Self-Regulatory Organizations; NYSE Arca, Inc.; Order Instituting Proceedings To Determine Whether To Approve or Disapprove a Proposed Rule Change To Amend Rule 7.31-E To Adopt the Selective Midpoint Order, 12835-12838 [2025-04510]

Download as PDF Federal Register / Vol. 90, No. 52 / Wednesday, March 19, 2025 / Notices For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.35 Sherry R. Haywood, Assistant Secretary. [FR Doc. 2025–04505 Filed 3–18–25; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–102657; File No. SR– NYSEARCA–2024–112] Self-Regulatory Organizations; NYSE Arca, Inc.; Order Instituting Proceedings To Determine Whether To Approve or Disapprove a Proposed Rule Change To Amend Rule 7.31–E To Adopt the Selective Midpoint Order March 13, 2025. I. Introduction On December 18, 2024, NYSE Arca, Inc. (‘‘Exchange’’ or ‘‘NYSE Arca’’) filed with the Securities and Exchange Commission (‘‘Commission’’), pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’) 1 and Rule 19b–4 thereunder,2 a proposed rule change to amend Exchange Rule 7.31– E to adopt the Selective Midpoint (‘‘SeMi’’) Order. The proposed rule change was published for comment in the Federal Register on December 30, 2024.3 The Commission received comment on the proposal.4 On February 11, 2025, pursuant to Section 19(b)(2) of the Act,5 the Commission designated a longer period within which to approve the proposed rule change, disapprove the proposed rule change, or institute proceedings to determine whether to disapprove the proposed rule change.6 The Commission is instituting proceedings pursuant to Section 19(b)(2)(B) of the Act 7 to determine whether to approve or disapprove the proposed rule change. 35 17 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 3 See Securities Exchange Act Release No. 102005 (Dec. 19, 2024), 89 FR 106630 (Dec. 30, 2024) (‘‘Notice’’). 4 Comments received on the proposed rule change are available at: https://www.sec.gov/comments/srnysearca-2024-112/srnysearca2024112.htm. 5 15 U.S.C. 78s(b)(2). 6 See Securities Exchange Act Release No. 102401 (Feb. 11, 2025), 90 FR 9782 (Feb. 18, 2025) (designating Mar. 30, 2025, as the date by which the Commission shall either approve, disapprove, or institute proceedings to determine whether to disapprove the proposed rule change). 7 15 U.S.C. 78s(b)(2)(B). lotter on DSK11XQN23PROD with NOTICES1 1 15 VerDate Sep<11>2014 18:11 Mar 18, 2025 Jkt 265001 II. Description of the Proposed Rule Change 8 The Exchange offers the Discretionary Pegged Order (‘‘DPO’’), which is a nondisplayed order to buy (sell) that is pegged to the same side of the PBBO. Upon entry, a DPO is assigned a working price equal to the lower (higher) of the midpoint of the PBBO (the ‘‘Midpoint Price’’) or the limit price of the order.9 Any untraded shares of such order are assigned a working price equal to the lower (higher) of PBB (PBO) or the order’s limit price, which is automatically adjusted in response to changes to the PBB (PBO) for buy (sell) orders up (down) to the order’s limit price. A DPO exercises the least amount of discretion necessary from its working price to its discretionary price (defined as the lower (higher) of the Midpoint Price or the limit price of the order) to trade with contra-side interest. The Exchange proposes to modify NYSE Arca Rule 7.31–E(h)(3) to replace the DPO with the SeMi Order. As described in the Notice, the SeMi Order would be similar to the DPO in that the SeMi Order would be a non-displayed order to buy (sell) that is pegged to the same side of the PBBO that is assigned a working price equal to the lower (higher) of the Midpoint Price or the limit price of the order.10 Any untraded shares of a SeMi Order would be assigned a working price equal to the lower (higher) of the PBB (PBO) or the order’s limit price and automatically adjusted in response to changes to the PBB (PBO) for buy (sell) orders up (down) to the order’s limit price.11 In order to trade with contra-side orders on the NYSE Arca Book,12 a SeMi Order to buy (sell) would exercise the least amount of price discretion necessary from its working price to its discretionary price, which is defined as the lower (higher) of the Midpoint Price or the SeMi Order’s limit price.13 When exercising discretion, SeMi Orders (like DPOs) would maintain their time priority at their working price as Priority 3—Non-Display Orders and be prioritized behind Priority 3—NonDisplay Orders with a working price equal to the discretionary price of a 8 For a full description of the proposed rule change, refer to the Notice, supra note 3. 9 See NYSE Arca Rule 7.31–E(h)(3). As defined in NYSE Arca Rule 1.1, ‘‘PBBO’’ means the Best Protected Bid and the Best Protected Offer. NYSE Arca Rule 1.1 also defines ‘‘PBB’’ as the highest Protected Bid and ‘‘PBO’’ as the lowest Protected Offer. 10 See proposed NYSE Arca Rule 7.31–E(h)(3). 11 Id. 12 See NYSE Arca Rule 1.1. 13 Id. PO 00000 Frm 00140 Fmt 4703 Sfmt 4703 12835 SeMi Order at the time of execution.14 If multiple SeMi Orders are exercising price discretion during the same book processing action, they would maintain their relative time priority at the discretionary price.15 The Exchange is proposing to adopt new NYSE Arca Rule 7.31–E(h)(3)(D) to allow SeMi Orders to be optionally designated as Liquidity Providing.16 This functionality is not available for DPOs. An incoming SeMi Order designated as Liquidity Providing would only execute against resting orders that include a Non-Display Remove Modifier and are priced within the discretionary range of the Liquidity Providing SeMi Order. If a resting contra-side order without a Non-Display Remove Modifier is priced within an arriving Liquidity Providing SeMi Order’s discretionary range, the Liquidity Providing SeMi Order would be placed on the NYSE Arca Book, and its discretionary range would be adjusted to equal the resting price of the non-displayed contra-side order or one minimum price variation (‘‘MPV’’) less aggressive than the resting price of the displayed contra-side order.17 Further, a resting Liquidity Providing SeMi Order would not trade with an arriving contraside order that cannot remove liquidity.18 Once such arriving contraside order is placed on the NYSE Arca Book, the discretionary range of the Liquidity Providing SeMi Order would be adjusted to equal the resting price of a non-displayed contra-side order or to one MPV less aggressive than the resting price of a displayed contra-side order. Once resting on the NYSE Arca Book, the discretionary range of a Liquidity Providing SeMi Order would be adjusted based on resting contra-side interest.19 A Liquidity Providing SeMi Order to buy (sell) would not be eligible to trade at a price equal to or above (below) any sell (buy) orders that are displayed and have a working price equal to or below (above) the working price of such Liquidity Providing SeMi Order, or at a price above (below) any 14 See proposed NYSE Arca Rule 7.31–E(h)(3)(B). 15 Id. 16 See proposed NYSE Arca Rule 7.31–E(h)(3)(D). proposed NYSE Arca Rule 7.31– E(h)(3)(D)(ii). The Exchange states that allowing Liquidity Providing SeMi Orders to trade with resting orders with a Non-Display Remove Modifier, as well as adjusting the discretionary range of such orders, would be consistent with the operation of discretionary order types on other equities exchanges. See Notice, supra note 3 at 106631. 18 See proposed NYSE Arca Rule 7.31– E(h)(3)(D)(iii). The Exchange states that this proposed handling is also consistent with the handling of similar discretionary order types by other equities exchanges. 19 See proposed NYSE Arca Rule 7.31– E(h)(3)(D)(iv). 17 See E:\FR\FM\19MRN1.SGM 19MRN1 12836 Federal Register / Vol. 90, No. 52 / Wednesday, March 19, 2025 / Notices lotter on DSK11XQN23PROD with NOTICES1 sell (buy) orders that are not displayed and that have a working price below (above) the working price of such Liquidity Providing SeMi Order.20 The Exchange also proposes to add new NYSE Arca Rule 7.31–E(h)(3)(C) to provide that the SeMi Order would be ineligible to trade during unstable market conditions, as identified by the Selective Midpoint Indicator (‘‘SMI’’) (as discussed in further detail below), and would remain ineligible to trade at any price until market conditions stabilize, as determined by the SMI. The Exchange previously calculated quote stability and, when in operation, only restricted the execution of a DPO within its discretionary price range; DPOs remained eligible to execute at their working price during times determined to be unstable.21 If the SMI determines the PBB (PBO) for a particular security to be an unstable quote, both an arriving and resting SeMi Order would be ineligible to trade until there is a stable PBB (PBO) at which point the order’s working price would be adjusted. As described by the Exchange in the Notice, this functionality is designed to prevent potentially undesirable executions during volatile or unstable market conditions. As discussed above, in the past, the DPO relied on a static logistical regression model to forecast market instability and only prevented DPOs in any symbol from exercising discretion to trade when the model anticipated an unstable market.22 As proposed, the SeMi Order would rely on the SMI, a gradient-boosting machine learning model,23 to predict market instability and, if the SMI determined the market unstable, SeMi Orders would be prevented from trading at any price (as opposed to only suspending the ability to execute within price discretion). 20 See proposed NYSE Arca Rule 7.31– E(h)(3)(D)(iv)(a) and (b). 21 See Securities Exchange Act Release No. 96322 (Nov. 15, 2022), 87 FR 69376 (Nov. 18, 2022) (SR– NYSEARCA–2022–76) (Notice of Filing and Immediate Effectiveness of Proposed Rule Change to Amend Rule 7.31–E). Following a temporary suspension of the order type, the Exchange amended Rule 7.31–E(h)(3) in order to resume the use of the DPO and eliminate the functionality that calculated quote stability and potentially restricted the use of DPO discretionary range during periods of instability. 22 The Exchange eliminated its quote stability calculation in Nov. 2022. Accordingly, DPOs exercise discretion during periods that may have been considered unstable. See Notice at 102005 for a description of the Exchange’s previous use of quote instability calculations. See also supra note 19. 23 The Exchange filed a white paper as Exhibit 3 to the proposed rule change that discusses details of the SMI, which is available at https:// www.sec.gov/files/rules/sro/nysearca/2024/34102005-ex3.pdf. VerDate Sep<11>2014 18:11 Mar 18, 2025 Jkt 265001 According to the Exchange, the SMI would facilitate the SeMi Order’s ability to provide protection against potentially unfavorable executions. The Exchange developed the SMI to predict market instability, which is defined by the Exchange as relatively large price moves during a relatively short time frame using PBBO updates as the fundamental data points.24 The Exchange proposes to use two types of SMI models: (1) an individualized model for more active stocks, and (2) a market model for less active stocks that are not assigned to the individual SMI. As proposed, the Exchange would identify at least 200 (and up to 1,000) symbols that have the highest volume and quote updates and evaluate whether an individualized SMI or the market model SMI would yield better performance for those symbols. As described by the Exchange in the Notice, the symbols that would have an individual SMI model would be published on the Exchange website. The SMI would use NYSE Arca Book data, and the 83 Exchange-selected features described in the Exchange’s white paper.25 The SMI models would be retrained on a nightly basis using the data from the previous three trading days. As described in the Notice, the SMI models will use the feature weights determined from the previous night’s training and the features will be calculated using real-time intraday data. As proposed, the SMI would be integrated into the Pillar Trading platform and would have access to realtime trading data to evaluate whether the market is stable or unstable. Generally, a SeMi Order would be allowed to trade unless the SMI determines that the market is unstable, in which case a SeMi Order would be prevented from trading at any price for as long as the SMI predicts the market to be unstable. The SeMi Order would remain ineligible to trade at any price until the SMI determines that there is a return to market stability. The Exchange states that the models underlying the SMI are objective and designed to avoid bias and discrimination, and use of the SeMi Order (like use of the DPO) would be voluntary for all market participants. III. Proceedings To Determine Whether To Approve or Disapprove SR– NYSEARCA–2024–112, and Grounds for Disapproval Under Consideration The Commission is instituting proceedings pursuant to Section 19(b)(2)(B) of the Act 26 to determine 24 See Notice, supra note 3 at 106632. id. 26 15 U.S.C. 78s(b)(2)(B). 25 See PO 00000 Frm 00141 Fmt 4703 Sfmt 4703 whether the proposed rule change should be approved or disapproved. Institution of such proceedings is appropriate at this time in view of the legal and policy issues raised by the proposed rule change and the comment received thereon. Institution of proceedings does not indicate that the Commission has reached any conclusions with respect to any of the issues involved. Rather, as described below, the Commission seeks and encourages interested persons to provide additional comment on the proposed rule change to inform the Commission’s analysis of whether to approve or disapprove the proposed rule change. Pursuant to Section 19(b)(2)(B) of the Act,27 the Commission is providing notice of the grounds for possible disapproval under consideration. As described above, the Exchange has proposed to (i) replace the DPO with the SeMi Order, (ii) implement the SMI to identify periods of market instability using machine learning methods, (iii) prevent SeMi Orders from trading during such periods of instability, and (iv) permit SeMi Orders to be optionally designated as Liquidity Providing. The Commission received comment on the proposal.28 The commenter stated that ‘‘machine learning technology is not an ‘established, nondiscretionary method’ under 3b–16.’’ 29 The commenter questioned how the SMI’s use of immediate-or-cancel (‘‘IOC’’) orders and book data in its calculations is consistent with Sections 6(b)(5) and 6(b)(8) of the Act.30 The commenter stated that ‘‘not only will data from (a) an unrelated and nondisplayed order type, but orders dictated by (b) a regulatory mandate, will be used as fuel in a commercial offering’’ and that ‘‘[t]o my knowledge something like that hasn’t been done before.’’ 31 The commenter also stated that self-regulatory organizations should provide more specificity when using the terms ‘‘price’’ or ‘‘volume’’ in a proposed rule change as to whether the terms considered displayed or nondisplayed information so that ‘‘the public has all the information it needs to provide meaningful comment.’’ 32 The commenter also stated that the use of book data ‘‘includes non-displayed prices and volumes from all participants’’ for commercial purposes 27 Id. 28 See letter from R.T. Leuchtkafer dated Jan. 16, 2025 (‘‘Leuchtkafer Letter’’). 29 See Leuchtkafer Letter at 1. 30 See Leuchtkafer Letter at 2. 31 Id. 32 See Leuchtkafer Letter at 3. E:\FR\FM\19MRN1.SGM 19MRN1 Federal Register / Vol. 90, No. 52 / Wednesday, March 19, 2025 / Notices lotter on DSK11XQN23PROD with NOTICES1 ‘‘even if that commercial use is of no benefit to and could be adverse to the participant itself.’’ 33 In this regard, the commenter stated that ‘‘a threshold question for any exchange method that mines past or present non-displayed behavior to affect its market’’ to advantage unrelated participants would be ‘‘how is that consistent with 6(b)(5) and 6(b)(8)?’’ 34 Further, the commenter raised questions about the Exchange proposal to suspend some SeMi Orders but not others.35 The commenter stated that ‘‘[i]f exchanges can make their own indeterminate and undisclosed judgements about market conditions and direction using any participant data they like—related or unrelated, displayed or non-displayed, whether with a commercial or regulatory purpose—from any time period they like to (a) change an order’s material terms . . . or if exchanges can make their own indeterminate and undisclosed judgements about market direction using any data they like to (b) work some orders and not others in a stock (as with SeMi), in what sense are they still exchanges? ’’ 36 In this regard, the commenter questioned the effect of the proposal on competition. The commenter also raised questions about (1) how the Exchange would assign the individual SMI models; (2) whether the Exchange would be able to use other indices or exchange-traded funds for the market model; and (3) ‘‘what principles, if any—distinguish permissible factors in these calculations from impermissible factors? ’’ 37 Finally, the commenter stated that the proposal described that the Exchange would make changes to parameters in the SMI and decisions about whether to ‘‘implement a retrained model in production.’’ 38 The commenter questioned ‘‘how these apparently staffmade, indeterminate, and unqualified decisions are ‘established, nondiscretionary methods.’ ’’ 39 The Commission is instituting proceedings to allow for additional analysis of, and input from commenters with respect to, the proposed rule change’s consistency with the Act, and in particular, Section 6(b)(5) and 6(b)(8) of the Act. Section 6(b)(5) of the Act requires, among other things, that the rules of a national securities exchange be designed to prevent fraudulent and 33 See Leuchtkafer Letter at 2. 34 Id. 35 See Leuchtkafer Letter at 3. 36 Id. 37 Id. 38 Id. 39 Id. VerDate Sep<11>2014 18:11 Mar 18, 2025 Jkt 265001 manipulative acts and practices, to promote just and equitable principles of trade, 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; and not be designed to permit unfair discrimination between customers, issuers, brokers or dealers.40 Section 6(b)(8) of the Act requires that the rules of a national securities exchange not impose any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Act.41 The Commission asks that commenters address the sufficiency of the Exchange’s statements in support of the proposal, which are set forth in the Notice, in addition to any other comments they may wish to submit about the proposed rule change. IV. Procedure: Request for Written Comments The Commission requests that interested persons provide written submissions of their data, views, 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 proposed rule change, is consistent with Sections 6(b)(5) and 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 data, views, and arguments, the Commission will consider, pursuant to Rule 19b–4 under the Act,42 any request for an opportunity to make an oral presentation.43 Interested persons are invited to submit written data, views, and arguments regarding whether the proposed rule change should be approved or disapproved by April 9, 2025. Any person who wishes to file a rebuttal to any other person’s submission must file that rebuttal by April 23, 2025. The Commission asks that commenters address the sufficiency 40 15 U.S.C. 78f(b)(5). U.S.C. 78f(b)(8). 42 17 CFR 240.19b–4. 43 Section 19(b)(2) of the Act, as amended by the Securities Acts Amendments of 1975, Public Law 94–29 (Jun. 4, 1975), grants to the Commission flexibility to determine what type of proceeding— either oral or notice and opportunity for written comments—is appropriate for consideration of a particular proposal by a self-regulatory organization. See Securities Acts Amendments of 1975, Senate Comm. on Banking, Housing & Urban Affairs, S. Rep. No. 75, 94th Cong., 1st Sess. 30 (1975). 41 15 PO 00000 Frm 00142 Fmt 4703 Sfmt 4703 12837 of the Exchange’s statements in support of the proposal, in addition to any other comments they may wish to submit about the proposed rule change. Comments may be submitted by any of the following methods: Electronic Comments • Use the Commission’s internet comment form (https://www.sec.gov/ rules/sro.shtml); or • Send an email to rule-comments@ sec.gov. Please include file number SR– NYSEARCA–2024–112 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–NYSEARCA–2024–112. 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–NYSEARCA–2024–112 and should be submitted by April 9, 2025. Rebuttal comments should be submitted by April 23, 2025. E:\FR\FM\19MRN1.SGM 19MRN1 12838 Federal Register / Vol. 90, No. 52 / Wednesday, March 19, 2025 / Notices For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.44 Vanessa A. Countryman, Secretary. [FR Doc. 2025–04510 Filed 3–18–25; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [OMB Control No. 3235–0633] lotter on DSK11XQN23PROD with NOTICES1 Proposed Collection; Comment Request; Extension: Rule 0–4 Upon Written Request, Copies Available From: Securities and Exchange Commission, Office of FOIA Services, 100 F Street NE, Washington, DC 20549–2736 Notice is hereby given that pursuant to the Paperwork Reduction Act of 1995 (44 U.S.C. 3501 et seq.), the Securities and Exchange Commission (the ‘‘Commission’’) is soliciting comments on the collection of information summarized below. The Commission plans to submit this collection of information to the Office of Management and Budget for extension and approval. Rule 0–4 (17 CFR 275.0–4) under the Investment Advisers Act of 1940 (‘‘Act’’ or ‘‘Advisers Act’’) (15 U.S.C. 80b–1 et seq.) entitled ‘‘General Requirements of Papers and Applications,’’ prescribes general instructions for filing an application seeking exemptive relief with the Commission. The requirements of rule 0–4 are designed to provide Commission staff with the necessary information to assess whether granting the Orders of exemption are necessary and appropriate in the public interest and consistent with the protection of investors and the intended purposes of the Act. Applicants for Orders under the Advisers Act can include registered investment advisers, affiliated persons of registered investment advisers, and entities seeking to avoid investment adviser status, among others. Commission staff estimates that it receives up to 7 applications per year submitted under rule 0–4 of the Act seeking relief from various provisions of the Advisers Act. Although each application typically is submitted on behalf of multiple applicants, the applicants in the vast majority of cases are related entities and are treated as a single respondent for purposes of this analysis. Most of the work of preparing an application is performed by outside 44 17 CFR 200.30–3(a)(57). VerDate Sep<11>2014 18:11 Mar 18, 2025 Jkt 265001 counsel and, therefore, imposes no hourly burden on respondents. The cost outside counsel charges applicants depends on the complexity of the issues covered by the application and the time required. Based on conversations with applicants and attorneys, the cost for applications ranges from approximately $15,259.94 for preparing a wellprecedented, routine (or otherwise less involved) application to approximately $238,761.88 to prepare a complex or novel application. We estimate that the Commission receives 1 of the most timeconsuming applications annually, 3 applications of medium difficulty, and 3 of the least difficult applications subject to rule 0–4. This distribution gives a total estimated annual cost burden to applicants of filing all applications of $440,387.38 [(1 × $238,761.88) + (3 × $51,948.56) + (3 × $15,259.94)]. The estimate of annual cost burden is made solely for the purposes of the Paperwork Reduction Act and is not derived from a comprehensive or even representative survey or study of the costs of Commission rules and forms. The requirements of this collection of information are required to obtain or retain benefits. Responses will not be kept confidential. An agency may not conduct or sponsor, and a person is not required to respond to a collection of information unless it displays a currently valid control number. Written comments are invited on: (a) whether the proposed collection of information is necessary for the proper performance of the functions of the Commission, including whether the information shall have practical utility; (b) the accuracy of the Commission’s estimate of the burden of the collection of information; (c) ways to enhance the quality, utility, and clarity of the information collected; and (d) ways to minimize the burden of the collection of information on respondents, including through the use of automated collection techniques or other forms of information technology. Consideration will be given to comments and suggestions submitted by May 19, 2025. An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information under the PRA unless it displays a currently valid OMB control number. Please direct your written comments to: Austin Gerig, Director/Chief Data Officer, Securities and Exchange Commission, c/o Tanya Ruttenberg, 100 F Street NE, Washington, DC 20549 or send an email to: PaperworkReductionAct@sec.gov. PO 00000 Frm 00143 Fmt 4703 Sfmt 4703 Dated: March 14, 2025. Vanessa A. Countryman, Secretary. [FR Doc. 2025–04569 Filed 3–18–25; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–102649; File No. SR– CboeEDGX–2025–018] Self-Regulatory Organizations; Cboe EDGX Exchange, Inc.; Notice of Filing of a Proposed Rule Change To Amend Rule 19.3 To Permit the Listing of Options on Commodity-Based Trust Shares March 13, 2025. 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 March 5, 2025, Cboe EDGX Exchange, Inc. (the ‘‘Exchange’’ or ‘‘EDGX’’) filed with the Securities and Exchange Commission (‘‘Commission’’) the proposed rule change as described in Items I, II, and III below, which Items have been prepared by the Exchange. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change Cboe EDGX Exchange, Inc. (the ‘‘Exchange’’ or ‘‘EDGX Options’’) proposes to amend Rule 19.3 to permit the listing of options on CommodityBased Trust Shares. 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/ options/regulation/rule_filings/edgx/), 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 1 15 2 17 U.S.C. 78s(b)(1). CFR 240.19b–4. E:\FR\FM\19MRN1.SGM 19MRN1

Agencies

[Federal Register Volume 90, Number 52 (Wednesday, March 19, 2025)]
[Notices]
[Pages 12835-12838]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2025-04510]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-102657; File No. SR-NYSEARCA-2024-112]


Self-Regulatory Organizations; NYSE Arca, Inc.; Order Instituting 
Proceedings To Determine Whether To Approve or Disapprove a Proposed 
Rule Change To Amend Rule 7.31-E To Adopt the Selective Midpoint Order

March 13, 2025.

I. Introduction

    On December 18, 2024, NYSE Arca, Inc. (``Exchange'' or ``NYSE 
Arca'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change to amend Exchange Rule 7.31-E to adopt the 
Selective Midpoint (``SeMi'') Order. The proposed rule change was 
published for comment in the Federal Register on December 30, 2024.\3\ 
The Commission received comment on the proposal.\4\ On February 11, 
2025, pursuant to Section 19(b)(2) of the Act,\5\ the Commission 
designated a longer period within which to approve the proposed rule 
change, disapprove the proposed rule change, or institute proceedings 
to determine whether to disapprove the proposed rule change.\6\ The 
Commission is instituting proceedings pursuant to Section 19(b)(2)(B) 
of the Act \7\ to determine whether to approve or disapprove the 
proposed rule change.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 102005 (Dec. 19, 
2024), 89 FR 106630 (Dec. 30, 2024) (``Notice'').
    \4\ Comments received on the proposed rule change are available 
at: https://www.sec.gov/comments/sr-nysearca-2024-112/srnysearca2024112.htm.
    \5\ 15 U.S.C. 78s(b)(2).
    \6\ See Securities Exchange Act Release No. 102401 (Feb. 11, 
2025), 90 FR 9782 (Feb. 18, 2025) (designating Mar. 30, 2025, as the 
date by which the Commission shall either approve, disapprove, or 
institute proceedings to determine whether to disapprove the 
proposed rule change).
    \7\ 15 U.S.C. 78s(b)(2)(B).
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II. Description of the Proposed Rule Change 8
---------------------------------------------------------------------------

    \8\ For a full description of the proposed rule change, refer to 
the Notice, supra note 3.
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    The Exchange offers the Discretionary Pegged Order (``DPO''), which 
is a non-displayed order to buy (sell) that is pegged to the same side 
of the PBBO. Upon entry, a DPO is assigned a working price equal to the 
lower (higher) of the midpoint of the PBBO (the ``Midpoint Price'') or 
the limit price of the order.\9\ Any untraded shares of such order are 
assigned a working price equal to the lower (higher) of PBB (PBO) or 
the order's limit price, which is automatically adjusted in response to 
changes to the PBB (PBO) for buy (sell) orders up (down) to the order's 
limit price. A DPO exercises the least amount of discretion necessary 
from its working price to its discretionary price (defined as the lower 
(higher) of the Midpoint Price or the limit price of the order) to 
trade with contra-side interest.
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    \9\ See NYSE Arca Rule 7.31-E(h)(3). As defined in NYSE Arca 
Rule 1.1, ``PBBO'' means the Best Protected Bid and the Best 
Protected Offer. NYSE Arca Rule 1.1 also defines ``PBB'' as the 
highest Protected Bid and ``PBO'' as the lowest Protected Offer.
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    The Exchange proposes to modify NYSE Arca Rule 7.31-E(h)(3) to 
replace the DPO with the SeMi Order. As described in the Notice, the 
SeMi Order would be similar to the DPO in that the SeMi Order would be 
a non-displayed order to buy (sell) that is pegged to the same side of 
the PBBO that is assigned a working price equal to the lower (higher) 
of the Midpoint Price or the limit price of the order.\10\ Any untraded 
shares of a SeMi Order would be assigned a working price equal to the 
lower (higher) of the PBB (PBO) or the order's limit price and 
automatically adjusted in response to changes to the PBB (PBO) for buy 
(sell) orders up (down) to the order's limit price.\11\ In order to 
trade with contra-side orders on the NYSE Arca Book,\12\ a SeMi Order 
to buy (sell) would exercise the least amount of price discretion 
necessary from its working price to its discretionary price, which is 
defined as the lower (higher) of the Midpoint Price or the SeMi Order's 
limit price.\13\ When exercising discretion, SeMi Orders (like DPOs) 
would maintain their time priority at their working price as Priority 
3--Non-Display Orders and be prioritized behind Priority 3--Non-Display 
Orders with a working price equal to the discretionary price of a SeMi 
Order at the time of execution.\14\ If multiple SeMi Orders are 
exercising price discretion during the same book processing action, 
they would maintain their relative time priority at the discretionary 
price.\15\
---------------------------------------------------------------------------

    \10\ See proposed NYSE Arca Rule 7.31-E(h)(3).
    \11\ Id.
    \12\ See NYSE Arca Rule 1.1.
    \13\ Id.
    \14\ See proposed NYSE Arca Rule 7.31-E(h)(3)(B).
    \15\ Id.
---------------------------------------------------------------------------

    The Exchange is proposing to adopt new NYSE Arca Rule 7.31-
E(h)(3)(D) to allow SeMi Orders to be optionally designated as 
Liquidity Providing.\16\ This functionality is not available for DPOs. 
An incoming SeMi Order designated as Liquidity Providing would only 
execute against resting orders that include a Non-Display Remove 
Modifier and are priced within the discretionary range of the Liquidity 
Providing SeMi Order. If a resting contra-side order without a Non-
Display Remove Modifier is priced within an arriving Liquidity 
Providing SeMi Order's discretionary range, the Liquidity Providing 
SeMi Order would be placed on the NYSE Arca Book, and its discretionary 
range would be adjusted to equal the resting price of the non-displayed 
contra-side order or one minimum price variation (``MPV'') less 
aggressive than the resting price of the displayed contra-side 
order.\17\ Further, a resting Liquidity Providing SeMi Order would not 
trade with an arriving contra-side order that cannot remove 
liquidity.\18\ Once such arriving contra-side order is placed on the 
NYSE Arca Book, the discretionary range of the Liquidity Providing SeMi 
Order would be adjusted to equal the resting price of a non-displayed 
contra-side order or to one MPV less aggressive than the resting price 
of a displayed contra-side order. Once resting on the NYSE Arca Book, 
the discretionary range of a Liquidity Providing SeMi Order would be 
adjusted based on resting contra-side interest.\19\ A Liquidity 
Providing SeMi Order to buy (sell) would not be eligible to trade at a 
price equal to or above (below) any sell (buy) orders that are 
displayed and have a working price equal to or below (above) the 
working price of such Liquidity Providing SeMi Order, or at a price 
above (below) any

[[Page 12836]]

sell (buy) orders that are not displayed and that have a working price 
below (above) the working price of such Liquidity Providing SeMi 
Order.\20\
---------------------------------------------------------------------------

    \16\ See proposed NYSE Arca Rule 7.31-E(h)(3)(D).
    \17\ See proposed NYSE Arca Rule 7.31-E(h)(3)(D)(ii). The 
Exchange states that allowing Liquidity Providing SeMi Orders to 
trade with resting orders with a Non-Display Remove Modifier, as 
well as adjusting the discretionary range of such orders, would be 
consistent with the operation of discretionary order types on other 
equities exchanges. See Notice, supra note 3 at 106631.
    \18\ See proposed NYSE Arca Rule 7.31-E(h)(3)(D)(iii). The 
Exchange states that this proposed handling is also consistent with 
the handling of similar discretionary order types by other equities 
exchanges.
    \19\ See proposed NYSE Arca Rule 7.31-E(h)(3)(D)(iv).
    \20\ See proposed NYSE Arca Rule 7.31-E(h)(3)(D)(iv)(a) and (b).
---------------------------------------------------------------------------

    The Exchange also proposes to add new NYSE Arca Rule 7.31-
E(h)(3)(C) to provide that the SeMi Order would be ineligible to trade 
during unstable market conditions, as identified by the Selective 
Midpoint Indicator (``SMI'') (as discussed in further detail below), 
and would remain ineligible to trade at any price until market 
conditions stabilize, as determined by the SMI. The Exchange previously 
calculated quote stability and, when in operation, only restricted the 
execution of a DPO within its discretionary price range; DPOs remained 
eligible to execute at their working price during times determined to 
be unstable.\21\ If the SMI determines the PBB (PBO) for a particular 
security to be an unstable quote, both an arriving and resting SeMi 
Order would be ineligible to trade until there is a stable PBB (PBO) at 
which point the order's working price would be adjusted. As described 
by the Exchange in the Notice, this functionality is designed to 
prevent potentially undesirable executions during volatile or unstable 
market conditions.
---------------------------------------------------------------------------

    \21\ See Securities Exchange Act Release No. 96322 (Nov. 15, 
2022), 87 FR 69376 (Nov. 18, 2022) (SR-NYSEARCA-2022-76) (Notice of 
Filing and Immediate Effectiveness of Proposed Rule Change to Amend 
Rule 7.31-E). Following a temporary suspension of the order type, 
the Exchange amended Rule 7.31-E(h)(3) in order to resume the use of 
the DPO and eliminate the functionality that calculated quote 
stability and potentially restricted the use of DPO discretionary 
range during periods of instability.
---------------------------------------------------------------------------

    As discussed above, in the past, the DPO relied on a static 
logistical regression model to forecast market instability and only 
prevented DPOs in any symbol from exercising discretion to trade when 
the model anticipated an unstable market.\22\ As proposed, the SeMi 
Order would rely on the SMI, a gradient-boosting machine learning 
model,\23\ to predict market instability and, if the SMI determined the 
market unstable, SeMi Orders would be prevented from trading at any 
price (as opposed to only suspending the ability to execute within 
price discretion). According to the Exchange, the SMI would facilitate 
the SeMi Order's ability to provide protection against potentially 
unfavorable executions. The Exchange developed the SMI to predict 
market instability, which is defined by the Exchange as relatively 
large price moves during a relatively short time frame using PBBO 
updates as the fundamental data points.\24\
---------------------------------------------------------------------------

    \22\ The Exchange eliminated its quote stability calculation in 
Nov. 2022. Accordingly, DPOs exercise discretion during periods that 
may have been considered unstable. See Notice at 102005 for a 
description of the Exchange's previous use of quote instability 
calculations. See also supra note 19.
    \23\ The Exchange filed a white paper as Exhibit 3 to the 
proposed rule change that discusses details of the SMI, which is 
available at https://www.sec.gov/files/rules/sro/nysearca/2024/34-102005-ex3.pdf.
    \24\ See Notice, supra note 3 at 106632.
---------------------------------------------------------------------------

    The Exchange proposes to use two types of SMI models: (1) an 
individualized model for more active stocks, and (2) a market model for 
less active stocks that are not assigned to the individual SMI. As 
proposed, the Exchange would identify at least 200 (and up to 1,000) 
symbols that have the highest volume and quote updates and evaluate 
whether an individualized SMI or the market model SMI would yield 
better performance for those symbols. As described by the Exchange in 
the Notice, the symbols that would have an individual SMI model would 
be published on the Exchange website.
    The SMI would use NYSE Arca Book data, and the 83 Exchange-selected 
features described in the Exchange's white paper.\25\ The SMI models 
would be retrained on a nightly basis using the data from the previous 
three trading days. As described in the Notice, the SMI models will use 
the feature weights determined from the previous night's training and 
the features will be calculated using real-time intraday data.
---------------------------------------------------------------------------

    \25\ See id.
---------------------------------------------------------------------------

    As proposed, the SMI would be integrated into the Pillar Trading 
platform and would have access to real-time trading data to evaluate 
whether the market is stable or unstable. Generally, a SeMi Order would 
be allowed to trade unless the SMI determines that the market is 
unstable, in which case a SeMi Order would be prevented from trading at 
any price for as long as the SMI predicts the market to be unstable. 
The SeMi Order would remain ineligible to trade at any price until the 
SMI determines that there is a return to market stability. The Exchange 
states that the models underlying the SMI are objective and designed to 
avoid bias and discrimination, and use of the SeMi Order (like use of 
the DPO) would be voluntary for all market participants.

III. Proceedings To Determine Whether To Approve or Disapprove SR-
NYSEARCA-2024-112, and Grounds for Disapproval Under Consideration

    The Commission is instituting proceedings pursuant to Section 
19(b)(2)(B) of the Act \26\ to determine whether the proposed rule 
change should be approved or disapproved. Institution of such 
proceedings is appropriate at this time in view of the legal and policy 
issues raised by the proposed rule change and the comment received 
thereon. Institution of proceedings does not indicate that the 
Commission has reached any conclusions with respect to any of the 
issues involved. Rather, as described below, the Commission seeks and 
encourages interested persons to provide additional comment on the 
proposed rule change to inform the Commission's analysis of whether to 
approve or disapprove the proposed rule change.
---------------------------------------------------------------------------

    \26\ 15 U.S.C. 78s(b)(2)(B).
---------------------------------------------------------------------------

    Pursuant to Section 19(b)(2)(B) of the Act,\27\ the Commission is 
providing notice of the grounds for possible disapproval under 
consideration. As described above, the Exchange has proposed to (i) 
replace the DPO with the SeMi Order, (ii) implement the SMI to identify 
periods of market instability using machine learning methods, (iii) 
prevent SeMi Orders from trading during such periods of instability, 
and (iv) permit SeMi Orders to be optionally designated as Liquidity 
Providing.
---------------------------------------------------------------------------

    \27\ Id.
---------------------------------------------------------------------------

    The Commission received comment on the proposal.\28\ The commenter 
stated that ``machine learning technology is not an `established, non-
discretionary method' under 3b-16.'' \29\ The commenter questioned how 
the SMI's use of immediate-or-cancel (``IOC'') orders and book data in 
its calculations is consistent with Sections 6(b)(5) and 6(b)(8) of the 
Act.\30\ The commenter stated that ``not only will data from (a) an 
unrelated and non-displayed order type, but orders dictated by (b) a 
regulatory mandate, will be used as fuel in a commercial offering'' and 
that ``[t]o my knowledge something like that hasn't been done before.'' 
\31\ The commenter also stated that self-regulatory organizations 
should provide more specificity when using the terms ``price'' or 
``volume'' in a proposed rule change as to whether the terms considered 
displayed or non-displayed information so that ``the public has all the 
information it needs to provide meaningful comment.'' \32\ The 
commenter also stated that the use of book data ``includes non-
displayed prices and volumes from all participants'' for commercial 
purposes

[[Page 12837]]

``even if that commercial use is of no benefit to and could be adverse 
to the participant itself.'' \33\ In this regard, the commenter stated 
that ``a threshold question for any exchange method that mines past or 
present non-displayed behavior to affect its market'' to advantage 
unrelated participants would be ``how is that consistent with 6(b)(5) 
and 6(b)(8)?'' \34\
---------------------------------------------------------------------------

    \28\ See letter from R.T. Leuchtkafer dated Jan. 16, 2025 
(``Leuchtkafer Letter'').
    \29\ See Leuchtkafer Letter at 1.
    \30\ See Leuchtkafer Letter at 2.
    \31\ Id.
    \32\ See Leuchtkafer Letter at 3.
    \33\ See Leuchtkafer Letter at 2.
    \34\ Id.
---------------------------------------------------------------------------

    Further, the commenter raised questions about the Exchange proposal 
to suspend some SeMi Orders but not others.\35\ The commenter stated 
that ``[i]f exchanges can make their own indeterminate and undisclosed 
judgements about market conditions and direction using any participant 
data they like--related or unrelated, displayed or non-displayed, 
whether with a commercial or regulatory purpose--from any time period 
they like to (a) change an order's material terms . . . or if exchanges 
can make their own indeterminate and undisclosed judgements about 
market direction using any data they like to (b) work some orders and 
not others in a stock (as with SeMi), in what sense are they still 
exchanges? '' \36\ In this regard, the commenter questioned the effect 
of the proposal on competition. The commenter also raised questions 
about (1) how the Exchange would assign the individual SMI models; (2) 
whether the Exchange would be able to use other indices or exchange-
traded funds for the market model; and (3) ``what principles, if any--
distinguish permissible factors in these calculations from 
impermissible factors? '' \37\ Finally, the commenter stated that the 
proposal described that the Exchange would make changes to parameters 
in the SMI and decisions about whether to ``implement a retrained model 
in production.'' \38\ The commenter questioned ``how these apparently 
staff-made, indeterminate, and unqualified decisions are `established, 
nondiscretionary methods.' '' \39\
---------------------------------------------------------------------------

    \35\ See Leuchtkafer Letter at 3.
    \36\ Id.
    \37\ Id.
    \38\ Id.
    \39\ Id.
---------------------------------------------------------------------------

    The Commission is instituting proceedings to allow for additional 
analysis of, and input from commenters with respect to, the proposed 
rule change's consistency with the Act, and in particular, Section 
6(b)(5) and 6(b)(8) of the Act. Section 6(b)(5) of the Act requires, 
among other things, that the rules of a national securities exchange be 
designed to prevent fraudulent and manipulative acts and practices, to 
promote just and equitable principles of trade, 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; and not be designed to permit unfair discrimination between 
customers, issuers, brokers or dealers.\40\ Section 6(b)(8) of the Act 
requires that the rules of a national securities exchange not impose 
any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act.\41\
---------------------------------------------------------------------------

    \40\ 15 U.S.C. 78f(b)(5).
    \41\ 15 U.S.C. 78f(b)(8).
---------------------------------------------------------------------------

    The Commission asks that commenters address the sufficiency of the 
Exchange's statements in support of the proposal, which are set forth 
in the Notice, in addition to any other comments they may wish to 
submit about the proposed rule change.

IV. Procedure: Request for Written Comments

    The Commission requests that interested persons provide written 
submissions of their data, views, 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 proposed rule 
change, is consistent with Sections 6(b)(5) and 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 data, 
views, and arguments, the Commission will consider, pursuant to Rule 
19b-4 under the Act,\42\ any request for an opportunity to make an oral 
presentation.\43\
---------------------------------------------------------------------------

    \42\ 17 CFR 240.19b-4.
    \43\ Section 19(b)(2) of the Act, as amended by the Securities 
Acts Amendments of 1975, Public Law 94-29 (Jun. 4, 1975), grants to 
the Commission flexibility to determine what type of proceeding--
either oral or notice and opportunity for written comments--is 
appropriate for consideration of a particular proposal by a self-
regulatory organization. See Securities Acts Amendments of 1975, 
Senate Comm. on Banking, Housing & Urban Affairs, S. Rep. No. 75, 
94th Cong., 1st Sess. 30 (1975).
---------------------------------------------------------------------------

    Interested persons are invited to submit written data, views, and 
arguments regarding whether the proposed rule change should be approved 
or disapproved by April 9, 2025. Any person who wishes to file a 
rebuttal to any other person's submission must file that rebuttal by 
April 23, 2025. The Commission asks that commenters address the 
sufficiency of the Exchange's statements in support of the proposal, in 
addition to any other comments they may wish to submit about the 
proposed rule change.
    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-NYSEARCA-2024-112 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-NYSEARCA-2024-112. 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-NYSEARCA-2024-112 and should 
be submitted by April 9, 2025. Rebuttal comments should be submitted by 
April 23, 2025.


[[Page 12838]]


    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\44\
---------------------------------------------------------------------------

    \44\ 17 CFR 200.30-3(a)(57).
---------------------------------------------------------------------------

Vanessa A. Countryman,
Secretary.
[FR Doc. 2025-04510 Filed 3-18-25; 8:45 am]
BILLING CODE 8011-01-P
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