[Federal Register Volume 85, Number 215 (Thursday, November 5, 2020)]
[Notices]
[Pages 70678-70696]
[FR Doc No: 2020-24495]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-90288; File No. SR-CboeBYX-2020-021]

Self-Regulatory Organizations; Cboe BYX Exchange, Inc.; Notice of
Filing of Amendment No. 2 and Order Instituting Proceedings To
Determine Whether To Approve or Disapprove a Proposed Rule Change, as
Modified by Amendment No. 2, To Introduce Periodic Auctions for the
Trading of U.S. Equity Securities

October 30, 2020.
    On July 17, 2020, Cboe BYX Exchange, Inc. (``Exchange'' or ``BYX'')
filed with the Securities and Exchange Commission (``Commission''),
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'' or ``Exchange Act'') \1\ and Rule 19b-4 thereunder,\2\ a
proposed rule change to introduce periodic auctions in U.S. equity
securities. The proposed rule change was published for comment in the
Federal Register on August 4, 2020.\3\
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 89424 (July 29,
2020), 85 FR 47262 (``Notice'').
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    On September 10, 2020, pursuant to Section 19(b)(2) of the Exchange
Act,\4\ the Commission designated a longer period within which to
approve the proposed rule change, disapprove the proposed rule change,
or institute proceedings to determine whether to disapprove the
proposed rule change.\5\ On October 27, 2020, the Exchange filed
Amendment No. 1 to the proposed rule change, and on October 28, 2020
the Exchange filed Amendment No. 2 to the proposed rule change, which
replaced in its entirety the proposed rule change as modified by
Amendment No. 1.\6\ The

Commission has received two comment letters on the proposed rule
change.\7\ The Commission is publishing this notice and order to
solicit comments on the proposed rule change, as modified by Amendment
No. 2, for interested persons and to institute proceedings pursuant to
Section 19(b)(2)(B) of the Act \8\ to determine whether to approve or
disapprove the proposed rule change, as modified by Amendment No. 2.
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    \4\ 15 U.S.C. 78s(b)(2).
    \5\ See Securities Exchange Act Release No. 89820, 85 FR 57891
(September 16, 2020). The Commission designated November 2, 2020 as
the date by which the Commission shall approve or disapprove, or
institute proceedings to determine whether to disapprove, the
proposed rule change.
    \6\ Comments on the proposal, including Amendments No. 1 and No.
2, can be found on the Commission's website at: https://www.sec.gov/comments/sr-cboebyx-2020-021/srcboebyx2020021.htm.
    \7\ See supra note 6.
    \8\ 15 U.S.C. 78s(b)(2)(B).
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I. The Exchange's Description of the Proposed Rule Change, as Modified
by Amendment No. 2

    Cboe BYX Exchange, Inc. (``BYX'' or the ``Exchange'') is filing
with the Securities and Exchange Commission (the ``Commission'') a
proposed rule change to introduce periodic auctions for the trading of
U.S. equity securities. The text of the proposed rule change is
provided in Exhibit 5.
    The text of the proposed rule change is also available on the
Exchange's website (http://markets.cboe.com/us/equities/regulation/rule_filings/byx/), at the Exchange's Office of the Secretary, and at
the Commission's Public Reference Room.

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

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

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

1. Purpose
    This Amendment No. 2 to SR-CboeBYX-2020-021 amends and replaces in
its entirety the proposal as originally submitted on July 17, 2020 and
amended pursuant to Amendment No. 1 on October 27, 2020. The purpose of
the proposed rule change is to introduce periodic auctions for the
trading of U.S. equity securities (``Periodic Auctions'').\9\ As
proposed, Periodic Auctions of one hundred milliseconds would be
conducted throughout the course of the trading day when there are
matching buy and sell Periodic Auction Orders, as defined below, that
are available to trade in such an auction. Periodic Auctions would not
interrupt trading in the continuous market, and would be price forming
auctions that are executed at the price level that maximizes the total
number of shares in both the auction book and the continuous market
that are executed in the auction. The Exchange's parent company, Cboe
Global Markets, Inc. (``Cboe''), has been a global leader in the
implementation of periodic auctions, and currently runs the largest
periodic auction book for the trading of European equities. The
proposed Periodic Auctions that the Exchange would implement are based
on the model that Cboe offers to clients in Europe, with targeted
changes to adapt this model for the U.S. equities market. The Exchange
believes that its implementation of Periodic Auctions would enhance the
ability for investors to source liquidity in all equity securities
traded on the Exchange. As discussed below, this includes both equity
securities that trade in lower volume (i.e., ``thinly-traded
securities'') where liquidity is naturally more scarce, but also more
actively traded securities, including where available liquidity may be
diminished due to increased volatility or other market conditions.\10\
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    \9\ The term ``Periodic Auction'' shall mean an auction
conducted pursuant to Proposed Rule 11.25. See Proposed Rule
11.25(a)(4).
    \10\ As discussed in the following section, while Periodic
Auctions would be available in all securities traded on the
Exchange, the Exchange believes that this trading mechanism would be
particularly valuable for securities that trade in lower volume and
consequently suffer from wider spreads and less liquidity displayed
in the public markets.
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    Today, U.S. equities market participants are largely limited to two
significant liquidity events where orders are pooled and executed at a
single point in time--i.e., the opening and closing auctions. During
the rest of the trading day, liquidity may be more limited,
particularly for market participants that are seeking to trade larger
orders. As proposed, Periodic Auctions would offer a new price forming
auction that could be utilized by investors seeking liquidity,
including block-size liquidity, during the course of the trading day.
The Exchange believes that concentrating available liquidity in
Periodic Auctions that would take place when the Exchange has received
matching auctionable buy and sell orders would assist investors in
obtaining needed liquidity, particularly in the case of investors
seeking to execute larger orders that would be difficult to execute
without market impact in the continuous market. In addition, since the
proposed Periodic Auctions would be price forming, these auctions would
perform a valuable price discovery function, which may be particularly
helpful for investors when trading securities that typically trade with
wider spreads, including thinly-traded securities.
i. Commission Statement on Thinly-Traded Securities
    On October 17, 2019, the Commission issued a Statement on Market
Structure Innovation for Thinly Traded Securities (``Statement'').\11\
The Statement requested comment on potential innovations that could
improve market quality in thinly-traded securities, and sought further
feedback on the regulatory changes that may be needed to facilitate
such innovation. Cboe submitted a comment letter in response to the
Statement on December 20, 2019.\12\ As expressed in that comment
letter, Cboe shares the Commission's interest in improving market
quality in this segment of the U.S. equities market, and believes that
the best way to accomplish this goal is through innovation and targeted
approaches that invite investor choice.\13\ At that time, Cboe
suggested a handful of different approaches that national securities
exchanges could take to improve market quality in thinly-traded
securities, without requiring anti-competitive and ultimately harmful
changes to U.S. equities market structure.\14\ Following the submission
of that comment letter, Cboe has continued to work on the design of
potential market structure innovations that it could implement to
improve market quality in thinly-traded and other securities that
suffer from diminished market quality, consistent with the Commission's
request. As a result of those efforts, the Exchange is now proposing to
implement Periodic Auctions.
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    \11\ See Securities Exchange Act Release No. 87327 (October 17,
2019), 84 FR 56956 (October 24, 2019) (File No. S7-18-19).
    \12\ See Letter from Adrian Griffiths, Assistant General
Counsel, Cboe to Vanessa Countryman, Secretary, Commission dated
December 20, 2019, available at https://www.sec.gov/comments/s7-18-19/s71819-6574727-201085.pdf.
    \13\ Id.
    \14\ Id.
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    As discussed above, Periodic Auctions would be available in all
securities traded on the Exchange, where it may benefit market
participants and investors by providing a deeper

pool of liquidity with which to trade, as well as providing important
price discovery and other benefits. At the same time, the Exchange
believes that the proposed introduction of Periodic Auctions would be
particularly valuable in thinly-traded securities that currently suffer
from diminished market quality compared to their more actively-traded
counterparts. As expressed in Cboe's comment letter on the Commission's
Statement, Cboe continues to believe that a successful approach to
improving market quality in thinly-traded securities should focus on
the difficulties that market participants face in trading these
securities in the public markets today. In that letter, Cboe discussed
three difficulties that market participants currently face in trading
thinly traded securities: (1) Sourcing liquidity, (2) the availability
of price improvement opportunities, and (3) the potential for
significant market impact in securities that are less liquid and trade
infrequently. As discussed later in this proposed rule change, the
Exchange believes that Periodic Auctions would provide an effective
means of addressing each of these issues, and may therefore serve to
improve market quality in this currently underserved segment of the
U.S. equities market. Further, the Exchange believes that Periodic
Auctions, as designed, would provide a competitive mechanism for the
execution of orders in thinly-traded securities, and may therefore
bring order flow in such securities back into the public market,
subject to fair access and pursuant to transparent exchange rules.
ii. Order Entry and Cancellation
    The Exchange would offer Periodic Auction Only Orders and Periodic
Auction Eligible Orders,\15\ both of which indicate a member's desire
to initiate a Periodic Auction, if possible, as well as Continuous Book
Orders that would not initiate a Periodic Auction but would be eligible
to participate in such an auction when it is executed.\16\ Thus, as
provided in Proposed Rule 11.25(b), Users may enter Periodic Auction
Orders, i.e., Periodic Auction Only Orders or Periodic Auction Eligible
Orders,\17\ that are eligible to initiate Periodic Auctions pursuant to
Proposed Rule 11.25(c), as discussed later in this proposed rule
change, and Continuous Book Orders that may participate in such
Periodic Auctions if present on the Continuous Book at the time a
Periodic Auction is executed. As explained in more detail below, the
ability to choose between Periodic Auction Only Orders, Periodic
Auction Eligible Orders, and Continuous Book Orders would allow members
to control how their orders are handled in Periodic Auctions--e.g.,
whether the order is able to initiate a Periodic Auction, or not, and
whether the order participates on the Continuous Book, or not. The
choice of different methods of participating in Periodic Auctions would
therefore provide flexibility to members based on their individual
business needs, or the needs of their customers. Regardless of the type
of order submitted, orders entered on the Exchange that are present
when a Periodic Auction is executed would generally be eligible to
participate in that execution. The proposed introduction of Periodic
Auctions would therefore benefit both Users explicitly seeking to use
this functionality, as well as other Users that may benefit from any
increased liquidity routed to the Exchange in order to participate in
such Periodic Auctions.
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    \15\ A ``Periodic Auction Only Order'' is a Non-Displayed Limit
Order entered with an instruction to participate solely in Periodic
Auctions pursuant to Proposed Rule 11.25. A ``Periodic Auction
Eligible Order'' is a Non-Displayed Limit Order eligible to trade on
the Continuous Book that is entered with an instruction to also
initiate a Periodic Auction, if possible, pursuant to Proposed Rule
11.25. See Proposed Rule 11.25(b)(1)-(2).
    \16\ The term ``Continuous Book Order'' shall mean an order on
the BYX Book that is not a Periodic Auction Order, and the term
``Continuous Book'' shall mean System's electronic file of such
Continuous Book Orders. See Proposed Rule 11.25(a)(2).
    \17\ The term ``Periodic Auction Order'' shall mean a ``Periodic
Auction Only Order'' or ``Periodic Auction Eligible Order'' as those
terms are defined in Proposed Rules 11.25(b)(1)-(2), and the term
``Periodic Auction Book'' shall mean the System's electronic file of
such Periodic Auction Orders. See Proposed Rule 11.25(a)(6).
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    General Requirements for Order Entry and Cancellation. Periodic
Auction Orders and Continuous Book Orders may be modified and/or
cancelled at any time, including during the Periodic Auction
Period,\18\ at the discretion of the User. Periodic Auctions are
designed to allow seamless participation in a price forming auction
process without impacting continuous trading, and market participants
would therefore remain able to manage orders that they have entered to
participate in such auctions during the course of the trading day.
Since some Users may not wish to cancel Periodic Auction Orders
inadvertently during the course of an ongoing Periodic Auction,
however, the Exchange would provide an optional instruction that would
allow such Users to instruct the Exchange not to cancel a Periodic
Auction Order during a Periodic Auction Period if it is marketable at
the Periodic Auction Book Price.\19\
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    \18\ The term ``Periodic Auction Period'' would be defined in
Proposed Rule 11.25(a)(8) as the fixed time period of 100
milliseconds for conducting a Periodic Auction.
    \19\ The Periodic Auction Book Price is an indicative price that
is designed to provide information about the price where a Periodic
Auction may ultimately be executed. See infra note 34. The
instruction to ``lock-in'' a Periodic Auction Order would be
included as a port setting that a User can use to flag any orders
entered through a particular port. Users that wish to use this
feature must use the port setting and would not be able to flag
individual orders on an order-by-order basis.
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    Given that Periodic Auctions are designed, in part, to facilitate
the sourcing of larger blocks of liquidity that may not be available in
continuous trading, the Exchange would also implement certain size
restrictions that would be applicable to Periodic Auction Orders.
Specifically, Periodic Auction Orders would have to be for a size of
100 shares or more in securities priced below $500 based on the
consolidated last sale price, i.e., the last sale price that is
disseminated by the securities information processor, or if no
consolidated last sale price is available, the previous day's closing
price.\20\ There would be no similar size restrictions for higher-
priced securities, where such a size requirement would require a higher
notional value to participate in a Periodic Auction.\21\
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    \20\ Periodic Auction Only Orders that do not meet applicable
size requirements would be rejected. Periodic Auction Eligible
Orders would be converted to Continuous Book Orders, and would be
eligible to trade on the Continuous Book based on User instructions.
    \21\ For example, Amazon.com, Inc. (``AMZN'') closed at
$3,531.45 on September 2, 2020. Requiring that a Periodic Auction
Order in AMZN be for at least 100 shares would require that the User
be willing to trade a notional value of $353,450. Given the large
notional associated with such high-priced securities, the Exchange
would not apply the proposed size requirement to securities priced
at or above $500.
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    Periodic Auction Only Orders. A ``Periodic Auction Only Order''
would be defined in proposed Rule 11.25(b)(1) as a Non-Displayed Limit
Order entered with an instruction to participate solely in Periodic
Auctions pursuant to Proposed Rule 11.25. The Periodic Auction Only
Order is an optional order type that is designed for market
participants that want to access liquidity that is available in one or
more Periodic Auctions and do not wish to participate in the continuous
market. As such, a Periodic Auction Only Order would not be eligible
for execution on the Continuous Book. Instead, such orders would remain
on the Periodic Auction Book for participation in Periodic Auctions
until executed or cancelled.
    Periodic Auction Only Orders would only be accepted with a time-in-
force of Regular Hours Only (``RHO'') or

immediate-or-cancel (``IOC''). Specifically, Periodic Auction Only
Orders entered outside of Regular Trading Hours must include a time-in-
force of Regular Hours Only (``RHO'') as the Exchange would conduct
Periodic Auctions only during Regular Trading Hours,\22\ and not during
the Early Trading,\23\ Pre-Opening,\24\ or After Hours Trading
Sessions.\25\ Periodic Auction Only Orders entered during Regular
Trading Hours may be either RHO or immediate-or-cancel (``IOC''). If
entered with a time-in-force of IOC, the order must include an
instruction pursuant to Proposed Rule 11.25(b) not to cancel the order
during a Periodic Auction Period if it is marketable at the Periodic
Auction Book Price.\26\ As previously discussed, with the inclusion of
this instruction, an order that initiates a Periodic Auction would be
considered ``locked-in'' and would not be cancellable by the entering
User during the course of an ongoing Periodic Auction Period unless it
is not marketable at the Periodic Auction Book Price. An IOC order
entered with this instruction would therefore be able to immediately
initiate a Periodic Auction on entry. And, if it does so, it would not
be cancelled for the duration of the Periodic Auction Period, except in
circumstances where the Periodic Auction Book Price indicates that the
order might not be executable, thereby ensuring that Periodic Auction
Only Orders entered with these attributes would ordinarily be eligible
to participate in Periodic Auctions that they initiate.
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    \22\ The term ``Regular Trading Hours'' means the time between
9:30 a.m. and 4:00 p.m. Eastern Time. See BYX Rule 1.5(w).
    \23\ The term ``Early Trading Session'' means the time between
7:00 a.m. and 8:00 a.m. Eastern Time. See BYX Rule 1.5(ee).
    \24\ The term ``Pre-Opening Session'' means the time between
8:00 a.m. and 9:30 a.m. Eastern Time. See BYX Rule 1.5(r).
    \25\ The term ``After Hours Trading Session'' means the time
between 4:00 p.m. and 8:00 p.m. Eastern Time. See BYX Rule 1.5(c).
    \26\ Periodic Auction Only Orders will be rejected if they are
entered with a time-in-force of IOC but do not contain an ``lock-
in'' instruction pursuant to Proposed Rule 11.25(b).
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    The Exchange believes that the Periodic Auction Only Order may be
particularly valuable for market participants that are seeking to
execute larger orders that they may not be willing expose for trading
on the Continuous Book. Thus, the Exchange would permit Users to
specify a minimum execution quantity for their Periodic Auction Only
Orders. A Periodic Auction Only Order entered with a minimum execution
quantity would be executed in a Periodic Auction only if the minimum
size specified can be executed against one or more contra-side Periodic
Auction Orders or Continuous Book Orders. The Exchange offers Minimum
Quantity Orders to Users that trade on the Continuous Book today.\27\
The proposed instruction that could be attached to a Periodic Auction
Only Order is similar to the current Minimum Quantity Orders used for
trading on the Continuous Book but would only permit the default
handling of that order type, and would not allow a member to
alternatively specify that the minimum quantity condition be satisfied
by each individual contra-side order. Periodic Auction Eligible Orders
and Continuous Book Orders entered as Minimum Quantity Orders would be
subject to similar restrictions.
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    \27\ See BYX Rule 11.9(c)(5).
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    In addition, the Exchange believes that some Users may wish to use
Periodic Auctions to seek liquidity at or better than a pegged price
that is based on the applicable national best bid and offer (``NBBO'').
The Exchange would therefore allow a User to optionally include an
instruction on its Periodic Auction Only Orders to peg such orders to
either the midpoint of the NBBO (``midpoint peg''), or the same side of
the NBBO (``primary peg''). Similar to pegging instructions offered for
Continuous Book Orders today,\28\ Periodic Auction Only Orders entered
with a primary peg instruction could be pegged to the NBB or NBO, or a
certain amount above the NBB or below the NBO (``offset'').\29\ The
inclusion of a pegging instruction for Periodic Auction Only Orders
would ensure that Users have the opportunity to specify that these
orders are only executed at prices defined in relation to the market
for the particular security, including midpoint executions that offer
price improvement compared to the applicable NBBO.
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    \28\ See BYX Rule 11.9(c)(8)(A).
    \29\ Since Periodic Auctions are restricted from trading outside
of the applicable Protected NBBO, the offset included on such orders
would have to result in the order being more aggressive than the
NBBO--i.e., priced higher for buy orders or lower for sell orders.
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    Periodic Auction Eligible Orders. A ``Periodic Auction Eligible
Order'' would be defined in Proposed Rule 11.25(b)(2) as a Non-
Displayed Limit Order eligible to trade on the Continuous Book that is
entered with an instruction to also initiate a Periodic Auction, if
possible, pursuant to Proposed Rule 11.25. The Periodic Auction
Eligible Order would allow market participants to trade in the
continuous market during the course of the trading day, with the
ability to also initiate Periodic Auctions when there is contra-side
liquidity available to trade. The Exchange notes that there may be
situations where an incoming Periodic Auction Eligible Order would be
able to either initiate a Periodic Auction, or alternatively trade
immediately with one or more orders resting on the Continuous Book. In
such instances the Periodic Auction Eligible Order would trade
immediately with the Continuous Book, thereby securing a guaranteed
execution for the order. However, since Periodic Auction Eligible
Orders are geared towards participation in Periodic Auctions, with
attendant price discovery benefits and potential price improvement
opportunities, such orders would not trade on the Continuous Book
during a Periodic Auction Period in the security. Although the Exchange
would not halt or otherwise suspend trading on the Continuous Book
while conducting a Periodic Auction, the Exchange believes that
Periodic Auction Eligible Orders that are designed for use in Periodic
Auctions should generally preference trading in ongoing auctions over
trading on the Continuous Book.
    The time-in-force included on a Periodic Auction Eligible Order
would also need to allow the order to be entered and remain on the
Periodic Auction Book during the course of a Periodic Auction. As a
result, there would be certain limitations on the entry of Periodic
Auction Eligible Orders with a time-in-IOC or fill-or-kill (``FOK'').
An IOC order is defined in BYX Rule 11.9(b)(1) as a limit order that is
to be executed in whole or in part as soon as such order is received.
Thus, under the ordinary terms of an IOC order, if such an order were
to initiate a Periodic Auction, it would generally not be available for
later execution at the end of any Periodic Auction Period. To ensure
that IOC orders that initiate a Periodic Auction are eligible to
participate in the auction's eventual execution, the Exchange therefore
proposes that Periodic Auction Eligible Orders entered with a time-in-
force of IOC must include an instruction pursuant to Proposed Rule
11.25(b) not to cancel the order during a Periodic Auction Period if it
is marketable at the Periodic Auction Book Price.\30\ Such Periodic
Auction Eligible Orders would be handled in a manner consistent with
that described above with respect to Periodic Auction Only Orders.
Similarly, an FOK order is defined in BYX Rule 11.9(b)(6) as a limit
order that

is to be executed in its entirety as soon as it is received and, if not
so executed, cancelled. The Exchange is not proposing to support the
use of FOK orders in Periodic Auctions, and therefore Periodic Auction
Eligible Orders would not be able to be entered with a time-in-force of
FOK.\31\
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    \30\ Periodic Auction Eligible Orders will be rejected if they
are entered with a time-in-force of IOC but do not contain an
``lock-in'' instruction pursuant to Proposed Rule 11.25(b).
    \31\ Although the Exchange is not proposing any special handling
for IOC or FOK orders that are entered as Continuous Book Orders,
the Exchange notes that such orders would not participate in
Periodic Auctions as they would never be posted to the Continuous
Book.
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    As previously explained, the Exchange believes that Users seeking
liquidity in Periodic Auctions may wish to use such auctions to receive
an execution at prices at or better than the midpoint of the NBBO. The
Exchange currently offers functionality that allows members entering
Mid-Point Peg Orders on the Continuous Book to forgo an execution in
situations where the NBBO is locked.\32\ However, in order to avoid a
Periodic Auction from being initiated that may not ultimately result in
an execution during a locked market, Mid-Point Peg Orders that are
entered with an instruction to not execute when the NBBO is locked
would not be eligible to be entered as Periodic Auction Eligible
Orders.\33\ This handling would mirror the handling of Periodic Auction
Orders, which as proposed could be entered with a midpoint peg
instruction, but would not include any further instructions that would
allow the User to elect not to trade during a locked market.
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    \32\ See BYX Rule 11.9(c)(9).
    \33\ This restriction would not apply to Continuous Book Orders.
Since Continuous Book Orders do not initiate Periodic Auctions, a
Continuous Book Order entered with these instructions would be able
to participate in the eventual execution of Periodic Auctions if
such execution can take place in accordance with the terms of the
order.
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    Since the Exchange believes that Periodic Auctions may be
beneficial to market participants trading larger orders that they may
not want to be executed unless a specified minimum size can be
satisfied, the Exchange would also allow for Minimum Quantity Orders to
be entered as Periodic Auction Eligible Orders. As previously
discussed, the Exchange currently offers two variants of this order
type. By default, a Minimum Quantity Order would execute upon entry
against a single order or multiple aggregated orders simultaneously.
Alternatively, such orders may be entered with an instruction that the
order not trade with multiple aggregated orders simultaneously, and
that the minimum quantity condition instead be satisfied by each
individual order resting on the Continuous Book. As proposed, Minimum
Quantity Orders, as defined in Rule 11.9(c)(5), may be entered as
Periodic Auction Eligible Orders only if the order includes the default
instruction that allows the minimum size specified to be executed
against one or more contra-side orders--i.e., similar to the proposed
handling of Periodic Auction Only Orders entered with a minimum
execution quantity instruction. Orders entered with the alternative
instruction that requires the minimum size specified to be satisfied by
each individual contra-side order would not be eligible to be entered
as Periodic Auction Eligible Orders. As discussed later in this
proposed rule change, similar restrictions would also apply to
Continuous Book Orders, which would not participate in Periodic
Auctions if entered with this alternative instruction.
    Finally, similar to the opening process used to begin trading in a
security pursuant to BYX Rule 11.23: (1) Discretionary Orders, as
defined in rule 11.9(c)(10), would be eligible to participate only up
to their ranked price for buy orders or down to their ranked price for
sell orders; \34\ and (2) all Pegged Orders and Mid-Point Peg Orders,
as defined in BYX Rule 11.9(c)(8) and (9), would be eligible for
execution in Periodic Auctions based on their pegged prices. The
Exchange believes that this proposed handling is equally relevant to
Periodic Auctions, and would ensure, where appropriate, that the order
handling experienced in such Periodic Auctions is familiar to members
and investors.
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    \34\ The discretionary range of such orders would not be
considered in Periodic Auctions.
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    Continuous Book Orders. A ``Continuous Book Order'' would be
defined in Proposed Rule 11.25(a)(2) as an order on the BYX Book that
is not a Periodic Auction Order. Continuous Book Orders, which may
participate in the eventual execution of a Periodic Auction but would
not be able to initiate such an auction, would be handled in the same
manner as Periodic Auction Eligible Orders solely with respect to
handling of (1) Discretionary Orders, and (2) Pegged Orders and Mid-
Point Peg Orders, each as discussed in the preceding paragraph.
Continuous Book Orders would also be subject to the handling discussed
for Periodic Auction Eligible Orders entered as Minimum Quantity
Orders, with the caveat that this handling would only apply to
Continuous Book Orders entered with the default instruction that
permits the execution of such orders against one or more contra-side
orders. As proposed, similar to the treatment of Periodic Auction
Orders--including both Periodic Auction Only Orders and Periodic
Auction Eligible Orders--Continuous Book Orders entered with the
alternative instruction that requires the minimum size specified to be
satisfied by each individual contra-side order would not be included in
Periodic Auctions. However, rather than prohibiting Users from entering
Minimum Quantity Orders with this instruction on the Continuous Book,
where this instruction may still be valuable for investors, the
Exchange would simply prohibit any orders entered with that instruction
from participating in the execution of any Periodic Auctions. Finally,
Continuous Book Orders that are entered as Reserve Orders, as defined
in Rule 11.9(c)(1), would be eligible to participate in Periodic
Auctions to the full extent of their displayed size and Reserve
Quantity.\35\
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    \35\ There are no similar requirements applicable to Periodic
Auction Eligible Orders since Reserve Orders include a displayed
portion and therefore would not be eligible for entry as Periodic
Auction Eligible Orders. As discussed, Periodic Auction Eligible
Orders, as defined, would include only Non-Displayed Limit Orders.
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iii. Initiation and Publication of Periodic Auction Information
    The Exchange would conduct Periodic Auctions during Regular Trading
Hours to give market participants an opportunity to obtain liquidity
during the course of the trading day. Instead of initiating such
auctions on a set schedule, the Exchange would wait until it has
executable interest that is eligible to initiate a Periodic Auction,
thereby ensuring that Periodic Auctions are only performed when it may
be possible for interested market participants to obtain an execution
at the end of the Periodic Auction Period. Specifically, as provided in
Proposed Rule 11.25(c), a Periodic Auction would be initiated in a
security during Regular Trading Hours when one or more Periodic Auction
Orders to buy become executable against one or more Periodic Auction
Orders to sell pursuant to Proposed Rule 11.25.\36\ This would begin a
Periodic Auction Period of 100 milliseconds

where the Exchange would match buy and sell orders for potential
execution.\37\
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    \36\ As proposed, Periodic Auctions would operate alongside
trading on the Continuous Book. The Exchange has therefore developed
its system for processing Periodic Auctions with the goal of
minimizing interference with trading in the continuous market. Thus,
in rare circumstances where a number of Periodic Auctions could
potentially be triggered at or around the same time, the Exchange
may throttle the initiation of such Periodic Auctions if needed to
maintain appropriate system performance and latency.
    \37\ One relevant exception to this would be for Periodic
Auctions that would otherwise end after the Regular Trading Session.
As previously discussed, Periodic Auctions would only be conducted
during Regular Trading Hours. As a result, such Periodic Auctions
would be performed at the end of the Regular Trading Session.
---------------------------------------------------------------------------

    Once the Periodic Auction Period has begun, the Exchange would
consolidate any additional Periodic Auction Orders that it receives,
which would be used to calculate the information disseminated at a
randomized time thereafter in a Periodic Auction Message.\38\
Specifically, at a randomized time in one millisecond intervals after a
Periodic Auction has been initiated and before the end of the Periodic
Auction,\39\ the Exchange would disseminate via electronic means a
Periodic Auction Message that includes two important pieces of
information about the Periodic Auction: (1) The Periodic Auction Book
Price,\40\ and (2) and the total number of shares of Periodic Auction
Orders that are matched at the Periodic Auction Book Price.\41\ With
these two pieces of information, market participants would be informed
of both the price at which Periodic Auction Orders would match based on
current market conditions, and the number of shares of such orders that
would be matched. The calculation of the Periodic Auction Book Price
would exclude Continuous Book Orders. Although Continuous Book Orders
are eligible to trade in a Periodic Auction at the end of the Periodic
Auction Period, they are potentially subject to execution on the
Continuous Book prior to the execution of the Periodic Auction. As a
result, similar to certain information disseminated by other national
securities exchanges in advance of their auctions,\42\ Continuous Book
Orders would not be used to calculate the data elements included in the
Periodic Auction Message. After its initial dissemination, a revised
Periodic Auction Message would be disseminated in one millisecond
intervals for the remaining duration of the auction, thereby ensuring
that market participants maintain a current view of the market with
which to make appropriate trading decisions throughout the Periodic
Auction Period.
---------------------------------------------------------------------------

    \38\ The ``Periodic Auction Message'' would be defined in
Proposed Rule 11.25(a)(7) as a message disseminated by electronic
means that includes information about any matched Periodic Auction
Orders on the Periodic Auction Book, as described in Rule 11.25(c).
    \39\ With the randomization of sending the message, the initial
Periodic Auction Message would be disseminated between 0 and 99
milliseconds following the initiation of the Periodic Auction--e.g.,
immediately upon initiation, at the one millisecond mark, two
millisecond mark, three millisecond mark, and so forth until the 99
millisecond mark. The specific time chosen would be entirely random
for each Periodic Auction.
    \40\ The ``Periodic Auction Book Price'' would be defined in
Proposed Rule 11.25(a)(5) as the price within the Collar Price Range
at which the most shares from the Periodic Auction Book would match.
In the event of a volume-based tie at multiple price levels, the
Periodic Auction Book Price would be the price that results in the
minimum total imbalance. In the event of a volume-based tie and a
tie in minimum total imbalance at multiple price levels, the
Periodic Auction Book Price would be the price closest to the Volume
Based Tie Breaker. As calculated, the Periodic Auction Book Price
would be expressed in the minimum increment for the security unless
the midpoint of the NBBO establishes the Periodic Auction Book
Price.
    \41\ Similar to the auction information disseminated by the
Exchange's affiliate, BZX, for its opening and closing auctions, the
Periodic Auction Message would be disseminated to market
participants over the Exchange's proprietary depth-of-book market
data feeds.
    \42\ For example, the ``Current Reference Price'' disseminated
ahead of Nasdaq's closing cross is defined as the single price that
is at or within the current Nasdaq Market Center best bid and offer
at which the maximum number of shares of MOC, LOC, and IO orders can
be paired, subject to certain tie-breakers. See Nasdaq Rule
4754(a)(7)(A). Nasdaq does not include ``Close Eligible Interest''
entered on its continuous book in determining the Current Reference
Price pursuant to Nasdaq Rule 4754(a)(7)(A), nor does it include
such orders in its dissemination of the number of shares represented
by MOC, LOC, and IO orders that are paired at the Current Reference
Price. See Nasdaq Rule 4754(a)(7)(B).
---------------------------------------------------------------------------

iv. Determination of Periodic Auction Price
    Periodic Auctions are designed to facilitate meaningful price
discovery in securities traded on the Exchange throughout the course of
the trading day. Similar to the operation of opening and closing
auctions in securities listed on the Exchange's affiliate, Cboe BZX
Exchange, Inc. (``BZX''),\43\ as well as similar auctions conducted on
other national securities exchanges, Periodic Auctions would therefore
be executed at a price that maximizes the number of shares traded in
the auction within designated auction collars (``Collar Price
Range'').\44\ Specifically, as provided in Proposed Rule 11.25(d), the
Periodic Auction Price would be established by determining the price
level within the Collar Price Range that maximizes the number of shares
executed between the Continuous Book and Periodic Auction Book in the
Periodic Auction.\45\
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    \43\ See BZX Rule 11.23(b)(2)(B); (c)(2)(B).
    \44\ The term ``Collar Price Range'' shall mean the more
restrictive of the Midpoint Collar Price Range, as defined in
Proposed Rule 11.25(a)(1), and the Protected NBBO. See Proposed Rule
11.25(a)(1). Notwithstanding the foregoing, if the Collar Price
Range calculated by the Exchange would be outside of the applicable
Price Bands established pursuant to the Limit Up-Limit Down Plan,
the Collar Price Range will be capped at such Price Bands. Id.
    \45\ The calculation of Collar Price Range, as defined in the
Proposed Rule, is described in more detail in Section V of this
proposed rule change. As calculated, the Periodic Auction Price
would be expressed in the minimum increment for the security unless
the midpoint of the NBBO establishes the Periodic Auction Price.
---------------------------------------------------------------------------

    The Exchange would also implement certain ``tie-breakers'' that
would be used to determine the applicable Periodic Auction Price if
multiple price levels would satisfy the requirement to maximize the
number of shares executed in the auction. These tie-breakers would be
the same as the tie-breakers currently used for opening and closing
auctions on BZX for that exchange's listed securities. Specifically, in
the event of a volume-based tie at multiple price levels, the Periodic
Auction Price would be the price that results in the minimum total
imbalance--i.e., the price at which the number of any executable shares
to buy or sell that do not participate in the Periodic Auction is
minimized.\46\ In the event of a volume-based tie and a tie in minimum
total imbalance at multiple price levels, the Periodic Auction Price
would be the price closest to the Volume Based Tie Breaker, which would
be defined in Proposed Rule 11.25(a)(9) as the midpoint of the NBBO for
a particular security where the NBBO is a Valid NBBO.\47\
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    \46\ Selecting a price that would minimize the imbalance best
reflects the value of the security based on the auction's price
discovery process because it is the price level where the amount of
buy and sell interest is closest to equal.
    \47\ As is the case on the Exchange's affiliate, BZX, for
opening and closing auctions for BZX-listed securities, a NBBO would
be considered a Valid NBBO where: (i) There is both a NBB and NBO
for the security; (ii) the NBBO is not crossed; and (iii) the
midpoint of the NBBO is less than the Maximum Percentage away from
both the NBB and the NBO as determined by the Exchange and published
in a circular distributed to Members with reasonable advance notice
prior to initial implementation and any change thereto. See BZX Rule
11.23(b)(23). Where the NBBO is not a Valid NBBO, the consolidated
last sale price would be used. Id.
---------------------------------------------------------------------------

v. Determination of Collar Price Range
    As discussed, the Periodic Auction Price would be constrained by
auction collars that are designed to ensure that the execution of a
Periodic Auction takes place at a price that is reasonably related to
the market for the security and consistent with applicable regulatory
requirements. While Periodic Auctions are designed to balance supply
and demand through a competitive auction process, the Collar Price
Range would restrict trading from occurring at prices that are far away
from the market. Specifically, as proposed, the term ``Collar Price
Range'' would be defined in Proposed Rule 11.25(a)(1) as the more
restrictive of the Midpoint Collar Price

Range and the Protected NBBO.\48\ The Collar Price Range would be
similar to the auction collars used today for BZX's opening and closing
processes, with important differences to account for the fact that
Periodic Auctions would be subject to the requirements of the Rule 611
of Regulation NMS (``Order Protection Rule'') and the Plan to Address
Extraordinary Market Volatility (the ``Limit Up-Limit Down'' or
``LULD'' Plan). Specifically, Periodic Auctions would be subject to a
Collar Price Range that is the more restrictive of the Midpoint Collar
Price Range (described below) and the Protected NBBO. This
implementation would therefore ensure that such Periodic Auctions are
executed at a price that is consistent with the requirements of the
Order Protection Rule as well as the additional protections provided by
auction collars that are similar to those currently used by the
Exchanges' affiliate, BZX, for opening and closing auctions in that
exchange's listed securities. For all Periodic Auctions, the Exchange
would calculate a Midpoint Collar Price Range to establish an upper and
lower bound for the execution of such auctions. The Midpoint Collar
Price Range would mirror the collars currently established for use in
BZX auctions, and would be defined in Proposed Rule 11.25(a)(3) as the
range from a set percentage below the Collar Midpoint to above the
Collar Midpoint,\49\ such set percentage being dependent on the value
of the Collar Midpoint at the time of the auction. Specifically, the
Collar Price Range would be determined as follows: (1) Where the Collar
Midpoint is $25.00 or less, the Collar Price Range would be the range
from 10% below the Collar Midpoint to 10% above the Collar Midpoint;
(2) where the Collar Midpoint is greater than $25.00 but less than or
equal to $50.00, the Collar Price Range would be the range from 5%
below the Collar Midpoint to 5% above the Collar Midpoint; and (3)
where the Collar Midpoint is greater than $50.00, the Collar Price
Range would be the range from 3% below the Collar Midpoint to 3% above
the Collar Midpoint.
---------------------------------------------------------------------------

    \48\ The term ``Midpoint Collar Price Range'' shall mean the
range from a set percentage below the Collar Midpoint (as defined
below) to above the Collar Midpoint, such set percentage being
dependent on the value of the Collar Midpoint at the time of the
auction, as described below. See Proposed Rule 11.25(a)(3). The
``Protected NBBO'' is the national best bid or offer that is a
Protected Quotation. See BYX Rule 1.5(s).
    \49\ The Collar Midpoint would be the Volume Based Tie Breaker
for all Periodic Auctions. As discussed later in this proposed rule
change, the Volume Based Tie Breaker would generally be the midpoint
of the NBBO, except where there is no Valid NBBO.
---------------------------------------------------------------------------

    Finally, all Periodic Auctions would be conducted during Regular
Trading Hours and therefore would be subject to the requirements of the
LULD Plan. Generally, the LULD Plan sets forth procedures that provide
for market-wide limit up-limit down requirements to prevent trades in
individual NMS Stocks from occurring outside of specified Price Bands.
Consistent with the requirements of the LULD Plan, the Exchange would
not execute Periodic Auctions at a price that is outside of the
applicable Price Bands. Thus, if the Collar Price Range calculated by
the Exchange would be outside of the applicable Price Bands established
pursuant to the LULD Plan, the Collar Price Range would be capped at
such Price Bands.
vi. Priority and Execution of Orders
    As discussed, Periodic Auction Orders and Continuous Book Orders
that are executable at the end of the Periodic Auction Period would be
executed at the Periodic Auction Price determined pursuant to Proposed
Rule 11.25(d). Such orders would be executed in accordance with
Proposed Rule 11.25(e), which describes the allocation model for
Periodic Auctions. Generally, the allocation model described in this
rule is intended to encourage active participation of Periodic Auction
Orders, including participation of larger orders, while ensuring that
Continuous Book Orders are also able to participate in resulting
executions, as appropriate, in order to encourage continued liquidity
on the Continuous Book. First, any displayed Continuous Book Orders
that are executable at the Periodic Auction Price would be executed in
price/time priority, thereby encouraging the continued submission of
displayed orders. Second, after any displayed Continuous Book Orders
have been executed, the Exchange would execute any Periodic Auction
Orders that are executable at the Periodic Auction Price. Since
Periodic Auctions are designed, in part, to facilitate the execution of
larger orders, such Periodic Auction Orders would be executed in size/
time priority, beginning with the largest order. Finally, any non-
displayed Continuous Book Orders that are executable at the Periodic
Auction Price would be executed pursuant the normal price-time priority
allocation used for the execution of orders on the Continuous Book, as
provided in BYX Rule 11.9(a)(2)(B). All Match Trade Prevention
modifiers, as defined in BYX Rule 11.9(f), would be ignored as it
relates to executions occurring during a Periodic Auction.\50\
---------------------------------------------------------------------------

    \50\ The Exchange notes that its Match Trade Prevention features
are designed for use on the Continuous Book, and may complicate the
execution of an auction that requires the pooling and matching of
multiple orders against other orders at a market clearing price.
---------------------------------------------------------------------------

    Finally, the Exchange notes that, in certain rare circumstances,
the inclusion of a minimum execution quantity on one or more Periodic
Auction Orders and/or Continuous Book Orders could potentially result
in the Exchange being unable to process a Periodic Auction in a timely
manner. Thus, as provided in Proposed Rule 11.25(f), to prevent
potential capacity and/or performance issues that may impact both the
execution of the auction, as well as trading on Continuous Book, in
such an event the Exchange would cancel the auction after a specified
number of attempts. Specifically, to prevent potential capacity and/or
performance issues, the Exchange will cancel a Periodic Auction at the
end of the Periodic Auction Period if it is unable to successfully
process such Periodic Auction according to Rule 11.25 after a number of
attempts determined by the Exchange and published in a circular
distributed to members.
vii. Regulatory and Other Considerations
    The Exchange would also adopt rule language in the Interpretations
and Policies to the proposed rule that describes how Periodic Auctions
would be processed consistent with certain other regulatory
obligations, including obligations related to member conduct, or
otherwise to ensure transparent handling in certain specified
circumstances. These rules would provide additional clarity and
transparency to members and investors with respect to how the Exchange
would process Periodic Auctions consistent with relevant obligations
under the Exchange Act, or as otherwise necessary or appropriate to
maintain a fair and orderly market on the Exchange.
    First, as explained in Interpretations and Policies .01 to Proposed
Rule 11.25, the Exchange would not conduct Periodic Auctions during a
trading halt when such trading is prohibited. If a symbol is halted
prior to the execution of a Periodic Auction that has already been
initiated pursuant to Proposed Rule 11.25(c), the Periodic Auction
would be immediately cancelled without execution, consistent with
applicable limitations on trading during a halt.

    Second, as explained in Interpretations and Policies .02 to
Proposed Rule 11.25, a Periodic Auction would not be initiated during a
Crossed Market. If the market becomes crossed during a Periodic Auction
that has already been initiated pursuant to Proposed Rule 11.25(c), and
remains crossed at the end of the Periodic Auction Period, the Periodic
Auction would be cancelled without execution.\51\ If the market
subsequently becomes uncrossed, resting Periodic Auction Orders may
trigger a Periodic Auction pursuant to Rule 11.25(c).
---------------------------------------------------------------------------

    \51\ The Exchange would not immediately cancel the auction as
crossed markets are typically short-lived and the market may no
longer be crossed at the end of the Periodic Auction Period, in
which case the Exchange could successfully execute the auction.
---------------------------------------------------------------------------

    Third, Interpretations and Policies .03 to Proposed Rule 11.25
would detail the proposed handling of orders consistent with Regulation
SHO. As proposed, all short sale orders designated for participation in
the Periodic Auction would have to be identified as ``short'' or
``short exempt'' pursuant to Rule 11.10(a)(5). Rules 201(b)(1)(i) and
(ii) of Regulation SHO generally requires that trading centers such as
the Exchange establish, maintain, and enforce written policies and
procedures reasonably designed to: (i) Prevent the execution or display
of a short sale order of a covered security at a price that is less
than or equal to the current national best bid if the price of that
covered security decreases by 10% or more from the covered security's
closing price; and (ii) impose this price restriction for the remainder
of the day and the following day. So as to maintain compliance with
Rule 201 of Regulation SHO, the Exchange would only execute short sale
orders (i.e., those not marked short exempt) if the execution would
take place at a permissible price pursuant to Regulation SHO.
Specifically, if a security is in a short sale circuit breaker, orders
marked short will only trade in a Periodic Auction if the Periodic
Auction Price determined pursuant to Rule 11.25(d) is above the
national best bid.\52\
---------------------------------------------------------------------------

    \52\ This restriction would not apply to orders marked short
exempt, which are exempted from these restrictions pursuant to Rule
201(b)(1)(iii)(B) of Regulation SHO. Rule 201(b)(1)(iii)(B) of
Regulation SHO provides that the policies and procedures required by
the rule must be reasonably designed to permit the execution or
display of a short sale order of a covered security marked ``short
exempt'' without regard to whether the order is at a price that is
less than or equal to the current national best bid.
---------------------------------------------------------------------------

    Finally, Interpretations and Policies .04 to Proposed Rule 11.25
would describe member conduct obligations with respect to the entry of
Periodic Auction Orders. As proposed, Periodic Auction Orders must be
entered with the intent to participate in Periodic Auctions. A pattern
or practice of submitting orders for the purpose of disrupting or
manipulating Periodic Auctions, including entering and immediately
cancelling Periodic Auction Orders, would be deemed conduct
inconsistent with just and equitable principles of trade. The Exchange
would conduct surveillance to ensure that Users do not inappropriately
enter Periodic Auction Orders for impermissible purposes, such as to
gain information about other Periodic Auction Orders that are resting
on the Periodic Auction Book, or otherwise disrupting or manipulating
Periodic Auctions.
viii. Examples
    The following examples illustrate the proposed operation of
Periodic Auctions:

Periodic Auction Initiation

Example 1

NBBO: $10.00 x $10.10
Order 1: Buy 100 shares @ $10.05 Midpoint Peg--Periodic Auction Only/
Eligible
Order 2: Sell 100 shares @ $10.05 Midpoint Peg--Periodic Auction Only/
Eligible

    Periodic Auctions are initiated when one or more Periodic Auction
Orders to buy are matched with one or more Periodic Auction Orders to
sell. Therefore, a Periodic Auction is initiated when Order 2 matches
with Order 1.

Example 2

NBBO: $10.00 x $10.10
Order 1: Buy 100 shares @ 10.05 Midpoint Peg--Continuous Book Order
Order 2: Sell 100 shares @ 10.05 Midpoint Peg--Periodic Auction
Eligible

    A Periodic Auction is not initiated as Order 1 is a Continuous Book
Order. Instead, Order 2, which is a Periodic Auction Eligible Order,
would trade immediately with the Continuous Book and execute 100 shares
against Order 1 at $10.05.

Example 3

NBBO: $10.00 x $10.10
Order 1: Buy 100 shares @ 10.05 Midpoint Peg--Periodic Auction Only
Order 2: Buy 100 shares @ 10.05 Midpoint Peg--Continuous Book Order
Order 3: Sell 100 shares @ 10.05 Midpoint Peg--Periodic Auction
Eligible

    A Periodic Auction is not initiated. Instead, Order 3, which is a
Periodic Auction Eligible Order, would trade immediately with the
Continuous Book and execute 100 shares against Order 2 at $10.05.
Although Order 1 is available to initiate a Periodic Auction, a
Periodic Auction Eligible Order would trade immediately with Continuous
Book Orders on entry if it can do so instead of initiating a Periodic
Auction.

Periodic Auction Initiation and Execution

Example 4

NBBO: $10.00 x $10.10
Order 1: Buy 150 shares @ $10.05 Midpoint Peg--Periodic Auction Only
Order 2: Sell 100 shares @ $10.05 Midpoint Peg--Continuous Book Order
Order 3: Sell 100 shares @ $10.05 Midpoint Peg--Periodic Auction
Eligible

    Auction Initiation: Order 1 is a Periodic Auction Only Order and
Order 2 is a Continuous Book Order. As a result, when Order 2 is
entered into the Exchange, it will not initiate a Periodic Auction or
trade with Order 1 immediately. Instead, a Periodic Auction is
initiated when Order 3 matches with Order 1.
    Execution: After 100 milliseconds the Periodic Auction would end,
and orders would be executed in the auction at a price of $10.05, which
is the price at which the maximum number of shares can be executed.
Order 1 is the only order to buy and would trade its full size of 150
shares. Between the available sell orders, Order 3, which is a Periodic
Auction Eligible Order, would have priority over Order 2, which is a
Non-Displayed Continuous Book Order. As a result, Order 3 would trade
its full size of 100 shares, and Order 2 would receive a partial
execution for 50 shares.

Example 5

NBBO: $10.00 x $10.01
Order 1: Buy 5,000 shares @ $10.01--Periodic Auction Only
Order 2: Sell 1,000 shares @ $10.01--Displayed Continuous Book Order
Order 3: Sell 2,000 @ $10.01--Non-Displayed Continuous Book Order
Order 4: Sell 3,000 @ $10.01--Periodic Auction Eligible

    Auction Initiation: Order 1 is a Periodic Auction Only Order and
Orders 2 and 3 are Continuous Book Orders. As a result, when Order 2
and 3 are entered into the Exchange, those orders will not

initiate a Periodic Auction or trade with Order 1 immediately. Instead,
a Periodic Auction would be initiated when Order 4 matches with Order
1.
    Execution: After 100 milliseconds the Periodic Auction would end,
and orders would be executed in the auction at a price of $10.01, which
is the price at which the maximum number of shares can be executed.
Order 1 is the only order to buy and would trade its full size of 5,000
shares. Between the available sell orders, Order 2, which is a
Displayed Continuous Book Order, would have priority over Order 4,
which is a Periodic Auction Eligible Order that in turn has priority
over Order 3, which is a Non-Displayed Continuous Book Order. As a
result, Order 2 and Order 4 would each trade their full size of 1,000
shares and 3,000 shares respectively, and Order 3 would receive a
partial execution for 1,000 shares.

Periodic Auction Price Calculation

Example 6

NBBO: $10.00 x $10.10
Order 1: Buy 500 shares @ $10.05 Non-Displayed--Periodic Auction Only
Order 2: Buy 300 shares @ $10.04 Non-Displayed--Continuous Book Order
Order 3: Sell 100 shares @ $10.04 Non-Displayed--Periodic Auction
Eligible
Order 4: Sell 200 shares @ $10.04 Non-Displayed--Periodic Auction
Eligible

    Auction Initiation: A Periodic Auction would be initiated when
Order 3 is entered into the Exchange and matches with Order 1.
    Execution: After 100 milliseconds the Periodic Auction would end,
and orders would be executed in the auction at a price of $10.05. In
this example, there are two prices at which the maximum number of
shares can be executed, i.e., $10.04 or $10.05. However, an execution
at $10.04 would leave a 500 share buy-side imbalance, whereas an
execution at $10.05 would leave a smaller 200 share buy-side imbalance
due to the fact that Order 2 cannot participate at that price. As a
result, the Periodic Auction Price would be $10.05, i.e., the price
that minimizes the imbalance. Orders 3 and 4 would trade their full
size of 100 shares and 200 shares, respectively, with Order 1.

Example 7

NBBO: $10.00 x $10.10
Order 1: Buy 500 shares @ $10.05 Non-Displayed--Periodic Auction Only
Order 2: Sell 200 shares @ $10.04 Non-Displayed--Periodic Auction Only

    Auction Initiation: A Periodic Auction would be initiated when
Order 1 and Order 2, which are both Periodic Auction Only Orders, match
with each other.
    Execution: After 100 milliseconds the Periodic Auction would end,
and orders would be executed in the auction at a price of $10.05. In
this example, there are two prices at which the maximum number of
shares can be executed, i.e., $10.04 or $10.05, and in both cases there
would be a buy-side imbalance of 300 shares. As a result, the Periodic
Auction Price would be the price closest to the Volume Based Tie
Breaker, i.e., the midpoint price of $10.05. Order 1 would trade 200
shares with Order 2.

Periodic Auction Message

Example 8

NBBO: $10.00 x $10.10
Order 1: Buy 500 shares @ $10.05 Midpoint--Periodic Auction Only
Order 2: Buy 300 shares @ $10.06 Midpoint--Periodic Auction Eligible
Order 3: Sell 800 shares @ $10.05 Midpoint--Periodic Auction Eligible
New NBBO: $10.02 x $10.10

    Auction Initiation: A Periodic Auction would be initiated when
Order 3 matches with Orders 1 and 2.
    Auction Message: A Periodic Auction Message would be disseminated
at a randomized time after the initiation of the auction, showing 800
shares matched at a price of $10.05. After a new NBBO is established,
the midpoint orders would be re-priced to the new midpoint of $10.06,
subject to their limit prices. As a result, Orders 2 and 3 would be re-
priced to $10.06, while Order 1 would remain priced at $10.05 due to
its lower limit price. The next Auction Message would therefore
indicate 300 shares matched at a price of $10.06 due to the exclusion
of Order 1 at the new midpoint.
2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with
the requirements of Section 6(b) of the Act,\53\ in general, and
Section 6(b)(5) of the Act,\54\ in particular, in that it is designed
to remove impediments to and perfect the mechanism of a free and open
market and a national market system, to promote just and equitable
principles of trade, and, in general, to protect investors and the
public interest and not to permit unfair discrimination between
customers, issuers, brokers, or dealers. Specifically, the Exchange
believes that the proposed rule change is consistent with the
protection of investors and the public interest as it would facilitate
improved price formation and provide additional execution opportunities
for investors, particularly in securities that may suffer from limited
liquidity, including thinly-traded securities.
---------------------------------------------------------------------------

    \53\ 15 U.S.C. 78f(b).
    \54\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    Periodic Auctions would supplement existing opening and closing
auctions by consolidating buy and sell interest in a price forming
auction when investors seek liquidity during the course of the trading
day. Although liquidity is frequently available in size around the open
and close of trading, liquidity may be more limited intraday. Thus,
investors looking to trade in size may have issues getting their orders
filled during the trading day, or may receive inferior execution
quality due to the market impact of trading larger blocks of equity
securities in a market with limited liquidity. As proposed, Periodic
Auctions would allow the Exchange to consolidate volume from market
participants, thereby increasing the liquidity available to investors.
By creating a deeper pool of liquidity for the intraday execution of
orders, including block-sized liquidity, the Exchange believes that
members and investors would be able to secure better quality
executions. In addition, Periodic Auctions would perform an important
price discovery function, which the Exchange believes may be
particularly valuable in thinly-traded securities that often trade with
significantly wider spreads that negatively impact the ability for
investors to ascertain market value,\55\ as well as high-priced or
other securities that may also trade with wider spreads today. The
proposed introduction of Periodic Auctions would therefore contribute
to a fair and orderly market in equity securities traded on the
Exchange.
---------------------------------------------------------------------------

    \55\ See Letter from Adrian Griffiths, supra note 6, which
illustrates the wider spreads that often impact trading in thinly-
traded securities. The Exchange believes that Periodic Auctions
would improve price discovery in securities that tend to trade with
wider spreads. As explained in that letter, volume in thinly-traded
securities often migrates to off-exchange venues where market
participants can trade without publicly displaying their orders and
while potentially minimizing market impact.
---------------------------------------------------------------------------

i. Periodic Auctions in Europe
    The Exchange's affiliate, Cboe Europe, has had a successful history
with periodic auctions in the European equities market, and the
proposed introduction of Periodic Auctions for the trading of U.S.
equity securities is based, in part, on the successful implementation
of a similar product offered by Cboe Europe. As illustrated

in Chart A, Cboe Europe's periodic auction book has grown to about 2%--
2.5% of notional value traded on European equities exchanges since its
introduction in October 2015. Indeed, such periodic auctions now
account for an average daily value traded (``ADVT'') of about [euro]1
billion, with two months in Q1 2020 actually exceeding this threshold,
reflecting the value that this offering has provided to market
participants that trade European equities.
[GRAPHIC] [TIFF OMITTED] TN05NO20.007

[GRAPHIC] [TIFF OMITTED] TN05NO20.008

    This growth in Cboe Europe's periodic auction offering has promoted
price improvement opportunities, with an analysis of periodic auctions
conducted by Cboe Europe for Q1 2020 showing such periodic auctions
trading about 85% of value traded at the midpoint. Although the
Exchange recognizes that there are important differences in market
structure between the U.S. and European equities markets, as well as
relevant design differences between the two products, the Exchange
believes that U.S. investors may receive similar benefits from its
proposed introduction of Periodic Auctions. Moreover, the Exchange
believes that such innovation should take preference over other
regulatory approaches that may impede future innovation.
ii. Periodic Auction Proposal
    As discussed in detail in the paragraphs that follow, Periodic
Auctions are designed to improve the investor experience for market
participants that trade U.S. equities, and the Exchange believes that
this product may therefore contribute to a free and open market and
national market system. Specifically, Periodic Auctions, as designed,
would provide investors

with an innovative mechanism with which to secure liquidity intraday,
providing additional price improvement opportunities, and allowing
market participants to reduce risks that may be associated with
displaying orders on a traditional limit order book. As such, Periodic
Auctions may improve market quality in U.S. equity securities traded on
the Exchange, and these benefits may be even more pronounced in
securities that currently trade with diminished market quality. The
paragraphs that follow addresses each aspect of the Periodic Auction
proposal in turn.
    The Exchange believes that it is consistent with the protection of
investors and the public interest to introduce Periodic Auction Only
Orders and Periodic Auction Eligible Orders to facilitate trading in
the Periodic Auctions. Use of these order types would be voluntary, and
market participants would be able to determine whether and how to
participate in Periodic Auctions using these order types. Specifically,
while both forms of Periodic Auction Orders would be eligible to
initiate Periodic Auctions, Periodic Auction Only Orders would allow
firms to indicate that they are seeking liquidity solely in Periodic
Auctions, while Periodic Auction Eligible Orders would allow firms to
also seek liquidity on the Continuous Book before and after the
execution of a Periodic Auction. The Exchange believes that it is
appropriate to offer these two methods of initiating Periodic Auctions
so that market participants can decide whether to use Periodic Auctions
as the sole means of sourcing liquidity, or as an additional means of
accessing liquidity if an order entered onto the Continuous Book has
not been executed.
    Periodic Auction Only Orders would provide a means for Users to
indicate that they solely wish to have their order executed in a
Periodic Auction. Since Periodic Auctions would only take place during
the Regular Trading Session, Periodic Auction Only Orders would be
accepted with a time-in-force of RHO (either during or outside of
Regular Trading Hours), or IOC (solely during Regular Trading Hours).
If entered with a time-in-force of IOC, a Periodic Auction Only Order
would also have to be entered with an instruction to ``lock-in'' the
order to avoid situations where a Periodic Auction Only Order initiates
an auction and then is immediately cancelled prior to the execution of
that auction. Periodic Auction Only Orders are not eligible to trade on
the Continuous Book and therefore must include instructions that would
allow the order to be executed in a Periodic Auction. The requirement
to ``lock-in'' the order during the course of a Periodic Auction if the
order is marketable at the Periodic Auction Book Price is designed to
allow a User to specify that they are only interested in participating
in a Periodic Auction if they can do so immediately, while ensuring
that they are actually eligible to participate in the execution of that
auction, if possible. Without this requirement, a Periodic Auction
could be initiated even though the order responsible for initiating
that auction, by its terms, would not be eligible to participate at the
end of the Periodic Auction Period, which would potentially be to the
detriment both of the User entering the order and any Users that
submitted contra-side orders to trade with it under the assumption that
such interest was available. The Exchange believes that the proposed
requirements would benefit Users that are looking for a speedy
execution in Periodic Auctions, while also ensuring that Periodic
Auction Only Orders entered with a time-in-force of IOC can trade at
the end of the Periodic Auction Period.
    The Exchange would also allow Users to include certain specified
instructions on their Periodic Auction Only Orders. Specifically, such
orders would be accepted with minimum execution quantity and pegging
instructions. The Exchange believes that the Periodic Auction Only
Order may be particularly valuable for market participants that have
larger orders to be executed in Periodic Auctions that they may not be
willing expose for trading in the continuous market. As illustrated in
Cboe's commenter letter in response to the Commission's statement on
thinly-traded securities,\56\ liquidity is often more limited in these
securities, and as such market participants often look to off-exchange
venues that may be able to meet their liquidity needs without
displaying orders in the public market, thereby limiting the market
impact of their trading activity. The Exchange believes that market
participants that are looking for liquidity in size may find Periodic
Auctions to be a valuable means of sourcing needing liquidity without
the potential risks of displaying their orders for execution.
---------------------------------------------------------------------------

    \56\ See Letter from Adrian Griffiths, supra note 6.
---------------------------------------------------------------------------

    Given the potential benefits to larger orders, the Exchange would
permit Users to specify a minimum execution quantity for their Periodic
Auction Only Orders. A Periodic Auction Only Order entered with a
minimum execution quantity would be executed in a Periodic Auction only
if the minimum size specified can be executed against one or more
contra-side Periodic Auction Orders. The Exchange offers a Minimum
Quantity Order on the Continuous Book today. The proposed instruction
that could be attached to a Periodic Auction Only Order is similar to
the current Minimum Quantity Order but would only permit the default
handling of that order type, and would not allow a member to
alternatively specify that the minimum quantity condition be satisfied
by each individual contra-side order. Periodic Auction Eligible Orders
and Continuous Book Orders entered as Minimum Quantity Orders would be
subject to a similar restriction.
    In addition, in light of the fact that market participants often
value midpoint executions, or may wish to receive executions at other
prices based on the applicable national best bid or offer (``NBBO''),
the Exchange would also allow Users to enter a pegging instruction for
such orders. Periodic Auction Only Orders would therefore accommodate
instructions that the order is to be pegged to either the midpoint or
same side of the market. As is the case for orders entered for trading
on the Continuous Book, Periodic Auction Only Orders entered with a
primary peg instruction would be pegged to the NBBO, with or without an
offset, provided that only aggressive offsets would be permitted given
the fact that Periodic Auctions would be restricted to trading within
the Protected NBBO and would not be eligible to trade at inferior
prices. Although the Exchange would not generally offer special order
handling instructions for Periodic Auction Only Orders, the Exchange
believes that midpoint and primary peg instructions, as described,
would allow Users to more accurately capture their trading intent, and
may therefore promote more active use of Periodic Auctions as a means
of sourcing liquidity for such orders.
    With respect to Periodic Auction Eligible Orders, the Exchange
would allow Users to include an instruction on non-displayed orders
entered to trade on the Continuous Book that would allow such orders to
initiate a Periodic Auction if executable against contra-side Periodic
Auction Orders. The Exchange would not allow Users to enter displayed
orders as Periodic Auction Eligible Orders as such Periodic Auction
Eligible Orders would not be available for execution during an ongoing
Periodic Auction. As a result, displayed orders, which are disseminated
to the market and subject to firm quote requirements under Rule

602(b)(2) of Regulation NMS,\57\ would not be able to be entered as
Periodic Auction Eligible Orders. However, such displayed orders could
still participate in Periodic Auctions as Continuous Book Orders, and
would receive execution priority when executed in that manner.
---------------------------------------------------------------------------

    \57\ See 17 CFR 242.602(b)(2).
---------------------------------------------------------------------------

    As discussed in the purpose section of the proposed rule change,
the time-in-force included on a Periodic Auction Eligible Order would
need to allow the order to remain executable during the course of a
Periodic Auction. The Exchange has therefore proposed to: (1) Only
allow IOC orders to be entered as Periodic Auction Eligible Orders if
such orders include an instruction not to cancel the order during a
Periodic Auction Period; and (2) disallow FOK orders from being entered
as Periodic Auction Orders. The Exchange believes that both of these
requirements are consistent with just and equitable principles of trade
as they are designed to ensure that a Periodic Auction Eligible Order,
which as discussed would be eligible for the initiation of a Periodic
Auction, would not be prevented from participating in the eventual
execution of such Periodic Auction due to a time-in-force that
contemplates the order either being executed or cancelled immediately
on entry. As discussed with respect to Periodic Auction Only Orders,
without this requirement, a Periodic Auction could be initiated even
though the order responsible for initiating that auction, by its terms,
would not be eligible to participate at the end of the Periodic Auction
Period, which would potentially be to the detriment both of the User
entering the order and any Users that submitted contra-side orders to
trade with it under the assumption that such interest was available.
    Nevertheless, the Exchange believes that some Users may find it
valuable to enter IOC orders as Periodic Auction Eligible Orders.
Although such Users may be looking for a speedy execution, and would
therefore generally prefer an execution on entry, or not at all, they
may be willing to wait 100 milliseconds for a potential execution in a
Periodic Auction, instead of having the order cancelled immediately.
The Exchange would therefore allow Users to signal their intent to
trade in this manner by entering the IOC order with an instruction that
it should not be cancelled during a Periodic Auction. If entered in
this manner, a Periodic Auction Eligible Order may trade immediately on
entry on the Continuous Book, whether in full or in part, or may
alternatively participate in a Periodic Auction, subject to
cancellation no later than the end of any Periodic Auction Period. The
Exchange does not anticipate the same use case for FOK orders, which
contain an additional condition that requires the order to be
executable in full, and would therefore restrict their ability to be
entered as Periodic Auction Eligible Orders.
    The Exchange would also not accept Mid-Point Peg Orders entered as
Periodic Auction Eligible Orders if the Mid-Point Peg Order is entered
with an instruction to not execute when the NBBO is locked. If the
Exchange permitted Mid-Point Peg Orders with this instruction to be
entered as Periodic Auction Eligible Orders, those orders could
initiate a Periodic Auction but would not be available for the
auction's eventual execution if the market subsequently becomes locked
at that time. The Exchange believes that the proposed handling is
consistent with just and equitable principles of trade as the Exchange
wishes to avoid the potential for such orders to initiate a Periodic
Auction that may ultimately not execute due to the inclusion of this
condition. Periodic Auction Eligible Orders are designed to initiate
Periodic Auctions and may encourage other Users to enter orders that
could participate in the auction's execution. As a result, the Exchange
believes that such orders should reflect trading interest that does not
include unnecessary conditions. Users that wish to use Mid-Point Peg
Orders with this instruction would still be eligible to participate in
Periodic Auctions as Continuous Book Orders, which are able to
participate in the eventual execution of a Periodic Auction, but would
not initiate such auctions.
    Similar to the proposed handling of Periodic Auction Only Orders,
the Exchange would allow Periodic Auction Eligible Orders to be entered
as Minimum Quantity Orders, but would only permit such orders to be
entered with the default handling of that instruction. That is, Minimum
Quantity Orders entered as Periodic Auction Eligible Orders would
execute only if the minimum size specified can be executed against one
or more contra-side Periodic Auction Orders or Continuous Book Orders.
Although the Exchange does offer an alternative instruction that
permits the User to request that the Exchange only execute the order
against a single contra-side order, such handling is designed primarily
for use on the Continuous Book, and would complicate the execution of
Periodic Auctions.\58\ For similar reasons, Minimum Quantity Orders are
excluded from the Exchange's opening process for securities traded
pursuant to unlisted trading privileges. However, as discussed, the
Exchange believes that Users participating in Periodic Auctions may
value the ability to specify a minimum quantity, and the Exchange has
therefore proposed to allow such functionality for Periodic Auction
Eligible Orders so long as the User is willing for those orders to be
executed against one or more contra-side orders. The Exchange believes
that this strikes the right balance between allowing Users to ensure
that they only trade in a Periodic Auction if their minimum quantity
criteria can be met, while excluding instructions that could
unnecessarily complicate the execution of Periodic Auctions.
---------------------------------------------------------------------------

    \58\ See BYX Rule 11.23(a)(2).
---------------------------------------------------------------------------

    In addition, the Exchange would specify handling for Discretionary
Orders, Pegged Orders, and Mid-Point Pegged Orders that are entered as
Periodic Auction Eligible Orders. Including this information in the
rule would increase transparency around the operation of the Exchange
and ensure that Users are properly informed about how orders with these
instructions would be handled in Periodic Auctions. The same handling
is currently applied to the Exchange's opening process for securities
traded pursuant to unlisted trading privileges, and treating these
orders in the same manner for purposes of Periodic Auctions would
ensure a consistent and familiar experience for market participants
that enter such orders on the Exchange. The Exchange therefore believes
that these proposed rules are consistent the maintenance of a fair and
orderly market.
    The Exchange also believes that it is consistent with just and
equitable principles of trade to allow Continuous Book Orders, i.e.,
orders that are not entered as either Periodic Auction Only Orders or
Periodic Auction Eligible Orders, to participate in any Periodic
Auction that results in an execution. Although Continuous Book Orders
would not initiate a Periodic Auction, such orders would be eligible to
participate in the resulting execution, thereby facilitating additional
liquidity for those orders without disrupting their ability to trade
normally during the course of the auction. Continuous Book Orders would
remain on the Continuous Book and subject to potential execution during
a Periodic Auction Period, but would be included in the final
determination of the Periodic Auction

Price, and participate in any resulting execution. Although the
Exchange believes that a number of Users may wish to use Periodic
Auction Orders that are specifically designed for participation in
Periodic Auctions and have the ability to initiate those auctions, the
Exchange also believes that Periodic Auctions would be valuable to
Users that wish primarily to trade on the Continuous Book but may be
able to secure an execution in a Periodic Auction if possible. As a
result, Continuous Book Orders would generally be eligible to trade in
Periodic Auctions at the end of the auction process, except in the case
of Minimum Quantity Orders entered with the alternative instruction
that requires the minimum size specified to be satisfied by each
individual contra-side order.\59\
---------------------------------------------------------------------------

    \59\ As discussed in the following paragraph, such orders are
not compatible with Periodic Auctions, and therefore would not
participate in the execution of such auctions.
---------------------------------------------------------------------------

    Such Continuous Book Orders would be subject to similar handling to
Periodic Auction Eligible Orders that may also trade on the Continuous
Book in addition to Periodic Auctions, including the same handling
discussed above with respect to Discretionary Orders, Pegged Orders,
and Mid-Point Peg Orders. The Exchange believes that this handling is
consistent with just and equitable principles of trade as it would
ensure consistent treatment of similar orders traded in Periodic
Auctions. In addition, Continuous Book Orders that are entered as
Minimum Quantity Orders would be subject to similar but not identical
handling to Periodic Auction Eligible Orders. Given the value of
Minimum Quantity Orders that include the alternative instruction that
allows a User to specify that the minimum size specified be satisfied
by each individual contra-side order, Users would continue to be able
to use this instruction for trading on the Continuous Book. However,
such orders, which would not be permitted to be entered as Periodic
Auction Orders, would similarly not be able to participate in Periodic
Auctions as Continuous Book Orders. Users that wish to include a
minimum quantity on their orders could participate in Periodic Auctions
as either Periodic Auction Only Orders, Periodic Auction Eligible
Orders, or Continuous Book Orders, provided that for each of these
order types, the order must be willing to trade against one or more
contra-side orders. As discussed, the Exchange believes that this
treatment is necessary in order to offer a minimum quantity instruction
in an auction that pools interest and executes such interest at a
single price.
    The Exchange also believes that the proposed handling of Continuous
Book Orders entered as Reserve Orders is consistent with the
maintenance of a fair and orderly market as it will ensure a familiar
and consistent experience for market participants that trade on the
Exchange. Although Periodic Auction Eligible Orders must be non-
displayed and therefore cannot be entered as a Reserve Order that, by
rule, includes both a displayed portion and non-displayed portion, the
proposed handling for Continuous Book Orders is the same as the
handling applied to the Exchange's opening process securities traded
pursuant to unlisted trading privileges. Thus, similar to the treatment
of Discretionary Orders, Pegged Orders, and Mid-Point Peg Orders,
detailing the proposed handling of Reserve Orders would both increase
operational transparency and ensure consistent and familiar treatment
of similar orders on the Exchange.
    Periodic Auctions would be initiated throughout Regular Trading
Hours when Periodic Auction Orders entered by Users are executable
against each other, thereby ensuring that the initiation of an auction
is tied to demonstrated interest from both buyers and sellers in the
security. Once the Exchange has matched two or more Periodic Auction
Orders in this manner, a Periodic Auction Period of 100 milliseconds
would begin to allow orders from additional market participants to
participate in the execution of the Periodic Auction. The fixed 100-
millisecond auction length is based on the maximum auction duration
used for periodic auctions conducted by Cboe Europe today.\60\ Based on
the Exchange's affiliates experience operating auctions for the trading
of European equities, the Exchange believes that the proposed auction
length would facilitate the prompt processing and execution of Periodic
Auctions, while continuing to provide time for interested market
participants to enter orders to participate in the auction.
---------------------------------------------------------------------------

    \60\ Cboe Europe randomizes the length of the auction rather
than its dissemination of the auction message. As a result, periodic
auctions conducted by Cboe Europe would be for a maximum duration of
100 milliseconds, but could also be for a shorter duration.
---------------------------------------------------------------------------

    To facilitate the pooling of Periodic Auction Orders during this
period, the Exchange would publish information about the auction,
including (1) an indicative Periodic Auction Book Price that reflects
price at which the Periodic Auction could be executed, counting only
Periodic Auction Orders and excluding Continuous Book Orders that may
be subject to execution prior to the end of the Periodic Auction
Period; and (2) the total number of shares of Periodic Auction Orders
that are matched at the Periodic Auction Book Price. This information
would be published beginning at a randomized time in one millisecond
intervals, and would be refreshed in one millisecond intervals
thereafter as additional orders are entered or cancelled, or other
changes to market conditions are made that could impact the Periodic
Auction Book Price. The Exchange believes that it is consistent with
the protection of investors and the public interest to publish this
information as it may inform potential trading in periodic auctions and
encourage additional order flow to be entered to participate in such
auctions. The Exchange also believes that sending out the initial
dissemination at a randomized time after Periodic Auction Orders have
been matched would facilitate the operation of a fair and orderly
market. This handling would allow additional Periodic Auction Orders
received during this interim period to be pooled in the initial
dissemination of auction information. In addition, since market
participants would not know how much time is left in the Periodic
Auction Period, firms would be incentivized to respond quickly with
Periodic Auction Orders to participate in the Periodic Auction, rather
than potentially waiting until the end of the auction, which may reduce
the value of the information proposed to be disseminated to investors
and may impact price discovery.
    Once the 100 millisecond Periodic Auction Period has ended, the
Exchange would calculate the execution price of the auction, i.e., the
Periodic Auction Price, and execute Periodic Auction Orders and
Continuous Book Orders that are eligible to trade at that price. The
Exchange believes that the proposed methodology for determining the
Periodic Auction Price is consistent with just and equitable principles
of trade. Generally, the proposed methodology for calculating the
Periodic Auction Price is designed to allow Periodic Auctions to
facilitate price discovery while maintaining important investor
protections and assuring compliance with applicable regulations. Given
the important price formation function of these auctions, the Exchange
would use logic for pricing Periodic Auctions that largely mirrors the
logic used by its affiliate, BZX, for

opening and closing auctions in that exchange's listed securities.
    Specifically, the Exchange would seek to execute Periodic Auctions
at a price that maximizes the number of shares that can trade in the
auction, subject to specified price collars that would limit executions
at prices that are not reasonably related to the price of the security
established by the market. The applicable price collars would also be
based on the auction collars used for BZX opening and closing auctions,
except that trading would be further limited by applicable LULD Price
Bands and the Protected NBBO, as required pursuant to applicable
regulatory requirements.\61\ That is, the auction collars would
generally be the same as those used for BZX auctions, but could be
narrowed by applicable regulatory requirements.
---------------------------------------------------------------------------

    \61\ As discussed in the purpose section of this proposed rule
change, both the requirements of the LULD Plan and the Order
Protection Rule apply to transactions executed during Regular
Trading Hours. Although opening and closing auctions are generally
exempt from these requirements, there are currently no exemptions
that would apply to Periodic Auctions that perform a similar role in
facilitating price discovery.
---------------------------------------------------------------------------

    Finally, the price calculation would be subject to tie-breakers
that are consistent with those used for BZX opening and closing
auctions in situations where there is a volume-based tie at multiple
price levels. These tie-breakers would help ensure the selection of a
meaningful Periodic Auction Price by selecting the price that would
minimize the potential imbalance between supply and demand, and then
favoring prices closer to a Volume Based Tie Breaker that is generally
the midpoint of the NBBO. In sum, the proposed calculation of the
Periodic Auction Price would allow the Exchange to appropriately
balance supply and demand in Periodic Auctions and facilitate robust
price formation similar to opening and closing auctions.
    After the Exchange determines the Periodic Auction Price, any
Periodic Auction Orders or Continuous Book Orders that are eligible for
execution at that price would be executed based on a special allocation
methodology designed for use in Periodic Auctions. First, in order to
continue to incentivize the entry of displayed orders on the Exchange,
Continuous Book Orders that are displayed on the Continuous Book would
be executed first in price/time priority. Although the Exchange is
proposing to introduce Periodic Auctions to incentivize additional
liquidity, the Exchange believes that it is important to continue to
encourage the entry of displayed orders on the Continuous Book.
Displayed orders entered in the public market contribute to price
formation, and are used as a reference price for the execution of
orders on other venues. As a result, the Exchange's proposal to
introduce Periodic Auctions is designed to continue to encourage the
entry of displayed orders that would both trade on the Continuous Book
and simultaneously benefit from priority when executed in a Periodic
Auction.
    Second, after Continuous Book Orders displayed on the Continuous
Book have been executed, Periodic Auction Orders would be executed in
size/time priority. As previously noted, the Exchange believes that
Periodic Auctions may be valuable for investors that are seeking
liquidity in size. As a result, the priority methodology employed by
the Exchange for Periodic Auction Orders would preference larger
orders, which the Exchange believes may contribute to greater depth in
Periodic Auctions. In turn, the liquidity provided by these larger
orders would contribute to the execution of smaller orders that may
also participate in Periodic Auctions, thereby facilitating the
execution of all orders, both large and small, that seek liquidity in
such auctions, and furthering execution opportunities for investors
that trade on the Exchange.
    Finally, non-displayed Continuous Book Orders would be executed
last in priority. Unlike displayed orders entered on the Continuous
Book, or Periodic Auction Orders that contribute to important pricing
information disseminated to market participants during the course of a
Periodic Auction, non-displayed orders entered on the Continuous Book
do not contribute to pre-execution price formation.\62\ As a result,
while these orders would be eligible to trade in Periodic Auctions,
where they may benefit from additional execution opportunities, they
would be subject to the lowest priority among Periodic Auction Orders
and Continuous Book Orders. In addition, since these orders are not
specifically seeking liquidity in Periodic Auctions, and would
participate in Periodic Auctions solely as an additional source of
liquidity, priority within this band would be determined based on the
normal execution priority afforded to such orders on the Continuous
Book. The Exchange believes that this approach is consistent with just
and equitable principles of trade as it would ensure that non-displayed
Continuous Book Orders receive the priority that they would normally be
afforded for executions on the Continuous Book.
---------------------------------------------------------------------------

    \62\ Non-displayed orders would contribute to price formation at
the end of a Periodic Auction as they would be considered in the
determination of the Periodic Auction Price.
---------------------------------------------------------------------------

    Similar to the Exchange's opening process for securities traded
pursuant to unlisted trading privileges,\63\ all Match Trade Prevention
modifiers, as defined in BYX Rule 11.9(f), would be ignored as it
relates to executions occurring during a Periodic Auction. The
Exchange's Match Trade Prevention modifiers are designed to allow Users
to better manage order flow and prevent certain undesirable executions
on the Continuous Book. However, this functionality would complicate
the processing of Periodic Auctions, where orders are pooled together
and executed at a price that balances supply and demand in the auction.
As a result, the Exchange believes that ignoring Match Trade Prevention
modifiers in Periodic Auctions, similar to the handling currently used
by the Exchange for its opening process, is consistent with the
maintenance of a fair and orderly market in securities traded in such
Periodic Auctions.
---------------------------------------------------------------------------

    \63\ See BYX Rule 11.23(b).
---------------------------------------------------------------------------

    The Exchange also believes that it is consistent with the
maintenance of a fair and orderly market to cancel a Periodic Auction
that cannot be completed after a specified number of attempts
communicated to members. As discussed in the purpose section of this
proposed rule change, there may be rare circumstances where the
inclusion of a minimum execution quantity on one or more Periodic
Auction Orders and/or Continuous Book Orders may result in the Exchange
being unable to process a Periodic Auction in a timely manner. To
prevent potential capacity and/or performance issues that may impact
both the execution of the auction, as well as trading on Continuous
Book, the Exchange would cancel the auction after a specified number of
attempts, as determined by the Exchange, rather than continuing to
attempt to complete the auction ad infinitum when there may be no
possibility for eventual execution, and no guarantee that such
execution could be determined and processed in a timely fashion. While
the Exchange believes that these situations are likely to be
infrequent, the proposed handling would serve to eliminate certain
potential performance issues, and including this language in the rule
would add additional transparency around the operation of the Exchange.
    Finally, the Exchange believes that the proposed language being
codified in the Interpretations and Policies to the proposed rule is
consistent with the

Exchange Act and the rules and regulations adopted thereunder. As
proposed, these rules would include language that identifies how
Periodic Auctions would be conducted during a crossed market, and
consistent with applicable regulatory requirements related to handling
of trading halts and Regulation SHO. Such rules would also describe
appropriate standards of member conduct, consistent with the Exchange's
obligations under the Act to regulate and surveil its market. The
proposed rules included in Interpretations and Policies .01-.03 would
ensure that: (1) Periodic Auctions do not take place when their
execution may be complicated by the existence of a crossed market that
could interfere with the auction's price discovery function, or when
such execution would not be permissible due to a trading halt in a
security; \64\ and (2) the execution in Periodic Auctions of any short
sale orders that are not marked ``short exempt'' would only take place
at a permissible price when the security is in a short sale circuit
breaker pursuant to Rule 201 of Regulation SHO. Further, the proposed
rules included in Interpretations and Policies .04 would provide
additional guidance to Users with respect to conduct that would be
considered inconsistent with just and equitable principles of trade.
The Exchange intends to conduct appropriate surveillance of its members
to ensure that their participation in Periodic Auctions is done in a
manner that is consistent with such rules. As a result, these rules
would ensure that orders Periodic Auctions would be processed in a
manner that is consistent with applicable regulatory obligations and
the maintenance of a fair and orderly market in securities traded on
the Exchange.
---------------------------------------------------------------------------

    \64\ Although Rule 611(b)(4) of Regulation NMS provides an
exception from the trade-through requirements of that rule for
situations where a protected bid is crossed with a protected offer,
the Exchange believes that market participants may not desire an
execution in a Periodic Auction during periods when the market is
crossed.
---------------------------------------------------------------------------

iii. Benefits for Thinly-Traded Securities
    As mentioned in the purpose section of this proposed rule change,
the Exchange believes that its proposed introduction of Periodic
Auctions is responsive to the Statement that the Commission issued in
October 2019 to address market quality concerns in thinly-traded
securities.\65\ Specifically, the Periodic Auction proposal is designed
to improve liquidity and price formation in thinly-traded and other
securities that suffer from diminished market quality, while also
allowing the Exchange to better compete with off-exchange venues that
currently offer features that investors may find beneficial for
sourcing liquidity when displayed liquidity in the public markets is
more scarce. Cboe offered its thoughts in response to the Statement in
a comment letter submitted to the Commission on December 20, 2019. As
stated in that comment letter, Cboe believes that innovation by
national securities exchanges, rather than potentially harmful
regulatory changes that favor a limited segment of the market, is what
is ultimately needed to facilitate better market quality in thinly-
traded securities. The Exchange believes that Periodic Auctions, as
designed, are such an innovation, and would address the three main
difficulties that market participants currently face in trading thinly
traded securities: (1) Sourcing liquidity, (2) the availability of
price improvement opportunities, and (3) the potential for significant
market impact in securities that are less liquid and trade
infrequently.
---------------------------------------------------------------------------

    \65\ See supra note 5.
---------------------------------------------------------------------------

    First, Periodic Auctions would assist investors in sourcing
liquidity in the public markets by establishing meaningful liquidity
events outside of the opening and closing auctions conducted by the
primary listing exchanges. As proposed, Periodic Auctions would pool
available interest from market participants and execute those orders in
price forming auctions conducted at multiple points in time during the
course of the trading day when there are matching Periodic Auctions to
buy and sell. The Exchange therefore believes that Periodic Auctions
would help investors to source liquidity, including block-size
liquidity, that may be unavailable through continuous trading on a
traditional limit order book. In addition, the Exchange has taken steps
to encourage greater liquidity in Periodic Auctions, including
prioritizing Periodic Auction Orders based on size, establishing
minimum size requirements for auction participation, and supporting
minimum execution size instructions in the auction. These features, in
combination with other features that are designed to encourage
participation in Periodic Auctions generally, may increase needed
liquidity in thinly-traded securities.
    Second, Periodic Auctions are designed to balance supply and demand
and execute available interest at a single market clearing price that
would benefit both buyers and sellers by providing potential price
improvement opportunities. This price formation process is broadly
beneficial, but would also be particularly beneficial in thinly-traded
securities where spreads are typically wider and executing transactions
at a market clearing price within the spread would allow for meaningful
price improvement opportunities for investors that may otherwise have
to seek those opportunities in the off-exchange market. Based on Cboe
Europe's experience in operating periodic auctions for the European
equities market, the Exchange believes that Periodic Auctions may
facilitate significant price improvement, including midpoint
executions, which as discussed account for about 85% of value traded in
Cboe Europe's periodic auctions.
    Third, Periodic Auctions are designed to minimize the risk of
market impact of transacting in thinly-traded securities by providing a
mechanism that allows market participants to trade, potentially in
size, without the information leakage that may otherwise be associated
with displaying orders to trade on a traditional limit order book. The
Exchange believes that this may encourage additional participation in
Periodic Auctions as market participants can avoid publicly showing
their trading interest similar to their ability to do so in various
off-exchange markets that currently trade significant volume in thinly-
traded securities.
iv. Compliance With Other Regulatory Requirements
    As discussed in more detail below, the Exchange also believes that
the proposed rule change is consistent with other regulatory
requirements, including the Order Protection Rule, the LULD Plan, and
Rule 602 of Regulation NMS (i.e., the ``Quote Rule'').
    First, with respect to compliance with the Order Protection Rule,
the Exchange's proposed auction collars would, as previously discussed,
limit trades to prices that are within the Protected NBBO. As discussed
in the purpose section of this proposed rule change, the Order
Protection Rule applies to transactions executed during Regular Trading
Hours. Although opening and closing auctions are generally exempt from
these requirements,\66\ there are currently no exceptions that would
apply to Periodic Auctions that perform a similar role in facilitating
price discovery. The Exchange would therefore not execute

Periodic Auctions at prices that are inconsistent with the requirements
of that rule. Generally, the Order Protection Rule requires trading
centers to establish, maintain, and enforce written policies and
procedures that are reasonably designed to prevent trade-throughs on
that trading center of protected quotations in NMS stocks, unless an
exception applies. A ``trade-through'' is defined in Rule 600(b)(81) of
Regulation NMS as the purchase or sale of an NMS stock during regular
trading hours, either as principal or agent, at a price that is lower
than a protected bid or higher than a protected offer. The proposed
auction collars would be applied at the time of execution, and would
therefore prevent trades from occurring at prices that would constitute
a trade-through at the time the Periodic Auction is processed,
consistent with the requirements of the Order Protection Rule.
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    \66\ Rule 611(b)(3) of Regulation NMS provides an exception to
the requirements of the Order Protection Rule where the transaction
that constituted the trade-through was a single-priced opening,
reopening, or closing transaction by the trading center.
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    Similarly, with respect to compliance with the LULD Plan, the
Exchange's proposed auction collars would also limit trades to prices
that are within the LULD Price Bands established pursuant to that
national market system plan. As is the case with the Exchange's
utilization of the Protected NBBO in setting applicable auction
collars, the LULD Price Bands would be used as an additional collar on
Periodic Auctions, and would ensure that all transactions that result
from a Periodic Auction would be executed within the applicable LULD
Price Bands at the time the Periodic Auction is processed. The Exchange
would not execute Periodic Auctions at prices that are inconsistent
with the LULD Plan.
    The Exchange also believes that the proposed rule change is
consistent with the Quote Rule. Generally, the firm quote provisions of
the Quote Rule require each responsible broker or dealer to execute an
order presented to it, other than an odd lot order, at a price at least
as favorable as its published bid or published offer, in any amount up
to its published quotation size. Periodic Auction Orders, including
both Periodic Auction Only Orders that trade solely in Periodic
Auctions and Periodic Auction Eligible Orders that may also trade on
the Continuous Book, would at all times be non-displayed, and therefore
would not trigger the firm quote requirements of the Quote Rule. That
is, there would be no ``published bid'' or ``published offer''
displayed to market participants that would be required to be ``firm''
under the Quote Rule.
    Similarly, the introduction of Periodic Auctions alongside trading
on the Continuous Book would not result in violations of the Quote
Rule. The Exchange would not halt or otherwise suspend trading on the
Continuous Book while conducting a Periodic Auction. As a result,
Continuous Book Orders entered to trade with the Exchange's published
quotation would continue to be able to do so in the same manner that
they do today, notwithstanding the introduction of Periodic Auctions to
be conducted throughout the course of the trading day. The Exchange has
designed its system for trading Periodic Auctions to minimize
unnecessary latency, and therefore does not believe that the
introduction of Periodic Auctions would impair the ability of the
Exchange to execute incoming orders entered on the Continuous Book
against its published bids or offers. The Exchange will continue to
monitor system performance and latency after the introduction of
Periodic Auctions to ensure that it is able to process both Periodic
Auctions and Continuous Book Orders efficiently and without undue
latency.
    In addition, the Exchange would continue to handle events processed
by the matching engine in sequence, and a Continuous Book Order that is
included in the Exchange's published bid or offer would trade with
incoming Continuous Book Orders unless the Periodic Auction is
processed prior to the matching engine's receipt of the incoming
Continuous Book Order. Such executions would not run afoul of the firm
quote requirements of the Quote Rule as Rule 602(b)(3) of Regulation
NMS contains an explicit exemption from these requirements for broker-
dealers that are in the process of effecting a transaction in that
security at the time the incoming order is ``presented'' to the broker-
dealer for potential execution.
    Finally, the Exchange's published quotations would continue to be
considered ``automated quotations'' as defined in Rule 600(b)(4) of
Regulation NMS. As discussed with respect to compliance with the Quote
Rule, the Exchange has designed its system for trading Periodic
Auctions to minimize unnecessary latency, and therefore does not
believe that the introduction of Periodic Auctions would impair the
ability of the Exchange to execute incoming orders entered on the
Continuous Book against its published bids or offers. In this regard,
the Exchange represents that any additional latency on the Continuous
Book that may result from the proposed introduction of Periodic
Auctions would not be material from the perspective of compliance with
the Order Protection Rule. Under Regulation NMS, an ``automated''
quotation is one that, among other things, can be executed
``immediately and automatically'' against an incoming immediate-or-
cancel order. Although the Commission's recent guidance related to
automated quotations has focused on the introduction of intentional
delay mechanisms or ``speed bumps,'' \67\ which present different and
more complex issues under Regulation NMS, the Exchange believes that
its proposed implementation of Periodic Auctions would not frustrate
the purposes of the Order Protection Rule by ``impairing fair and
efficient access'' to the Exchange's quotations. In this regard, the
Exchange notes that it has engaged in substantial testing of its
Periodic Auction product and, based on that testing, believes that any
additional latency that may be experienced on the Continuous Book as a
result of the introduction of its Periodic Auction product would be
minimal and de minis from the perspective of the Order Protection
Rule.\68\
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    \67\ See Securities Exchange Act Release No. 78102 (June 17,
2016), 81 FR 40785 (June 23, 2017) (File No. S7-03-16) (``Commission
Interpretation'').
    \68\ Although the Commission refused to enumerate a numeric
latency threshold for an intentional delay that is sufficiently de
minimis for the purposes of the Order Protection Rule, the Staff of
the Division of Trading and Markets has issued guidance stating the
Staff's belief that delays of less than one millisecond would
qualify as de minimis. See Staff Guidance on Automated Quotations
under Regulation NMS (June 17, 2016), available at https://www.sec.gov/divisions/marketreg/automated-quotations-under-regulation-nms.htm. While the Exchange's proposal would not
introduce an intentional delay, the Exchange's testing indicates
that any additional latency that may result from the proposed
introduction of Periodic Auctions would be well within this
threshold.
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v. Compliance With Section 11(a) of the Exchange Act
    The proposed rule change is also consistent with Section 11(a)(1)
of the Act \69\ and the rules promulgated thereunder. Generally,
Section 11(a)(1) of the Act restricts any member of a national
securities exchange from effecting any transaction on such exchange for
(i) the member's own account, (ii) the account of a person associated
with the member, or (iii) an account with respect to which the member
or a person associated with the member exercises investment discretion
(collectively referred to as ``covered accounts''), unless a specific
exemption is available. Rule 11a2-2(T) under the

Act,\70\ known as the ``effect versus execute'' rule, provides exchange
members with an exemption from the Section 11(a)(1) prohibition.
---------------------------------------------------------------------------

    \69\ 15 U.S.C. 78k(a). Section 11(a)(1) prohibits a member of a
national securities exchange from effecting transactions on that
exchange for its own account, the account of an associated person,
or an account over which it or its associated person exercises
discretion unless an exception applies.
    \70\ 17 CFR 240.11a2-2(T).
---------------------------------------------------------------------------

    The ``Effect vs. Execute'' exemption permits an exchange member,
subject to certain conditions, to effect transactions for covered
accounts by arranging for an unaffiliated member to execute
transactions on the exchange. To comply with Rule 11a2-2(T)'s
conditions, a member: (i) Must transmit the order from off the exchange
floor; (ii) may not participate in the execution of the transaction
once it has been transmitted to the member performing the execution;
\71\ (iii) may not be affiliated with the executing member; and (iv)
with respect to an account over which the member has investment
discretion, neither the member nor its associated person may retain any
compensation in connection with effecting the transaction except as
provided in the rule. For the reasons set forth below, the Exchange
believes that members entering orders into Periodic Auctions would
satisfy the requirements of Rule 11a2-2(T), and that the proposal is
therefore consistent with Section 11(a) of the Act and the rules
thereunder.
---------------------------------------------------------------------------

    \71\ The member may, however, participate in clearing and
settling the transaction.
---------------------------------------------------------------------------

    The first condition of Rule 11a2-2(T) is that orders for covered
accounts be transmitted from off the exchange floor. The Exchange's
system, including the proposed system for processing Periodic Auctions
pursuant Proposed Rule 11.25, would continue to receive orders
electronically through remote terminals or computer-to-computer
interfaces. In the context of other automated trading systems, the
Commission has found that the off-floor transmission requirement is met
if an order for a covered account is transmitted from a remote location
directly to an exchange by electronic means.\72\ Because the Exchange's
system for handling Periodic Auctions would receive orders from members
electronically through remote terminals or computer-to-computer
interfaces, the Exchange believes that orders submitted to a Periodic
Auction electronically would satisfy the off-floor transmission
requirement.
---------------------------------------------------------------------------

    \72\ See Securities Exchange Act Release No. 15533 (January 29,
1979), 44 FR 6084 (January 31, 1979) (``1979 Release'').
---------------------------------------------------------------------------

    The second condition of Rule 11a2-2(T) requires that neither a
member nor an associated person of such member participate in the
execution of its order. The Exchange represents that Periodic Auctions
would be executed automatically pursuant to the rules set forth in
Proposed Rule 11.25, which would govern the operation of Periodic
Auctions. In particular, the execution of a member's orders in a
Periodic Auction would depend not on the member entering the order, but
rather on what other orders are present, the priority of those orders,
and the remaining duration of any Periodic Auction in the security.
Thus, at no time following the submission of an order is a member or
associated person of such member able to acquire control or influence
over the result or timing of order execution.\73\ Once an orders has
been transmitted, the member that transmitted the order will not
participate in its eventual execution.
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    \73\ Users may modify and/or cancel their Periodic Auction
Orders at any time unless the User has elected to use the proposed
``lock-in'' feature. See Proposed Rule 11.25(b). The Commission has
stated that the non-participation requirement does not preclude
members from cancelling or modifying orders, or from modifying
instructions for executing orders, after they have been transmitted
so long as such modifications or cancellations are also transmitted
from off the floor. See Securities Exchange Act Release No. 14563
(March 14, 1978), 43 FR 11542, 11547 (the ``1978 Release'').
---------------------------------------------------------------------------

    The third condition of Rule 11a2-2(T) requires that the order be
executed by an exchange member who is unaffiliated with the member
initiating the order. The Commission has stated that the requirement is
satisfied when automated exchange facilities are used, as long as the
design of these systems ensures that members do not possess any special
or unique trading advantages in handling their orders after
transmitting them to the exchange.\74\ The Exchange represents that the
Periodic Auctions are designed such that no member has any special or
unique trading advantage in the handling of any orders that are
processed in Periodic Auctions after transmitting such orders to the
Exchange.
---------------------------------------------------------------------------

    \74\ In considering the operation of automated execution systems
operated by an exchange, the Commission noted that, while there is
not an independent executing exchange member, the execution of an
order is automatic once it has been transmitted into the system.
Because the design of these systems ensures that members do not
possess any special or unique trading advantages in handling their
orders after transmitting them to the exchange, the Commission has
stated that executions obtained through these systems satisfy the
independent execution requirement of Rule 11a2-2(T). See 1979
Release.
---------------------------------------------------------------------------

    Finally, the fourth condition of Rule 11a2-2(T) requires that, in
the case of a transaction effected for an account with respect to which
the initiating member or an associated person thereof exercises
investment discretion, neither the initiating member nor any associated
person thereof may retain any compensation in connection with effecting
the transaction, unless the person authorized to transact business for
the account has expressly provided otherwise by written contract
referring to Section 11(a) of the Act and Rule 11a2-2(T)
thereunder.\75\ The Exchange recognizes that members relying on Rule
11a2-2(T) for transactions effected through a Periodic Auction must
comply with this condition of the Rule, and the Exchange will enforce
this requirement pursuant to its obligations under Section 6(b)(1) of
the Act to enforce compliance with federal securities laws.
---------------------------------------------------------------------------

    \75\ See 17 CFR 240.11a2-2(T)(a)(2)(iv). In addition, Rule 11a2-
2(T)(d) requires a member or associated person authorized by written
contract to retain compensation, in connection with effecting
transactions for covered accounts over which such member or
associated persons thereof exercises investment discretion, to
furnish at least annually to the person authorized to transact
business for the account a statement setting forth the total amount
of compensation retained by the member in connection with effecting
transactions for the account during the period covered by the
statement which amount must be exclusive of all amounts paid to
others during that period for services rendered to effect such
transactions. See also 1978 Release, at 11548 (stating ``[t]he
contractual and disclosure requirements are designed to assure that
accounts electing to permit transaction-related compensation do so
only after deciding that such arrangements are suitable to their
interests'').
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vi. Conclusion
    In conclusion, the Exchange believes that the proposed rule change
would enhance the experience of investors looking to access liquidity
in the public market and fill an important role in the U.S. equities
market where liquidity may be more limited outside of the open and
close of trading. By introducing a price forming auction for the
aggregation and execution of buy and sell orders intraday, Periodic
Auctions would increase execution opportunities available to investors.
In turn, Periodic Auctions may improve trading outcomes for market
participants that have trouble sourcing liquidity in the public markets
today, including in thinly-traded securities where liquidity is often
limited and trading often occurs on a number of off-exchange venues
that can offer reduced market impact. As such, the Exchange believes
that the proposed rule change would remove impediments to and perfect
the mechanism of a free and open market.

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change would
impose any burden on competition that is not necessary or appropriate
in furtherance of the purposes of the Act. Rather, the proposed rule
change is designed to increase competition by introducing an