[Federal Register Volume 85, Number 215 (Thursday, November 5, 2020)]
[Notices]
[Pages 70678-70696]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-24495]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-90288; File No. SR-CboeBYX-2020-021]


Self-Regulatory Organizations; Cboe BYX Exchange, Inc.; Notice of 
Filing of Amendment No. 2 and Order Instituting Proceedings To 
Determine Whether To Approve or Disapprove a Proposed Rule Change, as 
Modified by Amendment No. 2, To Introduce Periodic Auctions for the 
Trading of U.S. Equity Securities

October 30, 2020.
    On July 17, 2020, Cboe BYX Exchange, Inc. (``Exchange'' or ``BYX'') 
filed with the Securities and Exchange Commission (``Commission''), 
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'' or ``Exchange Act'') \1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change to introduce periodic auctions in U.S. equity 
securities. The proposed rule change was published for comment in the 
Federal Register on August 4, 2020.\3\
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 89424 (July 29, 
2020), 85 FR 47262 (``Notice'').
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    On September 10, 2020, pursuant to Section 19(b)(2) of the Exchange 
Act,\4\ 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 to disapprove the 
proposed rule change.\5\ On October 27, 2020, the Exchange filed 
Amendment No. 1 to the proposed rule change, and on October 28, 2020 
the Exchange filed Amendment No. 2 to the proposed rule change, which 
replaced in its entirety the proposed rule change as modified by 
Amendment No. 1.\6\ The

[[Page 70679]]

Commission has received two comment letters on the proposed rule 
change.\7\ The Commission is publishing this notice and order to 
solicit comments on the proposed rule change, as modified by Amendment 
No. 2, for interested persons and to institute proceedings pursuant to 
Section 19(b)(2)(B) of the Act \8\ to determine whether to approve or 
disapprove the proposed rule change, as modified by Amendment No. 2.
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    \4\ 15 U.S.C. 78s(b)(2).
    \5\ See Securities Exchange Act Release No. 89820, 85 FR 57891 
(September 16, 2020). The Commission designated November 2, 2020 as 
the date by which the Commission shall approve or disapprove, or 
institute proceedings to determine whether to disapprove, the 
proposed rule change.
    \6\ Comments on the proposal, including Amendments No. 1 and No. 
2, can be found on the Commission's website at: https://www.sec.gov/comments/sr-cboebyx-2020-021/srcboebyx2020021.htm.
    \7\ See supra note 6.
    \8\ 15 U.S.C. 78s(b)(2)(B).
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I. The Exchange's Description of the Proposed Rule Change, as Modified 
by Amendment No. 2

    Cboe BYX Exchange, Inc. (``BYX'' or the ``Exchange'') is filing 
with the Securities and Exchange Commission (the ``Commission'') a 
proposed rule change to introduce periodic auctions for the trading of 
U.S. equity securities. The text of the proposed rule change is 
provided in Exhibit 5.
    The text of the proposed rule change is also available on the 
Exchange's website (http://markets.cboe.com/us/equities/regulation/rule_filings/byx/), at the Exchange's Office of the Secretary, and at 
the Commission's Public Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the Exchange included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The Exchange has prepared summaries, set forth in 
sections A, B, and C below, of the most significant aspects of such 
statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    This Amendment No. 2 to SR-CboeBYX-2020-021 amends and replaces in 
its entirety the proposal as originally submitted on July 17, 2020 and 
amended pursuant to Amendment No. 1 on October 27, 2020. The purpose of 
the proposed rule change is to introduce periodic auctions for the 
trading of U.S. equity securities (``Periodic Auctions'').\9\ As 
proposed, Periodic Auctions of one hundred milliseconds would be 
conducted throughout the course of the trading day when there are 
matching buy and sell Periodic Auction Orders, as defined below, that 
are available to trade in such an auction. Periodic Auctions would not 
interrupt trading in the continuous market, and would be price forming 
auctions that are executed at the price level that maximizes the total 
number of shares in both the auction book and the continuous market 
that are executed in the auction. The Exchange's parent company, Cboe 
Global Markets, Inc. (``Cboe''), has been a global leader in the 
implementation of periodic auctions, and currently runs the largest 
periodic auction book for the trading of European equities. The 
proposed Periodic Auctions that the Exchange would implement are based 
on the model that Cboe offers to clients in Europe, with targeted 
changes to adapt this model for the U.S. equities market. The Exchange 
believes that its implementation of Periodic Auctions would enhance the 
ability for investors to source liquidity in all equity securities 
traded on the Exchange. As discussed below, this includes both equity 
securities that trade in lower volume (i.e., ``thinly-traded 
securities'') where liquidity is naturally more scarce, but also more 
actively traded securities, including where available liquidity may be 
diminished due to increased volatility or other market conditions.\10\
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    \9\ The term ``Periodic Auction'' shall mean an auction 
conducted pursuant to Proposed Rule 11.25. See Proposed Rule 
11.25(a)(4).
    \10\ As discussed in the following section, while Periodic 
Auctions would be available in all securities traded on the 
Exchange, the Exchange believes that this trading mechanism would be 
particularly valuable for securities that trade in lower volume and 
consequently suffer from wider spreads and less liquidity displayed 
in the public markets.
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    Today, U.S. equities market participants are largely limited to two 
significant liquidity events where orders are pooled and executed at a 
single point in time--i.e., the opening and closing auctions. During 
the rest of the trading day, liquidity may be more limited, 
particularly for market participants that are seeking to trade larger 
orders. As proposed, Periodic Auctions would offer a new price forming 
auction that could be utilized by investors seeking liquidity, 
including block-size liquidity, during the course of the trading day. 
The Exchange believes that concentrating available liquidity in 
Periodic Auctions that would take place when the Exchange has received 
matching auctionable buy and sell orders would assist investors in 
obtaining needed liquidity, particularly in the case of investors 
seeking to execute larger orders that would be difficult to execute 
without market impact in the continuous market. In addition, since the 
proposed Periodic Auctions would be price forming, these auctions would 
perform a valuable price discovery function, which may be particularly 
helpful for investors when trading securities that typically trade with 
wider spreads, including thinly-traded securities.
i. Commission Statement on Thinly-Traded Securities
    On October 17, 2019, the Commission issued a Statement on Market 
Structure Innovation for Thinly Traded Securities (``Statement'').\11\ 
The Statement requested comment on potential innovations that could 
improve market quality in thinly-traded securities, and sought further 
feedback on the regulatory changes that may be needed to facilitate 
such innovation. Cboe submitted a comment letter in response to the 
Statement on December 20, 2019.\12\ As expressed in that comment 
letter, Cboe shares the Commission's interest in improving market 
quality in this segment of the U.S. equities market, and believes that 
the best way to accomplish this goal is through innovation and targeted 
approaches that invite investor choice.\13\ At that time, Cboe 
suggested a handful of different approaches that national securities 
exchanges could take to improve market quality in thinly-traded 
securities, without requiring anti-competitive and ultimately harmful 
changes to U.S. equities market structure.\14\ Following the submission 
of that comment letter, Cboe has continued to work on the design of 
potential market structure innovations that it could implement to 
improve market quality in thinly-traded and other securities that 
suffer from diminished market quality, consistent with the Commission's 
request. As a result of those efforts, the Exchange is now proposing to 
implement Periodic Auctions.
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    \11\ See Securities Exchange Act Release No. 87327 (October 17, 
2019), 84 FR 56956 (October 24, 2019) (File No. S7-18-19).
    \12\ See Letter from Adrian Griffiths, Assistant General 
Counsel, Cboe to Vanessa Countryman, Secretary, Commission dated 
December 20, 2019, available at https://www.sec.gov/comments/s7-18-19/s71819-6574727-201085.pdf.
    \13\ Id.
    \14\ Id.
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    As discussed above, Periodic Auctions would be available in all 
securities traded on the Exchange, where it may benefit market 
participants and investors by providing a deeper

[[Page 70680]]

pool of liquidity with which to trade, as well as providing important 
price discovery and other benefits. At the same time, the Exchange 
believes that the proposed introduction of Periodic Auctions would be 
particularly valuable in thinly-traded securities that currently suffer 
from diminished market quality compared to their more actively-traded 
counterparts. As expressed in Cboe's comment letter on the Commission's 
Statement, Cboe continues to believe that a successful approach to 
improving market quality in thinly-traded securities should focus on 
the difficulties that market participants face in trading these 
securities in the public markets today. In that letter, Cboe discussed 
three difficulties that market participants currently face in trading 
thinly traded securities: (1) Sourcing liquidity, (2) the availability 
of price improvement opportunities, and (3) the potential for 
significant market impact in securities that are less liquid and trade 
infrequently. As discussed later in this proposed rule change, the 
Exchange believes that Periodic Auctions would provide an effective 
means of addressing each of these issues, and may therefore serve to 
improve market quality in this currently underserved segment of the 
U.S. equities market. Further, the Exchange believes that Periodic 
Auctions, as designed, would provide a competitive mechanism for the 
execution of orders in thinly-traded securities, and may therefore 
bring order flow in such securities back into the public market, 
subject to fair access and pursuant to transparent exchange rules.
ii. Order Entry and Cancellation
    The Exchange would offer Periodic Auction Only Orders and Periodic 
Auction Eligible Orders,\15\ both of which indicate a member's desire 
to initiate a Periodic Auction, if possible, as well as Continuous Book 
Orders that would not initiate a Periodic Auction but would be eligible 
to participate in such an auction when it is executed.\16\ Thus, as 
provided in Proposed Rule 11.25(b), Users may enter Periodic Auction 
Orders, i.e., Periodic Auction Only Orders or Periodic Auction Eligible 
Orders,\17\ that are eligible to initiate Periodic Auctions pursuant to 
Proposed Rule 11.25(c), as discussed later in this proposed rule 
change, and Continuous Book Orders that may participate in such 
Periodic Auctions if present on the Continuous Book at the time a 
Periodic Auction is executed. As explained in more detail below, the 
ability to choose between Periodic Auction Only Orders, Periodic 
Auction Eligible Orders, and Continuous Book Orders would allow members 
to control how their orders are handled in Periodic Auctions--e.g., 
whether the order is able to initiate a Periodic Auction, or not, and 
whether the order participates on the Continuous Book, or not. The 
choice of different methods of participating in Periodic Auctions would 
therefore provide flexibility to members based on their individual 
business needs, or the needs of their customers. Regardless of the type 
of order submitted, orders entered on the Exchange that are present 
when a Periodic Auction is executed would generally be eligible to 
participate in that execution. The proposed introduction of Periodic 
Auctions would therefore benefit both Users explicitly seeking to use 
this functionality, as well as other Users that may benefit from any 
increased liquidity routed to the Exchange in order to participate in 
such Periodic Auctions.
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    \15\ A ``Periodic Auction Only Order'' is a Non-Displayed Limit 
Order entered with an instruction to participate solely in Periodic 
Auctions pursuant to Proposed Rule 11.25. A ``Periodic Auction 
Eligible Order'' is a Non-Displayed Limit Order eligible to trade on 
the Continuous Book that is entered with an instruction to also 
initiate a Periodic Auction, if possible, pursuant to Proposed Rule 
11.25. See Proposed Rule 11.25(b)(1)-(2).
    \16\ The term ``Continuous Book Order'' shall mean an order on 
the BYX Book that is not a Periodic Auction Order, and the term 
``Continuous Book'' shall mean System's electronic file of such 
Continuous Book Orders. See Proposed Rule 11.25(a)(2).
    \17\ The term ``Periodic Auction Order'' shall mean a ``Periodic 
Auction Only Order'' or ``Periodic Auction Eligible Order'' as those 
terms are defined in Proposed Rules 11.25(b)(1)-(2), and the term 
``Periodic Auction Book'' shall mean the System's electronic file of 
such Periodic Auction Orders. See Proposed Rule 11.25(a)(6).
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    General Requirements for Order Entry and Cancellation. Periodic 
Auction Orders and Continuous Book Orders may be modified and/or 
cancelled at any time, including during the Periodic Auction 
Period,\18\ at the discretion of the User. Periodic Auctions are 
designed to allow seamless participation in a price forming auction 
process without impacting continuous trading, and market participants 
would therefore remain able to manage orders that they have entered to 
participate in such auctions during the course of the trading day. 
Since some Users may not wish to cancel Periodic Auction Orders 
inadvertently during the course of an ongoing Periodic Auction, 
however, the Exchange would provide an optional instruction that would 
allow such Users to instruct the Exchange not to cancel a Periodic 
Auction Order during a Periodic Auction Period if it is marketable at 
the Periodic Auction Book Price.\19\
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    \18\ The term ``Periodic Auction Period'' would be defined in 
Proposed Rule 11.25(a)(8) as the fixed time period of 100 
milliseconds for conducting a Periodic Auction.
    \19\ The Periodic Auction Book Price is an indicative price that 
is designed to provide information about the price where a Periodic 
Auction may ultimately be executed. See infra note 34. The 
instruction to ``lock-in'' a Periodic Auction Order would be 
included as a port setting that a User can use to flag any orders 
entered through a particular port. Users that wish to use this 
feature must use the port setting and would not be able to flag 
individual orders on an order-by-order basis.
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    Given that Periodic Auctions are designed, in part, to facilitate 
the sourcing of larger blocks of liquidity that may not be available in 
continuous trading, the Exchange would also implement certain size 
restrictions that would be applicable to Periodic Auction Orders. 
Specifically, Periodic Auction Orders would have to be for a size of 
100 shares or more in securities priced below $500 based on the 
consolidated last sale price, i.e., the last sale price that is 
disseminated by the securities information processor, or if no 
consolidated last sale price is available, the previous day's closing 
price.\20\ There would be no similar size restrictions for higher-
priced securities, where such a size requirement would require a higher 
notional value to participate in a Periodic Auction.\21\
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    \20\ Periodic Auction Only Orders that do not meet applicable 
size requirements would be rejected. Periodic Auction Eligible 
Orders would be converted to Continuous Book Orders, and would be 
eligible to trade on the Continuous Book based on User instructions.
    \21\ For example, Amazon.com, Inc. (``AMZN'') closed at 
$3,531.45 on September 2, 2020. Requiring that a Periodic Auction 
Order in AMZN be for at least 100 shares would require that the User 
be willing to trade a notional value of $353,450. Given the large 
notional associated with such high-priced securities, the Exchange 
would not apply the proposed size requirement to securities priced 
at or above $500.
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    Periodic Auction Only Orders. A ``Periodic Auction Only Order'' 
would be defined in proposed Rule 11.25(b)(1) as a Non-Displayed Limit 
Order entered with an instruction to participate solely in Periodic 
Auctions pursuant to Proposed Rule 11.25. The Periodic Auction Only 
Order is an optional order type that is designed for market 
participants that want to access liquidity that is available in one or 
more Periodic Auctions and do not wish to participate in the continuous 
market. As such, a Periodic Auction Only Order would not be eligible 
for execution on the Continuous Book. Instead, such orders would remain 
on the Periodic Auction Book for participation in Periodic Auctions 
until executed or cancelled.
    Periodic Auction Only Orders would only be accepted with a time-in-
force of Regular Hours Only (``RHO'') or

[[Page 70681]]

immediate-or-cancel (``IOC''). Specifically, Periodic Auction Only 
Orders entered outside of Regular Trading Hours must include a time-in-
force of Regular Hours Only (``RHO'') as the Exchange would conduct 
Periodic Auctions only during Regular Trading Hours,\22\ and not during 
the Early Trading,\23\ Pre-Opening,\24\ or After Hours Trading 
Sessions.\25\ Periodic Auction Only Orders entered during Regular 
Trading Hours may be either RHO or immediate-or-cancel (``IOC''). If 
entered with a time-in-force of IOC, the order must include an 
instruction pursuant to Proposed Rule 11.25(b) not to cancel the order 
during a Periodic Auction Period if it is marketable at the Periodic 
Auction Book Price.\26\ As previously discussed, with the inclusion of 
this instruction, an order that initiates a Periodic Auction would be 
considered ``locked-in'' and would not be cancellable by the entering 
User during the course of an ongoing Periodic Auction Period unless it 
is not marketable at the Periodic Auction Book Price. An IOC order 
entered with this instruction would therefore be able to immediately 
initiate a Periodic Auction on entry. And, if it does so, it would not 
be cancelled for the duration of the Periodic Auction Period, except in 
circumstances where the Periodic Auction Book Price indicates that the 
order might not be executable, thereby ensuring that Periodic Auction 
Only Orders entered with these attributes would ordinarily be eligible 
to participate in Periodic Auctions that they initiate.
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    \22\ The term ``Regular Trading Hours'' means the time between 
9:30 a.m. and 4:00 p.m. Eastern Time. See BYX Rule 1.5(w).
    \23\ The term ``Early Trading Session'' means the time between 
7:00 a.m. and 8:00 a.m. Eastern Time. See BYX Rule 1.5(ee).
    \24\ The term ``Pre-Opening Session'' means the time between 
8:00 a.m. and 9:30 a.m. Eastern Time. See BYX Rule 1.5(r).
    \25\ The term ``After Hours Trading Session'' means the time 
between 4:00 p.m. and 8:00 p.m. Eastern Time. See BYX Rule 1.5(c).
    \26\ Periodic Auction Only Orders will be rejected if they are 
entered with a time-in-force of IOC but do not contain an ``lock-
in'' instruction pursuant to Proposed Rule 11.25(b).
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    The Exchange believes that the Periodic Auction Only Order may be 
particularly valuable for market participants that are seeking to 
execute larger orders that they may not be willing expose for trading 
on the Continuous Book. Thus, the Exchange would permit Users to 
specify a minimum execution quantity for their Periodic Auction Only 
Orders. A Periodic Auction Only Order entered with a minimum execution 
quantity would be executed in a Periodic Auction only if the minimum 
size specified can be executed against one or more contra-side Periodic 
Auction Orders or Continuous Book Orders. The Exchange offers Minimum 
Quantity Orders to Users that trade on the Continuous Book today.\27\ 
The proposed instruction that could be attached to a Periodic Auction 
Only Order is similar to the current Minimum Quantity Orders used for 
trading on the Continuous Book but would only permit the default 
handling of that order type, and would not allow a member to 
alternatively specify that the minimum quantity condition be satisfied 
by each individual contra-side order. Periodic Auction Eligible Orders 
and Continuous Book Orders entered as Minimum Quantity Orders would be 
subject to similar restrictions.
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    \27\ See BYX Rule 11.9(c)(5).
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    In addition, the Exchange believes that some Users may wish to use 
Periodic Auctions to seek liquidity at or better than a pegged price 
that is based on the applicable national best bid and offer (``NBBO''). 
The Exchange would therefore allow a User to optionally include an 
instruction on its Periodic Auction Only Orders to peg such orders to 
either the midpoint of the NBBO (``midpoint peg''), or the same side of 
the NBBO (``primary peg''). Similar to pegging instructions offered for 
Continuous Book Orders today,\28\ Periodic Auction Only Orders entered 
with a primary peg instruction could be pegged to the NBB or NBO, or a 
certain amount above the NBB or below the NBO (``offset'').\29\ The 
inclusion of a pegging instruction for Periodic Auction Only Orders 
would ensure that Users have the opportunity to specify that these 
orders are only executed at prices defined in relation to the market 
for the particular security, including midpoint executions that offer 
price improvement compared to the applicable NBBO.
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    \28\ See BYX Rule 11.9(c)(8)(A).
    \29\ Since Periodic Auctions are restricted from trading outside 
of the applicable Protected NBBO, the offset included on such orders 
would have to result in the order being more aggressive than the 
NBBO--i.e., priced higher for buy orders or lower for sell orders.
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    Periodic Auction Eligible Orders. A ``Periodic Auction Eligible 
Order'' would be defined in Proposed Rule 11.25(b)(2) as a Non-
Displayed Limit Order eligible to trade on the Continuous Book that is 
entered with an instruction to also initiate a Periodic Auction, if 
possible, pursuant to Proposed Rule 11.25. The Periodic Auction 
Eligible Order would allow market participants to trade in the 
continuous market during the course of the trading day, with the 
ability to also initiate Periodic Auctions when there is contra-side 
liquidity available to trade. The Exchange notes that there may be 
situations where an incoming Periodic Auction Eligible Order would be 
able to either initiate a Periodic Auction, or alternatively trade 
immediately with one or more orders resting on the Continuous Book. In 
such instances the Periodic Auction Eligible Order would trade 
immediately with the Continuous Book, thereby securing a guaranteed 
execution for the order. However, since Periodic Auction Eligible 
Orders are geared towards participation in Periodic Auctions, with 
attendant price discovery benefits and potential price improvement 
opportunities, such orders would not trade on the Continuous Book 
during a Periodic Auction Period in the security. Although the Exchange 
would not halt or otherwise suspend trading on the Continuous Book 
while conducting a Periodic Auction, the Exchange believes that 
Periodic Auction Eligible Orders that are designed for use in Periodic 
Auctions should generally preference trading in ongoing auctions over 
trading on the Continuous Book.
    The time-in-force included on a Periodic Auction Eligible Order 
would also need to allow the order to be entered and remain on the 
Periodic Auction Book during the course of a Periodic Auction. As a 
result, there would be certain limitations on the entry of Periodic 
Auction Eligible Orders with a time-in-IOC or fill-or-kill (``FOK''). 
An IOC order is defined in BYX Rule 11.9(b)(1) as a limit order that is 
to be executed in whole or in part as soon as such order is received. 
Thus, under the ordinary terms of an IOC order, if such an order were 
to initiate a Periodic Auction, it would generally not be available for 
later execution at the end of any Periodic Auction Period. To ensure 
that IOC orders that initiate a Periodic Auction are eligible to 
participate in the auction's eventual execution, the Exchange therefore 
proposes that Periodic Auction Eligible Orders entered with a time-in-
force of IOC must include an instruction pursuant to Proposed Rule 
11.25(b) not to cancel the order during a Periodic Auction Period if it 
is marketable at the Periodic Auction Book Price.\30\ Such Periodic 
Auction Eligible Orders would be handled in a manner consistent with 
that described above with respect to Periodic Auction Only Orders. 
Similarly, an FOK order is defined in BYX Rule 11.9(b)(6) as a limit 
order that

[[Page 70682]]

is to be executed in its entirety as soon as it is received and, if not 
so executed, cancelled. The Exchange is not proposing to support the 
use of FOK orders in Periodic Auctions, and therefore Periodic Auction 
Eligible Orders would not be able to be entered with a time-in-force of 
FOK.\31\
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    \30\ Periodic Auction Eligible Orders will be rejected if they 
are entered with a time-in-force of IOC but do not contain an 
``lock-in'' instruction pursuant to Proposed Rule 11.25(b).
    \31\ Although the Exchange is not proposing any special handling 
for IOC or FOK orders that are entered as Continuous Book Orders, 
the Exchange notes that such orders would not participate in 
Periodic Auctions as they would never be posted to the Continuous 
Book.
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    As previously explained, the Exchange believes that Users seeking 
liquidity in Periodic Auctions may wish to use such auctions to receive 
an execution at prices at or better than the midpoint of the NBBO. The 
Exchange currently offers functionality that allows members entering 
Mid-Point Peg Orders on the Continuous Book to forgo an execution in 
situations where the NBBO is locked.\32\ However, in order to avoid a 
Periodic Auction from being initiated that may not ultimately result in 
an execution during a locked market, Mid-Point Peg Orders that are 
entered with an instruction to not execute when the NBBO is locked 
would not be eligible to be entered as Periodic Auction Eligible 
Orders.\33\ This handling would mirror the handling of Periodic Auction 
Orders, which as proposed could be entered with a midpoint peg 
instruction, but would not include any further instructions that would 
allow the User to elect not to trade during a locked market.
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    \32\ See BYX Rule 11.9(c)(9).
    \33\ This restriction would not apply to Continuous Book Orders. 
Since Continuous Book Orders do not initiate Periodic Auctions, a 
Continuous Book Order entered with these instructions would be able 
to participate in the eventual execution of Periodic Auctions if 
such execution can take place in accordance with the terms of the 
order.
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    Since the Exchange believes that Periodic Auctions may be 
beneficial to market participants trading larger orders that they may 
not want to be executed unless a specified minimum size can be 
satisfied, the Exchange would also allow for Minimum Quantity Orders to 
be entered as Periodic Auction Eligible Orders. As previously 
discussed, the Exchange currently offers two variants of this order 
type. By default, a Minimum Quantity Order would execute upon entry 
against a single order or multiple aggregated orders simultaneously. 
Alternatively, such orders may be entered with an instruction that the 
order not trade with multiple aggregated orders simultaneously, and 
that the minimum quantity condition instead be satisfied by each 
individual order resting on the Continuous Book. As proposed, Minimum 
Quantity Orders, as defined in Rule 11.9(c)(5), may be entered as 
Periodic Auction Eligible Orders only if the order includes the default 
instruction that allows the minimum size specified to be executed 
against one or more contra-side orders--i.e., similar to the proposed 
handling of Periodic Auction Only Orders entered with a minimum 
execution quantity instruction. Orders entered with the alternative 
instruction that requires the minimum size specified to be satisfied by 
each individual contra-side order would not be eligible to be entered 
as Periodic Auction Eligible Orders. As discussed later in this 
proposed rule change, similar restrictions would also apply to 
Continuous Book Orders, which would not participate in Periodic 
Auctions if entered with this alternative instruction.
    Finally, similar to the opening process used to begin trading in a 
security pursuant to BYX Rule 11.23: (1) Discretionary Orders, as 
defined in rule 11.9(c)(10), would be eligible to participate only up 
to their ranked price for buy orders or down to their ranked price for 
sell orders; \34\ and (2) all Pegged Orders and Mid-Point Peg Orders, 
as defined in BYX Rule 11.9(c)(8) and (9), would be eligible for 
execution in Periodic Auctions based on their pegged prices. The 
Exchange believes that this proposed handling is equally relevant to 
Periodic Auctions, and would ensure, where appropriate, that the order 
handling experienced in such Periodic Auctions is familiar to members 
and investors.
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    \34\ The discretionary range of such orders would not be 
considered in Periodic Auctions.
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    Continuous Book Orders. A ``Continuous Book Order'' would be 
defined in Proposed Rule 11.25(a)(2) as an order on the BYX Book that 
is not a Periodic Auction Order. Continuous Book Orders, which may 
participate in the eventual execution of a Periodic Auction but would 
not be able to initiate such an auction, would be handled in the same 
manner as Periodic Auction Eligible Orders solely with respect to 
handling of (1) Discretionary Orders, and (2) Pegged Orders and Mid-
Point Peg Orders, each as discussed in the preceding paragraph. 
Continuous Book Orders would also be subject to the handling discussed 
for Periodic Auction Eligible Orders entered as Minimum Quantity 
Orders, with the caveat that this handling would only apply to 
Continuous Book Orders entered with the default instruction that 
permits the execution of such orders against one or more contra-side 
orders. As proposed, similar to the treatment of Periodic Auction 
Orders--including both Periodic Auction Only Orders and Periodic 
Auction Eligible Orders--Continuous Book Orders entered with the 
alternative instruction that requires the minimum size specified to be 
satisfied by each individual contra-side order would not be included in 
Periodic Auctions. However, rather than prohibiting Users from entering 
Minimum Quantity Orders with this instruction on the Continuous Book, 
where this instruction may still be valuable for investors, the 
Exchange would simply prohibit any orders entered with that instruction 
from participating in the execution of any Periodic Auctions. Finally, 
Continuous Book Orders that are entered as Reserve Orders, as defined 
in Rule 11.9(c)(1), would be eligible to participate in Periodic 
Auctions to the full extent of their displayed size and Reserve 
Quantity.\35\
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    \35\ There are no similar requirements applicable to Periodic 
Auction Eligible Orders since Reserve Orders include a displayed 
portion and therefore would not be eligible for entry as Periodic 
Auction Eligible Orders. As discussed, Periodic Auction Eligible 
Orders, as defined, would include only Non-Displayed Limit Orders.
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iii. Initiation and Publication of Periodic Auction Information
    The Exchange would conduct Periodic Auctions during Regular Trading 
Hours to give market participants an opportunity to obtain liquidity 
during the course of the trading day. Instead of initiating such 
auctions on a set schedule, the Exchange would wait until it has 
executable interest that is eligible to initiate a Periodic Auction, 
thereby ensuring that Periodic Auctions are only performed when it may 
be possible for interested market participants to obtain an execution 
at the end of the Periodic Auction Period. Specifically, as provided in 
Proposed Rule 11.25(c), a Periodic Auction would be initiated in a 
security during Regular Trading Hours when one or more Periodic Auction 
Orders to buy become executable against one or more Periodic Auction 
Orders to sell pursuant to Proposed Rule 11.25.\36\ This would begin a 
Periodic Auction Period of 100 milliseconds

[[Page 70683]]

where the Exchange would match buy and sell orders for potential 
execution.\37\
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    \36\ As proposed, Periodic Auctions would operate alongside 
trading on the Continuous Book. The Exchange has therefore developed 
its system for processing Periodic Auctions with the goal of 
minimizing interference with trading in the continuous market. Thus, 
in rare circumstances where a number of Periodic Auctions could 
potentially be triggered at or around the same time, the Exchange 
may throttle the initiation of such Periodic Auctions if needed to 
maintain appropriate system performance and latency.
    \37\ One relevant exception to this would be for Periodic 
Auctions that would otherwise end after the Regular Trading Session. 
As previously discussed, Periodic Auctions would only be conducted 
during Regular Trading Hours. As a result, such Periodic Auctions 
would be performed at the end of the Regular Trading Session.
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    Once the Periodic Auction Period has begun, the Exchange would 
consolidate any additional Periodic Auction Orders that it receives, 
which would be used to calculate the information disseminated at a 
randomized time thereafter in a Periodic Auction Message.\38\ 
Specifically, at a randomized time in one millisecond intervals after a 
Periodic Auction has been initiated and before the end of the Periodic 
Auction,\39\ the Exchange would disseminate via electronic means a 
Periodic Auction Message that includes two important pieces of 
information about the Periodic Auction: (1) The Periodic Auction Book 
Price,\40\ and (2) and the total number of shares of Periodic Auction 
Orders that are matched at the Periodic Auction Book Price.\41\ With 
these two pieces of information, market participants would be informed 
of both the price at which Periodic Auction Orders would match based on 
current market conditions, and the number of shares of such orders that 
would be matched. The calculation of the Periodic Auction Book Price 
would exclude Continuous Book Orders. Although Continuous Book Orders 
are eligible to trade in a Periodic Auction at the end of the Periodic 
Auction Period, they are potentially subject to execution on the 
Continuous Book prior to the execution of the Periodic Auction. As a 
result, similar to certain information disseminated by other national 
securities exchanges in advance of their auctions,\42\ Continuous Book 
Orders would not be used to calculate the data elements included in the 
Periodic Auction Message. After its initial dissemination, a revised 
Periodic Auction Message would be disseminated in one millisecond 
intervals for the remaining duration of the auction, thereby ensuring 
that market participants maintain a current view of the market with 
which to make appropriate trading decisions throughout the Periodic 
Auction Period.
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    \38\ The ``Periodic Auction Message'' would be defined in 
Proposed Rule 11.25(a)(7) as a message disseminated by electronic 
means that includes information about any matched Periodic Auction 
Orders on the Periodic Auction Book, as described in Rule 11.25(c).
    \39\ With the randomization of sending the message, the initial 
Periodic Auction Message would be disseminated between 0 and 99 
milliseconds following the initiation of the Periodic Auction--e.g., 
immediately upon initiation, at the one millisecond mark, two 
millisecond mark, three millisecond mark, and so forth until the 99 
millisecond mark. The specific time chosen would be entirely random 
for each Periodic Auction.
    \40\ The ``Periodic Auction Book Price'' would be defined in 
Proposed Rule 11.25(a)(5) as the price within the Collar Price Range 
at which the most shares from the Periodic Auction Book would match. 
In the event of a volume-based tie at multiple price levels, the 
Periodic Auction Book Price would be the price that results in the 
minimum total imbalance. In the event of a volume-based tie and a 
tie in minimum total imbalance at multiple price levels, the 
Periodic Auction Book Price would be the price closest to the Volume 
Based Tie Breaker. As calculated, the Periodic Auction Book Price 
would be expressed in the minimum increment for the security unless 
the midpoint of the NBBO establishes the Periodic Auction Book 
Price.
    \41\ Similar to the auction information disseminated by the 
Exchange's affiliate, BZX, for its opening and closing auctions, the 
Periodic Auction Message would be disseminated to market 
participants over the Exchange's proprietary depth-of-book market 
data feeds.
    \42\ For example, the ``Current Reference Price'' disseminated 
ahead of Nasdaq's closing cross is defined as the single price that 
is at or within the current Nasdaq Market Center best bid and offer 
at which the maximum number of shares of MOC, LOC, and IO orders can 
be paired, subject to certain tie-breakers. See Nasdaq Rule 
4754(a)(7)(A). Nasdaq does not include ``Close Eligible Interest'' 
entered on its continuous book in determining the Current Reference 
Price pursuant to Nasdaq Rule 4754(a)(7)(A), nor does it include 
such orders in its dissemination of the number of shares represented 
by MOC, LOC, and IO orders that are paired at the Current Reference 
Price. See Nasdaq Rule 4754(a)(7)(B).
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iv. Determination of Periodic Auction Price
    Periodic Auctions are designed to facilitate meaningful price 
discovery in securities traded on the Exchange throughout the course of 
the trading day. Similar to the operation of opening and closing 
auctions in securities listed on the Exchange's affiliate, Cboe BZX 
Exchange, Inc. (``BZX''),\43\ as well as similar auctions conducted on 
other national securities exchanges, Periodic Auctions would therefore 
be executed at a price that maximizes the number of shares traded in 
the auction within designated auction collars (``Collar Price 
Range'').\44\ Specifically, as provided in Proposed Rule 11.25(d), the 
Periodic Auction Price would be established by determining the price 
level within the Collar Price Range that maximizes the number of shares 
executed between the Continuous Book and Periodic Auction Book in the 
Periodic Auction.\45\
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    \43\ See BZX Rule 11.23(b)(2)(B); (c)(2)(B).
    \44\ The term ``Collar Price Range'' shall mean the more 
restrictive of the Midpoint Collar Price Range, as defined in 
Proposed Rule 11.25(a)(1), and the Protected NBBO. See Proposed Rule 
11.25(a)(1). Notwithstanding the foregoing, if the Collar Price 
Range calculated by the Exchange would be outside of the applicable 
Price Bands established pursuant to the Limit Up-Limit Down Plan, 
the Collar Price Range will be capped at such Price Bands. Id.
    \45\ The calculation of Collar Price Range, as defined in the 
Proposed Rule, is described in more detail in Section V of this 
proposed rule change. As calculated, the Periodic Auction Price 
would be expressed in the minimum increment for the security unless 
the midpoint of the NBBO establishes the Periodic Auction Price.
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    The Exchange would also implement certain ``tie-breakers'' that 
would be used to determine the applicable Periodic Auction Price if 
multiple price levels would satisfy the requirement to maximize the 
number of shares executed in the auction. These tie-breakers would be 
the same as the tie-breakers currently used for opening and closing 
auctions on BZX for that exchange's listed securities. Specifically, in 
the event of a volume-based tie at multiple price levels, the Periodic 
Auction Price would be the price that results in the minimum total 
imbalance--i.e., the price at which the number of any executable shares 
to buy or sell that do not participate in the Periodic Auction is 
minimized.\46\ In the event of a volume-based tie and a tie in minimum 
total imbalance at multiple price levels, the Periodic Auction Price 
would be the price closest to the Volume Based Tie Breaker, which would 
be defined in Proposed Rule 11.25(a)(9) as the midpoint of the NBBO for 
a particular security where the NBBO is a Valid NBBO.\47\
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    \46\ Selecting a price that would minimize the imbalance best 
reflects the value of the security based on the auction's price 
discovery process because it is the price level where the amount of 
buy and sell interest is closest to equal.
    \47\ As is the case on the Exchange's affiliate, BZX, for 
opening and closing auctions for BZX-listed securities, a NBBO would 
be considered a Valid NBBO where: (i) There is both a NBB and NBO 
for the security; (ii) the NBBO is not crossed; and (iii) the 
midpoint of the NBBO is less than the Maximum Percentage away from 
both the NBB and the NBO as determined by the Exchange and published 
in a circular distributed to Members with reasonable advance notice 
prior to initial implementation and any change thereto. See BZX Rule 
11.23(b)(23). Where the NBBO is not a Valid NBBO, the consolidated 
last sale price would be used. Id.
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v. Determination of Collar Price Range
    As discussed, the Periodic Auction Price would be constrained by 
auction collars that are designed to ensure that the execution of a 
Periodic Auction takes place at a price that is reasonably related to 
the market for the security and consistent with applicable regulatory 
requirements. While Periodic Auctions are designed to balance supply 
and demand through a competitive auction process, the Collar Price 
Range would restrict trading from occurring at prices that are far away 
from the market. Specifically, as proposed, the term ``Collar Price 
Range'' would be defined in Proposed Rule 11.25(a)(1) as the more 
restrictive of the Midpoint Collar Price

[[Page 70684]]

Range and the Protected NBBO.\48\ The Collar Price Range would be 
similar to the auction collars used today for BZX's opening and closing 
processes, with important differences to account for the fact that 
Periodic Auctions would be subject to the requirements of the Rule 611 
of Regulation NMS (``Order Protection Rule'') and the Plan to Address 
Extraordinary Market Volatility (the ``Limit Up-Limit Down'' or 
``LULD'' Plan). Specifically, Periodic Auctions would be subject to a 
Collar Price Range that is the more restrictive of the Midpoint Collar 
Price Range (described below) and the Protected NBBO. This 
implementation would therefore ensure that such Periodic Auctions are 
executed at a price that is consistent with the requirements of the 
Order Protection Rule as well as the additional protections provided by 
auction collars that are similar to those currently used by the 
Exchanges' affiliate, BZX, for opening and closing auctions in that 
exchange's listed securities. For all Periodic Auctions, the Exchange 
would calculate a Midpoint Collar Price Range to establish an upper and 
lower bound for the execution of such auctions. The Midpoint Collar 
Price Range would mirror the collars currently established for use in 
BZX auctions, and would be defined in Proposed Rule 11.25(a)(3) as the 
range from a set percentage below the Collar Midpoint to above the 
Collar Midpoint,\49\ such set percentage being dependent on the value 
of the Collar Midpoint at the time of the auction. Specifically, the 
Collar Price Range would be determined as follows: (1) Where the Collar 
Midpoint is $25.00 or less, the Collar Price Range would be the range 
from 10% below the Collar Midpoint to 10% above the Collar Midpoint; 
(2) where the Collar Midpoint is greater than $25.00 but less than or 
equal to $50.00, the Collar Price Range would be the range from 5% 
below the Collar Midpoint to 5% above the Collar Midpoint; and (3) 
where the Collar Midpoint is greater than $50.00, the Collar Price 
Range would be the range from 3% below the Collar Midpoint to 3% above 
the Collar Midpoint.
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    \48\ The term ``Midpoint Collar Price Range'' shall mean the 
range from a set percentage below the Collar Midpoint (as defined 
below) to above the Collar Midpoint, such set percentage being 
dependent on the value of the Collar Midpoint at the time of the 
auction, as described below. See Proposed Rule 11.25(a)(3). The 
``Protected NBBO'' is the national best bid or offer that is a 
Protected Quotation. See BYX Rule 1.5(s).
    \49\ The Collar Midpoint would be the Volume Based Tie Breaker 
for all Periodic Auctions. As discussed later in this proposed rule 
change, the Volume Based Tie Breaker would generally be the midpoint 
of the NBBO, except where there is no Valid NBBO.
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    Finally, all Periodic Auctions would be conducted during Regular 
Trading Hours and therefore would be subject to the requirements of the 
LULD Plan. Generally, the LULD Plan sets forth procedures that provide 
for market-wide limit up-limit down requirements to prevent trades in 
individual NMS Stocks from occurring outside of specified Price Bands. 
Consistent with the requirements of the LULD Plan, the Exchange would 
not execute Periodic Auctions at a price that is outside of the 
applicable Price Bands. Thus, if the Collar Price Range calculated by 
the Exchange would be outside of the applicable Price Bands established 
pursuant to the LULD Plan, the Collar Price Range would be capped at 
such Price Bands.
vi. Priority and Execution of Orders
    As discussed, Periodic Auction Orders and Continuous Book Orders 
that are executable at the end of the Periodic Auction Period would be 
executed at the Periodic Auction Price determined pursuant to Proposed 
Rule 11.25(d). Such orders would be executed in accordance with 
Proposed Rule 11.25(e), which describes the allocation model for 
Periodic Auctions. Generally, the allocation model described in this 
rule is intended to encourage active participation of Periodic Auction 
Orders, including participation of larger orders, while ensuring that 
Continuous Book Orders are also able to participate in resulting 
executions, as appropriate, in order to encourage continued liquidity 
on the Continuous Book. First, any displayed Continuous Book Orders 
that are executable at the Periodic Auction Price would be executed in 
price/time priority, thereby encouraging the continued submission of 
displayed orders. Second, after any displayed Continuous Book Orders 
have been executed, the Exchange would execute any Periodic Auction 
Orders that are executable at the Periodic Auction Price. Since 
Periodic Auctions are designed, in part, to facilitate the execution of 
larger orders, such Periodic Auction Orders would be executed in size/
time priority, beginning with the largest order. Finally, any non-
displayed Continuous Book Orders that are executable at the Periodic 
Auction Price would be executed pursuant the normal price-time priority 
allocation used for the execution of orders on the Continuous Book, as 
provided in BYX Rule 11.9(a)(2)(B). All Match Trade Prevention 
modifiers, as defined in BYX Rule 11.9(f), would be ignored as it 
relates to executions occurring during a Periodic Auction.\50\
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    \50\ The Exchange notes that its Match Trade Prevention features 
are designed for use on the Continuous Book, and may complicate the 
execution of an auction that requires the pooling and matching of 
multiple orders against other orders at a market clearing price.
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    Finally, the Exchange notes that, in certain rare circumstances, 
the inclusion of a minimum execution quantity on one or more Periodic 
Auction Orders and/or Continuous Book Orders could potentially result 
in the Exchange being unable to process a Periodic Auction in a timely 
manner. Thus, as provided in Proposed Rule 11.25(f), to prevent 
potential capacity and/or performance issues that may impact both the 
execution of the auction, as well as trading on Continuous Book, in 
such an event the Exchange would cancel the auction after a specified 
number of attempts. Specifically, to prevent potential capacity and/or 
performance issues, the Exchange will cancel a Periodic Auction at the 
end of the Periodic Auction Period if it is unable to successfully 
process such Periodic Auction according to Rule 11.25 after a number of 
attempts determined by the Exchange and published in a circular 
distributed to members.
vii. Regulatory and Other Considerations
    The Exchange would also adopt rule language in the Interpretations 
and Policies to the proposed rule that describes how Periodic Auctions 
would be processed consistent with certain other regulatory 
obligations, including obligations related to member conduct, or 
otherwise to ensure transparent handling in certain specified 
circumstances. These rules would provide additional clarity and 
transparency to members and investors with respect to how the Exchange 
would process Periodic Auctions consistent with relevant obligations 
under the Exchange Act, or as otherwise necessary or appropriate to 
maintain a fair and orderly market on the Exchange.
    First, as explained in Interpretations and Policies .01 to Proposed 
Rule 11.25, the Exchange would not conduct Periodic Auctions during a 
trading halt when such trading is prohibited. If a symbol is halted 
prior to the execution of a Periodic Auction that has already been 
initiated pursuant to Proposed Rule 11.25(c), the Periodic Auction 
would be immediately cancelled without execution, consistent with 
applicable limitations on trading during a halt.

[[Page 70685]]

    Second, as explained in Interpretations and Policies .02 to 
Proposed Rule 11.25, a Periodic Auction would not be initiated during a 
Crossed Market. If the market becomes crossed during a Periodic Auction 
that has already been initiated pursuant to Proposed Rule 11.25(c), and 
remains crossed at the end of the Periodic Auction Period, the Periodic 
Auction would be cancelled without execution.\51\ If the market 
subsequently becomes uncrossed, resting Periodic Auction Orders may 
trigger a Periodic Auction pursuant to Rule 11.25(c).
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    \51\ The Exchange would not immediately cancel the auction as 
crossed markets are typically short-lived and the market may no 
longer be crossed at the end of the Periodic Auction Period, in 
which case the Exchange could successfully execute the auction.
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    Third, Interpretations and Policies .03 to Proposed Rule 11.25 
would detail the proposed handling of orders consistent with Regulation 
SHO. As proposed, all short sale orders designated for participation in 
the Periodic Auction would have to be identified as ``short'' or 
``short exempt'' pursuant to Rule 11.10(a)(5). Rules 201(b)(1)(i) and 
(ii) of Regulation SHO generally requires that trading centers such as 
the Exchange establish, maintain, and enforce written policies and 
procedures 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 the covered security's 
closing price; and (ii) impose this price restriction for the remainder 
of the day and the following day. So as to maintain compliance with 
Rule 201 of Regulation SHO, the Exchange would only execute short sale 
orders (i.e., those not marked short exempt) if the execution would 
take place at a permissible price pursuant to Regulation SHO. 
Specifically, if a security is in a short sale circuit breaker, orders 
marked short will only trade in a Periodic Auction if the Periodic 
Auction Price determined pursuant to Rule 11.25(d) is above the 
national best bid.\52\
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    \52\ This restriction would not apply to orders marked short 
exempt, which are exempted from these restrictions pursuant to Rule 
201(b)(1)(iii)(B) of Regulation SHO. Rule 201(b)(1)(iii)(B) of 
Regulation SHO provides that the policies and procedures required by 
the rule 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.
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    Finally, Interpretations and Policies .04 to Proposed Rule 11.25 
would describe member conduct obligations with respect to the entry of 
Periodic Auction Orders. As proposed, Periodic Auction Orders must be 
entered with the intent to participate in Periodic Auctions. A pattern 
or practice of submitting orders for the purpose of disrupting or 
manipulating Periodic Auctions, including entering and immediately 
cancelling Periodic Auction Orders, would be deemed conduct 
inconsistent with just and equitable principles of trade. The Exchange 
would conduct surveillance to ensure that Users do not inappropriately 
enter Periodic Auction Orders for impermissible purposes, such as to 
gain information about other Periodic Auction Orders that are resting 
on the Periodic Auction Book, or otherwise disrupting or manipulating 
Periodic Auctions.
viii. Examples
    The following examples illustrate the proposed operation of 
Periodic Auctions:

Periodic Auction Initiation

Example 1

NBBO: $10.00 x $10.10
Order 1: Buy 100 shares @ $10.05 Midpoint Peg--Periodic Auction Only/
Eligible
Order 2: Sell 100 shares @ $10.05 Midpoint Peg--Periodic Auction Only/
Eligible

    Periodic Auctions are initiated when one or more Periodic Auction 
Orders to buy are matched with one or more Periodic Auction Orders to 
sell. Therefore, a Periodic Auction is initiated when Order 2 matches 
with Order 1.

Example 2

NBBO: $10.00 x $10.10
Order 1: Buy 100 shares @ 10.05 Midpoint Peg--Continuous Book Order
Order 2: Sell 100 shares @ 10.05 Midpoint Peg--Periodic Auction 
Eligible

    A Periodic Auction is not initiated as Order 1 is a Continuous Book 
Order. Instead, Order 2, which is a Periodic Auction Eligible Order, 
would trade immediately with the Continuous Book and execute 100 shares 
against Order 1 at $10.05.

Example 3

NBBO: $10.00 x $10.10
Order 1: Buy 100 shares @ 10.05 Midpoint Peg--Periodic Auction Only
Order 2: Buy 100 shares @ 10.05 Midpoint Peg--Continuous Book Order
Order 3: Sell 100 shares @ 10.05 Midpoint Peg--Periodic Auction 
Eligible

    A Periodic Auction is not initiated. Instead, Order 3, which is a 
Periodic Auction Eligible Order, would trade immediately with the 
Continuous Book and execute 100 shares against Order 2 at $10.05. 
Although Order 1 is available to initiate a Periodic Auction, a 
Periodic Auction Eligible Order would trade immediately with Continuous 
Book Orders on entry if it can do so instead of initiating a Periodic 
Auction.

Periodic Auction Initiation and Execution

Example 4

NBBO: $10.00 x $10.10
Order 1: Buy 150 shares @ $10.05 Midpoint Peg--Periodic Auction Only
Order 2: Sell 100 shares @ $10.05 Midpoint Peg--Continuous Book Order
Order 3: Sell 100 shares @ $10.05 Midpoint Peg--Periodic Auction 
Eligible

    Auction Initiation: Order 1 is a Periodic Auction Only Order and 
Order 2 is a Continuous Book Order. As a result, when Order 2 is 
entered into the Exchange, it will not initiate a Periodic Auction or 
trade with Order 1 immediately. Instead, a Periodic Auction is 
initiated when Order 3 matches with Order 1.
    Execution: After 100 milliseconds the Periodic Auction would end, 
and orders would be executed in the auction at a price of $10.05, which 
is the price at which the maximum number of shares can be executed. 
Order 1 is the only order to buy and would trade its full size of 150 
shares. Between the available sell orders, Order 3, which is a Periodic 
Auction Eligible Order, would have priority over Order 2, which is a 
Non-Displayed Continuous Book Order. As a result, Order 3 would trade 
its full size of 100 shares, and Order 2 would receive a partial 
execution for 50 shares.

Example 5

NBBO: $10.00 x $10.01
Order 1: Buy 5,000 shares @ $10.01--Periodic Auction Only
Order 2: Sell 1,000 shares @ $10.01--Displayed Continuous Book Order
Order 3: Sell 2,000 @ $10.01--Non-Displayed Continuous Book Order
Order 4: Sell 3,000 @ $10.01--Periodic Auction Eligible

    Auction Initiation: Order 1 is a Periodic Auction Only Order and 
Orders 2 and 3 are Continuous Book Orders. As a result, when Order 2 
and 3 are entered into the Exchange, those orders will not

[[Page 70686]]

initiate a Periodic Auction or trade with Order 1 immediately. Instead, 
a Periodic Auction would be initiated when Order 4 matches with Order 
1.
    Execution: After 100 milliseconds the Periodic Auction would end, 
and orders would be executed in the auction at a price of $10.01, which 
is the price at which the maximum number of shares can be executed. 
Order 1 is the only order to buy and would trade its full size of 5,000 
shares. Between the available sell orders, Order 2, which is a 
Displayed Continuous Book Order, would have priority over Order 4, 
which is a Periodic Auction Eligible Order that in turn has priority 
over Order 3, which is a Non-Displayed Continuous Book Order. As a 
result, Order 2 and Order 4 would each trade their full size of 1,000 
shares and 3,000 shares respectively, and Order 3 would receive a 
partial execution for 1,000 shares.

Periodic Auction Price Calculation

Example 6

NBBO: $10.00 x $10.10
Order 1: Buy 500 shares @ $10.05 Non-Displayed--Periodic Auction Only
Order 2: Buy 300 shares @ $10.04 Non-Displayed--Continuous Book Order
Order 3: Sell 100 shares @ $10.04 Non-Displayed--Periodic Auction 
Eligible
Order 4: Sell 200 shares @ $10.04 Non-Displayed--Periodic Auction 
Eligible

    Auction Initiation: A Periodic Auction would be initiated when 
Order 3 is entered into the Exchange and matches with Order 1.
    Execution: After 100 milliseconds the Periodic Auction would end, 
and orders would be executed in the auction at a price of $10.05. In 
this example, there are two prices at which the maximum number of 
shares can be executed, i.e., $10.04 or $10.05. However, an execution 
at $10.04 would leave a 500 share buy-side imbalance, whereas an 
execution at $10.05 would leave a smaller 200 share buy-side imbalance 
due to the fact that Order 2 cannot participate at that price. As a 
result, the Periodic Auction Price would be $10.05, i.e., the price 
that minimizes the imbalance. Orders 3 and 4 would trade their full 
size of 100 shares and 200 shares, respectively, with Order 1.

Example 7

NBBO: $10.00 x $10.10
Order 1: Buy 500 shares @ $10.05 Non-Displayed--Periodic Auction Only
Order 2: Sell 200 shares @ $10.04 Non-Displayed--Periodic Auction Only

    Auction Initiation: A Periodic Auction would be initiated when 
Order 1 and Order 2, which are both Periodic Auction Only Orders, match 
with each other.
    Execution: After 100 milliseconds the Periodic Auction would end, 
and orders would be executed in the auction at a price of $10.05. In 
this example, there are two prices at which the maximum number of 
shares can be executed, i.e., $10.04 or $10.05, and in both cases there 
would be a buy-side imbalance of 300 shares. As a result, the Periodic 
Auction Price would be the price closest to the Volume Based Tie 
Breaker, i.e., the midpoint price of $10.05. Order 1 would trade 200 
shares with Order 2.

Periodic Auction Message

Example 8

NBBO: $10.00 x $10.10
Order 1: Buy 500 shares @ $10.05 Midpoint--Periodic Auction Only
Order 2: Buy 300 shares @ $10.06 Midpoint--Periodic Auction Eligible
Order 3: Sell 800 shares @ $10.05 Midpoint--Periodic Auction Eligible
New NBBO: $10.02 x $10.10

    Auction Initiation: A Periodic Auction would be initiated when 
Order 3 matches with Orders 1 and 2.
    Auction Message: A Periodic Auction Message would be disseminated 
at a randomized time after the initiation of the auction, showing 800 
shares matched at a price of $10.05. After a new NBBO is established, 
the midpoint orders would be re-priced to the new midpoint of $10.06, 
subject to their limit prices. As a result, Orders 2 and 3 would be re-
priced to $10.06, while Order 1 would remain priced at $10.05 due to 
its lower limit price. The next Auction Message would therefore 
indicate 300 shares matched at a price of $10.06 due to the exclusion 
of Order 1 at the new midpoint.
2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
the requirements of Section 6(b) of the Act,\53\ in general, and 
Section 6(b)(5) of the Act,\54\ in particular, in that it is designed 
to remove impediments to and perfect the mechanism of a free and open 
market and a national market system, to promote just and equitable 
principles of trade, and, in general, to protect investors and the 
public interest and not to permit unfair discrimination between 
customers, issuers, brokers, or dealers. Specifically, the Exchange 
believes that the proposed rule change is consistent with the 
protection of investors and the public interest as it would facilitate 
improved price formation and provide additional execution opportunities 
for investors, particularly in securities that may suffer from limited 
liquidity, including thinly-traded securities.
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    \53\ 15 U.S.C. 78f(b).
    \54\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    Periodic Auctions would supplement existing opening and closing 
auctions by consolidating buy and sell interest in a price forming 
auction when investors seek liquidity during the course of the trading 
day. Although liquidity is frequently available in size around the open 
and close of trading, liquidity may be more limited intraday. Thus, 
investors looking to trade in size may have issues getting their orders 
filled during the trading day, or may receive inferior execution 
quality due to the market impact of trading larger blocks of equity 
securities in a market with limited liquidity. As proposed, Periodic 
Auctions would allow the Exchange to consolidate volume from market 
participants, thereby increasing the liquidity available to investors. 
By creating a deeper pool of liquidity for the intraday execution of 
orders, including block-sized liquidity, the Exchange believes that 
members and investors would be able to secure better quality 
executions. In addition, Periodic Auctions would perform an important 
price discovery function, which the Exchange believes may be 
particularly valuable in thinly-traded securities that often trade with 
significantly wider spreads that negatively impact the ability for 
investors to ascertain market value,\55\ as well as high-priced or 
other securities that may also trade with wider spreads today. The 
proposed introduction of Periodic Auctions would therefore contribute 
to a fair and orderly market in equity securities traded on the 
Exchange.
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    \55\ See Letter from Adrian Griffiths, supra note 6, which 
illustrates the wider spreads that often impact trading in thinly-
traded securities. The Exchange believes that Periodic Auctions 
would improve price discovery in securities that tend to trade with 
wider spreads. As explained in that letter, volume in thinly-traded 
securities often migrates to off-exchange venues where market 
participants can trade without publicly displaying their orders and 
while potentially minimizing market impact.
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i. Periodic Auctions in Europe
    The Exchange's affiliate, Cboe Europe, has had a successful history 
with periodic auctions in the European equities market, and the 
proposed introduction of Periodic Auctions for the trading of U.S. 
equity securities is based, in part, on the successful implementation 
of a similar product offered by Cboe Europe. As illustrated

[[Page 70687]]

in Chart A, Cboe Europe's periodic auction book has grown to about 2%--
2.5% of notional value traded on European equities exchanges since its 
introduction in October 2015. Indeed, such periodic auctions now 
account for an average daily value traded (``ADVT'') of about [euro]1 
billion, with two months in Q1 2020 actually exceeding this threshold, 
reflecting the value that this offering has provided to market 
participants that trade European equities.
[GRAPHIC] [TIFF OMITTED] TN05NO20.007

[GRAPHIC] [TIFF OMITTED] TN05NO20.008

    This growth in Cboe Europe's periodic auction offering has promoted 
price improvement opportunities, with an analysis of periodic auctions 
conducted by Cboe Europe for Q1 2020 showing such periodic auctions 
trading about 85% of value traded at the midpoint. Although the 
Exchange recognizes that there are important differences in market 
structure between the U.S. and European equities markets, as well as 
relevant design differences between the two products, the Exchange 
believes that U.S. investors may receive similar benefits from its 
proposed introduction of Periodic Auctions. Moreover, the Exchange 
believes that such innovation should take preference over other 
regulatory approaches that may impede future innovation.
ii. Periodic Auction Proposal
    As discussed in detail in the paragraphs that follow, Periodic 
Auctions are designed to improve the investor experience for market 
participants that trade U.S. equities, and the Exchange believes that 
this product may therefore contribute to a free and open market and 
national market system. Specifically, Periodic Auctions, as designed, 
would provide investors

[[Page 70688]]

with an innovative mechanism with which to secure liquidity intraday, 
providing additional price improvement opportunities, and allowing 
market participants to reduce risks that may be associated with 
displaying orders on a traditional limit order book. As such, Periodic 
Auctions may improve market quality in U.S. equity securities traded on 
the Exchange, and these benefits may be even more pronounced in 
securities that currently trade with diminished market quality. The 
paragraphs that follow addresses each aspect of the Periodic Auction 
proposal in turn.
    The Exchange believes that it is consistent with the protection of 
investors and the public interest to introduce Periodic Auction Only 
Orders and Periodic Auction Eligible Orders to facilitate trading in 
the Periodic Auctions. Use of these order types would be voluntary, and 
market participants would be able to determine whether and how to 
participate in Periodic Auctions using these order types. Specifically, 
while both forms of Periodic Auction Orders would be eligible to 
initiate Periodic Auctions, Periodic Auction Only Orders would allow 
firms to indicate that they are seeking liquidity solely in Periodic 
Auctions, while Periodic Auction Eligible Orders would allow firms to 
also seek liquidity on the Continuous Book before and after the 
execution of a Periodic Auction. The Exchange believes that it is 
appropriate to offer these two methods of initiating Periodic Auctions 
so that market participants can decide whether to use Periodic Auctions 
as the sole means of sourcing liquidity, or as an additional means of 
accessing liquidity if an order entered onto the Continuous Book has 
not been executed.
    Periodic Auction Only Orders would provide a means for Users to 
indicate that they solely wish to have their order executed in a 
Periodic Auction. Since Periodic Auctions would only take place during 
the Regular Trading Session, Periodic Auction Only Orders would be 
accepted with a time-in-force of RHO (either during or outside of 
Regular Trading Hours), or IOC (solely during Regular Trading Hours). 
If entered with a time-in-force of IOC, a Periodic Auction Only Order 
would also have to be entered with an instruction to ``lock-in'' the 
order to avoid situations where a Periodic Auction Only Order initiates 
an auction and then is immediately cancelled prior to the execution of 
that auction. Periodic Auction Only Orders are not eligible to trade on 
the Continuous Book and therefore must include instructions that would 
allow the order to be executed in a Periodic Auction. The requirement 
to ``lock-in'' the order during the course of a Periodic Auction if the 
order is marketable at the Periodic Auction Book Price is designed to 
allow a User to specify that they are only interested in participating 
in a Periodic Auction if they can do so immediately, while ensuring 
that they are actually eligible to participate in the execution of that 
auction, if possible. Without this requirement, a Periodic Auction 
could be initiated even though the order responsible for initiating 
that auction, by its terms, would not be eligible to participate at the 
end of the Periodic Auction Period, which would potentially be to the 
detriment both of the User entering the order and any Users that 
submitted contra-side orders to trade with it under the assumption that 
such interest was available. The Exchange believes that the proposed 
requirements would benefit Users that are looking for a speedy 
execution in Periodic Auctions, while also ensuring that Periodic 
Auction Only Orders entered with a time-in-force of IOC can trade at 
the end of the Periodic Auction Period.
    The Exchange would also allow Users to include certain specified 
instructions on their Periodic Auction Only Orders. Specifically, such 
orders would be accepted with minimum execution quantity and pegging 
instructions. The Exchange believes that the Periodic Auction Only 
Order may be particularly valuable for market participants that have 
larger orders to be executed in Periodic Auctions that they may not be 
willing expose for trading in the continuous market. As illustrated in 
Cboe's commenter letter in response to the Commission's statement on 
thinly-traded securities,\56\ liquidity is often more limited in these 
securities, and as such market participants often look to off-exchange 
venues that may be able to meet their liquidity needs without 
displaying orders in the public market, thereby limiting the market 
impact of their trading activity. The Exchange believes that market 
participants that are looking for liquidity in size may find Periodic 
Auctions to be a valuable means of sourcing needing liquidity without 
the potential risks of displaying their orders for execution.
---------------------------------------------------------------------------

    \56\ See Letter from Adrian Griffiths, supra note 6.
---------------------------------------------------------------------------

    Given the potential benefits to larger orders, the Exchange would 
permit Users to specify a minimum execution quantity for their Periodic 
Auction Only Orders. A Periodic Auction Only Order entered with a 
minimum execution quantity would be executed in a Periodic Auction only 
if the minimum size specified can be executed against one or more 
contra-side Periodic Auction Orders. The Exchange offers a Minimum 
Quantity Order on the Continuous Book today. The proposed instruction 
that could be attached to a Periodic Auction Only Order is similar to 
the current Minimum Quantity Order but would only permit the default 
handling of that order type, and would not allow a member to 
alternatively specify that the minimum quantity condition be satisfied 
by each individual contra-side order. Periodic Auction Eligible Orders 
and Continuous Book Orders entered as Minimum Quantity Orders would be 
subject to a similar restriction.
    In addition, in light of the fact that market participants often 
value midpoint executions, or may wish to receive executions at other 
prices based on the applicable national best bid or offer (``NBBO''), 
the Exchange would also allow Users to enter a pegging instruction for 
such orders. Periodic Auction Only Orders would therefore accommodate 
instructions that the order is to be pegged to either the midpoint or 
same side of the market. As is the case for orders entered for trading 
on the Continuous Book, Periodic Auction Only Orders entered with a 
primary peg instruction would be pegged to the NBBO, with or without an 
offset, provided that only aggressive offsets would be permitted given 
the fact that Periodic Auctions would be restricted to trading within 
the Protected NBBO and would not be eligible to trade at inferior 
prices. Although the Exchange would not generally offer special order 
handling instructions for Periodic Auction Only Orders, the Exchange 
believes that midpoint and primary peg instructions, as described, 
would allow Users to more accurately capture their trading intent, and 
may therefore promote more active use of Periodic Auctions as a means 
of sourcing liquidity for such orders.
    With respect to Periodic Auction Eligible Orders, the Exchange 
would allow Users to include an instruction on non-displayed orders 
entered to trade on the Continuous Book that would allow such orders to 
initiate a Periodic Auction if executable against contra-side Periodic 
Auction Orders. The Exchange would not allow Users to enter displayed 
orders as Periodic Auction Eligible Orders as such Periodic Auction 
Eligible Orders would not be available for execution during an ongoing 
Periodic Auction. As a result, displayed orders, which are disseminated 
to the market and subject to firm quote requirements under Rule

[[Page 70689]]

602(b)(2) of Regulation NMS,\57\ would not be able to be entered as 
Periodic Auction Eligible Orders. However, such displayed orders could 
still participate in Periodic Auctions as Continuous Book Orders, and 
would receive execution priority when executed in that manner.
---------------------------------------------------------------------------

    \57\ See 17 CFR 242.602(b)(2).
---------------------------------------------------------------------------

    As discussed in the purpose section of the proposed rule change, 
the time-in-force included on a Periodic Auction Eligible Order would 
need to allow the order to remain executable during the course of a 
Periodic Auction. The Exchange has therefore proposed to: (1) Only 
allow IOC orders to be entered as Periodic Auction Eligible Orders if 
such orders include an instruction not to cancel the order during a 
Periodic Auction Period; and (2) disallow FOK orders from being entered 
as Periodic Auction Orders. The Exchange believes that both of these 
requirements are consistent with just and equitable principles of trade 
as they are designed to ensure that a Periodic Auction Eligible Order, 
which as discussed would be eligible for the initiation of a Periodic 
Auction, would not be prevented from participating in the eventual 
execution of such Periodic Auction due to a time-in-force that 
contemplates the order either being executed or cancelled immediately 
on entry. As discussed with respect to Periodic Auction Only Orders, 
without this requirement, a Periodic Auction could be initiated even 
though the order responsible for initiating that auction, by its terms, 
would not be eligible to participate at the end of the Periodic Auction 
Period, which would potentially be to the detriment both of the User 
entering the order and any Users that submitted contra-side orders to 
trade with it under the assumption that such interest was available.
    Nevertheless, the Exchange believes that some Users may find it 
valuable to enter IOC orders as Periodic Auction Eligible Orders. 
Although such Users may be looking for a speedy execution, and would 
therefore generally prefer an execution on entry, or not at all, they 
may be willing to wait 100 milliseconds for a potential execution in a 
Periodic Auction, instead of having the order cancelled immediately. 
The Exchange would therefore allow Users to signal their intent to 
trade in this manner by entering the IOC order with an instruction that 
it should not be cancelled during a Periodic Auction. If entered in 
this manner, a Periodic Auction Eligible Order may trade immediately on 
entry on the Continuous Book, whether in full or in part, or may 
alternatively participate in a Periodic Auction, subject to 
cancellation no later than the end of any Periodic Auction Period. The 
Exchange does not anticipate the same use case for FOK orders, which 
contain an additional condition that requires the order to be 
executable in full, and would therefore restrict their ability to be 
entered as Periodic Auction Eligible Orders.
    The Exchange would also not accept Mid-Point Peg Orders entered as 
Periodic Auction Eligible Orders if the Mid-Point Peg Order is entered 
with an instruction to not execute when the NBBO is locked. If the 
Exchange permitted Mid-Point Peg Orders with this instruction to be 
entered as Periodic Auction Eligible Orders, those orders could 
initiate a Periodic Auction but would not be available for the 
auction's eventual execution if the market subsequently becomes locked 
at that time. The Exchange believes that the proposed handling is 
consistent with just and equitable principles of trade as the Exchange 
wishes to avoid the potential for such orders to initiate a Periodic 
Auction that may ultimately not execute due to the inclusion of this 
condition. Periodic Auction Eligible Orders are designed to initiate 
Periodic Auctions and may encourage other Users to enter orders that 
could participate in the auction's execution. As a result, the Exchange 
believes that such orders should reflect trading interest that does not 
include unnecessary conditions. Users that wish to use Mid-Point Peg 
Orders with this instruction would still be eligible to participate in 
Periodic Auctions as Continuous Book Orders, which are able to 
participate in the eventual execution of a Periodic Auction, but would 
not initiate such auctions.
    Similar to the proposed handling of Periodic Auction Only Orders, 
the Exchange would allow Periodic Auction Eligible Orders to be entered 
as Minimum Quantity Orders, but would only permit such orders to be 
entered with the default handling of that instruction. That is, Minimum 
Quantity Orders entered as Periodic Auction Eligible Orders would 
execute only if the minimum size specified can be executed against one 
or more contra-side Periodic Auction Orders or Continuous Book Orders. 
Although the Exchange does offer an alternative instruction that 
permits the User to request that the Exchange only execute the order 
against a single contra-side order, such handling is designed primarily 
for use on the Continuous Book, and would complicate the execution of 
Periodic Auctions.\58\ For similar reasons, Minimum Quantity Orders are 
excluded from the Exchange's opening process for securities traded 
pursuant to unlisted trading privileges. However, as discussed, the 
Exchange believes that Users participating in Periodic Auctions may 
value the ability to specify a minimum quantity, and the Exchange has 
therefore proposed to allow such functionality for Periodic Auction 
Eligible Orders so long as the User is willing for those orders to be 
executed against one or more contra-side orders. The Exchange believes 
that this strikes the right balance between allowing Users to ensure 
that they only trade in a Periodic Auction if their minimum quantity 
criteria can be met, while excluding instructions that could 
unnecessarily complicate the execution of Periodic Auctions.
---------------------------------------------------------------------------

    \58\ See BYX Rule 11.23(a)(2).
---------------------------------------------------------------------------

    In addition, the Exchange would specify handling for Discretionary 
Orders, Pegged Orders, and Mid-Point Pegged Orders that are entered as 
Periodic Auction Eligible Orders. Including this information in the 
rule would increase transparency around the operation of the Exchange 
and ensure that Users are properly informed about how orders with these 
instructions would be handled in Periodic Auctions. The same handling 
is currently applied to the Exchange's opening process for securities 
traded pursuant to unlisted trading privileges, and treating these 
orders in the same manner for purposes of Periodic Auctions would 
ensure a consistent and familiar experience for market participants 
that enter such orders on the Exchange. The Exchange therefore believes 
that these proposed rules are consistent the maintenance of a fair and 
orderly market.
    The Exchange also believes that it is consistent with just and 
equitable principles of trade to allow Continuous Book Orders, i.e., 
orders that are not entered as either Periodic Auction Only Orders or 
Periodic Auction Eligible Orders, to participate in any Periodic 
Auction that results in an execution. Although Continuous Book Orders 
would not initiate a Periodic Auction, such orders would be eligible to 
participate in the resulting execution, thereby facilitating additional 
liquidity for those orders without disrupting their ability to trade 
normally during the course of the auction. Continuous Book Orders would 
remain on the Continuous Book and subject to potential execution during 
a Periodic Auction Period, but would be included in the final 
determination of the Periodic Auction

[[Page 70690]]

Price, and participate in any resulting execution. Although the 
Exchange believes that a number of Users may wish to use Periodic 
Auction Orders that are specifically designed for participation in 
Periodic Auctions and have the ability to initiate those auctions, the 
Exchange also believes that Periodic Auctions would be valuable to 
Users that wish primarily to trade on the Continuous Book but may be 
able to secure an execution in a Periodic Auction if possible. As a 
result, Continuous Book Orders would generally be eligible to trade in 
Periodic Auctions at the end of the auction process, except in the case 
of Minimum Quantity Orders entered with the alternative instruction 
that requires the minimum size specified to be satisfied by each 
individual contra-side order.\59\
---------------------------------------------------------------------------

    \59\ As discussed in the following paragraph, such orders are 
not compatible with Periodic Auctions, and therefore would not 
participate in the execution of such auctions.
---------------------------------------------------------------------------

    Such Continuous Book Orders would be subject to similar handling to 
Periodic Auction Eligible Orders that may also trade on the Continuous 
Book in addition to Periodic Auctions, including the same handling 
discussed above with respect to Discretionary Orders, Pegged Orders, 
and Mid-Point Peg Orders. The Exchange believes that this handling is 
consistent with just and equitable principles of trade as it would 
ensure consistent treatment of similar orders traded in Periodic 
Auctions. In addition, Continuous Book Orders that are entered as 
Minimum Quantity Orders would be subject to similar but not identical 
handling to Periodic Auction Eligible Orders. Given the value of 
Minimum Quantity Orders that include the alternative instruction that 
allows a User to specify that the minimum size specified be satisfied 
by each individual contra-side order, Users would continue to be able 
to use this instruction for trading on the Continuous Book. However, 
such orders, which would not be permitted to be entered as Periodic 
Auction Orders, would similarly not be able to participate in Periodic 
Auctions as Continuous Book Orders. Users that wish to include a 
minimum quantity on their orders could participate in Periodic Auctions 
as either Periodic Auction Only Orders, Periodic Auction Eligible 
Orders, or Continuous Book Orders, provided that for each of these 
order types, the order must be willing to trade against one or more 
contra-side orders. As discussed, the Exchange believes that this 
treatment is necessary in order to offer a minimum quantity instruction 
in an auction that pools interest and executes such interest at a 
single price.
    The Exchange also believes that the proposed handling of Continuous 
Book Orders entered as Reserve Orders is consistent with the 
maintenance of a fair and orderly market as it will ensure a familiar 
and consistent experience for market participants that trade on the 
Exchange. Although Periodic Auction Eligible Orders must be non-
displayed and therefore cannot be entered as a Reserve Order that, by 
rule, includes both a displayed portion and non-displayed portion, the 
proposed handling for Continuous Book Orders is the same as the 
handling applied to the Exchange's opening process securities traded 
pursuant to unlisted trading privileges. Thus, similar to the treatment 
of Discretionary Orders, Pegged Orders, and Mid-Point Peg Orders, 
detailing the proposed handling of Reserve Orders would both increase 
operational transparency and ensure consistent and familiar treatment 
of similar orders on the Exchange.
    Periodic Auctions would be initiated throughout Regular Trading 
Hours when Periodic Auction Orders entered by Users are executable 
against each other, thereby ensuring that the initiation of an auction 
is tied to demonstrated interest from both buyers and sellers in the 
security. Once the Exchange has matched two or more Periodic Auction 
Orders in this manner, a Periodic Auction Period of 100 milliseconds 
would begin to allow orders from additional market participants to 
participate in the execution of the Periodic Auction. The fixed 100-
millisecond auction length is based on the maximum auction duration 
used for periodic auctions conducted by Cboe Europe today.\60\ Based on 
the Exchange's affiliates experience operating auctions for the trading 
of European equities, the Exchange believes that the proposed auction 
length would facilitate the prompt processing and execution of Periodic 
Auctions, while continuing to provide time for interested market 
participants to enter orders to participate in the auction.
---------------------------------------------------------------------------

    \60\ Cboe Europe randomizes the length of the auction rather 
than its dissemination of the auction message. As a result, periodic 
auctions conducted by Cboe Europe would be for a maximum duration of 
100 milliseconds, but could also be for a shorter duration.
---------------------------------------------------------------------------

    To facilitate the pooling of Periodic Auction Orders during this 
period, the Exchange would publish information about the auction, 
including (1) an indicative Periodic Auction Book Price that reflects 
price at which the Periodic Auction could be executed, counting only 
Periodic Auction Orders and excluding Continuous Book Orders that may 
be subject to execution prior to the end of the Periodic Auction 
Period; and (2) the total number of shares of Periodic Auction Orders 
that are matched at the Periodic Auction Book Price. This information 
would be published beginning at a randomized time in one millisecond 
intervals, and would be refreshed in one millisecond intervals 
thereafter as additional orders are entered or cancelled, or other 
changes to market conditions are made that could impact the Periodic 
Auction Book Price. The Exchange believes that it is consistent with 
the protection of investors and the public interest to publish this 
information as it may inform potential trading in periodic auctions and 
encourage additional order flow to be entered to participate in such 
auctions. The Exchange also believes that sending out the initial 
dissemination at a randomized time after Periodic Auction Orders have 
been matched would facilitate the operation of a fair and orderly 
market. This handling would allow additional Periodic Auction Orders 
received during this interim period to be pooled in the initial 
dissemination of auction information. In addition, since market 
participants would not know how much time is left in the Periodic 
Auction Period, firms would be incentivized to respond quickly with 
Periodic Auction Orders to participate in the Periodic Auction, rather 
than potentially waiting until the end of the auction, which may reduce 
the value of the information proposed to be disseminated to investors 
and may impact price discovery.
    Once the 100 millisecond Periodic Auction Period has ended, the 
Exchange would calculate the execution price of the auction, i.e., the 
Periodic Auction Price, and execute Periodic Auction Orders and 
Continuous Book Orders that are eligible to trade at that price. The 
Exchange believes that the proposed methodology for determining the 
Periodic Auction Price is consistent with just and equitable principles 
of trade. Generally, the proposed methodology for calculating the 
Periodic Auction Price is designed to allow Periodic Auctions to 
facilitate price discovery while maintaining important investor 
protections and assuring compliance with applicable regulations. Given 
the important price formation function of these auctions, the Exchange 
would use logic for pricing Periodic Auctions that largely mirrors the 
logic used by its affiliate, BZX, for

[[Page 70691]]

opening and closing auctions in that exchange's listed securities.
    Specifically, the Exchange would seek to execute Periodic Auctions 
at a price that maximizes the number of shares that can trade in the 
auction, subject to specified price collars that would limit executions 
at prices that are not reasonably related to the price of the security 
established by the market. The applicable price collars would also be 
based on the auction collars used for BZX opening and closing auctions, 
except that trading would be further limited by applicable LULD Price 
Bands and the Protected NBBO, as required pursuant to applicable 
regulatory requirements.\61\ That is, the auction collars would 
generally be the same as those used for BZX auctions, but could be 
narrowed by applicable regulatory requirements.
---------------------------------------------------------------------------

    \61\ As discussed in the purpose section of this proposed rule 
change, both the requirements of the LULD Plan and the Order 
Protection Rule apply to transactions executed during Regular 
Trading Hours. Although opening and closing auctions are generally 
exempt from these requirements, there are currently no exemptions 
that would apply to Periodic Auctions that perform a similar role in 
facilitating price discovery.
---------------------------------------------------------------------------

    Finally, the price calculation would be subject to tie-breakers 
that are consistent with those used for BZX opening and closing 
auctions in situations where there is a volume-based tie at multiple 
price levels. These tie-breakers would help ensure the selection of a 
meaningful Periodic Auction Price by selecting the price that would 
minimize the potential imbalance between supply and demand, and then 
favoring prices closer to a Volume Based Tie Breaker that is generally 
the midpoint of the NBBO. In sum, the proposed calculation of the 
Periodic Auction Price would allow the Exchange to appropriately 
balance supply and demand in Periodic Auctions and facilitate robust 
price formation similar to opening and closing auctions.
    After the Exchange determines the Periodic Auction Price, any 
Periodic Auction Orders or Continuous Book Orders that are eligible for 
execution at that price would be executed based on a special allocation 
methodology designed for use in Periodic Auctions. First, in order to 
continue to incentivize the entry of displayed orders on the Exchange, 
Continuous Book Orders that are displayed on the Continuous Book would 
be executed first in price/time priority. Although the Exchange is 
proposing to introduce Periodic Auctions to incentivize additional 
liquidity, the Exchange believes that it is important to continue to 
encourage the entry of displayed orders on the Continuous Book. 
Displayed orders entered in the public market contribute to price 
formation, and are used as a reference price for the execution of 
orders on other venues. As a result, the Exchange's proposal to 
introduce Periodic Auctions is designed to continue to encourage the 
entry of displayed orders that would both trade on the Continuous Book 
and simultaneously benefit from priority when executed in a Periodic 
Auction.
    Second, after Continuous Book Orders displayed on the Continuous 
Book have been executed, Periodic Auction Orders would be executed in 
size/time priority. As previously noted, the Exchange believes that 
Periodic Auctions may be valuable for investors that are seeking 
liquidity in size. As a result, the priority methodology employed by 
the Exchange for Periodic Auction Orders would preference larger 
orders, which the Exchange believes may contribute to greater depth in 
Periodic Auctions. In turn, the liquidity provided by these larger 
orders would contribute to the execution of smaller orders that may 
also participate in Periodic Auctions, thereby facilitating the 
execution of all orders, both large and small, that seek liquidity in 
such auctions, and furthering execution opportunities for investors 
that trade on the Exchange.
    Finally, non-displayed Continuous Book Orders would be executed 
last in priority. Unlike displayed orders entered on the Continuous 
Book, or Periodic Auction Orders that contribute to important pricing 
information disseminated to market participants during the course of a 
Periodic Auction, non-displayed orders entered on the Continuous Book 
do not contribute to pre-execution price formation.\62\ As a result, 
while these orders would be eligible to trade in Periodic Auctions, 
where they may benefit from additional execution opportunities, they 
would be subject to the lowest priority among Periodic Auction Orders 
and Continuous Book Orders. In addition, since these orders are not 
specifically seeking liquidity in Periodic Auctions, and would 
participate in Periodic Auctions solely as an additional source of 
liquidity, priority within this band would be determined based on the 
normal execution priority afforded to such orders on the Continuous 
Book. The Exchange believes that this approach is consistent with just 
and equitable principles of trade as it would ensure that non-displayed 
Continuous Book Orders receive the priority that they would normally be 
afforded for executions on the Continuous Book.
---------------------------------------------------------------------------

    \62\ Non-displayed orders would contribute to price formation at 
the end of a Periodic Auction as they would be considered in the 
determination of the Periodic Auction Price.
---------------------------------------------------------------------------

    Similar to the Exchange's opening process for securities traded 
pursuant to unlisted trading privileges,\63\ all Match Trade Prevention 
modifiers, as defined in BYX Rule 11.9(f), would be ignored as it 
relates to executions occurring during a Periodic Auction. The 
Exchange's Match Trade Prevention modifiers are designed to allow Users 
to better manage order flow and prevent certain undesirable executions 
on the Continuous Book. However, this functionality would complicate 
the processing of Periodic Auctions, where orders are pooled together 
and executed at a price that balances supply and demand in the auction. 
As a result, the Exchange believes that ignoring Match Trade Prevention 
modifiers in Periodic Auctions, similar to the handling currently used 
by the Exchange for its opening process, is consistent with the 
maintenance of a fair and orderly market in securities traded in such 
Periodic Auctions.
---------------------------------------------------------------------------

    \63\ See BYX Rule 11.23(b).
---------------------------------------------------------------------------

    The Exchange also believes that it is consistent with the 
maintenance of a fair and orderly market to cancel a Periodic Auction 
that cannot be completed after a specified number of attempts 
communicated to members. As discussed in the purpose section of this 
proposed rule change, there may be rare circumstances where the 
inclusion of a minimum execution quantity on one or more Periodic 
Auction Orders and/or Continuous Book Orders may result in the Exchange 
being unable to process a Periodic Auction in a timely manner. To 
prevent potential capacity and/or performance issues that may impact 
both the execution of the auction, as well as trading on Continuous 
Book, the Exchange would cancel the auction after a specified number of 
attempts, as determined by the Exchange, rather than continuing to 
attempt to complete the auction ad infinitum when there may be no 
possibility for eventual execution, and no guarantee that such 
execution could be determined and processed in a timely fashion. While 
the Exchange believes that these situations are likely to be 
infrequent, the proposed handling would serve to eliminate certain 
potential performance issues, and including this language in the rule 
would add additional transparency around the operation of the Exchange.
    Finally, the Exchange believes that the proposed language being 
codified in the Interpretations and Policies to the proposed rule is 
consistent with the

[[Page 70692]]

Exchange Act and the rules and regulations adopted thereunder. As 
proposed, these rules would include language that identifies how 
Periodic Auctions would be conducted during a crossed market, and 
consistent with applicable regulatory requirements related to handling 
of trading halts and Regulation SHO. Such rules would also describe 
appropriate standards of member conduct, consistent with the Exchange's 
obligations under the Act to regulate and surveil its market. The 
proposed rules included in Interpretations and Policies .01-.03 would 
ensure that: (1) Periodic Auctions do not take place when their 
execution may be complicated by the existence of a crossed market that 
could interfere with the auction's price discovery function, or when 
such execution would not be permissible due to a trading halt in a 
security; \64\ and (2) the execution in Periodic Auctions of any short 
sale orders that are not marked ``short exempt'' would only take place 
at a permissible price when the security is in a short sale circuit 
breaker pursuant to Rule 201 of Regulation SHO. Further, the proposed 
rules included in Interpretations and Policies .04 would provide 
additional guidance to Users with respect to conduct that would be 
considered inconsistent with just and equitable principles of trade. 
The Exchange intends to conduct appropriate surveillance of its members 
to ensure that their participation in Periodic Auctions is done in a 
manner that is consistent with such rules. As a result, these rules 
would ensure that orders Periodic Auctions would be processed in a 
manner that is consistent with applicable regulatory obligations and 
the maintenance of a fair and orderly market in securities traded on 
the Exchange.
---------------------------------------------------------------------------

    \64\ Although Rule 611(b)(4) of Regulation NMS provides an 
exception from the trade-through requirements of that rule for 
situations where a protected bid is crossed with a protected offer, 
the Exchange believes that market participants may not desire an 
execution in a Periodic Auction during periods when the market is 
crossed.
---------------------------------------------------------------------------

iii. Benefits for Thinly-Traded Securities
    As mentioned in the purpose section of this proposed rule change, 
the Exchange believes that its proposed introduction of Periodic 
Auctions is responsive to the Statement that the Commission issued in 
October 2019 to address market quality concerns in thinly-traded 
securities.\65\ Specifically, the Periodic Auction proposal is designed 
to improve liquidity and price formation in thinly-traded and other 
securities that suffer from diminished market quality, while also 
allowing the Exchange to better compete with off-exchange venues that 
currently offer features that investors may find beneficial for 
sourcing liquidity when displayed liquidity in the public markets is 
more scarce. Cboe offered its thoughts in response to the Statement in 
a comment letter submitted to the Commission on December 20, 2019. As 
stated in that comment letter, Cboe believes that innovation by 
national securities exchanges, rather than potentially harmful 
regulatory changes that favor a limited segment of the market, is what 
is ultimately needed to facilitate better market quality in thinly-
traded securities. The Exchange believes that Periodic Auctions, as 
designed, are such an innovation, and would address the three main 
difficulties that market participants currently face in trading thinly 
traded securities: (1) Sourcing liquidity, (2) the availability of 
price improvement opportunities, and (3) the potential for significant 
market impact in securities that are less liquid and trade 
infrequently.
---------------------------------------------------------------------------

    \65\ See supra note 5.
---------------------------------------------------------------------------

    First, Periodic Auctions would assist investors in sourcing 
liquidity in the public markets by establishing meaningful liquidity 
events outside of the opening and closing auctions conducted by the 
primary listing exchanges. As proposed, Periodic Auctions would pool 
available interest from market participants and execute those orders in 
price forming auctions conducted at multiple points in time during the 
course of the trading day when there are matching Periodic Auctions to 
buy and sell. The Exchange therefore believes that Periodic Auctions 
would help investors to source liquidity, including block-size 
liquidity, that may be unavailable through continuous trading on a 
traditional limit order book. In addition, the Exchange has taken steps 
to encourage greater liquidity in Periodic Auctions, including 
prioritizing Periodic Auction Orders based on size, establishing 
minimum size requirements for auction participation, and supporting 
minimum execution size instructions in the auction. These features, in 
combination with other features that are designed to encourage 
participation in Periodic Auctions generally, may increase needed 
liquidity in thinly-traded securities.
    Second, Periodic Auctions are designed to balance supply and demand 
and execute available interest at a single market clearing price that 
would benefit both buyers and sellers by providing potential price 
improvement opportunities. This price formation process is broadly 
beneficial, but would also be particularly beneficial in thinly-traded 
securities where spreads are typically wider and executing transactions 
at a market clearing price within the spread would allow for meaningful 
price improvement opportunities for investors that may otherwise have 
to seek those opportunities in the off-exchange market. Based on Cboe 
Europe's experience in operating periodic auctions for the European 
equities market, the Exchange believes that Periodic Auctions may 
facilitate significant price improvement, including midpoint 
executions, which as discussed account for about 85% of value traded in 
Cboe Europe's periodic auctions.
    Third, Periodic Auctions are designed to minimize the risk of 
market impact of transacting in thinly-traded securities by providing a 
mechanism that allows market participants to trade, potentially in 
size, without the information leakage that may otherwise be associated 
with displaying orders to trade on a traditional limit order book. The 
Exchange believes that this may encourage additional participation in 
Periodic Auctions as market participants can avoid publicly showing 
their trading interest similar to their ability to do so in various 
off-exchange markets that currently trade significant volume in thinly-
traded securities.
iv. Compliance With Other Regulatory Requirements
    As discussed in more detail below, the Exchange also believes that 
the proposed rule change is consistent with other regulatory 
requirements, including the Order Protection Rule, the LULD Plan, and 
Rule 602 of Regulation NMS (i.e., the ``Quote Rule'').
    First, with respect to compliance with the Order Protection Rule, 
the Exchange's proposed auction collars would, as previously discussed, 
limit trades to prices that are within the Protected NBBO. As discussed 
in the purpose section of this proposed rule change, the Order 
Protection Rule applies to transactions executed during Regular Trading 
Hours. Although opening and closing auctions are generally exempt from 
these requirements,\66\ there are currently no exceptions that would 
apply to Periodic Auctions that perform a similar role in facilitating 
price discovery. The Exchange would therefore not execute

[[Page 70693]]

Periodic Auctions at prices that are inconsistent with the requirements 
of that rule. Generally, the Order Protection Rule requires trading 
centers to establish, maintain, and enforce written policies and 
procedures that are reasonably designed to prevent trade-throughs on 
that trading center of protected quotations in NMS stocks, unless an 
exception applies. A ``trade-through'' is defined in Rule 600(b)(81) of 
Regulation NMS as the purchase or sale of an NMS stock during regular 
trading hours, either as principal or agent, at a price that is lower 
than a protected bid or higher than a protected offer. The proposed 
auction collars would be applied at the time of execution, and would 
therefore prevent trades from occurring at prices that would constitute 
a trade-through at the time the Periodic Auction is processed, 
consistent with the requirements of the Order Protection Rule.
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    \66\ Rule 611(b)(3) of Regulation NMS provides an exception to 
the requirements of the Order Protection Rule where the transaction 
that constituted the trade-through was a single-priced opening, 
reopening, or closing transaction by the trading center.
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    Similarly, with respect to compliance with the LULD Plan, the 
Exchange's proposed auction collars would also limit trades to prices 
that are within the LULD Price Bands established pursuant to that 
national market system plan. As is the case with the Exchange's 
utilization of the Protected NBBO in setting applicable auction 
collars, the LULD Price Bands would be used as an additional collar on 
Periodic Auctions, and would ensure that all transactions that result 
from a Periodic Auction would be executed within the applicable LULD 
Price Bands at the time the Periodic Auction is processed. The Exchange 
would not execute Periodic Auctions at prices that are inconsistent 
with the LULD Plan.
    The Exchange also believes that the proposed rule change is 
consistent with the Quote Rule. Generally, the firm quote provisions of 
the Quote Rule require each responsible broker or dealer to execute an 
order presented to it, other than an odd lot order, at a price at least 
as favorable as its published bid or published offer, in any amount up 
to its published quotation size. Periodic Auction Orders, including 
both Periodic Auction Only Orders that trade solely in Periodic 
Auctions and Periodic Auction Eligible Orders that may also trade on 
the Continuous Book, would at all times be non-displayed, and therefore 
would not trigger the firm quote requirements of the Quote Rule. That 
is, there would be no ``published bid'' or ``published offer'' 
displayed to market participants that would be required to be ``firm'' 
under the Quote Rule.
    Similarly, the introduction of Periodic Auctions alongside trading 
on the Continuous Book would not result in violations of the Quote 
Rule. The Exchange would not halt or otherwise suspend trading on the 
Continuous Book while conducting a Periodic Auction. As a result, 
Continuous Book Orders entered to trade with the Exchange's published 
quotation would continue to be able to do so in the same manner that 
they do today, notwithstanding the introduction of Periodic Auctions to 
be conducted throughout the course of the trading day. The Exchange has 
designed its system for trading Periodic Auctions to minimize 
unnecessary latency, and therefore does not believe that the 
introduction of Periodic Auctions would impair the ability of the 
Exchange to execute incoming orders entered on the Continuous Book 
against its published bids or offers. The Exchange will continue to 
monitor system performance and latency after the introduction of 
Periodic Auctions to ensure that it is able to process both Periodic 
Auctions and Continuous Book Orders efficiently and without undue 
latency.
    In addition, the Exchange would continue to handle events processed 
by the matching engine in sequence, and a Continuous Book Order that is 
included in the Exchange's published bid or offer would trade with 
incoming Continuous Book Orders unless the Periodic Auction is 
processed prior to the matching engine's receipt of the incoming 
Continuous Book Order. Such executions would not run afoul of the firm 
quote requirements of the Quote Rule as Rule 602(b)(3) of Regulation 
NMS contains an explicit exemption from these requirements for broker-
dealers that are in the process of effecting a transaction in that 
security at the time the incoming order is ``presented'' to the broker-
dealer for potential execution.
    Finally, the Exchange's published quotations would continue to be 
considered ``automated quotations'' as defined in Rule 600(b)(4) of 
Regulation NMS. As discussed with respect to compliance with the Quote 
Rule, the Exchange has designed its system for trading Periodic 
Auctions to minimize unnecessary latency, and therefore does not 
believe that the introduction of Periodic Auctions would impair the 
ability of the Exchange to execute incoming orders entered on the 
Continuous Book against its published bids or offers. In this regard, 
the Exchange represents that any additional latency on the Continuous 
Book that may result from the proposed introduction of Periodic 
Auctions would not be material from the perspective of compliance with 
the Order Protection Rule. Under Regulation NMS, an ``automated'' 
quotation is one that, among other things, can be executed 
``immediately and automatically'' against an incoming immediate-or-
cancel order. Although the Commission's recent guidance related to 
automated quotations has focused on the introduction of intentional 
delay mechanisms or ``speed bumps,'' \67\ which present different and 
more complex issues under Regulation NMS, the Exchange believes that 
its proposed implementation of Periodic Auctions would not frustrate 
the purposes of the Order Protection Rule by ``impairing fair and 
efficient access'' to the Exchange's quotations. In this regard, the 
Exchange notes that it has engaged in substantial testing of its 
Periodic Auction product and, based on that testing, believes that any 
additional latency that may be experienced on the Continuous Book as a 
result of the introduction of its Periodic Auction product would be 
minimal and de minis from the perspective of the Order Protection 
Rule.\68\
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    \67\ See Securities Exchange Act Release No. 78102 (June 17, 
2016), 81 FR 40785 (June 23, 2017) (File No. S7-03-16) (``Commission 
Interpretation'').
    \68\ Although the Commission refused to enumerate a numeric 
latency threshold for an intentional delay that is sufficiently de 
minimis for the purposes of the Order Protection Rule, the Staff of 
the Division of Trading and Markets has issued guidance stating the 
Staff's belief that delays of less than one millisecond would 
qualify as de minimis. See Staff Guidance on Automated Quotations 
under Regulation NMS (June 17, 2016), available at https://www.sec.gov/divisions/marketreg/automated-quotations-under-regulation-nms.htm. While the Exchange's proposal would not 
introduce an intentional delay, the Exchange's testing indicates 
that any additional latency that may result from the proposed 
introduction of Periodic Auctions would be well within this 
threshold.
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v. Compliance With Section 11(a) of the Exchange Act
    The proposed rule change is also consistent with Section 11(a)(1) 
of the Act \69\ and the rules promulgated thereunder. Generally, 
Section 11(a)(1) of the Act restricts any member of a national 
securities exchange from effecting any transaction on such exchange for 
(i) the member's own account, (ii) the account of a person associated 
with the member, or (iii) an account with respect to which the member 
or a person associated with the member exercises investment discretion 
(collectively referred to as ``covered accounts''), unless a specific 
exemption is available. Rule 11a2-2(T) under the

[[Page 70694]]

Act,\70\ known as the ``effect versus execute'' rule, provides exchange 
members with an exemption from the Section 11(a)(1) prohibition.
---------------------------------------------------------------------------

    \69\ 15 U.S.C. 78k(a). Section 11(a)(1) prohibits a member of a 
national securities exchange from effecting transactions on that 
exchange for its own account, the account of an associated person, 
or an account over which it or its associated person exercises 
discretion unless an exception applies.
    \70\ 17 CFR 240.11a2-2(T).
---------------------------------------------------------------------------

    The ``Effect vs. Execute'' exemption permits an exchange member, 
subject to certain conditions, to effect transactions for covered 
accounts by arranging for an unaffiliated member to execute 
transactions on the exchange. To comply with Rule 11a2-2(T)'s 
conditions, a member: (i) Must transmit the order from off the exchange 
floor; (ii) may not participate in the execution of the transaction 
once it has been transmitted to the member performing the execution; 
\71\ (iii) may not be affiliated with the executing member; and (iv) 
with respect to an account over which the member has investment 
discretion, neither the member nor its associated person may retain any 
compensation in connection with effecting the transaction except as 
provided in the rule. For the reasons set forth below, the Exchange 
believes that members entering orders into Periodic Auctions would 
satisfy the requirements of Rule 11a2-2(T), and that the proposal is 
therefore consistent with Section 11(a) of the Act and the rules 
thereunder.
---------------------------------------------------------------------------

    \71\ The member may, however, participate in clearing and 
settling the transaction.
---------------------------------------------------------------------------

    The first condition of Rule 11a2-2(T) is that orders for covered 
accounts be transmitted from off the exchange floor. The Exchange's 
system, including the proposed system for processing Periodic Auctions 
pursuant Proposed Rule 11.25, would continue to receive orders 
electronically through remote terminals or computer-to-computer 
interfaces. In the context of other automated trading systems, the 
Commission has found that the off-floor transmission requirement is met 
if an order for a covered account is transmitted from a remote location 
directly to an exchange by electronic means.\72\ Because the Exchange's 
system for handling Periodic Auctions would receive orders from members 
electronically through remote terminals or computer-to-computer 
interfaces, the Exchange believes that orders submitted to a Periodic 
Auction electronically would satisfy the off-floor transmission 
requirement.
---------------------------------------------------------------------------

    \72\ See Securities Exchange Act Release No. 15533 (January 29, 
1979), 44 FR 6084 (January 31, 1979) (``1979 Release'').
---------------------------------------------------------------------------

    The second condition of Rule 11a2-2(T) requires that neither a 
member nor an associated person of such member participate in the 
execution of its order. The Exchange represents that Periodic Auctions 
would be executed automatically pursuant to the rules set forth in 
Proposed Rule 11.25, which would govern the operation of Periodic 
Auctions. In particular, the execution of a member's orders in a 
Periodic Auction would depend not on the member entering the order, but 
rather on what other orders are present, the priority of those orders, 
and the remaining duration of any Periodic Auction in the security. 
Thus, at no time following the submission of an order is a member or 
associated person of such member able to acquire control or influence 
over the result or timing of order execution.\73\ Once an orders has 
been transmitted, the member that transmitted the order will not 
participate in its eventual execution.
---------------------------------------------------------------------------

    \73\ Users may modify and/or cancel their Periodic Auction 
Orders at any time unless the User has elected to use the proposed 
``lock-in'' feature. See Proposed Rule 11.25(b). The Commission has 
stated that the non-participation requirement does not preclude 
members from cancelling or modifying orders, or from modifying 
instructions for executing orders, after they have been transmitted 
so long as such modifications or cancellations are also transmitted 
from off the floor. See Securities Exchange Act Release No. 14563 
(March 14, 1978), 43 FR 11542, 11547 (the ``1978 Release'').
---------------------------------------------------------------------------

    The third condition of Rule 11a2-2(T) requires that the order be 
executed by an exchange member who is unaffiliated with the member 
initiating the order. The Commission has stated that the requirement is 
satisfied when automated exchange facilities are used, as long as the 
design of these systems ensures that members do not possess any special 
or unique trading advantages in handling their orders after 
transmitting them to the exchange.\74\ The Exchange represents that the 
Periodic Auctions are designed such that no member has any special or 
unique trading advantage in the handling of any orders that are 
processed in Periodic Auctions after transmitting such orders to the 
Exchange.
---------------------------------------------------------------------------

    \74\ In considering the operation of automated execution systems 
operated by an exchange, the Commission noted that, while there is 
not an independent executing exchange member, the execution of an 
order is automatic once it has been transmitted into the system. 
Because the design of these systems ensures that members do not 
possess any special or unique trading advantages in handling their 
orders after transmitting them to the exchange, the Commission has 
stated that executions obtained through these systems satisfy the 
independent execution requirement of Rule 11a2-2(T). See 1979 
Release.
---------------------------------------------------------------------------

    Finally, the fourth condition of Rule 11a2-2(T) requires that, in 
the case of a transaction effected for an account with respect to which 
the initiating member or an associated person thereof exercises 
investment discretion, neither the initiating member nor any associated 
person thereof may retain any compensation in connection with effecting 
the transaction, unless the person authorized to transact business for 
the account has expressly provided otherwise by written contract 
referring to Section 11(a) of the Act and Rule 11a2-2(T) 
thereunder.\75\ The Exchange recognizes that members relying on Rule 
11a2-2(T) for transactions effected through a Periodic Auction must 
comply with this condition of the Rule, and the Exchange will enforce 
this requirement pursuant to its obligations under Section 6(b)(1) of 
the Act to enforce compliance with federal securities laws.
---------------------------------------------------------------------------

    \75\ See 17 CFR 240.11a2-2(T)(a)(2)(iv). In addition, Rule 11a2-
2(T)(d) requires a member or associated person authorized by written 
contract to retain compensation, in connection with effecting 
transactions for covered accounts over which such member or 
associated persons thereof exercises investment discretion, to 
furnish at least annually to the person authorized to transact 
business for the account a statement setting forth the total amount 
of compensation retained by the member in connection with effecting 
transactions for the account during the period covered by the 
statement which amount must be exclusive of all amounts paid to 
others during that period for services rendered to effect such 
transactions. See also 1978 Release, at 11548 (stating ``[t]he 
contractual and disclosure requirements are designed to assure that 
accounts electing to permit transaction-related compensation do so 
only after deciding that such arrangements are suitable to their 
interests'').
---------------------------------------------------------------------------

vi. Conclusion
    In conclusion, the Exchange believes that the proposed rule change 
would enhance the experience of investors looking to access liquidity 
in the public market and fill an important role in the U.S. equities 
market where liquidity may be more limited outside of the open and 
close of trading. By introducing a price forming auction for the 
aggregation and execution of buy and sell orders intraday, Periodic 
Auctions would increase execution opportunities available to investors. 
In turn, Periodic Auctions may improve trading outcomes for market 
participants that have trouble sourcing liquidity in the public markets 
today, including in thinly-traded securities where liquidity is often 
limited and trading often occurs on a number of off-exchange venues 
that can offer reduced market impact. As such, the Exchange believes 
that the proposed rule change would remove impediments to and perfect 
the mechanism of a free and open market.

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change would 
impose any burden on competition that is not necessary or appropriate 
in furtherance of the purposes of the Act. Rather, the proposed rule 
change is designed to increase competition by introducing an

[[Page 70695]]

additional mechanism for equities market participants to seek liquidity 
during the course of the trading day. Indeed, the proposed introduction 
of Periodic Auctions is a pro-competitive means of addressing the 
concerns that the Commission expressed in its Statement on thinly-
traded securities. The proposal, which seeks to introduce innovative 
functionality on a non-primary listing exchange, would allow 
competition, rather than regulatory intervention designed to limit 
competition (e.g., through the suspension or termination of unlisted 
trading privileges), to improve market quality in thinly-traded and 
other securities.
    The introduction of Periodic Auctions is designed to improve 
execution quality for investors sourcing liquidity during the trading 
day, and, in particular, those that are looking to trade in size, or 
are looking to access liquidity in thinly-traded or other securities 
where liquidity may be more scarce. Providing an additional mechanism 
for price forming orders to be executed would promote competition 
between venues that seek to execute this order flow, and provide market 
participants and investors with greater choice with respect to how they 
choose to source liquidity. The equities industry is fiercely 
competitive as the Exchange must compete with other equities exchanges 
and off-exchange venues for order flow. The proposal is both evidence 
of this competition, and would further enable the Exchange to compete 
effectively in this market.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    No written comments were solicited or received on the proposed rule 
change.

III. Comments on the Proposed Rule Change

    The Commission received two comment letters regarding the proposal. 
One commenter opposes the proposed rule change. The commenter expressed 
concern that the contemplated intraday periodic auctions would (1) harm 
market quality, including execution quality, price discovery, and 
liquidity; (2) increase market fragility during volatile market 
conditions; and (3) contribute to market disruptions--all while adding 
unnecessary complexity to the market.According to the commenter, the 
proposed periodic auction would be a complex new mechanism for non-
displayed, dark transactions. The commenter stated that the periodic 
auctions might harm the market ecosystem and decrease the quality of 
overall liquidity (i.e., wider bid-ask spreads and decreased posted 
size), and asserted that it is necessary to conduct a comprehensive and 
quantitative analysis to understand the impact of the auctions before 
implementing them. More generally, the commenter stated that new 
matching protocols and order types impose costs because market 
participants are forced to analyze the impact these innovations.
    Another commenter stated that it is awaiting clarification from the 
Exchange regarding the mechanics of the proposed auctions. In 
particular, the commenter said that it is waiting for the Exchange to 
issue a set of frequently asked questions and, once it is, the 
commenter will determine whether to comment on the proposal.

IV. Proceedings To Determine Whether To Approve or Disapprove SR-
CboeBYX-2020-021 and Grounds for Disapproval Under Consideration

    The Commission is instituting proceedings pursuant to Section 
19(b)(2)(B) of the Act \76\ to determine whether the proposed rule 
change, as modified by Amendment No. 2, should be approved or 
disapproved. Institution of such proceedings is appropriate at this 
time in view of the legal and policy issues raised by the proposed rule 
change. Institution of proceedings does not indicate that the 
Commission has reached any conclusions with respect to any of the 
issues involved.
---------------------------------------------------------------------------

    \76\ 15 U.S.C. 78s(b)(2)(B).
---------------------------------------------------------------------------

    Pursuant to Section 19(b)(2)(B) of the Act,\77\ the Commission is 
providing notice of the grounds for disapproval under consideration. 
The Commission is instituting proceedings to allow for additional 
analysis of and input concerning the consistency of the proposed rule 
change, as modified by Amendment No. 2, with the Exchange Act and in 
particular: (1) Section 6(b)(1) of the Exchange Act, which requires 
(among other things) that a national securities exchange be organized 
and have the capacity to comply with the Exchange Act and the rules 
thereunder; (2) Section 6(b)(5) of the Exchange Act, which requires, 
among other things, that the rules of a national securities exchange be 
``designed to prevent fraudulent and manipulative acts and practices, 
to promote just and equitable principles of trade, to remove 
impediments to and perfect the mechanism of a free and open market and 
a national market system, and, in general, to protect investors and the 
public interest; and are not designed to permit unfair discrimination 
between customers, issuers, brokers, or dealers;'' \78\ (3) Section 
10(a) of the Exchange Act; \79\ (4) Section 11A of the Exchange Act; 
\80\ and (5) Regulation NMS under the Exchange Act.\81\
---------------------------------------------------------------------------

    \77\ Id.
    \78\ 15 U.S.C. 78f(b)(5).
    \79\ 15 U.S.C. 78j(a). See also Securities Exchange Act Release 
No. 61595 (February 26, 2010), 75 FR 11232, 11235 (March 10, 2010) 
(``Section 10(a) of the Exchange Act gives the Commission plenary 
authority to regulate short sales of securities registered on a 
national securities exchange, as necessary or appropriate in the 
public interest or for the protection of investors'').
    \80\ 15 U.S.C. 78k-1.
    \81\ 17 CFR 242.600-602.
---------------------------------------------------------------------------

    The proposed Periodic Auctions would operate simultaneously with 
the Continuous Book and could incorporate orders entered on the 
Continuous Book. The Exchange states that, based on testing it has 
conducted, it believes that the Periodic Auction would cause additional 
latency in the Continuous Book.\82\ Do commenters believe that the 
Exchange has provided sufficient information regarding any additional 
latency in the Continuous Book that may be caused by the proposed 
Periodic Auctions or how the Exchange intends to address or otherwise 
minimize such latency? Is there additional information that commenters 
believe would be useful in assessing the impact that additional latency 
may have on trades executed either on the Continuous Book or in the 
proposed Periodic Auctions? If so, what additional information should 
the Exchange provide?
---------------------------------------------------------------------------

    \82\ The Exchange states that any latency caused by the proposed 
Periodic Auctions would be ``well within'' one millisecond. See 
Amendment No. 2, supra note 6, at 56, n.62.
---------------------------------------------------------------------------

    Has the Exchange provided sufficient information regarding how 
quotations subject to Regulation SHO under the Exchange Act would be 
treated in the proposed Periodic Auctions? Is there additional 
information the Exchange should provide regarding Regulation SHO 
requirements? \83\
---------------------------------------------------------------------------

    \83\ 17 CFR 240.200-203.
---------------------------------------------------------------------------

    Is there other information regarding the operation of the proposed 
Periodic Auctions that commenters believe would be useful for the 
Exchange to provide in support of its proposal?
    Under 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 [`SRO'] that proposed the rule change.'' 
\84\ The description of a proposed rule change, its purpose and 
operation, its effect, and a legal analysis

[[Page 70696]]

of its consistency with applicable requirements must all be 
sufficiently detailed and specific to support an affirmative Commission 
finding, and any failure of an SRO to provide this information may 
result in the Commission not having a sufficient basis to make an 
affirmative finding that a proposed rule change is consistent with the 
Exchange Act and the applicable rules and regulations.\85\
---------------------------------------------------------------------------

    \84\ Rule 700(b)(3), Commission Rules of Practice, 17 CFR 
201.700(b)(3).
    \85\ See id.
---------------------------------------------------------------------------

    For these reasons, the Commission believes it is appropriate to 
institute proceedings pursuant to Section 19(b)(2)(B) of the Act to 
determine whether the proposal should be approved or disapproved.

IV. Procedure: Request for Written Comments

    The Commission requests that interested persons provide written 
submissions of their views, data, and arguments with respect to the 
issues identified above, as well as any other concerns they may have 
with the proposal. In particular, the Commission invites the written 
views of interested persons concerning whether the proposal is 
consistent with Section 6(b)(5) or any other provision of the Act, or 
the rules and regulations thereunder. Although there do not appear to 
be any issues relevant to approval or disapproval that would be 
facilitated by an oral presentation of views, data, and arguments, the 
Commission will consider, pursuant to Rule 19b-4, any request for an 
opportunity to make an oral presentation.\86\
---------------------------------------------------------------------------

    \86\ Section 19(b)(2) of the Act, as amended by the Securities 
Act Amendments of 1975, Public Law 94-29 (June 4, 1975), grants the 
Commission flexibility to determine what type of proceeding--either 
oral or notice and opportunity for written comments--is appropriate 
for consideration of a particular proposal by a self-regulatory 
organization. See Securities Act Amendments of 1975, Senate Comm. on 
Banking, Housing & Urban Affairs, S. Rep. No. 75, 94th Cong., 1st 
Sess. 30 (1975).
---------------------------------------------------------------------------

    Interested persons are invited to submit written data, views, and 
arguments regarding whether the proposal should be approved or 
disapproved by November 27, 2020. Any person who wishes to file a 
rebuttal to any other person's submission must file that rebuttal by 
December 10, 2020. The Commission asks that commenters address the 
sufficiency of the Exchange's statements in support of the proposal, 
which are set forth in Amendment No. 2, in addition to any other 
comments they may wish to submit about the proposed rule change.
    Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-CboeBYX-2020-021 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.

All submissions should refer to File Number SR-CboeBYX-2020-021. This 
file number should be included on the subject line if email is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's internet website (http://www.sec.gov/rules/sro.shtml). 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for website viewing and printing in 
the Commission's Public Reference Room, 100 F Street NE, Washington, DC 
20549 on official business days between the hours of 10:00 a.m. and 
3:00 p.m. Copies of the filing also will be available for inspection 
and copying at the principal office of the Exchange. All comments 
received will be posted without change. Persons submitting comments are 
cautioned that we do not redact or edit personal identifying 
information from comment submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to File Number SR-CboeBYX-2020-021 and should be submitted 
by November 27, 2020. Rebuttal comments should be submitted by December 
10, 2020.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\87\
---------------------------------------------------------------------------

    \87\ 17 CFR 200.30-3(a)(57).
---------------------------------------------------------------------------

Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2020-24495 Filed 11-4-20; 8:45 am]
BILLING CODE 8011-01-P


