I. Introduction

On July 13, 2022, New York Stock Exchange LLC (“NYSE” 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 amend NYSE Rule 7.35B (DMM-Facilitated Closing Auctions) relating to the Closing Auction, and make certain conforming and non-substantive changes to NYSE Rules 7.31 (Orders and Modifiers), 7.35 (General), 7.35B, and NYSE Rule 104 (Dealings and Responsibilities of DMMs). The proposed rule change was published for comment in the Federal Register on July 28, 2022.^[3] The Commission has received no comment letters on the proposed rule change. This order approves the proposal.

II. Description of the Proposal

The Exchange proposes to amend NYSE Rule 7.35B to add price parameters within which Designated Market Makers (“DMMs”) must select a Closing Auction Price when facilitation the Closing Auctions in their assigned securities. As described below, the Closing Auction Price determined by the DMM must be at a price that is at or between the last-published Imbalance Reference Price and the last-published Continuous Book Clearing Price. Further, the Exchange proposes to modify how the DMM would participate in the Closing Auction by canceling any resting DMM Orders at the end of Core Trading Hours. The Exchange also proposes to make conforming changes to other affected rules.

The Exchange states that the proposed changes would make the Closing Auction more transparent and deterministic while retaining the ( printed page 56100) DMMs' unique obligation to facilitate the Closing Auction.

Overview of Current Closing Auction Process ^[4]

Pursuant to NYSE Rule 104(a)(3), DMMs have the responsibility to facilitate the close of trading for each of the securities in which the DMM is registered, which may include supplying liquidity as needed.^[5] NYSE Rule 104(a)(3) further provides that DMMs and DMM unit algorithms will have access to aggregate order information in order to comply with their requirement to facilitate the close of trading for each of the securities in which the DMM is registered. Accordingly, aggregate order information about all orders eligible to participate in the Closing Auction, including the full quantity of Reserve Orders ^[6] and Market-on-Close and Limit-on-Close Order quantities, is available to DMMs at each price point. This information is available at the point of sale to DMMs, and is also made available to DMM unit algorithms in connection with the electronic message sent to a DMM unit algorithm to close an assigned security electronically, which is sent shortly after the end of Core Trading Hours.

NYSE Rule 7.35B specifies the process for DMM-facilitated Closing Auctions. Pursuant to NYSE Rule 7.35B(a), it is the responsibility of each DMM to ensure that registered securities close as soon after the end of Core Trading Hours as possible, while at the same time not unduly hasty, particularly when at a price disparity from the Exchange Last Sale Price.^[7] As provided for in NYSE Rule 7.35B(a)(2), a DMM may enter or cancel DMM Interest after the end of Core Trading Hours in order to supply liquidity as needed to meet the DMM's obligation to facilitate the Closing Auction in a fair and orderly manner, and entry of DMM Interest after the end of Core Trading Hours is not subject to Limit Order Price Protection. Pursuant to NYSE Rule 7.35B(c), the DMM may effectuate a Closing Auction manually or electronically. NYSE Rule 7.35B(g) provides that the DMM is responsible for determining the Auction Price for a Closing Auction and that if there is an Imbalance of any size, the DMM must select an Auction Price at which all better-priced orders on the Side of the Imbalance can be satisfied.^[8]

The following interest is eligible to participate in a Closing Auction: unexecuted buy and sell orders resting on the Exchange Book at the end of Core Trading Hours (including DMM Orders); ^[9] Auction-Only Orders; ^[10] and DMM Auction Liquidity entered by the DMM in connection with facilitating the Closing Auction.^[11]

Beginning 10 minutes before the scheduled end of Core Trading Hours, the Exchange begins disseminating through its proprietary data feed Closing Auction Imbalance Information that is calculated based on the interest eligible to participate in the Closing Auction.^[12] The Closing Auction Imbalance Information includes the Continuous Book Clearing Price, which is the price at which all better-priced orders eligible to trade in the Closing Auction on the Side of the Imbalance can be traded.^[13] The Closing Auction Imbalance Information also includes an Imbalance Reference Price, which is the Exchange Last Sale Price bounded by the Exchange Best Bid and Offer.^[14] Beginning five minutes before the end of Core Trading Hours, Closing D Orders are included in the Closing Auction Imbalance Information at their undisplayed discretionary price.^[15] The Closing Auction Imbalance Information is updated at least every second (unless there is no change to the information) and is disseminated until the Closing Auction begins.^[16] In addition, if at the Closing Auction Imbalance Freeze Time ^[17] the Closing Imbalance ^[18] is 500 round lots or more, the Exchange will ( printed page 56101) disseminate a Regulatory Closing Imbalance to both the securities information processor and proprietary data feeds.^[19]

Proposed Changes to the Closing Auction Price

The Exchange proposes to amend NYSE Rule 7.35B(g) to add explicit price parameters to the Closing Auction Price.^[20] The Exchange proposes that the Closing Auction Price determined by the DMM must be at a price that is at or between the last-published Imbalance Reference Price and the last-published Continuous Book Clearing Price.^[21] The Exchange also proposes related clarifying and conforming changes.^[22]

The Exchange states that the proposed Closing Auction Price parameter would be consistent with how the Closing Auction Price has been determined for the vast majority of Closing Auctions. For example, the Exchange states, during the period of January 1, 2021, to June 17, 2022, 95.6% of all Closing Auctions were priced at or between the last-published Imbalance Reference Price and the Continuous Book Clearing Price. Similarly, the Exchange states that, during the same period, 94.6% of closing auction volume priced within these parameters. Moreover, according to the Exchange, of the 4.4% of Closing Auctions that did not price within those parameters, 73.6% closed at prices that were only one or two cents away from those boundaries.^[23] The Exchange states that more recent Closing Auction data also shows that auctions executing within the proposed range resulted in more representative prices for market participants.^[24] The Exchange states that that this proposed change would eliminate any potential for a Closing Auction Price to be lower (higher) than the last-published Imbalance Reference Price in the case of a Buy (Sell) Imbalance. The Exchange believes this this proposed change would promote transparency and determinism with respect to the Closing Auction because the Closing Auction Price would be required to be within a pre-determined range of prices that have been disseminated via the Closing Auction Imbalance Information and that cannot be changed after the end of Core Trading Hours.^[25]

Proposed Changes to How DMMs Would Participate in the Closing Auction

The Exchange proposes to change how DMMs would be able to enter buy and sell interest to participate in the Closing Auction by modifying how a DMM could enter or cancel interest after the end of Core Trading Hours.^[26] Specifically, the Exchange proposes to amend NYSE Rule 7.35B(a)(2) to provide that, after the end of Core Trading Hours, a DMM may enter DMM Auction Liquidity only in order to supply liquidity as needed to meet the DMM's obligation to facilitate the Closing Auction in a fair and orderly manner.^[27] As proposed, a DMM could enter DMM Auction Liquidity after the end of Core Trading Hours only to close a security within the proposed new price parameters, described above.^[28] The Exchanges states that, because only DMM Auction Liquidity could be entered after the end of Core Trading Hours, such interest could be either entered electronically in response to the electronic message sent to a DMM unit algorithm to close an assigned security or entered manually.

The Exchange proposes that DMM Orders ( i.e., DMM buy and sell orders resting on the Exchange Book) would not be eligible to participate in the Closing Auction.^[29] Because DMM Orders would not participate in the Closing Auction, the Exchange further proposes that this interest would not be included in the calculation of the Continuous Book Clearing Price.^[30] The Exchange states that, with this proposed change, the Continuous Book Clearing Price would be based on non-DMM interest eligible to participate in the Closing Auction. Finally, the Exchange states that because, as proposed, resting DMM Orders would not participate in the Closing Auction, the Exchange also proposes to cancel DMM Orders at the end of Core Trading Hours.^[31]

The Exchange states that, in connection with the Closing Auction, with this proposed change to NYSE Rule 7.35B(a)(2), DMMs would still be required, consistent with their obligations under NYSE Rule 104, to contribute their own capital to supply liquidity as needed to assist in the maintenance of a fair and orderly market. DMMs would also continue to have an obligation with respect to determining a Closing Auction Price that satisfies all better-priced orders on the Side of the Imbalance.

Proposed Conforming and Non-Substantive Amendments

The Exchange proposes to amend NYSE Rule 104 to eliminate obsolete rule text and update rule references, and to make other conforming changes to NYSE Rules 7.31 and 104 as follows.

• The Exchange proposes to amend NYSE Rule 104(a)(2) to update the cross reference from NYSE Rule 123D to NYSE Rule 7.35A and to use the Pillar terms of “Core Open Auctions and Trading Halt Auctions” instead of referring to “openings.” The Exchange also proposes to delete, as obsolete, the reference to NYSE Rule 13 and Reserve Order interest procedures at the opening. Finally, the Exchange proposes to delete the reference to Supplementary Material .05 to NYSE Rule 104 with respect to odd-lot order information to the DMM unit algorithm, as the Exchange states this is also obsolete now that the Exchange trades on Pillar.
• The Exchange proposes to amend NYSE Rule 104(a)(3) to update the cross reference from NYSE Rule 123C to NYSE Rule 7.35B and to use the Pillar term of “Closing Auctions” instead of “closes.” The Exchange also proposes to delete, as obsolete, the reference to NYSE Rule 13 and Reserve Order interest procedures at the close.
• The Exchange proposes to amend NYSE Rule 104(b) by deleting subparagraphs (2) and (6) and replacing the text for NYSE Rule 104(b)(2) with the following: “Unless otherwise specified in NYSE Rule 7.31, DMM unit algorithms may use the orders and modifiers set forth in NYSE Rule 7.31.” ^[32]

• The Exchange proposes to amend NYSE Rule 7.31(a)(3) to reflect that Inside Limit Orders are not available to DMMs,^[33] because all of the orders and modifiers set forth in NYSE Rule 104(b)(6) that are unavailable to DMMs are reflected in NYSE Rule 7.31 except for Inside Limit Orders, which limitation was added only to NYSE Rule 104(b)(6).^[34]

• The Exchange proposes to amend NYSE Rule 104(b)(3) to delete references to “Floor broker agency interest files or reserve interest,” as the Exchange states that these references are now obsolete.^[35]

• The Exchange proposes to amend NYSE Rule 104(b) by deleting subparagraph (4).^[36] The Exchanges states that, with the transition to Pillar, the Exchange has replaced the “Capital Commitment Schedule” with Capital Commitment Orders, as described in NYSE Rule 7.31(d)(5), and has deleted NYSE Rule 1000. The Exchange states that, accordingly, this current rule is obsolete. The Exchange proposes a non-substantive amendment to renumber NYSE Rule 104(b)(5) as NYSE Rule 104(b)(4).

• The Exchange proposes to delete the text accompanying current Rules 104(c), (d), and (e) as obsolete now that the Exchange trades on Pillar.^[37] With these proposed deletions, the Exchange proposes non-substantive amendments to renumber Rules 104(f), (g), (h), (i), and (j) as Rules 104(c), (d), (e), (f), and (g) and to update cross-references in proposed NYSE Rule 104(e)(iii) from subparagraph (h)(ii) and (iii) to (e)(ii) and (iii).

• The Exchange proposes to amend current NYSE Rule 104(h)(ii) (proposed NYSE Rule 104(e)(ii)) to delete reference to information that is no longer available to a DMM at the post.^[38]

The Exchange proposes that the non-substantive amendments to NYSE Rule 104 would be operative immediately upon approval of this proposed rule change. The Exchange states, that, because of the technology changes associated with the proposed changes to NYSE Rule 7.35B, it proposes that, subject to approval of the proposed rule change, the Exchange will announce the implementation date of the remaining proposed rule changes by Trader Update.^[39]

III. Discussion and Commission Findings

After careful review, the Commission finds that the proposed rule change is consistent with the requirements of the Act and the rules and regulations thereunder applicable to a national ( printed page 56103) securities exchange.^[40] In particular, the Commission finds that the proposed rule change is consistent with Section 6(b)(5) of the Act,^[41] which requires, among other things, that the rules of a national securities exchange be designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, to remove impediments to and perfect the mechanism of a free and open market and a national market system, and, in general, to protect investors and the public interest; and that the rules of a national securities exchange are not designed to permit unfair discrimination between customers, issuers, brokers, or dealers.

As described above, the DMM is responsible for determining the Auction Price for the Closing Auctions in its assigned securities, and if there is an Imbalance of any size, the DMM must select an Auction Price that is able to satisfy all better-priced orders on the Side of the Imbalance. The Exchange proposes to add that the Closing Auction Price determined by the DMM must also be at a price that is at or between the last-published Imbalance Reference Price and the last-published Continuous Book Clearing Price. The Exchange has included statistics in its proposal showing that the proposed Closing Auction Price parameters are, for the vast majority of Closing Auctions, consistent with how the Closing Auction Price has been determined under the current rules.^[42] The Exchange has also included statistics in its proposal showing that, as to more recent Closing Auction data, auctions executing within the proposed range resulted in more representative prices for market participants.^[43]

The Exchange also proposes that DMM Orders would not participate in the Closing Auction or factor into the calculation of the Continuous Book Clearing Price and that, after the end of Core Trading Hours, a DMM would be able to enter DMM Auction Liquidity only in order to supply liquidity as needed to meet the DMM's obligation to facilitate the Closing Auction in a fair and orderly manner within the proposed pricing parameters.

The Commission finds that the proposed pricing parameters for determining the Closing Auction Price, as well as the proposed limitation on the entry of DMM interest (specifically, DMM Auction Liquidity) after the close of regular trading, are reasonably designed to (1) limit the price range within which a DMM can facilitate the Closing Auction in its assigned securities to a price range that reflects the natural forces of supply and demand for a security in the Closing Auction; and (2) enhance transparency and certainty for market participants with respect to the Closing Auction. The proposed price parameters and limitation on DMM Auction Liquidity are therefore reasonably designed to remove impediments to and perfect the mechanism of a free and open market and a national market system. Moreover, by providing that DMM Orders will neither participate in the Closing Auction nor figure into the calculation of the Continuous Book Clearing Price—one of the proposed pricing parameters for the Closing Auction—the Exchange's proposal would limit the extent to which a DMM could influence the price parameters for the Closing Auction Price, which is reasonably designed to prevent fraudulent and manipulative acts and practices. The Commission further finds that the other conforming and non-substantive changes proposed by the Exchange are consistent with the substantive changes discussed above and do not raise any regulatory issues.

IV. Conclusion

It is therefore ordered , pursuant to Section 19(b)(2) of the Act,^[44] that the proposed rule change (SR-NYSE-2022-32) be, and it hereby is, approved.