83 FR 3205 - Self-Regulatory Organizations; Bats BZX Exchange, Inc.; Notice of Filing of Amendment No. 1 and Order Granting Approval of a Proposed Rule Change, as Modified by Amendment No. 1, To Introduce Cboe Market Close, a Closing Match Process for Non-BZX Listed Securities Under New Exchange Rule 11.28
SECURITIES AND EXCHANGE COMMISSION Federal Register Volume 83, Issue 15 (January 23, 2018)
Federal Register Volume 83, Issue 15 (January 23, 2018)
| Page Range | 3205-3224 | |
| FR Document | 2018-01093 |
[Federal Register Volume 83, Number 15 (Tuesday, January 23, 2018)] [Notices] [Pages 3205-3224] From the Federal Register Online [www.thefederalregister.org] [FR Doc No: 2018-01093] ----------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION [Release No. 34-82522; File No. SR-BatsBZX-2017-34] Self-Regulatory Organizations; Bats BZX Exchange, Inc.; Notice of Filing of Amendment No. 1 and Order Granting Approval of a Proposed Rule Change, as Modified by Amendment No. 1, To Introduce Cboe Market Close, a Closing Match Process for Non-BZX Listed Securities Under New Exchange Rule 11.28 January 17, 2018. I. Introduction On May 5, 2017, Bats BZX Exchange, Inc. (now known as Cboe BZX Exchange, Inc.) (``BZX'' or ``Exchange'') 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 adopt Bats Market Close, a closing match process for non-BZX Listed Securities. The proposed rule change was published for comment in the Federal Register on May 22, 2017.\3\ On July 3, 2017, 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 the proposed rule change should be disapproved.\4\ The Commission received 54 comment letters on the proposed rule change, including a response from the Exchange.\5\ On August 18, 2017, the Commission instituted proceedings under Section 19(b)(2)(B) of the Act \6\ to determine whether to approve or disapprove the proposed rule change.\7\ Thereafter, the Commission received nine more comment letters, including three responses from the Exchange.\8\ On [[Page 3206]] November 17, 2017, pursuant to Section 19(b)(2) of the Act,\9\ the Commission designated a longer period for Commission action on proceedings to determine whether to disapprove the proposed rule change.\10\ On December 1, 2017, the Exchange filed Amendment No. 1 to the proposed rule change, renaming ``Bats Market Close'' as ``Cboe Market Close.'' \11\ This order approves 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. 80683 (May 16, 2017), 82 FR 23320 (``Notice''). \4\ See Securities Exchange Act Release No. 81072, 82 FR 31792 (July 10, 2017). \5\ See Letters to Brent J. Fields, Secretary, Commission, from: (1) Donald K. Ross, Jr., Executive Chairman, PDQ Enterprise, LLC, dated June 6, 2017 (``PDQ Letter''); (2) Edward S. Knight, Executive Vice President and General Counsel, Nasdaq, Inc., dated June 12, 2017 (``Nasdaq Letter 1''); (3) Ray Ross, Chief Technology Officer, Clearpool Group, dated June 12, 2017 (``Clearpool Letter''); (4) Venu Palaparthi, SVP, Compliance, Regulatory and Government Affairs, Virtu Financial, dated June 12, 2017 (``Virtu Letter''); (5) Theodore R. Lazo, Managing Director and Associate General Counsel, SIFMA, dated June 13, 2017 (``SIFMA Letter 1''); (6) Elizabeth K. King, General Counsel and Corporate Secretary, New York Stock Exchange (``NYSE''), dated June 13, 2017 (``NYSE Letter 1''); (7) John M. Bowers, Bowers Securities, dated June 14, 2017 (``Bowers Letter''); (8) Jonathan D. Corpina, Senior Managing Partner, Meridian Equity Partners, dated June 16, 2017 (``Meridian Letter''); (9) Fady Tanios, Chief Executive Officer, and Brian Fraioli, Chief Compliance Officer, Americas Executions, LLC, dated June 16, 2017 (``Americas Executions Letter''); (10) Ari M. Rubenstein, Co-Founder and Chief Executive Officer, GTS Securities LLC, dated June 22, 2017 (``GTS Securities Letter 1''); (11) John Ramsay, Chief Market Policy Officer, Investors Exchange LLC, dated June 23, 2017 (``IEX Letter''); (12) Jay S. Sidhu, Chairman, Chief Executive Officer, Customers Bancorp, Inc., dated June 27, 2017 (``Customers Bancorp Letter''); (13) Joanne Freiberger, Vice President, Treasurer, Masonite International Corporation, dated June 27, 2017 (``Masonite International Letter''); (14) David B. Griffith, Investor Relations Manager, Orion Group Holdings, Inc., dated June 27, 2017 (``Orion Group Letter''); (15) Kieran O'Sullivan, Chairman, President and CEO, CTS Corporation, dated June 28, 2017 (``CTS Corporation Letter''); (16) Sherri Brillon, Executive Vice-President and Chief Financial Officer, Encana Corporation, dated June 29, 2017 (``Encana Letter''); (17) Steven C. Lilly, Chief Financial Officer, Triangle Capital Corporation, dated June 29, 2017 (``Triangle Capital Letter''); (18) Robert F. McCadden, Executive Vice President and Chief Financial Officer, Pennsylvania Real Estate Investment Trust, dated June 29, 2017 (``Pennsylvania REIT Letter''); (19) Andrew Stevens, General Counsel, IMC Financial Markets, dated June 30, 2017 (``IMC Letter''); (20) Daniel S. Tucker, Senior Vice President and Treasurer, Southern Company, dated July 5, 2017 (``Southern Company Letter''); (21) Cole Stevens, Investor Relations Associate, Nobilis Health, dated July 6, 2017 (``Nobilis Health Letter''); (22) Mehmet Kinak, Head of Global Equity Market Structure & Electronic Trading, et al., T. Rowe Price Associates, Inc., dated July 7, 2017 (``T. Rowe Price Letter''); (23) David L. Dragics, Senior Vice President, Investor Relations, CACI International Inc., dated July 7, 2017 (``CACI Letter''); (24) Mark A. Stegeman, Senior Vice President & CFO, Turning Point Brands, Inc., dated July 12, 2017 (``Turning Point Letter''); (25) Jon R. Moeller, Vice Chair and Chief Financial Officer, and Deborah J. Majoras, Chief Legal Officer and Secretary, The Proctor & Gamble Company, dated July 12, 2017 (``P&G Letter''); (26) Christopher A. Iacovella, Chief Executive Officer, Equity Dealers of America, dated July 12, 2017 (``EDA Letter''); (27) Rob Bernshteyn, Chief Executive Officer, Chairman Board of Directors, Coupa Software, Inc., dated July 12, 2017 (``Coupa Software Letter''); (28) Sally J. Curley, Senior Vice President, Investor Relations, Cardinal Health, Inc., dated July 14, 2017 (``Cardinal Health Letter''); (29) Mickey Foster, Vice President, Investor Relations, FedEx Corporation, dated July 14, 2017 (``FedEx Letter''); (30) Alexander J. Matturri, CEO, S&P Dow Jones Indices, dated July 18, 2017 (``SPDJI Letter''); (31) John L. Killea, Chief Legal Officer, Stewart Information Services, dated July 19, 2017 (``Stewart Letter''); (32) M. Farooq Kathwari, Chairman, President & CEO, Ethan Allen Interiors, Inc., dated July 24, 2017 (``Ethan Allen Letter''); (33) Jeff Green, Founder, Chief Executive Officer and Chairman of the Board of Directors, The Trade Desk Inc., dated July 26, 2017 (``Trade Desk Letter''); (34) James J. Angel, Associate Professor, McDonough School of Business, Georgetown University, dated July 30, 2017 (``Angel Letter''); (35) Jon Stonehouse, CEO, and Tom Staab, CFO, BioCryst Pharmaceuticals, Inc., dated July 31, 2017 (``BioCryst Letter''); (36) Peter Campbell, Chief Financial Officer, Mimecast, dated July 31, 2017 (``Mimecast Letter''); (37) Joanne Moffic-Silver, Executive Vice President, General Counsel, and Corporate Secretary, Bats Global Markets, Inc., dated August 2, 2017 (``BZX Letter 1''); (38) David M. Weisberger, Head of Equities, ViableMkts, dated August 3, 2017 (``ViableMkts Letter''); (39) Charles Beck, Chief Financial Officer, Digimarc Corporation, dated August 3, 2017 (``Digimarc Letter''); (40) Elizabeth K. King, General Counsel and Corporate Secretary, NYSE, dated August 9, 2017 (``NYSE Letter 2''); (41) Representative Sean P. Duffy and Representative Gregory W. Meeks, dated August 9, 2017 (``Duffy/Meeks Letter''); (42) Michael J. Chewens, Senior Executive Vice President & Chief Financial Officer, NBT Bancorp Inc., dated August 11, 2017 (``NBT Bancorp Letter''); (43) Barry Zwarenstein, Chief Financial Officer, Five9, Inc., dated August 11, 2017 (``Five9 Letter''); (44) William A. Backus, Chief Financial Officer & Treasurer, Balchem Corporation, dated August 15, 2017 (``Balchem Letter''); (45) Raiford Garrabrant, Director, Investor Relations, Cree, Inc., dated August 15, 2017 (``Cree Letter''); (46) Steven Paladino, Executive Vice President & Chief Financial Officer, Henry Schein, Inc., dated August 16, 2017 (``Henry Schein Letter''); (47) Theodore Jenkins, Senior Director, Investor Relations and Communications, Corbus Pharmaceuticals, Inc., dated August 17, 2017 (``Corbus Letter''); (48) Ari M. Rubenstein, Co-Founder and Chief Executive Officer, GTS Securities LLC, dated August 17, 2017 (``GTS Securities Letter 2''); (49) Cameron Bready, Senior Executive VP, Chief Financial Officer, Global Payments Inc., dated August 17, 2017 (``Global Payments Letter''); (50) Mike Gregoire, CEO, CA Technologies, dated August 17, 2017 (``CA Technologies Letter''); (51) Patrick L. Donnelly, Executive Vice President & General Counsel, Sirius XMHoldings Inc., dated August 17, 2017 (``Sirius Letter''); (52) Theodore R. Lazo, Managing Director and Associate General Counsel, SIFMA, dated August 18, 2017 (``SIFMA Letter 2''); (53) Donald Bollerman, dated August 18, 2017 (``Bollerman Letter''); and (54) Sarah A. O'Dowd, Senior Vice President, Chief Legal Officer and Secretary, Lam Research Corporation, dated August 18, 2017 (``Lam Letter''). \6\ 15 U.S.C. 78s(b)(2)(B). \7\ See Securities Exchange Act Release No. 81437, 82 FR 40202 (August 24, 2017) (``OIP''). In the OIP, the Commission specifically requested comment on eight series of questions. See id. at 40210-11. \8\ See Letters to Brent J. Fields, Secretary, Commission, from: (1) Gabrielle Rabinovitch, VP, Investor Relations, PayPal Holdings, Inc., dated September 12, 2017 (``PayPal Letter''); (2) Edward S. Knight, Executive Vice President and General Counsel, Nasdaq, Inc., dated September 18, 2017 (``Nasdaq Letter 2''); (3) Joanne Moffic- Silver, Executive Vice President, General Counsel, and Corporate Secretary, Bats Global Markets, Inc., dated October 11, 2017 (``BZX Letter 2''); (4) Elizabeth K. King, General Counsel and Corporate Secretary, NYSE, dated November 3, 2017 (``NYSE Letter 3''); (5) Theodore R. Lazo, Managing Director and Associate General Counsel, SIFMA, dated December 8, 2017 (``SIFMA Letter 3''); (6) Jeffrey S. Davis, Deputy General Counsel, Nasdaq, Inc., dated December 21, 2017 (``Nasdaq Letter 3''); (7) Joanne Moffic-Silver, Executive Vice President, General Counsel, and Corporate Secretary, Cboe Global Markets, Inc., dated January 3, 2018 (``BZX Letter 3''); (8) Joanne Moffic-Silver, Executive Vice President, General Counsel, and Corporate Secretary, Cboe Global Markets, Inc., dated January 12, 2018 (``BZX Letter 4''); and (9) Elizabeth K. King, General Counsel and Corporate Secretary, NYSE, dated January 12, 2018 (``NYSE Letter 4''). All comments on the proposed rule change are available at: https://www.sec.gov/comments/sr-batsbzx-2017-34/batsbzx201734.htm. In addition, the Commission's Division of Economic and Risk Analysis (``DERA'') released in the public comment file for this proposal a memorandum setting forth its analysis examining the relationship between the proportion of MOC orders executed off-exchange and closing price discovery and efficiency (``DERA Analysis''). See Memorandum to File from DERA, Bats Market Close: Off-Exchange Closing Volume and Price Discovery, dated December 1, 2017 (``DERA Analysis''), available at: https://www.sec.gov/files/bats_moc_analysis.pdf; see also infra note 129 and accompanying discussion. NYSE Letter 4 included an assessment of the DERA Analysis conducted by D. Timothy McCormick, Ph.D., dated January 11, 2018 (``NYSE Report''). See NYSE Letter 4, at 1 and NYSE Report, cover page (stating that the research was funded by NYSE Group). For purposes of this order, statements in the NYSE Report are attributed to NYSE. \9\ 15 U.S.C. 78s(b)(2). \10\ See Securities Exchange Act Release No. 82108, 82 FR 55894 (November 24, 2017). \11\ The only change in Amendment No. 1 was to rename the proposed closing match process as Cboe Market Close. Because Amendment No. 1 is a technical amendment and does not materially alter the substance of the proposed rule change or raise unique or novel regulatory issues, Amendment No. 1 is not subject to notice and comment. For purposes of consistency and readability, all references to the proposed closing match process made herein will be to ``Cboe Market Close.'' --------------------------------------------------------------------------- II. Summary of the Proposal As described in more detail in the Notice,\12\ the Exchange proposes to introduce Cboe Market Close, a closing match process for non-BZX listed securities. For non-BZX listed securities, the Exchange's System \13\ would seek to match buy and sell Market-On-Close (``MOC'') \14\ orders designated for participation in Cboe Market Close at the official closing price for such security published by the primary listing market. --------------------------------------------------------------------------- \12\ See Notice, supra, note 3. \13\ The term ``System'' is defined as ``the electronic communications and trading facility designated by the Board through which securities orders of Users are consolidated for ranking, execution and, when applicable, routing away.'' See Exchange Rule 1.5(aa). \14\ The term ``Market-On-Close'' or ``MOC'' means a BZX market order that is designated for execution only in the Closing Auction. See Exchange Rule 11.23(a)(15). The Exchange proposed to amend the description of Market-On-Close orders to include orders designated to execute in the proposed Cboe Market Close. --------------------------------------------------------------------------- Members \15\ would be able to enter, cancel or replace MOC orders designated for participation in Cboe Market Close beginning at 6:00 a.m. Eastern Time up until 3:35 p.m. Eastern Time (``MOC Cut-Off Time'').\16\ Members would not be able to enter, cancel or replace MOC orders designated for participation in the proposed Cboe Market Close after the MOC Cut-Off Time. --------------------------------------------------------------------------- \15\ The term ``Member'' is defined as ``any registered broker or dealer that has been admitted to membership in the Exchange.'' See Exchange Rule 1.5(n). \16\ Currently, the NYSE designates the cut-off time for the entry of Market At-the-Close Orders as 3:45 p.m. Eastern Time. See NYSE Rule 123C. Nasdaq, in turn, designates the ``end of the order entry period'' as 3:50 p.m. Eastern Time. See Nasdaq Rule 4754. --------------------------------------------------------------------------- At the MOC Cut-Off Time, the System would match for execution all buy and sell MOC orders entered into the System based on time priority.\17\ Any remaining balance of unmatched shares would be cancelled back to the Member(s). The System would disseminate, via the Bats Auction Feed,\18\ the total size of all buy and sell orders matched per security via Cboe Market Close. All matched buy and sell MOC orders would remain on the System until the publication of the official closing price by the primary listing market. Upon publication of the official closing price by the primary listing market, the System would execute all previously matched buy and sell MOC orders at that official closing price.\19\ --------------------------------------------------------------------------- \17\ As set forth in proposed Interpretation and Policy .02, the Exchange would cancel all MOC orders designated to participate in Cboe Market Close in the event the Exchange becomes impaired prior to the MOC Cut-Off Time and is unable to recover within 5 minutes from the MOC Cut-Off Time. The Exchange states that this would provide Members time to route their orders to the primary listing market's closing auction. Should the Exchange become impaired after the MOC Cut-Off Time, proposed Interpretation and Policy .02 states that it would retain all matched MOC orders and execute those orders at the official closing price once it is operational. \18\ The Bats Auction Feed disseminates information regarding the current status of price and size information related to auctions conducted by the Exchange and is provided at no charge. See Exchange Rule 11.22(i). The Exchange also proposed to amend Exchange Rule 11.22(i) to reflect that the Bats Auction Feed would also include the total size of all buy and sell orders matched via Cboe Market Close. \19\ The Exchange would report the execution of all previously matched buy and sell orders to the applicable securities information processor and will designate such trades as ``.P'', Prior Reference Price. See Notice, supra note 3, at 23321. --------------------------------------------------------------------------- The Exchange would utilize the official closing price published by the exchange designated by the primary listing market in the case where the primary listing market suffers an impairment and is unable to perform its closing auction process.\20\ In addition, proposed Interpretation and Policy .03 specifies that up until the closing of the applicable securities information processor at 8:00 p.m. Eastern Time, the Exchange intends to monitor the initial publication of the official closing price, and any subsequent changes to the published official closing price, and adjust the price of such trades accordingly. If there is no initial official closing price published by 8:00 p.m. Eastern Time for any security, the Exchange would cancel all matched MOC orders in such security. --------------------------------------------------------------------------- \20\ See proposed Interpretation and Policy .01. --------------------------------------------------------------------------- The Exchange states that it is proposing to adopt Cboe Market Close in response to requests from market participants, particularly buy-side firms, for an alternative to the primary listing markets' closing auctions that still provides an execution at a security's official closing price.\21\ Moreover, the Exchange contends that the proposal would not compromise the price discovery function performed by the primary listing markets' closing auctions because Cboe Market Close would only accept MOC orders, and not limit orders, and the Exchange would only execute those matched MOC orders that naturally pair off and effectively cancel each other out.\22\ --------------------------------------------------------------------------- \21\ See Notice, supra note 3, at 23321. The Exchange intends, should the Commission approve the proposed rule change, to file a separate proposal to offer executions of MOC orders at the official closing price, to the extent matched on the Exchange, at a rate less than the fee charged by the applicable primary listing market. The Exchange also intends for such fee to remain lower than the fee charged by the applicable primary listing market. See id. \22\ See id. --------------------------------------------------------------------------- III. Discussion and Commission Findings The Commission has carefully reviewed the proposal, including the comments received, and finds that approval of the proposed rule change is consistent with the requirements of the Act and the rules and regulations thereunder applicable to a national securities exchange.\23\ In particular, as [[Page 3207]] discussed below, the Commission finds that the proposal is consistent with: Section 6(b)(5) of the Act,\24\ which requires that the rules of a national securities exchange, among other things, 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 Section 6(b)(8) of the Act,\25\ which requires that the rules of a national securities exchange not impose any burden on competition not necessary or appropriate in furtherance of the purposes of the Act. --------------------------------------------------------------------------- \23\ In approving this proposed rule change, the Commission has considered the proposed rule change's impact on efficiency, competition, and capital formation. See 15 U.S.C. 78c(f). The Commission addresses comments about economic effects of the proposed rule change, including competitive effects, below. \24\ 15 U.S.C. 78f(b)(5). \25\ 15 U.S.C. 78f(b)(8). --------------------------------------------------------------------------- The Commission received sixty-three comment letters from fifty-two commenters on the proposal, including four response letters from the Exchange.\26\ --------------------------------------------------------------------------- \26\ See supra notes 5 and 8. --------------------------------------------------------------------------- Price Discovery and Fragmentation The majority of commenters addressed the potential impacts of the proposal on price discovery in the closing auctions on the primary listing markets. Eight commenters stated that the proposal would not negatively impact price discovery in the primary listing markets' closing auctions.\27\ These commenters asserted that because Cboe Market Close would only execute paired MOC orders, and not limit-on- close orders, it would not impede the price discovery mechanisms of the primary listing markets' closing auctions. Five commenters referenced the current Nasdaq and NYSE Arca closing auction processes for securities listed on other exchanges, stating that these competing closing auction processes, which have been permitted by the Commission, may attract limit orders from the primary listing market and impede price discovery, unlike the BZX proposal which is limited to market orders.\28\ In addition, five commenters argued that, because BZX will publish the size of matched MOC orders in advance of the primary market's cut-off time, market participants would have available information needed to make further decisions regarding order execution and thus price discovery would not be impaired.\29\ Two commenters also asserted that many brokers already provide market-on-close pricing to customers through products that match orders internally, and the proposal may provide incentives for brokers to send such orders to an exchange, thereby increasing transparency, reliability and price discovery at the close.\30\ --------------------------------------------------------------------------- \27\ See PDQ Letter; Clearpool Letter, at 3; Virtu Letter, at 2; SIFMA Letter, at 2; IEX Letter, at 1-2; Angel Letter, at 4; ViableMkts Letter, at 3-4; and Bollerman Letter, at 1. See also SIFMA Letter 2, at 1-2. \28\ See Clearpool, at 3; IEX Letter, at 2; Angel Letter, at 4; SIFMA Letter 2, at 2; and Bollerman Letter, at 3. \29\ See Clearpool Letter, at 3; SIFMA Letter 1, at 2; IEX Letter, at 2; Angel Letter, at 4; ViableMkts Letter, at 3; and SIFMA Letter 2, at 1. \30\ See Clearpool, at 3-4; and ViableMkts Letter, at 4-5. One commenter further argued that to the extent BZX accrues market share as a result of the proposal it will likely result from less MOC pairing executed off-exchange. See Angel Letter, at 4. --------------------------------------------------------------------------- Thirty-eight commenters stated that the proposal would further fragment the markets and harm price discovery in the closing auctions on the primary listing markets.\31\ For example, Nasdaq argued that BZX's MOC orders would be incapable of contributing to price discovery, and instead would further fragment the market by drawing orders and quotations away from primary closing auctions and undermine the mechanisms used to set closing prices.\32\ Nasdaq asserted that any attempt to divert trading interest from its closing auction would be detrimental to investors as it would inhibit Nasdaq's closing auction from functioning as intended and would negatively affect the price discovery process and consequently, the quality of the official closing price.\33\ --------------------------------------------------------------------------- \31\ See Nasdaq Letter 1; NYSE Letter 1; Bowers Letter; Meridian Letter; Americas Executions Letter; GTS Securities Letter 1; Customers Bancorp Letter; Masonite International Letter; Orion Group Letter; CTS Corporation Letter; Encana Letter; Triangle Capital Letter; Pennsylvania REIT Letter; IMC Letter; Southern Company Letter; Nobilis Health Letter; T. Rowe Price Letter; CACI Letter; Turning Point Letter; P&G Letter; EDA Letter; Coupa Software Letter; Cardinal Health Letter; FedEx Letter; Trade Desk Letter; BioCryst Letter; Mimecast Letter; Digimarc Letter; NYSE Letter 2; NBT Bancorp Letter; Balchem Letter; Cree Letter; Henry Schein Letter; Corbus Letter; GTS Securities Letter 2; Global Payments Letter; CA Technologies Letter; Sirius Letter; Lam Letter; PayPal Letter; Nasdaq Letter 2; NYSE Letter 3. See also Duffy/Meeks Letter, at 1 (stating that public companies are expressing concern that the proposal will further fragment the market and cause harm to the pricing of their companies' shares at the close and, as such, they are concerned the proposal may disrupt the process for determining the closing price on the primary listing market, which is viewed as ``an incredibly well-functioning part of the capital markets''). In addition, one commenter urged the Commission to conduct a close analysis of the proposal and stated that if the Bats proposal would seriously degrade the quality of the closing price, then it should be rejected. See Angel Letter. \32\ See Nasdaq Letter 1, at 5 and 8 (stating that, for this reason Nasdaq did not believe the proposal promotes fair and orderly markets in accordance with Sections 6 and 11A of the Exchange Act); and Nasdaq Letter 2, at 3-7. \33\ See Nasdaq Letter 1, at 11 and Nasdaq Letter 2, at 5-6. Nasdaq also stated that while BZX does not have a responsibility to contribute to price discovery in Nasdaq's closing auction, it also is obligated to avoid affirmatively undermining price discovery. See Nasdaq Letter 1, at 5. In addition, Nasdaq stated that it considered, but chose not to, disclose segmented information, such as matched MOC or LOC shares, for its closing auction in a piece- meal fashion, because Nasdaq believed it would lead to unintended consequences and undermine price discovery in the closing auction. See id., at 4 and Nasdaq Letter 2, at 6. --------------------------------------------------------------------------- Specifically, Nasdaq expressed concern that the availability of Cboe Market Close could cause a reduction in the number of limit-on- close orders submitted to the primary listing markets' closing auctions, which Nasdaq asserted would harm price discovery at the market close.\34\ Nasdaq asserted that the impact of the proposal on the use of limit-on-close orders that may be submitted to NYSE and Nasdaq should be studied and carefully analyzed.\35\ In the OIP, the Commission specifically solicited comments on the potential impact of the proposal on the use of limit-on-close orders, including requesting any available data, analyses or studies.\36\ In response, Nasdaq explained that reducing MOC orders would impact the behavior of limit orders by reducing the ability of continuous book limit orders and LOC orders to compete with each other and to interact with MOC orders, which it asserted is essential to its closing auction.\37\ Specifically, Nasdaq contended that if BZX were to disseminate a paired shares amount at 3:35pm, but Nasdaq published little or [[Page 3208]] no paired or imbalance shares in its imbalance publications, it would discourage further participation in the continuous market leading up to the closing auction and the closing cross, and thus there would be little ongoing price discovery, because market participants would know they would not have the ability to interact with market orders.\38\ Nasdaq contrasted the BZX proposal with its own closing auction process, arguing that after it disseminates an imbalance notification that combines MOC and LOC orders, market participants can continue to submit orders to interact with existing auction interest.\39\ --------------------------------------------------------------------------- \34\ See Nasdaq Letter 1, at 5 and 11. \35\ See id. at 11. \36\ See OIP, supra note 7, at 40210. Specifically, the Commission asked, ``To what extent, if at all, would the availability of the Bats Market Close impact market participants' use of limit-on-close orders in the closing auction processes on the primary listing exchanges, including with respect to size and price? Please explain. Would market participants use MOC orders in the Bats Market Close as a substitute for using limit orders to participate in the closing auction processes at the primary listing exchanges? Would any such impacts be the same for each of the primary listing exchanges? Are there differences between the closing auction processes at each of the primary listing exchanges whereby the proposed Bats Market Close would have differing effects on each primary listing exchange? If so, please explain. How does information available in the closing auction process affect market participants' order submissions and/or determination of the closing price? Would the proposed rule change affect market participants' trading strategies in closing auctions? If so, how? If commenters believe the proposal would impact the use of limit-on-close orders in closing auctions, to the extent possible please provide specific data, analyses, or studies for support.'' \37\ See Nasdaq Letter 2, at 5-6. Nasdaq did not submit any specific data regarding the impact of the proposal on the use of limit on close orders. \38\ See id. at 6. \39\ See id. --------------------------------------------------------------------------- Moreover, Nasdaq argued that even if the proposal only resulted in fewer market-on-close orders submitted to Nasdaq closing auctions, investors would be harmed because the official closing price could potentially represent a stale or undermined price.\40\ Nasdaq asserted that its closing cross is designed to maximize the number of shares that can be executed at a single price and that the number of market- on-close orders impacts the number of shares able to execute in a closing cross.\41\ Further, in its second comment letter, Nasdaq elaborated on the impact it believed reducing MOC orders could have on Nasdaq's closing auction. In particular, Nasdaq argued that the proposal would harm price discovery because fragmentation of MOC orders would directly impact closing auctions for which Nasdaq only received MOC orders and that, in cases where all MOC orders were removed from the Nasdaq closing auction, the last sale price would become the official closing price, as opposed to the price being determined through the price discovery process of its closing auction.\42\ Nasdaq discussed several hypothetical examples where removal of all MOC orders from certain of its previously conducted closing auctions would have resulted in use of the last sale price as the official closing price and provided aggregated statistics denoting the differential between the last sale price and the official closing price in such situations.\43\ --------------------------------------------------------------------------- \40\ See Nasdaq Letter 1, at 12. See also Nasdaq Letter 2, at 6 (providing an example of how the proposal could cause a stale closing price). Nasdaq also stated that a credible independent study of the potential risk to price discovery is essential in order to consider whether the proposal is consistent with the Act. See Nasdaq Letter 1, at 12. \41\ See id., at 11. Nasdaq subsequently submitted a memorandum providing, among other things, data relating to the level of matched MOC volume in Nasdaq closing auctions spanning the period of January 1, 2017 through September 30, 2017 (``Nasdaq Data Memo''). Nasdaq requested protection under the Freedom of Information Act for its memorandum. \42\ See Nasdaq Letter 2, at 3. \43\ See id. at 3-5. Specifically, Nasdaq identified 1,653 closing crosses between January 1, 2016 and August 31, 2017 where removal of all MOC orders would have changed the closing prices. Nasdaq asserts that this would have changed the closing valuation of Nasdaq issuers ``by nearly $870,000,000 of aggregate impact.'' --------------------------------------------------------------------------- NYSE similarly argued that even though Cboe Market Close would only accept MOC orders, it could materially impact official closing prices determined through a NYSE closing auction.\44\ NYSE emphasized the importance of the centralization of orders during the closing auction on the primary listing exchange, stating that it is ``an iterative process'' that provides ``periodic information about order imbalances, indicative price, matched volume, and other metrics'' to help market participants anticipate the likely closing price, and that allows for investors to find contra-side liquidity and assess whether to offset imbalances, and for orders to be priced based on the true supply and demand in the market.\45\ NYSE asserted that information on the lack of matched MOC orders in the closing process could discourage liquidity providers from participating in the closing process because their order would be less likely to interact with market orders.\46\ NYSE also explained that its designated market makers (``DMMs''), which have an obligation to facilitate the close of trading in their assigned securities, factor in the size of paired-off volume, and the composition of the closing interest in assessing the appropriate closing price.\47\ NYSE asserted that, under the proposal, DMMs would lose full visibility into the size and composition of MOC interest, and thus would likely have to make more risk-adverse closing decisions, resulting in inferior price formation.\48\ --------------------------------------------------------------------------- \44\ See NYSE Letter 1, at 3. While NYSE's arguments focused primarily on the potential for MOC orders to migrate to Cboe Market Close as described below, NYSE also asserted that, if the fees for the Cboe Market Close were set lower than the fees charged by the primary listing exchanges, it could induce some market participants to use MOC orders rather than sending LOC orders to the primary listing market. See NYSE Report, at 23. \45\ See NYSE Report, at 12. See also NYSE Letter 1, at 4. NYSE, as well as Nasdaq, also asserted that the proposal contradicts the Commission's approval of recent amendments to the National Market System Plan to Address Extraordinary Market Volatility (the ``LULD Plan'') which, they argue, centralize re-opening auction liquidity at the primary listing exchange by prohibiting other market centers from re-opening following a trading pause until the primary listing exchange conducts a re-opening auction. These commenters asserted that it would be inconsistent for the Commission to find it in the public interest to consolidate trading in a re-opening auction, while sanctioning fragmentation of trading in a closing auction. See Nasdaq Letter 1, at 6; NYSE Letter 1, at 3; and Nasdaq Letter 2, at 12. In response, commenters asserted the amendment to the LULD Plan cited by NYSE and Nasdaq granted the primary listing market the ability to set the re-opening price but did not mandate the consolidation of orders at the primary listing market following a trading halt. BZX believes the proposal is consistent with the LULD Plan as it seeks to avoid producing a ``bad'' or ``outlier'' closing price and does not affect the centralization of price-setting closing auction orders. See BZX Letter 1, at 8-9. See also Bollerman Letter, at 3. \46\ See NYSE Report, at 13 and 23. See also NYSE Report, at 12 (arguing that ``[a]nticipation that there will be MOC orders in the closing auction is a critical component feeding into the decisions of liquidity providers and other market participants'' trading in the closing auction). \47\ See NYSE Letter 1, at 4. In response to this assertion, ViableMkts argues that use of Cboe Market Close is voluntary. Accordingly, if a market participant wanted a DMM to be aware of their closing activity they could still send their orders to the NYSE closing auction. See ViableMkts Letter, at 4. \48\ See NYSE Letter 1, at 4. --------------------------------------------------------------------------- NYSE also argued that the proposal would detrimentally impact price discovery on the NYSE Arca and NYSE American automated closing auctions. NYSE stated that in the last six months there were 130 instances where the official closing price determined through a NYSE Arca closing auction was based entirely on paired-off market order volume.\49\ In those instances, pursuant to NYSE Arca rules, ``the Official Closing Price for that auction is the midpoint of the Auction NBBO as of the time the auction is conducted.'' \50\ NYSE stated that if all market orders for a NYSE Arca listed security were sent to BZX, the official closing price would instead be the consolidated last sale price, which can differ from the midpoint of the auction NBBO by as much as 3.2%.\51\ --------------------------------------------------------------------------- \49\ See NYSE Letter 1, at 5. See also NYSE Report, at 11-12. NYSE represented that once NYSE American transitions to Pillar technology, it will conduct a closing auction in an identical manner to NYSE Arca. \50\ See id. \51\ See id. In its third comment letter, NYSE also asserts that, in contrast to the data NYSE provided in its first letter, BZX failed to provide any data in response to the requests for comment in the OIP to support the claim that there would be no impact on price discovery. See NYSE Letter 3, at 2. But see BZX Letter 3, at 2-4, 7-9 and infra notes 99-106 and accompanying text discussing data and analysis provided by BZX. --------------------------------------------------------------------------- In arguing that additional fragmentation of closing auction interest would detrimentally impact price discovery, both Nasdaq and NYSE distinguished the Cboe Market Close from competing closing auctions currently operated by Nasdaq and NYSE Arca for securities listed on other markets. Nasdaq stated that the BZX proposal is a price-matching order type and not a competitive single-priced [[Page 3209]] auction that offers price discovery.\52\ In contrast, Nasdaq states that its single-priced auction for non-Nasdaq listed stocks was designed to maximize order interaction and improve price discovery for issuers, not to siphon orders away from the primary market without seeking to improve price discovery.\53\ Accordingly, Nasdaq argued that the fact that it and NYSE offer competing closing auctions is irrelevant because those auctions are fundamentally different from the BZX proposal.\54\ Similarly, NYSE argued that it believed it was misleading to compare the proposal to the competing closing auctions because BZX would be offering neither a competing closing auction nor a facility to establish the official closing price should a primary listing exchange invoke its closing auction contingency plan.\55\ --------------------------------------------------------------------------- \52\ See Nasdaq Letter 2, at 8-9. \53\ See id. at 9. \54\ See id. \55\ See NYSE Letter 2, at 3. --------------------------------------------------------------------------- Nasdaq and NYSE further argued that competing closing auctions cause minimal fragmentation, as volumes in those auctions are ``miniscule.'' \56\ For example, Nasdaq stated that volumes in all competing auctions in Nasdaq-listed corporate securities in the month of June 2017 were less than 0.5% of Nasdaq's closing volume.\57\ Similarly, NYSE stated that for the period January 1, 2017 through October 13, 2017, closing auctions in NYSE and Nasdaq-listed securities on NYSE Arca represent 0.5% of the notional value traded in the NYSE and Nasdaq closing auctions.\58\ Nasdaq further asserted that less than half of Nasdaq-listed corporate issues experience price dislocations in competing closing auctions.\59\ Moreover, Nasdaq and NYSE stated that on multiple occasions when they received closing interest for securities listed on another exchange, they have contacted the firms associated with those orders and encouraged them to route their orders directly to the primary listing exchange.\60\ --------------------------------------------------------------------------- \56\ See Nasdaq Letter 2, at 9-10; see also NYSE Letter 3, at 5- 6. \57\ See Nasdaq Letter 2, at 11. \58\ See NYSE Letter 3, at 6. NYSE also stated that it does not have a business interest in running closing auctions for securities listed on other markets. It operates the NYSE Arca closing auction for resiliency purposes, which it believes outweighs any modest negative impact on fragmentation. See id.; see also infra note 239. \59\ See Nasdaq Letter 2, at 11. In response to BZX's claim that a large percentage of competing closing auctions conducted by Nasdaq and NYSE resulted in closing prices different from the official closing price, Nasdaq also stated that many of the examples cited in BZX Letter 1 are from competing auctions in ETFs, which, Nasdaq stated, have a fundamentally different price discovery process. Nasdaq argued that if ETFs were removed from the analysis, less than half of Nasdaq-listed corporate issues see a price difference when closing on NYSE Arca. See id. \60\ See id. at 13; NYSE Letter 3, at 6. See also infra note 87 and accompanying text. --------------------------------------------------------------------------- Nasdaq and NYSE also addressed price-matching services in the over- the-counter market. Nasdaq stated that the proposal would introduce a new category of price-matching venues, which would exacerbate the harm caused by fragmentation.\61\ Both Nasdaq and NYSE stated that over-the- counter price-matching services should not be considered a precedent for the Cboe Market Close proposal. Nasdaq stated that, as a neutral trading platform, an exchange is capable of attracting and aggregating more liquidity than a broker-dealer.\62\ Moreover, according to Nasdaq, trades resulting from broker-dealer price-matching services are often also involved in the closing auction on the primary listing exchange, thus contributing to price discovery despite operating a price-matching service.\63\ Nasdaq explained that a broker may accept a MOC order and trade as either agent or principal against that order by entering limit orders into either the closing auction on the primary listing exchange or the continuous market leading up to the closing auction. After receiving an execution in the primary market closing auction, the broker would then trade with the customer off-exchange at a price determined by the primary market closing auction.\64\ Similarly, NYSE argued that it should not be assumed that the current level of MOC orders executed away from the primary market is a reasonable proxy for the impact of the BZX proposal.\65\ Specifically, NYSE asserted that market makers that cross orders on behalf of clients at the closing price could be risking capital on such transactions, which would likely be a constraining force on the magnitude of orders crossed away from primary markets, while BZX would have no such obligation to commit capital in Cboe Market Close.\66\ As such, NYSE argued that the BZX proposal, if successful, could result in a much higher percentage of MOC orders diverted away from the primary market than what occurs today.\67\ --------------------------------------------------------------------------- \61\ See Nasdaq Letter 2, at 13. \62\ See id. \63\ See id. \64\ See id. The Nasdaq Data Memo also provided data and analysis arguing that a portion of the broker-dealer volume executed off-exchange after the close at the primary listing market's closing price reflects brokers submitting customers' interest to the closing cross and subsequently reporting an over-the-counter trade between the broker and its customers. \65\ See NYSE Report, at 10. \66\ See NYSE Report, at 10. \67\ See NYSE Report, at 10. The NYSE Report asserted that this was one of the limitations of drawing conclusions from the DERA Analysis regarding how the BZX proposal would impact the market close. See discussion of DERA Analysis, infra notes 133-134 and accompanying text. --------------------------------------------------------------------------- In addition, NYSE stated that existing off-exchange matching services have a negative impact on the validity and integrity of price discovery in the closing auctions.\68\ NYSE stated that data it analyzed from certain closing auctions with large imbalances \69\ shows that, for securities with 1,000 shares or less reported at the official closing price (on and off-exchange), volatility in the last 10 minutes of trading leading into the close is 52% higher when more than 75% of a security's closing share volume is reported to a trade reporting facility (``TRF'') (i.e., paired off-exchange), compared to when less than 25% of a security's closing share volume is reported to a TRF. In addition, NYSE asserted that its data showed that the official closing price generated in auctions for securities with 1,000 shares or less reported at the official closing price (on and off-exchange) where more than 75% of a security's share volume is reported to a TRF was more than twice as far away from the last consolidated sale price and nearly twice as far away from the market volume weighted average price (``VWAP'') of the last two minutes of trading leading into the close.\70\ Accordingly, NYSE concluded that existing fragmentation degrades the quality of the closing price.\71\ --------------------------------------------------------------------------- \68\ See NYSE Letter 3, at 3. \69\ See id. at 3. NYSE stated that it reviewed closing auctions with imbalances of 50% of paired shares as of 3:50 p.m. See id. at 4. \70\ See id. at 3-4. NYSE provided data that they asserted illustrates that the same degradation in the quality of the official closing price also occurs in closes for securities with 10,000 shares or more reported at the official closing price. See id. at 4. \71\ See id. at 3-4. --------------------------------------------------------------------------- Several other commenters also discussed how the proposal may impact the integrity of official closing prices. In particular, GTS, a DMM on NYSE, argued that market-on-close orders are a vital component of closing prices and, should those orders be diverted away from the primary listing markets as a result of the proposal, it could undermine the official closing prices.\72\ GTS stated that, in pricing a closing auction on NYSE, it considers a variety of inputs and stated that it considers ``the size of . . . matched shares and the time those matched shares are consumed by each individual book [to be] essential data points for [[Page 3210]] consideration.'' \73\ If this information is fragmented across multiple venues, according to GTS, the closing price will change and will become less reliable.\74\ Eighteen commenters asserted that the proposal would make it more difficult for Designated Market Makers to facilitate an orderly close of NYSE listed securities as they would lose the ability to continually assess the composition of market-on-close interest.\75\ Many of these commenters are issuers listed on NYSE and asserted that one of the reasons they chose to list on NYSE was the ability to have access to a DMM that is responsible for facilitating an orderly closing auction.\76\ --------------------------------------------------------------------------- \72\ See GTS Securities Letter 1, at 2-3. \73\ See GTS Securities Letter 2, at 3. GTS also stated that the types of orders submitted to the closing auction, such as limit or market, also impact its pricing determinations. See id. \74\ See id. at 4. \75\ See NYSE Letter 1, at 4; GTS Securities Letter 1, at 2-3; Customers Bancorp Letter; Masonite International Letter; Orion Group Letter; CTS Corporation Letter; Encana Letter; Triangle Capital Letter; Pennsylvania REIT Letter; IMC Letter, at 1-2; Southern Company Letter; Nobilis Health Letter; CACI Letter; Turning Point Letter; P&G Letter; Cardinal Health Letter; FedEx Letter; Stewart Letter; Global Payments Letter. See also supra notes 45-48 and accompanying text. Four commenters also asserted that the proposal would have potentially detrimental impacts on NYSE floor brokers. See Bowers Letter; Meridian Letter; Americas Executions Letter; and GTS Securities Letter 2, at 4. \76\ See GTS Securities Letter 1, at 2-3; Masonite International Letter; Encana Letter; Triangle Capital Letter; Pennsylvania REIT Letter; Nobilis Health Letter; CACI Letter; Turning Point Letter; P&G Letter; Cardinal Health Letter; FedEx Letter; and Stewart Letter. --------------------------------------------------------------------------- Multiple commenters stated that one of the benefits of a centralized closing auction conducted by the primary listing market is that it allows market participants to fairly assess supply and demand such that the closing prices reflect both market sentiment and total market participation.\77\ Because they believed that the proposal may cause orders to be diverted away from the primary listing exchanges, these commenters argued that it would negatively affect the reliability and value of closing auction prices. Several commenters further argued that centralized closing auctions provide better opportunities to fill large orders with relatively little price impact.\78\ --------------------------------------------------------------------------- \77\ See Bowers Letter; Americas Executions Letter; and FedEx Letter. See also Coupa Software Letter; Trade Desk Letter; Mimecast Letter (arguing that gathering liquidity in a single venue ensures that the market reaches an accurate and reliable closing price for their stocks); Global Payments Letter. \78\ See e.g., Bowers Letter; Americas Executions Letter; Customers Bancorp Letter; Orion Group Letter; and Southern Company Letter. --------------------------------------------------------------------------- In response to concerns regarding the impact of the proposal on the price discovery process, BZX argued that, because the proposal would only match MOC orders and would require the Exchange to publish the number of matched shares in advance of the primary listing markets' cut-off times, BZX believes it would avoid any impact on price discovery.\79\ BZX also stated that it does not believe the proposal would impact the use of LOC orders on the primary listing markets as LOC orders provide price protection and the lower fees charged to MOC orders that participate in Cboe Market Close would not outweigh the risk of receiving an execution at an unfavorable price.\80\ BZX further challenged commenters' concerns that Cboe Market Close could pull all MOC orders away from the primary listing markets and alter the calculation of the closing price, stating that such a scenario could occur today as a result of competing closing auctions and broker- dealers that offer internal MOC order matching solutions.\81\ Accordingly, BZX contends that the proposal would not impose fragmentation on the market at the close that does not already exist today.\82\ --------------------------------------------------------------------------- \79\ See BZX Letter 1, at 3-4 and BZX Letter 2, at 2 and 10. In addition, BZX offered to disseminate more information with regard to Cboe Market Close and to disseminate such information via the applicable securities information processor, in addition to the Bats Auction Feed. See BZX Letter 1, at 4 and 12-13, and BZX Letter 2, at 2. BZX further asserted that it believed modern software can easily and simply add this data to data disseminated by the primary listing markets. See BZX Letter 1, at 4 and BZX Letter 2, at 3. \80\ See BZX Letter 2, at 3. \81\ See BZX Letter 1, at 4-5 (stating that neither NYSE nor Nasdaq prohibits their members from withholding MOC orders from their closing auctions) and BZX Letter 2, at 2-3. In response, NYSE stated that it believed such broker-dealer services degrade the public price and size discovery of the primary listing exchanges' closing auctions, but that such activities are not held to the same standards under the Act as national securities exchanges and against which the BZX proposal must be evaluated. See NYSE Letter 2, at 4. GTS further stated in response that it believes such broker-dealer services deprive the DMM of content that is critical to pricing a closing auction and the Commission should study the impact of this activity on closing auctions. See GTS Securities Letter 2, at 4. See infra note 129 and accompanying text discussing the DERA analysis of the relationship between the proportion of MOC orders currently executed off-exchange and closing price discovery and efficiency. \82\ See BZX Letter 1, at 4 and BZX Letter 2, at 2. --------------------------------------------------------------------------- In particular, with regard to competing closing auctions, BZX argued that such competing auctions could not only pull all MOC interest away from the primary listing markets but could also divert all price-setting limit-on-close interest from those markets as well.\83\ Further, BZX argued that Nasdaq and NYSE's assertions that they currently attract low trading volumes in their competing closing auctions are irrelevant to an analysis of their potential impact on fragmentation.\84\ Should these auctions see an increase in order flow, BZX argued they would increase existing market fragmentation.\85\ BZX also asserted that such competing closing auctions often may produce bad auction prices on the non-primary market, as compared to the proposed Cboe Market Close which would ensure that market participants receive the official closing price.\86\ In addition, in response to NYSE's assertion that it contacted firms that submitted orders to NYSE Arca's competing closing auction and encouraged them to instead submit orders to the primary listing market, BZX provided data that it stated evidences that NYSE has not, in fact, discouraged order flow to their competing auctions and that NYSE Arca's competing auction ``continues to maintain not insignificant monthly volume'' in at least two securities.\87\ --------------------------------------------------------------------------- \83\ See BZX Letter 1, at 5; BZX Letter 2, at 2; and BZX Letter 3, at 4. BZX provided evidence of 14 instances in June 2017 where a Nasdaq-listed security had no volume in Nasdaq's closing auction but did have volume in NYSE Arca's closing auction. See BZX Letter 1, at 5. \84\ See id. at 6. \85\ See id. BZX also stated that, despite their potential utility as a back-up in case of a market impairment, Nasdaq and NYSE Arca run these competing auctions on a daily basis, regardless of whether there is an impairment at a primary listing exchange. See id. BZX further questioned why these exchanges do not utilize test symbols and test data in order to confirm the operational integrity of the auction processes without potentially harming the price discovery process by the primary's closing auction. See BZX Letter 3, at 5. \86\ See BZX Letter 1, at 4 and BZX Letter 2, at 2. BZX asserted that 86% of closing auctions conducted by Nasdaq for NYSE-listed securities in June 2017 resulted in closing prices different from the official closing price and 84% of competing closing auctions conducted by NYSE Arca for Nasdaq-listed securities in June 2017 resulted in closing prices different from the official closing price. BZX Letter 1, at 4. \87\ BZX Letter 3, at 4. --------------------------------------------------------------------------- With regard to off-exchange matching processes, BZX stated that several off-exchange venues currently offer executions at the official closing price and therefore provide a forum to which participants may choose to send MOC orders in lieu of sending MOC or LOC orders to the primary listing market.\88\ BZX stated, however, that it was not aware of any concerns raised by NYSE, Nasdaq, or the Commission regarding the impact of such venues on the use of LOC orders in the closing auctions of the primary listing exchanges.\89\ --------------------------------------------------------------------------- \88\ BZX Letter 2, at 3. \89\ Id., at 3. --------------------------------------------------------------------------- BZX also provided certain data regarding current trading volume at the close on venues other than primary listing exchanges to show that the proposal would ``not introduce a new [[Page 3211]] type of fragmentation at the close.'' \90\ Specifically, BZX argued that off-exchange venues ``siphon significant order flow at the close from the primary listing markets,'' as over the first nine months of 2017, off-exchange volume at the official closing price represented approximately 30% of Nasdaq closing volume for Nasdaq-listed securities and 23% of NYSE closing volume for NYSE-listed securities.\91\ Moreover, BZX argued that the proposal ``could increase transparency by incentivizing market participants to re-direct their MOC orders from off-exchange venues to a public exchange,'' whose processes are subject to the requirements of the Act, would be included in BZX's rules, and would be subject to the proposed rule change requirements of Section 19(b) of the Act before any changes could be made to the operation of Cboe Market Close.\92\ In addition, BZX argued that attracting order flow away from off-exchange venues would have the additional benefit of increasing the amount of volume at the close executed on systems subject to Regulation SCI's resiliency requirements.\93\ --------------------------------------------------------------------------- \90\ See id. at 4-5. \91\ See BZX Letter 2, at 4. BZX further asserted that, over the course of 2017, the amount of off-exchange closing volume has been increasing. See id. at 5. \92\ See id. at 5-6. \93\ See id. at 11. --------------------------------------------------------------------------- In response to NYSE's data regarding the impact of off-exchange activity at the close on closing auction price formation, BZX presented several critiques of the analysis. First, BZX asserted that NYSE provided selective data that supported their conclusion that existing fragmentation at the close has a negative impact on price discovery in closing auctions. In particular, BZX stated that NYSE did not indicate the number of closing auctions included in its data set.\94\ BZX also stated that NYSE's data set was limited to auctions with less than 1,000 shares, imbalances of 50% or more of the paired shares as of 3:50 p.m., and securities for which more than 75% of the volume was reported to the TRF. Based on its own analysis, discussed below, BZX estimated that the number of auctions included in NYSE's data set for auctions with 1,000 shares or less to be less than 100th of 1% of all auctions.\95\ Therefore, BZX argued that NYSE's findings are ``of no statistical significance.'' \96\ --------------------------------------------------------------------------- \94\ See BZX Letter 3, at 2. \95\ See id. at 2-3. \96\ See id. at 3. --------------------------------------------------------------------------- BZX further argued that it is possible that such low volume securities with severe imbalances would be subject to price variations between the last sale and the official closing price, regardless of the amount of off-exchange closing activity.\97\ In addition, BZX stated that the data that NYSE provided for auctions with more than 10,000 shares shows that the ``impact on closing prices is dampened in more actively traded securities,'' which it believes undercuts NYSE's conclusions and ``further highlights the selective and limited nature of NYSE's data set.'' \98\ --------------------------------------------------------------------------- \97\ See id. \98\ See id. --------------------------------------------------------------------------- Furthermore, BZX stated that it conducted its own analysis of data from all primary auctions in NYSE-listed securities for which there was a closing auction and a last sale regular way trade, regardless of size, from January 2, 2017 through September 29, 2017.\99\ BZX stated that it reviewed auctions with imbalances of 50% or more of paired shares at 3:55 p.m. BZX also stated that it compared auctions where less than 25%, 25% to 50%, 50% to 75%, and more than 75%, of the closing volume was reported to the TRF.\100\ BZX also grouped its data amongst auctions with 1,000,000 shares or more, 100,000 shares to 1,000,000 shares, 10,000 to 100,000 shares, 1,000 to 10,000 shares, and less than 1,000 shares.\101\ BZX stated that its analysis shows that ``the average price gap between the last sale and the official closing price was 9.09 basis points across all groups.'' \102\ BZX stated that it also found that ``price gaps are greater amongst auctions with less than 25% of closing volume reported to the TRF.'' \103\ BZX concluded that its analysis contradicts NYSE's conclusions, asserting that it shows that ``the amount of TRF closing volume has little to no relationship to the primary listing market's closing auction process.'' \104\ --------------------------------------------------------------------------- \99\ See id. \100\ See id. \101\ See id. \102\ See id. \103\ See id. \104\ See id. at 3-4. --------------------------------------------------------------------------- In addition, BZX stated that it also found similar patterns ``when it analyzed securities based on their ADV instead of auction size.'' \105\ BZX acknowledged that, while securities with less than 10,000 shares appear to have the most volatility, these securities account for a small percentage of overall auction volume, and argued that such volatility ``is more likely indicative of the applicable security's trading characteristics.'' \106\ --------------------------------------------------------------------------- \105\ See id. at 3. \106\ See id. at 4. --------------------------------------------------------------------------- In response to NYSE's arguments regarding the impact on a DMM's ability to price the close, BZX argued that this point highlights what it believes to be an additional benefit of allowing it to compete with NYSE's closing auction.\107\ Specifically, BZX argued that NYSE's assertion that DMMs consider the composition of closing interest in making pricing decisions ``suggests that the NYSE closing auction is not a true auction and can be an immediate detriment to users sending MOC orders of meaningful size to the NYSE.'' \108\ Accordingly, BZX stated that it believed this ``highlights an additional benefit'' of Cboe Market Close as it ``would provide an alternative pool of liquidity and a mechanism for large order senders to avoid the subjective decision making of the DMMs who are free to make closing price decisions to their profit benefit at the client's expense.'' \109\ --------------------------------------------------------------------------- \107\ See BZX Letter 1, at 10. \108\ Id. See also supra note 47-48 and accompanying text. \109\ Id. In response, NYSE argued that BZX's claims regarding the role of the DMM were not germane to whether the proposal is consistent with the Act and stated that it believed the scale of its closing auction and the low levels of volatility observed in the auction demonstrate its effectiveness. See NYSE Letter 2, at 4. --------------------------------------------------------------------------- As the Commission stated in the OIP, it has consistently recognized the importance of the closing auctions of the primary listing markets.\110\ In particular, the Commission has previously stated that ``reliable . . . closings on the primary listing markets are key to the establishment of fair and orderly markets.'' \111\ Accordingly, the Commission has carefully analyzed and considered the proposal's potential impact, if any, on the primary listing markets' closing auctions, including their important price discovery functions, and the reliability and integrity of closing prices. After careful consideration of the proposal and all of the comments received and for the reasons discussed throughout, the Commission believes that Cboe Market Close is reasonably designed not to disrupt the price discovery process in the closing auctions of the primary listing exchanges and is consistent with the Act and the rules and regulations thereunder.\112\ --------------------------------------------------------------------------- \110\ See OIP, supra note 7, at 40210. \111\ See id. (citing to Securities Exchange Act Release No. 73639 (November 19, 2014), 79 FR 72255, 72278 (December 5, 2014)). \112\ Accordingly, for the reasons discussed throughout, the Commission believes the proposal is consistent with the maintenance of fair and orderly markets. See Sections 6 and 11A of the Act; see supra note 32. --------------------------------------------------------------------------- Importantly, Cboe Market Close will only accept MOC orders and not LOC orders. Contrary to some commenters' assertions that MOC orders contribute to the closing price, the Commission [[Page 3212]] believes that MOC orders, which do not specify a target price and seek to be executed at the closing price at the end of the trading day are, by their nature, the recipients of price formation information and generally do not directly contribute to setting the official closing price of securities on the primary listing markets.\113\ In particular, the Commission believes that paired-off MOC interest, such as that would be matched and executed in the Cboe Market Close, does not fundamentally affect the determination of the closing price. As many commenters stated, the price determined in a closing auction is designed to be a reflection of market supply and demand, and key considerations in setting the closing price are maximizing the number of shares executed and minimizing the amount of the imbalance between buy and sell interest. The Commission believes that matching paired-off MOC orders in the manner BZX proposes would not affect the net imbalance of closing eligible trading interest in the market. As such, the orders that actively participate in, and contribute to, the price formation process in a closing auction--including limit orders and unpaired MOC orders--would not be executed in the Cboe Market Close and could continue to be submitted to the primary listing exchange. Accordingly, the Commission believes that the proposal is reasonably designed to not disrupt the price discovery process and closing auction price formation. --------------------------------------------------------------------------- \113\ See supra notes 40-48 (discussing Nasdaq's and NYSE's arguments of how MOCs can contribute to the closing price). --------------------------------------------------------------------------- The Commission recognizes that several commenters made assertions that matched MOC order flow provides informational content regarding the depth of the market that indicates true supply and demand and contributes to market participants' decisions regarding order submission and ultimately price formation.\114\ As such, these commenters argued that removing matched MOC orders from the primary listing market would impact price formation. However, the Commission believes that, while the proposal may result in the execution of some MOC orders on a venue other than the primary listing exchange, BZX's proposal, because it would require the size of matched MOC orders to be published well in advance of the order entry cut-off times for the primary listing exchanges' closing auctions, is reasonably designed to allow market participants to, in conjunction with the information disseminated by the primary listing exchanges, ascertain closing auction liquidity demand. Accordingly, the Commission believes that the information disseminated by BZX could be used by market participants in conjunction with the information disseminated by the primary listing exchange to make order submission decisions. Although some commenters also asserted that DMMs would no longer have full visibility into the size and composition of MOC interest, DMMs will have access to the amount of paired-off MOC volume on BZX well in advance of NYSE's order entry cut-off time and the start of the NYSE closing auction. An NYSE DMM could, for example, use such information to determine the total amount of MOC interest for a given security in Cboe Market Close and NYSE's closing auction, in establishing the relevant context for any imbalances in NYSE closing auctions and calculating appropriate closing prices.\115\ Further, the Commission believes that, as BZX stated, the Cboe Market Close could benefit market participants that do not wish to disclose information regarding their orders to certain other market participants such as DMMs by providing another venue to which they may send their orders for execution at the closing price. In addition, the Commission does not agree with those commenters that argued that the proposal contradicts the Commission's approval of Amendment 12 to the LULD Plan, as the LULD Plan does not mandate that market participants consolidate their orders at the primary listing exchanges, but rather requires that a trading pause continue until the primary listing exchange has reopened trading.\116\ While pursuant to the LULD Plan trading may not begin until the reopening on the primary listing exchange, market participants continue to have the choice as to where to submit their orders. --------------------------------------------------------------------------- \114\ See supra notes 45-48, 72-75 and 77 and accompanying text. \115\ The proposal would not alter the information DMMs would have relating to off-exchange MOC interest. In addition, one commenter that is supportive of the proposal is a DMM on NYSE and stated that the proposal ensures that the price discovery process remains intact because BZX would only match buy and sell MOC orders and not limit orders, which it stated, ultimately lead to price formation. See Virtu Letter, at 2. \116\ See Securities Exchange Act Release No. 79845 (January 19, 2017), 82 FR 8551, 8552 (January 26, 2017). See also BZX Letter 1, at 8-9 and Bollerman Letter at 3. --------------------------------------------------------------------------- As discussed above, NYSE and Nasdaq argued that if the proposed rule change resulted in the removal of all MOC orders from the primary listing exchanges' closing auctions, that result would impact closing prices in instances where no auction could be held in accordance with their rules. In such scenarios, NYSE and Nasdaq assert that, pursuant to the primary listing exchanges' rules, the resulting closing price would be the consolidated last sale price.\117\ NYSE and Nasdaq both sought to quantify the extent to which last consolidated sale prices would have differed from closing prices determined through closing auctions. The data and counterfactual examples provided in this regard assume that the BZX proposal would result in no market participants choosing to send any MOC orders to the primary listing markets' closing auctions. However, the commenters did not assert how likely it was for such a scenario to occur or provide data in support thereof, nor did they provide any other data regarding what the impact would be should fewer than all MOC orders be diverted from the primary listing markets. While NYSE further asserted that one ``plausible outcome'' of the BZX proposal is that the majority of MOC orders would migrate to Cboe Market Close, it acknowledged that it was ``hard to predict what would happen if the [BZX] proposal were to be approved.'' \118\ Further, NYSE explained that this outcome would likely be the case if the fees set by BZX for Cboe Market Close were lower than the primary listing markets and there was no competitive response by the primary listing exchanges.\119\ The Commission believes it may be possible that there would be instances in which no MOC orders participate in a primary listing market's closing auction following implementation of the Cboe Market Close. However, such instances can occur today, and the Commission believes that the more likely scenario is that, if Cboe Market Close were to be approved and implemented, it would draw some, though not all, MOC orders from the primary listing markets, because many market participants likely base decisions regarding where to send closing orders not solely on fees, but rather on many other factors, including the reliability, stability, technology and surveillance associated with such auctions,\120\ and because currently there [[Page 3213]] exist competitive alternatives to execute MOC orders off-exchange, yet the majority of MOC orders continue to be executed in the closing auctions on the primary listing exchanges.\121\ While the Commission acknowledges that, as some commenters argued, current levels of off- exchange MOC activity are not a perfect measure of the potential resulting impact of the proposal, the Commission believes that they do provide some limited insight, as discussed further below. Further, the Commission believes that, should market participants choose to send a substantial portion of MOC orders to the Cboe Market Close, the primary listing exchanges have various other options available to them to try to compete for such orders, and it is unlikely that such exchanges would choose to accept the complete loss of MOC order market share and make no attempt at a competitive response. --------------------------------------------------------------------------- \117\ See Nasdaq Letter 2, at 3; NYSE Letter 1, at 5. See also, e.g., NYSE Rule 123C(1)(e); NYSE Arca Rule 1.1(ll)1. \118\ See NYSE Report, at 22. \119\ Id. \120\ See generally, Nasdaq Letter 1, at 3-4 (asserting that the Nasdaq closing cross has been successful due to its integrity, stability, reliability, and regulation). Furthermore, in assessing whether to utilize Cboe Market Close, market participants may evaluate other attributes of the functionality, such as the need to monitor whether they were matched on BZX and potentially having to send their MOC orders to more than one venue if not matched, as well as having to commit to transact at the closing price at an earlier time than they otherwise would have had they chosen to send their MOC orders to the primary listing exchanges. \121\ See DERA Analysis, supra note 8 (finding that, on average, approximately 9.3 percent of closing volume is matched off-exchange at the primary listing exchange's closing price); NYSE Report, at 22 (stating that closing auctions on the listing exchanges currently process the vast majority of the MOC and LOC orders in the market); and Nasdaq Data Memo, supra note 41 (providing data relating to the level of matched MOC volume in Nasdaq closing auctions). --------------------------------------------------------------------------- Further, while the commenters' analyses examined price differentials in various contexts, differences in prices alone are not dispositive with respect to price discovery or efficiency. First, a large difference between a reference price (e.g., the last sale price) and the closing price may reflect genuine information if the price change persists, or may reflect a temporary price pressure if the price change subsequently reverses.\122\ Because the data and analyses that commenters provided did not analyze subsequent price changes, it is unclear whether the pre-close price differentials indicate better or worse price discovery or efficiency. Second, when comparing price differences across securities, the analyses did not distinguish whether the observed differences were due to the removal of MOC orders from the primary listing exchange or due to liquidity differences. As described above, NYSE provided an analysis comparing price differences between securities in which 75% of the total closing volume was reported to a TRF, to securities in which 25% of the total closing volume was reported to a TRF, and argued that securities with more off-exchange MOC activity have more closing price volatility. However, the Commission believes that closing price volatility and off-exchange activity may be correlated with unobserved liquidity factors. For example, small stocks tend to have high trading costs (e.g., wider spreads, thinner order books) and more volatility on average.\123\ Therefore, it is possible that the price differences observed by the commenter could be due to differences in liquidity or other factors not controlled for in the analysis, rather than the levels of off-exchange MOC activity.\124\ Nasdaq's analysis involved 1,653 closing crosses that occurred between January 1, 2016 and August 31, 2017, which the Commission estimates accounts for approximately 0.44% of all Nasdaq auctions over that time period. As such, the Nasdaq analysis may not be a representative sample.\125\ Moreover, Nasdaq did not address whether the securities analyzed are highly illiquid. If they are highly illiquid, price differences between the last sale price and the closing auction price may be large for reasons unrelated to the specifics of the auction mechanism.\126\ Given these limitations, including that Nasdaq's estimate may overstate the impact, the data and analysis provided in these comments do not persuade the Commission that the proposal is inconsistent with the Act. --------------------------------------------------------------------------- \122\ See e.g., Joel Hasbrouck, ``Measuring the Information Content of Stock Trades,'' Journal of Finance 46, 179-207 (1991), available at www.jstor.org/stable/2328693. \123\ For example, one study examined fragmentation in the U.S. equities markets and showed that small cap stocks are more fragmented than large cap stocks for Nasdaq-listed issues. It also found that fragmentation is correlated with higher short-term volatility, but increased market efficiency. See Maureen O'Hara and Mao Ye, ``Is Market Fragmentation Harming Market Quality?,'' Journal of Financial Economics 100, 459-474 (2011), available at http://www.sciencedirect.com/science/article/pii/S0304405X11000390. \124\ See also notes 94-106 and accompanying text (discussing BZX's comments with respect to NYSE's analysis and BZX's own analysis of such data). \125\ See supra note 43. \126\ See id. See also NYSE Report, at 12 (``The difference between the last sale price in the continuous market and the closing auction price, particularly for less active securities where the last sale price may be stale, can be significant.''). --------------------------------------------------------------------------- Further, while NYSE and Nasdaq implied that use of the consolidated last sale price as the official closing price is inferior to the price discovery process of the closing auction, the use of the consolidated last sale price as the official closing price when a primary listing exchange does not conduct a closing auction is not mandated by the Act or rules thereunder, but rather is established by the rules of that exchange. Therefore, if a primary listing exchange believes that such prices no longer reflect an appropriate closing price in certain scenarios, it is within the exchange's discretion to reevaluate whether reliance on the last consolidated sale price is the appropriate means for determining the official closing price in such scenarios, and may file proposed rule changes to amend its rules to establish alternative methods of determining the official closing price should no auction be held that it believes to be more appropriate.\127\ --------------------------------------------------------------------------- \127\ For example, like all market participants, the primary listing exchanges could determine if and how to utilize the information BZX disseminates regarding paired MOC interest in the Cboe Market Close for determining the official closing price should they choose to do so. --------------------------------------------------------------------------- Some commenters also argued that the proposal would impact the submission of LOC orders to the primary listing markets. As BZX stated in its response letter, LOC orders provide price protection, whereas MOC orders are submitted by market participants who may be less price sensitive and who may prioritize other aspects of a closing execution over price. As such, the Commission does not believe that it is likely that market participants would be more inclined to assume the risk of submitting MOC orders to the Cboe Market Close in circumstances where they otherwise would have submitted price-protected LOC orders into the primary markets' closing auctions, solely to pay lower fees. As discussed above, Nasdaq and NYSE also asserted that the Cboe Market Close could discourage submission of orders in the continuous market and closing cross if there were a large amount of paired MOC orders in Cboe Market Close and a subsequent lack of imbalance information disseminated on the primary listing markets.\128\ However, the Commission believes this risk is not unique to the availability of the Cboe Market Close and, indeed, exists today. Specifically, the Commission believes that the submission of orders would similarly be discouraged today if such large amount of MOC orders in a listed security had been paired on the primary listing exchange and accordingly, there was little or no resulting imbalance disseminated by such exchange. Irrespective of the exchange upon which the MOC orders are paired, the net imbalance published by the primary listing exchange would be expected to be the same. In addition, because Cboe Market Close would publish the volume of MOC orders paired prior to the start of the closing auctions on the primary [[Page 3214]] listing exchanges, market participants should have sufficient time to incorporate such information relating to the levels of MOC interest in the Cboe Market Close in a given security into their decisions about order submissions into the closing auctions. --------------------------------------------------------------------------- \128\ See supra notes 37-38 and 46 and accompanying text. --------------------------------------------------------------------------- In addition, as discussed above, many commenters addressed the existence of fragmentation at the close today due to off-exchange matching processes and competing closing auctions. With regard to broker-dealer matching services, the Commission's consideration and analysis of whether BZX's proposal is consistent with the Act as an exchange is subject to differing requirements and standards than those that apply to broker-dealers under the Act. At the same time, how such existing off-exchange services impact closing auctions on the primary listing markets may provide some limited insight into the potential impact of the proposal on the price discovery function of the primary closing markets, particularly to the extent the proposed Cboe Market Close is similar to such off-exchange services. The staff from the Commission's Division of Economic and Risk Analysis analyzed the relationship between the proportion of MOC orders executed off-exchange and closing price discovery and efficiency.\129\ The DERA Analysis made several findings that the Commission believes, while not dispositive, are relevant to commenters' claims regarding Cboe Market Close's potential impact on price discovery and other data and assertions presented regarding current off-exchange matching services. In particular, the DERA Analysis found that, on average, closing auction volume accounts for approximately 5.2 percent of daily volume, and on average, approximately 9.3 percent of closing volume is executed off-exchange at the primary listing exchange's closing price. The DERA Analysis also found that, in a sample spanning the first quarter of 2017, variation in off-exchange MOC share is not significantly correlated with closing price discovery or efficiency, controlling for primary auction activity, off-exchange trading activity during regular trading hours, average market capitalization, average daily trading volume, average daily stock return volatility, and closing price volatility.\130\ In further sample splits (e.g., by listing venue, security type, and index inclusion), the DERA Analysis finds some mixed evidence of statistically significant correlations, but no consistent or conclusive evidence that contradicts the full- sample analysis. --------------------------------------------------------------------------- \129\ See DERA Analysis, supra, note 8. \130\ Though the DERA Analysis' findings suggest ``that existing levels of fragmentation do not, on average, correlate with price discover or price efficiency,'' the DERA Analysis makes clear that ``the data we have does not allow us to predict how [Cboe Market Close] would affect price discovery in the closing auction process, and market participants' use of limit-on-close orders in the closing auction processes.'' In addition, the DERA Analysis states that it does not attempt to establish a causal link between off-exchange activity and closing price discovery and efficiency. See DERA Analysis, supra, note 8, at 1-2. --------------------------------------------------------------------------- NYSE provided several critiques of the DERA Analysis' methodology and argued that the DERA Analysis' findings should not be interpreted as providing evidence that BZX's proposal would have no negative impact on price discovery or the efficiency of closing prices.\131\ NYSE also asserted that the DERA Analysis does not adequately address the concerns raised by commenters that the BZX proposal might undermine price discovery, have a negative effect on the quality of official closing prices, and introduce new concerns related to market manipulation and ``gaming.'' \132\ --------------------------------------------------------------------------- \131\ See NYSE Report, at 1 and 9. \132\ See id. at 9. To provide context for these assertions, the NYSE Report included background information summarizing the existing closing auction processes, including both the procedures for the primary listing exchanges' closing auctions as well as the competing closing auctions operated by Nasdaq and NYSE Arca. NYSE also summarized BZX's proposal and the DERA Analysis. See id. at 3-9. --------------------------------------------------------------------------- As discussed above, NYSE stated that because the bulk of the volume accounted for in the DERA Analysis is market maker volume crossed on behalf of clients, it may not be a good proxy for evaluating the potential impact of the proposal.\133\ In addition, NYSE stated that if BZX's proposal is successful, it could divert a higher percentage of MOC orders away from the primary listing markets than is currently observed in an analysis of existing off-exchange MOC activity. Accordingly, NYSE argued that the DERA Analysis does not have sufficient data to measure the effects when off-exchange MOC volume is high, which is likely to yield greater power to find an effect.\134\ NYSE also claimed that the DERA Analysis failed to account for instances when there is no closing auction, which could result in not considering instances where, according to NYSE, price discovery in the closing auction would be most impacted by diverting MOC orders away from the primary listing market.\135\ --------------------------------------------------------------------------- \133\ See id. at 10; see also supra notes 65-66 and accompanying text. \134\ See id. at 10-11. \135\ See id. at 13. --------------------------------------------------------------------------- In criticizing the methodology of the DERA Analysis, NYSE further asserted that ``widely accepted'' alternative approaches for analyzing potential behavior and incentives under alternative market structures could be useful in considering the impact of BZX's proposal on closing price discovery and efficiency.\136\ In addition, NYSE stated that it may be possible to use a simulation approach to investigate the degree to which routing MOC orders away from the primary listing exchanges impacts price discovery.\137\ --------------------------------------------------------------------------- \136\ See id. at 14. The author of the NYSE Report also stated that a study he conducted providing evidence that higher levels of off-market trading under certain market structures can harm market quality may be relevant to the analysis of the potential impacts of BZX's proposal. See id. at 11. However, as the study the author cited analyzes continuous trading in Nasdaq stocks prior to the implementation of Regulation NMS (adopted in 2005 and which implemented significant changes to the regulatory framework of the equity markets), the Commission does not believe in this instance that it can be relied upon to make inferences regarding current market structure. See generally 70 FR 27496 (June 29, 2005). \137\ See id. --------------------------------------------------------------------------- Concluding that the methodology used by the DERA Analysis does not provide meaningful evidence of the extent to which off-exchange MOC trading currently impacts the informational efficiency of the official closing price, NYSE discussed the metrics used in the DERA Analysis.\138\ With respect to the Price Contribution metric, NYSE argued that the metric is not suitable for evaluating the quality of the closing auction because it is a ``simplistic measure'' of the degree of price discovery that would classify ``large arbitrary swings'' in prices as good price discovery.\139\ Concerning the Price Reversal metric, NYSE stated that as a measure of the efficiency of official closing prices, it is a ``noisy and imprecise'' metric that makes it unlikely that one would find a significant result, even if one exists, and that it also has no clear interpretation.\140\ NYSE further [[Page 3215]] asserted the Price Reaction metric is likewise ``imprecise and problematic'' because it is ``just an indicator-variable version'' of price reversal and thus ``imprecisely measures the imprecise Price Reversal metric.'' \141\ NYSE asserted that the DERA Analysis' lack of a finding of statistically significant results ``is not surprising'' because the power of the Price Reaction test to find significant results is severely hampered.\142\ --------------------------------------------------------------------------- \138\ See id. at 17. NYSE also argued that while the DERA Analysis cited to two published papers by Barclay and Hendershott to support using a regression-based approach to study the information content of closing prices, the DERA Analysis does not use the Barclay and Hendershott methodology. \139\ See id. at 14-15. NYSE suggested that an alternative approach to examine price continuity measures could provide some pertinent information regarding price discovery at the close. NYSE also stated that controlling for the size of the auction and the auction's initial imbalance may be important because price deviations that are the result of large imbalances or large demand are more likely to be indicative of informationally-driven price moves, which would be an indication of good price discovery, rather than liquidity-driven price moves, which would be an indication of bad price discovery. See id. at 15-16. \140\ See id. at 16. NYSE provided several examples that it stated illustrated the imprecision of the Price Reversal metric. See id. at 16-17. \141\ See id. at 17. \142\ See id. --------------------------------------------------------------------------- The Commission has considered the criticisms of NYSE with respect to the DERA Analysis. Importantly, the DERA Analysis was explicit regarding the limited scope of its analysis and does not assert that BZX's proposal would have no negative impact on price discovery of official closing prices. The DERA Analysis sought to explore the correlation of closing price discovery and efficiency with existing off-exchange MOC activity. It did not make any findings with respect to establishing a causal link between off-exchange MOC activity and closing price discovery and efficiency.\143\ In addition, it was not designed to, nor does it purport to, opine on or address other aspects of BZX's proposal, including the potential impact on manipulation.\144\ While NYSE also criticized the scope of the DERA Analysis for not considering instances where there was no closing auction, the sample in Table 4 of the DERA Analysis did, in fact, include all symbol-day observations, including those days where there was no closing auction, and this sample showed results consistent with DERA's overall findings.\145\ --------------------------------------------------------------------------- \143\ See DERA Analysis, supra note 8, at 1. See also supra note 130. \144\ See infra notes 204-211 and 213-226 and accompanying text (discussing in more detail NYSE's arguments relating to manipulation and the Commission's response). \145\ See id. at 11 and 16. See also supra notes 117-121 (discussing the Commission's response to NYSE and other commenters arguments relating to the potential scenario of all MOC orders being diverted to Cboe Market Close and the primary listing markets conducting no auction). --------------------------------------------------------------------------- NYSE noted that the DERA Analysis ``cites to two published papers by Barclay and Hendershott as support for using a regression-based approach to study the information content of the closing price. However, the DERA Analysis does not actually use the Barclay- Hendershott methodology.'' \146\ The DERA Analysis explains that, in order to maintain a consistent sample size across the different regression specifications, rather than take time-series weighted averages and running pure cross-sectional regressions, the DERA Analysis uses weighted panel regressions to perform the same estimation.\147\ The DERA Analysis explains that the weighted panel regression approach produces the same Price Contribution estimates as the time-series weighted averages.\148\ Furthermore, the panel regression approach allows for the analysis of within-stock--day-to- day--variation in Price Contributions, off-exchange MOC activity, as well as the controls.\149\ Finally, the NYSE, in its critique of the DERA Analysis, does not explain how any differences in regression specifications would affect coefficient estimates or change the interpretation of these estimates. --------------------------------------------------------------------------- \146\ See NYSE Report, at 15. See also supra note 138. \147\ See DERA Analysis, supra note 8, at 6, note 20. \148\ See DERA Analysis, supra note 8, at 6, note 20 and accompanying text. \149\ Footnote 22 of the DERA Analysis describes a robustness check using stock and day fixed effects. See DERA Analysis, supra note 8, at 8. Controlling for unobserved heterogeneity at the stock level using stock fixed effects would not be possible using pure cross-sectional regressions. --------------------------------------------------------------------------- With respect to NYSE's critique of the Price Contribution metric, the DERA Analysis controlled for contemporaneous absolute price volatility to account for the precise concerns identified by NYSE. Accordingly, the regression utilized in the DERA Analysis sought to isolate variations in Price Contributions that were not merely ``large arbitrary price swings'' that happened to be correlated with off- exchange MOC activity.\150\ While NYSE also argues that the imprecision of the Price Reversal and Price Reaction metrics render it unlikely to yield statistically significant results, the Commission believes that the DERA Analysis included a sufficient sample size and variables to achieve statistical power.\151\ Regarding the Price Reversal metric, the DERA Analysis used the same definition as Barclay and Hendershott, which found statistical relations using this measure, and the DERA Analysis used all stock-days over a quarter so as to not limit the analysis to a small sample.\152\ Concerning the Price Reaction measurements, the Commission acknowledges that they may be imprecise, but many of the variables included in the regression, including auction share and market capitalization, are statistically correlated with price reactions, which suggests that, in this case, the definition of the dependent variable does not, on its own, create a lack of statistical power.\153\ --------------------------------------------------------------------------- \150\ See NYSE Report, at 14-15. \151\ Statistical power is the ability for statistical tests to identify differences across samples when those differences are indeed significant. \152\ In fact, Table 2 of the DERA Analysis finds strong statistically significant correlations between Price Reversals and contemporaneous closing price volatility. See DERA Analysis, supra note 8, at 15. \153\ The DERA Analysis included this metric to account for price continuations, which would also indicate a lack of price efficiency. See DERA Analysis, supra note 8, at 6-7. --------------------------------------------------------------------------- Moreover, NYSE suggested that there are alternative approaches that would be useful in considering how market participants are likely to behave under alternative market structures and for analyzing how potential structures create incentives for market manipulation, as well as alternative measures that could provide pertinent information regarding price discovery at the close.\154\ However, NYSE did not, in fact, provide any data or studies employing any of these methods. In the OIP, the Commission requested data, analyses or studies on a variety of relevant issues including arguments that BZX's proposal would harm price discovery in the primary listing exchanges' closing auctions, that BZX's proposal would affect the integrity or reliability of the official closing auction and the resulting closing price, and that BZX's proposal would increase the potential for manipulative activity.\155\ However, despite asserting that it believed there are other relevant approaches for studying and analyzing matters relevant to these points that it could have used to respond to the Commission's solicitation of comments, NYSE did not do so.\156\ --------------------------------------------------------------------------- \154\ See NYSE Report at 14 and 15-16. \155\ See OIP, supra note 7, at 40210-40211. \156\ See supra note 154. See also infra note 209 (stating that NYSE did not provide any data, studies, or analyses supporting its arguments regarding the potential impacts of BZX's proposal on manipulative activity in response to the Commission's specific solicitation in this regard). --------------------------------------------------------------------------- As discussed above, Nasdaq and NYSE concluded that existing over- the-counter price matching should not be considered a precedent for the proposal and described how they believed some over-the-counter MOC trades differed from those that would occur through Cboe Market Close.\157\ While the utility of any consideration of the impact of off-exchange MOC execution services on price discovery on the primary listing exchanges may be more limited to the extent that such existing activity and services are not identical to the proposed Cboe Market Close, the Commission nonetheless believes that the DERA Analysis, while not conclusive, provides some insights in [[Page 3216]] considering whether there would likely be potential negative impacts on the price discovery process in the closing auctions of the primary listing exchanges that would occur from executing MOC orders on a venue other than the primary listing market. Accordingly, the Commission believes that the DERA Analysis lends support for the argument that there is no strong evidence to suggest that existing levels of fragmentation of closing auctions through off-exchange MOC activity negatively impacts the price discovery process on the primary listing exchanges. In addition, as a general matter, commenters failed to provide data, studies or analyses, as requested in the OIP,\158\ that persuasively supported their assertions regarding the proposal's negative impact on price discovery on the closing auctions of the primary listing markets. --------------------------------------------------------------------------- \157\ See supra notes 61-66 and accompanying text (stating that Nasdaq asserted that broker-dealers may accept MOC orders and trade against them as principal and that NYSE asserted that market makers crossing orders on behalf of clients may be risking capital on such transactions). \158\ See OIP, supra note 7, at 40210-40211. --------------------------------------------------------------------------- With regard to competing closing auctions, BZX's proposed Cboe Market Close is not a closing auction and the Commission believes, as do some commenters, that there are certain fundamental differences between BZX's proposed Cboe Market Close and existing competing closing auctions, such as those identified by NYSE and Nasdaq regarding the price discovery mechanisms of their competing, single-priced closing auctions, which produce closing prices independent from those determined through the primary listing exchanges' closing auctions.\159\ Nevertheless, the Commission believes that considering such competing closing auctions, which already exist today, is useful to an analysis of the current proposal. Importantly, in such competing closing auctions, market participants may choose not only to submit MOC orders, but also price-setting LOC orders. As pointed out by BZX, this could affect the closing price on the primary listing market by potentially diverting LOC orders that contribute to price discovery away from the primary listing market's closing auction.\160\ In contrast, BZX's proposal would not accept LOC orders, but rather only matches MOC orders, and thus is reasonably designed to not impact the closing price formation process. --------------------------------------------------------------------------- \159\ See supra notes 52-55 and accompanying text. \160\ Competing auctions could also potentially reduce the centralization of orders at the primary listing market's closing auction, which NYSE and Nasdaq argued was a critical element of the primary listing markets' closing auctions. --------------------------------------------------------------------------- Several commenters stated that the proposal could harm issuers, particularly small and mid-cap companies.\161\ Many of these commenters argued that because of their view that the proposal undermines the reliability of the closing process and/or the official closing price it also poses a risk to listed companies and its shareholders.\162\ Many of these commenters, some of which are issuers, stated that the current centralized closing auctions on the primary listing markets contribute meaningful liquidity to a company's stock, facilitates investment in the company, and helps to lower the cost of capital. Accordingly, these commenters expressed concern that the potential additional fragmentation caused by the proposal could negatively impact liquidity during the closing auction, causing detrimental effects to listed issuers.\163\ --------------------------------------------------------------------------- \161\ See Nasdaq Letter 1, at 6-7; Nasdaq Letter 2, at 1-2 (asserting that as a result of fragmentation, small- and mid-cap companies are more susceptible to abrupt and disruptive price swings and therefore, centralizing liquidity at the close is important for these issuers and their investors); NYSE Letter 1, at 3; GTS Securities Letter 1, at 2-5; Customers Bancorp Letter; Orion Group Letter; CTS Corporation Letter; IMC Financial Letter, at 1-2; Southern Company Letter; Nobilis Health Letter; EDA Letter, at 1-2; Coupa Software Letter; Trade Desk Letter; Duffy/Meeks Letter, at 1; and Henry Schein Letter. \162\ See NYSE Letter 1, at 3 (arguing that the proposal is indifferent to the potential risks to public companies and that the closing is the most important data point for shareholders); IMC Financial Letter, at 1-2; Nobilis Health Letter; EDA Letter, at 1-2; Coupa Software Letter; Ethan Allen Letter; Trade Desk Letter; BioCryst Letter; Digimarc Letter; Duffy/Meeks Letter, at 1-2 (stating that public companies are concerned the proposal will have an unforeseen effect on the pricing of their companies' shares at the close, ultimately harming a critical measure of the company's value and harming its shareholders and asking the Commission to carefully consider the impacts of the proposal and whether such impacts would be necessary and helpful to public companies); NBT Bancorp Letter; Five9 Letter; Balchem Letter; Cree Letter; Henry Schein Letter; Corbus Letter; Global Payments Letter; CA Technologies Letter; Sirius Letter; Lam Letter; and PayPal Letter. Several issuers also asserted that decentralizing closing auctions will increase volatility, reduce visibility, and negatively impact liquidity for equity securities. See e.g., Customers Bancorp Letter; Orion Group Letter; Nobilis Health Letter; Cardinal Health Letter; and Stewart Letter. \163\ See Customers Bancorp Letter; Orion Group Letter; CTS Corporation Letter; Southern Company Letter; Duffy/Meeks Letter, at 1-2 (stating that the proposal could cause a disruption to the closing auction process, which could lead to discouraging investors from participating in and having confidence in our markets); and Five9 Letter. In contrast, one commenter argued that the proposal would improve aggregate liquidity at the official closing price because the lower aggregate cost of trading would likely spur incremental increases in trading volumes. In addition, this commenter stated that the ability to enter MOC orders into Cboe Market Close with little risk of information leakage may attract an additional source of liquidity. See ViableMkts Letter, at 2. --------------------------------------------------------------------------- In addition, one commenter, SPDJI, argued that the proposal may also impact confidence in the pricing of benchmark indices as confidence in closing prices is a prerequisite for market participants to maintain confidence in the pricing of benchmark indices.\164\ Accordingly, SPDJI asserted that because the closing price is a critical data point for investors, great caution should be taken in any changes to the closing auction.\165\ --------------------------------------------------------------------------- \164\ See SPDJI Letter, at 1-2 (stating that it relies solely on primary market auction prices to calculate the official closing index values, and that these closing index values play an important role in the markets, including use by portfolio managers to measure their funds' value and for use in calculating settlement prices for certain products); see also Coupa Software Letter; Trade Desk Letter; and Henry Schein Letter (stating that the official closing price is used to value their stocks for purposes of various indexes and mutual funds). \165\ See SPDJI Letter, at 2; see also NYSE Report, at 23-24. In contrast, one commenter acknowledged that while impacting the quality of the closing price is an objection that deserves close analysis, as the closing price is ``the most important price of the day,'' and would warrant rejection of the proposal, the commenter does not believe the proposal would harm the quality of the closing price. See Angel Letter, at 4. --------------------------------------------------------------------------- Moreover, some commenters argued that the centralization of liquidity at the open and close of trading, and how primary listing markets perform during the opening and closing, are important factors for issuers in determining where to list their securities, and the additional risk posed to listed companies from an unreliable or unrepresentative closing price and/or process could impact an issuer's decision where to list and/or cause companies to forgo going public.\166\ --------------------------------------------------------------------------- \166\ See NYSE Letter 1, at 3 and 9 (stating that no single data point is more important than the closing price to the company or its shareholders); GTS Securities Letter 1, at 3-5; EDA Letter, at 1; Duffy/Meeks Letter, at 1 (stating that the closing price is a critical measure of a company's value and that public companies view the closing auction on the primary listing exchange as a critical aspect of listing); and GTS Securities Letter 2, at 1-2. In addition, one commenter stated that further fragmenting the market would limit the quality and quantity of information on trading dynamics that the primary listing markets provide to their listed issuers. See CA Technologies Letter. --------------------------------------------------------------------------- With regard to concerns about the impact of the proposal on issuers and their shareholders, BZX stated that the proposal ``would not adversely impact the trading environment for issuers and their securities'' because it ``specifically designed the [p]roposal so that it would not impact the very important price discovery function performed by the primary listing markets' closing auction'' by only matching paired MOC orders and not LOC orders and ensuring executions at the closing price.\167\ BZX further stated that unlike the competing closing auctions run by NYSE Arca and Nasdaq, the proposal would not create [[Page 3217]] a price that deviates from the official closing price, and therefore, the proposal ``would not impact listed issuers or the market for their securities.'' \168\ --------------------------------------------------------------------------- \167\ See BZX Letter 1, at 2 and 4 and BZX Letter 2, at 10. \168\ See BZX Letter 2, at 10. --------------------------------------------------------------------------- The Commission believes that, because the proposal is reasonably designed to minimize any impact on the price discovery process, as described above, commenters' concerns regarding the effects on listed issuers, including small and mid-cap companies, are similarly mitigated. Commenters stated that the proposal would undermine the value and reliability of closing prices for securities and, as a result, the pricing of benchmark indices, and that decentralization of the closing auction would harm liquidity in their stock.\169\ However, for the reasons discussed above,\170\ the Commission believes that, because the proposal is reasonably designed to not impact price formation in closing auctions on the primary listing markets, the proposal is likewise reasonably designed to avoid the detrimental impacts that commenters have raised regarding the reliability of official closing prices, confidence in closing prices and pricing of benchmark indices, increased volatility, liquidity conditions for particular stocks, and the cost of raising capital. Further, as described above, because BZX will disseminate the amount of BZX matched shares well before the cut-off time for the primary markets' closing auctions, the Commission does not believe that the proposal would negatively impact visibility and transparency into the closing auction process on the primary listing exchanges. --------------------------------------------------------------------------- \169\ See supra notes 161-166 and accompanying text. \170\ See supra notes 110-160 and accompanying text. --------------------------------------------------------------------------- Impact on Market Complexity and Operational Risk Several commenters addressed the potential impact of the proposal on market complexity and operational risk that could occur if the proposal resulted in increased market fragmentation. Some of these commenters believed that the proposal would not introduce significant additional complexity or operational risk. For example, two commenters argued that the proposal could enhance the resiliency of the closing auction process by providing market participants an additional mechanism through which to execute orders at the official closing price in the event of a disruption at a primary listing market.\171\ Another commenter argued that exchanges already have many market data feeds that firms must purchase to ensure that they have all of the information necessary to make informed execution decisions and that adding another data feed will not add complexity given the small amount of information that goes into the closing data feed and the current capabilities of market participants to re-aggregate multiple data feeds.\172\ --------------------------------------------------------------------------- \171\ See SIFMA Letter 1, at 2 and ViableMkts Letter, at 3 (further stating that once BZX is able to process MOC orders, they would be in a position to develop the capability to offer a full backup closing auction process). \172\ See Clearpool Letter, at 4. --------------------------------------------------------------------------- In contrast, other commenters argued that the proposal would add unnecessary market complexity and operational risk. In particular, two commenters stated that the proposal would require market participants to monitor an additional data feed, the Bats Auction Feed, with one also stating that if additional exchanges adopted similar functionality to Cboe Market Close, it would require monitoring of even more data feeds.\173\ These commenters argued that monitoring an additional data feed could increase operational risk by creating another point of failure at a critical time of the trading day.\174\ One commenter also stated its view of the increased complexity involved in sending order flow to more than one exchange in short periods of time near the close of the trading day.\175\ This commenter argued that the proposal increases operational risk and complexity at a critical point of the trading day by forcing market participants whose orders did not match in Cboe Market Close to quickly send MOC orders from one exchange to another before the cut-off time at the primary market closing auction.\176\ This added complexity, GTS argued, puts additional stress on the systems of exchanges and increases the potential for disruptions.\177\ Lastly, two commenters argued that the proposal could encourage other exchanges, broker-dealers, and alternative trading systems to offer similar processes, which would introduce undesirable fragmentation to the market and lead to operational challenges for investors and traders.\178\ --------------------------------------------------------------------------- \173\ See NYSE Letter 1, at 7 and IMC Letter, at 1. See also NYSE Letter 3, at 3 (stating that market participants that may not subscribe to multiple proprietary data feeds would be at a disadvantage and that the complexity would be further compounded when other exchanges adopt functionality similar to Cboe Market Close). \174\ See IMC Letter, at 1 and NYSE Letter 1, at 7. See also Ethan Allen Letter (arguing the proposal would add a layer of complexity). \175\ See GTS Securities Letter 1, at 6. \176\ See GTS Securities Letter 1, at 6. Furthermore, NYSE argued that in certain situations, investors may not be able to participate in a closing auction on NYSE American or NYSE Arca if they wait until after their order was cancelled by BZX to send in a market-on-close order to closing auctions on NYSE Arca and NYSE American. NYSE explained that in situations where there is an order imbalance priced outside the Auction Collars, orders on the side of the imbalance are not guaranteed to participate in the closing auctions on those two exchanges. Earlier submitted market-on-close orders have priority. See NYSE Letter 1, at 8. \177\ See GTS Securities Letter 1, at 6. \178\ See T. Rowe Price Letter, at 1-2. See also Nasdaq Letter 1, at 8 (stating that other exchanges may propose similar offerings but choose different pairing cut-off times which could further complicate investors' decisions and programming requirements). --------------------------------------------------------------------------- In response, BZX argued that the proposal would not increase market complexity or operational risks.\179\ Rather, BZX asserted that it would provide a way to address the single point of failure risk that exists for closing auctions conducted on the primary listing markets.\180\ BZX argued that, despite the current system of designated auction backups, market participants can be confused about whether an exchange is in fact able to conduct a closing auction.\181\ BZX believes, in the event there is an impairment at a primary listing market, Cboe Market Close could provide an alternative option for market participants to route MOC orders and still receive the official closing price.\182\ --------------------------------------------------------------------------- \179\ See BZX Letter 1, at 12 and BZX Letter 2, at 10-11. \180\ See BZX Letter 1, at 12 and BZX Letter 2, at 10-11. \181\ See BZX Letter 1, at 12. \182\ See id. In contrast, Nasdaq argued that Cboe Market Close could not serve as a back-up for a primary listing market suffering an impairment because it is not a price-discovering auction and would not operate in the absence of the auction it would be backing- up. See Nasdaq Letter 2, at 12. --------------------------------------------------------------------------- In addition, BZX added that modern software can easily and simply add volume data disseminated by the primary listing markets regarding the closing auction and data regarding matched MOC orders from the Cboe Market Close.\183\ Moreover, BZX stated that it believed the 3:35 p.m. cut-off time would provide market participants with adequate time to receive any necessary information and to route any unmatched orders to the primary listing exchange.\184\ Lastly, BZX stated that market participants would not be obligated to use Cboe Market Close and accordingly, may weigh the value of seeking an execution in Cboe Market Close against any perceived risks.\185\ --------------------------------------------------------------------------- \183\ See BZX Letter 1, at 4 and BZX Letter 2, at 3. \184\ See BZX Letter 2, at 8. \185\ See id. at 8-9. In contrast, NYSE argued that it is irrelevant whether it is optional to send market orders to the Cboe Market Close, as the analysis should turn on whether the mere existence of the Cboe Market Close would increase complexity and operational risk in the market. See NYSE Letter 3, at 2. --------------------------------------------------------------------------- [[Page 3218]] The Cboe Market Close will offer market participants an additional venue to which they may send orders for execution at the official closing price and an additional data feed that some market participants may choose to monitor. However, as several commenters stated, many market participants already monitor multiple data feeds and the Commission believes that those market participants that would plan to monitor information disseminated by BZX relating to Cboe Market Close would likely already maintain systems and software that are able to aggregate such feeds.\186\ Accordingly, the Commission does not believe that monitoring the Cboe Market Close feed or having an additional venue to submit MOC interest would significantly increase complexity or impose substantial burdens on market participants in such a manner as to render the proposal inconsistent with the Act. In addition, the Commission believes, as stated by BZX, that because BZX will disseminate the amount of paired shares well in advance of the order entry cut-off times for the primary listing markets' closing auctions, the proposal is reasonably designed to give market participants adequate time to review the necessary data, make informed decisions about closing order submission, and route orders to the primary listing exchange when desired. Further, the Commission believes, as BZX argued, that market participants have the ability to evaluate any potential risks that they believe may be associated with using the proposed functionality in any determination as to whether to send their orders to Cboe Market Close, such as the need to monitor additional data feeds, whether their orders were matched on BZX, or potentially having to send their MOC orders to more than one venue if they are not matched in Cboe Market Close.\187\ --------------------------------------------------------------------------- \186\ In addition, in response to comments regarding the potential for other exchanges to adopt similar functionality that would require monitoring of even more data feeds, the Commission believes that those participants that would likely choose to monitor such data feeds likely already have the capability to monitor and aggregate information from multiple data feeds. Furthermore, the current BZX filing under consideration is a proposal from one exchange to disseminate information on one data feed and, as such, the Commission's analysis considers whether the instant proposal is consistent with the Act, rather than similar functionality that other exchanges may or may not propose in the future. \187\ See supra note 120. --------------------------------------------------------------------------- Manipulation Several commenters addressed the issue of whether the proposal would facilitate manipulation of both the closing auctions on the primary listing markets, as well as continuous trading during the final minutes of the trading day. Some commenters did not believe it would do so. For example, one commenter stated that incentives to manipulate the closing price already exist and it is unlikely the proposal would result in increased manipulation of the market close.\188\ --------------------------------------------------------------------------- \188\ See Angel Letter, at 5. --------------------------------------------------------------------------- In contrast, several commenters asserted that the proposal raises a risk of manipulation, in part due to the asymmetry of information that would be disseminated, which would allow market participants to utilize informational advantages to their own benefit. For example, Nasdaq argued that information concerning the amount of orders matched through Cboe Market Close, would represent tradable information that market participants could use to ``game'' the closing crosses on the primary listing markets and undermine fair and orderly markets.\189\ In particular, Nasdaq argued that its closing auction was designed to carefully balance the amount and timing of data released so as to reduce the risk of gaming, but that this new information regarding paired MOC orders could be used to gauge the depth of the market, the direction of existing imbalances, and the likely depth remaining at Nasdaq, creating gaming opportunities.\190\ While Nasdaq acknowledged that information asymmetries exist today as a result of broker-dealer MOC order matching services, it argued that BZX, ``as a neutral platform, is more likely to gather orders from multiple brokers and enable a small number of participants to gain actionable asymmetric information,'' which could potentially change the Nasdaq closing price.\191\ In response to claims from BZX that Nasdaq's closing auction is subject to the same information asymmetries and risks, Nasdaq argued that by having its data dissemination and cut-off time occur simultaneously, all market participants learn the imbalance at the same time, avoiding such risks.\192\ --------------------------------------------------------------------------- \189\ See Nasdaq Letter 1, at 8 and Nasdaq Letter 2, at 14. \190\ See Nasdaq Letter 1, at 8 and Nasdaq Letter 2, at 13-14 (arguing that market participants may use information gained regarding an imbalance in Cboe Market Close to detect the direction of the Nasdaq closing auction imbalance and trade against that information in either the closing auction or the continuous market). \191\ See Nasdaq Letter 2, at 14. Nasdaq argued that this would weaken the price discovery process, create a cycle of closing price deterioration, and increase volatility. See id. But see supra notes 110-160 and accompanying text discussing why the proposal is reasonably designed to not impact the price discovery process of the primary listing markets' closing auctions. \192\ See id. --------------------------------------------------------------------------- NYSE further asserted that the proposal could potentially provide some market participants, such as professional traders, with useful information that other market participants do not have, such as the direction of an imbalance, which could be used to influence the official closing price.\193\ --------------------------------------------------------------------------- \193\ See NYSE Letter 1, at 6. However, ViableMkts argued that because these market participants would not know the full magnitude of the imbalance, it does not believe the proposal creates an incremental risk of manipulation. See ViableMkts Letter, at 5. --------------------------------------------------------------------------- Although not citing concerns regarding manipulation specifically, T. Rowe Price similarly argued that the proposal would lead to information asymmetries that could result in changes in continuous trading behavior leading into the market close as some market participants could be trading on information gathered from Cboe Market Close pairing results.\194\ T. Rowe Price asserted that a market participant that is aware of the composition of volume paired through Cboe Market Close at 3:35 p.m. would be in a position to use that information to influence its trading behavior over the next ten to fifteen minutes leading in to the closing auction cut-off times on NYSE and Nasdaq respectively.\195\ T. Rowe Price argued that, as a result, the proposal could not only impact price discovery in closing auctions on the primary listing markets it could also impact continuous trading behavior.\196\ --------------------------------------------------------------------------- \194\ See T. Rowe Price Letter, at 2-3. \195\ See id. \196\ See id. --------------------------------------------------------------------------- In contrast, BZX argued that information asymmetries are inherent in trading, including the primary listing markets closing auctions.\197\ For example, BZX argued that the current operation of d- Quotes on NYSE carries a risk of manipulation as it provides an informational advantage to NYSE DMMs and floor brokers, and allows d- Quotes to be entered, modified or cancelled up until 3:59:50 p.m. while other market participants are prohibited from entering, modifying or cancelling on-close orders after 3:45 p.m.\198\ Lastly, BZX argued that the information [[Page 3219]] disseminated through the Bats Auction Feed would not provide any indication of whether the cancelling of a particular side of an order that has not been matched back to a market participant ``is meaningful or just happenstance,'' which limits this information's ability to create or increase manipulative activity.\199\ --------------------------------------------------------------------------- \197\ See BZX Letter 1, at 11-12 and BZX Letter 2, at 9. \198\ See BZX Letter 1, at 12 and BZX Letter 2, at 9. BZX also requested that the Commission review the appropriateness of NYSE's use of the d-Quote and its potential for price manipulation of NYSE's closing prices. See BZX Letter 1, at 9. \199\ See id. --------------------------------------------------------------------------- The Commission believes that the proposed rule change is consistent with the requirement of Section 6(b)(5) of the Act that the rules of a national securities exchange be designed to prevent fraudulent and manipulative acts and practices. The Commission believes information asymmetries as those described by commenters exist today and are inherent in trading, including with respect to closing auctions. For example, any party to a trade gains valuable insight regarding the depth of the market when an order is executed or partially executed. Further, on NYSE, not only DMMs, but NYSE floor brokers have access to closing auction imbalance information that is not simultaneously available to other market participants, far in advance of the NYSE order entry cut-off time. Specifically, pursuant to NYSE rules, floor brokers receive the amount of, and any imbalance between, MOC and marketable LOC interest every fifteen seconds beginning at 2:00 p.m. until 3:45 p.m.\200\ Floor brokers are permitted to provide their customers with specific data points from this imbalance feed. In arguing for the Commission to approve its proposal to disseminate such information to floor brokers, NYSE stated that the imbalance information does not represent overall supply or demand for a security, but rather is a small subset of buying and selling interest that is subject to change before the close, nor is it actionable prior to 15 minutes before the close.\201\ NYSE further asserted that it believed the information it disseminates to all participants at 3:45 p.m. is more material to investors, as it is more accurate, complete, and timely information.\202\ --------------------------------------------------------------------------- \200\ See NYSE Rule 123C(6)(b). \201\ See Securities Exchange Act Release No. 62923 (September 15, 2010), 75 FR 57541, 57542 (September 21, 2010) (SR-NYSE-2010-20; SR-NYSEAmex-2010-25). \202\ See id. --------------------------------------------------------------------------- The Commission believes that the same arguments apply with respect to BZX's proposal. In particular, even if a market participant becomes aware of the direction of the imbalance for a security in Cboe Market Close as a result of receiving a cancellation of part or all of that participant's order, such information does not represent overall supply or demand for the security, is subject to change before the close, and is only one piece of information and likely less useful than other information regarding the close that would be available to market participants, such as the total matched amount of MOC shares that would be disseminated by BZX at 3:35 p.m. and available to all market participants on equal terms, as well as any imbalance information disseminated by the primary listing markets. While commenters argue that those who participate in Cboe Market Close would be able to discern the direction of an imbalance and use such information to manipulate the closing price, the Commission believes the utility of such gleaned information is limited. In particular, a market participant would only be able to determine the direction of the imbalance, and would have difficulty determining the magnitude of any imbalance, as it would only know the unexecuted size of its own order. In addition, the information would only be with regard to the pool of liquidity on BZX and would provide no insight into imbalances on the primary listing market, competing auctions, or off-exchange matching services which, as described above, can represent a significant portion of trading volume at the close. Likewise, while a market participant would be able to determine whether its own order made up a large or small percentage of the paired shares for a security in Cboe Market Close, it would not be able to determine the composition of same-side or contra-side MOC orders submitted to Cboe Market Close, nor would such information enable it to determine the composition of orders submitted to the primary listing market, competing auctions, or off- exchange matching services.\203\ Therefore, the Commission believes the utility of this information is also limited. Accordingly, the Commission believes the proposal's potential for increased manipulation due to information asymmetries is negligible. --------------------------------------------------------------------------- \203\ See supra notes 194-196 and accompanying text. While one commenter expressed concern that market participants that are aware of the composition of volume paired through Cboe Market Close would be in a position to use that information to influence their trading behavior leading up to the close, under BZX's proposal, BZX would only publish the size, and not the composition, of paired MOC shares, and that such disseminated information would be available to all market participants. --------------------------------------------------------------------------- NYSE also argued that the proposal would increase potential manipulation for several reasons.\204\ First, NYSE asserted that the potential for manipulative activity at the close would increase because primary listing exchange auctions would decrease in size and thus be easier to manipulate.\205\ NYSE also argued that the proposal facilitates manipulative activity by providing an incentive for market participants to influence the closing price when they know they have been successfully matched on BZX to the benefit of the price of its already matched order.\206\ Further, NYSE argued that market participants could manipulate information leading up to the close by entering orders into Cboe Market Close in an attempt to send a false signal regarding demand and subsequently reverse such positions after hours.\207\ --------------------------------------------------------------------------- \204\ See NYSE Letter 1, at 6 and NYSE Report, at 19-22. See also Americas Executions Letter (stating that the proposal creates new opportunities to possibly manipulate the close). \205\ See NYSE Letter 1, at 6. \206\ See NYSE Letter 1, at 6 and NYSE Report, at 19. \207\ See NYSE Report, at 19-20. --------------------------------------------------------------------------- The Commission recognizes that, with or without Cboe Market Close, the potential exists that there may be market participants who may seek to engage in manipulative or illegal trading activity, including with respect to closing prices.\208\ Although no commenters provided specific data, analyses, or studies regarding manipulation generally or to support the assertion that the proposal could increase the potential for manipulative activity,\209\ scholarly articles have suggested that closing auction manipulations are often characterized by large, unrepresentatively priced orders submitted in the final seconds of the auction.\210\ Accordingly, the [[Page 3220]] Commission believes that, while it is possible that the potential for manipulation could increase if the closing auctions on the primary listing exchanges decreased significantly in size, existing surveillance systems, should be able to continue to detect such activity.\211\ With respect to NYSE's comment that the proposal would provide an incentive for market participants to influence the closing price when they know they have been successfully matched on BZX, market participants can attempt this today with respect to existing off- exchange MOC matching services (which are surveilled by FINRA) and any attempts to use Cboe Market Close to do this would result in such activity occurring on BZX, a national securities exchange with obligations under the Act to regulate and surveil its market. Similarly, entering non bona fide orders in an attempt to give the appearance of high demand is not a new form of potential manipulation unique to the proposal; rather, similar forms of market manipulation exist today and the Commission believes that current surveillance systems are designed to detect such activity. --------------------------------------------------------------------------- \208\ NYSE also asserted that arbitrageurs will look for opportunities presented by Cboe Market Close to ``gam[e] the system.'' However, NYSE also acknowledged that, ``[i]t is hard to predict all of the ways in which, and the degree to which, this might occur because it will depend on a wide range of variables, including the degree of usage of the Bats close, the changes to order flow and liquidity provision in the primary market's closing mechanism, the profits realized from manipulation, and the vitality of market oversight.'' See NYSE Report, at 19-22. \209\ In the OIP, the Commission specifically solicited comments on the whether the proposal would increase the potential for manipulation and requested that commenters provide specific data, analyses, or studies for support to the extent possible. See OIP, supra note 7, at 40211. Although the NYSE Report criticized the DERA Analysis for not addressing concerns regarding manipulation, the potential impact of the proposal on manipulation was outside the intended scope of such analysis, see supra note 144, and NYSE did not, in response to the OIP request, provide any of its own specific data or purport to provide findings of any study or analyses in this area. See NYSE Report, at 19-22. \210\ See Carole Comerton-Forde and Talis J. Putnins, ``Measuring Closing Price Manipulation,'' Journal of Financial Intermediation 20, 135-158 (2011), available at: https://www.sciencedirect.com/science/article/pii/S104295731000015X; and Talis J. Putnins, ``Market Manipulation: A Survey,'' Journal of Economic Surveys, 26, 952-967 (2012), available at: http://onlinelibrary.wiley.com/doi/10.1111/j.1467-6419.2011.00692.x/full. \211\ See infra for discussion of the obligations under the Act of national securities exchanges, as self-regulatory organizations, to surveil for manipulative activity on their markets. --------------------------------------------------------------------------- Lastly, Nasdaq stated that it and other exchanges would need to develop new cross-market surveillance systems in order to address these risks.\212\ NYSE also stated that there are no safeguards built-in to the proposal to prevent manipulation, and identifying manipulative activity would also become more difficult under the proposal due to the time difference between the Cboe Market Close and primary market closing auctions and the cross-market nature of the manipulation.\213\ Further, NYSE argued that market participants may have legitimate reasons to want to reverse their trades that have been matched in Cboe Market Close by trading in the primary market auction, and thus, it would be difficult to distinguish between manipulative trading activity and legitimate `positioning.' \214\ GTS similarly argued that the proposal would make surveillance of the market close more difficult and expensive due to fragmentation of order flow across multiple markets.\215\ In contrast, IEX argued that participation in the Cboe Market Close, followed by activity intended to affect the closing price on the primary market, would make manipulation of closing crosses as or more conspicuous than other trading patterns for which exchanges already conduct surveillance.\216\ Two commenters also stated that the Consolidated Audit Trail would provide a new tool for detecting any such manipulation.\217\ --------------------------------------------------------------------------- \212\ See Nasdaq Letter 2, at 14. \213\ See NYSE Report, at 20-21 and NYSE Letter 1, at 6. \214\ See NYSE Report, at 19. \215\ See GTS Securities Letter 1, at 6; GTS Securities Letter 2, at 5. \216\ See IEX Letter, at 2. \217\ See id., at 2-3 and Bollerman Letter, at 2. --------------------------------------------------------------------------- In response, BZX made several arguments as to why it does not believe that the proposal creates a potential for increased manipulation.\218\ BZX stated that, should the Commission approve the proposal, both it and FINRA, as well as other exchanges, would continue to surveil for manipulative activity and ``seek to punish those that engage in such behavior.'' \219\ In its final response letter, BZX reiterated that while it does not believe that the proposal would increase the potential for manipulation, it is ``committed to enhancing its current surveillance procedures and working with other [SROs], including FINRA, the NYSE, and Nasdaq, to ensure that any potential inappropriate trading activity is detected and prevented.'' \220\ Specifically, BZX stated that, consistent with its obligations as an SRO, it currently surveils all trading activity on its system including trading activity at the close, and intends to implement and enhance in- house surveillance processes designed to detect potential manipulative activity related to the Cboe Market Close.\221\ --------------------------------------------------------------------------- \218\ See BZX Letter 1, at 11-12 and BZX Letter 2, at 9. \219\ See BZX Letter 1, at 11 and BZX Letter 2, at 9. \220\ See BZX Letter 4, at 1. \221\ Id. In particular, BZX stated that the surveillance would include, among other things, monitoring for possible non bona fide order activity, such as the submission of orders for the purpose of gaining an informational advantage, the entry of large size orders on one side of the market, or other trading activity that would indicate a pattern or practice aimed at manipulating the closing auction. Id. Further, BZX committed to providing the Commission staff its surveillance plan and stated that it would implement that plan on the date that Cboe Market Close becomes available to market participants. See id. at 2. --------------------------------------------------------------------------- BZX also highlighted the cross-market surveillance that FINRA conducts on its behalf.\222\ In particular, BZX stated that FINRA's comprehensive cross-market surveillance program can monitor for nefarious activity by a market participant across two or more markets and includes surveillance designed to detect activity geared towards manipulating a security's closing price.\223\ Stating that it currently provides FINRA the necessary trade data to conduct such surveillance, BZX represented that it is also committed to work with FINRA on enhancements to the current cross market surveillance program to account for any potential manipulative activity by participants in Cboe Market Close and the primary listing markets' closing auctions.\224\ BZX also stated that, as a member of the Intermarket Surveillance Group (``ISG''), it would share the necessary information concerning Cboe Market Close with NYSE and Nasdaq, as part of their participation in ISG, to allow them to properly surveil for potentially manipulative activity within their closing auctions.\225\ --------------------------------------------------------------------------- \222\ See id. Under regulatory services agreements, national securities exchanges, such as BZX, may enter into contracts with other regulatory entities, such as FINRA, to provide regulatory services on the exchange's behalf. Notwithstanding the existence of a regulatory services agreement, the exchange retains legal responsibility for the regulation of its members and its market and the performance of its regulatory services provider. \223\ Id. \224\ Id. \225\ Id. --------------------------------------------------------------------------- With respect to manipulative or illegal trading activity more broadly, self-regulatory organizations such as BZX and the primary listing markets have an obligation under the Act to surveil for manipulative activity on their markets. The Commission generally believes that existing self-regulatory organization surveillance and enforcement activity, and the measures that the Exchange has represented that it would take to surveil for and detect manipulative activity related to the proposal, would help to deter market participants who might otherwise seek to try and abuse Cboe Market Close or a closing auction on a primary listing exchange. The Commission expects that BZX will closely monitor Cboe Market Close and implement new or enhanced surveillance measures, as necessary, designed to identify potential manipulative behavior. Further, the Commission expects that potential violative conduct identified by BZX, FINRA, or any other national securities exchange would be investigated. With respect to NYSE's comment on the potential challenges posed that time differences or cross-market activity may pose in identifying manipulative activity,\226\ these issues also exist today with respect to existing off-exchange MOC matching services. To the extent [[Page 3221]] that such attempted manipulative activity instead occurs on BZX, it would simply shift surveillance from FINRA to BZX, a national securities exchange with obligations under the Act to regulate and surveil its market. Further, with regard to the challenge of differentiating between legitimate trading and manipulative activity, this too exists today with regard to many different trading scenarios. --------------------------------------------------------------------------- \226\ See supra note 213 and accompanying text. --------------------------------------------------------------------------- Impact on Competition A number of commenters addressed the proposal's impact on competition. Seven commenters supporting the proposal stated that it would increase competition among exchanges for executions of orders at the close.\227\ These commenters asserted that increased competition could result in reduced fees for market participants.\228\ Three commenters characterized the primary listing markets as maintaining a ``monopoly'' on orders seeking a closing price with no market competition, which they argued has, and would continue to, result in a continual increase in fees for such orders if the proposal were not approved.\229\ In addition, IEX argued that the proposal does not unduly burden competition as exchanges often attempt to compete by adopting functionality or fee schedules developed by competitors.\230\ ViableMkts also asserted that the proposal is not fully competitive with closing auctions, as it does not accept priced orders or disseminate imbalance information.\231\ Rather, it believed that the proposal competes with other un-priced orders in closing auctions which, in its view, is not ``destructive to the mission of the closing auction.'' \232\ --------------------------------------------------------------------------- \227\ See PDQ Letter; Clearpool Letter, at 2; Virtu Letter, at 2; SIFMA Letter 1, at 2; IEX Letter, at 1; ViableMkts Letter, at 1- 2; and Bollerman Letter, at 2. \228\ See PDQ Letter; Clearpool Letter, at 2; Virtu Letter, at 2; SIFMA Letter 1, at 2; IEX Letter, at 1; ViableMkts Letter, at 1; SIFMA Letter 2, at 2; and Bollerman Letter, at 2. \229\ See IEX Letter, at 3; Clearpool Letter, at 2; and ViableMkts Letter, at 1-2. However, one commenter also stated that it believes the fees charged by NYSE and Nasdaq for participating in their closing auctions are not excessive and there is no need for additional fee competition for executing orders at the official closing price. See GTS Securities Letter 1, at 5. \230\ See IEX Letter, at 3. \231\ See ViableMkts Letter, at 5. \232\ See id. ViableMkts also argued that the effect of this competition will most likely be increased volumes at the closing price because of lower marginal costs and the potential to attract new types of investors to transact at the closing price. See id. --------------------------------------------------------------------------- In contrast, other commenters argued that the proposal would impose a burden on competition not necessary or appropriate in furtherance of the purposes of the Act, including by ``free-riding'' on the investments the primary listing markets have made in their closing auctions.\233\ Specifically, NYSE asserted that the proposal is an unnecessary and inappropriate burden on competition as it would allow BZX to use the closing prices established through the auction of a primary listing market, without bearing any of the costs or risks associated with conducting a closing auction.\234\ NYSE added that the existing exchange fees for closing auctions reflect the value created by the primary listing exchange's complex procedures and technology to determine the official closing price of a security.\235\ NYSE emphasized that it has invested significantly in intellectual property and software to implement systems that facilitate orderly price discovery in the closing auction, as well as surveillance tools necessary to monitor activity leading up to, and in, the closing process.\236\ Specifically, NYSE stated that operating an auction is the most technologically complicated function of an exchange that requires significant resources.\237\ According to NYSE, BZX would be able to sell the official closing price established by a NYSE closing auction at a price point with which it could not realistically compete.\238\ NYSE also stated that the proposal differs from the Nasdaq and NYSE Arca competing auctions in securities not listed on their exchanges in that such auctions compete on a level playing field because they are independent price-discovery auction events that do not rely on prices established by the primary listing exchange and they serve as an alternative method of establishing an official closing price if a primary listing exchange is unable to conduct a closing auction due to a technology issue.\239\ --------------------------------------------------------------------------- \233\ See NYSE Letter 1, at 9-10; NYSE Letter 3, at 1, 4-6 Nasdaq Letter 1, at 5-6 & 9; Nasdaq Letter 2, at 7-8 (reiterating its assertion that BZX is ``free-riding'' on the primary listing markets' investments in issuer relationships, real-time regulation, and closing cross technology); BioCryst Letter, at 2; Digimarc Letter, at 1-2; NBT Bancorp Letter, at 2; Balchem Letter, at 2; Cree Letter, at 2; Sirius Letter, at 2; Lam Letter, at 2; and PayPal Letter, at 1. See also Angel Letter, at 3 (calling for a rationalization of intellectual property protection in order to foster productive innovation). \234\ See NYSE Letter 1, at 9, NYSE Letter 2, at 1-3 (adding that the proposal is anti-competitive because it is proposing to sell at a lower price the closing prices produced through resources expended by NYSE), and NYSE Letter 3, at 5; and NYSE Letter 4, at 1. In contrast, one commenter argued that BZX would not be ``free- riding'' on the primary listing exchanges' price discovery process because it is ``a regular and accepted practice'' to match orders at reference prices. See SIFMA Letter 2, at 2. \235\ See NYSE Letter 1, at 9 and NYSE Letter 3, at 5 (stating that NYSE does not segregate the costs associated with building, testing, monitoring or maintaining its closing auction process and that the costs do not vary based on the volume of orders sent to the closing auction). NYSE also argued that the proposal impacts competition for listings, as issuers choose where to list their securities based on how primary listing exchanges are able to centralize liquidity and perform closing auctions. See NYSE Letter 1, at 9. \236\ See NYSE Letter 2, at 2. Moreover, NYSE stated that it dedicates resources to providing systems to DMMs necessary to facilitate the closing of trading as well as to floor brokers to enter and manage their customers' closing interest. See id. \237\ See NYSE Letter 3, at 5. \238\ See id. NYSE stated that the majority of costs associated with operating a closing auction are fixed costs. If NYSE were to reduce the fees charged for participating in its closing auction, NYSE stated that there likely would be other impacts on the exchange's overall fee structure. See id. \239\ See NYSE Letter 1, at 6; NYSE Letter 2, at 3-4; and NYSE Letter 3, at 5. In response, one commenter stated that these competing auctions were not originally proposed to only serve as a back-up to a primary listing markets' closing auction. See SIFMA Letter 2, at 2. In addition, one commenter stated that such competing auctions are not expressly limited to operating only when another primary listing exchange is experiencing a failure. See Bollerman Letter, at 3. --------------------------------------------------------------------------- Nasdaq also argued that the proposal would impose a burden on competition not necessary or appropriate in furtherance of the purposes of the Act. Specifically, Nasdaq believed that the proposal undermines intra-market competition, by removing orders from Nasdaq's auction book and prohibiting those orders from competing on Nasdaq, which Nasdaq argued is necessary for the exchange to arrive at the most accurate closing price.\240\ Nasdaq also stated that, by diverting orders away from NYSE and Nasdaq, the proposal would detract from robust price competition and discovery that closing auctions ensure.\241\ Nasdaq further argued that in order for BZX to meaningfully enhance competition, it would have to generate its own closing price, as opposed to merely utilizing the closing price generated by a primary listing market.\242\ In addition, Nasdaq argued that price competition between exchanges is not as important a form of competition as innovation because price competition elevates fragmentation, sacrifices quote and order interaction, and, in the case of Cboe Market Close, undermines innovation.\243\ Further, Nasdaq stated that BZX's comparisons to pegged orders, where the price is based upon reference data that does not originate on that exchange, was misplaced because all exchanges [[Page 3222]] contribute to the prices to which such orders are pegged.\244\ Nasdaq asserted that Cboe Market Close is not an analogous offering because BZX does not contribute to the closing price on a primary listing exchange.\245\ --------------------------------------------------------------------------- \240\ See Nasdaq Letter 1, at 9. \241\ See Nasdaq Letter 1, at 10 and Nasdaq Letter 2, at 7-8. See also supra notes 27-109 and accompanying text (discussing comments on the proposal's impact on price discovery). \242\ See id., at 13. See also supra notes 52-54 (discussing comments on the proposal's impact on price discovery and competing auctions and over-the-counter matching services). \243\ See Nasdaq Letter 2, at 8. \244\ See id., at 13. \245\ See id. --------------------------------------------------------------------------- In response to commenters' contentions about competition, BZX asserted that the proposal would enhance rather than burden competition.\246\ In this regard, BZX argued that its proposal would promote competition in the use of MOC orders at the official closing price.\247\ Specifically, BZX stated that the proposal would have a positive impact on competition as it offers a price-competitive alternative that will not impact the price discovery process.\248\ --------------------------------------------------------------------------- \246\ See BZX Letter 1, at 10-11 and BZX Letter 2, at 6-7. \247\ See id. BZX further argued that Nasdaq's assertion that the proposal would undermine competition amongst orders is misplaced because BZX believes that paired MOC orders, which are beneficiaries of price discovery and not price-setting orders do not impact interactions that take place on another exchange because orders compete with each other for executions within each individual exchange based on the parameters a market participant places on its orders. See id., at 11. \248\ See BZX Letter 2, at 7. --------------------------------------------------------------------------- BZX also challenged the assertion that it was ``free-riding'' on the primary listing exchanges' closing auctions.\249\ In this regard, BZX argued that instead it was, on balance, providing a ``a materially better value to the marketplace'' in two ways: By not diverting price- forming limit orders away from the primary listing market; and by providing users with the official closing price because any other price would be undesirable to market participants and potentially harmful to price formation.\250\ BZX further argued that there is precedent for an exchange to execute orders solely at reference prices while not also displaying priced orders for that security.\251\ In addition, BZX stated that no rule or regulation provides the primary listing market with control over how other market participants use the official closing price in their matching engines or with regard to the pricing of their own products, such as mutual funds, ETFs, and indices.\252\ BZX also stated that improving and mimicking functionality enhances the competitive dynamic amongst exchanges.\253\ --------------------------------------------------------------------------- \249\ See BZX Letter 1, at 5 and BZX Letter 2, at 7. \250\ See BZX Letter 1, at 5. \251\ See BZX Letter 1, at 6 and BZX Letter 2, at 7 (describing NYSE's after hours crossing sessions which executes orders at the NYSE official closing price and the ISE Stock Exchange functionality that only executed orders at the midpoint of the NBBO and did not display orders). \252\ See BZX Letter 2, at 8. \253\ See id. --------------------------------------------------------------------------- Further, BZX asserted that the Commission has approved the operation of competing closing auctions, noting in particular the closing auctions on Nasdaq, NYSE Arca, and the American Stock Exchange.\254\ --------------------------------------------------------------------------- \254\ See BZX Letter 1, at 6. See also supra notes 81-93 and accompanying text (discussing BZX's comments on competing closing auctions with regard to price discovery). In addition, in response to Nasdaq's contention that it is aware of no regulator in any jurisdiction that has sanctioned a diversion of orders from the primary market close, BZX stated the Ontario Securities Commission's approval of a similar proposal by Chi-X Canada ATS, which it said is currently owned by Nasdaq, to match MOC orders at the closing price established by the Toronto Stock Exchange. See Nasdaq Letter 1, at 10; BZX Letter 1, at 7; and BZX Letter 2, at 2 (stating that the Ontario Securities Commission stated that the proposal would not threaten the integrity of the price formation process and would pressure the Toronto Stock Exchange to competitively price executions during their closing auction). --------------------------------------------------------------------------- The Commission believes that the proposal does not impose any burden on competition not necessary or appropriate in furtherance of the Act; rather, it provides an alternative venue to which market participants may submit closing interest and receive the official closing price. The Commission believes that while BZX would not be conducting the closing auction that would determine the execution price for orders executed in Cboe Market Close, the availability of Cboe Market Close will inject competition into the closing process to the ultimate benefit of market participants generally, which could include price and execution quality competition. The Commission further believes that implementation of Cboe Market Close could incent other venues, including the primary listing exchanges as well as off-exchange matching venues, to continue to innovate and compete to attract MOC orders to their closing auctions, which may include lowering transaction fees, to the benefit of market participants generally. The proposal would also provide an opportunity for market participants to assess and compare their experience in seeking to execute MOC orders on different national securities exchanges, which would foster competition and that may enhance the quality and efficiency of MOC order executions. Ultimately, the Commission believes that the success of the Cboe Market Close in competing with the primary listing exchanges and off-exchange matching venues for MOC orders will depend on a variety of factors, including the quality of the MOC order execution services, the attendant risks, and the costs associated with such executions. While the primary listing markets and other commenters argue that BZX is ``free riding'' on investments of the primary listing markets in the development and maintenance of the closing auction process and thus impeding competition in a manner inconsistent with the Act, the Commission believes that this form of burden on competition must be evaluated against the potentially enhanced competition that the proposal also provides, as discussed above.\255\ Further, while NYSE and Nasdaq argue that their fees for closing executions reflect their costs of developing and operating the closing auctions, other commenters assert that the primary listing markets have taken advantage of the ``monopoly'' they have on orders seeking a closing price to impose high fees. In this regard, the Commission expects that the proposal, by introducing further competition, should result in a reduction of fees for such orders. This may result in benefits to investors generally. In addition, in the highly competitive environment of the current national market system with numerous exchanges competing for order flow, it is commonplace for exchanges to attempt to mimic or build upon various functionality of their competitors. Doing so does not result in the proposal imposing a competitive burden not necessary or appropriate in furtherance of the purposes of the Act. --------------------------------------------------------------------------- \255\ To the extent that the primary listing markets believe the proposal infringes on their intellectual property and innovations they have developed with regard to closing auctions, they have the ability to seek protection under applicable laws, as appropriate. --------------------------------------------------------------------------- In addition, both NYSE and Nasdaq referenced the Commission's disapproval of Nasdaq's proposal to create a Benchmark Order as support that BZX has not sufficiently satisfied its obligation to justify that the proposal is consistent with the Act and not an inappropriate burden on competition. NYSE argued that BZX essentially proposes to compete with broker-dealer agency order matching services.\256\ NYSE asserted that the Commission disapproved Nasdaq's Benchmark Order in part because it would provide an exchange with an unfair advantage over competing broker-dealers, which was not consistent with Section 6(b)(8) of the Act.\257\ Nasdaq further argued that the disapproval of its Benchmark Order proposal supports the assertion that an exchange must articulate how a proposed service is consistent with the [[Page 3223]] policy goals of the Act with respect to national securities exchanges.\258\ --------------------------------------------------------------------------- \256\ See NYSE Letter 1, at 8. \257\ See id. \258\ See Nasdaq Letter 1, at 5. --------------------------------------------------------------------------- Likewise, SIFMA also referenced the Commission's disapproval of Nasdaq's proposal to create a Benchmark Order as support for its assertion that BZX is proposing to offer a function identical to that currently offered by broker-dealers, yet would benefit from regulatory immunity as well as the limits on liability contained in BZX Rule 11.16.\259\ Specifically, SIFMA stated that, while it supports the proposal, it believes that as a condition of approval, BZX and the Commission should clarify in writing that Cboe Market Close would not be entitled to any application of regulatory immunity and that the Exchange should amend its Rule 11.16 to provide that Cboe Market Close would not be subject to the monetary limits on the Exchange's liability.\260\ --------------------------------------------------------------------------- \259\ See SIFMA Letter 3, at 2-4. \260\ See id. at 1. --------------------------------------------------------------------------- With respect to regulatory immunity, SIFMA asserted that both courts and the Commission have stated that regulatory immunity applies only in situations where an exchange is exercising its regulatory authority over its member, pursuant to the Act.\261\ SIFMA stated that because Cboe Market Close would not be a self-regulatory function whereby the exchange would be regulating its members, BZX should not be entitled to apply regulatory immunity for any losses arising from the functionality.\262\ In addition, SIFMA stated that BZX Rule 11.16 currently limits the liability exposure of the exchange to its members.\263\ SIFMA asserted that BZX's limits on liability set forth in Rule 11.16 ``bear no relation to the actual amount of financial loss that could result from an exchange malfunction.'' \264\ SIFMA argued that the ``disparity is particularly acute'' with respect to the proposal because broker-dealers currently perform services akin to Cboe Market Close without a limitation on their liability.\265\ Accordingly, SIFMA stated that, as a condition of operating Cboe Market Close, BZX should carve it out from the liability limits of Rule 11.16.\266\ --------------------------------------------------------------------------- \261\ See id. at 2-3. \262\ See id. at 3. \263\ See BZX Rule 11.16. \264\ See SIFMA Letter 3, at 4. \265\ See id. \266\ See id. --------------------------------------------------------------------------- BZX argued that, rather than looking to compete with broker-dealer services, it is seeking to compete on price with the primary listing markets' closing auctions.\267\ In addition, BZX argued that, contrary to the assertions by NYSE and Nasdaq, its proposal does not implicate the same issues as Nasdaq's Benchmark Order proposal because the Commission's disapproval of that proposal rested primarily on its finding that it raised issues under the Market Access Rule.\268\ BZX responded to SIFMA's comments on regulatory immunity and its limitation on liability rule by stating that the concerns raised were ``not germane to whether the [p]roposal is consistent with the Act,'' and further stated that it believed it would be inappropriate in the context of a filing on one proposed rule change to set a new standard on an issue that has broad application to all exchange services as well as National Market System Plans.\269\ BZX also asserted that SIFMA did not provide any evidence to support its claim that its members have been disadvantaged by the exchange's limitation of liability rule as compared to limitation on liability provisions in a broker-dealer's contracts with its clients, which often disclaim all liability.\270\ --------------------------------------------------------------------------- \267\ See BZX Letter 1, at 10. \268\ See id., at 11. \269\ See id. \270\ See BZX Letter 3, at 5. --------------------------------------------------------------------------- The Commission believes, as acknowledged by BZX, that it is possible that BZX's proposal could divert some MOC orders from off- exchange matching services operated by broker-dealers onto a regulated exchange.\271\ Broker-dealers and national securities exchanges currently compete with respect to a variety of functions and services that they offer to market participants within the current national market system. As such, the fact that a national securities exchange proposes to offer functionality that is similar to a service offered by a broker-dealer does not, in and of itself, render such functionality an inappropriate burden on competition. Rather, the proposal must be considered in the broader context of the existing competitive landscape and different regulatory structures applicable to broker-dealers and exchanges under the Act, respectively. With respect to BZX's proposal, the Commission believes that, on balance, in light of the differing requirements under the Act and the rules and regulations thereunder applicable to national securities exchanges and broker-dealers, the proposal does not pose any burden on competition not necessary or appropriate in furtherance of the purposes of the Act. --------------------------------------------------------------------------- \271\ See BZX Letter 2, at 11. --------------------------------------------------------------------------- Further, the Commission believes that the issues raised by commenters regarding the judicial doctrine of regulatory immunity and rule-based limitations on liability are part of a broader policy issue regarding the different regulatory structures for exchanges and broker- dealers, and do not materially impact the Commission's analysis or finding regarding whether this proposal poses an unnecessary or inappropriate burden on competition.\272\ --------------------------------------------------------------------------- \272\ The Commission also notes that MOC orders submitted to other exchanges' closing auctions would be subject to those exchanges' rules governing limitations on liability. --------------------------------------------------------------------------- The Commission has taken the position that immunity from suit ``is properly afforded to the exchanges when engaged in their traditional self-regulatory functions--where the exchanges act as regulators of their members,'' including ``the core adjudicatory and prosecutorial functions that have traditionally been accorded absolute immunity, as well as other functions that materially relate to the exchanges' regulation of their members,'' but should not ``extend to functions performed by an exchange itself in the operation of its own market, or to the sale of products and services arising out of those functions.'' \273\ The Court of Appeals for the Second Circuit recently reached a similar conclusion.\274\ The Commission has also recognized that an exchange's invocation of immunity from suit should be examined on a ```case-by-case basis,' with `the party asserting immunity bear[ing] the burden of demonstrating [an] entitlement to it.' '' \275\ Whether and to what extent a court would consider BZX's additional functionality under the proposed rule to fall within an exchange's traditional regulatory functions depends on an assessment of the facts and circumstances of the particular allegations before it and is beyond the scope of the Commission's consideration of the proposed rule change pursuant to the Act. --------------------------------------------------------------------------- \273\ Brief of the Securities and Exchange Commission, Amicus Curiae, No. 15-3057, City of Providence v. Bats Global Markets, Inc. (2d Cir.) (``City of Providence Amicus Br.''), at 22. \274\ City of Providence v. Bats Global Markets, Inc., 878 F.3d 36 (2d Cir. 2017) (``When an exchange engages in conduct to operate its own market that is distinct from its oversight role, it is acting as a regulated entity--not a regulator. Although the latter warrants immunity, the former does not.''). \275\ City of Providence Amicus Br. at 21 (quoting In re NYSE Specialists Secs. Litig., 503 F.3d 89, 96 (2d Cir. 2007)). --------------------------------------------------------------------------- IV. Conclusion For the foregoing reasons, the Commission finds that the proposed rule change is consistent with the Act and the rules and regulations thereunder applicable to a national securities exchange. [[Page 3224]] It is therefore ordered, pursuant to Section 19(b)(2) of the Act \276\ that the proposed rule change (SR-BatsBZX-2017-34), as modified by Amendment No. 1, be, and hereby is, approved. --------------------------------------------------------------------------- \276\ 15 U.S.C. 78s(b)(2). For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.\277\ --------------------------------------------------------------------------- \277\ 17 CFR 200.30-3(a)(12). --------------------------------------------------------------------------- Eduardo A. Aleman, Assistant Secretary. [FR Doc. 2018-01093 Filed 1-22-18; 8:45 am] BILLING CODE 8011-01-P
![Federal Register / Vol. 83, No. 15 / Tuesday, January 23, 2018 / Notices 3205
inspection and copying at the principal letters on the proposed rule change, Commission instituted proceedings
office of the Exchange. All comments including a response from the under Section 19(b)(2)(B) of the Act 6 to
received will be posted without change. Exchange.5 On August 18, 2017, the determine whether to approve or
Persons submitting comments are disapprove the proposed rule change.7
cautioned that we do not redact or edit 5 See Letters to Brent J. Fields, Secretary, Thereafter, the Commission received
personal identifying information from Commission, from: (1) Donald K. Ross, Jr., nine more comment letters, including
Executive Chairman, PDQ Enterprise, LLC, dated
comment submissions. You should June 6, 2017 (‘‘PDQ Letter’’); (2) Edward S. Knight,
three responses from the Exchange.8 On
submit only information that you wish Executive Vice President and General Counsel,
to make available publicly. All Nasdaq, Inc., dated June 12, 2017 (‘‘Nasdaq Letter Services, dated July 19, 2017 (‘‘Stewart Letter’’);
submissions should refer to File 1’’); (3) Ray Ross, Chief Technology Officer, (32) M. Farooq Kathwari, Chairman, President &
Clearpool Group, dated June 12, 2017 (‘‘Clearpool CEO, Ethan Allen Interiors, Inc., dated July 24, 2017
Number CboeEDGA–2018–001 and Letter’’); (4) Venu Palaparthi, SVP, Compliance, (‘‘Ethan Allen Letter’’); (33) Jeff Green, Founder,
should be submitted on or before Regulatory and Government Affairs, Virtu Chief Executive Officer and Chairman of the Board
February 13, 2018. Financial, dated June 12, 2017 (‘‘Virtu Letter’’); (5) of Directors, The Trade Desk Inc., dated July 26,
Theodore R. Lazo, Managing Director and Associate 2017 (‘‘Trade Desk Letter’’); (34) James J. Angel,
For the Commission, by the Division of General Counsel, SIFMA, dated June 13, 2017 Associate Professor, McDonough School of
Trading and Markets, pursuant to delegated (‘‘SIFMA Letter 1’’); (6) Elizabeth K. King, General Business, Georgetown University, dated July 30,
authority.12 Counsel and Corporate Secretary, New York Stock 2017 (‘‘Angel Letter’’); (35) Jon Stonehouse, CEO,
Exchange (‘‘NYSE’’), dated June 13, 2017 (‘‘NYSE and Tom Staab, CFO, BioCryst Pharmaceuticals,
Eduardo A. Aleman, Letter 1’’); (7) John M. Bowers, Bowers Securities, Inc., dated July 31, 2017 (‘‘BioCryst Letter’’); (36)
Assistant Secretary. dated June 14, 2017 (‘‘Bowers Letter’’); (8) Jonathan Peter Campbell, Chief Financial Officer, Mimecast,
[FR Doc. 2018–01089 Filed 1–22–18; 8:45 am] D. Corpina, Senior Managing Partner, Meridian dated July 31, 2017 (‘‘Mimecast Letter’’); (37) Joanne
Equity Partners, dated June 16, 2017 (‘‘Meridian Moffic-Silver, Executive Vice President, General
BILLING CODE 8011–01–P Letter’’); (9) Fady Tanios, Chief Executive Officer, Counsel, and Corporate Secretary, Bats Global
and Brian Fraioli, Chief Compliance Officer, Markets, Inc., dated August 2, 2017 (‘‘BZX Letter
Americas Executions, LLC, dated June 16, 2017 1’’); (38) David M. Weisberger, Head of Equities,
SECURITIES AND EXCHANGE (‘‘Americas Executions Letter’’); (10) Ari M. ViableMkts, dated August 3, 2017 (‘‘ViableMkts
Rubenstein, Co-Founder and Chief Executive Letter’’); (39) Charles Beck, Chief Financial Officer,
COMMISSION Officer, GTS Securities LLC, dated June 22, 2017 Digimarc Corporation, dated August 3, 2017
(‘‘GTS Securities Letter 1’’); (11) John Ramsay, Chief (‘‘Digimarc Letter’’); (40) Elizabeth K. King, General
[Release No. 34–82522; File No. SR–
Market Policy Officer, Investors Exchange LLC, Counsel and Corporate Secretary, NYSE, dated
BatsBZX–2017–34] dated June 23, 2017 (‘‘IEX Letter’’); (12) Jay S. August 9, 2017 (‘‘NYSE Letter 2’’); (41)
Sidhu, Chairman, Chief Executive Officer, Representative Sean P. Duffy and Representative
Self-Regulatory Organizations; Bats Customers Bancorp, Inc., dated June 27, 2017 Gregory W. Meeks, dated August 9, 2017 (‘‘Duffy/
BZX Exchange, Inc.; Notice of Filing of (‘‘Customers Bancorp Letter’’); (13) Joanne Meeks Letter’’); (42) Michael J. Chewens, Senior
Amendment No. 1 and Order Granting Freiberger, Vice President, Treasurer, Masonite Executive Vice President & Chief Financial Officer,
International Corporation, dated June 27, 2017 NBT Bancorp Inc., dated August 11, 2017 (‘‘NBT
Approval of a Proposed Rule Change, (‘‘Masonite International Letter’’); (14) David B. Bancorp Letter’’); (43) Barry Zwarenstein, Chief
as Modified by Amendment No. 1, To Griffith, Investor Relations Manager, Orion Group Financial Officer, Five9, Inc., dated August 11, 2017
Introduce Cboe Market Close, a Holdings, Inc., dated June 27, 2017 (‘‘Orion Group (‘‘Five9 Letter’’); (44) William A. Backus, Chief
Letter’’); (15) Kieran O’Sullivan, Chairman, Financial Officer & Treasurer, Balchem Corporation,
Closing Match Process for Non-BZX President and CEO, CTS Corporation, dated June dated August 15, 2017 (‘‘Balchem Letter’’); (45)
Listed Securities Under New Exchange 28, 2017 (‘‘CTS Corporation Letter’’); (16) Sherri Raiford Garrabrant, Director, Investor Relations,
Rule 11.28 Brillon, Executive Vice-President and Chief Cree, Inc., dated August 15, 2017 (‘‘Cree Letter’’);
Financial Officer, Encana Corporation, dated June (46) Steven Paladino, Executive Vice President &
January 17, 2018. 29, 2017 (‘‘Encana Letter’’); (17) Steven C. Lilly, Chief Financial Officer, Henry Schein, Inc., dated
Chief Financial Officer, Triangle Capital August 16, 2017 (‘‘Henry Schein Letter’’); (47)
I. Introduction Corporation, dated June 29, 2017 (‘‘Triangle Capital Theodore Jenkins, Senior Director, Investor
Letter’’); (18) Robert F. McCadden, Executive Vice Relations and Communications, Corbus
On May 5, 2017, Bats BZX Exchange, President and Chief Financial Officer, Pennsylvania Pharmaceuticals, Inc., dated August 17, 2017
Inc. (now known as Cboe BZX Real Estate Investment Trust, dated June 29, 2017 (‘‘Corbus Letter’’); (48) Ari M. Rubenstein, Co-
Exchange, Inc.) (‘‘BZX’’ or ‘‘Exchange’’) (‘‘Pennsylvania REIT Letter’’); (19) Andrew Stevens, Founder and Chief Executive Officer, GTS
General Counsel, IMC Financial Markets, dated Securities LLC, dated August 17, 2017 (‘‘GTS
filed with the Securities and Exchange June 30, 2017 (‘‘IMC Letter’’); (20) Daniel S. Tucker, Securities Letter 2’’); (49) Cameron Bready, Senior
Commission (‘‘Commission’’), pursuant Senior Vice President and Treasurer, Southern Executive VP, Chief Financial Officer, Global
to Section 19(b)(1) of the Securities Company, dated July 5, 2017 (‘‘Southern Company Payments Inc., dated August 17, 2017 (‘‘Global
Exchange Act of 1934 (‘‘Act’’) 1 and Rule Letter’’); (21) Cole Stevens, Investor Relations Payments Letter’’); (50) Mike Gregoire, CEO, CA
Associate, Nobilis Health, dated July 6, 2017 Technologies, dated August 17, 2017 (‘‘CA
19b–4 thereunder,2 a proposed rule (‘‘Nobilis Health Letter’’); (22) Mehmet Kinak, Head Technologies Letter’’); (51) Patrick L. Donnelly,
change to adopt Bats Market Close, a of Global Equity Market Structure & Electronic Executive Vice President & General Counsel, Sirius
closing match process for non-BZX Trading, et al., T. Rowe Price Associates, Inc., dated XMHoldings Inc., dated August 17, 2017 (‘‘Sirius
Listed Securities. The proposed rule July 7, 2017 (‘‘T. Rowe Price Letter’’); (23) David L. Letter’’); (52) Theodore R. Lazo, Managing Director
Dragics, Senior Vice President, Investor Relations,
change was published for comment in and Associate General Counsel, SIFMA, dated
CACI International Inc., dated July 7, 2017 (‘‘CACI
August 18, 2017 (‘‘SIFMA Letter 2’’); (53) Donald
the Federal Register on May 22, 2017.3 Letter’’); (24) Mark A. Stegeman, Senior Vice
Bollerman, dated August 18, 2017 (‘‘Bollerman
On July 3, 2017, the Commission President & CFO, Turning Point Brands, Inc., dated
Letter’’); and (54) Sarah A. O’Dowd, Senior Vice
designated a longer period within which July 12, 2017 (‘‘Turning Point Letter’’); (25) Jon R.
President, Chief Legal Officer and Secretary, Lam
Moeller, Vice Chair and Chief Financial Officer, and
to approve the proposed rule change, Deborah J. Majoras, Chief Legal Officer and
Research Corporation, dated August 18, 2017 (‘‘Lam
disapprove the proposed rule change, or Letter’’).
Secretary, The Proctor & Gamble Company, dated 6 15 U.S.C. 78s(b)(2)(B).
institute proceedings to determine July 12, 2017 (‘‘P&G Letter’’); (26) Christopher A.
7 See Securities Exchange Act Release No. 81437,
Iacovella, Chief Executive Officer, Equity Dealers of
whether the proposed rule change America, dated July 12, 2017 (‘‘EDA Letter’’); (27) 82 FR 40202 (August 24, 2017) (‘‘OIP’’). In the OIP,
should be disapproved.4 The Rob Bernshteyn, Chief Executive Officer, Chairman the Commission specifically requested comment on
Commission received 54 comment Board of Directors, Coupa Software, Inc., dated July eight series of questions. See id. at 40210–11.
sradovich on DSK3GMQ082PROD with NOTICES
12, 2017 (‘‘Coupa Software Letter’’); (28) Sally J. 8 See Letters to Brent J. Fields, Secretary,
12 17 Curley, Senior Vice President, Investor Relations, Commission, from: (1) Gabrielle Rabinovitch, VP,
CFR 200.30–3(a)(12).
1 15
Cardinal Health, Inc., dated July 14, 2017 Investor Relations, PayPal Holdings, Inc., dated
U.S.C. 78s(b)(1). (‘‘Cardinal Health Letter’’); (29) Mickey Foster, Vice September 12, 2017 (‘‘PayPal Letter’’); (2) Edward
2 17 CFR 240.19b–4.
President, Investor Relations, FedEx Corporation, S. Knight, Executive Vice President and General
3 See Securities Exchange Act Release No. 80683
dated July 14, 2017 (‘‘FedEx Letter’’); (30) Counsel, Nasdaq, Inc., dated September 18, 2017
(May 16, 2017), 82 FR 23320 (‘‘Notice’’). Alexander J. Matturri, CEO, S&P Dow Jones Indices, (‘‘Nasdaq Letter 2’’); (3) Joanne Moffic-Silver,
4 See Securities Exchange Act Release No. 81072, dated July 18, 2017 (‘‘SPDJI Letter’’); (31) John L. Executive Vice President, General Counsel, and
82 FR 31792 (July 10, 2017). Killea, Chief Legal Officer, Stewart Information Continued
VerDate Sep<11>2014 17:59 Jan 22, 2018 Jkt 244001 PO 00000 Frm 00096 Fmt 4703 Sfmt 4703 E:\FR\FM\23JAN1.SGM 23JAN1](https://thefederalregister.org/doc/83_FR_3220/page/1.svg)
![3208 Federal Register / Vol. 83, No. 15 / Tuesday, January 23, 2018 / Notices
no paired or imbalance shares in its between the last sale price and the also explained that its designated
imbalance publications, it would official closing price in such market makers (‘‘DMMs’’), which have
discourage further participation in the situations.43 an obligation to facilitate the close of
continuous market leading up to the NYSE similarly argued that even trading in their assigned securities,
closing auction and the closing cross, though Cboe Market Close would only factor in the size of paired-off volume,
and thus there would be little ongoing accept MOC orders, it could materially and the composition of the closing
price discovery, because market impact official closing prices interest in assessing the appropriate
participants would know they would determined through a NYSE closing closing price.47 NYSE asserted that,
not have the ability to interact with auction.44 NYSE emphasized the under the proposal, DMMs would lose
market orders.38 Nasdaq contrasted the importance of the centralization of full visibility into the size and
BZX proposal with its own closing orders during the closing auction on the composition of MOC interest, and thus
auction process, arguing that after it primary listing exchange, stating that it would likely have to make more risk-
disseminates an imbalance notification is ‘‘an iterative process’’ that provides adverse closing decisions, resulting in
that combines MOC and LOC orders, ‘‘periodic information about order inferior price formation.48
market participants can continue to imbalances, indicative price, matched NYSE also argued that the proposal
submit orders to interact with existing volume, and other metrics’’ to help would detrimentally impact price
auction interest.39 market participants anticipate the likely discovery on the NYSE Arca and NYSE
Moreover, Nasdaq argued that even if closing price, and that allows for American automated closing auctions.
the proposal only resulted in fewer investors to find contra-side liquidity NYSE stated that in the last six months
market-on-close orders submitted to and assess whether to offset imbalances,
there were 130 instances where the
Nasdaq closing auctions, investors and for orders to be priced based on the
official closing price determined
would be harmed because the official true supply and demand in the
through a NYSE Arca closing auction
closing price could potentially represent market.45 NYSE asserted that
was based entirely on paired-off market
a stale or undermined price.40 Nasdaq information on the lack of matched
order volume.49 In those instances,
asserted that its closing cross is MOC orders in the closing process could
pursuant to NYSE Arca rules, ‘‘the
designed to maximize the number of discourage liquidity providers from
Official Closing Price for that auction is
shares that can be executed at a single participating in the closing process
the midpoint of the Auction NBBO as of
price and that the number of market-on- because their order would be less likely
the time the auction is conducted.’’ 50
close orders impacts the number of to interact with market orders.46 NYSE
shares able to execute in a closing NYSE stated that if all market orders for
cross.41 Further, in its second comment 43 See id. at 3–5. Specifically, Nasdaq identified a NYSE Arca listed security were sent
letter, Nasdaq elaborated on the impact 1,653 closing crosses between January 1, 2016 and to BZX, the official closing price would
it believed reducing MOC orders could August 31, 2017 where removal of all MOC orders instead be the consolidated last sale
would have changed the closing prices. Nasdaq price, which can differ from the
have on Nasdaq’s closing auction. In asserts that this would have changed the closing
particular, Nasdaq argued that the valuation of Nasdaq issuers ‘‘by nearly midpoint of the auction NBBO by as
proposal would harm price discovery $870,000,000 of aggregate impact.’’ much as 3.2%.51
44 See NYSE Letter 1, at 3. While NYSE’s
because fragmentation of MOC orders In arguing that additional
arguments focused primarily on the potential for
would directly impact closing auctions MOC orders to migrate to Cboe Market Close as
fragmentation of closing auction interest
for which Nasdaq only received MOC described below, NYSE also asserted that, if the fees would detrimentally impact price
orders and that, in cases where all MOC for the Cboe Market Close were set lower than the discovery, both Nasdaq and NYSE
fees charged by the primary listing exchanges, it distinguished the Cboe Market Close
orders were removed from the Nasdaq could induce some market participants to use MOC
closing auction, the last sale price orders rather than sending LOC orders to the
from competing closing auctions
would become the official closing price, primary listing market. See NYSE Report, at 23. currently operated by Nasdaq and NYSE
as opposed to the price being 45 See NYSE Report, at 12. See also NYSE Letter Arca for securities listed on other
determined through the price discovery 1, at 4. NYSE, as well as Nasdaq, also asserted that markets. Nasdaq stated that the BZX
the proposal contradicts the Commission’s approval
process of its closing auction.42 Nasdaq of recent amendments to the National Market
proposal is a price-matching order type
discussed several hypothetical examples System Plan to Address Extraordinary Market and not a competitive single-priced
where removal of all MOC orders from Volatility (the ‘‘LULD Plan’’) which, they argue,
certain of its previously conducted centralize re-opening auction liquidity at the liquidity providers and other market participants’’
primary listing exchange by prohibiting other
closing auctions would have resulted in market centers from re-opening following a trading
trading in the closing auction).
47 See NYSE Letter 1, at 4. In response to this
use of the last sale price as the official pause until the primary listing exchange conducts
assertion, ViableMkts argues that use of Cboe
closing price and provided aggregated a re-opening auction. These commenters asserted
Market Close is voluntary. Accordingly, if a market
statistics denoting the differential that it would be inconsistent for the Commission to
find it in the public interest to consolidate trading participant wanted a DMM to be aware of their
in a re-opening auction, while sanctioning closing activity they could still send their orders to
38 See id. at 6. fragmentation of trading in a closing auction. See the NYSE closing auction. See ViableMkts Letter, at
39 See id. Nasdaq Letter 1, at 6; NYSE Letter 1, at 3; and 4.
48 See NYSE Letter 1, at 4.
40 See Nasdaq Letter 1, at 12. See also Nasdaq Nasdaq Letter 2, at 12. In response, commenters
49 See NYSE Letter 1, at 5. See also NYSE Report,
Letter 2, at 6 (providing an example of how the asserted the amendment to the LULD Plan cited by
proposal could cause a stale closing price). Nasdaq NYSE and Nasdaq granted the primary listing at 11–12. NYSE represented that once NYSE
also stated that a credible independent study of the market the ability to set the re-opening price but did American transitions to Pillar technology, it will
potential risk to price discovery is essential in order not mandate the consolidation of orders at the conduct a closing auction in an identical manner
to consider whether the proposal is consistent with primary listing market following a trading halt. BZX to NYSE Arca.
the Act. See Nasdaq Letter 1, at 12. believes the proposal is consistent with the LULD 50 See id.
sradovich on DSK3GMQ082PROD with NOTICES
41 See id., at 11. Nasdaq subsequently submitted Plan as it seeks to avoid producing a ‘‘bad’’ or 51 See id. In its third comment letter, NYSE also
a memorandum providing, among other things, data ‘‘outlier’’ closing price and does not affect the asserts that, in contrast to the data NYSE provided
relating to the level of matched MOC volume in centralization of price-setting closing auction in its first letter, BZX failed to provide any data in
Nasdaq closing auctions spanning the period of orders. See BZX Letter 1, at 8–9. See also Bollerman response to the requests for comment in the OIP to
January 1, 2017 through September 30, 2017 Letter, at 3. support the claim that there would be no impact on
(‘‘Nasdaq Data Memo’’). Nasdaq requested 46 See NYSE Report, at 13 and 23. See also NYSE price discovery. See NYSE Letter 3, at 2. But see
protection under the Freedom of Information Act Report, at 12 (arguing that ‘‘[a]nticipation that there BZX Letter 3, at 2–4, 7–9 and infra notes 99–106
for its memorandum. will be MOC orders in the closing auction is a and accompanying text discussing data and analysis
42 See Nasdaq Letter 2, at 3. critical component feeding into the decisions of provided by BZX.
VerDate Sep<11>2014 17:59 Jan 22, 2018 Jkt 244001 PO 00000 Frm 00099 Fmt 4703 Sfmt 4703 E:\FR\FM\23JAN1.SGM 23JAN1](https://thefederalregister.org/doc/83_FR_3220/page/4.svg)
![Federal Register / Vol. 83, No. 15 / Tuesday, January 23, 2018 / Notices 3209
auction that offers price discovery.52 In and encouraged them to route their diverted away from the primary market
contrast, Nasdaq states that its single- orders directly to the primary listing than what occurs today.67
priced auction for non-Nasdaq listed exchange.60 In addition, NYSE stated that existing
stocks was designed to maximize order Nasdaq and NYSE also addressed off-exchange matching services have a
interaction and improve price discovery price-matching services in the over-the- negative impact on the validity and
for issuers, not to siphon orders away counter market. Nasdaq stated that the integrity of price discovery in the
from the primary market without closing auctions.68 NYSE stated that
proposal would introduce a new
seeking to improve price discovery.53 data it analyzed from certain closing
category of price-matching venues,
Accordingly, Nasdaq argued that the auctions with large imbalances 69 shows
which would exacerbate the harm
fact that it and NYSE offer competing that, for securities with 1,000 shares or
closing auctions is irrelevant because caused by fragmentation.61 Both Nasdaq
less reported at the official closing price
those auctions are fundamentally and NYSE stated that over-the-counter
(on and off-exchange), volatility in the
different from the BZX proposal.54 price-matching services should not be
last 10 minutes of trading leading into
Similarly, NYSE argued that it believed considered a precedent for the Cboe
the close is 52% higher when more than
it was misleading to compare the Market Close proposal. Nasdaq stated 75% of a security’s closing share
proposal to the competing closing that, as a neutral trading platform, an volume is reported to a trade reporting
auctions because BZX would be offering exchange is capable of attracting and facility (‘‘TRF’’) (i.e., paired off-
neither a competing closing auction nor aggregating more liquidity than a exchange), compared to when less than
a facility to establish the official closing broker-dealer.62 Moreover, according to 25% of a security’s closing share
price should a primary listing exchange Nasdaq, trades resulting from broker- volume is reported to a TRF. In
invoke its closing auction contingency dealer price-matching services are often addition, NYSE asserted that its data
plan.55 also involved in the closing auction on showed that the official closing price
Nasdaq and NYSE further argued that the primary listing exchange, thus generated in auctions for securities with
competing closing auctions cause contributing to price discovery despite 1,000 shares or less reported at the
minimal fragmentation, as volumes in operating a price-matching service.63 official closing price (on and off-
those auctions are ‘‘miniscule.’’ 56 For Nasdaq explained that a broker may exchange) where more than 75% of a
example, Nasdaq stated that volumes in accept a MOC order and trade as either security’s share volume is reported to a
all competing auctions in Nasdaq-listed agent or principal against that order by TRF was more than twice as far away
corporate securities in the month of entering limit orders into either the from the last consolidated sale price and
June 2017 were less than 0.5% of closing auction on the primary listing nearly twice as far away from the market
Nasdaq’s closing volume.57 Similarly, exchange or the continuous market volume weighted average price
NYSE stated that for the period January leading up to the closing auction. After (‘‘VWAP’’) of the last two minutes of
1, 2017 through October 13, 2017, receiving an execution in the primary trading leading into the close.70
closing auctions in NYSE and Nasdaq- market closing auction, the broker Accordingly, NYSE concluded that
listed securities on NYSE Arca represent would then trade with the customer off- existing fragmentation degrades the
0.5% of the notional value traded in the exchange at a price determined by the quality of the closing price.71
NYSE and Nasdaq closing auctions.58 primary market closing auction.64 Several other commenters also
Nasdaq further asserted that less than discussed how the proposal may impact
Similarly, NYSE argued that it should
half of Nasdaq-listed corporate issues the integrity of official closing prices. In
not be assumed that the current level of
experience price dislocations in particular, GTS, a DMM on NYSE,
MOC orders executed away from the
competing closing auctions.59 Moreover, argued that market-on-close orders are a
primary market is a reasonable proxy for
Nasdaq and NYSE stated that on vital component of closing prices and,
the impact of the BZX proposal.65
multiple occasions when they received should those orders be diverted away
closing interest for securities listed on Specifically, NYSE asserted that market
makers that cross orders on behalf of from the primary listing markets as a
another exchange, they have contacted result of the proposal, it could
the firms associated with those orders clients at the closing price could be
risking capital on such transactions, undermine the official closing prices.72
52 See which would likely be a constraining GTS stated that, in pricing a closing
Nasdaq Letter 2, at 8–9.
53 See id. at 9. force on the magnitude of orders crossed auction on NYSE, it considers a variety
54 See id. away from primary markets, while BZX of inputs and stated that it considers
55 See NYSE Letter 2, at 3.
would have no such obligation to ‘‘the size of . . . matched shares and the
56 See Nasdaq Letter 2, at 9–10; see also NYSE
commit capital in Cboe Market Close.66 time those matched shares are
Letter 3, at 5–6.
As such, NYSE argued that the BZX consumed by each individual book [to
57 See Nasdaq Letter 2, at 11.
proposal, if successful, could result in a be] essential data points for
58 See NYSE Letter 3, at 6. NYSE also stated that
it does not have a business interest in running much higher percentage of MOC orders 67 See NYSE Report, at 10. The NYSE Report
closing auctions for securities listed on other
asserted that this was one of the limitations of
markets. It operates the NYSE Arca closing auction 60 See id. at 13; NYSE Letter 3, at 6. See also infra drawing conclusions from the DERA Analysis
for resiliency purposes, which it believes outweighs note 87 and accompanying text. regarding how the BZX proposal would impact the
any modest negative impact on fragmentation. See 61 See Nasdaq Letter 2, at 13. market close. See discussion of DERA Analysis,
id.; see also infra note 239.
59 See Nasdaq Letter 2, at 11. In response to BZX’s
62 See id. infra notes 133–134 and accompanying text.
63 See id. 68 See NYSE Letter 3, at 3.
claim that a large percentage of competing closing 69 See id. at 3. NYSE stated that it reviewed
64 See id. The Nasdaq Data Memo also provided
auctions conducted by Nasdaq and NYSE resulted
sradovich on DSK3GMQ082PROD with NOTICES
in closing prices different from the official closing data and analysis arguing that a portion of the closing auctions with imbalances of 50% of paired
price, Nasdaq also stated that many of the examples broker-dealer volume executed off-exchange after shares as of 3:50 p.m. See id. at 4.
cited in BZX Letter 1 are from competing auctions the close at the primary listing market’s closing 70 See id. at 3–4. NYSE provided data that they
in ETFs, which, Nasdaq stated, have a price reflects brokers submitting customers’ interest asserted illustrates that the same degradation in the
fundamentally different price discovery process. to the closing cross and subsequently reporting an quality of the official closing price also occurs in
Nasdaq argued that if ETFs were removed from the over-the-counter trade between the broker and its closes for securities with 10,000 shares or more
analysis, less than half of Nasdaq-listed corporate customers. reported at the official closing price. See id. at 4.
65 See NYSE Report, at 10. 71 See id. at 3–4.
issues see a price difference when closing on NYSE
Arca. See id. 66 See NYSE Report, at 10. 72 See GTS Securities Letter 1, at 2–3.
VerDate Sep<11>2014 17:59 Jan 22, 2018 Jkt 244001 PO 00000 Frm 00100 Fmt 4703 Sfmt 4703 E:\FR\FM\23JAN1.SGM 23JAN1](https://thefederalregister.org/doc/83_FR_3220/page/5.svg)
![3212 Federal Register / Vol. 83, No. 15 / Tuesday, January 23, 2018 / Notices
believes that MOC orders, which do not information disseminated by the instances where no auction could be
specify a target price and seek to be primary listing exchanges, ascertain held in accordance with their rules. In
executed at the closing price at the end closing auction liquidity demand. such scenarios, NYSE and Nasdaq assert
of the trading day are, by their nature, Accordingly, the Commission believes that, pursuant to the primary listing
the recipients of price formation that the information disseminated by exchanges’ rules, the resulting closing
information and generally do not BZX could be used by market price would be the consolidated last
directly contribute to setting the official participants in conjunction with the sale price.117 NYSE and Nasdaq both
closing price of securities on the information disseminated by the sought to quantify the extent to which
primary listing markets.113 In particular, primary listing exchange to make order last consolidated sale prices would have
the Commission believes that paired-off submission decisions. Although some differed from closing prices determined
MOC interest, such as that would be commenters also asserted that DMMs through closing auctions. The data and
matched and executed in the Cboe would no longer have full visibility into counterfactual examples provided in
Market Close, does not fundamentally the size and composition of MOC this regard assume that the BZX
affect the determination of the closing interest, DMMs will have access to the proposal would result in no market
price. As many commenters stated, the amount of paired-off MOC volume on participants choosing to send any MOC
price determined in a closing auction is BZX well in advance of NYSE’s order orders to the primary listing markets’
designed to be a reflection of market entry cut-off time and the start of the closing auctions. However, the
supply and demand, and key NYSE closing auction. An NYSE DMM commenters did not assert how likely it
considerations in setting the closing could, for example, use such was for such a scenario to occur or
price are maximizing the number of information to determine the total provide data in support thereof, nor did
shares executed and minimizing the amount of MOC interest for a given they provide any other data regarding
amount of the imbalance between buy security in Cboe Market Close and what the impact would be should fewer
and sell interest. The Commission NYSE’s closing auction, in establishing than all MOC orders be diverted from
believes that matching paired-off MOC the relevant context for any imbalances the primary listing markets. While
orders in the manner BZX proposes in NYSE closing auctions and NYSE further asserted that one
would not affect the net imbalance of calculating appropriate closing ‘‘plausible outcome’’ of the BZX
closing eligible trading interest in the prices.115 Further, the Commission proposal is that the majority of MOC
market. As such, the orders that actively believes that, as BZX stated, the Cboe orders would migrate to Cboe Market
participate in, and contribute to, the Market Close could benefit market Close, it acknowledged that it was ‘‘hard
price formation process in a closing participants that do not wish to disclose to predict what would happen if the
auction—including limit orders and information regarding their orders to [BZX] proposal were to be
unpaired MOC orders—would not be certain other market participants such approved.’’ 118 Further, NYSE explained
executed in the Cboe Market Close and as DMMs by providing another venue to that this outcome would likely be the
could continue to be submitted to the which they may send their orders for case if the fees set by BZX for Cboe
primary listing exchange. Accordingly, execution at the closing price. In Market Close were lower than the
the Commission believes that the addition, the Commission does not primary listing markets and there was
proposal is reasonably designed to not agree with those commenters that no competitive response by the primary
disrupt the price discovery process and argued that the proposal contradicts the listing exchanges.119 The Commission
closing auction price formation. Commission’s approval of Amendment believes it may be possible that there
The Commission recognizes that 12 to the LULD Plan, as the LULD Plan would be instances in which no MOC
several commenters made assertions does not mandate that market orders participate in a primary listing
that matched MOC order flow provides participants consolidate their orders at market’s closing auction following
informational content regarding the the primary listing exchanges, but rather implementation of the Cboe Market
depth of the market that indicates true requires that a trading pause continue Close. However, such instances can
supply and demand and contributes to until the primary listing exchange has occur today, and the Commission
market participants’ decisions regarding reopened trading.116 While pursuant to believes that the more likely scenario is
the LULD Plan trading may not begin that, if Cboe Market Close were to be
order submission and ultimately price
until the reopening on the primary approved and implemented, it would
formation.114 As such, these
listing exchange, market participants draw some, though not all, MOC orders
commenters argued that removing
continue to have the choice as to where from the primary listing markets,
matched MOC orders from the primary
to submit their orders. because many market participants likely
listing market would impact price
As discussed above, NYSE and base decisions regarding where to send
formation. However, the Commission
Nasdaq argued that if the proposed rule closing orders not solely on fees, but
believes that, while the proposal may
change resulted in the removal of all rather on many other factors, including
result in the execution of some MOC
MOC orders from the primary listing the reliability, stability, technology and
orders on a venue other than the
exchanges’ closing auctions, that result surveillance associated with such
primary listing exchange, BZX’s auctions,120 and because currently there
would impact closing prices in
proposal, because it would require the
size of matched MOC orders to be 115 The proposal would not alter the information 117 See Nasdaq Letter 2, at 3; NYSE Letter 1, at
published well in advance of the order DMMs would have relating to off-exchange MOC 5. See also, e.g., NYSE Rule 123C(1)(e); NYSE Arca
entry cut-off times for the primary interest. In addition, one commenter that is Rule 1.1(ll)1.
listing exchanges’ closing auctions, is supportive of the proposal is a DMM on NYSE and 118 See NYSE Report, at 22.
sradovich on DSK3GMQ082PROD with NOTICES
reasonably designed to allow market stated that the proposal ensures that the price 119 Id.
discovery process remains intact because BZX 120 See generally, Nasdaq Letter 1, at 3–4
participants to, in conjunction with the would only match buy and sell MOC orders and not (asserting that the Nasdaq closing cross has been
limit orders, which it stated, ultimately lead to successful due to its integrity, stability, reliability,
113 See supra notes 40–48 (discussing Nasdaq’s price formation. See Virtu Letter, at 2. and regulation). Furthermore, in assessing whether
and NYSE’s arguments of how MOCs can contribute 116 See Securities Exchange Act Release No. to utilize Cboe Market Close, market participants
to the closing price). 79845 (January 19, 2017), 82 FR 8551, 8552 (January may evaluate other attributes of the functionality,
114 See supra notes 45–48, 72–75 and 77 and 26, 2017). See also BZX Letter 1, at 8–9 and such as the need to monitor whether they were
accompanying text. Bollerman Letter at 3. matched on BZX and potentially having to send
VerDate Sep<11>2014 17:59 Jan 22, 2018 Jkt 244001 PO 00000 Frm 00103 Fmt 4703 Sfmt 4703 E:\FR\FM\23JAN1.SGM 23JAN1](https://thefederalregister.org/doc/83_FR_3220/page/8.svg)
![3214 Federal Register / Vol. 83, No. 15 / Tuesday, January 23, 2018 / Notices
listing exchanges, market participants In further sample splits (e.g., by listing In criticizing the methodology of the
should have sufficient time to venue, security type, and index DERA Analysis, NYSE further asserted
incorporate such information relating to inclusion), the DERA Analysis finds that ‘‘widely accepted’’ alternative
the levels of MOC interest in the Cboe some mixed evidence of statistically approaches for analyzing potential
Market Close in a given security into significant correlations, but no behavior and incentives under
their decisions about order submissions consistent or conclusive evidence that alternative market structures could be
into the closing auctions. contradicts the full-sample analysis. useful in considering the impact of
In addition, as discussed above, many NYSE provided several critiques of BZX’s proposal on closing price
commenters addressed the existence of the DERA Analysis’ methodology and discovery and efficiency.136 In addition,
fragmentation at the close today due to argued that the DERA Analysis’ findings NYSE stated that it may be possible to
off-exchange matching processes and should not be interpreted as providing use a simulation approach to investigate
competing closing auctions. With regard evidence that BZX’s proposal would the degree to which routing MOC orders
to broker-dealer matching services, the have no negative impact on price away from the primary listing exchanges
Commission’s consideration and discovery or the efficiency of closing impacts price discovery.137
analysis of whether BZX’s proposal is prices.131 NYSE also asserted that the Concluding that the methodology
consistent with the Act as an exchange DERA Analysis does not adequately used by the DERA Analysis does not
is subject to differing requirements and address the concerns raised by provide meaningful evidence of the
standards than those that apply to commenters that the BZX proposal extent to which off-exchange MOC
broker-dealers under the Act. At the might undermine price discovery, have trading currently impacts the
same time, how such existing off- informational efficiency of the official
a negative effect on the quality of
exchange services impact closing closing price, NYSE discussed the
official closing prices, and introduce
auctions on the primary listing markets metrics used in the DERA Analysis.138
new concerns related to market
may provide some limited insight into With respect to the Price Contribution
manipulation and ‘‘gaming.’’ 132
the potential impact of the proposal on metric, NYSE argued that the metric is
the price discovery function of the As discussed above, NYSE stated that not suitable for evaluating the quality of
primary closing markets, particularly to because the bulk of the volume the closing auction because it is a
the extent the proposed Cboe Market accounted for in the DERA Analysis is ‘‘simplistic measure’’ of the degree of
Close is similar to such off-exchange market maker volume crossed on behalf price discovery that would classify
services. of clients, it may not be a good proxy ‘‘large arbitrary swings’’ in prices as
The staff from the Commission’s for evaluating the potential impact of good price discovery.139 Concerning the
Division of Economic and Risk Analysis the proposal.133 In addition, NYSE Price Reversal metric, NYSE stated that
analyzed the relationship between the stated that if BZX’s proposal is as a measure of the efficiency of official
proportion of MOC orders executed off- successful, it could divert a higher closing prices, it is a ‘‘noisy and
exchange and closing price discovery percentage of MOC orders away from imprecise’’ metric that makes it unlikely
and efficiency.129 The DERA Analysis the primary listing markets than is that one would find a significant result,
made several findings that the currently observed in an analysis of even if one exists, and that it also has
Commission believes, while not existing off-exchange MOC activity. no clear interpretation.140 NYSE further
dispositive, are relevant to commenters’ Accordingly, NYSE argued that the
claims regarding Cboe Market Close’s DERA Analysis does not have sufficient 136 See id. at 14. The author of the NYSE Report
potential impact on price discovery and data to measure the effects when off- also stated that a study he conducted providing
exchange MOC volume is high, which is evidence that higher levels of off-market trading
other data and assertions presented under certain market structures can harm market
regarding current off-exchange matching likely to yield greater power to find an quality may be relevant to the analysis of the
services. In particular, the DERA effect.134 NYSE also claimed that the potential impacts of BZX’s proposal. See id. at 11.
Analysis found that, on average, closing DERA Analysis failed to account for However, as the study the author cited analyzes
continuous trading in Nasdaq stocks prior to the
auction volume accounts for instances when there is no closing implementation of Regulation NMS (adopted in
approximately 5.2 percent of daily auction, which could result in not 2005 and which implemented significant changes to
volume, and on average, approximately considering instances where, according the regulatory framework of the equity markets), the
to NYSE, price discovery in the closing Commission does not believe in this instance that
9.3 percent of closing volume is it can be relied upon to make inferences regarding
executed off-exchange at the primary auction would be most impacted by current market structure. See generally 70 FR 27496
listing exchange’s closing price. The diverting MOC orders away from the (June 29, 2005).
DERA Analysis also found that, in a primary listing market.135 137 See id.
138 See id. at 17. NYSE also argued that while the
sample spanning the first quarter of
DERA Analysis cited to two published papers by
2017, variation in off-exchange MOC participants’ use of limit-on-close orders in the
Barclay and Hendershott to support using a
share is not significantly correlated with closing auction processes.’’ In addition, the DERA
regression-based approach to study the information
Analysis states that it does not attempt to establish
closing price discovery or efficiency, a causal link between off-exchange activity and
content of closing prices, the DERA Analysis does
controlling for primary auction activity, not use the Barclay and Hendershott methodology.
closing price discovery and efficiency. See DERA 139 See id. at 14–15. NYSE suggested that an
off-exchange trading activity during Analysis, supra, note 8, at 1–2.
alternative approach to examine price continuity
131 See NYSE Report, at 1 and 9.
regular trading hours, average market measures could provide some pertinent information
132 See id. at 9. To provide context for these
capitalization, average daily trading regarding price discovery at the close. NYSE also
assertions, the NYSE Report included background stated that controlling for the size of the auction
volume, average daily stock return information summarizing the existing closing and the auction’s initial imbalance may be
volatility, and closing price volatility.130 auction processes, including both the procedures important because price deviations that are the
sradovich on DSK3GMQ082PROD with NOTICES
for the primary listing exchanges’ closing auctions result of large imbalances or large demand are more
129 See DERA Analysis, supra, note 8. as well as the competing closing auctions operated likely to be indicative of informationally-driven
130 Though the DERA Analysis’ findings suggest by Nasdaq and NYSE Arca. NYSE also summarized price moves, which would be an indication of good
‘‘that existing levels of fragmentation do not, on BZX’s proposal and the DERA Analysis. See id. at price discovery, rather than liquidity-driven price
average, correlate with price discover or price 3–9. moves, which would be an indication of bad price
133 See id. at 10; see also supra notes 65–66 and
efficiency,’’ the DERA Analysis makes clear that discovery. See id. at 15–16.
‘‘the data we have does not allow us to predict how accompanying text. 140 See id. at 16. NYSE provided several examples
134 See id. at 10–11.
[Cboe Market Close] would affect price discovery in that it stated illustrated the imprecision of the Price
the closing auction process, and market 135 See id. at 13. Reversal metric. See id. at 16–17.
VerDate Sep<11>2014 17:59 Jan 22, 2018 Jkt 244001 PO 00000 Frm 00105 Fmt 4703 Sfmt 4703 E:\FR\FM\23JAN1.SGM 23JAN1](https://thefederalregister.org/doc/83_FR_3220/page/10.svg)
![3216 Federal Register / Vol. 83, No. 15 / Tuesday, January 23, 2018 / Notices
considering whether there would likely companies.161 Many of these benchmark indices as confidence in
be potential negative impacts on the commenters argued that because of their closing prices is a prerequisite for
price discovery process in the closing view that the proposal undermines the market participants to maintain
auctions of the primary listing reliability of the closing process and/or confidence in the pricing of benchmark
exchanges that would occur from the official closing price it also poses a indices.164 Accordingly, SPDJI asserted
executing MOC orders on a venue other risk to listed companies and its that because the closing price is a
than the primary listing market. shareholders.162 Many of these critical data point for investors, great
Accordingly, the Commission believes commenters, some of which are issuers, caution should be taken in any changes
that the DERA Analysis lends support stated that the current centralized to the closing auction.165
for the argument that there is no strong closing auctions on the primary listing Moreover, some commenters argued
evidence to suggest that existing levels markets contribute meaningful liquidity that the centralization of liquidity at the
of fragmentation of closing auctions to a company’s stock, facilitates open and close of trading, and how
through off-exchange MOC activity investment in the company, and helps primary listing markets perform during
negatively impacts the price discovery to lower the cost of capital. Accordingly, the opening and closing, are important
process on the primary listing these commenters expressed concern factors for issuers in determining where
exchanges. In addition, as a general that the potential additional to list their securities, and the
matter, commenters failed to provide fragmentation caused by the proposal additional risk posed to listed
data, studies or analyses, as requested in could negatively impact liquidity during companies from an unreliable or
the OIP,158 that persuasively supported the closing auction, causing detrimental unrepresentative closing price and/or
their assertions regarding the proposal’s effects to listed issuers.163 process could impact an issuer’s
negative impact on price discovery on In addition, one commenter, SPDJI, decision where to list and/or cause
the closing auctions of the primary argued that the proposal may also companies to forgo going public.166
listing markets. impact confidence in the pricing of With regard to concerns about the
impact of the proposal on issuers and
With regard to competing closing 161 See Nasdaq Letter 1, at 6–7; Nasdaq Letter 2,
their shareholders, BZX stated that the
auctions, BZX’s proposed Cboe Market at 1–2 (asserting that as a result of fragmentation,
small- and mid-cap companies are more susceptible
proposal ‘‘would not adversely impact
Close is not a closing auction and the the trading environment for issuers and
to abrupt and disruptive price swings and therefore,
Commission believes, as do some centralizing liquidity at the close is important for their securities’’ because it ‘‘specifically
commenters, that there are certain these issuers and their investors); NYSE Letter 1, at designed the [p]roposal so that it would
fundamental differences between BZX’s 3; GTS Securities Letter 1, at 2–5; Customers
not impact the very important price
proposed Cboe Market Close and Bancorp Letter; Orion Group Letter; CTS
Corporation Letter; IMC Financial Letter, at 1–2; discovery function performed by the
existing competing closing auctions, Southern Company Letter; Nobilis Health Letter; primary listing markets’ closing
such as those identified by NYSE and EDA Letter, at 1–2; Coupa Software Letter; Trade auction’’ by only matching paired MOC
Nasdaq regarding the price discovery Desk Letter; Duffy/Meeks Letter, at 1; and Henry
orders and not LOC orders and ensuring
mechanisms of their competing, single- Schein Letter.
162 See NYSE Letter 1, at 3 (arguing that the executions at the closing price.167 BZX
priced closing auctions, which produce proposal is indifferent to the potential risks to further stated that unlike the competing
closing prices independent from those public companies and that the closing is the most closing auctions run by NYSE Arca and
determined through the primary listing important data point for shareholders); IMC Nasdaq, the proposal would not create
exchanges’ closing auctions.159 Financial Letter, at 1–2; Nobilis Health Letter; EDA
Letter, at 1–2; Coupa Software Letter; Ethan Allen
Nevertheless, the Commission believes Letter; Trade Desk Letter; BioCryst Letter; Digimarc
164 See SPDJI Letter, at 1–2 (stating that it relies
that considering such competing closing Letter; Duffy/Meeks Letter, at 1–2 (stating that solely on primary market auction prices to calculate
auctions, which already exist today, is public companies are concerned the proposal will the official closing index values, and that these
have an unforeseen effect on the pricing of their closing index values play an important role in the
useful to an analysis of the current markets, including use by portfolio managers to
companies’ shares at the close, ultimately harming
proposal. Importantly, in such a critical measure of the company’s value and measure their funds’ value and for use in
competing closing auctions, market harming its shareholders and asking the calculating settlement prices for certain products);
participants may choose not only to Commission to carefully consider the impacts of the see also Coupa Software Letter; Trade Desk Letter;
proposal and whether such impacts would be and Henry Schein Letter (stating that the official
submit MOC orders, but also price- closing price is used to value their stocks for
necessary and helpful to public companies); NBT
setting LOC orders. As pointed out by Bancorp Letter; Five9 Letter; Balchem Letter; Cree purposes of various indexes and mutual funds).
BZX, this could affect the closing price Letter; Henry Schein Letter; Corbus Letter; Global 165 See SPDJI Letter, at 2; see also NYSE Report,
on the primary listing market by Payments Letter; CA Technologies Letter; Sirius at 23–24. In contrast, one commenter acknowledged
Letter; Lam Letter; and PayPal Letter. Several that while impacting the quality of the closing price
potentially diverting LOC orders that is an objection that deserves close analysis, as the
issuers also asserted that decentralizing closing
contribute to price discovery away from auctions will increase volatility, reduce visibility, closing price is ‘‘the most important price of the
the primary listing market’s closing and negatively impact liquidity for equity day,’’ and would warrant rejection of the proposal,
auction.160 In contrast, BZX’s proposal securities. See e.g., Customers Bancorp Letter; the commenter does not believe the proposal would
Orion Group Letter; Nobilis Health Letter; Cardinal harm the quality of the closing price. See Angel
would not accept LOC orders, but rather Letter, at 4.
Health Letter; and Stewart Letter.
only matches MOC orders, and thus is 163 See Customers Bancorp Letter; Orion Group 166 See NYSE Letter 1, at 3 and 9 (stating that no
reasonably designed to not impact the Letter; CTS Corporation Letter; Southern Company single data point is more important than the closing
closing price formation process. Letter; Duffy/Meeks Letter, at 1–2 (stating that the price to the company or its shareholders); GTS
proposal could cause a disruption to the closing Securities Letter 1, at 3–5; EDA Letter, at 1; Duffy/
Several commenters stated that the auction process, which could lead to discouraging Meeks Letter, at 1 (stating that the closing price is
proposal could harm issuers, investors from participating in and having a critical measure of a company’s value and that
particularly small and mid-cap confidence in our markets); and Five9 Letter. In public companies view the closing auction on the
sradovich on DSK3GMQ082PROD with NOTICES
contrast, one commenter argued that the proposal primary listing exchange as a critical aspect of
would improve aggregate liquidity at the official listing); and GTS Securities Letter 2, at 1–2. In
158 See OIP, supra note 7, at 40210–40211. closing price because the lower aggregate cost of addition, one commenter stated that further
159 See supra notes 52–55 and accompanying text. fragmenting the market would limit the quality and
trading would likely spur incremental increases in
160 Competing auctions could also potentially trading volumes. In addition, this commenter stated quantity of information on trading dynamics that
reduce the centralization of orders at the primary that the ability to enter MOC orders into Cboe the primary listing markets provide to their listed
listing market’s closing auction, which NYSE and Market Close with little risk of information leakage issuers. See CA Technologies Letter.
Nasdaq argued was a critical element of the primary may attract an additional source of liquidity. See 167 See BZX Letter 1, at 2 and 4 and BZX Letter
listing markets’ closing auctions. ViableMkts Letter, at 2. 2, at 10.
VerDate Sep<11>2014 17:59 Jan 22, 2018 Jkt 244001 PO 00000 Frm 00107 Fmt 4703 Sfmt 4703 E:\FR\FM\23JAN1.SGM 23JAN1](https://thefederalregister.org/doc/83_FR_3220/page/12.svg)
![Federal Register / Vol. 83, No. 15 / Tuesday, January 23, 2018 / Notices 3219
disseminated through the Bats Auction information does not represent overall asserted that the potential for
Feed would not provide any indication supply or demand for the security, is manipulative activity at the close would
of whether the cancelling of a particular subject to change before the close, and increase because primary listing
side of an order that has not been is only one piece of information and exchange auctions would decrease in
matched back to a market participant ‘‘is likely less useful than other information size and thus be easier to manipulate.205
meaningful or just happenstance,’’ regarding the close that would be NYSE also argued that the proposal
which limits this information’s ability to available to market participants, such as facilitates manipulative activity by
create or increase manipulative the total matched amount of MOC providing an incentive for market
activity.199 shares that would be disseminated by participants to influence the closing
The Commission believes that the BZX at 3:35 p.m. and available to all price when they know they have been
proposed rule change is consistent with market participants on equal terms, as successfully matched on BZX to the
the requirement of Section 6(b)(5) of the well as any imbalance information benefit of the price of its already
Act that the rules of a national securities disseminated by the primary listing matched order.206 Further, NYSE argued
exchange be designed to prevent markets. While commenters argue that that market participants could
fraudulent and manipulative acts and those who participate in Cboe Market manipulate information leading up to
practices. The Commission believes Close would be able to discern the the close by entering orders into Cboe
information asymmetries as those direction of an imbalance and use such Market Close in an attempt to send a
described by commenters exist today information to manipulate the closing false signal regarding demand and
and are inherent in trading, including price, the Commission believes the subsequently reverse such positions
with respect to closing auctions. For utility of such gleaned information is after hours.207
example, any party to a trade gains limited. In particular, a market The Commission recognizes that, with
valuable insight regarding the depth of participant would only be able to or without Cboe Market Close, the
the market when an order is executed or determine the direction of the potential exists that there may be market
partially executed. Further, on NYSE, imbalance, and would have difficulty participants who may seek to engage in
not only DMMs, but NYSE floor brokers determining the magnitude of any manipulative or illegal trading activity,
have access to closing auction imbalance, as it would only know the including with respect to closing
imbalance information that is not unexecuted size of its own order. In prices.208 Although no commenters
simultaneously available to other addition, the information would only be provided specific data, analyses, or
market participants, far in advance of with regard to the pool of liquidity on studies regarding manipulation
the NYSE order entry cut-off time. BZX and would provide no insight into generally or to support the assertion that
Specifically, pursuant to NYSE rules, imbalances on the primary listing the proposal could increase the
floor brokers receive the amount of, and market, competing auctions, or off- potential for manipulative activity,209
any imbalance between, MOC and exchange matching services which, as scholarly articles have suggested that
marketable LOC interest every fifteen described above, can represent a closing auction manipulations are often
seconds beginning at 2:00 p.m. until significant portion of trading volume at characterized by large,
3:45 p.m.200 Floor brokers are permitted the close. Likewise, while a market unrepresentatively priced orders
to provide their customers with specific participant would be able to determine submitted in the final seconds of the
data points from this imbalance feed. In whether its own order made up a large auction.210 Accordingly, the
arguing for the Commission to approve or small percentage of the paired shares
its proposal to disseminate such for a security in Cboe Market Close, it that the proposal creates new opportunities to
information to floor brokers, NYSE would not be able to determine the possibly manipulate the close).
205 See NYSE Letter 1, at 6.
stated that the imbalance information composition of same-side or contra-side 206 See NYSE Letter 1, at 6 and NYSE Report, at
does not represent overall supply or MOC orders submitted to Cboe Market 19.
demand for a security, but rather is a Close, nor would such information 207 See NYSE Report, at 19–20.
small subset of buying and selling enable it to determine the composition 208 NYSE also asserted that arbitrageurs will look
interest that is subject to change before of orders submitted to the primary for opportunities presented by Cboe Market Close
the close, nor is it actionable prior to 15 listing market, competing auctions, or to ‘‘gam[e] the system.’’ However, NYSE also
minutes before the close.201 NYSE acknowledged that, ‘‘[i]t is hard to predict all of the
off-exchange matching services.203 ways in which, and the degree to which, this might
further asserted that it believed the Therefore, the Commission believes the occur because it will depend on a wide range of
information it disseminates to all utility of this information is also variables, including the degree of usage of the Bats
participants at 3:45 p.m. is more limited. Accordingly, the Commission close, the changes to order flow and liquidity
material to investors, as it is more provision in the primary market’s closing
believes the proposal’s potential for mechanism, the profits realized from manipulation,
accurate, complete, and timely increased manipulation due to and the vitality of market oversight.’’ See NYSE
information.202 information asymmetries is negligible. Report, at 19–22.
The Commission believes that the NYSE also argued that the proposal 209 In the OIP, the Commission specifically
same arguments apply with respect to would increase potential manipulation solicited comments on the whether the proposal
BZX’s proposal. In particular, even if a would increase the potential for manipulation and
for several reasons.204 First, NYSE requested that commenters provide specific data,
market participant becomes aware of the analyses, or studies for support to the extent
direction of the imbalance for a security 203 See supra notes 194–196 and accompanying possible. See OIP, supra note 7, at 40211. Although
in Cboe Market Close as a result of text. While one commenter expressed concern that the NYSE Report criticized the DERA Analysis for
receiving a cancellation of part or all of market participants that are aware of the not addressing concerns regarding manipulation,
composition of volume paired through Cboe Market the potential impact of the proposal on
sradovich on DSK3GMQ082PROD with NOTICES
that participant’s order, such Close would be in a position to use that information manipulation was outside the intended scope of
to influence their trading behavior leading up to the such analysis, see supra note 144, and NYSE did
199 See id. close, under BZX’s proposal, BZX would only not, in response to the OIP request, provide any of
200 See NYSE Rule 123C(6)(b). publish the size, and not the composition, of paired its own specific data or purport to provide findings
201 See Securities Exchange Act Release No. MOC shares, and that such disseminated of any study or analyses in this area. See NYSE
62923 (September 15, 2010), 75 FR 57541, 57542 information would be available to all market Report, at 19–22.
(September 21, 2010) (SR–NYSE–2010–20; SR– participants. 210 See Carole Comerton-Forde and Talis J.
NYSEAmex–2010–25). 204 See NYSE Letter 1, at 6 and NYSE Report, at Putnins, ‘‘Measuring Closing Price Manipulation,’’
202 See id. 19–22. See also Americas Executions Letter (stating Continued
VerDate Sep<11>2014 17:59 Jan 22, 2018 Jkt 244001 PO 00000 Frm 00110 Fmt 4703 Sfmt 4703 E:\FR\FM\23JAN1.SGM 23JAN1](https://thefederalregister.org/doc/83_FR_3220/page/15.svg)
![3220 Federal Register / Vol. 83, No. 15 / Tuesday, January 23, 2018 / Notices
Commission believes that, while it is close more difficult and expensive due FINRA’s comprehensive cross-market
possible that the potential for to fragmentation of order flow across surveillance program can monitor for
manipulation could increase if the multiple markets.215 In contrast, IEX nefarious activity by a market
closing auctions on the primary listing argued that participation in the Cboe participant across two or more markets
exchanges decreased significantly in Market Close, followed by activity and includes surveillance designed to
size, existing surveillance systems, intended to affect the closing price on detect activity geared towards
should be able to continue to detect the primary market, would make manipulating a security’s closing
such activity.211 With respect to NYSE’s manipulation of closing crosses as or price.223 Stating that it currently
comment that the proposal would more conspicuous than other trading provides FINRA the necessary trade
provide an incentive for market patterns for which exchanges already data to conduct such surveillance, BZX
participants to influence the closing conduct surveillance.216 Two represented that it is also committed to
price when they know they have been commenters also stated that the work with FINRA on enhancements to
successfully matched on BZX, market Consolidated Audit Trail would provide the current cross market surveillance
participants can attempt this today with a new tool for detecting any such program to account for any potential
respect to existing off-exchange MOC manipulation.217 manipulative activity by participants in
matching services (which are surveilled In response, BZX made several Cboe Market Close and the primary
by FINRA) and any attempts to use Cboe arguments as to why it does not believe listing markets’ closing auctions.224 BZX
Market Close to do this would result in that the proposal creates a potential for also stated that, as a member of the
such activity occurring on BZX, a increased manipulation.218 BZX stated Intermarket Surveillance Group (‘‘ISG’’),
national securities exchange with that, should the Commission approve it would share the necessary
obligations under the Act to regulate the proposal, both it and FINRA, as well information concerning Cboe Market
and surveil its market. Similarly, as other exchanges, would continue to Close with NYSE and Nasdaq, as part of
entering non bona fide orders in an surveil for manipulative activity and their participation in ISG, to allow them
attempt to give the appearance of high ‘‘seek to punish those that engage in to properly surveil for potentially
demand is not a new form of potential such behavior.’’ 219 In its final response manipulative activity within their
manipulation unique to the proposal; letter, BZX reiterated that while it does closing auctions.225
rather, similar forms of market not believe that the proposal would With respect to manipulative or
manipulation exist today and the increase the potential for manipulation, illegal trading activity more broadly,
Commission believes that current it is ‘‘committed to enhancing its self-regulatory organizations such as
surveillance systems are designed to current surveillance procedures and BZX and the primary listing markets
detect such activity. working with other [SROs], including have an obligation under the Act to
Lastly, Nasdaq stated that it and other FINRA, the NYSE, and Nasdaq, to surveil for manipulative activity on
exchanges would need to develop new ensure that any potential inappropriate their markets. The Commission
cross-market surveillance systems in trading activity is detected and generally believes that existing self-
order to address these risks.212 NYSE prevented.’’ 220 Specifically, BZX stated regulatory organization surveillance and
also stated that there are no safeguards that, consistent with its obligations as enforcement activity, and the measures
built-in to the proposal to prevent an SRO, it currently surveils all trading that the Exchange has represented that
manipulation, and identifying activity on its system including trading it would take to surveil for and detect
manipulative activity would also activity at the close, and intends to manipulative activity related to the
become more difficult under the implement and enhance in-house proposal, would help to deter market
proposal due to the time difference surveillance processes designed to participants who might otherwise seek
between the Cboe Market Close and detect potential manipulative activity to try and abuse Cboe Market Close or
primary market closing auctions and the related to the Cboe Market Close.221 a closing auction on a primary listing
cross-market nature of the BZX also highlighted the cross-market exchange. The Commission expects that
manipulation.213 Further, NYSE argued surveillance that FINRA conducts on its BZX will closely monitor Cboe Market
that market participants may have behalf.222 In particular, BZX stated that Close and implement new or enhanced
legitimate reasons to want to reverse surveillance measures, as necessary,
their trades that have been matched in 215 See GTS Securities Letter 1, at 6; GTS designed to identify potential
Securities Letter 2, at 5. manipulative behavior. Further, the
Cboe Market Close by trading in the 216 See IEX Letter, at 2.
primary market auction, and thus, it Commission expects that potential
217 See id., at 2–3 and Bollerman Letter, at 2.
would be difficult to distinguish 218 See BZX Letter 1, at 11–12 and BZX Letter 2,
violative conduct identified by BZX,
between manipulative trading activity at 9. FINRA, or any other national securities
and legitimate ‘positioning.’ 214 GTS 219 See BZX Letter 1, at 11 and BZX Letter 2, at exchange would be investigated. With
similarly argued that the proposal 9. respect to NYSE’s comment on the
would make surveillance of the market 220 See BZX Letter 4, at 1.
potential challenges posed that time
221 Id. In particular, BZX stated that the
differences or cross-market activity may
surveillance would include, among other things,
Journal of Financial Intermediation 20, 135–158 monitoring for possible non bona fide order
pose in identifying manipulative
(2011), available at: https://www.sciencedirect.com/ activity, such as the submission of orders for the activity,226 these issues also exist today
science/article/pii/S104295731000015X; and Talis purpose of gaining an informational advantage, the with respect to existing off-exchange
J. Putnins, ‘‘Market Manipulation: A Survey,’’ entry of large size orders on one side of the market,
Journal of Economic Surveys, 26, 952–967 (2012), MOC matching services. To the extent
or other trading activity that would indicate a
available at: http://onlinelibrary.wiley.com/doi/ pattern or practice aimed at manipulating the
sradovich on DSK3GMQ082PROD with NOTICES
10.1111/j.1467-6419.2011.00692.x/full. closing auction. Id. Further, BZX committed to the exchange’s behalf. Notwithstanding the
211 See infra for discussion of the obligations
providing the Commission staff its surveillance existence of a regulatory services agreement, the
under the Act of national securities exchanges, as plan and stated that it would implement that plan exchange retains legal responsibility for the
self-regulatory organizations, to surveil for on the date that Cboe Market Close becomes regulation of its members and its market and the
manipulative activity on their markets. available to market participants. See id. at 2. performance of its regulatory services provider.
212 See Nasdaq Letter 2, at 14. 223 Id.
222 See id. Under regulatory services agreements,
213 See NYSE Report, at 20–21 and NYSE Letter 224 Id.
national securities exchanges, such as BZX, may
1, at 6. enter into contracts with other regulatory entities, 225 Id.
214 See NYSE Report, at 19. such as FINRA, to provide regulatory services on 226 See supra note 213 and accompanying text.
VerDate Sep<11>2014 17:59 Jan 22, 2018 Jkt 244001 PO 00000 Frm 00111 Fmt 4703 Sfmt 4703 E:\FR\FM\23JAN1.SGM 23JAN1](https://thefederalregister.org/doc/83_FR_3220/page/16.svg)
![Federal Register / Vol. 83, No. 15 / Tuesday, January 23, 2018 / Notices 3223
policy goals of the Act with respect to and Nasdaq, its proposal does not limitations on liability are part of a
national securities exchanges.258 implicate the same issues as Nasdaq’s broader policy issue regarding the
Likewise, SIFMA also referenced the Benchmark Order proposal because the different regulatory structures for
Commission’s disapproval of Nasdaq’s Commission’s disapproval of that exchanges and broker-dealers, and do
proposal to create a Benchmark Order as proposal rested primarily on its finding not materially impact the Commission’s
support for its assertion that BZX is that it raised issues under the Market analysis or finding regarding whether
proposing to offer a function identical to Access Rule.268 BZX responded to this proposal poses an unnecessary or
that currently offered by broker-dealers, SIFMA’s comments on regulatory inappropriate burden on
yet would benefit from regulatory immunity and its limitation on liability competition.272
immunity as well as the limits on rule by stating that the concerns raised The Commission has taken the
liability contained in BZX Rule were ‘‘not germane to whether the position that immunity from suit ‘‘is
11.16.259 Specifically, SIFMA stated [p]roposal is consistent with the Act,’’ properly afforded to the exchanges
that, while it supports the proposal, it and further stated that it believed it when engaged in their traditional self-
believes that as a condition of approval, would be inappropriate in the context of regulatory functions—where the
BZX and the Commission should clarify a filing on one proposed rule change to exchanges act as regulators of their
in writing that Cboe Market Close would set a new standard on an issue that has members,’’ including ‘‘the core
not be entitled to any application of broad application to all exchange adjudicatory and prosecutorial
regulatory immunity and that the services as well as National Market functions that have traditionally been
Exchange should amend its Rule 11.16 System Plans.269 BZX also asserted that accorded absolute immunity, as well as
to provide that Cboe Market Close SIFMA did not provide any evidence to other functions that materially relate to
would not be subject to the monetary support its claim that its members have the exchanges’ regulation of their
limits on the Exchange’s liability.260 been disadvantaged by the exchange’s members,’’ but should not ‘‘extend to
With respect to regulatory immunity, limitation of liability rule as compared functions performed by an exchange
SIFMA asserted that both courts and the to limitation on liability provisions in a itself in the operation of its own market,
Commission have stated that regulatory broker-dealer’s contracts with its clients, or to the sale of products and services
immunity applies only in situations which often disclaim all liability.270 arising out of those functions.’’ 273 The
where an exchange is exercising its The Commission believes, as Court of Appeals for the Second Circuit
regulatory authority over its member, acknowledged by BZX, that it is recently reached a similar
pursuant to the Act.261 SIFMA stated possible that BZX’s proposal could conclusion.274 The Commission has also
that because Cboe Market Close would divert some MOC orders from off- recognized that an exchange’s
not be a self-regulatory function exchange matching services operated by invocation of immunity from suit
whereby the exchange would be broker-dealers onto a regulated should be examined on a ‘‘‘case-by-case
regulating its members, BZX should not exchange.271 Broker-dealers and basis,’ with ‘the party asserting
be entitled to apply regulatory national securities exchanges currently immunity bear[ing] the burden of
immunity for any losses arising from the compete with respect to a variety of demonstrating [an] entitlement to
functionality.262 In addition, SIFMA functions and services that they offer to it.’ ’’ 275 Whether and to what extent a
stated that BZX Rule 11.16 currently market participants within the current court would consider BZX’s additional
limits the liability exposure of the national market system. As such, the functionality under the proposed rule to
exchange to its members.263 SIFMA fact that a national securities exchange fall within an exchange’s traditional
asserted that BZX’s limits on liability set proposes to offer functionality that is regulatory functions depends on an
forth in Rule 11.16 ‘‘bear no relation to similar to a service offered by a broker- assessment of the facts and
the actual amount of financial loss that dealer does not, in and of itself, render circumstances of the particular
could result from an exchange such functionality an inappropriate allegations before it and is beyond the
malfunction.’’ 264 SIFMA argued that the burden on competition. Rather, the scope of the Commission’s
‘‘disparity is particularly acute’’ with proposal must be considered in the consideration of the proposed rule
respect to the proposal because broker- broader context of the existing change pursuant to the Act.
dealers currently perform services akin competitive landscape and different
to Cboe Market Close without a IV. Conclusion
regulatory structures applicable to
limitation on their liability.265 broker-dealers and exchanges under the For the foregoing reasons, the
Accordingly, SIFMA stated that, as a Act, respectively. With respect to BZX’s Commission finds that the proposed
condition of operating Cboe Market proposal, the Commission believes that, rule change is consistent with the Act
Close, BZX should carve it out from the on balance, in light of the differing and the rules and regulations
liability limits of Rule 11.16.266 requirements under the Act and the thereunder applicable to a national
BZX argued that, rather than looking rules and regulations thereunder securities exchange.
to compete with broker-dealer services, applicable to national securities
it is seeking to compete on price with exchanges and broker-dealers, the
272 The Commission also notes that MOC orders
the primary listing markets’ closing submitted to other exchanges’ closing auctions
proposal does not pose any burden on would be subject to those exchanges’ rules
auctions.267 In addition, BZX argued competition not necessary or governing limitations on liability.
that, contrary to the assertions by NYSE appropriate in furtherance of the 273 Brief of the Securities and Exchange
Commission, Amicus Curiae, No. 15–3057, City of
258 See
purposes of the Act. Providence v. Bats Global Markets, Inc. (2d Cir.)
Nasdaq Letter 1, at 5.
259 See
Further, the Commission believes that (‘‘City of Providence Amicus Br.’’), at 22.
SIFMA Letter 3, at 2–4.
sradovich on DSK3GMQ082PROD with NOTICES
260 See id. at 1. the issues raised by commenters 274 City of Providence v. Bats Global Markets, Inc.,
261 See id. at 2–3. regarding the judicial doctrine of 878 F.3d 36 (2d Cir. 2017) (‘‘When an exchange
262 See id. at 3. regulatory immunity and rule-based engages in conduct to operate its own market that
263 See BZX Rule 11.16.
is distinct from its oversight role, it is acting as a
regulated entity—not a regulator. Although the
264 See SIFMA Letter 3, at 4. 268 See id., at 11. latter warrants immunity, the former does not.’’).
265 See id. 269 See id. 275 City of Providence Amicus Br. at 21 (quoting
266 See id. 270 See BZX Letter 3, at 5.
In re NYSE Specialists Secs. Litig., 503 F.3d 89, 96
267 See BZX Letter 1, at 10. 271 See BZX Letter 2, at 11. (2d Cir. 2007)).
VerDate Sep<11>2014 17:59 Jan 22, 2018 Jkt 244001 PO 00000 Frm 00114 Fmt 4703 Sfmt 4703 E:\FR\FM\23JAN1.SGM 23JAN1](https://thefederalregister.org/doc/83_FR_3220/page/19.svg)
![3224 Federal Register / Vol. 83, No. 15 / Tuesday, January 23, 2018 / Notices
It is therefore ordered, pursuant to the same meaning as set forth in OCC’s recovery and orderly wind-down of the
Section 19(b)(2) of the Act 276 that the By-Laws and Rules.4 [CCA] necessitated by credit losses, liquidity
proposed rule change (SR–BatsBZX– shortfalls, losses from general business risk,
II. Clearing Agency’s Statement of the or any other losses.10
2017–34), as modified by Amendment
Purpose of, and Statutory Basis for, the
No. 1, be, and hereby is, approved. OCC is defined as a covered clearing
Advance Notice
For the Commission, by the Division of agency under the CCA rules, and
Trading and Markets, pursuant to delegated In its filing with the Commission, therefore is subject to the requirements
authority.277 OCC included statements concerning of the CCA rules, including Rule 17Ad–
Eduardo A. Aleman, the purpose of and basis for the advance 22(e)(3).11
Assistant Secretary. notice and discussed any comments it
received on the advance notice. The text Proposed RWD Plan
[FR Doc. 2018–01093 Filed 1–22–18; 8:45 am]
of these statements may be examined at OCC is proposing to update, formalize
BILLING CODE 8011–01–P
the places specified in Item IV below. and adopt its RWD Plan.12 Consistent
OCC has prepared summaries, set forth with the Commission’s guidance
in sections A and B below, of the most concerning the requirements of Rule
SECURITIES AND EXCHANGE
significant aspects of these statements. 17Ad–22(e)(3)(ii), the purpose of the
COMMISSION
proposed RWD Plan is to (i)
[Release No. 34–82514; File No. SR–OCC– (A) Clearing Agency’s Statement on demonstrate that OCC has considered
2017–810] Comments on the Advance Notice the scenarios which may potentially
Received From Members, Participants or prevent it from being able to provide its
Self-Regulatory Organizations; The Others ‘‘Critical Services’’ (defined below) as a
Options Clearing Corporation; Notice Written comments were not and are going-concern,13 (ii) provide
of Filing of Advance Notice not intended to be solicited with respect appropriate plans for OCC’s recovery or
Concerning Updates to and to the proposed rule change and none orderly wind-down based on the results
Formalization of OCC’s Recovery and have been received. OCC will notify the of such consideration; 14 and (iii) impart
Orderly Wind-Down Plan Commission of any written comments to relevant authorities the information
January 17, 2018. received by OCC. reasonably anticipated to be necessary
Pursuant to Section 806(e)(1) of Title for purposes of recovery and orderly
(B) Advance Notices Filed Pursuant to
VIII of the Dodd-Frank Wall Street wind-down planning.15
Section 806(e) of the Payment, Clearing,
Reform and Consumer Protection Act, As discussed in greater detail below,
and Settlement Supervision Act
entitled Payment, Clearing and in preparing the proposed Plan, OCC
Settlement Supervision Act of 2010 Description of the Proposed Change was informed by relevant guidance from
(‘‘Clearing Supervision Act’’) 1 and Rule Background not only from OCC’s regulators, but also
19b–4(n)(1)(i) under the Securities from certain international organizations.
On September 28, 2016 the Within the framework of this guidance,
Exchange Act of 1934 (‘‘Act’’),2 notice is Commission adopted amendments to
hereby given that on December 8, 2017, OCC has drafted the proposed Plan to
Rule 17Ad–22 5 and added new Rule reflect OCC’s specific characteristics,
The Options Clearing Corporation 17Ab2–2 6 pursuant to Section 17A of
(‘‘OCC’’) filed with the Securities and including its ownership, organizational,
the Securities Exchange Act of 1934 7 and operational structures, as well as
Exchange Commission (‘‘Commission’’) and the Payment, Clearing, and
an advance notice as described in Items OCC’s size and systemic importance
Settlement Supervision Act of 2010 relative to the products that its clears.16
I, II and III below, which Items have (‘‘Payment, Clearing and Settlement
been prepared by OCC. The Commission The proposed RWD Plan consists of
Supervision Act’’) 8 to establish eight chapters. A description of each of
is publishing this notice to solicit enhanced standards for the operation
comments on the advance notice from the first seven chapters of the proposed
and governance of those clearing Plan is provided below (Chapter 8 of the
interested persons. agencies registered with the proposed plan consists of a series of
I. Clearing Agency’s Statement of the Commission that meet the definition of appendices containing supporting
Terms of Substance of the Advance a ‘‘covered clearing agency,’’ as defined material).
Notice by Rule 17Ad–22(a)(5) 9 (collectively,
the new and amended rules are herein Chapter 1: Executive Summary
This advance notice is filed in
connection with a proposed change to referred to as ‘‘CCA’’ rules). The CCA Chapter 1 of the RWD Plan would
formalize and update OCC’s Recovery rules require that covered clearing provide an executive summary and
and Orderly Wind-Down Plan (‘‘RWD agencies, among other things: overview of the proposed Plan. Chapter
Plan’’ or ‘‘Plan’’), consistent with the [E]stablish, implement, maintain and enforce 1 would begin by acknowledging OCC’s
requirement applicable to OCC in Rule written policies and procedures reasonably
10 17 CFR 240.17Ad–22(e)(3)(ii).
17Ad–22(e)(3)(ii). designed to . . . [m]aintain a sound risk
11 Id.
management framework for comprehensively
The RWD Plan was included as 12 OCC maintains a recovery and orderly wind-
managing legal, credit, liquidity, operational,
confidential Exhibit 5 of the filing.3 The general business, investment, custody, and down plan that was prepared in response to
proposed change is described in detail other risks that arise in or are borne by the evolving international standards for CCPs. The
in Item II below. All terms with initial existing version of OCC’s recovery and orderly
[CCA], which . . . [i]ncludes plans for the wind-down plan was prepared in advance of the
capitalization not defined herein have
sradovich on DSK3GMQ082PROD with NOTICES
adoption of the CCA rules.
4 OCC’s By-Laws and Rules can be found on 13 As defined by Rule 17Ad–22(e)(3)(ii), those
276 15 U.S.C. 78s(b)(2). OCC’s public website: http://optionsclearing.com/ scenarios are: ‘‘credit losses, liquidity shortfalls,
277 17 CFR 200.30–3(a)(12). about/publications/bylaws.jsp. losses from general business risks and other losses.’’
5 17 CFR 240.17Ad–22.
1 12 U.S.C. 5465(e)(1). 17 CFR 240.17Ad–22(e)(3)(ii).
2 17 CFR 240.19b–4(n)(1)(i). 6 17 CFR 240.17Ab2–2. 14 See Standards for Covered Clearing Agencies,
3 OCC has filed a proposed rule change with the 7 15 U.S.C. 78q–1. 81 FR 70786, 70810 (Oct. 13, 2016).
8 12 U.S.C. 5461 et. seq. 15 Id.
Commission in connection with the proposed
change. See SR–OCC–2017–021. 9 17 CFR 240.17Ad–22(a)(5). 16 See 81 FR at 70808.
VerDate Sep<11>2014 19:38 Jan 22, 2018 Jkt 244001 PO 00000 Frm 00115 Fmt 4703 Sfmt 4703 E:\FR\FM\23JAN1.SGM 23JAN1](https://thefederalregister.org/doc/83_FR_3220/page/20.svg)
Document Created: 2018-01-23 01:08:44
Document Modified: 2018-01-23 01:08:44
| Category | Regulatory Information | |
| Collection | Federal Register | |
| sudoc Class | AE 2.7: GS 4.107: AE 2.106: | |
| Publisher | Office of the Federal Register, National Archives and Records Administration | |
| Section | Notices | |
| FR Citation | 83 FR 3205 |
2024 Federal Register | Disclaimer | Privacy Policy
USC | CFR | eCFR