[Federal Register Volume 86, Number 94 (Tuesday, May 18, 2021)]
[Notices]
[Pages 26982-26985]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-10389]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-91875; File No. SR-CboeBZX-2021-036]


Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Notice of 
Filing of a Proposed Rule Change To Exclude a National Best Bid or 
Offer From the Calculation of the BZX Official Closing Price, as 
Provided in Rule 11.23(c)(2)(B)(ii)(b), That Is Outside the Bands 
Provided Under the Plan To Address Extraordinary Market Volatility

May 12, 2021.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on April 29, 2021, Cboe BZX Exchange, Inc. (``Exchange'' or ``BZX'') 
filed with the Securities and Exchange Commission (``Commission'') the 
proposed rule change as described in Items I, II, and III below, which 
Items have been prepared by the Exchange. The Commission is publishing 
this notice to solicit comments on the proposed rule change from 
interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    Cboe BZX Exchange, Inc. (the ``Exchange'' or ``BZX'') is filing 
with the Securities and Exchange Commission (``Commission'') a proposed 
rule change to exclude an National Best Bid or Offer \3\ (``NBBO'') 
from the calculation of the BZX Official Closing Price, as provided in 
Rule 11.23(c)(2)(B)(ii)(b), that is outside the bands provided under 
the Plan to Address Extraordinary Market Volatility (the ``Limit Up-
Limit Down'' or ``LULD'' Plan).\4\ The text of the proposed rule change 
is provided in Exhibit 5.
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    \3\ See BZX Rule 1.5(o).
    \4\ See Securities Exchange Act No. 88704 (April 21, 2020) 85 FR 
23383 (April 27, 2020) (File No. 4-634) (Amendment No. 20 Approval 
Order).
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    The text of the proposed rule change is also available on the 
Exchange's website (http://markets.cboe.com/us/equities/regulation/rule_filings/bzx/), at the Exchange's Office of the Secretary, and at 
the Commission's Public Reference Room.

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

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

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

1. Purpose
    The Exchange proposes to amend BZX Rule 11.23, Auctions, to modify 
how the BZX Official Closing Price, which is the price disseminated to 
the consolidated tape as the market center closing trade,\5\ would be 
determined for any BZX-listed security that is not a corporate security 
(i.e., an Exchange-Traded Product (``ETP'') as provided in Exchange 
Rule 14.11, also referred to as a ``Derivative Securities Product'') 
when the time-weighted average price of the NBBO midpoint is used to 
calculate the BZX Official Closing Price, as set forth in Rule 
11.23(c)(2)(B)(ii)(b). This provision of Rule 11.23(c)(2)(B)(ii)(b) is 
only used to determine the BZX Official Closing Price and does not 
impact any executions in the Closing Auction. Such provision also only 
applies where there is less than one round lot executed in the Closing 
Auction and where there has not been a trade that would qualify as a 
Final Last Sale Eligible Trade within the final five minutes before the 
end of Regular Trading Hours. The Exchange is proposing instead to 
exclude from this midpoint calculation under Rule 11.23(c)(2)(B)(ii)(b) 
any NBBO when either the NBB is lower than the Lower Price Band or the 
NBO is higher than the Upper Price Band, as further described below. 
Excluding such NBBOs from the calculation will ensure that only those 
quotes in which both the NBB and NBO are actually executable will be 
included in determining the BZX Official Closing Price.
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    \5\ See Exchange Rule 11.23(a)(3).
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    Rule 11.23(c)(2)(B)(i) through (iii) sets forth how the BZX 
Official Closing Price for Derivative Securities Products is 
determined. Paragraph (B)(i) provides that where at least one round lot 
is executed in the Closing Auction, the Closing Auction price will be 
the BZX Official Closing Price. Paragraph (B)(ii) provides that in the 
event that the BZX Official Closing Price cannot be determined under 
paragraph (B)(i), the BZX Official Closing Price for such security will 
depend on when the last consolidated last-sale trade occurs. 
Specifically, if a trade that would qualify as a Final Last Sale 
Eligible Trade \6\ occurred (a) within the final five minutes before 
the end of Regular Trading Hours,\7\ the Final Last Sale Eligible Trade 
will be the BZX Official Closing Price; or (b) prior to five minutes 
before the end of Regular Trading Hours, the time-weighted average 
price of the NBBO midpoint measured over the last five minutes before 
the end of Regular Trading Hours will be the BZX Official Closing 
Price. Paragraph (B)(iii) provides that if the BZX Official Closing 
Price cannot be determined under paragraphs (B)(i) or (B)(ii), the 
Final Last Sale Eligible Trade will be the BZX Official Closing Price.
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    \6\ The term ``Final Last Sale Eligible Trade'' shall mean the 
last round lot trade occurring during Regular Trading Hours on the 
Exchange if the trade was executed within the last one second prior 
to either the Closing Auction or, for Halt Auctions, trading in the 
security being halted. Where the trade was not executed within the 
last one second, the last round lot trade reported to the 
consolidated tape received by the Exchange during Regular Trading 
Hours and, where applicable, prior to trading in the security being 
halted will be used. If there is no qualifying trade for the current 
day, the BZX Official Closing Price from the previous trading day 
will be used. See BZX Rule 11.23(a)(9).
    \7\ The term ``Regular Trading Hours'' means the time between 
9:30 a.m. and 4:00 p.m. Eastern Time. See BZX Rule 1.5(w).
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    The Exchange proposes to amend Rule 11.23(c)(2)(B)(ii)(b) in order 
to change how the BZX Official Closing Price is calculated using the 
time-weighted average price of the NBBO midpoint measured over the last 
five minutes before the end of Regular Trading Hours. Under current 
functionality, the Exchange uses all NBBO quotes during the last five 
minutes of Regular Trading Hours to determine the BZX Official Closing 
Price under Rule 11.23(c)(2)(B)(ii)(b). Certain market conditions may 
result in setting a BZX Official Closing Price that is not necessarily 
reflective of a Derivative Securities Product's reasonable market 
value. For example, if during a particular period of time in the last 
five minutes of Regular Trading Hours, a Derivative Securities Product 
has an NBO that is reasonably reflective

[[Page 26983]]

of the current market value and an NBB that is significantly away from 
the current market value, the midpoint of the NBBO could be 
significantly lower than the reasonable market value of the security. 
In turn, the BZX Official Closing Price, when determined pursuant to 
Rule 11.23(c)(2)(B)(ii)(b), could also be set at a price that is 
significantly lower than the reasonable market value of the security.
    Moreover, Rule 11.23(c)(2)(B)(ii)(b) is the only method of 
determining the BZX Official Closing Price that does not provide 
safeguards against a price that would not have been executable during 
Regular Trading Hours. Specifically, if the BZX Official Closing Price 
were determined pursuant to Rule 11.23(c)(2)(B)(i), the price would be 
determined as a result of the Closing Auction which must occur at a 
price within a Collar Price Range.\8\ Generally, the Collar Price Range 
limits the Closing Auction from occurring at a price ranging from up to 
10% below the Collar Midpoint \9\ to up to 10% above the Collar 
Midpoint, and is based on the Exchange's clearly erroneous execution 
standards as detailed in Rule 11.17(c)(1). Similarly, if the BZX 
Official Closing Price were determined pursuant to Rules 
11.23(c)(2)(B)(ii)(a) or 11.23(c)(2)(B)(iii), the price would be 
determined by the Final Last Sale Eligible Trade, as described 
above.\10\ Any Final Last Sale Eligible Trade would occur during 
Regular Trading Hours, and thus could not occur outside the bands 
provided under the LULD Plan, as further discussed below.
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    \8\ See Exchange Rule 11.23(a)(6).
    \9\ Id.
    \10\ See Exchange Rule 11.23(a)(9).
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    Given the above, the Exchange proposes to amend Rule 
11.23(c)(2)(B)(ii)(b) to exclude an NBBO outside the bands provided 
under the LULD Plan from the BZX Official Closing Price calculation. By 
way of background, the LULD Plan created a market-wide limit up-limit 
down mechanism to address extraordinary volatility in NMS Stocks by 
preventing unwarranted Trading Pauses \11\ that are unrelated to 
volatility while also reducing the negative impacts of sudden 
unanticipated price movements in NMS Stocks.\12\ The LULD Plan provides 
for market-wide single-stock price bands designed to prevent individual 
NMS Stocks from trading outside of specific price bands during Regular 
Trading Hours. Those price bands are based on a reference price for 
each NMS Stock that equals the arithmetic mean price of Eligible 
Reported Transactions \13\ for the NMS Stock over the immediately 
preceding five-minute period.\14\ Specifically, the price bands for an 
NMS Stock are calculated by applying the Percentage Parameter \15\ for 
such NMS Stock to the Reference Price, with the ``Lower Price Band'' 
being a Percentage Parameter below the Reference Price, and the ``Upper 
Price Band'' being a Percentage Parameter above the Reference Price. 
The Upper and Lower Price Bands are calculated and disseminated market-
wide by the securities information processor (``SIP'') feeds with 
trading generally prohibited outside of the specified price bands. 
Thus, orders priced outside the Upper and Lower Bands are non-
executable.\16\ The Percentage Parameter is determined by a security's 
designation as a Tier 1 \17\ or Tier 2 \18\ security. Currently, all 
Derivative Securities Products listed on the Exchange are Tier 2 
Securities, which have the following pricing parameters under the LULD 
Plan: Securities greater than $3.00 have a Percentage Parameter of 10%; 
securities $0.75 up to and including $3.00 have a Percentage Parameter 
of 20%, and, securities less than $0.75 have a Percentage Parameter of 
the lesser of $0.15 or 75%.\19\ As discussed in the Eighteenth 
Amendment to the LULD Plan,\20\ recent data has shown that the 
Percentage Parameters used to determine the width of the price bands 
were reasonably designed to ensure that they were not too wide as to 
permit trades to occur at prices that do not properly reflect supply 
and demand, and not too narrow as to cause excessive disruptions, 
inhibiting the price discovery process.
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    \11\ See section VII of the LULD Plan https://assets.website-files.com/5fd0e55ae5f254cd291b2d35/5fd10d8e4c53d2024dd15f4f_LULD_Plan%20Amendment_20.pdf.
    \12\ See Exchange Rule 11.18(e).
    \13\ An ``Eligible Reported Transaction'' generally means 
transactions that are eligible to update the last sale price of an 
NMS Stock.
    \14\ See Securities Exchange Act Release No. 67091 (May 31, 
2012) 77 FR 33498 (June 6, 2012) (Order approving the National 
Market System Plan to Address Extraordinary Market Volatility).
    \15\ The ``Percentage Parameter'' means the percentages for each 
tier of NMS Stocks set forth in Appendix A of the Plan.
    \16\ See Exchange Rule 11.18(e)(4). Additionally, paragraph 
VI(A)(2) of the LULD Plan states ``When a National Best Bid is below 
the Lower Price Band or a National Best Offer is above the Upper 
Price Band for an NMS Stock, the Processor shall disseminate such 
National Best Bid or National Best Offer with an appropriate flag 
identifying it as non-executable.''
    \17\ Tier 1 securities comprise all securities in the S&P 500, 
the Russell 1000, and select ETPs.
    \18\ Tier 2 securities comprise of all NMS Stocks not included 
in Tier 1, except for rights and warrants, which are specifically 
excluded from coverage.
    \19\ See the LULD Annual Report for 2020 at 
60663c2660e0056c9c8b6023_LULD FINAL.pdf (website-files.com).
    \20\ See Securities Exchange Act Release No. 84843 (December 18, 
2018) 83 FR 66464 (December 26, 2018). See also Securities Exchange 
Act Release No. 85623 (April 11, 2019) 84 FR 16086 (April 17, 2019) 
(File No. 4-631).
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    Similar to the LULD Plan, the Exchange's proposal seeks to 
calculate a BZX Official Closing Price pursuant to Rule 
11.23(c)(2)(B)(ii)(b) that accurately reflects the supply and demand in 
the Derivative Securities Product. Therefore, the Exchange believes it 
is reasonable to limit the NBBO used to calculate the Official Closing 
Price pursuant to Rule 11.23(c)(2)(B)(ii)(b) to an NBB and NBO within 
the LULD Bands. As stated above, certain market conditions may result 
in setting a BZX Official Closing Price that is not necessarily 
reflective of a Derivative Securities Product's reasonable market 
value. For example, if during the last two minutes of Regular Trading 
Hours the NBB is below the Lower Price Band while the NBO is inside the 
price band (i.e., a straddle state), the NBBO midpoint and in turn the 
BZX Official Closing Price may be significantly lower than the 
reasonable market value of the Derivative Securities Product. In turn, 
the BZX Official Closing Price, when determined pursuant to Rule 
11.23(c)(2)(B)(ii)(b), could also be set at a price that is 
significantly lower than the reasonable market value of the security. 
As proposed, the NBBO in the above example would be excluded from the 
Official Closing Price calculation provided under Rule 
11.23(c)(2)(B)(ii)(b) as the NBB was below the Lower Price Band. The 
Exchange believes it is reasonable to exclude such an NBBO because the 
NBB in this example would not have been executable during Regular 
Trading Hours as it was below the Lower Price Band, and thus could not 
contribute to an NBBO that is reflective of a Derivative Securities 
Product's reasonable market value. The Exchange believes that this 
proposed change will ensure a BZX Official Closing Price determined 
pursuant to Rule 11.23(c)(2)(B)(ii)(b) does not occur at a price that 
would not have been executable in either the Closing Auction or during 
Regular Trading Hours. Further, the Exchange believes the proposal will 
ensure that the BZX Official Closing Price is reflective of the 
reasonable market value of the Derivative Securities Product.
    The Exchange notes NYSE Arca, Inc. (``NYSE Arca'') Rule 
1.11(ll)(1)(B) [sic] similarly provides for the exclusion of an NBBO 
midpoint that is not reflective of a security's true and current value 
from its calculation of the Official Closing Price. The intent of NYSE 
Arca

[[Page 26984]]

Rule 1.11(ll)(1)(B) [sic] is to ``validate whether an NBBO used in the 
calculation of the Official Closing Price bears a relation to the value 
of the underlying security.'' \21\ The Exchange's proposal similarly 
intends to exclude an NBBO from the calculation of the Official Closing 
Price that is not reasonably reflective of the current market value as 
the proposal would exclude an NBBO where one or both of the quotes 
comprising the NBBO would not have been executable during Regular 
Trading Hours.
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    \21\ See Securities Exchange Act No. 84079 (September 11, 2018) 
83 FR 46981 (September 17, 2018) (SR-NYSEArca-2018-63) (the ``NYSE 
Arca Proposal''). See also Securities Exchange Act No. 84471 
(October 23, 2018) 83 FR 54384 (October 29, 2018) (SR-NYSEArca-2018-
63) (the ``Approval Order'').
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    The Exchange will implement the proposed rule change as soon as is 
practicable after the operative date of this proposed rule change and 
will announce the implementation date via Trade Desk Notice.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6(b) of the Act,\22\ in general, and furthers the 
objectives of Section 6(b)(5) of the Act,\23\ in particular, in that it 
is designed to prevent fraudulent and manipulative acts and practices, 
to promote just and equitable principles of trade, to foster 
cooperation and coordination with persons engaged in facilitating 
transactions in securities, and to remove impediments to and perfect 
the mechanism of a free and open market and a national market system.
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    \22\ 15 U.S.C. 78f(b).
    \23\ 15 U.S.C. 78f(b)(5).
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    The Exchange believes that the proposed rule change would remove 
impediments to and perfect the mechanism of a free and open market and 
a national market system because it is designed to prevent the BZX 
Official Closing Price from being set at a price that is significantly 
away from the reasonable market value of an Exchange-listed Derivative 
Securities Product. Specifically, in the event that during the last 
five minutes of the Regular Trading Hours either the NBB or NBO (or 
both) is outside of the applicable LULD Bands, the proposed amendment 
would allow the Exchange to exclude such quotes from its calculation of 
the BZX Official Closing Price as provided under Rule 
11.23(c)(2)(B)(ii)(b). The exclusion of an NBBO outside the LULD bands 
would help to ensure that the NBBO midpoint used in the calculation of 
the BZX Official Closing Price pursuant to the Rule accurately reflects 
the supply and demand in the Derivative Securities Product, and is not 
set at a price that would not have been executable during Regular 
Trading Hours.
    Under current rules, Rule 11.23(c)(2)(B)(ii)(b) is the only 
mechanism for determining the BZX Official Closing Price that does not 
provide safeguards to ensure that the price is set near the reasonable 
market value of the Derivative Securities Product. As discussed above, 
if the BZX Official Closing Price were determined pursuant to Rule 
11.23(c)(2)(B)(i), the price would be determined as a result of the 
Closing Auction which must occur at a price within a Collar Price Range 
that is similar to the Percentage Parameters provided under the LULD 
Plan. Similarly, if the BZX Official Closing Price were determined 
pursuant to Rules 11.23(c)(2)(B)(ii)(a) or 11.23(c)(2)(B)(iii), the 
price would be the Final Last Sale Eligible Trade which could not occur 
outside the bands provided under the LULD Plan. Therefore, the Exchange 
believes the proposed change will provide greater transparency and 
certainty in the determination of the BZX Official Closing Price by 
eliminating the possibility that the BZX Official Closing Price could 
be set at a price that could not have executed in the Closing Auction 
or during Regular Trading Hours.
    The Exchange believes the LULD bands are an appropriate mechanism 
to ensure that the BZX Official Closing Price is set at a price that 
reflects the reasonable market value of the Derivative Securities 
Product. The LULD Plan is intended to reduce the negative impacts of 
sudden unanticipated price movements in NMS Stocks, thereby protecting 
investors and promoting a fair and orderly market. As discussed above, 
the Exchange's proposal seeks to ensure a BZX Official Closing Price 
that accurately reflects the supply and demand in the Derivative 
Securities Product and prevent the calculation of the BZX Official 
Closing Price at a price that could not have occurred in the Closing 
Auction or during Regular Trading Hours. Therefore, the Exchange 
believes it is reasonable to limit the NBBO used for such calculation 
to an NBB and NBO within the LULD Bands.
    While the Exchange believes the proposal would benefit investors, 
the Exchange does not believe that a significant number of quotes would 
be excluded from the calculation of the BZX Official Closing Price 
under the proposal. As noted in the LULD 2020 Annual Report,\24\ LULD 
events were less likely to occur during the last 25 minutes of the 
trading day. Despite accounting for just 6% of the trading day (except 
short days), the last 25 minutes accounted for 3.43% LULD events. 
Specifically, the last 25 minutes involved a daily average of 93.3 
straddle states during 2020, when the total daily average number of 
straddle states was 3,044.7. Therefore, the Exchange does not expect 
quotes to be excluded from the BZX Official Closing Price calculation 
as proposed with great frequency.
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    \24\ See supra note 19.
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition that is not necessary or appropriate 
in furtherance of the purposes of the Act. The proposed rule change is 
designed to ensure that the BZX Official Closing Price of BZX-listed 
Derivative Securities Products is calculated, pursuant to Rule 
11.23(c)(2)(B)(ii)(b), at a price that is reasonably reflective of the 
market value of the security in the event that either the NBB or NBO is 
significantly away from the reasonable market value of the security 
during the last five minutes of Regular Trading Hours. Further, the 
proposal is designed to ensure that such a BZX Official Closing Price 
is not set at a price that would not have been executable during 
Regular Trading Hours or in the Closing Auction. The Exchange believes 
the proposed changes would improve the experience of market 
participants trading on the Exchange without imposing any significant 
burden on competition as the proposal would simply provide for 
safeguards to ensure that the BZX Official Closing Price is set near 
the reasonable market value of the Derivative Securities Product. 
Further, as the proposal is designed to ensure the BZX Official Closing 
Price calculated pursuant to Exchange Rule 11.23(c)(2)(B)(ii)(b) 
accurately reflects the supply and demand in the Derivative Securities 
Product, the Exchange believes the proposal will help it better compete 
as a listing venue.

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

    The Exchange neither solicited nor received comments on the 
proposed rule change.

[[Page 26985]]

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period up to 90 days (i) as the 
Commission may designate if it finds such longer period to be 
appropriate and publishes its reasons for so finding or (ii) as to 
which the Exchange consents, the Commission will:
    A. By order approve or disapprove such proposed rule change, or
    B. institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the 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-CboeBZX-2021-036 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-CboeBZX-2021-036. 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-CboeBZX-2021-036 and should be submitted 
on or before June 8, 2021.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\25\
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    \25\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-10389 Filed 5-17-21; 8:45 am]
BILLING CODE 8011-01-P


