Notice2021-11410
Self-Regulatory Organizations; BOX Exchange LLC; Notice of Filing of Proposed Rule Change To Adopt Rules Governing the Trading of Equity Securities on the Exchange Through a Facility of the Exchange Known as Boston Security Token Exchange LLC
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
June 2, 2021
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 86 Issue 104 (Wednesday, June 2, 2021)</title>
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[Federal Register Volume 86, Number 104 (Wednesday, June 2, 2021)]
[Notices]
[Pages 29634-29674]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2021-11410]
[[Page 29633]]
Vol. 86
Wednesday,
No. 104
June 2, 2021
Part II
Securities and Exchange Commission
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Self-Regulatory Organizations; BOX Exchange LLC; Notice of Filing of
Proposed Rule Change To Adopt Rules Governing the Trading of Equity
Securities on the Exchange Through a Facility of the Exchange Known as
Boston Security Token Exchange LLC; Notice
Federal Register / Vol. 86 , No. 104 / Wednesday, June 2, 2021 /
Notices
[[Page 29634]]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-92017; File No. SR-BOX-2021-06]
Self-Regulatory Organizations; BOX Exchange LLC; Notice of Filing
of Proposed Rule Change To Adopt Rules Governing the Trading of Equity
Securities on the Exchange Through a Facility of the Exchange Known as
Boston Security Token Exchange LLC
May 25, 2021.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on May 12, 2021, BOX Exchange LLC (the ``Exchange'') filed with the
Securities and Exchange Commission (``Commission'') the proposed rule
change as described in Items I and II below, which Items have been
prepared by the self-regulatory organization. The Commission is
publishing this notice to solicit comments on the proposed rule from
interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
Pursuant to the provisions of Section 19(b)(1) of the Securities
Exchange Act of 1934 as amended (``Exchange Act''),\3\ BOX Exchange LLC
(``BOX'' or the ``Exchange'') is filing with the Securities and
Exchange Commission (``SEC'' or ``Commission'') a proposed rule change
to adopt rules to govern the trading of equity securities on the
Exchange through a facility of the Exchange known as Boston Security
Token Exchange LLC (``BSTX''). As described more fully below, BSTX
would operate a fully automated, price/time priority execution system
for the trading of ``Securities,'' which would be equity securities
that meet BSTX listing standards and for which certain information
regarding orders and executions on BSTX would be recorded and
disseminated on a proprietary market data feed that BSTX operates using
a proprietary blockchain system (``BSTX Market Data Blockchain''). The
proposed additions to the Exchange's Rules setting forth new Rule
Series 17000-29000 have been submitted with the proposal as Exhibit 5A.
All text set forth in Exhibit 5A would be added to the Exchange's rules
and therefore underlining of the text is omitted to improve
readability. Forms proposed to be used in connection with the proposed
rule change, such as the application to become a BSTX Participant, have
been submitted with the proposal as Exhibits 3A through 3L.
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\3\ 15 U.S.C. 78s(b)(1).
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In addition, the Exchange proposes to make certain amendments to
several existing BOX Rules to facilitate trading on BSTX. The proposed
changes to the existing BOX Rules would not change the core purpose of
the subject Rules or the functionality of other BOX trading systems and
facilities. Specifically, the Exchange is seeking to amend BOX Rules
100, 2020, 2060, 3180, 7130, 7150, 7230, 7245, IM-8050-3, 11010, 11030
and 12140. These proposed changes are set forth in Exhibit 5B. Material
proposed to be added to the Rule as currently in effect is underlined
and material proposed to be deleted is bracketed.
All capitalized terms not defined herein have the same meaning as
set forth in the Exchange's Rules.\4\
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\4\ The Exchange's Rules can be found on the Exchange's public
website: <a href="https://boxoptions.com/regulatory/rulebook-filings/">https://boxoptions.com/regulatory/rulebook-filings/</a>.
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The text of the proposed rule change is available from the
principal office of the Exchange, at the Commission's Public Reference
Room and also on the Exchange's internet website at http://
<a href="<a href="http://boxoptions.com">http://boxoptions.com</a>">boxoptions.com</a>.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the self-regulatory organization
included statements concerning the purpose of, and basis for, the
proposed rule change and discussed any comments it received on the
proposed rule change. The text of these statements may be examined at
the places specified in Item IV below. The self-regulatory organization
has prepared summaries, set forth in Sections A, B, and C below, of the
most significant aspects of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Exchange is proposing to adopt a series of rules to govern the
trading of certain equity securities through a facility of the Exchange
known as BSTX and make certain amendments to the existing BOX rules to
facilitate trading on BSTX. As described more fully below, BSTX would
operate a fully automated, price/time priority execution system (``BSTX
System'') for the trading of certain equity securities that would be
considered ``Securities'' under the proposed rules. The ``Securities''
\5\ under the proposed rules would be equity securities that meet BSTX
listing standards and that trade on the BSTX System. The Exchange would
operate the BSTX Market Data Blockchain, which would record certain
information regarding orders and transactions occurring on BSTX with
respect to Securities. All BOX Participants would be eligible to
participate in BSTX provided that they become a BSTX Participant
pursuant to the proposed rules. Under the proposed rules, BSTX would
serve as the listing market for eligible companies and issuers of
exchange traded products (``ETPs'') that wish to issue their registered
securities as Securities. Securities would trade as NMS stock.\6\ The
Exchange is not proposing rules that would support its extension of
unlisted trading privileges (``UTP'') to other NMS stock, and
accordingly the Exchange does not intend to extend any such UTP in
connection with this proposal. The Exchange would therefore only trade
Securities listed on BSTX unless and until it proposes and receives
Commission approval for rules that would support trading in other types
of securities, including through any extension of UTP to other NMS
stock. A guide to the structure of the proposed rule change is
described immediately below.
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\5\ As discussed further below, BSTX proposes to use the term
``Security'' to refer to BSTX-listed securities to distinguish them
from other securities issued by an issuer that the issuer does not
list on BSTX.
\6\ 17 CFR 242.600(b)(48).
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Guide to the Scope of the Proposed Rule Change
The proposal for trading of Securities through BSTX generally
involves changes to existing BOX Rules and new BOX Rules pertaining
specifically to BSTX (``BSTX Rules''). In addition, the Exchange plans
to submit a separate proposed rule change pertaining to BSTX's
corporate governance documents. To support the trading of Securities
through BSTX, certain conforming changes are proposed to existing BOX
Rules and entirely new BSTX Rules are also proposed as Rule Series
17000 through 29000.\7\ Each of those new Rule Series and the
provisions thereunder are described in greater detail below. Where the
BSTX Rules are based on existing rules of another national securities
exchange, the source rule from the relevant exchange is noted along
with a
[[Page 29635]]
discussion of notable differences between the source rule and the
proposed BSTX Rule. The proposed BSTX Rules are addressed in Part III
below and they generally cover the following areas:
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\7\ The proposed changes to BOX Rules and the proposed BSTX
Rules have been submitted with this proposal as Exhibits 5B and 5A,
respectively.
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<bullet> Section 17000--General Provisions of BSTX;
<bullet> Section 18000--Participation on BSTX;
<bullet> Section 19000--Business Conduct for BSTX Participants;
<bullet> Section 20000--Financial and Operational Rules for BSTX
Participants;
<bullet> Section 21000--Supervision;
<bullet> Section 22000--Miscellaneous Provisions;
<bullet> Section 23000--Trading Practice Rules;
<bullet> Section 24000--Discipline and Summary Suspension;
<bullet> Section 25000--Trading Rules;
<bullet> Section 25200--Market Making on BSTX;
<bullet> Section 26000--BSTX Listing Rules Other Than for Exchange
Traded Products;
<bullet> Section 27000--Suspension and Delisting;
<bullet> Section 27100--Guide to Filing Requirements;
<bullet> Section 27200--Procedures for Review of Exchange Listing
Determinations; and
<bullet> Section 28000--Trading and Listing of Exchange Traded
Products;
<bullet> Section 29000--Dues, Fees, Assessments and Other Charges.
Overview of BSTX and Considerations Related to the Listing, Trading and
Clearance and Settlement of Securities
The Joint Venture and Ownership of BSTX
On June 19, 2018, <a href="http://t0.com">t0.com</a> Inc. (``tZERO'') and BOX Digital Markets
LLC (``BOX Digital'') announced a joint venture to facilitate the
trading of Securities on the Exchange.\8\ As part of the joint venture,
BOX Digital, which is a subsidiary of BOX Holdings Group LLC, and tZERO
each own 50% of the voting class of equity and over 45% economic
interest of BSTX LLC. Pursuant to the BSTX LLC Agreement, BOX Digital
and tZERO will perform certain specified functions with respect to the
operation of BSTX. As noted, these details, as well as the proposed
governance structure of the joint venture will be the subject of a
separate proposed rule change that the Exchange will submit to the
Commission.
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\8\ See tZERO and BOX Digital Markets Sign Deal to Create Joint
Venture, Business Wire (June 19, 2018), <a href="https://www.businesswire.com/news/home/20180619005897/en/tZERO-and-BOX-Digital-Markets-Sign-Deal-to-Create-Joint-Venture">https://www.businesswire.com/news/home/20180619005897/en/tZERO-and-BOX-Digital-Markets-Sign-Deal-to-Create-Joint-Venture</a>.
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BSTX Would Be a Facility of BOX That Would Support Trading in the New
Asset Class of Securities for BOX
BSTX would operate as a facility \9\ of BOX, which is a national
securities exchange registered with the SEC. As a facility of BOX,
BSTX's operations would be subject to applicable requirements in
Sections 6 and 19 of the Exchange Act, among other applicable rules and
regulations.\10\ Currently, BOX functions as an exchange only for
standardized options. At the time that BSTX commences operations it
would support trading in Securities that are equity securities
(including certain ETPs), as descried in more detail below.
Accordingly, the proposal represents a new asset class for BOX, and the
discussion below sets forth the changes and additions to the Exchange's
Rules to support the trading of equity securities as Securities on
BSTX.
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\9\ 15 U.S.C. 78c(a)(2). Section 3(a)(2) of the Exchange Act,
provides that ``the term `facility' when used with respect to an
exchange includes its premises, tangible or intangible property
whether on the premises or not, any right to the use of such
premises or property or any service thereof for the purpose of
effecting or reporting a transaction on an exchange (including,
among other things, any system of communication to or from the
exchange, by ticker or otherwise, maintained by or with the consent
of the exchange), and any right of the exchange to the use of any
property or service.'' Because BSTX will share certain systems of
the Exchange, BSTX would be a facility of the Exchange.
\10\ 15 U.S.C. 78f; 15 U.S.C. 78s.
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The Exchange proposes to use the term ``Security'' \11\ to describe
a NMS stock trading on the BSTX system. The legal significance,
therefore, of a ``Security'' is that it would be an equity security
that is approved for listing on BSTX and that trades on the BSTX
System. A security that is offered by an issuer with the intent of it
becoming listed on BSTX would therefore not become a ``Security'' under
the proposed BSTX Rules unless and until it actually does become listed
on BSTX and trades on the BSTX System.\12\
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\11\ The Exchange proposes to define the term ``Security'' to
mean a NMS stock, as defined in Rule 600(b)(47) of the Exchange Act,
trading on the BSTX System. See proposed Rule 17000(a)(31).
\12\ Id.
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Securities Would Be NMS Stocks
The Securities would qualify as NMS stocks pursuant to Regulation
NMS,\13\ which defines the term ``NMS security'' in relevant part to
mean ``any security or class of securities for which transaction
reports are collected, processed and made available pursuant to an
effective transaction reporting plan . . . .'' \14\ The Exchange plans
to join existing transaction reporting plans, as discussed in Part VIII
below, for the purposes of Security quotation and transaction
reporting.\15\ The term ``NMS stock'' means ``any NMS security other
than an option'' \16\ and therefore Securities traded on BSTX would be
classified as NMS stock.
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\13\ 17 CFR 242.600 through .613.
\14\ 17 CFR 242.600(b)(47).
\15\ 17 CFR 242.601(a)(1). The Rule states in relevant part that
``every national securities exchange shall file [with the SEC] a
transaction reporting plan regarding transactions in listed equity
and Nasdaq securities executed through its facilities . . . .''
\16\ 17 CFR 242.600(b)(47).
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Securities would meet the definition of NMS stock and would trade,
clear, and settle in the same manner as all other NMS stocks traded
today. As described in further detail below, the operation of the BSTX
Market Data Blockchain would in no way modify or alter market
participants' obligations under Regulation NMS.
BSTX Would Support Trading of Registered Securities
All Securities traded on BSTX would generally be required to be
registered with the Commission under both Section 12 of the Exchange
Act \17\ and Section 6 of the Securities Act of 1933 (``Securities
Act'').\18\ BSTX would not support trading of Securities offered under
an exemption from registration for public offerings, with the exception
of certain offerings under Regulation A that meet the proposed BSTX
listing standards.
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\17\ 15 U.S.C. 78l.
\18\ 15 U.S.C. 77f.
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Issuance and Clearance and Settlement of Securities
BSTX would maintain certain rules, as described below, to address
custody, clearance and settlement in connection with Securities. All
transactions in Securities would clear and settle in accordance with
the rules, policies and procedures of registered clearing agencies.
Specifically, BSTX anticipates that at the time it commences
operations, Securities that are listed and traded on BSTX would be
securities that have been made eligible for services by The Depository
Trust Company (``DTC'') and that DTC would serve as the securities
depository \19\ for such
[[Page 29636]]
Securities. It is also expected that confirmed trades in Securities on
BSTX would be transmitted to National Securities Clearing Corporation
(``NSCC'') for clearing such that NSCC would clear the trades through
its systems to produce settlement obligations that would be due for
settlement between participants at DTC. BSTX believes that this
custody, clearance and settlement structure is the same general
structure that exists today for other exchange-traded equity
securities. Importantly, for purposes of NSCC's clearing activities and
DTC's settlement activities in respect of the Securities, the relevant
Securities would be cleared and settled by NSCC and DTC in exactly the
same manner as those activities are performed by NSCC and DTC currently
regarding a class of NMS Stock.
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\19\ 15 U.S.C. 78c(a)(23)(A). Section 3(a)(23)(A) of the
Exchange Act defines the term ``clearing agency'' to include ``any
person, such as a securities depository, who (i) acts as a custodian
of securities in connection with a system for the handling of
securities whereby all securities of a particular class or series of
any issuer deposited within the system are treated as fungible and
may be transferred, loaned, or pledged by bookkeeping entry without
physical delivery of securities certificates, or (ii) otherwise
permits or facilitates the settlement of securities transactions or
the hypothecation or lending of securities without physical delivery
of securities certificates.''
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The operation of the BSTX Market Data Blockchain will have no
impact or effect on the manner in which a Security clears and settles.
The BSTX Market Data Blockchain would be implemented through the
operation of the proposed BSTX Rules and would occur separate and apart
from the clearance and settlement process. The Security would be an
ordinary equity security for NSCC's and DTC's purposes. The BSTX Market
Data Blockchain would be a separate set of market data that uses
distributed ledger technology to record certain order and transaction
information regarding orders and transactions in Securities on BSTX.
Issuance of Equity Securities Eligible To Become a Security
With the exception of certain offerings under Regulation A that
meet the proposed BSTX listing standards, all Securities traded on BSTX
will have been offered and sold in registered offerings under the
Securities Act, which means that purchasers of the Securities will
benefit from all of the protections of registration. The Division of
Corporation Finance will need to make a public interest finding in
order to accelerate the effectiveness of the registration statements
for these offerings. Because BSTX would be a facility of a national
securities exchange, all Securities would be registered under Section
12(b) of the Exchange Act, thereby subjecting all of these issuers to
the reporting regime in Section 13(a) of the Exchange Act.
All offerings of securities that are intended to be listed as
Securities on BSTX would be conducted in the same general manner in
which offerings of exchange-listed equity securities are conducted
today under the federal securities laws. An issuer will enter into a
firm commitment or best efforts underwriting agreement with a sole
underwriter or underwriting syndicate; the underwriter(s) will market
the securities and distribute them to purchasers; and secondary trading
in the securities (that are intended to trade on BSTX as Securities)
will thereafter commence on BSTX.
Issuers on BSTX could include both (1) new issuers who do not
currently have any class of securities registered on a national
securities exchange, and (2) issuers who currently have securities
registered on a national securities exchange and who are seeking
registration of a separate class of equity securities for listing on
BSTX as Securities. BSTX does not intend for Securities listed, or
intended to be listed, on BSTX to be fungible with any other class of
securities from the same issuer.\20\ If an issuer sought to list
securities on BSTX that are not a separate class of an issuer's
securities, BSTX does not intend to approve such a class of security
for listing on BSTX as a Security, pursuant to BSTX's authority under
BSTX Rule 26101. At the commencement of BSTX's operations, certain
equities (including ETPs) would be eligible for listing as Securities.
This would be addressed by BSTX Rules 26102 (Equity Issues), 26103
(Preferred Securities), 26105 (Warrant Securities) and the Rule 28000
Series (Trading and Listing of Exchange Traded Products), which would
be part of BSTX's listing rules and would contemplate that only those
specified types of equity securities would be eligible for listing.
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\20\ The Exchange notes that distinct classes of securities
issued by an issuer that are Securities would not be fungible with
another class of securities of the same issuer because no class of
an issuer's securities is fungible with a separate class of its
securities--otherwise they would be the same class of security. To
the extent that two classes of an issuer's shares had identical
voting and economic rights but were registered with the Commission
as separate classes (e.g., Class A shares and Class B shares), the
two classes of shares could be economically fungible with one
another insofar as they convey the same economic and beneficial
rights and interests to investors, but this would not mean that
ownership of a Class A share is the same as ownership of a Class B
share notwithstanding that each class provides the same economic
benefits. In any case, nothing herein proposes any change to the
existing framework for different classes of securities.
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Securities Depository Eligibility
BSTX would maintain rules that would promote a structure in which
Securities would be held in ``street name'' with DTC.\21\ BSTX Rule
26137 would require that for an issuer's security to be eligible to be
a Security, BSTX must have received a representation from the issuer
that a CUSIP number that identifies the security is included in a file
of eligible issues maintained by a securities depository that is
registered with the SEC as a clearing agency. This is based on rules
that are currently maintained by other equities exchanges.\22\ In
practice, BSTX Rule 26137 requires the Security to have a CUSIP number
that is included in a file of eligible securities that is maintained by
DTC because the Exchange believes that DTC currently is the only
clearing agency registered with the SEC that provides securities
depository services.\23\
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\21\ The term ``street name'' refers to a securities holding
structure in which DTC, through its nominee Cede & Co., would be the
registered holder of the securities and, in turn, DTC would grant
security entitlements in such securities to relevant accounts of its
participants. Proposed BSTX Rule 26136 would also provide, with
certain exceptions, that securities listed on BSTX must be eligible
for a direct registration program operated by a clearing agency
registered under Section 17A of the Exchange Act. DTC operates the
only such program today, known as the Direct Registration System,
which permits an investor to hold a security as the registered owner
in electronic form on the books of the issuer.
\22\ Proposed BSTX Rule 26137 is based on current NYSE Rule 777.
\23\ See Exchange Act Release No. 78963 (September 28, 2016), 81
FR 70744, 70748 (October 13, 2016) (footnote 46 and the accompanying
text acknowledge that DTC is the only registered clearing agency
that provides securities depository services for the U.S. securities
markets).
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Book-Entry Settlement at a Securities Depository
BSTX would also maintain Proposed BSTX Rule 26135 regarding uniform
book-entry settlement. The rule would require each BSTX Participant to
use the facilities of a securities depository for the book-entry
settlement of all transactions in depository eligible securities with
another BSTX Participant or a member of a national securities exchange
that is not BSTX or a member of a national securities association.\24\
Proposed BSTX Rule 26135 is based on the depository eligibility rules
of other equities exchanges and Financial Industry Regulatory Authority
(``FINRA'').\25\ Those rules were first adopted as part of a
coordinated industry effort in 1995 to promote book-entry settlement
for the vast majority of initial public offerings
[[Page 29637]]
and ``thereby reduce settlement risk'' in the U.S. national market
system.\26\
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\24\ FINRA is currently the only national securities association
registered with the SEC.
\25\ See e.g., FINRA Rule 11310. Book-Entry Settlement and NYSE
Rule 776. Book-Entry Settlement of Transactions.
\26\ These coordinated depository eligibility rules resulted
from proposed listing rules amendments developed by the Legal and
Regulatory Subgroup of the U.S. Working Committee, Group of Thirty
Clearance and Settlement Project. See Securities Exchange Act
Release Nos 35774 (May 26, 1995) (SR-NASD-95-24), 60 FR 28813 (June
2, 1995); 35773 (May 26, 1995), 60 FR 28817 (June 2, 1995) (SR-NYSE-
95-19).
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Participation in a Registered Clearing Agency That Uses a Continuous
Net Settlement System
Under proposed BSTX Rule 25140, each BSTX Participant would be
required to either (i) be a member of a registered clearing agency that
uses a continuous net settlement (``CNS'') system, or (ii) clear
transactions executed on BSTX through a member of such a registered
clearing agency. The Exchange believes that today NSCC is the only
registered clearing agency that uses a CNS system to clear equity
securities, and proposed BSTX Rule 25140 further specifies that BSTX
will maintain connectivity and access to the Universal Trade Capture
system of NSCC to transmit confirmed trade details to NSCC regarding
trades executed on BSTX. The proposed rule would also address the
following: (i) A requirement that each Security transaction executed
through BSTX must be executed on a locked-in basis for automatic
clearance and settlement processing; (ii) the circumstances under which
the identity of contra parties to a Security transaction that is
executed through BSTX would be required to remain anonymous or may be
revealed; and (iii) certain circumstances under which a Security
transaction may be cleared through arrangements with a member of a
foreign clearing agency. Proposed BSTX Rule 25140 is based on a
substantially identical rule of the Investor's Exchange, LLC (``IEX''),
which, in turn, is consistent with the rules of other equities
exchanges.\27\
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\27\ See IEX Rule 11.250 (Clearance and Settlement; Anonymity),
which was approved by the Commission in 2016 as part of its approval
of IEX's application for registration as a national securities
exchange. Exchange Act Release No. 78101 (June 17, 2016); 81 FR
41142 (June 23, 2016); see also Cboe BZX Rule 11.14 (Clearance and
Settlement; Anonymity).
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BSTX believes that the operation of its depository eligibility rule
and its book-entry services rule would promote a framework in which
Securities that would be eligible to be listed and traded on BSTX would
be equity securities that have been made eligible for services by a
registered clearing agency that operates as a securities depository and
that are settled through the facilities of the securities depository by
book-entry. The Exchange believes that because DTC currently is the
only clearing agency registered with the SEC that provides securities
depository services, at the commencement of BSTX's operations,
Securities would be securities that have been made eligible for
services by DTC, including book-entry settlement services.
Settlement Cycle
Proposed BSTX Rule 25100(d) would address settlement cycle
considerations regarding trades in Securities. Security trades that
result from orders matched against the electronic order book of BSTX
would be required to clear and settle pursuant to the rules, policies
and procedures of a registered clearing agency. As noted above in
connection with the description of proposed BSTX Rule 25140, the
Exchange expects that at the commencement of operations by BSTX it
would transmit confirmed trade details to NSCC regarding Security
trades that occur on BSTX and that NSCC would be the registered
clearing agency that clears Security trades.
As described in greater detail below in Part II.I, the Exchange is
also proposing that BSTX Participants would be able to include
parameters in orders submitted to BSTX to indicate a preference to use
faster settlement cycles that are currently available through NSCC and
DTC under certain circumstances. BSTX believes that allowing BSTX
Participants to use these faster settlement cycles where consistent
with the rules, policies and procedures of a registered clearing agency
would mitigate settlement risk for transactions in such Securities due
to faster settlement. BSTX believes that NSCC already has authority
under its rules, policies and procedures to clear certain trades on a
T+1 or T+0 basis, which are shorter settlement cycles than the longest
settlement cycle of T+2 that is generally permitted under SEC Rule
15c6-1 for a security trade that involves a broker-dealer.\28\
Furthermore, BSTX understands that NSCC does already clear trades in
accordance with this authority.
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\28\ 17 CFR 240.15c6-1. Under SEC Rule 15c6-1, with certain
exceptions, a broker-dealer is not permitted to enter a contract for
the purchase or sale of security that provides for payment of funds
and delivery of securities later than the second business day after
the date of the contract unless otherwise expressly agreed to by the
parties at the time of the transaction.
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The BSTX Market Data Blockchain
BSTX will make available to BSTX Participants certain market data
related to trading activity occurring on BSTX through the use of a
private, permissioned blockchain maintained by the Exchange. As
described further below, a BSTX Participant would have the ability to
see detailed information about its trading activity on BSTX but only
anonymized information with respect to the trading activity of other
BSTX Participants. BSTX Participants would have no obligations with
respect to providing information to, accessing, maintaining, or using
the BSTX Market Data Blockchain. The Exchange believes that the
information made available on the BSTX Market Data Blockchain would be
generally similar to Daily Trade and Quote (``TAQ'') data made
available by New York Stock Exchange LLC except that the Exchange would
use distributed ledger or ``blockchain'' technology to record such
information, a BSTX Participant would be able to see non-anonymized
information about its own trading activity on BSTX, and the market data
would pertain only to trading activity on BSTX and not the broader
market (e.g., an over-the-counter (``OTC'') \29\ transaction in a
Security reported to the consolidated tape).\30\
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\29\ OTC in this context refers to trading occurring otherwise
than on a national securities exchange.
\30\ See e.g., NYSE, Daily TAQ Fact Sheet, <a href="https://www.nyse.com/publicdocs/nyse/data/Daily_TAQ_Fact_Sheet.pdf">https://www.nyse.com/publicdocs/nyse/data/Daily_TAQ_Fact_Sheet.pdf</a>.
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Background on Blockchain Technology
In general, a blockchain is essentially a ledger that can maintain
digital records of assets, transactions, or other information. A
blockchain's central function is to encode transitions or changes to
the ledger. Whenever one change to the blockchain ledger occurs to
record a state transition, the entire blockchain is immutably changed
to reflect the state transition.
There are broadly two types of blockchains: (i) Public blockchains
that are decentralized, open to anyone running the same protocol; \31\
and (ii) a private, permission-based blockchains where only those
granted access may view or take other actions with respect to the
blockchain.
---------------------------------------------------------------------------
\31\ A ``protocol'' in this context generally means a set of
rules governing the format of messages that are exchanged between
the participants.
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BSTX Market Data Blockchain as a Private Permissioned Network
The BSTX Market Data Blockchain would operate as a private,
permission-based blockchain accessible only to BSTX Participants. The
Exchange would control all aspects of the BSTX Market Data Blockchain.
Pursuant to proposed Rule 17020(b), each BSTX Participant would be
assigned a BSTX Market Data Blockchain address that corresponds to the
BSTX Participant's trading activity
[[Page 29638]]
on BSTX. The Exchange will also issue login credentials to each BSTX
Participant through which the BSTX Participant may access the BSTX
Market Data Blockchain to see its order and transaction information on
BSTX as well as certain anonymized market data from other BSTX
Participants, as discussed further below.
The BSTX Market Data Blockchain would generally operate by
collecting information from two sources, which the Exchange would then
translate into information capable of being recorded to the BSTX Market
Data Blockchain. Specifically, the data inputs for the BSTX Market Data
Blockchain would come from (i) the BSTX System \32\ to capture
information such as executed transactions and (ii) each BSTX
Participant's order/message information passing through the financial
information exchange (``FIX'') gateway through which all orders and
messages pass in order to connect to the BSTX System. For example, if a
BSTX Participant sends an order to buy 100 shares of Security XYZ, when
that order is sent to the Exchange, the Exchange would capture this
information as it passes through the FIX gateway in an automated
process that results in the BSTX Participant being able to see that
order on the BSTX Market Data Blockchain through its login credentials.
---------------------------------------------------------------------------
\32\ The ``BSTX System'' refers to the automated trading system
used by BSTX for the trading of Securities. See proposed Rule
17000(a)(15).
---------------------------------------------------------------------------
The BSTX Market Data Blockchain does not require any affirmative
action on the part of a BSTX Participant in order for its information
to be recorded to the BSTX Market Data Blockchain. Rather, the BSTX
Market Data Blockchain captures trading activity that occurs on BSTX in
the normal course and is made available to BSTX Participants as an
additional resource that they may choose to use in their discretion in
the same general manner that a market participant might use TAQ data.
Information Available on the BSTX Market Data Blockchain
As set forth in proposed Rule 17020(c), there are two types of
information that would be available on the BSTX Market Data Blockchain:
(i) A BSTX Participant's own order and transaction information related
to its trading activity on BSTX (``Participant Proprietary Data''); and
(ii) anonymized, general market data available to all BSTX Participants
(``General Market Data''). With respect to Participant Proprietary
Data, a BSTX Participant would be able to see the following information
with respect to all orders and messages and executions submitted to and
occurring on BSTX:
(1) Symbol, side (buy/sell), limit price, quantity, time-in-force
(2) Order type (e.g., limit order, ISO)
(3) Order capacity (principal/agent)
(4) Short/long sale order marking
(5) Message type (e.g., order, modification, cancellation)
(6) A unique identification number attributable to each order,
execution, or other message (e.g., cancelation or modification)
(7) Such other information regarding a BSTX Participant's trading
activity on BSTX as the Exchange may determine and set forth via
Regulatory Circular.
Participant Proprietary Data would effectively contain a record of
all of a BSTX's Participant's trading activity on BSTX. Participant
Proprietary Data would only be available to the BSTX Participant from
which such data derived. That is, a BSTX Participant would not have
access to the Participant Proprietary Data of another BSTX Participant.
As a result, no BSTX Participant would be provided with access to
trading information of another BSTX Participant in a manner that would
allow for reverse engineering of trading strategies or otherwise
compromise the confidential nature of each BSTX Participant's trading
information. The Exchange proposes to allow for flexibility to provide
additional Participant Proprietary Data to each BSTX Participant via
Regulatory Circular in order to provide the Exchange with the ability
to enhance the content of Participant Proprietary Data based on
feedback from BSTX Participants.
General Market Data is the second type of information that would be
available on the BSTX Market Data Blockchain, which would consist of:
(1) All orders, modifications, cancellations, and executions
occurring on BSTX in an anonymized format.
(2) Administrative data and other information from the Exchange
(e.g., trading halts, or technical messages).
(3) Such other anonymized trading activity or general information
as the Exchange may determine and set forth via Regulatory Circular.
General Market Data is intended to allow BSTX Participants to be
able to observe the BSTX Order Book, changes thereto, and executions
occurring on BSTX in generally the same manner that a market
participant can today see order and transaction information on an
exchange by subscribing to an exchange's proprietary market data feed.
The Exchange notes that the General Market Data that would be available
on the BSTX Market Data Blockchain would be the same substantive
information that would be available through the Exchange's proprietary
market data feeds, so access to the BSTX Market Data Blockchain would
not provide additional information that could not otherwise be obtained
through the Exchange's proprietary market data feed.\33\ The Exchange
proposes to allow for flexibility to provide additional, anonymized
trading activity or general information to BSTX Participants via
Regulatory Circular in order to provide the Exchange with the ability
to enhance the content of General Market Data based on feedback from
BSTX Participants or in the event that new data elements become
relevant in the future.
---------------------------------------------------------------------------
\33\ The BSTX Market Data Blockchain may include certain non-
material information, such as a unique order identification number
specific to the blockchain that would not be available through
proprietary market data products.
---------------------------------------------------------------------------
General Market Data would be anonymized, meaning that a BSTX
Participant would not be able to determine the identity of another BSTX
Participant's orders, quotes, cancellations, or other messages. For the
avoidance of doubt, the alphanumeric address assigned to each BSTX
Participant to facilitate the BSTX Market Data Blockchain would not be
visible as part of General Market Data.\34\ As a result, there should
not be cause for concern regarding potential trading information
leakage or the ability to reverse engineer another BSTX Participant's
trading strategies given the anonymous nature of General Market Data.
BSTX Participants would generally have available to them via the BSTX
Market Data Blockchain the same information they would have today with
respect to other BSTX Participants trading activity in subscribing to
an exchange's proprietary data feed.
---------------------------------------------------------------------------
\34\ For example, in looking at General Market Data, BSTX
Participant X would not be able to determine by name, address, or
otherwise that a particular order, modification to an existing
order, or executed transaction involved BSTX Participant Y or any
other BSTX Participant.
---------------------------------------------------------------------------
The Exchange proposes to append timestamps to the information made
available. Timestamps related to all information on the BSTX Market
Data Blockchain would indicate the time to the microsecond at which an
order posted to the BSTX Book or that the BSTX System took other action
with respect to an order (e.g., effects a cancellation, execution,
modification). Information would be posted to the BSTX Market Data
Blockchain on a delayed basis of at least 5 minutes. As a result, the
BSTX Market Data Blockchain would not function as a
[[Page 29639]]
substitute for real-time market data. A BSTX Participant would have the
ability to download market data from the BSTX Market Data Blockchain,
which it could use to, for example, back test trading strategies or
evaluate executions received on BSTX.
Finally, in order to promote clarity with respect to how a BSTX
Participant may use the BSTX Market Data Blockchain, the Exchange
proposes to provide in Rule 17020(c)(3) that the information available
on the BSTX Market Data Blockchain does not act as a substitute for any
recordkeeping obligations of a BSTX Participant. The Exchange notes
that broker-dealers recordkeeping obligations generally require a much
broader set of records covering the entirety of a broker-dealers
trading activity across all trading centers.\35\ As a result, the
Exchange would not expect that a BSTX Participant would ever rely on
the BSTX Market Data Blockchain, which would contain only its trading
activity on BSTX, as a substitute for its independent recordkeeping
obligations.
---------------------------------------------------------------------------
\35\ See e.g., 17 CFR 240.17a-3.
---------------------------------------------------------------------------
Periodic Audit of the BSTX Market Data Blockchain by the Exchange
To help ensure the proper functioning of the BSTX Market Data
Blockchain and accuracy of information thereon, the Exchange proposes
in Rule 17020(c)(3) to periodically audit the BSTX Market Data
Blockchain. Specifically, the Exchange proposes to perform the audit at
least bi-annually to ensure that the BSTX Market Data Blockchain
accurately captures order and transaction data on BSTX. The Exchange
expects that it will initially audit the BSTX Market Data Blockchain
more frequently (e.g., monthly) during the first year of operation to
make sure the BSTX Market Data Blockchain operates as intended during
the period of time when the Exchange expects BSTX Participants to be
familiarizing themselves with the BSTX Market Data Blockchain.
Benefits of the BSTX Market Data Blockchain
The Exchange believes that there are two primary benefits related
to the BSTX Market Data Blockchain. First, the Exchange believes that a
BSTX Participant may find the information useful to them for a variety
of purposes such as to review the BSTX Participant's trading activity
on BSTX, determine what the market was at a particular point in time on
BSTX for a given Security, evaluate execution quality on BSTX, or
download the data to back-test trading strategies. As proposed, the
BSTX Market Data Blockchain requires no affirmative obligation on the
part of the BSTX Participant. As a result, if a BSTX Participant does
not find the BSTX Market Data Blockchain to be of use to it, it could
simply ignore it without cost or penalty.
Second, the Exchange believes that the BSTX Market Data Blockchain
will help familiarize BSTX Participants with the use and capabilities
of blockchain technology in a manner that does not impose any burden on
them or other market participants. The Commission has stated that it is
``mindful of the benefits of increasing use of new technologies for
investors and the markets, and has encouraged experimentation and
innovation . . .'' \36\ stating further that ``[i]nformation and
communications technologies are critical to healthy and efficient
primary and secondary markets.'' \37\ Regarding the judgment of whether
the benefits of certain technologies are meritorious, the Commission
has explained its view that ``[t]he market will ultimately prove the
worth of technology--whether the benefits to the industry and its
investors of developing and using new services are greater than the
associated costs.'' \38\ Consistent with these statements, the Exchange
believes that promoting use of blockchain technology through the BSTX
Market Data Blockchain will allow BSTX Participants to observe and
increase their familiarity with the capabilities and potential benefits
of blockchain technology in a context that operates within the current
equity market infrastructure and that the proposal will thereby advance
and protect the public's interest in the use and development of new
data processing techniques that may create opportunities for more
efficient, effective and safe securities markets.\39\ Moreover, the
Exchange believes that new technology, such as blockchain technology,
may be able to help perfect the mechanism of a free and open market and
a national market system, consistent with Section 6(b)(5) of the
Exchange Act.\40\
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\36\ Securities and Exchange Commission, The Impact of Recent
Technological Advances on the Securities Markets (Sep. 1997),
<a href="https://www.sec.gov/news/studies/techrp97.htm">https://www.sec.gov/news/studies/techrp97.htm</a>.
\37\ Id.
\38\ Id.
\39\ Report of the Senate Committee on Banking, Housing & Urban
Affairs, S. Rep. No. 94-75, at 8 (1975) (expressing Congress'
finding that new data processing and communications systems create
the opportunity for more efficient and effective markets). While the
Exchange believes that its proposal represents an introductory step
in pairing the benefits of blockchain technology with the current
equity market infrastructure, other market participants and FINRA
have recognized additional potential benefits to blockchain
technology in various applications related to the securities
markets. FINRA has stated ``[o]ne of the proposed benefits of
[blockchain technology] is the ability to offer a timestamped,
sequential, audit trail of transaction records. This may provide
regulators and other interested parties (e.g., internal audit,
public auditors) with the opportunity to leverage the technology to
view the complete history of a transaction where it may not be
available today and enhance existing records related to securities
transactions.'' Financial Industry Regulatory Authority, Distributed
Ledger Technology: Implications of Blockchain for the Securities
Industry (January 2017), available at: <a href="https://www.finra.org/sites/default/files/FINRA_Blockchain_Report.pdf">https://www.finra.org/sites/default/files/FINRA_Blockchain_Report.pdf</a>. Further, Paxos Trust
Company echoed similar themes in connection with its receipt of no-
action relief from the Commission staff, and explained in its
request letter certain benefits of blockchain technology including
``greater data accuracy and transparency, advanced security, and
increased levels of availability and operational efficiency . . .
.'' See Letter from Jeffrey S. Mooney, Division of Trading and
Markets, Securities and Exchange Commission to Charles Cascarilla
and Daniel Burstein, Paxos Trust Company, LLC re: Clearing Agency
Registration Under Section 17A(b)(1) of the Securities Exchange Act
of 1934 (October 28, 2019), <a href="https://www.sec.gov/divisions/marketreg/mr-noaction/2019/paxos-trust-company-102819-17a.pdf">https://www.sec.gov/divisions/marketreg/mr-noaction/2019/paxos-trust-company-102819-17a.pdf</a>. The Exchange
believes such benefits may be generally relevant to future potential
applications of blockchain technology.
\40\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
In the event of any disruption to the BSTX Market Data Blockchain
or a BSTX Participant's access to the BSTX Market Data Blockchain,
there would be no impact on the ability of market participants to trade
Securities, which the Exchange believes furthers the protection of
investors and the public interest, consistent with Section 6(b)(5) of
the Exchange Act.\41\ There would also be no disruption in the
distribution of market data related to Securities because the BSTX
Market Data Blockchain operates as a separate and distinct service of
the Exchange.
---------------------------------------------------------------------------
\41\ Id.
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Trading Securities on Other National Securities Exchanges
Securities would be eligible for trading on other national
securities exchanges that extend UTP to them, other than with respect
to Thinly Traded Securities as discussed below in Part II.H. As
described above in Part II.E, Securities would be held in ``street
name'' at DTC, have a CUSIP number, and would clear and settle through
the facilities of a clearing agency registered with the SEC (i.e., NSCC
and DTC respectively). As a result, Securities would be able to trade
on other exchanges and OTC in the same manner as other NMS stock.
Accordingly, other exchanges would generally be able to extend UTP to
Securities in accordance with Commission rules. The BSTX Market Data
Blockchain would not
[[Page 29640]]
impact the ability of Securities to trade on other exchanges or OTC.
Qualifying Thinly Traded Securities Trading Only on BSTX
The Exchange proposes to suspend UTP in Securities that meet the
proposed definition of a ``Thinly Traded Security'' in order to
concentrate displayed liquidity for such Securities, make market making
in such securities more attractive, and thereby improve the market
quality for such Securities. As proposed, Thinly Traded Securities
would still be able to trade OTC, but would not be eligible for trading
on another national securities exchange for as long as the Security
meets the definition of a Thinly Traded Security, described below.
The Commission, Commission staff, the U.S. Department of
Treasury,\42\ academics, and a broad spectrum of market participants
have recognized that ``the current `one-size-fits-all' equity market
structure, as largely governed under Regulation NMS, may not be optimal
for thinly traded securities'' \43\ and that ``more needs to be done to
promote liquidity and to improve the listing and trading environment
for thinly traded stocks.'' \44\ The Commission noted that the
``secondary market for thinly traded securities faces liquidity
challenges that can have a negative effect on both investors and
issuers traded securities faces liquidity challenges that can have a
negative effect on both investors and issuer'' including ``wider
spreads and less displayed size relative to securities that trade in
greater volume, often resulting in higher transaction costs for
investors.'' \45\ These concerns have been echoed in statements by
former Commission Chairman Jay Clayton,\46\ former Director of the
Division of Trading and Market Brett Redfearn,\47\ the Commission's
Small Business Advisory Committee \48\ and demonstrated through
empirical analyses by the Division of Trading and Market's Office of
Analytics and Research (``OAR'') \49\ and academics.\50\
---------------------------------------------------------------------------
\42\ See U.S. Department of the Treasury, ``A Financial System
That Creates Economic Opportunities: Capital Markets'' (October
2017), <a href="https://www.treasury.gov/press-center/press-releases/Documents/A-Financial-System-Capital-MarketsFINAL-FINAL.pdf">https://www.treasury.gov/press-center/press-releases/Documents/A-Financial-System-Capital-MarketsFINAL-FINAL.pdf</a>
(``Treasury Report'').
\43\ Commission Statement on Market Structure Innovation for
Thinly Traded Securities (Oct. 17, 2019), 84 FR 56956 (Oct. 24,
2019) (``Commission Statement on Thinly Traded Securities'').
\44\ See Division of Trading and Markets, Commission,
``Background Paper on the Market Structure for Thinly Traded
Securities,'' at 9 (Oct. 17, 2019), <a href="https://www.sec.gov/rules/policy/2019/thinly-traded-securities-tm-background-paper.pdf">https://www.sec.gov/rules/policy/2019/thinly-traded-securities-tm-background-paper.pdf</a> (``TM
Background Paper'') (summarizing the views of certain participants
in the Commission staff's Roundtable on the Market Structure for
Thinly Traded Securities in April 2018).
\45\ Commission Statement on Thinly Traded Securities at 56956.
\46\ ``Illiquidity hampers [thinly-traded issuers] in many
areas, including in their ability to raise additional capital,
obtain research coverage, engage in mergers and acquisitions, and
hire and retain personnel.'' Chairman Jay Clayton, Commission,
Equity Market Structure 2019: Looking Back & Moving Forward, Remarks
at Gabelli School of Business, Fordham University, New York, New
York (March 8, 2019) (``2019 Market Structure Remarks''), <a href="https://www.sec.gov/news/speech/clayton-redfearn-equity-market-structure-2019">https://www.sec.gov/news/speech/clayton-redfearn-equity-market-structure-2019</a>.
\47\ ``I believe there are serious questions, however, about
whether the current market structure that works relatively well for
very active stocks is optimal for thinly traded securities.'' Brett
Redfearn, Director of the Division of Trading and Markets,
Commission, Modernizing U.S. Equity Market Structure (June 22, 2020)
(``2020 Market Structure Remarks''), <a href="https://www.sec.gov/news/speech/clayton-redfearn-modernizing-us-equity-market-structure-2020-06-22">https://www.sec.gov/news/speech/clayton-redfearn-modernizing-us-equity-market-structure-2020-06-22</a>.
\48\ Advisory Committee on Small and Emerging Companies,
Commission, Recommendation Regarding Separate U.S. Equity Market for
Securities of Small and Emerging Companies (February 1, 2013)
(generally finding that the U.S. equity markets frequently fail to
offer a satisfactory trading venue for small and emerging companies,
which (i) has discouraged initial public offerings of the securities
of such companies, (ii) undermines entrepreneurship, and (iii)
weakens the broader U.S. economy), <a href="https://www.sec.gov/info/smallbus/acsec/acsecrecommendation-032113-emerg-co-ltr.pdf">https://www.sec.gov/info/smallbus/acsec/acsecrecommendation-032113-emerg-co-ltr.pdf</a>.
\49\ Division of Trading and Markets, Commission, ``Empirical
Analysis of Liquidity Demographics and Market Quality,'' (April 10,
2018) (``OAR Report''), <a href="https://www.sec.gov/files/thinly_traded_eqs_data_summary.pdf">https://www.sec.gov/files/thinly_traded_eqs_data_summary.pdf</a> (finding, among other things,
that thinly traded securities (i) had, on average, fewer exchanges
quoting at the national best bid or national best offer than more
actively traded securities; (ii) had quoted depths at the inside
(i.e., the volume of shares available at the highest bid and lowest
offer) were smaller and quoted spreads (i.e., the difference between
bid and offer prices) and relative quoted spreads were greater for
these thinly traded securities relative to more actively traded
securities; and (iii) likely face a trading environment with less
market making activity at the inside (i.e., the highest bid and
lowest offer) or in larger order size, which may make finding a
counterparty to execute a particular trade more difficult). See also
TM Background Paper at 2-3 (summarizing the findings from the OAR
Report).
\50\ See e.g., TM Background Paper at 6-7 (noting that ``the
economic literature in this area [of liquidity and trading volume]
has consistently documented that stocks with lower trading volume
tend to have higher transaction costs'' and ``[n]umerous studies
have found evidence linking lower liquidity to lower stock prices,
which suggests that diminished liquidity may also impact stock
prices. These analyses show that investors must be paid a premium in
order to hold less liquid stocks. Consequently, thinly traded
securities may have lower stock prices due to diminished
liquidity.'') (internal citations omitted).
---------------------------------------------------------------------------
A frequently discussed potential solution to these liquidity and
poor market quality issues facing thinly traded securities has been the
suspension of UTP for such securities, allowing for displayed liquidity
to be concentrated on a single exchange.\51\ Indeed, as former Chairman
Jay Clayton noted, the Commission's Statement on Market Structure
Innovation for Thinly Traded Securities specifically invites ``market
participants to submit innovative proposals designed to improve the
secondary market for thinly traded securities, including, in connection
with such proposals, requests to suspend or terminate unlisted trading
privileges, known as UTP.'' \52\ In response to the Commission's call
and to improve the market quality for thinly traded securities, the
Exchange proposes a suspension of UTP for qualifying ``Thinly Traded
Securities,'' as detailed further below.
---------------------------------------------------------------------------
\51\ See e.g., Treasury Report at 60 (``Treasury recommends that
issuers of less-liquid stocks, in consultation with their
underwriter and listing exchange, be permitted to partially or fully
suspend UTP for their securities and select the exchanges and venues
upon which their securities will trade.''); 2019 Market Structure
Remarks, at n.13 (noting that several panelists on the Roundtable on
Market Structure for Thinly-Traded Securities, supported the
approach of limiting unlisted trading privileges, with some
suggesting going even farther and considering whether Regulation NMS
rules should be eliminated in this segment of the market).
\52\ 2020 Market Structure Remarks. See also Commission
Statement on Thinly Traded Securities at 56957 (``[t]herefore, for
thinly traded securities, the Commission is interested in
considering proposals for market structure innovations in
conjunction with the potential suspension or termination of UTP and/
or the possibility of exemptive relief from Regulation NMS and other
rules under the Exchange Act.'').
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Thinly Traded Securities Defined
The Exchange proposes in Rule 25150(a) to define ``Thinly Traded
Securities'' as a Security \53\ of an operating company that meets
certain market capitalization and average daily volume of trading
(``ADV'') requirements. The Exchange proposes two separate, but
similar, types of eligibility criteria depending on if a Security has
been publicly traded for at least six months or if the Security is just
beginning to trade publicly (i.e., publicly traded for less than six
months). Specifically, the Exchange proposes that a Security that has
been publicly traded for at least six months shall be considered a
Thinly Traded Security if the Security has (i) market capitalization of
less than $1 billion, and (ii) an average daily volume of trading of
100,000 shares or less during at least four (4) of the preceding six
(6) calendar months (``Ongoing Eligibility Criteria''). For a Security
that has not been publicly traded for at least six months, the Exchange
proposes that a Security shall be considered a Thinly Traded Security
if during the first three
[[Page 29641]]
(3) months of public trading in the Security, the Security has a (i)
market capitalization of less than $1 billion, and (ii) an average
daily volume of trading of 100,000 shares or less (``Initial
Eligibility Criteria'').
---------------------------------------------------------------------------
\53\ The Exchange proposes to define a ``Security'' to mean a
NMS stock, as defined in Rule 600(b)(47) of the Exchange Act,
trading on the BSTX System. See proposed Rule 17000(a)(31).
---------------------------------------------------------------------------
Thinly Traded Security Criteria Thresholds
The Exchange believes that the criteria of a market capitalization
of less than $1 billion and an ADV of 100,000 shares or less are
appropriate thresholds to determine whether a security is thinly
traded. The ADV requirement is the primary indicator of whether a
security is thinly traded as it helps indicate how much liquidity there
is in a stock and the relative ease through which an investor may get
into and out of positions in that stock. The Commission staff's OAR
Report found that NMS stocks with ADV of less than 100,000 ``face a
trading environment with less market making activity at the inside
(i.e., the highest bid and lowest offer) or in larger order size, which
may make finding a counterparty to execute a particular trade more
difficult.'' The OAR Report also found, among other things, that NMS
stocks with an ADV of less than 100,000: (i) Have on average, fewer
exchanges quoting at the national best bid or offer (``NBBO''); (ii)
more volume executing away from exchange venues indicating that
exchange venues are a relatively less attractive venue for executions
in such securities; and (iii) have a smaller number of block trades
than more actively traded securities.\54\ The Treasury Report also
recommended the use of ADV as a simple approach ``to differentiate
between liquid and illiquid stocks.'' \55\ Accordingly, the Exchange
believes that a threshold of an ADV of trading at or below 100,000 is
appropriate because it would limit the Securities for which UTP is
suspended only to those Securities that are in fact thinly traded and
for which the Commission's OAR found concerns with respect to market
quality relative to more widely-traded securities.\56\
---------------------------------------------------------------------------
\54\ See OAR Report and TM Background Paper at 2.
\55\ Treasury Report at 60.
\56\ The Exchange notes that OAR's criteria used an ADV of less
than 100,000 shares while the Exchange proposes to use a criteria of
100,000 shares or less. The Exchange believes that this de minimis
difference is immaterial.
---------------------------------------------------------------------------
The Exchange believes that it is also appropriate to set a maximum
market capitalization threshold for Thinly Traded Securities to ensure
that the suspension of UTP (discussed below) is limited to small,
thinly traded companies. The Exchange believes that companies with a
market capitalization greater than $1 billion may be more likely to
have or soon have an ADV above 100,000 shares. The OAR Report indicates
that the median market capitalization for common stocks with an ADV
between 50,000 to 100,000 shares is $313 million.\57\ This same figure
for common stocks with an ADV above 100,000 shares is $1.313
billion.\58\ Accordingly, the Exchange believes that most, if not all,
stocks that have an ADV of 100,000 shares or less will also have a
market capitalization of less than $1 billion. The primary purpose of
the market capitalization threshold is therefore to limit the
availability of Thinly Traded Security status to smaller issuers and
remove companies whose securities may soon reach an ADV of more than
100,000.
---------------------------------------------------------------------------
\57\ OAR Report at 4.
\58\ Id.
---------------------------------------------------------------------------
The Exchange proposes to set forth how it will calculate market
capitalization in proposed Rule 25150(a)(4). For Ongoing Eligibility
Criteria, market capitalization would be determined as the product of
(a) the number outstanding shares of the Security as reported in the
most recent quarterly or annual report of the company; and (b) the
average closing price of the Security over the preceding six (6) full
calendar months. For Initial Eligibility Criteria, market
capitalization would be determined as the product of (a) the number of
outstanding shares of the Security as reported in the most recent
quarterly or annual report of the company; and (b) the average closing
price of the Security over the first three months during which the
Security has been publicly traded. The Exchange believes that this is a
standard method for calculating the market capitalization of a
security.
Average daily volume would be measured in accordance with the terms
of the proposed Rules--e.g., for Ongoing Eligibility Criteria, the
analysis would be the average daily share volume of trading in the
Security over the preceding six months of trading to determine whether
the ADV is 100,000 shares or less for four out of those six months. The
Exchange believes the use of a look back of four out of the previous
six months is a reasonable approach to determine whether a stock is
thinly traded and is similar to other mechanisms used in Commission
rules to evaluate differing regulatory treatment.\59\ Under this
formulation, a Security could have an ADV that exceeded 100,000 shares
in up to two of the previous six months, but would be required to
continuously meet the requirement of an ADV at or below 100,000 shares
for four of the preceding six months on a rolling basis.
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\59\ See e.g., 17 CFR 242.301(b)(5) (regarding the triggering of
fair access requirements under Regulation ATS) and 17 CFR 242.1000
(defining a SCI ATS with reference to the volume of its trading.
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Thinly Traded Exchange Traded Products
Importantly, the Exchange proposes to limit the availability of
Thinly Traded Security status to operating companies. This means that
an ETP that is a Security would not be eligible to be considered a
Thinly Traded Security even if it otherwise meets the criteria. The
Exchange proposes to exclude ETPs from eligibility because ETPs, even
those with an ADV of 100,000 shares or less, do not necessarily have
the same problems of a lack of liquidity as thinly traded shares of an
operating company. For example, participants in the Commission's
Roundtable on Market Structure for Thinly-Traded Securities (the
``Roundtable'') noted that ``as opposed to a corporate stock, an ETP
that is thinly traded may still be highly liquid, and that therefore
the level of secondary market trading does not correlate as closely
with liquidity as it does for corporate stocks.'' \60\ Given that the
purpose of the Exchange's proposal with respect to Thinly Traded
Securities is to improve liquidity and market quality for small
issuers, the Exchange believes that it is appropriate to exclude ETPs
that, while perhaps thinly traded, do not appear to suffer from the
same liquidity issues as those faced by the securities of thinly traded
operating companies.
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\60\ Background Paper at 19. Other Roundtable participants
similarly noted that ``. . . as a practical matter, ETPs have
`unlimited liquidity' and an ETP can be both thinly traded and very
liquid at the same time.'' Id.
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Initial and Ongoing Criteria
As described above, the Exchange proposes different sets of
criteria to become a Thinly Traded Security depending on how long a
Security has been publicly traded. As proposed, the earliest in time
that a Security could become eligible for status as a Thinly Traded
Security (and therefore eligible for suspension of UTP, as discussed
below) would be three months after the initial public offering of the
Security. The Exchange believes that every Security that undergoes an
initial public offering should initially be available for UTP because
there is no way to determine a priori whether or not a Security will be
thinly traded. Only after there is some empirical evidence based on the
first three months of public trading that a Security appears to be
[[Page 29642]]
thinly traded would the Security become eligible.
The Exchange proposes in Rule 25150(a)(3) that a Security that
becomes a Thinly Traded Security under the Initial Eligibility Criteria
would be considered a Thinly Traded Security until it has been publicly
traded for at least six months, at which time the Security would have
to meet the Ongoing Eligibility Criteria. In effect, the Exchange
proposes that a Security that meets the Initial Eligibility Criteria
would be deemed to meet such criteria until it has been publicly traded
for long enough to determine whether it meets the Ongoing Eligibility
Criteria. The Exchange notes that any suspension of UTP, as discussed
further below, would not be effective for at least thirty days after
publication of a rule filing with the Commission in the Federal
Register. As a result, a Security that meets the Initial Eligibility
Criteria for the first three months that it trades publicly could only
have UTP suspended at the earliest at the commencement of month four
and more likely at the four and one half month mark.\61\ Thus, a
Security that meets the Initial Eligibility Requirements and for which
UTP was suspended would be deemed to be a Thinly Traded Security for
1.5 to two months before it would have to meet the Ongoing Eligibility
Criteria.
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\61\ After a seven business day review period during which the
Commission may reject a rule filing submitted by the Exchange under
certain circumstances (15 U.S.C. 78s(b)(10)), the Commission must
publish a proposed rule change by the Exchange within 15 days after
the initial submission by the Exchange to the Commission (15 U.S.C.
78s(b)(2)(E)). As a result, a rule filing seeking suspension of UTP
for a qualifying Thinly Traded Security would likely only be
published in the Federal Register at the earliest after the Security
had been trading for 3.5 months and the suspension of UTP would only
commence thirty days thereafter (i.e., after the Security had traded
for 4.5 months). Suspension of UTP would then last for a minimum of
1.5 months, at which time, the Security would need to meet the
Ongoing Eligibility requirements to continue to have UTP continue to
be suspended.
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The Exchange believes that this approach of initially allowing a
Security to be eligible for UTP promotes consistency with Section
6(b)(5) of the Exchange Act \62\ by helping to perfect the mechanism of
a free and open market and by promoting just and equitable principles
of trade. Specifically, the Exchange believes that companies engaged in
an initial public offering should not have UTP suspended until it can
be determined whether those shares have an ADV of 100,000 shares or
less and market capitalization of less than $1 billion, thereby
ensuring that IPOs resulting in a high ADV or market capitalization are
freely and openly available on all venues and equitably available on
other exchange venues. The Exchange believes that three months is a
sufficient amount of time to determine whether a Security that recently
underwent its IPO is thinly traded given that interest in a Security is
likely to be highest around the time of its IPO in connection with
underwriter's selling efforts and the media attention that often
accompanies an IPO. Thus, if a Security has an ADV of 100,000 shares or
less during its first three months of trading despite this time period
being among the most likely to have the highest market interest in the
Security, the Security is likely to benefit from a suspension of UTP.
The Exchange therefore proposes the Initial Eligibility Criteria as an
early on-ramp to the suspension of UTP for a Security that has not yet
traded for a full four to six months to be able to determine whether it
meets the Ongoing Eligibility Criteria.
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\62\ 15 U.S.C. 78f(b)(5).
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Suspension of Unlisted Trading Privileges
As noted above, the Exchange proposes that a Security that
qualifies as a Thinly Traded Security would be eligible for a
suspension of UTP. The Exchange proposes that an issuer of a qualifying
Thinly Traded Security would have to affirmatively request in writing
that UTP be suspended. The Exchange believes that issuers should be
empowered to make the decision as to whether UTP should be suspended
with respect to the issuer's Thinly Traded Security.
Thereafter, in order to effectuate a suspension of UTP and to
provide notice to market participants of the suspension of UTP, the
Exchange would submit an immediately effective rule filing pursuant to
Section 19(b)(3)(A) of the Exchange Act,\63\ with the effectiveness of
such suspension of UTP occurring at least 30 calendar days after
publication of the rule filing in the Federal Register.\64\ Conversely,
when a Security no longer meets the definition of a Thinly Traded
Security under the Exchange's Rules, the Exchange would similarly
submit a rule filing pursuant to Section 19b(b)(3)(A) within 14
calendar days of the Thinly Traded Security no longer qualifying as a
Thinly Traded Security (and therefore no longer eligible to have UTP
suspended).\65\ The resumption of UTP with respect to the former Thinly
Traded Security would be effective upon publication of the rule filing
in the Federal Register.
---------------------------------------------------------------------------
\63\ 15 U.S.C. 78s(b)(3)(A).
\64\ See proposed Rule 25150(b)(1).
\65\ See proposed Rule 25150(b)(2).
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The Exchange believes that these rule filings to effectuate the
suspension of UTP would be appropriately filed pursuant to Section
19(b)(3)(A) and Rule 19b-4(f) thereunder as a stated policy, practice,
or interpretation with respect to the meaning, administration, or
enforcement of an existing rule.\66\ Specifically, the proposed rule
change would provide notice of the Exchange's upcoming enforcement of
proposed Rule 25150 to suspend UTP (or remove a suspension of UTP) with
respect to a qualifying Thinly Traded Security.
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\66\ 15 U.S.C. 78s(b)(3)(A). 17 CFR 240.19b-4(f)(1).
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The Exchange believes that exchanges are readily capable of
suspending trading in a security that is currently traded on their
exchange. Exchanges need and provide for the ability to suspend trading
in securities on their exchange for regulatory halts, triggering of
market wide or single stock circuit breakers, and to comply with the
Commission's authority to order a trading halt pursuant to Section
12(k) of the Exchange Act.\67\ Accordingly, the Exchange believes that
voluntarily delaying the implementation of the suspension of UTP by 30
calendar days will provide other exchanges and market participants with
adequate notice and sufficient time to prepare for a suspension of UTP
in the relevant Thinly Traded Security. The Exchange also believes that
exchanges are also readily capable of extending UTP to a Security that
is not currently traded on the exchange.\68\ Accordingly, the Exchange
believes that other exchanges would be able to extend UTP to a Security
for which the suspension of UTP is lifted shortly after the
effectiveness of the rule filing providing notice of a resumption in
UTP with respect to the Security.
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\67\ 15 U.S.C. 78l(k).
\68\ For example, in November 2000, the Commission adopted
amendment to Rule 12f-2 lifting a limitation that previously
prevented an exchange from extending UTP until the day after trading
commenced on the primary listing exchange. See Exchange Act Release
No. 43217, 65 FR 53560 (Sept. 5, 2000).
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The Exchange recognizes that suspending UTP and making BSTX the
only national securities exchange on which a Thinly Traded Security
trades would increase both the relative importance of BSTX as a trading
venue for such Thinly Traded Security and the disruption that might
arise if access to BSTX were somehow disrupted. Accordingly, the
Exchange proposes to run a live, parallel system in addition to the
Exchange's primary system supporting trading in any Thinly Traded
[[Page 29643]]
Securities for which UTP has been suspended in order to guard against a
potential disruption in trading access. The Exchange would maintain the
ability to automatically fail over to the other live or ``hot''
parallel system in the event of any disruption to the primary system.
In addition, because Thinly Traded Securities would no longer trade
on other exchanges via UTP at the election of an issuer and a
determination by the Exchange that the Security qualifies as a Thinly
Traded Security, the Exchange plans to remove quotation and trading
activity in Thinly Traded Securities from the revenue allocation
formulas of the appropriate NMS plan for consolidated market data
through an amendment to such plan(s).\69\ The Exchange believes that it
would be appropriate to exclude such Thinly Traded Securities from the
revenue allocation formula so that the Exchange does not receive undue
compensation from the NMS plan for consolidated market data arising
from the Thinly Traded Securities. The existing and proposed revenue
allocation formulas apportion revenues from the NMS plan in part based
on the amount of trading and quoting occurring on each exchange in
``Eligible Securities'' as defined under the NMS plan.\70\ As a result,
BSTX might receive additional profits under the revenue allocation
formula if Thinly Traded Securities were not excluded from ``Eligible
Securities'' given that BSTX would be the only venue able to quote and
trade Thinly Traded Securities.
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\69\ The Exchange notes that certain exchanges have challenged
the Commission's May 6, 2020, order directing the self-regulatory
organizations to develop a new NMS plan for consolidated market
data. Exchange Act Release No. 88827 (May 5, 2020), 85 FR 28702 (May
13, 2020). The Exchange would seek to amend the new NMS plan or the
existing NMS plans as appropriate.
\70\ See e.g., Exchange Act Release No. 90096 (Oct. 6, 2020), 85
FR 64565, Exhibit D (Oct. 13, 2020) <a href="https://www.sec.gov/rules/sro/nms/2020/34-90096.pdf">https://www.sec.gov/rules/sro/nms/2020/34-90096.pdf</a>.
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Finally, the Exchange proposes to make available each month
anonymized trade and quotation data relating to Thinly Traded
Securities to regulators, academics, and others requesting such market
data from the Exchange for the purpose of studying the effects of the
suspension of UTP. The Exchange intends to additionally perform its own
analysis on the impact of the suspension of UTP for Thinly Traded
Securities to evaluate its efficacy. The Exchange will evaluate market
quality for Thinly Traded Securities across a variety of metrics
including an analysis of: (i) Relative trading volumes on BSTX versus
OTC; (ii) improvements in ADV; (iii) changes in quotation size; (iv)
changes in the depth of liquidity; (v) changes in spreads (quoted
spread and realized spread); and (vi) changes in trade size. The
Exchange will perform this analysis at least annually (provided there
is sufficient sample data from the preceding year) and make public its
findings with respect to how the market for Thinly Traded Securities
has changed as a result of the suspension of UTP.
Request for Exemptive Relief
The Exchange believes that it is in the public interest and
consistent with protection of investors, pursuant to Section 6(b)(5) of
the Exchange Act,\71\ as well as in furtherance of the perfection of a
free and open market and national market system to suspend UTP under
this proposal with respect to Thinly Traded Securities to improve
liquidity and overall market quality for such Securities. Consistent
with the Department of the Treasury's recommendations, the Exchange
believes that ``[c]onsolidating trading to fewer venues would simplify
the process of making markets in those stocks and thereby encourage
more market makers to provide more liquidity in those issues.'' \72\
Also consistent with the Department of the Treasury's recommendations,
the Exchange proposes that there be no limitation on trading OTC in
order ``maintain a basic level of competition for execution'' and that
an issuer would be provided a choice as to whether its qualifying
Thinly Traded Security have UTP suspended.\73\
---------------------------------------------------------------------------
\71\ 15 U.S.C. 78f(b)(5).
\72\ Treasury Report at 60.
\73\ Id.
---------------------------------------------------------------------------
In addition, the Exchange believes that, consistent with the OAR
Report which found that NMS stocks with an ADV of less than 100,000
shares experience more trading on off-exchange venues than on-exchange
and have less quoted depth at the inside of the market, much of the
poor market quality is attributable to deficiencies in displayed
quotations of Thinly Traded Securities. As a result the Exchange
believes that it is appropriate to suspend trading on other exchanges--
i.e., other venues displaying liquidity--in order to concentrate
displayed liquidity on a single exchange, while still allowing trading
to occur in the OTC market.
The Exchange does not believe that the suspension of UTP for Thinly
Traded Securities will impose a burden on competition not necessary or
appropriate in furtherance of the Exchange Act \74\ because other
exchanges could similarly be granted a suspension of UTP for qualifying
thinly traded securities listed on their markets. Exchanges can compete
with each other in attracting issuers of thinly traded securities to be
singly-listed and traded on their respective exchanges. Exchanges would
still be able to compete with one another for listings and the market
for all thinly traded securities could be improved. Moreover, if the
suspension of UTP has the desired effect of improving the overall
liquidity of a Thinly Traded Security, such Security should hopefully
exceed the 100,000 share ADV or $1 billion market capitalization
thresholds and become available for UTP, thus removing any barrier to
competition once the purpose for which the suspension of UTP was
initiated has been fulfilled.
---------------------------------------------------------------------------
\74\ 15 U.S.C. 78f(b)(8).
---------------------------------------------------------------------------
Similarly, consistent with Section 6(b)(5) of the Exchange Act,\75\
the Exchange believes that the proposed suspension of UTP for Thinly
Traded Securities would not permit unfair discrimination between
customers, issuers, brokers or dealers, because the suspension is for
the purpose of furthering the regulatory objective of improving market
quality for securities that are thinly traded. Although non-Thinly
Traded Securities would not be able to have UTP suspended, this
discriminatory treatment is not ``unfair'' given the substantial public
interest, as demonstrated through the Commission's statements and by
market participants at the Roundtable, in improving market conditions
for thinly traded securities. The Exchange believes that the proposed
suspension of UTP would help protect investors and the public interest,
consistent with Section 6(b)(5), by concentrating displayed liquidity
on a single venue, thereby providing greater incentives for market
makers in Thinly Traded Securities and in turn making it easier for
investors to buy and sell shares of Thinly Traded Securities. The
Exchange believes that there is a general consensus among members of
Commission staff, former Commissioners (including former Chairman Jay
Clayton), the Department of the Treasury, and market participants, as
well as empirical evidence, making clear that operating company stocks
with an ADV of less than 100,000 shares suffer significant liquidity
and market quality challenges not faced by stocks with greater trading
volume. It is for this reason, the Exchange believes, that the
Commission specifically solicited requests from
[[Page 29644]]
exchanges for innovative approaches to improve the market for thinly
traded securities, including requests for suspension of UTP.\76\
---------------------------------------------------------------------------
\75\ 15 U.S.C. 78f(b)(5).
\76\ Commission Statement on Thinly Traded Securities at 56956.
---------------------------------------------------------------------------
Accordingly, the Exchange plans to submit an application for the
suspension of UTP for Thinly Traded Securities, as described above, to
the Commission pursuant to Rule 12f-3 of the Exchange Act, which rule
allows issuers, broker-dealers who make markets in a security admitted
to UTP, ``or any other person having a bona fide interest in the
question of termination or suspension of such unlisted trading
privileges'' to submit an application for the suspension of UTP
consistent with certain specified requirements.\77\ The Exchange
believes that there is good cause for the suspension of UTP to promote
efficiency, competition, and capital formation \78\ by facilitating the
trading of Thinly Traded Securities in a manner that addresses
structural market quality challenges in today's markets for such
securities.
---------------------------------------------------------------------------
\77\ 17 CFR 240.12f-3.
\78\ 15 U.S.C. 78c(f).
---------------------------------------------------------------------------
Ability for BSTX Participants To Include a Parameter for a Preference
for Settlement of Transactions in Securities Faster Than T+2
As described above in Section II.E.5., BSTX believes that NSCC
already has authority under its rules, policies and procedures to clear
certain trades on a T+1 or T+0 basis, which are shorter settlement
cycles than the longest settlement cycle of T+2 that is generally
permitted under SEC Rule 15c6-1 for a security trade that involves a
broker-dealer.\79\ Furthermore, BSTX understands that NSCC does already
clear trades in accordance with this authority.
---------------------------------------------------------------------------
\79\ See supra note 28.
---------------------------------------------------------------------------
The Exchange proposes that BSTX Participants would be able to
include in their orders in Securities that are submitted to BSTX
certain parameters to indicate a preference for settlement on a same
day (T+0) or next trading day (T+1) basis when certain conditions are
met.\80\ Any such orders would at the time of order entry represent
orders that would be regular-way and would be presumed to settle on a
T+2 basis just like any other order submitted by a BSTX Participant
that does not include a parameter indicating a preference for faster
settlement. As described in greater detail below, however, orders in a
Security that include a parameter indicating a preference for
settlement on a T+0 basis (``Order with a T+0 Preference'') or on a T+1
basis (``Order with a T+1 Preference'') would only result in executions
that would actually settle more quickly than on a T+2 basis if, and
only if, all of the conditions in Rule 25060(h) are met and the
execution that is transmitted to NSCC is eligible for T+0 or T+1
settlement under the rules, policies and procedures of a registered
clearing agency.\81\ Any such preference included by a BSTX Participant
would only become operative if the order happens to execute against
another order from a BSTX Participant that also includes a parameter
indicating a preference for settlement on a T+0 or T+1 basis, as
described in more detail below. This means that at the time of order
entry all orders in Securities would be regular way orders that would
be presumed to settle on a T+2 basis. Faster settlement consistent with
the rules, policies and procedures of a registered clearing agency
would occur if and only if two orders execute against each other in a
manner that meets the conditions in Rule 25060(h).
---------------------------------------------------------------------------
\80\ See proposed Rule 25060(h).
\81\ See proposed Rule 25100(d).
---------------------------------------------------------------------------
As proposed, an Order with a T+0 Preference will execute against
any order against which it is marketable with settlement occurring on a
standard settlement cycle (T+2) except where: (i) The Order with a T+0
Preference executes against another Order with a T+0 Preference, in
which case settlement shall occur on the trade date, or (ii) the Order
with a T+0 Preference executes against an Order with a T+1 Preference,
in which case settlement shall occur the next trading day after the
trade date (i.e., T+1). Similarly, as proposed, an Order with a T+1
Preference will execute against any order against which it is
marketable with settlement occurring on a standard settlement cycle
(T+2) except where: (i) The Order with a T+1 Preference executes
against another Order with a T+1 Preference or an Order with a T+0
Preference, in which case settlement occurs on the next trading day
after the trade date (i.e., T+1). In all cases, an order not marked
with a preference for either T+0 or T+1 settlement would be assured
under the settlement timing logic in proposed Rule 25060(h) of
settlement on T+2. The possibility of a shortened settlement time would
have no impact on the Exchange's proposed price time priority structure
for order matching.\82\
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\82\ For example, assume Order A is marked as an Order with a
T+0 Preference and it is sent to BSTX and is marketable against both
resting Order B (standard T+2 settlement, with time priority over
Order C) and resting Order C (marked as an Order with a T+0
Preference but with priority second to that of Order B). Order A
will interact first with Order B, notwithstanding that Order C is
also marketable against Order A and is also marked as an Order with
a T+0 Preference.
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As a result of this structure, all orders in Securities would be
eligible to match and execute against any order against which they are
marketable with settlement to occur at the later settlement date of any
two matching orders. Only where an Order with a T+1 Preference or an
Order with a T+0 Preference match with another Order with a T+1
Preference or Order with a T+0 Preference will those orders (or
matching portions thereof) be eligible to settle more quickly than the
standard settlement cycle of T+2. As previously noted in Part II.E, the
Exchange believes that the clearance and settlement processes at NSCC
and DTC are already capable of facilitating such shortened settlement
times.
The Exchange believes that facilitating shorter settlement cycles
as permitted under the rules, policies, and procedures of a registered
clearing agency is consistent with Section 6(b)(5) of the Exchange Act
\83\ because it is in the public interest and furthers the protection
of investors as well as helps perfect the mechanism of a free and open
market and the national market system. Specifically, the Exchange
believes that BSTX Participants have an interest in being able to
access risk-reducing market functionality that is presently available
and compatible with market structure, such as shorter settlement
cycles, and that this can reduce costs for market participants settling
trading obligations in that Security and reduce settlement risk. For
example, market participants settling trades in a Security on a T+2
basis must post margin collateral to NSCC for two trading days. The
margin collateral cannot otherwise be used until settlement on T+2. In
addition, by shortening the timing of settlement from T+2 to T+1 or
T+0, the risk horizon for a potential default in settling the trade is
correspondingly shortened as well. This means that market participants
engaged in a transaction settling transactions on shorter settlement
cycles than T+2 receive the benefits of not having to encumber
collateral assets for as long and facing a shorter period of settlement
risk. The Exchange believes that these benefits in turn free up assets
to be used elsewhere in financial markets, thereby helping to promote
the efficient allocation of capital and perfecting the mechanism of a
free and
[[Page 29645]]
open market.\84\ All else being equal, the Exchange believes that a
BSTX participant may find that between two otherwise identical stocks,
one for which it may be able to settle the transaction more quickly is
more attractive than one that settles over a longer duration and
potentially requires collateral to be held for a longer period.
---------------------------------------------------------------------------
\83\ 15 U.S.C. 78(f)(b)(5).
\84\ Id.
---------------------------------------------------------------------------
The Exchange notes that the proposed potential for shortened
settlement timing for an Order with a T+0 Preference or an Order with a
T+1 Preference will in no way impact or prevent any market participant
that desires to effect a trade in a Security on BSTX from doing so.
This is because under proposed Rule 25060(h), any Order with a T+1
Preference or Order with a T+0 Preference will continue to interact
with any other order in the Security against which it is marketable
(including any order in the Security that does not include a parameter
indicating a preference for settlement faster than T+2) and a resulting
execution will always settle using the latest settlement timing
associated with two matching orders. Accordingly, non-BSTX Participants
seeing a quote in a Security on BSTX will remain able to execute
against that quote posted on BSTX even if that quote includes a latent
parameter for a preference for T+0 or T+1 settlement where consistent
with the rules, policies and procedures of a registered clearing
agency. In this way, the Exchange believes that the proposal is fully
compatible with the current market structure and would help perfect the
mechanism of a free and open market by allowing for shorter settlement
times than T+2 where consistent with the rules, policies and procedures
of a registered clearing agency and where both parties to a transaction
in a Security indicate a preference for faster settlement than T+2.
Finally, because all orders in Securities submitted to BSTX would
at the time of the order entry be presumed to settle on a regular way
T+2 basis and would interact with any other order against which the
order is marketable, the Exchange believes that Orders with a T+0
Preference and Orders with a T+1 Preference would be considered
``protected'' within the meaning of Rule 611 of the Exchange Act.\85\
Orders with a T+0 Preference and Orders with a T+1 Preference would not
fall within the exception for protected quotation status set forth in
Rule 611(b)(2) of the Exchange Act because they will only settle more
quickly than T+2 where all of the conditions in Rule 25060(h) are met,
as described above, where settlement faster than T+2 is consistent with
the rules, policies and procedures of a registered clearing agency.\86\
---------------------------------------------------------------------------
\85\ 17 CFR 242.611.
\86\ 17 CFR 242.611(b)(2).
---------------------------------------------------------------------------
In adopting amendments to SEC Rule 15c6-1 in 2017 to shorten the
standard settlement cycle for most broker-dealer transactions in
securities from T+3 to T+2, the Commission stated its belief that the
shorter settlement cycle would have positive effects regarding the
liquidity risks and costs faced by members in a clearing agency, like
NSCC, that performs central counterparty \87\ (``CCP'') services, and
that it would also have positive effects for other market participants.
Specifically, the Commission stated its belief that the resulting
``reduction in the amount of unsettled trades and the period of time
during which the CCP is exposed to risk would reduce the amount of
financial resources that the CCP members may have to provide to support
the CCP's risk management process . . .'' and that ``[t]his reduction
in the potential need for financial resources should, in turn, reduce
the liquidity costs and capital demands clearing broker-dealers face .
. . and allow for improved capital utilization.'' \88\ The Commission
went on to state its belief that shortening the settlement cycle
``would also lead to benefits to other market participants, including
introducing broker-dealers, institutional investors, and retail
investors'' such as ``quicker access to funds and securities following
trade execution'' and ``reduced margin charges and other fees that
clearing broker-dealers may pass down to other market participants[.]''
\89\ The Commission also ``noted that a move to a T+1 standard
settlement cycle could have similar qualitative benefits of market,
credit, and liquidity risk reduction for market participants[.]'' \90\
BSTX agrees with these statements by the Commission and has therefore
proposed BSTX Rules 25060(h) and 25100(d) in a form that would promote
the benefits of available, shorter settlement cycles.\91\
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\87\ See 17 CFR 240.17Ad-22(a)(2) (defining the term ``central
counterparty'' to mean ``a clearing agency that interposes itself
between the counterparties to securities transactions, acting
functionally as the buyer to every seller and the seller to every
buyer'').
\88\ Exchange Act Release No. 80295 (March 22, 2017), 82 FR
15564, 15570-71 (March 29, 2017).
\89\ Id. at 15571.
\90\ Id. at 15582.
\91\ As described in this Part II.I, an order for a Security
marked for T+0 or T+1 could still interact with any other order,
including an order with the default T+2 settlement, with settlement
to occur at the later of any two matched orders (e.g., if a T+1
order matches with a T+2 order, the orders would settle T+2). Only
where an order marked for a shorter settlement time matches with
another order similarly marked would a shorter settlement time
occur. Consequently, the proposed use of shorter settlement times
would not adversely impact any market participant seeking T+2
settlement in a transaction for a Security.
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Proposed BSTX Rules
The discussion in this Part III addresses the proposed BSTX Rules
that would be adopted as Rule Series 17000 through 29000.
General Provisions of BSTX and Definitions (Rule 17000 Series)
The Exchange proposes to adopt as its Rule 17000 Series (General
Provisions of BSTX) a set of general provisions relating to the trading
of Securities and other rules governing participation on BSTX. Proposed
Rule 17000 sets forth the defined terms used throughout the BSTX Rules.
The majority of the proposed definitions are substantially similar to
defined terms used in other equities exchange rulebooks, such as with
respect to the term ``customer.'' \92\ The Exchange proposes to set
forth new definitions for certain terms to specifically identify
systems, agreements, or persons as they relate to BSTX and as distinct
from other Exchange systems, agreements, or persons that may be used in
connection with the trading of other options on the Exchange.\93\ The
Exchange also proposes to define certain unique terms relating to the
trading of Securities, including the term ``Security'' itself \94\ and
``Thinly Traded Securities,'' \95\ as well as for other features of
BSTX such
[[Page 29646]]
as the ``BSTX Market Data Blockchain.'' \96\
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\92\ Proposed Rule 17000(a)(17) defines the term ``customer'' to
not include a broker or dealer, which parallels the same definition
in other exchange rulebooks. See e.g., IEX Rule 1.160(j). Similarly,
the Exchange proposes to define the term ``Regular Trading Hours''
as the time between 9:30 a.m. and 4:00 p.m. Eastern Time. See
proposed Rule 17000(a)(29) cf. IEX Rule 1.160(gg) (defining
``Regular Market Hours'' in the same manner).
\93\ For example, the Exchange proposes to define the term
``BSTX'' to mean the facility of the Exchange for executing
transaction in Securities, the term ``BSTX Participant'' to mean a
Participant or Options Participant (as those terms are defined in
the Exchange's Rule 100 Series) that is authorized to trade
Securities, and the term ``BSTX System'' to mean the automated
trading system used by BSTX for the trading of Securities. See
proposed Rule 17000(a)(8), (11), and (15).
\94\ Proposed Rule 17000(a)(31) provides that the term
``Security'' means a NMS stock, as defined in Rule 600(b)(47) of the
Exchange Act, trading on the BSTX System. The proposed definition
further specifies that references to a ``security'' or
``securities'' in the Rules may include Securities.
\95\ Proposed Rule 17000(a)(32) provides that the term ``Thinly
Traded Security'' is defined in Rule 25150. See Part II.H for
further discussion of Thinly Traded Securities and the definition
set forth in proposed Rule 25150.
\96\ Proposed Rule 17000(a)(9) provides that the term ``BSTX
Market Data Blockchain'' means the private, permissioned blockchain
network through which a BSTX Participant may access certain order
and transaction data related to trading activity on BSTX. See Part
II.F for further discussion of the BSTX Market Data Blockchain.
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In addition to setting forth proposed definitions used throughout
the proposed Rules, the Exchange proposes to specify in proposed Rule
17010 (Applicability) that the Rules set forth in the Rule 17000 Series
to Rule 29000 Series apply to the trading, listing, and related matters
pertaining to the trading of Securities. Proposed Rule 17010(b)
provides that, unless specific Rules relating to Securities govern or
unless the context otherwise requires, the provisions of any Exchange
Rule (i.e., including Exchange Rules in the Rule 100 through 16000
Series) shall be applicable to BSTX Participants.\97\ This is intended
to make clear that BSTX Participants are subject to all of the
Exchange's Rules that may be applicable to them, notwithstanding that
their trading activity may be limited solely to trading Securities. The
Exchange believes that the proposed definitions set forth in Rule 17000
are consistent with Section 6(b)(5) of the Exchange Act \98\ because
they protect investors and the public interest by setting forth clear
definitions that help BSTX Participants understand and apply Exchange
Rules. Without clearly defining terms used in the Exchanges Rules and
providing clarity as to the Exchange Rules that may apply, market
participants could be confused as to the application of certain rules,
which could cause harm to investors.
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\97\ Proposed Rule 17010 further specifies that to the extent
the provisions of the Rules relating to the trading of Securities
contained in Rule 17000 Series to Rule 29000 Series are inconsistent
with any other provisions of the Exchange Rules, the Rules relating
to Security trading shall control.
\98\ 15 U.S.C. 78f(b)(5).
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Participation on BSTX (Rule 18000 Series)
The Exchange proposes to adopt as its Rule 18000 Series
(Participation on BSTX), three rules setting forth certain requirements
relating to participation on BSTX. Proposed Rule 18000 (BSTX
Participation) establishes ``BSTX Participants'' as a new category of
Exchange participation for effecting transactions on the BSTX System,
provided they: (i) Complete the BSTX Participant Application,
Participation Agreement, and User Agreement; \99\ (ii) be an existing
Options Participant or become a Participant of the Exchange pursuant to
the Rule 2000 Series; and (iii) provide such other information as
required by the Exchange.\100\ Proposed Rule 18010 (Requirements for
BSTX Participants) sets forth certain requirements for BSTX
Participants including requirements that each BSTX Participant comply
with Rule 15c3-1 under the Exchange Act, comply with applicable books
and records requirements, and be a member of a registered clearing
agency or clear Security transactions through another BSTX Participant
that is a member/participant of a registered clearing agency.\101\
Finally, proposed Rule 18020 (Associated Persons) provides that
associated persons of a BSTX Participant are bound by the Rules of the
Exchange to the same extent as each BSTX Participant.
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\99\ The BSTX Participant Application, Participation Agreement,
and User Agreement have been submitted as Exhibits 3A, 3B, and 3C to
the proposal respectively.
\100\ Proposed Rule 18000 also sets forth the Exchange's review
process regarding BSTX Participation Agreements and certain
limitations on the ability to transfer BSTX Participant status
(e.g., in the case of a change of control). In addition proposed
Rule 18000(b)(2) provides that a BSTX Participant shall continue to
abide by all applicable requirements of the Rule 2000 Series, which
would include, for example, IM-2040-5, which specifies continuing
education requirements of Exchange Participants and their associated
persons.
\101\ Proposed Rule 18010(b) is similar to the rules of existing
exchanges. See e.g., IEX Rule 2.160(c). Proposed Rule 18010(a) is
also similar to the rules of existing exchanges. See e.g., IEX Rule
1.160(s) and Cboe BZX Rule 17.2(a).
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The Exchange believes that the proposed Rule 18000 Series
(Participation on BSTX) is consistent with Section 6(b)(5) of the
Exchange Act \102\ because these proposed rules are designed to promote
just and equitable principles of trade, and protect investors and the
public interest by setting forth the requirements to become a BSTX
Participant and specifying that associated persons of a BSTX
Participant are bound by Exchange Rules. Under proposed Rule 18000, a
BSTX Participant must first become an Exchange Participant pursuant to
the Exchange Rule 2000 Series which the Exchange believes would help
assure that BSTX Participants meet the appropriate standards for
trading on BSTX in furtherance of the protection of investors.\103\
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\102\ 15 U.S.C. 78f(b)(5).
\103\ The Exchange notes that the approach of requiring members
of a facility of an exchange to first become members of the exchange
is consistent with the approach used by another national securities
exchange. See Cboe BZX Rule 17.1(b)(3) (requiring that a Cboe BZX
options member be an existing member or become a member of the Cboe
BZX equities exchange pursuant to the Cboe BZX Chapter II Series).
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Business Conduct for BSTX Participants (Rule 19000 Series)
The Exchange proposes to adopt as its Rule 19000 Series (Business
Conduct for BSTX Participants), twenty two rules relating to business
conduct requirements for BSTX Participants that are substantially
similar to business conduct rules of other exchanges.\104\ The proposed
Rule 19000 Series would specify business conduct requirements with
respect to: (i) Just and equitable principles of trade; \105\ (ii)
adherence to law; \106\ (iii) use of fraudulent devices; \107\ (iv)
false statements; \108\ (v) know your customer; \109\ (vi) fair dealing
with customers; \110\ (vii) suitability; \111\ (viii) the prompt
receipt and delivery of securities; \112\ (ix) charges for services
performed; \113\ (x) use of information obtained in a fiduciary
capacity; \114\ (xi) publication of transactions and quotations; \115\
(xii) offers at stated
[[Page 29647]]
prices; \116\ (xiii) payments involving publications that influence the
market price of a security; \117\ (xiv) customer confirmations; \118\
(xv) disclosure of a control relationship with an issuer of Securities;
\119\ (xvi) discretionary accounts; \120\ (xvii) improper use of
customers' securities or funds and a prohibition against guarantees and
sharing in accounts; \121\ (xviii) the extent to which sharing in
accounts is permissible; \122\ (xix) communications with customers and
the public; \123\ (xx) gratuities; \124\ (xxi) telemarketing; \125\ and
(xxii) mandatory systems testing.\126\ The Exchange notes that the
proposed financial responsibility rules are virtually identical to
those of other national securities exchanges other than changes to
defined terms and certain other provisions that would not apply to the
trading of Securities on the BSTX System.\127\
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\104\ See Cboe BZX Chapter 5 rules. See also IEX Rule 5.150 with
respect to proposed Rule 21040 (Prevention of the Misuse of
Material, Non-Public Information).
\105\ Proposed Rule 19000 (Just and Equitable Principles of
Trade) provides that no BSTX Participant, including its associated
persons, shall engage in acts or practices inconsistent with just
and equitable principles of trade.
\106\ Proposed Rule 19010 (Adherence to Law) generally requires
BSTX Participants to adhere to applicable laws and regulatory
requirements.
\107\ Proposed Rule 19020 (Use of Fraudulent Devices) generally
prohibits BSTX Participants from effecting a transaction in any
security by means of a manipulative, deceptive or other fraudulent
device or contrivance.
\108\ Proposed Rule 19030 (False Statements) generally prohibits
BSTX Participants and their associated persons from making false
statements or misrepresentations in communications with the
Exchange.
\109\ Proposed Rule 19040 (Know Your Customer) requires BSTX
Participants to comply with FINRA Rule 2090 as if such rule were
part of the Exchange Rules.
\110\ Proposed Rule 19050 (Fair Dealing with Customers)
generally requires BSTX Participants to deal fairly with customers
and specifies certain activities that would violate the duty of fair
dealing (e.g., churning or overtrading in relation to the objectives
and financial situation of a customer).
\111\ Proposed Rule 19060 (Suitability) provides that BSTX
Participants and their associated persons shall comply with FINRA
Rule 2111 as if such rule were part of the Exchange Rules.
\112\ Proposed Rule 19070 (Prompt Receipt and Delivery of
Securities) would generally prohibit a BSTX Participant from
accepting a customer's purchase order for a security until it can
determine that the customer agrees to receive the securities against
payment.
\113\ Proposed Rule 19080 (Charges for Services Performed)
generally requires that charges imposed on customers by broker-
dealers shall be reasonable and not unfairly discriminatory.
\114\ Proposed Rule 19090 (Use of Information Obtained in a
Fiduciary Capacity) generally restricts the use of information as to
the ownership of securities when acting in certain capacities (e.g.,
as a trustee).
\115\ Proposed Rule 19100 (Publication of Transactions and
Quotations) generally prohibits a BSTX Participant from
disseminating a transaction or quotation information unless the BSTX
Participant believes it to be bona fide.
\116\ Proposed Rule 19110 (Offers at Stated Prices) generally
prohibits a BSTX Participant from offering to transact in a security
at a stated price unless it is in fact prepared to do so.
\117\ Proposed Rule 19120 (Payments Involving Publications that
Influence the Market Price of a Security) generally prohibits direct
or indirect payments with the aim of disseminating information that
is intended to effect the price of a security.
\118\ Proposed Rule 19130 (Customer Confirmations) requires that
BSTX Participants comply with Rule 10b-10 of the Exchange Act. 17
CFR 240.10b-10.
\119\ Proposed Rule 19140 (Disclosure of Control Relationship
with Issuer) generally requires BSTX Participants to disclose any
control relationship with an issuer of a security before effecting a
transaction in that security for the customer.
\120\ Proposed Rule 19150 (Discretionary Accounts) generally
provides certain restrictions on BSTX Participants handling of
discretionary accounts, such as by effecting excessive transactions
or obtained authorization to exercise discretionary powers.
\121\ Proposed Rule 19160 (Improper Use of Customers' Securities
or Funds and Prohibition against Guarantees and Sharing in Accounts)
generally prohibits BSTX Participants from making improper use of
customers securities or funds and prohibits guarantees to customers
against losses.
\122\ Proposed Rule 19170 (Sharing in Accounts; Extent
Permissible) generally prohibits BSTX Participants and their
associated persons from sharing directly or indirectly in the profit
or losses of the account of a customer unless certain exceptions
apply such as where an associated person receives prior written
authorization from the BSTX Participant with which he or she is
associated.
\123\ Proposed Rule 19180 (Communications with Customers and the
Public) generally provides that BSTX Participants and their
associated persons shall comply with FINRA Rule 2210 as if such rule
were part of the Exchange Rules.
\124\ Proposed Rule 19190 (Gratuities) requires BSTX
Participants to comply with the requirements set forth in BOX
Exchange Rule 3060 (Gratuities).
\125\ Proposed Rule 19200 (Telemarketing) requires that BSTX
Participants and their associated persons comply with FINRA Rule
3230 as if such rule were part of the Exchange's Rules.
\126\ Proposed Rule 19210 (Mandatory Systems Testing) requires
that BSTX Participants comply with Exchange Rule 3180 (Mandatory
Systems Testing).
\127\ For example, the Exchange is not proposing to adopt a rule
contained in other exchanges' business conduct rules relating to
disclosures that broker-dealers give to their customers regarding
the risks of effecting securities transactions during times other
than during regular trading hours (e.g., higher volatility, possibly
lower liquidity) because executions may only occur during regular
trading hours on the BSTX System. See e.g., IEX Rule 3.290, Cboe BZX
Rule 3.21.
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The Exchange believes that the proposed Rule 19000 Series (Business
Conduct) is consistent with Section 6(b)(5) of the Exchange Act \128\
because these proposed rules are designed to prevent fraudulent and
manipulative acts and practices, promote just and equitable principles
of trade, and protect investors and the public interest by setting
forth appropriate standards of conduct applicable to BSTX Participants
in carrying out their business activities. For example, proposed Rule
19000 (Just and Equitable Principles of Trade) and 19010 (Adherence to
Law) would prohibit BSTX Participants from engaging in acts or
practices inconsistent with just and equitable principles of trade or
that would violate applicable laws and regulations. Similarly, proposed
Rule 19050 (Fair Dealing with Customers) would require that BSTX
Participants deal fairly with their customers and proposed Rule 19030
(False Statements) would generally prohibit BSTX Participants, or their
associated persons from making false statements or misrepresentations
to the Exchange. The Exchange believes that requiring that BSTX
Participants comply with the proposed business conduct rules in the
Rule 19000 Series would further the protection of investors and the
public interest by promoting high standards of commercial honor and
integrity. In addition, each of the rules in the proposed Rule 19000
Series (Business Conduct) is substantially similar to supervisory rules
of other exchanges.\129\
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\128\ 15 U.S.C. 78f(b)(5).
\129\ See supra note 1044.
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Financial and Operational Rules for BSTX Participants (Rule 20000
Series)
The Exchange proposes to adopt as its Rule 20000 Series (Financial
and Operational Rules), ten rules relating to financial and operational
requirements for BSTX Participants that are substantially similar to
financial and operational rules of other exchanges.\130\ The proposed
Rule 20000 Series would specify financial and operational requirements
with respect to: (i) Maintenance and furnishing of books and records;
\131\ (ii) financial reports; \132\ (iii) net capital compliance; \133\
(iv) early warning notifications pursuant to Rule 17a-11 under the
Exchange Act; \134\ (v) authority of the Chief Regulatory Officer to
impose certain restrictions; \135\ (vi) margin; \136\ (vii) day-trading
margin; \137\ (viii) customer account information; \138\ (ix)
maintaining records of customer complaints; \139\ and (x) disclosure of
financial condition.\140\
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\130\ See Cboe BZX Chapter 6 rules and IEX Chapter 5 rules.
\131\ Proposed Rule 20000 (Maintenance, Retention and Furnishing
of Books, Records and Other Information) requires that BSTX
Participants comply with current Exchange Rule 1000 (Maintenance,
Retention and Furnishing of Books, Records and Other Information)
and that BSTX Participants shall submit to the Exchange order,
market and transaction data as the Exchange may specify by
Information Circular.
\132\ Proposed Rule 20010 (Financial Reports) provides that BSTX
Participants shall comply with the requirements of current Exchange
Rule 10020 (Financial Reports).
\133\ Proposed Rule 20020 (Capital Compliance) provides that
each BSTX Participant subject to Rule 15c3-1 under the Exchange Act
(17 CFR 240.15c3-1) shall comply with such rule and other financial
and operational rules contained in the proposed Rule 20000 series.
\134\ 17 CFR 240.17a-11. Proposed Rule 20030 (``Early Warning''
Notification) provides that BSTX Participants subject to the
reporting or notifications requirements of Rule 17a-11 under the
Exchange Act (17 CFR 240.17a-11) or similar ``early warning''
requirements imposed by other regulators shall provide the Exchange
with certain reports and financial statements.
\135\ Proposed Rule 20040 (Power of CRO to Impose Restrictions)
generally provides that the Exchange's Chief Regulatory Officer may
impose restrictions and conditions on a BSTX Participant subject to
the early warning notification requirements under certain
circumstances.
\136\ Proposed Rule 20050 (Margin) sets forth the required
margin amounts for certain securities held in a customer's margin
account.
\137\ Proposed Rule 20060 (Day Trading Margin) sets forth
additional requirements with respect to customers that engage in day
trading.
\138\ Proposed Rule 20070 (Customer Account Information)
requires that BSTX Participants comply with FINRA Rule 4512 as if
such rule were part of the Exchange Rules and further clarifies
certain cross-references within FINRA Rule 4512.
\139\ Proposed Rule 20080 (Record of Written Customer
Complaints) requires that BSTX Participants comply with FINRA Rule
4513 as if such rule were part of the Exchange Rules.
\140\ Proposed Rule 20090 (Disclosure of Financial Condition)
generally requires that BSTX Participants make available certain
information regarding the BSTX Participant's financial condition
upon request of a customer.
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The Exchange believes that the proposed Rule 20000 (Financial and
Operational Rules) Series is consistent with Section 6(b)(5) of the
Exchange Act \141\ because these proposed rules are designed to prevent
fraudulent and manipulative acts and practices, promote just and
equitable principles of trade, and protect investors and the public
interest by subjecting BSTX Participants to certain recordkeeping,
[[Page 29648]]
disclosure, and related requirements designed to ensure that BSTX
Participants conduct themselves in a financially responsible manner.
For example, proposed Rule 20000 would require BSTX Participants to
comply with existing Exchange Rule 1000, which sets forth certain
recordkeeping responsibilities and the obligation to furnish these to
the Exchange upon request so that the Exchange can appropriately
monitor the financial condition of a BSTX Participant and its
compliance with applicable regulatory requirements. Similarly, proposed
Rule 20050 would set forth the margin requirements that BSTX
Participants must retain with respect to customers trading in a margin
account to ensure that BSTX Participants are not extending credit to
customers in a manner that might put the financial condition of the
BSTX Participant in jeopardy. Each of the proposed rules in the Rule
20000 Series (Financial and Operational Rules) is substantially similar
to existing rules of other exchanges or incorporates an existing rule
of the Exchange or another self-regulatory organization (``SRO'') by
reference.
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\141\ 15 U.S.C. 78f(b)(5).
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Supervision (Rule 21000 Series)
The Exchange proposes to adopt as its Rule 21000 Series
(Supervision), six rules relating to certain supervisory requirements
for BSTX Participants that are substantially similar to supervisory
rules of other exchanges.\142\ The Proposed Rule 21000 Series would
specify supervisory requirements with respect to: (i) Enforcing written
procedures to appropriately supervise the BSTX Participant's conduct
and compliance with applicable regulatory requirements; \143\ (ii)
designation of an individual to carry out written supervisory
procedures; \144\ (iii) maintenance and keeping of records carrying out
the BSTX Participant's written supervisory procedures; \145\ (iv)
review of activities of each of a BSTX Participant's offices, including
periodic examination of customer accounts to detect and prevent
irregularities or abuses; \146\ (v) the prevention of the misuse of
material non-public information; \147\ and (vi) implementation of an
anti-money laundering (``AML'') compliance program.\148\ These rules
are designed to ensure that BSTX Participants are able to appropriately
supervise their business activities, review and maintain records with
respect to such supervision, and enforce specific procedures relating
insider-trading and AML.
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\142\ See Cboe BZX Chapter 5 rules. See also IEX Rule 5.150 with
respect to proposed Rule 21040 (Prevention of the Misuse of
Material, Non-Public Information).
\143\ Proposed Rule 21000 (Written Procedures).
\144\ Proposed Rule 21010 (Responsibility of BSTX Participants)
would also require that a copy of a BSTX's written supervisory
procedures be kept in each office and makes clear that final
responsibility for proper supervision rests with the BSTX
Participant.
\145\ Proposed Rule 21020 (Records).
\146\ Proposed Rule 21030 (Review of Activities).
\147\ Proposed Rule 21040 (Prevention of the Misuse of Material,
Non-Public Information) generally requires BSTX Participants to
enforce written procedures designed to prevent misuse of material
non-public information and sets forth examples of conduct that would
constitute a misuse of material, non-public information.
\148\ Proposed Rule 21050 (Anti-Money Laundering Compliance
Program). The Exchange already has rules with respect to Exchange
Participants enforcing an AML compliance program set forth in
Exchange Rule 10070 (Anti-Money Laundering Compliance Program), so
proposed Rule 21050 specifies that BSTX Participants shall comply
with the requirements of that pre-existing rule.
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The Exchange believes that the proposed Rule 21000 (Supervision)
Series is consistent with Section 6(b)(5) of the Exchange Act \149\
because these proposed rules are designed to prevent fraudulent and
manipulative acts and practices, promote just and equitable principles
of trade, and protect investors and the public interest by ensuring
that BSTX Participants have appropriate supervisory controls in place
to carry out their business activities in compliance with applicable
regulatory requirements. For example, proposed Rule 21000 (Written
Procedures) would require BSTX Participants to enforce written
procedures which enable them to supervise the activities of their
associated persons and proposed Rule 21010 (Responsibility of BSTX
Participants) would require a BSTX Participant to designate a person in
each office to carry out written supervisory procedures. Requiring
appropriate supervision of a BSTX Participant's business activities and
associated persons would promote compliance with the federal securities
laws and other applicable regulatory requirements in furtherance of the
protection of investors and the public interest.\150\ In addition, each
of the rules in the proposed Rule 21000 Series (Supervision) is
substantially similar to supervisory rules of other exchanges.\151\
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\149\ 15 U.S.C. 78f(b)(5).
\150\ Id.
\151\ See supra note 142.
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Miscellaneous Provisions (Rule 22000 Series)
The Exchange proposes to adopt as its Rule 22000 Series
(Miscellaneous Provisions), six rules relating to a variety of
miscellaneous requirements applicable to BSTX Participants that are
substantially similar to rules of other exchanges.\152\ These
miscellaneous provisions relate to: (i) Comparison and settlement
requirements; \153\ (ii) failures to deliver and failures to receive;
\154\ (iii) forwarding of proxy and other issuer-related materials;
\155\ (iv) commissions; \156\ (v) regulatory services agreements; \157\
and (vi) transactions involving Exchange employees.\158\ These rules
are designed to capture additional regulatory requirements applicable
to BSTX Participants, such as setting forth their obligation to deliver
proxy materials at the request of an issuer and to incorporate by
reference Rule 200-203 of Regulation SHO.\159\
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\152\ See Cboe BZX Chapter 13 rules. See also IEX Rule 6.180
with respect to proposed Rule 22050 (Transactions Involving BOX
Employees).
\153\ Proposed Rule 22000 (Comparison and Settlement
Requirements) provides that a BSTX Participant that is a member of a
registered clearing agency shall implement comparison and settlement
procedures as may be required under the rules of such entity. The
proposed rule would further provide that, notwithstanding this
general provision, the Board may extend or postpone the time of
delivery of a BSTX transaction whenever the Board determines that it
is called for by the public interest, just and equitable principles
of trade or to address unusual conditions. In such a case, delivery
will occur as directed by the Board.
\154\ Proposed Rule 22010 (Failure to Deliver and Failure to
Receive) provides that borrowing and deliveries must be effected in
accordance with Rule 203 of Regulation SHO (17 CFR 242.203) and
incorporates Rules 200-203 of Regulation SHO by reference into the
rule (17 CFR 242.200 through .203).
\155\ Proposed Rule 22020 (Forwarding of Proxy and Other
Information; Proxy Voting) generally provides that BSTX Participants
shall forward proxy materials when requested by an issuer and sets
forth certain conditions and limitations for BSTX Participants to
give a proxy to vote stock that is registered in its name.
\156\ Proposed Rule 22030 (Commissions) provides that the
Exchange Rules or practices shall not be construed to allow a BSTX
Participant or its associated persons to agree or arrange for the
charging of fixed rates commissions for transactions on the
Exchange.
\157\ Proposed Rule 22040 (Regulatory Service Agreement)
provides that the Exchange may enter into regulatory services
agreements with other SROs to assist in carrying out regulatory
functions, but the Exchange shall retain ultimate legal
responsibility for, and control of, its SRO responsibilities.
\158\ Proposed Rule 22040 (Transactions Involving Exchange
Employees) sets forth conditions and limitations on a BSTX
Participant providing loans or supporting the account of an Exchange
employee (e.g., promptly obtaining and implementing an instruction
from the employee to provide duplicate account statement to the
Exchange) in order to mitigate any potential conflicts of interest
that might arise from such a relationship.
\159\ 17 CFR 242.200 through .203.
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The Exchange believes that the proposed Rule 22000 (Miscellaneous
Provisions) Series is consistent with Section 6(b)(5) of the Exchange
Act \160\ because these proposed rules are designed to prevent
fraudulent and manipulative acts and practices,
[[Page 29649]]
promote just and equitable principles of trade, and protect investors
and the public interest by ensuring that BSTX Participants comply with
additional regulatory requirements, such as Rule 203 of Regulation SHO
\161\ as provided in proposed Rule 22010 (Failure to Deliver and
Failure to Receive), in connection with their participation on BSTX.
For example, proposed Rule 22030 (Commissions) prohibits BSTX
Participants from charging fixed rates of commissions for transactions
on the Exchange consistent with Section 6(e)(1) of the Exchange
Act.\162\ Similarly, proposed Rule 22050 (Transactions involving
Exchange Employees) sets forth certain requirements and prohibitions
relating to a BSTX Participant providing certain financial services to
an Exchange employee, which the Exchange believes helps prevent
potentially fraudulent and manipulative acts and practices and furthers
the protection of investors and the public interest.
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\160\ 15 U.S.C. 78f(b)(5).
\161\ 17 CFR 242.203.
\162\ 15 U.S.C. 78f(e)(1).
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Trading Practice Rules (Rule 23000 Series)
The Exchange proposes to adopt as its Rule 23000 Series (Trading
Practice Rules), 14 rules relating to trading practice requirements for
BSTX Participants that are substantially similar to trading practice
rules of other exchanges.\163\ The proposed Rule 23000 Series would
specify trading practice requirements related to: (i) Market
manipulation; (ii) fictitious transactions; (iii) excessive sales by a
BSTX Participant; (iv) manipulative transactions; (v) dissemination of
false information; (vi) prohibition against trading ahead of customer
orders; (vii) joint activity; (viii) influencing data feeds; (ix) trade
shredding; (x) best execution; (xi) publication of transactions and
changes; (xii) trading ahead of research reports; (xiii) front running
of block transactions; and (xiv) a prohibition against disruptive
quoting and trading activity. The purpose of the trading practice rules
is to set forth standards and rules relating to the trading conduct of
BSTX Participants, primarily with respect to prohibiting forms of
market manipulation and specifying certain obligations broker-dealers
have to their customers, such as the duty of best execution. For
example, proposed Rule 23000 (Market Manipulation) sets forth a general
prohibition against a BSTX Participant purchasing a security at
successively higher prices or sales of a security at successively lower
prices, or to otherwise engage in activity for the purpose of creating
or inducing a false, misleading or artificial appearance of activity in
such security.\164\ Proposed Rule 23010 (Fictitious Transactions)
similarly prohibits BSTX Participants from fictitious transaction
activity, such as executing a transaction which involves no beneficial
change in ownership, and proposed Rule 23020 (Excessive Sales by a BSTX
Participant) prohibits a BSTX Participant from executing purchases or
sales in any security trading on the Exchange for any account in which
it has an interest, which are excessive in view of the BSTX
Participant's financial resources or in view of the market for such
security.\165\ Proposed Rule 23060 (Joint Activity) prohibits a BSTX
Participant from directly or indirectly holding any interest or
participation in any joint account for buying or selling a security
traded on the Exchange unless reported to the Exchange with certain
information provided and proposed Rule 23090 (Best Execution) reaffirms
BSTX Participants best execution obligations to their customers.\166\
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\163\ See Cboe BZX Chapter 12 rules.
\164\ Proposed Rule 23030 (Manipulative Transactions) specifies
further prohibitions relating to potential manipulation by
prohibiting BSTX Participants from, among other things,
participating or having any direct or indirect interest in the
profits of a manipulative operation or knowingly managing or
financing a manipulative operation.
\165\ Other proposed rules relating to potential manipulation
include: (i) Rule 23040 (Dissemination of False Information), which
generally prohibits, consistent with Exchange Rule 3080, BSTX
Participants from spreading information that is false or misleading;
(ii) Rule 23070 (Influencing Data Feeds), which generally prohibits
transactions to influence data feeds; (iii) Rule 23080 (Trade
Shredding), which generally prohibits conduct that has the intent or
effect of splitting any order into multiple smaller orders for the
primary purpose of maximizing remuneration to the BSTX Participant;
(iv) Rule 23110 (Trading Ahead of Research Reports), which generally
prohibits BSTX Participants from trading based on non-public advance
knowledge of a research report and requires BSTX Participants to
enforce policies and procedures to limit information flow from
research personnel to trading personnel that might trade on such
information; (v) Rule 23120 (Front Running Block Transactions),
which incorporates FINRA Rule 5270 as though it were part of the
Exchange's Rules; and (vi) Rule 23130 (Disruptive Quoting and
Trading Activity Prohibited), which incorporates Exchange Rule 3220
by reference.
\166\ In addition, proposed Rule 23100 (Publication of
Transactions and Changes) provides that the Exchange will
disseminate transaction information to appropriate data feeds, BSTX
participants must provide information necessary to facilitate the
dissemination of such information, and that an Exchange official
shall be responsible for approving corrections to any reports
transmitted over data feeds.
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Proposed Rule 23050 (Prohibition against Trading Ahead of Customer
Orders) is substantially similar to FINRA 5320 and rules adopted by
other exchanges,\167\ and generally prohibits BSTX Participants from
trading ahead of customer orders unless certain enumerated exceptions
are available and requires BSTX Participants to have a written
methodology in place governing execution priority to ensure compliance
with the Rule. The Exchange proposes to adopt each of the exceptions to
the prohibition against trading ahead of customer orders as provided in
FINRA Rule 5320 other than the exception related to trading outside of
normal market hours, since trading on the Exchange would be limited to
regular trading hours.
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\167\ See e.g., Cboe BZX Rule 12.6.
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The Exchange proposes to adopt the order handling procedures
requirement in proposed Rule 23050(i) consistent with the rules of
other exchanges.\168\ Specifically, proposed Rule 23050(i) would
provide that a BSTX Participant must make every effort to execute a
marketable customer order that it receives fully and promptly and must
cross customer orders when they are marketable against each other
consistent with the proposed Rule.
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\168\ See e.g., Cboe BZX Rule 12.6.07.
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The Exchange proposes to adopt a modified version of the exception
set forth in FINRA Rule 5320.06 relating to minimum price improvement
standards as proposed in Rule 23050(h). Under proposed Rule 23050(h),
BSTX Participants would be permitted to execute an order on a
proprietary basis when holding an unexecuted limit order in that same
security without being required to execute the held limit order
provided that they give price improvement of $0.01 to the unexecuted
held limit order. While FINRA Rule 5320.06 sets forth alternate, lower
price improvement standards for securities priced below $1, the
Exchange proposes to adopt a uniform price improvement requirement of
$0.01 for Securities traded on the BSTX System consistent with the
Exchange's proposed uniform minimum price variant of $0.01 set forth in
proposed Rule 25030.
In addition, the Exchange proposes to adopt an exception for bona
fide error transactions as proposed in Rule 25030(g) which would allow
a BSTX Participant to trade ahead of a customer order if the trade is
to correct a bona fide error, as defined in the rule. This proposed
exception is nearly identical to similar exceptions of other exchanges
\169\ except that other exchange rules also provide an exception
whereby firms may submit a proprietary order ahead of a customer order
to offset a customer order that is
[[Page 29650]]
in an amount other than a round lot (i.e., 100 shares). The Exchange is
not adopting an exception for odd-lot orders under these circumstances
because the minimum unit of trading for Securities pursuant to proposed
Rule 25020 is one Security. The Exchange believes that there may be a
notable amount of trading in amounts of less than 100 Securities (i.e.,
trading in odd-lot amounts), and the Exchange accordingly does not
believe that it is appropriate to allow BSTX Participants to trade
ahead of customer orders just to offset an odd-lot customer order.
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\169\ See e.g., Cboe BZX Rule 12.5.05.
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The Exchange believes that the proposed Rule 23000 Series relating
to trading practice rules is consistent with Section 6(b)(5) of the
Exchange Act \170\ because these proposed rules are designed to prevent
fraudulent and manipulative acts and practices that could harm
investors and to promote just and equitable principles of trade. The
proposed rules in the Rule 23000 Series are substantially similar to
the rules of other exchanges and generally include a variety of
prohibitions against types of trading activity or other conduct that
could potentially be manipulative, such as prohibitions against market
manipulation, fictitious transactions, and the dissemination of false
information. The Exchange has proposed to exclude certain provisions
from, or make certain modifications to, comparable rules of other SROs,
as detailed above, in order to account for certain unique aspects
related to the proposed trading of Securities. The Exchange believes
that it is consistent with applicable requirements under the Exchange
Act to exclude these provisions and exceptions because they set forth
requirements that would not apply to BSTX Participants trading in
Securities and are not necessary for the Exchange to carry out its
functions of facilitating Security transactions and regulating BSTX
Participants.
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\170\ 15 U.S.C. 78f(b)(5).
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Disciplinary Rules (Rule 24000 Series)
With respect to disciplinary matters, the Exchange proposes to
adopt Rule 24000 (Discipline and Summary Suspension), which provides
that the provisions of the Exchange Rule 11000 Series (Summary
Suspension), 12000 Series (Discipline), 13000 Series (Review of Certain
Exchange Actions), and 14000 Series (Arbitration) of the Exchange Rules
shall be applicable to BSTX Participants and trading on the BSTX
System. The Exchange already has Rules pertaining to discipline and
suspension of Exchange Participants that it proposes to extend to BSTX
Participants and trading on the BSTX System. The Exchange also proposes
to adopt as Rule 24010 a minor rule violation plan with respect to
transactions on BSTX.\171\
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\171\ The proposed additions to the Exchange's minor rule
violation plan pursuant to proposed Rule 24010 are discussed below
in Part IV.
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Proposed Rule 24000 incorporates by reference existing rules that
have already been approved by the Commission.
Trading Rules and the BSTX System (Rule 25000 Series)
Rule 25000--Access to and Conduct on the BSTX Marketplace
The Exchange proposes to adopt Rule 25000 (Access to and Conduct on
the BSTX Marketplace) to set forth rules relating to access to the BSTX
System and certain conduct requirements applicable to BSTX
Participants. Specifically, proposed Rule 25000 provides that only BSTX
Participants, including their associated persons, that are approved for
trading on the BSTX System shall effect any transaction on the BSTX
System. Proposed Rule 25000(b) generally requires that a BSTX
Participant maintain a list of authorized traders that may obtain
access to the BSTX System on behalf of the BSTX Participant, have
procedures in place reasonably designed to ensure that all authorized
traders comply with Exchange Rules and to prevent unauthorized access
to the BSTX System, and to provide the list of authorized traders to
the Exchange upon request. Proposed Rule 25000(c) and (d) restate
provisions that are already set forth in Exchange Rule 7000, generally
providing that BSTX Participants shall not engage in conduct that is
inconsistent with the maintenance of a fair and orderly market or the
ordinary and efficient conduct of business, as well as conduct that is
likely to impair public confidence in the operations of the Exchange.
Examples of such prohibited conduct include failure to abide by a
determination of the Exchange, refusal to provide information requested
by the Exchange, and failure to adequately supervise employees.
Proposed Rule 25000(f) provides the Exchange with authority to suspend
or terminate access to the BSTX System under certain circumstances.
The Exchange believes that proposed Rule 25000 is consistent with
Section 6(b)(5) of the Exchange Act \172\ because it is designed to
protect investors and the public interest and promote just and
equitable principles of trade by ensuring that BSTX Participants would
not allow for unauthorized access to the BSTX System and would not
engage in conduct detrimental to the maintenance of fair and orderly
markets.
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\172\ 15 U.S.C. 78f(b)(5).
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Rule 25010--Days/Hours
Proposed Rule 25010 sets forth the days and hours during which BSTX
would be open for business and during which transactions may be
effected on the BSTX System. Under the proposed rule, transactions may
be executed on the BSTX System between 9:30 a.m. and 4:00 p.m. Eastern
Time. The proposed rule also specifies certain holidays BSTX would not
be open (e.g., New Year's Day) and provides that the Chief Executive
Officer, President, or Chief Regulatory Officer of the Exchange, or
such person's designee who is a senior officer of the Exchange, shall
have the power to halt or suspend trading in any Securities, close some
or all of BSTX's facilities, and determine the duration of any such
halt, suspension, or closing, when such person deems the action
necessary for the maintenance of fair and orderly markets, the
protection of investors, or otherwise in the public interest.
The Exchange believes that proposed Rule 25010 is designed to
protect investors and the public interest, consistent with Section
6(b)(5) of the Exchange Act,\173\ by setting forth the days and hours
that trades may be effected on the BSTX System and by providing
officers of the Exchange with the authority to halt or suspend trading
when such officers believe that such action is necessary or appropriate
to maintain fair and orderly markets or to protect investors or in the
public interest.
---------------------------------------------------------------------------
\173\ 15 U.S.C. 78f(b)(5).
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Rule 25020--Units of Trading
Proposed Rule 25020 sets forth the minimum unit of trading on the
BSTX System, which shall be one Security. The Exchange believes that
proposed Rule 25020 is consistent with Section 6(b)(5) of the Exchange
Act \174\ because it fosters cooperation and coordination of persons
engaged in facilitating transactions in securities by specifying the
minimum unit of trading of Securities on the BSTX System. In addition,
other exchanges similarly provide that the minimum unit of trading is
one share for their market and/or for certain securities.\175\
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\174\ 15 U.S.C. 78f(b)(5).
\175\ See e.g., IEX Rule 11.180.
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[[Page 29651]]
Rule 25030--Minimum Price Variant
Proposed Rule 25030 provides the minimum price variant for
Securities shall be $0.01. The Exchange believes that proposed Rule
25030 is consistent with Section 6(b)(5) of the Exchange Act because it
fosters cooperation and coordination of persons engaged in facilitating
transactions in securities by specifying the minimum price variant for
Securities and promotes compliance with Rule 612 of Regulation
NMS.\176\ Under Rule 612 of Regulation NMS, the Exchange is, among
other things, prohibited from displaying, ranking or accepting from any
person a bid or offer or order in an NMS stock in an increment smaller
than $0.01 if that bid or offer or order is priced equal to or greater
than $1.00 per share. Where a bid or offer or order is priced less than
or equal to $1.00 per share, the minimum acceptable increment is
$0.0001. Proposed Rule 25030 sets a uniform minimum price variant for
all Securities of $0.01 irrespective of whether the Security is trading
below $1.00.
---------------------------------------------------------------------------
\176\ 17 CFR 242.611.
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Rule 25040--Opening the Marketplace
Proposed Rule 25040 sets forth the opening process for the BSTX
System for BSTX-listed Securities and non-BSTX-listed securities. For
BSTX-listed Securities, the Exchange proposes to allow for order entry
to commence at 8:30 a.m. ET during the Pre-Opening Phase. Proposed Rule
25040(a) provides that orders will not execute during the Pre-Opening
Phase, which lasts until regular trading hours begin at 9:30 a.m.
ET.\177\ Similar to how the Exchange's opening process works for
options trading, BSTX would disseminate a theoretical opening price
(``TOP'') to BSTX Participants, which is the price at which the opening
match would occur at a given moment in time.\178\ Under the proposed
rule, the Exchange will also broadcast other information during the
Pre-Opening Phase. Specifically, in addition to the TOP, the Exchange
would disseminate pursuant to proposed Rule 25040(a)(3): (i) ``Paired
Securities,'' which is the quantity of Securities that would execute at
the TOP; (ii) the ``Imbalance Quantity,'' which is the number of
Securities that may not be matched with other orders at the TOP at the
time of dissemination; and (iii) the ``Imbalance Side,'' which is the
buy/sell direction of any imbalance at the time of dissemination
(collectively, with the TOP, ``Broadcast Information'').\179\ Broadcast
Information would be recalculated and disseminated every time a new
order is received or cancelled and where such event causes the TOP or
Paired Securities to change. With respect to priority during the
opening match for all Securities, consistent with proposed Rule 25080
(Execution and Price/Time Priority), among multiple orders at the same
price, execution priority during the opening match is determined based
on the time the order was received by the BSTX System.
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\177\ As a result, orders marked IOC submitted during the Pre-
Opening Phase would be rejected by the BSTX System. See proposed
Rule 25040(a)(7).
\178\ The TOP can only be calculated where the BSTX Book is
crossed during the Pre-Opening Phase. See proposed Rule 25040(a)(2).
\179\ Pursuant to proposed Rule 25040(a)(3), any orders which
are at a better price (i.e., bid higher or offer lower) than the TOP
would be shown only as a total quantity on the BSTX Book at a price
equal to the TOP.
---------------------------------------------------------------------------
Consistent with the manner in which the Exchange opens options
trading, the BSTX System would determine a single price at which a
BSTX-listed Security would be opened by calculating the optimum number
of Securities that could be matched at a price, taking into
consideration all the orders on the BSTX Book.\180\ Proposed Rule
25040(a)(6) provides that the opening match price is the price which
results in the matching of the highest number of Securities. If two or
more prices would satisfy this maximum quantity criteria, the price
leaving the fewest resting Securities in the BSTX Book will be selected
at the opening price and where two or more prices would satisfy the
maximum quantity criteria and leave the fewest Securities in the BSTX
Book, the price closest to the previous day's closing price will be
selected.\181\ The opening price must also be within the ``Collar Price
Range'' as set forth in proposed Rule 25040(a)(5), which is designed to
ensure that a Security opens in an fair and orderly manner and under
market conditions where there is sufficient quotation interest (e.g., a
national best bid and offer), the market is not crossed, and where the
opening price will not drastically depart from the market at the time
of the auction or the preceding day's closing price.\182\ Unexecuted
trading interest during the opening match will move to the BSTX Book
and will preserve price time priority.\183\ When the BSTX System cannot
determine an opening price of a BSTX-listed Security at the start of
regular trading hours, BSTX would nevertheless open the Security for
trading and move all trading interest received during the Pre-Opening
Phase to the BSTX Book.\184\
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\180\ See proposed Rule 25040(a)(4)(ii).
\181\ With respect to an initial public offering of a Security
where there is no previous day's closing price, the opening price
would be the price assigned to the Security by the underwriter for
the offering, referred to as the ``Initial Security Offering
Reference Price.'' See Proposed Rule 25040(a)(5)(ii)(3).
\182\ See proposed Rule 25040(a)(5). The Exchange notes that the
auction collars proposed in Rule 25040(a)(5) are substantially
similar to those of Cboe BZX. See Cboe BZX Rule 11.23.
\183\ See proposed Rule 25040(a)(7).
\184\ Id.
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For initial public offerings of Securities (``Initial Security
Offerings''), the process would be generally the same as regular market
openings. However, in advance of an Initial Security Offering auction
(``Initial Security Offering Auction''), the Exchange shall announce a
``Quote-Only Period'' that shall be between fifteen (15) and thirty
(30) minutes plus a short random period prior to the Initial Security
Offering Auction.\185\ The Quote-Only Period may be extended in certain
cases.\186\ As with regular market openings the Exchange would
disseminate Broadcast Information at the commencement of the Quote Only
Period, and Broadcast Information would be re-calculated and
disseminated every time a new order is received or cancelled and where
such event causes the TOP price or Paired Securities to change.\187\ In
the event of any extension to the Quote-Only Period or a trading pause,
the Exchange will notify market participants regarding the
circumstances and length of the extension.\188\ Orders will be matched
and executed at the conclusion of the Quote-Only Period, rather than at
9:30 a.m. Eastern Time.\189\ Following the initial cross at the end of
the Quote-Only Period wherein orders will execute based on price/time
priority consistent with proposed Rule 25080, the Exchange will
transition to normal trading pursuant to proposed Rule
25040(a)(6).\190\
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\185\ See proposed Rule 25040(b)(1).
\186\ Such cases are when: (i) There is no TOP; (ii) the
underwriter requests an extension; (iii) the TOP moves the greater
of 10% or fifty (50) cents in the fifteen (15) seconds prior to the
initial cross; or (iv) in the event of a technical or systems issue
at the Exchange that may impair the ability of BSTX Participants to
participate in the Initial Security Offering or of the Exchange to
complete the Initial Security Offering. See proposed Rule
25040(b)(2).
\187\ See proposed Rule 25040(b)(3).
\188\ See proposed Rule 25040(b)(4). The Exchange also proposes
that if a trading pause is triggered by the Exchange or if the
Exchange is unable to reopen trading at the end of the trading pause
due to a systems or technology issue, the Exchange will immediately
notify the single plan processor responsible for consolidation of
information for the security pursuant to Rule 603 of Regulation NMS
under the Securities Exchange Act of 1934. Id.
\189\ See proposed Rule 25040(b)(5).
\190\ As with the regular opening process, orders marked IOC
submitted during the Pre-Opening Phase of an Initial Security
Offering Auction would be rejected. See proposed Rule 25040(b)(6).
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[[Page 29652]]
The Exchange also proposes a process for reopening trading
following a Limit Up-Limit Down Halt or trading pause (``Halt
Auctions''). For Halt Auctions, the Exchange proposes that in advance
of reopening, the Exchange shall announce a Quote-Only Period that
shall be five (5) minutes prior to the Halt Auction.\191\ This Quote-
Only Period may be extended in certain circumstances.\192\ The Exchange
proposes to disseminate the same Broadcast Information as it does for
an Initial Security Offering Auction and would similarly provide
notification of any extension to the quote-only period as with an
Initial Security Offering Auction.\193\ The transition to normal
trading would also occur in the same manner as Initial Security
Offering Auctions, as described above.\194\
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\191\ See proposed Rule 25040(c)(1). Orders marked IOC submitted
during the Quote-Only Period would be rejected. In addition, Halt
Auctions would be subject to the proposed Halt Auction Collar, as
set forth in proposed Rule 25040(c)(2)(i) and (ii). These proposed
collars for Halt Auctions are substantially similar to those
provided by Cboe BZX, and are designed to make sure that the
Exchange is able to reopen trading in a Security in a fair and
orderly manner. See Cboe BZX Rule 11.23(d). To the extent an Halt
Auction would occur at an ``Impermissible Price'' (i.e., a price
outside of the proposed Halt Auction collars), the Exchange would
extend the period of Halt Auction and gradually expand the scope of
the collar price range over time until it is able to re-open trading
in the Security in a manner consistent with proposed Rule
25040(c)(2).
\192\ See proposed Rule 25040(c)(2). The Quote-Only Period shall
be extended for an additional five (5) minutes should a Halt Auction
be unable to be performed due to the absence of a TOP (``Initial
Extension Period''). After the Initial Extension Period, the
Exchange proposes that the Quote-Only Period shall be extended for
additional five (5) minute periods should a Halt Auction be unable
to be performed due to absence of a TOP (``Additional Extension
Period'') until a Halt Auction occurs. Under the proposed Rule, the
Exchange shall attempt to conduct a Halt Auction during the course
of each Additional Extension Period. Id.
\193\ See proposed Rule 25040(c)(3)-(5).
\194\ Id.
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The Exchange also proposes to adopt certain contingency procedures
in proposed Rule 25040(d) that would provide that when a disruption
occurs that prevents the execution of an Initial Security Offering
Auction the Exchange will publicly announce the Quote-Only Period for
the Initial Security Offering Auction, and the Exchange will then
cancel all orders on the BSTX Book and disseminate a new scheduled time
for the Quote-Only Period and opening match.\195\ Similarly, when a
disruption occurs that prevents the execution of a Halt Auction, the
Exchange will publicly announce that no Halt Auction will occur, and
all orders in the halted Security on the BSTX Book will be canceled
after which the Exchange will open the Security for trading without an
auction.\196\
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\195\ See proposed Rule 25040(d)(1).
\196\ See proposed Rule 25040(d)(2). The Exchange notes that
these contingency procedures are substantially similar to those of
another exchange (see e.g., IEX Rule 11.350(c)(4)) and are designed
to ensure that the Exchange has appropriate mechanisms in place to
address possible disruptions that may arise in an Initial Security
Offering Auction or Halt Auction, consistent with the protection of
investors and the public interest pursuant to Section 6(b)(5) of the
Exchange Act. 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
The opening process with respect to non-BSTX-listed securities is
set forth in proposed Rule 25040(e). Pursuant to that Rule, BSTX
Participants who wish to participate in the opening process may submit
orders and quotes for inclusion in the BSTX Book, but such orders and
quotes cannot execute until the termination of the Pre-Opening Phase
(``Opening Process''). Orders that are canceled before the Opening
Process will not participate in the Opening Process. The Exchange will
attempt to perform the Opening Process and will match buy and sell
orders that are executable at the midpoint of the NBBO.\197\ Generally,
the price of the Opening Process will be at the midpoint of the first
NBBO subsequent to the first two-sided quotation published by the
listing exchange after 9:30:00 a.m. Eastern Time. Pursuant to proposed
Rule 25040(e)(4), if the conditions to establish the price of the
Opening Process set forth above do not occur by 9:45:00 a.m. Eastern
Time, orders will be handled in time sequence, beginning with the order
with the oldest time stamp, and will be placed on the BSTX Book
cancelled, or executed in accordance with the terms of the order. A
similar process will occur for re-opening a non-BSTX-listed security
subject to a halt.\198\ The proposed opening process for Securities
listed on another exchange serves as a placeholder in anticipation of
other exchanges eventually listing and trading Securities, or the
equivalent thereof, given that there are no other exchanges currently
trading Securities. The proposed process for opening Securities listed
on another exchange is similar to existing exchange rules governing the
opening of trading of a security listed on another exchange.\199\
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\197\ See proposed Rule 25040(e)(2).
\198\ See proposed Rule 25040(e)(5).
\199\ See e.g., Cboe BZX Rule 11.24.
---------------------------------------------------------------------------
Consistent with Section 6(b)(5) of the Exchange Act,\200\ the
Exchange believes that the proposed process for opening trading in
BSTX-listed Securities and Securities listed on other exchanges will
promote just and equitable principles of trade and will help perfect
the mechanism of a free and open market by establishing a uniform
process to determine the opening price of Securities.\201\ Proposed
Rule 25040 provides a mechanism by which BSTX Participants may submit
orders in advance of the start of regular trading hours, perform an
opening cross, and commence regular hours trading in Securities listed
on BSTX or otherwise. Where an opening cross is not possible in a BSTX-
listed Security, the Exchange will proceed by opening regular hours
trading in the Security anyway, which is consistent with the manner in
which other exchanges open trading in securities.\202\ With respect to
initial public offerings of Securities and openings after a Limit Up-
Limit Down halt or trading pause, BSTX proposes to use a process with
features similar to its normal opening process. There are a variety of
different ways in which an exchange can open trading in securities,
including with respect to an initial public offering of a Security, and
the Exchange believes that proposed Rule 25040 provides a simple and
clear method for opening transactions that is consistent with the
protection of investors and the public interest.\203\ Additionally,
proposed Rule 25040 applies to all BSTX Participants in the same manner
and is therefore not designed to permit unfair discrimination among
BSTX Participants.
---------------------------------------------------------------------------
\200\ 15 U.S.C. 78f(b)(5).
\201\ The Exchange has not proposed to operate a closing auction
at this time. As a result, the closing price of a Security on BSTX
would be the last regular way transaction occurring on BSTX, which
the Exchange believes is a simple and fair way to establish the
closing price of a Security that does not permit unfair
discrimination among customers, issuers, or broker-dealers
consistent with Section 6(b)(5) of the Exchange Act. Id. This
proposed process is consistent with the overall proposed simplified
market structure for BSTX, which does not include a variety of order
types offered by other exchanges such as market-on-close and limit-
on-close orders. The Exchange believes that a simplified market
structure, including the proposed manner in which a closing price
would be determined, promotes the public interest and the protection
of investors consistent with Section 6(b)(5) of the Exchange Act
through reduced complexity. Id.
\202\ See e.g., BOX Rule 7070.
\203\ The Exchange notes that its proposed opening, Initial
Security Offering Auction, and Halt Auction processes are
substantially similar to those of another exchange. See Cboe BZX
Rule 11.23. The key differences between the Exchange's proposed
processes and those of the Cboe BZX exchange are that the Exchange
has substantially fewer order types, which make its opening process
less complex.
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Rule 25050--Trading Halts
BSTX proposes to adopt rules relating to trading halts \204\ that
are substantially
[[Page 29653]]
similar to other exchange rules adopted in connection with the NMS Plan
to Address Extraordinary Market Volatility (``LULD Plan''), with
certain exceptions that reflect Exchange functionality. BSTX intends to
join the LULD Plan prior to the commencement of trading Securities.
Below is an explanation of BSTX's approach to certain categories of
orders during a trading halt:
---------------------------------------------------------------------------
\204\ The Exchange notes that rules on opening trading for non-
BSTX-listed security are set forth in proposed Rule 25040(e).
---------------------------------------------------------------------------
<bullet> Short Sales--BSTX cancels all orders on the book during a
halt and rejects any new orders, so rules relating to the repricing of
short sale orders during a trading halt that certain other exchanges
have adopted have been omitted.
<bullet> Pegged Orders--BSTX would not support pegged orders, at
least initially, so rules relating to pegged orders during a trading
halt have been omitted.
<bullet> Routable Orders--Pursuant to proposed Rule 25130, the BSTX
System will reject any order or quotation that would lock or cross a
protected quotation of another exchange (rather than routing such order
or quotation), and therefore rules relating to handling of routable
orders during a trading halt have been omitted.
<bullet> Limit Orders--Because BSTX would cancel resting order
interest and reject incoming orders during a trading halt, specific
rules relating to the repricing of limit-priced interest that certain
other exchanges have adopted have been omitted.\205\
---------------------------------------------------------------------------
\205\ See e.g., Cboe BZX 11.18(e)(5)(B).
---------------------------------------------------------------------------
<bullet> Auction Orders, Market Orders, and FOK Orders--BSTX would
not support these order types, at least initially, so rules relating to
these order types during a trading halt have been omitted.\206\
---------------------------------------------------------------------------
\206\ IOC orders would be handled pursuant to proposed Rule
25050(g)(5).
---------------------------------------------------------------------------
Pursuant to proposed Rule 25050(d), the Exchange would cancel all
resting orders in a non-BSTX listed security subject to a trading halt,
reject any incoming orders in that Security, and will only resume
accepting orders following a broadcast message to BSTX Participants
indicating a forthcoming re-opening of trading.\207\
---------------------------------------------------------------------------
\207\ Trading would resume pursuant to proposed Rule
25040(e)(5). See proposed Rule 25050(g)(7).
---------------------------------------------------------------------------
BSTX believes that it is in the public interest and furthers the
protection of investors, consistent with Section 6(b)(5) of the
Exchange Act \208\ to provide for a mechanism to halt trading in
Securities during periods of extraordinary market volatility consistent
with the LULD Plan. However, the Exchange has excluded rules relating
to order types and other aspects of the LULD Plan that would not be
supported by the Exchange, such as market orders and auction orders.
The Exchange has also reserved the right in proposed Rule 25050(f) to
halt or suspend trading in other circumstances where the Exchange deems
it necessary to do so for the protection of investors and in the
furtherance of the public interest.
---------------------------------------------------------------------------
\208\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
The Exchange believes that canceling resting order interest during
a trading halt and rejecting incoming orders received during the
trading halt is consistent with Section 6(b)(5) of the Exchange Act
\209\ because it is not designed to permit unfair discrimination among
BSTX Participants. The orders and trading interest of all BSTX
Participants would be canceled in the event of a trading halt and each
BSTX Participant would be required to resubmit any orders they had
resting on the order book.
---------------------------------------------------------------------------
\209\ Id.
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Rule 25060--Order Entry
Proposed Rule 25060 sets forth the manner in which BSTX
Participants may enter orders to the BSTX System. The BSTX System would
initially only support limit orders.\210\ Orders that do not designate
a limit price would be rejected.\211\ The BSTX System would also only
support two time-in-force (``TIF'') designations initially: (i) DAY;
and (ii) immediate or cancel (``IOC''). DAY orders will queue during
the Pre-Opening Phase, may trade during regular market hours, and, if
unexecuted at the close of the trading day (4:00 p.m. ET), are canceled
by the BSTX System.\212\ All orders are given a default TIF of DAY.
BSTX Participants may also designate orders as IOC, which designation
overrides the default TIF of DAY. IOC orders are not accepted by the
BSTX System during the Pre-Opening Phase. During regular trading hours,
IOC orders will execute in whole or in part immediately upon receipt by
the BSTX System. The BSTX System will not support modification of
resting orders. To change the price or quantity of an order resting on
the BSTX Book, a BSTX Participant must cancel the resting order and
submit a new order, which will result in a new time stamp for purposes
of BSTX Book priority. In addition, all orders on BSTX will be
displayed, and the BSTX System will not support hidden orders or
undisplayed liquidity, as set forth in proposed Rule 25100. The
Exchange has also proposed an additional order parameter for BSTX
Participants to indicate a preference for T+0 or T+1 settlement, as
previously described in Item 3, Part II.I.
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\210\ The BSTX System will also accept incoming Intermarket
Sweep Orders (``ISO'') pursuant to proposed Rule 25060(c)(2). ISOs
must be limit orders, are ineligible for routing, may be submitted
with a limit price during Regular Trading Hours, and must have a
time-in-force of IOC. Proposed Rule 25060(c)(2) is substantially
similar to rules of other national securities exchanges. See e.g.,
Cboe BZX Rule 11.9(d).
\211\ Proposed Rule 25060(c)(1).
\212\ Proposed Rule 25060(d)(1).
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Consistent with Section 6(b)(5) of the Exchange Act,\213\ the
Exchange believes that the proposed order entry rules will promote just
and equitable principles of trade and help perfect the mechanism of a
free and open market by establishing the types of orders and modifiers
that all BSTX Participants may use in entering orders to the BSTX
System. Because these order types and TIFs are available to all BSTX
Participants, the proposed rule does not unfairly discriminate among
market participants, consistent with Section 6(b)(5) of the Exchange
Act. The proposed rule sets forth a very simple exchange model whereby
there is only one order type--limit orders--and two TIFs. Upon the
initial launch of BSTX, there will be no hidden orders, price sliding,
pegged orders, or other order type features that add complexity. The
Exchange believes that creating a simplified exchange model is designed
to protect investors and is in the public interest because it reduces
complexity, thereby helping market participants better understand how
orders would operate on the BSTX System.
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\213\ 15 U.S.C. 78f(b)(5).
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Rule 25070--Audit Trail
Proposed Rule 25070 (Audit Trail) is designed to ensure that BSTX
Participants provide the Exchange with information to be able to
identify the source of a particular order and other information
necessary to carry out the Exchange's oversight functions. The proposed
rule is substantially similar to existing BOX Rule 7120 but eliminates
certain information unique to orders for options contracts (e.g.,
exercise price) because Securities are equity securities. The proposed
rule also provides that BSTX Participants that employ an electronic
order routing or order management system that complies with Exchange
requirements will be deemed to comply with the Rule if the required
information is recorded in an electronic format. The proposed rule also
specifies that order information must be kept for no less than three
years and that where specific customer or account number information is
not provided to the Exchange, BSTX Participants must maintain such
information on their books and records.
The Exchange believes that proposed Rule 25070 is designed to
protect
[[Page 29654]]
investors and the public interest, consistent with Section 6(b)(5) of
the Exchange Act,\214\ because it will provide the Exchange with
information necessary to carry out its oversight role. Without being
able to identify the source and terms of a particular order, the
Exchange's ability to adequately surveil its market, with or through
another SRO, for trading inconsistent with applicable regulatory
requirements would be impeded. In order to promote compliance with Rule
201 of Regulation SHO, proposed Rule 25080(b)(3) provides that when a
short sale price test restriction is in effect, the execution price of
the short sale order must be higher than (i.e., above) the best bid,
unless the sell order is marked ``short exempt'' pursuant to Regulation
SHO.
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\214\ 15 U.S.C. 78f(b)(5).
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Rule 25080--Execution and Price Time Priority
Proposed Rule 25080 governs the execution of orders on the BSTX
System, providing a price-time priority model. The proposed rule
provides that orders of BSTX Participants shall be ranked and
maintained in the BSTX Book according to price-time priority, such that
within each price level, all orders shall be organized by the time of
entry. The proposed rule further provides that sell orders may not
execute a price below the best bid in the marketplace and buy orders
cannot execute at a price above the best offer in the marketplace.
Further, the proposed rule ensures compliance with Regulation SHO,
Regulation NMS, and the LULD Plan, in a manner consistent with the
rulebooks of other national securities exchanges.\215\
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\215\ See e.g., Cboe BZX Rule 11.13(a)(2)-(3) governing regular
trading hours.
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The Exchange believes that proposed Rule 25080 is consistent with
Section 6(b)(5) of the Exchange Act \216\ because it is designed to
promote just and equitable principles of trade and foster cooperation
and coordination with persons facilitating transactions in securities
by setting forth the order execution priority scheme for Security
transactions. Numerous other exchanges similarly operate a price-time
priority structure for effecting transactions. The proposed rule also
does not permit unfair discrimination among BSTX Participants because
all BSTX Participants are subject to the same price-time priority
structure. In addition, the Exchange believes that specifying in
proposed Rule 25080(b)(3) that execution of short sale orders when a
short sale price test restriction is in effect must occur at a price
above the best bid unless the order is market ``short exempt,'' is
consistent with the Exchange Act because it is intended promote
compliance with Regulation SHO in furtherance of the protection of
investors and the public interest.
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\216\ 15 U.S.C. 78f(b)(5).
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Rule 25090--BSTX Risk Controls
Proposed Rule 25090 sets forth certain risk controls applicable to
orders submitted to the BSTX System. The proposed risk controls are
designed to prevent the submission and execution of potentially
erroneous orders. Under the proposed rule, the BSTX System will reject
orders that exceed a maximum order size, as designated by each BSTX
Participant. The Exchange, however may set default values for this
control. The proposed rule also provides a means by which all of a BSTX
Participant's orders will be canceled in the event that the BSTX
Participant loses its connection to the BSTX System. Proposed Rule
25090(c) provides a risk control that prevents incoming limit orders
from being accepted by the BSTX System if the order's price is more
than a designated percentage away from the National Best Bid or Offer
in the marketplace. Proposed Rule 25090(d) provides a maximum order
rate control whereby the BSTX System will reject an incoming order if
the rate of orders received by the BSTX System exceeds a designated
threshold. With respect to both of these risk controls (price
protection for limit orders and maximum order rate), BSTX Participants
may designate the appropriate thresholds, but the Exchange may also
provide default values and mandatory minimum levels.
The Exchange believes the proposed risk controls in Rule 25090 are
consistent with Section 6(b)(5) of the Exchange Act \217\ because they
are designed to help prevent the execution of potentially erroneous
orders, which furthers the protection of investors and the public
interest. Among other things, erroneous orders can be disruptive to the
operation of an exchange marketplace, can lead to temporary price
dislocations, and can hinder price formation. The Exchange believes
that offering configurable risk controls to BSTX Participants, along
with default values where a BSTX Participant has not designated its
desired controls, will protect investors by reducing the number of
erroneous executions on the BSTX System and will remove impediments to
and perfect the mechanism of a free and open market system. The
proposed risk controls are also similar to existing risk controls
provided by the Exchange to Options Participants.
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\217\ 15 U.S.C. 78f(b)(5).
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Rule 25100--Trade Execution, Reporting, and Dissemination of Quotations
Proposed Rule 25100 provides that the Exchange shall collect and
disseminate last sale information for transactions executed on the BSTX
system. The proposed rule further provides that the aggregate of the
best-ranked non-marketable Limit Order(s), pursuant to Rule 25080, to
buy and the best-ranked non-marketable Limit Order(s) to sell in the
BSTX Book shall be collected and made available to quotation vendors
for dissemination. Proposed Rule 25100 further provides that the BSTX
System will operate as an ``automated market center'' within the
meaning of Regulation NMS and will display ``automated quotations'' at
all times except in the event of a system malfunction.\218\ In
addition, the proposed Rule specifies that the Exchange shall identify
all trades executed pursuant to an exception or an exemption of
Regulation NMS. The Exchange will disseminate last sale and quotation
information pursuant to Rule 602 of Regulation NMS and will maintain
connectivity to the securities information processors for dissemination
of quotation information.\219\ BSTX Participants may obtain access to
this information through the securities information processors.
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\218\ 17 CFR 242.600(b)(4) and (5). The general purpose of an
exchange being deemed an ``automated trading center'' displaying
``automated quotations'' relates to whether or not an exchange's
quotations may be considered protected under Regulation NMS. See
Exchange Act Release No. 51808, 70 FR 37495, 37520 (June 29, 2005).
Other trading centers may not effect transactions that would trade
through a protected quotation of another trading center. The
Exchange believes that it is useful to specify that it will operate
as an automated trading center at this time to make clear to market
participants that it is not operating a manual market with respect
to Securities.
\219\ 17 CFR 242.602.
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Proposed Rule 25100(d) provides that executions that occur as a
result of orders matched against the BSTX Book, pursuant to Rule 25080,
shall clear and settle pursuant to the rules, policies, and procedures
of a registered clearing agency. Rule 25100(e) obliges BSTX
Participants, or a clearing member/participant clearing on behalf of a
BSTX Participant to honor trades effected on the BSTX System on the
scheduled settlement date, and the Exchange shall not be liable for the
failure of BSTX
[[Page 29655]]
Participants to satisfy these obligations.\220\
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\220\ These proposed provisions are substantially similar to
those of exchanges. See e.g., Nasdaq Rule 4627 and IEX Rule 10.250.
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The Exchange believes that proposed Rule 25100 is consistent with
Section 6(b)(5) of the Exchange Act \221\ because it will foster
cooperation and coordination with persons processing information with
respect to, and facilitating transactions in securities by requiring
the Exchange to collect and disseminate quotation and last sale
transaction information to market participants. BSTX Participants will
need last sale and quotation information to effectively trade on the
BSTX System, and proposed Rule 25100 sets forth the requirement for the
Exchange to provide this information as well as the information to be
provided. The proposed rule is similar to rules of other exchanges
relating to the dissemination of last sale and quotation information.
The Exchange believes that requiring BSTX Participants (or firms
clearing trades on behalf of other BSTX Participants) to honor their
trade obligations on the settlement date is consistent with the
Exchange Act because it will foster cooperation with persons engaged in
clearing and settling transactions in Securities, consistent with
Section 6(b)(5) of the Exchange Act.\222\
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\221\ 15 U.S.C. 78f(b)(5).
\222\ Id.
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Rule 25110--Clearly Erroneous
Proposed Rule 25110 sets forth the manner in which BSTX will
resolve clearly erroneous executions that might occur on the BSTX
System and is substantially similar to comparable clearly erroneous
rules on other exchanges. Under proposed Rule 25100, transactions that
involve an obvious error such as price or quantity, may be canceled
after review and a determination by an officer of BSTX or such other
employee designee of BSTX (``Official'').\223\ BSTX Participants that
believe they submitted an order erroneously to the Exchange may request
a review of the transaction, and must do so within thirty (30) minutes
of execution and provide certain information, including the factual
basis for believing that the trade is clearly erroneous, to the
Official.\224\ Under proposed Rule 25100(c), an Official may determine
that a transaction is clearly erroneous if the price of the transaction
to buy (sell) that is the subject of the complaint is greater than
(less than) the ``Reference Price'' \225\ by an amount that equals or
exceeds specified ``Numerical Guidelines.'' \226\ The Official may
consider additional factors in determining whether a transaction is
clearly erroneous, such as whether trading in the security had recently
halted or overall market conditions.\227\ Similar to other exchanges
`clearly erroneous rules, the Exchange may determine that trades are
clearly erroneous in certain circumstances such as during a system
disruption or malfunction, on a BSTX Officer's (or senior employee
designee) own motion, during a trading halt, or with respect to a
series of transactions over multiple days.\228\ Under proposed Rule
25110(e)(2), BSTX Participants affected by a determination by an
Official may appeal this decision to the Chief Regulatory Officer of
BSTX, provided such appeal is made within thirty (30) minutes after the
party making the appeal is given notice of the initial determination
being appealed.\229\ The Chief Regulatory Officer's determination shall
constitute final action by the Exchange on the matter at issue pursuant
to proposed Rule 25110(e)(2)(ii).
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\223\ A transaction made in clearly erroneous error and canceled
by both parties or determined by the Exchange to be clearly
erroneous would be removed from the Consolidated Tape. Proposed Rule
25110(a).
\224\ Proposed Rule 25110(b). The Official may also consider
certain ``outlier'' transactions on a case by case basis where the
request for review is submitted after 30 minutes but no longer than
sixty (60) minutes after the transaction. Proposed Rule 2511(d).
\225\ The Reference Price would be equal to the consolidated
last sale immediately prior to the execution(s) under review except
for in circumstances, such as, for example, relevant news impacting
a security or securities, periods of extreme market volatility,
sustained illiquidity, or widespread system issues, where use of a
different Reference Price is necessary for the maintenance of a fair
and orderly market and the protection of investors and the public
interest. Proposed Rule 25110(c)(1).
\226\ The proposed Numerical Guidelines are 10% where the
Reference Price ranges from $0.00 to $25.00, 5% where the Reference
Price is greater than $25.00 up to and including $50.00, and 3%
where the Reference Price ranges is greater than $50. Proposed Rule
25110(c)(1).
\227\ Proposed Rule 25110(c)(1).
\228\ See proposed Rule 25110(f)-(j). These provisions are
virtually identical to similar provisions of other exchanges'
clearly erroneous rules other than by making certain administrative
edits (e.g., replacing the term ``security'' with ``Security'').
\229\ Determinations by an Official pursuant to proposed Rule
25110(f) relating to system disruptions or malfunctions may not be
appealed if the Official made a determination that the nullification
of transactions was necessary for the maintenance of a fair and
orderly market or the protection of invests and the public interest.
Proposed Rule 25110(d)(2).
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The Exchange believes that proposed Rule 25110 is consistent with
Section 6(b)(5) of the Exchange Act,\230\ because it would promote just
and equitable principles of trade, remove impediments to, and perfect
the mechanism of, a free and open market and a national market system
by setting forth the process by which clearly erroneous trades on the
BSTX System may be identified and remedied. Proposed Rule 25110 would
apply equally to all BSTX Participants and is therefore not designed to
permit unfair discrimination among BSTX Participants, consistent with
Section 6(b)(5) of the Exchange Act.\231\ The proposed rule is
substantially similar to the clearly erroneous rules of other
exchanges.\232\ For example, proposed Rule 25110 does not include
provisions related to clearly erroneous transactions for routed orders
because orders for Securities will not route to other exchanges.\233\
Securities would also only trade during regular trading hours (i.e.,
9:30 a.m. ET to 4:00 p.m. ET), so provisions from comparable exchange
rules relating to clearly erroneous executions occurring outside of
regular trading hours have been excluded. Proposed Rule 25110 also
excludes provisions from comparable clearly erroneous rules of certain
other exchanges relating to clearly erroneous executions in unlisted
trading privileges securities that are subject to an initial public
offering.\234\
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\230\ 15 U.S.C. 78f(b)(5).
\231\ Id.
\232\ See e.g., Cboe BZX Rule 11.17. Similar to other exchanges'
comparable rules, proposed Rule 25110 provides BSTX with the ability
to determine clearly erroneous trades that result from a system
disruption or malfunction, a BSTX Official acting on his or her own
motion, trading halts, multi-day trading events, multi-stock events
involving five or more (but less than twenty) securities whose
executions occurred within a period of five minutes or less, multi-
stock events involving twenty or more securities whose executions
occurred within a period of five minutes or less, securities subject
to the LULD Plan, and for leveraged ETP Securities.
\233\ Other exchange clearly erroneous rules reference removing
trades from the Consolidated Tape. Because Security transactions
would be reported pursuant to a separate transaction reporting plan,
proposed Rule 25110 eliminates references to the ``Consolidated
Tape'' and provides that clearly erroneous Security transactions
will be removed from ``all relevant data feeds disseminating last
sale information for Security transactions.'' See proposed Rule
25110(a).
\234\ The Exchange notes that not all equities exchanges have a
provision with respect to trade nullification for UTP securities
that are the subject of an initial public offering. See IEX Rule
11.270.
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The Exchange believes that its proposed process for BSTX
Participants to appeal clearly erroneous execution determinations made
by an Exchange Official pursuant to proposed Rule 25110 to the Chief
Regulatory Officer of BSTX is consistent with Section 6(b)(5) of the
Exchange Act \235\ because it
[[Page 29656]]
promotes just and equitable principles of trade and fosters cooperation
and coordination with persons regulating, settling, and facilitating
transactions in securities by providing a clear and expedient process
to appeal determinations made by an Official. BSTX Participants benefit
from having a quick resolution to potentially clearly erroneous
executions and giving the Chief Regulatory Officer discretion to decide
any appeals of an Official's determination provides an efficient means
to resolve potential appeals that applies equally to all BSTX
Participants and therefore does not permit unfair discrimination among
BSTX Participants, consistent with Section 6(b)(5) of the Exchange Act.
The Exchange notes that, with respect to options trading on the
Exchange, the Exchange's Chief Regulatory Officer similarly has sole
authority to overturn or modify obvious error determinations made by an
Exchange Official and that such determination constitutes final
Exchange action on the matter at issue.\236\ In addition, proposed Rule
25110(e)(2)(iii) provides that any determination made by an Official or
the Chief Regulatory Officer of BSTX under proposed Rule 25110 shall be
rendered without prejudice as to the rights of the parties to the
transaction to submit their dispute to arbitration. Accordingly, there
is an additional safeguard in place for BSTX Participants to seek
further review of the Exchange's clearly erroneous determination.
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\235\ 15 U.S.C. 78f(b)(5).
\236\ See BOX Rule 7170(n).
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To the extent Securities become tradeable on other national
securities exchanges or other changes arise that may necessitate
changes to proposed Rule 25110 to conform more closely with the clearly
erroneous execution rules of other exchanges, the Exchange intends to
implement changes as necessary through a proposed rule change filed
with the Commission pursuant to Section 19 of the Exchange Act \237\ at
such future date.
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\237\ 15 U.S.C. 78s.
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Rule 25120--Short Sales
Proposed Rule 25120 sets forth certain requirements with respect to
short sale orders submitted to the BSTX System that is virtually
identical to similar rules on other exchanges.\238\ Specifically,
proposed Rule 25120 requires BSTX Participants to appropriately mark
orders as long, short, or short exempt and provides that the BSTX
System will not execute or display a short sale order not marked short
exempt with respect to a ``covered security'' \239\ at a price that is
less than or equal to the current national best bid if the price of
that security decreases by 10% or more, as determined by the listing
market for the covered security, from the covered security's closing
price on the listing market as of the end of Regular Trading Hours on
the prior day (the ``Trigger Price''). The proposed rule further
specifies the duration of the ``Short Sale Price Test'' and that the
BSTX System shall determine whether a transaction in a covered security
has occurred at a Trigger Price and shall immediately notify the
responsible single plan processor.\240\
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[…truncated; see source link]Indexed from Federal Register on June 2, 2021.
This is legal information, not legal advice. Laws vary by jurisdiction and change frequently. Always verify current law with official sources and consult a licensed attorney in your jurisdiction for advice on your specific situation.