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[Federal Register Volume 87, Number 3 (Wednesday, January 5, 2022)]
[Notices]
[Pages 532-535]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-28572]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-93888; SR-CboeBZX-2021-086]

Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Notice of 
Filing of a Proposed Rule Change To Amend the Opening Auction Process 
Provided Under Rule 11.23(b)(2)(B)

December 30, 2021.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that on December 21, 2021, Cboe BZX Exchange, Inc. (the ``Exchange'' or 
``BZX'') filed with the Securities and Exchange Commission (the 
``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

    The Exchange proposes a rule change to amend the Opening Auction 
process provided under Rule 11.23(b)(2)(B) to better align the Opening 
Auction Process with current market conditions, and, where certain 
market conditions are not optimal, to delay the Opening Auction from 
occurring until those market conditions have improved.
    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 Rule 11.23(b)(2)(B) to make the 
Opening Auction process more dynamic by, under certain circumstances 
delaying the Opening Auction in order to incorporate additional 
information into the determination of the Opening Auction price. 
Specifically, as proposed the Rule would provide that when there is no 
Valid NBBO \3\ in a BZX-listed security and there is an Indicative 
Price \4\ that is not within the Collar Price Range,\5\ the Opening 
Auction will be delayed until there is a Valid NBBO or the delay period 
has lapsed, as further described below. The Exchange believes that the 
proposal will make the Opening Auction price in less liquid securities 
more representative of current market conditions making the Opening 
Auction process a more meaningful price formation event in such BZX-
listed securities.
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    \3\ As provided in Rule 11.23(a)(23), an NBBO is 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. See 
Exchange Rule 11.23(a)(23).
    \4\ The term ``Indicative Price'' shall mean the price at which 
the most shares from the Auction Book and the Continuous Book would 
match. In the event of a volume based tie at multiple price levels, 
the Indicative Price will be the price which 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 Indicative 
Price will be the price closest to the Volume Based Tie Breaker. See 
Exchange Rule 11.23(a)(10).
    \5\ See Exchange Rule 11.23(a)(6).
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Background
    Rule 11.23(b)(2)(B) sets forth the process by which the BZX 
Official Opening Price \6\ is determined for BZX-listed securities 
during the Opening Auction Process. Specifically, as provided in Rule 
11.23(b)(2)(B), the Opening Auction price will be the price level 
within the Collar Price Range that maximizes the number of shares 
executed between the Continuous Book \7\ and Auction Book \8\ in the 
Opening Auction. In the event of a volume based tie at multiple price 
levels, the Opening Auction price will be the price which 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 Opening 
Auction price will be the price closest to the Volume Based Tie 
Breaker.\9\
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    \6\ See Exchange Rule 11.23(a)(5).
    \7\ See Exchange Rule 11.23(a)(7).
    \8\ See Exchange Rule 11.23(a)(1).
    \9\ The Volume Based Tie Breaker is the midpoint of the NBBO for 
a particular security where the NBBO is a Valid NBBO. Where the NBBO 
is not a Valid NBBO, the price of the FLSET is used as the Volume 
Based Tie Breaker, which for the Opening Auction process is the 
previous BZX Official Closing Price. See Exchange Rule 11.23(a)(23).
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    The Volume Based Tie Breaker for an Opening Auction will be the 
midpoint of the NBBO where there is a Valid NBBO. Where there is no 
Valid NBBO, the FLSET will be used as the Volume Based Tie Breaker. 
Because the FLSET is typically based on the most recent execution in a 
security during Regular Trading Hours, its value may be significantly 
away from the Indicative Price at the time of the Opening Auction 
process, especially in more thinly traded securities. As a result, the 
Exchange has observed instances where auction eligible orders priced 
in-line with the Indicative Price were not executed in the Opening 
Auction because they were outside the Collar Price Range established 
using the FLSET. Based on analysis by the Exchange and feedback from 
market participants, certain of these instances resulted in orders not 
receiving executions in the Opening Auction that would have otherwise 
occurred at prices that would have been acceptable to both parties to 
the execution. To illustrate this point, the Exchange presents the 
following example: Consider a security with a prevailing NBBO at 
9:30:00 a.m. of $27.10 x $29.54 and an Indicative Price of $27.90. 
Because the midpoint of the NBBO (i.e., $28.32) is more than the 
Maximum Percentage away from both the NBB and NBO, the NBBO is not a 
Valid NBBO. Accordingly, the FLSET would be used as the Volume Based 
Tie Breaker, which would by definition be the BZX Official Closing 
Price from the previous business day. For purposes of this example, 
that price is $26.52. Using the FLSET as the Collar Midpoint, the 
Collar Price Range would be $25.19 x $27.85. Because the Indicative 
Price is outside of the Collar Price Range, the auction would occur at 
the upper most price that is included in the Collar Price Range (i.e., 
$27.85) even though more shares could have executed at $27.90. Because 
the Opening Auction was forced into the Collar Price Range and occurred 
at $27.85, a contingent of auction eligible orders that would have 
executed at $27.90 that were priced

[[Page 533]]

equally to or more aggressive than the Indicative Price and within the 
NBBO (i.e., sell orders priced between $27.86 and $27.90) would be 
canceled without execution.\10\
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    \10\ See Exchange Rule 11.23(b)(3)(C).
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Proposal
    Based on the scenario described above, the Exchange is proposing to 
amend its Opening Auction process such that rather than immediately 
forcing the Opening Auction to occur at either the lowest or highest 
end of the Collar Price Range and cancelling auction eligible orders 
that were willing to execute at the Indicative Price but outside of the 
Collar Price Range, the System would instead wait for the first of a 
Valid NBBO, the Indicative Price to be within the Collar Price Range, 
or the passage of a certain amount of time before initiating the 
Opening Auction process, as described in additional detail below. 
Proposed Rule 11.23(b)(2)(B)(i) would set forth the ``Standard Opening 
Process'', which mirrors the current process described in Rule 
11.23(b)(2)(B). Proposed Rule 11.23(b)(2)(B)(ii) would provide that if 
there is no Valid NBBO and the Indicative Price is within the Collar 
Price Range, the Opening Auction price will be established pursuant to 
the Standard Opening Process. Proposed Rule 11.23(b)(2)(B)(iii) would 
delay and set forth an alternative Opening Auction Process in the event 
there is no Valid NBBO and the Indicative Price is not within the 
Collar Price Range. The proposal is designed to prevent the 
cancellation of auction eligible orders priced equally or more 
aggressively than the Indicative Price which the Exchange believes will 
facilitate the presence of sufficient liquidity and information to make 
the Opening Auction a meaningful price formation event in BZX-listed 
securities.
    Proposed Rule 11.23(b)(2)(B)(iii) would provide that the Opening 
Auction price will be delayed as set forth in subparagraphs (a) and (b) 
as follows:
    (a) If after the one-second delay there is a Valid NBBO or the 
Indicative Price is within the Collar Price Range, the Opening Auction 
price will be established pursuant to the Standard Opening Auction 
Process. If there is no Valid NBBO and the Indicative Price is not 
within the Collar Price Range after the one-second delay, the Opening 
Auction will be delayed by one additional second, at which point if 
there is a Valid NBBO or the Indicative Price is within the Collar 
Price Range, the Opening Auction price will be established pursuant to 
the Standard Opening Process. If after the additional one-second delay 
there is a Valid NBBO or the Indicative Price is not within the Collar 
Price Range, the process described in this paragraph (a) will continue 
to be applied in one-second increments until either the Opening Auction 
occurs or until five seconds has lapsed (i.e., 9:30:05 a.m.).
    (b) If the Opening Auction has not occurred by 9:30:05, the System 
will widen the Collar Price Range in the direction of the auction 
imbalance by 5% of the Final Last Sale Eligible Trade as of 9:30:05 
a.m. (the ``Widening Amount''). If the Indicative Price is within the 
widened Collar Price Range, the Opening Auction price will be 
established pursuant to the Standard Opening Auction Process. If the 
Indicative Price is not within the widened Collar Price Range, the 
Opening Auction will be further delayed, as discussed below.
    Proposed Rules 11.23(b)(2)(B)(iii)(b)(1) through (4) would set 
forth the delay of the Opening Auction if no auction has occurred 
between 9:30:05 and 9:34:30. Specifically, the proposed Rules would 
provide:
    (1) The System will check to see whether the Indicative Price is 
inside the widened Collar Price Range every second between 9:30:05 and 
9:30:30 a.m. If an Indicative Price is inside the widened Collar Price 
Range during a check, the Opening Auction price will be established 
pursuant to the Standard Opening Auction Process.
    (2) If by 9:30:30 a.m. the Indicative Price is not within the 
widened Collar Price Range, the Collar Price Range will again widen by 
the Widening Amount. The System will check to see whether the 
Indicative Price is inside the widened Collar Price Range every second 
between 9:30:30 and 9:31:30 a.m. If an Indicative Price is inside the 
widened Collar Price Range during a check, the Opening Auction price 
will be established pursuant to the Standard Opening Auction Process.
    (3) If by 9:31:30 a.m. the Indicative Price is not within the 
widened Collar Price Range, the System will check to see whether the 
Indicative Price is inside the widened Collar Price Range every second 
between 9:31:30 and 9:34:30 a.m. If an Indicative Price is inside the 
widened Collar Price Range during a check, the Opening Auction price 
will be established pursuant to the Standard Opening Auction Process. 
Unless the Opening Auction has occurred, the Collar Price Range will 
widen in the direction of the auction imbalance by the Widening Amount 
each minute from 9:31:30 to 9:34:30.
    (4) If no Opening Auction has occurred by 9:34:30 a.m., the Opening 
Auction will occur pursuant to the Standard Opening Auction Process 
using the expanded Collar Price Range as of 9:34:30.
    The Exchange also proposes to move the last two sentences of 
existing Rule 11.23(b)(2)(B) to proposed Rules 11.23(b)(2)(B)(iv) and 
(v), respectively. Specifically, proposed Rule 11.23(b)(2)(B)(iv) would 
provide that the Opening Auction Price will be the BZX Official Opening 
Price. Proposed Rule 11.23(b)(2)(B)(v) would provide that in the event 
that there is no Opening Auction for an issue, the BZX Official Opening 
Price will be the price of the FLSET.
    Based on the above proposed amendments, the Exchange proposes to 
amend Rules 11.23(b)(1)(A) and (B) to reflect that the Opening Auction 
may occur at a time other than 9:30 a.m. Specifically, the Exchange 
proposes to amend paragraph (A) to provide the following: Users may 
submit orders to the Exchange as set forth in Rule 11.1. Any Eligible 
Auction Orders \11\ designated for the Opening Auction will be queued 
for participation in the Opening Auction. Users may submit limit-on-
open (``LOO'') and market-on-open (``MOO'') orders until 9:28 a.m., at 
which point any additional LOO and MOO orders submitted to the Exchange 
will be rejected. Regular Hours Only \12\ (``RHO'') market orders will 
also be rejected from 9:28 a.m. until the Opening Auction has 
concluded. Users may submit late-limit-on-open \13\ (``LLOO'') orders 
from 9:28 a.m. until the Opening Auction has concluded. Any LLOO orders 
submitted before 9:28 a.m. or after the Opening Auction has concluded 
will be rejected. RHO limit orders submitted from 9:28 a.m. until the 
Opening Auction has concluded will be treated as LLOO orders.
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    \11\ See Exchange Rule 11.23(a)(8).
    \12\ See Exchange Rule 11.9(b)(7).
    \13\ See Exchange Rule 11.23(a)(12).
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    The Exchange proposes to amend Rule 11.23(b)(1)(B) to provide that 
Eligible Auction Orders designated for the Opening Auction may not be 
cancelled or modified from 9:28 a.m. until the Opening Auction has 
concluded except that RHO limit orders designated for the Opening 
Auction may be modified, but not cancelled, from 9:28 a.m. until the 
time the Opening Auction has concluded. Any such RHO limit orders 
modified from 9:28 a.m. until the Opening Auction has

[[Page 534]]

concluded will be treated as LLOO orders.
    Applying the example discussed above, the Opening Auction would be 
delayed at 9:30:00 as there was no Valid NBBO and the Indicative Price 
was outside of the Collar Price Range. Under the proposal, the Opening 
Auction would be delayed until either (1) the NBBO becomes a Valid 
NBBO, (2) the Indicative Price is within the Collar Price Range (i.e., 
if the Opening Auction occurred between 9:30:01 and 9:30:05) or within 
the widened Collar Price Range (i.e., if the Opening Auction occurred 
between 9:30:06 and 9:34:30), or (3) the delay period of four minutes 
and 30 seconds lapsed. While the proposal does not guarantee that 
certain order priced equally or more aggressive to the Indicative Price 
will execute in the Opening Auction, it provides for additional time 
for the market to develop at the beginning of the trading day before 
conducting the Opening Auction.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6(b) of the Act.\14\ Specifically, the proposed change is 
consistent with Section 6(b)(5) of the Act,\15\ because it would 
promote just and equitable principles of trade, remove impediments to 
and perfect the mechanism of a free and open market and a national 
market system, and, in general, protect investors and the public 
interest. Generally, the Exchange believes that the proposed changes 
will improve the price discovery process in the Opening Auction for 
securities listed on the Exchange along with additional benefits set 
forth below.
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    \14\ 15 U.S.C. 78f(b).
    \15\ 15 U.S.C. 78f(b)(5).
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    First, the Exchange believes proposed Rules 11.23(b)(2)(B)(i) and 
(ii) will contribute to the protection of investors and the public 
interest by memorializing the circumstances under which the Exchange 
will continue to operate the Opening Auction in the same way that it 
does today. Second, the Exchange believes proposed Rule 
11.23(b)(2)(B)(iii) would promote just and equitable principles of 
trade, remove impediments to and perfect the mechanism of a free and 
open market and a national market system and, in general, protect 
investors and the public interest. The proposal is designed to increase 
the likelihood that auction eligible orders that are priced equally or 
more aggressive than the Indicative Value of the security are able to 
participate in the Opening Auction instead of being canceled because 
they are priced outside the Collar Price Range established using the 
FLSET. As stated above, current Rule 11.23(b)(2)(B) provides that in 
the event there is no Valid NBBO, the FLSET will be used as the Volume 
Based Tie Breaker and basis for calculating the Collar Price Range. 
Because the current Opening Auction process occurs at 9:30:00 a.m., 
such a Collar Price Range is based on an FLSET that may not have 
occurred recently or may not otherwise be reflective of current market 
conditions. As a result, the Exchange has observed instances where 
auction eligible orders priced equally or more aggressive than the 
Indicative Price were canceled without execution because they were 
outside the Collar Price Range established using the FLSET. The 
Exchange believes that the proposed approach would maximize the 
execution of auction eligible orders priced equally or more aggressive 
than the Indicative Price of the security while still [sic]. As such, 
the Exchange believes that the proposal would promote just and 
equitable principles of trade, remove impediments to and perfect the 
mechanism of a free and open market and a national market system and, 
in general, protect investors and the public interest by allowing the 
execution of orders in the Opening Auction with limit prices reflect 
current market conditions.
    The Exchange notes that the concept of delaying an auction and 
widening the Collar Price Range is similar to the Twelfth Amendment of 
the Plan to Address Extraordinary Market Volatility \16\ (the 
``Plan''). Specifically, Amendment 12 was created to improve re-
openings following a trading pause,\17\ with an eye towards carefully 
balancing halt auction price quality and the speed with which 
continuous trading can be resumed. Amendment 12 provided that auction 
halt periods would be extended if either the auction price at which the 
most shares would be traded is outside the range of the pre-defined 
price threshold collars (the ``price threshold collars'') or there is a 
market order share imbalance. Further, Amendment 12 provided that the 
price threshold collars would be widened in the event that the 
auction's halt period is extended. In its approval of Amendment 12, the 
Commission stated that it is appropriate in the public interest, for 
the protection of investors and the maintenance of a fair and orderly 
market to provide that a trading pause continue until the primary 
listing exchange has reopened trading using its established reopening 
procedures, even if such reopening is more than 10 minutes after the 
beginning of a trading pause, and to require that trading centers may 
not resume trading in an NMS Stock following a trading pause without 
Price Bands in such NMS Stock. The Commission believes that these two 
provisions together support a more standardized process for reopening 
trading after a trading pause has been declared. Further, these 
provisions ensure that trading would not resume after a trading pause 
without Price Bands. Given the similarity of the proposal to Amendment 
12, the Exchange believes the proposal is appropriate, in the public 
interest, for the protection of investors and the maintenance of a fair 
and orderly market.
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    \16\ See Securities and Exchange Act no. 79410 (November 28, 
2016) 81 FR 87114 (December 2, 2016) (Notice of Filing of the 
Twelfth Amendment to the National Market System Plan To Address 
Extraordinary Market Volatility (``Amendment 12'')).
    \17\ A ``trading pause'' refers to a function of the Limit Up-
Limit Down (``LULD'') mechanism provided under the Plan. 
Specifically, the Plan sets for procedures that provide for market-
wide LULD requirements that prevent trades in individual NMS stocks 
from occurring outside of the specified price bands and provides for 
trading pauses to accommodate more fundamental price moves.
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    Finally, the Exchange believes its proposed clarifications to Rules 
11.23(b)(1)(A) and (B) to reflect that the Opening Auction may occur at 
a time other than 9:30 a.m. will contribute to the protection of 
investors and the public interest. Specifically, the Exchange believes 
the proposed amendments to Rules 11.23(b)(1)(A) and (B) will add 
clarity, transparency and internal consistency to Exchange rules making 
them easier to navigate, in light of the other proposed Rule changes 
described herein.

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 not necessary or appropriate in 
furtherance of the purposes of the Act. To the contrary, allowing the 
Exchange to make the above proposed modifications will allow the 
Exchange to better compete with other exchanges as a listing venue by 
improving the Exchange's auction process by allowing more executions to 
occur at more reasonable prices that are based on the current value of 
the security. As mentioned above, the Exchange has received feedback 
from market participants regarding the issue under the current process, 
and the proposed amendments will both address this feedback and improve 
the Exchange's auction process, allowing it

[[Page 535]]

to better compete as both a listing and execution 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.

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 [email protected]. Please include 
File Number SR-CboeBZX-2021-086 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-2021-086. 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-2021-086 and 
should be submitted on or before January 26, 2022.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\18\
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    \18\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2021-28572 Filed 1-4-22; 8:45 am]
BILLING CODE 8011-01-P
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