Document ID: SEC-2018-1701-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Cboe BZX Exchange, Inc.
Posted Date: 2018-11-05T05:00Z

[Federal Register Volume 83, Number 214 (Monday, November 5, 2018)]
[Notices]
[Pages 55435-55438]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-24067]

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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-84507; File No. SR-CboeBZX-2018-079]

Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Notice of 
Filing of a Proposed Rule Change, as Modified by Amendment No. 1, To 
Establish How the BZX Official Closing Price Would Be Determined for 
BZX-Listed Securities

October 30, 2018.
    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 October 18, 2018, 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.\3\ The 
Commission is publishing this notice to solicit comments on the 
proposed rule change, as modified by Amendment No. 1, from interested 
persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ On October 29, 2018, the Exchange filed Amendment No. 1 to 
the proposed rule change to specify the date upon which the 
Exchange's President (or designee) approved the proposed rule 
change, pursuant to delegated authority.
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes a rule change to establish how the BZX 
Official Closing Price would be determined for BZX-listed securities.
    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 the 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Exchange proposes to amend BZX Rule 11.23, Auctions, to amend 
how the BZX Official Closing Price \4\ would be determined for any BZX-
listed security that is not a corporate security (a ``Derivative 
Securities Product'') \5\ if the Exchange does not conduct a Closing 
Auction or if a Closing Auction trade is less than a round lot 
(collectively, an ``Illiquid Auction''). Rule 11.23(c)(2)(B) currently 
provides how the Exchange determines the price of the Closing Auction 
and the BZX Official Closing Price. This proposed functionality is very 
similar to functionality that has already been approved by the 
Commission and is operational on NYSE Arca, Inc. (``Arca'') (the ``Arca 
Rule'') \6\ and the Exchange believes that it raises no new

[[Page 55436]]

substantive issues for the Commission to review.
---------------------------------------------------------------------------

    \4\ As defined in Rule 11.23(a)(3), the term ``BZX Official 
Closing Price'' shall mean the price disseminated to the 
consolidated tape as the market center closing trade.
    \5\ With respect to equities traded on the Exchange, the term 
``new derivative securities product'' means a security that meets 
the definition of ``new derivative securities product'' in Rule 19b-
4(e) under the Securities Exchange Act of 1934. See BZX Rule 
14.11(j). For purposes of Rule 19b-4(e), a ``new derivative 
securities product'' means any type of option, warrant, hybrid 
securities product or any other security, other than a single equity 
option or a security futures product, whose value is based, in whole 
or in part, upon the performance of, or interest, in, an underlying 
instrument. 17 CFR 240.19b-4(e).
    \6\ See Securities Exchange Act Release No. 82907 (March 20, 
2018), 83 FR 12980 (March 26, 2018) (SR-NYSEArca-2018-08) (order 
approving proposed changes to Arca Rule 1.1(ll) related to 
determining an Official Closing Price).
---------------------------------------------------------------------------

    Current Rule 11.23(c)(2)(B) outlines the process for determining 
the price level at which the Closing Auction will occur \7\ and 
provides that the Closing Auction price will be the BZX Official 
Closing Price or, in the event that there is no Closing Auction for an 
issue, the BZX Official Closing Price will be the price of the Final 
Last Sale Eligible Trade.\8\
---------------------------------------------------------------------------

    \7\ The Exchange notes that it is not proposing to make changes 
to the process for determining the price level at which the Closing 
Auction will occur.
    \8\ As defined in Rule 11.23(a)(9), the term ``Final Last Sale 
Eligible Trade'' shall mean the last 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 trade reported to 
the consolidated tape received by BZX 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.
---------------------------------------------------------------------------

    The Exchange proposes to amend Rule 11.23(c)(2)(B) in order to 
change how the BZX Official Closing Price for an Exchange-listed 
security that is a Derivative Securities Product would be determined in 
the event of an Illiquid Auction. The proposed rule change is intended 
to make the BZX Official Closing Price more reflective of the value of 
such a Derivative Securities Product. Specifically, if a security is 
thinly traded or generally illiquid, it's currently possible that the 
BZX Official Closing Price for such Derivatives Securities Product will 
be based on a Final Last Sale Eligible Trade that may be hours, days, 
or even months old and therefore not necessarily reflect the true and 
current value of the security.
    The Exchange believes that an execution that qualifies as a Final 
Last Sale Eligible Trade that occurs in the last five minutes of 
trading during Regular Trading Hours \9\ is sufficiently recent as to 
be reflective of the current market value of a Derivative Securities 
Product and, in the event of an Illiquid Auction, should be used as the 
BZX Official Closing Price. Where no such execution occurs, however, 
the Exchange believes that a time-weighted value based on the midpoint 
of the NBBO \10\ leading into the close is likely to be more indicative 
of the true and current value of the security than a Final Last Sale 
Eligible Trade that occurred more than five minutes prior to the close. 
As such, in the event that there is an Illiquid Auction in a BZX-listed 
Derivative Securities Product, the Exchange proposes that the BZX 
Official Closing Price would be the time-weighted average price of the 
midpoint of the NBBO over the last five minutes of trading before the 
end of Regular Trading Hours (the ``TWAP''). Based on the foregoing, 
the Exchange notes that it is proposing to use only the Final Last Sale 
Eligible Trade or the TWAP and not any weighting or combination of the 
two.
---------------------------------------------------------------------------

    \9\ As defined in Rule 1.5(w), the term ``Regular Trading 
Hours'' means the time between 9:30 a.m. and 4:00 p.m. Eastern Time.
    \10\ As defined in Rule 1.5(o), the term ``NBBO'' shall mean the 
national best bid or offer.
---------------------------------------------------------------------------

    In order to implement these proposed changes, the Exchange is 
proposing to amend Rule 11.23(c)(2)(B) to make clear that for a BZX-
listed corporate security, the Closing Auction price will be the BZX 
Official Closing Price, which is consistent with current functionality. 
The Exchange is further proposing to amend Rule 11.23(c)(2)(B) in order 
to add a three part test for determining the BZX Official Closing Price 
for Derivative Securities Products, as follows.
    Proposed new Rule 11.23(c)(2)(B)(i) would provide that where at 
least one round lot is executed in the Closing Auction, the Closing 
Auction price will be the BZX Official Closing Price.
    Proposed new Rule 11.23(c)(2)(B)(ii) would provide that in the 
event that the BZX Official Closing Price for an issue that is a 
Derivative Securities Product cannot be determined under paragraph 
(B)(i) of this Rule, the BZX Official Closing Price for such security 
will depend on when the last Final Last Sale Eligible Trade occurs. If 
a trade that would qualify as a Final Last Sale Eligible Trade 
occurred: (a) Within the final five minutes before the end of Regular 
Trading Hours, 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 5 minutes before the end Regular 
Trading Hours will be the BZX Official Closing Price.
    Proposed new Rule 11.23(c)(2)(B)(iii) would provide that if the BZX 
Official Closing Price cannot be determined under proposed paragraphs 
(B)(i) or (B)(ii) of this Rule, the Final Last Sale Eligible Trade will 
be the BZX Official Closing Price.
    As noted above, the Exchange believes that the proposed 
functionality is very similar to the Arca Rule and does not raise any 
substantive issues not already considered by the Commission. The only 
substantive difference between the proposal and the Arca Rule relates 
to the Exchange proposing only to use one of the TWAP or the Final Last 
Sale Eligible Trade for the BZX Official Closing Price and to exclude, 
contrary to the Arca Rule, any scenarios that would result in a blended 
price by changing the weight of the TWAP and the Final Last Sale 
Eligible Trade depending on how many minutes prior to the end of the 
trading day such Final Last Sale Eligible Trade occurs.
    There are also two differences that the Exchange believes are non-
substantive. First, the Exchange's proposed functionality for 
determining the BZX Official Closing Price applies to all securities 
listed on the Exchange that are not corporate securities, while the 
Arca Rule applies to all ``derivative securities products.'' \11\ 
Substantively, however, there is no practical difference between these 
definitions because the Exchange only offers listing of corporate 
securities (which it has excluded from the proposed new functionality) 
and products that would fall under the definition of derivative 
securities products. Second, the Arca Rule references the 
``consolidated last-sale eligible trade'' in several instances where 
the Exchange proposed rule references the Final Last Sale Eligible 
Trade. The only difference between the definition of the consolidated 
last-sale eligible trade and the Final Last Sale Eligible Trade for 
purposes of this application is that the value of the Final Last Sale 
Eligible Trade will default to any execution on the Exchange that 
occurs within the last one second prior to the Closing Auction. For 
purposes of this proposal, the definitions are otherwise identical. The 
Exchange does not believe that this is a substantive difference because 
it is unlikely that securities for which this functionality is intended 
to improve a BZX Official Closing Price because of a lack of trading 
activity will have trading activity in the final second prior to the 
Closing Auction.
---------------------------------------------------------------------------

    \11\ The term ``Derivative Securities Product'' as used in 
Arca's rules means a security that meets the definition of 
``derivative securities product'' in Rule 19b-4(e) under the 
Securities Exchange Act of 1934. See Arca Rule 1.1(k). For purposes 
of Rule 19b-4(e), a ``derivative securities product'' means any type 
of option, warrant, hybrid securities product or any other security, 
other than a single equity option or a security futures product, 
whose value is based, in whole or in part, upon the performance of, 
or interest, in, an underlying instrument. 17 CFR 240.19b-4(e).
---------------------------------------------------------------------------

Implementation
    The Exchange will implement the proposed rule change for 
determining the BZX Official Closing Price as soon as is practicable 
after the approval date of this proposed rule change and will announce 
the implementation date via Trade Desk Notice.

[[Page 55437]]

2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6(b) of the Act,\12\ in general, and furthers the 
objectives of Section 6(b)(5) of the Act,\13\ in particular, 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.
---------------------------------------------------------------------------

    \12\ 15 U.S.C. 78f(b).
    \13\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    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 would provide for a method of 
determining the BZX Official Closing Price in an Exchange-listed 
security that is a Derivative Securities Product if there is no Closing 
Auction or if a Closing Auction trade is less than a round lot on a 
trading day. More specifically, the Exchange believes the proposed 
methodology for determining the BZX Official Closing Price would remove 
impediments to and perfect the mechanism of a free and open market and 
a national market system because it would provide for a more up-to-date 
indication of the value of such a security if there have not been any 
Final Last Sale Eligible Trades leading in to the close of trading. The 
Exchange believes the proposed BZX Official Closing Price calculation 
would also provide a closing price that more accurately reflects the 
most recent and reliable market information possible.
    The Exchange further believes that the proposed TWAP calculation 
would remove impediments to and perfect the mechanism of a free and 
open market and a national market system because it would provide for a 
more robust mechanism to determine the value of an affected security 
for purposes of determining a BZX Official Closing Price. By using 
either the price of a Final Last Sale Eligible Trade that occurs within 
five minutes of the close or a time-weighted calculation based on the 
midpoint of the NBBO over the last five minutes of trading leading into 
the close, the Exchange believes that the proposed calculation would 
result in a BZX Official Closing Price that is more reflective of the 
true and current value of such security on that trading day than would 
otherwise occur under the current Closing Auction mechanism.
    The Exchange also believes that the proposed methodology for 
determining a BZX Official Closing Price would be appropriate for 
Derivative Securities Products because if such securities are thinly 
traded, the price of the Final Last Sale Eligible Trade that occurred 
earlier in a trading day or even from a prior trading day may no longer 
be reflective of the value of such product, which should be priced 
relative to the value of the components of such security. In such case, 
either a more recent execution (in the last five minutes of Regular 
Trading Hours) or recent quoting activity will likely be more 
reflective of the value of the security. As such, the Exchange is 
proposing to use the TWAP in order to measure such quoting activity in 
order to avoid overly weighting a potentially stale quote that may 
occur leading into the close, which the Exchange believes would provide 
a greater indication of the value of such securities.
    Finally, the Exchange believes that the proposed functionality does 
not raise any substantive issues not already considered by the 
Commission in approving the Arca Rule.
    For the above reasons, the Exchange believes that the proposal is 
consistent with the requirements of Section 6(b)(5) of the Act.

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 provide for how the Exchange would determine the BZX 
Official Closing Price for Exchange-listed securities that are 
Derivative Securities Products if there is no Closing Auction or if a 
Closing Auction trade is less than a round lot on a trading day, which 
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 has neither solicited nor received written 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-2018-079 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-2018-079. 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

[[Page 55438]]

to make available publicly. All submissions should refer to File Number 
SR-CboeBZX-2018-079, and should be submitted on or before November 26, 
2018.
---------------------------------------------------------------------------

    \14\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\14\
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-24067 Filed 11-2-18; 8:45 am]
 BILLING CODE 8011-01-P