Notice2021-23438
Self-Regulatory Organizations; Nasdaq BX, Inc.; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Amend Equity 7, Section 118 To Establish an Enhanced Market Quality Program
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Published
October 28, 2021
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 86 Issue 206 (Thursday, October 28, 2021)</title>
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[Federal Register Volume 86, Number 206 (Thursday, October 28, 2021)]
[Notices]
[Pages 59763-59766]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2021-23438]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-93405; File No. SR-BX-2021-047]
Self-Regulatory Organizations; Nasdaq BX, Inc.; Notice of Filing
and Immediate Effectiveness of Proposed Rule Change To Amend Equity 7,
Section 118 To Establish an Enhanced Market Quality Program
October 22, 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 October 12, 2021, Nasdaq BX, Inc. (``BX'' or ``Exchange'') filed
with the Securities and Exchange Commission (``SEC'' or ``Commission'')
the proposed rule change as described in Items I, II, and III below,
which Items have been prepared by the Exchange. The Commission is
publishing this notice to solicit comments on the proposed rule change
from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to amend Equity 7, Section 118 to establish
an Enhanced Market Quality Program, as described further below.
The text of the proposed rule change is available on the Exchange's
website at <a href="https://listingcenter.nasdaq.com/rulebook/bx/rules">https://listingcenter.nasdaq.com/rulebook/bx/rules</a>, at the
principal office of the Exchange, and at the Commission's Public
Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The Exchange has prepared summaries, set forth in
sections A, B, and C below, of the most significant aspects of such
statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Exchange proposes to establish an Enhanced Market Quality
Program that is similar to a program that exists (with proposed
amendments) on its sister exchange, Nasdaq PHLX, LLC.\3\ The Enhanced
Market Quality Program is intended to provide supplemental incentives
to members that meet certain quality standards in acting as market
makers for securities on the Exchange. It rewards members that make a
significant contribution to market quality by providing liquidity at
the national best bid and offer (``NBBO'') in a large number of
securities for a significant portion of the day.
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\3\ See Securities Exchange Act Release No. 34-92754 (August 25,
2021), 86 FR 48789 (August 31, 2021) (SR-Phlx-2021-47). The proposal
reflects changes to this program that Nasdaq PHLX, LLC is proposing
concurrently with this rule filing.
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Specifically, the Exchange proposes to make a lump sum payment at
the end of each month (a ``Fixed Payment'') to a member to the extent
that the member, through one or more of its MPIDs, quotes at the NBBO
for at least a threshold percentage of the time during Market Hours in
an average number of securities per day during the month (satisfying
the ``NBBO requirement''), as specified below.\4\ On a daily basis, the
Exchange will determine the number of securities in which each of a
member's MPIDs satisfied the NBBO requirement. The Exchange will
aggregate all of a member's MPIDs to determine the number of securities
for purposes of the NBBO requirement.
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\4\ For purposes of the Enhanced Market Quality Program, a
member will be deemed to quote at the NBBO in a security if it
quotes a displayed order of at least 100 shares in the security and
prices the order at either the national best bid or the national
best offer or both the national best bid and offer for the security.
Additionally, for a particular Tape A security to count towards the
threshold for qualifying for the Fixed Payment on a particular day,
and receiving the Fixed Payment, a member has to quote such security
at the NBBO for at least 30% of the time during Market Hours on that
day. For a particular Tape B security to count towards the threshold
for qualifying for the Fixed Payment on a particular day, and
receiving the Fixed Payment, a member has to quote such security at
the NBBO for at least 50% of the time during Market Hours on that
day.
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The Exchange proposes to limit the applicability of the Program to
the top 1,500 securities in each of Tapes A and B, as determined by
their total value traded during the second month prior to the current
month (e.g., for October 2021, the measurement period for determining
the list will be August 2021).\5\ In doing so, the Exchange seeks to
target the Program at securities in Tapes A and B that are most in
demand among market participants and which trade extensively, so that
an improvement in quoting in those securities would, in turn, stand
improve the attractiveness of the Exchange to participants. The
Exchange would divide the 1,500 securities into three equal groups (or
``Classes'') for each Tape, with the top 500 ranked securities placed
in Class 3, the middle 500 ranked securities placed in Class 2, and the
lowest ranked 500 securities placed in Class 1. The Exchange would
assign Fixed Payment amounts to each of the three Classes in each Tape
and in each of the five Tiers, with these amounts generally increasing
from Class 1 to Class 3, and from Tiers 1-5. Generally speaking (with
exceptions set forth in the schedules below), this proposed structure
would provide the largest Fixed Payments to those members that meet the
NBBO requirement in the greatest number of qualifying securities and
those that trade most extensively, and the lowest incentives to those
members that meet the NBBO requirement in the fewest number of
qualifying securities and those that trade least extensively.
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\5\ The Exchange notes that a symbol that did not trade during
the measurement month will not be eligible for inclusion in the
list.
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The Program will be open to all members. A member may but is not
[[Page 59764]]
required to be, a registered market maker in any security; thus, the
Program will not by itself impose a two-sided quotation obligation or
convey any of the benefits associated with being a registered market
maker. Accordingly, the Program is designed to attract liquidity both
from traditional market makers and from other firms that are willing to
commit capital to support liquidity at the NBBO.
For securities in each of the three Classes, the Exchange will
determine the amount of the Fixed Payment that it pays to a qualifying
member as follows. First, the Exchange will determine the number of
securities in each Class for which a member has met the NBBO
requirement during the month. The Exchange will then determine whether
the number of securities in a particular Class for which a member has
satisfied the NBBO requirement during the month is sufficient to
qualify it for a Tier, and if so, it will determine the highest Tier
applicable to the member with respect to that Class of securities.
Next, the Exchange will multiply the average daily number of its
qualifying securities in the Class and Tier by the applicable amounts
applicable to that Class and Tier, and [sic] the specified lump sum, if
applicable.
Under the proposal, a member that qualifies for a Fixed Payment for
securities in each of Tapes A and B and in multiple Classes within each
Tape will receive Fixed Payments covering qualifying securities in both
Tapes, and within each Tape, each of the applicable Classes, but within
each Tape and Class, a member may only qualify for one Tier during a
month.
The Exchange will pay the Fixed Payment in addition to other
rebates or fees provided under Equity 7, Sections 118(a)-(f).
As of the outset of every month, the Exchange will reevaluate and,
as applicable, update its lists of the securities that it places in
each Class, and it will publish its updated lists on its website as of
the outset of the month in which they will apply.
The Exchange proposes to set the Tiers, Classes, and the Fixed
Payments as follows:
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Tape A Securities
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Average daily
number of
securities quoted
at the NBBO for at Fixed payment for Fixed payment for Fixed payment for
Tiers least 30% of the securities in Tape securities in Tape securities in Tape
time during Market A in Class 1 A in Class 2 A in Class 3
Hours during the
month
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1............................... 0-24.............. $0 per qualified $0 per qualified $0 per qualified
security per security per security per
month. month. month.
2............................... 25-49............. $0 per qualified $0 per qualified $200 per qualified
security per security per security over 24
month. month. per month.
3............................... 50-149............ $50 per qualified $200 per qualified $5,000 + ($450 per
security per security over 49 qualified
month [sic]. per month. security over 49)
per month.
4............................... 150-249........... $5,000 + ($100 per $20,000 + ($300 $50,000 + ($600
qualified per qualified per qualified
security over security over security over
149) per month. 149) per month. 149) per month.
5............................... 250 or greater.... $15,000 + ($150 $50,000 + ($350 $50,000 + ($600
per qualified per qualified per qualified
security over security over security over
249) per month. 249) per month. 149) per month.
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Tape B Securities
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Average daily
number of
securities quoted
at the NBBO for at Fixed payment for Fixed payment for Fixed payment for
Tiers least 50% of the securities in Tape securities in Tape securities in Tape
time during Market B in Class 1 B in Class 2 B in Class 3
Hours during the
month
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1............................... 0-24.............. $0 per qualified $0 per qualified $0 per qualified
security per security per security per
month. month. month.
2............................... 25-49............. $0 per qualified $0 per qualified $100 per qualified
security per security per security over 24
month. month. per month.
3............................... 50-149............ $0 per qualified $25 per qualified $2,500 + ($150 per
security per security over 49 qualified
month. per month. security over 49)
per month.
4............................... 150-249........... $50 per qualified $2,500 + ($50 per $17,500 + ($300
security over 149 qualified per qualified
per month. security over security over
149) per month. 149) per month.
5............................... 250 or greater.... $5,000 + ($75 per $7,500 + ($150 per $17,500 + ($300
qualified qualified per qualified
security over security over security over
249) per month. 249) per month. 149) per month.
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The following are examples of the operation of the proposed
Enhanced Market Quality Program.
Example 1: A member quotes an average of 200 symbols a day in Tape
A, Class 2 in excess of the 30% NBBO requirement to qualify for a Tier
during the month. Under the proposal, the member would qualify for a
Fixed Payment equal to the combination of Tier 4, Class 2. The Fixed
Payment due to such member is calculated as follows: 51 (the number of
symbols over 149) times $300, which equals $15,300, plus $20,000, for a
total of $35,300 for the month.
Example 2: A member meets the NBBO requirements for an average of
200 symbols a day in Tape A, Class 2, 26 symbols a day in securities in
Tape A, Class 3, and 51 securities in Tape B,
[[Page 59765]]
Class 2. In this scenario, the member would qualify for three Fixed
Payments.
<bullet> First, for the 200 Tape A, Class 2 securities for which
the member meets the NBBO requirement during the month, the member
would receive a Fixed Payment equal to the combination of Tier 4, Class
2. The Fixed Payment due to such member is calculated as follows: 51
(the number of symbols over 149) times $300, which equals $15,300, plus
$20,000, for a total of $35,300 for the month.
<bullet> Second, for the 26 Tape A, Class 3 securities for which
the member meets the NBBO requirement during the month, the member
would receive a Fixed Payment equal to the combination of Tier 2, Class
3. The Fixed Payment due to such member is calculated as follows: 2
(the number of symbols over 24) times $200, which equals $400 for the
month.
<bullet> Third, for the 51 Tape B, Class 2 securities for which the
member meets the NBBO requirement during the month, the member would
receive a Fixed Payment equal to the combination of Tier 3, Class 2.
The Fixed Payment due to such member is calculated as follows: 2 (the
number of symbols over 49) times $25, which equals $50 for the month.
<bullet> The total of all Fixed Payments due to the member for the
month will be $35,750 ($35,300 + $400 + $50).
Through the use of this incentive Program, the Exchange hopes to
provide improved trading conditions for all market participants through
narrower bid-ask spreads and increased depth of liquidity available at
the inside market. In addition, the Program reflects an effort to use
financial incentives to encourage a wider variety of members to make
positive commitments to promote market quality. The Exchange believes
that different members may respond to different incentives, and
therefore the Enhanced Market Quality Program is designed to promote
market quality through quoting activity. The Exchange recognizes that
while generally market participants will provide quotes with the
intention of trading, market makers and liquidity providers cannot
control when counter parties choose to interact with those quotes and
therefore the Exchange believes it is beneficial to the market to offer
this incentive based on quoting activity directly.
2. Statutory Basis
The Exchange believes that its proposal is consistent with Section
6(b) of the Act,\6\ in general, and furthers the objectives of Sections
6(b)(4) and 6(b)(5) of the Act,\7\ in particular, in that it provides
for the equitable allocation of reasonable dues, fees and other charges
among members and issuers and other persons using any facility, and is
not designed to permit unfair discrimination between customers,
issuers, brokers, or dealers.
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\6\ 15 U.S.C. 78f(b).
\7\ 15 U.S.C. 78f(b)(4) and (5).
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The Commission and the courts have repeatedly expressed their
preference for competition over regulatory intervention in determining
prices, products, and services in the securities markets. In Regulation
NMS, while adopting a series of steps to improve the current market
model, the Commission highlighted the importance of market forces in
determining prices and SRO revenues and, also, recognized that current
regulation of the market system ``has been remarkably successful in
promoting market competition in its broader forms that are most
important to investors and listed companies.'' \8\
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\8\ Securities Exchange Act Release No. 51808 (June 9, 2005), 70
FR 37496, 37499 (June 29, 2005) (``Regulation NMS Adopting
Release'').
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Likewise, in NetCoalition v. Securities and Exchange Commission \9\
(``NetCoalition'') the D.C. Circuit stated as follows: ``[n]o one
disputes that competition for order flow is `fierce.' . . . As the SEC
explained, `[i]n the U.S. national market system, buyers and sellers of
securities, and the broker-dealers that act as their order-routing
agents, have a wide range of choices of where to route orders for
execution'; [and] `no exchange can afford to take its market share
percentages for granted' because `no exchange possesses a monopoly,
regulatory or otherwise, in the execution of order flow from broker
dealers'. . . .'' \10\
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\9\ NetCoalition v. SEC, 615 F.3d 525 (D.C. Cir. 2010).
\10\ Id. at 539 (quoting Securities Exchange Act Release No.
59039 (December 2, 2008), 73 FR 74770, 74782-83 (December 9, 2008)
(SR-NYSEArca-2006-21)).
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The Exchange believes that the proposed Enhanced Market Quality
Program is reasonable because it is similar to other incentive programs
offered by the Exchange for displayed orders that provide liquidity,
like the Qualified Market Maker Program set forth in Equity 7, Sections
118(f). The proposed Fixed Payment will provide an opportunity to
members to receive an additional credit in return for certain levels of
participation on the Exchange as measured by quoting at the NBBO for a
significant portion of the day each month. The proposed Fixed Payment
is set at a level that reflects the beneficial contributions of market
participants that quote significantly at the NBBO in certain qualifying
securities. The Exchange believes that it is reasonable to limit the
universe of qualifying securities to a list of 1,500 symbols that
traded most extensively on the Exchange in Tapes A and B during second
month prior to the current month, and to vary the amount of Fixed
Payments in relation to the relative extent to which symbols on that
list trade, because improving the quality of quotes for more popular
symbols will do more to enhance the attractiveness of the Exchange than
will improving quote quality for thinly-traded symbols. Given that the
Exchange has finite resources to allocate to incentive programs, it is
reasonable to allocate those resources in a manner that is most likely
to achieve its intended objectives. The Exchange notes that a competing
exchange which operates a similar incentive program also targets its
incentives to a select list of symbols.\11\
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\11\ Securities Exchange Act Release No. 34-92150 (June 10,
2021), 86 FR 32090, 32091 n.9 (June 16, 2021) (``SR-MEMX-2021-07'')
(``As proposed, the term `DLI Target Securities' means a list of
securities designated as such, the universe of which will be
determined by the Exchange and published on the Exchange's website.
The Exchange anticipates that the initial DLI Target Securities list
will include between 275 and 300 securities. The DLI Target
Securities list will always include at least 75 securities and may
be periodically updated by the Exchange, provided that the Exchange
will not remove a security from the DLI Target Securities list
without at least 30 days' prior notice to Members as published on
the Exchange's website (unless the security is no longer eligible
for trading on the Exchange).''
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The Exchange believes that it is reasonable to limit applicability
of the proposed Fixed Payments to securities in Tapes A and B, and to
set the credits higher for the Tape A securities, insofar as the
Exchange seeks to incentivize members to quote at the NBBO on the
Exchange in such securities and improve the market therefor.
The Exchange believes that the proposed Fixed Payments set forth by
the Enhanced Market Quality Program are an equitable allocation and are
not unfairly discriminatory because the Exchange will offer the same
Fixed Payment rates to all similarly situated members. Moreover, the
proposed qualification criteria requires a member to quote
significantly at the NBBO in securities that trade extensively,
therefore contributing to market quality in a meaningful way on the
Exchange. Any member may quote at the NBBO at the level required by the
qualification criteria of the Enhanced Market Quality Program. The
Exchange notes that it has a similar Qualified Market Maker Program in
which members are required to quote at the NBBO more than a certain
amount of time during regular
[[Page 59766]]
market hours.\12\ For these reasons, the Exchange believes that the
proposed Enhanced Market Quality Program Fixed Payments and
qualification criteria are an equitable allocation and are not unfairly
discriminatory.
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\12\ See Qualified Market Maker Program, Equity 7, Section
118(f).
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The Exchange also believes that it is equitable and not unfairly
discriminatory to apply the Enhanced Market Quality Program only to
Tape A and Tape B securities, and then only to the top 1,500 symbols in
each Tape by total value traded during the second month prior to the
current month, and to set the Fixed Payment rates higher for the Tape A
securities than Tape B securities, because the Exchange has limited
resources available to it for incentive programs and the Exchange
believes that the most effective application of such limited resources
is to improve the market quality for the most actively traded Tape A
and Tape B securities, as proposed.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition not necessary or appropriate in
furtherance of the purposes of the Act. In terms of inter-market
competition, the Exchange notes that it operates in a highly
competitive market in which market participants can readily favor
competing venues if they deem fee levels at a particular venue to be
excessive, or rebate opportunities available at other venues to be more
favorable. In such an environment, the Exchange must continually adjust
its fees to remain competitive with other exchanges and with
alternative trading systems that have been exempted from compliance
with the statutory standards applicable to exchanges. Because
competitors are free to modify their own fees in response, and because
market participants may readily adjust their order routing practices,
the Exchange believes that the degree to which fee changes in this
market may impose any burden on competition is extremely limited.
In this instance, the proposed Program will not impose a burden on
competition because the Exchange's execution services are completely
voluntary and subject to extensive competition both from other
exchanges and from off-exchange venues. The proposed Program will
provide members with the opportunity to receive incentive payments if
they improve the market by providing significant quoting at the NBBO in
a large number of securities, while limiting the universe of such
securities to those which the Exchange believes will do most to improve
market quality.
In terms of intra-market competition, the Exchange does not believe
that the proposed rule change will impose any burden on competition not
necessary or appropriate in furtherance of the purposes of the Act
because the Program is open to all members on the same terms.
In sum, the proposed Program is designed to improve the quality of
the Exchange for securities that are likely to attract the greatest
trading interest; however, if the changes proposed herein are
unattractive to market participants, it is likely that the Exchange
will lose market share as a result. Accordingly, the Exchange does not
believe that the proposed changes will impair the ability of members or
competing order execution venues to maintain their competitive standing
in the financial markets.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
No written comments were either solicited or received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
The foregoing rule change has become effective pursuant to Section
19(b)(3)(A)(ii) of the Act.\13\
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\13\ 15 U.S.C. 78s(b)(3)(A)(ii).
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At any time within 60 days of the filing of the proposed rule
change, the Commission summarily may temporarily suspend such rule
change if it appears to the Commission that such action is: (i)
Necessary or appropriate in the public interest; (ii) for the
protection of investors; or (iii) otherwise in furtherance of the
purposes of the Act. If the Commission takes such action, the
Commission shall institute proceedings to determine whether the
proposed rule should be approved or disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
<bullet> Use the Commission's internet comment form (<a href="http://www.sec.gov/rules/sro.shtml">http://www.sec.gov/rules/sro.shtml</a>); or
<bullet> Send an email to <a href="/cdn-cgi/l/email-protection#f486819891d9979b9999919a8087b4879197da939b82"><span class="__cf_email__" data-cfemail="a4d6d1c8c189c7cbc9c9c1cad0d7e4d7c1c78ac3cbd2">[email protected]</span></a>. Please include
File Number SR-BX-2021-047 on the subject line.
Paper Comments
<bullet> Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
All submissions should refer to File Number SR-BX-2021-047. This file
number should be included on the subject line if email is used. To help
the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's internet website (<a href="http://www.sec.gov/rules/sro.shtml">http://www.sec.gov/rules/sro.shtml</a>).
Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule change that are filed with
the Commission, and all written communications relating to the proposed
rule change between the Commission and any person, other than those
that may be withheld from the public in accordance with the provisions
of 5 U.S.C. 552, will be available for website viewing and printing in
the Commission's Public Reference Room, 100 F Street NE, Washington, DC
20549, on official business days between the hours of 10:00 a.m. and
3:00 p.m. Copies of the filing also will be available for inspection
and copying at the principal office of the Exchange. All comments
received will be posted without change. Persons submitting comments are
cautioned that we do not redact or edit personal identifying
information from comment submissions. You should submit only
information that you wish to make available publicly. All submissions
should refer to File Number SR-BX-2021-047 and should be submitted on
or before November 18, 2021.
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\14\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\14\
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-23438 Filed 10-27-21; 8:45 am]
BILLING CODE 8011-01-P
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