Self-Regulatory Organizations; Cboe BYX Exchange, Inc.; Notice of Filing of a Proposed Rule Change To Amend Exchange Rule 11.25(e) (“Priority and Execution of Orders”) To Allow Users To Utilize the Exchange's Match Trade Prevention Functionality When Entering Periodic Auction Orders Onto the Exchange for Execution, 52148-52152 [2024-13540]

Download as PDF 52148 Federal Register / Vol. 89, No. 120 / Friday, June 21, 2024 / Notices SECURITIES AND EXCHANGE COMMISSION the most significant aspects of such statements. [Release No. 34–100337; File No. SR– CboeBYX–2024–009] A. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change Self-Regulatory Organizations; Cboe BYX Exchange, Inc.; Notice of Filing of a Proposed Rule Change To Amend Exchange Rule 11.25(e) (‘‘Priority and Execution of Orders’’) To Allow Users To Utilize the Exchange’s Match Trade Prevention Functionality When Entering Periodic Auction Orders Onto the Exchange for Execution June 14, 2024. Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’),1 and Rule 19b–4 thereunder,2 notice is hereby given that on June 6, 2024, Cboe BYX Exchange, Inc. (‘‘Exchange’’ or ‘‘BYX’’) filed with the Securities and Exchange Commission (the ‘‘Commission’’) the proposed rule change as described in Items I, II, and III below, which Items have been prepared by the Exchange. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. ddrumheller on DSK120RN23PROD with NOTICES1 I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change Cboe BYX Exchange, Inc. (the ‘‘Exchange’’ or ‘‘BYX’’) proposes to amend Exchange Rule 11.25(e) (‘‘Priority and Execution of Orders’’) to allow Users to utilize the Exchange’s Match Trade Prevention functionality when entering Periodic Auction Orders onto the Exchange for execution. The text of the proposed rule change is provided in Exhibit 5. The text of the proposed rule change is also available on the Exchange’s website (https://markets.cboe.com/us/ equities/regulation/rule_filings/byx/), at the Exchange’s Office of the Secretary, and at the Commission’s Public Reference Room. II. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, the Exchange included statements concerning the purpose of and basis for the proposed rule change and discussed any comments it received on the proposed rule change. The text of these statements may be examined at the places specified in Item IV below. The Exchange has prepared summaries, set forth in sections A, B, and C below, of 1 15 2 17 U.S.C. 78s(b)(1). CFR 240.19b–4. VerDate Sep<11>2014 17:46 Jun 20, 2024 Jkt 262001 1. Purpose The Exchange proposes to amend Rule 11.25(e) to allow Users 3 to utilize the Exchange’s Match Trade Prevention (‘‘MTP’’) functionality when entering Periodic Auction Orders 4 onto the Exchange for execution.5 By way of background, MTP is an existing process 6 through which Users can prevent their incoming orders designated with a MTP modifier from executing against a resting opposite side order also designated with an MTP modifier and originating from the same market participant identifier (‘‘MPID’’), Exchange Member identifier, trading group identifier, Exchange Sponsored Participant identifier, affiliate identifier, or Multiple Access identifier (any such identifier, a ‘‘Unique Identifier’’).7 Both the buy and the sell order must include the same Unique Identifier in order to prevent an execution from occurring and to effect a cancel instruction. MTP is a valuable tool for Exchange Users because it allows them to better manage order flow and prevent undesirable trading activity such as wash sales 8 or self-trades 9 that may occur because of 3 The term ‘‘User’’ shall mean any Member or Sponsored Participant who is authorized to obtain access to the System pursuant to Rule 11.3. See Rule 1.5(cc), definition of ‘‘User’’. 4 The term ‘‘Periodic Auction Order’’ shall mean a ‘‘Periodic Auction Only Order’’ or ‘‘Periodic Auction Eligible Order’’ as those terms are defined in Rules 11.25(b)(1)–(2), and the term ‘‘Periodic Auction Book’’ shall mean the System’s electronic file of such Periodic Auction Orders. See Rule 11.25(a)(6). Hereinafter, a Periodic Auction Only Order may be referred to as a ‘‘PAO Order’’, and a Periodic Auction Eligible Order may be referred to as a, ‘‘PAE Order’’. 5 The Exchange plans to implement the proposed rule change on a date that will be circulated in a notice from the Cboe Trade Desk to all Members. 6 The Exchange notes that previous proposals extending the functionality of MTP to other trading scenarios were effective upon filing with the Commission. See generally Securities and Exchange Act Release No. 53429 (December 3, 2010), 75 FR 76763 (December 9, 2010) (SR–EDGX–2010–18); Securities and Exchange Act Release No. 34–96292 (November 10, 20220), 87 FR 68766 (November 16, 2022) (SR–CboeEDGX–2022–048). 7 See Rule 11.9(f)—Match Trade Prevention (‘‘MTP’’) Modifiers. 8 A ‘‘wash sale’’ is generally defined as a trade involving no change in beneficial ownership that is intended to produce the false appearance of trading and is strictly prohibited under both the federal securities laws and FINRA rules. See, e.g., 15 U.S.C. 78i(a)(1); FINRA Rule 6140(b) (‘‘Other Trading Practices’’). 9 Self-trades are ‘‘transactions in a security resulting from the unintentional interaction of orders originating from the same firm that involve PO 00000 Frm 00139 Fmt 4703 Sfmt 4703 the high-speed nature of trading in today’s marketplace. Currently, Rule 11.25(e) states that all MTP modifiers (as defined in Rule 11.9(f)(1)–(5)) for Periodic Auction Orders will be ignored for executions occurring during a Periodic Auction. As part of the Exchange’s prior Periodic Auction Rule filings,10 the Exchange reasoned that MTP is mainly designed for use on the Continuous Book,11 and use of MTP for Periodic Eligible Orders 12 and Periodic Auction Only Orders 13 (collectively, Periodic Auction Orders) may complicate the execution of an auction that requires the pooling and matching of multiple orders against other orders at the Periodic Auction Book Price.14 Based on User feedback, no change in beneficial ownership of the security.’’ FINRA requires members to have policies and procedures in place that are reasonably designed to review trading activity for, and prevent, a pattern or practice of self-trades resulting from orders originating from a single algorithm or trading desk, or related algorithms or trading desks. See FINRA Rule 5210, Supplementary Material .02, available at: https://www.finra.org/rules-guidance/rulebooks/ finra-rules/5210. 10 See Securities and Exchange Act Release No. 34–91423 (March 26, 2021), 86 FR 17230 (April 1, 2021) (SR–CboeBYX–2020–021). 11 The term ‘‘Continuous Book’’ shall mean an order on the BYX Book that is not a Periodic Auction Order, and the term ‘‘Continuous Book’’ shall mean the System’s electronic file of such Continuous Book Orders. See Rule 11.25(a)(2), definition of ‘‘Continuous Book Order’’. 12 ‘‘A ‘Periodic Auction Eligible Order’ is a nondisplayed limit order eligible to trade on the Continuous Book that is entered with an instruction to also initiate a Periodic Auction, if possible . . . Periodic Auction Eligible Orders will be ranked as Non-Displayed Limit Orders consistent with the priority of order outlined in Rule 11.12(a). An incoming Periodic Auction Eligible Order that is eligible both to trade on the Continuous Book and initiate a Periodic Auction against a Periodic Auction Only Order at the same price will trade immediately with the Continuous Book. Incoming Periodic Auction Eligible Orders will upon entry interact with Continuous Book Orders and other Periodic Auction Eligible Orders according to their rank under Rule 11.12(a). Periodic Auction Eligible Orders will not trade on the Continuous Book during a Periodic Auction Period in the security.’’ See 11.25(b)(2). 13 ‘‘A ‘Periodic Auction Only Order’ is a nondisplayed limit order entered with an instruction to participate solely in Periodic Auctions pursuant to this Rule 11.25. Periodic Auction Only Orders are not eligible for executions on the Continuous Book.’’ See Rule 11.25(b)(1). Hereinafter, Periodic Auction Only Orders as, ‘‘PAO Orders.’’ 14 ‘‘The term ‘Periodic Auction Book Price’ shall mean the price within the Collar Price Range at which the most shares from the Periodic Auction Book would match. In the event of a volume-based tied at multiple price-levels, the Periodic Auction Book Price will be the price that results in the minimum total imbalance. In the event of a volumebased tie and a tie in minimum total imbalance at multiple price levels, the Periodic Auction Book Price will be the price closest to the Volume Based Tie Breaker. The Periodic Auction Book Price will be expressed in the minimum increment for the security unless the midpoint of the NBBO establishes the Periodic Auction Book Price.’’ See 11.25(a)(5), definition of ‘‘Periodic Auction Book Price’’. E:\FR\FM\21JNN1.SGM 21JNN1 Federal Register / Vol. 89, No. 120 / Friday, June 21, 2024 / Notices however, Users of Periodic Auctions desire the ability to utilize MTP for their Periodic Auction Orders outside of a Periodic Auction to help them manage their order flow and prevent undesirable executions against themselves. Users are not asking to utilize MTP for their Periodic Auction Orders when a Periodic Auction is occurring. Accordingly, the Exchange now seeks to allow Users to utilize MTP when entering Periodic Auction Orders onto the Exchange.15 Importantly, allowing Users to designate Periodic Auction Orders with MTP modifiers will not impact how the Periodic Auction itself is conducted, and the proposed MTP functionality will not prevent the completion of a Periodic Auction once it has been initiated. As proposed, however, there will be instances where the Exchange has elected to temporarily bypass a User’s MTP instruction. The Exchange believes this is necessary and appropriate to help strike a responsible balance between providing Users with an optional risk tool to prevent undesirable executions and ensuring that Periodic Auctions will complete. Moreover, the current architecture and design of Exchange Systems 16 require that MTP for Periodic Auctions function as described. To illustrate how Periodic Auction Orders designated with MTP modifiers will behave, the Exchange offers the following examples: 17 ddrumheller on DSK120RN23PROD with NOTICES1 15 The Exchange notes that previous proposals extending the functionality of MTP to other trading scenarios were effective upon filing with the Commission. See Securities and Exchange Act Release No. 53429 (December 3, 2010), 75 FR 76763 (December 9, 2010) (SR–EDGX–2010–18); see also Securities and Exchange Act Release No. 34–96292 (November 10, 20220), 87 FR 68766 (November 16, 2022) (SR–CboeEDGX–2022–048). 16 The term ‘‘System’’ shall mean the electronic communications and trading facility designed by the Board through which securities orders of Users are consolidated for ranking, execution and, when applicable, routing away. See Rule 1.5(aa), definition of ‘‘System’’. 17 For each example, assume that all trade prices are within the National Best Bid or National Best Offer (‘‘NBBO’’). Additionally, note that while Exchange Rule 11.9(f) provides for various MTP modifiers—including Cancel Newest, Cancel Oldest, Decrement and Cancel, Cancel Both, and Cancel Smallest—the Examples provided in this rule filing only demonstrate how certain of these modifiers will operate. Including examples for every possible MTP scenario would be difficult to efficiently demonstrate in a rule filing. Nevertheless, the MTP modifier exemplified in the provided Examples is not critical to understanding how the proposed functionality will operate because as demonstrated below, when a Periodic Auction is not in progress MTP will operate as it does today, and when a Periodic Auction is in progress, the System will, as described below, temporarily bypass an order’s MTP instruction. VerDate Sep<11>2014 17:46 Jun 20, 2024 Jkt 262001 Example 1: Two PAE Orders Matching—MTP Action Occurs Example 1 illustrates how MTP will operate when Firm A’s resting PAE Order with an MTP modifier of MTP Cancel Oldest (‘‘MCO’’),18 interacts with a subsequent inbound PAE Order submitted by Firm A with an MTP modifier of MCO and a Periodic Auction is not in progress. Here, MTP operates in the same manner as it would for Continuous Book Orders 19 and predictably cancels Firm A’s Order 1, based on Firm A’s Order 2 MCO modifier, thereby preventing Firm A from potentially trading with itself either on the Continuous Book or during a Periodic Auction.20 • Order 1—Resting (Firm A): PAE Order (MTP = Cancel Oldest), Buy 100 @ 1.00 • Order 2—Inbound order (Firm A): PAE Order (MTP = Cancel Oldest), Sell 200 @ 1.00 • Result: Order 1 is canceled. Example 2: Two PAO Orders Matching—MTP Action Occurs Example 2 illustrates how MTP will operate when Firm A’s resting PAO Order with an MTP Modifier of MCN, interacts with Firm A’s inbound PAO Order with an MCN modifier, and a Periodic Auction is not in progress. Here, MTP operates in the same manner as it would for Continuous Book Orders and predictably cancels Firm A’s Order 2 based on Order 2’s MCN Modifier, 18 MTP Cancel Oldest (‘‘MCO’’) is defined as ‘‘[a]n incoming order marked with the ‘‘MCO’’ modifier will not execute against opposite side resting interest marked with any MTP modifier originating from the same Unique Identifier. The resting order marked with the MCO modifier will be cancelled back to the originating User(s). The incoming order marked with the MCO modifier will remain on the BYX Book. See Rule 11.9(f)(2). 19 The term ‘‘Continuous Book Order’’ shall mean an order on the BYX Book that is not a Periodic Auction Order, and the term ‘‘Continuous Book’’ shall mean System’s electronic file of such Continuous Book Orders. See Rule 11.25(a)(2). 20 As MTP action is controlled by the incoming order (‘‘. . . the MTP modifier on the incoming order controls the interaction between two orders marked with MTP modifiers.’’ See Rule 11.21(g)), Firm A’s Order 1 was correctly cancelled in this situation. Note, however, that if Firm A’s Order 2 had included an MTP modifier of MTP Cancel Newest (‘‘MCN’’), the result would simply be that Order 2 is instead canceled. MTP Cancel Newest (‘‘MCN’’) is defined as ‘‘[a]n incoming order marked with the ‘‘MCN’’ modifier will not execute against opposite side resting interest marked with any MTP modifier originating from the same Unique Identifier. The incoming order marked with the MCN modifier will be cancelled back to the originating User(s). The resting order marked with an MTP modifier will remain on the BYX Book.’’ See Rule 11.9(f)(1). Similarly, if we changed Order 1’s MTP Modifier to Cancel Newest and Order 2 remained as MTP Cancel Oldest, Order 1 would be canceled as Order 2’s instruction controls MTP action. PO 00000 Frm 00140 Fmt 4703 Sfmt 4703 52149 thereby preventing Firm A from potentially trading with itself during a Periodic Auction. • Order 1—Resting (Firm A): PAO Order (MTP = Cancel Newest), Buy 100 @ 1.00 • Order 2—Inbound order (Firm A): PAO Order (MTP = Cancel Newest), Sell 200 @ 1.00 • Result: Order 2 is canceled For the sake of clarity, the Exchange also wishes to explain what would happen to Order 2 if a Periodic Auction was in progress when Order 2 arrived. To address this scenario, assume an inbound Periodic Auction Order from Firm B—Order X—arrived between Order 1 and Order 2, and initiated a Periodic Auction with Order 1. Here, when Order 2 arrives, and the Periodic Auction is in progress, Order 2 would still be canceled. When a Periodic Auction is in progress, and an inbound Periodic Auction Order is designated with an MTP modifier, and such order matches against a resting contra-side order originating from the same Unique Identifier that is also designated with a MTP modifier, the inbound Periodic Auction Order will be canceled. This behavior will enable Users to better manage their order flow and prevent undesirable executions in Periodic Auctions, just as they do today for their Continuous Book orders. Example 3: Incoming PAE Order Matching Against a PAO Order—MTP Action Occurs Example 3 illustrates how MTP will operate when Firm A’s resting PAO Order with a MTP modifier of MTP Cancel Smallest (‘‘MCS’’),21 interacts with Firm A’s inbound PAE Order with an MCS modifier, and an auction is not in progress. Here, MTP operates in the same manner as it would for Continuous Book Orders and predictably cancels Firm A’s Order 1 based on Firm A’s Order 2 MCS modifier because Order 1 is smaller than Order 2, thereby preventing Firm A from potentially trading with itself during a Periodic Auction. • Order 1—Resting (Firm A): PAO Order (MTP = Cancel Smallest), Buy 100 @ 1.00 21 MTP Cancel Smallest (‘‘MCS’’) is defined as ‘‘[a]n incoming order marked with the ‘‘MCS’’ modifier will not execute against opposite side resting interest marked with any MTP modifier originating from the same Unique Identifier. If both orders are equivalent in size, both orders will be cancelled back to the originating User(s). If the orders are not equivalent in size, the smaller of the two orders will be cancelled back to the originating User and the larger order will remain on the book. See Rule 11.9(f)(5). E:\FR\FM\21JNN1.SGM 21JNN1 52150 Federal Register / Vol. 89, No. 120 / Friday, June 21, 2024 / Notices • Order 2—Inbound order (Firm A): PAE Order (MTP = Cancel Smallest), Sell 200 @ 1.00 • Result: Order 1 is canceled. ddrumheller on DSK120RN23PROD with NOTICES1 Example 4: Incoming PAE Order Matching Against a Continuous Book Order—MTP Action Occurs Example 4 illustrates how MTP will operate when Firm A’s incoming PAE Order with a MCS modifier, matches against Firm A’s resting Continuous Book Order, and a Periodic Auction is not in progress. Here, Firm’s A’s Order 1 is canceled based on Firm A’s Order 2 MCS modifier because Order 1 is smaller than Order 2. Because a PAE Order is eligible to receive an execution on the Continuous Book, and both Order 1 and Order 2 are designated with MTP modifiers, the System correctly cancels Order 1, thereby preventing Firm A from potentially trading with itself on the Continuous Book. • Order 1—Resting (Firm A): Continuous Book order (MTP = Cancel Smallest), Buy 100 @ 1.00 • Order 2—Inbound order (Firm A): PAE Order (MTP = Cancel Smallest), Sell 200 @ 1.00 • Result: Order 1 is canceled. For the sake of clarity, the Exchange wishes to describe what would happen to Order 1 if a Periodic Auction was in progress when Order 2 arrived.22 First, note that a Continuous Book Order cannot initiate a Periodic Auction.23 Therefore, to initiate a Periodic Auction in this example, assume that two Periodic Auction Orders arrived, from Firm B and Firm C, and in between Order 1 and Order 2—e.g., Order X (Firm B) and Order Y (Firm C). Further assume that Order X and Order Y are marketable versus each other. If Order X and Order Y arrived post-entry of Order 1, and initiated a Periodic Auction, Order 2 would be included in the Periodic Auction. The System will temporarily bypass Order 1’s MTP instruction, and Order 1 and Order 2 could then potentially trade at the end of the Periodic Auction, assuming of course Order 1 did not already receive an execution on the Continuous Book while the Periodic Auction was in progress, and that Order 1 has priority as determined by Rule 11.25(d). Note that the bypassing of the MTP modifiers 22 This iteration of Example 4 demonstrates the proposed functionality described in proposed Rule 11.25(e)(1). 23 See Rule 11.25(c), Initiation and Publication of Periodic Auction Information, ‘‘A Periodic Auction will be initiated in a security during Regular Trading Hours when one or more Periodic Auction Orders to buy become executable against one or more Periodic Auction Orders to sell pursuant to this Rule 11.25.’’ VerDate Sep<11>2014 17:46 Jun 20, 2024 Jkt 262001 in this scenario occurs only upon entry of Order 2 to prevent the cancelation of orders in situations where an immediate execution would not occur. Otherwise, MTP remains in effect, and would cause the cancelation of contra side Continuous Book Orders originating from the same Unique Identifier as Order 1 while the Periodic Auction is in progress, as well as the cancelation of any contras side Periodic Auction Orders originating from the same Unique Identifier as Order 2, seeking to join the Periodic Auction. Here, even though Order 1 and Order 2 both originated from Firm A, and are designated with an MTP modifier, Order 1 is not canceled upon Order 2’s arrival because Order 1 is a Continuous Book Order that may or may not end up trading with Order 2 once the Periodic Auction is complete. Because Order 1 could receive an execution on the Continuous Book while the Periodic Auction is in progress, the Exchange temporarily bypasses Order 1’s MTP instruction upon Order 2’s arrival to prevent Order 1 from forfeiting a Continuous Book execution based on a possibility that Order 1 would be executable versus Order 2 at the completion of the Periodic Auction. Example 5: Incoming Continuous Book Order Matching Against a PAO Order— No MTP Action Occurs Example 5 illustrates how MTP will operate when Firm A’s incoming Continuous Book Order with an MCS modifier matches with Firm A’s resting PAO Order with an MCS modifier, and a Periodic Auction is not in progress. Here, MTP will not be applied because PAO Orders and Continuous Book Orders are not permitted to trade with one another.24 As such, MTP is not needed to prevent Firm A’s Order 1 from trading with Firm A’s Order 2 and as such, Order 2 is permitted to post to the BYX Book. • Order 1—Resting (Firm A): PAO Order (MTP = Cancel Smallest), Buy 100 @ 1.00 • Order 2—Inbound order (Firm A): Continuous Book order (MTP = Cancel Smallest), Sell 200 @ 1.00 • Result: Order 2 will rest in the Continuous Book, and there is no MTP action. Example 6: Incoming Order Is Canceled Due to ‘‘Periodic Auction in Progress’’ Involving a PAO Order Example 6 illustrates how an incoming order with a MTP modifier is 24 Supra note 11 (‘‘Periodic Auction Only Orders are not eligible for execution on the Continuous Book.’’). PO 00000 Frm 00141 Fmt 4703 Sfmt 4703 canceled because a Periodic Auction is in progress.25 Here, Firm A’s inbound Order 2, a PAE Order to sell 200 @ 1.00, with a MTP modifier of MTP Cancel Both (‘‘MCB’’),26 immediately starts an auction with Firm B’s Order 1, a resting PAO Order to Buy 100 @ 1.00. While the Periodic Auction is in progress, Firm A enters Order 3, a PAE Order to Buy 200 @ 1.00 with an MCB instruction. The entry of Order 3 presents a scenario in which the Exchange seeks to implement MTP functionality that behaves differently than demonstrated in each of the preceding five examples. Specifically—and only in these circumstances—when a Periodic Auction is in progress, and an inbound PAO or PAE Order containing an MTP instruction that matches against a contra-side order from the same firm also containing an MTP instruction, the inbound PAO or PAE order will be canceled. Importantly, this behavior is necessary to help ensure that once a Periodic Auction is initiated it will be completed. Applying this proposed behavior to Example 6’s fact pattern, when Firm A’s Order 3, a PAE Order with an MCB modifier is entered after Periodic Auction has been initiated and Order 3 subsequently matches with Firm A’s Order 2 (a PAE Order with a MCB modifier), Order 3 will be cancelled. Without this proposed behavior, Order 3 would otherwise be included in the Periodic Auction, and its MTP Cancel Both instruction would result in the cancelation of Order 2, preventing the Periodic Auction from completing, and denying Firm A an execution it would otherwise have expected to receive. The Exchange believes that this proposed behavior appropriately balances the dual goals of ensuring that Periodic Auctions complete once initiated and providing Members the ability to utilize MTP for their Periodic Auction Orders in each of the scenarios described in the preceding five examples.27 25 Example 6 demonstrates the proposed functionality described in proposed Rule 11.25(e)(2). 26 MTP Cancel Both (‘‘MCB’’) is defined as ‘‘[a]n incoming order marketed with the ‘‘MCB’’ modifier will not execute against opposite side resting interest marked with any MTP modifier originating from the same Unique Identifier. The entire size of both orders will be cancelled back to the originating User(s). See Rule 11.9(f)(4). 27 The Exchange notes that the proposed MTP functionality is intended as a supplementary risk tool that Members may voluntarily use to help them manage their risk and compliance with applicable securities rules. As registered broker-dealers, Members are ultimately responsible for compliance with applicable securities rules, and should not rely on the proposed functionality as a sole means of compliance. As such, while the proposed MTP functionality will, in some instances, operate E:\FR\FM\21JNN1.SGM 21JNN1 Federal Register / Vol. 89, No. 120 / Friday, June 21, 2024 / Notices • Order 1—Resting (Firm B): PAO Order, Buy 100 @ 1.00 • Order 2—Inbound Order (Firm A): PAE Order (MTP = Cancel Both 28), Sell 200 @ 1.00 • Action: Order 2 initiates a Periodic Auction with Order 1 • Order 3—Inbound order (Firm A): PAE Order (MTP = Cancel Both), Buy 200 @ 1.00 • Action: Order’s 3’s MCB modifier is automatically converted to MCN • Result: Order 3 is canceled due to ‘‘Cancel Newest’’ rule (for Periodic Auction Orders only) that applies when there is a Periodic Auction in progress. ddrumheller on DSK120RN23PROD with NOTICES1 Example 7: Incoming Order Has MTP Temporarily Bypassed in a Periodic Auction Example 7 is another example of MTP modifiers not being applied when a Periodic Auction is in progress, despite the Member adding MTP instructions to their Periodic Auction Order(s) and Continuous Book Order(s). Here, Firm B’s Order 2, a PAE Order with an MCO modifier, initiates a Periodic Auction upon entry with Firm A’s Order 1, a resting PAE Order with an MCO modifier. Firm A subsequently enters a Continuous Book Order (Hidden) with an MCO modifier. Here, the Exchange will temporarily bypass 29 an inbound Continuous Book Order’s MTP modifier when a Periodic Auction is in progress, and such Continuous Book Order would post to the Continuous Book, and be eligible to participate in the Periodic Auction, or alternatively receive an execution from the Continuous Book. In such instance, applying the Continuous Book Order’s MPT modifier and canceling such order based on the potential that the order could trade in the Periodic Auction, would be unnecessarily prohibitive. By posting to the Continuous Book, such order could still execute without violating its MTP instructions. Based on the proposed MTP functionality, Order 3 will post to the differently than it does outside of the context of Periodic Auctions, its design as a supplementary risk tool will still serve to benefit Members that choose to utilize this tool. 28 MTP Cancel Both is defined as ‘‘[a]n incoming order marked with the ‘‘MCB’’ modifier will not execute against the opposite side resting interest marked with any MTP modifier originating from the same Unique Identifier. The entire size of both orders will be cancelled back to the originating User(s). See Rule 11.9(f)(4). 29 The Exchange notes that the bypassing of the Continuous Book Order’s MTP modifier in this scenario is temporary. Should the Periodic Auction complete and Order 3 does not have the opportunity to trade with Order 1 in the Periodic Auction, then Order 3 would remain posted on the Continuous Book with its MTP modifier and be afforded the protections of MTP. VerDate Sep<11>2014 17:46 Jun 20, 2024 Jkt 262001 BYX Book prior to the end of the Periodic Auction as the MTP modifier is temporarily bypassed. Order 1 and Order 2 will trade in the Periodic Auction for 500 shares @ 10.02. After trading with Order 2, Order 1 still has 500 shares remaining. Prior to the end of the Periodic Auction, Order 3 will be matched in the Periodic Auction and trade 200 shares with Order 1 @ 10.02, bypassing the MCO modifier assigned by Firm A to its Order 1 and Order 3. The Exchange believes that temporarily bypassing an MTP modifier in this scenario is necessary to ensure that a Periodic Auction completes once it is initiated.30 Additionally, bypassing Order 3’s MTP instruction is also necessary to avoid disrupting trading in the Continuous Book, because Order 3 could perhaps post and trade while the auction is in progress. The Exchange therefore believes cancelling Order 3 based on its potential to trade in the Periodic Auction would unnecessarily prevent a Member from potentially receiving a Continuous Book execution. While the proposed MTP functionality will explicitly and automatically temporarily bypass a Member’s MTP modifier when the scenario described in Example 7 is present, the Exchange believes that such behavior appropriately balances the dual goals of ensuring that Periodic Auctions operate as designed (i.e., once initiated they will complete, executing the maximum number of shares), and still provides Members the ability to utilize MTP for their Periodic Auction Orders in majority of instances described in each of the preceding six examples.31 • Order 1—Firm A: PAE Order (MTP = Cancel Oldest), Buy 1000 @ 10.02 • Order 2—Firm B: PAE Order (MTP = Cancel Oldest), Sell 500, @ 10.02 • Action: Order 2 initiates an auction with Order 1, because Firm A and Firm B are different entities. • Order 3—Inbound order (Firm A): Continuous Book Order (MTP = Cancel Oldest), Sell 200 @ 10.02 • Action: MTP modifier on Order 3 is temporarily bypassed 30 Example 7 demonstrates the proposed functionality described in proposed Rule 11.25(e)(3). 31 The Exchange notes that the proposed MTP functionality is intended as a supplementary risk tool that Members may voluntarily use to help them manage their risk and compliance with applicable securities rules. As registered broker-dealers, Members are ultimately responsible for compliance with applicable securities rules, and should not rely on the proposed functionality as a sole means of compliance. As such, while the proposed MTP functionality will, in some instances, operate differently than it does outside of the context of Periodic Auctions, its design as a supplementary risk tool will still serve to benefit Members that choose to utilize this tool. PO 00000 Frm 00142 Fmt 4703 Sfmt 4703 52151 Result: Order 3 posts to the BYX Book prior to the end of the auction; Order 1 and Order 2 trade in the Periodic Auction for 500 @ 10.02; Order 3 then trades 200 @ 10.02 with Order 1 (bypassing MTP). 2. Statutory Basis The Exchange believes the proposed rule change is consistent with the Securities Exchange Act of 1934 (the ‘‘Act’’) and the rules and regulations thereunder applicable to the Exchange and, in particular, the requirements of Section 6(b) of the Act.32 Specifically, the Exchange believes the proposed rule change is consistent with the Section 6(b)(5) 33 requirements that the rules of an exchange be designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, to foster cooperation and coordination with persons engaged in regulating, clearing, settling, processing information with respect to, and facilitating transactions in securities, to remove impediments to and perfect the mechanism of a free and open market and a national market system, and, in general, to protect investors and the public interest. Additionally, the Exchange believes the proposed rule change is consistent with the Section 6(b)(5) 34 requirement that the rules of an exchange not be designed to permit unfair discrimination between customers, issuers, brokers, or dealers. In particular, the Exchange believes that its proposed MTP functionality is designed to promote the just and equitable principles of trade, and to protect investors and the public interest, by enabling Users to better prevent undesirable trading activity such as wash sales or self-trades for not only their Continuous Book Orders, but their Periodic Auction Orders as well. Additionally, by providing Users with a supplemental risk tool that will better enable them to achieve compliance with applicable securities rules and regulations, the proposed rule change will help to further ensure that orders eligible for execution in the Periodic Auction indeed represent genuine trading interest from separate and distinct firms. While the proposed MTP functionality would not operate identically to MTP as it is used in nonPeriodic Auction scenarios, the Exchange believes that its proposal strikes an appropriate balance between ensuring Users receive executions in the Periodic Auction and providing Users’ the ability to utilize MTP in most 32 15 33 15 U.S.C. 78f(b). U.S.C. 78f(b)(5). 34 Id. E:\FR\FM\21JNN1.SGM 21JNN1 ddrumheller on DSK120RN23PROD with NOTICES1 52152 Federal Register / Vol. 89, No. 120 / Friday, June 21, 2024 / Notices trading situations involving Periodic Auctions (as demonstrated in Examples 1—6). By making this clear to Users,35 they will be able to anticipate how MTP modifiers will interact with their Periodic Auction Orders and mitigate any confusion that Users may have in using the proposed functionality. Additionally, the Exchange believes that the proposed rule change is designed to facilitate transactions in securities, and to remove impediments to and perfect the mechanism of a free and open market and a national market system. Based on User feedback, the lack of MTP functionality for Periodic Auction Orders may discourage Users from entering Periodic Auction Orders because they do not have an automated way to systematically prevent undesirable executions resulting from orders originating from a User’s algorithm or trading desk, or their related algorithms or trading desks. In this regard, the proposed rule may encourage Users to increase their Periodic Auction participation, thereby further enhancing the Periodic Auction liquidity pool and the ability of investors to execute larger orders that may otherwise be difficult to execute without market impact in the continuous market. Additionally, because Periodic Auctions are priceforming, the enhanced liquidity pools would indeed augment Periodic Auction’s valuable price discovery function, which may be particularly helpful for investors when trading securities that typically trade with wider spreads. Again, while the proposed MTP functionality may not apply a User’s MTP modifiers in all instances, the Exchange as well as its Users believe that some level of MTP protection is more beneficial than completely foregoing MTP protection in its entirety. By making clear to Users how MTP for Periodic Auction Orders will operate, Users can better manage their use of MTP modifiers, and anticipate how their Periodic Auction Orders will behave. Finally, the Exchange further believes that the proposed rule change does not unfairly discriminate amongst Users because the proposal will allow all Periodic Auction Users to utilize MTP just as all Users entering Continuous Book Orders may utilize MTP today. In this regard, the proposed amendment will avoid disparate treatment of Users. Furthermore, the bypassing or amending 35 In addition to codifying the proposed functionality, the Exchange will send out a Member notice that includes information about the proposed MTP functionality for Periodic Auctions. VerDate Sep<11>2014 17:46 Jun 20, 2024 Jkt 262001 of MTP modifiers, as described in the Examples above, will apply equally to all Periodic Auction Users, regardless of their size. B. Self-Regulatory Organization’s Statement on Burden on Competition The Exchange does not believe that the proposed rule change will impose any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Act. MTP is an optional functionality offered by the Exchange and Periodic Auction Users are free to decide whether to use MTP in their decision-making process when submitting Periodic Auction Orders to the Exchange. Similarly, the Exchange does not believe that the proposed amendment poses a burden on intermarket competition that is not necessary or appropriate in furtherance of the Act. Indeed, the proposed rule change is designed to increase competition by offering Periodic Auction Users the ability to better manage their order flow and prevent undesirable executions. In turn, Users may be further incentivized to send additional orders to BYX’s Periodic Auction mechanism, thereby fostering competition amongst exchanges. C. Self-Regulatory Organization’s Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others The Exchange neither solicited nor received comments on the proposed rule change. III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action Within 45 days of the date of publication of this notice in the Federal Register or within such longer period up to 90 days (i) as the Commission may designate if it finds such longer period to be appropriate and publishes its reasons for so finding or (ii) as to which the Exchange consents, the Commission will: A. by order approve or disapprove such proposed rule change, or B. institute proceedings to determine whether the proposed rule change should be disapproved. IV. Solicitation of Comments Interested persons are invited to submit written data, views and arguments concerning the foregoing, including whether the proposed rule change is consistent with the Act. Comments may be submitted by any of the following methods: PO 00000 Frm 00143 Fmt 4703 Sfmt 9990 Electronic Comments • Use the Commission’s internet comment form (https://www.sec.gov/ rules/sro.shtml); or • Send an email to rule-comments@ sec.gov. Please include file number SR– CboeBYX–2024–009 on the subject line. Paper Comments • Send paper comments in triplicate to Secretary, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549–1090. All submissions should refer to file number SR–CboeBYX–2024–009. 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 principal office of the Exchange. 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 SR–CboeBYX–2024–009 and should be submitted on or before July 12, 2024. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.36 Sherry R. Haywood, Assistant Secretary. [FR Doc. 2024–13540 Filed 6–20–24; 8:45 am] BILLING CODE 8011–01–P 36 17 E:\FR\FM\21JNN1.SGM CFR 200.30–3(a)(12). 21JNN1

Agencies

SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 89, Number 120 (Friday, June 21, 2024)]
[Notices]
[Pages 52148-52152]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-13540]

[[Page 52148]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-100337; File No. SR-CboeBYX-2024-009]

Self-Regulatory Organizations; Cboe BYX Exchange, Inc.; Notice of
Filing of a Proposed Rule Change To Amend Exchange Rule 11.25(e)
(``Priority and Execution of Orders'') To Allow Users To Utilize the
Exchange's Match Trade Prevention Functionality When Entering Periodic
Auction Orders Onto the Exchange for Execution

June 14, 2024.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on June 6, 2024, Cboe BYX Exchange, Inc. (``Exchange'' or ``BYX'')
filed with the Securities and Exchange Commission (the ``Commission'')
the proposed rule change as described in Items I, II, and III below,
which Items have been prepared by the Exchange. The Commission is
publishing this notice to solicit comments on the proposed rule change
from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change

Cboe BYX Exchange, Inc. (the ``Exchange'' or ``BYX'') proposes to
amend Exchange Rule 11.25(e) (``Priority and Execution of Orders'') to
allow Users to utilize the Exchange's Match Trade Prevention
functionality when entering Periodic Auction Orders onto the Exchange
for execution. The text of the proposed rule change is provided in
Exhibit 5.
The text of the proposed rule change is also available on the
Exchange's website (https://markets.cboe.com/us/equities/regulation/rule_filings/byx/), at the Exchange's Office of the Secretary, and at
the Commission's Public Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change

In its filing with the Commission, the Exchange included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The Exchange has prepared summaries, set forth in
sections A, B, and C below, of the most significant aspects of such
statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change

1. Purpose
The Exchange proposes to amend Rule 11.25(e) to allow Users \3\ to
utilize the Exchange's Match Trade Prevention (``MTP'') functionality
when entering Periodic Auction Orders \4\ onto the Exchange for
execution.\5\ By way of background, MTP is an existing process \6\
through which Users can prevent their incoming orders designated with a
MTP modifier from executing against a resting opposite side order also
designated with an MTP modifier and originating from the same market
participant identifier (``MPID''), Exchange Member identifier, trading
group identifier, Exchange Sponsored Participant identifier, affiliate
identifier, or Multiple Access identifier (any such identifier, a
``Unique Identifier'').\7\ Both the buy and the sell order must include
the same Unique Identifier in order to prevent an execution from
occurring and to effect a cancel instruction. MTP is a valuable tool
for Exchange Users because it allows them to better manage order flow
and prevent undesirable trading activity such as wash sales \8\ or
self-trades \9\ that may occur because of the high-speed nature of
trading in today's marketplace.
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\3\ The term ``User'' shall mean any Member or Sponsored
Participant who is authorized to obtain access to the System
pursuant to Rule 11.3. See Rule 1.5(cc), definition of ``User''.
\4\ The term ``Periodic Auction Order'' shall mean a ``Periodic
Auction Only Order'' or ``Periodic Auction Eligible Order'' as those
terms are defined in Rules 11.25(b)(1)-(2), and the term ``Periodic
Auction Book'' shall mean the System's electronic file of such
Periodic Auction Orders. See Rule 11.25(a)(6). Hereinafter, a
Periodic Auction Only Order may be referred to as a ``PAO Order'',
and a Periodic Auction Eligible Order may be referred to as a, ``PAE
Order''.
\5\ The Exchange plans to implement the proposed rule change on
a date that will be circulated in a notice from the Cboe Trade Desk
to all Members.
\6\ The Exchange notes that previous proposals extending the
functionality of MTP to other trading scenarios were effective upon
filing with the Commission. See generally Securities and Exchange
Act Release No. 53429 (December 3, 2010), 75 FR 76763 (December 9,
2010) (SR-EDGX-2010-18); Securities and Exchange Act Release No. 34-
96292 (November 10, 20220), 87 FR 68766 (November 16, 2022) (SR-
CboeEDGX-2022-048).
\7\ See Rule 11.9(f)--Match Trade Prevention (``MTP'')
Modifiers.
\8\ A ``wash sale'' is generally defined as a trade involving no
change in beneficial ownership that is intended to produce the false
appearance of trading and is strictly prohibited under both the
federal securities laws and FINRA rules. See, e.g., 15 U.S.C.
78i(a)(1); FINRA Rule 6140(b) (``Other Trading Practices'').
\9\ Self-trades are ``transactions in a security resulting from
the unintentional interaction of orders originating from the same
firm that involve no change in beneficial ownership of the
security.'' FINRA requires members to have policies and procedures
in place that are reasonably designed to review trading activity
for, and prevent, a pattern or practice of self-trades resulting
from orders originating from a single algorithm or trading desk, or
related algorithms or trading desks. See FINRA Rule 5210,
Supplementary Material .02, available at: https://www.finra.org/rules-guidance/rulebooks/finra-rules/5210.
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Currently, Rule 11.25(e) states that all MTP modifiers (as defined
in Rule 11.9(f)(1)-(5)) for Periodic Auction Orders will be ignored for
executions occurring during a Periodic Auction. As part of the
Exchange's prior Periodic Auction Rule filings,\10\ the Exchange
reasoned that MTP is mainly designed for use on the Continuous
Book,\11\ and use of MTP for Periodic Eligible Orders \12\ and Periodic
Auction Only Orders \13\ (collectively, Periodic Auction Orders) may
complicate the execution of an auction that requires the pooling and
matching of multiple orders against other orders at the Periodic
Auction Book Price.\14\ Based on User feedback,

[[Page 52149]]

however, Users of Periodic Auctions desire the ability to utilize MTP
for their Periodic Auction Orders outside of a Periodic Auction to help
them manage their order flow and prevent undesirable executions against
themselves. Users are not asking to utilize MTP for their Periodic
Auction Orders when a Periodic Auction is occurring.
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\10\ See Securities and Exchange Act Release No. 34-91423 (March
26, 2021), 86 FR 17230 (April 1, 2021) (SR-CboeBYX-2020-021).
\11\ The term ``Continuous Book'' shall mean an order on the BYX
Book that is not a Periodic Auction Order, and the term ``Continuous
Book'' shall mean the System's electronic file of such Continuous
Book Orders. See Rule 11.25(a)(2), definition of ``Continuous Book
Order''.
\12\ ``A `Periodic Auction Eligible Order' is a non-displayed
limit order eligible to trade on the Continuous Book that is entered
with an instruction to also initiate a Periodic Auction, if possible
. . . Periodic Auction Eligible Orders will be ranked as Non-
Displayed Limit Orders consistent with the priority of order
outlined in Rule 11.12(a). An incoming Periodic Auction Eligible
Order that is eligible both to trade on the Continuous Book and
initiate a Periodic Auction against a Periodic Auction Only Order at
the same price will trade immediately with the Continuous Book.
Incoming Periodic Auction Eligible Orders will upon entry interact
with Continuous Book Orders and other Periodic Auction Eligible
Orders according to their rank under Rule 11.12(a). Periodic Auction
Eligible Orders will not trade on the Continuous Book during a
Periodic Auction Period in the security.'' See 11.25(b)(2).
\13\ ``A `Periodic Auction Only Order' is a non-displayed limit
order entered with an instruction to participate solely in Periodic
Auctions pursuant to this Rule 11.25. Periodic Auction Only Orders
are not eligible for executions on the Continuous Book.'' See Rule
11.25(b)(1). Hereinafter, Periodic Auction Only Orders as, ``PAO
Orders.''
\14\ ``The term `Periodic Auction Book Price' shall mean the
price within the Collar Price Range at which the most shares from
the Periodic Auction Book would match. In the event of a volume-
based tied at multiple price-levels, the Periodic Auction Book Price
will be the price that results in the minimum total imbalance. In
the event of a volume-based tie and a tie in minimum total imbalance
at multiple price levels, the Periodic Auction Book Price will be
the price closest to the Volume Based Tie Breaker. The Periodic
Auction Book Price will be expressed in the minimum increment for
the security unless the midpoint of the NBBO establishes the
Periodic Auction Book Price.'' See 11.25(a)(5), definition of
``Periodic Auction Book Price''.
---------------------------------------------------------------------------

Accordingly, the Exchange now seeks to allow Users to utilize MTP
when entering Periodic Auction Orders onto the Exchange.\15\
Importantly, allowing Users to designate Periodic Auction Orders with
MTP modifiers will not impact how the Periodic Auction itself is
conducted, and the proposed MTP functionality will not prevent the
completion of a Periodic Auction once it has been initiated. As
proposed, however, there will be instances where the Exchange has
elected to temporarily bypass a User's MTP instruction. The Exchange
believes this is necessary and appropriate to help strike a responsible
balance between providing Users with an optional risk tool to prevent
undesirable executions and ensuring that Periodic Auctions will
complete. Moreover, the current architecture and design of Exchange
Systems \16\ require that MTP for Periodic Auctions function as
described.
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\15\ The Exchange notes that previous proposals extending the
functionality of MTP to other trading scenarios were effective upon
filing with the Commission. See Securities and Exchange Act Release
No. 53429 (December 3, 2010), 75 FR 76763 (December 9, 2010) (SR-
EDGX-2010-18); see also Securities and Exchange Act Release No. 34-
96292 (November 10, 20220), 87 FR 68766 (November 16, 2022) (SR-
CboeEDGX-2022-048).
\16\ The term ``System'' shall mean the electronic
communications and trading facility designed by the Board through
which securities orders of Users are consolidated for ranking,
execution and, when applicable, routing away. See Rule 1.5(aa),
definition of ``System''.
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To illustrate how Periodic Auction Orders designated with MTP
modifiers will behave, the Exchange offers the following examples: \17\
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\17\ For each example, assume that all trade prices are within
the National Best Bid or National Best Offer (``NBBO'').
Additionally, note that while Exchange Rule 11.9(f) provides for
various MTP modifiers--including Cancel Newest, Cancel Oldest,
Decrement and Cancel, Cancel Both, and Cancel Smallest--the Examples
provided in this rule filing only demonstrate how certain of these
modifiers will operate. Including examples for every possible MTP
scenario would be difficult to efficiently demonstrate in a rule
filing. Nevertheless, the MTP modifier exemplified in the provided
Examples is not critical to understanding how the proposed
functionality will operate because as demonstrated below, when a
Periodic Auction is not in progress MTP will operate as it does
today, and when a Periodic Auction is in progress, the System will,
as described below, temporarily bypass an order's MTP instruction.
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Example 1: Two PAE Orders Matching--MTP Action Occurs
Example 1 illustrates how MTP will operate when Firm A's resting
PAE Order with an MTP modifier of MTP Cancel Oldest (``MCO''),\18\
interacts with a subsequent inbound PAE Order submitted by Firm A with
an MTP modifier of MCO and a Periodic Auction is not in progress. Here,
MTP operates in the same manner as it would for Continuous Book Orders
\19\ and predictably cancels Firm A's Order 1, based on Firm A's Order
2 MCO modifier, thereby preventing Firm A from potentially trading with
itself either on the Continuous Book or during a Periodic Auction.\20\
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\18\ MTP Cancel Oldest (``MCO'') is defined as ``[a]n incoming
order marked with the ``MCO'' modifier will not execute against
opposite side resting interest marked with any MTP modifier
originating from the same Unique Identifier. The resting order
marked with the MCO modifier will be cancelled back to the
originating User(s). The incoming order marked with the MCO modifier
will remain on the BYX Book. See Rule 11.9(f)(2).
\19\ The term ``Continuous Book Order'' shall mean an order on
the BYX Book that is not a Periodic Auction Order, and the term
``Continuous Book'' shall mean System's electronic file of such
Continuous Book Orders. See Rule 11.25(a)(2).
\20\ As MTP action is controlled by the incoming order (``. . .
the MTP modifier on the incoming order controls the interaction
between two orders marked with MTP modifiers.'' See Rule 11.21(g)),
Firm A's Order 1 was correctly cancelled in this situation. Note,
however, that if Firm A's Order 2 had included an MTP modifier of
MTP Cancel Newest (``MCN''), the result would simply be that Order 2
is instead canceled. MTP Cancel Newest (``MCN'') is defined as
``[a]n incoming order marked with the ``MCN'' modifier will not
execute against opposite side resting interest marked with any MTP
modifier originating from the same Unique Identifier. The incoming
order marked with the MCN modifier will be cancelled back to the
originating User(s). The resting order marked with an MTP modifier
will remain on the BYX Book.'' See Rule 11.9(f)(1). Similarly, if we
changed Order 1's MTP Modifier to Cancel Newest and Order 2 remained
as MTP Cancel Oldest, Order 1 would be canceled as Order 2's
instruction controls MTP action.

Order 1--Resting (Firm A): PAE Order (MTP = Cancel Oldest),
Buy 100 @ 1.00
Order 2--Inbound order (Firm A): PAE Order (MTP = Cancel
Oldest), Sell 200 @ 1.00
Result: Order 1 is canceled.
Example 2: Two PAO Orders Matching--MTP Action Occurs
Example 2 illustrates how MTP will operate when Firm A's resting
PAO Order with an MTP Modifier of MCN, interacts with Firm A's inbound
PAO Order with an MCN modifier, and a Periodic Auction is not in
progress. Here, MTP operates in the same manner as it would for
Continuous Book Orders and predictably cancels Firm A's Order 2 based
on Order 2's MCN Modifier, thereby preventing Firm A from potentially
trading with itself during a Periodic Auction.

Order 1--Resting (Firm A): PAO Order (MTP = Cancel Newest),
Buy 100 @ 1.00
Order 2--Inbound order (Firm A): PAO Order (MTP = Cancel
Newest), Sell 200 @ 1.00
Result: Order 2 is canceled

For the sake of clarity, the Exchange also wishes to explain what
would happen to Order 2 if a Periodic Auction was in progress when
Order 2 arrived. To address this scenario, assume an inbound Periodic
Auction Order from Firm B--Order X--arrived between Order 1 and Order
2, and initiated a Periodic Auction with Order 1. Here, when Order 2
arrives, and the Periodic Auction is in progress, Order 2 would still
be canceled. When a Periodic Auction is in progress, and an inbound
Periodic Auction Order is designated with an MTP modifier, and such
order matches against a resting contra-side order originating from the
same Unique Identifier that is also designated with a MTP modifier, the
inbound Periodic Auction Order will be canceled. This behavior will
enable Users to better manage their order flow and prevent undesirable
executions in Periodic Auctions, just as they do today for their
Continuous Book orders.
Example 3: Incoming PAE Order Matching Against a PAO Order--MTP Action
Occurs
Example 3 illustrates how MTP will operate when Firm A's resting
PAO Order with a MTP modifier of MTP Cancel Smallest (``MCS''),\21\
interacts with Firm A's inbound PAE Order with an MCS modifier, and an
auction is not in progress. Here, MTP operates in the same manner as it
would for Continuous Book Orders and predictably cancels Firm A's Order
1 based on Firm A's Order 2 MCS modifier because Order 1 is smaller
than Order 2, thereby preventing Firm A from potentially trading with
itself during a Periodic Auction.
---------------------------------------------------------------------------

\21\ MTP Cancel Smallest (``MCS'') is defined as ``[a]n incoming
order marked with the ``MCS'' modifier will not execute against
opposite side resting interest marked with any MTP modifier
originating from the same Unique Identifier. If both orders are
equivalent in size, both orders will be cancelled back to the
originating User(s). If the orders are not equivalent in size, the
smaller of the two orders will be cancelled back to the originating
User and the larger order will remain on the book. See Rule
11.9(f)(5).

Order 1--Resting (Firm A): PAO Order (MTP = Cancel Smallest),
Buy 100 @ 1.00

[[Page 52150]]

Order 2--Inbound order (Firm A): PAE Order (MTP = Cancel
Smallest), Sell 200 @ 1.00
Result: Order 1 is canceled.
Example 4: Incoming PAE Order Matching Against a Continuous Book
Order--MTP Action Occurs
Example 4 illustrates how MTP will operate when Firm A's incoming
PAE Order with a MCS modifier, matches against Firm A's resting
Continuous Book Order, and a Periodic Auction is not in progress. Here,
Firm's A's Order 1 is canceled based on Firm A's Order 2 MCS modifier
because Order 1 is smaller than Order 2. Because a PAE Order is
eligible to receive an execution on the Continuous Book, and both Order
1 and Order 2 are designated with MTP modifiers, the System correctly
cancels Order 1, thereby preventing Firm A from potentially trading
with itself on the Continuous Book.

Order 1--Resting (Firm A): Continuous Book order (MTP = Cancel
Smallest), Buy 100 @ 1.00
Order 2--Inbound order (Firm A): PAE Order (MTP = Cancel
Smallest), Sell 200 @ 1.00
Result: Order 1 is canceled.

For the sake of clarity, the Exchange wishes to describe what would
happen to Order 1 if a Periodic Auction was in progress when Order 2
arrived.\22\ First, note that a Continuous Book Order cannot initiate a
Periodic Auction.\23\ Therefore, to initiate a Periodic Auction in this
example, assume that two Periodic Auction Orders arrived, from Firm B
and Firm C, and in between Order 1 and Order 2--e.g., Order X (Firm B)
and Order Y (Firm C). Further assume that Order X and Order Y are
marketable versus each other. If Order X and Order Y arrived post-entry
of Order 1, and initiated a Periodic Auction, Order 2 would be included
in the Periodic Auction. The System will temporarily bypass Order 1's
MTP instruction, and Order 1 and Order 2 could then potentially trade
at the end of the Periodic Auction, assuming of course Order 1 did not
already receive an execution on the Continuous Book while the Periodic
Auction was in progress, and that Order 1 has priority as determined by
Rule 11.25(d). Note that the bypassing of the MTP modifiers in this
scenario occurs only upon entry of Order 2 to prevent the cancelation
of orders in situations where an immediate execution would not occur.
Otherwise, MTP remains in effect, and would cause the cancelation of
contra side Continuous Book Orders originating from the same Unique
Identifier as Order 1 while the Periodic Auction is in progress, as
well as the cancelation of any contras side Periodic Auction Orders
originating from the same Unique Identifier as Order 2, seeking to join
the Periodic Auction.
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\22\ This iteration of Example 4 demonstrates the proposed
functionality described in proposed Rule 11.25(e)(1).
\23\ See Rule 11.25(c), Initiation and Publication of Periodic
Auction Information, ``A Periodic Auction will be initiated in a
security during Regular Trading Hours when one or more Periodic
Auction Orders to buy become executable against one or more Periodic
Auction Orders to sell pursuant to this Rule 11.25.''
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Here, even though Order 1 and Order 2 both originated from Firm A,
and are designated with an MTP modifier, Order 1 is not canceled upon
Order 2's arrival because Order 1 is a Continuous Book Order that may
or may not end up trading with Order 2 once the Periodic Auction is
complete. Because Order 1 could receive an execution on the Continuous
Book while the Periodic Auction is in progress, the Exchange
temporarily bypasses Order 1's MTP instruction upon Order 2's arrival
to prevent Order 1 from forfeiting a Continuous Book execution based on
a possibility that Order 1 would be executable versus Order 2 at the
completion of the Periodic Auction.
Example 5: Incoming Continuous Book Order Matching Against a PAO
Order--No MTP Action Occurs
Example 5 illustrates how MTP will operate when Firm A's incoming
Continuous Book Order with an MCS modifier matches with Firm A's
resting PAO Order with an MCS modifier, and a Periodic Auction is not
in progress. Here, MTP will not be applied because PAO Orders and
Continuous Book Orders are not permitted to trade with one another.\24\
As such, MTP is not needed to prevent Firm A's Order 1 from trading
with Firm A's Order 2 and as such, Order 2 is permitted to post to the
BYX Book.
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\24\ Supra note 11 (``Periodic Auction Only Orders are not
eligible for execution on the Continuous Book.'').

Order 1--Resting (Firm A): PAO Order (MTP = Cancel Smallest),
Buy 100 @ 1.00
Order 2--Inbound order (Firm A): Continuous Book order (MTP =
Cancel Smallest), Sell 200 @ 1.00
Result: Order 2 will rest in the Continuous Book, and there is
no MTP action.
Example 6: Incoming Order Is Canceled Due to ``Periodic Auction in
Progress'' Involving a PAO Order
Example 6 illustrates how an incoming order with a MTP modifier is
canceled because a Periodic Auction is in progress.\25\ Here, Firm A's
inbound Order 2, a PAE Order to sell 200 @ 1.00, with a MTP modifier of
MTP Cancel Both (``MCB''),\26\ immediately starts an auction with Firm
B's Order 1, a resting PAO Order to Buy 100 @ 1.00. While the Periodic
Auction is in progress, Firm A enters Order 3, a PAE Order to Buy 200 @
1.00 with an MCB instruction.
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\25\ Example 6 demonstrates the proposed functionality described
in proposed Rule 11.25(e)(2).
\26\ MTP Cancel Both (``MCB'') is defined as ``[a]n incoming
order marketed with the ``MCB'' modifier will not execute against
opposite side resting interest marked with any MTP modifier
originating from the same Unique Identifier. The entire size of both
orders will be cancelled back to the originating User(s). See Rule
11.9(f)(4).
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The entry of Order 3 presents a scenario in which the Exchange
seeks to implement MTP functionality that behaves differently than
demonstrated in each of the preceding five examples. Specifically--and
only in these circumstances--when a Periodic Auction is in progress,
and an inbound PAO or PAE Order containing an MTP instruction that
matches against a contra-side order from the same firm also containing
an MTP instruction, the inbound PAO or PAE order will be canceled.
Importantly, this behavior is necessary to help ensure that once a
Periodic Auction is initiated it will be completed.
Applying this proposed behavior to Example 6's fact pattern, when
Firm A's Order 3, a PAE Order with an MCB modifier is entered after
Periodic Auction has been initiated and Order 3 subsequently matches
with Firm A's Order 2 (a PAE Order with a MCB modifier), Order 3 will
be cancelled. Without this proposed behavior, Order 3 would otherwise
be included in the Periodic Auction, and its MTP Cancel Both
instruction would result in the cancelation of Order 2, preventing the
Periodic Auction from completing, and denying Firm A an execution it
would otherwise have expected to receive. The Exchange believes that
this proposed behavior appropriately balances the dual goals of
ensuring that Periodic Auctions complete once initiated and providing
Members the ability to utilize MTP for their Periodic Auction Orders in
each of the scenarios described in the preceding five examples.\27\
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\27\ The Exchange notes that the proposed MTP functionality is
intended as a supplementary risk tool that Members may voluntarily
use to help them manage their risk and compliance with applicable
securities rules. As registered broker-dealers, Members are
ultimately responsible for compliance with applicable securities
rules, and should not rely on the proposed functionality as a sole
means of compliance. As such, while the proposed MTP functionality
will, in some instances, operate differently than it does outside of
the context of Periodic Auctions, its design as a supplementary risk
tool will still serve to benefit Members that choose to utilize this
tool.

[[Page 52151]]

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Order 1--Resting (Firm B): PAO Order, Buy 100 @ 1.00
Order 2--Inbound Order (Firm A): PAE Order (MTP = Cancel Both
\28\), Sell 200 @ 1.00
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\28\ MTP Cancel Both is defined as ``[a]n incoming order marked
with the ``MCB'' modifier will not execute against the opposite side
resting interest marked with any MTP modifier originating from the
same Unique Identifier. The entire size of both orders will be
cancelled back to the originating User(s). See Rule 11.9(f)(4).
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Action: Order 2 initiates a Periodic Auction with Order 1
Order 3--Inbound order (Firm A): PAE Order (MTP = Cancel
Both), Buy 200 @ 1.00
Action: Order's 3's MCB modifier is automatically converted to
MCN
Result: Order 3 is canceled due to ``Cancel Newest'' rule (for
Periodic Auction Orders only) that applies when there is a Periodic
Auction in progress.
Example 7: Incoming Order Has MTP Temporarily Bypassed in a Periodic
Auction
Example 7 is another example of MTP modifiers not being applied
when a Periodic Auction is in progress, despite the Member adding MTP
instructions to their Periodic Auction Order(s) and Continuous Book
Order(s). Here, Firm B's Order 2, a PAE Order with an MCO modifier,
initiates a Periodic Auction upon entry with Firm A's Order 1, a
resting PAE Order with an MCO modifier. Firm A subsequently enters a
Continuous Book Order (Hidden) with an MCO modifier. Here, the Exchange
will temporarily bypass \29\ an inbound Continuous Book Order's MTP
modifier when a Periodic Auction is in progress, and such Continuous
Book Order would post to the Continuous Book, and be eligible to
participate in the Periodic Auction, or alternatively receive an
execution from the Continuous Book. In such instance, applying the
Continuous Book Order's MPT modifier and canceling such order based on
the potential that the order could trade in the Periodic Auction, would
be unnecessarily prohibitive. By posting to the Continuous Book, such
order could still execute without violating its MTP instructions.
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\29\ The Exchange notes that the bypassing of the Continuous
Book Order's MTP modifier in this scenario is temporary. Should the
Periodic Auction complete and Order 3 does not have the opportunity
to trade with Order 1 in the Periodic Auction, then Order 3 would
remain posted on the Continuous Book with its MTP modifier and be
afforded the protections of MTP.
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Based on the proposed MTP functionality, Order 3 will post to the
BYX Book prior to the end of the Periodic Auction as the MTP modifier
is temporarily bypassed. Order 1 and Order 2 will trade in the Periodic
Auction for 500 shares @ 10.02. After trading with Order 2, Order 1
still has 500 shares remaining. Prior to the end of the Periodic
Auction, Order 3 will be matched in the Periodic Auction and trade 200
shares with Order 1 @ 10.02, bypassing the MCO modifier assigned by
Firm A to its Order 1 and Order 3.
The Exchange believes that temporarily bypassing an MTP modifier in
this scenario is necessary to ensure that a Periodic Auction completes
once it is initiated.\30\ Additionally, bypassing Order 3's MTP
instruction is also necessary to avoid disrupting trading in the
Continuous Book, because Order 3 could perhaps post and trade while the
auction is in progress. The Exchange therefore believes cancelling
Order 3 based on its potential to trade in the Periodic Auction would
unnecessarily prevent a Member from potentially receiving a Continuous
Book execution. While the proposed MTP functionality will explicitly
and automatically temporarily bypass a Member's MTP modifier when the
scenario described in Example 7 is present, the Exchange believes that
such behavior appropriately balances the dual goals of ensuring that
Periodic Auctions operate as designed (i.e., once initiated they will
complete, executing the maximum number of shares), and still provides
Members the ability to utilize MTP for their Periodic Auction Orders in
majority of instances described in each of the preceding six
examples.\31\
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\30\ Example 7 demonstrates the proposed functionality described
in proposed Rule 11.25(e)(3).
\31\ The Exchange notes that the proposed MTP functionality is
intended as a supplementary risk tool that Members may voluntarily
use to help them manage their risk and compliance with applicable
securities rules. As registered broker-dealers, Members are
ultimately responsible for compliance with applicable securities
rules, and should not rely on the proposed functionality as a sole
means of compliance. As such, while the proposed MTP functionality
will, in some instances, operate differently than it does outside of
the context of Periodic Auctions, its design as a supplementary risk
tool will still serve to benefit Members that choose to utilize this
tool.

Order 1--Firm A: PAE Order (MTP = Cancel Oldest), Buy 1000 @
10.02
Order 2--Firm B: PAE Order (MTP = Cancel Oldest), Sell 500, @
10.02
Action: Order 2 initiates an auction with Order 1, because
Firm A and Firm B are different entities.
Order 3--Inbound order (Firm A): Continuous Book Order (MTP =
Cancel Oldest), Sell 200 @ 10.02
Action: MTP modifier on Order 3 is temporarily bypassed

Result: Order 3 posts to the BYX Book prior to the end of the
auction; Order 1 and Order 2 trade in the Periodic Auction for 500 @
10.02; Order 3 then trades 200 @ 10.02 with Order 1 (bypassing MTP).
2. Statutory Basis
The Exchange believes the proposed rule change is consistent with
the Securities Exchange Act of 1934 (the ``Act'') and the rules and
regulations thereunder applicable to the Exchange and, in particular,
the requirements of Section 6(b) of the Act.\32\ Specifically, the
Exchange believes the proposed rule change is consistent with the
Section 6(b)(5) \33\ requirements that the rules of an exchange be
designed to prevent fraudulent and manipulative acts and practices, to
promote just and equitable principles of trade, to foster cooperation
and coordination with persons engaged in regulating, clearing,
settling, processing information with respect to, and facilitating
transactions in securities, to remove impediments to and perfect the
mechanism of a free and open market and a national market system, and,
in general, to protect investors and the public interest. Additionally,
the Exchange believes the proposed rule change is consistent with the
Section 6(b)(5) \34\ requirement that the rules of an exchange not be
designed to permit unfair discrimination between customers, issuers,
brokers, or dealers.
---------------------------------------------------------------------------

\32\ 15 U.S.C. 78f(b).
\33\ 15 U.S.C. 78f(b)(5).
\34\ Id.
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In particular, the Exchange believes that its proposed MTP
functionality is designed to promote the just and equitable principles
of trade, and to protect investors and the public interest, by enabling
Users to better prevent undesirable trading activity such as wash sales
or self-trades for not only their Continuous Book Orders, but their
Periodic Auction Orders as well. Additionally, by providing Users with
a supplemental risk tool that will better enable them to achieve
compliance with applicable securities rules and regulations, the
proposed rule change will help to further ensure that orders eligible
for execution in the Periodic Auction indeed represent genuine trading
interest from separate and distinct firms. While the proposed MTP
functionality would not operate identically to MTP as it is used in
non-Periodic Auction scenarios, the Exchange believes that its proposal
strikes an appropriate balance between ensuring Users receive
executions in the Periodic Auction and providing Users' the ability to
utilize MTP in most

[[Page 52152]]

trading situations involving Periodic Auctions (as demonstrated in
Examples 1--6). By making this clear to Users,\35\ they will be able to
anticipate how MTP modifiers will interact with their Periodic Auction
Orders and mitigate any confusion that Users may have in using the
proposed functionality.
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\35\ In addition to codifying the proposed functionality, the
Exchange will send out a Member notice that includes information
about the proposed MTP functionality for Periodic Auctions.
---------------------------------------------------------------------------

Additionally, the Exchange believes that the proposed rule change
is designed to facilitate transactions in securities, and to remove
impediments to and perfect the mechanism of a free and open market and
a national market system. Based on User feedback, the lack of MTP
functionality for Periodic Auction Orders may discourage Users from
entering Periodic Auction Orders because they do not have an automated
way to systematically prevent undesirable executions resulting from
orders originating from a User's algorithm or trading desk, or their
related algorithms or trading desks. In this regard, the proposed rule
may encourage Users to increase their Periodic Auction participation,
thereby further enhancing the Periodic Auction liquidity pool and the
ability of investors to execute larger orders that may otherwise be
difficult to execute without market impact in the continuous market.
Additionally, because Periodic Auctions are price-forming, the enhanced
liquidity pools would indeed augment Periodic Auction's valuable price
discovery function, which may be particularly helpful for investors
when trading securities that typically trade with wider spreads.
Again, while the proposed MTP functionality may not apply a User's
MTP modifiers in all instances, the Exchange as well as its Users
believe that some level of MTP protection is more beneficial than
completely foregoing MTP protection in its entirety. By making clear to
Users how MTP for Periodic Auction Orders will operate, Users can
better manage their use of MTP modifiers, and anticipate how their
Periodic Auction Orders will behave.
Finally, the Exchange further believes that the proposed rule
change does not unfairly discriminate amongst Users because the
proposal will allow all Periodic Auction Users to utilize MTP just as
all Users entering Continuous Book Orders may utilize MTP today. In
this regard, the proposed amendment will avoid disparate treatment of
Users. Furthermore, the bypassing or amending of MTP modifiers, as
described in the Examples above, will apply equally to all Periodic
Auction Users, regardless of their size.

B. Self-Regulatory Organization's Statement on Burden on Competition

The Exchange does not believe that the proposed rule change will
impose any burden on competition that is not necessary or appropriate
in furtherance of the purposes of the Act. MTP is an optional
functionality offered by the Exchange and Periodic Auction Users are
free to decide whether to use MTP in their decision-making process when
submitting Periodic Auction Orders to the Exchange.
Similarly, the Exchange does not believe that the proposed
amendment poses a burden on intermarket competition that is not
necessary or appropriate in furtherance of the Act. Indeed, the
proposed rule change is designed to increase competition by offering
Periodic Auction Users the ability to better manage their order flow
and prevent undesirable executions. In turn, Users may be further
incentivized to send additional orders to BYX's Periodic Auction
mechanism, thereby fostering competition amongst exchanges.

C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others

The Exchange neither solicited nor received comments on the
proposed rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action

Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period up to 90 days (i) as the
Commission may designate if it finds such longer period to be
appropriate and publishes its reasons for so finding or (ii) as to
which the Exchange consents, the Commission will:
A. by order approve or disapprove such proposed rule change, or
B. institute proceedings to determine whether the proposed rule
change should be disapproved.

IV. Solicitation of Comments

Interested persons are invited to submit written data, views and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:

Electronic Comments

Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
file number SR-CboeBYX-2024-009 on the subject line.

Paper Comments

Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.

All submissions should refer to file number SR-CboeBYX-2024-009. 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 principal office of the Exchange. 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 SR-CboeBYX-2024-009 and should
be submitted on or before July 12, 2024.

For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\36\
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\36\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2024-13540 Filed 6-20-24; 8:45 am]
BILLING CODE 8011-01-P

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