[Federal Register Volume 86, Number 61 (Thursday, April 1, 2021)]
[Notices]
[Pages 17230-17252]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-06676]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-91423; File No. SR-CboeBYX-2020-021]


Self-Regulatory Organizations; Cboe BYX Exchange, Inc.; Notice of 
Filing of Amendments No. 3 and No. 4, and Order Granting Accelerated 
Approval of a Proposed Rule Change, as Modified by Amendments No. 3 and 
No. 4, To Introduce Periodic Auctions for the Trading of U.S. Equity 
Securities

March 26, 2021.

I. Introduction

    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.
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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. On October 30, 2020, the Commission noticed the filing 
of Amendment No. 2 and instituted proceedings under Section 19(b)(2)(B) 
of the Exchange Act \6\ to determine whether to approve or disapprove 
the proposed rule change.\7\ On January 26, 2021, the Commission 
designated a longer period for Commission action on the proposed rule 
change.\8\ On February 10, 2021, the Exchange filed Amendment No. 3 to 
the proposed rule change, which amended and superseded the proposed 
rule change as modified by Amendment No. 2. On March 18, 2021, the 
Exchange filed Amendment No. 4 to the proposed rule change, which 
amended the proposed rule change as modified by Amendment No. 3.\9\ The 
Commission has received comment letters on the proposed rule change, 
including a response by the Exchange.\10\ The Commission is publishing 
this notice to solicit comments on Amendments No. 3 and No. 4 from 
interested persons and is approving the proposed rule change, as 
modified by Amendments No. 3 and No. 4, on an accelerated basis.
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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\ 15 U.S.C. 78s(b)(2)(B).
    \7\ See Securities Exchange Act Release No. 90288, 85 FR 70678 
(November 5, 2020).
    \8\ See Securities Exchange Act Release No. 90993, 86 FR 7753 
(February 1, 2021) (designating April 1, 2021 as the date by which 
the Commission shall approve or disapprove the proposal).
    \9\ All of the amendments to the proposed rule change, including 
Amendments No. 3 and No. 4, can be can be found on the Commission's 
website at: https://www.sec.gov/comments/sr-cboebyx-2020-021/srcboebyx2020021.htm.
    \10\ Comments on the proposed rule change, including the 
Exchange's response, can be found on the Commission's website at: 
https://www.sec.gov/comments/sr-cboebyx-2020-021/srcboebyx2020021.htm.
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II. The Exchange's Description of the Proposed Rule Change, as Modified 
by Amendments No. 3 and No. 4

    In its filing with the Commission and subsequent letter responding 
to comments, 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
    Amendment No. 3 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 and Amendment 
No. 2 on October 28, 2020. Amendment No. 4 to SR-CboeBYX-2020-021 
partially amends the proposal as modified by Amendment No. 3.
    The purpose of the proposed rule change is to introduce periodic 
auctions for the trading of U.S. equity securities (``Periodic 
Auctions'').\11\ 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.\12\
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    \11\ The term ``Periodic Auction'' shall mean an auction 
conducted pursuant to Proposed Rule 11.25. See Proposed Rule 
11.25(a)(4).
    \12\ 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

[[Page 17231]]

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.
a. Commission Statement on Thinly-Traded Securities
    On October 17, 2019, the Commission issued a Statement on Market 
Structure Innovation for Thinly Traded Securities (``Statement'').\13\ 
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.\14\ 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.\15\ 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.\16\ 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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    \13\ See Securities Exchange Act Release No. 87327 (October 17, 
2019), 84 FR 56956 (October 24, 2019) (File No. S7-18-19).
    \14\ 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.
    \15\ Id.
    \16\ 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 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.
b. Order Entry and Cancellation
    The Exchange would offer Periodic Auction Only Orders and Periodic 
Auction Eligible Orders,\17\ 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.\18\ Thus, as 
provided in Proposed Rule 11.25(b), Users \19\ may enter Periodic 
Auction Orders, i.e., Periodic Auction Only Orders or Periodic Auction 
Eligible Orders,\20\ 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 completed. 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 completed 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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    \17\ 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).
    \18\ 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).
    \19\ The term ``User'' means any Member or Sponsored Participant 
who is authorized to obtain access to the System pursuant to Rule 
11.3. See BYX Rule 1.5(cc).
    \20\ 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,\21\ at the discretion of

[[Page 17232]]

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.\22\
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    \21\ 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. The Exchange would 
permit cancellations of Periodic Auction Orders while a Periodic 
Auction Period is ongoing in the security. During the ordinary 
course of trading, market participants often work orders 
simultaneously in multiple venues. In fact, a number of Exchange 
members, including global trading firms that currently use the 
periodic auction product offered by the Exchange's affiliate, Cboe 
Europe, have indicated that they plan to incorporate Periodic 
Auctions into their normal workflow as a potential source of 
additional liquidity. As discussed, these firms would generally 
continue to work their orders across other venues, and the Exchange 
has therefore proposed to allow cancellations of Periodic Auction 
Orders, including in cases where a Periodic Auction has already been 
initiated. This handling would minimize potential overfills or 
related workflow issues that could otherwise be experienced by 
firms, thereby allowing them to use Periodic Auctions in the manner 
intended while seeking liquidity across other venues. As a self-
regulatory organization, the Exchange would conduct surveillance to 
detect potential misuse of Periodic Auctions, including a pattern or 
practice of entering and cancelling Periodic Auction Orders to gain 
information about other Periodic Auction Orders resting on the 
Periodic Auction Book. While the Proposal would allow members to 
freely enter and cancel Periodic Auction Orders, the Exchange 
believes its regulatory program is appropriately designed to detect 
and deter use of Periodic Auction Orders that is inconsistent with 
applicable Exchange rules. Periodic Auction Orders must be entered 
with the intent to participate in Periodic Auctions. See 
Interpretations and Policies .04 to BYX Proposed Rule 11.25. A 
pattern or practice of submitting orders for the purpose of 
disrupting or manipulating Periodic Auctions, including entering and 
immediately cancelling Periodic Auction Orders, will be deemed 
conduct inconsistent with just and equitable principles of trade. 
Id.
    \22\ 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 42. 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.\23\ The Exchange would not implement similar size restrictions 
for higher-priced securities, where such a size requirement would 
generally require a higher minimum notional value to participate in a 
Periodic Auction. For example, Amazon.com, Inc. (``AMZN'') closed at $ 
3,292.23 on January 22, 2021. 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 $329,223. 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. Based on the Exchange's analysis of trading activity from January 
4-22, 2021, only 61 U.S. equity securities traded at prices of $500 or 
more, accounting for 0.53% of total traded volume during that period. 
As such, the Exchange believes that the proposed $500 threshold would 
exclude only the highest priced securities from the Exchange's proposed 
minimum size requirements.
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    \23\ 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.
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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 immediate-or-cancel (``IOC''). 
Specifically, Periodic Auction Only Orders entered outside of Regular 
Trading Hours must include a time-in-force of RHO as the Exchange would 
conduct Periodic Auctions only during Regular Trading Hours,\24\ and 
not during the Early Trading,\25\ Pre-Opening,\26\ or After Hours 
Trading Sessions.\27\ Orders entered with a time-in-force of RHO are 
cancelled at the end of Regular Trading Hours on the trading day in 
which the order is entered, and do not persist to the next trading day. 
Periodic Auction Only Orders entered during Regular Trading Hours may 
be either RHO or 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.\28\ 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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    \24\ 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).
    \25\ 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).
    \26\ 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).
    \27\ 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).
    \28\ 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 to 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

[[Page 17233]]

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.\29\ 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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    \29\ 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,\30\ 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'').\31\ 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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    \30\ See BYX Rule 11.9(c)(8)(A).
    \31\ 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.\32\ 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 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.\33\
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    \32\ 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).
    \33\ 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.\34\ 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.\35\ 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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    \34\ See BYX Rule 11.9(c)(9).
    \35\ 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

[[Page 17234]]

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; \36\ 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.
---------------------------------------------------------------------------

    \36\ The discretionary range of such orders would not be 
considered in Periodic Auctions.
---------------------------------------------------------------------------

    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.\37\
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    \37\ 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.
---------------------------------------------------------------------------

c. 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.\38\ This would begin a 
Periodic Auction Period of 100 milliseconds where the Exchange would 
match buy and sell orders for potential execution.\39\
---------------------------------------------------------------------------

    \38\ 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. Specifically, 
the throttle would limit the rate at which new auctions are 
initiated by the System by imposing configurable limits for both: 
(1) A sustained rate that controls the number of Periodic Auctions 
that can be initiated on a continuous basis, calculated by looking 
at System load during high utilization periods and the time it takes 
to initiate an auction to determine a safe maximum for the number of 
auctions that can be initiated each second; and (2) a burst rate 
that would allow the System to initiate a larger number of Periodic 
Auctions when either no or few auctions have been initiated for a 
specified time period.
    \39\ 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.\40\ 
Specifically, at a randomized time in one millisecond intervals after a 
Periodic Auction has been initiated and before the end of the Periodic 
Auction,\41\ the Exchange would disseminate via electronic means an 
initial Periodic Auction Message that includes two important pieces of 
information about the Periodic Auction: (1) The Periodic Auction Book 
Price,\42\ and (2) and the total number of shares of Periodic Auction 
Orders that are matched at the Periodic Auction Book Price.\43\ With

[[Page 17235]]

these two pieces of information, interested market participants would 
be informed of both the price at which Periodic Auction Orders would 
match based on current market conditions,\44\ and the number of shares 
of such orders that would be matched. Although the Exchange does not 
believe that all Users will want or need access to this information to 
participate in Periodic Auctions,\45\ making such information available 
may encourage further participation from market participants.
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    \40\ 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).
    \41\ 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, or so forth until the 99 
millisecond mark. The specific time chosen would be entirely random 
for each Periodic Auction. As discussed in the paragraph that 
follows, revised Periodic Auction Messages would thereafter be 
disseminated in five millisecond intervals following the Exchange's 
dissemination of the initial Periodic Auction Message.
    \42\ 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.
    \43\ 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.
    \44\ The Exchange would consider any relevant instructions 
included on Periodic Auction Orders in calculating the information 
included in the Periodic Auction Message. For example, the pegged 
price of a Periodic Auction Order that includes a pegging 
instruction would be used in determining the Periodic Auction Book 
Price, as well as the number of shares available at that price, as 
disseminated in the Periodic Auction Message.
    \45\ Periodic Auction Orders would not be tied in any way to a 
particular Periodic Auction. As a result, Users may freely enter 
Periodic Auction Orders, and such orders would be eligible to 
initiate a Periodic Auction, either on entry or after being posted 
to the Periodic Auction Book, or participate in an ongoing periodic 
Auction. A User's ability to participate effectively in the Periodic 
Auctions would therefore not be tied to their use of the Periodic 
Auction Message, and the Exchange believes that Periodic Auctions 
would be a valuable tool for such Users irrespective of whether they 
choose to use such information.
---------------------------------------------------------------------------

    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,\46\ 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 five 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.
---------------------------------------------------------------------------

    \46\ 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).
---------------------------------------------------------------------------

d. 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''),\47\ 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'').\48\ 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 from the Continuous Book and Periodic Auction Book in the 
Periodic Auction.\49\
---------------------------------------------------------------------------

    \47\ See BZX Rule 11.23(b)(2)(B); (c)(2)(B).
    \48\ 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.
    \49\ 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.
---------------------------------------------------------------------------

    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.\50\ 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.\51\
---------------------------------------------------------------------------

    \50\ 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.
    \51\ 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.
---------------------------------------------------------------------------

e. 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 Range and the Protected 
NBBO.\52\ 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

[[Page 17236]]

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,\53\ 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,\54\ 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.
---------------------------------------------------------------------------

    \52\ 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).
    \53\ See BZX Rule 11.23(c).
    \54\ 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.
---------------------------------------------------------------------------

    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.\55\ 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.
---------------------------------------------------------------------------

    \55\ See e.g., LULD Plan, Preamble, available at https://www.luldplan.com/plans.
---------------------------------------------------------------------------

f. 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.\56\
---------------------------------------------------------------------------

    \56\ 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.
---------------------------------------------------------------------------

    The Exchange intends to reflect executions that occur during a 
Periodic Auction as auction executions on its proprietary market data 
feeds as happens today for other auctions conducted by the Exchange and 
its affiliated U.S. equities exchanges. There is no similar indicator 
disseminated by the securities information processors (``SIPs'') for 
intraday auction executions, i.e., excluding opening and closing 
prints, and the Exchange is not able to unilaterally propose the 
introduction of such an indicator through a proposed rule change 
submitted to the Commission pursuant to Section 19(b) of the Exchange 
Act. Rather, pursuant to Regulation NMS, the dissemination of such 
information by the SIPs is governed by the operating committee(s) of 
the national market system (``NMS'') plan(s) that govern the 
dissemination of this information. In the interest of facilitating 
additional transparency about the nature of executions on the Exchange 
to subscribers of the SIP feeds, the Exchange will submit a request to 
the operating committee(s) of the NMS plan(s) and make best efforts to 
have similar information included on those feeds as soon as 
practicable. If approved by applicable operating committee(s), the 
Exchange represents that it will submit a trade modifier on executions 
that result from Periodic Auctions to the SIPs for dissemination to 
investors, similar to the manner in which it would mark such auction 
executions on its own proprietary feeds.
    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 specified 
number of attempts determined by the Exchange and published in a 
circular distributed to members.
g. 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

[[Page 17237]]

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.
    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.\57\ If the market 
subsequently becomes uncrossed, resting Periodic Auction Orders may 
trigger a Periodic Auction pursuant to Rule 11.25(c).
---------------------------------------------------------------------------

    \57\ 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.
---------------------------------------------------------------------------

    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 (``NBB'') 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, 
Periodic Auction Eligible Orders and Continuous Book Orders marked 
``short'' would be subject to the Exchange's current short sale price 
sliding process described in BYX Rule 11.9(g)(5). BYX Rule 11.9(g)(5) 
establishes the Exchange's price sliding process for orders entered on 
the Continuous Book, and is designed to ensure that in the event a 
security is in a short sale circuit breaker, short sale orders entered 
on the Continuous Book are re-priced to a price that is above the NBB, 
as needed to comply with Rule 201 of Regulation SHO. Since Periodic 
Auction Eligible Orders and Continuous Book Orders are available for 
trading on the Continuous Book they would be subject to the same price 
sliding process as all orders that trade in the continuous market. For 
example, pursuant to BYX Rule 11.9(g)(5)(A), a short sale order that, 
at the time of entry, could not be executed or displayed in compliance 
with Rule 201 of Regulation SHO will be re-priced by the System at one 
minimum price variation above the current NBB (``Permitted Price''). 
Thus, a short sale order that is a Periodic Auction Eligible Order or 
Continuous Book Order would be re-priced upon entry to a Permitted 
Price that is consistent with the requirements of Regulation SHO. Such 
orders may also be further adjusted to reflect declines in the NBB, 
depending on the instructions of the Users.\58\ In addition, pursuant 
to BYX Rule 11.9(g)(5)(B), the System may execute a displayed short 
sale order at a price below the Permitted Price if, at the time of 
initial display of the short sale order, the order was at a price above 
the then current NBB.\59\
---------------------------------------------------------------------------

    \58\ Pursuant to BYX Rule 11.9(g)(5)(A), the Exchange's default 
short sale sliding only re-prices an order upon entry. See BYX Rule 
11.9(g)(5)(A). However, Users may to elect to have a short sale 
order at the Permitted Price re-priced down to the order's original 
limit price to reflect declines in the NBB. Id.
    \59\ This handling would only be available for Continuous Book 
Orders as all Periodic Auction Eligible Orders are, by definition, 
non-displayed.
---------------------------------------------------------------------------

    Periodic Auction Only Orders, however, are designed solely for use 
in Periodic Auctions and do not trade on the Continuous Book. 
Therefore, such Periodic Auction Orders would not be managed pursuant 
to the price sliding process described in BYX Rule 11.9(g)(5), which is 
for managing orders that trade in the continuous market, as opposed to 
orders that would be entered in an auction mechanism, such as the 
proposed Periodic Auctions. As such, the Exchange would reject or 
cancel Periodic Auction Only Orders marked ``short'' during a short 
sale circuit breaker. Specifically, Periodic Auction Only Orders marked 
``short'' will be cancelled when a short sale circuit breaker has been 
triggered pursuant to Rule 201(b)(1)(i) of Regulation SHO, and 
subsequently entered Periodic Auction Only Orders marked ``short'' will 
be rejected while the short sale circuit breaker remains in effect 
pursuant to Rule 201(b)(1)(ii) of Regulation SHO. This will ensure that 
Periodic Auction Only Orders, which as discussed would not be handled 
pursuant to the Exchange's price sliding process, would not trade in a 
Periodic Auction that could potentially be executed at an impermissible 
price under Regulation SHO.
    Further, consistent with Rule 201(b)(iii)(B) of Regulation SHO, the 
Exchange's policies and procedures would be 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 NBB. As a result, the restrictions 
described in proposed Supplementary Material .03 to Rule 11.25 would 
not apply to orders marked ``short exempt.'' Such orders would instead 
be processed in the same manner as long sale orders, and may be 
executed in a Periodic Auction without being subject to either the 
Exchange's short sale price sliding process, or subject to rejection or 
cancellation, as appropriate.
    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.
h. 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

[[Page 17238]]

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 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 Only
Order 4: Sell 200 shares @ $10.04 Non-Displayed--Periodic Auction Only

    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.
i. Implementation
    The implementation of Periodic Auctions after any Commission 
approval of the proposed functionality would follow the Exchange's 
rigorous software development process for

[[Page 17239]]

significant trading system enhancements. This will include: (1) Unit 
testing by the development team and systemwide integration testing by 
an independent quality assurance team, both of which will be 
incorporated into the Exchange's automated test framework; (2) at least 
two weeks of internal testing in the Exchange's certification 
environment using an automated system to generate and send orders as 
well as manual testing by the Exchange's trade desk; and (3) at least 
four weeks of customer testing in the certification environment. Each 
of these steps would be completed and reviewed before Periodic Auctions 
would be made available to customers in the Exchange's production 
trading system. The Exchange's certification environment would also 
remain available alongside the production release of Periodic Auctions 
for customers that want to test Periodic Auction functionality in that 
environment following its initial rollout.
2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
the requirements of Section 6(b) of the Act,\60\ in general, and 
Section 6(b)(5) of the Act,\61\ 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.
---------------------------------------------------------------------------

    \60\ 15 U.S.C. 78f(b).
    \61\ 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,\62\ 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.
---------------------------------------------------------------------------

    \62\ See Letter from Adrian Griffiths, supra note 14, 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.
---------------------------------------------------------------------------

a. 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 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] TN01AP21.009


[[Page 17240]]



                                Chart B--Cboe Europe Periodic Auction Statistics
----------------------------------------------------------------------------------------------------------------
                                                 Periodic auction value traded           Periodic auction market
                                      -------------------------------------------------- share %  notional value
                Month                                                                     traded on exchanges in
                                            Total monthly            Average daily                  EU
----------------------------------------------------------------------------------------------------------------
Jan-20...............................    [euro] 19,266,389,823       [euro] 875,883,628                     2.42
Feb-20...............................           24,377,313,487            1,218,865,674                     2.52
Mar-20...............................           36,933,642,050            1,678,801,911                     2.46
Apr-20...............................           18,370,457,305              918,522,865                     2.33
May-20...............................           15,993,488,255              761,594,679                     2.13
Jun-20...............................           18,221,339,811              828,242,719                     1.91
----------------------------------------------------------------------------------------------------------------

    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.
b. 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 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 to 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,\63\ 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 needed liquidity without 
the potential risks of displaying their orders for execution.
---------------------------------------------------------------------------

    \63\ See Letter from Adrian Griffiths, supra note 14.

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

[[Page 17241]]

    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 
602(b)(2) of Regulation NMS,\64\ 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.
---------------------------------------------------------------------------

    \64\ 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

[[Page 17242]]

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.\65\ 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.
---------------------------------------------------------------------------

    \65\ 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 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.\66\
---------------------------------------------------------------------------

    \66\ 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.\67\ 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.
---------------------------------------------------------------------------

    \67\ 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

[[Page 17243]]

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 first 
published beginning at a randomized time in one millisecond intervals, 
and would be refreshed in five 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 opening and closing auctions in 
that exchange's listed securities.\68\
---------------------------------------------------------------------------

    \68\ See BZX Rules 11.23(b)(2)(B), (c)(2)(B).
---------------------------------------------------------------------------

    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.\69\ That is, the auction collars would 
generally be the same as those used for BZX auctions, but could be 
narrowed by applicable regulatory requirements.
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    \69\ 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.\70\ 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

[[Page 17244]]

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.
---------------------------------------------------------------------------

    \70\ 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,\71\ 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,\72\ is consistent with the 
maintenance of a fair and orderly market in securities traded in such 
Periodic Auctions.
---------------------------------------------------------------------------

    \71\ See BYX Rule 11.23(b).
    \72\ 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 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; \73\ and (2) when the security is in a short sale circuit 
breaker, short sale orders that are not marked ``short exempt'' would 
either be re-priced to a Permissible Price pursuant to BYX Rule 
11.9(g)(5), i.e., in the case of Periodic Auction Eligible Orders and 
Continuous Book Orders, or subject to rejection or cancellation, i.e., 
in the case of Periodic Auction Only Orders, in each instance to ensure 
that the execution or display of such short sale orders is consistent 
with the requirements of 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 in 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.
---------------------------------------------------------------------------

    \73\ 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.
---------------------------------------------------------------------------

c. 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.\74\ 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.
---------------------------------------------------------------------------

    \74\ See supra note 13.
---------------------------------------------------------------------------

    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

[[Page 17245]]

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.
d. 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,\75\ 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 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.
---------------------------------------------------------------------------

    \75\ 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.
---------------------------------------------------------------------------

    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

[[Page 17246]]

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,'' \76\ 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 [sic] from 
the perspective of the Order Protection Rule.\77\
---------------------------------------------------------------------------

    \76\ See Securities Exchange Act Release No. 78102 (June 17, 
2016), 81 FR 40785 (June 23, 2017) (File No. S7-03-16) (``Commission 
Interpretation'').
    \77\ 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.
---------------------------------------------------------------------------

e. Compliance With Section 11(a) of the Exchange Act
    The proposed rule change is also consistent with Section 11(a)(1) 
of the Act \78\ 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 Act,\79\ known as the 
``effect versus execute'' rule, provides exchange members with an 
exemption from the Section 11(a)(1) prohibition.
---------------------------------------------------------------------------

    \78\ 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.
    \79\ 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; 
\80\ (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.
---------------------------------------------------------------------------

    \80\ 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.\81\ 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.
---------------------------------------------------------------------------

    \81\ See Securities Exchange Act Release No. 15533 (January 29, 
1979), 44 FR 6084 (January 31, 1979) (``1979 Release''); 14563 
(March 14, 1978), 43 FR 11542 (March 17, 1978) (``1978 Release''); 
see also Securities Exchange Act Release No. 88806 (May 4, 2020), 85 
FR 27451 (May 8, 2020) (order approving MEMX LLC's exchange 
registration); 85828 (May 10, 2019), 84 FR 21841 (May 15, 2019) 
(order approving the Long-Term Stock Exchange, Inc.'s exchange 
registration).
---------------------------------------------------------------------------

    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. This requirement was originally intended to 
prevent members from using their own brokers on an exchange floor to 
influence or guide the execution of their orders.\82\ 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. Although the Exchange would 
disseminate Periodic Auction Messages during the Periodic Auction 
Period and members would generally be permitted to modify and/or cancel 
their orders during the auction process, 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. Specifically, the Periodic Auction Price at which orders 
would be executed in a Periodic Auction would be established at the end 
of the 100 millisecond Periodic Auction Period based on objective rules 
that balance supply and demand in the auction pursuant to Proposed Rule 
11.25(d), and the priority of any orders executed at the Periodic 
Auction Price would be determined based on the criteria established in 
Proposed Rule 11.25(e), which defines the priority of orders executed 
in such auctions. 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, which would 
instead be conducted pursuant to Proposed Rules 11.25(d)-(e), as 
described, based on the Periodic Auction Orders and Continuous Book 
Orders available to participate in the execution of the auction.\83\ 
Once an

[[Page 17247]]

order has been transmitted, the member that transmitted the order will 
not participate in its eventual execution.
---------------------------------------------------------------------------

    \82\ Id. (``1978 Release'').
    \83\ 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 recognized 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.\84\ 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.
---------------------------------------------------------------------------

    \84\ 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.\85\ 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.
---------------------------------------------------------------------------

    \85\ 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'').
---------------------------------------------------------------------------

f. 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 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.

III. Discussion and Commission Findings

    After careful review of the proposal and the comments, the 
Commission finds that the Exchange's proposal is consistent with the 
requirements of the Exchange Act and the rules and regulations 
thereunder applicable to a national securities exchange.\86\ In 
particular, the Commission finds that the proposed rule change is 
consistent

[[Page 17248]]

with Section 6(b)(5) of the Exchange Act,\87\ 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. As outlined below, the Commission has carefully reviewed the 
proposed rule change, comments received, and BYX's response to comments 
to arrive at these findings.
---------------------------------------------------------------------------

    \86\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f). One commenter asserts 
that exchange operators creating new matching protocols and order 
types on exchanges with little trading volume forces market 
participants ``to do their own subjective analysis to understand how 
these methods will affect the overall market'' and that it involves 
a ``painstaking assessment of every order type across each exchange 
that only the most sophisticated participants can master.'' Letter 
from Joanna Mallers, Secretary, FIA Principal Traders Group, to 
Vanessa Countryman, Secretary, Commission, dated August 25, 2020 
(``FIA PTG Letter'') at 2. The Commission does not believe that 
exchanges should be held to different standards for introducing new 
functionality based on their trading volume. The Commission has 
consistently encouraged trading centers to innovate and compete for 
order flow, consistent with the objectives of Section 11A of the 
Exchange Act, to assure fair competition among brokers and dealers, 
among exchange markets and between exchange markets and markets 
other than exchange markets. For example, in amending Rule 606(b)(3) 
of Regulation NMS, the Commission stated that the modified rule 
could affect competition among trading centers. The Commission 
stated: ``If broker-dealers change their order routing decisions to 
focus more on execution quality and route fewer orders to a given 
trading center, that trading center will have an incentive to take 
measures to attract and gain back order flow by innovating on 
execution quality.'' Securities Exchange Act Release No. 84528 
(November 2, 2018), 83 FR 58338, 58400 (November 19, 2018) (S7-14-
16).
    \87\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    In the current market structure for trading NMS stocks, there are 
multiple competing trading centers for the display and execution of 
orders. Congress has found that it is in the public interest and 
appropriate for the protection of investors and the maintenance of fair 
and orderly markets to assure, among other things, the economically 
efficient execution of securities transactions, the availability to 
brokers, dealers, and investors of information with respect to 
quotations for and transactions in securities, and the practicability 
of brokers executing investors' orders in the best market.\88\
---------------------------------------------------------------------------

    \88\ See Section 11A(a)(1)(C) of the Exchange Act, 15 U.S.C. 
78k(a)(1)(C).
---------------------------------------------------------------------------

    In the U.S. equity market structure, auctions are a fundamental 
form of price discovery mechanism, in which orders to buy and sell are 
matched at a single executing price. Traditionally, the U.S. markets 
open and close with an auction, and trading throughout the day is 
conducted via continuous trading. Consistent with Section 11A of the 
Exchange Act, the Commission has encouraged and welcomed beneficial 
innovations in the marketplace by market participants.\89\ In 
considering market structure innovations that may provide benefits to 
thinly traded securities, the Commission noted that some suggested that 
an exchange implement periodic intraday auctions as a means of 
concentrating liquidity at times other than solely at the market open 
and market close.\90\ The Exchange is proposing to add Periodic 
Auctions to continuous trading in an attempt to attract intra-day 
trading liquidity.
---------------------------------------------------------------------------

    \89\ See Securities Exchange Act Release Nos. 61358 (January 14, 
2010) (Concept Release on Equity Market Structure) (``Moreover, to 
the extent that a competitive advantage flows from these [highly 
sophisticated trading tools], does that competitive advantage help 
to promote and enable competition, beneficial innovation, and 
ultimately, enhanced market quality?'') and 83663 (July 18, 2018) 
(Regulation of NMS Stock Alternative Trading Systems) (``Regulation 
ATS was designed to encourage innovation and provide enough 
flexibility to accommodate the business objectives of, and benefits 
provided by, alternative trading systems''). See also Securities 
Exchange Act Release No. 87327, supra note 13.
    \90\ See Securities Exchange Act Release No. 87327, supra note 
13, 84 FR at 56957, n.15 and accompanying text.
---------------------------------------------------------------------------

    Two commenters support the innovation of the proposal and its 
potential benefits to the national market system.\91\ Commenters also 
raise some concerns and offer suggestions regarding the proposal. One 
commenter characterizes Periodic Auctions as a new mechanism for non-
displayed transactions and raises a concern that Periodic Auctions 
would encourage non-displayed trading.\92\ The commenter also states 
that market structure considerations, including the mechanics of 
matching trades, are complex and that a seemingly small change in 
market structure can result in significant negative and often 
unintended consequences and costs. From this general proposition, the 
commenter concludes that Periodic Auctions could cause wider bid-ask 
spreads \93\ and decreased posted size.\94\ The Commission notes that 
while auction orders are not displayed, information about auctions is 
disseminated to the marketplace, including transaction information. In 
addition, the Periodic Auction Book Price and the total number of 
shares of Periodic Auction Orders that are matched at the Periodic 
Auction Book Price would be disseminated and trades would be reported. 
Although the commenter states that trading system changes can result in 
increased costs to market participants,\95\ the Commission notes that 
participation in the Periodic Auctions is not required by the Exchange 
and that costs related to participation in or assessment of the 
Periodic Auctions would be determined by market participants. The 
Exchange asserts, in response to the commenter, that its proposal will 
enhance market quality by encouraging market participants to post 
orders on its Continuous Book because Periodic Auctions will: (1) 
Increase execution opportunities for such orders; and (2) provide an 
opportunity for such orders to receive price improvement beyond their 
posted prices when executed in a Periodic Auction.\96\ In addition, the 
Exchange states that it has already conducted rigorous testing 
(discussed below) \97\ and that, prior to implementing Periodic 
Auctions, it will conduct more testing of the proposed functionality. 
This additional testing will include: (1) Unit testing by the 
development team and system-wide integration testing by an independent 
quality assurance team, both of which will be incorporated into the 
Exchange's automated test framework; (2) at least two weeks of internal 
testing in the Exchange's certification environment using an automated 
system to generate and send orders as well as manual testing by the 
Exchange's trade desk; and (3) at least four weeks of customer testing 
in the certification environment.\98\ The Exchange states that its 
certification environment will remain available alongside the 
production release of Periodic Auctions for members that want to test 
Periodic Auction functionality in that environment following its 
initial rollout.\99\ The Commission believes that this testing may 
allow the Exchange and members to identify negative unintended 
consequences resulting from Periodic Auctions. More generally, the 
Commission believes that market innovations may create new 
opportunities for investors and have the potential to benefit the 
market overall. Given the anticipated enhancements to price discovery 
and opportunities for price improvement that Periodic Auctions may 
provide, the Commission finds the Exchange's proposal is consistent 
with the Exchange Act.
---------------------------------------------------------------------------

    \91\ See letter from Ellen Greene, Managing Director, Equities & 
Options Market Structure, Securities Industry and Financial Markets 
Association, to Vanessa Countryman, Secretary, Commission, dated 
December 17, 2020 (``SIFMA Letter'') at 1; letter from Joe Wald and 
Ray Ross, Managing Directors and Co-Heads of Electronic Trading, BMO 
Capital Markets Group, to Vanessa Countryman, Secretary, Commission, 
dated December 22, 2020 (``BMO Letter'') at 1.
    \92\ See FIA PTG Letter, supra note 86, at 1.
    \93\ Another commenter states that it is difficult to predict 
whether Periodic Auctions would increase liquidity. See SIFMA 
Letter, supra note 91, at 2. This commenter had previously submitted 
a letter stating that it might comment on the substance of the 
proposal after reviewing the Exchange's FAQs about the operation of 
the Periodic Auction. See letter from Ellen Greene, Managing 
Director, Equities & Options Market Structure, Securities Industry 
and Financial Markets Association, to Vanessa Countryman, Secretary, 
Commission, dated August 28, 2020. The Exchange did post FAQs on its 
website and the commenter submitted its second comment letter.
    \94\ See FIA PTG Letter, supra note 86, at 2. Therefore, the 
commenter suggests that it is necessary to conduct a comprehensive 
and quantitative analysis to understand the consequences. See id.
    \95\ See id.
    \96\ See letter from Adrian Griffiths, Assistant General 
Counsel, Exchange, to Vanessa Countryman, Secretary, Commission, 
dated February 4, 2021 (``BYX Response'') at 6.
    \97\ See infra note 102, and accompanying text.
    \98\ See Amendment No. 4 at 7-8.
    \99\ See id. at 8.
---------------------------------------------------------------------------

    One commenter asks whether there would be any impact on price 
discovery

[[Page 17249]]

in the continuous order book.\100\ The Exchange states that offering 
Periodic Auctions alongside its continuous trading would not cause any 
undue latency that would negatively impact trading on the Continuous 
Book.\101\ The Exchange represents that it has conducted rigorous 
testing, including both an analysis of system performance related to 
Periodic Auctions in expected market conditions and additional stress 
testing, including scenarios beyond what the Exchange expects to happen 
in a production environment.\102\ As a result, the Exchange does not 
believe that the proposed Periodic Auctions would have any meaningful 
impact on its ability to offer continuous trading alongside its 
proposed Periodic Auction and would not inappropriately interfere with 
trading on the Continuous Book.\103\ The Exchange states that, based on 
its analysis, any additional latency that may be experienced on the 
Continuous Book would be minimal, and both (1) within the range of 
latencies experienced when the Exchange conducts other resource 
consumptive tasks today, such as re-pricing of pegged orders; and (2) 
so small as to not present any regulatory concerns under either the 
Quote Rule or the Order Protection Rule.\104\ These statements 
supplement the Exchange's representation in Amendment No. 3 that, based 
on substantial testing, any additional latency resulting from running a 
Periodic Auction would be minimal and de minimis from the perspective 
of the Order Protection Rule and would be well within a threshold of 
one millisecond.\105\ Further, 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 specified 
number of attempts determined by the Exchange and published in a 
circular distributed to members.\106\ Based on the Exchange's 
representations and the Commission's understanding of the proposed 
operation of the Periodic Auctions, the Commission finds that the 
potential for delay resulting from the Periodic Auctions as proposed 
would not impair fair and efficient access to the Exchange's protected 
quotations under the Exchange Act.\107\
---------------------------------------------------------------------------

    \100\ See BMO Letter, supra note 91, at 2. The commenter also 
asks what the parameters are surrounding the circumstances in which 
the Exchange would ``throttle'' the initiation of periodic auctions. 
See id. In response, in Amendment No. 3, the Exchange provides 
additional information, stating that ``the throttle would limit the 
rate at which new auctions are initiated by the System by imposing 
configurable limits for both: (1) A sustained rate that controls the 
number of Periodic Auctions that can be initiated on a continuous 
basis, calculated by looking at System load during high utilization 
periods and the time it takes to initiate an auction to determine a 
safe maximum for the number of auctions that can be initiated each 
second; and (2) a burst rate that would allow the System to initiate 
a larger number of Periodic Auctions when either no or few auctions 
have been initiated for a specified time period.'' Amendment No. 3 
at 19, n.30.
    \101\ See BYX Response, supra note 96, at 10.
    \102\ See id. at 11.
    \103\ See id.
    \104\ See id.
    \105\ See Amendment No. 3, at 64, n.69.
    \106\ See proposed BYX Rule 11.25(f). See also Amendment No. 3 
at 27.
    \107\ See Securities Exchange Act Release No. 78102 (June 17, 
2016), 81 FR 40785 (File No. S7-03-16) (Commission Interpretation 
Regarding Automated Quotations Under Regulation NMS) (``Commission 
Interpretation'').
---------------------------------------------------------------------------

    Two commenters raise concerns about the potential for market 
participants to manipulate or otherwise misuse Periodic Auctions or the 
continuous book. One commenter states that market participants may 
route orders to other trading venues before and during the auction 
(based on information disseminated by the Exchange) and thereby impact 
the price of the auction, which could affect investors who submitted 
orders on BYX's continuous book because orders on the continuous book 
may not opt out of the auction.\108\ Another commenter states that 
because orders may be cancelled at any time, and given the 
interconnectivity of the periodic auction with the continuous order 
book, market participants may be able to utilize the ability to cancel 
and the transparency surrounding orders in the periodic auction to gain 
and improperly use information about trading interest on the Exchange 
in general.\109\ Supplementary Material to .04 to Proposed Rule 11.25 
provides that (1) Periodic Auction Orders must be entered with the 
intent to participate in Periodic Auctions; and (2) a pattern or 
practice of submitting orders for the purpose of disrupting or 
manipulating Periodic Auctions, including entering and immediately 
cancelling Periodic Auction Orders, will be deemed conduct inconsistent 
with just and equitable principles of trade. The Exchange represents 
that it will conduct surveillance to ensure that users do not 
inappropriately enter Periodic Auction Orders for impermissible 
purposes, including to gain information about Periodic Auction Orders 
that are resting on the Periodic Auction Book or to otherwise disrupt 
or manipulate Periodic Auctions.\110\ Based on the proposed standard 
established by Supplementary Material to .04 to Proposed Rule 11.25 as 
well as the Exchange's representation and the Commission's assessment 
of the Exchange's proposed surveillances, the Commission finds that the 
proposal is designed to prevent fraudulent and manipulative acts and 
practices.
---------------------------------------------------------------------------

    \108\ See SIFMA Letter, supra note 91, at 2.
    \109\ See BMO Letter, supra note 91, at 2, n.4.
    \110\ See BYX Response, supra note 96, at 6. See also Amendment 
No. 3 at 31 and 58.
---------------------------------------------------------------------------

    On a related point, one commenter raises concerns about information 
leakage from the operation of the Periodic Auctions. The commenter 
suggests that having a specific liquidity code attached to a continuous 
book order that interacts with an auction order indicating it was 
executed in a Periodic Auction could provide a ``free look'' regarding 
an imbalance in the market and the direction of the imbalance.\111\ The 
Exchange disagrees, asserting that disclosing when an execution occurs 
as part of an auction is required and important post-trade 
transparency, not a form of improper information leakage.\112\ 
Responding to the commenter's specific concern about potentially 
signaling a potential buy or sell imbalance by including Continuous 
Book Orders in Periodic Auctions, the Exchange states that: (1) The 
Commission has approved the dissemination of actual imbalance 
information in other auctions for U.S. equity securities due to the 
value of that information in informing public price discovery; (2) the 
Periodic Auction Price at which orders are executed in a Periodic 
Auction would also be reported on each executed transaction, rendering 
any additional information that could be inferred about a potential 
imbalance in a completed auction meaningless; and (3) Periodic Auctions 
are actually designed to perform an important price discovery function, 
which is facilitated by post-trade transparency about the execution of 
orders in the auction.\113\ While one may be able to detect that an 
order imbalance existed prior to a Periodic Auction based on the 
reported price of executions from that auction, the Commission agrees 
with the Exchange that one may not necessarily infer from that reported 
price that an imbalance persists after the auction and believes that 
timely dissemination of transaction information is an important element 
of the national market system.
---------------------------------------------------------------------------

    \111\ See BMO Letter, supra note 91, at 3.
    \112\ See BYX Response, supra note 96, at 9.
    \113\ See id. at 10.
---------------------------------------------------------------------------

    The same commenter seeks confirmation that the FIX message 
associated with a periodic auction

[[Page 17250]]

execution would not have anything indicating that it occurred in an 
auction, i.e., the auction trade print will be a bulk print that 
includes all fills, but that the trade will be identified as an auction 
print on the Exchange's proprietary data feed.\114\ The Exchange 
responds that it would disseminate information about executions in 
Periodic Auctions through both the securities information processors 
and its proprietary market data feeds as a single ``bulk print'' 
indicating the number of shares executed in the auction and the price 
at which those shares are executed. It also responds that its 
proprietary market data feeds would indicate that the execution is an 
auction execution.\115\ The Exchange states that currently there is no 
similar indicator disseminated by the SIPs for intraday auction 
executions.\116\ To facilitate additional transparency about the nature 
of Periodic Auction executions to subscribers of the SIP feeds, the 
Exchange represents that it will submit a request to the operating 
committee(s) of the NMS plan(s) governing the dissemination of such 
information and make best efforts to have similar information included 
on those feeds as soon as practicable.\117\ The Commission notes that 
SIP indicators currently include those for opening and closing auctions 
and believes that adding an indicator to identify Periodic Auction 
transactions via the SIP feeds should enhance transparency.
---------------------------------------------------------------------------

    \114\ See BMO Letter, supra note 91, at 3.
    \115\ See BYX Response, supra note 96, at 9.
    \116\ See Amendment No. 4 at 5.
    \117\ See id. at 5-6.
---------------------------------------------------------------------------

    National securities exchanges compete to attract orders through a 
variety of means, including by offering innovative order execution 
functionality. In turn, market participants have flexibility to choose 
how to route their orders so long as they meet their regulatory 
obligations, including their obligations to meet the requirements under 
Regulation NMS and meet best execution obligations for their 
customers.\118\ To the extent that market participants are concerned 
about possible information leakage through the reporting of the 
execution price or the operation of the Periodic Auctions, they may 
seek to protect their information in a number of ways, including 
choosing not to post orders on the Continuous Book, or not to submit 
orders to Periodic Auctions.\119\
---------------------------------------------------------------------------

    \118\ See Securities Exchange Act Release No. 90610 (December 9, 
2020) (S7-03-20) at 37-38.
    \119\ See text accompanying note 123, infra.
---------------------------------------------------------------------------

    Commenters also suggest modifications to BYX's proposal that they 
think could be beneficial, although commenters do not raise concerns 
that the proposal is inconsistent with the Exchange Act if the Exchange 
does not incorporate these suggested modifications. One commenter 
suggests that initially Periodic Auctions be held only for thinly 
traded securities and, if there are clear improvements to liquidity, 
Periodic Auctions should be gradually permitted for more liquid 
securities.\120\ The Exchange states that, while Periodic Auctions may 
be particularly beneficial in thinly traded securities, Periodic 
Auctions would be broadly beneficial to trading in other securities, 
including those that suffer from diminished market quality for reasons 
other than being thinly traded.\121\ The Exchange also states that its 
understanding, based on the experience of national securities exchanges 
that have implemented trading mechanisms limited to a subset of NMS 
stocks, is that a number of market participants that transact in NMS 
stocks do not employ differentiated routing logic for different 
symbols.\122\ Therefore, BYX believes those market participants may not 
incorporate Periodic Auctions into their routing logic if Periodic 
Auctions were limited to thinly traded securities, and this, in turn, 
may impact the Exchange's ability to achieve the critical mass 
necessary to make Periodic Auctions successful.\123\
---------------------------------------------------------------------------

    \120\ See SIFMA Letter, supra note 91, at 3.
    \121\ See BYX Response, supra note 96, at 7.
    \122\ See id. at 7, text accompanying n.8.
    \123\ See id. at 7-8.
---------------------------------------------------------------------------

    The same commenter suggests that Continuous Book Orders be excluded 
from the Periodic Auctions.\124\ That commenter and another commenter 
also suggest making Continuous Book Order participation in the Periodic 
Auctions optional.\125\ In response, the Exchange asserts that if a 
user is concerned that its Continuous Book Orders could be executed in 
Periodic Auctions at an unfair price the user would be no worse off 
than if the user were to trade with an immediate-or-cancel order in the 
Continuous Book.\126\ The Exchange states that a Continuous Book Order 
that is executed in a Periodic Auction would always trade at a price 
that is at least as good, and in many cases better than, the price it 
would obtain in an execution on the Continuous Book.\127\ Additionally, 
the Exchange asserts that, because each Periodic Auction is a price 
forming auction, a market participant that attempted to misuse the 
Periodic Auctions by entering orders into the Periodic Auction to trade 
with Continuous Book Orders at unfair prices would incur additional 
risks if trading in a Periodic Auction, where it may have to trade with 
such orders at an improved price rather than trading immediately with 
such orders on the Continuous Book.\128\
---------------------------------------------------------------------------

    \124\ See SIFMA Letter, supra note 91, at 3.
    \125\ See BMO Letter, supra note 91, at 2.
    \126\ See BYX Response, supra note 96, at 5.
    \127\ See id. at 4.
    \128\ See id. at 5.
---------------------------------------------------------------------------

    One commenter suggests that the Exchange execute orders in Periodic 
Auctions only at the midpoint of the NBBO to both reduce a potential 
latency impact on the continuous order book and address the complexity 
that Periodic Auctions would add to the market.\129\ The commenter also 
asserts that its suggested NBBO midpoint execution would create less 
potential for information leakage.\130\ The Exchange responds that the 
Periodic Auction is not designed to execute trades at the midpoint, but 
that it is designed as a price forming auction to execute orders at a 
price that balances supply and demand in the Periodic Auctions, whether 
or not that price is the NBBO midpoint.\131\ In addition, the Exchange 
states that market participants that wish to receive midpoint 
executions already can do so by using midpoint pegged orders and 
similar order types.\132\
---------------------------------------------------------------------------

    \129\ See BMO Letter, supra note 91, at 3.
    \130\ See id.
    \131\ See BYX Response, supra note 96, at 8.
    \132\ See id.
---------------------------------------------------------------------------

    The same commenter suggests that the Exchange provide further 
clarity regarding how and whether orders that trade in Periodic 
Auctions will receive a unique fee code indicating that they indeed 
were executed in a Periodic Auction.\133\ The Exchange notes that the 
pending proposal does not address fees, states that it intends to 
submit a fee proposal separately, and asserts that consideration of 
such fee codes is inappropriate in connection with this proposal.\134\
---------------------------------------------------------------------------

    \133\ See BMO Letter, supra note 91, at 3, n.5.
    \134\ See BYX Response, supra note 96, at 9, n.10. The Exchange 
also notes that the commenter will have an opportunity comment on 
its fee proposal if it has concerns. See id.
---------------------------------------------------------------------------

    The commenter also asks that BYX add its ``True Minimum Quantity'' 
instruction for orders participating in the proposed auction mechanism. 
The commenter states that this would better facilitate the interaction 
of large-size orders.\135\ The Exchange's ``true minimum'' instruction 
allows Users trading on the Continuous Book to enter orders with a 
minimum size condition that must be met by a single contra-side order, 
instead of one or more contra-side

[[Page 17251]]

orders.\136\ The Exchange states that introducing the true minimum 
instruction into a Periodic Auction would unnecessarily complicate 
executions; instead, the Exchange is proposing to offer a minimum 
quantity instruction in the Periodic Auctions, which it believes will 
be valuable.\137\ The Commission believes that the Exchange's decision 
not to incorporate the various suggestions offered by commenters into 
its proposal does not render the proposed rule change without a 
rational basis or inconsistent with the Exchange Act.
---------------------------------------------------------------------------

    \135\ See BMO Letter, supra note 91, at 4.
    \136\ See BYX Response, supra note 96, at 11. See also BYX Rule 
11.9(c)(5).
    \137\ See BYX Response, supra note 96, at 11-12. BYX also states 
that no provision of the Exchange Act requires that the Exchange 
make any particular order instruction available to customers, or to 
allow the use of all order instructions that it has determined to 
offer in each and every trading mechanism that is offers to its 
members. See id. at 12.
---------------------------------------------------------------------------

    The Commission finds that the proposed rule change is designed to 
remove impediments to and perfect the mechanism of a free and open 
market and a national market system. Periodic Auctions would supplement 
existing opening and closing auctions by consolidating buy and sell 
interest in price forming auctions during the course of the trading 
day. Periodic Auctions may be particularly helpful in fulfilling and 
improving execution quality of orders by or on behalf of market 
participants seeking to trade in size or in thinly traded securities. 
One potential issue with a periodic auction running concurrently with a 
continuous book is that the act of operating the periodic auction could 
cause latency in the operation of the continuous book that would impact 
market participants' ability to receive timely executions on the 
continuous book. As discussed above, the Exchange has conducted 
testing, including stress testing, of the potential latency the 
Periodic Auctions may introduce into the continuous book and has made 
representations that the impact would be minimal and de minimis from 
the perspective of the Order Protection Rule and would be well within a 
threshold of one millisecond.\138\ As a result, the Commission 
concludes that the potential latency caused by the Periodic Auctions as 
proposed does not impair fair and efficient access to the Exchange's 
protected quotations under the Exchange Act. In addition, the 
Commission believes that the Exchange has addressed the potential for 
manipulation or misuse of the Periodic Auctions and that the Exchange 
has appropriate surveillances in place to detect and deter such 
manipulation or misuse.
---------------------------------------------------------------------------

    \138\ See Commission Interpretation, supra note 107.
---------------------------------------------------------------------------

    The Commission must approve the proposed rule change, as modified 
by Amendments No. 3 and No. 4, which does not incorporate any of the 
commenters' suggestions, if it finds that it is consistent with the 
Exchange Act; \139\ alternatively the Commission must disapprove it if 
it cannot make that finding.\140\ For the reasons discussed above, the 
Commission finds that the proposed rule change, as modified by 
Amendments No. 3 and No. 4, is consistent with the Exchange Act \141\ 
and the rules and regulations thereunder applicable to a national 
securities exchange.
---------------------------------------------------------------------------

    \139\ See Section 19(b)(2)(C)(i) of the Exchange Act.
    \140\ See Section 19(b)(2)(C)(ii) of the Exchange Act.
    \141\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

IV. Solicitation of Comments on Amendments No. 3 and No. 4 to the 
Proposed Rule Change

    Interested persons are invited to submit written views, data, and 
arguments concerning whether Amendments No. 3 and No. 4 are consistent 
with the Exchange Act. 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 
on or before April 22, 2021.

V. Accelerated Approval of the Proposed Rule Change, as Modified by 
Amendments No. 3 and No. 4

    The Commission finds good cause to approve the proposed rule 
change, as modified by Amendments No. 3 and No. 4, prior to the 
thirtieth day after the date of publication of notice of the filing of 
Amendments No. 3 and No. 4 in the Federal Register. In Amendment No. 3, 
the Exchange (among other things) discussed how its proposal is 
consistent with Rule 201 of Regulation SHO. This supplemental 
information in Amendment No. 3 assisted the Commission in evaluating 
the Exchange's proposal and in determining that it is consistent with 
the Exchange Act. In Amendment No. 4, the Exchange corrected Example 6. 
Additionally, in Amendment No. 4, in response to comments, the Exchange 
discussed its efforts to submit trade reports to the SIP indicating 
which transactions were effected during Periodic Auctions, offered 
additional rationale for its proposal to allow cancellations of 
Periodic Auction Orders during ongoing Periodic Auctions, and set forth 
its implementation plans for the Periodic Auction. Neither Amendment 
No. 3 nor No. 4 raise any novel legal issue. Accordingly, the 
Commission finds good cause, pursuant to Section 19(b)(2) of the 
Exchange Act,\142\ to approve the proposed rule change, as modified by 
Amendments No. 3 and No. 4, on an accelerated basis.
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    \142\ 15 U.S.C. 78s(b)(2).
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VI. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Exchange Act,\143\ that the proposed rule change (SR-CboeBYX-2020-021), 
as modified by Amendments No. 3 and No. 4, be, and

[[Page 17252]]

it hereby is, approved on an accelerated basis.
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    \143\ Id.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\144\
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    \144\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-06676 Filed 3-31-21; 8:45 am]
BILLING CODE 8011-01-P


