a)(1) of the Act, the
Commission shall grant an application
for registration as a national securities
exchange if the Commission finds that
the requirements of the Act and the
rules and regulations thereunder with
respect to the applicant are satisfied.
The Commission shall deny such
application for registration if it does not
make such a finding.31 Under Section
6(b) of the Act, an exchange shall not be
registered as a national securities
exchange unless the Commission
determines that it has satisfied the
relevant requirements of the Act.32 In
particular, Section 6(b)(1) of the Act
requires that the Commission find that
an exchange is so organized and has the
capacity to carry out the purposes of the
Act.33 In addition, under Section 6(b)(3)
of the Act, the Commission must find
that the rules of the exchange assure a
fair representation of its members in the
26 The term ‘‘Regular Trading Hours’’ is not
defined in the proposed 24X rule book. See Exhibit
B–1 to the 24X Form 1.
27 See proposed 24X Rule 11.1 (describing the
hours of trading and trading days for 24X).
28 Regulation NMS Rule 600(b)(77) defines
‘‘regular trading hours’’ as ‘‘the time between 9:30
a.m. and 4:00 p.m. Eastern Time . . .’’ As described
further below, 24X proposes to define four different
trading sessions. See proposed 24X Rules 1.5(b),
defining the ‘‘24X Market Session’’; 1.5(k) defining
the ‘‘Core Market Session’’; 1.5(v) defining the
‘‘Post-market Session’’; and 1.5(w) defining the
‘‘Pre-Market Session.’’
29 See e.g., proposed 24X Rule 11.16 (describing
what orders are eligible for execution outside of
regular trading hours).
30 15 U.S.C. 78s(a)(1)(B).
31 15 U.S.C. 78s(a)(1).
32 15 U.S.C. 78f.
33 15 U.S.C. 78f(b)(1).
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54737
selection of its directors and
administration of its affairs and provide
that one or more directors shall be
representative of issuers and investors
and not be associated with a member of
the exchange, broker or dealer.34
Section 6(b)(5) of the Act requires that
the rules of the exchange be designed,
among other things, to prevent
fraudulent and manipulative acts and
practices, promote just and equitable
principles of trade, to foster cooperation
and coordination with persons engaged
in regulating, clearing, settling,
processing information with respect to,
and facilitating transactions in
securities, to remove impediments to
and perfect the mechanisms of a free
and open market and a national market
system, and in general to protect
investors and the public interest.35
Finally, under Section 6(b)(8) of the Act,
the Commission must find that the rules
of the exchange do not impose any
burden on competition that is not
necessary or appropriate in furtherance
of the purposes of Act.36
The Commission is particularly
interested in commenters’ views as to
whether 24X has provided sufficient
information in its Form 1 to support a
finding that the proposal is consistent
with the requirements of the Act and the
rules and regulations thereunder.37
In addition, the Commission is
particularly interested in commenters’
views as to whether the proposed rules
relating to the corporate structure of
24X, as described in more detail below,
would ensure that 24X is so organized
and has the capacity to carry out the
purposes of the Act and assure a fair
representation of its members in the
selection of its directors and
administration of its affairs.
The Commission also is particularly
interested in commenters’ views as to
whether 24X’s proposed rules that
would extensively expand the hours of
trading in NMS stocks, as described in
more detail below, are designed to
prevent fraudulent and manipulative
acts and practices, promote just and
equitable principles of trade, foster
cooperation and coordination with
persons engaged in regulating, clearing,
settling, processing information with
respect to, and facilitating transactions
in securities, remove impediments to
and perfect the mechanisms of a free
34 15
U.S.C. 78f(b)(3).
U.S.C. 78f(b)(5).
36 15 U.S.C. 78f(b)(8).
37 15 U.S.C. 78s(a)(1). See also NYSE Letter at 2
(‘‘the application falls short in providing sufficient
information upon which to assess how such
innovations could function consistent either with
the Act . . .’’); Nasdaq Letter at 2; and Blue Ocean
Letter at 2.
35 15
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Federal Register / Vol. 87, No. 172 / Wednesday, September 7, 2022 / Notices
and open market and a national market
system, and in general protect investors
and the public interest.
Further, the Commission is
particularly interested in commenters’
views as to whether 24X’s proposed
rules to allow orders to be submitted in
fractional shares are designed to foster
cooperation and coordination with
persons engaged in regulating, clearing,
settling, processing information with
respect to, and facilitating transactions
in securities, remove impediments to
and perfect the mechanisms of a free
and open market and a national market
system.
Additionally, the Commission is
particularly interested in commenters’
views as to whether 24X’s proposal to
locate a ‘‘mirrored’’ primary platform in
London would result in 24X being so
organized and have the capacity to be
able to carry out the purposes of the Act
and whether 24X’s rules relating to the
mirrored platform are designed to foster
cooperation and coordination with
persons engaged in regulating, clearing,
settling, processing information with
respect to, and facilitating transactions
in securities, and to remove
impediments to and perfect the
mechanisms of a free and open market
and a national market system.
A. Corporate Governance
1. 24X
24X is wholly-owned by its direct
parent company, 24X US Holdings LLC
(‘‘US Holdings’’), which in turn is
wholly-owned by 24X Bermuda
Holdings LLC (‘‘Bermuda Holdings’’).38
24X is a Delaware limited liability
company whose sole member is US
Holdings.39 The proposed business and
affairs of 24X will be managed under the
direction of a Board that is proposed to
have at a minimum six Directors once
24X commences operations as a national
securities exchange.40 As proposed, the
24X Board would consist of
• one Director who is the Chief
Executive Officer of the Company;
• at minimum three ‘‘Independent
Directors’’ 41; and
38 See
Exhibits A and C of 24X’s Form 1.
Exhibit A–2 of 24X’s Form 1 at 1.
40 See Exhibit A–2 of 24X’s Form 1 at 6.
41 ‘‘Independent Directors’’ are proposed to be
defined as a ‘‘Director who has no material
relationship with the Company or any affiliate of
the Company, or any Exchange Member or any
affiliate of any such Exchange Member; provided,
however, that an individual who otherwise
qualifies as an Independent Director shall not be
disqualified from serving in such capacity solely
because such Director is a Director of the Company
or an affiliate thereof.’’ See Exhibit A–2 of 24X’s
Form 1 at 2.
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39 See
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• the number of ‘‘Membership
Representative Directors’’ 42 which shall
be at least twenty percent of the Board,
provided that if twenty percent of the
Directors then serving on the Board is
not a whole number, such minimum
number of ‘‘Representative Directors’’ 43
shall be rounded up to the next whole
number.
The 24X LLC Agreement also
provides for ‘‘Public Directors’’ 44
although none are proposed to serve on
the 24X Board.
The proposed Nominating Committee
of 24X would nominate candidates for
election to the 24X Board.45 For
positions on the 24X Board requiring
persons who qualify as Member
Representative Directors, the proposed
Nominating Committee would nominate
only those persons whose names have
been approved and submitted by the
‘‘Member Nominating Committee.’’ 46
Nominees to the 24X Board from both
the proposed Nominating Committee
and the proposed Member Nominating
Committee would be elected on an
annual basis by vote of U.S. Holdings.47
In the past, the Commission has stated
that ensuring that at least 20% of an
exchange’s governing board is
comprised of directors that are chosen
and elected by the exchange’s members
helps to ensure the fair representation of
members in the selection of directors
and the administration of an exchange
as required by Section 6(b)(3) of the
42 ‘‘Member Representative Director’’ is proposed
to be defined as a Director ‘‘who has been elected
or appointed to the Board from time to time in
accordance with this Agreement after having been
nominated by the Member Nominating Committee.
A Member Representative Director must be an
officer, director, employee, or agent of an Exchange
Member.’’ See Exhibit A–2 of 24X’s Form 1 at 3.
43 ‘‘Representative Directors’’ are not defined in
the Limited Liability Company Agreement of 24X
National Exchange LLC (‘‘24X LLC Agreement’’).
44 See Exhibit A–2 of 24X’s Form 1 at 7. ‘‘Public
Directors’’ are not defined in the 24X LLC
Agreement.
45 See Exhibit A–2 of 24X’s Form 1 at 9.
According to the proposed Nominating Committee
Charter, the Nominating Committee shall consist of
at least three members, or such greater number as
determined by the Board, each of whom shall be an
‘‘Independent Director,’’ as such term is proposed
to be defined in the Limited Liability Company
Agreement of the Exchange. See Exhibit J–4 of
24X’s Form 1 at 1.
46 The ‘‘Member Nominating Committee’’ is
defined to mean ‘‘the Member Nominating
Committee elected pursuant to [the 24X Limited
Liability Company Agreement].’’ See Exhibit A–2 of
24X’s Form 1 at 1. According to the Member
Nominating Committee Charter, the Member
Nominating Committee shall consist of at least three
members, or such greater number as determined by
the Board, two of whom shall be a Member
Representative Director and one of whom shall be
an ‘Independent Director,’ as such term is defined
in the Limited Liability Company Agreement of the
Exchange.’’ See Exhibit J–3 of 24X’s Form 1 at 1.
47 See Exhibit A–2 of 24X’s Form 1 at 9.
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Act.48 The Commission has stated that
this requirement helps to ensure that
members have a voice in an exchange’s
self-regulatory program, and that an
exchange is administered in a way that
is equitable to all those who trade on its
market or through its facilities.49 The
Commission also has stated that a
process whereby exchange members can
directly nominate candidates for
directors for an exchange board via a
petition process also helps to ensure the
fair representation of members,
consistent with Section 6(b)(3) of the
Act.50
The Commission is considering
whether the overall composition of the
24X Board, including the specific
categories of Directors as defined in the
24X LLC Agreement, would enable 24X
to be so organized and have the capacity
to carry out the purposes of the Act
consistent with Section 6(b)(1) of the
Act 51. As proposed, there are categories
of Directors that are not defined in the
24X LLC Agreement.52 In addition, the
Commission is considering whether the
24X Board composition fulfills the
statutory requirement that one or more
directors on the 24X Board is
representative of issuers and investors
and not associated with a member of the
exchange, broker or dealer.53 The
Commission also is considering whether
48 Securities Exchange Act Release No. 88806
(May 4, 2020), 85 FR 27451 (May 8, 2020) (File No.
10–237) (order granting registration of MEMX LLC)
(‘‘MEMX Order’’) at 27452. See also 15 U.S.C.
78f(b)(3).
49 See, e.g., MEMX Order, supra note 48 at 27452;
Securities Exchange Act Release Nos. 85828 (May
10, 2019), 84 FR 21841 (May 15, 2019) (File No. 10–
234) (order granting registration of Long Term Stock
Exchange, Inc.) (‘‘LTSE Order’’) at 21843; 79543
(December 13, 2016), 81 FR 92901, 92903
(December 20, 2016) (File No. 10–227) (order
granting registration of MIAX PEARL, LLC) (‘‘MIAX
PEARL Order’’) at 92903. See also Securities
Exchange Act Release Nos. 68341 (December 3,
2012), 77 FR 73065, 73067 (December 7, 2012) (File
No. 10–207) (order granting the registration of
Miami International Securities Exchange, LLC);
58375 (August 18, 2008), 73 FR 49498, 49501
(August 21, 2008) (File No. 10–182) (order granting
the registration of BATS Exchange, Inc.); and 53128
(January 13, 2006), 71 FR 3550, 3553 (January 23,
2006) (File No. 10–131) (granting the exchange
registration of Nasdaq Stock Market, Inc.) (‘‘Nasdaq
Order’’).
50 See e.g., MEMX Order, supra note 48, at 27452;
LTSE Order, supra note 49, at 21843; and MIAX
PEARL Order, supra note 49, at 92903.
51 15 U.S.C. 78f(b)(1).
52 See supra notes 43 and 44.
53 15 U.S.C. 78f(b)(3). The Commission has
approved in the past an exchange board
composition that requires that the number of ‘‘NonIndustry Directors’’ equal or exceed the number of
‘‘Industry Directors’’ and directors that represent
the exchange’s members. With respect to this
compositional requirement, the Commission stated
that this requirement supports an exchange’s ability
to protect the public interest. See e.g., MEMX
Order, supra note 48, at 27452; LTSE Order, supra
note 49, at 21843; MIAX PEARL Order, supra note
49, at 92903.
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the proposed process for nominating
candidates for the Member
Representative Directors positions on
the 24X Board is consistent with the
Section 6(b)(3) of the Act in light of the
fact that 24X does not propose a process
that would permit 24X Members to
directly nominate such Member
Representative Directors for election to
the 24X Board.54
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2. US Holdings, Bermuda Holdings and
Regulation of 24X
US Holdings is a Delaware limited
liability company whose sole member is
Bermuda Holdings.55 As proposed, U.S.
Holdings would be managed by, and all
decisions on behalf of US Holdings
would be made by, Bermuda
Holdings.56 Generally, the members of
Bermuda Holdings include holders of
‘‘Preferred Units’’ 57 (which are further
divided into ‘‘Series A Units’’ and
‘‘Series Seed Units’’),58 ‘‘Common
Units’’ 59 and ‘‘Non-Voting Units’’.60
Members with voting rights, or ‘‘Voting
Units,’’ include Common Units and
Preferred Units except Series Seed-2
Units, which are a sub-category of Series
Seed Units.61 Each Voting Unit shall
have one vote.62
If 24X’s application for registration as
a national securities exchange is
granted, 24X would have all of the
attendant regulatory obligations of a
national securities exchange under the
Act. In particular, 24X would be
responsible for the operation and
regulation of its exchange and the
regulation of its members. Therefore, the
Commission is considering whether US
Holdings’ and Bermuda Holdings’
54 See LTSE Order, supra note 49, at 21843
(stating that, among other things, the means by
which member representatives will be chosen will
help ensure fair representation of members in
selection of directors and administration of LTSE,
and is therefore consistent with Section 6(b)(3) of
the Act).
55 See Exhibit C–12 and C–13 of 24X’s Form 1
at 1.
56 See Exhibit C–13 of 24X’s Form 1 at 2.
Bermuda Holdings is a limited liability company
formed under the laws of Bermuda. See Exhibit C–
1 and C–2 of 24X’s Form 1 at 1.
57 ‘‘Preferred Units’’ are defined to mean ‘‘Series
A Units and the Series Seed Units.’’ See Exhibit C–
2 of 24X’s Form 1 at 7.
58 See Exhibit C–2 of 24X’s Form 1.
59 ‘‘Common Units’’ are defined to mean ‘‘[u]nits
of common membership interests of the Company,
or any other ownership interests of the Company
into which such units are reclassified, reconstituted
or exchanged.’’ See Exhibit C–2 of 24X’s Form 1 at
5.
60 ‘‘Non-voting Units’’ are defined to mean ‘‘units
of non-voting membership interests of the
Company, or any other ownership interests of the
Company into which such units are reclassified,
reconstituted or exchanged. See Exhibit C–2 of
24X’s Form 1 at 7.
61 See Exhibit C–2 of 24X’s Form 1 at 11.
62 Id.
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activities with respect to the operation
of 24X are consistent with, and do not
interfere with, 24X’s self-regulatory
obligations.63 In making this
determination previously, the
Commission has considered whether the
governing documents of an exchange’s
parent company are designed to
facilitate the ability of the exchange to
fulfill its regulatory obligations and
their impact on Commission oversight
of the exchange.64 For the reasons
discussed below, the Commission is
considering whether US Holdings and
Bermuda Holdings are organized in
such a way as to enable 24X to fulfill its
statutory obligations as a national
securities exchange under Section 6(b)
of the Act.65
Ownership Structure: Voting and
Ownership Concentration Limits. The
Commission is considering whether the
corporate documents of 24X’s holding
companies, which are US Holdings and
Bermuda Holdings, contain ownership
and voting provisions that are designed
to prevent the holding companies, or
any party to the holding companies,
from exercising undue control over the
operation of 24X, and to ensure that 24X
and the Commission are able to carry
out their regulatory obligations under
the Act.66
For example, among other things, the
Commission has approved applications
for registration as a national securities
exchange where the governing
documents of the holding companies of
the exchange provide that for so long as
the holding companies shall control,
directly or indirectly, the exchange, no
person, either alone or together with its
related persons will be permitted to
beneficially own, directly or indirectly,
of record or beneficially, more than 40%
of the holding company.67 The
63 See 15 U.S.C. 78f(b)(1). See also Nasdaq Order,
supra note 49, at 3552.
64 See e.g., MEMX Order, supra note 48, at 27453;
LTSE Order, supra note 49, at 21843; MIAX Pearl
Order, supra note 49, at 73069; and Nasdaq Order,
supra note 49, at 3552.
65 15 U.S.C. 78f(b).
66 In some cases, an exchange applicant has been
owned by more than one holding company. For
purposes of this discussion regarding 24X, the
Commission shall refer to ‘‘holding companies’’
when referring to an entity or entities that own an
exchange.
67 See e.g., MEMX Order, supra note 48, at 27453;
LTSE Order, supra note 49, at 21844; and MIAX
Pearl Order, supra note 49, at 92905. See also
MEMX Holdings LLC Agreement, Article III,
Section 3.5(a)(1); LTSE Group Inc. Certificate,
Article IX, subparagraph (A)(2)(b)(i)(A); Miami
Holdings Certificate, Article NINTH (b)(i)(A). The
Commission also has approved registration where a
related provision also requires the exchange to
redeem any voting interest that was sold,
transferred or otherwise disposed of that was above
the ownership concentration limitation. See e.g.,
MEMX Order, supra note 48 at 27453; LTSE Order,
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54739
Commission stated that such ownership
concentration provisions are consistent
with the Act because they are designed
to prevent any party holding an interest
in the holding companies from
exercising undue control over the
operation of the exchange and to ensure
that the exchange and the Commission
are able to carry out their regulatory
obligations under the Act.68 The
Commission has approved provisions
setting ownership limitations for all
national securities exchanges.69
The Commission also has approved
more restrictive conditions for brokerdealer members of an exchange
applicant; specifically, the Commission
has approved requirements for holding
companies of exchanges that prohibit a
broker-dealer member of the exchange
from beneficially owning, directly or
indirectly, either alone or together with
their related persons, more than 20% of
voting interest in the exchange
applicant.70 The Commission stated that
such ownership limitations on brokerdealer members of an exchange
applicant are appropriate because they
are designed to address the conflicts of
interest that might result from a member
of a national securities exchange owning
supra note 49, at 21844; and MIAX Pearl Order,
supra note 49, at 92905. See also MEMX Holdings
LLC Agreement, Article III, Section 3.7(c); LTSE
Group Inc. Certificate, Article IX, subparagraph
(a)(2)(e); Miami Holdings Certificate, Article Ninth
(e).
68 See e.g., MEMX Order, supra note 48, at 27455;
LTSE Order, supra note 49, at 21845; and MIAX
PEARL Order, supra note 49, at 92906.
69 See, e.g., Securities Exchange Act Release Nos.
76998 (January 29, 2016), 81 FR 6066, 6070–71
(February 4, 2016) (File No. 10–221) (order granting
the exchange registration of ISE Mercury, LLC);
70050 (July 26, 2013), 78 FR 46622, 46627 (August
1, 2013) (File No. 10–209) (order granting the
exchange registration of Topaz Exchange LLC (nka
ISE Gemini, LLC); 68341 (December 3, 2012), 77 FR
73065, 73070 (December 7, 2012) (File No. 10–207)
(order granting the exchange registration of Miami
International Securities Exchange LLC); 58375
(August 18, 2008), 73 FR 49498, 49500 (August 21,
2008) (File No. 10–182) (order granting the
exchange registration of BATS Exchange, Inc.)
(‘‘BATS Order’’). See also supra notes 67–68;
Securities Exchange Act Release Nos. 62158 (May
24, 2010), 75 FR 30082 (May 28, 2010) (CBOE–
2008–88) (CBOE Demutualization Approval Order);
53963 (June 8, 2006), 71 FR 34660 (June 15, 2006)
(SR–NSX–2006–03) (NSX Demutualization Order);
51149 (February 8, 2005), 70 FR 7531 (February 14,
2005) (SR–CHX–2004–26) (CHX Demutualization
Order); and 49098 (January 16, 2004), 69 FR 3974
(January 27, 2004) (SR–Phlx–2003–73) (Phlx
Demutualization Order).
70 See e.g., MEMX Order, supra note 48, at 27453;
LTSE Order, supra note 49, at 21844; and MIAX
Pearl Order, supra note 49, at 92905. See also
MEMX Holdings LLC Agreement, Article III,
Section 3.5(a)(2); LTSE Group Inc. Certificate,
Article IX, subparagraph (A)(2)(b)(i)(B); Miami
Holdings Certificate, Article NINTH (b)(i)(B).
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interests in the exchange.71 The
Commission also has previously stated
that a member’s ownership interest in
an entity that controls an exchange
could become so large as to cast doubt
on whether the exchange may fairly and
objectively exercise its self-regulatory
responsibilities with respect to such
member.72 The Commission stated that
such requirements are designed to
minimize the potential that a person or
entity can improperly interfere with or
restrict the ability of the exchange to
effectively carry out its regulatory
oversight responsibilities under the
Act.73 The Commission has approved
provisions setting membership
ownership limitations for all national
securities exchanges.74
In addition, the Commission has
previously approved voting limitations
in the corporate documents of the
holding companies of exchanges that
provide that no person, alone or
together with its related persons, may,
directly, indirectly, or pursuant to any
agreement, vote or cause the voting of
voting interest in the exchange, or give
any consent or proxy with respect to
voting units in the exchange
representing more than 20% of the
voting power of the exchange.75 Similar
to the ownership concentration limits,
the Commission stated that such voting
concentration limits are a way to
minimize the potential that a person or
entity can improperly interfere with or
restrict the ability of the exchange to
effectively carry out its regulatory
oversight responsibilities under the Act
71 See MEMX Order, supra note 48, at 27455;
LTSE Order, supra note 49, at 21845; and MIAX
PEARL Order, supra note 49, at 92906.
72 Id. The Commission has further stated that a
member that is a controlling shareholder of an
exchange could seek to exercise that controlling
influence by directing the exchange to refrain from,
or the exchange may hesitate to, diligently monitor
and conduct surveillance of the member’s conduct
or diligently enforce the exchange’s rules and the
federal securities laws with respect to conduct by
the member that violates such provisions. Id.
73 See MEMX Order, supra note 48, at 27456;
LTSE Order, supra note 49, at 21845; and MIAX
PEARL Order, supra note 49, at 92906.
74 See supra notes 69–73.
75 See e.g., MEMX Order, supra note 48, at 27454;
LTSE Order, supra note 49, at 21844; MIAX Pearl
Order, supra note 49, at 92905. See also MEMX
Holdings LLC Agreement, Article III, Section
3.5(a)(iii); LTSEG Certificate, Article IX,
subparagraph (A)(2)(b)(i)(C); Miami Holdings
Certificate, Article NINTH (b)(i)(C). Such provisions
also applied to any voting agreement, plan, or other
arrangement, where the effect of such agreement,
plan, or other arrangement would be to enable any
person, either alone or together with its related
persons, to vote, possess the right to vote, or cause
the voting of voting interest in the exchange that
would represent more than 20% of the voting
power of the then issued and outstanding voting
interest in the exchange. See MEMX Holdings LLC
Agreement, Article III, Section 3.5(a)(iii); LTSEG
Certificate, Article IX, subparagraph (A)(2)(b)(i)(C).
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through the exercise of voting power.76
The Commission has approved
provisions setting voting limitations for
all national securities exchanges.77
The Commission is considering
whether the Limited Liability Company
Agreement of 24X US Holdings LLC and
the Amended and Restated Limited
Liability Company Agreement of 24X
Bermuda Holdings LLC, as proposed,
contain provisions that help ensure that
24X is so organized and has capacity to
carry out the purposes of Section 6(b)(1)
of the Act. As proposed, there are no
ownership or voting concentration
limits in either the Limited Liability
Company Agreement of 24X US
Holdings LLC or in the Amended and
Restated Limited Liability Company
Agreement of 24X Bermuda Holdings
LLC. 78 Therefore, the Commission is
considering whether 24X is so organized
and has capacity to carry out the
purposes of Section 6(b)(1) of the Act
without undue influence by US
Holdings and Bermuda Holdings.
Further, the Commission is considering
whether 24X retains a sufficient degree
of independence to effectively carry out
its regulatory obligations under the Act.
Similarly, because 24X does not propose
to include any ownership or voting
limitations on 24X members that might
have or acquire an ownership interest in
US Holdings and Bermuda Holdings,
the Commission is considering whether
the Limited Liability Company
Agreement of 24X US Holdings LLC and
the Amended and Restated Limited
Liability Company Agreement of 24X
Bermuda Holdings LLC contain
mechanisms to ensure that should a
member of 24X own Voting Units, such
ownership would not interfere with
24X’s ability to be so organized and
have the capacity to carry out the
purposes of Section 6(b)(1) of the Act
76 See MEMX Order, supra note 48, at 27456;
LTSE Order, supra note 49, at 21845; and MIAX
PEARL Order, supra note 49, at 92906. The
Commission also has approved the ability of an
exchange to waive the ownership and voting
concentration limits under certain circumstances.
See e.g., MEMX Order, supra note 48, at 27454;
LTSE Order, supra note 49, at 21844; and MIAX
PEARL Order, supra note 49, at 92905 MEMX
Holdings LLC Agreement, Article III, Section
3.5(b)(ii); LTSEG Certificate, Article IX,
subparagraph (A)(2)(b)(ii)(B); Miami Holdings
Certificate, Article NINTH (b)(ii)(B).
77 See supra notes 69, 75–76 .
78 As proposed, Schedule A to the Amended and
Restated Limited Liability Company Agreement of
24X Bermuda Holdings LLC indicates two
members, Dmitri Galinov and Point72 Ventures
Investments, LLC, own 44.76% and 20.09%,
respectively, of Bermuda Holdings. See Schedule A
to Exhibit C–2 of 24X’s Form 1. However, Exhibit
K of 24X’s Form 1 also indicates that Dmitri
Galinov and Point72 Ventures Investments, LLC
own 35.58% and 15.97% of Bermuda Holdings,
respectively.
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without undue influence by such
member.
Regulatory Independence of 24X and
Oversight of 24X. In order to be granted
registration as a national securities
exchange, 24X must be able to carry out
its regulatory responsibilities under, and
operate in a manner consistent with, the
Act. This requires 24X to have the
ability to carry out its regulatory
function independently, and to be
organized and operate in a fashion
consistent with, the Act, particularly
with Section 6(b)(1) of the Act, which
requires, in part, an exchange to be so
organized and have the capacity to carry
out the purposes of the Act.79 Although
neither US Holdings nor Bermuda
Holdings would themselves carry out
24X’s regulatory functions or be directly
overseen by the Commission, as direct
and indirect owners of 24X, the
activities and actions of US Holdings
and Bermuda Holdings with respect to
the operation of 24X must be consistent
with, and must not interfere with, 24X’s
regulatory obligations as a national
securities exchange. Therefore, the
Commission is considering whether the
corporate documents of US Holdings
and Bermuda Holdings contain
provisions that are designed to help
maintain the independence of the
regulatory function of 24X and oversight
of 24X by the Commission.
The Commission has granted the
registration of national securities
exchanges that have holding company
structures.80 As part of the
Commission’s analysis of a holding
company structure proposed by an
exchange, the Commission has
considered and approved provisions in
the exchange’s holding companies’
corporate documents that are designed
to help ensure that the holding
companies of an exchange will enable
the exchange to operate in a way that
facilitates the exchange’s ability to carry
out its regulatory function
independently, and to be organized and
operate in a fashion that is consistent
with the Act, particularly with Section
6(b)(1) of the Act, which requires, in
part, an exchange to be so organized and
have the capacity to carry out the
purposes of the Act.81 Such provisions
generally address: 82
79 15
U.S.C. 78f(b)(1).
e.g., supra note 69.
81 15 U.S.C. 78f(b)(1).
82 The Commission has approved provisions
addressing regulatory independence for all
exchanges. See, e.g., Securities Exchange Act
Release Nos. 76998 (January 29, 2016), 81 FR 6066,
6071–72 (February 4, 2016) (File No. 10–221) (order
granting the exchange registration of ISE Mercury,
LLC); 70050 (July 26, 2013), 78 FR 46622, 46627–
29 (August 1, 2013) (File No. 10–209) (order
80 See
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Giving Due Regard to a National
Securities Exchange’s Self-Regulatory
Obligations. A commitment that
requires the directors, officers,
employees and agents of exchange
holding companies to give due regard to
the preservation of the independence of
the self-regulatory function of the
exchange and its obligations to investors
and the general public.83
Compliance with Federal Securities
Laws. A provision that requires
exchange holding companies and their
officers, directors, employees, and
agents to comply with the federal
securities laws and the rules and
regulations promulgated thereunder and
agree to cooperate with the Commission
and the exchange in respect of the
Commission’s oversight
responsibilities.84
Submission of Jurisdiction. A
provision that requires exchange
holding companies and their officers,
directors, employees, and agents to
submit to the jurisdiction of the U.S.
federal courts, the Commission, and the
exchange, for purposes of any suit,
action or proceeding arising out of, or
relating to, the exchange’s activities.85
Books and Records of a National
Securities Exchange Reflecting
Confidential Information. A provision
that requires all books and records of an
exchange reflecting confidential
information pertaining to the selfgranting the exchange registration of Topaz
Exchange LLC (nka ISE Gemini, LLC); 68341
(December 3, 2012), 77 FR 73065, 73070–71
(December 7, 2012) (File No. 10–207) (order
granting the exchange registration of Miami
International Securities Exchange LLC); 58375
(August 18, 2008), 73 FR 49498, 49498–99(August
21, 2008) (File No. 10–182) (order granting the
exchange registration of BATS Exchange, Inc.)
(‘‘BATS Order’’). See also infra notes 83–91;
Securities Exchange Act Release Nos. 62158 (May
24, 2010), 75 FR 30082 (May 28, 2010) (CBOE–
2008–88) (CBOE Demutualization Approval Order);
53963 (June 8, 2006), 71 FR 34660 (June 15, 2006)
(SR–NSX–2006–03) (NSX Demutualization Order);
51149 (February 8, 2005).
83 See e.g., MEMX Order, supra note 48, at 27456;
LTSE Order, supra note 49, at 21845; and MIAX
Pearl Order, supra note 49, at 92906. See also
MEMX Holdings LLC Agreement, Article III,
Section 3.5(a)(iii); LTSE Group Inc. Bylaws, Article
X, Section 10.1; Miami Holdings Bylaws, Article
VII, Section 1.
84 See e.g., MEMX Order, supra note 48, at 27456;
LTSE Order, supra note 49, at 21845–21856; and
MIAX Pearl Order, supra note 49, at 92906. See also
MEMX Holdings LLC Agreement, Article XI,
Section 11.3(h); LTSE Group Inc. Bylaws, Article X,
Section 10.4; Miami Holdings Bylaws, Article VII,
Section 4. The holding companies also must take
reasonable steps necessary to cause its officers,
directors, employees and agents to so cooperate. Id.
85 See e.g., MEMX Order, supra note 48, at 27456;
LTSE Order, supra note 49, at 21846; and MIAX
Pearl Order, supra note 49, at 92906. See also
MEMX Holdings LLC Agreement, Article XV,
Section 15.12(b); LTSE Group Inc. Bylaws, Article
X, Section 10.5; Miami Holdings Bylaws, Article
VII, Section 5.
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regulatory function of the exchange to
be retained in confidence by the
exchange and its personnel, directors,
officers, employees, and agents, and will
not be used by the exchange for any
non-regulatory purposes and shall not
be made available to any person other
than to personnel of the Commission, or
to other personnel under specified
conditions.86 Similar provisions
regarding the treatment of confidential
information pertaining to the selfregulatory function of the exchange
apply to the holding companies of an
exchange, including the directors,
officers, employees, and agents of the
holding companies.87
Books and Records of the Holding
Companies. A provision that requires
the books and records of exchange
holding companies to be maintained in
the United States and, to the extent they
are related to the operation or
administration of the exchange, the
holding companies’ books and records
will be subject at all times to inspection
and copying by the Commission and the
exchange,88 and to the extent they are
related to the operation or
administration of the exchange, the
books, records, premises, officers,
directors, employees, and agents of the
holding companies will be deemed to be
the books, records, premises, officers,
directors, employees, and agents of
exchange, for purposes of, and subject to
oversight pursuant to, the Act.89
Consent to Provisions by Holding
Company Officers, Directors, Employees
and Agents. A provision that requires
exchange holding companies to take
reasonable steps necessary to cause its
officers, directors, employees, and
agents, prior to accepting a position
with the holding companies to consent
86 See e.g., MEMX Order, supra note 48, at 27456;
LTSE Order, supra note 49, at 21846; and MIAX
Pearl Order, supra note 49, at 92906. See also
Second Amended and Restated Limited Liability
Company Agreement of MEMX LLC, Article XIII,
Section 13.1; LTSE, Inc. Bylaws, Article XI, Section
11.4; MIAX Pearl Bylaws, Article X, Section 10.4.
87 See e.g., MEMX Order, supra note 48, at 27456;
LTSE Order, supra note 49, at 21846; and MIAX
Pearl Order, supra note 49, at 92906. See also
MEMX Holdings LLC Agreement, Article XII,
Section 12.2(c); LTSE Group Inc. Bylaws, Article X,
Section 10.2; Miami Holdings Bylaws, Article VII,
Section 2.
88 See e.g., MEMX Order, supra note 48 at 27456;
LTSE Order, supra note 49, at 21846; and MIAX
Pearl Order, supra note 49, at 92906–92907. See
also MEMX Holdings LLC Agreement, Article XII,
Section 12.2(a) and (b); LTSE Group Inc. Bylaws,
Article X, Section 10.3; Miami Holdings Bylaws,
Article VII, Section 3.
89 See e.g., MEMX Order, supra note 48, at 27456;
LTSE Order, supra note 49, at 21846; and MIAX
Pearl Order, supra note 49, at 92907. See also
MEMX Holdings LLC Agreement, Article XII,
Section 12.2(b); LTSE Group Inc. Bylaws, Article X,
Section 10.3; Miami Holdings Bylaws, Article VII,
Section 3.
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54741
in writing to the applicability of the
provisions discussed above, with
respect to their activities related to the
exchange.90
Changes to Holding Company
Constituting Documents to be Filed with
the Commission. A provision that
requires exchange holding companies’
corporate documents to provide that so
long as the holding companies control
the exchange, any changes to the
holding companies’ constituting
documents must be submitted to the
exchange governing board for approval,
and, if such change is required to be
filed with the Commission pursuant to
Section 19(b) of the Act and the rules
and regulations thereunder, such change
shall not be effective until filed with
and effective by operation of law, or
filed with and approved by the
Commission.91
The Commission is considering
whether US Holdings and Bermuda
Holdings are proposed to be organized
in a way that would help maintain the
independence of the regulatory function
of 24X and foster the oversight of the
exchange by the Commission. 24X has
not adopted any of these provisions in
the Amended and Restated Limited
Liability Company Agreement of 24X
Bermuda Holdings LLC.92 Therefore, the
Commission is considering whether the
structure of 24X and its parent
companies, US Holdings and Bermuda
Holdings, help to ensure the
independence of 24X’s regulatory
function. Further, the Commission is
considering whether the structure of
24X and its parent companies helps to
ensure that 24X can carry out its
regulatory responsibilities under, and
operate in a manner consistent with, the
Act. Specifically, the Commission is
considering whether the proposed
structure is consistent with Section
6(b)(1), which requires, in part, that an
exchange to be so organized and have
90 See e.g., MEMX Order, supra note 48, at 27456–
27457; LTSE Order, supra note 49, at 21846; and
MIAX Pearl Order, supra note 49, at 92907. See also
MEMX Holdings LLC Agreement, Article XIII,
Section 8.18(b); LTSE Group Inc. Bylaws, Article X,
Section 10.6; Miami Holdings Bylaws, Article VII,
Section 6.
91 See e.g., MEMX Order, supra note 48, at 27457;
LTSE Order, supra note 49, at 21846; and MIAX
Pearl Order, supra note 49, at 92907. See also
MEMX Holdings LLC Agreement, Article XV,
Section 15.9(a); LTSEG Certificate, Article IX,
Section (A)1 and LTSEG Bylaws, Article IX; Miami
Holdings Certificate, Article VIII and Miami
Holdings By-Laws, Article XII, Section 1. This
requirement is critical as it helps to ensure
Commission oversight and approval, as appropriate,
for any changes to an exchange holding company
corporate documents.
92 See Amended and Restated Limited Liability
Company Agreement of 24X Bermuda Holdings LLC
and the Limited Liability Company Agreement of
24X US Holdings LLC.
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the capacity to carry out the purposes of
the Act.93
B. 24X Trading Sessions
24X proposes to offer significantly
expanded trading outside of regular
trading hours for NMS stocks by
operating a national securities exchange
24 hours a day, seven days a week, 365
days a year, including holidays.94 24X
proposes to offer four trading sessions—
a ‘‘Core Market Session’’ that
corresponds with regular trading hours
of 9:30 a.m. to 4:00 p.m. Eastern time;
a ‘‘Post-Market Session’’ that would run
from 4:00 p.m. to 8:00 p.m. Eastern time
on each U.S. business day; a ‘‘PreMarket Session’’ that would run from
4:00 a.m. to 9:30 a.m. Eastern time on
each U.S. business day; and a ‘‘24X
Market Session’’ that would run from
8:00 p.m. to 4:00 a.m. Eastern time on
each U.S. business day, and any time
that falls on weekends and holidays.95
While several exchanges offer a premarket trading session starting as early
as 4:00 a.m. Eastern time on each U.S.
business day,96 and most exchanges
offer a post-close trading session until
8:00 p.m. Eastern time on each business
day,97 the Commission has not
previously considered the potential
issues arising from an exchange
application that expands the trading
hours for continuous trading as 24X
proposes.
1. Exchange Trading Hours
24X refers to the proposed Core
Market Session, Pre-Market Session and
Post-Market Session collectively in its
proposed rules as ‘‘Exchange Trading
Hours.’’ 98 24X proposes to permit
orders to be entered, canceled,
modified, executed on or routed away
from the Exchange during Exchange
Trading Hours.99 Orders outstanding at
7:59:59 p.m. Eastern Time each business
day would be automatically
cancelled.100 24X proposes to permit
trading in fractional shares in round
lots, odd lots, or mixed lots.101 Market
Orders 102 and pegged orders 103 would
93 15
U.S.C. 78f(b)(1).
24X Rule 11.1.
95 Proposed 24X Rule 11.1(a).
96 See, e.g., NYSE Arca, Inc., Cboe EDGX
Exchange, Inc. and The Nasdaq Stock Market LLC.
97 See, e.g., NYSE Arca, Inc., NYSE American
LLC, NYSE Chicago, Inc., NYSE National, Inc., Cboe
BZX Exchange, Inc., Cboe BYX Exchange, Inc., Cboe
EDGA Exchange, Inc., Cboe EDGX Exchange, Inc.,
and The Nasdaq Stock Market LLC.
98 Proposed 24X Rule 11.1(a)(1).
99 Proposed 24X Rule 11.1(b).
100 Proposed 24X Rule 11.1(d).
101 See Proposed 24X Rule 11.6(q) and Exhibit E
of 24X’s Form 1 at 4.
102 Proposed 24X Rule 11.7(a)(4).
103 Proposed 24X Rule 11.7(c)(4).
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be accepted only during the Core Market
Session, while limit orders would be
accepted during Exchange Trading
Hours and the 24X Market Session, as
discussed below.104
2. 24X Market Session
24X proposes to apply some, but not
all, of its rules that would apply during
Exchange Trading Hours to trading that
would occur during the 24X Market
Session.105 For example, market
orders 106 and pegged orders 107 would
be prohibited from the 24X Market
Session. Limit orders,108 which would
be allowed during the 24X Market
Session, would be required to have one
of the following time-in-force (‘‘TIF’’)
instructions: immediate or cancel
(‘‘IOC’’),109 fill-or-kill (‘‘FOK’’) 110 or
Day+.111 In addition, the proposed rules
would permit orders to be entered,
canceled, modified or executed on the
Exchange, but not routed away, during
the 24X Market Session.112 While the
proposed rules would impose
continuous two-sided quoting obligation
on retail market makers during ‘‘Regular
Trading Hours,’’ 113 the proposed rules
would establish no analogous market
making obligation during the 24X
Market Session.
While 24X proposes to join the CTA/
CQ and UTP Plans, the 24X proposal
does not address how real-time
consolidated dissemination of quotation
information and transaction reporting
could be available during the 24X
Market Session because currently, the
CTA/CQ and UTP Plans do not operate
during the times that cover the proposed
24X Market Session. One commenter
stated that the exclusive SIPs do not
operate during the 24X Market Session
104 Proposed
24X Rule 11.7(b)(6).
e.g., Proposed 24X Rule 11.16.
106 Proposed 24X Rules 11.7(a)(5) and 11.16(b)(1).
107 Proposed 24X Rules 11.7(c)(5) and 11.16(b)(2).
108 Proposed 24X Rule 11.7(b)(7).
109 Proposed 24X Rule 11.6(o)(1). IOC is defined
as an instruction the User may attach to an order
stating the order is to be executed in whole or in
part as soon as such order is received. The portion
not executed immediately on the Exchange or
another trading center (pursuant to proposed Rule
11.10) is treated as cancelled and is not posted to
the 24X Book.
110 Proposed 24X Rule 11.6(o)(3). FOK is defined
as an instruction the User may attach to an order
stating that the order is to be executed in its entirety
as soon as it is received and, if not so executed,
cancelled. An order with a FOK instruction is not
eligible for routing away pursuant to proposed Rule
11.10.
111 Proposed 24X Rule 11.6(o)(4). Day+ is defined
as an instruction the User may attach to an order
stating that an order to buy or sell is designated for
execution starting with the beginning of the 24X
Market Session and, if not executed, expires at the
end of the Post-Market Session.
112 Proposed 24X Rules 11.1(c) and 11.10.
113 See supra note 26.
105 See,
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and that therefore the national best bid
or offer (‘‘NBBO’’) would not be
disseminated.114 This commenter asked
the Commission to ‘‘consider the
potential risks related to the lack of
transparency, including the risk to
investors associated with trading during
the 24X Trading Session, without a realtime NBBO and if 24X’s proprietary
feeds are the only displayed
liquidity.’’ 115 Another commenter
stated that it was unclear how 24X
could offer after-hours trading in the
absence of real time reporting or
operation of the securities information
processors (‘‘SIPs’’) and that such
trading would likely be inconsistent
with Regulation NMS Rule 601.116
The proposed 24X Market Session
rules relating to risk and volatility
moderators would also differ from those
applicable during Exchange Trading
Hours. While 24X would participate in
the Plan to Address Extraordinary
Market Volatility (‘‘LULD Plan’’) 117
during the Core Market Session,118 the
LULD Plan currently is not effective
during the times that 24X proposes to
operate the 24X Market Session.
Consequently, during the 24X Market
Session, 24X proposes that the
Reference Price of a given security
would be defined as either the last sale
price prior to the start of the 24X Market
Session or the primary market’s most
recent closing price when opening on a
quote.119 Under 24X’s proposal, five
minutes after the start of the 24X Market
Session, the Reference Price would be
required to be updated every 30 seconds
to reflect the average price of the
security over the last preceding five
minute period of the 24X Market
Session, but only if the new Reference
Price would be at least 1% above or
below the existing Reference Price.120
24X also proposes to include certain
price bands during the 24X Market
Session (‘‘24X Price Band(s)’’). Under
the proposal, the 24X Price Bands are
calculated for a given security by
multiplying the Reference Price by an
applicable Percentage Parameter, which
is then added to the Reference Price to
calculate the Upper 24X Price Band and
114 See
Nasdaq Letter at 2.
Nasdaq Letter at 2. This commenter also
stated that it did ‘‘not believe that the Application
has adequately explained how 24X’s new exchange
will interact with, and be integrated into, the
national market system.’’
116 See NYSE Letter at 3.
117 See Securities Exchange Act Release No.
85623 (April 11, 2019), 84 FR 16086 (April 17,
2019) (Order Approving the Eighteenth Amendment
to the National Market System Plan to Address
Extraordinary Market Volatility).
118 Proposed 24X Rule 11.15(e)(2).
119 Proposed 24X Rules 11.14(c)(3) and 11.15(f).
120 Id.
115 See
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subtracted from the Reference Price to
calculate the Lower 24X Price Band.121
If an order entered during the 24X
Market Session falls outside of the 24X
Price Bands, 24X proposes to identify
three distinct Members that have at least
100 shares in the relevant security
priced at the applicable end of the 24X
Price Bands and consult with these
Members as to whether the 24X Price
Bands should be adjusted.122 In the
event that 24X is unable to find such
Members, or 24X and the Members
determine that the 24X Price Bands
should not change, the order that
triggered the review will be represented
at the Upper 24X Price Band or Lower
24X Price Band, as appropriate.123 One
commenter expressed concern with the
proposed 24X volatility monitors,
stating that it is not clear how well the
mechanism would work, especially
during periods of extreme market
volatility or material newsworthy
events.124 Commenters also raised
concerns about how 24X would
implement regulatory trading halts and
pauses.125
24X’s proposal to provide for
continuous trading on an exchange
outside of regular trading hours raises a
number of issues, many of which have
been considered previously in the
context of pre-market and post-market
trading sessions. In particular, these
include the need for heightened
disclosures and consolidated last sale
and quotation information in the afterhours market, as well as the associated
increased trading risks of after-hours
trading, including, among other things,
greater price volatility, reduced
liquidity, wider spreads, and fewer
investor protections, have been raised
before.126 As other exchanges have
121 Proposed
24X Rule 11.15(f).
122 Id.
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123 Id.
124 See Blue Ocean Letter at 4. The commenter
also stated that 24X’s proposal is silent on the
actual mechanics for initiating and ending trading
halts and does not explain how clearance and
settlement of trades made before or during a halt
would occur. See id. Further, the commenter states
that no explanation is given as to how corporate
actions would be treated. See id., at 5.
125 See Blue Ocean Letter at 4 and Nasdaq Letter
at 4 (‘‘the Application does not sufficiently explain
how 24X will coordinate with primary listing
exchanges to implement regulatory trading halts
and pauses during the entirety of the 24X Trading
Session’’).
126 See, e.g., Special Study: Electronic
Communication Networks and Afterhours Trading,
Division of Market Regulation, Commission (June
2000), https://www.sec.gov/news/studies/
ecnafter.htm; Investor Bulletin: After-Hours
Trading, Office of Investor Education and
Advocacy, Commission (May 2011), https://
www.sec.gov/files/afterhourtrading.pdf; and
Investor Publications, Commission, After-Hours
Trading: Understanding the Risks (Nov. 8, 2008),
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proposed expanded trading hours to
include pre-market and post-market
sessions, the Commission has approved
such expansion where certain
safeguards were implemented to
mitigate these concerns.127 Such
safeguards include, among other things,
specific disclosures to investors of
heightened risks of after-hours
trading,128 establishing risk and
volatility moderators and a
corresponding expansion of the
operational hours of the SIPs,129 to help
ensure the availability of consolidated
last sale and quotation information.
The Commission is considering
whether the 24X proposal to operate as
an exchange that permits continuous
trading is consistent with Section 6(b)(5)
of the Act, which requires, among other
things, that the rules of an exchange be
designed to prevent fraudulent and
manipulative acts and practices,
promote just and equitable principles of
trade, foster cooperation and
coordination with persons engaged in
regulating, clearing, settling, processing
information with respect to, and
https://www.sec.gov/reportspubs/investorpublications/investorpubsafterhourshtm.html.
Investor Bulletin: Extended Hours Trading (June 6,
2022) Extended-Hours Trading: Investor Bulletin |
Ivestor.gov. Staff reports, Investor Bulletins, and
other staff documents (including those cited herein)
represent the views of Commission staff and are not
a rule, regulation, or statement of the Commission.
The Commission has neither approved nor
disapproved the content of these documents and,
like all staff statements, they have no legal force or
effect, do not alter or amend applicable law, and
create no new or additional obligations for any
person. The Commission has expressed no view
regarding the analysis, findings, or conclusions
contained herein.
127 See, e.g., Securities and Exchange Act Nos.
77607 (April 13, 2016) 81 FR 23032 (April 19, 2016)
(Order Approving Proposed Rule Change, as
Modified by Amendment No. 1 Thereto, To Adopt
an Early Trading Session and Three New Time-InForce Instructions), at 23034; 42003 (October 13,
1999) 64 FR 56554 (October 20, 1999) (Notice of
Filing and Order Granting Accelerated Approval of
Proposed Rule Change and Amendment No. 1 by
National Association of Securities Dealers, Inc.
Relating to the Extension of Certain Nasdaq
Services and Facilities Until 6:30 p.m. Eastern
Time); 42004 (October 13, 1999) 64 FR 56548
(October 20,1999) (Notice of Filing of Proposed
Rule Change and Amendment Nos. 1 and 2 and
Order Granting Accelerated Approval of Proposed
Rules Change and Amendment Nos. 1 and 2 by the
Chicago Stock Exchange Relating to the
Implementation of an Extended Hours Trading
Session).
128 See, e.g., FINRA Rule 2265, Investors
Exchange Rule 3.290, Nasdaq Section 20.
129 The SIPs, which collect, consolidate and
disseminate consolidated data, including the
NBBO, in the equity market are currently governed
by (1) the Consolidated Tape Association Plan
(‘‘CTA Plan’’), (2) the Consolidated Quotation Plan
(‘‘CQ Plan’’), and (3) the Joint Self-Regulatory
Organization Plan Governing the Collection,
Consolidation, and Dissemination of Quotation and
Transaction Information for Nasdaq-Listed
Securities Traded on Exchanges on an Unlisted
Trading Privileges Basis (‘‘UTP Plan’’).
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54743
facilitating transactions in securities,
remove impediments to and perfect the
mechanisms of a free and open market
and a national market system, and in
general protect investors and the public
interest, particularly given the lack of
transparency during the 24X Market
Session. Specifically, the SIPs currently
do not operate during the hours the 24X
Market Session is proposed to occur and
therefore quotation and last sale
information, including the calculation
of an NBBO, would not be available
during the 24X Market Session. The
Commission is evaluating whether the
absence of consolidated market
information during the 24X Market
Session is consistent with Section
6(b)(5) of the Act.130 The Commission is
considering whether 24X’s proposed
investor disclosures,131 which mirror
those made available by other
exchanges,132 are sufficient to highlight
the what appear to be unique risks
associated with continuous trading
during the 24X Market Session.
Specifically, the Commission is
evaluating whether these disclosures,
currently used for exchange pre-market
and post-market trading sessions,
sufficiently inform investors of the
greater potential risks associated with
the significantly expanded after-hours
trading that 24X proposes for its 24X
Market Session.
Next, the Commission is considering
whether the rules proposed by 24X to
address certain risks associated with
trading during the 24X Market Session
are consistent with the Act. First,
certain mechanisms that address
volatility in individual symbols and the
equities market as a whole are not
available during the after-hours
sessions.133 The Commission is
considering whether the 24X proposed
risk and volatility moderators are
consistent with Section 6(b)(5) of the
Act. Second, 24X proposes to impose on
its members certain requirements
governing risk management controls and
supervisory procedures 134 that are
130 One commenter states that 24X has not
sufficiently analyzed how the Exchange would
comply with certain Commission rules and interact
with other exchanges when the SIPs are not
operating. See Nasdaq Letter at 2. The commenter
‘‘encouraged’’ the Commission to consider the
potential risks resulting from the absence of a realtime NBBO. See id. Further, the commenter states
that the 24X proposal would not allow for technical
changes that typically take place during pauses in
the trading day. See id., at 3.
131 Proposed 24X Rule 3.21.
132 See supra note 128.
133 Specifically, Limit Up—Limit Down trading
pauses and market wide circuit breakers are
unavailable during after-hours trading.
134 See Proposed 24X Rule 11.10(g). The Market
Access Rule, Rule 15c3–5, referred to in proposed
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similar to requirements imposed by
other exchanges.135 The Commission is
evaluating whether such proposed risk
management controls and supervisory
procedures, which appear to be based
on requirements that were established
for the current trading hours and
environment are sufficient during the
24X Market Session or whether
additional mechanisms would be
needed. The Commission is also
considering how the relevant clearing
agencies for equities, the National
Securities Clearing Corporation
(‘‘NSCC’’) and the Depository Trust
Company, would address any potential
credit, market, and liquidity risks
associated with trades submitted by the
Exchange when the markets, banks,
Fedwire, and any providers of
settlement services are closed for
business.136 The Commission is
considering whether the 24X proposal
would permit risk to be managed in a
manner consistent with the
requirements of Section 6(b)(5) of the
Act that an exchange’s rules be designed
to prevent fraudulent and manipulative
acts and practices, promote just and
equitable principles of trade, foster
cooperation and coordination with
persons engaged in regulating, clearing,
settling, processing information with
respect to, and facilitating transactions
in securities, remove impediments to
and perfect the mechanisms of a free
and open market and a national market
system, and, in general protect investors
and the public interest.
Further, the Commission is
considering other issues raised by
commenters about 24X’s proposal to
substantially extend exchange trading
hours. Commenters raise concerns about
whether 24X’s proposal is consistent
with the requirements of Section 6(b)(5)
of the Act that an exchange’s rules be
24X Rule 11.10(g), requires broker-dealers with
market access to, among other things, establish,
document, and maintain a system of risk
management controls and supervisory procedures
reasonably designed to manage financial,
regulatory, and other risks of this business activity.
17 CFR 240.15c3–5.
135 See, e.g., Cboe Rule 5.36(f); CboeEDGX Rules
21.9(f); Nasdaq Rule 4757(b); Nasdaq BX Rule
4758(c); MEMX Rule 11.11(g).
136 Three commenters raised concerns relating to
24X’s ability to clear and settle trades after-hours.
See Nasdaq Letter at 3 (stating that US equities
clearance and settlement does not operate on a 24/
7 basis); NYSE Letter at 2–4 (stating that 24X does
not describe any procedures or process for NSCC to
clear trades during the 24X market session); and
Blue Ocean Letter at 4 (stating that 24X has not
addressed the daily settlement of trades with NSCC
when NSCC and its constituent members are
typically closed). One commenter also questioned
whether 24X would be able to clear trades on a
continuous net settlement system as proposed
under its Rule 11.2 because NSCC is not open for
business on weekends. Id.
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designed to prevent fraudulent and
manipulative acts and practices,
promote just and equitable principles of
trade, foster cooperation and
coordination with persons engaged in
regulating, clearing, settling, processing
information with respect to, and
facilitating transactions in securities,
remove impediments to and perfect the
mechanisms of a free and open market
and a national market system, and, in
general protect investors and the public
interest. Specifically, commenters raised
concerns about the effect of 24X’s
proposal on market-wide
surveillance.137 These commenters
stated that the 24X proposal does not
sufficiently detail how 24X will
coordinate with primary listing
exchanges to surveil securities during
the 24X Market Session or how market
surveillance will work generally.138
In addition, commenters stated that
24X has not sufficiently explained how
24X will comply with relevant
Commission rules in light of 24X’s
novel features.139 Specifically, one
commenter states that the 24X proposal
does not explain how 24X intends to
comply with Regulation NMS Rules
602, 603, 610 and 611 and Regulation
SHO generally.140 The commenter also
stated that the 24X’s proposed routing
relationship with Instinet is not
adequately described, especially in light
of the 24X Market session when other
exchanges are closed.141
A commenter stated that listed
companies often release material
information outside of core market
hours and that primary listing
exchanges typically require companies
to notify their primary listing exchanges
prior to the release of such information
to allow the exchange to determine
whether a trading halt is necessary.142
The commenter suggested the
Commission consider the effect the 24X
Market Session would have on the
disclosure of material information and
the volatility in securities outside of
core hours trading hours when material
information is released.143
137 See
Nasdaq Letter at 4–5. See also Blue Ocean
Letter at 5–6.
138 See id. One commenter states that 24X’s
proposal would be the first occurrence of a national
securities exchange that utilizes unlisted trading
privileges to operate outside the trading hours of
the primary listing exchange. See Nasdaq Letter at
3.
139 See Nasdaq Letter at 3. See also Blue Ocean
Letter at 3 and 5.
140 See Blue Ocean Letter at 3 and 5.
141 See Blue Ocean Letter at 3 (stating that it is
‘‘critical’’ for the Commission and other market
participants to be able to understand and evaluate
how routing of orders will be administered when
other markets are closed).
142 See Nasdaq Letter at 4.
143 See id.
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A commenter stated that the 24X
proposal does not address how 24X will
handle the elimination of natural
trading pauses when corporate actions,
such as stock splits, dividends, mergers
and SPAC combinations typically occur
at the end of the trading day.144 The
commenter also stated that the 24X
proposal does not adequately explain
how 24X will pause trading to allow for
critical exchange, industry, and systems
tests that are typically performed when
the exchange is not operating.145
1. Fractional Shares
24X proposes to permit orders to be
submitted in round lots, mixed lots or
odd-lots. Orders are proposed to be
submitted in as small as 1/1,000th of a
share.146 24X’s proposal does not
describe how trading in fractional
shares would occur. Trading in
fractional shares on an exchange raises
issues relating to trade reporting,147
custody, clearance 148 and settlement,
and quote display. The Commission is
considering whether 24X’s proposal to
accept orders and offer trading in
fractional shares in units as small as 1/
1,000th of a share is designed to foster
cooperation and coordination with
persons engaged in regulating, clearing,
settling, processing information with
respect to, and facilitating transactions
in securities, remove impediments to
and perfect the mechanism of a free and
open market and a national market
system, and, in general, to protect
investors and the public interest,
consistent with Section 6(b)(5) of the
Act.
Three commenters raised concerns
over 24X’s proposal to allow for trading
in fractional shares. Three commenters
stated that 24X’s proposal does not
sufficiently explain how trading in
fractional shares would function.149 One
commenter stated that it is unclear from
24X’s proposal how trading in fractional
shares will comply with certain relevant
144 See id. Specifically, the commenter referenced
corporate actions including stock splits, dividends,
and mergers that typically take effect at the end of
the trading day.
145 See id. Specifically, the commenter references
tests such as general customer testing, disaster
recovery tests, industry-wide business continuity
tests.
146 See supra note 101.
147 See Nasdaq Letter at 3. (‘‘the SIPs do not
currently allow for the reporting of fractional
shares’’).
148 See Nasdaq Letter at 3 and NYSE Letter at 3.
149 See Blue Ocean Letter at 3. See also NYSE
Letter at 2 and Nasdaq Letter at 3. The commenters
state that important information including
minimum trade size and how fractional trading
would interact with other Exchanges is not
addressed.
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Commission rules.150 Two commenters
also stated that the 24X proposal has not
adequately described how fractional
share trading would operate in
connection with the SIPs,151 or how
fractional shares would clear, settle, and
route to other markets that do not allow
fractional share trading.152 One
commenter stated that because 24X’s
proposed rules require all transactions
to be cleared using a continuous net
settlement system, and because NSCC is
not available for either after-hours
trading or trading in fractional shares,
24X will not be able to provide afterhours trading and trading in fractional
shares while also complying with its
own rules regarding clearing and
settlement.153 Therefore, the commenter
states that if 24X were approved as a
national securities exchange, it would
immediately be in violation of Section
19(g) of the Act.154
C. Sufficiency of Exhibits—Regulatory
Funding
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1. Exhibit I
To help ensure that 24X has and
would continue to have adequate
funding to be able to meet its
responsibilities under the Act, 24X
represents that, if the Commission
approves 24X’s application for
registration as a national securities
exchange, US Holdings, as the
controlling owner of the membership
interests in the Exchange, would
allocate sufficient assets to 24X to
enable 24X’s operation.155 Specifically,
24X represents that the US Holdings
will make a cash contribution to 24X of
$5,000,000, ‘‘in addition to any
previously-provided in-kind
contributions, such as legal, regulatory,
and infrastructure-related services.’’ 156
24X also represents that such cash and
in-kind contributions from the US
Holdings will be adequate to operate
24X, including the regulation of the
150 See Nasdaq Letter at 3. The commenter
specifically states that 24X has not explained how
fractional share trading is consistent with Rules
602, 603, 610, and 611 of Regulation NMS.
151 See id. The commenter stated that 24X has not
analyzed the potential costs of technical
enhancements to the exclusive SIPs. See also NYSE
Letter at 2–4 (stating that 24X is silent on whether
it intends to report to the SIP in fractional
quantities or if it would round to a whole share.
Further, the commenter states that certain studies
have found that rounding up fractional shares to a
whole can distort reported market volumes).
152 See Nasdaq Letter at 3.
153 See NYSE Letter at 2–3.
154 Id. This commenter also states that it is
unclear how fractional share quotations would be
incorporated into any potential odd-lot quotation
reporting, should odd-lot quotations reporting be
expanded in the future.
155 See Exhibit I of 24X’s Form 1.
156 Id.
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Exchange, and that 24X and the US
Holdings have entered into an
agreement that requires the US Holdings
to provide adequate funding for the
Exchange’s operations, including the
regulation of the Exchange.157 24X
represents this agreement provides that
(1) the Exchange shall receive all fees,
including regulatory fees and trading
fees, payable by the Exchange’s
members, as well as any funds received
from any applicable market data fees
and tape revenue, and (2) US Holdings
will provide the Exchange with cash,
cash equivalents, securities or other
sufficiently liquid instruments sufficient
to help ensure that the Exchange’s
financial resources (calculated as assets
in excess of liabilities) remain greater
than $5 million.158
Further, any revenues received by the
Exchange from fees derived from its
regulatory function or regulatory fines
will not be used for non-regulatory
purposes or distributed to the US
Holdings, but rather, shall be applied to
fund the legal and regulatory operations
of the Exchange (including surveillance
and enforcement activities), or, as the
case may be, shall be used to pay
restitution and disgorgement of funds
intended for customers (except in the
event of liquidation of the Exchange,
which case US Holdings will be entitled
to the distribution of the remaining
assets of the Exchange).159
The Commission is considering
whether 24X has satisfied the
requirements to file certain exhibits
included in 24X’s Form 1. In its Form
1 application, 24X states that it is not
filing audited financial statements for
itself as the applicant, as required under
Exhibit I, because ‘‘24X National
Exchange LLC has been formed but has
not commenced operations and does not
yet have audited financial statements for
any fiscal year.’’ 160 Further, in the
Exhibit I, 24X represents that US
Holdings ‘‘shall make prior to the
launch of the Exchange, through its U.S.
bank account, a cash contribution to the
Exchange of $5 million, in addition to
any previously provided in-kind
contributions, such as legal, regulatory,
and infrastructure-related services.’’ 161
However, as discussed further below,
24X has not explained or otherwise
shown how the financial statements
filed for the US Holdings under Exhibit
D reflect that US Holdings has or will
157 Id.
have sufficient funds to provide 24X
with such cash contributions.
2. Exhibit D
Exhibit D requires that the applicant
file unconsolidated financial statements
for each subsidiary or affiliate for the
latest fiscal year. Such financial
statements must include a balance sheet
and income statement ‘‘with such
footnotes and other disclosures as are
necessary to avoid rendering the
financial statements misleading.’’ In the
US Holdings balance sheet filed under
Exhibit D, total assets are reported as
negative $439.162 It is unclear as to what
this number signifies, as assets generally
cannot be below $0. Further, this
negative $439 is not reflected in the
financial statements of other
subsidiaries. The financial statements
filed by 24X do not include
accompanying footnotes or disclosures
that explain these discrepancies.
Moreover, while in Exhibit I 24X states
that US Holdings ‘‘shall make prior to
the launch of the Exchange, through its
U.S. bank account, a cash contribution
to the Exchange of $5 million, in
addition to any previously provided inkind contributions, such as legal,
regulatory, and infrastructure-related
services,’’ 163 the Commission is
considering whether the financial
statements filed for US Holdings under
Exhibit D show US Holdings has the
financial resources to make a $5 million
U.S. Dollar cash infusion, as 24X states,
such that the Exchange would be
organized and have the capacity to carry
out the purposes of the Act, including
the ability to enforce compliance by its
members, and persons associated with
its members, with the federal securities
laws and rules thereunder and the rules
of the exchange.
In addition, the Commission is
considering whether the financial
statements for the US Holdings filed
under Exhibit D for the Form 1 show
that US Holdings would be able to
provide the financial support that 24X
describes in its Form 1. In its Form 1
application, 24X states that it is not
filing audited financial statements for
itself as applicant, as required under
Exhibit I, because ‘‘24X National
Exchange LLC has been formed but has
not commenced operations and does not
yet have audited financial statements for
any fiscal year.’’ 164 Moreover, 24X
further states that, ‘‘[i]f the Commission
approves the Exchange’s Form 1
Application for Registration as a
national securities exchange, 24X US
158 Id.
159 See
160 See
Proposed 24X Rule 15.2.
Exhibit I of 24X’s Form 1.
161 Id.
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Frm 00076
162 See
163 See
Exhibit D of 24X’s Form 1.
Exhibit I of 24X’s Form 1.
164 Id.
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Holdings LLC (‘‘Parent’’), as the
controlling owner of the membership
interests in the Exchange, will allocate
sufficient assets to the Exchange to
enable its operation.’’ 165 Given the
applicant’s stated reliance on US
Holdings for sufficient financial support
to enable its operation, the Commission
is considering whether the unaudited
financial statements filed for the
applicant’s parent, US Holdings, show
that the Exchange would be organized
and have the capacity to carry out the
purposes of the Act, including the
ability to enforce compliance by its
members, and persons associated with
its members, with the federal securities
laws and rules thereunder and the rules
of the exchange.
D. Location of Exchange Trading
Platform
24X proposes to locate its primary
trading platform in the Equinix data
center located in New York (‘‘NY4’’).
24X also proposes to locate a
‘‘mirrored’’ primary platform in London
(‘‘LD4’’).166 24X did not describe how
the LD4 platform would operate along
with the platform in NY4. The
Commission is considering whether the
proposal is consistent with the
requirements under Section 6(b)(1) of
the Act, which among other things,
requires the exchange to be so organized
and have the capacity to be able to carry
out the purposes of the Act and to
comply, and to enforce compliance by
its members and persons associated
with its members, with provisions of the
Act. The Commission also is
considering whether the proposal is
consistent with Section 6(b)(5) of the
Act, which requires the rules of the
exchange to prevent fraudulent and
manipulative acts and practices, to
promote just and equitable principles of
trade, to foster cooperation and
coordination with persons engaged with
regulating, clearing, settling, processing,
information with respect to and
facilitating transactions in securities, to
remove impediments to and perfect the
mechanisms of a free and open market
and a national market system.
One commenter expressed concern
over this aspect of 24X’s proposal.167
The commenter stated that no other U.S.
exchange operates a mirrored primary
U.S. trading platform outside of the
United States and stated that 24X does
not explain this structure in its
proposal.168 Further, the commenter
stated that the Commission should
165 Id.
166 See
Exhibit E–1 of 24X’s Form 1 at 1.
167 See Nasdaq Letter at 4.
168 Id.
VerDate Sep<11>2014
17:50 Sep 06, 2022
Jkt 256001
consider the proposed structure’s
jurisdictional and operational
implications and whether such a
structure ‘‘would open the door to
foreign markets to operate mirrored
markets within the United States.’’ 169
IV. Request for Written Comment
The Commission requests that
interested persons provide written
views and data with respect to 24X’s
Form 1 and the questions included
above or other relevant issues.
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 10–
239 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 10–239. 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/other.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to 24X’s Form 1 filed with
the Commission, and all written
communications relating to the
application 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. All
comments received will be posted
without change; the Commission does
not edit personal identifying
information from submissions. You
should submit only information that
you wish to make publicly available. All
submissions should refer to File
Number 10–239 and should be
submitted on or before September 28,
2022.
169 Id.
PO 00000
Frm 00077
Fmt 4703
Sfmt 4703
By the Commission.
J. Matthew DeLesDernier,
Deputy Secretary.
[FR Doc. 2022–19264 Filed 9–6–22; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–95647; File No. SR–CBOE–
2022–043]
Self-Regulatory Organizations; Cboe
Exchange, Inc.; Notice of Filing and
Immediate Effectiveness of a Proposed
Rule Change To Amend Its Rule
Relating to Minimum Market-Maker
Quote Size
August 31, 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
25, 2022, Cboe Exchange, Inc. (the
‘‘Exchange’’ or ‘‘Cboe Options’’) 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 Exchange filed the proposal as a
‘‘non-controversial’’ proposed rule
change pursuant to Section
19(b)(3)(A)(iii) of the Act 3 and Rule
19b–4(f)(6) thereunder.4 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 Exchange, Inc. (the ‘‘Exchange’’
or ‘‘Cboe Options’’) proposes to amend
its Rule relating to minimum MarketMaker quote size. The text of the
proposed rule change is provided
below.
(additions are italicized; deletions are
[bracketed])
*
*
*
*
*
Rules of Cboe Exchange, Inc.
*
*
*
*
*
Rule 5.52. Market-Maker Quotes
(a) No change.
(b) Size. A Market-Maker’s bid (offer) for a
series must be accompanied by the minimum
number of contracts determined by the
Exchange on a class-by-class basis, and if the
Exchange determines on a premium basis
and/or expiration basis for series with
expirations (1) no more than one week, (2)
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 15 U.S.C. 78s(b)(3)(A)(iii).
4 17 CFR 240.19b–4(f)(6).
2 17
E:\FR\FM\07SEN1.SGM
07SEN1
Agencies
[Federal Register Volume 87, Number 172 (Wednesday, September 7, 2022)]
[Notices]
[Pages 54736-54746]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-19264]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-95651; File No. 10-239]
In the Matter of the Application of 24X National Exchange LLC for
Registration as a National Securities Exchange; Order Instituting
Proceedings To Determine Whether To Grant or Deny an Application for
Registration as a National Securities Exchange Under Section 6 of the
Securities Exchange Act of 1934
September 1, 2022.
I. Introduction
On March 25, 2022, 24X National Exchange LLC (``24X'' or
``Exchange'') filed with the Securities and Exchange Commission
(``Commission'') a Form 1 application under the Securities Exchange Act
of 1934 (``Act''), seeking registration as a national securities
exchange under Section 6 of the Act.\1\ Notice of the application was
published for comment in the Federal Register on June 6, 2022.\2\ The
Commission received three comments on the application.\3\ As discussed
further below, the commenters stated that 24X's application does not
include sufficient information about several aspects of its proposed
operation.\4\ One commenter stated that the application ``does not meet
the legal and administrative requirements'' under the Act.\5\ Another
commenter questioned whether ``24X has the necessary structure and
checks in place to protect investors and ensure a fair and orderly
market'' and stated that certain elements of 24X's proposal were not
sufficiently described and that additional information was required to
evaluate the proposal.\6\ This commenter stated that 24X ``contemplates
trading concepts that have not been tested within the U.S. equities
markets'' and that the application raises a number of questions
``including how its new exchange will interact with the current trading
ecosystem.'' \7\ Another commenter stated that the 24X Form 1 should
not be approved because the regulatory infrastructure necessary to
support its proposed trading system does not yet exist.\8\
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78f.
\2\ See Securities Exchange Act Release No. 95007 (May 31,
2022), 87 FR 34333 (``Notice'').
\3\ See letters from Brian Hyndman, President and Chief
Executive Officer, Blue Ocean ATS, LLC, dated July 21, 2022 (``Blue
Ocean Letter''); Eun Ah Choi, Senior Vice President, The Nasdaq
Stock Market LLC, dated July 21, 2022 (``Nasdaq Letter''); and Hope
Jarkowski, General Counsel, NYSE Group, dated July 29, 2022 (``NYSE
Letter'') to Vanessa A. Countryman, Secretary, Commission. The
public comment file for 24X's Form 1 application (File No. 10-239)
is available on the Commission's website at: https://www.sec.gov/comments/10-239/10-239.htm.
\4\ See Blue Ocean Letter at 2-6, Nasdaq Letter at 2-5 and NYSE
Letter at 2-4.
\5\ See Blue Ocean Letter at 6.
\6\ See Nasdaq Letter at 5.
\7\ Id.
\8\ See NYSE Letter at 4.
---------------------------------------------------------------------------
Section 19(a)(1) of the Act \9\ requires the Commission, within
ninety days of the date of publication of notice of an application for
registration as a national securities exchange, or such longer period
as to which the applicant consents, to, by order, grant such
registration \10\ or institute proceedings to determine whether such
registration should be denied.\11\ This order is instituting
proceedings under Section 19(a)(1)(B) of the Act \12\ to determine
whether 24X's application for registration as a national securities
exchange should be granted or denied, and provides notice of the
grounds for denial under consideration by the Commission, as set forth
below.
---------------------------------------------------------------------------
\9\ 15 U.S.C. 78s(a)(1).
\10\ 15 U.S.C. 78s(a)(1)(A).
\11\ 15 U.S.C. 78a(a)(1)(B).
\12\ 15 U.S.C. 78s(a)(1)(B).
---------------------------------------------------------------------------
[[Page 54737]]
II. Description of 24X's Proposed Trading System
According to 24X's Form 1, 24X proposes to operate a fully
automated electronic trading platform for the trading of listed NMS
stocks pursuant to unlisted trading privileges (``UTP'').\13\ 24X would
not maintain a physical trading floor.\14\ Liquidity would be derived
from quotes as well as orders to buy and orders to sell submitted to
24X electronically by exchange members \15\ from remote locations.\16\
The Exchange proposes to operate an electronic limit order book with a
continuous matching function. Orders resting on the book would be
ranked in price/time priority.\17\ 24X proposes to accept market
orders, limit orders and pegged orders with various modifiers and time-
in-force instructions.\18\ Orders may be submitted in round lots, mixed
lots or odd-lots.\19\ One novel feature of 24X's proposal is that it
proposes to allow the unit of trading of an order to be 1/1,000th of a
share.\20\ 24X proposes to report executions to the appropriate
consolidated transaction reporting system ``to the extent required by
the Act and the rules and regulations thereunder.'' \21\
---------------------------------------------------------------------------
\13\ See Exhibit E of 24X's Form 1 at 1, 4.
\14\ Id. at 1.
\15\ 24X proposes to have one class of membership open to
registered broker-dealers. See proposed 24X Rule 2.3 (stating that,
``any registered broker or dealer that is and remains a member of a
national securities association registered under Section 15A(a) of
the Act or a member of another national securities exchange
registered under Section 6(a) of the Act shall be eligible to be,
and to remain, a Member.'').
\16\ See Exhibit E of 24X's Form 1 at 1.
\17\ Proposed 24X Rule 11.8(a).
\18\ Proposed 24X Rule 11.7. See also Exhibit B-1 of 24X's Form
1.
\19\ Proposed 24X Rule 11.6(q). See also Exhibit E-1 of 24X's
Form 1 at 4.
\20\ Proposed 24X Rule 11.6(q).
\21\ Proposed 24X Rule 11.11(a); see also Exhibit E to 24X Form
1 at 10 (stating that 24X intends to join the CTA and Nasdaq UTP
Plans).
---------------------------------------------------------------------------
24X proposes a retail order program.\22\ Pursuant to this program,
retail orders \23\ submitted by retail organization members \24\ would
be eligible to receive price improvement from retail market makers.\25\
Pursuant to proposed 24X Rule 11.21(d)(2), retail market makers would
be required to provide continuous two-sided quotes of at least 100
shares during ``Regular Trading Hours.'' \26\
---------------------------------------------------------------------------
\22\ Proposed 24X Rules 11.17-11.21.
\23\ See proposed 24X Rule 11.17(a)(2) for the proposed
definition of ``retail order.''
\24\ See proposed 24X Rule 11.17(a)(1) for the proposed
definition of ``retail organization member.''
\25\ See proposed 24X Rule 11.18 for the proposed registration
requirements for retail market makers.
\26\ The term ``Regular Trading Hours'' is not defined in the
proposed 24X rule book. See Exhibit B-1 to the 24X Form 1.
---------------------------------------------------------------------------
As discussed further below, one novel feature of 24X's proposed
trading rules is that 24X proposes to allow trading in NMS stocks 24
hours a day, 7 days per week, 365 days a year.\27\ 24X has proposed
specific rules to govern trading during regular trading hours \28\ as
well as trading outside of regular trading hours.\29\
---------------------------------------------------------------------------
\27\ See proposed 24X Rule 11.1 (describing the hours of trading
and trading days for 24X).
\28\ Regulation NMS Rule 600(b)(77) defines ``regular trading
hours'' as ``the time between 9:30 a.m. and 4:00 p.m. Eastern Time .
. .'' As described further below, 24X proposes to define four
different trading sessions. See proposed 24X Rules 1.5(b), defining
the ``24X Market Session''; 1.5(k) defining the ``Core Market
Session''; 1.5(v) defining the ``Post-market Session''; and 1.5(w)
defining the ``Pre-Market Session.''
\29\ See e.g., proposed 24X Rule 11.16 (describing what orders
are eligible for execution outside of regular trading hours).
---------------------------------------------------------------------------
III. Proceedings To Determine Whether To Grant or Deny the Application
and Grounds for Potential Denial Under Consideration
As required by Section 19(a)(1)(B) of the Act,\30\ the Commission
is hereby providing notice of grounds for denial under consideration,
as set forth below. Institution of such proceedings is appropriate at
this time in view of the issues raised by the application. Institution
of proceedings does not indicate that the Commission has reached any
conclusions with respect to any of the issues involved.
---------------------------------------------------------------------------
\30\ 15 U.S.C. 78s(a)(1)(B).
---------------------------------------------------------------------------
Under Section 19(a)(1) of the Act, the Commission shall grant an
application for registration as a national securities exchange if the
Commission finds that the requirements of the Act and the rules and
regulations thereunder with respect to the applicant are satisfied. The
Commission shall deny such application for registration if it does not
make such a finding.\31\ Under Section 6(b) of the Act, an exchange
shall not be registered as a national securities exchange unless the
Commission determines that it has satisfied the relevant requirements
of the Act.\32\ In particular, Section 6(b)(1) of the Act requires that
the Commission find that an exchange is so organized and has the
capacity to carry out the purposes of the Act.\33\ In addition, under
Section 6(b)(3) of the Act, the Commission must find that the rules of
the exchange assure a fair representation of its members in the
selection of its directors and administration of its affairs and
provide that one or more directors shall be representative of issuers
and investors and not be associated with a member of the exchange,
broker or dealer.\34\ Section 6(b)(5) of the Act requires that the
rules of the exchange be designed, among other things, to prevent
fraudulent and manipulative acts and practices, promote just and
equitable principles of trade, to foster cooperation and coordination
with persons engaged in regulating, clearing, settling, processing
information with respect to, and facilitating transactions in
securities, to remove impediments to and perfect the mechanisms of a
free and open market and a national market system, and in general to
protect investors and the public interest.\35\ Finally, under Section
6(b)(8) of the Act, the Commission must find that the rules of the
exchange do not impose any burden on competition that is not necessary
or appropriate in furtherance of the purposes of Act.\36\
---------------------------------------------------------------------------
\31\ 15 U.S.C. 78s(a)(1).
\32\ 15 U.S.C. 78f.
\33\ 15 U.S.C. 78f(b)(1).
\34\ 15 U.S.C. 78f(b)(3).
\35\ 15 U.S.C. 78f(b)(5).
\36\ 15 U.S.C. 78f(b)(8).
---------------------------------------------------------------------------
The Commission is particularly interested in commenters' views as
to whether 24X has provided sufficient information in its Form 1 to
support a finding that the proposal is consistent with the requirements
of the Act and the rules and regulations thereunder.\37\
---------------------------------------------------------------------------
\37\ 15 U.S.C. 78s(a)(1). See also NYSE Letter at 2 (``the
application falls short in providing sufficient information upon
which to assess how such innovations could function consistent
either with the Act . . .''); Nasdaq Letter at 2; and Blue Ocean
Letter at 2.
---------------------------------------------------------------------------
In addition, the Commission is particularly interested in
commenters' views as to whether the proposed rules relating to the
corporate structure of 24X, as described in more detail below, would
ensure that 24X is so organized and has the capacity to carry out the
purposes of the Act and assure a fair representation of its members in
the selection of its directors and administration of its affairs.
The Commission also is particularly interested in commenters' views
as to whether 24X's proposed rules that would extensively expand the
hours of trading in NMS stocks, as described in more detail below, are
designed to prevent fraudulent and manipulative acts and practices,
promote just and equitable principles of trade, foster cooperation and
coordination with persons engaged in regulating, clearing, settling,
processing information with respect to, and facilitating transactions
in securities, remove impediments to and perfect the mechanisms of a
free
[[Page 54738]]
and open market and a national market system, and in general protect
investors and the public interest.
Further, the Commission is particularly interested in commenters'
views as to whether 24X's proposed rules to allow orders to be
submitted in fractional shares are designed to foster cooperation and
coordination with persons engaged in regulating, clearing, settling,
processing information with respect to, and facilitating transactions
in securities, remove impediments to and perfect the mechanisms of a
free and open market and a national market system.
Additionally, the Commission is particularly interested in
commenters' views as to whether 24X's proposal to locate a ``mirrored''
primary platform in London would result in 24X being so organized and
have the capacity to be able to carry out the purposes of the Act and
whether 24X's rules relating to the mirrored platform are designed to
foster cooperation and coordination with persons engaged in regulating,
clearing, settling, processing information with respect to, and
facilitating transactions in securities, and to remove impediments to
and perfect the mechanisms of a free and open market and a national
market system.
A. Corporate Governance
1. 24X
24X is wholly-owned by its direct parent company, 24X US Holdings
LLC (``US Holdings''), which in turn is wholly-owned by 24X Bermuda
Holdings LLC (``Bermuda Holdings'').\38\ 24X is a Delaware limited
liability company whose sole member is US Holdings.\39\ The proposed
business and affairs of 24X will be managed under the direction of a
Board that is proposed to have at a minimum six Directors once 24X
commences operations as a national securities exchange.\40\ As
proposed, the 24X Board would consist of
---------------------------------------------------------------------------
\38\ See Exhibits A and C of 24X's Form 1.
\39\ See Exhibit A-2 of 24X's Form 1 at 1.
\40\ See Exhibit A-2 of 24X's Form 1 at 6.
---------------------------------------------------------------------------
one Director who is the Chief Executive Officer of the
Company;
at minimum three ``Independent Directors'' \41\; and
---------------------------------------------------------------------------
\41\ ``Independent Directors'' are proposed to be defined as a
``Director who has no material relationship with the Company or any
affiliate of the Company, or any Exchange Member or any affiliate of
any such Exchange Member; provided, however, that an individual who
otherwise qualifies as an Independent Director shall not be
disqualified from serving in such capacity solely because such
Director is a Director of the Company or an affiliate thereof.'' See
Exhibit A-2 of 24X's Form 1 at 2.
---------------------------------------------------------------------------
the number of ``Membership Representative Directors'' \42\
which shall be at least twenty percent of the Board, provided that if
twenty percent of the Directors then serving on the Board is not a
whole number, such minimum number of ``Representative Directors'' \43\
shall be rounded up to the next whole number.
---------------------------------------------------------------------------
\42\ ``Member Representative Director'' is proposed to be
defined as a Director ``who has been elected or appointed to the
Board from time to time in accordance with this Agreement after
having been nominated by the Member Nominating Committee. A Member
Representative Director must be an officer, director, employee, or
agent of an Exchange Member.'' See Exhibit A-2 of 24X's Form 1 at 3.
\43\ ``Representative Directors'' are not defined in the Limited
Liability Company Agreement of 24X National Exchange LLC (``24X LLC
Agreement'').
---------------------------------------------------------------------------
The 24X LLC Agreement also provides for ``Public Directors'' \44\
although none are proposed to serve on the 24X Board.
---------------------------------------------------------------------------
\44\ See Exhibit A-2 of 24X's Form 1 at 7. ``Public Directors''
are not defined in the 24X LLC Agreement.
---------------------------------------------------------------------------
The proposed Nominating Committee of 24X would nominate candidates
for election to the 24X Board.\45\ For positions on the 24X Board
requiring persons who qualify as Member Representative Directors, the
proposed Nominating Committee would nominate only those persons whose
names have been approved and submitted by the ``Member Nominating
Committee.'' \46\ Nominees to the 24X Board from both the proposed
Nominating Committee and the proposed Member Nominating Committee would
be elected on an annual basis by vote of U.S. Holdings.\47\
---------------------------------------------------------------------------
\45\ See Exhibit A-2 of 24X's Form 1 at 9. According to the
proposed Nominating Committee Charter, the Nominating Committee
shall consist of at least three members, or such greater number as
determined by the Board, each of whom shall be an ``Independent
Director,'' as such term is proposed to be defined in the Limited
Liability Company Agreement of the Exchange. See Exhibit J-4 of
24X's Form 1 at 1.
\46\ The ``Member Nominating Committee'' is defined to mean
``the Member Nominating Committee elected pursuant to [the 24X
Limited Liability Company Agreement].'' See Exhibit A-2 of 24X's
Form 1 at 1. According to the Member Nominating Committee Charter,
the Member Nominating Committee shall consist of at least three
members, or such greater number as determined by the Board, two of
whom shall be a Member Representative Director and one of whom shall
be an `Independent Director,' as such term is defined in the Limited
Liability Company Agreement of the Exchange.'' See Exhibit J-3 of
24X's Form 1 at 1.
\47\ See Exhibit A-2 of 24X's Form 1 at 9.
---------------------------------------------------------------------------
In the past, the Commission has stated that ensuring that at least
20% of an exchange's governing board is comprised of directors that are
chosen and elected by the exchange's members helps to ensure the fair
representation of members in the selection of directors and the
administration of an exchange as required by Section 6(b)(3) of the
Act.\48\ The Commission has stated that this requirement helps to
ensure that members have a voice in an exchange's self-regulatory
program, and that an exchange is administered in a way that is
equitable to all those who trade on its market or through its
facilities.\49\ The Commission also has stated that a process whereby
exchange members can directly nominate candidates for directors for an
exchange board via a petition process also helps to ensure the fair
representation of members, consistent with Section 6(b)(3) of the
Act.\50\
---------------------------------------------------------------------------
\48\ Securities Exchange Act Release No. 88806 (May 4, 2020), 85
FR 27451 (May 8, 2020) (File No. 10-237) (order granting
registration of MEMX LLC) (``MEMX Order'') at 27452. See also 15
U.S.C. 78f(b)(3).
\49\ See, e.g., MEMX Order, supra note 48 at 27452; Securities
Exchange Act Release Nos. 85828 (May 10, 2019), 84 FR 21841 (May 15,
2019) (File No. 10-234) (order granting registration of Long Term
Stock Exchange, Inc.) (``LTSE Order'') at 21843; 79543 (December 13,
2016), 81 FR 92901, 92903 (December 20, 2016) (File No. 10-227)
(order granting registration of MIAX PEARL, LLC) (``MIAX PEARL
Order'') at 92903. See also Securities Exchange Act Release Nos.
68341 (December 3, 2012), 77 FR 73065, 73067 (December 7, 2012)
(File No. 10-207) (order granting the registration of Miami
International Securities Exchange, LLC); 58375 (August 18, 2008), 73
FR 49498, 49501 (August 21, 2008) (File No. 10-182) (order granting
the registration of BATS Exchange, Inc.); and 53128 (January 13,
2006), 71 FR 3550, 3553 (January 23, 2006) (File No. 10-131)
(granting the exchange registration of Nasdaq Stock Market, Inc.)
(``Nasdaq Order'').
\50\ See e.g., MEMX Order, supra note 48, at 27452; LTSE Order,
supra note 49, at 21843; and MIAX PEARL Order, supra note 49, at
92903.
---------------------------------------------------------------------------
The Commission is considering whether the overall composition of
the 24X Board, including the specific categories of Directors as
defined in the 24X LLC Agreement, would enable 24X to be so organized
and have the capacity to carry out the purposes of the Act consistent
with Section 6(b)(1) of the Act \51\. As proposed, there are categories
of Directors that are not defined in the 24X LLC Agreement.\52\ In
addition, the Commission is considering whether the 24X Board
composition fulfills the statutory requirement that one or more
directors on the 24X Board is representative of issuers and investors
and not associated with a member of the exchange, broker or dealer.\53\
The Commission also is considering whether
[[Page 54739]]
the proposed process for nominating candidates for the Member
Representative Directors positions on the 24X Board is consistent with
the Section 6(b)(3) of the Act in light of the fact that 24X does not
propose a process that would permit 24X Members to directly nominate
such Member Representative Directors for election to the 24X Board.\54\
---------------------------------------------------------------------------
\51\ 15 U.S.C. 78f(b)(1).
\52\ See supra notes 43 and 44.
\53\ 15 U.S.C. 78f(b)(3). The Commission has approved in the
past an exchange board composition that requires that the number of
``Non-Industry Directors'' equal or exceed the number of ``Industry
Directors'' and directors that represent the exchange's members.
With respect to this compositional requirement, the Commission
stated that this requirement supports an exchange's ability to
protect the public interest. See e.g., MEMX Order, supra note 48, at
27452; LTSE Order, supra note 49, at 21843; MIAX PEARL Order, supra
note 49, at 92903.
\54\ See LTSE Order, supra note 49, at 21843 (stating that,
among other things, the means by which member representatives will
be chosen will help ensure fair representation of members in
selection of directors and administration of LTSE, and is therefore
consistent with Section 6(b)(3) of the Act).
---------------------------------------------------------------------------
2. US Holdings, Bermuda Holdings and Regulation of 24X
US Holdings is a Delaware limited liability company whose sole
member is Bermuda Holdings.\55\ As proposed, U.S. Holdings would be
managed by, and all decisions on behalf of US Holdings would be made
by, Bermuda Holdings.\56\ Generally, the members of Bermuda Holdings
include holders of ``Preferred Units'' \57\ (which are further divided
into ``Series A Units'' and ``Series Seed Units''),\58\ ``Common
Units'' \59\ and ``Non-Voting Units''.\60\ Members with voting rights,
or ``Voting Units,'' include Common Units and Preferred Units except
Series Seed-2 Units, which are a sub-category of Series Seed Units.\61\
Each Voting Unit shall have one vote.\62\
---------------------------------------------------------------------------
\55\ See Exhibit C-12 and C-13 of 24X's Form 1 at 1.
\56\ See Exhibit C-13 of 24X's Form 1 at 2. Bermuda Holdings is
a limited liability company formed under the laws of Bermuda. See
Exhibit C-1 and C-2 of 24X's Form 1 at 1.
\57\ ``Preferred Units'' are defined to mean ``Series A Units
and the Series Seed Units.'' See Exhibit C-2 of 24X's Form 1 at 7.
\58\ See Exhibit C-2 of 24X's Form 1.
\59\ ``Common Units'' are defined to mean ``[u]nits of common
membership interests of the Company, or any other ownership
interests of the Company into which such units are reclassified,
reconstituted or exchanged.'' See Exhibit C-2 of 24X's Form 1 at 5.
\60\ ``Non-voting Units'' are defined to mean ``units of non-
voting membership interests of the Company, or any other ownership
interests of the Company into which such units are reclassified,
reconstituted or exchanged. See Exhibit C-2 of 24X's Form 1 at 7.
\61\ See Exhibit C-2 of 24X's Form 1 at 11.
\62\ Id.
---------------------------------------------------------------------------
If 24X's application for registration as a national securities
exchange is granted, 24X would have all of the attendant regulatory
obligations of a national securities exchange under the Act. In
particular, 24X would be responsible for the operation and regulation
of its exchange and the regulation of its members. Therefore, the
Commission is considering whether US Holdings' and Bermuda Holdings'
activities with respect to the operation of 24X are consistent with,
and do not interfere with, 24X's self-regulatory obligations.\63\ In
making this determination previously, the Commission has considered
whether the governing documents of an exchange's parent company are
designed to facilitate the ability of the exchange to fulfill its
regulatory obligations and their impact on Commission oversight of the
exchange.\64\ For the reasons discussed below, the Commission is
considering whether US Holdings and Bermuda Holdings are organized in
such a way as to enable 24X to fulfill its statutory obligations as a
national securities exchange under Section 6(b) of the Act.\65\
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\63\ See 15 U.S.C. 78f(b)(1). See also Nasdaq Order, supra note
49, at 3552.
\64\ See e.g., MEMX Order, supra note 48, at 27453; LTSE Order,
supra note 49, at 21843; MIAX Pearl Order, supra note 49, at 73069;
and Nasdaq Order, supra note 49, at 3552.
\65\ 15 U.S.C. 78f(b).
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Ownership Structure: Voting and Ownership Concentration Limits. The
Commission is considering whether the corporate documents of 24X's
holding companies, which are US Holdings and Bermuda Holdings, contain
ownership and voting provisions that are designed to prevent the
holding companies, or any party to the holding companies, from
exercising undue control over the operation of 24X, and to ensure that
24X and the Commission are able to carry out their regulatory
obligations under the Act.\66\
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\66\ In some cases, an exchange applicant has been owned by more
than one holding company. For purposes of this discussion regarding
24X, the Commission shall refer to ``holding companies'' when
referring to an entity or entities that own an exchange.
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For example, among other things, the Commission has approved
applications for registration as a national securities exchange where
the governing documents of the holding companies of the exchange
provide that for so long as the holding companies shall control,
directly or indirectly, the exchange, no person, either alone or
together with its related persons will be permitted to beneficially
own, directly or indirectly, of record or beneficially, more than 40%
of the holding company.\67\ The Commission stated that such ownership
concentration provisions are consistent with the Act because they are
designed to prevent any party holding an interest in the holding
companies from exercising undue control over the operation of the
exchange and to ensure that the exchange and the Commission are able to
carry out their regulatory obligations under the Act.\68\ The
Commission has approved provisions setting ownership limitations for
all national securities exchanges.\69\
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\67\ See e.g., MEMX Order, supra note 48, at 27453; LTSE Order,
supra note 49, at 21844; and MIAX Pearl Order, supra note 49, at
92905. See also MEMX Holdings LLC Agreement, Article III, Section
3.5(a)(1); LTSE Group Inc. Certificate, Article IX, subparagraph
(A)(2)(b)(i)(A); Miami Holdings Certificate, Article NINTH
(b)(i)(A). The Commission also has approved registration where a
related provision also requires the exchange to redeem any voting
interest that was sold, transferred or otherwise disposed of that
was above the ownership concentration limitation. See e.g., MEMX
Order, supra note 48 at 27453; LTSE Order, supra note 49, at 21844;
and MIAX Pearl Order, supra note 49, at 92905. See also MEMX
Holdings LLC Agreement, Article III, Section 3.7(c); LTSE Group Inc.
Certificate, Article IX, subparagraph (a)(2)(e); Miami Holdings
Certificate, Article Ninth (e).
\68\ See e.g., MEMX Order, supra note 48, at 27455; LTSE Order,
supra note 49, at 21845; and MIAX PEARL Order, supra note 49, at
92906.
\69\ See, e.g., Securities Exchange Act Release Nos. 76998
(January 29, 2016), 81 FR 6066, 6070-71 (February 4, 2016) (File No.
10-221) (order granting the exchange registration of ISE Mercury,
LLC); 70050 (July 26, 2013), 78 FR 46622, 46627 (August 1, 2013)
(File No. 10-209) (order granting the exchange registration of Topaz
Exchange LLC (nka ISE Gemini, LLC); 68341 (December 3, 2012), 77 FR
73065, 73070 (December 7, 2012) (File No. 10-207) (order granting
the exchange registration of Miami International Securities Exchange
LLC); 58375 (August 18, 2008), 73 FR 49498, 49500 (August 21, 2008)
(File No. 10-182) (order granting the exchange registration of BATS
Exchange, Inc.) (``BATS Order''). See also supra notes 67-68;
Securities Exchange Act Release Nos. 62158 (May 24, 2010), 75 FR
30082 (May 28, 2010) (CBOE-2008-88) (CBOE Demutualization Approval
Order); 53963 (June 8, 2006), 71 FR 34660 (June 15, 2006) (SR-NSX-
2006-03) (NSX Demutualization Order); 51149 (February 8, 2005), 70
FR 7531 (February 14, 2005) (SR-CHX-2004-26) (CHX Demutualization
Order); and 49098 (January 16, 2004), 69 FR 3974 (January 27, 2004)
(SR-Phlx-2003-73) (Phlx Demutualization Order).
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The Commission also has approved more restrictive conditions for
broker-dealer members of an exchange applicant; specifically, the
Commission has approved requirements for holding companies of exchanges
that prohibit a broker-dealer member of the exchange from beneficially
owning, directly or indirectly, either alone or together with their
related persons, more than 20% of voting interest in the exchange
applicant.\70\ The Commission stated that such ownership limitations on
broker-dealer members of an exchange applicant are appropriate because
they are designed to address the conflicts of interest that might
result from a member of a national securities exchange owning
[[Page 54740]]
interests in the exchange.\71\ The Commission also has previously
stated that a member's ownership interest in an entity that controls an
exchange could become so large as to cast doubt on whether the exchange
may fairly and objectively exercise its self-regulatory
responsibilities with respect to such member.\72\ The Commission stated
that such requirements are designed to minimize the potential that a
person or entity can improperly interfere with or restrict the ability
of the exchange to effectively carry out its regulatory oversight
responsibilities under the Act.\73\ The Commission has approved
provisions setting membership ownership limitations for all national
securities exchanges.\74\
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\70\ See e.g., MEMX Order, supra note 48, at 27453; LTSE Order,
supra note 49, at 21844; and MIAX Pearl Order, supra note 49, at
92905. See also MEMX Holdings LLC Agreement, Article III, Section
3.5(a)(2); LTSE Group Inc. Certificate, Article IX, subparagraph
(A)(2)(b)(i)(B); Miami Holdings Certificate, Article NINTH
(b)(i)(B).
\71\ See MEMX Order, supra note 48, at 27455; LTSE Order, supra
note 49, at 21845; and MIAX PEARL Order, supra note 49, at 92906.
\72\ Id. The Commission has further stated that a member that is
a controlling shareholder of an exchange could seek to exercise that
controlling influence by directing the exchange to refrain from, or
the exchange may hesitate to, diligently monitor and conduct
surveillance of the member's conduct or diligently enforce the
exchange's rules and the federal securities laws with respect to
conduct by the member that violates such provisions. Id.
\73\ See MEMX Order, supra note 48, at 27456; LTSE Order, supra
note 49, at 21845; and MIAX PEARL Order, supra note 49, at 92906.
\74\ See supra notes 69-73.
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In addition, the Commission has previously approved voting
limitations in the corporate documents of the holding companies of
exchanges that provide that no person, alone or together with its
related persons, may, directly, indirectly, or pursuant to any
agreement, vote or cause the voting of voting interest in the exchange,
or give any consent or proxy with respect to voting units in the
exchange representing more than 20% of the voting power of the
exchange.\75\ Similar to the ownership concentration limits, the
Commission stated that such voting concentration limits are a way to
minimize the potential that a person or entity can improperly interfere
with or restrict the ability of the exchange to effectively carry out
its regulatory oversight responsibilities under the Act through the
exercise of voting power.\76\ The Commission has approved provisions
setting voting limitations for all national securities exchanges.\77\
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\75\ See e.g., MEMX Order, supra note 48, at 27454; LTSE Order,
supra note 49, at 21844; MIAX Pearl Order, supra note 49, at 92905.
See also MEMX Holdings LLC Agreement, Article III, Section
3.5(a)(iii); LTSEG Certificate, Article IX, subparagraph
(A)(2)(b)(i)(C); Miami Holdings Certificate, Article NINTH
(b)(i)(C). Such provisions also applied to any voting agreement,
plan, or other arrangement, where the effect of such agreement,
plan, or other arrangement would be to enable any person, either
alone or together with its related persons, to vote, possess the
right to vote, or cause the voting of voting interest in the
exchange that would represent more than 20% of the voting power of
the then issued and outstanding voting interest in the exchange. See
MEMX Holdings LLC Agreement, Article III, Section 3.5(a)(iii); LTSEG
Certificate, Article IX, subparagraph (A)(2)(b)(i)(C).
\76\ See MEMX Order, supra note 48, at 27456; LTSE Order, supra
note 49, at 21845; and MIAX PEARL Order, supra note 49, at 92906.
The Commission also has approved the ability of an exchange to waive
the ownership and voting concentration limits under certain
circumstances. See e.g., MEMX Order, supra note 48, at 27454; LTSE
Order, supra note 49, at 21844; and MIAX PEARL Order, supra note 49,
at 92905 MEMX Holdings LLC Agreement, Article III, Section
3.5(b)(ii); LTSEG Certificate, Article IX, subparagraph
(A)(2)(b)(ii)(B); Miami Holdings Certificate, Article NINTH
(b)(ii)(B).
\77\ See supra notes 69, 75-76 .
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The Commission is considering whether the Limited Liability Company
Agreement of 24X US Holdings LLC and the Amended and Restated Limited
Liability Company Agreement of 24X Bermuda Holdings LLC, as proposed,
contain provisions that help ensure that 24X is so organized and has
capacity to carry out the purposes of Section 6(b)(1) of the Act. As
proposed, there are no ownership or voting concentration limits in
either the Limited Liability Company Agreement of 24X US Holdings LLC
or in the Amended and Restated Limited Liability Company Agreement of
24X Bermuda Holdings LLC. \78\ Therefore, the Commission is considering
whether 24X is so organized and has capacity to carry out the purposes
of Section 6(b)(1) of the Act without undue influence by US Holdings
and Bermuda Holdings. Further, the Commission is considering whether
24X retains a sufficient degree of independence to effectively carry
out its regulatory obligations under the Act. Similarly, because 24X
does not propose to include any ownership or voting limitations on 24X
members that might have or acquire an ownership interest in US Holdings
and Bermuda Holdings, the Commission is considering whether the Limited
Liability Company Agreement of 24X US Holdings LLC and the Amended and
Restated Limited Liability Company Agreement of 24X Bermuda Holdings
LLC contain mechanisms to ensure that should a member of 24X own Voting
Units, such ownership would not interfere with 24X's ability to be so
organized and have the capacity to carry out the purposes of Section
6(b)(1) of the Act without undue influence by such member.
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\78\ As proposed, Schedule A to the Amended and Restated Limited
Liability Company Agreement of 24X Bermuda Holdings LLC indicates
two members, Dmitri Galinov and Point72 Ventures Investments, LLC,
own 44.76% and 20.09%, respectively, of Bermuda Holdings. See
Schedule A to Exhibit C-2 of 24X's Form 1. However, Exhibit K of
24X's Form 1 also indicates that Dmitri Galinov and Point72 Ventures
Investments, LLC own 35.58% and 15.97% of Bermuda Holdings,
respectively.
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Regulatory Independence of 24X and Oversight of 24X. In order to be
granted registration as a national securities exchange, 24X must be
able to carry out its regulatory responsibilities under, and operate in
a manner consistent with, the Act. This requires 24X to have the
ability to carry out its regulatory function independently, and to be
organized and operate in a fashion consistent with, the Act,
particularly with Section 6(b)(1) of the Act, which requires, in part,
an exchange to be so organized and have the capacity to carry out the
purposes of the Act.\79\ Although neither US Holdings nor Bermuda
Holdings would themselves carry out 24X's regulatory functions or be
directly overseen by the Commission, as direct and indirect owners of
24X, the activities and actions of US Holdings and Bermuda Holdings
with respect to the operation of 24X must be consistent with, and must
not interfere with, 24X's regulatory obligations as a national
securities exchange. Therefore, the Commission is considering whether
the corporate documents of US Holdings and Bermuda Holdings contain
provisions that are designed to help maintain the independence of the
regulatory function of 24X and oversight of 24X by the Commission.
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\79\ 15 U.S.C. 78f(b)(1).
---------------------------------------------------------------------------
The Commission has granted the registration of national securities
exchanges that have holding company structures.\80\ As part of the
Commission's analysis of a holding company structure proposed by an
exchange, the Commission has considered and approved provisions in the
exchange's holding companies' corporate documents that are designed to
help ensure that the holding companies of an exchange will enable the
exchange to operate in a way that facilitates the exchange's ability to
carry out its regulatory function independently, and to be organized
and operate in a fashion that is consistent with the Act, particularly
with Section 6(b)(1) of the Act, which requires, in part, an exchange
to be so organized and have the capacity to carry out the purposes of
the Act.\81\ Such provisions generally address: \82\
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\80\ See e.g., supra note 69.
\81\ 15 U.S.C. 78f(b)(1).
\82\ The Commission has approved provisions addressing
regulatory independence for all exchanges. See, e.g., Securities
Exchange Act Release Nos. 76998 (January 29, 2016), 81 FR 6066,
6071-72 (February 4, 2016) (File No. 10-221) (order granting the
exchange registration of ISE Mercury, LLC); 70050 (July 26, 2013),
78 FR 46622, 46627-29 (August 1, 2013) (File No. 10-209) (order
granting the exchange registration of Topaz Exchange LLC (nka ISE
Gemini, LLC); 68341 (December 3, 2012), 77 FR 73065, 73070-71
(December 7, 2012) (File No. 10-207) (order granting the exchange
registration of Miami International Securities Exchange LLC); 58375
(August 18, 2008), 73 FR 49498, 49498-99(August 21, 2008) (File No.
10-182) (order granting the exchange registration of BATS Exchange,
Inc.) (``BATS Order''). See also infra notes 83-91; Securities
Exchange Act Release Nos. 62158 (May 24, 2010), 75 FR 30082 (May 28,
2010) (CBOE-2008-88) (CBOE Demutualization Approval Order); 53963
(June 8, 2006), 71 FR 34660 (June 15, 2006) (SR-NSX-2006-03) (NSX
Demutualization Order); 51149 (February 8, 2005).
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[[Page 54741]]
Giving Due Regard to a National Securities Exchange's Self-
Regulatory Obligations. A commitment that requires the directors,
officers, employees and agents of exchange holding companies to give
due regard to the preservation of the independence of the self-
regulatory function of the exchange and its obligations to investors
and the general public.\83\
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\83\ See e.g., MEMX Order, supra note 48, at 27456; LTSE Order,
supra note 49, at 21845; and MIAX Pearl Order, supra note 49, at
92906. See also MEMX Holdings LLC Agreement, Article III, Section
3.5(a)(iii); LTSE Group Inc. Bylaws, Article X, Section 10.1; Miami
Holdings Bylaws, Article VII, Section 1.
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Compliance with Federal Securities Laws. A provision that requires
exchange holding companies and their officers, directors, employees,
and agents to comply with the federal securities laws and the rules and
regulations promulgated thereunder and agree to cooperate with the
Commission and the exchange in respect of the Commission's oversight
responsibilities.\84\
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\84\ See e.g., MEMX Order, supra note 48, at 27456; LTSE Order,
supra note 49, at 21845-21856; and MIAX Pearl Order, supra note 49,
at 92906. See also MEMX Holdings LLC Agreement, Article XI, Section
11.3(h); LTSE Group Inc. Bylaws, Article X, Section 10.4; Miami
Holdings Bylaws, Article VII, Section 4. The holding companies also
must take reasonable steps necessary to cause its officers,
directors, employees and agents to so cooperate. Id.
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Submission of Jurisdiction. A provision that requires exchange
holding companies and their officers, directors, employees, and agents
to submit to the jurisdiction of the U.S. federal courts, the
Commission, and the exchange, for purposes of any suit, action or
proceeding arising out of, or relating to, the exchange's
activities.\85\
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\85\ See e.g., MEMX Order, supra note 48, at 27456; LTSE Order,
supra note 49, at 21846; and MIAX Pearl Order, supra note 49, at
92906. See also MEMX Holdings LLC Agreement, Article XV, Section
15.12(b); LTSE Group Inc. Bylaws, Article X, Section 10.5; Miami
Holdings Bylaws, Article VII, Section 5.
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Books and Records of a National Securities Exchange Reflecting
Confidential Information. A provision that requires all books and
records of an exchange reflecting confidential information pertaining
to the self-regulatory function of the exchange to be retained in
confidence by the exchange and its personnel, directors, officers,
employees, and agents, and will not be used by the exchange for any
non-regulatory purposes and shall not be made available to any person
other than to personnel of the Commission, or to other personnel under
specified conditions.\86\ Similar provisions regarding the treatment of
confidential information pertaining to the self-regulatory function of
the exchange apply to the holding companies of an exchange, including
the directors, officers, employees, and agents of the holding
companies.\87\
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\86\ See e.g., MEMX Order, supra note 48, at 27456; LTSE Order,
supra note 49, at 21846; and MIAX Pearl Order, supra note 49, at
92906. See also Second Amended and Restated Limited Liability
Company Agreement of MEMX LLC, Article XIII, Section 13.1; LTSE,
Inc. Bylaws, Article XI, Section 11.4; MIAX Pearl Bylaws, Article X,
Section 10.4.
\87\ See e.g., MEMX Order, supra note 48, at 27456; LTSE Order,
supra note 49, at 21846; and MIAX Pearl Order, supra note 49, at
92906. See also MEMX Holdings LLC Agreement, Article XII, Section
12.2(c); LTSE Group Inc. Bylaws, Article X, Section 10.2; Miami
Holdings Bylaws, Article VII, Section 2.
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Books and Records of the Holding Companies. A provision that
requires the books and records of exchange holding companies to be
maintained in the United States and, to the extent they are related to
the operation or administration of the exchange, the holding companies'
books and records will be subject at all times to inspection and
copying by the Commission and the exchange,\88\ and to the extent they
are related to the operation or administration of the exchange, the
books, records, premises, officers, directors, employees, and agents of
the holding companies will be deemed to be the books, records,
premises, officers, directors, employees, and agents of exchange, for
purposes of, and subject to oversight pursuant to, the Act.\89\
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\88\ See e.g., MEMX Order, supra note 48 at 27456; LTSE Order,
supra note 49, at 21846; and MIAX Pearl Order, supra note 49, at
92906-92907. See also MEMX Holdings LLC Agreement, Article XII,
Section 12.2(a) and (b); LTSE Group Inc. Bylaws, Article X, Section
10.3; Miami Holdings Bylaws, Article VII, Section 3.
\89\ See e.g., MEMX Order, supra note 48, at 27456; LTSE Order,
supra note 49, at 21846; and MIAX Pearl Order, supra note 49, at
92907. See also MEMX Holdings LLC Agreement, Article XII, Section
12.2(b); LTSE Group Inc. Bylaws, Article X, Section 10.3; Miami
Holdings Bylaws, Article VII, Section 3.
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Consent to Provisions by Holding Company Officers, Directors,
Employees and Agents. A provision that requires exchange holding
companies to take reasonable steps necessary to cause its officers,
directors, employees, and agents, prior to accepting a position with
the holding companies to consent in writing to the applicability of the
provisions discussed above, with respect to their activities related to
the exchange.\90\
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\90\ See e.g., MEMX Order, supra note 48, at 27456-27457; LTSE
Order, supra note 49, at 21846; and MIAX Pearl Order, supra note 49,
at 92907. See also MEMX Holdings LLC Agreement, Article XIII,
Section 8.18(b); LTSE Group Inc. Bylaws, Article X, Section 10.6;
Miami Holdings Bylaws, Article VII, Section 6.
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Changes to Holding Company Constituting Documents to be Filed with
the Commission. A provision that requires exchange holding companies'
corporate documents to provide that so long as the holding companies
control the exchange, any changes to the holding companies'
constituting documents must be submitted to the exchange governing
board for approval, and, if such change is required to be filed with
the Commission pursuant to Section 19(b) of the Act and the rules and
regulations thereunder, such change shall not be effective until filed
with and effective by operation of law, or filed with and approved by
the Commission.\91\
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\91\ See e.g., MEMX Order, supra note 48, at 27457; LTSE Order,
supra note 49, at 21846; and MIAX Pearl Order, supra note 49, at
92907. See also MEMX Holdings LLC Agreement, Article XV, Section
15.9(a); LTSEG Certificate, Article IX, Section (A)1 and LTSEG
Bylaws, Article IX; Miami Holdings Certificate, Article VIII and
Miami Holdings By-Laws, Article XII, Section 1. This requirement is
critical as it helps to ensure Commission oversight and approval, as
appropriate, for any changes to an exchange holding company
corporate documents.
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The Commission is considering whether US Holdings and Bermuda
Holdings are proposed to be organized in a way that would help maintain
the independence of the regulatory function of 24X and foster the
oversight of the exchange by the Commission. 24X has not adopted any of
these provisions in the Amended and Restated Limited Liability Company
Agreement of 24X Bermuda Holdings LLC.\92\ Therefore, the Commission is
considering whether the structure of 24X and its parent companies, US
Holdings and Bermuda Holdings, help to ensure the independence of 24X's
regulatory function. Further, the Commission is considering whether the
structure of 24X and its parent companies helps to ensure that 24X can
carry out its regulatory responsibilities under, and operate in a
manner consistent with, the Act. Specifically, the Commission is
considering whether the proposed structure is consistent with Section
6(b)(1), which requires, in part, that an exchange to be so organized
and have
[[Page 54742]]
the capacity to carry out the purposes of the Act.\93\
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\92\ See Amended and Restated Limited Liability Company
Agreement of 24X Bermuda Holdings LLC and the Limited Liability
Company Agreement of 24X US Holdings LLC.
\93\ 15 U.S.C. 78f(b)(1).
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B. 24X Trading Sessions
24X proposes to offer significantly expanded trading outside of
regular trading hours for NMS stocks by operating a national securities
exchange 24 hours a day, seven days a week, 365 days a year, including
holidays.\94\ 24X proposes to offer four trading sessions--a ``Core
Market Session'' that corresponds with regular trading hours of 9:30
a.m. to 4:00 p.m. Eastern time; a ``Post-Market Session'' that would
run from 4:00 p.m. to 8:00 p.m. Eastern time on each U.S. business day;
a ``Pre-Market Session'' that would run from 4:00 a.m. to 9:30 a.m.
Eastern time on each U.S. business day; and a ``24X Market Session''
that would run from 8:00 p.m. to 4:00 a.m. Eastern time on each U.S.
business day, and any time that falls on weekends and holidays.\95\
While several exchanges offer a pre-market trading session starting as
early as 4:00 a.m. Eastern time on each U.S. business day,\96\ and most
exchanges offer a post-close trading session until 8:00 p.m. Eastern
time on each business day,\97\ the Commission has not previously
considered the potential issues arising from an exchange application
that expands the trading hours for continuous trading as 24X proposes.
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\94\ Proposed 24X Rule 11.1.
\95\ Proposed 24X Rule 11.1(a).
\96\ See, e.g., NYSE Arca, Inc., Cboe EDGX Exchange, Inc. and
The Nasdaq Stock Market LLC.
\97\ See, e.g., NYSE Arca, Inc., NYSE American LLC, NYSE
Chicago, Inc., NYSE National, Inc., Cboe BZX Exchange, Inc., Cboe
BYX Exchange, Inc., Cboe EDGA Exchange, Inc., Cboe EDGX Exchange,
Inc., and The Nasdaq Stock Market LLC.
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1. Exchange Trading Hours
24X refers to the proposed Core Market Session, Pre-Market Session
and Post-Market Session collectively in its proposed rules as
``Exchange Trading Hours.'' \98\ 24X proposes to permit orders to be
entered, canceled, modified, executed on or routed away from the
Exchange during Exchange Trading Hours.\99\ Orders outstanding at
7:59:59 p.m. Eastern Time each business day would be automatically
cancelled.\100\ 24X proposes to permit trading in fractional shares in
round lots, odd lots, or mixed lots.\101\ Market Orders \102\ and
pegged orders \103\ would be accepted only during the Core Market
Session, while limit orders would be accepted during Exchange Trading
Hours and the 24X Market Session, as discussed below.\104\
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\98\ Proposed 24X Rule 11.1(a)(1).
\99\ Proposed 24X Rule 11.1(b).
\100\ Proposed 24X Rule 11.1(d).
\101\ See Proposed 24X Rule 11.6(q) and Exhibit E of 24X's Form
1 at 4.
\102\ Proposed 24X Rule 11.7(a)(4).
\103\ Proposed 24X Rule 11.7(c)(4).
\104\ Proposed 24X Rule 11.7(b)(6).
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2. 24X Market Session
24X proposes to apply some, but not all, of its rules that would
apply during Exchange Trading Hours to trading that would occur during
the 24X Market Session.\105\ For example, market orders \106\ and
pegged orders \107\ would be prohibited from the 24X Market Session.
Limit orders,\108\ which would be allowed during the 24X Market
Session, would be required to have one of the following time-in-force
(``TIF'') instructions: immediate or cancel (``IOC''),\109\ fill-or-
kill (``FOK'') \110\ or Day+.\111\ In addition, the proposed rules
would permit orders to be entered, canceled, modified or executed on
the Exchange, but not routed away, during the 24X Market Session.\112\
While the proposed rules would impose continuous two-sided quoting
obligation on retail market makers during ``Regular Trading Hours,''
\113\ the proposed rules would establish no analogous market making
obligation during the 24X Market Session.
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\105\ See, e.g., Proposed 24X Rule 11.16.
\106\ Proposed 24X Rules 11.7(a)(5) and 11.16(b)(1).
\107\ Proposed 24X Rules 11.7(c)(5) and 11.16(b)(2).
\108\ Proposed 24X Rule 11.7(b)(7).
\109\ Proposed 24X Rule 11.6(o)(1). IOC is defined as an
instruction the User may attach to an order stating the order is to
be executed in whole or in part as soon as such order is received.
The portion not executed immediately on the Exchange or another
trading center (pursuant to proposed Rule 11.10) is treated as
cancelled and is not posted to the 24X Book.
\110\ Proposed 24X Rule 11.6(o)(3). FOK is defined as an
instruction the User may attach to an order stating that the order
is to be executed in its entirety as soon as it is received and, if
not so executed, cancelled. An order with a FOK instruction is not
eligible for routing away pursuant to proposed Rule 11.10.
\111\ Proposed 24X Rule 11.6(o)(4). Day+ is defined as an
instruction the User may attach to an order stating that an order to
buy or sell is designated for execution starting with the beginning
of the 24X Market Session and, if not executed, expires at the end
of the Post-Market Session.
\112\ Proposed 24X Rules 11.1(c) and 11.10.
\113\ See supra note 26.
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While 24X proposes to join the CTA/CQ and UTP Plans, the 24X
proposal does not address how real-time consolidated dissemination of
quotation information and transaction reporting could be available
during the 24X Market Session because currently, the CTA/CQ and UTP
Plans do not operate during the times that cover the proposed 24X
Market Session. One commenter stated that the exclusive SIPs do not
operate during the 24X Market Session and that therefore the national
best bid or offer (``NBBO'') would not be disseminated.\114\ This
commenter asked the Commission to ``consider the potential risks
related to the lack of transparency, including the risk to investors
associated with trading during the 24X Trading Session, without a real-
time NBBO and if 24X's proprietary feeds are the only displayed
liquidity.'' \115\ Another commenter stated that it was unclear how 24X
could offer after-hours trading in the absence of real time reporting
or operation of the securities information processors (``SIPs'') and
that such trading would likely be inconsistent with Regulation NMS Rule
601.\116\
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\114\ See Nasdaq Letter at 2.
\115\ See Nasdaq Letter at 2. This commenter also stated that it
did ``not believe that the Application has adequately explained how
24X's new exchange will interact with, and be integrated into, the
national market system.''
\116\ See NYSE Letter at 3.
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The proposed 24X Market Session rules relating to risk and
volatility moderators would also differ from those applicable during
Exchange Trading Hours. While 24X would participate in the Plan to
Address Extraordinary Market Volatility (``LULD Plan'') \117\ during
the Core Market Session,\118\ the LULD Plan currently is not effective
during the times that 24X proposes to operate the 24X Market Session.
Consequently, during the 24X Market Session, 24X proposes that the
Reference Price of a given security would be defined as either the last
sale price prior to the start of the 24X Market Session or the primary
market's most recent closing price when opening on a quote.\119\ Under
24X's proposal, five minutes after the start of the 24X Market Session,
the Reference Price would be required to be updated every 30 seconds to
reflect the average price of the security over the last preceding five
minute period of the 24X Market Session, but only if the new Reference
Price would be at least 1% above or below the existing Reference
Price.\120\ 24X also proposes to include certain price bands during the
24X Market Session (``24X Price Band(s)''). Under the proposal, the 24X
Price Bands are calculated for a given security by multiplying the
Reference Price by an applicable Percentage Parameter, which is then
added to the Reference Price to calculate the Upper 24X Price Band and
[[Page 54743]]
subtracted from the Reference Price to calculate the Lower 24X Price
Band.\121\ If an order entered during the 24X Market Session falls
outside of the 24X Price Bands, 24X proposes to identify three distinct
Members that have at least 100 shares in the relevant security priced
at the applicable end of the 24X Price Bands and consult with these
Members as to whether the 24X Price Bands should be adjusted.\122\ In
the event that 24X is unable to find such Members, or 24X and the
Members determine that the 24X Price Bands should not change, the order
that triggered the review will be represented at the Upper 24X Price
Band or Lower 24X Price Band, as appropriate.\123\ One commenter
expressed concern with the proposed 24X volatility monitors, stating
that it is not clear how well the mechanism would work, especially
during periods of extreme market volatility or material newsworthy
events.\124\ Commenters also raised concerns about how 24X would
implement regulatory trading halts and pauses.\125\
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\117\ See Securities Exchange Act Release No. 85623 (April 11,
2019), 84 FR 16086 (April 17, 2019) (Order Approving the Eighteenth
Amendment to the National Market System Plan to Address
Extraordinary Market Volatility).
\118\ Proposed 24X Rule 11.15(e)(2).
\119\ Proposed 24X Rules 11.14(c)(3) and 11.15(f).
\120\ Id.
\121\ Proposed 24X Rule 11.15(f).
\122\ Id.
\123\ Id.
\124\ See Blue Ocean Letter at 4. The commenter also stated that
24X's proposal is silent on the actual mechanics for initiating and
ending trading halts and does not explain how clearance and
settlement of trades made before or during a halt would occur. See
id. Further, the commenter states that no explanation is given as to
how corporate actions would be treated. See id., at 5.
\125\ See Blue Ocean Letter at 4 and Nasdaq Letter at 4 (``the
Application does not sufficiently explain how 24X will coordinate
with primary listing exchanges to implement regulatory trading halts
and pauses during the entirety of the 24X Trading Session'').
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24X's proposal to provide for continuous trading on an exchange
outside of regular trading hours raises a number of issues, many of
which have been considered previously in the context of pre-market and
post-market trading sessions. In particular, these include the need for
heightened disclosures and consolidated last sale and quotation
information in the after-hours market, as well as the associated
increased trading risks of after-hours trading, including, among other
things, greater price volatility, reduced liquidity, wider spreads, and
fewer investor protections, have been raised before.\126\ As other
exchanges have proposed expanded trading hours to include pre-market
and post-market sessions, the Commission has approved such expansion
where certain safeguards were implemented to mitigate these
concerns.\127\ Such safeguards include, among other things, specific
disclosures to investors of heightened risks of after-hours
trading,\128\ establishing risk and volatility moderators and a
corresponding expansion of the operational hours of the SIPs,\129\ to
help ensure the availability of consolidated last sale and quotation
information.
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\126\ See, e.g., Special Study: Electronic Communication
Networks and Afterhours Trading, Division of Market Regulation,
Commission (June 2000), https://www.sec.gov/news/studies/ecnafter.htm; Investor Bulletin: After-Hours Trading, Office of
Investor Education and Advocacy, Commission (May 2011), https://www.sec.gov/files/afterhourtrading.pdf; and Investor Publications,
Commission, After-Hours Trading: Understanding the Risks (Nov. 8,
2008), https://www.sec.gov/reportspubs/investor-publications/investorpubsafterhourshtm.html. Investor Bulletin: Extended Hours
Trading (June 6, 2022) Extended-Hours Trading: Investor Bulletin
[verbar] Ivestor.gov. Staff reports, Investor Bulletins, and other
staff documents (including those cited herein) represent the views
of Commission staff and are not a rule, regulation, or statement of
the Commission. The Commission has neither approved nor disapproved
the content of these documents and, like all staff statements, they
have no legal force or effect, do not alter or amend applicable law,
and create no new or additional obligations for any person. The
Commission has expressed no view regarding the analysis, findings,
or conclusions contained herein.
\127\ See, e.g., Securities and Exchange Act Nos. 77607 (April
13, 2016) 81 FR 23032 (April 19, 2016) (Order Approving Proposed
Rule Change, as Modified by Amendment No. 1 Thereto, To Adopt an
Early Trading Session and Three New Time-In-Force Instructions), at
23034; 42003 (October 13, 1999) 64 FR 56554 (October 20, 1999)
(Notice of Filing and Order Granting Accelerated Approval of
Proposed Rule Change and Amendment No. 1 by National Association of
Securities Dealers, Inc. Relating to the Extension of Certain Nasdaq
Services and Facilities Until 6:30 p.m. Eastern Time); 42004
(October 13, 1999) 64 FR 56548 (October 20,1999) (Notice of Filing
of Proposed Rule Change and Amendment Nos. 1 and 2 and Order
Granting Accelerated Approval of Proposed Rules Change and Amendment
Nos. 1 and 2 by the Chicago Stock Exchange Relating to the
Implementation of an Extended Hours Trading Session).
\128\ See, e.g., FINRA Rule 2265, Investors Exchange Rule 3.290,
Nasdaq Section 20.
\129\ The SIPs, which collect, consolidate and disseminate
consolidated data, including the NBBO, in the equity market are
currently governed by (1) the Consolidated Tape Association Plan
(``CTA Plan''), (2) the Consolidated Quotation Plan (``CQ Plan''),
and (3) the Joint Self-Regulatory Organization Plan Governing the
Collection, Consolidation, and Dissemination of Quotation and
Transaction Information for Nasdaq-Listed Securities Traded on
Exchanges on an Unlisted Trading Privileges Basis (``UTP Plan'').
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The Commission is considering whether the 24X proposal to operate
as an exchange that permits continuous trading is consistent with
Section 6(b)(5) of the Act, which requires, among other things, that
the rules of an exchange be designed to prevent fraudulent and
manipulative acts and practices, promote just and equitable principles
of trade, foster cooperation and coordination with persons engaged in
regulating, clearing, settling, processing information with respect to,
and facilitating transactions in securities, remove impediments to and
perfect the mechanisms of a free and open market and a national market
system, and in general protect investors and the public interest,
particularly given the lack of transparency during the 24X Market
Session. Specifically, the SIPs currently do not operate during the
hours the 24X Market Session is proposed to occur and therefore
quotation and last sale information, including the calculation of an
NBBO, would not be available during the 24X Market Session. The
Commission is evaluating whether the absence of consolidated market
information during the 24X Market Session is consistent with Section
6(b)(5) of the Act.\130\ The Commission is considering whether 24X's
proposed investor disclosures,\131\ which mirror those made available
by other exchanges,\132\ are sufficient to highlight the what appear to
be unique risks associated with continuous trading during the 24X
Market Session. Specifically, the Commission is evaluating whether
these disclosures, currently used for exchange pre-market and post-
market trading sessions, sufficiently inform investors of the greater
potential risks associated with the significantly expanded after-hours
trading that 24X proposes for its 24X Market Session.
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\130\ One commenter states that 24X has not sufficiently
analyzed how the Exchange would comply with certain Commission rules
and interact with other exchanges when the SIPs are not operating.
See Nasdaq Letter at 2. The commenter ``encouraged'' the Commission
to consider the potential risks resulting from the absence of a
real-time NBBO. See id. Further, the commenter states that the 24X
proposal would not allow for technical changes that typically take
place during pauses in the trading day. See id., at 3.
\131\ Proposed 24X Rule 3.21.
\132\ See supra note 128.
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Next, the Commission is considering whether the rules proposed by
24X to address certain risks associated with trading during the 24X
Market Session are consistent with the Act. First, certain mechanisms
that address volatility in individual symbols and the equities market
as a whole are not available during the after-hours sessions.\133\ The
Commission is considering whether the 24X proposed risk and volatility
moderators are consistent with Section 6(b)(5) of the Act. Second, 24X
proposes to impose on its members certain requirements governing risk
management controls and supervisory procedures \134\ that are
[[Page 54744]]
similar to requirements imposed by other exchanges.\135\ The Commission
is evaluating whether such proposed risk management controls and
supervisory procedures, which appear to be based on requirements that
were established for the current trading hours and environment are
sufficient during the 24X Market Session or whether additional
mechanisms would be needed. The Commission is also considering how the
relevant clearing agencies for equities, the National Securities
Clearing Corporation (``NSCC'') and the Depository Trust Company, would
address any potential credit, market, and liquidity risks associated
with trades submitted by the Exchange when the markets, banks, Fedwire,
and any providers of settlement services are closed for business.\136\
The Commission is considering whether the 24X proposal would permit
risk to be managed in a manner consistent with the requirements of
Section 6(b)(5) of the Act that an exchange's rules be designed to
prevent fraudulent and manipulative acts and practices, promote just
and equitable principles of trade, foster cooperation and coordination
with persons engaged in regulating, clearing, settling, processing
information with respect to, and facilitating transactions in
securities, remove impediments to and perfect the mechanisms of a free
and open market and a national market system, and, in general protect
investors and the public interest.
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\133\ Specifically, Limit Up--Limit Down trading pauses and
market wide circuit breakers are unavailable during after-hours
trading.
\134\ See Proposed 24X Rule 11.10(g). The Market Access Rule,
Rule 15c3-5, referred to in proposed 24X Rule 11.10(g), requires
broker-dealers with market access to, among other things, establish,
document, and maintain a system of risk management controls and
supervisory procedures reasonably designed to manage financial,
regulatory, and other risks of this business activity. 17 CFR
240.15c3-5.
\135\ See, e.g., Cboe Rule 5.36(f); CboeEDGX Rules 21.9(f);
Nasdaq Rule 4757(b); Nasdaq BX Rule 4758(c); MEMX Rule 11.11(g).
\136\ Three commenters raised concerns relating to 24X's ability
to clear and settle trades after-hours. See Nasdaq Letter at 3
(stating that US equities clearance and settlement does not operate
on a 24/7 basis); NYSE Letter at 2-4 (stating that 24X does not
describe any procedures or process for NSCC to clear trades during
the 24X market session); and Blue Ocean Letter at 4 (stating that
24X has not addressed the daily settlement of trades with NSCC when
NSCC and its constituent members are typically closed). One
commenter also questioned whether 24X would be able to clear trades
on a continuous net settlement system as proposed under its Rule
11.2 because NSCC is not open for business on weekends. Id.
---------------------------------------------------------------------------
Further, the Commission is considering other issues raised by
commenters about 24X's proposal to substantially extend exchange
trading hours. Commenters raise concerns about whether 24X's proposal
is consistent with the requirements of Section 6(b)(5) of the Act that
an exchange's rules be designed to prevent fraudulent and manipulative
acts and practices, promote just and equitable principles of trade,
foster cooperation and coordination with persons engaged in regulating,
clearing, settling, processing information with respect to, and
facilitating transactions in securities, remove impediments to and
perfect the mechanisms of a free and open market and a national market
system, and, in general protect investors and the public interest.
Specifically, commenters raised concerns about the effect of 24X's
proposal on market-wide surveillance.\137\ These commenters stated that
the 24X proposal does not sufficiently detail how 24X will coordinate
with primary listing exchanges to surveil securities during the 24X
Market Session or how market surveillance will work generally.\138\
---------------------------------------------------------------------------
\137\ See Nasdaq Letter at 4-5. See also Blue Ocean Letter at 5-
6.
\138\ See id. One commenter states that 24X's proposal would be
the first occurrence of a national securities exchange that utilizes
unlisted trading privileges to operate outside the trading hours of
the primary listing exchange. See Nasdaq Letter at 3.
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In addition, commenters stated that 24X has not sufficiently
explained how 24X will comply with relevant Commission rules in light
of 24X's novel features.\139\ Specifically, one commenter states that
the 24X proposal does not explain how 24X intends to comply with
Regulation NMS Rules 602, 603, 610 and 611 and Regulation SHO
generally.\140\ The commenter also stated that the 24X's proposed
routing relationship with Instinet is not adequately described,
especially in light of the 24X Market session when other exchanges are
closed.\141\
---------------------------------------------------------------------------
\139\ See Nasdaq Letter at 3. See also Blue Ocean Letter at 3
and 5.
\140\ See Blue Ocean Letter at 3 and 5.
\141\ See Blue Ocean Letter at 3 (stating that it is
``critical'' for the Commission and other market participants to be
able to understand and evaluate how routing of orders will be
administered when other markets are closed).
---------------------------------------------------------------------------
A commenter stated that listed companies often release material
information outside of core market hours and that primary listing
exchanges typically require companies to notify their primary listing
exchanges prior to the release of such information to allow the
exchange to determine whether a trading halt is necessary.\142\ The
commenter suggested the Commission consider the effect the 24X Market
Session would have on the disclosure of material information and the
volatility in securities outside of core hours trading hours when
material information is released.\143\
---------------------------------------------------------------------------
\142\ See Nasdaq Letter at 4.
\143\ See id.
---------------------------------------------------------------------------
A commenter stated that the 24X proposal does not address how 24X
will handle the elimination of natural trading pauses when corporate
actions, such as stock splits, dividends, mergers and SPAC combinations
typically occur at the end of the trading day.\144\ The commenter also
stated that the 24X proposal does not adequately explain how 24X will
pause trading to allow for critical exchange, industry, and systems
tests that are typically performed when the exchange is not
operating.\145\
---------------------------------------------------------------------------
\144\ See id. Specifically, the commenter referenced corporate
actions including stock splits, dividends, and mergers that
typically take effect at the end of the trading day.
\145\ See id. Specifically, the commenter references tests such
as general customer testing, disaster recovery tests, industry-wide
business continuity tests.
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1. Fractional Shares
24X proposes to permit orders to be submitted in round lots, mixed
lots or odd-lots. Orders are proposed to be submitted in as small as 1/
1,000th of a share.\146\ 24X's proposal does not describe how trading
in fractional shares would occur. Trading in fractional shares on an
exchange raises issues relating to trade reporting,\147\ custody,
clearance \148\ and settlement, and quote display. The Commission is
considering whether 24X's proposal to accept orders and offer trading
in fractional shares in units as small as 1/1,000th of a share is
designed to foster cooperation and coordination with persons engaged in
regulating, clearing, settling, processing information with respect to,
and facilitating transactions in securities, remove impediments to and
perfect the mechanism of a free and open market and a national market
system, and, in general, to protect investors and the public interest,
consistent with Section 6(b)(5) of the Act.
---------------------------------------------------------------------------
\146\ See supra note 101.
\147\ See Nasdaq Letter at 3. (``the SIPs do not currently allow
for the reporting of fractional shares'').
\148\ See Nasdaq Letter at 3 and NYSE Letter at 3.
---------------------------------------------------------------------------
Three commenters raised concerns over 24X's proposal to allow for
trading in fractional shares. Three commenters stated that 24X's
proposal does not sufficiently explain how trading in fractional shares
would function.\149\ One commenter stated that it is unclear from 24X's
proposal how trading in fractional shares will comply with certain
relevant
[[Page 54745]]
Commission rules.\150\ Two commenters also stated that the 24X proposal
has not adequately described how fractional share trading would operate
in connection with the SIPs,\151\ or how fractional shares would clear,
settle, and route to other markets that do not allow fractional share
trading.\152\ One commenter stated that because 24X's proposed rules
require all transactions to be cleared using a continuous net
settlement system, and because NSCC is not available for either after-
hours trading or trading in fractional shares, 24X will not be able to
provide after-hours trading and trading in fractional shares while also
complying with its own rules regarding clearing and settlement.\153\
Therefore, the commenter states that if 24X were approved as a national
securities exchange, it would immediately be in violation of Section
19(g) of the Act.\154\
---------------------------------------------------------------------------
\149\ See Blue Ocean Letter at 3. See also NYSE Letter at 2 and
Nasdaq Letter at 3. The commenters state that important information
including minimum trade size and how fractional trading would
interact with other Exchanges is not addressed.
\150\ See Nasdaq Letter at 3. The commenter specifically states
that 24X has not explained how fractional share trading is
consistent with Rules 602, 603, 610, and 611 of Regulation NMS.
\151\ See id. The commenter stated that 24X has not analyzed the
potential costs of technical enhancements to the exclusive SIPs. See
also NYSE Letter at 2-4 (stating that 24X is silent on whether it
intends to report to the SIP in fractional quantities or if it would
round to a whole share. Further, the commenter states that certain
studies have found that rounding up fractional shares to a whole can
distort reported market volumes).
\152\ See Nasdaq Letter at 3.
\153\ See NYSE Letter at 2-3.
\154\ Id. This commenter also states that it is unclear how
fractional share quotations would be incorporated into any potential
odd-lot quotation reporting, should odd-lot quotations reporting be
expanded in the future.
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C. Sufficiency of Exhibits--Regulatory Funding
1. Exhibit I
To help ensure that 24X has and would continue to have adequate
funding to be able to meet its responsibilities under the Act, 24X
represents that, if the Commission approves 24X's application for
registration as a national securities exchange, US Holdings, as the
controlling owner of the membership interests in the Exchange, would
allocate sufficient assets to 24X to enable 24X's operation.\155\
Specifically, 24X represents that the US Holdings will make a cash
contribution to 24X of $5,000,000, ``in addition to any previously-
provided in-kind contributions, such as legal, regulatory, and
infrastructure-related services.'' \156\ 24X also represents that such
cash and in-kind contributions from the US Holdings will be adequate to
operate 24X, including the regulation of the Exchange, and that 24X and
the US Holdings have entered into an agreement that requires the US
Holdings to provide adequate funding for the Exchange's operations,
including the regulation of the Exchange.\157\ 24X represents this
agreement provides that (1) the Exchange shall receive all fees,
including regulatory fees and trading fees, payable by the Exchange's
members, as well as any funds received from any applicable market data
fees and tape revenue, and (2) US Holdings will provide the Exchange
with cash, cash equivalents, securities or other sufficiently liquid
instruments sufficient to help ensure that the Exchange's financial
resources (calculated as assets in excess of liabilities) remain
greater than $5 million.\158\
---------------------------------------------------------------------------
\155\ See Exhibit I of 24X's Form 1.
\156\ Id.
\157\ Id.
\158\ Id.
---------------------------------------------------------------------------
Further, any revenues received by the Exchange from fees derived
from its regulatory function or regulatory fines will not be used for
non-regulatory purposes or distributed to the US Holdings, but rather,
shall be applied to fund the legal and regulatory operations of the
Exchange (including surveillance and enforcement activities), or, as
the case may be, shall be used to pay restitution and disgorgement of
funds intended for customers (except in the event of liquidation of the
Exchange, which case US Holdings will be entitled to the distribution
of the remaining assets of the Exchange).\159\
---------------------------------------------------------------------------
\159\ See Proposed 24X Rule 15.2.
---------------------------------------------------------------------------
The Commission is considering whether 24X has satisfied the
requirements to file certain exhibits included in 24X's Form 1. In its
Form 1 application, 24X states that it is not filing audited financial
statements for itself as the applicant, as required under Exhibit I,
because ``24X National Exchange LLC has been formed but has not
commenced operations and does not yet have audited financial statements
for any fiscal year.'' \160\ Further, in the Exhibit I, 24X represents
that US Holdings ``shall make prior to the launch of the Exchange,
through its U.S. bank account, a cash contribution to the Exchange of
$5 million, in addition to any previously provided in-kind
contributions, such as legal, regulatory, and infrastructure-related
services.'' \161\ However, as discussed further below, 24X has not
explained or otherwise shown how the financial statements filed for the
US Holdings under Exhibit D reflect that US Holdings has or will have
sufficient funds to provide 24X with such cash contributions.
---------------------------------------------------------------------------
\160\ See Exhibit I of 24X's Form 1.
\161\ Id.
---------------------------------------------------------------------------
2. Exhibit D
Exhibit D requires that the applicant file unconsolidated financial
statements for each subsidiary or affiliate for the latest fiscal year.
Such financial statements must include a balance sheet and income
statement ``with such footnotes and other disclosures as are necessary
to avoid rendering the financial statements misleading.'' In the US
Holdings balance sheet filed under Exhibit D, total assets are reported
as negative $439.\162\ It is unclear as to what this number signifies,
as assets generally cannot be below $0. Further, this negative $439 is
not reflected in the financial statements of other subsidiaries. The
financial statements filed by 24X do not include accompanying footnotes
or disclosures that explain these discrepancies. Moreover, while in
Exhibit I 24X states that US Holdings ``shall make prior to the launch
of the Exchange, through its U.S. bank account, a cash contribution to
the Exchange of $5 million, in addition to any previously provided in-
kind contributions, such as legal, regulatory, and infrastructure-
related services,'' \163\ the Commission is considering whether the
financial statements filed for US Holdings under Exhibit D show US
Holdings has the financial resources to make a $5 million U.S. Dollar
cash infusion, as 24X states, such that the Exchange would be organized
and have the capacity to carry out the purposes of the Act, including
the ability to enforce compliance by its members, and persons
associated with its members, with the federal securities laws and rules
thereunder and the rules of the exchange.
---------------------------------------------------------------------------
\162\ See Exhibit D of 24X's Form 1.
\163\ See Exhibit I of 24X's Form 1.
---------------------------------------------------------------------------
In addition, the Commission is considering whether the financial
statements for the US Holdings filed under Exhibit D for the Form 1
show that US Holdings would be able to provide the financial support
that 24X describes in its Form 1. In its Form 1 application, 24X states
that it is not filing audited financial statements for itself as
applicant, as required under Exhibit I, because ``24X National Exchange
LLC has been formed but has not commenced operations and does not yet
have audited financial statements for any fiscal year.'' \164\
Moreover, 24X further states that, ``[i]f the Commission approves the
Exchange's Form 1 Application for Registration as a national securities
exchange, 24X US
[[Page 54746]]
Holdings LLC (``Parent''), as the controlling owner of the membership
interests in the Exchange, will allocate sufficient assets to the
Exchange to enable its operation.'' \165\ Given the applicant's stated
reliance on US Holdings for sufficient financial support to enable its
operation, the Commission is considering whether the unaudited
financial statements filed for the applicant's parent, US Holdings,
show that the Exchange would be organized and have the capacity to
carry out the purposes of the Act, including the ability to enforce
compliance by its members, and persons associated with its members,
with the federal securities laws and rules thereunder and the rules of
the exchange.
---------------------------------------------------------------------------
\164\ Id.
\165\ Id.
---------------------------------------------------------------------------
D. Location of Exchange Trading Platform
24X proposes to locate its primary trading platform in the Equinix
data center located in New York (``NY4''). 24X also proposes to locate
a ``mirrored'' primary platform in London (``LD4'').\166\ 24X did not
describe how the LD4 platform would operate along with the platform in
NY4. The Commission is considering whether the proposal is consistent
with the requirements under Section 6(b)(1) of the Act, which among
other things, requires the exchange to be so organized and have the
capacity to be able to carry out the purposes of the Act and to comply,
and to enforce compliance by its members and persons associated with
its members, with provisions of the Act. The Commission also is
considering whether the proposal is consistent with Section 6(b)(5) of
the Act, which requires the rules of the exchange to prevent fraudulent
and manipulative acts and practices, to promote just and equitable
principles of trade, to foster cooperation and coordination with
persons engaged with regulating, clearing, settling, processing,
information with respect to and facilitating transactions in
securities, to remove impediments to and perfect the mechanisms of a
free and open market and a national market system.
---------------------------------------------------------------------------
\166\ See Exhibit E-1 of 24X's Form 1 at 1.
---------------------------------------------------------------------------
One commenter expressed concern over this aspect of 24X's
proposal.\167\ The commenter stated that no other U.S. exchange
operates a mirrored primary U.S. trading platform outside of the United
States and stated that 24X does not explain this structure in its
proposal.\168\ Further, the commenter stated that the Commission should
consider the proposed structure's jurisdictional and operational
implications and whether such a structure ``would open the door to
foreign markets to operate mirrored markets within the United States.''
\169\
---------------------------------------------------------------------------
\167\ See Nasdaq Letter at 4.
\168\ Id.
\169\ Id.
---------------------------------------------------------------------------
IV. Request for Written Comment
The Commission requests that interested persons provide written
views and data with respect to 24X's Form 1 and the questions included
above or other relevant issues. 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 10-239 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 10-239. 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/other.shtml).
Copies of the submission, all subsequent amendments, all written
statements with respect to 24X's Form 1 filed with the Commission, and
all written communications relating to the application 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. All
comments received will be posted without change; the Commission does
not edit personal identifying information from submissions. You should
submit only information that you wish to make publicly available. All
submissions should refer to File Number 10-239 and should be submitted
on or before September 28, 2022.
By the Commission.
J. Matthew DeLesDernier,
Deputy Secretary.
[FR Doc. 2022-19264 Filed 9-6-22; 8:45 am]
BILLING CODE 8011-01-P