[Federal Register Volume 83, Number 15 (Tuesday, January 23, 2018)]
[Notices]
[Pages 3205-3224]
[FR Doc No: 2018-01093]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-82522; File No. SR-BatsBZX-2017-34]

Self-Regulatory Organizations; Bats BZX Exchange, Inc.; Notice of
Filing of Amendment No. 1 and Order Granting Approval of a Proposed
Rule Change, as Modified by Amendment No. 1, To Introduce Cboe Market
Close, a Closing Match Process for Non-BZX Listed Securities Under New
Exchange Rule 11.28

January 17, 2018.

I. Introduction

    On May 5, 2017, Bats BZX Exchange, Inc. (now known as Cboe BZX
Exchange, Inc.) (``BZX'' or ``Exchange'') filed with the Securities and
Exchange Commission (``Commission''), pursuant to Section 19(b)(1) of
the Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4
thereunder,\2\ a proposed rule change to adopt Bats Market Close, a
closing match process for non-BZX Listed Securities. The proposed rule
change was published for comment in the Federal Register on May 22,
2017.\3\ On July 3, 2017, 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 the
proposed rule change should be disapproved.\4\ The Commission received
54 comment letters on the proposed rule change, including a response
from the Exchange.\5\ On August 18, 2017, the Commission instituted
proceedings under Section 19(b)(2)(B) of the Act \6\ to determine
whether to approve or disapprove the proposed rule change.\7\
Thereafter, the Commission received nine more comment letters,
including three responses from the Exchange.\8\ On

November 17, 2017, pursuant to Section 19(b)(2) of the Act,\9\ the
Commission designated a longer period for Commission action on
proceedings to determine whether to disapprove the proposed rule
change.\10\ On December 1, 2017, the Exchange filed Amendment No. 1 to
the proposed rule change, renaming ``Bats Market Close'' as ``Cboe
Market Close.'' \11\ This order approves the proposed rule change.
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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. 80683 (May 16,
2017), 82 FR 23320 (``Notice'').
    \4\ See Securities Exchange Act Release No. 81072, 82 FR 31792
(July 10, 2017).
    \5\ See Letters to Brent J. Fields, Secretary, Commission, from:
(1) Donald K. Ross, Jr., Executive Chairman, PDQ Enterprise, LLC,
dated June 6, 2017 (``PDQ Letter''); (2) Edward S. Knight, Executive
Vice President and General Counsel, Nasdaq, Inc., dated June 12,
2017 (``Nasdaq Letter 1''); (3) Ray Ross, Chief Technology Officer,
Clearpool Group, dated June 12, 2017 (``Clearpool Letter''); (4)
Venu Palaparthi, SVP, Compliance, Regulatory and Government Affairs,
Virtu Financial, dated June 12, 2017 (``Virtu Letter''); (5)
Theodore R. Lazo, Managing Director and Associate General Counsel,
SIFMA, dated June 13, 2017 (``SIFMA Letter 1''); (6) Elizabeth K.
King, General Counsel and Corporate Secretary, New York Stock
Exchange (``NYSE''), dated June 13, 2017 (``NYSE Letter 1''); (7)
John M. Bowers, Bowers Securities, dated June 14, 2017 (``Bowers
Letter''); (8) Jonathan D. Corpina, Senior Managing Partner,
Meridian Equity Partners, dated June 16, 2017 (``Meridian Letter'');
(9) Fady Tanios, Chief Executive Officer, and Brian Fraioli, Chief
Compliance Officer, Americas Executions, LLC, dated June 16, 2017
(``Americas Executions Letter''); (10) Ari M. Rubenstein, Co-Founder
and Chief Executive Officer, GTS Securities LLC, dated June 22, 2017
(``GTS Securities Letter 1''); (11) John Ramsay, Chief Market Policy
Officer, Investors Exchange LLC, dated June 23, 2017 (``IEX
Letter''); (12) Jay S. Sidhu, Chairman, Chief Executive Officer,
Customers Bancorp, Inc., dated June 27, 2017 (``Customers Bancorp
Letter''); (13) Joanne Freiberger, Vice President, Treasurer,
Masonite International Corporation, dated June 27, 2017 (``Masonite
International Letter''); (14) David B. Griffith, Investor Relations
Manager, Orion Group Holdings, Inc., dated June 27, 2017 (``Orion
Group Letter''); (15) Kieran O'Sullivan, Chairman, President and
CEO, CTS Corporation, dated June 28, 2017 (``CTS Corporation
Letter''); (16) Sherri Brillon, Executive Vice-President and Chief
Financial Officer, Encana Corporation, dated June 29, 2017 (``Encana
Letter''); (17) Steven C. Lilly, Chief Financial Officer, Triangle
Capital Corporation, dated June 29, 2017 (``Triangle Capital
Letter''); (18) Robert F. McCadden, Executive Vice President and
Chief Financial Officer, Pennsylvania Real Estate Investment Trust,
dated June 29, 2017 (``Pennsylvania REIT Letter''); (19) Andrew
Stevens, General Counsel, IMC Financial Markets, dated June 30, 2017
(``IMC Letter''); (20) Daniel S. Tucker, Senior Vice President and
Treasurer, Southern Company, dated July 5, 2017 (``Southern Company
Letter''); (21) Cole Stevens, Investor Relations Associate, Nobilis
Health, dated July 6, 2017 (``Nobilis Health Letter''); (22) Mehmet
Kinak, Head of Global Equity Market Structure & Electronic Trading,
et al., T. Rowe Price Associates, Inc., dated July 7, 2017 (``T.
Rowe Price Letter''); (23) David L. Dragics, Senior Vice President,
Investor Relations, CACI International Inc., dated July 7, 2017
(``CACI Letter''); (24) Mark A. Stegeman, Senior Vice President &
CFO, Turning Point Brands, Inc., dated July 12, 2017 (``Turning
Point Letter''); (25) Jon R. Moeller, Vice Chair and Chief Financial
Officer, and Deborah J. Majoras, Chief Legal Officer and Secretary,
The Proctor & Gamble Company, dated July 12, 2017 (``P&G Letter'');
(26) Christopher A. Iacovella, Chief Executive Officer, Equity
Dealers of America, dated July 12, 2017 (``EDA Letter''); (27) Rob
Bernshteyn, Chief Executive Officer, Chairman Board of Directors,
Coupa Software, Inc., dated July 12, 2017 (``Coupa Software
Letter''); (28) Sally J. Curley, Senior Vice President, Investor
Relations, Cardinal Health, Inc., dated July 14, 2017 (``Cardinal
Health Letter''); (29) Mickey Foster, Vice President, Investor
Relations, FedEx Corporation, dated July 14, 2017 (``FedEx
Letter''); (30) Alexander J. Matturri, CEO, S&P Dow Jones Indices,
dated July 18, 2017 (``SPDJI Letter''); (31) John L. Killea, Chief
Legal Officer, Stewart Information Services, dated July 19, 2017
(``Stewart Letter''); (32) M. Farooq Kathwari, Chairman, President &
CEO, Ethan Allen Interiors, Inc., dated July 24, 2017 (``Ethan Allen
Letter''); (33) Jeff Green, Founder, Chief Executive Officer and
Chairman of the Board of Directors, The Trade Desk Inc., dated July
26, 2017 (``Trade Desk Letter''); (34) James J. Angel, Associate
Professor, McDonough School of Business, Georgetown University,
dated July 30, 2017 (``Angel Letter''); (35) Jon Stonehouse, CEO,
and Tom Staab, CFO, BioCryst Pharmaceuticals, Inc., dated July 31,
2017 (``BioCryst Letter''); (36) Peter Campbell, Chief Financial
Officer, Mimecast, dated July 31, 2017 (``Mimecast Letter''); (37)
Joanne Moffic-Silver, Executive Vice President, General Counsel, and
Corporate Secretary, Bats Global Markets, Inc., dated August 2, 2017
(``BZX Letter 1''); (38) David M. Weisberger, Head of Equities,
ViableMkts, dated August 3, 2017 (``ViableMkts Letter''); (39)
Charles Beck, Chief Financial Officer, Digimarc Corporation, dated
August 3, 2017 (``Digimarc Letter''); (40) Elizabeth K. King,
General Counsel and Corporate Secretary, NYSE, dated August 9, 2017
(``NYSE Letter 2''); (41) Representative Sean P. Duffy and
Representative Gregory W. Meeks, dated August 9, 2017 (``Duffy/Meeks
Letter''); (42) Michael J. Chewens, Senior Executive Vice President
& Chief Financial Officer, NBT Bancorp Inc., dated August 11, 2017
(``NBT Bancorp Letter''); (43) Barry Zwarenstein, Chief Financial
Officer, Five9, Inc., dated August 11, 2017 (``Five9 Letter''); (44)
William A. Backus, Chief Financial Officer & Treasurer, Balchem
Corporation, dated August 15, 2017 (``Balchem Letter''); (45)
Raiford Garrabrant, Director, Investor Relations, Cree, Inc., dated
August 15, 2017 (``Cree Letter''); (46) Steven Paladino, Executive
Vice President & Chief Financial Officer, Henry Schein, Inc., dated
August 16, 2017 (``Henry Schein Letter''); (47) Theodore Jenkins,
Senior Director, Investor Relations and Communications, Corbus
Pharmaceuticals, Inc., dated August 17, 2017 (``Corbus Letter'');
(48) Ari M. Rubenstein, Co-Founder and Chief Executive Officer, GTS
Securities LLC, dated August 17, 2017 (``GTS Securities Letter 2'');
(49) Cameron Bready, Senior Executive VP, Chief Financial Officer,
Global Payments Inc., dated August 17, 2017 (``Global Payments
Letter''); (50) Mike Gregoire, CEO, CA Technologies, dated August
17, 2017 (``CA Technologies Letter''); (51) Patrick L. Donnelly,
Executive Vice President & General Counsel, Sirius XMHoldings Inc.,
dated August 17, 2017 (``Sirius Letter''); (52) Theodore R. Lazo,
Managing Director and Associate General Counsel, SIFMA, dated August
18, 2017 (``SIFMA Letter 2''); (53) Donald Bollerman, dated August
18, 2017 (``Bollerman Letter''); and (54) Sarah A. O'Dowd, Senior
Vice President, Chief Legal Officer and Secretary, Lam Research
Corporation, dated August 18, 2017 (``Lam Letter'').
    \6\ 15 U.S.C. 78s(b)(2)(B).
    \7\ See Securities Exchange Act Release No. 81437, 82 FR 40202
(August 24, 2017) (``OIP''). In the OIP, the Commission specifically
requested comment on eight series of questions. See id. at 40210-11.
    \8\ See Letters to Brent J. Fields, Secretary, Commission, from:
(1) Gabrielle Rabinovitch, VP, Investor Relations, PayPal Holdings,
Inc., dated September 12, 2017 (``PayPal Letter''); (2) Edward S.
Knight, Executive Vice President and General Counsel, Nasdaq, Inc.,
dated September 18, 2017 (``Nasdaq Letter 2''); (3) Joanne Moffic-
Silver, Executive Vice President, General Counsel, and Corporate
Secretary, Bats Global Markets, Inc., dated October 11, 2017 (``BZX
Letter 2''); (4) Elizabeth K. King, General Counsel and Corporate
Secretary, NYSE, dated November 3, 2017 (``NYSE Letter 3''); (5)
Theodore R. Lazo, Managing Director and Associate General Counsel,
SIFMA, dated December 8, 2017 (``SIFMA Letter 3''); (6) Jeffrey S.
Davis, Deputy General Counsel, Nasdaq, Inc., dated December 21, 2017
(``Nasdaq Letter 3''); (7) Joanne Moffic-Silver, Executive Vice
President, General Counsel, and Corporate Secretary, Cboe Global
Markets, Inc., dated January 3, 2018 (``BZX Letter 3''); (8) Joanne
Moffic-Silver, Executive Vice President, General Counsel, and
Corporate Secretary, Cboe Global Markets, Inc., dated January 12,
2018 (``BZX Letter 4''); and (9) Elizabeth K. King, General Counsel
and Corporate Secretary, NYSE, dated January 12, 2018 (``NYSE Letter
4''). All comments on the proposed rule change are available at:
https://www.sec.gov/comments/sr-batsbzx-2017-34/batsbzx201734.htm.
In addition, the Commission's Division of Economic and Risk Analysis
(``DERA'') released in the public comment file for this proposal a
memorandum setting forth its analysis examining the relationship
between the proportion of MOC orders executed off-exchange and
closing price discovery and efficiency (``DERA Analysis''). See
Memorandum to File from DERA, Bats Market Close: Off-Exchange
Closing Volume and Price Discovery, dated December 1, 2017 (``DERA
Analysis''), available at: https://www.sec.gov/files/bats_moc_analysis.pdf; see also infra note 129 and accompanying
discussion. NYSE Letter 4 included an assessment of the DERA
Analysis conducted by D. Timothy McCormick, Ph.D., dated January 11,
2018 (``NYSE Report''). See NYSE Letter 4, at 1 and NYSE Report,
cover page (stating that the research was funded by NYSE Group). For
purposes of this order, statements in the NYSE Report are attributed
to NYSE.
    \9\ 15 U.S.C. 78s(b)(2).
    \10\ See Securities Exchange Act Release No. 82108, 82 FR 55894
(November 24, 2017).
    \11\ The only change in Amendment No. 1 was to rename the
proposed closing match process as Cboe Market Close. Because
Amendment No. 1 is a technical amendment and does not materially
alter the substance of the proposed rule change or raise unique or
novel regulatory issues, Amendment No. 1 is not subject to notice
and comment. For purposes of consistency and readability, all
references to the proposed closing match process made herein will be
to ``Cboe Market Close.''
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II. Summary of the Proposal

    As described in more detail in the Notice,\12\ the Exchange
proposes to introduce Cboe Market Close, a closing match process for
non-BZX listed securities. For non-BZX listed securities, the
Exchange's System \13\ would seek to match buy and sell Market-On-Close
(``MOC'') \14\ orders designated for participation in Cboe Market Close
at the official closing price for such security published by the
primary listing market.
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    \12\ See Notice, supra, note 3.
    \13\ The term ``System'' is defined as ``the electronic
communications and trading facility designated by the Board through
which securities orders of Users are consolidated for ranking,
execution and, when applicable, routing away.'' See Exchange Rule
1.5(aa).
    \14\ The term ``Market-On-Close'' or ``MOC'' means a BZX market
order that is designated for execution only in the Closing Auction.
See Exchange Rule 11.23(a)(15). The Exchange proposed to amend the
description of Market-On-Close orders to include orders designated
to execute in the proposed Cboe Market Close.
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    Members \15\ would be able to enter, cancel or replace MOC orders
designated for participation in Cboe Market Close beginning at 6:00
a.m. Eastern Time up until 3:35 p.m. Eastern Time (``MOC Cut-Off
Time'').\16\ Members would not be able to enter, cancel or replace MOC
orders designated for participation in the proposed Cboe Market Close
after the MOC Cut-Off Time.
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    \15\ The term ``Member'' is defined as ``any registered broker
or dealer that has been admitted to membership in the Exchange.''
See Exchange Rule 1.5(n).
    \16\ Currently, the NYSE designates the cut-off time for the
entry of Market At-the-Close Orders as 3:45 p.m. Eastern Time. See
NYSE Rule 123C. Nasdaq, in turn, designates the ``end of the order
entry period'' as 3:50 p.m. Eastern Time. See Nasdaq Rule 4754.
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    At the MOC Cut-Off Time, the System would match for execution all
buy and sell MOC orders entered into the System based on time
priority.\17\ Any remaining balance of unmatched shares would be
cancelled back to the Member(s). The System would disseminate, via the
Bats Auction Feed,\18\ the total size of all buy and sell orders
matched per security via Cboe Market Close. All matched buy and sell
MOC orders would remain on the System until the publication of the
official closing price by the primary listing market. Upon publication
of the official closing price by the primary listing market, the System
would execute all previously matched buy and sell MOC orders at that
official closing price.\19\
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    \17\ As set forth in proposed Interpretation and Policy .02, the
Exchange would cancel all MOC orders designated to participate in
Cboe Market Close in the event the Exchange becomes impaired prior
to the MOC Cut-Off Time and is unable to recover within 5 minutes
from the MOC Cut-Off Time. The Exchange states that this would
provide Members time to route their orders to the primary listing
market's closing auction. Should the Exchange become impaired after
the MOC Cut-Off Time, proposed Interpretation and Policy .02 states
that it would retain all matched MOC orders and execute those orders
at the official closing price once it is operational.
    \18\ The Bats Auction Feed disseminates information regarding
the current status of price and size information related to auctions
conducted by the Exchange and is provided at no charge. See Exchange
Rule 11.22(i). The Exchange also proposed to amend Exchange Rule
11.22(i) to reflect that the Bats Auction Feed would also include
the total size of all buy and sell orders matched via Cboe Market
Close.
    \19\ The Exchange would report the execution of all previously
matched buy and sell orders to the applicable securities information
processor and will designate such trades as ``.P'', Prior Reference
Price. See Notice, supra note 3, at 23321.
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    The Exchange would utilize the official closing price published by
the exchange designated by the primary listing market in the case where
the primary listing market suffers an impairment and is unable to
perform its closing auction process.\20\ In addition, proposed
Interpretation and Policy .03 specifies that up until the closing of
the applicable securities information processor at 8:00 p.m. Eastern
Time, the Exchange intends to monitor the initial publication of the
official closing price, and any subsequent changes to the published
official closing price, and adjust the price of such trades
accordingly. If there is no initial official closing price published by
8:00 p.m. Eastern Time for any security, the Exchange would cancel all
matched MOC orders in such security.
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    \20\ See proposed Interpretation and Policy .01.
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    The Exchange states that it is proposing to adopt Cboe Market Close
in response to requests from market participants, particularly buy-side
firms, for an alternative to the primary listing markets' closing
auctions that still provides an execution at a security's official
closing price.\21\ Moreover, the Exchange contends that the proposal
would not compromise the price discovery function performed by the
primary listing markets' closing auctions because Cboe Market Close
would only accept MOC orders, and not limit orders, and the Exchange
would only execute those matched MOC orders that naturally pair off and
effectively cancel each other out.\22\
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    \21\ See Notice, supra note 3, at 23321. The Exchange intends,
should the Commission approve the proposed rule change, to file a
separate proposal to offer executions of MOC orders at the official
closing price, to the extent matched on the Exchange, at a rate less
than the fee charged by the applicable primary listing market. The
Exchange also intends for such fee to remain lower than the fee
charged by the applicable primary listing market. See id.
    \22\ See id.
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III. Discussion and Commission Findings

    The Commission has carefully reviewed the proposal, including the
comments received, and finds that approval of the proposed rule change
is consistent with the requirements of the Act and the rules and
regulations thereunder applicable to a national securities
exchange.\23\ In particular, as

discussed below, the Commission finds that the proposal is consistent
with: Section 6(b)(5) of the Act,\24\ which requires that the rules of
a national securities exchange, among other things, be designed to
prevent fraudulent and manipulative acts and practices, to promote just
and equitable principles of trade, to remove impediments to and perfect
the mechanism of a free and open market and a national market system,
and, in general, to protect investors and the public interest; and
Section 6(b)(8) of the Act,\25\ which requires that the rules of a
national securities exchange not impose any burden on competition not
necessary or appropriate in furtherance of the purposes of the Act.
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    \23\ In approving this proposed rule change, the Commission has
considered the proposed rule change's impact on efficiency,
competition, and capital formation. See 15 U.S.C. 78c(f). The
Commission addresses comments about economic effects of the proposed
rule change, including competitive effects, below.
    \24\ 15 U.S.C. 78f(b)(5).
    \25\ 15 U.S.C. 78f(b)(8).
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    The Commission received sixty-three comment letters from fifty-two
commenters on the proposal, including four response letters from the
Exchange.\26\
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    \26\ See supra notes 5 and 8.
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Price Discovery and Fragmentation

    The majority of commenters addressed the potential impacts of the
proposal on price discovery in the closing auctions on the primary
listing markets. Eight commenters stated that the proposal would not
negatively impact price discovery in the primary listing markets'
closing auctions.\27\ These commenters asserted that because Cboe
Market Close would only execute paired MOC orders, and not limit-on-
close orders, it would not impede the price discovery mechanisms of the
primary listing markets' closing auctions. Five commenters referenced
the current Nasdaq and NYSE Arca closing auction processes for
securities listed on other exchanges, stating that these competing
closing auction processes, which have been permitted by the Commission,
may attract limit orders from the primary listing market and impede
price discovery, unlike the BZX proposal which is limited to market
orders.\28\ In addition, five commenters argued that, because BZX will
publish the size of matched MOC orders in advance of the primary
market's cut-off time, market participants would have available
information needed to make further decisions regarding order execution
and thus price discovery would not be impaired.\29\ Two commenters also
asserted that many brokers already provide market-on-close pricing to
customers through products that match orders internally, and the
proposal may provide incentives for brokers to send such orders to an
exchange, thereby increasing transparency, reliability and price
discovery at the close.\30\
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    \27\ See PDQ Letter; Clearpool Letter, at 3; Virtu Letter, at 2;
SIFMA Letter, at 2; IEX Letter, at 1-2; Angel Letter, at 4;
ViableMkts Letter, at 3-4; and Bollerman Letter, at 1. See also
SIFMA Letter 2, at 1-2.
    \28\ See Clearpool, at 3; IEX Letter, at 2; Angel Letter, at 4;
SIFMA Letter 2, at 2; and Bollerman Letter, at 3.
    \29\ See Clearpool Letter, at 3; SIFMA Letter 1, at 2; IEX
Letter, at 2; Angel Letter, at 4; ViableMkts Letter, at 3; and SIFMA
Letter 2, at 1.
    \30\ See Clearpool, at 3-4; and ViableMkts Letter, at 4-5. One
commenter further argued that to the extent BZX accrues market share
as a result of the proposal it will likely result from less MOC
pairing executed off-exchange. See Angel Letter, at 4.
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    Thirty-eight commenters stated that the proposal would further
fragment the markets and harm price discovery in the closing auctions
on the primary listing markets.\31\ For example, Nasdaq argued that
BZX's MOC orders would be incapable of contributing to price discovery,
and instead would further fragment the market by drawing orders and
quotations away from primary closing auctions and undermine the
mechanisms used to set closing prices.\32\ Nasdaq asserted that any
attempt to divert trading interest from its closing auction would be
detrimental to investors as it would inhibit Nasdaq's closing auction
from functioning as intended and would negatively affect the price
discovery process and consequently, the quality of the official closing
price.\33\
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    \31\ See Nasdaq Letter 1; NYSE Letter 1; Bowers Letter; Meridian
Letter; Americas Executions Letter; GTS Securities Letter 1;
Customers Bancorp Letter; Masonite International Letter; Orion Group
Letter; CTS Corporation Letter; Encana Letter; Triangle Capital
Letter; Pennsylvania REIT Letter; IMC Letter; Southern Company
Letter; Nobilis Health Letter; T. Rowe Price Letter; CACI Letter;
Turning Point Letter; P&G Letter; EDA Letter; Coupa Software Letter;
Cardinal Health Letter; FedEx Letter; Trade Desk Letter; BioCryst
Letter; Mimecast Letter; Digimarc Letter; NYSE Letter 2; NBT Bancorp
Letter; Balchem Letter; Cree Letter; Henry Schein Letter; Corbus
Letter; GTS Securities Letter 2; Global Payments Letter; CA
Technologies Letter; Sirius Letter; Lam Letter; PayPal Letter;
Nasdaq Letter 2; NYSE Letter 3. See also Duffy/Meeks Letter, at 1
(stating that public companies are expressing concern that the
proposal will further fragment the market and cause harm to the
pricing of their companies' shares at the close and, as such, they
are concerned the proposal may disrupt the process for determining
the closing price on the primary listing market, which is viewed as
``an incredibly well-functioning part of the capital markets''). In
addition, one commenter urged the Commission to conduct a close
analysis of the proposal and stated that if the Bats proposal would
seriously degrade the quality of the closing price, then it should
be rejected. See Angel Letter.
    \32\ See Nasdaq Letter 1, at 5 and 8 (stating that, for this
reason Nasdaq did not believe the proposal promotes fair and orderly
markets in accordance with Sections 6 and 11A of the Exchange Act);
and Nasdaq Letter 2, at 3-7.
    \33\ See Nasdaq Letter 1, at 11 and Nasdaq Letter 2, at 5-6.
Nasdaq also stated that while BZX does not have a responsibility to
contribute to price discovery in Nasdaq's closing auction, it also
is obligated to avoid affirmatively undermining price discovery. See
Nasdaq Letter 1, at 5. In addition, Nasdaq stated that it
considered, but chose not to, disclose segmented information, such
as matched MOC or LOC shares, for its closing auction in a piece-
meal fashion, because Nasdaq believed it would lead to unintended
consequences and undermine price discovery in the closing auction.
See id., at 4 and Nasdaq Letter 2, at 6.
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    Specifically, Nasdaq expressed concern that the availability of
Cboe Market Close could cause a reduction in the number of limit-on-
close orders submitted to the primary listing markets' closing
auctions, which Nasdaq asserted would harm price discovery at the
market close.\34\ Nasdaq asserted that the impact of the proposal on
the use of limit-on-close orders that may be submitted to NYSE and
Nasdaq should be studied and carefully analyzed.\35\ In the OIP, the
Commission specifically solicited comments on the potential impact of
the proposal on the use of limit-on-close orders, including requesting
any available data, analyses or studies.\36\ In response, Nasdaq
explained that reducing MOC orders would impact the behavior of limit
orders by reducing the ability of continuous book limit orders and LOC
orders to compete with each other and to interact with MOC orders,
which it asserted is essential to its closing auction.\37\
Specifically, Nasdaq contended that if BZX were to disseminate a paired
shares amount at 3:35pm, but Nasdaq published little or

no paired or imbalance shares in its imbalance publications, it would
discourage further participation in the continuous market leading up to
the closing auction and the closing cross, and thus there would be
little ongoing price discovery, because market participants would know
they would not have the ability to interact with market orders.\38\
Nasdaq contrasted the BZX proposal with its own closing auction
process, arguing that after it disseminates an imbalance notification
that combines MOC and LOC orders, market participants can continue to
submit orders to interact with existing auction interest.\39\
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    \34\ See Nasdaq Letter 1, at 5 and 11.
    \35\ See id. at 11.
    \36\ See OIP, supra note 7, at 40210. Specifically, the
Commission asked, ``To what extent, if at all, would the
availability of the Bats Market Close impact market participants'
use of limit-on-close orders in the closing auction processes on the
primary listing exchanges, including with respect to size and price?
Please explain. Would market participants use MOC orders in the Bats
Market Close as a substitute for using limit orders to participate
in the closing auction processes at the primary listing exchanges?
Would any such impacts be the same for each of the primary listing
exchanges? Are there differences between the closing auction
processes at each of the primary listing exchanges whereby the
proposed Bats Market Close would have differing effects on each
primary listing exchange? If so, please explain. How does
information available in the closing auction process affect market
participants' order submissions and/or determination of the closing
price? Would the proposed rule change affect market participants'
trading strategies in closing auctions? If so, how? If commenters
believe the proposal would impact the use of limit-on-close orders
in closing auctions, to the extent possible please provide specific
data, analyses, or studies for support.''
    \37\ See Nasdaq Letter 2, at 5-6. Nasdaq did not submit any
specific data regarding the impact of the proposal on the use of
limit on close orders.
    \38\ See id. at 6.
    \39\ See id.
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    Moreover, Nasdaq argued that even if the proposal only resulted in
fewer market-on-close orders submitted to Nasdaq closing auctions,
investors would be harmed because the official closing price could
potentially represent a stale or undermined price.\40\ Nasdaq asserted
that its closing cross is designed to maximize the number of shares
that can be executed at a single price and that the number of market-
on-close orders impacts the number of shares able to execute in a
closing cross.\41\ Further, in its second comment letter, Nasdaq
elaborated on the impact it believed reducing MOC orders could have on
Nasdaq's closing auction. In particular, Nasdaq argued that the
proposal would harm price discovery because fragmentation of MOC orders
would directly impact closing auctions for which Nasdaq only received
MOC orders and that, in cases where all MOC orders were removed from
the Nasdaq closing auction, the last sale price would become the
official closing price, as opposed to the price being determined
through the price discovery process of its closing auction.\42\ Nasdaq
discussed several hypothetical examples where removal of all MOC orders
from certain of its previously conducted closing auctions would have
resulted in use of the last sale price as the official closing price
and provided aggregated statistics denoting the differential between
the last sale price and the official closing price in such
situations.\43\
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    \40\ See Nasdaq Letter 1, at 12. See also Nasdaq Letter 2, at 6
(providing an example of how the proposal could cause a stale
closing price). Nasdaq also stated that a credible independent study
of the potential risk to price discovery is essential in order to
consider whether the proposal is consistent with the Act. See Nasdaq
Letter 1, at 12.
    \41\ See id., at 11. Nasdaq subsequently submitted a memorandum
providing, among other things, data relating to the level of matched
MOC volume in Nasdaq closing auctions spanning the period of January
1, 2017 through September 30, 2017 (``Nasdaq Data Memo''). Nasdaq
requested protection under the Freedom of Information Act for its
memorandum.
    \42\ See Nasdaq Letter 2, at 3.
    \43\ See id. at 3-5. Specifically, Nasdaq identified 1,653
closing crosses between January 1, 2016 and August 31, 2017 where
removal of all MOC orders would have changed the closing prices.
Nasdaq asserts that this would have changed the closing valuation of
Nasdaq issuers ``by nearly $870,000,000 of aggregate impact.''
---------------------------------------------------------------------------

    NYSE similarly argued that even though Cboe Market Close would only
accept MOC orders, it could materially impact official closing prices
determined through a NYSE closing auction.\44\ NYSE emphasized the
importance of the centralization of orders during the closing auction
on the primary listing exchange, stating that it is ``an iterative
process'' that provides ``periodic information about order imbalances,
indicative price, matched volume, and other metrics'' to help market
participants anticipate the likely closing price, and that allows for
investors to find contra-side liquidity and assess whether to offset
imbalances, and for orders to be priced based on the true supply and
demand in the market.\45\ NYSE asserted that information on the lack of
matched MOC orders in the closing process could discourage liquidity
providers from participating in the closing process because their order
would be less likely to interact with market orders.\46\ NYSE also
explained that its designated market makers (``DMMs''), which have an
obligation to facilitate the close of trading in their assigned
securities, factor in the size of paired-off volume, and the
composition of the closing interest in assessing the appropriate
closing price.\47\ NYSE asserted that, under the proposal, DMMs would
lose full visibility into the size and composition of MOC interest, and
thus would likely have to make more risk-adverse closing decisions,
resulting in inferior price formation.\48\
---------------------------------------------------------------------------

    \44\ See NYSE Letter 1, at 3. While NYSE's arguments focused
primarily on the potential for MOC orders to migrate to Cboe Market
Close as described below, NYSE also asserted that, if the fees for
the Cboe Market Close were set lower than the fees charged by the
primary listing exchanges, it could induce some market participants
to use MOC orders rather than sending LOC orders to the primary
listing market. See NYSE Report, at 23.
    \45\ See NYSE Report, at 12. See also NYSE Letter 1, at 4. NYSE,
as well as Nasdaq, also asserted that the proposal contradicts the
Commission's approval of recent amendments to the National Market
System Plan to Address Extraordinary Market Volatility (the ``LULD
Plan'') which, they argue, centralize re-opening auction liquidity
at the primary listing exchange by prohibiting other market centers
from re-opening following a trading pause until the primary listing
exchange conducts a re-opening auction. These commenters asserted
that it would be inconsistent for the Commission to find it in the
public interest to consolidate trading in a re-opening auction,
while sanctioning fragmentation of trading in a closing auction. See
Nasdaq Letter 1, at 6; NYSE Letter 1, at 3; and Nasdaq Letter 2, at
12. In response, commenters asserted the amendment to the LULD Plan
cited by NYSE and Nasdaq granted the primary listing market the
ability to set the re-opening price but did not mandate the
consolidation of orders at the primary listing market following a
trading halt. BZX believes the proposal is consistent with the LULD
Plan as it seeks to avoid producing a ``bad'' or ``outlier'' closing
price and does not affect the centralization of price-setting
closing auction orders. See BZX Letter 1, at 8-9. See also Bollerman
Letter, at 3.
    \46\ See NYSE Report, at 13 and 23. See also NYSE Report, at 12
(arguing that ``[a]nticipation that there will be MOC orders in the
closing auction is a critical component feeding into the decisions
of liquidity providers and other market participants'' trading in
the closing auction).
    \47\ See NYSE Letter 1, at 4. In response to this assertion,
ViableMkts argues that use of Cboe Market Close is voluntary.
Accordingly, if a market participant wanted a DMM to be aware of
their closing activity they could still send their orders to the
NYSE closing auction. See ViableMkts Letter, at 4.
    \48\ See NYSE Letter 1, at 4.
---------------------------------------------------------------------------

    NYSE also argued that the proposal would detrimentally impact price
discovery on the NYSE Arca and NYSE American automated closing
auctions. NYSE stated that in the last six months there were 130
instances where the official closing price determined through a NYSE
Arca closing auction was based entirely on paired-off market order
volume.\49\ In those instances, pursuant to NYSE Arca rules, ``the
Official Closing Price for that auction is the midpoint of the Auction
NBBO as of the time the auction is conducted.'' \50\ NYSE stated that
if all market orders for a NYSE Arca listed security were sent to BZX,
the official closing price would instead be the consolidated last sale
price, which can differ from the midpoint of the auction NBBO by as
much as 3.2%.\51\
---------------------------------------------------------------------------

    \49\ See NYSE Letter 1, at 5. See also NYSE Report, at 11-12.
NYSE represented that once NYSE American transitions to Pillar
technology, it will conduct a closing auction in an identical manner
to NYSE Arca.
    \50\ See id.
    \51\ See id. In its third comment letter, NYSE also asserts
that, in contrast to the data NYSE provided in its first letter, BZX
failed to provide any data in response to the requests for comment
in the OIP to support the claim that there would be no impact on
price discovery. See NYSE Letter 3, at 2. But see BZX Letter 3, at
2-4, 7-9 and infra notes 99-106 and accompanying text discussing
data and analysis provided by BZX.
---------------------------------------------------------------------------

    In arguing that additional fragmentation of closing auction
interest would detrimentally impact price discovery, both Nasdaq and
NYSE distinguished the Cboe Market Close from competing closing
auctions currently operated by Nasdaq and NYSE Arca for securities
listed on other markets. Nasdaq stated that the BZX proposal is a
price-matching order type and not a competitive single-priced

auction that offers price discovery.\52\ In contrast, Nasdaq states
that its single-priced auction for non-Nasdaq listed stocks was
designed to maximize order interaction and improve price discovery for
issuers, not to siphon orders away from the primary market without
seeking to improve price discovery.\53\ Accordingly, Nasdaq argued that
the fact that it and NYSE offer competing closing auctions is
irrelevant because those auctions are fundamentally different from the
BZX proposal.\54\ Similarly, NYSE argued that it believed it was
misleading to compare the proposal to the competing closing auctions
because BZX would be offering neither a competing closing auction nor a
facility to establish the official closing price should a primary
listing exchange invoke its closing auction contingency plan.\55\
---------------------------------------------------------------------------

    \52\ See Nasdaq Letter 2, at 8-9.
    \53\ See id. at 9.
    \54\ See id.
    \55\ See NYSE Letter 2, at 3.
---------------------------------------------------------------------------

    Nasdaq and NYSE further argued that competing closing auctions
cause minimal fragmentation, as volumes in those auctions are
``miniscule.'' \56\ For example, Nasdaq stated that volumes in all
competing auctions in Nasdaq-listed corporate securities in the month
of June 2017 were less than 0.5% of Nasdaq's closing volume.\57\
Similarly, NYSE stated that for the period January 1, 2017 through
October 13, 2017, closing auctions in NYSE and Nasdaq-listed securities
on NYSE Arca represent 0.5% of the notional value traded in the NYSE
and Nasdaq closing auctions.\58\ Nasdaq further asserted that less than
half of Nasdaq-listed corporate issues experience price dislocations in
competing closing auctions.\59\ Moreover, Nasdaq and NYSE stated that
on multiple occasions when they received closing interest for
securities listed on another exchange, they have contacted the firms
associated with those orders and encouraged them to route their orders
directly to the primary listing exchange.\60\
---------------------------------------------------------------------------

    \56\ See Nasdaq Letter 2, at 9-10; see also NYSE Letter 3, at 5-
6.
    \57\ See Nasdaq Letter 2, at 11.
    \58\ See NYSE Letter 3, at 6. NYSE also stated that it does not
have a business interest in running closing auctions for securities
listed on other markets. It operates the NYSE Arca closing auction
for resiliency purposes, which it believes outweighs any modest
negative impact on fragmentation. See id.; see also infra note 239.
    \59\ See Nasdaq Letter 2, at 11. In response to BZX's claim that
a large percentage of competing closing auctions conducted by Nasdaq
and NYSE resulted in closing prices different from the official
closing price, Nasdaq also stated that many of the examples cited in
BZX Letter 1 are from competing auctions in ETFs, which, Nasdaq
stated, have a fundamentally different price discovery process.
Nasdaq argued that if ETFs were removed from the analysis, less than
half of Nasdaq-listed corporate issues see a price difference when
closing on NYSE Arca. See id.
    \60\ See id. at 13; NYSE Letter 3, at 6. See also infra note 87
and accompanying text.
---------------------------------------------------------------------------

    Nasdaq and NYSE also addressed price-matching services in the over-
the-counter market. Nasdaq stated that the proposal would introduce a
new category of price-matching venues, which would exacerbate the harm
caused by fragmentation.\61\ Both Nasdaq and NYSE stated that over-the-
counter price-matching services should not be considered a precedent
for the Cboe Market Close proposal. Nasdaq stated that, as a neutral
trading platform, an exchange is capable of attracting and aggregating
more liquidity than a broker-dealer.\62\ Moreover, according to Nasdaq,
trades resulting from broker-dealer price-matching services are often
also involved in the closing auction on the primary listing exchange,
thus contributing to price discovery despite operating a price-matching
service.\63\ Nasdaq explained that a broker may accept a MOC order and
trade as either agent or principal against that order by entering limit
orders into either the closing auction on the primary listing exchange
or the continuous market leading up to the closing auction. After
receiving an execution in the primary market closing auction, the
broker would then trade with the customer off-exchange at a price
determined by the primary market closing auction.\64\ Similarly, NYSE
argued that it should not be assumed that the current level of MOC
orders executed away from the primary market is a reasonable proxy for
the impact of the BZX proposal.\65\ Specifically, NYSE asserted that
market makers that cross orders on behalf of clients at the closing
price could be risking capital on such transactions, which would likely
be a constraining force on the magnitude of orders crossed away from
primary markets, while BZX would have no such obligation to commit
capital in Cboe Market Close.\66\ As such, NYSE argued that the BZX
proposal, if successful, could result in a much higher percentage of
MOC orders diverted away from the primary market than what occurs
today.\67\
---------------------------------------------------------------------------

    \61\ See Nasdaq Letter 2, at 13.
    \62\ See id.
    \63\ See id.
    \64\ See id. The Nasdaq Data Memo also provided data and
analysis arguing that a portion of the broker-dealer volume executed
off-exchange after the close at the primary listing market's closing
price reflects brokers submitting customers' interest to the closing
cross and subsequently reporting an over-the-counter trade between
the broker and its customers.
    \65\ See NYSE Report, at 10.
    \66\ See NYSE Report, at 10.
    \67\ See NYSE Report, at 10. The NYSE Report asserted that this
was one of the limitations of drawing conclusions from the DERA
Analysis regarding how the BZX proposal would impact the market
close. See discussion of DERA Analysis, infra notes 133-134 and
accompanying text.
---------------------------------------------------------------------------

    In addition, NYSE stated that existing off-exchange matching
services have a negative impact on the validity and integrity of price
discovery in the closing auctions.\68\ NYSE stated that data it
analyzed from certain closing auctions with large imbalances \69\ shows
that, for securities with 1,000 shares or less reported at the official
closing price (on and off-exchange), volatility in the last 10 minutes
of trading leading into the close is 52% higher when more than 75% of a
security's closing share volume is reported to a trade reporting
facility (``TRF'') (i.e., paired off-exchange), compared to when less
than 25% of a security's closing share volume is reported to a TRF. In
addition, NYSE asserted that its data showed that the official closing
price generated in auctions for securities with 1,000 shares or less
reported at the official closing price (on and off-exchange) where more
than 75% of a security's share volume is reported to a TRF was more
than twice as far away from the last consolidated sale price and nearly
twice as far away from the market volume weighted average price
(``VWAP'') of the last two minutes of trading leading into the
close.\70\ Accordingly, NYSE concluded that existing fragmentation
degrades the quality of the closing price.\71\
---------------------------------------------------------------------------

    \68\ See NYSE Letter 3, at 3.
    \69\ See id. at 3. NYSE stated that it reviewed closing auctions
with imbalances of 50% of paired shares as of 3:50 p.m. See id. at
4.
    \70\ See id. at 3-4. NYSE provided data that they asserted
illustrates that the same degradation in the quality of the official
closing price also occurs in closes for securities with 10,000
shares or more reported at the official closing price. See id. at 4.
    \71\ See id. at 3-4.
---------------------------------------------------------------------------

    Several other commenters also discussed how the proposal may impact
the integrity of official closing prices. In particular, GTS, a DMM on
NYSE, argued that market-on-close orders are a vital component of
closing prices and, should those orders be diverted away from the
primary listing markets as a result of the proposal, it could undermine
the official closing prices.\72\ GTS stated that, in pricing a closing
auction on NYSE, it considers a variety of inputs and stated that it
considers ``the size of . . . matched shares and the time those matched
shares are consumed by each individual book [to be] essential data
points for

consideration.'' \73\ If this information is fragmented across multiple
venues, according to GTS, the closing price will change and will become
less reliable.\74\ Eighteen commenters asserted that the proposal would
make it more difficult for Designated Market Makers to facilitate an
orderly close of NYSE listed securities as they would lose the ability
to continually assess the composition of market-on-close interest.\75\
Many of these commenters are issuers listed on NYSE and asserted that
one of the reasons they chose to list on NYSE was the ability to have
access to a DMM that is responsible for facilitating an orderly closing
auction.\76\
---------------------------------------------------------------------------

    \72\ See GTS Securities Letter 1, at 2-3.
    \73\ See GTS Securities Letter 2, at 3. GTS also stated that the
types of orders submitted to the closing auction, such as limit or
market, also impact its pricing determinations. See id.
    \74\ See id. at 4.
    \75\ See NYSE Letter 1, at 4; GTS Securities Letter 1, at 2-3;
Customers Bancorp Letter; Masonite International Letter; Orion Group
Letter; CTS Corporation Letter; Encana Letter; Triangle Capital
Letter; Pennsylvania REIT Letter; IMC Letter, at 1-2; Southern
Company Letter; Nobilis Health Letter; CACI Letter; Turning Point
Letter; P&G Letter; Cardinal Health Letter; FedEx Letter; Stewart
Letter; Global Payments Letter. See also supra notes 45-48 and
accompanying text. Four commenters also asserted that the proposal
would have potentially detrimental impacts on NYSE floor brokers.
See Bowers Letter; Meridian Letter; Americas Executions Letter; and
GTS Securities Letter 2, at 4.
    \76\ See GTS Securities Letter 1, at 2-3; Masonite International
Letter; Encana Letter; Triangle Capital Letter; Pennsylvania REIT
Letter; Nobilis Health Letter; CACI Letter; Turning Point Letter;
P&G Letter; Cardinal Health Letter; FedEx Letter; and Stewart
Letter.
---------------------------------------------------------------------------

    Multiple commenters stated that one of the benefits of a
centralized closing auction conducted by the primary listing market is
that it allows market participants to fairly assess supply and demand
such that the closing prices reflect both market sentiment and total
market participation.\77\ Because they believed that the proposal may
cause orders to be diverted away from the primary listing exchanges,
these commenters argued that it would negatively affect the reliability
and value of closing auction prices. Several commenters further argued
that centralized closing auctions provide better opportunities to fill
large orders with relatively little price impact.\78\
---------------------------------------------------------------------------

    \77\ See Bowers Letter; Americas Executions Letter; and FedEx
Letter. See also Coupa Software Letter; Trade Desk Letter; Mimecast
Letter (arguing that gathering liquidity in a single venue ensures
that the market reaches an accurate and reliable closing price for
their stocks); Global Payments Letter.
    \78\ See e.g., Bowers Letter; Americas Executions Letter;
Customers Bancorp Letter; Orion Group Letter; and Southern Company
Letter.
---------------------------------------------------------------------------

    In response to concerns regarding the impact of the proposal on the
price discovery process, BZX argued that, because the proposal would
only match MOC orders and would require the Exchange to publish the
number of matched shares in advance of the primary listing markets'
cut-off times, BZX believes it would avoid any impact on price
discovery.\79\ BZX also stated that it does not believe the proposal
would impact the use of LOC orders on the primary listing markets as
LOC orders provide price protection and the lower fees charged to MOC
orders that participate in Cboe Market Close would not outweigh the
risk of receiving an execution at an unfavorable price.\80\ BZX further
challenged commenters' concerns that Cboe Market Close could pull all
MOC orders away from the primary listing markets and alter the
calculation of the closing price, stating that such a scenario could
occur today as a result of competing closing auctions and broker-
dealers that offer internal MOC order matching solutions.\81\
Accordingly, BZX contends that the proposal would not impose
fragmentation on the market at the close that does not already exist
today.\82\
---------------------------------------------------------------------------

    \79\ See BZX Letter 1, at 3-4 and BZX Letter 2, at 2 and 10. In
addition, BZX offered to disseminate more information with regard to
Cboe Market Close and to disseminate such information via the
applicable securities information processor, in addition to the Bats
Auction Feed. See BZX Letter 1, at 4 and 12-13, and BZX Letter 2, at
2. BZX further asserted that it believed modern software can easily
and simply add this data to data disseminated by the primary listing
markets. See BZX Letter 1, at 4 and BZX Letter 2, at 3.
    \80\ See BZX Letter 2, at 3.
    \81\ See BZX Letter 1, at 4-5 (stating that neither NYSE nor
Nasdaq prohibits their members from withholding MOC orders from
their closing auctions) and BZX Letter 2, at 2-3. In response, NYSE
stated that it believed such broker-dealer services degrade the
public price and size discovery of the primary listing exchanges'
closing auctions, but that such activities are not held to the same
standards under the Act as national securities exchanges and against
which the BZX proposal must be evaluated. See NYSE Letter 2, at 4.
GTS further stated in response that it believes such broker-dealer
services deprive the DMM of content that is critical to pricing a
closing auction and the Commission should study the impact of this
activity on closing auctions. See GTS Securities Letter 2, at 4. See
infra note 129 and accompanying text discussing the DERA analysis of
the relationship between the proportion of MOC orders currently
executed off-exchange and closing price discovery and efficiency.
    \82\ See BZX Letter 1, at 4 and BZX Letter 2, at 2.
---------------------------------------------------------------------------

    In particular, with regard to competing closing auctions, BZX
argued that such competing auctions could not only pull all MOC
interest away from the primary listing markets but could also divert
all price-setting limit-on-close interest from those markets as
well.\83\ Further, BZX argued that Nasdaq and NYSE's assertions that
they currently attract low trading volumes in their competing closing
auctions are irrelevant to an analysis of their potential impact on
fragmentation.\84\ Should these auctions see an increase in order flow,
BZX argued they would increase existing market fragmentation.\85\ BZX
also asserted that such competing closing auctions often may produce
bad auction prices on the non-primary market, as compared to the
proposed Cboe Market Close which would ensure that market participants
receive the official closing price.\86\ In addition, in response to
NYSE's assertion that it contacted firms that submitted orders to NYSE
Arca's competing closing auction and encouraged them to instead submit
orders to the primary listing market, BZX provided data that it stated
evidences that NYSE has not, in fact, discouraged order flow to their
competing auctions and that NYSE Arca's competing auction ``continues
to maintain not insignificant monthly volume'' in at least two
securities.\87\
---------------------------------------------------------------------------

    \83\ See BZX Letter 1, at 5; BZX Letter 2, at 2; and BZX Letter
3, at 4. BZX provided evidence of 14 instances in June 2017 where a
Nasdaq-listed security had no volume in Nasdaq's closing auction but
did have volume in NYSE Arca's closing auction. See BZX Letter 1, at
5.
    \84\ See id. at 6.
    \85\ See id. BZX also stated that, despite their potential
utility as a back-up in case of a market impairment, Nasdaq and NYSE
Arca run these competing auctions on a daily basis, regardless of
whether there is an impairment at a primary listing exchange. See
id. BZX further questioned why these exchanges do not utilize test
symbols and test data in order to confirm the operational integrity
of the auction processes without potentially harming the price
discovery process by the primary's closing auction. See BZX Letter
3, at 5.
    \86\ See BZX Letter 1, at 4 and BZX Letter 2, at 2. BZX asserted
that 86% of closing auctions conducted by Nasdaq for NYSE-listed
securities in June 2017 resulted in closing prices different from
the official closing price and 84% of competing closing auctions
conducted by NYSE Arca for Nasdaq-listed securities in June 2017
resulted in closing prices different from the official closing
price. BZX Letter 1, at 4.
    \87\ BZX Letter 3, at 4.
---------------------------------------------------------------------------

    With regard to off-exchange matching processes, BZX stated that
several off-exchange venues currently offer executions at the official
closing price and therefore provide a forum to which participants may
choose to send MOC orders in lieu of sending MOC or LOC orders to the
primary listing market.\88\ BZX stated, however, that it was not aware
of any concerns raised by NYSE, Nasdaq, or the Commission regarding the
impact of such venues on the use of LOC orders in the closing auctions
of the primary listing exchanges.\89\
---------------------------------------------------------------------------

    \88\ BZX Letter 2, at 3.
    \89\ Id., at 3.
---------------------------------------------------------------------------

    BZX also provided certain data regarding current trading volume at
the close on venues other than primary listing exchanges to show that
the proposal would ``not introduce a new

type of fragmentation at the close.'' \90\ Specifically, BZX argued
that off-exchange venues ``siphon significant order flow at the close
from the primary listing markets,'' as over the first nine months of
2017, off-exchange volume at the official closing price represented
approximately 30% of Nasdaq closing volume for Nasdaq-listed securities
and 23% of NYSE closing volume for NYSE-listed securities.\91\
Moreover, BZX argued that the proposal ``could increase transparency by
incentivizing market participants to re-direct their MOC orders from
off-exchange venues to a public exchange,'' whose processes are subject
to the requirements of the Act, would be included in BZX's rules, and
would be subject to the proposed rule change requirements of Section
19(b) of the Act before any changes could be made to the operation of
Cboe Market Close.\92\ In addition, BZX argued that attracting order
flow away from off-exchange venues would have the additional benefit of
increasing the amount of volume at the close executed on systems
subject to Regulation SCI's resiliency requirements.\93\
---------------------------------------------------------------------------

    \90\ See id. at 4-5.
    \91\ See BZX Letter 2, at 4. BZX further asserted that, over the
course of 2017, the amount of off-exchange closing volume has been
increasing. See id. at 5.
    \92\ See id. at 5-6.
    \93\ See id. at 11.
---------------------------------------------------------------------------

    In response to NYSE's data regarding the impact of off-exchange
activity at the close on closing auction price formation, BZX presented
several critiques of the analysis. First, BZX asserted that NYSE
provided selective data that supported their conclusion that existing
fragmentation at the close has a negative impact on price discovery in
closing auctions. In particular, BZX stated that NYSE did not indicate
the number of closing auctions included in its data set.\94\ BZX also
stated that NYSE's data set was limited to auctions with less than
1,000 shares, imbalances of 50% or more of the paired shares as of 3:50
p.m., and securities for which more than 75% of the volume was reported
to the TRF. Based on its own analysis, discussed below, BZX estimated
that the number of auctions included in NYSE's data set for auctions
with 1,000 shares or less to be less than 100th of 1% of all
auctions.\95\ Therefore, BZX argued that NYSE's findings are ``of no
statistical significance.'' \96\
---------------------------------------------------------------------------

    \94\ See BZX Letter 3, at 2.
    \95\ See id. at 2-3.
    \96\ See id. at 3.
---------------------------------------------------------------------------

    BZX further argued that it is possible that such low volume
securities with severe imbalances would be subject to price variations
between the last sale and the official closing price, regardless of the
amount of off-exchange closing activity.\97\ In addition, BZX stated
that the data that NYSE provided for auctions with more than 10,000
shares shows that the ``impact on closing prices is dampened in more
actively traded securities,'' which it believes undercuts NYSE's
conclusions and ``further highlights the selective and limited nature
of NYSE's data set.'' \98\
---------------------------------------------------------------------------

    \97\ See id.
    \98\ See id.
---------------------------------------------------------------------------

    Furthermore, BZX stated that it conducted its own analysis of data
from all primary auctions in NYSE-listed securities for which there was
a closing auction and a last sale regular way trade, regardless of
size, from January 2, 2017 through September 29, 2017.\99\ BZX stated
that it reviewed auctions with imbalances of 50% or more of paired
shares at 3:55 p.m. BZX also stated that it compared auctions where
less than 25%, 25% to 50%, 50% to 75%, and more than 75%, of the
closing volume was reported to the TRF.\100\ BZX also grouped its data
amongst auctions with 1,000,000 shares or more, 100,000 shares to
1,000,000 shares, 10,000 to 100,000 shares, 1,000 to 10,000 shares, and
less than 1,000 shares.\101\ BZX stated that its analysis shows that
``the average price gap between the last sale and the official closing
price was 9.09 basis points across all groups.'' \102\ BZX stated that
it also found that ``price gaps are greater amongst auctions with less
than 25% of closing volume reported to the TRF.'' \103\ BZX concluded
that its analysis contradicts NYSE's conclusions, asserting that it
shows that ``the amount of TRF closing volume has little to no
relationship to the primary listing market's closing auction process.''
\104\
---------------------------------------------------------------------------

    \99\ See id.
    \100\ See id.
    \101\ See id.
    \102\ See id.
    \103\ See id.
    \104\ See id. at 3-4.
---------------------------------------------------------------------------

    In addition, BZX stated that it also found similar patterns ``when
it analyzed securities based on their ADV instead of auction size.''
\105\ BZX acknowledged that, while securities with less than 10,000
shares appear to have the most volatility, these securities account for
a small percentage of overall auction volume, and argued that such
volatility ``is more likely indicative of the applicable security's
trading characteristics.'' \106\
---------------------------------------------------------------------------

    \105\ See id. at 3.
    \106\ See id. at 4.
---------------------------------------------------------------------------

    In response to NYSE's arguments regarding the impact on a DMM's
ability to price the close, BZX argued that this point highlights what
it believes to be an additional benefit of allowing it to compete with
NYSE's closing auction.\107\ Specifically, BZX argued that NYSE's
assertion that DMMs consider the composition of closing interest in
making pricing decisions ``suggests that the NYSE closing auction is
not a true auction and can be an immediate detriment to users sending
MOC orders of meaningful size to the NYSE.'' \108\ Accordingly, BZX
stated that it believed this ``highlights an additional benefit'' of
Cboe Market Close as it ``would provide an alternative pool of
liquidity and a mechanism for large order senders to avoid the
subjective decision making of the DMMs who are free to make closing
price decisions to their profit benefit at the client's expense.''
\109\
---------------------------------------------------------------------------

    \107\ See BZX Letter 1, at 10.
    \108\ Id. See also supra note 47-48 and accompanying text.
    \109\ Id. In response, NYSE argued that BZX's claims regarding
the role of the DMM were not germane to whether the proposal is
consistent with the Act and stated that it believed the scale of its
closing auction and the low levels of volatility observed in the
auction demonstrate its effectiveness. See NYSE Letter 2, at 4.
---------------------------------------------------------------------------

    As the Commission stated in the OIP, it has consistently recognized
the importance of the closing auctions of the primary listing
markets.\110\ In particular, the Commission has previously stated that
``reliable . . . closings on the primary listing markets are key to the
establishment of fair and orderly markets.'' \111\ Accordingly, the
Commission has carefully analyzed and considered the proposal's
potential impact, if any, on the primary listing markets' closing
auctions, including their important price discovery functions, and the
reliability and integrity of closing prices. After careful
consideration of the proposal and all of the comments received and for
the reasons discussed throughout, the Commission believes that Cboe
Market Close is reasonably designed not to disrupt the price discovery
process in the closing auctions of the primary listing exchanges and is
consistent with the Act and the rules and regulations thereunder.\112\
---------------------------------------------------------------------------

    \110\ See OIP, supra note 7, at 40210.
    \111\ See id. (citing to Securities Exchange Act Release No.
73639 (November 19, 2014), 79 FR 72255, 72278 (December 5, 2014)).
    \112\ Accordingly, for the reasons discussed throughout, the
Commission believes the proposal is consistent with the maintenance
of fair and orderly markets. See Sections 6 and 11A of the Act; see
supra note 32.
---------------------------------------------------------------------------

    Importantly, Cboe Market Close will only accept MOC orders and not
LOC orders. Contrary to some commenters' assertions that MOC orders
contribute to the closing price, the Commission

believes that MOC orders, which do not specify a target price and seek
to be executed at the closing price at the end of the trading day are,
by their nature, the recipients of price formation information and
generally do not directly contribute to setting the official closing
price of securities on the primary listing markets.\113\ In particular,
the Commission believes that paired-off MOC interest, such as that
would be matched and executed in the Cboe Market Close, does not
fundamentally affect the determination of the closing price. As many
commenters stated, the price determined in a closing auction is
designed to be a reflection of market supply and demand, and key
considerations in setting the closing price are maximizing the number
of shares executed and minimizing the amount of the imbalance between
buy and sell interest. The Commission believes that matching paired-off
MOC orders in the manner BZX proposes would not affect the net
imbalance of closing eligible trading interest in the market. As such,
the orders that actively participate in, and contribute to, the price
formation process in a closing auction--including limit orders and
unpaired MOC orders--would not be executed in the Cboe Market Close and
could continue to be submitted to the primary listing exchange.
Accordingly, the Commission believes that the proposal is reasonably
designed to not disrupt the price discovery process and closing auction
price formation.
---------------------------------------------------------------------------

    \113\ See supra notes 40-48 (discussing Nasdaq's and NYSE's
arguments of how MOCs can contribute to the closing price).
---------------------------------------------------------------------------

    The Commission recognizes that several commenters made assertions
that matched MOC order flow provides informational content regarding
the depth of the market that indicates true supply and demand and
contributes to market participants' decisions regarding order
submission and ultimately price formation.\114\ As such, these
commenters argued that removing matched MOC orders from the primary
listing market would impact price formation. However, the Commission
believes that, while the proposal may result in the execution of some
MOC orders on a venue other than the primary listing exchange, BZX's
proposal, because it would require the size of matched MOC orders to be
published well in advance of the order entry cut-off times for the
primary listing exchanges' closing auctions, is reasonably designed to
allow market participants to, in conjunction with the information
disseminated by the primary listing exchanges, ascertain closing
auction liquidity demand. Accordingly, the Commission believes that the
information disseminated by BZX could be used by market participants in
conjunction with the information disseminated by the primary listing
exchange to make order submission decisions. Although some commenters
also asserted that DMMs would no longer have full visibility into the
size and composition of MOC interest, DMMs will have access to the
amount of paired-off MOC volume on BZX well in advance of NYSE's order
entry cut-off time and the start of the NYSE closing auction. An NYSE
DMM could, for example, use such information to determine the total
amount of MOC interest for a given security in Cboe Market Close and
NYSE's closing auction, in establishing the relevant context for any
imbalances in NYSE closing auctions and calculating appropriate closing
prices.\115\ Further, the Commission believes that, as BZX stated, the
Cboe Market Close could benefit market participants that do not wish to
disclose information regarding their orders to certain other market
participants such as DMMs by providing another venue to which they may
send their orders for execution at the closing price. In addition, the
Commission does not agree with those commenters that argued that the
proposal contradicts the Commission's approval of Amendment 12 to the
LULD Plan, as the LULD Plan does not mandate that market participants
consolidate their orders at the primary listing exchanges, but rather
requires that a trading pause continue until the primary listing
exchange has reopened trading.\116\ While pursuant to the LULD Plan
trading may not begin until the reopening on the primary listing
exchange, market participants continue to have the choice as to where
to submit their orders.
---------------------------------------------------------------------------

    \114\ See supra notes 45-48, 72-75 and 77 and accompanying text.
    \115\ The proposal would not alter the information DMMs would
have relating to off-exchange MOC interest. In addition, one
commenter that is supportive of the proposal is a DMM on NYSE and
stated that the proposal ensures that the price discovery process
remains intact because BZX would only match buy and sell MOC orders
and not limit orders, which it stated, ultimately lead to price
formation. See Virtu Letter, at 2.
    \116\ See Securities Exchange Act Release No. 79845 (January 19,
2017), 82 FR 8551, 8552 (January 26, 2017). See also BZX Letter 1,
at 8-9 and Bollerman Letter at 3.
---------------------------------------------------------------------------

    As discussed above, NYSE and Nasdaq argued that if the proposed
rule change resulted in the removal of all MOC orders from the primary
listing exchanges' closing auctions, that result would impact closing
prices in instances where no auction could be held in accordance with
their rules. In such scenarios, NYSE and Nasdaq assert that, pursuant
to the primary listing exchanges' rules, the resulting closing price
would be the consolidated last sale price.\117\ NYSE and Nasdaq both
sought to quantify the extent to which last consolidated sale prices
would have differed from closing prices determined through closing
auctions. The data and counterfactual examples provided in this regard
assume that the BZX proposal would result in no market participants
choosing to send any MOC orders to the primary listing markets' closing
auctions. However, the commenters did not assert how likely it was for
such a scenario to occur or provide data in support thereof, nor did
they provide any other data regarding what the impact would be should
fewer than all MOC orders be diverted from the primary listing markets.
While NYSE further asserted that one ``plausible outcome'' of the BZX
proposal is that the majority of MOC orders would migrate to Cboe
Market Close, it acknowledged that it was ``hard to predict what would
happen if the [BZX] proposal were to be approved.'' \118\ Further, NYSE
explained that this outcome would likely be the case if the fees set by
BZX for Cboe Market Close were lower than the primary listing markets
and there was no competitive response by the primary listing
exchanges.\119\ The Commission believes it may be possible that there
would be instances in which no MOC orders participate in a primary
listing market's closing auction following implementation of the Cboe
Market Close. However, such instances can occur today, and the
Commission believes that the more likely scenario is that, if Cboe
Market Close were to be approved and implemented, it would draw some,
though not all, MOC orders from the primary listing markets, because
many market participants likely base decisions regarding where to send
closing orders not solely on fees, but rather on many other factors,
including the reliability, stability, technology and surveillance
associated with such auctions,\120\ and because currently there

exist competitive alternatives to execute MOC orders off-exchange, yet
the majority of MOC orders continue to be executed in the closing
auctions on the primary listing exchanges.\121\ While the Commission
acknowledges that, as some commenters argued, current levels of off-
exchange MOC activity are not a perfect measure of the potential
resulting impact of the proposal, the Commission believes that they do
provide some limited insight, as discussed further below. Further, the
Commission believes that, should market participants choose to send a
substantial portion of MOC orders to the Cboe Market Close, the primary
listing exchanges have various other options available to them to try
to compete for such orders, and it is unlikely that such exchanges
would choose to accept the complete loss of MOC order market share and
make no attempt at a competitive response.
---------------------------------------------------------------------------

    \117\ See Nasdaq Letter 2, at 3; NYSE Letter 1, at 5. See also,
e.g., NYSE Rule 123C(1)(e); NYSE Arca Rule 1.1(ll)1.
    \118\ See NYSE Report, at 22.
    \119\ Id.
    \120\ See generally, Nasdaq Letter 1, at 3-4 (asserting that the
Nasdaq closing cross has been successful due to its integrity,
stability, reliability, and regulation). Furthermore, in assessing
whether to utilize Cboe Market Close, market participants may
evaluate other attributes of the functionality, such as the need to
monitor whether they were matched on BZX and potentially having to
send their MOC orders to more than one venue if not matched, as well
as having to commit to transact at the closing price at an earlier
time than they otherwise would have had they chosen to send their
MOC orders to the primary listing exchanges.
    \121\ See DERA Analysis, supra note 8 (finding that, on average,
approximately 9.3 percent of closing volume is matched off-exchange
at the primary listing exchange's closing price); NYSE Report, at 22
(stating that closing auctions on the listing exchanges currently
process the vast majority of the MOC and LOC orders in the market);
and Nasdaq Data Memo, supra note 41 (providing data relating to the
level of matched MOC volume in Nasdaq closing auctions).
---------------------------------------------------------------------------

    Further, while the commenters' analyses examined price
differentials in various contexts, differences in prices alone are not
dispositive with respect to price discovery or efficiency. First, a
large difference between a reference price (e.g., the last sale price)
and the closing price may reflect genuine information if the price
change persists, or may reflect a temporary price pressure if the price
change subsequently reverses.\122\ Because the data and analyses that
commenters provided did not analyze subsequent price changes, it is
unclear whether the pre-close price differentials indicate better or
worse price discovery or efficiency. Second, when comparing price
differences across securities, the analyses did not distinguish whether
the observed differences were due to the removal of MOC orders from the
primary listing exchange or due to liquidity differences. As described
above, NYSE provided an analysis comparing price differences between
securities in which 75% of the total closing volume was reported to a
TRF, to securities in which 25% of the total closing volume was
reported to a TRF, and argued that securities with more off-exchange
MOC activity have more closing price volatility. However, the
Commission believes that closing price volatility and off-exchange
activity may be correlated with unobserved liquidity factors. For
example, small stocks tend to have high trading costs (e.g., wider
spreads, thinner order books) and more volatility on average.\123\
Therefore, it is possible that the price differences observed by the
commenter could be due to differences in liquidity or other factors not
controlled for in the analysis, rather than the levels of off-exchange
MOC activity.\124\ Nasdaq's analysis involved 1,653 closing crosses
that occurred between January 1, 2016 and August 31, 2017, which the
Commission estimates accounts for approximately 0.44% of all Nasdaq
auctions over that time period. As such, the Nasdaq analysis may not be
a representative sample.\125\ Moreover, Nasdaq did not address whether
the securities analyzed are highly illiquid. If they are highly
illiquid, price differences between the last sale price and the closing
auction price may be large for reasons unrelated to the specifics of
the auction mechanism.\126\ Given these limitations, including that
Nasdaq's estimate may overstate the impact, the data and analysis
provided in these comments do not persuade the Commission that the
proposal is inconsistent with the Act.
---------------------------------------------------------------------------

    \122\ See e.g., Joel Hasbrouck, ``Measuring the Information
Content of Stock Trades,'' Journal of Finance 46, 179-207 (1991),
available at www.jstor.org/stable/2328693.
    \123\ For example, one study examined fragmentation in the U.S.
equities markets and showed that small cap stocks are more
fragmented than large cap stocks for Nasdaq-listed issues. It also
found that fragmentation is correlated with higher short-term
volatility, but increased market efficiency. See Maureen O'Hara and
Mao Ye, ``Is Market Fragmentation Harming Market Quality?,'' Journal
of Financial Economics 100, 459-474 (2011), available at http://www.sciencedirect.com/science/article/pii/S0304405X11000390.
    \124\ See also notes 94-106 and accompanying text (discussing
BZX's comments with respect to NYSE's analysis and BZX's own
analysis of such data).
    \125\ See supra note 43.
    \126\ See id. See also NYSE Report, at 12 (``The difference
between the last sale price in the continuous market and the closing
auction price, particularly for less active securities where the
last sale price may be stale, can be significant.'').
---------------------------------------------------------------------------

    Further, while NYSE and Nasdaq implied that use of the consolidated
last sale price as the official closing price is inferior to the price
discovery process of the closing auction, the use of the consolidated
last sale price as the official closing price when a primary listing
exchange does not conduct a closing auction is not mandated by the Act
or rules thereunder, but rather is established by the rules of that
exchange. Therefore, if a primary listing exchange believes that such
prices no longer reflect an appropriate closing price in certain
scenarios, it is within the exchange's discretion to reevaluate whether
reliance on the last consolidated sale price is the appropriate means
for determining the official closing price in such scenarios, and may
file proposed rule changes to amend its rules to establish alternative
methods of determining the official closing price should no auction be
held that it believes to be more appropriate.\127\
---------------------------------------------------------------------------

    \127\ For example, like all market participants, the primary
listing exchanges could determine if and how to utilize the
information BZX disseminates regarding paired MOC interest in the
Cboe Market Close for determining the official closing price should
they choose to do so.
---------------------------------------------------------------------------

    Some commenters also argued that the proposal would impact the
submission of LOC orders to the primary listing markets. As BZX stated
in its response letter, LOC orders provide price protection, whereas
MOC orders are submitted by market participants who may be less price
sensitive and who may prioritize other aspects of a closing execution
over price. As such, the Commission does not believe that it is likely
that market participants would be more inclined to assume the risk of
submitting MOC orders to the Cboe Market Close in circumstances where
they otherwise would have submitted price-protected LOC orders into the
primary markets' closing auctions, solely to pay lower fees. As
discussed above, Nasdaq and NYSE also asserted that the Cboe Market
Close could discourage submission of orders in the continuous market
and closing cross if there were a large amount of paired MOC orders in
Cboe Market Close and a subsequent lack of imbalance information
disseminated on the primary listing markets.\128\ However, the
Commission believes this risk is not unique to the availability of the
Cboe Market Close and, indeed, exists today. Specifically, the
Commission believes that the submission of orders would similarly be
discouraged today if such large amount of MOC orders in a listed
security had been paired on the primary listing exchange and
accordingly, there was little or no resulting imbalance disseminated by
such exchange. Irrespective of the exchange upon which the MOC orders
are paired, the net imbalance published by the primary listing exchange
would be expected to be the same. In addition, because Cboe Market
Close would publish the volume of MOC orders paired prior to the start
of the closing auctions on the primary

listing exchanges, market participants should have sufficient time to
incorporate such information relating to the levels of MOC interest in
the Cboe Market Close in a given security into their decisions about
order submissions into the closing auctions.
---------------------------------------------------------------------------

    \128\ See supra notes 37-38 and 46 and accompanying text.
---------------------------------------------------------------------------

    In addition, as discussed above, many commenters addressed the
existence of fragmentation at the close today due to off-exchange
matching processes and competing closing auctions. With regard to
broker-dealer matching services, the Commission's consideration and
analysis of whether BZX's proposal is consistent with the Act as an
exchange is subject to differing requirements and standards than those
that apply to broker-dealers under the Act. At the same time, how such
existing off-exchange services impact closing auctions on the primary
listing markets may provide some limited insight into the potential
impact of the proposal on the price discovery function of the primary
closing markets, particularly to the extent the proposed Cboe Market
Close is similar to such off-exchange services.
    The staff from the Commission's Division of Economic and Risk
Analysis analyzed the relationship between the proportion of MOC orders
executed off-exchange and closing price discovery and efficiency.\129\
The DERA Analysis made several findings that the Commission believes,
while not dispositive, are relevant to commenters' claims regarding
Cboe Market Close's potential impact on price discovery and other data
and assertions presented regarding current off-exchange matching
services. In particular, the DERA Analysis found that, on average,
closing auction volume accounts for approximately 5.2 percent of daily
volume, and on average, approximately 9.3 percent of closing volume is
executed off-exchange at the primary listing exchange's closing price.
The DERA Analysis also found that, in a sample spanning the first
quarter of 2017, variation in off-exchange MOC share is not
significantly correlated with closing price discovery or efficiency,
controlling for primary auction activity, off-exchange trading activity
during regular trading hours, average market capitalization, average
daily trading volume, average daily stock return volatility, and
closing price volatility.\130\ In further sample splits (e.g., by
listing venue, security type, and index inclusion), the DERA Analysis
finds some mixed evidence of statistically significant correlations,
but no consistent or conclusive evidence that contradicts the full-
sample analysis.
---------------------------------------------------------------------------

    \129\ See DERA Analysis, supra, note 8.
    \130\ Though the DERA Analysis' findings suggest ``that existing
levels of fragmentation do not, on average, correlate with price
discover or price efficiency,'' the DERA Analysis makes clear that
``the data we have does not allow us to predict how [Cboe Market
Close] would affect price discovery in the closing auction process,
and market participants' use of limit-on-close orders in the closing
auction processes.'' In addition, the DERA Analysis states that it
does not attempt to establish a causal link between off-exchange
activity and closing price discovery and efficiency. See DERA
Analysis, supra, note 8, at 1-2.
---------------------------------------------------------------------------

    NYSE provided several critiques of the DERA Analysis' methodology
and argued that the DERA Analysis' findings should not be interpreted
as providing evidence that BZX's proposal would have no negative impact
on price discovery or the efficiency of closing prices.\131\ NYSE also
asserted that the DERA Analysis does not adequately address the
concerns raised by commenters that the BZX proposal might undermine
price discovery, have a negative effect on the quality of official
closing prices, and introduce new concerns related to market
manipulation and ``gaming.'' \132\
---------------------------------------------------------------------------

    \131\ See NYSE Report, at 1 and 9.
    \132\ See id. at 9. To provide context for these assertions, the
NYSE Report included background information summarizing the existing
closing auction processes, including both the procedures for the
primary listing exchanges' closing auctions as well as the competing
closing auctions operated by Nasdaq and NYSE Arca. NYSE also
summarized BZX's proposal and the DERA Analysis. See id. at 3-9.
---------------------------------------------------------------------------

    As discussed above, NYSE stated that because the bulk of the volume
accounted for in the DERA Analysis is market maker volume crossed on
behalf of clients, it may not be a good proxy for evaluating the
potential impact of the proposal.\133\ In addition, NYSE stated that if
BZX's proposal is successful, it could divert a higher percentage of
MOC orders away from the primary listing markets than is currently
observed in an analysis of existing off-exchange MOC activity.
Accordingly, NYSE argued that the DERA Analysis does not have
sufficient data to measure the effects when off-exchange MOC volume is
high, which is likely to yield greater power to find an effect.\134\
NYSE also claimed that the DERA Analysis failed to account for
instances when there is no closing auction, which could result in not
considering instances where, according to NYSE, price discovery in the
closing auction would be most impacted by diverting MOC orders away
from the primary listing market.\135\
---------------------------------------------------------------------------

    \133\ See id. at 10; see also supra notes 65-66 and accompanying
text.
    \134\ See id. at 10-11.
    \135\ See id. at 13.
---------------------------------------------------------------------------

    In criticizing the methodology of the DERA Analysis, NYSE further
asserted that ``widely accepted'' alternative approaches for analyzing
potential behavior and incentives under alternative market structures
could be useful in considering the impact of BZX's proposal on closing
price discovery and efficiency.\136\ In addition, NYSE stated that it
may be possible to use a simulation approach to investigate the degree
to which routing MOC orders away from the primary listing exchanges
impacts price discovery.\137\
---------------------------------------------------------------------------

    \136\ See id. at 14. The author of the NYSE Report also stated
that a study he conducted providing evidence that higher levels of
off-market trading under certain market structures can harm market
quality may be relevant to the analysis of the potential impacts of
BZX's proposal. See id. at 11. However, as the study the author
cited analyzes continuous trading in Nasdaq stocks prior to the
implementation of Regulation NMS (adopted in 2005 and which
implemented significant changes to the regulatory framework of the
equity markets), the Commission does not believe in this instance
that it can be relied upon to make inferences regarding current
market structure. See generally 70 FR 27496 (June 29, 2005).
    \137\ See id.
---------------------------------------------------------------------------

    Concluding that the methodology used by the DERA Analysis does not
provide meaningful evidence of the extent to which off-exchange MOC
trading currently impacts the informational efficiency of the official
closing price, NYSE discussed the metrics used in the DERA
Analysis.\138\ With respect to the Price Contribution metric, NYSE
argued that the metric is not suitable for evaluating the quality of
the closing auction because it is a ``simplistic measure'' of the
degree of price discovery that would classify ``large arbitrary
swings'' in prices as good price discovery.\139\ Concerning the Price
Reversal metric, NYSE stated that as a measure of the efficiency of
official closing prices, it is a ``noisy and imprecise'' metric that
makes it unlikely that one would find a significant result, even if one
exists, and that it also has no clear interpretation.\140\ NYSE further

asserted the Price Reaction metric is likewise ``imprecise and
problematic'' because it is ``just an indicator-variable version'' of
price reversal and thus ``imprecisely measures the imprecise Price
Reversal metric.'' \141\ NYSE asserted that the DERA Analysis' lack of
a finding of statistically significant results ``is not surprising''
because the power of the Price Reaction test to find significant
results is severely hampered.\142\
---------------------------------------------------------------------------

    \138\ See id. at 17. NYSE also argued that while the DERA
Analysis cited to two published papers by Barclay and Hendershott to
support using a regression-based approach to study the information
content of closing prices, the DERA Analysis does not use the
Barclay and Hendershott methodology.
    \139\ See id. at 14-15. NYSE suggested that an alternative
approach to examine price continuity measures could provide some
pertinent information regarding price discovery at the close. NYSE
also stated that controlling for the size of the auction and the
auction's initial imbalance may be important because price
deviations that are the result of large imbalances or large demand
are more likely to be indicative of informationally-driven price
moves, which would be an indication of good price discovery, rather
than liquidity-driven price moves, which would be an indication of
bad price discovery. See id. at 15-16.
    \140\ See id. at 16. NYSE provided several examples that it
stated illustrated the imprecision of the Price Reversal metric. See
id. at 16-17.
    \141\ See id. at 17.
    \142\ See id.
---------------------------------------------------------------------------

    The Commission has considered the criticisms of NYSE with respect
to the DERA Analysis. Importantly, the DERA Analysis was explicit
regarding the limited scope of its analysis and does not assert that
BZX's proposal would have no negative impact on price discovery of
official closing prices. The DERA Analysis sought to explore the
correlation of closing price discovery and efficiency with existing
off-exchange MOC activity. It did not make any findings with respect to
establishing a causal link between off-exchange MOC activity and
closing price discovery and efficiency.\143\ In addition, it was not
designed to, nor does it purport to, opine on or address other aspects
of BZX's proposal, including the potential impact on manipulation.\144\
While NYSE also criticized the scope of the DERA Analysis for not
considering instances where there was no closing auction, the sample in
Table 4 of the DERA Analysis did, in fact, include all symbol-day
observations, including those days where there was no closing auction,
and this sample showed results consistent with DERA's overall
findings.\145\
---------------------------------------------------------------------------

    \143\ See DERA Analysis, supra note 8, at 1. See also supra note
130.
    \144\ See infra notes 204-211 and 213-226 and accompanying text
(discussing in more detail NYSE's arguments relating to manipulation
and the Commission's response).
    \145\ See id. at 11 and 16. See also supra notes 117-121
(discussing the Commission's response to NYSE and other commenters
arguments relating to the potential scenario of all MOC orders being
diverted to Cboe Market Close and the primary listing markets
conducting no auction).
---------------------------------------------------------------------------

    NYSE noted that the DERA Analysis ``cites to two published papers
by Barclay and Hendershott as support for using a regression-based
approach to study the information content of the closing price.
However, the DERA Analysis does not actually use the Barclay-
Hendershott methodology.'' \146\ The DERA Analysis explains that, in
order to maintain a consistent sample size across the different
regression specifications, rather than take time-series weighted
averages and running pure cross-sectional regressions, the DERA
Analysis uses weighted panel regressions to perform the same
estimation.\147\ The DERA Analysis explains that the weighted panel
regression approach produces the same Price Contribution estimates as
the time-series weighted averages.\148\ Furthermore, the panel
regression approach allows for the analysis of within-stock--day-to-
day--variation in Price Contributions, off-exchange MOC activity, as
well as the controls.\149\ Finally, the NYSE, in its critique of the
DERA Analysis, does not explain how any differences in regression
specifications would affect coefficient estimates or change the
interpretation of these estimates.
---------------------------------------------------------------------------

    \146\ See NYSE Report, at 15. See also supra note 138.
    \147\ See DERA Analysis, supra note 8, at 6, note 20.
    \148\ See DERA Analysis, supra note 8, at 6, note 20 and
accompanying text.
    \149\ Footnote 22 of the DERA Analysis describes a robustness
check using stock and day fixed effects. See DERA Analysis, supra
note 8, at 8. Controlling for unobserved heterogeneity at the stock
level using stock fixed effects would not be possible using pure
cross-sectional regressions.
---------------------------------------------------------------------------

    With respect to NYSE's critique of the Price Contribution metric,
the DERA Analysis controlled for contemporaneous absolute price
volatility to account for the precise concerns identified by NYSE.
Accordingly, the regression utilized in the DERA Analysis sought to
isolate variations in Price Contributions that were not merely ``large
arbitrary price swings'' that happened to be correlated with off-
exchange MOC activity.\150\ While NYSE also argues that the imprecision
of the Price Reversal and Price Reaction metrics render it unlikely to
yield statistically significant results, the Commission believes that
the DERA Analysis included a sufficient sample size and variables to
achieve statistical power.\151\ Regarding the Price Reversal metric,
the DERA Analysis used the same definition as Barclay and Hendershott,
which found statistical relations using this measure, and the DERA
Analysis used all stock-days over a quarter so as to not limit the
analysis to a small sample.\152\ Concerning the Price Reaction
measurements, the Commission acknowledges that they may be imprecise,
but many of the variables included in the regression, including auction
share and market capitalization, are statistically correlated with
price reactions, which suggests that, in this case, the definition of
the dependent variable does not, on its own, create a lack of
statistical power.\153\
---------------------------------------------------------------------------

    \150\ See NYSE Report, at 14-15.
    \151\ Statistical power is the ability for statistical tests to
identify differences across samples when those differences are
indeed significant.
    \152\ In fact, Table 2 of the DERA Analysis finds strong
statistically significant correlations between Price Reversals and
contemporaneous closing price volatility. See DERA Analysis, supra
note 8, at 15.
    \153\ The DERA Analysis included this metric to account for
price continuations, which would also indicate a lack of price
efficiency. See DERA Analysis, supra note 8, at 6-7.
---------------------------------------------------------------------------

    Moreover, NYSE suggested that there are alternative approaches that
would be useful in considering how market participants are likely to
behave under alternative market structures and for analyzing how
potential structures create incentives for market manipulation, as well
as alternative measures that could provide pertinent information
regarding price discovery at the close.\154\ However, NYSE did not, in
fact, provide any data or studies employing any of these methods. In
the OIP, the Commission requested data, analyses or studies on a
variety of relevant issues including arguments that BZX's proposal
would harm price discovery in the primary listing exchanges' closing
auctions, that BZX's proposal would affect the integrity or reliability
of the official closing auction and the resulting closing price, and
that BZX's proposal would increase the potential for manipulative
activity.\155\ However, despite asserting that it believed there are
other relevant approaches for studying and analyzing matters relevant
to these points that it could have used to respond to the Commission's
solicitation of comments, NYSE did not do so.\156\
---------------------------------------------------------------------------

    \154\ See NYSE Report at 14 and 15-16.
    \155\ See OIP, supra note 7, at 40210-40211.
    \156\ See supra note 154. See also infra note 209 (stating that
NYSE did not provide any data, studies, or analyses supporting its
arguments regarding the potential impacts of BZX's proposal on
manipulative activity in response to the Commission's specific
solicitation in this regard).
---------------------------------------------------------------------------

    As discussed above, Nasdaq and NYSE concluded that existing over-
the-counter price matching should not be considered a precedent for the
proposal and described how they believed some over-the-counter MOC
trades differed from those that would occur through Cboe Market
Close.\157\ While the utility of any consideration of the impact of
off-exchange MOC execution services on price discovery on the primary
listing exchanges may be more limited to the extent that such existing
activity and services are not identical to the proposed Cboe Market
Close, the Commission nonetheless believes that the DERA Analysis,
while not conclusive, provides some insights in

considering whether there would likely be potential negative impacts on
the price discovery process in the closing auctions of the primary
listing exchanges that would occur from executing MOC orders on a venue
other than the primary listing market. Accordingly, the Commission
believes that the DERA Analysis lends support for the argument that
there is no strong evidence to suggest that existing levels of
fragmentation of closing auctions through off-exchange MOC activity
negatively impacts the price discovery process on the primary listing
exchanges. In addition, as a general matter, commenters failed to
provide data, studies or analyses, as requested in the OIP,\158\ that
persuasively supported their assertions regarding the proposal's
negative impact on price discovery on the closing auctions of the
primary listing markets.
---------------------------------------------------------------------------

    \157\ See supra notes 61-66 and accompanying text (stating that
Nasdaq asserted that broker-dealers may accept MOC orders and trade
against them as principal and that NYSE asserted that market makers
crossing orders on behalf of clients may be risking capital on such
transactions).
    \158\ See OIP, supra note 7, at 40210-40211.
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    With regard to competing closing auctions, BZX's proposed Cboe
Market Close is not a closing auction and the Commission believes, as
do some commenters, that there are certain fundamental differences
between BZX's proposed Cboe Market Close and existing competing closing
auctions, such as those identified by NYSE and Nasdaq regarding the
price discovery mechanisms of their competing, single-priced closing
auctions, which produce closing prices independent from those
determined through the primary listing exchanges' closing
auctions.\159\ Nevertheless, the Commission believes that considering
such competing closing auctions, which already exist today, is useful
to an analysis of the current proposal. Importantly, in such competing
closing auctions, market participants may choose not only to submit MOC
orders, but also price-setting LOC orders. As pointed out by BZX, this
could affect the closing price on the primary listing market by
potentially diverting LOC orders that contribute to price discovery
away from the primary listing market's closing auction.\160\ In
contrast, BZX's proposal would not accept LOC orders, but rather only
matches MOC orders, and thus is reasonably designed to not impact the
closing price formation process.
---------------------------------------------------------------------------

    \159\ See supra notes 52-55 and accompanying text.
    \160\ Competing auctions could also potentially reduce the
centralization of orders at the primary listing market's closing
auction, which NYSE and Nasdaq argued was a critical element of the
primary listing markets' closing auctions.
---------------------------------------------------------------------------

    Several commenters stated that the proposal could harm issuers,
particularly small and mid-cap companies.\161\ Many of these commenters
argued that because of their view that the proposal undermines the
reliability of the closing process and/or the official closing price it
also poses a risk to listed companies and its shareholders.\162\ Many
of these commenters, some of which are issuers, stated that the current
centralized closing auctions on the primary listing markets contribute
meaningful liquidity to a company's stock, facilitates investment in
the company, and helps to lower the cost of capital. Accordingly, these
commenters expressed concern that the potential additional
fragmentation caused by the proposal could negatively impact liquidity
during the closing auction, causing detrimental effects to listed
issuers.\163\
---------------------------------------------------------------------------

    \161\ See Nasdaq Letter 1, at 6-7; Nasdaq Letter 2, at 1-2
(asserting that as a result of fragmentation, small- and mid-cap
companies are more susceptible to abrupt and disruptive price swings
and therefore, centralizing liquidity at the close is important for
these issuers and their investors); NYSE Letter 1, at 3; GTS
Securities Letter 1, at 2-5; Customers Bancorp Letter; Orion Group
Letter; CTS Corporation Letter; IMC Financial Letter, at 1-2;
Southern Company Letter; Nobilis Health Letter; EDA Letter, at 1-2;
Coupa Software Letter; Trade Desk Letter; Duffy/Meeks Letter, at 1;
and Henry Schein Letter.
    \162\ See NYSE Letter 1, at 3 (arguing that the proposal is
indifferent to the potential risks to public companies and that the
closing is the most important data point for shareholders); IMC
Financial Letter, at 1-2; Nobilis Health Letter; EDA Letter, at 1-2;
Coupa Software Letter; Ethan Allen Letter; Trade Desk Letter;
BioCryst Letter; Digimarc Letter; Duffy/Meeks Letter, at 1-2
(stating that public companies are concerned the proposal will have
an unforeseen effect on the pricing of their companies' shares at
the close, ultimately harming a critical measure of the company's
value and harming its shareholders and asking the Commission to
carefully consider the impacts of the proposal and whether such
impacts would be necessary and helpful to public companies); NBT
Bancorp Letter; Five9 Letter; Balchem Letter; Cree Letter; Henry
Schein Letter; Corbus Letter; Global Payments Letter; CA
Technologies Letter; Sirius Letter; Lam Letter; and PayPal Letter.
Several issuers also asserted that decentralizing closing auctions
will increase volatility, reduce visibility, and negatively impact
liquidity for equity securities. See e.g., Customers Bancorp Letter;
Orion Group Letter; Nobilis Health Letter; Cardinal Health Letter;
and Stewart Letter.
    \163\ See Customers Bancorp Letter; Orion Group Letter; CTS
Corporation Letter; Southern Company Letter; Duffy/Meeks Letter, at
1-2 (stating that the proposal could cause a disruption to the
closing auction process, which could lead to discouraging investors
from participating in and having confidence in our markets); and
Five9 Letter. In contrast, one commenter argued that the proposal
would improve aggregate liquidity at the official closing price
because the lower aggregate cost of trading would likely spur
incremental increases in trading volumes. In addition, this
commenter stated that the ability to enter MOC orders into Cboe
Market Close with little risk of information leakage may attract an
additional source of liquidity. See ViableMkts Letter, at 2.
---------------------------------------------------------------------------

    In addition, one commenter, SPDJI, argued that the proposal may
also impact confidence in the pricing of benchmark indices as
confidence in closing prices is a prerequisite for market participants
to maintain confidence in the pricing of benchmark indices.\164\
Accordingly, SPDJI asserted that because the closing price is a
critical data point for investors, great caution should be taken in any
changes to the closing auction.\165\
---------------------------------------------------------------------------

    \164\ See SPDJI Letter, at 1-2 (stating that it relies solely on
primary market auction prices to calculate the official closing
index values, and that these closing index values play an important
role in the markets, including use by portfolio managers to measure
their funds' value and for use in calculating settlement prices for
certain products); see also Coupa Software Letter; Trade Desk
Letter; and Henry Schein Letter (stating that the official closing
price is used to value their stocks for purposes of various indexes
and mutual funds).
    \165\ See SPDJI Letter, at 2; see also NYSE Report, at 23-24. In
contrast, one commenter acknowledged that while impacting the
quality of the closing price is an objection that deserves close
analysis, as the closing price is ``the most important price of the
day,'' and would warrant rejection of the proposal, the commenter
does not believe the proposal would harm the quality of the closing
price. See Angel Letter, at 4.
---------------------------------------------------------------------------

    Moreover, some commenters argued that the centralization of
liquidity at the open and close of trading, and how primary listing
markets perform during the opening and closing, are important factors
for issuers in determining where to list their securities, and the
additional risk posed to listed companies from an unreliable or
unrepresentative closing price and/or process could impact an issuer's
decision where to list and/or cause companies to forgo going
public.\166\
---------------------------------------------------------------------------

    \166\ See NYSE Letter 1, at 3 and 9 (stating that no single data
point is more important than the closing price to the company or its
shareholders); GTS Securities Letter 1, at 3-5; EDA Letter, at 1;
Duffy/Meeks Letter, at 1 (stating that the closing price is a
critical measure of a company's value and that public companies view
the closing auction on the primary listing exchange as a critical
aspect of listing); and GTS Securities Letter 2, at 1-2. In
addition, one commenter stated that further fragmenting the market
would limit the quality and quantity of information on trading
dynamics that the primary listing markets provide to their listed
issuers. See CA Technologies Letter.
---------------------------------------------------------------------------

    With regard to concerns about the impact of the proposal on issuers
and their shareholders, BZX stated that the proposal ``would not
adversely impact the trading environment for issuers and their
securities'' because it ``specifically designed the [p]roposal so that
it would not impact the very important price discovery function
performed by the primary listing markets' closing auction'' by only
matching paired MOC orders and not LOC orders and ensuring executions
at the closing price.\167\ BZX further stated that unlike the competing
closing auctions run by NYSE Arca and Nasdaq, the proposal would not
create

a price that deviates from the official closing price, and therefore,
the proposal ``would not impact listed issuers or the market for their
securities.'' \168\
---------------------------------------------------------------------------

    \167\ See BZX Letter 1, at 2 and 4 and BZX Letter 2, at 10.
    \168\ See BZX Letter 2, at 10.
---------------------------------------------------------------------------

    The Commission believes that, because the proposal is reasonably
designed to minimize any impact on the price discovery process, as
described above, commenters' concerns regarding the effects on listed
issuers, including small and mid-cap companies, are similarly
mitigated. Commenters stated that the proposal would undermine the
value and reliability of closing prices for securities and, as a
result, the pricing of benchmark indices, and that decentralization of
the closing auction would harm liquidity in their stock.\169\ However,
for the reasons discussed above,\170\ the Commission believes that,
because the proposal is reasonably designed to not impact price
formation in closing auctions on the primary listing markets, the
proposal is likewise reasonably designed to avoid the detrimental
impacts that commenters have raised regarding the reliability of
official closing prices, confidence in closing prices and pricing of
benchmark indices, increased volatility, liquidity conditions for
particular stocks, and the cost of raising capital. Further, as
described above, because BZX will disseminate the amount of BZX matched
shares well before the cut-off time for the primary markets' closing
auctions, the Commission does not believe that the proposal would
negatively impact visibility and transparency into the closing auction
process on the primary listing exchanges.
---------------------------------------------------------------------------

    \169\ See supra notes 161-166 and accompanying text.
    \170\ See supra notes 110-160 and accompanying text.
---------------------------------------------------------------------------

Impact on Market Complexity and Operational Risk

    Several commenters addressed the potential impact of the proposal
on market complexity and operational risk that could occur if the
proposal resulted in increased market fragmentation. Some of these
commenters believed that the proposal would not introduce significant
additional complexity or operational risk. For example, two commenters
argued that the proposal could enhance the resiliency of the closing
auction process by providing market participants an additional
mechanism through which to execute orders at the official closing price
in the event of a disruption at a primary listing market.\171\ Another
commenter argued that exchanges already have many market data feeds
that firms must purchase to ensure that they have all of the
information necessary to make informed execution decisions and that
adding another data feed will not add complexity given the small amount
of information that goes into the closing data feed and the current
capabilities of market participants to re-aggregate multiple data
feeds.\172\
---------------------------------------------------------------------------

    \171\ See SIFMA Letter 1, at 2 and ViableMkts Letter, at 3
(further stating that once BZX is able to process MOC orders, they
would be in a position to develop the capability to offer a full
backup closing auction process).
    \172\ See Clearpool Letter, at 4.
---------------------------------------------------------------------------

    In contrast, other commenters argued that the proposal would add
unnecessary market complexity and operational risk. In particular, two
commenters stated that the proposal would require market participants
to monitor an additional data feed, the Bats Auction Feed, with one
also stating that if additional exchanges adopted similar functionality
to Cboe Market Close, it would require monitoring of even more data
feeds.\173\ These commenters argued that monitoring an additional data
feed could increase operational risk by creating another point of
failure at a critical time of the trading day.\174\ One commenter also
stated its view of the increased complexity involved in sending order
flow to more than one exchange in short periods of time near the close
of the trading day.\175\ This commenter argued that the proposal
increases operational risk and complexity at a critical point of the
trading day by forcing market participants whose orders did not match
in Cboe Market Close to quickly send MOC orders from one exchange to
another before the cut-off time at the primary market closing
auction.\176\ This added complexity, GTS argued, puts additional stress
on the systems of exchanges and increases the potential for
disruptions.\177\ Lastly, two commenters argued that the proposal could
encourage other exchanges, broker-dealers, and alternative trading
systems to offer similar processes, which would introduce undesirable
fragmentation to the market and lead to operational challenges for
investors and traders.\178\
---------------------------------------------------------------------------

    \173\ See NYSE Letter 1, at 7 and IMC Letter, at 1. See also
NYSE Letter 3, at 3 (stating that market participants that may not
subscribe to multiple proprietary data feeds would be at a
disadvantage and that the complexity would be further compounded
when other exchanges adopt functionality similar to Cboe Market
Close).
    \174\ See IMC Letter, at 1 and NYSE Letter 1, at 7. See also
Ethan Allen Letter (arguing the proposal would add a layer of
complexity).
    \175\ See GTS Securities Letter 1, at 6.
    \176\ See GTS Securities Letter 1, at 6. Furthermore, NYSE
argued that in certain situations, investors may not be able to
participate in a closing auction on NYSE American or NYSE Arca if
they wait until after their order was cancelled by BZX to send in a
market-on-close order to closing auctions on NYSE Arca and NYSE
American. NYSE explained that in situations where there is an order
imbalance priced outside the Auction Collars, orders on the side of
the imbalance are not guaranteed to participate in the closing
auctions on those two exchanges. Earlier submitted market-on-close
orders have priority. See NYSE Letter 1, at 8.
    \177\ See GTS Securities Letter 1, at 6.
    \178\ See T. Rowe Price Letter, at 1-2. See also Nasdaq Letter
1, at 8 (stating that other exchanges may propose similar offerings
but choose different pairing cut-off times which could further
complicate investors' decisions and programming requirements).
---------------------------------------------------------------------------

    In response, BZX argued that the proposal would not increase market
complexity or operational risks.\179\ Rather, BZX asserted that it
would provide a way to address the single point of failure risk that
exists for closing auctions conducted on the primary listing
markets.\180\ BZX argued that, despite the current system of designated
auction backups, market participants can be confused about whether an
exchange is in fact able to conduct a closing auction.\181\ BZX
believes, in the event there is an impairment at a primary listing
market, Cboe Market Close could provide an alternative option for
market participants to route MOC orders and still receive the official
closing price.\182\
---------------------------------------------------------------------------

    \179\ See BZX Letter 1, at 12 and BZX Letter 2, at 10-11.
    \180\ See BZX Letter 1, at 12 and BZX Letter 2, at 10-11.
    \181\ See BZX Letter 1, at 12.
    \182\ See id. In contrast, Nasdaq argued that Cboe Market Close
could not serve as a back-up for a primary listing market suffering
an impairment because it is not a price-discovering auction and
would not operate in the absence of the auction it would be backing-
up. See Nasdaq Letter 2, at 12.
---------------------------------------------------------------------------

    In addition, BZX added that modern software can easily and simply
add volume data disseminated by the primary listing markets regarding
the closing auction and data regarding matched MOC orders from the Cboe
Market Close.\183\ Moreover, BZX stated that it believed the 3:35 p.m.
cut-off time would provide market participants with adequate time to
receive any necessary information and to route any unmatched orders to
the primary listing exchange.\184\ Lastly, BZX stated that market
participants would not be obligated to use Cboe Market Close and
accordingly, may weigh the value of seeking an execution in Cboe Market
Close against any perceived risks.\185\
---------------------------------------------------------------------------

    \183\ See BZX Letter 1, at 4 and BZX Letter 2, at 3.
    \184\ See BZX Letter 2, at 8.
    \185\ See id. at 8-9. In contrast, NYSE argued that it is
irrelevant whether it is optional to send market orders to the Cboe
Market Close, as the analysis should turn on whether the mere
existence of the Cboe Market Close would increase complexity and
operational risk in the market. See NYSE Letter 3, at 2.

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

    The Cboe Market Close will offer market participants an additional
venue to which they may send orders for execution at the official
closing price and an additional data feed that some market participants
may choose to monitor. However, as several commenters stated, many
market participants already monitor multiple data feeds and the
Commission believes that those market participants that would plan to
monitor information disseminated by BZX relating to Cboe Market Close
would likely already maintain systems and software that are able to
aggregate such feeds.\186\ Accordingly, the Commission does not believe
that monitoring the Cboe Market Close feed or having an additional
venue to submit MOC interest would significantly increase complexity or
impose substantial burdens on market participants in such a manner as
to render the proposal inconsistent with the Act. In addition, the
Commission believes, as stated by BZX, that because BZX will
disseminate the amount of paired shares well in advance of the order
entry cut-off times for the primary listing markets' closing auctions,
the proposal is reasonably designed to give market participants
adequate time to review the necessary data, make informed decisions
about closing order submission, and route orders to the primary listing
exchange when desired. Further, the Commission believes, as BZX argued,
that market participants have the ability to evaluate any potential
risks that they believe may be associated with using the proposed
functionality in any determination as to whether to send their orders
to Cboe Market Close, such as the need to monitor additional data
feeds, whether their orders were matched on BZX, or potentially having
to send their MOC orders to more than one venue if they are not matched
in Cboe Market Close.\187\
---------------------------------------------------------------------------

    \186\ In addition, in response to comments regarding the
potential for other exchanges to adopt similar functionality that
would require monitoring of even more data feeds, the Commission
believes that those participants that would likely choose to monitor
such data feeds likely already have the capability to monitor and
aggregate information from multiple data feeds. Furthermore, the
current BZX filing under consideration is a proposal from one
exchange to disseminate information on one data feed and, as such,
the Commission's analysis considers whether the instant proposal is
consistent with the Act, rather than similar functionality that
other exchanges may or may not propose in the future.
    \187\ See supra note 120.
---------------------------------------------------------------------------

Manipulation

    Several commenters addressed the issue of whether the proposal
would facilitate manipulation of both the closing auctions on the
primary listing markets, as well as continuous trading during the final
minutes of the trading day. Some commenters did not believe it would do
so. For example, one commenter stated that incentives to manipulate the
closing price already exist and it is unlikely the proposal would
result in increased manipulation of the market close.\188\
---------------------------------------------------------------------------

    \188\ See Angel Letter, at 5.
---------------------------------------------------------------------------

    In contrast, several commenters asserted that the proposal raises a
risk of manipulation, in part due to the asymmetry of information that
would be disseminated, which would allow market participants to utilize
informational advantages to their own benefit. For example, Nasdaq
argued that information concerning the amount of orders matched through
Cboe Market Close, would represent tradable information that market
participants could use to ``game'' the closing crosses on the primary
listing markets and undermine fair and orderly markets.\189\ In
particular, Nasdaq argued that its closing auction was designed to
carefully balance the amount and timing of data released so as to
reduce the risk of gaming, but that this new information regarding
paired MOC orders could be used to gauge the depth of the market, the
direction of existing imbalances, and the likely depth remaining at
Nasdaq, creating gaming opportunities.\190\ While Nasdaq acknowledged
that information asymmetries exist today as a result of broker-dealer
MOC order matching services, it argued that BZX, ``as a neutral
platform, is more likely to gather orders from multiple brokers and
enable a small number of participants to gain actionable asymmetric
information,'' which could potentially change the Nasdaq closing
price.\191\ In response to claims from BZX that Nasdaq's closing
auction is subject to the same information asymmetries and risks,
Nasdaq argued that by having its data dissemination and cut-off time
occur simultaneously, all market participants learn the imbalance at
the same time, avoiding such risks.\192\
---------------------------------------------------------------------------

    \189\ See Nasdaq Letter 1, at 8 and Nasdaq Letter 2, at 14.
    \190\ See Nasdaq Letter 1, at 8 and Nasdaq Letter 2, at 13-14
(arguing that market participants may use information gained
regarding an imbalance in Cboe Market Close to detect the direction
of the Nasdaq closing auction imbalance and trade against that
information in either the closing auction or the continuous market).
    \191\ See Nasdaq Letter 2, at 14. Nasdaq argued that this would
weaken the price discovery process, create a cycle of closing price