[Federal Register Volume 85, Number 17 (Monday, January 27, 2020)]
[Notices]
[Pages 4726-4752]
[FR Doc No: 2020-01253]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-88008; File No. SR-BatsBZX-2017-34]

Self-Regulatory Organizations; Bats BZX Exchange, Inc.; Order
Setting Aside Action by Delegated Authority and Approving a Proposed
Rule Change, as Modified by Amendments No. 1 and 2, To Introduce Cboe
Market Close, a Closing Match Process for Non-BZX Listed Securities
Under New Exchange Rule 11.28

January 21, 2020.

I. Introduction

    The official closing price for a listed security is generally
determined each day through a closing auction conducted by that
security's primary listing exchange. A closing auction is a point in
time event conducted at the end of each trading day pursuant to a
process set forth in the primary listing exchange's rules \1\ that
determines a security's official closing price by executing all orders
participating in the auction at a single price. Closing auctions are
designed to set closing prices that maximize the number of shares
executed and minimize the amount of the imbalance between orders to buy
a security and orders to sell a security. Market participants seeking
to execute orders at a security's official closing price may do so by
submitting a variety of order types to a closing auction, such as:
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    \1\ See, e.g., NYSE Rule 123C; and Nasdaq Rule 4754.
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     Market-on-close (``MOC'') orders, which are orders to
either buy or sell a security that are specifically designated to be
executed at a security's official closing price;

     limit-on-close (``LOC'') orders, which are orders to
either buy or sell a security at a specific price or better that are
specifically designated to execute in that security's closing auction;
and
     imbalance-only orders, which are limit orders (i.e.,
orders that specify a target execution price) designated to only
execute in a closing auction against an imbalance of closing auction
eligible trading interest, should there be any.
In addition, limit orders that are resting on the primary listing
exchange's order book at the time that a closing auction begins may
also participate in a closing auction.\2\ Furthermore, market
participants may seek to execute an order at the official closing price
on off-exchange venues, such as alternative trading systems (``ATSs'')
and with broker-dealers. While these orders that are executed off-
exchange would not be included in the closing auction on the primary
listing exchange, they would be executed at the official closing price
that is determined by the primary listing exchange.
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    \2\ Limit orders resting on an exchange's order book are orders
to buy or sell a security at specific price or better that are
eligible for execution at any point during regular intraday trading
or in a closing auction.
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    On May 5, 2017, Bats BZX Exchange, Inc. (now known as Cboe BZX
Exchange, Inc.) (``BZX'' or ``Exchange'') filed with the Securities and
Exchange Commission (``Commission''), pursuant to Section 19(b)(1) of
the Securities Exchange Act of 1934 (``Act'') \3\ and Rule 19b-4
thereunder,\4\ a proposed rule change to adopt a match process for MOC
orders in non-BZX listed securities referred to as ``Cboe Market
Close.'' \5\ Through Cboe Market Close, BZX would seek to match buy and
sell MOC orders for non-BZX listed securities and execute at BZX those
matched buy and sell MOC orders in such securities at the official
closing price published by the relevant primary listing exchange.
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    \3\ 15 U.S.C. 78s(b)(1).
    \4\ 17 CFR 240.19b-4.
    \5\ The Commission published notice of the proposed rule change
in the Federal Register on May 22, 2017. See Securities Exchange Act
Release No. 80683 (May 16, 2017), 82 FR 23320 (``Notice''). On July
3, 2017, the Commission designated a longer period within which to
approve the proposed rule change, disapprove the proposed rule
change, or institute proceedings to determine whether the proposed
rule change should be disapproved. See Securities Exchange Act
Release No. 81072, 82 FR 31792 (Jul. 10, 2017). On August 18, 2017,
the Commission instituted proceedings under Section 19(b)(2)(B) of
the Act, 15 U.S.C. 78s(b)(2)(B), to determine whether to approve or
disapprove the proposed rule change. See Securities Exchange Act
Release No. 81437, 82 FR 40202 (Aug. 24, 2017) (``OIP''). On
November 17, 2017, pursuant to Section 19(b)(2) of the Act, 15
U.S.C. 78s(b)(2), the Commission designated a longer period for
Commission action on proceedings to determine whether to disapprove
the proposed rule change. See Securities Exchange Act Release No.
82108, 82 FR 55894 (Nov. 24, 2017). On December 1, 2017, the
Exchange filed Amendment No. 1 to the proposed rule change, renaming
``Bats Market Close'' as ``Cboe Market Close.'' The only change in
Amendment No. 1 was to rename the proposed closing match process as
Cboe Market Close. Because Amendment No. 1 was a technical amendment
and did not materially alter the substance of the proposed rule
change or raise unique or novel regulatory issues, Amendment No. 1
was not subject to notice and comment. For purposes of consistency
and readability, all references to the proposed match process for
MOC orders discussed herein will be to ``Cboe Market Close.''
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    On January 17, 2018, the Commission, acting through authority
delegated to the Division of Trading and Markets,\6\ approved the
proposed rule change, as modified by Amendment No. 1 (``Approval
Order'').\7\ On January 31, 2018, NYSE Group, Inc. (``NYSE'') and The
Nasdaq Stock Market LLC (``Nasdaq'') filed petitions for review of the
Approval Order (``Petitions for Review''). Pursuant to Commission Rule
of Practice 431(e), the Approval Order was stayed by the filing with
the Commission of a notice of intention to petition for review.\8\ On
March 1, 2018, the Commission issued a scheduling order, pursuant to
Commission Rule of Practice 431, granting the Petitions for Review of
the Approval Order and providing until March 22, 2018, for any party or
other person to file a written statement in support of, or in
opposition to, the Approval Order.\9\ On April 12, 2018, NYSE and
Nasdaq submitted written statements in opposition to the Approval Order
and BZX submitted a written statement in support of the Approval
Order.\10\
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    \6\ 17 CFR 200.30-3(a)(12).
    \7\ Securities Exchange Act Release No. 82522, 83 FR 3205 (Jan.
23, 2018).
    \8\ 17 CFR 201.431(e). See Letter to Christopher Solgan,
Assistant General Counsel, Cboe Global Markets, Inc. (Jan. 24, 2018)
(providing notice of receipt of notices of intention to petition for
review of delegated action and stay of order), available at https://www.sec.gov/rules/sro/batsbzx/2018/sr-batsbzx-2017-34-letter-from-secretary-to-cboe.pdf.
    \9\ See Securities Exchange Act Release No. 82794, 83 FR 9561
(Mar. 6, 2018). On March 16, 2018, the Office of the Secretary,
acting by delegated authority, issued an order on behalf of the
Commission granting a motion for an extension of time to file
statements on or before April 12, 2018. See Securities Exchange Act
Release No. 82896, 83 FR 12633 (Mar. 22, 2018).
    \10\ See Statement of NYSE Group, Inc. in Opposition to the
Division's Order Approving a Rule to Introduce Cboe Market Close
(``NYSE Statement''); Statement of the Nasdaq Stock Market LLC in
Opposition to Order Granting Approval of a Proposed Rule Change, as
Modified by Amendment No. 1, to Introduce Cboe Market Close
(``Nasdaq Statement''); and Statement of Cboe BZX Exchange, Inc. in
Support of Commission Staff's Approval Order (``BZX Statement'').
The Nasdaq Statement included two reports, one by Harvey Pitt and
Chester Spatt (``Pitt/Spatt Report''), and one by Yakov Amihud and
Haim Mendelson (``Amihud/Mendelson Report'').
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    On October 4, 2018, BZX filed Amendment No. 2 to the proposed rule
change to address a comment made by NYSE and Nasdaq in their
statements. The Commission published Amendment No. 2 for comment in the
Federal Register on December 4, 2018.\11\ The Commission received one
comment letter on Amendment No. 2.\12\
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    \11\ See Securities Exchange Act Release No. 84670 (Nov. 28,
2018), 83 FR 62646 (``Amendment No. 2'').
    \12\ See Letter from Jeffrey S. Davis, Deputy General Counsel,
Nasdaq (Dec. 18, 2018) (``Nasdaq Letter 4'').
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    In response to the NYSE and Nasdaq Petitions, the Commission has
conducted a de novo review of BZX's proposal, giving careful
consideration to the entire record--including BZX's amended proposal,
the Petitions for Review, and all comments and statements submitted--to
determine whether the proposal is consistent with the requirements of
the Act and the rules and regulations issued thereunder that are
applicable to a national securities exchange. Under Section 19(b)(2)(C)
of the Act, the Commission must approve the proposed rule change of a
self-regulatory organization (``SRO'') if the Commission finds that the
proposed rule change is consistent with the requirements of the Act and
the applicable rules and regulations thereunder; if it does not make
such a finding, the Commission must disapprove the proposed rule
change.\13\ Additionally, under Rule 700(b)(3) of the Commission's
Rules of Practice, the ``burden to demonstrate that a proposed rule
change is consistent with the Exchange Act and the rules and
regulations issued thereunder . . . is on the self-regulatory
organization that proposed the rule change.'' \14\ The description of a
proposed rule change, its purpose and operation, its effect, and a
legal analysis of its consistency with applicable requirements must all
be sufficiently detailed and specific to support an affirmative
Commission finding.\15\ Any failure of a self-regulatory organization
to provide the information elicited by Form 19b-4 may result in the
Commission not having a sufficient basis to make an affirmative finding
that a proposed rule change is consistent with the Act and the rules
and regulations issued thereunder that are applicable to the self-
regulatory organization.\16\
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    \13\ 15 U.S.C. 78s(b)(2)(C).
    \14\ 17 CFR 201.700(b)(3).
    \15\ Id.
    \16\ Id.
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    The Commission has considered whether the proposal is consistent
with the Act, including Section 6(b)(8) of the

Act, which requires that the rules of a national securities exchange
not impose any burden on competition not necessary or appropriate in
furtherance of the purposes of the Act,\17\ as well as Section 6(b)(5)
of the Act, which requires, among other things, that the rules of a
national securities exchange be designed to prevent fraudulent and
manipulative acts and practices, remove impediments to and perfect the
mechanism of a free and open market and a national market system, and,
in general, protect investors and the public interest.\18\
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    \17\ 15 U.S.C. 78f(b)(8).
    \18\ 15 U.S.C. 78f(b)(8).
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    For the reasons discussed further herein, BZX has met its burden to
show that the proposed rule change is consistent with the Act, and this
order sets aside the Approval Order and approves BZX's proposed rule
change, as amended. In particular, the Commission concludes that the
record before the Commission demonstrates that Cboe Market Close should
introduce and promote competitive forces among national securities
exchanges for the execution of MOC orders. In addition, the record
demonstrates that Cboe Market Close should not disrupt the closing
auction price discovery process nor should it materially increase the
risk of manipulation of official closing prices. Therefore, and as
explained further below, the Commission finds the proposal consistent
with Sections 6(b)(8) and 6(b)(5) of the Act.
    The Commission recognizes that Cboe Market Close, once implemented,
would introduce a new match process for non-BZX listed securities, and
more generally, could potentially contribute to new dynamics in certain
aspects of the public equity markets. The Commission and Commission
staff regularly monitor changes in the equity markets, including
changes in market quality and investor outcomes (among other things),
and will be mindful of potential effects associated with Cboe Market
Close. To that end, no later than one year after the date that Cboe
Market Close becomes effective, the Commission staff will advise the
Commission of its assessment of any post-implementation effects or
changes on market quality or investor outcomes. The Commission and
Commission staff regularly receive input from the public, including
investors, other exchanges and markets, and other market participants
on matters related to market quality, investor outcomes and related
issues. For convenience, we are providing an email box as a method for
members of the public who wish to submit data, analyses or observations
concerning any such matters, including in respect of post-
implementation effects or changes associated with Cboe Market Close, to
communicate with the Commission's staff. That email box is:
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    \19\ Submissions received may be made public; personal
identifying information in the submission will not be redacted or
edited, so you should submit only information that you wish to make
available publicly.
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II. Summary of the Proposal

    BZX proposes to introduce Cboe Market Close, a match process for
MOC orders \20\ in non-BZX listed securities. Through Cboe Market
Close, a BZX Member would be able to submit buy and sell MOC orders for
non-BZX listed securities to the BZX System.\21\ Cboe Market Close
would not accept LOC orders or any other order types. Once accepted,
the System would seek to match buy and sell MOC orders and execute
those matched buy and sell MOC orders at the official closing price for
the security that is published by its primary listing exchange.
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    \20\ BZX defines the term ``Market-On-Close'' or ``MOC'' to mean
a BZX market order that is designated for execution only in the
Closing Auction. See Exchange Rule 11.23(a)(15). The Exchange
proposed to amend the description of Market-On-Close orders to
include orders designated to execute in the proposed Cboe Market
Close. A BZX market order is defined in BZX Rule 11.9(a)(1) as
``[a]n order to buy or sell a stated amount of a security that is to
be executed at the NBBO when the order reaches the Exchange . . .
.''
    \21\ The term ``System'' is defined as ``the electronic
communications and trading facility designated by the Board through
which securities orders of Users are consolidated for ranking,
execution and, when applicable, routing away.'' See BZX Rule
1.5(aa). The term ``Board'' is defined as ``the Board of Directors
of the Exchange.'' See BZX Rule 1.5(f).
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    BZX Members \22\ would be able to enter, cancel, or replace MOC
orders designated for participation in Cboe Market Close beginning at
6:00 a.m. Eastern Time until 3:35 p.m. Eastern Time (``MOC Cut-Off
Time'').\23\ Members would not be able to enter, cancel, or replace MOC
orders designated for participation in the proposed Cboe Market Close
after the MOC Cut-Off Time.
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    \22\ The term ``Member'' is defined as ``any registered broker
or dealer that has been admitted to membership in the Exchange.''
See BZX Rule 1.5(n).
    \23\ Currently, the NYSE designates the cut-off time for the
entry of NYSE Market At-the-Close Orders as 3:50 p.m. Eastern Time.
See NYSE Rule 123C. Nasdaq, in turn, designates the cut-off time for
the entry of Nasdaq Market On Close Orders as 3:55 p.m. Eastern
Time. See Nasdaq Rule 4702.
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    Members would be required to mark as ``short'' or ``short exempt''
all short sale MOC orders. MOC orders marked short would be rejected,
while MOC orders marked short exempt would be accepted and processed by
the System.\24\
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    \24\ See Amendment No. 2. In Amendment No. 2, the Exchange added
Interpretation and Policies .04 to proposed BZX Rule 11.28 to
reflect the handling of MOC orders marked as ``short'' or ``short
exempt.'' The Exchange stated that all MOC orders marked short would
be rejected to ensure that the Exchange is able to comply with the
Exchange's obligations under Rule 201 of Regulation SHO in the event
a short sale circuit breaker is triggered and the official closing
price determined by the primary listing exchange is not above the
national best bid.
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    At the MOC Cut-Off Time, the System would match for execution all
buy and sell MOC orders entered into the System with execution priority
determined based on time-received.\25\ Any remaining balance of
unmatched shares would be cancelled and returned to the Member(s). The
System would disseminate, via the Cboe Auction Feed,\26\ the total size
of all buy and sell MOC orders matched per security via Cboe Market
Close. All matched buy and sell MOC orders would remain on the System
until the publication of the official closing price by the primary
listing exchange. Upon publication of the official closing price by the
primary listing exchange, the System would execute all previously
matched buy and sell MOC orders at that official closing price.\27\ If
there is no initial official closing price published by 8:00 p.m.
Eastern Time for any security, BZX

would cancel all matched MOC orders in such security.
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    \25\ As set forth in proposed Interpretation and Policy .02, the
Exchange would cancel all MOC orders designated to participate in
Cboe Market Close in the event the Exchange becomes impaired prior
to the MOC Cut-Off Time and is unable to recover within 5 minutes
from the MOC Cut-Off Time. The Exchange states that this would
provide Members time to route their orders to the primary listing
exchange's closing auction. Should the Exchange become impaired
after the MOC Cut-Off Time, proposed Interpretation and Policy .02
states that the Exchange would retain all matched MOC orders and
execute those orders at the official closing price once it is
operational.
    \26\ The Cboe Auction Feed disseminates information regarding
the current status of price and size information related to auctions
conducted by the Exchange and the data is provided at no charge. See
BZX Rule 11.22(i). The Exchange also proposed to amend BZX Rule
11.22(i) to reflect that the Cboe Auction Feed would also include
the total size of all buy and sell orders matched via Cboe Market
Close.
    \27\ The Exchange would report the execution of all previously
matched buy and sell orders to the applicable securities information
processor and will designate such trades as ``.P'', Prior Reference
Price. See Notice at 23321. In the case where the primary listing
exchange suffers an impairment and is unable to perform its closing
auction process, BZX would utilize the official closing price
published by the exchange designated by the primary listing
exchange. See proposed Interpretation and Policy .01. In addition,
proposed Interpretation and Policy .03 specifies that up until the
closing of the applicable securities information processor at 8:00
p.m. Eastern Time, BZX intends to monitor the initial publication of
the official closing price, and any subsequent changes to the
published official closing price, and adjust the price of such
trades accordingly.
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    BZX states that it is proposing to adopt Cboe Market Close in
response to requests from market participants, particularly buy-side
firms, for an alternative to the primary listing exchanges' closing
auctions that still provides an execution at a security's official
closing price.\28\ BZX intends to file a separate proposal related to
fees for MOC orders executed in the Cboe Market Close. BZX stated that,
under this separate proposal, the fees for Cboe Market Close would be
set and maintained over time at a rate less than the fee charged by the
applicable primary listing exchange for its own respective closing
mechanism.\29\
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    \28\ See Notice at 23321.
    \29\ See id.
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    BZX contends that the proposal would not compromise the price
discovery function performed by the primary listing exchanges' closing
auctions because Cboe Market Close would only accept, match, and
execute MOC orders, which are designated to execute at the security's
official closing price.\30\ In order to avoid an impact on price
discovery, BZX states that Cboe Market Close would not accept limit
orders, which are orders to buy or sell a security at a specific price
or better and are the basis from which price formation occurs in a
closing auction.\31\
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    \30\ See BZX Rule 11.9(a)(2) which defines a ``limit order'' as
``[a]n order to buy or sell a stated amount of a security at a
specified price or better.''
    \31\ See Notice at 23321.
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III. Discussion and Commission Findings

    The Commission finds that the proposed rule change is consistent
with the requirements of the Act and the rules and regulations
thereunder applicable to a national securities exchange.\32\ The
Commission therefore approves the proposed rule change. In particular,
as discussed below, the Commission finds that the proposal is
consistent with: Section 6(b)(8) of the Act,\33\ which requires that
the rules of a national securities exchange not impose any burden on
competition not necessary or appropriate in furtherance of the purposes
of the Act; and Section 6(b)(5) of the Act,\34\ which requires that the
rules of a national securities exchange, among other things, be
designed to prevent fraudulent and manipulative acts and practices,
promote just and equitable principles of trade, remove impediments and
perfect the mechanism of a free and open market and a national market
system, and, in general, protect investors and the public interest.
Further, the Commission believes that the proposal is consistent with
the statutory objective of fair and orderly markets under Section 11A
of the Act.
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    \32\ In approving this proposed rule change, the Commission has
considered the proposed rule change's impact on efficiency,
competition, and capital formation. See 15 U.S.C. 78c(f). The
Commission addresses comments about economic effects of the proposed
rule change on efficiency and competition below in Section III.A.
The Commission addresses the effects of the proposed rule change on
capital formation below in Sections III.B.1 and III.C.
    \33\ 15 U.S.C. 78f(b)(8).
    \34\ 15 U.S.C. 78f(b)(5).
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    The Commission received a number of comment letters addressing the
proposed rule change's consistency with these provisions, specifically
focusing on its potential effect on: (1) Competition; (2) price
discovery and fragmentation; (3) issuers and other market participants;
(4) market complexity and operational risk; and (5) manipulation. The
Commission addresses each of these issues below.
    First, the Commission addresses arguments raised that the proposal
is inconsistent with Section 6(b)(8) of the Act because it would burden
competition by, among other things, free-riding on the investments of
the primary listing exchanges in their closing auctions. We find that,
on the contrary, the proposal will not impose any burden on competition
not necessary or appropriate in furtherance of the purposes of the Act,
and, in fact, it should promote competition among MOC order execution
venues and foster price competition for MOC order execution fees.
    Second, the Commission addresses comments regarding the proposal's
consistency with Section 6(b)(5) of the Act. These commenters argue
that the proposal would fragment the execution of MOC orders and
thereby disrupt closing auction price discovery, increase market
complexity and operational risk, and increase the risk of manipulation
through, among things, information asymmetries. The Commission finds,
based on Cboe Market Close's design and the record before us, that the
proposal is consistent with Section 6(b)(5) of the Act. As explained
below, because Cboe Market Close will only execute MOC orders against
other MOC orders, it should not disrupt the closing auction price
discovery process. Furthermore, Cboe Market Close should not
significantly increase market complexity and operational risk because
it will simply constitute an additional optional MOC order execution
venue for market participants, and an optional data feed that market
participants may choose to monitor for information regarding the total
size of matched MOC orders via Cboe Market Close. Lastly, as discussed
below, Cboe Market Close should not materially increase the risk of
manipulation through information asymmetries because the information
that may be discerned by participants of Cboe Market Close is of
limited usefulness, and BZX has made detailed commitments regarding its
plans to surveil, detect, and prevent against any potential
manipulation through the use of Cboe Market Close.

A. Effect on Competition

1. Price Competition and ``Free Riding''
a. Comments on the Proposal
    A number of commenters addressed the proposal's effect on
competition. Some commenters supporting the proposal stated that it
would increase competition among exchanges for executions of orders at
the close.\35\ These commenters asserted that increased competition
could result in reduced fees for market participants.\36\ Some of these
commenters characterized the primary listing exchanges as maintaining a
``monopoly'' on orders seeking a closing price with no market
competition, which they argued has, and would continue to, result in a
continual increase in fees for such orders if the proposal were not
approved.\37\ Commenters also asserted that the primary listing
exchanges have taken advantage of increasing volume at the close by
charging significantly higher fees for participation in the closing
auctions than for intraday

trading.\38\ One commenter added that the high costs of closing
transactions are exacerbated because primary listing exchanges assess a
fee on both sides of the closing auction executions, and imbalance
feeds for auctions are only available as part of the exchanges' premium
data products.\39\ Two commenters who opposed the proposal acknowledged
that increasing fees and lack of price competition with respect to
closing auctions are of concern, but suggested alternatively that
regulatory checks on closing auction pricing, such as fee caps, could
be put into place.\40\
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    \35\ See Letters from: Donald K. Ross, Jr., Executive Chairman,
PDQ Enterprise, LLC (June 6, 2017) (``PDQ Letter''); Ray Ross, Chief
Technology Officer, Clearpool Group (June 12, 2017) (``Clearpool
Letter'') at 2; Venu Palaparthi, SVP, Compliance, Regulatory and
Government Affairs, Virtu Financial (June 12, 2017) (``Virtu
Letter'') at 2; Theodore R. Lazo, Managing Director and Associate
General Counsel, SIFMA (June 13, 2017) (``SIFMA Letter 1'') at 2;
John Ramsay, Chief Market Policy Officer, Investors Exchange LLC
(June 23, 2017) (``IEX Letter'') at 1; David M. Weisberger, Head of
Equities, ViableMkts (Aug. 3, 2017) (``ViableMkts Letter'') at 1-2;
and Donald Bollerman (Aug. 18, 2017) (``Bollerman Letter'') at 2.
    \36\ See PDQ Letter; Clearpool Letter at 2; Virtu Letter at 2;
SIFMA Letter 1 at 2; IEX Letter at 1; ViableMkts Letter at 1;
Bollerman Letter at 2; and Letter from Theodore R. Lazo, Managing
Director and Associate General Counsel, SIFMA (Aug. 18, 2017)
(``SIFMA Letter 2'').
    \37\ See IEX Letter at 3; Clearpool Letter at 2; and ViableMkts
Letter at 1-2. However, one commenter also stated that it believes
the fees charged by NYSE and Nasdaq for participating in their
closing auctions are not excessive and there is no need for
additional fee competition for executing orders at the official
closing price. See Letter from Ari M. Rubenstein, Co-Founder and
Chief Executive Officer, GTS Securities LLC (June 22, 2017) (``GTS
Securities Letter 1'') at 5.
    \38\ See, e.g., Clearpool Letter at 2; and ViableMkts Letter at
1-2 (estimating that the average ``capture'' for MOC orders executed
in the Nasdaq and NYSE closing auctions is likely over 20 mils per
share compared to the average capture that ranges from a negative
number to 10 mils on Nasdaq and from a negative number to 16 mils on
NYSE for intraday executions).
    \39\ See Clearpool Letter at 2.
    \40\ See Letters from: Ari M. Rubenstein, Co-Founder and Chief
Executive Officer, GTS Securities LLC (Aug. 17, 2017) (``GTS
Securities Letter 2'') at 6 (acknowledging that many market
participants were concerned that the primary listing exchanges
``have too much pricing power relative to the closing auction'');
and Mehmet Kinak, Head of Global Equity Market Structure &
Electronic Trading, et al., T. Rowe Price Associates, Inc. (July 7,
2017) (``T. Rowe Price Letter'') at 3 (stating that closing auction
fees ``have been steadily increasing in the absence of competitive
alternatives'').
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    One commenter argued that the proposal does not unduly burden
competition as exchanges often attempt to compete by adopting
functionality or fee schedules developed by competitors.\41\ Another
commenter also asserted that the proposal is not fully competitive with
closing auctions, as it does not accept priced orders or disseminate
imbalance information.\42\ Rather, the commenter believed that the
proposal competes with other un-priced orders in closing auctions
which, in its view, is not ``destructive to the mission of the closing
auction.'' \43\
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    \41\ See IEX Letter at 3.
    \42\ See ViableMkts Letter at 5.
    \43\ See id. ViableMkts also argued that the effect of this
competition will most likely be increased volumes at the closing
price because of lower marginal costs and the potential to attract
new types of investors to transact at the closing price. See id.
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    In contrast, other commenters argued that the proposal would impose
a burden on competition not necessary or appropriate in furtherance of
the purposes of the Act, including by ``free-riding'' on the
investments the primary listing exchanges have made in their closing
auctions.\44\ These commenters asserted that the proposal would
unfairly burden competition as it would allow BZX to use the closing
prices established through the auction of a primary listing exchange,
without bearing any of the attendant costs or risks.\45\ In particular,
NYSE and Nasdaq asserted that the existing exchange fees for closing
auctions reflect the investments that have been made in developing and
operating the closing auctions, including the rules and procedures
governing the auctions, the technology to determine the official
closing price of a security, and the surveillance tools necessary to
monitor the closing process.\46\ In addition, Nasdaq and NYSE
highlighted the regulatory costs related to operating a closing
auction.\47\ Specifically, Nasdaq and NYSE cited compliance costs
associated with Regulation Systems Compliance and Integrity
(``Regulation SCI'').\48\ Nasdaq and NYSE explained that Regulation SCI
was adopted by the Commission to enhance the robustness and resiliency
of the technological systems of ``SCI entities,'' including
exchanges.\49\ They stated that closing auctions are ``critical SCI
systems'' under Regulation SCI, and as such, are subject to heightened
requirements and increased compliance costs, as compared to other ``SCI
systems.'' \50\ Nasdaq and NYSE asserted that, because Cboe Market
Close is not a closing auction and thus not a ``critical SCI system''
under the regulation, BZX would be at a competitive advantage by not
having to incur such additional compliance costs when competing to
attract MOC orders.\51\ Because BZX would not have to bear any of the
aforementioned expenses of developing and conducting a closing auction,
NYSE and Nasdaq concluded that BZX would be able to charge fees to
execute MOC orders at the official closing price at a price with which
the primary listing exchanges could not realistically compete.\52\
Nasdaq further argued that because the closing fees of NYSE and Nasdaq
would always be undercut by BZX, it would diminish incentives for the
primary listing exchanges to invest in enhancements to their closing
auctions.\53\ In addition, Nasdaq argued that the proposal would
decrease incentives to serve as a listing exchange if it could not
offset the cost of its regulatory responsibilities as a listing
exchange with the revenue derived from executing MOC orders in Nasdaq-
listed securities.\54\
---------------------------------------------------------------------------

    \44\ See, e.g., Letters from: Elizabeth K. King, General Counsel
and Corporate Secretary, NYSE (June 13, 2017) (``NYSE Letter 1'') at
9-10; Elizabeth K. King, General Counsel and Corporate Secretary,
NYSE (Nov. 3, 2017) (``NYSE Letter 3'') at 1; Edward S. Knight,
Executive Vice President and General Counsel, Nasdaq, Inc. (June 12,
2017) (``Nasdaq Letter 1'') at 5-6 & 9; Edward S. Knight, Executive
Vice President and General Counsel, Nasdaq, Inc. (Sept. 18, 2017)
(``Nasdaq Letter 2'') at 7-8; Jon Stonehouse, CEO, and Tom Staab,
CFO, BioCryst Pharmaceuticals, Inc. (July 31, 2017) (``BioCryst
Letter'') at 2; Charles Beck, Chief Financial Officer, Digimarc
Corporation (Aug. 3, 2017) (``Digimarc Letter'') at 1-2; Michael J.
Chewens, Senior Executive Vice President & Chief Financial Officer,
NBT Bancorp Inc. (Aug. 11, 2017) (``NBT Bancorp Letter'') at 2;
Patrick L. Donnelly, Executive Vice President & General Counsel,
Sirius XMHoldings Inc. (Aug. 17, 2017) (``Sirius Letter'') at 2; and
Gabrielle Rabinovitch, VP, Investor Relations, PayPal Holdings, Inc.
(Sept. 12, 2017) (``PayPal Letter'') at 1; NYSE Statement at 14-18;
Nasdaq Statement at 10-16; and Pitt/Spatt Report at 11-12, 19-20.
See also Letter from James J. Angel, Associate Professor, McDonough
School of Business, Georgetown University (July 30, 2017) (``Angel
Letter'') at 3 (calling for a rationalization of intellectual
property protection in order to foster productive innovation).
    \45\ See, e.g., NYSE Letter 1 at 9; NYSE Letter 3 at 5; NYSE
Statement at 14-18; Nasdaq Statement at 10-16; Pitt/Spatt Report at
11-12, 19-20; and Letters from: Elizabeth K. King, General Counsel
and Corporate Secretary, NYSE (Aug. 9, 2017) (``NYSE Letter 2'') at
1-3; and Elizabeth K. King, General Counsel and Corporate Secretary,
NYSE (Jan. 12, 2018) (``NYSE Letter 4'') at 1. In contrast, one
commenter argued that BZX would not be ``free-riding'' on the
primary listing exchanges' price discovery process because it is ``a
regular and accepted practice'' to match orders at reference prices.
See SIFMA Letter 2 at 2.
    \46\ See NYSE Letter 1 at 9; NYSE Letter 2 at 2; NYSE Letter 3
at 5; NYSE Statement at 14-16; and Nasdaq Statement at 11, 15.
Moreover, NYSE stated that it dedicates resources to providing
systems to designated market makers (``DMMs'') necessary to
facilitate the closing of trading as well as to floor brokers to
enter and manage their customers' closing interest. See NYSE Letter
2 at 2; and NYSE Statement at 15.
    \47\ See Nasdaq Statement at 11-12; and NYSE Statement at 15-16.
    \48\ See Nasdaq Statement at 11-12; and NYSE Statement at 15-16.
    \49\ See Nasdaq Statement at 11-12; and NYSE Statement at 15-16.
    \50\ See Nasdaq Statement at 11-12; and NYSE Statement at 15-16.
    \51\ See Nasdaq Statement at 11-12; and NYSE Statement at 15-16.
Nasdaq and NYSE also argued that Cboe Market Close results in
regulatory disparities similar to those that the Commission found in
its Benchmark Disapproval Order to unnecessarily and inappropriately
burden competition. See discussion, infra Section III.A.2.
    \52\ See Nasdaq Statement at 11-12; and NYSE Statement at 15-16.
NYSE stated that the majority of costs associated with operating a
closing auction are fixed costs. If NYSE were to reduce the fees
charged for participating in its closing auction, NYSE stated that
there likely would be other impacts on the exchange's overall fee
structure. See NYSE Statement at 15-16.
    \53\ See Nasdaq Statement at 11. See also PayPal Letter at 1
(citing concerns about the ``incentive structure'' that the proposal
presents).
    \54\ See Nasdaq Statement at 12-13.
---------------------------------------------------------------------------

    Nasdaq and NYSE further stated that BZX is not proposing to develop
its own auction or improve the functionality of the closing auctions in
the primary listing exchanges, but rather merely using the price
generated by the listing exchanges through their proprietary
processes.\55\ Nasdaq added that in order

for BZX to meaningfully enhance competition, it would have to generate
its own closing price.\56\ NYSE also stated that the proposal differs
from the competing auctions currently run by Nasdaq and NYSE Arca in
securities not listed on their exchanges because those auctions are
independent price-discovery auction events that do not rely on prices
established by the primary listing exchange. Therefore, in NYSE's view,
those auctions compete on a ``level playing field'' and serve as an
alternative method of establishing an official closing price if a
primary listing exchange is unable to conduct a closing auction due to
a technology issue.\57\
---------------------------------------------------------------------------

    \55\ See Nasdaq Statement at 15 (citing also the Pitt/Spatt
Report, which asserted that the Cboe Market Close `is not . . . a
strategically equivalent product to that previously developed by
Nasdaq'); and NYSE Statement at 14-15, 19-20. See also Pitt/Spatt
Report at 11-12 (noting the Cboe Market Close ``deliberately lacks
any mechanism for determining the price'' at which matched MOCs
would be executed and is dependent on the Nasdaq closing cross).
    \56\ See Nasdaq Statement at 13. See also infra notes 240-242
(discussing comments on the proposal's effect on price discovery and
competing auctions and over-the-counter matching services).
    \57\ See NYSE Letter 1 at 6; NYSE Letter 2 at 3-4; NYSE Letter 3
at 5; and NYSE Statement at 20 n.59. In response, one commenter
stated that these competing auctions were not originally proposed to
only serve as a back-up to a primary listing exchanges' closing
auction. See SIFMA Letter 2 at 2. In addition, one commenter stated
that such competing auctions are not expressly limited to operating
only when another primary listing exchange is experiencing a
failure. See Bollerman Letter at 3.
---------------------------------------------------------------------------

    Nasdaq also argued that the proposal undermines intra-market
competition, by removing orders from Nasdaq's auction book.\58\
Specifically, Nasdaq asserted that, by diverting orders away from NYSE
and Nasdaq, the proposal would detract from robust price competition
and discovery, which Nasdaq argued is necessary for the exchange to
arrive at the most accurate closing price.\59\ NYSE also argued that
the proposal affects competition for listings, as issuers choose where
to list their securities based on how primary listing exchanges are
able to centralize liquidity and perform closing auctions.\60\ In
addition, Nasdaq argued that price competition between exchanges is not
as important a form of competition as innovation because price
competition elevates fragmentation, sacrifices quote and order
interaction, and, in the case of Cboe Market Close, undermines
innovation.\61\ Further, Nasdaq stated that BZX's comparisons to pegged
orders--where the price is based upon reference data that does not
originate on that exchange--were misplaced because all exchanges
contribute to the prices to which such orders are pegged, whereas BZX
does not contribute to the closing price on a primary listing
exchange.\62\
---------------------------------------------------------------------------

    \58\ See Nasdaq Letter 1 at 9; and Nasdaq Statement at 12-14.
    \59\ See Nasdaq Letter 1 at 10; Nasdaq Letter 2 at 7-8; and
Nasdaq Statement at 13. See also infra Section III.B (discussing
comments on the proposal's effect on price discovery).
    \60\ See NYSE Letter 1 at 9.
    \61\ See Nasdaq Letter 2 at 8.
    \62\ See id. at 13.
---------------------------------------------------------------------------

    Nasdaq and NYSE also disputed the purported benefits of the
proposal for market participants.\63\ First, Nasdaq and NYSE asserted
that the cost savings from Cboe Market Close is unlikely to be passed
along to investors because broker-dealers typically pay an exchange's
transaction fees.\64\ Further, Nasdaq and NYSE asserted that the
proposal would not enhance competition with respect to execution
quality, but rather may harm execution quality.\65\ In this regard,
Nasdaq argued that because orders would be irrevocable earlier than on
the listing exchange, it would impair the price discovery function on
the primary listing exchanges' closing auctions,\66\ while NYSE stated
that the proposal would reduce the amount of MOC orders in the closing
auctions, thereby reducing the quality of the closing price and
inhibiting competition.\67\
---------------------------------------------------------------------------

    \63\ See Nasdaq Statement at 16; and NYSE Statement at 18-19.
    \64\ See Nasdaq Statement at 16; and NYSE Statement at 18-19.
    \65\ See Nasdaq Statement at 16; and NYSE Statement at 20.
    \66\ See Nasdaq Statement at 16.
    \67\ See NYSE Statement at 20.
---------------------------------------------------------------------------

b. BZX Response to Comments
    BZX asserted that the proposal would enhance rather than burden
competition by promoting competition in the use of MOC orders.\68\
Specifically, BZX stated that the proposal would have a positive effect
on competition as it offers a price-competitive alternative that will
not affect the price discovery process.\69\ BZX stated that it believes
that this increased price competition will result in lower fees for
market participants seeking an execution of MOC orders at the official
closing price.\70\ In response to NYSE and Nasdaq assertions that fee
reductions would not be passed along to investors, BZX argued that,
even if broker-dealers do not directly pass through lower fees to their
customers, customers would still receive indirect benefits from lower
execution fees such as general fee reductions from broker-dealers or
other improvements that broker-dealers may make due to cost
savings.\71\
---------------------------------------------------------------------------

    \68\ See Letters from: Joanne Moffic-Silver, Executive Vice
President, General Counsel, and Corporate Secretary, Bats Global
Markets, Inc. (Aug. 2, 2017) (``BZX Letter 1'') at 10-11; and Joanne
Moffic-Silver, Executive Vice President, General Counsel, and
Corporate Secretary, Bats Global Markets, Inc. (Oct. 11, 2017)
(``BZX Letter 2'') at 6-7. BZX further argued that Nasdaq's
assertion that the proposal would undermine competition amongst
orders is misplaced. BZX believes that paired-off MOC orders--which
are not price-setting orders but rather the beneficiaries of price
discovery--do not affect interactions that take place on another
exchange because orders compete with each other for executions
within each individual exchange based on the parameters a market
participant places on its orders. See BZX Letter 1 at 11.
    \69\ See BZX Letter 2 at 7.
    \70\ See BZX Statement at 22.
    \71\ See BZX Letter 2 at 7.
---------------------------------------------------------------------------

    BZX also challenged the assertion that it was ``free-riding'' on
the primary listing exchanges' closing auctions.\72\ BZX argued that
instead it was, on balance, providing a ``a materially better value to
the marketplace'' in two ways: by not diverting price-forming limit
orders away from the primary listing exchange; and by providing users
with the official closing price because any other price would be
undesirable to market participants and potentially harmful to price
formation.\73\ BZX further argued that there is precedent for an
exchange to execute orders solely at reference prices while not also
displaying priced orders for that security.\74\ In addition, BZX stated
that no rule or regulation provides the primary listing exchange with
control over how other market participants use the official closing
price in their matching engines or with regard to the pricing of their
own products, such as mutual funds, ETFs, and indices.\75\ BZX also
stated that improving and mimicking functionality enhances the
competitive dynamic among exchanges.\76\ Further, BZX stated that the
Commission has approved the operation of competing closing auctions,
noting in particular the closing auctions on Nasdaq, NYSE Arca, and the
American Stock Exchange.\77\
---------------------------------------------------------------------------

    \72\ See BZX Letter 1 at 5; and BZX Letter 2 at 7.
    \73\ See BZX Letter 1 at 5.
    \74\ See BZX Letter 1 at 6; and BZX Letter 2 at 7 (describing
NYSE's after hours crossing sessions which execute orders at the
NYSE official closing price and the ISE Stock Exchange functionality
that only executed orders at the midpoint of the NBBO and did not
display orders).
    \75\ See BZX Letter 2 at 8.
    \76\ See id.
    \77\ See BZX Letter 1 at 6. See also infra Section III.B.3
(discussing BZX's comments on competing closing auctions with regard
to price discovery). In addition, in response to Nasdaq's contention
that it is aware of no regulator in any jurisdiction that has
sanctioned a diversion of orders from the primary listing exchange
closing auction, BZX noted the Ontario Securities Commission's
approval of a similar proposal by Chi-X Canada ATS, which it said is
currently owned by Nasdaq, to match MOC orders at the closing price
established by the Toronto Stock Exchange. See Nasdaq Letter 1 at
10; BZX Letter 1 at 7; and BZX Letter 2 at 2 (stating that the
Ontario Securities Commission found that the proposal would not
threaten the integrity of the price formation process and would
pressure the Toronto Stock Exchange to competitively price
executions during their closing auction).

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

    BZX also asserted that Cboe Market Close would create benefits for
market participants beyond price competition.\78\ In particular, BZX
argued that it would be unable to attract order flow based solely on
lower execution fees, so it would have to build a ``viable alternative
venue to which market participants will choose to send their orders,''
including continually improving Cboe Market Close technology.\79\ This,
in turn, BZX argued, would likely cause the primary listing exchanges
to seek to improve quality and performance of their auctions, thereby
enhancing competition and benefiting market participants generally.\80\
---------------------------------------------------------------------------

    \78\ See BZX Statement at 23-24.
    \79\ See BZX Statement at 23-24.
    \80\ See BZX Statement at 23-24.
---------------------------------------------------------------------------

c. Commission Discussion and Findings
    BZX and other commenters have provided evidence that, over the past
several years, closing auction fees have steadily increased and are
significantly higher than fees for intraday trading.\81\ For example,
BZX stated that the per share proceeds (i.e., the per share fee charged
to the buyer plus the per share fee charged to the seller) for the
primary listing exchanges based on the top tier fees they assess for
closing auction trades is $0.0012 per share for NYSE and $0.0018 per
share for Nasdaq, while the primary listing exchanges' per share
proceeds from intraday trading based on the top tier fees and rebates
they assess for intraday trades are much lower, specifically $0.00055
for NYSE and -$0.00005 for Nasdaq.\82\ Another commenter estimated
that, under Nasdaq and NYSE's tiered fee structures, the average
proceeds from MOC orders executed in the Nasdaq and NYSE closing
auctions is likely over $0.0020 per share compared to the average per
share proceeds from intraday executions, which ranges from a negative
number to $0.0010 on Nasdaq and from a negative number to $0.0016 on
NYSE.\83\
---------------------------------------------------------------------------

    \81\ See Notice at 23321 and n.9; and supra notes 38-39 and
accompanying text. Specifically, BZX states that NYSE's closing
auction fees have gone up by 16%, while Nasdaq's fees have increased
by 60%. See Notice at 23321; and BZX Statement at 3 and n.11.
    \82\ See Notice at 23321; and BZX Statement at 3 and n.11. NYSE
and Nasdaq utilize fee structures whereby they pay per share rebates
to market participants who provide liquidity on their exchanges. As
a result, the per share proceeds figures for intraday trading
provided by BZX and other commenters may be reflected as negative
amounts because a rebate paid to a liquidity provider may, in some
instances, exceed the fee charged to a liquidity taker.
    \83\ See ViableMkts Letter at 1-2. See also Clearpool Letter at
2. The Commission notes that a recent academic paper supports this
notion. See Eric Budish, Robin S. Lee, and John J. Shim, Will the
Market Fix the Market? A Theory of Stock Exchange Competition and
Innovation, (May 6, 2019), available at https://www.nber.org/papers/w25855.pdf.
---------------------------------------------------------------------------

    While the development and ongoing costs associated with the primary
listing exchanges' closing auctions may play a role in the fees for
closing auctions, NYSE and Nasdaq have not provided any data or details
to support this assertion.\84\ And those costs are unlikely to account
for the entirety of the wide disparity between closing auction fees and
intraday trading fees demonstrated by BZX and other commenters. While
BZX would not be conducting the closing auction that would determine
the execution price for orders executed in Cboe Market Close, by
providing an additional exchange venue to execute MOC orders, the
availability of Cboe Market Close should foster price competition for
the execution of MOC orders. Further, as noted above, BZX stated that
it intends to file a separate proposal related to fees for MOC orders
executed in the Cboe Market Close that would set and maintain such fees
over time at a rate less than the fee charged by the applicable primary
listing exchange for its own respective closing mechanism.\85\ Although
some commenters argued that lower fees resulting from the proposal
would not generally benefit market participants because such fees are
typically not passed through from a broker-dealer to its customers, the
Commission believes that the costs of closing auctions can have a
negative effect on brokers and the investors that they serve,
particularly for smaller and mid-size brokers.\86\ The Commission
believes that fostering price competition for the execution of MOC
orders may facilitate the ability for smaller and mid-size brokers to
better compete for investors' MOC order flow, and greater choice among,
and participation by, broker-dealers in handling MOC orders should
inure to the benefit of end investors.
---------------------------------------------------------------------------

    \84\ The Commission requested such information in the OIP,
asking specifically: What are the current costs associated with a
primary listing market developing and operating a closing auction,
and to what extent (and if so, how) are these costs passed on to
market participants today? How do the fixed costs associated with
developing closing auctions compare to the variable costs of
conducting closing auctions? How do the revenues collected from
closing auctions compare to these costs? See OIP at 40211.
    \85\ See supra note 29 and accompanying text.
    \86\ See, e.g., Clearpool Letter at 1.
---------------------------------------------------------------------------

    While the primary listing exchanges and other commenters argue that
BZX is ``free riding'' on investments of the primary listing exchanges
in the development and maintenance of the closing auction process--and
thus impeding competition in a manner inconsistent with the Act--this
concern must be evaluated against the enhanced competition that the
proposal should provide. In particular, BZX has demonstrated that the
proposal will not impose a burden on competition that is not necessary
or appropriate in furtherance of the purposes of the Act because it
should promote competition among MOC order execution venues and foster
price competition for MOC order execution fees, areas which currently
appear to be lacking the same competitive forces as intraday trading.
In this regard, as discussed above, commenters assert that the primary
listing exchanges have taken advantage of the ``monopoly'' they have on
orders seeking a closing price to impose high per share fees for orders
executed in the closing auctions.\87\ Because Cboe Market Close will
provide an additional venue to execute MOC orders, the proposal should
introduce further competition, which may result in benefits to
investors generally. And while some commenters suggested capping
closing auction fees to address the lack of competition,\88\ Cboe
Market Close represents a market-based solution that is designed to
foster price competition for MOC orders without impairing the integrity
of the primary listing exchanges' closing auctions.
---------------------------------------------------------------------------

    \87\ See supra notes 36-38 and accompanying text.
    \88\ See supra note 40 and accompanying text.
---------------------------------------------------------------------------

    Moreover, in the highly competitive environment of the current
national market system with numerous exchanges competing for order
flow, it is commonplace for exchanges to attempt to mimic or build upon
various functionalities of their competitors.\89\ This practice does
not, in and of itself, result in a competitive burden that is not
necessary or appropriate in furtherance of the purposes of the Act.
While BZX is not proposing to generate

its own auction price, it has developed a process that will benefit the
market because, based on BZX's representations, it should foster price
competition and thereby decrease costs for market participants.\90\
---------------------------------------------------------------------------

    \89\ Exchanges regularly file proposed rule changes with the
Commission as required under Section 19(b) of the Act and Rule 19b-4
thereunder to adopt, for example, new products, order types, order
modifiers, price improvement mechanisms, risk mechanisms, and other
functionality that is based upon, and designed to compete with, that
of other competing exchanges. Reflecting this commonplace practice,
the requirements of Form 19b-4, with which exchanges must comply to
file such proposed rule changes, provide that exchanges must,
``[s]tate whether the proposed rule change is based on a rule either
of another self-regulatory organization or of the Commission, and if
so, identify the rule and explain any differences between the
proposed rule change and that rule . . .'' See Item 8, Form 19b-4,
available at: https://www.sec.gov/files/form19b-4.pdf.
    \90\ See supra note 29 and accompanying text.
---------------------------------------------------------------------------

    In addition to the proposal's intended effect on price competition,
the Commission also believes that the proposal may result in other
benefits to market participants generally, including execution quality
competition for MOC orders. The Commission believes that implementation
of Cboe Market Close could incent other venues, including the primary
listing exchanges, as well as ATSs and off-exchange matching venues, to
continue to innovate and compete to attract MOC orders to their venues.
As noted above, BZX stated that it would be unable to attract MOC order
flow solely on the basis of lower execution fees, and asserted that it
and the primary listing exchanges would continually need to improve
their technology and quality of their MOC order execution offerings in
order to compete for such order flow. The proposal would also provide
an opportunity for market participants to assess and compare their
experience in seeking to execute MOC orders on different national
securities exchanges and off-exchange venues, which would foster
further competition and may enhance the quality and efficiency of MOC
order executions.\91\
---------------------------------------------------------------------------

    \91\ See, e.g., ViableMkts Letter at 2 (stating that Cboe Market
Close may attract MOC liquidity from market participants that
currently may not utilize the primary listing exchanges' closing
auctions and that participation by these market participants may
also benefit the market more broadly).
---------------------------------------------------------------------------

    The primary listing exchanges argue that the proposal diminishes
incentives to invest in enhancements to closing auctions. But, in the
Commission's view, the proposal could actually incent these exchanges
to innovate and enhance their closing auctions in order to compete for
MOC orders despite the additional costs of obtaining a closing
execution on the primary listing exchange, to the extent the costs for
such executions will indeed be higher than those for Cboe Market
Close.\92\ Ultimately, the Commission believes that the success of the
Cboe Market Close in competing with the primary listing exchanges and
off-exchange matching venues for MOC orders will not depend solely on
lower fees. Rather, it will depend on a variety of factors, including
the quality of the MOC order execution services and the attendant risks
and costs associated with such executions.\93\
---------------------------------------------------------------------------

    \92\ While Nasdaq also argued that the proposal decreases
incentives to serve as a listing exchange if it cannot offset the
cost of regulatory responsibilities of being a listing exchange with
fees from the closing auction, the Commission finds such argument to
be unpersuasive. The Commission believes that the primary listing
exchanges have other means to recoup those costs such as using
existing fees such as their ``Trading Rights Fee,'' which they have
asserted is used to help defray costs of regulating the market.
    \93\ See infra note 195 and accompanying text.
---------------------------------------------------------------------------

    Among such factors that market participants may consider in
determining the venue to which it will send MOC orders are regulatory
protections, including Regulation SCI. The requirements of Regulation
SCI were designed to strengthen the infrastructure of the U.S.
securities markets and improve its resilience when technological issues
arise.\94\ As NYSE and Nasdaq pointed out, systems used for closing
auctions on the primary listing exchanges are ``critical SCI systems''
under Regulation SCI and as such, are held to heightened requirements
under the regulation as compared to ``SCI systems.'' The Commission
determined that closing auction systems are critical to the continuous
and orderly functioning of the securities markets because they, among
other things, establish official closing prices, and therefore they
should be subject to an increased level of obligation as compared to
other SCI systems.\95\ Accordingly, systems that directly support
closing auctions on the primary listing exchanges are subject to a two-
hour resumption goal following a wide-scale disruption and increased
information dissemination provisions following a systems issue.\96\
---------------------------------------------------------------------------

    \94\ See Securities Exchange Act Release No. 73639 (Nov. 19,
2014), 79 FR 72252 (Dec. 5, 2014) (``SCI Adopting Release'').
    \95\ See SCI Adopting Release at 72277-78. ``Critical SCI
systems'' are defined in Rule 1000 of Regulation SCI to include,
among other things, any SCI systems of, or operated by, or on behalf
of, an SCI entity that directly support functionality relating to
openings, reopenings, and closings on the primary listing market. 17
CFR 242.1000.
    \96\ See 17 CFR 242.1001(a)(2)(v) and 1002(c)(3). See also SCI
Adopting Release at 72277.
---------------------------------------------------------------------------

    NYSE and Nasdaq stated that there are additional costs due to
compliance with the heightened Regulation SCI requirements for their
closing auction systems that would put them at a competitive
disadvantage. Although Cboe Market Close systems, as proposed, would
also be subject to Regulation SCI as ``SCI systems,'' based on the
Regulation SCI rule definitions, they would not be ``critical SCI
systems,'' and thus would not be subject to the heightened requirements
of the regulation. Similarly, off-exchange MOC matching systems of ATSs
and broker-dealers would not be ``critical SCI systems'' and further,
may not be subject to any of the requirements of Regulation SCI if such
entities do not meet the definition of ``SCI entity'' under the
regulation.\97\ Importantly, Cboe Market Close is not a closing
auction, but rather matches and executes MOC orders at a security's
official closing price. Accordingly, Cboe Market Close will not serve
the same function to the markets as the closing auctions on the primary
listing exchanges. Regulation SCI, by design, takes a risk-based
approach, and designates as critical SCI systems those systems that the
Commission believes should be subject to the highest level of
requirements based on their criticality.\98\ The fact that systems
would be subject to different requirements of Regulation SCI because of
differences in their design, utility, and function does not establish a
burden on competition not necessary or appropriate in furtherance of
the purposes of the Act.
---------------------------------------------------------------------------

    \97\ Regulation SCI is not applicable to non-ATS broker-dealers.
Further, an ATS is only subject to the requirements of Regulation
SCI if it meets certain volume thresholds under the definition of
``SCI ATS.'' See 17 CFR 242.1000.
    \98\ In the SCI Adopting Release, the Commission acknowledged
that critical SCI systems may be subject to additional costs, but
stated that, ``by distinguishing critical systems, Regulation SCI is
consistent with a risk-based approach that targets areas that would
generate the most benefits.'' SCI Adopting Release at 72411.
---------------------------------------------------------------------------

    Additionally, the Commission believes that some market participants
could potentially view the lack of these heightened protections for
Cboe Market Close as a potential risk that may factor into their
determination as to whether to send MOC orders to BZX or to the primary
listing exchanges. Commenters, including the listing exchanges,
emphasized the importance of the closing auctions to the operation of
the markets, and touted such closing auctions' reliability, integrity,
stability, and resiliency.\99\ As such, the Commission believes that
market participants may continue to favor the primary listing exchanges
for their MOC order executions, in part, because such critical SCI
systems are subject to the heightened protections of Regulation SCI,
such that their MOC orders are being handled on trading platforms that
are subject to the highest operational resumption standards and are
thus designed to be less susceptible to the potential risk of
operational outages, instability or other disruptions.
---------------------------------------------------------------------------

    \99\ See, e.g., Nasdaq Letter 1 at 3 and Nasdaq Statement at 4-
5. Comment letters from listed issuers also referenced the
reliability, strength, and integrity of the closing auction
processes on the primary listing exchanges. See, e.g., NBT Bancorp
Letter, at 2.

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

    In addition, the primary listing exchanges advanced several
theories as to how the proposal could undermine other types of
competition, such as intramarket competition, by diverting orders away
from the primary listing exchanges and thereby preventing such orders
from interacting and competing on a primary listing exchange. But this
result is not unique to Cboe Market Close. In particular, when one
exchange innovates, makes enhancements, or modifies exchange fees, it
may result in market participants sending more order flow to one
exchange and less volume to other exchanges, thereby potentially
decreasing intramarket competition among orders on a particular
exchange. Thus, enhancing competition between exchanges will, in many
cases, have an inverse effect on intramarket competition. The
Commission does not believe this to be an inappropriate burden on
competition in this case.
2. Differing Regulatory Standards
a. Comments on the Proposal
    Several commenters referenced the Commission's order disapproving a
Nasdaq proposal to create a Benchmark Order (``Benchmark Disapproval
Order'') in arguing that BZX has not satisfied its obligation to
demonstrate that the proposal is consistent with the Act.\100\ Nasdaq
and NYSE characterized the Benchmark Disapproval Order as finding that
Nasdaq's proposal would give it an unfair advantage over competing
broker-dealers due to regulatory disparities, and the exchanges
asserted that similar regulatory disparities exist with BZX's proposal.
Specifically, NYSE and Nasdaq argued that the proposal creates a
disparate regulatory regime between the primary listing exchanges and
BZX because BZX would not be subject to the heightened standards
applicable to critical SCI systems under Regulation SCI, nor would BZX
be required to make or enforce rules for a closing auction.\101\ Nasdaq
further argued that the Benchmark Disapproval Order establishes that
``the Commission has been disinclined to approve proposed rule changes
in which the exchange cannot clearly articulate how a proposal to offer
a service is consistent with the policy goals of the Act with respect
to national securities exchanges,'' and BZX has not done so.\102\
---------------------------------------------------------------------------

    \100\ See Securities Exchange Act Release No. 68629 (Jan. 11,
2013), 78 FR 3928 (Jan. 17, 2013) (NASDAQ-2012-059).
    \101\ See NYSE Statement at 17-18; and Nasdaq Statement at 12.
See also supra notes 47-52 accompanying text (discussing the
regulatory costs of operating a closing auction, including those
related to Regulation SCI).
    \102\ See Nasdaq Letter 1 at 5.
---------------------------------------------------------------------------

    Similarly, SIFMA relied on the Benchmark Disapproval Order in
asserting that BZX is proposing to offer a function identical to that
currently offered by broker-dealers, yet would benefit from regulatory
immunity as well as the limits on liability contained in BZX Rule
11.16.\103\ SIFMA stated that, while it supports the proposal, it
believes that as a condition of approval, BZX and the Commission should
clarify in writing that Cboe Market Close would not be entitled to any
application of regulatory immunity and that the Exchange should amend
its Rule 11.16 to provide that Cboe Market Close would not be subject
to the monetary limits on the Exchange's liability.\104\
---------------------------------------------------------------------------

    \103\ See Letter from Theodore R. Lazo, Managing Director and
Associate General Counsel, SIFMA (Dec. 8, 2017) (``SIFMA Letter 3'')
at 2-4.
    \104\ See id. at 1.
---------------------------------------------------------------------------

    With respect to regulatory immunity, SIFMA asserted that both
courts and the Commission have stated that regulatory immunity applies
only in situations where an exchange is exercising its regulatory
authority over its member, pursuant to the Act.\105\ SIFMA stated that
because Cboe Market Close would not be a self-regulatory function
whereby the exchange would be regulating its members, BZX should not be
entitled to apply regulatory immunity for any losses arising from the
functionality.\106\ In addition, SIFMA stated that BZX Rule 11.16
currently limits the liability exposure of the Exchange to its
members.\107\ SIFMA asserted that BZX's limits on liability set forth
in Rule 11.16 ``bear no relation to the actual amount of financial loss
that could result from an exchange malfunction.'' \108\ SIFMA argued
that the ``disparity is particularly acute'' with respect to the
proposal because broker-dealers currently perform services akin to Cboe
Market Close without a limitation on their liability.\109\ Accordingly,
SIFMA stated that, as a condition of operating Cboe Market Close, BZX
should carve it out from the liability limits of Rule 11.16.\110\
---------------------------------------------------------------------------

    \105\ See id. at 2-3.
    \106\ See id. at 3.
    \107\ See BZX Rule 11.16.
    \108\ See SIFMA Letter 3 at 4.
    \109\ See id.
    \110\ See id.
---------------------------------------------------------------------------

b. BZX Response to Comments
    BZX argued that its proposal does not implicate the same issues as
the Benchmark Disapproval Order because the Commission's disapproval
rested primarily on its finding that it raised issues under the Market
Access Rule.\111\ BZX also stated that, unlike Nasdaq's proposal which
was designed to compete with the services offered by broker-dealers, it
is seeking to compete on price with the primary listing exchanges'
closing auctions.\112\
---------------------------------------------------------------------------

    \111\ See id. at 11.
    \112\ See BZX Letter 1 at 10.
---------------------------------------------------------------------------

    BZX responded to SIFMA's comments on regulatory immunity and its
limitation on liability rule by stating that the concerns raised were
``not germane to whether the [p]roposal is consistent with the Act,''
and further stated that it believed it would be inappropriate in the
context of a filing on one proposed rule change to set a new standard
on an issue that has broad application to all exchange services as well
as National Market System Plans.\113\ BZX also asserted that SIFMA did
not provide any evidence to support its claim that its members have
been disadvantaged by the Exchange's limitation of liability rule as
compared to limitation on liability provisions in a broker-dealer's
contracts with its clients, which often disclaim all liability.\114\
---------------------------------------------------------------------------

    \113\ See Letter from Joanne Moffic-Silver, Executive Vice
President, General Counsel, and Corporate Secretary, Cboe Global
Markets, Inc. (Jan. 3, 2018) (``BZX Letter 3'') at 5.
    \114\ See id.
---------------------------------------------------------------------------

c. Commission Discussion and Findings
    The Commission does not believe that the differing regulatory
standards applicable to Cboe Market Close and the primary listing
exchanges' closing auctions create an unfair burden on competition.
This is because, as discussed above, the Commission believes that, Cboe
Market Close differs from the primary listing exchanges' closing
auctions in design, utility, and function. As also discussed above, the
fact that closing auction systems are subject to the heightened
requirements of Regulation SCI for critical SCI systems could encourage
market participants to send MOC orders to closing auctions on the
primary listing exchanges due to the additional regulatory protections
required of such systems.\115\
---------------------------------------------------------------------------

    \115\ See supra notes 94-96 and accompanying text.
---------------------------------------------------------------------------

    With regard to SIFMA's comments regarding competition with broker-
dealer services and the applicability of limitations on liability, the
Commission believes Cboe Market Close may compete with the off-exchange
matching services operated by broker-dealers.\116\ Broker-dealers and
national securities exchanges currently compete with respect to a
variety of functions and services that they offer to market

participants within the current national market system. The Commission
does not agree with commenters' characterizations that the Benchmark
Disapproval Order broadly prohibits such competition or that the
existence of different regulatory requirements applicable to exchanges
on the one hand, and broker-dealers on the other hand is per se
evidence of an unfair competitive advantage. The fact that a national
securities exchange proposes to offer functionality that is similar to
a service offered by a broker-dealer does not, in and of itself, render
such functionality an inappropriate burden on competition. Rather, the
proposal must be considered in the broader context of the existing
competitive landscape and different regulatory structures applicable to
exchanges and broker-dealers under the Act, respectively. In
particular, while it is true that BZX may benefit from the protections
of its limitations on liability provisions that may not be available to
broker-dealers, this must be considered along with the other regulatory
requirements imposed on BZX that are not applicable to broker-dealers,
such as obligations to enforce compliance by its members and persons
associated with its members with the Act, the rules and regulations
thereunder, and its own rules, as discussed below, among others.\117\
Therefore, with respect to BZX's proposal, the Commission believes
that, on balance and in light of the differing requirements under the
Act and the rules and regulations thereunder applicable to national
securities exchanges and broker-dealers, the limitations on liability
available to BZX do not impose an inappropriate burden on competition
and the proposal is consistent with Section 6(b)(8) of the Act.
---------------------------------------------------------------------------

    \116\ See BZX Letter 2 at 11.
    \117\ 15 U.S.C. 78s(g)(1). The Commission also notes that MOC
orders submitted to other exchanges' closing auctions would
similarly be subject to those exchanges' rules governing limitations
on liability.
---------------------------------------------------------------------------

    With respect to the judicial doctrine of regulatory immunity, the
Commission has taken the position that immunity from suit ``is properly
afforded to the exchanges when engaged in their traditional self-
regulatory functions--where the exchanges act as regulators of their
members,'' including ``the core adjudicatory and prosecutorial
functions that have traditionally been accorded absolute immunity, as
well as other functions that materially relate to the exchanges'
regulation of their members,'' but should not ``extend to functions
performed by an exchange itself in the operation of its own market, or
to the sale of products and services arising out of those functions.''
\118\ The Court of Appeals for the Second Circuit recently reached a
similar conclusion.\119\ The Commission has also recognized that an
exchange's invocation of immunity from suit should be examined on a
```case-by-case basis,' with `the party asserting immunity bear[ing]
the burden of demonstrating [an] entitlement to it.' '' \120\ For
purposes of its consideration of BZX's proposal, the Commission notes,
as discussed in further detail below, that BZX represented that it
would continue to surveil for potentially manipulative activities and
BZX made commitments to enhance its surveillance procedures and work
with other SROs to detect and prevent manipulative activity through the
use of Cboe Market Close.\121\ However, whether and to what extent a
court would determine Cboe Market Close to fall within an exchange's
traditional regulatory functions depends on an assessment of the facts
and circumstances of the particular allegations before it and is beyond
the scope of the Commission's consideration of the proposed rule change
pursuant to the Act.
---------------------------------------------------------------------------

    \118\ Brief of the Securities and Exchange Commission, Amicus
Curiae, No. 15-3057, City of Providence v. Bats Global Markets, Inc.
(2d Cir.) (``City of Providence Amicus Br.''), at 22.
    \119\ City of Providence v. Bats Global Markets, Inc., 878 F.3d
36 (2d Cir. 2017) (``When an exchange engages in conduct to operate
its own market that is distinct from its oversight role, it is
acting as a regulated entity--not a regulator. Although the latter
warrants immunity, the former does not.'').
    \120\ City of Providence Amicus Br. at 21 (quoting In re NYSE
Specialists Secs. Litig., 503 F.3d 89, 96 (2d Cir. 2007)).
    \121\ See infra Section III.E.3.c.
---------------------------------------------------------------------------

B. Price Discovery and Fragmentation

    Many commenters addressed the potential effects of the proposal on
price discovery in the closing auctions on the primary listing
exchanges, including the effect of additional fragmentation of MOC
interest among multiple execution venues.
1. Effect of MOC Orders on Price Discovery
a. Comments on the Proposal
    Some commenters stated that the proposal would harm price discovery
in the closing auctions on the primary listing exchanges.\122\ For
example, Nasdaq argued that BZX's MOC orders would be incapable of
contributing to price discovery, and instead would draw orders and
quotations away from primary closing auctions and undermine the
mechanisms used to set closing prices.\123\ Nasdaq asserted that any
attempt to divert trading interest from its closing auction would be
detrimental to investors as it would inhibit Nasdaq's closing auction
from functioning as intended and would negatively affect the price
discovery process and, consequently, the quality of the official
closing price.\124\ Nasdaq argued that Cboe Market Close would deprive
it of critical information about the supply and demand of Nasdaq-listed
securities, and that both the information Nasdaq disseminated about its
closing auction and the price-discovery function of the auction would
be impaired.\125\ Nasdaq stated that even though BZX would disseminate
the amount of paired-off shares at 3:35 p.m., Nasdaq would have no way
to confirm that the information that BZX would disseminate regarding
the amount of matched volume in Cboe Market Close is accurate or ensure
that the information is timely disclosed.\126\
---------------------------------------------------------------------------

    \122\ See, e.g., Letters from: John M. Bowers, Bowers Securities
(June 14, 2017) (``Bowers Letter''); Andrew Stevens, General
Counsel, IMC Financial Markets (June 30, 2017) (``IMC Letter'');
Cameron Bready, Senior Executive VP, Chief Financial Officer, Global
Payments Inc. (Aug. 17, 2017) (``Global Payments Letter''); Mike
Gregoire, CEO, CA Technologies (Aug. 17, 2017) (``CA Technologies
Letter''); Nasdaq Letter 2; NYSE Letter 3; Nasdaq Letter 1; NYSE
Letter 1; GTS Letter 2; T. Rowe Price Letter; NBT Bancorp Letter;
Sirius Letter; PayPal Letter; NYSE Letter 2; NYSE Statement; and
Nasdaq Statement. See also Letter from Representative Sean P. Duffy
and Representative Gregory W. Meeks (Aug. 9, 2017) (``Duffy/Meeks
Letter''), at 1 (stating that public companies are expressing
concern that the proposal will further fragment the market and cause
harm to the pricing of their companies' shares at the close and, as
such, they are concerned the proposal may disrupt the process for
determining the closing price on the primary listing exchange, which
is viewed as ``an incredibly well-functioning part of the capital
markets.''). In addition, one commenter urged the Commission to
conduct a close analysis of the proposal and stated that if the BZX
proposal would seriously degrade the quality of the closing price,
then it should be rejected. See Angel Letter.
    \123\ See Nasdaq Letter 1 at 5 and 8 (stating that, for this
reason Nasdaq did not believe the proposal promotes fair and orderly
markets in accordance with Sections 6 and 11A of the Act); and
Nasdaq Letter 2 at 3-7.
    \124\ See Nasdaq Letter 1 at 11; and Nasdaq Letter 2 at 5-6. See
also Nasdaq Statement at 22. Nasdaq also stated that while BZX does
not have a responsibility to contribute to price discovery in
Nasdaq's closing auction, it also is obligated to avoid
affirmatively undermining price discovery. See Nasdaq Letter 1 at 5.
In addition, Nasdaq stated that it considered, but chose not to,
disclose segmented information, such as matched MOC or limit-on-
close (``LOC'') shares, for its closing auction in a piecemeal
fashion, because Nasdaq believed it would lead to unintended
consequences and undermine price discovery in the closing auction.
See id. at 4; and Nasdaq Letter 2 at 6.
    \125\ See Nasdaq Statement at 22.
    \126\ See id. at 23.
---------------------------------------------------------------------------

    Nasdaq also expressed concern that the availability of Cboe Market
Close could affect the behavior of limit orders,

which Nasdaq asserted would harm price discovery at the market
close.\127\ In Nasdaq's view, reducing MOC orders in the closing
auction could affect the behavior of limit orders by reducing the
ability of both continuous book limit orders \128\ and LOC orders to
compete with each other and to interact with MOC orders, which it
asserted is essential to its closing auction.\129\ Specifically, Nasdaq
contended that if BZX were to disseminate at 3:35 p.m. that a certain
amount of shares were paired-off for execution in Cboe Market Close,
but Nasdaq subsequently published little or no paired-off or imbalance
shares in its imbalance publications,\130\ further participation in the
intraday trading session leading up to the closing auction and in the
closing auction could be discouraged, and thus there would be little
ongoing price discovery, because market participants would know they
would not have the ability to interact with market orders.\131\ Nasdaq
contrasted the BZX proposal with its own closing auction process,
arguing that after Nasdaq disseminates an imbalance notification that
combines MOC and LOC orders, market participants can continue to submit
orders to interact with existing auction interest.\132\ In addition,
Nasdaq submitted the Pitt/Spatt Report, which asserted that the
proposal would detrimentally affect Nasdaq closing auctions by
preventing MOC orders from engaging with price-sensitive orders (LOC
orders or imbalance-only orders) and by altering the behavior of market
participants whose MOC orders went unfilled on BZX.\133\
---------------------------------------------------------------------------

    \127\ See Nasdaq Letter 1 at 5 and 11; and Nasdaq Statement at
25-26 (citing Pitt/Spatt Report at 18).
    \128\ A continuous book limit order is a limit order that is
eligible for execution during the regular intraday trading session
or in the closing auction. See supra note 2.
    \129\ See Nasdaq Letter 2 at 5-6. Nasdaq did not submit any
specific data regarding the effect of the proposal on the use of LOC
orders.
    \130\ Nasdaq publishes an ``Order Imbalance Indicator'' which
includes, among other things, the price at which the maximum number
of shares of orders eligible for participation in its closing
auction could execute as well as the size of any imbalance. See
Nasdaq Rule 4754(a)(7).
    \131\ See Nasdaq Letter 2 at 6.
    \132\ See id.
    \133\ See Pitt/Spatt Report at 15-19.
---------------------------------------------------------------------------

    Moreover, Nasdaq argued that even if the proposal only resulted in
fewer MOC orders submitted to Nasdaq closing auctions, investors would
be harmed because the official closing price could potentially
represent a stale or undermined price.\134\ Nasdaq asserted that its
closing auction is designed to maximize the number of shares that can
be executed at a single price and that the number of MOC orders affects
the number of shares able to execute in a closing auction.\135\ Nasdaq
added that because Cboe Market Close would undermine closing auction
price discovery, Cboe Market Close would also inhibit efficient capital
allocation and thereby impair capital formation.\136\
---------------------------------------------------------------------------

    \134\ See Nasdaq Letter 1 at 12. See also Nasdaq Letter 2 at 6
(providing an example of how Nasdaq believes the proposal could
cause a stale closing price). Nasdaq also stated that a credible
independent study of the potential risk to price discovery is
essential in order to consider whether the proposal is consistent
with the Act. See Nasdaq Letter 1 at 12.
    \135\ See id. at 11. Nasdaq submitted a memorandum providing,
among other things, data relating to the level of matched MOC volume
in Nasdaq closing auctions spanning the period of January 1, 2017
through September 30, 2017 (``Nasdaq Data Memo'').
    \136\ See Nasdaq Statement at 37.
---------------------------------------------------------------------------

    Nasdaq also argued that the proposal would harm price discovery
because fragmentation of MOC orders would directly affect closing
auctions for which Nasdaq only received MOC orders. Nasdaq contended
that, if all those MOC orders were removed from the Nasdaq closing
auction, the last sale price would become the official closing price,
as opposed to the price being determined through the price discovery
process of its closing auction.\137\ Nasdaq discussed several
hypothetical examples where removal of all MOC orders from certain of
its previously conducted closing auctions would have resulted in use of
the last sale price as the official closing price and provided
aggregated statistics denoting the differential between the last sale
price and the official closing price in such situations.\138\ The
examples provided assume that the BZX proposal would result in no
market participants choosing to send any MOC orders to the primary
listing exchanges' closing auctions. Nasdaq asserted this would be the
case because market participants would choose to submit their MOC
orders to the lower cost execution venue.\139\ Further, both Nasdaq and
NYSE explained that if the fees set by BZX for Cboe Market Close were
lower than the primary listing exchanges and there was no competitive
response by the primary listing exchanges, a likely outcome would be
that market participants would choose to submit their MOC orders to
BZX.\140\
---------------------------------------------------------------------------

    \137\ See Nasdaq Letter 2 at 3; and Nasdaq Statement at 23-24.
    \138\ See Nasdaq Letter 2 at 3-5; and Nasdaq Statement at 23.
Specifically, Nasdaq identified 1,653 closing crosses between
January 1, 2016, and August 31, 2017, where removal of all MOC
orders would have changed the closing prices. Nasdaq asserts that
this would have changed the closing valuation of Nasdaq issuers ``by
nearly $870,000,000 of aggregate impact.''
    \139\ See Nasdaq Statement at 25. While NYSE asserted that one
``plausible outcome'' of the BZX proposal is that the majority of
MOC orders would migrate to Cboe Market Close, it acknowledged that
it was ``hard to predict what would happen if the [BZX] proposal
were to be approved.'' See Assessment of the DERA Analysis conducted
by D. Timothy McCormick, Ph.D. (Jan. 11, 2018) (``NYSE Report''), at
22.
    \140\ Id. See also Nasdaq Statement at 24.
---------------------------------------------------------------------------

    The Pitt/Spatt Report submitted by Nasdaq states that, according to
formal auction theory, the auction price and bidding behaviors of
auction participants are determined by the rules of the auction.\141\
The Pitt/Spatt Report asserts that the price and bidding behaviors in
the closing auction on the primary listing exchange (such as the Nasdaq
closing auction) will change if a competing earlier auction (such as
the Cboe Market Close) is introduced, even though the rules in the
closing auction on the primary listing exchange are unchanged.
According to the Pitt/Spatt Report, one way in which bidding behavior
is affected is that traders with MOC orders may reallocate those orders
to the Cboe Market Close to obtain an earlier matching resolution at
3:35 p.m. while still retaining the ability to participate in the
Nasdaq closing auction. According to the report, this change in bidding
behavior would then affect the closing price on the listing exchange
for two reasons. First, the ``proposed [Cboe] Market Close would
prevent the direct interaction of the siphoned-off orders with price
sensitive orders, which are at the heart of true `price discovery,' and
necessarily would influence the determination of the closing price.''
\142\ Second, participants in the Cboe Market Close, ``[a]rmed with
information about the extent to which the matching efforts were
successful (or unsuccessful), . . . would potentially alter the
aggressiveness with which they would engage in the Nasdaq Market Close
after the conclusion of the [Cboe] Market Close at 3:35 p.m.'' \143\
---------------------------------------------------------------------------

    \141\ See Pitt/Spatt Report at 15.
    \142\ See id. at 17-18.
    \143\ See id. at 17.
---------------------------------------------------------------------------

    NYSE argued that even though Cboe Market Close would only accept
MOC orders, it could materially affect official closing prices
determined through a NYSE closing auction.\144\ NYSE emphasized the
importance of the centralization of orders during the closing auction
on the primary listing exchange.\145\ NYSE, as well as Nasdaq, also
asserted that the proposal contradicts the Commission's approval of
amendments to the National Market

System Plan to Address Extraordinary Market Volatility (the ``LULD
Plan'') which, they argue, centralized re-opening auction liquidity at
the primary listing exchange by prohibiting other market centers from
re-opening following a trading pause until the primary listing exchange
conducts a re-opening auction.\146\ These commenters asserted that it
would be inconsistent for the Commission to find it in the public
interest to consolidate trading in a re-opening auction, while
sanctioning fragmentation of trading in a closing auction.\147\
---------------------------------------------------------------------------

    \144\ See NYSE Letter 1 at 3; and NYSE Statement at 23.
    \145\ See NYSE Statement at 21. See also NYSE Report at 12; and
NYSE Letter 1 at 4.
    \146\ See Nasdaq Letter 1 at 6; NYSE Letter 1 at 3; and Nasdaq
Letter 2 at 12.
    \147\ See Nasdaq Letter 1 at 6; NYSE Letter 1 at 3; and Nasdaq
Letter 2 at 12.
---------------------------------------------------------------------------

    NYSE stated that producing a reliable and accurate closing price
for a security requires transparency into the ``full information''
about the volume of buy and sell orders and the extent of any
imbalances.\148\ NYSE also stated that the closing auction is ``an
iterative process'' that provides ``periodic information about order
imbalances, indicative price, matched volume, and other metrics'' to
help market participants anticipate the likely closing price, and that
allows for investors to find contra-side liquidity and assess whether
to offset imbalances, and for orders to be priced based on the true
supply and demand in the market.\149\ NYSE added that market
participants rely on information disseminated by the primary listing
exchanges to make trading decisions in the continuous market before the
closing auction as well as to determine the price, size, and type of
on-close orders they choose to enter, all of which ``ultimately
determine the closing price.'' \150\ NYSE stated that not disclosing to
market participants the balance of unmatched MOC volume submitted to
Cboe Market Close would deprive closing auction market participants of
``core data necessary'' to the auction's normal functioning.\151\
---------------------------------------------------------------------------

    \148\ See NYSE Statement at 21.
    \149\ See NYSE Report at 12. See also NYSE Letter 1 at 4.
    \150\ See NYSE Statement at 21-22.
    \151\ See id. at 22.
---------------------------------------------------------------------------

    NYSE also asserted that information to be disseminated by BZX on
the amount of matched MOC volume could discourage liquidity providers
from participating in the closing process because they would surmise
that their orders would be less likely to interact with market orders
in the closing auction.\152\ NYSE also argued that its DMMs would lose
full visibility into the size and composition of MOC interest, and thus
would likely have to make more risk-adverse closing decisions,
resulting in inferior price formation.\153\ Other commenters asserted
that the proposal would make it more difficult for DMMs to facilitate
an orderly close of NYSE listed securities as they would lose the
ability to continually assess the composition of MOC interest.\154\
Many of these commenters, all of whom are issuers listed on NYSE,
asserted that one of the reasons they chose to list on NYSE was the
ability to have access to a DMM that is responsible for facilitating an
orderly closing auction.\155\
---------------------------------------------------------------------------

    \152\ See NYSE Report at 13 and 23; and NYSE Statement at 23.
See also NYSE Report at 12 (arguing that ``[a]nticipation that there
will be MOC orders in the closing auction is a critical component
feeding into the decisions of liquidity providers and other market
participants'' trading in the closing auction).
    \153\ See NYSE Letter 1 at 4. See also NYSE Statement at 22.
GTS, a DMM on NYSE, argued that MOC orders are a vital component of
closing prices and that the types of orders submitted to the closing
auction, such as limit or market, also affect its pricing
determinations. See GTS Securities Letter 1 at 2-3; and GTS
Securities Letter 2 at 3. In response to this assertion, ViableMkts
argues that use of Cboe Market Close is voluntary. Accordingly, if a
market participant wanted a DMM to be aware of their closing
activity they could still send their orders to the NYSE closing
auction. See ViableMkts Letter at 4.
    \154\ See, e.g., GTS Securities Letter 1 at 2-3; Letter from Jay
S. Sidhu, Chairman, Chief Executive Officer, Customers Bancorp, Inc.
(June 27, 2017) (``Customers Bancorp Letter''); Letter from Joanne
Freiberger, Vice President, Treasurer, Masonite International
Corporation (June 27, 2017) (``Masonite International Letter''); IMC
Letter at 1-2; and Letter from Daniel S. Tucker, Senior Vice
President and Treasurer, Southern Company (July 5, 2017) (``Southern
Company Letter''). Several commenters also asserted that the
proposal would have potentially detrimental effects on NYSE floor
brokers. See Bowers Letter; Letter from Jonathan D. Corpina, Senior
Managing Partner, Meridian Equity Partners (June 16, 2017); Letter
from Fady Tanios, Chief Executive Officer, and Brian Fraioli, Chief
Compliance Officer, Americas Executions, LLC (June 16, 2017)
(``Americas Executions Letter''); and GTS Securities Letter 2 at 4.
    \155\ See, e.g., Masonite International Letter; Letter from
Sherri Brillon, Executive Vice-President and Chief Financial
Officer, Encana Corporation (June 29, 2017); Letter from Steven C.
Lilly, Chief Financial Officer, Triangle Capital Corporation (June
29, 2017); and Letter from Robert F. McCadden, Executive Vice
President and Chief Financial Officer, Pennsylvania Real Estate
Investment Trust (June 29, 2017).
---------------------------------------------------------------------------

    NYSE also argued that the proposal would detrimentally affect price
discovery on the NYSE Arca and NYSE American automated closing
auctions. NYSE stated that in the six months prior to June 2017 there
were 130 instances where the official closing price determined through
a NYSE Arca closing auction was based entirely on paired-off market
order volume.\156\ In those instances, pursuant to NYSE Arca rules,
``the Official Closing Price for that auction is the midpoint of the
Auction NBBO as of the time the auction is conducted.'' \157\ NYSE
stated that if all market orders for a NYSE Arca listed security were
sent to BZX, the official closing price would instead be the
consolidated last sale price, which can differ from the midpoint of the
Auction NBBO by as much as 3.2%.\158\
---------------------------------------------------------------------------

    \156\ See NYSE Letter 1 at 5. See also NYSE Report at 11-12.
    \157\ See NYSE Letter 1 at 5. NYSE Arca Rule 7.35-E(a)(5)
defines ``Auction NBBO'' to mean ``an NBBO [National Best Bid and
Offer] that is used for purposes of pricing an auction. An NBBO is
an Auction NBBO when (i) there is an NBB [National Best Bid] above
zero and NBO [National Best Offer] for the security and (ii) the
NBBO is not crossed.''
    \158\ See NYSE Letter 1 at 5.
---------------------------------------------------------------------------

    Multiple commenters stated that one of the benefits of a
centralized closing auction conducted by the primary listing exchange
is that it allows market participants to fairly assess supply and
demand such that the closing prices reflect both market sentiment and
total market participation.\159\ Because they believed that the
proposal may cause orders to be diverted away from the primary listing
exchanges, these commenters argued that it would negatively affect the
reliability and value of closing auction prices. Several commenters
further argued that centralized closing auctions provide better
opportunities to fill large orders with relatively little price
impact.\160\
---------------------------------------------------------------------------

    \159\ See Bowers Letter; Americas Executions Letter; Letter from
Mickey Foster, Vice President, Investor Relations, FedEx Corporation
(July 14, 2017); and Nasdaq Statement at 21. See also, e.g., Letter
from Rob Bernshteyn, Chief Executive Officer, Chairman of the Board
of Directors, Coupa Software, Inc. (July 12, 2017) (``Coupa Software
Letter''); Letter from Jeff Green, Founder, Chief Executive Officer
and Chairman of the Board of Directors, The Trade Desk Inc. (July
26, 2017) (``Trade Desk Letter''); and Global Payments Letter.
    \160\ See, e.g., Bowers Letter; Customers Bancorp Letter; and
Letter from David B. Griffith, Investor Relations Manager, Orion
Group Holdings, Inc. (June 27, 2017) (``Orion Group Letter'').
---------------------------------------------------------------------------

    In contrast, several commenters stated that the proposal would not
negatively affect price discovery in the primary listing exchanges'
closing auctions because Cboe Market Close would only execute MOC
orders that can be paired-off against other MOC orders, and not orders
that directly affect price discovery, such as limit orders, including
LOC orders.\161\ Some of these commenters also argued that, because BZX
will publish the size of matched MOC orders in advance of the primary
listing exchange's cut-off time, market participants would have
available information needed to make further decisions regarding order
execution,

and thus price discovery would not be impaired.\162\
---------------------------------------------------------------------------

    \161\ See PDQ Letter; Clearpool Letter at 3; Virtu Letter at 2;
SIFMA Letter 1 at 2; IEX Letter at 1-2; Angel Letter at 4;
ViableMkts Letter at 3-4; and Bollerman Letter at 1. See also SIFMA
Letter 2 at 1-2.
    \162\ See Clearpool Letter at 3; SIFMA Letter 1 at 2; IEX Letter
at 2; Angel Letter at 4; ViableMkts Letter at 3; and SIFMA Letter 2
at 1.
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b. BZX Response to Comments
    In response to concerns regarding the effect of the proposal on the
price discovery process, BZX argued that it expects the Cboe Market
Close would have no effect on price discovery because the proposal
would only match MOC orders and would require the Exchange to publish
the number of matched shares in advance of the primary listing
exchanges' cut-off times on a data feed that is available free of
charge.\163\ BZX also stated that it does not believe the proposal
would affect the use of LOC orders on the primary listing exchanges as
LOC orders provide price protection, by restricting the price at which
the order can execute to a price that is the same or better than the
LOC order's limit price. BZX stated that it does not believe that the
lower fees charged to MOC orders that participate in Cboe Market Close
would outweigh the risk of receiving an execution at an unfavorable
price.\164\ BZX further challenged commenters' concerns that Cboe
Market Close could pull all MOC orders away from the primary listing
exchanges and alter the calculation of the closing price, stating that
such a scenario could occur today as a result of competing closing
auctions and broker-dealers that offer internal MOC order matching
solutions.\165\
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    \163\ See BZX Letter 1 at 3-4; BZX Letter 2 at 2 and 10; and BZX
Statement at 9-10. In addition, BZX offered to disseminate this
information via the applicable securities information processor, in
addition to the Cboe Auction Feed. See BZX Letter 1 at 4 and 12-13;
and BZX Letter 2 at 2.
    \164\ See BZX Letter 2 at 3.
    \165\ See BZX Letter 1 at 4-5 (stating that neither NYSE nor
Nasdaq prohibits their members from withholding MOC orders from
their closing auctions); and BZX Letter 2 at 2-3.
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    In response to NYSE and Nasdaq comments regarding the consistency
of the Cboe Market Close with Amendment 12 of the LULD Plan, BZX
asserted that while the amendment to the LULD Plan cited by NYSE and
Nasdaq granted the primary listing exchange the ability to set the re-
opening price, the amendment did not mandate the consolidation of
orders at the primary listing exchange following a trading halt.\166\
BZX believes the proposal is consistent with the LULD Plan as it seeks
to avoid producing a ``bad'' or ``outlier'' closing price and does not
affect the centralization of price-setting closing auction orders.\167\
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    \166\ See BZX Letter 1 at 8-9. See also Bollerman Letter at 3.
    \167\ See BZX Letter 1 at 8-9.
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    In response to NYSE's arguments regarding the effect on a DMM's
ability to price the close, BZX argued that this point highlights what
it believes to be an additional benefit of allowing it to compete with
NYSE's closing auction.\168\ Specifically, BZX argued that NYSE's
assertion that DMMs consider the composition of closing interest in
making pricing decisions ``suggests that the NYSE closing auction is
not a true auction and can be an immediate detriment to users sending
MOC orders of meaningful size to the NYSE.'' \169\ Accordingly, BZX
stated that it believed Cboe Market Close would offer a beneficial
alternative pool of liquidity and execution mechanism for large MOC
order senders.\170\
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    \168\ See BZX Letter 1 at 10.
    \169\ Id. See also supra note 153 and accompanying text.
    \170\ BZX Letter 1 at 10. In response, NYSE argued that BZX's
claims regarding the role of the DMM were not germane to whether the
proposal is consistent with the Act and stated that it believed the
scale of its closing auction and the low levels of volatility
observed in the auction demonstrate its effectiveness. See NYSE
Letter 2 at 4.
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c. Commission Discussion and Findings
    The Commission has carefully analyzed and considered the proposal's
potential effects, if any, on the primary listing exchanges' closing
auctions, including their price discovery functions, and the
reliability and integrity of closing prices. The Commission finds that
BZX has demonstrated that based on the design of the proposal, Cboe
Market Close should not disrupt the price discovery process in the
closing auctions of the primary listing exchanges.\171\
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    \171\ For these reasons, the Commission also believes the
proposal will not impair capital formation. See supra note 136.
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    Importantly, Cboe Market Close will only accept, match, and execute
unpriced MOC orders with other unpriced MOC orders (i.e., paired-off
MOC orders). Contrary to some commenters' assertions that MOC orders
contribute to the determination of the official closing price, the
Commission believes that paired-off MOC orders, which do not specify a
price but instead seek to be executed at whatever closing price is
established via the primary listing exchange's closing auction, do not
directly contribute to setting the official closing price of securities
on the primary listing exchanges but, rather, are inherently the
recipients of price formation information.\172\ As many commenters
stated, the price determined in a closing auction is designed to be a
reflection of market supply and demand, and closing auctions are
designed to set closing prices that maximize the number of shares
executed and minimize the amount of the imbalance between buy and sell
interest (i.e., demand and supply). The orders that actively
participate in, and contribute to, the price formation process in a
closing auction would be orders that specify a desired execution price
such as LOC orders, imbalance-only orders, and other limit (priced)
orders that may participate in the closing auction. In addition,
unpaired MOC orders may contribute to price formation because they
suggest an imbalance of supply or demand. Thus, none of the orders that
could influence the formation of the official closing price in a
closing auction would be executed in the Cboe Market Close and could
continue to be submitted to the primary listing exchange.
---------------------------------------------------------------------------

    \172\ See supra notes 134-153 (discussing Nasdaq's and NYSE's
arguments of how MOCs can contribute to the closing price).
---------------------------------------------------------------------------

    The orders identified above affect the determination of an official
closing price because they directly affect the total number of shares
that are executed in an auction. More specifically, a limit order or
LOC order would only execute in a closing auction if the official
closing price is at or better than that order's limit price. In
addition, in a closing auction, the imbalance amount of MOC orders
(i.e., unpaired MOC orders) would only execute if there was limit order
trading interest (e.g., LOC orders or imbalance-only orders) on the
opposite side of the unpaired MOC orders that was eligible to execute
in the closing auction.\173\ In contrast, as BZX and commenters
stated,\174\ executing paired-off MOC orders in the manner BZX proposes
would not affect the net imbalance of closing eligible trading interest
because only paired-off MOC orders, and not the orders identified above
that actively participate in, and contribute to, the closing auction
price formation process, would be executed in Cboe Market Close.
Accordingly, the proposal should not disrupt the price discovery
process and closing auction price formation.
---------------------------------------------------------------------------

    \173\ In other words, if there was a buy MOC order that could
not be executed against a sell MOC order, the buy MOC order would
only execute in the closing auction if there was a sell limit order
that was able to execute in the closing auction. See, e.g.,
ViableMkts Letter at 3-4 (providing examples that illustrate how
executing paired-off MOC orders in the primary listing exchange's
closing auction or on a different venue does not ultimately impact
the price discovery process in the closing auction because only MOC
orders that cannot be paired-off with other MOC orders are eligible
to execute against limit orders in a closing auction).
    \174\ See, e.g., Notice at 23321; ViableMkts Letter at 3-4; and
Virtu Letter at 2.

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

    Several commenters made assertions that matched MOC order flow
provides informational content regarding the depth of the market that
indicates true supply and demand and contributes to market
participants' decisions regarding order submission and ultimately price
formation.\175\ But BZX proposes to publish and disseminate the size of
matched MOC orders at 3:35 p.m., which is well in advance of the order
entry cut-off times for the primary listing exchanges' closing
auctions.\176\ Market participants seeking to ascertain closing auction
liquidity supply and demand could incorporate that information with any
pertinent information disseminated by the primary listing exchanges.
Therefore, the Commission believes that the information disseminated by
BZX could be used by market participants in conjunction with the
information disseminated by the primary listing exchange to make order
submission decisions.
---------------------------------------------------------------------------

    \175\ See supra notes 149-153 and 159 and accompanying text.
    \176\ See supra note 23.
---------------------------------------------------------------------------

    And the Commission disagrees with NYSE that, in order for the
Commission to approve the proposed rule change, BZX should also
disclose the balance of unpaired shares that were submitted to Cboe
Market Close.\177\ NYSE stated that market participants use the
imbalance information published by the primary listing exchanges--which
includes information on available, actionable liquidity--to make order
submission decisions. However, unpaired shares on Cboe Market Close
would represent only a subset of cancelled buying and selling interest
that is no longer actionable and therefore, in the absence of any data
or further justification to the contrary, the Commission does not
believe that publishing this information would have a meaningful effect
on the closing auction price formation process.
---------------------------------------------------------------------------

    \177\ NYSE did not explain why it believed that MOC imbalances
in Cboe Market Close would be important information.
---------------------------------------------------------------------------

    Furthermore, the Commission does not find Nasdaq's concern
regarding its inability to confirm the accuracy of information
disseminated by BZX compelling. A fundamental aspect of the national
market system is reliance by national securities exchanges on
information disseminated by another exchange, supplemented by
Commission oversight of such legally enforceable obligations. Indeed,
all national securities exchanges, including Nasdaq, regularly rely on
information disseminated by other national securities exchanges in
other contexts, such as for the handling, routing, and execution of
orders.\178\
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    \178\ See, e.g., Nasdaq Rule 4759 (which states that Nasdaq
consumes quotation data from proprietary exchange data feeds for the
handling, routing, and execution of orders, as well as for
regulatory compliance processes related to those functions).
---------------------------------------------------------------------------

    The Pitt/Spatt Report argues that, according to formal auction
theory, bidding behaviors and closing price outcomes will be affected
by the introduction of the Cboe Market Close. But, even if some market
participants choose to send their MOC orders to the Cboe Market Close,
the Commission believes that closing price efficiency is unlikely to be
affected.\179\ The official closing price established through the
closing auction on the primary listing exchange is ultimately
determined by the intersection of supply and demand, and the price does
not change if an equal number of shares from MOC buy orders and MOC
sell orders are executed away from the auction. If an unequal number of
shares from MOC buy orders and MOC sell orders are sent to Cboe Market
Close, then the shares that were not paired-off in Cboe Market Close
are likely to be resubmitted back to the closing auction on the primary
listing exchange. This is because the traders who would send MOC orders
to Cboe Market Close instead of the closing auction on the primary
listing exchange have a revealed preference for obtaining the closing
price for such orders. If the trader fails to be paired-off on Cboe
Market Close, then resubmitting their order to the closing auction on
the primary listing exchange remains their primary option for obtaining
the closing price.
---------------------------------------------------------------------------

    \179\ Price efficiency is a measure of the quality of the
closing price that is designed to assess whether the closing price
reflects all relevant information.
---------------------------------------------------------------------------

    It is possible that the unpaired shares from Cboe Market Close
could be sent to a broker-dealer who offers off-exchange executions at
the closing price. However, as a general matter, data show that most
traders do not execute orders at the official closing price by trading
off-exchange with broker-dealers.\180\ That is, the data indicate that
most traders have a revealed preference for trading in the official
closing auction on the primary listing exchange over trading off-
exchange with a broker-dealer at the official closing price. Thus, the
Commission believes that the addition of the Cboe Market Close would
not change this preference for trading in the official closing auction
on the primary listing exchange over trading off-exchange with a
broker-dealer, even if the trader ultimately chooses to trade in Cboe
Market Close over both of these options. Finally, although it is
possible that the trader who fails to execute in the Cboe Market Close
could submit their order to the regular intraday trading session
between 3:35 p.m. and 4:00 p.m., the Commission views this possibility
as unlikely because, by virtue of sending a MOC order to Cboe Market
Close, the trader has a revealed preference in executing at the
official closing price, which is not guaranteed in the regular intraday
trading session. Thus, the unpaired shares from the Cboe Market Close
are likely to be resubmitted back to the official closing auction, and
the Commission therefore believes that the closing price on the primary
listing exchange is likely to remain unaffected by the Cboe Market
Close.
---------------------------------------------------------------------------

    \180\ See infra note 194 and accompanying text.
---------------------------------------------------------------------------

    Some commenters also argued that the proposal would affect the
submission of LOC orders to the primary listing exchanges. But as BZX
stated, LOC orders by their terms specify a price and therefore provide
price protection. Thus, utilization of a LOC order suggests that a
market participant is price sensitive and uniquely interested in
obtaining an execution at, or better than, its specified price. By
contrast, MOC orders do not specify a price and are submitted by market
participants who may be less price sensitive and who may prioritize
other aspects of a closing execution over price.\181\ In addition, the
cut-off times for submitting LOC orders to the primary listing
exchanges are later in the trading day than the Cboe Market Close cut-
off time. As such, the Commission does not believe that, solely on the
basis of lower fees, it is likely that market participants would be
more inclined to assume the risk of submitting MOC orders to the Cboe
Market Close at or before 3:35 p.m. in circumstances where they
otherwise would have submitted price-protected LOC orders into the
primary listing exchanges' closing auctions later in the day.
---------------------------------------------------------------------------

    \181\ See also BZX Letter 2 at 3.
---------------------------------------------------------------------------

    As discussed above, Nasdaq and NYSE also asserted that the Cboe
Market Close could discourage submission of orders in the intraday
trading session and closing auctions in certain circumstances, such as
if there were a large amount of paired-off MOC orders in Cboe Market
Close and a subsequent lack of imbalance information disseminated on
the primary listing exchanges.\182\ However, the Commission does not
believe the availability of the Cboe Market Close would increase this

risk beyond what currently exists. Again, Cboe Market Close would only
execute paired-off MOC orders and therefore would not affect the net
imbalance of MOC orders. And the Commission believes that the
submission of orders could similarly be discouraged today if a large
amount of MOC orders in a security had been paired-off on the primary
listing exchange and there was little or no resulting imbalance
disseminated by such exchange in their order imbalance indications.
Irrespective of the exchange upon which the MOC orders are paired-off,
the net imbalance published by the primary listing exchange would be
expected to be the same. Moreover, because Cboe Market Close would
publish the volume of paired-off MOC orders 15 minutes prior to the
current NYSE MOC order entry cut-off time and 20 minutes prior to the
current Nasdaq MOC order entry cut-off, market participants should have
sufficient time to incorporate information relating to the levels of
MOC interest paired-off in the Cboe Market Close in a given security
into their decisions about order submissions into the closing auctions.
---------------------------------------------------------------------------

    \182\ See supra notes 129-131 and 152 and accompanying text.
---------------------------------------------------------------------------

    The Commission also disagrees with commenters that asserted that
the proposal would inhibit DMMs' ability to establish closing prices
because they would no longer have full visibility into the size and
composition of MOC interest.\183\ First, DMMs currently do not have
full visibility into the composition of MOC interest, because they
currently have no visibility into MOC interest traded on off-exchange
venues. Thus, the proposal would not alter the information DMMs have
relating to MOC interest executed off-exchange. Second, as already
discussed above, the Commission believes that market participants,
including DMMs, will have access, via the Cboe Auction Feed, to the
amount of paired-off MOC volume on BZX well in advance of NYSE's order
entry cut-off time and the start of the NYSE closing auction. A NYSE
DMM could, for example, use the Cboe Market Close disseminated
information regarding paired-off MOC interest for a given security in
conjunction with information disseminated by the primary listing
exchange in establishing the relevant context for any imbalances in
NYSE closing auctions and calculating appropriate closing prices.\184\
Moreover, the Commission believes that, as BZX stated, the Cboe Market
Close could benefit market participants that do not wish to disclose
information regarding their orders to DMMs by providing another venue
to which they may send their orders for execution at the closing
price.\185\
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    \183\ See supra note 153 and accompanying text.
    \184\ In addition, one commenter that is supportive of the
proposal is a DMM on NYSE who stated that the proposal ensures that
the price discovery process remains intact because BZX would only
match buy and sell MOC orders and not limit orders, which it stated,
ultimately lead to price formation. See Virtu Letter at 2.
    \185\ See supra notes 168-170 and accompanying text.
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    Nor does the Commission agree with those commenters that argued
that the proposal contradicts the Commission's approval of Amendment 12
to the LULD Plan.\186\ As stated above, NYSE and Nasdaq asserted that
it would be contradictory for the Commission to find it in the public
interest in Amendment 12 of the LULD Plan to require the centralization
of re-opening auction liquidity at the primary listing exchange, but
sanction the execution of closing auction trading interest on a venue
other than the primary listing exchange.\187\ However, the LULD Plan
does not mandate that market participants consolidate their orders at
the primary listing exchanges, but rather requires that a trading pause
continue until the primary listing exchange has re-opened trading.\188\
While trading may not begin until the re-opening on the primary listing
exchange, market participants continue to have the choice as to where
to submit their orders. Likewise, with respect to Cboe Market Close,
official closing prices would continue to be determined through the
closing auctions conducted by the primary listing exchanges. However,
market participants would have the choice to submit their orders to
Cboe Market Close or a closing auction on a primary listing exchange to
obtain an execution at the official closing price.
---------------------------------------------------------------------------

    \186\ See supra note 149 (discussing comments arguing that it
would be inconsistent for the Commission to find it in the public
interest to consolidate trading in a re-opening auction, while
sanctioning fragmentation of trading in a closing auction).
    \187\ See supra notes 146-147 and accompanying text.
    \188\ See Securities Exchange Act Release No. 79845 (Jan. 19,
2017), 82 FR 8551, 8552 (Jan. 26, 2017). See also BZX Letter 1 at 8-
9; and Bollerman Letter at 3.
---------------------------------------------------------------------------

    As discussed above, NYSE and Nasdaq argued that if the proposed
rule change resulted in the removal of all MOC orders from the primary
listing exchanges' closing auctions, and circumstances arose such that
due to other factors no closing auction could be held, in accordance
with NYSE Arca's and Nasdaq's rules the official closing price would be
the consolidated last sale price.\189\ NYSE and Nasdaq provided data
and, in the case of Nasdaq, counterfactual examples,\190\ that sought
to quantify the extent to which last consolidated sale prices would
have differed from closing prices determined through closing auctions.