[Federal Register Volume 83, Number 15 (Tuesday, January 23, 2018)]
[Notices]
[Pages 3205-3224]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-01093]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-82522; File No. SR-BatsBZX-2017-34]


Self-Regulatory Organizations; Bats BZX Exchange, Inc.; Notice of 
Filing of Amendment No. 1 and Order Granting Approval of a Proposed 
Rule Change, as Modified by Amendment No. 1, To Introduce Cboe Market 
Close, a Closing Match Process for Non-BZX Listed Securities Under New 
Exchange Rule 11.28

January 17, 2018.

I. Introduction

    On May 5, 2017, Bats BZX Exchange, Inc. (now known as Cboe BZX 
Exchange, Inc.) (``BZX'' or ``Exchange'') filed with the Securities and 
Exchange Commission (``Commission''), pursuant to Section 19(b)(1) of 
the Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to adopt Bats Market Close, a 
closing match process for non-BZX Listed Securities. The proposed rule 
change was published for comment in the Federal Register on May 22, 
2017.\3\ On July 3, 2017, the Commission designated a longer period 
within which to approve the proposed rule change, disapprove the 
proposed rule change, or institute proceedings to determine whether the 
proposed rule change should be disapproved.\4\ The Commission received 
54 comment letters on the proposed rule change, including a response 
from the Exchange.\5\ On August 18, 2017, the Commission instituted 
proceedings under Section 19(b)(2)(B) of the Act \6\ to determine 
whether to approve or disapprove the proposed rule change.\7\ 
Thereafter, the Commission received nine more comment letters, 
including three responses from the Exchange.\8\ On

[[Page 3206]]

November 17, 2017, pursuant to Section 19(b)(2) of the Act,\9\ the 
Commission designated a longer period for Commission action on 
proceedings to determine whether to disapprove the proposed rule 
change.\10\ On December 1, 2017, the Exchange filed Amendment No. 1 to 
the proposed rule change, renaming ``Bats Market Close'' as ``Cboe 
Market Close.'' \11\ This order approves the proposed rule change.
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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. 80683 (May 16, 
2017), 82 FR 23320 (``Notice'').
    \4\ See Securities Exchange Act Release No. 81072, 82 FR 31792 
(July 10, 2017).
    \5\ See Letters to Brent J. Fields, Secretary, Commission, from: 
(1) Donald K. Ross, Jr., Executive Chairman, PDQ Enterprise, LLC, 
dated June 6, 2017 (``PDQ Letter''); (2) Edward S. Knight, Executive 
Vice President and General Counsel, Nasdaq, Inc., dated June 12, 
2017 (``Nasdaq Letter 1''); (3) Ray Ross, Chief Technology Officer, 
Clearpool Group, dated June 12, 2017 (``Clearpool Letter''); (4) 
Venu Palaparthi, SVP, Compliance, Regulatory and Government Affairs, 
Virtu Financial, dated June 12, 2017 (``Virtu Letter''); (5) 
Theodore R. Lazo, Managing Director and Associate General Counsel, 
SIFMA, dated June 13, 2017 (``SIFMA Letter 1''); (6) Elizabeth K. 
King, General Counsel and Corporate Secretary, New York Stock 
Exchange (``NYSE''), dated June 13, 2017 (``NYSE Letter 1''); (7) 
John M. Bowers, Bowers Securities, dated June 14, 2017 (``Bowers 
Letter''); (8) Jonathan D. Corpina, Senior Managing Partner, 
Meridian Equity Partners, dated June 16, 2017 (``Meridian Letter''); 
(9) Fady Tanios, Chief Executive Officer, and Brian Fraioli, Chief 
Compliance Officer, Americas Executions, LLC, dated June 16, 2017 
(``Americas Executions Letter''); (10) Ari M. Rubenstein, Co-Founder 
and Chief Executive Officer, GTS Securities LLC, dated June 22, 2017 
(``GTS Securities Letter 1''); (11) John Ramsay, Chief Market Policy 
Officer, Investors Exchange LLC, dated June 23, 2017 (``IEX 
Letter''); (12) Jay S. Sidhu, Chairman, Chief Executive Officer, 
Customers Bancorp, Inc., dated June 27, 2017 (``Customers Bancorp 
Letter''); (13) Joanne Freiberger, Vice President, Treasurer, 
Masonite International Corporation, dated June 27, 2017 (``Masonite 
International Letter''); (14) David B. Griffith, Investor Relations 
Manager, Orion Group Holdings, Inc., dated June 27, 2017 (``Orion 
Group Letter''); (15) Kieran O'Sullivan, Chairman, President and 
CEO, CTS Corporation, dated June 28, 2017 (``CTS Corporation 
Letter''); (16) Sherri Brillon, Executive Vice-President and Chief 
Financial Officer, Encana Corporation, dated June 29, 2017 (``Encana 
Letter''); (17) Steven C. Lilly, Chief Financial Officer, Triangle 
Capital Corporation, dated June 29, 2017 (``Triangle Capital 
Letter''); (18) Robert F. McCadden, Executive Vice President and 
Chief Financial Officer, Pennsylvania Real Estate Investment Trust, 
dated June 29, 2017 (``Pennsylvania REIT Letter''); (19) Andrew 
Stevens, General Counsel, IMC Financial Markets, dated June 30, 2017 
(``IMC Letter''); (20) Daniel S. Tucker, Senior Vice President and 
Treasurer, Southern Company, dated July 5, 2017 (``Southern Company 
Letter''); (21) Cole Stevens, Investor Relations Associate, Nobilis 
Health, dated July 6, 2017 (``Nobilis Health Letter''); (22) Mehmet 
Kinak, Head of Global Equity Market Structure & Electronic Trading, 
et al., T. Rowe Price Associates, Inc., dated July 7, 2017 (``T. 
Rowe Price Letter''); (23) David L. Dragics, Senior Vice President, 
Investor Relations, CACI International Inc., dated July 7, 2017 
(``CACI Letter''); (24) Mark A. Stegeman, Senior Vice President & 
CFO, Turning Point Brands, Inc., dated July 12, 2017 (``Turning 
Point Letter''); (25) Jon R. Moeller, Vice Chair and Chief Financial 
Officer, and Deborah J. Majoras, Chief Legal Officer and Secretary, 
The Proctor & Gamble Company, dated July 12, 2017 (``P&G Letter''); 
(26) Christopher A. Iacovella, Chief Executive Officer, Equity 
Dealers of America, dated July 12, 2017 (``EDA Letter''); (27) Rob 
Bernshteyn, Chief Executive Officer, Chairman Board of Directors, 
Coupa Software, Inc., dated July 12, 2017 (``Coupa Software 
Letter''); (28) Sally J. Curley, Senior Vice President, Investor 
Relations, Cardinal Health, Inc., dated July 14, 2017 (``Cardinal 
Health Letter''); (29) Mickey Foster, Vice President, Investor 
Relations, FedEx Corporation, dated July 14, 2017 (``FedEx 
Letter''); (30) Alexander J. Matturri, CEO, S&P Dow Jones Indices, 
dated July 18, 2017 (``SPDJI Letter''); (31) John L. Killea, Chief 
Legal Officer, Stewart Information Services, dated July 19, 2017 
(``Stewart Letter''); (32) M. Farooq Kathwari, Chairman, President & 
CEO, Ethan Allen Interiors, Inc., dated July 24, 2017 (``Ethan Allen 
Letter''); (33) Jeff Green, Founder, Chief Executive Officer and 
Chairman of the Board of Directors, The Trade Desk Inc., dated July 
26, 2017 (``Trade Desk Letter''); (34) James J. Angel, Associate 
Professor, McDonough School of Business, Georgetown University, 
dated July 30, 2017 (``Angel Letter''); (35) Jon Stonehouse, CEO, 
and Tom Staab, CFO, BioCryst Pharmaceuticals, Inc., dated July 31, 
2017 (``BioCryst Letter''); (36) Peter Campbell, Chief Financial 
Officer, Mimecast, dated July 31, 2017 (``Mimecast Letter''); (37) 
Joanne Moffic-Silver, Executive Vice President, General Counsel, and 
Corporate Secretary, Bats Global Markets, Inc., dated August 2, 2017 
(``BZX Letter 1''); (38) David M. Weisberger, Head of Equities, 
ViableMkts, dated August 3, 2017 (``ViableMkts Letter''); (39) 
Charles Beck, Chief Financial Officer, Digimarc Corporation, dated 
August 3, 2017 (``Digimarc Letter''); (40) Elizabeth K. King, 
General Counsel and Corporate Secretary, NYSE, dated August 9, 2017 
(``NYSE Letter 2''); (41) Representative Sean P. Duffy and 
Representative Gregory W. Meeks, dated August 9, 2017 (``Duffy/Meeks 
Letter''); (42) Michael J. Chewens, Senior Executive Vice President 
& Chief Financial Officer, NBT Bancorp Inc., dated August 11, 2017 
(``NBT Bancorp Letter''); (43) Barry Zwarenstein, Chief Financial 
Officer, Five9, Inc., dated August 11, 2017 (``Five9 Letter''); (44) 
William A. Backus, Chief Financial Officer & Treasurer, Balchem 
Corporation, dated August 15, 2017 (``Balchem Letter''); (45) 
Raiford Garrabrant, Director, Investor Relations, Cree, Inc., dated 
August 15, 2017 (``Cree Letter''); (46) Steven Paladino, Executive 
Vice President & Chief Financial Officer, Henry Schein, Inc., dated 
August 16, 2017 (``Henry Schein Letter''); (47) Theodore Jenkins, 
Senior Director, Investor Relations and Communications, Corbus 
Pharmaceuticals, Inc., dated August 17, 2017 (``Corbus Letter''); 
(48) Ari M. Rubenstein, Co-Founder and Chief Executive Officer, GTS 
Securities LLC, dated August 17, 2017 (``GTS Securities Letter 2''); 
(49) Cameron Bready, Senior Executive VP, Chief Financial Officer, 
Global Payments Inc., dated August 17, 2017 (``Global Payments 
Letter''); (50) Mike Gregoire, CEO, CA Technologies, dated August 
17, 2017 (``CA Technologies Letter''); (51) Patrick L. Donnelly, 
Executive Vice President & General Counsel, Sirius XMHoldings Inc., 
dated August 17, 2017 (``Sirius Letter''); (52) Theodore R. Lazo, 
Managing Director and Associate General Counsel, SIFMA, dated August 
18, 2017 (``SIFMA Letter 2''); (53) Donald Bollerman, dated August 
18, 2017 (``Bollerman Letter''); and (54) Sarah A. O'Dowd, Senior 
Vice President, Chief Legal Officer and Secretary, Lam Research 
Corporation, dated August 18, 2017 (``Lam Letter'').
    \6\ 15 U.S.C. 78s(b)(2)(B).
    \7\ See Securities Exchange Act Release No. 81437, 82 FR 40202 
(August 24, 2017) (``OIP''). In the OIP, the Commission specifically 
requested comment on eight series of questions. See id. at 40210-11.
    \8\ See Letters to Brent J. Fields, Secretary, Commission, from: 
(1) Gabrielle Rabinovitch, VP, Investor Relations, PayPal Holdings, 
Inc., dated September 12, 2017 (``PayPal Letter''); (2) Edward S. 
Knight, Executive Vice President and General Counsel, Nasdaq, Inc., 
dated September 18, 2017 (``Nasdaq Letter 2''); (3) Joanne Moffic-
Silver, Executive Vice President, General Counsel, and Corporate 
Secretary, Bats Global Markets, Inc., dated October 11, 2017 (``BZX 
Letter 2''); (4) Elizabeth K. King, General Counsel and Corporate 
Secretary, NYSE, dated November 3, 2017 (``NYSE Letter 3''); (5) 
Theodore R. Lazo, Managing Director and Associate General Counsel, 
SIFMA, dated December 8, 2017 (``SIFMA Letter 3''); (6) Jeffrey S. 
Davis, Deputy General Counsel, Nasdaq, Inc., dated December 21, 2017 
(``Nasdaq Letter 3''); (7) Joanne Moffic-Silver, Executive Vice 
President, General Counsel, and Corporate Secretary, Cboe Global 
Markets, Inc., dated January 3, 2018 (``BZX Letter 3''); (8) Joanne 
Moffic-Silver, Executive Vice President, General Counsel, and 
Corporate Secretary, Cboe Global Markets, Inc., dated January 12, 
2018 (``BZX Letter 4''); and (9) Elizabeth K. King, General Counsel 
and Corporate Secretary, NYSE, dated January 12, 2018 (``NYSE Letter 
4''). All comments on the proposed rule change are available at: 
https://www.sec.gov/comments/sr-batsbzx-2017-34/batsbzx201734.htm. 
In addition, the Commission's Division of Economic and Risk Analysis 
(``DERA'') released in the public comment file for this proposal a 
memorandum setting forth its analysis examining the relationship 
between the proportion of MOC orders executed off-exchange and 
closing price discovery and efficiency (``DERA Analysis''). See 
Memorandum to File from DERA, Bats Market Close: Off-Exchange 
Closing Volume and Price Discovery, dated December 1, 2017 (``DERA 
Analysis''), available at: https://www.sec.gov/files/bats_moc_analysis.pdf; see also infra note 129 and accompanying 
discussion. NYSE Letter 4 included an assessment of the DERA 
Analysis conducted by D. Timothy McCormick, Ph.D., dated January 11, 
2018 (``NYSE Report''). See NYSE Letter 4, at 1 and NYSE Report, 
cover page (stating that the research was funded by NYSE Group). For 
purposes of this order, statements in the NYSE Report are attributed 
to NYSE.
    \9\ 15 U.S.C. 78s(b)(2).
    \10\ See Securities Exchange Act Release No. 82108, 82 FR 55894 
(November 24, 2017).
    \11\ The only change in Amendment No. 1 was to rename the 
proposed closing match process as Cboe Market Close. Because 
Amendment No. 1 is a technical amendment and does not materially 
alter the substance of the proposed rule change or raise unique or 
novel regulatory issues, Amendment No. 1 is not subject to notice 
and comment. For purposes of consistency and readability, all 
references to the proposed closing match process made herein will be 
to ``Cboe Market Close.''
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II. Summary of the Proposal

    As described in more detail in the Notice,\12\ the Exchange 
proposes to introduce Cboe Market Close, a closing match process for 
non-BZX listed securities. For non-BZX listed securities, the 
Exchange's System \13\ would seek to match buy and sell Market-On-Close 
(``MOC'') \14\ orders designated for participation in Cboe Market Close 
at the official closing price for such security published by the 
primary listing market.
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    \12\ See Notice, supra, note 3.
    \13\ The term ``System'' is defined as ``the electronic 
communications and trading facility designated by the Board through 
which securities orders of Users are consolidated for ranking, 
execution and, when applicable, routing away.'' See Exchange Rule 
1.5(aa).
    \14\ The term ``Market-On-Close'' or ``MOC'' means a BZX market 
order that is designated for execution only in the Closing Auction. 
See Exchange Rule 11.23(a)(15). The Exchange proposed to amend the 
description of Market-On-Close orders to include orders designated 
to execute in the proposed Cboe Market Close.
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    Members \15\ would be able to enter, cancel or replace MOC orders 
designated for participation in Cboe Market Close beginning at 6:00 
a.m. Eastern Time up until 3:35 p.m. Eastern Time (``MOC Cut-Off 
Time'').\16\ Members would not be able to enter, cancel or replace MOC 
orders designated for participation in the proposed Cboe Market Close 
after the MOC Cut-Off Time.
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    \15\ The term ``Member'' is defined as ``any registered broker 
or dealer that has been admitted to membership in the Exchange.'' 
See Exchange Rule 1.5(n).
    \16\ Currently, the NYSE designates the cut-off time for the 
entry of Market At-the-Close Orders as 3:45 p.m. Eastern Time. See 
NYSE Rule 123C. Nasdaq, in turn, designates the ``end of the order 
entry period'' as 3:50 p.m. Eastern Time. See Nasdaq Rule 4754.
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    At the MOC Cut-Off Time, the System would match for execution all 
buy and sell MOC orders entered into the System based on time 
priority.\17\ Any remaining balance of unmatched shares would be 
cancelled back to the Member(s). The System would disseminate, via the 
Bats Auction Feed,\18\ the total size of all buy and sell orders 
matched per security via Cboe Market Close. All matched buy and sell 
MOC orders would remain on the System until the publication of the 
official closing price by the primary listing market. Upon publication 
of the official closing price by the primary listing market, the System 
would execute all previously matched buy and sell MOC orders at that 
official closing price.\19\
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    \17\ As set forth in proposed Interpretation and Policy .02, the 
Exchange would cancel all MOC orders designated to participate in 
Cboe Market Close in the event the Exchange becomes impaired prior 
to the MOC Cut-Off Time and is unable to recover within 5 minutes 
from the MOC Cut-Off Time. The Exchange states that this would 
provide Members time to route their orders to the primary listing 
market's closing auction. Should the Exchange become impaired after 
the MOC Cut-Off Time, proposed Interpretation and Policy .02 states 
that it would retain all matched MOC orders and execute those orders 
at the official closing price once it is operational.
    \18\ The Bats Auction Feed disseminates information regarding 
the current status of price and size information related to auctions 
conducted by the Exchange and is provided at no charge. See Exchange 
Rule 11.22(i). The Exchange also proposed to amend Exchange Rule 
11.22(i) to reflect that the Bats Auction Feed would also include 
the total size of all buy and sell orders matched via Cboe Market 
Close.
    \19\ The Exchange would report the execution of all previously 
matched buy and sell orders to the applicable securities information 
processor and will designate such trades as ``.P'', Prior Reference 
Price. See Notice, supra note 3, at 23321.
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    The Exchange would utilize the official closing price published by 
the exchange designated by the primary listing market in the case where 
the primary listing market suffers an impairment and is unable to 
perform its closing auction process.\20\ In addition, proposed 
Interpretation and Policy .03 specifies that up until the closing of 
the applicable securities information processor at 8:00 p.m. Eastern 
Time, the Exchange intends to monitor the initial publication of the 
official closing price, and any subsequent changes to the published 
official closing price, and adjust the price of such trades 
accordingly. If there is no initial official closing price published by 
8:00 p.m. Eastern Time for any security, the Exchange would cancel all 
matched MOC orders in such security.
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    \20\ See proposed Interpretation and Policy .01.
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    The Exchange states that it is proposing to adopt Cboe Market Close 
in response to requests from market participants, particularly buy-side 
firms, for an alternative to the primary listing markets' closing 
auctions that still provides an execution at a security's official 
closing price.\21\ Moreover, the Exchange contends that the proposal 
would not compromise the price discovery function performed by the 
primary listing markets' closing auctions because Cboe Market Close 
would only accept MOC orders, and not limit orders, and the Exchange 
would only execute those matched MOC orders that naturally pair off and 
effectively cancel each other out.\22\
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    \21\ See Notice, supra note 3, at 23321. The Exchange intends, 
should the Commission approve the proposed rule change, to file a 
separate proposal to offer executions of MOC orders at the official 
closing price, to the extent matched on the Exchange, at a rate less 
than the fee charged by the applicable primary listing market. The 
Exchange also intends for such fee to remain lower than the fee 
charged by the applicable primary listing market. See id.
    \22\ See id.
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III. Discussion and Commission Findings

    The Commission has carefully reviewed the proposal, including the 
comments received, and finds that approval of the proposed rule change 
is consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to a national securities 
exchange.\23\ In particular, as

[[Page 3207]]

discussed below, the Commission finds that the proposal is consistent 
with: Section 6(b)(5) of the Act,\24\ which requires that the rules of 
a national securities exchange, among other things, be designed to 
prevent fraudulent and manipulative acts and practices, to promote just 
and equitable principles of trade, to remove impediments to and perfect 
the mechanism of a free and open market and a national market system, 
and, in general, to protect investors and the public interest; and 
Section 6(b)(8) of the Act,\25\ which requires that the rules of a 
national securities exchange not impose any burden on competition not 
necessary or appropriate in furtherance of the purposes of the Act.
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    \23\ In approving this proposed rule change, the Commission has 
considered the proposed rule change's impact on efficiency, 
competition, and capital formation. See 15 U.S.C. 78c(f). The 
Commission addresses comments about economic effects of the proposed 
rule change, including competitive effects, below.
    \24\ 15 U.S.C. 78f(b)(5).
    \25\ 15 U.S.C. 78f(b)(8).
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    The Commission received sixty-three comment letters from fifty-two 
commenters on the proposal, including four response letters from the 
Exchange.\26\
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    \26\ See supra notes 5 and 8.
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Price Discovery and Fragmentation

    The majority of commenters addressed the potential impacts of the 
proposal on price discovery in the closing auctions on the primary 
listing markets. Eight commenters stated that the proposal would not 
negatively impact price discovery in the primary listing markets' 
closing auctions.\27\ These commenters asserted that because Cboe 
Market Close would only execute paired MOC orders, and not limit-on-
close orders, it would not impede the price discovery mechanisms of the 
primary listing markets' closing auctions. Five commenters referenced 
the current Nasdaq and NYSE Arca closing auction processes for 
securities listed on other exchanges, stating that these competing 
closing auction processes, which have been permitted by the Commission, 
may attract limit orders from the primary listing market and impede 
price discovery, unlike the BZX proposal which is limited to market 
orders.\28\ In addition, five commenters argued that, because BZX will 
publish the size of matched MOC orders in advance of the primary 
market's cut-off time, market participants would have available 
information needed to make further decisions regarding order execution 
and thus price discovery would not be impaired.\29\ Two commenters also 
asserted that many brokers already provide market-on-close pricing to 
customers through products that match orders internally, and the 
proposal may provide incentives for brokers to send such orders to an 
exchange, thereby increasing transparency, reliability and price 
discovery at the close.\30\
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    \27\ See PDQ Letter; Clearpool Letter, at 3; Virtu Letter, at 2; 
SIFMA Letter, at 2; IEX Letter, at 1-2; Angel Letter, at 4; 
ViableMkts Letter, at 3-4; and Bollerman Letter, at 1. See also 
SIFMA Letter 2, at 1-2.
    \28\ See Clearpool, at 3; IEX Letter, at 2; Angel Letter, at 4; 
SIFMA Letter 2, at 2; and Bollerman Letter, at 3.
    \29\ See Clearpool Letter, at 3; SIFMA Letter 1, at 2; IEX 
Letter, at 2; Angel Letter, at 4; ViableMkts Letter, at 3; and SIFMA 
Letter 2, at 1.
    \30\ See Clearpool, at 3-4; and ViableMkts Letter, at 4-5. One 
commenter further argued that to the extent BZX accrues market share 
as a result of the proposal it will likely result from less MOC 
pairing executed off-exchange. See Angel Letter, at 4.
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    Thirty-eight commenters stated that the proposal would further 
fragment the markets and harm price discovery in the closing auctions 
on the primary listing markets.\31\ For example, Nasdaq argued that 
BZX's MOC orders would be incapable of contributing to price discovery, 
and instead would further fragment the market by drawing orders and 
quotations away from primary closing auctions and undermine the 
mechanisms used to set closing prices.\32\ Nasdaq asserted that any 
attempt to divert trading interest from its closing auction would be 
detrimental to investors as it would inhibit Nasdaq's closing auction 
from functioning as intended and would negatively affect the price 
discovery process and consequently, the quality of the official closing 
price.\33\
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    \31\ See Nasdaq Letter 1; NYSE Letter 1; Bowers Letter; Meridian 
Letter; Americas Executions Letter; GTS Securities Letter 1; 
Customers Bancorp Letter; Masonite International Letter; Orion Group 
Letter; CTS Corporation Letter; Encana Letter; Triangle Capital 
Letter; Pennsylvania REIT Letter; IMC Letter; Southern Company 
Letter; Nobilis Health Letter; T. Rowe Price Letter; CACI Letter; 
Turning Point Letter; P&G Letter; EDA Letter; Coupa Software Letter; 
Cardinal Health Letter; FedEx Letter; Trade Desk Letter; BioCryst 
Letter; Mimecast Letter; Digimarc Letter; NYSE Letter 2; NBT Bancorp 
Letter; Balchem Letter; Cree Letter; Henry Schein Letter; Corbus 
Letter; GTS Securities Letter 2; Global Payments Letter; CA 
Technologies Letter; Sirius Letter; Lam Letter; PayPal Letter; 
Nasdaq Letter 2; NYSE Letter 3. See also Duffy/Meeks Letter, at 1 
(stating that public companies are expressing concern that the 
proposal will further fragment the market and cause harm to the 
pricing of their companies' shares at the close and, as such, they 
are concerned the proposal may disrupt the process for determining 
the closing price on the primary listing market, which is viewed as 
``an incredibly well-functioning part of the capital markets''). In 
addition, one commenter urged the Commission to conduct a close 
analysis of the proposal and stated that if the Bats proposal would 
seriously degrade the quality of the closing price, then it should 
be rejected. See Angel Letter.
    \32\ See Nasdaq Letter 1, at 5 and 8 (stating that, for this 
reason Nasdaq did not believe the proposal promotes fair and orderly 
markets in accordance with Sections 6 and 11A of the Exchange Act); 
and Nasdaq Letter 2, at 3-7.
    \33\ See Nasdaq Letter 1, at 11 and Nasdaq Letter 2, at 5-6. 
Nasdaq also stated that while BZX does not have a responsibility to 
contribute to price discovery in Nasdaq's closing auction, it also 
is obligated to avoid affirmatively undermining price discovery. See 
Nasdaq Letter 1, at 5. In addition, Nasdaq stated that it 
considered, but chose not to, disclose segmented information, such 
as matched MOC or LOC shares, for its closing auction in a piece-
meal fashion, because Nasdaq believed it would lead to unintended 
consequences and undermine price discovery in the closing auction. 
See id., at 4 and Nasdaq Letter 2, at 6.
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    Specifically, Nasdaq expressed concern that the availability of 
Cboe Market Close could cause a reduction in the number of limit-on-
close orders submitted to the primary listing markets' closing 
auctions, which Nasdaq asserted would harm price discovery at the 
market close.\34\ Nasdaq asserted that the impact of the proposal on 
the use of limit-on-close orders that may be submitted to NYSE and 
Nasdaq should be studied and carefully analyzed.\35\ In the OIP, the 
Commission specifically solicited comments on the potential impact of 
the proposal on the use of limit-on-close orders, including requesting 
any available data, analyses or studies.\36\ In response, Nasdaq 
explained that reducing MOC orders would impact the behavior of limit 
orders by reducing the ability of continuous book limit orders and LOC 
orders to compete with each other and to interact with MOC orders, 
which it asserted is essential to its closing auction.\37\ 
Specifically, Nasdaq contended that if BZX were to disseminate a paired 
shares amount at 3:35pm, but Nasdaq published little or

[[Page 3208]]

no paired or imbalance shares in its imbalance publications, it would 
discourage further participation in the continuous market leading up to 
the closing auction and the closing cross, and thus there would be 
little ongoing price discovery, because market participants would know 
they would not have the ability to interact with market orders.\38\ 
Nasdaq contrasted the BZX proposal with its own closing auction 
process, arguing that after it disseminates an imbalance notification 
that combines MOC and LOC orders, market participants can continue to 
submit orders to interact with existing auction interest.\39\
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    \34\ See Nasdaq Letter 1, at 5 and 11.
    \35\ See id. at 11.
    \36\ See OIP, supra note 7, at 40210. Specifically, the 
Commission asked, ``To what extent, if at all, would the 
availability of the Bats Market Close impact market participants' 
use of limit-on-close orders in the closing auction processes on the 
primary listing exchanges, including with respect to size and price? 
Please explain. Would market participants use MOC orders in the Bats 
Market Close as a substitute for using limit orders to participate 
in the closing auction processes at the primary listing exchanges? 
Would any such impacts be the same for each of the primary listing 
exchanges? Are there differences between the closing auction 
processes at each of the primary listing exchanges whereby the 
proposed Bats Market Close would have differing effects on each 
primary listing exchange? If so, please explain. How does 
information available in the closing auction process affect market 
participants' order submissions and/or determination of the closing 
price? Would the proposed rule change affect market participants' 
trading strategies in closing auctions? If so, how? If commenters 
believe the proposal would impact the use of limit-on-close orders 
in closing auctions, to the extent possible please provide specific 
data, analyses, or studies for support.''
    \37\ See Nasdaq Letter 2, at 5-6. Nasdaq did not submit any 
specific data regarding the impact of the proposal on the use of 
limit on close orders.
    \38\ See id. at 6.
    \39\ See id.
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    Moreover, Nasdaq argued that even if the proposal only resulted in 
fewer market-on-close orders submitted to Nasdaq closing auctions, 
investors would be harmed because the official closing price could 
potentially represent a stale or undermined price.\40\ Nasdaq asserted 
that its closing cross is designed to maximize the number of shares 
that can be executed at a single price and that the number of market-
on-close orders impacts the number of shares able to execute in a 
closing cross.\41\ Further, in its second comment letter, Nasdaq 
elaborated on the impact it believed reducing MOC orders could have on 
Nasdaq's closing auction. In particular, Nasdaq argued that the 
proposal would harm price discovery because fragmentation of MOC orders 
would directly impact closing auctions for which Nasdaq only received 
MOC orders and that, in cases where all MOC orders were removed from 
the Nasdaq closing auction, the last sale price would become the 
official closing price, as opposed to the price being determined 
through the price discovery process of its closing auction.\42\ Nasdaq 
discussed several hypothetical examples where removal of all MOC orders 
from certain of its previously conducted closing auctions would have 
resulted in use of the last sale price as the official closing price 
and provided aggregated statistics denoting the differential between 
the last sale price and the official closing price in such 
situations.\43\
---------------------------------------------------------------------------

    \40\ See Nasdaq Letter 1, at 12. See also Nasdaq Letter 2, at 6 
(providing an example of how the proposal could cause a stale 
closing price). Nasdaq also stated that a credible independent study 
of the potential risk to price discovery is essential in order to 
consider whether the proposal is consistent with the Act. See Nasdaq 
Letter 1, at 12.
    \41\ See id., at 11. Nasdaq subsequently submitted a memorandum 
providing, among other things, data relating to the level of matched 
MOC volume in Nasdaq closing auctions spanning the period of January 
1, 2017 through September 30, 2017 (``Nasdaq Data Memo''). Nasdaq 
requested protection under the Freedom of Information Act for its 
memorandum.
    \42\ See Nasdaq Letter 2, at 3.
    \43\ See id. at 3-5. Specifically, Nasdaq identified 1,653 
closing crosses between January 1, 2016 and August 31, 2017 where 
removal of all MOC orders would have changed the closing prices. 
Nasdaq asserts that this would have changed the closing valuation of 
Nasdaq issuers ``by nearly $870,000,000 of aggregate impact.''
---------------------------------------------------------------------------

    NYSE similarly argued that even though Cboe Market Close would only 
accept MOC orders, it could materially impact official closing prices 
determined through a NYSE closing auction.\44\ NYSE emphasized the 
importance of the centralization of orders during the closing auction 
on the primary listing exchange, stating that it is ``an iterative 
process'' that provides ``periodic information about order imbalances, 
indicative price, matched volume, and other metrics'' to help market 
participants anticipate the likely closing price, and that allows for 
investors to find contra-side liquidity and assess whether to offset 
imbalances, and for orders to be priced based on the true supply and 
demand in the market.\45\ NYSE asserted that information on the lack of 
matched MOC orders in the closing process could discourage liquidity 
providers from participating in the closing process because their order 
would be less likely to interact with market orders.\46\ NYSE also 
explained that its designated market makers (``DMMs''), which have an 
obligation to facilitate the close of trading in their assigned 
securities, factor in the size of paired-off volume, and the 
composition of the closing interest in assessing the appropriate 
closing price.\47\ NYSE asserted that, under the proposal, DMMs would 
lose full visibility into the size and composition of MOC interest, and 
thus would likely have to make more risk-adverse closing decisions, 
resulting in inferior price formation.\48\
---------------------------------------------------------------------------

    \44\ See NYSE Letter 1, at 3. While NYSE's arguments focused 
primarily on the potential for MOC orders to migrate to Cboe Market 
Close as described below, NYSE also asserted that, if the fees for 
the Cboe Market Close were set lower than the fees charged by the 
primary listing exchanges, it could induce some market participants 
to use MOC orders rather than sending LOC orders to the primary 
listing market. See NYSE Report, at 23.
    \45\ See NYSE Report, at 12. See also NYSE Letter 1, at 4. NYSE, 
as well as Nasdaq, also asserted that the proposal contradicts the 
Commission's approval of recent amendments to the National Market 
System Plan to Address Extraordinary Market Volatility (the ``LULD 
Plan'') which, they argue, centralize re-opening auction liquidity 
at the primary listing exchange by prohibiting other market centers 
from re-opening following a trading pause until the primary listing 
exchange conducts a re-opening auction. These commenters asserted 
that it would be inconsistent for the Commission to find it in the 
public interest to consolidate trading in a re-opening auction, 
while sanctioning fragmentation of trading in a closing auction. See 
Nasdaq Letter 1, at 6; NYSE Letter 1, at 3; and Nasdaq Letter 2, at 
12. In response, commenters asserted the amendment to the LULD Plan 
cited by NYSE and Nasdaq granted the primary listing market the 
ability to set the re-opening price but did not mandate the 
consolidation of orders at the primary listing market following a 
trading halt. BZX believes the proposal is consistent with the LULD 
Plan as it seeks to avoid producing a ``bad'' or ``outlier'' closing 
price and does not affect the centralization of price-setting 
closing auction orders. See BZX Letter 1, at 8-9. See also Bollerman 
Letter, at 3.
    \46\ See NYSE Report, at 13 and 23. See also NYSE Report, at 12 
(arguing that ``[a]nticipation that there will be MOC orders in the 
closing auction is a critical component feeding into the decisions 
of liquidity providers and other market participants'' trading in 
the closing auction).
    \47\ See NYSE Letter 1, at 4. In response to this assertion, 
ViableMkts argues that use of Cboe Market Close is voluntary. 
Accordingly, if a market participant wanted a DMM to be aware of 
their closing activity they could still send their orders to the 
NYSE closing auction. See ViableMkts Letter, at 4.
    \48\ See NYSE Letter 1, at 4.
---------------------------------------------------------------------------

    NYSE also argued that the proposal would detrimentally impact price 
discovery on the NYSE Arca and NYSE American automated closing 
auctions. NYSE stated that in the last six months there were 130 
instances where the official closing price determined through a NYSE 
Arca closing auction was based entirely on paired-off market order 
volume.\49\ In those instances, pursuant to NYSE Arca rules, ``the 
Official Closing Price for that auction is the midpoint of the Auction 
NBBO as of the time the auction is conducted.'' \50\ NYSE stated that 
if all market orders for a NYSE Arca listed security were sent to BZX, 
the official closing price would instead be the consolidated last sale 
price, which can differ from the midpoint of the auction NBBO by as 
much as 3.2%.\51\
---------------------------------------------------------------------------

    \49\ See NYSE Letter 1, at 5. See also NYSE Report, at 11-12. 
NYSE represented that once NYSE American transitions to Pillar 
technology, it will conduct a closing auction in an identical manner 
to NYSE Arca.
    \50\ See id.
    \51\ See id. In its third comment letter, NYSE also asserts 
that, in contrast to the data NYSE provided in its first letter, BZX 
failed to provide any data in response to the requests for comment 
in the OIP to support the claim that there would be no impact on 
price discovery. See NYSE Letter 3, at 2. But see BZX Letter 3, at 
2-4, 7-9 and infra notes 99-106 and accompanying text discussing 
data and analysis provided by BZX.
---------------------------------------------------------------------------

    In arguing that additional fragmentation of closing auction 
interest would detrimentally impact price discovery, both Nasdaq and 
NYSE distinguished the Cboe Market Close from competing closing 
auctions currently operated by Nasdaq and NYSE Arca for securities 
listed on other markets. Nasdaq stated that the BZX proposal is a 
price-matching order type and not a competitive single-priced

[[Page 3209]]

auction that offers price discovery.\52\ In contrast, Nasdaq states 
that its single-priced auction for non-Nasdaq listed stocks was 
designed to maximize order interaction and improve price discovery for 
issuers, not to siphon orders away from the primary market without 
seeking to improve price discovery.\53\ Accordingly, Nasdaq argued that 
the fact that it and NYSE offer competing closing auctions is 
irrelevant because those auctions are fundamentally different from the 
BZX proposal.\54\ Similarly, NYSE argued that it believed it was 
misleading to compare the proposal to the competing closing auctions 
because BZX would be offering neither a competing closing auction nor a 
facility to establish the official closing price should a primary 
listing exchange invoke its closing auction contingency plan.\55\
---------------------------------------------------------------------------

    \52\ See Nasdaq Letter 2, at 8-9.
    \53\ See id. at 9.
    \54\ See id.
    \55\ See NYSE Letter 2, at 3.
---------------------------------------------------------------------------

    Nasdaq and NYSE further argued that competing closing auctions 
cause minimal fragmentation, as volumes in those auctions are 
``miniscule.'' \56\ For example, Nasdaq stated that volumes in all 
competing auctions in Nasdaq-listed corporate securities in the month 
of June 2017 were less than 0.5% of Nasdaq's closing volume.\57\ 
Similarly, NYSE stated that for the period January 1, 2017 through 
October 13, 2017, closing auctions in NYSE and Nasdaq-listed securities 
on NYSE Arca represent 0.5% of the notional value traded in the NYSE 
and Nasdaq closing auctions.\58\ Nasdaq further asserted that less than 
half of Nasdaq-listed corporate issues experience price dislocations in 
competing closing auctions.\59\ Moreover, Nasdaq and NYSE stated that 
on multiple occasions when they received closing interest for 
securities listed on another exchange, they have contacted the firms 
associated with those orders and encouraged them to route their orders 
directly to the primary listing exchange.\60\
---------------------------------------------------------------------------

    \56\ See Nasdaq Letter 2, at 9-10; see also NYSE Letter 3, at 5-
6.
    \57\ See Nasdaq Letter 2, at 11.
    \58\ See NYSE Letter 3, at 6. NYSE also stated that it does not 
have a business interest in running closing auctions for securities 
listed on other markets. It operates the NYSE Arca closing auction 
for resiliency purposes, which it believes outweighs any modest 
negative impact on fragmentation. See id.; see also infra note 239.
    \59\ See Nasdaq Letter 2, at 11. In response to BZX's claim that 
a large percentage of competing closing auctions conducted by Nasdaq 
and NYSE resulted in closing prices different from the official 
closing price, Nasdaq also stated that many of the examples cited in 
BZX Letter 1 are from competing auctions in ETFs, which, Nasdaq 
stated, have a fundamentally different price discovery process. 
Nasdaq argued that if ETFs were removed from the analysis, less than 
half of Nasdaq-listed corporate issues see a price difference when 
closing on NYSE Arca. See id.
    \60\ See id. at 13; NYSE Letter 3, at 6. See also infra note 87 
and accompanying text.
---------------------------------------------------------------------------

    Nasdaq and NYSE also addressed price-matching services in the over-
the-counter market. Nasdaq stated that the proposal would introduce a 
new category of price-matching venues, which would exacerbate the harm 
caused by fragmentation.\61\ Both Nasdaq and NYSE stated that over-the-
counter price-matching services should not be considered a precedent 
for the Cboe Market Close proposal. Nasdaq stated that, as a neutral 
trading platform, an exchange is capable of attracting and aggregating 
more liquidity than a broker-dealer.\62\ Moreover, according to Nasdaq, 
trades resulting from broker-dealer price-matching services are often 
also involved in the closing auction on the primary listing exchange, 
thus contributing to price discovery despite operating a price-matching 
service.\63\ Nasdaq explained that a broker may accept a MOC order and 
trade as either agent or principal against that order by entering limit 
orders into either the closing auction on the primary listing exchange 
or the continuous market leading up to the closing auction. After 
receiving an execution in the primary market closing auction, the 
broker would then trade with the customer off-exchange at a price 
determined by the primary market closing auction.\64\ Similarly, NYSE 
argued that it should not be assumed that the current level of MOC 
orders executed away from the primary market is a reasonable proxy for 
the impact of the BZX proposal.\65\ Specifically, NYSE asserted that 
market makers that cross orders on behalf of clients at the closing 
price could be risking capital on such transactions, which would likely 
be a constraining force on the magnitude of orders crossed away from 
primary markets, while BZX would have no such obligation to commit 
capital in Cboe Market Close.\66\ As such, NYSE argued that the BZX 
proposal, if successful, could result in a much higher percentage of 
MOC orders diverted away from the primary market than what occurs 
today.\67\
---------------------------------------------------------------------------

    \61\ See Nasdaq Letter 2, at 13.
    \62\ See id.
    \63\ See id.
    \64\ See id. The Nasdaq Data Memo also provided data and 
analysis arguing that a portion of the broker-dealer volume executed 
off-exchange after the close at the primary listing market's closing 
price reflects brokers submitting customers' interest to the closing 
cross and subsequently reporting an over-the-counter trade between 
the broker and its customers.
    \65\ See NYSE Report, at 10.
    \66\ See NYSE Report, at 10.
    \67\ See NYSE Report, at 10. The NYSE Report asserted that this 
was one of the limitations of drawing conclusions from the DERA 
Analysis regarding how the BZX proposal would impact the market 
close. See discussion of DERA Analysis, infra notes 133-134 and 
accompanying text.
---------------------------------------------------------------------------

    In addition, NYSE stated that existing off-exchange matching 
services have a negative impact on the validity and integrity of price 
discovery in the closing auctions.\68\ NYSE stated that data it 
analyzed from certain closing auctions with large imbalances \69\ shows 
that, for securities with 1,000 shares or less reported at the official 
closing price (on and off-exchange), volatility in the last 10 minutes 
of trading leading into the close is 52% higher when more than 75% of a 
security's closing share volume is reported to a trade reporting 
facility (``TRF'') (i.e., paired off-exchange), compared to when less 
than 25% of a security's closing share volume is reported to a TRF. In 
addition, NYSE asserted that its data showed that the official closing 
price generated in auctions for securities with 1,000 shares or less 
reported at the official closing price (on and off-exchange) where more 
than 75% of a security's share volume is reported to a TRF was more 
than twice as far away from the last consolidated sale price and nearly 
twice as far away from the market volume weighted average price 
(``VWAP'') of the last two minutes of trading leading into the 
close.\70\ Accordingly, NYSE concluded that existing fragmentation 
degrades the quality of the closing price.\71\
---------------------------------------------------------------------------

    \68\ See NYSE Letter 3, at 3.
    \69\ See id. at 3. NYSE stated that it reviewed closing auctions 
with imbalances of 50% of paired shares as of 3:50 p.m. See id. at 
4.
    \70\ See id. at 3-4. NYSE provided data that they asserted 
illustrates that the same degradation in the quality of the official 
closing price also occurs in closes for securities with 10,000 
shares or more reported at the official closing price. See id. at 4.
    \71\ See id. at 3-4.
---------------------------------------------------------------------------

    Several other commenters also discussed how the proposal may impact 
the integrity of official closing prices. In particular, GTS, a DMM on 
NYSE, argued that market-on-close orders are a vital component of 
closing prices and, should those orders be diverted away from the 
primary listing markets as a result of the proposal, it could undermine 
the official closing prices.\72\ GTS stated that, in pricing a closing 
auction on NYSE, it considers a variety of inputs and stated that it 
considers ``the size of . . . matched shares and the time those matched 
shares are consumed by each individual book [to be] essential data 
points for

[[Page 3210]]

consideration.'' \73\ If this information is fragmented across multiple 
venues, according to GTS, the closing price will change and will become 
less reliable.\74\ Eighteen commenters asserted that the proposal would 
make it more difficult for Designated Market Makers to facilitate an 
orderly close of NYSE listed securities as they would lose the ability 
to continually assess the composition of market-on-close interest.\75\ 
Many of these commenters are issuers listed on NYSE and asserted that 
one of the reasons they chose to list on NYSE was the ability to have 
access to a DMM that is responsible for facilitating an orderly closing 
auction.\76\
---------------------------------------------------------------------------

    \72\ See GTS Securities Letter 1, at 2-3.
    \73\ See GTS Securities Letter 2, at 3. GTS also stated that the 
types of orders submitted to the closing auction, such as limit or 
market, also impact its pricing determinations. See id.
    \74\ See id. at 4.
    \75\ See NYSE Letter 1, at 4; GTS Securities Letter 1, at 2-3; 
Customers Bancorp Letter; Masonite International Letter; Orion Group 
Letter; CTS Corporation Letter; Encana Letter; Triangle Capital 
Letter; Pennsylvania REIT Letter; IMC Letter, at 1-2; Southern 
Company Letter; Nobilis Health Letter; CACI Letter; Turning Point 
Letter; P&G Letter; Cardinal Health Letter; FedEx Letter; Stewart 
Letter; Global Payments Letter. See also supra notes 45-48 and 
accompanying text. Four commenters also asserted that the proposal 
would have potentially detrimental impacts on NYSE floor brokers. 
See Bowers Letter; Meridian Letter; Americas Executions Letter; and 
GTS Securities Letter 2, at 4.
    \76\ See GTS Securities Letter 1, at 2-3; Masonite International 
Letter; Encana Letter; Triangle Capital Letter; Pennsylvania REIT 
Letter; Nobilis Health Letter; CACI Letter; Turning Point Letter; 
P&G Letter; Cardinal Health Letter; FedEx Letter; and Stewart 
Letter.
---------------------------------------------------------------------------

    Multiple commenters stated that one of the benefits of a 
centralized closing auction conducted by the primary listing market is 
that it allows market participants to fairly assess supply and demand 
such that the closing prices reflect both market sentiment and total 
market participation.\77\ Because they believed that the proposal may 
cause orders to be diverted away from the primary listing exchanges, 
these commenters argued that it would negatively affect the reliability 
and value of closing auction prices. Several commenters further argued 
that centralized closing auctions provide better opportunities to fill 
large orders with relatively little price impact.\78\
---------------------------------------------------------------------------

    \77\ See Bowers Letter; Americas Executions Letter; and FedEx 
Letter. See also Coupa Software Letter; Trade Desk Letter; Mimecast 
Letter (arguing that gathering liquidity in a single venue ensures 
that the market reaches an accurate and reliable closing price for 
their stocks); Global Payments Letter.
    \78\ See e.g., Bowers Letter; Americas Executions Letter; 
Customers Bancorp Letter; Orion Group Letter; and Southern Company 
Letter.
---------------------------------------------------------------------------

    In response to concerns regarding the impact of the proposal on the 
price discovery process, BZX argued that, because the proposal would 
only match MOC orders and would require the Exchange to publish the 
number of matched shares in advance of the primary listing markets' 
cut-off times, BZX believes it would avoid any impact on price 
discovery.\79\ BZX also stated that it does not believe the proposal 
would impact the use of LOC orders on the primary listing markets as 
LOC orders provide price protection and the lower fees charged to MOC 
orders that participate in Cboe Market Close would not outweigh the 
risk of receiving an execution at an unfavorable price.\80\ BZX further 
challenged commenters' concerns that Cboe Market Close could pull all 
MOC orders away from the primary listing markets and alter the 
calculation of the closing price, stating that such a scenario could 
occur today as a result of competing closing auctions and broker-
dealers that offer internal MOC order matching solutions.\81\ 
Accordingly, BZX contends that the proposal would not impose 
fragmentation on the market at the close that does not already exist 
today.\82\
---------------------------------------------------------------------------

    \79\ See BZX Letter 1, at 3-4 and BZX Letter 2, at 2 and 10. In 
addition, BZX offered to disseminate more information with regard to 
Cboe Market Close and to disseminate such information via the 
applicable securities information processor, in addition to the Bats 
Auction Feed. See BZX Letter 1, at 4 and 12-13, and BZX Letter 2, at 
2. BZX further asserted that it believed modern software can easily 
and simply add this data to data disseminated by the primary listing 
markets. See BZX Letter 1, at 4 and BZX Letter 2, at 3.
    \80\ See BZX Letter 2, at 3.
    \81\ See BZX Letter 1, at 4-5 (stating that neither NYSE nor 
Nasdaq prohibits their members from withholding MOC orders from 
their closing auctions) and BZX Letter 2, at 2-3. In response, NYSE 
stated that it believed such broker-dealer services degrade the 
public price and size discovery of the primary listing exchanges' 
closing auctions, but that such activities are not held to the same 
standards under the Act as national securities exchanges and against 
which the BZX proposal must be evaluated. See NYSE Letter 2, at 4. 
GTS further stated in response that it believes such broker-dealer 
services deprive the DMM of content that is critical to pricing a 
closing auction and the Commission should study the impact of this 
activity on closing auctions. See GTS Securities Letter 2, at 4. See 
infra note 129 and accompanying text discussing the DERA analysis of 
the relationship between the proportion of MOC orders currently 
executed off-exchange and closing price discovery and efficiency.
    \82\ See BZX Letter 1, at 4 and BZX Letter 2, at 2.
---------------------------------------------------------------------------

    In particular, with regard to competing closing auctions, BZX 
argued that such competing auctions could not only pull all MOC 
interest away from the primary listing markets but could also divert 
all price-setting limit-on-close interest from those markets as 
well.\83\ Further, BZX argued that Nasdaq and NYSE's assertions that 
they currently attract low trading volumes in their competing closing 
auctions are irrelevant to an analysis of their potential impact on 
fragmentation.\84\ Should these auctions see an increase in order flow, 
BZX argued they would increase existing market fragmentation.\85\ BZX 
also asserted that such competing closing auctions often may produce 
bad auction prices on the non-primary market, as compared to the 
proposed Cboe Market Close which would ensure that market participants 
receive the official closing price.\86\ In addition, in response to 
NYSE's assertion that it contacted firms that submitted orders to NYSE 
Arca's competing closing auction and encouraged them to instead submit 
orders to the primary listing market, BZX provided data that it stated 
evidences that NYSE has not, in fact, discouraged order flow to their 
competing auctions and that NYSE Arca's competing auction ``continues 
to maintain not insignificant monthly volume'' in at least two 
securities.\87\
---------------------------------------------------------------------------

    \83\ See BZX Letter 1, at 5; BZX Letter 2, at 2; and BZX Letter 
3, at 4. BZX provided evidence of 14 instances in June 2017 where a 
Nasdaq-listed security had no volume in Nasdaq's closing auction but 
did have volume in NYSE Arca's closing auction. See BZX Letter 1, at 
5.
    \84\ See id. at 6.
    \85\ See id. BZX also stated that, despite their potential 
utility as a back-up in case of a market impairment, Nasdaq and NYSE 
Arca run these competing auctions on a daily basis, regardless of 
whether there is an impairment at a primary listing exchange. See 
id. BZX further questioned why these exchanges do not utilize test 
symbols and test data in order to confirm the operational integrity 
of the auction processes without potentially harming the price 
discovery process by the primary's closing auction. See BZX Letter 
3, at 5.
    \86\ See BZX Letter 1, at 4 and BZX Letter 2, at 2. BZX asserted 
that 86% of closing auctions conducted by Nasdaq for NYSE-listed 
securities in June 2017 resulted in closing prices different from 
the official closing price and 84% of competing closing auctions 
conducted by NYSE Arca for Nasdaq-listed securities in June 2017 
resulted in closing prices different from the official closing 
price. BZX Letter 1, at 4.
    \87\ BZX Letter 3, at 4.
---------------------------------------------------------------------------

    With regard to off-exchange matching processes, BZX stated that 
several off-exchange venues currently offer executions at the official 
closing price and therefore provide a forum to which participants may 
choose to send MOC orders in lieu of sending MOC or LOC orders to the 
primary listing market.\88\ BZX stated, however, that it was not aware 
of any concerns raised by NYSE, Nasdaq, or the Commission regarding the 
impact of such venues on the use of LOC orders in the closing auctions 
of the primary listing exchanges.\89\
---------------------------------------------------------------------------

    \88\ BZX Letter 2, at 3.
    \89\ Id., at 3.
---------------------------------------------------------------------------

    BZX also provided certain data regarding current trading volume at 
the close on venues other than primary listing exchanges to show that 
the proposal would ``not introduce a new

[[Page 3211]]

type of fragmentation at the close.'' \90\ Specifically, BZX argued 
that off-exchange venues ``siphon significant order flow at the close 
from the primary listing markets,'' as over the first nine months of 
2017, off-exchange volume at the official closing price represented 
approximately 30% of Nasdaq closing volume for Nasdaq-listed securities 
and 23% of NYSE closing volume for NYSE-listed securities.\91\ 
Moreover, BZX argued that the proposal ``could increase transparency by 
incentivizing market participants to re-direct their MOC orders from 
off-exchange venues to a public exchange,'' whose processes are subject 
to the requirements of the Act, would be included in BZX's rules, and 
would be subject to the proposed rule change requirements of Section 
19(b) of the Act before any changes could be made to the operation of 
Cboe Market Close.\92\ In addition, BZX argued that attracting order 
flow away from off-exchange venues would have the additional benefit of 
increasing the amount of volume at the close executed on systems 
subject to Regulation SCI's resiliency requirements.\93\
---------------------------------------------------------------------------

    \90\ See id. at 4-5.
    \91\ See BZX Letter 2, at 4. BZX further asserted that, over the 
course of 2017, the amount of off-exchange closing volume has been 
increasing. See id. at 5.
    \92\ See id. at 5-6.
    \93\ See id. at 11.
---------------------------------------------------------------------------

    In response to NYSE's data regarding the impact of off-exchange 
activity at the close on closing auction price formation, BZX presented 
several critiques of the analysis. First, BZX asserted that NYSE 
provided selective data that supported their conclusion that existing 
fragmentation at the close has a negative impact on price discovery in 
closing auctions. In particular, BZX stated that NYSE did not indicate 
the number of closing auctions included in its data set.\94\ BZX also 
stated that NYSE's data set was limited to auctions with less than 
1,000 shares, imbalances of 50% or more of the paired shares as of 3:50 
p.m., and securities for which more than 75% of the volume was reported 
to the TRF. Based on its own analysis, discussed below, BZX estimated 
that the number of auctions included in NYSE's data set for auctions 
with 1,000 shares or less to be less than 100th of 1% of all 
auctions.\95\ Therefore, BZX argued that NYSE's findings are ``of no 
statistical significance.'' \96\
---------------------------------------------------------------------------

    \94\ See BZX Letter 3, at 2.
    \95\ See id. at 2-3.
    \96\ See id. at 3.
---------------------------------------------------------------------------

    BZX further argued that it is possible that such low volume 
securities with severe imbalances would be subject to price variations 
between the last sale and the official closing price, regardless of the 
amount of off-exchange closing activity.\97\ In addition, BZX stated 
that the data that NYSE provided for auctions with more than 10,000 
shares shows that the ``impact on closing prices is dampened in more 
actively traded securities,'' which it believes undercuts NYSE's 
conclusions and ``further highlights the selective and limited nature 
of NYSE's data set.'' \98\
---------------------------------------------------------------------------

    \97\ See id.
    \98\ See id.
---------------------------------------------------------------------------

    Furthermore, BZX stated that it conducted its own analysis of data 
from all primary auctions in NYSE-listed securities for which there was 
a closing auction and a last sale regular way trade, regardless of 
size, from January 2, 2017 through September 29, 2017.\99\ BZX stated 
that it reviewed auctions with imbalances of 50% or more of paired 
shares at 3:55 p.m. BZX also stated that it compared auctions where 
less than 25%, 25% to 50%, 50% to 75%, and more than 75%, of the 
closing volume was reported to the TRF.\100\ BZX also grouped its data 
amongst auctions with 1,000,000 shares or more, 100,000 shares to 
1,000,000 shares, 10,000 to 100,000 shares, 1,000 to 10,000 shares, and 
less than 1,000 shares.\101\ BZX stated that its analysis shows that 
``the average price gap between the last sale and the official closing 
price was 9.09 basis points across all groups.'' \102\ BZX stated that 
it also found that ``price gaps are greater amongst auctions with less 
than 25% of closing volume reported to the TRF.'' \103\ BZX concluded 
that its analysis contradicts NYSE's conclusions, asserting that it 
shows that ``the amount of TRF closing volume has little to no 
relationship to the primary listing market's closing auction process.'' 
\104\
---------------------------------------------------------------------------

    \99\ See id.
    \100\ See id.
    \101\ See id.
    \102\ See id.
    \103\ See id.
    \104\ See id. at 3-4.
---------------------------------------------------------------------------

    In addition, BZX stated that it also found similar patterns ``when 
it analyzed securities based on their ADV instead of auction size.'' 
\105\ BZX acknowledged that, while securities with less than 10,000 
shares appear to have the most volatility, these securities account for 
a small percentage of overall auction volume, and argued that such 
volatility ``is more likely indicative of the applicable security's 
trading characteristics.'' \106\
---------------------------------------------------------------------------

    \105\ See id. at 3.
    \106\ See id. at 4.
---------------------------------------------------------------------------

    In response to NYSE's arguments regarding the impact on a DMM's 
ability to price the close, BZX argued that this point highlights what 
it believes to be an additional benefit of allowing it to compete with 
NYSE's closing auction.\107\ Specifically, BZX argued that NYSE's 
assertion that DMMs consider the composition of closing interest in 
making pricing decisions ``suggests that the NYSE closing auction is 
not a true auction and can be an immediate detriment to users sending 
MOC orders of meaningful size to the NYSE.'' \108\ Accordingly, BZX 
stated that it believed this ``highlights an additional benefit'' of 
Cboe Market Close as it ``would provide an alternative pool of 
liquidity and a mechanism for large order senders to avoid the 
subjective decision making of the DMMs who are free to make closing 
price decisions to their profit benefit at the client's expense.'' 
\109\
---------------------------------------------------------------------------

    \107\ See BZX Letter 1, at 10.
    \108\ Id. See also supra note 47-48 and accompanying text.
    \109\ Id. In response, NYSE argued that BZX's claims regarding 
the role of the DMM were not germane to whether the proposal is 
consistent with the Act and stated that it believed the scale of its 
closing auction and the low levels of volatility observed in the 
auction demonstrate its effectiveness. See NYSE Letter 2, at 4.
---------------------------------------------------------------------------

    As the Commission stated in the OIP, it has consistently recognized 
the importance of the closing auctions of the primary listing 
markets.\110\ In particular, the Commission has previously stated that 
``reliable . . . closings on the primary listing markets are key to the 
establishment of fair and orderly markets.'' \111\ Accordingly, the 
Commission has carefully analyzed and considered the proposal's 
potential impact, if any, on the primary listing markets' closing 
auctions, including their important price discovery functions, and the 
reliability and integrity of closing prices. After careful 
consideration of the proposal and all of the comments received and for 
the reasons discussed throughout, the Commission believes that Cboe 
Market Close is reasonably designed not to disrupt the price discovery 
process in the closing auctions of the primary listing exchanges and is 
consistent with the Act and the rules and regulations thereunder.\112\
---------------------------------------------------------------------------

    \110\ See OIP, supra note 7, at 40210.
    \111\ See id. (citing to Securities Exchange Act Release No. 
73639 (November 19, 2014), 79 FR 72255, 72278 (December 5, 2014)).
    \112\ Accordingly, for the reasons discussed throughout, the 
Commission believes the proposal is consistent with the maintenance 
of fair and orderly markets. See Sections 6 and 11A of the Act; see 
supra note 32.
---------------------------------------------------------------------------

    Importantly, Cboe Market Close will only accept MOC orders and not 
LOC orders. Contrary to some commenters' assertions that MOC orders 
contribute to the closing price, the Commission

[[Page 3212]]

believes that MOC orders, which do not specify a target price and seek 
to be executed at the closing price at the end of the trading day are, 
by their nature, the recipients of price formation information and 
generally do not directly contribute to setting the official closing 
price of securities on the primary listing markets.\113\ In particular, 
the Commission believes that paired-off MOC interest, such as that 
would be matched and executed in the Cboe Market Close, does not 
fundamentally affect the determination of the closing price. As many 
commenters stated, the price determined in a closing auction is 
designed to be a reflection of market supply and demand, and key 
considerations in setting the closing price are maximizing the number 
of shares executed and minimizing the amount of the imbalance between 
buy and sell interest. The Commission believes that matching paired-off 
MOC orders in the manner BZX proposes would not affect the net 
imbalance of closing eligible trading interest in the market. As such, 
the orders that actively participate in, and contribute to, the price 
formation process in a closing auction--including limit orders and 
unpaired MOC orders--would not be executed in the Cboe Market Close and 
could continue to be submitted to the primary listing exchange. 
Accordingly, the Commission believes that the proposal is reasonably 
designed to not disrupt the price discovery process and closing auction 
price formation.
---------------------------------------------------------------------------

    \113\ See supra notes 40-48 (discussing Nasdaq's and NYSE's 
arguments of how MOCs can contribute to the closing price).
---------------------------------------------------------------------------

    The Commission recognizes that several commenters made assertions 
that matched MOC order flow provides informational content regarding 
the depth of the market that indicates true supply and demand and 
contributes to market participants' decisions regarding order 
submission and ultimately price formation.\114\ As such, these 
commenters argued that removing matched MOC orders from the primary 
listing market would impact price formation. However, the Commission 
believes that, while the proposal may result in the execution of some 
MOC orders on a venue other than the primary listing exchange, BZX's 
proposal, because it would require the size of matched MOC orders to be 
published well in advance of the order entry cut-off times for the 
primary listing exchanges' closing auctions, is reasonably designed to 
allow market participants to, in conjunction with the information 
disseminated by the primary listing exchanges, ascertain closing 
auction liquidity demand. Accordingly, the Commission believes that the 
information disseminated by BZX could be used by market participants in 
conjunction with the information disseminated by the primary listing 
exchange to make order submission decisions. Although some commenters 
also asserted that DMMs would no longer have full visibility into the 
size and composition of MOC interest, DMMs will have access to the 
amount of paired-off MOC volume on BZX well in advance of NYSE's order 
entry cut-off time and the start of the NYSE closing auction. An NYSE 
DMM could, for example, use such information to determine the total 
amount of MOC interest for a given security in Cboe Market Close and 
NYSE's closing auction, in establishing the relevant context for any 
imbalances in NYSE closing auctions and calculating appropriate closing 
prices.\115\ Further, the Commission believes that, as BZX stated, the 
Cboe Market Close could benefit market participants that do not wish to 
disclose information regarding their orders to certain other market 
participants such as DMMs by providing another venue to which they may 
send their orders for execution at the closing price. In addition, the 
Commission does not agree with those commenters that argued that the 
proposal contradicts the Commission's approval of Amendment 12 to the 
LULD Plan, as the LULD Plan does not mandate that market participants 
consolidate their orders at the primary listing exchanges, but rather 
requires that a trading pause continue until the primary listing 
exchange has reopened trading.\116\ While pursuant to the LULD Plan 
trading may not begin until the reopening on the primary listing 
exchange, market participants continue to have the choice as to where 
to submit their orders.
---------------------------------------------------------------------------

    \114\ See supra notes 45-48, 72-75 and 77 and accompanying text.
    \115\ The proposal would not alter the information DMMs would 
have relating to off-exchange MOC interest. In addition, one 
commenter that is supportive of the proposal is a DMM on NYSE and 
stated that the proposal ensures that the price discovery process 
remains intact because BZX would only match buy and sell MOC orders 
and not limit orders, which it stated, ultimately lead to price 
formation. See Virtu Letter, at 2.
    \116\ See Securities Exchange Act Release No. 79845 (January 19, 
2017), 82 FR 8551, 8552 (January 26, 2017). See also BZX Letter 1, 
at 8-9 and Bollerman Letter at 3.
---------------------------------------------------------------------------

    As discussed above, NYSE and Nasdaq argued that if the proposed 
rule change resulted in the removal of all MOC orders from the primary 
listing exchanges' closing auctions, that result would impact closing 
prices in instances where no auction could be held in accordance with 
their rules. In such scenarios, NYSE and Nasdaq assert that, pursuant 
to the primary listing exchanges' rules, the resulting closing price 
would be the consolidated last sale price.\117\ NYSE and Nasdaq both 
sought to quantify the extent to which last consolidated sale prices 
would have differed from closing prices determined through closing 
auctions. The data and counterfactual examples provided in this regard 
assume that the BZX proposal would result in no market participants 
choosing to send any MOC orders to the primary listing markets' closing 
auctions. However, the commenters did not assert how likely it was for 
such a scenario to occur or provide data in support thereof, nor did 
they provide any other data regarding what the impact would be should 
fewer than all MOC orders be diverted from the primary listing markets. 
While NYSE further asserted that one ``plausible outcome'' of the BZX 
proposal is that the majority of MOC orders would migrate to Cboe 
Market Close, it acknowledged that it was ``hard to predict what would 
happen if the [BZX] proposal were to be approved.'' \118\ Further, NYSE 
explained that this outcome would likely be the case if the fees set by 
BZX for Cboe Market Close were lower than the primary listing markets 
and there was no competitive response by the primary listing 
exchanges.\119\ The Commission believes it may be possible that there 
would be instances in which no MOC orders participate in a primary 
listing market's closing auction following implementation of the Cboe 
Market Close. However, such instances can occur today, and the 
Commission believes that the more likely scenario is that, if Cboe 
Market Close were to be approved and implemented, it would draw some, 
though not all, MOC orders from the primary listing markets, because 
many market participants likely base decisions regarding where to send 
closing orders not solely on fees, but rather on many other factors, 
including the reliability, stability, technology and surveillance 
associated with such auctions,\120\ and because currently there

[[Page 3213]]

exist competitive alternatives to execute MOC orders off-exchange, yet 
the majority of MOC orders continue to be executed in the closing 
auctions on the primary listing exchanges.\121\ While the Commission 
acknowledges that, as some commenters argued, current levels of off-
exchange MOC activity are not a perfect measure of the potential 
resulting impact of the proposal, the Commission believes that they do 
provide some limited insight, as discussed further below. Further, the 
Commission believes that, should market participants choose to send a 
substantial portion of MOC orders to the Cboe Market Close, the primary 
listing exchanges have various other options available to them to try 
to compete for such orders, and it is unlikely that such exchanges 
would choose to accept the complete loss of MOC order market share and 
make no attempt at a competitive response.
---------------------------------------------------------------------------

    \117\ See Nasdaq Letter 2, at 3; NYSE Letter 1, at 5. See also, 
e.g., NYSE Rule 123C(1)(e); NYSE Arca Rule 1.1(ll)1.
    \118\ See NYSE Report, at 22.
    \119\ Id.
    \120\ See generally, Nasdaq Letter 1, at 3-4 (asserting that the 
Nasdaq closing cross has been successful due to its integrity, 
stability, reliability, and regulation). Furthermore, in assessing 
whether to utilize Cboe Market Close, market participants may 
evaluate other attributes of the functionality, such as the need to 
monitor whether they were matched on BZX and potentially having to 
send their MOC orders to more than one venue if not matched, as well 
as having to commit to transact at the closing price at an earlier 
time than they otherwise would have had they chosen to send their 
MOC orders to the primary listing exchanges.
    \121\ See DERA Analysis, supra note 8 (finding that, on average, 
approximately 9.3 percent of closing volume is matched off-exchange 
at the primary listing exchange's closing price); NYSE Report, at 22 
(stating that closing auctions on the listing exchanges currently 
process the vast majority of the MOC and LOC orders in the market); 
and Nasdaq Data Memo, supra note 41 (providing data relating to the 
level of matched MOC volume in Nasdaq closing auctions).
---------------------------------------------------------------------------

    Further, while the commenters' analyses examined price 
differentials in various contexts, differences in prices alone are not 
dispositive with respect to price discovery or efficiency. First, a 
large difference between a reference price (e.g., the last sale price) 
and the closing price may reflect genuine information if the price 
change persists, or may reflect a temporary price pressure if the price 
change subsequently reverses.\122\ Because the data and analyses that 
commenters provided did not analyze subsequent price changes, it is 
unclear whether the pre-close price differentials indicate better or 
worse price discovery or efficiency. Second, when comparing price 
differences across securities, the analyses did not distinguish whether 
the observed differences were due to the removal of MOC orders from the 
primary listing exchange or due to liquidity differences. As described 
above, NYSE provided an analysis comparing price differences between 
securities in which 75% of the total closing volume was reported to a 
TRF, to securities in which 25% of the total closing volume was 
reported to a TRF, and argued that securities with more off-exchange 
MOC activity have more closing price volatility. However, the 
Commission believes that closing price volatility and off-exchange 
activity may be correlated with unobserved liquidity factors. For 
example, small stocks tend to have high trading costs (e.g., wider 
spreads, thinner order books) and more volatility on average.\123\ 
Therefore, it is possible that the price differences observed by the 
commenter could be due to differences in liquidity or other factors not 
controlled for in the analysis, rather than the levels of off-exchange 
MOC activity.\124\ Nasdaq's analysis involved 1,653 closing crosses 
that occurred between January 1, 2016 and August 31, 2017, which the 
Commission estimates accounts for approximately 0.44% of all Nasdaq 
auctions over that time period. As such, the Nasdaq analysis may not be 
a representative sample.\125\ Moreover, Nasdaq did not address whether 
the securities analyzed are highly illiquid. If they are highly 
illiquid, price differences between the last sale price and the closing 
auction price may be large for reasons unrelated to the specifics of 
the auction mechanism.\126\ Given these limitations, including that 
Nasdaq's estimate may overstate the impact, the data and analysis 
provided in these comments do not persuade the Commission that the 
proposal is inconsistent with the Act.
---------------------------------------------------------------------------

    \122\ See e.g., Joel Hasbrouck, ``Measuring the Information 
Content of Stock Trades,'' Journal of Finance 46, 179-207 (1991), 
available at www.jstor.org/stable/2328693.
    \123\ For example, one study examined fragmentation in the U.S. 
equities markets and showed that small cap stocks are more 
fragmented than large cap stocks for Nasdaq-listed issues. It also 
found that fragmentation is correlated with higher short-term 
volatility, but increased market efficiency. See Maureen O'Hara and 
Mao Ye, ``Is Market Fragmentation Harming Market Quality?,'' Journal 
of Financial Economics 100, 459-474 (2011), available at http://www.sciencedirect.com/science/article/pii/S0304405X11000390.
    \124\ See also notes 94-106 and accompanying text (discussing 
BZX's comments with respect to NYSE's analysis and BZX's own 
analysis of such data).
    \125\ See supra note 43.
    \126\ See id. See also NYSE Report, at 12 (``The difference 
between the last sale price in the continuous market and the closing 
auction price, particularly for less active securities where the 
last sale price may be stale, can be significant.'').
---------------------------------------------------------------------------

    Further, while NYSE and Nasdaq implied that use of the consolidated 
last sale price as the official closing price is inferior to the price 
discovery process of the closing auction, the use of the consolidated 
last sale price as the official closing price when a primary listing 
exchange does not conduct a closing auction is not mandated by the Act 
or rules thereunder, but rather is established by the rules of that 
exchange. Therefore, if a primary listing exchange believes that such 
prices no longer reflect an appropriate closing price in certain 
scenarios, it is within the exchange's discretion to reevaluate whether 
reliance on the last consolidated sale price is the appropriate means 
for determining the official closing price in such scenarios, and may 
file proposed rule changes to amend its rules to establish alternative 
methods of determining the official closing price should no auction be 
held that it believes to be more appropriate.\127\
---------------------------------------------------------------------------

    \127\ For example, like all market participants, the primary 
listing exchanges could determine if and how to utilize the 
information BZX disseminates regarding paired MOC interest in the 
Cboe Market Close for determining the official closing price should 
they choose to do so.
---------------------------------------------------------------------------

    Some commenters also argued that the proposal would impact the 
submission of LOC orders to the primary listing markets. As BZX stated 
in its response letter, LOC orders provide price protection, whereas 
MOC orders are submitted by market participants who may be less price 
sensitive and who may prioritize other aspects of a closing execution 
over price. As such, the Commission does not believe that it is likely 
that market participants would be more inclined to assume the risk of 
submitting MOC orders to the Cboe Market Close in circumstances where 
they otherwise would have submitted price-protected LOC orders into the 
primary markets' closing auctions, solely to pay lower fees. As 
discussed above, Nasdaq and NYSE also asserted that the Cboe Market 
Close could discourage submission of orders in the continuous market 
and closing cross if there were a large amount of paired MOC orders in 
Cboe Market Close and a subsequent lack of imbalance information 
disseminated on the primary listing markets.\128\ However, the 
Commission believes this risk is not unique to the availability of the 
Cboe Market Close and, indeed, exists today. Specifically, the 
Commission believes that the submission of orders would similarly be 
discouraged today if such large amount of MOC orders in a listed 
security had been paired on the primary listing exchange and 
accordingly, there was little or no resulting imbalance disseminated by 
such exchange. Irrespective of the exchange upon which the MOC orders 
are paired, the net imbalance published by the primary listing exchange 
would be expected to be the same. In addition, because Cboe Market 
Close would publish the volume of MOC orders paired prior to the start 
of the closing auctions on the primary

[[Page 3214]]

listing exchanges, market participants should have sufficient time to 
incorporate such information relating to the levels of MOC interest in 
the Cboe Market Close in a given security into their decisions about 
order submissions into the closing auctions.
---------------------------------------------------------------------------

    \128\ See supra notes 37-38 and 46 and accompanying text.
---------------------------------------------------------------------------

    In addition, as discussed above, many commenters addressed the 
existence of fragmentation at the close today due to off-exchange 
matching processes and competing closing auctions. With regard to 
broker-dealer matching services, the Commission's consideration and 
analysis of whether BZX's proposal is consistent with the Act as an 
exchange is subject to differing requirements and standards than those 
that apply to broker-dealers under the Act. At the same time, how such 
existing off-exchange services impact closing auctions on the primary 
listing markets may provide some limited insight into the potential 
impact of the proposal on the price discovery function of the primary 
closing markets, particularly to the extent the proposed Cboe Market 
Close is similar to such off-exchange services.
    The staff from the Commission's Division of Economic and Risk 
Analysis analyzed the relationship between the proportion of MOC orders 
executed off-exchange and closing price discovery and efficiency.\129\ 
The DERA Analysis made several findings that the Commission believes, 
while not dispositive, are relevant to commenters' claims regarding 
Cboe Market Close's potential impact on price discovery and other data 
and assertions presented regarding current off-exchange matching 
services. In particular, the DERA Analysis found that, on average, 
closing auction volume accounts for approximately 5.2 percent of daily 
volume, and on average, approximately 9.3 percent of closing volume is 
executed off-exchange at the primary listing exchange's closing price. 
The DERA Analysis also found that, in a sample spanning the first 
quarter of 2017, variation in off-exchange MOC share is not 
significantly correlated with closing price discovery or efficiency, 
controlling for primary auction activity, off-exchange trading activity 
during regular trading hours, average market capitalization, average 
daily trading volume, average daily stock return volatility, and 
closing price volatility.\130\ In further sample splits (e.g., by 
listing venue, security type, and index inclusion), the DERA Analysis 
finds some mixed evidence of statistically significant correlations, 
but no consistent or conclusive evidence that contradicts the full-
sample analysis.
---------------------------------------------------------------------------

    \129\ See DERA Analysis, supra, note 8.
    \130\ Though the DERA Analysis' findings suggest ``that existing 
levels of fragmentation do not, on average, correlate with price 
discover or price efficiency,'' the DERA Analysis makes clear that 
``the data we have does not allow us to predict how [Cboe Market 
Close] would affect price discovery in the closing auction process, 
and market participants' use of limit-on-close orders in the closing 
auction processes.'' In addition, the DERA Analysis states that it 
does not attempt to establish a causal link between off-exchange 
activity and closing price discovery and efficiency. See DERA 
Analysis, supra, note 8, at 1-2.
---------------------------------------------------------------------------

    NYSE provided several critiques of the DERA Analysis' methodology 
and argued that the DERA Analysis' findings should not be interpreted 
as providing evidence that BZX's proposal would have no negative impact 
on price discovery or the efficiency of closing prices.\131\ NYSE also 
asserted that the DERA Analysis does not adequately address the 
concerns raised by commenters that the BZX proposal might undermine 
price discovery, have a negative effect on the quality of official 
closing prices, and introduce new concerns related to market 
manipulation and ``gaming.'' \132\
---------------------------------------------------------------------------

    \131\ See NYSE Report, at 1 and 9.
    \132\ See id. at 9. To provide context for these assertions, the 
NYSE Report included background information summarizing the existing 
closing auction processes, including both the procedures for the 
primary listing exchanges' closing auctions as well as the competing 
closing auctions operated by Nasdaq and NYSE Arca. NYSE also 
summarized BZX's proposal and the DERA Analysis. See id. at 3-9.
---------------------------------------------------------------------------

    As discussed above, NYSE stated that because the bulk of the volume 
accounted for in the DERA Analysis is market maker volume crossed on 
behalf of clients, it may not be a good proxy for evaluating the 
potential impact of the proposal.\133\ In addition, NYSE stated that if 
BZX's proposal is successful, it could divert a higher percentage of 
MOC orders away from the primary listing markets than is currently 
observed in an analysis of existing off-exchange MOC activity. 
Accordingly, NYSE argued that the DERA Analysis does not have 
sufficient data to measure the effects when off-exchange MOC volume is 
high, which is likely to yield greater power to find an effect.\134\ 
NYSE also claimed that the DERA Analysis failed to account for 
instances when there is no closing auction, which could result in not 
considering instances where, according to NYSE, price discovery in the 
closing auction would be most impacted by diverting MOC orders away 
from the primary listing market.\135\
---------------------------------------------------------------------------

    \133\ See id. at 10; see also supra notes 65-66 and accompanying 
text.
    \134\ See id. at 10-11.
    \135\ See id. at 13.
---------------------------------------------------------------------------

    In criticizing the methodology of the DERA Analysis, NYSE further 
asserted that ``widely accepted'' alternative approaches for analyzing 
potential behavior and incentives under alternative market structures 
could be useful in considering the impact of BZX's proposal on closing 
price discovery and efficiency.\136\ In addition, NYSE stated that it 
may be possible to use a simulation approach to investigate the degree 
to which routing MOC orders away from the primary listing exchanges 
impacts price discovery.\137\
---------------------------------------------------------------------------

    \136\ See id. at 14. The author of the NYSE Report also stated 
that a study he conducted providing evidence that higher levels of 
off-market trading under certain market structures can harm market 
quality may be relevant to the analysis of the potential impacts of 
BZX's proposal. See id. at 11. However, as the study the author 
cited analyzes continuous trading in Nasdaq stocks prior to the 
implementation of Regulation NMS (adopted in 2005 and which 
implemented significant changes to the regulatory framework of the 
equity markets), the Commission does not believe in this instance 
that it can be relied upon to make inferences regarding current 
market structure. See generally 70 FR 27496 (June 29, 2005).
    \137\ See id.
---------------------------------------------------------------------------

    Concluding that the methodology used by the DERA Analysis does not 
provide meaningful evidence of the extent to which off-exchange MOC 
trading currently impacts the informational efficiency of the official 
closing price, NYSE discussed the metrics used in the DERA 
Analysis.\138\ With respect to the Price Contribution metric, NYSE 
argued that the metric is not suitable for evaluating the quality of 
the closing auction because it is a ``simplistic measure'' of the 
degree of price discovery that would classify ``large arbitrary 
swings'' in prices as good price discovery.\139\ Concerning the Price 
Reversal metric, NYSE stated that as a measure of the efficiency of 
official closing prices, it is a ``noisy and imprecise'' metric that 
makes it unlikely that one would find a significant result, even if one 
exists, and that it also has no clear interpretation.\140\ NYSE further

[[Page 3215]]

asserted the Price Reaction metric is likewise ``imprecise and 
problematic'' because it is ``just an indicator-variable version'' of 
price reversal and thus ``imprecisely measures the imprecise Price 
Reversal metric.'' \141\ NYSE asserted that the DERA Analysis' lack of 
a finding of statistically significant results ``is not surprising'' 
because the power of the Price Reaction test to find significant 
results is severely hampered.\142\
---------------------------------------------------------------------------

    \138\ See id. at 17. NYSE also argued that while the DERA 
Analysis cited to two published papers by Barclay and Hendershott to 
support using a regression-based approach to study the information 
content of closing prices, the DERA Analysis does not use the 
Barclay and Hendershott methodology.
    \139\ See id. at 14-15. NYSE suggested that an alternative 
approach to examine price continuity measures could provide some 
pertinent information regarding price discovery at the close. NYSE 
also stated that controlling for the size of the auction and the 
auction's initial imbalance may be important because price 
deviations that are the result of large imbalances or large demand 
are more likely to be indicative of informationally-driven price 
moves, which would be an indication of good price discovery, rather 
than liquidity-driven price moves, which would be an indication of 
bad price discovery. See id. at 15-16.
    \140\ See id. at 16. NYSE provided several examples that it 
stated illustrated the imprecision of the Price Reversal metric. See 
id. at 16-17.
    \141\ See id. at 17.
    \142\ See id.
---------------------------------------------------------------------------

    The Commission has considered the criticisms of NYSE with respect 
to the DERA Analysis. Importantly, the DERA Analysis was explicit 
regarding the limited scope of its analysis and does not assert that 
BZX's proposal would have no negative impact on price discovery of 
official closing prices. The DERA Analysis sought to explore the 
correlation of closing price discovery and efficiency with existing 
off-exchange MOC activity. It did not make any findings with respect to 
establishing a causal link between off-exchange MOC activity and 
closing price discovery and efficiency.\143\ In addition, it was not 
designed to, nor does it purport to, opine on or address other aspects 
of BZX's proposal, including the potential impact on manipulation.\144\ 
While NYSE also criticized the scope of the DERA Analysis for not 
considering instances where there was no closing auction, the sample in 
Table 4 of the DERA Analysis did, in fact, include all symbol-day 
observations, including those days where there was no closing auction, 
and this sample showed results consistent with DERA's overall 
findings.\145\
---------------------------------------------------------------------------

    \143\ See DERA Analysis, supra note 8, at 1. See also supra note 
130.
    \144\ See infra notes 204-211 and 213-226 and accompanying text 
(discussing in more detail NYSE's arguments relating to manipulation 
and the Commission's response).
    \145\ See id. at 11 and 16. See also supra notes 117-121 
(discussing the Commission's response to NYSE and other commenters 
arguments relating to the potential scenario of all MOC orders being 
diverted to Cboe Market Close and the primary listing markets 
conducting no auction).
---------------------------------------------------------------------------

    NYSE noted that the DERA Analysis ``cites to two published papers 
by Barclay and Hendershott as support for using a regression-based 
approach to study the information content of the closing price. 
However, the DERA Analysis does not actually use the Barclay-
Hendershott methodology.'' \146\ The DERA Analysis explains that, in 
order to maintain a consistent sample size across the different 
regression specifications, rather than take time-series weighted 
averages and running pure cross-sectional regressions, the DERA 
Analysis uses weighted panel regressions to perform the same 
estimation.\147\ The DERA Analysis explains that the weighted panel 
regression approach produces the same Price Contribution estimates as 
the time-series weighted averages.\148\ Furthermore, the panel 
regression approach allows for the analysis of within-stock--day-to-
day--variation in Price Contributions, off-exchange MOC activity, as 
well as the controls.\149\ Finally, the NYSE, in its critique of the 
DERA Analysis, does not explain how any differences in regression 
specifications would affect coefficient estimates or change the 
interpretation of these estimates.
---------------------------------------------------------------------------

    \146\ See NYSE Report, at 15. See also supra note 138.
    \147\ See DERA Analysis, supra note 8, at 6, note 20.
    \148\ See DERA Analysis, supra note 8, at 6, note 20 and 
accompanying text.
    \149\ Footnote 22 of the DERA Analysis describes a robustness 
check using stock and day fixed effects. See DERA Analysis, supra 
note 8, at 8. Controlling for unobserved heterogeneity at the stock 
level using stock fixed effects would not be possible using pure 
cross-sectional regressions.
---------------------------------------------------------------------------

    With respect to NYSE's critique of the Price Contribution metric, 
the DERA Analysis controlled for contemporaneous absolute price 
volatility to account for the precise concerns identified by NYSE. 
Accordingly, the regression utilized in the DERA Analysis sought to 
isolate variations in Price Contributions that were not merely ``large 
arbitrary price swings'' that happened to be correlated with off-
exchange MOC activity.\150\ While NYSE also argues that the imprecision 
of the Price Reversal and Price Reaction metrics render it unlikely to 
yield statistically significant results, the Commission believes that 
the DERA Analysis included a sufficient sample size and variables to 
achieve statistical power.\151\ Regarding the Price Reversal metric, 
the DERA Analysis used the same definition as Barclay and Hendershott, 
which found statistical relations using this measure, and the DERA 
Analysis used all stock-days over a quarter so as to not limit the 
analysis to a small sample.\152\ Concerning the Price Reaction 
measurements, the Commission acknowledges that they may be imprecise, 
but many of the variables included in the regression, including auction 
share and market capitalization, are statistically correlated with 
price reactions, which suggests that, in this case, the definition of 
the dependent variable does not, on its own, create a lack of 
statistical power.\153\
---------------------------------------------------------------------------

    \150\ See NYSE Report, at 14-15.
    \151\ Statistical power is the ability for statistical tests to 
identify differences across samples when those differences are 
indeed significant.
    \152\ In fact, Table 2 of the DERA Analysis finds strong 
statistically significant correlations between Price Reversals and 
contemporaneous closing price volatility. See DERA Analysis, supra 
note 8, at 15.
    \153\ The DERA Analysis included this metric to account for 
price continuations, which would also indicate a lack of price 
efficiency. See DERA Analysis, supra note 8, at 6-7.
---------------------------------------------------------------------------

    Moreover, NYSE suggested that there are alternative approaches that 
would be useful in considering how market participants are likely to 
behave under alternative market structures and for analyzing how 
potential structures create incentives for market manipulation, as well 
as alternative measures that could provide pertinent information 
regarding price discovery at the close.\154\ However, NYSE did not, in 
fact, provide any data or studies employing any of these methods. In 
the OIP, the Commission requested data, analyses or studies on a 
variety of relevant issues including arguments that BZX's proposal 
would harm price discovery in the primary listing exchanges' closing 
auctions, that BZX's proposal would affect the integrity or reliability 
of the official closing auction and the resulting closing price, and 
that BZX's proposal would increase the potential for manipulative 
activity.\155\ However, despite asserting that it believed there are 
other relevant approaches for studying and analyzing matters relevant 
to these points that it could have used to respond to the Commission's 
solicitation of comments, NYSE did not do so.\156\
---------------------------------------------------------------------------

    \154\ See NYSE Report at 14 and 15-16.
    \155\ See OIP, supra note 7, at 40210-40211.
    \156\ See supra note 154. See also infra note 209 (stating that 
NYSE did not provide any data, studies, or analyses supporting its 
arguments regarding the potential impacts of BZX's proposal on 
manipulative activity in response to the Commission's specific 
solicitation in this regard).
---------------------------------------------------------------------------

    As discussed above, Nasdaq and NYSE concluded that existing over-
the-counter price matching should not be considered a precedent for the 
proposal and described how they believed some over-the-counter MOC 
trades differed from those that would occur through Cboe Market 
Close.\157\ While the utility of any consideration of the impact of 
off-exchange MOC execution services on price discovery on the primary 
listing exchanges may be more limited to the extent that such existing 
activity and services are not identical to the proposed Cboe Market 
Close, the Commission nonetheless believes that the DERA Analysis, 
while not conclusive, provides some insights in

[[Page 3216]]

considering whether there would likely be potential negative impacts on 
the price discovery process in the closing auctions of the primary 
listing exchanges that would occur from executing MOC orders on a venue 
other than the primary listing market. Accordingly, the Commission 
believes that the DERA Analysis lends support for the argument that 
there is no strong evidence to suggest that existing levels of 
fragmentation of closing auctions through off-exchange MOC activity 
negatively impacts the price discovery process on the primary listing 
exchanges. In addition, as a general matter, commenters failed to 
provide data, studies or analyses, as requested in the OIP,\158\ that 
persuasively supported their assertions regarding the proposal's 
negative impact on price discovery on the closing auctions of the 
primary listing markets.
---------------------------------------------------------------------------

    \157\ See supra notes 61-66 and accompanying text (stating that 
Nasdaq asserted that broker-dealers may accept MOC orders and trade 
against them as principal and that NYSE asserted that market makers 
crossing orders on behalf of clients may be risking capital on such 
transactions).
    \158\ See OIP, supra note 7, at 40210-40211.
---------------------------------------------------------------------------

    With regard to competing closing auctions, BZX's proposed Cboe 
Market Close is not a closing auction and the Commission believes, as 
do some commenters, that there are certain fundamental differences 
between BZX's proposed Cboe Market Close and existing competing closing 
auctions, such as those identified by NYSE and Nasdaq regarding the 
price discovery mechanisms of their competing, single-priced closing 
auctions, which produce closing prices independent from those 
determined through the primary listing exchanges' closing 
auctions.\159\ Nevertheless, the Commission believes that considering 
such competing closing auctions, which already exist today, is useful 
to an analysis of the current proposal. Importantly, in such competing 
closing auctions, market participants may choose not only to submit MOC 
orders, but also price-setting LOC orders. As pointed out by BZX, this 
could affect the closing price on the primary listing market by 
potentially diverting LOC orders that contribute to price discovery 
away from the primary listing market's closing auction.\160\ In 
contrast, BZX's proposal would not accept LOC orders, but rather only 
matches MOC orders, and thus is reasonably designed to not impact the 
closing price formation process.
---------------------------------------------------------------------------

    \159\ See supra notes 52-55 and accompanying text.
    \160\ Competing auctions could also potentially reduce the 
centralization of orders at the primary listing market's closing 
auction, which NYSE and Nasdaq argued was a critical element of the 
primary listing markets' closing auctions.
---------------------------------------------------------------------------

    Several commenters stated that the proposal could harm issuers, 
particularly small and mid-cap companies.\161\ Many of these commenters 
argued that because of their view that the proposal undermines the 
reliability of the closing process and/or the official closing price it 
also poses a risk to listed companies and its shareholders.\162\ Many 
of these commenters, some of which are issuers, stated that the current 
centralized closing auctions on the primary listing markets contribute 
meaningful liquidity to a company's stock, facilitates investment in 
the company, and helps to lower the cost of capital. Accordingly, these 
commenters expressed concern that the potential additional 
fragmentation caused by the proposal could negatively impact liquidity 
during the closing auction, causing detrimental effects to listed 
issuers.\163\
---------------------------------------------------------------------------

    \161\ See Nasdaq Letter 1, at 6-7; Nasdaq Letter 2, at 1-2 
(asserting that as a result of fragmentation, small- and mid-cap 
companies are more susceptible to abrupt and disruptive price swings 
and therefore, centralizing liquidity at the close is important for 
these issuers and their investors); NYSE Letter 1, at 3; GTS 
Securities Letter 1, at 2-5; Customers Bancorp Letter; Orion Group 
Letter; CTS Corporation Letter; IMC Financial Letter, at 1-2; 
Southern Company Letter; Nobilis Health Letter; EDA Letter, at 1-2; 
Coupa Software Letter; Trade Desk Letter; Duffy/Meeks Letter, at 1; 
and Henry Schein Letter.
    \162\ See NYSE Letter 1, at 3 (arguing that the proposal is 
indifferent to the potential risks to public companies and that the 
closing is the most important data point for shareholders); IMC 
Financial Letter, at 1-2; Nobilis Health Letter; EDA Letter, at 1-2; 
Coupa Software Letter; Ethan Allen Letter; Trade Desk Letter; 
BioCryst Letter; Digimarc Letter; Duffy/Meeks Letter, at 1-2 
(stating that public companies are concerned the proposal will have 
an unforeseen effect on the pricing of their companies' shares at 
the close, ultimately harming a critical measure of the company's 
value and harming its shareholders and asking the Commission to 
carefully consider the impacts of the proposal and whether such 
impacts would be necessary and helpful to public companies); NBT 
Bancorp Letter; Five9 Letter; Balchem Letter; Cree Letter; Henry 
Schein Letter; Corbus Letter; Global Payments Letter; CA 
Technologies Letter; Sirius Letter; Lam Letter; and PayPal Letter. 
Several issuers also asserted that decentralizing closing auctions 
will increase volatility, reduce visibility, and negatively impact 
liquidity for equity securities. See e.g., Customers Bancorp Letter; 
Orion Group Letter; Nobilis Health Letter; Cardinal Health Letter; 
and Stewart Letter.
    \163\ See Customers Bancorp Letter; Orion Group Letter; CTS 
Corporation Letter; Southern Company Letter; Duffy/Meeks Letter, at 
1-2 (stating that the proposal could cause a disruption to the 
closing auction process, which could lead to discouraging investors 
from participating in and having confidence in our markets); and 
Five9 Letter. In contrast, one commenter argued that the proposal 
would improve aggregate liquidity at the official closing price 
because the lower aggregate cost of trading would likely spur 
incremental increases in trading volumes. In addition, this 
commenter stated that the ability to enter MOC orders into Cboe 
Market Close with little risk of information leakage may attract an 
additional source of liquidity. See ViableMkts Letter, at 2.
---------------------------------------------------------------------------

    In addition, one commenter, SPDJI, argued that the proposal may 
also impact confidence in the pricing of benchmark indices as 
confidence in closing prices is a prerequisite for market participants 
to maintain confidence in the pricing of benchmark indices.\164\ 
Accordingly, SPDJI asserted that because the closing price is a 
critical data point for investors, great caution should be taken in any 
changes to the closing auction.\165\
---------------------------------------------------------------------------

    \164\ See SPDJI Letter, at 1-2 (stating that it relies solely on 
primary market auction prices to calculate the official closing 
index values, and that these closing index values play an important 
role in the markets, including use by portfolio managers to measure 
their funds' value and for use in calculating settlement prices for 
certain products); see also Coupa Software Letter; Trade Desk 
Letter; and Henry Schein Letter (stating that the official closing 
price is used to value their stocks for purposes of various indexes 
and mutual funds).
    \165\ See SPDJI Letter, at 2; see also NYSE Report, at 23-24. In 
contrast, one commenter acknowledged that while impacting the 
quality of the closing price is an objection that deserves close 
analysis, as the closing price is ``the most important price of the 
day,'' and would warrant rejection of the proposal, the commenter 
does not believe the proposal would harm the quality of the closing 
price. See Angel Letter, at 4.
---------------------------------------------------------------------------

    Moreover, some commenters argued that the centralization of 
liquidity at the open and close of trading, and how primary listing 
markets perform during the opening and closing, are important factors 
for issuers in determining where to list their securities, and the 
additional risk posed to listed companies from an unreliable or 
unrepresentative closing price and/or process could impact an issuer's 
decision where to list and/or cause companies to forgo going 
public.\166\
---------------------------------------------------------------------------

    \166\ See NYSE Letter 1, at 3 and 9 (stating that no single data 
point is more important than the closing price to the company or its 
shareholders); GTS Securities Letter 1, at 3-5; EDA Letter, at 1; 
Duffy/Meeks Letter, at 1 (stating that the closing price is a 
critical measure of a company's value and that public companies view 
the closing auction on the primary listing exchange as a critical 
aspect of listing); and GTS Securities Letter 2, at 1-2. In 
addition, one commenter stated that further fragmenting the market 
would limit the quality and quantity of information on trading 
dynamics that the primary listing markets provide to their listed 
issuers. See CA Technologies Letter.
---------------------------------------------------------------------------

    With regard to concerns about the impact of the proposal on issuers 
and their shareholders, BZX stated that the proposal ``would not 
adversely impact the trading environment for issuers and their 
securities'' because it ``specifically designed the [p]roposal so that 
it would not impact the very important price discovery function 
performed by the primary listing markets' closing auction'' by only 
matching paired MOC orders and not LOC orders and ensuring executions 
at the closing price.\167\ BZX further stated that unlike the competing 
closing auctions run by NYSE Arca and Nasdaq, the proposal would not 
create

[[Page 3217]]

a price that deviates from the official closing price, and therefore, 
the proposal ``would not impact listed issuers or the market for their 
securities.'' \168\
---------------------------------------------------------------------------

    \167\ See BZX Letter 1, at 2 and 4 and BZX Letter 2, at 10.
    \168\ See BZX Letter 2, at 10.
---------------------------------------------------------------------------

    The Commission believes that, because the proposal is reasonably 
designed to minimize any impact on the price discovery process, as 
described above, commenters' concerns regarding the effects on listed 
issuers, including small and mid-cap companies, are similarly 
mitigated. Commenters stated that the proposal would undermine the 
value and reliability of closing prices for securities and, as a 
result, the pricing of benchmark indices, and that decentralization of 
the closing auction would harm liquidity in their stock.\169\ However, 
for the reasons discussed above,\170\ the Commission believes that, 
because the proposal is reasonably designed to not impact price 
formation in closing auctions on the primary listing markets, the 
proposal is likewise reasonably designed to avoid the detrimental 
impacts that commenters have raised regarding the reliability of 
official closing prices, confidence in closing prices and pricing of 
benchmark indices, increased volatility, liquidity conditions for 
particular stocks, and the cost of raising capital. Further, as 
described above, because BZX will disseminate the amount of BZX matched 
shares well before the cut-off time for the primary markets' closing 
auctions, the Commission does not believe that the proposal would 
negatively impact visibility and transparency into the closing auction 
process on the primary listing exchanges.
---------------------------------------------------------------------------

    \169\ See supra notes 161-166 and accompanying text.
    \170\ See supra notes 110-160 and accompanying text.
---------------------------------------------------------------------------

Impact on Market Complexity and Operational Risk

    Several commenters addressed the potential impact of the proposal 
on market complexity and operational risk that could occur if the 
proposal resulted in increased market fragmentation. Some of these 
commenters believed that the proposal would not introduce significant 
additional complexity or operational risk. For example, two commenters 
argued that the proposal could enhance the resiliency of the closing 
auction process by providing market participants an additional 
mechanism through which to execute orders at the official closing price 
in the event of a disruption at a primary listing market.\171\ Another 
commenter argued that exchanges already have many market data feeds 
that firms must purchase to ensure that they have all of the 
information necessary to make informed execution decisions and that 
adding another data feed will not add complexity given the small amount 
of information that goes into the closing data feed and the current 
capabilities of market participants to re-aggregate multiple data 
feeds.\172\
---------------------------------------------------------------------------

    \171\ See SIFMA Letter 1, at 2 and ViableMkts Letter, at 3 
(further stating that once BZX is able to process MOC orders, they 
would be in a position to develop the capability to offer a full 
backup closing auction process).
    \172\ See Clearpool Letter, at 4.
---------------------------------------------------------------------------

    In contrast, other commenters argued that the proposal would add 
unnecessary market complexity and operational risk. In particular, two 
commenters stated that the proposal would require market participants 
to monitor an additional data feed, the Bats Auction Feed, with one 
also stating that if additional exchanges adopted similar functionality 
to Cboe Market Close, it would require monitoring of even more data 
feeds.\173\ These commenters argued that monitoring an additional data 
feed could increase operational risk by creating another point of 
failure at a critical time of the trading day.\174\ One commenter also 
stated its view of the increased complexity involved in sending order 
flow to more than one exchange in short periods of time near the close 
of the trading day.\175\ This commenter argued that the proposal 
increases operational risk and complexity at a critical point of the 
trading day by forcing market participants whose orders did not match 
in Cboe Market Close to quickly send MOC orders from one exchange to 
another before the cut-off time at the primary market closing 
auction.\176\ This added complexity, GTS argued, puts additional stress 
on the systems of exchanges and increases the potential for 
disruptions.\177\ Lastly, two commenters argued that the proposal could 
encourage other exchanges, broker-dealers, and alternative trading 
systems to offer similar processes, which would introduce undesirable 
fragmentation to the market and lead to operational challenges for 
investors and traders.\178\
---------------------------------------------------------------------------

    \173\ See NYSE Letter 1, at 7 and IMC Letter, at 1. See also 
NYSE Letter 3, at 3 (stating that market participants that may not 
subscribe to multiple proprietary data feeds would be at a 
disadvantage and that the complexity would be further compounded 
when other exchanges adopt functionality similar to Cboe Market 
Close).
    \174\ See IMC Letter, at 1 and NYSE Letter 1, at 7. See also 
Ethan Allen Letter (arguing the proposal would add a layer of 
complexity).
    \175\ See GTS Securities Letter 1, at 6.
    \176\ See GTS Securities Letter 1, at 6. Furthermore, NYSE 
argued that in certain situations, investors may not be able to 
participate in a closing auction on NYSE American or NYSE Arca if 
they wait until after their order was cancelled by BZX to send in a 
market-on-close order to closing auctions on NYSE Arca and NYSE 
American. NYSE explained that in situations where there is an order 
imbalance priced outside the Auction Collars, orders on the side of 
the imbalance are not guaranteed to participate in the closing 
auctions on those two exchanges. Earlier submitted market-on-close 
orders have priority. See NYSE Letter 1, at 8.
    \177\ See GTS Securities Letter 1, at 6.
    \178\ See T. Rowe Price Letter, at 1-2. See also Nasdaq Letter 
1, at 8 (stating that other exchanges may propose similar offerings 
but choose different pairing cut-off times which could further 
complicate investors' decisions and programming requirements).
---------------------------------------------------------------------------

    In response, BZX argued that the proposal would not increase market 
complexity or operational risks.\179\ Rather, BZX asserted that it 
would provide a way to address the single point of failure risk that 
exists for closing auctions conducted on the primary listing 
markets.\180\ BZX argued that, despite the current system of designated 
auction backups, market participants can be confused about whether an 
exchange is in fact able to conduct a closing auction.\181\ BZX 
believes, in the event there is an impairment at a primary listing 
market, Cboe Market Close could provide an alternative option for 
market participants to route MOC orders and still receive the official 
closing price.\182\
---------------------------------------------------------------------------

    \179\ See BZX Letter 1, at 12 and BZX Letter 2, at 10-11.
    \180\ See BZX Letter 1, at 12 and BZX Letter 2, at 10-11.
    \181\ See BZX Letter 1, at 12.
    \182\ See id. In contrast, Nasdaq argued that Cboe Market Close 
could not serve as a back-up for a primary listing market suffering 
an impairment because it is not a price-discovering auction and 
would not operate in the absence of the auction it would be backing-
up. See Nasdaq Letter 2, at 12.
---------------------------------------------------------------------------

    In addition, BZX added that modern software can easily and simply 
add volume data disseminated by the primary listing markets regarding 
the closing auction and data regarding matched MOC orders from the Cboe 
Market Close.\183\ Moreover, BZX stated that it believed the 3:35 p.m. 
cut-off time would provide market participants with adequate time to 
receive any necessary information and to route any unmatched orders to 
the primary listing exchange.\184\ Lastly, BZX stated that market 
participants would not be obligated to use Cboe Market Close and 
accordingly, may weigh the value of seeking an execution in Cboe Market 
Close against any perceived risks.\185\
---------------------------------------------------------------------------

    \183\ See BZX Letter 1, at 4 and BZX Letter 2, at 3.
    \184\ See BZX Letter 2, at 8.
    \185\ See id. at 8-9. In contrast, NYSE argued that it is 
irrelevant whether it is optional to send market orders to the Cboe 
Market Close, as the analysis should turn on whether the mere 
existence of the Cboe Market Close would increase complexity and 
operational risk in the market. See NYSE Letter 3, at 2.

---------------------------------------------------------------------------

[[Page 3218]]

    The Cboe Market Close will offer market participants an additional 
venue to which they may send orders for execution at the official 
closing price and an additional data feed that some market participants 
may choose to monitor. However, as several commenters stated, many 
market participants already monitor multiple data feeds and the 
Commission believes that those market participants that would plan to 
monitor information disseminated by BZX relating to Cboe Market Close 
would likely already maintain systems and software that are able to 
aggregate such feeds.\186\ Accordingly, the Commission does not believe 
that monitoring the Cboe Market Close feed or having an additional 
venue to submit MOC interest would significantly increase complexity or 
impose substantial burdens on market participants in such a manner as 
to render the proposal inconsistent with the Act. In addition, the 
Commission believes, as stated by BZX, that because BZX will 
disseminate the amount of paired shares well in advance of the order 
entry cut-off times for the primary listing markets' closing auctions, 
the proposal is reasonably designed to give market participants 
adequate time to review the necessary data, make informed decisions 
about closing order submission, and route orders to the primary listing 
exchange when desired. Further, the Commission believes, as BZX argued, 
that market participants have the ability to evaluate any potential 
risks that they believe may be associated with using the proposed 
functionality in any determination as to whether to send their orders 
to Cboe Market Close, such as the need to monitor additional data 
feeds, whether their orders were matched on BZX, or potentially having 
to send their MOC orders to more than one venue if they are not matched 
in Cboe Market Close.\187\
---------------------------------------------------------------------------

    \186\ In addition, in response to comments regarding the 
potential for other exchanges to adopt similar functionality that 
would require monitoring of even more data feeds, the Commission 
believes that those participants that would likely choose to monitor 
such data feeds likely already have the capability to monitor and 
aggregate information from multiple data feeds. Furthermore, the 
current BZX filing under consideration is a proposal from one 
exchange to disseminate information on one data feed and, as such, 
the Commission's analysis considers whether the instant proposal is 
consistent with the Act, rather than similar functionality that 
other exchanges may or may not propose in the future.
    \187\ See supra note 120.
---------------------------------------------------------------------------

Manipulation

    Several commenters addressed the issue of whether the proposal 
would facilitate manipulation of both the closing auctions on the 
primary listing markets, as well as continuous trading during the final 
minutes of the trading day. Some commenters did not believe it would do 
so. For example, one commenter stated that incentives to manipulate the 
closing price already exist and it is unlikely the proposal would 
result in increased manipulation of the market close.\188\
---------------------------------------------------------------------------

    \188\ See Angel Letter, at 5.
---------------------------------------------------------------------------

    In contrast, several commenters asserted that the proposal raises a 
risk of manipulation, in part due to the asymmetry of information that 
would be disseminated, which would allow market participants to utilize 
informational advantages to their own benefit. For example, Nasdaq 
argued that information concerning the amount of orders matched through 
Cboe Market Close, would represent tradable information that market 
participants could use to ``game'' the closing crosses on the primary 
listing markets and undermine fair and orderly markets.\189\ In 
particular, Nasdaq argued that its closing auction was designed to 
carefully balance the amount and timing of data released so as to 
reduce the risk of gaming, but that this new information regarding 
paired MOC orders could be used to gauge the depth of the market, the 
direction of existing imbalances, and the likely depth remaining at 
Nasdaq, creating gaming opportunities.\190\ While Nasdaq acknowledged 
that information asymmetries exist today as a result of broker-dealer 
MOC order matching services, it argued that BZX, ``as a neutral 
platform, is more likely to gather orders from multiple brokers and 
enable a small number of participants to gain actionable asymmetric 
information,'' which could potentially change the Nasdaq closing 
price.\191\ In response to claims from BZX that Nasdaq's closing 
auction is subject to the same information asymmetries and risks, 
Nasdaq argued that by having its data dissemination and cut-off time 
occur simultaneously, all market participants learn the imbalance at 
the same time, avoiding such risks.\192\
---------------------------------------------------------------------------

    \189\ See Nasdaq Letter 1, at 8 and Nasdaq Letter 2, at 14.
    \190\ See Nasdaq Letter 1, at 8 and Nasdaq Letter 2, at 13-14 
(arguing that market participants may use information gained 
regarding an imbalance in Cboe Market Close to detect the direction 
of the Nasdaq closing auction imbalance and trade against that 
information in either the closing auction or the continuous market).
    \191\ See Nasdaq Letter 2, at 14. Nasdaq argued that this would 
weaken the price discovery process, create a cycle of closing price 
deterioration, and increase volatility. See id. But see supra notes 
110-160 and accompanying text discussing why the proposal is 
reasonably designed to not impact the price discovery process of the 
primary listing markets' closing auctions.
    \192\ See id.
---------------------------------------------------------------------------

    NYSE further asserted that the proposal could potentially provide 
some market participants, such as professional traders, with useful 
information that other market participants do not have, such as the 
direction of an imbalance, which could be used to influence the 
official closing price.\193\
---------------------------------------------------------------------------

    \193\ See NYSE Letter 1, at 6. However, ViableMkts argued that 
because these market participants would not know the full magnitude 
of the imbalance, it does not believe the proposal creates an 
incremental risk of manipulation. See ViableMkts Letter, at 5.
---------------------------------------------------------------------------

    Although not citing concerns regarding manipulation specifically, 
T. Rowe Price similarly argued that the proposal would lead to 
information asymmetries that could result in changes in continuous 
trading behavior leading into the market close as some market 
participants could be trading on information gathered from Cboe Market 
Close pairing results.\194\ T. Rowe Price asserted that a market 
participant that is aware of the composition of volume paired through 
Cboe Market Close at 3:35 p.m. would be in a position to use that 
information to influence its trading behavior over the next ten to 
fifteen minutes leading in to the closing auction cut-off times on NYSE 
and Nasdaq respectively.\195\ T. Rowe Price argued that, as a result, 
the proposal could not only impact price discovery in closing auctions 
on the primary listing markets it could also impact continuous trading 
behavior.\196\
---------------------------------------------------------------------------

    \194\ See T. Rowe Price Letter, at 2-3.
    \195\ See id.
    \196\ See id.
---------------------------------------------------------------------------

    In contrast, BZX argued that information asymmetries are inherent 
in trading, including the primary listing markets closing 
auctions.\197\ For example, BZX argued that the current operation of d-
Quotes on NYSE carries a risk of manipulation as it provides an 
informational advantage to NYSE DMMs and floor brokers, and allows d-
Quotes to be entered, modified or cancelled up until 3:59:50 p.m. while 
other market participants are prohibited from entering, modifying or 
cancelling on-close orders after 3:45 p.m.\198\ Lastly, BZX argued that 
the information

[[Page 3219]]

disseminated through the Bats Auction Feed would not provide any 
indication of whether the cancelling of a particular side of an order 
that has not been matched back to a market participant ``is meaningful 
or just happenstance,'' which limits this information's ability to 
create or increase manipulative activity.\199\
---------------------------------------------------------------------------

    \197\ See BZX Letter 1, at 11-12 and BZX Letter 2, at 9.
    \198\ See BZX Letter 1, at 12 and BZX Letter 2, at 9. BZX also 
requested that the Commission review the appropriateness of NYSE's 
use of the d-Quote and its potential for price manipulation of 
NYSE's closing prices. See BZX Letter 1, at 9.
    \199\ See id.
---------------------------------------------------------------------------

    The Commission believes that the proposed rule change is consistent 
with the requirement of Section 6(b)(5) of the Act that the rules of a 
national securities exchange be designed to prevent fraudulent and 
manipulative acts and practices. The Commission believes information 
asymmetries as those described by commenters exist today and are 
inherent in trading, including with respect to closing auctions. For 
example, any party to a trade gains valuable insight regarding the 
depth of the market when an order is executed or partially executed. 
Further, on NYSE, not only DMMs, but NYSE floor brokers have access to 
closing auction imbalance information that is not simultaneously 
available to other market participants, far in advance of the NYSE 
order entry cut-off time. Specifically, pursuant to NYSE rules, floor 
brokers receive the amount of, and any imbalance between, MOC and 
marketable LOC interest every fifteen seconds beginning at 2:00 p.m. 
until 3:45 p.m.\200\ Floor brokers are permitted to provide their 
customers with specific data points from this imbalance feed. In 
arguing for the Commission to approve its proposal to disseminate such 
information to floor brokers, NYSE stated that the imbalance 
information does not represent overall supply or demand for a security, 
but rather is a small subset of buying and selling interest that is 
subject to change before the close, nor is it actionable prior to 15 
minutes before the close.\201\ NYSE further asserted that it believed 
the information it disseminates to all participants at 3:45 p.m. is 
more material to investors, as it is more accurate, complete, and 
timely information.\202\
---------------------------------------------------------------------------

    \200\ See NYSE Rule 123C(6)(b).
    \201\ See Securities Exchange Act Release No. 62923 (September 
15, 2010), 75 FR 57541, 57542 (September 21, 2010) (SR-NYSE-2010-20; 
SR-NYSEAmex-2010-25).
    \202\ See id.
---------------------------------------------------------------------------

    The Commission believes that the same arguments apply with respect 
to BZX's proposal. In particular, even if a market participant becomes 
aware of the direction of the imbalance for a security in Cboe Market 
Close as a result of receiving a cancellation of part or all of that 
participant's order, such information does not represent overall supply 
or demand for the security, is subject to change before the close, and 
is only one piece of information and likely less useful than other 
information regarding the close that would be available to market 
participants, such as the total matched amount of MOC shares that would 
be disseminated by BZX at 3:35 p.m. and available to all market 
participants on equal terms, as well as any imbalance information 
disseminated by the primary listing markets. While commenters argue 
that those who participate in Cboe Market Close would be able to 
discern the direction of an imbalance and use such information to 
manipulate the closing price, the Commission believes the utility of 
such gleaned information is limited. In particular, a market 
participant would only be able to determine the direction of the 
imbalance, and would have difficulty determining the magnitude of any 
imbalance, as it would only know the unexecuted size of its own order. 
In addition, the information would only be with regard to the pool of 
liquidity on BZX and would provide no insight into imbalances on the 
primary listing market, competing auctions, or off-exchange matching 
services which, as described above, can represent a significant portion 
of trading volume at the close. Likewise, while a market participant 
would be able to determine whether its own order made up a large or 
small percentage of the paired shares for a security in Cboe Market 
Close, it would not be able to determine the composition of same-side 
or contra-side MOC orders submitted to Cboe Market Close, nor would 
such information enable it to determine the composition of orders 
submitted to the primary listing market, competing auctions, or off-
exchange matching services.\203\ Therefore, the Commission believes the 
utility of this information is also limited. Accordingly, the 
Commission believes the proposal's potential for increased manipulation 
due to information asymmetries is negligible.
---------------------------------------------------------------------------

    \203\ See supra notes 194-196 and accompanying text. While one 
commenter expressed concern that market participants that are aware 
of the composition of volume paired through Cboe Market Close would 
be in a position to use that information to influence their trading 
behavior leading up to the close, under BZX's proposal, BZX would 
only publish the size, and not the composition, of paired MOC 
shares, and that such disseminated information would be available to 
all market participants.
---------------------------------------------------------------------------

    NYSE also argued that the proposal would increase potential 
manipulation for several reasons.\204\ First, NYSE asserted that the 
potential for manipulative activity at the close would increase because 
primary listing exchange auctions would decrease in size and thus be 
easier to manipulate.\205\ NYSE also argued that the proposal 
facilitates manipulative activity by providing an incentive for market 
participants to influence the closing price when they know they have 
been successfully matched on BZX to the benefit of the price of its 
already matched order.\206\ Further, NYSE argued that market 
participants could manipulate information leading up to the close by 
entering orders into Cboe Market Close in an attempt to send a false 
signal regarding demand and subsequently reverse such positions after 
hours.\207\
---------------------------------------------------------------------------

    \204\ See NYSE Letter 1, at 6 and NYSE Report, at 19-22. See 
also Americas Executions Letter (stating that the proposal creates 
new opportunities to possibly manipulate the close).
    \205\ See NYSE Letter 1, at 6.
    \206\ See NYSE Letter 1, at 6 and NYSE Report, at 19.
    \207\ See NYSE Report, at 19-20.
---------------------------------------------------------------------------

    The Commission recognizes that, with or without Cboe Market Close, 
the potential exists that there may be market participants who may seek 
to engage in manipulative or illegal trading activity, including with 
respect to closing prices.\208\ Although no commenters provided 
specific data, analyses, or studies regarding manipulation generally or 
to support the assertion that the proposal could increase the potential 
for manipulative activity,\209\ scholarly articles have suggested that 
closing auction manipulations are often characterized by large, 
unrepresentatively priced orders submitted in the final seconds of the 
auction.\210\ Accordingly, the

[[Page 3220]]

Commission believes that, while it is possible that the potential for 
manipulation could increase if the closing auctions on the primary 
listing exchanges decreased significantly in size, existing 
surveillance systems, should be able to continue to detect such 
activity.\211\ With respect to NYSE's comment that the proposal would 
provide an incentive for market participants to influence the closing 
price when they know they have been successfully matched on BZX, market 
participants can attempt this today with respect to existing off-
exchange MOC matching services (which are surveilled by FINRA) and any 
attempts to use Cboe Market Close to do this would result in such 
activity occurring on BZX, a national securities exchange with 
obligations under the Act to regulate and surveil its market. 
Similarly, entering non bona fide orders in an attempt to give the 
appearance of high demand is not a new form of potential manipulation 
unique to the proposal; rather, similar forms of market manipulation 
exist today and the Commission believes that current surveillance 
systems are designed to detect such activity.
---------------------------------------------------------------------------

    \208\ NYSE also asserted that arbitrageurs will look for 
opportunities presented by Cboe Market Close to ``gam[e] the 
system.'' However, NYSE also acknowledged that, ``[i]t is hard to 
predict all of the ways in which, and the degree to which, this 
might occur because it will depend on a wide range of variables, 
including the degree of usage of the Bats close, the changes to 
order flow and liquidity provision in the primary market's closing 
mechanism, the profits realized from manipulation, and the vitality 
of market oversight.'' See NYSE Report, at 19-22.
    \209\ In the OIP, the Commission specifically solicited comments 
on the whether the proposal would increase the potential for 
manipulation and requested that commenters provide specific data, 
analyses, or studies for support to the extent possible. See OIP, 
supra note 7, at 40211. Although the NYSE Report criticized the DERA 
Analysis for not addressing concerns regarding manipulation, the 
potential impact of the proposal on manipulation was outside the 
intended scope of such analysis, see supra note 144, and NYSE did 
not, in response to the OIP request, provide any of its own specific 
data or purport to provide findings of any study or analyses in this 
area. See NYSE Report, at 19-22.
    \210\ See Carole Comerton-Forde and Talis J. Putnins, 
``Measuring Closing Price Manipulation,'' Journal of Financial 
Intermediation 20, 135-158 (2011), available at: https://www.sciencedirect.com/science/article/pii/S104295731000015X; and 
Talis J. Putnins, ``Market Manipulation: A Survey,'' Journal of 
Economic Surveys, 26, 952-967 (2012), available at: http://onlinelibrary.wiley.com/doi/10.1111/j.1467-6419.2011.00692.x/full.
    \211\ See infra for discussion of the obligations under the Act 
of national securities exchanges, as self-regulatory organizations, 
to surveil for manipulative activity on their markets.
---------------------------------------------------------------------------

    Lastly, Nasdaq stated that it and other exchanges would need to 
develop new cross-market surveillance systems in order to address these 
risks.\212\ NYSE also stated that there are no safeguards built-in to 
the proposal to prevent manipulation, and identifying manipulative 
activity would also become more difficult under the proposal due to the 
time difference between the Cboe Market Close and primary market 
closing auctions and the cross-market nature of the manipulation.\213\ 
Further, NYSE argued that market participants may have legitimate 
reasons to want to reverse their trades that have been matched in Cboe 
Market Close by trading in the primary market auction, and thus, it 
would be difficult to distinguish between manipulative trading activity 
and legitimate `positioning.' \214\ GTS similarly argued that the 
proposal would make surveillance of the market close more difficult and 
expensive due to fragmentation of order flow across multiple 
markets.\215\ In contrast, IEX argued that participation in the Cboe 
Market Close, followed by activity intended to affect the closing price 
on the primary market, would make manipulation of closing crosses as or 
more conspicuous than other trading patterns for which exchanges 
already conduct surveillance.\216\ Two commenters also stated that the 
Consolidated Audit Trail would provide a new tool for detecting any 
such manipulation.\217\
---------------------------------------------------------------------------

    \212\ See Nasdaq Letter 2, at 14.
    \213\ See NYSE Report, at 20-21 and NYSE Letter 1, at 6.
    \214\ See NYSE Report, at 19.
    \215\ See GTS Securities Letter 1, at 6; GTS Securities Letter 
2, at 5.
    \216\ See IEX Letter, at 2.
    \217\ See id., at 2-3 and Bollerman Letter, at 2.
---------------------------------------------------------------------------

    In response, BZX made several arguments as to why it does not 
believe that the proposal creates a potential for increased 
manipulation.\218\ BZX stated that, should the Commission approve the 
proposal, both it and FINRA, as well as other exchanges, would continue 
to surveil for manipulative activity and ``seek to punish those that 
engage in such behavior.'' \219\ In its final response letter, BZX 
reiterated that while it does not believe that the proposal would 
increase the potential for manipulation, it is ``committed to enhancing 
its current surveillance procedures and working with other [SROs], 
including FINRA, the NYSE, and Nasdaq, to ensure that any potential 
inappropriate trading activity is detected and prevented.'' \220\ 
Specifically, BZX stated that, consistent with its obligations as an 
SRO, it currently surveils all trading activity on its system including 
trading activity at the close, and intends to implement and enhance in-
house surveillance processes designed to detect potential manipulative 
activity related to the Cboe Market Close.\221\
---------------------------------------------------------------------------

    \218\ See BZX Letter 1, at 11-12 and BZX Letter 2, at 9.
    \219\ See BZX Letter 1, at 11 and BZX Letter 2, at 9.
    \220\ See BZX Letter 4, at 1.
    \221\ Id. In particular, BZX stated that the surveillance would 
include, among other things, monitoring for possible non bona fide 
order activity, such as the submission of orders for the purpose of 
gaining an informational advantage, the entry of large size orders 
on one side of the market, or other trading activity that would 
indicate a pattern or practice aimed at manipulating the closing 
auction. Id. Further, BZX committed to providing the Commission 
staff its surveillance plan and stated that it would implement that 
plan on the date that Cboe Market Close becomes available to market 
participants. See id. at 2.
---------------------------------------------------------------------------

    BZX also highlighted the cross-market surveillance that FINRA 
conducts on its behalf.\222\ In particular, BZX stated that FINRA's 
comprehensive cross-market surveillance program can monitor for 
nefarious activity by a market participant across two or more markets 
and includes surveillance designed to detect activity geared towards 
manipulating a security's closing price.\223\ Stating that it currently 
provides FINRA the necessary trade data to conduct such surveillance, 
BZX represented that it is also committed to work with FINRA on 
enhancements to the current cross market surveillance program to 
account for any potential manipulative activity by participants in Cboe 
Market Close and the primary listing markets' closing auctions.\224\ 
BZX also stated that, as a member of the Intermarket Surveillance Group 
(``ISG''), it would share the necessary information concerning Cboe 
Market Close with NYSE and Nasdaq, as part of their participation in 
ISG, to allow them to properly surveil for potentially manipulative 
activity within their closing auctions.\225\
---------------------------------------------------------------------------

    \222\ See id. Under regulatory services agreements, national 
securities exchanges, such as BZX, may enter into contracts with 
other regulatory entities, such as FINRA, to provide regulatory 
services on the exchange's behalf. Notwithstanding the existence of 
a regulatory services agreement, the exchange retains legal 
responsibility for the regulation of its members and its market and 
the performance of its regulatory services provider.
    \223\ Id.
    \224\ Id.
    \225\ Id.
---------------------------------------------------------------------------

    With respect to manipulative or illegal trading activity more 
broadly, self-regulatory organizations such as BZX and the primary 
listing markets have an obligation under the Act to surveil for 
manipulative activity on their markets. The Commission generally 
believes that existing self-regulatory organization surveillance and 
enforcement activity, and the measures that the Exchange has 
represented that it would take to surveil for and detect manipulative 
activity related to the proposal, would help to deter market 
participants who might otherwise seek to try and abuse Cboe Market 
Close or a closing auction on a primary listing exchange. The 
Commission expects that BZX will closely monitor Cboe Market Close and 
implement new or enhanced surveillance measures, as necessary, designed 
to identify potential manipulative behavior. Further, the Commission 
expects that potential violative conduct identified by BZX, FINRA, or 
any other national securities exchange would be investigated. With 
respect to NYSE's comment on the potential challenges posed that time 
differences or cross-market activity may pose in identifying 
manipulative activity,\226\ these issues also exist today with respect 
to existing off-exchange MOC matching services. To the extent

[[Page 3221]]

that such attempted manipulative activity instead occurs on BZX, it 
would simply shift surveillance from FINRA to BZX, a national 
securities exchange with obligations under the Act to regulate and 
surveil its market. Further, with regard to the challenge of 
differentiating between legitimate trading and manipulative activity, 
this too exists today with regard to many different trading scenarios.
---------------------------------------------------------------------------

    \226\ See supra note 213 and accompanying text.
---------------------------------------------------------------------------

Impact on Competition

    A number of commenters addressed the proposal's impact on 
competition. Seven commenters supporting the proposal stated that it 
would increase competition among exchanges for executions of orders at 
the close.\227\ These commenters asserted that increased competition 
could result in reduced fees for market participants.\228\ Three 
commenters characterized the primary listing markets as maintaining a 
``monopoly'' on orders seeking a closing price with no market 
competition, which they argued has, and would continue to, result in a 
continual increase in fees for such orders if the proposal were not 
approved.\229\ In addition, IEX argued that the proposal does not 
unduly burden competition as exchanges often attempt to compete by 
adopting functionality or fee schedules developed by competitors.\230\ 
ViableMkts also asserted that the proposal is not fully competitive 
with closing auctions, as it does not accept priced orders or 
disseminate imbalance information.\231\ Rather, it believed that the 
proposal competes with other un-priced orders in closing auctions 
which, in its view, is not ``destructive to the mission of the closing 
auction.'' \232\
---------------------------------------------------------------------------

    \227\ See PDQ Letter; Clearpool Letter, at 2; Virtu Letter, at 
2; SIFMA Letter 1, at 2; IEX Letter, at 1; ViableMkts Letter, at 1-
2; and Bollerman Letter, at 2.
    \228\ See PDQ Letter; Clearpool Letter, at 2; Virtu Letter, at 
2; SIFMA Letter 1, at 2; IEX Letter, at 1; ViableMkts Letter, at 1; 
SIFMA Letter 2, at 2; and Bollerman Letter, at 2.
    \229\ See IEX Letter, at 3; Clearpool Letter, at 2; and 
ViableMkts Letter, at 1-2. However, one commenter also stated that 
it believes the fees charged by NYSE and Nasdaq for participating in 
their closing auctions are not excessive and there is no need for 
additional fee competition for executing orders at the official 
closing price. See GTS Securities Letter 1, at 5.
    \230\ See IEX Letter, at 3.
    \231\ See ViableMkts Letter, at 5.
    \232\ See id. ViableMkts also argued that the effect of this 
competition will most likely be increased volumes at the closing 
price because of lower marginal costs and the potential to attract 
new types of investors to transact at the closing price. See id.
---------------------------------------------------------------------------

    In contrast, other commenters argued that the proposal would impose 
a burden on competition not necessary or appropriate in furtherance of 
the purposes of the Act, including by ``free-riding'' on the 
investments the primary listing markets have made in their closing 
auctions.\233\ Specifically, NYSE asserted that the proposal is an 
unnecessary and inappropriate burden on competition as it would allow 
BZX to use the closing prices established through the auction of a 
primary listing market, without bearing any of the costs or risks 
associated with conducting a closing auction.\234\ NYSE added that the 
existing exchange fees for closing auctions reflect the value created 
by the primary listing exchange's complex procedures and technology to 
determine the official closing price of a security.\235\ NYSE 
emphasized that it has invested significantly in intellectual property 
and software to implement systems that facilitate orderly price 
discovery in the closing auction, as well as surveillance tools 
necessary to monitor activity leading up to, and in, the closing 
process.\236\ Specifically, NYSE stated that operating an auction is 
the most technologically complicated function of an exchange that 
requires significant resources.\237\ According to NYSE, BZX would be 
able to sell the official closing price established by a NYSE closing 
auction at a price point with which it could not realistically 
compete.\238\ NYSE also stated that the proposal differs from the 
Nasdaq and NYSE Arca competing auctions in securities not listed on 
their exchanges in that such auctions compete on a level playing field 
because they are independent price-discovery auction events that do not 
rely on prices established by the primary listing exchange and they 
serve as an alternative method of establishing an official closing 
price if a primary listing exchange is unable to conduct a closing 
auction due to a technology issue.\239\
---------------------------------------------------------------------------

    \233\ See NYSE Letter 1, at 9-10; NYSE Letter 3, at 1, 4-6 
Nasdaq Letter 1, at 5-6 & 9; Nasdaq Letter 2, at 7-8 (reiterating 
its assertion that BZX is ``free-riding'' on the primary listing 
markets' investments in issuer relationships, real-time regulation, 
and closing cross technology); BioCryst Letter, at 2; Digimarc 
Letter, at 1-2; NBT Bancorp Letter, at 2; Balchem Letter, at 2; Cree 
Letter, at 2; Sirius Letter, at 2; Lam Letter, at 2; and PayPal 
Letter, at 1. See also Angel Letter, at 3 (calling for a 
rationalization of intellectual property protection in order to 
foster productive innovation).
    \234\ See NYSE Letter 1, at 9, NYSE Letter 2, at 1-3 (adding 
that the proposal is anti-competitive because it is proposing to 
sell at a lower price the closing prices produced through resources 
expended by NYSE), and NYSE Letter 3, at 5; and NYSE Letter 4, at 1. 
In contrast, one commenter argued that BZX would not be ``free-
riding'' on the primary listing exchanges' price discovery process 
because it is ``a regular and accepted practice'' to match orders at 
reference prices. See SIFMA Letter 2, at 2.
    \235\ See NYSE Letter 1, at 9 and NYSE Letter 3, at 5 (stating 
that NYSE does not segregate the costs associated with building, 
testing, monitoring or maintaining its closing auction process and 
that the costs do not vary based on the volume of orders sent to the 
closing auction). NYSE also argued that the proposal impacts 
competition for listings, as issuers choose where to list their 
securities based on how primary listing exchanges are able to 
centralize liquidity and perform closing auctions. See NYSE Letter 
1, at 9.
    \236\ See NYSE Letter 2, at 2. Moreover, NYSE stated that it 
dedicates resources to providing systems to DMMs necessary to 
facilitate the closing of trading as well as to floor brokers to 
enter and manage their customers' closing interest. See id.
    \237\ See NYSE Letter 3, at 5.
    \238\ See id. NYSE stated that the majority of costs associated 
with operating a closing auction are fixed costs. If NYSE were to 
reduce the fees charged for participating in its closing auction, 
NYSE stated that there likely would be other impacts on the 
exchange's overall fee structure. See id.
    \239\ See NYSE Letter 1, at 6; NYSE Letter 2, at 3-4; and NYSE 
Letter 3, at 5. In response, one commenter stated that these 
competing auctions were not originally proposed to only serve as a 
back-up to a primary listing markets' closing auction. See SIFMA 
Letter 2, at 2. In addition, one commenter stated that such 
competing auctions are not expressly limited to operating only when 
another primary listing exchange is experiencing a failure. See 
Bollerman Letter, at 3.
---------------------------------------------------------------------------

    Nasdaq also argued that the proposal would impose a burden on 
competition not necessary or appropriate in furtherance of the purposes 
of the Act. Specifically, Nasdaq believed that the proposal undermines 
intra-market competition, by removing orders from Nasdaq's auction book 
and prohibiting those orders from competing on Nasdaq, which Nasdaq 
argued is necessary for the exchange to arrive at the most accurate 
closing price.\240\ Nasdaq also stated that, by diverting orders away 
from NYSE and Nasdaq, the proposal would detract from robust price 
competition and discovery that closing auctions ensure.\241\ Nasdaq 
further argued that in order for BZX to meaningfully enhance 
competition, it would have to generate its own closing price, as 
opposed to merely utilizing the closing price generated by a primary 
listing market.\242\ In addition, Nasdaq argued that price competition 
between exchanges is not as important a form of competition as 
innovation because price competition elevates fragmentation, sacrifices 
quote and order interaction, and, in the case of Cboe Market Close, 
undermines innovation.\243\ Further, Nasdaq stated that BZX's 
comparisons to pegged orders, where the price is based upon reference 
data that does not originate on that exchange, was misplaced because 
all exchanges

[[Page 3222]]

contribute to the prices to which such orders are pegged.\244\ Nasdaq 
asserted that Cboe Market Close is not an analogous offering because 
BZX does not contribute to the closing price on a primary listing 
exchange.\245\
---------------------------------------------------------------------------

    \240\ See Nasdaq Letter 1, at 9.
    \241\ See Nasdaq Letter 1, at 10 and Nasdaq Letter 2, at 7-8. 
See also supra notes 27-109 and accompanying text (discussing 
comments on the proposal's impact on price discovery).
    \242\ See id., at 13. See also supra notes 52-54 (discussing 
comments on the proposal's impact on price discovery and competing 
auctions and over-the-counter matching services).
    \243\ See Nasdaq Letter 2, at 8.
    \244\ See id., at 13.
    \245\ See id.
---------------------------------------------------------------------------

    In response to commenters' contentions about competition, BZX 
asserted that the proposal would enhance rather than burden 
competition.\246\ In this regard, BZX argued that its proposal would 
promote competition in the use of MOC orders at the official closing 
price.\247\ Specifically, BZX stated that the proposal would have a 
positive impact on competition as it offers a price-competitive 
alternative that will not impact the price discovery process.\248\
---------------------------------------------------------------------------

    \246\ See BZX Letter 1, at 10-11 and BZX Letter 2, at 6-7.
    \247\ See id. BZX further argued that Nasdaq's assertion that 
the proposal would undermine competition amongst orders is misplaced 
because BZX believes that paired MOC orders, which are beneficiaries 
of price discovery and not price-setting orders do not impact 
interactions that take place on another exchange because orders 
compete with each other for executions within each individual 
exchange based on the parameters a market participant places on its 
orders. See id., at 11.
    \248\ See BZX Letter 2, at 7.
---------------------------------------------------------------------------

    BZX also challenged the assertion that it was ``free-riding'' on 
the primary listing exchanges' closing auctions.\249\ In this regard, 
BZX argued that instead it was, on balance, providing a ``a materially 
better value to the marketplace'' in two ways: By not diverting price-
forming limit orders away from the primary listing market; and by 
providing users with the official closing price because any other price 
would be undesirable to market participants and potentially harmful to 
price formation.\250\ BZX further argued that there is precedent for an 
exchange to execute orders solely at reference prices while not also 
displaying priced orders for that security.\251\ In addition, BZX 
stated that no rule or regulation provides the primary listing market 
with control over how other market participants use the official 
closing price in their matching engines or with regard to the pricing 
of their own products, such as mutual funds, ETFs, and indices.\252\ 
BZX also stated that improving and mimicking functionality enhances the 
competitive dynamic amongst exchanges.\253\
---------------------------------------------------------------------------

    \249\ See BZX Letter 1, at 5 and BZX Letter 2, at 7.
    \250\ See BZX Letter 1, at 5.
    \251\ See BZX Letter 1, at 6 and BZX Letter 2, at 7 (describing 
NYSE's after hours crossing sessions which executes orders at the 
NYSE official closing price and the ISE Stock Exchange functionality 
that only executed orders at the midpoint of the NBBO and did not 
display orders).
    \252\ See BZX Letter 2, at 8.
    \253\ See id.
---------------------------------------------------------------------------

    Further, BZX asserted that the Commission has approved the 
operation of competing closing auctions, noting in particular the 
closing auctions on Nasdaq, NYSE Arca, and the American Stock 
Exchange.\254\
---------------------------------------------------------------------------

    \254\ See BZX Letter 1, at 6. See also supra notes 81-93 and 
accompanying text (discussing BZX's comments on competing closing 
auctions with regard to price discovery). In addition, in response 
to Nasdaq's contention that it is aware of no regulator in any 
jurisdiction that has sanctioned a diversion of orders from the 
primary market close, BZX stated the Ontario Securities Commission's 
approval of a similar proposal by Chi-X Canada ATS, which it said is 
currently owned by Nasdaq, to match MOC orders at the closing price 
established by the Toronto Stock Exchange. See Nasdaq Letter 1, at 
10; BZX Letter 1, at 7; and BZX Letter 2, at 2 (stating that the 
Ontario Securities Commission stated that the proposal would not 
threaten the integrity of the price formation process and would 
pressure the Toronto Stock Exchange to competitively price 
executions during their closing auction).
---------------------------------------------------------------------------

    The Commission believes that the proposal does not impose any 
burden on competition not necessary or appropriate in furtherance of 
the Act; rather, it provides an alternative venue to which market 
participants may submit closing interest and receive the official 
closing price. The Commission believes that while BZX would not be 
conducting the closing auction that would determine the execution price 
for orders executed in Cboe Market Close, the availability of Cboe 
Market Close will inject competition into the closing process to the 
ultimate benefit of market participants generally, which could include 
price and execution quality competition. The Commission further 
believes that implementation of Cboe Market Close could incent other 
venues, including the primary listing exchanges as well as off-exchange 
matching venues, to continue to innovate and compete to attract MOC 
orders to their closing auctions, which may include lowering 
transaction fees, to the benefit of market participants generally. The 
proposal would also provide an opportunity for market participants to 
assess and compare their experience in seeking to execute MOC orders on 
different national securities exchanges, which would foster competition 
and that may enhance the quality and efficiency of MOC order 
executions. Ultimately, the Commission believes that the success of the 
Cboe Market Close in competing with the primary listing exchanges and 
off-exchange matching venues for MOC orders will depend on a variety of 
factors, including the quality of the MOC order execution services, the 
attendant risks, and the costs associated with such executions.
    While the primary listing markets and other commenters argue that 
BZX is ``free riding'' on investments of the primary listing markets in 
the development and maintenance of the closing auction process and thus 
impeding competition in a manner inconsistent with the Act, the 
Commission believes that this form of burden on competition must be 
evaluated against the potentially enhanced competition that the 
proposal also provides, as discussed above.\255\ Further, while NYSE 
and Nasdaq argue that their fees for closing executions reflect their 
costs of developing and operating the closing auctions, other 
commenters assert that the primary listing markets have taken advantage 
of the ``monopoly'' they have on orders seeking a closing price to 
impose high fees. In this regard, the Commission expects that the 
proposal, by introducing further competition, should result in a 
reduction of fees for such orders. This may result in benefits to 
investors generally. In addition, in the highly competitive environment 
of the current national market system with numerous exchanges competing 
for order flow, it is commonplace for exchanges to attempt to mimic or 
build upon various functionality of their competitors. Doing so does 
not result in the proposal imposing a competitive burden not necessary 
or appropriate in furtherance of the purposes of the Act.
---------------------------------------------------------------------------

    \255\ To the extent that the primary listing markets believe the 
proposal infringes on their intellectual property and innovations 
they have developed with regard to closing auctions, they have the 
ability to seek protection under applicable laws, as appropriate.
---------------------------------------------------------------------------

    In addition, both NYSE and Nasdaq referenced the Commission's 
disapproval of Nasdaq's proposal to create a Benchmark Order as support 
that BZX has not sufficiently satisfied its obligation to justify that 
the proposal is consistent with the Act and not an inappropriate burden 
on competition. NYSE argued that BZX essentially proposes to compete 
with broker-dealer agency order matching services.\256\ NYSE asserted 
that the Commission disapproved Nasdaq's Benchmark Order in part 
because it would provide an exchange with an unfair advantage over 
competing broker-dealers, which was not consistent with Section 6(b)(8) 
of the Act.\257\ Nasdaq further argued that the disapproval of its 
Benchmark Order proposal supports the assertion that an exchange must 
articulate how a proposed service is consistent with the

[[Page 3223]]

policy goals of the Act with respect to national securities 
exchanges.\258\
---------------------------------------------------------------------------

    \256\ See NYSE Letter 1, at 8.
    \257\ See id.
    \258\ See Nasdaq Letter 1, at 5.
---------------------------------------------------------------------------

    Likewise, SIFMA also referenced the Commission's disapproval of 
Nasdaq's proposal to create a Benchmark Order as support for its 
assertion that BZX is proposing to offer a function identical to that 
currently offered by broker-dealers, yet would benefit from regulatory 
immunity as well as the limits on liability contained in BZX Rule 
11.16.\259\ Specifically, SIFMA stated that, while it supports the 
proposal, it believes that as a condition of approval, BZX and the 
Commission should clarify in writing that Cboe Market Close would not 
be entitled to any application of regulatory immunity and that the 
Exchange should amend its Rule 11.16 to provide that Cboe Market Close 
would not be subject to the monetary limits on the Exchange's 
liability.\260\
---------------------------------------------------------------------------

    \259\ See SIFMA Letter 3, at 2-4.
    \260\ See id. at 1.
---------------------------------------------------------------------------

    With respect to regulatory immunity, SIFMA asserted that both 
courts and the Commission have stated that regulatory immunity applies 
only in situations where an exchange is exercising its regulatory 
authority over its member, pursuant to the Act.\261\ SIFMA stated that 
because Cboe Market Close would not be a self-regulatory function 
whereby the exchange would be regulating its members, BZX should not be 
entitled to apply regulatory immunity for any losses arising from the 
functionality.\262\ In addition, SIFMA stated that BZX Rule 11.16 
currently limits the liability exposure of the exchange to its 
members.\263\ SIFMA asserted that BZX's limits on liability set forth 
in Rule 11.16 ``bear no relation to the actual amount of financial loss 
that could result from an exchange malfunction.'' \264\ SIFMA argued 
that the ``disparity is particularly acute'' with respect to the 
proposal because broker-dealers currently perform services akin to Cboe 
Market Close without a limitation on their liability.\265\ Accordingly, 
SIFMA stated that, as a condition of operating Cboe Market Close, BZX 
should carve it out from the liability limits of Rule 11.16.\266\
---------------------------------------------------------------------------

    \261\ See id. at 2-3.
    \262\ See id. at 3.
    \263\ See BZX Rule 11.16.
    \264\ See SIFMA Letter 3, at 4.
    \265\ See id.
    \266\ See id.
---------------------------------------------------------------------------

    BZX argued that, rather than looking to compete with broker-dealer 
services, it is seeking to compete on price with the primary listing 
markets' closing auctions.\267\ In addition, BZX argued that, contrary 
to the assertions by NYSE and Nasdaq, its proposal does not implicate 
the same issues as Nasdaq's Benchmark Order proposal because the 
Commission's disapproval of that proposal rested primarily on its 
finding that it raised issues under the Market Access Rule.\268\ BZX 
responded to SIFMA's comments on regulatory immunity and its limitation 
on liability rule by stating that the concerns raised were ``not 
germane to whether the [p]roposal is consistent with the Act,'' and 
further stated that it believed it would be inappropriate in the 
context of a filing on one proposed rule change to set a new standard 
on an issue that has broad application to all exchange services as well 
as National Market System Plans.\269\ BZX also asserted that SIFMA did 
not provide any evidence to support its claim that its members have 
been disadvantaged by the exchange's limitation of liability rule as 
compared to limitation on liability provisions in a broker-dealer's 
contracts with its clients, which often disclaim all liability.\270\
---------------------------------------------------------------------------

    \267\ See BZX Letter 1, at 10.
    \268\ See id., at 11.
    \269\ See id.
    \270\ See BZX Letter 3, at 5.
---------------------------------------------------------------------------

    The Commission believes, as acknowledged by BZX, that it is 
possible that BZX's proposal could divert some MOC orders from off-
exchange matching services operated by broker-dealers onto a regulated 
exchange.\271\ Broker-dealers and national securities exchanges 
currently compete with respect to a variety of functions and services 
that they offer to market participants within the current national 
market system. As such, the fact that a national securities exchange 
proposes to offer functionality that is similar to a service offered by 
a broker-dealer does not, in and of itself, render such functionality 
an inappropriate burden on competition. Rather, the proposal must be 
considered in the broader context of the existing competitive landscape 
and different regulatory structures applicable to broker-dealers and 
exchanges under the Act, respectively. With respect to BZX's proposal, 
the Commission believes that, on balance, in light of the differing 
requirements under the Act and the rules and regulations thereunder 
applicable to national securities exchanges and broker-dealers, the 
proposal does not pose any burden on competition not necessary or 
appropriate in furtherance of the purposes of the Act.
---------------------------------------------------------------------------

    \271\ See BZX Letter 2, at 11.
---------------------------------------------------------------------------

    Further, the Commission believes that the issues raised by 
commenters regarding the judicial doctrine of regulatory immunity and 
rule-based limitations on liability are part of a broader policy issue 
regarding the different regulatory structures for exchanges and broker-
dealers, and do not materially impact the Commission's analysis or 
finding regarding whether this proposal poses an unnecessary or 
inappropriate burden on competition.\272\
---------------------------------------------------------------------------

    \272\ The Commission also notes that MOC orders submitted to 
other exchanges' closing auctions would be subject to those 
exchanges' rules governing limitations on liability.
---------------------------------------------------------------------------

    The Commission has taken the position that immunity from suit ``is 
properly afforded to the exchanges when engaged in their traditional 
self-regulatory functions--where the exchanges act as regulators of 
their members,'' including ``the core adjudicatory and prosecutorial 
functions that have traditionally been accorded absolute immunity, as 
well as other functions that materially relate to the exchanges' 
regulation of their members,'' but should not ``extend to functions 
performed by an exchange itself in the operation of its own market, or 
to the sale of products and services arising out of those functions.'' 
\273\ The Court of Appeals for the Second Circuit recently reached a 
similar conclusion.\274\ The Commission has also recognized that an 
exchange's invocation of immunity from suit should be examined on a 
```case-by-case basis,' with `the party asserting immunity bear[ing] 
the burden of demonstrating [an] entitlement to it.' '' \275\ Whether 
and to what extent a court would consider BZX's additional 
functionality under the proposed rule to fall within an exchange's 
traditional regulatory functions depends on an assessment of the facts 
and circumstances of the particular allegations before it and is beyond 
the scope of the Commission's consideration of the proposed rule change 
pursuant to the Act.
---------------------------------------------------------------------------

    \273\ Brief of the Securities and Exchange Commission, Amicus 
Curiae, No. 15-3057, City of Providence v. Bats Global Markets, Inc. 
(2d Cir.) (``City of Providence Amicus Br.''), at 22.
    \274\ City of Providence v. Bats Global Markets, Inc., 878 F.3d 
36 (2d Cir. 2017) (``When an exchange engages in conduct to operate 
its own market that is distinct from its oversight role, it is 
acting as a regulated entity--not a regulator. Although the latter 
warrants immunity, the former does not.'').
    \275\ City of Providence Amicus Br. at 21 (quoting In re NYSE 
Specialists Secs. Litig., 503 F.3d 89, 96 (2d Cir. 2007)).
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IV. Conclusion

    For the foregoing reasons, the Commission finds that the proposed 
rule change is consistent with the Act and the rules and regulations 
thereunder applicable to a national securities exchange.

[[Page 3224]]

    It is therefore ordered, pursuant to Section 19(b)(2) of the Act 
\276\ that the proposed rule change (SR-BatsBZX-2017-34), as modified 
by Amendment No. 1, be, and hereby is, approved.
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    \276\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\277\
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    \277\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-01093 Filed 1-22-18; 8:45 am]
 BILLING CODE 8011-01-P


