Joint Industry Plan; Order Instituting Proceedings To Determine Whether To Approve or Disapprove the Twenty-Third Amendment to the National Market System Plan To Address Extraordinary Market Volatility by Cboe BYX Exchange, Inc., Cboe BZX Exchange, Inc., Cboe EDGA Exchange, Inc., Cboe EDGX Exchange, Inc., The Financial Industry Regulatory Authority, Inc., Investors Exchange LLC, Long-Term Stock Exchange, Inc., MEMX LLC, MIAX Pearl, LLC, NASDAQ BX, Inc., NASDAQ PHLX LLC, The NASDAQ Stock Market LLC, New York Stock Exchange LLC, NYSE American LLC, NYSE Arca, Inc., NYSE Chicago, Inc., and NYSE National, Inc., 13389-13395 [2024-03539]
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Federal Register / Vol. 89, No. 36 / Thursday, February 22, 2024 / Notices
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.25
Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2024–03540 Filed 2–21–24; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–99545; File No. 4–631]
Joint Industry Plan; Order Instituting
Proceedings To Determine Whether To
Approve or Disapprove the TwentyThird Amendment to the National
Market System Plan To Address
Extraordinary Market Volatility by Cboe
BYX Exchange, Inc., Cboe BZX
Exchange, Inc., Cboe EDGA Exchange,
Inc., Cboe EDGX Exchange, Inc., The
Financial Industry Regulatory
Authority, Inc., Investors Exchange
LLC, Long-Term Stock Exchange, Inc.,
MEMX LLC, MIAX Pearl, LLC, NASDAQ
BX, Inc., NASDAQ PHLX LLC, The
NASDAQ Stock Market LLC, New York
Stock Exchange LLC, NYSE American
LLC, NYSE Arca, Inc., NYSE Chicago,
Inc., and NYSE National, Inc.
February 15, 2024.
I. Introduction
On October 24, 2023, NYSE Group,
Inc., on behalf of the Participants 1 to
the National Market System Plan to
Address Extraordinary Market Volatility
(‘‘Plan’’),2 filed with the Securities and
25 17
CFR 200.30–3(a)(12).
Participants are: Cboe BYX Exchange, Inc.,
Cboe BZX Exchange, Inc., Cboe EDGA Exchange,
Inc., Cboe EDGX Exchange, Inc., The Financial
Industry Regulatory Authority, Inc., Investors
Exchange LLC, Long-Term Stock Exchange, Inc.,
MEMX LLC, MIAX Pearl, LLC, NASDAQ BX, Inc.,
NASDAQ PHLX LLC, The NASDAQ Stock Market
LLC, New York Stock Exchange LLC, NYSE
American LLC, NYSE Arca, Inc., NYSE Chicago,
Inc., and NYSE National, Inc. (collectively,
‘‘Participants’’).
2 On May 31, 2012, the Commission approved the
Plan, as modified by Amendment No. 1. See
Securities Exchange Act Release No. 67091, 77 FR
33498 (June 6, 2012) (File No. 4–631) (‘‘Approval
Order’’). On February 20, 2013, the Commission
noticed for immediate effectiveness the Second
Amendment to the Plan. See Securities Exchange
Act Release No. 68953, 78 FR 13113 (February 26,
2013). On April 3, 2013, the Commission approved
the Third Amendment to the Plan. See Securities
Exchange Act Release No. 69287, 78 FR 21483
(April 10, 2013). On August 27, 2013, the
Commission noticed for immediate effectiveness
the Fourth Amendment to the Plan. See Securities
Exchange Act Release No. 70273, 78 FR 54321
(September 3, 2013). On September 26, 2013, the
Commission approved the Fifth Amendment to the
Plan. See Securities Exchange Act Release No.
70530, 78 FR 60937 (October 2, 2013). On January
7, 2014, the Commission noticed for immediate
effectiveness the Sixth Amendment to the Plan. See
Securities Exchange Act Release No. 71247, 79 FR
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1 The
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Exchange Commission (‘‘Commission’’),
pursuant to section 11A(a)(3) of the
Securities Exchange Act of 1934 (‘‘Act’’
or ‘‘Exchange Act’’) 3 and Rule 608
thereunder,4 a proposal (‘‘Proposal’’ or
‘‘Proposed Amendment’’) to amend
Appendix A to the Plan to provide that
all exchange-traded products (‘‘ETPs’’)
will be assigned to Tier 1 of the Plan,
except for single stock ETPs, which will
be assigned to the same tier as their
underlying stock, and in each case
adjusted for any leverage factor. The
Proposed Amendment was published
for comment in the Federal Register on
November 21, 2023.5
2204 (January 13, 2014). On April 3, 2014, the
Commission approved the Seventh Amendment to
the Plan. See Securities Exchange Act Release No.
71851, 79 FR 19687 (April 9, 2014). On February
19, 2015, the Commission approved the Eight
Amendment to the Plan. See Securities Exchange
Act Release No. 74323, 80 FR 10169 (February 25,
2015). On October 22, 2015, the Commission
approved the Ninth Amendment to the Plan. See
Securities Exchange Act Release No. 76244, 80 FR
66099 (October 28, 2015). On April 21, 2016, the
Commission approved the Tenth Amendment to the
Plan. See Securities Exchange Act Release No.
77679, 81 FR 24908 (April 27, 2016). On August 26,
2016, the Commission noticed for immediate
effectiveness the Eleventh Amendment to the Plan.
See Securities Exchange Act Release No. 78703, 81
FR 60397 (September 1, 2016). On January 19, 2017,
the Commission approved the Twelfth Amendment
to the Plan. See Securities Exchange Act Release
No. 79845, 82 FR 8551 (January 26, 2017). On April
13, 2017, the Commission approved the Thirteenth
Amendment to the Plan. See Securities Exchange
Act Release No. 80455, 82 FR 18519 (April 19,
2017). On April 28, 2017, the Commission noticed
for immediate effectiveness the Fourteenth
Amendment to the Plan. See Securities Exchange
Act Release No. 80549, 82 FR 20928 (May 4, 2017).
On September 26, 2017, the Commission noticed for
immediate effectiveness the Fifteenth Amendment
to Plan. See Securities Exchange Act Release No.
81720, 82 FR 45922 (October 2, 2017). On March
15, 2018, the Commission noticed for immediate
effectiveness the Sixteenth Amendment to the Plan.
See Securities Exchange Act Release No. 82887, 83
FR 12414 (March 21, 2018) (File No. 4–631). On
April 12, 2018, the Commission approved the
Seventeenth Amendment to the Plan. See Securities
Exchange Act Release No. 83044, 83 FR 17205
(April 18, 2018). On April 11, 2019, the
Commission approved the Eighteenth Amendment
to the Plan. See Securities Exchange Act Release
No. 85623, 84 FR 16086 (April 17, 2019)
(‘‘Amendment 18’’). On February 5, 2020, the
Commission noticed for immediate effectiveness
the Nineteenth Amendment to the Plan. See
Securities Exchange Act Release No. 88122, 85 FR
7805 (February 11, 2020) (File No. 4–631). On April
21, 2020, the Commission approved the Twentieth
Amendment to the Plan. See Securities Exchange
Act Release No. 88704, 85 FR 23383 (April 27,
2020). On July 29, 2020, the Commission noticed
for immediate effectiveness the Twenty-First
Amendment to the Plan. See Securities Exchange
Act Release No. 89420, 85 FR 46762 (August 3,
2020) (File No. 4–631). On October 1, 2020, the
Commission noticed for immediate effectiveness
the Twenty-Second Amendment to the Plan. See
Securities Exchange Act Release No. 90068, 85 FR
63322 (October 7, 2020) (File No. 4–631).
3 15 U.S.C. 78k–1(a)(3).
4 17 CFR 242.608.
5 See Securities Exchange Act Release No. 98928
(November 14, 2023), 88 FR 81131 (‘‘Notice’’).
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This order institutes proceedings
under Rule 608(b)(2)(i) of Regulation
NMS 6 to determine whether to approve
or disapprove the Proposed Amendment
or to approve the Proposed Amendment
with any changes or subject to any
conditions the Commission deems
necessary or appropriate after
considering public comment.
II. Background
The Participants filed the Plan with
the Commission on April 5, 2011 7 to
create a market-wide limit up-limit
down mechanism intended to address
extraordinary market volatility in NMS
Stocks, as defined in Rule 600(b)(47) of
Regulation NMS under the Exchange
Act.8 The Plan sets forth procedures that
provide for market-wide limit up-limit
down requirements to prevent trades in
individual NMS Stocks from occurring
outside of the specified Price Bands.9
These limit up-limit down requirements
are coupled with Trading Pauses, as
defined in Section I(Y) of the Plan, to
accommodate more fundamental price
moves. In particular, the Participants
adopted the Plan to address
extraordinary volatility in the securities
markets, i.e., significant fluctuations in
individual securities’ prices over a short
period of time, such as those
experienced during the ‘‘Flash Crash’’
on the afternoon of May 6, 2010.
As set forth in more detail in the Plan,
the single plan processor (‘‘Processor’’
or ‘‘Processors’’), which is responsible
for consolidation of information for an
NMS Stock pursuant to Rule 603(b) of
Regulation NMS under the Exchange
Act, calculates and disseminates a lower
Price Band and upper Price Band for
each NMS Stock. As set forth in Section
V of the Plan, the Price Bands are based
on a Reference Price for each NMS
Stock that equals the arithmetic mean
price of Eligible Reported Transactions
for the NMS Stock over the immediately
preceding five-minute period. The Price
Bands for an NMS Stock are calculated
by applying the Percentage Parameters,
as set out in Appendix A to the Plan,10
for such NMS Stock to the Reference
Comments received in response to the Notice can
be found on the Commission’s website at: https://
www.sec.gov/comments/4-631/4-631.htm.
6 17 CFR 242.608(b)(2)(i).
7 On May 31, 2012, the Commission approved the
Plan, as modified by Amendment No. 1. See
Approval Order, supra note 2.
8 17 CFR 242.600(b)(47).
9 See Notice, 88 FR at 81144–45 (setting forth the
defined terms as used under the Plan). For purposes
of this order, all capitalized terms referenced, but
not otherwise defined, herein shall have the
meanings as defined under the Plan or as defined
in the Notice.
10 See Notice, 88 FR at 81148 (Appendix A to the
Plan).
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Price, with the lower Price Band being
a Percentage Parameter below the
Reference Price, and the upper Price
Band being a Percentage Parameter
above the Reference Price.
Appendix A to the Plan sets out the
definitions of Tier 1 and Tier 2 NMS
Stocks and the Percentage Parameters
for each. Appendix A currently provides
that Tier 1 includes all NMS Stocks
included in the S&P 500 Index and the
Russell 1000 Index, as well as ‘‘eligible’’
ETPs. Appendix A specifies:
To determine eligibility for an ETP to be
included as a Tier 1 NMS Stock, all ETPs
across multiple asset classes and issuers,
including domestic equity, international
equity, fixed income, currency, and
commodities and futures will be identified.
Leveraged ETPs will be excluded, and the list
will be sorted by notional consolidated
average daily volume (‘‘CADV’’). The period
used to measure CADV will be from the first
day of the previous fiscal half year up until
one week before the beginning of the next
fiscal half year. Daily volumes will be
multiplied by closing prices and then
averaged over the period. ETPs, including
inverse ETPs, that trade over $2,000,000
CADV will be eligible to be included as a
Tier 1 NMS Stock.
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The eligible ETPs are then listed in
Schedule 1 to Appendix A, and the list
is reviewed and updated semi-annually.
All ETPs that do not meet the
‘‘eligibility’’ definition are currently
assigned to Tier 2.
For Tier 1 NMS Stocks, Appendix A
defines the Percentage Parameters as:
• 5% for Tier 1 NMS Stocks with a
Reference Price more than $3.00;
• 20% for Tier 1 NMS Stocks with a
Reference Price equal to $0.75 and up to
and including $3.00; and
• The lesser of $0.15 or 75% for Tier
1 NMS Stocks with a Reference Prices
less than $0.75.
For Tier 2 NMS Stocks, Appendix A
defines the Percentage Parameters as:
• 10% for Tier 2 NMS Stocks with a
Reference Price of more than $3.00;
• 20% for Tier 2 NMS Stocks with a
Reference Price equal to $0.75 and up to
and including $3.00; and
• The lesser of $0.15 or 75% for Tier
2 NMS Stocks with a Reference Price
less than $0.75.
The Percentage Parameter for a Tier 2
NMS Stock that is a leveraged ETP is the
applicable Percentage Parameter set
forth above, multiplied by the leverage
ratio of such product.
III. Summary of the Proposed
Amendment 11
The Participants propose to amend
Appendix A to delete the definition of
11 This section summarizes the proposed changes
to the Plan and the Participants’ analysis supporting
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ETPs ‘‘eligible’’ for Tier 1, and to specify
that all ETPs except for single-stock
ETPs would be assigned to Tier 1. The
Participants also propose to delete
Schedule 1 to Appendix A as obsolete.
Under the Proposal, Appendix A,
Section I, paragraph (1) would read as
follows:
Tier 1 NMS Stocks shall include all NMS
Stocks included in the S&P 500 Index and
the Russell 1000 Index, and all exchangetraded products (‘‘ETP’’), except for single
stock ETPs, which will be assigned to the
same Tier as their underlying stock, adjusted
for any leverage factor.
Because all leveraged ETPs (except
Tier 2 single stock ETPs) would be
assigned to Tier 1, the Participants also
propose to add text into Section I of
Appendix A describing how the
Percentage Parameters would be set for
leveraged ETPs. The Participants
propose to insert the following as
paragraph (5) of Section I, and to
renumber the paragraphs of Section I
accordingly:
Notwithstanding the foregoing, the
Percentage Parameters for a Tier 1 NMS
Stock that is a leveraged ETP shall be the
applicable Percentage Parameter set forth in
clauses (2), (3), or (4) above, multiplied by
the leverage ratio of such product.
A. Study Data
The Participants reviewed trading and
quoting in all ETPs during the period
from Q4 of 2019 through Q2 of 2021.
This time span afforded the Participants
the opportunity to study how the Plan
performed during certain stressful
periods. The ETPs studied covered
several asset classes, including domestic
equities, international equities, fixed
income, currency, commodity, and
digital currency ETPs.
At the time the Participants
conducted the study, there were not yet
any single stock ETPs listed in the U.S.
markets. Because a single stock ETP
should closely track the price movement
and volatility of its underlying security,
the Participants assert that it should be
assigned to the same tier, adjusted for
any leverage factor, to maintain uniform
and congruous application of controls.
The Participants also excluded Tier 2
ETPs with a Reference Price of $3.00 or
less, since ETPs with a Reference Price
of $3.00 or less are subject to identical
Percentage Parameters under Tier 1 and
Tier 2. The Participants also excluded
the last 25 minutes of the trading day
from the study, since the Percentage
Parameters for Tier 1 and Tier 2 NMS
the proposed changes, as described in the Notice.
For a full discussion of the Proposed Amendment,
including the Participants’ justifications for the
Proposed Amendment, see Notice, supra note 5.
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Stocks with Reference Prices more than
$3.00 are identical during that period.
B. Study Methodology
The Participants’ study consists of
three parts. First, the Participants
compared the realized volatility and
incidence of Limit States and Trading
Halts in Tier 2 ETPs against both Tier
1 and Tier 2 non-ETPs, to review the
reasonableness of assigning ETPs to Tier
2.
Second, the Participants calculated
theoretical Tier 1 (i.e., 5%) Price Bands
for all Tier 2 ETPs in the study. For
example, normally a Tier 2 ETP with a
Reference Price of $10.00 would have a
lower Price Band of $9.00 and an upper
Price Band of $11.00 (i.e., 10% bands).
For purposes of the study, that same
ETP would have a theoretical Tier 1
lower Price Band of $9.50 and an upper
Price Band of $10.50 (i.e., 5% bands).
Once the theoretical narrower bands
were calculated, the Participants
identified all trades that occurred at
prices between the theoretical narrower
bands and the actual Tier 2 bands. The
Participants then calculated the total
notional value if all trades beyond the
theoretical narrow bands had been
prevented, as well as the total notional
value if all such trades had occurred at
the price of the new bands, to determine
the range of potential notional value
impact of applying Tier 1 bands to Tier
2 ETPs. The Participants also studied
the price movement following these
‘‘breaches’’ of the theoretical narrower
bands and the likelihood of reversion to
determine the efficacy of tightening the
bands.
Third, the Participants compared
market quality changes and the
frequency of Limit States and Trading
Halts for Tier 1 ETPs vs. Tier 2 ETPs by
studying the ETPs that shift from one
tier to the other as part of the current
semi-annual review process.
C. Study Results
1. Volatility of Tier 2 ETPs vs. Tier 1
and Tier 2 Non-ETPs
For the first part of the study, the
Participants compared the volatility of
Tier 2 ETPs during the study period to
the volatility of non-ETP securities. If
the purpose of Tier 2’s wider bands is
to address higher expected volatility in
Tier 2 NMS Stocks, but ETPs in Tier 2
are already less volatile than non-ETPs
in Tier 1, that would suggest that ETPs
do not actually need Tier 2’s wider
bands.
According to the Participants, except
for single-stock, commodity, and foreign
exchange-based ETPs, ETPs are, by
definition, diversified instruments.
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Notwithstanding the lower trading
volumes associated with the less liquid
ETPs included in Tier 2, Tier 2 ETPs
exhibit volatilities that are lower than
those observed for Tier 1 non-ETPs that
already trade with narrower Price Bands
today.
The Participants calculated quote
volatilities 12 for all securities that were
part of the Plan during 2021. Nonleveraged Tier 2 ETPs had an average
quote volatility of 0.241 basis points
with a 90th percentile of 0.275 basis
points. Those figures are lower than for
Tier 1 non-ETPs during the same period,
which had an average quote volatility of
0.258 basis points with a 90th percentile
of 0.446 basis points. Tier 2 non-ETPs
had more than four times higher average
quote volatility and almost double the
average quote volatility at the 90th
percentile compared to Tier 2 nonleveraged ETPs. Leveraged Tier 2 ETPs
were somewhat higher than nonleveraged Tier 2 ETPs, with an average
quote volatility of 0.736 basis points and
a 90th percentile of 1.317 basis points.
Most leveraged ETPs represent
commodities or volatility index
products, which would be expected to
exhibit higher volatility. However, these
products’ Price Bands are also
multiplied by their leverage factor,
which makes their higher volatility
relative to other ETPs acceptable.
In comparing the incidence of Trading
Pauses and Limit States during 2021 by
Tier 1 non-ETPs, Tier 2 ETPs, and Tier
2 non-ETPs priced above $3.00, the data
shows that during 2021, Tier 2 nonleveraged ETPs had fewer Trading
Pauses and Limit States than Tier 1 nonETPs, even though the Tier 2 nonleveraged ETPs comprised nearly 50%
more securities. In addition, Tier 2 nonETPs had roughly four times the number
of symbols, but 63 times the number of
Limit States per day compared to Tier
2 non-leveraged ETPs. Tier 2 ETPs at the
90th percentile did not have any
Trading Pauses, while there were 30
Trading Pauses for Tier 2 non-ETPs.
Overall, the comparison between Tier
1 non-ETPs and Tier 2 ETPs shows that
quote volatility of Tier 2 ETPs operating
under wider Price Bands is lower than
Tier 1 non-ETPs, and that the incidence
of Limit States and Trading Pauses for
Tier 1 non-ETPs is substantially higher
than that of Tier 2 ETPs. By contrast,
Tier 2 non-ETPs are considerably more
volatile than Tier 1 non-ETPs, which
substantiates the wider Price Bands
applied to these securities, as the higher
number of Limit States and Trading
12 The Participants measured quote volatility as
the average basis point change of each second’s
mid-point during core hours annualized.
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Pauses in Tier 2 non-ETPs are occurring
under 10% Price Bands. The
Participants believe that these data
indicate that the Price Bands are not
well-calibrated to the realized volatility
for Tier 2 ETPs and should not be twice
as wide as those for Tier 1 non-ETPs.
2. Analysis of ETP Trades Executing
Past Theoretical Tier 1 Bands
For the second part of the study, the
Participants sought to identify the range
of potential notional value that would
have been impacted during the study
period if trades in Tier 2 ETPs had been
bounded by 5% Price Bands instead of
10% Price Bands. Specifically, the
Participants calculated theoretical Tier 1
(i.e., 5%, adjusted for leverage factor)
Price Bands for all Tier 2 ETPs in the
study (‘‘Theoretical Tier 1 Bands’’).
Once the theoretical narrower bands
were calculated, the Participants
identified 101,956 trades that occurred
at prices between the Theoretical Tier 1
Bands and the actual Tier 2 bands. The
Participants then calculated the upper
and lower ranges of the notional value
of the trades that would have been
impacted during the study period if Tier
2 ETPs had been subject to the narrower
Theoretical Tier 1 Bands instead of the
actual Tier 2 bands.
The Participants drilled down into the
results to determine, on a day-by-day
basis, the amount of notional value
prevented, and the number of symbols
impacted, by the narrower Theoretical
Tier 1 Bands. Most of the notional value
that would have been prevented by
using the narrower Theoretical Tier 1
Bands for Tier 2 ETPs occurred across
a handful of trade dates when the
markets were very volatile. Together,
the 10 days with the highest notional
value for trades prevented account for
59% of the trades prevented and 61% of
the total notional value overall. More
than $45 million in trades could have
been prevented during the pandemicdriven volatility in 2020. In contrast,
over the entire study period, the number
of Tier 2 ETPs that would have been
impacted by using narrower Theoretical
Tier 1 Bands was a median of nine ETPs
per day.
The Participants conclude that on
most days, tighter Price Bands would
have had little impact on the trading of
Tier 2 ETPs. However, during periods of
extreme volatility overall, the narrower
bands may prevent unnecessary
volatility in Tier 2 ETPs. Using narrower
Tier 1 Bands for these ETPs could
protect investors from executing trades
at inferior prices that may occur due to
transitory gaps in liquidity.
The Participants recognize that the
positive impacts of using narrower
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Theoretical Tier 1 Bands would be
blunted if the price trend that triggers a
Trading Pause continues in the same
direction. To study this issue, the
Participants computed several statistics
to measure the impact of blocking these
trades at the narrower Theoretical Tier
1 Bands. The Participants calculated
these statistics as a fraction of simple
trade counts, as well as the percentage
of shares that were impacted by the
theoretical narrower bands. The
calculations are as follows:
1. Last mid-quote 5 minutes after the
blocked trade compared to the trade
execution price.
2. Last mid-quote 10 minutes after the
blocked trade compared to the trade
execution price.
3. Same as #1, except cases where the stock
paused in the next 5 minutes (because there
may not be reliable 5-minute mid-quotes).
4. Same as #2, except cases where the stock
paused in the next 10 minutes (because there
may not be reliable 10-minute mid-quotes).
5. Same as #1–#4, except measured against
the theoretical narrower bands. This
measures the worst-case situation, where
none of the trades would have occurred and
the full impact of blocking the trades is
shown.
Prices 5 and 10 minutes after a
theoretically prevented trade usually
reverted away from the offending trade
price towards prior prices, and less
often moved back to levels inside the
new bands. When prices do not revert,
the benefit of the tighter bands is less
clear, but the tendency toward reversion
is further evidence in support of
narrowing the bands to Tier 1 levels.
After 5 minutes, more than 70% of the
trades and nearly 75% of the shares
impacted had their last quote return to
price levels prior to the move that
caused the breach of the Theoretical
Tier 1 Band. After 10 minutes, reversion
rates improved further (i.e., more than
75% of trades and 78% of shares). When
Trading Pauses are excluded, the results
appeared even more positive, although
the Participants believe that including
Trading Pauses is the superior measure,
as these situations better reflect the
general direction of the market.
The Participants note that during the
study period, only 7.1% of the trades
that executed beyond the narrower
Theoretical Tier 1 Bands (4.6% of shares
executed across the entire study period)
ultimately resulted in a Trading Pause
under the bands currently in place.
Prices did ultimately hit a Limit State
within 10 minutes in 12.6% of the
trades that moved through the bands,
accounting for 10.3% of shares traded,
but as noted above, less than half of
these shares resulted in a Trading Pause.
The Participants note that by
narrowing the bands, in all likelihood,
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there may be an increase in Trading
Pauses, even with market makers
moving liquidity in front of the revised
tighter bands. Because prices may likely
revert inside the bands after 10 minutes,
these Trading Pauses may be beneficial
for investors. Such Trading Pauses may
also be beneficial for investors because
many Tier 2 ETPs do not trade actively.
Their initial Price Bands are often based
on the prior day’s official closing price,
which may not perfectly reflect current
market conditions, but their Reference
Prices and Price Bands are not reset if
there are no trades. In such cases, it may
be beneficial to trigger a Trading Pause
that will permit a reopening auction,
which can more efficiently aggregate
liquidity, determine equilibrium prices,
reset the Price Bands, and further
mitigate volatility.
3. Market Quality Changes When ETPs
Change Tier Designation
For the third part of the study, the
Participants examined ETPs that have
moved between tiers. As background, at
launch, each ETP is assigned to Tier 2.
Per Appendix A, tiers are recalculated at
the end of each June and December and
any non-leveraged ETPs that trade over
$2,000,000 CADV during the
measurement period move from Tier 2
to Tier 1. It is common for an otherwiseilliquid ETP to have one or two very
high-volume days immediately after
listing, causing it to be recategorized
into Tier 1, and then ultimately settle
back into Tier 2 following its second
measurement period.
These tier changes provide the
Participants with an opportunity to
evaluate and compare the market
quality of ETPs under different price
band regimes. The Participants
understand that, in some cases, changes
in the volume of trades are what cause
an ETP to change from one tier to
another, and the improvements in
market quality may be attributable to
that increased volume, and not the tier
change in and of itself. But as noted
above, the Plan initially assigns ETPs
into Tier 2 irrespective of their volume
of trades, and many are then
subsequently reassigned to Tier 1 due to
high notional volume on a few days
after they are first funded, without
experiencing any real change in
notional volume overall. As such, the
Participants believe that market quality
changes after a tier shift are meaningful
because they are often not due to
developments in the character of the
market for the ETPs.
The Participants compared quoted
spreads and notional liquidity at the
NBBO, comparing changes in these two
values from half-year to half-year for
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ETPs that: stayed in Tier 1; stayed in
Tier 2; switched from Tier 1 to Tier 2;
and switched from Tier 2 to Tier 1.
ETPs that were in Tier 1 in the second
half of 2019 and stayed in Tier 1 during
the first half of 2020 had their
consolidated quoted spread increase by
102.0%, while those that shifted to Tier
2 saw their consolidated quoted spread
widen by 152.3%. Tier 2 ETPs that
moved to Tier 1 in the first half of 2020
had their spreads rise 96.6%—less than
those that stayed in Tier 1 for both
periods. ETPs that stayed in Tier 2
performed the worst, with their spreads
increasing by 175.7%. The pattern is
similar regarding ETPs that changed tier
in the second half of 2020. ETPs that
stayed in Tier 1 had their spreads
narrow by 34.2% while those that
moved to Tier 2 performed worse, with
their spreads tightening by 26.7%. Tier
2 ETPs that remained in Tier 2
performed similarly to those that stayed
in Tier 1, with their spreads narrowing
by 35.7%. The best performing category
was ETPs that moved to Tier 1 from Tier
2, as their spreads narrowed by 43.6%.
The Participants note that narrower
spreads can lead to less available
liquidity, but the tier changes studied
above do not appear to have caused a
negative impact on liquidity. For ETPs
that changed tiers between the second
half of 2019 and the first half of 2020,
the amount of available liquidity
dropped a similar amount for Tier 1
ETPs that stayed in Tier 1 or moved to
Tier 2. Tier 2 ETPs in general lost fewer
dollars at the inside, but those Tier 2
ETPs that transferred to Tier 1 did lose
slightly more—12.2% versus 10.1%. For
ETPs that changed tiers between the
first half and second half of 2020, Tier
2 ETPs again saw the largest increase in
liquidity, with those that moved to Tier
1 gaining 51.0% versus just 38.0% for
those that stayed in Tier 2. Tier 1 ETPs
that moved to Tier 2 saw a drop in
liquidity inside of 4.2%. Finally, for
those ETPs that changed tiers between
the second half of 2020 and the first half
of 2021, Tier 2 ETPs that moved to Tier
1 saw the smallest gains in liquidity at
the inside, increasing just 32.1%
compared to Tier 2 ETPs that remained
in Tier 2, which gained 42.7%. Tier 1
ETPs, whether they stayed in Tier 1 or
moved to Tier 2, garnered larger gains
of liquidity at the inside.
In sum, for two of the three half-year
changes the Participants studied,
spreads improved and there was a
neutral to positive effect on inside
liquidity for ETPs shifting from Tier 2
to Tier 1. The opposite was true for Tier
2 ETPs that changed tier from the
second half of 2020 to the first half of
2021. These results show that, on
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balance, market quality statistics
improved for Tier 2 ETPs that moved to
Tier 1.
The Participants note that even if
market quality statistics improved for
Tier 2 ETPs that moved to Tier 1, the
efficacy of such a move might be
questioned if the move created notably
more Limit States or Trading Pauses. To
study this issue, the Participants
examined three statistics for ETPs that
had a tier change in either direction
from one period to the next:
• the average number of Trading
Pauses per symbol during the next halfyear;
• the average number of Limit States
per symbol during the next half-year;
and
• the average number of seconds in a
Limit State per symbol during the next
half-year.
Narrowing the Price Bands for ETPs
that moved from Tier 2 into Tier 1 did
not increase the incidence of Trading
Pauses, Limit States, or the amount of
time spent in Limit States. The
Participants assert that this is likely
because market participants adjust their
behavior and provide more liquidity to
ETPs once their bands are tightened.
The Participants acknowledge that the
number of ETPs that move between
Tiers, especially into Tier 1 after being
in Tier 2, is relatively small and may not
provide a significant enough population
to offer strong support for that statistic.
The Participants note, however, that
Amendment 18 removed double-wide
bands at the open for all stocks and at
the close for Tier 2 stocks, market
participants adjusted to the tighter
bands without a large increase in
Trading Pauses.
D. Study Conclusions
In sum, the Participants’ study shows
the following:
• Tier 1 non-ETPs are far more likely
than Tier 2 ETPs to enter into Limit
States and Trading Pauses due to the
underlying volatility of these securities.
This finding suggests that the Price
Band width for Tier 2 ETPs is poorly
calibrated relative to their actual trading
behavior.
• During the study period, the
notional value of trades that would have
been prevented if Tier 2 ETPs had used
tighter Tier 1 bands would have been
substantial for such thinly traded
products, bounded on the lower end at
$36.8 million and the upper end at
$711.1 million.
• In the majority of cases where a
trade would have been prevented by the
narrower Theoretical Tier 1 Bands,
prices reverted by the end of the
following 5- and 10-minute periods,
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Federal Register / Vol. 89, No. 36 / Thursday, February 22, 2024 / Notices
suggesting that having these thinlytraded ETPs in Tier 1 would protect
investors from executing trades at
inferior prices that may occur due to
transitory gaps in liquidity rather than
fundamental valuation changes.
• In most cases where ETPs have
been reclassified from Tier 2 to Tier 1,
market quality improved as evidenced
by the lower quote volatility, tighter
spreads, and increased liquidity for
ETPs that moved from Tier 2 to Tier 1.
• Using tighter Tier 1 bands for all
ETPs would provide greater investor
protection from temporary liquidity
gaps, which are facilitated by the wider
price bands in Tier 2.
• The number of Limit States and
Trading Pauses decreased when Tier 2
ETPs moved to Tier 1 and increased
when Tier 1 ETPs moved to Tier 2.
From this evidence, the Participants
conclude that moving Tier 2 ETPs to
Tier 1 would improve market quality,
more effectively dampen volatility,
provide greater investor protection, and
decrease the number of unnecessary
Limit States and Trading Pauses.
The Participants also state that the
Proposed Amendment does not impose
any burden on competition that is not
necessary or appropriate in furtherance
of the purposes of the Exchange Act.
The Participants assert that the
Proposed Amendment to the Plan
would apply to all market participants
equally and would not impose a
competitive burden on one category of
market participants in favor of another
category of market participant. The
Proposed Amendment would apply to
trading on all Trading Centers and all
NMS Stocks would be subject to the
amended Plan’s requirements. The
Participants do not believe that the
Proposed Amendment introduces terms
that are unreasonably discriminatory for
the purposes of Section 11A(c)(1)(D) of
the Exchange Act because it would
apply to all market participants equally.
IV. Summary of Comments
lotter on DSK11XQN23PROD with NOTICES1
In response to the Notice, the
Commission received several comments
on the Proposed Amendment.13 A few
commenters generally oppose the Plan
and Proposed Amendment,14 and one
commenter representing a consortium of
13 See
supra note 5.
Letters from Alexander Kuchta dated
November 27, 2023 (‘‘Kuchta Letter’’); Anonymous
dated November 27, 2023 (‘‘Anonymous Letter’’);
Subhra Mazumdar dated November 27, 2023
(‘‘Mazundar Letter’’); Joe Edwards dated November
27, 2023 (‘‘Edwards Letter’’); Rax Nahali dated
November 27, 2023 (‘‘Nahali Letter’’); and Rene
Wright dated November 27, 2023 (‘‘Wright Letter’’).
14 See
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17:10 Feb 21, 2024
Jkt 262001
market participants support the
Proposal.15
Several commenters believe that the
Proposed Amendment poses a
significant threat to the foundational
principles of a free and open markets.16
Some commenters state that the
proposed tighter price bands would
effectively limit the natural price
discovery process, which would
infringe upon free market principles.17
One commenter states that these tighter
controls may lead to increased
volatility.18 The commenter further
states that leveraged derivatives, such as
options and futures, allow significant
positions to be taken with relatively less
capital. In the hands of large market
participants, according to this
commenter, these instruments could
potentially be used in conjunction with
the predictable price range boundaries
to manipulate market conditions,
highlighting the need for a thorough
evaluation of the rule’s implications on
market dynamics and fairness.19 The
same commenter concludes that the
Proposal caters to the interests of larger,
institutional investors who may benefit
from reduced volatility and more
predictable price movements at the
expense of smaller, retail investors.20
Some commenters state that the
Proposal enables the Participants to
control the price of a security
inappropriately.21
Separately, one commenter in support
of the Proposal concludes that using
Tier 1 Percentage Parameters for all
ETPs would better protect investors
during temporary liquidity gaps, which
may be exacerbated by the wider price
bands for Tier 2 NMS Stocks.22 The
commenter asserts that ETP liquidity
gaps can occur for reasons that may not
reflect the ETP’s fundamental value.23
The commenter states that in these
instances, the risk of an inefficient
15 See Letter to Vanessa Countryman, Secretary,
Commission, from Samara Cohen, Chief Investment
Officer of ETF and Index Investments, BlackRock,
et al. dated December 18, 2023 (‘‘BlackRock
Letter’’).
16 See, e.g., Kuchta Letter; Nahali Letter; Wright
Letter.
17 See Kuchta Letter; Edwards Letter; Nahali
Letter (noting that volatility is a part of the market).
18 See Kuchta Letter (stating that ‘‘as trades
accumulate at the band limits, the resumption of
trading could trigger sudden and sharp price
movements, contrary to the proposal’s intent to
reduce volatility’’).
19 See id.
20 See id.
21 See Mazundar Letter; Nahali Letter.
22 See BlackRock Letter at 1.
23 See id. at 2 (noting that outsized or aggressive
orders, temporary uncertainty about any inputs into
the calculation of the ETP’s fair value, or lower
levels of market participation, which is more
common in newly listed ETPs, can cause these ETP
prices not to reflect fundamental value).
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13393
execution away from the fair value of
the ETP’s holdings (as far as 10% away
from a Tier 2 ETP’s reference price)
rises, and the application of Tier 1
Percentage Parameters would improve
transparency and efficiency, particularly
during periods of extreme volatility.24 In
addition, the commenter states that, in
instances of sustained order imbalances
and/or gaps in liquidity in the market
for an ETP, a trading pause would help
attract liquidity from diverse market
participants and promote price
discovery through the reopening
mechanism, helping to keep ETP prices
in line with the value of underlying
holdings.25 The commenter agrees that
ETPs were assigned to tiers based on an
assumption that lower-volume ETPs
were more suited for wider price
parameters, and states that the data
presented in the Proposed Amendment
suggests that assumption was wrong.26
The commenter states that the analysis
demonstrated that on average, Tier 2
ETPs across asset classes exhibit lower
quote volatility than Tier 1 non-ETP
stocks.27 In light of the findings derived
from the study, the imposed semiannual migration of ETPs from one tier
to the other appears to be overly
complex, arbitrary, and unnecessary.28
V. Proceedings To Determine Whether
To Approve or Disapprove the
Proposed Amendment
The Commission is instituting
proceedings pursuant to Rule
608(b)(2)(i) of Regulation NMS,29 and
Rules 700 and 701 of the Commission’s
Rules of Practice,30 to determine
whether to approve or disapprove the
Proposed Amendment or to approve the
Proposed Amendment with any changes
or subject to any conditions the
Commission deems necessary or
appropriate. The Commission is
instituting proceedings to have
sufficient time to consider the complex
issues raised by Proposed Amendment,
including comments received.
Institution of proceedings does not
indicate that the Commission has
reached any conclusions with respect to
any of the issues involved. Rather, the
Commission seeks and encourages
interested persons to provide additional
comment on the Proposed Amendment
to inform the Commission’s analysis.
Rule 608(b)(2) of Regulation NMS
provides that the Commission ‘‘shall
24 See
id.
id.
26 See id.
27 See id.
28 See id.
29 17 CFR 242.608.
30 17 CFR 201.700; 17 CFR 201.701.
25 See
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Federal Register / Vol. 89, No. 36 / Thursday, February 22, 2024 / Notices
lotter on DSK11XQN23PROD with NOTICES1
approve a national market system plan
or proposed amendment to an effective
national market system plan, with such
changes or subject to such conditions as
the Commission may deem necessary or
appropriate, if it finds that such plan or
amendment is necessary or appropriate
in the public interest, for the protection
of investors and the maintenance of fair
and orderly markets, to remove
impediments to, and perfect the
mechanisms of, a national market
system, or otherwise in furtherance of
the purposes of the Exchange Act.’’ 31
Rule 608(b)(2) further provides that the
Commission shall disapprove a national
market system plan or proposed
amendment if it does not make such a
finding.32 In the Notice, the Commission
sought comment on the Proposed
Amendment, including whether the
Proposed Amendment is consistent with
the Exchange Act.33 In this order,
pursuant to Rule 608(b)(2)(i) of
Regulation NMS,34 the Commission is
providing notice of the grounds for
disapproval under consideration:
• Whether, consistent with Rule 608
of Regulation NMS, the Participants
have demonstrated how the Proposed
Amendment is necessary or appropriate
in the public interest, for the protection
of investors and the maintenance of fair
and orderly markets, to remove
impediments to, and perfect the
mechanisms of, a national market
system, or otherwise in furtherance of
the purposes of the Exchange Act.35
Under the Commission’s Rules of
Practice, the ‘‘burden to demonstrate
that a NMS plan filing is consistent with
the Exchange Act and the rules and
regulations issued thereunder. . . is on
the plan participants that filed the NMS
plan filing.’’ 36 The description of the
NMS plan filing, its purpose and
operation, its effect, and a legal analysis
of its consistency with applicable
requirements must all be sufficiently
detailed and specific to support an
affirmative Commission finding.37 Any
failure of the plan participants that filed
the NMS plan filing to provide such
detail and specificity may result in the
Commission not having a sufficient
basis to make an affirmative finding that
the NMS plan filing is consistent with
the Exchange Act and the applicable
rules and regulations thereunder.38
31 17
CFR 242.608(b)(2).
CFR 242.608(b)(2)(i).
700(c)(ii) of the Commission’s Rules of
Practice provides that ‘‘[t]he Commission, in its sole
discretion, may determine whether any issues
relevant to approval or disapproval would be
facilitated by the opportunity for an oral
presentation of views.’’ 17 CFR 201.700(c)(ii).
41 See Notice, supra note 5.
40 Rule
33 See
Notice, supra note 5.
34 17 CFR 242.608(b)(2)(i).
35 17 CFR 242.608(b)(2).
36 17 CFR 201.701(b)(3)(ii).
37 Id.
38 Id.
17:10 Feb 21, 2024
1. The Participants propose to amend
Appendix A of the Plan by deleting the
definition of ETPs ‘‘eligible’’ for Tier 1 and
to specify that all ETPs, except for single
stock ETPs, would be assigned to Tier 1.
What are commenters’ views on whether the
Proposal is consistent with the Exchange
Act?
2. Because all leveraged ETPs (except Tier
2 single stock ETPs) would be assigned to
Tier 1, the Participants also propose to add
text into Section I of Appendix A describing
how the Percentage Parameters would be set
for leveraged ETPs. What are commenters’
views on whether this Proposal regarding
leveraged ETPs to the Plan is consistent with
the Exchange Act?
3. The Proposal acknowledges that the
ETPs studied covered several asset classes,
including domestic equities, international
equities, fixed income, currency, commodity,
and digital currency ETPs. For example, the
Participants’ analysis provides aggregate
statistical information with respect to Tier 2
ETPs as a whole. In addition, the Proposal
states that, except for single-stock,
commodity, and foreign exchange-based
ETPs, ETPs are by definition diversified
instruments and that the analysis in the
Proposal supports the modern portfolio
theory that portfolios of securities exhibit
39 17
32 Id.
VerDate Sep<11>2014
VI. Commission’s Solicitation of
Comments
The Commission requests that
interested persons provide written
submissions of their views, data, and
arguments with respect to the issues
identified above, as well as any other
concerns they may have with the
Proposal. In particular, the Commission
invites the written views of interested
persons concerning whether the
Proposal is consistent with Section
6(b)(5), Section 6(b)(8), or any other
provision of the Act, or the rules and
regulations thereunder. Although there
do not appear to be any issues relevant
to approval or disapproval that would
be facilitated by an oral presentation of
views, data, and arguments, the
Commission will consider, pursuant to
Rule 608(b)(2)(i) of Regulation NMS,39
any request for an opportunity to make
an oral presentation.40 The Commission
asks that commenters address the
sufficiency and merit of the
Participants’ statements in support of
the Proposed Amendment,41 in addition
to any other comments they may wish
to submit about the Proposed
Amendment. In particular, the
Commission seeks comment on the
following:
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lower volatility than individual securities,
unless those products are perfectly
correlated. The Proposed Amendment to the
Plan, which would assign all ETPs to Tier 1,
only excludes single stock ETPs, but does not
propose to exclude other ETPs based on other
single reference assets, such as ETPs based
on single commodities or single digital
currency-related assets. Do commenters agree
that the methodology and results of the
analysis support the conclusions drawn by
the Participants? Please explain. Does this
aggregated approach to evaluating Tier 2
ETPs as a whole support the conclusions
drawn by the Participants with respect to
different segments of Tier 2 ETPs? For
example, what are commenters’ views on
whether the Proposal’s study explains why
such other ETPs, such as those based on a
single asset (other than stocks) or those that
might not otherwise reflect the volatility
characteristics described in the Proposal,
should be assigned to Tier 1?
4. The Proposal provides analysis
concerning the potential impacts that the
Proposal could have on the market. Among
other things, the analysis states that the
proposed narrower bands may have caused
minimal disruption during periods of less
volatility, amounting usually to a few dozen
trades per day. In contrast, the analysis
shows that the Proposal could have had a
much larger impact on trading during periods
of greater volatility. Table 4, Panel A, for
example, shows that during the first half of
2020, the Proposal could have impacted
approximately $147 million of trading in Tier
2 ETPs on a single day; approximately $577
million of trading in Tier 2 ETPs could have
been impacted over these six months. Chart
1 of the Proposal 42 also shows that over 500
Tier 2 ETPs would have been affected daily
during March 2020, a significant percentage
of the total number of Tier 2 ETPs. In the
Proposal, the Participants also provide
analysis that supports the view that the
potential impact on trading likely would not
be as significant as suggested in Table 4,
Panel A. For example, in Table 4, Panel B,
the Proposal provides analysis that assumes
that all impacted trading would execute at
the proposed price bands; under this more
conservative assumption, notional volume in
Tier 2 ETPs would only change by $8 million
on any given day in the first half of 2020,
while total notional volume in Tier 2 ETPs
over these six months would only change by
$30 million. The Proposal states that it is not
likely that the Proposal’s impact would be as
significant as suggested by the analysis in
Table 4, Panel A, because there could be
significant additional volume executed at or
near the proposed price bands. What are
commenters’ views on the Proposal’s analysis
of the potential impact on trading? Are
commenters concerned that the Proposal’s
impact on trading during periods of
significant volatility would further contribute
to that market stress?
5. One of the Proposal’s conclusions is
that, in a majority of cases where a trade
42 According to the Participants, Chart 1 describes
the amount of notional value prevented, and the
number of symbols impacted, by the narrower
Theoretical Tier 1 Bands on a day-to-day basis. See
Notice, 88 FR at 81136.
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Federal Register / Vol. 89, No. 36 / Thursday, February 22, 2024 / Notices
would have been prevented by the proposed
narrower bands (Theoretical Blocked Trades),
prices reverted back to within the proposed
narrower bands. To support this conclusion,
the Proposal provides an analysis that trades
in Tier 2 ETPs that executed outside the
proposed narrower bands are generally
followed by mid-point prices within the
narrower bands. According to the Proposal,
this analysis suggests that the Proposal
would protect investors from trading at
inferior prices that may occur because of
transitory gaps in liquidity instead of
fundamental valuation changes. Do
commenters agree that the analysis
appropriately measures price reversion and
that the Theoretical Blocked Trades often
executed during temporary liquidity gaps? If
not, how do commenters suggest the analysis
could examine the extent to which
Theoretical Blocked Trades executed during
temporary liquidity gaps? Please explain.
6. The Proposal compares the quote
volatility of Tier 2 ETPs to that of Tier 1 nonETPs, where quote volatility is measured
using the mid-point at each second. With this
measure of volatility, the Proposal concludes
that Tier 2 ETPs have lower quote volatility
than Tier 1 non-ETPs, suggesting that Tier 2
ETPs are not too volatile for the Tier 1 price
bands. In addition, the Proposal
acknowledges that Tier 2 ETPs are often
thinly traded. What are commenters’ views
on whether the comparative analysis has
adequately captured Tier 2 ETP volatility in
support of the conclusion that they are not
too volatile for the Tier 1 price bands? For
example, would infrequent trading interest
bias the analysis due to infrequent updates of
the mid-point? Are there other measures of
volatility that would be more appropriate?
Please explain.
7. The Participants state that the Plan does
not impose any burden on competition that
is not necessary or appropriate in furtherance
of the purposes of the Exchange Act. Do
commenters believe that the Plan, as
proposed to be amended, imposes any
burden on competition that is not necessary
or appropriate in furtherance of the purposes
of the Exchange Act?
8. Further, would the Proposal have a
positive, negative, or neutral impact on
competition? Please explain. How would the
Proposal impact competition across ETP
issuers or ETPs on similar baskets of
securities currently in different tiers? Please
explain. How would any impact on
competition from the Proposal benefit or
harm the national market system or the
various market participants? Please describe
and explain how, if at all, aspects of the
national market system or different market
participants would be affected. Please
support any response with data, if possible.
9. More generally, to the extent possible
please provide specific data, analyses, or
studies for support regarding any impacts of
the Proposal on competition.
The Commission requests that
commenters provide analysis to support
their views, if possible.
Interested persons are invited to
submit written data, views, and
arguments regarding whether the
VerDate Sep<11>2014
17:10 Feb 21, 2024
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Proposed Amendment should be
approved or disapproved by March 14,
2024. Any person who wishes to file a
rebuttal to any other person’s
submission must file that rebuttal by
March 28, 2024. Comments may be
submitted by any of the following
methods:
13395
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.43
Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2024–03539 Filed 2–21–24; 8:45 am]
BILLING CODE 8011–01–P
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 4–
631 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 4–631. This file number should
be included on the subject line if email
is used. To help the Commission
process and review your comments
more efficiently, please use only one
method. The Commission will post all
comments on the Commission’s internet
website (https://www.sec.gov/rules/
sro.shtml). Copies of the submission, all
subsequent amendments, all written
statements with respect to the proposed
rule change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for website viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE,
Washington, DC 20549, on official
business days between the hours of 10
a.m. and 3 p.m. Copies of the filing also
will be available for inspection and
copying at the Participants’ principal
offices. Do not include personal
identifiable information in submissions;
you should submit only information
that you wish to make available
publicly. We may redact in part or
withhold entirely from publication
submitted material that is obscene or
subject to copyright protection. All
submissions should refer to file number
4–631 and should be submitted on or
before March 14, 2024.
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DEPARTMENT OF STATE
[Public Notice: 12336]
Notice of Determinations; Culturally
Significant Objects Being Imported for
Exhibition—Determinations:
‘‘Auschwitz. Not long ago. Not far
away.’’ Exhibition
Notice is hereby given of the
following determinations: I hereby
determine that certain objects being
imported from abroad pursuant to an
agreement with their foreign owner or
custodian for temporary display in the
exhibition ‘‘Auschwitz. Not long ago.
Not far away.’’ by the Cincinnati
Museum Center, Cincinnati, Ohio, at
The Castle at Park Plaza, Boston,
Massachusetts, and at possible
additional exhibitions or venues yet to
be determined, are of cultural
significance, and, further, that their
temporary exhibition or display within
the United States as aforementioned is
in the national interest. I have ordered
that Public Notice of these
determinations be published in the
Federal Register.
SUMMARY:
FOR FURTHER INFORMATION CONTACT:
Reed Liriano, Program Coordinator,
Office of the Legal Adviser, U.S.
Department of State (telephone: 202–
632–6471; email: section2459@
state.gov). The mailing address is U.S.
Department of State, L/PD, 2200 C
Street, NW (SA–5), Suite 5H03,
Washington, DC 20522–0505.
The
foregoing determinations were made
pursuant to the authority vested in me
by the Act of October 19, 1965 (79 Stat.
985; 22 U.S.C. 2459), Executive Order
12047 of March 27, 1978, the Foreign
Affairs Reform and Restructuring Act of
1998 (112 Stat. 2681, et seq.; 22 U.S.C.
6501 note, et seq.), Delegation of
Authority No. 234 of October 1, 1999,
Delegation of Authority No. 236–3 of
August 28, 2000, and Delegation of
SUPPLEMENTARY INFORMATION:
43 17
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CFR 200.30–3(a)(85).
22FEN1
]]>Agencies
[Federal Register Volume 89, Number 36 (Thursday, February 22, 2024)]
[Notices]
[Pages 13389-13395]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-03539]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-99545; File No. 4-631]
Joint Industry Plan; Order Instituting Proceedings To Determine
Whether To Approve or Disapprove the Twenty-Third Amendment to the
National Market System Plan To Address Extraordinary Market Volatility
by Cboe BYX Exchange, Inc., Cboe BZX Exchange, Inc., Cboe EDGA
Exchange, Inc., Cboe EDGX Exchange, Inc., The Financial Industry
Regulatory Authority, Inc., Investors Exchange LLC, Long-Term Stock
Exchange, Inc., MEMX LLC, MIAX Pearl, LLC, NASDAQ BX, Inc., NASDAQ PHLX
LLC, The NASDAQ Stock Market LLC, New York Stock Exchange LLC, NYSE
American LLC, NYSE Arca, Inc., NYSE Chicago, Inc., and NYSE National,
Inc.
February 15, 2024.
I. Introduction
On October 24, 2023, NYSE Group, Inc., on behalf of the
Participants \1\ to the National Market System Plan to Address
Extraordinary Market Volatility (``Plan''),\2\ filed with the
Securities and Exchange Commission (``Commission''), pursuant to
section 11A(a)(3) of the Securities Exchange Act of 1934 (``Act'' or
``Exchange Act'') \3\ and Rule 608 thereunder,\4\ a proposal
(``Proposal'' or ``Proposed Amendment'') to amend Appendix A to the
Plan to provide that all exchange-traded products (``ETPs'') will be
assigned to Tier 1 of the Plan, except for single stock ETPs, which
will be assigned to the same tier as their underlying stock, and in
each case adjusted for any leverage factor. The Proposed Amendment was
published for comment in the Federal Register on November 21, 2023.\5\
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\1\ The Participants are: Cboe BYX Exchange, Inc., Cboe BZX
Exchange, Inc., Cboe EDGA Exchange, Inc., Cboe EDGX Exchange, Inc.,
The Financial Industry Regulatory Authority, Inc., Investors
Exchange LLC, Long-Term Stock Exchange, Inc., MEMX LLC, MIAX Pearl,
LLC, NASDAQ BX, Inc., NASDAQ PHLX LLC, The NASDAQ Stock Market LLC,
New York Stock Exchange LLC, NYSE American LLC, NYSE Arca, Inc.,
NYSE Chicago, Inc., and NYSE National, Inc. (collectively,
``Participants'').
\2\ On May 31, 2012, the Commission approved the Plan, as
modified by Amendment No. 1. See Securities Exchange Act Release No.
67091, 77 FR 33498 (June 6, 2012) (File No. 4-631) (``Approval
Order''). On February 20, 2013, the Commission noticed for immediate
effectiveness the Second Amendment to the Plan. See Securities
Exchange Act Release No. 68953, 78 FR 13113 (February 26, 2013). On
April 3, 2013, the Commission approved the Third Amendment to the
Plan. See Securities Exchange Act Release No. 69287, 78 FR 21483
(April 10, 2013). On August 27, 2013, the Commission noticed for
immediate effectiveness the Fourth Amendment to the Plan. See
Securities Exchange Act Release No. 70273, 78 FR 54321 (September 3,
2013). On September 26, 2013, the Commission approved the Fifth
Amendment to the Plan. See Securities Exchange Act Release No.
70530, 78 FR 60937 (October 2, 2013). On January 7, 2014, the
Commission noticed for immediate effectiveness the Sixth Amendment
to the Plan. See Securities Exchange Act Release No. 71247, 79 FR
2204 (January 13, 2014). On April 3, 2014, the Commission approved
the Seventh Amendment to the Plan. See Securities Exchange Act
Release No. 71851, 79 FR 19687 (April 9, 2014). On February 19,
2015, the Commission approved the Eight Amendment to the Plan. See
Securities Exchange Act Release No. 74323, 80 FR 10169 (February 25,
2015). On October 22, 2015, the Commission approved the Ninth
Amendment to the Plan. See Securities Exchange Act Release No.
76244, 80 FR 66099 (October 28, 2015). On April 21, 2016, the
Commission approved the Tenth Amendment to the Plan. See Securities
Exchange Act Release No. 77679, 81 FR 24908 (April 27, 2016). On
August 26, 2016, the Commission noticed for immediate effectiveness
the Eleventh Amendment to the Plan. See Securities Exchange Act
Release No. 78703, 81 FR 60397 (September 1, 2016). On January 19,
2017, the Commission approved the Twelfth Amendment to the Plan. See
Securities Exchange Act Release No. 79845, 82 FR 8551 (January 26,
2017). On April 13, 2017, the Commission approved the Thirteenth
Amendment to the Plan. See Securities Exchange Act Release No.
80455, 82 FR 18519 (April 19, 2017). On April 28, 2017, the
Commission noticed for immediate effectiveness the Fourteenth
Amendment to the Plan. See Securities Exchange Act Release No.
80549, 82 FR 20928 (May 4, 2017). On September 26, 2017, the
Commission noticed for immediate effectiveness the Fifteenth
Amendment to Plan. See Securities Exchange Act Release No. 81720, 82
FR 45922 (October 2, 2017). On March 15, 2018, the Commission
noticed for immediate effectiveness the Sixteenth Amendment to the
Plan. See Securities Exchange Act Release No. 82887, 83 FR 12414
(March 21, 2018) (File No. 4-631). On April 12, 2018, the Commission
approved the Seventeenth Amendment to the Plan. See Securities
Exchange Act Release No. 83044, 83 FR 17205 (April 18, 2018). On
April 11, 2019, the Commission approved the Eighteenth Amendment to
the Plan. See Securities Exchange Act Release No. 85623, 84 FR 16086
(April 17, 2019) (``Amendment 18''). On February 5, 2020, the
Commission noticed for immediate effectiveness the Nineteenth
Amendment to the Plan. See Securities Exchange Act Release No.
88122, 85 FR 7805 (February 11, 2020) (File No. 4-631). On April 21,
2020, the Commission approved the Twentieth Amendment to the Plan.
See Securities Exchange Act Release No. 88704, 85 FR 23383 (April
27, 2020). On July 29, 2020, the Commission noticed for immediate
effectiveness the Twenty-First Amendment to the Plan. See Securities
Exchange Act Release No. 89420, 85 FR 46762 (August 3, 2020) (File
No. 4-631). On October 1, 2020, the Commission noticed for immediate
effectiveness the Twenty-Second Amendment to the Plan. See
Securities Exchange Act Release No. 90068, 85 FR 63322 (October 7,
2020) (File No. 4-631).
\3\ 15 U.S.C. 78k-1(a)(3).
\4\ 17 CFR 242.608.
\5\ See Securities Exchange Act Release No. 98928 (November 14,
2023), 88 FR 81131 (``Notice''). Comments received in response to
the Notice can be found on the Commission's website at: https://www.sec.gov/comments/4-631/4-631.htm.
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This order institutes proceedings under Rule 608(b)(2)(i) of
Regulation NMS \6\ to determine whether to approve or disapprove the
Proposed Amendment or to approve the Proposed Amendment with any
changes or subject to any conditions the Commission deems necessary or
appropriate after considering public comment.
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\6\ 17 CFR 242.608(b)(2)(i).
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II. Background
The Participants filed the Plan with the Commission on April 5,
2011 \7\ to create a market-wide limit up-limit down mechanism intended
to address extraordinary market volatility in NMS Stocks, as defined in
Rule 600(b)(47) of Regulation NMS under the Exchange Act.\8\ The Plan
sets forth procedures that provide for market-wide limit up-limit down
requirements to prevent trades in individual NMS Stocks from occurring
outside of the specified Price Bands.\9\ These limit up-limit down
requirements are coupled with Trading Pauses, as defined in Section
I(Y) of the Plan, to accommodate more fundamental price moves. In
particular, the Participants adopted the Plan to address extraordinary
volatility in the securities markets, i.e., significant fluctuations in
individual securities' prices over a short period of time, such as
those experienced during the ``Flash Crash'' on the afternoon of May 6,
2010.
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\7\ On May 31, 2012, the Commission approved the Plan, as
modified by Amendment No. 1. See Approval Order, supra note 2.
\8\ 17 CFR 242.600(b)(47).
\9\ See Notice, 88 FR at 81144-45 (setting forth the defined
terms as used under the Plan). For purposes of this order, all
capitalized terms referenced, but not otherwise defined, herein
shall have the meanings as defined under the Plan or as defined in
the Notice.
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As set forth in more detail in the Plan, the single plan processor
(``Processor'' or ``Processors''), which is responsible for
consolidation of information for an NMS Stock pursuant to Rule 603(b)
of Regulation NMS under the Exchange Act, calculates and disseminates a
lower Price Band and upper Price Band for each NMS Stock. As set forth
in Section V of the Plan, the Price Bands are based on a Reference
Price for each NMS Stock that equals the arithmetic mean price of
Eligible Reported Transactions for the NMS Stock over the immediately
preceding five-minute period. The Price Bands for an NMS Stock are
calculated by applying the Percentage Parameters, as set out in
Appendix A to the Plan,\10\ for such NMS Stock to the Reference
[[Page 13390]]
Price, with the lower Price Band being a Percentage Parameter below the
Reference Price, and the upper Price Band being a Percentage Parameter
above the Reference Price.
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\10\ See Notice, 88 FR at 81148 (Appendix A to the Plan).
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Appendix A to the Plan sets out the definitions of Tier 1 and Tier
2 NMS Stocks and the Percentage Parameters for each. Appendix A
currently provides that Tier 1 includes all NMS Stocks included in the
S&P 500 Index and the Russell 1000 Index, as well as ``eligible'' ETPs.
Appendix A specifies:
To determine eligibility for an ETP to be included as a Tier 1
NMS Stock, all ETPs across multiple asset classes and issuers,
including domestic equity, international equity, fixed income,
currency, and commodities and futures will be identified. Leveraged
ETPs will be excluded, and the list will be sorted by notional
consolidated average daily volume (``CADV''). The period used to
measure CADV will be from the first day of the previous fiscal half
year up until one week before the beginning of the next fiscal half
year. Daily volumes will be multiplied by closing prices and then
averaged over the period. ETPs, including inverse ETPs, that trade
over $2,000,000 CADV will be eligible to be included as a Tier 1 NMS
Stock.
The eligible ETPs are then listed in Schedule 1 to Appendix A, and
the list is reviewed and updated semi-annually. All ETPs that do not
meet the ``eligibility'' definition are currently assigned to Tier 2.
For Tier 1 NMS Stocks, Appendix A defines the Percentage Parameters
as:
5% for Tier 1 NMS Stocks with a Reference Price more than
$3.00;
20% for Tier 1 NMS Stocks with a Reference Price equal to
$0.75 and up to and including $3.00; and
The lesser of $0.15 or 75% for Tier 1 NMS Stocks with a
Reference Prices less than $0.75.
For Tier 2 NMS Stocks, Appendix A defines the Percentage Parameters
as:
10% for Tier 2 NMS Stocks with a Reference Price of more
than $3.00;
20% for Tier 2 NMS Stocks with a Reference Price equal to
$0.75 and up to and including $3.00; and
The lesser of $0.15 or 75% for Tier 2 NMS Stocks with a
Reference Price less than $0.75.
The Percentage Parameter for a Tier 2 NMS Stock that is a leveraged
ETP is the applicable Percentage Parameter set forth above, multiplied
by the leverage ratio of such product.
III. Summary of the Proposed Amendment 11
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\11\ This section summarizes the proposed changes to the Plan
and the Participants' analysis supporting the proposed changes, as
described in the Notice. For a full discussion of the Proposed
Amendment, including the Participants' justifications for the
Proposed Amendment, see Notice, supra note 5.
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The Participants propose to amend Appendix A to delete the
definition of ETPs ``eligible'' for Tier 1, and to specify that all
ETPs except for single-stock ETPs would be assigned to Tier 1. The
Participants also propose to delete Schedule 1 to Appendix A as
obsolete. Under the Proposal, Appendix A, Section I, paragraph (1)
would read as follows:
Tier 1 NMS Stocks shall include all NMS Stocks included in the
S&P 500 Index and the Russell 1000 Index, and all exchange-traded
products (``ETP''), except for single stock ETPs, which will be
assigned to the same Tier as their underlying stock, adjusted for
any leverage factor.
Because all leveraged ETPs (except Tier 2 single stock ETPs) would
be assigned to Tier 1, the Participants also propose to add text into
Section I of Appendix A describing how the Percentage Parameters would
be set for leveraged ETPs. The Participants propose to insert the
following as paragraph (5) of Section I, and to renumber the paragraphs
of Section I accordingly:
Notwithstanding the foregoing, the Percentage Parameters for a
Tier 1 NMS Stock that is a leveraged ETP shall be the applicable
Percentage Parameter set forth in clauses (2), (3), or (4) above,
multiplied by the leverage ratio of such product.
A. Study Data
The Participants reviewed trading and quoting in all ETPs during
the period from Q4 of 2019 through Q2 of 2021. This time span afforded
the Participants the opportunity to study how the Plan performed during
certain stressful periods. The ETPs studied covered several asset
classes, including domestic equities, international equities, fixed
income, currency, commodity, and digital currency ETPs.
At the time the Participants conducted the study, there were not
yet any single stock ETPs listed in the U.S. markets. Because a single
stock ETP should closely track the price movement and volatility of its
underlying security, the Participants assert that it should be assigned
to the same tier, adjusted for any leverage factor, to maintain uniform
and congruous application of controls.
The Participants also excluded Tier 2 ETPs with a Reference Price
of $3.00 or less, since ETPs with a Reference Price of $3.00 or less
are subject to identical Percentage Parameters under Tier 1 and Tier 2.
The Participants also excluded the last 25 minutes of the trading day
from the study, since the Percentage Parameters for Tier 1 and Tier 2
NMS Stocks with Reference Prices more than $3.00 are identical during
that period.
B. Study Methodology
The Participants' study consists of three parts. First, the
Participants compared the realized volatility and incidence of Limit
States and Trading Halts in Tier 2 ETPs against both Tier 1 and Tier 2
non-ETPs, to review the reasonableness of assigning ETPs to Tier 2.
Second, the Participants calculated theoretical Tier 1 (i.e., 5%)
Price Bands for all Tier 2 ETPs in the study. For example, normally a
Tier 2 ETP with a Reference Price of $10.00 would have a lower Price
Band of $9.00 and an upper Price Band of $11.00 (i.e., 10% bands). For
purposes of the study, that same ETP would have a theoretical Tier 1
lower Price Band of $9.50 and an upper Price Band of $10.50 (i.e., 5%
bands). Once the theoretical narrower bands were calculated, the
Participants identified all trades that occurred at prices between the
theoretical narrower bands and the actual Tier 2 bands. The
Participants then calculated the total notional value if all trades
beyond the theoretical narrow bands had been prevented, as well as the
total notional value if all such trades had occurred at the price of
the new bands, to determine the range of potential notional value
impact of applying Tier 1 bands to Tier 2 ETPs. The Participants also
studied the price movement following these ``breaches'' of the
theoretical narrower bands and the likelihood of reversion to determine
the efficacy of tightening the bands.
Third, the Participants compared market quality changes and the
frequency of Limit States and Trading Halts for Tier 1 ETPs vs. Tier 2
ETPs by studying the ETPs that shift from one tier to the other as part
of the current semi-annual review process.
C. Study Results
1. Volatility of Tier 2 ETPs vs. Tier 1 and Tier 2 Non-ETPs
For the first part of the study, the Participants compared the
volatility of Tier 2 ETPs during the study period to the volatility of
non-ETP securities. If the purpose of Tier 2's wider bands is to
address higher expected volatility in Tier 2 NMS Stocks, but ETPs in
Tier 2 are already less volatile than non-ETPs in Tier 1, that would
suggest that ETPs do not actually need Tier 2's wider bands.
According to the Participants, except for single-stock, commodity,
and foreign exchange-based ETPs, ETPs are, by definition, diversified
instruments.
[[Page 13391]]
Notwithstanding the lower trading volumes associated with the less
liquid ETPs included in Tier 2, Tier 2 ETPs exhibit volatilities that
are lower than those observed for Tier 1 non-ETPs that already trade
with narrower Price Bands today.
The Participants calculated quote volatilities \12\ for all
securities that were part of the Plan during 2021. Non-leveraged Tier 2
ETPs had an average quote volatility of 0.241 basis points with a 90th
percentile of 0.275 basis points. Those figures are lower than for Tier
1 non-ETPs during the same period, which had an average quote
volatility of 0.258 basis points with a 90th percentile of 0.446 basis
points. Tier 2 non-ETPs had more than four times higher average quote
volatility and almost double the average quote volatility at the 90th
percentile compared to Tier 2 non-leveraged ETPs. Leveraged Tier 2 ETPs
were somewhat higher than non-leveraged Tier 2 ETPs, with an average
quote volatility of 0.736 basis points and a 90th percentile of 1.317
basis points. Most leveraged ETPs represent commodities or volatility
index products, which would be expected to exhibit higher volatility.
However, these products' Price Bands are also multiplied by their
leverage factor, which makes their higher volatility relative to other
ETPs acceptable.
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\12\ The Participants measured quote volatility as the average
basis point change of each second's mid-point during core hours
annualized.
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In comparing the incidence of Trading Pauses and Limit States
during 2021 by Tier 1 non-ETPs, Tier 2 ETPs, and Tier 2 non-ETPs priced
above $3.00, the data shows that during 2021, Tier 2 non-leveraged ETPs
had fewer Trading Pauses and Limit States than Tier 1 non-ETPs, even
though the Tier 2 non-leveraged ETPs comprised nearly 50% more
securities. In addition, Tier 2 non-ETPs had roughly four times the
number of symbols, but 63 times the number of Limit States per day
compared to Tier 2 non-leveraged ETPs. Tier 2 ETPs at the 90th
percentile did not have any Trading Pauses, while there were 30 Trading
Pauses for Tier 2 non-ETPs.
Overall, the comparison between Tier 1 non-ETPs and Tier 2 ETPs
shows that quote volatility of Tier 2 ETPs operating under wider Price
Bands is lower than Tier 1 non-ETPs, and that the incidence of Limit
States and Trading Pauses for Tier 1 non-ETPs is substantially higher
than that of Tier 2 ETPs. By contrast, Tier 2 non-ETPs are considerably
more volatile than Tier 1 non-ETPs, which substantiates the wider Price
Bands applied to these securities, as the higher number of Limit States
and Trading Pauses in Tier 2 non-ETPs are occurring under 10% Price
Bands. The Participants believe that these data indicate that the Price
Bands are not well-calibrated to the realized volatility for Tier 2
ETPs and should not be twice as wide as those for Tier 1 non-ETPs.
2. Analysis of ETP Trades Executing Past Theoretical Tier 1 Bands
For the second part of the study, the Participants sought to
identify the range of potential notional value that would have been
impacted during the study period if trades in Tier 2 ETPs had been
bounded by 5% Price Bands instead of 10% Price Bands. Specifically, the
Participants calculated theoretical Tier 1 (i.e., 5%, adjusted for
leverage factor) Price Bands for all Tier 2 ETPs in the study
(``Theoretical Tier 1 Bands''). Once the theoretical narrower bands
were calculated, the Participants identified 101,956 trades that
occurred at prices between the Theoretical Tier 1 Bands and the actual
Tier 2 bands. The Participants then calculated the upper and lower
ranges of the notional value of the trades that would have been
impacted during the study period if Tier 2 ETPs had been subject to the
narrower Theoretical Tier 1 Bands instead of the actual Tier 2 bands.
The Participants drilled down into the results to determine, on a
day-by-day basis, the amount of notional value prevented, and the
number of symbols impacted, by the narrower Theoretical Tier 1 Bands.
Most of the notional value that would have been prevented by using the
narrower Theoretical Tier 1 Bands for Tier 2 ETPs occurred across a
handful of trade dates when the markets were very volatile. Together,
the 10 days with the highest notional value for trades prevented
account for 59% of the trades prevented and 61% of the total notional
value overall. More than $45 million in trades could have been
prevented during the pandemic-driven volatility in 2020. In contrast,
over the entire study period, the number of Tier 2 ETPs that would have
been impacted by using narrower Theoretical Tier 1 Bands was a median
of nine ETPs per day.
The Participants conclude that on most days, tighter Price Bands
would have had little impact on the trading of Tier 2 ETPs. However,
during periods of extreme volatility overall, the narrower bands may
prevent unnecessary volatility in Tier 2 ETPs. Using narrower Tier 1
Bands for these ETPs could protect investors from executing trades at
inferior prices that may occur due to transitory gaps in liquidity.
The Participants recognize that the positive impacts of using
narrower Theoretical Tier 1 Bands would be blunted if the price trend
that triggers a Trading Pause continues in the same direction. To study
this issue, the Participants computed several statistics to measure the
impact of blocking these trades at the narrower Theoretical Tier 1
Bands. The Participants calculated these statistics as a fraction of
simple trade counts, as well as the percentage of shares that were
impacted by the theoretical narrower bands. The calculations are as
follows:
1. Last mid-quote 5 minutes after the blocked trade compared to
the trade execution price.
2. Last mid-quote 10 minutes after the blocked trade compared to
the trade execution price.
3. Same as #1, except cases where the stock paused in the next 5
minutes (because there may not be reliable 5-minute mid-quotes).
4. Same as #2, except cases where the stock paused in the next
10 minutes (because there may not be reliable 10-minute mid-quotes).
5. Same as #1-#4, except measured against the theoretical
narrower bands. This measures the worst-case situation, where none
of the trades would have occurred and the full impact of blocking
the trades is shown.
Prices 5 and 10 minutes after a theoretically prevented trade
usually reverted away from the offending trade price towards prior
prices, and less often moved back to levels inside the new bands. When
prices do not revert, the benefit of the tighter bands is less clear,
but the tendency toward reversion is further evidence in support of
narrowing the bands to Tier 1 levels. After 5 minutes, more than 70% of
the trades and nearly 75% of the shares impacted had their last quote
return to price levels prior to the move that caused the breach of the
Theoretical Tier 1 Band. After 10 minutes, reversion rates improved
further (i.e., more than 75% of trades and 78% of shares). When Trading
Pauses are excluded, the results appeared even more positive, although
the Participants believe that including Trading Pauses is the superior
measure, as these situations better reflect the general direction of
the market.
The Participants note that during the study period, only 7.1% of
the trades that executed beyond the narrower Theoretical Tier 1 Bands
(4.6% of shares executed across the entire study period) ultimately
resulted in a Trading Pause under the bands currently in place. Prices
did ultimately hit a Limit State within 10 minutes in 12.6% of the
trades that moved through the bands, accounting for 10.3% of shares
traded, but as noted above, less than half of these shares resulted in
a Trading Pause.
The Participants note that by narrowing the bands, in all
likelihood,
[[Page 13392]]
there may be an increase in Trading Pauses, even with market makers
moving liquidity in front of the revised tighter bands. Because prices
may likely revert inside the bands after 10 minutes, these Trading
Pauses may be beneficial for investors. Such Trading Pauses may also be
beneficial for investors because many Tier 2 ETPs do not trade
actively. Their initial Price Bands are often based on the prior day's
official closing price, which may not perfectly reflect current market
conditions, but their Reference Prices and Price Bands are not reset if
there are no trades. In such cases, it may be beneficial to trigger a
Trading Pause that will permit a reopening auction, which can more
efficiently aggregate liquidity, determine equilibrium prices, reset
the Price Bands, and further mitigate volatility.
3. Market Quality Changes When ETPs Change Tier Designation
For the third part of the study, the Participants examined ETPs
that have moved between tiers. As background, at launch, each ETP is
assigned to Tier 2. Per Appendix A, tiers are recalculated at the end
of each June and December and any non-leveraged ETPs that trade over
$2,000,000 CADV during the measurement period move from Tier 2 to Tier
1. It is common for an otherwise-illiquid ETP to have one or two very
high-volume days immediately after listing, causing it to be
recategorized into Tier 1, and then ultimately settle back into Tier 2
following its second measurement period.
These tier changes provide the Participants with an opportunity to
evaluate and compare the market quality of ETPs under different price
band regimes. The Participants understand that, in some cases, changes
in the volume of trades are what cause an ETP to change from one tier
to another, and the improvements in market quality may be attributable
to that increased volume, and not the tier change in and of itself. But
as noted above, the Plan initially assigns ETPs into Tier 2
irrespective of their volume of trades, and many are then subsequently
reassigned to Tier 1 due to high notional volume on a few days after
they are first funded, without experiencing any real change in notional
volume overall. As such, the Participants believe that market quality
changes after a tier shift are meaningful because they are often not
due to developments in the character of the market for the ETPs.
The Participants compared quoted spreads and notional liquidity at
the NBBO, comparing changes in these two values from half-year to half-
year for ETPs that: stayed in Tier 1; stayed in Tier 2; switched from
Tier 1 to Tier 2; and switched from Tier 2 to Tier 1.
ETPs that were in Tier 1 in the second half of 2019 and stayed in
Tier 1 during the first half of 2020 had their consolidated quoted
spread increase by 102.0%, while those that shifted to Tier 2 saw their
consolidated quoted spread widen by 152.3%. Tier 2 ETPs that moved to
Tier 1 in the first half of 2020 had their spreads rise 96.6%--less
than those that stayed in Tier 1 for both periods. ETPs that stayed in
Tier 2 performed the worst, with their spreads increasing by 175.7%.
The pattern is similar regarding ETPs that changed tier in the second
half of 2020. ETPs that stayed in Tier 1 had their spreads narrow by
34.2% while those that moved to Tier 2 performed worse, with their
spreads tightening by 26.7%. Tier 2 ETPs that remained in Tier 2
performed similarly to those that stayed in Tier 1, with their spreads
narrowing by 35.7%. The best performing category was ETPs that moved to
Tier 1 from Tier 2, as their spreads narrowed by 43.6%.
The Participants note that narrower spreads can lead to less
available liquidity, but the tier changes studied above do not appear
to have caused a negative impact on liquidity. For ETPs that changed
tiers between the second half of 2019 and the first half of 2020, the
amount of available liquidity dropped a similar amount for Tier 1 ETPs
that stayed in Tier 1 or moved to Tier 2. Tier 2 ETPs in general lost
fewer dollars at the inside, but those Tier 2 ETPs that transferred to
Tier 1 did lose slightly more--12.2% versus 10.1%. For ETPs that
changed tiers between the first half and second half of 2020, Tier 2
ETPs again saw the largest increase in liquidity, with those that moved
to Tier 1 gaining 51.0% versus just 38.0% for those that stayed in Tier
2. Tier 1 ETPs that moved to Tier 2 saw a drop in liquidity inside of
4.2%. Finally, for those ETPs that changed tiers between the second
half of 2020 and the first half of 2021, Tier 2 ETPs that moved to Tier
1 saw the smallest gains in liquidity at the inside, increasing just
32.1% compared to Tier 2 ETPs that remained in Tier 2, which gained
42.7%. Tier 1 ETPs, whether they stayed in Tier 1 or moved to Tier 2,
garnered larger gains of liquidity at the inside.
In sum, for two of the three half-year changes the Participants
studied, spreads improved and there was a neutral to positive effect on
inside liquidity for ETPs shifting from Tier 2 to Tier 1. The opposite
was true for Tier 2 ETPs that changed tier from the second half of 2020
to the first half of 2021. These results show that, on balance, market
quality statistics improved for Tier 2 ETPs that moved to Tier 1.
The Participants note that even if market quality statistics
improved for Tier 2 ETPs that moved to Tier 1, the efficacy of such a
move might be questioned if the move created notably more Limit States
or Trading Pauses. To study this issue, the Participants examined three
statistics for ETPs that had a tier change in either direction from one
period to the next:
the average number of Trading Pauses per symbol during the
next half-year;
the average number of Limit States per symbol during the
next half-year; and
the average number of seconds in a Limit State per symbol
during the next half-year.
Narrowing the Price Bands for ETPs that moved from Tier 2 into Tier
1 did not increase the incidence of Trading Pauses, Limit States, or
the amount of time spent in Limit States. The Participants assert that
this is likely because market participants adjust their behavior and
provide more liquidity to ETPs once their bands are tightened. The
Participants acknowledge that the number of ETPs that move between
Tiers, especially into Tier 1 after being in Tier 2, is relatively
small and may not provide a significant enough population to offer
strong support for that statistic. The Participants note, however, that
Amendment 18 removed double-wide bands at the open for all stocks and
at the close for Tier 2 stocks, market participants adjusted to the
tighter bands without a large increase in Trading Pauses.
D. Study Conclusions
In sum, the Participants' study shows the following:
Tier 1 non-ETPs are far more likely than Tier 2 ETPs to
enter into Limit States and Trading Pauses due to the underlying
volatility of these securities. This finding suggests that the Price
Band width for Tier 2 ETPs is poorly calibrated relative to their
actual trading behavior.
During the study period, the notional value of trades that
would have been prevented if Tier 2 ETPs had used tighter Tier 1 bands
would have been substantial for such thinly traded products, bounded on
the lower end at $36.8 million and the upper end at $711.1 million.
In the majority of cases where a trade would have been
prevented by the narrower Theoretical Tier 1 Bands, prices reverted by
the end of the following 5- and 10-minute periods,
[[Page 13393]]
suggesting that having these thinly-traded ETPs in Tier 1 would protect
investors from executing trades at inferior prices that may occur due
to transitory gaps in liquidity rather than fundamental valuation
changes.
In most cases where ETPs have been reclassified from Tier
2 to Tier 1, market quality improved as evidenced by the lower quote
volatility, tighter spreads, and increased liquidity for ETPs that
moved from Tier 2 to Tier 1.
Using tighter Tier 1 bands for all ETPs would provide
greater investor protection from temporary liquidity gaps, which are
facilitated by the wider price bands in Tier 2.
The number of Limit States and Trading Pauses decreased
when Tier 2 ETPs moved to Tier 1 and increased when Tier 1 ETPs moved
to Tier 2.
From this evidence, the Participants conclude that moving Tier 2
ETPs to Tier 1 would improve market quality, more effectively dampen
volatility, provide greater investor protection, and decrease the
number of unnecessary Limit States and Trading Pauses.
The Participants also state that the Proposed Amendment does not
impose any burden on competition that is not necessary or appropriate
in furtherance of the purposes of the Exchange Act. The Participants
assert that the Proposed Amendment to the Plan would apply to all
market participants equally and would not impose a competitive burden
on one category of market participants in favor of another category of
market participant. The Proposed Amendment would apply to trading on
all Trading Centers and all NMS Stocks would be subject to the amended
Plan's requirements. The Participants do not believe that the Proposed
Amendment introduces terms that are unreasonably discriminatory for the
purposes of Section 11A(c)(1)(D) of the Exchange Act because it would
apply to all market participants equally.
IV. Summary of Comments
In response to the Notice, the Commission received several comments
on the Proposed Amendment.\13\ A few commenters generally oppose the
Plan and Proposed Amendment,\14\ and one commenter representing a
consortium of market participants support the Proposal.\15\
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\13\ See supra note 5.
\14\ See Letters from Alexander Kuchta dated November 27, 2023
(``Kuchta Letter''); Anonymous dated November 27, 2023 (``Anonymous
Letter''); Subhra Mazumdar dated November 27, 2023 (``Mazundar
Letter''); Joe Edwards dated November 27, 2023 (``Edwards Letter'');
Rax Nahali dated November 27, 2023 (``Nahali Letter''); and Rene
Wright dated November 27, 2023 (``Wright Letter'').
\15\ See Letter to Vanessa Countryman, Secretary, Commission,
from Samara Cohen, Chief Investment Officer of ETF and Index
Investments, BlackRock, et al. dated December 18, 2023 (``BlackRock
Letter'').
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Several commenters believe that the Proposed Amendment poses a
significant threat to the foundational principles of a free and open
markets.\16\ Some commenters state that the proposed tighter price
bands would effectively limit the natural price discovery process,
which would infringe upon free market principles.\17\ One commenter
states that these tighter controls may lead to increased
volatility.\18\ The commenter further states that leveraged
derivatives, such as options and futures, allow significant positions
to be taken with relatively less capital. In the hands of large market
participants, according to this commenter, these instruments could
potentially be used in conjunction with the predictable price range
boundaries to manipulate market conditions, highlighting the need for a
thorough evaluation of the rule's implications on market dynamics and
fairness.\19\ The same commenter concludes that the Proposal caters to
the interests of larger, institutional investors who may benefit from
reduced volatility and more predictable price movements at the expense
of smaller, retail investors.\20\ Some commenters state that the
Proposal enables the Participants to control the price of a security
inappropriately.\21\
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\16\ See, e.g., Kuchta Letter; Nahali Letter; Wright Letter.
\17\ See Kuchta Letter; Edwards Letter; Nahali Letter (noting
that volatility is a part of the market).
\18\ See Kuchta Letter (stating that ``as trades accumulate at
the band limits, the resumption of trading could trigger sudden and
sharp price movements, contrary to the proposal's intent to reduce
volatility'').
\19\ See id.
\20\ See id.
\21\ See Mazundar Letter; Nahali Letter.
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Separately, one commenter in support of the Proposal concludes that
using Tier 1 Percentage Parameters for all ETPs would better protect
investors during temporary liquidity gaps, which may be exacerbated by
the wider price bands for Tier 2 NMS Stocks.\22\ The commenter asserts
that ETP liquidity gaps can occur for reasons that may not reflect the
ETP's fundamental value.\23\ The commenter states that in these
instances, the risk of an inefficient execution away from the fair
value of the ETP's holdings (as far as 10% away from a Tier 2 ETP's
reference price) rises, and the application of Tier 1 Percentage
Parameters would improve transparency and efficiency, particularly
during periods of extreme volatility.\24\ In addition, the commenter
states that, in instances of sustained order imbalances and/or gaps in
liquidity in the market for an ETP, a trading pause would help attract
liquidity from diverse market participants and promote price discovery
through the reopening mechanism, helping to keep ETP prices in line
with the value of underlying holdings.\25\ The commenter agrees that
ETPs were assigned to tiers based on an assumption that lower-volume
ETPs were more suited for wider price parameters, and states that the
data presented in the Proposed Amendment suggests that assumption was
wrong.\26\ The commenter states that the analysis demonstrated that on
average, Tier 2 ETPs across asset classes exhibit lower quote
volatility than Tier 1 non-ETP stocks.\27\ In light of the findings
derived from the study, the imposed semi-annual migration of ETPs from
one tier to the other appears to be overly complex, arbitrary, and
unnecessary.\28\
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\22\ See BlackRock Letter at 1.
\23\ See id. at 2 (noting that outsized or aggressive orders,
temporary uncertainty about any inputs into the calculation of the
ETP's fair value, or lower levels of market participation, which is
more common in newly listed ETPs, can cause these ETP prices not to
reflect fundamental value).
\24\ See id.
\25\ See id.
\26\ See id.
\27\ See id.
\28\ See id.
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V. Proceedings To Determine Whether To Approve or Disapprove the
Proposed Amendment
The Commission is instituting proceedings pursuant to Rule
608(b)(2)(i) of Regulation NMS,\29\ and Rules 700 and 701 of the
Commission's Rules of Practice,\30\ to determine whether to approve or
disapprove the Proposed Amendment or to approve the Proposed Amendment
with any changes or subject to any conditions the Commission deems
necessary or appropriate. The Commission is instituting proceedings to
have sufficient time to consider the complex issues raised by Proposed
Amendment, including comments received. Institution of proceedings does
not indicate that the Commission has reached any conclusions with
respect to any of the issues involved. Rather, the Commission seeks and
encourages interested persons to provide additional comment on the
Proposed Amendment to inform the Commission's analysis.
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\29\ 17 CFR 242.608.
\30\ 17 CFR 201.700; 17 CFR 201.701.
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Rule 608(b)(2) of Regulation NMS provides that the Commission
``shall
[[Page 13394]]
approve a national market system plan or proposed amendment to an
effective national market system plan, with such changes or subject to
such conditions as the Commission may deem necessary or appropriate, if
it finds that such plan or amendment is necessary or appropriate in the
public interest, for the protection of investors and the maintenance of
fair and orderly markets, to remove impediments to, and perfect the
mechanisms of, a national market system, or otherwise in furtherance of
the purposes of the Exchange Act.'' \31\ Rule 608(b)(2) further
provides that the Commission shall disapprove a national market system
plan or proposed amendment if it does not make such a finding.\32\ In
the Notice, the Commission sought comment on the Proposed Amendment,
including whether the Proposed Amendment is consistent with the
Exchange Act.\33\ In this order, pursuant to Rule 608(b)(2)(i) of
Regulation NMS,\34\ the Commission is providing notice of the grounds
for disapproval under consideration:
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\31\ 17 CFR 242.608(b)(2).
\32\ Id.
\33\ See Notice, supra note 5.
\34\ 17 CFR 242.608(b)(2)(i).
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Whether, consistent with Rule 608 of Regulation NMS, the
Participants have demonstrated how the Proposed Amendment is necessary
or appropriate in the public interest, for the protection of investors
and the maintenance of fair and orderly markets, to remove impediments
to, and perfect the mechanisms of, a national market system, or
otherwise in furtherance of the purposes of the Exchange Act.\35\
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\35\ 17 CFR 242.608(b)(2).
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Under the Commission's Rules of Practice, the ``burden to
demonstrate that a NMS plan filing is consistent with the Exchange Act
and the rules and regulations issued thereunder. . . is on the plan
participants that filed the NMS plan filing.'' \36\ The description of
the NMS plan filing, its purpose and operation, its effect, and a legal
analysis of its consistency with applicable requirements must all be
sufficiently detailed and specific to support an affirmative Commission
finding.\37\ Any failure of the plan participants that filed the NMS
plan filing to provide such detail and specificity may result in the
Commission not having a sufficient basis to make an affirmative finding
that the NMS plan filing is consistent with the Exchange Act and the
applicable rules and regulations thereunder.\38\
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\36\ 17 CFR 201.701(b)(3)(ii).
\37\ Id.
\38\ Id.
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VI. Commission's Solicitation of Comments
The Commission requests that interested persons provide written
submissions of their views, data, and arguments with respect to the
issues identified above, as well as any other concerns they may have
with the Proposal. In particular, the Commission invites the written
views of interested persons concerning whether the Proposal is
consistent with Section 6(b)(5), Section 6(b)(8), or any other
provision of the Act, or the rules and regulations thereunder. Although
there do not appear to be any issues relevant to approval or
disapproval that would be facilitated by an oral presentation of views,
data, and arguments, the Commission will consider, pursuant to Rule
608(b)(2)(i) of Regulation NMS,\39\ any request for an opportunity to
make an oral presentation.\40\ The Commission asks that commenters
address the sufficiency and merit of the Participants' statements in
support of the Proposed Amendment,\41\ in addition to any other
comments they may wish to submit about the Proposed Amendment. In
particular, the Commission seeks comment on the following:
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\39\ 17 CFR 242.608(b)(2)(i).
\40\ Rule 700(c)(ii) of the Commission's Rules of Practice
provides that ``[t]he Commission, in its sole discretion, may
determine whether any issues relevant to approval or disapproval
would be facilitated by the opportunity for an oral presentation of
views.'' 17 CFR 201.700(c)(ii).
\41\ See Notice, supra note 5.
1. The Participants propose to amend Appendix A of the Plan by
deleting the definition of ETPs ``eligible'' for Tier 1 and to
specify that all ETPs, except for single stock ETPs, would be
assigned to Tier 1. What are commenters' views on whether the
Proposal is consistent with the Exchange Act?
2. Because all leveraged ETPs (except Tier 2 single stock ETPs)
would be assigned to Tier 1, the Participants also propose to add
text into Section I of Appendix A describing how the Percentage
Parameters would be set for leveraged ETPs. What are commenters'
views on whether this Proposal regarding leveraged ETPs to the Plan
is consistent with the Exchange Act?
3. The Proposal acknowledges that the ETPs studied covered
several asset classes, including domestic equities, international
equities, fixed income, currency, commodity, and digital currency
ETPs. For example, the Participants' analysis provides aggregate
statistical information with respect to Tier 2 ETPs as a whole. In
addition, the Proposal states that, except for single-stock,
commodity, and foreign exchange-based ETPs, ETPs are by definition
diversified instruments and that the analysis in the Proposal
supports the modern portfolio theory that portfolios of securities
exhibit lower volatility than individual securities, unless those
products are perfectly correlated. The Proposed Amendment to the
Plan, which would assign all ETPs to Tier 1, only excludes single
stock ETPs, but does not propose to exclude other ETPs based on
other single reference assets, such as ETPs based on single
commodities or single digital currency-related assets. Do commenters
agree that the methodology and results of the analysis support the
conclusions drawn by the Participants? Please explain. Does this
aggregated approach to evaluating Tier 2 ETPs as a whole support the
conclusions drawn by the Participants with respect to different
segments of Tier 2 ETPs? For example, what are commenters' views on
whether the Proposal's study explains why such other ETPs, such as
those based on a single asset (other than stocks) or those that
might not otherwise reflect the volatility characteristics described
in the Proposal, should be assigned to Tier 1?
4. The Proposal provides analysis concerning the potential
impacts that the Proposal could have on the market. Among other
things, the analysis states that the proposed narrower bands may
have caused minimal disruption during periods of less volatility,
amounting usually to a few dozen trades per day. In contrast, the
analysis shows that the Proposal could have had a much larger impact
on trading during periods of greater volatility. Table 4, Panel A,
for example, shows that during the first half of 2020, the Proposal
could have impacted approximately $147 million of trading in Tier 2
ETPs on a single day; approximately $577 million of trading in Tier
2 ETPs could have been impacted over these six months. Chart 1 of
the Proposal \42\ also shows that over 500 Tier 2 ETPs would have
been affected daily during March 2020, a significant percentage of
the total number of Tier 2 ETPs. In the Proposal, the Participants
also provide analysis that supports the view that the potential
impact on trading likely would not be as significant as suggested in
Table 4, Panel A. For example, in Table 4, Panel B, the Proposal
provides analysis that assumes that all impacted trading would
execute at the proposed price bands; under this more conservative
assumption, notional volume in Tier 2 ETPs would only change by $8
million on any given day in the first half of 2020, while total
notional volume in Tier 2 ETPs over these six months would only
change by $30 million. The Proposal states that it is not likely
that the Proposal's impact would be as significant as suggested by
the analysis in Table 4, Panel A, because there could be significant
additional volume executed at or near the proposed price bands. What
are commenters' views on the Proposal's analysis of the potential
impact on trading? Are commenters concerned that the Proposal's
impact on trading during periods of significant volatility would
further contribute to that market stress?
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\42\ According to the Participants, Chart 1 describes the amount
of notional value prevented, and the number of symbols impacted, by
the narrower Theoretical Tier 1 Bands on a day-to-day basis. See
Notice, 88 FR at 81136.
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5. One of the Proposal's conclusions is that, in a majority of
cases where a trade
[[Page 13395]]
would have been prevented by the proposed narrower bands
(Theoretical Blocked Trades), prices reverted back to within the
proposed narrower bands. To support this conclusion, the Proposal
provides an analysis that trades in Tier 2 ETPs that executed
outside the proposed narrower bands are generally followed by mid-
point prices within the narrower bands. According to the Proposal,
this analysis suggests that the Proposal would protect investors
from trading at inferior prices that may occur because of transitory
gaps in liquidity instead of fundamental valuation changes. Do
commenters agree that the analysis appropriately measures price
reversion and that the Theoretical Blocked Trades often executed
during temporary liquidity gaps? If not, how do commenters suggest
the analysis could examine the extent to which Theoretical Blocked
Trades executed during temporary liquidity gaps? Please explain.
6. The Proposal compares the quote volatility of Tier 2 ETPs to
that of Tier 1 non-ETPs, where quote volatility is measured using
the mid-point at each second. With this measure of volatility, the
Proposal concludes that Tier 2 ETPs have lower quote volatility than
Tier 1 non-ETPs, suggesting that Tier 2 ETPs are not too volatile
for the Tier 1 price bands. In addition, the Proposal acknowledges
that Tier 2 ETPs are often thinly traded. What are commenters' views
on whether the comparative analysis has adequately captured Tier 2
ETP volatility in support of the conclusion that they are not too
volatile for the Tier 1 price bands? For example, would infrequent
trading interest bias the analysis due to infrequent updates of the
mid-point? Are there other measures of volatility that would be more
appropriate? Please explain.
7. The Participants state that the Plan does not impose any
burden on competition that is not necessary or appropriate in
furtherance of the purposes of the Exchange Act. Do commenters
believe that the Plan, as proposed to be amended, imposes any burden
on competition that is not necessary or appropriate in furtherance
of the purposes of the Exchange Act?
8. Further, would the Proposal have a positive, negative, or
neutral impact on competition? Please explain. How would the
Proposal impact competition across ETP issuers or ETPs on similar
baskets of securities currently in different tiers? Please explain.
How would any impact on competition from the Proposal benefit or
harm the national market system or the various market participants?
Please describe and explain how, if at all, aspects of the national
market system or different market participants would be affected.
Please support any response with data, if possible.
9. More generally, to the extent possible please provide
specific data, analyses, or studies for support regarding any
impacts of the Proposal on competition.
The Commission requests that commenters provide analysis to support
their views, if possible.
Interested persons are invited to submit written data, views, and
arguments regarding whether the Proposed Amendment should be approved
or disapproved by March 14, 2024. Any person who wishes to file a
rebuttal to any other person's submission must file that rebuttal by
March 28, 2024. 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 4-631 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 4-631. This file number
should be included on the subject line if email is used. To help the
Commission process and review your comments more efficiently, please
use only one method. The Commission will post all comments on the
Commission's internet website (https://www.sec.gov/rules/sro.shtml).
Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule change that are filed with
the Commission, and all written communications relating to the proposed
rule change between the Commission and any person, other than those
that may be withheld from the public in accordance with the provisions
of 5 U.S.C. 552, will be available for website viewing and printing in
the Commission's Public Reference Room, 100 F Street NE, Washington, DC
20549, on official business days between the hours of 10 a.m. and 3
p.m. Copies of the filing also will be available for inspection and
copying at the Participants' principal offices. Do not include personal
identifiable information in submissions; you should submit only
information that you wish to make available publicly. We may redact in
part or withhold entirely from publication submitted material that is
obscene or subject to copyright protection. All submissions should
refer to file number 4-631 and should be submitted on or before March
14, 2024.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\43\
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\43\ 17 CFR 200.30-3(a)(85).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2024-03539 Filed 2-21-24; 8:45 am]
BILLING CODE 8011-01-P
