[Federal Register Volume 85, Number 17 (Monday, January 27, 2020)]
[Notices]
[Pages 4726-4752]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-01253]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-88008; File No. SR-BatsBZX-2017-34]


Self-Regulatory Organizations; Bats BZX Exchange, Inc.; Order 
Setting Aside Action by Delegated Authority and Approving a Proposed 
Rule Change, as Modified by Amendments No. 1 and 2, To Introduce Cboe 
Market Close, a Closing Match Process for Non-BZX Listed Securities 
Under New Exchange Rule 11.28

January 21, 2020.

I. Introduction

    The official closing price for a listed security is generally 
determined each day through a closing auction conducted by that 
security's primary listing exchange. A closing auction is a point in 
time event conducted at the end of each trading day pursuant to a 
process set forth in the primary listing exchange's rules \1\ that 
determines a security's official closing price by executing all orders 
participating in the auction at a single price. Closing auctions are 
designed to set closing prices that maximize the number of shares 
executed and minimize the amount of the imbalance between orders to buy 
a security and orders to sell a security. Market participants seeking 
to execute orders at a security's official closing price may do so by 
submitting a variety of order types to a closing auction, such as:
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    \1\ See, e.g., NYSE Rule 123C; and Nasdaq Rule 4754.
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     Market-on-close (``MOC'') orders, which are orders to 
either buy or sell a security that are specifically designated to be 
executed at a security's official closing price;

[[Page 4727]]

     limit-on-close (``LOC'') orders, which are orders to 
either buy or sell a security at a specific price or better that are 
specifically designated to execute in that security's closing auction; 
and
     imbalance-only orders, which are limit orders (i.e., 
orders that specify a target execution price) designated to only 
execute in a closing auction against an imbalance of closing auction 
eligible trading interest, should there be any.
In addition, limit orders that are resting on the primary listing 
exchange's order book at the time that a closing auction begins may 
also participate in a closing auction.\2\ Furthermore, market 
participants may seek to execute an order at the official closing price 
on off-exchange venues, such as alternative trading systems (``ATSs'') 
and with broker-dealers. While these orders that are executed off-
exchange would not be included in the closing auction on the primary 
listing exchange, they would be executed at the official closing price 
that is determined by the primary listing exchange.
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    \2\ Limit orders resting on an exchange's order book are orders 
to buy or sell a security at specific price or better that are 
eligible for execution at any point during regular intraday trading 
or in a closing auction.
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    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'') \3\ and Rule 19b-4 
thereunder,\4\ a proposed rule change to adopt a match process for MOC 
orders in non-BZX listed securities referred to as ``Cboe Market 
Close.'' \5\ Through Cboe Market Close, BZX would seek to match buy and 
sell MOC orders for non-BZX listed securities and execute at BZX those 
matched buy and sell MOC orders in such securities at the official 
closing price published by the relevant primary listing exchange.
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    \3\ 15 U.S.C. 78s(b)(1).
    \4\ 17 CFR 240.19b-4.
    \5\ The Commission published notice of the proposed rule change 
in the Federal Register on May 22, 2017. See Securities Exchange Act 
Release No. 80683 (May 16, 2017), 82 FR 23320 (``Notice''). 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. See Securities Exchange Act 
Release No. 81072, 82 FR 31792 (Jul. 10, 2017). On August 18, 2017, 
the Commission instituted proceedings under Section 19(b)(2)(B) of 
the Act, 15 U.S.C. 78s(b)(2)(B), to determine whether to approve or 
disapprove the proposed rule change. See Securities Exchange Act 
Release No. 81437, 82 FR 40202 (Aug. 24, 2017) (``OIP''). On 
November 17, 2017, pursuant to Section 19(b)(2) of the Act, 15 
U.S.C. 78s(b)(2), the Commission designated a longer period for 
Commission action on proceedings to determine whether to disapprove 
the proposed rule change. See Securities Exchange Act Release No. 
82108, 82 FR 55894 (Nov. 24, 2017). On December 1, 2017, the 
Exchange filed Amendment No. 1 to the proposed rule change, renaming 
``Bats Market Close'' as ``Cboe Market Close.'' The only change in 
Amendment No. 1 was to rename the proposed closing match process as 
Cboe Market Close. Because Amendment No. 1 was a technical amendment 
and did not materially alter the substance of the proposed rule 
change or raise unique or novel regulatory issues, Amendment No. 1 
was not subject to notice and comment. For purposes of consistency 
and readability, all references to the proposed match process for 
MOC orders discussed herein will be to ``Cboe Market Close.''
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    On January 17, 2018, the Commission, acting through authority 
delegated to the Division of Trading and Markets,\6\ approved the 
proposed rule change, as modified by Amendment No. 1 (``Approval 
Order'').\7\ On January 31, 2018, NYSE Group, Inc. (``NYSE'') and The 
Nasdaq Stock Market LLC (``Nasdaq'') filed petitions for review of the 
Approval Order (``Petitions for Review''). Pursuant to Commission Rule 
of Practice 431(e), the Approval Order was stayed by the filing with 
the Commission of a notice of intention to petition for review.\8\ On 
March 1, 2018, the Commission issued a scheduling order, pursuant to 
Commission Rule of Practice 431, granting the Petitions for Review of 
the Approval Order and providing until March 22, 2018, for any party or 
other person to file a written statement in support of, or in 
opposition to, the Approval Order.\9\ On April 12, 2018, NYSE and 
Nasdaq submitted written statements in opposition to the Approval Order 
and BZX submitted a written statement in support of the Approval 
Order.\10\
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    \6\ 17 CFR 200.30-3(a)(12).
    \7\ Securities Exchange Act Release No. 82522, 83 FR 3205 (Jan. 
23, 2018).
    \8\ 17 CFR 201.431(e). See Letter to Christopher Solgan, 
Assistant General Counsel, Cboe Global Markets, Inc. (Jan. 24, 2018) 
(providing notice of receipt of notices of intention to petition for 
review of delegated action and stay of order), available at https://www.sec.gov/rules/sro/batsbzx/2018/sr-batsbzx-2017-34-letter-from-secretary-to-cboe.pdf.
    \9\ See Securities Exchange Act Release No. 82794, 83 FR 9561 
(Mar. 6, 2018). On March 16, 2018, the Office of the Secretary, 
acting by delegated authority, issued an order on behalf of the 
Commission granting a motion for an extension of time to file 
statements on or before April 12, 2018. See Securities Exchange Act 
Release No. 82896, 83 FR 12633 (Mar. 22, 2018).
    \10\ See Statement of NYSE Group, Inc. in Opposition to the 
Division's Order Approving a Rule to Introduce Cboe Market Close 
(``NYSE Statement''); Statement of the Nasdaq Stock Market LLC in 
Opposition to Order Granting Approval of a Proposed Rule Change, as 
Modified by Amendment No. 1, to Introduce Cboe Market Close 
(``Nasdaq Statement''); and Statement of Cboe BZX Exchange, Inc. in 
Support of Commission Staff's Approval Order (``BZX Statement''). 
The Nasdaq Statement included two reports, one by Harvey Pitt and 
Chester Spatt (``Pitt/Spatt Report''), and one by Yakov Amihud and 
Haim Mendelson (``Amihud/Mendelson Report'').
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    On October 4, 2018, BZX filed Amendment No. 2 to the proposed rule 
change to address a comment made by NYSE and Nasdaq in their 
statements. The Commission published Amendment No. 2 for comment in the 
Federal Register on December 4, 2018.\11\ The Commission received one 
comment letter on Amendment No. 2.\12\
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    \11\ See Securities Exchange Act Release No. 84670 (Nov. 28, 
2018), 83 FR 62646 (``Amendment No. 2'').
    \12\ See Letter from Jeffrey S. Davis, Deputy General Counsel, 
Nasdaq (Dec. 18, 2018) (``Nasdaq Letter 4'').
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    In response to the NYSE and Nasdaq Petitions, the Commission has 
conducted a de novo review of BZX's proposal, giving careful 
consideration to the entire record--including BZX's amended proposal, 
the Petitions for Review, and all comments and statements submitted--to 
determine whether the proposal is consistent with the requirements of 
the Act and the rules and regulations issued thereunder that are 
applicable to a national securities exchange. Under Section 19(b)(2)(C) 
of the Act, the Commission must approve the proposed rule change of a 
self-regulatory organization (``SRO'') if the Commission finds that the 
proposed rule change is consistent with the requirements of the Act and 
the applicable rules and regulations thereunder; if it does not make 
such a finding, the Commission must disapprove the proposed rule 
change.\13\ Additionally, under Rule 700(b)(3) of the Commission's 
Rules of Practice, the ``burden to demonstrate that a proposed rule 
change is consistent with the Exchange Act and the rules and 
regulations issued thereunder . . . is on the self-regulatory 
organization that proposed the rule change.'' \14\ The description of a 
proposed rule change, its purpose and operation, its effect, and a 
legal analysis of its consistency with applicable requirements must all 
be sufficiently detailed and specific to support an affirmative 
Commission finding.\15\ Any failure of a self-regulatory organization 
to provide the information elicited by Form 19b-4 may result in the 
Commission not having a sufficient basis to make an affirmative finding 
that a proposed rule change is consistent with the Act and the rules 
and regulations issued thereunder that are applicable to the self-
regulatory organization.\16\
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    \13\ 15 U.S.C. 78s(b)(2)(C).
    \14\ 17 CFR 201.700(b)(3).
    \15\ Id.
    \16\ Id.
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    The Commission has considered whether the proposal is consistent 
with the Act, including Section 6(b)(8) of the

[[Page 4728]]

Act, 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,\17\ as well as Section 6(b)(5) 
of the Act, which requires, among other things, that the rules of a 
national securities exchange be designed to prevent fraudulent and 
manipulative acts and practices, remove impediments to and perfect the 
mechanism of a free and open market and a national market system, and, 
in general, protect investors and the public interest.\18\
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    \17\ 15 U.S.C. 78f(b)(8).
    \18\ 15 U.S.C. 78f(b)(8).
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    For the reasons discussed further herein, BZX has met its burden to 
show that the proposed rule change is consistent with the Act, and this 
order sets aside the Approval Order and approves BZX's proposed rule 
change, as amended. In particular, the Commission concludes that the 
record before the Commission demonstrates that Cboe Market Close should 
introduce and promote competitive forces among national securities 
exchanges for the execution of MOC orders. In addition, the record 
demonstrates that Cboe Market Close should not disrupt the closing 
auction price discovery process nor should it materially increase the 
risk of manipulation of official closing prices. Therefore, and as 
explained further below, the Commission finds the proposal consistent 
with Sections 6(b)(8) and 6(b)(5) of the Act.
    The Commission recognizes that Cboe Market Close, once implemented, 
would introduce a new match process for non-BZX listed securities, and 
more generally, could potentially contribute to new dynamics in certain 
aspects of the public equity markets. The Commission and Commission 
staff regularly monitor changes in the equity markets, including 
changes in market quality and investor outcomes (among other things), 
and will be mindful of potential effects associated with Cboe Market 
Close. To that end, no later than one year after the date that Cboe 
Market Close becomes effective, the Commission staff will advise the 
Commission of its assessment of any post-implementation effects or 
changes on market quality or investor outcomes. The Commission and 
Commission staff regularly receive input from the public, including 
investors, other exchanges and markets, and other market participants 
on matters related to market quality, investor outcomes and related 
issues. For convenience, we are providing an email box as a method for 
members of the public who wish to submit data, analyses or observations 
concerning any such matters, including in respect of post-
implementation effects or changes associated with Cboe Market Close, to 
communicate with the Commission's staff. That email box is: 
Marketstructure@SEC.GOV.\19\
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    \19\ Submissions received may be made public; personal 
identifying information in the submission will not be redacted or 
edited, so you should submit only information that you wish to make 
available publicly.
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II. Summary of the Proposal

    BZX proposes to introduce Cboe Market Close, a match process for 
MOC orders \20\ in non-BZX listed securities. Through Cboe Market 
Close, a BZX Member would be able to submit buy and sell MOC orders for 
non-BZX listed securities to the BZX System.\21\ Cboe Market Close 
would not accept LOC orders or any other order types. Once accepted, 
the System would seek to match buy and sell MOC orders and execute 
those matched buy and sell MOC orders at the official closing price for 
the security that is published by its primary listing exchange.
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    \20\ BZX defines the term ``Market-On-Close'' or ``MOC'' to mean 
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. A BZX market order is defined in BZX Rule 11.9(a)(1) as 
``[a]n order to buy or sell a stated amount of a security that is to 
be executed at the NBBO when the order reaches the Exchange . . . 
.''
    \21\ 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 BZX Rule 
1.5(aa). The term ``Board'' is defined as ``the Board of Directors 
of the Exchange.'' See BZX Rule 1.5(f).
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    BZX Members \22\ 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 until 3:35 p.m. Eastern Time (``MOC Cut-Off 
Time'').\23\ 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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    \22\ The term ``Member'' is defined as ``any registered broker 
or dealer that has been admitted to membership in the Exchange.'' 
See BZX Rule 1.5(n).
    \23\ Currently, the NYSE designates the cut-off time for the 
entry of NYSE Market At-the-Close Orders as 3:50 p.m. Eastern Time. 
See NYSE Rule 123C. Nasdaq, in turn, designates the cut-off time for 
the entry of Nasdaq Market On Close Orders as 3:55 p.m. Eastern 
Time. See Nasdaq Rule 4702.
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    Members would be required to mark as ``short'' or ``short exempt'' 
all short sale MOC orders. MOC orders marked short would be rejected, 
while MOC orders marked short exempt would be accepted and processed by 
the System.\24\
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    \24\ See Amendment No. 2. In Amendment No. 2, the Exchange added 
Interpretation and Policies .04 to proposed BZX Rule 11.28 to 
reflect the handling of MOC orders marked as ``short'' or ``short 
exempt.'' The Exchange stated that all MOC orders marked short would 
be rejected to ensure that the Exchange is able to comply with the 
Exchange's obligations under Rule 201 of Regulation SHO in the event 
a short sale circuit breaker is triggered and the official closing 
price determined by the primary listing exchange is not above the 
national best bid.
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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 with execution priority 
determined based on time-received.\25\ Any remaining balance of 
unmatched shares would be cancelled and returned to the Member(s). The 
System would disseminate, via the Cboe Auction Feed,\26\ the total size 
of all buy and sell MOC 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 exchange. Upon publication of the official closing price by the 
primary listing exchange, the System would execute all previously 
matched buy and sell MOC orders at that official closing price.\27\ If 
there is no initial official closing price published by 8:00 p.m. 
Eastern Time for any security, BZX

[[Page 4729]]

would cancel all matched MOC orders in such security.
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    \25\ 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 
exchange's closing auction. Should the Exchange become impaired 
after the MOC Cut-Off Time, proposed Interpretation and Policy .02 
states that the Exchange would retain all matched MOC orders and 
execute those orders at the official closing price once it is 
operational.
    \26\ The Cboe Auction Feed disseminates information regarding 
the current status of price and size information related to auctions 
conducted by the Exchange and the data is provided at no charge. See 
BZX Rule 11.22(i). The Exchange also proposed to amend BZX Rule 
11.22(i) to reflect that the Cboe Auction Feed would also include 
the total size of all buy and sell orders matched via Cboe Market 
Close.
    \27\ 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 at 23321. In the case where the primary listing 
exchange suffers an impairment and is unable to perform its closing 
auction process, BZX would utilize the official closing price 
published by the exchange designated by the primary listing 
exchange. See proposed Interpretation and Policy .01. 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, BZX 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.
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    BZX 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 exchanges' closing 
auctions that still provides an execution at a security's official 
closing price.\28\ BZX intends to file a separate proposal related to 
fees for MOC orders executed in the Cboe Market Close. BZX stated that, 
under this separate proposal, the fees for Cboe Market Close would be 
set and maintained over time at a rate less than the fee charged by the 
applicable primary listing exchange for its own respective closing 
mechanism.\29\
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    \28\ See Notice at 23321.
    \29\ See id.
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    BZX contends that the proposal would not compromise the price 
discovery function performed by the primary listing exchanges' closing 
auctions because Cboe Market Close would only accept, match, and 
execute MOC orders, which are designated to execute at the security's 
official closing price.\30\ In order to avoid an impact on price 
discovery, BZX states that Cboe Market Close would not accept limit 
orders, which are orders to buy or sell a security at a specific price 
or better and are the basis from which price formation occurs in a 
closing auction.\31\
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    \30\ See BZX Rule 11.9(a)(2) which defines a ``limit order'' as 
``[a]n order to buy or sell a stated amount of a security at a 
specified price or better.''
    \31\ See Notice at 23321.
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III. Discussion and Commission Findings

    The Commission finds that the proposed rule change is consistent 
with the requirements of the Act and the rules and regulations 
thereunder applicable to a national securities exchange.\32\ The 
Commission therefore approves the proposed rule change. In particular, 
as discussed below, the Commission finds that the proposal is 
consistent with: Section 6(b)(8) of the Act,\33\ 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; and Section 6(b)(5) of the Act,\34\ which requires that the 
rules of a national securities exchange, among other things, be 
designed to prevent fraudulent and manipulative acts and practices, 
promote just and equitable principles of trade, remove impediments and 
perfect the mechanism of a free and open market and a national market 
system, and, in general, protect investors and the public interest. 
Further, the Commission believes that the proposal is consistent with 
the statutory objective of fair and orderly markets under Section 11A 
of the Act.
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    \32\ 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 on efficiency and competition below in Section III.A. 
The Commission addresses the effects of the proposed rule change on 
capital formation below in Sections III.B.1 and III.C.
    \33\ 15 U.S.C. 78f(b)(8).
    \34\ 15 U.S.C. 78f(b)(5).
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    The Commission received a number of comment letters addressing the 
proposed rule change's consistency with these provisions, specifically 
focusing on its potential effect on: (1) Competition; (2) price 
discovery and fragmentation; (3) issuers and other market participants; 
(4) market complexity and operational risk; and (5) manipulation. The 
Commission addresses each of these issues below.
    First, the Commission addresses arguments raised that the proposal 
is inconsistent with Section 6(b)(8) of the Act because it would burden 
competition by, among other things, free-riding on the investments of 
the primary listing exchanges in their closing auctions. We find that, 
on the contrary, the proposal will not impose any burden on competition 
not necessary or appropriate in furtherance of the purposes of the Act, 
and, in fact, it should promote competition among MOC order execution 
venues and foster price competition for MOC order execution fees.
    Second, the Commission addresses comments regarding the proposal's 
consistency with Section 6(b)(5) of the Act. These commenters argue 
that the proposal would fragment the execution of MOC orders and 
thereby disrupt closing auction price discovery, increase market 
complexity and operational risk, and increase the risk of manipulation 
through, among things, information asymmetries. The Commission finds, 
based on Cboe Market Close's design and the record before us, that the 
proposal is consistent with Section 6(b)(5) of the Act. As explained 
below, because Cboe Market Close will only execute MOC orders against 
other MOC orders, it should not disrupt the closing auction price 
discovery process. Furthermore, Cboe Market Close should not 
significantly increase market complexity and operational risk because 
it will simply constitute an additional optional MOC order execution 
venue for market participants, and an optional data feed that market 
participants may choose to monitor for information regarding the total 
size of matched MOC orders via Cboe Market Close. Lastly, as discussed 
below, Cboe Market Close should not materially increase the risk of 
manipulation through information asymmetries because the information 
that may be discerned by participants of Cboe Market Close is of 
limited usefulness, and BZX has made detailed commitments regarding its 
plans to surveil, detect, and prevent against any potential 
manipulation through the use of Cboe Market Close.

A. Effect on Competition

1. Price Competition and ``Free Riding''
a. Comments on the Proposal
    A number of commenters addressed the proposal's effect on 
competition. Some commenters supporting the proposal stated that it 
would increase competition among exchanges for executions of orders at 
the close.\35\ These commenters asserted that increased competition 
could result in reduced fees for market participants.\36\ Some of these 
commenters characterized the primary listing exchanges 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.\37\ Commenters also asserted that the primary listing 
exchanges have taken advantage of increasing volume at the close by 
charging significantly higher fees for participation in the closing 
auctions than for intraday

[[Page 4730]]

trading.\38\ One commenter added that the high costs of closing 
transactions are exacerbated because primary listing exchanges assess a 
fee on both sides of the closing auction executions, and imbalance 
feeds for auctions are only available as part of the exchanges' premium 
data products.\39\ Two commenters who opposed the proposal acknowledged 
that increasing fees and lack of price competition with respect to 
closing auctions are of concern, but suggested alternatively that 
regulatory checks on closing auction pricing, such as fee caps, could 
be put into place.\40\
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    \35\ See Letters from: Donald K. Ross, Jr., Executive Chairman, 
PDQ Enterprise, LLC (June 6, 2017) (``PDQ Letter''); Ray Ross, Chief 
Technology Officer, Clearpool Group (June 12, 2017) (``Clearpool 
Letter'') at 2; Venu Palaparthi, SVP, Compliance, Regulatory and 
Government Affairs, Virtu Financial (June 12, 2017) (``Virtu 
Letter'') at 2; Theodore R. Lazo, Managing Director and Associate 
General Counsel, SIFMA (June 13, 2017) (``SIFMA Letter 1'') at 2; 
John Ramsay, Chief Market Policy Officer, Investors Exchange LLC 
(June 23, 2017) (``IEX Letter'') at 1; David M. Weisberger, Head of 
Equities, ViableMkts (Aug. 3, 2017) (``ViableMkts Letter'') at 1-2; 
and Donald Bollerman (Aug. 18, 2017) (``Bollerman Letter'') at 2.
    \36\ See PDQ Letter; Clearpool Letter at 2; Virtu Letter at 2; 
SIFMA Letter 1 at 2; IEX Letter at 1; ViableMkts Letter at 1; 
Bollerman Letter at 2; and Letter from Theodore R. Lazo, Managing 
Director and Associate General Counsel, SIFMA (Aug. 18, 2017) 
(``SIFMA Letter 2'').
    \37\ 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 Letter from Ari M. Rubenstein, Co-Founder and 
Chief Executive Officer, GTS Securities LLC (June 22, 2017) (``GTS 
Securities Letter 1'') at 5.
    \38\ See, e.g., Clearpool Letter at 2; and ViableMkts Letter at 
1-2 (estimating that the average ``capture'' for MOC orders executed 
in the Nasdaq and NYSE closing auctions is likely over 20 mils per 
share compared to the average capture that ranges from a negative 
number to 10 mils on Nasdaq and from a negative number to 16 mils on 
NYSE for intraday executions).
    \39\ See Clearpool Letter at 2.
    \40\ See Letters from: Ari M. Rubenstein, Co-Founder and Chief 
Executive Officer, GTS Securities LLC (Aug. 17, 2017) (``GTS 
Securities Letter 2'') at 6 (acknowledging that many market 
participants were concerned that the primary listing exchanges 
``have too much pricing power relative to the closing auction''); 
and Mehmet Kinak, Head of Global Equity Market Structure & 
Electronic Trading, et al., T. Rowe Price Associates, Inc. (July 7, 
2017) (``T. Rowe Price Letter'') at 3 (stating that closing auction 
fees ``have been steadily increasing in the absence of competitive 
alternatives'').
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    One commenter argued that the proposal does not unduly burden 
competition as exchanges often attempt to compete by adopting 
functionality or fee schedules developed by competitors.\41\ Another 
commenter also asserted that the proposal is not fully competitive with 
closing auctions, as it does not accept priced orders or disseminate 
imbalance information.\42\ Rather, the commenter 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.'' \43\
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    \41\ See IEX Letter at 3.
    \42\ See ViableMkts Letter at 5.
    \43\ 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.
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    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 exchanges have made in their closing 
auctions.\44\ These commenters asserted that the proposal would 
unfairly burden competition as it would allow BZX to use the closing 
prices established through the auction of a primary listing exchange, 
without bearing any of the attendant costs or risks.\45\ In particular, 
NYSE and Nasdaq asserted that the existing exchange fees for closing 
auctions reflect the investments that have been made in developing and 
operating the closing auctions, including the rules and procedures 
governing the auctions, the technology to determine the official 
closing price of a security, and the surveillance tools necessary to 
monitor the closing process.\46\ In addition, Nasdaq and NYSE 
highlighted the regulatory costs related to operating a closing 
auction.\47\ Specifically, Nasdaq and NYSE cited compliance costs 
associated with Regulation Systems Compliance and Integrity 
(``Regulation SCI'').\48\ Nasdaq and NYSE explained that Regulation SCI 
was adopted by the Commission to enhance the robustness and resiliency 
of the technological systems of ``SCI entities,'' including 
exchanges.\49\ They stated that closing auctions are ``critical SCI 
systems'' under Regulation SCI, and as such, are subject to heightened 
requirements and increased compliance costs, as compared to other ``SCI 
systems.'' \50\ Nasdaq and NYSE asserted that, because Cboe Market 
Close is not a closing auction and thus not a ``critical SCI system'' 
under the regulation, BZX would be at a competitive advantage by not 
having to incur such additional compliance costs when competing to 
attract MOC orders.\51\ Because BZX would not have to bear any of the 
aforementioned expenses of developing and conducting a closing auction, 
NYSE and Nasdaq concluded that BZX would be able to charge fees to 
execute MOC orders at the official closing price at a price with which 
the primary listing exchanges could not realistically compete.\52\ 
Nasdaq further argued that because the closing fees of NYSE and Nasdaq 
would always be undercut by BZX, it would diminish incentives for the 
primary listing exchanges to invest in enhancements to their closing 
auctions.\53\ In addition, Nasdaq argued that the proposal would 
decrease incentives to serve as a listing exchange if it could not 
offset the cost of its regulatory responsibilities as a listing 
exchange with the revenue derived from executing MOC orders in Nasdaq-
listed securities.\54\
---------------------------------------------------------------------------

    \44\ See, e.g., Letters from: Elizabeth K. King, General Counsel 
and Corporate Secretary, NYSE (June 13, 2017) (``NYSE Letter 1'') at 
9-10; Elizabeth K. King, General Counsel and Corporate Secretary, 
NYSE (Nov. 3, 2017) (``NYSE Letter 3'') at 1; Edward S. Knight, 
Executive Vice President and General Counsel, Nasdaq, Inc. (June 12, 
2017) (``Nasdaq Letter 1'') at 5-6 & 9; Edward S. Knight, Executive 
Vice President and General Counsel, Nasdaq, Inc. (Sept. 18, 2017) 
(``Nasdaq Letter 2'') at 7-8; Jon Stonehouse, CEO, and Tom Staab, 
CFO, BioCryst Pharmaceuticals, Inc. (July 31, 2017) (``BioCryst 
Letter'') at 2; Charles Beck, Chief Financial Officer, Digimarc 
Corporation (Aug. 3, 2017) (``Digimarc Letter'') at 1-2; Michael J. 
Chewens, Senior Executive Vice President & Chief Financial Officer, 
NBT Bancorp Inc. (Aug. 11, 2017) (``NBT Bancorp Letter'') at 2; 
Patrick L. Donnelly, Executive Vice President & General Counsel, 
Sirius XMHoldings Inc. (Aug. 17, 2017) (``Sirius Letter'') at 2; and 
Gabrielle Rabinovitch, VP, Investor Relations, PayPal Holdings, Inc. 
(Sept. 12, 2017) (``PayPal Letter'') at 1; NYSE Statement at 14-18; 
Nasdaq Statement at 10-16; and Pitt/Spatt Report at 11-12, 19-20. 
See also Letter from James J. Angel, Associate Professor, McDonough 
School of Business, Georgetown University (July 30, 2017) (``Angel 
Letter'') at 3 (calling for a rationalization of intellectual 
property protection in order to foster productive innovation).
    \45\ See, e.g., NYSE Letter 1 at 9; NYSE Letter 3 at 5; NYSE 
Statement at 14-18; Nasdaq Statement at 10-16; Pitt/Spatt Report at 
11-12, 19-20; and Letters from: Elizabeth K. King, General Counsel 
and Corporate Secretary, NYSE (Aug. 9, 2017) (``NYSE Letter 2'') at 
1-3; and Elizabeth K. King, General Counsel and Corporate Secretary, 
NYSE (Jan. 12, 2018) (``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.
    \46\ See NYSE Letter 1 at 9; NYSE Letter 2 at 2; NYSE Letter 3 
at 5; NYSE Statement at 14-16; and Nasdaq Statement at 11, 15. 
Moreover, NYSE stated that it dedicates resources to providing 
systems to designated market makers (``DMMs'') necessary to 
facilitate the closing of trading as well as to floor brokers to 
enter and manage their customers' closing interest. See NYSE Letter 
2 at 2; and NYSE Statement at 15.
    \47\ See Nasdaq Statement at 11-12; and NYSE Statement at 15-16.
    \48\ See Nasdaq Statement at 11-12; and NYSE Statement at 15-16.
    \49\ See Nasdaq Statement at 11-12; and NYSE Statement at 15-16.
    \50\ See Nasdaq Statement at 11-12; and NYSE Statement at 15-16.
    \51\ See Nasdaq Statement at 11-12; and NYSE Statement at 15-16. 
Nasdaq and NYSE also argued that Cboe Market Close results in 
regulatory disparities similar to those that the Commission found in 
its Benchmark Disapproval Order to unnecessarily and inappropriately 
burden competition. See discussion, infra Section III.A.2.
    \52\ See Nasdaq Statement at 11-12; and NYSE Statement at 15-16. 
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 NYSE Statement at 15-16.
    \53\ See Nasdaq Statement at 11. See also PayPal Letter at 1 
(citing concerns about the ``incentive structure'' that the proposal 
presents).
    \54\ See Nasdaq Statement at 12-13.
---------------------------------------------------------------------------

    Nasdaq and NYSE further stated that BZX is not proposing to develop 
its own auction or improve the functionality of the closing auctions in 
the primary listing exchanges, but rather merely using the price 
generated by the listing exchanges through their proprietary 
processes.\55\ Nasdaq added that in order

[[Page 4731]]

for BZX to meaningfully enhance competition, it would have to generate 
its own closing price.\56\ NYSE also stated that the proposal differs 
from the competing auctions currently run by Nasdaq and NYSE Arca in 
securities not listed on their exchanges because those auctions are 
independent price-discovery auction events that do not rely on prices 
established by the primary listing exchange. Therefore, in NYSE's view, 
those auctions compete on a ``level playing field'' and 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.\57\
---------------------------------------------------------------------------

    \55\ See Nasdaq Statement at 15 (citing also the Pitt/Spatt 
Report, which asserted that the Cboe Market Close `is not . . . a 
strategically equivalent product to that previously developed by 
Nasdaq'); and NYSE Statement at 14-15, 19-20. See also Pitt/Spatt 
Report at 11-12 (noting the Cboe Market Close ``deliberately lacks 
any mechanism for determining the price'' at which matched MOCs 
would be executed and is dependent on the Nasdaq closing cross).
    \56\ See Nasdaq Statement at 13. See also infra notes 240-242 
(discussing comments on the proposal's effect on price discovery and 
competing auctions and over-the-counter matching services).
    \57\ See NYSE Letter 1 at 6; NYSE Letter 2 at 3-4; NYSE Letter 3 
at 5; and NYSE Statement at 20 n.59. In response, one commenter 
stated that these competing auctions were not originally proposed to 
only serve as a back-up to a primary listing exchanges' 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 undermines intra-market 
competition, by removing orders from Nasdaq's auction book.\58\ 
Specifically, Nasdaq asserted that, by diverting orders away from NYSE 
and Nasdaq, the proposal would detract from robust price competition 
and discovery, which Nasdaq argued is necessary for the exchange to 
arrive at the most accurate closing price.\59\ NYSE also argued that 
the proposal affects 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.\60\ 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.\61\ 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--were misplaced because all exchanges 
contribute to the prices to which such orders are pegged, whereas BZX 
does not contribute to the closing price on a primary listing 
exchange.\62\
---------------------------------------------------------------------------

    \58\ See Nasdaq Letter 1 at 9; and Nasdaq Statement at 12-14.
    \59\ See Nasdaq Letter 1 at 10; Nasdaq Letter 2 at 7-8; and 
Nasdaq Statement at 13. See also infra Section III.B (discussing 
comments on the proposal's effect on price discovery).
    \60\ See NYSE Letter 1 at 9.
    \61\ See Nasdaq Letter 2 at 8.
    \62\ See id. at 13.
---------------------------------------------------------------------------

    Nasdaq and NYSE also disputed the purported benefits of the 
proposal for market participants.\63\ First, Nasdaq and NYSE asserted 
that the cost savings from Cboe Market Close is unlikely to be passed 
along to investors because broker-dealers typically pay an exchange's 
transaction fees.\64\ Further, Nasdaq and NYSE asserted that the 
proposal would not enhance competition with respect to execution 
quality, but rather may harm execution quality.\65\ In this regard, 
Nasdaq argued that because orders would be irrevocable earlier than on 
the listing exchange, it would impair the price discovery function on 
the primary listing exchanges' closing auctions,\66\ while NYSE stated 
that the proposal would reduce the amount of MOC orders in the closing 
auctions, thereby reducing the quality of the closing price and 
inhibiting competition.\67\
---------------------------------------------------------------------------

    \63\ See Nasdaq Statement at 16; and NYSE Statement at 18-19.
    \64\ See Nasdaq Statement at 16; and NYSE Statement at 18-19.
    \65\ See Nasdaq Statement at 16; and NYSE Statement at 20.
    \66\ See Nasdaq Statement at 16.
    \67\ See NYSE Statement at 20.
---------------------------------------------------------------------------

b. BZX Response to Comments
    BZX asserted that the proposal would enhance rather than burden 
competition by promoting competition in the use of MOC orders.\68\ 
Specifically, BZX stated that the proposal would have a positive effect 
on competition as it offers a price-competitive alternative that will 
not affect the price discovery process.\69\ BZX stated that it believes 
that this increased price competition will result in lower fees for 
market participants seeking an execution of MOC orders at the official 
closing price.\70\ In response to NYSE and Nasdaq assertions that fee 
reductions would not be passed along to investors, BZX argued that, 
even if broker-dealers do not directly pass through lower fees to their 
customers, customers would still receive indirect benefits from lower 
execution fees such as general fee reductions from broker-dealers or 
other improvements that broker-dealers may make due to cost 
savings.\71\
---------------------------------------------------------------------------

    \68\ See Letters from: Joanne Moffic-Silver, Executive Vice 
President, General Counsel, and Corporate Secretary, Bats Global 
Markets, Inc. (Aug. 2, 2017) (``BZX Letter 1'') at 10-11; and Joanne 
Moffic-Silver, Executive Vice President, General Counsel, and 
Corporate Secretary, Bats Global Markets, Inc. (Oct. 11, 2017) 
(``BZX Letter 2'') at 6-7. BZX further argued that Nasdaq's 
assertion that the proposal would undermine competition amongst 
orders is misplaced. BZX believes that paired-off MOC orders--which 
are not price-setting orders but rather the beneficiaries of price 
discovery--do not affect 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 BZX Letter 1 at 11.
    \69\ See BZX Letter 2 at 7.
    \70\ See BZX Statement at 22.
    \71\ See BZX Letter 2 at 7.
---------------------------------------------------------------------------

    BZX also challenged the assertion that it was ``free-riding'' on 
the primary listing exchanges' closing auctions.\72\ 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 exchange; 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.\73\ 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.\74\ In addition, BZX stated 
that no rule or regulation provides the primary listing exchange 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.\75\ BZX also 
stated that improving and mimicking functionality enhances the 
competitive dynamic among exchanges.\76\ Further, BZX stated 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.\77\
---------------------------------------------------------------------------

    \72\ See BZX Letter 1 at 5; and BZX Letter 2 at 7.
    \73\ See BZX Letter 1 at 5.
    \74\ See BZX Letter 1 at 6; and BZX Letter 2 at 7 (describing 
NYSE's after hours crossing sessions which execute 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).
    \75\ See BZX Letter 2 at 8.
    \76\ See id.
    \77\ See BZX Letter 1 at 6. See also infra Section III.B.3 
(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 listing exchange 
closing auction, BZX noted 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 found 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).

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

[[Page 4732]]

    BZX also asserted that Cboe Market Close would create benefits for 
market participants beyond price competition.\78\ In particular, BZX 
argued that it would be unable to attract order flow based solely on 
lower execution fees, so it would have to build a ``viable alternative 
venue to which market participants will choose to send their orders,'' 
including continually improving Cboe Market Close technology.\79\ This, 
in turn, BZX argued, would likely cause the primary listing exchanges 
to seek to improve quality and performance of their auctions, thereby 
enhancing competition and benefiting market participants generally.\80\
---------------------------------------------------------------------------

    \78\ See BZX Statement at 23-24.
    \79\ See BZX Statement at 23-24.
    \80\ See BZX Statement at 23-24.
---------------------------------------------------------------------------

c. Commission Discussion and Findings
    BZX and other commenters have provided evidence that, over the past 
several years, closing auction fees have steadily increased and are 
significantly higher than fees for intraday trading.\81\ For example, 
BZX stated that the per share proceeds (i.e., the per share fee charged 
to the buyer plus the per share fee charged to the seller) for the 
primary listing exchanges based on the top tier fees they assess for 
closing auction trades is $0.0012 per share for NYSE and $0.0018 per 
share for Nasdaq, while the primary listing exchanges' per share 
proceeds from intraday trading based on the top tier fees and rebates 
they assess for intraday trades are much lower, specifically $0.00055 
for NYSE and -$0.00005 for Nasdaq.\82\ Another commenter estimated 
that, under Nasdaq and NYSE's tiered fee structures, the average 
proceeds from MOC orders executed in the Nasdaq and NYSE closing 
auctions is likely over $0.0020 per share compared to the average per 
share proceeds from intraday executions, which ranges from a negative 
number to $0.0010 on Nasdaq and from a negative number to $0.0016 on 
NYSE.\83\
---------------------------------------------------------------------------

    \81\ See Notice at 23321 and n.9; and supra notes 38-39 and 
accompanying text. Specifically, BZX states that NYSE's closing 
auction fees have gone up by 16%, while Nasdaq's fees have increased 
by 60%. See Notice at 23321; and BZX Statement at 3 and n.11.
    \82\ See Notice at 23321; and BZX Statement at 3 and n.11. NYSE 
and Nasdaq utilize fee structures whereby they pay per share rebates 
to market participants who provide liquidity on their exchanges. As 
a result, the per share proceeds figures for intraday trading 
provided by BZX and other commenters may be reflected as negative 
amounts because a rebate paid to a liquidity provider may, in some 
instances, exceed the fee charged to a liquidity taker.
    \83\ See ViableMkts Letter at 1-2. See also Clearpool Letter at 
2. The Commission notes that a recent academic paper supports this 
notion. See Eric Budish, Robin S. Lee, and John J. Shim, Will the 
Market Fix the Market? A Theory of Stock Exchange Competition and 
Innovation, (May 6, 2019), available at https://www.nber.org/papers/w25855.pdf.
---------------------------------------------------------------------------

    While the development and ongoing costs associated with the primary 
listing exchanges' closing auctions may play a role in the fees for 
closing auctions, NYSE and Nasdaq have not provided any data or details 
to support this assertion.\84\ And those costs are unlikely to account 
for the entirety of the wide disparity between closing auction fees and 
intraday trading fees demonstrated by BZX and other commenters. While 
BZX would not be conducting the closing auction that would determine 
the execution price for orders executed in Cboe Market Close, by 
providing an additional exchange venue to execute MOC orders, the 
availability of Cboe Market Close should foster price competition for 
the execution of MOC orders. Further, as noted above, BZX stated that 
it intends to file a separate proposal related to fees for MOC orders 
executed in the Cboe Market Close that would set and maintain such fees 
over time at a rate less than the fee charged by the applicable primary 
listing exchange for its own respective closing mechanism.\85\ Although 
some commenters argued that lower fees resulting from the proposal 
would not generally benefit market participants because such fees are 
typically not passed through from a broker-dealer to its customers, the 
Commission believes that the costs of closing auctions can have a 
negative effect on brokers and the investors that they serve, 
particularly for smaller and mid-size brokers.\86\ The Commission 
believes that fostering price competition for the execution of MOC 
orders may facilitate the ability for smaller and mid-size brokers to 
better compete for investors' MOC order flow, and greater choice among, 
and participation by, broker-dealers in handling MOC orders should 
inure to the benefit of end investors.
---------------------------------------------------------------------------

    \84\ The Commission requested such information in the OIP, 
asking specifically: What are the current costs associated with a 
primary listing market developing and operating a closing auction, 
and to what extent (and if so, how) are these costs passed on to 
market participants today? How do the fixed costs associated with 
developing closing auctions compare to the variable costs of 
conducting closing auctions? How do the revenues collected from 
closing auctions compare to these costs? See OIP at 40211.
    \85\ See supra note 29 and accompanying text.
    \86\ See, e.g., Clearpool Letter at 1.
---------------------------------------------------------------------------

    While the primary listing exchanges and other commenters argue that 
BZX is ``free riding'' on investments of the primary listing exchanges 
in the development and maintenance of the closing auction process--and 
thus impeding competition in a manner inconsistent with the Act--this 
concern must be evaluated against the enhanced competition that the 
proposal should provide. In particular, BZX has demonstrated that the 
proposal will not impose a burden on competition that is not necessary 
or appropriate in furtherance of the purposes of the Act because it 
should promote competition among MOC order execution venues and foster 
price competition for MOC order execution fees, areas which currently 
appear to be lacking the same competitive forces as intraday trading. 
In this regard, as discussed above, commenters assert that the primary 
listing exchanges have taken advantage of the ``monopoly'' they have on 
orders seeking a closing price to impose high per share fees for orders 
executed in the closing auctions.\87\ Because Cboe Market Close will 
provide an additional venue to execute MOC orders, the proposal should 
introduce further competition, which may result in benefits to 
investors generally. And while some commenters suggested capping 
closing auction fees to address the lack of competition,\88\ Cboe 
Market Close represents a market-based solution that is designed to 
foster price competition for MOC orders without impairing the integrity 
of the primary listing exchanges' closing auctions.
---------------------------------------------------------------------------

    \87\ See supra notes 36-38 and accompanying text.
    \88\ See supra note 40 and accompanying text.
---------------------------------------------------------------------------

    Moreover, 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 functionalities of their competitors.\89\ This practice does 
not, in and of itself, result in a competitive burden that is not 
necessary or appropriate in furtherance of the purposes of the Act. 
While BZX is not proposing to generate

[[Page 4733]]

its own auction price, it has developed a process that will benefit the 
market because, based on BZX's representations, it should foster price 
competition and thereby decrease costs for market participants.\90\
---------------------------------------------------------------------------

    \89\ Exchanges regularly file proposed rule changes with the 
Commission as required under Section 19(b) of the Act and Rule 19b-4 
thereunder to adopt, for example, new products, order types, order 
modifiers, price improvement mechanisms, risk mechanisms, and other 
functionality that is based upon, and designed to compete with, that 
of other competing exchanges. Reflecting this commonplace practice, 
the requirements of Form 19b-4, with which exchanges must comply to 
file such proposed rule changes, provide that exchanges must, 
``[s]tate whether the proposed rule change is based on a rule either 
of another self-regulatory organization or of the Commission, and if 
so, identify the rule and explain any differences between the 
proposed rule change and that rule . . .'' See Item 8, Form 19b-4, 
available at: https://www.sec.gov/files/form19b-4.pdf.
    \90\ See supra note 29 and accompanying text.
---------------------------------------------------------------------------

    In addition to the proposal's intended effect on price competition, 
the Commission also believes that the proposal may result in other 
benefits to market participants generally, including execution quality 
competition for MOC orders. The Commission believes that implementation 
of Cboe Market Close could incent other venues, including the primary 
listing exchanges, as well as ATSs and off-exchange matching venues, to 
continue to innovate and compete to attract MOC orders to their venues. 
As noted above, BZX stated that it would be unable to attract MOC order 
flow solely on the basis of lower execution fees, and asserted that it 
and the primary listing exchanges would continually need to improve 
their technology and quality of their MOC order execution offerings in 
order to compete for such order flow. 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 and off-exchange venues, which would foster 
further competition and may enhance the quality and efficiency of MOC 
order executions.\91\
---------------------------------------------------------------------------

    \91\ See, e.g., ViableMkts Letter at 2 (stating that Cboe Market 
Close may attract MOC liquidity from market participants that 
currently may not utilize the primary listing exchanges' closing 
auctions and that participation by these market participants may 
also benefit the market more broadly).
---------------------------------------------------------------------------

    The primary listing exchanges argue that the proposal diminishes 
incentives to invest in enhancements to closing auctions. But, in the 
Commission's view, the proposal could actually incent these exchanges 
to innovate and enhance their closing auctions in order to compete for 
MOC orders despite the additional costs of obtaining a closing 
execution on the primary listing exchange, to the extent the costs for 
such executions will indeed be higher than those for Cboe Market 
Close.\92\ 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 not depend solely on 
lower fees. Rather, it will depend on a variety of factors, including 
the quality of the MOC order execution services and the attendant risks 
and costs associated with such executions.\93\
---------------------------------------------------------------------------

    \92\ While Nasdaq also argued that the proposal decreases 
incentives to serve as a listing exchange if it cannot offset the 
cost of regulatory responsibilities of being a listing exchange with 
fees from the closing auction, the Commission finds such argument to 
be unpersuasive. The Commission believes that the primary listing 
exchanges have other means to recoup those costs such as using 
existing fees such as their ``Trading Rights Fee,'' which they have 
asserted is used to help defray costs of regulating the market.
    \93\ See infra note 195 and accompanying text.
---------------------------------------------------------------------------

    Among such factors that market participants may consider in 
determining the venue to which it will send MOC orders are regulatory 
protections, including Regulation SCI. The requirements of Regulation 
SCI were designed to strengthen the infrastructure of the U.S. 
securities markets and improve its resilience when technological issues 
arise.\94\ As NYSE and Nasdaq pointed out, systems used for closing 
auctions on the primary listing exchanges are ``critical SCI systems'' 
under Regulation SCI and as such, are held to heightened requirements 
under the regulation as compared to ``SCI systems.'' The Commission 
determined that closing auction systems are critical to the continuous 
and orderly functioning of the securities markets because they, among 
other things, establish official closing prices, and therefore they 
should be subject to an increased level of obligation as compared to 
other SCI systems.\95\ Accordingly, systems that directly support 
closing auctions on the primary listing exchanges are subject to a two-
hour resumption goal following a wide-scale disruption and increased 
information dissemination provisions following a systems issue.\96\
---------------------------------------------------------------------------

    \94\ See Securities Exchange Act Release No. 73639 (Nov. 19, 
2014), 79 FR 72252 (Dec. 5, 2014) (``SCI Adopting Release'').
    \95\ See SCI Adopting Release at 72277-78. ``Critical SCI 
systems'' are defined in Rule 1000 of Regulation SCI to include, 
among other things, any SCI systems of, or operated by, or on behalf 
of, an SCI entity that directly support functionality relating to 
openings, reopenings, and closings on the primary listing market. 17 
CFR 242.1000.
    \96\ See 17 CFR 242.1001(a)(2)(v) and 1002(c)(3). See also SCI 
Adopting Release at 72277.
---------------------------------------------------------------------------

    NYSE and Nasdaq stated that there are additional costs due to 
compliance with the heightened Regulation SCI requirements for their 
closing auction systems that would put them at a competitive 
disadvantage. Although Cboe Market Close systems, as proposed, would 
also be subject to Regulation SCI as ``SCI systems,'' based on the 
Regulation SCI rule definitions, they would not be ``critical SCI 
systems,'' and thus would not be subject to the heightened requirements 
of the regulation. Similarly, off-exchange MOC matching systems of ATSs 
and broker-dealers would not be ``critical SCI systems'' and further, 
may not be subject to any of the requirements of Regulation SCI if such 
entities do not meet the definition of ``SCI entity'' under the 
regulation.\97\ Importantly, Cboe Market Close is not a closing 
auction, but rather matches and executes MOC orders at a security's 
official closing price. Accordingly, Cboe Market Close will not serve 
the same function to the markets as the closing auctions on the primary 
listing exchanges. Regulation SCI, by design, takes a risk-based 
approach, and designates as critical SCI systems those systems that the 
Commission believes should be subject to the highest level of 
requirements based on their criticality.\98\ The fact that systems 
would be subject to different requirements of Regulation SCI because of 
differences in their design, utility, and function does not establish a 
burden on competition not necessary or appropriate in furtherance of 
the purposes of the Act.
---------------------------------------------------------------------------

    \97\ Regulation SCI is not applicable to non-ATS broker-dealers. 
Further, an ATS is only subject to the requirements of Regulation 
SCI if it meets certain volume thresholds under the definition of 
``SCI ATS.'' See 17 CFR 242.1000.
    \98\ In the SCI Adopting Release, the Commission acknowledged 
that critical SCI systems may be subject to additional costs, but 
stated that, ``by distinguishing critical systems, Regulation SCI is 
consistent with a risk-based approach that targets areas that would 
generate the most benefits.'' SCI Adopting Release at 72411.
---------------------------------------------------------------------------

    Additionally, the Commission believes that some market participants 
could potentially view the lack of these heightened protections for 
Cboe Market Close as a potential risk that may factor into their 
determination as to whether to send MOC orders to BZX or to the primary 
listing exchanges. Commenters, including the listing exchanges, 
emphasized the importance of the closing auctions to the operation of 
the markets, and touted such closing auctions' reliability, integrity, 
stability, and resiliency.\99\ As such, the Commission believes that 
market participants may continue to favor the primary listing exchanges 
for their MOC order executions, in part, because such critical SCI 
systems are subject to the heightened protections of Regulation SCI, 
such that their MOC orders are being handled on trading platforms that 
are subject to the highest operational resumption standards and are 
thus designed to be less susceptible to the potential risk of 
operational outages, instability or other disruptions.
---------------------------------------------------------------------------

    \99\ See, e.g., Nasdaq Letter 1 at 3 and Nasdaq Statement at 4-
5. Comment letters from listed issuers also referenced the 
reliability, strength, and integrity of the closing auction 
processes on the primary listing exchanges. See, e.g., NBT Bancorp 
Letter, at 2.

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[[Page 4734]]

    In addition, the primary listing exchanges advanced several 
theories as to how the proposal could undermine other types of 
competition, such as intramarket competition, by diverting orders away 
from the primary listing exchanges and thereby preventing such orders 
from interacting and competing on a primary listing exchange. But this 
result is not unique to Cboe Market Close. In particular, when one 
exchange innovates, makes enhancements, or modifies exchange fees, it 
may result in market participants sending more order flow to one 
exchange and less volume to other exchanges, thereby potentially 
decreasing intramarket competition among orders on a particular 
exchange. Thus, enhancing competition between exchanges will, in many 
cases, have an inverse effect on intramarket competition. The 
Commission does not believe this to be an inappropriate burden on 
competition in this case.
2. Differing Regulatory Standards
a. Comments on the Proposal
    Several commenters referenced the Commission's order disapproving a 
Nasdaq proposal to create a Benchmark Order (``Benchmark Disapproval 
Order'') in arguing that BZX has not satisfied its obligation to 
demonstrate that the proposal is consistent with the Act.\100\ Nasdaq 
and NYSE characterized the Benchmark Disapproval Order as finding that 
Nasdaq's proposal would give it an unfair advantage over competing 
broker-dealers due to regulatory disparities, and the exchanges 
asserted that similar regulatory disparities exist with BZX's proposal. 
Specifically, NYSE and Nasdaq argued that the proposal creates a 
disparate regulatory regime between the primary listing exchanges and 
BZX because BZX would not be subject to the heightened standards 
applicable to critical SCI systems under Regulation SCI, nor would BZX 
be required to make or enforce rules for a closing auction.\101\ Nasdaq 
further argued that the Benchmark Disapproval Order establishes that 
``the Commission has been disinclined to approve proposed rule changes 
in which the exchange cannot clearly articulate how a proposal to offer 
a service is consistent with the policy goals of the Act with respect 
to national securities exchanges,'' and BZX has not done so.\102\
---------------------------------------------------------------------------

    \100\ See Securities Exchange Act Release No. 68629 (Jan. 11, 
2013), 78 FR 3928 (Jan. 17, 2013) (NASDAQ-2012-059).
    \101\ See NYSE Statement at 17-18; and Nasdaq Statement at 12. 
See also supra notes 47-52 accompanying text (discussing the 
regulatory costs of operating a closing auction, including those 
related to Regulation SCI).
    \102\ See Nasdaq Letter 1 at 5.
---------------------------------------------------------------------------

    Similarly, SIFMA relied on the Benchmark Disapproval Order in 
asserting 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.\103\ 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.\104\
---------------------------------------------------------------------------

    \103\ See Letter from Theodore R. Lazo, Managing Director and 
Associate General Counsel, SIFMA (Dec. 8, 2017) (``SIFMA Letter 3'') 
at 2-4.
    \104\ 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.\105\ 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.\106\ In addition, SIFMA stated that BZX Rule 11.16 
currently limits the liability exposure of the Exchange to its 
members.\107\ 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.'' \108\ 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.\109\ 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.\110\
---------------------------------------------------------------------------

    \105\ See id. at 2-3.
    \106\ See id. at 3.
    \107\ See BZX Rule 11.16.
    \108\ See SIFMA Letter 3 at 4.
    \109\ See id.
    \110\ See id.
---------------------------------------------------------------------------

b. BZX Response to Comments
    BZX argued that its proposal does not implicate the same issues as 
the Benchmark Disapproval Order because the Commission's disapproval 
rested primarily on its finding that it raised issues under the Market 
Access Rule.\111\ BZX also stated that, unlike Nasdaq's proposal which 
was designed to compete with the services offered by broker-dealers, it 
is seeking to compete on price with the primary listing exchanges' 
closing auctions.\112\
---------------------------------------------------------------------------

    \111\ See id. at 11.
    \112\ See BZX Letter 1 at 10.
---------------------------------------------------------------------------

    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.\113\ 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.\114\
---------------------------------------------------------------------------

    \113\ See Letter from Joanne Moffic-Silver, Executive Vice 
President, General Counsel, and Corporate Secretary, Cboe Global 
Markets, Inc. (Jan. 3, 2018) (``BZX Letter 3'') at 5.
    \114\ See id.
---------------------------------------------------------------------------

c. Commission Discussion and Findings
    The Commission does not believe that the differing regulatory 
standards applicable to Cboe Market Close and the primary listing 
exchanges' closing auctions create an unfair burden on competition. 
This is because, as discussed above, the Commission believes that, Cboe 
Market Close differs from the primary listing exchanges' closing 
auctions in design, utility, and function. As also discussed above, the 
fact that closing auction systems are subject to the heightened 
requirements of Regulation SCI for critical SCI systems could encourage 
market participants to send MOC orders to closing auctions on the 
primary listing exchanges due to the additional regulatory protections 
required of such systems.\115\
---------------------------------------------------------------------------

    \115\ See supra notes 94-96 and accompanying text.
---------------------------------------------------------------------------

    With regard to SIFMA's comments regarding competition with broker-
dealer services and the applicability of limitations on liability, the 
Commission believes Cboe Market Close may compete with the off-exchange 
matching services operated by broker-dealers.\116\ Broker-dealers and 
national securities exchanges currently compete with respect to a 
variety of functions and services that they offer to market

[[Page 4735]]

participants within the current national market system. The Commission 
does not agree with commenters' characterizations that the Benchmark 
Disapproval Order broadly prohibits such competition or that the 
existence of different regulatory requirements applicable to exchanges 
on the one hand, and broker-dealers on the other hand is per se 
evidence of an unfair competitive advantage. 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 
exchanges and broker-dealers under the Act, respectively. In 
particular, while it is true that BZX may benefit from the protections 
of its limitations on liability provisions that may not be available to 
broker-dealers, this must be considered along with the other regulatory 
requirements imposed on BZX that are not applicable to broker-dealers, 
such as obligations to enforce compliance by its members and persons 
associated with its members with the Act, the rules and regulations 
thereunder, and its own rules, as discussed below, among others.\117\ 
Therefore, with respect to BZX's proposal, the Commission believes 
that, on balance and in light of the differing requirements under the 
Act and the rules and regulations thereunder applicable to national 
securities exchanges and broker-dealers, the limitations on liability 
available to BZX do not impose an inappropriate burden on competition 
and the proposal is consistent with Section 6(b)(8) of the Act.
---------------------------------------------------------------------------

    \116\ See BZX Letter 2 at 11.
    \117\ 15 U.S.C. 78s(g)(1). The Commission also notes that MOC 
orders submitted to other exchanges' closing auctions would 
similarly be subject to those exchanges' rules governing limitations 
on liability.
---------------------------------------------------------------------------

    With respect to the judicial doctrine of regulatory immunity, 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.'' 
\118\ The Court of Appeals for the Second Circuit recently reached a 
similar conclusion.\119\ 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.' '' \120\ For 
purposes of its consideration of BZX's proposal, the Commission notes, 
as discussed in further detail below, that BZX represented that it 
would continue to surveil for potentially manipulative activities and 
BZX made commitments to enhance its surveillance procedures and work 
with other SROs to detect and prevent manipulative activity through the 
use of Cboe Market Close.\121\ However, whether and to what extent a 
court would determine Cboe Market Close 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.
---------------------------------------------------------------------------

    \118\ 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.
    \119\ 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.'').
    \120\ City of Providence Amicus Br. at 21 (quoting In re NYSE 
Specialists Secs. Litig., 503 F.3d 89, 96 (2d Cir. 2007)).
    \121\ See infra Section III.E.3.c.
---------------------------------------------------------------------------

B. Price Discovery and Fragmentation

    Many commenters addressed the potential effects of the proposal on 
price discovery in the closing auctions on the primary listing 
exchanges, including the effect of additional fragmentation of MOC 
interest among multiple execution venues.
1. Effect of MOC Orders on Price Discovery
a. Comments on the Proposal
    Some commenters stated that the proposal would harm price discovery 
in the closing auctions on the primary listing exchanges.\122\ For 
example, Nasdaq argued that BZX's MOC orders would be incapable of 
contributing to price discovery, and instead would draw orders and 
quotations away from primary closing auctions and undermine the 
mechanisms used to set closing prices.\123\ 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.\124\ Nasdaq argued that Cboe Market Close would deprive 
it of critical information about the supply and demand of Nasdaq-listed 
securities, and that both the information Nasdaq disseminated about its 
closing auction and the price-discovery function of the auction would 
be impaired.\125\ Nasdaq stated that even though BZX would disseminate 
the amount of paired-off shares at 3:35 p.m., Nasdaq would have no way 
to confirm that the information that BZX would disseminate regarding 
the amount of matched volume in Cboe Market Close is accurate or ensure 
that the information is timely disclosed.\126\
---------------------------------------------------------------------------

    \122\ See, e.g., Letters from: John M. Bowers, Bowers Securities 
(June 14, 2017) (``Bowers Letter''); Andrew Stevens, General 
Counsel, IMC Financial Markets (June 30, 2017) (``IMC Letter''); 
Cameron Bready, Senior Executive VP, Chief Financial Officer, Global 
Payments Inc. (Aug. 17, 2017) (``Global Payments Letter''); Mike 
Gregoire, CEO, CA Technologies (Aug. 17, 2017) (``CA Technologies 
Letter''); Nasdaq Letter 2; NYSE Letter 3; Nasdaq Letter 1; NYSE 
Letter 1; GTS Letter 2; T. Rowe Price Letter; NBT Bancorp Letter; 
Sirius Letter; PayPal Letter; NYSE Letter 2; NYSE Statement; and 
Nasdaq Statement. See also Letter from Representative Sean P. Duffy 
and Representative Gregory W. Meeks (Aug. 9, 2017) (``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 exchange, 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 BZX 
proposal would seriously degrade the quality of the closing price, 
then it should be rejected. See Angel Letter.
    \123\ 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 Act); and 
Nasdaq Letter 2 at 3-7.
    \124\ See Nasdaq Letter 1 at 11; and Nasdaq Letter 2 at 5-6. See 
also Nasdaq Statement at 22. 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 limit-on-
close (``LOC'') shares, for its closing auction in a piecemeal 
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.
    \125\ See Nasdaq Statement at 22.
    \126\ See id. at 23.
---------------------------------------------------------------------------

    Nasdaq also expressed concern that the availability of Cboe Market 
Close could affect the behavior of limit orders,

[[Page 4736]]

which Nasdaq asserted would harm price discovery at the market 
close.\127\ In Nasdaq's view, reducing MOC orders in the closing 
auction could affect the behavior of limit orders by reducing the 
ability of both continuous book limit orders \128\ and LOC orders to 
compete with each other and to interact with MOC orders, which it 
asserted is essential to its closing auction.\129\ Specifically, Nasdaq 
contended that if BZX were to disseminate at 3:35 p.m. that a certain 
amount of shares were paired-off for execution in Cboe Market Close, 
but Nasdaq subsequently published little or no paired-off or imbalance 
shares in its imbalance publications,\130\ further participation in the 
intraday trading session leading up to the closing auction and in the 
closing auction could be discouraged, 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.\131\ Nasdaq 
contrasted the BZX proposal with its own closing auction process, 
arguing that after Nasdaq disseminates an imbalance notification that 
combines MOC and LOC orders, market participants can continue to submit 
orders to interact with existing auction interest.\132\ In addition, 
Nasdaq submitted the Pitt/Spatt Report, which asserted that the 
proposal would detrimentally affect Nasdaq closing auctions by 
preventing MOC orders from engaging with price-sensitive orders (LOC 
orders or imbalance-only orders) and by altering the behavior of market 
participants whose MOC orders went unfilled on BZX.\133\
---------------------------------------------------------------------------

    \127\ See Nasdaq Letter 1 at 5 and 11; and Nasdaq Statement at 
25-26 (citing Pitt/Spatt Report at 18).
    \128\ A continuous book limit order is a limit order that is 
eligible for execution during the regular intraday trading session 
or in the closing auction. See supra note 2.
    \129\ See Nasdaq Letter 2 at 5-6. Nasdaq did not submit any 
specific data regarding the effect of the proposal on the use of LOC 
orders.
    \130\ Nasdaq publishes an ``Order Imbalance Indicator'' which 
includes, among other things, the price at which the maximum number 
of shares of orders eligible for participation in its closing 
auction could execute as well as the size of any imbalance. See 
Nasdaq Rule 4754(a)(7).
    \131\ See Nasdaq Letter 2 at 6.
    \132\ See id.
    \133\ See Pitt/Spatt Report at 15-19.
---------------------------------------------------------------------------

    Moreover, Nasdaq argued that even if the proposal only resulted in 
fewer MOC orders submitted to Nasdaq closing auctions, investors would 
be harmed because the official closing price could potentially 
represent a stale or undermined price.\134\ Nasdaq asserted that its 
closing auction is designed to maximize the number of shares that can 
be executed at a single price and that the number of MOC orders affects 
the number of shares able to execute in a closing auction.\135\ Nasdaq 
added that because Cboe Market Close would undermine closing auction 
price discovery, Cboe Market Close would also inhibit efficient capital 
allocation and thereby impair capital formation.\136\
---------------------------------------------------------------------------

    \134\ See Nasdaq Letter 1 at 12. See also Nasdaq Letter 2 at 6 
(providing an example of how Nasdaq believes 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.
    \135\ See id. at 11. Nasdaq 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'').
    \136\ See Nasdaq Statement at 37.
---------------------------------------------------------------------------

    Nasdaq also argued that the proposal would harm price discovery 
because fragmentation of MOC orders would directly affect closing 
auctions for which Nasdaq only received MOC orders. Nasdaq contended 
that, if all those 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.\137\ 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.\138\ The 
examples provided assume that the BZX proposal would result in no 
market participants choosing to send any MOC orders to the primary 
listing exchanges' closing auctions. Nasdaq asserted this would be the 
case because market participants would choose to submit their MOC 
orders to the lower cost execution venue.\139\ Further, both Nasdaq and 
NYSE explained that if the fees set by BZX for Cboe Market Close were 
lower than the primary listing exchanges and there was no competitive 
response by the primary listing exchanges, a likely outcome would be 
that market participants would choose to submit their MOC orders to 
BZX.\140\
---------------------------------------------------------------------------

    \137\ See Nasdaq Letter 2 at 3; and Nasdaq Statement at 23-24.
    \138\ See Nasdaq Letter 2 at 3-5; and Nasdaq Statement at 23. 
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.''
    \139\ See Nasdaq Statement at 25. While NYSE 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.'' See Assessment of the DERA Analysis conducted 
by D. Timothy McCormick, Ph.D. (Jan. 11, 2018) (``NYSE Report''), at 
22.
    \140\ Id. See also Nasdaq Statement at 24.
---------------------------------------------------------------------------

    The Pitt/Spatt Report submitted by Nasdaq states that, according to 
formal auction theory, the auction price and bidding behaviors of 
auction participants are determined by the rules of the auction.\141\ 
The Pitt/Spatt Report asserts that the price and bidding behaviors in 
the closing auction on the primary listing exchange (such as the Nasdaq 
closing auction) will change if a competing earlier auction (such as 
the Cboe Market Close) is introduced, even though the rules in the 
closing auction on the primary listing exchange are unchanged. 
According to the Pitt/Spatt Report, one way in which bidding behavior 
is affected is that traders with MOC orders may reallocate those orders 
to the Cboe Market Close to obtain an earlier matching resolution at 
3:35 p.m. while still retaining the ability to participate in the 
Nasdaq closing auction. According to the report, this change in bidding 
behavior would then affect the closing price on the listing exchange 
for two reasons. First, the ``proposed [Cboe] Market Close would 
prevent the direct interaction of the siphoned-off orders with price 
sensitive orders, which are at the heart of true `price discovery,' and 
necessarily would influence the determination of the closing price.'' 
\142\ Second, participants in the Cboe Market Close, ``[a]rmed with 
information about the extent to which the matching efforts were 
successful (or unsuccessful), . . . would potentially alter the 
aggressiveness with which they would engage in the Nasdaq Market Close 
after the conclusion of the [Cboe] Market Close at 3:35 p.m.'' \143\
---------------------------------------------------------------------------

    \141\ See Pitt/Spatt Report at 15.
    \142\ See id. at 17-18.
    \143\ See id. at 17.
---------------------------------------------------------------------------

    NYSE argued that even though Cboe Market Close would only accept 
MOC orders, it could materially affect official closing prices 
determined through a NYSE closing auction.\144\ NYSE emphasized the 
importance of the centralization of orders during the closing auction 
on the primary listing exchange.\145\ NYSE, as well as Nasdaq, also 
asserted that the proposal contradicts the Commission's approval of 
amendments to the National Market

[[Page 4737]]

System Plan to Address Extraordinary Market Volatility (the ``LULD 
Plan'') which, they argue, centralized 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.\146\ 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.\147\
---------------------------------------------------------------------------

    \144\ See NYSE Letter 1 at 3; and NYSE Statement at 23.
    \145\ See NYSE Statement at 21. See also NYSE Report at 12; and 
NYSE Letter 1 at 4.
    \146\ See Nasdaq Letter 1 at 6; NYSE Letter 1 at 3; and Nasdaq 
Letter 2 at 12.
    \147\ See Nasdaq Letter 1 at 6; NYSE Letter 1 at 3; and Nasdaq 
Letter 2 at 12.
---------------------------------------------------------------------------

    NYSE stated that producing a reliable and accurate closing price 
for a security requires transparency into the ``full information'' 
about the volume of buy and sell orders and the extent of any 
imbalances.\148\ NYSE also stated that the closing auction 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.\149\ NYSE added that market 
participants rely on information disseminated by the primary listing 
exchanges to make trading decisions in the continuous market before the 
closing auction as well as to determine the price, size, and type of 
on-close orders they choose to enter, all of which ``ultimately 
determine the closing price.'' \150\ NYSE stated that not disclosing to 
market participants the balance of unmatched MOC volume submitted to 
Cboe Market Close would deprive closing auction market participants of 
``core data necessary'' to the auction's normal functioning.\151\
---------------------------------------------------------------------------

    \148\ See NYSE Statement at 21.
    \149\ See NYSE Report at 12. See also NYSE Letter 1 at 4.
    \150\ See NYSE Statement at 21-22.
    \151\ See id. at 22.
---------------------------------------------------------------------------

    NYSE also asserted that information to be disseminated by BZX on 
the amount of matched MOC volume could discourage liquidity providers 
from participating in the closing process because they would surmise 
that their orders would be less likely to interact with market orders 
in the closing auction.\152\ NYSE also argued that its 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.\153\ Other commenters asserted 
that the proposal would make it more difficult for DMMs to facilitate 
an orderly close of NYSE listed securities as they would lose the 
ability to continually assess the composition of MOC interest.\154\ 
Many of these commenters, all of whom are issuers listed on NYSE, 
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.\155\
---------------------------------------------------------------------------

    \152\ See NYSE Report at 13 and 23; and NYSE Statement at 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).
    \153\ See NYSE Letter 1 at 4. See also NYSE Statement at 22. 
GTS, a DMM on NYSE, argued that MOC orders are a vital component of 
closing prices and that the types of orders submitted to the closing 
auction, such as limit or market, also affect its pricing 
determinations. See GTS Securities Letter 1 at 2-3; and GTS 
Securities Letter 2 at 3. 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.
    \154\ See, e.g., GTS Securities Letter 1 at 2-3; Letter from Jay 
S. Sidhu, Chairman, Chief Executive Officer, Customers Bancorp, Inc. 
(June 27, 2017) (``Customers Bancorp Letter''); Letter from Joanne 
Freiberger, Vice President, Treasurer, Masonite International 
Corporation (June 27, 2017) (``Masonite International Letter''); IMC 
Letter at 1-2; and Letter from Daniel S. Tucker, Senior Vice 
President and Treasurer, Southern Company (July 5, 2017) (``Southern 
Company Letter''). Several commenters also asserted that the 
proposal would have potentially detrimental effects on NYSE floor 
brokers. See Bowers Letter; Letter from Jonathan D. Corpina, Senior 
Managing Partner, Meridian Equity Partners (June 16, 2017); Letter 
from Fady Tanios, Chief Executive Officer, and Brian Fraioli, Chief 
Compliance Officer, Americas Executions, LLC (June 16, 2017) 
(``Americas Executions Letter''); and GTS Securities Letter 2 at 4.
    \155\ See, e.g., Masonite International Letter; Letter from 
Sherri Brillon, Executive Vice-President and Chief Financial 
Officer, Encana Corporation (June 29, 2017); Letter from Steven C. 
Lilly, Chief Financial Officer, Triangle Capital Corporation (June 
29, 2017); and Letter from Robert F. McCadden, Executive Vice 
President and Chief Financial Officer, Pennsylvania Real Estate 
Investment Trust (June 29, 2017).
---------------------------------------------------------------------------

    NYSE also argued that the proposal would detrimentally affect price 
discovery on the NYSE Arca and NYSE American automated closing 
auctions. NYSE stated that in the six months prior to June 2017 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.\156\ 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.'' \157\ 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%.\158\
---------------------------------------------------------------------------

    \156\ See NYSE Letter 1 at 5. See also NYSE Report at 11-12.
    \157\ See NYSE Letter 1 at 5. NYSE Arca Rule 7.35-E(a)(5) 
defines ``Auction NBBO'' to mean ``an NBBO [National Best Bid and 
Offer] that is used for purposes of pricing an auction. An NBBO is 
an Auction NBBO when (i) there is an NBB [National Best Bid] above 
zero and NBO [National Best Offer] for the security and (ii) the 
NBBO is not crossed.''
    \158\ See NYSE Letter 1 at 5.
---------------------------------------------------------------------------

    Multiple commenters stated that one of the benefits of a 
centralized closing auction conducted by the primary listing exchange 
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.\159\ 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.\160\
---------------------------------------------------------------------------

    \159\ See Bowers Letter; Americas Executions Letter; Letter from 
Mickey Foster, Vice President, Investor Relations, FedEx Corporation 
(July 14, 2017); and Nasdaq Statement at 21. See also, e.g., Letter 
from Rob Bernshteyn, Chief Executive Officer, Chairman of the Board 
of Directors, Coupa Software, Inc. (July 12, 2017) (``Coupa Software 
Letter''); Letter from Jeff Green, Founder, Chief Executive Officer 
and Chairman of the Board of Directors, The Trade Desk Inc. (July 
26, 2017) (``Trade Desk Letter''); and Global Payments Letter.
    \160\ See, e.g., Bowers Letter; Customers Bancorp Letter; and 
Letter from David B. Griffith, Investor Relations Manager, Orion 
Group Holdings, Inc. (June 27, 2017) (``Orion Group Letter'').
---------------------------------------------------------------------------

    In contrast, several commenters stated that the proposal would not 
negatively affect price discovery in the primary listing exchanges' 
closing auctions because Cboe Market Close would only execute MOC 
orders that can be paired-off against other MOC orders, and not orders 
that directly affect price discovery, such as limit orders, including 
LOC orders.\161\ Some of these commenters also argued that, because BZX 
will publish the size of matched MOC orders in advance of the primary 
listing exchange's cut-off time, market participants would have 
available information needed to make further decisions regarding order 
execution,

[[Page 4738]]

and thus price discovery would not be impaired.\162\
---------------------------------------------------------------------------

    \161\ See PDQ Letter; Clearpool Letter at 3; Virtu Letter at 2; 
SIFMA Letter 1 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.
    \162\ 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.
---------------------------------------------------------------------------

b. BZX Response to Comments
    In response to concerns regarding the effect of the proposal on the 
price discovery process, BZX argued that it expects the Cboe Market 
Close would have no effect on price discovery 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 
exchanges' cut-off times on a data feed that is available free of 
charge.\163\ BZX also stated that it does not believe the proposal 
would affect the use of LOC orders on the primary listing exchanges as 
LOC orders provide price protection, by restricting the price at which 
the order can execute to a price that is the same or better than the 
LOC order's limit price. BZX stated that it does not believe that the 
lower fees charged to MOC orders that participate in Cboe Market Close 
would outweigh the risk of receiving an execution at an unfavorable 
price.\164\ BZX further challenged commenters' concerns that Cboe 
Market Close could pull all MOC orders away from the primary listing 
exchanges 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.\165\
---------------------------------------------------------------------------

    \163\ See BZX Letter 1 at 3-4; BZX Letter 2 at 2 and 10; and BZX 
Statement at 9-10. In addition, BZX offered to disseminate this 
information via the applicable securities information processor, in 
addition to the Cboe Auction Feed. See BZX Letter 1 at 4 and 12-13; 
and BZX Letter 2 at 2.
    \164\ See BZX Letter 2 at 3.
    \165\ 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 to NYSE and Nasdaq comments regarding the consistency 
of the Cboe Market Close with Amendment 12 of the LULD Plan, BZX 
asserted that while the amendment to the LULD Plan cited by NYSE and 
Nasdaq granted the primary listing exchange the ability to set the re-
opening price, the amendment did not mandate the consolidation of 
orders at the primary listing exchange following a trading halt.\166\ 
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.\167\
---------------------------------------------------------------------------

    \166\ See BZX Letter 1 at 8-9. See also Bollerman Letter at 3.
    \167\ See BZX Letter 1 at 8-9.
---------------------------------------------------------------------------

    In response to NYSE's arguments regarding the effect 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.\168\ 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.'' \169\ Accordingly, BZX 
stated that it believed Cboe Market Close would offer a beneficial 
alternative pool of liquidity and execution mechanism for large MOC 
order senders.\170\
---------------------------------------------------------------------------

    \168\ See BZX Letter 1 at 10.
    \169\ Id. See also supra note 153 and accompanying text.
    \170\ BZX Letter 1 at 10. 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.
---------------------------------------------------------------------------

c. Commission Discussion and Findings
    The Commission has carefully analyzed and considered the proposal's 
potential effects, if any, on the primary listing exchanges' closing 
auctions, including their price discovery functions, and the 
reliability and integrity of closing prices. The Commission finds that 
BZX has demonstrated that based on the design of the proposal, Cboe 
Market Close should not disrupt the price discovery process in the 
closing auctions of the primary listing exchanges.\171\
---------------------------------------------------------------------------

    \171\ For these reasons, the Commission also believes the 
proposal will not impair capital formation. See supra note 136.
---------------------------------------------------------------------------

    Importantly, Cboe Market Close will only accept, match, and execute 
unpriced MOC orders with other unpriced MOC orders (i.e., paired-off 
MOC orders). Contrary to some commenters' assertions that MOC orders 
contribute to the determination of the official closing price, the 
Commission believes that paired-off MOC orders, which do not specify a 
price but instead seek to be executed at whatever closing price is 
established via the primary listing exchange's closing auction, do not 
directly contribute to setting the official closing price of securities 
on the primary listing exchanges but, rather, are inherently the 
recipients of price formation information.\172\ As many commenters 
stated, the price determined in a closing auction is designed to be a 
reflection of market supply and demand, and closing auctions are 
designed to set closing prices that maximize the number of shares 
executed and minimize the amount of the imbalance between buy and sell 
interest (i.e., demand and supply). The orders that actively 
participate in, and contribute to, the price formation process in a 
closing auction would be orders that specify a desired execution price 
such as LOC orders, imbalance-only orders, and other limit (priced) 
orders that may participate in the closing auction. In addition, 
unpaired MOC orders may contribute to price formation because they 
suggest an imbalance of supply or demand. Thus, none of the orders that 
could influence the formation of the official closing price in a 
closing auction would be executed in the Cboe Market Close and could 
continue to be submitted to the primary listing exchange.
---------------------------------------------------------------------------

    \172\ See supra notes 134-153 (discussing Nasdaq's and NYSE's 
arguments of how MOCs can contribute to the closing price).
---------------------------------------------------------------------------

    The orders identified above affect the determination of an official 
closing price because they directly affect the total number of shares 
that are executed in an auction. More specifically, a limit order or 
LOC order would only execute in a closing auction if the official 
closing price is at or better than that order's limit price. In 
addition, in a closing auction, the imbalance amount of MOC orders 
(i.e., unpaired MOC orders) would only execute if there was limit order 
trading interest (e.g., LOC orders or imbalance-only orders) on the 
opposite side of the unpaired MOC orders that was eligible to execute 
in the closing auction.\173\ In contrast, as BZX and commenters 
stated,\174\ executing paired-off MOC orders in the manner BZX proposes 
would not affect the net imbalance of closing eligible trading interest 
because only paired-off MOC orders, and not the orders identified above 
that actively participate in, and contribute to, the closing auction 
price formation process, would be executed in Cboe Market Close. 
Accordingly, the proposal should not disrupt the price discovery 
process and closing auction price formation.
---------------------------------------------------------------------------

    \173\ In other words, if there was a buy MOC order that could 
not be executed against a sell MOC order, the buy MOC order would 
only execute in the closing auction if there was a sell limit order 
that was able to execute in the closing auction. See, e.g., 
ViableMkts Letter at 3-4 (providing examples that illustrate how 
executing paired-off MOC orders in the primary listing exchange's 
closing auction or on a different venue does not ultimately impact 
the price discovery process in the closing auction because only MOC 
orders that cannot be paired-off with other MOC orders are eligible 
to execute against limit orders in a closing auction).
    \174\ See, e.g., Notice at 23321; ViableMkts Letter at 3-4; and 
Virtu Letter at 2.

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

[[Page 4739]]

    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.\175\ But BZX proposes to publish and disseminate the size of 
matched MOC orders at 3:35 p.m., which is well in advance of the order 
entry cut-off times for the primary listing exchanges' closing 
auctions.\176\ Market participants seeking to ascertain closing auction 
liquidity supply and demand could incorporate that information with any 
pertinent information disseminated by the primary listing exchanges. 
Therefore, 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.
---------------------------------------------------------------------------

    \175\ See supra notes 149-153 and 159 and accompanying text.
    \176\ See supra note 23.
---------------------------------------------------------------------------

    And the Commission disagrees with NYSE that, in order for the 
Commission to approve the proposed rule change, BZX should also 
disclose the balance of unpaired shares that were submitted to Cboe 
Market Close.\177\ NYSE stated that market participants use the 
imbalance information published by the primary listing exchanges--which 
includes information on available, actionable liquidity--to make order 
submission decisions. However, unpaired shares on Cboe Market Close 
would represent only a subset of cancelled buying and selling interest 
that is no longer actionable and therefore, in the absence of any data 
or further justification to the contrary, the Commission does not 
believe that publishing this information would have a meaningful effect 
on the closing auction price formation process.
---------------------------------------------------------------------------

    \177\ NYSE did not explain why it believed that MOC imbalances 
in Cboe Market Close would be important information.
---------------------------------------------------------------------------

    Furthermore, the Commission does not find Nasdaq's concern 
regarding its inability to confirm the accuracy of information 
disseminated by BZX compelling. A fundamental aspect of the national 
market system is reliance by national securities exchanges on 
information disseminated by another exchange, supplemented by 
Commission oversight of such legally enforceable obligations. Indeed, 
all national securities exchanges, including Nasdaq, regularly rely on 
information disseminated by other national securities exchanges in 
other contexts, such as for the handling, routing, and execution of 
orders.\178\
---------------------------------------------------------------------------

    \178\ See, e.g., Nasdaq Rule 4759 (which states that Nasdaq 
consumes quotation data from proprietary exchange data feeds for the 
handling, routing, and execution of orders, as well as for 
regulatory compliance processes related to those functions).
---------------------------------------------------------------------------

    The Pitt/Spatt Report argues that, according to formal auction 
theory, bidding behaviors and closing price outcomes will be affected 
by the introduction of the Cboe Market Close. But, even if some market 
participants choose to send their MOC orders to the Cboe Market Close, 
the Commission believes that closing price efficiency is unlikely to be 
affected.\179\ The official closing price established through the 
closing auction on the primary listing exchange is ultimately 
determined by the intersection of supply and demand, and the price does 
not change if an equal number of shares from MOC buy orders and MOC 
sell orders are executed away from the auction. If an unequal number of 
shares from MOC buy orders and MOC sell orders are sent to Cboe Market 
Close, then the shares that were not paired-off in Cboe Market Close 
are likely to be resubmitted back to the closing auction on the primary 
listing exchange. This is because the traders who would send MOC orders 
to Cboe Market Close instead of the closing auction on the primary 
listing exchange have a revealed preference for obtaining the closing 
price for such orders. If the trader fails to be paired-off on Cboe 
Market Close, then resubmitting their order to the closing auction on 
the primary listing exchange remains their primary option for obtaining 
the closing price.
---------------------------------------------------------------------------

    \179\ Price efficiency is a measure of the quality of the 
closing price that is designed to assess whether the closing price 
reflects all relevant information.
---------------------------------------------------------------------------

    It is possible that the unpaired shares from Cboe Market Close 
could be sent to a broker-dealer who offers off-exchange executions at 
the closing price. However, as a general matter, data show that most 
traders do not execute orders at the official closing price by trading 
off-exchange with broker-dealers.\180\ That is, the data indicate that 
most traders have a revealed preference for trading in the official 
closing auction on the primary listing exchange over trading off-
exchange with a broker-dealer at the official closing price. Thus, the 
Commission believes that the addition of the Cboe Market Close would 
not change this preference for trading in the official closing auction 
on the primary listing exchange over trading off-exchange with a 
broker-dealer, even if the trader ultimately chooses to trade in Cboe 
Market Close over both of these options. Finally, although it is 
possible that the trader who fails to execute in the Cboe Market Close 
could submit their order to the regular intraday trading session 
between 3:35 p.m. and 4:00 p.m., the Commission views this possibility 
as unlikely because, by virtue of sending a MOC order to Cboe Market 
Close, the trader has a revealed preference in executing at the 
official closing price, which is not guaranteed in the regular intraday 
trading session. Thus, the unpaired shares from the Cboe Market Close 
are likely to be resubmitted back to the official closing auction, and 
the Commission therefore believes that the closing price on the primary 
listing exchange is likely to remain unaffected by the Cboe Market 
Close.
---------------------------------------------------------------------------

    \180\ See infra note 194 and accompanying text.
---------------------------------------------------------------------------

    Some commenters also argued that the proposal would affect the 
submission of LOC orders to the primary listing exchanges. But as BZX 
stated, LOC orders by their terms specify a price and therefore provide 
price protection. Thus, utilization of a LOC order suggests that a 
market participant is price sensitive and uniquely interested in 
obtaining an execution at, or better than, its specified price. By 
contrast, MOC orders do not specify a price and are submitted by market 
participants who may be less price sensitive and who may prioritize 
other aspects of a closing execution over price.\181\ In addition, the 
cut-off times for submitting LOC orders to the primary listing 
exchanges are later in the trading day than the Cboe Market Close cut-
off time. As such, the Commission does not believe that, solely on the 
basis of lower fees, it is likely that market participants would be 
more inclined to assume the risk of submitting MOC orders to the Cboe 
Market Close at or before 3:35 p.m. in circumstances where they 
otherwise would have submitted price-protected LOC orders into the 
primary listing exchanges' closing auctions later in the day.
---------------------------------------------------------------------------

    \181\ See also BZX Letter 2 at 3.
---------------------------------------------------------------------------

    As discussed above, Nasdaq and NYSE also asserted that the Cboe 
Market Close could discourage submission of orders in the intraday 
trading session and closing auctions in certain circumstances, such as 
if there were a large amount of paired-off MOC orders in Cboe Market 
Close and a subsequent lack of imbalance information disseminated on 
the primary listing exchanges.\182\ However, the Commission does not 
believe the availability of the Cboe Market Close would increase this

[[Page 4740]]

risk beyond what currently exists. Again, Cboe Market Close would only 
execute paired-off MOC orders and therefore would not affect the net 
imbalance of MOC orders. And the Commission believes that the 
submission of orders could similarly be discouraged today if a large 
amount of MOC orders in a security had been paired-off on the primary 
listing exchange and there was little or no resulting imbalance 
disseminated by such exchange in their order imbalance indications. 
Irrespective of the exchange upon which the MOC orders are paired-off, 
the net imbalance published by the primary listing exchange would be 
expected to be the same. Moreover, because Cboe Market Close would 
publish the volume of paired-off MOC orders 15 minutes prior to the 
current NYSE MOC order entry cut-off time and 20 minutes prior to the 
current Nasdaq MOC order entry cut-off, market participants should have 
sufficient time to incorporate information relating to the levels of 
MOC interest paired-off in the Cboe Market Close in a given security 
into their decisions about order submissions into the closing auctions.
---------------------------------------------------------------------------

    \182\ See supra notes 129-131 and 152 and accompanying text.
---------------------------------------------------------------------------

    The Commission also disagrees with commenters that asserted that 
the proposal would inhibit DMMs' ability to establish closing prices 
because they would no longer have full visibility into the size and 
composition of MOC interest.\183\ First, DMMs currently do not have 
full visibility into the composition of MOC interest, because they 
currently have no visibility into MOC interest traded on off-exchange 
venues. Thus, the proposal would not alter the information DMMs have 
relating to MOC interest executed off-exchange. Second, as already 
discussed above, the Commission believes that market participants, 
including DMMs, will have access, via the Cboe Auction Feed, 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. A NYSE 
DMM could, for example, use the Cboe Market Close disseminated 
information regarding paired-off MOC interest for a given security in 
conjunction with information disseminated by the primary listing 
exchange in establishing the relevant context for any imbalances in 
NYSE closing auctions and calculating appropriate closing prices.\184\ 
Moreover, 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 DMMs by providing another venue 
to which they may send their orders for execution at the closing 
price.\185\
---------------------------------------------------------------------------

    \183\ See supra note 153 and accompanying text.
    \184\ In addition, one commenter that is supportive of the 
proposal is a DMM on NYSE who 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.
    \185\ See supra notes 168-170 and accompanying text.
---------------------------------------------------------------------------

    Nor does the Commission agree with those commenters that argued 
that the proposal contradicts the Commission's approval of Amendment 12 
to the LULD Plan.\186\ As stated above, NYSE and Nasdaq asserted that 
it would be contradictory for the Commission to find it in the public 
interest in Amendment 12 of the LULD Plan to require the centralization 
of re-opening auction liquidity at the primary listing exchange, but 
sanction the execution of closing auction trading interest on a venue 
other than the primary listing exchange.\187\ However, 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 re-opened trading.\188\ 
While trading may not begin until the re-opening on the primary listing 
exchange, market participants continue to have the choice as to where 
to submit their orders. Likewise, with respect to Cboe Market Close, 
official closing prices would continue to be determined through the 
closing auctions conducted by the primary listing exchanges. However, 
market participants would have the choice to submit their orders to 
Cboe Market Close or a closing auction on a primary listing exchange to 
obtain an execution at the official closing price.
---------------------------------------------------------------------------

    \186\ See supra note 149 (discussing comments arguing 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).
    \187\ See supra notes 146-147 and accompanying text.
    \188\ See Securities Exchange Act Release No. 79845 (Jan. 19, 
2017), 82 FR 8551, 8552 (Jan. 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, and circumstances arose such that 
due to other factors no closing auction could be held, in accordance 
with NYSE Arca's and Nasdaq's rules the official closing price would be 
the consolidated last sale price.\189\ NYSE and Nasdaq provided data 
and, in the case of Nasdaq, counterfactual examples,\190\ that sought 
to quantify the extent to which last consolidated sale prices would 
have differed from closing prices determined through closing auctions. 
NYSE and Nasdaq argue that these examples show that price discovery 
would be harmed if they were unable to conduct closing auctions because 
they did not receive any MOC orders and there was no other closing 
auction-eligible trading interest. However, the Commission believes 
that differences in prices alone are not dispositive of effects with 
respect to price discovery or efficiency, and it is not clear that the 
data NYSE and Nasdaq submitted actually reflects an effect on price 
discovery.
---------------------------------------------------------------------------

    \189\ 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.
    \190\ See supra note 138 and accompanying text (stating that 
Nasdaq identified previously conducted closing auctions that 
consisted entirely of MOC orders and described what it believed the 
official closing price would have been had no MOC orders been 
submitted to those closing auctions).
---------------------------------------------------------------------------

    First, the data and analyses that commenters provided did not 
analyze subsequent price changes on the next trading day following the 
closing auction. Thus, it is unclear whether the price differentials 
between the official closing price and the price of the last sale prior 
to the closing auction indicate better or worse price discovery or 
efficiency. A large difference between a reference price (e.g., the 
last sale price) and the official closing price may reflect relevant 
market information if the official closing price persists to the next 
trading day, or it may reflect a temporary price pressure if the 
official closing price subsequently reverses to the reference price on 
the next trading day.\191\ 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. And because 
Nasdaq's analysis involved only 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 closing 
auctions over that time period) the Nasdaq analysis may not be a 
representative sample.\192\ Finally, Nasdaq did not address the 
liquidity of the securities analyzed. If the securities

[[Page 4741]]

analyzed were highly illiquid, price differences between the last sale 
price and the closing auction price may have been large for reasons 
unrelated to the specifics of the auction mechanism.\193\ Given these 
limitations, the data and analysis provided in these comments do not 
alter the Commission's conclusion that the proposal is consistent with 
the Act.
---------------------------------------------------------------------------

    \191\ 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.
    \192\ See supra note 138.
    \193\ 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.'').
---------------------------------------------------------------------------

    In addition, the Commission acknowledges that it may be possible 
that following implementation of the Cboe Market Close there could be 
instances in which no MOC orders participate in a primary listing 
exchange's closing auction. But the fact that the majority of MOC 
orders today continue to be executed in the closing auctions on the 
primary listing exchanges \194\ despite the numerous destinations 
currently available to which MOC orders may be sent (including primary 
listing exchange auctions, competing closing auctions, ATSs, and other 
off-exchange venues) suggests that at least some market participants 
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.\195\ Similarly, in assessing whether to utilize Cboe Market 
Close, market participants may evaluate other consequences of using the 
proposed mechanism, such as by monitoring the extent to which their 
orders were matched or not matched on BZX (with the resulting need to 
send their MOC orders to more than one venue if not matched), as well 
as the opportunity cost incurred by committing 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. 
Moreover, 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, for example, through improvements to their 
auction processes or through modifications to their fee structures, 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.
---------------------------------------------------------------------------

    \194\ 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 (finding that, on average, approximately 9.3% 
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 (providing data relating to the level of matched MOC volume in 
Nasdaq closing auctions).
    \195\ 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).
---------------------------------------------------------------------------

    Further, the use of the consolidated last sale price as the 
official closing price in situations 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.\196\ Therefore, if a primary listing exchange believes that 
such prices no longer reflect an appropriate closing price in those 
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. An 
exchange may, at any time, file a proposed rule change to amend its 
rules to establish alternative methods that it believes to be more 
appropriate for determining the official closing price should no 
auction be held.
---------------------------------------------------------------------------

    \196\ See, e.g., NYSE Rule 123C(1)(e); and NYSE Arca Rule 
1.1(ll)(1)(C).
---------------------------------------------------------------------------

2. Off-Exchange MOC Activity and Fragmentation
a. Comments on the Proposal
    Commenters, including Nasdaq and NYSE, also argued that the 
proposal is inconsistent with Section 6(b)(5) of the Act because it 
would fragment the markets beyond what currently occurs through off-
exchange closing price matching by broker-dealers. Nasdaq and NYSE 
stated that such off-exchange activity is structurally different from 
Cboe Market Close and thus asserted that it would be inappropriate to 
analogize to such off-exchange activity in evaluating the 
proposal.\197\ Nasdaq stated that the proposal would introduce a new 
category of price-matching venues, and that as a neutral trading 
platform, an exchange such as BZX is capable of attracting and 
aggregating more liquidity than a broker-dealer which would exacerbate 
the harm caused by fragmentation.\198\ In the Pitt/Spatt Report, Nasdaq 
added that the underlying structure of off-exchange markets is 
different from the proposal in various respects.\199\ Moreover, 
according to Nasdaq, trades resulting from broker-dealer off-exchange 
activity are often also involved in the closing auction on the primary 
listing exchange, thus also contributing to closing auction price 
discovery.\200\ Both Nasdaq and NYSE argued that it should not be 
assumed that the current level of MOC orders executed away from the 
primary listing exchange is a reasonable proxy for the effect of the 
proposal.\201\ Nasdaq and NYSE stated that broker-dealers that execute 
MOC orders on behalf of clients at the closing price could be risking 
their own capital on such transactions.\202\ Nasdaq and NYSE stated 
that such capital commitment by broker-dealers would likely be a 
constraining force on the magnitude of MOC orders executed away from 
primary listing exchanges, while BZX would have no such obligation to 
commit capital in Cboe Market Close.\203\ For this reason, NYSE also 
argued that the BZX proposal, if successful, could result in a much 
higher percentage of MOC orders diverted away from the primary listing 
exchange than what occurs today.\204\
---------------------------------------------------------------------------

    \197\ See, e.g., Nasdaq Letter 2 at 13; and NYSE Report at 10. 
GTS further stated 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 effect of this activity 
on closing auctions. See GTS Securities Letter 2 at 4. See infra 
note 232 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.
    \198\ See Nasdaq Letter 2 at 13.
    \199\ See Pitt/Spatt Report at 21.
    \200\ 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 exchange'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. See also Nasdaq Statement at 
31.
    \201\ See NYSE Report at 10; and Nasdaq Statement at 30.
    \202\ See NYSE Report at 10; and Nasdaq Statement at 30.
    \203\ See NYSE Report at 10; and Nasdaq Statement at 30.
    \204\ See NYSE Report at 10.
---------------------------------------------------------------------------

    In addition, NYSE provided data that focused on existing off-
exchange matching services.\205\ NYSE stated that data it analyzed from 
certain closing auctions with large imbalances \206\ shows that, for 
securities with 1,000 shares or less reported at the official closing 
price (resulting from executions

[[Page 4742]]

that occurred both on and off-exchange), volatility in the last 10 
minutes of trading leading into the closing auction is 52% higher when 
more than 75% of the volume executed at that security's official 
closing price (i.e., closing share volume) is executed off-exchange, 
compared to when less than 25% of a security's closing share volume is 
executed off-exchange. 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 
(resulting from executions that occurred both on and off-exchange) 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'') over the last two minutes of trading before the closing 
auction when more than 75% of a security's closing share volume is 
executed off-exchange.\207\ Accordingly, NYSE concluded that these 
price differentials suggest that existing fragmentation degrades the 
quality of the closing price and further asserted that this 
demonstrates ``a substantial likelihood that any appreciable 
redirection'' of MOC orders from the primary listing exchange to Cboe 
Market Close would negatively affect price discovery and would be most 
acute for ``less-liquid'' stocks.\208\
---------------------------------------------------------------------------

    \205\ See NYSE Letter 3 at 3; and NYSE Statement at 22. See also 
NYSE Letter 2 at 4. The Commission notes that NYSE also asserted, in 
regards to the DERA Analysis, that drawing conclusions regarding 
Cboe Market Close's potential impact on price discovery by comparing 
Cboe Market Close to off-exchange MOC activity represented an 
apples-to-oranges comparison due to the structural differences 
between the proposal and the services of broker-dealers executing 
MOC orders off-exchange. See NYSE Statement at 25.
    \206\ See NYSE Letter 3 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.
    \207\ 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.
    \208\ See id. at 3-4; and NYSE Statement at 23-24.
---------------------------------------------------------------------------

b. BZX Response to Comments
    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 exchange.\209\ Contrary to 
assertions by Nasdaq and NYSE,\210\ BZX provided certain data regarding 
trading volume at the close on venues other than primary listing 
exchanges to show that the proposal would ``not introduce a new type of 
fragmentation at the close.'' \211\ BZX asserted that because this 
existing fragmentation has had no adverse effect on the price discovery 
process, there is no basis to believe that the proposal ``would 
negatively contribute to meaningful fragmentation to the detriment of 
the price discovery process.'' \212\
---------------------------------------------------------------------------

    \209\ BZX Letter 2 at 3.
    \210\ See Nasdaq Statement at 28; and NYSE Statement at 21.
    \211\ See BZX Letter 2 at 4-5. BZX stated that 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 and that, over the course of 2017, the amount of 
off-exchange closing volume has been increasing. See id. BZX 
estimated, based on its internal data, that this off-exchange volume 
represented approximately $270 billion and $426 billion in notional 
volume in Nasdaq-listed and NYSE-listed securities, respectively. 
See BZX Statement at 16.
    \212\ See id.
---------------------------------------------------------------------------

    Moreover, other commenters argued that the proposal could increase 
transparency, reliability and price discovery at the close by incenting 
brokers that would otherwise seek to match MOC orders off-exchange to 
re-direct their MOC orders to a public exchange.\213\ 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 the resiliency requirements of 
Regulation SCI.\214\
---------------------------------------------------------------------------

    \213\ See Clearpool Letter at 3-4; ViableMkts Letter at 4-5; and 
BZX Letter 2 at 5-6. See also Angel Letter at 4.
    \214\ See BZX Letter 2 at 11.
---------------------------------------------------------------------------

    BZX presented several critiques in response to NYSE's data 
regarding the effect of off-exchange MOC activity on closing auction 
price formation. First, BZX stated that NYSE did not provide the number 
of closing auctions included in its data set.\215\ 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 was 
less than a 100th of 1% of all auctions.\216\ Therefore, BZX argued 
that NYSE's findings are ``of no statistical significance'' and BZX 
also asserted that NYSE selectively chose its data to support NYSE's 
conclusions.\217\
---------------------------------------------------------------------------

    \215\ See BZX Letter 3 at 2.
    \216\ See id. at 2-3; and BZX Statement at 13-14
    \217\ See BZX Letter 3 at 2-3.
---------------------------------------------------------------------------

    BZX further argued that it is possible that 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.\218\ 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 BZX believes undercuts NYSE's conclusions and 
``further highlights the selective and limited nature of NYSE's data 
set.'' \219\
---------------------------------------------------------------------------

    \218\ See id.
    \219\ See id.
---------------------------------------------------------------------------

    Furthermore, despite assertions from Nasdaq and NYSE that BZX did 
not provide data on the effect of off-exchange MOC activity on closing 
auction price formation,\220\ BZX 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.\221\ 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.'' \222\ BZX stated that it also found that ``price gaps are 
greater amongst auctions with less than 25% of closing volume'' 
executed off-exchange.\223\ BZX concluded that its analysis contradicts 
NYSE's conclusions, asserting that it shows that ``the amount of [off-
exchange] closing volume has little to no relationship to the primary 
listing [exchange's] closing auction process.'' \224\
---------------------------------------------------------------------------

    \220\ See Nasdaq Statement at 28; and NYSE Statement at 21.
    \221\ See BZX Letter 3 at 3. BZX stated that it reviewed 
auctions with imbalances of 50% or more of paired shares at 3:55p.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. 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.
    \222\ Id. See also BZX Statement at 12 n. 41 (noting that it, 
like NYSE, utilized the difference between the last sale price and 
official closing price to determine price impact but it believes 
this to be a ``reasonable measure of the quality'' of closing 
auction price discovery).
    \223\ See BZX Letter 3 at 3.
    \224\ Id. at 3-4. See also BZX Statement at 13.
---------------------------------------------------------------------------

    In addition, BZX stated that it also found similar patterns ``when 
it analyzed securities based on their [average daily volume] instead of 
auction size.'' \225\ BZX acknowledged that, while securities with 
average daily volume of 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.'' 
\226\
---------------------------------------------------------------------------

    \225\ See BZX Letter 3 at 3.
    \226\ See id. at 4. See also BZX Statement at 13.
---------------------------------------------------------------------------

    BZX added that there is no support for a contention that the effect 
of the proposal on price discovery may be greater because more market 
participants might use an exchange offering as opposed to a non-
exchange offering.\227\ As such, BZX asserted that its data provides 
compelling evidence for the proposal's potential lack of an effect on 
price discovery.\228\
---------------------------------------------------------------------------

    \227\ See BZX Statement at 13 n. 46.
    \228\ See id. at 15.

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[[Page 4743]]

c. Commission Discussion and Findings
    As Nasdaq and NYSE noted,\229\ comparisons to off-exchange MOC 
activity are not a perfect measure of the potential resulting effect of 
the proposal because the structures of many off-exchange MOC trading 
mechanisms differ from the structure of Cboe Market Close. Importantly, 
unlike what occurs in some off-exchange MOC activity, Cboe Market Close 
would only execute paired-off MOC interest, and therefore, even if it 
attracts a larger percentage of MOC orders than are currently executed 
off-exchange, Cboe Market Close would not affect the net MOC order 
imbalance, which could contribute to price formation in a closing 
auction. The Commission agrees with NYSE and Nasdaq that it should not 
rely on inapposite analogies in approving the proposal. Therefore, and 
as discussed in more detail below, in finding that Cboe Market Close is 
consistent with Section 6(b)(5) the Act, the Commission is not 
persuaded by (or otherwise relying upon) any analyses or comparisons 
submitted to the record that focused on the purported effects of off-
exchange MOC activity.
---------------------------------------------------------------------------

    \229\ See supra notes 198-203 and accompanying text.
---------------------------------------------------------------------------

    However, if the Commission were to consider analyses regarding off-
exchange MOC activity, the Commission notes that the NYSE analysis, 
when comparing price differences across securities, did not distinguish 
whether the observed price differences were due to the removal of MOC 
orders from the primary listing exchange or due to liquidity or other 
differences not controlled for in the analysis. As described above, 
NYSE provided an analysis comparing price differences between 
securities in which 75% of the total closing volume was executed off-
exchange, and securities in which 25% of the total closing volume was 
executed off-exchange. NYSE 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.\230\ 
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.\231\ In contrast, the data provided by BZX covers a 
broader set of auctions and provides more granular data. That data 
observed greater volatility in less-liquid stocks and illustrates that 
those securities account for a much smaller percentage of auction 
volume, and the observed difference is likely indicative of liquidity 
or other characteristics common to less-liquid stocks.
---------------------------------------------------------------------------

    \230\ 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.
    \231\ See also supra notes 215-228 and accompanying text 
(discussing BZX's comments with respect to NYSE's analysis and BZX's 
own analysis of such data).
---------------------------------------------------------------------------

d. DERA Analysis
    In connection with the consideration of the proposal, the staff 
from the Commission's Division of Economic and Risk Analysis (``DERA'') 
sought to explore the correlation of closing price discovery and 
efficiency with existing off-exchange MOC activity.\232\ DERA found 
that, in a sample spanning the first quarter of 2017, variation in off-
exchange MOC share (i.e., the amount of MOC volume executed off-
exchange relative to the amount of volume executed in the primary 
listing exchange closing auction) 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.\233\ In 
further sample splits (e.g., by listing venue, security type, and index 
inclusion), DERA found some mixed evidence of statistically significant 
correlations, but no consistent or conclusive evidence that contradicts 
the full-sample analysis. This staff analysis was placed in the comment 
file prior to the issuance of the Approval Order. And, while the 
Approval Order recognized that a comparison to off-exchange MOC 
activity represents an inapposite analogy for purposes of considering 
the proposal's potential effect on closing auction price discovery, it 
discussed the DERA Analysis, which suggested that existing levels of 
fragmentation of closing auctions through the off-exchange MOC activity 
DERA studied are not, on average, significantly correlated with closing 
price discovery or efficiency.
---------------------------------------------------------------------------

    \232\ See DERA Analysis supra note 194. 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 at 1-2.
    \233\ Though the DERA Analysis' findings suggest ``that existing 
levels of fragmentation do not, on average, correlate with price 
discovery 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.''
---------------------------------------------------------------------------

    NYSE and Nasdaq both stated that the Commission should not attempt 
to estimate the effect of Cboe Market Close through a comparison to 
off-exchange MOC trading because of the structural differences between 
off-exchange MOC trading and Cboe Market Close.\234\ They also both 
critiqued the methodology employed in the DERA Analysis.\235\ In 
addition, the Amihud/Mendelson Report commissioned by Nasdaq purports 
to provide evidence of a negative and statistically significant 
relationship between closing price efficiency, measured by weighted 
price contribution (WPC), and the off-exchange market share (OEMS) of 
closing volume that occurs off-exchange between 4:00 p.m. and 4:10 p.m. 
at the closing price. In particular, the Amihud/Mendelson Report 
studies the largest 500 Nasdaq stocks by market capitalization during 
the last two quarters of 2017 and states that a one standard deviation 
increase in OEMS decreases WPC1 (their first measure of closing price 
efficiency) by 9.4% of its mean and WPC2 (their second measure of 
closing price efficiency) by 25.7% of its mean. The Amihud/Mendelson 
Report further purports to show that their results are robust to the 
inclusion of stock fixed effects, date fixed effects, and a variety of 
intraday control variables.
---------------------------------------------------------------------------

    \234\ See NYSE Statement at 25 (stating that comparing Cboe 
Market Close to off-exchange MOC trading is an ``apples-to-oranges 
comparison''). See also Nasdaq Statement at 31.
    \235\ See, e.g., NYSE Report at 9-18; Nasdaq Statement at 29-31; 
Pitt/Spatt Report at 21.
---------------------------------------------------------------------------

    As previously stated, the Commission agrees with NYSE and Nasdaq 
that the structure of existing mechanisms to conduct off-exchange MOC 
trading may not, in all instances, be identical to Cboe Market 
Close.\236\ Therefore, the Commission's belief that Cboe Market Close 
should not disrupt the price discovery process and closing auction 
price formation is not dependent on the DERA Analysis or other studies 
focused on off-exchange MOC activity.\237\ While the Commission has 
reviewed NYSE's and Nasdaq's critiques of the

[[Page 4744]]

methodology of the DERA Analysis, the DERA Analysis does not bear on 
the Commission's decision to approve BZX's proposal.
---------------------------------------------------------------------------

    \236\ See supra notes 198-203 and accompanying text.
    \237\ See supra Section III.B.
---------------------------------------------------------------------------

    Furthermore, even though NYSE's and Nasdaq's critiques of the 
methodology of the DERA Analysis are not relevant to this order, the 
Commission notes that it is not persuaded by the findings of the 
Amihud/Mendelson Report because it believes there are two 
methodological flaws in that study that lead to an overstatement of the 
economic significance of the findings. First, the Amihud/Mendelson 
Report expresses the changes in WPC1 and WPC2 as percentages of their 
respective means. The means of WPC1 and WPC2 are very close to zero 
because any individual WPC1 or WPC2 observation can be positive or 
negative. The percentage decreases in WPC1 and WPC2 appear high (9.4% 
and 25.7%) because the OEMS effects on WPC1 and WPC2 are expressed as 
percentages of near-zero numbers. If the Amihud/Mendelson Report 
expressed the OEMS effects on WPC1 and WPC2 as a percentage of their 
respective standard deviations instead, then the Amihud/Mendelson 
Report would obtain much lower percentage effects that are unlikely to 
be economically significant. Second, the Amihud/Mendelson Report takes 
the log transformation of the OEMS variable in their tests. By 
construction, the OEMS variable is bound between zero and one, and 
taking the log transformation of this variable will greatly skew its 
distribution and increase its standard deviation. If the standard 
deviation of the OEMS variable is inflated, then any economic effect on 
closing price efficiency resulting from a one standard deviation 
increase in the OEMS variable will also be inflated. These 
methodological flaws cast doubt on the economic significance of the 
findings in the Amihud/Mendelson Report.
3. Competing Closing Auctions
a. Comments on the Proposal
    In support of its proposal, BZX stated that Nasdaq and NYSE Arca 
operate closing auctions for securities listed on other exchanges and 
that these closing auctions produce independent prices that may differ 
from a security's official closing price determined in the closing 
auction conducted by the security's primary listing exchange.\238\ BZX 
stated that in contrast to Cboe Market Close, these competing closing 
auctions not only fragment closing auction trading interest, but also 
detrimentally impact price discovery.\239\
---------------------------------------------------------------------------

    \238\ See Notice at 23322.
    \239\ See BZX Letter 1 at 3-4.
---------------------------------------------------------------------------

    In response, 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 exchanges. Nasdaq stated that 
the BZX proposal is a price-matching order type and not a competitive 
single-priced auction that offers price discovery.\240\ Nasdaq stated 
that its single-priced auction for non-Nasdaq listed stocks was 
designed to maximize order interaction and improve price discovery for 
issuers, and was not designed to siphon orders away from the primary 
listing exchange without seeking to improve price discovery.\241\ 
Accordingly, Nasdaq argued that the fact that it and NYSE Arca offer 
competing closing auctions is irrelevant to evaluating BZX's proposal 
because those auctions are fundamentally different from the BZX 
proposal.\242\ Similarly, NYSE argued that it believed it was 
misleading to compare the proposal to these competing closing auctions 
operated by Nasdaq and NYSE Arca for securities listed on other 
exchanges 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.\243\
---------------------------------------------------------------------------

    \240\ See Nasdaq Letter 2 at 8-9.
    \241\ See id. at 9.
    \242\ See id.
    \243\ See NYSE Letter 2 at 3.
---------------------------------------------------------------------------

    Nasdaq further argued that competing closing auctions cause minimal 
fragmentation, as volumes in those auctions are ``miniscule.'' \244\ 
Nasdaq further asserted that less than half of Nasdaq-listed corporate 
issues experience price dislocations in competing closing 
auctions.\245\ Moreover, both Nasdaq and NYSE stated that there were 
multiple instances when they had received orders in their competing 
closing auctions for securities listed on another exchange, and they 
both chose to contact the firms that submitted those orders and 
encouraged them to instead route their orders directly to the primary 
listing exchange.\246\
---------------------------------------------------------------------------

    \244\ See Nasdaq Letter 2 at 9-11. See also NYSE Letter 3 at 5-
6. NYSE also stated that it does not have a business interest in 
running closing auctions for securities listed on other markets. It 
stated it operates the NYSE Arca closing auction for resiliency 
purposes, which it believes outweighs any modest negative effect on 
fragmentation. See id.
    \245\ See Nasdaq Letter 2 at 11.
    \246\ See id. at 13; and NYSE Letter 3 at 6. See also infra note 
253 and accompanying text.
---------------------------------------------------------------------------

    In contrast, other commenters stated that these competing closing 
auctions may attract price-setting limit orders from the primary 
listing exchange and impede price discovery, unlike the BZX proposal 
which is limited to market orders.\247\
---------------------------------------------------------------------------

    \247\ See Clearpool Letter at 3; IEX Letter at 2; Angel Letter 
at 4; SIFMA Letter 2 at 2; and Bollerman Letter at 3.
---------------------------------------------------------------------------

b. BZX Response to Comments
    As noted above, BZX stated that, unlike Cboe Market Close, the 
competing closing auctions operated by Nasdaq and NYSE Arca accept 
price-setting limit orders, in addition to MOC orders, and therefore 
may harm price discovery.\248\ Therefore, BZX questioned whether 
Nasdaq's and NYSE's concerns regarding the potential impact of Cboe 
Market Close should not also apply to the competing closing auctions 
operated by Nasdaq and NYSE Arca.\249\ 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 effect on fragmentation.\250\ BZX argued that should these 
auctions see an increase in order flow, they would increase existing 
market fragmentation.\251\ BZX also asserted that such competing 
closing auctions often may produce bad auction prices on the non-
primary listing exchange, as compared to the proposed Cboe Market Close 
which would ensure that market participants receive the official 
closing price.\252\ 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

[[Page 4745]]

orders to the primary listing exchange, 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.\253\
---------------------------------------------------------------------------

    \248\ 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.
    \249\ See, e.g., BZX Letter 2 at 2.
    \250\ See BZX Letter 1 at 6.
    \251\ 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.
    \252\ 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.
    \253\ BZX Letter 3 at 4.
---------------------------------------------------------------------------

c. Commission Discussion and Findings
    The Commission believes, as some commenters argued, that there are 
certain fundamental differences between BZX's proposed Cboe Market 
Close and existing competing closing auctions. First, BZX's proposed 
Cboe Market Close is not a closing auction. Further, as NYSE and Nasdaq 
stated, their existing competing, single-priced closing auctions accept 
LOC orders (which specify target prices) and therefore, produce closing 
prices independent from those determined through the primary listing 
exchanges' closing auctions. As pointed out by BZX, this could affect 
the closing price on the primary listing exchange by potentially 
diverting LOC orders that contribute to price discovery away from the 
primary listing exchange's closing auction.\254\ In contrast, BZX's 
proposal would not accept LOC orders. Rather, Cboe Market Close only 
matches MOC orders. Thus, based on its design, Cboe Market Close should 
not affect the price formation process in the closing auctions on the 
primary listing exchanges.
---------------------------------------------------------------------------

    \254\ Competing auctions could also potentially reduce the 
centralization of orders at the primary listing exchange's closing 
auction, which NYSE and Nasdaq argued was a critical element of the 
primary listing exchanges' closing auctions. See Nasdaq Letter 1 at 
11; Nasdaq Letter 2 at 5-6; Nasdaq Statement at 22; NYSE Statement 
at 21; NYSE Report at 12; and NYSE Letter 1 at 4.
---------------------------------------------------------------------------

C. Potential Effect on Issuers and Other Market Participants

1. Comments on the Proposal
    Several commenters stated that the proposal could harm issuers, 
particularly small and mid-cap companies.\255\ Many of these commenters 
argued that because, in their view, the proposal undermines the 
reliability of the closing process and/or the official closing price it 
also poses a risk to listed companies and their shareholders.\256\ Many 
of these commenters, some of which are issuers, stated that the current 
centralized closing auctions on the primary listing exchanges 
contribute meaningful liquidity to a company's stock, facilitate 
investment in the company, and help to lower the cost of capital. These 
commenters expressed concern that the potential additional 
fragmentation they believed could be caused by the proposal could 
negatively affect liquidity during the closing auction, causing 
detrimental effects to listed issuers.\257\
---------------------------------------------------------------------------

    \255\ See, e.g., Nasdaq Letter 1 at 6-7; Nasdaq Letter 2 at 1-2; 
Nasdaq Statement at 27; NYSE Letter 1 at 3; GTS Securities Letter 1 
at 2-5; Customers Bancorp Letter; Orion Group Letter; IMC Financial 
Letter at 1-2; Southern Company Letter; Letter from Cole Stevens, 
Investor Relations Associate, Nobilis Health, (July 6, 2017) 
(``Nobilis Health Letter''); Letter from Christopher A. Iacovella, 
Chief Executive Officer, Equity Dealers of America, (July 12, 2017) 
(``EDA Letter'') at 1-2; Coupa Software Letter; Trade Desk Letter; 
and Duffy/Meeks Letter at 1.
    \256\ See, e.g., NYSE Letter 1 at 3; IMC Financial Letter at 1-
2; Nobilis Health Letter; EDA Letter at 1-2; Coupa Software Letter; 
Letter from M. Farooq Kathwari, Chairman, President & CEO, Ethan 
Allen Interiors, Inc. (July 24, 2017) (``Ethan Allen Letter''); 
Trade Desk Letter; BioCryst Letter; Digimarc Letter; Duffy/Meeks 
Letter at 1-2; NBT Bancorp Letter; Global Payments Letter; CA 
Technologies Letter; Sirius Letter; and PayPal Letter. Several 
issuers also asserted that decentralizing closing auctions will 
increase volatility, reduce visibility, and negatively affect 
liquidity for equity securities. See, e.g., Customers Bancorp 
Letter; Orion Group Letter; and Nobilis Health Letter.
    \257\ See, e.g., Customers Bancorp Letter; Orion Group Letter; 
Southern Company Letter; and Duffy/Meeks Letter at 1-2. In contrast, 
one commenter argued that the proposal would attract more liquidity 
at the official closing price because the lower aggregate cost of 
trading at the official closing price would likely result in 
incremental increases in trading volumes at the official closing 
price. 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 from ``patient 
investors'' that seek to trade large amounts of stock but may not 
utilize the primary listing exchanges' closing auctions due to 
concerns about information leakage. See ViableMkts Letter at 2.
---------------------------------------------------------------------------

    In addition, commenters stated that closing prices play an 
important role in the pricing of pooled investment vehicles, derivative 
securities, and benchmark indices.\258\ One of these commenters 
asserted that because the closing price is a critical data point for 
investors, the Commission should take ``great caution'' in considering 
any changes related to the primary listing exchanges' closing 
auctions.\259\
---------------------------------------------------------------------------

    \258\ See Pitt/Spatt Report at 6-7; and Letter from Alexander J. 
Matturri, CEO, S&P Dow Jones Indices (July 18, 2017) (``SPDJI 
Letter'') at 1-2. See also, e.g., Coupa Software Letter; and Trade 
Desk Letter.
    \259\ See SPDJI Letter at 2. See also NYSE Report at 23-24. In 
contrast, one commenter acknowledged that while affecting 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 
exchanges perform during the opening and closing, are important factors 
for issuers in determining where to list their securities.\260\ 
Commenters also stated that the additional risk posed to listed 
companies from an unreliable or unrepresentative closing price and/or 
process could affect an issuer's decision where to list and/or cause 
companies to forgo going public.\261\ Nasdaq added that the proposal 
would undermine confidence in the price discovery process and the mere 
perception of these risks could discourage issuers from going 
public.\262\
---------------------------------------------------------------------------

    \260\ See, e.g., EDA Letter at 1; Duffy/Meeks Letter at 1; and 
GTS Securities Letter 2 at 1-2.
    \261\ See, e.g., NYSE Letter 1 at 3 and 9; GTS Securities Letter 
1 at 3-5; and EDA Letter at 1. 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 
exchanges provide to their listed issuers. See CA Technologies 
Letter.
    \262\ See Nasdaq Statement at 27-28.
---------------------------------------------------------------------------

2. BZX Response to Comments
    BZX stated that because the proposal only matches paired-off MOC 
orders, it ``would not adversely impact the trading environment for 
issuers and their securities.'' \263\ BZX further stated that unlike 
the competing closing auctions run by NYSE Arca and Nasdaq, the 
proposal would not create a price that deviates from the official 
closing price, and therefore, the proposal ``would not impact listed 
issuers or the market for their securities.'' \264\
---------------------------------------------------------------------------

    \263\ See BZX Letter 1 at 2 and 4; and BZX Letter 2 at 10.
    \264\ See BZX Letter 2 at 10.
---------------------------------------------------------------------------

3. Commission Discussion and Findings
    As discussed above, BZX has demonstrated that because Cboe Market 
Close will only execute paired-off MOC orders, it should not disrupt 
the price discovery process.\265\ Accordingly, the proposal should not 
lead to the detrimental effects 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 matched shares at 3:35 p.m.--well before the cut-off time for 
the primary listing exchanges' closing auctions \266\--the Commission 
does not believe that the proposal would negatively affect visibility 
and transparency into the closing auction process on the primary 
listing exchanges, nor would it limit the quality and quantity of 
information on trading dynamics that the primary

[[Page 4746]]

listing exchanges could provide to their listed issuers.
---------------------------------------------------------------------------

    \265\ See supra Section III.B.
    \266\ See supra note 23.
---------------------------------------------------------------------------

D. Effect on Market Complexity and Operational Risk

1. Comments on the Proposal
    Several commenters addressed the potential effect of the proposal 
on market complexity and operational risk to the securities markets.
    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 exchange.\267\ 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.\268\
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    \267\ See SIFMA Letter 1 at 2; and ViableMkts Letter at 3 
(further stating that once BZX is able to process MOC orders, BZX 
would be in a position to develop the capability to offer a full 
backup closing auction process).
    \268\ See Clearpool Letter at 4.
---------------------------------------------------------------------------

    In contrast, other commenters argued that the proposal would add 
unnecessary market complexity and operational risk to the securities 
markets. Nasdaq asserted that the proposal would impair the statutory 
objective of fair and orderly markets by ``fostering complexity and 
fragmentation in the securities markets.'' \269\ In particular, Nasdaq 
and other commenters stated that the proposal would exacerbate market 
complexity by requiring market participants to monitor and analyze an 
additional data feed, the Cboe Auction Feed.\270\ These commenters 
argued that monitoring an additional data feed could create challenges 
and increase operational risk by creating another point of failure at a 
critical time of the trading day.\271\ Some commenters stated that 
additional exchanges, broker-dealers, or ATSs are likely to adopt 
similar functionality to Cboe Market Close, which would require 
monitoring of even more data feeds and further increase fragmentation, 
risk, and operational challenges in the market.\272\ While 
acknowledging that sophisticated market participants are capable of 
monitoring additional data feeds, Nasdaq and NYSE argued that many 
closing auction participants are less-active traders than the 
professional market participants who trade during the continuous 
trading session.\273\ Such market participants, they argued, do not 
have the technology and systems to analyze an additional data feed and 
would thereby be placed at a disadvantage to sophisticated market 
participants who already have such systems in place.\274\
---------------------------------------------------------------------------

    \269\ See Nasdaq Statement at 32.
    \270\ See Nasdaq Statement at 33; NYSE Letter 1 at 7; NYSE 
Statement at 26-27; and IMC Letter at 1.
    \271\ See IMC Letter at 1; NYSE Letter 1 at 7; and Nasdaq 
Statement at 33. See also Ethan Allen Letter (arguing the proposal 
would add a layer of complexity).
    \272\ See NYSE Letter 3 at 3; NYSE Statement at 26; T. Rowe 
Price Letter at 1-2; Nasdaq Letter 1 at 8; and Nasdaq Statement at 
33-34.
    \273\ See Nasdaq Statement at 33-34; and NYSE Statement at 27-
28.
    \274\ See Nasdaq Statement at 33-34; and NYSE Statement at 27-
28.
---------------------------------------------------------------------------

    One commenter also 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 listing exchange closing auction.\275\ This added 
complexity, the commenter argued, puts additional stress on the systems 
of exchanges and increases the potential for disruptions.\276\
---------------------------------------------------------------------------

    \275\ 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 MOC orders have priority. 
See NYSE Letter 1 at 8.
    \276\ See GTS Securities Letter 1 at 6.
---------------------------------------------------------------------------

2. BZX Response to Comments
    In response, BZX argued that the proposal would not increase market 
complexity or operational risks.\277\ BZX characterized the proposal as 
a simple crossing process that provides one additional venue, among the 
many that exist today, to which market participants may send MOC 
orders.\278\ BZX asserted that Cboe Market Close would provide a way to 
address the single point of failure risk that exists for closing 
auctions conducted on the primary listing exchanges.\279\ Specifically, 
BZX argued that in the event there is an impairment at a primary 
listing exchange, Cboe Market Close could provide an alternative option 
for market participants to route MOC orders and still receive the 
official closing price.\280\
---------------------------------------------------------------------------

    \277\ See BZX Letter 1 at 12; BZX Letter 2 at 10-11; and BZX 
Statement at 17-20.
    \278\ See BZX Statement at 17.
    \279\ See BZX Letter 1 at 12; and BZX Letter 2 at 10-11.
    \280\ See id. In contrast, Nasdaq argued that Cboe Market Close 
could not serve as a back-up for a primary listing exchange 
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.
---------------------------------------------------------------------------

    BZX also argued that modern software can easily and simply add 
volume data disseminated by the primary listing exchanges regarding the 
closing auction and data regarding matched MOC orders from the Cboe 
Market Close.\281\ 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.\282\ BZX stated that market participants 
would not be obligated to use Cboe Market Close or subscribe to its 
data feed (or any other additional functionality or feeds that 
competitors develop), and accordingly, may weigh the value of seeking 
an execution in such a facility against any perceived risks.\283\ BZX 
also stated that the proposal should not be evaluated based on 
speculation about whether others might mimic the functionality in the 
future.\284\
---------------------------------------------------------------------------

    \281\ See BZX Letter 1 at 4; BZX Letter 2 at 3; and BZX 
Statement at 19.
    \282\ See BZX Letter 2 at 8; and BZX Statement at 18.
    \283\ See BZX Letter 2 at 8-9; and BZX Statement at 19. 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.
    \284\ See BZX Statement at 19.
---------------------------------------------------------------------------

3. Commission Discussion and Findings
    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 the market participants that monitor 
information disseminated by BZX relating to Cboe Market Close would 
likely already maintain systems and software that are able to aggregate 
such feeds. While NYSE and Nasdaq argue that many closing auction

[[Page 4747]]

participants are less active, less sophisticated participants that 
would not have the systems or ability to aggregate an additional feed, 
there are currently numerous destinations available to send MOC 
orders--primary listing auctions, competing auctions, ATSs, and other 
off-exchange venues. As a result, the Commission believes that even 
less active traders seeking closing executions likely already monitor, 
have the capability to monitor, or rely on their broker-dealers to 
monitor, multiple data points for closing auction liquidity and 
information.
    Further, the Commission notes that exchanges currently offer a wide 
array of proprietary market data products providing expansive trading 
information, including auction information.\285\ Unlike some of these 
other proprietary market data feeds offered by certain exchanges, the 
Cboe Auction Feed is equally available to all market participants at no 
charge,\286\ and, as part of this proposal, BZX has proposed to enhance 
the Cboe Auction Feed to include only one point of additional data 
(total matched shares in the Cboe Market Close), once a day. 
Accordingly, the Commission does not believe that monitoring the Cboe 
Auction feed or having one additional venue to which market 
participants may submit MOC interest would significantly increase 
complexity or fragmentation, or impose substantial burdens on market 
participants, in such a manner as to render the proposal inconsistent 
with the Act.\287\ Specifically, the Commission does not believe that 
the proposal adds such a level of complexity so as to be inconsistent 
with the Act, such as, among other things, by impeding fair and orderly 
markets, imposing impediments to a free and open market and a national 
market system, being unfairly discriminatory, or impeding fair 
competition among market participants.
---------------------------------------------------------------------------

    \285\ See, e.g., Clearpool Letter at 2 (stating that imbalance 
feeds that are published for NYSE's and Nasdaq's closing auctions 
are only available as part of the exchanges' premium data products). 
Therefore, less active traders that wish to trade in the NYSE or 
Nasdaq closing auction arguably already would have the technology 
and systems necessary to integrate the additional proprietary data 
products offered by the exchanges.
    \286\ BZX does not charge a fee for the data provided by the 
Cboe Auction Feed, which also includes market data not related to 
Cboe Market Close; however, BZX does charge logical port and 
connectivity fees for the receipt of the Cboe Auction Feed.
    \287\ See also supra Section III.B. further discussing and 
addressing concerns regarding the potential effects of the proposal 
on fragmentation of the markets.
---------------------------------------------------------------------------

    In addition, in response to comments regarding the potential for 
other exchanges and venues to adopt similar functionality that would 
require monitoring of even more data feeds, again the Commission 
believes that those participants that would choose to monitor such data 
feeds likely already have the capability to monitor and aggregate 
information from multiple data feeds.
    Finally, the Commission believes that because BZX will disseminate 
the amount of paired-off shares well in advance of the order entry cut-
off times for the primary listing exchanges' closing auctions, the 
proposal is reasonably designed to limit market complexity and risk by 
giving 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.\288\
---------------------------------------------------------------------------

    \288\ As noted above, NYSE pointed out one instance on NYSE Arca 
and NYSE American where, pursuant to their rules, if there is an 
order imbalance priced outside of the Auction Collars, orders are 
not guaranteed to participate in the closing auction, and MOC orders 
entered earlier in the day have priority over later-arriving MOC 
orders. As such, NYSE argued that if a market participant waits to 
enter an MOC order on NYSE Arca or NYSE American until after their 
MOC order is cancelled by BZX, that MOC order could lose priority 
over earlier-entered MOC orders. See supra note 275. However, as 
noted above, market participants are not required to send MOC orders 
to Cboe Market Close. Further, the Commission believes that the 
operation of the NYSE Arca and NYSE American's auctions are clearly 
delineated in their rules, and this limited scenario is the type of 
potential risk that the Commission expects that market participants 
will need to evaluate in any determination as to whether to send 
their orders to Cboe Market Close.
---------------------------------------------------------------------------

E. Manipulation

1. Manipulation Due to Information Asymmetries
a. Comments on the Proposal
    Several commenters asserted that the proposal would increase the 
risk of manipulation. Commenters argued that the proposal increases 
opportunities for manipulation due, in part, to the information 
asymmetries that they argue Cboe Market Close would create. For 
example, Nasdaq argued that information obtained by Cboe Market Close 
participants regarding their paired-off MOC orders could be used to 
gauge the depth of the market, the direction and magnitude of existing 
imbalances, and the likely depth remaining at Nasdaq, creating 
manipulation opportunities and undermining fair and orderly 
markets.\289\ Similarly, NYSE offered several hypothetical examples to 
illustrate how Cboe Market Close could potentially be used to 
manipulate the official closing price, including by providing market 
participants who participate in Cboe Market Close with useful 
information that is unavailable to other market participants, such as 
the direction of an imbalance.\290\ 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.\291\ 
Specifically, T. Rowe Price asserted that a market participant that is 
aware of the composition of volume paired-off 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.\292\
---------------------------------------------------------------------------

    \289\ See Nasdaq Letter 1 at 8; Nasdaq Letter 2 at 13-14; Nasdaq 
Statement at 17-20; and Pitt/Spatt Report at 21-23. The Nasdaq 
Statement and accompanying Pitt/Spatt Report provided several 
examples to illustrate how such information could potentially be 
utilized to ``mark the close,'' learn the direction of the order 
imbalance, and/or determine the relative magnitude of the imbalance. 
For example, Nasdaq argued that a market participant could enter 
both buy and sell MOC orders in the Cboe Market Close to learn the 
likely direction of the MOC imbalance in advance of other market 
participants and use such information to its benefit in the closing 
auction on the primary listing exchange. See Nasdaq Statement at 17-
20; and Pitt/Spatt Report at 21-23.
    \290\ See NYSE Letter 1 at 6; and NYSE Statement at 28-30. 
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.
    \291\ See T. Rowe Price Letter at 2-3.
    \292\ See id. T. Rowe Price argued that, as a result, the 
proposal could not only affect price discovery in closing auctions 
on the primary listing exchanges but it could also affect continuous 
trading behavior. See id.
---------------------------------------------------------------------------

    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.\293\

[[Page 4748]]

Nasdaq also distinguished its closing auction from the proposed Cboe 
Market Close, stating 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.\294\
---------------------------------------------------------------------------

    \293\ 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 
Section III.B, discussing why the Commission believes the proposal, 
based on its design, will not disrupt the price discovery process of 
the primary listing exchanges' closing auctions.
    \294\ See Nasdaq Letter 2 at 14; Nasdaq Statement at 18; and 
Pitt/Spatt Report at 23.
---------------------------------------------------------------------------

    Nasdaq further argued that information asymmetries can undermine 
public confidence in the markets.\295\ In particular, Nasdaq asserted 
that the proposal could disincent market participants from submitting 
LOC orders for fear of competing with other market participants with 
more market information.\296\ This decreased liquidity, Nasdaq argued, 
could make stocks even more susceptible to manipulation, particularly 
those with relatively lower levels of liquidity.\297\
---------------------------------------------------------------------------

    \295\ See Nasdaq Statement at 19.
    \296\ See Nasdaq Statement at 19.
    \297\ See Nasdaq Statement at 19-20.
---------------------------------------------------------------------------

b. BZX Response to Comments
    In contrast, BZX argued that information asymmetries are inherent 
in trading, including the primary listing exchanges closing 
auctions.\298\ For example, BZX argued that the current operation of d-
Quotes \299\ on NYSE 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.\300\ Lastly, BZX argued that the information disseminated 
through the Cboe 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.\301\
---------------------------------------------------------------------------

    \298\ See BZX Letter 1 at 11-12; BZX Letter 2 at 9; and BZX 
Statement at 20.
    \299\ Pursuant to NYSE Rules, a floor broker may enter 
discretionary instructions as to size and/or price with respect to 
his or her e-Quotes (``discretionary e-Quotes'' or ``d-Quotes''). 
The discretionary instructions relate to the price at which the d-
Quote may trade and the number of shares to which the discretionary 
price instructions apply. Discretionary instructions are active 
during the trading day, unless the Protected Best Bid and Offer 
(``PBBO'') (as defined in NYSE Rule 1.1(o)) is crossed, and at the 
opening, reopening and closing transactions, and may include 
instructions to participate in the opening or closing transaction 
only. Exchange systems will reject any d-Quotes that are entered 10 
seconds or less before the scheduled close of trading. Executions of 
d-Quotes within the discretionary pricing instruction range are 
considered non-displayable interest. See NYSE Rule 70.25(a).
    \300\ See BZX Letter 1 at 12; and BZX Letter 2 at 9. The 
Commission notes that NYSE's cut-off time for entering, modifying, 
or cancelling on-close orders is now 3:50 p.m. See NYSE Rule 
123C(2)(a)(i).
    \301\ See id.
---------------------------------------------------------------------------

c. Commission Discussion and Findings
    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.\302\ 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 exchange, competing auctions, 
ATSs, or other off-exchange matching services which, as described 
above, can represent a significant portion of trading volume at the 
close.
---------------------------------------------------------------------------

    \302\ While Nasdaq argued that the size of a market 
participant's cancelled order and time of day would provide some 
indication of the magnitude of the imbalance, as discussed herein, 
the Commission believes the value of this information to be 
extremely limited as it does not give accurate or comprehensive 
insight into the overall MOC imbalance size in the Cboe Market Close 
or of the MOC imbalances in the entire market inclusive of other 
venues. See Nasdaq Statement at 18. The Commission acknowledges that 
the greater the size of the cancelled order, the more useful the 
information may be in determining the imbalance magnitude on Cboe 
Market Close, but the Commission believes it is unlikely that a 
market participant would risk placing and receiving an execution of 
a large MOC order (for example, 10,000 shares as in Nasdaq's 
example), purely to gain limited insight into MOC imbalance size. 
The risk of receiving an execution of a large order that may be 
inconsistent with a market participant's goals is likely to eclipse 
any limited potential benefit that could be gained.
---------------------------------------------------------------------------

    Likewise, while a market participant would be able to determine 
whether its own order made up a large or small percentage of the 
paired-off 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 exchange, competing auctions, ATSs, or other off-
exchange matching services.\303\ Therefore, the Commission believes the 
utility of this information is also limited.
---------------------------------------------------------------------------

    \303\ While one commenter expressed concern that market 
participants that are aware of the composition of volume paired-off 
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-off MOC shares, and such disseminated 
information would be available to all market participants. See supra 
notes 291-292 and accompanying text.
---------------------------------------------------------------------------

    Further, 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. In addition, on NYSE, not only 
DMMs,\304\ but also 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 3:50 p.m.\305\ 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.\306\ 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.\307\
---------------------------------------------------------------------------

    \304\ The Commission has acknowledged the information 
asymmetries that benefit DMMs, explaining that, ``[i]n return for 
their obligations and responsibilities, DMMs have significant 
priority and informational advantages in trading on the Exchanges, 
both during continuous trading and during the closing auction'' and 
that ``DMMs have unique access to aggregated information about 
closing auction interest at each price level, and during the auction 
itself, DMMs are aware of interest represented by floor brokers, 
which is not publicly disseminated''. See Securities Exchange 
Release No. 81150 (July 20, 2017), 82 FR 33534, 33536-37 (July 20, 
2017) (NYSE-2016-71 and NYSEMKT-2016-99) (``NYSE DMM Disapproval 
Order'').
    \305\ See NYSE Rule 123C(6)(b).
    \306\ See Securities Exchange Act Release No. 62923 (Sept. 15, 
2010), 75 FR 57541, 57542 (Sept. 21, 2010) (SR-NYSE-2010-20; SR-
NYSEAmex-2010-25).
    \307\ See id.
---------------------------------------------------------------------------

    The Commission believes that the same arguments apply with respect 
to BZX's proposal. In particular, as discussed above, even if a market 
participant becomes aware of the

[[Page 4749]]

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 relevant information. Therefore, given these limitations, the 
Commission believes that such information is likely less useful than 
other more comprehensive 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 exchanges.
    Given the limited usefulness of information that can be discerned 
from participants of Cboe Market Close, the Commission also believes it 
is unlikely that the proposal will have a negative effect on public 
confidence in the markets or on market participants' use of LOC orders 
in the close. This is not to say that merely because some information 
asymmetries exist in the market today and are inherent in all trading 
that those created by Cboe Market Close need not be carefully 
considered. Rather, after careful consideration and analysis of the 
proposal and the information that may be gleaned from Cboe Market 
Close, its utility, and potential use, the Commission believes BZX has 
demonstrated that the potential for increased manipulation due to 
information asymmetries created by this proposal is negligible and that 
it is in line with other proposals that have similarly introduced 
certain limited information asymmetries into the market but been found 
by the Commission to be consistent with the Act, as described 
above.\308\
---------------------------------------------------------------------------

    \308\ The Commission believes that Nasdaq's reliance on recent 
Direct Edge and NYSE enforcement cases as support for the principle 
that the Commission has found informational advantages to be 
inconsistent with the Act is misplaced. See Nasdaq Statement at 19. 
Both of the cases cited by Nasdaq are distinguishable from the 
current proposal in that they involved instances where the 
exchanges' rules were inaccurate or incomplete regarding the 
description of the operation of certain order types. Informational 
asymmetries arose as a result of such inaccuracies and/or omissions 
in the exchanges' rules and because only certain members had access 
to correct information regarding the operation of such order types. 
See Securities Exchange Act Release No. 82808, In the Matter of NYSE 
LLC, NYSE American LLC, and NYSE Arca, Inc. (Mar. 6, 2018), 
available at: https://www.sec.gov/litigation/admin/2018/33-10463.pdf 
and Securities Exchange Act Release No. 74032, In the Matter of EDGA 
Exchange, Inc. (Jan. 12, 2015) (settled orders), available at: 
https://www.sec.gov/litigation/admin/2015/34-74032.pdf (``It is 
essential that an exchange operate in compliance with its own rules 
regarding order types so that the exchange's members and all other 
participants in trading that occurs on an exchange can understand on 
what terms and conditions their trading will be conducted. When an 
exchange fails to completely and accurately describe its order types 
in its rules, it creates a significant risk that the manner in which 
those order types operate will not be understood by all market 
participants, thereby compromising the integrity and fairness of 
trading on that exchange. This risk is compounded when the exchange 
discloses information regarding the operation of those order types 
to some but not all of its members.'').
---------------------------------------------------------------------------

2. Other Causes for Increased Potential for Manipulation
a. Comments on the Proposal
    Commenters advanced several other theories as to how the proposal 
could enhance the risk of manipulation.\309\ For example, NYSE and 
Nasdaq asserted that the potential for manipulative activity at the 
close would increase because primary listing exchange closing auctions 
would decrease in size and thus be easier to manipulate.\310\ NYSE and 
Nasdaq 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.\311\ 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.\312\
---------------------------------------------------------------------------

    \309\ See, e.g., NYSE Letter 1 at 6; NYSE Report at 19-22; and 
Americas Executions Letter.
    \310\ See NYSE Letter 1 at 6; and Nasdaq Statement at 19-20. See 
also supra notes 295-297 (discussing Nasdaq's assertion that the 
proposal would affect public confidence in the markets, resulting in 
decreased liquidity and more susceptibility to manipulation).
    \311\ See NYSE Letter 1 at 6; NYSE Report at 19; Nasdaq 
Statement at 17; and Pitt/Spatt Report at 22-23.
    \312\ See NYSE Report at 19-20.
---------------------------------------------------------------------------

    Some commenters did not believe Cboe Market Close would increase 
manipulation. 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.\313\
---------------------------------------------------------------------------

    \313\ See Angel Letter at 5.
---------------------------------------------------------------------------

b. BZX Response to Comments
    In response, BZX argued that the proposal does not introduce any 
specific or new ways to manipulate the closing price.\314\ BZX further 
asserted that commenters' arguments regarding increased chances for 
manipulation ignore the supervisory responsibilities and capabilities 
of exchanges and the existing cross-market surveillance conducted by 
FINRA today.\315\ As discussed in more detail below, BZX stated that it 
would continue to surveil for potentially manipulative activities and 
made commitments to enhance surveillance procedures and work with other 
SROs to detect and prevent manipulation through the use of Cboe Market 
Close.\316\
---------------------------------------------------------------------------

    \314\ See BZX Letter 1 at 11; BZX Letter 2 at 9; and BZX Letter 
4 at 1-2.
    \315\ See BZX Letter 1 at 11; and BZX Letter 2, at 9.
    \316\ See BZX Letter 1 at 11; BZX Letter 2 at 9; and BZX Letter 
4 at 1-2. See also infra Section III.E.3.
---------------------------------------------------------------------------

c. Commission Discussion and Findings
    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.\317\ While an exchange must show that their 
proposal is designed to prevent fraudulent and manipulative acts and 
practices, the Act does not require an exchange to ensure, with 
certainty, that their proposal will not give rise to any attempted 
manipulation or illegal acts. Scholarly articles have suggested that 
closing auction manipulations are often characterized by large, 
unrepresentatively priced orders submitted in the final seconds of the 
auction.\318\ Accordingly, 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.\319\ With respect to NYSE's

[[Page 4750]]

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, 
including ATSs (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.
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    \317\ 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 [Cboe Market Close], the 
changes to order flow and liquidity provision in the primary listing 
exchange's closing mechanism, the profits realized from 
manipulation, and the vitality of market oversight.'' See NYSE 
Report at 19-22. Further, the Pitt/Spatt Report acknowledged that, 
``closing prices are inherently somewhat vulnerable to 
manipulation.'' See Pitt/Spatt Report at 22.
    \318\ 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.
    \319\ See infra Section III.E.3 for discussion of the 
obligations under the Act of national securities exchanges, as self-
regulatory organizations, to surveil for manipulative activity on 
their markets.
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3. Surveillance
a. Comments on the Proposal
    Lastly, some commenters argued that BZX and other exchanges would 
need to develop new cross-market surveillance systems in order to 
address these risks and expressed concerns regarding the costs and 
complexities of doing so.\320\ For example, NYSE 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 listing exchange closing auctions and the cross-
market nature of the manipulation.\321\ 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 listing exchange auction, and thus, it would be difficult 
to distinguish between manipulative behavior and legitimate trading 
activity.\322\ Both NYSE and Nasdaq stated that BZX's commitment to 
enhance its surveillance mechanisms \323\ and its statutory obligation 
to surveil for manipulative activity was insufficient to render the 
proposal consistent with the Act.\324\ Nasdaq recommended that, at a 
minimum, BZX should be required to memorialize its enhanced procedures 
in its rules,\325\ and NYSE added that BZX must demonstrate 
affirmatively that the proposal is designed to prevent fraudulent 
activity, not merely mitigate the risks of such activity.\326\ In 
contrast, IEX argued that participation in the Cboe Market Close, 
followed by activity intended to affect the closing price on the 
primary listing exchange, would make manipulation of closing crosses as 
or more conspicuous than other trading patterns for which exchanges 
already conduct surveillance.\327\ Two commenters also stated that the 
Consolidated Audit Trail would provide a new tool for detecting any 
such manipulation.\328\
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    \320\ See Nasdaq Letter 2 at 14; Nasdaq Statement at 20-21; 
Pitt/Spatt Report at 23-24; NYSE Report at 20-21; NYSE Letter 1 at 
6; NYSE Statement at 30; GTS Securities Letter 1 at 6; and GTS 
Securities Letter 2 at 5.
    \321\ See NYSE Report at 20-21; NYSE Letter 1 at 6; and NYSE 
Statement at 30.
    \322\ See NYSE Report at 19; and NYSE Statement at 30.
    \323\ See infra notes 329-338 and accompanying text.
    \324\ See Nasdaq Statement at 21; and NYSE Statement at 31. As 
support for this argument, Nasdaq and NYSE referenced a Commission 
disapproval of a proposal by NYSE to eliminate certain restrictions 
on the trading activities of DMMs that were designed to address the 
risk of manipulative activity. See Nasdaq Statement at 21; and NYSE 
Statement at 31 (discussing the Commission's disapproval of NYSE-
2016-17). See also NYSE DMM Disapproval Order, supra note 304.
    \325\ See Nasdaq Statement at 21 (citing the Commission's 
Benchmark Disapproval Order as support for the assertion that an 
exchange must include any enhanced procedures to mitigate risk in 
its rules). See also Securities Exchange Act Release No. 68629 (Jan. 
11, 2013), 78 FR 3928 (Jan. 17, 2013) (NASDAQ-2012-059).
    \326\ See NYSE Statement at 31.
    \327\ See IEX Letter at 2.
    \328\ See id. at 2-3; and Bollerman Letter at 2.
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b. BZX Response to Comments
    In response, BZX made several arguments as to why it does not 
believe that the proposal creates a potential for increased 
manipulation.\329\ 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 address such 
behavior.\330\ BZX further stated that 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.'' \331\ In 
addition, 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.\332\ 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.\333\ BZX committed to provide 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.\334\
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    \329\ See BZX Letter 1 at 11-12; and BZX Letter 2 at 9.
    \330\ See BZX Letter 1 at 11; and BZX Letter 2 at 9.
    \331\ See Letter from Joanne Moffic-Silver, Executive Vice 
President, General Counsel, and Corporate Secretary, Cboe Global 
Markets, Inc. (Jan. 12, 2018) (``BZX Letter 4'') at 1. See also BZX 
Statement at 21-22.
    \332\ See BZX Letter 4 at 1.
    \333\ See BZX Letter 4 at 1.
    \334\ See id. at 2.
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    BZX also highlighted the cross-market surveillance that FINRA 
conducts on its behalf.\335\ 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.\336\ 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 exchanges' closing auctions.\337\ 
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.\338\
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    \335\ 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.
    \336\ Id.
    \337\ See id. at 2; and BZX Statement at 21.
    \338\ See BZX Letter 4 at 2; and BZX Statement at 21.
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c. Commission Discussion and Findings
    With respect to manipulative or illegal trading activity more 
broadly, self-regulatory organizations such as

[[Page 4751]]

BZX and the primary listing exchanges have an obligation under the Act 
to surveil for manipulative activity on their markets. The Commission 
agrees with commenters who say that relying on this obligation alone 
and/or a mere declaration that existing surveillances are adequate is 
not necessarily sufficient to render a proposal consistent with the 
Act. At the same time, contrary to commenters' assertions that enhanced 
surveillance procedures must be included as part of the exchange's 
proposed rules,\339\ exchanges generally do not delineate detailed 
surveillance procedures in their rules as doing so could present a 
security risk and potentially give those seeking to engage in 
manipulative behavior advance notice as to how the exchange will be 
monitoring and surveilling for such behavior and potentially a roadmap 
for evading detection.\340\
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    \339\ As noted above, Nasdaq argued that the Commission made 
clear in its Benchmark Disapproval Order that if an exchange 
represents that it will enhance its oversight procedures to mitigate 
the risks of a proposal, it must, at a minimum, memorialize such 
procedures in its rules. See supra note 325. However, the Commission 
does not agree that the Benchmark Disapproval Order imposed such a 
requirement. The Benchmark Disapproval Order discussed the lack of 
order handling requirements being set forth in the Nasdaq proposed 
rule change. The Benchmark Order Disapproval did not express the 
need for surveillance procedures to be set forth in a proposed rule 
change. The Benchmark Disapproval Order discussion was specific to 
concerns regarding risk controls of Rule 15c3-5 and the general 
statements that were made by Nasdaq that although such Rule 15c3-5 
risk controls were inapplicable, it would impose substantial risk 
controls on the proposed Benchmark Orders. The Commission noted in 
its disapproval order that Nasdaq had not amended the proposed rule 
change to address this concern or detail its commitments, but that 
if appropriately developed and reflected in the proposed rule 
change, the Commission's concerns could have been potentially 
addressed. See Benchmark Disapproval Order at 3929-30.
    \340\ The staff reviews the adequacy and effectiveness of self-
regulatory organizations' surveillance procedures and programs as 
part of its routine and for-cause examinations and inspections.
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    For the reasons discussed above, the Commission believes that the 
proposal raises only a minimal risk of increased manipulation, and 
this, coupled with the detailed commitments made by BZX to enhance 
surveillance and share surveillance plans with the Commission 
staff,\341\ support the Commission's finding that BZX has demonstrated 
that its proposal is designed to prevent fraudulent and manipulative 
acts and practices.\342\ In particular, the Commission believes that 
existing self-regulatory organization surveillance and enforcement 
activity, and the enhanced 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. While the Commission agrees with 
BZX that the proposal raises minimal risk of increased manipulation, it 
also believes that it is prudent and consistent with an Exchange's 
surveillance obligations to undertake efforts to tailor and enhance 
surveillance measures in anticipation of any potentially manipulative 
conduct that may arise in connection with Cboe Market Close. Such 
actions to enhance surveillance procedures are not unique to the 
current proposal; rather, exchanges commonly make changes to their 
surveillance programs to better detect manipulative or improper 
behavior in connection with proposed rule changes to implement new 
functionality. Thus, the Commission expects that, once the proposal is 
implemented, BZX will continue to closely monitor Cboe Market Close and 
implement new or enhanced surveillance measures, as necessary, designed 
to identify potential manipulative behavior that potentially could 
result from Cboe Market Close. Further, the Commission expects that, as 
required by Section 19(g)(1) of the Act,\343\ BZX, FINRA, and other 
national securities exchanges will enforce compliance by their members 
and persons associated with their members with the Act, the rules and 
regulations thereunder, and their own rules, including with regard to 
manipulative conduct.
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    \341\ Id.
    \342\ As noted above, NYSE and Nasdaq referenced the NYSE DMM 
Disapproval Order as support for the argument that an exchange must 
affirmatively demonstrate that its proposal is designed to prevent 
fraudulent activity and that a mere commitment to comply with market 
surveillance obligations is insufficient. See NYSE DMM Disapproval 
Order. As stated, the Commission generally agrees with these 
principles; however, it believes that the factual differences 
between the NYSE DMM Disapproval Order and the current BZX proposal 
support a different outcome. In particular, in the case of the NYSE 
DMM Disapproval Order, NYSE proposed to eliminate existing 
restrictions on DMM trading activity that, when adopted and 
subsequently retained through several market model changes, were 
determined to be necessary to address the risk of DMM manipulative 
activity. Although NYSE asserted that the rule was no longer needed 
because of developments in the equity markets and that existing 
rules and surveillances would address the manipulation risk, the 
Commission found, among other things, that NYSE had not met its 
burden of establishing how these other rules and surveillance 
procedures were an adequate substitute for the rule that NYSE sought 
to delete. See NYSE DMM Disapproval Order at 33537 (stating that, 
``the Commission believes that NYSE and NYSE MKT have merely 
asserted that, but not explained how, existing surveillances can act 
as an adequate substitute for this bright-line rule''). In contrast, 
as described above, the Commission believes that BZX has established 
that there is minimal risk of increased manipulation from its 
current proposal and has described its plans for enhanced 
surveillance.
    \343\ 15 U.S.C. 78s(g)(1).
---------------------------------------------------------------------------

    With respect to NYSE's comment on the potential challenges that 
time differences or cross-market activity may pose in identifying 
manipulative activity,\344\ these issues also exist today with respect 
to existing off-exchange MOC matching services as well as to trading 
generally. Surveillance procedures already must account for time 
differences and cross-market activity throughout the trading day. To 
the extent 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 comments concerning the 
challenge of differentiating between legitimate trading and 
manipulative activity, this too exists today with regard to many 
different trading scenarios and is not unique to this proposal. Despite 
the challenges of detecting and accurately identifying manipulative 
activity, SROs have been able to design their surveillance programs to 
flag potentially manipulative behavior in a variety of contexts and 
then subsequently further analyze and investigate such behavior to 
determine whether, in fact, there is evidence of improper activity. The 
Commission expects the same to be true with regard to Cboe Market 
Close. Further, the Commission agrees with the commenters that noted 
that the Consolidated Audit Trail is designed to provide an additional 
cross-market surveillance mechanism that should help to identify and 
prevent any potentially manipulative activity.
---------------------------------------------------------------------------

    \344\ See supra note 321 and accompanying text.
---------------------------------------------------------------------------

F. Amendment No. 2

    BZX filed Amendment No. 2 to the proposed rule change in response 
to the statements submitted by Nasdaq and NYSE which stated, among 
other arguments, that Cboe Market Close would potentially cause BZX to 
violate Rule 201(b) of Regulation SHO.\345\
---------------------------------------------------------------------------

    \345\ See supra note 10.
---------------------------------------------------------------------------

    Rule 201(b) of Regulation SHO generally requires that trading 
centers, such as the Exchange, establish, maintain, and enforce written 
policies and procedures that are reasonably designed to (i) prevent the 
execution or display of a short sale order of a covered security at a 
price that is less than or equal to the current national best bid if 
the price of that covered security decreases by 10% or more from that

[[Page 4752]]

covered security's closing price as determined by the listing market 
for that covered security as of the end of regular trading hours on the 
prior day, and (ii) impose such short sale circuit breaker restriction 
for the remainder of the day and the following day. In addition, the 
Exchange's policies and procedures, among other things, must be 
reasonably designed to permit the execution or display of a short sale 
order of a covered security marked ``short exempt'' without regard to 
whether the order is at a price that is less than or equal to the 
current national best bid.
    In Amendment No. 2, the Exchange recognized that since the Cboe 
Market Close will match buy and sell MOC orders at 3:35 p.m. without 
knowing the later determined execution price (namely, the official 
closing price as determined by the primary listing exchange), there is 
a possibility that a short sale MOC order that is matched for execution 
in the Cboe Market Close could result in an execution price that 
violates Rule 201 of Regulation SHO. To prevent such a violation of 
Rule 201 of Regulation SHO, the Exchange proposed to reject all short 
sale MOC orders that are designated for participation in the Cboe 
Market Close. The Exchange noted, however, that MOC orders marked 
``short exempt'' are not subject to the short sale circuit breaker 
restriction under Regulation SHO, and would therefore be accepted for 
participation in the Cboe Market Close.
    One commenter addressed the proposed Amendment No. 2.\346\ In 
particular, Nasdaq acknowledged that the proposed amendment could help 
BZX avoid violations of Rule 201 of Regulation SHO.\347\ The Commission 
believes that the Exchange's proposed handling of short sale MOC orders 
and ``short exempt'' MOC orders in the context of the Cboe Market 
Close, as described in Amendment No. 2, will help to ensure that the 
Exchange is in compliance with its responsibilities under Rule 201(b) 
of Regulation SHO and is otherwise consistent with the protection of 
investors and in the public interest.
---------------------------------------------------------------------------

    \346\ See Nasdaq Letter 4.
    \347\ See id. (noting also Nasdaq's belief that Amendment No. 2 
did not address any of the other issues that had been raised in 
prior comment letters).
---------------------------------------------------------------------------

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.
    It is therefore ordered, pursuant to Rule 431 of the Commission's 
Rules of Practice, that the earlier action taken by delegated 
authority, Exchange Act Release No. 82522 (January 17, 2018), 83 FR 
3205 (January 23, 2018), is set aside and, pursuant to Section 19(b)(2) 
of the Exchange Act, the proposed rule change (SR-BatsBZX-2017-34), as 
modified by Amendment No. 1 and Amendment No. 2, hereby is approved.

    By the Commission.
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-01253 Filed 1-24-20; 8:45 am]
 BILLING CODE 8011-01-P


