Notice2022-01465
Self-Regulatory Organizations; Cboe BYX Exchange, Inc.; Notice of Filing of Amendment No. 2 and Order Approving on an Accelerated Basis a Proposed Rule Change, as Modified by Amendment No. 2, To Make Clarifying Changes Regarding Its Periodic Auctions
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
January 26, 2022
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 87 Issue 17 (Wednesday, January 26, 2022)</title>
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[Federal Register Volume 87, Number 17 (Wednesday, January 26, 2022)]
[Notices]
[Pages 4060-4066]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2022-01465]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-94012; File No. SR-CboeBYX-2021-024]
Self-Regulatory Organizations; Cboe BYX Exchange, Inc.; Notice of
Filing of Amendment No. 2 and Order Approving on an Accelerated Basis a
Proposed Rule Change, as Modified by Amendment No. 2, To Make
Clarifying Changes Regarding Its Periodic Auctions
January 20, 2022.
On October 14, 2021, Cboe BYX Exchange, Inc. (``BYX'' or
``Exchange'') filed with the Securities and Exchange Commission
(``Commission''), pursuant to Section 19(b)(1) of the Securities
Exchange Act of 1934 (``Act''),\1\ and Rule 19b-4 thereunder,\2\ a
proposed rule change to make certain clarifying changes regarding its
Periodic Auctions. The proposed rule change was published for comment
in the Federal Register on October 26, 2021.\3\ On January 12, 2022,
the Exchange filed Amendment No. 1 to the proposed rule change. On
January 14, 2022, the Exchange withdrew Amendment No. 1 and filed
Amendment No. 2, which replaces in its entirety the proposal as
originally submitted on October 14, 2021.\4\ The Commission received no
comment letters regarding the proposal. This order approves the
proposed rule change, as modified by Amendment No. 2, on an accelerated
basis.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 93390 (October 20,
2021), 86 FR 59202.
\4\ The amendments to the proposed rule change are available at:
<a href="https://www.sec.gov/comments/sr-cboebyx-2021-024/srcboebyx2021024.htm">https://www.sec.gov/comments/sr-cboebyx-2021-024/srcboebyx2021024.htm</a>.
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I. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change \5\
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\5\ This description of the proposed rule change was
substantially prepared by the Exchange.
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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
This Amendment No. 2 to SR-CboeBYX-2021-024 amends and replaces in
its entirety the proposal as originally submitted on October 14,
2021.\6\ The Exchange submits this Amendment No. 2 in order to clarify
certain points and add additional details to the proposal.
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\6\ The Exchange notes that it submitted Amendment No. 1 to this
proposal on January 12, 2022, which it subsequently withdrew on
January 14, 2022.
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The purpose of this proposed rule change is to make certain
clarifying changes to Exchange Rule 11.25 related to periodic auctions
for the trading of U.S. equity securities (``Periodic Auctions'').\7\
The Commission approved the Exchange's proposal to introduce Periodic
Auctions on March 26, 2021.\8\ The Exchange has not yet implemented
Periodic Auctions. The Exchange is submitting this proposal in order to
simplify certain portions of the Periodic Auction process and to add
clarity to the rule text prior to implementation.
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\7\ The term ``Periodic Auction'' shall mean an auction
conducted pursuant to Rule 11.25. See Rule 11.25(a)(4).
\8\ See Securities Exchange Act Release No. 91423 (March 26,
2021), 86 FR 17230 (April 1, 2021) (SR-BYX-2020-021, Amendments No.
3 and 4) (the ``Approved Proposal''). The Exchange also notes that
the original proposal to adopt Periodic Auctions (the ``Original
Proposal'') was submitted on July 17, 2020. See Securities Exchange
Act Release No. 89424 (July 29, 2020), 85 FR 47262 (August 4, 2020).
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Specifically, the Exchange is proposing that: (i) Periodic Auction
Eligible Orders \9\ will be ranked as non-displayed limit orders
consistent with the priority of orders outlined in Rule 11.12(a); (ii)
incoming Periodic Auction Eligible Orders that are eligible both to
trade on the Continuous Book and initiate a Periodic Auction against a
Periodic Auction Only Order at the same price will trade immediately
with the Continuous Book, and other incoming Periodic Auction Eligible
Orders will upon entry interact with Continuous Book Orders \10\ and
other Periodic Auction Eligible Orders according to their rank under
Rule 11.12(a); and (iii) Periodic Auction Eligible Orders that are also
Minimum Quantity Orders \11\ will only initiate a Periodic Auction upon
entry where a single contra-side Periodic Auction Order would satisfy
the specified minimum size. The Exchange is also proposing to make a
simplifying change to reject Periodic Auction Orders that are
immediate-or-cancel (``IOC''). Finally, the Exchange is proposing to
make certain clean-up changes to Rule 11.25(b)(1), (2), and (3) to
eliminate certain typos from the rule text.
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\9\ The term ``Periodic Auction Order'' shall mean a ``Periodic
Auction Only Order'' or ``Periodic Auction Eligible Order'' as those
terms are defined in Rules 11.25(b)(1)-(2), and the term ``Periodic
Auction Book'' shall mean the System's electronic file of such
Periodic Auction Orders. See Rule 11.25(a)(6).
\10\ The term ``Continuous Book Order'' shall mean an order on
the BYX Book that is not a Periodic Auction Order, and the term
``Continuous Book'' shall mean System's electronic file of such
Continuous Book Orders. See Rule 11.25(a)(2).
\11\ See BYX Rule 11.9(c)(5).
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Ranking Periodic Auction Eligible Orders
Rule 11.25(b)(2) currently reads as follows:
Periodic Auction Eligible Orders. A ``Periodic Auction Eligible
Order'' is a Non-Displayed Limit Order eligible to trade on the
Continuous Book that is entered with an instruction to also initiate a
Periodic Auction, if possible, pursuant to this Rule 11.25. An incoming
Periodic Auction Eligible Order that is eligible both to trade on the
Continuous Book and initiate a Periodic Auction will trade immediately
with the Continuous Book.
The first sentence makes clear that Periodic Auction Eligible
Orders are
[[Page 4061]]
eligible to trade on the Continuous Book and suggests that Periodic
Auction Eligible Orders would be ranked as non-displayed limit orders
by referring to such as orders as types of non-displayed limit orders.
However, reading this sentence together with the second sentence could
make it unclear as to how Periodic Auction Eligible Orders are ranked
and how an incoming Periodic Auction Eligible Order would interact with
other Periodic Auction Orders and resting orders on the Continuous
Book.\12\
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\12\ The Exchange notes that in the Original Proposal the second
sentence of Rule 11.25(b)(2) originally said ``An incoming PAE Order
that is eligible both to trade on the Continuous Book and initiate a
Periodic Auction will initiate a Periodic Auction.'' In Amendment 1
of the Original Proposal, the Exchange instead proposed the current
language which remained in the Approved Proposal. The intent of this
change in the rule text was to make clear that the Exchange would
not prioritize a Periodic Auction Order over every other resting
order, which is made clear in the examples and in the Approved
Proposal. The proposed new language further clarifies this intent
from Amendment 1 of the Original Proposal in the rule text.
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As such, the Exchange is proposing to add a new sentence in between
the two sentences that reads ``Periodic Auction Eligible Orders will be
ranked as non-displayed limit orders consistent with the priority of
orders outlined in Rule 11.12(a).'' \13\ This will make explicit that
Periodic Auction Eligible Orders will be ranked in price-time priority
among Continuous Book Orders and will also help to make clear how
incoming orders (both Periodic Auction Eligible Orders and Continuous
Book Orders) will interact with resting orders, as further discussed
below. Practically, the Exchange believes this clarifying change is
reasonably inferred from the definition of Periodic Auction Eligible
Orders, which defines a Periodic Auction Eligible Order as (emphases
added) ``a Non-Displayed Limit Order eligible to trade on the
Continuous Book that is entered with an instruction to also initiate a
Periodic Auction, if possible, pursuant to this Rule 11.25.'' If such
orders are eligible to trade on the Continuous Book, they would need to
be prioritized by the System and it would only make sense for them to
be prioritized in accordance with the Exchange's existing priority
rules. Rather than rely on this implication, the Exchange is proposing
to explicitly state this in the Rules by adding the language proposed
above.
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\13\ Rule 11.12(a)(1) and (2) relate to the priority and ranking
of orders and specifically state: ``(a) Ranking. Orders of Users
shall be ranked and maintained in the BYX Book based on the
following priority: (1) Price. The highest-priced order to buy (or
lowest-priced order to sell) shall have priority over all other
orders to buy (or orders to sell) in all cases. (2) Time. Subject to
the execution process described in Rule 11.13(a) below, where orders
to buy (or sell) are made at the same price, the order clearly
established as the first entered into the System at such particular
price shall have precedence at that price, up to the number of
shares of stock specified in the order. The System shall rank
equally priced trading interest within the System in time priority
in the following order: (A) Displayed size of limit orders; (B) Non-
Displayed limit orders; (C) Non-Displayed Pegged Orders; (D) Mid-
Point Peg Orders; (E) Reserve size of orders; (F) Discretionary
portion of Discretionary Orders as set forth in Rule 11.9(c)(9); (G)
Supplemental Peg Orders.''
Example 1:
NBBO: $10.00 x $10.05
Order 1: Buy 200 shares @ $10.02 Non-Displayed--Periodic Auction
Eligible
Order 2: Buy 100 shares @ $10.02 Displayed--Continuous Book Order
Order 3: Sell 100 shares @ $10.02 Non-Displayed--Periodic Auction
Eligible
Order 2 is ranked ahead of Order 1 because it is a displayed limit
order in accordance with Rule 11.12(a)(1), meaning that Order 3 would
execute 100 shares against Order 2.
Incoming Periodic Auction Eligible Orders
As described above, Rule 11.25(b)(2) currently states that ``An
incoming Periodic Auction Eligible Order that is eligible both to trade
on the Continuous Book and initiate a Periodic Auction will trade
immediately with the Continuous Book.'' This language was originally
introduced to make clear that an incoming Periodic Auction Eligible
Order would interact with other Periodic Auction Eligible Orders and
Continuous Book Orders before interacting with Periodic Auction Only
Orders, as made clear in Example 3 in the Approved Proposal (``AP
Example 3'').\14\ While part of the rule is made clear by the
surrounding rule text and the clarifying context from the Approved
Proposal, on its own it could be read to imply that all resting
Periodic Auction Eligible Orders would either be prioritized behind any
executable Continuous Book Order or that such resting orders should
immediately execute against an incoming Periodic Auction Eligible Order
instead of initiating a Periodic Auction, which is not the case.
Additionally, another example from the Approved Proposal laid out
circumstances under which an incoming Periodic Auction Eligible Order
that is eligible both to trade on the Continuous Book and initiate a
Periodic Auction against a Periodic Auction Only Order will trade
immediately with the Continuous Book, even where the Periodic Auction
Only Order is more aggressively priced than the Continuous Book
Order.\15\ The Exchange is proposing to add language to Rule
11.25(b)(2) in order to change the outcome of that example such that an
incoming Periodic Auction Eligible Order that is eligible both to trade
on the Continuous Book and initiate a Periodic Auction against a more
aggressively priced Periodic Auction Only Order will initiate a
Periodic Auction (the ``Aggressive PAO Change'').
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\14\ AP Example 3 specifically provides the following example:
NBBO: $10.00 x $10.10
Order 1: Buy 100 shares @ $10.05 Midpoint Peg--Periodic Auction
Only
Order 2: Buy 100 shares @ $10.05 Midpoint Peg--Continuous Book
Order
Order 3: Sell 100 shares @ $10.05 Midpoint Peg--Periodic Auction
Eligible
A Periodic Auction is not initiated. Instead, Order 3, which is
a Periodic Auction Eligible Order, would trade immediately with the
Continuous Book and execute 100 shares against Order 2 at $10.05.
Although Order 1 is available to initiate a Periodic Auction, a
Periodic Auction Eligible Order would trade immediately with
Continuous Book Orders on entry if it can do so instead of
initiating a Periodic Auction.
\15\ The Exchange notes that the functionality captured in
Example 6 as laid out in Amendment No. 3 to the Approved Proposal as
corrected in Amendment No. 4 to the Approved Proposal (``Corrected
Example 6 from Amendment No. 3'') provided that even where a
Periodic Auction Only Order was priced more aggressively than a
Continuous Book Order, the incoming Periodic Auction Eligible Order
would trade immediately with the Continuous Book. While this example
was technically replaced as part of Amendment No. 4, it was laid out
in Amendment No. 3 with an incorrect outcome and Amendment No. 4
provided some explanation about what should have happened before
laying out a new replacement Example 6. What follows is the example
as laid out in Amendment No. 3 and followed by the explanation from
Amendment No. 4.
NBBO: $10.00 x $10.10
Order 1: Buy 500 shares @ $10.05 Non-Displayed--Periodic Auction
Only
Order 2: Buy 300 shares @ $10.04 Non-Displayed--Continuous Book
Order
Order 3: Sell 100 shares @ $10.04 Non-Displayed--Periodic
Auction Eligible
Order 4: Sell 200 shares @ $10.04 Non-Displayed--Periodic
Auction Eligible
Specifically, Amendment No. 4 stated ``the amended
functionality would require that Order 3 and Order 4, which are
Periodic Auction Eligible Orders, each trade immediately with Order
2, which is a Non-Displayed Continuous Book Order.''
As such, current functionality provides that an order that is
eligible both to trade on the Continuous Book and initiate a
Periodic Auction will trade immediately with the Continuous Book,
even where the Periodic Auction Only Order is more aggressively
priced than the Continuous Book Order, which is consistent with
Corrected Example 6 from Amendment No. 3.
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Specifically, the Exchange is proposing to add language to Rule
11.25(b)(2) such that it will instead read (additions in italics): ``An
incoming Periodic Auction Eligible Order that is eligible both to trade
on the Continuous Book and initiate a Periodic Auction against a
Periodic Auction Only Order at the same price will trade immediately
[[Page 4062]]
with the Continuous Book. Incoming Periodic Auction Eligible Orders
will upon entry interact with Continuous Book Orders and other Periodic
Auction Eligible Orders according to their rank under Rule 11.12(a).''
\16\ This language will: (i) Make explicit in the rule text the outcome
described in AP Example 3; and (ii) change the functionality from how
it was described in the Approved Proposal such that an incoming
Periodic Auction Eligible Order will now initiate a Periodic Auction
where there is a Periodic Auction Only Order that is priced more
aggressively than any other Continuous Book Orders instead of executing
immediately with the most aggressively priced Continuous Book Order.
Further, this proposed change will provide additional clarity to the
language in Rule 11.25(c) describing when a Periodic Auction will be
initiated. Specifically, Rule 11.25(c) provides that a Periodic Auction
will be initiated in a security when ``one or more Periodic Auction
Orders to buy become executable against one or more Periodic Auction
Orders to sell.'' The proposed amendment to Rule 11.25(b)(2) to
specifically describe how incoming Periodic Auction Eligible Orders
will interact with resting orders will add clarity regarding what it
means when Periodic Auction Orders become ``executable'' against one
another in this context.
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\16\ See supra note 12.
Example 2:
NBBO: $10.00 x $10.05
Order 1: Buy 200 shares @ $10.02 Non-Displayed--Periodic Auction
Eligible
Order 2: Buy 100 shares @ $10.02 Displayed--Continuous Book Order
Order 3: Sell 400 shares @ $10.02 Non-Displayed--Periodic Auction
Eligible
Order 3 would execute 100 shares against Order 2 (consistent with
Example 1). Order 3 and Order 1 would then be executable against one
another and are both Periodic Auction Eligible Orders, so the remaining
300 shares from Order 3 would be sent to the Periodic Auction Book and
the Periodic Auction initiation process would begin.\17\
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\17\ As noted in the Approved Proposal, Periodic Auctions would
operate alongside trading on the Continuous Book. The Exchange has
therefore developed its system for processing Periodic Auctions with
the goal of minimizing interference with trading in the continuous
market. Thus, in rare circumstances where a number of Periodic
Auctions could potentially be triggered at or around the same time,
the Exchange may throttle the initiation of such Periodic Auctions
if needed to maintain appropriate system performance and latency. In
the event that the System was throttling Periodic Auctions during
this example, it would delay the Periodic Auction initiation
process. See Approved Proposal at 17234.
Example 3:
NBBO: $10.00 x $10.05
Order 1: Buy 200 shares @ $10.02 Non-Displayed--Periodic Auction
Eligible
Order 2: Buy 100 shares @ $10.02 Non-Displayed--Continuous Book Order
Order 3: Sell 400 shares @ $10.02 Non-Displayed--Periodic Auction
Eligible
This example is identical to Example 2 except that Order 2 is Non-
Displayed rather than Displayed. Upon entry, Order 3 would be
executable against Order 1 and both are Periodic Auction Eligible
Orders, so the 400 shares from Order 3 would be sent to the Periodic
Auction Book and the Periodic Auction initiation process would
begin.\18\
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\18\ See supra note 15.
Example 4:
NBBO: $10.00 x $10.05
Order 1: Buy 200 shares @ $10.02 Non-Displayed--Periodic Auction Only
Order 2: Buy 100 shares @ $10.02 Non-Displayed--Continuous Book Order
Order 3: Sell 100 shares @ $10.02 Non-Displayed--Periodic Auction
Eligible
Because an incoming Periodic Auction Eligible Order that ``is eligible
both to trade on the Continuous Book and initiate a Periodic Auction
against a Periodic Auction Only Order at the same price will trade
immediately with the Continuous Book,'' Order 3 would execute 100
shares against Order 2 and a Periodic Auction would not be initiated.
Example 5:
NBBO: $10.00 x $10.05
Order 1: Buy 200 shares @ $10.03 Non-Displayed--Periodic Auction Only
Order 2: Buy 100 shares @ $10.02 Non-Displayed--Continuous Book Order
Order 3: Sell 100 shares @ $10.02 Non-Displayed--Periodic Auction
Eligible
Because an incoming Periodic Auction Eligible Order that ``is eligible
both to trade on the Continuous Book and initiate a Periodic Auction
against a Periodic Auction Only Order at the same price will trade
immediately with the Continuous Book,'' and Order 1 is priced more
aggressively than Order 2 (i.e., not against a Periodic Auction Only
Order at the same price), the 100 shares from Order 3 would be sent to
the Periodic Auction Book and the Periodic Auction initiation process
would begin.\19\
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\19\ See supra note 15.
Example 6:
NBBO: $10.00 x $10.05
Order 1: Buy 200 shares @ $10.03 Non-Displayed--Periodic Auction Only
Order 2: Buy 100 shares @ $10.02 Non-Displayed--Continuous Book Order
Order 3: Sell 100 shares @ $10.03 Non-Displayed--Periodic Auction
Eligible
This example is identical to Example 5 except that Order 3 has a limit
of $10.03 instead of $10.02. Because the only orders that are able to
execute against one another are Order 3 and Order 1, Order 3 would post
and the System would check to see whether a Periodic Auction could be
initiated (which it could because Order 3 and Order 1 are executable
against one another), and the Periodic Auction initiation process would
begin.
Periodic Auction Eligible Orders With a Minimum Quantity
Rule 11.25(b)(2)(C) describes how Minimum Quantity Orders will
participate in Periodic Auctions and the use of such orders with
Periodic Auction Eligible Orders, but does not address how such orders
will be handled in initiating Periodic Auctions. It states that
``Minimum Quantity Orders, as defined in Rule 11.9(c)(5),\20\ will be
executed in a Periodic Auction only if the minimum size specified can
be executed against one or more contra-side orders. Orders entered with
the alternative instruction that requires the minimum size specified to
be satisfied by each individual contra-side order cannot be entered as
Periodic Auction Eligible Orders.''
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\20\ See Rule 11.9(c)(5).
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The current rule and the Approved Proposal are clear in describing
how Minimum Quantity Orders will be handled in a Periodic Auction (they
``will be executed in a Periodic Auction only if the minimum size
specified can be executed against one or more contra-side orders''),
but as noted above they do not describe how incoming Periodic Auction
Eligible Orders with minimum size requirements will be handled in
initiating Periodic Auctions. Because Periodic Auction Eligible Orders
are eligible to both execute against orders on the book or to initiate
a Periodic Auction where they would execute against a Periodic Auction
Order, an incoming order with a minimum size requirement creates unique
issues related to how to calculate executable quantity and determining
whether an order should be executed or initiate a Periodic Auction,
especially where resting orders also have minimum size requirements. As
such, the Exchange is proposing to explain how it intends to handle
such orders by adding a sentence that states ``A Periodic Auction
Eligible Order entered with a minimum execution quantity will only
initiate a Periodic Auction upon entry where a single contra-side
Periodic Auction Order would satisfy the specified minimum size.'' This
provides a
[[Page 4063]]
straightforward approach to managing minimum execution quantity that
makes the interaction of minimum execution quantity more easily
understandable and predictable while ensuring that the minimum
execution quantity will be satisfied if the incoming order initiates a
Periodic Auction. This proposed change is consistent with the
protection of investors and the public interest as it would help to
simplify the minimum execution quantity functionality. The following
examples represent basic illustrations of the unique issues and
explanation of how the Exchange will manage incoming Periodic Auction
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Eligible Orders with minimum size requirements.
Example 7:
NBBO: $10.00 x $10.05
Order 1: Buy 200 shares @ $10.02 Non-Displayed--Periodic Auction
Eligible
Order 2: Buy 100 shares @ $10.02 Displayed--Continuous Book Order
Order 3: Buy 400 shares @ $10.02 Non-Displayed--Periodic Auction
Eligible
Order 4: Sell 1000 shares @ $10.02 Non-Displayed--Periodic Auction
Eligible; Minimum Quantity = 500
Order 4 would execute 700 shares upon entry against Orders 2, 1, and 3,
and would post 300 shares. Even though there are a collective 600
shares of Periodic Auction Orders between Orders 1 and 3 (enough to
satisfy the minimum size requirement for Order 4), the Periodic Auction
initiation process would not occur because no single Periodic Auction
Order satisfies the Minimum Quantity of 500 shares.
Example 8:
NBBO: $10.00 x $10.05
Order 1: Buy 300 shares @ $10.02 Non-Displayed--Periodic Auction
Eligible
Order 2: Buy 500 shares @ $10.02 Non-Displayed--Continuous Book Order
Order 3: Buy 200 shares @ $10.02 Non-Displayed--Periodic Auction
Eligible
Order 4: Sell 800 shares @ $10.02 Non-Displayed--Periodic Auction
Eligible; Minimum Quantity = 500
Order 4 would execute 800 shares upon entry against Orders 1 and 2.
Even though there are a collective 500 shares of Periodic Auction
Orders between Orders 1 and 3 (enough to satisfy the minimum size
requirement for Order 4), the Periodic Auction initiation process would
not occur because no single Periodic Auction Order would satisfy the
Minimum Quantity of 500 shares.
Example 9:
NBBO: $10.00 x $10.05
Order 1: Buy 500 shares @ $10.02 Non-Displayed--Periodic Auction
Eligible
Order 2: Buy 500 shares @ $10.02 Non-Displayed--Continuous Book Order
Order 3: Buy 200 shares @ $10.02 Non-Displayed--Periodic Auction
Eligible
Order 4: Sell 800 shares @ $10.02 Non-Displayed--Periodic Auction
Eligible; Minimum Quantity = 500
The only difference between this Example 9 and Example 8 above is that
Order 1 has 500 shares instead of 300. This change means that Order 1
would on its own satisfy the 500 share minimum size requirement of
Order 4 and would thus be ``a single contra-side Periodic Auction
Order'' that ``would satisfy the specified minimum size'' of the
incoming order. As such, Order 4 would be sent to the Periodic Auction
Book and the Periodic Auction initiation process would begin.\21\
Similarly, where a Periodic Auction Eligible Order with a minimum size
requirement is already on the book, incoming orders that do not
individually satisfy the minimum size requirements will not execute
immediately. However, consistent with the Exchange's treatment of
Minimum Quantity Orders generally, such orders will aggregate after
posting.
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\21\ See supra note 15.
Example 10:
NBBO: $10.00 x $10.05
Order 1: Buy 1000 shares @ $10.02 Non-Displayed--Periodic Auction
Eligible; Minimum Quantity = 500
Order 2: Sell 400 shares @ $10.02 Non-Displayed--Periodic Auction
Eligible
Order 3: Sell 400 shares @ $10.02 Non-Displayed--Periodic Auction
Eligible
Orders 2 and 3 do not satisfy the minimum size requirement of Order 1
and therefore would not execute or initiate a Periodic Auction upon
entry. After the orders are resting, however, the System will aggregate
the size of Orders 2 and 3, check whether a Periodic Auction can be
initiated (which it could because the minimum size requirement for
Order 1 is satisfied), and the Periodic Auction initiation process
would begin.\22\
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\22\ See supra note 15.
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IOC Orders
The Exchange is also proposing to amend Rule 11.25(b)(2)(A) in
order to reject Periodic Auction Orders that are IOC. Based on industry
feedback, the Exchange believes that the majority of participants would
use RHO \23\ orders to initiate or participate in a Periodic Auction
and would not generally enter IOC orders to participate in the Periodic
Auction process.\24\ Allowing for IOCs to participate in Periodic
Auctions requires additional development work and, because the Exchange
believes that there would not at the outset be significant interest in
using such functionality, the Exchange believes that rejecting Periodic
Auction Orders that are IOCs would simplify the Periodic Auction
process without meaningfully impacting its practical functionality.
Stated another way, the minimal benefits that would come from including
IOCs at this time are outweighed by the cost to implement the
functionality and rejecting IOCs would simplify the Periodic Auction
process. As such, the Exchange is proposing to reject Periodic Auction
Orders that are IOC orders.
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\23\ As provided in Rule 11.9(b)(7), an RHO order is an order
that is designated for execution only during Regular Trading Hours.
\24\ The Exchange notes that it may consider adding IOC
functionality in the future in the event that there was meaningful
interest from participants.
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Clean-Up Changes
The Exchange is also proposing to make non-substantive clean-up
changes to make references to ``Non-Displayed Limit Order'' in Rules
11.25(b)(1) and (2) instead read ``non-displayed limit order'' and to
delete an extra instance of the word ``be'' from Rule 11.25(b)(3).
2. Statutory Basis
The Exchange believes the proposed rule change is consistent with
the requirements of Section 6(b) of the Act,\25\ in general, and
Section 6(b)(5) of the Act,\26\ in particular, in that it is designed
to remove impediments to and perfect the mechanism of a free and open
market and a national market system, to promote just and equitable
principles of trade, and, in general, to protect investors and the
public interest and not to permit unfair discrimination between
customers, issuers, brokers, or dealers. As further described below,
the Exchange believes that the proposed rule change is consistent with
the protection of investors and the public interest as it would help to
clarify and simplify the Exchange's Periodic Auction process, which
itself is intended to facilitate improved price formation and provide
additional execution opportunities for investors, particularly in
securities that may suffer from limited liquidity, including thinly-
traded securities. Specifically, the Exchange believes that its
proposed changes to the rule text that: (i) Periodic Auction Eligible
Orders will be ranked as non-displayed limit orders consistent with the
priority of orders outlined in Rule 11.12(a); (ii) incoming Periodic
Auction Eligible Orders that are eligible both to trade on the
Continuous Book and initiate a Periodic Auction against a Periodic
Auction Only Order at the same price will trade immediately with
[[Page 4064]]
the Continuous Book, and other incoming Periodic Auction Eligible
Orders will upon entry interact with Continuous Book Orders \27\ and
other Periodic Auction Eligible Orders according to their rank under
Rule 11.12(a); and (iii) Periodic Auction Eligible Orders that are also
Minimum Quantity Orders will only initiate a Periodic Auction upon
entry where a single contra-side Periodic Auction Order would satisfy
the specified minimum size, are all consistent with the Act because
they are designed to promote just and equitable principles of trade
and, in general, to protect investors and the public interest because
the changes make the rules of the Exchange more straightforward and
easily understandable. The Exchange also believes that its simplifying
change to reject Periodic Auction Orders that are IOC is consistent
with the Act because it is designed to promote just and equitable
principles of trade and, in general, to protect investors and the
public interest because it will simplify Periodic Auction functionality
without meaningfully impacting its utility. Finally, the Exchange
believes that its proposed non-substantive clean-up changes to Rule
11.25(b)(1), (2), and (3) are consistent with the Act because they are
designed to promote just and equitable principles of trade and, in
general, to protect investors and the public interest because the
changes are designed to make the rules of the Exchange more easily
understandable.
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\25\ 15 U.S.C. 78f(b).
\26\ 15 U.S.C. 78f(b)(5).
\27\ The term ``Continuous Book Order'' shall mean an order on
the BYX Book that is not a Periodic Auction Order, and the term
``Continuous Book'' shall mean System's electronic file of such
Continuous Book Orders. See Rule 11.25(a)(2).
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Ranking Periodic Auction Eligible Orders
The Exchange believes that the proposed change to add a new
clarifying sentence to Rule 11.25(b)(2) is consistent with the Act
because it is designed to promote just and equitable principles of
trade and, in general, to protect investors and the public interest
because the changes are designed to make the rules of the Exchange more
straightforward and easily understandable by making explicit that
Periodic Auction Eligible Orders will be ranked in price-time priority
among Continuous Book Orders and will also help to make clear how
incoming orders (both Periodic Auction Eligible Orders and Continuous
Book Orders) will interact with resting orders. As described above, the
point that is being clarified could reasonably be inferred from the
definition of Periodic Auctions Orders and is consistent with the
intent of current Rule 11.25(b)(2). The Exchange believes that adding
the clarifying change will promote just and equitable principles of
trade and remove impediments to a free and open market by making
explicit how Periodic Auction Eligible Orders will be ranked and how
incoming orders will interact with resting orders.
Incoming Periodic Auction Eligible Orders
The Exchange believes that the proposed change to Rule 11.25(b)(2)
is consistent with the Act because it is designed to promote just and
equitable principles of trade and, in general, to protect investors and
the public interest because the changes are designed to make the rules
of the Exchange more straightforward and easily understandable by
making more clear how incoming Periodic Auction Eligible Orders will
interact with resting orders. The current rule text was originally
introduced to make clear that an incoming Periodic Auction Eligible
Order would interact with other Periodic Auction Eligible Orders and
Continuous Book Orders before interacting with Periodic Auction Only
Orders, as made clear in AP Example 3. The Exchange believes that the
proposed new language is consistent with the Act in that it will make
the rule text more clear and easily understandable. The proposed rule
text will also change the existing functionality from how it was
described in Corrected Example 6 from Amendment No. 3 such that an
incoming Periodic Auction Eligible Order will now initiate a Periodic
Auction where there is a Periodic Auction Only Order that is priced
more aggressively than any other Continuous Book Orders instead of
executing immediately with the most aggressively priced Continuous Book
Order. The Exchange believes that this proposed new language will
specify how resting Periodic Auction Only Orders will interact with
incoming Periodic Auction Eligible Orders by specifying that immediate
executions will occur where a Periodic Auction Only Order and
Continuous Book Order are at the same price, but a Periodic Auction
will be initiated when the Periodic Auction Only Order is priced more
aggressively than the Continuous Book Order. The Exchange believes that
this proposed change is consistent with the Act because it is designed
to promote just and equitable principles of trade and, in general, to
protect investors and the public interest because the change strikes a
middle ground between prioritizing immediate executions and initiating
Periodic Auctions as it relates to incoming Periodic Auction Eligible
Orders and how they interact with resting Periodic Auction Only Orders
and Continuous Book Orders. Further, the Exchange also notes that the
proposed change will also clarify what it means when Periodic Auction
Orders become ``executable'' against one another. Additionally, this
proposal specifies that an order that is eligible both to trade on the
Continuous Book and initiate a Periodic Auction against a Periodic
Auction Only Order at the same price will trade immediately with the
Continuous Book, but where the Periodic Auction Only Order is more
aggressively priced than the Continuous Book Order, the incoming
Periodic Auction Eligible Order will be sent to the Periodic Auction
Book and the Periodic Auction initiation process would begin. The
Exchange believes that such proposed functionality would promote just
and equitable principles of trade and remove impediments to a free and
open market by incentivizing the entry of aggressively priced Periodic
Auction Only Orders, which the Exchange believes will add additional
detail already memorialized in the Approved Proposal and making the
Exchange's rules related to Periodic Auctions more explicit.
Periodic Auction Eligible Orders With a Minimum Quantity
The Exchange believes that its proposed change to Rule
11.25(b)(2)(C) is also consistent with the Act because it is designed
to promote just and equitable principles of trade and, in general, to
protect investors and the public interest because the changes are
designed to make the rules of the Exchange more straightforward and
easily understandable by making clear how Minimum Quantity Orders will
be handled in initiating Periodic Auctions. Specifically, Rule
11.25(b)(2) currently describes how Minimum Quantity Orders will
participate in Periodic Auctions and the use of such orders with
Periodic Auction Eligible Orders, but does not explicitly address how
such orders will be handled in initiating Periodic Auctions.
The current rule and the Approved Proposal are clear in describing
how Minimum Quantity Orders will be handled in a Periodic Auction (they
``will be executed in a Periodic Auction only if the minimum size
specified can be executed against one or more contra-side orders''),
but they do not describe how incoming Periodic Auction Eligible Orders
with minimum size requirements will be handled in initiating Periodic
Auctions. Because
[[Page 4065]]
Periodic Auction Eligible Orders are eligible to both execute against
orders on the book or to initiate a Periodic Auction where they would
execute against a Periodic Auction Order, an incoming order with a
minimum size requirement creates unique issues related to how to
calculate executable quantity and determining whether an order should
be executed or initiate a Periodic Auction, especially where resting
orders also have minimum size requirements. As such, the Exchange
believes that it will benefit investors to explain how it intends to
handle such Minimum Quantity Orders. The Exchange believes that having
a Periodic Auction Eligible Order entered with a minimum execution
quantity only initiate a Periodic Auction upon entry where a single
contra-side Periodic Auction Order would satisfy the specified minimum
size represents a straightforward approach to managing minimum
execution quantity that makes the interaction of minimum execution
quantity more easily understandable and predictable while ensuring that
the minimum execution quantity will be satisfied if the incoming order
initiates a Periodic Auction. This proposed change is consistent with
the protection of investors and the public interest as it would help to
simplify the minimum execution quantity functionality. As such, the
Exchange believes that the proposed change to Rule 11.25(b)(2)(C)
related to Minimum Quantity Orders is consistent with the Act.
IOC Orders
The Exchange believes that the proposed change to reject Periodic
Auction Orders that are IOC orders will remove impediments to and
perfect a national market system by simplifying the Periodic Auction
process without meaningfully impacting its functionality. Specifically,
based on industry feedback, the Exchange believes that the majority of
participants would use RHO orders to initiate or participate in a
Periodic Auction and would not generally enter IOC orders to
participate in the Periodic Auction process. Allowing for IOCs to
participate in Periodic Auctions requires additional development work
and, because the Exchange believes that there would not at the outset
be significant interest in using such functionality, the Exchange
believes that rejecting Periodic Auction Orders that are IOCs would
simplify the Periodic Auction process without meaningfully impacting
its practical functionality. Stated another way, the minimal benefits
that would come from including IOCs at this time are outweighed by the
cost to implement the functionality and rejecting IOCs would simplify
the Periodic Auction process. The Exchange also believes that
eliminating this order instruction is consistent with the public
interest and the protection of investors given the expected limited
demand for use of this order instruction upon implementation. As such,
the Exchange believes that this proposed change is consistent with the
Act because it is designed to promote just and equitable principles of
trade and, in general, to protect investors and the public interest
because it will simplify Periodic Auction functionality without
meaningfully impacting its utility.
Clean-Up Changes
Finally, the Exchange believes that making the non-substantive
clean up changes including changing references to ``Non-Displayed Limit
Order'' in Rules 11.25(b)(1) and (2) instead read ``non-displayed limit
order'' and to delete an extra instance of the word ``be'' from Rule
11.25(b)(3) are consistent with the Act because they are designed to
promote just and equitable principles of trade and, in general, to
protect investors and the public interest because the changes are
designed to make the rules of the Exchange more easily understandable.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change would
impose any burden on competition that is not necessary or appropriate
in furtherance of the purposes of the Act. Rather, the proposed rule
change would allow the Exchange to make certain clarifying and
simplifying changes to the Exchange's rules and functionality related
to Periodic Auctions in a manner consistent with the current Rules (and
the Approved Proposal), making the Periodic Auction functionality more
straightforward and transparent prior to implementation. The Exchange's
Periodic Auction functionality is designed to introduce innovative
functionality to allow competition and to improve market quality in
thinly-traded and other securities. The equities industry is fiercely
competitive as the Exchange must compete with other equities exchanges
and off-exchange venues for order flow and this proposal will allow the
Exchange to implement certain simplifying and clarifying changes to its
Periodic Auction rules and functionality that will allow it to better
compete in this market.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
No written comments were solicited or received on the proposed rule
change.
II. Discussion and Commission Findings
After careful review, the Commission finds that the proposed rule
change, as modified by Amendment No. 2, is consistent with the
requirements of the Act and the rules and regulations thereunder
applicable to a national securities exchange.\28\ In particular, the
Commission finds that the proposed rule change is consistent with
Section 6(b)(1) of the Act,\29\ which requires that a national
securities exchange be so organized as to have the capacity to be able
to (among other things) carry out the purposes of the Act and to comply
with the provisions of the Act, the rules and regulations thereunder,
and the rules of the exchange. These changes, including the clean-up
changes, will allow BYX to continue to be organized to have the
capacity to be able to comply with its rules. The Commission also finds
that the clarifications regarding the operation of Periodic Auctions
are consistent Section 6(b)(5) of the Act,\30\ which requires that the
proposed rule change be designed to (among other things) remove
impediments to and perfect the mechanism of a free and open market and
a national market system, to promote just and equitable principles of
trade, and, in general, to protect investors and the public interest.
The Commission believes that the Exchange's effort to help market
participants' understand how order types will interact and the
operation of Periodic Auctions is consistent with the protection of
investors and the public interest.
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\28\ In approving this proposed rule change, the Commission has
considered the proposed rule's impact on efficiency, competition,
and capital formation. See 15 U.S.C. 78c(f).
\29\ 15 U.S.C. 78f(b)(1).
\30\ 15 U.S.C. 78f(b)(5).
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Similarly, the Commission finds that the proposal to reject
Periodic Auction Orders that are IOC, as well as the proposal to permit
a Periodic Auction Eligible Order entered with a minimum execution
quantity to initiate a Periodic Auction upon entry only where a single
contra-side Periodic Auction Order satisfies the specified minimum
size, are consistent with Section 6(b)(5) of the Act. The rejection of
Periodic Auction Orders that are IOC should simplify
[[Page 4066]]
Periodic Auctions without negatively affecting their utility and
therefore the Commission believes this proposal is consistent with the
protection of investors and the public interest. The Commission
believes that the new provision that allows a Periodic Auction Eligible
Order entered with a minimum execution quantity to initiate a Periodic
Auction upon entry only where a single contra-side Periodic Auction
Order satisfies the specified minimum size clarifies the operation of
Periodic Auctions and therefore is consistent with the protection of
investors and the public interest. Lastly, the Commission finds that
the Aggressive PAO Change is consistent with Section 6(b)(5) of the
Act.\31\ The Commission believes that this discrete change may
incentivize entry of aggressively priced Periodic Auction Only Orders
and should in this particular circumstance improve the opportunity for
price improvement for incoming orders, which is consistent with the
removal of impediments to and perfection of the mechanism of a free and
open market and a national market system, the promotion of just and
equitable principles of trade, and the protection of investors and the
public interest.
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\31\ As approved by the Approved Proposal, an immediate
execution will occur where a Periodic Auction Only Order and
Continuous Book Order are at the same price.
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III. Solicitation of Comments on Amendment No. 2 to the Proposed Rule
Change
Interested persons are invited to submit written data, views, and
arguments concerning whether Amendment No. 2 is consistent with the
Exchange 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#d6a4a3bab3fbb5b9bbbbb3b8a2a596a5b3b5f8b1b9a0"><span class="__cf_email__" data-cfemail="b8cacdd4dd95dbd7d5d5ddd6cccbf8cbdddb96dfd7ce">[email protected]</span></a>. Please include
File Number SR-CboeBYX-2021-024 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-CboeBYX-2021-024. 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-CboeBYX-2021-024, and should be
submitted on or before February 16, 2022.
IV. Accelerated Approval of Proposed Rule Change, as Modified by
Amendment No. 2
The Commission finds good cause to approve the proposed rule
change, as modified by Amendment No. 2, prior to the thirtieth day
after the date of publication of notice of the filing of Amendment No.
2 in the Federal Register. In Amendment No. 2, the Exchange proposed
the Aggressive PAO Change in place of a clarification it sought in the
original proposal. As discussed above, the Aggressive PAO Change is
consistent with the requirements of the Act,\32\ and does not raise
novel regulatory issues. Accordingly, the Commission finds good cause,
pursuant to Section 19(b)(2) of the Act,\33\ to approve the proposed
rule change, as modified by Amendment No. 2, on an accelerated basis.
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\32\ See supra text following note 31.
\33\ 15 U.S.C. 78s(b)(2).
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V. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\34\ that the proposed rule change, as modified by Amendment No. 2
(SR-CboeBYX-2021-024), be, and hereby is, approved on an accelerated
basis.
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\34\ 15 U.S.C. 78s(b)(2).
\35\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\35\
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2022-01465 Filed 1-25-22; 8:45 am]
BILLING CODE 8011-01-P
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</html>Indexed from Federal Register on January 26, 2022.
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